filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
When used in this report, the terms “The Coca-Cola Company,” “Company,” “we,” “us” and “our” mean The Coca-Cola Company and all entities included in our consolidated financial statements.
On March 8, 2022, the Company announced the suspension of its business in Russia as a result of the conflict between Russia and Ukraine. In addition, the conflict has caused a disruption of our business in Ukraine. 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 in Russia and Ukraine 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.
During the nine months ended September 30, 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 are focused on executing for growth with a goal of operating at a higher level through these challenges.
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 ended December 31, 2021, as well as “Item 1A. Risk Factors” in Part II of our Quarterly Report on Form 10-Q for the quarter ended April 1, 2022. 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 in the 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 in Ukraine 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 away-from-home channels and/or that generate cash flows in geographic areas which are more heavily impacted by the COVID-19 pandemic, and therefore these assets are 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 impairment tests 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.
During the nine months ended September 30, 2022, the Company recorded an other-than-temporary impairment charge of $96 million related to an equity method investee in Russia. As of September 30, 2022, the remaining carrying value of the Company’s assets related to Russia and Ukraine was less than 0.5 percent of the Company’s total assets. In addition, as of September 30, 2022, the Company had an approximate 21 percent ownership interest in Coca-Cola HBC AG, the Company’s bottling and distribution partner in the region.
As of September 30, 2022, the carrying value of our investment in Coca-Cola Bottlers Japan Holdings Inc. exceeded the fair value by $37 million, or 10 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 key 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. For Costa 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 exchange rate 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 concentrate sales, 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.
“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 related 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 August 2022, the Company acquired a controlling interest in a bottling operation in Malawi. The impact of this acquisition has been included as a structural change in our analysis of net operating revenues on a consolidated basis as well as for the Bottling Investments operating segment. Additionally, in November 2021, the Company acquired the remaining ownership interest in BA 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 the North 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 indicators of the underlying strength of the Coca-Cola system because it measures demand for our products 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 for each of our operating segments is as follows:
| Percent Change 2022 versus 2021 | |||||||||||||||||
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||||||||
| Unit Cases1,2,3 | Concentrate Sales4 | Unit Cases1,2,3 | Concentrate Sales4 | ||||||||||||||
| Worldwide | 4 | % | 4 | % | 6 | % | 6 | % | |||||||||
| Europe, Middle East & Africa | (1) | % | 1 | % | 5 | % | 5 | % | |||||||||
| Latin America | 5 | 6 | 8 | 7 | |||||||||||||
| North America | 1 | (1) | 2 | 2 | |||||||||||||
| Asia Pacific | 9 | 9 | 8 | 8 | |||||||||||||
| Global Ventures | 8 | 17 | 15 | 16 | |||||||||||||
| Bottling Investments | 16 | N/A | 16 | N/A |
1Bottling Investments operating segment data reflects unit case volume growth for consolidated bottlers only.
2Geographic and Global 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.
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 indicators of the underlying strength of the Coca-Cola system because it measures demand for our products at the consumer level.
Three Months Ended September 30, 2022 versus Three Months Ended October 1, 2021
Unit case volume in Europe, Middle East and Africa decreased 1 percent, which included a 23 percent decline in nutrition, juice, dairy and plant-based beverages, a 2 percent decline in sparkling flavors and a 1 percent decline in hydration, sports, coffee and tea, partially offset by 2 percent growth in Trademark Coca-Cola. The operating segment reported declines in unit case volume of 4 percent in the Africa operating unit and 1 percent in the Europe operating unit, partially offset by growth of 3 percent in the Eurasia and Middle East operating unit. The decline in the Africa operating unit included the impact of transitioning certain territories to new franchise bottling partners, and the decline in the Europe operating unit was primarily due to the suspension of the Company’s business in Russia.
Unit case volume in Latin America increased 5 percent, which included 4 percent growth in Trademark Coca-Cola, 8 percent growth in hydration, sports, coffee and tea, and 5 percent growth in both sparkling flavors and nutrition, juice, dairy and plant-based beverages. The operating segment’s volume performance included 6 percent growth in both Mexico and Brazil.
Unit case volume in North America increased 1 percent, which included 2 percent growth in Trademark Coca-Cola, 2 percent growth in nutrition, juice, dairy and plant-based beverages, and even performance in sparkling flavors, partially offset by a 1 percent decline in hydration, sports, coffee and tea.
Unit case volume in Asia Pacific increased 9 percent, which included 11 percent growth in hydration, sports, coffee and tea, 8 percent growth in sparkling flavors, 7 percent growth in Trademark Coca-Cola, and 12 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment reported growth in unit case volume of 25 percent in the India and Southwest Asia operating unit, 5 percent in the Greater China and Mongolia operating unit, 9 percent in the ASEAN and South Pacific operating unit, and 4 percent in the Japan and South Korea operating unit.
Unit case volume for Global Ventures increased 8 percent, driven by 3 percent growth in hydration, sports, coffee and tea along with growth in energy drinks, partially offset by a 15 percent decline in nutrition, juice, dairy and plant-based beverages.
Unit case volume for Bottling Investments increased 16 percent, driven by growth in most markets, led by India and Vietnam.
Nine Months Ended September 30, 2022 versus Nine Months Ended October 1, 2021
Unit case volume in Europe, Middle East and Africa increased 5 percent, which included 6 percent growth in Trademark Coca-Cola, 8 percent growth in hydration, sports, coffee and tea, and 4 percent growth in sparkling flavors, partially offset by a decline of 5 percent in nutrition, juice, dairy and plant-based beverages. The operating segment reported growth in unit case volume of 5 percent in the Europe operating unit, 7 percent in the Eurasia and Middle East operating unit, and 2 percent in the Africa operating unit.
Unit case volume in Latin America increased 8 percent, which included 6 percent growth in Trademark Coca-Cola, 11 percent growth in hydration, sports, coffee and tea, 8 percent growth in sparkling flavors, and 12 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment’s volume performance included 6 percent growth in Mexico and 10 percent growth in Brazil.
Unit case volume in North America increased 2 percent, which included 2 percent growth in Trademark Coca-Cola, 3 percent growth in both sparkling flavors and nutrition, juice, dairy and plant-based beverages, and 1 percent growth in hydration, sports, coffee and tea.
Unit case volume in Asia Pacific increased 8 percent, which included 11 percent growth in sparkling flavors, 6 percent growth in both Trademark Coca-Cola and hydration, sports, coffee and tea, and 13 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment reported growth in unit case volume of 41 percent in the India and Southwest Asia operating unit, 8 percent in the ASEAN and South Pacific operating unit, and 4 percent in the Japan and South Korea operating unit, partially offset by a decline in unit case volume of 2 percent in the Greater China and Mongolia operating unit.
Unit case volume for Global Ventures increased 15 percent, driven by 16 percent growth in hydration, sports, coffee and tea along with growth in energy drinks, partially offset by a 9 percent decline in nutrition, juice, dairy and plant-based beverages.
Unit case volume for Bottling Investments increased 16 percent, which reflects growth in all of our consolidated bottling operations.
Concentrate Sales Volume
During the three months ended September 30, 2022, worldwide concentrate sales volume and unit case volume both increased 4 percent compared to the three months ended October 1, 2021. During the nine months ended September 30, 2022, worldwide concentrate sales volume and unit case volume both increased 6 percent compared to the nine months ended October 1, 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.
Net Operating Revenues
Three Months Ended September 30, 2022 versus Three Months Ended October 1, 2021
During the three months ended September 30, 2022, net operating revenues were $11,063 million, compared to $10,042 million during the three months ended October 1, 2021, an increase of $1,021 million, or 10 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 | ||||||||||||||||||||
| Volume1 | Price, Product & Geographic Mix | Foreign Currency Fluctuations | Acquisitions & Divestitures2 | Total | ||||||||||||||||
| Consolidated | 4 | % | 12 | % | (8) | % | 2 | % | 10 | % | ||||||||||
| Europe, Middle East & Africa | 1 | % | 19 | % | (16) | % | — | % | 4 | % | ||||||||||
| Latin America | 6 | 12 | (6) | — | 12 | |||||||||||||||
| North America | (1) | 15 | — | 6 | 21 | |||||||||||||||
| Asia Pacific | 9 | 4 | (10) | — | 4 | |||||||||||||||
| Global Ventures | 17 | (12) | (15) | — | (10) | |||||||||||||||
| Bottling Investments | 16 | 3 | (12) | — | 7 | |||||||||||||||
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 our Global Ventures operating segment (expressed in unit case equivalents) after considering the impact of acquisitions and divestitures, if any. 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, fluctuations 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 12 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:
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Europe, Middle East and Africa — favorable channel and package mix and favorable pricing initiatives, including inflationary pricing in Turkey, partially offset by unfavorable geographic mix;
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Latin America — favorable pricing initiatives, including inflationary pricing in Argentina, along with favorable channel and package mix;
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North America — favorable pricing initiatives and favorable channel, package and product mix;
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Asia Pacific — favorable pricing initiatives along with favorable channel and package mix, partially offset by unfavorable geographic mix;
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Global Ventures — unfavorable impact of no longer receiving COVID-related incentives in the current year and unfavorable product mix, partially offset by favorable channel mix, primarily due to the timing of Costa retail store reopenings in the United Kingdom in the prior year; and
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Bottling Investments — favorable pricing initiatives across most markets.
The favorable channel and package mix in all applicable operating segments was primarily a result of the continued recovery from the COVID-19 pandemic in away-from-home channels in many markets in the current year and the impact of social distancing measures in the prior year.
Fluctuations in foreign currency exchange rates decreased our consolidated net operating revenues by 8 percent. This unfavorable impact was primarily due to a stronger U.S. dollar compared to certain foreign currencies, including the Japanese yen, British pound sterling, Turkish lira, euro and South African rand, which had an unfavorable impact on our Asia Pacific; Global Ventures; Europe, Middle East and Africa; and Bottling Investments operating segments. 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.
Nine Months Ended September 30, 2022 versus Nine Months Ended October 1, 2021
During the nine months ended September 30, 2022, net operating revenues were $32,879 million, compared to $29,191 million during the nine months ended October 1, 2021, an increase of $3,688 million, or 13 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 | ||||||||||||||||||||
| Volume1 | Price, Product & Geographic Mix | Foreign Currency Fluctuations | Acquisitions & Divestitures2 | Total | ||||||||||||||||
| Consolidated | 6 | % | 10 | % | (6) | % | 2 | % | 13 | % | ||||||||||
| Europe, Middle East & Africa | 5 | % | 16 | % | (13) | % | — | % | 8 | % | ||||||||||
| Latin America | 7 | 14 | (4) | — | 16 | |||||||||||||||
| North America | 2 | 12 | — | 7 | 21 | |||||||||||||||
| Asia Pacific | 8 | 3 | (8) | — | 3 | |||||||||||||||
| Global Ventures | 16 | (2) | (11) | — | 4 | |||||||||||||||
| Bottling Investments | 16 | 4 | (8) | — | 12 | |||||||||||||||
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 our Global Ventures operating segment (expressed in unit case equivalents) after considering the impact of acquisitions and divestitures, if any. 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 had a 10 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:
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Europe, Middle East and Africa — favorable channel and package mix and favorable pricing initiatives, including inflationary pricing in Turkey, partially offset by unfavorable geographic mix;
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Latin America — favorable pricing initiatives, including inflationary pricing in Argentina, along with favorable channel and package mix;
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North America — favorable pricing initiatives, including a benefit resulting from the timing of price increases in the prior year, and favorable channel, package and product mix;
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Asia Pacific — favorable pricing initiatives along with favorable channel and package mix, partially offset by unfavorable geographic mix;
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Global Ventures — unfavorable impact of no longer receiving COVID-related incentives in the current year, partially offset by favorable channel mix, primarily due to the timing of Costa retail store reopenings in the United Kingdom in the prior year; and
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Bottling Investments — favorable pricing initiatives across most markets, partially offset by unfavorable geographic mix.
The favorable channel and package mix in all applicable operating segments was primarily a result of the continued recovery from the COVID-19 pandemic in away-from-home channels in many markets in the current year and the impact of social distancing measures in the prior year.
Fluctuations in foreign currency exchange rates decreased our consolidated net operating revenues by 6 percent. This unfavorable impact was primarily due to a stronger U.S. dollar compared to certain foreign currencies, including the Turkish lira, euro, British pound sterling, Japanese yen, Philippine peso and South African rand, which had an unfavorable impact on our Europe, Middle East and Africa; Global Ventures; Asia Pacific; and Bottling Investments operating segments. Refer to the heading “Liquidity, Capital Resources and Financial Position — Foreign Exchange” below.
Net operating revenue growth rates are impacted by sales volume; price, product and geographic mix; foreign currency exchange rate 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 exchange rate 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 selling, general and administrative expenses and other operating charges 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 58.7 percent for the three months ended September 30, 2022, compared to 60.4 percent for the three months ended October 1, 2021. Our gross profit margin decreased to 59.0 percent for the nine months ended September 30, 2022, compared to 61.4 percent for the nine months ended October 1, 2021. These decreases were primarily due to the unfavorable impact of foreign currency exchange rate fluctuations, the impact of increased commodity and transportation costs, the impact of operating segment mix due to the relative outperformance of the lower margin Bottling Investments operating segment versus our geographic operating segments, 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 have an unfavorable impact on our gross profit margin during the remainder of 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 | Nine Months Ended | ||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||
| Selling and distribution expenses | $ | 563 | $ | 606 | $ | 1,903 | $ | 1,824 | |||||||||
| Advertising expenses | 1,451 | 1,173 | 3,599 | 3,208 | |||||||||||||
| Stock-based compensation expense | 84 | 88 | 273 | 236 | |||||||||||||
| Other operating expenses | 1,181 | 1,255 | 3,674 | 3,540 | |||||||||||||
| Selling, general and administrative expenses | $ | 3,279 | $ | 3,122 | $ | 9,449 | $ | 8,808 |
During the three months ended September 30, 2022, selling, general and administrative expenses increased $157 million, or 5 percent, versus the prior year. The increase was primarily due to increased marketing spending, partially offset by lower selling and distribution expenses as well as lower annual incentive and stock-based compensation expense as a result of the timing of cumulative adjustments in the prior year for annual incentive and stock-based compensation expense due to increased estimates of payouts. During the three months ended September 30, 2022, foreign currency exchange rate fluctuations decreased selling, general and administrative expenses by 8 percent.
During the nine months ended September 30, 2022, selling, general and administrative expenses increased $641 million, or 7 percent, versus the prior year. The increase was primarily due to higher annual incentive and stock-based compensation expense, increased marketing spending, 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 nine months ended September 30, 2022, foreign currency exchange rate fluctuations decreased selling, general and administrative expenses by 6 percent.
As of September 30, 2022, we had $385 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 1.9 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 | Nine Months Ended | ||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||
| Europe, Middle East & Africa | $ | — | $ | 2 | $ | (1) | $ | 63 | |||||||||
| Latin America | — | — | — | 11 | |||||||||||||
| North America | (1) | (2) | (19) | 18 | |||||||||||||
| Asia Pacific | 57 | — | 57 | 13 | |||||||||||||
| Global Ventures | — | — | — | — | |||||||||||||
| Bottling Investments | — | — | — | — | |||||||||||||
| Corporate | 74 | 45 | 1,072 | 373 | |||||||||||||
| Total | $ | 130 | $ | 45 | $ | 1,109 | $ | 478 |
During the three months ended September 30, 2022, the Company recorded other operating charges of $130 million. These charges primarily consisted of $57 million related to the impairment of a trademark in Asia Pacific, $32 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with our acquisition of fairlife, LLC (“fairlife”) in 2020, $27 million related to the Company’s productivity and reinvestment program and $15 million related to the BodyArmor acquisition in the prior year, which included various transition and transaction costs, employee retention costs and the amortization of noncompete agreements.
During the nine months ended September 30, 2022, the Company recorded other operating charges of $1,109 million. These charges primarily consisted of $971 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition, $57 million related to the impairment of a trademark in Asia Pacific and $56 million related to the Company’s productivity and reinvestment program. In addition, other operating charges included $23 million related to the BodyArmor acquisition in the prior year, which included various transition and transaction costs, employee retention costs and the amortization of noncompete agreements, net of the reimbursement of distributor termination fees recorded in the prior year.
During the three months ended October 1, 2021, the Company recorded other operating charges of $45 million. These charges included $31 million related to the Company’s productivity and reinvestment program, $12 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition, $4 million related to the Company’s strategic realignment initiatives and $1 million related to tax litigation. Other operating charges also included a net gain of $3 million related to the restructuring of our manufacturing operations in the United States.
During the nine months ended October 1, 2021, the Company recorded other operating charges of $478 million. These charges primarily consisted of $263 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition, $126 million related to the Company’s strategic realignment initiatives and $71 million related to the Company’s productivity and reinvestment program. In addition, other operating charges included $14 million related to tax litigation and a net charge of $4 million related to the restructuring of our manufacturing operations in the United States.
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 15 of Notes to Consolidated Financial Statements for additional information on the impairment charge and the fairlife acquisition. 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 | Nine Months Ended | ||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||
| Europe, Middle East & Africa | 33.9 | % | 35.5 | % | 37.9 | % | 34.6 | % | |||||||||
| Latin America | 23.0 | 24.6 | 24.3 | 22.5 | |||||||||||||
| North America | 35.0 | 29.9 | 33.7 | 30.2 | |||||||||||||
| Asia Pacific | 19.1 | 20.5 | 22.7 | 23.7 | |||||||||||||
| Global Ventures | 2.2 | 3.9 | 1.8 | 2.5 | |||||||||||||
| Bottling Investments | 1.5 | 2.8 | 4.0 | 3.6 | |||||||||||||
| Corporate | (14.7) | (17.2) | (24.4) | (17.1) | |||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
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 for each of our operating segments and Corporate is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||
| Consolidated | 27.9 | % | 28.9 | % | 26.9 | % | 29.6 | % | |||||||||
| Europe, Middle East & Africa | 56.7 | % | 58.5 | % | 60.5 | % | 58.7 | % | |||||||||
| Latin America | 56.2 | 62.7 | 59.3 | 62.4 | |||||||||||||
| North America | 25.8 | 25.0 | 25.2 | 26.7 | |||||||||||||
| Asia Pacific | 46.6 | 48.3 | 52.3 | 53.7 | |||||||||||||
| Global Ventures | 9.9 | 15.1 | 7.7 | 10.6 | |||||||||||||
| Bottling Investments | 2.6 | 4.9 | 6.0 | 5.9 | |||||||||||||
| Corporate | * | * | * | * |
*** Calculation is not meaningful.
Three Months Ended September 30, 2022 versus Three Months Ended October 1, 2021
During the three months ended September 30, 2022, operating income was $3,088 million, compared to $2,898 million during the three months ended October 1, 2021, an increase of $190 million, or 7 percent. The increase was driven by concentrate sales volume growth of 4 percent, favorable pricing initiatives, and favorable channel and package mix, partially offset by higher other operating charges; higher selling, general and administrative expenses; and an unfavorable foreign currency exchange rate impact.
During the three months ended September 30, 2022, fluctuations in foreign currency exchange rates unfavorably impacted consolidated operating income by 10 percent due to a stronger U.S. dollar compared to certain foreign currencies, including the Japanese yen, Turkish lira, Zimbabwean dollar, British pound sterling and Argentine peso, which had an unfavorable impact on our Asia Pacific; Europe, Middle East and Africa; Global Ventures; and Latin America operating segments. Refer to the heading “Liquidity, Capital Resources and Financial Position — Foreign Exchange” below.
The Europe, Middle East and Africa operating segment reported operating income of $1,046 million and $1,028 million for the three months ended September 30, 2022 and October 1, 2021, respectively. The increase in operating income was primarily driven by favorable pricing initiatives as well as favorable channel and package mix, partially offset by an unfavorable foreign currency exchange rate impact of 18 percent, higher commodity costs and increased marketing spending.
Latin America reported operating income of $712 million and $712 million for the three months ended September 30, 2022 and October 1, 2021, respectively. Operating income for the three months ended September 30, 2022 was impacted by concentrate sales volume growth of 6 percent, favorable pricing initiatives, and favorable channel and package mix. These favorable
impacts were offset by higher commodity costs, increased marketing spending, higher operating expenses and an unfavorable foreign currency exchange rate impact of 7 percent.
Operating income for North America for the three months ended September 30, 2022 and October 1, 2021 was $1,082 million and $868 million, respectively. The increase in operating income was primarily driven by favorable pricing initiatives as well as favorable channel and product mix, partially offset by higher commodity costs, increased marketing spending and higher annual incentive expense.
Asia Pacific’s operating income for the three months ended September 30, 2022 and October 1, 2021 was $589 million and $594 million, respectively. The decrease in operating income was primarily driven by an unfavorable foreign currency exchange rate impact of 9 percent, higher other operating charges related to the impairment of a trademark, higher commodity costs, and increased marketing spending, partially offset by concentrate sales volume growth of 9 percent, favorable pricing initiatives, and favorable channel and package mix.
Global Ventures’ operating income for the three months ended September 30, 2022 and October 1, 2021 was $67 million and $114 million, respectively. The decrease in operating income was primarily driven by the impact of no longer receiving COVID-related incentives in the current year, higher commodity costs, higher selling and distribution expenses, and an unfavorable foreign currency exchange rate impact of 6 percent, partially offset by concentrate sales volume growth of 17 percent.
Bottling Investments’ operating income for the three months ended September 30, 2022 and October 1, 2021 was $46 million and $81 million, respectively. The decrease in operating income was primarily driven by higher commodity costs and an unfavorable foreign currency exchange rate impact of 5 percent, partially offset by unit case volume growth of 16 percent and favorable pricing initiatives.
Corporate’s operating loss for the three months ended September 30, 2022 and October 1, 2021 was $454 million and $499 million, respectively. Operating loss in 2022 decreased primarily as a result of lower marketing spending as well as the timing of cumulative adjustments in the prior year for annual incentive and stock-based compensation expense due to increased estimates of payouts, partially offset by higher other operating charges and higher operating expenses.
Nine Months Ended September 30, 2022 versus Nine Months Ended October 1, 2021
During the nine months ended September 30, 2022, operating income was $8,834 million, compared to $8,636 million during the nine months ended October 1, 2021, an increase of $198 million, or 2 percent. The increase was driven by concentrate sales volume growth of 6 percent, favorable pricing initiatives, and favorable channel and package mix, partially offset by higher other operating charges; higher selling, general and administrative expenses; and an unfavorable foreign currency exchange rate impact.
During the nine months ended September 30, 2022, fluctuations in foreign currency exchange rates unfavorably impacted consolidated operating income by 8 percent due to a stronger U.S. dollar compared to certain foreign currencies, including the Japanese yen, Turkish lira, British pound sterling and Argentine peso, which had an unfavorable impact on our Asia Pacific; Europe, Middle East and Africa; Global Ventures; and Latin America 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 Brazilian real, which had a favorable impact on our Latin America operating segment. Refer to the heading “Liquidity, Capital Resources and Financial Position — Foreign Exchange” below.
The Europe, Middle East and Africa operating segment reported operating income of $3,344 million and $2,990 million for the nine months ended September 30, 2022 and October 1, 2021, respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 5 percent, favorable pricing initiatives, favorable channel and package mix, and lower other operating charges, partially offset by an unfavorable foreign currency exchange rate impact of 14 percent, higher commodity costs and increased marketing spending.
Latin America reported operating income of $2,146 million and $1,942 million for the nine months ended September 30, 2022 and October 1, 2021, respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 7 percent, favorable pricing initiatives and lower other operating charges, partially offset by increased marketing spending, higher commodity costs and an unfavorable foreign currency exchange rate impact of 5 percent.
Operating income for North America for the nine months ended September 30, 2022 and October 1, 2021 was $2,978 million and $2,610 million, respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 2 percent, favorable pricing initiatives, and favorable channel and product mix, partially offset by higher commodity costs, higher annual incentive expense and increased marketing spending.
Asia Pacific’s operating income for the nine months ended September 30, 2022 and October 1, 2021 was $2,006 million and $2,046 million, respectively. The decrease in operating income was primarily driven by an unfavorable foreign currency exchange rate impact of 7 percent, higher other operating charges related to the impairment of a trademark, higher commodity
costs and increased marketing spending, partially offset by concentrate sales volume growth of 8 percent, favorable pricing initiatives, and favorable channel and package mix.
Global Ventures’ operating income for the nine months ended September 30, 2022 and October 1, 2021 was $162 million and $215 million, respectively. The decrease in operating income was primarily driven by the impact of no longer receiving COVID-related incentives in the current year, higher commodity costs, higher selling and distribution expenses, and an unfavorable foreign currency exchange rate impact of 4 percent, partially offset by concentrate sales volume growth of 16 percent.
Bottling Investments’ operating income for the nine months ended September 30, 2022 and October 1, 2021 was $352 million and $314 million, respectively. The increase in operating income was primarily driven by unit case volume growth of 16 percent and favorable pricing initiatives, partially offset by higher commodity costs and an unfavorable foreign currency exchange rate impact of 9 percent.
Corporate’s operating loss for the nine months ended September 30, 2022 and October 1, 2021 was $2,154 million and $1,481 million, respectively. Operating loss in 2022 increased primarily as a result of higher other operating charges due to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition as well as higher annual incentive and stock-based compensation expense, partially offset by lower marketing spending.
Based on current spot rates and our hedging coverage in place, we expect foreign currency exchange rate fluctuations will have an unfavorable impact on our full year 2022 operating income.
Interest Income
During the three months ended September 30, 2022, interest income was $128 million, compared to $68 million during the three months ended October 1, 2021, an increase of $60 million, or 87 percent. During the nine months ended September 30, 2022, interest income was $306 million, compared to $205 million during the nine months ended October 1, 2021, an increase of $101 million, or 49 percent. The increases were primarily driven by higher returns in certain of our international locations.
Interest Expense
During the three months ended September 30, 2022, interest expense was $198 million, compared to $210 million during the three months ended October 1, 2021, a decrease of $12 million, or 6 percent. The decrease was primarily due to lower average debt balances and certain hedging activities that occurred during the prior year, partially offset by the impact of higher interest rates. During the nine months ended September 30, 2022, interest expense was $578 million, compared to $1,432 million during the nine months ended October 1, 2021, a decrease of $854 million, or 60 percent. The decrease was primarily due to charges in the prior year of $650 million associated with the extinguishment of long-term debt and certain hedging activities that occurred during the prior year.
Equity Income (Loss) — Net
Three Months Ended September 30, 2022 versus Three Months Ended October 1, 2021
During the three months ended September 30, 2022, equity income was $479 million, compared to equity income of $455 million during the three months ended October 1, 2021, an increase of $24 million, or 5 percent. The increase was primarily due to more favorable operating results reported by several of our equity method investees in the current year, partially offset by an unfavorable foreign currency exchange rate impact and the sale of all or a portion of our ownership interest in certain equity method investees. In addition, the Company recorded a net charge of $14 million and a net gain of $18 million during the three months ended September 30, 2022 and October 1, 2021, respectively, resulting from the Company’s proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees.
Nine Months Ended September 30, 2022 versus Nine Months Ended October 1, 2021
During the nine months ended September 30, 2022, equity income was $1,133 million, compared to equity income of $1,136 million during the nine months ended October 1, 2021, a decrease of $3 million. The decrease was primarily due to a $39 million increase in net charges resulting from the Company’s proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees, the sale of all or a portion of our ownership interest in certain 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
Three Months Ended September 30, 2022 versus Three Months Ended October 1, 2021
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 ended September 30, 2022, other income (loss) — net was a loss of $53 million. The Company recognized a net loss of $78 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, and recognized net foreign currency exchange losses of $36 million. Additionally, other income (loss) — net included income of $41 million related to the non-service cost components of net periodic benefit income and dividend income of $25 million. None of the other items included in other income (loss) — net was individually significant.
During the three months ended October 1, 2021, other income (loss) — net was a loss of $127 million. Other income (loss) — net included charges of $266 million related to the restructuring of our manufacturing operations in the United States and pension settlement charges of $21 million related to the Company’s strategic realignment initiatives. These charges were partially offset by income of $73 million related to the non-service cost components of net periodic benefit income, a gain of $63 million related to the sale of a portion of our ownership interest in one of our equity method investments and dividend income of $18 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 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 the charges related to the restructuring of our manufacturing operations in the United States. 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.
Nine Months Ended September 30, 2022 versus Nine Months Ended October 1, 2021
During the nine months ended September 30, 2022, other income (loss) — net was a loss of $509 million. The Company recognized a net loss of $449 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, and recognized net foreign currency exchange losses of $190 million. The Company also recorded an other-than-temporary impairment charge of $96 million related to an equity method investee in Russia 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 $178 million related to the non-service cost components of net periodic benefit income and dividend income of $73 million. None of the other items included in other income (loss) — net was individually significant.
During the nine months ended October 1, 2021, other income (loss) — net was income of $920 million. The Company recognized a net gain of $695 million related to the sale of our ownership interest in Coca-Cola Amatil Limited (“CCA”), an equity method investee, to Coca-Cola Europacific Partners plc, also an equity method investee; a net gain of $341 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; and a gain of $63 million related to the sale of a portion of our ownership interest in one of our equity method investments. Additionally, other income (loss) — net included income of $206 million related to the non-service cost components of net periodic benefit income and dividend income of $57 million. Other income (loss) — net also included charges of $266 million related to the restructuring of our manufacturing operations in the United States, pension settlement charges of $104 million related to our strategic realignment initiatives and net foreign currency exchange losses of $47 million. None of the other items included in other income (loss) — net was individually significant.
Refer to Note 2 of Notes to Consolidated Financial Statements for additional information on the sale of our ownership interest in CCA. Refer to Note 4 of Notes to Consolidated Financial Statements for additional information on equity and debt securities. 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 the impairment charge, one of our equity method investees issuing additional shares of its stock, and the charges related to the restructuring of our manufacturing operations in the United States. 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.
Income Taxes
The Company recorded income taxes of $622 million (18.1 percent effective tax rate) and $609 million (19.7 percent effective tax rate) during the three months ended September 30, 2022 and October 1, 2021, respectively. The Company recorded income taxes of $1,671 million (18.2 percent effective tax rate) and $2,111 million (22.3 percent effective tax rate) during the nine months ended September 30, 2022 and October 1, 2021, respectively.
The Company’s effective tax rates for the three and nine months ended September 30, 2022 and October 1, 2021 vary from the statutory U.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 outside of the 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 statutory U.S. rate.
The Company’s effective tax rates for the three and nine months ended October 1, 2021 included $75 million and $251 million, respectively, of net tax expense related to various discrete tax items, including changes in tax laws in certain foreign jurisdictions and the net tax impact of agreed-upon audit issues.
On November 18, 2020, the U.S. Tax Court (“Tax Court”) issued an opinion (“Opinion”) regarding the Company’s 2015 litigation with the U.S. Internal Revenue Service (“IRS”) involving transfer pricing tax adjustments in which the Tax Court predominantly sided with the IRS. 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, as well as our current interpretation of recently issued regulations, the Company’s effective tax rate in 2022 is expected to be 19.0 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 the IRS, 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 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 $13.2 billion as of September 30, 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 of September 30, 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 the IRS for tax years 2007 through 2009. On November 18, 2020, the Tax Court issued the Opinion in which it predominantly sided with the IRS; however, a final decision is still pending and the timing of such decision is not currently known. The Company strongly disagrees with the IRS’ 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 the IRS and sustained by the Tax Court could ultimately be upheld. In the event that all of the adjustments proposed by the IRS were to be ultimately upheld for tax years 2007 through 2009 and the IRS, 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 of December 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 nine months ended September 30, 2022 would increase the potential aggregate incremental tax and interest liability by approximately $750 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 $5.1 billion (including interest accrued through September 30, 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.
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 September 30, 2022 and December 31, 2021, suppliers had elected to sell $1,199 million and $882 million, respectively, of our outstanding payment obligations to the financial institutions. The amounts settled through the SCF program were $3,315 million and $2,339 million during the nine months ended September 30, 2022 and October 1, 2021, respectively. We do not believe there is a risk that our payment terms will be shortened in the near 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 $7,097 million and $4,595 million of trade accounts receivables under this program during the nine months ended September 30, 2022 and October 1, 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 nine months ended September 30, 2022 and October 1, 2021 was $8,068 million and $9,231 million, respectively, a decrease of $1,163 million, or 13 percent. This decrease was primarily driven by higher annual incentive payments in 2022, higher marketing payments resulting from year-end accruals, higher tax payments, 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 increased benefits from the extension of certain vendor payment terms and our trade accounts receivable factoring program.
Cash Flows from Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2022 was $2,189 million and net cash provided by investing activities during the nine months ended October 1, 2021 was $1,919 million.
Purchases of Investments and Proceeds from Disposals of Investments
During the nine months ended September 30, 2022, purchases of investments were $3,169 million and proceeds from disposals of investments were $3,049 million, resulting in a net cash outflow of $120 million. During the nine months ended October 1, 2021, purchases of investments were $4,732 million and proceeds from disposals of investments were $5,294 million, resulting in a net cash inflow of $562 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.
Acquisitions of Businesses, Equity Method Investments and Nonmarketable Securities
During the nine months ended September 30, 2022 and October 1, 2021, the Company’s acquisitions of businesses, equity method investments and nonmarketable securities totaled $40 million and $11 million, respectively.
Proceeds from Disposals of Businesses, Equity Method Investments and Nonmarketable Securities
During the nine months ended September 30, 2022, proceeds from disposals of businesses, equity method investments and nonmarketable securities were $229 million, which primarily related to the sale of our ownership interest in one of our equity method investments. During the nine months ended October 1, 2021, proceeds from disposals of businesses, equity method investments and nonmarketable securities were $1,950 million, which primarily related to the sale of our ownership interest in CCA and the sale of a portion of our ownership interest in one of our equity method investments. 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 nine months ended September 30, 2022 and October 1, 2021 were $776 million and $728 million, respectively.
Collateral (Paid) Received Associated with Hedging Activities — Net
Collateral paid associated with our hedging activities during the nine months ended September 30, 2022 was $1,449 million. Refer to Note 6 of Notes to Consolidated Financial Statements for additional information on our hedging activities.
Cash Flows from Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2022 and October 1, 2021 was $5,078 million and $6,591 million, respectively.
Debt Financing
Issuances and payments of debt included both short-term and long-term financing activities. During the nine months ended September 30, 2022, the Company had issuances of debt of $4,351 million, which included $2,163 million of net issuances of commercial paper and short-term debt with maturities of 90 days or less, $1,402 million of issuances of commercial paper and short-term debt with maturities greater than 90 days, and long-term debt issuances of $786 million, net of related discounts and issuance costs.
The Company made payments of debt of $3,761 million during the nine months ended September 30, 2022, which included payments of $3,022 million related to commercial paper and short-term debt with maturities greater than 90 days and payments of long-term debt of $739 million.
During the nine months ended September 30, 2022, the Company retired upon maturity U.S. dollar-denominated debentures of $410 million. Refer to Note 7 of Notes to Consolidated Financial Statements for additional information.
Issuances of Stock
During the nine months ended September 30, 2022, the Company received cash proceeds from issuances of stock of $707 million, an increase of $214 million when compared to cash proceeds from issuances of stock of $493 million during the nine months ended October 1, 2021. The issuances of stock during the nine months ended September 30, 2022 and October 1, 2021 were related to the exercise of stock options by employees.
Share Repurchases
During the nine months ended September 30, 2022, the total cash outflow for treasury stock purchases was $1,412 million. The Company repurchased 21.3 million shares of common stock under the share repurchase plans authorized by our Board of Directors. These shares were repurchased at an average cost of $62.67 per share, for a total cost of $1,336 million. In addition to shares repurchased, the Company’s treasury stock activity included 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 nine months ended September 30, 2022 resulted in a net cash outflow of $705 million.
Dividends
During the nine months ended September 30, 2022 and October 1, 2021, the Company paid dividends of $3,910 million and $5,437 million, respectively. As a result of the timing of dividend payment dates, the Company made two regular quarterly dividend payments during the nine months ended September 30, 2022, compared to three regular quarterly dividend payments during the nine months ended October 1, 2021. In 2022, the Company made its third regular quarterly dividend payment on October 3.
Our Board of Directors approved the Company’s regular quarterly dividend of $0.44 per share at its October 2022 meeting. This dividend is payable on December 15, 2022 to shareowners of record as of the close of business on December 1, 2022.
Other Financing Activities
During the nine months ended September 30, 2022 and October 1, 2021, the total cash outflow for other financing activities was $1,053 million and $354 million, respectively. The activities during the nine months ended September 30, 2022 included payments totaling $548 million of the remaining $860 million of the purchase price of BodyArmor, which was originally held back related to indemnification obligations. The remainder of the activities during the nine months ended September 30, 2022 primarily included repayments of collateral related to our hedging programs.
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 fluctuations 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 and nine months ended September 30, 2022 by 10 percent and 8 percent, respectively.
Based on current spot rates and our hedging coverage in place, we expect foreign currency exchange rate 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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