The Coca-Cola Company — Q3 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2016; comparative periods ended October 2, 2015. Coca-Cola reported results amid ongoing North American bottler refranchising and changes to its bottling portfolio, including the deconsolidation of its German and South African bottling operations. The company reorganized certain operating groups during 2016 and recast prior-period segment information.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net operating revenues | $10.633bn | $11.427bn | $32.454bn | $34.294bn |
| Operating income | $2.271bn | $2.379bn | $7.271bn | $7.210bn |
| Net income attributable to Coca-Cola shareowners | $1.046bn | $1.449bn | $5.977bn | $6.114bn |
| Diluted earnings per share | $0.24 | $0.33 | $1.37 | $1.39 |
| Gross margin | 61.1% | 59.9% | 61.0% | 60.8% |
| Operating margin | 21.4% | 20.8% | 22.4% | 21.0% |
Q3 revenue fell 7% year over year; management attributed the decline principally to structural changes, with currency also a headwind. Worldwide unit case volume grew 1% in both Q3 and the nine-month period; concentrate sales volume grew 1% in Q3 and was flat for nine months. Positive pricing and product/geographic mix supported margins, alongside lower commodity costs.
For the first nine months, cash provided by operating activities was $6.723bn, down from $8.390bn. Capital expenditures were $1.561bn gross ($1.469bn net of disposals). Cash and cash equivalents were $11.147bn, and short-term investments were $11.265bn at September 30. Debt comprised $12.088bn of loans and notes payable, $3.473bn of current long-term debt and $31.663bn of long-term debt. Current assets were $37.956bn and current liabilities were $27.792bn. The filing reports $8.340bn of available credit lines.
Material changes versus prior comparable periods
- Q3 shareowner net income declined to $1.046bn from $1.449bn, despite higher operating margin, primarily amid a $1.106bn other-income/expense loss. This included a $1.089bn North America refranchising loss and a $21m loss on deconsolidating South African bottling operations.
- For nine months, operating income increased slightly, but shareowner net income and diluted EPS decreased. The prior-year comparison included a $320m early debt-extinguishment charge and a net Monster transaction gain; 2016 included a $1.323bn gain from deconsolidating German bottling operations, offset in part by $1.657bn of North America refranchising losses.
- Cash from operations declined $1.667bn, reflecting currency impacts, $471m of incremental pension contributions and one fewer day in the first quarter, partly offset by lower income tax payments.
- At quarter-end, cash and short-term investments together were $22.412bn. Total debt across the three reported debt categories was $47.224bn, up from $44.116bn at December 31, 2015.
Outlook, management commentary, risks and unusual items
- Management described near-term prospects as strong and expected substantial operating cash flow in 2016. It expected currency to weigh on revenue and operating income through year-end; acquisitions and divestitures were also expected to reduce full-year revenue.
- 2016 net capital expenditures were expected to be slightly below $2.5bn. The company expected 2016 treasury-share purchases of $2.0bn–$2.5bn, net of employee stock-option proceeds. It estimated a 22.5% full-year effective tax rate, excluding significant unusual items.
- The productivity program, extended through 2019, targets approximately $3.6bn of total annualized productivity by 2019, including $2bn of incremental annualized productivity from expanded initiatives. The company had incurred $2.243bn of pretax program costs to date.
- Venezuela remains exposed to currency convertibility and liquidity constraints. The company recorded a $76m receivable write-down in 2016 and warned of possible further foreign-exchange losses, receivable write-downs or impairments. The carrying value of specified Venezuelan net monetary assets, partner receivables and intangible assets was $88m.
- The IRS asserts approximately $3.3bn of additional federal tax for 2007–2009, plus interest, in a transfer-pricing dispute; it indicated it may assert penalties. Coca-Cola disputes the claims and is litigating in Tax Court, with trial set for March 5, 2018. Management said it believes reserves are adequate and the outcome will not materially affect results, but acknowledged an adverse outcome could be material.
- After quarter-end, Coca-Cola elected to exercise its contractual right to acquire ABI’s controlling interest in Coca-Cola Beverages Africa, subject to regulatory approval and negotiation. Also after quarter-end, additional North American territories qualified as held for sale; the company estimated a $248m fourth-quarter loss on those territories.
- Other unusual nine-month operating charges included $240m for German bottling integration, $187m for productivity initiatives, $170m for North America refranchising costs, and a $100m contribution to The Coca-Cola Foundation.
Important facts for investors to verify
- How much of reported revenue and earnings trends reflects underlying volume and pricing versus bottler refranchising, deconsolidations, currency and other structural changes.
- The timing, cash implications and recurring economics of North American refranchising, including the expected additional fourth-quarter loss and future contingent bottler payments.
- Debt maturities, refinancing needs and the sustainability of operating cash flow, dividends and share repurchases as debt increased.
- Developments in the IRS transfer-pricing litigation, including any potential penalties, interest and reserve changes.
- Venezuela’s exchange-rate convertibility and the collectability of bottler receivables, as well as regulatory and transaction outcomes for the proposed CCBA acquisition.