ATLANTA--(BUSINESS WIRE)--The Coca-Cola Company today reported second quarter 2016 operating results. Muhtar Kent, Chairman and Chief Executive Officer of The Coca-Cola Company said, “Despite challenging macroeconomic conditions, structural changes and foreign exchange headwinds which contributed to a 5% decline in reported revenues, we delivered 3% organic revenue growth, gained value share in total nonalcoholic ready-to-drink beverages, expanded our operating margins and grew profits in line with our expectations. Strong performance in some of our largest and most developed markets, including the United States, Mexico and Japan, was offset by difficult external conditions in many of our emerging and developing markets, including China and Argentina. These factors combined to put pressure on our volume and top-line performance in the quarter, especially where we own bottling businesses. In these international operations where external headwinds have proven to be more severe than originally forecast, we are taking action by reassessing local market initiatives where needed and continuing our efforts in driving productivity.

• Concentrate sales growth was in line with unit case volume growth in the quarter and was slightly behind unit case volume growth for the year-to-date period. After adjusting for one less day in the first quarter, concentrate sales and unit case volume growth were in line for the year-to-date period. The positive price/mix in the quarter was driven by solid underlying pricing partially offset by 1 point of geographic mix. Acquisitions, divestitures and structural items in the quarter primarily include the impact of refranchised territories in North America, the deconsolidation of our German bottling operations as a result of their being merged to create Coca-Cola European Partners as well as the impact of the brand transfer agreement associated with the closing of the transaction with Monster Beverage Corporation (“Monster”) in 2015.
• We gained global volume and value share in sparkling beverages in the quarter. Value share grew ahead of volume share, emphasizing our focus on accelerating our revenue growth management strategies. Sparkling beverage volume was even year to date and declined 1% in the quarter primarily due to weakness in certain emerging markets.
• We gained global volume and value share in still beverages in the quarter. Still beverage volume grew 4% year to date and 2% in the quarter. Volume growth in the quarter was driven by strong performance in most categories partially offset by a decline in juice and juice drinks primarily due to industry weakness in China.
• The decline in reported income before taxes in the quarter was primarily driven by an unfavorable currency impact of 9% and structural impacts, partially offset by a 5% favorable impact due to comparability items. Also, income before taxes benefited from the impact of our productivity initiatives, a slightly favorable commodity pricing environment, the timing of expenses and an increase in equity income. The structural headwind on comparable currency neutral income before taxes was 4%.
• The reported effective tax rate for the quarter was 19.5%. The underlying effective tax rate was 22.5%. The variance between the reported rate and the underlying rate was due to the tax effect of various items impacting comparability, separately disclosed in the Reconciliation of GAAP and Non-GAAP Financial Measures schedule.
• Reported EPS was $0.79 and comparable EPS was $0.60 in the quarter. Items impacting comparability increased reported EPS by a net $0.19 and were primarily related to a noncash gain recognized in connection with the deconsolidation of our German bottling operations as a result of their being merged to create Coca-Cola European Partners, partially offset by noncash charges related to refranchising territories in North America and costs associated with our previously announced productivity and restructuring initiatives.
• Fluctuations in foreign currency exchange rates resulted in a headwind of 7 points, 9 points and 10 points on reported operating income, reported income before taxes and reported EPS, respectively, in the quarter. Fluctuations in foreign currency exchange rates resulted in a 6 point headwind on comparable operating income and an 11 point headwind on both comparable income before taxes and comparable EPS in the quarter.
• Year-to-date cash from operations was $3.8 billion, down $1.3 billion primarily due to the impact of contributions to our pension plans, fluctuations in foreign currency exchange rates, one less day in the first quarter and the deconsolidation of our German bottling operations.

2016 OUTLOOK

Our 2016 outlook for organic revenues, comparable currency neutral income before taxes (structurally adjusted) and comparable EPS are non-GAAP financial measures that exclude or have otherwise been adjusted for items impacting comparability, the impact of changes in foreign currency exchange rates, acquisitions and divestitures, and the impact of structural items, as applicable. We are not able to reconcile these forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures without unreasonable efforts because we are unable to predict with a reasonable degree of certainty the actual impact of changes in foreign currency exchange rates and the exact timing of acquisitions and divestitures and/or structural changes throughout 2016. The unavailable information could have a significant impact on our full-year 2016 GAAP financial results.

• The Company now expects organic revenues to be up 3% in 2016. The net impact of acquisitions, divestitures and structural items on net revenues is expected to be a 6 to 7 point headwind, and based on the current spot rates, currency is expected to be a 2 to 3 point headwind, including the impact of hedged positions for the full year.
• The Company continues to expect comparable currency neutral income before taxes (structurally adjusted) to grow 6% to 8% in 2016, in line with our long-term target. The net impact of structural items is expected to be a 4 point headwind, and based on the current spot rates, currency is expected to be an 8 to 9 point headwind, including the impact of hedged positions for the full year.
• Based on the above, the Company expects full-year comparable EPS to be down 4% to 7% versus prior year’s comparable EPS of $2.00.
• In addition to the above, the Company expects the following:
• The underlying effective annual tax rate in 2016 is expected to be 22.5%.
• We are targeting full-year 2016 net share repurchases of $2.0 to $2.5 billion.
• For the third quarter of 2016, we estimate that based on the current spot rates, currency will be a 2 point headwind on comparable net revenues and a 2 to 3 point headwind on comparable income before taxes, including the impact of hedged positions. The net impact of structural items is expected to be a 3 point headwind on comparable income before taxes.

ITEMS IMPACTING COMPARABILITY

• For details on items impacting comparability in the quarter, refer to the Reconciliation of GAAP and Non-GAAP Financial Measures schedule.

NOTES

• All references to growth rate percentages and share compare the results of the period to those of the prior year comparable period.
• The Company reports its financial results in accordance with accounting principles generally accepted in the United States (GAAP). However, management uses non-GAAP financial measures, including, but not limited to, organic revenues, comparable currency neutral income before taxes and comparable currency neutral earnings per share, in making financial, operating, compensation and planning decisions and in evaluating the Company's performance. Management believes that these non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing our ongoing performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP. The Company’s non-GAAP financial information does not represent a comprehensive basis of accounting. Refer to the Reconciliation of GAAP and Non-GAAP Financial Measures schedule.
• "Comparable currency neutral income before taxes" is a non-GAAP financial measure that excludes or otherwise adjusts for items impacting comparability and the impact of changes in foreign currency exchange rates. For details on these adjustments, refer to the Reconciliation of GAAP and Non-GAAP Financial Measures schedule.

• "Comparable currency neutral income before taxes (structurally adjusted)" is a non-GAAP financial measure that excludes or otherwise adjusts for items impacting comparability, the impact of changes in foreign currency exchange rates and the impact of structural items. For details on these adjustments, refer to the Reconciliation of GAAP and Non-GAAP Financial Measures schedule.
• "Concentrate sales" represents the amount of concentrates, syrups, beverage bases and powders sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers.
• "Concentrate sales/reported volume" represents the percent change in net revenues attributable to the increase (decrease) in concentrate sales volume for our geographic operating segments (expressed in equivalent unit cases) after considering the impact of structural changes. For our Bottling Investments operating segment, this represents the percent change in net revenues attributable to the increase (decrease) in unit case volume after considering the impact of structural changes. Our Bottling Investments operating segment reflects unit case volume growth for consolidated bottlers only, which is computed on a reported basis.
• "Organic revenues" is a non-GAAP financial measure that excludes or has otherwise been adjusted for the impact of changes in foreign currency exchange rates and acquisitions, divestitures and structural items, as applicable. For details on these adjustments, refer to the Reconciliation of GAAP and Non-GAAP Financial Measures schedule.
• “Core business” represents the combined performance from the Eurasia and Africa, Europe, Latin America, North America, Asia Pacific and Corporate operating segments offset by intersegment eliminations.
• "Sparkling beverages" means NARTD beverages with carbonation, including carbonated energy drinks and waters.
• "Still beverages" means nonalcoholic beverages without carbonation, including noncarbonated waters, flavored waters and enhanced waters, juices and juice drinks, teas, coffees, sports drinks, dairy and noncarbonated energy drinks.
• All references to volume and volume percentage changes indicate unit case volume, unless otherwise noted. All volume percentage changes are computed based on average daily sales, unless otherwise noted. "Unit case" means a unit of measurement equal to 24 eight ounce servings of finished beverage. "Unit case volume" means the number of unit cases (or unit case equivalents) of Company beverages directly or indirectly sold by the Company and its bottling partners to customers.
• First quarter 2016 financial results were impacted by one less day, while fourth quarter financial results will be impacted by two additional days. Unit case volume results for the quarters are not impacted by the variance in days due to the average daily sales computation referenced above.

Productivity and Reinvestment

During the three and six months ended July 1, 2016, the Company recorded charges of $65 million and $128 million, respectively, related to our productivity and reinvestment initiatives. The Company also recorded charges of $92 million and $182 million during the three and six months ended July 3, 2015, respectively. These productivity and reinvestment initiatives are focused on four key areas: restructuring the Company's global supply chain; implementing zero-based work, an evolution of zero-based budget principles across the organization; streamlining and simplifying the Company's operating model; and further driving increased discipline and efficiency in direct marketing investments. The savings realized from the program will enable the Company to fund marketing initiatives and innovation required to deliver sustainable net revenue growth. The savings will also support margin expansion and increased returns on invested capital over time.

Equity Investees

During the three and six months ended July 1, 2016, the Company recorded net charges of $18 million and $21 million, respectively. During the three and six months ended July 3, 2015, the Company recorded net charges of $9 million and $82 million, respectively. These amounts represent the Company’s proportionate share of unusual or infrequent items recorded by certain of our equity method investees.

Transaction Gains/Losses

During the three and six months ended July 1, 2016, the Company recorded charges of $52 million and $97 million, respectively, related to costs incurred to refranchise our North America bottling territories. These costs include, among other items, internal and external costs for individuals directly working on the refranchising efforts, severance, and costs associated with the implementation of information technology systems to facilitate consistent data standards and availability throughout the North America bottling system.

During the three and six months ended July 1, 2016, the Company recorded charges of $32 million and $33 million, respectively, for noncapitalizable transaction costs associated with pending and closed transactions, primarily related to the deconsolidation of our German bottling operations discussed below.

During the three and six months ended July 1, 2016, the Company recognized a noncash gain of $1,292 million, net of transaction costs described above, as a result of the deconsolidation of our German bottling operations. On May 29, 2016, the Company merged its German bottling operations with Coca-Cola Enterprises, Inc. and Coca-Cola Iberian Partners, S.A.U., to create Coca-Cola European Partners ("CCEP") in exchange for an equity investment in CCEP.

During the three and six months ended July 1, 2016, the Company incurred noncash losses of $199 million and $568 million, respectively. The Company also incurred noncash losses of $12 million and $33 million during the three and six months ended July 3, 2015, respectively. These losses were primarily due to the derecognition of intangible assets relating to the refranchising of territories in North America to certain of our unconsolidated bottling partners.

During the six months ended July 1, 2016, the Company recorded a net gain of $18 million as a result of the disposal of our shares in Keurig Green Mountain, Inc.

During the three and six months ended July 3, 2015, the Company recorded a net gain of $1,402 million as a result of our transaction with Monster Beverage Corporation ("Monster"), primarily due to the difference in the recorded carrying value of the assets transferred, including an allocated portion of goodwill, compared to the value of the total assets and business acquired. This net gain was recorded in the line item other income (loss) — net in our condensed consolidated statement of income. Additionally, under the terms of this transaction, the Company was required to discontinue selling energy products under certain trademarks, including one trademark in the glacéau portfolio. As a result, the Company recognized an impairment charge of $380 million in the line item other operating charges in our condensed consolidated statement of income upon the closing of the transaction with Monster, primarily related to the discontinuation of the energy products in the glacéau portfolio.

In the fourth quarter of 2014, the owners of the majority interest of a Brazilian bottler exercised their option to acquire from us a 10 percent interest in the entity's outstanding shares resulting in our recognizing an estimated loss of $32 million due to the exercise price being lower than our carrying value. The transaction closed in January 2015, and the Company recorded an additional loss of $6 million during the six months ended July 3, 2015, calculated based on the final option price. Also during the six months ended July 3, 2015, the Company recorded a loss of $19 million on our previously held investment in a South African bottler, which had been accounted for under the equity method of accounting prior to our acquisition of the bottler in February 2015.

Other Items

Economic (Nondesignated) Hedges

The Company uses derivatives as economic hedges primarily to mitigate the price risk associated with the purchase of materials used in the manufacturing process as well as the purchase of vehicle fuel. Although these derivatives were not designated and/or did not qualify for hedge accounting, they are effective economic hedges. The changes in fair values of these economic hedges are immediately recognized into earnings.

The Company excludes the net impact of mark-to-market adjustments for outstanding hedges and realized gains/losses for settled hedges from our non-GAAP financial information until the period in which the underlying exposure being hedged impacts our condensed consolidated statement of income. We believe this adjustment provides meaningful information related to the impact of our economic hedging activities. During the three months ended July 1, 2016 and July 3, 2015, the impact of the Company's adjustment related to our economic hedging activities resulted in decreases of $95 million and $56 million, respectively, to our non-GAAP income before income taxes. During the six months ended July 1, 2016 and July 3, 2015, the net impact of the Company's adjustment related to our economic hedging activities described above resulted in decreases of $71 million and $11 million, respectively, to our non-GAAP income before income taxes.

Donation to The Coca-Cola Foundation

During the three and six months ended July 1, 2016, the Company recorded a charge of $100 million. During the three and six months ended July 3, 2015, the Company recorded a charge of $100 million. These charges were due to contributions the Company made to The Coca-Cola Foundation.

Early Extinguishment of Long-Term Debt

During the six months ended July 3, 2015, the Company recorded charges of $320 million due to the early extinguishment of certain long-term debt, which were recorded in the line item interest expense in our condensed consolidated statement of income.

Hyperinflationary Economies

During the six months ended July 3, 2015, the Company recorded net charges of $135 million related to our Venezuelan operations. These charges were primarily a result of the remeasurement of the net monetary assets of our Venezuelan subsidiary using the SIMADI exchange rate, an impairment of a Venezuelan trademark due to higher exchange rates, and a write-down of receivables from our bottling partner in Venezuela. The write-down was recorded primarily as a result of the continued lack of liquidity and our revised assessment of the U.S. dollar value we expect to realize upon the conversion of the Venezuelan bolivar into U.S. dollars by our bottling partner to pay our receivables.

Other

During the three and six months ended July 1, 2016, the Company recorded other charges of $7 million and $10 million, respectively. During the six months ended July 3, 2015, the Company recorded other charges of $1 million. These charges were primarily related to tax litigation expense as well as charges associated with certain fixed assets and costs associated with restructuring and transitioning the Company's Russian juice operations to an existing joint venture with an unconsolidated bottling partner.

Certain Tax Matters

During the three and six months ended July 1, 2016, the Company recorded net tax charges of $83 million and $77 million, respectively, related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. During the three months ended July 3, 2015, the Company recorded a net tax charge of $16 million related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties.

CURRENCY NEUTRAL

Management evaluates the operating performance of our Company and our international subsidiaries on a currency neutral basis. We determine our currency neutral operating results by dividing or multiplying, as appropriate, our current period actual U.S. dollar operating results, normalizing for certain structural items in hyperinflationary economies, by the current period actual exchange rates (that include the impact of current period currency hedging activities), to derive our current period local currency operating results. We then multiply or divide, as appropriate, the derived current period local currency operating results by the foreign currency exchange rates (that also include the impact of the comparable prior period currency hedging activities) used to translate the Company's financial statements in the comparable prior year period to determine what the current period U.S. dollar operating results would have been if the foreign currency exchange rates had not changed from the comparable prior year period.

ORGANIC REVENUES

Organic revenues is a non-GAAP financial measure that excludes or has otherwise been adjusted for the impact of changes in foreign currency exchange rates and acquisitions, divestitures and structural items, as applicable. The adjustments related to acquisitions, divestitures and structural items for the three and six months ended July 1, 2016 and July 3, 2015 consisted of the structural changes discussed below. Additionally, during the three and six months ended July 1, 2016, organic revenues were adjusted, both on a consolidated basis and for our Asia Pacific operating segment, for the sales of the Company's newly acquired plant-based protein beverages in China.

STRUCTURAL CHANGES

Structural changes generally refer to acquisitions or dispositions of bottling, distribution or canning operations and consolidation or deconsolidation of bottling and distribution entities for accounting purposes. In 2016, the Company deconsolidated our German bottling operations as a result of their being merged to create CCEP. As a result of the merger transaction, the Company now owns an equity method investment in CCEP. Accordingly, the impact of the deconsolidation and new equity method investment has been included as a structural change (a component of acquisitions and divestitures) in our analysis of net operating revenues and income (loss) before income taxes on a consolidated basis as well as for our Europe and Bottling Investments operating segments. During 2016, the Company also changed our funding arrangement with our bottling partners in China, which resulted in a reduction in net revenues with an offsetting reduction in direct marketing expense. In 2016 and 2015, the Company refranchised territories in North America to certain of its unconsolidated bottling partners. Additionally, in 2015, the Company sold its global energy drink business to Monster; acquired Monster's non-energy drink business; acquired an equity interest in Monster; amended its current distribution coordination agreements with Monster to expand into additional territories; and acquired a South African bottler. Accordingly, these activities have been included as structural items in our analysis of the impact of these changes on certain line items in our condensed consolidated statements of income. In addition, for non-Company-owned and licensed beverage products sold in the refranchised territories in North America for which the Company no longer reports unit case volume, we have eliminated the unit case volume from the base year when calculating 2016 versus 2015 volume growth rates on a consolidated basis as well as for the North America and Bottling Investments operating segments.

2016 OUTLOOK

Our 2016 outlook for organic revenue, comparable currency neutral income before taxes (structurally adjusted) and comparable EPS are non-GAAP financial measures that exclude or have otherwise been adjusted for items impacting comparability, the impact of changes in foreign currency exchange rates, acquisitions and divestitures, and the impact of structural items, as applicable. We are not able to reconcile our full-year 2016 projected organic revenue to our full-year 2016 projected reported net revenue, our full-year 2016 projected comparable currency neutral income before taxes (structurally adjusted) to our full-year 2016 projected reported income before taxes, or our full-year 2016 projected comparable EPS to our full-year 2016 projected reported EPS without unreasonable efforts because we are unable to predict with a reasonable degree of certainty the actual impact of changes in foreign currency exchange rates and the exact timing of acquisitions and divestitures and/or structural changes throughout 2016. The unavailable information could have a significant impact on our full-year 2016 GAAP financial results.

About The Coca-Cola Company

The Coca-Cola Company (NYSE: KO) is the world's largest beverage company, refreshing consumers with more than 500 sparkling and still brands and more than 3,800 beverage choices. Led by Coca-Cola, one of the world's most valuable and recognizable brands, our Company's portfolio features 20 billion-dollar brands, 18 of which are available in reduced-, low- or no-calorie options. These brands include Diet Coke, Coca-Cola Zero, Fanta, Sprite, Dasani, vitaminwater, Powerade, Minute Maid, Simply, Del Valle, Georgia and Gold Peak. Through the world's largest beverage distribution system, we are the No. 1 provider of both sparkling and still beverages. More than 1.9 billion servings of our beverages are enjoyed by consumers in more than 200 countries each day. With an enduring commitment to building sustainable communities, our Company is focused on initiatives that reduce our environmental footprint, create a safe, inclusive work environment for our associates, and enhance the economic development of the communities where we operate. Together with our bottling partners, we rank among the world's top 10 private employers with more than 700,000 system associates. For more information, visit Coca-Cola Journey at www.coca-colacompany.com, follow us on Twitter at twitter.com/CocaColaCo, visit our blog, Coca-Cola Unbottled, at www.coca-colablog.com or find us on LinkedIn at www.linkedin.com/company/the-coca-cola-company.