The Coca-Cola Company — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2014; unaudited. Coca-Cola operates a global nonalcoholic beverage business through concentrate, finished-product and bottling operations. Sales are seasonal, with the second and third quarters typically the strongest.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net operating revenue | $12.574B | $12.749B | $23.150B | $23.784B |
| Operating income | $3.170B | $3.243B | $5.546B | $5.651B |
| Net income attributable to Coca-Cola shareowners | $2.595B | $2.676B | $4.214B | $4.427B |
| Diluted earnings per share | $0.58 | $0.59 | $0.95 | $0.98 |
| Gross margin | 61.7% | 60.9% | 61.5% | 60.8% |
| Consolidated operating margin | 25.2% | 25.4% | 24.0% | 23.8% |
- Revenue declined 1% in Q2 and 3% for the first six months. Worldwide unit-case volume increased 3% in Q2 and 2% for the half; six-month concentrate sales volume rose 2% (1% after structural changes).
- Six-month operating cash flow was $4.470B, up from $3.956B. Capital expenditures were $1.030B; operating cash flow less capital expenditures was approximately $3.440B. Dividends paid were $1.342B.
- At June 27, cash, cash equivalents and short-term investments totaled $18.142B; marketable securities added $3.467B. Current assets were $33.871B versus current liabilities of $32.629B.
- Reported borrowings—loans and notes payable, current maturities and long-term debt—totaled approximately $40.2B, versus $37.1B at year-end 2013. The company also reported $6.321B of available backup credit lines.
Changes and operating drivers
- Net revenue was pressured by foreign exchange and structural changes, partly offset by favorable price, product and geographic mix. Currency movements reduced consolidated revenue by an estimated 2% in Q2 and 3% for the first half.
- Q2 unit-case volume was strongest in Asia Pacific (+8%) and Eurasia and Africa (+5%); Europe, Latin America and North America were flat. Mexico’s new excise tax weighed on Latin American volume. For the first half, Europe declined 2%; Asia Pacific grew 8%.
- Gross margin improved, partly reflecting the 2013 deconsolidation of Philippine and Brazilian bottling operations. Bottling Investments operating income fell to $12M for the half from $164M, primarily following those changes.
- Other income (loss) was a $77M loss in Q2 and a $318M loss for the half. First-half items included a $226M Venezuela currency remeasurement charge and a $140M noncash loss on North America refranchising. Other operating charges were $201M in Q2 and $329M for the half, including productivity, German bottling integration, Russian juice restructuring and Venezuela receivables charges.
Outlook, risks and contingencies
- Management said the near-term business outlook remained strong and expected substantial operating cash flows through the rest of 2014. Estimated full-year capital expenditures were $2.5B–$3.0B; expected 2014 net share repurchases were also $2.5B–$3.0B.
- Management estimated a 22.5% full-year 2014 effective tax rate, excluding unusual or infrequent items. It expected foreign exchange, including the Venezuelan bolivar, to reduce consolidated operating income by 3% for the remainder of 2014, based on early-July rates and hedging. The Venezuelan Fair Price Law was expected to reduce full-year consolidated operating income by about 2% and Latin America revenue by about 5%.
- The productivity program was expanded to target an additional $1B of productivity by 2016, primarily for reinvestment in media and consumer-facing marketing. Management cited the possibility of further German integration charges; additional plans were not finalized.
- Venezuela presents material currency-conversion, collections and regulatory exposure. The company remeasured its subsidiary using the SICAD 1 rate and recorded a $226M charge. At quarter-end, the subsidiary had $263M of net monetary assets, including $178M in cash and investments; U.S.-dollar receivables from the bottling partner were $281M. Dividend transfers remained restricted, and further devaluation or collection problems could cause additional losses or impairments.
- The company reported $549M of third-party debt guarantees, which management did not consider probable to be called. It could not estimate the ultimate reasonably possible loss related to Aqua-Chem asbestos claims, although it reported substantial insurance coverage subject to insurer solvency and ongoing issues. A separate EPA matter was settled for $165,900. Management stated pending legal matters were not expected to have a material adverse effect overall.
- Management said disclosure controls were effective as of June 27, 2014, with no material quarter-to-quarter change in internal control over financial reporting.
Investor verification priorities
- Track underlying volume and pricing separately from currency impacts, refranchising and bottling deconsolidations.
- Monitor Venezuela’s exchange-rate access, the $281M bottler receivable, margin restrictions and potential further remeasurement charges.
- Assess the rise in reported borrowings and near-term maturities alongside cash generation, credit availability, dividends and planned repurchases.
- Evaluate the results and costs of the expanded productivity program, German integration and North America refranchising, including future contingent payments.
- Review the company’s FX assumptions, 2014 capital-spending and repurchase plans, and the stated tax-rate outlook against subsequent filings and results.