Business context and reporting period
The Coca-Cola Company’s unaudited Form 10-Q covers the three months ended March 29, 2013, compared with the three months ended March 30, 2012. Results are seasonal, with higher beverage volumes generally in the second and third quarters; Q1 2013 had two fewer selling days than Q1 2012. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net operating revenues | $11,035 | $11,137 | Down 1% |
| Gross profit / margin | $6,711 / 60.8% | $6,789 / 61.0% | Margin down 0.2 pts |
| Operating income / margin | $2,408 / 21.8% | $2,509 / 22.5% | Income down 4%; margin down 0.7 pts |
| Income before taxes | $2,344 | $2,725 | Down 14% |
| Net income attributable to Coca-Cola shareowners | $1,751 | $2,054 | Down 15% |
| Diluted earnings per share | $0.39 | $0.45 | Down 13% |
| Operating cash flow | $478 | $493 | Down 3% |
| Dividends per share | $0.28 | $0.255 | Increased |
Worldwide unit case volume grew 4%, while concentrate sales volume rose 2%. Revenue was affected by lower selling-day count and a 2% unfavorable currency impact; price, product and geographic mix was approximately flat overall. Gross margin was pressured by hedging effects, currency, and acquired bottling operations, partly offset by the deconsolidation of Philippine bottling operations. Operating income also reflected foreign exchange headwinds, restructuring charges and fewer selling days.
Financial position and liquidity
- At March 29, 2013, cash, cash equivalents and short-term investments totaled $15.338 billion; marketable securities were a further $3.090 billion.
- Total assets were $88.450 billion and total equity was $32.894 billion. Current liabilities were $31.102 billion versus current assets of $31.519 billion.
- Debt comprised $16.322 billion of loans and notes payable, $4.505 billion of current long-term debt and $14.291 billion of long-term debt. Long-term debt including current maturities had a carrying amount of $18.796 billion and fair value of $19.581 billion.
- The company issued $2.5 billion of long-term debt in Q1. Current maturities rose to $4.505 billion, primarily reflecting debt due or scheduled for redemption within 12 months. Available backup credit lines were $6.410 billion.
- Investing activities used $1.218 billion, including $498 million of property, plant and equipment purchases. Financing activities provided $1.435 billion; treasury share purchases used $1.523 billion in cash. The Q1 dividend of $1.247 billion was paid April 1, after quarter-end.
Material changes, outlook and risks
- Net income was pressured by a $149 million charge related to Venezuela’s currency devaluation, including the company’s share of an investee’s charge; a further $39 million net charge from unusual or infrequent items at equity-method investees contributed to lower equity income. Other income (loss) was a $165 million loss, versus $49 million of income a year earlier.
- The sale of a majority interest in Philippine bottling operations to Coca-Cola FEMSA closed in January. The company received $690 million in proceeds from business and investment disposals during the quarter and now accounts for its remaining Philippine interest under the equity method. Brazilian bottling operations remained classified as held for sale.
- Other operating charges were $121 million, primarily $102 million for the four-year productivity and reinvestment program and $21 million for other restructuring and integration initiatives. Since launch, the program had incurred $372 million of pretax costs. Management targets $550–$650 million of annualized savings, phased in over time, with the full annual benefit expected in 2015; savings are intended to support brand investment and offset costs.
- Management said the near-term outlook remained strong and expected substantial operating cash flow for the rest of 2013. It forecast approximately $3.0 billion of 2013 capital expenditures, $3.0–$3.5 billion of net treasury share purchases, and an estimated 23.5% full-year effective tax rate excluding unusual items. Expected incremental commodity costs were approximately $100 million for full-year 2013. Pension contributions of approximately $82 million were anticipated for the remainder of 2013.
- Based on early-April exchange rates and hedging, management expected currencies to reduce consolidated operating income by 3% in Q2 and 2% for full-year 2013. It also expected foreign exchange to remain a headwind through year-end.
- Foreign cash, cash equivalents, short-term investments and marketable securities totaled $15.2 billion; most foreign earnings were considered indefinitely reinvested. Argentina and Venezuela currency-conversion restrictions constrained remittances; subsidiaries in those countries held $559 million of these assets.
- Contingencies include guarantees of third-party indebtedness totaling $632 million, which management did not consider probable to require payment; approximately 40,000 active asbestos claims against former subsidiary Aqua-Chem, with the company unable to estimate its potential loss; and an EPA notice alleging RMP violations at a Michigan juice plant, with proposed civil penalties of $278,000. The company said pending legal matters were not expected to have a material adverse effect overall. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether volume growth, pricing and mix can offset currency pressure and the impact of fewer selling days.
- How much of the earnings decline reflects recurring operating conditions versus Venezuela, investee items, hedging and restructuring charges.
- Progress and costs against the $550–$650 million annualized productivity savings target and the expected 2015 realization date.
- Debt maturities, refinancing needs, share repurchases and dividend cash requirements relative to operating cash flow and accessible liquidity.
- Execution and financial effects of the Philippine divestiture and planned Brazilian bottling transaction, plus developments in the Aqua-Chem appeal and EPA matter.