10-Q 1 a2013062810q.htm 10-Q 2013.06.28 10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2013
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to                                     
Commission File No. 001-02217
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
58-0628465
(IRS Employer
Identification No.)
One Coca-Cola Plaza
Atlanta, Georgia
(Address of principal executive offices)
 
30313
(Zip Code)
Registrant's telephone number, including area code: (404) 676-2121
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ý
                
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
                
Smaller reporting company o
Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
Class of Common Stock 
 
Outstanding at July 22, 2013
$0.25 Par Value
 
4,433,153,574 Shares
 




THE COCA-COLA COMPANY AND SUBSIDIARIES
Table of Contents
 
 
Page Number
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.





FORWARD-LOOKING STATEMENTS
This report contains information that may constitute "forward-looking statements." Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to volume growth, share of sales and earnings per share growth, and statements expressing general views about future operating results — are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, "Item 1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2012, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

1



Part I. Financial Information
Item 1.  Financial Statements (Unaudited)
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions except per share data)
 
Three Months Ended
 
Six Months Ended
 
June 28,
2013

June 29,
2012

 
June 28,
2013

June 29,
2012

NET OPERATING REVENUES
$
12,749

$
13,085

 
$
23,784

$
24,222

Cost of goods sold
4,989

5,224

 
9,313

9,572

GROSS PROFIT
7,760

7,861

 
14,471

14,650

Selling, general and administrative expenses
4,385

4,497

 
8,567

8,678

Other operating charges
132

70

 
253

169

OPERATING INCOME
3,243

3,294

 
5,651

5,803

Interest income
129

112

 
245

227

Interest expense
122

112

 
224

200

Equity income (loss) — net
246

245

 
333

385

Other income (loss) — net
29

84

 
(136
)
133

INCOME BEFORE INCOME TAXES
3,525

3,623

 
5,869

6,348

Income taxes
831

823

 
1,406

1,481

CONSOLIDATED NET INCOME
2,694

2,800

 
4,463

4,867

Less: Net income attributable to noncontrolling interests
18

12

 
36

25

NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF
THE COCA-COLA COMPANY
$
2,676

$
2,788

 
$
4,427

$
4,842

BASIC NET INCOME PER SHARE1
$
0.60

$
0.62

 
$
0.99

$
1.07

DILUTED NET INCOME PER SHARE1
$
0.59

$
0.61

 
$
0.98

$
1.05

DIVIDENDS PER SHARE
$
0.28

$
0.255

 
$
0.56

$
0.51

AVERAGE SHARES OUTSTANDING
4,446

4,511

 
4,450

4,518

Effect of dilutive securities
81

81

 
78

78

AVERAGE SHARES OUTSTANDING ASSUMING DILUTION
4,527

4,592

 
4,528

4,596

1 Calculated based on net income attributable to shareowners of The Coca-Cola Company.
Refer to Notes to Condensed Consolidated Financial Statements.

2



THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In millions)
 
Three Months Ended
 
Six Months Ended
 
June 28,
2013

June 29,
2012

 
June 28,
2013

June 29,
2012

CONSOLIDATED NET INCOME
$
2,694

$
2,800

 
$
4,463

$
4,867

Other comprehensive income:
 
 
 
 
 
Net foreign currency translation adjustment
(1,051
)
(1,729
)
 
(981
)
(799
)
Net gain (loss) on derivatives
117

28

 
204

59

Net unrealized gain (loss) on available-for-sale securities
18

66

 
26

166

Net change in pension and other benefit liabilities
46

22

 
78

11

TOTAL COMPREHENSIVE INCOME
1,824

1,187

 
3,790

4,304

Less: Comprehensive income (loss) attributable to
noncontrolling interests
20

(7
)
 
61

57

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO
SHAREOWNERS OF THE COCA-COLA COMPANY
$
1,804

$
1,194

 
$
3,729

$
4,247

Refer to Notes to Condensed Consolidated Financial Statements.

3



THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except par value)
 
June 28,
2013

December 31,
2012

ASSETS
 
 
CURRENT ASSETS
 
 
Cash and cash equivalents
$
9,406

$
8,442

Short-term investments
6,634

5,017

TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
16,040

13,459

Marketable securities
3,173

3,092

Trade accounts receivable, less allowances of $55 and $53, respectively
5,516

4,759

Inventories
3,643

3,264

Prepaid expenses and other assets
3,055

2,781

Assets held for sale
1,145

2,973

TOTAL CURRENT ASSETS
32,572

30,328

EQUITY METHOD INVESTMENTS
9,511

9,216

OTHER INVESTMENTS, PRINCIPALLY BOTTLING COMPANIES
1,318

1,232

OTHER ASSETS
3,855

3,585

 PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation of
$9,602 and $9,010, respectively
14,549

14,476

TRADEMARKS WITH INDEFINITE LIVES
6,541

6,527

BOTTLERS' FRANCHISE RIGHTS WITH INDEFINITE LIVES
7,410

7,405

GOODWILL
12,657

12,255

OTHER INTANGIBLE ASSETS
1,098

1,150

TOTAL ASSETS
$
89,511

$
86,174

LIABILITIES AND EQUITY
 
 
CURRENT LIABILITIES
 
 
Accounts payable and accrued expenses
$
10,047

$
8,680

Loans and notes payable
18,314

16,297

Current maturities of long-term debt
3,193

1,577

Accrued income taxes
447

471

Liabilities held for sale
468

796

TOTAL CURRENT LIABILITIES
32,469

27,821

LONG-TERM DEBT
14,179

14,736

OTHER LIABILITIES
4,934

5,468

DEFERRED INCOME TAXES
5,298

4,981

THE COCA-COLA COMPANY SHAREOWNERS' EQUITY
 
 
Common stock, $0.25 par value; Authorized — 11,200 shares;
Issued — 7,040 and 7,040 shares, respectively
1,760

1,760

Capital surplus
11,990

11,379

Reinvested earnings
59,978

58,045

Accumulated other comprehensive income (loss)
(4,083
)
(3,385
)
Treasury stock, at cost — 2,606 and 2,571 shares, respectively
(37,422
)
(35,009
)
EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY
32,223

32,790

EQUITY ATTRIBUTABLE TO NONCONTROLLING INTERESTS
408

378

TOTAL EQUITY
32,631

33,168

TOTAL LIABILITIES AND EQUITY
$
89,511

$
86,174

Refer to Notes to Condensed Consolidated Financial Statements.

4



THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
 
Six Months Ended
 
June 28,
2013

June 29,
2012

OPERATING ACTIVITIES
 
 
Consolidated net income
$
4,463

$
4,867

Depreciation and amortization
947

955

Stock-based compensation expense
92

166

Deferred income taxes
100

53

Equity (income) loss — net of dividends
(132
)
(143
)
Foreign currency adjustments
159

(82
)
Significant (gains) losses on sales of assets — net
(23
)
(106
)
Other operating charges
83

99

Other items
22

32

Net change in operating assets and liabilities
(1,755
)
(1,663
)
Net cash provided by operating activities
3,956

4,178

INVESTING ACTIVITIES
 
 
Purchases of investments
(7,077
)
(8,617
)
Proceeds from disposals of investments
5,224

2,038

Acquisitions of businesses, equity method investments and nonmarketable securities
(308
)
(755
)
Proceeds from disposals of businesses, equity method investments and nonmarketable securities
690

11

Purchases of property, plant and equipment
(1,069
)
(1,305
)
Proceeds from disposals of property, plant and equipment
57

57

Other investing activities
(225
)
11

Net cash provided by (used in) investing activities
(2,708
)
(8,560
)
FINANCING ACTIVITIES
 
 
Issuances of debt
22,779

21,964

Payments of debt
(19,454
)
(18,101
)
Issuances of stock
951

995

Purchases of stock for treasury
(2,978
)
(2,610
)
Dividends
(1,249
)
(1,155
)
Other financing activities
87

55

Net cash provided by (used in) financing activities
136

1,148

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(420
)
(232
)
CASH AND CASH EQUIVALENTS
 
 
Net increase (decrease) during the period
964

(3,466
)
Balance at beginning of period
8,442

12,803

Balance at end of period
$
9,406

$
9,337

Refer to Notes to Condensed Consolidated Financial Statements.


5



THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K of The Coca-Cola Company for the year ended December 31, 2012.
When used in these notes, the terms "The Coca-Cola Company," "Company," "we," "us" or "our" mean The Coca-Cola Company and all entities included in our condensed consolidated financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 28, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Sales of our nonalcoholic ready-to-drink beverages are somewhat seasonal, with the second and third calendar quarters accounting for the highest sales volumes. The volume of sales in the beverage business may be affected by weather conditions.
Each of our interim reporting periods, other than the fourth interim reporting period, ends on the Friday closest to the last day of the corresponding quarterly calendar period. The second quarter of 2013 and 2012 ended on June 28, 2013, and June 29, 2012, respectively. Our fourth interim reporting period and our fiscal year end on December 31 regardless of the day of the week on which December 31 falls.
Effective January 1, 2013, the Company transferred our India and South West Asia business unit from the Eurasia and Africa operating segment to the Pacific operating segment. Accordingly, these and certain other amounts in the prior year's condensed consolidated financial statements and notes have been revised to conform to the current year presentation.
Advertising Costs
The Company's accounting policy related to advertising costs for annual reporting purposes, as disclosed in Note 1 of our 2012 Annual Report on Form 10-K, is to expense production costs of print, radio, television and other advertisements as of the first date the advertisements take place. All other marketing expenditures are expensed in the annual period in which the expenditure is incurred.
For interim reporting purposes, we allocate our estimated full year marketing expenditures that benefit multiple interim periods to each of our interim reporting periods. We use the proportion of each interim period's actual unit case volume to the estimated full year unit case volume as the basis for the allocation. This methodology results in our marketing expenditures being recognized at a standard rate per unit case. At the end of each interim reporting period, we review our estimated full year unit case volume and our estimated full year marketing expenditures in order to evaluate if a change in estimate is necessary. The impact of any changes in these full year estimates is recognized in the interim period in which the change in estimate occurs. Our full year marketing expenditures are not impacted by this interim accounting policy.

6



NOTE 2: ACQUISITIONS AND DIVESTITURES
Acquisitions
During the six months ended June 28, 2013, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $308 million, which primarily included our acquisition of the majority of the remaining outstanding shares of Fresh Trading Ltd. ("innocent") and bottling operations in Myanmar. The Company previously accounted for our investment in innocent under the equity method of accounting. We remeasured our equity interest in innocent to fair value upon the close of the transaction. The resulting gain on the remeasurement was not significant to our condensed consolidated financial statements.
During the six months ended June 29, 2012, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $755 million, which primarily included investments in the existing beverage business of Aujan Industries Company J.S.C. ("Aujan"), one of the largest independent beverage companies in the Middle East, and our acquisition of bottling operations in Vietnam, Cambodia and Guatemala.
The Company transferred $531 million during the six months ended June 29, 2012, under its definitive agreement with Aujan in exchange for an ownership interest of 50 percent in the Aujan entity that holds the rights to Aujan-owned brands in certain territories and an ownership interest of 49 percent in Aujan's bottling and distribution operations in certain territories. The Company's investments in Aujan are being accounted for under the equity method of accounting.
Divestitures
During the six months ended June 28, 2013, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $690 million, which primarily included the sale of a majority ownership interest in our previously consolidated bottling operations in the Philippines ("Philippine bottling operations") to Coca-Cola FEMSA, S.A.B. de C.V. ("Coca-Cola FEMSA"), an equity method investee. The Company now accounts for our ownership interest in the Philippine bottling operations under the equity method of accounting. Following this transaction, we remeasured our investment in the Philippine bottling operations to fair value taking into consideration the sale price of the majority ownership interest. Coca-Cola FEMSA has an option to purchase our remaining ownership interest in the Philippine bottling operations at any time during the seven years following closing based on the initial purchase price plus a defined return. Coca-Cola FEMSA also has an option exercisable during the sixth year after closing to sell its ownership interest back to the Company at a price not to exceed the initial purchase price.
During the six months ended June 29, 2012, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $11 million. None of the disposals were individually significant.
Assets and Liabilities Held for Sale
On December 13, 2012, the Company and Coca-Cola FEMSA executed a share purchase agreement for the sale of a majority ownership interest in our consolidated Philippine bottling operations. This transaction was completed on January 25, 2013. As of December 31, 2012, our Philippine bottling operations met the criteria to be classified as held for sale, and we were required to record their assets and liabilities at the lower of carrying value or fair value less any costs to sell based on the agreed-upon sale price. The Company recorded a total loss of $107 million, primarily during the fourth quarter of 2012, on the sale of our Philippine bottling operations. Refer to the table below for details of our Philippine bottling assets and liabilities that were classified as held for sale as of December 31, 2012.
On December 17, 2012, the Company entered into an agreement with several parties to combine our consolidated bottling operations in Brazil ("Brazilian bottling operations") with an independent bottler in Brazil in a transaction involving a disposition of shares for cash and an exchange of shares for a minority ownership interest in the newly combined entity resulting, upon completion, in the deconsolidation of our Brazilian bottling operations. As a result, our Brazilian bottling operations met the criteria to be classified as held for sale. We were not required to record their assets and liabilities at fair value less any costs to sell because their fair value exceeded our carrying value as of June 28, 2013, and December 31, 2012. This transaction was completed on July 3, 2013.

7



The following table presents information related to the major classes of assets and liabilities that were classified as held for sale in our condensed consolidated balance sheets as of June 28, 2013, and December 31, 2012 (in millions):
 
June 28, 2013

 
December 31, 2012
 
Brazilian
Bottling Operations

 
Brazilian
Bottling Operations

 
Philippine Bottling Operations

 
Total Bottling Operations
Held for Sale as of December 31, 2012

Cash, cash equivalents and short-term investments
$
162

 
$
45

 
$
133

 
$
178

Trade accounts receivable, less allowances
59

 
88

 
108

 
196

Inventories
92

 
85

 
187

 
272

Prepaid expenses and other assets
118

 
174

 
223

 
397

Other assets
144

 
128

 
7

 
135

Property, plant and equipment — net
428

 
419

 
841

 
1,260

Bottlers' franchise rights with indefinite lives
122

 
130

 
341

 
471

Goodwill
20

 
22

 
148

 
170

Other intangible assets

 
1

 

 
1

Allowance for reduction of assets held for sale

 

 
(107
)
 
(107
)
Total assets1
$
1,145

 
$
1,092

 
$
1,881

 
$
2,973

Accounts payable and accrued expenses
$
141

 
$
157

 
$
241

 
$
398

Loans and notes payable
58

 
6

 

 
6

Current maturities of long-term debt
28

 
28

 

 
28

Accrued income taxes
1

 
4

 
(4
)
 

Long-term debt
157

 
147

 

 
147

Other liabilities
64

 
75

 
20

 
95

Deferred income taxes
19

 
20

 
102

 
122

Total liabilities1
$
468

 
$
437

 
$
359

 
$
796

1 
The assets and liabilities of our Philippine and Brazilian bottling operations were included in our Bottling Investments operating segment during the period(s) in which they were consolidated entities of the Company. Refer to Note 15.
We determined that our Philippine and Brazilian bottling operations did not meet the criteria to be classified as discontinued operations, primarily due to the continued significant involvement we anticipate having in these operations following each transaction.
NOTE 3: INVESTMENTS
Investments in debt and marketable equity securities, other than investments accounted for under the equity method, are classified as trading, available-for-sale or held-to-maturity. Our marketable equity investments are classified as either trading or available-for-sale with their cost basis determined by the specific identification method. Realized and unrealized gains and losses on trading securities and realized gains and losses on available-for-sale securities are included in net income. Unrealized gains and losses, net of deferred taxes, on available-for-sale securities are included in our condensed consolidated balance sheets as a component of accumulated other comprehensive income ("AOCI"), except for the change in fair value attributable to the currency risk being hedged. Refer to Note 5 for additional information related to the Company's fair value hedges of available-for-sale securities.
Our investments in debt securities are carried at either amortized cost or fair value. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity. Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale.

8



Trading Securities
As of June 28, 2013, and December 31, 2012, our trading securities had a fair value of $277 million and $266 million, respectively, and consisted primarily of equity securities. The Company had net unrealized gains on trading securities of $30 million and $19 million as of June 28, 2013, and December 31, 2012, respectively. The Company's trading securities were included in the following line items in our condensed consolidated balance sheets (in millions):
 
June 28,
2013

December 31,
2012

Marketable securities
$
195

$
184

Other assets
82

82

Total trading securities
$
277

$
266

Available-for-Sale and Held-to-Maturity Securities
As of June 28, 2013, available-for-sale securities consisted of the following (in millions):
 
 
Gross Unrealized
 
 
Cost

Gains

Losses

Fair Value

Available-for-sale securities:1
 
 
 
 
Equity securities
$
949

$
544

$
(19
)
$
1,474

Debt securities
3,233

34

(22
)
3,245

Total available-for-sale securities
$
4,182

$
578

$
(41
)
$
4,719

1 Refer to Note 14 for additional information related to the estimated fair value.
As of December 31, 2012, available-for-sale securities consisted of the following (in millions):
 
 
Gross Unrealized
 
 
Cost

Gains

Losses

Fair Value

Available-for-sale securities:1
 
 
 
 
Equity securities
$
957

$
441

$
(10
)
$
1,388

Debt securities
3,169

46

(10
)
3,205

Total available-for-sale securities
$
4,126

$
487

$
(20
)
$
4,593

1 Refer to Note 14 for additional information related to the estimated fair value.
The sale and/or maturity of available-for-sale securities resulted in the following activity during the three and six months ended June 28, 2013, and June 29, 2012 (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 28,
2013

June 29,
2012

 
June 28,
2013

June 29,
2012

Gross gains
$
3

$
11

 
$
8

$
12

Gross losses
(5
)

 
(10
)
(2
)
Proceeds
1,121

1,611

 
2,258

2,842

The Company uses one of its insurance captives to reinsure group annuity insurance contracts that cover the pension obligations of certain of our European pension plans. In accordance with local insurance regulations, our insurance captive is required to meet and maintain minimum solvency capital requirements. The Company elected to invest its solvency capital in a portfolio of available-for-sale securities, which are classified in the line item other assets in our condensed consolidated balance sheets because the assets are not available to satisfy our current obligations. As of June 28, 2013, and December 31, 2012, the Company's available-for-sale securities included solvency capital funds of $454 million and $451 million, respectively.

9



The Company's available-for-sale securities were included in the following line items in our condensed consolidated balance sheets (in millions):
 
June 28,
2013

December 31,
2012

Cash and cash equivalents
$

$
9

Marketable securities
2,978

2,908

Other investments, principally bottling companies
1,168

1,087

Other assets
573

589

Total available-for-sale securities
$
4,719

$
4,593

The contractual maturities of these available-for-sale securities as of June 28, 2013, were as follows (in millions):
 
Cost

Fair Value

Within 1 year
$
1,210

$
1,218

After 1 year through 5 years
1,541

1,544

After 5 years through 10 years
141

146

After 10 years
341

337

Equity securities
949

1,474

Total available-for-sale securities
$
4,182

$
4,719

The Company expects that actual maturities may differ from the contractual maturities above because borrowers have the right to call or prepay certain obligations.
As of June 28, 2013, and December 31, 2012, the Company did not have any held-to-maturity securities.
Cost Method Investments
Cost method investments are initially recorded at cost, and we record dividend income when applicable dividends are declared. Cost method investments are reported as other investments in our condensed consolidated balance sheets, and dividend income from cost method investments is reported in other income (loss) — net in our condensed consolidated statements of income. We review all of our cost method investments quarterly to determine if impairment indicators are present; however, we are not required to determine the fair value of these investments unless impairment indicators exist. When impairment indicators exist, we generally use discounted cash flow analyses to determine the fair value. We estimate that the fair values of our cost method investments approximated or exceeded their carrying values as of June 28, 2013, and December 31, 2012. Our cost method investments had a carrying value of $150 million and $145 million as of June 28, 2013, and December 31, 2012, respectively.
NOTE 4: INVENTORIES
Inventories consist primarily of raw materials and packaging (which include ingredients and supplies) and finished goods (which include concentrates and syrups in our concentrate operations and finished beverages in our finished product operations). Inventories are valued at the lower of cost or market. We determine cost on the basis of the average cost or first-in, first-out methods. Inventories consisted of the following (in millions):
 
June 28,
2013

December 31,
2012

Raw materials and packaging
$
1,909

$
1,773

Finished goods
1,397

1,171

Other
337

320

Total inventories
$
3,643

$
3,264


10



NOTE 5: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company's financial performance and are referred to as "market risks." When deemed appropriate, our Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are foreign currency exchange rate risk, commodity price risk and interest rate risk.
The Company uses various types of derivative instruments including, but not limited to, forward contracts, commodity futures contracts, option contracts, collars and swaps. Forward contracts and commodity futures contracts are agreements to buy or sell a quantity of a currency or commodity at a predetermined future date, and at a predetermined rate or price. An option contract is an agreement that conveys the purchaser the right, but not the obligation, to buy or sell a quantity of a currency or commodity at a predetermined rate or price during a period or at a time in the future. A collar is a strategy that uses a combination of options to limit the range of possible positive or negative returns on an underlying asset or liability to a specific range, or to protect expected future cash flows. To do this, an investor simultaneously buys a put option and sells (writes) a call option, or alternatively buys a call option and sells (writes) a put option. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. We do not enter into derivative financial instruments for trading purposes.
All derivatives are carried at fair value in our condensed consolidated balance sheets in the following line items, as applicable: prepaid expenses and other assets; other assets; accounts payable and accrued expenses; and other liabilities. The carrying values of the derivatives reflect the impact of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as applicable. These master netting agreements allow the Company to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same counterparty.
The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationships. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded in the same line item in our condensed consolidated statements of income as the changes in the fair values of the hedged items attributable to the risk being hedged. The changes in the fair values of derivatives that have been designated and qualify as cash flow hedges or hedges of net investments in foreign operations are recorded in AOCI and are reclassified into the line item in our condensed consolidated statement of income in which the hedged items are recorded in the same period the hedged items affect earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in fair values of derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized into earnings.
For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company formally assesses, both at inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a financial instrument's change in fair value is immediately recognized into earnings.
The Company determines the fair values of its derivatives based on quoted market prices or pricing models using current market rates. Refer to Note 14. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or other financial indices. The Company does not view the fair values of its derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying hedged transactions or other exposures. Virtually all of our derivatives are straightforward over-the-counter instruments with liquid markets.

11



The following table presents the fair values of the Company's derivative instruments that were designated and qualified as part of a hedging relationship (in millions):
 
 
Fair Value1,2
Derivatives Designated as
Hedging Instruments
Balance Sheet Location1
June 28,
2013

December 31, 2012

Assets
 
 
 
Foreign currency contracts
Prepaid expenses and other assets
$
298

$
149

Foreign currency contracts
Other assets
70


Interest rate contracts
Prepaid expenses and other assets
52

7

Interest rate contracts
Other assets
284

335

Total assets
 
$
704

$
491

Liabilities
 
 
 
Foreign currency contracts
Accounts payable and accrued expenses
$
49

$
55

Foreign currency contracts
Other liabilities
22


Commodity contracts
Accounts payable and accrued expenses
1

1

Interest rate contracts
Other liabilities

6

Total liabilities
 
$
72

$
62

1 All of the Company's derivative instruments are carried at fair value in our condensed consolidated balance sheets after considering the impact of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as applicable. Current disclosure requirements mandate that derivatives must also be disclosed without reflecting the impact of master netting agreements and cash collateral. Refer to Note 14 for the net presentation of the Company's derivative instruments.
2 Refer to Note 14 for additional information related to the estimated fair value.
The following table presents the fair values of the Company's derivative instruments that were not designated as hedging instruments (in millions):
 
 
Fair Value1,2
Derivatives Not Designated as
Hedging Instruments
Balance Sheet Location1
June 28,
2013

December 31, 2012

Assets
 
 
 
Foreign currency contracts
Prepaid expenses and other assets
$
30

$
19

Foreign currency contracts
Other assets
156

42

Commodity contracts
Prepaid expenses and other assets
64

72

Other derivative instruments
Prepaid expenses and other assets
1

6

Total assets
 
$
251

$
139

Liabilities
 
 
 
Foreign currency contracts
Accounts payable and accrued expenses
$
52

$
24

Foreign currency contracts
Other liabilities
11

1

Commodity contracts
Accounts payable and accrued expenses
55

43

Commodity contracts
Other liabilities
3

1

Interest rate contracts
Other liabilities
3


Other derivative instruments
Accounts payable and accrued expenses
5

2

Total liabilities
 
$
129

$
71

1 All of the Company's derivative instruments are carried at fair value in our condensed consolidated balance sheets after considering the impact of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as applicable. Current disclosure requirements mandate that derivatives must also be disclosed without reflecting the impact of master netting agreements and cash collateral. Refer to Note 14 for the net presentation of the Company's derivative instruments.
2 Refer to Note 14 for additional information related to the estimated fair value.

12



Credit Risk Associated with Derivatives
We have established strict counterparty credit guidelines and enter into transactions only with financial institutions of investment grade or better. We monitor counterparty exposures regularly and review any downgrade in credit rating immediately. If a downgrade in the credit rating of a counterparty were to occur, we have provisions requiring collateral in the form of U.S. government securities for substantially all of our transactions. To mitigate presettlement risk, minimum credit standards become more stringent as the duration of the derivative financial instrument increases. In addition, the Company's master netting agreements reduce credit risk by permitting the Company to net settle for transactions with the same counterparty. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.
Cash Flow Hedging Strategy
The Company uses cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates, commodity prices or interest rates. The changes in the fair values of derivatives designated as cash flow hedges are recorded in AOCI and are reclassified into the line item in our condensed consolidated statement of income in which the hedged items are recorded in the same period the hedged items affect earnings. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from AOCI into earnings. The Company did not discontinue any cash flow hedging relationships during the six months ended June 28, 2013, or June 29, 2012. The maximum length of time for which the Company hedges its exposure to future cash flows is typically three years.
The Company maintains a foreign currency cash flow hedging program to reduce the risk that our eventual U.S. dollar net cash inflows from sales outside the United States and U.S. dollar net cash outflows from procurement activities will be adversely affected by fluctuations in foreign currency exchange rates. We enter into forward contracts and purchase foreign currency options (principally euros and Japanese yen) and collars to hedge certain portions of forecasted cash flows denominated in foreign currencies. When the U.S. dollar strengthens against the foreign currencies, the decline in the present value of future foreign currency cash flows is partially offset by gains in the fair value of the derivative instruments. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash flows is partially offset by losses in the fair value of the derivative instruments. The total notional values of derivatives that were designated and qualified for the Company's foreign currency cash flow hedging program were $6,473 million and $4,715 million as of June 28, 2013, and December 31, 2012, respectively.
The Company has entered into commodity futures contracts and other derivative instruments on various commodities to mitigate the price risk associated with forecasted purchases of materials used in our manufacturing process. These derivative instruments have been designated and qualify as part of the Company's commodity cash flow hedging program. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of certain commodities. The total notional value of derivatives that were designated and qualified for the Company's commodity cash flow hedging program was $17 million as of June 28, 2013, and December 31, 2012.
Our Company monitors our mix of short-term debt and long-term debt regularly. From time to time, we manage our risk to interest rate fluctuations through the use of derivative financial instruments. The Company has entered into interest rate swap agreements and has designated these instruments as part of the Company's interest rate cash flow hedging program. The objective of this hedging program is to mitigate the risk of adverse changes in benchmark interest rates on the Company's future interest payments. The total notional values of these interest rate swap agreements that were designated and qualified for the Company's interest rate cash flow hedging program were $2,778 million and $1,764 million as of June 28, 2013, and December 31, 2012, respectively.

13



The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the three months ended June 28, 2013 (in millions):
 
Gain (Loss)
Recognized
in Other
Comprehensive
Income ("OCI")

Location of Gain (Loss)
Recognized in Income1
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)

Gain (Loss)
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)

Foreign currency contracts
$
89

Net operating revenues
$
51

$
1

Foreign currency contracts
14

Cost of goods sold
8


Interest rate contracts
138

Interest expense
(3
)

Commodity contracts
(1
)
Cost of goods sold
(1
)

Total
$
240

 
$
55

$
1

1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the six months ended June 28, 2013 (in millions):
 
Gain (Loss)
Recognized
in OCI

Location of Gain (Loss)
Recognized in Income1
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)

Gain (Loss)
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)

 
Foreign currency contracts
$
220

Net operating revenues
$
70

$
1

 
Foreign currency contracts
35

Cost of goods sold
10


 
Interest rate contracts
151

Interest expense
(6
)

2 
Commodity contracts
1

Cost of goods sold
(1
)

 
Total
$
407

 
$
73

$
1

 
1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
2 Includes a de minimis amount of ineffectiveness in the hedging relationship.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the three months ended June 29, 2012 (in millions):
 
Gain (Loss)
Recognized
in OCI

Location of Gain (Loss)
Recognized in Income1
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)

Gain (Loss)
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)

Foreign currency contracts
$
72

Net operating revenues
$
(5
)
$
1

Foreign currency contracts
(14
)
Cost of goods sold
(6
)

Interest rate contracts

Interest expense
(3
)

Commodity contracts
(3
)
Cost of goods sold
(1
)

Total
$
55

 
$
(15
)
$
1

1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the six months ended June 29, 2012 (in millions):
 
Gain (Loss)
Recognized
in OCI

Location of Gain (Loss)
Recognized in Income1
Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)

Gain (Loss)
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)

Foreign currency contracts
$
71

Net operating revenues
$
(26
)
$
2

Foreign currency contracts
12

Cost of goods sold
(12
)

Interest rate contracts

Interest expense
(6
)

Commodity contracts
(4
)
Cost of goods sold


Total
$
79

 
$
(44
)
$
2

1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.

14



As of June 28, 2013, the Company estimates that it will reclassify into earnings during the next 12 months approximately $228 million of gains from the pretax amount recorded in AOCI as the anticipated cash flows occur.
Fair Value Hedging Strategy
The Company uses interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in benchmark interest rates. The changes in fair values of derivatives designated as fair value hedges and the offsetting changes in fair values of the hedged items are recognized in earnings. The ineffective portions of these hedges are immediately recognized in earnings. As of June 28, 2013, such adjustments had cumulatively increased the carrying value of our long-term debt by $106 million. When a derivative is no longer designated as a fair value hedge for any reason, including termination and maturity, the remaining difference between the carrying value of the hedged item at that time and the par value of the hedged item is amortized to earnings over the remaining life of the hedged item, or immediately if the hedged item has matured. The total notional values of derivatives that related to our fair value hedges of this type were $6,550 million and $6,700 million as of June 28, 2013, and December 31, 2012, respectively.
The Company also uses fair value hedges to minimize exposure to changes in the fair value of certain available-for-sale securities from fluctuations in foreign currency exchange rates. The changes in fair values of derivatives designated as fair value hedges and the offsetting changes in fair values of the hedged items are recognized in earnings. As a result, any difference is reflected in earnings as ineffectiveness. The total notional values of derivatives that related to our fair value hedges of this type were $899 million and $850 million as of June 28, 2013, and December 31, 2012, respectively.
The following table summarizes the pretax impact that changes in the fair values of derivatives designated as fair value hedges had on earnings during the three months ended June 28, 2013, and June 29, 2012 (in millions):
Fair Value Hedging Instruments
Location of Gain (Loss)
Recognized in Income
Gain (Loss)
Recognized in Income
 
June 28,
2013

June 29,
2012

Interest rate swaps
Interest expense
$
(116
)
$
90

Fixed-rate debt
Interest expense
131

(90
)
Net impact to interest expense
 
$
15

$

Foreign currency contracts
Other income (loss) — net
$
(17
)
$
(25
)
Available-for-sale securities
Other income (loss) — net
14

23

Net impact to other income (loss) — net
 
$
(3
)
$
(2
)
Net impact of fair value hedging instruments
 
$
12

$
(2
)
The following table summarizes the pretax impact that changes in the fair values of derivatives designated as fair value hedges had on earnings during the six months ended June 28, 2013, and June 29, 2012 (in millions):
Fair Value Hedging Instruments
Location of Gain (Loss)
Recognized in Income
Gain (Loss)
Recognized in Income
 
June 28,
2013

June 29,
2012

Interest rate swaps
Interest expense
$
(151
)
$
69

Fixed-rate debt
Interest expense
176

(51
)
Net impact to interest expense
 
$
25

$
18

Foreign currency contracts
Other income (loss) — net
$
(7
)
$
15

Available-for-sale securities
Other income (loss) — net
(2
)
(16
)
Net impact to other income (loss) — net
 
$
(9
)
$
(1
)
Net impact of fair value hedging instruments
 
$
16

$
17


15



Hedges of Net Investments in Foreign Operations Strategy
The Company uses forward contracts to protect the value of our investments in a number of foreign subsidiaries. For derivative instruments that are designated and qualify as hedges of net investments in foreign operations, the changes in fair values of the derivative instruments are recognized in net foreign currency translation gain (loss), a component of AOCI, to offset the changes in the values of the net investments being hedged. Any ineffective portions of net investment hedges are reclassified from AOCI into earnings during the period of change. The total notional values of derivatives that were designated and qualified for the Company's net investments hedging program were $1,491 million and $1,718 million as of June 28, 2013, and December 31, 2012, respectively.
The following table presents the pretax impact that changes in the fair values of derivatives designated as net investment hedges had on AOCI during the three and six months ended June 28, 2013, and June 29, 2012 (in millions):
 
Gain (Loss) Recognized in OCI
 
Three Months Ended
 
Six Months Ended
 
June 28,
2013

June 29,
2012

 
June 28,
2013

June 29,
2012

Foreign currency contracts
$
87

$
136

 
$
30

$
42

The Company did not reclassify any deferred gains or losses related to net investment hedges from AOCI to earnings during the three and six months ended June 28, 2013, and June 29, 2012. In addition, the Company did not have any ineffectiveness related to net investment hedges during the three and six months ended June 28, 2013, and June 29, 2012.
Economic (Nondesignated) Hedging Strategy
In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives as economic hedges of foreign currency, interest rate and commodity exposure. Although these derivatives were not designated and/or did not qualify for hedge accounting, they are effective economic hedges. The changes in fair values of economic hedges are immediately recognized into earnings.
The Company uses foreign currency economic hedges to offset the earnings impact that fluctuations in foreign currency exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies. The changes in fair values of economic hedges used to offset those monetary assets and liabilities are immediately recognized into earnings in the line item other income (loss) — net in our condensed consolidated statements of income. In addition, we use foreign currency economic hedges to minimize the variability in cash flows associated with fluctuations in foreign currency exchange rates. The changes in fair values of economic hedges used to offset the variability in U.S. dollar net cash flows are recognized into earnings in the line items net operating revenues and cost of goods sold in our condensed consolidated statements of income, as applicable. The total notional values of derivatives related to our foreign currency economic hedges were $4,263 million and $3,865 million as of June 28, 2013, and December 31, 2012, respectively.
The Company also uses certain derivatives as economic hedges to mitigate the price risk associated with the purchase of materials used in the manufacturing process and for vehicle fuel. The changes in fair values of these economic hedges are immediately recognized into earnings in the line items cost of goods sold and selling, general and administrative expenses in our condensed consolidated statements of income, as applicable. The total notional values of derivatives related to our economic hedges of this type were $1,571 million and $1,084 million as of June 28, 2013, and December 31, 2012, respectively.

16



The following tables present the pretax impact that changes in the fair values of derivatives not designated as hedging instruments had on earnings during the three and six months ended June 28, 2013, and June 29, 2012, respectively (in millions):
 
 
Three Months Ended
Derivatives Not Designated
as Hedging Instruments
Location of Gain (Loss)
Recognized in Income
June 28,
2013

June 29,
2012

Foreign currency contracts
Net operating revenues
$
6

$
6

Foreign currency contracts
Other income (loss) — net
6

(184
)
Foreign currency contracts
Cost of goods sold
2

3

Interest rate contracts
Interest expense
(3
)

Commodity contracts
Net operating revenues
(1
)

Commodity contracts
Cost of goods sold
(75
)
(50
)
Commodity contracts
Selling, general and administrative expenses
(2
)
(26
)
Other derivative instruments
Selling, general and administrative expenses
4

2

Total
 
$
(63
)
$
(249
)
 
 
Six Months Ended
Derivatives Not Designated
as Hedging Instruments
Location of Gain (Loss)
Recognized in Income
June 28,
2013

June 29,
2012

Foreign currency contracts
Net operating revenues
$
4

$
(3
)
Foreign currency contracts
Other income (loss) — net
73

(72
)
Foreign currency contracts
Cost of goods sold

3

Interest rate contracts
Interest expense
(3
)

Commodity contracts
Net operating revenues
(1
)

Commodity contracts
Cost of goods sold
(144
)
(44
)
Commodity contracts
Selling, general and administrative expenses
(2
)
(7
)
Other derivative instruments
Selling, general and administrative expenses
24

18

Total
 
$
(49
)
$
(105
)
NOTE 6: DEBT AND BORROWING ARRANGEMENTS
During the three months ended June 28, 2013, the Company extinguished $1,254 million of long-term debt prior to maturity and recorded a charge of $23 million in the line item interest expense in our condensed consolidated statement of income. The general terms of the notes that were extinguished are as follows:
$225 million total principal amount of notes due August 15, 2013, at a fixed interest rate of 5.0 percent;
$675 million total principal amount of notes due March 3, 2014, at a fixed interest rate of 7.375 percent; and
$354 million total principal amount of notes due March 1, 2015, at a fixed interest rate of 4.25 percent.
During the first quarter of 2013, the Company issued $2,500 million of long-term debt. The general terms of the notes issued are as follows:
$500 million total principal amount of notes due March 5, 2015, at a variable interest rate equal to the three-month London Interbank Offered Rate minus 0.02 percent;
$1,250 million total principal amount of notes due April 1, 2018, at a fixed interest rate of 1.15 percent; and
$750 million total principal amount of notes due April 1, 2023, at a fixed interest rate of 2.5 percent.

17



NOTE 7: COMMITMENTS AND CONTINGENCIES
Guarantees
As of June 28, 2013, we were contingently liable for guarantees of indebtedness owed by third parties of $644 million, of which $290 million related to variable interest entities ("VIEs"). These guarantees are primarily related to third-party customers, bottlers, vendors and container manufacturing operations and have arisen through the normal course of business. These guarantees have various terms, and none of these guarantees were individually significant. The amount represents the maximum potential future payments that we could be required to make under the guarantees; however, we do not consider it probable that we will be required to satisfy these guarantees.
We believe our exposure to concentrations of credit risk is limited due to the diverse geographic areas covered by our operations.
Legal Contingencies
The Company is involved in various legal proceedings. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. Management believes that the total liabilities to the Company that may arise as a result of currently pending legal proceedings will not have a material adverse effect on the Company taken as a whole.
During the period from 1970 to 1981, our Company owned Aqua-Chem, Inc., now known as Cleaver-Brooks, Inc. ("Aqua-Chem"). During that time, the Company purchased over $400 million of insurance coverage, which also insures Aqua-Chem for some of its prior and future costs for certain product liability and other claims. A division of Aqua-Chem manufactured certain boilers that contained gaskets that Aqua-Chem purchased from outside suppliers. Several years after our Company sold this entity, Aqua-Chem received its first lawsuit relating to asbestos, a component of some of the gaskets. Aqua-Chem was first named as a defendant in asbestos lawsuits in or around 1985 and currently has approximately 40,000 active claims pending against it. In September 2002, Aqua-Chem notified our Company that it believed we were obligated for certain costs and expenses associated with its asbestos litigations. Aqua-Chem demanded that our Company reimburse it for approximately $10 million for out-of-pocket litigation-related expenses. Aqua-Chem also demanded that the Company acknowledge a continuing obligation to Aqua-Chem for any future liabilities and expenses that are excluded from coverage under the applicable insurance or for which there is no insurance. Our Company disputes Aqua-Chem's claims, and we believe we have no obligation to Aqua-Chem for any of its past, present or future liabilities, costs or expenses. Furthermore, we believe we have substantial legal and factual defenses to Aqua-Chem's claims. The parties entered into litigation in Georgia to resolve this dispute, which was stayed by agreement of the parties pending the outcome of litigation filed in Wisconsin by certain insurers of Aqua-Chem. In that case, five plaintiff insurance companies filed a declaratory judgment action against Aqua-Chem, the Company and 16 defendant insurance companies seeking a determination of the parties' rights and liabilities under policies issued by the insurers and reimbursement for amounts paid by plaintiffs in excess of their obligations. During the course of the Wisconsin insurance coverage litigation, Aqua-Chem and the Company reached settlements with several of the insurers, including plaintiffs, who have or will pay funds into an escrow account for payment of costs arising from the asbestos claims against Aqua-Chem. On July 24, 2007, the Wisconsin trial court entered a final declaratory judgment regarding the rights and obligations of the parties under the insurance policies issued by the remaining defendant insurers, which judgment was not appealed. The judgment directs, among other things, that each insurer whose policy is triggered is jointly and severally liable for 100 percent of Aqua-Chem's losses up to policy limits. The court's judgment concluded the Wisconsin insurance coverage litigation. The Georgia litigation remains subject to the stay agreement. The Company and Aqua-Chem continued to negotiate with various insurers that were defendants in the Wisconsin insurance coverage litigation over those insurers' obligations to defend and indemnify Aqua-Chem for the asbestos-related claims. The Company anticipated that a final settlement with three of those insurers (the "Chartis insurers") would be finalized in May 2011, but such insurers repudiated their settlement commitments and, as a result, Aqua-Chem and the Company filed suit against them in Wisconsin state court to enforce the coverage-in-place settlement or, in the alternative, to obtain a declaratory judgment validating Aqua-Chem and the Company's interpretation of the court's judgment in the Wisconsin insurance coverage litigation. In February 2012, the parties filed and argued a number of cross-motions for summary judgment related to the issues of the enforceability of the settlement agreement and the exhaustion of policies underlying those of the Chartis insurers. The court granted defendants' motions for summary judgment that the 2011 settlement agreement and 2010 term sheet were not binding contracts, but denied their similar motions related to the plaintiffs' claims for promissory and/or equitable estoppel. On or about May 15, 2012, the parties entered into a mutually agreeable settlement/stipulation resolving two major issues: exhaustion of underlying coverage and control of defense. On or about January 10, 2013, the parties reached a settlement of the estoppel claims and all of the remaining coverage issues, with the exception of one disputed issue relating to the scope of the Chartis insurers' defense obligations in two policy years. The trial court granted summary judgment in favor of the Company and Aqua-Chem on that one open issue and entered a final appealable judgment to that effect following the parties' settlement. On January 23, 2013, the Chartis insurers filed a

18



notice of appeal of the trial court's summary judgment ruling. Whatever the outcome of that appeal, these three insurance companies will remain subject to the court's judgment in the Wisconsin insurance coverage litigation.
The Company is unable to estimate at this time the amount or range of reasonably possible loss it may ultimately incur as a result of asbestos-related claims against Aqua-Chem. The Company believes that assuming (a) the defense and indemnity costs for the asbestos-related claims against Aqua-Chem in the future are in the same range as during the past five years, and (b) the various insurers that cover the asbestos-related claims against Aqua-Chem remain solvent, regardless of the outcome of the coverage-in-place settlement litigation but taking into account the issues resolved to date, insurance coverage for substantially all defense and indemnity costs would be available for the next 10 to 15 years.
Tax Audits
The Company is involved in various tax matters, with respect to some of which the outcome is uncertain. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based upon one of the following conditions: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the "more likely than not" recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is "more likely than not" to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. Refer to Note 13.
Risk Management Programs
The Company has numerous global insurance programs in place to help protect the Company from the risk of loss. In general, we are self-insured for large portions of many different types of claims; however, we do use commercial insurance above our self-insured retentions to reduce the Company's risk of catastrophic loss. Our reserves for the Company's self-insured losses are estimated using actuarial methods and assumptions of the insurance industry, adjusted for our specific expectations based on our claim history. Our self-insurance reserves totaled $522 million and $508 million as of June 28, 2013, and December 31, 2012, respectively.
NOTE 8: COMPREHENSIVE INCOME
The following table summarizes the allocation of total comprehensive income between shareowners of The Coca-Cola Company and noncontrolling interests (in millions):
 
Six Months Ended June 28, 2013
 
Shareowners of
The Coca-Cola Company

Noncontrolling
Interests

Total

Consolidated net income
$
4,427

$
36

$
4,463

Other comprehensive income:
 
 
 
Net foreign currency translation adjustment
(1,006
)
25

(981
)
Net gain (loss) on derivatives1
204


204

Net unrealized gain (loss) on available-for-sale securities2
26


26

Net change in pension and other benefit liabilities
78


78

Total comprehensive income
$
3,729

$
61

$
3,790

1 Refer to Note 5 for information related to the net gain or loss on derivative instruments classified as cash flow hedges.
2 Refer to Note 3 for information related to the net unrealized gain or loss on available-for-sale securities.

19



The following tables present OCI attributable to shareowners of The Coca-Cola Company, including our proportionate share of equity method investees' OCI (in millions):
Three Months Ended June 28, 2013
Before-Tax Amount

 
Income Tax

 
After-Tax Amount

Foreign currency translation adjustments:
 
 
 
 
 
Translation adjustment arising during the period
$
(1,004
)
 
$
(47
)
 
$
(1,051
)
Reclassification adjustments recognized in net income
(2
)
 

 
(2
)
Net foreign currency translation adjustments
(1,006
)
 
(47
)
 
(1,053
)
Derivatives:
 
 
 
 
 
Unrealized gains (losses) arising during the period
240

 
(89
)
 
151

Reclassification adjustments recognized in net income
(55
)
 
21

 
(34
)
Net gain (loss) on derivatives1
185

 
(68
)
 
117

Available-for-sale securities:
 
 
 
 
 
Unrealized gains (losses) arising during the period
39

 
(23
)
 
16

Reclassification adjustments recognized in net income
2

 

 
2

Net change in unrealized gain (loss) on available-for-sale securities2
41

 
(23
)
 
18

Pension and other benefit liabilities:
 
 
 
 
 
Net pension and other benefits arising during the period
18

 
(4
)
 
14

Reclassification adjustments recognized in net income
50

 
(18
)
 
32

Net change in pension and other benefit liabilities3
68

 
(22
)
 
46

Other comprehensive income (loss) attributable to The Coca-Cola Company
$
(712
)
 
$
(160
)
 
$
(872
)
1 
Refer to Note 5 for additional information related to the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments.
2 
Includes reclassification adjustments related to divestitures of certain available-for-sale securities. Refer to Note 3 for additional information related to these divestitures.
3 
Refer to Note 12 for additional information related to the Company's pension and other postretirement benefit liabilities.
Six Months Ended June 28, 2013
Before-Tax Amount

 
Income Tax

 
After-Tax Amount

Foreign currency translation adjustments:
 
 
 
 
 
Translation adjustment arising during the period
$
(679
)
 
$
(107
)
 
$
(786
)
Reclassification adjustments recognized in net income
(220
)
 

 
(220
)
Net foreign currency translation adjustments
(899
)
 
(107
)
 
(1,006
)
Derivatives:
 
 
 
 
 
Unrealized gains (losses) arising during the period
402

 
(153
)
 
249

Reclassification adjustments recognized in net income
(73
)
 
28

 
(45
)
Net gain (loss) on derivatives1
329

 
(125
)
 
204

Available-for-sale securities:
 
 
 
 
 
Unrealized gains (losses) arising during the period
44

 
(20
)
 
24

Reclassification adjustments recognized in net income
2

 

 
2

Net change in unrealized gain (loss) on available-for-sale securities2
46

 
(20
)
 
26

Pension and other benefit liabilities:
 
 
 
 
 
Net pension and other benefits arising during the period
25

 
(9
)
 
16

Reclassification adjustments recognized in net income
98

 
(36
)
 
62

Net change in pension and other benefit liabilities3
123

 
(45
)
 
78

Other comprehensive income (loss) attributable to The Coca-Cola Company
$
(401
)
 
$
(297
)
 
$
(698
)
1
Refer to Note 5 for additional information related to the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments.
2 
Includes reclassification adjustments related to divestitures of certain available-for-sale securities. Refer to Note 3 for additional information related to these divestitures.
3 
Refer to Note 12 for additional information related to the Company's pension and other postretirement benefit liabilities.

20



Three Months Ended June 29, 2012
Before-Tax Amount

 
Income Tax

 
After-Tax Amount

Foreign currency translation adjustments:
 
 
 
 
 
Translation adjustment arising during the period
$
(1,707
)
 
$
(10
)
 
$
(1,717
)
Reclassification adjustments recognized in net income
7

 

 
7

Net foreign currency translation adjustments
(1,700
)
 
(10
)
 
(1,710
)
Derivatives:
 
 
 
 
 
Unrealized gains (losses) arising during the period
40

 
(21
)
 
19

Reclassification adjustments recognized in net income
15

 
(6
)
 
9

Net gain (loss) on derivatives1
55

 
(27
)
 
28

Available-for-sale securities:
 
 
 
 
 
Unrealized gains (losses) arising during the period
113

 
(35
)
 
78

Reclassification adjustments recognized in net income
(12
)
 

 
(12
)
Net change in unrealized gain (loss) on available-for-sale securities2
101

 
(35
)
 
66

Pension and other benefit liabilities:
 
 
 
 
 
Net pension and other benefits arising during the period
7

 
1

 
8

Reclassification adjustments recognized in net income
22

 
(8
)
 
14

Net change in pension and other benefit liabilities3
29

 
(7
)
 
22

Other comprehensive income (loss) attributable to The Coca-Cola Company
$
(1,515
)
 
$
(79
)
 
$
(1,594
)
1 
Refer to Note 5 for additional information related to the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments.
2 
Includes reclassification adjustments related to divestitures of certain available-for-sale securities. Refer to Note 3 for additional information related to these divestitures.
3 
Refer to Note 12 for additional information related to the Company's pension and other postretirement benefit liabilities.
Six Months Ended June 29, 2012
Before-Tax Amount

 
Income Tax

 
After-Tax Amount

Foreign currency translation adjustments:
 
 
 
 
 
Translation adjustment arising during the period
$
(807
)
 
$
(31
)
 
$
(838
)
Reclassification adjustments recognized in net income
7

 

 
7

Net foreign currency translation adjustments
(800
)
 
(31
)
 
(831
)
Derivatives:
 
 
 
 
 
Unrealized gains (losses) arising during the period
63

 
(31
)
 
32

Reclassification adjustments recognized in net income
44

 
(17
)
 
27

Net gain (loss) on derivatives1
107

 
(48
)
 
59

Available-for-sale securities:
 
 
 
 
 
Unrealized gains (losses) arising during the period
268

 
(92
)
 
176

Reclassification adjustments recognized in net income
(10
)
 

 
(10
)
Net change in unrealized gain (loss) on available-for-sale securities2
258

 
(92
)
 
166

Pension and other benefit liabilities:
 
 
 
 
 
Net pension and other benefits arising during the period
(17
)
 

 
(17
)
Reclassification adjustments recognized in net income
44

 
(16
)
 
28

Net change in pension and other benefit liabilities3
27

 
(16
)
 
11

Other comprehensive income (loss) attributable to The Coca-Cola Company
$
(408
)
 
$
(187
)
 
$
(595
)
1
Refer to Note 5 for additional information related to the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments.
2
Includes reclassification adjustments related to divestitures of certain available-for-sale securities. Refer to Note 3 for additional information related to these divestitures.
3 
Refer to Note 12 for additional information related to the Company's pension and other postretirement benefit liabilities.

21



The following table presents the amounts and line items in our condensed consolidated statements of income where adjustments reclassified from AOCI into income were recorded during the three and six months ended June 28, 2013 (in millions):
 
 
Amount Reclassified from
AOCI into Income
 
Description of AOCI Component
Location of Gain (Loss)
Recognized in Income
Three Months Ended June 28, 2013

Six Months Ended June 28, 2013

 
Foreign currency translation adjustments:
 
 
 
 
Divestitures, deconsolidations and other
Other income (loss) — net
$
(2
)
$
(220
)
1 
 
Income before income taxes
$
(2
)
$
(220
)
 
 
Income taxes


 
 
Consolidated net income
$
(2
)
$
(220
)
 
Derivatives:
 
 
 
 
Foreign currency contracts
Net operating revenues
$
(51
)
$
(70
)
 
Foreign currency contracts
Cost of goods sold
(7
)
(9
)
 
Interest rate contracts
Interest expense
3

6

 
 
Income before income taxes
$
(55
)
$
(73
)
 
 
Income taxes
21

28

 
 
Consolidated net income
$
(34
)
$
(45
)
 
Available-for-sale securities:
 
 
 
 
Sale of securities
Other income (loss) — net
$
2

$
2

 
 
Income before income taxes
$
2

$
2

 
 
Income taxes


 
 
Consolidated net income
$
2

$
2

 
Pension and other benefit liabilities:
 
 
 
 
Insignificant items
Other income (loss) — net
$

$
(1
)
 
Amortization of net actuarial loss
*
52

105

 
Amortization of prior service cost (credit)
*
(2
)
(6
)
 
 
Income before income taxes
$
50

$
98

 
 
Income taxes
(18
)
(36
)
 
 
Consolidated net income
$
32

$
62

 
*
This component of AOCI is included in the Company's computation of net periodic benefit cost and is not reclassified out of AOCI into a single line item in our condensed consolidated statements of income in its entirety. Refer to Note 12 for additional information.
1 
Primarily related to the disposition of our Philippine bottling operations in January 2013. Refer to Note 2 for additional information related to this transaction.

22



NOTE 9: CHANGES IN EQUITY
The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to shareowners of The Coca-Cola Company and equity attributable to noncontrolling interests (in millions):
 
 
Shareowners of The Coca-Cola Company  
 

 
Total

Reinvested
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Common
Stock

Capital
Surplus

Treasury
Stock

Non-
controlling
Interests

December 31, 2012
$
33,168

$
58,045

$
(3,385
)
$
1,760

$
11,379

$
(35,009
)
$
378

Comprehensive income (loss)
3,790

4,427

(698
)



61

Dividends paid/payable to shareowners of
     The Coca-Cola Company
(2,494
)
(2,494
)





Dividends paid to noncontrolling interests
(50
)





(50
)
Contributions by noncontrolling interests
1






1

Business combinations
25






25

Deconsolidation of certain entities
(7
)





(7
)
Purchases of treasury stock
(2,935
)




(2,935
)

Impact of employee stock option and
     restricted stock plans
1,133




611

522


June 28, 2013
$
32,631

$
59,978

$
(4,083
)
$
1,760

$
11,990

$
(37,422
)
$
408

NOTE 10: SIGNIFICANT OPERATING AND NONOPERATING ITEMS
Other Operating Items
Cost of Goods Sold
In December 2011, the Company detected that orange juice being imported from Brazil contained residues of carbendazim, a fungicide that is not registered in the United States for use on citrus products. As a result, we began purchasing additional supplies of Florida orange juice at a higher cost than Brazilian orange juice and incurred charges of $3 million and $8 million during the three and six months ended June 29, 2012, respectively. These charges were recorded in the line item cost of goods sold in our condensed consolidated statements of income.
Other Operating Charges
During the three months ended June 28, 2013, the Company incurred other operating charges of $132 million. These charges primarily consisted of $113 million due to the Company's productivity and reinvestment program as well as $20 million due to the Company's integration of our German bottling and distribution operations. Refer to Note 11 for additional information on these initiatives. Refer to Note 15 for the impact these charges had on our operating segments.
During the six months ended June 28, 2013, the Company incurred other operating charges of $253 million. These charges primarily consisted of $215 million due to the Company's productivity and reinvestment program as well as $41 million due to the Company's other restructuring initiatives and the integration of our German bottling and distribution operations. Refer to Note 11 for additional information on these initiatives. Refer to Note 15 for the impact these charges had on our operating segments.
During the three months ended June 29, 2012, the Company incurred other operating charges of $70 million. These charges consisted of $54 million due to the Company's productivity and reinvestment program; $15 million due to the Company's other restructuring and integration initiatives, including the integration of our German bottling and distribution operations; and $3 million due to costs associated with the Company detecting carbendazim in orange juice imported from Brazil for distribution in the United States. These charges were partially offset by a reversal of $2 million due to the refinement of previously established accruals related to the Company's 2008–2011 productivity initiatives. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to Note 15 for the impact these charges had on our operating segments.
During the six months ended June 29, 2012, the Company incurred other operating charges of $169 million. These charges consisted of $118 million due to the Company's productivity and reinvestment program; $30 million due to the Company's other restructuring and integration initiatives, including the integration of our German bottling and distribution operations; $20 million due to changes in the Company's ready-to-drink tea strategy as a result of our U.S. license agreement with Nestlé S.A. ("Nestlé") terminating at the end of 2012; and $4 million due to costs associated with the Company detecting carbendazim

23



in orange juice imported from Brazil for distribution in the United States. These charges were partially offset by a reversal of $3 million due to the refinement of previously established accruals related to the Company's 2008–2011 productivity initiatives. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to Note 15 for the impact these charges had on our operating segments.
Other Nonoperating Items
Equity Income (Loss) — Net
During the three and six months ended June 28, 2013, the Company recorded net charges of $3 million and $42 million, respectively, in the line item equity income (loss) — net. These net charges represent the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees. The net charge recorded during the six months ended June 28, 2013, includes a charge incurred by an equity method investee due to the devaluation of the Venezuelan bolivar. Refer to Note 15 for the impact these charges had on our operating segments.
During the three months ended June 29, 2012, the Company recorded a net charge of $1 million in the line item equity income (loss) — net. This net charge primarily represents the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees. In addition, the Company recorded charges of $11 million due to changes in the structure of Beverage Partners Worldwide ("BPW"), our 50/50 joint venture with Nestlé in the ready-to-drink tea category. These changes resulted in the joint venture focusing its geographic scope primarily on Europe and Canada. The Company accounts for our investment in BPW under the equity method of accounting. Refer to Note 15 for the impact these charges had on our operating segments.
During the six months ended June 29, 2012, the Company recorded a net gain of $43 million in the line item equity income (loss) — net. This net gain primarily represents the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees. In addition, the Company recorded charges of $14 million due to changes in the structure of BPW. The Company accounts for our investment in BPW under the equity method of accounting. Refer to Note 15 for the impact these charges had on our operating segments.
Other Income (Loss) — Net
During the three and six months ended June 28, 2013, the Company recorded a loss of $144 million related to the pending merger of four of its Japanese bottling partners. In 2012, the four bottlers announced their intent to merge as Coca-Cola East Japan Bottling Company, Ltd. ("CCEJ"), a publicly traded entity, through a share exchange. The merger was approved by the respective bottlers' shareowners in March 2013, and the transaction received final regulatory approval in May 2013. The terms of the merger agreement include the issuance of new shares of one of the publicly traded bottlers in exchange for 100 percent of the outstanding shares of the remaining three bottlers according to an agreed upon share exchange ratio. Based on the closing price of the shares on June 28, 2013, the value of the shares that the Company will receive in exchange for its investments in two of the non-publicly traded bottlers was less than the carrying value of those investments. As a result, we were required to write down the carrying value of these investments to their implied fair value, resulting in a loss. The merger was completed effective July 1, 2013.
During the three and six months ended June 28, 2013, the Company also recognized a gain of $139 million due to Coca-Cola FEMSA, an equity method investee, issuing additional shares of its own stock at a per share amount greater than the carrying value of the Company's per share investment. Accordingly, the Company is required to treat this type of transaction as if the Company sold a proportionate share of its investment in Coca-Cola FEMSA. Refer to Note 15 for the impact this gain had on our operating segments.
In addition, during the six months ended June 28, 2013, the Company recorded a charge of $140 million in the line item other income (loss) — net due to the Venezuelan government announcing a currency devaluation. As a result of this devaluation, the Company remeasured the net assets related to its operations in Venezuela. Refer to Note 15 for the impact this charge had on our operating segments.
During the three and six months ended June 29, 2012, the Company recognized a gain of $92 million due to Coca-Cola FEMSA issuing additional shares of its own stock at a per share amount greater than the carrying value of the Company's per share investment. Accordingly, the Company is required to treat this type of transaction as if the Company sold a proportionate share of its investment in Coca-Cola FEMSA. Refer to Note 15 for the impact this gain had on our operating segments.

24



NOTE 11: PRODUCTIVITY, INTEGRATION AND RESTRUCTURING INITIATIVES
Productivity and Reinvestment
In February 2012, the Company announced a four-year productivity and reinvestment program which is designed to further enable our efforts to strengthen our brands and reinvest our resources to drive long-term profitable growth. This program is focused on the following initiatives: global supply chain optimization; global marketing and innovation effectiveness; operating expense leverage and operational excellence; data and information technology systems standardization; and further integration of Coca-Cola Enterprises' former North America business.
As of June 28, 2013, the Company has incurred total pretax expenses of $485 million related to this program since the plan commenced. These expenses were recorded in the line item other operating charges in our condensed consolidated statements of income. Refer to Note 15 for the impact these charges had on our operating segments. Outside services reported in the tables below primarily relate to expenses in connection with legal, outplacement and consulting activities. Other direct costs reported in the tables below include, among other items, internal and external costs associated with the development, communication, administration and implementation of these initiatives; accelerated depreciation on certain fixed assets; contract termination fees; and relocation costs.
The following table summarizes the balance of accrued expenses related to these productivity and reinvestment initiatives and the changes in the accrued amounts as of and for the three months ended June 28, 2013 (in millions):
 
Accrued
Balance
March 29,
2013

Costs
Incurred
Three Months Ended
June 28,
2013

Payments

Noncash
and
Exchange

Accrued
Balance
June 28,
2013

Severance pay and benefits
$
50

$
34

$
(47
)
$

$
37

Outside services
3

14

(14
)

3

Other direct costs
10

65

(63
)

12

Total
$
63

$
113

$
(124
)
$

$
52

The following table summarizes the balance of accrued expenses related to these productivity and reinvestment initiatives and the changes in the accrued amounts as of and for the six months ended June 28, 2013 (in millions):
 
Accrued
Balance
December 31,
2012

Costs
Incurred
Six Months Ended
June 28,
2013

Payments

Noncash
and
Exchange

Accrued
Balance
June 28,
2013

Severance pay and benefits
$
12

$
79

$
(54
)
$

$
37

Outside services
6

37

(40
)

3

Other direct costs
8

99

(95
)

12

Total
$
26

$
215

$
(189
)
$

$
52

Integration of Our German Bottling and Distribution Operations
In 2008, the Company began an integration initiative related to the 18 German bottling and distribution operations acquired in 2007. The Company incurred expenses of $20 million and $40 million related to this initiative during the three and six months ended June 28, 2013, respectively, and has incurred total pretax expenses of $480 million related to this initiative since it commenced. These charges were recorded in the line item other operating charges in our condensed consolidated statements of income and impacted the Bottling Investments operating segment. The charges recorded in connection with these integration activities have been primarily due to involuntary terminations. The Company had $95 million and $96 million accrued related to these integration costs as of June 28, 2013, and December 31, 2012, respectively.
The Company is currently reviewing other integration and restructuring opportunities within the German bottling and distribution operations, which, if implemented, will result in additional charges in future periods. However, as of June 28, 2013, the Company has not finalized any additional plans.

25



NOTE 12: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Net periodic benefit cost for our pension and other postretirement benefit plans consisted of the following during the three and six months ended June 28, 2013, and June 29, 2012, respectively (in millions):
 
Pension Benefits  
 
Other Benefits  
 
Three Months Ended
 
June 28,
2013

June 29,
2012

 
June 28,
2013

June 29,
2012

Service cost
$
69

$
71

 
$
9

$
9

Interest cost
95

97

 
10

11

Expected return on plan assets
(165
)
(144
)
 
(3
)
(2
)
Amortization of prior service cost (credit)


 
(2
)
(13
)
Amortization of net actuarial loss
49

34

 
3

1

Total cost (credit) recognized in statements of income
$
48

$
58

 
$
17

$
6

 
Pension Benefits  
 
Other Benefits  
 
Six Months Ended
 
June 28,
2013

June 29,
2012

 
June 28,
2013

June 29,
2012

Service cost
$
138

$
136

 
$
18

$
17

Interest cost
189

195

 
21

22

Expected return on plan assets
(329
)
(288
)
 
(5
)
(4
)
Amortization of prior service cost (credit)
(1
)
(1
)
 
(5
)
(26
)
Amortization of net actuarial loss
99

68

 
6

3

Total cost (credit) recognized in statements of income
$
96

$
110

 
$
35

$
12

During the six months ended June 28, 2013, the Company contributed $616 million to our pension plans, and we anticipate making additional contributions of approximately $14 million to our pension plans during the remainder of 2013. The Company contributed $990 million to our pension plans during the six months ended June 29, 2012.
NOTE 13: INCOME TAXES
Our effective tax rate reflects the benefits of having significant operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate of 35 percent. As a result of employment actions and capital investments made by the Company, certain tax jurisdictions provide income tax incentive grants, including Brazil, Costa Rica, Singapore and Swaziland. The terms of these grants expire from 2015 to 2020. We expect each of these grants to be renewed indefinitely. In addition, our effective tax rate reflects the benefits of having significant earnings generated in investments accounted for under the equity method of accounting, which are generally taxed at rates lower than the U.S. statutory rate.
At the end of each interim period, 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 current tax laws, the Company's estimated effective tax rate for 2013 is 23.0 percent. However, in arriving at this estimate we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.

26



The Company recorded income tax expense of $831 million (23.5 percent effective tax rate) and $823 million (22.7 percent effective tax rate) during the three months ended June 28, 2013, and June 29, 2012, respectively. The Company recorded income tax expense of $1,406 million (23.9 percent effective tax rate) and $1,481 million (23.3 percent effective tax rate) during the six months ended June 28, 2013, and June 29, 2012, respectively. The following table illustrates the tax expense (benefit) associated with unusual and/or infrequent items for the interim periods presented (in millions):
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2013

 
June 29,
2012

 
June 28,
2013

 
June 29,
2012

 
Productivity and reinvestment program
$
(38
)
1 
$
(20
)
7 
$
(78
)
1 
$
(44
)
7 
Other productivity, integration and restructuring initiatives
1

2 
1

8 
1

2 
1

8 
Transaction gains and losses
48

3 
33

9 
48

3 
33

9 
Certain tax matters
(1
)
4 
(25
)
10 

4 
(33
)
12 
Other — net
(8
)
5 
(7
)
11 
(4
)
6 
(14
)
13 
1 
Related to charges of $113 million and $215 million during the three and six months ended June 28, 2013, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 10 and Note 11.
2 
Related to net charges of $18 million and $39 million during the three and six months ended June 28, 2013, respectively. These charges were primarily due to the Company's other restructuring initiatives that are outside the scope of the Company's productivity and reinvestment program. Refer to Note 10 and Note 11.
3 
Related to a net charge of $11 million that primarily consisted of a loss of $144 million due to the pending merger of four of the Company's Japanese bottling partners, partially offset by a gain of $139 million the Company recognized as a result of Coca-Cola FEMSA issuing additional shares of its own stock during the period at a per share amount greater than the carrying value of the Company's per share investment. Refer to Note 10 and Note 14.