ko-20211001

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-02217

COCA COLA CO

(Exact name of Registrant as specified in its charter)


Delaware		58-0628465
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Coca-Cola Plaza
Atlanta	Georgia	30313
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (404) 676-2121

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.25 Par Value	KO	New York Stock Exchange
0.500% Notes Due 2024	KO24	New York Stock Exchange
1.875% Notes Due 2026	KO26	New York Stock Exchange
0.750% Notes Due 2026	KO26C	New York Stock Exchange
1.125% Notes Due 2027	KO27	New York Stock Exchange
0.125% Notes Due 2029	KO29A	New York Stock Exchange
0.125% Notes Due 2029	KO29B	New York Stock Exchange
0.400% Notes Due 2030	KO30B	New York Stock Exchange
1.250% Notes Due 2031	KO31	New York Stock Exchange
0.375% Notes Due 2033	KO33	New York Stock Exchange
0.500% Notes Due 2033	KO33A	New York Stock Exchange
1.625% Notes Due 2035	KO35	New York Stock Exchange
1.100% Notes Due 2036	KO36	New York Stock Exchange
0.950% Notes Due 2036	KO36A	New York Stock Exchange
0.800% Notes Due 2040	KO40B	New York Stock Exchange
1.000% Notes Due 2041	KO41	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.


Class of Common Stock						Shares Outstanding as of October 25, 2021
$0.25 Par Value						4,319,420,236

THE COCA-COLA COMPANY AND SUBSIDIARIES

Table of Contents


		Page
	Forward-Looking Statements	1

	Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	2

	Condensed Consolidated Statements of Income Three and Nine Months Ended October 1, 2021 and September 25, 2020	2

	Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended October 1, 2021 and September 25, 2020	3

	Condensed Consolidated Balance Sheets October 1, 2021 and December 31, 2020	4

	Condensed Consolidated Statements of Cash Flows Nine Months Ended October 1 , 2021 and September 25 , 2020	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management ’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	51

	Part II. Other Information

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6.	Exhibits	56
	Signatures	60

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 our Company’s actual results to differ materially from historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, the possibility that the assumptions used to calculate our estimated aggregate incremental tax and interest liability related to the potential unfavorable outcome of the ongoing tax dispute with the U.S. Internal Revenue Service could significantly change; 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, 2020; 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
	October 1, 2021		September 25, 2020		October 1, 2021		September 25, 2020
Net Operating Revenues	$	10,042	$	8,652	$	29,191	$	24,403
Cost of goods sold	3,977		3,471		11,269		9,855
Gross Profit	6,065		5,181		17,922		14,548
Selling, general and administrative expenses	3,122		2,511		8,808		7,142
Other operating charges	45		372		478		747
Operating Income	2,898		2,298		8,636		6,659
Interest income	68		82		205		294
Interest expense	210		660		1,432		1,127
Equity income (loss) — net	455		431		1,136		774
Other income (loss) — net	(127)		30		920		788
Income Before Income Taxes	3,084		2,181		9,465		7,388
Income taxes	609		441		2,111		1,094
Consolidated Net Income	2,475		1,740		7,354		6,294
Less: Net income (loss) attributable to noncontrolling interests	4		3		(3)		3
Net Income Attributable to Shareowners of The Coca-Cola Company	$	2,471	$	1,737	$	7,357	$	6,291
Basic Net Income Per Share1	$	0.57	$	0.40	$	1.71	$	1.47
Diluted Net Income Per Share1	$	0.57	$	0.40	$	1.70	$	1.46
Average Shares Outstanding — Basic	4,318		4,296		4,313		4,293
Effect of dilutive securities	26		25		24		28
Average Shares Outstanding — Diluted	4,344		4,321		4,337		4,321

1 Calculated based on net income attributable to shareowners of The Coca-Cola Company.

Refer to Notes to Condensed Consolidated Financial Statements.

THE COCA-COLA COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In millions)


	Three Months Ended				Nine Months Ended
	October 1, 2021		September 25, 2020		October 1, 2021		September 25, 2020
Consolidated Net Income	$	2,475	$	1,740	$	7,354	$	6,294
Other Comprehensive Income:
Net foreign currency translation adjustments	(991)		1,052		(131)		(2,283)
Net gains (losses) on derivatives	28		(13)		184		(23)
Net change in unrealized gains (losses) on available-for-sale debt securities	(22)		(21)		(83)		(40)
Net change in pension and other postretirement benefit liabilities	(32)		(2)		368		45
Total Comprehensive Income	1,458		2,756		7,692		3,993
Less: Comprehensive income (loss) attributable to noncontrolling interests	(62)		5		(16)		(396)
Total Comprehensive Income Attributable to Shareowners of The Coca-Cola Company	$	1,520	$	2,751	$	7,708	$	4,389

Refer to Notes to Condensed Consolidated Financial Statements.

THE COCA-COLA COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In millions except par value)


	October 1, 2021		December 31, 2020
ASSETS
Current Assets
Cash and cash equivalents	$	11,301	$	6,795
Short-term investments	1,844		1,771
Total Cash, Cash Equivalents and Short-Term Investments	13,145		8,566
Marketable securities	1,724		2,348
Trade accounts receivable, less allowances of $534 and $526, respectively	3,889		3,144
Inventories	3,182		3,266
Prepaid expenses and other assets	2,300		1,916
Total Current Assets	24,240		19,240
Equity method investments	18,284		19,273
Other investments	897		812
Other assets	6,490		6,184
Deferred income tax assets	2,237		2,460
Property, plant and equipment, less accumulated depreciation of $9,153 and $8,923, respectively	10,058		10,777
Trademarks with indefinite lives	10,449		10,395
Goodwill	17,455		17,506
Other intangible assets	496		649
Total Assets	$	90,606	$	87,296
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	12,830	$	11,145
Loans and notes payable	1,866		2,183
Current maturities of long-term debt	448		485
Accrued income taxes	846		788
Total Current Liabilities	15,990		14,601
Long-term debt	39,394		40,125
Other liabilities	8,401		9,453
Deferred income tax liabilities	2,688		1,833
The Coca-Cola Company Shareowners’ Equity
Common stock, $0.25 par value; authorized — 11,200 shares; issued — 7,040 shares	1,760		1,760
Capital surplus	17,929		17,601
Reinvested earnings	68,494		66,555
Accumulated other comprehensive income (loss)	(14,250)		(14,601)
Treasury stock, at cost — 2,721 and 2,738 shares, respectively	(51,754)		(52,016)
Equity Attributable to Shareowners of The Coca-Cola Company	22,179		19,299
Equity attributable to noncontrolling interests	1,954		1,985
Total Equity	24,133		21,284
Total Liabilities and Equity	$	90,606	$	87,296

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
	October 1, 2021		September 25, 2020
Operating Activities
Consolidated net income	$	7,354	$	6,294
Depreciation and amortization	1,111		1,106
Stock-based compensation expense	236		88
Deferred income taxes	726		10
Equity (income) loss — net of dividends	(621)		(565)
Foreign currency adjustments	(5)		(145)
Significant (gains) losses — net	(498)		(899)
Other operating charges	243		671
Other items	517		562
Net change in operating assets and liabilities	168		(902)
Net Cash Provided by Operating Activities	9,231		6,220
Investing Activities
Purchases of investments	(4,732)		(12,051)
Proceeds from disposals of investments	5,294		6,482
Acquisitions of businesses, equity method investments and nonmarketable securities	(11)		(989)
Proceeds from disposals of businesses, equity method investments and nonmarketable securities	1,950		46
Purchases of property, plant and equipment	(728)		(759)
Proceeds from disposals of property, plant and equipment	65		156
Other investing activities	81		43
Net Cash Provided by (Used in) Investing Activities	1,919		(7,072)
Financing Activities
Issuances of debt	11,848		26,898
Payments of debt	(13,037)		(17,977)
Issuances of stock	493		514
Purchases of stock for treasury	(104)		(93)
Dividends	(5,437)		(3,522)
Other financing activities	(354)		153
Net Cash Provided by (Used in) Financing Activities	(6,591)		5,973
Effect of Exchange Rate Changes on Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents	(56)		(36)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period	4,503		5,085
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period	7,110		6,737
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents at End of Period	11,613		11,822
Less: Restricted cash and restricted cash equivalents at end of period	312		437
Cash and Cash Equivalents at End of Period	$	11,301	$	11,385

Refer to Notes to Condensed Consolidated Financial Statements.

THE COCA-COLA COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by U.S. GAAP for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K of The Coca-Cola Company for the year ended December 31, 2020.

When used in these notes, the terms “The Coca-Cola Company,” “Company,” “we,” “us” and “our” mean The Coca-Cola Company and all entities included in our condensed consolidated financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended October 1, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Sales of our nonalcoholic ready-to-drink beverages are somewhat seasonal, with the second and third calendar quarters typically accounting for the highest sales volumes. The volume of sales in the beverage business may be affected by weather conditions.

Each of our quarterly reporting periods, other than the fourth quarter, ends on the Friday closest to the last day of the corresponding quarterly calendar period. The third quarter of 2021 and the third quarter of 2020 ended on October 1, 2021 and September 25, 2020, respectively. Our fourth quarter and our fiscal year end on December 31 regardless of the day of the week on which December 31 falls.

Advertising Costs

The Company’s accounting policy related to advertising costs for annual reporting purposes is to expense production costs of print, radio, television and other advertisements as of the first date the advertisements take place. All other marketing expenditures are expensed in the annual period in which the expenditure is incurred.

For quarterly reporting purposes, we allocate our estimated full year marketing expenditures that benefit multiple quarters to each of those quarters. We use the proportion of each quarter’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 quarter, we review our estimated full year unit case volume and our estimated full year marketing expenditures that benefit multiple quarters in order to evaluate if a change in estimate is necessary. The impact of any change in the full year estimate is recognized in the quarter in which the change in estimate occurs. Our full year marketing expenditures are not impacted by this interim accounting policy.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

We classify time deposits and other investments that are highly liquid and have maturities of three months or less at the date of purchase as cash equivalents or restricted cash equivalents, as applicable. Restricted cash and restricted cash equivalents generally consist of amounts held by our captive insurance companies, which are included in the line item other assets in our consolidated balance sheet. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor our concentrations of credit risk.

The following tables provide a summary of cash, cash equivalents, restricted cash and restricted cash equivalents that constitute the total amounts shown in our condensed consolidated statements of cash flows (in millions):


	October 1, 2021		December 31, 2020
Cash and cash equivalents	$	11,301	$	6,795
Restricted cash and restricted cash equivalents included in other assets1	312		315
Cash, cash equivalents, restricted cash and restricted cash equivalents	$	11,613	$	7,110

1 Amounts represent restricted cash and restricted cash equivalents in our solvency capital portfolio set aside primarily to cover pension obligations in certain of our European and Canadian pension plans. Refer to Note 4.


	September 25, 2020		December 31, 2019
Cash and cash equivalents	$	11,385	$	6,480
Restricted cash and restricted cash equivalents included in other assets1	437		257
Cash, cash equivalents, restricted cash and restricted cash equivalents	$	11,822	$	6,737

NOTE 2: ACQUISITIONS AND DIVESTITURES

Acquisitions

Our Company’s acquisitions of businesses, equity method investments and nonmarketable securities totaled $11 million and $989 million during the nine months ended October 1, 2021 and September 25, 2020, respectively. In 2020, we acquired the remaining ownership interest in fairlife, LLC (“fairlife”).

fairlife, LLC

In January 2020, the Company acquired the remaining 57.5 percent ownership interest in, and now owns 100 percent of, fairlife. fairlife offers a broad portfolio of products in the value-added dairy category across North America. Upon consolidation, we recognized a gain of $902 million resulting from the remeasurement of our previously held equity interest in fairlife to fair value. The fair value of our previously held equity interest was determined using a discounted cash flow model based on Level 3 inputs. The gain was recorded in the line item other income (loss) — net in our condensed consolidated statement of income. We acquired the remaining ownership interest in exchange for $979 million of cash, net of cash acquired, and effectively settled our $306 million note receivable from fairlife at the recorded amount. Under the terms of the agreement, we are subject to making future milestone payments which are contingent on fairlife achieving certain financial targets through 2024 and, if achieved, are payable in 2021, 2023 and 2025. These milestone payments are based on agreed-upon formulas related to fairlife’s operating results, the resulting values of which are not subject to a ceiling. Under the applicable accounting guidance, we recorded a $270 million liability representing our best estimate of the fair value of this contingent consideration as of the acquisition date. The fair value of this contingent consideration was determined using a Monte Carlo valuation model based on Level 3 inputs, including management’s latest estimates of future operating results. We are required to remeasure this liability to fair value quarterly, with any changes in the fair value recorded in income until the final milestone payment is made. Upon finalization of purchase accounting, $1.3 billion of the purchase price was allocated to the fairlife trademark and $0.8 billion was allocated to goodwill. The goodwill recognized as part of this acquisition is primarily related to synergistic value created from the opportunity for additional expansion. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce. The goodwill is not tax deductible and has been assigned to the North America operating segment.

During the three and nine months ended October 1, 2021, we recorded charges of $12 million and $263 million, respectively. During the three and nine months ended September 25, 2020, we recorded charges of $18 million and $47 million, respectively. These charges related to the remeasurement of the contingent consideration liability to fair value and were recorded in the line item other operating charges in our condensed consolidated statements of income. During the nine months ended October 1, 2021, we made the first milestone payment of $100 million based on fairlife meeting its financial targets in 2020.

Divestitures

Proceeds from disposals of businesses, equity method investments and nonmarketable securities during the nine months ended October 1, 2021 and September 25, 2020 totaled $1,950 million and $46 million, respectively. In 2021, we sold our ownership interest in Coca-Cola Amatil Limited (“CCA”), an equity method investee, to Coca-Cola Europacific Partners plc (“CCEP”), also an equity method investee. We received cash proceeds of $1,738 million and recognized a net gain of $695 million as a result of the sale and the related reversal of cumulative translation adjustments. In 2021 and 2020, we sold portions of our ownership interest in one of our equity method investments and received cash proceeds of $134 million and $34 million, respectively, resulting in gains of $63 million and $18 million, respectively. All of the gains were recorded in the line item other income (loss) — net in our condensed consolidated statements of income.

NOTE 3: REVENUE RECOGNITION

The following tables present net operating revenues disaggregated between the United States and International and further by line of business (in millions):


	United States		International		Total
Three Months Ended October 1, 2021
Concentrate operations	$	1,749	$	4,122	$	5,871
Finished product operations	1,669		2,502		4,171
Total	$	3,418	$	6,624	$	10,042
Three Months Ended September 25, 2020
Concentrate operations	$	1,523	$	3,556	$	5,079
Finished product operations	1,503		2,070		3,573
Total	$	3,026	$	5,626	$	8,652


	United States		International		Total
Nine Months Ended October 1, 2021
Concentrate operations	$	4,899	$	11,948	$	16,847
Finished product operations	4,744		7,600		12,344
Total	$	9,643	$	19,548	$	29,191
Nine Months Ended September 25, 2020
Concentrate operations	$	4,117	$	9,966	$	14,083
Finished product operations	4,299		6,021		10,320
Total	$	8,416	$	15,987	$	24,403

Refer to Note 16 for disclosures of net operating revenues by operating segment and Corporate.

NOTE 4: INVESTMENTS

Equity Securities

The carrying values of our equity securities were included in the following line items in our condensed consolidated balance sheets (in millions):


	Fair Value with Changes Recognized in Income		Measurement Alternative — No Readily Determinable Fair Value
October 1, 2021

Marketable securities	$	361	$	—
Other investments	850		47
Other assets	1,490		—
Total equity securities	$	2,701	$	47
December 31, 2020

Marketable securities	$	330	$	—
Other investments	762		50
Other assets	1,282		—
Total equity securities	$	2,374	$	50

The calculation of net unrealized gains and losses recognized during the period related to equity securities still held at the end of the period is as follows (in millions):


	Three Months Ended
	October 1, 2021		September 25, 2020
Net gains (losses) recognized during the period related to equity securities	$	4	$	17
Less: Net gains (losses) recognized during the period related to equity securities sold during the period	5		—
Net unrealized gains (losses) recognized during the period related to equity securities still held at the end of the period	$	(1)	$	17


	Nine Months Ended
	October 1, 2021		September 25, 2020
Net gains (losses) recognized during the period related to equity securities	$	361	$	(137)
Less: Net gains (losses) recognized during the period related to equity securities sold during the period	33		(24)
Net unrealized gains (losses) recognized during the period related to equity securities still held at the end of the period	$	328	$	(113)

Debt Securities

Our debt securities consisted of the following (in millions):


			Gross Unrealized				Estimated Fair Value
	Cost		Gains		Losses
October 1, 2021
Trading securities	$	38	$	2	$	—	$	40
Available-for-sale securities	1,677		35		(123)		1,589
Total debt securities	$	1,715	$	37	$	(123)	$	1,629
December 31, 2020
Trading securities	$	36	$	2	$	—	$	38
Available-for-sale securities	2,227		51		(13)		2,265
Total debt securities	$	2,263	$	53	$	(13)	$	2,303

The carrying values of our debt securities were included in the following line items in our condensed consolidated balance sheets (in millions):


	October 1, 2021				December 31, 2020
	Trading Securities		Available-for-Sale Securities		Trading Securities		Available-for-Sale Securities

Marketable securities	$	40	$	1,323	$	38	$	1,980
Other assets	—		266		—		285
Total debt securities	$	40	$	1,589	$	38	$	2,265

The contractual maturities of these available-for-sale debt securities as of October 1, 2021 were as follows (in millions):


	Cost		Estimated Fair Value
Within 1 year	$	26	$	26
After 1 year through 5 years	1,381		1,279
After 5 years through 10 years	91		100
After 10 years	179		184
Total	$	1,677	$	1,589

The Company expects that actual maturities may differ from the contractual maturities above because borrowers have the right to call or prepay certain obligations.

The sale and/or maturity of available-for-sale debt securities resulted in the following realized activity (in millions):


	Three Months Ended				Nine Months Ended
	October 1, 2021		September 25, 2020		October 1, 2021		September 25, 2020
Gross gains	$	2	$	2	$	4	$	19
Gross losses	—		(3)		(8)		(11)
Proceeds	91		233		1,058		1,419

Captive Insurance Companies

In accordance with local insurance regulations, our consolidated captive insurance companies are required to meet and maintain minimum solvency capital requirements. The Company elected to invest a majority of its solvency capital in a portfolio of marketable equity and debt securities. These securities are included in the disclosures above. The Company uses one of our consolidated captive insurance companies to reinsure group annuity insurance contracts that cover the obligations of certain of our European and Canadian pension plans. This captive’s solvency capital funds included total equity and debt securities of $1,589 million and $1,389 million as of October 1, 2021 and December 31, 2020, respectively, which are classified in the line item other assets in our condensed consolidated balance sheets because the assets are not available to satisfy our current obligations.

NOTE 5: INVENTORIES

Inventories consisted of the following (in millions):


	October 1, 2021		December 31, 2020
Raw materials and packaging	$	1,914	$	2,106
Finished goods	925		791
Other	343		369
Total inventories	$	3,182	$	3,266

NOTE 6: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS

The following table presents the fair values of the Company’s derivative instruments that were designated and qualified as part of a hedging relationship (in millions):


		Fair Value1,2
Derivatives Designated as Hedging Instruments	Balance Sheet Location1	October 1, 2021		December 31, 2020
Assets:
Foreign currency contracts	Prepaid expenses and other assets	$	122	$	26
Foreign currency contracts	Other assets	41		74
Commodity contracts	Prepaid expenses and other assets	—		2
Interest rate contracts	Prepaid expenses and other assets	2		—
Interest rate contracts	Other assets	346		659
Total assets		$	511	$	761
Liabilities:
Foreign currency contracts	Accounts payable and accrued expenses	$	19	$	29
Foreign currency contracts	Other liabilities	1		—
Commodity contracts	Accounts payable and accrued expenses	2		—
Interest rate contracts	Accounts payable and accrued expenses	—		5

Total liabilities		$	22	$	34

1 All of the Company’s derivative instruments are carried at fair value in our condensed consolidated balance sheets after considering the impact of legally enforceable master netting agreements and cash collateral held or placed with the same counterparties, as applicable. Current disclosure requirements mandate that derivatives must also be disclosed without reflecting the impact of master netting agreements and cash collateral. Refer to Note 15 for the net presentation of the Company’s derivative instruments.

2 Refer to Note 15 for additional information related to the estimated fair value.

The following table presents the fair values of the Company’s derivative instruments that were not designated as hedging instruments (in millions):


		Fair Value1,2
Derivatives Not Designated as Hedging Instruments	Balance Sheet Location1	October 1, 2021		December 31, 2020
Assets:
Foreign currency contracts	Prepaid expenses and other assets	$	28	$	28
Foreign currency contracts	Other assets	2		1
Commodity contracts	Prepaid expenses and other assets	115		76
Commodity contracts	Other assets	48		9
Other derivative instruments	Prepaid expenses and other assets	1		20
Other derivative instruments	Other assets	—		3
Total assets		$	194	$	137
Liabilities:
Foreign currency contracts	Accounts payable and accrued expenses	$	49	$	41
Foreign currency contracts	Other liabilities	6		—
Commodity contracts	Accounts payable and accrued expenses	2		15
Commodity contracts	Other liabilities	—		1


Other derivative instruments	Accounts payable and accrued expenses	6		—

Total liabilities		$	63	$	57

2 Refer to Note 15 for additional information related to the estimated fair value.

Credit Risk Associated with Derivatives

We have established strict counterparty credit guidelines and enter into transactions only with financial institutions of investment grade or better. We monitor counterparty exposures regularly and review any downgrade in credit rating immediately. If a downgrade in the credit rating of a counterparty were to occur, we have provisions requiring collateral for substantially all of our transactions. To mitigate presettlement risk, minimum credit standards become more stringent as the duration of the derivative financial instrument increases. In addition, the Company’s master netting agreements reduce credit risk by permitting the Company to net settle for transactions with the same counterparty. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.

Cash Flow Hedging Strategy

The Company uses cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates, commodity prices or interest rates. The changes in the fair values of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss) (“AOCI”) and are reclassified into the line item in our consolidated statement of income in which the hedged items are recorded in the same period the hedged items affect earnings. The changes in the fair values of hedges that are determined to be ineffective are immediately reclassified from AOCI into earnings. The maximum length of time for which the Company hedges its exposure to the variability in future cash flows is typically four years.

The Company maintains a foreign currency cash flow hedging program to reduce the risk that our U.S. dollar net cash inflows from sales outside the United States and U.S. dollar net cash outflows from procurement activities will be adversely affected by fluctuations in foreign currency exchange rates. We enter into forward contracts and purchase foreign currency options and collars (principally euro, British pound sterling and Japanese yen) to hedge certain portions of forecasted cash flows denominated in foreign currencies. When the U.S. dollar strengthens against the foreign currencies, the decline in the present value of future foreign currency cash flows is partially offset by gains in the fair value of the derivative instruments. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash flows is partially offset by losses in the fair value of the derivative instruments. The total notional values of derivatives that were designated and qualified for the Company’s foreign currency cash flow hedging program were $8,105 million and $7,785 million as of October 1, 2021 and December 31, 2020, respectively.

The Company uses cross-currency swaps to hedge the changes in cash flows of certain of its foreign currency denominated debt and other monetary assets or liabilities due to fluctuations in foreign currency exchange rates. For this hedging program, the Company recognizes in earnings each period the changes in carrying values of these foreign currency denominated assets and liabilities due to changes in exchange rates. The changes in fair values of the cross-currency swap derivatives are recorded in AOCI with an immediate reclassification into earnings for the changes in fair values attributable to fluctuations in foreign currency exchange rates. The total notional values of derivatives that were designated as cash flow hedges for the Company’s foreign currency denominated assets and liabilities were $2,700 million as of October 1, 2021 and December 31, 2020.

The Company has entered into commodity futures contracts and other derivative instruments on various commodities to mitigate the price risk associated with forecasted purchases of materials used in our manufacturing process. These derivative instruments were designated as part of the Company’s commodity cash flow hedging program. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of certain commodities. The total notional values of derivatives that were designated and qualified for this program were $34 million and $11 million as of October 1, 2021 and December 31, 2020, respectively.

Our Company monitors our mix of short-term debt and long-term debt regularly. From time to time, we manage our risk to interest rate fluctuations through the use of derivative financial instruments. The Company has entered into interest rate swap agreements and has designated these instruments as part of the Company’s interest rate cash flow hedging program. The objective of this hedging program is to mitigate the risk of adverse changes in benchmark interest rates on the Company’s future interest payments. The total notional value of these interest rate swap agreements that were designated and qualified for the Company’s interest rate cash flow hedging program was $1,233 million as of December 31, 2020. As of October 1, 2021, we did not have any interest rate swaps designated as a cash flow hedge.

The following tables present the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on other comprehensive income (“OCI”), AOCI and earnings (in millions):


	Gain (Loss) Recognized in OCI		Location of Gain (Loss) Recognized in Income	Gain (Loss) Reclassified from AOCI into Income
Three Months Ended October 1, 2021
Foreign currency contracts	$	15	Net operating revenues	$	(21)
Foreign currency contracts	6		Cost of goods sold	(6)
Foreign currency contracts	—		Interest expense	(1)
Foreign currency contracts	(43)		Other income (loss) — net	(35)


Total	$	(22)		$	(63)
Three Months Ended September 25, 2020
Foreign currency contracts	$	(84)	Net operating revenues	$	(21)
Foreign currency contracts	(4)		Cost of goods sold	2
Foreign currency contracts	—		Interest expense	(6)
Foreign currency contracts	122		Other income (loss) — net