Coca-Cola Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 28, 2014; comparative period ended March 29, 2013. Amounts are in U.S. dollars unless stated otherwise. Interim results are unaudited; beverage sales are seasonal, and the company cautions that first-quarter results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Net operating revenue | $10.576 billion | $11.035 billion | Down 4% |
| Gross profit / gross margin | $6.493 billion / 61.4% | $6.711 billion / 60.8% | Margin improved, partly reflecting bottling-operation deconsolidations |
| Operating income / operating margin | $2.376 billion / 22.5% | $2.408 billion / 21.8% | Income down about 1%; margin improved |
| Net income attributable to Coca-Cola shareowners | $1.619 billion | $1.751 billion | Down about 8% |
| Diluted earnings per share | $0.36 | $0.39 | Down about 8% |
| Operating cash flow | $1.066 billion | $478 million | Up $588 million |
| Cash, cash equivalents and short-term investments | $16.049 billion | $17.121 billion at Dec. 31, 2013 | Balance-sheet comparison |
| Total debt, including current maturities and short-term borrowings | $38.441 billion | $37.079 billion at Dec. 31, 2013 | Calculated from reported debt components |
Net cash used in investing activities was $2.213 billion, including the $1.265 billion purchase of a roughly 10% stake in Green Mountain Coffee Roasters (now Keurig Green Mountain). Net cash provided by financing activities was $205 million. The company had $6.321 billion available under backup credit lines. Current liabilities were $30.056 billion and current assets were $31.052 billion.
Quarterly dividends were $0.305 per share, versus $0.280 a year earlier. The $1.342 billion dividend declared in Q4 2013 was paid on April 1, 2014, after quarter-end. Q1 share repurchases totaled 20.9 million shares for $804 million.
Material changes and operating trends
- Worldwide unit case volume and concentrate sales volume each increased 2%. Revenue fell 4%, reflecting a 4% adverse currency impact and a 2% adverse impact from structural changes, partly offset by 2% favorable price, product and geographic mix.
- Regional unit case volume increased 7% in Asia Pacific, 2% in Eurasia and Africa and 1% in Latin America; it was flat in North America and declined 4% in Europe. Bottling Investments volume fell 10%, mainly reflecting the Philippines and Brazil bottling-operation changes.
- Foreign exchange reduced consolidated operating income by 11%. A stronger U.S. dollar weighed on several markets. Europe’s volume was also affected by weak consumer conditions and Easter timing; Mexico faced a new excise tax, and Thailand’s volume was affected by political unrest.
- Other operating charges were $128 million, including $86 million for the productivity and reinvestment program and $42 million for other restructuring and integration initiatives. Q1 2013 charges were $121 million.
Outlook, commentary and risks
- Management described the near-term outlook as strong and expected substantial operating cash flow for the remainder of 2014. It forecast 2014 capital expenditures of $2.5–$3.0 billion and treasury-share purchases of $2.5–$3.0 billion, net of employee stock-option proceeds.
- Based on early-April spot rates and hedging, the company expected currencies, including the Venezuelan bolivar, to reduce consolidated operating income by 7% in both Q2 and full-year 2014. Management also expected structural changes to reduce 2014 revenue by about 1%, with the full impact in the first half.
- The productivity program was expanded to target an additional $1 billion of productivity by 2016, primarily for reinvestment in media and consumer-facing marketing. The company had incurred $850 million of pretax program expenses since its 2012 launch. Management expected full-year pension expense to decline about $160 million versus 2013.
- Venezuela’s exchange-rate changes led Coca-Cola to remeasure subsidiary net monetary assets at the SICAD 1 rate of 10.8 bolivars per U.S. dollar, recording a $226 million charge. The company reported $266 million of Venezuelan net monetary assets, including $182 million in cash and investments, and $222 million of receivables from its bottling partner. Currency access restricted dividend transfers; further devaluation or collection and convertibility issues could result in additional losses or impairment.
- The company was evaluating the effect of a Venezuelan law capping business profit margins. It also reported pending legal matters, including Aqua-Chem asbestos litigation; management could not estimate the company’s potential loss in that matter, but stated that pending proceedings were not expected to have a material adverse effect on the company as a whole.
Important facts for investors to verify
- Whether revenue, volume and margins improve after accounting for currency movements, bottler structural changes, seasonality and the one fewer selling day in Q1.
- The assumptions behind the 7% currency headwind, especially Venezuela’s exchange-rate access, the $222 million bottler receivable and the ability to transfer funds.
- Progress and costs of the expanded productivity program, German bottling integration and the additional approximately $50 million of German integration charges announced in April.
- Debt and liquidity trends, including short-term borrowing, planned capital spending, share repurchases and dividend commitments.
- Developments in the Venezuelan profit-margin cap, Mexico’s excise tax, legal contingencies and other risks referenced in the company’s 2013 Form 10-K.