Coca-Cola Company — Q1 2021 Form 10-Q
Reporting period: Three months ended April 2, 2021, compared with the three months ended March 27, 2020. The 2021 quarter included five more days, affecting volume comparisons. Unaudited results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2021 | Prior comparable quarter | Change |
|---|---|---|---|
| Net operating revenues | $9.020 billion | $8.601 billion | Up 5% |
| Gross profit / margin | $5.515 billion / 61.1% | $5.230 billion / 60.8% | Margin up 0.3 percentage points |
| Operating income / margin | $2.722 billion / 30.2% | $2.380 billion / 27.7% | Income up 14% |
| Income before taxes | $2.763 billion | $3.010 billion | Down 8% |
| Net income attributable to shareowners | $2.245 billion | $2.775 billion | Down 19% |
| Diluted earnings per share | $0.52 | $0.64 | Down 19% |
| Cash from operating activities | $1.636 billion | $0.556 billion | Up $1.080 billion |
Gross-margin improvement reflected economic hedging gains, partly offset by unfavorable channel and package mix. Operating income benefited from higher concentrate sales volume, favorable mix, cost management and lower other operating charges. Net income fell despite operating growth, in part because the prior-year quarter included a $902 million fairlife remeasurement gain; higher interest expense and income taxes also weighed on the current period. The effective tax rate was 18.4%, versus 7.2%.
Cash, debt and liquidity
- Cash and cash equivalents were $8.484 billion at April 2, 2021; cash, short-term investments and marketable securities totaled $12.6 billion.
- Current liabilities were $16.486 billion. Long-term debt, including current maturities, had a carrying value of $43.050 billion; loans and notes payable were $1.933 billion.
- The company reported $6.5 billion of unused credit lines. Management described liquidity as strong and sufficient for foreseeable operating and cash commitments.
- Operating cash flow rose substantially, with contributions from receivables factoring, lower incentive and marketing-related payments, extended supplier payment terms and improved operating income. Receivables factoring generated $1.309 billion of sales in the quarter.
- Capital expenditures were $216 million. Financing cash flow included $1.810 billion of dividends paid; the prior-year quarter’s dividend payment fell in early April.
Business trends and material changes
- Worldwide unit case volume was flat, while concentrate sales volume increased 5%. The company attributed the difference partly to the five additional reporting days and bottler inventory timing.
- Unit case volume declined 6% in North America and 2% in Europe, Middle East and Africa; it was flat in Latin America and increased 9% in Asia Pacific.
- COVID-19 continued to pressure away-from-home demand and mix, while consumer demand shifted toward at-home consumption. Management reported no material manufacturing or distribution impact at filing date.
- Other operating charges were $124 million, mainly $93 million for strategic realignment and $18 million for the productivity program. Prior-year charges were $202 million, including a $152 million Odwalla trademark impairment.
- Interest expense increased to $442 million from $193 million, including $58 million of charges on early debt extinguishment and costs associated with hedging and higher average long-term debt.
Outlook, contingencies and unusual items
- Management expected COVID-19 to affect business for much of 2021, with the first half likely more challenging than the second as vaccination and consumer mobility improve. The company planned higher brand marketing investment and expected operating expenses reduced in 2020 to rise.
- 2021 outlook included capital expenditures of approximately $1.5 billion, an expected effective tax rate of 19.1% before significant items and the tax dispute, and a slightly favorable foreign-exchange impact on revenue and operating income based on then-current rates and hedges. The company did not intend to repurchase shares in 2021 and said it planned to continue growing dividends.
- IRS transfer-pricing litigation: The Tax Court had largely sided with the IRS, while Coca-Cola disputed the ruling and intended to appeal. The company recorded a $390 million tax reserve. If the court methodology were ultimately upheld and applied to subsequent years, the company estimated potential aggregate incremental taxes and interest of about $12 billion as of year-end 2020, with an estimated increase of $250 million for Q1 2021. A payment of about $4.7 billion, plus additional interest, could be due for 2007–2009 after a final decision; some or all could be refunded if the company prevails on appeal.
- Subsequent events: In April, the company extinguished additional debt and incurred approximately $110 million in charges. In May, an equity-method investee was expected to acquire Coca-Cola’s approximately 31% stake in Coca-Cola Amatil for about $1.7 billion in cash.
Important facts for investors to verify
- Developments and potential cash consequences in the IRS dispute, including the timing and amount of any final assessment or appeal payment.
- Whether consumer mobility and away-from-home channel recovery support the company’s volume, mix and marketing-spend expectations.
- Cash-flow quality and sustainability, particularly the effects of receivables factoring and extended supplier payment terms.
- Debt levels, refinancing and extinguishment costs, and the use of proceeds from the Coca-Cola Amatil stake sale.
- Execution and remaining costs of strategic realignment, alongside the stated 2021 capital expenditure and dividend plans.