10-Q 1 a2014062710-q.htm 10-Q 2014.06.27 10-Q


 
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 27, 2014
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 25, 2014
$0.25 Par Value
 
4,385,923,844 Shares
 




THE COCA-COLA COMPANY AND SUBSIDIARIES
Table of Contents
 
 
Page Number
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
Condensed Consolidated Statements of Income
Three
and six months ended June 27, 2014 and June 28, 2013
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
Three and six months ended June 27, 2014 and June 28, 2013
 
 
 
 
Condensed Consolidated Balance Sheets
June 27, 2014 and December 31, 2013
 
 
 
 
Condensed Consolidated Statements of Cash Flows
Six months ended June 27, 2014 and June 28, 2013
 
 
 
 
 
 
 
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, 2013, 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 27,
2014

June 28,
2013

 
June 27,
2014

June 28,
2013

NET OPERATING REVENUES
$
12,574

$
12,749

 
$
23,150

$
23,784

Cost of goods sold
4,819

4,989

 
8,902

9,313

GROSS PROFIT
7,755

7,760

 
14,248

14,471

Selling, general and administrative expenses
4,384

4,385

 
8,373

8,567

Other operating charges
201

132

 
329

253

OPERATING INCOME
3,170

3,243

 
5,546

5,651

Interest income
144

129

 
267

245

Interest expense
107

122

 
231

224

Equity income (loss) — net
254

246

 
325

333

Other income (loss) — net
(77
)
29

 
(318
)
(136
)
INCOME BEFORE INCOME TAXES
3,384

3,525

 
5,589

5,869

Income taxes
779

831

 
1,358

1,406

CONSOLIDATED NET INCOME
2,605

2,694

 
4,231

4,463

Less: Net income attributable to noncontrolling interests
10

18

 
17

36

NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF
THE COCA-COLA COMPANY
$
2,595

$
2,676

 
$
4,214

$
4,427

BASIC NET INCOME PER SHARE1
$
0.59

$
0.60

 
$
0.96

$
0.99

DILUTED NET INCOME PER SHARE1
$
0.58

$
0.59

 
$
0.95

$
0.98

DIVIDENDS PER SHARE
$
0.305

$
0.280

 
$
0.610

$
0.560

AVERAGE SHARES OUTSTANDING
4,391

4,446

 
4,396

4,450

Effect of dilutive securities
63

81

 
63

78

AVERAGE SHARES OUTSTANDING ASSUMING DILUTION
4,454

4,527

 
4,459

4,528

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 27,
2014

June 28,
2013

 
June 27,
2014

June 28,
2013

CONSOLIDATED NET INCOME
$
2,605

$
2,694

 
$
4,231

$
4,463

Other comprehensive income:
 
 
 
 
 
Net foreign currency translation adjustment
337

(1,051
)
 
(52
)
(981
)
Net gain (loss) on derivatives
(81
)
117

 
(180
)
204

Net unrealized gain (loss) on available-for-sale securities
334

18

 
649

26

Net change in pension and other benefit liabilities
17

46

 
24

78

TOTAL COMPREHENSIVE INCOME
3,212

1,824

 
4,672

3,790

Less: Comprehensive income (loss) attributable to
noncontrolling interests
9

20

 
12

61

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO
SHAREOWNERS OF THE COCA-COLA COMPANY
$
3,203

$
1,804

 
$
4,660

$
3,729

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 27,
2014

December 31,
2013

ASSETS
 
 
CURRENT ASSETS
 
 
Cash and cash equivalents
$
11,618

$
10,414

Short-term investments
6,524

6,707

TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
18,142

17,121

Marketable securities
3,467

3,147

Trade accounts receivable, less allowances of $59 and $61, respectively
5,870

4,873

Inventories
3,536

3,277

Prepaid expenses and other assets
2,856

2,886

TOTAL CURRENT ASSETS
33,871

31,304

EQUITY METHOD INVESTMENTS
10,857

10,393

OTHER INVESTMENTS
3,601

1,119

OTHER ASSETS
4,805

4,661

 PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation of
$10,610 and $10,065, respectively
14,918

14,967

TRADEMARKS WITH INDEFINITE LIVES
6,798

6,744

BOTTLERS' FRANCHISE RIGHTS WITH INDEFINITE LIVES
7,284

7,415

GOODWILL
12,296

12,312

OTHER INTANGIBLE ASSETS
1,059

1,140

TOTAL ASSETS
$
95,489

$
90,055

LIABILITIES AND EQUITY
 
 
CURRENT LIABILITIES
 
 
Accounts payable and accrued expenses
$
10,575

$
9,577

Loans and notes payable
20,081

16,901

Current maturities of long-term debt
1,519

1,024

Accrued income taxes
454

309

TOTAL CURRENT LIABILITIES
32,629

27,811

LONG-TERM DEBT
18,643

19,154

OTHER LIABILITIES
3,447

3,498

DEFERRED INCOME TAXES
6,469

6,152

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
12,675

12,276

Reinvested earnings
63,194

61,660

Accumulated other comprehensive income (loss)
(2,986
)
(3,432
)
Treasury stock, at cost — 2,655 and 2,638 shares, respectively
(40,572
)
(39,091
)
EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY
34,071

33,173

EQUITY ATTRIBUTABLE TO NONCONTROLLING INTERESTS
230

267

TOTAL EQUITY
34,301

33,440

TOTAL LIABILITIES AND EQUITY
$
95,489

$
90,055

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 27,
2014

June 28,
2013

OPERATING ACTIVITIES
 
 
Consolidated net income
$
4,231

$
4,463

Depreciation and amortization
967

947

Stock-based compensation expense
112

92

Deferred income taxes
(67
)
100

Equity (income) loss — net of dividends
(124
)
(132
)
Foreign currency adjustments
260

159

Significant (gains) losses on sales of assets — net
140

(23
)
Other operating charges
120

83

Other items
6

22

Net change in operating assets and liabilities
(1,175
)
(1,755
)
Net cash provided by operating activities
4,470

3,956

INVESTING ACTIVITIES
 
 
Purchases of investments
(7,895
)
(7,077
)
Proceeds from disposals of investments
6,192

5,224

Acquisitions of businesses, equity method investments and nonmarketable securities
(332
)
(308
)
Proceeds from disposals of businesses, equity method investments and nonmarketable securities
45

690

Purchases of property, plant and equipment
(1,030
)
(1,069
)
Proceeds from disposals of property, plant and equipment
134

57

Other investing activities
(242
)
(225
)
Net cash provided by (used in) investing activities
(3,128
)
(2,708
)
FINANCING ACTIVITIES
 
 
Issuances of debt
21,267

22,779

Payments of debt
(18,122
)
(19,454
)
Issuances of stock
650

951

Purchases of stock for treasury
(1,953
)
(2,978
)
Dividends
(1,342
)
(1,249
)
Other financing activities
(438
)
87

Net cash provided by (used in) financing activities
62

136

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(200
)
(420
)
CASH AND CASH EQUIVALENTS
 
 
Net increase (decrease) during the period
1,204

964

Balance at beginning of period
10,414

8,442

Balance at end of period
$
11,618

$
9,406

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, 2013.
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 27, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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 2014 and 2013 ended on June 27, 2014 and June 28, 2013, 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, 2014, the Company changed the name of the Pacific operating segment to Asia Pacific. Accordingly, the name has been updated for both the current and prior year disclosures in the notes to condensed consolidated financial statements.
Advertising Costs
The Company's accounting policy related to advertising costs for annual reporting purposes, as disclosed in Note 1 of our 2013 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.
Hyperinflationary Economies
A hyperinflationary economy is one that has cumulative inflation of 100 percent or more over a three-year period. Effective January 1, 2010, Venezuela was determined to be a hyperinflationary economy. In accordance with hyperinflationary accounting under accounting principles generally accepted in the United States, our local subsidiary is required to use the U.S. dollar as its functional currency.
In February 2013, the Venezuelan government devalued its currency to an official rate of exchange ("official rate") of 6.3 bolivars per U.S. dollar provided by the Commission for the Administration of Foreign Exchange ("CADIVI"). At that time, the Company remeasured the net monetary assets of our Venezuelan subsidiary at the official rate. As a result of the devaluation, we recognized a loss of $140 million in the line item other income (loss) — net in our condensed consolidated statement of income during the six months ended June 28, 2013.
Beginning in October 2013, the government authorized certain companies that operate in designated industry sectors to exchange a limited volume of bolivars for U.S. dollars at a bid rate established via weekly auctions under a system referred to as "SICAD 1." During the first quarter of 2014, the government expanded the types of transactions that may be subject to the weekly SICAD 1 auction process while retaining the official rate of 6.3 bolivars per U.S. dollar; replaced CADIVI with a new

6



foreign currency administration, the National Center for Foreign Commerce ("CENCOEX"); and introduced another currency exchange mechanism ("SICAD 2"). The SICAD 2 rate is intended to more closely resemble a market-driven exchange rate than the official rate and SICAD 1. As a result of these changes, an entity may be able to convert bolivars to U.S. dollars at one of three legal exchange rates, which as of March 28, 2014, were 6.3 (official rate), 10.8 (SICAD 1) and 50.9 (SICAD 2). We analyzed the multiple rates available and the Company's estimates of the applicable rate at which future transactions could be settled, including the payment of dividends. Based on this analysis, we determined that the SICAD 1 rate is the most appropriate rate to use for remeasurement given our circumstances. Therefore, as of March 28, 2014, we remeasured the net monetary assets of our Venezuelan subsidiary using an exchange rate of 10.8 bolivars per U.S. dollar, which was the SICAD 1 rate on that date. We recorded a charge of $226 million related to the change in exchange rates in the line item other income (loss) — net in our condensed consolidated statement of income during the six months ended June 27, 2014. The Company will continue to use the SICAD 1 rate to remeasure the net monetary assets of our Venezuelan subsidiary unless facts and circumstances change.
If the bolivar devalues further, or if we are able to access currency at different rates that are reasonable to the Company, it would result in our Company recognizing additional foreign currency exchange gains or losses in our condensed consolidated financial statements. As of June 27, 2014, our Venezuelan subsidiary held net monetary assets of $263 million, including $178 million of cash, cash equivalents, short-term investments and marketable securities. Despite the additional currency conversion mechanisms, the Company's ability to pay dividends from Venezuela is still restricted due to the low volume of U.S. dollars available for conversion.
In addition to the foreign currency exchange exposure related to our Venezuelan subsidiary's net monetary assets, we also sell concentrate to our bottling partner in Venezuela from outside the country. These sales are denominated in U.S. dollars and the carrying value of the receivables related to these sales was $281 million as of June 27, 2014. If a government-approved exchange rate mechanism is not available for our bottling partner in Venezuela to convert bolivars and pay for these receivables and for future concentrate sales, the receivables balance will continue to increase. We will continue to monitor the collectability and convertibility of these receivables. We also have certain U.S. dollar denominated intangible assets associated with products sold in Venezuela, which had a carrying value of $107 million as of June 27, 2014. If the bolivar further devalues, it could result in the impairment of these intangible assets. Additionally, in January 2014, the Venezuelan government enacted a new law which imposes limits on profit margins earned in the country, which limited the Company's cash flows during the three and six months ended June 27, 2014, and will continue to limit the future cash flows as long as the law is in effect.
Recently Issued Accounting Guidance
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization's operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. ASU 2014-08 is effective for fiscal and interim periods beginning on or after December 15, 2014. The Company is currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, which will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU allows for both retrospective and prospective methods of adoption and is effective for periods beginning after December 15, 2016. The Company is currently evaluating the impact that the adoption of this ASU will have on our consolidated financial statements.
NOTE 2: ACQUISITIONS AND DIVESTITURES
Acquisitions
During the six months ended June 27, 2014, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $332 million, which primarily included a joint investment with one of our bottling partners in a dairy company in Ecuador, which is accounted for under the equity method of accounting. 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 a majority interest in bottling operations in Myanmar. We remeasured our equity interest in innocent to

7



fair value upon the close of the transaction. The resulting gain on the remeasurement was not significant to our condensed consolidated financial statements.
Green Mountain Coffee Roasters, Inc.
In February 2014, the Company and Green Mountain Coffee Roasters, Inc. ("GMCR"), now known as Keurig Green Mountain, Inc., entered into a 10-year global strategic agreement to collaborate on the development and introduction of the Company's global brand portfolio for use in GMCR's forthcoming Keurig ColdTM at-home beverage system. Under the agreement, the companies will cooperate to bring the Keurig ColdTM beverage system to consumers around the world, and GMCR will be the Company's exclusive partner for the production and sale of our branded single-serve, pod-based cold beverages. Together we will also explore other future opportunities to collaborate on the Keurig® platform. In an effort to align long-term interests, we also entered into an agreement to purchase a 10 percent equity position in GMCR, and on February 27, 2014, the Company purchased the newly issued shares in GMCR for approximately $1,265 million, including transaction costs of $14 million.
In May 2014, the Company purchased additional shares of GMCR in the market for $302 million, which represented an additional 2 percent equity position in GMCR. We account for the investment in GMCR as an available-for-sale security, which is included in the line item other investments in our condensed consolidated balance sheet. These purchases were included in the line item purchases of investments in our condensed consolidated statement of cash flows.
Subsequent to these purchases, the Company entered into an agreement with Credit Suisse Capital LLC ("CS") to purchase additional shares of GMCR which would increase the Company's equity position to a 16 percent interest based on the total number of issued and outstanding shares of GMCR as of May 1, 2014. Under the agreement, the Company will purchase from CS, on a date selected by CS no later than February 2015, the lesser of (1) 6.5 million shares of GMCR or (2) the number of shares that shall cause our ownership to equal 16 percent. The purchase price per share will be the average of the daily volume-weighted average price per share from May 15, 2014, to the date selected by CS, as adjusted in certain circumstances specified in the agreement. CS will have exclusive ownership and control over any such shares until delivered to the Company. This agreement with CS qualifies as a derivative, and the changes in its fair value are immediately recognized into earnings.
Coca-Cola Erfrischungsgetränke AG
In conjunction with the Company's acquisition of 18 German bottling and distribution operations in 2007, the former owners received put options to sell their respective shares in Coca-Cola Erfrischungsgetränke AG ("CCEAG") back to the Company in January 2014. The Company paid $503 million to purchase these shares, which was included in the line item other financing activities in our condensed consolidated statement of cash flows, and now owns 100 percent of CCEAG.
Divestitures
During the six months ended June 27, 2014, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $45 million, which represented the proceeds from the refranchising of certain of our territories in North America.
In conjunction with implementing a new beverage partnership model in North America, the Company refranchised certain territories that were previously managed by our consolidated North America bottling and customer service organization called Coca-Cola Refreshments ("CCR") to three of its unconsolidated bottling partners. These territories border these bottlers' existing territories, allowing each bottler to better service local customers and provide more efficient execution. Through the execution of comprehensive beverage agreements ("CBAs") with each of the bottlers, we granted certain exclusive territory rights for the distribution, promotion, marketing and sale of Company-owned and licensed beverage products as defined by the CBA. Under the arrangement for these territories, CCR retains the rights to produce these beverage products and the bottlers will purchase from CCR substantially all of the related finished products needed in order to service the customers in these territories. Each CBA has a term of 10 years and is renewable by the bottler indefinitely for successive additional terms of 10 years each. Under the CBA, each bottler will make ongoing quarterly payments to CCR based on their future gross profit in these territories throughout the term of the CBA, including renewals, in exchange for the grant of the exclusive territory rights.
Contemporaneously with the grant of these rights, the Company sold the distribution assets, certain working capital items, and the exclusive rights to distribute certain beverage brands not owned by the Company, but distributed by CCR, in each of these territories to the respective bottlers in exchange for cash totaling $45 million. Under the applicable accounting guidance, we were required to derecognize all of the tangible assets sold as well as the intangible assets transferred, including distribution rights, customer relationships and an allocated portion of goodwill related to these territories. We recognized a $140 million noncash loss during the three and six months ended June 27, 2014, primarily related to the derecognition of the intangible assets transferred. We expect to recover the value of the intangible assets transferred to the bottlers under the CBAs through the future quarterly payments; however, as the payments for the territory rights are dependent on the bottlers' future gross profit in these territories, they are considered a form of contingent consideration.

8



There is diversity in practice as it relates to the accounting for contingent consideration by the seller. The seller can account for the future contingent payments received as a gain contingency, recognizing the amounts in the income statement only after the related contingencies are resolved and the gain is realized, which in this arrangement will be quarterly as the bottlers earn gross profit in the transferred territories. Alternatively, the seller can record a receivable for the contingent consideration at fair value on the date of sale and record any future differences between the payments received and this receivable in the income statement as they occur. We elected the gain contingency treatment since the quarterly payments will be received throughout the terms of the CBAs, including all subsequent renewals, regardless of the cumulative amount received as compared to the value of the intangible assets transferred.
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.
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.
Trading Securities
As of June 27, 2014, and December 31, 2013, our trading securities had a fair value of $396 million and $372 million, respectively, and consisted primarily of equity securities. The Company had net unrealized gains on trading securities of $39 million and $12 million as of June 27, 2014, and December 31, 2013, respectively.

The Company's trading securities were included in the following line items in our condensed consolidated balance sheets (in millions):
 
June 27,
2014

December 31,
2013

Marketable securities
$
304

$
286

Other assets
92

86

Total trading securities
$
396

$
372


9



Available-for-Sale and Held-to-Maturity Securities
As of June 27, 2014, and December 31, 2013, the Company did not have any held-to-maturity securities. As of June 27, 2014, available-for-sale securities consisted of the following (in millions):
 
 
Gross Unrealized
 
 
Cost

Gains

Losses

Fair Value

Available-for-sale securities:1
 
 
 
 
Equity securities
$
2,796

$
1,304

$
(18
)
$
4,082

Debt securities
3,478

44

(9
)
3,513

Total available-for-sale securities
$
6,274

$
1,348

$
(27
)
$
7,595

1 Refer to Note 14 for additional information related to the estimated fair value.
As of December 31, 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
$
1,097

$
373

$
(17
)
$
1,453

Debt securities
3,388

24

(23
)
3,389

Total available-for-sale securities
$
4,485

$
397

$
(40
)
$
4,842

1 Refer to Note 14 for additional information related to the estimated fair value.
As of June 27, 2014, and December 31, 2013, the Company had investments classified as available-for-sale securities in which our cost basis exceeded the fair value of our investment. Management assessed each of these investments on an individual basis to determine if the decline in fair value was other than temporary. Management’s assessment as to the nature of a decline in fair value is based on, among other things, the length of time and the extent to which the market value has been less than our cost basis; the financial condition and near-term prospects of the issuer; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. As a result of these assessments, management determined that the decline in fair value of these investments was not other than temporary and did not record any impairment charges.
The sale and/or maturity of available-for-sale securities resulted in the following realized activity (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 27,
2014

June 28,
2013

 
June 27,
2014

June 28,
2013

Gross gains
$
13

$
3

 
$
16

$
8

Gross losses
(9
)
(5
)
 
(13
)
(10
)
Proceeds
817

1,121

 
2,182

2,258

The Company uses one of its insurance captives to reinsure group annuity insurance contracts that cover the pension obligations of certain of our European and Canadian 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 27, 2014, and December 31, 2013, the Company's available-for-sale securities included solvency capital funds of $871 million and $667 million, respectively.

10



The Company's available-for-sale securities were included in the following line items in our condensed consolidated balance sheets (in millions):
 
June 27,
2014

December 31,
2013

Cash and cash equivalents
$

$
245

Marketable securities
3,163

2,861

Other investments
3,435

958

Other assets
997

778

Total available-for-sale securities
$
7,595

$
4,842

The contractual maturities of these available-for-sale securities as of June 27, 2014, were as follows (in millions):
 
Cost

Fair Value

Within 1 year
$
1,255

$
1,258

After 1 year through 5 years
1,700

1,724

After 5 years through 10 years
142

150

After 10 years
381

381

Equity securities
2,796

4,082

Total available-for-sale securities
$
6,274

$
7,595

The Company expects that actual maturities may differ from the contractual maturities above because borrowers have the right to call or prepay certain obligations.
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 27, 2014, and December 31, 2013. Our cost method investments had a carrying value of $165 million and $162 million as of June 27, 2014, and December 31, 2013, 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 27,
2014

December 31,
2013

Raw materials and packaging
$
1,822

$
1,692

Finished goods
1,362

1,240

Other
352

345

Total inventories
$
3,536

$
3,277


11



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.

12



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 27,
2014

December 31, 2013

Assets
 
 
 
Foreign currency contracts
Prepaid expenses and other assets
$
92

$
211

Foreign currency contracts
Other assets
83

109

Commodity contracts
Prepaid expenses and other assets

1

Interest rate contracts
Prepaid expenses and other assets
3


Interest rate contracts
Other assets
218

283

Total assets
 
$
396

$
604

Liabilities
 
 
 
Foreign currency contracts
Accounts payable and accrued expenses
$
129

$
84

Foreign currency contracts
Other liabilities
43

40

Commodity contracts
Accounts payable and accrued expenses
1

1

Interest rate contracts
Other liabilities
2


Total liabilities
 
$
175

$
125

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 27,
2014

December 31, 2013

Assets
 
 
 
Foreign currency contracts
Prepaid expenses and other assets
$
16

$
21

Foreign currency contracts
Other assets
172

171

Commodity contracts
Prepaid expenses and other assets
27

33

Commodity contracts
Other assets
5

1

Other derivative instruments
Prepaid expenses and other assets
24

9

Total assets
 
$
244

$
235

Liabilities
 
 
 
Foreign currency contracts
Accounts payable and accrued expenses
$
11

$
24

Foreign currency contracts
Other liabilities
10


Commodity contracts
Accounts payable and accrued expenses
6

23

Interest rate contracts
Other liabilities
2

3

Other derivative instruments
Accounts payable and accrued expenses
1


Other derivative instruments
Other liabilities
2


Total liabilities
 
$
32

$
50

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.

13



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 27, 2014, or June 28, 2013. 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 $9,161 million and $8,450 million as of June 27, 2014, and December 31, 2013, 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 values of derivatives that were designated and qualified for the Company's commodity cash flow hedging program were $20 million and $26 million as of June 27, 2014, and December 31, 2013, respectively.
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 value of these interest rate swap agreements that were designated and qualified for the Company's interest rate cash flow hedging program was $1,828 million as of June 27, 2014, and December 31, 2013.
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 27, 2014 (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
$
(50
)
Net operating revenues
$
18

$

2 
Foreign currency contracts
(9
)
Cost of goods sold
7


2 
Interest rate contracts
(40
)
Interest expense


 
Commodity contracts
(1
)
Cost of goods sold


 
Total
$
(100
)
 
$
25

$

 
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.

14



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 27, 2014 (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
$
(112
)
Net operating revenues
$
43

$

2 
Foreign currency contracts
(21
)
Cost of goods sold
20


2 
Interest rate contracts
(91
)
Interest expense


 
Commodity contracts
1

Cost of goods sold
1


 
Total
$
(223
)
 
$
64

$

 
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 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
$
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

2 
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.
As of June 27, 2014, the Company estimates that it will reclassify into earnings during the next 12 months approximately $16 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 27, 2014, such adjustments had cumulatively increased the carrying value of our long-term debt by $67 million. When a derivative is no longer designated as a fair value hedge for any reason, including termination and maturity, the remaining unamortized 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 $6,600 million and $5,600 million as of June 27, 2014, and December 31, 2013, respectively.

15



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 $983 million and $996 million as of June 27, 2014, and December 31, 2013, 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 27, 2014 and June 28, 2013 (in millions):
Fair Value Hedging Instruments
Location of Gain (Loss)
Recognized in Income
Gain (Loss)
Recognized in Income
 
Three Months Ended
June 27,
2014

June 28,
2013

Interest rate swaps
Interest expense
$
21

$
(116
)
Fixed-rate debt
Interest expense
(12
)
131

Net impact to interest expense
 
$
9

$
15

Foreign currency contracts
Other income (loss) — net
$
(37
)
$
(17
)
Available-for-sale securities
Other income (loss) — net
30

14

Net impact to other income (loss) — net
 
$
(7
)
$
(3
)
Net impact of fair value hedging instruments
 
$
2

$
12

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 27, 2014 and June 28, 2013 (in millions):
Fair Value Hedging Instruments
Location of Gain (Loss)
Recognized in Income
Gain (Loss)
Recognized in Income
 
Six Months Ended
June 27,
2014

June 28,
2013

Interest rate swaps
Interest expense
$
26

$
(151
)
Fixed-rate debt
Interest expense
(15
)
176

Net impact to interest expense
 
$
11

$
25

Foreign currency contracts
Other income (loss) — net
$
(19
)
$
(7
)
Available-for-sale securities
Other income (loss) — net
8

(2
)
Net impact to other income (loss) — net

$
(11
)
$
(9
)
Net impact of fair value hedging instruments

$

$
16

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 $1,746 million and $2,024 million as of June 27, 2014, and December 31, 2013, 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 27, 2014 and June 28, 2013 (in millions):
 
Gain (Loss) Recognized in OCI
 
Three Months Ended
 
Six Months Ended
 
June 27,
2014

June 28,
2013

 
June 27,
2014

June 28,
2013

Foreign currency contracts
$
(74
)
$
87

 
$
(142
)
$
30


16



The Company did not reclassify any deferred gains or losses related to net investment hedges from AOCI into earnings during the three and six months ended June 27, 2014 and June 28, 2013. In addition, the Company did not have any ineffectiveness related to net investment hedges during the three and six months ended June 27, 2014 and June 28, 2013.
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 to primarily manage 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 or 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 $3,836 million and $3,871 million as of June 27, 2014, and December 31, 2013, 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 net operating revenues, 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 $853 million and $1,441 million as of June 27, 2014, and December 31, 2013, respectively.
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 27, 2014 and June 28, 2013 (in millions):
 
 
Three Months Ended
Derivatives Not Designated
as Hedging Instruments
Location of Gain (Loss)
Recognized in Income
June 27,
2014

June 28,
2013

Foreign currency contracts
Net operating revenues
$
(6
)
$
6

Foreign currency contracts
Other income (loss) — net
21

6

Foreign currency contracts
Cost of goods sold

2

Interest rate contracts
Interest expense

(3
)
Commodity contracts
Net operating revenues
2

(1
)
Commodity contracts
Cost of goods sold
13

(75
)
Commodity contracts
Selling, general and administrative expenses
4

(2
)
Other derivative instruments
Selling, general and administrative expenses
17

4

Other derivative instruments
Other income (loss) — net
8


Total
 
$
59

$
(63
)
 
 
Six Months Ended
Derivatives Not Designated
as Hedging Instruments
Location of Gain (Loss)
Recognized in Income
June 27,
2014

June 28,
2013

Foreign currency contracts
Net operating revenues
$
(18
)
$
4

Foreign currency contracts
Other income (loss) — net
23

73

Interest rate contracts
Interest expense

(3
)
Commodity contracts
Net operating revenues

(1
)
Commodity contracts
Cost of goods sold
35

(144
)
Commodity contracts
Selling, general and administrative expenses
1

(2
)
Other derivative instruments
Selling, general and administrative expenses
14

24

Other derivative instruments
Other income (loss) — net
8


Total
 
$
63

$
(49
)

17



NOTE 6: DEBT AND BORROWING ARRANGEMENTS
During the six months ended June 27, 2014, the Company retired $1,000 million of long-term debt upon maturity and issued $1,000 million total principal amount of notes due September 1, 2015, at a variable interest rate equal to the three-month London Interbank Offered Rate plus 0.01 percent.
NOTE 7: COMMITMENTS AND CONTINGENCIES
Guarantees
As of June 27, 2014, we were contingently liable for guarantees of indebtedness owed by third parties of $549 million, of which $174 million related to variable interest entities. 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 was 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 paid 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

18



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 notice of appeal of the trial court's summary judgment ruling. On October 29, 2013, the Wisconsin Court of Appeals affirmed the grant of summary judgment in favor of the Company and Aqua-Chem. On November 27, 2013, the Chartis insurers filed a petition for review in the Supreme Court of Wisconsin, and on December 11, 2013, the Company filed its opposition to that petition. On April 16, 2014, the Supreme Court of Wisconsin denied the Chartis insurers' petition for review.
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 (1) 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 (2) 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 $533 million and $537 million as of June 27, 2014, and December 31, 2013, 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 27, 2014
 
Shareowners of
The Coca-Cola Company

Noncontrolling
Interests

Total

Consolidated net income
$
4,214

$
17

$
4,231

Other comprehensive income:
 
 
 
Net foreign currency translation adjustment
(47
)
(5
)
(52
)
Net gain (loss) on derivatives1
(180
)

(180
)
Net unrealized gain (loss) on available-for-sale securities2
649


649

Net change in pension and other benefit liabilities
24


24

Total comprehensive income
$
4,660

$
12

$
4,672

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 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 27, 2014
Before-Tax Amount

 
Income Tax

 
After-Tax Amount

Foreign currency translation adjustments:
 
 
 
 
 
Translation adjustment arising during the period
$
364

 
$
(26
)
 
$
338

Reclassification adjustments recognized in net income

 

 

Net foreign currency translation adjustments
364

 
(26
)
 
338

Derivatives:
 
 
 
 
 
Unrealized gains (losses) arising during the period
(102
)
 
36

 
(66
)
Reclassification adjustments recognized in net income
(25
)
 
10

 
(15
)
Net gain (loss) on derivatives1
(127
)
 
46

 
(81
)
Available-for-sale securities:
 
 
 
 
 
Unrealized gains (losses) arising during the period
488

 
(150
)
 
338

Reclassification adjustments recognized in net income
(4
)
 

 
(4
)
Net change in unrealized gain (loss) on available-for-sale securities2
484

 
(150
)
 
334

Pension and other benefit liabilities:
 
 
 
 
 
Net pension and other benefits arising during the period
11

 
(3
)
 
8

Reclassification adjustments recognized in net income
15

 
(6
)
 
9

Net change in pension and other benefit liabilities3
26

 
(9
)
 
17

Other comprehensive income (loss) attributable to The Coca-Cola Company
$
747

 
$
(139
)
 
$
608

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 27, 2014
Before-Tax Amount

 
Income Tax

 
After-Tax Amount

Foreign currency translation adjustments:


 


 


Translation adjustment arising during the period
$
(120
)
 
$
73

 
$
(47
)
Reclassification adjustments recognized in net income

 

 

Net foreign currency translation adjustments
(120
)
 
73

 
(47
)
Derivatives:

 

 

Unrealized gains (losses) arising during the period
(225
)
 
84

 
(141
)
Reclassification adjustments recognized in net income
(64
)
 
25

 
(39
)
Net gain (loss) on derivatives1
(289
)
 
109

 
(180
)
Available-for-sale securities:

 

 

Unrealized gains (losses) arising during the period
968

 
(316
)
 
652

Reclassification adjustments recognized in net income
(3
)
 

 
(3
)
Net change in unrealized gain (loss) on available-for-sale securities2
965

 
(316
)
 
649

Pension and other benefit liabilities:

 

 

Net pension and other benefits arising during the period
8

 
(2
)
 
6

Reclassification adjustments recognized in net income
29

 
(11
)
 
18

Net change in pension and other benefit liabilities3
37

 
(13
)
 
24

Other comprehensive income (loss) attributable to The Coca-Cola Company
$
593

 
$
(147
)
 
$
446

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 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.

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 27, 2014 (in millions):
 
 
Amount Reclassified from
AOCI into Income
 
Description of AOCI Component
Location of Gain (Loss)
Recognized in Income
Three Months Ended June 27, 2014
Six Months Ended June 27, 2014

 
Derivatives:
 
 
 
 
Foreign currency contracts
Net operating revenues
$
(18
)
$
(43
)
 
Foreign currency and commodity contracts
Cost of goods sold
(7
)
(21
)
 
 
Income before income taxes
$
(25
)
$
(64
)
 
 
Income taxes
10

25

 
 
Consolidated net income
$
(15
)
$
(39
)
 
Available-for-sale securities:
 
 
 
 
Sale of securities
Other income (loss) — net
$
(4
)
$
(3
)
 
 
Income before income taxes
$
(4
)
$
(3
)
 
 
Income taxes


 
 
Consolidated net income
$
(4
)
$
(3
)
 
Pension and other benefit liabilities:
 
 
 
 
Amortization of net actuarial loss
*
$
19

$
38

 
Amortization of prior service cost (credit)
*
(4
)
(9
)
 
 
Income before income taxes
$
15

$
29

 
 
Income taxes
(6
)
(11
)
 
 
Consolidated net income
$
9

$
18

 
*
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.

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, 2013
$
33,440

$
61,660

$
(3,432
)
$
1,760

$
12,276

$
(39,091
)
$
267

Comprehensive income (loss)
4,672

4,214

446




12

Dividends paid/payable to shareowners of
     The Coca-Cola Company
(2,680
)
(2,680
)





Dividends paid to noncontrolling interests
(21
)





(21
)
Business combinations including purchase accounting adjustments
(28
)





(28
)
Purchases of treasury stock
(1,878
)




(1,878
)

Impact of employee stock option and
     restricted stock plans
796




399

397


June 27, 2014
$
34,301

$
63,194

$
(2,986
)
$
1,760

$
12,675

$
(40,572
)
$
230

NOTE 10: SIGNIFICANT OPERATING AND NONOPERATING ITEMS
Other Operating Charges
During the three months ended June 27, 2014, the Company incurred other operating charges of $201 million. These charges consisted of $89 million due to the Company's productivity and reinvestment program and $66 million due to the integration of our German bottling and distribution operations. The Company also recorded a loss of $25 million as a result of the

22



restructuring and transition of the Company's Russian juice operations to an existing joint venture with an unconsolidated bottling partner. In addition, a charge of $21 million was incurred due to the write-down of receivables related to sales of concentrate to our bottling partner in Venezuela as a result of limited government-approved exchange rate conversion mechanisms. Refer to Note 11 for additional information on the Company's 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 27, 2014, the Company recorded other operating charges of $329 million. These charges consisted of $175 million due to the Company's productivity and reinvestment program and $108 million due to the integration of our German bottling and distribution operations. In addition, the Company recorded a loss of $25 million as a result of the restructuring and transition of the Company's Russian juice operations to an existing joint venture with an unconsolidated bottling partner. The Company also incurred a charge of $21 million due to the write-down of receivables related to sales of concentrate to our bottling partner in Venezuela as a result of limited government-approved exchange rate conversion mechanisms. Refer to Note 11 for additional information on the Company's productivity, integration and restructuring initiatives. Refer to Note 15 for the impact these charges had on our operating segments.
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 and $20 million due to the integration of our German bottling and distribution operations. Refer to Note 11 for additional information on the Company's 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 28, 2013, the Company incurred other operating charges of $253 million. These charges consisted of $215 million due to the Company's productivity and reinvestment program and $41 million primarily due to the integration of our German bottling and distribution operations. Refer to Note 11 for additional information on the Company's 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 27, 2014, the Company recorded net charges of $6 million and $33 million, respectively, in the line item 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 charges represent the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees, including charges incurred by an equity method investee due to the devaluation of the Venezuelan bolivar. Refer to Note 15 for the impact these items had on our operating segments.
Other Income (Loss) — Net
During the three months ended June 27, 2014, the Company recorded a charge of $140 million primarily due to the derecognition of intangible assets as a result of refranchising certain territories in North America to three of its unconsolidated bottling partners. Refer to Note 2 for more information related to this charge and Note 15 for the impact this charge had on our operating segments.
During the six months ended June 27, 2014, the Company recorded a charge of $140 million primarily due to the derecognition of intangible assets as a result of refranchising certain territories in North America to three of its unconsolidated bottling partners. The Company also incurred a charge of $226 million due to the expansion of the Venezuelan government's currency conversion markets. Refer to Note 2 for more information related to the North America refranchising, Note 1 for more information related to the charge due to the change in Venezuelan exchange rates and Note 15 for the impact these charges had on our operating segments.
During the three and six months ended June 28, 2013, the Company recorded a loss of $144 million related to the then 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 received 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.

23



During the three and six months ended June 28, 2013, the Company also recorded a gain of $139 million due to Coca-Cola FEMSA, an equity method investee, 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. 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 to the items above, 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 1 for more information related to this charge and Note 15 for the impact this charge had on our operating segments.
NOTE 11: PRODUCTIVITY, INTEGRATION AND RESTRUCTURING INITIATIVES
Productivity and Reinvestment
In February 2012, the Company announced a four-year productivity and reinvestment program 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 Inc.'s former North America business.
In February 2014, the Company announced that we are expanding our productivity and reinvestment program to drive an incremental $1 billion in productivity by 2016 that will primarily be redirected into increased media investments. Our incremental productivity goal consists of two relatively equal components. First, we will expand savings through global supply chain optimization, data and information technology systems standardization, and resource and cost reallocation. These savings will be reinvested in global brand-building initiatives, with an emphasis on increased media spending. Second, we will increase the effectiveness of our marketing investments by transforming our marketing and commercial model to redeploy resources into more consumer-facing marketing investments to accelerate growth.
As of June 27, 2014, the Company has incurred total pretax expenses of $939 million related to our productivity and reinvestment 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 table below primarily relate to expenses in connection with legal, outplacement and consulting activities. Other direct costs reported in the table 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; losses on disposal of certain 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 27, 2014 (in millions):
 
Accrued
Balance
March 28, 2014

Costs
Incurred
Three Months Ended
June 27, 2014

Payments

Noncash
and
Exchange

Accrued
Balance
June 27, 2014

Severance pay and benefits
$
68

$
8

$
(32
)
$
(1
)
$
43

Outside services
6

22

(24
)

4

Other direct costs
16

59

(56
)
(5
)
14

Total
$
90

$
89

$
(112
)
$
(6
)
$
61

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 27, 2014 (in millions):
 
Accrued
Balance
December 31, 2013

Costs
Incurred
Six Months Ended
June 27, 2014

Payments

Noncash
and
Exchange

Accrued
Balance
June 27, 2014

Severance pay and benefits
$
88

$
14

$
(58
)
$
(1
)
$
43

Outside services
6

31

(33
)

4

Other direct costs
18

130

(113
)
(21
)
14

Total
$
112

$
175

$
(204
)
$
(22
)
$
61


24



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 $66 million and $108 million related to this initiative during the three and six months ended June 27, 2014, and has incurred total pretax expenses of $735 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 expenses recorded in connection with these integration activities have been primarily due to involuntary terminations. The Company had $142 million and $127 million accrued related to these integration costs as of June 27, 2014, and December 31, 2013, respectively.
We are currently reviewing additional restructuring opportunities within the German bottling and distribution operations, including integration costs related to information technology and other initiatives. If implemented, these initiatives will result in additional charges in future periods. However, as of June 27, 2014, the Company has not finalized any additional plans.
NOTE 12: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Net periodic benefit cost for our pension and other postretirement benefit plans consisted of the following (in millions):
 
Pension Benefits  
 
Other Benefits  
 
Three Months Ended
 
June 27,
2014

June 28,
2013

 
June 27,
2014

June 28,
2013

Service cost
$
67

$
69

 
$
7

$
9

Interest cost
102

95

 
10

10

Expected return on plan assets
(180
)
(165
)
 
(3
)
(3
)
Amortization of prior service cost (credit)


 
(4
)
(2
)
Amortization of net actuarial loss
18

49

 
1

3

Net periodic benefit cost (credit)
$
7

$
48

 
$
11

$
17

Settlement charge
2


 


Total cost (credit) recognized in statements of income
$
9

$
48

 
$
11

$
17

 
Pension Benefits  
 
Other Benefits  
 
Six Months Ended
 
June 27,
2014

June 28,
2013

 
June 27,
2014

June 28,
2013

Service cost
$
134

$
138

 
$
13

$
18

Interest cost
203

189

 
21

21

Expected return on plan assets
(358
)
(329
)
 
(6
)
(5
)
Amortization of prior service cost (credit)
(1
)
(1
)
 
(8
)
(5
)
Amortization of net actuarial loss
36

99

 
2

6

Net periodic benefit cost (credit)
$
14

$
96

 
$
22

$
35

Settlement charge
2


 


Total cost (credit) recognized in statements of income
$
16

$
96

 
$
22

$
35

During the six months ended June 27, 2014, the Company contributed $165 million to our pension plans, and we anticipate making additional contributions of approximately $6 million to our pension plans during the remainder of 2014. The Company contributed $616 million to our pension plans during the six months ended June 28, 2013.
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 2023. We anticipate that we will be able to extend or renew the grants in these locations. 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 2014 is 22.5 percent. However, in arriving at

25



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.
The Company recorded income tax expense of $779 million (23.0 percent effective tax rate) and $831 million (23.5 percent effective tax rate) during the three months ended June 27, 2014 and June 28, 2013, respectively. The Company recorded income tax expense of $1,358 million (24.3 percent effective tax rate) and $1,406 million (23.9 percent effective tax rate) during the six months ended June 27, 2014 and June 28, 2013, 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 27,
2014

 
June 28,
2013

 
June 27,
2014

 
June 28,
2013

 
Productivity and reinvestment program
$
(34
)
1 
$
(38
)
7 
$
(66
)
1 
$
(78
)
7 
Other productivity, integration and restructuring initiatives

2 
1

8 

2 
1

8 
Transaction gains and losses
(51
)
3 
48

9 
(51
)
3 
48

9 
Certain tax matters
26

4 
(1
)
10 
31

4 

10 
Other — net
3

5 
(8
)
11 
8

6 
(4
)
12 
1 
Related to charges of $89 million and $175 million during the three and six months ended June 27, 2014, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 10 and Note 11.
2 
Related to charges of $66 million and $108 million during the three and six months ended June 27, 2014, respectively. These charges were due to the integration of our German bottling and distribution operations. Refer to Note 10 and Note 11.
3 
Related to a charge of $140 million during the three and six months ended June 27, 2014, which was primarily due to the derecognition of intangible assets as a result of refranchising certain North America territories to three of its unconsolidated bottling partners. Refer to Note 2.
4 
Related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. The components of the net change in uncertain tax positions were individually insignificant.
5 
Related to charges of $52 million that consisted of $21 million due to a write-down of receivables related to sales of concentrate to our bottling partner in Venezuela, $25 million due to the restructuring and transition of the Company's Russian juice operations to an existing joint venture with an unconsolidated bottling partner, and $6 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 10.
6 
Related to charges of $305 million that consisted of $268 million due to the expansion of the Venezuelan government's currency conversion markets, including a write-down of receivables from our bottling partner in Venezuela, $25 million due to the restructuring and transition of the Company's Russian juice operations to an existing joint venture with an unconsolidated bottling partner, and $12 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 1 and Note 10.
7 
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.
8 
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 integration of our German bottling and distribution operations. Refer to Note 10 and Note 11.
9 
Related to a net charge of $11 million that primarily consisted of a loss of $144 million due to the then 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.
10 
Related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. The components of the net change in uncertain tax positions were individually insignificant.
11 
Related to a net charge of $26 million that primarily consisted of a charge of $23 million due to the early extinguishment of certain long-term debt.
12 
Related to charges of $202 million that primarily consisted of a charge of $23 million due to the early extinguishment of certain long-term debt; a charge of $149 million due to the devaluation of the Venezuelan bolivar; and a net charge of $33 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity investees. Refer to Note 1 and Note 10.

26



NOTE 14: FAIR VALUE MEASUREMENTS
Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1. We value assets and liabilities included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Recurring Fair Value Measurements
In accordance with accounting principles generally accepted in the United States, certain assets and liabilities are required to be recorded at fair value on a recurring basis. For our Company, the only assets and liabilities that are adjusted to fair value on a recurring basis are investments in equity and debt securities classified as trading or available-for-sale and derivative financial instruments. Additionally, the Company adjusts the fair value of long-term debt as a result of the Company's fair value hedging strategy.
Investments in Trading and Available-for-Sale Securities
The fair values of our investments in trading and available-for-sale securities using quoted market prices from daily exchange traded markets are based on the closing price as of the balance sheet date and are classified as Level 1. The fair values of our investments in trading and available-for-sale securities classified as Level 2 are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. Inputs into these valuation techniques include actual trade data, benchmark yields, broker/dealer quotes, and other similar data. These inputs are obtained from quoted market prices, independent pricing vendors or other sources.
Derivative Financial Instruments
The fair values of our futures contracts are primarily determined using quoted contract prices on futures exchange markets. The fair values of these instruments are based on the closing contract price as of the balance sheet date and are classified as Level 1.
The fair values of our derivative instruments other than exchange-traded contracts are determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments other than futures include the applicable exchange rates, forward rates, interest rates and discount rates. The standard valuation model for options also uses implied volatility as an additional input. The discount rates are based on the historical U.S. Deposit or U.S. Treasury rates, and the implied volatility specific to options is based on quoted rates from financial institutions.
Included in the fair value of derivative instruments is an adjustment for nonperformance risk. The adjustment is based on the current one-year credit default swap ("CDS") rate applied to each contract, by counterparty. We use our counterparty's CDS rate when we are in an asset position and our own CDS rate when we are in a liability position. The adjustment for nonperformance risk did not have a significant impact on the estimated fair value of our derivative instruments.

27



The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of June 27, 2014 (in millions):
 
Level 1

Level 2

Level 3

 
Netting
Adjustment1

Fair Value
Measurements

 
Assets
 
 
 
 
 
 
 
Trading securities2
$
217

$
173

$
6

 
$

$
396

 
Available-for-sale securities2
4,079

3,393

123

3 

7,595

 
Derivatives4
14

626


 
(165
)
475

5 
Total assets
$
4,310

$
4,192

$
129

 
$
(165
)
$
8,466

 
Liabilities
 
 
 
 
 
 
 
Derivatives4
$
3

$
204

$

 
$
(165
)
$
42

5 
Total liabilities
$
3

$
204

$

 
$
(165
)
$
42

 
1 Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and also cash collateral held or placed with the same counterparties. There are no amounts subject to legally enforceable master netting agreements that management has chosen not to offset or that do not meet the offsetting requirements.
2 
Refer to Note 3 for additional information related to the composition of our trading securities and available-for-sale securities.
3 Primarily related to long-term debt securities that mature in 2018.
4 Refer to Note 5 for additional information related to the composition of our derivative portfolio.
5 The Company's derivative financial instruments are recorded at fair value in our condensed consolidated balance sheet as follows: $3 million in the line item prepaid expenses and other assets; $472 million in the line item other assets; $13 million in the line item accounts payable and accrued expenses; and $29 million in the line item other liabilities. Refer to Note 5 for additional information related to the composition of our derivative portfolio.
The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 (in millions):