Business context and reporting period
The Coca-Cola Company’s unaudited Form 10-Q covers the three and six months ended July 1, 2016; comparisons are with periods ended July 3, 2015. The company sells beverages through a mix of concentrate operations, bottling investments and independent bottling partners. Effective January 1, 2016, U.S. and Canadian Coca-Cola Refreshments bottling operations were moved from North America to Bottling Investments; prior segment comparisons were recast.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net operating revenues | $11,539 | $12,156 | $21,821 | $22,867 |
| Gross profit | $7,068 | $7,408 | $13,281 | $14,016 |
| Operating income | $2,859 | $2,535 | $5,000 | $4,831 |
| Net income attributable to Coca-Cola shareowners | $3,448 | $3,108 | $4,931 | $4,665 |
| Diluted EPS | $0.79 | $0.71 | $1.13 | $1.06 |
| Gross margin | 61.3% | 60.9% | 60.9% | 61.3% |
| Operating margin | 24.8% | 20.9% | 22.9% | 21.1% |
- Revenue fell 5% in both Q2 and the first half. In Q2, structural changes reduced revenue about 5%, currency about 3%, and price/product/geographic mix contributed about 3%; volume was approximately flat.
- Operating income rose 13% in Q2 and 4% in the first half, despite lower revenue. Shareowner net income rose 11% and 6%, respectively. Q2 pretax income was lower year over year; lower income tax expense contributed to higher net income.
- Operating cash flow was $3.82 billion in the first half, down from $5.12 billion. Capital expenditures were $1.09 billion; dividends paid were $3.02 billion. Cash and cash equivalents at period end were $9.65 billion.
- At July 1, cash, cash equivalents and short-term investments totaled $21.40 billion. Loans and notes payable were $13.90 billion, current maturities of long-term debt $4.90 billion, and long-term debt $29.25 billion. The company also had $8.34 billion of available credit lines.
- Quarterly dividends were $0.35 per share; first-half dividends were $0.70 per share, versus $0.66 in the prior-year period.
Material changes versus prior period
- Q2 and first-half operating income benefited from lower other operating charges than the prior year. First-half 2016 included a roughly $1.3 billion noncash gain from deconsolidating German bottling operations and a $568 million noncash loss from North American refranchising. First-half 2015 included a $1.4 billion net Monster transaction gain and $320 million of debt-extinguishment charges.
- The German bottling transaction closed in May: Coca-Cola exchanged its German bottling operations for an 18% interest in Coca-Cola European Partners, accounted for under the equity method. The transaction materially increased equity-method investments and contributed to reported earnings.
- First-half operating cash flow declined by $1.30 billion, including the effect of $471 million in incremental pension contributions, one fewer reporting day in the first quarter, and currency movements; lower income tax payments partly offset the decline.
- Worldwide unit-case volume was flat in Q2 and up 1% in the first half. North America and Europe were flat to modestly positive; declines in some Eurasia and Africa markets and China offset growth elsewhere. Diet Coke volume declined in North America.
Outlook, commentary, risks and unusual items
- Management described the near-term outlook as strong and expected substantial 2016 operating cash flow. It estimated a 22.5% full-year 2016 effective tax rate, excluding unusual or infrequent items.
- Management expected 2016 capital expenditures of $2.5–$3.0 billion and net treasury-share purchases of $2.0–$2.5 billion. The productivity program, extended through 2019, targets about $3.6 billion of total annualized productivity by 2019; management expects savings to support marketing, innovation and margin expansion.
- The company expected foreign exchange to weigh on revenue and operating income through year-end. Venezuela’s new floating DICOM rate may lead to further currency losses, receivable write-downs or impairment charges; the carrying value of related net monetary assets, bottler receivables and intangibles was $149 million at July 1.
- The IRS asserted approximately $3.3 billion of additional federal tax for 2007–2009, plus interest, and may seek penalties. Coca-Cola disputes the claim and is litigating in U.S. Tax Court. Management believed reserves were adequate and the matter would not materially affect the company, while warning an adverse outcome could be material.
- Other notable items included a $100 million cash contribution to The Coca-Cola Foundation in each of the first halves of 2016 and 2015, productivity and restructuring costs, and North American refranchising losses. The Coca-Cola Beverages Africa transaction closed July 2, 2016; management was still evaluating its third-quarter accounting impact. The company also classified China bottling operations as held for sale in July.
- Management noted seasonality, weather sensitivity, foreign-currency exposure and uncertainty in emerging markets. It cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus the German deconsolidation gain, refranchising losses and other unusual items.
- Whether revenue and consumer-volume trends improve, especially in North America sparkling beverages, China, and Eurasia and Africa.
- Cash conversion and liquidity after elevated pension contributions, dividends, capital spending and share repurchases; also review debt maturities and borrowing needs.
- Developments in the IRS transfer-pricing litigation and Venezuela’s currency conversion, collectability and impairment exposure.
- The final accounting and operating effects of the Africa and China bottling transactions and continuing North American refranchising.