Investments |
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| Investments |
INVESTMENTS
Investments in debt and marketable 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. 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. 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 consolidated balance sheets as a component of accumulated other comprehensive income (loss) ("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.
Trading Securities
As of October 2, 2015 and December 31, 2014, our trading securities had a fair value of $319 million and $409 million, respectively, and consisted primarily of equity securities. The Company had net unrealized gains on trading securities of $14 million and $40 million as of October 2, 2015 and December 31, 2014, respectively.
The Company's trading securities were included in the following line items in our condensed consolidated balance sheets (in millions):
Available-for-Sale and Held-to-Maturity Securities
As of October 2, 2015 and December 31, 2014, the Company did not have any held-to-maturity securities. As of October 2, 2015, available-for-sale securities consisted of the following (in millions):
1 Refer to Note 14 for additional information related to the estimated fair value.
As of December 31, 2014, available-for-sale securities consisted of the following (in millions):
1 Refer to Note 14 for additional information related to the estimated fair value.
2 Includes $101 million recognized in the condensed consolidated income statement line item other income (loss) — net during the year ended December 31, 2014. The amount was primarily offset by changes in the fair value of foreign currency contracts designated as fair value hedges. Refer to Note 5 for additional information.
Management assessed each of the available-for-sale securities that were in a gross unrealized loss position on an individual basis to determine if the decline in fair value was other than temporary. Management's assessment as to the nature of a decline in fair value is based on, among other things, the length of time and the extent to which the market value has been less than our cost basis; the financial condition and near-term prospects of the issuer; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. As a result of these assessments, management determined that the decline in fair value of these investments was not other than temporary and did not record any impairment charges.
Included in the gross unrealized losses on available-for-sale securities as of October 2, 2015 is $966 million related to our investment in Keurig. Our investment in Keurig has been in a continuous unrealized loss position since July 3, 2015.
In February 2014, we entered into a 10-year global strategic agreement with Keurig to collaborate on the development and introduction of our global brand portfolio for use in the Keurig® KOLD™ at-home beverage system. Under the terms of the agreement, the companies will cooperate to bring the Keurig® KOLD™ beverage system to consumers around the world, and Keurig will be the Company's exclusive partner for the production and sale of our branded single-serve, pod-based cold beverages. Together we will also explore future opportunities to collaborate on the Keurig® platform. In an effort to align our long-term interests, we acquired a 16 percent equity position in Keurig. Under our agreement with Keurig, we are not permitted to dispose of our Keurig shares before the end of February 2017. As of October 2, 2015, the cost basis of our equity position in Keurig was $2,354 million.
In reaching our conclusion that the decline in fair value of our investment in Keurig was not other than temporary, we considered several factors. Our investment in Keurig has only been in a continuous unrealized loss position since July 3, 2015, a relatively short period of time. Keurig’s stock price over the last several years has been volatile and Keurig's brewer sales are seasonal, with sales heavily weighted to the holiday season. Keurig has significant growth potential in new markets, including the launch of the new Keurig® KOLD™ home beverage system. We also considered Keurig's recently announced $300 million multi-year productivity initiative and incremental $1 billion share repurchase authorization and noted that Keurig's current valuation is at the low end of comparable company multiples.
Keurig has stated that a primary factor impacting its 2015 operating results was lower than expected brewer sales during the 2014 holiday season, and the impact of that on subsequent pod sales. The lower than expected 2014 holiday brewer sales resulted in part from consumer confusion over the pod compatibility with the new 2.0 brewing system and from the recall of Keurig® MINI Plus brewers. The holiday season historically represents about half of full year Keurig brewer unit sales at retail. Pod sales during the year following each holiday season are highly correlated to the household penetration of brewers. In Keurig's business model, substantially all of the profit is derived from the sale of pods rather than the sale of brewers. Therefore, the weaker than expected 2014 holiday season brewer sales resulted in lower than expected pod sales volume throughout 2015. Keurig has disclosed that it is addressing the issues that caused the weaker than expected 2014 holiday season brewer unit sales and anticipates better 2015 brewer unit sales. Assuming the historical correlation between pod sales and household penetration continues into future periods, higher unit sales of brewers at retail in the 2015 holiday season should result in increased pod sales in 2016. Considering the short duration of the continuous unrealized loss, we believe results of the 2015 holiday season will provide additional insight to determine if the impairment is other than temporary.
We also considered the views of the industry analysts who cover Keurig. While the current average 12-month price targets of these analysts do not project a stock price appreciation sufficient to recover our unrealized loss, several of these analysts note that the results of the next several quarters will provide insight into whether or not the prior year Keurig hot system issues are systemic as well as an early view of consumer adoption of Keurig® KOLD™.
As noted above, we are contractually obligated to hold our shares at least through February 2017. We entered into a 10-year global strategic agreement with Keurig, and we believe owning a significant equity interest in Keurig assists in keeping our long-term interests aligned.
We will continue to monitor our investments and evaluate whether any impairments are other than temporary.
The sale and/or maturity of available-for-sale securities resulted in the following realized activity (in millions):
The Company uses two of its insurance captives to reinsure group annuity insurance contracts that cover the pension obligations of certain of our European and Canadian pension plans. In accordance with local insurance regulations, our insurance captive is required to meet and maintain minimum solvency capital requirements. The Company elected to invest its solvency capital in a portfolio of available-for-sale securities, which are classified in the line item other assets in our condensed consolidated balance sheets because the assets are not available to satisfy our current obligations. As of October 2, 2015 and December 31, 2014, the Company's available-for-sale securities included solvency capital funds of $795 million and $836 million, respectively.
The Company's available-for-sale securities were included in the following line items in our condensed consolidated balance sheets (in millions):
The contractual maturities of these available-for-sale securities as of October 2, 2015 were as follows (in millions):
The Company expects that actual maturities may differ from the contractual maturities above because borrowers have the right to call or prepay certain obligations.
Cost Method Investments
Cost method investments are initially recorded at cost, and we record dividend income when applicable dividends are declared. Cost method investments are reported as other investments in our condensed consolidated balance sheets, and dividend income from cost method investments is reported in other income (loss) — net in our condensed consolidated statements of income. We review all of our cost method investments quarterly to determine if impairment indicators are present; however, we are not required to determine the fair value of these investments unless impairment indicators exist. When impairment indicators exist, we generally use discounted cash flow analyses to determine the fair value. We estimate that the fair values of our cost method investments approximated or exceeded their carrying values as of October 2, 2015 and December 31, 2014. Our cost method investments had a carrying value of $191 million and $166 million as of October 2, 2015 and December 31, 2014, respectively.
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