The Coca-Cola Company — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 29, 2012; comparisons are with the periods ended July 1, 2011. Financial figures are in U.S. dollars unless stated otherwise. Interim results are unaudited.
Business context and operating performance
Coca-Cola sells beverages through a global system of company-owned and independent bottling operations. Worldwide unit case volume increased 4% in Q2 and 5% year to date; concentrate sales volume increased 3% in both periods. Revenue growth reflected volume, pricing and mix, partly offset by currency translation.
- Q2 regional unit case volume: Eurasia & Africa +12%, Pacific +8%, Latin America +3%, North America +1%, and Europe −4%.
- North American sparkling beverage volume declined 2% in Q2, while still beverages grew 8%. European volume weakness reflected unseasonable weather and macroeconomic uncertainty.
- Revenue growth by geography was uneven: Q2 net operating revenues increased 5% in North America and 7% in Pacific, but declined 9% in Europe, including the impact of foreign currency.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net operating revenues | $13.085 billion | $12.737 billion | $24.222 billion | $23.254 billion |
| Operating income | $3.294 billion | $3.179 billion | $5.803 billion | $5.463 billion |
| Net income attributable to Coca-Cola shareowners | $2.788 billion | $2.800 billion | $4.842 billion | $4.703 billion |
| Diluted EPS | $1.21 | $1.20 | $2.11 | $2.02 |
| Gross margin | 60.1% | 60.8% | 60.5% | 61.6% |
| Operating margin | 25.2% | 25.0% | 24.0% | 23.5% |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $4.178 billion | $3.642 billion |
Q2 revenue rose 3% and operating income rose 4%, while shareowner net income was nearly unchanged. Diluted EPS increased 1%, with lower average diluted shares contributing. For the first half, revenue grew 4%, operating income 6%, shareowner net income 3%, and diluted EPS 4%. Gross margin contracted in both comparisons, reflecting currency, channel and package mix, higher commodity costs, and acquired bottling operations. Pricing partly offset these pressures.
First-half operating cash flow increased 15%. Net cash used in investing was $8.560 billion, substantially higher than the prior-year $2.328 billion, largely because of the expanded investment in high-quality securities and cash-management changes. Net cash provided by financing was $1.148 billion. First-half capital expenditures were $1.305 billion gross ($1.248 billion net of asset-sale proceeds); management expected full-year capital expenditures of $3.0–$3.2 billion.
Balance sheet, debt and liquidity
- At June 29, cash and cash equivalents were $9.337 billion, short-term investments $4.807 billion, and marketable securities $2.822 billion. Cash, cash equivalents and short-term investments totaled $14.144 billion.
- Current assets were $29.325 billion versus current liabilities of $26.482 billion. The company also reported $6.4 billion in unused credit lines for general corporate purposes, including commercial-paper backup.
- Loans and notes payable were $15.964 billion, current maturities of long-term debt $0.128 billion, and long-term debt $16.390 billion. These reported debt categories totaled approximately $32.482 billion, up from approximately $28.568 billion at December 31, 2011.
- Equity was $32.629 billion and total assets were $85.149 billion. Cash and cash equivalents declined from $12.803 billion at year-end, partly as funds shifted into short-term investments and marketable securities.
- The company issued $2.750 billion of long-term debt in Q1 and retired $1.250 billion of notes at maturity in May. First-half treasury-stock purchases had $2.610 billion of cash outflow; management expected full-year repurchases of $2.5–$3.0 billion, net of employee-option proceeds.
Outlook, management commentary and key risks
- Management described the near-term outlook as strong and expected substantial operating cash flow for 2012, while cautioning that interim results are not necessarily indicative of full-year results.
- Management estimated 2012 incremental commodity-cost pressure of approximately $300 million and expected currency, product/channel mix, and commodities to weigh on gross margin through the rest of the year.
- Based on forecast exchange rates and existing hedges, management expected currency to reduce Q3 consolidated operating income by 8%–9% and full-year operating income by the high end of a mid-single-digit range.
- A four-year productivity and reinvestment program announced in February 2012 targeted $550–$650 million in annualized savings, with the full annual benefit expected by the end of 2015. The company had incurred $118 million of program costs by June 29; costs for remaining initiatives were still being defined. Further CCE North America integration costs were estimated at about $300 million.
- Other items affecting comparability included a $92 million gain tied to Coca-Cola FEMSA’s share issuance in 2012, versus a $418 million Arca/Contal merger gain in Q2 2011; the prior-year comparison also included Japan disaster charges. The company recorded $169 million of other operating charges in the first half, including productivity, restructuring, and tea-strategy costs.
- The U.S. Nestlé ready-to-drink tea license was scheduled to terminate at year-end 2012; related strategy charges were $20 million in the first half. Aujan investment and bottling acquisitions in Vietnam, Cambodia, and Guatemala affected reported volumes and operations.
- Risks include foreign-exchange volatility, commodity prices, economic and weather conditions, and exposure to emerging markets. The filing describes pending Aqua-Chem asbestos-related litigation; the company said it could not estimate its potential loss, while stating that insurance was expected to cover most costs over approximately the next ten years, subject to insurer solvency and ongoing litigation.
- The company reported $687 million of third-party debt guarantees, including $297 million related to variable-interest entities, and did not consider payment probable. It also reported $373 million of gross unrecognized tax benefits; management did not expect a significant near-term financial-statement impact from expected changes.
- After quarter-end, shareowners approved a two-for-one stock split, with a record date expected July 27, 2012 and distribution expected on or about August 10, 2012.
Most important facts for investors to verify
- Whether volume growth and pricing continue to offset foreign-exchange pressure, particularly in Europe and North America.
- Actual commodity-cost inflation versus the approximately $300 million full-year estimate, and the resulting gross-margin trend.
- Delivery and timing of the $550–$650 million productivity savings, implementation costs, and planned reinvestment.
- Debt and commercial-paper levels, cash deployment into securities, pension contributions, and the capacity to fund dividends and share repurchases.
- Developments in the Aqua-Chem litigation and related insurance coverage, as well as uncertain tax positions.
- The effects of the Nestlé tea-license transition, Aujan investment, bottling acquisitions, and the approved stock split.