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 30, 2011
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 24, 2011 |
$0.25 Par Value | | 2,271,232,205 Shares |
THE COCA-COLA COMPANY AND SUBSIDIARIES
Table of Contents
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Item 2. | | |
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Item 3. | | |
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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, 2010, 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 30, 2011 |
| October 1, 2010 |
| | September 30, 2011 |
| October 1, 2010 |
|
NET OPERATING REVENUES | $ | 12,248 |
| $ | 8,426 |
| | $ | 35,502 |
| $ | 24,625 |
|
Cost of goods sold | 4,875 |
| 2,918 |
| | 13,813 |
| 8,414 |
|
GROSS PROFIT | 7,373 |
| 5,508 |
| | 21,689 |
| 16,211 |
|
Selling, general and administrative expenses | 4,527 |
| 3,064 |
| | 13,029 |
| 8,647 |
|
Other operating charges | 96 |
| 100 |
| | 457 |
| 274 |
|
OPERATING INCOME | 2,750 |
| 2,344 |
| | 8,203 |
| 7,290 |
|
Interest income | 141 |
| 93 |
| | 356 |
| 220 |
|
Interest expense | 116 |
| 80 |
| | 313 |
| 246 |
|
Equity income (loss) — net | 180 |
| 355 |
| | 535 |
| 847 |
|
Other income (loss) — net | (32 | ) | (12 | ) | | 447 |
| (109 | ) |
INCOME BEFORE INCOME TAXES | 2,923 |
| 2,700 |
| | 9,228 |
| 8,002 |
|
Income taxes | 680 |
| 633 |
| | 2,268 |
| 1,927 |
|
CONSOLIDATED NET INCOME | 2,243 |
| 2,067 |
| | 6,960 |
| 6,075 |
|
Less: Net income attributable to noncontrolling interests | 22 |
| 12 |
| | 42 |
| 37 |
|
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | $ | 2,221 |
| $ | 2,055 |
| | $ | 6,918 |
| $ | 6,038 |
|
BASIC NET INCOME PER SHARE1 | $ | 0.97 |
| $ | 0.89 |
| | $ | 3.02 |
| $ | 2.62 |
|
DILUTED NET INCOME PER SHARE1 | $ | 0.95 |
| $ | 0.88 |
| | $ | 2.97 |
| $ | 2.59 |
|
DIVIDENDS PER SHARE | $ | 0.47 |
| $ | 0.44 |
| | $ | 1.41 |
| $ | 1.32 |
|
AVERAGE SHARES OUTSTANDING | 2,286 |
| 2,310 |
| | 2,289 |
| 2,307 |
|
Effect of dilutive securities | 40 |
| 26 |
| | 40 |
| 22 |
|
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION | 2,326 |
| 2,336 |
| | 2,329 |
| 2,329 |
|
1 Basic net income per share and diluted net income per share are 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 BALANCE SHEETS
(UNAUDITED)
(In millions except par value)
|
| | | | | | |
| September 30, 2011 |
| December 31, 2010 |
|
ASSETS | | |
CURRENT ASSETS | | |
Cash and cash equivalents | $ | 12,682 |
| $ | 8,517 |
|
Short-term investments | 3,684 |
| 2,682 |
|
TOTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS | 16,366 |
| 11,199 |
|
Marketable securities | 131 |
| 138 |
|
Trade accounts receivable, less allowances of $90 and $48, respectively | 5,131 |
| 4,430 |
|
Inventories | 3,172 |
| 2,650 |
|
Prepaid expenses and other assets | 3,391 |
| 3,162 |
|
TOTAL CURRENT ASSETS | 28,191 |
| 21,579 |
|
EQUITY METHOD INVESTMENTS | 7,073 |
| 6,954 |
|
OTHER INVESTMENTS, PRINCIPALLY BOTTLING COMPANIES | 1,264 |
| 631 |
|
OTHER ASSETS | 3,219 |
| 2,121 |
|
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation of $8,118 and $6,979, respectively | 14,522 |
| 14,727 |
|
TRADEMARKS WITH INDEFINITE LIVES | 6,501 |
| 6,356 |
|
BOTTLERS' FRANCHISE RIGHTS WITH INDEFINITE LIVES | 7,716 |
| 7,511 |
|
GOODWILL | 12,073 |
| 11,665 |
|
OTHER INTANGIBLE ASSETS | 1,194 |
| 1,377 |
|
TOTAL ASSETS | $ | 81,753 |
| $ | 72,921 |
|
LIABILITIES AND EQUITY | | |
CURRENT LIABILITIES | | |
Accounts payable and accrued expenses | $ | 9,837 |
| $ | 8,859 |
|
Loans and notes payable | 13,398 |
| 8,100 |
|
Current maturities of long-term debt | 2,082 |
| 1,276 |
|
Accrued income taxes | 264 |
| 273 |
|
TOTAL CURRENT LIABILITIES | 25,581 |
| 18,508 |
|
LONG-TERM DEBT | 13,708 |
| 14,041 |
|
OTHER LIABILITIES | 4,404 |
| 4,794 |
|
DEFERRED INCOME TAXES | 4,561 |
| 4,261 |
|
THE COCA-COLA COMPANY SHAREOWNERS' EQUITY | | |
Common stock, $0.25 par value; Authorized — 5,600 shares; Issued — 3,520 and 3,520 shares, respectively | 880 |
| 880 |
|
Capital surplus | 11,056 |
| 10,057 |
|
Reinvested earnings | 52,965 |
| 49,278 |
|
Accumulated other comprehensive income (loss) | (1,174 | ) | (1,450 | ) |
Treasury stock, at cost — 1,249 and 1,228 shares, respectively | (30,518 | ) | (27,762 | ) |
EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY | 33,209 |
| 31,003 |
|
EQUITY ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 290 |
| 314 |
|
TOTAL EQUITY | 33,499 |
| 31,317 |
|
TOTAL LIABILITIES AND EQUITY | $ | 81,753 |
| $ | 72,921 |
|
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 30, 2011 |
| October 1, 2010 |
|
OPERATING ACTIVITIES | | |
Consolidated net income | $ | 6,960 |
| $ | 6,075 |
|
Depreciation and amortization | 1,423 |
| 934 |
|
Stock-based compensation expense | 268 |
| 185 |
|
Deferred income taxes | 194 |
| 46 |
|
Equity (income) loss — net of dividends | (172 | ) | (567 | ) |
Foreign currency adjustments | 35 |
| 109 |
|
Significant (gains) losses on sales of assets — net | (104 | ) | (48 | ) |
Other operating charges | 188 |
| 111 |
|
Other items | (316 | ) | 87 |
|
Net change in operating assets and liabilities | (1,676 | ) | 292 |
|
Net cash provided by operating activities | 6,800 |
| 7,224 |
|
INVESTING ACTIVITIES | | |
Purchases of short-term investments | (4,036 | ) | (3,252 | ) |
Proceeds from disposals of short-term investments | 3,026 |
| 2,742 |
|
Acquisitions and investments | (310 | ) | (1,798 | ) |
Purchases of other investments | (611 | ) | (65 | ) |
Proceeds from disposals of bottling companies and other investments | 468 |
| 1,050 |
|
Purchases of property, plant and equipment | (1,915 | ) | (1,335 | ) |
Proceeds from disposals of property, plant and equipment | 66 |
| 94 |
|
Other investing activities | (102 | ) | (149 | ) |
Net cash provided by (used in) investing activities | (3,414 | ) | (2,713 | ) |
FINANCING ACTIVITIES | | |
Issuances of debt | 22,623 |
| 8,611 |
|
Payments of debt | (17,095 | ) | (6,983 | ) |
Issuances of stock | 1,382 |
| 535 |
|
Purchases of stock for treasury | (3,608 | ) | (3 | ) |
Dividends | (2,159 | ) | (3,034 | ) |
Other financing activities | 33 |
| (11 | ) |
Net cash provided by (used in) financing activities | 1,176 |
| (885 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (397 | ) | (138 | ) |
CASH AND CASH EQUIVALENTS | | |
Net increase (decrease) during the period | 4,165 |
| 3,488 |
|
Balance at beginning of period | 8,517 |
| 7,021 |
|
Balance at end of period | $ | 12,682 |
| $ | 10,509 |
|
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, 2010.
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 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Sales of our ready-to-drink nonalcoholic 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 2011 and 2010 ended on September 30, 2011, and October 1, 2010, 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, as disclosed in Note 1 of our 2010 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 30, 2011, our Company's acquisition and investment activities totaled $310 million, which included our acquisition of the remaining ownership interest of Honest Tea, Inc. ("Honest Tea") not already owned by the Company. Prior to this transaction, the Company accounted for our investment in Honest Tea under the equity method of accounting. We remeasured our equity interest in Honest Tea to fair value upon the close of the transaction. The resulting gain on the remeasurement was not significant to our condensed consolidated financial statements. The Company anticipates finalizing our purchase accounting for the Honest Tea acquisition by the end of 2011. In addition, the Company's acquisition and investment activities included immaterial cash payments for the finalization of working capital adjustments related to our acquisition of Coca-Cola Enterprises Inc.'s ("CCE") North American business. Refer to our discussion of this transaction below.
During the nine months ended October 1, 2010, our Company's acquisition and investment activities totaled $1,798 million. The Company's acquisition and investment activities were primarily related to payments made by the Company to CCE in anticipation of the closing of our acquisition of CCE's North American business; our acquisition of OAO Nidan Juices ("Nidan"), a Russian juice company; and our additional investment in Fresh Trading Ltd. ("innocent"). Total consideration for the Nidan acquisition was $276 million, which was primarily allocated to property, plant and equipment, identifiable intangible assets and goodwill. Under the terms of the agreement for our additional investment in innocent, innocent's founders retained operational control of the business, and we continued to account for our investment under the equity method of accounting. Additionally, the Company and the existing shareowners of innocent have a series of outstanding put and call options for the Company to potentially acquire the remaining shares not already owned by the Company. The put and call options are exercisable in stages between 2013 and 2014.
Acquisition of Coca-Cola Enterprises Inc.'s North American Business
Pursuant to the terms of the business separation and merger agreement entered into on February 25, 2010, as amended (the "merger agreement"), on October 2, 2010 (the "acquisition date"), we acquired CCE's North American business, consisting of CCE's production, sales and distribution operations in the United States, Canada, the British Virgin Islands, the United States Virgin Islands and the Cayman Islands, and a substantial majority of CCE's corporate segment. Upon completion of the CCE transaction, we combined the management of the acquired North American business with the management of our existing foodservice business; Minute Maid and Odwalla juice businesses; North America supply chain operations; and Company-owned bottling operations in Philadelphia, Pennsylvania, into a unified bottling and customer service organization called Coca-Cola Refreshments ("CCR"). In addition, we reshaped our remaining Coca-Cola North America ("CCNA") operations into an organization that primarily provides franchise leadership and consumer marketing and innovation for the North American market. As a result of the transaction and related reorganization, our North American businesses operate as aligned and agile organizations with distinct capabilities, responsibilities and strengths. We believe this acquisition will result in an evolved franchise system that will enable us to better serve the unique needs of the North American market. The creation of a unified operating system will strategically position us to better market and distribute our nonalcoholic beverage brands in North America. Refer to Note 11 for information related to the integration of this acquisition.
Under the terms of the merger agreement, the Company acquired the 67 percent of CCE's North American business that was not already owned by the Company for consideration that included: (1) the Company's 33 percent indirect ownership interest in CCE's European operations; (2) cash consideration; and (3) replacement awards issued to certain current and former employees of CCE's North American and corporate operations. At closing, CCE shareowners other than the Company exchanged their CCE common stock for common stock in a new entity, which was renamed Coca-Cola Enterprises, Inc. (which is referred to herein as "New CCE") and which continues to hold the European operations held by CCE prior to the acquisition. At closing, New CCE became 100 percent owned by shareowners that held shares of common stock of CCE immediately prior to the closing, other than the Company. As a result of this transaction, the Company does not own any interest in New CCE.
In addition, we granted New CCE the right to negotiate the acquisition of our majority interest in our German bottling operation, Coca-Cola Erfrischungsgetraenke AG ("CCEAG"), 18 to 39 months after the date of the merger agreement, at the then current fair value and subject to terms and conditions as mutually agreed.
The final purchase price of this acquisition was $6,895 million. The following table presents the final allocation of the purchase price by major class of assets and liabilities (in millions) as of the acquisition date, as well as adjustments made during the first nine months of 2011 (referred to as "measurement period adjustments"):
|
| | | | | | | | | | | |
| Amounts Recognized as of Acquisition Date1 |
| | Measurement Period Adjustments2 |
| | Amounts Recognized as of Acquisition Date (as Adjusted) |
|
Cash and cash equivalents | $ | 49 |
| | $ | — |
| | $ | 49 |
|
Marketable securities | 7 |
| | — |
| | 7 |
|
Trade accounts receivable | 1,194 |
| | — |
| | 1,194 |
|
Inventories | 696 |
| | — |
| | 696 |
|
Other current assets3 | 744 |
| | (5 | ) | | 739 |
|
Property, plant and equipment3 | 5,385 |
| | (682 | ) | | 4,703 |
|
Bottlers' franchise rights with indefinite lives3 | 5,100 |
| | 100 |
| | 5,200 |
|
Other intangible assets3 | 1,032 |
| | 45 |
| | 1,077 |
|
Other noncurrent assets | 261 |
| | — |
| | 261 |
|
Total identifiable assets acquired | 14,468 |
| | (542 | ) | | 13,926 |
|
Accounts payable and accrued expenses3 | 1,826 |
| | 8 |
| | 1,834 |
|
Loans and notes payable | 266 |
| | — |
| | 266 |
|
Long-term debt | 9,345 |
| | — |
| | 9,345 |
|
Pension and other postretirement liabilities | 1,313 |
| | — |
| | 1,313 |
|
Other noncurrent liabilities3 | 2,603 |
| | (293 | ) | | 2,310 |
|
Total liabilities assumed | 15,353 |
| | (285 | ) | | 15,068 |
|
Net liabilities assumed | (885 | ) | | (257 | ) | | (1,142 | ) |
Goodwill3 | 7,746 |
| | 304 |
| | 8,050 |
|
| 6,861 |
| | 47 |
| | 6,908 |
|
Less: Noncontrolling interests | 13 |
| | — |
| | 13 |
|
Net assets acquired | $ | 6,848 |
| | $ | 47 |
| | $ | 6,895 |
|
1 As previously reported in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.
2 The measurement period adjustments did not have a significant impact on our condensed consolidated statements of income for the three and nine months ended September 30, 2011. In addition, these adjustments did not have a significant impact on our condensed consolidated balance sheets as of September 30, 2011, and December 31, 2010. Therefore, we have not retrospectively adjusted the comparative 2010 financial information presented herein.
3 The measurement period adjustments were due to the finalization of appraisals related to intangible assets and certain fixed assets and resulted in the following: a decrease to property, plant and equipment; an increase to franchise rights; and a decrease to noncurrent deferred tax liabilities. The net impact of the measurement period adjustments and the payments made to New CCE that related to the finalization of working capital adjustments resulted in a net increase to goodwill.
Divestitures
During the nine months ended September 30, 2011, proceeds from disposals of bottling companies and other investments totaled $468 million, primarily related to the sale of our investment in Coca-Cola Embonor, S.A. ("Embonor"), a bottling partner with operations primarily in Chile, for $394 million. Prior to this transaction, the Company accounted for our investment in Embonor under the equity method of accounting. Refer to Note 10. None of the Company's other divestitures was individually significant.
During the nine months ended October 1, 2010, proceeds from the disposal of bottling companies and other investments totaled $1,050 million, primarily related to the cash received in anticipation of the sale of all our ownership interests in Coca-Cola Drikker AS (the "Norwegian bottling operation") and Coca-Cola Drycker Sverige AB (the "Swedish bottling operation") to New CCE for $0.9 billion in cash. In addition to the proceeds related to the disposal of our Norwegian and Swedish bottling operations, our Company sold 50 percent of our investment in Leão Junior, S.A. ("Leão Junior"), a Brazilian tea company, for $83 million. Refer to Note 10.
Note 3 — Investments
Investments in debt and marketable equity securities, other than investments accounted for under the equity method, are classified as trading, available-for-sale or held-to-maturity. Our marketable equity investments are classified as either trading or available-for-sale with their cost basis determined by the specific identification method. Realized and unrealized gains and losses on trading securities and realized gains and losses on available-for-sale securities are included in net income. Unrealized gains and losses, net of deferred taxes, on available-for-sale securities are included in our condensed consolidated balance sheets as a component of accumulated other comprehensive income (loss) ("AOCI").
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 30, 2011, and December 31, 2010, our trading securities had a fair value of $198 million and $209 million, respectively. The Company had net unrealized losses on trading securities of $13 million and $3 million as of September 30, 2011, and December 31, 2010, respectively. The Company's trading securities were included in the following captions in our condensed consolidated balance sheets (in millions):
|
| | | | | | |
| September 30, 2011 |
| December 31, 2010 |
|
Marketable securities | $ | 125 |
| $ | 132 |
|
Other assets | 73 |
| 77 |
|
Total trading securities | $ | 198 |
| $ | 209 |
|
Available-for-Sale and Held-to-Maturity Securities
As of September 30, 2011, available-for-sale and held-to-maturity securities consisted of the following (in millions):
|
| | | | | | | | | | | | |
| | Gross Unrealized | Estimated |
|
| Cost |
| Gains |
| Losses |
| Fair Value |
|
Available-for-sale securities:1 | | | | |
Equity securities | $ | 940 |
| $ | 270 |
| $ | (12 | ) | $ | 1,198 |
|
Other securities | 85 |
| 1 |
| (1 | ) | 85 |
|
| $ | 1,025 |
| $ | 271 |
| $ | (13 | ) | $ | 1,283 |
|
Held-to-maturity securities: | | | | |
Bank and corporate debt | $ | 325 |
| $ | — |
| $ | — |
| $ | 325 |
|
1 Refer to Note 14 for additional information related to the estimated fair value.
As of December 31, 2010, available-for-sale and held-to-maturity securities consisted of the following (in millions):
|
| | | | | | | | | | | | |
| | Gross Unrealized | Estimated |
|
| Cost |
| Gains |
| Losses |
| Fair Value |
|
Available-for-sale securities:1 | | | | |
Equity securities | $ | 209 |
| $ | 267 |
| $ | (5 | ) | $ | 471 |
|
Other securities | 14 |
| — |
| — |
| 14 |
|
| $ | 223 |
| $ | 267 |
| $ | (5 | ) | $ | 485 |
|
Held-to-maturity securities: | | | | |
Bank and corporate debt | $ | 111 |
| $ | — |
| $ | — |
| $ | 111 |
|
1 Refer to Note 14 for additional information related to the estimated fair value.
At the end of the first quarter of 2010, the Company had several investments classified as available-for-sale securities in which our cost basis exceeded the fair value of the investment. Management assessed each of these investments on an individual basis to determine if the decline in fair value was other than temporary. Based on these assessments, management determined that the decline in fair value of each investment was other than temporary. As a result, the Company recognized other-than-temporary impairment charges of $26 million during the three months ended April 2, 2010. These impairment charges were recorded in other income (loss) — net in our condensed consolidated statements of income. Refer to Note 10 and Note 14.
The sale of available-for-sale securities did not result in significant gross gains, gross losses or proceeds during the three and nine months ended September 30, 2011, and October 1, 2010.
The Company's available-for-sale and held-to-maturity securities were included in the following captions in our condensed consolidated balance sheets (in millions):
|
| | | | | | | | | | | | | |
| September 30, 2011 | | December 31, 2010 |
| Available- for-Sale Securities |
| Held-to- Maturity Securities |
| | Available- for-Sale Securities |
| Held-to- Maturity Securities |
|
Cash and cash equivalents | $ | — |
| $ | 324 |
| | $ | — |
| $ | 110 |
|
Marketable securities | 5 |
| 1 |
| | 5 |
| 1 |
|
Other investments, principally bottling companies | 1,103 |
| — |
| | 471 |
| — |
|
Other assets | 175 |
| — |
| | 9 |
| — |
|
| $ | 1,283 |
| $ | 325 |
| | $ | 485 |
| $ | 111 |
|
The contractual maturities of these investments as of September 30, 2011, were as follows (in millions):
|
| | | | | | | | | | | | | |
| Available-for-Sale Securities | | Held-to-Maturity Securities |
| Cost |
| Fair Value |
| | Amortized Cost |
| Fair Value |
|
Within 1 year | $ | — |
| $ | — |
| | $ | 325 |
| $ | 325 |
|
After 1 year through 5 years | 2 |
| 2 |
| | — |
| — |
|
After 5 years through 10 years | 72 |
| 73 |
| | — |
| — |
|
After 10 years | 11 |
| 10 |
| | — |
| — |
|
Equity securities | 940 |
| 1,198 |
| | — |
| — |
|
| $ | 1,025 |
| $ | 1,283 |
| | $ | 325 |
| $ | 325 |
|
Cost Method Investments
Cost method investments are originally 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 30, 2011, and December 31, 2010. Our cost method investments had a carrying value of $161 million and $160 million as of September 30, 2011, and December 31, 2010, 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 products 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 30, 2011 |
| December 31, 2010 |
|
Raw materials and packaging | $ | 1,751 |
| $ | 1,425 |
|
Finished goods | 1,209 |
| 1,029 |
|
Other | 212 |
| 196 |
|
Total inventories | $ | 3,172 |
| $ | 2,650 |
|
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." Our Company, when deemed appropriate, 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 the 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 30, 2011 |
| December 31, 2010 |
|
Assets | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 189 |
| $ | 32 |
|
Commodity contracts | Prepaid expenses and other assets | 3 |
| 4 |
|
Interest rate swaps | Other assets | 242 |
| — |
|
Total assets | | $ | 434 |
| $ | 36 |
|
Liabilities | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 94 |
| $ | 141 |
|
Commodity contracts | Accounts payable and accrued expenses | 3 |
| 2 |
|
Interest rate swaps | Other liabilities | — |
| 97 |
|
Total liabilities | | $ | 97 |
| $ | 240 |
|
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. However, current disclosure requirements mandate that derivatives 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 30, 2011 |
| December 31, 2010 |
|
Assets | | | |
Foreign currency contracts | Prepaid expenses and other assets | $ | 110 |
| $ | 65 |
|
Commodity contracts | Prepaid expenses and other assets | 60 |
| 56 |
|
Other derivative instruments | Prepaid expenses and other assets | 4 |
| 17 |
|
Total assets | | $ | 174 |
| $ | 138 |
|
Liabilities | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 45 |
| $ | 144 |
|
Commodity contracts | Accounts payable and accrued expenses | 118 |
| — |
|
Other derivative instruments | Accounts payable and accrued expenses | 4 |
| — |
|
Total liabilities | | $ | 167 |
| $ | 144 |
|
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. However, current disclosure requirements mandate that derivatives be disclosed without reflecting the impact of master netting agreements and cash collateral. Refer to Note 14 for the net presentation of the Company's derivative instruments.
2 Refer to Note 14 for additional information related to the estimated fair value.
Credit Risk Associated with Derivatives
We have established strict counterparty credit guidelines and enter into transactions only with financial institutions of investment grade or better. We monitor counterparty exposures regularly and review any downgrade in credit rating immediately. If a downgrade in the credit rating of a counterparty were to occur, we have provisions requiring collateral in the form of U.S. government securities for substantially all of our transactions. To mitigate presettlement risk, minimum credit standards become more stringent as the duration of the derivative financial instrument increases. In addition, the Company's master netting agreements reduce credit risk by permitting the Company to net settle for transactions with the same counterparty. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.
Cash Flow Hedging Strategy
The Company uses cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates, commodity prices or interest rates. The changes in the fair values of derivatives designated as cash flow hedges are recorded in AOCI and are reclassified into the line item in our condensed consolidated statements of income in which the hedged items are recorded in the same period the hedged items affect earnings. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from AOCI into earnings. The Company did not discontinue any cash flow hedging relationships during the nine months ended September 30, 2011, or October 1, 2010. The maximum length of time for which the Company hedges its exposure to future cash flows is typically three years.
The Company maintains a foreign currency cash flow hedging program to reduce the risk that our eventual U.S. dollar net cash inflows from sales outside the United States and U.S. dollar net cash outflows from procurement activities will be adversely affected by changes in foreign currency exchange rates. We enter into forward contracts and purchase foreign currency options (principally euros and Japanese yen) and collars to hedge certain portions of forecasted cash flows denominated in foreign currencies. When the U.S. dollar strengthens against the foreign currencies, the decline in the present value of future foreign currency cash flows is partially offset by gains in the fair value of the derivative instruments. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash flows is partially offset by losses in the fair value of the derivative instruments. The total notional value of derivatives that were designated and qualified for the Company's foreign currency cash flow hedging program was $6,223 million and $3,968 million as of September 30, 2011, and December 31, 2010, 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. The 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 value of derivatives that were designated and qualified for the Company's commodity cash flow hedging program was $24 million and $28 million as of September 30, 2011, and December 31, 2010, 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 had no outstanding derivative instruments under this hedging program as of September 30, 2011, and December 31, 2010.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the three months ended September 30, 2011 (in millions):
|
| | | | | | | | | | | |
| Gain (Loss) Recognized in 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 | $ | 60 |
| Net operating revenues | $ | (80 | ) | $ | — |
| 2 |
Interest rate locks | (11 | ) | Interest expense | (3 | ) | (1 | ) | |
Commodity contracts | (2 | ) | Cost of goods sold | 1 |
| — |
| |
Total | $ | 47 |
| | $ | (82 | ) | $ | (1 | ) | |
1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
2 Includes a de minimis amount of ineffectiveness in the hedging relationship.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings during the nine months ended September 30, 2011 (in millions):
|
| | | | | | | | | | | |
| Gain (Loss) Recognized in OCI |
| Location of Gain (Loss) Recognized in Income1 | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| |
Foreign currency contracts | $ | (91 | ) | Net operating revenues | $ | (196 | ) | $ | — |
| 2 |
Interest rate locks | (11 | ) | Interest expense | (9 | ) | (1 | ) | |
Commodity contracts | (2 | ) | Cost of goods sold | — |
| — |
| |
Total | $ | (104 | ) | | $ | (205 | ) | $ | (1 | ) | |
1 The Company records gains and losses reclassified from AOCI into income for the effective portion and the ineffective portion, if any, to the same line items in our condensed consolidated statements of income.
2 Includes a de minimis amount of ineffectiveness in the hedging relationship.
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 October 1, 2010 (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 | $ | (419 | ) | Net operating revenues | $ | 8 |
| $ | — |
| |
Interest rate locks | — |
| Interest expense | (3 | ) | — |
| |
Commodity contracts | 2 |
| Cost of goods sold | — |
| — |
| |
Total | $ | (417 | ) | | $ | 5 |
| $ | — |
| |
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 October 1, 2010 (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 | $ | (271 | ) | Net operating revenues | $ | 36 |
| $ | (2 | ) | |
Interest rate locks | — |
| Interest expense | (9 | ) | — |
| |
Commodity contracts | — |
| Cost of goods sold | — |
| — |
| |
Total | $ | (271 | ) | | $ | 27 |
| $ | (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 30, 2011, the Company estimates that it will reclassify into earnings during the next 12 months approximately $174 million of losses from the pretax amount recorded in AOCI as the anticipated cash flows occur.
Fair Value Hedging Strategy
The Company uses interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in benchmark interest rates. The changes in fair values of derivatives designated as fair value hedges and the offsetting changes in fair values of the hedged items are recognized in earnings. As of September 30, 2011, such adjustments increased the carrying value of our long-term debt by $235 million. The changes in fair values of hedges that are determined to be ineffective are immediately recognized in earnings. The total notional value of derivatives that were designated and qualified for the Company's fair value hedging program was $5,700 million and $4,750 million as of September 30, 2011, and December 31, 2010, 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 30, 2011 (in millions):
|
| | | | | |
Fair Value Hedging Instruments | Location of Gain (Loss) Recognized in Income | | Gain (Loss) Recognized in Income |
|
Interest rate swaps | Interest expense | | $ | 271 |
|
Fixed-rate debt | Interest expense | | (279 | ) |
Net impact | | | $ | (8 | ) |
The following table summarizes the pretax impact that changes in the fair values of derivatives designated as fair value hedges had on earnings during the nine months ended September 30, 2011 (in millions):
|
| | | | | |
Fair Value Hedging Instruments | Location of Gain (Loss) Recognized in Income | | Gain (Loss) Recognized in Income |
|
Interest rate swaps | Interest expense | | $ | 339 |
|
Fixed-rate debt | Interest expense | | (337 | ) |
Net impact | | | $ | 2 |
|
The Company did not have any outstanding derivatives designated as fair value hedges during the three and nine months ended October 1, 2010. As a result, the tables above do not include comparative period financial data.
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 value of derivatives that were designated and qualified for the Company's net investments hedging program was $1,992 million as of September 30, 2011. The Company had no outstanding derivative instruments under this hedging program as of December 31, 2010.
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 months ended September 30, 2011, and October 1, 2010 (in millions):
|
| | | | | | |
| Gain (Loss) Recognized in OCI | |
| September 30, 2011 |
| October 1, 2010 |
|
Foreign currency contracts | $ | 13 |
| $ | (4 | ) |
Total | $ | 13 |
| $ | (4 | ) |
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 nine months ended September 30, 2011, and October 1, 2010 (in millions):
|
| | | | | | |
| Gain (Loss) Recognized in OCI | |
| September 30, 2011 |
| October 1, 2010 |
|
Foreign currency contracts | $ | 10 |
| $ | 9 |
|
Total | $ | 10 |
| $ | 9 |
|
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 30, 2011, and October 1, 2010. In addition, the Company did not have any ineffectiveness related to net investment hedges during the three and nine months ended September 30, 2011, and October 1, 2010, respectively.
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. Although these derivatives were not designated and/or did not qualify for hedge accounting, they are effective economic hedges. The Company primarily uses 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 these economic hedges are immediately recognized into earnings in the line item other income (loss) — net. The total notional value of derivatives related to our economic hedges of this type was $4,019 million and $2,312 million as of September 30, 2011, and December 31, 2010, respectively.
In 2010, the Company expanded certain commodity hedging programs as a result of our acquisition of CCE's North American business. The Company uses these 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 item cost of goods sold or selling, general and administrative expenses, as applicable. The total notional value of derivatives for economic hedges of this type was $2,647 million and $425 million as of September 30, 2011, and December 31, 2010, respectively.
The following table presents 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 30, 2011, and October 1, 2010,
respectively (in millions):
|
| | | | | | | |
| | Three Months Ended |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | September 30, 2011 |
| October 1, 2010 |
|
Foreign currency contracts | Net operating revenues | $ | 4 |
| $ | (20 | ) |
Foreign currency contracts | Other income (loss) — net | 11 |
| 25 |
|
Foreign currency contracts | Cost of goods sold | — |
| (2 | ) |
Commodity contracts | Cost of goods sold | (63 | ) | 7 |
|
Commodity contracts | Selling, general and administrative expenses | (23 | ) | — |
|
Other derivative instruments | Selling, general and administrative expenses | (12 | ) | 19 |
|
Total | | $ | (83 | ) | $ | 29 |
|
|
| | | | | | | |
| | Nine Months Ended |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | September 30, 2011 |
| October 1, 2010 |
|
Foreign currency contracts | Net operating revenues | $ | (1 | ) | $ | (16 | ) |
Foreign currency contracts | Other income (loss) — net | 212 |
| 10 |
|
Foreign currency contracts | Cost of goods sold | (13 | ) | (2 | ) |
Commodity contracts | Cost of goods sold | (21 | ) | 4 |
|
Commodity contracts | Selling, general and administrative expenses | (19 | ) | — |
|
Other derivative instruments | Selling, general and administrative expenses | (4 | ) | 5 |
|
Total | | $ | 154 |
| $ | 1 |
|
Note 6 — Debt and Borrowing Arrangements
During the three months ended September 30, 2011, the Company issued $2,979 million of long-term debt, of which $979 million was exchanged for $1,022 million of existing long-term debt plus a premium of $208 million. The existing long-term debt was assumed in connection with our acquisition of CCE's North American business in the fourth quarter of 2010. The remaining cash from the issuance was used to reduce the Company's outstanding commercial paper balance and exchange a certain amount of short-term debt. The Company recorded a charge of $5 million in the line item interest expense during the three months ended September 30, 2011, primarily due to transaction costs associated with the exchange of long-term debt.
The general terms of the notes issued during the three months ended September 30, 2011, are as follows:
| |
• | $1,655 million total principal amount of notes due September 1, 2016, at a fixed interest rate of 1.8 percent; and |
| |
• | $1,324 million total principal amount of notes due September 1, 2021, at a fixed interest rate of 3.3 percent. |
In addition, the Company repurchased long-term debt during the three months ended September 30, 2011, that we assumed in connection with our acquisition of CCE's North American business. The repurchased debt had a carrying value of $19 million and included $5 million in unamortized fair value adjustments recorded as part of our purchase accounting. The Company recorded a nominal net gain in the line item interest expense during the three months ended September 30, 2011, primarily due to the change in fair value from the date we assumed the CCE debt until the date it was repurchased.
The Company also repurchased long-term debt during the second quarter of 2011 that was assumed in connection with our acquisition of CCE's North American business. The repurchased debt had a carrying value of $42 million, which included $12 million in unamortized fair value adjustments recorded as part of our purchase accounting. The Company recorded a net gain of $1 million in the line item interest expense during the second quarter of 2011, primarily due to the change in fair value from the date we assumed the debt until the date it was repurchased.
During the first quarter of 2011, the Company repurchased all of our outstanding U.K. pound sterling notes due in 2016 and 2021. We assumed this debt in connection with our acquisition of CCE's North American business. The repurchased debt had a carrying value of $674 million on the settlement date, which included $106 million in unamortized fair value adjustments recorded as part of our purchase accounting. The Company recorded a net charge of $4 million in the line item interest expense during the first quarter of 2011, primarily due to the change in fair value from the date we assumed the debt until the date it was repurchased, in addition to premiums paid to repurchase the debt.
As of September 30, 2011, the carrying value of the Company's long-term debt included $767 million of fair value adjustments related to the debt assumed from CCE. These fair value adjustments will be amortized over a weighted-average period of approximately 16 years, which is equal to the weighted-average maturity of the assumed debt to which these fair value adjustments relate. The amortization of these fair value adjustments will be a reduction of interest expense in future periods, which will typically result in our interest expense being less than the actual interest paid to service the debt.
Note 7 — Commitments and Contingencies
Guarantees
As of September 30, 2011, we were contingently liable for guarantees of indebtedness owed by third parties of $652 million, of which $334 million related to variable interest entities ("VIEs"). These guarantees are primarily related to third-party customers, bottlers, vendors and container manufacturing operations that have arisen through the normal course of business. These guarantees have various terms, and none of these guarantees was individually significant. The amount represents the maximum potential future payments that we could be required to make under the guarantees; however, we do not consider it probable that we will be required to satisfy these guarantees.
We believe our exposure to concentrations of credit risk is limited due to the diverse geographic areas covered by our operations.
Legal Contingencies
The Company is involved in various legal proceedings. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. Management believes that the total liabilities to the Company that may arise as a result of currently pending legal proceedings will not have a material adverse effect on the Company taken as a whole.
During the period from 1970 to 1981, our Company owned Aqua-Chem, Inc., now known as Cleaver-Brooks, Inc. ("Aqua-Chem"). During that time, the Company purchased over $400 million of insurance coverage, which also insures Aqua-Chem for some of its prior and future costs for certain product liability and other claims. A division of Aqua-Chem manufactured certain boilers that contained gaskets that Aqua-Chem purchased from outside suppliers. Several years after our Company sold this entity, Aqua-Chem received its first lawsuit relating to asbestos, a component of some of the gaskets. Aqua-Chem was first named as a defendant in asbestos lawsuits in or around 1985 and currently has approximately 40,000 active claims pending against it. In September 2002, Aqua-Chem notified our Company that it believed we were obligated for certain costs and expenses associated with its asbestos litigations. Aqua-Chem demanded that our Company reimburse it for approximately $10 million for out-of-pocket litigation-related expenses. Aqua-Chem also demanded that the Company acknowledge a continuing obligation to Aqua-Chem for any future liabilities and expenses that are excluded from coverage under the applicable insurance or for which there is no insurance. Our Company disputes Aqua-Chem's claims, and we believe we have no obligation to Aqua-Chem for any of its past, present or future liabilities, costs or expenses. Furthermore, we believe we have substantial legal and factual defenses to Aqua-Chem's claims. The parties entered into litigation in Georgia to resolve this dispute, which was stayed by agreement of the parties pending the outcome of litigation filed in Wisconsin by certain insurers of Aqua-Chem. In that case, five plaintiff insurance companies filed a declaratory judgment action against Aqua-Chem, the Company and 16 defendant insurance companies seeking a determination of the parties' rights and liabilities under policies issued by the insurers and reimbursement for amounts paid by plaintiffs in excess of their obligations. During the course of the Wisconsin insurance coverage litigation, Aqua-Chem and the Company reached settlements with several of the insurers, including plaintiffs, who have or will pay funds into an escrow account for payment of costs arising from the asbestos claims against Aqua-Chem. On July 24, 2007, the Wisconsin trial court entered a final declaratory judgment regarding the rights and obligations of the parties under the insurance policies issued by the remaining defendant insurers, which judgment was not appealed. The judgment directs, among other things, that each insurer whose policy is triggered is jointly and severally liable for 100 percent of Aqua-Chem's losses up to policy limits. The court's judgment concluded the Wisconsin insurance coverage litigation. The Georgia litigation remains subject to the stay agreement. The Company and Aqua-Chem continued to negotiate with various insurers that were defendants in the Wisconsin insurance coverage litigation over those insurers' obligations to defend and indemnify Aqua-Chem for the asbestos-related claims. The Company anticipated that a final settlement with three of those 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. Whether or not Aqua-Chem and the Company prevail in the coverage-in-place settlement litigation, these three insurance companies will remain subject to the court's judgment in the Wisconsin insurance coverage litigation.
The Company is unable to estimate at this time the amount or range of reasonably possible loss it may ultimately incur as a result of asbestos-related claims against Aqua-Chem. The Company believes that assuming that (a) the defense and indemnity costs for the asbestos-related claims against Aqua-Chem in the future are in the same range as during the past five years, and (b) the various insurers that cover the asbestos-related claims against Aqua-Chem remain solvent, regardless of the outcome of the coverage-in-place settlement litigation, there will likely be little defense or indemnity costs that are not covered by insurance over the next five to seven years and, therefore, it is unlikely that Aqua-Chem would seek indemnification from the Company within that period of time. In the event Aqua-Chem and the Company prevail in the coverage-in-place settlement litigation, and based on the same assumptions, the Company believes insurance coverage for substantially all defense and indemnity costs would be available for the next 10 to 12 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 through actuarial procedures of the insurance industry and by using industry assumptions, adjusted for our specific expectations based on our claim history. Our self-insurance reserves totaled $537 million and $502 million as of September 30, 2011, and December 31, 2010, respectively.
Note 8 — Comprehensive Income
The following table provides a summary of total comprehensive income, including our proportionate share of equity method investees' other comprehensive income (loss), for the applicable periods (in millions):
|
| | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2011 |
| October 1, 2010 |
| | September 30, 2011 |
| October 1, 2010 |
|
Consolidated net income | $ | 2,243 |
| $ | 2,067 |
| | $ | 6,960 |
| $ | 6,075 |
|
Other comprehensive income: | | | | | |
Net foreign currency translation gain (loss) | (1,486 | ) | 1,114 |
| | 188 |
| (607 | ) |
Net gain (loss) on derivatives1 | 80 |
| (256 | ) | | 63 |
| (188 | ) |
Net change in unrealized gain on available-for-sale securities2 | (71 | ) | 62 |
| | 5 |
| 133 |
|
Net change in pension liability | 3 |
| — |
| | (9 | ) | 32 |
|
Total comprehensive income | $ | 769 |
| $ | 2,987 |
| | $ | 7,207 |
| $ | 5,445 |
|
1 Refer to Note 5 for information related to the net gain or loss on derivative instruments classified as cash flow hedges.
2 Includes reclassification adjustments related to other-than-temporary impairments of certain available-for-sale securities. Refer to Note 3 and Note 14 for additional information related to these impairments.
The following table summarizes the allocation of total comprehensive income between shareowners of The Coca-Cola Company and the noncontrolling interests (in millions):
|
| | | | | | | | | |
| Nine Months Ended September 30, 2011 |
| Shareowners of The Coca-Cola Company |
| Noncontrolling Interests |
| Total |
|
Consolidated net income | $ | 6,918 |
| $ | 42 |
| $ | 6,960 |
|
Other comprehensive income: | | | |
Net foreign currency translation gain (loss) | 217 |
| (29 | ) | 188 |
|
Net gain (loss) on derivatives1 | 63 |
| — |
| 63 |
|
Net change in unrealized gain on available-for-sale securities | 5 |
| — |
| 5 |
|
Net change in pension liability | (9 | ) | — |
| (9 | ) |
Total comprehensive income | $ | 7,194 |
| $ | 13 |
| $ | 7,207 |
|
1 Refer to Note 5 for information related to the net gain or loss on derivative instruments classified as cash flow hedges.
Note 9 — Changes in Equity
The following table provides a reconciliation of the beginning and the ending carrying amounts of total equity, equity attributable to shareowners of The Coca-Cola Company and equity attributable to the 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, 2010 | $ | 31,317 |
| $ | 49,278 |
| $ | (1,450 | ) | $ | 880 |
| $ | 10,057 |
| $ | (27,762 | ) | $ | 314 |
|
Comprehensive income (loss)1 | 7,207 |
| 6,918 |
| 276 |
| — |
| — |
| — |
| 13 |
|
Dividends paid / payable to shareowners of The Coca-Cola Company | (3,231 | ) | (3,231 | ) | — |
| — |
| — |
| — |
| — |
|
Dividends paid to noncontrolling interests | (37 | ) | — |
| — |
| — |
| — |
| — |
| (37 | ) |
Purchases of treasury stock | (3,457 | ) | — |
| — |
| — |
| — |
| (3,457 | ) | — |
|
Impact of employee stock option and restricted stock plans | 1,700 |
| — |
| — |
| — |
| 999 |
| 701 |
| — |
|
September 30, 2011 | $ | 33,499 |
| $ | 52,965 |
| $ | (1,174 | ) | $ | 880 |
| $ | 11,056 |
| $ | (30,518 | ) | $ | 290 |
|
1 The allocation of the individual components of comprehensive income attributable to shareowners of The Coca-Cola Company and the noncontrolling interests is disclosed in Note 8.
Note 10 — Significant Operating and Nonoperating Items
Other Operating Items
On March 11, 2011, a major earthquake struck off the coast of Japan, resulting in a tsunami that devastated the northern and eastern regions of the country. As a result of these events, the Company made a donation to a charitable organization to establish the Coca-Cola Japan Reconstruction Fund, which will help rebuild schools and community facilities across the impacted areas of the country.
The Company recorded total charges of $84 million related to these events during the nine months ended September 30, 2011. These charges were recorded in various line items in our condensed consolidated statements of income, including charges of $22 million in deductions from revenue, $12 million in cost of goods sold and $50 million in other operating charges. These charges impacted the Pacific and North America operating segments. Refer to Note 15.
The $22 million of charges recorded in deductions from revenue were primarily related to funds we provided our local bottling partners to enable them to continue producing and distributing our beverage products in the affected regions. This support not only helped restore our business operations in the impacted areas, but it also assisted our bottling partners in meeting the evolving customer and consumer needs as the recovery and rebuilding efforts advanced. The $12 million of charges in cost of goods sold were primarily related to Company-owned inventory that was destroyed or lost. The $50 million of other operating charges were primarily related to the donation discussed above and a $1 million impairment charge related to certain Company-owned fixed assets. These fixed assets primarily consisted of Company-owned vending equipment and coolers that were damaged or lost as a result of these events. Refer to Note 14 for the fair value disclosures related to the inventory and fixed asset charges described above.
During the three months ended September 30, 2011, the Company refined our initial estimates that were recorded during the first and second quarters of 2011 and recorded an additional net charge of $1 million related to the events in Japan. Refer to Note 15 for the impact this net charge had on our operating segments.
The Company is assessing its insurance coverage, and we intend to file a claim for certain of our losses in Japan. As of September 30, 2011, we have not recorded any insurance recovery related to these events, as we are not currently able to deem any amount of potential insurance recovery as probable.
Other Operating Charges
During the three months ended September 30, 2011, the Company incurred other operating charges of $96 million, which primarily consisted of $89 million associated with the Company's productivity, integration and restructuring initiatives and $9 million of costs associated with the merger of Embotelladoras Arca, S.A.B. de C.V. ("Arca") and Grupo Continental S.A.B. ("Contal"). The charges were partially offset by a $2 million reversal associated with the refinement of previously recorded accruals related to the events in Japan described above. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to the discussion of the merger of Arca and Contal below for additional information on the transaction. Refer to Note 15 for the impact these charges had on our operating segments.
During the nine months ended September 30, 2011, the Company incurred other operating charges of $457 million, which primarily consisted of $370 million associated with the Company's productivity, integration and restructuring initiatives; $35 million of costs associated with the merger of Arca and Contal; and $50 million related to the events in Japan described above. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to the discussion of the merger of Arca and Contal below for additional information on the transaction. Refer to Note 15 for the impact these charges had on our operating segments.
During the three months ended October 1, 2010, the Company incurred other operating charges of $100 million, which consisted of $64 million attributable to the Company's ongoing productivity, integration and restructuring initiatives and $36 million related to transaction costs incurred in connection with our acquisition of CCE's North American business and the sale of our Norwegian and Swedish bottling operations to New CCE. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to Note 2 for additional information related to the Company's acquisition of CCE's North American business and the disposal of our Norwegian and Swedish bottling operations. Refer to Note 15 for the impact these charges had on our operating segments.
During the nine months ended October 1, 2010, the Company incurred other operating charges of $274 million, which consisted of $227 million attributable to the Company's ongoing productivity, integration and restructuring initiatives and $47 million related to transaction costs incurred in connection with our acquisition of CCE's North American business and the sale of our Norwegian and Swedish bottling operations to New CCE. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to Note 2 for additional information related to the Company's acquisition of CCE's North American business and the disposal of our Norwegian and Swedish bottling operations. 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 30, 2011, the Company recorded charges of $36 million and $40 million, respectively, in equity income (loss) — net. These charges primarily represent the Company's proportionate share of asset impairments and restructuring charges recorded by equity method investees and impacted the Bottling Investments operating segment.
During the three months ended October 1, 2010, the Company recorded a net charge of $10 million in equity income (loss) — net. This net charge primarily represents the Company's proportionate share of transaction costs incurred by CCE in connection with our acquisition of CCE's North American business and the sale of our Norwegian and Swedish bottling operations to New CCE. Refer to Note 2 for additional information related to these transactions. Our proportionate share of these charges was partially offset by our proportionate share of a foreign currency remeasurement gain recorded by an equity method investee. The components of the net charge were individually insignificant and impacted the Bottling Investments operating segment.
During the nine months ended October 1, 2010, the Company recorded a net charge of $55 million in equity income (loss) — net. This net charge primarily represents the Company's proportionate share of unusual tax charges, asset impairments, restructuring charges and transaction costs recorded by equity method investees. The unusual tax charges primarily relate to an additional tax liability recorded by Coca-Cola Hellenic Bottling Company S.A. as a result of the Extraordinary Social Contribution Tax levied by the Greek government. The transaction costs represent our proportionate share of certain costs incurred by CCE in connection with our acquisition of CCE's North American business and the sale of our Norwegian and Swedish bottling operations to New CCE. Refer to Note 2 for additional information related to the Company's acquisition of CCE's North American business and the disposal of our Norwegian and Swedish bottling operations. These charges were partially offset by our proportionate share of a foreign currency remeasurement gain recorded by an equity method investee. The components of the net charge were individually insignificant and impacted the Bottling Investments operating segment.
Other Income (Loss) — Net
During the three months ended September 30, 2011, the Company recorded a charge of $5 million in other income (loss) — net related to the finalization of working capital adjustments associated with the sale of our Norwegian and Swedish bottling operations to New CCE in the fourth quarter of 2010. This charge reduced the amount of our previously reported gain on the sale of these bottling operations. The Company also recorded a charge of $3 million in other income (loss) — net during the period related to the impairment of an investment accounted for under the equity method of accounting. These charges impacted the Corporate operating segment.
During the nine months ended September 30, 2011, the Company recognized a net gain of $417 million, primarily as a result of the merger of Arca and Contal, two bottling partners headquartered in Mexico, into a combined entity known as Arca Continental, S.A.B. de C.V. ("Arca Contal"). Prior to this transaction the Company held an investment in Contal that we accounted for under the equity method of accounting. The merger of the two companies was a non-cash transaction that resulted in Contal shareholders exchanging their existing Contal shares for new shares in Arca Contal at a specified exchange rate. The gain was recorded in other income (loss) — net and impacted our Corporate operating segment. Refer to Note 14 for additional information on the measurement of the gain. As a result, the Company now holds an investment in Arca Contal that we account for as an available-for-sale security.
In addition, the Company recorded a charge of $41 million in other income (loss) — net during the nine months ended September 30, 2011, due to the impairment of an investment in an entity accounted for under the equity method of accounting. This charge impacted our Corporate operating segment. Refer to Note 14 for additional information. The Company also recognized a gain of $102 million in other income (loss) — net during the nine months ended September 30, 2011, related to the sale of our investment in Embonor. The gain on this transaction impacted our Corporate operating segment. Refer to Note 2 for additional information.
During the three months ended October 1, 2010, the Company recorded a gain of $23 million in other income (loss) — net related to the sale of 50 percent of our investment in Leão Junior, which was a wholly owned subsidiary of the Company prior to this transaction. The gain on the transaction consisted of two parts: (1) the difference between the consideration received and 50 percent of the carrying value of our investment, and (2) the fair value adjustment for our remaining 50 percent ownership. We have accounted for our remaining investment in Leão Junior under the equity method of accounting since the close of this transaction. Refer to Note 14 for related fair value disclosures. This gain impacted the Corporate operating segment.
In addition to the gain on the sale of a portion of our investment in Leão Junior, the Company recorded a charge of $103 million in other income (loss) — net related to the remeasurement of our Venezuelan subsidiary's net assets during the nine months ended October 1, 2010. Subsequent to December 31, 2009, the Venezuelan government announced a currency devaluation, and Venezuela was determined to be a hyperinflationary economy. As a result of Venezuela being a hyperinflationary economy, our local subsidiary was required to use the U.S. dollar as its functional currency, and the remeasurement gains and losses were recognized in our condensed consolidated statements of income. This charge impacted the Corporate operating segment.
Also during the nine months ended October 1, 2010, the Company recorded charges of $26 million in other income (loss) — net related to other-than-temporary impairments. In the first quarter of 2010, the Company had several investments classified as available-for-sale securities in which our cost basis exceeded the fair value of the investment. Management assessed each of these investments on an individual basis to determine if the decline in fair value was other than temporary. Based on these assessments, management determined that the decline in fair value of each investment was other than temporary. Refer to Note 14 for the fair value disclosures related to these other-than-temporary impairment charges. These impairment charges impacted the Bottling Investments and Corporate operating segments.
Note 11 — Productivity, Integration and Restructuring Initiatives
Productivity Initiatives
During 2008, the Company announced a transformation effort centered on productivity initiatives that will provide additional flexibility to invest for growth. The initiatives impact a number of areas and include aggressively managing operating expenses supported by lean techniques; redesigning key processes to drive standardization and effectiveness; and better leveraging our size and scale.
The Company has incurred total pretax expenses of $428 million related to these productivity initiatives since they commenced in the first quarter of 2008. These expenses were recorded in the line item other operating charges. Refer to Note 15 for the impact these charges had on our operating segments.
Other direct costs included both internal and external costs associated with the development, communication, administration and implementation of these initiatives and accelerated depreciation on certain fixed assets. The Company is expecting to generate at least $500 million in annualized savings from productivity initiatives by the end of 2011 to provide additional flexibility to invest for growth. In realizing these savings, the Company currently expects the total cost of these initiatives to be approximately $500 million and anticipates recognizing the remainder of the costs by the end of 2011.
The following table summarizes the balance of accrued expenses related to productivity initiatives and the changes in the accrued amounts as of and for the three months ended September 30, 2011 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance July 1, 2011 |
| Costs Incurred Three Months Ended September 30, 2011 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 30, 2011 |
|
Severance pay and benefits | $ | 28 |
| $ | 4 |
| $ | (8 | ) | $ | 1 |
| $ | 25 |
|
Outside services1 | 4 |
| 1 |
| (1 | ) | — |
| 4 |
|
Other direct costs | 3 |
| 17 |
| (13 | ) | (1 | ) | 6 |
|
Total | $ | 35 |
| $ | 22 |
| $ | (22 | ) | $ | — |
| $ | 35 |
|
1 Primarily relate to expenses in connection with legal, outplacement and consulting activities.
The following table summarizes the balance of accrued expenses related to productivity initiatives and the changes in the accrued amounts as of and for the nine months ended September 30, 2011 (in millions):
|
| | | | | | | | | | | | | | | | |
| Accrued Balance December 31, 2010 |
| Costs Incurred Nine Months Ended September 30, 2011 |
| Payments |
| Noncash and Exchange |
| | Accrued Balance September 30, 2011 |
|
Severance pay and benefits | $ | 59 |
| $ | 16 |
| $ | (32 | ) | $ | (18 | ) | 1 | $ | 25 |
|
Outside services2 | 6 |
| 12 |
| (15 | ) | 1 |
| | 4 |
|
Other direct costs | 9 |
| 48 |
| (42 | ) | (9 | ) | | 6 |
|
Total | $ | 74 |
| $ | 76 |
| $ | (89 | ) | $ | (26 | ) | | $ | 35 |
|
1 Primarily relates to enhanced postretirement benefits associated with the Company's productivity initiatives. These special termination benefits are included in the Company's pension and other postretirement accruals. Refer to Note 12.
2 Primarily relate to expenses in connection with legal, outplacement and consulting activities.
Integration Initiatives
Integration of CCE's North American Business
On October 2, 2010, we acquired CCE's North American business. In 2010, the Company began an integration initiative as a result of this acquisition to develop and design our future operating framework. The Company has incurred total pretax expenses of $350 million related to this initiative since the plan commenced. These expenses were recorded in the line item other operating charges. Other direct costs included both internal and external costs associated with the development and design of our future operating framework in North America. Refer to Note 15 for the impact these charges had on our operating segments.
We believe this acquisition will result in an evolved franchise system that will enable us to better serve the unique needs of the North American market. The creation of a unified operating system will strategically position us to better market and distribute our nonalcoholic beverage brands in North America. We are reconfiguring our manufacturing, supply chain and logistics operations to achieve cost reductions over time. Once fully integrated, we expect to generate operational synergies of at least $350 million per year. We anticipate that these operational synergies will be phased in over the four years following the acquisition, and that we will begin to fully realize the annual benefit from these synergies in the fourth year.
Upon completion of the CCE transaction, we combined the management of the acquired North American business with the management of our existing foodservice business; Minute Maid and Odwalla juice businesses; North America supply chain operations; and Company-owned bottling operations in Philadelphia, Pennsylvania, into a unified bottling and customer service organization called Coca-Cola Refreshments, or CCR. In addition, we reshaped our remaining CCNA operations into an organization that primarily provides franchise leadership and consumer marketing and innovation for the North American market. As a result of the transaction and related reorganization, our North American businesses operate as aligned and agile organizations with distinct capabilities, responsibilities and strengths. The Company currently expects the total cost of these integration initiatives to be approximately $425 million and anticipates recognizing these charges over the three years following the acquisition.
The following table summarizes the balance of accrued expenses related to these integration initiatives and the changes in the accrued amounts as of and for the three months ended September 30, 2011 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance July 1, 2011 |
| Costs Incurred Three Months Ended September 30, 2011 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 30, 2011 |
|
Severance pay and benefits | $ | 33 |
| $ | (5 | ) | $ | (9 | ) | $ | (1 | ) | $ | 18 |
|
Outside services1 | 31 |
| 14 |
| (17 | ) | — |
| 28 |
|
Other direct costs | 37 |
| 40 |
| (40 | ) | (4 | ) | 33 |
|
Total | $ | 101 |
| $ | 49 |
| $ | (66 | ) | $ | (5 | ) | $ | 79 |
|
1 Primarily relate to expenses in connection with legal, outplacement and consulting activities.
The following table summarizes the balance of accrued expenses related to these integration initiatives and the changes in the accrued amounts as of and for the nine months ended September 30, 2011 (in millions):
|
| | | | | | | | | | | | | | | |
| Accrued Balance December 31, 2010 |
| Costs Incurred Nine Months Ended September 30, 2011 |
| Payments |
| Noncash and Exchange |
| Accrued Balance September 30, 2011 |
|
Severance pay and benefits | $ | 48 |
| $ | 6 |
| $ | (36 | ) | $ | — |
| $ | 18 |
|
Outside services1 | 9 |
| 55 |
| (36 | ) | — |
| 28 |
|
Other direct costs | 12 |
| 154 |
| (128 | ) | (5 | ) | 33 |
|
Total | $ | 69 |
| $ | 215 |
| $ | (200 | ) | $ | (5 | ) | $ | 79 |
|
1 Primarily relate to expenses in connection with legal, outplacement and consulting activities.
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 $13 million and $49 million related to this initiative during the three and nine months ended September 30, 2011, respectively. The Company has incurred total pretax expenses of $274 million related to this initiative since it commenced, which were recorded in the line item other operating charges and impacted the Bottling Investments operating segment. The expenses recorded in connection with these integration activities have been primarily due to involuntary terminations. The Company had $37 million and $34 million accrued related to these integration costs as of September 30, 2011, and December 31, 2010, 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 30, 2011, the Company has not finalized any additional plans.
Other Restructuring Activities
The Company incurred expenses of $5 million and $30 million related to other restructuring initiatives during the three and nine months ended September 30, 2011, respectively. These other restructuring initiatives were outside the scope of the productivity and integration initiatives discussed above. These other restructuring charges were related to individually insignificant activities throughout many of our business units. None of these activities is expected to be individually significant. These charges were recorded in the line item other operating charges. Refer to Note 15 for the impact these charges had on our operating segments.
Note 12 — Pension and Other Postretirement Benefit Plans
Net periodic benefit cost for our pension and other postretirement benefit plans consisted of the following (in millions):
|
| | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three Months Ended |
| September 30, 2011 |
| October 1, 2010 |
| | September 30, 2011 |
| October 1, 2010 |
|
Service cost | $ | 62 |
| $ | 28 |
| | $ | 8 |
| $ | 5 |
|
Interest cost | 97 |
| 54 |
| | 11 |
| 7 |
|
Expected return on plan assets | (125 | ) | (62 | ) | | (2 | ) | (2 | ) |
Amortization of prior service cost (credit) | 2 |
| 1 |
| | (15 | ) | (16 | ) |
Amortization of net actuarial loss | 22 |
| 14 |
| | — |
| 1 |
|
Net periodic benefit cost (credit) | 58 |
| 35 |
| | 2 |
| (5 | ) |
Curtailment charge (credit) | — |
| — |
| | — |
| — |
|
Special termination benefits | — |
| — |
| | — |
| — |
|
Total cost (credit) recognized in statements of income | $ | 58 |
| $ | 35 |
| | $ | 2 |
| $ | (5 | ) |
|
| | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Nine Months Ended |
| September 30, 2011 |
| October 1, 2010 |
| | September 30, 2011 |
| October 1, 2010 |
|
Service cost | $ | 186 |
| $ | 85 |
| | $ | 24 |
| $ | 16 |
|
Interest cost | 292 |
| 162 |
| | 34 |
| 20 |
|
Expected return on plan assets | (371 | ) | (185 | ) | | (6 | ) | (6 | ) |
Amortization of prior service cost (credit) | 5 |
| 3 |
| | (46 | ) | (46 | ) |
Amortization of net actuarial loss | 64 |
| 43 |
| | 1 |
| 2 |
|
Net periodic benefit cost (credit) | 176 |
| 108 |
| | 7 |
| (14 | ) |
Curtailment charge (credit) | — |
| (1 | ) | | — |
| — |
|
Special termination benefits1 | 4 |
| 1 |
| | 2 |
| 1 |
|
Total cost (credit) recognized in statements of income | $ | 180 |
| $ | 108 |
| | $ | 9 |
| $ | (13 | ) |
1 Primarily relate to the Company's productivity, integration and restructuring initiatives. Refer to Note 11 for additional information related to these initiatives.
We contributed $874 million to our pension plans during the nine months ended September 30, 2011, which primarily consisted of $360 million to our primary U.S. pension plans and $369 million to certain European pension plans whose assets are managed through one of our captive insurance companies. We anticipate making additional contributions of approximately $13 million to our pension plans during the remainder of 2011. The Company contributed $57 million to our pension plans during the nine months ended October 1, 2010.
On March 23, 2010, the Patient Protection and Affordable Care Act (HR 3590) was signed into law in the United States. As a result of this legislation, entities are no longer eligible to receive a tax deduction for the portion of prescription drug expenses reimbursed under the Medicare Part D subsidy. This change resulted in a reduction of our deferred tax assets and a corresponding charge to income tax expense of $14 million during the first quarter of 2010. Refer to Note 13.
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 range from 2016 to 2021. 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 2011 is 24.0 percent. However, in arriving at this estimate we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.
The Company recorded income tax expense of $680 million (23.3 percent effective tax rate) and $2,268 million (24.6 percent effective tax rate) during the three and nine months ended September 30, 2011, respectively. The Company recorded income tax expense of $633 million (23.4 percent effective tax rate) and $1,927 million (24.1 percent effective tax rate) during the three and nine months ended October 1, 2010, 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 30, 2011 |
| | October 1, 2010 |
| | September 30, 2011 |
| | October 1, 2010 |
| |
Asset impairments | $ | — |
| 1 | $ | — |
| | $ | (15 | ) | 1 | $ | — |
| 11 |
Productivity, integration, restructuring and transaction costs | (25 | ) | 2 | (19 | ) | 8 | (111 | ) | 2 | (59 | ) | 8 |
Transaction gains and losses | (5 | ) | 3 | 10 |
| 9 | 203 |
| 6 | 10 |
| 9 |
Certain tax matters | (4 | ) | 4 | 13 |
| 4 | 15 |
| 4 | 42 |
| 12 |
Other — net | (6 | ) | 5 | (1 | ) | 10 | (44 | ) | 7 | (7 | ) | 13 |
1 Related to charges of $3 million and $41 million during the three and nine months ended September 30, 2011, respectively, due to the impairment of an investment in an entity accounted for under the equity method of accounting. Refer to Note 10. The Company does not expect to receive a tax benefit on the portion of the impairment recorded during the three months ended September 30, 2011.
2 Related to charges of $89 million and $372 million during the three and nine months ended September 30, 2011, respectively, primarily due to our ongoing productivity, integration and restructuring initiatives. Refer to Note 10 and Note 11.
3 Related to a charge of $14 million due to costs associated with the merger of Arca and Contal and the finalization of working capital adjustments related to the sale of all our ownership interests in our Norwegian and Swedish bottling operations to New CCE. Refer to Note 10.
4 Related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. The components of the net change in uncertain tax positions were individually insignificant.
5 Related to a net charge of $42 million, primarily due to the Company's proportionate share of asset impairments and restructuring charges recorded by certain of our equity method investees; a net charge in connection with the repurchase and/or exchange of certain long-term debt; and a net charge associated with the earthquake and tsunami that devastated northern and eastern Japan. Refer to Note 10.
6 Related to a net gain of $479 million, primarily due to the gain on the merger of Arca and Contal and the gain on the sale of our investment in Embonor, partially offset by costs associated with the merger of Arca and Contal and the finalization of working capital adjustments related to the sale of all our ownership interests in our Norwegian and Swedish bottling operations to New CCE. Refer to Note 10.
7 Related to a net charge of $151 million, primarily due to estimated charges related to the earthquake and tsunami that devastated northern and eastern Japan; our proportionate share of asset impairments and restructuring charges recorded by certain of our equity method investees; the amortization of favorable supply contracts acquired in connection with our acquisition of CCE's North American business; and a net charge in connection with the repurchase and/or exchange of certain long-term debt. Refer to Note 10.
8 Related to charges of $100 million and $274 million during the three and nine months ended October 1, 2010, respectively, due to our ongoing productivity, integration and restructuring initiatives as well as transaction costs. Refer to Note 10 and Note 11.
9 Related to a gain of $23 million on the sale of 50 percent of our investment in Leão Junior. Refer to Note 10.
10 Related to a net charge of $10 million, primarily attributable to the Company's proportionate share of transaction costs recorded by CCE, which was partially offset by our proportionate share of a foreign currency remeasurement gain recorded by an equity method investee. Refer to Note 10.
11 Income before income taxes included charges of $26 million due to other-than-temporary impairments of available-for-sale securities. There was a zero percent effective tax rate on these items. Refer to Note 10.
12 Related to a tax charge of $14 million due to new legislation that changed the tax treatment of Medicare Part D subsidies. In addition, the Company recorded a net tax charge of $28 million related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties. The components of the net change in uncertain tax positions were individually insignificant. Refer to Note 12 for additional information on the change in tax treatment of Medicare Part D subsidies.
13 Related to a net charge of $55 million, primarily due to our proportionate share of unusual tax charges, asset impairments, restructuring charges and transaction costs recorded by equity method investees. In addition, income before income taxes included charges of $103 million due to the remeasurement of our Venezuelan subsidiary's net assets, which had a zero percent effective tax rate. Refer to Note 10.
It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a significant impact on our condensed consolidated statements of income or condensed consolidated balance sheets. The change may be the result of settlements of ongoing audits, statutes of limitations expiring or final settlements in matters that are the subject of litigation. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.
Note 14 — Fair Value Measurements
Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| |
• | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
| |
• | Level 2 — Observable inputs other than quoted prices included in Level 1. We value assets and liabilities included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data. |
| |
• | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
Recurring Fair Value Measurements
In accordance with accounting principles generally accepted in the United States, certain assets and liabilities are required to be recorded at fair value on a recurring basis. For our Company, the only assets and liabilities that are adjusted to fair value on a recurring basis are investments in equity and debt securities classified as trading or available-for-sale and derivative financial instruments.
Investments in Trading and Available-for-Sale Securities
The fair values of our investments in trading and available-for-sale securities were primarily determined using quoted market prices from daily exchange traded markets. The fair values of these instruments were based on the closing price as of the balance sheet date and were classified as Level 1.
Derivative Financial Instruments
The fair values of our futures contracts were primarily determined using quoted contract prices on futures exchange markets. The fair values of these instruments were based on the closing contract price as of the balance sheet date and were classified as Level 1.
The fair values of our forward contracts and foreign currency options were determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and, therefore, have been classified as Level 2. Inputs used in these standard valuation models for both forward contracts and foreign currency options include the applicable exchange rate, forward rates and discount rates. The standard valuation model for foreign currency options also uses implied volatility as an additional input. The discount rates are based on the historical U.S. Deposit or U.S. Treasury rates, and the implied volatility specific to individual foreign currency options is based on quoted rates from financial institutions.
Included in the fair value of derivative instruments is an adjustment for nonperformance risk. The adjustment is based on the current one-year credit default swap ("CDS") rate applied to each contract, by counterparty. We use our counterparty's CDS rate when we are in an asset position and our own CDS rate when we are in a liability position. The adjustment for nonperformance risk did not have a significant impact on the estimated fair value of our derivative instruments. The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 (in millions):
|
| | | | | | | | | | | | | | | | | |
| Level 1 |
| Level 2 |
| Level 3 |
| | Netting Adjustment1 |
| Fair Value Measurements |
|
Assets | | | | | | |
Trading securities | $ | 173 |
| $ | 21 |
| $ | 4 |
| | $ | — |
| $ | 198 |
|
Available-for-sale securities | 1,190 |
| 21 |
| 72 |
| 2 |
| — |
| 1,283 |
|
Derivatives3 | 33 |
| 574 |
| 1 |
| | (152 | ) | 456 |
|
Total assets | $ | 1,396 |
| $ | 616 |
| $ | 77 |
| | $ | (152 | ) | $ | 1,937 |
|
Liabilities | | | | | | |
Derivatives3 | $ | 66 |
| $ | 198 |
| $ | — |
| | $ | (235 | ) | $ | 29 |
|
Total liabilities | $ | 66 |
| $ | 198 |
| $ | — |
| | $ | (235 | ) | $ | 29 |
|
1 Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and also cash collateral held or placed with the same counterparties. Refer to Note 5.
2 Primarily related to long-term debt securities that mature in 2018.
3 Refer to Note 5 for additional information related to the composition of our derivative portfolio.
The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 (in millions):
|
| | | | | | | | | | | | | | | | |
| Level 1 |
| Level 2 |
| Level 3 |
| | Netting Adjustment1 |
| Fair Value Measurements |
|
Assets | | | | | | |
Trading securities | $ | 183 |
| $ | 23 |
| $ | 3 |
| | $ | — |
| $ | 209 |
|
Available-for-sale securities | 480 |
| 5 |
| — |
| | — |
| 485 |
|
Derivatives2 | 19 |
| 151 |
| 4 |
| | (143 | ) | 31 |
|
Total assets | $ | 682 |
| $ | 179 |
| $ | 7 |
| | $ | (143 | ) | $ | 725 |
|
Liabilities | | | | | | |
Derivatives2 | $ | 2 |
| $ | 382 |
| $ | — |
| | $ | (142 | ) | $ | 242 |
|
Total liabilities | $ | 2 |
| $ | 382 |
| $ | — |
| | $ | (142 | ) | $ | 242 |
|
1 Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and also cash collateral held or placed with the same counterparties. Refer to Note 5.
2 Refer to Note 5 for additional information related to the composition of our derivative portfolio.
Gross realized and unrealized gains and losses on Level 3 assets and liabilities were not significant for the three and nine months ended September 30, 2011, and October 1, 2010.
The Company recognizes transfers between levels within the hierarchy as of the beginning of the reporting period. Gross transfers between levels within the hierarchy were not significant for the three and nine months ended September 30, 2011, and October 1, 2010.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a nonrecurring basis as required by accounting principles generally accepted in the United States. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. The gains or losses on assets measured at fair value on a nonrecurring basis are summarized in the table below (in millions):
|
| | | | | | | | | | | | | | | | |
| Gains (Losses) | |
| Three Months Ended | | Nine Months Ended | |
| September 30, 2011 |
| | October 1, 2010 |
| | September 30, 2011 |
| | October 1, 2010 |
| |
Exchange of investment in equity securities | $ | — |
| | $ | — |
| | $ | 418 |
| 1 | $ | — |
| |
Equity method investments | (3 | ) | 2 | — |
| | (41 | ) | 2 | — |
| |
Inventories | (5 | ) | 3 | — |
| | (12 | ) | 3 | — |
| |
Cold-drink equipment | — |
| | — |
| | (1 | ) | 3 | — |
| |
Retained investment in formerly consolidated subsidiary | — |
| | 12 |
| 4 | — |
| | 12 |
| 4 |
Available-for-sale securities | — |
| | — |
| | — |
| | (26 | ) | 5 |
Total | $ | (8 | ) | | $ | 12 |
| | $ | 364 |
| | $ | (14 | ) | |
1 As a result of the merger of Arca and Contal, the Company recognized a gain on the exchange of the shares we previously owned in Contal for shares in the newly formed entity Arca Contal. The gain represents the difference between the carrying value of the Contal shares we relinquished and the fair value of the Arca Contal shares we received as a result of the transaction. The gain was calculated based on Level 1 inputs. Refer to Note 10 for additional information.
2 The Company recognized impairment charges of $3 million and $41 million during the three and nine months ended September 30, 2011, respectively. These charges related to an investment in an entity accounted for under the equity method of accounting. Subsequent to the recognition of these impairment charges, the Company's remaining financial exposure related to this entity is not significant. This charge was determined using Level 3 inputs. Refer to Note 10.
3 These assets primarily consisted of Company-owned inventory as well as cold-drink equipment that were damaged or lost as a result of the natural disasters in Japan. During the nine months ended September 30, 2011, we recorded impairment charges of $12 million and $1 million related to Company-owned inventory and cold-drink equipment, respectively. The impairment charges related to Company-owned inventory included a charge of $5 million recorded during the three months ended September 30, 2011. These charges represent the Company's best estimate as of September 30, 2011, and were determined using Level 3 inputs based on the carrying value of the inventory and cold-drink equipment prior to these events. Refer to Note 10 for additional information.
4 The Company sold 50 percent of our investment in Leão Junior, which was a wholly owned subsidiary prior to this transaction. The gain on the transaction consisted of two parts: (1) the difference between the consideration received and 50 percent of the carrying value of our investment, and (2) the fair value adjustment for our remaining 50 percent ownership. The gain in the table above represents the portion of the total gain related to the remeasurement of our retained investment in Leão Junior, which was based on Level 3 inputs. Refer to Note 10.
5 The Company recognized other-than-temporary impairment charges on certain available-for-sale securities. The aggregate carrying value of these securities prior to recognizing the impairment charges was approximately $131 million. The Company determined the fair value of these securities based on Level 1 and Level 2 inputs. The fair value of the Level 2 security was based on a dealer quotation. Refer to Note 3 for further discussion of the factors leading to the recognition of these other-than-temporary impairment charges.
Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents; short-term investments; receivables; accounts payable and accrued expenses; and loans and notes payable approximate their fair values because of the relatively short-term maturities of these instruments.
The fair value of our long-term debt is estimated based on quoted prices for those or similar instruments. As of September 30, 2011, the carrying amount and fair value of our long-term debt, including the current portion, were $15,790 million and $16,289 million, respectively. As of December 31, 2010, the carrying amount and fair value of our long-term debt, including the current portion, were $15,317 million and $15,346 million, respectively.
Note 15 — Operating Segments
Information about our Company's operations as of and for the three months ended September 30, 2011, and October 1, 2010, by operating segment, is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eurasia & Africa |
| Europe |
| Latin America |
| North America |
| Pacific |
| Bottling Investments |
| Corporate |
| Eliminations |
| Consolidated |
|
2011 | | | | | | | | | |
Net operating revenues: | | | | | | | | | |
Third party | $ | 684 |
| $ | 1,207 |
| $ | 1,162 |
| $ | 5,387 |
| $ | 1,534 |
| $ | 2,240 |
| $ | 34 |
| $ | — |
| $ | 12,248 |
|
Intersegment | 34 |
| 192 |
| 64 |
| — |
| 121 |
| 24 |
| — |
| (435 | ) | — |
|
Total net revenues | 718 |
| 1,399 |
| 1,226 |
| 5,387 |
| 1,655 |
| 2,264 |
| 34 |
| (435 | ) | 12,248 |
|
Operating income (loss) | 265 |
| 810 |
| 773 |
| 619 |
| 608 |
| 76 |
| (401 | ) | — |
| 2,750 |
|
Income (loss) before income taxes | 258 |
| 821 |
| 772 |
| 621 |
| 609 |
| 266 |
| (424 | ) | — |
| 2,923 |
|
Identifiable operating assets | 1,379 |
| 3,499 |
| 2,552 |
| 33,444 |
| 2,207 |
| 9,204 |
| 21,131 |
| — |
| 73,416 |
|
Noncurrent investments | 309 |
| 266 |
| 494 |
| 26 |
| 127 |
| 7,041 |
| 74 |
| — |
| 8,337 |
|
2010 | | | | | | | | | |
Net operating revenues: | | | | | | | | | |
Third party | $ | 599 |
| $ | 1,107 |
| $ | 988 |
| $ | 2,159 |
| $ | 1,429 |
| $ | 2,132 |
| $ | 12 |
| $ | — |
| $ | 8,426 |
|
Intersegment | 25 |
| 231 |
| 60 |
| 12 |
| 109 |
| 27 |
| — |
| (464 | ) | — |
|
Total net revenues | 624 |
| 1,338 |
| 1,048 |
| 2,171 |
| 1,538 |
| 2,159 |
| 12 |
| (464 | ) | 8,426 |
|
Operating income (loss) | 221 |
| 742 |
| 616 |
| 503 |
| 586 |
| 78 |
| (402 | ) | — |
| 2,344 |
|
Income (loss) before income taxes | 217 |
| 748 |
| 617 |
| 501 |
| 588 |
| 432 |
| (403 | ) | — |
| 2,700 |
|
Identifiable operating assets | 1,279 |
| 3,104 |
| 2,104 |
| 10,897 |
| 1,915 |
| 8,701 |
| 18,609 |
| — |
| 46,609 |
|
Noncurrent investments | 300 |
| 236 |
| 340 |
| 45 |
| 123 |
| 6,369 |
| 67 |
| — |
| 7,480 |
|
As of December 31, 2010 | | | | | | | | | |
Identifiable operating assets | $ | 1,278 |
| $ | 2,724 |
| $ | 2,298 |
| $ | 32,793 |
| $ | 1,827 |
| $ | 8,398 |
| $ | 16,018 |
| $ | — |
| $ | 65,336 |
|
Noncurrent investments | 291 |
| 243 |
| 379 |
| 57 |
| 123 |
| 6,426 |
| 66 |
| — |
| 7,585 |
|
During the three months ended September 30, 2011, the results of our operating segments were impacted by the following items:
| |
• | Operating income (loss) and income (loss) before income taxes were reduced by $2 million for Europe, $2 million for Latin America, $52 million for North America, $2 million for Pacific, $14 million for Bottling Investments and $26 million for Corporate due to the Company's ongoing productivity, integration and restructuring initiatives as well as costs associated with the merger of Arca and Contal. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. Refer to Note 10 for additional information related to the merger of Arca and Contal. |
| |
• | Operating income (loss) and income (loss) before income taxes were reduced by $2 million for North America and increased by $1 million for Pacific due to charges associated with the earthquake and tsunami that devastated northern and eastern Japan on March 11, 2011. Refer to Note 10. |
| |
• | Income (loss) before income taxes was reduced by $36 million for Bottling Investments, primarily attributable to the Company's proportionate share of asset impairments and restructuring charges recorded by certain of our equity method investees. Refer to Note 10. |
| |
• | Income (loss) before income taxes was reduced by $5 million for Corporate due to the net charge we recognized on the repurchase and/or exchange of certain long-term debt assumed in connection with our acquisition of CCE's North American business. Refer to Note 6. |
| |
• | Income (loss) before income taxes was reduced by $5 million for Corporate due to the finalization of working capital adjustments related to the sale of all our ownership interests in our Norwegian and Swedish bottling operations to New CCE. Refer to Note 10. |
| |
• | Income (loss) before income taxes was reduced by $3 million for Corporate due to the impairment of an investment in an entity accounted for under the equity method of accounting. Refer to Note 10 and Note 14. |
During the three months ended October 1, 2010, the results of our operating segments were impacted by the following items:
| |
• | Operating income (loss) and income (loss) before income taxes were reduced by $1 million for Eurasia and Africa, $13 million for Europe, $8 million for Pacific, $12 million for Bottling Investments and $68 million for Corporate, primarily due to the Company's ongoing productivity, integration and restructuring initiatives as well as transaction costs. Operating income (loss) and income (loss) before income taxes were increased by $2 million for North America due to the refinement of previously established restructuring accruals. Refer to Note 11 for additional information on our productivity, integration and restructuring initiatives. |
| |
• | Income (loss) before income taxes was reduced by $10 million for Bottling Investments. This net charge was primarily attributable to the Company's proportionate share of transaction costs recorded by CCE, which was partially offset by our proportionate share of a foreign currency remeasurement gain recorded by an equity method investee. The components of the net charge were individually insignificant. Refer to Note 10. |
| |
• | Income (loss) before income taxes was increased by $23 million for Corporate due to the gain on the sale of 50 percent of our investment in Leão Junior. Refer to Note 10. |
Information about our Company's operations for the nine months ended September 30, 2011, and October 1, 2010, by operating segment, is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eurasia & Africa |
| Europe |
| Latin America |
| North America |
| Pacific |
| Bottling Investments |
| Corporate |
| Eliminations |
| Consolidated |
|
2011 | | | | | | | | | |
Net operating revenues: | | | | | | | | | |
Third party | $ | 2,054 |
| $ | 3,725 |
| $ | 3,308 |
| $ | 15,567 |
| $ | 4,175 |
| $ | 6,548 |
| $ | 125 |
| $ | — |
| $ | 35,502 |
|
Intersegment | 124 |
| 537 |
| 205 |
| 11 |
| |