Attached files

file filename
EX-12 - RATIO OF EARNINGS TO FIXED CHARGES - COCA-COLA EUROPEAN PARTNERS US, LLCa2015q3ex12cce.htm
EX-31.2 - 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - COCA-COLA EUROPEAN PARTNERS US, LLCa2015q3ex312cce.htm
EX-32.1 - 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - COCA-COLA EUROPEAN PARTNERS US, LLCa2015q3ex321cce.htm
EX-32.2 - 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER - COCA-COLA EUROPEAN PARTNERS US, LLCa2015q3ex322cce.htm
EX-31.1 - 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - COCA-COLA EUROPEAN PARTNERS US, LLCa2015q3ex311cce.htm
EX-10.3 - INCIDENCE PRICING AGREEMENT - COCA-COLA EUROPEAN PARTNERS US, LLCa2015q3ex103incidenceprici.htm
EX-10.2 - RSU AGREEMENT - DAMIAN GAMMELL - COCA-COLA EUROPEAN PARTNERS US, LLCa2015q3ex102gammellrsuaward.htm
EX-10.1 - EMPLOYMENT AGREEMENT - DAMIAN GAMMELL - COCA-COLA EUROPEAN PARTNERS US, LLCa2015q3ex101gammellcontract.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 October 2, 2015
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.
226,952,267 Shares of $0.01 Par Value Common Stock as of October 2, 2015




COCA-COLA ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 2015
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
Item 1.        
 
 
 
 
Condensed Consolidated Statements of Income for the Third Quarter and First Nine Months of 2015 and 2014
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Third Quarter and First Nine Months of 2015 and 2014
 
 
 
 
Condensed Consolidated Balance Sheets as of October 2, 2015 and December 31, 2014
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the First Nine Months of 2015 and 2014
 
 
 
 
 
 
 
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
 
2015
 
2014
 
2015
 
2014
Net sales
$
1,822

 
$
2,136

 
$
5,381

 
$
6,339

Cost of sales
1,125

 
1,328

 
3,411

 
4,035

Gross profit
697

 
808

 
1,970

 
2,304

Selling, delivery, and administrative expenses
437

 
463

 
1,277

 
1,480

Operating income
260

 
345

 
693

 
824

Interest expense, net
31

 
31

 
92

 
89

Other nonoperating expense
(4
)
 

 
(3
)
 

Income before income taxes
225

 
314

 
598

 
735

Income tax expense
57

 
76

 
158

 
184

Net income
$
168

 
$
238

 
$
440

 
$
551

Basic earnings per share
$
0.74

 
$
0.97

 
$
1.90

 
$
2.21

Diluted earnings per share
$
0.72

 
$
0.96

 
$
1.87

 
$
2.17

Dividends declared per share
$
0.28

 
$
0.25

 
$
0.84

 
$
0.75

Basic weighted average shares outstanding
228

 
244

 
232

 
249

Diluted weighted average shares outstanding
232

 
248

 
236

 
254




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 (LOSS)
(Unaudited; in millions)
    
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
Net income
$
168

 
$
238

 
$
440

 
$
551

Components of other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translations
 
 
 
 
 
 
 
    Pretax activity, net
(35
)
 
(279
)
 
(215
)
 
(255
)
    Tax effect

 

 

 

Currency translations, net of tax
(35
)
 
(279
)
 
(215
)
 
(255
)
Net investment hedges
 
 
 
 
 
 
 
    Pretax activity, net
(24
)
 
153

 
99

 
169

    Tax effect
9

 
(54
)
 
(34
)
 
(59
)
Net investment hedges, net of tax
(15
)
 
99

 
65

 
110

Cash flow hedges
 
 
 
 
 
 
 
    Pretax activity, net
18

 
(9
)
 
14

 
(15
)
    Tax effect
(4
)
 
2

 
(4
)
 
3

Cash flow hedges, net of tax
14

 
(7
)
 
10

 
(12
)
Pension plan adjustments
 
 
 
 
 
 
 
    Pretax activity, net
7

 
7

 
21

 
20

    Tax effect
(2
)
 
(1
)
 
(5
)
 
(4
)
Pension plan adjustments, net of tax
5

 
6

 
16

 
16

Other comprehensive loss, net of tax
(31
)
 
(181
)
 
(124
)
 
(141
)
Comprehensive income
$
137

 
$
57

 
$
316

 
$
410




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)
 
 
October 2,
2015
 
December 31,
2014
ASSETS
 
 
 
Current:
 
 
 
Cash and cash equivalents
$
196

 
$
223

Trade accounts receivable, less allowances of $16 and $17, respectively
1,353

 
1,514

Amounts receivable from The Coca-Cola Company
65

 
67

Inventories
383

 
388

Other current assets
214

 
268

Total current assets
2,211

 
2,460

Property, plant, and equipment, net
1,986

 
2,101

Franchise license intangible assets, net
3,484

 
3,641

Goodwill
91

 
101

Other noncurrent assets
243

 
240

Total assets
$
8,015

 
$
8,543

LIABILITIES
 
 
 
Current:
 
 
 
Accounts payable and accrued expenses
$
1,705

 
$
1,872

Amounts payable to The Coca-Cola Company
124

 
104

Current portion of debt
522

 
632

Total current liabilities
2,351

 
2,608

Debt, less current portion
3,483

 
3,320

Other noncurrent liabilities
215

 
207

Noncurrent deferred income tax liabilities
959

 
977

Total liabilities
7,008

 
7,112

SHAREOWNERS’ EQUITY
 
 
 
Common stock, $0.01 par value – Authorized – 1,000,000,000 shares;
        Issued – 355,883,688 and 354,551,447 shares, respectively
4

 
3

Additional paid-in capital
4,017

 
3,958

Reinvested earnings
2,236

 
1,991

Accumulated other comprehensive loss
(838
)
 
(714
)
Common stock in treasury, at cost – 128,931,421 and 115,305,477 shares, respectively
(4,412
)
 
(3,807
)
Total shareowners’ equity
1,007

 
1,431

Total liabilities and shareowners’ equity
$
8,015

 
$
8,543




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
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net income
$
440

 
$
551

Adjustments to reconcile net income to net cash derived from operating activities:
 
 
 
Depreciation and amortization
208

 
231

Share-based compensation expense
30

 
21

Deferred income tax expense
31

 
60

Pension expense less than contributions
(7
)
 
(5
)
Net changes in assets and liabilities
87

 
(267
)
Net cash derived from operating activities
789

 
591

Cash Flows from Investing Activities:
 
 
 
Capital asset investments
(260
)
 
(239
)
Capital asset disposals
13

 
27

Settlement of net investment hedges
27

 
21

       Other investing activities, net
(12
)
 

Net cash used in investing activities
(232
)
 
(191
)
Cash Flows from Financing Activities:
 
 
 
Net change in commercial paper
120

 
242

Issuances of debt
527

 
347

Payments on debt
(484
)
 
(111
)
Shares repurchased under share repurchase programs
(614
)
 
(800
)
Dividend payments on common stock
(193
)
 
(185
)
Exercise of employee share options
17

 
11

Settlement of debt-related cross currency swaps
56

 

Other financing activities, net
2

 
(12
)
Net cash used in financing activities
(569
)
 
(508
)
Net effect of currency exchange rate changes on cash and cash equivalents
(15
)
 
(17
)
Net Change in Cash and Cash Equivalents
(27
)
 
(125
)
Cash and Cash Equivalents at Beginning of Period
223

 
343

Cash and Cash Equivalents at End of Period
$
196

 
$
218




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


6

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 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 2015 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2015.
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, 2014 (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. There were four additional selling days in the first quarter of 2015 versus the first quarter of 2014, and there will be four fewer selling days in the fourth quarter of 2015 versus the fourth quarter of 2014 (based upon a standard five-day selling week).
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Full
Year
2015
67

 
65

 
65

 
64

 
261

2014
63

 
65

 
65

 
68

 
261

Change
4

 

 

 
(4
)
 


NOTE 2—MERGER AGREEMENT
On August 6, 2015, we entered into agreements with The Coca-Cola Company (TCCC), Coca-Cola Iberian Partners (CCIP), the privately-owned Coca-Cola bottler operating primarily in Spain and Portugal, and Coca-Cola Erfrischungsgetränke (CCEAG), the wholly-owned TCCC bottler operating in Germany, under which:
The parties agreed to combine their respective businesses by combining CCE, CCIP, and CCEAG. The combination will be effected through the contribution of CCEAG and CCIP to a newly created entity, Coca-Cola European Partners, plc (CCEP), and the merger of CCE (the Merger) with and into a newly formed indirect U.S. subsidiary of CCEP (MergeCo), with the MergeCo continuing as the surviving entity. Upon completion of the Merger, CCEP will consist of businesses involved in the marketing, production, and distribution of beverages in Great Britain, France, Germany, Spain, Portugal, Belgium, the Netherlands, Luxembourg, Norway, Sweden, Iceland, Monaco, and Andorra.
At the effective time of the Merger, each outstanding share of common stock of CCE will be converted into the right to receive one ordinary share of CCEP and a cash payment of $14.50. At closing, CCIP and TCCC will own 34 percent and 18 percent of CCEP, respectively, with CCE shareowners owning 48 percent on a fully diluted basis.
Following the Merger, CCEP will directly and indirectly wholly-own all contributed assets and liabilities of CCE, CCIP, and CCEAG.

7

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

At the time of the Merger, CCEP's ordinary shares are expected to be listed for trading on the New York Stock Exchange, Euronext Amsterdam Exchange, and Madrid Stock Exchange.
The consummation of the Merger is subject to various conditions including, among others, obtaining the approval of at least a majority of the CCE’s shareholders, the availability of cash in an amount sufficient to pay the cash payment for the Merger, the New York Stock Exchange approving the listing of shares of CCEP, the shares of CCEP being admitted to listing and trading on the Amsterdam Stock Exchange, the approval by the UK Financial Conduct Authority of CCEP’s prospectus complying with the European prospectus directive, the filing and effectiveness of CCEP’s Registration Statement on Form F-4 with the U.S. Securities and Exchange Commission, the receipt of tax opinions by CCE, TCCC, and CCIP, the absence of legal prohibitions and the receipt of requisite regulatory approvals, the absence of pending actions by any governmental entity that would prevent the consummation of the Merger, and TCCC having executed new bottling agreements for CCEP having an initial 10-year term with a 10-year renewal term and, except as otherwise agreed, containing other terms materially similar to those currently in effect at CCE, CCIP, and CCEAG. Each of the parties’ obligation to close is further subject to there being no material adverse breach by the other parties. The obligation of the parties to close is further conditioned on the completion of a capital restructuring of CCIP and obtaining the approval of 80 percent of shareholders of CCIP in favor of the Merger (as of July 30, 2015 CCIP shareholders holding 95.6 percent of such voting power have agreed to approve the Merger and related transactions). Each of the parties has generally agreed to use all reasonable endeavors to take such steps to satisfy the conditions. If the conditions to completion are not satisfied by August 6, 2016 or any conditions become impossible to be satisfied by such date (or any breach of other covenants or warranties occurs which would result in a breach due to a material adverse effect in respect of the breaching party and which is not capable of cure or is not cured by such date or within 30 days’ notice), the transaction may be terminated.
The agreements set out certain covenants the parties must comply with prior to completion, including carrying out the agreed transaction steps, the consummation of the CCIP capital restructuring, and the removal of certain assets and liabilities from CCIP that are not being transferred to CCEP. The parties have agreed to cooperate in making employee notifications, competition approvals, securities laws filings and listing applications, and obtaining financing. Further, the parties will cooperate to reach an agreement on a chart of authority of the CCEP Board of Directors and terms of reference for specified committees of the CCEP Board of Directors. The parties have agreed to use their reasonable endeavors to negotiate and agree on CCEP’s new bottling agreements, an initial business plan, and a long range business plan. The parties have also agreed to cause CCIP and CCEP and its subsidiaries to enter into a share purchase agreement, on terms satisfactory to the parties, with Cobega S.A. and Solinbar, S.L.U. in respect of the sale of Vifilfell hf. (the entity that owns the Coca-Cola bottling business in Iceland) for aggregate consideration of no more than €35 million.
The agreements contain customary warranties of the parties regarding their respective businesses. The warranties of CCE, CCIP, CCEAG, and an entity to be established for the purposes of holding CCIP will survive for three months after the date that CCEP files its December 31, 2016 Form 20-F with the U.S. Securities and Exchange Commission. In the event of certain breaches of the warranties resulting in agreed claims or awards against a particular company above $400 million, the relative equity ownership percentages of CCEP will be adjusted by issuing additional shares of CCEP to increase the ownership of the non-breaching parties to reflect the indemnification claim amount, not to exceed $450 million.
The agreements contain specified termination rights. The agreements can be terminated if the parties fail to perform their representations, warranties, covenants or agreements, if any court of competent jurisdiction or any governmental authority issues an order, decree or ruling or takes any other action permanently enjoining, restraining or otherwise prohibiting the consummation of the transactions or if the CCE Board of Directors withdraws, modifies, or qualifies its recommendation to shareholders regarding the adoption of the merger agreements. Upon termination under specified circumstances, including upon a termination resulting from a change in the CCE Board of Directors recommendation to shareholders, CCE would be required to pay CCEP a termination fee of $450 million.
During the third quarter of 2015, we incurred expenses totaling $26 million related to the Merger and expect to incur total Merger expenses of approximately $140 million through the consummation of the Merger. These expenses are included in selling, delivery, and administrative (SD&A) expenses on our Condensed Consolidated Statements of Income.
CCE has been named in three lawsuits related to the Merger. For additional information about these lawsuits, refer to Note 9.
CCEP and/or its subsidiaries intend to finance the cash payment in the Merger primarily using debt financing in either the public or private markets. CCEP expects to have financing in place during the second quarter of 2016.

8

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


NOTE 3—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):
 
October 2,
2015
 
December 31,
2014
Finished goods
$
253

 
$
238

Raw materials and supplies
130

 
150

Total inventories
$
383

 
$
388


NOTE 4—PROPERTY, PLANT, AND EQUIPMENT
The following table summarizes our property, plant, and equipment as of the dates presented (in millions):
 
October 2,
2015
 
December 31,
2014
Land
$
135

 
$
147

Building and improvements
925

 
961

Machinery, equipment, and containers
1,477

 
1,476

Cold drink equipment
1,179

 
1,168

Vehicle fleet
86

 
91

Furniture, office equipment, and software
297

 
287

Property, plant, and equipment
4,099

 
4,130

Accumulated depreciation and amortization
(2,244
)
 
(2,162
)
 
1,855

 
1,968

Construction in process
131

 
133

Property, plant, and equipment, net
$
1,986

 
$
2,101

 
NOTE 5—ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table summarizes our accounts payable and accrued expenses as of the dates presented (in millions):
 
October 2,
2015
 
December 31,
2014
Trade accounts payable
$
489

 
$
537

Accrued customer marketing costs
588

 
656

Accrued compensation and benefits
214

 
257

Accrued taxes
189

 
172

Accrued deposits
55

 
60

Other accrued expenses
170

 
190

Accounts payable and accrued expenses
$
1,705

 
$
1,872

 
NOTE 6—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.

9

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

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
 
2015
 
2014
 
2015
 
2014
Amounts affecting net sales:
 
 
 
 
 
 
 
Fountain syrup and packaged product sales
$
4

 
$
4

 
$
11

 
$
13

Amounts affecting cost of sales:
 
 
 
 
 
 
 
Purchases of concentrate, syrup, mineral water, and juice
$
(489
)
 
$
(522
)
 
$
(1,532
)
 
$
(1,722
)
Purchases of finished products
(10
)
 
(15
)
 
(33
)
 
(39
)
Marketing support funding earned
47

 
56

 
145

 
163

Total
$
(452
)
 
$
(481
)
 
$
(1,420
)
 
$
(1,598
)
On August 6, 2015, we entered into agreements with TCCC, CCIP, and CCEAG related to the pending merger to form CCEP. For more information about the pending Merger to form CCEP, refer to Note 2.
We and TCCC reached an understanding on a new incidence-based concentrate pricing model and funding program to be effective on January 1, 2016. The term of this new understanding is tied to the term of our bottling agreements, which expire on October 2, 2020. If our bottling agreements are terminated due to the closing of the proposed Merger, this understanding will continue until the commencement of a new incidence pricing agreement between TCCC and CCEP. Under the new funding program, the $45 million Global Marketing Fund (GMF), which will be terminated effective December 31, 2015, will be replaced by the integration of $20 million into the incidence rate and annual payments of $25 million from TCCC to CCE to support the execution of commercial strategies focused on capturing growth opportunities. This funding will be paid twice yearly in equal installments. The new pricing model and funding program will result in simplified administration without value transfer between the parties. CCE and TCCC believe that this new understanding should be a key factor for better alignment between the parties and position both parties to win in the marketplace and create value.
For additional information about our relationship with TCCC, refer to Note 3 of the Notes to Consolidated Financial Statements in our Form 10-K.

NOTE 7—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 that 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. For more information regarding the valuation of our derivatives, refer to Note 17.

10

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
 
October 2,
2015
 
December 31,
2014
Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
Foreign currency contracts(A)
 
Other current assets
 
$
21

 
$
58

Foreign currency contracts
 
Other noncurrent assets
 
10

 

Total
 
 
 
31

 
58

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

 
24

Commodity contracts
 
Other current assets
 

 
3

Foreign currency contracts
 
Other noncurrent assets
 
7

 

Total
 
 
 
10

 
27

Total Assets
 
 
 
$
41

 
$
85

Liabilities:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Foreign currency contracts(A)
 
Accounts payable and accrued expenses
 
$
15

 
$
29

Foreign currency contracts
 
Other noncurrent liabilities
 
4

 
12

Total
 
 
 
19

 
41

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency contracts
 
Accounts payable and accrued expenses
 
7

 
22

Commodity contracts
 
Accounts payable and accrued expenses
 
20

 
8

Foreign currency contracts
 
Other noncurrent liabilities
 
7

 

Commodity contracts
 
Other noncurrent liabilities
 
12

 
5

Total
 
 
 
46

 
35

Total Liabilities
 
 
 
$
65

 
$
76

___________________________ 
(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. During the third quarter of 2015, we received $56 million upon maturity of certain of our cross currency swaps related to intercompany loans.
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):
 
 
October 2, 2015
 
December 31, 2014
Type
 
Notional Amount
 
Latest Maturity
 
Notional Amount
 
Latest Maturity
Foreign currency contracts
 
USD 753 million
 
June 2021
 
USD 1.3 billion
 
June 2021

11

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
 
2015
 
2014
 
2015
 
2014
Foreign currency contracts
 
$
3

 
$
38

 
$
(14
)
 
$
13

 
 
 
 
 
Amount of Gain (Loss) Reclassified from 
AOCI into Earnings(B)
 
 
 
 
Third Quarter
 
First Nine Months
Cash Flow Hedging Instruments
 
Location - Statements of Income
 
2015
 
2014
 
2015
 
2014
Foreign currency contracts
 
Cost of sales
 
$
(4
)
 
$
(1
)
 
$
(12
)
 
$
1

Foreign currency contracts
 
Selling, delivery, and administrative expenses
 
(1
)
 

 
(1
)
 

Foreign currency contracts(C)
 
Other nonoperating expense
 
$
(6
)
 
$
46

 
$
(11
)
 
$
24

Total
 
 
 
$
(11
)
 
$
45

 
$
(24
)
 
$
25

___________________________
(A) 
The amount of ineffectiveness associated with these hedging instruments was not material.
(B) 
Over the next 12 months, deferred losses totaling $5 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 (expense) income 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, components of PET (plastic), 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):
 
 
October 2, 2015
 
December 31, 2014
Type
 
Notional Amount
 
Latest Maturity
 
Notional Amount
 
Latest Maturity
Foreign currency contracts
 
USD 664 million
 
December 2015
 
USD 222 million
 
July 2015
Commodity contracts
 
USD 162 million
 
December 2018
 
USD 125 million
 
December 2017
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.

12

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
 
2015
 
2014
 
2015
 
2014
Commodity contracts
 
Cost of sales
 
$
(10
)
 
$
6

 
$
(20
)
 
$
4

Commodity contracts
 
Selling, delivery, and administrative expenses
 
(8
)
 
(1
)
 
(7
)
 
(1
)
Foreign currency contracts
 
Other nonoperating expense(A)
 
13

 
4

 
(15
)
 
4

Total
 
 
 
$
(5
)
 
$
9

 
$
(42
)
 
$
7

___________________________
(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 (expense) income 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 October 2, 2015, our Corporate segment earnings included net mark-to-market losses on non-designated commodity hedges totaling $33 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 13.
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(A)
 
Cost of Sales
 
SD&A
 
Total
Balance at December 31, 2014
 
$
1

 
$
(11
)
 
$
(10
)
Amounts recognized during the period and recorded in our Corporate segment, net
 
(20
)
 
(7
)
 
(27
)
Amounts transferred from our Corporate segment to our Europe operating segment, net
 
(1
)
 
5

 
4

Balance at October 2, 2015
 
$
(20
)
 
$
(13
)
 
$
(33
)
___________________________
(A) 
Over the next 12 months, deferred losses totaling $20 million are expected to be reclassified from our Corporate segment earnings into the earnings of our Europe operating segment as the underlying hedged transactions occur.
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 (expense) income on our Condensed Consolidated Statements of Income. During the third quarter of 2015, we received $27 million upon maturity of a portion of our 2015 net investment hedges.

13

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:
 
 
October 2, 2015
 
December 31, 2014
Type
 
Notional Amount
 
Latest Maturity
 
Notional Amount
 
Latest Maturity
Foreign currency contracts
 
USD 175 million
 
August 2016
 
USD 250 million
 
November 2015
Foreign currency denominated debt
 
USD 2.0 billion
 
March 2030
 
USD 1.6 billion
 
May 2026
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
 
2015
 
2014
 
2015
 
2014
Foreign currency contracts
 
$
(3
)
 
$
18

 
$
12

 
$
19

Foreign currency denominated debt
 
(12
)
 
81

 
53

 
91

Total
 
$
(15
)
 
$
99

 
$
65

 
$
110

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

NOTE 8—DEBT
The following table summarizes our debt as of the dates presented (in millions, except rates):
 
 
October 2, 2015
 
December 31, 2014
 
Principal
Balance
 
Rates(A)
 
Principal
Balance
 
Rates(A)
U.S. dollar commercial paper
$
266

 
0.3
%
 
$
146

 
0.5
%
U.S. dollar notes due 2016-2021(B)
1,318

 
3.4

 
1,793

 
3.1

Euro notes due 2017-2030(C)
2,402

 
2.4

 
1,987

 
2.6

Capital lease obligations(D)
19

 
n/a

 
26

 
n/a

Total debt(E)
4,005

 
 
 
3,952

 
 
Current portion of debt
(522
)
 
 
 
(632
)
 
 
Debt, less current portion
$
3,483

 
 
 
$
3,320

 
 
___________________________
(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 September 2015, our $475 million, 2.1 percent notes matured and were paid in full.
(C) 
In March 2015, we issued €500 million, 1.9 percent notes due 2030.
(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 $4.1 billion and $4.2 billion at October 2, 2015 and December 31, 2014, respectively. The fair value of our debt is determined using quoted market prices for publicly traded instruments (Level 1).
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 October 2, 2015, 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.

14

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 us to limit the incurrence of certain liens or encumbrances in excess of defined amounts. Additionally, our credit facility requires that we meet a minimum interest coverage ratio. We were in compliance with these requirements as of October 2, 2015. These requirements currently are not, nor is it anticipated that they will become, restrictive to our liquidity or capital resources.
 
NOTE 9—COMMITMENTS AND CONTINGENCIES
Legal Contingencies
In connection with the agreements entered into between us, TCCC, CCIP, and CCEAG on August 6, 2015, three putative class action lawsuits were filed in Delaware Chancery Court between the announcement date and the present. The lawsuits are similar and assert claims on behalf of our shareholders for various alleged breaches of fiduciary duty in connection with the Merger. The lawsuits name us, our Board of Directors, CCIP, CCEAG, CCEP, and TCCC as defendants. Plaintiffs in each case seek to enjoin the transaction, to rescind the Merger if it is consummated and allow termination damages, and to recover other damages, attorneys’ fees, and litigation expenses. We believe the cases to be without merit and intend to defend them vigorously. For additional information about the Merger between us, TCCC, CCIP, and CCEAG, refer to Note 2.
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.

15

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


NOTE 10—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
 
2015
 
2014
 
2015
 
2014
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
14

 
$
13

 
$
42

 
$
40

Interest cost
14

 
16

 
41

 
48

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

 
1

 

 
2

Amortization of actuarial loss
7

 
6

 
21

 
18

Total costs
$
11

 
$
12

 
$
31

 
$
35


Contributions
Contributions to our pension plans totaled $38 million and $40 million during the first nine months of 2015 and 2014, respectively. The following table summarizes our projected contributions for the full year ending December 31, 2015, as well as actual contributions for the year ended December 31, 2014 (in millions):
 
Projected(A)
2015
 
Actual(A)
2014
Total pension contributions
$
55

 
$
51

___________________________
(A) 
These amounts represent only contributions made by CCE.

NOTE 11—TAXES
Our effective tax rate was approximately 26 percent and 25 percent for the first nine months of 2015 and 2014, 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
 
2015
 
2014
U.S. federal statutory expense
$
209

 
$
257

Taxation of foreign operations, net(A)
(120
)
 
(138
)
U.S. taxation of foreign earnings, net of tax credits
57

 
60

Nondeductible items
3

 
12

Rate and law change benefit, net(B)

 
(1
)
Other, net
9

 
(6
)
Total provision for income taxes
$
158

 
$
184

___________________________
(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.

16

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

Repatriation of Current Year Foreign Earnings to the U.S.
During the third quarter of 2015, we repatriated to the U.S. $450 million of our 2015 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 2015 foreign earnings that were not repatriated in 2015, 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 12—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 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
 
2015
 
2014
 
2015
 
2014
Net income
$
168

 
$
238

 
$
440

 
$
551

Basic weighted average shares outstanding
228

 
244

 
232

 
249

Effect of dilutive securities(A)
4

 
4

 
4

 
5

Diluted weighted average shares outstanding
232

 
248

 
236

 
254

Basic earnings per share
$
0.74

 
$
0.97

 
$
1.90

 
$
2.21

Diluted earnings per share
$
0.72

 
$
0.96

 
$
1.87

 
$
2.17

___________________________
(A) 
Options to purchase 7.5 million and 7.7 million shares were outstanding at October 2, 2015 and September 26, 2014, respectively. During the first nine months of 2015 and 2014, options to purchase 0.7 million and 0.1 million shares, respectively, 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.
During the third quarter and first nine months of 2015, we repurchased 2.2 million and 13.5 million shares, respectively, and during the third quarter and first nine months of 2014, we repurchased 4.2 million and 17.3 million shares, respectively, under our share repurchase program. Refer to Note 16.
During the first nine months of 2015, we issued an aggregate of 1.0 million shares of common stock in connection with the exercise of share options with a total intrinsic value of $29 million.
Dividend payments on our common stock totaled $193 million and $185 million during the first nine months of 2015 and 2014, respectively. In February 2015, our Board of Directors approved a $0.03 per share increase in our quarterly dividend from $0.25 per share to $0.28 per share beginning in the first quarter of 2015.

NOTE 13—OPERATING SEGMENT
We operate in one industry and have one operating segment (our Europe 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 2015 or 2014.
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.

17

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

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 7.
The following table summarizes selected segment financial information for the periods presented (in millions):
 
Europe
 
Corporate
 
Consolidated
Third Quarter 2015:
 
 
 
 
 
Net sales(A)
$
1,822

 
$

 
$
1,822

Operating income (loss)(B), (C)
330

 
(70
)
 
260

Third Quarter 2014:
 
 
 
 
 
Net sales(A)
$
2,136

 
$

 
$
2,136

Operating income (loss)(B)
366

 
(21
)
 
345

First Nine Months 2015:
 
 
 
 
 
Net sales(A)
$
5,381

 
$

 
$
5,381

Operating income (loss)(B), (C)
844

 
(151
)
 
693

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

 
$

 
$
6,339

Operating income (loss)(B)
911

 
(87
)
 
824

___________________________
(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
 
2015
 
2014
Net sales:
 
 
 
Great Britain
37
%
 
34
%
France
29

 
30

Belgium
15

 
15

The Netherlands
8

 
8

Norway
6

 
7

Sweden
5

 
6

Total
100
%
 
100
%
 
(B) 
Our Corporate segment earnings include net mark-to-market losses on our non-designated commodity hedges totaling $23 million for the first nine months of 2015 and net mark-to-market gains of $14 million for the first nine months of 2014. As of October 2, 2015, our Corporate segment earnings included net mark-to-market losses on non-designated commodity hedges totaling $33 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 7.
(C) 
For the three and nine months ended October 2, 2015, operating income in our Corporate and Europe segments included Merger related expenses totaling $19 million and $7 million, respectively.

18

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

 
NOTE 14—RESTRUCTURING ACTIVITIES
The following table summarizes our restructuring costs for the periods presented (in millions):
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
Europe (A)
$
6

 
$
1

 
$
19

 
$
63

Corporate

 

 

 

Total
$
6

 
$
1

 
$
19

 
$
63

___________________________
(A) 
During the first nine months of 2015, we incurred $7 million of restructuring costs under our business transformation program. During the third quarter and first nine months of 2015, we incurred $6 million and $12 million of restructuring costs, respectively, related to other restructuring activities. All restructuring expenses recorded during the third quarter and first nine months of 2014 related to our Business Transformation Program.
Business Transformation Program
In 2012, we announced a business transformation program designed to improve our operating model and to create a platform for driving sustainable future growth. Through this program we have: (1) streamlined and reduced the cost structure of our finance support function, including the establishment of a new centralized shared services center; (2) restructured 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) improved the efficiency and effectiveness of certain aspects of our operations, including activities related to our cold drink equipment.
We are substantially complete with this program, and to date our nonrecurring restructuring charges totaled $233 million, including severance, transition, consulting, accelerated depreciation, and lease termination costs. During the first nine months of 2015, we recorded nonrecurring restructuring charges under this program totaling $7 million. 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. 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, 2014(A)
$
30

 
$

 
$
12

 
$
42

Provision
26

 
7

 
48

 
81

Cash payments
(33
)
 

 
(55
)
 
(88
)
Noncash items

 
(7
)
 

 
(7
)
Balance at December 31, 2014(A)
23

 

 
5

 
28

Provision
1

 
1

 
5

 
7

Cash payments
(12
)
 

 
(6
)
 
(18
)
Noncash items

 
(1
)
 

 
(1
)
Balance at October 2, 2015(A)
$
12

 
$

 
$
4

 
$
16

___________________________
(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) 
During 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.

19

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


NOTE 15—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.
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, 2014
 
$
41

 
$
(54
)
 
$
(7
)
 
$
(311
)
 
$
(331
)
Other comprehensive (loss) income before reclassifications
 
(482
)
 
166

 
34

 
20

 
(262
)
Amounts reclassified from AOCI
 

 

 
(45
)
 
(76
)
 
(121
)
Net change in other comprehensive (loss) income
 
(482
)
 
166

 
(11
)
 
(56
)
 
(383
)
Balance at December 31, 2014
 
(441
)
 
112

 
(18
)
 
(367
)
 
(714
)
Other comprehensive (loss) income before reclassifications
 
(215
)
 
65

 
(14
)
 

 
(164
)
Amounts reclassified from AOCI
 

 

 
24

 
16

 
40

Net change in other comprehensive (loss) income
 
(215
)
 
65

 
10

 
16

 
(124
)
Balance at October 2, 2015
 
$
(656
)
 
$
177

 
$
(8
)
 
$
(351
)
 
$
(838
)
___________________________
(A) 
For additional information about our cash flow hedges, refer to Note 7.
(B) 
For additional information about our pension plans, refer to Note 10.

NOTE 16—SHARE REPURCHASE PROGRAM
Beginning in October 2010, our Board of Directors approved a series of resolutions authorizing the repurchase of shares of our stock. Since 2010, we have repurchased $4.3 billion in outstanding shares, representing 125.9 million shares, under these resolutions. In December 2013, our Board of Directors authorized 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. In the third quarter of 2015 we completed authorized share repurchases under the December 2013 resolution. In December 2014, our Board of Directors approved a resolution to authorize additional share repurchases for an aggregate price of not more than $1.0 billion. We currently have $969 million in authorized share repurchases remaining under the December 2014 resolution. We completed our planned share repurchases for 2015 during the third quarter, and do not intend to repurchase additional outstanding shares prior to the closing of the Merger (expected to be during the second quarter of 2016).
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. In addition to market conditions, we consider alternative uses of cash and/or debt, balance sheet ratios, and shareowner returns when evaluating share repurchases. 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
 
2015
 
2014
 
2015
 
2014
Number of shares repurchased
2.2

 
4.2

 
13.5

 
17.3

Weighted average purchase price per share
$
45.16

 
$
47.43

 
$
44.35

 
$
46.11

Amount of share repurchases(A)
$
100

 
$
200

 
$
600

 
$
800


20

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

___________________________
(A)
Total cash paid in the first nine months of 2015 for these share repurchases totaled $614 million due to the timing of settlement.

NOTE 17—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):
 
October 2, 2015
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Derivative assets(A)
$
41

 
$

 
$
41

 
$

Derivative liabilities(A)
$
65

 
$

 
$
65

 
$

 
December 31, 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)
$
85

 
$

 
$
85

 
$

Derivative liabilities(A)
$
76

 
$

 
$
76

 
$

___________________________
(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.
 

21

COCA-COLA ENTERPRISES, INC.



Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Business
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 2015 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2015.
On August 6, 2015, we entered into agreements with TCCC, CCIP, and CCEAG related to the pending Merger to form CCEP. For more information about the pending Merger to form CCEP, refer to Note 2.
We and TCCC reached an understanding on a new incidence-based concentrate pricing model and funding program to be effective on January 1, 2016. The term of this new understanding is tied to the term of our bottling agreements, which expire on October 2, 2020. If our bottling agreements are terminated due to the closing of the proposed Merger, this understanding will continue until the commencement of a new incidence pricing agreement between TCCC and CCEP. Under the new funding program, the $45 million Global Marketing Fund (GMF), which will be terminated effective December 31, 2015, will be replaced by the integration of $20 million into the incidence rate and annual payments of $25 million from TCCC to CCE to support the execution of commercial strategies focused on capturing growth opportunities. This funding will be paid twice yearly in equal installments. The new pricing model and funding program will result in simplified administration without value transfer between the parties. CCE and TCCC believe that this new understanding should be a key factor for better alignment between the parties and position both parties to win in the marketplace and create value.
Basis of Presentation
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 were four additional selling days in the first quarter of 2015 versus the first quarter of 2014, and there will be four fewer selling days in the fourth quarter of 2015 versus the fourth quarter of 2014 (based upon a standard five-day selling week).
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Full
Year
2015
67

 
65

 
65

 
64

 
261

2014
63

 
65

 
65

 
68

 
261

Change
4

 

 

 
(4
)
 

Strategic Vision and 2015 Business Plan
Our strategic vision is to “be the best beverage sales and service company,” and to support this vision we are focused on three primary objectives which are to (1) lead category value growth; (2) excel at serving our customers with world-class capabilities; and (3) drive an inclusive and passionate culture. In addition to these objectives, we operate with a strong commitment to sustainability leadership and a shared vision and partnership with TCCC. For more information about our transactions with TCCC, refer to Note 6 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
In alignment with our vision and objectives, our 2015 business plan is centered on strategies to navigate the realities of our operating environment, which include unfavorable macroeconomic conditions, a challenging customer environment, and shifting consumer taste and preferences. These strategies focus on leveraging our core brand portfolio, strengthening our focus on high growth brands, and continuing to promote brand and package innovation.  

22

COCA-COLA ENTERPRISES, INC.


Financial Results
Our net income in the third quarter of 2015 was $168 million, or $0.72 per diluted share, compared to net income of $238 million, or $0.96 per diluted share, in the third quarter of 2014. 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 2015
Charges totaling $6 million ($4 million net of tax, or $0.02 per diluted share) related to restructuring activities;
Net mark-to-market losses totaling $15 million ($10 million net of tax, or $0.05 per diluted share) related to non-designated commodity hedges associated with underlying transactions that relate to a different reporting period;
Charges totaling $26 million ($18 million net of tax, or $0.08 per diluted share) related to the pending Merger; and
A gain of $10 million ($7 million net of tax, or $0.03 per diluted share) related to the sale of a distribution facility in Great Britain.
Third Quarter 2014
Restructuring charges totaling $1 million ($1 million net of tax) related to our restructuring activities;
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.
Our year-over-year financial performance during the third quarter of 2015 reflects the impact of the following significant factors:
Persistent currency headwinds which decreased our net sales by 13.5 percent, our operating income by 14.0 percent, and our diluted earnings per share by 18.5 percent;
Continued softness in the consumer environment coupled with unfavorable weather in Great Britain which contributed to a volume decrease of 1.0 percent;
Favorable cost trends in certain key commodities, which drove bottle and can gross margin per case expansion of 2.0 percent; and
A decline in operating expenses resulting from exchange rate changes which more than offset our costs related to the pending Merger.
Our operating and financial performance during the third quarter of 2015 was impacted by a soft consumer environment resulting in a 1.0 percent year-over-year decline in volume. Additionally, the continued weakness of the euro in relation to the U.S. dollar, which fell more than 15.0 percent year-over-year, had a significant impact on our financial performance in the third quarter of 2015.
Volume in Great Britain declined 4.0 percent reflecting the impact of a soft consumer environment and unfavorable weather, particularly in August 2015. Volume in our continental European territories increased 1.0 percent driven by increases in our still beverage sales which outpaced declines in sparkling beverage sales. Across our territories, the overall volume decrease of 1.0 percent was the result of declines in our Coca-Cola trademark and Schweppes beverage sales, offset partially by increased sales of our water brands. During the third quarter of 2015, we continued to adapt our plans and enhance our opportunities for growth through investment in innovation and expansion, and increasing the presence of new brands in the marketplace.
Gross margin per case expanded year-over-year as our cost of sales per case decline of 2.5 percent outpaced a 0.5 percent decline in our net price per case. Our gross margin performance continued to be impacted by favorable cost trends in some of our key commodities, including aluminum, sugar, and PET (plastic). The decline in bottle and can net price per case was the result of our strategic approach to pricing given the current consumer and cost environment, coupled with the impact of package mix-shifts.
Operating expenses decreased $26 million during the third quarter of 2015 versus the third quarter of 2014 broadly reflecting the impact of currency exchange rates and a gain on the sale of a distribution facility in Great Britain, offset partially by costs related to the pending Merger.
Year-over-year diluted earnings per share declined 25.0 percent, including the impact of (1) an $0.18 decrease due to currency exchange rates; (2) an $0.11 decrease due to Merger related costs; and (3) a $0.04 benefit from our share repurchase activity. During the third quarter of 2015 we repurchased approximately $100 million of our shares under our share repurchase program.

23

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
 
2015
 
2014
 
2015
 
2014
Net sales
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
%
Cost of sales
61.7

 
62.2

 
63.4

 
63.7

Gross profit
38.3

 
37.8

 
36.6

 
36.3

Selling, delivery, and administrative expenses
24.0

 
21.6

 
23.7

 
23.3

Operating income
14.3

 
16.2

 
12.9

 
13.0

Interest expense, net
1.7

 
1.5

 
1.7

 
1.4

Other nonoperating (expense) income
(0.3
)
 

 
(0.1
)
 

Income before income taxes
12.3

 
14.7

 
11.1

 
11.6

Income tax expense
3.1

 
3.6

 
2.9

 
2.9

Net income
9.2
 %
 
11.1
%
 
8.2
 %
 
8.7
%
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
 
2015
 
2014
 
2015
 
2014
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
Europe
$
330

 
127.0
 %
 
$
366

 
106.0
 %
 
$
844

 
122.0
 %
 
$
911

 
110.5
 %
Corporate
(70
)
 
(27.0
)
 
(21
)
 
(6.0
)
 
(151
)
 
(22.0
)
 
(87
)
 
(10.5
)
Consolidated
$
260

 
100.0
 %
 
$
345

 
100.0
 %
 
$
693

 
100.0
 %
 
$
824

 
100.0
 %
During the third quarter and first nine months of 2015, we generated operating income of $260 million and $693 million, respectively, compared to $345 million and $824 million in the third quarter and first nine months of 2014, respectively. 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 2015
 
First Nine Months 2015
 
Amount
 
Change
Percent
of Total
 
Amount
 
Change
Percent
of Total
Changes in operating income:
 
 
 
 
 
 
 
Impact of bottle and can price-mix on gross profit
$
(10
)
 
(3.0
)%
 
$
(74
)
 
(9.0
)%
Impact of bottle and can cost-mix on gross profit
28

 
8.5

 
90

 
11.0

Impact of bottle and can volume on gross profit
(8
)
 
(2.5
)
 
(11
)
 
(1.5
)
Impact of bottle and can selling day shift on gross profit

 

 
34

 
4.0

Impact of post-mix, non-trade, and other on gross profit
(3
)
 
(1.0
)
 
3

 
0.5

Net mark-to-market losses related to non-designated commodity hedges
(23
)
 
(6.5
)
 
(37
)
 
(4.5
)
Net impact of restructuring charges
(5
)
 
(1.5
)
 
44

 
5.5

Merger related costs
(26
)
 
(7.5
)
 
(26
)
 
(3.0
)
Gain on property sale
10

 
3.0

 
10

 
1.0

Other selling, delivery, and administrative expenses
(8
)
 
(2.5
)
 
(28
)
 
(3.5
)
Currency exchange rate changes
(49
)
 
(14.0
)
 
(144
)
 
(17.5
)
Other changes
9

 
2.5

 
8

 
1.0

Change in operating income
$
(85
)
 
(24.5
)%
 
$
(131
)
 
(16.0
)%

24

COCA-COLA ENTERPRISES, INC.


Net Sales
Net sales decreased 14.5 percent in the third quarter of 2015 to $1.8 billion from $2.1 billion in the third quarter of 2014. Net sales decreased 15.0 percent during the first nine months of 2015 to $5.4 billion from $6.3 billion in the first nine months of 2014. These changes include currency exchange rate decreases of 13.5 percent and 15.0 percent when compared to the third quarter and first nine months of 2014, respectively.
Net sales per case decreased 14.0 percent in the third quarter of 2015 when compared to the third quarter of 2014 and also decreased 16.0 percent in the first nine months of 2015 when compared to the first nine months of 2014. 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 2015
 
First Nine Months 2015
Changes in net sales per case:
 
 
 
Bottle and can net price per case
(0.5
)%
 
(1.0
)%
Bottle and can currency exchange rate changes
(14.0
)
 
(15.0
)
Post-mix, non-trade, and other
0.5

 

Change in net sales per case
(14.0
)%
 
(16.0
)%
During the third quarter of 2015, 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 in 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. During the third quarter of 2015, our 0.5 percent decline in bottle and can net price per case was the result of our strategic approach to pricing given the current consumer and cost environment, coupled with the impact of package mix-shifts away from higher-priced PET (plastic).
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 four additional selling days in the first nine months of 2015 when compared to the first nine months of 2014 (rounded to the nearest 0.5 percent):
 
Third Quarter 2015
 
First Nine Months 2015
Change in volume
(1.0
)%
 
1.0
 %
Impact of selling day shift(A)

 
(1.5
)
Change in volume, adjusted for selling day shift
(1.0
)%
 
(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 four additional selling days in the first nine months of 2015 when compared to t