Coca-Cola Company — Q3 2011 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2011, compared with periods ended October 1, 2010. Figures are in millions of dollars except per-share data. Comparisons are substantially affected by Coca-Cola’s October 2010 acquisition of CCE’s North American business and related Dr Pepper Snapple distribution licenses; reported revenue growth is not an organic-growth measure. Beverage sales are seasonal, with the second and third quarters typically strongest.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net operating revenues | $12,248 | $8,426 | $35,502 | $24,625 |
| Gross profit | $7,373 | $5,508 | $21,689 | $16,211 |
| Operating income | $2,750 | $2,344 | $8,203 | $7,290 |
| Net income attributable to Coca-Cola shareowners | $2,221 | $2,055 | $6,918 | $6,038 |
| Diluted EPS | $0.95 | $0.88 | $2.97 | $2.59 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $6,800 | $7,224 |
- Reported revenue increased 45% in Q3 and 44% year to date; management said the CCE acquisition and DPS licenses were major drivers. Consolidated revenue growth cannot be cleanly separated into structural and other factors during the CCE integration.
- Global unit case volume rose 5% in Q3 and 6% year to date. Q3 North American unit case volume rose 5%, including 4 percentage points attributed to the new DPS licenses.
- Gross margin fell to 60.2% from 65.4% in Q3 and to 61.1% from 65.8% year to date. Consolidated operating margin declined to 22.5% from 27.8% in Q3 and to 23.1% from 29.6% year to date. The filing attributes the pressure principally to consolidating CCE’s lower-margin finished-product bottling operations and higher commodity costs.
- Q3 diluted EPS increased 8%; nine-month diluted EPS increased 15%. Year-to-date other income was $447 million versus a $109 million loss, helped by gains on the Arca–Contal merger and the sale of Embonor. These gains make the year-to-date comparison less representative of recurring operations.
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $12,682 million and short-term investments were $3,684 million, totaling $16,366 million, up from $11,199 million at December 31, 2010.
- Current liabilities were $25,581 million. Loans and notes payable were $13,398 million, current maturities of long-term debt $2,082 million, and long-term debt $13,708 million. These debt categories total $29,188 million, compared with $23,417 million at year-end 2010; the increase in short-term borrowings was principally associated with commercial paper.
- Nine-month operating cash flow was $6,800 million, down 6%. Management cited higher pension contributions, a longer cash conversion cycle after the CCE acquisition, extended credit terms in Japan, and restructuring-related payments. Investing cash outflow was $3,414 million; property, plant and equipment purchases were $1,915 million.
- Financing activities provided $1,176 million. The Company paid $2,159 million in dividends and reported $3,608 million of cash outflow for treasury-stock purchases. It had $4,564 million of unused credit lines available at quarter-end.
Outlook, commentary and risks
- Management described the near-term outlook as strong and expected substantial operating cash flow in 2011. It forecast full-year capital expenditures of $3.0–$3.2 billion and said gross margin was expected to be lower for full-year 2011 than 2010.
- Management estimated approximately $800 million of full-year 2011 unfavorable commodity-cost impact from key inputs. It expected foreign-exchange movements to reduce Q4 operating income by a low-to-mid-single-digit percentage, while providing a low-to-mid-single-digit benefit for the full year.
- The company estimated Japan’s earthquake and tsunami would reduce 2011 diluted EPS by $0.03–$0.05. It recorded $84 million of related charges through September, had not recognized a potential insurance recovery, and said the eventual impact remained uncertain.
- CCE integration costs totaled $350 million to date; management expected total costs of about $425 million and at least $350 million in annual operational synergies once fully integrated, phased in over four years. It expected $140–$150 million of net cost synergies in 2011. Productivity initiatives had incurred $428 million in costs; management targeted at least $500 million in annualized savings by year-end 2011.
- Risks include foreign-exchange and political exposure in Venezuela, where exchange restrictions could impede collection of bottler receivables; management reported approximately $250 million of net monetary assets at the subsidiary and less than $200 million of related receivables and product intangible assets. The filing also describes ongoing legal matters, including Aqua-Chem asbestos claims; Coca-Cola could not estimate its potential loss, though management did not expect pending legal matters in aggregate to have a material adverse effect. Third-party debt guarantees totaled $652 million, which the Company did not consider probable to be called.
Most important facts for investors to verify
- How much of the sharp reported revenue increase reflects CCE consolidation and DPS licensed-brand distribution, rather than comparable underlying growth.
- Whether commodity inflation, finished-product mix and CCE integration continue to pressure gross and operating margins, and whether projected savings are achieved.
- Whether year-to-date earnings excluding the Arca–Contal and Embonor gains show a different trend from reported earnings.
- Whether cash conversion improves as management expected, and how commercial-paper balances, debt maturities and capital spending evolve.
- Whether the Japan impact, Venezuela collection and currency exposures, and unresolved legal contingencies change materially.