Business context and reporting period
The Coca-Cola Company’s unaudited Form 10-Q covers the quarter ended September 30, 2022, and the nine months then ended. Comparatives are the three and nine months ended October 1, 2021. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net operating revenues | $11,063 | $10,042 | $32,879 | $29,191 |
| Operating income | $3,088 | $2,898 | $8,834 | $8,636 |
| Net income attributable to Coca-Cola shareowners | $2,825 | $2,471 | $7,511 | $7,357 |
| Diluted EPS | $0.65 | $0.57 | $1.73 | $1.70 |
| Gross margin | 58.7% | 60.4% | 59.0% | 61.4% |
| Operating margin | 27.9% | 28.9% | 26.9% | 29.6% |
| Effective tax rate | 18.1% | 19.7% | 18.2% | 22.3% |
For the nine months, operating cash flow was $8.068 billion, down from $9.231 billion. Investing cash flow was an outflow of $2.189 billion and financing cash flow an outflow of $5.078 billion. Cash and cash equivalents were $10.127 billion at September 30, 2022; cash, short-term investments and marketable securities totaled approximately $13.2 billion. Total debt, including current maturities and loans and notes payable, was approximately $39.6 billion, versus approximately $42.8 billion at December 31, 2021. The company reported $7.8 billion of unused backup credit lines.
Material changes versus comparable periods
- Q3 revenue rose 10%; nine-month revenue rose 13%. Volume and pricing/mix supported growth, while currency reduced reported revenue growth.
- Worldwide unit case and concentrate sales volume each increased 4% in Q3 and 6% for the nine months. Q3 revenue drivers were volume +4%, price/product/geographic mix +12%, foreign currency -8%, and acquisitions/divestitures +2%.
- Q3 operating income increased 7%, while nine-month operating income increased 2%. Shareowner net income and diluted EPS increased in both periods.
- Gross margin declined 1.7 percentage points in Q3 and 2.4 points for the nine months, reflecting currency, higher commodity and transportation costs, segment mix and BodyArmor; pricing and channel/package mix partly offset these pressures.
- Nine-month operating cash flow declined 13%, with higher incentive, marketing and tax payments and currency headwinds partly offset by operating growth and working-capital measures.
- Nine-month other operating charges increased to $1.109 billion from $478 million, primarily reflecting a $971 million fairlife contingent-consideration remeasurement charge. Nine-month interest expense fell to $578 million from $1.432 billion, including $650 million of prior-year debt-extinguishment charges.
Outlook, commentary and risks
- Management expected 2022 capital expenditures of approximately $1.5 billion and share repurchases of approximately $500 million, in addition to repurchases related to stock-compensation issuances.
- The company expected a 19% 2022 effective tax rate before significant operating and nonoperating items. It expected foreign exchange to weigh on full-year revenue, operating income and operating cash flow, and commodity and transportation costs to continue pressuring gross margin.
- Management cited continued COVID-19 effects, supply-chain and labor constraints, inflation, and the Russia-Ukraine conflict. Coca-Cola suspended its Russia business; disruption also affected Ukraine. Russia and Ukraine together represented about 1% of 2021 consolidated revenue and 2% of operating income. A $96 million impairment was recorded for a Russian equity-method investee.
- A long-running IRS transfer-pricing dispute remains unresolved. The company recorded a $419 million tax reserve and estimates a potential aggregate incremental tax and interest liability of about $13 billion as of year-end 2021 under an adverse methodology, with the estimate increasing about $750 million during the first nine months of 2022. A potential payment related to 2007–2009 was estimated at $5.1 billion, including interest through September 30, 2022. The company says it expects to prevail on appeal but acknowledges an adverse outcome could materially affect results, financial position and cash flows.
- Other unusual items included a $57 million Asia Pacific trademark impairment and fairlife contingent-consideration charges. Management described liquidity as strong and sufficient for foreseeable operating and cash commitments.
Important facts for investors to verify
- How much of reported revenue growth reflects sustained volume and pricing versus currency, mix and acquired operations.
- Whether margins recover as commodity, transportation and foreign-exchange pressures evolve.
- Cash conversion and working-capital trends, including supplier payment terms, supply-chain finance and receivables factoring.
- Developments in the IRS litigation, including the eventual decision, appeal timetable and any effect on the potential liability and tax rate.
- Fairlife contingent-consideration remeasurement and the timing and amount of any future milestone payments.