The Coca Cola Company (KO) reported operating earnings per share of $1.17 for the second-quarter 2011, ahead of the Zacks Consensus Estimate by a penny. It was also higher than the year-ago EPS of $1.06.
In both the current and the prior-year quarter, Coca Cola was impacted by restructuring charges and costs related to global productivity initiatives as well as the acquisition of Coca Cola Enterprises' (CCE) North American operations. Including these one-time items, the company reported earnings of $1.20 per share in the second quarter, compared with $1.17 per share in the prior-year quarter.
The results of the second quarter of 2011 also included a one-time non-cash gain of 9 cents on the adjustment to fair value of the investment in Mexican bottler Grupo Continental S.A.B. (Contal).
The results were ahead of the long-term targets of Coca Cola, encouraged by strong growth outside the U.S. and in emerging markets.
Quarterly Details
During the reported quarter, Coca-Cola’s net revenues saw robust growth of 47% to $12.7 billion, surpassing the Zacks Consensus Estimate of $12.4 billion and the year ago revenue of $8.7 billion. The growth was mainly attributable to a 6% increase in concentrate sales, 6% currency benefit, favorable impact of price-mix ratio and the CCE transaction, partially offset by the effect of structural changes. Concentrate sales in the quarter were broadly in line with unit case volume. The comparable net revenue was also up by 47% during the reported quarter.
Geographically, the Eurasia & Africa division witnessed volume growth of 7% year-over-year led by Russia, which surged 9%, followed by Turkey at 12%, 8% in Middle East and North Africa, 6% in Sub-Saharan Africa, and 8% in India.
The Latin American segment volumes increased 6% driven by Mexico (10%), Brazil (1%) and the South Latin Region (7%). While North America recorded 4% volume growth, the Pacific region and Europe witnessed a 7% and 5% volume growth respectively.
Coca-Cola’s gross profit during the quarter soared by 35% to $7.7 billion compared to $5.7 billion a year ago. Gross margin contracted 510 basis points to 60.8% versus 65.9% in the prior-year quarter, due to increased commodity costs. The operating profit increased by 10% to $5.5 billion from $4.9 billion in the prior-year period.
Balance Sheet, Cash Flow and Share Repurchase
Coca-Cola exited the year with $10,166 million in cash and cash equivalents and long-term debt of $11.4 billion. Cash from operations was $3.6 billion for the first six months of 2011 as compared to $4.3 billion in the prior year, a decrease of 15%, reflecting the additional pension funding made in the first quarter as well as the effect of the acquisition of CCE’s North American operations.
Net cash provided by financing activities was $30 million year-to-date, while net cash used in financing activities was $1,875 million in the prior year.
Through the second quarter of 2011, Coca Cola had repurchased $1.37 billion in shares, although some of these repurchases have been offset by other treasury stock activity, primarily related to the exercise of employee stock options. The company did not buy shares under its share repurchase program for most of the quarter. However, Coca Cola is planning to purchase at least $2.5 billion in shares under its existing share repurchase program by year end 2011.
Guidance
Coca Cola stated that Coca-Cola Refreshments (CCR) integration efforts are on track, with expected 2011 net cost synergies of $140 to $150 million. Also, the company-wide productivity initiatives are well on track to slightly exceed the upper end of our original targeted range of $400 to $500 million in annualized savings by year-end 2011, the final year of the four-year program.
Additionally, Coca Cola expects the sale of the company’s stake in Chilean bottler Coca-Cola Embonor S.A. in first quarter 2011 and the change in accounting resulting from the merger of Arca and Contal in the second quarter will decrease equity income by approximately 1 cent on a full-year basis.
The company continues to anticipate challenges in the remainder of 2011 in Japan as a result of the natural disasters earlier this year that is estimated to have a dilutive impact on full-year comparable EPS in the range of 3 cents to 5 cents per share. This impact will be primarily observed in the third and fourth quarter of 2011.
For 2011, Coca Cola expects its effective tax rate on operations to be 24.0%.
Coca Cola which competes with Pepsico, Inc. (PEP) currently holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock, which translates into a short-term Hold rating.
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