01—Abstract
Summary
Summary of the 10-K filed March 26, 2003. Cited figures are marked; the original filing is the authoritative source.
The Coca-Cola Company's 2002 Form 10-K (filed March 26, 2003) shows a year of solid operating growth overshadowed by a sharp drop in reported earnings.
Net operating revenues rose 12% to $19.564 billiona, driven by 5% growth in gallon shipments, 3% from price and mix, and 6% from structural changes (chiefly the consolidation of CCEAG, the German bottler, plus CCDA, CBC and Odwalla). Operating income grew only 2% to $5.458 billion, and operating margin fell to 27.9% from 30.5%, reflecting lower-margin consolidated bottling operations and a $365 million stock-based compensation expense recognized for the first time under SFAS 123. Currency headwinds were significant, with a stronger U.S. dollar reducing operating income by about 3%.
Reported net income fell 23% to $3.050 billionb, or $1.23 per diluted share, versus $1.60 in 2001. The decline is attributable to a $926 million after-tax cumulative effect charge from adopting SFAS 142 (goodwill and intangibles accounting), comprising $367 million for Company operations and $559 million for equity investees. Excluding that charge, income before accounting change was essentially flat at $3.976 billion.
Other income was also pressured by a $157 millionc Latin America write-down and about $118 million in exchange losses. For investors, the balance sheet and cash flow remain strong: operating cash flow rose 15% to $4.742 billion, and the company paid $1.987 billion in dividends and repurchased about $691 million of stock. Management guided to roughly $1.5 billion in 2003 buybacks, a dividend increase to $0.88 annualized (the 41st consecutive annual increase), and a gradual reduction of the payout ratio, which was about 65%.
Management also stopped providing quarterly or annual EPS guidance and announced a 2003 restructuring charge of roughly $400 milliond tied to North American integration and CCEAG plant closures. Ongoing risks include Latin American economic instability, the European Commission and Spanish competition investigations, and the Aqua-Chem litigation, which management does not expect to be material.
02—Key points
Key Highlights
- Net operating revenues grew 12% to $19.56 billion, with about 5% from gallon volume growth, 3% from pricing and mix, and 6% from structural changes such as the CCEAG consolidation.
- Reported net income declined 23% to $3.05 billion ($1.23 per diluted share), but this reflects a $926 million non-cash SFAS 142 accounting charge; income before accounting change was flat at $3.98 billion.
- Operating margin compressed to 27.9% from 30.5%, weighed down by lower-margin consolidated bottling operations and $365 million of newly expensed stock-based compensation.
- Operating cash flow rose 15% to $4.74 billion, supporting $1.99 billion in dividends and $691 million in share repurchases.
- Management plans about $1.5 billion in 2003 share repurchases and raised the annual dividend to $0.88 per share, the 41st consecutive annual increase, while gradually reducing the payout ratio (about 65% in 2002).
- A 2003 restructuring charge of roughly $400 million is expected from North American integration (about 1,000 jobs) and CCEAG streamlining (about 900 jobs), with projected savings of at least $100 million annually from 2004.
- Company discontinued quarterly and annual EPS guidance in December 2002 and moved to a focus on long-term strategic value drivers.
03—Questions
Frequently Asked Questions
Why did reported earnings fall so sharply in 2002 if operating income grew?
Operating income rose 2% to $5.46 billion, but net income fell 23% to $3.05 billion because of a $926 million after-tax cumulative effect charge from adopting SFAS 142. That one-time, non-cash charge covered goodwill and intangible write-downs at the Company ($367 million) and at its equity investees ($559 million). Excluding it, income before accounting change was $3.98 billion, essentially flat with 2001.
What drove the 12% revenue increase, and how much was organic?
Revenue growth came from about 5 points of gallon shipment growth (including acquisitions), 3 points of price and product/geographic mix, and 6 points of structural changes, mainly the February 2002 consolidation of CCEAG, the German bottler, plus Cosmos (CBC), CCDA and Odwalla. Currency was a 2-point drag from a stronger U.S. dollar. The structural changes make the 12% figure less indicative of underlying growth than the volume and pricing components.
Is the dividend safe, and what is the capital return plan?
The dividend is well covered by cash flow. The quarterly dividend was raised to $0.22 ($0.88 annualized), the 41st straight annual increase, and operating cash flow was $4.74 billion against $1.99 billion in dividends. Management intends to gradually lower the payout ratio, which was about 65% of net income in 2002, to free cash for reinvestment. Share repurchases of about $1.5 billion are planned for 2003, and management expects cash flow to grow in later years.
What are the main risks flagged in the filing?
Key risks include economic and currency instability in Latin America (a $157 million write-down was taken in Q1 2002 after Argentina's devaluation), political instability in the Middle East and Venezuela, and competitive pressure in carbonated soft drinks from PepsiCo and others. Legal risks include the European Commission and Spanish competition investigations and the Aqua-Chem asbestos-related dispute, which management believes will not have a material adverse effect. Consolidating CCEAG and other bottlers also adds balance-sheet and integration exposure, and FIN 46 could require further consolidation of variable interest entities from July 2003.
04—Continue