Coca-Cola Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 29, 2017; comparisons are to the corresponding 2016 periods. Amounts below are in U.S. dollars unless noted.
Business context
Coca-Cola continued shifting from company-owned bottling operations to an asset-light franchise model. North America and China refranchising materially reduced reported revenue and changed the mix of consolidated operations. Worldwide unit case volume was flat in Q3 and for the first nine months; reported consolidated revenue therefore does not reflect consumer volume trends alone.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net operating revenues | $9.078B | $10.633B | $27.898B | $32.454B |
| Operating income | $2.120B | $2.271B | $6.180B | $7.271B |
| Net income attributable to Coca-Cola shareowners | $1.447B | $1.046B | $4.000B | $5.977B |
| Diluted earnings per share | $0.33 | $0.24 | $0.92 | $1.37 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $5.918B | $6.723B |
- Revenue fell 15% in Q3 and 14% year to date, primarily reflecting acquisitions and divestitures, including bottling refranchising. Price, product and geographic mix contributed 3% favorable impact in both periods. Volume contributed 1% in Q3 and was down 1% year to date.
- Gross margin increased to 62.6% from 61.1% in Q3 and to 62.1% from 61.0% year to date. Management attributed the improvement mainly to acquisitions and divestitures.
- Q3 shareowner net income rose despite lower revenue and operating income; the comparison included a less negative other income (loss) result. Year-to-date net income and diluted EPS declined substantially.
- Year-to-date operating cash flow declined 12%, with working capital, two fewer days in Q1, refranchising and currency effects among the factors cited. Investing activities provided $244M, versus $1.333B used in the prior-year period; financing activities used $2.499B.
Financial position and capital
- At September 29, cash, cash equivalents and short-term investments totaled $22.219B, up from $18.150B at year-end 2016. Current liabilities were $27.633B.
- Loans and notes payable were $13.398B, current maturities of long-term debt $3.231B, and long-term debt $32.471B. Long-term debt including current maturities had a carrying value of $35.702B; total debt balances increased versus year-end.
- Total assets were $90.515B and total equity $22.152B. The company had $8.265B of available credit lines and described its liquidity position as strong.
- Dividends paid during the first nine months were $3.165B. The company repurchased 68.8M shares for $3.012B and expected approximately $2.0B of net repurchases for full-year 2017.
Outlook, commentary and notable items
- Management expected acquisitions and divestitures to reduce full-year 2017 net operating revenue by 18%. Based on then-current spot rates and hedges, it expected currencies to have a slight favorable impact on Q4 revenue and a favorable impact on Q4 operating income.
- Management expected 2017 capital expenditures, net of disposals, of approximately $2.0B and substantial operating cash flow. It anticipated approximately $85M of additional pension contributions in the remainder of 2017.
- The productivity program was extended, with an additional $800M of annualized savings targeted by 2019; the company also cited a broader target of approximately $3.0B annualized productivity by 2019. Savings were intended to support marketing, innovation and growth.
- Unusual charges weighed on results: nine-month other operating charges were $1.491B, including $737M of CCR asset impairments, $355M for productivity initiatives and $314M of refranchising costs. Other income (loss) included a net $1.473B North America refranchising charge for the first nine months. CCR goodwill was written down to zero.
- After quarter-end, Coca-Cola acquired ABI’s 54.5% majority interest in Coca-Cola Beverages Africa for $3.15B. The company said it planned to hold the controlling interest temporarily, was discussing a sale with potential buyers and would account for CCBA as a discontinued operation.
- The IRS transfer-pricing dispute for tax years 2007–2009 involved potential additional federal tax of approximately $3.4B plus interest after an amended IRS adjustment. Coca-Cola disputed the claims; a Tax Court trial was scheduled for March 5, 2018. Management said it believed the ultimate outcome would not materially affect the company, while acknowledging an adverse outcome could have a material impact.
- Other exposures include foreign currency and political conditions, including Venezuela, where the company recorded $34M of intangible-asset impairments and reduced those assets’ remaining carrying value to zero. The filing also describes ordinary-course legal matters and third-party guarantees, which management did not consider probable to require payment.
Important facts for investors to verify
- How much of reported revenue and operating-income change reflects refranchising and other structural changes versus underlying volume, pricing and mix.
- Progress and cash costs of the U.S. bottling refranchising program, including completion of remaining territories and contingent payments under bottler agreements.
- Whether productivity savings and the revised operating model deliver the stated 2019 targets without impairing growth or brand investment.
- Developments in the IRS dispute, including the potential $3.4B tax claim plus interest and any related reserve or cash-flow implications.
- Post-quarter CCBA ownership, expected sale timing and the effects of discontinued-operations accounting.
- Debt levels, interest expense, working-capital trends, and the company’s capacity to sustain dividends and planned repurchases.