The Coca-Cola Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 29, 2019, compared with the three months ended March 30, 2018. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data. Results are unaudited.
Business context
Coca-Cola reports concentrate and finished-product beverage operations across geographic segments, Global Ventures, and Bottling Investments. Global Ventures was established in 2019 and includes Costa, acquired in January, as well as other businesses. The company notes that beverage sales are seasonal, with the second and third quarters typically having the highest volumes.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net operating revenues | $8,020 | $7,626 |
| Gross profit / gross margin | $5,030 / 62.7% | $4,888 / 64.1% |
| Operating income / operating margin | $2,336 / 29.1% | $1,811 / 23.7% |
| Net income attributable to Coca-Cola shareowners | $1,678 | $1,368 |
| Diluted EPS | $0.39 | $0.32 |
| Cash from operating activities | $699 | $613 |
- Revenue increased 5%; operating income rose 29%. Operating income benefited from favorable price and product mix, acquisition effects, and lower other operating charges than in the prior year. The 2018 comparison included $390 million of bottling asset impairments.
- Gross margin declined 1.4 percentage points, primarily reflecting structural changes and unfavorable currency movements. The reported operating-margin increase also reflects the lower year-over-year level of other operating charges.
- Worldwide unit case volume grew 2%, while concentrate sales volume grew 1%. Asia Pacific unit case volume increased 7%; Latin America and North America each declined 1%.
- Other income, net was a loss of $234 million, including $343 million of equity-method investment impairment charges and a $121 million loss associated with acquiring the remaining interest in CHI. These items were partly offset by investment and other gains.
- At March 29, cash and cash equivalents were $5,645; short-term investments were $1,538 and marketable securities were $4,765. Together, these totaled approximately $11.9 billion, down from approximately $16.0 billion at year-end, primarily due to funding the Costa acquisition.
- Cash used in investing activities was $4,315, including $5,201 of acquisitions, primarily Costa and CHI. Capital expenditures were $364. Cash provided by financing activities was $285.
- Debt comprised $11,570 of loans and notes payable, $3,297 of current maturities of long-term debt, and $29,400 of long-term debt. Long-term debt increased from year-end, while total cash and investments declined.
- Current assets were $28,540 and current liabilities were $27,943. Management described liquidity as strong and reported $8.6 billion of available credit lines for general corporate purposes.
Outlook, commentary, risks, and unusual items
- Management expected full-year 2019 acquisitions and divestitures to add 8%–9% to net operating revenue. Based on then-current rates and hedges, it expected foreign exchange to weigh on revenue, operating income, and operating cash flows through year-end.
- The company expected a 2019 effective tax rate of 19.5% before significant operating or nonoperating items, approximately $2.0 billion of full-year capital expenditures, and substantial operating cash flows.
- Management estimated that Brexit-related concentrate inventory buildup by certain European bottlers contributed approximately 4 percentage points to the region’s concentrate sales growth and approximately $100 million of revenue in the quarter. It expected those inventory levels to normalize during 2019.
- Coca-Cola acquired Costa for $4.9 billion net of cash acquired. The purchase-price allocation was preliminary, including $2.4 billion assigned to the trademark and $2.5 billion to goodwill.
- A U.S. federal tax dispute remains material: the IRS asserted approximately $3.3 billion of additional tax for 2007–2009, plus interest; a later IRS adjustment added a further $135 million of potential tax. The Tax Court case had been tried and was awaiting a decision. The company said an adverse outcome could materially affect financial position, results, and cash flows.
- The company anticipated divesting part of its CCBA ownership in 2019, which would end its controlling interest. The quarter included $127 million of other operating charges, primarily productivity-program costs, Costa transaction costs, and bottling refranchising costs.
- Management cautioned that first-quarter results are not necessarily indicative of full-year results. The filing also identifies currency, commodity, market, regulatory, and impairment-estimation risks.
Important facts for investors to verify
- Whether the European concentrate inventory benefit unwinds as expected and how underlying volume and pricing develop.
- The final Costa purchase-price allocation, integration results, and contribution to Global Ventures.
- Progress and potential financial exposure from the IRS transfer-pricing litigation, including possible implications for subsequent tax years.
- Cash generation, acquisition spending, debt levels, and liquidity after the Costa transaction.
- Whether investment impairments, foreign-exchange headwinds, and the planned CCBA divestiture affect later-period earnings or cash flows.