The Coca-Cola Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended July 2, 2021; comparisons are with periods ended June 26, 2020. Amounts are in U.S. dollars. Results are unaudited.
Business context and results
Coca-Cola reported a sharp year-over-year recovery as markets reopened and away-from-home channels improved from the pandemic-affected prior-year period. Management cautioned that COVID-19, including new variants and differing vaccination and reopening rates, continued to create uncertainty.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net operating revenues | $10.129 billion | $7.150 billion | $19.149 billion | $15.751 billion |
| Operating income | $3.016 billion | $1.981 billion | $5.738 billion | $4.361 billion |
| Net income attributable to Coca-Cola shareowners | $2.641 billion | $1.779 billion | $4.886 billion | $4.554 billion |
| Diluted EPS | $0.61 | $0.41 | $1.13 | $1.05 |
| Gross margin | 62.6% | 57.9% | 61.9% | 59.5% |
| Operating margin | 29.8% | 27.7% | 30.0% | 27.7% |
Q2 revenue rose 42% and operating income 52%; first-half revenue rose 22% and operating income 32%. Management attributed the improvement to volume recovery, favorable channel and package mix, cost management and favorable currency effects, partly offset by higher marketing and compensation costs and unusual charges. First-half unit case volume grew 9% worldwide; concentrate sales volume grew 15%, partly reflecting shipment timing and the extra days in the first quarter versus 2020.
Cash flow, debt and liquidity
- First-half operating cash flow was $5.525 billion, up from $2.786 billion. Management cited operating improvement, receivables factoring, supplier payment-term extensions and other working-capital effects; these factors mean the increase was not solely earnings-driven.
- Investing activities provided $1.753 billion, including $1.738 billion of proceeds from the sale of Coca-Cola Amatil (CCA). Financing activities used $4.962 billion, including $3.623 billion of dividends.
- Cash and cash equivalents were $9.188 billion at July 2, 2021. Cash, short-term investments and marketable securities totaled $13.0 billion; unused credit lines were $6.5 billion.
- Current and long-term debt totaled approximately $42.0 billion, compared with approximately $42.8 billion at December 31, 2020. The company issued and retired substantial debt during the half, including early extinguishments that generated significant charges.
- Capital expenditures were $450 million in the first half. The company expected approximately $1.5 billion for full-year 2021.
Material changes and unusual items
- Q2 included a $695 million gain on the CCA sale and $203 million of net gains from investment securities. These increased non-operating income and are not representative of recurring operating performance.
- Debt extinguishment charges were $592 million in Q2 and $650 million in the first half, recorded in interest expense. First-half interest expense was $1.222 billion versus $467 million a year earlier.
- Fairlife contingent consideration remeasurement charges were $247 million in Q2 and $251 million in the first half. Other charges included strategic realignment and productivity initiatives.
- The prior-year comparison included a $902 million fairlife remeasurement gain in first-half 2020, as well as brand impairment and discontinuation charges. This affects comparisons of reported earnings and other income.
- First-half effective tax rate was 23.5%, versus 12.5% in 2020, including $176 million of net tax expense from discrete items, primarily foreign tax-law changes.
Outlook, risks and contingencies
- Management expected continued business improvement as vaccination rates and reopening progress, while noting recovery would vary by geography and remain exposed to COVID-19 variants and restrictions. It planned increased marketing investment in 2021.
- Management expected a 19.1% full-year 2021 effective tax rate before significant operating or non-operating items and the potential effect of the IRS dispute. Currency was expected to have a slightly favorable impact on full-year revenue and operating income.
- The company did not intend to repurchase shares under its authorized plan in 2021 and stated it did not intend to change its dividend approach. The board approved a quarterly dividend of $0.42 per share, payable October 1, 2021.
- IRS transfer-pricing litigation: The Tax Court had largely sided with the IRS, but the case was not final and Coca-Cola said it would appeal. The company recorded a $395 million tax reserve. It estimated potential aggregate incremental tax and interest of approximately $12 billion if the Tax Court methodology were ultimately upheld and applied to subsequent years; the estimated payment for the 2007–2009 years was approximately $4.8 billion, including interest through July 2, 2021. The company maintained that prevailing on appeal was more likely than not.
- Other risks include foreign-exchange exposure, potential impairment of assets sensitive to away-from-home demand, and changes in consumer demand, supply conditions and economic recovery. Management said it believed liquidity was sufficient for foreseeable operating and financing needs.
Important facts for investors to verify
- How much of reported revenue, earnings and cash-flow growth reflects reopening and sustainable underlying demand versus prior-year comparisons, unusual gains and working-capital programs.
- The progress and potential cash and earnings effects of the IRS litigation, including the estimated $4.8 billion payment for the litigated years and the broader $12 billion exposure scenario.
- Whether marketing, compensation and restructuring costs rise as planned, and whether increased brand spending translates into revenue and margin growth.
- Debt levels, interest costs and cash availability after dividends, capital spending and any eventual tax payment.
- The pace of recovery in away-from-home channels and the effects of COVID-19 variants, currency movements and potential asset impairments.