The Coca-Cola Company — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone Q4 filing. Financial amounts are in U.S. dollars.
Business context and reporting period
Coca-Cola sells and licenses more than 500 nonalcoholic beverage brands in over 200 countries and territories. Its business includes concentrate and syrup sales to bottling partners and finished-product operations, the latter generally generating higher revenue but lower gross margins. The company continued refranchising bottling operations, shifting its mix toward concentrate operations.
- Worldwide system unit-case volume grew 2% in 2018 to 29.6 billion cases; concentrate sales volume grew 3%.
- Concentrate operations represented 64% of company revenue, compared with 51% in 2017; finished-product operations represented 36%, down from 49%.
- On a comparable volume basis, Asia Pacific grew 4%, Europe, Middle East and Africa grew 2%, North America grew 1%, and Latin America was flat.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net operating revenues | $31.856 billion | $35.410 billion |
| Gross profit / gross margin | $20.086 billion / 63.1% | $22.155 billion / 62.6% |
| Operating income / operating margin | $8.700 billion / 27.3% | $7.599 billion / 21.5% |
| Net income from continuing operations | $6.727 billion | $1.182 billion |
| Net income attributable to Coca-Cola shareowners | $6.434 billion | $1.248 billion |
| Diluted EPS | $1.50; $1.57 from continuing operations | $0.29; $0.27 from continuing operations |
| Cash provided by operating activities | $7.320 billion | $6.930 billion |
| Capital expenditures | $1.347 billion | $1.675 billion |
Revenue fell 10%, primarily reflecting a 16% unfavorable impact from acquisitions and divestitures, principally bottling refranchising. Volume, price/mix and accounting changes contributed positively. Operating income increased 14%, helped by lower selling, general and administrative expenses and other operating charges. Net income rose sharply against 2017, when the Tax Reform Act drove an unusually high effective tax rate of 82.5%; the 2018 rate was 19.4%.
Fourth-quarter revenue was $7.058 billion versus $7.512 billion in Q4 2017. Shareowner-attributable net income was $870 million versus a $2.752 billion loss; the prior-year quarter included a substantial tax-reform charge. Quarterly results also included impairments, refranchising costs, productivity charges and investment-related gains and losses.
At year-end, cash and cash equivalents were $8.926 billion, short-term investments $2.025 billion and marketable securities $5.013 billion. Current assets were $30.634 billion and current liabilities $29.223 billion. Loans and notes payable, current maturities of long-term debt and long-term debt totaled approximately $43.6 billion. Long-term debt alone was $25.364 billion, down from $31.182 billion. Operating cash flow less capital expenditures was approximately $5.973 billion. Financing activities used $10.552 billion, including $6.644 billion of dividends. Management described liquidity as strong and cited $7.895 billion of backup credit lines.
Material changes, outlook and risks
- Refranchising and mix: Bottling divestitures materially reduced reported revenue and changed the company’s revenue and cost profile. Gross margin increased to 63.1%; management attributed the increase primarily to divestitures, partly offset by currency and accounting changes.
- Unusual items: 2018 included $1.079 billion of other operating charges, including $450 million of CCR asset impairments and $440 million related to productivity and reinvestment initiatives. Other income/loss included $591 million of impairments of equity-method investments and a $476 million net charge related to North American refranchising, partly offset by gains on asset sales.
- Accounting comparability: Adoption of ASC 606 increased reported 2018 revenue by $665 million versus the prior accounting basis, while operating income increased only $6 million. The filing also describes other accounting-standard adoption adjustments.
- Tax and contingencies: The IRS transfer-pricing dispute for 2007–2009 could produce approximately $3.3 billion of additional federal tax, plus interest; the IRS increased its adjustment in 2017. Trial concluded in 2018 and post-trial briefs were filed in February 2019. The company disputes the claim. The filing says a loss could materially affect financial position, results and cash flows. Other pending legal proceedings were not expected by management to have a material adverse effect in aggregate.
- 2019 outlook: Management expected acquisitions and divestitures to increase full-year revenue by 8%–9%, currencies to be a headwind to revenue and operating income, capital expenditures of approximately $2.0 billion, and an effective tax rate near 19.5% before significant items. It expected substantial operating cash flow. The 2019 annualized dividend was raised to $1.60 per share.
- Subsequent event: On January 3, 2019, Coca-Cola acquired Costa for $4.9 billion in cash. The company said purchase accounting was still being finalized. A new Global Ventures segment was established in January 2019.
- Principal risks: Consumer shifts toward lower-sugar and alternative beverages; competition and retailer bargaining power; water availability and agricultural, packaging and energy costs; foreign-exchange and political risks; bottler relationships and financial health; cyber and privacy incidents; regulation and litigation; and execution of productivity, digital and refranchising programs.
Important facts for investors to verify
- How much of reported revenue and margin movement reflects refranchising, underlying volume and pricing, currency, and ASC 606 rather than comparable organic performance.
- Whether the 2019 revenue contribution from acquisitions and divestitures and the forecast currency headwind matched management’s stated expectations.
- The outcome and potential financial exposure of the IRS transfer-pricing case, including possible effects on later tax years and transition-tax obligations.
- Cash-flow generation, debt maturities and refinancing needs, and the company’s capacity to fund dividends, capital spending and the Costa acquisition.
- Whether the 2018 equity-investment and bottling impairments indicate further downside risk to carrying values or planned divestiture proceeds.