The Coca-Cola Company — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below where relevant. Unless stated otherwise, amounts are in U.S. dollars. Prior-year figures reflect the company’s retrospective pension-accounting change, and per-share amounts reflect the 2012 two-for-one stock split.
Business context and reporting period
Coca-Cola owns or licenses more than 500 nonalcoholic beverage brands and sells products in more than 200 countries. Its business combines higher-margin concentrate and syrup sales with lower-margin finished beverage operations, including North American bottling through Coca-Cola Refreshments. The Coca-Cola system sold approximately 27.7 billion unit cases in 2012, up 4% from 2011. Sparkling beverages represented about 75% of worldwide volume.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net operating revenues | $48.017 billion | $46.542 billion | +3% |
| Gross profit | $28.964 billion | $28.327 billion | +2% |
| Gross margin | 60.3% | 60.9% | Down 0.6 percentage point |
| Operating income | $10.779 billion | $10.173 billion | +6% |
| Operating margin | 22.4% | 21.9% | Up 0.5 percentage point |
| Net income attributable to Coca-Cola shareowners | $9.019 billion | $8.584 billion | +5% |
| Diluted earnings per share | $1.97 | $1.85 | +6% |
| Cash from operating activities | $10.645 billion | $9.474 billion | +12% |
| Capital expenditures | $2.780 billion | $2.920 billion | Down $140 million |
Operating cash flow less capital expenditures was approximately $7.865 billion in 2012. Revenue growth reflected 4% volume growth, favorable 1% price/product/geographic mix and a 3% adverse currency impact. Management attributed the lower gross margin primarily to commodity-cost increases and mix effects; key input costs added $225 million of expense. Operating income benefited in part from reversals of previously recognized incentive-compensation expense.
Fourth-quarter 2012 revenue was $11.455 billion versus $11.040 billion a year earlier. Shareowner net income was $1.866 billion versus $1.657 billion; diluted EPS was $0.41 versus $0.36.
Financial position, liquidity and capital allocation
- At December 31, 2012, total assets were $86.174 billion and total liabilities were $53.006 billion. Cash and cash equivalents were $8.442 billion; short-term investments were $5.017 billion; marketable securities were $3.092 billion.
- Current assets were $30.328 billion and current liabilities were $27.821 billion. The resulting current ratio was approximately 1.09.
- Loans and notes payable were $16.297 billion, current maturities of long-term debt were $1.577 billion, and long-term debt was $14.736 billion. Total debt across these balance-sheet categories was approximately $32.610 billion, up from approximately $28.568 billion in 2011.
- The company reported $6.314 billion of undrawn general-purpose credit lines. Management stated that liquidity was strong and expected operating cash flows to cover commitments.
- Cash dividends paid were $4.595 billion and treasury-stock purchases were $4.559 billion in 2012. The board raised the 2013 quarterly dividend to $0.28 per share, or $1.12 annualized, and the company expected $3.0–$3.5 billion of net share repurchases in 2013.
Material changes versus the prior comparable period
- Worldwide unit case volume grew 4%, compared with 5% in 2011. Eurasia and Africa led reported growth at 11%; Europe declined 1%. North America grew 2%, including still-beverage strength that offset a 1% decline in sparkling beverages.
- Currency reduced 2012 revenue by 3% and operating income by approximately 5%. This reversed the favorable currency contribution to operating income in 2011.
- Income from equity-method investments increased 19% to $819 million, primarily reflecting improved investee results and the Aujan investment, partly offset by currency effects.
- Other income, net, fell to $137 million from $529 million. The 2012 result included, among other items, gains on the Andina/Polar merger and Coca-Cola FEMSA share issuance, offset by a $108 million loss on the planned Philippine bottling sale and other charges. The 2011 result included sizable transaction-related gains.
- Cash and cash equivalents decreased $4.361 billion, while short-term investments and marketable securities rose, largely reflecting a revised cash-management strategy and investment in high-quality securities.
- Assets and liabilities held for sale included the Philippine and Brazilian bottling operations. The Philippine sale closed in January 2013; the Brazilian transaction was expected to result in deconsolidation in exchange for cash and a minority interest.
Outlook, management commentary, risks and unusual items
- Management expected substantial operating cash flow in 2013, approximately $3.0 billion of capital expenditures, and a 2013 effective tax rate of approximately 24.0%. These are company estimates, not a full-year revenue or EPS forecast.
- The company expected underlying commodity costs, after hedging, to add approximately $100 million to 2013 full-year results. It forecast currency to reduce operating income by 1% for full-year 2013, based on early-February rates and stated assumptions.
- A four-year productivity and reinvestment program targeted $550–$650 million of annualized savings by 2015: $350–$400 million from global productivity measures and $200–$250 million from North American integration. The company incurred $270 million of related charges in 2012; savings were intended to be reinvested in brand building and to help offset commodity costs.
- Venezuela’s post-year-end currency devaluation was expected to produce a $100–$125 million remeasurement loss in first-quarter 2013. Further devaluation or restrictions on currency conversion could create additional losses and collection risks.
- Other notable 2012 items included a $283 million tax benefit from reversing foreign valuation allowances; a $108 million loss on the Philippine sale; $82 million expensed for a premium paid in the Mikuni investment; and $447 million of other operating charges, principally productivity, integration and restructuring costs.
- Principal risks include changing health preferences and possible beverage taxes or labeling rules; water scarcity and climate-related agricultural or supply disruption; competition and retailer bargaining power; commodity, packaging, energy and foreign-exchange volatility; bottler-partner financial health; political and economic instability; taxes and litigation; cybersecurity; and execution of the productivity and bottling strategies.
- Contingencies included approximately $671 million of third-party debt guarantees, which management did not consider probable to require payment. The company also disclosed environmental compliance matters in Atlanta and Brazil and ongoing asbestos-related proceedings involving former subsidiary Aqua-Chem; it could not estimate a reasonably possible loss for the latter. Management said pending legal matters were not expected to have a material adverse effect overall.
The company and its independent auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether 2013 volume, pricing and mix can offset currency headwinds and expected commodity-cost pressure, particularly given Europe’s volume decline and North America’s sparkling-beverage softness.
- Whether productivity savings are achieved on schedule and exceed the associated restructuring and integration costs.
- How the Philippine sale and proposed Brazilian bottling transaction affect earnings, cash proceeds, debt and ongoing equity-method income.
- The sensitivity of reported results and cash availability to further Venezuelan devaluation, currency-conversion restrictions and bottler receivables.
- Whether cash returned through dividends and repurchases remains consistent with investment needs, pension funding and the higher reported debt balance.
- The final outcomes and any financial effects of tax audits, the Aqua-Chem coverage litigation, and the disclosed environmental matters.