The Coca-Cola Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 29, 2023, compared with periods ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Coca-Cola reported seasonality in ready-to-drink beverage sales, with Q2 and Q3 typically its highest-volume quarters.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net operating revenues | $11,953 | $11,063 | $34,905 | $32,879 |
| Gross profit | $7,296 | $6,497 | $21,019 | $19,392 |
| Operating income | $3,270 | $3,088 | $9,038 | $8,834 |
| Net income attributable to Coca-Cola shareowners | $3,087 | $2,825 | $8,741 | $7,511 |
| Diluted EPS | $0.71 | $0.65 | $2.01 | $1.73 |
| Operating cash flow | Not separately provided | Not separately provided | $8,929 | $8,068 |
- Revenue growth: 8% in Q3 and 6% for the nine months. Management attributed growth chiefly to favorable pricing, product and geographic mix; reported unit case volume increased 2% worldwide in Q3 and 2% year to date.
- Margins: Gross margin improved to 61.0% from 58.7% in Q3 and to 60.2% from 59.0% year to date. Consolidated operating margin was 27.4% versus 27.9% in Q3 and 25.9% versus 26.9% year to date.
- Cash flow and investment: Nine-month investing cash outflow was $2,423 million; financing cash outflow was $4,085 million. Capital expenditures were $1,001 million, dividends paid were $4,078 million, and share repurchases were $1,193 million.
- Liquidity: At September 29, cash, cash equivalents and short-term investments totaled $14.215 billion; including marketable securities, the total was about $15.4 billion. The company also reported $4.2 billion of unused backup credit lines.
- Debt: Balance-sheet borrowings comprised $3.915 billion of loans and notes payable, $2.080 billion of current long-term debt maturities and $34.176 billion of long-term debt. Total debt on this basis was about $40.2 billion, versus about $39.1 billion at December 31, 2022. Nine-month interest expense rose to $1.114 billion from $578 million, mainly reflecting higher rates on short-term borrowings and derivatives.
Material changes and unusual items
- Other operating charges were $1.808 billion for the first nine months, up from $1.109 billion. The principal 2023 item was a $1.620 billion fair-value remeasurement of contingent consideration from the fairlife acquisition; the Q3 charge was $296 million. The remaining fairlife milestone payment is contingent on results through 2024, is payable in 2025 if achieved and has no contractual ceiling.
- Nine-month other income included a $439 million gain from refranchising Vietnam bottling operations. Philippine and Bangladesh bottling operations were classified as held for sale at quarter-end.
- Higher operating income and favorable pricing were partly offset by higher commodity costs, SG&A and other operating charges, and currency headwinds. Foreign exchange reduced operating income by 4% in Q3 and 7% year to date. Asia Pacific operating income declined year over year in both periods.
- Interest income rose to $640 million from $306 million year to date, while interest expense increased substantially. The nine-month effective tax rate was 16.7%, versus 18.2%; 2023 included discrete tax benefits, including a $90 million benefit from a foreign tax-law change.
Outlook, risks and contingencies
- Management expected full-year 2023 capital expenditures of approximately $1.9 billion. It expected currency movements to adversely affect full-year revenue, operating income and operating cash flow, based on then-current rates and hedging.
- Management expected commodity costs to continue pressuring gross margin during the remainder of 2023. It expected a 2023 effective tax rate of about 19% before significant operating or nonoperating items and excluding any adverse outcome in the IRS dispute.
- IRS transfer-pricing dispute: The Tax Court had predominantly sided with the IRS in its 2020 opinion; further proceedings and a decision remained pending. Coca-Cola said it would appeal and believed its position was more likely than not to prevail. The recorded tax reserve was $432 million. The company estimated a potential aggregate incremental tax and interest liability of approximately $14 billion as of December 31, 2022 under the IRS/Tax Court methodology; it said the methodology’s continued application would add approximately $1.2 billion for the first nine months of 2023. A potential payment for 2007–2009 was estimated at about $5.6 billion, including interest through September 29, 2023, plus further interest; some or all could be refunded if the company prevailed on appeal.
- The company stated that an adverse tax outcome could materially affect financial position, results and cash flows, while management considered liquidity sufficient to meet foreseeable operating and capital commitments. Other risks include foreign-exchange volatility, commodity costs, asset impairment assumptions, and pending legal and regulatory matters.
Most important facts for investors to verify
- Whether revenue growth remains supported by underlying volume as well as pricing and mix, particularly across regions.
- The fairlife contingent-consideration valuation, future milestone outcomes and effect of related charges on reported operating profit.
- Developments in the IRS litigation, the potential amount and timing of any payment, and how the exposure estimate changes.
- Cash-flow quality and working-capital effects: the company sold $12.793 billion of receivables through factoring arrangements in the first nine months, at a reported cost of $58 million.
- Execution and proceeds from the planned divestitures of bottling operations classified as held for sale, alongside currency and commodity-cost trends.