The Coca-Cola Company: Q3 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended October 2, 2015; comparable 2014 periods ended September 26, 2014. Coca-Cola reports beverage operations across geographic segments, Bottling Investments and Corporate. The company noted that beverage sales are seasonal, with the second and third quarters generally having the highest volumes. Unless otherwise noted, amounts are U.S. dollars.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net operating revenues | $11.427 billion | $11.976 billion | $34.294 billion | $35.126 billion |
| Gross profit | $6.850 billion | $7.346 billion | $20.866 billion | $21.594 billion |
| Operating income | $2.379 billion | $2.711 billion | $7.210 billion | $8.257 billion |
| Net income attributable to Coca-Cola shareowners | $1.449 billion | $2.114 billion | $6.114 billion | $6.328 billion |
| Diluted EPS | $0.33 | $0.48 | $1.39 | $1.42 |
| Gross margin | 59.9% | 61.3% | 60.8% | 61.5% |
| Operating margin | 20.8% | 22.6% | 21.0% | 23.5% |
- Volume and revenue drivers: Worldwide unit-case volume rose 3% in Q3 and 2% year to date; concentrate sales volume rose 1% and 3%, respectively. Reported revenue fell 5% in Q3 and 2% year to date. Management attributed the revenue pressure chiefly to unfavorable foreign exchange, partly offset by favorable price and mix. Currency reduced consolidated revenue by 8% in Q3 and 7% year to date.
- Cash flow: Nine-month operating cash flow was $8.390 billion, versus $7.979 billion. Capital expenditures were $1.670 billion; operating cash flow less capital expenditures was approximately $6.720 billion. Cash and cash equivalents were $9.983 billion at quarter-end, compared with $8.958 billion at year-end 2014.
- Debt and liquidity: At October 2, short-term loans and notes were $17.545 billion, current maturities of long-term debt $2.692 billion and long-term debt $25.949 billion. Cash, cash equivalents and short-term investments totaled $19.160 billion; marketable securities added $3.614 billion. The company reported $8.090 billion of available credit lines.
- Shareholder returns: Dividends were $0.33 per share in Q3 and $0.99 per share year to date. The company paid $4.313 billion of dividends and repurchased 49.3 million shares for $1.997 billion during the first nine months.
Material changes and unusual items
- Q3 other income (loss) was a loss of $871 million, including a $794 million charge primarily from North American refranchising. This weighed on pretax income alongside lower operating income and increased interest expense.
- Year-to-date other income (loss) was income of $709 million, including a $1.402 billion net gain on the Monster transaction, partly offset by $827 million of North American refranchising charges. The Monster transaction included Coca-Cola’s acquisition of an approximately 16.7% interest in Monster, transfer of Coca-Cola’s global energy drink business to Monster, acquisition of Monster non-energy brands and expanded distribution arrangements.
- Year-to-date interest expense rose to $713 million from $344 million, including $320 million of charges related to early extinguishment of long-term debt. The company also issued Swiss-franc- and euro-denominated debt. Long-term debt, including current maturities, had a carrying value of $28.641 billion at October 2.
- Other operating charges were $1.166 billion year to date, including productivity and reinvestment costs, German bottling integration costs, $418 million of trademark impairment charges primarily related to discontinuing energy products, a $100 million Coca-Cola Foundation contribution, and Venezuela-related charges.
- Other comprehensive income was materially affected by currency translation and investment valuation: year-to-date foreign currency translation adjustment was negative $3.544 billion, and the unrealized change in available-for-sale securities was negative $1.701 billion.
Outlook, management commentary and risks
- Management described near-term business prospects as strong and expected substantial operating cash flow for the rest of 2015. It expected currency to remain a headwind to revenue and operating income through year-end.
- Management expected full-year capital expenditures of approximately $2.5 billion to $3.0 billion, an estimated 2015 effective tax rate of 22.5% excluding unusual items, and a 1% unfavorable revenue impact from acquisitions and divestitures. The company expected net treasury-share purchases of $2.0 billion to $2.5 billion for 2015.
- The productivity program was extended through 2019. Coca-Cola expects approximately $3.6 billion of total annualized productivity by 2019 from initiatives begun in 2012, including an incremental $2 billion in annualized productivity from the expanded program.
- Planned structural changes included the proposed Coca-Cola European Partners merger, expected to close in Q2 2016 subject to approvals, and the proposed Coca-Cola Beverages Africa transaction, expected to close in Q1 2016 subject to regulatory approval. Additional North American refranchising closings were expected between Q4 2015 and Q3 2016.
- Tax dispute: The IRS issued a notice asserting approximately $3.3 billion of additional federal tax for 2007–2009, plus interest, in a transfer-pricing dispute. No penalties were asserted. Coca-Cola disputed the assessment and said it planned to challenge it in Tax Court; the company said it believed its reserves were adequate, while acknowledging an adverse outcome could have a material impact.
- Other exposures: Venezuela’s currency restrictions and further devaluation could trigger additional exchange losses, receivable write-downs or impairments. Coca-Cola reported a $966 million unrealized loss on its Keurig investment, which it did not consider other-than-temporary at the filing date; it could not sell the shares before February 2017. The fair value of one glacéau trademark equaled its $2.6 billion carrying value, and management warned of possible further impairment if forecasts or market conditions deteriorated.
- The company reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. A subsequent event was the issuance of $4.0 billion of long-term debt on October 27, 2015.
Important facts for investors to verify
- Whether underlying earnings and margins stabilize after separating currency effects, refranchising charges, Monster-related gains and other unusual items.
- Whether the IRS transfer-pricing dispute, including potential interest, develops in a way that changes the company’s assessment of its exposure or reserves.
- Progress, approvals, timing and expected financial effects of the European bottler merger, Africa bottling transaction and North American refranchising.
- Performance of the Keurig investment and the glacéau trademark, including whether further impairment is required.
- Continued cash generation, debt levels and access to liquidity, alongside planned capital expenditures, dividends and share repurchases.
- Foreign-exchange conditions, particularly in Venezuela, and the extent to which hedging and price increases offset currency pressure.