The Coca-Cola Company — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the periods ended July 1, 2022. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data. Interim results are unaudited.
Financial performance
- Q2 revenue: $11.972 billion, up 6% year over year. Revenue growth reflected 10% favorable price, product and geographic mix and 1% volume contribution, partly offset by a 4% foreign-exchange headwind.
- Q2 profit: Gross profit was $7.060 billion; operating income was $2.401 billion, up 3%. Net income attributable to Coca-Cola shareowners was $2.547 billion, versus $1.905 billion; diluted EPS was $0.59, versus $0.44.
- Q2 margins: Gross margin rose to 59.0% from 57.3%; operating margin declined to 20.1% from 20.7%. Higher other operating charges and SG&A weighed on operating margin.
- First-half revenue and profit: Revenue was $22.952 billion, up 5%; operating income was $5.768 billion, approximately flat. Shareowner net income was $5.654 billion, versus $4.686 billion; diluted EPS was $1.30, versus $1.08. Gross margin increased to 59.8% from 59.1%, while operating margin declined to 25.1% from 26.3%.
- Cash flow: First-half operating cash flow was $4.629 billion, up 2% from $4.546 billion. Investing activities used $766 million and financing activities used $998 million. Capital expenditures were $615 million.
- Liquidity and debt: Cash and cash equivalents were $12.564 billion; cash, short-term investments and marketable securities totaled about $15.7 billion. The company reported $4.2 billion of unused backup credit lines. Total reported borrowings—loans and notes payable, current maturities and long-term debt—were approximately $41.6 billion, versus $39.1 billion at year-end 2022. Commercial paper outstanding was $4.643 billion.
Changes and operating drivers
- Worldwide unit case volume was flat in Q2 and up 2% in the first half; concentrate sales volume increased 1% in both periods. Price and mix, rather than volume, were the principal consolidated revenue growth driver.
- Latin America and North America contributed to operating-income growth; Europe, Middle East & Africa and Asia Pacific operating income declined. Russia-related business suspension continued to affect EMEA volume, particularly in certain beverage categories.
- Interest expense increased to $374 million in Q2 and $746 million in the first half, primarily due to higher rates on short-term borrowings and derivative instruments.
- Foreign exchange reduced consolidated revenue by 4% in Q2 and 5% in the first half. Management said FX also negatively affected operating income.
Unusual items, outlook and risks
- Fairlife contingent consideration: Other operating charges included $1.262 billion in Q2 and $1.324 billion in the first half from fair-value remeasurement of the fairlife acquisition milestone liability. The remaining liability was valued at $2.639 billion; the milestone depends on fairlife results through 2024 and, if earned, is payable in 2025. These charges materially affected reported operating results.
- Other notable items: First-half other income included a $439 million gain on the Vietnam bottling refranchising and $240 million of net investment-related gains. The quarter also included $127 million of net gains on securities. Such items make reported earnings period-sensitive.
- IRS transfer-pricing litigation: The company contests the Tax Court’s largely unfavorable 2020 opinion and says the case remains pending. Its recorded tax reserve was $439 million. Under the disputed methodology, the company estimated a potential aggregate incremental tax and interest liability of about $14 billion as of December 31, 2022; it estimated the methodology added about $800 million to that potential exposure in the first half of 2023. A potential payment of about $5.5 billion for 2007–2009 could be due after a Tax Court decision, plus further interest. The company says it believes it is more likely than not to prevail on appeal, but an adverse outcome could materially affect financial position, results and cash flows.
- Management outlook: The company expected a 2023 effective tax rate of 19.3% before significant operating or nonoperating items, and capital expenditures of approximately $1.9 billion. Management expected FX to negatively affect full-year revenue, operating income and operating cash flow, and commodity costs to continue pressuring gross margin for the rest of 2023.
- Other risks noted include commodity-cost inflation, currency fluctuations, seasonal and weather-related demand variability, and potential impairment of assets. Management described liquidity as strong and sufficient for foreseeable operating and cash commitments.
Important facts for investors to verify
- Track the Tax Court case, the possible $5.5 billion payment for the litigated years, and how the broader estimated exposure and reserve change.
- Assess how much reported earnings reflect the fairlife liability remeasurement and the Vietnam and securities gains; the filing does not present an adjusted earnings measure in the figures summarized here.
- Monitor commercial-paper borrowing, interest expense and total debt alongside cash generation and available credit facilities.
- Compare future volume and pricing growth with FX and commodity headwinds, and check progress against the approximately $1.9 billion capital-spending outlook.
- Consider cash-flow quality: the company sold $7.197 billion of receivables through its factoring program in the first half, compared with $3.686 billion a year earlier; factoring costs rose to $31 million from $5 million.