KO

Business Context and Reporting Period

This Form 10-Q covers The Coca-Cola Company for the quarterly period ended September 30, 2003. The company operates globally across six segments: North America, Africa, Europe/Eurasia/Middle East, Latin America, Asia, and Corporate. The reporting period reflects the impact of a weaker U.S. dollar, strategic acquisitions (including water brands), and significant streamlining initiatives in North America and Germany.

Key Financial Metrics

Note: 2002 Net Income and EPS figures include a cumulative effect of accounting change (SFAS No. 142) of $926 million pretax ($367M company + $559M equity investees) recorded in Q1 2002, which significantly depressed 2002 comparables.

Material Changes vs. Prior Period

• Revenue Growth: Net operating revenues increased 6% in Q3 and 7% year-to-date (YTD) compared to 2002. Growth was driven by a 4% increase in gallon shipments, a weaker U.S. dollar (favorable impact of ~3%), and structural changes (inclusion of an extra month of German bottler revenue).
• Profitability: Q3 Operating Income remained flat ($1,451M vs $1,450M) despite revenue growth, primarily due to $43M in streamlining charges and increased marketing expenses. YTD Operating Income decreased 1% ($4,129M vs $4,168M) due to $272M in streamlining charges and higher stock-based compensation, partially offset by a $52M vitamin antitrust settlement.
• Equity Income: Equity income decreased significantly in Q3 ($86M vs $113M) and YTD ($325M vs $350M) due to a $95M non-cash charge related to an equity investee in Latin America (Coca-Cola FEMSA) involving asset impairments in Venezuela.
• Cash Flow: Net cash provided by operating activities increased 21% YTD to $4.121 billion, driven by higher profits and improved working capital management.

Guidance, Outlook, and Risks

• Streamlining Initiatives: The company expects total pretax charges of approximately $500 million for 2003 related to streamlining operations (separating ~2,800 associates). $272 million has been recognized through Q3, with the remainder expected in Q4. These initiatives are projected to save $50 million pretax in 2003 and $100 million annually starting in 2004.
• Tax Rate: The estimated full-year 2003 effective tax rate on operations was revised down to approximately 22% (from 24%), reflecting strong profit contributions from lower-taxed international locations.
• Share Repurchases: The company estimates total share repurchases of approximately $1.5 billion for 2003 and expects to increase repurchase levels in 2004.
• Japan Restructuring: Effective October 1, 2003, a new supply chain management company in Japan will shift a portion of the business from a finished product model to a concentrate model. This is expected to reduce revenues and cost of goods sold by ~$1.0 billion annually but will not impact underlying operating income.
• Risks: Key risks include political instability in the Middle East and Venezuela, currency fluctuations, adverse weather, and litigation (including asbestos claims related to a former subsidiary and antitrust investigations in Europe).

Investor Verification Checklist

• Streamlining Costs: Verify the timing and magnitude of the remaining $228 million in expected streamlining charges for Q4 2003.
• Latin America Exposure: Assess the ongoing impact of the $95M charge related to Coca-Cola FEMSA and the political/economic situation in Venezuela on future equity income.
• Japan Transition: Monitor the Q4 2003 financial statements for the initial impact of the Japan supply chain restructuring on revenue and cost of goods sold line items.
• Currency Hedging: Review the effectiveness of hedging strategies given the volatility in the Euro, Yen, and Latin American currencies.
• Debt Maturity: Confirm the company's liquidity position relative to its $5.5 billion total debt, noting the heavy reliance on commercial paper.