The Coca-Cola Company — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 28, 2019; comparisons are with the quarter ended June 29, 2018. Year-to-date (YTD) figures cover the six months ended on those dates. Amounts are in U.S. dollars unless noted.
Business context and performance
Coca-Cola sells beverage concentrates and syrups and finished beverages through company operations, bottlers, distributors and retailers. The company established a Global Ventures segment, including Costa, acquired in January 2019. In Q2 it also changed its plans for Coca-Cola Beverages Africa (CCBA), intending to retain its controlling stake; CCBA is again included in continuing operations, with prior periods reclassified. Beverage sales are seasonal, and volume can be affected by weather.
- Worldwide unit-case volume grew 3% in Q2 and 2% YTD; concentrate sales volume grew 4% and 3%, respectively. Q2 unit-case volume rose 7% in Asia Pacific and fell 1% in North America.
- Revenue growth reflected volume, acquisitions and divestitures, and favorable pricing/mix, partly offset by currency. Costa materially increased Global Ventures revenue; acquisition and divestiture effects contributed an estimated 6 percentage points to consolidated revenue growth in both periods.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net operating revenues | $9.997B | $9.421B | $18.691B | $17.719B |
| Gross profit | $6.076B | $5.878B | $11.405B | $11.100B |
| Operating income | $2.988B | $2.766B | $5.423B | $4.713B |
| Net income attributable to Coca-Cola shareowners | $2.607B | $2.316B | $4.285B | $3.684B |
| Diluted EPS | $0.61 | $0.54 | $1.00 | $0.86 |
| Gross margin | 60.8% | 62.4% | 61.0% | 62.6% |
| Operating margin | 29.9% | 29.4% | 29.0% | 26.6% |
| Operating cash flow | — | $4.501B | $2.686B |
Revenue increased 6% in Q2 and 5% YTD; operating income increased 8% and 15%, while shareowner net income increased 13% and 16%. Gross margin fell 1.6 percentage points in both comparisons, primarily due to structural changes and unfavorable currency effects. Operating margin improved, reflecting growth, favorable mix and lower operating charges.
YTD investing cash outflow was $5.362B, versus a $2.254B inflow a year earlier, primarily reflecting acquisitions. Capital expenditures were $767M. Financing cash outflow was $1.432B; dividends paid were $1.709B.
At June 28, cash and cash equivalents were $6.731B, short-term investments $2.572B and marketable securities $4.058B, totaling $13.361B. Total current assets were $24.360B and current liabilities $29.382B. Debt comprised $13.030B of loans and notes payable, $2.749B of current maturities and $29.296B of long-term debt. Total liabilities were $69.701B. Cash and cash equivalents declined from $9.077B at year-end, primarily reflecting Costa’s acquisition.
Material changes and unusual items
- Costa was acquired for $4.9B cash, net of cash acquired. Preliminary purchase accounting allocated $2.4B to its trademark and $2.5B to goodwill; the allocation remained subject to refinement.
- CCBA’s change in classification led to a $160M reduction in the carrying value of its property, plant and equipment and definite-lived intangible assets. The company also recorded a $199M tax benefit related to CCBA no longer being classified as a discontinued operation.
- YTD other-than-temporary investment impairments totaled $392M, including $286M related to Coca-Cola Bottlers Japan Holdings and $57M related to a North American investee. The company also recorded a $121M loss on acquiring the remaining interest in CHI.
- Other operating charges were $92M in Q2 and $219M YTD, including productivity-program costs, North America bottling refranchising costs and Costa transaction costs. Prior-year YTD charges included $450M of bottling asset impairments, contributing to the year-over-year increase in operating income.
- The reported effective tax rate was 13.8% for Q2 and 17.9% YTD, compared with 20.7% and 23.6% in 2018. Management attributed differences from the 21% U.S. statutory rate to significant items and the geographic and equity-method earnings mix.
Outlook, commentary and risks
- Management expected 2019 acquisitions and divestitures to have a favorable 7% impact on full-year revenue. Currency was expected to adversely affect revenue, operating income and operating cash flow through year-end. The company expected a 19.5% 2019 effective tax rate before significant operating or nonoperating items.
- Management described the near-term outlook as strong and expected substantial operating cash generation. Full-year 2019 capital expenditures were expected to be approximately $2.4B. No full-year EPS guidance is stated in the supplied filing text.
- European bottlers raised concentrate inventories amid Brexit uncertainty; the company estimated this added about $100M to YTD revenue and approximately 1 percentage point to EMEA concentrate-sales growth. It expected inventory levels and timing effects to normalize during 2019.
- The IRS transfer-pricing dispute concerns tax years 2007–2009 and a potential additional federal tax liability of approximately $3.3B plus interest. The Tax Court trial concluded in 2018 and final briefs were exchanged in April 2019; a decision was pending. The IRS could pursue similar adjustments for later years. The company disputes the IRS position but acknowledges an adverse result could materially affect financial position, results and cash flows.
- The EPA alleged violations of California truck regulations involving certain third-party diesel vehicles operated for the company. Settlement discussions were ongoing; the company expected any monetary sanctions to be immaterial. The filing also describes guarantees of third-party indebtedness totaling $634M, which management did not consider probable to require payment.
Important facts for investors to verify
- Track Costa’s contribution, integration, final purchase-price allocation and the performance of the Global Ventures segment.
- Assess whether volume and pricing/mix can offset currency headwinds and lower gross margin as Brexit-related inventory effects unwind.
- Review cash generation, working-capital movements, acquisition-related investment outflows, debt levels and dividend commitments.
- Monitor the IRS litigation and any potential transfer-pricing assessments for years beyond 2007–2009.
- Separate recurring operating performance from investment impairments, CCBA adjustments, acquisition costs, productivity charges and the tax benefit tied to CCBA’s reclassification.