Coca-Cola Company — Q3 2013 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 27, 2013; comparisons are to September 28, 2012, except balance-sheet comparisons, which are to December 31, 2012. Amounts are in millions of dollars except per-share data. The company operates a global beverage business; it notes that beverage sales are seasonal and can be affected by weather.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net operating revenues | $12,030 | $12,340 | $35,814 | $36,562 |
| Gross profit | $7,237 | $7,487 | $21,708 | $22,137 |
| Operating income | $2,472 | $2,793 | $8,123 | $8,596 |
| Net income attributable to Coca-Cola shareowners | $2,447 | $2,311 | $6,874 | $7,153 |
| Diluted EPS | $0.54 | $0.50 | $1.52 | $1.56 |
| Operating margin | 20.5% | 22.6% | 22.7% | 23.5% |
| Gross margin | 60.2% | 60.7% | 60.6% | 60.5% |
- Q3 revenue fell about 3%, while operating income fell about 11%; shareowner net income rose about 6% and diluted EPS rose 8%. The increase in net income was not equivalent to stronger operating performance: other income included a $615 million gain on Brazil bottling deconsolidation.
- For the first nine months, revenue declined about 2%, operating income about 6%, shareowner net income about 4%, and diluted EPS about 3%. The filing attributes revenue pressure to currency translation and structural changes, partly offset by volume and favorable pricing/mix.
- Worldwide unit case volume grew 2% in both Q3 and year to date; concentrate sales volume grew 1% in Q3 and 2% year to date. Q3 geographic volume varied: Pacific +5%, Eurasia & Africa +4%, North America +2%, Europe -1%, and Latin America approximately flat. Bottling Investments volume fell 18%, principally reflecting bottling divestitures and deconsolidation.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $7,712, down from $7,840. Investing activities used $2,983, compared with $10,399 used in the prior period; financing activities used $1,383, compared with $399 used.
- Cash and cash equivalents were $11,118; short-term investments were $6,139; and marketable securities were $3,202 at September 27. Current assets were $31,576 versus current liabilities of $33,042.
- Loans and notes payable, current maturities of long-term debt, and long-term debt totaled approximately $36.2 billion, compared with approximately $32.6 billion at year-end 2012. Long-term debt including current maturities had a reported fair value of $17,764 versus carrying value of $17,367.
- The company reported $6,410 of available credit lines. It repurchased 95.9 million shares during the first nine months for $3,820 and paid $2,494 in dividends. The quarterly dividend was raised to $0.28 per share, payable in December 2013.
- Capital expenditures were $1,625 for the nine months; management expected full-year 2013 capital expenditures of approximately $3.0 billion. Pension contributions were $574 year to date, with about $60 more expected in the remainder of 2013.
Material changes, outlook and risks
- Structural changes included selling a majority interest in Philippine bottling operations and deconsolidating Brazilian bottling operations. The company expected these transactions to reduce full-year 2013 revenue by 3%. The Brazil transaction generated a $615 million gain; the company retained an equity-method investment.
- Q3 other operating charges were $341, including $190 of intangible-asset impairments, $97 for the productivity and reinvestment program, and $45 for other restructuring and integration initiatives. Nine-month charges were $594. The impairment included $108 for trademarks being phased out and $82 of Bottling Investments goodwill, reflecting revised market and volume expectations.
- Other notable nine-month items included a $149 million charge related to Venezuela’s currency devaluation, a $114 million net loss associated with the merger of Japanese bottling partners, and a $139 million gain from Coca-Cola FEMSA share issuance. These items, along with the Brazil gain, make reported earnings less representative of underlying operating trends.
- Management described the near-term business outlook as strong and expected substantial operating cash flows. It estimated a 23% full-year 2013 effective tax rate, excluding unusual items. Based on early-October exchange rates and hedging, it expected currency movements to reduce Q4 operating income by 5%–6% and full-year operating income by about 4%.
- The four-year productivity and reinvestment program targeted annualized savings of $550–$650 million, with the full annual benefit expected in 2015; savings were intended to offset costs and support brand investment. The filing also forecast foreign-exchange pressure and identified ongoing macroeconomic weakness, especially in parts of Europe, and currency-conversion restrictions in Argentina and Venezuela.
- Liquidity considerations include significant foreign-held funds: $15.1 billion in cash, cash equivalents, short-term investments and marketable securities at foreign subsidiaries, mostly considered indefinitely reinvested. The company said it did not foresee a need to repatriate these funds; repatriation could raise tax expense. It also expected to pay approximately $492 million in January 2014 on exercised put options relating to German bottling operations.
- Contingencies include guarantees of third-party debt totaling $639 million, which management did not consider probable to require payment. Management said pending legal proceedings were not expected to have a material adverse effect overall, but could not estimate a possible loss related to Aqua-Chem asbestos litigation. The company reported no material changes to previously disclosed market-risk information.
Important facts for investors to verify
- Separate recurring operating trends from the Brazil deconsolidation gain and other unusual gains, charges, and currency-related items.
- Assess whether volume growth and pricing/mix can offset foreign-exchange headwinds, weak markets, and the revenue effect of bottling structural changes.
- Review the increase in borrowings, the current-liability position, and the timing of the German bottling put-option payment alongside available cash and credit facilities.
- Track further impairment risk: management cited higher costs of capital and the possibility of additional charges if volume, pricing, or market assumptions weaken.
- Monitor the delivery and timing of targeted productivity savings, planned capital spending, and the stated full-year currency and tax expectations.