The Coca-Cola Company — Q1 2015 Form 10-Q
Reporting period: Three months ended April 3, 2015; compared with the three months ended March 28, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The 2015 quarter included six more days than the comparable 2014 quarter, affecting reported results and volume comparisons.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net operating revenues | $10,711 | $10,576 |
| Gross profit / margin | $6,608 / 61.7% | $6,493 / 61.4% |
| Operating income / margin | $2,296 / 21.4% | $2,376 / 22.5% |
| Income before income taxes | $1,981 | $2,205 |
| Net income attributable to shareowners | $1,557 | $1,619 |
| Diluted earnings per share | $0.35 | $0.36 |
| Dividends per share | $0.330 | $0.305 |
| Cash provided by operating activities | $1,574 | $1,066 |
Revenue increased about 1%, while operating income declined about 3% and shareowner net income about 4%. Gross margin improved, attributed primarily to favorable price and product mix and lower commodity costs, but operating margin fell. Operating cash flow rose $508 million, with management citing working-capital management and the additional reporting days; currency was a headwind.
At April 3, cash and cash equivalents were $8,211, short-term investments $8,366, and marketable securities $3,472. Current assets were $32,119 and current liabilities $26,123. Debt comprised $14,383 of loans and notes payable, $2,040 of current maturities, and $26,087 of long-term debt. Total debt on these balance-sheet lines was $42,510, versus $41,745 at year-end 2014. The company reported $8,090 of available credit lines.
Investing cash outflow was $812 and financing cash outflow was $1,177. The company paid $1,441 in dividends and repurchased 16.0 million shares for approximately $661. It issued €8.5 billion of long-term debt and extinguished $2,039 of debt early, incurring a $320 charge in interest expense. The reported interest expense of $447 compares with $124 a year earlier.
Business changes and key drivers
- Worldwide unit case volume increased 1%; concentrate sales volume increased 5%. The difference partly reflects the six extra days in the 2015 quarter and shipment timing.
- Revenue drivers, as reported by management: volume +5%, price/product/geographic mix +3%, acquisitions and divestitures −1%, and currency −6%, for reported revenue growth of 1%.
- Foreign exchange was a substantial headwind: management said it reduced consolidated operating income by 8%. North America operating income increased to $511 from $428, while Latin America declined to $578 from $668; currency weighed on multiple international segments.
- Other operating charges were $233, compared with $128. They included $90 for the productivity program, $35 for German bottling integration, and $108 related to Venezuela receivables and trademark impairment.
Outlook, risks, and unusual items
- Management expected currency to reduce full-year 2015 net revenues by 6%, operating income by 10%, and income before taxes by 7%; corresponding Q2 estimates were −7%, −10%, and −5% to −6%. These are estimates based on then-current exchange rates and hedge positions.
- Management estimated a 22.5% full-year effective tax rate, excluding the estimated impact of unusual or infrequent items. Full-year capital expenditures were expected to be approximately $2.5–$3.0 billion. Expected 2015 net share purchases were $2.0–$3.0 billion. The filing provides no full-year EPS guidance.
- The productivity and reinvestment program is expected to generate approximately $3.6 billion of annualized productivity by 2019, including an incremental $2 billion from the expanded initiatives; savings are intended to support marketing, innovation, growth, and margins. Related pretax costs incurred since 2012 totaled $1,455 million.
- Venezuela was designated hyperinflationary. Coca-Cola used the SIMADI rate of 193 bolivars per U.S. dollar to remeasure its net monetary assets, recording a $27 charge. It also wrote down $56 of bottler receivables and impaired a trademark by $52. The combined carrying value of relevant Venezuelan monetary assets, receivables, and intangible assets was $69, including $12 of cash. Currency convertibility restrictions and further devaluation could cause additional losses or impairments.
- The Monster transaction was expected to close in Q2 2015, subject to customary conditions and regulatory approvals. Coca-Cola expected to pay net cash of $2.15 billion, acquire about 16.7% of Monster, and transfer its energy-drink business in exchange for Monster’s non-energy drink business. Management anticipated a transaction gain at closing, partly offset by a possible trademark impairment of up to $350 million.
- The proposed Coca-Cola Beverages Africa transaction was expected to close in the second half of 2015, subject to regulatory approval; Coca-Cola expected an 11% interest in the combined bottler. The company also acquired a South African bottler during the quarter and made an investment in Indonesian bottling operations.
- The company stated that currently pending legal proceedings were not expected to have a material adverse effect overall. It reported $539 of third-party guarantees and said it did not consider payment probable. Management described liquidity as strong and expected cash flows and financing access to support commitments; significant foreign cash is generally intended to remain reinvested abroad.
Important facts for investors to verify
- Whether reported growth persists after accounting for the extra quarter days, concentrate shipment timing, and structural changes from refranchising and bottling transactions.
- Actual currency effects versus management’s 2015 estimates, particularly in light of the stronger U.S. dollar and Venezuela’s restricted convertibility.
- The closing, cash consideration, accounting gain, and potential impairment associated with the Monster transaction.
- Execution costs and realized savings from the productivity program, and whether savings translate into sustainable revenue growth and margin improvement.
- Debt levels, interest costs, and liquidity following the euro debt issuance, early debt retirement, dividends, and share repurchases.