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 28, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-02217
(Exact name of Registrant as specified in its Charter)
|
| | |
Delaware (State or other jurisdiction of incorporation or organization) | | 58-0628465 (IRS Employer Identification No.) |
One Coca-Cola Plaza Atlanta, Georgia (Address of principal executive offices) | | 30313 (Zip Code) |
Registrant's telephone number, including area code: (404) 676-2121
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. |
| | | |
| Large accelerated filer ý | | Accelerated filer o |
| Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. |
| | |
Class of Common Stock | | Outstanding at October 22, 2012 |
$0.25 Par Value | | 4,485,161,506 Shares |
THE COCA-COLA COMPANY AND SUBSIDIARIES
Table of Contents
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Item 2. | | |
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Item 4. | | |
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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, 2011, 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 28, 2012 |
| September 30, 2011 |
| | September 28, 2012 |
| September 30, 2011 |
|
| | As Adjusted |
| | | As Adjusted |
|
NET OPERATING REVENUES | $ | 12,340 |
| $ | 12,248 |
| | $ | 36,562 |
| $ | 35,502 |
|
Cost of goods sold | 4,853 |
| 4,875 |
| | 14,425 |
| 13,812 |
|
GROSS PROFIT | 7,487 |
| 7,373 |
| | 22,137 |
| 21,690 |
|
Selling, general and administrative expenses | 4,630 |
| 4,523 |
| | 13,308 |
| 13,016 |
|
Other operating charges | 64 |
| 96 |
| | 233 |
| 457 |
|
OPERATING INCOME | 2,793 |
| 2,754 |
| | 8,596 |
| 8,217 |
|
Interest income | 118 |
| 141 |
| | 345 |
| 356 |
|
Interest expense | 102 |
| 116 |
| | 302 |
| 313 |
|
Equity income (loss) — net | 252 |
| 180 |
| | 637 |
| 535 |
|
Other income (loss) — net | 23 |
| (32 | ) | | 156 |
| 447 |
|
INCOME BEFORE INCOME TAXES | 3,084 |
| 2,927 |
| | 9,432 |
| 9,242 |
|
Income taxes | 755 |
| 681 |
| | 2,236 |
| 2,273 |
|
CONSOLIDATED NET INCOME | 2,329 |
| 2,246 |
| | 7,196 |
| 6,969 |
|
Less: Net income attributable to noncontrolling interests | 18 |
| 22 |
| | 43 |
| 42 |
|
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | $ | 2,311 |
| $ | 2,224 |
| | $ | 7,153 |
| $ | 6,927 |
|
BASIC NET INCOME PER SHARE1,2 | $ | 0.51 |
| $ | 0.49 |
| | $ | 1.58 |
| $ | 1.51 |
|
DILUTED NET INCOME PER SHARE1,2 | $ | 0.50 |
| $ | 0.48 |
| | $ | 1.56 |
| $ | 1.49 |
|
DIVIDENDS PER SHARE2 | $ | 0.255 |
| $ | 0.235 |
| | $ | 0.765 |
| $ | 0.705 |
|
AVERAGE SHARES OUTSTANDING2 | 4,502 |
| 4,571 |
| | 4,513 |
| 4,579 |
|
Effect of dilutive securities2 | 85 |
| 82 |
| | 80 |
| 79 |
|
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION2 | 4,587 |
| 4,653 |
| | 4,593 |
| 4,658 |
|
1 Calculated based on net income attributable to shareowners of The Coca-Cola Company.
| |
2 | Following shareowner approval, the Company amended its certificate of incorporation on July 27, 2012, to double the number of authorized shares of common stock and effect a two-for-one stock split of the common stock. Accordingly, all share and per share data presented herein reflect the impact of the increase in authorized shares and the stock split. |
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 28, 2012 |
| September 30, 2011 |
| | September 28, 2012 |
| September 30, 2011 |
|
| | As Adjusted |
| | | As Adjusted |
|
CONSOLIDATED NET INCOME | $ | 2,329 |
| $ | 2,246 |
| | $ | 7,196 |
| $ | 6,969 |
|
Other comprehensive income: | | | | | |
Net foreign currency translation adjustment | 285 |
| (1,486 | ) | | (514 | ) | 188 |
|
Net gain (loss) on derivatives | (48 | ) | 80 |
| | 11 |
| 63 |
|
Net unrealized gain (loss) on available-for-sale securities | 182 |
| (71 | ) | | 348 |
| 5 |
|
Net change in pension and other benefit liabilities | 11 |
| 3 |
| | 22 |
| (12 | ) |
TOTAL COMPREHENSIVE INCOME | 2,759 |
| 772 |
| | 7,063 |
| 7,213 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests | 20 |
| 9 |
| | 77 |
| 13 |
|
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | $ | 2,739 |
| $ | 763 |
| | $ | 6,986 |
| $ | 7,200 |
|
Refer to Notes to Condensed Consolidated Financial Statements.
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except par value)
|
| | | | | | |
| September 28, 2012 |
| December 31, 2011 |
|
| | As Adjusted |
|
ASSETS | | |
CURRENT ASSETS | | |
Cash and cash equivalents | $ | 9,615 |
| $ | 12,803 |
|
Short-term investments | 5,320 |
| 1,088 |
|
TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS | 14,935 |
| 13,891 |
|
Marketable securities | 3,148 |
| 144 |
|
Trade accounts receivable, less allowances of $73 and $83, respectively | 5,083 |
| 4,920 |
|
Inventories | 3,447 |
| 3,092 |
|
Prepaid expenses and other assets | 3,099 |
| 3,450 |
|
TOTAL CURRENT ASSETS | 29,712 |
| 25,497 |
|
EQUITY METHOD INVESTMENTS | 8,538 |
| 7,233 |
|
OTHER INVESTMENTS, PRINCIPALLY BOTTLING COMPANIES | 1,612 |
| 1,141 |
|
OTHER ASSETS | 3,629 |
| 3,495 |
|
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation of $9,128 and $8,212, respectively | 15,388 |
| 14,939 |
|
TRADEMARKS WITH INDEFINITE LIVES | 6,510 |
| 6,430 |
|
BOTTLERS' FRANCHISE RIGHTS WITH INDEFINITE LIVES | 7,746 |
| 7,770 |
|
GOODWILL | 12,381 |
| 12,219 |
|
OTHER INTANGIBLE ASSETS | 1,138 |
| 1,250 |
|
TOTAL ASSETS | $ | 86,654 |
| $ | 79,974 |
|
LIABILITIES AND EQUITY | | |
CURRENT LIABILITIES | | |
Accounts payable and accrued expenses | $ | 9,803 |
| $ | 9,009 |
|
Loans and notes payable | 16,208 |
| 12,871 |
|
Current maturities of long-term debt | 341 |
| 2,041 |
|
Accrued income taxes | 656 |
| 362 |
|
TOTAL CURRENT LIABILITIES | 27,008 |
| 24,283 |
|
LONG-TERM DEBT | 16,181 |
| 13,656 |
|
OTHER LIABILITIES | 4,678 |
| 5,420 |
|
DEFERRED INCOME TAXES | 5,197 |
| 4,694 |
|
THE COCA-COLA COMPANY SHAREOWNERS' EQUITY | | |
Common stock, $0.25 par value; Authorized — 11,200 shares; Issued — 7,040 and 7,040 shares, respectively1 | 1,760 |
| 1,760 |
|
Capital surplus1 | 11,280 |
| 10,332 |
|
Reinvested earnings | 57,320 |
| 53,621 |
|
Accumulated other comprehensive income (loss) | (2,941 | ) | (2,774 | ) |
Treasury stock, at cost — 2,554 and 2,514 shares, respectively1 | (34,209 | ) | (31,304 | ) |
EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | 33,210 |
| 31,635 |
|
EQUITY ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 380 |
| 286 |
|
TOTAL EQUITY | 33,590 |
| 31,921 |
|
TOTAL LIABILITIES AND EQUITY | $ | 86,654 |
| $ | 79,974 |
|
| |
1 | Following shareowner approval, the Company amended its certificate of incorporation on July 27, 2012, to double the number of authorized shares of common stock and effect a two-for-one stock split of the common stock. Accordingly, all share and per share data presented herein reflect the impact of the increase in authorized shares and the stock split. |
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 28, 2012 |
| September 30, 2011 |
|
| | As Adjusted |
|
OPERATING ACTIVITIES | | |
Consolidated net income | $ | 7,196 |
| $ | 6,969 |
|
Depreciation and amortization | 1,469 |
| 1,423 |
|
Stock-based compensation expense | 254 |
| 268 |
|
Deferred income taxes | 156 |
| 199 |
|
Equity (income) loss — net of dividends | (338 | ) | (172 | ) |
Foreign currency adjustments | (106 | ) | 35 |
|
Significant (gains) losses on sales of assets — net | (108 | ) | (104 | ) |
Other operating charges | 98 |
| 188 |
|
Other items | 61 |
| (330 | ) |
Net change in operating assets and liabilities | (842 | ) | (1,676 | ) |
Net cash provided by operating activities | 7,840 |
| 6,800 |
|
INVESTING ACTIVITIES | | |
Purchases of short-term investments | (7,015 | ) | (4,036 | ) |
Proceeds from disposals of short-term investments | 2,745 |
| 3,026 |
|
Acquisitions and investments | (1,166 | ) | (310 | ) |
Purchases of other investments | (4,756 | ) | (611 | ) |
Proceeds from disposals of bottling companies and other investments | 1,703 |
| 468 |
|
Purchases of property, plant and equipment | (1,971 | ) | (1,915 | ) |
Proceeds from disposals of property, plant and equipment | 73 |
| 66 |
|
Other investing activities | (12 | ) | (102 | ) |
Net cash provided by (used in) investing activities | (10,399 | ) | (3,414 | ) |
FINANCING ACTIVITIES | | |
Issuances of debt | 32,888 |
| 22,623 |
|
Payments of debt | (28,790 | ) | (17,095 | ) |
Issuances of stock | 1,319 |
| 1,382 |
|
Purchases of stock for treasury | (3,619 | ) | (3,608 | ) |
Dividends | (2,304 | ) | (2,159 | ) |
Other financing activities | 107 |
| 33 |
|
Net cash provided by (used in) financing activities | (399 | ) | 1,176 |
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (230 | ) | (397 | ) |
CASH AND CASH EQUIVALENTS | | |
Net increase (decrease) during the period | (3,188 | ) | 4,165 |
|
Balance at beginning of period | 12,803 |
| 8,517 |
|
Balance at end of period | $ | 9,615 |
| $ | 12,682 |
|
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, 2011.
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 28, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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 2012 and 2011 ended on September 28, 2012, and September 30, 2011, 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.
On July 27, 2012, the Company's certificate of incorporation was amended to increase the number of authorized shares of common stock from 5.6 billion to 11.2 billion and effect a two-for-one stock split of the common stock. The record date for the stock split was July 27, 2012, and the additional shares were distributed on August 10, 2012. Each shareowner of record on the close of business on the record date received one additional share of common stock for each share held. All share and per share data presented herein reflect the impact of the increase in authorized shares and the stock split, as appropriate.
Certain amounts in the prior year's condensed consolidated financial statements and notes have been revised to conform to the current year presentation.
Advertising Costs
The Company's accounting policy related to advertising costs for annual reporting purposes, as disclosed in Note 1 of our 2011 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.
Pension and Other Postretirement Benefit Plans
Effective January 1, 2012, the Company elected to change our accounting methodology for determining the market-related value of assets for our U.S. qualified defined benefit pension plans. The market-related value of assets is used to determine the Company's expected return on assets, a component of our annual pension expense calculation. The Company previously used a smoothing technique to calculate our market-related value of assets, which reflected changes in the fair value over no more than five years. However, we now use the actual fair value of plan assets to determine our expected return on those assets for all of our defined benefit plans. Although both methods are permitted under accounting principles generally accepted in the United States, the Company believes our new methodology is preferable as it accelerates the recognition of gains and losses in the determination of our annual pension expense.
The Company's change in accounting methodology has been applied retrospectively, and we have adjusted all applicable prior period financial information presented herein as required. The cumulative effect of this change on retained earnings as of January 1, 2011, was an increase of $59 million, with an offset to accumulated other comprehensive income (“AOCI”). The impact of this change on the Company's income before income taxes was an increase of $1 million and $3 million during the three and nine months ended September 28, 2012, respectively. In addition, the Company's income before income taxes increased $4 million and $14 million as a result of this change during the three and nine months ended September 30, 2011, respectively. The impact on the Company's earnings per share was not significant for any of the financial statement periods presented in this report.
Note 2 — Acquisitions and Divestitures
Acquisitions
During the nine months ended September 28, 2012, our Company's acquisition and investment activities totaled $1,166 million, which primarily included investments in the existing beverage business of Aujan Industries ("Aujan"), one of the largest independent beverage companies in the Middle East, and our acquisition of bottling operations in Guatemala, Vietnam and Cambodia.
During the nine months ended September 28, 2012, the Company acquired 50 percent of the Aujan entity that holds the rights to Aujan-owned brands in certain territories and 49 percent of Aujan's bottling and distribution operations in certain territories. The Company completed the transaction for $980 million in total value, of which $815 million was paid in cash by the Company and the remainder was composed of the Company's proportionate share of underlying debt in the acquired entities. The Company's investments in Aujan are being accounted for under the equity method of accounting.
During the nine months ended September 30, 2011, our Company's acquisition and investment activities totaled $310 million, which included our acquisition of the remaining ownership interest of Honest Tea, Inc. ("Honest Tea") not already owned by the Company. Prior to this transaction, the Company accounted for our investment in Honest Tea under the equity method of accounting. We remeasured our equity interest in Honest Tea to fair value upon the close of the transaction. The resulting gain on the remeasurement was not significant to our condensed consolidated financial statements. In addition, the Company's acquisition and investment activities included immaterial cash payments for the finalization of working capital adjustments related to our acquisition of Coca-Cola Enterprises Inc.'s ("CCE") former North America business.
Divestitures
During the nine months ended September 28, 2012, proceeds from disposals of bottling companies and other investments totaled $1,703 million. These proceeds resulted from the sale and/or maturity of investments associated with the Company's cash and risk management programs and were not related to the disposal of bottling companies. Refer to Note 3 for additional information.
During the nine months ended September 30, 2011, proceeds from disposals of bottling companies and other investments totaled $468 million, primarily related to the sale of our investment in Coca-Cola Embonor, S.A. ("Embonor"), a bottling partner with operations primarily in Chile, for $394 million. Prior to this transaction, the Company accounted for our investment in Embonor under the equity method of accounting. Refer to Note 10.
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 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 28, 2012, and December 31, 2011, our trading securities had a fair value of $255 million and $211 million, respectively, and consisted primarily of equity securities. The Company had net unrealized gains on trading securities of $20 million as of September 28, 2012, and net unrealized losses of $5 million as of December 31, 2011. The Company's trading securities were included in the following line items in our condensed consolidated balance sheets (in millions):
|
| | | | | | |
| September 28, 2012 |
| December 31, 2011 |
|
Marketable securities | $ | 174 |
| $ | 138 |
|
Other assets | 81 |
| 73 |
|
Total trading securities | $ | 255 |
| $ | 211 |
|
Available-for-Sale and Held-to-Maturity Securities
During 2012, the Company made a change in its overall cash management program. In an effort to manage counterparty risk and diversify our assets, the Company began to make additional investments in high-quality securities. These investments are primarily classified as available-for-sale securities.
As of September 28, 2012, available-for-sale and held-to-maturity securities consisted of the following (in millions):
|
| | | | | | | | | | | | |
| | Gross Unrealized | Estimated |
|
| Cost |
| Gains |
| Losses |
| Fair Value |
|
Available-for-sale securities:1 | | | | |
Equity securities | $ | 1,017 |
| $ | 707 |
| $ | (10 | ) | $ | 1,714 |
|
Debt securities | 3,239 |
| 55 |
| (4 | ) | 3,290 |
|
| $ | 4,256 |
| $ | 762 |
| $ | (14 | ) | $ | 5,004 |
|
Held-to-maturity securities: | | | | |
Bank and corporate debt | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
1 Refer to Note 14 for additional information related to the estimated fair value.
As of December 31, 2011, available-for-sale and held-to-maturity securities consisted of the following (in millions):
|
| | | | | | | | | | | | |
| | Gross Unrealized | Estimated |
|
| Cost |
| Gains |
| Losses |
| Fair Value |
|
Available-for-sale securities:1 | | | | |
Equity securities | $ | 834 |
| $ | 237 |
| $ | — |
| $ | 1,071 |
|
Debt securities | 332 |
| 1 |
| (3 | ) | 330 |
|
| $ | 1,166 |
| $ | 238 |
| $ | (3 | ) | $ | 1,401 |
|
Held-to-maturity securities: | | | | |
Bank and corporate debt | $ | 113 |
| $ | — |
| $ | — |
| $ | 113 |
|
1 Refer to Note 14 for additional information related to the estimated fair value.
The sale and/or maturity of available-for-sale securities resulted in the following activity during the three and nine months ended September 28, 2012 (in millions):
|
| | | | | | | |
| September 28, 2012 |
| Three Months Ended | | Nine Months Ended |
Gross gains | $ | 22 |
| | $ | 34 |
|
Gross losses | (26 | ) | | (28 | ) |
Proceeds | 1,256 |
| | 4,098 |
|
The Company's sale of available-for-sale securities did not result in any significant gross gains, gross losses or proceeds during the three and nine months ended September 30, 2011.
During 2011, the Company began using one of its insurance captives to reinsure group annuity insurance contracts that cover the pension obligations of certain of our European pension plans. In accordance with local insurance regulations, our insurance captive is required to meet and maintain minimum solvency capital requirements. The Company elected to invest its solvency capital in a portfolio of available-for-sale securities, which have been 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 28, 2012, and December 31, 2011, the Company's available-for-sale securities included solvency capital funds of $427 million and $285 million, respectively.
The Company's available-for-sale and held-to-maturity securities were included in the following line items in our condensed consolidated balance sheets (in millions):
|
| | | | | | | | | | | | | |
| September 28, 2012 | | December 31, 2011 |
| Available- for-Sale Securities |
| Held-to- Maturity Securities |
| | Available- for-Sale Securities |
| Held-to- Maturity Securities |
|
Cash and cash equivalents | $ | 1 |
| $ | — |
| | $ | — |
| $ | 112 |
|
Marketable securities | 2,974 |
| — |
| | 5 |
| 1 |
|
Other investments, principally bottling companies | 1,456 |
| — |
| | 986 |
| — |
|
Other assets | 573 |
| — |
| | 410 |
| — |
|
| $ | 5,004 |
| $ | — |
| | $ | 1,401 |
| $ | 113 |
|
The contractual maturities of these investments as of September 28, 2012, were as follows (in millions):
|
| | | | | | | | | | | | | |
| Available-for-Sale Securities | | Held-to-Maturity Securities |
| Cost |
| Fair Value |
| | Amortized Cost |
| Fair Value |
|
Within 1 year | $ | 1,060 |
| $ | 1,067 |
| | $ | — |
| $ | — |
|
After 1 year through 5 years | 1,583 |
| 1,591 |
| | — |
| — |
|
After 5 years through 10 years | 289 |
| 323 |
| | — |
| — |
|
After 10 years | 307 |
| 309 |
| | — |
| — |
|
Equity securities | 1,017 |
| 1,714 |
| | — |
| — |
|
| $ | 4,256 |
| $ | 5,004 |
| | $ | — |
| $ | — |
|
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 28, 2012, and December 31, 2011. Our cost method investments had a carrying value of $156 million and $155 million as of September 28, 2012, and December 31, 2011, 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 28, 2012 |
| December 31, 2011 |
|
Raw materials and packaging | $ | 1,880 |
| $ | 1,680 |
|
Finished goods | 1,263 |
| 1,198 |
|
Other | 304 |
| 214 |
|
Total inventories | $ | 3,447 |
| $ | 3,092 |
|
Note 5 — Hedging Transactions and Derivative Financial Instruments
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company's financial performance and are referred to as "market risks." When deemed appropriate, our Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are foreign currency exchange rate risk, commodity price risk and interest rate risk.
The Company uses various types of derivative instruments including, but not limited to, forward contracts, commodity futures contracts, option contracts, collars and swaps. Forward contracts and commodity futures contracts are agreements to buy or sell a quantity of a currency or commodity at a predetermined future date, and at a predetermined rate or price. An option contract is an agreement that conveys the purchaser the right, but not the obligation, to buy or sell a quantity of a currency or commodity at a predetermined rate or price during a period or at a time in the future. A collar is a strategy that uses a combination of options to limit the range of possible positive or negative returns on an underlying asset or liability to a specific range, or to protect expected future cash flows. To do this, an investor simultaneously buys a put option and sells (writes) a call option, or alternatively buys a call option and sells (writes) a put option. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. We do not enter into derivative financial instruments for trading purposes.
All derivatives are carried at fair value in our condensed consolidated balance sheets in the following line items, as applicable: prepaid expenses and other assets; other assets; accounts payable and accrued expenses; and other liabilities. The carrying values of the derivatives reflect the impact of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as applicable. These master netting agreements allow the Company to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same counterparty.
The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationships. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded in the same line item in our condensed consolidated statements of income as the changes in the fair values of the hedged items attributable to the risk being hedged. The changes in the fair values of derivatives that have been designated and qualify as cash flow hedges or hedges of net investments in foreign operations are recorded in AOCI and are reclassified into the line item in our condensed consolidated statement of income in which the hedged items are recorded in the same period the hedged items affect earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in fair values of derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized into earnings.
For derivatives that will be accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company formally assesses, both at inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a financial instrument's change in fair value is immediately recognized into earnings.
The Company determines the fair values of its derivatives based on quoted market prices or pricing models using current market rates. Refer to Note 14. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described
above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or other financial indices. The Company does not view the fair values of its derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying hedged transactions or other exposures. Virtually all of our derivatives are straightforward over-the-counter instruments with liquid markets.
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 28, 2012 |
| December 31, 2011 |
|
Assets | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 58 |
| $ | 170 |
|
Foreign currency contracts | Other assets | 3 |
| — |
|
Commodity contracts | Prepaid expenses and other assets | — |
| 2 |
|
Interest rate swaps | Prepaid expenses and other assets | 1 |
| — |
|
Interest rate swaps | Other assets | 356 |
| 246 |
|
Total assets | | $ | 418 |
| $ | 418 |
|
Liabilities | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 90 |
| $ | 41 |
|
Foreign currency contracts | Other liabilities | 3 |
| — |
|
Commodity contracts | Accounts payable and accrued expenses | 2 |
| 1 |
|
Interest rate swaps | Other liabilities | 11 |
| — |
|
Total liabilities | | $ | 106 |
| $ | 42 |
|
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 28, 2012 |
| December 31, 2011 |
|
Assets | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 53 |
| $ | 29 |
|
Commodity contracts | Prepaid expenses and other assets | 93 |
| 54 |
|
Other derivative instruments | Prepaid expenses and other assets | 4 |
| 5 |
|
Total assets | | $ | 150 |
| $ | 88 |
|
Liabilities | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 40 |
| $ | 116 |
|
Commodity contracts | Accounts payable and accrued expenses | 30 |
| 47 |
|
Other derivative instruments | Accounts payable and accrued expenses | — |
| 1 |
|
Total liabilities | | $ | 70 |
| $ | 164 |
|
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 statements 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 28, 2012, or September 30, 2011. 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 changes 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 $4,066 million and $5,158 million as of September 28, 2012, and December 31, 2011, respectively.
The Company has entered into commodity futures contracts and other derivative instruments on various commodities to mitigate the price risk associated with forecasted purchases of materials used in our manufacturing process. These derivative instruments have been designated and qualify as part of the Company's commodity cash flow hedging program. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of certain commodities. The total notional values of derivatives that were designated and qualified for the Company's commodity cash flow hedging program were $16 million and $26 million as of September 28, 2012, and December 31, 2011, 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 $1,317 million as of September 28, 2012. The Company had no outstanding derivative instruments under this hedging program as of December 31, 2011.
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 28, 2012 (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 | $ | (82 | ) | Net operating revenues | $ | (6 | ) | $ | — |
| 2 |
Foreign currency contracts | (7 | ) | Cost of goods sold | (4 | ) | — |
| |
Interest rate contracts | (11 | ) | Interest expense | (3 | ) | — |
| |
Commodity contracts | — |
| Cost of goods sold | — |
| — |
| |
Total | $ | (100 | ) | | $ | (13 | ) | $ | — |
| |
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 28, 2012 (in millions):
|
| | | | | | | | | | | |
| Gain (Loss) Recognized in OCI |
| Location of Gain (Loss) Recognized in Income1 | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| |
Foreign currency contracts | $ | (11 | ) | Net operating revenues | $ | (32 | ) | $ | 2 |
| |
Foreign currency contracts | 5 |
| Cost of goods sold | (16 | ) | — |
| |
Interest rate contracts | (11 | ) | Interest expense | (9 | ) | — |
| |
Commodity contracts | (4 | ) | Cost of goods sold | — |
| — |
| |
Total | $ | (21 | ) | | $ | (57 | ) | $ | 2 |
| |
1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
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 30, 2011 (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 | $ | 60 |
| Net operating revenues | $ | (80 | ) | $ | — |
| 2 |
Interest rate contracts | (11 | ) | Interest expense | (3 | ) | (1 | ) | |
Commodity contracts | (2 | ) | Cost of goods sold | 1 |
| — |
| |
Total | $ | 47 |
| | $ | (82 | ) | $ | (1 | ) | |
1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
2 Includes a de minimis amount of ineffectiveness in the hedging relationship.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the nine months ended September 30, 2011 (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 | $ | (91 | ) | Net operating revenues | $ | (196 | ) | $ | — |
| 2 |
Interest rate contracts | (11 | ) | Interest expense | (9 | ) | (1 | ) | |
Commodity contracts | (2 | ) | Cost of goods sold | — |
| — |
| |
Total | $ | (104 | ) | | $ | (205 | ) | $ | (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 28, 2012, the Company estimates that it will reclassify into earnings during the next 12 months approximately $51 million of losses 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. As of September 28, 2012, such adjustments increased the carrying value of our long-term debt by $312 million. The changes in fair values of hedges that are determined to be ineffective are immediately recognized into earnings. The total notional values of derivatives that related to our fair value hedges of this type were $6,700 million and $5,700 million as of September 28, 2012, and December 31, 2011, respectively.
During the first quarter of 2012, the Company began using 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 of September 28, 2012, such adjustments increased the carrying value of our marketable securities and other assets by $4 million. The changes in fair values of hedges that are determined to be ineffective are immediately recognized into earnings. The total notional value of derivatives that related to our fair value hedges of this type was $1,325 million as of September 28, 2012.
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 28, 2012, and September 30, 2011 (in millions):
|
| | | | | | | |
Fair Value Hedging Instruments | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income | |
September 28, 2012 |
| September 30, 2011 |
|
Interest rate swaps | Interest expense | $ | 42 |
| $ | 271 |
|
Fixed-rate debt | Interest expense | (30 | ) | (279 | ) |
Net impact to interest expense | | $ | 12 |
| $ | (8 | ) |
Foreign currency contracts | Other income (loss) — net | $ | 8 |
| $ | — |
|
Available-for-sale securities | Other income (loss) — net | (5 | ) | — |
|
Net impact to other income (loss) — net | | $ | 3 |
| $ | — |
|
Net impact of fair value hedging instruments | | $ | 15 |
| $ | (8 | ) |
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 28, 2012, and September 30, 2011 (in millions):
|
| | | | | | | |
Fair Value Hedging Instruments | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income | |
September 28, 2012 |
| September 30, 2011 |
|
Interest rate swaps | Interest expense | $ | 111 |
| $ | 339 |
|
Fixed-rate debt | Interest expense | (81 | ) | (337 | ) |
Net impact to interest expense | | $ | 30 |
| $ | 2 |
|
Foreign currency contracts | Other income (loss) — net | $ | 23 |
| $ | — |
|
Available-for-sale securities | Other income (loss) — net | (21 | ) | — |
|
Net impact to other income (loss) — net | | $ | 2 |
| $ | — |
|
Net impact of fair value hedging instruments | | $ | 32 |
| $ | 2 |
|
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 $2,033 million and $1,681 million as of September 28, 2012, and December 31, 2011, 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 28, 2012, and September 30, 2011 (in millions):
|
| | | | | | | | | | | | | |
| Gain (Loss) Recognized in OCI |
| Three Months Ended | | Nine Months Ended |
| September 28, 2012 |
| September 30, 2011 |
| | September 28, 2012 |
| September 30, 2011 |
|
Foreign currency contracts | $ | (100 | ) | $ | 13 |
| | $ | (58 | ) | $ | 10 |
|
The Company did not reclassify any deferred gains or losses related to net investment hedges from AOCI to earnings during the three and nine months ended September 28, 2012, and September 30, 2011. In addition, the Company did not have any ineffectiveness related to net investment hedges during the three and nine months ended September 28, 2012, and September 30, 2011.
Economic (Nondesignated) Hedging Strategy
In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives as economic hedges of foreign currency 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 changes in foreign currency exchange rates. The changes in fair values of economic hedges used to offset the variability in U.S. dollar net cash flows are recognized into earnings in the line items net operating revenues and cost of goods sold in our condensed consolidated statements of income, as applicable. The total notional values of derivatives related to our foreign currency economic hedges were $3,587 million and $3,629 million as of September 28, 2012, and December 31, 2011, respectively.
The Company also uses certain derivatives as economic hedges to mitigate the price risk associated with the purchase of materials used in the manufacturing process and for vehicle fuel. The changes in fair values of these economic hedges are immediately recognized into earnings in the line items cost of goods sold and selling, general and administrative expenses in our condensed consolidated statements of income, as applicable. The total notional values of derivatives related to our economic hedges of this type were $1,608 million and $1,165 million as of September 28, 2012, and December 31, 2011, 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 28, 2012, and September 30, 2011, respectively (in millions):
|
| | | | | | | |
| | Three Months Ended |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | September 28, 2012 |
| September 30, 2011 |
|
Foreign currency contracts | Net operating revenues | $ | (2 | ) | $ | 4 |
|
Foreign currency contracts | Other income (loss) — net | 18 |
| 11 |
|
Foreign currency contracts | Cost of goods sold | (3 | ) | — |
|
Commodity contracts | Net operating revenues | 5 |
| — |
|
Commodity contracts | Cost of goods sold | 25 |
| (63 | ) |
Commodity contracts | Selling, general and administrative expenses | 19 |
| (23 | ) |
Other derivative instruments | Selling, general and administrative expenses | 3 |
| (12 | ) |
Total | | $ | 65 |
| $ | (83 | ) |
|
| | | | | | | |
| | Nine Months Ended |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | September 28, 2012 |
| September 30, 2011 |
|
Foreign currency contracts | Net operating revenues | $ | (5 | ) | $ | (1 | ) |
Foreign currency contracts | Other income (loss) — net | (54 | ) | 212 |
|
Foreign currency contracts | Cost of goods sold | — |
| (13 | ) |
Commodity contracts | Net operating revenues | 5 |
| — |
|
Commodity contracts | Cost of goods sold | (19 | ) | (21 | ) |
Commodity contracts | Selling, general and administrative expenses | 12 |
| (19 | ) |
Other derivative instruments | Selling, general and administrative expenses | 21 |
| (4 | ) |
Total | | $ | (40 | ) | $ | 154 |
|
Note 6 — Debt and Borrowing Arrangements
On May 15, 2012, the Company retired $1,250 million of long-term notes upon maturity. This transaction resulted in a decrease in the Company's current maturities of long-term debt.
During the first quarter of 2012, the Company issued $2,750 million of long-term debt. The general terms of the notes issued are as follows:
| |
• | $1,000 million total principal amount of notes due March 14, 2014, at a variable interest rate equal to the three-month London Interbank Offered Rate ("LIBOR") minus 0.05 percent; |
| |
• | $1,000 million total principal amount of notes due March 13, 2015, at a fixed interest rate of 0.75 percent; and |
| |
• | $750 million total principal amount of notes due March 14, 2018, at a fixed interest rate of 1.65 percent. |
Note 7 — Commitments and Contingencies
Guarantees
As of September 28, 2012, we were contingently liable for guarantees of indebtedness owed by third parties of $720 million, of which $297 million related to variable interest entities ("VIEs"). These guarantees are primarily related to third-party customers, bottlers, vendors and container manufacturing operations that 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 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 agreed on a term sheet with three of those insurers in 2010 and anticipated that a settlement agreement would be effective in May 2011, but such insurers repudiated their settlement commitments and, as a result, Aqua-Chem and the Company filed suit in Wisconsin state court to enforce the settlement agreement and the 2010 term sheet and to obtain a declaratory judgment validating Aqua-Chem and the Company's interpretation of the court's judgment in the 2004 Wisconsin insurance coverage litigation. In February 2012, the parties argued a number of cross-motions for summary judgment related to the issues of the enforceability of the settlement agreement and the term sheet and exhaustion of policies underlying those issued by the defendant insurers. The court granted defendants' motion for summary judgment that the 2011 settlement agreement is not enforceable, but held over for trial several of the plaintiffs' claims for enforcement of the term sheet agreed to by the parties in 2010. The parties to this case have also resolved several substantive coverage issues that were once in the case. This should ensure coverage of Aqua-Chem asbestos claims without any gap in insurance coverage for approximately the next 10 years. The remaining issues in the case are set for trial on January 7, 2013. Whether or not Aqua-Chem and the Company prevail in the coverage-in-place settlement litigation, these three insurance companies will remain subject to the court's judgment in the 2004 Wisconsin insurance coverage litigation.
The Company is unable to estimate at this time the amount or range of reasonably possible loss it may ultimately incur as a result of asbestos-related claims against Aqua-Chem. The Company believes that assuming that (a) the defense and indemnity costs for the asbestos-related claims against Aqua-Chem in the future are in the same range as during the past five years, and (b) the various insurers that cover the asbestos-related claims against Aqua-Chem remain solvent, regardless of the outcome of the coverage-in-place settlement litigation but taking into account the issues resolved to date, there will likely be little of Aqua-Chem's defense or indemnity costs that are not covered by insurance over the next 10 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 procedures and assumptions of the insurance industry, adjusted for our specific expectations based on our claim history. Our self-insurance reserves totaled $524 million and $527 million as of September 28, 2012, and December 31, 2011, 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 28, 2012 |
| Shareowners of The Coca-Cola Company |
| Noncontrolling Interests |
| Total |
|
Consolidated net income | $ | 7,153 |
| $ | 43 |
| $ | 7,196 |
|
Other comprehensive income: | | | |
Net foreign currency translation adjustment | (548 | ) | 34 |
| (514 | ) |
Net gain (loss) on derivatives1 | 11 |
| — |
| 11 |
|
Net unrealized gain (loss) on available-for-sale securities2 | 348 |
| — |
| 348 |
|
Net change in pension and other benefit liabilities | 22 |
| — |
| 22 |
|
Total comprehensive income | $ | 6,986 |
| $ | 77 |
| $ | 7,063 |
|
1 Refer to Note 5 for information related to the net gain or loss on derivative instruments classified as cash flow hedges.
2 Refer to Note 3 for information related to the net unrealized gain or loss on available-for-sale securities.
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, 2011 — As Adjusted | $ | 31,921 |
| $ | 53,621 |
| $ | (2,774 | ) | $ | 1,760 |
| $ | 10,332 |
| $ | (31,304 | ) | $ | 286 |
|
Comprehensive income (loss) | 7,063 |
| 7,153 |
| (167 | ) | — |
| — |
| — |
| 77 |
|
Dividends paid/payable to shareowners of The Coca-Cola Company | (3,454 | ) | (3,454 | ) | — |
| — |
| — |
| — |
| — |
|
Dividends paid to noncontrolling interests | (33 | ) | — |
| — |
| — |
| — |
| — |
| (33 | ) |
Business combinations | 50 |
| — |
| — |
| — |
| — |
| — |
| 50 |
|
Purchases of treasury stock | (3,653 | ) | — |
| — |
| — |
| — |
| (3,653 | ) | — |
|
Impact of employee stock option and restricted stock plans | 1,696 |
| — |
| — |
| — |
| 948 |
| 748 |
| — |
|
September 28, 2012 | $ | 33,590 |
| $ | 57,320 |
| $ | (2,941 | ) | $ | 1,760 |
| $ | 11,280 |
| $ | (34,209 | ) | $ | 380 |
|
Note 10 — Significant Operating and Nonoperating Items
Other Operating Items
In December 2011, the Company detected that orange juice being imported from Brazil contained residues of carbendazim, a fungicide that is not registered in the United States for use on citrus products. As a result, we began purchasing additional supplies of Florida orange juice at a higher cost than Brazilian orange juice and incurred charges of $7 million and $15 million during the three and nine months ended September 28, 2012, respectively. These charges were recorded in the line item cost of goods sold in our condensed consolidated statements of income.
On March 11, 2011, a major earthquake struck off the coast of Japan, resulting in a tsunami that devastated the northern and eastern regions of the country. As a result of these events, the Company made a donation to a charitable organization to establish the Coca-Cola Japan Reconstruction Fund, which is helping to rebuild schools and community facilities across the impacted areas of the country.
The Company recorded total charges of $84 million related to these events during the nine months ended September 30, 2011. These charges were recorded in various line items in our condensed consolidated statement of income, including $22 million in deductions from revenue, $12 million in cost of goods sold and $50 million in other operating charges. Refer to Note 15 for the impact these charges had on our operating segments.
The charges of $22 million recorded in deductions from revenue were primarily related to funds we provided our local bottling partners to enable them to continue producing and distributing our beverage products in the affected regions. This support not only helped restore our business operations in the impacted areas, but it also assisted our bottling partners in meeting the evolving customer and consumer needs as the recovery and rebuilding efforts advanced. The charges of $12 million recorded in cost of goods sold were primarily related to Company-owned inventory that was destroyed or lost. The charges of $50 million recorded in other operating charges were primarily related to the donation discussed above and included an impairment charge of $1 million on certain Company-owned fixed assets. These fixed assets primarily consisted of Company-owned vending equipment and coolers that were damaged or lost as a result of these events. Refer to Note 14 for the fair value disclosures related to the inventory and fixed asset charges described above.
During the three months ended September 30, 2011, the Company refined our initial estimates that were recorded during the first quarter of 2011 and recorded an additional net charge of $1 million related to the events in Japan. Refer to Note 15 for the impact this net charge had on our operating segments.
Other Operating Charges
During the three months ended September 28, 2012, the Company incurred other operating charges of $64 million. These charges consisted of $59 million associated with the Company's productivity and reinvestment program; $14 million related to the Company's other restructuring initiatives, including the integration of 18 German bottling and distribution operations acquired during 2007; and $2 million due to costs associated with the Company detecting carbendazim in orange juice imported from Brazil for distribution in the United States. These charges were partially offset by reversals of $6 million
associated with the refinement of previously established accruals related to the Company's 2008–2011 productivity initiatives, as well as reversals of $5 million associated with the refinement of previously established accruals related to the Company's integration of CCE's former North America business. Refer to Note 11 for additional information on our productivity and reinvestment program as well as the Company's other 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 28, 2012, the Company incurred other operating charges of $233 million. These charges consisted of $177 million associated with the Company's productivity and reinvestment program; $44 million related to the Company's other restructuring and integration initiatives, including the integration of 18 German bottling and distribution operations acquired during 2007; $20 million due to changes in the Company's ready-to-drink tea strategy as a result of our current U.S. license agreement with Nestlé S.A. ("Nestlé") terminating at the end of 2012; and $6 million due to costs associated with the Company detecting carbendazim in orange juice imported from Brazil for distribution in the United States. These charges were partially offset by reversals of $9 million associated with the refinement of previously established accruals related to the Company's 2008–2011 productivity initiatives, as well as reversals of $5 million associated with the refinement of previously established accruals related to the Company's integration of CCE's former North America business. Refer to Note 11 for additional information on our productivity and reinvestment program as well as the Company's other 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 30, 2011, the Company incurred other operating charges of $96 million, which primarily consisted of $89 million associated with the Company's productivity, integration and restructuring initiatives and $9 million of costs associated with the merger of Embotelladoras Arca, S.A.B. de C.V. ("Arca") and Grupo Continental S.A.B. ("Contal"). These charges were partially offset by reversals of $2 million associated with the refinement of previously established accruals related to the events in Japan described above. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to the discussion of the merger of Arca and Contal below for additional information on the transaction. Refer to Note 15 for the impact these charges had on our operating segments.
During the nine months ended September 30, 2011, the Company incurred other operating charges of $457 million, which primarily consisted of $370 million associated with the Company's productivity, integration and restructuring initiatives; $35 million of costs associated with the merger of Arca and Contal; and $50 million related to the events in Japan described above. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to the discussion of the merger of Arca and Contal below for additional information on the transaction. Refer to Note 15 for the impact these charges had on our operating segments.
Other Nonoperating Items
Equity Income (Loss) — Net
During the three months ended September 28, 2012, the Company recorded a net charge of $10 million in the line item equity income (loss) — net. This net charge represents the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 15 for the impact these charges had on our operating segments.
During the nine months ended September 28, 2012, the Company recorded a net gain of $33 million in the line item equity income (loss) — net. This net gain represents the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees. In addition, the Company recorded a charge of $14 million related to changes in the structure of Beverage Partners Worldwide ("BPW"), our 50/50 joint venture with Nestlé in the ready-to-drink tea category. These changes resulted in the joint venture focusing its geographic scope on Europe and Canada. The Company accounts for our investment in BPW under the equity method of accounting. Refer to Note 15 for the impact these charges had on our operating segments.
During the three and nine months ended September 30, 2011, the Company recorded charges of $36 million and $40 million, respectively, in the line item equity income (loss) — net. These charges represent the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 15 for the impact these charges had on our operating segments.
Other Income (Loss) — Net
During the nine months ended September 28, 2012, the Company recognized a gain of $92 million as a result of Coca-Cola FEMSA, S.A.B. de C.V. ("Coca-Cola FEMSA"), an equity method investee, issuing additional shares of its own stock at a per share amount greater than the carrying value of the Company's per share investment. Accordingly, the Company is required to treat this type of transaction as if the Company had sold a proportionate share of its investment in Coca-Cola FEMSA. The gain was recorded in other income (loss) — net and impacted the Corporate operating segment. Refer to Note 14 for additional information on the measurement of the gain.
During the three months ended September 30, 2011, the Company recorded a charge of $5 million related to the finalization of working capital adjustments associated with the sale of our Swedish and Norwegian bottling operations to Coca-Cola Enterprises, Inc. ("New CCE") in the fourth quarter of 2010. This charge reduced the amount of our previously reported gain on the sale of these bottling operations. The Company also recorded a charge of $3 million due to the impairment of an investment in an entity accounted for under the equity method of accounting. These charges were recorded in the line item other income (loss) — net and impacted the Corporate operating segment. Refer to Note 14 for additional information.
During the nine months ended September 30, 2011, the Company recognized a net gain of $417 million, primarily as a result of the merger of Arca and Contal, two bottling partners headquartered in Mexico, into a combined entity known as Arca Continental, S.A.B. de C.V. ("Arca Contal"). Prior to this transaction, the Company held an investment in Contal that we accounted for under the equity method of accounting. The merger of the two companies was a noncash transaction that resulted in Contal shareholders exchanging their existing Contal shares for new shares in Arca Contal at a specified exchange rate. The gain was recorded in the line item other income (loss) — net and impacted the Corporate operating segment. Refer to Note 14 for additional information on the measurement of the gain. As a result of this transaction, the Company now holds an investment in Arca Contal that we account for as an available-for-sale security.
In addition, the Company recorded a charge of $41 million in the line item other income (loss) — net during the nine months ended September 30, 2011, due to the impairment of an investment in an entity accounted for under the equity method of accounting. This charge impacted the Corporate operating segment. Refer to Note 14 for additional information. The Company also recognized a gain of $102 million during the nine months ended September 30, 2011, related to the sale of our investment in Embonor. This gain was recorded in the line item other income (loss) — net and impacted the Corporate operating segment. Refer to Note 2 for additional information.
Note 11 — Productivity, Integration and Restructuring Initiatives
Productivity Initiatives
During 2008, the Company announced a transformation effort centered on productivity initiatives to provide additional flexibility to invest for growth. During the fourth quarter of 2011, we completed this program. The initiatives impacted a number of areas, including aggressively managing operating expenses supported by lean techniques; redesigning key processes to drive standardization and effectiveness; better leveraging our size and scale; and driving savings in indirect costs through the implementation of a "procure-to-pay" program.
The Company has incurred total pretax expenses of $499 million related to these productivity initiatives since they commenced in the first quarter of 2008. These expenses were recorded in the line item other operating charges. Refer to Note 15 for the impact these charges had on our operating segments. Outside services reported in the tables below primarily relate to expenses in connection with legal, outplacement and consulting activities. Other direct costs reported in the tables below include, among other items, internal and external costs associated with the development, communication, administration and implementation of these initiatives and accelerated depreciation on certain fixed assets.
The following table summarizes the balance of accrued expenses related to productivity initiatives and the changes in the accrued amounts as of and for the three months ended September 28, 2012 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance June 29, 2012 |
| Costs Incurred Three Months Ended September 28, 2012 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 28, 2012 |
|
Severance pay and benefits | $ | 21 |
| $ | (5 | ) | $ | (4 | ) | $ | — |
| $ | 12 |
|
Outside services | 1 |
| — |
| — |
| — |
| 1 |
|
Other direct costs | 6 |
| (1 | ) | — |
| (2 | ) | 3 |
|
Total | $ | 28 |
| $ | (6 | ) | $ | (4 | ) | $ | (2 | ) | $ | 16 |
|
The following table summarizes the balance of accrued expenses related to productivity initiatives and the changes in the accrued amounts as of and for the nine months ended September 28, 2012 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance December 31, 2011 |
| Costs Incurred Nine Months Ended September 28, 2012 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 28, 2012 |
|
Severance pay and benefits | $ | 48 |
| $ | (8 | ) | $ | (25 | ) | $ | (3 | ) | $ | 12 |
|
Outside services | 3 |
| — |
| (1 | ) | (1 | ) | 1 |
|
Other direct costs | 9 |
| (1 | ) | (3 | ) | (2 | ) | 3 |
|
Total | $ | 60 |
| $ | (9 | ) | $ | (29 | ) | $ | (6 | ) | $ | 16 |
|
Integration Initiatives
Integration of CCE's North American Business
In 2010, we acquired CCE's North American business and began an integration initiative to develop, design and implement our future operating framework. Upon completion of the CCE transaction, we combined the management of the acquired North American business with the management of our existing foodservice business; Minute Maid and Odwalla juice businesses; North America supply chain operations; and Company-owned bottling operations in Philadelphia, Pennsylvania, into a unified bottling and customer service organization called Coca-Cola Refreshments, or CCR. In addition, we reshaped our remaining Coca-Cola North America ("CCNA") operations into an organization that primarily provides franchise leadership and consumer marketing and innovation for the North American market. As a result of the transaction and related reorganization, our North American businesses operate as aligned and agile organizations with distinct capabilities, responsibilities and strengths.
The Company has incurred total pretax expenses of $488 million related to this initiative since the plan commenced. These expenses were recorded in the line item other operating charges. Refer to Note 15 for the impact these charges had on our operating segments. Outside services reported in the tables below primarily relate to expenses in connection with legal, outplacement and consulting activities. Other direct costs reported in the tables below include, among other items, internal and external costs associated with the development, design and implementation of our future operating framework; contract termination fees; and relocation costs. During the fourth quarter of 2011, the Company completed this program.
The following table summarizes the balance of accrued expenses related to these integration initiatives and the changes in the accrued amounts as of and for the three months ended September 28, 2012 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance June 29, 2012 |
| Costs Incurred Three Months Ended September 28, 2012 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 28, 2012 |
|
Severance pay and benefits | $ | 29 |
| $ | (5 | ) | $ | (16 | ) | $ | — |
| $ | 8 |
|
Outside services | — |
| — |
| (1 | ) | 1 |
| — |
|
Other direct costs | 8 |
| — |
| — |
| (1 | ) | 7 |
|
Total | $ | 37 |
| $ | (5 | ) | $ | (17 | ) | $ | — |
| $ | 15 |
|
The following table summarizes the balance of accrued expenses related to these integration initiatives and the changes in the accrued amounts as of and for the nine months ended September 28, 2012 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance December 31, 2011 |
| Costs Incurred Nine Months Ended September 28, 2012 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 28, 2012 |
|
Severance pay and benefits | $ | 48 |
| $ | (5 | ) | $ | (35 | ) | $ | — |
| $ | 8 |
|
Outside services | 11 |
| — |
| (13 | ) | 2 |
| — |
|
Other direct costs | 32 |
| — |
| (22 | ) | (3 | ) | 7 |
|
Total | $ | 91 |
| $ | (5 | ) | $ | (70 | ) | $ | (1 | ) | $ | 15 |
|
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 $12 million and $37 million related to this initiative during the three and nine months ended September 28, 2012. The Company has incurred total pretax expenses of $329 million related to this initiative since it commenced, which were recorded in the line item other operating charges 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 $24 million and $30 million accrued related to these integration costs as of September 28, 2012, and December 31, 2011, respectively.
The Company is currently reviewing other integration and restructuring opportunities within the German bottling and distribution operations, which, if implemented, will result in additional charges in future periods. However, as of September 28, 2012, the Company has not finalized any additional plans.
Productivity and Reinvestment
In February 2012, the Company announced a four-year productivity and reinvestment program which will further enable our efforts to strengthen our brands and reinvest our resources to drive long-term profitable growth. This program will be 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 CCE's former North America business.
As of September 28, 2012, the Company has incurred total pretax expenses of $177 million related to this program since the plan commenced. These expenses were recorded in the line item other operating charges. Refer to Note 15 for the impact these charges had on our operating segments. Outside services reported in the tables below primarily relate to expenses in connection with legal, outplacement and consulting activities. Other direct costs reported in the tables below include, among other items, internal and external costs associated with the development, communication, administration and implementation of these initiatives; accelerated depreciation on certain fixed assets; contract termination fees; and relocation costs.
The following table summarizes the balance of accrued expenses related to these productivity and reinvestment initiatives and the changes in the accrued amounts as of and for the three months ended September 28, 2012 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance June 29, 2012 |
| Costs Incurred Three Months Ended September 28, 2012 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 28, 2012 |
|
Severance pay and benefits | $ | 3 |
| $ | 11 |
| $ | (2 | ) | $ | — |
| $ | 12 |
|
Outside services | 7 |
| 16 |
| (19 | ) | — |
| 4 |
|
Other direct costs | 4 |
| 32 |
| (26 | ) | (5 | ) | 5 |
|
Total | $ | 14 |
| $ | 59 |
| $ | (47 | ) | $ | (5 | ) | $ | 21 |
|
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 28, 2012 (in millions):
|
| | | | | | | | | | | | |
| Costs Incurred Nine Months Ended September 28, 2012 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 28, 2012 |
|
Severance pay and benefits | $ | 18 |
| $ | (6 | ) | $ | — |
| $ | 12 |
|
Outside services | 49 |
| (45 | ) | — |
| 4 |
|
Other direct costs | 110 |
| (94 | ) | (11 | ) | 5 |
|
Total | $ | 177 |
| $ | (145 | ) | $ | (11 | ) | $ | 21 |
|
Other Restructuring Activities
The Company incurred expenses of $2 million and $7 million related to other restructuring initiatives during the three and nine months ended September 28, 2012. These other restructuring initiatives were outside the scope of the initiatives discussed above. These other restructuring charges were related to individually insignificant activities throughout many of our business units. None of these activities is expected to be individually significant. These charges were recorded in the line item other operating charges. Refer to Note 15 for the impact these charges had on our operating segments.
Note 12 — Pension and Other Postretirement Benefit Plans
Net periodic benefit cost for our pension and other postretirement benefit plans consisted of the following during the three and nine months ended September 28, 2012, and September 30, 2011, respectively (in millions):
|
| | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three Months Ended |
| September 28, 2012 |
| September 30, 2011 |
| | September 28, 2012 |
| September 30, 2011 |
|
| | As Adjusted |
| | | |
Service cost | $ | 88 |
| $ | 62 |
| | $ | 8 |
| $ | 8 |
|
Interest cost | 97 |
| 97 |
| | 11 |
| 11 |
|
Expected return on plan assets | (143 | ) | (127 | ) | | (2 | ) | (2 | ) |
Amortization of prior service cost (credit) | (1 | ) | 2 |
| | (13 | ) | (15 | ) |
Amortization of net actuarial loss | 34 |
| 20 |
| | 2 |
| — |
|
Net periodic benefit cost (credit) | 75 |
| 54 |
| | 6 |
| 2 |
|
Special termination benefits | — |
| — |
| | — |
| — |
|
Total cost (credit) recognized in statements of income | $ | 75 |
| $ | 54 |
| | $ | 6 |
| $ | 2 |
|
|
| | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Nine Months Ended |
| September 28, 2012 |
| September 30, 2011 |
| | September 28, 2012 |
| September 30, 2011 |
|
| | As Adjusted |
| | | |
Service cost | $ | 224 |
| $ | 186 |
| | $ | 25 |
| $ | 24 |
|
Interest cost | 292 |
| 292 |
| | 33 |
| 34 |
|
Expected return on plan assets | (431 | ) | (381 | ) | | (6 | ) | (6 | ) |
Amortization of prior service cost (credit) | (2 | ) | 5 |
| | (39 | ) | (46 | ) |
Amortization of net actuarial loss | 102 |
| 60 |
| | 5 |
| 1 |
|
Net periodic benefit cost (credit) | 185 |
| 162 |
| | 18 |
| 7 |
|
Special termination benefits1 | — |
| 4 |
| | — |
| 2 |
|
Total cost (credit) recognized in statements of income | $ | 185 |
| $ | 166 |
| | $ | 18 |
| $ | 9 |
|
| |
1 | The special termination benefits primarily relate to the Company's productivity, integration and restructuring initiatives. Refer to Note 11 for additional information related to these initiatives. |
Effective January 1, 2012, the Company elected to change our accounting methodology for determining the market-related value of assets for our U.S. qualified defined benefit pension plans. The Company's change in accounting methodology has been applied retrospectively, and we have adjusted all applicable prior period financial information presented herein as required. Refer to Note 1 for further information related to this change and the impact it had on our condensed consolidated financial statements.
We contributed $992 million to our pension plans during the nine months ended September 28, 2012, which primarily consisted of $900 million to our U.S. pension plans and $70 million to certain European pension plans whose assets are managed through one of our captive insurance companies. We anticipate making additional contributions of approximately $9 million to our pension plans during the remainder of 2012. The Company contributed $874 million to our pension plans during the nine months ended September 30, 2011.
Note 13 — Income Taxes
Our effective tax rate reflects the benefits of having significant operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate of 35 percent. As a result of employment actions and capital investments made by the Company, certain tax jurisdictions provide income tax incentive grants, including Brazil, Costa Rica, Singapore and Swaziland. The terms of these grants expire from 2015 to 2020. We expect each of these grants to be renewed indefinitely. In addition, our effective tax rate reflects the benefits of having significant earnings generated in investments accounted for under the equity method of accounting, which are generally taxed at rates lower than the U.S. statutory rate.
At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year. This estimate reflects, among other items, our best estimate of operating results and foreign currency exchange rates. Based on current tax laws, the Company's estimated effective tax rate for 2012 is 24.0 percent. However, in arriving at this estimate we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.
The Company recorded income tax expense of $755 million (24.5 percent effective tax rate) and $681 million (23.3 percent effective tax rate) during the three months ended September 28, 2012, and September 30, 2011, respectively. The Company recorded income tax expense of $2,236 million (23.7 percent effective tax rate) and $2,273 million (24.6 percent effective tax rate) during the nine months ended September 28, 2012, and September 30, 2011, 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 28, 2012 |
| | September 30, 2011 |
| | September 28, 2012 |
| | September 30, 2011 |
| |
Asset impairments | $ | — |
| | $ | — |
| 8 | $ | — |
| | $ | (15 | ) | 8 |
Productivity and reinvestment program | (21 | ) | 1 | — |
| | (65 | ) | 1 | — |
| |
Other productivity, integration and restructuring initiatives | 4 |
| 2 | (25 | ) | 9 | 5 |
| 2 | (111 | ) | 9 |
Transaction gains and losses | — |
| | (5 | ) | 10 | 33 |
| 5 | 203 |
| 13 |
Certain tax matters | 7 |
| 3 | (4 | ) | 11 | (26 | ) | 6 | 15 |
| 11 |
Other — net | (4 | ) | 4 | (6 | ) | 12 | (18 | ) | 7 | (44 | ) | 14 |
| |
1 | Related to charges of $59 million and $177 million during the three and nine months ended September 28, 2012, respectively. These charges were due to the Company's productivity and reinvestment program announced in February 2012. Refer to Note 10 and Note 11. |
| |
2 | Related to net charges of $3 million and $30 million during the three and nine months ended September 28, 2012, respectively. These charges were primarily due to the Company's other productivity, restructuring and integration initiatives that are outside the scope of the Company's productivity and reinvestment program announced in February 2012. Refer to Note 10 and Note 11. |
| |
3 | 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. |
| |
4 | Related to a charge of $19 million that consisted of a charge of $10 million due to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees and charges of $9 million associated with the Company's orange juice supply in the United States. Refer to Note 10. |
| |
5 | Related to a gain of $92 million the Company realized as a result of 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 amount of the Company's per share investment. Refer to Note 10. |
| |
6 | Related to a net tax benefit primarily associated with the reversal of valuation allowances in the Company's foreign jurisdictions, partially offset by amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. See below for additional details related to the change in the Company's uncertain tax positions. |
| |
7 | Related to a net charge of $22 million. This net charge is due to charges of $20 million associated with changes in the Company's ready-to-drink tea strategy in the United States, charges of $14 million associated with changes in the structure of BPW, and charges of $21 million associated with the Company's orange juice supply in the United States, partially offset by a net gain of $33 million related to our proportionate share of unusual or infrequent items recorded by certain of our equity method investees. Refer to Note 10. |
| |
8 | Related to charges of $3 million and $41 million during the three and nine months ended September 30, 2011, respectively, due to the impairment of an entity accounted for under the equity method of accounting. Refer to Note 10. The Company does not expect to receive a tax benefit on the portion of the impairment recorded during the three months ended September 30, 2011. |
| |
9 | Related to charges of $89 million and $372 million during the three and nine months ended September 30, 2011, respectively, primarily due to our productivity, integration and restructuring initiatives. These productivity and integration initiatives were outside the scope of the Company's productivity and reinvestment program announced in February 2012. Refer to Note 10 and Note 11. |
| |
10 | Related to a charge of $14 million due to costs associated with the merger of Arca and Contal and the finalization of working capital adjustments related to the sale of all our ownership interests in our Norwegian and Swedish bottling operations to New CCE. Refer to Note 10. |
| |
11 | 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. |
| |
12 | Related to a net charge of $42 million, primarily due to the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees; a net charge on the repurchase and/or exchange of certain long-term debt we assumed in connection with our acquisition of CCE's former North America business; and a net charge associated with the earthquake and tsunami that devastated northern and eastern Japan on March 11, 2011. Refer to Note 10. |
| |
13 | Related to a net gain of $479 million, primarily due to the gain on the merger of Arca and Contal and the gain on the sale of our investment in Embonor, partially offset by costs associated with the merger of Arca and Contal and the finalization of working capital adjustments related to the sale of all our ownership interests in our Norwegian and Swedish bottling operations to New CCE. Refer to Note 10. |
| |
14 | Related to a net charge of $151 million, primarily due to charges related to the earthquake and tsunami that devastated northern and eastern Japan on March 11, 2011; our proportionate share of unusual or infrequent items recorded by certain of our equity method investees; the amortization of favorable supply contracts acquired in connection with our acquisition of CCE's former North America business; and a net charge on the repurchase and/or exchange of certain long-term debt we assumed in connection with the CCE transaction. Refer to Note 10. |
During the first quarter of 2012, the Company made a change in judgment about one of its tax positions as a result of an adverse court decision. The Company concluded that because of the court decision, the tax position had become uncertain and the tax benefits associated with the position could not be recognized for financial statement purposes. During the three months ended September 28, 2012, the Company determined that the liability associated with the tax position is now certain, and thus recorded the liability as an income tax payable. There has not been a material change in the balance of our unrecognized tax benefits as a result of this litigation. In addition, the litigation did not have a material impact on the Company's condensed consolidated statements of income during the three and nine months ended September 28, 2012.
As of September 28, 2012, the gross amount of unrecognized tax benefits was $328 million. If the Company were to prevail on all uncertain tax positions, the net effect would be a benefit to the Company's effective tax rate of $190 million, exclusive of any benefits related to interest and penalties. The remaining $138 million, which was recorded as a deferred tax asset, primarily represents tax benefits that would be received in different tax jurisdictions in the event the Company did not prevail on all uncertain tax positions. A reconciliation of the changes in the gross balance of unrecognized tax benefits during the nine months ended September 28, 2012, is as follows (in millions):
|
| | | |
Balance of unrecognized tax benefits as of December 31, 2011 | $ | 320 |
|
Increase related to prior period tax positions | 68 |
|
Decrease related to prior period tax positions | (7 | ) |
Increase related to current period tax positions | 17 |
|
Decrease related to settlements with taxing authorities | (45 | ) |
Decrease as a result of a lapse of the applicable statute of limitations | (7 | ) |
Decrease from effects of foreign currency exchange rates | (18 | ) |
Balance of unrecognized tax benefits as of September 28, 2012 | $ | 328 |
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company had $119 million and $110 million in interest and penalties related to unrecognized tax benefits accrued as of September 28, 2012, and December 31, 2011, respectively. The change in the accrued interest and penalties related to unrecognized tax benefits did not have a material impact on the Company's condensed consolidated statements of income during the three and nine months ended September 28, 2012.
It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a significant impact on our condensed consolidated statements of income or condensed consolidated balance sheets. The change may be the result of settlements of ongoing audits, statutes of limitations expiring or final settlements in matters that are the subject of litigation. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.
The Company evaluates the recoverability of our deferred tax assets in accordance with accounting principles generally accepted in the United States. We perform our recoverability tests on a quarterly basis, or more frequently, to determine whether it is more likely than not that any of our deferred tax assets will not be realized within their life cycle based on the available evidence. The Company's deferred tax valuation allowances are primarily a result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards from operations in various jurisdictions.
During the nine months ended September 28, 2012, the Company changed its judgment on the realizability of certain deferred tax assets. As a result of considering recent significant positive evidence, including, among other things, a consistent pattern of positive earnings in the past three years as well as forecasts of future earnings, it was determined that a valuation allowance was no longer required for certain deferred tax assets primarily recorded on net operating losses in foreign jurisdictions. The decrease in these valuation allowances resulted in a tax benefit of $153 million during the nine months ended September 28, 2012. Furthermore, the Company currently believes it is reasonably possible that $125 million to $175 million of valuation allowances related to net operating losses in certain foreign jurisdictions may be reversed within the next 12 months.
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 were based on the closing price as of the balance sheet date and were classified as Level 1. The fair values of our investments in trading and available-for-sale securities classified as Level 2 are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. Inputs into these valuation techniques include actual trade data, benchmark yields, broker/dealer quotes, and other similar data. These inputs are obtained from quoted market prices, independent pricing vendors or other sources.
Derivative Financial Instruments
The fair values of our futures contracts were primarily determined using quoted contract prices on futures exchange markets. The fair values of these instruments were based on the closing contract price as of the balance sheet date and were classified as Level 1.
The fair values of our derivative instruments other than futures were determined using standard valuation models. The significant inputs used in these models are readily available in public markets, or can be derived from observable market transactions, and therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments other than futures include the applicable exchange rates, forward rates, interest rates and discount rates. The standard valuation model for options also uses implied volatility as an additional input. The discount rates are based on the historical U.S. Deposit or U.S. Treasury rates, and the implied volatility specific to options is based on quoted rates from financial institutions.
Included in the fair value of derivative instruments is an adjustment for nonperformance risk. The adjustment is based on the current one-year credit default swap ("CDS") rate applied to each contract, by counterparty. We use our counterparty's CDS rate
when we are in an asset position and our own CDS rate when we are in a liability position. The adjustment for nonperformance risk did not have a significant impact on the estimated fair value of our derivative instruments. The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of September 28, 2012 (in millions):
|
| | | | | | | | | | | | | | | | | |
| Level 1 |
| Level 2 |
| Level 3 |
| | Netting Adjustment1 |
| Fair Value Measurements |
|
Assets | | | | | | |
Trading securities | $ | 142 |
| $ | 109 |
| $ | 4 |
| | $ | — |
| $ | 255 |
|
Available-for-sale securities2 | 1,713 |
| 3,150 |
| 141 |
| 3 |
| — |
| 5,004 |
|
Derivatives4 | 52 |
| 516 |
| — |
| | (105 | ) | 463 |
|
Total assets | $ | 1,907 |
| $ | 3,775 |
| $ | 145 |
| | $ | (105 | ) | $ | 5,722 |
|
Liabilities | | | | | | |
Derivatives4 | $ | 18 |
| $ | 158 |
| $ | — |
| | $ | (115 | ) | $ | 61 |
|
Total liabilities | $ | 18 |
| $ | 158 |
| $ | — |
| | $ | (115 | ) | $ | 61 |
|
1 Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and also cash collateral held or placed with the same counterparties. Refer to Note 5.
| |
2 | Refer to Note 3 for additional information related to the composition of our available-for-sale securities. |
3 Primarily related to long-term debt securities that mature in 2018.
4 Refer to Note 5 for additional information related to the composition of our derivative portfolio.
The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 (in millions):
|
| | | | | | | | | | | | | | | | | |
| Level 1 |
| Level 2 |
| Level 3 |
| | Netting Adjustment1 |
| Fair Value Measurements |
|
Assets | | | | | | |
Trading securities | $ | 166 |
| $ | 41 |
| $ | 4 |
| | $ | — |
| $ | 211 |
|
Available-for-sale securities2 | 1,071 |
| 214 |
| 116 |
| 3 |
| — |
| 1,401 |
|
Derivatives4 | 39 |
| 467 |
| — |
| | (117 | ) | 389 |
|
Total assets | $ | 1,276 |
| $ | 722 |
| $ | 120 |
| | $ | (117 | ) | $ | 2,001 |
|
Liabilities | | | | | | |
Derivatives4 | $ | 5 |
| $ | 201 |
| $ | — |
| | $ | (121 | ) | $ | 85 |
|
Total liabilities | $ | 5 |
| $ | 201 |
| $ | — |
| | $ | (121 | ) | $ | 85 |
|
1 Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and also cash collateral held or placed with the same counterparties. Refer to Note 5.
| |
2 | Refer to Note 3 for additional information related to the composition of our available-for-sale securities. |
3 Primarily related to long-term debt securities that mature in 2018.
4 Refer to Note 5 for additional information related to the composition of our derivative portfolio.
Gross realized and unrealized gains and losses on Level 3 assets and liabilities were not significant for the three and nine months ended September 28, 2012, and September 30, 2011.
The Company recognizes transfers between levels within the hierarchy as of the beginning of the reporting period. Gross transfers between levels within the hierarchy were not significant for the three and nine months ended September 28, 2012, and September 30, 2011.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a nonrecurring basis as required by accounting principles generally accepted in the United States. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. The gains or losses on assets measured at fair value on a nonrecurring basis for the three and nine months ended September 28, 2012, and September 30, 2011, are summarized in the table below (in millions):
|
| | | | | | | | | | | | | | | | |
| Gains (Losses) | |
| Three Months Ended | | Nine Months Ended | |
| September 28, 2012 |
| | September 30, 2011 |
| | September 28, 2012 |
| | September 30, 2011 |
| |
Valuation of shares in equity method investee | $ | — |
| | $ | — |
| | $ | 92 |
| 1 | $ | — |
| |
Exchange of investment in equity securities | — |
| | — |
| | — |
| | 418 |
| 4 |
Equity method investments | — |
| | (3 | ) | 2 | — |
| | (41 | ) | 2 |
Inventories | — |
| | (5 | ) | 3 | — |
| | (12 | ) | 3 |
Cold-drink equipment | — |
| | — |
| | — |
| | (1 | ) | 3 |
Total | $ | — |
| | $ | (8 | ) | | $ | 92 |
| | $ | 364 |
| |
1 The Company recognized a gain of $92 million as a result of Coca-Cola FEMSA, an equity method investee, issuing additional shares of its own stock at a per share amount greater than the carrying value of the Company's per share investment. Accordingly, the Company is required to treat this type of transaction as if the Company had sold a proportionate share of its investment in Coca-Cola FEMSA. The gain was determined using Level 1 inputs. Refer to Note 10.
2 The Company recognized impairment charges of $3 million and $41 million during the three and nine months ended September 30, 2011, respectively. These charges related to an investment in an entity accounted for under the equity method of accounting. Subsequent to the recognition of these impairment charges, the Company's remaining financial exposure related to this entity was not significant. This charge was determined using Level 3 inputs. Refer to Note 10.
3 These assets primarily consisted of Company-owned inventory and cold-drink equipment that were damaged or lost as a result of the natural disasters in Japan on March 11, 2011. During the nine months ended September 30, 2011, we recorded impairment charges of $12 million and $1 million related to Company-owned inventory and cold-drink equipment, respectively. The impairment charges related to Company-owned inventory included a charge of $5 million recorded during the three months ended September 30, 2011. These charges represent the Company's best estimate as of September 30, 2011, and were determined using Level 3 inputs based on the carrying value of the inventory and cold-drink equipment prior to the natural disasters. Refer to Note 10.
4 As a result of the merger of Arca and Contal, the Company recognized a gain on the exchange of the shares we previously owned in Contal for shares in the newly formed entity Arca Contal. The gain represents the difference between the carrying value of the Contal shares we relinquished and the fair value of the Arca Contal shares we received as a result of the transaction. The gain and initial carrying value of our investment were calculated based on Level 1 inputs. Refer to Note 10.
Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents; short-term investments; receivables; accounts payable and accrued expenses; and loans and notes payable approximate their fair values because of the relatively short-term maturities of these instruments.
The fair value of our long-term debt is estimated using Level 2 inputs based on quoted prices for those or similar instruments. As of September 28, 2012, the carrying amount and fair value of our long-term debt, including the current portion, were $16,522 million and $17,402 million, respectively. As of December 31, 2011, the carrying amount and fair value of our long-term debt, including the current portion, were $15,697 million and $16,360 million, respectively.
Note 15 — Operating Segments
Information about our Company's operations as of and for the three months ended September 28, 2012, and September 30, 2011, by operating segment, is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eurasia & Africa |
| Europe |
| Latin America |
| North America |
| Pacific |
| Bottling Investments |
| Corporate |
| Eliminations |
| Consolidated |
|
2012 | | | | | | | | | |
Net operating revenues: | | | | | | | | | |
Third party | $ | 720 |
| $ | 1,124 |
| $ | 1,171 |
| $ | 5,669 |
| $ | 1,448 |
| $ | 2,182 |
| $ | 26 |
| $ | — |
| $ | 12,340 |
|
Intersegment | 29 |
| 165 |
| 55 |
| 1 |
| 147 |
| 26 |
| — |
| (423 | ) | — |
|
Total net revenues | 749 |
| 1,289 |
| 1,226 |
| 5,670 |
| 1,595 |
| 2,208 |
| 26 |
| (423 | ) | 12,340 |
|
Operating income (loss) | 254 |
| 698 |
| 734 |
| 832 |
| 603 |
| 44 |
| (372 | ) | — |
| 2,793 |
|
Income (loss) before income taxes | 258 |
| 716 |
| 734 |
| 838 |
| 606 |
| 269 |
| (337 | ) | — |
| 3,084 |
|
Identifiable operating assets | 1,488 |
| 3,012 |
| 2,576 |
| 33,906 |
| 2,188 |
| 9,374 |
| 23,960 |
| — |
| 76,504 |
|
Noncurrent investments | 1,143 |
| 275 |
| 556 |
| 21 |
| 126 |
| 7,953 |
| 76 |
| — |
| 10,150 |
|
2011 — As Adjusted | | | | | | | | | |
Net operating revenues: | | | | | | | | | |
Third party | $ | 684 |
| $ | 1,207 |
| $ | 1,162 |
| $ | 5,387 |
| $ | 1,534 |
| $ | 2,240 |
| $ | 34 |
| $ | — |
| $ | 12,248 |
|
Intersegment | 34 |
| 192 |
| 64 |
| — |
| 121 |
| 24 |
| — |
| (435 | ) | — |
|
Total net revenues | 718 |
| 1,399 |
| 1,226 |
| 5,387 |
| 1,655 |
| 2,264 |
| 34 |
| (435 | ) | 12,248 |
|
Operating income (loss) | 265 |
| 810 |
| 773 |
| 618 |
| 608 |
| 76 | |