Coca-Cola Company — Q1 2022 Form 10-Q
Reporting period: Three months ended April 1, 2022; comparative period ended April 2, 2021. Unaudited results. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Business context and performance
Coca-Cola reported stronger revenue and operating income, with improved beverage volumes and favorable pricing and mix. The quarter also reflected inflationary input costs, foreign-exchange headwinds, increased marketing and compensation costs, and ongoing effects from COVID-19. Beverage sales are seasonal, with the second and third quarters typically having the highest volumes.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net operating revenues | $10,491 | $9,020 | +16% |
| Gross profit | $6,400 | $5,515 | +16% |
| Gross margin | 61.0% | 61.1% | Down 0.1 percentage point |
| Operating income | $3,405 | $2,722 | +25% |
| Operating margin | 32.5% | 30.2% | Up 2.3 percentage points |
| Net income attributable to shareowners | $2,781 | $2,245 | +24% |
| Diluted earnings per share | $0.64 | $0.52 | +23% |
| Net cash provided by operating activities | $623 | $1,636 | Down 62% |
| Purchases of property, plant and equipment | $217 | $216 | — |
Worldwide unit case volume grew 8% and concentrate sales volume grew 11%. Reported revenue growth reflected volume (+11%), price/product/geographic mix (+7%), acquisitions and divestitures (+3%), and foreign currency (-4%). Operating cash flow declined mainly due to incentive and marketing payments, lower benefits from receivables factoring, and currency effects.
At April 1, 2022, cash, cash equivalents, short-term investments and marketable securities totaled $10.4 billion; unused backup credit lines were $7.8 billion. Total debt was approximately $41.7 billion, comprising loans and notes payable, current maturities and long-term debt. Cash and cash equivalents were $7.7 billion, down from $9.7 billion at year-end 2021. The company paid $1.9 billion in dividends during the quarter.
Material changes and unusual items
- Revenue increased $1.47 billion year over year. Operating income rose $683 million, supported by volume, favorable mix and lower other operating charges.
- Interest expense fell to $182 million from $442 million, primarily reflecting hedging activity and prior-year debt-extinguishment charges.
- Other income (loss) shifted to a $105 million loss from $138 million of income, including a $104 million net loss on investment securities and a $24 million loss related to an equity-method investee share issuance.
- Other operating charges were $28 million versus $124 million in the prior year, when strategic realignment costs were substantially higher.
- The company recorded a $13 million gain from selling an equity-method investment. It also classified certain Asia Pacific bottling operations as held for sale and expected to refranchise them in the second half of 2022.
Outlook, risks and contingencies
- Management expected the 2022 effective tax rate to be approximately 19.5% before significant operating or nonoperating items, and excluding any adverse outcome in the IRS litigation.
- Management expected 2022 capital expenditures of approximately $1.5 billion and share repurchases of approximately $500 million, in addition to repurchases tied to stock-compensation proceeds.
- Foreign-exchange movements were expected to negatively affect full-year revenue, operating income and operating cash flow. Commodity and transportation costs were expected to continue increasing; management said it would take actions to mitigate the impact.
- The company suspended its Russia business on March 8, 2022, and operations in Ukraine were disrupted. Russia and Ukraine represented approximately 1% and 2% of 2021 consolidated revenue and operating income, respectively. The conflict could bring further disruption, cost increases or impairment charges.
- COVID-19 effects, supply-chain conditions, labor shortages, inflation, currency movements and geopolitical developments remained sources of uncertainty. Management noted that estimates for asset recoverability and impairment depend on uncertain assumptions.
- IRS transfer-pricing dispute: The Tax Court had predominantly sided with the IRS in its 2020 opinion, but a final decision remained pending. Coca-Cola maintained that it was more likely than not to prevail on appeal. The recorded tax reserve was $410 million; under the adverse scenario described, potential aggregate incremental tax and interest was estimated at approximately $13 billion as of year-end 2021, with an estimated $250 million increase during Q1 2022. A potential payment for 2007–2009 was estimated at approximately $5.0 billion, plus interest through payment. The company stated that the outcome could materially affect its financial position, results and cash flows.
- Management considered liquidity sufficient for foreseeable operating, investing and financing needs. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Monitor the Tax Court case, possible appeal timing, and any revision to the estimated IRS exposure or potential payment.
- Track whether operating cash flow recovers after its steep year-over-year decline and assess working-capital drivers, including supplier payment terms and receivables factoring.
- Compare subsequent input-cost inflation and foreign-exchange effects with management’s 2022 expectations, including resulting margin trends.
- Follow Russia and Ukraine developments, the planned Asia Pacific bottling refranchising, and any related impairment or operating impacts.
- Check whether planned 2022 capital spending, dividends and share repurchases align with cash generation and debt levels.