Coca Cola 2010 Annual Report Download - page 55

In 2010, the gross profit for our North America operating segment was negatively impacted by $235 million, primarily
due to the elimination of gross profit in inventory on intercompany sales and an inventory fair value adjustment as a
result of the acquisition. Refer to the headings ‘‘Gross Profit Margin’’ and ‘‘Operating Income and Operating Margin.’’
The acquisition of CCE’s North American business has resulted in a significant adjustment to our overall cost structure,
especially in North America. We estimate that approximately 35 percent of our total cost of goods in 2011 will be
comprised of both the raw material and conversion costs associated with the following inputs: (1) sweeteners,
(2) metals, (3) juices and (4) PET. The bulk of these costs will reside within our North America and Bottling
Investments operating segments. We anticipate the underlying commodities related to these inputs will continue to face
upward pressure; and therefore, we have increased our hedging activities related to certain commodities in order to
mitigate a portion of the price risk associated with forecasted purchases. Many of the derivative financial instruments
used by the Company to mitigate the risk associated with these commodity exposures do not qualify for hedge
accounting. As a result, the change in fair value of these derivative instruments will be included as a component of net
income each reporting period. Refer to the heading ‘‘Gross Profit Margin,’’ below, and Note 5 of Notes to Consolidated
Financial Statements for additional information regarding our commodity hedging activity.
The acquisition of CCE’s North American business increased the Company’s selling, general and administrative
expenses in 2010, primarily due to delivery-related expenses. Selling, general and administrative expenses are typically
higher, as a percentage of net operating revenues, for finished products operations compared to concentrate operations.
Selling, general and administrative expenses were also negatively impacted by the amortization of definite-lived
intangible assets acquired in the acquisition. The Company recorded $605 million of definite-lived acquired franchise
rights that are being amortized over a weighted-average life of approximately 8 years, which is equal to the weighted-
average remaining contractual term of the acquired franchise rights. In addition, the Company recorded $380 million of
customer rights that are being amortized over 20 years. We estimate the amortization expense related to these definite-
lived intangible assets to be approximately $100 million per year for the next several years, which will be recorded in
selling, general and administrative expenses.
Once fully integrated, we expect to generate operational synergies of at least $350 million per year. We anticipate
realizing approximately $140 million to $150 million of these synergies in 2011. Refer to the heading ‘‘Other Operating
Charges,’’ below, and Note 18 of Notes to Consolidated Financial Statements for additional information regarding this
integration initiative.
In connection with the Company’s acquisition of CCE’s North American business, we assumed $7,602 million of long-
term debt, which had an estimated fair value of $9,345 million as of the acquisition date. In accordance with accounting
principles generally accepted in the United States, we recorded the assumed debt at its fair value as of the acquisition
date. Refer to Note 2 of Notes to Consolidated Financial Statements.
On November 15, 2010, the Company issued $4,500 million of long-term notes and used some of the proceeds to
repurchase $2,910 million of long-term debt. The Company used the remaining cash from the issuance to reduce our
outstanding commercial paper balance. The repurchased debt consisted of $1,827 million of debt assumed in our
acquisition of CCE’s North American business and $1,083 million of the Company’s debt that was outstanding prior to
the acquisition. The Company recorded a charge of $342 million related to the premiums paid to repurchase the long-
term debt and the costs associated with the settlement of treasury rate locks issued in connection with the debt tender
offer. Refer to the heading ‘‘Interest Expense,’’ below, and Note 10 of Notes to Consolidated Financial Statements for
additional information.
In 2010, we recognized a gain of $4,978 million due to the remeasurement of our equity interest in CCE to fair value
upon the close of the transaction. This gain was classified in the line item other income (loss) — net in our
consolidated statement of income.
Although our 2010 operating results and certain key metrics were affected by these structural changes, we do not
believe it is indicative of the impact they will have on future operating periods. Our 2011 consolidated financial
statements will reflect twelve months of operating results of the acquired CCE North American business and DPS
license agreements compared to three months in 2010. Therefore, we expect these structural changes to have a
significant impact on our operating results and certain key metrics in 2011, when compared to 2010.
Prior to the closing of this acquisition, we had accounted for our investment in CCE under the equity method of
accounting. Under the equity method of accounting, we recorded our proportionate share of CCE’s net income or loss
53