KO — Q2 2026 Financial Report Analysis

Volume did the work; the headline EPS number did not

Coca-Cola's second quarter of 2026 (the three months ended July 3, 2026) was a genuine volume quarter. Net operating revenues rose $845 million, or 7%, to $13,380 million, and the 10-Q's own revenue bridge attributes 4 percentage points of that to higher concentrate sales volume — the amount of syrup and beverage base Coca-Cola actually sells to its bottlers, which is how the company books most of its revenue. Unit case volume, the measure of how much finished drink reaches consumers, rose 5%. Both figures are strong for a business this size.

The reported bottom line looked even better: diluted earnings per share (EPS — profit divided by shares outstanding) grew 16% to $1.03. That number overstates the operating result. On the company's "comparable" basis — its own adjusted measure, which strips out gains and charges management considers one-off — EPS grew 11% to $0.97, and stripping out currency movements as well, 9%. The gap between 16% and 11% is not trading noise; it is specific items identified in the filing, laid out below.

The quarter in numbers

EPS growth is shown as the company reports it, calculated on unrounded per-share figures; dividing the rounded $1.03 by $0.88 gives 17%. Operating margin is operating income as a share of revenue — what is left after the cost of goods and all selling and administrative spending, before interest and tax.

Where the 7% came from

The 10-Q breaks the revenue change into four pieces (percentage points):

Two things stand out.

First, currency was a tailwind, not a headwind — an unusual position for Coca-Cola, which earns most of its money outside the US and has spent recent years absorbing the cost of a strong dollar. Exchange rates added 2 points to revenue and, because they land disproportionately on high-margin segments, 5 points to operating income. The filing names the currencies: "a weaker U.S. dollar compared to certain foreign currencies, including the Mexican peso, Brazilian real, euro and South African rand," partly offset by a stronger dollar against the Indian rupee, Japanese yen, Turkish lira and Argentine peso. Latin America's 16% revenue growth is almost entirely this effect — 11 of those 16 points are currency, and only 1 point is volume.

Second, Asia Pacific is trading price for volume, deliberately. Concentrate volume there rose 11% while price/mix subtracted 9 points, leaving revenue up just 1%. The MD&A gives the reason plainly: "unfavorable mix and affordability initiatives." Underneath that, unit case volume grew 13% in India and Southwest Asia and 8% in Greater China and Mongolia. Coca-Cola is selling smaller, cheaper packs to add drinkers in its two largest population markets. The segment still held its operating margin (44.1% versus 44.2%) because commodity costs and operating expenses fell, so the trade is being made without immediate profit damage — but it means Asia Pacific's revenue line will keep understating how fast the business is actually growing there.

North America, the largest segment at $5,405 million of revenue, produced the cleanest result: 3 points of volume and 4 points of price, no currency effect. Unit case volume rose 3%, led by 5% growth in Trademark Coca-Cola.

Segments

Revenue is third-party revenue; operating margin is calculated on that base.

EMEA is the one segment where operating income fell in dollars, from $1,325 million to $1,309 million, despite a 4-point currency tailwind. The filing attributes the decline to "increased marketing spending and higher operating expenses," partly offset by volume, price and lower commodity costs. EMEA's reported revenue also carries a 3-point drag from the sale of Coca-Cola's finished-product operations in Nigeria, the same disposal behind the segment's 9% decline in juice, dairy and plant-based volume.

Bottling Investments — the company-owned bottling operations Coca-Cola holds temporarily before selling them to franchise partners — is structurally low-margin, but operating income rose 55% to $91 million on 8% volume growth, against a 24% currency headwind.

Costs: gross margin up, marketing up more

Gross margin improved half a point to 62.9%, which the filing credits to "the favorable impact of pricing initiatives and foreign currency exchange rate fluctuations, as well as the impact of the sale of our finished product operations in Nigeria, partially offset by higher commodity costs." Divesting a low-margin bottling business mechanically raises the average, so part of this gain is portfolio mix rather than better economics in the retained business.

Selling, general and administrative expenses rose 7% to $3,720 million, in line with revenue. Within that, advertising rose much faster — 18%, to $1,565 million. Management calls this "increased marketing spending partly due to timing," meaning some spend shifted into this quarter from another, so the full-year increase should be smaller than 18%. Offsetting it were lower annual incentive expense (smaller bonus accrual) and the Nigeria disposal.

Why reported EPS ran 5 points ahead of the underlying

Three items below the operating line account for most of the gap between +16% reported EPS and +11% comparable EPS:

• Securities gains, $320 million. Other income was $370 million, versus $212 million a year ago. The largest piece was "a net gain of $320 million related to realized and unrealized gains and losses on equity securities and trading debt securities," up from $163 million. Unrealized gains are paper marks on investments that move with markets; they can reverse next quarter and tell you nothing about how much Coke was sold.
• An impairment reversal, $66 million. Coca-Cola wrote back part of a previous write-down on its African bottling operations, which are held for sale, "based on management's revised estimates."
• A lower tax rate. The effective tax rate fell to 18.9% from 20.7%, helped by $40 million of discrete tax benefits including $43 million of interest income on the deposit the company paid the IRS. Management still guides to roughly 19.9% for the full year, so this quarter's rate is not the run rate.

Interest expense fell 17% to $369 million on lower average short-term debt — that one is durable. Equity income, Coca-Cola's share of profit from bottlers it partly owns, rose 8% to $604 million.

Takeaway: The operating quarter is better than the adjusted numbers suggest and the reported quarter is worse. Underneath a 16% GAAP EPS print inflated by securities marks and a temporarily low tax rate, Coca-Cola delivered 4% concentrate volume growth and a 0.9-point expansion in comparable operating margin — and it did so while deliberately suppressing its own revenue line in Asia Pacific, where 11% volume growth converted to just 1% revenue because of cheaper packs sold to add drinkers in India and China. That is the trade worth watching, not the headline EPS.

Cash and the $6 billion tax overhang

First-half operating cash flow was $7,543 million, against $1,391 million used in the same period of 2025 — but that comparison is distorted by a single item: the 2025 half included $6,069 million of the final milestone payment for the fairlife acquisition. Adjusting for that, the underlying improvement is real but far smaller, helped by the receivables factoring programme, lower tax payments and lower incentive payouts. First-half free cash flow (operating cash flow less capital spending of $684 million) was $6,859 million.

The unresolved item is the IRS litigation over 2007–2009 transfer pricing. Coca-Cola paid a $6.0 billion deposit in September 2024 to stop interest accruing, and it sits on the balance sheet as a non-current asset alongside $514 million of accrued interest receivable. The Eleventh Circuit heard the appeal on June 25, 2026, so a ruling is plausible within the next several quarters. The company states it is "more likely than not" to prevail, and notes that an Eighth Circuit decision in the 3M case on October 1, 2025 reversed the Tax Court on the same blocked-income regulation — "highly supportive of the Company's position." If it loses, the exposure is not limited to the deposit: the filing estimates the potential incremental tax and interest for 2010 through 2025 at approximately $14 billion, growing by roughly $450 million per quarter. This is the single largest binary risk in the business and it is unrelated to how many drinks get sold.

Guidance: raised

Management raised full-year 2026 guidance with these results:

Organic revenue is growth excluding currency moves and the effect of businesses bought or sold — the closest thing to a like-for-like figure. The raise is broad: the underlying growth range went up, and so did the currency-neutral EPS range, meaning management is not relying solely on the weaker dollar. Currency guidance actually narrowed, to approximately 1% tailwind on revenue from 1–2%, while the drag from disposals was reduced from roughly 4% to 2–3% because the pending sale of the African bottling operations is now expected to close toward the end of the third quarter or in the fourth, later than previously assumed.

Our read on trajectory. Two of the three profit drivers this quarter — securities gains and the tax rate — will not repeat, and management's own 19.9% full-year tax guidance implies a higher rate in the second half. The durable pieces are volume, price/mix of roughly 2 points, lower interest expense, and a currency tailwind that the company expects to persist ("we expect foreign currency exchange rate fluctuations will have a favorable impact on our full year 2026 net operating revenues"). Note also a mechanical headwind ahead: the fourth quarter of 2026 will have six fewer days than the fourth quarter of 2025, which will depress reported Q4 revenue and concentrate sales without any change in demand — the company has already flagged that it expects full-year concentrate sales volume growth to run "slightly behind" unit case volume growth for this reason. Expect reported fourth-quarter growth to look weaker than the business is, and judge the year on unit case volume and comparable currency-neutral EPS instead.