When used in this report, the terms "The Coca-Cola Company ," "Company," "we," "us" and "our" meanThe Coca-Cola Company and all entities included in our condensed consolidated financial statements. During the six months endedJuly 2, 2021 , the effects of the COVID-19 pandemic and the related actions by governments around the world to attempt to contain the spread of the virus continued to impact our business globally. In particular, the outbreak and preventive measures taken to contain COVID-19, including the spread of new variants, negatively impacted our unit case volume and our price, product and geographic mix, primarily due to unfavorable channel and product mix as consumer demand has shifted to more at-home consumption versus away-from-home consumption. However, the timing and number of people receiving vaccinations, the governmental actions to reopen certain economies around the world, and the substance and pace of the post-pandemic economic recovery are favorably impacting our business when compared to the prior year results. While uncertainty caused by the COVID-19 pandemic remains, including the spread of new variants of the virus, we expect to continue to see improvements in our business as vaccines become more widely available around the world and global vaccination rates increase. During the COVID-19 pandemic and related business disruption, the Company's priorities are ensuring the health and safety of our employees; supporting and making a difference in the communities we serve; keeping our brands in supply and maintaining the quality and safety of our products; serving our customers across all channels as they adapt to the shifting demands of consumers during the pandemic; and positioning ourselves to emerge stronger from the pandemic. Throughout the COVID-19 pandemic, business continuity and adapting to the needs of our customers have been critical. We have developed systemwide knowledge-sharing routines and processes, which include the management of any supply chain challenges. There is a high degree of variation in COVID-19 vaccination rates and government-imposed mobility restrictions in the countries and territories where our products are sold. However, as of the date of this filing, there has been no material impact, and we do not foresee a material impact, on our and our bottling partners' ability to manufacture or distribute our products. Together with our bottlers and customers, we are working to ensure adequate inventory levels and partnering to forecast demand given changing conditions related to vaccination rates, infection levels and any government-imposed mobility restrictions. In addition, we continue to increase investments in e-commerce to support retailer and meal delivery services. Although we have been experiencing significant challenges as a result of the COVID-19 pandemic, we are not losing sight of long-term opportunities for our business. We believe that we will emerge from this situation as a better and stronger company. We are leveraging the pandemic as a catalyst to accelerate our strategy by focusing on the following: prioritizing stronger global brands across various consumer needs while, at the same time, doing a better job of nurturing and growing regional and scaled local brands; establishing a more disciplined innovation framework and increasing marketing effectiveness and efficiency; strengthening our revenue growth management capabilities; enhancing our system collaboration and capturing supply chain efficiencies; and investing in new capabilities and evolving our organization to support the accelerated strategy. InAugust 2020 , the Company announced strategic steps to transform our organizational structure in an effort to better enable us to capture growth in the fast-changing marketplace. The Company is building a networked global organization designed to combine the power of scale with the deep knowledge required to win locally. These organizational changes required a reallocation of resources, along with both voluntary and involuntary reductions of associates. Refer to Note 12 of Notes to Condensed Consolidated Financial Statements for additional information about our strategic realignment initiatives. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Recoverability of Current and Noncurrent Assets Our Company faces many uncertainties and risks related to various economic, political and regulatory environments in the countries in which we operate, particularly in developing and emerging markets. Refer to the heading "Item 1A. Risk Factors" in Part I and "Our Business - Challenges and Risks" in Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as well as "Item 1A. Risk Factors" in Part II of our Quarterly Report on Form 10-Q for the quarter endedApril 2, 2021 . As a result, management must make numerous assumptions, which involve a significant amount of judgment, when completing recoverability and impairment tests of current and noncurrent assets in various regions around the world. We perform recoverability and impairment tests of current and noncurrent assets in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). For certain assets, recoverability and/or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable. For other assets, impairment tests are required at least annually, or more frequently if events or circumstances indicate that an asset may be impaired. The assessment of recoverability and the performance of impairment tests of current and noncurrent assets involve critical accounting estimates. These estimates require significant management judgment, include inherent uncertainties and are often interdependent; therefore, they do not change in isolation. Factors that management must estimate include, among others, the economic lives of the assets, sales volume, pricing, royalty rates, costs of raw materials, delivery costs, inflation, cost of capital, 36 -------------------------------------------------------------------------------- marketing spending, foreign currency exchange rates, tax rates, capital spending, proceeds from the sale of assets and customers' financial condition. These factors are even more difficult to estimate as a result of uncertainties associated with the scope, severity and duration of the global COVID-19 pandemic and any resurgences of the pandemic including, but not limited to, the number of people contracting the virus; the impact of shelter-in-place and social distancing requirements; the impact of governmental actions across the globe to contain the virus; vaccine availability, rates of vaccination, and effectiveness of vaccines against existing and new variants of the virus; and the substance and pace of the post-pandemic economic recovery. The estimates we use when assessing the recoverability of assets are consistent with those we use in our internal planning. When performing impairment tests, we estimate the fair values of the assets using management's best assumptions, which we believe are consistent with those a market participant would use. The variability of these factors depends on a number of conditions, including uncertainties associated with the COVID-19 pandemic, and thus our accounting estimates may change from period to period. Our current estimates reflect our belief that COVID-19 will impact our business for the remainder of 2021, with the first half of the year likely to be more challenging than the second half. While uncertainty still exists, we expect to see continued improvements in our business as vaccines become more widely available, as global vaccination rates increase, and as consumers return to many of their previous work routines as well as socializing and traveling. The Company has certain intangible and other long-lived assets that are more dependent on cash flows generated in away-from-home channels and/or that generate cash flows in geographic areas that are more heavily impacted by the COVID-19 pandemic and are therefore more susceptible to impairment. In addition, intangible and other long-lived assets we acquired in recent transactions are naturally more susceptible to impairment, because they are recorded at fair value based on recent operating plans and macroeconomic conditions at the time of acquisition. If we had used other assumptions and estimates when tests of these assets were performed, impairment charges could have resulted. Furthermore, if management uses different assumptions or if different conditions exist in future periods, future impairment charges could result. The total future impairment charges we may be required to record could be material. Our equity method investees also perform such recoverability and/or impairment tests. If an impairment charge is recorded by one of our equity method investees, the Company records its proportionate share of such charge as a reduction of equity income (loss) - net in our consolidated statement of income. However, the actual amount we record with respect to our proportionate share of such charge may be impacted by items such as basis differences, deferred taxes and deferred gains. OPERATIONS REVIEW Sales of our nonalcoholic ready-to-drink beverages are somewhat seasonal, with the second and third calendar quarters typically accounting for the highest sales volumes. The volume of sales in the beverage business may be affected by weather conditions. Structural Changes, Acquired Brands and Newly Licensed Brands In order to continually improve upon the Company's operating performance, from time to time, we engage in buying and selling ownership interests in bottling partners and other manufacturing operations. In addition, we also acquire brands and their related operations or enter into license agreements for certain brands to supplement our beverage offerings. These items impact our operating results and certain key metrics used by management in assessing the Company's performance. Unit case volume growth is a metric used by management to evaluate the Company's performance because it measures demand for our products at the consumer level. The Company's unit case volume represents the number of unit cases (or unit case equivalents) of Company beverage products directly or indirectly sold by the Company and its bottling partners to customers or consumers and, therefore, reflects unit case volume for both consolidated and unconsolidated bottlers. Refer to the heading "Beverage Volume" below. Concentrate sales volume represents the amount of concentrates, syrups, source waters and powders/minerals (in all instances expressed in unit case equivalents) sold by, or used in finished products sold by, the Company to its bottling partners or other customers. ForCosta Limited ("Costa") non-ready-to-drink beverage products, concentrate sales volume represents the amount of coffee (in all instances expressed in unit case equivalents) sold by the Company to customers or consumers. Refer to the heading "Beverage Volume" below. When we analyze our net operating revenues we generally consider the following factors: (1) volume growth (concentrate sales volume or unit case volume, as applicable); (2) changes in price, product and geographic mix; (3) foreign currency fluctuations; and (4) acquisitions and divestitures (including structural changes defined below), as applicable. Refer to the heading "Net Operating Revenues" below. The Company sells concentrates and syrups to both consolidated and unconsolidated bottling partners. The ownership structure of our bottling partners impacts the timing of recognizing concentrate revenue and concentrate sales volume. When we sell concentrates or syrups to our consolidated bottling partners, we do not recognize the concentrate revenue or concentrate sales volume until the bottling partner has sold finished products manufactured from the concentrates or syrups to a third party. When we sell concentrates or syrups to our unconsolidated bottling partners, we recognize the concentrate revenue and concentrate sales volume when the concentrates or syrups are sold to the bottling partner. The subsequent sale of the finished products manufactured from the concentrates or syrups to a third party does not impact the 37 -------------------------------------------------------------------------------- timing of recognizing the concentrate revenue or concentrate sales volume. When we account for an unconsolidated bottling partner as an equity method investment, we eliminate the intercompany profit related to these transactions to the extent of our ownership interest until the equity method investee has sold finished products manufactured from the concentrates or syrups to a third party. We typically report unit case volume when finished products manufactured from the concentrates or syrups are sold to a third party, regardless of our ownership interest in the bottling partner, if any. We generally refer to acquisitions and divestitures of bottling operations as "structural changes," which are a component of acquisitions and divestitures. Typically, structural changes do not impact the Company's unit case volume or concentrate sales volume on a consolidated basis or at the geographic operating segment level. We recognize unit case volume for all sales of Company beverage products, regardless of our ownership interest in the bottling partner, if any. However, the unit case volume reported by our Bottling Investments operating segment is generally impacted by structural changes because it only includes the unit case volume of our consolidated bottling operations. "Acquired brands" refers to brands acquired during the past 12 months. Typically, the Company has not reported unit case volume or recognized concentrate sales volume related to an acquired brand in periods prior to the closing of a transaction. Therefore, the unit case volume and concentrate sales volume related to an acquired brand are incremental to prior year volume. We generally do not consider the acquisition of a brand to be a structural change. "Licensed brands" refers to brands not owned by the Company but for which we hold certain rights, generally including, but not limited to, distribution rights, and from which we derive an economic benefit when the products are sold. Typically, the Company has not reported unit case volume or recognized concentrate sales volume related to a licensed brand in periods prior to the beginning of the term of a license agreement. Therefore, in the year a license agreement is entered into, the unit case volume and concentrate sales volume related to a licensed brand are incremental to prior year volume. We generally do not consider the licensing of a brand to be a structural change. In 2020, the Company discontinued ourOdwalla juice business. The impact of discontinuing ourOdwalla juice business has been included in acquisitions and divestitures in our analysis of net operating revenues on a consolidated basis as well as for theNorth America operating segment. Beverage Volume We measure the volume of Company beverage products sold in two ways: (1) unit cases of finished products and (2) concentrate sales. As used in this report, "unit case" means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings), with the exception of unit case equivalents for Costa non-ready-to-drink beverage products, which are primarily measured in number of transactions; and "unit case volume" means the number of unit cases (or unit case equivalents) of Company beverage products directly or indirectly sold by the Company and its bottling partners to customers or consumers. Unit case volume primarily consists of beverage products bearing Company trademarks. Also included in unit case volume are certain brands licensed to, or distributed by, our Company, and brands owned by Coca-Cola system bottlers for which our Company provides marketing support and from the sale of which we derive economic benefit. In addition, unit case volume includes sales by certain joint ventures in which the Company has an ownership interest. We believe unit case volume is one of the measures of the underlying strength ofthe Coca-Cola system because it measures trends at the consumer level. The unit case volume numbers used in this report are derived based on estimates received by the Company from its bottling partners and distributors. Concentrate sales volume represents the amount of concentrates, syrups, source waters and powders/minerals (in all instances expressed in unit case equivalents) sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers. For Costa non-ready-to-drink beverage products, concentrate sales volume represents the amount of coffee (in all instances expressed in unit case equivalents) sold by the Company to customers or consumers. Unit case volume and concentrate sales volume growth rates are not necessarily equal during any given period. Factors such as seasonality, bottlers' inventory practices, supply point changes, timing of price increases, new product introductions and changes in product mix can create differences between unit case volume and concentrate sales volume growth rates. In addition to these items, the impact of unit case volume from certain joint ventures in which the Company has an ownership interest, but to which the Company does not sell concentrates, syrups, source waters or powders/minerals, may give rise to differences between unit case volume and concentrate sales volume growth rates. 38 --------------------------------------------------------------------------------
Information about our volume growth worldwide and by operating segment is as follows:
Percent Change 2021 versus 2020
Three Months Ended Six Months Ended July 2, 2021 July 2, 2021 Unit Cases1,2,3 Concentrate Sales4 Unit Cases1,2,3 Concentrate Sales4 Worldwide 18 % 26 % 9 % 15 % Europe, Middle East & Africa 21 % 41 % 9 % 18 % Latin America 12 29 6 14 North America 17 16 5 8 Asia Pacific 16 15 13 17 Global Ventures 48 60 19 27 Bottling Investments 25 N/A 14 N/A 1 Bottling Investments operating segment data reflects unit case volume growth for consolidated bottlers only. 2Geographic and Global Ventures operating segment data reflects unit case volume growth for all bottlers, both consolidated and unconsolidated, and distributors in the applicable geographic areas.Global Ventures operating segment data also reflects unit case volume growth for Costa retail stores. 3 Unit case volume percent change is based on average daily sales. Unit case volume growth based on average daily sales is computed by comparing the average daily sales in each of the corresponding periods. Average daily sales are the unit cases sold during the period divided by the number of days in the period. 4 Concentrate sales volume represents the amount of concentrates, syrups, source waters and powders/minerals (in all instances expressed in unit case equivalents) sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers and is not based on average daily sales. For Costa non-ready-to-drink products, concentrate sales volume represents the amount of coffee (in all instances expressed in unit case equivalents) sold by the Company to customers or consumers and is not based on average daily sales. Each of our interim reporting periods, other than the fourth interim reporting period, ends on the Friday closest to the last day of the corresponding quarterly calendar period. As a result, the first quarter of 2021 had five additional days when compared to the first quarter of 2020, and the fourth quarter of 2021 will have six fewer days when compared to the fourth quarter of 2020. Unit Case Volume Although a significant portion of our Company's revenues is not based directly on unit case volume, we believe unit case volume is one of the measures of the underlying strength ofthe Coca-Cola system because it measures trends at the consumer level. Three Months EndedJuly 2, 2021 versus Three Months EndedJune 26, 2020 Unit case volume inEurope ,Middle East andAfrica increased 21 percent, which included 19 percent growth in Trademark Coca-Cola, 20 percent growth in sparkling flavors, 27 percent growth in hydration, sports, coffee and tea, and 32 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment reported growth in unit case volume of 21 percent in theEurope operating unit, 22 percent in theAfrica operating unit and 20 percent in the Eurasia andMiddle East operating unit. Unit case volume inLatin America increased 12 percent, which included 8 percent growth in Trademark Coca-Cola, 19 percent growth in hydration, sports, coffee and tea, 17 percent growth in sparkling flavors and 19 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment's volume performance included 17 percent growth inBrazil and 4 percent growth inMexico . Unit case volume inNorth America increased 17 percent, which included 28 percent growth in hydration, sports, coffee and tea, 24 percent growth in sparkling flavors, 8 percent growth in Trademark Coca-Cola and 17 percent growth in nutrition, juice, dairy and plant-based beverages. Unit case volume inAsia Pacific increased 16 percent, which included 19 percent growth in hydration, sports, coffee and tea, 15 percent growth in sparkling flavors, 12 percent growth in Trademark Coca-Cola and 34 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment reported growth in unit case volume of 61 percent in theIndia andSouthwest Asia operating unit, 10 percent in theGreater China andMongolia operating unit, 12 percent in theASEAN andSouth Pacific operating unit and 9 percent in theJapan andSouth Korea operating unit. Unit case volume forGlobal Ventures increased 48 percent, driven by 71 percent growth in hydration, sports, coffee and tea, 15 percent growth in nutrition, juice, dairy and plant-based beverages, and growth in energy drinks. Unit case volume for Bottling Investments increased 25 percent, which primarily reflects growth inIndia andSouth Africa . 39 -------------------------------------------------------------------------------- Six Months EndedJuly 2, 2021 versus Six Months EndedJune 26, 2020 Unit case volume inEurope ,Middle East andAfrica increased 9 percent, which included 11 percent growth in Trademark Coca-Cola, 10 percent growth in sparkling flavors, 17 percent growth in nutrition, juice, dairy and plant-based beverages, and even performance in hydration, sports, coffee and tea. The operating segment reported growth in unit case volume of 15 percent in the Eurasia andMiddle East operating unit, 11 percent in theAfrica operating unit and 6 percent in theEurope operating unit. Unit case volume inLatin America increased 6 percent, which included 7 percent growth in Trademark Coca-Cola, 7 percent growth in sparkling flavors, 4 percent growth in hydration, sports, coffee and tea, and 8 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment's volume performance included 8 percent growth inBrazil and 2 percent growth inMexico . Unit case volume inNorth America increased 5 percent, which included 6 percent growth in hydration, sports, coffee and tea, 8 percent growth in sparkling flavors, 2 percent growth in Trademark Coca-Cola and 6 percent growth in nutrition, juice, dairy and plant-based beverages. Unit case volume inAsia Pacific increased 13 percent, which included 13 percent growth in Trademark Coca-Cola, 13 percent growth in sparkling flavors, 8 percent growth in hydration, sports, coffee and tea, and 25 percent growth in nutrition, juice, dairy and plant-based beverages. The operating segment reported growth in unit case volume of 14 percent in theGreater China andMongolia operating unit, 40 percent in theIndia andSouthwest Asia operating unit, 4 percent in theASEAN andSouth Pacific operating unit and 2 percent in theJapan andSouth Korea operating unit. Unit case volume forGlobal Ventures increased 19 percent, driven by 10 percent growth in hydration, sports, coffee and tea, 2 percent growth in nutrition, juice, dairy and plant-based beverages, and growth in energy drinks. Unit case volume for Bottling Investments increased 14 percent, which primarily reflects growth inIndia andSouth Africa . Concentrate Sales Volume During the three months endedJuly 2, 2021 , worldwide concentrate sales volume increased 26 percent and unit case volume increased 18 percent compared to the three months endedJune 26, 2020 . During the six months endedJuly 2, 2021 , worldwide concentrate sales volume increased 15 percent and unit case volume increased 9 percent compared to the six months endedJune 26, 2020 . Concentrate sales volume growth is calculated based on the amount of concentrate sold during the reporting periods, which is impacted by the number of days. Conversely, unit case volume growth is calculated based on average daily sales, which is not impacted by the number of days in the reporting periods. The first quarter of 2021 had five additional days when compared to the first quarter of 2020, which contributed to the differences between concentrate sales volume and unit case volume growth rates on a consolidated basis and for the individual operating segments during the six months endedJuly 2, 2021 . In addition, the differences between concentrate sales volume and unit case volume growth rates during the three and six months endedJuly 2, 2021 were also impacted by the timing of concentrate shipments, as bottlers adjusted inventory levels in the prior year due to COVID-19 uncertainty. We expect the differences between concentrate sales volume and unit case sales volume growth rates to reduce over the remainder of the year primarily as a result of the fourth quarter of 2021 having six fewer days when compared to the fourth quarter of 2020. 40 -------------------------------------------------------------------------------- Net Operating Revenues Three Months EndedJuly 2, 2021 versus Three Months EndedJune 26, 2020 During the three months endedJuly 2, 2021 , net operating revenues were$10,129 million , compared to$7,150 million during the three months endedJune 26, 2020 , an increase of$2,979 million , or 42 percent. The following table illustrates, on a percentage basis, the estimated impact of the factors resulting in the increase (decrease) in net operating revenues on a consolidated basis and for each of our operating segments:
Percent Change 2021 versus 2020
Price,
Product & Foreign Currency Acquisitions &
Volume1 Geographic Mix Fluctuations Divestitures2 Total Consolidated 26 % 11 % 5 % - % 42 % Europe, Middle East & Africa 41 % 20 % 6 % - % 67 % Latin America 29 9 3 - 41 North America 16 12 1 (1) 28 Asia Pacific 15 6 6 - 27 Global Ventures 60 57 23 - 139 Bottling Investments 25 3 9 - 38 Note: Certain rows may not add due to rounding. 1 Represents the percent change in net operating revenues attributable to the increase (decrease) in concentrate sales volume for our geographic operating segments and ourGlobal Ventures operating segment (expressed in unit case equivalents) after considering the impact of acquisitions and divestitures. For our Bottling Investments operating segment, this represents the percent change in net operating revenues attributable to the increase (decrease) in unit case volume computed by comparing the total sales (rather than the average daily sales) in each of the corresponding periods after considering the impact of structural changes, if any. Our Bottling Investments operating segment data reflects unit case volume growth for consolidated bottlers only after considering the impact of structural changes, if any. Refer to the heading "Beverage Volume" above. 2 Includes structural changes, if any. Refer to the heading "Structural Changes, Acquired Brands and Newly Licensed Brands" above. Refer to the heading "Beverage Volume" above for additional information related to changes in our unit case and concentrate sales volumes. "Price, product and geographic mix" refers to the change in net operating revenues caused by factors such as price changes, the mix of products and packages sold, and the mix of channels and geographic territories where the sales occurred. The impact of price, product and geographic mix is calculated by subtracting the change in net operating revenues resulting from volume increases or decreases, changes in foreign currency exchange rates, and acquisitions and divestitures from the total change in net operating revenues. Management believes that providing investors with price, product and geographic mix enhances their understanding about the combined impact that the following items had on the Company's net operating revenues: (1) pricing actions taken by the Company and, where applicable, our bottling partners; (2) changes in the mix of products and packages sold; (3) changes in the mix of channels where products were sold; and (4) changes in the mix of geographic territories where products were sold. Management uses this measure in making financial, operating and planning decisions and in evaluating the Company's performance. Price, product and geographic mix had an 11 percent favorable impact on our consolidated net operating revenues. Price, product and geographic mix was impacted by a variety of factors and events including, but not limited to, the following: •Europe,Middle East andAfrica - favorable channel and package mix, partially offset by unfavorable geographic mix; •Latin America - favorable pricing initiatives, including inflationary pricing inArgentina , along with favorable channel and package mix; •North America - favorable channel and package mix; •Asia Pacific - favorable product, channel and package mix; •Global Ventures - favorable product and channel mix primarily due to the reopening of Costa retail stores; and •Bottling Investments - favorable price, category and package mix, partially offset by unfavorable geographic mix. The favorable channel and package mix for the three months endedJuly 2, 2021 in all applicable operating segments was primarily a result of the gradual reopening of away-from-home channels in many markets in the current year and the impact of shelter-in-place and social distancing requirements in the prior year. 41 -------------------------------------------------------------------------------- Fluctuations in foreign currency exchange rates increased our consolidated net operating revenues by 5 percent. This favorable impact was primarily due to a weakerU.S. dollar compared to certain foreign currencies, including the South African rand, British pound sterling, euro, Mexican peso, Chinese yuan and Philippine peso, which had a favorable impact on ourEurope ,Middle East andAfrica ,Latin America ,Asia Pacific ,Global Ventures and Bottling Investments operating segments. The favorable impact of a weakerU.S. dollar compared to the currencies listed above was partially offset by the impact of a strongerU.S. dollar compared to certain other foreign currencies, including the Argentine peso and Turkish lira, which had an unfavorable impact on ourLatin America andEurope ,Middle East andAfrica operating segments. Refer to the heading "Liquidity, Capital Resources and Financial Position - Foreign Exchange" below. "Acquisitions and divestitures" generally refers to acquisitions and divestitures of brands or businesses, some of which the Company considers to be structural changes. The impact of acquisitions and divestitures is the difference between the change in net operating revenues and the change in what our net operating revenues would have been if we removed the net operating revenues associated with an acquisition or divestiture from either the current year or the prior year, as applicable. Management believes that quantifying the impact that acquisitions and divestitures had on the Company's net operating revenues provides investors with useful information to enhance their understanding of the Company's net operating revenue performance by improving their ability to compare our period-to-period results. Management considers the impact of acquisitions and divestitures when evaluating the Company's performance. Refer to the heading "Structural Changes, Acquired Brands and Newly Licensed Brands" above for additional information related to acquisitions and divestitures. Six Months EndedJuly 2, 2021 versus Six Months EndedJune 26, 2020 During the six months endedJuly 2, 2021 , net operating revenues were$19,149 million , compared to$15,751 million during the six months endedJune 26, 2020 , an increase of$3,398 million , or 22 percent. The following table illustrates, on a percentage basis, the estimated impact of the factors resulting in the increase (decrease) in net operating revenues on a consolidated basis and for each of our operating segments:
Percent Change 2021 versus 2020
Price,
Product & Foreign Currency Acquisitions &
Volume1 Geographic Mix Fluctuations Divestitures2 Total Consolidated 15 % 5 % 2 % - % 22 % Europe, Middle East & Africa 18 % 3 % 3 % - % 24 % Latin America 14 7 (5) - 17 North America 8 8 - (1) 15 Asia Pacific 17 2 6 - 26 Global Ventures 27 9 11 - 47 Bottling Investments 18 4 3 - 24 Note: Certain rows may not add due to rounding. 1 Represents the percent change in net operating revenues attributable to the increase (decrease) in concentrate sales volume for our geographic operating segments and ourGlobal Ventures operating segment (expressed in unit case equivalents) after considering the impact of acquisitions and divestitures. For our Bottling Investments operating segment, this represents the percent change in net operating revenues attributable to the increase (decrease) in unit case volume computed by comparing the total sales (rather than the average daily sales) in each of the corresponding periods after considering the impact of structural changes, if any. Our Bottling Investments operating segment data reflects unit case volume growth for consolidated bottlers only after considering the impact of structural changes, if any. Refer to the heading "Beverage Volume" above. 2 Includes structural changes, if any. Refer to the heading "Structural Changes, Acquired Brands and Newly Licensed Brands" above. Refer to the heading "Beverage Volume" above for additional information related to changes in our unit case and concentrate sales volumes. Price, product and geographic mix had a 5 percent favorable impact on our consolidated net operating revenues. Price, product and geographic mix was impacted by a variety of factors and events including, but not limited to, the following: •Europe,Middle East andAfrica - favorable channel and package mix, partially offset by unfavorable geographic mix; •Latin America - favorable pricing initiatives, including inflationary pricing inArgentina , along with favorable channel and package mix; •North America - favorable channel and package mix; •Asia Pacific - favorable product, channel and package mix, partially offset by unfavorable geographic mix; 42 -------------------------------------------------------------------------------- •Global Ventures - favorable channel mix primarily due to the reopening of Costa retail stores, partially offset by unfavorable product mix; and •Bottling Investments - favorable price, category and package mix, partially offset by unfavorable geographic mix. The favorable channel and package mix for the six months endedJuly 2, 2021 in all applicable operating segments was primarily a result of the gradual reopening of away-from-home channels in many markets in the current year and the impact of shelter-in-place and social distancing requirements in the prior year. Fluctuations in foreign currency exchange rates increased our consolidated net operating revenues by 2 percent. This favorable impact was primarily due to a weakerU.S. dollar compared to certain foreign currencies, including the British pound sterling, euro, South African rand, Mexican peso, Chinese yuan and Philippine peso, which had a favorable impact on ourEurope ,Middle East andAfrica ,Latin America ,Asia Pacific ,Global Ventures and Bottling Investments operating segments. The favorable impact of a weakerU.S. dollar compared to the currencies listed above was partially offset by the impact of a strongerU.S. dollar compared to certain other foreign currencies, including the Argentine peso, Brazilian real and Turkish lira, which had an unfavorable impact on ourLatin America andEurope ,Middle East andAfrica operating segments. Refer to the heading "Liquidity, Capital Resources and Financial Position - Foreign Exchange" below. Net operating revenue growth rates are impacted by sales volume; price, product and geographic mix; foreign currency fluctuations; and acquisitions and divestitures. The size and timing of acquisitions and divestitures are not consistent from period to period. Based on current spot rates and our hedging coverage in place, we expect foreign currency fluctuations will have a slightly favorable impact on our full year 2021 net operating revenues. Gross Profit Margin Gross profit margin is a ratio calculated by dividing gross profit by net operating revenues. Management believes gross profit margin provides investors with useful information related to the profitability of our business prior to considering all of the operating costs incurred. Management uses this measure in making financial, operating and planning decisions and in evaluating the Company's performance. Our gross profit margin increased to 62.6 percent for the three months endedJuly 2, 2021 , compared to 57.9 percent for the three months endedJune 26, 2020 . Our gross profit margin increased to 61.9 percent for the six months endedJuly 2, 2021 , compared to 59.5 percent for the six months endedJune 26, 2020 . These increases were primarily due to the impact of favorable channel and package mix as a result of the gradual reopening of away-from-home channels in the current year along with the impact of shelter-in-place and social distancing requirements in the prior year. Selling, General and Administrative Expenses The following table sets forth the components of selling, general and administrative expenses (in millions): Three Months Ended Six Months Ended July 2, June 26, July 2, June 26, 2021 2020 2021 2020 Stock-based compensation expense$ 90 $ 41 $ 148 $ 36 Advertising expenses 1,134 370 2,035 1,272 Selling and distribution expenses 600 569 1,218 1,267 Other operating expenses 1,193 1,003 2,285 2,056
Selling, general and administrative expenses
During the three and six months endedJuly 2, 2021 , selling, general and administrative expenses increased$1,034 million , or 52 percent, and increased$1,055 million , or 23 percent, respectively, versus the prior year comparable period. The increases were primarily due to increased marketing spending and an increase in short-term incentive and stock-based compensation expense. The increase in stock-based compensation expense in the current year was due to a more favorable outlook for our financial performance in the current year, which resulted in higher payout assumptions as compared to the prior year. During the three and six months endedJuly 2, 2021 , foreign currency exchange rate fluctuations increased selling, general and administrative expenses by 7 percent and 3 percent, respectively. The increase in selling and distribution expenses during the three months endedJuly 2, 2021 was primarily due to the continued reopening of Costa retail stores in theUnited Kingdom , the gradual recovery in away-from-home channels in certain markets, and foreign currency exchange rate fluctuations. The decrease in selling and distribution expenses during the six months endedJuly 2, 2021 included the increase during the three months endedJuly 2, 2021 , which was more than offset by the larger negative impact that the COVID-19 pandemic had on Costa retail stores in theUnited Kingdom and onNorth America away-from-home channels during the first quarter of the current year as compared to the first quarter of the prior year. 43 -------------------------------------------------------------------------------- As ofJuly 2, 2021 , we had$429 million of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under our plans, which we expect to recognize over a weighted-average period of 2.2 years as stock-based compensation expense. This expected cost does not include the impact of any future stock-based compensation awards. Other Operating Charges Other operating charges incurred by operating segment and Corporate were as follows (in millions): Three Months Ended Six Months Ended July 2, June 26, July 2, June 26, 2021 2020 2021 2020 Europe, Middle East & Africa$ 11 $ -$ 61 $ - Latin America - 10 11 10 North America 8 110 20 262 Asia Pacific - - 13 - Global Ventures - - - - Bottling Investments - 13 - 13 Corporate 290 40 328 90 Total$ 309 $ 173 $ 433 $ 375 During the three months endedJuly 2, 2021 , the Company recorded other operating charges of$309 million . These charges primarily consisted of$247 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife, LLC ("fairlife") acquisition,$29 million due to the Company's strategic realignment initiatives and$22 million related to the Company's productivity and reinvestment program. In addition, other operating charges included$7 million related to the restructuring of our manufacturing operations inthe United States and$4 million related to tax litigation expense. During the six months endedJuly 2, 2021 , the Company recorded other operating charges of$433 million . These charges primarily consisted of$251 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition,$122 million due to the Company's strategic realignment initiatives and$40 million related to the Company's productivity and reinvestment program. In addition, other operating charges included$13 million related to tax litigation expense and$7 million related to the restructuring of our manufacturing operations inthe United States . During the three months endedJune 26, 2020 , the Company recorded other operating charges of$173 million . These charges included an impairment charge of$55 million related to a trademark inNorth America , which was primarily driven by the impact of the COVID-19 pandemic, revised projections of future operating results and a change in brand focus in the Company's portfolio. Also included were charges of$35 million related to discontinuing theOdwalla juice business and an impairment charge of$8 million related to theOdwalla trademark. Other operating charges also included$22 million related to the Company's productivity and reinvestment program,$18 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition and$12 million related to the restructuring of our manufacturing operations inthe United States . During the six months endedJune 26, 2020 , the Company recorded other operating charges of$375 million . These charges primarily consisted of an impairment charge of$160 million related to theOdwalla trademark and charges of$35 million related to discontinuing theOdwalla juice business. These charges also included an impairment charge of$55 million related to a trademark inNorth America , which was primarily driven by the impact of the COVID-19 pandemic, revised projections of future operating results and a change in brand focus in the Company's portfolio. Other operating charges also included$61 million related to the Company's productivity and reinvestment program,$29 million related to the remeasurement of our contingent consideration liability to fair value in conjunction with the fairlife acquisition and$12 million related to the restructuring of our manufacturing operations inthe United States . Refer to Note 2 of Notes to Condensed Consolidated Financial Statements for additional information on the fairlife acquisition. Refer to Note 8 of Notes to Condensed Consolidated Financial Statements for additional information related to the tax litigation. Refer to Note 12 of Notes to Condensed Consolidated Financial Statements for additional information on the Company's strategic realignment initiatives and productivity and reinvestment program. Refer to Note 15 of Notes to Condensed Consolidated Financial Statements for additional information on the impairment charges. Refer to Note 16 of Notes to Condensed Consolidated Financial Statements for the impact these charges had on our operating segments and Corporate. 44 -------------------------------------------------------------------------------- Operating Income and Operating Margin Information about our operating income contribution by operating segment and Corporate on a percentage basis is as follows: Three Months Ended Six Months Ended July 2, June 26, July 2, June 26, 2021 2020 2021 2020 Europe, Middle East & Africa 37.9 % 36.1 % 34.2 % 38.4 % Latin America 22.5 25.4 21.4 23.9 North America 31.5 24.7 30.4 20.1 Asia Pacific 25.4 32.9 25.3 26.7 Global Ventures 2.5 (5.1) 1.8 (1.9) Bottling Investments 3.0 0.6 4.0 1.7 Corporate (22.8) (14.6) (17.1) (8.9) Total 100.0 % 100.0 % 100.0 % 100.0 % Operating margin is a ratio calculated by dividing operating income by net operating revenues. Management believes operating margin provides investors with useful information related to the profitability of our business after considering all of the operating costs incurred. Management uses this measure in making financial, operating and planning decisions and in evaluating the Company's performance. Information about our operating margin on a consolidated basis and by operating segment and Corporate is as follows: Three Months Ended Six Months Ended July 2, June 26, July 2, June 26, 2021 2020 2021 2020 Consolidated 29.8 % 27.7 % 30.0 % 27.7 % Europe, Middle East & Africa 60.9 % 63.0 % 58.8 % 61.8 % Latin America 63.5 66.8 62.2 61.9 North America 28.1 18.5 27.6 15.9 Asia Pacific 56.8 61.1 56.2 56.5 Global Ventures 10.6 (34.5) 7.9 (9.5) Bottling Investments 5.3 1.0 6.4 2.6 Corporate * * * * * Calculation is not meaningful. Three Months EndedJuly 2, 2021 versus Three Months EndedJune 26, 2020 During the three months endedJuly 2, 2021 , operating income was$3,016 million , compared to$1,981 million during the three months endedJune 26, 2020 , an increase of$1,035 million , or 52 percent. The increase was driven by concentrate sales volume growth of 26 percent, favorable channel and package mix, effective cost management, and a favorable foreign currency exchange rate impact, partially offset by increased short-term incentive and stock-based compensation expense, increased marketing spending, and higher other operating charges. During the three months endedJuly 2, 2021 , fluctuations in foreign currency exchange rates favorably impacted consolidated operating income by 5 percent due to a weakerU.S. dollar compared to certain foreign currencies, including the Mexican peso, Chinese yuan, Australian dollar and British pound sterling, which had a favorable impact on ourLatin America ,Asia Pacific ,Europe ,Middle East andAfrica , andGlobal Ventures operating segments. The favorable impact of a weakerU.S. dollar compared to the currencies listed above was partially offset by the impact of a strongerU.S. dollar compared to certain other foreign currencies, including the Argentine peso and Zimbabwean dollar, which had an unfavorable impact on ourLatin America andEurope ,Middle East andAfrica operating segments. Refer to the heading "Liquidity, Capital Resources and Financial Position - Foreign Exchange" below. The Company'sEurope ,Middle East andAfrica operating segment reported operating income of$1,142 million and$715 million for the three months endedJuly 2, 2021 andJune 26, 2020 , respectively. The increase in operating income was primarily driven by a 41 percent increase in concentrate sales volume, favorable channel and package mix, and a favorable foreign currency exchange rate impact of 5 percent, partially offset by increased marketing spending and higher other operating charges. 45 --------------------------------------------------------------------------------Latin America reported operating income of$678 million and$504 million for the three months endedJuly 2, 2021 andJune 26, 2020 , respectively. The increase in operating income was driven by concentrate sales volume growth of 29 percent; favorable price, channel and package mix; a favorable foreign currency exchange rate impact of 1 percent; and lower other operating charges, partially offset by increased marketing spending. Operating income forNorth America for the three months endedJuly 2, 2021 andJune 26, 2020 was$950 million and$489 million , respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 16 percent, favorable channel and package mix, a favorable foreign currency exchange rate impact of 1 percent, and lower other operating charges, partially offset by increased marketing spending.Asia Pacific's operating income for the three months endedJuly 2, 2021 andJune 26, 2020 was$766 million and$652 million , respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 15 percent; favorable product, channel and package mix; and a favorable foreign currency exchange rate impact of 7 percent, partially offset by increased marketing spending.Global Ventures' operating income for the three months endedJuly 2, 2021 was$75 million , while the operating segment's operating loss for the three months endedJune 26, 2020 was$102 million . The change in operating income was primarily driven by revenue growth as a result of the reopening of Costa retail stores in theUnited Kingdom and a favorable foreign currency exchange rate impact of 2 percent. Bottling Investments' operating income for the three months endedJuly 2, 2021 andJune 26, 2020 was$92 million and$12 million , respectively. The increase in operating income was driven by volume growth of 25 percent; favorable price, category and package mix; and lower other operating charges, partially offset by an unfavorable foreign currency exchange rate impact of 147 percent. Corporate's operating loss for the three months endedJuly 2, 2021 andJune 26, 2020 was$687 million and$289 million , respectively. Operating loss in 2021 increased primarily as a result of increased marketing spending, higher short-term incentive and stock-based compensation expense, and higher other operating charges. Six Months EndedJuly 2, 2021 versus Six Months EndedJune 26, 2020 During the six months endedJuly 2, 2021 , operating income was$5,738 million , compared to$4,361 million during the six months endedJune 26, 2020 , an increase of$1,377 million , or 32 percent. The increase was driven by concentrate sales volume growth of 15 percent, favorable channel and package mix, effective cost management, and a favorable foreign currency exchange rate impact, partially offset by increased short-term incentive and stock-based compensation expense, increased marketing spending and higher other operating charges. During the six months endedJuly 2, 2021 , fluctuations in foreign currency exchange rates favorably impacted consolidated operating income by 1 percent due to a weakerU.S. dollar compared to certain foreign currencies, including the Chinese yuan, Australian dollar, Mexican peso, euro and British pound sterling, which had a favorable impact on ourAsia Pacific ,Latin America ,Europe ,Middle East andAfrica , andGlobal Ventures operating segments. The favorable impact of a weakerU.S. dollar compared to the currencies listed above was partially offset by the impact of a strongerU.S. dollar compared to certain other foreign currencies, including the Brazilian real, Argentine peso and Turkish lira, which had an unfavorable impact on ourLatin America andEurope ,Middle East andAfrica operating segments. Refer to the heading "Liquidity, Capital Resources and Financial Position - Foreign Exchange" below. The Company'sEurope ,Middle East andAfrica operating segment reported operating income of$1,962 million and$1,675 million for the six months endedJuly 2, 2021 andJune 26, 2020 , respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 18 percent, favorable channel and package mix, and a favorable foreign currency exchange rate impact of 2 percent, partially offset by increased marketing spending and higher other operating charges.Latin America reported operating income of$1,230 million and$1,043 million for the six months endedJuly 2, 2021 andJune 26, 2020 , respectively. The increase in operating income was driven by concentrate sales volume growth of 14 percent and favorable price, channel and package mix, partially offset by increased marketing spending and an unfavorable foreign currency exchange rate impact of 5 percent. Operating income forNorth America for the six months endedJuly 2, 2021 andJune 26, 2020 was$1,742 million and$876 million , respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 8 percent, favorable channel and package mix, a favorable foreign currency exchange rate impact of 1 percent, effective cost management and lower other operating charges, partially offset by increased marketing spending.Asia Pacific's operating income for the six months endedJuly 2, 2021 andJune 26, 2020 was$1,452 million and$1,163 million , respectively. The increase in operating income was primarily driven by concentrate sales volume growth of 46 -------------------------------------------------------------------------------- 17 percent; favorable product, channel and package mix; and a favorable foreign currency exchange rate impact of 8 percent, partially offset by increased marketing spending and higher other operating charges.Global Ventures' operating income for the six months endedJuly 2, 2021 was$101 million , while the operating segment's operating loss for the six months endedJune 26, 2020 was$83 million . The change in operating income was primarily driven by revenue growth as a result of the reopening of Costa retail stores in theUnited Kingdom and a favorable foreign currency exchange rate impact of 4 percent. Bottling Investments' operating income for the six months endedJuly 2, 2021 andJune 26, 2020 was$233 million and$75 million , respectively. The increase in operating income was driven by volume growth of 18 percent; favorable price, category and package mix; and lower other operating charges, partially offset by an unfavorable foreign currency exchange rate impact of 42 percent. Corporate's operating loss for the six months endedJuly 2, 2021 andJune 26, 2020 was$982 million and$388 million , respectively. Operating loss in 2021 increased primarily as a result of higher short-term incentive and stock-based compensation expense, increased marketing spending and higher other operating charges. Based on current spot rates and our hedging coverage in place, we expect foreign currency fluctuations will have a slightly favorable impact on operating income through the end of the year. Interest Income During the three months endedJuly 2, 2021 , interest income was$71 million , compared to$100 million during the three months endedJune 26, 2020 , a decrease of$29 million , or 29 percent. During the six months endedJuly 2, 2021 , interest income was$137 million , compared to$212 million during the six months endedJune 26, 2020 , a decrease of$75 million , or 36 percent. These decreases were primarily driven by lower returns in certain of our international locations. Interest Expense During the three months endedJuly 2, 2021 , interest expense was$780 million , compared to$274 million during the three months endedJune 26, 2020 , an increase of$506 million , or 184 percent. During the six months endedJuly 2, 2021 , interest expense was$1,222 million , compared to$467 million during the six months endedJune 26, 2020 , an increase of$755 million , or 162 percent. The increases for the three and six months endedJuly 2, 2021 were primarily due to charges of$592 million and$650 million , respectively, associated with the extinguishment of long-term debt. The increases in interest expense were also driven by higher average long-term debt balances, partially offset by lower short-termU.S. interest rates and balances. Refer to Note 7 of Notes to Condensed Consolidated Financial Statements. Equity Income (Loss) - Net Three Months EndedJuly 2, 2021 versus Three Months EndedJune 26, 2020 During the three months endedJuly 2, 2021 , equity income was$402 million , compared to equity income of$176 million during the three months endedJune 26, 2020 , an increase of$226 million , or 128 percent. This increase primarily reflects the impact of more favorable operating results reported by most of our equity method investees in the current year, as prior year results were more negatively impacted by the COVID-19 pandemic, along with a favorable impact from fluctuations in foreign currency exchange rates. In addition, the Company recorded net charges of$60 million and$63 million in the line item equity income (loss) - net during the three months endedJuly 2, 2021 andJune 26, 2020 , respectively. These amounts represent the Company's proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees. Six Months EndedJuly 2, 2021 versus Six Months EndedJune 26, 2020 During the six months endedJuly 2, 2021 , equity income was$681 million , compared to equity income of$343 million during the six months endedJune 26, 2020 , an increase of$338 million , or 98 percent. This increase primarily reflects the impact of more favorable operating results reported by most of our equity method investees in the current year, as prior year results were more negatively impacted by the COVID-19 pandemic, along with a favorable foreign currency exchange rate impact. In addition, the Company recorded net charges of$23 million and$101 million in the line item equity income (loss) - net during the six months endedJuly 2, 2021 andJune 26, 2020 , respectively. These amounts represent the Company's proportionate share of significant operating and nonoperating items recorded by certain of our equity method investees. Other Income (Loss) - Net Three Months EndedJuly 2, 2021 versus Three Months EndedJune 26, 2020 Other income (loss) - net includes, among other things, dividend income; gains and losses related to the disposal of property, plant and equipment; gains and losses related to acquisitions and divestitures; non-service cost components of net periodic benefit cost (income) for pension and other postretirement benefit plans; other charges and credits related to pension and other 47 -------------------------------------------------------------------------------- postretirement benefit plans; realized and unrealized gains and losses on equity securities and trading debt securities; realized gains and losses on available-for-sale debt securities; other-than-temporary impairment charges; and net foreign currency exchange gains and losses. The foreign currency exchange gains and losses are primarily the result of the remeasurement of monetary assets and liabilities from certain currencies into functional currencies. The effects of the remeasurement of these assets and liabilities are partially offset by the impact of our economic hedging program for certain exposures on our consolidated balance sheet. Refer to Note 6 of Notes to Condensed Consolidated Financial Statements. During the three months endedJuly 2, 2021 , other income (loss) - net was income of$909 million . The Company recognized a net gain of$695 million related to the sale of our ownership interest in Coca-Cola Amatil Limited ("CCA"), an equity method investee, to Coca-Cola Europacific Partners plc ("CCEP"), also an equity method investee. Additionally, the Company recognized a net gain of$203 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. The Company also recorded pension benefit plan settlement charges of$29 million related to its strategic realignment initiatives. Other income (loss) - net also included income of$73 million related to the non-service cost components of net periodic benefit cost (income), dividend income of$29 million and net foreign currency exchange losses of$37 million . During the three months endedJune 26, 2020 , other income (loss) - net was income of$214 million . The Company recognized a net gain of$247 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. The Company also recorded an other-than-temporary impairment charge of$38 million related to one of our equity method investees inLatin America and a charge of$19 million related to asset write-offs associated with the restructuring of our manufacturing operations inthe United States . Other income (loss) - net also included income of$42 million related to the non-service cost components of net periodic benefit cost (income), dividend income of$35 million and net foreign currency exchange losses of$49 million . None of the other items included in other income (loss) - net for the three months endedJuly 2, 2021 andJune 26, 2020 was individually significant. Refer to Note 2 of Notes to Condensed Consolidated Financial Statements for additional information on the sale of our ownership interest in CCA. Refer to Note 4 of Notes to Condensed Consolidated Financial Statements for additional information on equity and debt securities. Refer to Note 12 of Notes to Condensed Consolidated Financial Statements for additional information on the strategic realignment initiatives. Refer to Note 13 of Notes to Condensed Consolidated Financial Statements for additional information on net periodic benefit cost (income). Refer to Note 15 of Notes to Condensed Consolidated Financial Statements for additional information on the impairment charge. Refer to Note 16 of Notes to Condensed Consolidated Financial Statements for the impact that certain of these items had on our operating segments and Corporate. Six Months EndedJuly 2, 2021 versus Six Months EndedJune 26, 2020 During the six months endedJuly 2, 2021 , other income (loss) - net was income of$1,047 million . The Company recognized a net gain of$695 million related to the sale of our ownership interest in CCA, an equity method investee, to CCEP, also an equity method investee. Additionally, the Company recognized a net gain of$336 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities. The Company also recorded pension benefit plan settlement charges of$83 million related to its strategic realignment initiatives. Other income (loss) - net also included income of$133 million related to the non-service cost components of net periodic benefit cost (income), dividend income of$39 million and net foreign currency exchange losses of$46 million . During the six months endedJune 26, 2020 , other income (loss) - net was income of$758 million . The Company recognized a gain of$902 million in conjunction with the fairlife acquisition, which resulted from the remeasurement of our previously held equity interest in fairlife to fair value, and a gain of$18 million related to the sale of a portion of our ownership interest in one of our equity method investments. These gains were partially offset by an other-than-temporary impairment charge of$38 million related to one of our equity method investees inLatin America , a charge of$19 million related to asset write-offs associated with the restructuring of our manufacturing operations inthe United States , a net loss of$144 million related to realized and unrealized gains and losses on equity securities and trading debt securities as well as realized gains and losses on available-for-sale debt securities, and a net loss of$55 million related to economic hedging activities. Other income (loss) - net also included income of$85 million related to the non-service cost components of net periodic benefit cost (income), dividend income of$42 million and net foreign currency exchange losses of$33 million . None of the other items included in other income (loss) - net for the six months endedJuly 2, 2021 andJune 26, 2020 was individually significant. Refer to Note 2 of Notes to Condensed Consolidated Financial Statements for additional information on the sale of our ownership interest in CCA and the fairlife acquisition. Refer to Note 4 of Notes to Condensed Consolidated Financial Statements for additional information on equity and debt securities. Refer to Note 6 of Notes to Condensed Consolidated Financial Statements for additional information on economic hedging activities. Refer to Note 12 of Notes to Condensed Consolidated Financial Statements for additional information on the strategic realignment initiatives. Refer to 48 -------------------------------------------------------------------------------- Note 13 of Notes to Condensed Consolidated Financial Statements for additional information on net periodic benefit cost (income). Refer to Note 15 of Notes to Condensed Consolidated Financial Statements for additional information on the impairment charge. Refer to Note 16 of Notes to Condensed Consolidated Financial Statements for the impact that certain of these items had on our operating segments and Corporate. Income Taxes The Company recorded income taxes of$994 million (27.5 percent effective tax rate) and$438 million (19.9 percent effective tax rate) during the three months endedJuly 2, 2021 andJune 26, 2020 , respectively. The Company recorded income taxes of$1,502 million (23.5 percent effective tax rate) and$653 million (12.5 percent effective tax rate) during the six months endedJuly 2, 2021 andJune 26, 2020 , respectively. The Company's effective tax rates for the three and six months endedJuly 2, 2021 andJune 26, 2020 vary from the statutoryU.S. federal income tax rate of 21.0 percent primarily due to the tax impact of significant operating and nonoperating items, as described in Note 11 of Notes to Condensed Consolidated Financial Statements, along with the tax benefits of having significant operations outsidethe United States and significant earnings generated in investments accounted for under the equity method, both of which are generally taxed at rates lower than the statutoryU.S. rate. The Company's effective tax rates for the three and six months endedJuly 2, 2021 included$183 million and$176 million , respectively, of net tax expense related to various discrete tax items, primarily changes in tax laws in certain foreign jurisdictions. The Company's effective tax rates for the three and six months endedJune 26, 2020 included$11 million and$99 million of net tax benefits, respectively, associated with various discrete tax items, including return to provision adjustments, excess tax benefits associated with the Company's stock-based compensation arrangements, and net tax charges for changes to our uncertain tax positions, including interest and penalties. The Company's effective tax rate for the six months endedJune 26, 2020 also included a tax benefit of$54 million associated with a change in tax law in a foreign jurisdiction as well as a tax benefit of$40 million associated with the gain recorded upon the acquisition of the remaining interest in fairlife. Refer to Note 2 of Notes to Condensed Consolidated Financial Statements for additional information on the fairlife acquisition. OnNovember 18, 2020 , theU.S. Tax Court ("Tax Court") issued an opinion ("Opinion") regarding the Company's 2015 litigation with theU.S. Internal Revenue Service ("IRS") involving transfer pricing tax adjustments in which the Tax Court predominantly sided with theIRS . The Company strongly disagrees with the Opinion and intends to vigorously defend its position. Refer to Note 8 of Notes to Condensed Consolidated Financial Statements for additional information on the litigation. At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year. This estimate reflects, among other items, our best estimate of operating results and foreign currency exchange rates. Based on current tax laws, the Company's effective tax rate in 2021 is expected to be 19.1 percent before considering the potential impact of any significant operating and nonoperating items that may affect our effective tax rate. This rate does not include the impact of the ongoing tax litigation with theIRS , if the Company were not to prevail. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION We believe our ability to generate cash flows from operating activities is one of the fundamental strengths of our business. Refer to the heading "Cash Flows from Operating Activities" below. The Company does not typically raise capital through the issuance of stock. Instead, we use debt financing to lower our overall cost of capital and increase our return on shareowners' equity. Refer to the heading "Cash Flows from Financing Activities" below. We have a history of borrowing funds both domestically and internationally at reasonable interest rates, and we expect to be able to continue to borrow funds at reasonable rates over the long term. Our debt financing also includes the use of a commercial paper program. We currently have the ability to borrow funds in this market at levels that are consistent with our debt financing strategy, and we expect to continue to be able to do so in the future. The Company reviews its optimal mix of short-term and long-term debt regularly and, as a result of this review, in 2021, we issuedU.S. dollar- and euro-denominated long-term debt of$6.0 billion and €3.2 billion, respectively, across various maturities. We used a portion of the proceeds from the long-term debt issuances to extinguish certain tranches of our previously issued long-term debt. Refer to Note 7 of Notes to Condensed Consolidated Financial Statements for additional information on the debt issuances and extinguishments. The Company's cash, cash equivalents, short-term investments and marketable securities totaled$13.0 billion as ofJuly 2, 2021 . In addition to these funds, our commercial paper program and our ability to issue long-term debt, we had$6.5 billion in unused lines of credit for general corporate purposes as ofJuly 2, 2021 . These backup lines of credit expire at various times from 2021 through 2025. 49 -------------------------------------------------------------------------------- While uncertainty caused by the COVID-19 pandemic remains, we expect to continue to see improvements in our business as vaccines become more widely available. The timing and availability of vaccines will be different around the world, and therefore we believe the pace of the recovery will vary by geography depending on vaccine availability, rates of vaccination and the effectiveness of vaccines against existing and new variants of the virus, along with other macroeconomic factors. We will remain flexible so that we can adjust to uncertainties while we continue to move forward on the initiatives we implemented to emerge stronger from the COVID-19 pandemic. In 2021, we are increasing marketing spending behind our brands to drive increased net operating revenues. We expect the return on that spending to become more favorable as mobility increases and away-from-home channels regain momentum. While many of the operating expenses that were significantly reduced in 2020 are increasing in 2021, we will continue to focus on cash flow generation. Our current capital allocation priorities are focused on investing wisely to support our business operations and continuing to grow our dividend payment. We currently expect 2021 capital expenditures to be approximately$1.5 billion . In addition, we do not intend to repurchase shares under our Board of Directors' authorized plan during the year endingDecember 31, 2021 , and we do not intend to change our approach toward paying dividends. We are currently in litigation with theIRS for tax years 2007 through 2009. OnNovember 18, 2020 , the Tax Court issued the Opinion in which it predominantly sided with theIRS ; however, a final decision is still pending and the timing of such decision is not currently known. The Company strongly disagrees with theIRS' positions and the portions of the Opinion affirming such positions and intends to vigorously defend our positions utilizing every available avenue of appeal. While the Company believes that it is more likely than not that we will ultimately prevail in this litigation upon appeal, it is possible that all, or some portion of, the adjustments proposed by theIRS and sustained by the Tax Court could ultimately be upheld. In the event that all of the adjustments proposed by theIRS are ultimately upheld for tax years 2007 through 2009 and theIRS , with the consent of the federal court, were to decide to apply the underlying methodology ("Tax Court Methodology") to the subsequent years up to and including 2020, the Company currently estimates that the potential aggregate incremental tax and interest liability could be approximately$12 billion . Additional income tax and interest would continue to accrue until the time any such potential liability, or portion thereof, were to be paid. The Company estimates the impact of the continued application of the Tax Court Methodology for the six months endedJuly 2, 2021 would increase the potential aggregate incremental tax and interest liability by approximately$500 million . Once the Tax Court renders a final decision, the Company will have 90 days to file a notice of appeal and pay the portion of the potential aggregate incremental tax and interest liability related to the 2007 through 2009 litigation period, which we currently estimate to be approximately$4.8 billion (including interest accrued throughJuly 2, 2021 ), plus any additional interest accrued through the time of payment. Refer to Note 8 of Notes to Condensed Consolidated Financial Statements for additional information on the tax litigation. While we believe it is more likely than not that we will prevail in the tax litigation discussed above, we are confident that, between our ability to generate cash flows from operating activities and our ability to borrow funds at reasonable interest rates, we can manage the range of possible outcomes in the final resolution of the matter. Based on all of the aforementioned factors, the Company believes its current liquidity position is strong and will continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for the foreseeable future. Cash Flows from Operating Activities As part of our continued efforts to improve our working capital efficiency, we have worked with our suppliers over the past several years to revisit terms and conditions, including the extension of payment terms. Our current payment terms with the majority of our suppliers are 120 days. Additionally, two global financial institutions offer a voluntary supply chain finance ("SCF") program which enables our suppliers, at their sole discretion, to sell their receivables from the Company to these financial institutions on a non-recourse basis at a rate that leverages our credit rating and thus may be more beneficial to them. The SCF program is available to suppliers of goods and services included in cost of goods sold as well as suppliers of goods and services included in selling, general and administrative expenses in our consolidated statement of income. The Company and our suppliers agree on contractual terms for the goods and services we procure, including prices, quantities and payment terms, regardless of whether the supplier elects to participate in the SCF program. The suppliers sell goods or services, as applicable, to the Company and issue the associated invoices to the Company based on the agreed-upon contractual terms. Then, if they are participating in the SCF program, our suppliers, at their sole discretion, determine which invoices, if any, they want to sell to the financial institutions. Our suppliers' voluntary inclusion of invoices in the SCF program has no bearing on our payment terms. No guarantees are provided by the Company or any of our subsidiaries under the SCF program. We have no economic interest in a supplier's decision to participate in the SCF program, and we have no direct financial relationship with the financial institutions, as it relates to the SCF program. Accordingly, amounts due to our suppliers that elected to participate in the SCF program are included in the line item accounts payable and accrued expenses in our consolidated balance sheet. All activity related to amounts due to suppliers that elected to participate in the SCF program is reflected within the operating activities section of our consolidated statement of cash flows. We have been informed by the financial institutions that as ofJuly 2, 2021 andDecember 31, 2020 , suppliers had elected to sell$774 million and$703 million , respectively, of our outstanding payment obligations to the financial institutions. The amounts settled through the SCF program were 50 --------------------------------------------------------------------------------$1,475 million and$1,375 million for the six months endedJuly 2, 2021 andJune 26, 2020 , respectively. We do not believe there is a risk that our payment terms will be shortened in the near future, and we do not currently expect our net cash provided by operating activities to be significantly impacted by additional extensions of payment terms in the foreseeable future. In the fourth quarter of 2020, the Company started a trade accounts receivable factoring program in certain countries. Under this program, we can elect to sell trade accounts receivables to unaffiliated financial institutions at a discount. In these factoring arrangements, for ease of administration, the Company collects customer payments related to the factored receivables and remits those payments to the financial institutions. The Company sold$2,942 million of trade accounts receivables under this program during the six months endedJuly 2, 2021 , and the costs of factoring such receivables were not material. The Company classifies the cash received from the financial institutions within the operating activities section of our consolidated statement of cash flows. Net cash provided by operating activities for the six months endedJuly 2, 2021 andJune 26, 2020 was$5,525 million and$2,786 million , respectively, an increase of$2,739 million , or 98 percent. This increase was primarily driven by increased operating income, a benefit from our trade accounts receivable factoring program, lower short-term incentive payments in 2021 as a result of the impact of the COVID-19 pandemic on our operating performance in 2020, lower payments of year-end marketing accruals due to lower spending in 2020 as a result of the COVID-19 pandemic, lower current year prepayments to customers and the impact of payment term extensions with certain of our suppliers throughout 2020. These items were partially offset by higher restructuring, tax and interest payments in the current year. Refer to Note 12 of Notes to Condensed Consolidated Financial Statements for additional information on our restructuring initiatives. Cash Flows from Investing Activities Net cash provided by investing activities for the six months endedJuly 2, 2021 was$1,753 million and net cash used in investing activities for the six months endedJune 26, 2020 was$6,967 million . Purchases of Investments and Proceeds from Disposals of Investments During the six months endedJuly 2, 2021 , purchases of investments were$3,431 million and proceeds from disposals of investments were$3,811 million , resulting in a net cash inflow of$380 million . During the six months endedJune 26, 2020 , purchases of investments were$8,294 million and proceeds from disposals of investments were$2,649 million , resulting in a net cash outflow of$5,645 million . This activity primarily represents the purchases of, and proceeds from the disposals of, investments in marketable securities and short-term investments that were made as part of the Company's overall cash management strategy. Also included in this activity are purchases of, and proceeds from the disposals of, investments held by our captive insurance companies. Refer to Note 4 of Notes to Condensed Consolidated Financial Statements for additional information. Acquisitions of Businesses,Equity Method Investments andNonmarketable Securities During the six months endedJuly 2, 2021 , the Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled$11 million . During the six months endedJune 26, 2020 , the Company's acquisitions of businesses, equity method investments and nonmarketable securities totaled$984 million , which primarily related to the acquisition of the remaining ownership interest in fairlife. Refer to Note 2 of Notes to Condensed Consolidated Financial Statements for additional information. Proceeds from Disposals of Businesses,Equity Method Investments andNonmarketable Securities During the six months endedJuly 2, 2021 , proceeds from disposals of businesses, equity method investments and nonmarketable securities were$1,765 million , which primarily related to the sale of our ownership interest in CCA. During the six months endedJune 26, 2020 , proceeds from disposals of businesses, equity method investments and nonmarketable securities were$46 million , which primarily related to the sale of a portion of our ownership interest in one of our equity method investments. Refer to Note 2 of Notes to Condensed Consolidated Financial Statements for additional information. Purchases of Property, Plant and Equipment Purchases of property, plant and equipment for the six months endedJuly 2, 2021 andJune 26, 2020 were$450 million and$536 million , respectively. Cash Flows from Financing Activities Net cash used in financing activities during the six months endedJuly 2, 2021 was$4,962 million and net cash provided by financing activities during the six months endedJune 26, 2020 was$8,045 million . Debt Financing Issuances and payments of debt included both short-term and long-term financing activities. During the six months endedJuly 2, 2021 , the Company had issuances of debt of$10,752 million , which included$1,127 million of issuances related to 51 -------------------------------------------------------------------------------- commercial paper and short-term debt with maturities greater than 90 days and long-term debt issuances of$9,625 million , net of related discounts and issuance costs. The Company made payments of debt of$11,957 million during the six months endedJuly 2, 2021 , which included$1,280 million of payments of commercial paper and short-term debt with maturities greater than 90 days,$170 million of payments of commercial paper and short-term debt with maturities of 90 days or less, and net payments of long-term debt of$10,507 million . The payments of long-term debt included payments of$6,500 million and €2,430 million related to the extinguishment of long-term debt. Refer to Note 7 of Notes to Condensed Consolidated Financial Statements. Issuances of Stock During the six months endedJuly 2, 2021 , the Company received cash proceeds from issuances of stock of$342 million , a decrease of$102 million when compared to cash proceeds from issuances of stock of$444 million during the six months endedJune 26, 2020 . The issuances of stock during the six months endedJuly 2, 2021 andJune 26, 2020 were related to the exercise of stock options by employees. Share Repurchases During the six months endedJuly 2, 2021 , the Company did not repurchase common stock under the share repurchase plan authorized by our Board of Directors. The Company's treasury stock activity includes shares surrendered to the Company to pay the exercise price and/or to satisfy tax withholding obligations in connection with so-called stock swap exercises of employee stock options and/or the vesting of restricted stock issued to employees. The Company's treasury stock activity during the six months endedJuly 2, 2021 resulted in a cash outflow of$104 million . Dividends During the six months endedJuly 2, 2021 andJune 26, 2020 , the Company paid dividends of$3,623 million and$1,761 million , respectively. As a result of timing, the Company paid the second quarter dividend in 2021 prior to the end of the reporting period and paid the second quarter dividend in 2020 subsequent to the end of the reporting period. Our Board of Directors approved the Company's regular quarterly dividend of$0.42 per share at itsJuly 2021 meeting. This dividend is payable onOctober 1, 2021 to shareowners of record as of the close of business onSeptember 15, 2021 . Foreign Exchange Our international operations are subject to certain opportunities and risks, including currency fluctuations and governmental actions. We closely monitor our operations in each country and seek to adopt appropriate strategies that are responsive to changing economic and political environments as well as to fluctuations in currencies. Our Company conducts business in more than 200 countries and territories. Due to the geographic diversity of our operations, weakness in some currencies may be offset by strength in others. Our foreign currency management program is designed to mitigate, over time, a portion of the potentially unfavorable impact of exchange rate changes on our net income and earnings per share. Taking into account the effects of our hedging activities, the impact of fluctuations in foreign currency exchange rates increased our operating income for the three and six months endedJuly 2, 2021 by 5 percent and 1 percent, respectively. Based on current spot rates and our hedging coverage in place, we expect foreign currency fluctuations will have a slightly favorable impact on operating income and cash flows from operating activities through the end of the year. Item 3. Quantitative and Qualitative Disclosures About Market Risk We have no material changes to the disclosures on this matter made in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Item 4. Controls and Procedures Evaluation of Disclosure Controls and ProceduresThe Company , under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as ofJuly 2, 2021 . Changes in Internal Control Over Financial Reporting InApril 2021 , we implemented a new financial book of record with the upgrade of our Enterprise Resource Planning ("ERP") system to SAP S/4HANA. Along with this upgrade, we have made changes to our internal controls over financial reporting to address processes impacted by the ERP system upgrade. Other than the implementation of a new financial book of record and 52 -------------------------------------------------------------------------------- the upgrade of our ERP system, there have been no changes in the Company's internal control over financial reporting during the quarter endedJuly 2, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Additional system upgrades of our core supply chain systems are planned to be implemented in a phased approach through 2022 and will result in further changes to our internal controls over financial reporting. As changes occur, we will evaluate quarterly whether such changes materially affect our internal control over financial reporting. Part II. Other Information Item 1. Legal Proceedings Information regarding reportable legal proceedings is contained in Part I, "Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The following updates and restates the description of the previously reportedU.S. Federal Income Tax Dispute matter.U.S. Federal Income Tax Dispute OnSeptember 17, 2015 , the Company received a Statutory Notice of Deficiency ("Notice") from theU.S. Internal Revenue Service ("IRS") seeking approximately$3.3 billion of additional federal income tax for years 2007 through 2009. In the Notice, theIRS stated its intent to reallocate over$9 billion of income to theU.S. parent company from certain of its foreign affiliates that theU.S. parent company licensed to manufacture, distribute, sell, market and promote its products in certain non-U.S. markets. The Notice concerned the Company's transfer pricing between itsU.S. parent company and certain of its foreign affiliates.IRS rules governing transfer pricing require arm's-length pricing of transactions between related parties such as the Company'sU.S. parent and its foreign affiliates. To resolve the same transfer pricing issue for the tax years 1987 through 1995, the Company and theIRS had agreed in 1996 on an arm's-length methodology for determining the amount ofU.S. taxable income that theU.S. parent company would report as compensation from its foreign licensees. The Company and theIRS memorialized this accord in a closing agreement resolving that dispute ("Closing Agreement"). The Closing Agreement provided that, absent a change in material facts or circumstances or relevant federal tax law, in calculating the Company's income taxes going forward, the Company would not be assessed penalties by theIRS for using the agreed-upon tax calculation methodology that the Company and theIRS agreed would be used for the 1987 through 1995 tax years. TheIRS audited and confirmed the Company's compliance with the agreed-upon Closing Agreement methodology in five successive audit cycles for tax years 1996 through 2006. TheSeptember 17, 2015 Notice from theIRS retroactively rejected the previously agreed-upon methodology for the 2007 through 2009 tax years, in favor of an entirely different methodology, without prior notice to the Company. Using the new tax calculation methodology, theIRS reallocated over$9 billion of income to theU.S. parent company from its foreign licensees for tax years 2007 through 2009. Consistent with the Closing Agreement, theIRS did not assert penalties, and it has yet to do so. TheIRS designated the Company's matter for litigation onOctober 15, 2015 . Litigation designation is anIRS determination that forecloses to a company any and all alternative means for resolution of a tax dispute. As a result of theIRS' designation of the Company's matter for litigation, the Company was forced to either accept theIRS' newly imposed tax assessment and pay the full amount of the asserted tax or litigate the matter in the federal courts. The matter remains subject to theIRS' litigation designation, preventing the Company from any attempt to settle or otherwise mutually resolve the matter with theIRS .The Company consequently initiated litigation by filing a petition in theU.S. Tax Court ("Tax Court") inDecember 2015 , challenging the tax adjustments enumerated in the Notice. Prior to trial, theIRS increased its transfer pricing adjustment by$385 million , resulting in an additional tax adjustment of$135 million . The Company obtained a summary judgment in its favor on a different matter related to Mexican foreign tax credits, which thereafter effectively reduced theIRS' potential tax adjustment by approximately$138 million . The trial was held in the Tax Court from March throughMay 2018 , and final post-trial briefs were filed and exchanged inApril 2019 . OnNovember 18, 2020 , the Tax Court issued an opinion ("Opinion") in which it predominantly sided with theIRS but agreed with the Company that dividends previously paid by the foreign licensees to theU.S. parent company in reliance upon the Closing Agreement should continue to be allowed to offset royalties, including those that would become payable to the Company in accordance with the Opinion. The Tax Court reserved ruling on the effect of Brazilian legal restrictions on the payment of royalties by the Company's licensee inBrazil until after the Tax Court issues its opinion in the separate case of 53 -------------------------------------------------------------------------------- 3M Co. & Subs. v. Commissioner,T.C. Docket No . 5816-13 (filedMarch 11, 2013 ). Once the Tax Court issues its opinion in 3M Co. & Subs. v. Commissioner, the Company expects the Tax Court thereafter to render another opinion, and ultimately a final decision, in the Company's case. The Company believes that theIRS and the Tax Court misinterpreted and misapplied the applicable regulations in reallocating income earned by the Company's foreign licensees to increase the Company'sU.S. tax. Moreover, the Company believes that the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed upon by theIRS and the Company, and audited by theIRS for over a decade, is unconstitutional. The Company intends to assert its claims on appeal and vigorously defend its position. In determining the amount of tax reserve to be recorded as ofDecember 31, 2020 , the Company completed the required two-step evaluation process prescribed by Accounting Standards Codification 740, Accounting for Income Taxes. In doing so, we consulted with outside advisors and we reviewed and considered relevant laws, rules, and regulations, including, though not limited to, the Opinion and relevant caselaw. We also considered our intention to vigorously defend our positions and assert our various well-founded legal claims via every available avenue of appeal. We concluded, based on the technical and legal merits of the Company's tax positions, that it is more likely than not the Company's tax positions will ultimately be sustained on appeal. In addition, we considered a number of alternative transfer pricing methodologies, including the methodology asserted by theIRS and affirmed in the Opinion ("Tax Court Methodology"), that could be applied by the courts upon final resolution of the litigation. Based on the required probability analysis, we determined the methodologies we believe the federal courts could ultimately order to be used in calculating the Company's tax. As a result of this analysis, we recorded a tax reserve of$438 million during the year endedDecember 31, 2020 related to the application of the resulting methodologies as well as the different tax treatment applicable to dividends originally paid to theU.S. parent company by its foreign licensees, in reliance upon the Closing Agreement, that would be recharacterized as royalties in accordance with the Opinion and the Company's analysis. The Company's conclusion that it is more likely than not the Company's tax positions will ultimately be sustained on appeal is unchanged as ofJuly 2, 2021 . However, we updated our calculation of the methodologies we believe the federal courts could ultimately order to be used in calculating the Company's tax. As a result of the application of the required probability analysis to these updated calculations and the accrual of interest through the current reporting period, we updated our tax reserve as ofJuly 2, 2021 to$395 million . While the Company strongly disagrees with theIRS' positions and the portions of the Opinion affirming such positions, it is possible that some portion or all of the adjustment proposed by theIRS and sustained by the Tax Court could ultimately be upheld. In that event, the Company would likely be subject to significant additional liabilities for tax years 2007 through 2009, and potentially also for subsequent years, which could have a material adverse impact on the Company's financial position, results of operations and cash flows. The Company calculated the potential impact of applying the Tax Court Methodology to reallocate income from foreign licensees potentially covered within the scope of the Opinion, assuming such methodology were to be ultimately upheld by the courts, and theIRS were to decide to apply that methodology to subsequent years, with consent of the federal courts. This impact would include taxes and interest accrued throughDecember 31, 2020 for the 2007 through 2009 litigated tax years and for subsequent tax years from 2010 to 2020. The calculations incorporated the estimated impact of correlative adjustments to the previously accrued transition tax payable under the 2017 Tax Cuts and Jobs Act. The Company currently estimates that the potential aggregate incremental tax and interest liability could be approximately$12 billion as ofDecember 31, 2020 . Additional income tax and interest would continue to accrue until the time any such potential liability, or portion thereof, were to be paid. The Company estimates the impact of the continued application of the Tax Court Methodology for the three and six months endedJuly 2, 2021 would increase the potential aggregate incremental tax and interest liability by approximately$250 million and$500 million , respectively. Additionally, we currently project the continued application of the Tax Court Methodology in future years, assuming similar facts and circumstances as ofDecember 31, 2020 , would result in an incremental annual tax liability that would increase the Company's effective tax rate by approximately 3.5 percent. The Company does not know when the Tax Court will issue its opinion regarding the effect of Brazilian legal restrictions on the payment of royalties by the Company's licensee inBrazil for the 2007 through 2009 tax years. After the Tax Court issues its opinion on the Company's Brazilian licensee, the Company and theIRS will be provided time to agree on the tax impact, if any, of both opinions, after which the Tax Court would render a final decision in the case. The Company will have 90 days thereafter to file a notice of appeal to theU.S. Court of Appeals for the Eleventh Circuit and pay the tax liability and interest related to the 2007 through 2009 tax period. The Company currently estimates that the payment to be made at that time related to the 2007 through 2009 tax period, which is included in the above estimate of the potential aggregate incremental tax and interest liability, would be approximately$4.8 billion (including interest accrued throughJuly 2, 2021 ), plus any additional interest accrued through the time of payment. Some or all of this amount would be refunded if the Company were to prevail on appeal. 54
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