Coca-Cola Company — Q1 2011 Form 10-Q
Business context and reporting period. The unaudited quarter ended April 1, 2011, compared with the quarter ended April 2, 2010; Q1 2011 had one fewer day. Results are materially affected by the October 2010 acquisition of Coca-Cola Enterprises’ North American business (CCE), which shifted North America toward finished-product bottling and distribution. Amounts below are in millions of dollars except per-share data.
Financial results and position
| Metric | Q1 2011 | Comparable period | Change |
|---|---|---|---|
| Net operating revenues | $10,517 | $7,525 | +40% |
| Gross profit | $6,568 | $4,984 | +32% |
| Operating income | $2,279 | $2,183 | +4% |
| Income before taxes | $2,511 | $2,179 | +15% |
| Net income attributable to Coca-Cola shareowners | $1,900 | $1,614 | +18% |
| Diluted earnings per share | $0.82 | $0.69 | +19% |
| Operating cash flow | $458 | $1,326 | −65% |
- Gross margin fell to 62.5% from 66.2%; consolidated operating margin fell to 21.7% from 29.0%. Management attributed the margin pressure principally to the CCE acquisition and higher commodity costs.
- Unit case volume rose 6% worldwide and concentrate sales volume rose 4%. North America unit case volume grew 6%, including 4% from new Dr Pepper Snapple distribution licenses.
- At April 1, cash and cash equivalents were $9,075 and short-term investments were $3,049. Current assets were $23,542 against current liabilities of $21,923.
- Total debt, including current maturities, was approximately $26,080 at April 1, versus $23,417 at December 31, 2010. Loans and notes payable rose to $11,985 from $8,100, while long-term debt declined to $12,681 from $14,041.
- Investing cash outflow was $1,047; financing cash inflow was $986. The company paid $1,065 in dividends and repurchased approximately 15.7 million shares under its plan for about $1,010.
Material changes and unusual items
- CCE consolidation drove much of the revenue and expense increase. It also changed the timing of revenue recognition and lengthened the cash conversion cycle; management said the integration reduced operating margins compared with the prior concentrate-focused North American business.
- Other income included a $102 gain on the sale of the Embonor investment. The prior-year period included a $103 Venezuela remeasurement loss and $26 of investment impairment charges, making the year-over-year profit comparison benefit from nonrecurring items.
- The Japan earthquake and tsunami resulted in $79 of charges, including support for bottlers, lost inventory, a reconstruction-fund donation and asset impairment. The company recorded no insurance recovery because recovery was not then considered probable.
- Other operating charges were $209, including $162 for productivity, integration and restructuring initiatives. Q1 2010 charges were $96.
- Operating cash flow was pressured by $769 of pension contributions, working-capital demands and the CCE-related change in cash collection timing.
Outlook, management commentary and risks
- Management expected full-year 2011 commodity-cost pressure of $550–$700 and gross margin to remain lower than in 2010, reflecting CCE consolidation and input costs.
- Management forecast 2011 capital expenditures of $3.0–$3.2 billion and expected pension expense to increase by about $60 versus 2010. It anticipated approximately $39 of additional pension contributions for the rest of 2011.
- CCE integration was expected to generate at least $350 of annual operational synergies when fully realized; management expected $140–$150 of net synergies in 2011. Estimated total integration costs were approximately $425.
- The company expected to reach $500 of annualized savings from productivity initiatives by year-end 2011, with total initiative costs also expected to be approximately $500.
- Management estimated Japan-related effects would reduce diluted EPS by $0.02–$0.04 for the remainder of 2011, following a $0.01 Q1 impact. It expected foreign-exchange movements to have a low- to mid-single-digit positive effect on full-year operating income, based on then-current forecasts and hedges.
- Risks include commodity-price and foreign-exchange volatility, seasonal and weather-sensitive beverage demand, integration execution, and political, currency and cash-repatriation restrictions in Venezuela. The filing also describes legal proceedings, tax audits and $649 of third-party debt guarantees; management did not expect pending legal matters to materially adversely affect the company as a whole.
- Management said liquidity was strong, citing operating cash generation and $4,496 of unused credit facilities. It cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of reported revenue growth and margin compression reflects CCE consolidation versus organic volume, pricing, mix and currency effects.
- Whether cash conversion and operating cash flow improve as North American integration and seasonal inventory build progress.
- Whether commodity costs, hedging results and pricing actions stay within management’s stated assumptions.
- Progress toward the CCE synergy and productivity-savings targets, including associated costs and timing.
- Developments in Japan recovery and insurance claims, and in Venezuela’s exchange-rate, receivables and repatriation risks.
- Debt levels, refinancing needs and share repurchases relative to cash generation and planned capital expenditures.