Why did operating income jump 45% in 2001?

Much of the increase reflects the absence of 2000's $1.44 billion in nonrecurring charges, which included $405 million of bottling asset impairments, $850 million for the Realignment restructuring, and $188 million for a discrimination lawsuit settlement. Underlying gains came from higher gallon shipments, selective price increases, and consolidation of Nordic and Brazilian bottlers, partly offset by currency headwinds.

How strong is the company's cash flow and balance sheet?

Operating cash flow was $4.11 billion, up 15%, producing free cash flow of $3.15 billion. That cash funded dividends of $1.79 billion and debt reduction, cutting net debt to $3.3 billion. The company's long-term debt is rated A+ by S&P and Aa3 by Moody's, and total debt-to-total capital fell to 31% from 38%.

What accounting changes could affect future reported results?

SFAS 142 will stop goodwill and indefinite-lived intangible amortization, with an initial impairment test expected to produce a roughly $1 billion pretax non-cash charge in Q1 2002, though it adds about $60 million in amortization savings and $150 million in equity income. EITF 00-25 will move about $2.6 billion of payments from SG&A into revenue deductions, reducing reported net operating revenues and gross margin presentation but not operating income.

What are the main legal and concentration risks?

A consolidated securities class action alleges misleading statements about 1999-2000 results and remains pending a decision on the company's motion to dismiss, which the company expects in 2002. Management believes it has meritorious defenses and does not expect material adverse effects. Coca-Cola Enterprises represented about 19% of net operating revenues through concentrate sales, so the company depends heavily on the health of its largest bottler.

What is the outlook for shareholder returns?

The company raised its 2002 quarterly dividend to $0.20 per share, its 40th consecutive annual increase, and plans to expand share repurchases to $750 million-$1 billion in 2002. Management intends to gradually reduce the dividend payout ratio from about 45% toward 30% to redirect cash to high-return beverage investments, which could moderate dividend growth relative to earnings growth.

KO 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 11, 2002. Cited figures are marked; the original filing is the authoritative source.

The Coca-Cola Company's 2001 Form 10-K shows a year of strong profit recovery after a difficult 2000.

Net operating revenues rose 1% to $20.1 billion^a, while operating income jumped 45% to $5.35 billion, lifted by the absence of 2000's $1.44 billion in nonrecurring charges (impairments, the Realignment restructuring, and a discrimination lawsuit settlement). Net income reached $3.97 billion, or $1.60 per diluted share, up from $0.88 the prior year. Gross margin improved to 69.9% and operating margin to 26.6%.

Management also cited a stronger U.S. dollar as a headwind, reducing operating income by about 5% in 2001. Cash generation and balance-sheet discipline were a key theme. Operating cash flow rose 15% to $4.11 billion^b and free cash flow reached $3.15 billion.

Management used that cash to cut net debt from $3.9 billion to $3.3 billion^c, and net debt-to-net capital fell to 23% from 29%. The company's credit ratings (S&P A+, Moody's Aa3) remained strong. Dividends rose to $0.72 per share for 2001, and the board raised the 2002 quarterly dividend to $0.20.

Management intends to gradually lower the payout ratio toward 30% to free cash for reinvestment, and expects 2002 share repurchases of $750 million to $1 billion^d. Investors should note several forward-looking items. Adoption of SFAS 142 is expected to produce a non-cash pretax charge of roughly $1 billion in Q1 2002, while EITF 00-25 will reclassify about $2.6 billion of payments to bottlers and customers from SG&A into revenue reductions, which will lower reported net revenues without affecting operating income.

The company also plans to assume management control of CCEAG, Germany's largest bottler, adding $700-800 million to debt. Legal risk includes a consolidated securities class action in which the motion to dismiss is pending. The filing also highlights ongoing dependence on Coca-Cola Enterprises, which accounted for about 19% of net operating revenues through concentrate sales.

02—Key points

Key Highlights

Operating income rose 45% to $5.35 billion in 2001, mainly because 2000 included $1.44 billion of nonrecurring charges; operating margin improved to 26.6% from 18.6%.
Net income increased to $3.97 billion, or $1.60 per diluted share, versus $2.18 billion, or $0.88 per share, in 2000.
Free cash flow reached $3.15 billion (up 12%), and net debt fell to $3.3 billion from $3.9 billion, with net debt-to-net capital down to 23%.
Net operating revenues grew only 1% to $20.1 billion, held back by a stronger U.S. dollar, which reduced operating income by about 5%.
Dividend increased to $0.72 for 2001 and the 2002 quarterly rate was raised to $0.20; the company plans to lower its payout ratio toward 30% over time.
Share repurchases are expected to rise to $750 million-$1 billion in 2002, and an SFAS 142 non-cash charge of about $1 billion is expected in Q1 2002.
EITF 00-25 will reclassify roughly $2.6 billion of bottler and customer payments from SG&A into revenue deductions, lowering reported revenue without affecting operating income.

03—Questions

Frequently Asked Questions

Why did operating income jump 45% in 2001?
Much of the increase reflects the absence of 2000's $1.44 billion in nonrecurring charges, which included $405 million of bottling asset impairments, $850 million for the Realignment restructuring, and $188 million for a discrimination lawsuit settlement. Underlying gains came from higher gallon shipments, selective price increases, and consolidation of Nordic and Brazilian bottlers, partly offset by currency headwinds.
How strong is the company's cash flow and balance sheet?
Operating cash flow was $4.11 billion, up 15%, producing free cash flow of $3.15 billion. That cash funded dividends of $1.79 billion and debt reduction, cutting net debt to $3.3 billion. The company's long-term debt is rated A+ by S&P and Aa3 by Moody's, and total debt-to-total capital fell to 31% from 38%.
What accounting changes could affect future reported results?
SFAS 142 will stop goodwill and indefinite-lived intangible amortization, with an initial impairment test expected to produce a roughly $1 billion pretax non-cash charge in Q1 2002, though it adds about $60 million in amortization savings and $150 million in equity income. EITF 00-25 will move about $2.6 billion of payments from SG&A into revenue deductions, reducing reported net operating revenues and gross margin presentation but not operating income.
What are the main legal and concentration risks?
A consolidated securities class action alleges misleading statements about 1999-2000 results and remains pending a decision on the company's motion to dismiss, which the company expects in 2002. Management believes it has meritorious defenses and does not expect material adverse effects. Coca-Cola Enterprises represented about 19% of net operating revenues through concentrate sales, so the company depends heavily on the health of its largest bottler.
What is the outlook for shareholder returns?
The company raised its 2002 quarterly dividend to $0.20 per share, its 40th consecutive annual increase, and plans to expand share repurchases to $750 million-$1 billion in 2002. Management intends to gradually reduce the dividend payout ratio from about 45% toward 30% to redirect cash to high-return beverage investments, which could moderate dividend growth relative to earnings growth.

04—Continue

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