KO

Business Context and Reporting Period

This Form 10-Q covers The Coca-Cola Company for the quarterly period ended September 30, 2002. The Company operates globally across six segments: North America, Africa, Europe/Eurasia/Middle East, Latin America, Asia, and Corporate. The reporting period reflects significant structural changes, including the consolidation of major bottling operations such as Coca-Cola Erfrischungsgetraenke AG (CCEAG) in Germany, CCDA Waters in the U.S., and Cosmos Bottling Corporation in the Philippines.

Key Financial Metrics

Margins (9M 2002 vs 9M 2001): Gross margin decreased to 63.4% from 65.3%. Operating margin decreased to 30.1% from 30.8%.

Material Changes vs. Prior Period

• Revenue Growth: Net operating revenues increased 13% in Q3 and 11% for the nine months ended September 30, 2002. Growth was driven by a 7% increase in gallon shipments (Q3) and structural changes adding approximately $450 million (Q3) and $1,050 million (9M) in revenue due to consolidations (CCEAG, CBC, Odwalla, CCDA).
• Accounting Changes (SFAS No. 142): The adoption of SFAS No. 142 resulted in a one-time, non-cash, after-tax charge of $926 million ($367 million for Company operations and $559 million for equity investees) in the first nine months of 2002. This significantly reduced reported Net Income and EPS for the nine-month period.
• Equity Income: Equity income increased 110% for the nine months ended September 30, 2002 ($350 million vs. $167 million), driven by improved performance at Coca-Cola Enterprises Inc. and reduced amortization expenses due to SFAS No. 142, partially offset by impairment charges in Latin America.
• Debt Levels: Long-term debt increased by $1,616 million year-over-year, primarily due to the consolidation of CCEAG (adding ~$810 million) and the issuance of $750 million in notes due in 2005.

Guidance, Outlook, and Risks

• Outlook: Management expects the macroeconomic environment to remain difficult for the remainder of 2002. Exchange rates are expected to have a neutral or slightly negative impact on operating results in 2003.
• Volume Growth: Worldwide unit case volume increased 5% in Q3 and 5% for the first nine months of 2002. North America grew 9% (Q3) and 6% (9M), while international operations grew 4% (Q3) and 5% (9M).
• Capital Allocation: The Company estimates share repurchases will total approximately $750 million in 2002 and over $1 billion in 2003. Capital expenditures are estimated at $800-$900 million for 2002.
• Risks and Contingencies:
  • Geopolitical/Economic: Unstable conditions in the Middle East, Northern Africa, and Latin America (specifically Argentina, Venezuela, and Brazil) continue to adversely impact results and asset valuations.
  • Currency: A stronger U.S. dollar reduced operating income by approximately 1% in Q3 and 3% for the nine months ended September 30, 2002.
  • Legal: The Company is defending a consolidated class action lawsuit regarding alleged misrepresentations of financial performance in 1999-2000; management believes it has meritorious defenses.

Investor Verification Checklist

• Impact of SFAS No. 142: Verify the distinction between reported Net Income ($2,326M for 9M) and adjusted Net Income excluding the $926M accounting change charge to assess core operational profitability.
• Consolidation Effects: Review the impact of consolidating CCEAG, CBC, and CCDA on gross and operating margins, as bottling operations typically have lower margins than concentrate operations.
• Latin America Exposure: Assess the magnitude of impairment charges ($157M write-down in Q1 2002) and ongoing economic risks in Argentina, Brazil, and Venezuela.
• Debt Structure: Confirm the increase in long-term debt associated with the CCEAG consolidation and the company's ability to service this debt given the current interest rate environment.
• Share Repurchases: Monitor the execution of the $750M repurchase plan for 2002 against the stated target.