Coca-Cola Company — Q3 2010 Form 10-Q
Business context and period: Unaudited results cover the three and nine months ended October 1, 2010; comparisons are with the periods ended October 2, 2009. Amounts are in U.S. dollars, millions except per-share data. Beverage sales are seasonal and may be affected by weather.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | First 9 months 2010 | First 9 months 2009 |
|---|---|---|---|---|
| Net operating revenues | $8,426 | $8,044 | $24,625 | $23,480 |
| Gross profit | $5,508 | $5,110 | $16,211 | $15,043 |
| Operating income | $2,344 | $2,150 | $7,290 | $6,451 |
| Net income attributable to Coca-Cola shareowners | $2,055 | $1,896 | $6,038 | $5,281 |
| Diluted earnings per share | $0.88 | $0.81 | $2.59 | $2.27 |
| Dividends per share | $0.44 | $0.41 | $1.32 | $1.23 |
- Margins: Gross margin rose to 65.4% from 63.5% in Q3 and to 65.8% from 64.1% year to date. Operating margin increased to 27.8% from 26.7% in Q3 and to 29.6% from 27.5% year to date. Management cited favorable geographic and product mix, currency effects, and the deconsolidation of bottling entities.
- Volume and revenue drivers: Worldwide unit case volume increased 5% in both periods; concentrate sales volume rose 7% in Q3 and 5% year to date. Revenue increased 5% in Q3 and year to date. Year-to-date revenue benefited 3 percentage points from currency, while structural changes reduced revenue growth by 3 points.
- Cash flow: Nine-month operating cash flow was $7,224, versus $6,270. Investing cash outflow was $2,713, versus $1,560; financing cash outflow was $885, versus $884. Purchases of property, plant and equipment were $1,335. Cash and cash equivalents ended at $10,509, up from $7,021 at year-end 2009.
- Liquidity and debt at October 1: Cash, cash equivalents and short-term investments totaled $13,153, compared with $9,151 at December 31, 2009. Loans and notes payable were $8,390, current maturities of long-term debt $547, and long-term debt $4,456. These balances precede the CCE North American acquisition, which closed the following day. The company also reported approximately $2.4 billion in unused committed credit lines before closing.
- Other: Equity income rose to $355 in Q3 and $847 year to date, from $282 and $609. The estimated full-year effective tax rate was approximately 23.0%. Nine-month dividends paid were $3,034.
Material changes and unusual items
- On October 2, 2010, immediately after the reporting period, Coca-Cola acquired CCE’s North American business. It assumed approximately $8.0 billion of CCE debt and paid approximately $1.3 billion cash, including about $0.9 billion related to a debt shortfall. The acquired business is not included in the October 1 balance sheet.
- On October 2, the company also sold its Norwegian and Swedish bottling operations to New CCE for approximately $0.9 billion cash. At October 1, those businesses were classified as held for sale, with $613 million of assets and $214 million of liabilities. The transactions’ working-capital amounts remained subject to refinement.
- The CCE transaction was accompanied by a $715 million one-time payment to Dr Pepper Snapple Group for long-term brand distribution licenses; this payment occurred after quarter-end.
- Other operating charges were $100 in Q3 and $274 year to date, including restructuring, integration, productivity and CCE transaction costs. Nine-month other income/loss included a $103 Venezuelan currency remeasurement loss and $26 of investment impairment charges; the quarter included a $23 gain on the sale of part of the Leao Junior investment.
- Venezuela’s hyperinflationary status and currency devaluation resulted in the remeasurement loss. Further devaluation could cause additional losses or impairment; the Venezuelan subsidiary held approximately $200 million in monetary assets at quarter-end.
- Beginning in 2010, revised accounting guidance led to deconsolidation of certain bottling-related variable-interest entities. Management said the change had a nominal impact on shareowner net income, but affected individual revenue, expense and volume measures.
Outlook, commentary and risks
- Management expected substantial operating cash generation in 2010 and estimated 2010 capital spending on property, plant and equipment to be in line with 2009 and 2008.
- Management expected price and product/geographic mix to be approximately even for full-year 2010. It anticipated foreign exchange would have a minimal to low-single-digit negative impact on Q4 operating income.
- After closing the CCE acquisition, the company expected at least $350 million of annual operating synergies, phased in over four years, with the full annual benefit expected in year four. Integration costs were estimated at approximately $425 million over the next three years.
- The company remained on track for a $500 million annualized productivity-savings target by end-2011, with total initiative costs expected to be approximately $500 million by then. It also expected to repurchase approximately $2 billion of stock in Q4 2010 after pausing repurchases pending the CCE transaction.
- Key risks include difficult economic conditions in parts of Europe and North America, foreign exchange and political risks, emerging-market volatility, weather and seasonality, commodity and interest-rate exposures, and impairment risks. Legal proceedings related to the CCE transaction included a proposed Georgia settlement subject to court approval; related Delaware litigation was expected to be dismissed if that settlement received final approval. Management stated pending legal matters were not expected to materially adversely affect the company as a whole.
Investor verification priorities
- Verify the final purchase accounting, acquired debt and working-capital adjustments for the CCE transaction, and the realized proceeds and adjustments for the Nordic bottling divestiture.
- Track delivery, timing and costs of the CCE integration synergies and the productivity savings targets.
- Assess the effect of the CCE acquisition and related financing on leverage, liquidity, interest expense and future cash flows; the quarter-end balance sheet predates the acquisition.
- Monitor currency developments in Venezuela and related exposure to further losses or asset impairment.
- Review the outcome of the CCE shareowner litigation and approval of the proposed settlement, as well as the company’s disclosed tax and other legal contingencies.