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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2020
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 Number 001-02217
COCA COLA CO
(Exact name of Registrant as specified in its charter)
|
| | | |
Delaware | | 58-0628465 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
One Coca-Cola Plaza | | |
Atlanta | Georgia | | 30313 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (404) 676-2121
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.25 Par Value | KO | New York Stock Exchange |
0.000% Notes Due 2021 | KO21B | New York Stock Exchange |
Floating Rate Notes Due 2021 | KO21C | New York Stock Exchange |
1.125% Notes Due 2022 | KO22 | New York Stock Exchange |
0.125% Notes Due 2022 | KO22B | New York Stock Exchange |
0.75% Notes Due 2023 | KO23B | New York Stock Exchange |
0.500% Notes Due 2024 | KO24 | New York Stock Exchange |
1.875% Notes Due 2026 | KO26 | New York Stock Exchange |
0.750% Notes Due 2026 | KO26C | New York Stock Exchange |
1.125% Notes Due 2027 | KO27 | New York Stock Exchange |
1.250% Notes Due 2031 | KO31 | New York Stock Exchange |
1.625% Notes Due 2035 | KO35 | New York Stock Exchange |
1.100% Notes Due 2036 | KO36 | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
| | | | | | |
Large accelerated filer | ☒ | | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ |
Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 | | Shares Outstanding as of April 21, 2020 |
$0.25 Par Value | | 4,294,891,353 |
THE COCA-COLA COMPANY AND SUBSIDIARIES
Table of Contents
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| | |
| | Page |
| | |
| | |
| | |
| | |
Item 1. | | |
| | |
| Three Months Ended March 27, 2020 and March 29, 2019 | |
| | |
| Three Months Ended March 27, 2020 and March 29, 2019 | |
| | |
| March 27, 2020 and December 31, 2019 | |
| | |
| Three Months Ended March 27, 2020 and March 29, 2019 | |
| | |
| | |
| | |
Item 2. | | |
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Item 3. | | |
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Item 4. | | |
| | |
| | |
| | |
Item 1. | | |
| | |
Item 1A. | | |
| | |
Item 2. | | |
| | |
Item 5. | | |
| | |
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. We undertake 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 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, 2019, 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 |
| March 27, 2020 |
| March 29, 2019 |
|
Net Operating Revenues | $ | 8,601 |
| $ | 8,694 |
|
Cost of goods sold | 3,371 |
| 3,365 |
|
Gross Profit | 5,230 |
| 5,329 |
|
Selling, general and administrative expenses | 2,648 |
| 2,767 |
|
Other operating charges | 202 |
| 127 |
|
Operating Income | 2,380 |
| 2,435 |
|
Interest income | 112 |
| 133 |
|
Interest expense | 193 |
| 245 |
|
Equity income (loss) — net | 167 |
| 133 |
|
Other income (loss) — net | 544 |
| (231 | ) |
Income Before Income Taxes | 3,010 |
| 2,225 |
|
Income taxes | 215 |
| 522 |
|
Consolidated Net Income | 2,795 |
| 1,703 |
|
Less: Net income (loss) attributable to noncontrolling interests | 20 |
| 25 |
|
Net Income Attributable to Shareowners of The Coca-Cola Company | $ | 2,775 |
| $ | 1,678 |
|
Basic Net Income Per Share1 | $ | 0.65 |
| $ | 0.39 |
|
Diluted Net Income Per Share1 | $ | 0.64 |
| $ | 0.39 |
|
Average Shares Outstanding | 4,289 |
| 4,271 |
|
Effect of dilutive securities | 36 |
| 35 |
|
Average Shares Outstanding Assuming Dilution | 4,325 |
| 4,306 |
|
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 |
| March 27, 2020 |
| March 29, 2019 |
|
Consolidated Net Income | $ | 2,795 |
| $ | 1,703 |
|
Other Comprehensive Income: | | |
Net foreign currency translation adjustments | (2,621 | ) | 926 |
|
Net gains (losses) on derivatives | 16 |
| 8 |
|
Net change in unrealized gains (losses) on available-for-sale debt securities | (8 | ) | 15 |
|
Net change in pension and other benefit liabilities | 6 |
| 31 |
|
Total Comprehensive Income | 188 |
| 2,683 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests | (435 | ) | (3 | ) |
Total Comprehensive Income Attributable to Shareowners of The Coca-Cola Company | $ | 623 |
| $ | 2,686 |
|
Refer to Notes to Condensed Consolidated Financial Statements.
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except par value)
|
| | | | | | |
| March 27, 2020 |
| December 31, 2019 |
|
ASSETS |
Current Assets | | |
Cash and cash equivalents | $ | 13,561 |
| $ | 6,480 |
|
Short-term investments | 1,713 |
| 1,467 |
|
Total Cash, Cash Equivalents and Short-Term Investments | 15,274 |
| 7,947 |
|
Marketable securities | 2,392 |
| 3,228 |
|
Trade accounts receivable, less allowances of $527 and $524, respectively | 4,430 |
| 3,971 |
|
Inventories | 3,558 |
| 3,379 |
|
Prepaid expenses and other assets | 2,580 |
| 1,886 |
|
Total Current Assets | 28,234 |
| 20,411 |
|
Equity method investments | 18,020 |
| 19,025 |
|
Other investments | 652 |
| 854 |
|
Other assets | 6,001 |
| 6,075 |
|
Deferred income tax assets | 2,275 |
| 2,412 |
|
Property, plant and equipment, less accumulated depreciation of $8,285 and $8,083, respectively | 10,993 |
| 10,838 |
|
Trademarks with indefinite lives | 10,457 |
| 9,266 |
|
Bottlers' franchise rights with indefinite lives | 108 |
| 109 |
|
Goodwill | 16,673 |
| 16,764 |
|
Other intangible assets | 600 |
| 627 |
|
Total Assets | $ | 94,013 |
| $ | 86,381 |
|
LIABILITIES AND EQUITY |
Current Liabilities | | |
Accounts payable and accrued expenses | $ | 12,640 |
| $ | 11,312 |
|
Loans and notes payable | 13,657 |
| 10,994 |
|
Current maturities of long-term debt | 5,642 |
| 4,253 |
|
Accrued income taxes | 458 |
| 414 |
|
Total Current Liabilities | 32,397 |
| 26,973 |
|
Long-term debt | 31,094 |
| 27,516 |
|
Other liabilities | 8,832 |
| 8,510 |
|
Deferred income tax liabilities | 1,856 |
| 2,284 |
|
The Coca-Cola Company Shareowners' Equity | | |
Common stock, $0.25 par value; authorized — 11,200 shares; issued — 7,040 shares | 1,760 |
| 1,760 |
|
Capital surplus | 17,312 |
| 17,154 |
|
Reinvested earnings | 66,870 |
| 65,855 |
|
Accumulated other comprehensive income (loss) | (15,696 | ) | (13,544 | ) |
Treasury stock, at cost — 2,746 and 2,760 shares, respectively | (52,088 | ) | (52,244 | ) |
Equity Attributable to Shareowners of The Coca-Cola Company | 18,158 |
| 18,981 |
|
Equity attributable to noncontrolling interests | 1,676 |
| 2,117 |
|
Total Equity | 19,834 |
| 21,098 |
|
Total Liabilities and Equity | $ | 94,013 |
| $ | 86,381 |
|
Refer to Notes to Condensed Consolidated Financial Statements.
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
|
| | | | | | |
| Three Months Ended |
| March 27, 2020 |
| March 29, 2019 |
|
Operating Activities | | |
Consolidated net income | $ | 2,795 |
| $ | 1,703 |
|
Depreciation and amortization | 367 |
| 275 |
|
Stock-based compensation expense | (5 | ) | 40 |
|
Deferred income taxes | (122 | ) | 122 |
|
Equity (income) loss — net of dividends | (157 | ) | (120 | ) |
Foreign currency adjustments | (59 | ) | (39 | ) |
Significant (gains) losses — net | (919 | ) | 87 |
|
Other operating charges | 190 |
| 55 |
|
Other items | 235 |
| 147 |
|
Net change in operating assets and liabilities | (1,769 | ) | (1,482 | ) |
Net Cash Provided by Operating Activities | 556 |
| 788 |
|
Investing Activities | |
| |
|
Purchases of investments | (1,455 | ) | (1,062 | ) |
Proceeds from disposals of investments | 1,603 |
| 1,994 |
|
Acquisitions of businesses, equity method investments and nonmarketable securities | (984 | ) | (5,322 | ) |
Proceeds from disposals of businesses, equity method investments and nonmarketable securities | 36 |
| 261 |
|
Purchases of property, plant and equipment | (327 | ) | (388 | ) |
Proceeds from disposals of property, plant and equipment | 91 |
| 27 |
|
Other investing activities | (48 | ) | 31 |
|
Net Cash Provided by (Used in) Investing Activities | (1,084 | ) | (4,459 | ) |
Financing Activities |
|
| |
|
Issuances of debt | 12,563 |
| 10,256 |
|
Payments of debt | (4,833 | ) | (9,652 | ) |
Issuances of stock | 413 |
| 190 |
|
Purchases of stock for treasury | (94 | ) | (397 | ) |
Other financing activities | (239 | ) | 24 |
|
Net Cash Provided by (Used in) Financing Activities | 7,810 |
| 421 |
|
Effect of Exchange Rate Changes on Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents | (54 | ) | 56 |
|
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents |
|
|
|
|
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period | 7,228 |
| (3,194 | ) |
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 6,737 |
| 9,318 |
|
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents at End of Period | 13,965 |
| 6,124 |
|
Less: Restricted cash and restricted cash equivalents at end of period | 404 |
| 276 |
|
Cash and Cash Equivalents at End of Period | $ | 13,561 |
| $ | 5,848 |
|
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 ("U.S. GAAP") 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 U.S. GAAP 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, 2019.
When used in these notes, the terms "The Coca-Cola Company," "Company," "we," "us" and "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 months ended March 27, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. Sales of our nonalcoholic ready-to-drink beverages are somewhat seasonal, with the second and third calendar quarters typically 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 first quarter of 2020 and the first quarter of 2019 ended on March 27, 2020 and March 29, 2019, 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.
Advertising Costs
The Company's accounting policy related to advertising costs for annual reporting purposes 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 that benefit multiple interim periods 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.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
We classify time deposits and other investments that are highly liquid and have maturities of three months or less at the date of purchase as cash equivalents or restricted cash equivalents, as applicable. Restricted cash and restricted cash equivalents generally consist of amounts held by our captive insurance companies, which are included in the line item other assets on our consolidated balance sheet, and amounts classified in assets held for sale. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties and procedures to monitor our concentrations of credit risk.
The following table provides a summary of cash, cash equivalents, restricted cash and restricted cash equivalents that constitute the total amounts shown in the condensed consolidated statements of cash flows (in millions): |
| | | | | | |
| March 27, 2020 |
| December 31, 2019 |
|
Cash and cash equivalents | $ | 13,561 |
| $ | 6,480 |
|
Cash and cash equivalents included in other assets1 | 404 |
| 257 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents | $ | 13,965 |
| $ | 6,737 |
|
| March 29, 2019 |
| December 31, 2018 |
|
Cash and cash equivalents | $ | 5,848 |
| $ | 9,077 |
|
Cash and cash equivalents included in other assets1 | 276 |
| 241 |
|
Cash, cash equivalents, restricted cash and restricted cash equivalents | $ | 6,124 |
| $ | 9,318 |
|
1 Amounts represent cash and cash equivalents in our solvency capital portfolio set aside primarily to cover pension obligations in certain of
our European and Canadian pension plans. Refer to Note 4.
Recently Issued Accounting Guidance
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company beginning January 1, 2021 and would require us to recognize a cumulative effect adjustment to the opening balance of reinvested earnings, if applicable. We are currently evaluating the impact that ASU 2019-12 may have on our consolidated financial statements.
NOTE 2: ACQUISITIONS AND DIVESTITURES
Acquisitions
During the three months ended March 27, 2020, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $984 million, which primarily related to the acquisition of the remaining equity ownership interest in fairlife, LLC ("fairlife").
During the three months ended March 29, 2019, our Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled $5,322 million, which primarily related to the acquisition of Costa Limited ("Costa"), the remaining equity ownership interest in C.H.I. Limited ("CHI") and controlling interests in bottling operations in Zambia.
fairlife, LLC
In January 2020, the Company acquired the remaining 57.5 percent interest in, and now owns 100 percent of, fairlife. fairlife offers a broad portfolio of products in the value-added dairy category across North America. A significant portion of fairlife's revenues was already reflected in our consolidated financial statements, as we have operated as the sales and distribution organization for certain fairlife products. Upon consolidation, we recognized a gain of $902 million resulting from the remeasurement of our previously held equity interest in fairlife to fair value. The fair value of our previously held interest was determined using a discounted cash flow model based on Level 3 inputs. The gain was recorded in the line item other income (loss) — net in our condensed consolidated statement of income. We acquired the remaining interest in exchange for $979 million of cash, net of cash acquired, and effectively settled our $306 million note receivable from fairlife at the recorded amount. Under the terms of the agreement, we are subject to making future milestone payments which are contingent on fairlife achieving certain financial targets through 2024, and if achieved, are payable in 2021, 2023 and 2025. These milestone payments are based on agreed-upon formulas related to fairlife's operating results, the resulting value of which is not subject to a ceiling. Under the applicable accounting guidance, we recorded a $270 million liability representing our best estimate of the fair value of this contingent consideration. The fair value of this contingent consideration was determined using a Monte Carlo valuation model based on Level 3 inputs. We will be required to remeasure this liability to fair value quarterly with any changes in the fair value recorded in income until the final milestone payments are made. During the three months ended March 27, 2020, we recorded a charge of $11 million related to this remeasurement in the line item other operating charges in our condensed consolidated statement of income. As of March 27, 2020, $1.3 billion of the purchase price was preliminarily allocated to the fairlife trademark and $0.8 billion was preliminarily allocated to goodwill. The goodwill recognized as part of this acquisition is primarily related to synergistic value created from the opportunity for additional expansion. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce. The goodwill is not tax deductible and has been preliminarily assigned to the North America operating segment. The preliminary allocation of the
purchase price is subject to refinement when valuations are finalized. As of March 27, 2020, the valuations that have not been finalized primarily relate to the trademark and other intangible assets; property, plant and equipment; and operating lease right-of-use ("ROU") assets and operating lease liabilities. The final purchase price allocation will be completed no later than the first quarter of 2021.
Costa Limited
In January 2019, the Company acquired Costa in exchange for $4.9 billion of cash, net of cash acquired. Costa is a coffee business with retail outlets in more than 30 countries, the Costa Express vending system and a state-of-the-art roastery. We believe this acquisition will allow us to increase our presence in the hot beverage market as Costa has a scalable platform across multiple formats and channels, including opportunities to introduce ready-to-drink products. Upon finalization of purchase accounting, $2.4 billion of the purchase price was allocated to the Costa trademark and $2.5 billion was allocated to goodwill. The goodwill recognized as part of this acquisition is primarily related to synergistic value created from the opportunity for additional expansion as well as our ability to market and distribute Costa in ready-to-drink form throughout our bottling system. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce. The goodwill is not tax deductible and has been assigned to the Global Ventures operating segment, except for $108 million, which was allocated to the Europe, Middle East and Africa operating segment.
C.H.I. Limited
In January 2019, the Company acquired the remaining 60 percent interest in CHI, a Nigerian producer of value-added dairy and juice beverages and iced tea, in exchange for $260 million of cash, net of cash acquired, under the terms of the agreement for our original investment in CHI. Upon consolidation, we recognized a net charge of $121 million during the three months ended March 29, 2019, which included the remeasurement of our previously held equity interest in CHI to fair value and the reversal of the related cumulative translation adjustments. The fair value of our previously held equity investment was determined using a discounted cash flow model based on Level 3 inputs. The net charge was recorded in the line item other income (loss) — net in our condensed consolidated statement of income.
Divestitures
During the three months ended March 27, 2020, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $36 million, which primarily related to the sale of a portion of our ownership interest in one of our equity method investments. We recognized a net gain of $18 million as a result of the sale, which was recorded in the line item other income (loss) — net in our condensed consolidated statement of income.
During the three months ended March 29, 2019, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $261 million, which primarily related to the sale of a portion of our equity method investment in Embotelladora Andina S.A. ("Andina"). We recognized a gain of $39 million as a result of the sale, which was recorded in the line item other income (loss) — net in our condensed consolidated statement of income. We continue to account for our remaining interest in Andina as an equity method investment as a result of our representation on Andina's Board of Directors and other governance rights.
NOTE 3: REVENUE RECOGNITION
The following table presents net operating revenues disaggregated between the United States and International and further by line of business (in millions): |
| | | | | | | | | |
| United States |
| International |
| Total |
|
Three Months Ended March 27, 2020 |
|
|
|
|
|
|
Concentrate operations | $ | 1,324 |
| $ | 3,465 |
| $ | 4,789 |
|
Finished product operations | 1,483 |
| 2,329 |
| 3,812 |
|
Total | $ | 2,807 |
| $ | 5,794 |
| $ | 8,601 |
|
Three Months Ended March 29, 2019 |
|
|
|
|
|
|
Concentrate operations | $ | 1,185 |
| $ | 3,593 |
| $ | 4,778 |
|
Finished product operations | 1,460 |
| 2,456 |
| 3,916 |
|
Total | $ | 2,645 |
| $ | 6,049 |
| $ | 8,694 |
|
Refer to Note 16 for additional revenue disclosures by operating segment and Corporate.
NOTE 4: INVESTMENTS
Equity Securities
The carrying values of our equity securities were included in the following line items in our condensed consolidated balance sheets (in millions): |
| | | | | | |
| Fair Value with Changes Recognized in Income |
| Measurement Alternative — No Readily Determinable Fair Value |
|
March 27, 2020 | | |
Marketable securities | $ | 275 |
| $ | — |
|
Other investments | 599 |
| 53 |
|
Other assets | 889 |
| — |
|
Total equity securities | $ | 1,763 |
| $ | 53 |
|
December 31, 2019 |
|
|
Marketable securities | $ | 329 |
| $ | — |
|
Other investments | 772 |
| 82 |
|
Other assets | 1,118 |
| — |
|
Total equity securities | $ | 2,219 |
| $ | 82 |
|
The calculation of net unrealized gains and losses recognized during the period related to equity securities still held at the end of the period is as follows (in millions): |
| | | | | | |
| Three Months Ended |
| March 27, 2020 |
| March 29, 2019 |
|
Net gains (losses) recognized during the period related to equity securities | $ | (396 | ) | $ | 147 |
|
Less: Net gains (losses) recognized during the period related to equity securities sold during the period | (16 | ) | 7 |
|
Net unrealized gains (losses) recognized during the period related to equity securities still held at the end of the period | $ | (380 | ) | $ | 140 |
|
Debt Securities
Our debt securities consisted of the following (in millions): |
| | | | | | | | | | | | |
| | Gross Unrealized | Estimated Fair Value |
|
| Cost |
| Gains |
| Losses |
|
March 27, 2020 | | | | |
Trading securities | $ | 33 |
| $ | — |
| $ | (2 | ) | $ | 31 |
|
Available-for-sale securities | 2,365 |
| 98 |
| (4 | ) | 2,459 |
|
Total debt securities | $ | 2,398 |
| $ | 98 |
| $ | (6 | ) | $ | 2,490 |
|
December 31, 2019 | | | | |
Trading securities | $ | 46 |
| $ | 1 |
| $ | — |
| $ | 47 |
|
Available-for-sale securities | 3,172 |
| 113 |
| (4 | ) | 3,281 |
|
Total debt securities | $ | 3,218 |
| $ | 114 |
| $ | (4 | ) | $ | 3,328 |
|
The carrying values of our debt securities were included in the following line items in our condensed consolidated balance sheets (in millions): |
| | | | | | | | | | | | | |
| March 27, 2020 | | December 31, 2019 |
| Trading Securities |
| Available-for-Sale Securities |
| | Trading Securities |
| Available-for-Sale Securities |
|
Cash and cash equivalents | $ | — |
| $ | 97 |
| | $ | — |
| $ | 123 |
|
Marketable securities | 31 |
| 2,086 |
| | 47 |
| 2,852 |
|
Other assets | — |
| 276 |
| | — |
| 306 |
|
Total debt securities | $ | 31 |
| $ | 2,459 |
| | $ | 47 |
| $ | 3,281 |
|
The contractual maturities of these available-for-sale debt securities as of March 27, 2020 were as follows (in millions): |
| | | | | | |
| Cost |
| Estimated Fair Value |
|
Within 1 year | $ | 1,374 |
| $ | 1,393 |
|
After 1 year through 5 years | 761 |
| 805 |
|
After 5 years through 10 years | 58 |
| 68 |
|
After 10 years | 172 |
| 193 |
|
Total | $ | 2,365 |
| $ | 2,459 |
|
The Company expects that actual maturities may differ from the contractual maturities above because borrowers have the right to call or prepay certain obligations.
The sale and/or maturity of available-for-sale debt securities resulted in the following realized activity (in millions): |
| | | | | | |
| Three Months Ended |
| March 27, 2020 |
| March 29, 2019 |
|
Gross gains | $ | 8 |
| $ | 5 |
|
Gross losses | (2 | ) | (3 | ) |
Proceeds | 906 |
| 722 |
|
Captive Insurance Companies
In accordance with local insurance regulations, our captive insurance companies are required to meet and maintain minimum solvency capital requirements. The Company elected to invest a majority of its solvency capital in a portfolio of marketable equity and debt securities. These securities are included in the disclosures above. The Company uses one of its consolidated captive insurance companies to reinsure group annuity insurance contracts that cover the pension obligations of certain of our European and Canadian pension plans. This captive's solvency capital funds included equity and debt securities of $1,025 million as of March 27, 2020 and $1,266 million as of December 31, 2019, 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.
NOTE 5: INVENTORIES
Inventories consisted of the following (in millions):
|
| | | | | | |
| March 27, 2020 |
| December 31, 2019 |
|
Raw materials and packaging | $ | 2,282 |
| $ | 2,180 |
|
Finished goods | 901 |
| 851 |
|
Other | 375 |
| 348 |
|
Total inventories | $ | 3,558 |
| $ | 3,379 |
|
NOTE 6: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
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 | March 27, 2020 |
| December 31, 2019 |
|
Assets: | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 140 |
| $ | 24 |
|
Foreign currency contracts | Other assets | 228 |
| 91 |
|
Interest rate contracts | Prepaid expenses and other assets | 12 |
| 10 |
|
Interest rate contracts | Other assets | 517 |
| 427 |
|
Total assets | | $ | 897 |
| $ | 552 |
|
Liabilities: | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 84 |
| $ | 40 |
|
Foreign currency contracts | Other liabilities | 231 |
| 48 |
|
Interest rate contracts | Other liabilities | 23 |
| 21 |
|
Total liabilities | | $ | 338 |
| $ | 109 |
|
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 15 for the net presentation of the Company's derivative instruments.
2 Refer to Note 15 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 | March 27, 2020 |
| December 31, 2019 |
|
Assets: | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 88 |
| $ | 13 |
|
Foreign currency contracts | Other assets | 2 |
| — |
|
Commodity contracts | Prepaid expenses and other assets | 1 |
| 8 |
|
Commodity contracts | Other assets | — |
| 2 |
|
Other derivative instruments | Prepaid expenses and other assets | — |
| 12 |
|
Other derivative instruments | Other assets | 1 |
| 1 |
|
Total assets | | $ | 92 |
| $ | 36 |
|
Liabilities: | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 130 |
| $ | 39 |
|
Foreign currency contracts | Other liabilities | 4 |
| — |
|
Commodity contracts | Accounts payable and accrued expenses | 70 |
| 13 |
|
Commodity contracts | Other liabilities | 28 |
| 1 |
|
Other derivative instruments | Accounts payable and accrued expenses | 44 |
| — |
|
Total liabilities | | $ | 276 |
| $ | 53 |
|
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 15 for the net presentation of the Company's derivative instruments.
2 Refer to Note 15 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 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 accumulated other comprehensive income (loss) ("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 maximum length of time for which the Company hedges its exposure to the variability in future cash flows is typically four 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 and collars (principally euro, British pound sterling and Japanese yen) 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 qualify for the Company's foreign currency cash flow hedging program were $9,849 million and $6,957 million as of March 27, 2020 and December 31, 2019, respectively.
The Company uses cross-currency swaps to hedge the changes in cash flows of certain of its foreign currency denominated debt and other monetary assets or liabilities due to changes in foreign currency exchange rates. For this hedging program, the Company records the change in carrying value of these foreign currency denominated assets and liabilities due to changes in exchange rates into earnings each period. The changes in fair value of the cross-currency swap derivatives are recorded in AOCI with an immediate reclassification into earnings for the change in fair value attributable to fluctuations in foreign currency exchange rates. The total notional values of derivatives that have been designated as cash flow hedges for the Company's foreign currency denominated assets and liabilities were $3,028 million as of both March 27, 2020 and December 31, 2019.
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 have been designated and qualify for this program were $2 million as of both March 27, 2020 and December 31, 2019.
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 $550 million as of March 27, 2020. As of December 31, 2019, we did not have any interest rate swaps designated as a cash flow hedge.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on other comprehensive income ("OCI"), AOCI and earnings (in millions):
|
| | | | | | | |
| Gain (Loss) Recognized in OCI | Location of Gain (Loss) Recognized in Income | Gain (Loss) Reclassified from AOCI into Income |
Three Months Ended March 27, 2020 | | | |
Foreign currency contracts | $ | 103 |
| Net operating revenues | $ | (4 | ) |
Foreign currency contracts | 11 |
| Cost of goods sold | 1 |
|
Foreign currency contracts | — |
| Interest expense | (2 | ) |
Foreign currency contracts | (90 | ) | Other income (loss) — net | 15 |
|
Interest rate contracts | 8 |
| Interest expense | (11 | ) |
Total | $ | 32 |
|
| $ | (1 | ) |
Three Months Ended March 29, 2019 | | | |
Foreign currency contracts | $ | (2 | ) | Net operating revenues | $ | 6 |
|
Foreign currency contracts | 1 |
| Cost of goods sold | 4 |
|
Foreign currency contracts | — |
| Interest expense | (2 | ) |
Foreign currency contracts | (22 | ) | Other income (loss) — net | (50 | ) |
Interest rate contracts | — |
| Interest expense | (10 | ) |
Total | $ | (23 | ) | | $ | (52 | ) |
As of March 27, 2020, the Company estimates that it will reclassify into earnings during the next 12 months net gains of $6 million 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 Company also uses cross-currency interest rate swaps to hedge the changes in the fair value of foreign currency denominated debt relating to changes in foreign currency exchange rates and 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. When a derivative is no longer designated as a fair value hedge for any reason, including termination and maturity, the remaining unamortized difference between the carrying value of the hedged item at that time and the face 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 related to our fair value hedges of this type were $12,360 million and $12,523 million as of March 27, 2020 and December 31, 2019, respectively.
The following table summarizes the pretax impact that changes in the fair values of derivatives designated as fair value hedges had on earnings (in millions): |
| | | | | | | |
Hedging Instruments and Hedged Items | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income |
Three Months Ended |
March 27, 2020 |
| March 29, 2019 |
|
Interest rate contracts | Interest expense | $ | 112 |
| $ | 212 |
|
Fixed-rate debt | Interest expense | (103 | ) | (210 | ) |
Net impact to interest expense | | $ | 9 |
| $ | 2 |
|
Net impact of fair value hedging instruments | | $ | 9 |
| $ | 2 |
|
The following table summarizes the amounts recorded in the condensed consolidated balance sheets related to hedged items in fair value hedging relationships (in millions):
|
| | | | | | | | | | | | | |
| Carrying Value of Hedged Items | | Cumulative Amount of Fair Value Hedging Adjustments Included in Carrying Value of Hedged Items1 |
Balance Sheet Location of Hedged Items | March 27, 2020 |
| December 31, 2019 |
| | March 27, 2020 |
| December 31, 2019 |
|
Current maturities of long-term debt | $ | 1,007 |
| $ | 1,004 |
| | $ | 8 |
| $ | 5 |
|
Long-term debt | 12,123 |
| 12,087 |
| | 539 |
| 448 |
|
1 Cumulative amount of fair value hedging adjustments does not include changes due to foreign currency exchange rates.
Hedges of Net Investments in Foreign Operations Strategy
The Company uses forward contracts and a portion of its foreign currency denominated debt, a non-derivative financial instrument, to protect the value of our net investments in a number of foreign operations. 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 adjustments, a component of AOCI, to offset the changes in the values of the net investments being hedged. For non-derivative financial instruments that are designated and qualify as hedges of net investments in foreign operations, the change in the carrying value of the designated portion of the non-derivative financial instrument due to changes in foreign currency exchange rates is recorded in net foreign currency translation adjustments. Any ineffective portions of net investment hedges are reclassified from AOCI into earnings during the period of change.
The following table summarizes the notional values and pretax impact of changes in the fair values of instruments designated as net investment hedges (in millions): |
| | | | | | | | | | | | | |
| Notional Amount | | Gain (Loss) Recognized in OCI |
| as of | | Three Months Ended |
| March 27, 2020 |
| December 31, 2019 |
| | March 27, 2020 |
| March 29, 2019 |
|
Foreign currency contracts | $ | 491 |
| $ | — |
| | $ | (3 | ) | $ | 22 |
|
Foreign currency denominated debt | 12,255 |
| 12,334 |
| | 79 |
| 131 |
|
Total | $ | 12,746 |
| $ | 12,334 |
| | $ | 76 |
| $ | 153 |
|
The Company did not reclassify any gains or losses related to net investment hedges from AOCI into earnings during the three months ended March 27, 2020 and March 29, 2019. In addition, the Company did not have any ineffectiveness related to net investment hedges during the three months ended March 27, 2020 and March 29, 2019. The cash inflows and outflows associated with the Company's derivative contracts designated as net investment hedges are classified in the line item other investing activities in our condensed consolidated statement of cash flows.
Economic (Non-Designated) 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 the fair value of economic hedges are immediately recognized in 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 value of economic hedges used to offset those monetary assets and liabilities are immediately recognized in earnings in the line item other income (loss) — net in our condensed consolidated statement 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, including those related to certain acquisition and divestiture activities. The changes in fair values of economic hedges used to offset the variability in U.S. dollar net cash flows are recognized in earnings in the line items net operating revenues, cost of goods sold or other income (loss) — net in our condensed consolidated statement of income, as applicable. The total notional values of derivatives related to our foreign currency economic hedges were $4,725 million and $4,291 million as of March 27, 2020 and December 31, 2019, 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 in earnings in the line items net operating revenues, cost of goods sold, or selling, general and
administrative expenses in our condensed consolidated statement of income, as applicable. The total notional values of derivatives related to our economic hedges of this type were $405 million and $425 million as of March 27, 2020 and December 31, 2019, respectively.
The following table presents the pretax impact that changes in the fair values of derivatives not designated as hedging instruments had on earnings (in millions): |
| | | | | | | |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income |
Three Months Ended |
March 27, 2020 |
| March 29, 2019 |
|
Foreign currency contracts | Net operating revenues | $ | 24 |
| $ | (11 | ) |
Foreign currency contracts | Cost of goods sold | 14 |
| (1 | ) |
Foreign currency contracts | Other income (loss) — net | (91 | ) | 21 |
|
Commodity contracts | Cost of goods sold | (85 | ) | 20 |
|
Other derivative instruments | Selling, general and administrative expenses | (56 | ) | 17 |
|
Other derivative instruments | Other income (loss) — net | (57 | ) | 34 |
|
Total | | $ | (251 | ) | $ | 80 |
|
NOTE 7: DEBT AND BORROWING ARRANGEMENTS
During the three months ended March 27, 2020, the Company issued U.S. dollar-denominated debt of $5,000 million. The carrying value of this debt as of March 27, 2020 was $4,951 million. The general terms of the notes issued are as follows:
| |
• | $1,000 million total principal amount of notes due March 25, 2025, at a fixed interest rate of 2.950 percent; |
| |
• | $1,000 million total principal amount of notes due March 25, 2027, at a fixed interest rate of 3.375 percent; |
| |
• | $1,250 million total principal amount of notes due March 25, 2030, at a fixed interest rate of 3.450 percent; |
| |
• | $500 million total principal amount of notes due March 25, 2040, at a fixed interest rate of 4.125 percent; and |
| |
• | $1,250 million total principal amount of notes due March 25, 2050, at a fixed interest rate of 4.200 percent. |
NOTE 8: COMMITMENTS AND CONTINGENCIES
Guarantees
As of March 27, 2020, we were contingently liable for guarantees of indebtedness owed by third parties of $411 million, of which $130 million was related to variable interest entities. Our guarantees are primarily related to third-party customers, bottlers and vendors and have arisen through the normal course of business. These guarantees have various terms, and none of these guarantees is individually significant. These amounts represent 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 of 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.
Tax Audits
The Company is involved in various tax matters, some of which have an uncertain outcome. 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. The number of years subject to tax audits or 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 14.
On September 17, 2015, the Company received a Statutory Notice of Deficiency (the "Notice") from the Internal Revenue Service ("IRS") for the tax years 2007 through 2009 after a five-year audit. In the Notice, the IRS claimed that the Company's U.S. taxable income should be increased by an amount that creates a potential additional federal income tax liability of approximately $3.3 billion for the period plus interest. No penalties were asserted in the Notice. The disputed amounts largely relate to a transfer pricing matter involving the appropriate amount of taxable income the Company should report in the United States in connection with its licensing of intangible property to certain related foreign licensees regarding the manufacturing, distribution, sale, marketing, and promotion of products in certain foreign markets.
During the 2007-2009 audit period, the Company followed the same transfer pricing methodology for these licenses that had consistently been followed since the methodology was agreed with the IRS in a 1996 closing agreement (the "Closing Agreement") that applied back to 1987. The Closing Agreement provided prospective penalty protection conditioned on the Company's continued adherence to the prescribed methodology absent a change in material facts or circumstances or relevant federal tax law. Although the IRS subsequently asserted, without explanation, that material facts and circumstances and relevant federal tax law had changed, it has not asserted penalties. The Company's compliance with the Closing Agreement was audited and confirmed by the IRS in five successive audit cycles covering the subsequent 11 years through 2006, with the last audit concluding as recently as 2009.
The Notice represents a repudiation of the methodology previously adopted in the Closing Agreement. The IRS designated the matter for litigation on October 15, 2015. Due to the fact that the matter remains designated, the Company is prevented from pursuing any administrative settlement at IRS Appeals or under the IRS Advance Pricing and Mutual Agreement Program.
The Company firmly believes that the IRS' claims are without merit and is pursuing, and will continue to pursue, all available administrative and judicial remedies necessary to vigorously defend its position. To that end, the Company filed a petition in the U.S. Tax Court on December 14, 2015, and the IRS filed its answer on February 12, 2016. On October 4, 2017, the IRS filed an amended answer to the Company's petition in which it increased its transfer pricing adjustment by $385 million resulting in an additional tax adjustment of $135 million.
On June 20, 2017, the Company filed a motion for summary judgment on the portion of the IRS' adjustments related to our licensee in Mexico. On December 14, 2017, the U.S. Tax Court issued a decision on the summary judgment motion in favor of the Company. This decision effectively reduced the IRS' potential tax adjustment by approximately $138 million.
The U.S. Tax Court trial was held from March 8, 2018 through May 11, 2018. The Company and the IRS filed and exchanged final post-trial briefs in April 2019. It is not known how much time will elapse thereafter prior to the issuance of the court's opinion. In the interim, or subsequent to the court's opinion, the IRS may propose similar adjustments for years subsequent to the 2007-2009 litigation period. While the Company continues to strongly disagree with the IRS' position, there is no assurance that the court will rule in the Company's favor, and it is possible that all or some portion of the adjustment proposed by the Notice ultimately could be sustained. In that event, the Company may be subject to significant additional liabilities for the years at issue and potentially also for subsequent periods, which could have a material adverse impact on the Company's financial position, results of operations, and cash flows.
The Company regularly assesses the likelihood of adverse outcomes resulting from tax disputes such as this and other examinations for all open years to determine the adequacy of its tax reserves. Any such adjustments related to years prior to 2018, either in the litigation period or later, may have an impact on the transition tax payable as part of the Tax Cuts and Jobs Act of 2017 ("Tax Reform Act").
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 $280 million and $301 million as of March 27, 2020 and December 31, 2019, respectively.
NOTE 9: OTHER COMPREHENSIVE INCOME
AOCI attributable to shareowners of The Coca-Cola Company is separately presented in our condensed consolidated balance sheet as a component of The Coca-Cola Company's shareowners' equity, which also includes our proportionate share of equity method investees' AOCI. OCI attributable to noncontrolling interests is allocated to, and included in, our condensed consolidated balance sheet as part of the line item equity attributable to noncontrolling interests.
AOCI attributable to shareowners of The Coca-Cola Company consisted of the following, net of tax (in millions): |
| | | | | | | |
| March 27, 2020 |
| | December 31, 2019 |
|
Foreign currency translation adjustments | $ | (13,436 | ) | | $ | (11,270 | ) |
Accumulated derivative net gains (losses) | (193 | ) | | (209 | ) |
Unrealized net gains (losses) on available-for-sale debt securities | 67 |
| | 75 |
|
Adjustments to pension and other benefit liabilities | (2,134 | ) | | (2,140 | ) |
Accumulated other comprehensive income (loss) | $ | (15,696 | ) | | $ | (13,544 | ) |
The following table summarizes the allocation of total comprehensive income between shareowners of The Coca-Cola Company and noncontrolling interests (in millions): |
| | | | | | | | | |
| Three Months Ended March 27, 2020 |
| Shareowners of The Coca-Cola Company |
| Noncontrolling Interests |
| Total |
|
Consolidated net income | $ | 2,775 |
| $ | 20 |
| $ | 2,795 |
|
Other comprehensive income: | | | |
Net foreign currency translation adjustments | (2,166 | ) | (455 | ) | (2,621 | ) |
Net gains (losses) on derivatives1 | 16 |
| — |
| 16 |
|
Net change in unrealized gains (losses) on available-for-sale debt securities2 | (8 | ) | — |
| (8 | ) |
Net change in pension and other benefit liabilities | 6 |
| — |
| 6 |
|
Total comprehensive income (loss) | $ | 623 |
| $ | (435 | ) | $ | 188 |
|
1 Refer to Note 6 for additional information related to the net gains or losses on derivative instruments.
2 Refer to Note 4 for additional information related to the net unrealized gains or losses on available-for-sale debt 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 March 27, 2020 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustments arising during the period | $ | (2,281 | ) | | $ | 212 |
| | $ | (2,069 | ) |
Reclassification adjustments recognized in net income | 3 |
| | — |
| | 3 |
|
Gains (losses) on intra-entity transactions that are of a long-term investment nature | (157 | ) | | — |
| | (157 | ) |
Gains (losses) on net investment hedges arising during the period1 | 76 |
| | (19 | ) | | 57 |
|
Net foreign currency translation adjustments | $ | (2,359 | ) | | $ | 193 |
| | $ | (2,166 | ) |
Derivatives: |
| |
| |
|
Gains (losses) arising during the period | $ | 23 |
| | $ | (8 | ) | | $ | 15 |
|
Reclassification adjustments recognized in net income | 1 |
| | — |
| | 1 |
|
Net gains (losses) on derivatives1 | $ | 24 |
| | $ | (8 | ) | | $ | 16 |
|
Available-for-sale debt securities: |
| |
| |
|
Unrealized gains (losses) arising during the period | $ | (8 | ) | | $ | 5 |
| | $ | (3 | ) |
Reclassification adjustments recognized in net income | (6 | ) | | 1 |
| | (5 | ) |
Net change in unrealized gains (losses) on available-for-sale debt securities2 | $ | (14 | ) | | $ | 6 |
| | $ | (8 | ) |
Pension and other benefit liabilities: |
| |
| |
|
Net pension and other benefit liabilities arising during the period | $ | (25 | ) | | $ | (1 | ) | | $ | (26 | ) |
Reclassification adjustments recognized in net income | 43 |
| | (11 | ) | | 32 |
|
Net change in pension and other benefit liabilities | $ | 18 |
| | $ | (12 | ) | | $ | 6 |
|
Other comprehensive income (loss) attributable to shareowners of The Coca-Cola Company | $ | (2,331 | ) | | $ | 179 |
| | $ | (2,152 | ) |
| |
1 | Refer to Note 6 for additional information related to the net gains or losses on derivative instruments. |
| |
2 | Refer to Note 4 for additional information related to the net unrealized gains or losses on available-for-sale debt securities. |
|
| | | | | | | | | | | |
Three Months Ended March 29, 2019 | Before-Tax Amount |
| | Income Tax |
| | After-Tax Amount |
|
Foreign currency translation adjustments: | | | | | |
Translation adjustments arising during the period | $ | 997 |
| | $ | (73 | ) | | $ | 924 |
|
Reclassification adjustments recognized in net income | 192 |
| | — |
| | 192 |
|
Gains (losses) on intra-entity transactions that are of a long-term investment nature | (287 | ) | | — |
| | (287 | ) |
Gains (losses) on net investment hedges arising during the period1 | 153 |
| | (28 | ) | | 125 |
|
Net foreign currency translation adjustments | $ | 1,055 |
| | $ | (101 | ) | | $ | 954 |
|
Derivatives: | | | | | |
Gains (losses) arising during the period | $ | (36 | ) | | $ | 4 |
| | $ | (32 | ) |
Reclassification adjustments recognized in net income | 53 |
| | (13 | ) | | 40 |
|
Net gains (losses) on derivatives1 | $ | 17 |
| | $ | (9 | ) | | $ | 8 |
|
Available-for-sale debt securities: | | | | | |
Unrealized gains (losses) arising during the period | $ | 24 |
| | $ | (7 | ) | | $ | 17 |
|
Reclassification adjustments recognized in net income | (2 | ) | | — |
| | (2 | ) |
Net change in unrealized gains (losses) on available-for-sale debt securities2 | $ | 22 |
| | $ | (7 | ) | | $ | 15 |
|
Pension and other benefit liabilities: | | | | | |
Net pension and other benefit liabilities arising during the period | $ | (1 | ) | | $ | 4 |
| | $ | 3 |
|
Reclassification adjustments recognized in net income | 37 |
| | (9 | ) | | 28 |
|
Net change in pension and other benefit liabilities | $ | 36 |
| | $ | (5 | ) | | $ | 31 |
|
Other comprehensive income (loss) attributable to shareowners of The Coca-Cola Company | $ | 1,130 |
| | $ | ( |