KO

Business Context and Reporting Period

Company: The Coca-Cola Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended April 3, 2009 (First Quarter 2009)
Comparison Period: Three months ended March 28, 2008

The Company reported results for a quarter containing five additional selling days compared to the prior year. The period was characterized by a strengthening U.S. dollar, challenging macroeconomic conditions in key markets (Europe, Russia, Turkey), and the termination of the proposed acquisition of China Huiyuan Juice Group Limited following regulatory rejection.

Key Financial Metrics

Margins: Gross profit margin decreased to 63.9% from 64.4%. Operating margin increased slightly to 26.0% from 25.4%.

Material Changes vs. Prior Period

• Revenue Decline: Net operating revenues decreased 3% ($210 million). While concentrate sales volume increased 7% and price/mix contributed 2%, a 10% negative impact from foreign currency fluctuations (stronger U.S. dollar) and a 2% impact from structural changes (deconsolidation of bottling operations) drove the decline.
• Profitability: Net income decreased 10% ($152 million). Operating income remained relatively flat despite revenue declines, aided by a 6% reduction in Selling, General, and Administrative (SG&A) expenses.
• Debt Structure: Long-term debt increased significantly by $2,236 million. The Company issued $2.25 billion in long-term notes (3.625% and 4.875% rates) to replace commercial paper and short-term debt.
• Equity Income: Equity income dropped $120 million to $17 million, primarily due to the Company's proportionate share of asset impairments and restructuring charges recorded by equity method investees ($52 million).
• Other Charges: Other operating charges increased to $92 million from $85 million, driven by restructuring ($52 million), asset impairment ($23 million), and productivity initiatives ($17 million).

Guidance, Outlook, and Risks

• Foreign Exchange Outlook: Management expects foreign currency fluctuations to have an estimated 14% to 16% negative impact on operating income in the second quarter of 2009.
• Capital Allocation: The Company is evaluating whether to reactivate its share repurchase program, which was curtailed in late 2008. No repurchases were made in Q1 2009. Dividends of $950 million were paid in the quarter.
• Pension Obligations: Due to the decline in equity markets and discount rates, the Company contributed $193 million to pension plans in Q1 2009 and anticipates an additional $70 million in contributions for the remainder of the year. Full-year 2009 U.S. pension costs are expected to increase by approximately $100 million.
• Acquisition Status: The proposed acquisition of Huiyuan Juice was terminated after the Chinese Ministry of Commerce declined approval. The Company is evaluating alternative uses for the cash accumulated for this transaction.
• Productivity Initiatives: The Company targets $500 million in annualized savings by the end of 2011, with total expected costs of approximately $500 million to achieve these savings.

Investor Verification Checklist

• Currency Hedging Effectiveness: Verify the extent to which hedging programs offset the 10% revenue and 17% operating income headwinds from the strong U.S. dollar.
• Impairment Details: Review the specific nature of the $23 million intangible asset impairment and the $27 million other-than-temporary impairment of a cost method investment.
• Pension Funding: Confirm the trajectory of pension contributions and the impact of market volatility on future benefit costs beyond 2009.
• Debt Maturity Profile: Assess the impact of the new long-term debt issuances on future interest expense, which is expected to increase for the full year 2009.
• Volume Trends: Monitor unit case volume growth in key markets (North America, Europe) where declines were reported, versus growth in emerging markets (India, China, Latin America).