The Coca-Cola Company (KO) — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 26, 2020; comparisons are with the quarter ended June 28, 2019. Financial statements are unaudited. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net operating revenues | $7.150B | $9.997B | $15.751B | $18.691B |
| Operating income | $1.981B | $2.988B | $4.361B | $5.423B |
| Net income attributable to Coca-Cola shareowners | $1.779B | $2.607B | $4.554B | $4.285B |
| Diluted EPS | $0.41 | $0.61 | $1.05 | $1.00 |
| Gross margin | 57.9% | 60.8% | 59.5% | 61.0% |
| Operating margin | 27.7% | 29.9% | 27.7% | 29.0% |
- Volume and revenue: Worldwide unit case volume declined 16% in Q2 and 9% in the first half; concentrate sales volume declined 22% and 12%, respectively. Q2 revenue fell 28%, and first-half revenue fell 16%.
- Cash flow: First-half operating cash flow was $2.786B, down 38% from $4.501B. Capital expenditures were $536M, implying operating cash flow less capital expenditures of about $2.250B, versus $3.734B a year earlier. Dividends paid were $1.761B.
- Liquidity and debt: At June 26, cash and cash equivalents were $10.037B, short-term investments $7.551B, and marketable securities $2.228B—$19.8B combined. The company also reported $8.9B in unused credit lines. Balance-sheet borrowings—loans and notes payable, current maturities, and long-term debt—totaled about $52.3B, compared with $42.8B at year-end 2019.
Material changes and unusual items
- COVID-19 materially reduced sales, especially in away-from-home channels, and shifted demand toward at-home consumption and generally less favorable channel and package mix. The company attributed the Q2 operating income decline of 34% primarily to lower revenue, foreign exchange, and higher other operating charges, partly offset by lower SG&A.
- First-half net income benefited from a $902M noncash gain when Coca-Cola acquired the remaining 57.5% of fairlife and remeasured its previously held interest. The acquisition involved $979M cash, net of cash acquired, and a recorded $270M estimated contingent-consideration liability, which is subject to quarterly remeasurement.
- Other operating charges were $173M in Q2 and $375M in the first half. First-half charges included a $160M Odwalla trademark impairment, $55M impairment of another North American trademark tied partly to pandemic impacts and revised forecasts, $35M to discontinue Odwalla, and productivity, fairlife remeasurement, and water-operations restructuring costs.
- The company issued $11.5B of U.S. dollar long-term debt in the first half. First-half financing cash flow was $8.045B, reflecting net debt issuance; the company said some long-term debt proceeds would be used to reduce commercial paper.
Outlook, commentary, and risks
- Management said it expected Q2 to be the most severely affected quarter of 2020, but anticipated continued negative effects in Q3. Since early July, global unit case volume had declined mid-single digits, an improvement from Q2; the full-year pandemic impact remained uncertain.
- Management cited an expected 2020 effective tax rate of 19.5% before significant operating and nonoperating items. Based on then-current exchange rates and hedges, foreign currency was expected to negatively affect full-year revenue, operating income, and operating cash flow.
- The company described liquidity as strong and sufficient for foreseeable operating and cash commitments. It prioritized business investment and dividends, had no intention to repurchase shares or change its dividend approach in 2020, and did not expect significant M&A activity for the rest of the year. The board approved a regular quarterly dividend of $0.41 per share payable October 1, 2020.
- Key risks include a prolonged or renewed pandemic, continued away-from-home weakness, customer closures, supply-chain or bottler disruptions, packaging constraints, currency and credit-market volatility, potential impairment charges, and pressure on pension assets. The company warned that future impairment charges and asset write-offs could be material.
- A long-running IRS transfer-pricing dispute for tax years 2007–2009 remained before the U.S. Tax Court. The IRS’s proposed adjustment implied approximately $3.3B of potential additional federal tax before interest, subject to subsequent adjustments and litigation; the company disputes the IRS position and says an adverse outcome could materially affect results, financial position, and cash flows.
Most important facts for investors to verify
- Whether reopening and channel mix improved sufficiently to support beverage volumes, revenue, and margins after Q2.
- How much of first-half earnings depended on the one-time fairlife remeasurement gain, and how contingent consideration is subsequently revalued.
- Debt maturities, commercial-paper exposure, interest costs, and liquidity needs as borrowings rose during the first half.
- Further impairment, restructuring, or customer-funding write-offs, including developments involving Odwalla and pandemic-sensitive assets.
- Progress and potential financial exposure in the IRS transfer-pricing litigation, along with foreign-exchange and equity-method-investee risks.