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EXCEL - IDEA: XBRL DOCUMENT - COCA-COLA EUROPEAN PARTNERS US, LLCFinancial_Report.xls
EX-12 - RATIO OF EARNINGS TO FIXED CHARGES - COCA-COLA EUROPEAN PARTNERS US, LLCa2014q3ex12cce.htm
EX-31.2 - 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - COCA-COLA EUROPEAN PARTNERS US, LLCa2014q3ex312cce.htm
EX-32.1 - 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - COCA-COLA EUROPEAN PARTNERS US, LLCa2014q3ex321cce.htm
EX-31.1 - 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - COCA-COLA EUROPEAN PARTNERS US, LLCa2014q3ex311cce.htm
EX-10.1 - EMPLOYMENT AGREEMENT - JOHN F BROCK - COCA-COLA EUROPEAN PARTNERS US, LLCa2014q3ex101brockcontract.htm
EX-32.2 - 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER - COCA-COLA EUROPEAN PARTNERS US, LLCa2014q3ex322cce.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
 
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2014
or 
[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR
 
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34874
(Exact name of registrant as specified in its charter)
Delaware
 
27-2197395
(State of incorporation)
 
(I.R.S. Employer Identification No.)
2500 Windy Ridge Parkway
Atlanta, Georgia 30339
(Address of principal executive offices, including zip code)
678-260-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]  No  [    ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  [X]  No  [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [X]
  
Accelerated filer [    ]
Non-accelerated filer [    ]
  
Smaller reporting company [    ]
(Do not check if a smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  [    ]  No  [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
241,734,401 Shares of $0.01 Par Value Common Stock as of September 26, 2014




COCA-COLA ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 2014
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
Item 1.        
 
 
 
 
Condensed Consolidated Statements of Income for the Third Quarter and First Nine Months of 2014 and 2013
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of September 26, 2014 and December 31, 2013
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the First Nine Months of 2014 and 2013
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


1


PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

COCA-COLA ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share data)
 
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Net sales
$
2,136

 
$
2,174

 
$
6,339

 
$
6,180

Cost of sales
1,328

 
1,387

 
4,035

 
4,006

Gross profit
808

 
787

 
2,304

 
2,174

Selling, delivery, and administrative expenses
463

 
473

 
1,480

 
1,477

Operating income
345

 
314

 
824

 
697

Interest expense, net
31

 
26

 
89

 
75

Other nonoperating income (expense)

 
1

 

 
(3
)
Income before income taxes
314

 
289

 
735

 
619

Income tax expense
76

 

 
184

 
87

Net income
$
238

 
$
289

 
$
551

 
$
532

Basic earnings per share
$
0.97

 
$
1.09

 
$
2.21

 
$
1.96

Diluted earnings per share
$
0.96

 
$
1.07

 
$
2.17

 
$
1.92

Dividends declared per share
$
0.25

 
$
0.20

 
$
0.75

 
$
0.60

Basic weighted average shares outstanding
244

 
264

 
249

 
271

Diluted weighted average shares outstanding
248

 
269

 
254

 
277




The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.



2


COCA-COLA ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in millions)
    
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Net income
$
238

 
$
289

 
$
551

 
$
532

Components of other comprehensive income:
 
 
 
 
 
 
 
Currency translations
 
 
 
 
 
 
 
    Pretax activity, net
(279
)
 
204

 
(255
)
 
14

    Tax effect

 

 

 

Currency translations, net of tax
(279
)
 
204

 
(255
)
 
14

Net investment hedges
 
 
 
 
 
 
 
    Pretax activity, net
153

 
(52
)
 
169

 
(34
)
    Tax effect
(54
)
 
18

 
(59
)
 
12

Net investment hedges, net of tax
99

 
(34
)
 
110

 
(22
)
Cash flow hedges
 
 
 
 
 
 
 
    Pretax activity, net
(9
)
 
(10
)
 
(15
)
 
18

    Tax effect
2

 
3

 
3

 
(5
)
Cash flow hedges, net of tax
(7
)
 
(7
)
 
(12
)
 
13

Pension plan adjustments
 
 
 
 
 
 
 
    Pretax activity, net
7

 
8

 
20

 
20

    Tax effect
(1
)
 
(2
)
 
(4
)
 
(4
)
Pension plan adjustments, net of tax
6

 
6

 
16

 
16

Other comprehensive (loss) income, net of tax
(181
)
 
169

 
(141
)
 
21

Comprehensive income
$
57

 
$
458

 
$
410

 
$
553




The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


3


COCA-COLA ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except share data)
 
 
September 26,
2014
 
December 31,
2013
ASSETS
 
 
 
Current:
 
 
 
Cash and cash equivalents
$
218

 
$
343

Trade accounts receivable, less allowances of $19 and $16, respectively
1,800

 
1,515

Amounts receivable from The Coca-Cola Company
95

 
89

Inventories
410

 
452

Other current assets
305

 
169

Total current assets
2,828

 
2,568

Property, plant, and equipment, net
2,167

 
2,353

Franchise license intangible assets, net
3,824

 
4,004

Goodwill
115

 
124

Other noncurrent assets
352

 
476

Total assets
$
9,286

 
$
9,525

LIABILITIES
 
 
 
Current:
 
 
 
Accounts payable and accrued expenses
$
1,994

 
$
1,939

Amounts payable to The Coca-Cola Company
124

 
145

Current portion of debt
729

 
111

Total current liabilities
2,847

 
2,195

Debt, less current portion
3,419

 
3,726

Other noncurrent liabilities
183

 
221

Noncurrent deferred income tax liabilities
1,107

 
1,103

Total liabilities
7,556

 
7,245

SHAREOWNERS’ EQUITY
 
 
 
Common stock, $0.01 par value – Authorized – 1,000,000,000 shares;
        Issued – 354,167,172 and 352,374,063 shares, respectively
4

 
3

Additional paid-in capital
3,940

 
3,899

Reinvested earnings
1,940

 
1,577

Accumulated other comprehensive loss
(472
)
 
(331
)
Common stock in treasury, at cost – 112,432,771 and 94,776,979 shares, respectively
(3,682
)
 
(2,868
)
Total shareowners’ equity
1,730

 
2,280

Total liabilities and shareowners’ equity
$
9,286

 
$
9,525




The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.



4


COCA-COLA ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
 
 
First Nine Months
 
2014
 
2013
Cash Flows from Operating Activities:
 
 
 
Net income
$
551

 
$
532

Adjustments to reconcile net income to net cash derived from operating activities:
 
 
 
Depreciation and amortization
231

 
231

Share-based compensation expense
21

 
24

Deferred income tax expense (benefit)
60

 
(66
)
Pension expense less than contributions
(5
)
 
(3
)
Net changes in assets and liabilities
(267
)
 
(121
)
Net cash derived from operating activities
591

 
597

Cash Flows from Investing Activities:
 
 
 
Capital asset investments
(239
)
 
(220
)
Capital asset disposals
27

 

Settlement of net investment hedges
21

 

Net cash used in investing activities
(191
)
 
(220
)
Cash Flows from Financing Activities:
 
 
 
Net change in commercial paper
242

 
182

Issuances of debt
347

 
459

Payments on debt
(111
)
 
(220
)
Shares repurchased under share repurchase programs
(800
)
 
(888
)
Dividend payments on common stock
(185
)
 
(161
)
Other financing activities, net
(1
)
 
8

Net cash used in financing activities
(508
)
 
(620
)
Net effect of currency exchange rate changes on cash and cash equivalents
(17
)
 
10

Net Change in Cash and Cash Equivalents
(125
)
 
(233
)
Cash and Cash Equivalents at Beginning of Period
343

 
721

Cash and Cash Equivalents at End of Period
$
218

 
$
488




The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.



5


COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements

NOTE 1—BUSINESS AND REPORTING POLICIES
Business
Coca-Cola Enterprises, Inc. ("CCE," "we," "our," or "us") is a marketer, producer, and distributor of nonalcoholic beverages. We market, produce, and distribute our products to customers and consumers through licensed territory agreements in Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway, and Sweden. We operate in the highly competitive beverage industry and face strong competition from other general and specialty beverage companies. Our financial results are affected by a number of factors including, but not limited to, consumer preferences, cost to manufacture and distribute products, foreign currency exchange rates, general economic conditions, local and national laws and regulations, raw material availability, and weather patterns.
Sales of our products tend to be seasonal, with the second and third quarters accounting for higher unit sales of our products than the first and fourth quarters. In a typical year, we earn more than 60 percent of our annual operating income during the second and third quarters. The seasonality of our sales volume, combined with the accounting for fixed costs, such as depreciation, amortization, rent, and interest expense, impacts our results on an interim period basis. Additionally, year-over-year shifts in holidays and selling days can impact our results on an interim period. Accordingly, our results for the third quarter and first nine months of 2014 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2014.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and expense allocations) considered necessary for fair presentation have been included. The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2013 (Form 10-K).
Our Condensed Consolidated Financial Statements include all entities that we control by ownership of a majority voting interest. All significant intercompany accounts and transactions are eliminated in consolidation.
For reporting convenience, our first three quarters close on the Friday closest to the end of the quarterly calendar period. Our fiscal year ends on December 31st. The following table summarizes the number of selling days for the periods presented (based on a standard five-day selling week):
 
First
Quarter    
 
Second
Quarter    
 
Third
Quarter    
 
Fourth
Quarter    
 
Full
Year    
2014
63

 
65

 
65

 
68

 
261

2013
64

 
65

 
65

 
67

 
261

Change
(1
)
 

 

 
1

 


NOTE 2—INVENTORIES
We value our inventories at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. The following table summarizes our inventories as of the dates presented (in millions):
 
September 26,
2014
 
December 31,
2013
Finished goods
$
259

 
$
260

Raw materials and supplies
151

 
192

Total inventories
$
410

 
$
452



6

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


NOTE 3—PROPERTY, PLANT, AND EQUIPMENT
The following table summarizes our property, plant, and equipment as of the dates presented (in millions):
 
September 26,
2014
 
December 31,
2013
Land
$
155

 
$
166

Building and improvements
998

 
1,024

Machinery, equipment, and containers
1,704

 
1,773

Cold drink equipment
1,604

 
1,721

Vehicle fleet
94

 
110

Furniture, office equipment, and software
440

 
431

Property, plant, and equipment
4,995

 
5,225

Accumulated depreciation and amortization
(2,946
)
 
(3,050
)
 
2,049

 
2,175

Construction in process
118

 
178

Property, plant, and equipment, net
$
2,167

 
$
2,353


NOTE 4—ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table summarizes our accounts payable and accrued expenses as of the dates presented (in millions):
 
September 26,
2014
 
December 31,
2013
Trade accounts payable
$
552

 
$
486

Accrued customer marketing costs
733

 
625

Accrued compensation and benefits
233

 
321

Accrued taxes
214

 
229

Accrued deposits
65

 
72

Other accrued expenses
197

 
206

Accounts payable and accrued expenses
$
1,994

 
$
1,939


NOTE 5—RELATED PARTY TRANSACTIONS
Transactions with The Coca-Cola Company (TCCC)
We are a marketer, producer, and distributor principally of products of TCCC, with greater than 90 percent of our sales volume consisting of sales of TCCC products. Our license arrangements with TCCC are governed by product licensing agreements. From time to time, the terms and conditions of these agreements with TCCC are modified.
The following table summarizes the transactions with TCCC that directly affected our Condensed Consolidated Statements of Income for the periods presented (in millions):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Amounts affecting net sales:
 
 
 
 
 
 
 
Fountain syrup and packaged product sales
$
4

 
$
5

 
$
13

 
$
13

Amounts affecting cost of sales:
 
 
 
 
 
 
 
Purchases of concentrate, syrup, mineral water, and juice
$
(522
)
 
$
(568
)
 
$
(1,722
)
 
$
(1,735
)
Purchases of finished products
(15
)
 
(15
)
 
(39
)
 
(43
)
Marketing support funding earned
56

 
52

 
163

 
148

Total
$
(481
)
 
$
(531
)
 
$
(1,598
)
 
$
(1,630
)
For additional information about our relationship with TCCC, refer to Note 3 of the Notes to Consolidated Financial Statements in our Form 10-K.

7

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 



NOTE 6—DERIVATIVE FINANCIAL INSTRUMENTS
We utilize derivative financial instruments to mitigate our exposure to certain market risks associated with our ongoing operations. The primary risks that we seek to manage through the use of derivative financial instruments include currency exchange risk, commodity price risk, and interest rate risk. All derivative financial instruments are recorded at fair value on our Condensed Consolidated Balance Sheets. We do not use derivative financial instruments for trading or speculative purposes. While certain of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments (referred to as an “economic hedge” or “non-designated hedge”). Changes in the fair value of these non-designated hedging instruments are recognized in each reporting period in the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the hedged risk. We are exposed to counterparty credit risk on all of our derivative financial instruments. We have established and maintain strict counterparty credit guidelines and enter into hedges only with financial institutions that are investment grade or better. We continuously monitor our counterparty credit risk and utilize numerous counterparties to minimize our exposure to potential defaults. We do not require collateral under these agreements.
The fair value of our derivative contracts (including forwards, options, cross currency swaps, and interest rate swaps) is 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, our derivative contracts have been classified as Level 2. Inputs used in these standard valuation models include the applicable spot, forward, and discount rates which are current as of the valuation date. The standard valuation model for our option contracts also includes implied volatility which is specific to individual options and is based on rates quoted from a widely used third-party resource. Refer to Note 16.

8

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


The following table summarizes the fair value of our assets and liabilities related to derivative financial instruments and the respective line items in which they were recorded on our Condensed Consolidated Balance Sheets as of the dates presented (in millions):
Hedging Instruments
 
Location – Balance Sheets
 
September 26,
2014
 
December 31,
2013
Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
Foreign currency contracts(A)
 
Other current assets
 
$
35

 
$
11

Foreign currency contracts
 
Other noncurrent assets
 
2

 

Total
 
 
 
37

 
11

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency contracts
 
Other current assets
 
3

 

Commodity contracts
 
Other current assets
 
3

 
1

Foreign currency contracts
 
Other noncurrent assets
 
3

 
7

Commodity contracts
 
Other noncurrent assets
 
1

 

Total
 
 
 
10

 
8

Total Assets
 
 
 
$
47

 
$
19

Liabilities:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Foreign currency contracts(A)
 
Accounts payable and accrued expenses
 
$
37

 
$
29

Foreign currency contracts
 
Other noncurrent liabilities
 
28

 
43

Total
 
 
 
65

 
72

Derivatives not designated as hedging instruments:
 
 
 
 
Commodity contracts
 
Accounts payable and accrued expenses
 
2

 
12

Foreign currency contracts
 
Other noncurrent liabilities
 
3

 
7

Commodity contracts
 
Other noncurrent liabilities
 

 
1

Total
 
 
 
5

 
20

Total Liabilities
 
 
 
$
70

 
$
92

___________________________ 
(A) 
Amounts include the gross interest receivable or payable on our cross currency swap agreements.
Cash Flow Hedges
We use cash flow hedges to mitigate our exposure to changes in cash flows attributable to currency fluctuations associated with certain forecasted transactions, including purchases of raw materials and services denominated in non-functional currencies, the receipt of interest and principal on intercompany loans denominated in non-functional currencies, and the payment of interest and principal on debt issuances in a non-functional currency. Effective changes in the fair value of these cash flow hedging instruments are recognized in accumulated other comprehensive income (loss) (AOCI) on our Condensed Consolidated Balance Sheets. The effective changes are then recognized in the period that the forecasted purchases or payments impact earnings in the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the underlying hedged item. Any changes in the fair value of these cash flow hedges that are the result of ineffectiveness are recognized immediately in the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the underlying hedged item.
The following table summarizes our outstanding cash flow hedges as of the dates presented (all contracts denominated in a foreign currency have been converted into U.S. dollars using the period end spot rate):
 
 
September 26, 2014
 
December 31, 2013
Type
 
Notional Amount
 
Latest Maturity
 
Notional Amount
 
Latest Maturity
Foreign currency contracts
 
USD 1.6 billion
 
June 2021
 
USD 1.6 billion
 
June 2021

9

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


The following tables summarize the effect of our derivative financial instruments, net of tax, designated as cash flow hedges on our AOCI and Condensed Consolidated Statements of Income for the periods presented (in millions):
 
 
Amount of Gain (Loss) Recognized in AOCI on 
Derivative Instruments(A)
 
 
Third Quarter
 
First Nine Months
Cash Flow Hedging Instruments
 
2014
 
2013
 
2014
 
2013
Foreign currency contracts
 
$
38

 
$
(41
)
 
$
13

 
$
9

 
 
 
 
 
Amount of Gain (Loss) Reclassified from 
AOCI into Earnings(B)
 
 
 
 
Third Quarter
 
First Nine Months
Cash Flow Hedging Instruments
 
Location - Statements of Income
 
2014
 
2013
 
2014
 
2013
Foreign currency contracts
 
Cost of sales
 
$
(1
)
 
$
1

 
$
1

 
$
2

Foreign currency contracts(C)
 
Other nonoperating income (expense)
 
46

 
(35
)
 
24

 
(6
)
Total
 
 
 
$
45

 
$
(34
)
 
$
25

 
$
(4
)
___________________________
(A) 
The amount of ineffectiveness associated with these hedging instruments was not material.
(B) 
Over the next 12 months, deferred losses totaling $9 million are expected to be reclassified from AOCI as the forecasted transactions occur. The amounts will be recorded on our Condensed Consolidated Statements of Income in the expense line item that is consistent with the nature of the underlying hedged item.
(C) 
The gain (loss) recognized on these currency contracts is offset by the gain (loss) recognized on the remeasurement of the underlying debt instruments; therefore, there is a minimal consolidated net effect in other nonoperating income (expense) on our Condensed Consolidated Statements of Income.
Economic (Non-designated) Hedges
We periodically enter into derivative instruments that are designed to hedge various risks, but are not designated as hedging instruments. These hedged risks include those related to commodity price fluctuations associated with forecasted purchases of aluminum, sugar, and vehicle fuel. At times, we also enter into other short-term non-designated hedges to mitigate our exposure to changes in cash flows attributable to currency fluctuations associated with short-term intercompany loans and certain cash equivalents denominated in non-functional currencies.
The following table summarizes our outstanding economic hedges as of the dates presented (all contracts denominated in a foreign currency have been converted into U.S. dollars using the period end spot rate):
 
 
September 26, 2014
 
December 31, 2013
Type
 
Notional Amount
 
Latest Maturity
 
Notional Amount
 
Latest Maturity
Foreign currency contracts
 
USD 256 million
 
October 2014
 
USD 55 million
 
January 2014
Commodity contracts
 
USD 112 million
 
December 2015
 
USD 129 million
 
December 2015
Changes in the fair value of outstanding economic hedges are recognized each reporting period in the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the hedged risk.

10

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


The following table summarizes the gains (losses) recognized from our non-designated derivative financial instruments on our Condensed Consolidated Statements of Income for the periods presented (in millions):
 
 
 
 
Third Quarter
 
First Nine Months
Non-Designated Hedging Instruments
 
Location - Statements of Income
 
2014
 
2013
 
2014
 
2013
Commodity contracts
 
Cost of sales
 
$
6

 
$
(3
)
 
$
4

 
$
(16
)
Commodity contracts
 
Selling, delivery, and administrative expenses
 
(1
)
 

 
(1
)
 

Foreign currency contracts
 
Other nonoperating income (expense)(A)
 
4

 
(6
)
 
4

 
1

 
 
Total
 
$
9

 
$
(9
)
 
$
7

 
$
(15
)
___________________________
(A) 
The gain (loss) recognized on these currency contracts is offset by the gain (loss) recognized on the remeasurement of the underlying hedged items; therefore, there is a minimal consolidated net effect in other nonoperating income (expense) on our Condensed Consolidated Statements of Income.
Mark-to-market gains/(losses) related to our non-designated commodity hedges are recognized in the earnings of our Corporate segment until such time as the underlying hedged transaction affects the earnings of our Europe operating segment. In the period the underlying hedged transaction occurs, the accumulated mark-to-market gains/(losses) related to the hedged transaction are reclassified from the earnings of our Corporate segment into the earnings of our Europe operating segment. This treatment allows our Europe operating segment to reflect the true economic effects of the underlying hedged transaction in the period the hedged transaction occurs without experiencing the mark-to-market volatility associated with these non-designated commodity hedges.
As of September 26, 2014, our Corporate segment earnings included net mark-to-market gains on non-designated commodity hedges totaling $2 million. These amounts will be reclassified into the earnings of our Europe operating segment when the underlying hedged transactions occur. For additional information about our segment reporting, refer to Note 12.
The following table summarizes the deferred gain (loss) activity in our Corporate segment during the period presented (in millions):
Gains (Losses) Deferred at Corporate Segment
 
Cost of Sales    
 
SD&A
 
Total
Balance at December 31, 2013
 
$
(12
)
 
$

 
$
(12
)
Amounts recognized during the period and recorded in our Corporate segment, net
 
4

 

 
4

Amounts transferred from our Corporate segment to our Europe operating segment, net
 
10

 

 
10

Balance at September 26, 2014
 
$
2

 
$

 
$
2

Net Investment Hedges
We have entered into currency forwards, options, and foreign currency denominated borrowings designated as net investment hedges of our foreign subsidiaries. Changes in the fair value of these hedges resulting from currency exchange rate changes are recognized in AOCI on our Condensed Consolidated Balance Sheets to offset the change in the carrying value of the net investment being hedged. Any changes in the fair value of these hedges that are the result of ineffectiveness are recognized immediately in other nonoperating income (expense) on our Condensed Consolidated Statements of Income. During the third quarter of 2014, we settled our November 2014 net investment hedges prior to maturity. We received $21 million upon settlement of these hedges.

11

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


The following table summarizes our outstanding instruments designated as net investment hedges as of the dates presented:
  
 
September 26, 2014
 
December 31, 2013
Type
 
Notional Amount
 
Latest Maturity
 
Notional Amount
 
Latest Maturity
Foreign currency contracts
 
USD 75 million
 
November 2015
 
USD 190 million
 
November 2014
Foreign currency denominated debt
 
USD 1.6 billion
 
May 2026
 
USD 1.4 billion
 
May 2025
The following table summarizes the effect of our derivative financial instruments, net of tax, designated as net investment hedges on our AOCI for the periods presented (in millions):
 
 
Amount of Gain (Loss) Recognized in AOCI on 
Derivative Instruments(A)
 
 
Third Quarter
 
First Nine Months
Net Investment Hedging Instruments
 
2014
 
2013
 
2014
 
2013
Foreign currency contracts
 
$
18

 
$
(11
)
 
$
19

 
$
(5
)
Foreign currency denominated debt
 
81

 
(23
)
 
91

 
(17
)
Total
 
$
99

 
$
(34
)
 
$
110

 
$
(22
)
___________________________
(A) 
The amount of ineffectiveness associated with these hedging instruments was not material.

NOTE 7—DEBT
The following table summarizes our debt as of the dates presented (in millions, except rates):
 
 
September 26, 2014
 
December 31, 2013
 
Principal
Balance
 
Rates(A)
 
Principal
Balance
 
Rates(A)
U.S. dollar commercial paper
$
242

 
0.2
%
 
$

 
%
U.S. dollar notes due 2015-2021(B)
1,793

 
3.1

 
1,891

 
2.9

Euro notes due 2017-2026(C)
2,083

 
2.6

 
1,915

 
2.5

Capital lease obligations(D)
30

 
n/a

 
31

 
n/a

Total debt(E)
4,148

 
 
 
3,837

 
 
Current portion of debt(F)
(729
)
 
 
 
(111
)
 
 
Debt, less current portion
$
3,419

 
 
 
$
3,726

 
 
___________________________
(A) 
These rates represent the weighted average interest rates or effective interest rates on the balances outstanding, as adjusted for the effects of interest rate swap agreements, if applicable.
(B) 
In February 2014, we repaid $100 million floating rate notes at maturity.
(C) 
In May 2014, we issued €250 million, 2.8 percent notes due 2026.
(D) 
These amounts represent the present value of our minimum capital lease payments.
(E)    The total fair value of our outstanding debt, excluding capital lease obligations, was $4.3 billion and $3.8 billion at
September 26, 2014 and December 31, 2013, respectively. The fair value of our debt is determined using quoted
market prices for publicly traded instruments (Level 1).
(F)    In the third quarter of 2014, our $475 million, 2.1 percent notes due September 2015 became current.
Credit Facilities
We have amounts available to us for borrowing under a $1 billion multi-currency credit facility with a syndicate of eight banks. This credit facility matures in 2017 and is for general corporate purposes, including serving as a backstop to our commercial paper program and supporting our working capital needs. At September 26, 2014, our availability under this credit facility was $1 billion. Based on information currently available to us, we have no indication that the financial institutions syndicated under this facility would be unable to fulfill their commitments to us as of the date of the filing of this report.

12

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


Covenants
Our credit facility and outstanding notes contain various provisions that, among other things, require limitation of the incurrence of certain liens or encumbrances in excess of defined amounts. Additionally, our credit facility requires that our net debt to total capital ratio does not exceed a defined amount. We were in compliance with these requirements as of September 26, 2014. These requirements currently are not, nor is it anticipated that they will become, restrictive to our liquidity or capital resources.
 
NOTE 8—COMMITMENTS AND CONTINGENCIES
Tax Audits
Our tax filings are subjected to audit by tax authorities in most jurisdictions in which we do business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. We believe that we have adequately provided for any assessments that could result from those proceedings where it is more likely than not that we will pay some amount.
Indemnifications
In the normal course of business, we enter into agreements that provide general indemnifications. We have not made significant indemnification payments under such agreements in the past, and we believe the likelihood of incurring such a payment obligation in the future is remote. Furthermore, we cannot reasonably estimate future potential payment obligations because we cannot predict when and under what circumstances they may be incurred. As a result, we have not recorded a liability in our Condensed Consolidated Financial Statements with respect to these general indemnifications.
We have certain indemnity obligations to TCCC resulting from the merger with TCCC that occurred on October 2, 2010 (the Merger). For additional information regarding the Merger, including our remaining indemnity obligations to TCCC, refer to Note 8 of the Notes to Consolidated Financial Statements in our Form 10-K.

NOTE 9—EMPLOYEE BENEFIT PLANS
Pension Plans
We sponsor a number of defined benefit pension plans. The following table summarizes the net periodic benefit costs of our pension plans for the periods presented (in millions):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
13

 
$
14

 
$
40

 
$
43

Interest cost
16

 
14

 
48

 
42

Expected return on plan assets
(24
)
 
(22
)
 
(73
)
 
(64
)
Amortization of net prior service cost
1

 
2

 
2

 
4

Amortization of actuarial loss
6

 
6

 
18

 
16

Net periodic benefit cost
12

 
14

 
35

 
41

Other(A)

 

 

 
2

Total costs
$
12

 
$
14

 
$
35

 
$
43

___________________________
(A) 
During the first nine months of 2013, we recorded additional pension expense related to our restructuring activities (refer to Note 13).

13

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


Contributions
Contributions to our pension plans totaled $40 million and $46 million during the first nine months of 2014 and 2013, respectively. The following table summarizes our projected contributions for the full year ending December 31, 2014, as well as actual contributions for the year ended December 31, 2013 (in millions):
 
Projected(A)
2014
 
Actual(A)
2013
Total pension contributions
$
60

 
$
72

___________________________
(A) 
These amounts represent only contributions made by CCE. During 2013, we contributed an incremental $15 million to our Great Britain defined benefit pension plan to improve the funded status of the plan. For additional information about the funded status of our defined benefit pension plans, refer to Note 9 of the Notes to Consolidated Financial Statements in our Form 10-K.

NOTE 10—TAXES
Our effective tax rate was approximately 25 percent and 14 percent for the first nine months of 2014 and 2013, respectively. The following table provides a reconciliation of our income tax expense at the statutory U.S. federal rate to our actual income tax expense for the periods presented (in millions):
 
First Nine Months
 
2014
 
2013
U.S. federal statutory expense
$
257

 
$
217

Taxation of foreign operations, net(A)
(138
)
 
(115
)
U.S. taxation of foreign earnings, net of tax credits
60

 
57

Nondeductible items
12

 
(4
)
Rate and law change benefit, net(B)(C)
(1
)
 
(71
)
Other, net
(6
)
 
3

Total provision for income taxes
$
184

 
$
87

___________________________
(A) 
Our effective tax rate reflects the benefit of having all of our operations outside of the U.S., most of which are taxed at statutory rates lower than the statutory U.S. rate, and the benefit of some income being fully or partially exempt from income taxes due to various operating and financing activities.
(B) 
During the third quarter of 2014, France extended the temporary corporate income tax surcharge of 10.7 percent to the year 2015. As a result, we recognized a deferred tax benefit of approximately $1 million during the third quarter of 2014 related to net deferred tax assets that are expected to be realized in 2015.
(C) 
During the third quarter of 2013, the United Kingdom enacted a corporate income tax rate reduction of 3 percentage points of which 2 percentage points were effective April 1, 2014 and 1 percentage point will be effective April 1, 2015. As a result, we recognized a deferred tax benefit of approximately $71 million during the third quarter of 2013 to reflect the impact of this change.
Repatriation of Current Year Foreign Earnings to the U.S.
During the third quarter of 2014, we repatriated to the U.S. $450 million of our 2014 foreign earnings for the payment of dividends, share repurchases, interest on U.S.-issued debt, salaries for U.S.-based employees, and other corporate-level operations in the U.S. Our historical foreign earnings, including our 2014 foreign earnings that were not repatriated in 2014, will remain permanently reinvested, and, if we do not generate sufficient current year foreign earnings to repatriate to the U.S. in any future given year, we expect to have adequate access to capital in the U.S. to allow us to satisfy our U.S.-based cash flow needs in that year. Therefore, historical foreign earnings and future foreign earnings that are not repatriated to the U.S. will remain permanently reinvested and will be used to service our foreign operations, non-U.S. debt, and to fund future acquisitions. For additional information about our undistributed foreign earnings, refer to Note 10 of the Notes to Consolidated Financial Statements in our Form 10-K.

NOTE 11—EARNINGS PER SHARE
We calculate our basic earnings per share by dividing net income by the weighted average number of shares and participating securities outstanding during the period. Our diluted earnings per share are calculated in a similar manner, but include the effect

14

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


of dilutive securities. To the extent these securities are antidilutive, they are excluded from the calculation of diluted earnings per share.
The following table summarizes our basic and diluted earnings per share calculations for the periods presented (in millions, except per share data; per share data is calculated prior to rounding):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Net income
$
238

 
$
289

 
$
551

 
$
532

Basic weighted average shares outstanding
244

 
264

 
249

 
271

Effect of dilutive securities(A)
4

 
5

 
5

 
6

Diluted weighted average shares outstanding
248

 
269

 
254

 
277

Basic earnings per share
$
0.97

 
$
1.09

 
$
2.21

 
$
1.96

Diluted earnings per share
$
0.96

 
$
1.07

 
$
2.17

 
$
1.92

___________________________
(A) 
Options to purchase 7.7 million and 8.0 million shares were outstanding as of September 26, 2014 and September 27, 2013, respectively. During the first nine months of 2014, options to purchase 0.1 million shares were not included in the computation of diluted earnings per share because the effect of including these options in the computation would have been antidilutive. The dilutive impact of the remaining options outstanding in each period was included in the effect of dilutive securities.
Under our share repurchase program, during the third quarter and first nine months of 2014, we repurchased 4.2 million and 17.3 million shares, respectively, and during the third quarter and first nine months of 2013, we repurchased 7.9 million and 24.6 million shares, respectively. Refer to Note 15.
During the first nine months of 2014, we issued an aggregate of 0.8 million shares of common stock in connection with the exercise of share options with a total intrinsic value of $24.9 million.
Dividend payments on our common stock totaled $185 million and $161 million during the first nine months of 2014 and 2013, respectively. In February 2014, our Board of Directors approved a $0.05 per share increase in our quarterly dividend from $0.20 per share to $0.25 per share beginning in the first quarter of 2014.

NOTE 12—OPERATING SEGMENT
We operate in one industry and have one operating segment. This segment derives its revenues from marketing, producing, and distributing nonalcoholic beverages. No single customer accounted for more than 10 percent of our net sales during the first nine months of 2014 or 2013.
Our segment operating income includes the segment’s revenue less substantially all the segment’s cost of production, distribution, and administration. We evaluate the segment’s performance based on several factors, of which net sales and operating income are the primary financial measures.
Mark-to-market gains (losses) related to our non-designated commodity hedges are recognized in the earnings of our Corporate segment until such time as the underlying hedged transaction affects the earnings of our Europe operating segment. In the period the underlying hedged transaction occurs, the accumulated mark-to-market gains (losses) related to the hedged transaction are reclassified from the earnings of our Corporate segment into the earnings of our Europe operating segment. This treatment allows our Europe operating segment to reflect the true economic effects of the underlying hedged transaction in the period the hedged transaction occurs without experiencing the mark-to-market volatility associated with these non-designated commodity hedges. For additional information about our non-designated hedges, refer to Note 6.

15

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


The following table summarizes selected segment financial information for the periods presented (in millions):
 
Europe    
 
Corporate    
 
Consolidated    
Third Quarter 2014:
 
 
 
 
 
Net sales
$
2,136

 
$

 
$
2,136

Operating income (loss)
366

 
(21
)
 
345

Third Quarter 2013:
 
 
 
 
 
Net sales
$
2,174

 
$

 
$
2,174

Operating income (loss)
350

 
(36
)
 
314

First Nine Months 2014:
 
 
 
 
 
Net sales(A)
$
6,339

 
$

 
$
6,339

Operating income (loss)(B)
911

 
(87
)
 
824

First Nine Months 2013:
 
 
 
 
 
Net sales(A)
$
6,180

 
$

 
$
6,180

Operating income (loss)(B)
804

 
(107
)
 
697

___________________________
(A) 
The following table summarizes the contribution of total net sales by country as a percentage of total net sales for the periods presented:
 
First Nine Months
 
2014
 
2013
Net sales:
 
 
 
Great Britain
34
%
 
33
%
France
30

 
30

Belgium
15

 
15

The Netherlands
8

 
8

Norway
7

 
8

Sweden
6

 
6

Total
100
%
 
100
%
 
(B) 
Our Corporate segment earnings include net mark-to-market gains on our non-designated commodity hedges totaling $14 million for the first nine months of 2014, and net mark-to-market losses of $8 million for the first nine months of 2013. As of September 26, 2014, our Corporate segment earnings included net mark-to-market gains on non-designated commodity hedges totaling $2 million. These amounts will be reclassified into the earnings of our Europe operating segment when the underlying hedged transactions occur. For additional information about our non-designated hedges, refer to Note 6.

NOTE 13—RESTRUCTURING ACTIVITIES
The following table summarizes our restructuring costs for the periods presented (in millions):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Europe(A)
$
1

 
$
7

 
$
63

 
$
109

Corporate

 

 

 

Total
$
1

 
$
7

 
$
63

 
$
109

___________________________
(A)
All restructuring expenses recorded during the third quarter and first nine months of 2014 related to our Business Transformation Program. During the third quarter and first nine months of 2013, we recorded restructuring expense of $6 million and $87 million, respectively, related to our Business Transformation Program and $1 million and $22 million, respectively, related to our Norway Business Optimization which concluded at the end of 2013.

16

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


Business Transformation Program
In 2012, we announced a business transformation program designed to improve our operating model and create a platform for driving sustainable future growth. Through this program we intend to: (1) streamline and reduce the cost structure of our finance support function, including the establishment of a new centralized shared services center; (2) restructure our sales and marketing organization to better align central and field sales, and to deploy standardized channel-focused organizations within each of our territories; and (3) improve the efficiency and effectiveness of certain aspects of our operations, including activities related to our cold drink equipment.
We expect to be substantially complete with this program by the end of 2014 and anticipate nonrecurring restructuring charges of approximately $240 million, including severance, transition, consulting, accelerated depreciation, and lease termination costs. Approximately $20 million of this amount is expected to be non-cash. During the third quarter and first nine months of 2014, we recorded nonrecurring restructuring charges under this program totaling $1 million and $63 million, respectively. During the third quarter and first nine months of 2013, we recorded nonrecurring restructuring charges under this program totaling $6 million and $87 million, respectively. To date, we have recorded nonrecurring restructuring charges totaling $208 million under this program. Substantially all nonrecurring restructuring charges related to this program are included in selling, delivery, and administrative expenses (SD&A) on our Condensed Consolidated Statements of Income.
The following table summarizes these restructuring charges for the periods presented (in millions):
 
Severance Pay
and Benefits
 
Accelerated Depreciation(B)
 
Other(C)
 
Total
Balance at January 1, 2012(A)
$

 
$

 
$

 
$

Provision
41

 
2

 
3

 
46

Cash payments

 

 
(2
)
 
(2
)
Noncash items

 
(2
)
 

 
(2
)
Balance at December 31, 2012(A)
41

 

 
1

 
42

Provision
67

 
5

 
27

 
99

Cash payments
(78
)
 

 
(17
)
 
(95
)
Noncash items

 
(5
)
 
1

 
(4
)
Balance at December 31, 2013(A)
30

 

 
12

 
42

Provision
10

 
6

 
47

 
63

Cash payments
(26
)
 

 
(54
)
 
(80
)
Noncash items

 
(6
)
 

 
(6
)
Balance at September 26, 2014(A)
$
14

 
$

 
$
5

 
$
19

___________________________
(A) 
Substantially all of the amounts are included in accounts payable and accrued expenses on our Condensed Consolidated Balance Sheets.
(B) 
Accelerated depreciation represents the difference between the depreciation expense of the asset using the original useful life and the depreciation expense of the asset under the reduced useful life due to the restructuring activity.
(C) 
In 2012 and 2013, these charges primarily related to program management and consulting costs. During the first nine months of 2014, these charges primarily related to costs incurred regarding our cold-drink operations, including social and other transition costs associated with the transfer of certain employees and assets to a third party.

NOTE 14—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
AOCI is comprised of net income and other adjustments, including foreign currency translation adjustments, hedges of our net investments in our foreign subsidiaries, changes in the fair value of certain derivative financial instruments qualifying as cash flow hedges, and pension plan adjustments. We do not provide income taxes on currency translation adjustments (CTA), as the historical earnings from our foreign subsidiaries are considered to be permanently reinvested. If current year earnings are repatriated, the amount to be repatriated is determined in U.S. dollars and converted to the equivalent amount of foreign currency at the time of repatriation; therefore, the repatriation of current year earnings does not have an impact on the CTA component of our AOCI balance.

17

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


The following table summarizes the change in the components of our AOCI balance for the periods presented (in millions; all amounts are presented net of tax):
 
 
Currency Translations
 
Net Investment Hedges
 
Cash Flow Hedges(A)
 
Pension Plan Adjustments(B)
 
Total
Balance at January 1, 2013
 
$
(41
)
 
$
(14
)
 
$
(22
)
 
$
(353
)
 
$
(430
)
Other comprehensive income (loss) before reclassifications
 
82

 
(40
)
 
(6
)
 
21

 
57

Amounts reclassified from AOCI
 

 

 
21

 
21

 
42

Net change in other comprehensive income (loss)
 
82

 
(40
)
 
15

 
42

 
99

Balance at December 31, 2013
 
41

 
(54
)
 
(7
)
 
(311
)
 
(331
)
Other comprehensive (loss) income before reclassifications
 
(255
)
 
110

 
13

 

 
(132
)
Amounts reclassified from AOCI
 

 

 
(25
)
 
16

 
(9
)
Net change in other comprehensive (loss) income
 
(255
)
 
110

 
(12
)
 
16

 
(141
)
Balance at September 26, 2014
 
$
(214
)
 
$
56

 
$
(19
)
 
$
(295
)
 
$
(472
)
___________________________
(A) 
For additional information about our cash flow hedges, refer to Note 6.
(B) 
For additional information about our pension plans, refer to Note 9.

NOTE 15—SHARE REPURCHASE PROGRAM
In December 2012, our Board of Directors authorized share repurchases for an aggregate price of not more than $1.5 billion, as part of a publicly announced program. Share repurchases under this authorization were completed during the second quarter of 2014. In December 2013, our Board of Directors authorized additional share repurchases for an aggregate price of not more than $1.0 billion. Share repurchase activity under this authorization commenced during the second quarter of 2014 when the share repurchases under the previous authorization were completed. We can repurchase shares in the open market and in privately negotiated transactions. Repurchased shares are added to treasury stock and are available for general corporate purposes, including acquisition financing and the funding of various employee benefit and compensation plans. When we evaluate share repurchases, we consider market conditions and alternative uses of cash and/or debt, balance sheet ratios, and shareowner returns. For additional information about our share repurchase program, refer to Note 15 of the Notes to Consolidated Financial Statements in our Form 10-K.
The following table summarizes the share repurchase activity for the periods presented (in millions, except per share data):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Number of shares repurchased
4.2

 
7.9

 
17.3

 
24.6

Weighted average purchase price per share
$
47.43

 
$
37.89

 
$
46.11

 
$
36.53

Amount of share repurchases(A)
$
200

 
$
300

 
$
800

 
$
900

___________________________
(A)
Total cash paid in the first nine months of 2013 for these share repurchases totaled $888 million due to the timing of settlement.
 

18

COCA-COLA ENTERPRISES, INC.
Notes to Condensed Consolidated Financial Statements
 


NOTE 16—FAIR VALUE MEASUREMENTS
The following tables summarize our non-pension financial assets and liabilities recorded at fair value on a recurring basis (at least annually) as of the dates presented (in millions):
 
September 26, 2014
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Derivative assets(A)
$
47

 
$

 
$
47

 
$

Derivative liabilities(A)
$
70

 
$

 
$
70

 
$

 
December 31, 2013
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Derivative assets(A)
$
19

 
$

 
$
19

 
$

Derivative liabilities(A)
$
92

 
$

 
$
92

 
$

___________________________
(A) 
We are required to report our derivative instruments at fair value. We calculate our derivative asset and liability values using a variety of valuation techniques, depending on the specific characteristics of the hedging instrument, taking into account credit risk. The fair value of our derivative contracts (including forwards, options, cross currency swaps, and interest rate swaps) is 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, our derivative contracts have been classified as Level 2. Inputs used in these standard valuation models include the applicable spot, forward, and discount rates which are current as of the valuation date. The standard valuation model for our option contracts also includes implied volatility which is specific to individual options and is based on rates quoted from a widely used third-party resource.
 

19

COCA-COLA ENTERPRISES, INC.



Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Business and Basis of Presentation
Coca-Cola Enterprises, Inc. ("CCE," "we," "our," or "us") is a marketer, producer, and distributor of nonalcoholic beverages. We market, produce, and distribute our products to customers and consumers through licensed territory agreements in Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway, and Sweden. We operate in the highly competitive beverage industry and face strong competition from other general and specialty beverage companies. Our financial results are affected by a number of factors including, but not limited to, consumer preferences, cost to manufacture and distribute products, foreign currency exchange rates, general economic conditions, local and national laws and regulations, raw material availability, and weather patterns.
Sales of our products tend to be seasonal, with the second and third quarters accounting for higher unit sales of our products than the first and fourth quarters. In a typical year, we earn more than 60 percent of our annual operating income during the second and third quarters. The seasonality of our sales volume, combined with the accounting for fixed costs, such as depreciation, amortization, rent, and interest expense, impacts our results on a quarterly basis. Additionally, year-over-year shifts in holidays and selling days can impact our results on an interim period basis. Accordingly, our results for the third quarter and first nine months of 2014 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2014.
For reporting convenience, our first three quarters close on the Friday closest to the end of the quarterly calendar period. Our fiscal year ends on December 31st. There was one less selling day in the first quarter of 2014 versus the first quarter of 2013, and there will be one additional selling day in the fourth quarter of 2014 versus the fourth quarter of 2013 (based upon a standard five-day selling week).
 
First
Quarter    
 
Second
Quarter    
 
Third
Quarter    
 
Fourth
Quarter    
 
Full
Year    
2014
63

 
65

 
65

 
68

 
261

2013
64

 
65

 
65

 
67

 
261

Change
(1
)
 

 

 
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Relationship with The Coca-Cola Company (TCCC)
We are a marketer, producer, and distributor principally of products of TCCC with greater than 90 percent of our sales volume consisting of sales of TCCC products. Our license arrangements with TCCC are governed by product licensing agreements. From time to time, the terms and conditions of these agreements with TCCC are modified. Our financial results are greatly impacted by our relationship with TCCC. For additional information about our transactions with TCCC, refer to Note 5 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
Financial Results
Our net income in the third quarter of 2014 was $238 million, or $0.96 per diluted share, compared to net income of $289 million, or $1.07 per diluted share, in the third quarter of 2013. The following items included in our reported results affect the comparability of our year-over-year financial performance (the items listed below are based on defined terms and thresholds and represent all material items management considered for year-over-year comparability):
Third Quarter 2014
Restructuring charges totaling $1 million ($1 million net of tax) related to our Business Transformation Program;
Net mark-to-market gains totaling $8 million ($6 million net of tax, or $0.02 per diluted share) related to non-designated commodity hedges associated with underlying transactions that relate to a different reporting period; and
Net tax items totaling $6 million ($0.02 per diluted share) principally related to the tax impact of both changes in underlying rates and cumulative nonrecurring items on the quarter.
Third Quarter 2013
Restructuring charges totaling $7 million ($4 million net of tax, or $0.01 per diluted share) related to our Business Transformation Program and Norway Business Optimization;
Net mark-to-market gains totaling $1 million ($1 million net of tax) related to non-designated commodity hedges associated with underlying transactions that relate to a different reporting period; and

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COCA-COLA ENTERPRISES, INC.


A deferred tax benefit of $71 million ($0.26 per diluted share) due to the enactment of a United Kingdom tax rate change that reduced the corporate income tax rate by 3 percentage points of which 2 percentage points were effective April 1, 2014 and 1 percentage point will be effective April 1, 2015.
Financial Summary
Our financial performance during the third quarter of 2014 reflects the impact of the following significant factors:
Year-over-year volume decrease of 4.0 percent driven by sustained macroeconomic softness, a difficult retail environment, poor weather early in the quarter, and strong prior year volume comparisons;
Flat year-over-year bottle and can net price per case reflecting the impact of planned promotional activity and challenging operating conditions;
Year-over-year bottle and can cost of sales per case decline of 1.0 percent due to mix-shifts into lower cost packages and the impact of favorable cost trends in certain key commodities; and
Lower underlying operating expenses resulting from reduced volume, strong expense control, and the realized savings associated with our Business Transformation Program.
Our operating and financial performance during the third quarter of 2014 was impacted by challenging marketplace conditions, including persistent macroeconomic softness, a difficult retail environment, and poor weather early in the quarter, particularly in France. Third quarter volume declined 4.0 percent year-over-year driven by declines in both sparkling and still beverage brands. Our bottle and can net price per case was flat versus prior year reflecting planned promotional activities and mix-shifts to lower priced packages.
During the third quarter of 2014, volume declined 5.0 percent in our continental European territories and 2.5 percent in Great Britain. This volume performance was primarily driven by declines in Coca-Cola trademark and other sparkling beverage brands versus strong prior year volume comparisons. Despite these decreases, we continued to see overall growth in Coca-Cola Zero and energy drinks.
During the third quarter of 2014, we continued our brand and product initiatives with the Share a Coke promotion as well as the launch of two new products, Coca-Cola Life in Great Britain and Sweden, and smartwater in Great Britain. Furthermore, Finley, an adult sparkling non-alcoholic beverage introduced in France earlier this year and recently expanded into Belgium, continues to receive a positive consumer response. We remain committed to expanding our offerings through further portfolio innovation to create value for our customers and consumers.
Bottle and can cost of sales per case declined 1.0 percent during the third quarter of 2014, reflecting mix-shifts into lower cost packages, and benefits from favorable cost trends in some of our key commodities, principally sugar. Despite these recent favorable trends, the cost environment remains volatile. As such, we continue to seek opportunities to mitigate our exposure to commodity price volatility through the use of supplier agreements and hedging instruments.
Our underlying operating expenses declined during the third quarter of 2014 as a result of lower volume levels, strong operating expense controls, and the realization of cost savings associated with efforts under our Business Transformation Program as we approach its completion.
Our diluted earnings per share benefited from operating income growth and the impact of share repurchase activity, which increased diluted earnings per share in the third quarter of 2014 by approximately $0.07. During 2014, we repurchased approximately $800 million of our shares under our share repurchase program.

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COCA-COLA ENTERPRISES, INC.


Operations Review
The following table summarizes our Condensed Consolidated Statements of Income as a percentage of net sales for the periods presented:
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
62.2

 
63.8

 
63.7

 
64.8

Gross profit
37.8

 
36.2

 
36.3

 
35.2

Selling, delivery, and administrative expenses
21.6

 
21.8

 
23.3

 
23.9

Operating income
16.2

 
14.4

 
13.0

 
11.3

Interest expense, net
1.5

 
1.1

 
1.4

 
1.3

Other nonoperating income (expense)

 

 

 

Income before income taxes
14.7

 
13.3

 
11.6

 
10.0

Income tax expense (A)
3.6

 

 
2.9

 
1.4

Net income
11.1
%
 
13.3
%
 
8.7
%
 
8.6
%
___________________________
(A) 
During the third quarter and first nine months of 2013, income tax expense reflects the enactment of the United Kingdom corporate income tax rate reduction.
Operating Income
The following table summarizes our operating income by segment for the periods presented (in millions; percentages rounded to the nearest 0.5 percent):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
Europe
$
366

 
106.0
 %
 
$
350

 
111.5
 %
 
$
911

 
110.5
 %
 
$
804

 
115.5
 %
Corporate
(21
)
 
(6.0
)
 
(36
)
 
(11.5
)
 
(87
)
 
(10.5
)
 
(107
)
 
(15.5
)
Consolidated
$
345

 
100.0
 %
 
$
314

 
100.0
 %
 
$
824

 
100.0
 %
 
$
697

 
100.0
 %
During the third quarter and first nine months of 2014, we generated operating income of $345 million and $824 million, respectively, compared to $314 million and $697 million in the same periods of 2013. The following table summarizes the significant components of the year-over-year change in our operating income for the periods presented (in millions; percentages rounded to the nearest 0.5 percent):
 
Third Quarter 2014
 
First Nine Months 2014
 
Amount
 
Change
Percent
of Total
 
Amount
 
Change
Percent
of Total
Changes in operating income:
 
 
 
 
 
 
 
Impact of bottle and can price-mix on gross profit
$
(2
)
 
(0.5
)%
 
$
13

 
2.0
 %
Impact of bottle and can cost-mix on gross profit
12

 
4.0

 
25

 
3.5

Impact of bottle and can volume on gross profit
(31
)
 
(10.0
)
 
(14
)
 
(2.0
)
Impact of bottle and can selling day shift on gross profit

 

 
(9
)
 
(1.5
)
Impact of post-mix, non-trade, and other on gross profit
3

 
1.0

 

 

Net mark-to-market gains related to non-designated commodity hedges
7

 
2.5

 
21

 
3.0

Net impact of restructuring charges
6

 
2.0

 
46

 
6.5

Other selling, delivery, and administrative expenses
13

 
4.0

 
3

 
0.5

Currency exchange rate changes
10

 
3.0

 
41

 
6.0

Other changes
13

 
4.0

 
1

 

Change in operating income
$
31

 
10.0
 %
 
$
127

 
18.0
 %

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COCA-COLA ENTERPRISES, INC.


Net Sales
Net sales decreased 1.5 percent in the third quarter of 2014 to $2.1 billion, and increased 2.5 percent in the first nine months of 2014 to $6.3 billion. These changes include currency exchange rate increases of 2.0 percent and 4.0 percent when compared to the third quarter and first nine months of 2013, respectively.
Net sales per case increased 2.5 percent in the third quarter of 2014 when compared to the third quarter of 2013, and also increased 3.5 percent in the first nine months of 2014 when compared to the first nine months of 2013. The following table summarizes the significant components of the year-over-year change in our net sales per case for the periods presented (rounded to the nearest 0.5 percent and based on wholesale physical case volume):
 
Third Quarter 2014
 
First Nine Months 2014
Changes in net sales per case:
 
 
 
Bottle and can net price per case
%
 
 %
Bottle and can currency exchange rate changes
2.0

 
4.0

Post-mix, non-trade, and other
0.5

 
(0.5
)
Change in net sales per case
2.5
%
 
3.5
 %
During the third quarter of 2014, our bottle and can sales accounted for approximately 94 percent of our total net sales. Bottle and can net price per case is based on the invoice price charged to customers reduced by promotional allowances and is impacted by the price charged per package or brand, the volume generated by each package or brand, and the channels in which those packages or brands are sold. To the extent we are able to increase volume in higher-margin packages or brands that are sold through higher-margin channels, our bottle and can net pricing per case will increase without an actual increase in wholesale pricing. Our bottle and can net price per case was flat versus prior year as a result of planned promotional activities and negative mix-shifts to lower priced packages.
Volume
The following table summarizes the year-over-year change in our bottle and can volume for the periods presented, as adjusted to reflect the impact of one less selling day in the first nine months of 2014 when compared to the first nine months of 2013 (selling days are the same in the third quarter of 2014 and 2013; rounded to the nearest 0.5 percent):
 
Third Quarter 2014
 
First Nine Months 2014
Change in volume
(4.0
)%
 
(1.0
)%
Impact of selling day shift(A)

 
0.5

Change in volume, adjusted for selling day shift
(4.0
)%
 
(0.5
)%
___________________________
(A) 
Represents the impact of changes in selling days between periods (based upon a standard five-day selling week).
Brands
The following table summarizes our bottle and can volume results by major brand category for the periods presented, with the percentage change adjusted to reflect the impact of one less selling day in the first nine months of 2014 when compared to the first nine months of 2013 (selling days are the same in the third quarter of 2014 and 2013; rounded to the nearest 0.5 percent):
 
Third Quarter
 
First Nine Months
 
Change
 
2014 Percent of Total
 
2013 Percent of Total
 
Change    
 
2014 Percent of Total
 
2013 Percent of Total
Coca-Cola trademark
(3.5
)%
 
67.5
%
 
67.0
%
 
 %
 
68.5
%
 
68.0
%
Sparkling flavors and energy
(6.5
)
 
18.0

 
18.5

 
(2.5
)
 
17.5

 
18.0