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 27, 2013
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-02217
(Exact name of Registrant as specified in its Charter)
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| | |
Delaware (State or other jurisdiction of incorporation or organization) | | 58-0628465 (IRS Employer Identification No.) |
One Coca-Cola Plaza Atlanta, Georgia (Address of principal executive offices) | | 30313 (Zip Code) |
Registrant's telephone number, including area code: (404) 676-2121
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. |
| | | |
| 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 21, 2013 |
$0.25 Par Value | | 4,415,922,733 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, 2012, 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 27, 2013 |
| September 28, 2012 |
| | September 27, 2013 |
| September 28, 2012 |
|
NET OPERATING REVENUES | $ | 12,030 |
| $ | 12,340 |
| | $ | 35,814 |
| $ | 36,562 |
|
Cost of goods sold | 4,793 |
| 4,853 |
| | 14,106 |
| 14,425 |
|
GROSS PROFIT | 7,237 |
| 7,487 |
| | 21,708 |
| 22,137 |
|
Selling, general and administrative expenses | 4,424 |
| 4,630 |
| | 12,991 |
| 13,308 |
|
Other operating charges | 341 |
| 64 |
| | 594 |
| 233 |
|
OPERATING INCOME | 2,472 |
| 2,793 |
| | 8,123 |
| 8,596 |
|
Interest income | 136 |
| 118 |
| | 381 |
| 345 |
|
Interest expense | 90 |
| 102 |
| | 314 |
| 302 |
|
Equity income (loss) — net | 204 |
| 252 |
| | 537 |
| 637 |
|
Other income (loss) — net | 658 |
| 23 |
| | 522 |
| 156 |
|
INCOME BEFORE INCOME TAXES | 3,380 |
| 3,084 |
| | 9,249 |
| 9,432 |
|
Income taxes | 925 |
| 755 |
| | 2,331 |
| 2,236 |
|
CONSOLIDATED NET INCOME | 2,455 |
| 2,329 |
| | 6,918 |
| 7,196 |
|
Less: Net income attributable to noncontrolling interests | 8 |
| 18 |
| | 44 |
| 43 |
|
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | $ | 2,447 |
| $ | 2,311 |
| | $ | 6,874 |
| $ | 7,153 |
|
BASIC NET INCOME PER SHARE1 | $ | 0.55 |
| $ | 0.51 |
| | $ | 1.55 |
| $ | 1.58 |
|
DILUTED NET INCOME PER SHARE1 | $ | 0.54 |
| $ | 0.50 |
| | $ | 1.52 |
| $ | 1.56 |
|
DIVIDENDS PER SHARE | $ | 0.28 |
| $ | 0.255 |
| | $ | 0.84 |
| $ | 0.765 |
|
AVERAGE SHARES OUTSTANDING | 4,426 |
| 4,502 |
| | 4,442 |
| 4,513 |
|
Effect of dilutive securities | 72 |
| 85 |
| | 76 |
| 80 |
|
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION | 4,498 |
| 4,587 |
| | 4,518 |
| 4,593 |
|
1 Calculated based on net income attributable to shareowners of The Coca-Cola Company.
Refer to Notes to Condensed Consolidated Financial Statements.
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In millions)
|
| | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2013 |
| September 28, 2012 |
| | September 27, 2013 |
| September 28, 2012 |
|
CONSOLIDATED NET INCOME | $ | 2,455 |
| $ | 2,329 |
| | $ | 6,918 |
| $ | 7,196 |
|
Other comprehensive income: | | | | | |
Net foreign currency translation adjustment | (466 | ) | 285 |
| | (1,447 | ) | (514 | ) |
Net gain (loss) on derivatives | (82 | ) | (48 | ) | | 122 |
| 11 |
|
Net unrealized gain (loss) on available-for-sale securities | (92 | ) | 182 |
| | (66 | ) | 348 |
|
Net change in pension and other benefit liabilities | 27 |
| 11 |
| | 105 |
| 22 |
|
TOTAL COMPREHENSIVE INCOME | 1,842 |
| 2,759 |
| | 5,632 |
| 7,063 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests | 11 |
| 20 |
| | 72 |
| 77 |
|
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | $ | 1,831 |
| $ | 2,739 |
| | $ | 5,560 |
| $ | 6,986 |
|
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 27, 2013 |
| December 31, 2012 |
|
ASSETS | | |
CURRENT ASSETS | | |
Cash and cash equivalents | $ | 11,118 |
| $ | 8,442 |
|
Short-term investments | 6,139 |
| 5,017 |
|
TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS | 17,257 |
| 13,459 |
|
Marketable securities | 3,202 |
| 3,092 |
|
Trade accounts receivable, less allowances of $57 and $53, respectively | 5,116 |
| 4,759 |
|
Inventories | 3,321 |
| 3,264 |
|
Prepaid expenses and other assets | 2,680 |
| 2,781 |
|
Assets held for sale | — |
| 2,973 |
|
TOTAL CURRENT ASSETS | 31,576 |
| 30,328 |
|
EQUITY METHOD INVESTMENTS | 10,385 |
| 9,216 |
|
OTHER INVESTMENTS, PRINCIPALLY BOTTLING COMPANIES | 1,150 |
| 1,232 |
|
OTHER ASSETS | 4,270 |
| 3,585 |
|
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation of $9,853 and $9,010, respectively | 14,548 |
| 14,476 |
|
TRADEMARKS WITH INDEFINITE LIVES | 6,608 |
| 6,527 |
|
BOTTLERS' FRANCHISE RIGHTS WITH INDEFINITE LIVES | 7,426 |
| 7,405 |
|
GOODWILL | 12,412 |
| 12,255 |
|
OTHER INTANGIBLE ASSETS | 1,057 |
| 1,150 |
|
TOTAL ASSETS | $ | 89,432 |
| $ | 86,174 |
|
LIABILITIES AND EQUITY | | |
CURRENT LIABILITIES | | |
Accounts payable and accrued expenses | $ | 10,590 |
| $ | 8,680 |
|
Loans and notes payable | 18,840 |
| 16,297 |
|
Current maturities of long-term debt | 3,194 |
| 1,577 |
|
Accrued income taxes | 418 |
| 471 |
|
Liabilities held for sale | — |
| 796 |
|
TOTAL CURRENT LIABILITIES | 33,042 |
| 27,821 |
|
LONG-TERM DEBT | 14,173 |
| 14,736 |
|
OTHER LIABILITIES | 4,445 |
| 5,468 |
|
DEFERRED INCOME TAXES | 5,307 |
| 4,981 |
|
THE COCA-COLA COMPANY SHAREOWNERS' EQUITY | | |
Common stock, $0.25 par value; Authorized — 11,200 shares; Issued — 7,040 and 7,040 shares, respectively | 1,760 |
| 1,760 |
|
Capital surplus | 12,122 |
| 11,379 |
|
Reinvested earnings | 61,187 |
| 58,045 |
|
Accumulated other comprehensive income (loss) | (4,699 | ) | (3,385 | ) |
Treasury stock, at cost — 2,624 and 2,571 shares, respectively | (38,238 | ) | (35,009 | ) |
EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | 32,132 |
| 32,790 |
|
EQUITY ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 333 |
| 378 |
|
TOTAL EQUITY | 32,465 |
| 33,168 |
|
TOTAL LIABILITIES AND EQUITY | $ | 89,432 |
| $ | 86,174 |
|
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 27, 2013 |
| September 28, 2012 |
|
OPERATING ACTIVITIES | | |
Consolidated net income | $ | 6,918 |
| $ | 7,196 |
|
Depreciation and amortization | 1,444 |
| 1,469 |
|
Stock-based compensation expense | 155 |
| 254 |
|
Deferred income taxes | 179 |
| 156 |
|
Equity (income) loss — net of dividends | (270 | ) | (338 | ) |
Foreign currency adjustments | 140 |
| (106 | ) |
Significant (gains) losses on sales of assets — net | (670 | ) | (108 | ) |
Other operating charges | 331 |
| 98 |
|
Other items | 137 |
| 61 |
|
Net change in operating assets and liabilities | (652 | ) | (842 | ) |
Net cash provided by operating activities | 7,712 |
| 7,840 |
|
INVESTING ACTIVITIES | | |
Purchases of investments | (11,451 | ) | (11,759 | ) |
Proceeds from disposals of investments | 9,601 |
| 4,428 |
|
Acquisitions of businesses, equity method investments and nonmarketable securities | (326 | ) | (1,148 | ) |
Proceeds from disposals of businesses, equity method investments and nonmarketable securities | 869 |
| 19 |
|
Purchases of property, plant and equipment | (1,625 | ) | (1,971 | ) |
Proceeds from disposals of property, plant and equipment | 64 |
| 73 |
|
Other investing activities | (115 | ) | (41 | ) |
Net cash provided by (used in) investing activities | (2,983 | ) | (10,399 | ) |
FINANCING ACTIVITIES | | |
Issuances of debt | 31,147 |
| 32,888 |
|
Payments of debt | (27,293 | ) | (28,790 | ) |
Issuances of stock | 1,079 |
| 1,319 |
|
Purchases of stock for treasury | (3,892 | ) | (3,619 | ) |
Dividends | (2,494 | ) | (2,304 | ) |
Other financing activities | 70 |
| 107 |
|
Net cash provided by (used in) financing activities | (1,383 | ) | (399 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (670 | ) | (230 | ) |
CASH AND CASH EQUIVALENTS | | |
Net increase (decrease) during the period | 2,676 |
| (3,188 | ) |
Balance at beginning of period | 8,442 |
| 12,803 |
|
Balance at end of period | $ | 11,118 |
| $ | 9,615 |
|
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, 2012.
When used in these notes, the terms "The Coca-Cola Company," "Company," "we," "us" or "our" mean The Coca-Cola Company and all entities included in our condensed consolidated financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 27, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Sales of our nonalcoholic ready-to-drink beverages are somewhat seasonal, with the second and third calendar quarters accounting for the highest sales volumes. The volume of sales in the beverage business may be affected by weather conditions.
Each of our interim reporting periods, other than the fourth interim reporting period, ends on the Friday closest to the last day of the corresponding quarterly calendar period. The third quarter of 2013 and 2012 ended on September 27, 2013, and September 28, 2012, respectively. Our fourth interim reporting period and our fiscal year end on December 31 regardless of the day of the week on which December 31 falls.
Effective January 1, 2013, the Company transferred our India and South West Asia business unit from the Eurasia and Africa operating segment to the Pacific operating segment. Accordingly, these and certain other amounts in the prior year's condensed consolidated financial statements and notes have been revised to conform to the current year presentation.
Advertising Costs
The Company's accounting policy related to advertising costs for annual reporting purposes, as disclosed in Note 1 of our 2012 Annual Report on Form 10-K, is to expense production costs of print, radio, television and other advertisements as of the first date the advertisements take place. All other marketing expenditures are expensed in the annual period in which the expenditure is incurred.
For interim reporting purposes, we allocate our estimated full year marketing expenditures that benefit multiple interim periods to each of our interim reporting periods. We use the proportion of each interim period's actual unit case volume to the estimated full year unit case volume as the basis for the allocation. This methodology results in our marketing expenditures being recognized at a standard rate per unit case. At the end of each interim reporting period, we review our estimated full year unit case volume and our estimated full year marketing expenditures in order to evaluate if a change in estimate is necessary. The impact of any changes in these full year estimates is recognized in the interim period in which the change in estimate occurs. Our full year marketing expenditures are not impacted by this interim accounting policy.
NOTE 2: ACQUISITIONS AND DIVESTITURES
Acquisitions
During the nine months ended September 27, 2013, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $326 million, which primarily included our acquisition of the majority of the remaining outstanding shares of Fresh Trading Ltd. ("innocent") and bottling operations in Myanmar. The Company previously accounted for our investment in innocent under the equity method of accounting. We remeasured our equity interest in innocent to fair value upon the close of the transaction. The resulting gain on the remeasurement was not significant to our condensed consolidated financial statements.
During the nine months ended September 28, 2012, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $1,148 million, which primarily included investments in the existing beverage business of Aujan Industries Company J.S.C. ("Aujan"), one of the largest independent beverage companies in the Middle East, and our acquisition of bottling operations in Vietnam, Cambodia and Guatemala.
The Company transferred $815 million during the nine months ended September 28, 2012, under its definitive agreement with Aujan in exchange for an ownership interest of 50 percent in the Aujan entity that holds the rights to Aujan-owned brands in certain territories and an ownership interest of 49 percent in Aujan's bottling and distribution operations in certain territories. The Company's investments in Aujan are being accounted for under the equity method of accounting.
Coca-Cola Erfrischungsgetränke AG
In conjunction with the Company's acquisition of 18 German bottling and distribution operations in 2007, the former owners received put options to sell their respective shares in Coca-Cola Erfrischungsgetränke AG back to the Company on January 2, 2014, with notification to the Company required by September 30, 2013. During the nine months ended September 27, 2013, the Company received notice that 100 percent of the put options would be exercised. The total exercise price for the put options is approximately $492 million.
Divestitures
During the nine months ended September 27, 2013, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $869 million. These proceeds primarily included the sale of a majority ownership interest in our previously consolidated bottling operations in the Philippines ("Philippine bottling operations"), and separately, the deconsolidation of our bottling operations in Brazil ("Brazilian bottling operations"). See below for further details on each of these transactions.
During the nine months ended September 28, 2012, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $19 million. None of the disposals were individually significant.
Philippine Bottling Operations
On December 13, 2012, the Company and Coca-Cola FEMSA, S.A.B. de C.V. ("Coca-Cola FEMSA"), an equity method investee, executed a share purchase agreement for the sale of a majority ownership interest in our consolidated Philippine bottling operations. This transaction was completed on January 25, 2013. The Company now accounts for our ownership interest in the Philippine bottling operations under the equity method of accounting. Following this transaction, we remeasured our investment in the Philippine bottling operations to fair value taking into consideration the sale price of the majority ownership interest. Coca-Cola FEMSA has an option to purchase our remaining ownership interest in the Philippine bottling operations at any time during the seven years following closing based on the initial purchase price plus a defined return. Coca-Cola FEMSA also has an option exercisable during the sixth year after closing to sell its ownership interest back to the Company at a price not to exceed the initial purchase price.
As of December 31, 2012, our Philippine bottling operations met the criteria to be classified as held for sale, and we were required to record their assets and liabilities at the lower of carrying value or fair value less any costs to sell based on the agreed-upon sale price. The Company recorded a total loss of $107 million, primarily during the fourth quarter of 2012, on the sale of our Philippine bottling operations. Refer to the table below for details of our Philippine bottling assets and liabilities that were classified as held for sale.
Brazilian Bottling Operations
On December 17, 2012, the Company entered into an agreement with several parties to combine our Brazilian bottling operations with an independent bottler in Brazil in a transaction involving a disposition of shares for cash and an exchange of shares for a 44 percent minority ownership interest in the newly combined entity which was recorded at fair value. This transaction was completed on July 3, 2013, and resulted in the deconsolidation of our Brazilian bottling operations. The Company recognized a gain of $615 million as a result of this transaction. The owners of the majority interest have the option to acquire from us up to 24 percent of the new entity's outstanding shares at any time for a period of six years beginning December 31, 2013.
As of December 31, 2012, our Brazilian bottling operations met the criteria to be classified as held for sale, but we were not required to record their assets and liabilities at fair value less any costs to sell because their fair value exceeded our carrying value. Refer to the table below for details of our Brazilian bottling assets and liabilities that were classified as held for sale.
Assets and Liabilities Held for Sale
The following table presents information related to the major classes of assets and liabilities that were classified as held for sale in our condensed consolidated balance sheet as of December 31, 2012 (in millions):
|
| | | | | | | | | | | |
| December 31, 2012 |
| Brazilian Bottling Operations |
| | Philippine Bottling Operations |
| | Total Bottling Operations Held for Sale as of December 31, 2012 |
|
Cash, cash equivalents and short-term investments | $ | 45 |
| | $ | 133 |
| | $ | 178 |
|
Trade accounts receivable, less allowances | 88 |
| | 108 |
| | 196 |
|
Inventories | 85 |
| | 187 |
| | 272 |
|
Prepaid expenses and other assets | 174 |
| | 223 |
| | 397 |
|
Other assets | 128 |
| | 7 |
| | 135 |
|
Property, plant and equipment — net | 419 |
| | 841 |
| | 1,260 |
|
Bottlers' franchise rights with indefinite lives | 130 |
| | 341 |
| | 471 |
|
Goodwill | 22 |
| | 148 |
| | 170 |
|
Other intangible assets | 1 |
| | — |
| | 1 |
|
Allowance for reduction of assets held for sale | — |
| | (107 | ) | | (107 | ) |
Total assets1 | $ | 1,092 |
| | $ | 1,881 |
| | $ | 2,973 |
|
Accounts payable and accrued expenses | $ | 157 |
| | $ | 241 |
| | $ | 398 |
|
Loans and notes payable | 6 |
| | — |
| | 6 |
|
Current maturities of long-term debt | 28 |
| | — |
| | 28 |
|
Accrued income taxes | 4 |
| | (4 | ) | | — |
|
Long-term debt | 147 |
| | — |
| | 147 |
|
Other liabilities | 75 |
| | 20 |
| | 95 |
|
Deferred income taxes | 20 |
| | 102 |
| | 122 |
|
Total liabilities1 | $ | 437 |
| | $ | 359 |
| | $ | 796 |
|
| |
1 | The assets and liabilities of our Philippine and Brazilian bottling operations were included in our Bottling Investments operating segment during the period(s) in which they were consolidated entities of the Company. Refer to Note 15. |
We determined that our Philippine and Brazilian bottling operations did not meet the criteria to be classified as discontinued operations, primarily due to the continued significant involvement we have in these operations following each transaction.
NOTE 3: INVESTMENTS
Investments in debt and marketable equity securities, other than investments accounted for under the equity method, are classified as trading, available-for-sale or held-to-maturity. Our marketable equity investments are classified as either trading or available-for-sale with their cost basis determined by the specific identification method. Realized and unrealized gains and losses on trading securities and realized gains and losses on available-for-sale securities are included in net income. Unrealized gains and losses, net of deferred taxes, on available-for-sale securities are included in our condensed consolidated balance sheets as a component of accumulated other comprehensive income ("AOCI"), except for the change in fair value attributable to the currency risk being hedged. Refer to Note 5 for additional information related to the Company's fair value hedges of available-for-sale securities.
Our investments in debt securities are carried at either amortized cost or fair value. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity. Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale.
Trading Securities
As of September 27, 2013, and December 31, 2012, our trading securities had a fair value of $314 million and $266 million, respectively, and consisted primarily of equity securities. The Company had net unrealized gains on trading securities of $28 million and $19 million as of September 27, 2013, and December 31, 2012, respectively. The Company's trading securities were included in the following line items in our condensed consolidated balance sheets (in millions):
|
| | | | | | |
| September 27, 2013 |
| December 31, 2012 |
|
Marketable securities | $ | 231 |
| $ | 184 |
|
Other assets | 83 |
| 82 |
|
Total trading securities | $ | 314 |
| $ | 266 |
|
Available-for-Sale and Held-to-Maturity Securities
As of September 27, 2013, available-for-sale securities consisted of the following (in millions):
|
| | | | | | | | | | | | |
| | Gross Unrealized | |
| Cost |
| Gains |
| Losses |
| Fair Value |
|
Available-for-sale securities:1 | | | | |
Equity securities | $ | 983 |
| $ | 389 |
| $ | (15 | ) | $ | 1,357 |
|
Debt securities | 3,343 |
| 21 |
| (34 | ) | 3,330 |
|
Total available-for-sale securities | $ | 4,326 |
| $ | 410 |
| $ | (49 | ) | $ | 4,687 |
|
1 Refer to Note 14 for additional information related to the estimated fair value.
As of December 31, 2012, available-for-sale securities consisted of the following (in millions):
|
| | | | | | | | | | | | |
| | Gross Unrealized | |
| Cost |
| Gains |
| Losses |
| Fair Value |
|
Available-for-sale securities:1 | | | | |
Equity securities | $ | 957 |
| $ | 441 |
| $ | (10 | ) | $ | 1,388 |
|
Debt securities | 3,169 |
| 46 |
| (10 | ) | 3,205 |
|
Total available-for-sale securities | $ | 4,126 |
| $ | 487 |
| $ | (20 | ) | $ | 4,593 |
|
1 Refer to Note 14 for additional information related to the estimated fair value.
The sale and/or maturity of available-for-sale securities resulted in the following realized activity during the three and nine months ended September 27, 2013, and September 28, 2012 (in millions):
|
| | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 27, 2013 |
| September 28, 2012 |
| | September 27, 2013 |
| September 28, 2012 |
|
Gross gains | $ | 2 |
| $ | 22 |
| | $ | 10 |
| $ | 34 |
|
Gross losses | (9 | ) | (26 | ) | | (19 | ) | (28 | ) |
Proceeds | 1,091 |
| 1,256 |
| | 3,349 |
| 4,098 |
|
The Company uses one of its insurance captives to reinsure group annuity insurance contracts that cover the pension obligations of certain of our European pension plans. In accordance with local insurance regulations, our insurance captive is required to meet and maintain minimum solvency capital requirements. The Company elected to invest its solvency capital in a portfolio of available-for-sale securities, which are classified in the line item other assets in our condensed consolidated balance sheets because the assets are not available to satisfy our current obligations. As of September 27, 2013, and December 31, 2012, the Company's available-for-sale securities included solvency capital funds of $530 million and $451 million, respectively.
The Company's available-for-sale securities were included in the following line items in our condensed consolidated balance sheets (in millions):
|
| | | | | | |
| September 27, 2013 |
| December 31, 2012 |
|
Cash and cash equivalents | $ | 76 |
| $ | 9 |
|
Marketable securities | 2,971 |
| 2,908 |
|
Other investments, principally bottling companies | 993 |
| 1,087 |
|
Other assets | 647 |
| 589 |
|
Total available-for-sale securities | $ | 4,687 |
| $ | 4,593 |
|
The contractual maturities of these available-for-sale securities as of September 27, 2013, were as follows (in millions):
|
| | | | | | |
| Cost |
| Fair Value |
|
Within 1 year | $ | 1,285 |
| $ | 1,267 |
|
After 1 year through 5 years | 1,574 |
| 1,580 |
|
After 5 years through 10 years | 149 |
| 153 |
|
After 10 years | 335 |
| 330 |
|
Equity securities | 983 |
| 1,357 |
|
Total available-for-sale securities | $ | 4,326 |
| $ | 4,687 |
|
The Company expects that actual maturities may differ from the contractual maturities above because borrowers have the right to call or prepay certain obligations.
As of September 27, 2013, and December 31, 2012, the Company did not have any held-to-maturity securities.
Cost Method Investments
Cost method investments are initially recorded at cost, and we record dividend income when applicable dividends are declared. Cost method investments are reported as other investments in our condensed consolidated balance sheets, and dividend income from cost method investments is reported in other income (loss) — net in our condensed consolidated statements of income. We review all of our cost method investments quarterly to determine if impairment indicators are present; however, we are not required to determine the fair value of these investments unless impairment indicators exist. When impairment indicators exist, we generally use discounted cash flow analyses to determine the fair value. We estimate that the fair values of our cost method investments approximated or exceeded their carrying values as of September 27, 2013, and December 31, 2012. Our cost method investments had a carrying value of $157 million and $145 million as of September 27, 2013, and December 31, 2012, respectively.
NOTE 4: INVENTORIES
Inventories consist primarily of raw materials and packaging (which include ingredients and supplies) and finished goods (which include concentrates and syrups in our concentrate operations and finished beverages in our finished product operations). Inventories are valued at the lower of cost or market. We determine cost on the basis of the average cost or first-in, first-out methods. Inventories consisted of the following (in millions):
|
| | | | | | |
| September 27, 2013 |
| December 31, 2012 |
|
Raw materials and packaging | $ | 1,683 |
| $ | 1,773 |
|
Finished goods | 1,297 |
| 1,171 |
|
Other | 341 |
| 320 |
|
Total inventories | $ | 3,321 |
| $ | 3,264 |
|
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 27, 2013 |
| December 31, 2012 |
|
Assets | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 146 |
| $ | 149 |
|
Foreign currency contracts | Other assets | 39 |
| — |
|
Interest rate contracts | Prepaid expenses and other assets | 47 |
| 7 |
|
Interest rate contracts | Other assets | 299 |
| 335 |
|
Total assets | | $ | 531 |
| $ | 491 |
|
Liabilities | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 102 |
| $ | 55 |
|
Foreign currency contracts | Other liabilities | 17 |
| — |
|
Commodity contracts | Accounts payable and accrued expenses | 1 |
| 1 |
|
Interest rate contracts | Other liabilities | — |
| 6 |
|
Total liabilities | | $ | 120 |
| $ | 62 |
|
1 All of the Company's derivative instruments are carried at fair value in our condensed consolidated balance sheets after considering the impact of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as applicable. Current disclosure requirements mandate that derivatives must also be disclosed without reflecting the impact of master netting agreements and cash collateral. Refer to Note 14 for the net presentation of the Company's derivative instruments.
2 Refer to Note 14 for additional information related to the estimated fair value.
The following table presents the fair values of the Company's derivative instruments that were not designated as hedging instruments (in millions):
|
| | | | | | | |
| | Fair Value1,2 |
Derivatives Not Designated as Hedging Instruments | Balance Sheet Location1 | September 27, 2013 |
| December 31, 2012 |
|
Assets | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 21 |
| $ | 19 |
|
Foreign currency contracts | Other assets | 164 |
| 42 |
|
Commodity contracts | Prepaid expenses and other assets | 31 |
| 72 |
|
Other derivative instruments | Prepaid expenses and other assets | 2 |
| 6 |
|
Total assets | | $ | 218 |
| $ | 139 |
|
Liabilities | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 27 |
| $ | 24 |
|
Foreign currency contracts | Other liabilities | — |
| 1 |
|
Commodity contracts | Accounts payable and accrued expenses | 14 |
| 43 |
|
Commodity contracts | Other liabilities | 1 |
| 1 |
|
Interest rate contracts | Other liabilities | 3 |
| — |
|
Other derivative instruments | Accounts payable and accrued expenses | 2 |
| 2 |
|
Total liabilities | | $ | 47 |
| $ | 71 |
|
1 All of the Company's derivative instruments are carried at fair value in our condensed consolidated balance sheets after considering the impact of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as applicable. Current disclosure requirements mandate that derivatives must also be disclosed without reflecting the impact of master netting agreements and cash collateral. Refer to Note 14 for the net presentation of the Company's derivative instruments.
2 Refer to Note 14 for additional information related to the estimated fair value.
Credit Risk Associated with Derivatives
We have established strict counterparty credit guidelines and enter into transactions only with financial institutions of investment grade or better. We monitor counterparty exposures regularly and review any downgrade in credit rating immediately. If a downgrade in the credit rating of a counterparty were to occur, we have provisions requiring collateral in the form of U.S. government securities for substantially all of our transactions. To mitigate presettlement risk, minimum credit standards become more stringent as the duration of the derivative financial instrument increases. In addition, the Company's master netting agreements reduce credit risk by permitting the Company to net settle for transactions with the same counterparty. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.
Cash Flow Hedging Strategy
The Company uses cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates, commodity prices or interest rates. The changes in the fair values of derivatives designated as cash flow hedges are recorded in AOCI and are reclassified into the line item in our condensed consolidated statement of income in which the hedged items are recorded in the same period the hedged items affect earnings. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from AOCI into earnings. The Company did not discontinue any cash flow hedging relationships during the nine months ended September 27, 2013, or September 28, 2012. The maximum length of time for which the Company hedges its exposure to future cash flows is typically three years.
The Company maintains a foreign currency cash flow hedging program to reduce the risk that our eventual U.S. dollar net cash inflows from sales outside the United States and U.S. dollar net cash outflows from procurement activities will be adversely affected by fluctuations in foreign currency exchange rates. We enter into forward contracts and purchase foreign currency options (principally euros and Japanese yen) and collars to hedge certain portions of forecasted cash flows denominated in foreign currencies. When the U.S. dollar strengthens against the foreign currencies, the decline in the present value of future foreign currency cash flows is partially offset by gains in the fair value of the derivative instruments. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash flows is partially offset by losses in the fair value of the derivative instruments. The total notional values of derivatives that were designated and qualified for the Company's foreign currency cash flow hedging program were $5,543 million and $4,715 million as of September 27, 2013, and December 31, 2012, respectively.
The Company has entered into commodity futures contracts and other derivative instruments on various commodities to mitigate the price risk associated with forecasted purchases of materials used in our manufacturing process. These derivative instruments have been designated and qualify as part of the Company's commodity cash flow hedging program. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of certain commodities. The total notional values of derivatives that were designated and qualified for the Company's commodity cash flow hedging program were $15 million and $17 million as of September 27, 2013, and December 31, 2012, 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 values of these interest rate swap agreements that were designated and qualified for the Company's interest rate cash flow hedging program were $2,778 million and $1,764 million as of September 27, 2013, and December 31, 2012, respectively.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the three months ended September 27, 2013 (in millions):
|
| | | | | | | | | | |
| Gain (Loss) Recognized in 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 | $ | (70 | ) | Net operating revenues | $ | 53 |
| $ | — |
|
Foreign currency contracts | (4 | ) | Cost of goods sold | 11 |
| — |
|
Interest rate contracts | 4 |
| Interest expense | (3 | ) | — |
|
Commodity contracts | — |
| Cost of goods sold | (1 | ) | — |
|
Total | $ | (70 | ) | | $ | 60 |
| $ | — |
|
1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the nine months ended September 27, 2013 (in millions):
|
| | | | | | | | | | | |
| Gain (Loss) Recognized in OCI |
| Location of Gain (Loss) Recognized in Income1 | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| |
Foreign currency contracts | $ | 150 |
| Net operating revenues | $ | 123 |
| $ | 1 |
| |
Foreign currency contracts | 31 |
| Cost of goods sold | 21 |
| — |
| |
Interest rate contracts | 155 |
| Interest expense | (9 | ) | — |
| 2 |
Commodity contracts | 1 |
| Cost of goods sold | (2 | ) | — |
| |
Total | $ | 337 |
| | $ | 133 |
| $ | 1 |
| |
1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
2 Includes a de minimis amount of ineffectiveness in the hedging relationship.
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 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.
As of September 27, 2013, the Company estimates that it will reclassify into earnings during the next 12 months approximately $93 million of gains from the pretax amount recorded in AOCI as the anticipated cash flows occur.
Fair Value Hedging Strategy
The Company uses interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in benchmark interest rates. The changes in fair values of derivatives designated as fair value hedges and the offsetting changes in fair values of the hedged items are recognized in earnings. The ineffective portions of these hedges are immediately recognized in earnings. As of September 27, 2013, such adjustments had cumulatively increased the carrying value of our long-term debt by $101 million. When a derivative is no longer designated as a fair value hedge for any reason, including termination and maturity, the remaining difference between the carrying value of the hedged item at that time and the par value of the hedged item is amortized to earnings over the remaining life of the hedged item, or immediately if the hedged item has matured. The total notional values of derivatives that related to our fair value hedges of this type were $6,750 million and $6,700 million as of September 27, 2013, and December 31, 2012, respectively.
The Company also uses fair value hedges to minimize exposure to changes in the fair value of certain available-for-sale securities from fluctuations in foreign currency exchange rates. The changes in fair values of derivatives designated as fair value hedges and the offsetting changes in fair values of the hedged items are recognized in earnings. As a result, any difference is reflected in earnings as ineffectiveness. The total notional values of derivatives that related to our fair value hedges of this type were $985 million and $850 million as of September 27, 2013, and December 31, 2012, respectively.
The following table summarizes the pretax impact that changes in the fair values of derivatives designated as fair value hedges had on earnings during the three months ended September 27, 2013, and September 28, 2012 (in millions):
|
| | | | | | | |
Fair Value Hedging Instruments | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income | |
September 27, 2013 |
| September 28, 2012 |
|
Interest rate swaps | Interest expense | $ | 4 |
| $ | 42 |
|
Fixed-rate debt | Interest expense | 5 |
| (30 | ) |
Net impact to interest expense | | $ | 9 |
| $ | 12 |
|
Foreign currency contracts | Other income (loss) — net | $ | 39 |
| $ | 8 |
|
Available-for-sale securities | Other income (loss) — net | (45 | ) | (5 | ) |
Net impact to other income (loss) — net | | $ | (6 | ) | $ | 3 |
|
Net impact of fair value hedging instruments | | $ | 3 |
| $ | 15 |
|
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 27, 2013, and September 28, 2012 (in millions):
|
| | | | | | | |
Fair Value Hedging Instruments | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income | |
September 27, 2013 |
| September 28, 2012 |
|
Interest rate swaps | Interest expense | $ | (147 | ) | $ | 111 |
|
Fixed-rate debt | Interest expense | 181 |
| (81 | ) |
Net impact to interest expense | | $ | 34 |
| $ | 30 |
|
Foreign currency contracts | Other income (loss) — net | $ | 32 |
| $ | 23 |
|
Available-for-sale securities | Other income (loss) — net | (47 | ) | (21 | ) |
Net impact to other income (loss) — net | | $ | (15 | ) | $ | 2 |
|
Net impact of fair value hedging instruments | | $ | 19 |
| $ | 32 |
|
Hedges of Net Investments in Foreign Operations Strategy
The Company uses forward contracts to protect the value of our investments in a number of foreign subsidiaries. For derivative instruments that are designated and qualify as hedges of net investments in foreign operations, the changes in fair values of the derivative instruments are recognized in net foreign currency translation gain (loss), a component of AOCI, to offset the changes in the values of the net investments being hedged. Any ineffective portions of net investment hedges are reclassified from AOCI into earnings during the period of change. The total notional values of derivatives that were designated and qualified for the Company's net investments hedging program were $1,691 million and $1,718 million as of September 27, 2013, and December 31, 2012, respectively.
The following table presents the pretax impact that changes in the fair values of derivatives designated as net investment hedges had on AOCI during the three and nine months ended September 27, 2013, and September 28, 2012 (in millions):
|
| | | | | | | | | | | | | |
| Gain (Loss) Recognized in OCI |
| Three Months Ended | | Nine Months Ended |
| September 27, 2013 |
| September 28, 2012 |
| | September 27, 2013 |
| September 28, 2012 |
|
Foreign currency contracts | $ | (22 | ) | $ | (100 | ) | | $ | 8 |
| $ | (58 | ) |
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 27, 2013, and September 28, 2012. In addition, the Company did not have any ineffectiveness related to net investment hedges during the three and nine months ended September 27, 2013, and September 28, 2012.
Economic (Nondesignated) Hedging Strategy
In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives as economic hedges of foreign currency, interest rate and commodity exposure. Although these derivatives were not designated and/or did not qualify for hedge accounting, they are effective economic hedges. The changes in fair values of economic hedges are immediately recognized into earnings.
The Company uses foreign currency economic hedges to offset the earnings impact that fluctuations in foreign currency exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies. The changes in fair values of economic hedges used to offset those monetary assets and liabilities are immediately recognized into earnings in the line item other income (loss) — net in our condensed consolidated statements of income. In addition, we use foreign currency economic hedges to minimize the variability in cash flows associated with fluctuations in foreign currency exchange rates. The changes in fair values of economic hedges used to offset the variability in U.S. dollar net cash flows are recognized into earnings in the line items net operating revenues and cost of goods sold in our condensed consolidated statements of income, as applicable. The total notional values of derivatives related to our foreign currency economic hedges were $3,630 million and $3,865 million as of September 27, 2013, and December 31, 2012, respectively.
The Company also uses certain derivatives as economic hedges to mitigate the price risk associated with the purchase of materials used in the manufacturing process and for vehicle fuel. The changes in fair values of these economic hedges are immediately recognized into earnings in the line items cost of goods sold and selling, general and administrative expenses in our condensed consolidated statements of income, as applicable. The total notional values of derivatives related to our economic hedges of this type were $1,357 million and $1,084 million as of September 27, 2013, and December 31, 2012, 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 27, 2013, and September 28, 2012, respectively (in millions):
|
| | | | | | | |
| | Three Months Ended |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | September 27, 2013 |
| September 28, 2012 |
|
Foreign currency contracts | Net operating revenues | $ | (2 | ) | $ | (2 | ) |
Foreign currency contracts | Other income (loss) — net | 47 |
| 18 |
|
Foreign currency contracts | Cost of goods sold | 2 |
| (3 | ) |
Interest rate contracts | Interest expense | — |
| — |
|
Commodity contracts | Net operating revenues | 2 |
| 5 |
|
Commodity contracts | Cost of goods sold | (3 | ) | 25 |
|
Commodity contracts | Selling, general and administrative expenses | 3 |
| 19 |
|
Other derivative instruments | Selling, general and administrative expenses | 9 |
| 3 |
|
Total | | $ | 58 |
| $ | 65 |
|
|
| | | | | | | |
| | Nine Months Ended |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | September 27, 2013 |
| September 28, 2012 |
|
Foreign currency contracts | Net operating revenues | $ | 2 |
| $ | (5 | ) |
Foreign currency contracts | Other income (loss) — net | 120 |
| (54 | ) |
Foreign currency contracts | Cost of goods sold | 2 |
| — |
|
Interest rate contracts | Interest expense | (3 | ) | — |
|
Commodity contracts | Net operating revenues | 1 |
| 5 |
|
Commodity contracts | Cost of goods sold | (147 | ) | (19 | ) |
Commodity contracts | Selling, general and administrative expenses | 1 |
| 12 |
|
Other derivative instruments | Selling, general and administrative expenses | 33 |
| 21 |
|
Total | | $ | 9 |
| $ | (40 | ) |
NOTE 6: DEBT AND BORROWING ARRANGEMENTS
During the second quarter of 2013, the Company extinguished $1,254 million of long-term debt prior to maturity and recorded a charge of $23 million in the line item interest expense in our condensed consolidated statement of income. The general terms of the notes that were extinguished are as follows:
| |
• | $225 million total principal amount of notes due August 15, 2013, at a fixed interest rate of 5.0 percent; |
| |
• | $675 million total principal amount of notes due March 3, 2014, at a fixed interest rate of 7.375 percent; and |
| |
• | $354 million total principal amount of notes due March 1, 2015, at a fixed interest rate of 4.25 percent. |
During the first quarter of 2013, the Company issued $2,500 million of long-term debt. The general terms of the notes issued are as follows:
| |
• | $500 million total principal amount of notes due March 5, 2015, at a variable interest rate equal to the three-month London Interbank Offered Rate minus 0.02 percent; |
| |
• | $1,250 million total principal amount of notes due April 1, 2018, at a fixed interest rate of 1.15 percent; and |
| |
• | $750 million total principal amount of notes due April 1, 2023, at a fixed interest rate of 2.5 percent. |
NOTE 7: COMMITMENTS AND CONTINGENCIES
Guarantees
As of September 27, 2013, we were contingently liable for guarantees of indebtedness owed by third parties of $639 million, of which $287 million related to variable interest entities ("VIEs"). These guarantees are primarily related to third-party customers, bottlers, vendors and container manufacturing operations and have arisen through the normal course of business. These guarantees have various terms, and none of these guarantees were individually significant. The amount represents the maximum potential future payments that we could be required to make under the guarantees; however, we do not consider it probable that we will be required to satisfy these guarantees.
We believe our exposure to concentrations of credit risk is limited due to the diverse geographic areas covered by our operations.
Legal Contingencies
The Company is involved in various legal proceedings. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. Management believes that the total liabilities to the Company that may arise as a result of currently pending legal proceedings will not have a material adverse effect on the Company taken as a whole.
During the period from 1970 to 1981, our Company owned Aqua-Chem, Inc., now known as Cleaver-Brooks, Inc. ("Aqua-Chem"). During that time, the Company purchased over $400 million of insurance coverage, which also insures Aqua-Chem for some of its prior and future costs for certain product liability and other claims. A division of Aqua-Chem manufactured certain boilers that contained gaskets that Aqua-Chem purchased from outside suppliers. Several years after our Company sold this entity, Aqua-Chem received its first lawsuit relating to asbestos, a component of some of the gaskets. Aqua-Chem was first named as a defendant in asbestos lawsuits in or around 1985 and currently has approximately 40,000 active claims pending against it. In September 2002, Aqua-Chem notified our Company that it believed we were obligated for certain costs and expenses associated with its asbestos litigations. Aqua-Chem demanded that our Company reimburse it for approximately $10 million for out-of-pocket litigation-related expenses. Aqua-Chem also demanded that the Company acknowledge a continuing obligation to Aqua-Chem for any future liabilities and expenses that are excluded from coverage under the applicable insurance or for which there is no insurance. Our Company disputes Aqua-Chem's claims, and we believe we have no obligation to Aqua-Chem for any of its past, present or future liabilities, costs or expenses. Furthermore, we believe we have substantial legal and factual defenses to Aqua-Chem's claims. The parties entered into litigation in Georgia to resolve this dispute, which was stayed by agreement of the parties pending the outcome of litigation filed in Wisconsin by certain insurers of Aqua-Chem. In that case, five plaintiff insurance companies filed a declaratory judgment action against Aqua-Chem, the Company and 16 defendant insurance companies seeking a determination of the parties' rights and liabilities under policies issued by the insurers and reimbursement for amounts paid by plaintiffs in excess of their obligations. During the course of the Wisconsin insurance coverage litigation, Aqua-Chem and the Company reached settlements with several of the insurers, including plaintiffs, who have or will pay funds into an escrow account for payment of costs arising from the asbestos claims against Aqua-Chem. On July 24, 2007, the Wisconsin trial court entered a final declaratory judgment regarding the rights and obligations of the parties under the insurance policies issued by the remaining defendant insurers, which judgment was not appealed. The judgment directs, among other things, that each insurer whose policy is triggered is jointly and severally liable for 100 percent of Aqua-Chem's losses up to policy limits. The court's judgment concluded the Wisconsin insurance coverage litigation. The Georgia litigation remains subject to the stay agreement. The Company and Aqua-Chem continued to negotiate with various insurers that were defendants in the Wisconsin insurance coverage litigation over those insurers' obligations to defend and indemnify Aqua-Chem for the asbestos-related claims. The Company anticipated that a final settlement with three of those insurers (the "Chartis insurers") would be finalized in May 2011, but such insurers repudiated their settlement commitments and, as a result, Aqua-Chem and the Company filed suit against them in Wisconsin state court to enforce the coverage-in-place settlement or, in the alternative, to obtain a declaratory judgment validating Aqua-Chem and the Company's interpretation of the court's judgment in the Wisconsin insurance coverage litigation. In February 2012, the parties filed and argued a number of cross-motions for summary judgment related to the issues of the enforceability of the settlement agreement and the exhaustion of policies underlying those of the Chartis insurers. The court granted defendants' motions for summary judgment that the 2011 settlement agreement and 2010 term sheet were not binding contracts, but denied their similar motions related to the plaintiffs' claims for promissory and/or equitable estoppel. On or about May 15, 2012, the parties entered into a mutually agreeable settlement/stipulation resolving two major issues: exhaustion of underlying coverage and control of defense. On or about January 10, 2013, the parties reached a settlement of the estoppel claims and all of the remaining coverage issues, with the exception of one disputed issue relating to the scope of the Chartis insurers' defense obligations in two policy years. The trial court granted summary judgment in favor of the Company and Aqua-Chem on that one open issue and entered a final appealable judgment to that effect following the parties' settlement. On January 23, 2013, the Chartis insurers filed a
notice of appeal of the trial court's summary judgment ruling. Whatever the outcome of that appeal, these three insurance companies will remain subject to the court's judgment in the Wisconsin insurance coverage litigation.
The Company is unable to estimate at this time the amount or range of reasonably possible loss it may ultimately incur as a result of asbestos-related claims against Aqua-Chem. The Company believes that assuming (a) the defense and indemnity costs for the asbestos-related claims against Aqua-Chem in the future are in the same range as during the past five years, and (b) the various insurers that cover the asbestos-related claims against Aqua-Chem remain solvent, regardless of the outcome of the coverage-in-place settlement litigation but taking into account the issues resolved to date, insurance coverage for substantially all defense and indemnity costs would be available for the next 10 to 15 years.
Tax Audits
The Company is involved in various tax matters, with respect to some of which the outcome is uncertain. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based upon one of the following conditions: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the "more likely than not" recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is "more likely than not" to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. Refer to Note 13.
Risk Management Programs
The Company has numerous global insurance programs in place to help protect the Company from the risk of loss. In general, we are self-insured for large portions of many different types of claims; however, we do use commercial insurance above our self-insured retentions to reduce the Company's risk of catastrophic loss. Our reserves for the Company's self-insured losses are estimated using actuarial methods and assumptions of the insurance industry, adjusted for our specific expectations based on our claim history. Our self-insurance reserves totaled $539 million and $508 million as of September 27, 2013, and December 31, 2012, respectively.
NOTE 8: COMPREHENSIVE INCOME
The following table summarizes the allocation of total comprehensive income between shareowners of The Coca-Cola Company and noncontrolling interests (in millions):
|
| | | | | | | | | |
| Nine Months Ended September 27, 2013 |
| Shareowners of The Coca-Cola Company |
| Noncontrolling Interests |
| Total |
|
Consolidated net income | $ | 6,874 |
| $ | 44 |
| $ | 6,918 |
|
Other comprehensive income: | | | |
Net foreign currency translation adjustment | (1,475 | ) | 28 |
| (1,447 | ) |
Net gain (loss) on derivatives1 | 122 |
| — |
| 122 |
|
Net unrealized gain (loss) on available-for-sale securities2 | (66 | ) | — |
| (66 | ) |
Net change in pension and other benefit liabilities | 105 |
| — |
| 105 |
|
Total comprehensive income | $ | 5,560 |
| $ | 72 |
| $ | 5,632 |
|
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.
The following tables present OCI attributable to shareowners of The Coca-Cola Company, including our proportionate share of equity method investees' OCI (in millions):
|
| | | | | | | | | | | |
Three Months Ended September 27, 2013 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustment arising during the period | $ | (639 | ) | | $ | 144 |
| | $ | (495 | ) |
Reclassification adjustments recognized in net income | 26 |
| | — |
| | 26 |
|
Net foreign currency translation adjustments | (613 | ) | | 144 |
| | (469 | ) |
Derivatives: | | | | | |
Unrealized gains (losses) arising during the period | (69 | ) | | 25 |
| | (44 | ) |
Reclassification adjustments recognized in net income | (60 | ) | | 22 |
| | (38 | ) |
Net gain (loss) on derivatives1 | (129 | ) | | 47 |
| | (82 | ) |
Available-for-sale securities: | | | | | |
Unrealized gains (losses) arising during the period | (152 | ) | | 53 |
| | (99 | ) |
Reclassification adjustments recognized in net income | 7 |
| | — |
| | 7 |
|
Net change in unrealized gain (loss) on available-for-sale securities2 | (145 | ) | | 53 |
| | (92 | ) |
Pension and other benefit liabilities: | | | | | |
Net pension and other benefits arising during the period | (5 | ) | | — |
| | (5 | ) |
Reclassification adjustments recognized in net income | 49 |
| | (17 | ) | | 32 |
|
Net change in pension and other benefit liabilities3 | 44 |
| | (17 | ) | | 27 |
|
Other comprehensive income (loss) attributable to The Coca-Cola Company | $ | (843 | ) | | $ | 227 |
| | $ | (616 | ) |
| |
1 | Refer to Note 5 for additional information related to the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments. |
| |
2 | Includes reclassification adjustments related to divestitures of certain available-for-sale securities. Refer to Note 3 for additional information related to these divestitures. |
| |
3 | Refer to Note 12 for additional information related to the Company's pension and other postretirement benefit liabilities. |
|
| | | | | | | | | | | |
Nine Months Ended September 27, 2013 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustment arising during the period | $ | (1,318 | ) | | $ | 37 |
| | $ | (1,281 | ) |
Reclassification adjustments recognized in net income | (194 | ) | | — |
| | (194 | ) |
Net foreign currency translation adjustments | (1,512 | ) | | 37 |
| | (1,475 | ) |
Derivatives: | | | | | |
Unrealized gains (losses) arising during the period | 333 |
| | (128 | ) | | 205 |
|
Reclassification adjustments recognized in net income | (133 | ) | | 50 |
| | (83 | ) |
Net gain (loss) on derivatives1 | 200 |
| | (78 | ) | | 122 |
|
Available-for-sale securities: | | | | | |
Unrealized gains (losses) arising during the period | (108 | ) | | 33 |
| | (75 | ) |
Reclassification adjustments recognized in net income | 9 |
| | — |
| | 9 |
|
Net change in unrealized gain (loss) on available-for-sale securities2 | (99 | ) | | 33 |
| | (66 | ) |
Pension and other benefit liabilities: | | | | | |
Net pension and other benefits arising during the period | 20 |
| | (9 | ) | | 11 |
|
Reclassification adjustments recognized in net income | 147 |
| | (53 | ) | | 94 |
|
Net change in pension and other benefit liabilities3 | 167 |
| | (62 | ) | | 105 |
|
Other comprehensive income (loss) attributable to The Coca-Cola Company | $ | (1,244 | ) | | $ | (70 | ) | | $ | (1,314 | ) |
| |
1 | Refer to Note 5 for additional information related to the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments. |
| |
2 | Includes reclassification adjustments related to divestitures of certain available-for-sale securities. Refer to Note 3 for additional information related to these divestitures. |
| |
3 | Refer to Note 12 for additional information related to the Company's pension and other postretirement benefit liabilities. |
|
| | | | | | | | | | | |
Three Months Ended September 28, 2012 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustment arising during the period | $ | 236 |
| | $ | 47 |
| | $ | 283 |
|
Reclassification adjustments recognized in net income | — |
| | — |
| | — |
|
Net foreign currency translation adjustments | 236 |
| | 47 |
| | 283 |
|
Derivatives: | | | | | |
Unrealized gains (losses) arising during the period | (101 | ) | | 45 |
| | (56 | ) |
Reclassification adjustments recognized in net income | 13 |
| | (5 | ) | | 8 |
|
Net gain (loss) on derivatives1 | (88 | ) | | 40 |
| | (48 | ) |
Available-for-sale securities: | | | | | |
Unrealized gains (losses) arising during the period | 248 |
| | (70 | ) | | 178 |
|
Reclassification adjustments recognized in net income | 4 |
| | — |
| | 4 |
|
Net change in unrealized gain (loss) on available-for-sale securities2 | 252 |
| | (70 | ) | | 182 |
|
Pension and other benefit liabilities: | | | | | |
Net pension and other benefits arising during the period | (5 | ) | | 2 |
| | (3 | ) |
Reclassification adjustments recognized in net income | 22 |
| | (8 | ) | | 14 |
|
Net change in pension and other benefit liabilities3 | 17 |
| | (6 | ) | | 11 |
|
Other comprehensive income (loss) attributable to The Coca-Cola Company | $ | 417 |
| | $ | 11 |
| | $ | 428 |
|
| |
1 | Refer to Note 5 for additional information related to the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments. |
| |
2 | Includes reclassification adjustments related to divestitures of certain available-for-sale securities. Refer to Note 3 for additional information related to these divestitures. |
| |
3 | Refer to Note 12 for additional information related to the Company's pension and other postretirement benefit liabilities. |
|
| | | | | | | | | | | |
Nine Months Ended September 28, 2012 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustment arising during the period | $ | (571 | ) | | $ | 16 |
| | $ | (555 | ) |
Reclassification adjustments recognized in net income | 7 |
| | — |
| | 7 |
|
Net foreign currency translation adjustments | (564 | ) | | 16 |
| | (548 | ) |
Derivatives: | | | | | |
Unrealized gains (losses) arising during the period | (39 | ) | | 15 |
| | (24 | ) |
Reclassification adjustments recognized in net income | 57 |
| | (22 | ) | | 35 |
|
Net gain (loss) on derivatives1 | 18 |
| | (7 | ) | | 11 |
|
Available-for-sale securities: | | | | | |
Unrealized gains (losses) arising during the period | 516 |
| | (162 | ) | | 354 |
|
Reclassification adjustments recognized in net income | (6 | ) | | — |
| | (6 | ) |
Net change in unrealized gain (loss) on available-for-sale securities2 | 510 |
| | (162 | ) | | 348 |
|
Pension and other benefit liabilities: | | | | | |
Net pension and other benefits arising during the period | (22 | ) | | 2 |
| | (20 | ) |
Reclassification adjustments recognized in net income | 66 |
| | (24 | ) | | 42 |
|
Net change in pension and other benefit liabilities3 | 44 |
| | (22 | ) | | 22 |
|
Other comprehensive income (loss) attributable to The Coca-Cola Company | $ | 8 |
| | $ | (175 | ) | | $ | (167 | ) |
| |
1 | Refer to Note 5 for additional information related to the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments. |
| |
2 | Includes reclassification adjustments related to divestitures of certain available-for-sale securities. Refer to Note 3 for additional information related to these divestitures. |
| |
3 | Refer to Note 12 for additional information related to the Company's pension and other postretirement benefit liabilities. |
The following table presents the amounts and line items in our condensed consolidated statements of income where adjustments reclassified from AOCI into income were recorded during the three and nine months ended September 27, 2013 (in millions):
|
| | | | | | | | |
| | Amount Reclassified from AOCI into Income | |
Description of AOCI Component | Location of Gain (Loss) Recognized in Income | Three Months Ended September 27, 2013 |
| Nine Months Ended September 27, 2013 |
| |
Foreign currency translation adjustments: | | | | |
Divestitures, deconsolidations and other | Other income (loss) — net | $ | 26 |
| $ | (194 | ) | 1 |
| Income before income taxes | $ | 26 |
| $ | (194 | ) | |
| Income taxes | — |
| — |
| |
| Consolidated net income | $ | 26 |
| $ | (194 | ) | |
Derivatives: | | | | |
Foreign currency contracts | Net operating revenues | $ | (53 | ) | $ | (123 | ) | |
Foreign currency contracts | Cost of goods sold | (10 | ) | (19 | ) | |
Interest rate contracts | Interest expense | 3 |
| 9 |
| |
| Income before income taxes | $ | (60 | ) | $ | (133 | ) | |
| Income taxes | 22 |
| 50 |
| |
| Consolidated net income | $ | (38 | ) | $ | (83 | ) | |
Available-for-sale securities: | | | | |
Sale of securities | Other income (loss) — net | $ | 7 |
| $ | 9 |
| |
| Income before income taxes | $ | 7 |
| $ | 9 |
| |
| Income taxes | — |
| — |
| |
| Consolidated net income | $ | 7 |
| $ | 9 |
| |
Pension and other benefit liabilities: | | | | |
Insignificant items | Other income (loss) — net | $ | — |
| $ | (1 | ) | |
Amortization of net actuarial loss | * | 53 |
| 158 |
| |
Amortization of prior service cost (credit) | * | (4 | ) | (10 | ) | |
| Income before income taxes | $ | 49 |
| $ | 147 |
| |
| Income taxes | (17 | ) | (53 | ) | |
| Consolidated net income | $ | 32 |
| $ | 94 |
| |
| |
* | This component of AOCI is included in the Company's computation of net periodic benefit cost and is not reclassified out of AOCI into a single line item in our condensed consolidated statements of income in its entirety. Refer to Note 12 for additional information. |
| |
1 | Related to the disposition of our Philippine bottling operations in January 2013, the deconsolidation of our Brazilian bottling operations in July 2013 and the merger of four of the Company's Japanese bottling partners in July 2013. Refer to Note 2 and Note 10 for additional information related to these transactions. |
NOTE 9: CHANGES IN EQUITY
The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to shareowners of The Coca-Cola Company and equity attributable to noncontrolling interests (in millions):
|
| | | | | | | | | | | | | | | | | | | | | |
| | Shareowners of The Coca-Cola Company | |
|
| Total |
| Reinvested Earnings |
| Accumulated Other Comprehensive Income (Loss) |
| Common Stock |
| Capital Surplus |
| Treasury Stock |
| Non- controlling Interests |
|
December 31, 2012 | $ | 33,168 |
| $ | 58,045 |
| $ | (3,385 | ) | $ | 1,760 |
| $ | 11,379 |
| $ | (35,009 | ) | $ | 378 |
|
Comprehensive income (loss) | 5,632 |
| 6,874 |
| (1,314 | ) | — |
| — |
| — |
| 72 |
|
Dividends paid/payable to shareowners of The Coca-Cola Company | (3,732 | ) | (3,732 | ) | — |
| — |
| — |
| — |
| — |
|
Dividends paid to noncontrolling interests | (54 | ) | — |
| — |
| — |
| — |
| — |
| (54 | ) |
Contributions by noncontrolling interests | 1 |
| — |
| — |
| — |
| — |
| — |
| 1 |
|
Business combinations | 25 |
| — |
| — |
| — |
| — |
| — |
| 25 |
|
Deconsolidation of certain entities | (89 | ) | — |
| — |
| — |
| — |
| — |
| (89 | ) |
Purchases of treasury stock | (3,820 | ) | — |
| — |
| — |
| — |
| (3,820 | ) | — |
|
Impact of employee stock option and restricted stock plans | 1,334 |
| — |
| — |
| — |
| 743 |
| 591 |
| — |
|
September 27, 2013 | $ | 32,465 |
| $ | 61,187 |
| $ | (4,699 | ) | $ | 1,760 |
| $ | 12,122 |
| $ | (38,238 | ) | $ | 333 |
|
NOTE 10: SIGNIFICANT OPERATING AND NONOPERATING ITEMS
Other Operating Items
Cost of Goods Sold
In December 2011, the Company detected that orange juice being imported from Brazil contained residues of carbendazim, a fungicide that is not registered in the United States for use on citrus products. As a result, we began purchasing additional supplies of Florida orange juice at a higher cost than Brazilian orange juice and incurred charges of $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.
Other Operating Charges
During the three months ended September 27, 2013, the Company incurred other operating charges of $341 million. These charges primarily consisted of $190 million due to the impairment of certain intangible assets described below; $97 million due to the Company's productivity and reinvestment program; and $45 million due to the Company's other restructuring and integration initiatives. Refer to Note 11 for additional information on the Company's productivity, integration and restructuring initiatives. Refer to Note 14 for additional information on the impairment charges recorded. Refer to Note 15 for the impact these charges had on our operating segments.
During the nine months ended September 27, 2013, the Company incurred other operating charges of $594 million. These charges primarily consisted of $312 million due to the Company's productivity and reinvestment program; $190 million due to the impairment of certain intangible assets described below; and $86 million due to the Company's other restructuring and integration initiatives. Refer to Note 11 for additional information on the Company's productivity, integration and restructuring initiatives. Refer to Note 14 for additional information on the impairment charges recorded. Refer to Note 15 for the impact these charges had on our operating segments.
During the three and nine months ended September 27, 2013, the Company recorded charges of $190 million related to certain intangible assets. These charges included $108 million related to the impairment of trademarks recorded in our Bottling Investments and Pacific operating segments. These impairments were primarily due to a strategic decision to phase out certain local-market value brands which resulted in a change in the expected useful life of the intangible assets. The charges were determined by comparing the fair value of the trademarks, derived using discounted cash flow analyses, to the current carrying value. Additionally, the remaining charge of $82 million related to goodwill recorded in our Bottling Investments operating segment. This charge was primarily the result of management's revised outlook on market conditions and volume performance. The total impairment charges of $190 million were recorded in our Corporate operating segment in the line item other operating charges in our condensed consolidated statements of income.
During the three months ended September 28, 2012, the Company incurred other operating charges of $64 million. These charges consisted of $59 million due to the Company's productivity and reinvestment program; $14 million due to the Company's other restructuring and integration initiatives; 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 a reversal of $6 million due to the refinement of previously established accruals related to the Company's 2008–2011 productivity initiatives as well as a reversal of $5 million due to the refinement of previously established accruals related to the Company's integration of Coca-Cola Enterprises Inc.'s ("CCE") former North America business. Refer to Note 11 for additional information on the Company's productivity, integration and restructuring initiatives. Refer to Note 15 for the impact these charges had on our operating segments.
During the nine months ended September 28, 2012, the Company incurred other operating charges of $233 million. These charges consisted of $177 million due to the Company's productivity and reinvestment program; $44 million due to the Company's other restructuring and integration initiatives; $20 million due to changes in the Company's ready-to-drink tea strategy as a result of our U.S. license agreement with Nestlé S.A. ("Nestlé") terminating at the end of 2012; and $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 a reversal of $9 million due to the refinement of previously established accruals related to the Company's 2008–2011 productivity initiatives as well as a reversal of $5 million due to 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 the Company's productivity, integration and restructuring initiatives. Refer to Note 15 for the impact these charges had on our operating segments.
Other Nonoperating Items
Equity Income (Loss) — Net
During the three and nine months ended September 27, 2013, the Company recorded a net gain of $8 million and net charge of $34 million, respectively, in the line item equity income (loss) — net. These amounts represent the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees. The net charge recorded during the nine months ended September 27, 2013, includes a charge incurred by an equity method investee due to the devaluation of the Venezuelan bolivar. Refer to Note 15 for the impact these items had on our operating segments.
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 primarily 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 items 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 primarily represents the Company's proportionate share of unusual or infrequent items recorded by certain of our equity method investees. In addition, the Company recorded a charge of $14 million due to changes in the structure of Beverage Partners Worldwide ("BPW"), our 50/50 joint venture with Nestlé in the ready-to-drink tea category. These changes resulted in the joint venture focusing its geographic scope 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 items had on our operating segments.
Other Income (Loss) — Net
During the three and nine months ended September 27, 2013, the Company recorded a gain of $615 million in the line item other income (loss) — net. This gain was due to the deconsolidation of our Brazilian bottling operations as a result of their combination with an independent bottling partner. Refer to Note 2 for additional information on this transaction. Refer to Note 15 for the impact this gain had on our operating segments.
In 2012, four of the Company's Japanese bottling partners announced their intent to merge as Coca-Cola East Japan Bottling Company, Ltd. ("CCEJ"), a publicly traded entity, through a share exchange. The merger was completed effective July 1, 2013. The terms of the merger agreement included the issuance of new shares of one of the publicly traded bottlers in exchange for 100 percent of the outstanding shares of the remaining three bottlers according to an agreed upon share exchange ratio. As a result, the Company recorded a gain of $30 million during the three months ended September 27, 2013, based on the value of the shares it received on July 1, 2013. This gain partially offset a loss of $144 million the Company recorded during the second quarter of 2013 for those investments in which the Company’s carrying value was higher than the fair value of the shares expected to be received. In total, the Company recorded a net loss of $114 million during the nine months ended September 27, 2013, related to our investment in the entities that merged to form CCEJ. Refer to Note 15 for the impact these items had on our operating segments.
During the nine months ended September 27, 2013, the Company recorded a charge of $140 million in the line item other income (loss) — net due to the Venezuelan government announcing a currency devaluation. As a result of this devaluation, the Company remeasured the net assets related to its operations in Venezuela. Refer to Note 15 for the impact this charge had on our operating segments.
In addition, during the nine months ended September 27, 2013, the Company recognized a gain of $139 million due to Coca-Cola FEMSA issuing additional shares of its own stock at a per share amount greater than the carrying value of the Company's per share investment. Accordingly, the Company is required to treat this type of transaction as if the Company sold a proportionate share of its investment in Coca-Cola FEMSA. Refer to Note 15 for the impact this gain had on our operating segments.
During the nine months ended September 28, 2012, the Company recognized a gain of $92 million due to Coca-Cola FEMSA issuing additional shares of its own stock at a per share amount greater than the carrying value of the Company's per share investment. Accordingly, the Company is required to treat this type of transaction as if the Company sold a proportionate share of its investment in Coca-Cola FEMSA. Refer to Note 15 for the impact this gain had on our operating segments.
NOTE 11: PRODUCTIVITY, INTEGRATION AND RESTRUCTURING INITIATIVES
Productivity and Reinvestment
In February 2012, the Company announced a four-year productivity and reinvestment program which is designed to further enable our efforts to strengthen our brands and reinvest our resources to drive long-term profitable growth. This program is focused on the following initiatives: global supply chain optimization; global marketing and innovation effectiveness; operating expense leverage and operational excellence; data and information technology systems standardization; and further integration of CCE's former North America business.
As of September 27, 2013, the Company has incurred total pretax expenses of $582 million related to this program since the plan commenced. These expenses were recorded in the line item other operating charges in our condensed consolidated statements of income. Refer to Note 15 for the impact these charges had on our operating segments. Outside services reported in the tables below primarily relate to expenses in connection with legal, outplacement and consulting activities. Other direct costs reported in the tables below include, among other items, internal and external costs associated with the development, communication, administration and implementation of these initiatives; accelerated depreciation on certain fixed assets; contract termination fees; and relocation costs.
The following table summarizes the balance of accrued expenses related to these productivity and reinvestment initiatives and the changes in the accrued amounts as of and for the three months ended September 27, 2013 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance June 28, 2013 |
| Costs Incurred Three Months Ended September 27, 2013 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 27, 2013 |
|
Severance pay and benefits | $ | 37 |
| $ | 30 |
| $ | (29 | ) | $ | 1 |
| $ | 39 |
|
Outside services | 3 |
| 12 |
| (3 | ) | — |
| 12 |
|
Other direct costs | 12 |
| 55 |
| (50 | ) | (1 | ) | 16 |
|
Total | $ | 52 |
| $ | 97 |
| $ | (82 | ) | $ | — |
| $ | 67 |
|
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 27, 2013 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance December 31, 2012 |
| Costs Incurred Nine Months Ended September 27, 2013 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 27, 2013 |
|
Severance pay and benefits | $ | 12 |
| $ | 109 |
| $ | (83 | ) | $ | 1 |
| $ | 39 |
|
Outside services | 6 |
| 49 |
| (43 | ) | — |
| 12 |
|
Other direct costs | 8 |
| 154 |
| (145 | ) | (1 | ) | 16 |
|
Total | $ | 26 |
| $ | 312 |
| $ | (271 | ) | $ | — |
| $ | 67 |
|
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 $45 million and $85 million related to this initiative during the three and nine months ended September 27, 2013, respectively, and has incurred total pretax expenses of $525 million related to this initiative since it commenced. These charges were recorded in the line item other operating charges in our condensed consolidated statements of income and impacted the Bottling Investments operating segment. The charges recorded in connection with these integration activities have been primarily due to involuntary terminations. The Company had $108 million and $96 million accrued related to these integration costs as of September 27, 2013, and December 31, 2012, respectively.
The Company is currently reviewing other integration and restructuring opportunities within the German bottling and distribution operations, which, if implemented, will result in additional charges in future periods. However, as of September 27, 2013, the Company has not finalized any additional plans.
NOTE 12: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Net periodic benefit cost for our pension and other postretirement benefit plans consisted of the following during the three and nine months ended September 27, 2013, and September 28, 2012, respectively (in millions):
|
| | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three Months Ended |
| September 27, 2013 |
| September 28, 2012 |
| | September 27, 2013 |
| September 28, 2012 |
|
Service cost | $ | 69 |
| $ | 88 |
| | $ | 9 |
| $ | 8 |
|
Interest cost | 93 |
| 97 |
| | 10 |
| 11 |
|
Expected return on plan assets | (163 | ) | (143 | ) | | (2 | ) | (2 | ) |
Amortization of prior service cost (credit) | (1 | ) | (1 | ) | | (3 | ) | (13 | ) |
Amortization of net actuarial loss | 50 |
| 34 |
| | 3 |
| 2 |
|
Total cost (credit) recognized in statements of income | $ | 48 |
| $ | 75 |
| | $ | 17 |
| $ | 6 |
|
|
| | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Nine Months Ended |
| September 27, 2013 |
| September 28, 2012 |
| | September 27, 2013 |
| September 28, 2012 |
|
Service cost | $ | 207 |
| $ | 224 |
| | $ | 27 |
| $ | 25 |
|
Interest cost | 282 |
| 292 |
| | 31 |
| 33 |
|
Expected return on plan assets | (492 | ) | (431 | ) | | (7 | ) | (6 | ) |
Amortization of prior service cost (credit) | (2 | ) | (2 | ) | | (8 | ) | (39 | ) |
Amortization of net actuarial loss | 149 |
| 102 |
| | 9 |
| 5 |
|
Total cost (credit) recognized in statements of income | $ | 144 |
| $ | 185 |
| | $ | 52 |
| $ | 18 |
|
During the nine months ended September 27, 2013, the Company contributed $574 million to our pension plans, and we anticipate making additional contributions of approximately $60 million to our pension plans during the remainder of 2013. The Company contributed $992 million to our pension plans during the nine months ended September 28, 2012.
NOTE 13: INCOME TAXES
Our effective tax rate reflects the benefits of having significant operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate of 35 percent. As a result of employment actions and capital investments made by the Company, certain tax jurisdictions provide income tax incentive grants, including Brazil, Costa Rica, Singapore and Swaziland. The terms of these grants expire from 2015 to 2020. We expect each of these grants to be renewed indefinitely. In addition, our effective tax rate reflects the benefits of having significant earnings generated in investments accounted for under the equity method of accounting, which are generally taxed at rates lower than the U.S. statutory rate.
At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year. This estimate reflects, among other items, our best estimate of operating results and foreign currency exchange rates. Based on current tax laws, the Company's estimated effective tax rate for 2013 is 23.0 percent. However, in arriving at this estimate we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.
The Company recorded income tax expense of $925 million (27.4 percent effective tax rate) and $755 million (24.5 percent effective tax rate) during the three months ended September 27, 2013, and September 28, 2012, respectively. The Company recorded income tax expense of $2,331 million (25.2 percent effective tax rate) and $2,236 million (23.7 percent effective tax rate) during the nine months ended September 27, 2013, and September 28, 2012, respectively. The following table illustrates the tax expense (benefit) associated with unusual and/or infrequent items for the interim periods presented (in millions):
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| September 27, 2013 |
| | September 28, 2012 |
| | September 27, 2013 |
| | September 28, 2012 |
| |
Asset impairments | $ | — |
| 1 | $ | — |
| | $ | — |
| 1 | $ | — |
| |
Productivity and reinvestment program | (37 | ) | 2 | (21 | ) | 9 | (115 | ) | 2 | (65 | ) | 9 |
Other productivity, integration and restructuring initiatives | 1 |
| 3 | 4 |
| 10 | 2 |
| 3 | 5 |
| 10 |
Transaction gains and losses | 255 |
| 4 | — |
| | 303 |
| 7 | 33 |
| 11 |
Certain tax matters | (20 | ) | 5 | 7 |
| 12 | (20 | ) | 5 | (26 | ) | 14 |
Other — net | 4 |
| 6 | (4 | ) | 13 | — |
| 8 | (18 | ) | 15 |
| |
1 | Related to charges of $190 million due to the impairment of certain of the Company's intangible assets. Refer to Note 10 and Note 14. |
| |
2 | Related to charges of $97 million and $312 million during the three and nine months ended September 27, 2013, respectively. These charges were due to the Company's productivity and reinvestment program. Refer to Note 10 and Note 11. |
| |
3 | Related to net charges of $43 million and $82 million during the three and nine months ended September 27, 2013, respectively. These charges were primarily due to the Company's other restructuring initiatives that are outside the scope of the Company's productivity and reinvestment program. Refer to Note 10 and Note 11. |
| |
4 | Related to a net gain of $585 million consisting of the following items: a gain of $615 million due to the deconsolidation of our Brazilian bottling operations upon their combination with an independent bottler; a gain of $30 million due to the merger of four of the Company's Japanese bottling partners; and charges of $60 million due to the deferral of revenue and corresponding gross profit associated with the intercompany portion of our concentrate sales to CCEJ and the newly combined Brazilian bottling operations until the finished beverage products made from those concentrates are sold to a third party. Refer to Note 2, |