COCA COLA CO quarterly report, Q3 FY2012

The Coca-Cola Company — Q3 2012 Form 10-Q

Reporting period: Quarter ended September 28, 2012; year-to-date results cover the nine months ended that date. Financial statements are unaudited. Comparatives are for the corresponding 2011 periods and are adjusted where indicated. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.

Financial performance

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Net operating revenues	$12,340	$12,248	$36,562	$35,502
Gross profit	$7,487	$7,373	$22,137	$21,690
Operating income	$2,793	$2,754	$8,596	$8,217
Net income attributable to Coca-Cola shareowners	$2,311	$2,224	$7,153	$6,927
Diluted EPS	$0.50	$0.48	$1.56	$1.49
Operating cash flow	—	—	$7,840	$6,800

Revenue increased 1% in Q3 and 3% year to date. Worldwide unit case volume grew 4% in Q3 and 5% year to date; concentrate sales volume grew 5% and 4%, respectively.
Gross margin was 60.7% in Q3 versus 60.2%; year-to-date margin was 60.5% versus 61.1%. The Q3 improvement partly reflected a lower estimate of commodity-cost increases; year-to-date margin remained pressured by commodity costs, mix, currency and bottling acquisitions.
Q3 operating income rose 1% and shareowner net income rose 4%; year-to-date operating income rose 5% and shareowner net income rose 3%. Q3 diluted EPS was $0.50, versus $0.48.
Year-to-date operating cash flow increased 15% to $7.84 billion, reflecting higher customer receipts, lower tax payments and the end of temporary extended credit terms in Japan; higher pension contributions and currency effects partly offset the increase.
Year-to-date investing cash outflow was $10.40 billion, versus $3.41 billion, largely reflecting increased purchases of short-term and other high-quality investments under a revised cash-management strategy. Financing cash outflow was $399 million, compared with $1.18 billion of inflow.

Liquidity, debt and capital allocation

At September 28, cash and cash equivalents were $9.62 billion, short-term investments $5.32 billion and marketable securities $3.15 billion. Together these totaled $18.08 billion. The company said foreign subsidiaries held $15.5 billion of cash, cash equivalents, short-term investments and marketable securities; substantially all foreign earnings were considered indefinitely reinvested.
Current assets were $29.71 billion and current liabilities $27.01 billion. Loans and notes payable were $16.21 billion, current maturities of long-term debt $341 million and long-term debt $16.18 billion. Total debt on these balance-sheet lines was approximately $32.73 billion, up from approximately $28.57 billion at year-end 2011.
The company had $6.4 billion of unused backup credit lines. It issued $2.75 billion of long-term debt during Q1 and retired $1.25 billion of notes at maturity in May. The new notes included fixed-rate tranches at 0.75% and 1.65%, and a floating-rate tranche due 2014.
Year-to-date dividends paid were $2.30 billion; the quarterly dividend was $0.255 per share, reflecting the July 2012 two-for-one stock split. The company repurchased 96.7 million shares year to date for $3.59 billion in total cost and expected 2012 net share repurchases of $2.5–$3.0 billion.
Capital expenditures were expected to be approximately $3.0 billion for full-year 2012.

Changes and operating developments

Revenue growth was supported by volume, pricing and mix, but partly offset by foreign exchange: currency reduced consolidated revenue by 5% in Q3 and 4% year to date. North America revenue rose 5% in both periods; Europe revenue declined 8% in Q3 and 7% year to date, with currency a major factor.
Q3 unit case volume rose across most regions, including 11% in Eurasia and Africa, 5% in Latin America, 2% in North America and 3% in Pacific; Europe was up 1%. North American sparkling beverage volume was flat in Q3, while still beverages grew 7%.
Acquisitions included bottling operations in Vietnam, Cambodia and Guatemala and investments in Aujan Industries. The company cited acquired bottling volume as a contributor to Bottling Investments growth.
The U.S. ready-to-drink tea license agreement with Nestlé was due to end in 2012; the related strategy change generated $20 million of year-to-date operating charges. Beverage Partners Worldwide was also narrowing its geographic focus to Europe and Canada.
The company completed its earlier productivity and CCE integration programs, and began a new four-year productivity and reinvestment program in 2012. A July 2012 two-for-one stock split doubled authorized common shares to 11.2 billion; all share and per-share data in the filing reflect the split.

Outlook, risks and unusual items

Management expected substantial operating cash flows for the remainder of 2012 and described liquidity as strong. The filing does not provide a specific full-year revenue or EPS target.
The new productivity program was expected to generate $550–$650 million in annualized savings, phased in over four years, with the full annual benefit expected by the end of 2015. Savings are intended to support brand investment and help offset costs.
Management estimated an approximately $225 million full-year 2012 operating impact from incremental commodity costs, primarily sweeteners and juices. It expected foreign exchange, commodity costs and channel/package mix to continue to pressure gross margin.
Based on forecast exchange rates and hedges, management expected currency fluctuations to have a mid-single-digit negative impact on consolidated operating income for both Q4 and full-year 2012. The company reported that currency had reduced operating income by 8% in Q3 and 6% year to date.
Unusual items included $233 million of year-to-date other operating charges, primarily the new productivity program and restructuring; a $92 million gain related to Coca-Cola FEMSA issuing shares; and $153 million of tax benefit from releasing certain foreign deferred-tax valuation allowances. The prior-year comparison included substantial gains from the Arca-Contal merger and sale of the Embonor investment, as well as Japan disaster-related charges.
The company was contingently liable for $720 million of third-party guarantees, including $297 million related to variable-interest entities; management did not consider payment probable. It reported approximately 40,000 active asbestos claims against former subsidiary Aqua-Chem, disputed its obligation for related costs, and said it could not estimate the possible loss. Management expected insurance to cover most defense and indemnity costs over approximately the next ten years, subject to ongoing litigation.
Other stated risks include foreign currency exposure, commodity prices, economic and consumer mix shifts, weather and seasonality, tax audits and valuation judgments for investments and intangible assets. The company said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.

Investor verification priorities

Check whether volume growth and pricing can sustain revenue and earnings growth as foreign exchange and consumer mix remain adverse.
Track commodity-cost realization against management’s approximately $225 million full-year impact estimate and assess the resulting gross-margin trend.
Monitor debt growth, commercial-paper reliance, liquidity composition and the extent to which foreign-held funds are available for U.S. uses.
Assess execution, costs and realized savings from the $550–$650 million productivity program, including additional CCE integration spending.
Review the timing and potential financial impact of the Nestlé tea-license transition, tax matters and Aqua-Chem asbestos litigation.