CASE CC-3 Comprehensive Analysis of Equity Investments The Policy Committee of your company decides to Coca-Cola Company change investment strategies. This change entails Coca-Cola Enterprises an increase in exposure to the stocks of large com- panies producing consumer products dominated by leading brands. The committee decides the soft drink industry, specifically Coca-Cola Company (KO) and Coca-Cola Enterprises (CCE), qualify as potential purchases for your company's portfolio. As the company's beverage industry expert, you must prepare a financial analysis of these two soft drink producers. KO owns the brands included in its broad product line. Its marketing efforts center on world- wide advertising promoting these soft drinks. KO manufactures primarily soft drink extract. The production process requires only low-cost raw materials and relatively limited fixed asset invest- ment. Extract is inexpensive to ship and requires limited numbers of production facilities throughout the world. KO's position as a leading soft drink extract producer is protected by the technical nature of its manufacturing process, the restricted formula for its product, and strong brand names established from over a century of operations. Competition is limited essentially to one competitor, PepsiCo. Ko plays almost no direct role in domestic manufacturing and distri- bution beyond the output of soft drink extract. CCE's business is also dominated by soft drinks. CCE purchases extract from KO and trans- forms it into completed products sold in a wide variety of retail outlets throughout the United States. This costly, complex production and distribution system requires hundreds of plants and warehouses, as well as thousands of vehicles. Marketing efforts emphasize local promotion. Competition consists of a large number of highly automated, similarly organized companies also manufacturing soft drinks from extract. Selected financial statements and notes for these two companies follow: Consolidated Balance Sheets December 31, Year 8 Coca-Cola Company (KO) Coca-Cola Enterprises (CCE) $1,231 627 779 608 3,245 $ 294 125 69 488 ($ milions) Assets Current assets Cash and cash equivalents Trade accounts receivable Inventories Other current assets. Total current assets Other investments Investments in affiliates Other... Total other investments Fixed assets Land Plant and equipment Other Total fixed assets Lass: Accumulated depreciation Total and assets, et Goodwil Total assets 1,912 478 2,390 66 66 117 2,500 293 2,910 (1,150) 1.760 56 $7,451 135 1.561 42 1.738 (558) 1.180 2,935 $4,669 Liabilities & shareholders' equity Current abilities Short-term debt $1,363 $ 148 Accounts payable 1,081 402 Other current liabilities 425 Total current les 2.869 550 Long-ternet 761 2,062 Deferred incontes 270 222 Other long-term liabilities 206 27 Shareholders' equity Preferred stock 300 250 Common stock 3,045 1.558 3.345 1.808 so Page 101 Location 19723 MacBook Pro 80 gue $ 4 3 % 5 8 W E R Y U 0 P. Upd A some prever Consolidated Balance Sheets December 31, Year 8 Coca-Cola Coca-Cola ($ millions) Company (KO) Enterprises (CCE) Assets Current assets Cash and cash equivalents $1,231 $ Trade accounts receivable 627 294 Inventories 779 125 Other current assets. 608 69 Total current assets 3,245 488 Other investments Investments in affiliates. 1,912 Other... 478 66 Total other investments 2,390 66 Flued assets 117 135 2,500 1,561 293 42 2910 1,738 (1.150) 1558) 1.760 1,180 56 2,935 $7,451 $4,669 Land Plant and equipment Other Total fund assets Less: Accumulated depreciation Total fund assets, net Goodwill Total assets Liabilities I shareholders' equity Current liabilities Short-term debit $1,363 $ 148 Accounts payable 1,081 402 Other current liabilities 425 Total current 2,869 550 Long-term debe 751 2,062 Defend income 270 222 Other long-term is 206 27 Shareholders' equity Pred stock 300 250 Common stock 3.045 1.558 3.345 1.808 Total abilities shaders' equity $7.451 $4.669 90% Page 3 of 101 Lot 14 of 19725 Tuula Year 8 Consolidated Statements of Income Coca-Cola Enterprises (CCE) Coca-Cola ($ millions except per share data) Company (KO) Revenues... $8,338 Cost of goods sold. (3,702) Gross profit 4,636 Selling & administrative expenses (3,038) Provision for restructuring Operating profit 1,598 Interest expense (231) Gain on sale of operations Equity in income of affiliates 48 Other income 167 Pretax income 1,582 Income taxes. (538) Net income $1,044 Preferred cash dividends. 16) Income available for common $1,038 Earnings per share $ 2.85 $3,874 12.268) 1,606 (1,225) (27) 354 (211) 104 21 268 (115) $ 153 (10) $ 143 $ 1.03 Data Extracted from Financial Statement Footnotes Coca-Cola Company (KO) 1. Certain soft drink and citrus inventories are valued on the last-in first-out (LIFO) method. The excess of current costs over UFO stated values amount to approximately $30 million at December 31, Year 8. 2. The market value of the company's investments in publicly traded equity investees exceed the company's carrying value at December 31, Year 8 by approximately $291 million 3. The company is contingently liable for guarantees of indebtedness owed by some of its licensees and others totaling approximately $133 million at December 31, Year & 4. Pension plan assets total $496 million. The projected benefit obligation for all plans totals $413 million Coca-Cola Enterprises (CCE) 1. Inventory cost is computed principally on the last-in first-out (LIFO) method At December 31, Year 8. the UFO reserve is $2,077.000 2. Is December Year 8, the company purchases for cash various outstanding bond issues. These transactions result in a preta gain of approximately $8.5 million 3. The company leases office and warehouse space and machinery and equipment under lease agreements 90 Page 700 of 101 Location 17703 of 19723 MacBook Pro 80 900 $ 4 % 5 3 8