The Coca-Cola Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 1, 2022; comparisons are to periods ended July 2, 2021. Dollar amounts are in millions unless stated otherwise. Figures are unaudited.
Business context and results
Coca-Cola sells beverages through concentrate operations and finished-product operations, supported by company-owned and independent bottlers. The company reported broad-based volume growth, while pricing and mix helped revenue growth offset foreign-exchange headwinds and higher input costs.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net operating revenues | $11,325 | $10,129 | $21,816 | $19,149 |
| Gross profit | $6,495 | $6,342 | $12,895 | $11,857 |
| Operating income | $2,341 | $3,016 | $5,746 | $5,738 |
| Net income attributable to Coca-Cola shareowners | $1,905 | $2,641 | $4,686 | $4,886 |
| Diluted earnings per share | $0.44 | $0.61 | $1.08 | $1.13 |
| Gross margin | 57.3% | 62.6% | 59.1% | 61.9% |
| Operating margin | 20.7% | 29.8% | 26.3% | 30.0% |
Cash flow, debt and liquidity
- First-half operating cash flow was $4,546, down 18% from $5,525. Capital spending was $487; operating cash flow less capital spending was approximately $4,059.
- Cash and cash equivalents were $8,976 at July 1, 2022; cash, short-term investments and marketable securities totaled approximately $11.6 billion. The company also reported $7.8 billion of unused backup credit lines.
- Current assets were $23,141 and current liabilities $20,531. Reported debt—loans and notes payable, current maturities and long-term debt—totaled approximately $41.9 billion, versus $42.8 billion at year-end 2021.
- First-half financing cash outflows included $3,810 of dividends and $1,210 of treasury-stock purchases. The company declared a quarterly dividend of $0.44 per share in July.
Material changes and unusual items
- Revenue increased 12% in Q2 and 14% in the first half. First-half worldwide unit-case volume grew 8%; concentrate sales volume grew 7%. Consolidated revenue benefited from price, product and geographic mix (+12 percentage points in Q2; +10 in the first half), while currency reduced revenue by 6 and 5 percentage points, respectively.
- Q2 operating income fell 22%, while first-half operating income was broadly unchanged. Gross margin declined amid currency effects, higher commodity and transportation costs, a greater contribution from lower-margin Bottling Investments, and the BodyArmor acquisition; pricing and favorable channel/package mix partly offset these pressures.
- Other operating charges were $951 in Q2, primarily a $917 fair-value remeasurement of contingent consideration related to the fairlife acquisition. That liability was $1,529 at July 1, compared with $590 at year-end 2021. The charge materially affected Q2 operating profit.
- Other income (loss) included Q2 losses on securities and an impairment charge of $96 for a Russian equity-method investee. In the prior-year quarter, other income included a $695 gain on the sale of Coca-Cola Amatil. Prior-year interest expense also included $592 of debt-extinguishment charges. These items make reported earnings comparisons less indicative of underlying operating trends.
- Foreign-currency translation adjustments were a substantial drag on comprehensive income: Q2 consolidated net income was $1,900, while total comprehensive income was $253, including a $1,910 currency-translation loss.
Outlook, risks and contingencies
- Management expected foreign-exchange movements to reduce full-year 2022 net revenue and operating income; based on then-current rates and hedging, currency was also expected to weigh on operating cash flow through year-end. Commodity and transportation costs were expected to continue rising.
- Management expected a 2022 effective tax rate of approximately 19.5% before significant operating or nonoperating items. The company expected capital expenditures of approximately $1.5 billion and share repurchases of approximately $500 million for 2022, in addition to repurchases related to stock-compensation issuance proceeds.
- The IRS transfer-pricing dispute remains unresolved. Coca-Cola recorded a $414 tax reserve but estimated a potential aggregate incremental tax-and-interest exposure of approximately $13 billion as of year-end 2021 if the Tax Court methodology were ultimately applied to the litigated and subsequent years. The company estimated a possible payment of about $5.0 billion for 2007–2009, including interest through July 1, 2022, if a final decision required payment; some or all could be refunded if the company prevails on appeal. The timing of a final decision was unknown.
- The company suspended its business in Russia in March 2022 and reported disruption in Ukraine. COVID-related impacts, supply-chain and labor constraints, inflation, foreign exchange, and asset-impairment uncertainty remained risks. Management noted that beverage sales are seasonal and can be affected by weather.
- Management stated that current liquidity was sufficient for foreseeable operating, investing and financing commitments. It also reported that disclosure controls were effective at July 1, 2022.
Important facts for investors to verify
- How much of revenue growth and volume performance is sustainable after pricing, mix, shipment timing, acquisitions and currency effects.
- The fairlife contingent-consideration valuation, its potential future cash payments, and the resulting effect on operating earnings.
- Developments in the IRS litigation, including the possible timing and amount of any payment, appeal prospects and exposure for subsequent tax years.
- Whether commodity, transportation, inflation and foreign-exchange pressures continue to compress margins and cash generation.
- Progress against the stated 2022 capital-spending and repurchase expectations, and the company’s capacity to sustain dividends while meeting debt and other cash commitments.