COCA COLA CO annual report, FY2017

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Business context and reporting period

The Coca-Cola Company’s Form 10-K covers the fiscal year ended December 31, 2017. The company owns or licenses more than 500 nonalcoholic beverage brands, selling through its global bottling and distribution system. The year continued a shift toward a more asset-light concentrate business as bottling territories were refranchised. Figures are in U.S. dollars; financial statements are in millions unless noted.

Key financial metrics

  • Revenue: $35.41 billion, down 15% from $41.86 billion in 2016. Management attributed the decline chiefly to acquisitions and divestitures, which reduced revenue by 17 percentage points; price, product and geographic mix added 3 points, while currency reduced revenue by 1 point. Worldwide unit case volume and concentrate sales volume were both essentially flat.
  • Profit and margins: Operating income was $7.50 billion, down 13%; operating margin rose to 21.2% from 20.6%. Gross profit was $22.15 billion and gross margin was 62.6%, up from 60.7%. Net income from continuing operations fell to $1.18 billion from $6.55 billion; net income attributable to shareowners was $1.25 billion versus $6.53 billion. Diluted EPS was $0.29 versus $1.49.
  • Cash flow: Operating cash flow was $7.00 billion, down 20% from $8.80 billion. Capital expenditures were $1.68 billion; operating cash flow less capital expenditures was approximately $5.32 billion. Investing activities used $2.39 billion and financing activities used $7.41 billion.
  • Liquidity: Cash, cash equivalents and short-term investments totaled $15.36 billion; marketable securities were an additional $5.32 billion. Current assets were $36.55 billion and current liabilities $27.19 billion. Management described liquidity as strong and expected cash flows and financing access to cover commitments.
  • Debt: Long-term debt was $31.18 billion, compared with $29.68 billion in 2016. The balance sheet also reported $13.21 billion of loans and notes payable and $3.30 billion of current maturities of long-term debt. Interest expense rose 15% to $841 million. Credit ratings were AA- from S&P and Aa3 from Moody’s.
  • Returns to shareholders: Dividends paid totaled $6.32 billion; the 2017 annual dividend was $1.48 per share. The company repurchased $3.7 billion of stock. The board subsequently raised the quarterly dividend to $0.39 per share for 2018.

Material changes versus the prior comparable period

  • Revenue fell 15%, with refranchising and other structural changes materially reducing reported sales; the shift also increased the proportion of revenue from concentrate operations to 51% from 40%.
  • Gross and operating margins improved despite lower revenue, while operating income declined. The Bottling Investments segment reported a $1.12 billion operating loss, compared with a $137 million loss in 2016, reflecting refranchising impacts and $737 million of CCR asset impairments.
  • Net income was sharply lower primarily because the Tax Reform Act generated a provisional $3.61 billion net tax charge, contributing to an 82.5% effective tax rate versus 19.5% in 2016. Before this one-time tax effect, results also included substantial refranchising and other unusual items.
  • Operating cash flow decreased by $1.80 billion, which management linked to refranchising, foreign exchange, increased tax and restructuring payments, and one fewer day in the year.
  • The company began consolidating Coca-Cola Beverages Africa (CCBA) in October 2017, then classified it as discontinued operations and held for sale. The 2017 statements include $101 million of income from discontinued operations; CCBA was reported as $7.33 billion of assets held for sale.

Outlook, commentary, risks and unusual items

  • 2018 outlook: Management expected acquisitions and divestitures to reduce full-year net operating revenues by 17%; currency was expected to have a slight favorable effect. It forecast approximately $1.9 billion of capital expenditures, about $1.0 billion of net share repurchases, and an effective tax rate of approximately 21%, subject to tax-law clarification and unusual items. No EPS growth guidance is stated in the provided filing text.
  • Productivity: The company expected total annualized productivity of approximately $3.0 billion by 2019 under its program, plus an additional $800 million in annualized savings by 2019 from the 2017 expansion. It had incurred $3.06 billion in pretax program expenses through 2017.
  • Tax matters: Tax Reform Act amounts were provisional. The IRS dispute over 2007–2009 transfer pricing carried a potential additional federal tax liability of approximately $3.3 billion plus interest; the IRS increased its adjustment in 2017, while a Tax Court ruling reduced the potential adjustment by approximately $138 million. The company said it intended to defend its position.
  • Other unusual items: Other operating charges totaled $2.16 billion, including $737 million of CCR asset impairments, $650 million of productivity-program costs, $419 million of refranchising costs and a $225 million contribution to The Coca-Cola Foundation. Other income (loss) included a $2.14 billion net charge related to North American refranchising, partly offset by transaction-related gains.
  • Principal risks: Consumer health concerns and changing preferences; competition; water availability and quality; agricultural and packaging input costs and supply; foreign exchange and interest rates; bottler and retailer relationships; cybersecurity; regulation and indirect taxes; climate and weather; and litigation. The company reported $609 million of guarantees of third-party indebtedness, which management did not consider probable to require significant payment.
  • Reporting controls: The company and auditor reported effective internal control over financial reporting and an unqualified audit opinion. CCBA, which represented 8% of year-end assets and 8% of 2017 consolidated net income, was excluded from the internal-control assessment.

Important facts for investors to verify

  • How much of the revenue decline and margin improvement reflects permanent business-model changes from refranchising versus underlying demand, pricing and mix.
  • The final tax effects of the Tax Reform Act, including the transition-tax calculation, and the eventual outcome and cash exposure from the IRS transfer-pricing litigation.
  • Whether the projected 2018 revenue, tax, capital-spending and repurchase assumptions were achieved, and whether productivity savings were realized without impairing growth.
  • CCBA’s planned 2018 divestiture, its proceeds and any resulting effects on reported earnings, cash flow and balance-sheet items.
  • Debt maturities, refinancing needs and liquidity available after dividends, buybacks and other contractual commitments.
  • The performance and valuation of major equity-method bottler investments, including the disclosed fair-value shortfall for Coca-Cola European Partners.