NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 consolidated financial statements.
Description of Business
The Coca-Cola Company is a total beverage company. We own or license and market numerous beverage brands, which we group into the following categories: Trademark Coca-Cola; sparkling flavors; hydration, sports, coffee and tea; nutrition, juice, dairy and plant-based beverages; and emerging beverages. We own and market five of the world’s top six nonalcoholic sparkling soft drink brands: Coca-Cola, Sprite, Fanta, Diet Coke and Coca-Cola Zero Sugar. Finished beverage products bearing our trademarks, sold in the United States since 1886, are now sold in more than 200 countries and territories.
We make our branded beverage products available to consumers throughout the world through our network of independent bottling partners, distributors, wholesalers and retailers as well as the Company’s consolidated bottling and distribution operations. Beverages bearing trademarks owned by or licensed to us account for 2.1 billion of the approximately 63 billion servings of all beverages consumed worldwide every day.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.
Principles of Consolidation
Our Company consolidates all entities that we control by ownership of a majority voting interest. Additionally, there are situations in which consolidation is required even though the usual condition of consolidation (ownership of a majority voting interest) does not apply. Generally, this occurs when an entity holds an interest in another business enterprise that was achieved through arrangements that do not involve voting interests, which results in a disproportionate relationship between such entity’s voting interests in, and its exposure to the economic risks and potential rewards of, the other business enterprise. This disproportionate relationship results in what is known as a variable interest, and the entity in which we have the variable interest is referred to as a “VIE.” An enterprise must consolidate a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Our Company holds interests in certain VIEs, primarily bottling operations, for which we were not determined to be the primary beneficiary. Our variable interests in these VIEs primarily relate to equity investments, profit guarantees or subordinated financial support. Refer to Note 11. Although these financial arrangements resulted in our holding variable interests in these entities, they did not empower us to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance. Our Company’s investments, plus any loans and guarantees, and other subordinated financial support related to these VIEs totaled $1,980 million and $2,567 million as of December 31, 2021 and 2020, respectively, representing our maximum exposures to loss. The Company’s investments, plus any loans and guarantees, related to these VIEs were not individually significant to the Company’s consolidated financial statements.
In addition, our Company holds interests in certain VIEs, primarily bottling operations, for which we were determined to be the primary beneficiary. As a result, we have consolidated these entities. Our Company’s investments, plus any loans and guarantees, related to these VIEs totaled $103 million and $74 million as of December 31, 2021 and 2020, respectively, representing our maximum exposures to loss. The assets and liabilities of VIEs for which we are the primary beneficiary were not significant to the Company’s consolidated financial statements.
Creditors of our VIEs do not have recourse against the general credit of the Company, regardless of whether they are accounted for as consolidated entities.
We use the equity method to account for investments in companies if our investment provides us with the ability to exercise significant influence over operating and financial policies of the investee. Our consolidated net income includes our Company’s proportionate share of the net income or loss of these companies. Our judgment regarding the level of influence over each equity method investee includes considering key factors such as our ownership interest, representation on the board of directors, participation in policy-making decisions, other commercial arrangements and material intercompany transactions.
We eliminate from our financial results all significant intercompany transactions, including the intercompany transactions with consolidated VIEs and the intercompany portion of transactions with equity method investees.
Revenue Recognition
Our Company recognizes revenue when performance obligations under the terms of the contracts with our customers are satisfied. Our performance obligation generally consists of the promise to sell concentrates, syrups or finished products to our bottling partners, wholesalers, distributors or retailers. Refer to Note 3.
Advertising Costs
Our Company expenses 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. Advertising costs included in the line item selling, general and administrative expenses in our consolidated statements of income were $4 billion, $3 billion and $4 billion in 2021, 2020 and 2019, respectively. As of December 31, 2021 and 2020, advertising and production costs of $57 million and $83 million, respectively, were primarily recorded in the line item prepaid expenses and other current assets in our consolidated balance sheets.
Shipping and Handling Costs
Shipping and handling costs related to the movement of goods from our manufacturing locations to our sales distribution centers are included in the line item cost of goods sold in our consolidated statement of income. Shipping and handling costs incurred to move goods from our manufacturing locations or sales distribution centers to our customers are also included in the line item cost of goods sold in our consolidated statement of income, except for costs incurred to distribute goods sold by our consolidated bottlers to our customers, which are included in the line item selling, general and administrative expenses in our consolidated statement of income. Our customers generally do not pay us separately for shipping and handling costs. We recognize the cost of shipping and handling activities that are performed after a customer obtains control of the goods as costs to fulfill our promise to provide goods to the customer. As a result of this election, the Company does not evaluate whether shipping and handling activities are services promised to customers. If revenue is recognized for the related goods before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued.
Sales, Use, Value-Added and Excise Taxes
The Company collects taxes imposed directly on its customers related to sales, use, value-added, excise and other similar taxes. The Company then remits such taxes on behalf of its customers to the applicable governmental authorities. We exclude from net operating revenues the tax amounts imposed on revenue-producing transactions that were collected from our customers to be remitted to governmental authorities. Accordingly, such tax amounts are recorded in the line item trade accounts receivable in our consolidated balance sheet when collection of taxes from the customer has not yet occurred and are recorded in the line item accounts payable and accrued expenses in our consolidated balance sheet until they are remitted to the applicable governmental authorities. Taxes imposed directly on the Company, whether based on receipts from sales, inventory procurement costs or manufacturing activities, are recorded in the line item cost of goods sold in our consolidated statement of income.
Net Income Per Share
Basic net income per share is computed by dividing net income attributable to shareowners of The Coca-Cola Company by the weighted-average number of common shares outstanding during the reporting period. Diluted net income per share is computed similarly to basic net income per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Approximately 6 million stock options were excluded from the computation of diluted net income per share in both 2021 and 2020 because the stock options would have been antidilutive. The number of stock options excluded from the computation of diluted net income per share in 2019 was insignificant.
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 noncurrent
assets on 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 table provides a summary of cash, cash equivalents, restricted cash and restricted cash equivalents that constitute the total amounts shown in our consolidated statements of cash flows (in millions):
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December 31, | 2021 | 2020 | 2019 |
Cash and cash equivalents | $ | 9,684 | | $ | 6,795 | | $ | 6,480 | |
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Restricted cash and restricted cash equivalents included in other noncurrent assets1,2 | 341 | | 315 | | 257 | |
Cash, cash equivalents, restricted cash and restricted cash equivalents | $ | 10,025 | | $ | 7,110 | | $ | 6,737 | |
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1Amounts 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.
2As of December 31, 2021, restricted cash and restricted cash equivalents includes amounts related to assets held for sale. Refer to Note 2.
Short-Term Investments
We classify time deposits and other investments that have maturities of greater than three months but less than one year as short-term investments.
Investments in Equity and Debt Securities
We measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with the change in fair value included in net income. We use quoted market prices to determine the fair value of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis. 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. Refer to Note 4 for additional information on our policy for investments, which includes our assessment of impairments.
Trade Accounts Receivable
We record trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any expected loss on the trade accounts receivable balances and charged to the provision for doubtful accounts. We calculate this allowance based on available relevant information, in addition to historical loss information, the level of past-due accounts based on the contractual terms of the receivables, and our relationships with, and the economic status of, our bottling partners and customers. We believe our exposure to concentrations of credit risk is limited due to the diverse geographic areas covered by our operations.
In the fourth quarter of 2020, the Company started a trade accounts receivable factoring program in certain countries. Under this program we can elect to sell trade accounts receivables to unaffiliated financial institutions at a discount. In these factoring arrangements, for ease of administration, the Company collects customer payments related to the factored receivables and remits those payments to the financial institutions. The Company sold $6,266 million and $185 million of trade accounts receivables under this program during the years ended December 31, 2021 and 2020, respectively, and the costs of factoring such receivables were not material. The Company accounts for this program as a sale, and accordingly, the trade receivables sold are excluded from trade accounts receivable on our consolidated balance sheet. The cash received from the financial institutions is classified within the operating activities section in our consolidated statement of cash flows.
Inventories
Inventories consist primarily of raw materials and packaging (which include ingredients and supplies) and finished goods (which include concentrates and syrups in our concentrate operations and finished beverages in our finished product operations). Inventories are valued at the lower of cost or net realizable value. We determine cost on the basis of the average cost or first-in, first-out methods.
Inventories consisted of the following (in millions):
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December 31, | 2021 | 2020 |
Raw materials and packaging | $ | 2,133 | | $ | 2,106 | |
Finished goods | 982 | | 791 | |
Other | 299 | | 369 | |
Total inventories | $ | 3,414 | | $ | 3,266 | |
Derivative Instruments
When deemed appropriate, our Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are foreign currency exchange rate risk, commodity price risk and interest rate risk. All derivatives are carried at fair value in our consolidated balance sheet in the following line items, as applicable: prepaid expenses and other current assets; other noncurrent assets; accounts payable and accrued expenses; and other noncurrent liabilities. The cash flow impact of the Company’s derivative instruments is primarily included in our consolidated statement of cash flows in net cash provided by operating activities. Refer to Note 5.
Leases
We determine if a contract contains a lease at its inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances. We are the lessee in a lease contract when we obtain the right to control the asset. Operating lease right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and are included in the line item other noncurrent assets on our consolidated balance sheet. Operating lease liabilities represent our obligation to make lease payments arising from the lease and are included in the line items accounts payable and accrued expenses and other noncurrent liabilities on our consolidated balance sheet. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on our consolidated balance sheet and are expensed on a straight-line basis over the lease term in our consolidated statement of income. When determining the lease term, we include renewal or termination options that we are reasonably certain to exercise. As most of our leases do not provide an implicit interest rate, we use our local incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. When our contracts contain lease and non-lease components, we account for both components as a single lease component. Refer to Note 9.
We have various contracts for certain fountain equipment under which we are the lessor. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred. Depreciation is recorded principally by the straight-line method over the estimated useful lives of our assets, which are reviewed periodically and generally have the following ranges: buildings and improvements: 40 years or less; and machinery and equipment: 20 years or less. Land is not depreciated, and construction in progress is not depreciated until ready for service. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term, including renewal options that we are reasonably certain to exercise, or the estimated useful life of the improvement. Depreciation is not recorded during the period in which a long-lived asset or disposal group is classified as held for sale, even if the asset or disposal group continues to generate revenue during the period. Depreciation expense, including the depreciation expense of assets under finance leases, totaled $1,262 million, $1,301 million and $1,208 million in 2021, 2020 and 2019, respectively. Amortization expense for leasehold improvements totaled $15 million, $18 million and $18 million in 2021, 2020 and 2019, respectively.
The following table summarizes our property, plant and equipment (in millions):
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December 31, | 2021 | 2020 |
Land | $ | 652 | | $ | 676 | |
Buildings and improvements | 4,349 | | 4,782 | |
Machinery and equipment | 13,861 | | 14,242 | |
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Property, plant and equipment — cost | 18,862 | | 19,700 | |
Less: Accumulated depreciation | 8,942 | | 8,923 | |
Property, plant and equipment — net | $ | 9,920 | | $ | 10,777 | |
Certain events or changes in circumstances may indicate that the recoverability of the carrying amount of property, plant and equipment should be assessed, including, among others, a significant decrease in market value, a significant change in the business climate in a particular market, or a current period operating or cash flow loss combined with historical losses or projected future losses. When such events or changes in circumstances are present and a recoverability test is performed, we estimate the future cash flows expected to result from the use of the asset or asset group and its eventual disposition. These estimated future cash flows are consistent with those we use in our internal planning. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we recognize an impairment charge. The impairment charge recognized is the amount by which the carrying amount of the asset or asset group exceeds the fair value. We use a variety of methodologies to determine the fair value of property, plant and equipment, including appraisals and discounted cash flow models. These appraisals and models include assumptions we believe are consistent with those a market participant would use.
Goodwill, Trademarks and Other Intangible Assets
We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company’s long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their useful lives, generally less than 20 years. Refer to Note 7.
When events or circumstances indicate that the carrying value of definite-lived intangible assets may not be recoverable, management performs a recoverability test of the carrying value by preparing estimates of sales volume and the resulting profit and cash flows expected to result from the use of the asset or asset group and its eventual disposition. These estimated future cash flows are consistent with those we use in our internal planning. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we recognize an impairment charge. The impairment charge recognized is the amount by which the carrying amount of the asset or asset group exceeds the fair value. We use a variety of methodologies to determine the fair value of these assets, including discounted cash flow models, which include assumptions we believe are consistent with those a market participant would use.
We test intangible assets determined to have indefinite useful lives, including trademarks, franchise rights and goodwill, for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired. Our Company performs these annual impairment tests as of the first day of our third fiscal quarter. We use a variety of methodologies in conducting impairment tests of indefinite-lived intangible assets, including, but not limited to, discounted cash flow models, which include assumptions we believe are consistent with those a market participant would use. For indefinite-lived intangible assets, other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess. The Company has the option to perform a qualitative assessment of indefinite-lived intangible assets, other than goodwill, rather than completing the impairment test. The Company must assess whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. If the Company concludes that this is the case, it must perform the impairment testing described above. Otherwise, the Company does not need to perform any further assessment.
We perform impairment tests of goodwill at our reporting unit level, which is generally one level below our operating segments. Our operating segments are primarily based on geographic responsibility, which is consistent with the way management runs our business. Our geographic operating segments are generally subdivided into smaller geographic regions. These geographic regions are our reporting units. Our Global Ventures operating segment includes the results of our Costa Limited (“Costa”), innocent and doğadan businesses as well as fees earned pursuant to distribution coordination agreements between the Company and Monster Beverage Corporation (“Monster”), each of which is its own reporting unit. The Bottling
Investments operating segment includes all of our consolidated bottling operations, regardless of geographic location. Generally, each consolidated bottling operation within our Bottling Investments operating segment is its own reporting unit. Goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination.
In order to test for goodwill impairment, the Company compares the fair value of the reporting unit to its carrying value,
including goodwill. If the fair value of the reporting unit is less than its carrying amount, goodwill is written down for the amount by which the carrying amount exceeds the fair value. However, the impairment charge recognized cannot exceed the carrying amount of goodwill. We typically use discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those we believe a market participant would use. The Company has the option to perform a qualitative assessment of goodwill in order to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company concludes that this is the case, it must perform the impairment testing discussed above. Otherwise, the Company does not need to perform any further assessment.
Impairment charges related to intangible assets, including goodwill, are generally recorded in the line item other operating charges or, to the extent they relate to equity method investees, in the line item equity income (loss) — net in our consolidated statement of income.
Contingencies
Our Company is involved in various legal proceedings and tax matters. Due to their nature, such legal proceedings and tax matters involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. Management assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate. Refer to Note 11.
Stock-Based Compensation
Our Company grants long-term equity awards under its stock-based compensation plans to certain employees of the Company. These awards include stock options, performance share units, restricted stock and restricted stock units. The fair value of stock option grants is estimated on the grant date using a Black-Scholes-Merton option-pricing model. The Company recognizes compensation expense on a straight-line basis over the period the stock option award is earned by the employee, which is generally four years.
The fair value of restricted stock, restricted stock units and certain performance share units is the closing market price per share of the Company’s stock on the grant date less the present value of the expected dividends not received during the vesting period. The Company included a relative total shareowner return (“TSR”) modifier for most performance share unit awards granted from 2014 through 2017 as well as for performance share unit awards granted to executives from 2018 through 2021. For these awards, the number of performance share units earned based on the certified achievement of the predefined performance criteria will be reduced or increased if the Company’s total shareowner return over the performance period relative to a predefined compensation comparator group of companies fell outside of a predefined range. The fair value of performance share units that include a TSR modifier is determined using a Monte Carlo valuation model.
In the reporting period it becomes probable that the minimum performance threshold specified in the performance share unit award will be achieved, we recognize compensation expense for the proportionate share of the total fair value of the performance share units related to the vesting period that has already lapsed for the performance share units expected to vest. The remaining fair value of the performance share units expected to vest is expensed on a straight-line basis over the remainder of the vesting period. In the event the Company determines it is no longer probable that the minimum performance threshold specified in the award will be achieved, we reverse all of the previously recognized compensation expense in the reporting period such a determination is made.
The Company has made a policy election to estimate the number of stock-based compensation awards that will ultimately vest to determine the amount of compensation expense recognized each reporting period. Forfeiture estimates are trued-up at the end of the vesting period in order to ensure that compensation expense is recognized only for those awards that ultimately vest. Refer to Note 12.
Income Taxes
Income tax expense includes U.S., state, local and international income taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the book basis and the tax basis of assets and liabilities. The tax rate used to determine the deferred tax assets and liabilities is the enacted tax rate for the year and manner in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
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 caselaw 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 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 11 and Note 14.
Translation and Remeasurement
We translate the assets and liabilities of our foreign subsidiaries from their respective functional currencies to U.S. dollars at the appropriate spot rates as of the balance sheet date. Generally, our foreign subsidiaries use the local currency as their functional currency. Changes in the carrying values of these assets and liabilities attributable to fluctuations in spot rates are recognized in net foreign currency translation adjustments, a component of accumulated other comprehensive income (loss) (“AOCI”). Refer to Note 15. Accounts in our consolidated statement of income are translated using the monthly average exchange rates during the year.
Monetary assets and liabilities denominated in a currency that is different from a reporting entity’s functional currency must first be remeasured from the applicable currency to the legal entity’s functional currency. The effect of this remeasurement process is recognized in the line item other income (loss) — net in our consolidated statement of income and is partially offset by the impact of our economic hedging program for certain exposures on our consolidated balance sheet. Refer to Note 5.
Recently Adopted Accounting Guidance
In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which permits entities to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”) on items within AOCI to reinvested earnings. These disproportionate income tax effect items are referred to as “stranded tax effects.” The amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act. Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income is not affected by this update. We adopted ASU 2018-02 effective January 1, 2019. We recognized a cumulative effect adjustment to increase the opening balance of reinvested earnings as of January 1, 2019 by $558 million related to the effect that the change in the income tax rate had on the gross deferred tax amounts of items remaining in AOCI.
NOTE 2: ACQUISITIONS AND DIVESTITURES
Acquisitions
During 2021, our Company’s acquisitions of businesses, equity method investments and nonmarketable securities totaled $4,766 million, which primarily related to the acquisition of the remaining ownership interest in BA Sports Nutrition, LLC (“BodyArmor”).
During 2020, our Company’s acquisitions of businesses, equity method investments and nonmarketable securities totaled $1,052 million, which primarily related to the acquisition of the remaining ownership interest in fairlife, LLC (“fairlife”).
During 2019, our Company’s acquisitions of businesses, equity method investments and nonmarketable securities totaled $5,542 million, which primarily related to the acquisitions of Costa, the remaining ownership interest in C.H.I. Limited (“CHI”) and controlling interests in bottling operations in Zambia, Kenya and Eswatini.
BA Sports Nutrition, LLC
In November 2021, the Company acquired the remaining 85 percent ownership interest in, and now owns 100 percent of, BodyArmor, which offers a line of sports performance and hydration beverages in the United States. We acquired the remaining ownership interest in exchange for approximately $5,600 million of cash, of which $4,745 million was paid at close, net of cash acquired. The purchase price reflected the contractual discount included in the purchase option we obtained with our initial
investment in 2018. The remaining $860 million of the purchase price was held back related to indemnification obligations, of which $540 million was included in the line item accounts payable and accrued expenses and $320 million was included in the line item other noncurrent liabilities in our consolidated balance sheet. Upon consolidation, we recognized a gain of $834 million resulting from the remeasurement of our previously held equity interest in BodyArmor 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 consolidated statement of income. As of December 31, 2021, $4.2 billion of the purchase price was preliminarily allocated to the BodyArmor trademark and $2.2 billion was preliminarily allocated to goodwill, of which $1.2 billion is tax deductible. The goodwill recognized as part of this acquisition is primarily related to the synergistic value created from leveraging the capabilities, assets and scale of the Company and the opportunity for international expansion. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce. Of the total amount preliminarily allocated to goodwill, $1.9 billion has been assigned to the North America operating segment and $0.3 billion has been assigned to our other geographic operating segments. The preliminary allocation of the purchase price is subject to refinement when valuations are finalized. As of December 31, 2021, the valuations that have not been finalized primarily relate to other intangible assets and operating lease ROU assets and operating lease liabilities. The final purchase price allocation will be completed no later than the fourth quarter of 2022.
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 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 years ended December 31, 2021 and 2020, we recorded charges of $369 million and $51 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 consolidated statements of income. During the year ended December 31, 2021, we made the first milestone payment of $100 million based on fairlife meeting its financial targets in 2020.
Costa Limited
In January 2019, the Company acquired Costa in exchange for $4.9 billion of cash, net of cash acquired. Costa is a coffee business with retail stores in more than 30 countries, the Costa Express vending system and a state-of-the-art roastery. We believe this acquisition will allow us to increase our presence in the hot beverage market, as Costa has a scalable platform across multiple formats and channels, including opportunities to introduce ready-to-drink products. Upon finalization of purchase accounting, $2.4 billion of the purchase price was allocated to the Costa trademark and $2.5 billion was allocated to goodwill. The goodwill recognized as part of this acquisition is primarily related to synergistic value created from the opportunity for additional expansion as well as our ability to market and distribute Costa in ready-to-drink form throughout our bottling system. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce. The goodwill is not tax deductible and has been assigned to the Global Ventures operating segment, except for $108 million which was assigned to the Europe, Middle East and Africa operating segment.
C.H.I. Limited
In January 2019, the Company acquired the remaining 60 percent ownership interest in CHI, a Nigerian producer of value-added dairy and juice beverages and iced tea, in exchange for $257 million of cash, net of cash acquired, under the terms of the agreement for our original investment in CHI. Upon consolidation, we recognized a net loss of $118 million, which included
the remeasurement of our previously held equity interest in CHI to fair value and the reversal of the related cumulative translation adjustments. The fair value of our previously held equity investment was determined using a discounted cash flow model based on Level 3 inputs. The net loss was recorded in the line item other income (loss) — net in our consolidated statement of income.
Divestitures
During 2021, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $2,180 million, which primarily related to the sale of 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. Also included were the sale of our ownership interest in an equity method investee and the sale of a portion of our ownership interest in another equity method investee. We received cash proceeds of $293 million and recognized a net gain of $114 million as a result of these sales.
During 2020, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $189 million, which primarily related to the sale of our ownership interest in Piedmont Coca-Cola Bottling Partnership to Coca-Cola Consolidated, Inc., an equity method investee. We received cash proceeds of $100 million and recognized a net loss of $2 million as a result of this sale. Also included were the sale of our ownership interest in an equity method investee and the sale of a portion of our ownership interest in another equity method investee. We received cash proceeds of $62 million and recognized a net gain of $35 million as a result of these sales.
During 2019, proceeds from disposals of businesses, equity method investments and nonmarketable securities totaled $429 million, which primarily related to the sale of a portion of our ownership interest in Embotelladora Andina S.A. (“Andina”) and the refranchising of certain of our bottling operations in India. As a result of these transactions, we recognized gains of $39 million and $73 million, respectively. We continue to account for our remaining ownership interest in Andina as an equity method investment as a result of our representation on Andina’s Board of Directors and other governance rights.
Coca-Cola Beverages Africa Proprietary Limited
Due to the Company’s original intent to refranchise Coca-Cola Beverages Africa Proprietary Limited (“CCBA”), it was accounted for as held for sale and as a discontinued operation from October 2017 through the first quarter of 2019. Additionally, CCBA’s property, plant and equipment was not depreciated and its definite-lived intangible assets were not amortized during this period. While the Company had discussions with a number of potential partners throughout the period CCBA was held for sale, during the second quarter of 2019 the Company updated its plans with the intent to maintain its controlling stake in CCBA, which resulted in CCBA no longer qualifying as held for sale or as a discontinued operation. As a result of this change, we recorded a $160 million adjustment to reduce the carrying value of CCBA’s property, plant and equipment and definite-lived intangible assets by an additional $34 million and $126 million, respectively, to reflect additional depreciation and amortization that would have been recognized during the period CCBA was held for sale. This adjustment was recorded in the line item other income (loss) — net in our consolidated statement of income.
Assets and Liabilities Held for Sale
As of December 31, 2021, the Company had certain bottling operations in Asia Pacific that met the criteria to be classified as held for sale. As a result, we were required to record their assets and liabilities at the lower of carrying value or fair value less any costs to sell. As the fair value less any costs to sell exceeded the carrying value, the related assets and liabilities were recorded at their carrying value. These assets and liabilities were included in the Bottling Investments operating segment. The Company expects these bottling operations to be refranchised during 2022.
The following table presents information related to the major classes of assets and liabilities that were classified as held for sale
and were included in the line items prepaid expenses and other current assets and accounts payable and accrued expenses, respectively, in our consolidated balance sheet (in millions):
| | | | | |
| December 31, 2021 |
Cash, cash equivalents and short-term investments | $ | 228 | |
Trade accounts receivable, less allowances | 21 | |
Inventories | 55 | |
Prepaid expenses and other current assets | 36 | |
Other noncurrent assets | 9 | |
Deferred income tax assets | 6 | |
Property, plant and equipment — net | 282 | |
Goodwill | 37 | |
Assets held for sale | $ | 674 | |
Accounts payable and accrued expenses | $ | 139 | |
Accrued income taxes | 4 | |
Other noncurrent liabilities | 9 | |
Deferred income tax liabilities | 5 | |
Liabilities held for sale | $ | 157 | |
NOTE 3: REVENUE RECOGNITION
Our Company markets, manufactures and sells:
•beverage concentrates, sometimes referred to as “beverage bases,” and syrups, including fountain syrups (we refer to this part of our business as our “concentrate operations”); and
•finished sparkling soft drinks and other beverages (we refer to this part of our business as our “finished product operations”).
Generally, finished product operations generate higher net operating revenues but lower gross profit margins than concentrate operations.
Our concentrate operations typically generate net operating revenues by selling concentrates, syrups and certain finished beverages to authorized bottling operations (to which we typically refer as our “bottlers” or our “bottling partners”). Our bottling partners either combine concentrates with still or sparkling water and sweeteners (depending on the product), or combine syrups with still or sparkling water, to produce finished beverages. The finished beverages are packaged in authorized containers, such as cans and refillable and nonrefillable glass and plastic bottles, bearing our trademarks or trademarks licensed to us and are then sold to retailers directly or, in some cases, through wholesalers or other bottlers. In addition, outside the United States, our bottling partners are typically authorized to manufacture fountain syrups, using our concentrates, which they sell to fountain retailers for use in producing beverages for immediate consumption, or to authorized fountain wholesalers who in turn sell and distribute the fountain syrups to fountain retailers. Our concentrate operations are included in our geographic operating segments and our Global Ventures operating segment.
Our finished product operations generate net operating revenues by selling sparkling soft drinks and a variety of other finished beverages to retailers, or to distributors and wholesalers who in turn sell the beverages to retailers. These operations consist primarily of our consolidated bottling and distribution operations, which are included in our Bottling Investments operating segment. In certain markets, the Company also operates non-bottling finished product operations in which we sell finished beverages to distributors and wholesalers that are generally not one of the Company’s bottling partners. These operations are generally included in one of our geographic operating segments or our Global Ventures operating segment. Additionally, we sell directly to consumers through retail stores operated by Costa. These sales are included in our Global Ventures operating segment. In the United States, we manufacture fountain syrups and sell them to fountain retailers, who use the fountain syrups to produce beverages for immediate consumption, or to authorized fountain wholesalers or bottling partners who in turn sell the fountain syrups to fountain retailers. These fountain syrup sales are included in our North America operating segment.
Revenue is recognized when performance obligations under the terms of the contracts with our customers are satisfied. Our performance obligation generally consists of the promise to sell concentrates, syrups or finished products to our bottling partners, wholesalers, distributors or retailers. Control of the concentrates, syrups or finished products is transferred upon shipment to, or receipt at, our customers’ locations, as determined by the specific terms of the contract. Upon transfer of control to the customer, which completes our performance obligation, revenue is recognized. Our sales terms generally do not allow for a right of return except for matters related to any manufacturing defects on our part. After completion of our performance obligation, we have an unconditional right to consideration as outlined in the contract. Our receivables will generally be collected in less than six months, in accordance with the underlying payment terms. All of our performance obligations under the terms of contracts with our customers have an original duration of one year or less.
Our customers and bottling partners may be entitled to cash discounts, funds for promotional and marketing activities, volume-based incentive programs, support for infrastructure programs and other similar programs. In most markets, in an effort to allow our Company and our bottling partners to grow together through shared value, aligned financial objectives and the flexibility necessary to meet consumers’ always changing needs and tastes, we have implemented an incidence-based concentrate pricing model. Under this model, the price we charge bottlers for concentrates they use to prepare and package finished products is impacted by a number of factors, including, but not limited to, the prices charged by the bottlers for such finished products, the channels in which they are sold, and package mix. The amounts associated with the arrangements described above represent variable consideration, an estimate of which is included in the transaction price as a component of net operating revenues in our consolidated statement of income upon completion of our performance obligations. The total revenue recorded, including any variable consideration, cannot exceed the amount for which it is probable that a significant reversal will not occur when uncertainties related to variability are resolved. As a result, we are recognizing revenue based on our faithful depiction of the consideration that we expect to receive. In making our estimates of variable consideration, we consider past results and make significant assumptions related to: (1) customer sales volumes; (2) customer ending inventories; (3) customer selling price per unit; (4) selling channels; and (5) discount rates, rebates and other pricing allowances, as applicable. In gathering data to estimate our variable consideration, we generally calculate our estimates using a portfolio approach at the country and product line level rather than at the individual contract level. The result of making these estimates will impact the line items trade accounts receivable and accounts payable and accrued expenses in our consolidated balance sheet. The actual amounts ultimately paid and/or received may be different from our estimates. The change in the amount of variable consideration recognized during the year ended December 31, 2021 related to performance obligations satisfied in prior periods was immaterial.
The following table presents net operating revenues disaggregated between the United States and International and further by line of business (in millions):
| | | | | | | | | | | |
| United States | International | Total |
Year Ended December 31, 2021 | | | |
Concentrate operations | $ | 6,551 | | $ | 15,248 | | $ | 21,799 | |
Finished product operations | 6,459 | | 10,397 | | 16,856 | |
Total | $ | 13,010 | | $ | 25,645 | | $ | 38,655 | |
Year Ended December 31, 2020 | | | |
Concentrate operations | $ | 5,443 | | $ | 13,139 | | $ | 18,582 | |
Finished product operations | 5,838 | | 8,594 | | 14,432 | |
Total | $ | 11,281 | | $ | 21,733 | | $ | 33,014 | |
Year Ended December 31, 2019 | | | |
Concentrate operations | $ | 5,252 | | $ | 15,247 | | $ | 20,499 | |
Finished product operations | 6,463 | | 10,304 | | 16,767 | |
Total | $ | 11,715 | | $ | 25,551 | | $ | 37,266 | |
Refer to Note 19 for additional revenue disclosures by operating segment and Corporate.
NOTE 4: INVESTMENTS
We measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with the change in fair value included in net income. We use quoted market prices to determine the fair values of equity securities with readily determinable fair values. For equity securities without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management assesses each of these investments on an individual basis.
Our investments in debt securities are carried at either amortized cost or fair value. The cost basis is determined by the specific identification method. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity. Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale. Realized and unrealized gains and losses on trading debt securities as well as realized gains and losses on available-for-sale debt securities are included in net income. Unrealized gains and losses, net of tax, on available-for-sale debt securities are included in our consolidated balance sheet as a component of AOCI, except for the changes in fair values attributable to the currency risk being hedged, if applicable, which are included in net income. Refer to Note 5 for additional information related to the Company’s fair value hedges of available-for-sale debt securities.
Equity securities with readily determinable fair values that are not accounted for under the equity method and debt securities classified as trading are not assessed for impairment, since they are carried at fair value with the change in fair value included in net income. Equity method investments, equity securities without readily determinable fair values and debt securities classified as available-for-sale or held-to-maturity are reviewed each reporting period to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value of each investment. When such events or changes occur, we evaluate the fair value compared to our cost basis in the investment. We also perform this evaluation every reporting period for each investment for which our cost basis has exceeded the fair value. The fair values of most of our Company’s investments in publicly traded companies are often readily available based on quoted market prices. For investments in nonpublicly traded companies, management’s assessment of fair value is based on valuation methodologies including discounted cash flows, estimates of sales proceeds and appraisals, as appropriate. We consider the assumptions that we believe a market participant would use in evaluating estimated future cash flows when employing the discounted cash flow or estimates of sales proceeds valuation methodologies. The ability to accurately predict future cash flows, especially in emerging and developing markets, may impact the determination of fair value. In the event the fair value of an investment declines below our cost basis, management is required to determine if the decline in fair value is other than temporary. If management determines the decline is other than temporary, an impairment charge is recorded. Management’s assessment as to the nature of a decline in fair value is based on, among other things, the length of time and the extent to which the market value has been less than our cost basis; the financial condition and near-term prospects of the issuer; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Equity Securities
The carrying values of our equity securities were included in the following line items in our consolidated balance sheets (in millions):
| | | | | | | | |
| Fair Value with Changes Recognized in Income | Measurement Alternative — No Readily Determinable Fair Value |
December 31, 2021 | | |
Marketable securities | $ | 376 | | $ | — | |
Other investments | 771 | | 47 | |
Other noncurrent assets | 1,576 | | — | |
Total equity securities | $ | 2,723 | | $ | 47 | |
December 31, 2020 | | |
Marketable securities | $ | 330 | | $ | — | |
Other investments | 762 | | 50 | |
Other noncurrent assets | 1,282 | | — | |
Total equity securities | $ | 2,374 | | $ | 50 | |
The calculation of net unrealized gains and losses recognized during the year related to equity securities still held at the end of the year is as follows (in millions):
| | | | | | | | |
Year Ended December 31, | 2021 | 2020 |
Net gains (losses) recognized during the year related to equity securities | $ | 509 | | $ | 146 | |
Less: Net gains (losses) recognized during the year related to equity securities sold during the year | 71 | | (22) | |
Net unrealized gains (losses) recognized during the year related to equity securities still held at the end of the year | $ | 438 | | $ | 168 | |
Debt Securities
Our debt securities consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | Gross Unrealized | Estimated Fair Value |
| Cost | Gains | Losses |
December 31, 2021 | | | | |
Trading securities | $ | 39 | | $ | 1 | | $ | — | | $ | 40 | |
Available-for-sale securities | 1,648 | | 33 | | (132) | | 1,549 | |
Total debt securities | $ | 1,687 | | $ | 34 | | $ | (132) | | $ | 1,589 | |
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 consolidated balance sheets (in millions):
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Trading Securities | Available-for-Sale Securities | | Trading Securities | Available-for-Sale Securities |
| | | | | |
Marketable securities | $ | 40 | | $ | 1,283 | | | $ | 38 | | $ | 1,980 | |
Other noncurrent assets | — | | 266 | | | — | | 285 | |
Total debt securities | $ | 40 | | $ | 1,549 | | | $ | 38 | | $ | 2,265 | |
The contractual maturities of these available-for-sale debt securities as of December 31, 2021 were as follows (in millions):
| | | | | | | | | | | |
| Cost | Estimated Fair Value | | | |
Within 1 year | $ | 28 | | $ | 28 | | | | |
After 1 year through 5 years | 1,355 | | 1,241 | | | | |
After 5 years through 10 years | 88 | | 98 | | | | |
After 10 years | 177 | | 182 | | | | |
Total | $ | 1,648 | | $ | 1,549 | | | | |
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):
| | | | | | | | | | | |
Year Ended December 31, | 2021 | 2020 | 2019 |
Gross gains | $ | 6 | | $ | 20 | | $ | 39 | |
Gross losses | (10) | | (13) | | (8) | |
Proceeds | 1,197 | | 1,559 | | 3,956 | |
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 $1,670 million and $1,389 million as of December 31, 2021 and 2020, respectively, which were classified in the line item other noncurrent assets in our consolidated balance sheets because the assets are not available to satisfy our current obligations.
NOTE 5: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as “market risks.” When deemed appropriate, our Company uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative and non-derivative financial 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. The Company may also designate certain non-derivative instruments, such as our foreign currency denominated third-party debt, in hedging relationships.
All derivative instruments are carried at fair value in our consolidated balance sheet, primarily in the following line items, as applicable: prepaid expenses and other current assets; other noncurrent assets; accounts payable and accrued expenses; and other noncurrent 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 consolidated statement 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 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 values 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 the fair values of derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized in 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.
The Company determines the fair values of its derivatives based on quoted market prices or pricing models using current market rates. Refer to Note 16. 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, commodity 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.
We adopted ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, effective January 1, 2019 using the modified retrospective method. For highly effective cash flow hedges, this ASU requires the entire change in fair value of the hedging instrument included in the assessment of hedge effectiveness to be recorded in other comprehensive income (“OCI”). No components of the Company’s hedging instruments were excluded from the assessment of hedge effectiveness. To reflect the adoption of the new hedging standard on our cash flow hedging relationships at January 1, 2019, we recorded a $6 million increase, net of taxes, to the opening balance of reinvested earnings and a corresponding decrease to AOCI. For fair value hedges of interest rate risk, this ASU allows entities to elect to use the benchmark interest rate component of the contractual coupon cash flows to calculate the change in fair value of the hedged item attributable to changes in the benchmark interest rate. As a result of applying the new hedging standard to our fair value hedges on January 1, 2019, we recorded a $24 million increase to our hedged long-term debt balances, with a corresponding decrease to the opening balance of reinvested earnings of $18 million, net of taxes.
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 | December 31, 2021 | December 31, 2020 |
Assets: | | | |
Foreign currency contracts | Prepaid expenses and other current assets | $ | 151 | | $ | 26 | |
Foreign currency contracts | Other noncurrent assets | 27 | | 74 | |
Commodity contracts | Prepaid expenses and other current assets | — | | 2 | |
Interest rate contracts | Prepaid expenses and other current assets | 1 | | — | |
Interest rate contracts | Other noncurrent assets | 282 | | 659 | |
Total assets | | $ | 461 | | $ | 761 | |
Liabilities: | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 15 | | $ | 29 | |
Foreign currency contracts | Other noncurrent liabilities | 17 | | — | |
| | | |
Interest rate contracts | Accounts payable and accrued expenses | — | | 5 | |
Interest rate contracts | Other noncurrent liabilities | 14 | | — | |
Total liabilities | | $ | 46 | | $ | 34 | |
1All of the Company’s derivative instruments are carried at fair value in our 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 16 for the net presentation of the Company’s derivative instruments.
2Refer to Note 16 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 | December 31, 2021 | December 31, 2020 |
Assets: | | | |
Foreign currency contracts | Prepaid expenses and other current assets | $ | 53 | | $ | 28 | |
Foreign currency contracts | Other noncurrent assets | — | | 1 | |
Commodity contracts | Prepaid expenses and other current assets | 131 | | 76 | |
Commodity contracts | Other noncurrent assets | 3 | | 9 | |
Other derivative instruments | Prepaid expenses and other current assets | 9 | | 20 | |
Other derivative instruments | Other noncurrent assets | — | | 3 | |
Total assets | | $ | 196 | | $ | 137 | |
Liabilities: | | | |
Foreign currency contracts | Accounts payable and accrued expenses | $ | 34 | | $ | 41 | |
Foreign currency contracts | Other noncurrent liabilities | 9 | | — | |
Commodity contracts | Accounts payable and accrued expenses | 6 | | 15 | |
Commodity contracts | Other noncurrent liabilities | 1 | | 1 | |
| | | |
| | | |
| | | |
| | | |
Total liabilities | | $ | 50 | | $ | 57 | |
1All of the Company’s derivative instruments are carried at fair value in our 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 16 for the net presentation of the Company’s derivative instruments.
2Refer to Note 16 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 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 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 three 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 $7,399 million and $7,785 million as of December 31, 2021 and 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 changes 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 fluctuations 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 $1,994 million and $2,700 million as of December 31, 2021 and 2020, respectively.
The Company has entered into commodity futures contracts and other derivative instruments on various commodities to mitigate the price risk associated with forecasted purchases of materials used in our manufacturing process. These derivative instruments 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 $10 million and $11 million as of December 31, 2021 and 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 December 31, 2021, we did not have any interest rate swaps designated as a cash flow hedge.
The following table presents the pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on 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 | | |
2021 | | | | | | |
Foreign currency contracts | $ | 36 | | | Net operating revenues | $ | (77) | | | |
Foreign currency contracts | (2) | | | Cost of goods sold | (10) | | | |
Foreign currency contracts | — | | | Interest expense | (13) | | | |
Foreign currency contracts | 19 | | | Other income (loss) — net | 74 | | | |
Interest rate contracts | 110 | | | Interest expense | (90) | | | |
Commodity contracts | (1) | | | Cost of goods sold | — | | | |
Total | $ | 162 | | | | $ | (116) | | | |
2020 | | | | | | |
Foreign currency contracts | $ | (93) | | | Net operating revenues | $ | (73) | | | |
Foreign currency contracts | 4 | | | Cost of goods sold | 9 | | | |
Foreign currency contracts | — | | | Interest expense | (16) | | | |
Foreign currency contracts | 37 | | | Other income (loss) — net | 60 | | | |
Interest rate contracts | 15 | | | Interest expense | (54) | | | |
Commodity contracts | 2 | | | Cost of goods sold | — | | | |
Total | $ | (35) | | | | $ | (74) | | | |
2019 | | | | | | |
Foreign currency contracts | $ | (58) | | | Net operating revenues | $ | (3) | | | |
Foreign currency contracts | 1 | | | Cost of goods sold | 11 | | | |
Foreign currency contracts | — | | | Interest expense | (9) | | | |
Foreign currency contracts | (97) | | | Other income (loss) — net | (119) | | | |
Interest rate contracts | (47) | | | Interest expense | (42) | | | |
Commodity contracts | 1 | | | Cost of goods sold | — | | | |
Total | $ | (200) | | | | $ | (162) | | | |
As of December 31, 2021, the Company estimates that it will reclassify into earnings during the next 12 months net gains of $36 million from the pretax amount recorded in AOCI as the anticipated cash flows occur.
Fair Value Hedging Strategy
The Company uses interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that result from fluctuations in benchmark interest rates. The Company also uses cross-currency interest rate swaps to hedge the changes in the fair value of foreign currency denominated debt relating to fluctuations in foreign currency exchange rates and benchmark interest rates. The changes in fair values of derivatives designated as fair value hedges and the offsetting changes in fair values of the hedged items are recognized in earnings. As a result, any difference is reflected in earnings as ineffectiveness. When a derivative is no longer designated as a fair value hedge for any reason, including termination and maturity, the remaining unamortized difference between the carrying value of the hedged item at that time and the face value of the hedged item is amortized to earnings over the remaining life of the hedged item, or immediately if the hedged item has matured or has been extinguished. The total notional values of derivatives that were designated and qualified as fair value hedges of this type were $12,113 million and $10,215 million as of December 31, 2021 and 2020, respectively.
The following table summarizes the pretax impact that changes in the fair values of derivatives designated as fair value hedges had on earnings (in millions):
| | | | | | | | |
Hedging Instruments and Hedged Items | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income |
2021 | | |
Interest rate contracts | Interest expense | $ | (67) | |
Fixed-rate debt | Interest expense | 66 | |
Net impact to interest expense | | $ | (1) | |
| | |
| | |
| | |
Net impact of fair value hedging instruments | | $ | (1) | |
2020 | | |
Interest rate contracts | Interest expense | $ | 275 | |
Fixed-rate debt | Interest expense | (274) | |
Net impact to interest expense | | $ | 1 | |
Foreign currency contracts | Other income (loss) — net | $ | (4) | |
Available-for-sale securities | Other income (loss) — net | 5 | |
Net impact to other income (loss) — net | | $ | 1 | |
Net impact of fair value hedging instruments | | $ | 2 | |
2019 | | |
Interest rate contracts | Interest expense | $ | 368 | |
Fixed-rate debt | Interest expense | (369) | |
Net impact to interest expense | | $ | (1) | |
| | |
| | |
| | |
Net impact of fair value hedging instruments | | $ | (1) | |
The following table summarizes the amounts recorded in our consolidated balance sheets related to hedged items in fair value hedging relationships (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Cumulative Amount of Fair Value Hedging Adjustments1 |
| Carrying Values of Hedged Items | | Included in the Carrying Values of Hedged Items | | Remaining for Which Hedge Accounting Has Been Discontinued |
Balance Sheet Location of Hedged Items | December 31, 2021 | December 31, 2020 | | December 31, 2021 | December 31, 2020 | | December 31, 2021 | December 31, 2020 |
Current maturities of long-term debt | $ | 200 | | $ | — | | | $ | 1 | | $ | — | | | $ | — | | $ | — | |
Long-term debt | 12,353 | | 11,129 | | | 255 | | 646 | | | 228 | | — | |
1 Cumulative amount of fair value hedging adjustments does not include changes due to foreign currency exchange rate fluctuations.
Hedges of Net Investments in Foreign Operations Strategy
The Company uses forward contracts and a portion of its foreign currency denominated debt, a non-derivative financial instrument, to protect the value of our net investments in a number of foreign operations. For derivative financial instruments that are designated and qualify as hedges of net investments in foreign operations, the changes in the fair values of the derivative financial instruments are recognized in net foreign currency translation adjustments, a component of AOCI, to offset the changes in the values of the net investments being hedged. For non-derivative financial instruments that are designated and qualify as hedges of net investments in foreign operations, the changes in the carrying values of the designated portions of the non-derivative financial instruments due to fluctuations in foreign currency exchange rates are recorded in net foreign currency translation adjustments. Any ineffective portions of net investment hedges are reclassified from AOCI into earnings during the period of change.
The following table summarizes the notional values and pretax impact of changes in the fair values of instruments designated as net investment hedges (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Gain (Loss) Recognized in OCI |
| as of December 31, | | Year Ended December 31, |
| 2021 | 2020 | | 2021 | 2020 | 2019 |
Foreign currency contracts | $ | 40 | | $ | 451 | | | $ | (10) | | $ | (5) | | $ | 51 | |
Foreign currency denominated debt | 12,812 | | 13,336 | | | 928 | | (1,089) | | 144 | |
Total | $ | 12,852 | | $ | 13,787 | | | $ | 918 | | $ | (1,094) | | $ | 195 | |
The Company reclassified a loss of $4 million related to net investment hedges from AOCI into earnings during the year ended December 31, 2021. The Company did not reclassify any gains or losses related to net investment hedges from AOCI into earnings during the years ended December 31, 2020 and 2019. In addition, the Company did not have any ineffectiveness related to net investment hedges during the years ended December 31, 2021, 2020 and 2019. The cash inflows and outflows associated with the Company’s derivative contracts designated as net investment hedges are classified in the line item other investing activities in our consolidated statement of cash flows.
Economic (Non-Designated) Hedging Strategy
In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives as economic hedges of foreign currency, interest rate and commodity exposure. Although these derivatives were not designated and/or did not qualify for hedge accounting, they are effective economic hedges. The changes in the fair values of economic hedges are immediately recognized in earnings.
The Company uses foreign currency economic hedges to offset the earnings impact that fluctuations in foreign currency exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies. The changes in the fair values of economic hedges used to offset those monetary assets and liabilities are immediately recognized in earnings in the line item other income (loss) — net in our consolidated statement of income. In addition, we use foreign currency economic hedges to minimize the variability in cash flows associated with fluctuations in foreign currency exchange rates, including those related to certain acquisition and divestiture activities. The changes in the fair values of economic hedges used to offset the variability in U.S. dollar net cash flows are immediately recognized in earnings in the line items net operating revenues, cost of goods sold or other income (loss) — net in our consolidated statement of income, as applicable. The total notional values of derivatives related to our foreign currency economic hedges were $4,258 million and $5,727 million as of December 31, 2021 and 2020, respectively.
The Company uses interest rate contracts as economic hedges to minimize exposure to changes in the fair value of fixed-rate debt that result from fluctuations in benchmark interest rates. The total notional value of derivatives related to our economic hedges of this type was $200 million as of both December 31, 2021 and 2020.
The Company also uses certain derivatives as economic hedges to mitigate the price risk associated with the purchase of materials used in the manufacturing process and vehicle fuel. The changes in the fair values of these economic hedges are immediately recognized in earnings in the line items net operating revenues, cost of goods sold, or selling, general and administrative expenses in our consolidated statement of income, as applicable. The total notional values of derivatives related to our economic hedges of this type were $908 million and $715 million as of December 31, 2021 and 2020, respectively.
The following table presents the pretax impact that changes in the fair values of derivatives not designated as hedging instruments had on earnings (in millions):
| | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income | Gain (Loss) Recognized in Income |
Year Ended December 31, |
2021 | 2020 | 2019 |
Foreign currency contracts | Net operating revenues | $ | 6 | | $ | 58 | | $ | (4) | |
Foreign currency contracts | Cost of goods sold | (10) | | 6 | | 1 | |
Foreign currency contracts | Other income (loss) — net | (84) | | (13) | | (66) | |
| | | | |
Commodity contracts | Cost of goods sold | 171 | | 54 | | (23) | |
| | | | |
Interest rate contracts | Interest expense | (187) | | 6 | | — | |
Other derivative instruments | Selling, general and administrative expenses | 34 | | 21 | | 47 | |
Other derivative instruments | Other income (loss) — net | (3) | | (55) | | 48 | |
Total | | $ | (73) | | $ | 77 | | $ | 3 | |
NOTE 6: EQUITY METHOD INVESTMENTS
Our consolidated net income includes our Company’s proportionate share of the net income or loss of our equity method investees. When we record our proportionate share of net income, it increases equity income (loss) — net in our consolidated statement of income and our carrying value of that investment. Conversely, when we record our proportionate share of a net loss, it decreases equity income (loss) — net in our consolidated statement of income and our carrying value of that investment. The Company’s proportionate share of the net income or loss of our equity method investees includes significant operating and nonoperating items recorded by our equity method investees. These items can have a significant impact on the amount of equity income (loss) — net in our consolidated statement of income and our carrying value of those investments. Refer to Note 17 for additional information related to significant operating and nonoperating items recorded by our equity method investees. The carrying values of our equity method investments are also impacted by our proportionate share of items impacting the equity method investees’ AOCI.
We eliminate from our financial results all significant intercompany transactions to the extent of our ownership interest, including the intercompany portion of transactions with equity method investees.
The Company’s equity method investments include, but are not limited to, our ownership interests in CCEP, Monster, AC Bebidas, S. de R.L. de C.V., Coca-Cola FEMSA, S.A.B. de C.V., Coca-Cola HBC AG and Coca-Cola Bottlers Japan Holdings Inc. (“CCBJHI”). As of December 31, 2021, we owned approximately 19 percent, 19 percent, 20 percent, 28 percent, 21 percent and 19 percent, respectively, of these companies’ outstanding shares. As of December 31, 2021, our investments in our equity method investees in the aggregate exceeded our proportionate share of the net assets of these equity method investees by $7,298 million. This difference is not amortized.
A summary of financial information for our equity method investees in the aggregate is as follows (in millions):
| | | | | | | | | | | |
Year Ended December 31,1 | 2021 | 2020 | 2019 |
Net operating revenues | $ | 79,934 | | $ | 69,384 | | $ | 75,980 | |
Cost of goods sold | 47,847 | | 41,139 | | 44,881 | |
Gross profit | $ | 32,087 | | $ | 28,245 | | $ | 31,099 | |
Operating income | $ | 9,089 | | $ | 7,056 | | $ | 7,748 | |
Consolidated net income | $ | 6,050 | | $ | 4,176 | | $ | 4,597 | |
Less: Net income attributable to noncontrolling interests | 91 | | 54 | | 63 | |
Net income attributable to common shareowners | $ | 5,959 | | $ | 4,122 | | $ | 4,534 | |
Company equity income (loss) — net | $ | 1,438 | | $ | 978 | | $ | 1,049 | |
1 The financial information represents the results of the equity method investees during the Company’s period of ownership.
| | | | | | | | |
December 31, | 2021 | 2020 |
Current assets | $ | 30,992 | | $ | 29,431 | |
Noncurrent assets | 72,064 | | 67,900 | |
Total assets | $ | 103,056 | | $ | 97,331 | |
Current liabilities | $ | 21,362 | | $ | 20,033 | |
Noncurrent liabilities | 37,353 | | 33,613 | |
Total liabilities | $ | 58,715 | | $ | 53,646 | |
Equity attributable to shareowners of investees | $ | 43,422 | | $ | 42,622 | |
Equity attributable to noncontrolling interests | 919 | | 1,063 | |
Total equity | $ | 44,341 | | $ | 43,685 | |
Company equity method investments | $ | 17,598 | | $ | 19,273 | |
Net sales to equity method investees, the majority of which are located outside the United States, were $14,471 million, $13,041 million and $14,832 million in 2021, 2020 and 2019, respectively. Total payments, primarily related to marketing, made to equity method investees were $516 million, $547 million and $897 million in 2021, 2020 and 2019, respectively. The increase in net sales to equity method investees in 2021 was primarily due to recovery from the COVID-19 pandemic. In addition, purchases of beverage products from equity method investees were $496 million, $452 million and $426 million in 2021, 2020 and 2019, respectively. The increase in purchases of beverage products in 2021 was primarily due to increased purchases of Monster products as a result of international expansion and category growth.
The following table presents the difference between calculated fair value, based on quoted closing prices of publicly traded shares, and our Company’s carrying value in investments in publicly traded companies accounted for under the equity method (in millions):
| | | | | | | | | | | |
December 31, 2021 | Fair Value | Carrying Value | Difference |
Monster Beverage Corporation | $ | 9,808 | | $ | 4,323 | | $ | 5,485 | |
Coca-Cola Europacific Partners plc | 4,919 | | 3,578 | | 1,341 | |
Coca-Cola FEMSA, S.A.B. de C.V. | 3,182 | | 1,568 | | 1,614 | |
Coca-Cola HBC AG | 2,705 | | 1,115 | | 1,590 | |
Coca-Cola Consolidated, Inc. | 1,537 | | 224 | | 1,313 | |
Coca-Cola Bottlers Japan Holdings Inc.1 | 387 | | 474 | | (87) | |
Coca-Cola İçecek A.Ş. | 340 | | 123 | | 217 | |
Embotelladora Andina S.A. | 130 | | 98 | | 32 | |
Total | $ | 23,008 | | $ | 11,503 | | $ | 11,505 | |
1The carrying value of our investment in CCBJHI exceeded its fair value as of December 31, 2021 by $87 million. Based on the length of time and the extent to which the fair value has been less than our carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value, management determined that the decline in fair value was temporary in nature. Therefore, we did not record an impairment charge related to the investment.
Net Receivables and Dividends from Equity Method Investees
Total net receivables due from equity method investees were $882 million and $1,025 million as of December 31, 2021 and 2020, respectively. The total amount of dividends received from equity method investees was $823 million, $467 million and $628 million for the years ended December 31, 2021, 2020 and 2019, respectively. The amount of consolidated reinvested earnings that represents undistributed earnings of investments accounted for under the equity method as of December 31, 2021 was $6,143 million.
NOTE 7: INTANGIBLE ASSETS
Indefinite-Lived Intangible Assets
The following table presents the carrying values of indefinite-lived intangible assets included in our consolidated balance sheets (in millions):
| | | | | | | | |
December 31, | 2021 | 2020 |
Trademarks1 | $ | 14,465 | | $ | 10,395 | |
Goodwill | 19,363 | | 17,506 | |
Other | 211 | | 225 | |
Indefinite-lived intangible assets | $ | 34,039 | | $ | 28,126 | |
1 For information related to the Company’s acquisitions, refer to Note 2.
The following table provides information related to the carrying value of our goodwill by operating segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Europe, Middle East & Africa | Latin America | North America | Asia Pacific | Global Ventures | Bottling Investments | Total |
2020 | | | | | | | |
Balance at beginning of year | $ | 1,294 | | $ | 170 | | $ | 7,943 | | $ | 170 | | $ | 2,806 | | $ | 4,381 | | $ | 16,764 | |
Effect of foreign currency translation | 40 | | (6) | | — | | 7 | | 84 | | (216) | | (91) | |
Acquisitions1 | — | | — | | 775 | | — | | — | | — | | 775 | |
Purchase accounting adjustments1,2 | (26) | | — | | 74 | | 24 | | 2 | | (2) | | 72 | |
Impairments | — | | — | | — | | — | | — | | (14) | | (14) | |
| | | | | | | |
Balance at end of year | $ | 1,308 | | $ | 164 | | $ | 8,792 | | $ | 201 | | $ | 2,892 | | $ | 4,149 | | $ | 17,506 | |
2021 | | | | | | | |
Balance at beginning of year | $ | 1,308 | | $ | 164 | | $ | 8,792 | | $ | 201 | | $ | 2,892 | | $ | 4,149 | | $ | 17,506 | |
Effect of foreign currency translation | (83) | | (8) | | — | | (6) | | 46 | | (285) | | (336) | |
Acquisitions1 | 55 | | 44 | | 1,886 | | 227 | | 45 | | — | | 2,257 | |
| | | | | | | |
Impairments | — | | — | | — | | — | | — | | (7) | | (7) | |
Divestitures, deconsolidations and other3 | — | | — | | (13) | | — | | (7) | | (37) | | (57) | |
Balance at end of year | $ | 1,280 | | $ | 200 | | $ | 10,665 | | $ | 422 | | $ | 2,976 | | $ | 3,820 | | $ | 19,363 | |
1For information related to the Company’s acquisitions, refer to Note 2.
2Includes the allocation of goodwill from the Europe, Middle East and Africa segment to other reporting units expected to benefit from the CHI acquisition as well as purchase accounting adjustments related to fairlife. Refer to Note 2.
3The decrease in the Bottling Investments segment was a result of certain bottling operations in Asia Pacific being classified as held for sale. Refer to Note 2.
Definite-Lived Intangible Assets
The following table provides information related to definite-lived intangible assets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Gross Carrying Value | | Accumulated Amortization | Net Carrying Value | | Gross Carrying Value | Accumulated Amortization | Net Carrying Value |
Customer relationships | $ | 336 | | 1 | $ | (86) | | $ | 250 | | | $ | 195 | | $ | (61) | | $ | 134 | |
Trademarks | 189 | | | (87) | | 102 | | | 245 | | (77) | | 168 | |
Other | 273 | | 2 | (51) | | 222 | | | 332 | | (210) | | 122 | |
Total | $ | 798 | | | $ | (224) | | $ | 574 | | | $ | 772 | | $ | (348) | | $ | 424 | |
1Includes $150 million related to the BodyArmor acquisition. Refer to Note 2.
2Includes $102 million for BodyArmor noncompete agreements. Refer to Note 2.
Total amortization expense for intangible assets subject to amortization was $165 million, $203 million and $120 million in 2021, 2020 and 2019, respectively. The increase in amortization expense in 2020 was due to the recognition of a full year of intangible amortization related to CCBA versus seven months in 2019.
Based on the carrying value of definite-lived intangible assets as of December 31, 2021, we estimate our amortization expense for the next five years will be as follows (in millions):
| | | | | |
| Amortization Expense |
2022 | $ | 106 | |
2023 | 81 | |
2024 | 66 | |
2025 | 59 | |
2026 | 47 | |
NOTE 8: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following (in millions):
| | | | | | | | |
December 31, | 2021 | 2020 |
Accounts payable | $ | 4,602 | | $ | 3,517 | |
Accrued marketing expenses | 2,830 | | 1,930 | |
Variable consideration payable | 1,118 | | 1,137 | |
Accrued compensation | 1,051 | | 609 | |
Other accrued expenses | 5,018 | | 3,952 | |
Accounts payable and accrued expenses | $ | 14,619 | | $ | 11,145 | |
NOTE 9: LEASES
We have operating leases primarily for real estate, aircraft, vehicles, and manufacturing and other equipment.
Balance sheet information related to operating leases is as follows (in millions):
| | | | | | | | |
December 31, | 2021 | 2020 |
Operating lease ROU assets1 | $ | 1,418 | | $ | 1,548 | |
Current portion of operating lease liabilities2 | $ | 310 | | $ | 322 | |
Noncurrent portion of operating lease liabilities3 | 1,161 | | 1,300 | |
Total operating lease liabilities | $ | 1,471 | | $ | 1,622 | |
1 Operating lease ROU assets are included in the line item other noncurrent assets in our consolidated balance sheets.
2 The current portion of operating lease liabilities is included in the line item accounts payable and accrued expenses in our consolidated balance sheets.
3 The noncurrent portion of operating lease liabilities is included in the line item other noncurrent liabilities in our consolidated balance sheets.
We had operating lease costs of $342 million and $353 million for the years ended December 31, 2021 and 2020, respectively. During 2021 and 2020, cash paid for amounts included in the measurement of operating lease liabilities was $352 million and $365 million, respectively. Operating lease ROU assets obtained in exchange for operating lease obligations were $194 million and $528 million for the years ended December 31, 2021 and 2020, respectively.
Information associated with the measurement of our operating lease obligations as of December 31, 2021 is as follows:
| | | | | |
Weighted-average remaining lease term | 8 years |
Weighted-average discount rate | 2.7 | % |
Our leases have remaining lease terms of 1 year to 43 years, inclusive of renewal or termination options that we are reasonably certain to exercise.
The following table summarizes the maturities of our operating lease liabilities as of December 31, 2021 (in millions):
| | | | | |
| Maturities of Operating Lease Liabilities |
2022 | $ | 324 | |
2023 | 284 | |
2024 | 231 | |
2025 | 190 | |
2026 | 142 | |
Thereafter | 476 | |
Total operating lease payments | 1,647 | |
Less: Imputed interest | 176 | |
Total operating lease liabilities | $ | 1,471 | |
NOTE 10: DEBT AND BORROWING ARRANGEMENTS
Short-Term Borrowings
Loans and notes payable consist primarily of commercial paper issued in the United States. As of December 31, 2021 and 2020, we had $2,462 million and $1,329 million, respectively, in outstanding commercial paper borrowings. Our weighted-average interest rates for commercial paper outstanding were approximately 0.1 percent and 1.3 percent as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, the Company also had $845 million and $854 million, respectively, in lines of credit, short-term credit facilities and other short-term borrowings that were related to our international operations.
In addition, we had $9,972 million in unused lines of credit and other short-term credit facilities as of December 31, 2021, of which $8,060 million was in corporate backup lines of credit for general purposes. These backup lines of credit expire at various times from 2022 through 2027. There were no borrowings under these corporate backup lines of credit during 2021. These credit facilities are subject to normal banking terms and conditions. Some of the financial arrangements require compensating balances, none of which is presently significant to our Company.
Long-Term Debt
During 2021, the Company issued fixed interest rate U.S. dollar- and euro-denominated notes of $5,950 million and €3,150 million, respectively, with maturity dates ranging from 2028 to 2051 and interest rates ranging from 0.125 percent to 3.000 percent. The carrying value of these notes as of December 31, 2021 was $9,410 million.
During 2021, the Company retired upon maturity variable interest rate euro-denominated notes of €371 million with an interest rate equal to the three-month Euro Interbank Offered Rate (“EURIBOR”) plus 0.200 percent.
During 2021, the Company also extinguished prior to maturity fixed interest rate U.S. dollar- and euro-denominated notes of $6,500 million and €2,430 million, respectively, with maturity dates ranging from 2023 to 2026 and interest rates ranging from 0.750 percent to 3.200 percent. These extinguishments resulted in associated charges of $559 million recorded in the line item interest expense in our consolidated statement of income. These charges included the difference between the reacquisition price and the net carrying value of the notes extinguished, including the impact of the related fair value hedging relationships. We also incurred charges of $91 million as a result of the reclassification of related cash flow hedging balances from AOCI into income.
During 2020, the Company issued fixed interest rate U.S. dollar- and euro-denominated notes of $15,600 million and €2,600 million, respectively, with maturity dates ranging from 2025 to 2060 and interest rates ranging from 0.125 percent to 4.200 percent. The carrying value of these notes as of December 31, 2020 was $17,616 million.
During 2020, the Company retired upon maturity fixed interest rate Australian dollar- and U.S. dollar-denominated notes of AUD450 million and $3,750 million, respectively, with interest rates ranging from 1.875 percent to 3.150 percent. Additionally, the Company retired upon maturity U.S. dollar zero coupon notes of $171 million.
During 2020, the Company also extinguished prior to maturity fixed interest rate U.S. dollar- and euro-denominated notes of $3,815 million and €2,300 million, respectively, with maturity dates ranging from 2021 to 2050 and interest rates ranging from
0.000 percent to 4.200 percent. Additionally, the Company extinguished prior to maturity variable interest rate euro-denominated notes of €379 million with a maturity date in 2021 and an interest rate equal to the three-month EURIBOR plus 0.200 percent. These extinguishments resulted in associated charges of $459 million recorded in the line item interest expense in our consolidated statement of income. These charges included the difference between the reacquisition price and the net carrying value of the notes extinguished, including the impact of the related fair value hedging relationships. We also incurred charges of $25 million as a result of the reclassification of related cash flow hedging balances from AOCI into income.
During 2019, the Company issued fixed interest rate euro- and U.S. dollar-denominated notes of €2,750 million and $2,000 million, respectively, with maturity dates ranging from 2022 to 2031 and interest rates ranging from 0.125 percent to 2.125 percent. Additionally, the Company issued variable interest rate euro-denominated notes of €750 million maturing in 2021 with an interest rate equal to the three-month EURIBOR plus 0.200 percent. The carrying value of these notes as of December 31, 2019 was $5,891 million.
During 2019, the Company retired upon maturity variable interest rate euro-denominated notes of €3,500 million with interest rates equal to the three-month EURIBOR plus 0.230 percent and the three-month EURIBOR plus 0.250 percent. Additionally, the Company retired upon maturity fixed interest rate U.S. dollar-denominated notes of $1,000 million with an interest rate of 1.375 percent.
The Company’s long-term debt consisted of the following (in millions except average rate data):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Amount | | Average Rate1 | | Amount | | Average Rate1 |
Fixed interest rate long-term debt: | | | | | | | |
U.S. dollar notes due 2023-2093 | $ | 21,953 | | | 2.2 | % | | $ | 22,550 | | | 2.0 | % |
U.S. dollar debentures due 2022-2098 | 1,316 | | | 5.2 | | | 1,342 | | | 5.1 | |
Australian dollar notes due 2024 | 398 | | | 2.5 | | | 400 | | | 2.5 | |
Euro notes due 2023-2041 | 13,249 | | | 0.4 | | | 13,369 | | | 0.3 | |
Swiss franc notes due 2022-2028 | 1,234 | | | 2.3 | | | 1,236 | | | 2.7 | |
Variable interest rate long-term debt: | | | | | | | |
Euro notes due 2021 | — | | | — | | | 452 | | | 0.0 | |
Other, due through 20982 | 821 | | | 6.0 | | | 615 | | | 5.2 | |
Fair value adjustments3 | 483 | | | N/A | | 646 | | | N/A |
Total4,5 | 39,454 | | | 1.7 | % | | 40,610 | | | 1.6 | % |
Less: Current portion | 1,338 | | | | | 485 | | | |
Long-term debt | $ | 38,116 | | | | | $ | 40,125 | | | |
1Rates represent the weighted-average effective interest rate on the balances outstanding as of year end, as adjusted for the effects of interest rate swap agreements, cross-currency swap agreements and fair value adjustments, if applicable. Refer to Note 5 for a more detailed discussion on interest rate management.
2As of December 31, 2021, the amount shown includes $690 million of debt instruments and finance leases that are due through 2046.
3Amounts represent the changes in fair values due to changes in benchmark interest rates. Refer to Note 5 for additional information about our fair value hedging strategy.
4As of December 31, 2021 and 2020, the fair value of our long-term debt, including the current portion, was $40,311 million and $43,218 million, respectively.
5The above notes and debentures include various restrictions, none of which is presently significant to our Company.
Total interest paid was $738 million, $935 million and $921 million in 2021, 2020 and 2019, respectively.
The following table summarizes the maturities of long-term debt for the five years succeeding December 31, 2021 (in millions):
| | | | | |
| Maturities of Long-Term Debt |
2022 | $ | 1,338 | |
2023 | 177 | |
2024 | 2,023 | |
2025 | 18 | |
2026 | 1,733 | |
NOTE 11: COMMITMENTS AND CONTINGENCIES
Guarantees
As of December 31, 2021, we were contingently liable for guarantees of indebtedness owed by third parties of $440 million, of which $93 million was related to VIEs. Refer to Note 1 for additional information related to the Company’s maximum exposure to loss due to our involvement with VIEs. Our guarantees are primarily related to third-party customers, bottlers and vendors and have arisen through the normal course of business. These guarantees have various terms, and none of these guarantees is individually significant. These amounts represent the maximum potential future payments that we could be required to make under the guarantees. However, management has concluded that the likelihood of any significant amounts being paid by our Company under these guarantees is not probable.
We believe our exposure to concentrations of credit risk is limited due to the diverse geographic areas covered by our operations.
Legal Contingencies
The Company is involved in various legal proceedings. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made. Management believes that the total liabilities of the Company that may arise as a result of currently pending legal proceedings (excluding tax audit claims) will not have a material adverse effect on the Company taken as a whole.
Indemnifications
At the time we acquire or divest an ownership interest in an entity, we sometimes agree to indemnify the seller or buyer for specific contingent liabilities. Management believes that any liability to the Company that may arise as a result of any such indemnification agreements will not have a material adverse effect on the Company taken as a whole.
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 caselaw and their applicability to the facts and circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved. The number of years subject to tax audits or tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in income tax expense in the quarter in which the uncertainty disappears under any one of the following conditions: (1) the tax position is “more likely than not” to be sustained; (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation; or (3) the statute of limitations for the tax position has expired. Refer to Note 14.
On September 17, 2015, the Company received a Statutory Notice of Deficiency (“Notice”) from the U.S. Internal Revenue Service (“IRS”) seeking approximately $3.3 billion of additional federal income tax for years 2007 through 2009. In the Notice, the IRS stated its intent to reallocate over $9 billion of income to the U.S. parent company from certain of its foreign affiliates that the U.S. parent company licensed to manufacture, distribute, sell, market and promote its products in certain non-U.S. markets.
The Notice concerned the Company’s transfer pricing between its U.S. parent company and certain of its foreign affiliates. IRS rules governing transfer pricing require arm’s-length pricing of transactions between related parties such as the Company’s U.S. parent and its foreign affiliates.
To resolve the same transfer pricing issue for the tax years 1987 through 1995, the Company and the IRS had agreed in 1996 on an arm’s-length methodology for determining the amount of U.S. taxable income that the U.S. parent company would report as compensation from its foreign licensees. The Company and the IRS memorialized this accord in a closing agreement resolving that dispute (“Closing Agreement”). The Closing Agreement provided that, absent a change in material facts or circumstances or relevant federal tax law, in calculating the Company’s income taxes going forward, the Company would not be assessed
penalties by the IRS for using the agreed-upon tax calculation methodology that the Company and the IRS agreed would be used for the 1987 through 1995 tax years.
The IRS audited and confirmed the Company’s compliance with the agreed-upon Closing Agreement methodology in five successive audit cycles for tax years 1996 through 2006.
The September 17, 2015 Notice from the IRS retroactively rejected the previously agreed-upon methodology for the 2007 through 2009 tax years in favor of an entirely different methodology, without prior notice to the Company. Using the new tax calculation methodology, the IRS reallocated over $9 billion of income to the U.S. parent company from its foreign licensees for tax years 2007 through 2009. Consistent with the Closing Agreement, the IRS did not assert penalties, and it has yet to do so.
The IRS designated the Company’s matter for litigation on October 15, 2015. Litigation designation is an IRS determination that forecloses to a company any and all alternative means for resolution of a tax dispute. As a result of the IRS’ designation of the Company’s matter for litigation, the Company was forced to either accept the IRS’ newly imposed tax assessment and pay the full amount of the asserted tax or litigate the matter in the federal courts. The matter remains subject to the IRS’ litigation designation, preventing the Company from any attempt to settle or otherwise mutually resolve the matter with the IRS.
The Company consequently initiated litigation by filing a petition in the U.S. Tax Court (“Tax Court”) in December 2015, challenging the tax adjustments enumerated in the Notice.
Prior to trial, the IRS increased its transfer pricing adjustment by $385 million, resulting in an additional tax adjustment of $135 million. The Company obtained a summary judgment in its favor on a different matter related to Mexican foreign tax credits, which thereafter effectively reduced the IRS’ potential tax adjustment by approximately $138 million.
The trial was held in the Tax Court from March through May 2018, and final post-trial briefs were filed and exchanged in April 2019.
On November 18, 2020, the Tax Court issued an opinion (“Opinion”) in which it predominantly sided with the IRS but agreed with the Company that dividends previously paid by the foreign licensees to the U.S. parent company in reliance upon the Closing Agreement should continue to be allowed to offset royalties, including those that would become payable to the Company in accordance with the Opinion. The Tax Court reserved ruling on the effect of Brazilian legal restrictions on the payment of royalties by the Company’s licensee in Brazil until after the Tax Court issues its opinion in the separate case of 3M Co. & Subs. v. Commissioner, T.C. Docket No. 5816-13 (filed March 11, 2013). Once the Tax Court issues its opinion in 3M Co. & Subs. v. Commissioner, the Company expects the Tax Court thereafter to render another opinion, and ultimately a final decision, in the Company’s case.
The Company believes that the IRS and the Tax Court misinterpreted and misapplied the applicable regulations in reallocating income earned by the Company’s foreign licensees to increase the Company’s U.S. tax. Moreover, the Company believes that the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed upon by the IRS and the Company, and audited by the IRS for over a decade, is unconstitutional. The Company intends to assert its claims on appeal and vigorously defend its position.
In determining the amount of tax reserve to be recorded as of December 31, 2020, the Company completed the required two-step evaluation process prescribed by Accounting Standards Codification 740, Accounting for Income Taxes. In doing so, we consulted with outside advisors and we reviewed and considered relevant laws, rules, and regulations, including, but not limited to, the Opinion and relevant caselaw. We also considered our intention to vigorously defend our positions and assert our various well-founded legal claims via every available avenue of appeal. We concluded, based on the technical and legal merits of the Company’s tax positions, that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal. In addition, we considered a number of alternative transfer pricing methodologies, including the methodology asserted by the IRS and affirmed in the Opinion (“Tax Court Methodology”), that could be applied by the courts upon final resolution of the litigation. Based on the required probability analysis, we determined the methodologies we believe the federal courts could ultimately order to be used in calculating the Company’s tax. As a result of this analysis, we recorded a tax reserve of $438 million during the year ended December 31, 2020 related to the application of the resulting methodologies as well as the different tax treatment applicable to dividends originally paid to the U.S. parent company by its foreign licensees, in reliance upon the Closing Agreement, that would be recharacterized as royalties in accordance with the Opinion and the Company’s analysis.
The Company’s conclusion that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal is unchanged as of December 31, 2021. However, we updated our calculation of the methodologies we believe the federal courts could ultimately order to be used in calculating the Company’s tax. As a result of the application of the required probability
analysis to these updated calculations and the accrual of interest through the current reporting period, we updated our tax reserve as of December 31, 2021 to $400 million.
While the Company strongly disagrees with the IRS’ positions and the portions of the Opinion affirming such positions, it is possible that some portion or all of the adjustment proposed by the IRS and sustained by the Tax Court could ultimately be upheld. In that event, the Company would likely be subject to significant additional liabilities for tax years 2007 through 2009, and potentially also for subsequent years, which could have a material adverse impact on the Company’s financial position, results of operations, and cash flows.
The Company calculated the potential impact of applying the Tax Court Methodology to reallocate income from foreign licensees potentially covered within the scope of the Opinion, assuming such methodology were to be ultimately upheld by the courts, and the IRS were to decide to apply that methodology to subsequent years, with consent of the federal courts. This impact would include taxes and interest accrued through December 31, 2021 for the 2007 through 2009 litigated tax years and for subsequent tax years from 2010 through 2021. The calculations incorporated the estimated impact of correlative adjustments to the previously accrued transition tax payable under the 2017 Tax Cuts and Jobs Act. The Company estimates that the potential aggregate incremental tax and interest liability could be approximately $13 billion as of December 31, 2021. Additional income tax and interest would continue to accrue until the time any such potential liability, or portion thereof, were to be paid. We currently project the continued application of the Tax Court Methodology in future years, assuming similar facts and circumstances as of December 31, 2021, would result in an incremental annual tax liability that would increase the Company’s effective tax rate by approximately 3.5 percent.
The Company does not know when the Tax Court will issue its opinion regarding the effect of Brazilian legal restrictions on the payment of royalties by the Company’s licensee in Brazil for the 2007 through 2009 tax years. After the Tax Court issues its opinion on the Company’s Brazilian licensee, the Company and the IRS will be provided time to agree on the tax impact, if any, of both opinions, after which the Tax Court would render a final decision in the case. The Company will have 90 days thereafter to file a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit and pay the tax liability and interest related to the 2007 through 2009 tax years. The Company currently estimates that the payment to be made at that time related to the 2007 through 2009 tax years, which is included in the above estimate of the potential aggregate incremental tax and interest liability, would be approximately $4.9 billion (including interest accrued through December 31, 2021), plus any additional interest accrued through the time of payment. Some or all of this amount would be refunded if the Company were to prevail on appeal.
Risk Management Programs
The Company has numerous global insurance programs in place to help protect the Company from the risk of loss. In general, we are self-insured for large portions of many different types of claims; however, we do use commercial insurance above our self-insured retentions to reduce the Company’s risk of catastrophic loss. Our reserves for the Company’s self-insured losses are estimated using actuarial methods and assumptions of the insurance industry, adjusted for our specific expectations based on our claims history. Our self-insurance reserves totaled $229 million and $265 million as of December 31, 2021 and 2020, respectively.
NOTE 12: STOCK-BASED COMPENSATION PLANS
Our Company grants long-term equity awards under its stock-based compensation plans to certain employees of the Company. The Coca-Cola Company 2014 Equity Plan (“2014 Equity Plan”) was approved by shareowners in April 2014. Under the 2014 Equity Plan, a maximum of 500 million shares of our common stock was approved to be issued through the grant of equity awards. The 2014 Equity Plan allows for grants of stock options, performance share units, restricted stock, restricted stock units and other specified award types, including cash awards with performance-based vesting criteria. As of December 31, 2021, there were approximately 329 million shares available to be granted under the 2014 Equity Plan. In addition, there were approximately 3 million shares available for stock option and restricted stock award grants under plans approved by shareowners prior to 2014.
From 2015 to 2017, certain employees who had previously been eligible for long-term equity awards received long-term performance-based cash awards. Employees who received these performance-based cash awards did not receive equity awards as part of the long-term incentive program. In 2017, the Company changed the long-term incentive program for employees previously eligible for the performance-based cash award. These employees no longer participate in the long-term incentive program and were granted a final restricted stock unit award that vests ratably over five years.
Total stock-based compensation expense was $337 million, $141 million and $201 million in 2021, 2020 and 2019, respectively. In 2020, for certain employees who accepted voluntary separation from the Company as a result of our strategic realignment initiatives, the Company modified their outstanding equity awards granted prior to 2020 so that the employees
retained all or some of their awards, whereas otherwise the awards would have been forfeited. The incremental stock-based compensation expense in 2020 arising from the modifications was $15 million, which was recorded in the line item other operating charges in our consolidated statement of income. Refer to Note 18 for additional information on the Company’s strategic realignment initiatives. The remainder of stock-based compensation expense in 2020 of $126 million and all stock-based compensation expense in 2021 and 2019 were recorded in the line item selling, general and administrative expenses in our consolidated statements of income. The total income tax benefit recognized in our consolidated statements of income related to total stock-based compensation expense was $60 million, $32 million and $43 million in 2021, 2020 and 2019, respectively.
As of December 31, 2021, we had $335 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under our plans, which we expect to recognize over a weighted-average period of 1.9 years as stock‑based compensation expense. This expected cost does not include the impact of any future stock-based compensation awards.
Stock Option Awards
Stock option awards are generally granted with an exercise price equal to the average of the high and low market prices per share of the Company’s stock on the date of grant. The fair value of each stock option award is estimated using a Black-Scholes-Merton option-pricing model and is expensed on a straight-line basis over the vesting period, which is generally four years.
The weighted-average fair value of stock options granted during the years ended December 31, 2021, 2020 and 2019 and the weighted-average assumptions used in the Black-Scholes-Merton option-pricing model for such grants were as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Fair value of stock options on grant date | $ | 5.08 | | | $ | 6.44 | | | $ | 4.94 | |
Dividend yield1 | 3.3 | % | | 2.7 | % | | 3.5 | % |
Expected volatility2 | 18.0 | % | | 16.0 | % | | 15.5 | % |
Risk-free interest rate3 | 0.9 | % | | 1.4 | % | | 2.6 | % |
Expected term of stock options4 | 6 years | | 6 years | | 6 years |
1The dividend yield is the calculated yield on the closing market price per share of the Company’s stock on the grant date.
2The expected volatility is based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors.
3The risk-free interest rate for the period matching the expected term of the stock options is based on the U.S. Treasury yield curve in effect on the grant date.
4The expected term of the stock options represents the period of time that options granted are expected to be outstanding and is derived by analyzing historical exercise behavior.
Stock option awards generally expire 10 years after the date of grant. The shares of common stock to be issued and/or sold upon the exercise of stock options are made available from either authorized and unissued common stock or from treasury shares. Since 2007, the Company has issued common stock under its stock-based compensation plans from treasury shares.
Stock option activity during the year ended December 31, 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares (In millions) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life | | Aggregate Intrinsic Value (In millions) |
Outstanding on January 1, 2021 | 88 | | | $ | 40.55 | | | | | |
Granted | 7 | | | 50.59 | | | | | |
Exercised | (19) | | | 36.32 | | | | | |
Forfeited/expired | (1) | | | 54.18 | | | | | |
Outstanding on December 31, 2021 | 75 | | | $ | 42.43 | | | 4.2 years | | $ | 1,264 | |
Expected to vest | 74 | | | $ | 42.32 | | | 4.1 years | | $ | 1,256 | |
Exercisable on December 31, 2021 | 59 | | | $ | 40.08 | | | 3.1 years | | $ | 1,138 | |
The total intrinsic value of the stock options exercised was $358 million, $453 million and $609 million in 2021, 2020 and 2019, respectively. The total number of stock options exercised was approximately 19 million, 23 million and 34 million in 2021, 2020 and 2019, respectively.
Performance-Based Share Unit Awards
Performance share unit awards require achievement of certain performance criteria, which are predefined by the Talent and Compensation Committee of the Board of Directors at the time of grant. For performance share unit awards granted from 2015 through 2017, the performance criteria were economic profit and net operating revenues over a predefined performance period of three years. Economic profit is our net operating profit after tax less the cost of the capital used in our business. Economic profit and net operating revenues are adjusted for certain items, which are approved by the Audit Committee of the Company’s Board of Directors (“Audit Committee”). The purpose of these adjustments is to ensure a consistent year-to-year comparison of the specific performance criteria. These awards included a relative TSR modifier to determine the final number of performance share units earned. For these awards, the number of performance share units earned based on the certified achievement of the predefined performance criteria was reduced or increased if the Company’s total shareowner return over the performance period relative to a predefined compensation comparator group of companies fell outside of a predefined range. The fair value of these performance share units was determined using a Monte Carlo valuation model. The performance share unit awards granted from 2015 through 2017 were subject to a one-year holding period after the performance period before the shares were released.
For performance share unit awards granted from 2018 through 2021, the performance criteria were equally weighted among net operating revenues, earnings per share and free cash flow over a predefined performance period of three years. For purposes of these performance criteria, earnings per share is diluted net income per share and free cash flow is net cash provided by operating activities less purchases of property, plant and equipment. Net operating revenues, earnings per share and free cash flow are adjusted for certain items, which are approved by the Audit Committee. The purpose of these adjustments is to ensure a consistent year-to-year comparison of the specific performance criteria. Performance share unit awards granted to executives include a relative TSR modifier to determine the final number of performance share units earned. The fair value of performance share units that include a TSR modifier is determined using a Monte Carlo valuation model. For these awards, the number of performance share units earned based on the certified achievement of the predefined performance criteria will be reduced or increased if the Company’s total shareowner return over the performance period relative to a predefined compensation comparator group of companies fell outside of a predefined range. The fair value of performance share units that do not include a TSR modifier is the closing market price per share of the Company’s stock on the grant date less the present value of the expected dividends not received during the performance period. The performance share unit awards will generally vest at the end of the respective performance period.
During 2021, in addition to granting performance share unit awards with a three-year performance period, the Company granted emerging stronger performance share unit awards with a predefined performance period of two years. The award’s performance criterion is earnings per share, and the award includes a relative TSR modifier. Earnings per share for these purposes is diluted net income per share adjusted for certain items, which are approved by the Audit Committee. The purpose of these adjustments is to ensure a consistent year-to-year comparison of the performance criterion. The performance share unit awards will generally vest at the end of the two-year performance period.
For performance share unit awards, in the event the certified results equal the predefined performance criteria, the number of performance share units earned will be equal to the target award. In the event the certified results exceed the predefined performance criteria, additional performance share units up to the maximum award will be earned. In the event the certified results fall below the predefined performance criteria but are at or above the minimum threshold, a reduced number of performance share units will be earned. If the certified results fall below the minimum threshold, no performance share units will be earned. Performance share unit awards do not entitle participants to vote or receive dividends until the performance share units are settled in stock.
In the reporting period it becomes probable that the minimum performance threshold specified in the award will be achieved, we recognize compensation expense for the proportionate share of the total fair value of the performance share units related to the vesting period that has already lapsed for the performance share units expected to vest. The remaining fair value of the performance share units expected to vest is expensed on a straight-line basis over the remainder of the vesting period. In the event the Company determines it is no longer probable that the minimum performance threshold specified in the award will be achieved, we reverse all previously recognized compensation expense in the reporting period such a determination is made.
Performance share units earned are generally settled in stock, except for certain circumstances such as death or disability, in which case beneficiaries or employees are provided cash payments. As of December 31, 2021, nonvested performance share units of approximately 1,587,000, 578,000 and 2,021,000 were outstanding for the 2020-2022, 2021-2022 and 2021-2023 performance periods, respectively, based on the target award amounts. The following table summarizes information about outstanding nonvested performance share units based on the target award levels:
| | | | | | | | |
| Performance Share Units (In thousands) | Weighted-Average Grant Date Fair Value |
Nonvested on January 1, 2021 | 3,771 | | $ | 48.29 | |
Granted | 2,728 | | 47.04 | |
Vested1 | (1,846) | | 40.29 | |
Forfeited | (467) | | 49.18 | |
Nonvested on December 31, 20212 | 4,186 | | $ | 50.90 | |
1Represents the target level of performance share units vested at December 31, 2021 for the 2019-2021 performance period. Upon certification in February 2022 of the financial results for the performance period, the final number of shares earned will be determined and released.
2The outstanding nonvested performance share units as of December 31, 2021 at the threshold award and maximum award levels were approximately 1,725,000 and 9,759,000, respectively.
The weighted-average grant date fair value of performance share unit awards granted in 2021, 2020 and 2019 was $47.04, $57.00 and $40.29, respectively.
The following table summarizes information about vested performance share units based on the certified award level:
| | | | | | | | | | | | | | | | | |
| 2017-2020 Award | | 2018-2020 Award |
| Performance Share Units (In thousands) | Weighted- Average Grant Date Fair Value | | Performance Share Units (In thousands) | Weighted- Average Grant Date Fair Value |
Certified | 3,728 | | $ | 35.30 | | | 1,014 | | $ | 41.02 | |
Released during 2021 | (3,720) | | 36.31 | | | (1,008) | | 41.72 | |
Forfeited during 2021 | (8) | | 35.30 | | | (6) | | 41.02 | |
The total intrinsic value of performance share units that were released was $237 million, $191 million and $118 million in 2021, 2020 and 2019, respectively.
Time-Based Restricted Stock and Restricted Stock Unit Awards
Time-based restricted stock and restricted stock unit awards granted under the 2014 Equity Plan do not entitle recipients to vote or receive dividends during the vesting period and will be forfeited in the event of the recipient’s termination of employment, except for certain circumstances such as death or disability. The fair value of restricted stock and restricted stock units is the closing market price per share of the Company’s stock on the grant date less the present value of the expected dividends not received during the vesting period. The fair value of the restricted stock and restricted stock units expected to vest and be released is expensed on a straight-line basis over the vesting period. As of December 31, 2021, the Company had outstanding nonvested time-based restricted stock and restricted stock units totaling approximately 3,394,000.
The following table summarizes information about outstanding nonvested time-based restricted stock and restricted stock units:
| | | | | | | | |
| Restricted Stock and Restricted Stock Units (In thousands) | Weighted-Average Grant Date Fair Value |
Nonvested on January 1, 2021 | 4,162 | | $ | 44.18 | |
Granted | 1,242 | | 46.20 | |
Vested and released | (1,495) | | 41.91 | |
Forfeited | (515) | | 46.46 | |
Nonvested on December 31, 2021 | 3,394 | | $ | 46.56 | |
NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Our Company sponsors and/or contributes to pension and postretirement health care and life insurance benefit plans covering substantially all U.S. employees. We also sponsor nonqualified, unfunded defined benefit pension plans for certain employees. In addition, our Company and its subsidiaries have various pension plans and other forms of postretirement benefit arrangements outside the United States.
We refer to the funded defined benefit pension plan in the United States that is not associated with collective bargaining agreements as the “primary U.S. plan.” As of December 31, 2021, the primary U.S. plan represented 61 percent and 57 percent of the Company’s consolidated projected benefit obligation and pension plan assets, respectively.
Obligations and Funded Status
The following table sets forth the changes in the benefit obligations and the fair value of plan assets for our pension and other postretirement benefit plans (in millions):
| | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
Year Ended December 31, | 2021 | 2020 | | 2021 | 2020 |
Benefit obligation at beginning of year1 | $ | 9,414 | | $ | 8,757 | | | $ | 769 | | $ | 757 | |
Service cost | 97 | | 112 | | | 9 | | 11 | |
Interest cost | 183 | | 235 | | | 15 | | 21 | |
Participant contributions | 5 | | 1 | | | 13 | | 12 | |
Foreign currency exchange rate changes | (33) | | 67 | | | (1) | | (1) | |
Amendments | — | | 3 | | | (13) | | — | |
Net actuarial loss (gain)2 | (226) | | 746 | | | (28) | | 22 | |
Benefits paid | (375) | | (485) | | | (67) | | (59) | |
Settlements3 | (491) | | (81) | | | — | | — | |
Curtailments3 | — | | (15) | | | (1) | | 6 | |
Special termination benefits | 3 | | 2 | | | — | | — | |
Other | 3 | | 72 | | | — | | — | |
Benefit obligation at end of year1 | $ | 8,580 | | $ | 9,414 | | | $ | 696 | | $ | 769 | |
Fair value of plan assets at beginning of year | $ | 8,639 | | $ | 8,080 | | | $ | 396 | | $ | 339 | |
Actual return on plan assets | 1,003 | | 830 | | | 15 | | 51 | |
Employer contributions | 33 | | 30 | | | — | | — | |
Participant contributions | 6 | | 1 | | | 8 | | 7 | |
Foreign currency exchange rate changes | (42) | | 97 | | | — | | — | |
Benefits paid | (315) | | (419) | | | — | | (1) | |
Settlements3 | (421) | | (53) | | | — | | — | |
Other | 2 | | 73 | | | — | | — | |
Fair value of plan assets at end of year | $ | 8,905 | | $ | 8,639 | | | $ | 419 | | $ | 396 | |
Net asset (liability) recognized | $ | 325 | | $ | (775) | | | $ | (277) | | $ | (373) | |
1 For pension plans, the benefit obligation is the projected benefit obligation. For other postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation. The accumulated benefit obligation for our pension plans was $8,431 million and $9,263 million as of December 31, 2021 and 2020, respectively.
2 A change in the weighted-average discount rate was the primary driver of net actuarial loss (gain) during 2021 and 2020. For our primary U.S. pension plan, an increase in the discount rate resulted in an actuarial gain of $197 million during 2021, and a decrease in the discount rate resulted in an actuarial loss of $491 million during 2020. Other drivers of net actuarial loss (gain) included assumption updates, plan experience and our strategic realignment initiatives. Refer to Note 18.
3 Settlements and curtailments were primarily related to our strategic realignment initiatives. Refer to Note 18.
Pension and other postretirement benefit plan amounts recognized in our consolidated balance sheets were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
December 31, | 2021 | 2020 | | 2021 | 2020 |
Other noncurrent assets | $ | 1,545 | | $ | 1,151 | | | $ | — | | $ | — | |
Accounts payable and accrued expenses | (70) | | (116) | | | (18) | | (19) | |
Other noncurrent liabilities | (1,150) | | (1,810) | | | (259) | | (354) | |
Net asset (liability) recognized | $ | 325 | | $ | (775) | | | $ | (277) | | $ | (373) | |
Certain of our pension plans have a projected benefit obligation in excess of the fair value of plan assets. For these plans, the projected benefit obligation and the fair value of plan assets were as follows (in millions):
| | | | | | | | |
December 31, | 2021 | 2020 |
Projected benefit obligation | $ | 6,862 | | $ | 7,722 | |
Fair value of plan assets | 5,641 | | 5,796 | |
Certain of our pension plans have an accumulated benefit obligation in excess of the fair value of plan assets. For these plans, the accumulated benefit obligation and the fair value of plan assets were as follows (in millions):
| | | | | | | | |
December 31, | 2021 | 2020 |
Accumulated benefit obligation | $ | 6,689 | | $ | 7,553 | |
Fair value of plan assets | 5,584 | | 5,745 | |
All of our other postretirement benefit plans have an accumulated postretirement benefit obligation in excess of the fair value of plan assets.
Pension Plan Assets
The following table presents total assets by asset class for our U.S. and non-U.S. pension plans (in millions):
| | | | | | | | | | | | | | | | | |
| U.S. Pension Plans | | Non-U.S. Pension Plans |
December 31, | 2021 | 2020 | | 2021 | 2020 |
Cash and cash equivalents | $ | 272 | | $ | 279 | | | $ | 233 | | $ | 399 | |
Equity securities: | | | | | |
U.S.-based companies | 1,463 | | 1,382 | | | 968 | | 757 | |
International-based companies | 876 | | 988 | | | 830 | | 738 | |
Fixed-income securities: | | | | | |
Government bonds | 182 | | 220 | | | 495 | | 417 | |
Corporate bonds and debt securities | 899 | | 926 | | | 124 | | 116 | |
Mutual, pooled and commingled funds1 | 290 | | 301 | | | 560 | | 513 | |
Hedge funds/limited partnerships | 682 | | 588 | | | 38 | | 34 | |
Real estate | 381 | | 326 | | | 8 | | 6 | |
Derivative financial instruments | (1) | | (1) | | | (8) | | (14) | |
Other | 339 | | 364 | | | 274 | | 300 | |
Total pension plan assets2 | $ | 5,383 | | $ | 5,373 | | | $ | 3,522 | | $ | 3,266 | |
1 Mutual, pooled and commingled funds include investments in equity securities, fixed-income securities and combinations of both. There are a significant number of mutual, pooled and commingled funds from which investors can choose. The selection of the type of fund is dictated by the specific investment objectives and needs of a given plan. These objectives and needs vary greatly between plans.
2 Fair value disclosures related to our pension plan assets are included in Note 16. Fair value disclosures include, but are not limited to, the levels within the fair value hierarchy in which the fair value measurements in their entirety fall; a reconciliation of the beginning and ending balances of Level 3 assets; and information about the valuation techniques and inputs used to measure the fair value of our pension plan assets.
Investment Strategy for U.S. Pension Plans
The Company utilizes the services of investment managers to actively manage the assets of our U.S. pension plans. We have established asset allocation targets and investment guidelines with each investment manager. Our asset allocation targets promote optimal expected return and volatility characteristics given the long-term time horizon for fulfilling the obligations of the plans. Selection of the targeted asset allocation for U.S. pension plan assets was based upon a review of the expected return and risk characteristics of each asset class, as well as the correlation of returns among asset classes. Our target allocation is a mix of 42 percent equity investments, 30 percent fixed-income investments and 28 percent alternative investments. We believe this target allocation will enable us to achieve the following long-term investment objectives:
(1)optimize the long-term return on plan assets at an acceptable level of risk;
(2)maintain a broad diversification across asset classes and among investment managers; and
(3)maintain careful control of the risk level within each asset class.
The guidelines that have been established with each investment manager provide parameters within which the investment managers agree to operate, including criteria that determine eligible and ineligible securities, diversification requirements and credit quality standards, where applicable. Investment managers agree to obtain written approval for deviations from stated investment style or guidelines. As of December 31, 2021, no investment manager was responsible for more than 8 percent of total U.S. pension plan assets.
Our target allocation of 42 percent equity investments is composed of 60 percent global equities, 16 percent emerging market equities and 24 percent domestic small-cap and mid-cap equities. Optimal returns through our investments in global equities are achieved through security selection as well as country and sector diversification. Investments in our common stock accounted for approximately 5 percent of total global equities and approximately 3 percent of total U.S. pension plan assets. Our investments in global equities are intended to provide diversified exposure to both U.S. and non-U.S. equity markets. Our investments in both emerging market equities and domestic small-cap and mid-cap equities may experience large swings in their market value. Our investments in these asset classes are selected based on capital appreciation potential.
Our target allocation of 30 percent fixed-income investments is composed of 33 percent long-duration bonds and 67 percent with multi-strategy alternative credit managers. Long-duration bonds are intended to provide a stable rate of return through investments in high-quality publicly traded debt securities. Our investments in long-duration bonds are diversified in order to mitigate duration and credit exposure. Multi-strategy alternative credit managers invest in a combination of high-yield bonds, bank loans, structured credit and emerging market debt. These investments are in lower-rated and non-rated debt securities, which generally produce higher returns compared to long-duration bonds and also help to diversify our overall fixed-income portfolio.
Our target allocation for alternative investments is 28 percent. These alternative investments include hedge funds, reinsurance, private equity limited partnerships, leveraged buyout funds, international venture capital partnerships and real estate. The objective of investing in alternative investments is to provide a higher rate of return than that which is typically available from publicly traded equity securities. Alternative investments are inherently illiquid and require a long-term perspective in evaluating investment performance.
Investment Strategy for Non-U.S. Pension Plans
The long-term target allocation for 70 percent of our international subsidiaries’ pension plan assets, primarily certain of our European and Canadian plans, was 66 percent equity securities, 4 percent fixed-income securities and 30 percent other investments. The actual allocation for the remaining 30 percent of the Company’s international subsidiaries’ pension plan assets consisted of 44 percent mutual, pooled and commingled funds; 21 percent fixed-income securities; 1 percent equity securities and 34 percent other investments. The investment strategies for our international subsidiaries’ pension plans vary greatly, and in some instances are influenced by local law. None of our pension plans outside the United States is individually significant for separate disclosure.
Other Postretirement Benefit Plan Assets
Plan assets associated with other postretirement benefits primarily represent funding of one of the U.S. postretirement benefit plans through a Voluntary Employee Beneficiary Association (“VEBA”), a tax-qualified trust. The VEBA assets are primarily invested in liquid assets due to the level and timing of expected future benefit payments.
The following table presents total assets by asset class for our other postretirement benefit plans (in millions):
| | | | | | | | |
December 31, | 2021 | 2020 |
Cash and cash equivalents | $ | 33 | | $ | 30 | |
Equity securities: | | |
U.S.-based companies | 184 | | 170 | |
International-based companies | 12 | | 12 | |
Fixed-income securities: | | |
Government bonds | 3 | | 3 | |
Corporate bonds and debt securities | 82 | | 80 | |
Mutual, pooled and commingled funds | 87 | | 86 | |
Hedge funds/limited partnerships | 9 | | 7 | |
Real estate | 5 | | 4 | |
Other | 4 | | 4 | |
Total other postretirement benefit plan assets1 | $ | 419 | | $ | 396 | |
1Fair value disclosures related to our other postretirement benefit plan assets are included in Note 16. Fair value disclosures include, but are not limited to, the levels within the fair value hierarchy in which the fair value measurements in their entirety fall and information about the valuation techniques and inputs used to measure the fair value of our other postretirement benefit plan assets.
Components of Net Periodic Benefit Cost (Income)
Net periodic benefit cost or income for our pension and other postretirement benefit plans consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
Year Ended December 31, | 2021 | 2020 | 2019 | | 2021 | 2020 | 2019 |
Service cost | $ | 97 | | $ | 112 | | $ | 104 | | | $ | 9 | | $ | 11 | | $ | 9 | |
Interest cost | 183 | | 235 | | 291 | | | 15 | | 21 | | 28 | |
Expected return on plan assets1 | (606) | | (587) | | (552) | | | (17) | | (16) | | (13) | |
Amortization of prior service cost (credit) | — | | 3 | | (4) | | | (2) | | (3) | | (2) | |
Amortization of net actuarial loss2 | 146 | | 171 | | 151 | | | 4 | | 5 | | 2 | |
Net periodic benefit cost (income) | (180) | | (66) | | (10) | | | 9 | | 18 | | 24 | |
Settlement charges3 | 117 | | 23 | | 6 | | | — | | — | | — | |
Curtailment charges (credits) | (1) | | 1 | | — | | | (1) | | 6 | | (2) | |
Special termination benefits | 3 | | 2 | | 1 | | | — | | — | | — | |
Other | — | | (4) | | 1 | | | — | | — | | — | |
Total cost (income) | $ | (61) | | $ | (44) | | $ | (2) | | | $ | 8 | | $ | 24 | | $ | 22 | |
1The Company has elected to use the actual fair value of plan assets as the market-related value of assets in the determination of the expected return on plan assets.
2Actuarial gains and losses are amortized using a corridor approach. The gain/loss corridor is equal to 10 percent of the greater of the benefit obligation and the market-related value of assets. Gains and losses in excess of the corridor are generally amortized over the average future working lifetime of the plan participants.
3Settlement charges were primarily related to our strategic realignment initiatives. Refer to Note 18.
All of the amounts in the table above, other than service cost, were recorded in the line item other income (loss) — net in our consolidated statements of income.
Impact on Accumulated Other Comprehensive Income
The following table sets forth the pretax changes in AOCI for our pension and other postretirement benefit plans (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
Year Ended December 31, | 2021 | | 2020 | | 2021 | 2020 |
Balance in AOCI at beginning of year | $ | (3,012) | | | $ | (2,678) | | | $ | (47) | | $ | (59) | |
Recognized prior service cost (credit) | 1 | | | 3 | |
| (2) | | (3) | |
Recognized net actuarial loss | 261 | | 1 | 195 | | 2 | 3 | | 11 | |
Prior service credit (cost) occurring during the year | — | | | (3) | | | 13 | | — | |
Net actuarial (loss) gain occurring during the year | 623 | | | (488) | | 3 | 27 | | 7 | |
Net foreign currency translation adjustments | 2 | | | (41) | | | 2 | | (3) | |
Balance in AOCI at end of year | $ | (2,125) | | | $ | (3,012) | | | $ | (4) | | $ | (47) | |
1 Includes $117 million of recognized net actuarial loss due to the impact of settlements, which were primarily related to our strategic realignment initiatives. Refer to Note 18.
2 Includes $23 million of recognized net actuarial loss due to the impact of settlements, which were primarily related to our strategic realignment initiatives. Refer to Note 18.
3 Includes $15 million of net actuarial loss occurring during the year due to the impact of curtailments.
The following table sets forth the pretax amounts in AOCI for our pension and other postretirement benefit plans (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
December 31, | 2021 | | 2020 | | 2021 | 2020 |
Prior service credit (cost) | $ | (9) | | | $ | (10) | | | $ | 28 | | $ | 17 | |
Net actuarial loss | (2,116) | | | (3,002) | | | (32) | | (64) | |
Balance in AOCI at end of year | $ | (2,125) | | | $ | (3,012) | | | $ | (4) | | $ | (47) | |
Assumptions
Certain weighted-average assumptions used in computing the benefit obligations for our pension and other postretirement benefit plans were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
December 31, | 2021 | | 2020 | | 2021 | 2020 |
Discount rate | 3.00 | % | | 2.50 | % | | 3.25 | % | 2.75 | % |
Interest crediting rate | 3.00 | % | | 3.00 | % | | N/A | N/A |
Rate of increase in compensation levels | 3.75 | % | | 3.75 | % | | N/A | N/A |
Certain weighted-average assumptions used in computing net periodic benefit cost or income were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
Year Ended December 31, | 2021 | 2020 | 2019 | | 2021 | 2020 | 2019 |
Discount rate | 2.50 | % | 3.25 | % | 4.00 | % | | 2.75 | % | 3.50 | % | 4.25 | % |
Interest crediting rate | 3.00 | % | 3.50 | % | 3.75 | % | | N/A | N/A | N/A |
Rate of increase in compensation levels | 3.75 | % | 3.75 | % | 3.75 | % | | N/A | N/A | N/A |
Expected long-term rate of return on plan assets | 7.25 | % | 7.50 | % | 7.75 | % | | 4.25 | % | 4.50 | % | 4.50 | % |
The discount rate assumptions used to account for pension and other postretirement benefit plans reflect the rates at which the benefit obligations could be effectively settled. Rates for U.S. and certain non-U.S. plans at December 31, 2021 were determined using a cash flow matching technique whereby the rates of a yield curve, developed from high-quality debt securities, were applied to the benefit obligations to determine the appropriate discount rate. For other non-U.S. plans, we base the discount rate assumption on comparable indices within each of the countries. The Company measures the service cost and interest cost components of net periodic benefit cost or income for pension and other postretirement benefit plans by applying the specific spot rates along the yield curve to the plans’ projected cash flows. The rate of compensation increase assumption is determined by the Company based upon annual reviews.
The current cash balance interest crediting rate for the primary U.S. pension plan is the yield on six-month U.S. Treasury bills on the last day of September of the previous plan year, plus 150 basis points. The Company assumes that the current cash balance interest crediting rate will grow linearly over 10 years to the ultimate interest crediting rate assumption.
The expected long-term rate of return assumption for U.S. pension plan assets is based upon the target asset allocation and is determined using forward-looking assumptions in the context of historical returns and volatilities for each asset class, as well as correlations among asset classes. We evaluate the rate of return assumption on an annual basis. The expected long-term rate of return assumption used in computing 2021 net periodic benefit income for the U.S. pension plans was 7.25 percent. As of December 31, 2021, the 5-year, 10-year and 15-year annualized return on plan assets for the primary U.S. plan was 10.7 percent, 9.7 percent and 6.8 percent, respectively. The annualized return since inception was 10.6 percent.
The weighted-average assumptions for health care cost trend rates were as follows:
| | | | | | | | |
December 31, | 2021 | 2020 |
Health care cost trend rate assumed for next year | 6.75 | % | 6.75 | % |
Rate to which the trend rate is assumed to decline (the ultimate trend rate) | 5.25 | % | 5.25 | % |
Year that the trend rate reaches the ultimate trend rate | 2027 | 2025 |
We review external data and our own historical trends for health care costs to determine the health care cost trend rate assumptions. The Company’s U.S. postretirement benefit plans are primarily defined-dollar benefit plans that limit the effects of health care inflation because the plans have established dollar limits for determining our contributions.
Cash Flows
The expected benefit payments for our pension and other postretirement benefit plans for the 10 years succeeding December 31, 2021 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2022 | 2023 | 2024 | 2025 | 2026 | 2027-2031 |
Benefit payments for pension plans | $ | 486 | | $ | 454 | | $ | 464 | | $ | 470 | | $ | 471 | | $ | 2,390 | |
Benefit payments for other postretirement benefit plans | 59 | | 56 | | 53 | | 51 | | 48 | | 211 | |
Total | $ | 545 | | $ | 510 | | $ | 517 | | $ | 521 | | $ | 519 | | $ | 2,601 | |
The Company anticipates making contributions to our pension trusts in 2022 of $26 million, all of which will be allocated to our international plans. These contributions are generally made in accordance with local laws and tax regulations.
Defined Contribution Plans
Our Company sponsors qualified defined contribution plans covering substantially all U.S. employees. Under the largest U.S. defined contribution plan, we match participants’ contributions up to a maximum of 3.5 percent of compensation, subject to an IRS limit on compensation. The Company’s expense for the U.S. plans totaled $32 million, $43 million and $43 million in 2021, 2020 and 2019, respectively. We also sponsor defined contribution plans in certain locations outside the United States. The Company’s expense for these plans totaled $79 million, $63 million and $64 million in 2021, 2020 and 2019, respectively.
Multi-Employer Retirement Plans
The Company participates in various multi-employer retirement plans. Multi-employer retirement plans are designed to provide benefits to or on behalf of employees of multiple employers. These plans are typically established under collective bargaining agreements. Multi-employer retirement plans are generally governed by a board of trustees composed of representatives of both management and labor and are generally funded through employer contributions.
The Company’s expense for multi-employer retirement plans totaled $1 million, $2 million and $5 million in 2021, 2020 and 2019, respectively. The plans we currently participate in have contractual arrangements that extend into 2025. If, in the future, we choose to withdraw from any of the multi-employer retirement plans in which we currently participate, we would record the appropriate withdrawal liability, if any, at that time.
NOTE 14: INCOME TAXES
Income before income taxes consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 | |
United States | $ | 3,538 | | | $ | 3,149 | | | $ | 3,249 | | |
International | 8,887 | | | 6,600 | | | 7,537 | | |
Total | $ | 12,425 | | | $ | 9,749 | | | $ | 10,786 | | |
Income taxes consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | State and Local | | International | | Total |
2021 | | | | | | | |
Current | $ | 243 | | | $ | 106 | | | $ | 1,378 | | | $ | 1,727 | |
Deferred | 229 | | | (10) | | | 675 | | 1 | 894 | |
2020 | | | | | | | |
Current | $ | 296 | | | $ | 396 | | | $ | 1,307 | | | $ | 1,999 | |
Deferred | (220) | | | 21 | | | 181 | | | (18) | |
2019 | | | | | | | |
Current | $ | 508 | | | $ | 94 | | | $ | 1,479 | | | $ | 2,081 | |
Deferred | (65) | | | 52 | | | (267) | | | (280) | |
1 Includes net tax expense of $195 million related to the changes in tax laws in certain foreign jurisdictions.
We made income tax payments of $2,168 million, $1,268 million and $2,126 million in 2021, 2020 and 2019, respectively.
Our effective tax rate reflects the tax benefits of having significant operations outside the United States, which are generally taxed at rates lower than the statutory U.S. rate. 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 Eswatini. The terms of these grants expire from 2023 to 2036. We anticipate that we will be able to extend or renew the grants in these locations. Tax incentive grants favorably impacted our income tax expense by $381 million, $317 million and $335 million for the years ended December 31, 2021, 2020 and 2019, respectively. In addition, our effective tax rate reflects the benefits of having significant earnings generated in investments accounted for under the equity method.
A reconciliation of the statutory U.S. federal tax rate and our effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 | | | |
Statutory U.S. federal tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | | |
State and local income taxes — net of federal benefit | 1.1 | | | 1.1 | | | 0.9 | | | | |
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal tax rate | 2.3 | | 1 | 0.9 | | 3 | 1.1 | | 6,7,8 | | |
Equity income or loss | (2.0) | | | (1.4) | | | (1.6) | | | | |
| | | | | | | | |
| | | | | | | | |
Excess tax benefits on stock-based compensation | (0.5) | | | (0.8) | | | (0.9) | | | | |
Other — net | (0.8) | | 2 | (0.5) | | 4,5 | (3.8) | | 9 | | |
Effective tax rate | 21.1 | % | | 20.3 | % | | 16.7 | % | | | |
1 Includes net tax charges of $375 million (or a 3.0 percent impact on our effective tax rate) related to changes in tax laws in certain foreign jurisdictions, amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in various international jurisdictions, as well as other discrete items.
2 Includes a tax benefit of $14 million (or a 1.5 percent impact on our effective tax rate) associated with the $834 million gain recorded upon the acquisition of the remaining ownership interest in BodyArmor. Refer to Note 2.
3 Includes net tax charges of $110 million (or a 1.1 percent impact on our effective tax rate) related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in various international jurisdictions, as well as other agreed-upon audit issues.
4 Includes net tax expense of $431 million (or a 4.4 percent impact on our effective tax rate) primarily related to changes in judgment on specific tax positions due to the Opinion and amounts required to be recorded for changes to other uncertain tax positions, including interest and penalties. Also includes a tax benefit of $107 million (or a 1.1 percent impact on our effective tax rate) related to changes in our assessment of certain valuation allowances and a net tax benefit of $135 million (or a 1.4 percent impact on our effective tax rate) related to domestic return to provision adjustments and other tax items.
5 Includes a tax benefit of $40 million (or a 2.4 percent impact on our effective tax rate) associated with the $902 million gain recorded upon the acquisition of the remaining ownership interest in fairlife. Refer to Note 2.
6 Includes net tax charges of $199 million (or a 1.9 percent impact on our effective tax rate) related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, in various international jurisdictions, as well as other agreed-upon audit issues.
7 Includes the impact of pretax charges of $710 million (or a 1.2 percent impact on our effective tax rate) related to the impairment of certain of our equity method investees.
8 Includes a tax benefit of $199 million (or a 1.5 percent impact on our effective tax rate) recorded as a result of CCBA no longer qualifying as a discontinued operation. Refer to Note 2.
9 Includes a net tax benefit of $184 million (or a 1.7 percent impact on our effective tax rate) related to amounts required to be recorded for changes to our uncertain tax positions, including interest and penalties, a tax benefit of $145 million (or a 1.4 percent impact on our effective tax rate) related to changes in our assessment of certain valuation allowances and a net tax benefit of $89 million (or a 0.8 percent impact on our effective tax rate) related to domestic return to provision adjustments as well as other agreed-upon audit issues.
As of December 31, 2021, we have not recorded incremental income taxes for any additional outside basis differences of approximately $5.1 billion in our investments in foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis differences in these entities is not practicable.
The Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Reform Act require the Company to include in its U.S. income tax return each foreign subsidiary’s earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. An accounting policy election is available to either account for the tax effects of GILTI in the period that is subject to such taxes or to provide deferred taxes for book and tax basis differences that upon reversal may be subject to such taxes. We have elected to account for the tax effects of these provisions in the period that is subject to such tax and the impact is reflected in our full year provision.
The Company and its subsidiaries file income tax returns in all applicable jurisdictions, including the U.S. federal jurisdiction, U.S. state jurisdictions and foreign jurisdictions. U.S. tax authorities have completed their federal income tax examinations for all years prior to 2007. With respect to U.S. state jurisdictions and foreign jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years prior to 2006. For U.S. federal and state tax purposes, the net operating losses and tax credit carryovers acquired in connection with our acquisition of Coca‑Cola Enterprises Inc.’s former North America business that were generated from the years of 1990 through 2010 are subject to adjustments until the year in which they are actually utilized is no longer subject to examination. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, including interest and penalties, have been provided for in accordance with the applicable accounting guidance.
On November 18, 2020, the Tax Court issued the Opinion regarding the Company’s 2015 litigation with the IRS involving transfer pricing tax adjustments in which the court predominantly sided with the IRS. The Company disagrees with the Opinion and intends to vigorously defend its position. Refer to Note 11.
As of December 31, 2021, the gross amount of unrecognized tax benefits was $906 million. If the Company were to prevail on all uncertain tax positions, the net effect would be a benefit of $600 million, exclusive of any benefits related to interest and penalties. The remaining $306 million primarily represents tax benefits that would be received in different tax jurisdictions in the event the Company did not prevail on all uncertain tax positions.
A reconciliation of the changes in the gross amount of unrecognized tax benefits is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 | |
Balance of unrecognized tax benefits at beginning of year | $ | 915 | | | $ | 392 | | | $ | 336 | | |
Increase related to prior period tax positions | 9 | | | 528 | | 1 | 204 | | 2 |
Decrease related to prior period tax positions | (50) | | | (1) | | | — | | |
Increase related to current period tax positions | 37 | | | 26 | | | 29 | | |
| | | | | | |
Decrease related to settlements with taxing authorities | (4) | | | (19) | | | (174) | | 3 |
| | | | | | |
| | | | | | |
Effect of foreign currency translation | (1) | | | (11) | | | (3) | | |
Balance of unrecognized tax benefits at end of year | $ | 906 | | | $ | 915 | | | $ | 392 | | |
1 The increase was primarily related to a change in judgment on certain tax positions due to the Opinion. Refer to Note 11.
2 The increase was primarily related to a change in judgment about the Company’s tax positions with several foreign jurisdictions.
3 The decrease was primarily related to a change in judgment about one of the Company’s tax positions that became certain as a result of settlement of a matter in the United States.
The Company recognizes interest and penalties related to unrecognized tax benefits in the line item income taxes on our consolidated statement of income. The Company had $453 million, $391 million and $201 million in interest and penalties related to unrecognized tax benefits accrued as of December 31, 2021, 2020 and 2019, respectively. Of these amounts, expense of $62 million, $190 million and $11 million was recognized in 2021, 2020 and 2019, respectively. If the Company were to prevail on all uncertain tax positions, the reversal of this accrual would be a benefit to the Company’s effective tax rate.
It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect any changes will have a significant impact on our consolidated statement of income or consolidated balance sheet. These changes may be the result of settlements of ongoing audits, statute of limitations expiring or final settlements in transfer pricing matters that are the subject of litigation. Currently, an estimate of the range of the reasonably possible outcomes cannot be made.
The tax effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities consisted of the following (in millions):
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Deferred tax assets: | | | |
Property, plant and equipment | $ | 36 | | | $ | 44 | |
Trademarks and other intangible assets | 1,910 | | | 2,214 | |
Equity method investments (including net foreign currency translation adjustments) | 595 | | | 580 | |
Derivative financial instruments | 215 | | | 523 | |
Other liabilities | 1,255 | | | 1,401 | |
Benefit plans | 670 | | | 893 | |
Net operating/capital loss carryforwards | 280 | | | 320 | |
Other | 377 | | | 391 | |
Gross deferred tax assets | 5,338 | | | 6,366 | |
Valuation allowances | (401) | | | (406) | |
Total deferred tax assets | $ | 4,937 | | | $ | 5,960 | |
Deferred tax liabilities: | | | |
Property, plant and equipment | $ | (721) | | | $ | (837) | |
Trademarks and other intangible assets | (1,783) | | | (1,661) | |
Equity method investments (including net foreign currency translation adjustments) | (1,619) | | | (1,533) | |
Derivative financial instruments | (500) | | | (435) | |
Other liabilities | (315) | | | (402) | |
Benefit plans | (527) | | | (321) | |
Other | (164) | | | (144) | |
Total deferred tax liabilities | $ | (5,629) | | | $ | (5,333) | |
Net deferred tax assets (liabilities) | $ | (692) | | | $ | 627 | |
As of December 31, 2021 and 2020, we had net deferred tax assets of $0.7 billion and $1.4 billion, respectively, located in countries outside the United States.
As of December 31, 2021, we had $2,313 million of loss carryforwards available to reduce future taxable income. Loss carryforwards of $849 million must be utilized within the next five years, and the remainder can be utilized over a period greater than five years.
An analysis of our deferred tax asset valuation allowances is as follows (in millions):
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Balance at beginning of year | $ | 406 | | | $ | 303 | | | $ | 419 | |
| | | | | |
Additions | 25 | | | 240 | | | 148 | |
Deductions | (30) | | | (137) | | | (264) | |
Balance at end of year | $ | 401 | | | $ | 406 | | | $ | 303 | |
The Company’s deferred tax asset valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards and foreign tax credit carryforwards from operations in various jurisdictions and basis differences in certain equity investments. Current evidence does not suggest we will realize sufficient taxable income of the appropriate character within the carryforward period to allow us to realize these deferred tax benefits. If we were to identify and implement tax planning strategies to recover these deferred tax assets or generate sufficient income of the appropriate character in these jurisdictions in the future, it could lead to the reversal of these valuation allowances and a reduction of income tax expense. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets in our consolidated balance sheet.
In 2021, the Company recognized a net decrease of $5 million in its valuation allowances. The decrease was primarily due to net decreases in the deferred tax assets and related valuation allowances on certain equity investments and the changes in net operating losses in the normal course of business.
In 2020, the Company recognized a net increase of $103 million in its valuation allowances. The increase was primarily due to net increases in the deferred tax assets and related valuation allowances on certain equity investments. The increase was also due to the increase of valuation allowances after considering significant negative evidence on the utilization of certain net operating losses and excess foreign tax credits.
In 2019, the Company recognized a net decrease of $116 million in its valuation allowances. This decrease was primarily due to the reversal of a valuation allowance after considering significant positive evidence on the utilization of certain net operating losses. This decrease was also due to the reversal of a valuation allowance in our U.S. operations related to expenses that were previously determined to be nondeductible and the changes in net operating losses in the normal course of business. The decrease was partially offset by an increase in the valuation allowance due to increases in the deferred tax assets and related valuation allowances on certain equity method investments and an increase due to the acquisition of foreign operations.
NOTE 15: OTHER COMPREHENSIVE INCOME
AOCI attributable to shareowners of The Coca-Cola Company is separately presented in our consolidated balance sheet as a component of The Coca-Cola Company’s shareowners’ equity, which also includes our proportionate share of equity method investees’ AOCI. OCI attributable to noncontrolling interests is allocated to, and included in, our consolidated balance sheet as part of the line item equity attributable to noncontrolling interests.
AOCI attributable to shareowners of The Coca-Cola Company consisted of the following, net of tax (in millions):
| | | | | | | | |
December 31, | 2021 | 2020 |
Net foreign currency translation adjustments | $ | (12,595) | | $ | (12,028) | |
Accumulated net gains (losses) on derivatives | 20 | | (194) | |
Unrealized net gains (losses) on available-for-sale debt securities | (62) | | 28 | |
Adjustments to pension and other postretirement benefit liabilities | (1,693) | | (2,407) | |
Accumulated other comprehensive income (loss) | $ | (14,330) | | $ | (14,601) | |
The following table summarizes the allocation of total comprehensive income between shareowners of The Coca-Cola Company and noncontrolling interests (in millions):
| | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Shareowners of The Coca-Cola Company | Noncontrolling Interests | Total |
Consolidated net income | $ | 9,771 | | $ | 33 | | $ | 9,804 | |
Other comprehensive income: | | | |
Net foreign currency translation adjustments | (567) | | (132) | | (699) | |
Net gains (losses) on derivatives1 | 214 | | — | | 214 | |
Net change in unrealized gains (losses) on available-for-sale debt securities2 | (90) | | — | | (90) | |
Net change in pension and other postretirement benefit liabilities3 | 714 | | (2) | | 712 | |
Total comprehensive income | $ | 10,042 | | $ | (101) | | $ | 9,941 | |
1 Refer to Note 5 for additional information related to the net gains or losses on derivative instruments.
2 Refer to Note 4 for additional information related to the net unrealized gains or losses on available-for-sale debt securities.
3 Refer to Note 13 for additional information related to the Company’s pension and other postretirement benefit liabilities.
The following tables present OCI attributable to shareowners of The Coca-Cola Company, including our proportionate share of equity method investees’ OCI (in millions):
| | | | | | | | | | | |
| Before-Tax Amount | Income Tax | After-Tax Amount |
2021 | | | |
Foreign currency translation adjustments: | | | |
Translation adjustments arising during the year | $ | 263 | | $ | 19 | | $ | 282 | |
Reclassification adjustments recognized in net income | 257 | | — | | 257 | |
Gains (losses) on intra-entity transactions that are of a long-term investment nature | (1,798) | | — | | (1,798) | |
Gains (losses) on net investment hedges arising during the year1 | 918 | | (230) | | 688 | |
Reclassification adjustments for net investment hedges recognized in net income1 | 4 | | — | | 4 | |
Net foreign currency translation adjustments | $ | (356) | | $ | (211) | | $ | (567) | |
Derivatives: | | | |
Gains (losses) arising during the year | $ | 160 | | $ | (41) | | $ | 119 | |
Reclassification adjustments recognized in net income | 124 | | (29) | | 95 | |
Net gains (losses) on derivatives1 | $ | 284 | | $ | (70) | | $ | 214 | |
Available-for-sale debt securities: | | | |
Unrealized gains (losses) arising during the year | $ | (141) | | $ | 48 | | $ | (93) | |
Reclassification adjustments recognized in net income | 4 | | (1) | | 3 | |
Net change in unrealized gains (losses) on available-for-sale debt securities2 | $ | (137) | | $ | 47 | | $ | (90) | |
Pension and other postretirement benefit liabilities: | | | |
Net pension and other postretirement benefit liabilities arising during the year | $ | 653 | | $ | (138) | | $ | 515 | |
Reclassification adjustments recognized in net income | 265 | | (66) | | 199 | |
Net change in pension and other postretirement benefit liabilities3 | $ | 918 | | $ | (204) | | $ | 714 | |
Other comprehensive income (loss) attributable to shareowners of The Coca-Cola Company | $ | 709 | | $ | (438) | | $ | 271 | |
| | | | | | | | | | | |
2020 | | | |
Foreign currency translation adjustments: | | | |
Translation adjustments arising during the year | $ | (2,223) | | $ | 150 | | $ | (2,073) | |
Reclassification adjustments recognized in net income | 3 | | — | | 3 | |
Gains (losses) on intra-entity transactions that are of a long-term investment nature | 2,133 | | — | | 2,133 | |
Gains (losses) on net investment hedges arising during the year1 | (1,094) | | 273 | | (821) | |
| | | |
Net foreign currency translation adjustments | $ | (1,181) | | $ | 423 | | $ | (758) | |
Derivatives: | | | |
Gains (losses) arising during the year | $ | (54) | | $ | 13 | | $ | (41) | |
Reclassification adjustments recognized in net income | 74 | | (18) | | 56 | |
Net gains (losses) on derivatives1 | $ | 20 | | $ | (5) | | $ | 15 | |
Available-for-sale debt securities: | | | |
Unrealized gains (losses) arising during the year | $ | (64) | | $ | 22 | | $ | (42) | |
Reclassification adjustments recognized in net income | (7) | | 2 | | (5) | |
Net change in unrealized gains (losses) on available-for-sale debt securities2 | $ | (71) | | $ | 24 | | $ | (47) | |
Pension and other postretirement benefit liabilities: | | | |
Net pension and other postretirement benefit liabilities arising during the year | $ | (560) | | $ | 138 | | $ | (422) | |
Reclassification adjustments recognized in net income | 206 | | (51) | | 155 | |
Net change in pension and other postretirement benefit liabilities3 | $ | (354) | | $ | 87 | | $ | (267) | |
Other comprehensive income (loss) attributable to shareowners of The Coca-Cola Company | $ | (1,586) | | $ | 529 | | $ | (1,057) | |
| | | | | | | | | | | |
| Before-Tax Amount | Income Tax | After-Tax Amount |
2019 | | | |
Foreign currency translation adjustments: | | | |
Translation adjustments arising during the year | $ | 52 | | $ | (54) | | $ | (2) | |
Reclassification adjustments recognized in net income | 192 | | — | | 192 | |
Gains (losses) on intra-entity transactions that are of a long-term investment nature | (307) | | — | | (307) | |
Gains (losses) on net investment hedges arising during the year1 | 195 | | (49) | | 146 | |
Net foreign currency translation adjustments | $ | 132 | | $ | (103) | | $ | 29 | |
Derivatives: | | | |
Gains (losses) arising during the year | $ | (225) | | $ | 49 | | $ | (176) | |
Reclassification adjustments recognized in net income | 163 | | (41) | | 122 | |
Net gains (losses) on derivatives1 | $ | (62) | | $ | 8 | | $ | (54) | |
Available-for-sale debt securities: | | | |
Unrealized gains (losses) arising during the year | $ | 47 | | $ | (4) | | $ | 43 | |
Reclassification adjustments recognized in net income | (31) | | 6 | | (25) | |
Net change in unrealized gains (losses) on available-for-sale debt securities2 | $ | 16 | | $ | 2 | | $ | 18 | |
Pension and other postretirement benefit liabilities: | | | |
Net pension and other postretirement benefit liabilities arising during the year | $ | (379) | | $ | 105 | | $ | (274) | |
Reclassification adjustments recognized in net income | 151 | | (36) | | 115 | |
Net change in pension and other postretirement benefit liabilities3 | $ | (228) | | $ | 69 | | $ | (159) | |
Other comprehensive income (loss) attributable to shareowners of The Coca-Cola Company | $ | (142) | | $ | (24) | | $ | (166) | |
1Refer to Note 5 for additional information related to the net gains or losses on derivative instruments.
2Refer to Note 4 for additional information related to the net unrealized gains or losses on available-for-sale debt securities.
3Refer to Note 13 for additional information related to the Company’s pension and other postretirement benefit liabilities.
The following table presents the amounts and line items in our consolidated statement of income where adjustments reclassified from AOCI into income were recorded during the year ended December 31, 2021 (in millions):
| | | | | | | | |
Description of AOCI Component | Financial Statement Line Item | Amount Reclassified from AOCI into Income |
Foreign currency translation adjustments: | | |
Divestitures, deconsolidations and other1 | Other income (loss) — net | $ | 261 | |
| Income before income taxes | 261 | |
| Income taxes | — | |
| Consolidated net income | $ | 261 | |
Derivatives: | | |
Foreign currency contracts | Net operating revenues | $ | 77 | |
Foreign currency and commodity contracts | Cost of goods sold | 10 | |
Foreign currency contracts | Other income (loss) — net | (74) | |
Divestitures, deconsolidations and other1 | Other income (loss) — net | 8 | |
Foreign currency and interest rate contracts | Interest expense | 103 | |
| Income before income taxes | 124 | |
| Income taxes | (29) | |
| Consolidated net income | $ | 95 | |
Available-for-sale debt securities: | | |
| | |
Sale of debt securities | Other income (loss) — net | $ | 4 | |
| Income before income taxes | 4 | |
| Income taxes | (1) | |
| Consolidated net income | $ | 3 | |
Pension and other postretirement benefit liabilities: | | |
Settlement charges2 | Other income (loss) — net | $ | 117 | |
Curtailment charges (credits)2 | Other income (loss) — net | (2) | |
Recognized net actuarial loss | Other income (loss) — net | 150 | |
Recognized prior service cost (credit) | Other income (loss) — net | (2) | |
Divestitures, deconsolidations and other1 | Other income (loss) — net | 2 | |
| Income before income taxes | 265 | |
| Income taxes | (66) | |
| Consolidated net income | $ | 199 | |
1 Refer to Note 2.
2 The settlement charges and curtailment credits were related to our strategic realignment initiatives. Refer to Note 13 and Note 18.
NOTE 16: FAIR VALUE MEASUREMENTS
U.S. GAAP defines 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 U.S. GAAP, 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 securities with readily determinable fair values, debt securities classified as trading or available-for-sale, derivative financial instruments and our contingent consideration liability. Additionally, the Company adjusts the carrying value of certain long-term debt as a result of the Company’s fair value hedging strategy.
Investments in Debt and Equity Securities
The fair values of our investments in debt and equity securities using quoted market prices from daily exchange traded markets are based on the closing price as of the balance sheet date and are classified as Level 1. The fair values of our investments in debt and equity securities classified as Level 2 are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. Inputs into these valuation techniques include actual trade data, benchmark yields, broker/dealer quotes and other similar data. These inputs are obtained from quoted market prices, independent pricing vendors or other sources.
Derivative Financial Instruments
The fair values of our futures contracts are primarily determined using quoted contract prices on futures exchange markets. The fair values of these instruments are based on the closing contract prices as of the balance sheet date and are classified as Level 1.
The fair values of our derivative instruments other than futures are 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 derivative instruments other than futures include the applicable exchange rates, forward rates, interest rates, discount rates and commodity prices. The standard valuation model for 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 options is based on quoted rates from financial institutions.
Included in the fair values of derivative instruments is an adjustment for nonperformance risk. The adjustment is based on current credit default swap (“CDS”) rates 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 values of our derivative instruments.
The following tables summarize those assets and liabilities measured at fair value on a recurring basis (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | |
| Level 1 | Level 2 | Level 3 | | Other3 | Netting Adjustment | 4 | Fair Value Measurements | |
Assets: | | | | | | | | | |
Equity securities with readily determinable values1 | $ | 2,372 | | $ | 230 | | $ | 17 | | | $ | 104 | | $ | — | | | $ | 2,723 | | |
Debt securities1 | — | | 1,556 | | 33 | | | — | | — | | | 1,589 | | |
Derivatives2 | 69 | | 588 | | — | | | — | | (459) | | 6 | 198 | | 8 |
Total assets | $ | 2,441 | | $ | 2,374 | | $ | 50 | | | $ | 104 | | $ | (459) | | | $ | 4,510 | | |
Liabilities: | | | | | | | | | |
Contingent consideration liability | $ | — | | $ | — | | $ | 590 | | 5 | $ | — | | $ | — | | | $ | 590 | | |
Derivatives2 | — | | 96 | | — | | | — | | (82) | | 7 | 14 | | 8 |
Total liabilities | $ | — | | $ | 96 | | $ | 590 | | | $ | — | | $ | (82) | | | $ | 604 | | |
1Refer to Note 4 for additional information related to the composition of our equity securities with readily determinable values and debt securities.
2Refer to Note 5 for additional information related to the composition of our derivative portfolio.
3Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in Note 4.
4Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle net positive and negative positions and also cash collateral held or placed with the same counterparties. There are no amounts subject to legally enforceable master netting agreements that management has chosen not to offset or that do not meet the offsetting requirements. Refer to Note 5.
5Refer to Note 2 for additional information related to the contingent consideration liability resulting from the fairlife acquisition.
6The Company is obligated to return $331 million in cash collateral it has netted against its derivative position.
7The Company does not have the right to reclaim any cash collateral it has netted against its derivative position.
8The Company’s derivative financial instruments are recorded at fair value in our consolidated balance sheet as follows: $198 million in the line item other noncurrent assets and $14 million in the line item other noncurrent liabilities. Refer to Note 5 for additional information related to the composition of our derivative portfolio.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | |
| Level 1 | Level 2 | Level 3 | | Other3 | Netting Adjustment | 4 | Fair Value Measurements | |
Assets: | | | | | | | | | |
Equity securities with readily determinable values1 | $ | 2,049 | | $ | 210 | | $ | 12 | | | $ | 103 | | $ | — | | | $ | 2,374 | | |
Debt securities1 | 4 | | 2,267 | | 32 | | | — | | — | | | 2,303 | | |
Derivatives2 | 63 | | 835 | | — | | | — | | (669) | | 6 | 229 | | 8 |
Total assets | $ | 2,116 | | $ | 3,312 | | $ | 44 | | | $ | 103 | | $ | (669) | | | $ | 4,906 | | |
Liabilities: | | | | | | | | | |
Contingent consideration liability | $ | — | | $ | — | | $ | 321 | | 5 | $ | — | | $ | — | | | $ | 321 | | |
Derivatives2 | — | | 91 | | — | | | — | | (81) | | 7 | 10 | | 8 |
Total liabilities | $ | — | | $ | 91 | | $ | 321 | | | $ | — | | $ | (81) | | | $ | 331 | | |
1Refer to Note 4 for additional information related to the composition of our equity securities with readily determinable values and debt securities.
2Refer to Note 5 for additional information related to the composition of our derivative portfolio.
3Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in Note 4.
4Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle net positive and negative positions and also cash collateral held or placed with the same counterparties. There are no amounts subject to legally enforceable master netting agreements that management has chosen not to offset or that do not meet the offsetting requirements. Refer to Note 5.
5Refer to Note 2 for additional information related to the contingent consideration liability resulting from the fairlife acquisition.
6The Company is obligated to return $546 million in cash collateral it has netted against its derivative position.
7The Company does not have the right to reclaim any cash collateral it has netted against its derivative position.
8The Company’s derivative financial instruments are recorded at fair value in our consolidated balance sheet as follows: $229 million in the line item other noncurrent assets, $9 million in the line item accounts payable and accrued expenses and $1 million in the line item other noncurrent liabilities. 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 years ended December 31, 2021 and 2020.
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 years ended December 31, 2021 and 2020.
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 U.S. GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges or as a result of observable changes in equity securities using the measurement alternative.
The gains and losses on assets measured at fair value on a nonrecurring basis are summarized in the following table (in millions):
| | | | | | | | | | | | | | |
| Gains (Losses) | |
Year Ended December 31, | 2021 | | 2020 | |
Assets held for sale | $ | (266) | | 1 | $ | — | | |
Other-than-temporary impairment charges | — | | | (290) | | 3 |
Impairment of intangible assets | (78) | | 2 | (215) | | 4 |
Impairment of equity investment without a readily determinable fair value | — | | | (26) | | 5 |
Total | $ | (344) | | | $ | (531) | | |
1The Company is required to record assets and liabilities that are held for sale at the lower of carrying value or fair value less any costs to sell based on the agreed-upon sale price. The Company recorded charges of $266 million in the line item other income (loss) — net in our consolidated statement of income related to the restructuring of our manufacturing operations in the United States. These charges, which were calculated based on Level 3 inputs, primarily impacted the line item property, plant and equipment in our consolidated balance sheet.
2The Company recorded an impairment charge of $78 million related to a trademark in Europe, which was driven by a change in the long-term outlook on the licensing arrangement for a certain brand. The fair value of this trademark was derived using discounted cash flow analyses based on Level 3 inputs.
3During the year ended December 31, 2020, the Company recorded an other-than-temporary impairment charge of $252 million related to CCBJHI, an equity method investee. Based on the length of time and the extent to which the market value of our investment in CCBJHI was less than our carrying value and the financial condition and near-term prospects of the issuer, management determined that the decline in fair value was other than temporary in nature. This impairment charge was determined using the quoted market price (a Level 1 measurement) of CCBJHI. The Company also recorded an other-than-temporary impairment charge of $38 million related to one of our equity method investees in Latin America. This impairment charge was derived using Level 3 inputs and was primarily driven by revised projections of future operating results.
4The Company recorded impairment charges of $160 million related to its Odwalla trademark in North America, as the Company decided in June 2020 to discontinue its Odwalla juice business. The Company also recorded an impairment charge of $55 million related to a trademark in North America, which was driven by the impact of the COVID-19 pandemic, revised projections of future operating results and a change in brand focus in the Company’s portfolio. The fair value of this trademark was derived using discounted cash flow analyses based on Level 3 inputs.
5The Company recorded an impairment charge of $26 million related to an investment in an equity security without a readily determinable fair value. This impairment charge was derived using Level 3 inputs and was primarily driven by revised projections of future operating results.
Fair Value Measurements for Pension and Other Postretirement Benefit Plan Assets
The fair value hierarchy discussed above is not only applicable to assets and liabilities that are included in our consolidated balance sheet but is also applied to certain other assets that indirectly impact our consolidated financial statements. For example, our Company sponsors and/or contributes to a number of pension and other postretirement benefit plans. Assets contributed by the Company become the property of the individual plans. Even though the Company no longer has control over these assets, we are indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts the Company’s future net periodic benefit cost or income as well as amounts recognized in our consolidated balance sheet. Refer to Note 13. The Company uses the fair value hierarchy to measure the fair value of assets held by our pension and other postretirement benefit plans.
Pension Plan Assets
The following table summarizes the levels within the fair value hierarchy for our pension plan assets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Level 1 | Level 2 | | Level 3 | | Other | 1 | Total | | Level 1 | Level 2 | | Level 3 | | Other | 1 | Total |
Cash and cash equivalents | $ | 479 | | $ | 26 | | | $ | — | | | $ | — | | | $ | 505 | | | $ | 558 | | $ | 120 | | | $ | — | | | $ | — | | | $ | 678 | |
Equity securities: | | | | | | | | | | | | | | | | | |
U.S.-based companies | 2,382 | | 22 | | | 27 | | | — | | | 2,431 | | | 2,123 | | 12 | | | 4 | | | — | | | 2,139 | |
International-based companies | 1,684 | | 22 | | | — | | | — | | | 1,706 | | | 1,694 | | 32 | | | — | | | — | | | 1,726 | |
Fixed-income securities: | | | | | | | | | | | | | | | | | |
Government bonds | — | | 677 | | | — | | | — | | | 677 | | | — | | 637 | | | — | | | — | | | 637 | |
Corporate bonds and debt securities | — | | 994 | | | 29 | | | — | | | 1,023 | | | — | | 1,011 | | | 31 | | | — | | | 1,042 | |
Mutual, pooled and commingled funds | 36 | | 283 | | | — | | | 531 | | 4 | 850 | | | 44 | | 268 | | | — | | | 502 | | 4 | 814 | |
Hedge funds/limited partnerships | — | | — | | | — | | | 720 | | 5 | 720 | | | — | | — | | | — | | | 622 | | 5 | 622 | |
Real estate | — | | — | | | — | | | 389 | | 6 | 389 | | | — | | — | | | — | | | 332 | | 6 | 332 | |
Derivative financial instruments | — | | (9) | | 2 | — | | | — | | | (9) | | | — | | (15) | | 2 | — | | | — | | | (15) | |
Other | — | | — | | | 283 | | 3 | 330 | | 7 | 613 | | | — | | — | | | 302 | | 3 | 362 | | 7 | 664 | |
Total | $ | 4,581 | | $ | 2,015 | | | $ | 339 | | | $ | 1,970 | | | $ | 8,905 | | | $ | 4,419 | | $ | 2,065 | | | $ | 337 | | | $ | 1,818 | | | $ | 8,639 | |
1Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in Note 13.
2This class of assets includes investments in credit contracts.
3Includes purchased annuity insurance contracts.
4This class of assets includes actively managed emerging markets equity funds and a collective trust fund for qualified plans, invested primarily in equity securities of companies in developing and emerging markets. There are no liquidity restrictions on these investments.
5This class of assets includes hedge funds that can be subject to redemption restrictions, ranging from monthly to semiannually, with a redemption notice period of up to one year and/or initial lock-up periods of up to three years, and private equity funds that are primarily closed-end funds in which the Company’s investments are generally not eligible for redemption. Distributions from these private equity funds will be received as the underlying assets are liquidated or distributed.
6This class of assets includes funds invested in real estate, including a privately held real estate investment trust, a real estate commingled pension trust fund, infrastructure limited partnerships and commingled investment funds. These funds seek current income and capital appreciation and can be subject to redemption restrictions, ranging from quarterly to semiannually, with a redemption notice period of up to 90 days.
7Primarily includes segregated portfolios of private investment funds that are invested in a portfolio of insurance-linked securities. These assets can be subject to a semiannual redemption, with a redemption notice period of 90 days, subject to certain gate restrictions.
The following table provides a reconciliation of the beginning and ending balance of Level 3 assets for our U.S. and non-U.S. pension plans (in millions):
| | | | | | | | | | | | | | | | | | |
| Equity Securities | Fixed-Income Securities | | Other | 1 | Total |
2020 | | | | | | |
Balance at beginning of year | $ | 21 | | $ | 40 | | | $ | 273 | | | $ | 334 | |
Actual return on plan assets | — | | 1 | | | 6 | | | 7 | |
| | | | | | |
| | | | | | |
Purchases, sales and settlements — net | (18) | | (17) | | | 4 | | | (31) | |
Transfers into Level 3 — net | 1 | | 7 | | | — | | | 8 | |
Net foreign currency translation adjustments | — | | — | | | 19 | | | 19 | |
Balance at end of year | $ | 4 | | $ | 31 | | | $ | 302 | | | $ | 337 | |
2021 | | | | | | |
Balance at beginning of year | $ | 4 | | $ | 31 | | | $ | 302 | | | $ | 337 | |
Actual return on plan assets | 21 | | (3) | | | (6) | | | 12 | |
| | | | | | |
| | | | | | |
Purchases, sales and settlements — net | 2 | | 7 | | | (2) | | | 7 | |
Transfers into Level 3 — net | — | | (6) | | | — | | | (6) | |
Net foreign currency translation adjustments | — | | — | | | (11) | | | (11) | |
Balance at end of year | $ | 27 | | $ | 29 | | | $ | 283 | | | $ | 339 | |
1Includes purchased annuity insurance contracts.
Other Postretirement Benefit Plan Assets
The following table summarizes the levels within the fair value hierarchy for our other postretirement benefit plan assets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Level 1 | Level 2 | | Other 1 | Total | | Level 1 | Level 2 | | Other 1 | Total |
Cash and cash equivalents | $ | 32 | | $ | 1 | | | $ | — | | $ | 33 | | | $ | 29 | | $ | 1 | | | $ | — | | $ | 30 | |
Equity securities: | | | | | | | | | | | |
U.S.-based companies | 183 | | 1 | | | — | | 184 | | | 169 | | 1 | | | — | | 170 | |
International-based companies | 12 | | — | | | — | | 12 | | | 12 | | — | | | — | | 12 | |
Fixed-income securities: | | | | | | | | | | | |
Government bonds | — | | 3 | | | — | | 3 | | | — | | 3 | | | — | | 3 | |
Corporate bonds and debt securities | — | | 82 | | | — | | 82 | | | — | | 80 | | | — | | 80 | |
Mutual, pooled and commingled funds | — | | 85 | | | 2 | | 87 | | | — | | 84 | | | 2 | | 86 | |
Hedge funds/limited partnerships | — | | — | | | 9 | | 9 | | | — | | — | | | 7 | | 7 | |
Real estate | — | | — | | | 5 | | 5 | | | — | | — | | | 4 | | 4 | |
Other | — | | — | | | 4 | | 4 | | | — | | — | | | 4 | | 4 | |
Total | $ | 227 | | $ | 172 | | | $ | 20 | | $ | 419 | | | $ | 210 | | $ | 169 | | | $ | 17 | | $ | 396 | |
1Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in Note 13.
Other Fair Value Disclosures
The carrying values of cash and cash equivalents; short-term investments; trade accounts receivable; accounts payable and accrued expenses; and loans and notes payable approximate their fair values because of the relatively short-term maturities of these financial instruments. As of December 31, 2021, the carrying value and fair value of our long-term debt, including the current portion, were $39,454 million and $40,311 million, respectively. As of December 31, 2020, the carrying value and fair value of our long-term debt, including the current portion, were $40,610 million and $43,218 million, respectively.
NOTE 17: SIGNIFICANT OPERATING AND NONOPERATING ITEMS
Other Operating Charges
In 2021, the Company recorded other operating charges of $846 million. These charges primarily consisted of $369 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition, $146 million related to the Company’s strategic realignment initiatives, $119 million related to the BodyArmor acquisition, which includes various transition and transaction costs, distributor termination fees, employee retention costs and the amortization of noncompete agreements, and $115 million related to the Company’s productivity and reinvestment program. In addition, other operating charges included an impairment charge of $78 million related to a trademark in Europe, charges of $15 million related to tax litigation and a net charge of $4 million related to the restructuring of our manufacturing operations in the United States.
In 2020, the Company recorded other operating charges of $853 million. These charges primarily consisted of $413 million related to the Company’s strategic realignment initiatives and $99 million related to the Company’s productivity and reinvestment program. In addition, other operating charges included impairment charges of $160 million related to the Odwalla trademark and net charges of $33 million related to discontinuing the Odwalla juice business. Other operating charges also included an impairment charge of $55 million related to a trademark in North America. In addition, other operating charges included $51 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition and net charges of $16 million related to the restructuring of our manufacturing operations in the United States.
In 2019, the Company recorded other operating charges of $458 million. These charges included $264 million related to the Company’s productivity and reinvestment program and $42 million related to the impairment of a trademark in Asia Pacific. In addition, other operating charges included $46 million of transaction costs associated with the purchase of Costa, which we acquired in January 2019, and $95 million for costs incurred to refranchise certain of our North America bottling operations. These costs included, among other items, internal and external costs for individuals directly working on the refranchising efforts, severance, and costs associated with the implementation of information technology systems to facilitate consistent data standards and availability throughout our bottling systems.
Refer to Note 2 for additional information on the acquisitions of BodyArmor, fairlife and Costa. Refer to Note 11 for additional information related to the tax litigation. Refer to Note 16 for additional information on the impairment charges. Refer to Note 18 for additional information on the Company’s strategic realignment initiatives and productivity and reinvestment program. Refer to Note 19 for the impact these charges had on our operating segments and Corporate.
Other Nonoperating Items
Interest Expense
During the years ended December 31, 2021 and 2020, the Company recorded charges of $650 million and $484 million, respectively, related to the extinguishment of long-term debt. Refer to Note 10.
Equity Income (Loss) — Net
The Company recorded net charges of $13 million, $216 million and $100 million in equity income (loss) — net during the years ended December 31, 2021, 2020 and 2019, respectively. These amounts represent the Company’s proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees. Refer to Note 19 for the impact these charges had on our operating segments and Corporate.
Other Income (Loss) — Net
During 2021, the Company recognized a gain of $834 million in conjunction with the BodyArmor acquisition, a net gain of $695 million related to the sale of our ownership interest in CCA, an equity method investee, and a net gain of $114 million related to the sale of our ownership interest in an equity method investee and the sale of a portion of our ownership interest in another equity method investee. Additionally, the Company recognized a net gain of $467 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. The Company also recorded charges of $266 million related to the restructuring of our manufacturing operations in the United States and pension plan settlement charges of $117 million related to our strategic realignment initiatives.
During 2020, the Company recognized a gain of $902 million in conjunction with the fairlife acquisition, a net gain of $148 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities, and a net gain of $35 million related to the sale of our ownership interest in an equity method investee and the sale of a portion of our ownership interest in another equity method investee. These gains were partially offset by an other-than-temporary impairment charge of $252 million related to CCBJHI, an equity method investee, an other-than-temporary impairment charge of $38 million related to one of our equity method investees in Latin America, an impairment charge of $26 million associated with an investment in an equity security without a readily determinable fair value and a net loss of $55 million related to economic hedging activities. The Company also recorded net charges of $25 million related to the restructuring of our manufacturing operations in the United States and pension and other postretirement benefit plan settlement and curtailment charges of $14 million related to the Company’s strategic realignment initiatives.
During 2019, the Company recognized a gain of $739 million on the sale of a retail and office building in New York City. The Company also recognized a net gain of $250 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities, a gain of $73 million related to the refranchising of certain bottling operations in India and a gain of $39 million related to the sale of a portion of our ownership interest in Andina. These gains were partially offset by other-than-temporary impairment charges of $406 million related to CCBJHI, an equity method investee, $255 million related to certain equity method investees in the Middle East, $57 million related to one of our equity method investees in North America and $49 million related to one of our equity method investees in Latin America. The Company also recorded an adjustment to reduce the carrying amount of CCBA’s fixed assets and definite-lived intangible assets by $160 million and recognized a $118 million net loss in conjunction with our acquisition of the remaining ownership interest in CHI. Additionally, the Company recorded net charges of $105 million primarily related to post-closing adjustments as contemplated by the related agreements associated with the refranchising of certain bottling territories in North America.
Refer to Note 2 for additional information on the acquisitions of BodyArmor, fairlife and CHI, the sale of our ownership interest in CCA, the sale of a portion of our ownership interest in Andina, the refranchising activity in India, and the CCBA asset adjustment. Refer to Note 4 for additional information on equity and debt securities. Refer to Note 5 for additional information on our economic hedging activities. Refer to Note 16 for additional information on the impairment charges and charges related to the restructuring of our manufacturing operations in the United States. Refer to Note 18 for additional information on the Company’s strategic realignment initiatives. Refer to Note 19 for the impact these items had on our operating segments and Corporate.
NOTE 18: RESTRUCTURING
Strategic Realignment
In August 2020, the Company announced strategic steps to transform our organizational structure in an effort to better enable us to capture growth in the fast-changing marketplace. The Company has transformed into a networked global organization designed to combine the power of scale with the deep knowledge required to win locally. We created new operating units effective January 1, 2021, which are focused on regional and local execution. The operating units, which sit under the four existing geographic operating segments, are highly interconnected, with more consistency in their structure and a focus on eliminating duplication of resources and scaling new products more quickly. The operating units work closely with five global marketing category leadership teams to rapidly scale ideas while staying close to the consumer. The global marketing category leadership teams primarily focus on innovation as well as marketing efficiency and effectiveness. The organizational structure also includes a center and a platform services organization. Refer to Note 19 for additional information on our organizational structure.
The Company has incurred total pretax expenses of $690 million related to these strategic realignment initiatives since they commenced. These expenses were recorded in the line items other operating charges and other income (loss) — net in our consolidated statements of income. Refer to Note 19 for the impact these expenses had on our operating segments and Corporate. Outside services reported in the table below primarily relate to expenses in connection with legal and consulting activities. These initiatives were substantially complete as of December 31, 2021.
The following table summarizes the balance of accrued expenses related to these strategic realignment initiatives (in millions):
| | | | | | | | | | | | | | | | | |
| Severance Pay and Benefits | | Outside Services | Other Direct Costs | Total |
2020 | | | | | |
Costs incurred | $ | 386 | | | $ | 37 | | $ | 4 | | $ | 427 | |
Payments | (170) | | | (36) | | (1) | | (207) | |
Noncash and exchange | (35) | | 1 | — | | — | | (35) | |
Accrued balance at end of year | $ | 181 | | | $ | 1 | | $ | 3 | | $ | 185 | |
2021 | | | | | |
Accrued balance at beginning of year | $ | 181 | | | $ | 1 | | $ | 3 | | $ | 185 | |
Costs incurred | 224 | | | 37 | | 2 | | 263 | |
Payments | (265) | | | (35) | | (3) | | (303) | |
Noncash and exchange | (120) | | 1 | (2) | | — | | (122) | |
Accrued balance at end of year | $ | 20 | | | $ | 1 | | $ | 2 | | $ | 23 | |
1Includes stock-based compensation modifications, pension settlement charges, and other postretirement benefit plan curtailment charges. Refer to Note 12 and Note 13.
Productivity and Reinvestment Program
In February 2012, the Company announced a productivity and reinvestment program designed to strengthen our brands and reinvest our resources to drive long-term profitable growth. This program was expanded multiple times, with the last expansion occurring in April 2017. While we expect most of the remaining initiatives included in this program, which are primarily designed to further simplify and standardize our organization, to be completed by the end of 2023, certain initiatives may extend into 2024.
The Company has incurred total pretax expenses of $4,044 million related to our productivity and reinvestment program since it commenced. These expenses were recorded in the line items other operating charges and other income (loss) — net in our consolidated statements of income. Refer to Note 19 for the impact these charges had on our operating segments and Corporate. Outside services reported in the table below primarily include costs associated with outplacement and consulting activities. Other direct costs reported in the table below include, among other items, internal and external costs associated with the development, communication, administration and implementation of these initiatives; accelerated depreciation on certain fixed assets; contract termination fees; and relocation costs.
The following table summarizes the balance of accrued expenses related to these productivity and reinvestment initiatives and the changes in the accrued amounts (in millions):
| | | | | | | | | | | | | | |
| Severance Pay and Benefits | Outside Services | Other Direct Costs | Total |
2019 | | | | |
Accrued balance at beginning of year | $ | 76 | | $ | 10 | | $ | 4 | | $ | 90 | |
Costs incurred | 36 | | 87 | | 141 | | 264 | |
Payments | (57) | | (98) | | (119) | | (274) | |
Noncash and exchange | 3 | | 2 | | (19) | | (14) | |
Accrued balance at end of year | $ | 58 | | $ | 1 | | $ | 7 | | $ | 66 | |
2020 | | | | |
Accrued balance at beginning of year | $ | 58 | | $ | 1 | | $ | 7 | | $ | 66 | |
Costs incurred | (12) | | 69 | | 42 | | 99 | |
Payments | (29) | | (70) | | (36) | | (135) | |
Noncash and exchange | (2) | | — | | (11) | | (13) | |
Accrued balance at end of year | $ | 15 | | $ | — | | $ | 2 | | $ | 17 | |
2021 | | | | |
Accrued balance at beginning of year | $ | 15 | | $ | — | | $ | 2 | | $ | 17 | |
Costs incurred | 4 | | 97 | | 14 | | 115 | |
Payments | (6) | | (97) | | (14) | | (117) | |
Noncash and exchange | (1) | | — | | 3 | | 2 | |
Accrued balance at end of year | $ | 12 | | $ | — | | $ | 5 | | $ | 17 | |
NOTE 19: OPERATING SEGMENTS
Our organizational structure consists of the following operating segments: Europe, Middle East and Africa; Latin America; North America; Asia Pacific; Global Ventures; and Bottling Investments. Our operating structure also includes Corporate, which consists of two components: (1) a center focusing on strategic initiatives, policy, governance and scaling global initiatives; and (2) a platform services organization supporting operating units, global marketing category leadership teams and the center by providing efficient and scaled global services and capabilities including, but not limited to, transactional work, data management, consumer analytics, digital commerce and social/digital hubs.
Segment Products and Services
The business of our Company is primarily nonalcoholic beverages. Our geographic operating segments (Europe, Middle East and Africa; Latin America; North America; and Asia Pacific) derive a majority of their revenues from the manufacture and sale of beverage concentrates and syrups and, in some cases, the sale of finished beverages. Our Global Ventures operating segment includes the results of our Costa, innocent and doğadan businesses as well as fees earned pursuant to distribution coordination agreements between the Company and Monster. Our Bottling Investments operating segment is composed of our consolidated bottling operations, regardless of the geographic location of the bottler. Our Bottling Investments operating segment also includes equity income from the majority of our equity method investees. Our consolidated bottling operations derive the majority of their revenues from the manufacture and sale of finished beverages. Generally, finished product operations produce higher net operating revenues but lower gross profit margins than concentrate operations. Refer to Note 3.
The following table sets forth the percentage of total net operating revenues attributable to concentrate operations and finished product operations:
| | | | | | | | | | | |
Year Ended December 31, | 2021 | 2020 | 2019 |
Concentrate operations | 56 | % | 56 | % | 55 | % |
Finished product operations | 44 | | 44 | | 45 | |
Total | 100 | % | 100 | % | 100 | % |
Method of Determining Segment Income or Loss
Management evaluates the performance of our operating segments separately to individually monitor the different factors affecting financial performance. Our Company manages income taxes and certain treasury-related items, such as interest income and interest expense, on a global basis within Corporate. We evaluate operating segment performance based primarily on net operating revenues and operating income (loss).
Geographic Data
The following table provides information related to our net operating revenues (in millions):
| | | | | | | | | | | |
Year Ended December 31, | 2021 | 2020 | 2019 |
United States | $ | 13,010 | | $ | 11,281 | | $ | 11,715 | |
International | 25,645 | | 21,733 | | 25,551 | |
Net operating revenues | $ | 38,655 | | $ | 33,014 | | $ | 37,266 | |
The following table provides information related to our property, plant and equipment — net (in millions):
| | | | | | | | | | | |
Year Ended December 31, | 2021 | 2020 | 2019 |
United States | $ | 3,420 | | $ | 3,988 | | $ | 4,062 | |
International | 6,500 | | 6,789 | | 6,776 | |
Property, plant and equipment — net | $ | 9,920 | | $ | 10,777 | | $ | 10,838 | |
Information about our Company’s operations by operating segment and Corporate is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Europe, Middle East & Africa | | Latin America | | North America | | Asia Pacific | | Global Ventures | | Bottling Investments | | Corporate | | Eliminations | | Consolidated |
As of and for the Year Ended December 31, 2021 | | | | | | | | | | | | | | | | | |
Net operating revenues: | | | | | | | | | | | | | | | | | |
Third party | $ | 6,564 | | | $ | 4,143 | | | $ | 13,184 | | | $ | 4,682 | |
| $ | 2,805 | | | $ | 7,194 | | | $ | 83 | | | $ | — | | | $ | 38,655 | |
Intersegment | 629 | | | — | | | 6 | | | 609 | | | — | | | 9 | | | 2 | | | (1,255) | | | — | |
Total net operating revenues | 7,193 | | | 4,143 | | | 13,190 | | | 5,291 | | | 2,805 | | | 7,203 | | | 85 | | | (1,255) | | | 38,655 | |
Operating income (loss) | 3,735 | | | 2,534 | | | 3,331 | | | 2,325 | | | 293 | | | 473 | | | (2,383) | | | — | | | 10,308 | |
Interest income | — | | | — | | | 40 | | | — | | | 10 | | | — | | | 226 | | | — | | | 276 | |
Interest expense | — | | | — | | | — | | | — | | | — | | | — | | | 1,597 | | | — | | | 1,597 | |
Depreciation and amortization | 76 | | | 39 | | | 388 | | | 49 | | | 135 | | | 529 | | | 236 | | | — | | | 1,452 | |
Equity income (loss) — net | 33 | | | 9 | | | 22 | | | 8 | | | (6) | | | 1,071 | | | 301 | | | — | | | 1,438 | |
Income (loss) before income taxes | 3,821 | | | 2,542 | | | 3,140 | | | 2,350 | | | 310 | | | 1,596 | | | (1,334) | | | — | | | 12,425 | |
Identifiable operating assets | 7,908 | | 2 | 1,720 | | | 25,730 | | | 2,355 | | 3 | 7,949 | | | 10,312 | | 2,3 | 19,964 | | | — | | | 75,938 | |
Investments1 | 436 | | | 594 | | | 21 | | | 230 | | | — | | | 12,669 | | | 4,466 | | | — | | | 18,416 | |
Capital expenditures | 35 | | | 2 | | | 228 | | | 65 | | | 285 | | | 560 | | | 192 | | | — | | | 1,367 | |
As of and for the Year Ended December 31, 2020 | | | | | | | | | | | | | | | | | |
Net operating revenues: | | | | | | | | | | | | | | | | | |
Third party | $ | 5,534 | | | $ | 3,499 | | | $ | 11,473 | | | $ | 4,213 | | | $ | 1,991 | | | $ | 6,258 | | | $ | 46 | | | $ | — | | | $ | 33,014 | |
Intersegment | 523 | | | — | | | 4 | | | 509 | | | — | | | 7 | | | — | | | (1,043) | | | — | |
Total net operating revenues | 6,057 | | | 3,499 | | | 11,477 | | | 4,722 | | | 1,991 | | | 6,265 | | | 46 | | | (1,043) | | | 33,014 | |
Operating income (loss) | 3,313 | | | 2,116 | | | 2,471 | | | 2,133 | | | (123) | | | 308 | | | (1,221) | | | — | | | 8,997 | |
Interest income | — | | | — | | | 64 | | | — | | | 11 | | | — | | | 295 | | | — | | | 370 | |
Interest expense | — | | | — | | | — | | | — | | | — | | | — | | | 1,437 | | | — | | | 1,437 | |
Depreciation and amortization | 86 | | | 45 | | | 439 | | | 47 | | | 122 | | | 551 | | | 246 | | | — | | | 1,536 | |
Equity income (loss) — net | 31 | | | (72) | | | — | | | 8 | | | (9) | | | 779 | | | 241 | | | — | | | 978 | |
Income (loss) before income taxes | 3,379 | | | 2,001 | | | 2,500 | | | 2,158 | | | (120) | | | 898 | | | (1,067) | | | — | | | 9,749 | |
Identifiable operating assets | 8,098 | | 2 | 1,597 | | | 19,444 | | | 2,073 | | 3 | 7,575 | | | 10,521 | | 2,3 | 17,903 | | | — | | | 67,211 | |
Investments1 | 517 | | | 603 | | | 345 | | | 240 | | | 4 | | | 14,183 | | | 4,193 | | | — | | | 20,085 | |
Capital expenditures | 27 | | | 6 | | | 182 | | | 20 | | | 261 | | | 474 | | | 207 | | | — | | | 1,177 | |
Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | |
Net operating revenues: | | | | | | | | | | | | | | | | | |
Third party | $ | 6,434 | | | $ | 4,118 | | | $ | 11,906 | | | $ | 4,723 | | | $ | 2,560 | | | $ | 7,431 | | | $ | 94 | | | $ | — | | | $ | 37,266 | |
Intersegment | 624 | | | — | | | 9 | | | 604 | | | 2 | | | 9 | | | — | | | (1,248) | | | — | |
Total net operating revenues | 7,058 | | | 4,118 | | | 11,915 | | | 5,327 | | | 2,562 | | | 7,440 | | | 94 | | | (1,248) | | | 37,266 | |
Operating income (loss) | 3,551 | | | 2,375 | | | 2,594 | | | 2,282 | | | 334 | | | 358 | | | (1,408) | | | — | | | 10,086 | |
Interest income | — | | | — | | | 65 | | | — | | | 12 | | | — | | | 486 | | | — | | | 563 | |
Interest expense | — | | | — | | | — | | | — | | | — | | | — | | | 946 | | | — | | | 946 | |
Depreciation and amortization | 86 | | | 35 | | | 439 | | | 31 | | | 117 | | | 446 | | | 211 | | | — | | | 1,365 | |
Equity income (loss) — net | 35 | | | (32) | | | (6) | | | 11 | | | (3) | | | 836 | | | 208 | | | — | | | 1,049 | |
Income (loss) before income taxes | 3,361 | | | 2,288 | | | 2,592 | | | 2,310 | | | 343 | | | 716 | | | (824) | | | — | | | 10,786 | |
Capital expenditures | 108 | | | 140 | | | 392 | | | 47 | | | 209 | | | 836 | | | 322 | | | — | | | 2,054 | |
1Principally equity method investments and other investments in bottling companies.
2Property, plant and equipment — net in South Africa represented 16 percent and 15 percent of consolidated property, plant and equipment — net as of December 31, 2021 and 2020, respectively.
3Property, plant and equipment — net in the Philippines represented 10 percent of consolidated property, plant and equipment — net as of December 31, 2021 and 2020.
During 2021, 2020 and 2019, our operating segments and Corporate were impacted by acquisition and divestiture activities. Refer to Note 2.
In 2021, the results of our operating segments and Corporate were impacted by the following items:
•Operating income (loss) and income (loss) before income taxes were reduced by $369 million for Corporate related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition. Refer to Note 2.
•Operating income (loss) and income (loss) before income taxes were reduced by $115 million for Corporate due to the Company’s productivity and reinvestment program. Refer to Note 18.
•Operating income (loss) and income (loss) before income taxes were reduced by $98 million for Corporate and $21 million for North America related to various costs incurred in conjunction with our acquisition of BodyArmor. Refer to Note 2 and Note 17.
•Operating income (loss) and income (loss) before income taxes were reduced by $78 million for Europe, Middle East and Africa related to the impairment of a trademark. Refer to Note 16.
•Operating income (loss) and income (loss) before income taxes were reduced by $63 million and $61 million, respectively, for Europe, Middle East and Africa, $46 million and $160 million, respectively, for Corporate, $12 million and $14 million, respectively, for Asia Pacific, and $11 million and $12 million, respectively, for Latin America due to the Company’s strategic realignment initiatives. In addition, operating income (loss) and income (loss) before income taxes were both reduced by $14 million for North America and income (loss) before income taxes was reduced by $2 million for Bottling Investments due to the Company’s strategic realignment initiatives. Refer to Note 18.
•Operating income (loss) and income (loss) before income taxes were reduced by $52 million and $316 million, respectively, for North America, and income (loss) before income taxes was reduced by $2 million for Corporate related to the restructuring of our manufacturing operations in the United States. Refer to Note 16.
•Operating income (loss) and income (loss) before income taxes were reduced by $15 million for Corporate related to tax litigation expense. Refer to Note 11.
•Income (loss) before income taxes was increased by $834 million for Corporate in conjunction with our acquisition of BodyArmor, which resulted from the remeasurement of our previously held equity interest in BodyArmor to fair value. Refer to Note 2.
•Income (loss) before income taxes was increased by $695 million for Corporate related to the sale of our ownership interest in CCA, an equity method investee. Refer to Note 2.
•Income (loss) before income taxes was increased by $467 million for Corporate related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. Refer to Note 4.
•Income (loss) before income taxes was increased by $114 million for Corporate related to the sale of our ownership interest in an equity method investee and the sale of a portion of our ownership interest in another equity method investee. Refer to Note 2.
•Income (loss) before income taxes was reduced by $650 million for Corporate related to charges associated with the extinguishment of long-term debt. Refer to Note 10.
•Income (loss) before income taxes was reduced by $45 million for Bottling Investments and was increased by $32 million for Corporate due to the Company’s proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees.
In 2020, the results of our operating segments and Corporate were impacted by the following items:
•Operating income (loss) and income (loss) before income taxes for North America were reduced by $160 million related to the impairment of the Odwalla trademark and $33 million related to the cost of discontinuing the Odwalla juice business.
•Operating income (loss) and income (loss) before income taxes were reduced by $145 million and $153 million, respectively, for Corporate, $31 million and $30 million, respectively, for Asia Pacific, $21 million and $26 million, respectively, for Bottling Investments, and $19 million and $21 million, respectively, for Latin America due to the Company’s strategic realignment initiatives. Additionally, operating income (loss) and income (loss) before income taxes
were reduced by $115 million for North America, $78 million for Europe, Middle East and Africa and $4 million for Global Ventures due to the Company’s strategic realignment initiatives. Refer to Note 18.
•Operating income (loss) and income (loss) before income taxes were reduced by $104 million for Corporate due to the Company’s productivity and reinvestment program. Operating income (loss) and income (loss) before income taxes were increased by $5 million for Europe, Middle East and Africa due to the refinement of previously established accruals related to the Company’s productivity and reinvestment program. Refer to Note 18.
•Operating income (loss) and income (loss) before income taxes were reduced by $59 million and $84 million, respectively, for North America related to the restructuring of our manufacturing operations in the United States.
•Operating income (loss) and income (loss) before income taxes were reduced by $55 million for North America related to the impairment of a trademark. Refer to Note 16.
•Operating income (loss) and income (loss) before income taxes were reduced by $51 million for Corporate related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition. Refer to Note 2.
•Income (loss) before income taxes was increased by $902 million for Corporate in conjunction with our fairlife acquisition, which resulted from the remeasurement of our previously held equity interest in fairlife to fair value. Refer to Note 2.
•Income (loss) before income taxes was increased by $148 million for Corporate related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. Refer to Note 4.
•Income (loss) before income taxes was increased by $35 million for Corporate related to the sale of our ownership interest in an equity method investee and the sale of a portion of our ownership interest in another equity method investee. Refer to Note 2.
•Income (loss) before income taxes was reduced by $484 million for Corporate related to charges associated with the extinguishment of long-term debt. Refer to Note 10.
•Income (loss) before income taxes was reduced by $252 million for Bottling Investments and $38 million for Latin America due to other-than-temporary impairment charges related to certain of our equity method investees. Refer to Note 16.
•Income (loss) before income taxes was reduced by $145 million for Bottling Investments, $70 million for Latin America and $1 million for North America due to the Company’s proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees.
•Income (loss) before income taxes was reduced by $26 million for Corporate due to an impairment charge associated with an investment in an equity security without a readily determinable fair value. Refer to Note 16.
In 2019, the results of our operating segments and Corporate were impacted by the following items:
•Operating income (loss) and income (loss) before income taxes were reduced by $2 million for Europe, Middle East and Africa, $1 million for Latin America, $62 million for North America, $5 million for Bottling Investments and $194 million for Corporate due to the Company’s productivity and reinvestment program. Refer to Note 18.
•Operating income (loss) and income (loss) before income taxes were reduced by $95 million for Bottling Investments due to costs incurred to refranchise certain of our North America bottling operations.
•Operating income (loss) and income (loss) before income taxes were reduced by $46 million for Corporate related to transaction costs associated with the purchase of Costa, which we acquired in January 2019. Refer to Note 2.
•Operating income (loss) and income (loss) before income taxes were reduced by $42 million for Asia Pacific due to an impairment charge related to a trademark.
•Income (loss) before income taxes was increased by $739 million for Corporate as a result of the sale of a retail and office building in New York City.
•Income (loss) before income taxes was increased by $250 million for Corporate related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. Refer to Note 4.
•Income (loss) before income taxes was increased by $73 million for Bottling Investments due to the refranchising of certain bottling operations in India. Refer to Note 2.
•Income (loss) before income taxes was increased by $39 million for Corporate related to the sale of a portion of our ownership interest in Andina. Refer to Note 2.
•Income (loss) before income taxes was reduced by $406 million for Bottling Investments, $255 million for Europe, Middle East and Africa, $57 million for North America and $49 million for Latin America due to other-than-temporary impairment charges related to certain of our equity method investees.
•Income (loss) before income taxes was reduced by $160 million for Corporate as a result of CCBA asset adjustments. Refer to Note 2.
•Income (loss) before income taxes was reduced by $118 million for Corporate resulting from a net loss in conjunction with our acquisition of the remaining ownership interest in CHI. Refer to Note 2.
•Income (loss) before income taxes was reduced by $105 million for Bottling Investments due to the refranchising of certain bottling territories in North America.
•Income (loss) before income taxes was reduced by $98 million for Bottling Investments and $2 million for Corporate due to the Company’s proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees.
NOTE 20: NET CHANGE IN OPERATING ASSETS AND LIABILITIES
Net cash provided by (used in) operating activities attributable to the net change in operating assets and liabilities was composed of the following (in millions):
| | | | | | | | | | | |
Year Ended December 31, | 2021 | 2020 | 2019 |
(Increase) decrease in trade accounts receivable1 | $ | (225) | | $ | 882 | | $ | (158) | |
(Increase) decrease in inventories | (135) | | 99 | | (183) | |
(Increase) decrease in prepaid expenses and other current assets | (241) | | 78 | | (87) | |
Increase (decrease) in accounts payable and accrued expenses2 | 2,843 | | (860) | | 1,318 | |
Increase (decrease) in accrued income taxes3 | (566) | | (16) | | 96 | |
Increase (decrease) in other noncurrent liabilities4 | (351) | | 507 | | (620) | |
Net change in operating assets and liabilities | $ | 1,325 | | $ | 690 | | $ | 366 | |
1The increase in trade accounts receivable in 2021 was primarily due to improved business performance. The decrease in trade accounts receivable in 2020 was primarily due to the impact of the COVID-19 pandemic and the start of a trade accounts receivable factoring program. Refer to Note 1 for additional information on the factoring program.
2The increase in accounts payable and accrued expenses in 2021 was primarily driven by an increase in trade accounts payable, higher marketing accruals, BodyArmor acquisition-related accruals and higher annual incentive accruals. The decrease in accounts payable and accrued expenses in 2020 was primarily driven by the impact of the COVID-19 pandemic and lower annual incentive accruals. Refer to Note 2 for information regarding the BodyArmor acquisition.
3The decrease in accrued income taxes in 2021 was primarily driven by increased tax payments in 2021. Refer to Note 14.
4The increase in other noncurrent liabilities in 2020 was primarily due to the increase in income tax reserves related to the litigation with the IRS. Refer to Note 11.
REPORT OF MANAGEMENT
Management’s Responsibility for the Financial Statements
Management of the Company is responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report on Form 10-K. The financial statements were prepared in conformity with accounting principles generally accepted in the United States appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates. Financial information in this report is consistent with that in the financial statements.
Management of the Company is responsible for establishing and maintaining a system of internal controls and procedures to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Our internal control system is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel, and a written Code of Business Conduct adopted by our Company’s Board of Directors, applicable to all officers and employees of our Company and subsidiaries. In addition, our Company’s Board of Directors adopted a written Code of Business Conduct for Non-Employee Directors which reflects the same principles and values as our Code of Business Conduct for officers and employees but focuses on matters of relevance to non-employee Directors.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 (“Exchange Act”). Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“COSO”) in Internal Control—Integrated Framework. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2021.
The Company’s independent auditors, Ernst & Young LLP, a registered public accounting firm, are appointed by the Audit Committee of our Company’s Board of Directors, subject to ratification by our Company’s shareowners. Ernst & Young LLP has audited and reported on the consolidated financial statements of The Coca-Cola Company and subsidiaries and the Company’s internal control over financial reporting. The reports of the independent auditors are contained in this report.
Audit Committee’s Responsibility
The Audit Committee of our Company’s Board of Directors, composed solely of Directors who are independent in accordance with the requirements of the New York Stock Exchange listing standards, the Exchange Act, and the Company’s Corporate Governance Guidelines, meets with the independent auditors, management and internal auditors periodically to discuss internal controls along with auditing and financial reporting matters. The Audit Committee reviews with the independent auditors the scope and results of the audit effort. The Audit Committee also meets periodically with the independent auditors and the chief internal auditor without management present to ensure that the independent auditors and the chief internal auditor have free access to the Audit Committee. Our Audit Committee’s Report can be found in the Company’s 2022 Proxy Statement.