The Coca-Cola Company — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also provides unaudited fourth-quarter results; it is not a standalone quarterly filing. Dollar amounts are in U.S. dollars.
Business context and reporting period
Coca-Cola markets more than 500 nonalcoholic beverage brands in over 200 countries through a global system of company-owned and independent bottlers. Its business includes higher-margin concentrate sales and lower-margin finished beverage operations.
On October 2, 2010, Coca-Cola acquired CCE’s North American business and formed Coca-Cola Refreshments (CCR). The acquisition materially changed the company’s North American mix toward finished products and affects year-over-year comparisons: acquired operations are included only from the closing date. Coca-Cola also sold its Norwegian and Swedish bottling operations to New CCE.
Key financial results
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net operating revenues | $35.119 billion | $30.990 billion | +13% |
| Gross profit | $22.426 billion | $19.902 billion | +13% |
| Gross margin | 63.9% | 64.2% | Down 0.3 percentage points |
| Operating income | $8.449 billion | $8.231 billion | +3% |
| Operating margin | 24.1% | 26.6% | Down 2.5 percentage points |
| Net income attributable to Coca-Cola shareowners | $11.809 billion | $6.824 billion | +73% |
| Diluted EPS | $5.06 | $2.93 | +73% |
| Cash provided by operating activities | $9.532 billion | $8.186 billion | +16% |
Fourth-quarter 2010 net operating revenues were $10.494 billion and shareowner net income was $5.771 billion; diluted EPS was $2.46. Fourth-quarter 2009 revenue was $7.510 billion, net income was $1.543 billion and diluted EPS was $0.66. The comparison is heavily affected by the CCE transaction and unusual gains in 2010.
Worldwide unit case volume increased 5% to approximately 25.5 billion cases. Volume grew 12% in Eurasia and Africa, 5% in Latin America, 2% in North America and 6% in the Pacific; Europe was flat. Sparkling beverages were approximately 76% of worldwide volume, versus 77% in 2009.
Cash flow, debt and liquidity
- Operating cash flow was $9.532 billion. Investing activities used $4.405 billion, including $2.215 billion of capital expenditures; financing activities used $3.465 billion. Cash and cash equivalents ended the year at $8.517 billion, with a further $2.682 billion in short-term investments.
- At year-end, current assets were $21.579 billion and current liabilities were $18.508 billion. Cash, cash equivalents and short-term investments totaled $11.199 billion.
- Balance-sheet debt included $8.100 billion of loans and notes payable, $1.276 billion of current maturities of long-term debt and $14.041 billion of long-term debt. Long-term debt was $5.059 billion at year-end 2009. The increase primarily reflects debt assumed in the CCE acquisition.
- Coca-Cola assumed approximately $7.9 billion of CCE debt and paid approximately $1.3 billion cash in the transaction. It issued $4.5 billion of long-term notes in November and repurchased $2.91 billion of long-term debt, recording a $342 million charge related to the repurchase and treasury-rate-lock settlements.
- The company reported $4.597 billion of unused availability under general-purpose and commercial-paper backup credit lines. Long-term debt ratings were A+ from S&P, Aa3 from Moody’s and A+ from Fitch.
- Declared dividends were $1.76 per share in 2010, up from $1.64. The board subsequently raised the quarterly dividend to $0.47 per share, equivalent to $1.88 annually for 2011.
Material changes and unusual items
- Reported net income included a $4.978 billion gain from remeasuring Coca-Cola’s existing CCE investment to fair value and a $597 million gain on the sale of the Norwegian and Swedish bottlers. These gains are not recurring operating performance.
- Other income also included a $265 million charge for preexisting CCE relationships and a $103 million Venezuelan currency-remeasurement loss. The effective tax rate was 16.7%, compared with 22.8% in 2009; the transaction and other items affected the 2010 rate.
- Other operating charges rose to $819 million from $313 million, including $478 million for productivity, integration and restructuring initiatives, $250 million of charitable contributions and $81 million of transaction costs.
- The acquired North American business contributed $3.637 billion in revenue and a $122 million net loss from October 2 through year-end. The North America operating margin fell to 13.6% from 20.7%, reflecting the shift to finished products and acquisition-related effects.
- CCE-related integration and acquisition effects included a $235 million reduction to North America gross profit, primarily from intercompany inventory-profit elimination and an inventory fair-value adjustment, and $74 million of accelerated share-based compensation expense.
Outlook, management commentary and risks
- Management expected the CCE integration to generate at least $350 million in annual operating synergies once fully integrated, phased in over four years; it projected $140–$150 million of synergies in 2011. Estimated total CCE integration costs were approximately $425 million over three years.
- Management expected 2011 gross margin to decline, reflecting a full year of consolidated CCE operations and commodity-cost pressure. It estimated a $300–$400 million full-year 2011 impact from higher commodity costs.
- Expected 2011 capital expenditures were $3.0–$3.2 billion. The company expected approximately $800 million of pension-plan contributions in 2011 and pension expense of approximately $240 million, versus $176 million in 2010.
- Management described the near-term outlook as strong and expected substantial 2011 operating cash flow. It estimated a 2011 effective tax rate of 23.5%–24.5% before unusual or special items and expected foreign exchange to have an even to slightly positive effect on operating income. The filing does not provide a clear consolidated 2011 revenue or EPS guidance figure.
- Key risks include CCE integration and synergy execution, increased debt and interest exposure, commodity and packaging costs, water availability, changing health and consumer preferences, competition, foreign exchange and political conditions, bottler financial health, pension funding, regulation and litigation. The company noted increased commodity hedging after CCE; some derivatives do not qualify for hedge accounting and their fair-value changes can affect reported earnings.
- CCE shareowner lawsuits in Delaware and Georgia were subject to a settlement stipulation awaiting court approval. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes could differ from estimates. Third-party guarantees totaled approximately $683 million; management did not consider payment probable.
- Management and the auditor excluded the acquired CCE North American operations from their 2010 internal-control evaluation. Those operations represented approximately 31% of consolidated assets and 10% of annual revenue. The auditor gave unqualified opinions on the financial statements and on controls within the scope of its audit.
Important facts for investors to verify
- Normalize earnings and EPS for the $4.978 billion CCE remeasurement gain, $597 million divestiture gain, associated charges and tax effects; compare operating results on a pro forma or otherwise comparable basis.
- Track CCE integration costs, delivery and commodity expenses, gross and operating margins, and progress toward the stated synergy targets.
- Review debt maturities, commercial-paper reliance, interest expense and liquidity following the acquisition-related increase in leverage.
- Assess the pension funding position and planned 2011 contributions, as well as potential multi-employer plan withdrawal liabilities.
- Monitor currency restrictions and exposure in Venezuela, outstanding legal matters and the integration of acquired operations into internal controls.