The Coca-Cola Company — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the three months ended April 1, 2016, compared with the three months ended April 3, 2015. The 2016 quarter had one fewer day. Beverage sales are seasonal, typically strongest in the second and third quarters.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net operating revenues | $10.282 billion | $10.711 billion |
| Gross profit / margin | $6.213 billion / 60.4% | $6.608 billion / 61.7% |
| Operating income / margin | $2.141 billion / 20.8% | $2.296 billion / 21.4% |
| Net income attributable to Coca-Cola shareowners | $1.483 billion | $1.557 billion |
| Diluted earnings per share | $0.34 | $0.35 |
| Dividends per share | $0.35 | $0.33 |
| Cash provided by operating activities | $604 million | $1.574 billion |
Revenue fell 4% year over year, reflecting a 5% adverse currency impact and a 1% adverse impact from acquisitions and divestitures, partly offset by 1% growth from volume and 1% favorable price, product and geographic mix. Worldwide unit case volume grew 2%; concentrate sales volume grew 1%. Currency headwinds and structural changes contributed to lower margins.
Interest expense was $141 million versus $447 million, primarily because the prior-year quarter included a $320 million charge for early debt extinguishment. Equity income improved to $92 million from $2 million. Other income (loss) was a $342 million loss, including $369 million of noncash refranchising losses, partly offset by an $18 million gain on the Keurig investment disposal.
Liquidity, debt and cash flows
At April 1, 2016, cash, cash equivalents and short-term investments were $18.751 billion; including marketable securities, these totaled $22.211 billion. Current assets were $36.510 billion and current liabilities were $30.987 billion. Total debt was approximately $46.834 billion, including loans and notes payable, current maturities and long-term debt. The company reported $8.340 billion of available credit lines.
Operating cash flow declined by $970 million year over year, with the filing citing $471 million of incremental pension contributions, one fewer day in the quarter and unfavorable currency effects. Investing activities provided $348 million, including proceeds from investment disposals, notably Keurig. Financing activities provided $399 million; cash dividends paid were $1.505 billion. The company contributed $493 million to pension plans during the quarter.
Material changes, outlook and risks
- Management said it expects substantial operating cash flow in 2016 and considers liquidity strong. It forecast full-year capital expenditures of approximately $2.5–$3.0 billion and share repurchases of $2.0–$2.5 billion, net of employee option proceeds.
- The company expected acquisitions and divestitures to reduce 2016 full-year revenue by a mid-single-digit percentage, and foreign exchange to remain an unfavorable influence on revenue and operating income.
- The productivity program targets approximately $3.6 billion of annualized productivity by 2019, including $2 billion incremental productivity from its expanded initiatives. Q1 charges included $199 million for German bottling integration, $63 million for productivity initiatives and $45 million for North America refranchising costs.
- North America refranchising generated significant noncash losses as transferred intangible assets were derecognized; management expects to recover value through contingent future bottler payments. The company also intended to refranchise all company-owned North America bottling territories by the end of 2017. Proposed European and African bottling transactions were expected to close in Q2 2016, subject to approvals.
- Venezuela adopted a floating DICOM exchange mechanism. The carrying value of the company’s Venezuelan net monetary assets, bottler receivables and related intangible assets totaled $140 million. Management anticipated further foreign-exchange losses and possible receivable write-downs or impairment charges; currency conversion restrictions remained.
- The IRS asserts approximately $3.3 billion of additional federal tax for 2007–2009, plus interest, and has indicated it may assert penalties. The dispute concerns transfer pricing of foreign intangible-property licenses and is in U.S. Tax Court. Coca-Cola contests the claims and says it believes the matter will not materially affect its consolidated position or results, while acknowledging an adverse outcome could be material.
- Other risks include foreign exchange, emerging-market conditions, seasonality and potential impairment of intangible assets. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue, margins and cash generation stabilize after currency effects, refranchising and other structural changes.
- Progress on bottling refranchising and proposed CCEP and Coca-Cola Beverages Africa transactions, including contingent-payment accounting and future cash proceeds.
- Developments in the IRS transfer-pricing dispute, including potential interest or penalties and the eventual tax exposure.
- Venezuela currency conversion, bottler collectability and any further impairment or foreign-exchange charges.
- Execution of the productivity targets, capital spending and repurchase plans, alongside debt maturities and liquidity needs.