The Coca-Cola Company: 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing reports full-year results; fourth-quarter figures are also provided below. Amounts are U.S. dollars unless stated otherwise.
Business context
Coca-Cola markets more than 500 nonalcoholic beverage brands across more than 200 countries. Its business combines sales of beverage concentrates and syrups with finished beverage production and distribution. The 2010 acquisition of Coca-Cola Enterprises’ North American operations made North America predominantly a finished-products business, increasing reported revenue while lowering margins relative to concentrate operations.
Key financial results
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net operating revenues | $46.542 billion | $35.119 billion | +33% |
| Gross profit | $28.326 billion | $22.426 billion | +26% |
| Gross margin | 60.9% | 63.9% | Down 3.0 percentage points |
| Operating income | $10.154 billion | $8.449 billion | +20% |
| Operating margin | 21.8% | 24.1% | Down 2.3 percentage points |
| Net income attributable to Coca-Cola shareowners | $8.572 billion | $11.809 billion | -27% |
| Diluted EPS | $3.69 | $5.06 | -27% |
| Net cash from operating activities | $9.474 billion | $9.532 billion | -1% |
| Capital expenditures | $2.920 billion | $2.215 billion | +32% |
The Coca-Cola system’s unit case volume and concentrate sales volume each grew 5%. Revenue growth also reflected the full-year consolidation of CCE North America, new Dr Pepper Snapple distribution licenses, pricing and favorable foreign exchange.
Fourth quarter: Revenue was $11.040 billion versus $10.494 billion in Q4 2010; shareowner net income was $1.654 billion versus $5.771 billion; diluted EPS was $0.72 versus $2.46. The prior-year quarter included large transaction gains, so the earnings comparison is not indicative of underlying operating performance.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $12.803 billion; short-term investments were $1.088 billion. Current assets were $25.497 billion and current liabilities were $24.283 billion.
- Year-end borrowings included $12.871 billion of loans and notes payable, $2.041 billion of current maturities of long-term debt, and $13.656 billion of long-term debt. The company had $4.625 billion of undrawn general-purpose credit lines.
- Operating cash flow was nearly unchanged from 2010. The company attributed the decline mainly to higher pension contributions, Japan-related customer credit terms, interest payments and restructuring cash costs.
- Dividends paid were $4.300 billion; treasury stock purchases were $4.513 billion. Management expected to repurchase $2.5–$3.0 billion of stock in 2012, net of employee option proceeds. The 2012 annualized dividend was raised to $2.04 per share.
Material changes and unusual items
- CCE North America’s full-year consolidation drove much of the 2011 revenue increase and shifted the business mix toward lower-margin finished products. Higher commodity costs also pressured margins; the company reported $800 million of incremental costs for key inputs in 2011.
- 2010 shareowner net income included a $4.978 billion gain from remeasuring the CCE investment and a $597 million gain from selling Norwegian and Swedish bottling operations. These gains materially elevated the prior-year earnings comparison.
- 2011 other income included a $417 million gain related to the Arca–Contal merger, a $122 million gain related to an equity investee share issuance, and a $102 million gain on the sale of the Embonor investment.
- Other operating charges were $732 million, primarily productivity, integration and restructuring costs. The company said it completed the CCE North American integration initiative and realized nearly all of its targeted $350 million annualized savings by year-end.
Outlook, management commentary and risks
- Management expected 2012 incremental commodity-cost pressure of $350–$450 million, primarily from juices and sweeteners; capital expenditures of $3.0–$3.2 billion; and pension expense of approximately $200 million.
- A new four-year productivity and reinvestment program was expected to generate annualized savings of $550–$650 million by 2015, with savings reinvested in brand building and used in the near term to help offset commodity costs. Planned costs included approximately $300 million for additional North American integration synergies; costs for the global initiative were still being defined.
- Management expected the 2012 effective tax rate to be approximately 24%–25% and foreign currencies to have a mid-single-digit negative impact on full-year operating income. The filing does not provide a clear full-year revenue or EPS forecast.
- Key risks include commodity and packaging costs, water availability and quality, health-related concerns and potential beverage taxes or labeling rules, foreign exchange and political instability, bottler financial health, competition, labor relations, and execution of integration and productivity plans. The filing also discusses restrictions and uncertainty involving Venezuelan currency conversion and supply impacts from FDA restrictions on Brazilian orange juice containing carbendazim.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate underlying operating growth from the acquisition-driven revenue increase and the unusually large 2010 gains affecting earnings comparisons.
- Track whether margin pressure from the CCE business mix and commodity inflation moderates, and whether anticipated 2012 cost savings are realized.
- Assess the company’s short-term debt, pension funding needs, and the extent to which cash held overseas is available for U.S. uses.
- Monitor foreign-exchange exposure, especially Venezuela, and the cost and availability of orange juice and other key inputs.
- Review the full notes for legal contingencies, including the Aqua-Chem asbestos-related dispute; management said pending proceedings were not expected to have a material adverse effect, but could not estimate a reasonably possible loss for that matter.