The Coca-Cola Company — Q1 2010 Form 10-Q
Business context and period. The filing covers the three months ended April 2, 2010, compared with the three months ended April 3, 2009. The 2010 quarter had one fewer day. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data. Results are unaudited, and beverage sales are seasonal, with higher volumes typically in the second and third quarters.
Key financial results
- Revenue: $7,525, up 5% from $7,169. Concentrate sales volume increased 3%; currency added about 6 percentage points, while structural changes and price/product/geographic mix each reduced growth by about 2 percentage points.
- Profit: Operating income was $2,183, up 17% from $1,863. Net income attributable to Coca-Cola shareowners was $1,614, up 20% from $1,348. Diluted EPS was $0.69 versus $0.58; dividends per share were $0.44 versus $0.41.
- Margins: Gross margin rose to 66.2% from 63.9%; operating margin rose to 29.0% from 26.0%. Management cited favorable geographic and product mix, currency, and the deconsolidation of bottling entities.
- Cash flow: Operating cash flow was $1,326, versus $873. Investing activities used $1,368, including $915 of purchases of other investments, chiefly time deposits, and $393 of capital expenditures. Financing activities used $1,043, including $1,015 of dividends. Cash and cash equivalents fell by $1,337 to $5,684.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $8,722, compared with $9,151 at year-end 2009. Current assets were $17,208 and current liabilities $13,583. Loans and notes payable were $6,670; current maturities of long-term debt were $546; long-term debt was $4,419. The company also reported about $2.4 billion of committed, unused credit lines.
Material changes and unusual items
- Revenue rose despite a 2% decline in North American unit case volume and flat European unit case volume. Worldwide unit case volume and concentrate sales volume each grew 3%.
- Equity income increased to $136 from $17, reflecting improved investee results, currency effects, fewer investee impairment and restructuring charges, and the accounting change described below.
- Other income (loss) was a loss of $115, including a $103 Venezuelan currency remeasurement charge and $26 of available-for-sale investment impairments. The Venezuela charge followed currency devaluation and the country’s designation as hyperinflationary.
- Other operating charges were $96, including $50 for productivity initiatives, $40 of restructuring charges and $6 of CCE transaction costs. The prior-year quarter included $92 of such charges, including a $23 asset impairment.
- Effective tax rate was 25.4%, versus 25.1%; 2010 included a $14 tax charge related to legislation affecting Medicare Part D subsidies.
- New VIE accounting guidance led to deconsolidation of certain primarily bottling entities from January 1, 2010. The company said the change had no material impact on consolidated net income, but affected individual financial statement lines and segment volumes.
Outlook, transactions and risks
- Management said the near-term outlook remained strong and expected substantial operating cash flow during 2010. It expected full-year price and product/geographic mix to be neutral and currency to have a slightly favorable impact on operating income, based on forecast exchange rates and existing hedges.
- The company expected its 2010 effective tax rate to be approximately 23.2% before discrete items, and full-year pension expense to decrease by approximately $50 million versus 2009. It expected 2010 net capital expenditures to be in line with 2009 and 2008.
- Productivity initiatives target $500 million in annualized savings by the end of 2011; the company expected total initiative costs of approximately $500 million by then and said it was on track. It was reviewing additional German bottling integration opportunities, but had not finalized further plans.
- The proposed CCE transaction would acquire CCE’s North American operations using Coca-Cola’s 34% CCE stake, valued at about $3.4 billion, and assume approximately $8.9 billion of CCE debt. Separately, Coca-Cola agreed to sell its Norwegian and Swedish bottling interests for about $822 million in cash. The transactions were subject to shareholder and regulatory approvals and were expected to close in Q4 2010. The new CCE entity also received a right to acquire Coca-Cola’s majority interest in its German bottling operation 18 to 36 months after signing, at then-current fair value.
- Management expected to repurchase at least $1.5 billion of shares in 2010, with repurchases anticipated after the CCE North American transaction closes. No shares were repurchased under the authorized plan during the quarter.
- Risks include currency movements, economic and competitive conditions, weather and seasonality, emerging-market and regulatory exposure, and transaction execution and approvals. CCE shareowner lawsuits in Delaware and Georgia seek to block or rescind the proposed transaction; Coca-Cola said it believed the claims were without merit and would defend itself. The filing also reported $348 million of third-party guarantees, which management did not consider likely to require payment, and discussed ongoing legal and tax matters.
Important facts for investors to verify
- Whether the CCE acquisition and related bottling divestitures received required approvals, closed as expected, and resulted in the disclosed debt assumption and cash proceeds.
- How much reported growth and margin improvement came from currency and the VIE deconsolidations, versus underlying volume, pricing and mix.
- Whether the Venezuela currency remeasurement, future currency changes, and restrictions on repatriating Venezuelan cash create further earnings or liquidity effects.
- Progress against the $500 million annualized productivity-savings target and the remaining restructuring and integration costs.
- Actual operating cash flow, investment spending, debt levels, and timing of the planned share repurchases and pension contributions.