XFRA:CKK Coca-Cola Enterprises Inc Quarterly Report 10-Q Filing - 6/29/2012

Effective Date 6/29/2012

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

For the quarterly period ended June 29, 2012
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  [P]  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  [P]  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 [P]
  
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  [P]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
294,501,643 Shares of $0.01 Par Value Common Stock as of June 29, 2012




COCA-COLA ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2012
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
Item 1.        
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


1


PART 1.  FINANCIAL INFORMATION

Item 1. Financial Statements

COCA-COLA ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share data)
 
 
Second Quarter
 
First Six Months
 
2012
 
2011
 
2012
 
2011
Net sales
$
2,208

 
$
2,407

 
$
4,076

 
$
4,251

Cost of sales
1,401

 
1,513

 
2,613

 
2,696

Gross profit
807

 
894

 
1,463

 
1,555

Selling, delivery, and administrative expenses
506

 
535

 
991

 
1,032

Operating income
301

 
359

 
472

 
523

Interest expense
23

 
20

 
46

 
39

Other nonoperating income (expense)
2

 
(2
)
 
3

 
(3
)
Income before income taxes
280

 
337

 
429

 
481

Income tax expense
75

 
91

 
115

 
129

Net income
$
205

 
$
246

 
$
314

 
$
352

Basic earnings per share
$
0.68

 
$
0.76

 
$
1.04

 
$
1.08

Diluted earnings per share
$
0.67

 
$
0.74

 
$
1.02

 
$
1.05

Dividends declared per share
$
0.16

 
$
0.13

 
$
0.32

 
$
0.25

Basic weighted average shares outstanding
298

 
323

 
300

 
326

Diluted weighted average shares outstanding
305

 
331

 
308

 
335

Income (expense) from transactions with The Coca-Cola Company—Note 5:
 
 
 
 
 
 
 
Net sales
$
3

 
$
6

 
$
6

 
$
10

Cost of sales
(586
)
 
(667
)
 
(1,077
)
 
(1,199
)



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)

 
Second Quarter
 
First Six Months
 
2012
 
2011
 
2012
 
2011
Net income
$
205

 
$
246

 
$
314

 
$
352

Components of other comprehensive (loss) income:
 
 
 
 
 
 
 
Currency translations
(130
)
 
20

 
(8
)
 
195

Net investment hedges, net of tax
13

 
(4
)
 
8

 
(6
)
Cash flow hedges, net of tax
(2
)
 
7

 
(3
)
 
24

Pension plan liability adjustments, net of tax
4

 
2

 
7

 
3

Other comprehensive (loss) income
(115
)
 
25

 
4

 
216

Comprehensive income
$
90

 
$
271

 
$
318

 
$
568




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)
 
 
June 29,
2012
 
December 31,
2011
ASSETS
 
 
 
Current:
 
 
 
Cash and cash equivalents
$
422

 
$
684

Trade accounts receivable, less allowances of $16 and $16, respectively
1,688

 
1,387

Amounts receivable from The Coca-Cola Company
66

 
64

Inventories
455

 
403

Other current assets
194

 
148

Total current assets
2,825

 
2,686

Property, plant, and equipment, net
2,163

 
2,230

Franchise license intangible assets, net
3,770

 
3,771

Goodwill
124

 
124

Other noncurrent assets
352

 
283

Total assets
$
9,234

 
$
9,094

LIABILITIES
 
 
 
Current:
 
 
 
Accounts payable and accrued expenses
$
1,821

 
$
1,716

Amounts payable to The Coca-Cola Company
132

 
116

Current portion of debt
396

 
16

Total current liabilities
2,349

 
1,848

Debt, less current portion
2,761

 
2,996

Other noncurrent liabilities
165

 
160

Noncurrent deferred income tax liabilities
1,195

 
1,191

Total liabilities
6,470

 
6,195

SHAREOWNERS’ EQUITY
 
 
 
Common stock, $0.01 par value – Authorized – 1,100,000,000 shares;
Issued – 347,628,195 and 343,394,495 shares, respectively
3

 
3

Additional paid-in capital
3,797

 
3,745

Reinvested earnings
855

 
638

Accumulated other comprehensive loss
(469
)
 
(473
)
Common stock in treasury, at cost – 53,126,552 and 38,445,287 shares, respectively
(1,422
)
 
(1,014
)
Total shareowners’ equity
2,764

 
2,899

Total liabilities and shareowners’ equity
$
9,234

 
$
9,094




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 Six Months
 
2012
 
2011
Cash Flows from Operating Activities:
 
 
 
Net income
$
314

 
$
352

Adjustments to reconcile net income to net cash derived from operating activities:
 
 
 
Depreciation and amortization
170

 
161

Share-based compensation expense
20

 
23

Deferred income tax benefit
(22
)
 
(37
)
Pension expense less than contributions
(46
)
 
(5
)
Net changes in assets and liabilities
(206
)
 
(238
)
Net cash derived from operating activities
230

 
256

Cash Flows from Investing Activities:
 
 
 
Capital asset investments
(183
)
 
(181
)
Capital asset disposals
13

 

Net cash used in investing activities
(170
)
 
(181
)
Cash Flows from Financing Activities:
 
 
 
Net change in commercial paper
166

 
24

Issuances of debt

 
400

Payments on debt
(10
)
 
(7
)
Shares repurchased under share repurchase program
(375
)
 
(400
)
Dividend payments on common stock
(95
)
 
(81
)
Net cash received from The Coca-Cola Company for transaction-related items

 
48

Other financing activities
(8
)
 
8

Net cash used in financing activities
(322
)
 
(8
)
Net effect of currency exchange rate changes on cash and cash equivalents

 
16

Net Change in Cash and Cash Equivalents
(262
)
 
83

Cash and Cash Equivalents at Beginning of Period
684

 
321

Cash and Cash Equivalents at End of Period
$
422

 
$
404




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 a quarterly basis. Additionally, year-over-year shifts in holidays and selling days can impact our results on a quarterly basis. Accordingly, our results for the second quarter and first six months of 2012 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2012.
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, 2011 (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 quarters close on the Friday closest to the end of the quarterly calendar period. 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    
2012
65

 
65

 
65

 
66

 
261

2011
65

 
65

 
65

 
65

 
260

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):
 
 
June 29,
2012
 
December 31,
2011
Finished goods
$
280

 
$
225

Raw materials and supplies
175

 
178

Total inventories
$
455

 
$
403





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):
  
 
June 29,
2012
 
December 31, 2011
Land
$
154

 
$
154

Building and improvements
882

 
880

Machinery, equipment, and containers
1,537

 
1,487

Cold drink equipment
1,495

 
1,446

Vehicle fleet
112

 
116

Furniture, office equipment, and software
330

 
320

Property, plant, and equipment
4,510

 
4,403

Accumulated depreciation and amortization
(2,529
)
 
(2,387
)
 
1,981

 
2,016

Construction in process
182

 
214

Property, plant, and equipment, net
$
2,163

 
$
2,230



 NOTE 4—ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
The following table summarizes our accounts payable and accrued expenses as of the dates presented (in millions):
 
 
June 29,
2012
 
December 31, 2011
Trade accounts payable
$
497

 
$
473

Accrued marketing costs
558

 
461

Accrued compensation and benefits
220

 
262

Accrued taxes
247

 
239

Accrued deposits
97

 
97

Other accrued expenses
202

 
184

Accounts payable and accrued expenses
$
1,821

 
$
1,716


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 programs with TCCC are modified.

7

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):
 
 
Second Quarter
 
First Six Months
 
2012
 
2011
 
2012
 
2011
Amounts affecting net sales:
 
 
 
 
 
 
 
Fountain syrup and packaged product sales
$
3

 
$
6

 
$
6

 
$
10

Amounts affecting cost of sales:
 
 
 
 
 
 
 
Purchases of syrup, concentrate, mineral water, and juice
$
(623
)
 
$
(704
)
 
$
(1,153
)
 
$
(1,267
)
Purchases of finished products
(18
)
 
(21
)
 
(30
)
 
(33
)
Marketing support funding earned
55

 
58

 
106

 
101

Total
$
(586
)
 
$
(667
)
 
$
(1,077
)
 
$
(1,199
)

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 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 hedges”). Changes in the fair value of these non-designated hedging instruments are recognized 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 15.


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
 
June 29,
2012
 
December 31, 2011
Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
Foreign currency contracts(A)
 
Other current assets
 
$
37

 
$
11

Interest rate swap agreements(B)
 
Other current assets
 
1

 

Foreign currency contracts
 
Other noncurrent assets
 
19

 
26

Interest rate swap agreements
 
Other noncurrent assets
 
1

 

Total
 
 
 
58

 
37

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency contracts
 
Other current assets
 
2

 
3

Commodity contracts
 
Other current assets
 
2

 
5

Total
 
 
 
4

 
8

Total Assets
 
 
 
$
62

 
$
45

Liabilities:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Foreign currency contracts(A)
 
Accounts payable and accrued expenses
 
$
32

 
$
28

Interest rate swap agreements(B)
 
Accounts payable and accrued expenses
 
1

 

Foreign currency contracts
 
Other noncurrent liabilities
 
3

 
1

Total
 
 
 
36

 
29

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency contracts
 
Accounts payable and accrued expenses
 
16

 
7

Commodity contracts
 
Accounts payable and accrued expenses
 
6

 
2

Commodity contracts
 
Other noncurrent liabilities
 
3

 
1

Total
 
 
 
25

 
10

Total Liabilities
 
 
 
$
61

 
$
39

___________________________ 
(A) 
Amount includes the gross interest receivable or payable on our cross currency swap agreements.
(B) 
Amounts include the gross interest receivable or payable on our interest rate swap agreements.
Fair Value Hedges
We utilize certain interest rate swap agreements designated as fair value hedges to mitigate our exposure to changes in the fair value of fixed-rate debt resulting from fluctuations in interest rates. The gain or loss on the derivative and the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized immediately in interest expense on our Condensed Consolidated Statements of Income. The following table summarizes our outstanding interest rate swap agreements designated as fair value hedges as of the periods presented:
 
  
June 29, 2012
  
December 31, 2011
Type
  
Notional Amount
  
Latest Maturity
  
Notional Amount
  
Latest Maturity
Fixed-to-floating interest rate swap
  
USD 400 million
  
November 2013
  
N/A
  
N/A

9

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


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 (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):
 
 
  
June 29, 2012
  
December 31, 2011
Type
  
Notional Amount
  
Latest Maturity
  
Notional Amount
  
Latest Maturity
Foreign currency contracts
  
USD 1.6 billion
  
June 2021
  
USD 1.6 billion
  
June 2021
The following tables summarize the net of tax effect of our derivative financial instruments 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)
 
 
Second Quarter
 
First Six Months
Cash Flow Hedging Instruments
 
2012
 
2011
 
2012
 
2011
Foreign currency contracts
 
$
13

 
$
17

 
$
(5
)
 
$
(17
)
 
 
 
 
 
Amount of Gain (Loss) Reclassified from 
AOCI into Earnings(B)
 
 
 
 
Second Quarter
 
First Six Months
Cash Flow Hedging Instruments
 
Location - Statements of Income
 
2012
 
2011
 
2012
 
2011
Foreign currency contracts
 
Cost of sales
 
$
(4
)
 
$
1

 
$
(6
)
 
$
1

Foreign currency contracts(C)
 
Other nonoperating income (expense)
 
19

 
9

 
4

 
(42
)
Total
 
 
 
$
15

 
$
10

 
$
(2
)
 
$
(41
)
 ___________________________
(A) 
The amount of ineffectiveness associated with these hedging instruments was not material.
(B) 
Over the next 12 months, deferred losses totaling $11 million are expected to be reclassified from AOCI on our Condensed Consolidated Balance Sheets into the expense line item on our Condensed Consolidated Statements of Income that is consistent with the nature of the underlying hedged item as the forecasted transactions occur.
(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.

10

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


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 currency and commodity price fluctuations associated with certain forecasted transactions, including 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):
 
 
  
June 29, 2012
  
December 31, 2011
Type
  
Notional Amount
  
Latest Maturity
  
Notional Amount
  
Latest Maturity
Foreign currency contracts
  
USD 329 million
 
September 2012
  
USD 404 million
  
September 2012
Commodity contracts
  
USD 159 million
  
December 2014
  
USD 95 million
  
December 2013
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. 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):
 
 
 
Second Quarter
 
First Six Months
Location - Statements of Income
 
2012
 
2011
 
2012
 
2011
Cost of sales
 
$
(8
)
 
$
1

 
$
(5
)
 
$
1

Selling, delivery, and administrative expenses
 
(5
)
 
(3
)
 
(1
)
 
4

Other nonoperating income (expense)(A)
 
6

 
(2
)
 
(5
)
 
(16
)
Total
 
$
(7
)
 
$
(4
)
 
$
(11
)
 
$
(11
)
 ___________________________
(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 June 29, 2012, our Corporate segment earnings included net mark-to-market losses on non-designated commodity hedges totaling $10 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):
 
(Losses) Gains Deferred at Corporate Segment(A)
 
Cost of Sales    
 
SD&A
 
Total
Balance at December 31, 2011
 
$
(3
)
 
$
2

 
$
(1
)
Losses recognized during the period and recorded in the Corporate segment, net
 
(6
)
 
(2
)
 
(8
)
Losses (gains) transferred to the Europe operating segment, net
 
1

 
(2
)
 
(1
)
Balance at June 29, 2012
 
$
(8
)
 
$
(2
)
 
$
(10
)
 ___________________________
(A) 
Over the next 12 months, deferred losses totaling $6 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.

11

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


Net Investment Hedges
We have entered into currency forwards and options 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. The following table summarizes our outstanding instruments designated as net investment hedges as of the dates presented:
 
  
 
June 29, 2012
 
December 31, 2011
Type
 
Notional Amount
 
Latest Maturity
 
Notional Amount
 
Latest Maturity
Foreign currency contracts
 
USD 630 million
 
December 2013
 
USD 125 million
 
December 2012

The following table summarizes the net of tax effect of our derivative financial instruments 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)
 
 
Second Quarter
 
First Six Months
Net Investment Hedging Instruments
 
2012
 
2011
 
2012
 
2011
Foreign currency contracts
 
$
13

 
$
(4
)
 
$
8

 
$
(6
)
 ___________________________
(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):
 
 
June 29, 2012
 
December 31, 2011
 
Principal
Balance
 
Rates(A)
 
Principal
Balance
 
Rates(A)
U.S. dollar commercial paper
$
166

 
0.5
%
 
$

 
%
U.S. dollar notes due 2013-2021
2,290

 
2.6

 
2,289

 
2.6

Euro notes due 2017
443

 
3.1

 
453

 
3.1

Swiss franc notes due 2013
211

 
3.8

 
213

 
3.8

Capital lease obligations(B)
47

 
n/a

 
57

 
n/a

Total debt(C) (D)
3,157

 
 
 
3,012

 
 
Current portion of debt
(396
)
 
 
 
(16
)
 
 
Debt, less current portion
$
2,761

 
 
 
$
2,996

 
 
___________________________
(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) 
These amounts represent the present value of our minimum capital lease payments.
(C) 
At June 29, 2012, approximately $211 million of our outstanding debt was issued by our subsidiaries and guaranteed by CCE.
(D) 
The total fair value of our outstanding debt, excluding capital lease obligations, was $3.2 billion and $3.1 billion at June 29, 2012 and December 31, 2011, respectively. The fair value of our debt is determined using quoted market prices for publicly traded instruments (Level 1).

12

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


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 serves as a backstop to our commercial paper program, supports our working capital needs, and matures in 2014. At June 29, 2012, 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.
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 June 29, 2012. 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 Agreement (the Agreement) with TCCC that occurred on October 2, 2010. For additional information regarding the transaction with TCCC (the Merger), including our remaining indemnity obligations to TCCC, refer to 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):
 
 
Second Quarter
 
First Six Months
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit costs:
 
 
 
 
 
Service cost
$
13

 
$
12

 
$
26

 
$
24

Interest cost
14

 
14

 
28

 
28

Expected return on plan assets
(20
)
 
(19
)
 
(40
)
 
(37
)
Amortization of net prior service cost
2

 
1

 
3

 
1

Amortization of actuarial loss
3

 
2

 
6

 
4

Net periodic benefit cost
12

 
10

 
23

 
20

Other

 

 

 
3

Total costs
$
12

 
$
10

 
$
23

 
$
23


13


Contributions
Contributions to our pension plans totaled $69 million and $28 million during the first six months of 2012 and 2011, respectively. The following table summarizes our projected contributions for the full year ending December 31, 2012, as well as actual contributions for the year ended December 31, 2011 (in millions):
 
 
Projected(A)
2012
 
Actual(A)
2011
Total pension contributions
$
100

 
$
68

 ___________________________
(A) 
These amounts represent only contributions made by CCE. During the first quarter of 2012, we contributed an incremental $40 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 27 percent for both the first six months of 2012 and 2011. 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 Six Months
 
2012
 
2011
U.S. federal statutory expense
$
150

 
$
168

Taxation of foreign operations, net(A)
(68
)
 
(77
)
U.S. taxation of foreign earnings, net of tax credits
26

 
24

Nondeductible items
5

 
13

Other, net
2

 
1

Total provision for income taxes
$
115

 
$
129

___________________________
(A) 
Our effective tax rate reflects the benefit of having all of our operations outside of the U.S., 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.
In July 2012, the United Kingdom enacted a corporate income tax rate reduction of 2 percentage points, 1 percentage point retroactive to April 1, 2012, and 1 percentage point effective April 1, 2013. As a result, we expect to recognize a deferred tax benefit of approximately $50 million during the third quarter of 2012 to reflect the impact of this change on our deferred taxes.
Repatriation of Current Foreign Earnings to the U.S.
During the fourth quarter of 2012, we expect to repatriate to the U.S. a portion of our 2012 foreign earnings to satisfy our 2012 U.S.-based cash flow needs. The amount to be repatriated to the U.S. will depend on, among other things, our actual 2012 foreign earnings and our actual 2012 U.S.-based cash flow needs. Our historical earnings will continue to remain permanently reinvested outside of the U.S. and, if we do not generate sufficient current year foreign earnings to repatriate to the U.S., we expect to have adequate access to capital in the U.S. to allow us to satisfy our U.S.-based cash flow needs. 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 foreign operations, foreign 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.
Tax Sharing Agreement with TCCC
As part of the Merger, we entered into a Tax Sharing Agreement (TSA) with TCCC. Under the TSA, we have agreed to indemnify TCCC and its affiliates from and against certain taxes, the responsibility for which the parties have specifically agreed to allocate to us, generally related to periods prior to October 2, 2010, as well as any taxes and losses by reason of or arising from certain breaches by CCE of representations, covenants, or obligations under the Agreement or the TSA. Some of these indemnifications extend through 2014. As of June 29, 2012, the remaining liability related to these indemnifications was $28 million, of which $20 million is recorded in accounts payable and accrued expenses on our Condensed Consolidated Balance Sheets, and $8 million is recorded in other noncurrent liabilities on our Condensed Consolidated Balance Sheets.

14


In the future, there could be additional tax items related to the Merger that require cash settlements under the TSA as tax audits are resolved and refund claims are pursued by both us and TCCC. For additional information about the TSA and related accruals, 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 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 to millions):
 
 
Second Quarter
 
First Six Months
 
2012
 
2011
 
2012
 
2011
Net income
$
205

 
$
246

 
$
314

 
$
352

Basic weighted average shares outstanding
298

 
323

 
300

 
326

Effect of dilutive securities(A)
7

 
8

 
8

 
9

Diluted weighted average shares outstanding
305

 
331

 
308

 
335

Basic earnings per share
$
0.68

 
$
0.76

 
$
1.04

 
$
1.08

Diluted earnings per share
$
0.67

 
$
0.74

 
$
1.02

 
$
1.05

_________________________
(A) 
Options to purchase 8 million and 9 million shares were outstanding as of June 29, 2012 and July 1, 2011, respectively. For all periods presented, options to purchase 1.2 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 second quarter of 2012 and 2011, we repurchased 8.1 million and 7.1 million shares, respectively, and during the first six months of 2012 and 2011, we repurchased 13.6 million and 14.8 million shares, respectively. Refer to Note 14.
During the first six months of 2012, we issued an aggregate of 1.0 million shares of common stock from the exercise of share options with a total intrinsic value of $16 million.
Dividend payments on our common stock totaled $95 million and $81 million during the first six months of 2012 and 2011, respectively. In February 2012, our Board of Directors approved a $0.03 per share increase in our quarterly dividend from $0.13 per share to $0.16 per share beginning in the first quarter of 2012.

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 six months of 2012 or 2011.
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    
Second Quarter 2012:
 
 
 
 
 
Net sales
$
2,208

 
$

 
$
2,208

Operating income
350

 
(49
)
 
301

Second Quarter 2011:
 
 
 
 
 
Net sales
$
2,407

 
$

 
$
2,407

Operating income
408

 
(49
)
 
359

First Six Months 2012:
 
 
 
 
 
Net sales(A)
$
4,076

 
$

 
$
4,076

Operating income(B)
557

 
(85
)
 
472

First Six Months 2011:
 
 
 
 
 
Net sales(A)
$
4,251

 
$

 
$
4,251

Operating income(B)
608

 
(85
)
 
523

___________________________
(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 Six Months
 
2012
 
2011
Net sales:
 
 
 
Great Britain
33
%
 
33
%
France
31

 
30

Belgium
15

 
15

The Netherlands
8

 
9

Norway
7

 
7

Sweden
6

 
6

Total
100
%
 
100
%
 
(B) 
Our Corporate segment earnings include net mark-to-market losses on our non-designated commodity hedges totaling $9 million for the first six months of 2012, and net mark-to-market gains of $2 million for the first six months of 2011. As of June 29, 2012, our Corporate segment earnings included net mark-to-market losses on non-designated commodity hedges totaling $10 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):
 
 
Second Quarter
 
First Six Months
 
2012
 
2011
 
2012
 
2011
Europe
$
14

 
$
1

 
$
22

 
$
15

Corporate

 

 

 

Total
$
14

 
$
1

 
$
22

 
$
15


    

16


Norway Business Optimization Program

We have initiated a project in Norway to restructure and optimize certain aspects of our operations. This project includes changing our principal route to market from delivering our products directly to retailers to distributing our products to our customers' central warehouses. Additionally, we are transitioning from the production and sale of refillable bottles to the production and sale of recyclable, non-refillable bottles. These efforts are designed to increase our packaging flexibility, improve variety and convenience for customers and consumers, and enhance operational efficiency. We expect the transition to result in (1) accelerated depreciation for certain machinery and equipment, plastic crates, and refillable bottles; (2) costs for replacing current production lines; (3) transition and outplacement costs; and (4) external warehousing costs and operational inefficiencies during the transition period. This project will take place during 2012 and 2013 and is expected to result in approximately $60 million in capital expenditures and approximately $50 million in nonrecurring restructuring charges. During the second quarter and first six months of 2012, we recorded nonrecurring restructuring charges totaling $14 million and $22 million, respectively, under this program. As of June 29, 2012, we had invested $23 million in cumulative capital expenditures under this program. The nonrecurring restructuring charges are included in SD&A expenses 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(A)
 
Other
 
Total
Balance at December 31, 2011
$

 
$

 
$

 
$

Provision
2

 
14

 
6

 
22

Cash payments

 

 
(4
)
 
(4
)
Noncash items

 
(14
)
 

 
(14
)
Balance at June 29, 2012
$
2

 
$

 
$
2

 
$
4

___________________________
(A) 
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.

NOTE 14—SHARE REPURCHASE PROGRAM
In October 2010, our Board of Directors approved a resolution to authorize the repurchase of up to 65 million shares, for an aggregate purchase price of not more than $1 billion, as part of a publicly announced program. This program was completed at the end of 2011, and resulted in the repurchase of $1 billion in outstanding shares, representing 37.9 million shares at an average price of $26.35 per share. In September 2011, our Board of Directors approved a resolution to authorize additional share repurchases for an aggregate purchase price of not more than $1 billion, subject to the cumulative 65 million share repurchase limit. Unless terminated by resolution of our Board of Directors, our current share repurchase program will expire when we have repurchased all shares authorized under the program. We can repurchase shares in the open market and in privately negotiated transactions. During the first six months of 2012, we repurchased $375 million in outstanding shares, representing 13.6 million shares at an average price of $27.61 per share. We currently plan to repurchase at least $225 million in additional outstanding shares during the remainder of 2012 under this program, subject to economic, operating, and other factors, including acquisition opportunities and the cumulative 65 million share repurchase limit. 



17

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


NOTE 15—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):
 
 
June 29, 2012
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Derivative assets(A)
$
62

 
$

 
$
62

 
$

Derivative liabilities(A)
$
61

 
$

 
$
61

 
$

 
December 31, 2011
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Derivative assets(A)
$
45

 
$

 
$
45

 
$

Money market funds(B)
410

 

 
410

 

Total assets
$
455

 
$

 
$
455

 
$

Derivative liabilities(A)
$
39

 
$

 
$
39

 
$

 ___________________________
(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.
(B) 
We had investments in certain money market funds that held a portfolio of short-term, high-quality, fixed-income securities issued by the U.S. Government that were required to be reported at fair value. We classified these investments as cash equivalents due to their short-term nature and the ability for them to be readily converted into known amounts of cash. The fair value of these investments approximated their carrying value because of their short maturities. These investments are not publicly traded, so their fair value was determined based on the values of the underlying investments in money market funds.



18

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 a quarterly basis. Accordingly, our results for the second quarter and first six months of 2012 may not necessarily be indicative of the results that may be expected for the full year ending December 31, 2012.
For reporting convenience, our quarters close on the Friday closest to the end of the quarterly calendar period. There were the same number of selling days in the first and second quarters of 2012 versus the first and second quarters of 2011, respectively (based upon a standard five-day selling week). Year-over-year selling days will be the same in the third quarter, and there will be one additional selling day in the fourth quarter of 2012 versus the fourth quarter of 2011.
Relationship with 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 programs 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 second quarter of 2012 was $205 million, or $0.67 per diluted share, compared to net income of $246 million, or $0.74 per diluted share, in the second quarter of 2011. The following items included in our reported results affect the comparability of our year-over-year financial results (the items listed below are based on defined terms and thresholds and represent all material items management considered for year-over-year comparability):
Second Quarter 2012
Charges totaling $14 million related to restructuring activities; and
Net mark-to-market losses totaling $13 million related to non-designated commodity hedges associated with underlying transactions that relate to a different reporting period.
Second Quarter 2011
Charges totaling $1 million related to restructuring activities;
Net mark-to-market losses totaling $3 million related to non-designated commodity hedges associated with underlying transactions that related to a different reporting period; and
Charges totaling $5 million related to post-Merger changes in certain underlying tax matters covered by our indemnification to TCCC for periods prior to the Merger.
Financial Summary
Our financial performance during the second quarter of 2012 reflects the impact of the following significant factors:
A challenging operating environment reflecting the combination of poor weather conditions, the French excise tax increase, and ongoing general macroeconomic softness;
Volume declines driven by unfavorable weather and challenging prior year growth hurdles;
Excluding the impact of foreign currency changes, higher cost of sales per case and net pricing per case driven, in

19

COCA-COLA ENTERPRISES, INC.


part, by the increased French excise tax (substantially all of the increased cost was borne by our customers in the form of higher prices);
Strong operating expense control reflecting our continued focus on minimizing operating expenses;
Unfavorable currency exchange rate changes that decreased operating income in the second quarter of 2012 by 9.0 percent ($0.08 per diluted share); and
The continuation of our share repurchase program, which increased diluted earnings per share in the second quarter of 2012 by approximately 7.5 percent ($0.05 per diluted share) when compared to the second quarter of 2011.
Our operating and financial performance during the second quarter of 2012 was impacted by a challenging operating environment that included poor weather conditions, the French excise tax increase, and ongoing general macroeconomic softness. These factors, along with prior year growth hurdles, led to a volume decline of 6.0 percent for the quarter. Our bottle and can price per case excluding the impact of the French excise tax increase grew 4.0 percent during the quarter, reflecting increased rates and a slight benefit from product mix.
Volume in our continental European territories (including Norway and Sweden) declined 7.0 percent, reflecting a decline in sparkling beverage sales, including Sprite and Fanta, as well as declines in the sale of Coca-Cola Classic and Diet Coke/Coca-Cola light. Our volume in Great Britain decreased 4.5 percent for the quarter, driven by declines in sparkling beverage brand sales, as well as a decrease in sales of juices, isotonics, and other beverages versus strong prior year growth. Declines in both continental Europe and Great Britain were offset partially by strong growth in our multi-brand energy drink strategy, which continues to allow us to seize opportunities with fast growing Monster brands, while gaining additional presence with our other energy brands. The continued success of Coca-Cola Zero was also evident during the quarter, as the brand achieved low single-digit volume growth. During the remainder of 2012, we plan to leverage our marketing plans and initiatives, particularly those related to the 2012 London Olympics, in order to drive volume growth, while maintaining our focus on daily operational excellence.
Our bottle and can cost of sales per case excluding the French excise tax increase grew 3.0 percent during the quarter. Overall, the cost environment remains volatile, but trends have moderated recently, particularly for PET (plastic) due to lower oil prices. We continue to seek opportunities through the use of supplier agreements and hedging instruments to mitigate our exposure to commodity volatility. During the second quarter of 2012, we also continued to drive initiatives to minimize our operating expenses. We intend to remain diligent in these efforts through the remainder of 2012, as we navigate the marketplace challenges and the increased expenditures we expect to incur as a result of our planned 2012 summer initiatives, specifically the 2012 London Olympics.

Our financial results during the second quarter of 2012 were also impacted by unfavorable currency exchange rate changes, which resulted in an approximate $0.08 decrease in our earnings per diluted share. Partially offsetting the negative currency impact was the benefit of our share repurchases, which increased earnings per diluted share during the second quarter of 2012 by approximately $0.05 when compared to the second quarter of 2011. During the remainder of 2012, we intend to continue our share repurchase program in support of our ongoing commitment to increase shareowner value.


 Operations Review
The following table summarizes our Condensed Consolidated Statements of Income as a percentage of net sales for the periods presented:
 
 
Second Quarter
 
First Six Months
 
2012
 
2011
 
2012
 
2011
Net sales
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
 %
Cost of sales
63.5

 
62.9

 
64.1

 
63.4

Gross profit
36.5

 
37.1

 
35.9

 
36.6

Selling, delivery, and administrative expenses
22.9

 
22.2

 
24.3

 
24.3

Operating income
13.6

 
14.9

 
11.6

 
12.3

Interest expense
1.0

 
0.8

 
1.2

 
0.9

Other nonoperating income (expense)
0.1

 
(0.1
)
 
0.1

 
(0.1
)
Income before income taxes
12.7

 
14.0

 
10.5

 
11.3

Income tax expense
3.4

 
3.8

 
2.8

 
3.0

Net income
9.3
%
 
10.2
 %
 
7.7
%
 
8.3
 %

20

COCA-COLA ENTERPRISES, INC.


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):
 
 
Second Quarter
 
First Six Months
 
2012
 
2011
 
2012
 
2011
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
Europe
$
350

 
116.0
 %
 
$
408

 
113.5
 %
 
$
557

 
118.0
 %
 
$
608

 
116.5
 %
Corporate
(49
)
 
(16.0
)
 
(49
)
 
(13.5
)
 
(85
)
 
(18.0
)
 
(85
)
 
(16.5
)
Consolidated
$
301

 
100.0
 %
 
$
359

 
100.0
 %
 
$
472

 
100.0
 %
 
$
523

 
100.0
 %
During the second quarter and first six months of 2012, we had operating income of $301 million and $472 million, respectively, compared to $359 million and $523 million in the second quarter and first six months of 2011, 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):
 
 
Second Quarter 2012
 
First Six Months 2012
 
Amount
 
Change
Percent
of Total
 
Amount
 
Change
Percent
of Total
Changes in operating income:
 
 
 
 
 
 
 
Impact of bottle and can price-mix on gross profit
$
140

 
39.0
 %
 
$
236

 
45.0
 %
Impact of bottle and can cost-mix on gross profit
(91
)
 
(25.5
)
 
(163
)
 
(31.0
)
Impact of bottle and can volume on gross profit
(51
)
 
(14.5
)
 
(54
)
 
(10.5
)
Impact of post-mix, non-trade, and other on gross profit
(5
)
 
(1.5
)
 
(11
)
 
(2.0
)
Net mark-to-market losses related to non-designated commodity hedges
(10
)
 
(3.0
)
 
(11
)
 
(2.0
)
Net impact of restructuring charges
(13
)
 
(3.5
)
 
(7
)
 
(1.5
)
Impact of Tax Sharing Agreement indemnification changes
5

 
1.5

 
5

 
1.0

Other selling, delivery, and administrative expenses
(1
)
 

 
(5
)
 
(1.0
)
Currency exchange rate changes
(34
)
 
(9.0
)
 
(42
)
 
(8.0
)
Other changes
2

 
0.5

 
1

 

Change in operating income
$
(58
)
 
(16.0
)%
 
$
(51
)
 
(10.0
)%
Net Sales
Net sales decreased 8.5 percent in the second quarter of 2012 to $2.2 billion, and decreased 4.0 percent in the first six months of 2012 to $4.1 billion. These changes include increases of 2.0 percent for both the second quarter and first six months of 2012 due to the increased French excise tax. These changes also include unfavorable currency exchange rate decreases of 8.5 percent and 6.5 percent for the second quarter and first six months of 2012, respectively.
Net sales per case decreased 2.5 percent in the second quarter of 2012 versus the second quarter of 2011, and decreased 0.5 percent in the first six months of 2012 versus the first six months of 2011. 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):
 
 
Second Quarter 2012
 
First Six Months 2012
Changes in net sales per case:
 
 
 
Bottle and can net price per case (excluding French excise tax increase)
4.0
 %
 
3.0
 %
French excise tax increase
2.5

 
2.5

Bottle and can currency exchange rate changes
(9.0
)
 
(6.5
)
Post-mix, non-trade, and other

 
0.5

Change in net sales per case
(2.5
)%
 
(0.5
)%

21

COCA-COLA ENTERPRISES, INC.


During the second quarter of 2012, our bottle and can sales accounted for approximately 95 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 grew 4.0 percent during the second quarter of 2012, reflecting increased rates and a slight benefit from product mix.

During the second quarter and first six months of 2012, our net sales included approximately $50 million and $90 million, respectively, in incremental revenue as a result of the cost associated with the increased French excise tax on beverages with added sweetener (nutritive and non-nutritive), substantially all of which was borne by our customers in the form of higher prices. We estimate that the full year 2012 impact on our net sales will be approximately $180 million.
Volume
The following table summarizes the year-over-year change in our bottle and can volume for the periods presented (selling days were the same in the second quarter and first six months of 2012 and 2011; rounded to the nearest 0.5 percent):
  
 
Second Quarter 2012
 
First Six Months 2012
Change in volume
(6.0
)%
 
(3.5
)%
 
Brands
The following table summarizes our bottle and can volume results by major brand category for the periods presented (selling days were the same in the second quarter and first six months of 2012 and 2011; change is versus same period from prior year; rounded to the nearest 0.5 percent):
 
 
Second Quarter
 
First Six Months
 
Change
 
2012 Percent of Total
 
2011 Percent of Total
 
Change    
 
2012 Percent of Total
 
2011 Percent of Total
Coca-Cola trademark
(6.0
)%
 
68.0
%
 
68.5
%
 
(3.0
)%
 
69.0
%
 
68.5
%
Sparkling flavors and energy
(5.0
)
 
18.5

 
18.0

 
(3.5
)
 
17.5

 
17.5

Juices, isotonics, and other
(6.5
)
 
10.5

 
10.5

 
(7.0
)
 
10.5

 
11.0

Water
(3.0
)
 
3.0

 
3.0

 
(1.0
)
 
3.0

 
3.0

Total
(6.0
)%
 
100.0
%
 
100.0
%
 
(3.5
)%
 
100.0
%
 
100.0
%

During the second quarter of 2012, volume declined 6.0 percent versus the second quarter of 2011. This decline reflects the impact of unfavorable weather conditions, the increased French excise tax, ongoing general macroeconomic softness, and prior year growth hurdles. Regarding the weather-related pressures, the second quarter of 2012 was one of the wettest in recorded history in Great Britain, while the April 2012 rainfall in France significantly exceeded the average for the month. Despite these challenges, we continued to execute our operating plans in the marketplace and did experience sequential volume improvement late in the quarter.

Our volume performance during the second quarter of 2012 included a decline in sales of both sparkling beverage brands and still beverages of 6.0 percent and 5.5 percent, respectively. Volume in continental Europe (including our Norway and Sweden territories) declined 7.0 percent year-over-year. Great Britain also experienced an overall volume decline during the second quarter of 2012 of 4.5 percent. Both our continental Europe and Great Britain territories experienced increased challenges as a result of prior year growth hurdles, particularly in still beverage brands such as Capri-Sun and Chaudfontaine mineral water, and sparkling beverage brands such as Sprite and Fanta. These decreases were partially offset by a significant volume increase in our energy drink portfolio, principally Monster, and the continued growth of Coca-Cola Zero, which grew across our territories. During the remainder of 2012, we will continue our portfolio innovation with the launch of products with new sweetener alternatives, such as stevia, the expansion of our Fanta line with new flavors such as Mango and Passionfruit, and the re-launch of our Nestea brand. In addition to these product innovations, we also have several packaging initiatives planned for 2012 including a new 375 milliliter bottle and a 250 milliliter can. These product and packaging initiatives are designed to create new price points and to help meet our expanding consumer demands.

22

COCA-COLA ENTERPRISES, INC.


Our Coca-Cola trademark sparkling brand volume declined 6.0 percent in the second quarter of 2012 as compared to the second quarter of 2011. This decrease was driven by a decline in the sales of Diet Coke/Coca-Cola light, offset partially by the continued growth of Coca-Cola Zero. Sparkling flavors and energy volume declined 5.0 percent in the second quarter of 2012, reflecting volume declines in sparkling flavor brands including Sprite, Fanta, and Schweppes, offset partially by a greater than 15.0 percent volume increase in energy drink sales, led by Monster. Juices, isotonics, and other volume decreased 6.5 percent in the second quarter of 2012, reflecting declines in the sale of our other juice brands including Capri-Sun, Minute Maid, and Oasis. Sales volume of our water brands decreased 3.0 percent in the second quarter of 2012, reflecting a decline in sales of Chaudfontaine, offset partially by an increase in sales of Abbey Well Mineral Water in Great Britain.
Consumption
The following table summarizes our volume by consumption type for the periods presented (selling days were the same in the second quarter and first six months of 2012 and 2011; change is versus same period from prior year; rounded to the nearest 0.5 percent):
 
 
Second Quarter
 
First Six Months
 
Change
 
2012 Percent of Total
 
2011 Percent of Total
 
Change
 
2012 Percent of Total
 
2011 Percent of Total
Multi-serve(A)
(5.0
)%
 
58.0
%
 
57.5
%
 
(3.5
)%
 
57.5
%
 
57.5
%
Single-serve(B)
(7.0
)
 
42.0

 
42.5

 
(3.0
)
 
42.5

 
42.5

Total
(6.0
)%
 
100.0
%
 
100.0
%
 
(3.5
)%
 
100.0
%
 
100.0
%
___________________________
(A) 
Multi-serve packages include containers that are typically greater than one liter, purchased by consumers in multi-packs in take-home channels at ambient temperatures, and are intended for consumption in the future.
(B) 
Single-serve packages include containers that are typically one liter or less, purchased by consumers as a single bottle or can in cold drink channels at chilled temperatures, and are intended for consumption shortly after purchase.
Packages
The following table summarizes our volume by packaging category for the periods presented (selling days were the same in the second quarter and first six months of 2012 and 2011; change is versus same period from prior year; rounded to the nearest 0.5 percent):
 
 
Second Quarter
 
First Six Months
 
Change    
 
2012 Percent of Total
 
2011 Percent of Total
 
Change    
 
2012 Percent of Total
 
2011 Percent of Total
PET (plastic)
(5.0
)%
 
44.5
%
 
44.0
%
 
(4.5
)%
 
44.0
%
 
44.5
%
Cans
(7.5
)
 
40.0

 
40.5

 
(2.5
)
 
40.5

 
40.0

Glass and other
(4.0
)
 
15.5

 
15.5

 
(3.0
)
 
15.5

 
15.5

Total
(6.0
)%
 
100.0
%
 
100.0
%
 
(3.5
)%
 
100.0
%
 
100.0
%
Cost of Sales
Cost of sales decreased 7.5 percent in the second quarter of 2012 to $1.4 billion and decreased 3.0 percent in the first six months of 2012 to $2.6 billion. These changes include increases of 3.5 percent for both the second quarter and first six months of 2012 due to the implementation of the additional French excise tax beginning January 1, 2012. These changes also include decreases of 8.5 percent and 6.5 percent during the second quarter and first six months of 2012, respectively, due to currency exchange rate changes. The following table summarizes the significant components of the year-over-year change in our cost of sales per case for the periods presented (rounded to the nearest 0.5 percent and based on wholesale physical case volume):
 
 
Second Quarter 2012
 
First Six Months 2012
Changes in cost of sales per case:
 
 
 
Bottle and can ingredient and packaging costs (excluding French excise tax increase)
3.0
 %
 
2.5
 %
French excise tax increase
3.5

 
3.5

Bottle and can currency exchange rate changes
(9.0
)
 
(6.5
)
Post mix, non-trade, and other

 
0.5

Change in cost of sales per case
(2.5
)%
 
 %

23

COCA-COLA ENTERPRISES, INC.


Our bottle and can ingredient and packaging costs during the second quarter of 2012 reflect the benefit of a moderating cost environment, particularly for PET (plastic) due to lower oil prices. Overall, though, the cost environment remains volatile, and we continue to seek opportunities through the use of supplier agreements and hedging instruments to mitigate our exposure to commodity volatility.

During the second quarter and first six months of 2012, our cost of sales included approximately $50 million and $90 million, respectively, in incremental costs as a result of the increased French excise tax on beverages with added sweetener (nutritive and non-nutritive). We estimate that the full year 2012 impact on our cost of sales will be approximately $180 million.
Selling, Delivery, and Administrative Expenses
Selling, delivery, and administrative (SD&A) expenses decreased $29 million, or 5.5 percent, in the second quarter of 2012 to $506 million from $535 million in the second quarter of 2011, and decreased $41 million, or 4.0 percent, in the first six months of 2012 to $1.0 billion. These changes include currency exchange rate decreases of 7.5 percent and 5.0 percent for the second quarter and first six months of 2012, respectively. The following table summarizes the significant components of the year-over-year change in our SD&A expenses for the periods presented (in millions; percentages rounded to the nearest 0.5 percent):
 
 
Second Quarter 2012
 
First Six Months 2012
 
Amount
 
Change
Percent
of Total
 
Amount
 
Change
Percent
of Total
Changes in SD&A expenses:
 
 
 
 
 
 
 
General and administrative expenses
$
(6
)
 
(1.0
)%
 
$
(9
)
 
(1.0
)%
Selling and marketing expenses
(1
)
 

 
(1
)
 

Delivery and merchandising expenses
1

 

 
5

 
0.5

Warehousing expenses
4

 
0.5

 
10

 
1.0

Depreciation and amortization expenses
3

 
0.5

 
3

 
0.5

Net mark-to-market gains related to non-designated commodity hedges
2

 
0.5

 
5

 
0.5

Net impact of restructuring charges
13

 
2.5