10-QPeriod: Q2 FY2008

COCA COLA CO Quarterly Report for Q2 Ended Jun 27, 2008

Filed July 24, 2008For Securities:KO

Summary

The Coca-Cola Company reported a mixed financial performance for the quarter and six months ending June 27, 2008. While net operating revenues saw a significant increase of 17% and 19% respectively, driven by volume growth and favorable currency impacts, net income experienced a decline. The three months ended June 27, 2008, saw net income fall to $1.42 billion from $1.85 billion in the prior year, and for the six-month period, net income decreased to $2.92 billion from $3.11 billion. This decline in profitability was largely attributable to a substantial equity loss of $843 million in the second quarter, primarily due to Coca-Cola Enterprises Inc. (CCE) recording a significant impairment charge on its North American franchise rights. However, the company also reported gains on divestitures, including the sale of a Brazilian bottler. Despite the earnings dip, the company demonstrated strong cash flow generation from operations and continued its share repurchase program and dividend payments, indicating confidence in its underlying business.

Financial Highlights

26 data points
Beta

Revenue

$9.05B

65.0% Gross Margin

Net Income

$1.42B

15.7% Net Margin

Cash & Equivalents

$6.57B

Free Cash Flow

$2.32B

Financial Statements
Beta
Revenue$9.05B
Cost of Revenue$3.16B
Gross Profit$5.88B
SG&A Expenses$3.10B
Operating Income$2.68B
Interest Expense$89.00M
Net Income$1.42B
Shares Outstanding (Basic)4.63B
Shares Outstanding (Diluted)4.69B

Key Highlights

  • 1Net operating revenues increased by 17% for the quarter and 19% for the six months, driven by volume growth (3% and 4% respectively) and a significant positive impact from currency fluctuations (9% in both periods).
  • 2Net income declined year-over-year, with the quarter down to $1.42 billion ($0.61 EPS) from $1.85 billion ($0.80 EPS) and the six-month period down to $2.92 billion ($1.24 diluted EPS) from $3.11 billion ($1.34 diluted EPS).
  • 3A substantial equity loss of $843 million in the quarter (compared to equity income of $190 million) and $706 million for the six months (compared to $210 million) significantly impacted net income, primarily due to CCE's impairment charge on North American franchise rights.
  • 4The company made significant investments in acquisitions and brands, including brands and licenses in Denmark and Finland for $225 million, and continued to manage its capital through share repurchases and dividend payments.
  • 5Operating income increased by 18% for the quarter to $2.68 billion, but the operating margin saw a slight decrease for the six-month period to 27.7% from 28.2% in the prior year, partly due to acquisitions of bottling operations.
  • 6Net cash provided by operating activities remained strong at $3.22 billion for the six months, although slightly down from $3.30 billion in the prior year, while investing activities used $1.23 billion, a significant decrease from $4.05 billion in the prior year due to lower acquisition spending.
  • 7The company recognized gains on divestitures, including the sale of a Brazilian bottler for approximately $275 million in proceeds.

Frequently Asked Questions

The primary driver for the decrease in net income was a significant loss from equity method investments. This was mainly due to Coca-Cola Enterprises Inc. (CCE) recording a substantial impairment charge of $5.3 billion pretax related to its North American franchise rights, of which Coca-Cola Company's proportionate share was approximately $1.1 billion.

Currency fluctuations had a significantly positive impact on net operating revenues, contributing an estimated 9% increase for both the quarter and the six-month period. This was primarily due to stronger foreign currencies like the euro, Japanese yen, and Brazilian real relative to the U.S. dollar.

The company continued its strategic acquisitions, including brands and licenses in Denmark and Finland. It also generated gains from divestitures, such as the sale of a Brazilian bottler. Significant restructuring costs were also incurred globally to streamline operations, and the company continued its share repurchase program and dividend payments, signaling confidence in its financial health.

The company has a foreign currency management program designed to mitigate the impact of exchange rate fluctuations on its net income and earnings per share over time. They actively monitor operations in over 200 countries and utilize hedging activities. Based on their current strategy and hedging coverage, they expected a favorable currency impact on 2008 operating income of at least mid single digits.