The Coca-Cola Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 28, 2018; comparative periods ended September 29, 2017. Unaudited consolidated statements. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Coca-Cola sells beverage concentrates and finished products through company operations and independent bottling partners. The company continued refranchising bottling operations, including completing the sale of its Canadian bottling operations on September 28, 2018. CCBA, the Africa bottling business, was presented as discontinued operations while the company pursued a partial divestiture.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net operating revenues | $8,245 | $9,078 | $24,798 | $27,898 |
| Gross profit | $5,186 | $5,684 | $15,749 | $17,332 |
| Gross margin | 62.9% | 62.6% | 63.5% | 62.1% |
| Operating income | $2,526 | $2,245 | $7,064 | $6,245 |
| Operating margin | 30.6% | 24.7% | 28.5% | 22.4% |
| Net income from continuing operations | $2,319 | $1,444 | $5,935 | $4,000 |
| Net income attributable to Coca-Cola shareowners | $1,880 | $1,447 | $5,564 | $4,000 |
| Diluted EPS, continuing operations | $0.54 | $0.33 | $1.38 | $0.92 |
| Diluted EPS, total | $0.44 | $0.33 | $1.29 | $0.92 |
Q3 discontinued operations produced a $501 million loss, including a $554 million impairment of CCBA assets held for sale. Nine-month discontinued operations recorded a $386 million loss.
- Cash flow: Nine-month operating cash flow was $5.48 billion, down 7% from $5.86 billion. The filing cites refranchising effects, tax payments (including a $370 million transition-tax payment), hedge timing, foreign exchange and one fewer selling day. Investing activities provided $4.24 billion; financing activities used $6.38 billion.
- Capital spending and shareholder returns: Property, plant and equipment purchases were $917 million in the first nine months. Dividends paid were $3.32 billion; treasury-stock purchases used $1.60 billion of cash. The quarterly dividend was raised to $0.39 per share, payable December 14, 2018.
- Debt and liquidity: Cash and cash equivalents were $9.07 billion; short-term investments, $4.73 billion; marketable securities, $5.06 billion. Loans and notes payable, current maturities and long-term debt totaled approximately $44.84 billion. Long-term debt, including current maturities, had a $31.86 billion carrying value. Available credit lines totaled $6.67 billion.
Material changes versus prior comparable periods
- Reported revenue fell 9% in Q3 and 11% year to date. The largest stated factor was acquisitions and divestitures, particularly bottling refranchising; Q3 also had a 3% adverse currency effect. Worldwide unit case volume grew 2% in both periods, while concentrate sales volume rose 4% in Q3 and 3% year to date.
- Operating income increased despite lower reported revenue, supported by volume, pricing/mix, lower selling and administrative expenses, and fewer other operating charges. Nine-month gross and operating margins improved, with management attributing the margin changes primarily to acquisitions and divestitures, partly offset by revenue-recognition accounting changes.
- ASC 606 adoption increased reported revenue by $137 million in Q3 and $488 million year to date versus prior guidance, but reduced gross profit by $75 million and $123 million, respectively. Its operating-income effect was $40 million in Q3 and negative $8 million year to date.
- Other income (loss) improved substantially year over year: Q3 was income of $9 million versus a loss of $896 million; year to date was a loss of $143 million versus $1.19 billion. Comparisons were affected by refranchising charges and gains in the prior year, alongside the 2018 Lindley sale gain and other unusual items.
- Operating cash flow declined, while cash and cash equivalents rose to $9.07 billion from $6.01 billion at year-end. Total debt declined from approximately $47.69 billion at year-end to $44.84 billion.
Outlook, management commentary, risks and unusual items
- Management described near-term prospects as strong and expected substantial operating cash flow in 2018. It forecast full-year capital expenditures of approximately $1.7 billion and expected acquisitions and divestitures to reduce 2018 full-year net revenue by about 16%. Management expected foreign exchange to adversely affect revenue and operating income through year-end.
- Management estimated a 2018 effective tax rate of 20.3% before further Tax Reform Act clarification and unusual or special items. Accounting for the Tax Reform Act remained provisional and could materially change tax expense.
- The productivity and reinvestment program continues through 2019. The filing describes an expected $3.0 billion in annualized productivity by 2019 under earlier expansions, plus a further $800 million in annualized savings expected from the 2017 expansion. The company had incurred $3.44 billion of program expenses since 2012.
- CCBA assets held for sale were written down by $554 million based on revised operating projections and foreign exchange. Coca-Cola anticipated selling part of its CCBA interest in the first half of 2019, which would end its controlling interest.
- Other notable items included a $370 million gain on the sale of Lindley, $450 million of CCR asset impairments, and $257 million of impairment charges on equity-method investees year to date, including $205 million related to the Indonesian investee.
- Tax contingency: The IRS asserts approximately $3.3 billion of additional federal tax for 2007–2009, plus interest, concerning transfer pricing. The Tax Court trial concluded in May 2018; final briefs were due February 2019. A prior court ruling reduced the potential adjustment by approximately $138 million. Coca-Cola disputes the claim, but an adverse outcome could materially affect financial position, results and cash flows; the IRS may also propose adjustments for later years.
- Foreign currency, commodity and interest-rate exposure; emerging-market and political conditions; impairment estimates; variable consideration estimates under ASC 606; and the seasonality and weather sensitivity of beverage sales remain relevant risks. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the revenue and margin movement reflects ongoing business performance versus refranchising, currency and ASC 606 presentation changes.
- Whether CCBA’s sale proceeds and timing support the revised held-for-sale valuation and planned first-half 2019 divestiture.
- The outcome and potential exposure from the IRS transfer-pricing dispute, including any proposed assessments for later tax years.
- Progress against productivity savings targets and the expected effect of refranchising on future revenue, operating costs and cash flows.
- Debt maturities, refinancing needs, and the sustainability of dividends and repurchases alongside planned capital expenditures.
- Whether impairment assumptions for CCR and equity-method investees change as operating and foreign-exchange conditions develop.