Coca-Cola Co. (KO) — Q3 2020 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 25, 2020, compared with the periods ended September 27, 2019. COVID-19 materially affected demand, particularly away-from-home sales, and shifted consumer purchases toward at-home channels and generally lower-margin products.
Key financial metrics
Amounts in U.S. dollars, millions except per-share data.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net operating revenues | $8,652 | $9,507 | $24,403 | $28,198 |
| Gross profit | $5,181 | $5,740 | $14,548 | $17,145 |
| Operating income | $2,298 | $2,499 | $6,659 | $7,922 |
| Net income attributable to Coca-Cola shareowners | $1,737 | $2,593 | $6,291 | $6,878 |
| Diluted EPS | $0.40 | $0.60 | $1.46 | $1.60 |
| Gross margin | 59.9% | 60.4% | 59.6% | 60.8% |
| Operating margin | 26.6% | 26.3% | 27.3% | 28.1% |
- Revenue declined 9% in Q3 and 13% for the first nine months. Q3 impacts were volume (-4%), price/product/geographic mix (-3%) and foreign exchange (-3%); nine-month impacts were volume (-9%), mix (-2%) and foreign exchange (-3%).
- Worldwide unit case volume fell 4% in Q3 and 7% year to date; concentrate sales volume declined 3% and 9%, respectively. Q3 unit case volume improved relative to the first half, but remained down across most segments.
- Nine-month operating cash flow was $6,220, down 20% from $7,771. Capital expenditures were $759, versus $1,206. Dividends paid were $3,522, versus $3,419.
- At September 25, cash and cash equivalents were $11,385 and short-term investments were $7,347; marketable securities were another $2,396. Total debt was approximately $52,867, comprising loans and notes payable, current maturities and long-term debt, compared with $42,763 at year-end 2019.
- Current assets were $30,410 and current liabilities $26,891. The company reported $8,900 of unused credit lines for general corporate purposes and characterized its liquidity as strong.
Material changes and unusual items
- Q3 operating income fell 8%; the nine-month decline was 16%. Lower revenue and unfavorable currency effects were partly offset by lower selling, general and administrative expenses. SG&A decreased 19% in Q3 and 20% year to date, including lower advertising and cost-management savings.
- Interest expense increased to $660 in Q3 and $1,127 year to date, largely due to $405 of charges for early debt extinguishments. The company issued substantial U.S.-dollar and euro debt during 2020 and used proceeds in part to repay debt and reduce commercial paper.
- Nine-month other income included a $902 gain from remeasuring Coca-Cola’s previously held fairlife interest when it acquired the remaining ownership in January. The fairlife contingent consideration liability was remeasured, generating $47 of year-to-date charges.
- Other operating charges totaled $372 in Q3 and $747 year to date. Year-to-date items included $332 for strategic realignment, $160 for the Odwalla trademark impairment, $35 to discontinue the Odwalla juice business and $55 for another North American trademark impairment.
- In August, Coca-Cola announced a networked organizational redesign involving resource reallocations and employee reductions. It expects total strategic realignment costs of approximately $350–$550 and expects the new structure to be established at the beginning of 2021.
- October’s subsequent-event disclosure reports extinguishment of debt with a September carrying value of $3,306, resulting in approximately $80 of charges.
Outlook, commentary and risks
- Management said the pandemic’s full-year impact remained uncertain, expected Q2 to be the most severely affected quarter, and anticipated continued negative effects in Q4. Worldwide unit case volume for October month-to-date was down low single digits.
- Management expected foreign exchange to adversely affect full-year revenue and operating income, and operating income and operating cash flows through year-end. The expected 2020 effective tax rate was 19.5% before significant operating or nonoperating items.
- The company said it had no intention of repurchasing shares during 2020, intended to maintain its dividend approach, and did not expect significant M&A activity for the remainder of the year. The Board approved a regular dividend of $0.41 per share payable December 15, 2020.
- COVID-19 risks include prolonged away-from-home weakness, unfavorable channel and product mix, economic deterioration, supply-chain and bottler disruptions, currency effects, and potential future asset impairments. Management noted that smaller customers could permanently close.
- A disputed IRS transfer-pricing matter for tax years 2007–2009 remains before the U.S. Tax Court. The IRS asserted a potential additional federal tax liability of approximately $3.3 billion plus interest; the company disputes the claim. An adverse outcome could materially affect financial position, results and cash flows.
Important facts for investors to verify
- How quickly away-from-home demand and channel mix recover, and whether the October volume trend persists.
- Whether margins and cash generation stabilize as pandemic-related costs, marketing spend and volume change.
- Debt levels, maturity and refinancing plans, and the cash impact of 2020 and subsequent debt extinguishments.
- Actual strategic realignment costs and whether expected efficiencies and growth benefits are achieved.
- Potential exposure and timing of the IRS transfer-pricing decision, including any effects on subsequent tax years.
- Whether COVID-19 conditions trigger further impairments, supply disruptions or material changes to the company’s outlook.