Coca-Cola Company (KO) — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 27, 2019; comparisons are with the quarter ended September 28, 2018. Financial statements are unaudited. Amounts are in U.S. dollars unless stated otherwise.
Business context and key financial metrics
Coca-Cola sells beverage concentrates and finished beverages through geographic segments, Global Ventures and Bottling Investments. The company acquired Costa in January 2019 and now includes Coca-Cola Beverages Africa (CCBA) in continuing operations and Bottling Investments; comparative segment information was recast.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net operating revenues | $9.507bn | $8.775bn | $28.198bn | $26.494bn |
| Gross profit | $5.740bn | $5.429bn | $17.145bn | $16.529bn |
| Gross margin | 60.4% | 61.9% | 60.8% | 62.4% |
| Operating income | $2.499bn | $2.614bn | $7.922bn | $7.327bn |
| Operating margin | 26.3% | 29.8% | 28.1% | 27.7% |
| Net income attributable to Coca-Cola shareowners | $2.593bn | $1.880bn | $6.878bn | $5.564bn |
| Diluted EPS | $0.60 | $0.44 | $1.60 | $1.29 |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $7.771bn | $5.690bn |
Q3 revenue rose 8%, while operating income fell 4%; shareowner net income increased 38%. For the first nine months, revenue increased 6%, operating income 8% and shareowner net income 24%. The Q3 diluted EPS increase was $0.16 per share.
Cash flow, debt and liquidity
- Nine-month investing cash outflow was $3.901bn, including $5.376bn for acquisitions, principally Costa and the remaining interest in CHI, and $1.206bn of capital expenditures. Financing cash outflow was $5.337bn, including $3.419bn of dividends.
- Cash and cash equivalents were $7.531bn at September 27, versus $9.077bn at year-end 2018. Cash, short-term investments and marketable securities totaled approximately $13.0bn; the company also reported $8.6bn of credit lines for general corporate purposes.
- Loans and notes payable, current maturities of long-term debt and long-term debt totaled $42.476bn, compared with $44.214bn at December 31, 2018. Long-term debt alone increased to $31.012bn from $25.376bn, partly reflecting new issuances. Nine-month debt issuance was $19.598bn and repayments were $21.716bn.
- Management described liquidity as strong and expected substantial operating cash flow in 2019. Operating lease liabilities recognized at quarter-end were $1.329bn following adoption of the new lease standard.
Material changes, outlook and risks
- Revenue drivers: Q3 growth reflected favorable price, product and geographic mix and acquisitions, partly offset by currency headwinds and lower concentrate sales volume. Worldwide unit case volume grew 2% in Q3 and 2% year to date; concentrate sales volume declined 1% in Q3 and grew 2% year to date. Acquisitions and divestitures contributed an estimated 6 percentage points to Q3 and year-to-date revenue growth.
- Margins and currencies: Gross margin declined in both periods, primarily due to structural changes and foreign exchange. Management said currency movements were expected to remain an unfavorable influence on revenue, operating income and operating cash flow through year-end.
- Company outlook: Management expected acquisitions and divestitures to add 7% to full-year 2019 revenue, capital expenditures of approximately $2.2bn, and a 19.5% effective tax rate before significant operating or nonoperating items. It expected the Brexit-related concentrate inventory timing effect to reverse by year-end; related incremental revenue was estimated at approximately $100mn for the first nine months.
- Unusual items: Q3 other income included a $739mn gain from the sale of a New York City retail and office building, alongside equity-method investment impairment charges of $375mn and $103mn of net North America refranchising-related charges. Nine-month other income/loss also included $739mn building-sale gain, $767mn of equity-method investment impairments, a $160mn CCBA asset adjustment and a $121mn loss on acquiring the remaining CHI interest. These items materially affected period comparisons.
- Acquisition and restructuring: Costa was acquired for $4.9bn cash, net of cash acquired. Its purchase-price allocation remained preliminary. The productivity and reinvestment program generated $184mn of charges in the first nine months; certain initiatives will continue beyond 2019.
- Contingency: The IRS transfer-pricing dispute for tax years 2007–2009 involves a potential additional federal tax liability of approximately $3.3bn plus interest. The Tax Court trial concluded and post-trial briefs were filed; an opinion was pending. The company disputes the IRS position but disclosed that an adverse outcome could materially affect financial position, results and cash flows. Separately, a California vehicle-regulation matter settled for a $145,000 civil penalty.
- Other risk factors: Foreign exchange, market and investment impairments, emerging-market conditions, tax matters, and seasonal/weather-related beverage demand may affect results. Management stated that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much reported earnings growth depended on the one-time $739mn property-sale gain, tax benefits and other significant items.
- Whether revenue growth and volume trends persist after acquisition effects, Brexit-related inventory timing and currency impacts are separated.
- Progress integrating Costa, final purchase-price allocation, and the returns and cash requirements associated with the acquisition.
- Developments in the IRS dispute, including any Tax Court decision, additional tax years challenged or reserve changes.
- Debt maturities, refinancing needs, cash generation, dividends and the stated 2019 outlook as subsequent results become available.