THE COCA-COLA COMPANY When used in this report, the terms "
OnMarch 8, 2022 , the Company announced the suspension of its business inRussia as a result of the conflict betweenRussia andUkraine . In addition, the conflict has caused a disruption of our business inUkraine . Given the rapidly changing conditions, the Company will continue to monitor and assess the situation as circumstances evolve. As a point of reference, in 2021, the Company's business inRussia andUkraine contributed approximately 2 percent of the Company's unit case volume and approximately 1 percent and 2 percent of the Company's consolidated net operating revenues and operating income, respectively. As ofApril 1, 2022 , the carrying value of the Company's assets related toRussia andUkraine is less than 0.5 percent of the Company's total assets. In addition, as ofApril 1, 2022 , the Company had an approximate 21 percent ownership interest in Coca-Cola HBC AG ("CCH"), the Company's bottling and distribution partner in the region. If CCH were to record an impairment charge, we would be required to record our proportionate share of the charge as a reduction of equity income (loss) - net in our consolidated statement of income. During the three months endedApril 1, 2022 , the effects of the COVID-19 pandemic, including the resurgence of the virus in certain countries and the related actions by governments to attempt to contain the spread of the virus, continued to negatively impact our business. While uncertainties caused by the COVID-19 pandemic remain, and factors such as the state of the supply chain, labor shortages and the inflationary environment are likely to impact the pace of the economic recovery, we expect to continue to see improvements in our business as we continue to learn and adapt to the ever-changing environment. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Recoverability of Current and Noncurrent Assets
Our Company faces many uncertainties and risks related to various economic, political and regulatory environments in the countries in which we operate, particularly in developing and emerging markets. Refer to the headings "Item 1A. Risk Factors" in Part I and "Our Business - Challenges and Risks" in Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . As a result, management must make numerous assumptions, which involve a significant amount of judgment, when performing recoverability and impairment tests of current and noncurrent assets in various regions around the world. We perform recoverability and impairment tests of current and noncurrent assets in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). For certain assets, recoverability and/or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable. For other assets, impairment tests are required at least annually, or more frequently if events or circumstances indicate that an asset may be impaired. The performance of recoverability and impairment tests of current and noncurrent assets involves critical accounting estimates. These estimates require significant management judgment, include inherent uncertainties and are often interdependent; therefore, they do not change in isolation. Factors that management must estimate include, among others, the economic lives of the assets, sales volume, pricing, royalty rates, cost of raw materials, delivery costs, the impact of any supply chain disruptions, inflation, long-term growth rates, cost of capital, marketing spending, foreign currency exchange rates, tax rates, capital spending, proceeds from the sale of assets and customers' financial condition. The variability of these factors depends on a number of conditions, and thus our accounting estimates may change from period to period. These factors are even more difficult to estimate as a result of uncertainties associated with the conflict inUkraine and the scope, severity and duration of the global COVID-19 pandemic. The estimates we use when performing recoverability tests of assets are consistent with those we use in our internal planning. When performing impairment tests, we estimate the fair values of the assets using management's best assumptions, which we believe are consistent with those a market participant would use. While pandemic-related uncertainties still exist, we expect to see continued improvements in our business as consumers return to many of their previous work routines as well as socializing and traveling. The Company has certain intangible and other long-lived assets that are more dependent on cash flows generated in the away-from-home channels and/or that generate cash flows in geographic areas that are more heavily impacted by the COVID-19 pandemic and are therefore more susceptible to impairment. In addition, intangible and other long-lived assets we acquired in recent transactions are naturally more susceptible to impairment, because they are recorded at fair value based on recent operating plans and macroeconomic conditions at the time of acquisition. If we had used other assumptions and estimates when tests of these assets were performed, impairment charges could have resulted. Furthermore, if management uses different assumptions in future periods, or if different conditions exist in future periods, impairment charges could result. The total future impairment charges we may be required to record could be material. 26 -------------------------------------------------------------------------------- As ofApril 1, 2022 , the carrying value of our investment in Coca-Cola Bottlers Japan Holdings Inc. exceeded the fair value by$33 million , or 8 percent. Based on the length of time and the extent to which the fair value has been less than our carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value, management determined that the decline in fair value was temporary in nature. Therefore, we did not record an impairment charge related to the investment. Our equity method investees also perform such recoverability and impairment tests. If an impairment charge is recorded by one of our equity method investees, the Company records its proportionate share of such charge as a reduction of equity income (loss) - net in our consolidated statement of income. However, the actual amount we record with respect to our proportionate share of such charge may be impacted by items such as basis differences, deferred taxes and deferred gains. OPERATIONS REVIEW Sales of our ready-to-drink beverages are somewhat seasonal, with the second and third calendar quarters typically accounting for the highest sales volumes. The volume of sales in the beverage business may be affected by weather conditions.
Structural Changes, Acquired Brands and Newly Licensed Brands
In order to continually improve upon the Company's operating performance, from time to time, we engage in buying and selling ownership interests in bottling partners and other manufacturing operations. In addition, we periodically acquire brands and their related operations or enter into license agreements for certain brands to supplement our beverage offerings. These items impact our operating results and certain key metrics used by management in assessing the Company's performance. Unit case volume growth is a metric used by management to evaluate the Company's performance because it measures demand for our products at the consumer level. The Company's unit case volume represents the number of unit cases (or unit case equivalents) of Company beverage products directly or indirectly sold by the Company and its bottling partners to customers or consumers and, therefore, reflects unit case volume for both consolidated and unconsolidated bottlers. Refer to the heading "Beverage Volume" below. Concentrate sales volume represents the amount of concentrates, syrups, source waters and powders/minerals (in all instances expressed in unit case equivalents) sold by, or used in finished products sold by, the Company to its bottling partners or other customers. ForCosta Limited ("Costa") non-ready-to-drink beverage products, concentrate sales volume represents the amount of beverages, primarily measured in number of transactions (in all instances expressed in unit case equivalents), sold by the Company to customers or consumers. Refer to the heading "Beverage Volume" below. When we analyze our net operating revenues, we generally consider the following factors: (1) volume growth (concentrate sales volume or unit case volume, as applicable); (2) changes in price, product and geographic mix; (3) foreign currency fluctuations; and (4) acquisitions and divestitures (including structural changes as defined below), as applicable. Refer to the heading "Net Operating Revenues" below. The Company sells concentrates and syrups to both consolidated and unconsolidated bottling partners. The ownership structure of our bottling partners impacts the timing of recognizing concentrate revenue and concentrate sales volume. When we sell concentrates or syrups to our consolidated bottling partners, we do not recognize the concentrate revenue or concentrate sales volume until the bottling partner has sold finished products manufactured from the concentrates or syrups to a third party. When we sell concentrates or syrups to our unconsolidated bottling partners, we recognize the concentrate revenue and concentrate sales volume when the concentrates or syrups are sold to the bottling partner. The subsequent sale of the finished products manufactured from the concentrates or syrups to a third party does not impact the timing of recognizing the concentrate revenue or concentrate sales volume. When we account for an unconsolidated bottling partner as an equity method investment, we eliminate the intercompany profit related to these transactions to the extent of our ownership interest until the equity method investee has sold finished products manufactured from the concentrates or syrups to a third party. We typically report unit case volume when finished products manufactured from the concentrates or syrups are sold to a third party, regardless of our ownership interest in the bottling partner, if any. We generally refer to acquisitions and divestitures of bottling operations as "structural changes," which are a component of acquisitions and divestitures. Typically, structural changes do not impact the Company's unit case volume or concentrate sales volume on a consolidated basis or at the geographic operating segment level. We recognize unit case volume for all sales of Company beverage products, regardless of our ownership interest in the bottling partner, if any. However, the unit case volume reported by our Bottling Investments operating segment is generally impacted by structural changes because it only includes the unit case volume of our consolidated bottling operations. "Acquired brands" refers to brands acquired during the past 12 months. Typically, the Company has not reported unit case volume or recognized concentrate sales volume related to acquired brands in periods prior to the closing of a transaction. Therefore, the unit case volume and concentrate sales volume related to an acquired brand are incremental to prior year volume. We generally do not consider the acquisition of a brand to be a structural change. 27 -------------------------------------------------------------------------------- "Licensed brands" refers to brands not owned by the Company but for which we hold certain rights, generally including, but not limited to, distribution rights, and from which we derive an economic benefit when the products are sold. Typically, the Company has not reported unit case volume or recognized concentrate sales volume related to a licensed brand in periods prior to the beginning of the term of a license agreement. Therefore, in the year that a license agreement is entered into, the unit case volume and concentrate sales volume related to a licensed brand are incremental to prior year volume. We generally do not consider the licensing of a brand to be a structural change. In 2021, the Company acquired the remaining ownership interest inBA Sports Nutrition, LLC ("BodyArmor"). The impact of this acquisition has been included in acquisitions and divestitures in our analysis of net operating revenues on a consolidated basis as well as for theNorth America operating segment.
Beverage Volume
We measure the volume of Company beverage products sold in two ways: (1) unit cases of finished products and (2) concentrate sales. As used in this report, "unit case" means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings), with the exception of unit case equivalents for Costa non-ready-to-drink beverage products, which are primarily measured in number of transactions; and "unit case volume" means the number of unit cases (or unit case equivalents) of Company beverage products directly or indirectly sold by the Company and its bottling partners to customers or consumers. Unit case volume primarily consists of beverage products bearing Company trademarks. Also included in unit case volume are certain brands licensed to, or distributed by, our Company, and brands owned by Coca-Cola system bottlers for which our Company provides marketing support and from the sale of which we derive an economic benefit. In addition, unit case volume includes sales by certain joint ventures in which the Company has an ownership interest. We believe unit case volume is one of the measures of the underlying strength ofthe Coca-Cola system because it measures trends at the consumer level. The unit case volume numbers used in this report are derived based on estimates received by the Company from its bottling partners and distributors. Concentrate sales volume represents the amount of concentrates, syrups, source waters and powders/minerals (in all instances expressed in unit case equivalents) sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers. For Costa non-ready-to-drink beverage products, concentrate sales volume represents the amount of beverages, primarily measured in number of transactions (in all instances expressed in unit case equivalents), sold by the Company to customers or consumers. Unit case volume and concentrate sales volume growth rates are not necessarily equal during any given period. Factors such as seasonality, bottlers' inventory practices, supply point changes, timing of price increases, new product introductions and changes in product mix can create differences between unit case volume and concentrate sales volume growth rates. In addition to these items, the impact of unit case volume from certain joint ventures in which the Company has an ownership interest, but to which the Company does not sell concentrates, syrups, source waters or powders/minerals, may give rise to differences between unit case volume and concentrate sales volume growth rates.
Information about our volume growth worldwide and by operating segment is as follows:
Percent Change 2022 versus 2021
Three Months Ended April
1, 2022
Unit Cases1,2,3 Concentrate Sales4
Worldwide 8 % 11 %
Europe, Middle East & Africa 11 % 15 %
Latin America 9 20
North America 5 3
Asia Pacific 4 -
Global Ventures 23 22
Bottling Investments 8 N/A
1Bottling Investments operating segment data reflects unit case volume growth for consolidated bottlers only.
2Geographic andGlobal Ventures operating segment data reflects unit case volume growth for all bottlers, both consolidated and unconsolidated, and distributors in the applicable geographic areas.Global Ventures operating segment data also reflects unit case volume growth for Costa retail stores. 3Unit case volume percent change is based on average daily sales. Unit case volume growth based on average daily sales is computed by comparing the average daily sales in each of the corresponding periods. Average daily sales are the unit cases sold during the period divided by the number of days in the period. 28 -------------------------------------------------------------------------------- 4Concentrate sales volume represents the amount of concentrates, syrups, source waters and powders/minerals (in all instances expressed in unit case equivalents) sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers and is not based on average daily sales. For Costa non-ready-to-drink beverage products, concentrate sales volume represents the amount of beverages, primarily measured in number of transactions (in all instances expressed in unit case equivalents), sold by the Company to customers or consumers and is not based on average daily sales. Each of our quarters, other than the fourth quarter, ends on the Friday closest to the last day of the corresponding quarterly calendar period. As a result, the first quarter of 2022 had one less day when compared to the first quarter of 2021, and the fourth quarter of 2022 will have one additional day when compared to the fourth quarter of 2021. Unit Case Volume Although a significant portion of our Company's net operating revenues is not based directly on unit case volume, we believe unit case volume performance is one of the measures of the underlying strength ofthe Coca-Cola system because it measures trends at the consumer level. Unit case volume inEurope ,Middle East andAfrica increased 11 percent, which included 10 percent growth in Trademark Coca-Cola, 9 percent growth in sparkling flavors, 17 percent growth in hydration, sports, coffee and tea, and 18 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment reported growth in unit case volume of 14 percent in theEurope operating unit, 9 percent in theAfrica operating unit and 8 percent in the Eurasia andMiddle East operating unit. Unit case volume inLatin America increased 9 percent, which included 7 percent growth in Trademark Coca-Cola, 13 percent growth in hydration, sports, coffee and tea, 9 percent growth in sparkling flavors, and 16 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment's volume performance included 14 percent growth inBrazil and 4 percent growth inMexico . Unit case volume inNorth America increased 5 percent, which included 6 percent growth in hydration, sports, coffee and tea, 7 percent growth in both sparkling flavors and nutrition, juice, dairy and plant-based beverages, and 1 percent growth in Trademark Coca-Cola. Unit case volume inAsia Pacific increased 4 percent, which included 4 percent growth in both sparkling flavors and Trademark Coca-Cola, 11 percent growth in nutrition, juice, dairy and plant-based beverages, and 3 percent growth in hydration, sports, coffee and tea. The operating segment reported growth in unit case volume of 16 percent in theIndia andSouthwest Asia operating unit, 9 percent in theASEAN andSouth Pacific operating unit, and 4 percent in theJapan andSouth Korea operating unit, partially offset by a decline in unit case volume of 3 percent in theGreater China andMongolia operating unit. Unit case volume forGlobal Ventures increased 23 percent, driven by 32 percent growth in hydration, sports, coffee and tea, growth in energy drinks and even performance in nutrition, juice, dairy and plant-based beverages.
Unit case volume for Bottling Investments increased 8 percent, which primarily
reflects growth in
Concentrate Sales Volume
During the three months endedApril 1, 2022 , worldwide concentrate sales volume increased 11 percent and unit case volume increased 8 percent compared to the three months endedApril 2, 2021 . Concentrate sales volume growth is calculated based on the amount sold during the reporting periods, which is impacted by the number of days. Conversely, unit case volume growth is calculated based on average daily sales, which is not impacted by the number of days in the reporting periods. The first quarter of 2022 had one less day when compared to the first quarter of 2021, which contributed to the differences between concentrate sales volume and unit case volume growth rates on a consolidated basis and for the individual operating segments during the three months endedApril 1, 2022 . In addition, for theEurope ,Middle East andAfrica andLatin America operating segments, the differences between concentrate sales volume and unit case volume growth rates during the three months endedApril 1, 2022 were impacted by the timing of concentrate shipments, as certain bottlers adjusted inventory levels in an effort to manage through near-term supply chain disruptions as we enter the peak selling season in many markets. The difference between concentrate sales volume and unit case volume growth for theAsia Pacific operating segment was partially due to the resurgence of COVID-19 and the related lockdowns inChina . We expect the differences between concentrate sales volume and unit case volume growth rates to lessen over the remainder of the year. 29 --------------------------------------------------------------------------------
Net Operating Revenues
During the three months endedApril 1, 2022 , net operating revenues were$10,491 million , compared to$9,020 million during the three months endedApril 2, 2021 , an increase of$1,471 million , or 16 percent. The following table illustrates, on a percentage basis, the estimated impact of the factors resulting in the increase (decrease) in net operating revenues on a consolidated basis and for each of our operating segments: Percent Change 2022 versus 2021 Price, Product & Foreign Currency Acquisitions & Volume1 Geographic Mix Fluctuations Divestitures2 Total Consolidated 11 % 7 % (4) % 3 % 16 % Europe, Middle East & Africa 15 % 6 % (9) % - % 13 % Latin America 20 19 (6) - 34 North America 3 11 - 8 22 Asia Pacific - 6 (5) - 1 Global Ventures 22 12 (6) - 28 Bottling Investments 7 5 (5) - 8
Note: Certain rows may not add due to rounding.
1Represents the percent change in net operating revenues attributable to the increase (decrease) in concentrate sales volume for our geographic operating segments and ourGlobal Ventures operating segment (expressed in unit case equivalents) after considering the impact of acquisitions and divestitures. For our Bottling Investments operating segment, this represents the percent change in net operating revenues attributable to the increase (decrease) in unit case volume computed by comparing the total sales (rather than the average daily sales) in each of the corresponding periods after considering the impact of structural changes, if any. Our Bottling Investments operating segment data reflects unit case volume growth for consolidated bottlers only after considering the impact of structural changes, if any. Refer to the heading "Beverage Volume" above.
2Includes structural changes, if any. Refer to the heading "Structural Changes, Acquired Brands and Newly Licensed Brands" above.
Refer to the heading "Beverage Volume" above for additional information related to changes in our unit case and concentrate sales volumes.
"Price, product and geographic mix" refers to the change in net operating revenues caused by factors such as price changes, the mix of products and packages sold, and the mix of channels and geographic territories where the sales occurred. The impact of price, product and geographic mix is calculated by subtracting the change in net operating revenues resulting from volume increases or decreases, changes in foreign currency exchange rates, and acquisitions and divestitures from the total change in net operating revenues. Management believes that providing investors with price, product and geographic mix enhances their understanding about the combined impact that the following items had on the Company's net operating revenues: (1) pricing actions taken by the Company and, where applicable, our bottling partners; (2) changes in the mix of products and packages sold; (3) changes in the mix of channels where products were sold; and (4) changes in the mix of geographic territories where products were sold. Management uses this measure in making financial, operating and planning decisions and in evaluating the Company's performance.
Price, product and geographic mix had a 7 percent favorable impact on our consolidated net operating revenues. Price, product and geographic mix was impacted by a variety of factors and events including, but not limited to, the following:
•Europe,
•Latin America - favorable pricing initiatives, including inflationary pricing
in
•North America - favorable pricing initiatives, including a benefit resulting from the timing of price increases in the prior year, and favorable channel and product mix;
•Asia Pacific - favorable pricing initiatives along with favorable channel, package and geographic mix;
•Global Ventures - favorable channel mix, primarily due to the timing of Costa retail store reopenings in theUnited Kingdom in the prior year, and favorable product mix; and
•Bottling Investments - favorable pricing initiatives.
30
--------------------------------------------------------------------------------
The favorable channel and package mix for the three months ended April 1, 2022
in all applicable operating segments was primarily a result of the continued
recovery in away-from-home channels in many markets in the current year and the
impact of shelter-in-place and social distancing requirements in the prior year.
Fluctuations in foreign currency exchange rates decreased our consolidated net
operating revenues by 4 percent. This unfavorable impact was primarily due to a
stronger U.S. dollar compared to certain foreign currencies, including the
Turkish lira, euro, Japanese yen and Philippine peso, which had an unfavorable
impact on our Europe , Middle East and Africa , Asia Pacific and Bottling
Investments operating segments. The unfavorable impact of a stronger U.S. dollar
compared to the currencies listed above was partially offset by the impact of a
weaker U.S. dollar compared to certain other foreign currencies, including the
Chinese yuan, which had a favorable impact on our Asia Pacific operating
segment. Refer to the heading "Liquidity, Capital Resources and Financial
Position - Foreign Exchange" below.
"Acquisitions and divestitures" generally refers to acquisitions and
divestitures of brands or businesses, some of which the Company considers to be
structural changes. The impact of acquisitions and divestitures is the
difference between the change in net operating revenues and the change in what
our net operating revenues would have been if we removed the net operating
revenues associated with an acquisition or a divestiture from either the current
year or the prior year, as applicable. Management believes that quantifying the
impact that acquisitions and divestitures had on the Company's net operating
revenues provides investors with useful information to enhance their
understanding of the Company's net operating revenue performance by improving
their ability to compare our period-to-period results. Management considers the
impact of acquisitions and divestitures when evaluating the Company's
performance. Refer to the heading "Structural Changes, Acquired Brands and Newly
Licensed Brands" above for additional information related to acquisitions and
divestitures.
Net operating revenue growth rates are impacted by sales volume; price, product
and geographic mix; foreign currency fluctuations; and acquisitions and
divestitures. The size and timing of acquisitions and divestitures are not
consistent from period to period. Based on current spot rates and our hedging
coverage in place, we expect foreign currency fluctuations will have an
unfavorable impact on our full year 2022 net operating revenues.
Gross Profit Margin
Gross profit margin is a ratio calculated by dividing gross profit by net operating revenues. Management believes gross profit margin provides investors with useful information related to the profitability of our business prior to considering all of the operating costs incurred. Management uses this measure in making financial, operating and planning decisions and in evaluating the Company's performance. Our gross profit margin decreased to 61.0 percent for the three months endedApril 1, 2022 , compared to 61.1 percent for the three months endedApril 2, 2021 . This decrease was primarily due to the unfavorable impact of foreign currency exchange rate fluctuations, the impact of increased commodity and transportation costs, and the acquisition of BodyArmor. These unfavorable impacts were partially offset by the impact of favorable pricing initiatives as well as favorable channel and package mix. We expect commodity and transportation costs to continue to increase in 2022, and we will continue to proactively take actions in an effort to mitigate the impact of these incremental costs.
Selling, General and Administrative Expenses
The following table sets forth the components of selling, general and administrative expenses (in millions):
Three Months Ended
April 1, April 2,
2022 2021
Selling and distribution expenses $ 655 $ 618
Advertising expenses 980 901
Stock-based compensation expense 87 58
Other operating expenses 1,245 1,092
Selling, general and administrative expenses $
2,967
During the three months endedApril 1, 2022 , selling, general and administrative expenses increased$298 million , or 11 percent, versus the prior year. The increase was due to increased marketing spending, higher annual incentive and stock-based compensation expense, and increased selling and distribution expenses. The increase in annual incentive and stock-based compensation expense was due to a more favorable outlook for our financial performance in the current year. The increase in selling and distribution expenses was primarily due to the continued recovery from the COVID-19 pandemic. During the three months endedApril 1, 2022 , foreign currency exchange rate fluctuations decreased selling, general and administrative expenses by 3 percent. 31 -------------------------------------------------------------------------------- As ofApril 1, 2022 , we had$517 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under our plans, which we expect to recognize over a weighted-average period of 2.2 years as stock-based compensation expense. This expected cost does not include the impact of any future stock-based compensation awards.
Other Operating Charges
Other operating charges incurred by operating segment and Corporate were as
follows (in millions):
Three Months Ended
April 1, April 2,
2022 2021
Europe, Middle East & Africa $ (1) $ 50
Latin America - 11
North America (17) 12
Asia Pacific - 13
Global Ventures - -
Bottling Investments - -
Corporate 46 38
Total $ 28 $ 124
During the three months ended April 1, 2022 , the Company recorded other
operating charges of $28 million . These charges primarily consisted of
$22 million related to the remeasurement of our contingent consideration
liability to fair value in conjunction with our acquisition of fairlife, LLC
("fairlife") in 2020, $10 million related to the Company's productivity and
reinvestment program and $2 million related to the restructuring of our
manufacturing operations in the United States . These charges were partially
offset by a net gain of $5 million , which included the reimbursement of
distributor termination fees for BodyArmor recorded in the prior year partially
offset by various transition and transaction costs, employee retention costs and
the amortization of noncompete agreements, and income of $1 million related to
the Company's strategic realignment initiatives primarily as a result of a
revision to estimated severance costs accrued in the prior year.
During the three months ended
Refer to Note 8 of Notes to Consolidated Financial Statements for additional information related to the tax litigation. Refer to Note 12 of Notes to Consolidated Financial Statements for additional information on the Company's productivity and reinvestment program. Refer to Note 16 of Notes to Consolidated Financial Statements for the impact these charges had on our operating segments and Corporate.
Operating Income and Operating Margin
Information about our operating income contribution by operating segment and Corporate on a percentage basis is as follows:
Three Months Ended
April 1, April 2,
2022 2021
Europe, Middle East & Africa 29.6 % 30.1 %
Latin America 22.3 20.3
North America 31.0 29.1
Asia Pacific 19.5 25.2
Global Ventures 1.5 1.0
Bottling Investments 5.7 5.2
Corporate (9.6) (10.9)
Total 100.0 % 100.0 %
32-------------------------------------------------------------------------------- Operating margin is a ratio calculated by dividing operating income by net operating revenues. Management believes operating margin provides investors with useful information related to the profitability of our business after considering all of the operating costs incurred. Management uses this measure in making financial, operating and planning decisions and in evaluating the Company's performance.
Information about our operating margin on a consolidated basis and by operating segment and Corporate is as follows:
Three Months Ended
April 1, April 2,
2022 2021
Consolidated 32.5 % 30.2 %
Europe, Middle East & Africa 60.6 % 56.1 %
Latin America 62.6 60.7
North America 29.4 27.0
Asia Pacific 53.9 55.6
Global Ventures 6.9 4.6
Bottling Investments 9.5 7.4
Corporate * *
* Calculation is not meaningful.
During the three months endedApril 1, 2022 , operating income was$3,405 million , compared to$2,722 million during the three months endedApril 2, 2021 , an increase of$683 million , or 25 percent. The increase was driven by concentrate sales volume growth of 11 percent, favorable channel and package mix, and lower other operating charges, partially offset by an unfavorable foreign currency exchange rate impact and higher selling, general and administrative expenses. During the three months endedApril 1, 2022 , fluctuations in foreign currency exchange rates unfavorably impacted consolidated operating income by 6 percent due to a strongerU.S. dollar compared to certain foreign currencies, including the Japanese yen, Turkish lira, euro and Argentine peso, which had an unfavorable impact on ourAsia Pacific ,Europe ,Middle East andAfrica , andLatin America operating segments. The unfavorable impact of a strongerU.S. dollar compared to the currencies listed above was partially offset by the impact of a weakerU.S. dollar compared to certain other foreign currencies, including the Chinese yuan, which had a favorable impact on ourAsia Pacific operating segment. Refer to the heading "Liquidity, Capital Resources and Financial Position - Foreign Exchange" below. TheEurope ,Middle East andAfrica operating segment reported operating income of$1,007 million and$820 million for the three months endedApril 1, 2022 andApril 2, 2021 , respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 15 percent, favorable channel and package mix, and lower other operating charges, partially offset by an unfavorable foreign currency exchange rate impact of 11 percent.Latin America reported operating income of$760 million and$552 million for the three months endedApril 1, 2022 andApril 2, 2021 , respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 20 percent, favorable pricing initiatives, and lower other operating charges, partially offset by increased marketing spending and an unfavorable foreign currency exchange rate impact of 7 percent. Operating income forNorth America for the three months endedApril 1, 2022 andApril 2, 2021 was$1,056 million and$792 million , respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 3 percent, favorable pricing initiatives, favorable channel and product mix, and lower other operating charges, partially offset by higher annual incentive expense and increased marketing spending.Asia Pacific's operating income for the three months endedApril 1, 2022 andApril 2, 2021 was$664 million and$686 million , respectively. The decrease in operating income was primarily driven by an unfavorable foreign currency exchange rate impact of 5 percent and increased marketing spending, partially offset by favorable pricing, channel and package mix along with lower other operating charges.Global Ventures' operating income for the three months endedApril 1, 2022 andApril 2, 2021 was$51 million and$26 million , respectively. The increase in operating income was primarily driven by net operating revenue growth as a result of the timing of Costa retail store reopenings in theUnited Kingdom in the prior year, partially offset by higher selling and distribution expenses, increased marketing spending and an unfavorable foreign currency exchange rate impact of 5 percent. Bottling Investments' operating income for the three months endedApril 1, 2022 andApril 2, 2021 was$193 million and$141 million , respectively. The increase in operating income was primarily driven by volume growth of 7 percent, favorable pricing initiatives and effective cost management, partially offset by an unfavorable foreign currency exchange rate impact of 7 percent. 33 -------------------------------------------------------------------------------- Corporate's operating loss for the three months endedApril 1, 2022 andApril 2, 2021 was$326 million and$295 million , respectively. Operating loss in 2022 increased primarily as a result of higher annual incentive and stock-based compensation expense as well as higher other operating charges.
Based on current spot rates and our hedging coverage in place, we expect foreign currency fluctuations will have an unfavorable impact on our full year 2022 operating income.
Interest Income
During the three months endedApril 1, 2022 , interest income was$78 million , compared to$66 million during the three months endedApril 2, 2021 , an increase of$12 million , or 20 percent. The increase was primarily driven by higher returns in certain of our international locations.
Interest Expense
During the three months endedApril 1, 2022 , interest expense was$182 million , compared to$442 million during the three months endedApril 2, 2021 , a decrease of$260 million , or 59 percent. The decrease was primarily due to certain hedging activities and charges of$58 million in the prior year associated with the extinguishment of long-term debt.
Equity Income (Loss) - Net
During the three months endedApril 1, 2022 , equity income was$262 million , compared to equity income of$279 million during the three months endedApril 2, 2021 , a decrease of$17 million , or 6 percent. The decrease was primarily due to a$32 million reduction in net gains resulting from the Company's proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees and an unfavorable foreign currency exchange rate impact. These unfavorable impacts were partially offset by more favorable operating results reported by several of our equity method investees in the current year.
Other Income (Loss) - Net
Other income (loss) - net includes, among other things, dividend income; gains and losses related to the disposal of property, plant and equipment; gains and losses related to acquisitions and divestitures; non-service cost components of net periodic benefit cost or income for pension and other postretirement benefit plans; other charges and credits related to pension and other postretirement benefit plans; realized and unrealized gains and losses on equity securities and trading debt securities; realized gains and losses on available-for-sale debt securities; other-than-temporary impairment charges; and net foreign currency exchange gains and losses. The foreign currency exchange gains and losses are primarily the result of the remeasurement of monetary assets and liabilities from certain currencies into functional currencies. The effects of the remeasurement of these assets and liabilities are partially offset by the impact of our economic hedging program for certain exposures on our consolidated balance sheet. Refer to Note 6 of Notes to Consolidated Financial Statements. During the three months endedApril 1, 2022 , other income (loss) - net was a loss of$105 million . The Company recognized a net loss of$104 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities, net foreign currency exchange losses of$73 million and a net loss of$24 million as a result of one of our equity method investees issuing additional shares of its stock. Additionally, other income (loss) - net included income of$70 million related to the non-service cost components of net periodic benefit income and dividend income of$12 million . During the three months endedApril 2, 2021 , other income (loss) - net was income of$138 million . The Company recognized a net gain of$133 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. The Company also recorded pension settlement charges of$54 million related to its strategic realignment initiatives. Other income (loss) - net also included income of$60 million related to the non-service cost components of net periodic benefit income,$10 million of dividend income and net foreign currency exchange losses of$9 million . None of the other items included in other income (loss) - net was individually significant. Refer to Note 4 of Notes to Consolidated Financial Statements for additional information on equity and debt securities. Refer to Note 6 of Notes to Consolidated Financial Statements for additional information on economic hedging activities. Refer to Note 13 of Notes to Consolidated Financial Statements for additional information on net periodic benefit income. Refer to Note 15 of Notes to Consolidated Financial Statements for additional information on one of our equity method investees issuing additional shares of its stock. Refer to Note 16 of Notes to Consolidated Financial Statements for the impact that certain of these items had on our operating segments and Corporate. 34 --------------------------------------------------------------------------------
Income Taxes
The Company recorded income taxes of$665 million (19.2 percent effective tax rate) and$508 million (18.4 percent effective tax rate) during the three months endedApril 1, 2022 andApril 2, 2021 , respectively. The Company's effective tax rates for the three months endedApril 1, 2022 andApril 2, 2021 vary from the statutoryU.S. federal income tax rate of 21.0 percent primarily due to the tax impact of significant operating and nonoperating items, as described in Note 11 of Notes to Consolidated Financial Statements, along with the tax benefits of having significant earnings generated outsidethe United States and significant earnings generated in investments accounted for under the equity method, both of which are generally taxed at rates lower than the statutoryU.S. rate. OnNovember 18, 2020 , theU.S. Tax Court ("Tax Court") issued an opinion ("Opinion") regarding the Company's 2015 litigation with theU.S. Internal Revenue Service ("IRS") involving transfer pricing tax adjustments in which the Tax Court predominantly sided with theIRS . The Company strongly disagrees with the Opinion and intends to vigorously defend its position. Refer to Note 8 of Notes to Consolidated Financial Statements for additional information on the litigation. At the end of each quarter, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year. This estimate reflects, among other items, our best estimate of operating results and foreign currency exchange rates. Based on enacted tax laws, including our current interpretation of recently issued regulations, the Company's effective tax rate in 2022 is expected to be 19.5 percent before considering the potential impact of any significant operating and nonoperating items that may affect our effective tax rate. This rate does not include the impact of the ongoing tax litigation with theIRS , if the Company were not to prevail. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION We believe our ability to generate cash flows from operating activities is one of the fundamental strengths of our business. Refer to the heading "Cash Flows from Operating Activities" below. The Company does not typically raise capital through the issuance of stock. Instead, we use debt financing to lower our overall cost of capital and increase our return on shareowners' equity. Refer to the heading "Cash Flows from Financing Activities" below. We have a history of borrowing funds both domestically and internationally at reasonable interest rates, and we expect to be able to continue to borrow funds at reasonable rates over the long term. Our debt financing also includes the use of a commercial paper program. We currently have the ability to borrow funds in this market at levels that are consistent with our debt financing strategy and, and we expect to continue to be able to do so in the future. The Company regularly reviews its optimal mix of short-term and long-term debt. The Company's cash, cash equivalents, short-term investments and marketable securities totaled$10.4 billion as ofApril 1, 2022 . In addition to these funds, our commercial paper program, and our ability to issue long-term debt, we had$7.8 billion in unused backup lines of credit for general corporate purposes as ofApril 1, 2022 . These backup lines of credit expire at various times from 2022 through 2027. Our current capital allocation priorities are as follows: investing wisely to support our business operations, continuing to grow our dividend payment, enhancing our beverage portfolio and capabilities through opportunistic and disciplined acquisitions, and using excess cash to repurchase shares over time. We currently expect 2022 capital expenditures to be approximately$1.5 billion . During 2022, we also expect to repurchase approximately$500 million of shares in addition to repurchasing shares equivalent to the proceeds from the issuances of stock under our stock-based compensation plans. We are currently in litigation with theIRS for tax years 2007 through 2009. OnNovember 18, 2020 , the Tax Court issued the Opinion in which it predominantly sided with theIRS ; however, a final decision is still pending and the timing of such decision is not currently known. The Company strongly disagrees with theIRS' positions and the portions of the Opinion affirming such positions and intends to vigorously defend our positions utilizing every available avenue of appeal. While the Company believes that it is more likely than not that we will ultimately prevail in this litigation upon appeal, it is possible that all, or some portion of, the adjustments proposed by theIRS and sustained by the Tax Court could ultimately be upheld. In the event that all of the adjustments proposed by theIRS are ultimately upheld for tax years 2007 through 2009 and theIRS , with the consent of the federal courts, were to decide to apply the underlying methodology ("Tax Court Methodology") to the subsequent years up to and including 2021, the Company currently estimates that the potential aggregate incremental tax and interest liability could be approximately$13 billion as ofDecember 31, 2021 . Additional income tax and interest would continue to accrue until the time any such potential liability, or portion thereof, were to be paid. The Company estimates the impact of the continued application of the Tax Court Methodology for the three months endedApril 1, 2022 would increase the potential aggregate incremental tax and interest liability by approximately$250 million . Once the Tax Court renders a final decision, the Company will have 90 days to file a notice of appeal and pay the portion of the potential aggregate incremental tax and interest liability related to the 2007 through 2009 tax years, which we currently estimate to be approximately$5.0 billion (including interest accrued throughApril 1, 2022 ), plus any additional interest accrued through the time of payment. Refer to Note 8 of Notes to Consolidated Financial Statements for additional information on the tax litigation. 35 -------------------------------------------------------------------------------- While we believe it is more likely than not that we will prevail in the tax litigation discussed above, we are confident that, between our ability to generate cash flows from operating activities and our ability to borrow funds at reasonable interest rates, we can manage the range of possible outcomes in the final resolution of the matter. Based on all of the aforementioned factors, the Company believes its current liquidity position is strong and will continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for the foreseeable future.
Cash Flows from Operating Activities
As part of our continued efforts to improve our working capital efficiency, we
have worked with our suppliers over the past several years to revisit terms and
conditions, including the extension of payment terms. Our current payment terms
with the majority of our suppliers are 120 days. Additionally, two global
financial institutions offer a voluntary supply chain finance ("SCF") program
which enables our suppliers, at their sole discretion, to sell their receivables
from the Company to these financial institutions on a non-recourse basis at a
rate that leverages our credit rating and thus may be more beneficial to them.
The SCF program is available to suppliers of goods and services included in cost
of goods sold as well as suppliers of goods and services included in selling,
general and administrative expenses in our consolidated statement of income. The
Company and our suppliers agree on contractual terms for the goods and services
we procure, including prices, quantities and payment terms, regardless of
whether the supplier elects to participate in the SCF program. The suppliers
sell goods or services, as applicable, to the Company and issue the associated
invoices to the Company based on the agreed-upon contractual terms. Then, if
they are participating in the SCF program, our suppliers, at their sole
discretion, determine which invoices, if any, they want to sell to the financial
institutions. Our suppliers' voluntary inclusion of invoices in the SCF program
has no bearing on our payment terms. No guarantees are provided by the Company
or any of our subsidiaries under the SCF program. We have no economic interest
in a supplier's decision to participate in the SCF program, and we have no
direct financial relationship with the financial institutions, as it relates to
the SCF program. Accordingly, amounts due to our suppliers that elected to
participate in the SCF program are included in the line item accounts payable
and accrued expenses in our consolidated balance sheet. All activity related to
amounts due to suppliers that elected to participate in the SCF program is
reflected within the operating activities section of our consolidated statement
of cash flows. We have been informed by the financial institutions that as of
April 1, 2022 and December 31, 2021 , suppliers had elected to sell $876 million
and $882 million , respectively, of our outstanding payment obligations to the
financial institutions. The amounts settled through the SCF program were
$882 million and $705 million during the three months ended April 1, 2022 and
April 2, 2021 , respectively. We do not believe there is a risk that our payment
terms will be shortened in the near future, and we do not currently expect our
net cash provided by operating activities to be significantly impacted by
additional extensions of payment terms in the foreseeable future.
The Company has a trade accounts receivable factoring program in certain
countries. Under this program, we can elect to sell trade accounts receivables
to unaffiliated financial institutions at a discount. In these factoring
arrangements, for ease of administration, the Company collects customer payments
related to the factored receivables and remits those payments to the financial
institutions. The Company sold $1,597 million and $1,309 million of trade
accounts receivables under this program during the three months ended April 1,
2022 and April 2, 2021 , respectively, and the costs of factoring such
receivables were not material. The cash received from the financial institutions
is reflected within the operating activities section of our consolidated
statement of cash flows.
Net cash provided by operating activities during the three months ended April 1,
2022 and April 2, 2021 was $623 million and $1,636 million , respectively, a
decrease of $1,013 million , or 62 percent. This decrease was primarily driven by
higher annual incentive payments in 2022, higher marketing payments resulting
from year-end accruals, lower benefits from our trade accounts receivable
factoring program in the current year, and an unfavorable impact due to foreign
currency exchange rate fluctuations. These items were partially offset by
increased operating income, lower payments related to our strategic realignment
initiatives and lower tax payments.
Cash Flows from Investing Activities
Net cash provided by investing activities during the three months ended
Purchases of Investments and Proceeds from Disposals of Investments
During the three months endedApril 1, 2022 , purchases of investments were$835 million and proceeds from disposals of investments were$1,323 million , resulting in a net cash inflow of$488 million . During the three months endedApril 2, 2021 , purchases of investments were$1,466 million and proceeds from disposals of investments were$1,375 million , resulting in a net cash outflow of$91 million . This activity primarily represents the purchases of, and proceeds from the disposals of, investments in marketable securities and short-term investments that were made as part of the Company's overall cash management strategy. Also included in this activity are purchases of, and proceeds from the disposals of, investments held by our captive insurance companies. Refer to Note 4 of Notes to Consolidated Financial Statements for additional information. 36 --------------------------------------------------------------------------------
Acquisitions of Businesses,
During the three months ended
Proceeds from Disposals of Businesses,
During the three months endedApril 1, 2022 , proceeds from disposals of businesses, equity method investments and nonmarketable securities were$218 million , which primarily related to the sale of our ownership interest in one of our equity method investments. During the three months endedApril 2, 2021 , proceeds from disposals of businesses, equity method investments and nonmarketable securities were$2 million . Refer to Note 2 of Notes to Consolidated Financial Statements for additional information.
Purchases of Property, Plant and Equipment
Purchases of property, plant and equipment during the three months ended
Cash Flows from Financing Activities
Net cash used in financing activities during the three months endedApril 1, 2022 was$2,975 million , and net cash provided by financing activities during the three months endedApril 2, 2021 was$364 million .
Debt Financing
Issuances and payments of debt included both short-term and long-term financing activities. During the three months endedApril 1, 2022 , the Company had issuances of debt of$1,052 million , which included$1,026 million of net issuances of commercial paper and short-term debt with maturities of 90 days or less,$5 million of issuances of commercial paper and short-term debt with maturities greater than 90 days, and long-term debt issuances of$21 million , net of related discounts and issuance costs.
The Company made payments of debt of
During the three months ended
Issuances of Stock
During the three months endedApril 1, 2022 , the Company received cash proceeds from issuances of stock of$449 million , an increase of$266 million when compared to cash proceeds from issuances of stock of$183 million during the three months endedApril 2, 2021 . The issuances of stock during the three months endedApril 1, 2022 andApril 2, 2021 were related to the exercise of stock options by employees.
Share Repurchases
During the three months endedApril 1, 2022 , the total cash outflow for treasury stock purchases was$546 million . The Company repurchased 7.7 million shares of common stock under the share repurchase plan authorized by our Board of Directors. These shares were repurchased at an average cost of$61.48 per share, for a total cost of$471 million . In addition to shares repurchased, the Company's treasury stock activity also includes shares surrendered to the Company to pay the exercise price and/or to satisfy tax withholding obligations in connection with so-called stock swap exercises of employee stock options and/or the vesting of restricted stock issued to employees. The net impact of the Company's issuances of stock and share repurchases during the three months endedApril 1, 2022 resulted in a net cash outflow of$97 million . During 2022, we expect to repurchase approximately$500 million of shares in addition to repurchasing shares equivalent to the proceeds from the issuances of stock under our stock-based compensation plans.
Dividends
During the three months ended
Our Board of Directors approved the Company's regular quarterly dividend of
37
--------------------------------------------------------------------------------Other Financing Activities
During the three months endedApril 1, 2022 andApril 2, 2021 , the total cash outflow for other financing activities was$979 million and$449 million , respectively. The activity during the three months endedApril 1, 2022 included the payment of$540 million of the purchase price for BodyArmor, which was originally held back related to indemnification obligations.
Foreign Exchange
Our international operations are subject to certain opportunities and risks, including currency fluctuations and governmental actions. We closely monitor our operations in each country and seek to adopt appropriate strategies that are responsive to changing economic and political environments as well as to fluctuations in currencies. Due to the geographic diversity of our operations, weakness in some currencies may be offset by strength in others. Our foreign currency management program is designed to mitigate, over time, a portion of the potentially unfavorable impact of exchange rate changes on our net income and earnings per share. Taking into account the effects of our hedging activities, the impact of fluctuations in foreign currency exchange rates decreased our operating income for the three months endedApril 1, 2022 by 6 percent. Based on current spot rates and our hedging coverage in place, we expect foreign currency fluctuations will have an unfavorable impact on operating income and cash flows from operating activities through the end of the year.
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