2014.09.26 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 September 26, 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)
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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. |
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| 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. |
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Class of Common Stock | | Outstanding at October 24, 2014 |
$0.25 Par Value | | 4,380,112,851 Shares |
THE COCA-COLA COMPANY AND SUBSIDIARIES
Table of Contents
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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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.
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 | | Nine Months Ended |
| September 26, 2014 |
| September 27, 2013 |
| | September 26, 2014 |
| September 27, 2013 |
|
NET OPERATING REVENUES | $ | 11,976 |
| $ | 12,030 |
| | $ | 35,126 |
| $ | 35,814 |
|
Cost of goods sold | 4,630 |
| 4,793 |
| | 13,532 |
| 14,106 |
|
GROSS PROFIT | 7,346 |
| 7,237 |
| | 21,594 |
| 21,708 |
|
Selling, general and administrative expenses | 4,507 |
| 4,424 |
| | 12,880 |
| 12,991 |
|
Other operating charges | 128 |
| 341 |
| | 457 |
| 594 |
|
OPERATING INCOME | 2,711 |
| 2,472 |
| | 8,257 |
| 8,123 |
|
Interest income | 169 |
| 136 |
| | 436 |
| 381 |
|
Interest expense | 113 |
| 90 |
| | 344 |
| 314 |
|
Equity income (loss) — net | 205 |
| 204 |
| | 530 |
| 537 |
|
Other income (loss) — net | (312 | ) | 658 |
| | (630 | ) | 522 |
|
INCOME BEFORE INCOME TAXES | 2,660 |
| 3,380 |
| | 8,249 |
| 9,249 |
|
Income taxes | 538 |
| 925 |
| | 1,896 |
| 2,331 |
|
CONSOLIDATED NET INCOME | 2,122 |
| 2,455 |
| | 6,353 |
| 6,918 |
|
Less: Net income attributable to noncontrolling interests | 8 |
| 8 |
| | 25 |
| 44 |
|
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | $ | 2,114 |
| $ | 2,447 |
| | $ | 6,328 |
| $ | 6,874 |
|
BASIC NET INCOME PER SHARE1 | $ | 0.48 |
| $ | 0.55 |
| | $ | 1.44 |
| $ | 1.55 |
|
DILUTED NET INCOME PER SHARE1 | $ | 0.48 |
| $ | 0.54 |
| | $ | 1.42 |
| $ | 1.52 |
|
DIVIDENDS PER SHARE | $ | 0.305 |
| $ | 0.280 |
| | $ | 0.915 |
| $ | 0.840 |
|
AVERAGE SHARES OUTSTANDING | 4,383 |
| 4,426 |
| | 4,392 |
| 4,442 |
|
Effect of dilutive securities | 62 |
| 72 |
| | 62 |
| 76 |
|
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION | 4,445 |
| 4,498 |
| | 4,454 |
| 4,518 |
|
1 Calculated based on net income attributable to shareowners of The Coca-Cola Company.
Refer to Notes to Condensed Consolidated Financial Statements.
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In millions)
|
| | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 26, 2014 |
| September 27, 2013 |
| | September 26, 2014 |
| September 27, 2013 |
|
CONSOLIDATED NET INCOME | $ | 2,122 |
| $ | 2,455 |
| | $ | 6,353 |
| $ | 6,918 |
|
Other comprehensive income: | | | | | |
Net foreign currency translation adjustment | (1,232 | ) | (466 | ) | | (1,284 | ) | (1,447 | ) |
Net gain (loss) on derivatives | 278 |
| (82 | ) | | 98 |
| 122 |
|
Net unrealized gain (loss) on available-for-sale securities | 74 |
| (92 | ) | | 723 |
| (66 | ) |
Net change in pension and other benefit liabilities | 24 |
| 27 |
| | 48 |
| 105 |
|
TOTAL COMPREHENSIVE INCOME | 1,266 |
| 1,842 |
| | 5,938 |
| 5,632 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests | 9 |
| 11 |
| | 21 |
| 72 |
|
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | $ | 1,257 |
| $ | 1,831 |
| | $ | 5,917 |
| $ | 5,560 |
|
Refer to Notes to Condensed Consolidated Financial Statements.
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except par value)
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| | | | | | |
| September 26, 2014 |
| December 31, 2013 |
|
ASSETS | | |
CURRENT ASSETS | | |
Cash and cash equivalents | $ | 11,084 |
| $ | 10,414 |
|
Short-term investments | 9,185 |
| 6,707 |
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TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS | 20,269 |
| 17,121 |
|
Marketable securities | 3,445 |
| 3,147 |
|
Trade accounts receivable, less allowances of $58 and $61, respectively | 5,081 |
| 4,873 |
|
Inventories | 3,277 |
| 3,277 |
|
Prepaid expenses and other assets | 3,277 |
| 2,886 |
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Assets held for sale | 103 |
| — |
|
TOTAL CURRENT ASSETS | 35,452 |
| 31,304 |
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EQUITY METHOD INVESTMENTS | 10,582 |
| 10,393 |
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OTHER INVESTMENTS | 3,737 |
| 1,119 |
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OTHER ASSETS | 4,850 |
| 4,661 |
|
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation of $10,800 and $10,065, respectively | 14,738 |
| 14,967 |
|
TRADEMARKS WITH INDEFINITE LIVES | 6,619 |
| 6,744 |
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BOTTLERS' FRANCHISE RIGHTS WITH INDEFINITE LIVES | 7,025 |
| 7,415 |
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GOODWILL | 12,188 |
| 12,312 |
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OTHER INTANGIBLE ASSETS | 1,123 |
| 1,140 |
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TOTAL ASSETS | $ | 96,314 |
| $ | 90,055 |
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LIABILITIES AND EQUITY | | |
CURRENT LIABILITIES | | |
Accounts payable and accrued expenses | $ | 10,517 |
| $ | 9,577 |
|
Loans and notes payable | 19,175 |
| 16,901 |
|
Current maturities of long-term debt | 2,524 |
| 1,024 |
|
Accrued income taxes | 528 |
| 309 |
|
Liabilities held for sale | 16 |
| — |
|
TOTAL CURRENT LIABILITIES | 32,760 |
| 27,811 |
|
LONG-TERM DEBT | 20,111 |
| 19,154 |
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OTHER LIABILITIES | 3,383 |
| 3,498 |
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DEFERRED INCOME TAXES | 6,391 |
| 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 | 12,901 |
| 12,276 |
|
Reinvested earnings | 63,972 |
| 61,660 |
|
Accumulated other comprehensive income (loss) | (3,843 | ) | (3,432 | ) |
Treasury stock, at cost — 2,665 and 2,638 shares, respectively | (41,361 | ) | (39,091 | ) |
EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | 33,429 |
| 33,173 |
|
EQUITY ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 240 |
| 267 |
|
TOTAL EQUITY | 33,669 |
| 33,440 |
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TOTAL LIABILITIES AND EQUITY | $ | 96,314 |
| $ | 90,055 |
|
Refer to Notes to Condensed Consolidated Financial Statements.
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
|
| | | | | | |
| Nine Months Ended |
| September 26, 2014 |
| September 27, 2013 |
|
OPERATING ACTIVITIES | | |
Consolidated net income | $ | 6,353 |
| $ | 6,918 |
|
Depreciation and amortization | 1,477 |
| 1,444 |
|
Stock-based compensation expense | 143 |
| 155 |
|
Deferred income taxes | (179 | ) | 179 |
|
Equity (income) loss — net of dividends | (259 | ) | (270 | ) |
Foreign currency adjustments | 305 |
| 140 |
|
Significant (gains) losses on sales of assets — net | 410 |
| (670 | ) |
Other operating charges | 192 |
| 331 |
|
Other items | 38 |
| 137 |
|
Net change in operating assets and liabilities | (501 | ) | (652 | ) |
Net cash provided by operating activities | 7,979 |
| 7,712 |
|
INVESTING ACTIVITIES | | |
Purchases of investments | (14,098 | ) | (11,451 | ) |
Proceeds from disposals of investments | 9,558 |
| 9,601 |
|
Acquisitions of businesses, equity method investments and nonmarketable securities | (343 | ) | (326 | ) |
Proceeds from disposals of businesses, equity method investments and nonmarketable securities | 73 |
| 869 |
|
Purchases of property, plant and equipment | (1,618 | ) | (1,625 | ) |
Proceeds from disposals of property, plant and equipment | 150 |
| 64 |
|
Other investing activities | (280 | ) | (115 | ) |
Net cash provided by (used in) investing activities | (6,558 | ) | (2,983 | ) |
FINANCING ACTIVITIES | | |
Issuances of debt | 33,292 |
| 31,147 |
|
Payments of debt | (28,494 | ) | (27,293 | ) |
Issuances of stock | 1,058 |
| 1,079 |
|
Purchases of stock for treasury | (2,963 | ) | (3,892 | ) |
Dividends | (2,680 | ) | (2,494 | ) |
Other financing activities | (409 | ) | 70 |
|
Net cash provided by (used in) financing activities | (196 | ) | (1,383 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (555 | ) | (670 | ) |
CASH AND CASH EQUIVALENTS | | |
Net increase (decrease) during the period | 670 |
| 2,676 |
|
Balance at beginning of period | 10,414 |
| 8,442 |
|
Balance at end of period | $ | 11,084 |
| $ | 11,118 |
|
Refer to Notes to Condensed Consolidated Financial Statements.
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 nine months ended September 26, 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 third quarter of 2014 and 2013 ended on September 26, 2014 and September 27, 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 nine months ended September 27, 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
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 nine months ended September 26, 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 September 26, 2014, our Venezuelan subsidiary held net monetary assets of $206 million, including $175 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 $275 million as of September 26, 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 September 26, 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 nine months ended September 26, 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.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, 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 ASU 2014-09 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. ASU 2014-09 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 ASU 2014-09 will have on our consolidated financial statements.
NOTE 2: ACQUISITIONS AND DIVESTITURES
Acquisitions
During the nine months ended September 26, 2014, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $343 million, and 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 nine months ended September 27, 2013, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $326 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 fair value upon the close of the transaction. The resulting gain on the remeasurement was not significant to our condensed consolidated financial statements.
Monster Beverage Corporation
On August 14, 2014, the Company and Monster Beverage Corporation ("Monster") entered into definitive agreements for a long-term strategic relationship in the global energy drink category. Subject to the terms and conditions of the agreements, upon the closing of the transactions (1) the Company will acquire newly issued shares of Monster common stock representing approximately 16.7 percent of the outstanding shares of Monster common stock (after giving effect to the new issuance) and will be represented by two directors on Monster's Board of Directors; (2) the Company will transfer its global energy drink business (including NOS, Full Throttle, Burn, Mother, Play and Power Play, and Relentless) to Monster, and Monster will transfer its non-energy drink business (including Hansen's Natural Sodas, Peace Tea, Hubert's Lemonade and Hansen's Juice Products) to the Company; and (3) the parties will amend their current distribution coordination agreements by expanding into additional territories and entering into long-term agreements with the Company's existing network of bottling and distribution partners. Upon closing, the Company will make a net cash payment of $2.15 billion to Monster. The closing of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to take place in late 2014 or early 2015. The Company expects to account for its resulting interest in Monster as an equity method investment.
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 KoldTM at-home beverage system. Under the agreement, the companies will cooperate to bring the Keurig KoldTM 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 nine months ended September 26, 2014, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $73 million, which primarily 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 territories that were previously managed by our consolidated North America bottling and customer service organization called Coca-Cola Refreshments ("CCR") to certain of our 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, the bottlers 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 $23 million and $68 million during the three and nine months ended September 26, 2014, respectively. 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 noncash loss of $34 million and $174 million during the three and nine months ended September 26, 2014, respectively, primarily related to the derecognition of the intangible assets transferred, which was included in the line item other income (loss) — net in our condensed consolidated statements of income. 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.
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.
As of September 26, 2014, the Company had entered into agreements to refranchise additional territories in North America. These territories met the criteria to be classified as held for sale, and we were required to record their assets and liabilities at the lower of carrying value or fair value less any costs to sell based on the agreed-upon sale price. The Company recognized a noncash loss of $236 million during the three and nine months ended September 26, 2014 as a result of writing down the assets to their fair value less costs to sell, which was included in the line item other income (loss) — net in our condensed consolidated statements of income. This loss was primarily related to the anticipated derecognition of the intangible assets to be transferred, which we expect to recover under the CBAs through the future quarterly payments.
The following table presents information related to the major classes of assets and liabilities that were classified as held for sale in our condensed consolidated balance sheet (in millions):
|
| | | |
| September 26, 2014 |
|
Inventories | $ | 15 |
|
Prepaid expenses and other assets | 1 |
|
Property, plant and equipment — net | 78 |
|
Bottlers' franchise rights with indefinite lives | 183 |
|
Goodwill | 23 |
|
Other intangible assets | 39 |
|
Allowance for reduction of assets held for sale | (236 | ) |
Total assets held for sale | $ | 103 |
|
Other liabilities | $ | 16 |
|
Total liabilities held for sale | $ | 16 |
|
We determined that these territories did not meet the criteria to be classified as discontinued operations, primarily due to the continued significant involvement we have in these operations following each transaction.
During the nine months ended September 27, 2013, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $869 million. These proceeds primarily resulted from the sale of a majority ownership interest in our previously consolidated bottling operations in the Philippines ("Philippine bottling operations"), and separately, the deconsolidation of our bottling operations in Brazil ("Brazilian bottling operations"). See below for further details on each of these transactions.
Philippine Bottling Operations
On December 13, 2012, the Company and Coca-Cola FEMSA, S.A.B. de C.V. ("Coca-Cola FEMSA"), an equity method investee, executed a share purchase agreement for the sale of a majority ownership interest in our consolidated Philippine bottling operations. This transaction was completed on January 25, 2013. 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.
Brazilian Bottling Operations
On December 17, 2012, the Company entered into an agreement with several parties to combine our Brazilian bottling operations with an independent bottler in Brazil in a transaction involving a disposition of shares for cash and an exchange of shares for a 44 percent minority ownership interest in the newly combined entity which was recorded at fair value. This transaction was completed on July 3, 2013 and resulted in the deconsolidation of our Brazilian bottling operations. The Company recognized a gain of $615 million as a result of this transaction. The owners of the majority interest have the option to acquire from us up to 24 percent of the new entity's outstanding shares at any time for a period of six years beginning December 31, 2013.
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 September 26, 2014, and December 31, 2013, our trading securities had a fair value of $395 million and $372 million, respectively, and consisted primarily of equity securities. The Company had net unrealized gains on trading securities of $35 million and $12 million as of September 26, 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):
|
| | | | | | |
| September 26, 2014 |
| December 31, 2013 |
|
Marketable securities | $ | 304 |
| $ | 286 |
|
Other assets | 91 |
| 86 |
|
Total trading securities | $ | 395 |
| $ | 372 |
|
Available-for-Sale and Held-to-Maturity Securities
As of September 26, 2014 and December 31, 2013, the Company did not have any held-to-maturity securities. As of September 26, 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 | $ | 2,752 |
| $ | 1,465 |
| $ | (16 | ) | $ | 4,201 |
|
Debt securities | 3,452 |
| 51 |
| (8 | ) | 3,495 |
|
Total available-for-sale securities | $ | 6,204 |
| $ | 1,516 |
| $ | (24 | ) | $ | 7,696 |
|
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 September 26, 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 | | Nine Months Ended |
| September 26, 2014 |
| September 27, 2013 |
| | September 26, 2014 |
| September 27, 2013 |
|
Gross gains | $ | 9 |
| $ | 2 |
| | $ | 25 |
| $ | 10 |
|
Gross losses | (3 | ) | (9 | ) | | (16 | ) | (19 | ) |
Proceeds | 1,260 |
| 1,091 |
| | 3,442 |
| 3,349 |
|
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 September 26, 2014 and December 31, 2013, the Company's available-for-sale securities included solvency capital funds of $856 million and $667 million, respectively.
The Company's available-for-sale securities were included in the following line items in our condensed consolidated balance sheets (in millions):
|
| | | | | | |
| September 26, 2014 |
| December 31, 2013 |
|
Cash and cash equivalents | $ | — |
| $ | 245 |
|
Marketable securities | 3,141 |
| 2,861 |
|
Other investments | 3,569 |
| 958 |
|
Other assets | 986 |
| 778 |
|
Total available-for-sale securities | $ | 7,696 |
| $ | 4,842 |
|
The contractual maturities of these available-for-sale securities as of September 26, 2014 were as follows (in millions):
|
| | | | | | |
| Cost |
| Fair Value |
|
Within 1 year | $ | 1,240 |
| $ | 1,241 |
|
After 1 year through 5 years | 1,703 |
| 1,730 |
|
After 5 years through 10 years | 129 |
| 139 |
|
After 10 years | 380 |
| 385 |
|
Equity securities | 2,752 |
| 4,201 |
|
Total available-for-sale securities | $ | 6,204 |
| $ | 7,696 |
|
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 September 26, 2014 and December 31, 2013. Our cost method investments had a carrying value of $167 million and $162 million as of September 26, 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):
|
| | | | | | |
| September 26, 2014 |
| December 31, 2013 |
|
Raw materials and packaging | $ | 1,645 |
| $ | 1,692 |
|
Finished goods | 1,267 |
| 1,240 |
|
Other | 365 |
| 345 |
|
Total inventories | $ | 3,277 |
| $ | 3,277 |
|
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 values 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.
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 | September 26, 2014 |
| December 31, 2013 |
|
Assets | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 496 |
| $ | 211 |
|
Foreign currency contracts | Other assets | 181 |
| 109 |
|
Commodity contracts | Prepaid expenses and other assets | — |
| 1 |
|
Interest rate contracts | Prepaid expenses and other assets | 24 |
| — |
|
Interest rate contracts | Other assets | 154 |
| 283 |
|
Total assets | | $ | 855 |
| $ | 604 |
|
Liabilities | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 23 |
| $ | 84 |
|
Foreign currency contracts | Other liabilities | 109 |
| 40 |
|
Commodity contracts | Accounts payable and accrued expenses | 1 |
| 1 |
|
Interest rate contracts | Other liabilities | 5 |
| — |
|
Total liabilities | | $ | 138 |
| $ | 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 | September 26, 2014 |
| December 31, 2013 |
|
Assets | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 64 |
| $ | 21 |
|
Foreign currency contracts | Other assets | 174 |
| 171 |
|
Commodity contracts | Prepaid expenses and other assets | 36 |
| 33 |
|
Commodity contracts | Other assets | 2 |
| 1 |
|
Other derivative instruments | Prepaid expenses and other assets | 30 |
| 9 |
|
Other derivative instruments | Other assets | 2 |
| — |
|
Total assets | | $ | 308 |
| $ | 235 |
|
Liabilities | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 35 |
| $ | 24 |
|
Foreign currency contracts | Other liabilities | 44 |
| — |
|
Commodity contracts | Accounts payable and accrued expenses | 42 |
| 23 |
|
Commodity contracts | Other liabilities | 4 |
| — |
|
Interest rate contracts | Other liabilities | 2 |
| 3 |
|
Other derivative instruments | Accounts payable and accrued expenses | 2 |
| — |
|
Total liabilities | | $ | 129 |
| $ | 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.
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 nine months ended September 26, 2014 or September 27, 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 $10,412 million and $8,450 million as of September 26, 2014 and December 31, 2013, respectively.
During the three months ended September 26, 2014, the Company entered into cross-currency swaps to hedge the changes in the cash flows of its euro-denominated debt due to changes in euro exchange rates. These swaps have been designated as cash flow hedges. The Company records the change in carrying value of the euro-denominated debt due to changes in exchange rates into earnings each period. The changes in fair value of the cross-currency swap derivatives are recorded into AOCI with an immediate reclassification into earnings for the change in fair value attributable to fluctuations in the euro exchange rates. These swaps have a notional amount of $2,590 million as of September 26, 2014.
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 $16 million and $26 million as of September 26, 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 September 26, 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 September 26, 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 | $ | 490 |
| Net operating revenues | $ | 19 |
| $ | — |
| |
Foreign currency contracts | 36 |
| Cost of goods sold | 5 |
| — |
| 2 |
Foreign currency contracts | (93 | ) | Other income (loss) — net | (52 | ) | — |
| |
Interest rate contracts | (9 | ) | Interest expense | — |
| — |
| |
Commodity contracts | — |
| Cost of goods sold | 1 |
| — |
| |
Total | $ | 424 |
| | $ | (27 | ) | $ | — |
| |
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 nine months ended September 26, 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 | $ | 378 |
| Net operating revenues | $ | 62 |
| $ | — |
| 2 |
Foreign currency contracts | 15 |
| Cost of goods sold | 25 |
| — |
| 2 |
Foreign currency contracts | (93 | ) | Other income (loss) — net | (52 | ) | — |
| |
Interest rate contracts | (100 | ) | Interest expense | — |
| — |
| |
Commodity contracts | 1 |
| Cost of goods sold | 2 |
| — |
| |
Total | $ | 201 |
| | $ | 37 |
| $ | — |
| |
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 September 27, 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 | $ | (70 | ) | Net operating revenues | $ | 53 |
| $ | — |
| |
Foreign currency contracts | (4 | ) | Cost of goods sold | 11 |
| — |
| |
Interest rate contracts | 4 |
| Interest expense | (3 | ) | — |
| |
Commodity contracts | — |
| Cost of goods sold | (1 | ) | — |
| |
Total | $ | (70 | ) | | $ | 60 |
| $ | — |
| |
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 nine months ended September 27, 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 | $ | 150 |
| Net operating revenues | $ | 123 |
| $ | 1 |
| |
Foreign currency contracts | 31 |
| Cost of goods sold | 21 |
| — |
| |
Interest rate contracts | 155 |
| Interest expense | (9 | ) | — |
| 2 |
Commodity contracts | 1 |
| Cost of goods sold | (2 | ) | — |
| |
Total | $ | 337 |
| | $ | 133 |
| $ | 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 September 26, 2014, the Company estimates that it will reclassify into earnings during the next 12 months $208 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 September 26, 2014, such adjustments had cumulatively increased the carrying value of our long-term debt by $22 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 September 26, 2014 and December 31, 2013, respectively.
The Company also uses fair value hedges to minimize exposure to changes in the fair value of certain available-for-sale securities from fluctuations in foreign currency exchange rates. The changes in fair values of derivatives designated as fair value hedges and the offsetting changes in fair values of the hedged items are recognized in earnings. As a result, any difference is reflected in earnings as ineffectiveness. The total notional values of derivatives that related to our fair value hedges of this type were $985 million and $996 million as of September 26, 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 September 26, 2014 and September 27, 2013 (in millions):
|
| | | | | | | |
Fair Value Hedging Instruments | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income | |
Three Months Ended |
September 26, 2014 |
| September 27, 2013 |
|
Interest rate swaps | Interest expense | $ | (36 | ) | $ | 4 |
|
Fixed-rate debt | Interest expense | 44 |
| 5 |
|
Net impact to interest expense | | $ | 8 |
| $ | 9 |
|
Foreign currency contracts | Other income (loss) — net | $ | 12 |
| $ | 39 |
|
Available-for-sale securities | Other income (loss) — net | (18 | ) | (45 | ) |
Net impact to other income (loss) — net | | $ | (6 | ) | $ | (6 | ) |
Net impact of fair value hedging instruments | | $ | 2 |
| $ | 3 |
|
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 nine months ended September 26, 2014 and September 27, 2013 (in millions):
|
| | | | | | | |
Fair Value Hedging Instruments | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income | |
Nine Months Ended |
September 26, 2014 |
| September 27, 2013 |
|
Interest rate swaps | Interest expense | $ | (10 | ) | $ | (147 | ) |
Fixed-rate debt | Interest expense | 29 |
| 181 |
|
Net impact to interest expense | | $ | 19 |
| $ | 34 |
|
Foreign currency contracts | Other income (loss) — net | $ | (7 | ) | $ | 32 |
|
Available-for-sale securities | Other income (loss) — net | (10 | ) | (47 | ) |
Net impact to other income (loss) — net |
| $ | (17 | ) | $ | (15 | ) |
Net impact of fair value hedging instruments |
| $ | 2 |
| $ | 19 |
|
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 $1,921 million and $2,024 million as of September 26, 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 nine months ended September 26, 2014 and September 27, 2013 (in millions):
|
| | | | | | | | | | | | | |
| Gain (Loss) Recognized in OCI |
| Three Months Ended | | Nine Months Ended |
| September 26, 2014 |
| September 27, 2013 |
| | September 26, 2014 |
| September 27, 2013 |
|
Foreign currency contracts | $ | 134 |
| $ | (22 | ) | | $ | (8 | ) | $ | 8 |
|
The Company did not reclassify any deferred gains or losses related to net investment hedges from AOCI into earnings during the three and nine months ended September 26, 2014 and September 27, 2013. In addition, the Company did not have any ineffectiveness related to net investment hedges during the three and nine months ended September 26, 2014 and September 27, 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 $4,294 million and $3,871 million as of September 26, 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 $1,164 million and $1,441 million as of September 26, 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 nine months ended September 26, 2014 and September 27, 2013 (in millions):
|
| | | | | | | |
| | Three Months Ended |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | September 26, 2014 |
| September 27, 2013 |
|
Foreign currency contracts | Net operating revenues | $ | 6 |
| $ | (2 | ) |
Foreign currency contracts | Other income (loss) — net | (70 | ) | 47 |
|
Foreign currency contracts | Cost of goods sold | — |
| 2 |
|
Commodity contracts | Net operating revenues | (9 | ) | 2 |
|
Commodity contracts | Cost of goods sold | 25 |
| (3 | ) |
Commodity contracts | Selling, general and administrative expenses | (15 | ) | 3 |
|
Other derivative instruments | Selling, general and administrative expenses | 3 |
| 9 |
|
Other derivative instruments | Other income (loss) — net | 18 |
| — |
|
Total | | $ | (42 | ) | $ | 58 |
|
|
| | | | | | | |
| | Nine Months Ended |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | September 26, 2014 |
| September 27, 2013 |
|
Foreign currency contracts | Net operating revenues | $ | (12 | ) | $ | 2 |
|
Foreign currency contracts | Other income (loss) — net | (47 | ) | 120 |
|
Foreign currency contracts | Cost of goods sold | — |
| 2 |
|
Interest rate contracts | Interest expense | — |
| (3 | ) |
Commodity contracts | Net operating revenues | (9 | ) | 1 |
|
Commodity contracts | Cost of goods sold | 60 |
| (147 | ) |
Commodity contracts | Selling, general and administrative expenses | (14 | ) | 1 |
|
Other derivative instruments | Selling, general and administrative expenses | 17 |
| 33 |
|
Other derivative instruments | Other income (loss) — net | 26 |
| — |
|
Total | | $ | 21 |
| $ | 9 |
|
NOTE 6: DEBT AND BORROWING ARRANGEMENTS
During the nine months ended September 26, 2014, the Company issued $3,537 million of long-term debt. The general terms of the notes issued are as follows:
| |
• | $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; |
| |
• | $1,015 million total principal amount of euro notes due September 22, 2022 at a fixed interest rate of 1.125 percent; and |
| |
• | $1,522 million total principal amount of euro notes due September 22, 2026 at a fixed interest rate of 1.875 percent. |
During the nine months ended September 26, 2014, the Company retired $1,000 million of long-term debt upon maturity.
NOTE 7: COMMITMENTS AND CONTINGENCIES
Guarantees
As of September 26, 2014, we were contingently liable for guarantees of indebtedness owed by third parties of $527 million, of which $173 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 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 $543 million and $537 million as of September 26, 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): |
| | | | | | | | | |
| Nine Months Ended September 26, 2014 |
| Shareowners of The Coca-Cola Company |
| Noncontrolling Interests |
| Total |
|
Consolidated net income | $ | 6,328 |
| $ | 25 |
| $ | 6,353 |
|
Other comprehensive income: | | | |
Net foreign currency translation adjustment | (1,280 | ) | (4 | ) | (1,284 | ) |
Net gain (loss) on derivatives1 | 98 |
| — |
| 98 |
|
Net unrealized gain (loss) on available-for-sale securities2 | 723 |
| — |
| 723 |
|
Net change in pension and other benefit liabilities | 48 |
| — |
| 48 |
|
Total comprehensive income | $ | 5,917 |
| $ | 21 |
| $ | 5,938 |
|
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.
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 September 26, 2014 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustment arising during the period | $ | (1,166 | ) | | $ | (67 | ) | | $ | (1,233 | ) |
Reclassification adjustments recognized in net income | — |
| | — |
| | — |
|
Net foreign currency translation adjustments | (1,166 | ) | | (67 | ) | | (1,233 | ) |
Derivatives: | | | | | |
Unrealized gains (losses) arising during the period | 419 |
| | (157 | ) | | 262 |
|
Reclassification adjustments recognized in net income | 27 |
| | (11 | ) | | 16 |
|
Net gain (loss) on derivatives1 | 446 |
| | (168 | ) | | 278 |
|
Available-for-sale securities: | | | | | |
Unrealized gains (losses) arising during the period | 177 |
| | (99 | ) | | 78 |
|
Reclassification adjustments recognized in net income | (6 | ) | | 2 |
| | (4 | ) |
Net change in unrealized gain (loss) on available-for-sale securities2 | 171 |
| | (97 | ) | | 74 |
|
Pension and other benefit liabilities: | | | | | |
Net pension and other benefits arising during the period | 19 |
| | (4 | ) | | 15 |
|
Reclassification adjustments recognized in net income | 14 |
| | (5 | ) | | 9 |
|
Net change in pension and other benefit liabilities3 | 33 |
| | (9 | ) | | 24 |
|
Other comprehensive income (loss) attributable to The Coca-Cola Company | $ | (516 | ) | | $ | (341 | ) | | $ | (857 | ) |
| |
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. |
|
| | | | | | | | | | | |
Nine Months Ended September 26, 2014 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: |
|
| |
|
| |
|
|
Translation adjustment arising during the period | $ | (1,286 | ) | | $ | 6 |
| | $ | (1,280 | ) |
Reclassification adjustments recognized in net income | — |
| | — |
| | — |
|
Net foreign currency translation adjustments | (1,286 | ) | | 6 |
| | (1,280 | ) |
Derivatives: |
| |
| |
|
Unrealized gains (losses) arising during the period | 194 |
| | (73 | ) | | 121 |
|
Reclassification adjustments recognized in net income | (37 | ) | | 14 |
| | (23 | ) |
Net gain (loss) on derivatives1 | 157 |
| | (59 | ) | | 98 |
|
Available-for-sale securities: |
| |
| |
|
Unrealized gains (losses) arising during the period | 1,145 |
| | (415 | ) | | 730 |
|
Reclassification adjustments recognized in net income | (9 | ) | | 2 |
| | (7 | ) |
Net change in unrealized gain (loss) on available-for-sale securities2 | 1,136 |
| | (413 | ) | | 723 |
|
Pension and other benefit liabilities: |
| |
| |
|
Net pension and other benefits arising during the period | 27 |
| | (6 | ) | | 21 |
|
Reclassification adjustments recognized in net income | 43 |
| | (16 | ) | | 27 |
|
Net change in pension and other benefit liabilities3 | 70 |
| | (22 | ) | | 48 |
|
Other comprehensive income (loss) attributable to The Coca-Cola Company | $ | 77 |
| | $ | (488 | ) | | $ | (411 | ) |
| |
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. |
|
| | | | | | | | | | | |
Three Months Ended September 27, 2013 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustment arising during the period | $ | (639 | ) | | $ | 144 |
| | $ | (495 | ) |
Reclassification adjustments recognized in net income | 26 |
| | — |
| | 26 |
|
Net foreign currency translation adjustments | (613 | ) | | 144 |
| | (469 | ) |
Derivatives: | | | | | |
Unrealized gains (losses) arising during the period | (69 | ) | | 25 |
| | (44 | ) |
Reclassification adjustments recognized in net income | (60 | ) | | 22 |
| | (38 | ) |
Net gain (loss) on derivatives1 | (129 | ) | | 47 |
| | (82 | ) |
Available-for-sale securities: | | | | | |
Unrealized gains (losses) arising during the period | (152 | ) | | 53 |
| | (99 | ) |
Reclassification adjustments recognized in net income | 7 |
| | — |
| | 7 |
|
Net change in unrealized gain (loss) on available-for-sale securities2 | (145 | ) | | 53 |
| | (92 | ) |
Pension and other benefit liabilities: | | | | | |
Net pension and other benefits arising during the period | (5 | ) | | — |
| | (5 | ) |
Reclassification adjustments recognized in net income | 49 |
| | (17 | ) | | 32 |
|
Net change in pension and other benefit liabilities3 | 44 |
| | (17 | ) | | 27 |
|
Other comprehensive income (loss) attributable to The Coca-Cola Company | $ | (843 | ) | | $ | 227 |
| | $ | (616 | ) |
| |
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. |
|
| | | | | | | | | | | |
Nine Months Ended September 27, 2013 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustment arising during the period | $ | (1,318 | ) | | $ | 37 |
| | $ | (1,281 | ) |
Reclassification adjustments recognized in net income | (194 | ) | | — |
| | (194 | ) |
Net foreign currency translation adjustments | (1,512 | ) | | 37 |
| | (1,475 | ) |
Derivatives: |
| |
| |
|
Unrealized gains (losses) arising during the period | 333 |
| | (128 | ) | | 205 |
|
Reclassification adjustments recognized in net income | (133 | ) | | 50 |
| | (83 | ) |
Net gain (loss) on derivatives1 | 200 |
| | (78 | ) | | 122 |
|
Available-for-sale securities: |
| |
| |
|
Unrealized gains (losses) arising during the period | (108 | ) | | 33 |
| | (75 | ) |
Reclassification adjustments recognized in net income | 9 |
| | — |
| | 9 |
|
Net change in unrealized gain (loss) on available-for-sale securities2 | (99 | ) | | 33 |
| | (66 | ) |
Pension and other benefit liabilities: |
| |
| |
|
Net pension and other benefits arising during the period | 20 |
| | (9 | ) | | 11 |
|
Reclassification adjustments recognized in net income | 147 |
| | (53 | ) | | 94 |
|
Net change in pension and other benefit liabilities3 | 167 |
| | (62 | ) | | 105 |
|
Other comprehensive income (loss) attributable to The Coca-Cola Company | $ | (1,244 | ) | | $ | (70 | ) | | $ | (1,314 | ) |
| |
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. |
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 nine months ended September 26, 2014 (in millions):
|
| | | | | | | | |
| | Amount Reclassified from AOCI into Income | |
Description of AOCI Component | Location of Gain (Loss) Recognized in Income | Three Months Ended September 26, 2014 | Nine Months Ended September 26, 2014 |
| |
Derivatives: | | | | |
Foreign currency contracts | Net operating revenues | $ | (19 | ) | $ | (62 | ) | |
Foreign currency and commodity contracts | Cost of goods sold | (6 | ) | (27 | ) | |
Foreign currency contracts | Other income (loss) — net | 52 |
| 52 |
| |
| Income before income taxes | 27 |
| (37 | ) | |
| Income taxes | (11 | ) | 14 |
| |
| Consolidated net income | $ | 16 |
| $ | (23 | ) | |
Available-for-sale securities: | | | | |
Sale of securities | Other income (loss) — net | $ | (6 | ) | $ | (9 | ) | |
| Income before income taxes | (6 | ) | (9 | ) | |
| Income taxes | 2 |
| 2 |
| |
| Consolidated net income | $ | (4 | ) | $ | (7 | ) | |
Pension and other benefit liabilities: | | | | |
Amortization of net actuarial loss | * | $ | 18 |
| $ | 56 |
| |
Amortization of prior service cost (credit) | * | (4 | ) | (13 | ) | |
| Income before income taxes | 14 |
| 43 |
| |
| Income taxes | (5 | ) | (16 | ) | |
| Consolidated net income | $ | 9 |
| $ | 27 |
| |
| |
* | 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) | 5,938 |
| 6,328 |
| (411 | ) | — |
| — |
| — |
| 21 |
|
Dividends paid/payable to shareowners of The Coca-Cola Company | (4,016 | ) | (4,016 | ) | — |
| — |
| — |
| — |
| — |
|
Dividends paid to noncontrolling interests | (21 | ) | — |
| — |
| — |
| — |
| — |
| (21 | ) |
Business combinations including purchase accounting adjustments | (27 | ) | — |
| — |
| — |
| — |
| — |
| (27 | ) |
Purchases of treasury stock | (2,887 | ) | — |
| — |
| — |
| — |
| (2,887 | ) | — |
|
Impact of employee stock option and restricted stock plans | 1,242 |
| — |
| — |
| — |
| 625 |
| 617 |
| — |
|
September 26, 2014 | $ | 33,669 |
| $ | 63,972 |
| $ | (3,843 | ) | $ | 1,760 |
| $ | 12,901 |
| $ | (41,361 | ) | $ | 240 |
|
NOTE 10: SIGNIFICANT OPERATING AND NONOPERATING ITEMS
Other Operating Charges
During the three months ended September 26, 2014, the Company incurred other operating charges of $128 million. These charges primarily consisted of $84 million due to the Company's productivity and reinvestment program and $34 million due to the integration of our German bottling and distribution operations. The Company also recorded a loss of $2 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. 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 nine months ended September 26, 2014, the Company recorded other operating charges of $457 million. These charges primarily consisted of $259 million due to the Company's productivity and reinvestment program and $142 million due to the integration of our German bottling and distribution operations. In addition, the Company recorded a loss of $27 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 September 27, 2013, the Company incurred other operating charges of $341 million. These charges primarily consisted of $190 million due to the impairment of certain intangible assets described below; $97 million due to the Company's productivity and reinvestment program; and $45 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 14 for additional information on the impairment charges recorded. Refer to Note 15 for the impact these charges had on our operating segments.
During the nine months ended September 27, 2013, the Company incurred other operating charges of $594 million. These charges primarily consisted of $312 million due to the Company's productivity and reinvestment program; $190 million due to the impairment of certain intangible assets described below; and $86 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 14 for additional information on the impairment charges recorded. Refer to Note 15 for the impact these charges had on our operating segments.
During the three and nine months ended September 27, 2013, the Company recorded charges of $190 million related to certain intangible assets. These charges included $108 million related to the impairment of trademarks recorded in our Bottling Investments and Asia Pacific operating segments. These impairments were primarily due to a strategic decision to phase out certain local-market value brands which resulted in a change in the expected useful life of the intangible assets. The charges were determined by comparing the fair value of the trademarks, derived using discounted cash flow analyses, to the current carrying value. Additionally, the remaining charge of $82 million related to goodwill recorded in our Bottling Investments operating segment. This charge was primarily the result of management's revised outlook on market conditions and volume performance. The total impairment charges of $190 million were recorded in our Corporate operating segment in the line item other operating charges in our condensed consolidated statements of income.
Other Nonoperating Items
Equity Income (Loss) — Net
During the three and nine months ended September 26, 2014, the Company recorded net charges of $8 million and $41 million, respectively, in the line item equity income (loss) — net. During the three and nine months ended September 27, 2013, the Company recorded a net gain of $8 million and a net charge of $34 million, respectively, in the line item equity income (loss) — net. These amounts 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 September 26, 2014, the Company recorded charges of $270 million due to the refranchising of certain territories in North America. Refer to Note 2 for more information related to these charges and Note 15 for the impact this charge had on our operating segments.
During the nine months ended September 26, 2014, the Company recorded charges of $410 million due to the refranchising of certain territories in North America. 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 nine months ended September 27, 2013, the Company recorded a gain of $615 million in the line item other income (loss) — net. This gain was due to the deconsolidation of our Brazilian bottling operations as a result of their combination with an independent bottling partner. Refer to Note 2 for additional information on this transaction. Refer to Note 15 for the impact this gain had on our operating segments.
In 2012, four of the Company's Japanese bottling partners 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 completed effective July 1, 2013. The terms of the merger agreement included 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. As a result, the Company recorded a gain of $30 million during the three months ended September 27, 2013, based on the value of the shares it received on July 1, 2013. This gain partially offset a loss of $144 million the Company recorded during the second quarter of 2013 for those investments in which the Company’s carrying value was higher than the fair value of the shares expected to be received. In total, the Company recorded a net loss of $114 million during the nine months ended September 27, 2013, related to our investment in the entities that merged to form CCEJ. Refer to Note 15 for the impact these items had on our operating segments.
During the nine months ended September 27, 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 nine months ended September 27, 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 September 26, 2014, the Company has incurred total pretax expenses of $1,023 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 September 26, 2014 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance June 27, 2014 |
| Costs Incurred Three Months Ended September 26, 2014 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 26, 2014 |
|
Severance pay and benefits | $ | 43 |
| $ | 12 |
| $ | (18 | ) | $ | (1 | ) | $ | 36 |
|
Outside services | 4 |
| 21 |
| (22 | ) | — |
| 3 |
|
Other direct costs | 14 |
| 51 |
| (49 | ) | (2 | ) | 14 |
|
Total | $ | 61 |
| $ | 84 |
| $ | (89 | ) | $ | (3 | ) | $ | 53 |
|
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 nine months ended September 26, 2014 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance December 31, 2013 |
| Costs Incurred Nine Months Ended September 26, 2014 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 26, 2014 |
|
Severance pay and benefits | $ | 88 |
| $ | 26 |
| $ | (77 | ) | $ | (1 | ) | $ | 36 |
|
Outside services | 6 |
| 52 |
| (55 | ) | — |
| 3 |
|
Other direct costs | 18 |
| 181 |
| (162 | ) | (23 | ) | 14 |
|
Total | $ | 112 |
| $ | 259 |
| $ | (294 | ) | $ | (24 | ) | $ | 53 |
|
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 $34 million and $142 million related to this initiative during the three and nine months ended September 26, 2014, respectively, and has incurred total pretax expenses of $769 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 $124 million and $127 million accrued related to these integration costs as of September 26, 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 September 26, 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 |
| September 26, 2014 |
| September 27, 2013 |
| | September 26, 2014 |
| September 27, 2013 |
|
Service cost | $ | 62 |
| $ | 69 |
| | $ | 7 |
| $ | 9 |
|
Interest cost | 101 |
| 93 |
| | 11 |
| 10 |
|
Expected return on plan assets | (179 | ) | (163 | ) | | (3 | ) | (2 | ) |
Amortization of prior service cost (credit) | — |
| (1 | ) | | (4 | ) | (3 | ) |
Amortization of net actuarial loss | 18 |
| 50 |
| | — |
| 3 |
|
Net periodic benefit cost (credit) | $ | 2 |
| $ | 48 |
| | $ | 11 |
| $ | 17 |
|
Settlement charge | — |
| — |
| | — |
| — |
|
Total cost (credit) recognized in statements of income | $ | 2 |
| $ | 48 |
| | $ | 11 |
| $ | 17 |
|
|
| | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Nine Months Ended |
| September 26, 2014 |
| September 27, 2013 |
| | September 26, 2014 |
| September 27, 2013 |
|
Service cost | $ | 196 |
| $ | 207 |
| | $ | 20 |
| $ | 27 |
|
Interest cost | 304 |
| 282 |
| | 32 |
| 31 |
|
Expected return on plan assets | (537 | ) | (492 | ) | | (9 | ) | (7 | ) |
Amortization of prior service cost (credit) | (1 | ) | (2 | ) | | (12 | ) | (8 | ) |
Amortization of net actuarial loss | 54 |
| 149 |
| | 2 |
| 9 |
|
Net periodic benefit cost (credit) | $ | 16 |
| $ | 144 |
| | $ | 33 |
| $ | 52 |
|
Settlement charge | 2 |
| — |
| | — |
| — |
|
Total cost (credit) recognized in statements of income | $ | 18 |
| $ | 144 |
| | $ | 33 |
| $ | 52 |
|
During the nine months ended September 26, 2014, the Company contributed $168 million to our pension plans, and we anticipate making additional contributions of approximately $48 million to our pension plans during the remainder of 2014. The Company contributed $574 million to our pension plans during the nine months ended September 27, 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 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 $538 million (20.2 percent effective tax rate) and $925 million (27.4 percent effective tax rate) during the three months ended September 26, 2014 and September 27, 2013, respectively. The Company recorded income tax expense of $1,896 million (23.0 percent effective tax rate) and $2,331 million (25.2 percent effective tax rate) during the nine months ended September 26, 2014 and September 27, 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 | | Nine Months Ended | |
| September 26, 2014 |
| | September 27, 2013 |
| | September 26, 2014 |
| | September 27, 2013 |
| |
Asset impairments | $ | — |
| | $ | — |
| 8 | $ | — |
| | $ | — |
| 8 |
Productivity and reinvestment program | (30 | ) | 1 | (37 | ) | 9 | (96 | ) | 1 | (115 | ) | 9 |
Other productivity, integration and restructuring initiatives | — |
| 2 | 1 |
| 10 | — |
| 2 | 2 |
| 10 |
Transaction gains and losses | (96 | ) | 3 | 255 |
| 11 | (147 | ) | 4 | 303 |
| 12 |
Certain tax matters | (29 | ) | 5 | (20 | ) | 13 | 2 |
| 5 | (20 | ) | 13 |
Other — net | (2 | ) | 6 | 4 |
| 14 | 6 |
| 7 | — |
| 15 |
| |
1 | Related to charges of $84 million and $259 million during the three and nine months ended September 26, 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 $34 million and $142 million during the three and nine months ended September 26, 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 charges of $277 million including $270 million due to refranchising certain North America territories. Refer to Note 2. |
| |
4 | Related to charges of $417 million including $410 million due to refranchising certain North America territories. Refer to Note 2. |
| |
5 | Primarily related to prior year audit settlements and amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, of which the components of the net change are individually insignificant. |
| |
6 | Related to charges of $14 million that consisted of $5 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 $8 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 10. |
| |
7 | Related to charges of $319 million that primarily 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, $30 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 $20 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. |
| |
8 | Related to charges of $190 million due to the impairment of certain of the Company's intangible assets. Refer to Note 10 and Note 14. |
| |
9 | Related to charges of $97 million and $312 million during the three and nine months ended September 27, 2013, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 10 and Note 11. |
| |
10 | Related to net charges of $43 million and $82 million during the three and nine months ended September 27, 2013, respectively. These charges were primarily due to the integration of our German bottling and distribution operations. Refer to Note 10 and Note 11. |
| |
11 | Related to a net gain of $585 million consisting of the following items: a gain of $615 million due to the deconsolidation of our Brazilian bottling operations upon their combination with an independent bottler; a gain of $30 million due to the merger of four of the Company's Japanese bottling partners; and charges of $60 million due to the deferral of revenue and corresponding gross profit associated with the intercompany portion of our concentrate sales to CCEJ and the newly combined Brazilian operations until the finished beverage products made from those concentrates are sold to a third party. Refer to Note 2, Note 10 and Note 14. |
| |
12 | Related to a net gain of $574 million that primarily consisted of the following items: a gain of $615 million related to the deconsolidation of our Brazilian bottling operations upon their combination with an independent bottler; 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; a net loss of $114 million due to the merger of four of the Company's Japanese bottling partners; and charges of $60 million due to the deferral of revenue and corresponding gross profit associated with the intercompany portion of our concentrate sales to CCEJ and the newly combined Brazilian bottling operations until the finished beverage products made from those concentrates are sold to a third party. Refer to Note 2, Note 10 and Note 14. |
| |
13 | 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. |
| |
14 | Related to a net charge of $3 million that consisted of a charge of $11 million associated with certain of the Company's fixed assets, partially offset by a net gain of $8 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 10. |
| |
15 | Related to charges of $205 million that primarily consisted of the following items: 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; a net charge of $25 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity investees; and a charge of $11 million associated with certain of the Company's fixed assets. Refer to Note 10. |
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.