================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 1-2217
The Coca-Cola Company
(Exact name of Registrant as specified in its Charter)
Delaware 58-0628465
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Coca-Cola Plaza 30313
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (404) 676-2121
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date.
Class of Common Stock Outstanding at October 26, 2001
--------------------- -------------------------------
$.25 Par Value 2,486,772,722 Shares
================================================================================
THE COCA-COLA COMPANY AND SUBSIDIARIES
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income
Three and nine months ended September 30, 2001 and
2000 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 31
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 32
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except share data)
ASSETS
September 30, December 31,
2001 2000
------------- ------------
CURRENT
Cash and cash equivalents $ 2,495 $ 1,819
Marketable securities 72 73
------------ -----------
2,567 1,892
Trade accounts receivable, less
allowances of $45 at September 30
and $62 at December 31 1,807 1,757
Inventories 1,140 1,066
Prepaid expenses and other assets 2,151 1,905
------------ -----------
TOTAL CURRENT ASSETS 7,665 6,620
------------ -----------
INVESTMENTS AND OTHER ASSETS
Equity method investments
Coca-Cola Enterprises Inc. 821 707
Coca-Cola Amatil Ltd 440 617
Coca-Cola HBC S.A. 829 758
Other, principally bottling companies 3,311 3,164
Cost method investments,
principally bottling companies 446 519
Marketable securities and other assets 2,440 2,364
------------ ------------
8,287 8,129
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Land 246 225
Buildings and improvements 1,811 1,642
Machinery and equipment 4,912 4,547
Containers 245 200
------------ ------------
7,214 6,614
Less allowances for depreciation 2,724 2,446
------------ ------------
4,490 4,168
------------ ------------
GOODWILL AND OTHER INTANGIBLE ASSETS 2,223 1,917
------------ ------------
$ 22,665 $ 20,834
============ ============
3
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except share data)
LIABILITIES AND SHARE-OWNERS' EQUITY
September 30, December 31,
2001 2000
------------- ------------
CURRENT
Accounts payable and accrued expenses $ 4,062 $ 3,905
Loans and notes payable 3,878 4,795
Current maturities of long-term debt 3 21
Accrued income taxes 825 600
------------ -----------
TOTAL CURRENT LIABILITIES 8,768 9,321
------------ -----------
LONG-TERM DEBT 1,399 835
------------ -----------
OTHER LIABILITIES 1,043 1,004
------------ -----------
DEFERRED INCOME TAXES 371 358
------------ -----------
SHARE-OWNERS' EQUITY
Common stock, $.25 par value
Authorized: 5,600,000,000 shares
Issued: 3,490,756,202 shares at
September 30; 3,481,882,834 shares
at December 31 873 870
Capital surplus 3,477 3,196
Reinvested earnings 22,976 21,265
Accumulated other comprehensive income
and unearned compensation on restricted
stock (2,626) (2,722)
------------ -----------
24,700 22,609
Less treasury stock, at cost
(1,003,848,868 shares at September 30;
997,121,427 shares at December 31) 13,616 13,293
------------ -----------
11,084 9,316
------------ -----------
$ 22,665 $ 20,834
============ ===========
See Notes to Condensed Consolidated Financial Statements.
4
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---------- ---------- ---------- ---------
NET OPERATING REVENUES $ 5,397 $ 5,413 $ 15,169 $ 15,156
Cost of goods sold 1,692 1,736 4,616 4,811
---------- ---------- ---------- ---------
GROSS PROFIT 3,705 3,677 10,553 10,345
Selling, administrative and
general expenses 2,394 2,256 6,449 6,528
Other operating charges - 94 - 965
---------- ---------- ---------- ---------
OPERATING INCOME 1,311 1,327 4,104 2,852
Interest income 68 92 227 257
Interest expense 66 120 234 338
Equity income 104 63 167 49
Other income - net 26 121 23 102
Gain on issuances of stock
by equity investee 91 - 91 -
---------- ---------- ---------- ---------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,534 1,483 4,378 2,922
Income taxes 460 416 1,313 987
---------- ---------- ---------- ---------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 1,074 1,067 3,065 1,935
Cumulative effect of
accounting change, net of
income taxes - - (10) -
---------- ---------- ---------- ---------
NET INCOME $ 1,074 $ 1,067 $ 3,055 $ 1,935
========== ========== ========== =========
BASIC NET INCOME PER SHARE:
Before accounting change $ .43 $ .43 $ 1.23 $ .78
Cumulative effect of
accounting change - - - -
---------- ---------- ---------- ----------
$ .43 $ .43 $ 1.23 $ .78
========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
5
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
DILUTED NET INCOME PER SHARE:
Before accounting change $ .43 $ .43 $ 1.23 $ .78
Cumulative effect of
accounting change - - - -
---------- ---------- ---------- ----------
$ .43 $ .43 $ 1.23 $ .78
========== ========== ========== ==========
DIVIDENDS PER SHARE $ .18 $ .17 $ .54 $ .51
========== ========== ========== ==========
AVERAGE SHARES OUTSTANDING 2,488 2,478 2,487 2,475
========== ========== ========== ==========
Dilutive effect of
stock options - 11 - 9
---------- ---------- ---------- ----------
AVERAGE SHARES OUTSTANDING
ASSUMING DILUTION 2,488 2,489 2,487 2,484
========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
6
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
Nine Months Ended
September 30,
-----------------------------
2001 2000
---------- -------
OPERATING ACTIVITIES
Net income $ 3,055 $ 1,935
Depreciation and amortization 571 572
Deferred income taxes (45) (43)
Equity income, net of dividends (83) 28
Foreign currency adjustments (47) 110
Other operating charges - 655
Gain on issuances of stock by equity investee (91) -
Other items 11 (78)
Net change in operating assets and liabilities (318) (600)
---------- ----------
Net cash provided by operating activities 3,053 2,579
---------- ----------
INVESTING ACTIVITIES
Acquisitions and investments,
principally trademarks and bottling companies (308) (284)
Purchases of investments and other assets (365) (271)
Proceeds from disposals of investments
and other assets 179 111
Purchases of property, plant and equipment (528) (571)
Proceeds from disposals of property, plant
and equipment 70 17
Other investing activities 112 62
---------- ----------
Net cash used in investing activities (840) (936)
---------- ----------
Net cash provided by operations after reinvestment 2,213 1,643
---------- ----------
FINANCING ACTIVITIES
Issuances of debt 2,660 2,902
Payments of debt (3,225) (2,397)
Issuances of stock 155 243
Purchases of stock for treasury (219) (130)
Dividends (897) (841)
---------- ----------
Net cash used in financing activities (1,526) (223)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (11) (86)
---------- ----------
CASH AND CASH EQUIVALENTS
Net increase during the period 676 1,334
Balance at beginning of period 1,819 1,611
---------- ----------
Balance at end of period $ 2,495 $ 2,945
========== ==========
See Notes to Condensed Consolidated Financial Statements.
7
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information
and notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to consolidated
financial statements included in the Annual Report on Form 10-K of The Coca-Cola
Company (our Company) for the year ended December 31, 2000. In the opinion of
management, all adjustments (consisting of normal recurring accruals), as well
as the accounting change to adopt Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 2001, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001.
Certain amounts in our prior period financial statements have been
reclassified to conform to the current period presentation.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note B - Seasonality
Sales of ready-to-drink nonalcoholic beverages are somewhat seasonal, with
the second and third calendar quarters accounting for the highest sales volumes
in the Northern Hemisphere. The volume of sales in the beverages business may be
affected by weather conditions.
Note C - Comprehensive Income
Total comprehensive income for the third quarter 2001 was $1,161 million,
comprising net income of $1,074 million, a reduction of derivative gains of
approximately $27 million, a net increase for foreign currency translation of
approximately $140 million and a net decrease in the unrealized gain on
available-for-sale securities of approximately $26 million. Total comprehensive
income for the third quarter 2000 was $973 million, comprising net income of
$1,067 million, an increase in the unrealized gain on available-for-sale
securities of approximately $3 million, offset by a net reduction for foreign
currency translation of approximately $97 million.
For the first nine months of 2001, total comprehensive income was $3,114
million, comprising net income of $3,055 million, accumulated net gains on
derivative financial instruments of approximately $77 million, a net increase
for foreign currency translation of approximately $1 million and a net decrease
in the unrealized gain on available-for-sale securities of approximately $19
million. For the first nine months of 2000, total comprehensive income was
$1,404 million, comprising net income of $1,935 million offset by a net
reduction for foreign currency translation of approximately $475 million and a
net decrease in the unrealized gain on available-for-sale securities of
approximately $56 million.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note D - Accounting Pronouncements
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
---------------------------------------------------------------------------
Effective January 1, 2001, the Company adopted SFAS No. 133 as amended by
SFAS No. 137 and SFAS No. 138. These statements require the Company to recognize
all derivative instruments on the balance sheet at fair value. The statements
also establish new accounting rules for hedging instruments, which depend on the
nature of the hedge relationship. A fair value hedge requires that the effective
portion of the change in the fair value of a derivative instrument be offset
against the change in the fair value of the underlying asset, liability, or firm
commitment being hedged through earnings. A cash flow hedge requires that the
effective portion of the change in the fair value of a derivative instrument be
recognized in Other Comprehensive Income (OCI), a component of Share-Owners'
Equity, and reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. Any ineffective portion of a
derivative instrument's change in fair value is immediately recognized in
earnings. The third quarter 2001 unaudited condensed consolidated financial
statements include the provisions required by SFAS No. 133, while the third
quarter 2000 unaudited condensed consolidated financial statements were prepared
in accordance with the applicable professional literature for derivatives and
hedging instruments in effect at that time.
Upon adoption of SFAS No. 133 on January 1, 2001, the Company recorded
transition adjustments to recognize its derivative instruments at fair value and
to recognize the ineffective portion of the change in fair value of its
derivatives. The cumulative effect of these transition adjustments was an
after-tax reduction to net income of approximately $10 million and an after-tax
net increase to OCI of approximately $50 million.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note D - Accounting Pronouncements (Continued)
Emerging Issues Task Force (EITF)
---------------------------------
Effective January 1, 2001, our Company adopted the provisions of EITF Issue
00-14, "Accounting for Certain Sales Incentives," and Issue 00-22, "Accounting
for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to be Delivered in the Future."
Both of these EITF Issues provide additional guidance relating to the income
statement classification of certain sales incentives. The adoption of these EITF
Issues resulted in the Company reducing both net operating revenues and selling,
administrative and general expenses by approximately $142 million for the third
quarter ended September 30, 2001, and by approximately $445 million for the nine
months ended September 30, 2001. For the three and nine month periods ending
September 30, 2000, the Company reduced both net operating revenues and selling,
administrative and general expenses by approximately $130 million and $399
million, respectively.
In April 2001, the EITF reached a consensus on EITF Issue 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products or Services." EITF Issue 00-25, which is effective for the
Company beginning January 1, 2002, will require certain selling expenses
incurred by the Company to be classified as deductions from revenue. We are
currently assessing the financial impact EITF Issue 00-25 will have on our
Consolidated Financial Statements; however, we estimate that in excess of $2
billion of our payments to bottlers and customers which are currently classified
within selling, administrative and general expenses will be reclassified as
deductions from revenue in accordance with this EITF Issue. In our 2002
Consolidated Financial Statements, all comparative periods will be reclassified.
11
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets"
-------------------------------------------------------------------------------
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill
and indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning January 1, 2002. We are currently assessing the financial impact SFAS
No. 141 and SFAS No. 142 will have on our Consolidated Financial Statements;
however, we estimate that amortization expense for 2002 will be reduced by
approximately $50 million, and equity income for 2002 will be increased by an
amount in excess of $100 million.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note E - Operating Segments
The Company's operating structure includes the following operating segments:
the North America Group (including The Minute Maid Company); the Africa Group;
the Europe, Eurasia and Middle East Group; the Latin America Group; the Asia
Group; and Corporate. The North America Group includes the United States, Canada
and Puerto Rico.
Effective January 1, 2001, the Company's operating segments were
geographically reconfigured and/or renamed as follows: Puerto Rico was added to
the North America Group from the Latin America Group. The Middle East Division
was added to the Europe and Eurasia Group, which changed its name to the Europe,
Eurasia and Middle East Group. At the same time the Africa and Middle East
Group, less the relocated Middle East Division, changed its name to the Africa
Group. During the first quarter of 2001, the Asia Pacific Group was renamed the
Asia Group. Prior period amounts have been reclassified to conform to the
current period presentation.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note E - Operating Segments (Continued)
Information about our Company's operations by operating segment, is as
follows:
As of and for the Three Months Ended September 30, 2001 and 2000 (in
millions):
Europe,
North Eurasia and Latin
America Africa Middle East America Asia Corporate Consolidated
------- ------ ------------ --------- -------- --------- ------------
2001
----
Net operating
revenues $ 1,981 $ 152 $ 1,355 $ 548 $ 1,330 $ 31 $ 5,397
Operating income 368 61 314 269 495 (196) 1,311
Identifiable
operating
assets 4,268 292 2,587 1,641 2,066 5,964 16,818
Investments 141 90 1,962 1,677 1,067 910 5,847
2000
----
Net operating
revenues $ 1,930 $ 157 $ 1,212 $ 551 $ 1,511 $ 52 $ 5,413
Operating income(1) 383 51 324 272 452 (155) 1,327
Identifiable
operating
assets 4,185 309 1,810 1,568 2,216 6,527 16,615
Investments 143 92 2,086 1,957 1,404 844 6,526
Intercompany transfers between operating segments are not material.
(1) Operating income was reduced by $17 million for North America; $2 million
for Africa; $32 million for Europe, Eurasia and Middle East; $7 million for
Latin America; $8 million for Asia; and $28 million for Corporate as a result of
other operating charges associated with the Company's organizational
realignment.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note E - Operating Segments (Continued)
For the Nine Months Ended September 30, 2001 and 2000 (in millions):
Europe,
North Eurasia and Latin
America Africa Middle East America Asia Corporate Consolidated
------- ------ ------------ --------- -------- --------- ------------
2001
----
Net operating
revenues $ 5,644 $ 439 $ 3,491 $ 1,669 $ 3,801 $ 125 $ 15,169
Operating income 1,117 183 1,147 828 1,341 (512) 4,104
2000
----
Net operating
revenues $ 5,600 $ 419 $ 3,529 $ 1,561 $ 3,945 $ 102 $ 15,156
Operating income(1,2) 1,034 120 1,044 743 598 (687) 2,852
Intercompany transfers between operating segments are not material.
(1) Operating income was reduced by $3 million for North America; $397
million for Asia; and $5 million for Corporate as a result of other operating
charges recorded for asset impairments.
(2) Operating income was reduced by $97 million for North America; $7 million
for Africa; $72 million for Europe, Eurasia and Middle East; $28 million for
Latin America; $116 million for Asia; and $240 million for Corporate as a result
of other operating charges associated with the Company's organizational
realignment.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE F - Other Operating Charges
In the third quarter of 2000, we recorded total charges of approximately $94
million related to costs associated with the Company's organizational
realignment (the Realignment). For the first nine months of 2000, we recorded
total charges of $965 million. Of this $965 million, approximately $405 million
related to the impairment of certain bottling, manufacturing and intangible
assets, and approximately $560 million related to the Realignment.
In the first quarter of 2000, we recorded charges of approximately $405
million related to the impairment of certain bottling, manufacturing and
intangible assets, primarily within our Indian bottling operations. These
impairment charges were recorded to reduce the carrying value of the identified
assets to fair value. Fair value was derived using cash flow analysis. The
assumptions used in the cash flow analysis were consistent with those used in
our internal planning process. The assumptions included estimates of future
growth in unit cases, estimates of gross margins, estimates of the impact of
exchange rates and estimates of tax rates and tax incentives. The charge was
primarily the result of our revised outlook for the Indian beverage market
including the future expected tax environment. The remaining carrying value of
long-lived assets within our Indian bottling operations, immediately after
recording the impairment charge, was approximately $300 million.
In the third quarter of 2000, the Company incurred total pretax Realignment
expenses of approximately $94 million. Under the Realignment, which was
completed during the year ended December 31, 2000, approximately 5,200 employees
were separated from almost all functional areas of the Company's operations, and
certain activities were outsourced to third parties. Employees separated from
the Company as a result of the Realignment were offered severance or early
retirement packages, as appropriate, which included both financial and
non-financial components. The Realignment expenses included costs associated
with involuntary terminations, voluntary retirements and other direct costs
associated with implementing the Realignment. Other direct costs included
repatriating and relocating employees to local markets; asset write-downs; lease
cancellation costs; and costs associated with the development, communication and
administration of the Realignment.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE F - Other Operating Charges (Continued)
The table below summarizes the balance of accrued Realignment expenses and
the movement in that accrual as of and for the three months ended September 30,
2001 (in millions):
Accrued Accrued
Balance Noncash Balance
June 30 and September 30
REALIGNMENT SUMMARY 2001 Payments Exchange 2001
------------------- --------- -------- -------- ------------
Employees involuntarily separated
Severance pay and benefits $ 49 $ (12) $ (4) $ 33
Other - including asset
write-downs 17 (2) 6 21
--------- -------- -------- ----------
$ 66 $ (14) $ 2 $ 54
--------- -------- -------- ----------
Employees voluntarily separated
Special retirement pay and
benefits $ 149 $ (4) $ 1 $ 146
Outside services - legal,
outplacement, consulting 2 - - 2
--------- -------- -------- ----------
$ 151 $ (4) $ 1 $ 148
--------- -------- -------- ----------
Other direct costs $ 56 $ (2) $ (8) $ 46
--------- -------- -------- ----------
Total Realignment $ 273 $ (20) $ (5) $ 248 (1)
========= ======== ======== ==========
(1) Accrued Realignment expenses of approximately $124 million have been
included in both of the Condensed Consolidated Balance Sheet captions Accounts
payable and accrued expenses and Other liabilities.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE F - Other Operating Charges (Continued)
The table below summarizes the balance of accrued Realignment expenses and
the movement in that accrual as of and for the nine months ended September 30,
2001 (in millions):
Accrued Accrued
Balance Noncash Balance
December 31 and September 30
REALIGNMENT SUMMARY 2000 Payments Exchange 2001
------------------- --------- -------- -------- ------------
Employees involuntarily separated
Severance pay and benefits $ 91 $ (54) $ (4) $ 33
Outside services - legal,
outplacement, consulting 8 (8) - -
Other - including asset
write-downs 37 (18) 2 21
--------- -------- -------- ----------
$ 136 $ (80) $ (2) $ 54
--------- -------- -------- ----------
Employees voluntarily separated
Special retirement pay and
benefits $ 179 $ (23) $ (10) $ 146
Outside services - legal,
outplacement, consulting 3 (1) - 2
--------- -------- -------- ----------
$ 182 $ (24) $ (10) $ 148
--------- -------- -------- ----------
Other direct costs $ 60 $ (11) $ (3) $ 46
--------- -------- -------- ----------
Total Realignment $ 378 $ (115) $ (15) $ 248 (1)
========= ======== ======== ==========
(1) Accrued Realignment expenses of approximately $124 million have been
included in both of the Condensed Consolidated Balance Sheet captions Accounts
payable and accrued expenses and Other liabilities.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE G Issuances of Stock by Equity Investee
In July 2001, Coca-Cola Enterprises Inc. (CCE) completed its acquisition of
Hondo Incorporated and Herbco Enterprises, Inc., collectively known as Herb
Coca-Cola. The transaction was valued at approximately $1.4 billion, with
approximately 30 percent of the transaction funded with the issuance of
approximately 25 million shares of CCE common stock, and the remaining portion
funded through debt and assumed debt. The issuance of shares resulted in a
one-time noncash pretax gain for our Company of approximately $91 million. We
provided deferred taxes of approximately $36 million on this gain. This
transaction resulted in our Company's 40 percent ownership interest in CCE being
diluted to 38 percent.
18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Beverage Volume
---------------
For both the third quarter of 2001 and the first nine months of 2001, our
worldwide unit case volume increased more than 4 percent compared to the same
periods in 2000. The increase in unit case volume reflects strong performance in
the United States and international markets, particularly Japan, China, Russia,
Argentina and Great Britain, partially offset by declines in volume recorded by
Germany and Turkey. Third quarter 2001 unit case volume growth for the Company's
operating segments was 3 percent for the North America Group; 3 percent for the
Latin America Group; 4 percent for the Europe, Eurasia and Middle East Group; 9
percent for the Africa Group; and 8 percent for the Asia Group. Worldwide gallon
sales of concentrates and syrups increased slightly in the third quarter and
increased 4 percent for the first nine months of 2001, compared to the same
periods in 2000.
Net Operating Revenues and Gross Margin
---------------------------------------
Net operating revenues of $5,397 million in the third quarter of 2001 and
$15,169 million in the first nine months of 2001 were comparable to the net
operating revenues recorded for the same periods in 2000. Net operating revenues
for the third quarter 2001 reflect a slight increase in gallon shipments, price
increases in selected countries and the consolidation of bottling operations in
Brazil and the Nordic Region, offset by the negative impact of currencies and
the deconsolidation of our previously owned vending operations in Japan and
canning operations in Germany.
Our gross profit margin increased to 68.6 percent in the third quarter of
2001 from 67.9 percent in the third quarter of 2000. For the first nine months
of 2001, our gross profit margin increased to 69.6 percent from 68.3 percent for
the first nine months of 2000. The increase in our gross profit margin for both
the third quarter and the first nine months of 2001 was due primarily to the
deconsolidation in 2001 of our Japan vending and German canning operations,
partially offset by the consolidation in 2001 of the Nordic and Brazilian
bottling operations. In addition, the increase in the gross profit margin for
the first nine months of 2001 was impacted by the reduction of concentrate
inventory levels by certain bottlers within the Coca-Cola system in 2000.
19
RESULTS OF OPERATIONS (Continued)
Selling, Administrative and General Expenses
--------------------------------------------
Selling, administrative and general expenses were approximately $2,394
million in the third quarter of 2001, compared to $2,256 million in the third
quarter of 2000. The increase for the third quarter is due to incremental
marketing expenses in 2001 as discussed below, the consolidation in 2001 of the
Nordic and Brazilian bottling operations, partially offset by the sale in 2001
of our Japan vending and German canning operations and the impact of the
stronger U.S. dollar. For the first nine months of 2001, selling, administrative
and general expenses were $6,449 million compared to $6,528 million for the same
period in 2000. The decrease during the first nine months of 2001 was due
primarily to the combination of savings in expenses achieved from the
Realignment completed during 2000, the impact of a stronger U.S. dollar and the
deconsolidation in 2001 of our Japan vending and German canning operations,
partially offset by the consolidation in 2001 of the Nordic and Brazilian
bottling operations and incremental marketing expenses in 2001 as discussed
below.
During the first quarter of 2001, the Company announced plans to implement
significant strategic one-time marketing initiatives in order to accelerate the
Company's business strategies. During calendar year 2001, the Company expects to
invest approximately $300 million of incremental marketing, or approximately
$0.08 per share after tax, in selected key markets, specifically the United
States, Japan and Germany. During the third quarter of 2001, approximately $94
million, or $0.03 per share after tax, was expensed on these incremental
marketing activities; in the second quarter of 2001, approximately $82 million,
or $0.02 per share after tax, was expensed.
Other Operating Charges
-----------------------
In the third quarter of 2000, we recorded total nonrecurring charges of
approximately $94 million related to costs associated with the Company's
Realignment. For the first nine months of 2000, we recorded total charges of
$965 million. Of this $965 million, approximately $405 million related to the
impairment of certain bottling, manufacturing and intangible assets, and
approximately $560 million related to the Realignment.
20
RESULTS OF OPERATIONS (Continued)
Other Operating Charges (Continued)
------------------------------------
In the first quarter of 2000, we recorded charges of approximately $405
million related to the impairment of certain bottling, manufacturing and
intangible assets, primarily within our Indian bottling operations. These
impairment charges were recorded to reduce the carrying value of the identified
assets to fair value. Fair value was derived using cash flow analysis. The
assumptions used in the cash flow analysis were consistent with those used in
our internal planning process. The assumptions included estimates of future
growth in unit cases, estimates of gross margins, estimates of the impact of
exchange rates and estimates of tax rates and tax incentives. The charge was
primarily the result of our revised outlook for the Indian beverage market
including the future expected tax environment. The remaining carrying value of
long-lived assets within our Indian bottling operations, immediately after
recording the impairment charge, was approximately $300 million.
In the third quarter of 2000, the Company incurred total pretax Realignment
expenses of approximately $94 million, or $0.03 per share after tax. Under the
Realignment, which was completed during the year ended December 31, 2000,
approximately 5,200 employees were separated from almost all functional areas of
the Company's operations, and certain activities were outsourced to third
parties. Employees separated from the Company as a result of the Realignment
were offered severance or early retirement packages, as appropriate, which
included both financial and non-financial components. The Realignment expenses
included costs associated with involuntary terminations, voluntary retirements
and other direct costs associated with implementing the Realignment. Other
direct costs included repatriating and relocating employees to local markets;
asset write-downs; lease cancellation costs; and costs associated with the
development, communication and administration of the Realignment.
21
RESULTS OF OPERATIONS (Continued)
Operating Income and Operating Margin
-------------------------------------
Operating income was $1,311 million in the third quarter of 2001, compared to
$1,327 million in the third quarter of 2000. Our consolidated operating margin
for the third quarter of 2001 was 24.3 percent, comparable to 24.5 percent for
the same period in 2000. Operating income for the third quarter of 2001
decreased compared to the third quarter of 2000 due primarily to the increase in
selling, administrative and general expenses as previously discussed, offset by
the recording in the third quarter of 2000 of approximately $94 million in
charges as previously discussed under the heading, "Other Operating Charges."
Operating income and operating margin for the nine months ended September 30,
2001 were $4,104 million and 27.1 percent, respectively, compared to $2,852
million and 18.8 percent for the nine months ended September 30, 2000. The
increases in operating income and operating margin for the first nine months of
2001 reflect the recording of approximately $965 million in charges in 2000 as
previously discussed under the heading, "Other Operating Charges," the effect of
the planned reduction of concentrate inventory by certain bottlers within the
Coca-Cola system in 2000, and the decrease in selling, administrative and
general expenses in 2001 as previously discussed. Operating income and operating
margin for the third quarter of 2001 and for the first nine months of 2001 were
also negatively impacted by a stronger U.S. dollar.
Interest Income and Interest Expense
------------------------------------
Interest income decreased to $68 million for the third quarter of 2001 and to
$227 million year to date at September 30, 2001, from $92 million and $257
million, respectively, for the comparable periods in 2000, due primarily to
lower interest rates. Interest expense decreased 45 percent to $66 million in
the third quarter of 2001 relative to the comparable period in 2000, and by
approximately 31 percent to $234 million year to date at September 30, 2001, due
to both a decrease in average commercial paper debt balances and lower interest
rates. Interest income exceeded interest expense for the third quarter of 2001.
Interest income benefited from cash invested in locations outside the United
States earning higher rates of interest than can be obtained within the United
States. Our interest expense is primarily incurred on borrowings within the
United States.
22
RESULTS OF OPERATIONS (Continued)
Equity Income
-------------
Our Company's share of income from equity method investments for the third
quarter of 2001 totaled $104 million, compared to $63 million in the third
quarter of 2000. For the first nine months of 2001, our Company's share of
income from equity method investments totaled $167 million, compared to equity
income of $49 million for the comparable period in 2000. The increase in our
Company's share of income from equity method investments was due primarily to
the continued improvement in operating performance by the majority of our equity
investees.
Other Income - Net
------------------
Other income - net decreased to $26 million income for the third quarter of
2001, compared to $121 million income for the third quarter of 2000. Other
income - net decreased to $23 million income for the first nine months of 2001
compared to $102 million income for the comparable period in 2000. The
reductions in other income - net in both periods were due primarily to the
Company recognizing a tax free noncash gain of $118 million in the third quarter
of 2000 from the merger of Coca-Cola Beverages plc and Hellenic Bottling Company
S.A.
Issuances of Stock by Equity Investee
-------------------------------------
In July 2001, CCE completed its acquisition of Herb Coca-Cola. The
transaction was valued at approximately $1.4 billion, with approximately 30
percent of the transaction funded with the issuance of approximately 25 million
shares of CCE common stock, and the remaining portion funded through debt and
assumed debt. The issuance of shares resulted in a one-time noncash pretax gain
for our Company of approximately $91 million. We provided deferred taxes of
approximately $36 million on this gain. This transaction resulted in our
Company's 40 percent ownership interest in CCE being diluted to 38 percent.
23
RESULTS OF OPERATIONS (Continued)
Income Taxes
------------
Our effective tax rate was 30 percent for the third quarter of 2001 compared
to 28.1 percent for the third quarter of 2000. The increase in our effective tax
rate for the third quarter of 2001 compared with the third quarter of 2000 was
due primarily to the recognition in the third quarter of 2000 of a tax free gain
of approximately $118 million upon the merger of Coca-Cola Beverages plc and
Hellenic Bottling Company S.A., partially offset by the noncash gain recorded in
the third quarter of 2001 related to CCE's acquisition of Herb Coca-Cola. The
effective tax rate was 30 percent for the first nine months of 2001 compared to
33.8 percent for the first nine months of 2000. The decrease in our effective
tax rate for the first nine months of 2001 compared with the first nine months
of 2000 was due primarily to the first quarter of 2000 including other operating
charges of approximately $405 million related to asset impairments for which no
tax benefit was recognized. Excluding the impact of these impairment charges,
the effective tax rate on operations for the first nine months of 2000 was 30.8
percent. Our effective tax rate of 30 percent for the three and nine months
ended September 30, 2001, reflects tax benefits derived from significant
operations outside the United States, which are taxed at rates lower than the
U.S. statutory rate of 35 percent.
Recent Developments
-------------------
In February 2001, our Company and The Procter & Gamble Company announced
plans to create a stand-alone enterprise to develop and market juices and salted
snacks. In September 2001, the two companies announced that they will
independently pursue opportunities to grow their respective businesses, instead
of pursuing a joint business as previously announced.
24
RESULTS OF OPERATIONS (Continued)
Recent Developments (Continued)
-------------------------------
The Company has concluded negotiations regarding the terms of a proposed
Control and Profit and Loss (CPL) agreement with certain other shareholders of
Coca-Cola Erfrischungsgetraenke AG (CCEAG), a bottler in Germany in which the
Company owns approximately a 41 percent ownership interest. Under the terms of
the proposed CPL agreement, the Company would obtain management control of CCEAG
for a period of up to five years, commencing January 1, 2002. In return for the
management control of CCEAG, the Company would guarantee minimum annual dividend
payments by CCEAG (or the equivalent) to all other CCEAG shareholders.
Additionally, all CCEAG shareholders have agreed to enter into either a put or a
put/call option agreement with the Company, exercisable at the end of the term
of the CPL agreement at previously agreed prices. The CPL agreement and other
related proposed agreements are subject to final execution of definitive
agreements and are further subject to CCEAG shareholder, supervisory board and
European Union regulatory approval. If the CPL agreement and the related
agreements are executed and receive the requisite approvals, the transfer of
management control of CCEAG would require the Company to consolidate CCEAG in
its financial statements beginning January 1, 2002. The consolidation of CCEAG
effective Janaury 1, 2002 would be expected to increase the Company's assets and
decrease the Company's 2002 gross margin and operating margin, but would not be
expected to have a material effect on the Company's 2002 operating income, net
income or earnings per share.
25
FINANCIAL CONDITION
Net Cash Provided by Operations After Reinvestment
--------------------------------------------------
In the first nine months of 2001, net cash provided by operations after
reinvestment totaled $2,213 million compared to $1,643 million for the
comparable period in 2000.
Net cash provided by operating activities in the first nine months of 2001
amounted to $3,053 million, a $474 million increase compared to the first nine
months of 2000. The increase was due primarily to the first nine months of 2000
being unfavorably impacted by the previously mentioned planned inventory
reduction by certain bottlers, cash payments made to separated employees under
the Realignment, as well as additional Japanese tax payments made pursuant to
the terms of an Advance Pricing Agreement (APA) entered into by the United
States and Japan taxing authorities, referred to in Note 14 to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
Net cash used in investing activities totaled $840 million for the first nine
months of 2001, compared to $936 million for the first nine months of 2000. The
decrease was due primarily to (i) a reduction in purchases of property, plant
and equipment; (ii) proceeds received from the sale of our vending operations in
Japan; offset by (iii) the consolidation of the Nordic bottling operations and
other investing activities.
Financing Activities
--------------------
Our financing activities include net borrowings, dividend payments and share
issuances and repurchases. Net cash used in financing activities totaled $1,526
million for the first nine months of 2001, compared to $223 million for the
first nine months of 2000. Our Company reduced its cash borrowings by $565
million in the first nine months of 2001 compared to a net increase in cash
borrowings of $505 million for the comparable period in 2000. In 2000, the
Company increased its borrowings due to the impact on cash from the reduction of
concentrate inventory by certain bottlers, costs associated with the Realignment
and the satisfaction of tax obligations pursuant to the terms of the APA.
Cash used to purchase common stock for treasury was $219 million for the
first nine months of 2001, compared to $130 million for the first nine months of
2000. The Company repurchased approximately 4,050,000 shares of common stock
during the first nine months of 2001 at an average cost of $48.76 per share.
During the first nine months of 2000, our Company did not repurchase any common
stock under the stock repurchase plan. Treasury stock repurchases in 2000 were
due primarily to the repurchase of shares from employees pursuant to the
provisions of the Company's Stock Option and Restricted Stock Award Plans.
26
FINANCIAL CONDITION (Continued)
Financial Position
------------------
The increase in current prepaid expenses and other assets during the first
nine months of 2001 was due primarily to the change in the carrying value of
derivatives and hedging instruments as reported under SFAS No. 133 and an
increase in prepaid marketing.
Total current and non-current debt decreased by $371 million during the first
nine months of 2001. The increase in non-current debt was due primarily to the
Company's issuance in March 2001 of $500 million in 10-year global notes. This
amount, together with cash generated from operations, was used to reduce current
debt.
Euro Conversion
---------------
In January 1999, certain member countries of the European Union established
irrevocable, fixed conversion rates between their existing currencies and the
European Union's common currency (the Euro).
The introduction of the Euro is scheduled to be phased in over a period
ending January 1, 2002, when Euro notes and coins will come into circulation.
The existing currencies are due to be completely removed from circulation on
February 28, 2002. Our Company has been preparing for the introduction of the
Euro for several years. The timing of our phasing out all uses of the existing
currencies will comply with the legal requirements and also be scheduled to
facilitate optimal coordination with the plans of our vendors, distributors and
customers. Our work related to the introduction of the Euro and the phasing out
of the other currencies includes converting information technology systems;
recalculating currency risk; recalibrating derivatives and other financial
instruments; evaluating and taking action, if needed, regarding the continuity
of contracts; and modifying our processes for preparing tax, accounting, payroll
and customer records.
Based on our work to date, we believe the Euro replacing the other currencies
will not have a material impact on our operations or our Consolidated Financial
Statements.
27
FINANCIAL CONDITION (Continued)
Exchange
--------
Our international operations are subject to certain opportunities and risks,
including currency fluctuations and government actions. We closely monitor our
operations in each country and seek to adopt appropriate strategies that are
responsive to changing economic and political environments and to fluctuations
in foreign currencies.
Due to our global operations, we use approximately 65 functional currencies.
Weaknesses in some of these currencies are often offset by strengths in others.
In the third quarter of 2001, the U.S. dollar was approximately 9 percent
stronger as a weighted average of all of our functional currencies, compared to
the third quarter of 2000. This does not include the effects of our hedging
activities and, therefore, does not reflect the actual impact of fluctuations in
exchange rates on our operating results. Our foreign currency management program
mitigates over time a portion of the impact of exchange on net income and
earnings per share. The amount of foreign currency exposure we hedge at any
point in time varies based on our hedging strategy and market conditions. The
impact of a stronger U.S. dollar reduced our operating income by approximately 3
percent for the third quarter 2001, and by approximately 5 percent for the first
nine months of 2001, led by movements in the Euro and the Brazilian Real.
The Company will continue to manage its foreign currency exposures to
mitigate over time a portion of the impact of exchange on net income and
earnings per share. Our Company conducts business in nearly 200 countries around
the world, and we manage foreign currency exposures through the portfolio effect
of the basket of functional currencies in which we do business.
28
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by our Company and subsidiaries or
with the approval of an authorized executive officer of our Company may
constitute "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995, including statements made in this report and
other filings with the Securities and Exchange Commission. Generally, the words
"believe," "expect," "intend," "estimate," "anticipate," "project," "will" and
similar expressions identify forward-looking statements, which generally are not
historical in nature. All statements which address operating performance, events
or developments that we expect or anticipate will occur in the future --
including statements relating to volume growth, share of sales and earnings per
share growth and statements expressing general optimism about future operating
results -- are forward-looking statements. Forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from our Company's historical experience and our present
expectations or projections. As and when made, management believes that these
forward-looking statements are reasonable. However, caution should be taken not
to place undue reliance on any such forward-looking statements since such
statements speak only as of the date when made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
The following are some of the factors that could cause our Company's actual
results to differ materially from the expected results described in or
underlying our Company's forward-looking statements:
- Our ability to generate sufficient cash flows to support capital expansion
plans, share repurchase programs and general operating activities.
- Changes in the nonalcoholic beverages business environment. These include,
without limitation, competitive product and pricing pressures and our
ability to gain or maintain share of sales in the global market as a result
of actions by competitors. While we believe our opportunities for
sustained, profitable growth are considerable, factors such as these could
impact our earnings, share of sales and volume growth.
- Changes in laws and regulations, including changes in accounting standards,
taxation requirements (including tax rate changes, new tax laws and revised
tax law interpretations) and environmental laws in domestic or foreign
jurisdictions.
- Fluctuations in the cost and availability of raw materials and the ability
to maintain favorable supplier arrangements and relationships.
29
FORWARD-LOOKING STATEMENTS (Continued)
- Our ability to achieve earnings forecasts, which are generated based on
projected volumes and sales of many product types, some of which are more
profitable than others. There can be no assurance that we will achieve the
projected level or mix of product sales.
- Interest rate fluctuations and other capital market conditions, including
foreign currency rate fluctuations. Most of our exposures to capital
markets, including interest and foreign currency, are managed on a
consolidated basis, which allows us to net certain exposures and, thus,
take advantage of any natural offsets. We use derivative financial
instruments to reduce our net exposure to financial risks. There can be no
assurance, however, that our financial risk management program will be
successful in reducing foreign currency exposures.
- Economic and political conditions, especially in international markets,
including civil unrest, governmental changes and restrictions on the
ability to transfer capital across borders.
- Our ability to penetrate developing and emerging markets, which also
depends on economic and political conditions, and how well we are able to
acquire or form strategic business alliances with local bottlers and make
necessary infrastructure enhancements to production facilities,
distribution networks, sales equipment and technology. Moreover, the supply
of products in developing markets must match the customers' demand for
those products, and due to product price and cultural differences, there
can be no assurance of product acceptance in any particular market.
- The effectiveness of our advertising, marketing and promotional programs.
- The uncertainties of litigation, as well as other risks and uncertainties
detailed from time to time in our Company's Securities and Exchange
Commission filings.
- Adverse weather conditions, which could reduce demand for Company products.
The foregoing list of important factors is not exclusive.
30
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
We have no material changes to the disclosure on this matter made in our
Annual Report on Form 10-K for the year ended December 31, 2000.
31
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 - Letter Agreement, dated June 12, 2001, between the Company and
Joseph R. Gladden, Jr.
10.2 - Letter Agreement, dated August 22, 2001, between the Company and
Charles S. Frenette.
10.3 - Letter Agreement, dated August 22, 2001, between The Coca-Cola
Export Corporation and Charles S. Frenette.
10.4 - Letter Agreement, dated September 17, 2001, between the Company
and Brian G. Dyson.
12 - Computation of Ratios of Earnings to Fixed Charges.
(b) Reports on Form 8-K:
No report on Form 8-K has been filed by the Registrant during the quarter
for which this report is filed.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE COCA-COLA COMPANY
(REGISTRANT)
Date: November 13, 2001 By: /s/ Connie D. McDaniel
------------------------
Connie D. McDaniel
Vice President and Controller
(On behalf of the Registrant and
as Chief Accounting Officer)
33
Exhibit Index
Exhibit Number and Description
10.1 - Letter Agreement, dated June 12, 2001, between the Company and
Joseph R. Gladden, Jr.
10.2 - Letter Agreement, dated August 22, 2001, between the Company and
Charles S. Frenette.
10.3 - Letter Agreement, dated August 22, 2001, between The Coca-Cola
Export Corporation and Charles S. Frenette.
10.4 - Letter Agreement, dated September 17, 2001, between the Company
and Brian G. Dyson.
12 - Computation of Ratios of Earnings to Fixed Charges.