The Coca-Cola Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 1, 2021; comparisons are with the periods ended September 25, 2020. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Net operating revenues | $10.0B | $8.7B | $29.2B | $24.4B |
| Operating income | $2.9B | $2.3B | $8.6B | $6.7B |
| Net income attributable to shareowners | $2.5B | $1.7B | $7.4B | $6.3B |
| Diluted EPS | $0.57 | $0.40 | $1.70 | $1.46 |
| Gross margin | 60.4% | 59.9% | 61.4% | 59.6% |
| Operating margin | 28.9% | 26.6% | 29.6% | 27.3% |
| Effective tax rate | 19.7% | 20.2% | 22.3% | 14.8% |
- Q3 revenue increased 16%, operating income 26%, and diluted EPS 43% year over year. For the first nine months, revenue rose 20%, operating income 30%, and diluted EPS 16%.
- Worldwide unit case volume grew 6% in Q3 and 8% year to date; concentrate sales volume grew 8% and 13%, respectively. Management attributed revenue growth to volume recovery, favorable pricing and product/channel mix, and currency effects.
- Operating cash flow for the first nine months was $9.2B, versus $6.2B. Capital expenditures were $728M; operating cash flow less capital expenditures was approximately $8.5B. Dividends paid were $5.4B.
- At October 1, cash and cash equivalents were $11.3B; cash, short-term investments and marketable securities totaled approximately $14.9B. Current assets were $24.2B and current liabilities $16.0B.
- Long-term debt, including current maturities, was $39.8B; loans and notes payable were $1.9B. Total debt on these balance-sheet lines was approximately $41.7B, compared with approximately $42.8B at December 31, 2020. The Company also had $6.5B of unused credit lines.
Material changes and unusual items
- Results benefited from the recovery in away-from-home demand compared with pandemic-affected 2020, alongside stronger volumes, pricing and favorable mix. Foreign exchange lifted reported revenue by 2% in both Q3 and year to date.
- Higher marketing, incentive and stock-based compensation expenses partially offset operating improvement. Other operating charges were $478M year to date, including $263M from remeasurement of fairlife contingent consideration and costs for strategic realignment and productivity programs.
- Other income included a $695M gain on the sale of Coca-Cola Amatil and $341M of gains related to investment securities; these items supported year-to-date earnings. Interest expense included $650M of debt-extinguishment charges, versus $405M in the prior-year period.
- The Company issued new debt and retired or repurchased other debt during the period. It paid $5.4B in dividends and did not repurchase shares under its authorized plan.
- Operating cash flow included proceeds from a trade receivables factoring program: $4.6B of receivables were sold during the first nine months. Suppliers had elected to sell $860M of Coca-Cola payment obligations through the voluntary supply-chain finance program as of October 1; the Company classifies these amounts in accounts payable.
Outlook, risks and contingencies
- Management expected a 2021 effective tax rate of 18.6% before significant operating and nonoperating items, and slightly favorable foreign-exchange effects on full-year revenue and operating income. Expected 2021 capital expenditures were approximately $1.5B. The Company said it intended to continue growing dividends and did not plan 2021 share repurchases.
- Management expected supply-chain challenges to persist in the near term and commodity and transportation costs to rise in 2022. It reported no material impact to the Company’s or bottlers’ ability to manufacture or distribute products as of the filing date, while warning of potential labor, ingredient, packaging and shipping disruptions.
- COVID-19 continued to affect volumes, costs and channel mix. Management expected improvement as vaccination and reopening progressed, but noted uncertainty from variants, government measures and uneven economic recovery. U.S.-based employees were subject to a federal-contractor vaccination requirement, with specified exemptions.
- IRS transfer-pricing litigation: The Tax Court had predominantly sided with the IRS in its November 2020 opinion; the Company planned to appeal and maintained that it was more likely than not to prevail. The Company estimated potential aggregate incremental tax and interest exposure of about $12B as of December 31, 2020 under the adverse methodology, with an estimated additional $750M increase through the first nine months of 2021. It estimated a possible payment of about $4.9B for the litigated 2007–2009 years, including interest through October 1, 2021, if required after a final decision. The recorded tax reserve was $400M at October 1, 2021. The matter remains unresolved.
- Management said other pending legal proceedings were not expected to have a material adverse effect on the Company as a whole. The filing also identifies potential impairment, foreign-exchange, market, and counterparty risks.
Important facts for investors to verify
- Progress and potential cash impact of the IRS litigation, including the distinction between the $400M recorded reserve and the much larger scenario-based exposure estimates.
- How much reported growth reflects underlying volume and pricing versus reopening-related mix, currency, investment gains and other unusual items.
- Whether supply-chain and commodity-cost pressures, including the expected 2022 increases, affect margins or product availability.
- The sustainability of operating cash flow given receivables factoring, supplier payment terms, dividends and debt refinancing activity.
- How the fairlife contingent-consideration remeasurement and other restructuring costs evolve; the filing states strategic realignment costs are expected to total approximately $675M.