The Coca-Cola Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 30, 2018; unaudited. Comparisons are with the three months ended March 31, 2017, unless stated otherwise. Financial amounts are in millions of U.S. dollars except per-share data.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net operating revenue | $7,626 | $9,118 | -16% |
| Gross profit / margin | $4,888 / 64.1% | $5,605 / 61.5% | Margin +2.6 points |
| Operating income | $1,811 | $1,963 | -8% |
| Income from continuing operations | $1,327 | $1,184 | +12% |
| Net income attributable to Coca-Cola shareowners | $1,368 | $1,182 | +16% |
| Diluted EPS | $0.32 | $0.27 | Continuing-operations EPS: $0.31 vs. $0.27 |
| Operating cash flow | $613 | $764 | -20% |
Reported revenue fell chiefly because of bottling refranchising and other structural changes: acquisitions and divestitures reduced revenue by an estimated 26 percentage points. Volume contributed 4 points, foreign currency 2 points, price/product/geographic mix 1 point, and revenue-accounting changes 3 points. Worldwide unit case and concentrate sales volume each grew 3%; after structural changes, concentrate sales volume grew 4% worldwide.
Gross margin improved primarily due to acquisitions and divestitures. Other operating charges increased to $536 from $290, including $390 of CCR asset impairments, $95 for the productivity and reinvestment program, and $45 of refranchising costs. Interest expense rose to $230 from $192. Other income (loss) improved to a loss of $55 from a loss of $535, which included a $497 refranchising loss in the prior-year quarter.
Balance sheet, debt and liquidity
- At March 30, cash and cash equivalents were $8,291; short-term investments were $7,518; marketable securities were $5,564. Cash, cash equivalents and short-term investments totaled $15,809.
- Total current assets were $38,042 and current liabilities $31,480. Debt-related balances included $14,785 of loans and notes payable, $4,370 of current maturities, and $29,792 of long-term debt.
- Operating cash flow was $613; investing activities provided $1,321 and financing activities provided $284. Capital expenditures were $274 before $43 of asset-sale proceeds.
- The company had $6,665 of credit lines for general corporate purposes. Management characterized liquidity as strong and expected operating cash flows, available cash and financing capacity to meet commitments.
Changes, outlook and significant matters
- Q1 results included $73 of income from discontinued operations, attributable to Coca-Cola Beverages Africa (CCBA), which was classified as held for sale. Coca-Cola said it anticipated divesting its controlling interest in 2018. CCBA assets held for sale were $7,166 at quarter-end.
- The 2018 full-year effective tax rate was estimated at 21.0% before Tax Reform Act clarification and unusual items; the Q1 continuing-operations effective rate was 27.6%. Tax accounting remained provisional. The company recorded a $176 tax expense adjustment in the quarter and had previously recorded a provisional $4.6 billion transition-tax liability.
- Management expected 2018 acquisitions and divestitures to reduce full-year revenue by 17%; currencies were expected to have a slight favorable impact on revenue but a slight unfavorable impact on operating income. Full-year capital expenditures were expected to be approximately $1.9 billion. The company expected to repurchase approximately $1.0 billion of stock, net of employee-option proceeds, and approved a quarterly dividend of $0.39 per share.
- The productivity program was extended through 2019. Management cited a target of approximately $3.0 billion in annualized productivity by 2019 and an additional $800 million in annualized savings from initiatives announced in 2017. The company had incurred $3,153 of pretax program expenses since inception.
- A major contingency is the IRS transfer-pricing dispute for tax years 2007–2009: the IRS asserted approximately $3.3 billion of additional federal tax, plus interest, and later increased its adjustment. A Tax Court decision reduced the potential tax adjustment by about $138; trial began in March 2018. Coca-Cola said it believed the claims lacked merit, while acknowledging an adverse outcome could materially affect results and cash flows.
- Other items to monitor include CCR refranchising-related impairment estimates, foreign exchange and political/economic risks in international markets, and the effect of seasonal demand and weather. Q1 is not necessarily indicative of full-year results; second and third quarters typically have the highest beverage sales volumes.
- Accounting changes affected comparability: ASC 606 adoption reduced opening retained earnings by $257, net of tax, and increased reported Q1 revenue by $191 versus prior guidance, with an equal increase in cost of goods sold and no gross-profit effect. Adoption of other standards, including intra-entity tax accounting, materially affected opening equity and deferred tax assets.
Key facts for investors to verify
- Whether volume growth and pricing/mix can offset continuing refranchising-related revenue comparisons.
- How much of the quarter’s earnings and margin trends reflect recurring operations versus impairment, restructuring, tax and investment-mark-to-market items.
- Progress and final financial effect of the IRS tax dispute and completion of Tax Reform Act accounting.
- Timing and proceeds of the planned CCBA sale, and how the divestiture will affect future reported results and debt/liquidity.
- Execution of the 2018 capital-spending, productivity, share-repurchase and dividend plans against cash generation and debt maturities.