The Coca-Cola Company — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 30, 2012, compared with the three months ended April 1, 2011. Prior-year amounts were adjusted for a retrospective pension-accounting change. Coca-Cola noted that beverage sales are seasonal, with the second and third quarters typically having the highest volumes.
Financial performance and key metrics
- Revenue: $11.14 billion, up 6% from $10.52 billion. Worldwide unit case volume grew 5%; concentrate sales volume grew 3%.
- Profit: Operating income was $2.51 billion, up 10%. Net income attributable to Coca-Cola shareowners was $2.05 billion, up 8%. Diluted EPS was $0.89 versus $0.82; dividends per share were $0.51 versus $0.47.
- Margins: Gross margin declined to 61.0% from 62.5%, primarily reflecting higher commodity costs and acquisitions of bottling operations. Consolidated operating margin rose to 22.5% from 21.7%.
- Cash flow: Operating cash flow was $493 million, up from $458 million. Investing activities used $4.88 billion, including $2.76 billion of purchases of other investments; financing activities provided $1.92 billion. Cash and cash equivalents declined $2.14 billion to $10.66 billion.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $13.14 billion; adding marketable securities brings the balance to $15.78 billion. Current liabilities were $24.85 billion. Loans and notes payable, current maturities and long-term debt totaled approximately $31.12 billion, versus $28.57 billion at year-end. Long-term debt, including current maturities, had a carrying amount of $17.74 billion and fair value of $18.35 billion. The company had $6.48 billion in unused credit lines.
- Other financial items: The effective tax rate was 24.1%; management estimated a 24.8% rate for full-year 2012, excluding unusual items. Pension contributions were $936 million during the quarter.
Material changes versus the prior comparable period
- Revenue growth reflected volume, structural changes and favorable price/product/geographic mix, partly offset by currency headwinds. The quarter included acquired bottling operations in Vietnam and Cambodia.
- Gross margin fell despite higher revenue. Management cited increased commodity costs and the greater share of lower-margin finished-product bottling operations.
- Other operating charges declined to $99 million from $209 million. Q1 2012 included $64 million for the new productivity and reinvestment program, $20 million for the ready-to-drink tea strategy change, and other restructuring and integration costs. Q1 2011 included $79 million of Japan earthquake/tsunami-related charges.
- Other income was $49 million versus $117 million; the prior-year period included a $102 million gain on the sale of the Embonor investment. Q1 2012 equity income included a $44 million net gain related primarily to an investee transaction.
- Cash and short-term investment balances shifted as the company increased investment in marketable securities to diversify assets and manage counterparty risk. Long-term debt increased, primarily due to new issuance.
Outlook, management commentary, risks and unusual items
- Management described the near-term outlook as strong and expected substantial operating cash flow during 2012.
- For 2012, the company expected incremental commodity costs of $350 million to $450 million, mainly from juices and sweeteners, but anticipated full-year gross margin would remain consistent with 2011, supported by pricing and cost management.
- Management expected foreign-exchange movements to have a mid-single-digit negative impact on full-year operating income. Currency movements reduced Q1 reported operating income by 3%.
- Expected 2012 capital expenditures were $3.0 billion to $3.2 billion. The company expected to repurchase $2.5 billion to $3.0 billion of treasury shares, net of employee stock-option proceeds.
- A four-year productivity and reinvestment program was expected to generate $550 million to $650 million in annualized savings by the end of 2015, with savings reinvested in brands. Estimated costs for further integration of CCE’s former North American business were approximately $300 million; costs for other program initiatives were still being defined.
- A $133 million tax benefit resulted from reversing a valuation allowance on certain foreign net operating losses. The company said $125 million to $175 million of additional valuation allowances might be reversed within 12 months. Gross unrecognized tax benefits were $379 million; the company could not estimate the range of reasonably possible outcomes for related matters.
- The company reported $696 million of guarantees of third-party indebtedness and said it did not consider payment probable. It could not estimate its potential loss from Aqua-Chem asbestos-related claims, though management believed insurance coverage and other defenses limited the likely exposure. Management did not expect pending legal proceedings collectively to have a material adverse effect.
- Key risks include commodity prices, foreign exchange, weather and seasonality, economic and political conditions in international markets, regulatory matters and the realization of asset values. The company said foreign cash and investments were largely considered indefinitely reinvested; Argentina and Venezuela currency controls restricted dividend payments.
- Subsequent to quarter-end, the board recommended a two-for-one stock split, subject to shareowner approval. The filing also reported no material changes to market-risk disclosures and that disclosure controls were effective.
Important facts for investors to verify
- Whether volume growth, pricing and mix can offset commodity-cost inflation and the decline in gross margin.
- Actual savings, implementation costs and timing for the four-year productivity program, including CCE integration costs.
- Debt growth, cash deployment into marketable securities, and the accessibility of foreign-held cash for domestic needs.
- Progress on foreign-exchange exposure, uncertain tax positions and possible valuation-allowance reversals.
- Developments in the Aqua-Chem asbestos litigation and insurance coverage, as well as the approval and timing of the proposed stock split.