The Coca-Cola Company — Q2 2013 Form 10-Q
Reporting period: Quarter ended June 28, 2013; comparisons are with the quarter ended June 29, 2012. Financial statements are unaudited. Coca-Cola sells nonalcoholic beverages globally; sales are seasonal, with the second and third quarters generally strongest.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net operating revenues | $12.749B | $13.085B | $23.784B | $24.222B |
| Operating income | $3.243B | $3.294B | $5.651B | $5.803B |
| Net income attributable to Coca-Cola shareowners | $2.676B | $2.788B | $4.427B | $4.842B |
| Diluted earnings per share | $0.59 | $0.61 | $0.98 | $1.05 |
| Gross margin | 60.9% | 60.1% | 60.8% | 60.5% |
| Operating margin | 25.4% | 25.2% | 23.8% | 24.0% |
- Worldwide unit-case volume rose 1% in Q2 and 3% year to date; concentrate sales volume increased 1% and 2%, respectively. Q2 volume was strongest in Eurasia and Africa (+9%) and weakest in Europe (-4%) and North America (-1%).
- For the six months, operating cash flow was $3.956B, down 5% from $4.178B. Capital expenditures were $1.069B gross ($1.012B net of disposals). Investing activities used $2.708B; financing activities provided $136M. Cash and cash equivalents ended the period at $9.406B.
- At June 28, cash, cash equivalents and short-term investments totaled $16.040B; adding marketable securities gives $19.213B. Current assets were $32.572B and current liabilities $32.469B.
- Debt reported as loans and notes payable, current maturities of long-term debt, and long-term debt totaled approximately $35.686B, versus $32.610B at year-end 2012. The company had $6.410B of available credit lines. Long-term debt, including its current portion, had a carrying amount of $17.372B and estimated fair value of $17.735B.
- Dividends were $0.28 per share in Q2 versus $0.255 a year earlier. First-half cash dividends paid were $1.249B.
Changes versus prior period
- Q2 revenue declined 3% and first-half revenue declined 2%. Management attributed the first-half decrease mainly to a 2% foreign-exchange headwind, a 2% structural-change headwind and two fewer selling days; volume growth partly offset these effects.
- Q2 attributable net income fell about 4%; first-half attributable net income fell about 9%. First-half operating income declined about 3%. Gross margin improved, while first-half operating margin eased.
- Currency translation and transaction effects were substantial: first-half other income (loss) was a $136M loss versus $133M of income in 2012, including a $149M Venezuelan currency-devaluation charge. Equity income declined to $333M from $385M.
- The January sale of a majority interest in Philippine bottling operations reduced consolidated bottling volume. The Brazilian bottling transaction closed July 3, after quarter-end; management expected the Philippine and Brazilian changes together to reduce full-year 2013 revenue by 3%.
Outlook, commentary and risks
- Management said the near-term outlook remained strong and expected substantial operating cash flow for the rest of 2013. Based on early-July exchange rates and hedges, it expected currency to reduce consolidated operating income by 4% for both Q3 and full-year 2013.
- Management estimated 2013 capital expenditures of approximately $3.0B, treasury-share purchases of $3.0B–$3.5B net of employee stock-issuance proceeds, and a full-year effective tax rate of approximately 23% before unusual items.
- The four-year productivity and reinvestment program targets annualized savings of $550M–$650M, expected to be fully realized in 2015 and reinvested in brand building. First-half program charges were $215M; total charges since the program began were $485M. First-half total other operating charges were $253M.
- Other notable items included a $144M loss related to the Japanese bottler merger, partly offset by a $139M gain from Coca-Cola FEMSA share issuance, and a $23M charge from early debt extinguishment. The Japanese merger closed July 1.
- Management said higher commodity costs were not expected to have a significant effect on full-year 2013 operating results versus 2012. However, non-hedge-accounted commodity derivatives generated $144M of first-half losses in cost of goods sold.
- Foreign-currency conversion restrictions in Argentina and Venezuela limit dividend remittances; those subsidiaries held $576M of cash, cash equivalents, short-term investments and marketable securities. The company said most foreign-held funds were indefinitely reinvested and not intended for repatriation.
- Contingencies include $644M of guarantees of third-party debt, which management did not consider probable to be called. The company disclosed ongoing legal matters, including approximately 40,000 asbestos claims against former subsidiary Aqua-Chem; it disputes responsibility and could not estimate a possible loss range. Management did not expect pending legal proceedings overall to have a material adverse effect.
- Management cited potential impairment exposure if market costs of capital rise or sales-volume assumptions are not achieved. It reported no significant intangible-asset impairment in the period. Beverage volumes may also be affected by weather, consumer spending, competition and foreign-exchange movements.
Investor verification priorities
- Check whether reported volume growth translates into revenue and earnings growth after currency, selling-day and bottler-structure effects.
- Track the stated 4% currency drag, especially exposure to the Venezuelan bolivar and other weakening currencies.
- Verify delivery and timing of productivity-program savings against restructuring charges and reinvestment spending.
- Monitor leverage, near-term debt maturities, operating cash flow and the ability to access or use overseas cash.
- Assess the effects of the Brazilian bottling deconsolidation and other bottler transactions on revenue, margins and reported volume.
- Follow the Japanese bottler transaction, legal and tax contingencies, commodity-hedge volatility and any developments affecting impairment assumptions.