The Coca-Cola Company — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2023, compared with the three months ended April 1, 2022. Coca-Cola operates globally across concentrate and finished-product businesses; beverage sales are seasonal, with the second and third quarters typically strongest.
Key financial metrics
| Metric | Q1 2023 | Prior-year comparable quarter |
|---|---|---|
| Net operating revenues | $10.980 billion | $10.491 billion |
| Gross profit / gross margin | $6.663 billion / 60.7% | $6.400 billion / 61.0% |
| Operating income / operating margin | $3.367 billion / 30.7% | $3.405 billion / 32.5% |
| Net income attributable to Coca-Cola shareowners | $3.107 billion | $2.781 billion |
| Diluted earnings per share | $0.72 | $0.64 |
| Cash provided by operating activities | $160 million | $623 million |
- Revenue rose 5%: price, product and geographic mix contributed 11%; volume contributed 1%; foreign exchange reduced revenue 6%; acquisitions and divestitures reduced it 1%.
- Worldwide unit case volume increased 3%, while concentrate sales volume increased 1%. The first quarter had one fewer day than the prior-year quarter.
- Operating income declined 1% despite higher revenue. SG&A increased 7% to $3.185 billion, reflecting higher marketing and operating expenses. Interest expense increased to $372 million from $182 million.
- Cash and cash equivalents were $12.004 billion; cash, cash equivalents and short-term investments totaled $13.170 billion. Including marketable securities, the company reported $14.3 billion of cash and investments, plus $4.2 billion of unused backup credit lines.
- At March 31, total debt was approximately $42.4 billion, comprising $5.455 billion of loans and notes payable, $811 million of current long-term debt maturities and $36.134 billion of long-term debt. Commercial paper outstanding was $5.282 billion.
- Current assets were $26.880 billion and current liabilities were $23.357 billion. Total assets were $97.404 billion and total equity was $26.868 billion.
Material changes and unusual items
- Net income increased 12%, while operating income fell 1%. Other income included a $439 million gain from refranchising bottling operations in Vietnam and $113 million of net gains on securities. These items supported pretax income, which rose to $4.053 billion from $3.458 billion.
- Gross margin slipped 0.3 percentage points, primarily from foreign exchange and commodity costs, partly offset by pricing and favorable channel and package mix. Operating margin declined 1.8 percentage points.
- Operating cash flow fell 74%, primarily due to working-capital timing, inventory-related payments, foreign exchange and the fairlife milestone payment. Factored receivables were $2.709 billion, up from $1.597 billion a year earlier.
- Cash from financing was $2.065 billion, including $4.074 billion of debt issuance and $848 million of treasury-stock purchases. Cash dividends paid were $101 million; payment timing differed materially from the prior-year quarter. The board approved a quarterly dividend of $0.46 per share, payable July 3, 2023.
Outlook, risks and contingencies
- Management expected commodity costs to pressure gross margin for the rest of 2023 and foreign exchange to adversely affect full-year revenue, operating income and operating cash flow. It expected 2023 capital expenditures of approximately $1.9 billion.
- Management estimated a 2023 effective tax rate of 20.2% before significant items; pending non-U.S. tax legislation, if enacted, was expected to reduce it to approximately 19.5%. These estimates exclude a possible adverse outcome in the IRS dispute.
- The transfer-pricing dispute with the IRS remains a significant contingency. Coca-Cola said it believes its tax positions are more likely than not to prevail on appeal, but estimated potential aggregate incremental tax and interest of approximately $14 billion as of December 31, 2022, increasing by about $400 million during Q1 2023 under the disputed methodology. A potential payment related to 2007–2009 was estimated at approximately $5.4 billion, plus further interest, if the case proceeds to that stage. The recorded reserve was $432 million at March 31, 2023.
- Other risks noted include currency volatility, inflation and commodity costs, supply-chain and labor challenges, geopolitical disruption, and possible impairment of assets. The company reported that its disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects pricing and the Vietnam refranchising gain versus underlying volume, and how results develop as the year progresses.
- Whether operating cash flow recovers from the quarter’s low level and how working capital, receivables factoring and fairlife milestone payments affect cash generation.
- Debt and commercial-paper levels, interest expense, and the availability of backup credit facilities.
- Developments in the IRS litigation, including the Tax Court’s pending decision and the potential timing and amount of any payment.
- Whether management’s currency, commodity-cost, tax-rate and capital-expenditure expectations remain on track.