UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20162017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number1-16483
Mondelēz International, Inc.
(Exact name of registrant as specified in its charter)
Virginia | 52-2284372 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Three Parkway North, Deerfield, Illinois | 60015 | |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code) (847)943-4000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |||
Non-accelerated filer | Smaller reporting company | |||
(Do not check if a smaller reporting company) | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ¨☐ No x☒
At October 21, 2016,July 28, 2017, there were 1,544,411,7071,507,639,931 shares of the registrant’s Class A Common Stock outstanding.
Mondelēz International, Inc.
Page No. | ||||||
PART I - FINANCIAL INFORMATION | ||||||
Item 1. | ||||||
1 | ||||||
2 | ||||||
Condensed Consolidated Balance Sheets | 3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | ||||||
Item 4. | ||||||
OTHER INFORMATION | ||||||
Item 1. | ||||||
Item 1A. | ||||||
Item 2. | ||||||
Item 6. | ||||||
In this report, for all periods presented, “we,” “us,” “our,” “the Company” and “Mondelēz International” refer to Mondelēz International, Inc. and subsidiaries. References to “Common Stock” refer to our Class A Common Stock.
PART I – FINANCIAL INFORMATION
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of U.S. dollars, except per share data)
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Net revenues | $ | 6,396 | $ | 6,849 | $ | 19,153 | $ | 22,272 | $ | 5,986 | $ | 6,302 | $ | 12,400 | $ | 12,757 | ||||||||||||||||
Cost of sales | 3,908 | 4,179 | 11,614 | 13,595 | 3,662 | 3,786 | 7,551 | 7,706 | ||||||||||||||||||||||||
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Gross profit | 2,488 | 2,670 | 7,539 | 8,677 | 2,324 | 2,516 | 4,849 | 5,051 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 1,552 | 1,790 | 4,835 | 5,675 | 1,449 | 1,668 | 2,924 | 3,283 | ||||||||||||||||||||||||
Asset impairment and exit costs | 190 | 155 | 510 | 546 | 187 | 166 | 353 | 320 | ||||||||||||||||||||||||
Gain on divestiture | – | (7,122 | ) | – | (7,135 | ) | ||||||||||||||||||||||||||
Loss on divestiture | 3 | – | 3 | – | ||||||||||||||||||||||||||||
Amortization of intangibles | 44 | 45 | 132 | 137 | 44 | 44 | 88 | 88 | ||||||||||||||||||||||||
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Operating income | 702 | 7,802 | 2,062 | 9,454 | 641 | 638 | 1,481 | 1,360 | ||||||||||||||||||||||||
Interest and other expense, net | 145 | 114 | 540 | 814 | 124 | 151 | 243 | 395 | ||||||||||||||||||||||||
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Earnings before income taxes | 557 | 7,688 | 1,522 | 8,640 | 517 | 487 | 1,238 | 965 | ||||||||||||||||||||||||
Provision for income taxes | (40 | ) | (348 | ) | (207 | ) | (561 | ) | (84 | ) | (118 | ) | (238 | ) | (167 | ) | ||||||||||||||||
Gain on equity method investment exchange | – | – | 43 | – | – | – | – | 43 | ||||||||||||||||||||||||
Equity method investment net (losses) / earnings | 31 | (72 | ) | 218 | (72 | ) | ||||||||||||||||||||||||||
Equity method investment net earnings | 67 | 102 | 133 | 187 | ||||||||||||||||||||||||||||
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Net earnings | 548 | 7,268 | 1,576 | 8,007 | 500 | 471 | 1,133 | 1,028 | ||||||||||||||||||||||||
Noncontrolling interest earnings | – | (2 | ) | (10 | ) | (11 | ) | (2 | ) | (7 | ) | (5 | ) | (10 | ) | |||||||||||||||||
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Net earnings attributable to Mondelēz International | �� | $ | 548 | $ | 7,266 | $ | 1,566 | $ | 7,996 | $ | 498 | $ | 464 | $ | 1,128 | $ | 1,018 | |||||||||||||||
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Per share data: | ||||||||||||||||||||||||||||||||
Basic earnings per share attributable to | $ | 0.35 | $ | 4.52 | $ | 1.00 | $ | 4.91 | $ | 0.33 | $ | 0.30 | $ | 0.74 | $ | 0.65 | ||||||||||||||||
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Diluted earnings per share attributable to | $ | 0.35 | $ | 4.46 | $ | 0.99 | $ | 4.86 | $ | 0.32 | $ | 0.29 | $ | 0.73 | $ | 0.64 | ||||||||||||||||
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Dividends declared | $ | 0.19 | $ | 0.17 | $ | 0.53 | $ | 0.47 | $ | 0.19 | $ | 0.17 | $ | 0.38 | $ | 0.34 | ||||||||||||||||
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See accompanying notes to the condensed consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of U.S. dollars)
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net earnings | $ | 548 | $ | 7,268 | $ | 1,576 | $ | 8,007 | ||||||||
Other comprehensive earnings / (losses): | ||||||||||||||||
Currency translation adjustment | 35 | (1,070 | ) | 173 | (2,482 | ) | ||||||||||
Pension and other benefit plans | 30 | 156 | 99 | 229 | ||||||||||||
Derivative cash flow hedges | 2 | (9 | ) | 12 | (60 | ) | ||||||||||
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Total other comprehensive earnings / (losses) | 67 | (923 | ) | 284 | (2,313 | ) | ||||||||||
Comprehensive earnings / (losses) | 615 | 6,345 | 1,860 | 5,694 | ||||||||||||
less: Comprehensive earnings / (losses) attributable to noncontrolling interests | (2 | ) | (4 | ) | 7 | (11 | ) | |||||||||
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Comprehensive earnings / (losses) attributable to | $ | 617 | $ | 6,349 | $ | 1,853 | $ | 5,705 | ||||||||
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For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net earnings | $ | 500 | $ | 471 | $ | 1,133 | $ | 1,028 | ||||||||
Other comprehensive earnings/(losses), net of tax: | ||||||||||||||||
Currency translation adjustment | 380 | (528 | ) | 923 | 103 | |||||||||||
Pension and other benefit plans | (33 | ) | 110 | (32 | ) | 104 | ||||||||||
Derivative cash flow hedges | 12 | 17 | 30 | 10 | ||||||||||||
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Total other comprehensive earnings/(losses) | 359 | (401 | ) | 921 | 217 | |||||||||||
Comprehensive earnings | 859 | 70 | 2,054 | 1,245 | ||||||||||||
less: Comprehensive earnings/(losses) attributable to noncontrolling interests | 14 | (7 | ) | 21 | 9 | |||||||||||
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Comprehensive earnings attributable to | $ | 845 | $ | 77 | $ | 2,033 | $ | 1,236 | ||||||||
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See accompanying notes to the condensed consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of U.S. dollars, except share data)
(Unaudited)
September 30, | December 31, | |||||||||||||||
2016 | 2015 | June 30, | December 31, | |||||||||||||
2017 | 2016 | |||||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 1,686 | $ | 1,870 | $ | 1,397 | $ | 1,741 | ||||||||
Trade receivables (net of allowances of $64 at September 30, 2016 | 3,019 | 2,634 | ||||||||||||||
Other receivables (net of allowances of $103 at September 30, 2016 | 895 | 1,212 | ||||||||||||||
Trade receivables (net of allowances of $47 at June 30, 2017 | 2,395 | 2,611 | ||||||||||||||
Other receivables (net of allowances of $99 at June 30, 2017 | 913 | 859 | ||||||||||||||
Inventories, net | 2,776 | 2,609 | 2,710 | 2,469 | ||||||||||||
Other current assets | 479 | 633 | 778 | 800 | ||||||||||||
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Total current assets | 8,855 | 8,958 | 8,193 | 8,480 | ||||||||||||
Property, plant and equipment, net | 8,465 | 8,362 | 8,444 | 8,229 | ||||||||||||
Goodwill | 20,751 | 20,664 | 20,915 | 20,276 | ||||||||||||
Intangible assets, net | 18,721 | 18,768 | 18,514 | 18,101 | ||||||||||||
Prepaid pension assets | 83 | 69 | 144 | 159 | ||||||||||||
Deferred income taxes | 289 | 277 | 347 | 358 | ||||||||||||
Equity method investments | 5,717 | 5,387 | 5,853 | 5,585 | ||||||||||||
Other assets | 384 | 358 | 347 | 350 | ||||||||||||
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TOTAL ASSETS | $ | 63,265 | $ | 62,843 | $ | 62,757 | $ | 61,538 | ||||||||
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LIABILITIES | ||||||||||||||||
Short-term borrowings | $ | 2,490 | $ | 236 | $ | 4,813 | $ | 2,531 | ||||||||
Current portion of long-term debt | 1,511 | 605 | 742 | 1,451 | ||||||||||||
Accounts payable | 4,884 | 4,890 | 5,012 | 5,318 | ||||||||||||
Accrued marketing | 1,624 | 1,634 | 1,574 | 1,745 | ||||||||||||
Accrued employment costs | 779 | 844 | 603 | 736 | ||||||||||||
Other current liabilities | 2,669 | 2,713 | 2,819 | 2,636 | ||||||||||||
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Total current liabilities | 13,957 | 10,922 | 15,563 | 14,417 | ||||||||||||
Long-term debt | 13,105 | 14,557 | 13,226 | 13,217 | ||||||||||||
Deferred income taxes | 4,762 | 4,750 | 4,587 | 4,721 | ||||||||||||
Accrued pension costs | 1,654 | 2,183 | 1,708 | 2,014 | ||||||||||||
Accrued postretirement health care costs | 501 | 499 | 393 | 382 | ||||||||||||
Other liabilities | 1,709 | 1,832 | 1,488 | 1,572 | ||||||||||||
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TOTAL LIABILITIES | 35,688 | 34,743 | 36,965 | 36,323 | ||||||||||||
Commitments and Contingencies (Note 11) | ||||||||||||||||
EQUITY | ||||||||||||||||
Common Stock, no par value (5,000,000,000 shares authorized and | – | – | ||||||||||||||
Common Stock, no par value (5,000,000,000 shares authorized and | – | – | ||||||||||||||
Additional paid-in capital | 31,805 | 31,760 | 31,860 | 31,847 | ||||||||||||
Retained earnings | 21,366 | 20,700 | 21,648 | 21,149 | ||||||||||||
Accumulated other comprehensive losses | (9,699 | ) | (9,986 | ) | (10,217 | ) | (11,122 | ) | ||||||||
Treasury stock, at cost (450,941,657 shares at September 30, 2016 and | (15,963 | ) | (14,462 | ) | ||||||||||||
Treasury stock, at cost (485,738,865 shares at June 30, 2017 and | (17,571 | ) | (16,713 | ) | ||||||||||||
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Total Mondelēz International Shareholders’ Equity | 27,509 | 28,012 | 25,720 | 25,161 | ||||||||||||
Noncontrolling interest | 68 | 88 | 72 | 54 | ||||||||||||
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TOTAL EQUITY | 27,577 | 28,100 | 25,792 | 25,215 | ||||||||||||
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TOTAL LIABILITIES AND EQUITY | $ | 63,265 | $ | 62,843 | $ | 62,757 | $ | 61,538 | ||||||||
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See accompanying notes to the condensed consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(in millions of U.S. dollars, except per share data)
(Unaudited)
Mondelēz International Shareholders’ Equity | ||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Earnings / (Losses) | Treasury Stock | Noncontrolling Interest* | Total Equity | ||||||||||||||||||||||
Balances at January 1, 2015 | $ | – | $ | 31,651 | $ | 14,529 | $ | (7,318 | ) | $ | (11,112 | ) | $ | 103 | $ | 27,853 | ||||||||||||
Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
Net earnings | – | – | 7,267 | – | – | 24 | 7,291 | |||||||||||||||||||||
Other comprehensive losses, net of income taxes | – | – | – | (2,668 | ) | – | (26 | ) | (2,694 | ) | ||||||||||||||||||
Exercise of stock options and | – | 109 | (70 | ) | – | 272 | – | 311 | ||||||||||||||||||||
Common Stock repurchased | – | – | – | – | (3,622 | ) | – | (3,622 | ) | |||||||||||||||||||
Cash dividends declared ($0.64 per share) | – | – | (1,026 | ) | – | – | – | (1,026 | ) | |||||||||||||||||||
Dividends paid on noncontrolling interest and other activities | – | – | – | – | – | (13 | ) | (13 | ) | |||||||||||||||||||
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Balances at December 31, 2015 | $ | – | $ | 31,760 | $ | 20,700 | $ | (9,986 | ) | $ | (14,462 | ) | $ | 88 | $ | 28,100 | ||||||||||||
Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
Net earnings | – | – | 1,566 | – | – | 10 | 1,576 | |||||||||||||||||||||
Other comprehensive earnings / (losses), | – | – | – | 287 | – | (3 | ) | 284 | ||||||||||||||||||||
Exercise of stock options and | – | 45 | (74 | ) | – | 286 | – | 257 | ||||||||||||||||||||
Common Stock repurchased | – | – | – | – | (1,787 | ) | – | (1,787 | ) | |||||||||||||||||||
Cash dividends declared ($0.53 per share) | – | – | (826 | ) | – | – | – | (826 | ) | |||||||||||||||||||
Dividends paid on noncontrolling interest and other activities | – | – | – | – | – | (27 | ) | (27 | ) | |||||||||||||||||||
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Balances at September 30, 2016 | $ | – | $ | 31,805 | $ | 21,366 | $ | (9,699 | ) | $ | (15,963 | ) | $ | 68 | $ | 27,577 | ||||||||||||
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Mondelēz International Shareholders’ Equity | ||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Earnings/ (Losses) | Treasury Stock | Noncontrolling Interest* | Total Equity | ||||||||||||||||||||||
Balances at January 1, 2016 | $ | – | $ | 31,760 | $ | 20,700 | $ | (9,986 | ) | $ | (14,462 | ) | $ | 88 | $ | 28,100 | ||||||||||||
Comprehensive earnings/(losses): | ||||||||||||||||||||||||||||
Net earnings | – | – | 1,659 | – | – | 10 | 1,669 | |||||||||||||||||||||
Other comprehensive earnings/(losses), net of income taxes | – | – | – | (1,136 | ) | – | (17 | ) | (1,153 | ) | ||||||||||||||||||
Exercise of stock options and issuance of other stock awards | – | 87 | (94 | ) | – | 350 | – | 343 | ||||||||||||||||||||
Common Stock repurchased | – | – | – | – | (2,601 | ) | – | (2,601 | ) | |||||||||||||||||||
Cash dividends declared ($0.72 per share) | – | – | (1,116 | ) | – | – | – | (1,116 | ) | |||||||||||||||||||
Dividends paid on noncontrolling interest and other activities | – | – | – | – | – | (27 | ) | (27 | ) | |||||||||||||||||||
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Balances at December 31, 2016 | $ | – | $ | 31,847 | $ | 21,149 | $ | (11,122 | ) | $ | (16,713 | ) | $ | 54 | $ | 25,215 | ||||||||||||
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Comprehensive earnings/(losses): | ||||||||||||||||||||||||||||
Net earnings | – | – | 1,128 | – | – | 5 | 1,133 | |||||||||||||||||||||
Other comprehensive earnings/(losses), net of income taxes | – | – | – | 905 | – | 16 | 921 | |||||||||||||||||||||
Exercise of stock options and issuance of other stock awards | – | 13 | (48 | ) | – | 251 | – | 216 | ||||||||||||||||||||
Common Stock repurchased | – | – | – | – | (1,109 | ) | – | (1,109 | ) | |||||||||||||||||||
Cash dividends declared ($0.38 per share) | – | – | (581 | ) | – | – | – | (581 | ) | |||||||||||||||||||
Dividends paid on noncontrolling interest and other activities | – | – | – | – | – | (3 | ) | (3 | ) | |||||||||||||||||||
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Balances at June 30, 2017 | $ | – | $ | 31,860 | $ | 21,648 | $ | (10,217 | ) | $ | (17,571 | ) | $ | 72 | $ | 25,792 | ||||||||||||
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* | Noncontrolling interest as of |
See accompanying notes to the condensed consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of U.S. dollars)
(Unaudited)
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||
September 30, | June 30, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES | ||||||||||||||||
CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES | ||||||||||||||||
Net earnings | $ | 1,576 | $ | 8,007 | $ | 1,133 | $ | 1,028 | ||||||||
Adjustments to reconcile net earnings to operating cash flows: | ||||||||||||||||
Depreciation and amortization | 615 | 663 | 395 | 408 | ||||||||||||
Stock-based compensation expense | 102 | 98 | 77 | 72 | ||||||||||||
Deferred income tax benefit | (163 | ) | (81 | ) | ||||||||||||
Gains on JDE coffee business transactions and divestiture | – | (7,135 | ) | |||||||||||||
Asset impairments | 262 | 195 | ||||||||||||||
Deferred income tax provision/(benefit) | – | (86 | ) | |||||||||||||
Asset impairments and accelerated depreciation | 168 | 142 | ||||||||||||||
Loss on early extinguishment of debt | – | 708 | 11 | – | ||||||||||||
JDE coffee business transactions currency-related net gains | – | (436 | ) | |||||||||||||
Gain on equity method investment exchange | (43 | ) | – | – | (43 | ) | ||||||||||
Equity method investment net (earnings) / losses | (218 | ) | 16 | |||||||||||||
Loss on divestiture | 3 | – | ||||||||||||||
Equity method investment net earnings | (133 | ) | (187 | ) | ||||||||||||
Distributions from equity method investments | 75 | 58 | 132 | 58 | ||||||||||||
Other non-cash items, net | 10 | 142 | (29 | ) | 126 | |||||||||||
Change in assets and liabilities, net of acquisitions and divestitures: | ||||||||||||||||
Receivables, net | (265 | ) | (868 | ) | 153 | (27 | ) | |||||||||
Inventories, net | (121 | ) | (314 | ) | (181 | ) | (63 | ) | ||||||||
Accounts payable | (143 | ) | 496 | (430 | ) | (319 | ) | |||||||||
Other current assets | 79 | 36 | (88 | ) | 23 | |||||||||||
Other current liabilities | (266 | ) | 11 | (646 | ) | (457 | ) | |||||||||
Change in pension and postretirement assets and liabilities, net | (362 | ) | (184 | ) | (303 | ) | (338 | ) | ||||||||
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Net cash provided by operating activities | 1,138 | 1,412 | 262 | 337 | ||||||||||||
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CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES | ||||||||||||||||
CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES | ||||||||||||||||
Capital expenditures | (909 | ) | (1,178 | ) | (488 | ) | (604 | ) | ||||||||
Proceeds from JDE coffee business transactions currency hedge settlements | – | 1,050 | ||||||||||||||
Acquisitions, net of cash received | – | (536 | ) | |||||||||||||
Proceeds from JDE coffee business transaction and divestiture, net of disbursements | 275 | 4,091 | ||||||||||||||
Proceeds from divestiture, net of disbursements | 169 | – | ||||||||||||||
Proceeds from sale of property, plant and equipment and other assets | 113 | 33 | 33 | 99 | ||||||||||||
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Net cash (used in) / provided by investing activities | (521 | ) | 3,460 | |||||||||||||
Net cash used in investing activities | (286 | ) | (505 | ) | ||||||||||||
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CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES | ||||||||||||||||
CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES | ||||||||||||||||
Issuances of commercial paper, maturities greater than 90 days | 1,028 | 613 | 1,150 | 491 | ||||||||||||
Repayments of commercial paper, maturities greater than 90 days | (337 | ) | (710 | ) | (1,141 | ) | (68 | ) | ||||||||
Net issuances of other short-term borrowings | 1,533 | 396 | 2,230 | 2,008 | ||||||||||||
Long-term debt proceeds | 1,149 | 3,606 | 350 | 1,149 | ||||||||||||
Long-term debt repaid | (1,757 | ) | (4,543 | ) | (1,469 | ) | (1,757 | ) | ||||||||
Repurchase of Common Stock | (1,727 | ) | (3,003 | ) | (1,069 | ) | (1,312 | ) | ||||||||
Dividends paid | (801 | ) | (736 | ) | (581 | ) | (537 | ) | ||||||||
Other | 82 | 107 | 154 | 54 | ||||||||||||
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Net cash used in financing activities | (830 | ) | (4,270 | ) | ||||||||||||
Net cash (used in)/provided by financing activities | (376 | ) | 28 | |||||||||||||
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Effect of exchange rate changes on cash and cash equivalents | 29 | (194 | ) | 56 | 25 | |||||||||||
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Cash and cash equivalents: | ||||||||||||||||
(Decrease) / increase | (184 | ) | 408 | |||||||||||||
Decrease | (344 | ) | (115 | ) | ||||||||||||
Balance at beginning of period | 1,870 | 1,631 | 1,741 | 1,870 | ||||||||||||
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Balance at end of period | $ | 1,686 | $ | 2,039 | $ | 1,397 | $ | 1,755 | ||||||||
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See accompanying notes to the condensed consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include Mondelēz International, Inc. as well as our wholly owned and majority owned subsidiaries.
Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of our results of operations, financial position and operating results. Net revenues and net earningscash flows. Results of operations for any interim period are not necessarily indicative of future or annual results.
We derived the condensed consolidated balance sheet data as For a complete set of December 31, 2015 from audited financial statements but do not include all disclosures required by U.S. GAAP. You should read these statements in conjunction with our consolidated financial statements and related notes, inrefer to our Annual Report on Form10-K for the year ended December 31, 2015.2016.
Principles of Consolidation:
The condensed consolidated financial statements include Mondelēz International, Inc. as well as our wholly owned and majority owned subsidiaries, except our Venezuelan subsidiaries. As of the close of the fourth quarter of 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations from our consolidated financial statements.operations. As such, for all periods presented, we have excluded the results of operations, financial position and cash flows of our Venezuelan subsidiaries are not included infrom our condensed consolidated financial statements for the three and nine months ended September 30, 2016. The operating results of our Venezuelan subsidiaries are included in our condensed consolidated financial statements for the three and nine months ended September 30, 2015. Seestatements.
Currency Translation and Highly Inflationary Accounting: VenezuelaSegment Change below for more information.:
On July 2, 2015,October 1, 2016, we contributedintegrated our global coffee businessesEastern Europe, Middle East, and Africa (“EEMEA”) operating segment into our Europe and Asia Pacific operating segments to further leverage and optimize the operating scale built within the Europe and Asia Pacific regions. Russia, Ukraine, Turkey, Belarus, Georgia and Kazakhstan were combined within our Europe region, while the remaining Middle East and African countries were combined within our Asia Pacific region to form a new company, Jacobs Douwe EgbertsAsia, Middle East and Africa (“JDE”AMEA”), operating segment. We have reflected the segment change as if it had occurred in which we now hold an equity interest (collectively, the “JDE coffee business transactions”). Historically,all periods presented.
As of October 1, 2016, our coffee businessesoperations and the income from equity method investmentsmanagement structure were recorded within ourorganized into four reportable operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig Green Mountain Inc. (“Keurig”) and Dongsuh Foods Corporation (“DSF”), and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income and segment income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income and segment income. Please see Note 2,Divestitures and Acquisitions – JDE Coffee Business TransactionsandKeurig Transaction, andsegments:
See Note 15,Segment Reporting, for moreadditional information on these transactions.our segments.
Currency Translation and Highly Inflationary Accounting:
We translate the results of operations of our subsidiaries from multiple currencies using average exchange rates during each period and translate balance sheet accounts using exchange rates at the end of each period. We record currency translation adjustments as a component of equity (except for highly inflationary currencies) and realized exchange gains and losses on transactions in earnings.
United Kingdom.OnHighly inflationary accounting is triggered when a country’s three-year cumulative inflation rate exceeds 100%. It requires the remeasurement of financial statements of subsidiaries in the country, from the functional currency of the subsidiary to our U.S. dollar reporting currency, with currency remeasurement gains or losses recorded in earnings. As of June 23, 2016, the United Kingdom (“U.K.”) voted by referendum30, 2017, none of our consolidated subsidiaries were subject to exit the European Union (“E.U.”); this vote is commonly referredhighly inflationary accounting.
Argentina. We continue to as “Brexit.” The referendum is non-bindingclosely monitor inflation and the exit frompotential for the E.U. iseconomy to become highly inflationary for accounting purposes. As of June 30, 2017, the Argentinian economy was not immediate. Once the U.K. invokes E.U. Article 50, there is a two-year window in which the U.K. and European Commission can negotiate the future terms for imports, exports, taxes, employment, immigration and other areas.
Brexit has caused volatility in global stock markets and currency exchange rates, affecting the markets in which we operate. The implications of Brexit could adversely affect demand for our products, our financial results and operations, and our relationships with customers, suppliers and employees in the short or long-term. On June 24, 2016, the value of the British pound sterling relative to the U.S. dollar fell by 9%. Since that date, the value of the British pound sterling relative to the U.S. dollar declined an additional 5% through September 30, 2016. Further volatility in the exchange rate is expected over the transition period.
As the business operating environment remains uncertain,designated as highly inflationary. At this time, we continue to monitor our investments and currency exposures abroad. As the U.K. is not a highly-inflationary economy, we record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings. While we did not experience significant business disruptions in our U.K. businesses immediately following the referendum, the devaluation of the British pound sterling in late June adversely affected our translated results reported in U.S. dollars. We have a natural hedge in the form of pound sterling-denominated debt that acts as a net investment hedge, moving counter to adverse pound sterling currency translation impacts. British pound sterling currency transaction risks are largely mitigated due to our global chocolate businesses buying cocoa in British pound sterling. Our U.K.Argentinian operations contributed $505$159 million, or 7.9%2.7% of consolidated net revenues in the three months and $1.6 billion,$301 million, or 8.4%2.4% of consolidated net revenues in the ninesix months ended SeptemberJune 30, 2016.
Venezuela.From January 1, 2010 through December 31, 2015, we accounted for the results of2017, and our Venezuelan subsidiaries using the U.S. dollar as the functional currency as prescribed by U.S. GAAP for highly inflationary economies.
EffectiveArgentinian operations had a net monetary liability position as of June 30, 2017.
Ukraine. In the closesecond quarter of 2017, based on projected inflation data published by the 2015 fiscal year, we concluded that weNational Bank of Ukraine, Ukraine’s three-year cumulative inflation rate dropped below 100% and it is projected to stay below 100% in late 2017. As such, Ukraine is no longer met the accounting criteria for consolidation of our Venezuelan subsidiaries due to a loss of control over our Venezuelan operations and an other-than-temporary lack of currency exchangeability. During the fourth quarter of 2015, representatives of the Venezuelan government arbitrarily imposed pricing restrictions on our local operations that resulted in our inability to recover operating costs. We immediately began an appeal process with the Venezuelan authorities to demonstrate that our pricing was in line with the regulatory requirements. In January 2016, local officials communicated that some of the pricing restrictions had been lifted; however, the legally required administrative order had not been issued and it was uncertain when it would be issued. The legal and regulatory environment also became more unreliable. While we had been complying with the Venezuelan law governing pricing and profitability controls and followed the legal process for appeal, the appeal process was not available to us as outlined under law. Additionally, we were increasingly facing issues procuring raw materials and packaging. Taken together, these actions, the economic environment in Venezuela and the progressively limited access to dollars to import goods through the use of any of the available currency mechanisms impaired our ability to operate and control our Venezuelan businesses. As a result of these factors, we concluded that we no longer met the criteria for the consolidation of our Venezuelan subsidiaries.
As of the close of the 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations. We recorded a $778 million pre-tax loss on December 31, 2015 as we reduced the value of our cost method investment in Venezuela and all Venezuelan receivables held by our other subsidiaries to realizable fair value, resulting in full impairment. The recorded loss also included historical cumulative translation adjustments related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity. The fair value of our investments in our Venezuelan subsidiaries was estimated based on discounted cash flow projections of current and expected operating losses in the foreseeable future and our ability to operate the business on a sustainable basis. Our fair value estimate included U.S. dollar exchange and discount rate assumptions that reflect the inflation and economic uncertainty in Venezuela.
Beginning in 2016, we no longer include net revenues, earnings or net assets of our Venezuelan subsidiaries within our condensed consolidated financial statements. Under the cost method of accounting, earnings are only recognized to the extent cash is received. Given the current and ongoing difficult economic, regulatory and business environment in Venezuela, there continues to be significant uncertainty related to our operations in Venezuela, and we expect these conditions will continue for the foreseeable future. We will monitor the extent of our ability to control our Venezuelan operations and the liquidity and availability of U.S. dollars at different rates, including the changes to the currency exchange systems in March 2016, as our current situation in Venezuela may change over time and lead to consolidation at a future date.
We recorded no revenues, earnings or other financial results from our Venezuelan subsidiaries during the three and nine months ended September 30, 2016,designated highly inflationary and we continue to monitor the business, economic and regulatory climate in Venezuela. For the three and nine months ended September 30, 2015, the operating results of our Venezuelan operations were included in our condensed consolidated statements of earnings. During the first quarter of 2015, we recognized an $11 million currency-related remeasurement loss resulting from a devaluation of the Venezuela bolivar exchange rate we historically used to source U.S. dollars for purchases of imported raw materials, packaging and other goods and services.
The following table sets forth net revenues and operating income (including the impact of remeasurement losses) for our Venezuelan operations for the three and nine months ended September 30, 2015:
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Argentina. On December 16, 2015, the new Argentinean government fiscal authority announced the lifting of strict currency controls and reduced restrictions on exports and imports. The next day, the value of the Argentinean peso relative to the U.S. dollar fell by 36%. In the first nine months of 2016, the value of the Argentinean peso relative to the U.S. dollar declined 18%. Further volatility in the exchange rate is expected. While the business operating environment remains challenging, we continue to monitor and actively manage our investment and exposures in Argentina. We continue executing our hedging programs and refining our product portfolio to improve our product offerings, mix and profitability. We also continue to implement additional cost initiatives to protect the business. While further currency declines could have an adverse impact on our ongoing results of operations, we believe the actions by the new government to reduce economic controls and business restrictions will provide favorable opportunities for our Argentinean subsidiaries. Our Argentinean operations contributed $145 million, or 2.3% of consolidated net revenues in the three months and $439 million, or 2.3% of consolidated net revenues in the nine months ended September 30, 2016. As of September 30, 2016, the net monetary liabilities of our Argentina operations were not material. Argentina is not designated as a highly-inflationary economy for accounting purposes, so we record currency translation adjustments
within equity and realized exchange gains and losses on transactions in earnings. Our Ukraine operations contributed $15 million, or 0.3%, of consolidated net revenues in the three months and $30 million, or 0.2% of consolidated net revenues in the six months ended June 30, 2017, and our Ukraine net monetary assets as of June 30, 2017 were not material.
Other Countries.Since we sell in approximately 165 countries and have operations in over 80 countries, and sell in 165 countries, we regularly monitor economic and currency-related risks and seek to take protective measures in response to these exposures. Some of the countries in which we do business have recently experienced periods of significant economic uncertainty. These include Brazil, China, Mexico, Russia, United Kingdom (Brexit), Turkey, Egypt, Nigeria and Ukraine,South Africa, most of which have had either currency devaluation or volatility in exchange rates.rate volatility. We continue to monitor operations, currencies and net monetary exposures in these countries. At this time, we do not anticipate anya risk to our operating results from changing to highly inflationary accounting in these countries.
Transfers of Financial Assets:
We account for transfers of financial assets, such as uncommitted revolvingnon-recourse accounts receivable factoring arrangements, when we have surrendered control over the related assets. Determining whether control has transferred requires an evaluation of relevant legal considerations, an assessment of the nature and extent of our continuing involvement with the assets transferred and any other relevant considerations. We use receivable factoring arrangements periodically when circumstances are favorable to manage liquidity. We have a factoring arrangement with a major global bank for a maximum combined capacity of $820 million.$1.0 billion. Under the program, we may sell eligible short-term trade receivables to the bank in exchange for cash. We then continue to collect the receivables sold, acting solely as a collecting agent on behalf of the bank. WeThe outstanding principal amount of receivables under this arrangement amounted to $594 million as of June 30, 2017 and $644 million as of December 31, 2016. The incremental cost of factoring receivables under this arrangement was recorded in net revenue and was approximately $2 million in the three months and $3 million in the six months ended June 30, 2017 and was $1 million in the three months and $2 million in the six months ended June 30, 2016. During our contract negotiations with customers, we also enter into arrangementswork with our customers to achieve earlier collection of receivables. The incremental cost of factoring receivables for all regions was $2 million in the three months and $6 million in the nine months ended September 30, 2016 and $1 million in the three months and $4 million in the nine months ended September 30, 2015 and was recorded in net revenue. The outstanding principal amount of receivables under these arrangements amounted to $589$38 million as of SeptemberJune 30, 20162017 and $401$101 million as of September 30, 2015.
Accounting Calendar Change:
In connection with moving toward a common consolidation date across the Company,December 31, 2016. The incremental cost of these arrangements was recorded in the first quarter of 2015, we changed the consolidation date for our North America segment from the last Saturday of each period to the last calendar day of each period. The change had a favorable impact of $19net revenue and was less than $1 million on net revenues and $9 million on operating income in the three months and $57$1 million on net revenues and $27 million on operating income in the ninesix months ended SeptemberJune 30, 2015. As a result of this change, each of our operating subsidiaries now reports results as of2017 and was $2 million in the last calendar day ofthree months and $3 million in the period.six months ended June 30, 2016.
New Accounting Pronouncements:
In August 2016,May 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to clarify when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The ASU is applied prospectively to awards that are modified on or after the adoption date. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently assessing the impact on our consolidated financial statements and do not anticipate a material impact to our consolidated financial statements.
In March 2017, the FASB issued an ASU to amend the amortization period for certain purchased callable debt securities held at a premium, shortening the period to the earliest call date instead of the maturity date. The standard does not impact securities held at a discount as the discount continues to be amortized to maturity. The ASU is applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact on our consolidated financial statements and do not anticipate a material impact to our consolidated financial statements.
In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The standard requires employers to disaggregate the service cost component from the other components of net benefit cost and disclose the amount and location where the net benefit cost is recorded in the income statement or capitalized in assets. The standard is to be applied on a retrospective basis for the change in presentation in the income statement and prospectively for the change in presentation on the balance sheet. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently assessing the impact on our consolidated financial statements.
In January 2017, the FASB issued an ASU that clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business may affect many areas of accounting including acquisitions, disposals, goodwill and consolidation. The ASU is applied on a prospective basis and is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We continue to assess the ASU based on any pending or new transactions that may arise prior to the January 1, 2018 adoption date. At this time, we do not anticipate early adopting nor a material impact on our consolidated financial statements.
In November 2016, the FASB issued an ASU that requires the change in restricted cash or cash equivalents to be included with other changes in cash and cash equivalents in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We anticipate adopting this standard at the same time as the cash flow statement classification changes described below go into effect on January 1, 2018. We continue to assess the impact on our consolidated statement of cash flows.
In October 2016, the FASB issued an ASU that requires the recognition of tax consequences of intercompany asset transfers other than inventory when the transfer occurs and removes the exception to postpone recognition until the asset has been sold to an outside party. The standard is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We anticipate adopting on January 1, 2018 and do not expect the ASU to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued an ASU to provide guidance on eight specific cash flow classification issues and reduce diversity in practice in how some cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently assessinganticipate adopting this standard on January 1, 2018. We continue to assess the impact on our condensed consolidated financial statements.
In March 2016, the FASB issued an ASU to simplify the accounting for stock-based compensation. The ASU addresses several areasstatement of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and cash flow statement presentation. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact on our condensed consolidated financial statements. We anticipate the impact of adopting the standard on January 1, 2017 will be greater volatility in our condensed consolidated income statement in subsequent reporting periods. We will begin recording certain stock-based compensation tax impacts in our provision for income taxes prospectively which, under current guidance, are recorded directly to equity.
In March 2016, the FASB issued an ASU that simplifies the transition accounting for increases in investments that require a change from the cost basis to the equity method of accounting. U.S. GAAP currently requires the impact of such changes in accounting method to be retroactively applied to all prior periods that the investment was held. Under the new standard, adjustments to the investor’s basis in the investment should be recorded on the date the investment becomes qualified for equity method accounting. The equity method of accounting is then applied prospectively from that date. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. This ASU is not expected to have a significant impact on our condensed consolidated financial statements. We plan to adopt when the ASU becomes effective or earlier if an in-scope transaction arises.
In March 2016, the FASB issued an ASU that clarifies whether contingent put and call options meet the “clearly and closely related” criteria in connection with accounting for embedded derivatives. U.S GAAP requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. The criteria include determining that the economic characteristics and risks of the embedded derivatives are not “clearly and closely related” to those of the host contract. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We plan to adopt the new standard as of December 31, 2016 and do not expect this ASU to have a significant impact on our condensed consolidated financial statements.
In March 2016, the FASB issued an ASU that applies when there is a contract novation to a new counterparty for a derivative designated as an accounting hedge. The ASU clarifies that such a change in counterparty does not, in and of itself, require de-designation of the hedging relationship, provided that all other hedge accounting criteria continue to be met. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We plan to adopt the new standard as of December 31, 2016 and do not expect this ASU to have a significant impact on our condensed consolidated financial statements.flows.
In February 2016, the FASB issued an ASU on lease accounting. The ASU revises existing U.S. GAAP and outlines a new model for lessors and lessees to use in accounting for lease contracts. The guidance requires lessees to recognize aright-of-use asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases. In the condensed consolidated statement of earnings, lessees will classify leases as either operating (resulting in straight-line expense) or financing (resulting in a front-loaded expense pattern). The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently assessinganticipate adopting the new standard on January 1, 2019. We continue to make progress in our due diligence and assess the impact of the new standard across our operations and on our condensed consolidated financial statements.statements, which will consist primarily of recording lease assets and liabilities on our balance sheet for our operating leases.
In January 2016, the FASB issued an ASU that provides updated guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. The standard requires that equity investments (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) be measured at fair value, with changes in fair value recognized in net income. The standard also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017. This ASU is not expected to have a significant impact on our condensed consolidated financial statements.
In May 2014, the FASB issued an ASU on revenue recognition from contracts with customers. The new ASU outlines a new, single comprehensive model for companies to use in accounting for revenue. The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for the goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows from customer contracts, including significant judgments made in recognizing revenue. In 2016 and early 2017, the FASB issued several ASUs that clarified principal versus agent (gross versus net) revenue presentation considerations, confirmed the accounting for certain prepaid stored-value products should be accounted for under the new revenue recognition ASU and not under other U.S. GAAP and clarified the guidance for identifying performance obligations within a contract, and the accounting for licenses.licenses and partial sales of nonfinancial assets. The FASB also issued an ASUtwo ASUs providing technical corrections, narrow scope exceptions and practical expedients to clarify and improve the implementation of the new revenue recognition guidance. Early adoptionThe revenue guidance is permitted as of the original effective date which was for annual reporting periods beginning after December 15, 2016.2017, with early adoption permitted as of the original effective date (annual reporting periods beginning after December 15, 2016). The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption. We continueplan to make progress on our efforts to assess the impact of the ASU across our operations and on our condensed consolidated financial statements. We anticipate adoptingadopt the new standard on January 1, 2018 on a full retrospective basis. We are
finalizing reviews and working on implementing the process, policy and disclosure changes that will go into effect on January 1, 2018. At this time, we do not expect a material financial impact from adopting the new revenue standards.
Reclassifications:
Certain amounts previously reported have been reclassified to conform to current-year presentation. In connection with the October 1, 2016 segment change described above, see Notes 5,Goodwill and Intangible Assets; 6,2014-2018 Restructuring Program;and 15,Segment Reporting for information on related changes made to prior-period segment goodwill, net revenues and earnings aligned with the new segment structure. We also reclassified certain amounts previously reported within our condensed consolidated statements of cash flows, condensed consolidated statements of comprehensive earnings and Note 12,Reclassifications from Accumulated Other Comprehensive Income, to be consistent with the current-year presentation.
Note 2. Divestitures and Acquisitions
JDE Coffee Business Transactions:
On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, JDE.Jacobs Douwe Egberts (“JDE”). Following the exchange of a portion of our investment in JDE for an interest in Keurig Green Mountain, Inc. (“Keurig”) in March 2016, we held a 26.5% equity interest in JDE. (See discussion underKeurig Transactionbelow.) The remaining 73.5% equity interest in JDE was held by a subsidiary of Acorn Holdings B.V. (“AHBV,” owner of DEMB prior to July 2, 2015). Please see discussion of the acquisition of an interest in Keurig below underKeurig Transaction. As of September 30, 2016, we hold a 26.4% equity interest in JDE followingFollowing the transactions discussed underJDE Stock-Based Compensation Arrangementsbelow.
The consideration we received in the JDE coffee business transactions completed on July 2, 2015 consisted of€3.8 billion of cash ($4.2 billionbelow, as of July 2, 2015),June 30, 2017, we hold a 43.5% equity26.5% voting interest, a 26.4% ownership interest and a 26.2% profit and dividend sharing interest in JDE. We recorded $19 million of JDE (prior toequity earnings for three months and $38 million for the decrease in ownership due tosix months ended June 30, 2017 and $45 million for the Keurig transactionthree months and $92 million for the compensation arrangements discussed below)and $794 million in receivables (related to sales price adjustments and tax formation cost payments). During the third quarter of 2015, wesix months ended June 30, 2016. We also recorded $283$49 million of cash and receivables from JDE related to reimbursement of costs that we incurred in separating our coffee businesses. The cash and equity consideration wedividends received at closing reflects that we retained our interest in a Korea-based joint venture, DSF. During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”). In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from this sale as part of the overall JDE coffee business transactions. Please see discussion of the divestiture of AGF below underOther Divestitures and Acquisitions.
On July 5, 2016, we received an expected cash payment of $275 million from JDE to settle the receivable related to tax formation costs that were part of the initial sales price.
In connection with the contribution of our global coffee businesses to JDE on July 2, 2015, we recorded a final pre-tax gain of $6.8 billion (or $6.6 billion after taxes) in 2015 after final adjustments as described below. We also recorded approximately $1.0 billion of pre-tax net gains related to hedging the expected cash proceeds from the transactions as described further below. During the fourth quarter of 2015, we and JDE concluded negotiations of a sales price adjustment and completed the valuation of our investment in JDE. Primarily due to the negotiated resolution of the sales price adjustment in the fourth quarter of 2015, we recorded a $313 million reduction in the pre-tax gain on the coffee transaction, reducing the $7.1 billion estimated gain in the third quarter of 2015 to the $6.8 billion final gain for 2015. As part of our sales price negotiations, we retained the right to collect future cash payments if certain estimated pension liabilities are realized over an agreed amount in the future. As such, we may recognize additional income related to this negotiated term in the future.
The final value of our investment in JDE on July 2, 2015 was€4.1 billion ($4.5 billion as of July 2, 2015). The fair value of the JDE investment was determined using both income-based and market-based valuation techniques. The discounted cash flow analysis reflected growth, discount and tax rates and other assumptions reflecting the underlying combined businesses and countries in which the combined coffee businesses operate. The fair value of the JDE investment also included the fair values of theCarte Noire andMerrild businesses, which JDE agreed to divest to comply with the conditioned approval by the European Commission related to the JDE coffee business transactions. As of the end ofduring the first quarter of 2016, these businesses were sold by JDE. As the July 2, 2015 fair values for these businesses were recorded by JDE at their pending sales values, we did not record any gain or loss on the sales of these businesses in our share of JDE’s earnings.
In connection with the expected receipt of cash in euros at the time of closing, we entered into a number of consecutive currency exchange forward contracts in 2014 and 2015 to lock in an equivalent expected value in U.S. dollars as of the date the JDE coffee business transactions were first announced in May 2014. Cumulatively, we realized aggregate net gains and received cash of approximately $1.0 billion on these hedging contracts that increased the cash we received in connection with the JDE coffee business transactions from $4.2 billion in cash consideration received to $5.2 billion. In connection with these currency contracts, we recognized net gains of $29 million in the three months and $436 million in the nine months ended September 30, 2015 within interest and other expense, net.
We also incurred incremental expenses related to readying our global coffee businesses for the transactions that totaled $54 million in the three months and $239 million in the nine months ended September 30, 2015. These expenses were recorded within selling, general and administrative expenses of primarily our Europe segment, as well as within our Eastern Europe, Middle East and Africa (“EEMEA”) segment and general corporate expenses.
JDE Capital Increase:
On December 18, 2015, AHBV and we agreed to provide JDE additional capital to pay down some of its debt with lenders. Our pro rata share of the capital increase was€499 million ($544 million as of December 18, 2015) and was made in return for a pro rata number of additional shares in JDE such that our ownership in JDE did not change following the capital increase. To fund our share of the capital increase, we contributed€460 million ($501 million) of JDE receivables and made a€39 million ($43 million) cash payment.2017.
JDE Stock-Based Compensation Arrangements:
At the close ofOn June 30, 2016, we entered into agreements with AHBV and its affiliates to establish a new stock-based compensation arrangement tied to the issuance of JDE equity compensation awards to JDE employees. This arrangement replaced a temporary equity compensation program tied to the issuance of AHBV equity compensation to JDE employees. New Class C, D and E JDE shares were authorized and issued for investments made by, and vested stock-based compensation awards granted to, JDE employees. Under these arrangements, share ownership dilution offrom the JDE sharesClass C, D and E shareholders is limited to 2%. We retained our 26.5% voting rights and have a slightly lower portion of JDE’s profits and dividends than our shareholder ownership interest as certain employee shareholders receive a slightly larger share. Upon execution of the agreements and the creation of the Class C, D and E JDE shares, as a percentage of the total JDE issued shares, our Class B shares changeddecreased from 26.5% to 26.4% and AHBV’s Class A shares changeddecreased from 73.5% to 73.22%, while the Class C, D and E shares, held by AHBV and its affiliates until the JDE employee awards vest, comprised 0.38% of JDE’s shares. Additional Class C shares are available to be issued when planned long-term incentive plan (“JDE LTIP”) awards vest, generally over the next five years. When the JDE Class C shares are issued in connection with the vested JDE LTIP awards, the Class A and B relative ownership interests will decrease. Based on estimated achievement and forfeiture assumptions, we do not expect our JDE ownership interest to decrease below 26.27%. As of September 30, 2016, our ownership interest in JDE was 26.4%.
JDE Tax Matter Resolution:
On July 19, 2016, the Supreme Court of Spain reached a final resolution on a challenged JDE tax position held by a predecessor DEMB company that resulted in an unfavorable tax expense of€114 million ($128 million as of September 30, 2016). As a result, our earnings in the third quarter of 2016 were negatively affected by€30 million ($34 million as of September 30, 2016).
Keurig Transaction:
On March 3, 2016, a subsidiary of AHBV completed thea $13.9 billion acquisition of all of the outstanding common stock of Keurig through a merger transaction. On March 7, 2016, we exchanged with a subsidiary of AHBV a portion of our equity interest in JDE with a carrying value of€1.7 billion (approximately $2.0 billion as of March 7, 2016) for an interest in Keurig with a fair value of $2.0 billion based on the merger consideration per share for Keurig. We recorded the difference between the fair value of Keurig and our basis in JDE shares as a $43 million gain on the equity method investment exchange in March 2016. FollowingImmediately following the exchange, our ownership interest in JDE was 26.5% and our interest in Keurig was 24.2%. Both AHBV and we hold our investments in Keurig through a combination of equity and interests in a shareholder loan, withpro-rata ownership of each. Our initial $2.0 billion investment in Keurig includes a $1.6 billion Keurig equity interest and a $0.4 billion shareholder loan receivable, which are reported on a combined basis within equity method investments on our condensed consolidated balance sheet as of SeptemberJune 30, 2016.2017. The shareholder loan has a 5.5% interest rate and is payable at the end of a seven-year term on February 27, 2023. We recorded Keurig equity earnings, shareholder loan interest and dividends of $10$15 million, for$6 million and $2 million during the three months and $39$29 million, for$12 million and $6 million during the sevensix months ended SeptemberJune 30, 2017. In 2016, and interest income from thewe recorded Keurig equity earnings, shareholder loan interest and dividends of $21 million, $6 million forand no dividends during the three months and $14$29 million, for$8 million and $2 million during the sevenfour months ended SeptemberJune 30, 2016 within equity method earnings. Additionally, we received $2 million in the three months ended and $4 million in the seven months ended September 30, 2016 of dividends on our investment in Keurig. We continue to account for our investments in JDE and Keurig under the equity method and recognize our share of their earnings within equity method investment earnings and our share of their dividends within our cash flows. As of September 30, 2016, Keurig is working to finalize the acquisition purchase price allocation.2016.
Coffee Business Equity Earnings:
We have reflected the results of our historical coffee businesses and equity earnings from JDE, Keurig and DSF in our results from continuing operations as the coffee category continues to be a significant part of our net earnings and business strategy going forward. Historically, our coffee businesses and the income from equity method investments were recorded within our operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig and DSF, and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income.
The equity method investment earnings and interest income contributed by our coffee investments included losses of $3 million from JDE, earnings of $16 million from Keurig and $11 million from DSF for the three months and earnings of $89 million from JDE, $53 million from Keurig (since March 7, 2016) and $56 million from DSF for the nine months ended September 30, 2016. For the three and nine months ended September 30, 2015, the equity method investment losses contributed by our coffee investments included $105 million from JDE and the equity method investment earnings contributed by our coffee investments included $20 million from DSF. For the nine months ended September 30, 2015, after-tax earnings were $296 million for the coffee businesses we contributed to JDE on July 2, 2015 and $40 million for DSF.
Other Divestitures and AcquisitionsAcquisitions::
DuringOn July 4, 2017, we completed the nine months ended September 30, 2016, we entered into the following transactions thatsale of most of our grocery business in Australia and New Zealand to Bega Cheese Limited for $456 million Australian dollars ($347 million as of September 30, 2016, metJuly 4, 2017) and we expect to make a final working capital adjustment next quarter. We divested approximately $25 million of current assets, approximately $135 million ofnon-current assets and approximately $5 million of current liabilities based on the qualificationsJuly 4, 2017 exchange rate.
On April 28, 2017, we completed the sale of held for sale accounting. These transactions included pending sales of:
On November 2, 2016, we recorded anpurchased from Burton’s Biscuit Company certain intangibles, which include the license to manufacture, market and sell Cadbury-branded biscuits in additional $5 million impairment charge for another candy trademark to reducekey markets around the overall net assets to the estimated net sales proceeds after transaction costs. Additionally,world, including in the nine months ended September 30, 2016, we incurredU.K., France, Ireland, North America and accrued $84 million of incremental expenses to ready theSaudi Arabia. The transaction was accounted for as a business combination. Total cash paid for the sale transactions expected to close in 2017. We recorded these costs within cost of sales and selling, general and administrative expenses of our Europe segment.
As of September 30,to inventory, reflecting a November 2, 2016 the total held for sale assets and liabilities consisted of $139 million of current assets, $243 million of non-current assets, $39 million of current liabilities and $34 million of non-current liabilities.exchange rate.
During the nine months ended September 30, 2016, we also completed the following asset sales:
On August 12, 2016, we announced an agreement to purchase from Burton’s Biscuit Company the license that enables us to manufacture, market and sell Cadbury-branded biscuits around the world, including in the U.K., France, Ireland, North America and Saudi Arabia.requirements. The transaction remains subject to regulatory approval. We expect that this transaction will close in the fourth quarter of 2016.
During the third quarter of 2016, we completed the acquisition of a Vietnamese biscuit operation within our Asia Pacific segment. On July 15, 2015, we acquired an 80% interest in the biscuit operation and on August 22, 2016, we acquired the remaining 20% interest. Total cash paid for the biscuit operation, intellectual property, non-compete and consulting agreements less purchase price adjustments was 12,404 billion Vietnamese dong ($569 million using applicable exchange rates on July 15, 2015, November 27, 2015 and August 22, 2016). We have made and received the following cash payments in connection with the acquisition:
As of September 30, 2016, we have recorded a final allocation of the consideration paid including $10 million to inventory, $49 million to property, plant and equipment, $86$2 million of intangible assets, $385 million of goodwill and $31 million to other net liabilities. The allocation ofconsideration increased the fair values had an immaterial impact on operating results in periods following the initial July 15, 2015 closing date. We recorded the non-compete and consulting agreements as prepaid contracts within other current and non-current assets and they are amortized into net earnings over the contract terms. For the nine months ended September 30, 2016, the acquisition added $71 million in incremental net revenues and $5 million in incremental operating income. For the three and nine months ended September 30, 2015, the acquisition added $70 million in incremental revenues and $16 million in incremental operating income. Within selling, general and administrative expenses, we recorded integration costspre-tax gain of $6 million for the nine months ended September 30, 2016 and $4 million for the three months and $5 million for the nine months ended September 30, 2015. We also recorded acquisition costs of $6 million for the three months and $7 million for the nine months ended September 30, 2015.
On April 23, 2015, we completed the divestiture of our 50% equity interest in AGF, our Japanese coffee joint venture, to our joint venture partner, which generated cash proceeds of 27 billion Japanese yen ($225 million as of April 23, 2015) and a pre-tax gain of $13 million (after-tax loss of $9 million) in the second quarter of 2015. Upon closing, we divested our $99 million investment in the joint venture, $65 million2016 to a total 2016pre-tax gain of goodwill and $41 million of accumulated other comprehensive losses. We also incurred approximately $7 million of transaction costs. The operating results of the divestiture were not material to our condensed consolidated financial statements for the three and nine months ended September 30, 2015.$8 million.
On February 16, 2015, we acquired a U.S. snack food company, Enjoy Life Foods, within our North America segment. We paid cash and settled debt totaling $81 million in connection with the acquisition. Upon finalizing the valuation of the acquired net assets during the second quarter of 2015, we recorded an $81 million purchase price allocation of $58 million in identifiable intangible assets, $20 million of goodwill and $3 million of other net assets. The acquisition-related costs and operating results of the acquisition were not material to our condensed consolidated financial statements for the three and nine months ended September 30, 2016 and 2015.
Sales of Property:
In the nine months ended September 30,second quarter of 2016, we sold property within our North America segment and from our centrally held corporate assets. In the third quarter, we sold property inThe North America that generated cash proceeds of $10 million and a pre-tax gain of $6 million and we sold a corporate aircraft hangar that generated cash proceeds of $3 million and a pre-tax gain of $1 million. In the second quarter of 2016, we also sold separate property in North America thatsale generated cash proceeds of $40 million and apre-tax gain of $33 million and we sold amillion. The corporate aircraft thatsale generated cash proceeds of $20 million and apre-tax gain of $6 million. The gains were recorded within selling, general and administrative expenses and cash proceeds were recorded in cash flows from other investing activities in the ninesix months ended SeptemberJune 30, 2016.
Note 3. Inventories
Inventories consisted of the following:
As of September 30, | As of December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Raw materials | $ | 819 | $ | 782 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Inventory reserves | (106 | ) | (103 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Note 4. Property, Plant and Equipment Property, plant and equipment consisted of the following:
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In connection with our restructuring program, we recordednon-cash asset write-downs (including accelerated depreciation and asset impairments) of $47 million in | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Capital expenditures of $909 million for the nine months ended September 30, 2016 exclude $274 million of accrued capital expenditures remaining unpaid at September 30, 2016 and include payment for $322 million of capital expenditures that were accrued and unpaid at December 31, 2015.
In connection with our restructuring program, we recorded non-cash asset write-downs (including accelerated depreciation and asset impairments) of $120 million in the three months and $233 million in the nine months ended September 30, 2016 and $56 million in the three months and $191 million in the nine months ended September 30, 2015 (see Note 6,2014-2018 Restructuring Program). These charges were recorded in the condensed consolidated statements of earnings within asset impairment and exit costs as follows:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
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Latin America | $ | 3 | $ | 6 | $ | 16 | $ | 40 | ||||||||
Asia Pacific | 6 | 18 | 24 | 46 | ||||||||||||
EEMEA | 10 | 2 | 16 | 4 | ||||||||||||
Europe | 42 | 14 | 77 | 51 | ||||||||||||
North America | 59 | 16 | 98 | 50 | ||||||||||||
Corporate | – | – | 2 | – | ||||||||||||
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Latin America | $ | 6 | $ | 8 | $ | 12 | $ | 13 | ||||||||
AMEA | 30 | 12 | 42 | 21 | ||||||||||||
Europe | 4 | 17 | 42 | 38 | ||||||||||||
North America | 7 | 22 | 22 | 39 | ||||||||||||
Corporate | – | 2 | – | 2 | ||||||||||||
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Totalnon-cash asset write-downs | $ | 47 | $ | 61 | $ | 118 | $ | 113 | ||||||||
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Note 5. Goodwill and Intangible Assets
Goodwill by reportable segment was:reflects our current segment structure for both periods presented:
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Latin America | $ | 917 | $ | 858 | ||||
Asia Pacific | 2,489 | 2,520 | ||||||
EEMEA | 1,337 | 1,304 | ||||||
Europe | 7,107 | 7,117 | ||||||
North America | 8,901 | 8,865 | ||||||
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Non-amortizable intangible assets | $ | 17,603 | $ | 17,527 | ||||
Amortizable intangible assets | 2,340 | 2,320 | ||||||
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Non-amortizable intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the globalLU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of trademarks, customer-related intangibles, process technology, licenses and non-compete agreements. At September 30, 2016, the weighted-average life of our amortizable intangible assets was 13.6 years.
Amortization expense for intangible assets was $44 million in the three months and $132 million in the nine months ended September 30, 2016 and $45 million in the three months and $137 million in the nine months ended September 30, 2015. We currently estimate annual amortization expense for each of the next five years to be approximately $185 million, estimated using September 30, 2016 exchange rates.
Changes in goodwill and intangible assets consisted of:
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Balance at January 1, 2016 | $ | 20,664 | $ | 19,847 | ||||
Changes due to: | ||||||||
Currency | 163 | 48 | ||||||
Acquisition | (76 | ) | 86 | |||||
Asset impairments | – | (30 | ) | |||||
Sale of business and assets | – | (8 | ) | |||||
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Latin America | $ | 925 | $ | 897 | ||||
AMEA | 3,413 | 3,324 | ||||||
Europe | 7,667 | 7,170 | ||||||
North America | 8,910 | 8,885 | ||||||
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Non-amortizable intangible assets | $ | 17,465 | $ | 17,004 | ||||
Amortizable intangible assets | 2,389 | 2,315 | ||||||
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Accumulated amortization | (1,340 | ) | (1,218 | ) | ||||
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Non-amortizable intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the globalLU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of trademarks, customer-related intangibles, process technology, licenses andnon-compete agreements. At June 30, 2017, the weighted-average life of our amortizable intangible assets was 13.6 years.
Amortization expense for intangible assets was $44 million in each of the three months and $88 million in each of the six months ended June 30, 2017 and June 30, 2016. For the next five years, we currently estimate annual amortization expense of approximately $175 million for the next four years and approximately $85 million in year five, reflecting June 30, 2017 exchange rates.
Changes in goodwill and intangible assets consisted of:
Goodwill | Intangible Assets, at cost | |||||||
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Balance at January 1, 2017 | $ | 20,276 | $ | 19,319 | ||||
Currency | 651 | 634 | ||||||
Divestiture | (23 | ) | (62 | ) | ||||
Acquisition | 12 | – | ||||||
Asset impairment | – | (38 | ) | |||||
Other | (1 | ) | 1 | |||||
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Balance at June 30, 2017 | $ | 20,915 | $ | 19,854 | ||||
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Changes to goodwill and intangibles were:
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• | Acquisition – During the second quarter of 2017, we recorded a $12 million adjustment to goodwill in connection with our preliminary purchase price allocation for the Burton’s Biscuit Company purchase completed in the fourth quarter of 2016. See Note 2,Divestitures and Acquisitions, for additional information. |
During our 20152016 annual testing ofnon-amortizable intangible assets, we recorded $71$98 million of impairment charges in the three months ended December 31, 2015fourth quarter of 2016 related to fourfive trademarks in Asia Pacific, Europe and Latin America.recorded across all regions. We also noted sevennine brands, including the fourfive impaired trademarks, with $598$630 million of aggregate book value as of December 31, 20152016 that each had a fair value in excess of book value of 10% or less. While these intangible assets passed our annual impairment testing and weWe believe our current plans for each of these brands will allow them to continue to not be impaired, but if the product line expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future.
Note 6. 2014-2018 Restructuring Program
On May 6, 2014, our Board of Directors approved a $3.5 billion restructuring program comprised of approximately $2.5 billion in cash costs and $1 billion in non-cash costs (the “2014-2018 Restructuring Program”), and up to $2.2 billion of capital expenditures. On August 31, 2016, our Board of Directors approved a reallocation within the program of $600 million of previously approved capital expenditures to be spent onreallocation between restructuring program cash costs resulting in $3.1and capital expenditures so that now the $5.7 billion program consists of approximately $4.1 billion of restructuring program costs ($3.1 billion cash costs to be expensedand $1 billionnon-cash costs) and up to $1.6 billion of capital expenditures. There was no change to the total $5.7 billion of total program costs and no change to the total $4.7 billion of cash outlays. The primary objective of the 2014-2018 Restructuring Program is to reduce our operating cost structure in both our supply chain and overhead costs. The program is intended primarily to cover severance as well as asset disposals and other manufacturing-relatedone-time costs. Since inception, we have incurred total restructuring and related implementation charges of $2.1$2.9 billion related to the 2014-2018 Restructuring Program. We have incurred the majority of the program’s charges through the third quarter of 2016 and we expect to completeincur the full $4.1 billion of program charges byyear-end 2018.
Restructuring Costs:
We recorded restructuring charges of $187$148 million in the three months and $480$305 million in the ninesix months ended SeptemberJune 30, 20162017 and $146$154 million in the three months and $442$293 million in the ninesix months ended SeptemberJune 30, 20152016 within asset impairment and exit costs. The activity for the 2014-2018 Restructuring Program liability activity for the ninesix months ended SeptemberJune 30, 20162017 was:
Severance | Severance and related costs | Asset Write-downs | Total | |||||||||||||||||||||
and related | Asset | (in millions) | ||||||||||||||||||||||
costs | Write-downs | Total | ||||||||||||||||||||||
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Liability balance, January 1, 2016 | $ | 395 | $ | – | $ | 395 | ||||||||||||||||||
Liability balance, January 1, 2017 | $ | 464 | $ | – | $ | 464 | ||||||||||||||||||
Charges | 246 | 234 | 480 | 184 | 121 | 305 | ||||||||||||||||||
Cash spent | (249 | ) | – | (249 | ) | (162 | ) | – | (162 | ) | ||||||||||||||
Non-cash settlements / adjustments | (10 | ) | (234 | ) | (244 | ) | ||||||||||||||||||
Non-cash settlements/adjustments | (5 | ) | (121 | ) | (126 | ) | ||||||||||||||||||
Currency | 7 | – | 7 | 19 | – | 19 | ||||||||||||||||||
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Liability balance, September 30, 2016 | $ | 389 | $ | – | $ | 389 | ||||||||||||||||||
Liability balance, June 30, 2017 | $ | 500 | $ | – | $ | 500 | ||||||||||||||||||
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We spent $89$78 million in the three months and $249$162 million in the ninesix months ended SeptemberJune 30, 20162017 and $51$86 million in the three months and $156$160 million in the ninesix months ended SeptemberJune 30, 20152016 in cash severance and related costs. We also recognizednon-cash pension settlement losses (See Note 9,Benefit PlansPlans)),non-cash asset write-downs (including accelerated depreciation and asset impairments) and othernon-cash adjustments of $120totaling $54 million in the three months and $244$126 million in the ninesix months ended SeptemberJune 30, 20162017 and $56$72 million in the three months and $196$124 million in the ninesix months ended SeptemberJune 30, 2015.2016. At SeptemberJune 30, 2016, $3022017, $435 million of our net restructuring liability was recorded within other current liabilities and $87$65 million was recorded within other long-term liabilities.
Implementation Costs:
Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities. We believe the disclosure of implementation costs provides readers of our financial statements with more information on the total costs of our 2014-2018 Restructuring Program. Implementation costs primarily relate to reorganizing our operations and facilities in connection with our supply chain reinvention program and other identified productivity and cost saving initiatives. The costs include incremental expenses related to the closure of facilities, costs to terminate certain contracts and the simplification of our information systems. Within our continuing results of operations, we recorded implementation costs of $114$63 million in the three months and $286$117 million in the ninesix months ended SeptemberJune 30, 20162017 and $75$74 million in the three months and $185$172 million in the ninesix months ended SeptemberJune 30, 2015.2016. We recorded these costs within cost of sales and general corporate expense within selling, general and administrative expenses.
Restructuring and Implementation Costs in Operating Income:
During the three and ninesix months ended SeptemberJune 30, 20162017 and 2015June 30, 2016, and since inception of the 2014-2018 Restructuring Program, we recorded restructuring and implementation costs within operating income by segment (as revised to reflect our current segment structure) as follows:
Latin | Asia | North | Latin | North | ||||||||||||||||||||||||||||||||||||||||||||||||
America | Pacific | EEMEA | Europe | America (1) | Corporate (2) | Total | America | AMEA | Europe | America (1) | Corporate (2) | Total | ||||||||||||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring Costs | $ | 27 | $ | 10 | $ | 6 | $ | 69 | $ | 75 | $ | – | $ | 187 | $ | 8 | $ | 48 | $ | 50 | $ | 33 | $ | 9 | $ | 148 | ||||||||||||||||||||||||||
Implementation Costs | 15 | 7 | 2 | 45 | 30 | 15 | 114 | 10 | 10 | 19 | 13 | 11 | 63 | |||||||||||||||||||||||||||||||||||||||
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Total | $ | 42 | $ | 17 | $ | 8 | $ | 114 | $ | 105 | $ | 15 | $ | 301 | $ | 18 | $ | 58 | $ | 69 | $ | 46 | $ | 20 | $ | 211 | ||||||||||||||||||||||||||
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For the Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring Costs | $ | 71 | $ | 51 | $ | 37 | $ | 172 | $ | 144 | $ | 5 | $ | 480 | $ | 31 | $ | 73 | $ | 119 | $ | 72 | $ | 10 | $ | 305 | ||||||||||||||||||||||||||
Implementation Costs | 34 | 18 | 13 | 74 | 101 | 46 | 286 | 20 | 20 | 31 | 25 | 21 | 117 | |||||||||||||||||||||||||||||||||||||||
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Total | $ | 105 | $ | 69 | $ | 50 | $ | 246 | $ | 245 | $ | 51 | $ | 766 | $ | 51 | $ | 93 | $ | 150 | $ | 97 | $ | 31 | $ | 422 | ||||||||||||||||||||||||||
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For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring Costs | $ | 30 | $ | 33 | $ | 7 | $ | 35 | $ | 39 | $ | 2 | $ | 146 | $ | 32 | $ | 34 | $ | 45 | $ | 36 | $ | 7 | $ | 154 | ||||||||||||||||||||||||||
Implementation Costs | 6 | 3 | 1 | 19 | 19 | 27 | 75 | 12 | 10 | 3 | 35 | 14 | 74 | |||||||||||||||||||||||||||||||||||||||
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Total | $ | 36 | $ | 36 | $ | 8 | $ | 54 | $ | 58 | $ | 29 | $ | 221 | $ | 44 | $ | 44 | $ | 48 | $ | 71 | $ | 21 | $ | 228 | ||||||||||||||||||||||||||
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For the Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring Costs | $ | 79 | $ | 78 | $ | 21 | $ | 190 | $ | 70 | $ | 4 | $ | 442 | $ | 44 | $ | 63 | $ | 112 | $ | 68 | $ | 6 | $ | 293 | ||||||||||||||||||||||||||
Implementation Costs | 27 | 12 | 7 | 47 | 40 | 52 | 185 | 19 | 18 | 33 | 72 | 30 | 172 | |||||||||||||||||||||||||||||||||||||||
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Total | $ | 106 | $ | 90 | $ | 28 | $ | 237 | $ | 110 | $ | 56 | $ | 627 | $ | 63 | $ | 81 | $ | 145 | $ | 140 | $ | 36 | $ | 465 | ||||||||||||||||||||||||||
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Total Project 2014-2016(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Project 2014-2017(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring Costs | $ | 297 | $ | 199 | $ | 120 | $ | 491 | $ | 313 | $ | 45 | $ | 1,465 | $ | 369 | $ | 382 | $ | 768 | $ | 425 | $ | 60 | $ | 2,004 | ||||||||||||||||||||||||||
Implementation Costs | 89 | 47 | 28 | 184 | 177 | 159 | 684 | 128 | 104 | 235 | 221 | 199 | 887 | |||||||||||||||||||||||||||||||||||||||
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Total | $ | 386 | $ | 246 | $ | 148 | $ | 675 | $ | 490 | $ | 204 | $ | 2,149 | $ | 497 | $ | 486 | $ | 1,003 | $ | 646 | $ | 259 | $ | 2,891 | ||||||||||||||||||||||||||
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(1) | During |
(2) | Includes adjustment for rounding. |
(3) | Includes all charges recorded since program inception on May 6, 2014 through |
Note 7. Debt and Borrowing Arrangements
Short-Term Borrowings:
Our short-term borrowings and related weighted-average interest rates consisted of:
As of September 30, 2016 | As of December 31, 2015 | As of June 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||||||||
Amount | Weighted- | Amount | Weighted- | Amount | Weighted- | Amount | Weighted- | |||||||||||||||||||||||||
Outstanding | Average Rate | Outstanding | Average Rate | Outstanding | Average Rate | Outstanding | Average Rate | |||||||||||||||||||||||||
(in millions) | (in millions) | (in millions) | (in millions) | |||||||||||||||||||||||||||||
Commercial paper | $ | 2,175 | 0.8% | $ | – | 0.0% | $ | 4,219 | 1.2% | $ | 2,371 | 1.0% | ||||||||||||||||||||
Bank loans | 315 | 8.9% | 236 | 9.5% | 594 | 6.9% | 160 | 10.6% | ||||||||||||||||||||||||
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Total short-term borrowings | $ | 2,490 | $ | 236 | $ | 4,813 | $ | 2,531 | ||||||||||||||||||||||||
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As of SeptemberJune 30, 2016, the2017, commercial paper issued and outstanding had between 3 and 8889 days remaining to maturity. Bank loans includeCommercial paper borrowings onincreased sinceyear-end primarily as a result of issuances to finance the payment of long-term debt maturities, dividend payments and share repurchases during the quarter.
Some of our international subsidiaries maintain primarily uncommitted credit lines maintained by some of our international subsidiaries to meet short-term working capital needs. Collectively, these credit lines amounted to $2.2 billion at June 30, 2017 and $1.8 billion at December 31, 2016. Borrowings on these lines were $594 million at June 30, 2017 and $160 million at December 31, 2016. Short-term bank loans and cash and cash equivalents increased at the end of the second quarter as scheduled cash sweeps, which normally transfer cash between accounts to fund obligations, did not occur. As a result, temporary bank overdrafts resulted in the accounts scheduled to be funded and were recorded within short-term bank loans and funded in early July.
Borrowing Arrangements:
On March 1, 2017, to supplement our commercial paper program, we entered into a $1.5 billion revolving credit agreement for a364-day senior unsecured credit facility that is scheduled to expire on February 28, 2018. The agreement includes the same terms and conditions as our existing $4.5 billion multi-year credit facility discussed below. As of June 30, 2017, no amounts were drawn on the facility.
We also maintain a $4.5 billion multi-year senior unsecured revolving credit facility for general corporate purposes, including working capital needs, and to support our commercial paper program. On October 14, 2016, the revolving credit agreement, which was scheduled to expire on October 11, 2018, was extended through October 11, 2021. The revolving credit agreement includes a covenant that we maintain a minimum shareholders’ equity of at least $24.6 billion, excluding accumulated other comprehensive earnings / earnings/(losses) and the cumulative effects of any changes in accounting principles. At SeptemberJune 30, 2016,2017, we complied with this covenant as our shareholders’ equity, as defined by the covenant, was $37.2$35.9 billion. The revolving credit facility agreement also contains customary representations, covenants and events of default. There are no credit rating triggers, provisions or other financial covenants that could require us to post collateral as security. As of SeptemberJune 30, 2016,2017, no amounts were drawn on the facility.
Some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $1.8 billion at September 30, 2016 and $1.9 billion at December 31, 2015. Borrowings on these lines amounted to $315 million at September 30, 2016 and $236 million at December 31, 2015.
Long-Term Debt:
On October 17, 2016,April 12, 2017, we announced a cash tender offer to retire some of our long-term debt. We expect to complete the tender in the fourth quarter of 2016. We have not yet determined the notes to be retired and the full impact to our operating results. We expect to finance the repurchase of these notes, including the payment of accrued interest and other costs incurred, from net proceeds received from the $3.75 billion note issuance, expected to close on October 28, 2016, and the term loans, both described below.
On October 19, 2016, Mondelez International Holdings Netherlands B.V. (“MIHN”), a wholly owned subsidiary of Mondelēz International, Inc., launched an offering of $3.75 billion of notes, guaranteed by Mondelēz International, Inc. The $1.75 billion of 1.625% notes and the $500 million of floating rate notes will mature on October 28, 2019 and the $1.5 billion of 2.0% notes will mature on October 28, 2021. On October 28, 2016, we expect to receive proceeds, net of discounts and associated financing costs, of $3.73 billion. Proceeds from the notes issuance will be used for general corporate purposes, including to grant loans or make distributions to Mondelēz International, Inc. or its subsidiaries to fund all or a portion of the October 2016 cash tender offer and near-term debt maturities. We expect to amortize deferred financing costs into interest expense over the life of the notes. We entered into cross-currency swaps, serving as cash flow hedges, so that the U.S. dollar-denominated debt payments will effectively be paid in euros over the life of the debt.
On October 14, 2016, MIHN executed a $1.5 billion bank term loan facility. The loan facility consists of two $750 million loans, one with a three-year maturity and the other with a five-year maturity. The term loans can be drawn at any time for 60 days after signing. On October 25, 2016, we gave notice of our intent to fully draw on the loan with a five-year maturity, and we expect funding to occur on October 28, 2016. Proceeds from the $750 million term loan may be used for general corporate purposes, including funding of the tender offer or other debt. On October 25, 2016, we also gave notice of our intent to terminate the $750 million loan with the three-year maturity.
On February 9, 2016, $1,750discharged $488 million of our 4.125%6.500% U.S. dollardollar-denominated debt. We paid $504 million, representing principal as well as past and future interest accruals from February 2017 through the August 2017 maturity date. We recorded an $11 million loss on debt extinguishment within interest expense and a $5 million reduction in accrued interest.
On March 30, 2017,fr.175 million of our 0.000% Swiss franc-denominated notes matured. The notes and accrued interest to date were paid with net proceeds from thefr.400.350 million Swiss franc-denominated notes issued on January 26, 2016 and the€700 million euro-denominated notes issued on January 21, 2016, as well as cash on hand and the issuance of commercial paper. As we refinanced $1,150 million of the matured notes with net proceeds from the long-term debt issued in January 2016, we reflected this amount within long-term debt as of December 31, 2015.March 13, 2017.
On January 26, 2016,March 13, 2017, we issuedlaunched an offering offr.400.350 million of Swiss franc-denominated notes, or $399$349 million in U.S. dollars locked in with a forward currency contract on January 12, 2016,as of March 31, 2017, consisting of:
• | fr |
• | fr |
WeOn March 30, 2017, we received net proceeds net of premiums and deferred financing costs, of $398fr.349 million (or $349 million) that were used to partially fund the February 2016 note maturity and for other general corporate purposes. We recorded approximately $1 million of premiums and deferred financing costs, which will be amortized into interest expense over the life of the notes.
On January 21, 2016, we issued26, 2017,€700750 million of euro-denominated 1.625% notes, or $760 million in U.S. dollars locked in with a forward currency contract on January 13, 2016. Theour 1.125% euro-denominated notes will maturematured. The notes and accrued interest to date were paid with the issuance of commercial paper and cash on January 20, 2023. We received proceeds, net of discounts and deferred financing costs, of $752 million that were used to partially fund the February 2016 note maturity and for other general corporate purposes. We recorded approximately $8 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.hand.
Our weighted-average interest rate on our total debt was 3.1%2.1% as of SeptemberJune 30, 2017 and 2.2% as of December 31, 2016, following the refinancing of the February 9, 2016 debt maturity. Our weighted-average interest rate on our total debt wasdown from 3.7% as of December 31, 2015, down from 4.3% as of December 31, 2014.2015.
Fair Value of Our Debt:
The fair value of our short-term borrowings at SeptemberJune 30, 20162017 and December 31, 20152016 reflects current market interest rates and approximates the amounts we have recorded on our condensed consolidated balance sheet.sheets. The fair value of our long-term debt was determined using quoted prices in active markets (Level 1 valuation data) for the publicly traded debt obligations. At SeptemberJune 30, 2017, the aggregate fair value of our total debt was $19,477 million and its carrying value was $18,781 million. At December 31, 2016, the aggregate fair value of our total debt was $18,616$17,882 million and its carrying value was $17,106$17,199 million. At December 31, 2015, the aggregate fair value of our total debt was $15,908 million and its carrying value was $15,398 million.
Interest and Other Expense, net:
Interest and other expense, net within our results of continuing operations consisted of:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Interest expense, debt | $ | 129 | $ | 139 | $ | 400 | $ | 461 | $ | 103 | $ | 135 | $ | 206 | $ | 271 | ||||||||||||||||
Loss on debt extinguishment and related expenses | – | – | – | 713 | ||||||||||||||||||||||||||||
JDE coffee business transactions currency-related net gain | – | (29 | ) | – | (436 | ) | ||||||||||||||||||||||||||
Loss on debt extinguishment | 11 | – | 11 | – | ||||||||||||||||||||||||||||
Loss related to interest rate swaps | – | – | 97 | 34 | – | – | – | 97 | ||||||||||||||||||||||||
Other expense, net | 16 | 4 | 43 | 42 | 10 | 16 | 26 | 27 | ||||||||||||||||||||||||
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Interest and other expense, net | $ | 145 | $ | 114 | $ | 540 | $ | 814 | $ | 124 | $ | 151 | $ | 243 | $ | 395 | ||||||||||||||||
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See Note 2,Divestitures and Acquisitions, and Note 8,Financial Instruments,for information on the currency exchange forward contracts associated with the JDE coffee business transactions. Also see Note 8,Financial Instruments, for information on the loss related to U.S. dollar interest rate swaps no longer designated as accounting cash flow hedges during the first quartersquarter of 2016 and 2015.2016.
Note 8. Financial Instruments
Fair Value of Derivative Instruments:
Derivative instruments were recorded at fair value in the condensed consolidated balance sheets as follows:
As of September 30, 2016 | As of December 31, 2015 | As of June 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||||||||
Asset | Liability | Asset | Liability | Asset | Liability | Asset | Liability | |||||||||||||||||||||||||
Derivatives | Derivatives | Derivatives | Derivatives | Derivatives | Derivatives | Derivatives | Derivatives | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Derivatives designated as | ||||||||||||||||||||||||||||||||
Currency exchange contracts | $ | 4 | $ | 8 | $ | 20 | $ | 7 | $ | 2 | $ | 1 | $ | 19 | $ | 8 | ||||||||||||||||
Commodity contracts | 38 | 16 | 37 | 35 | 1 | 9 | 17 | 22 | ||||||||||||||||||||||||
Interest rate contracts | 10 | 16 | 12 | 57 | 22 | 246 | 108 | 19 | ||||||||||||||||||||||||
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$ | 52 | $ | 40 | $ | 69 | $ | 99 | $ | 25 | $ | 256 | $ | 144 | $ | 49 | |||||||||||||||||
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Currency exchange contracts | $ | 14 | $ | 57 | $ | 61 | $ | 33 | $ | 51 | $ | 49 | $ | 29 | $ | 43 | ||||||||||||||||
Commodity contracts | 52 | 47 | 70 | 56 | 57 | 234 | 112 | 167 | ||||||||||||||||||||||||
Interest rate contracts | 29 | 20 | 43 | 28 | 22 | 15 | 27 | 19 | ||||||||||||||||||||||||
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$ | 95 | $ | 124 | $ | 174 | $ | 117 | $ | 130 | $ | 298 | $ | 168 | $ | 229 | |||||||||||||||||
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Total fair value | $ | 147 | $ | 164 | $ | 243 | $ | 216 | $ | 155 | $ | 554 | $ | 312 | $ | 278 | ||||||||||||||||
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During the first nine months of 2016 and 2015, derivativesDerivatives designated as accounting hedges include cash flow and fair value hedges and derivatives not designated as accounting hedges include economic hedges.Non-U.S. dollar denominated debt, designated as a hedge of our net investments innon-U.S. operations, is not reflected in the table above, but is included in long-term debt summarized in Note 7,Debt and Borrowing Arrangements. We record derivative assets and liabilities on a gross basis inon our condensed consolidated balance sheet.sheets. The fair value of our asset derivatives is recorded within other current assets and the fair value of our liability derivatives is recorded within other current liabilities.
The fair values (asset / (asset/(liability)) of our derivative instruments were determined using:
As of September 30, 2016 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
Total | for Identical | Other Observable | Unobservable | |||||||||||||
Fair Value of Net | Assets | Inputs | Inputs | |||||||||||||
Asset / (Liability) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(in millions) | ||||||||||||||||
Currency exchange contracts | $ | (47 | ) | $ | – | $ | (47 | ) | $ | – | ||||||
Commodity contracts | 27 | 17 | 10 | – | ||||||||||||
Interest rate contracts | 3 | – | 3 | – | ||||||||||||
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Total derivatives | $ | (17 | ) | $ | 17 | $ | (34 | ) | $ | – | ||||||
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Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
Total | for Identical | Other Observable | Unobservable | |||||||||||||
Fair Value of Net | Assets | Inputs | Inputs | |||||||||||||
Asset / (Liability) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(in millions) | ||||||||||||||||
Currency exchange contracts | $ | 41 | $ | – | $ | 41 | $ | – | ||||||||
Commodity contracts | 16 | 29 | (13 | ) | – | |||||||||||
Interest rate contracts | (30 | ) | – | (30 | ) | – | ||||||||||
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Total derivatives | $ | 27 | $ | 29 | $ | (2 | ) | $ | – | |||||||
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Currency exchange contracts Commodity contracts Interest rate contracts Total derivatives Currency exchange contracts Commodity contracts Interest rate contracts Total derivatives As of June 30, 2017 Quoted Prices in Active Markets Significant Significant Total for Identical Other Observable Unobservable Fair Value of Net Assets Inputs Inputs Asset/(Liability) (Level 1) (Level 2) (Level 3) (in millions) $ 3 $ – $ 3 $ – (185 ) (175 ) (10 ) – (217 ) – (217 ) – $ (399 ) $ (175 ) $ (224 ) $ – As of December 31, 2016 Quoted Prices in Active Markets Significant Significant Total for Identical Other Observable Unobservable Fair Value of Net Assets Inputs Inputs Asset/(Liability) (Level 1) (Level 2) (Level 3) (in millions) $ (3 ) $ – $ (3 ) $ – (60 ) (86 ) 26 – 97 – 97 – $ 34 $ (86 ) $ 120 $ –
Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges. Our exchange-traded derivatives are generally subject to master netting arrangements that permit net settlement of transactions with the same counterparty when certain criteria are met, such as in the event of default. We also are required to maintain cash margin accounts in connection with funding the settlement of our open positions, and the margin requirements generally fluctuate daily based on market conditions. We have recorded margin deposits related to our exchange-traded derivatives of $16$270 million as of SeptemberJune 30, 20162017 and margin deposits of $22$133 million as of December 31, 20152016 within other current assets. Based on our net asset or liability positions with individual counterparties, in the event of default and immediate net settlement of all of our open positions, for derivatives we have in a net asset position, our counterparties would owe us a total of $32$95 million as of SeptemberJune 30, 20162017 and $52$48 million as of December 31, 2015. For derivatives2016. As of June 30, 2017, we have no derivatives in a net liability position, we would owe less than $1 millionand as of September 30, 2016. As of December 31, 2015, there were no Level 12016 we would have owed $2 million for derivatives we have in a net liability position.
Level 2 financial assets and liabilities consist primarily ofover-the-counter (“OTC”) currency exchange forwards, options and swaps; commodity forwards and options; and interest rate swaps. Our currency exchange contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk. Our OTC derivative transactions are governed by International Swap Dealers Association agreements and other standard industry contracts. Under these agreements, we do not post nor require collateral from our counterparties. The majority of our commodity and currency exchange OTC derivatives do not have a legal right ofset-off. In connection with our OTC derivatives that could benet-settled in the event of default, assuming all parties were to fail to comply with the terms of the agreements, for derivatives we have in a net liability position, we would owe $36$257 million as of SeptemberJune 30, 20162017 and $101$40 million as of December 31, 2015,2016, and for derivatives we have in a net asset position, our counterparties would owe us a total of $54$30 million as of SeptemberJune 30, 20162017 and $64$162 million as of December 31, 2015.2016. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.
Derivative Volume:
The net notional values of our derivative instruments were:
Notional Amount | ||||||||
As of September 30, | As of December 31, | |||||||
2016 | 2015 | |||||||
(in millions) | ||||||||
Currency exchange contracts: | ||||||||
Intercompany loans and forecasted interest payments | $ | 3,211 | $ | 4,148 | ||||
Forecasted transactions | 1,318 | 1,094 | ||||||
Commodity contracts | 654 | 732 | ||||||
Interest rate contracts | 2,050 | 3,033 | ||||||
Net investment hedge – euro notes | 5,280 | 4,345 | ||||||
Net investment hedge – pound sterling notes | 1,236 | 1,404 | ||||||
Net investment hedge – Swiss franc notes | 1,518 | 1,073 |
Currency exchange contracts: Intercompany loans and forecasted interest payments Forecasted transactions Commodity contracts Interest rate contracts Net investment hedge – euro notes Net investment hedge – pound sterling notes Net investment hedge – Swiss franc notes Notional Amount As of June 30, As of December 31, 2017 2016 (in millions) $ 2,992 $ 3,343 1,432 1,452 1,174 837 6,480 6,365 3,844 4,012 442 419 1,723 1,447
Cash Flow Hedges:
Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings / earnings/(losses) included:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
September 30, | September 30, | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | (in millions) | ||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Accumulated gain / (loss) at | $ | (36 | ) | $ | (53 | ) | $ | (45 | ) | $ | (2 | ) | ||||||||||||||||||||
Transfer of realized losses / (gains) | (2 | ) | 60 | 64 | 6 | |||||||||||||||||||||||||||
Unrealized gain / (loss) in fair value | 4 | (69 | ) | (53 | ) | (66 | ) | |||||||||||||||||||||||||
Accumulated (loss)/gain at January 1 | $ | (103 | ) | $ | (53 | ) | $ | (121 | ) | $ | (45 | ) | ||||||||||||||||||||
Transfer of realized (gains)/losses in fair value to earnings | (4 | ) | 8 | 3 | 66 | |||||||||||||||||||||||||||
Unrealized gain/(loss) in fair value | 16 | 9 | 27 | (57 | ) | |||||||||||||||||||||||||||
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Accumulated gain / (loss) at | $ | (34 | ) | $ | (62 | ) | $ | (34 | ) | $ | (62 | ) | ||||||||||||||||||||
Accumulated (loss)/gain at June 30 | $ | (91 | ) | $ | (36 | ) | $ | (91 | ) | $ | (36 | ) | ||||||||||||||||||||
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After-tax gains / (losses) reclassified from accumulated other comprehensive earnings / (losses) into net earnings were:
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After-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings were: | After-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings were: | |||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
September 30, | September 30, | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | (in millions) | ||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Currency exchange contracts – forecasted transactions | $ | (6 | ) | $ | (11 | ) | $ | (3 | ) | $ | 73 | $ | 1 | $ | (2 | ) | $ | 1 | $ | 3 | ||||||||||||
Commodity contracts | 8 | (49 | ) | (1 | ) | (53 | ) | 3 | (6 | ) | (4 | ) | (9 | ) | ||||||||||||||||||
Interest rate contracts | – | – | (60 | ) | (26 | ) | – | – | – | (60 | ) | |||||||||||||||||||||
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Total | $ | 2 | $ | (60 | ) | $ | (64 | ) | $ | (6 | ) | $ | 4 | $ | (8 | ) | $ | (3 | ) | $ | (66 | ) | ||||||||||
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After-tax gains / (losses) recognized in other comprehensive earnings / (losses) were:
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After-tax gains/(losses) recognized in other comprehensive earnings/(losses) were: | After-tax gains/(losses) recognized in other comprehensive earnings/(losses) were: | |||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
September 30, | September 30, | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | (in millions) | ||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Currency exchange contracts – forecasted transactions | $ | (11 | ) | $ | 8 | $ | (21 | ) | $ | 33 | $ | (14 | ) | $ | 2 | $ | (26 | ) | $ | (10 | ) | |||||||||||
Commodity contracts | 10 | (38 | ) | 19 | (61 | ) | 6 | 14 | 6 | 9 | ||||||||||||||||||||||
Interest rate contracts | 5 | (39 | ) | (51 | ) | (38 | ) | 24 | (7 | ) | 47 | (56 | ) | |||||||||||||||||||
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Total | $ | 4 | $ | (69 | ) | $ | (53 | ) | $ | (66 | ) | $ | 16 | $ | 9 | $ | 27 | $ | (57 | ) | ||||||||||||
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Cash flow hedge ineffectiveness was not material for all periods presented.
Within interest and other expense, net, we recordedpre-tax losses of $97 million in the first quarter of 2016 and $34 million in the first quarter of 2015 related to amounts excluded from effectiveness testing. These amounts relateThis amount relates to interest rate swaps no longer designated as cash flow hedges due to changes in financing plans. Due to lower overall costs and our decision to hedge a greater portion of our net investments in operations that use currencies other than the U.S. dollar as their functional currencies, we changed our plans to issue U.S. dollar-denominated debt changed and we instead issued euro and Swiss franc-denominated notes in the current year first quarter and euro, British pound sterling and Swiss franc-denominated notes in the prior-year first quarter.of 2016. Amounts excluded from effectiveness testing were not material for the third quarter of 2016 and 2015.all periods presented.
We recordpre-tax andafter-tax (i) gains or losses reclassified from accumulated other comprehensive earnings / earnings/(losses) into earnings, (ii) gains or losses on ineffectiveness and (iii) gains or losses on amounts excluded from effectiveness testing in:
Based on current market conditions, we would expect to transfer unrealized gainslosses of $11$20 million (net of taxes) for commodity cash flow hedges, unrealized lossesgains of $11$1 million (net of taxes) for currency cash flow hedges and unrealized losses of less than $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.
Cash Flow Hedge Coverage:
As of SeptemberJune 30, 2016,2017, we hedged transactions forecasted to impact cash flows over the following periods:
Fair Value Hedges:
Pre-tax gains / gains/(losses) due to changes in fair value of our interest rate swaps and related hedged long-term debt were recorded in interest and other expense, net:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||
(in millions) | ||||||||||||||||||||
Derivatives | $ | (11 | ) | $ | 4 | $ | (2 | ) | $ | 8 | ||||||||||
Borrowings | 11 | (4 | ) | 2 | (8 | ) | ||||||||||||||
Fair value hedge ineffectiveness and amounts excluded from effectiveness testing were not material for all periods presented.
Economic Hedges: Pre-tax gains / (losses) recorded in net earnings for economic hedges were:
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Location of | ||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | Gain / (Loss) | ||||||||||||||||||
September 30, | September 30, | Recognized | ||||||||||||||||||
2016 | 2015 | 2016 | 2015 | in Earnings | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Currency exchange contracts: | ||||||||||||||||||||
Intercompany loans and forecasted interest payments | $ | 7 | $ | 8 | $ | 18 | $ | 22 | | Interest and other expense, net | | |||||||||
Forecasted transactions | (14 | ) | 43 | (91 | ) | 33 | Cost of sales | |||||||||||||
Forecasted transactions | 2 | 36 | 10 | 437 | | Interest and other expense, net | | |||||||||||||
Forecasted transactions | 4 | 5 | 16 | (11 | ) | | Selling, general and administrative expenses | | ||||||||||||
Interest rate contracts | – | – | – | – | | Interest and other expense, net | | |||||||||||||
Commodity contracts | (13 | ) | (99 | ) | (26 | ) | (158 | ) | Cost of sales | |||||||||||
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Total | $ | (14 | ) | $ | (7 | ) | $ | (73 | ) | $ | 323 | |||||||||
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In connection with the JDE coffee business transactions, we entered into a number of consecutive euro to U.S. dollar currency exchange forward contracts in 2015 to lock in an equivalent expected value in U.S. dollars. The mark-to-market gains and losses on the derivatives were recorded in earnings. We recorded net gains of $29 million for the three months and $436 million for the nine months ended September 30, 2015 within interest and other expense, net in connection with the forward contracts and the transferring of proceeds to our subsidiaries where coffee net assets and shares were deconsolidated. The currency hedge and related gains and losses were recorded within interest and other expense, net. See Note 2,Divestitures and Acquisitions — JDE Coffee Business Transactions, for additional information.
Hedges of Net Investments in International Operations: After-tax gains / (losses) related to hedges of net investments in international operations in the form of euro, pound sterling and Swiss franc-denominated debt were:
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Location of | ||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | Gain / (Loss) | ||||||||||||||||||
September 30, | September 30, | Recognized in | ||||||||||||||||||
2016 | 2015 | 2016 | 2015 | AOCI | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Euro notes | $ | (38 | ) | $ | (8 | ) | $ | (110 | ) | $ | 188 | Currency | ||||||||
Pound sterling notes | 21 | 30 | 107 | 17 | Translation | |||||||||||||||
Swiss franc notes | (4 | ) | 18 | (33 | ) | (13 | ) | Adjustment |
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||
(in millions) | ||||||||||||||||||
Derivatives | $ | 1 | $ | 4 | $ | (2 | ) | $ | 9 | |||||||||
Borrowings | (1 | ) | (4 | ) | 2 | (9 | ) |
Fair value hedge ineffectiveness and amounts excluded from effectiveness testing were not material for all periods presented.
Economic Hedges:
Pre-tax gains/(losses) recorded in net earnings for economic hedges were:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | Location of in Earnings | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||
(in millions) | ||||||||||||||||||
Currency exchange contracts: | ||||||||||||||||||
Intercompany loans and | $ | 3 | $ | 6 | $ | 5 | $ | 11 | Interest and other expense, net | |||||||||
Forecasted transactions | 18 | (46 | ) | 2 | (77 | ) | Cost of sales | |||||||||||
Forecasted transactions | 1 | – | (2 | ) | 8 | Interest and other expense, net | ||||||||||||
Forecasted transactions | 2 | 8 | 2 | 12 | Selling, general and administrative expenses | |||||||||||||
Commodity contracts | (97 | ) | 31 | (160 | ) | (13 | ) | Cost of sales | ||||||||||
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Total | $ | (73 | ) | $ | (1 | ) | $ | (153 | ) | $ | (59 | ) | ||||||
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Hedges of Net Investments in International Operations:
After-tax gains/(losses) related to hedges of net investments in international operations in the form of euro, pound sterling and Swiss franc-denominated debt were:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | Location of Gain/(Loss) Recognized in AOCI | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||
(in millions) | ||||||||||||||||||
Euro notes | $ | (168 | ) | $ | 82 | $ | (196 | ) | $ | (72 | ) | Currency | ||||||
Pound sterling notes | (10 | ) | 63 | (15 | ) | 86 | Translation | |||||||||||
Swiss franc notes | (49 | ) | 14 | (64 | ) | (29 | ) | Adjustment |
Note 9. Benefit Plans
Pension Plans
Components of Net Periodic Pension Cost:
Net periodic pension cost consisted of the following:
U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||||||||||
For the Three Months Ended June 30, | For the Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Service cost | $ | 10 | $ | 14 | $ | 38 | $ | 39 | ||||||||||||||||||||||||
Interest cost | 16 | 15 | 49 | 62 | ||||||||||||||||||||||||||||
Expected return on plan assets | (25 | ) | (24 | ) | (108 | ) | (111 | ) | ||||||||||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||
Net loss from experience differences | 9 | 9 | 40 | 31 | ||||||||||||||||||||||||||||
Prior service cost/(credit) | – | 1 | – | (1 | ) | |||||||||||||||||||||||||||
Settlement losses/(gains) and other expenses | 18 | 12 | 1 | (1 | ) | |||||||||||||||||||||||||||
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Net periodic pension cost | $ | 28 | $ | 27 | $ | 20 | $ | 19 | ||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans |
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For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | For the Six Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Service cost | $ | 15 | $ | 16 | $ | 37 | $ | 44 | $ | 22 | $ | 27 | $ | 77 | $ | 77 | ||||||||||||||||
Interest cost | 15 | 16 | 57 | 77 | 31 | 31 | 97 | 122 | ||||||||||||||||||||||||
Expected return on plan assets | (24 | ) | (23 | ) | (105 | ) | (120 | ) | (50 | ) | (48 | ) | (212 | ) | (221 | ) | ||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||
Net loss from experience differences | 12 | 11 | 31 | 33 | 17 | 18 | 81 | 62 | ||||||||||||||||||||||||
Prior service cost / (credit) | – | – | – | – | ||||||||||||||||||||||||||||
Settlement losses and other expenses | 9 | 2 | – | – | ||||||||||||||||||||||||||||
Prior service cost/(credit) | 1 | 1 | (1 | ) | (2 | ) | ||||||||||||||||||||||||||
Settlement losses/(gains) and other expenses | 21 | 16 | 2 | (1 | ) | |||||||||||||||||||||||||||
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Net periodic pension cost | $ | 27 | $ | 22 | $ | 20 | $ | 34 | $ | 42 | $ | 45 | $ | 44 | $ | 37 | ||||||||||||||||
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U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||||||||||
For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Service cost | $ | 42 | $ | 48 | $ | 114 | $ | 145 | ||||||||||||||||||||||||
Interest cost | 46 | 50 | 179 | 231 | ||||||||||||||||||||||||||||
Expected return on plan assets | (72 | ) | (70 | ) | (326 | ) | (358 | ) | ||||||||||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||
Net loss from experience differences | 30 | 33 | 93 | 110 | ||||||||||||||||||||||||||||
Prior service cost / (credit) | 1 | 1 | (2 | ) | 16 | |||||||||||||||||||||||||||
Settlement losses / (gains) and other expenses | 25 | 15 | (1 | ) | – | |||||||||||||||||||||||||||
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Net periodic pension cost | $ | 72 | $ | 77 | $ | 57 | $ | 144 | ||||||||||||||||||||||||
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Net periodic pension cost decreased in the nine months ended September 30, 2016 due to a combinationWithin settlement losses/(gains) and other expenses are losses of factors, including a decreased number of plan participants, changes in discount rates, company contributions to the plans and a change in our approach to measuring service and interest costs. For 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, we have elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. The impact of this change was a decrease in net periodic pension cost of approximately $16$11 million for the three months and $48 million for the ninesix months ended SeptemberJune 30, 2016. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate2017 and accordingly, have accounted for it on a prospective basis.
Net pension costs of our non-U.S. plans in the three and nine months ended September 30, 2016 were also favorably impacted by the reduction in our pension plan obligations due to the JDE coffee business transactions. Prior to the July 2, 2015 closing of the JDE coffee business transactions, certain active employees who transitioned to JDE participated in our non-U.S. pension plans. Following the transactions, benefits began to be provided directly by JDE to participants continuing with JDE. JDE assumed certain pension plan obligations and received the related plan assets. In 2015, we reduced our net benefit plan liabilities by $131 million and the related deferred tax assets by $24 million. Prior to the transactions, for the nine months ended September 30, 2015, amortization of prior service cost includes $17 million of pension curtailment losses related to employees who subsequently transitioned to JDE. Refer to Note 2,Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information. For participants that elected not to transfer into the JDE plans, we retained the plan obligations and related plan assets.
Settlement losses also include pension settlement losses for employees who elected lump-sum payments in connection with our 2014-2018 Restructuring Program. These settlement losses were $3$9 million for the three months and $12 million for the ninesix months ended SeptemberJune 30, 2016, and $1 million for the three months and $7 million for the nine months ended September 30, 2015. See Note 6,that are related to our 2014-2018 Restructuring Program, for more information. We also and are recorded an additional $49 millionwithin asset impairment and exit costs on our condensed consolidated statements of pension settlement losses in the nine months ended September 30, 2015 related to the JDE coffee business transactions within the gain on the JDE coffee business transactions.earnings.
Employer Contributions:
During the ninesix months ended SeptemberJune 30, 2016,2017, we contributed $169$9 million (of which, $150 million was voluntarily contributed) to our U.S. pension plans and $329$369 million (of which, $100to ournon-U.S. pension plans. Thenon-U.S. amount included anon-recurring $250 million wascontribution made in connection with a non-recurring contribution related to merging our and legacy Cadbury plansnew funding agreement for a Company plan in the U.K.) We make contributions to our non-U.S. plans. pension plans in accordance with local funding arrangements and statutory minimum funding requirements. Discretionary contributions are made to the extent that they are tax deductible and do not generate an excise tax liability.
As of SeptemberJune 30, 2016,2017, we plan to make further contributions of approximately $6$4 million to our U.S. plans and approximately $50$86 million to ournon-U.S. plans during the remainder of 2016. However, our2017. Our actual contributions may differbe different due to many factors, including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.
Postretirement Benefit Plans
Net periodic postretirement health care costs consisted of the following:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||
(in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Service cost | $ | 3 | $ | 4 | $ | 9 | $ | 11 | $ | 2 | $ | 3 | $ | 4 | $ | 6 | ||||||||||||||||
Interest cost | 6 | 5 | 16 | 17 | 3 | 5 | 7 | 10 | ||||||||||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||
Net loss from experience differences | 2 | 3 | 5 | 10 | 4 | 1 | 7 | 3 | ||||||||||||||||||||||||
Prior service credit(1) | (11 | ) | (1 | ) | (14 | ) | (5 | ) | (10 | ) | (1 | ) | (20 | ) | (3 | ) | ||||||||||||||||
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Net periodic postretirement health care costs | $ | – | $ | 11 | $ | 16 | $ | 33 | $ | (1 | ) | $ | 8 | $ | (2 | ) | $ | 16 | ||||||||||||||
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(1) For the three and nine months ended September 30, 2016, amortization of prior service credit includes $8 million of curtailment gain related to a change in the eligibility requirement.
Net periodic postretirement health care costs decreased in the three and nine months ended September 30, 2016 due to a combination of factors, including a decreased number of plan participants, changes in discount rates, company contributions to the plans and a change in our approach to measuring service and interest costs. For 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. The impact of this change was a decrease in net periodic postretirement health care costs of approximately $1 million for the three months and $3 million for the nine months ended September 30, 2016. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.
Postemployment Benefit Plans
Net periodic postemployment costs consisted of the following:
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For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Service cost | $ | 2 | $ | 2 | $ | 5 | $ | 5 | ||||||||||||||||||||||||
Interest cost | 1 | 1 | 4 | 4 | ||||||||||||||||||||||||||||
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Net periodic postemployment costs | $ | 3 | $ | 3 | $ | 9 | $ | 9 | ||||||||||||||||||||||||
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(1) | For the three and six months ended June 30, 2017, amortization of prior service credit includes an $8 million and $16 million gain respectively, related to a change in the eligibility requirement and a change in benefits to Medicare-eligible participants. |
Postemployment Benefit Plans
Net periodic postemployment costs consisted of the following:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost | $ | 2 | $ | 1 | $ | 3 | $ | 3 | ||||||||
Interest cost | 1 | 2 | 2 | 3 | ||||||||||||
Amortization of net gains | (1 | ) | – | (2 | ) | – | ||||||||||
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Net periodic postemployment costs | $ | 2 | $ | 3 | $ | 3 | $ | 6 | ||||||||
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Note 10. Stock Plans
Stock Options:
Stock option activity is reflected below:
Shares Subject to Option | Weighted- Average Exercise or Grant Price Per Share | Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
Balance at January 1, 2017 | 53,601,612 | $ | 28.02 | 6 years | $ | 874 million | ||||||||||
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Annual grant to eligible employees | 6,012,140 | 43.20 | ||||||||||||||
Additional options issued | 26,600 | 44.30 | ||||||||||||||
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Total options granted | 6,038,740 | 43.20 | ||||||||||||||
Options exercised(1) | (6,099,149 | ) | 27.38 | $ | 109 million | |||||||||||
Options cancelled | (1,270,978 | ) | 38.80 | |||||||||||||
|
| |||||||||||||||
Balance at June 30, 2017 | 52,270,225 | 29.59 | 6 years | $ | 711 million | |||||||||||
|
|
Weighted- | ||||||||||||||||
Average | Average | |||||||||||||||
Exercise or | Remaining | Aggregate | ||||||||||||||
Shares Subject | Grant Price | Contractual | Intrinsic | |||||||||||||
to Option | Per Share | Term | Value | |||||||||||||
Balance at January 1, 2016 | 57,034,108 | $ | 26.12 | 6 years | $ | 229 million | ||||||||||
|
| |||||||||||||||
Annual grant to eligible employees | 7,517,290 | 39.70 | ||||||||||||||
Additional options issued | 97,680 | 43.32 | ||||||||||||||
|
| |||||||||||||||
Total options granted | 7,614,970 | 39.75 | ||||||||||||||
Options exercised | (7,094,555 | ) | 24.01 | $ | 139 million | |||||||||||
Options cancelled | (1,735,698 | ) | 35.39 | |||||||||||||
|
| |||||||||||||||
Balance at September 30, 2016 | 55,818,825 | 27.95 | 6 years | $ | 252 million | |||||||||||
|
| |||||||||||||||
Deferred Stock Units, Performance Share Units and Restricted Stock: Historically we have made grants of deferred stock units, performance share units and restricted stock. Beginning in 2016, we only grant deferred stock units and performance share units and no longer grant restricted stock. Our deferred stock unit, performance share unit and restricted stock activity is reflected below:
|
| |||||||||||||||
Weighted-Average | Weighted-Average | |||||||||||||||
Number of | Fair Value | Aggregate | ||||||||||||||
Shares | Grant Date | Per Share | Fair Value | |||||||||||||
Balance at January 1, 2016 | 9,418,216 | $ | 28.00 | |||||||||||||
|
| |||||||||||||||
Annual grant to eligible employees: | Feb. 22, 2016 | |||||||||||||||
Performance share units | 1,406,500 | 39.70 | ||||||||||||||
Deferred stock units | 1,040,790 | 39.70 | ||||||||||||||
Additional shares granted(1) | 755,171 | Various | 29.51 | |||||||||||||
|
| |||||||||||||||
Total shares granted | 3,202,461 | 37.30 | $ | 119 million | ||||||||||||
Vested(2) | (3,903,681 | ) | 40.13 | $ | 157 million | |||||||||||
Forfeited(2) | (1,019,864 | ) | 37.47 | |||||||||||||
|
| |||||||||||||||
Balance at September 30, 2016 | 7,697,132 | 24.46 | ||||||||||||||
|
|
(1) | Cash received from options exercised was $113 million in the three months and $170 million in the six months ended June 30, 2017. The actual tax benefit realized and recorded in the provision for income taxes for the tax deductions from the option exercises totaled $10 million in the three months and $18 million in the six months ended June 30, 2017. |
Performance Share Units and Other Stock-Based Awards:
Our performance share unit, deferred stock unit and historically granted restricted stock activity is reflected below:
Weighted-Average | Weighted-Average | |||||||||||||||
Number | Fair Value | Aggregate | ||||||||||||||
of Shares | Grant Date | Per Share | Fair Value | |||||||||||||
Balance at January 1, 2017 | 7,593,627 | $ | 24.29 | |||||||||||||
|
| |||||||||||||||
Annual grant to eligible employees: | Feb. 16, 2017 | |||||||||||||||
Performance share units | 1,087,010 | 43.20 | ||||||||||||||
Deferred stock units | 845,550 | 43.20 | ||||||||||||||
Additional shares granted(1) | 304,961 | Various | 40.39 | |||||||||||||
|
| |||||||||||||||
Total shares granted | 2,237,521 | 42.82 | $ | 96 million | ||||||||||||
Vested(2) | (2,443,709 | ) | 43.01 | $ | 105 million | |||||||||||
Forfeited(2) | (569,922 | ) | 39.59 | |||||||||||||
|
| |||||||||||||||
Balance at June 30, 2017 | 6,817,517 | 22.38 | ||||||||||||||
|
|
(1) | Includes performance share units and deferred stock units. |
(2) | Includes performance share units, deferred stock units and historically granted restricted stock. The actual tax benefit realized and recorded in the provision for income taxes for the tax deductions from the shares vested totaled $1 million in the three months and $7 million for six months ended June 30, 2017. |
Share Repurchase Program:
During 2013, our Board of Directors authorized the repurchase of $7.7 billion of our Common Stock through December 31, 2016. On July 29, 2015, our Finance Committee, with authorization delegated from our Board of Directors, approved an increase of $6.0 billion in the share repurchase program, raising the authorization to $13.7 billion of Common Stock repurchases, and extended the program through December 31, 2018. Repurchases under the program are determined by management and are wholly discretionary. Prior to January 1, 2016,2017, we had repurchased $8.2$10.8 billion of Common Stock pursuant to this authorization. During the ninesix months ended SeptemberJune 30, 2016,2017, we repurchased 42.9approximately 25 million shares of Common Stock at an average cost of $41.64$44.61 per share, or an aggregate cost of $1.8 billion,approximately $1,109 million, all of which $1.7 billion was paid during the period.period except for approximately $40 million settled in July 2017. All share repurchases were funded through available cash and commercial paper issuances. As of SeptemberJune 30, 2016,2017, we have $3.7$1.7 billion in remaining share repurchase capacity.
Note 11. Commitments and Contingencies
Legal Proceedings:
We routinely are involved in legal proceedings, claims and governmental inspections or investigations (“Legal Matters”) arising in the ordinary course of our business.
A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success. Accordingly, after we acquired Cadbury in February 2010, we began reviewing and adjusting, as needed, Cadbury’s operations in light of applicable standards as well as our policies and practices. We initially focused on such high priority areas as food safety, the Foreign Corrupt Practices Act (“FCPA”) and antitrust. Based upon Cadbury’s pre-acquisition policies and compliance programs and our post-acquisition reviews, our preliminary findings indicated that Cadbury’s overall state of compliance was sound. Nonetheless, through our reviews, we determined that in certain jurisdictions, including India, there appeared to be facts and circumstances warranting further investigation. We are continuing our investigations in certain jurisdictions, including in India, and we continue to cooperate with governmental authorities.
As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are continuing to cooperate with the U.S. and Indian governments in their investigations of these matters. On February 11, 2016, we received a “Wells” notice from the SEC indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against us for violations of the books and records and internal controls provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the investigation. On March 18, 2016, we made a submission to the staff of the SEC in response to the notice. We have engaged in discussions with the SEC and with the U.S. Department of Justice to discuss potential resolution of their respective investigations. We have not reached a settlement to resolve these investigations, and we are unable to predict when or if we can reach a mutually satisfactory resolution.
In February 2013 and March 2014, Cadbury India Limited (now known as Mondelez India Foods Private Limited), a subsidiary of Mondelēz International, and other parties received show cause notices from the Indian Central Excise Authority (the “Excise Authority”) calling upon the parties to demonstrate why the Excise Authority should not collect a total of 3.7 billion Indian rupees ($5658 million as of SeptemberJune 30, 2016)2017) of unpaid excise tax and an equivalent amount of penalties, as well as interest, related to production at the same Indian facility. We contested these demands for unpaid excise taxes, penalties and interest. On March 27, 2015, after several hearings, the Commissioner of the Excise Authority issued an order denying the excise exemption that we claimed for the Indian facility and confirming the Excise Authority’s demands for total taxes and penalties in the amount of 5.8 billion Indian rupees ($8890 million as of SeptemberJune 30, 2016)2017). We have appealed this order. In addition, the Excise Authority issued additional show cause notices onin February 6, 2015 and December 8, 2015 on the same issue but covering the periods January to October 2014 and November 2014 to September 2015, respectively. These notices added a total of 2.4 billion Indian rupees ($3637 million as of SeptemberJune 30, 2016)2017) of unpaid excise taxes as well as penalties to be determined up to an amount equivalent to that claimed by the Excise Authority and interest. We believe that the decision to claim the excise tax benefit is valid and we are continuing to contest the show cause notices through the administrative and judicial process.
In April 2013, the staff of the U.S. Commodity Futures Trading Commission (“CFTC”) advised us and Kraft Foods Group that it was investigating activities related to the trading of December 2011 wheat futures contracts that occurred prior to theSpin-Off of Kraft Foods Group. We cooperated with the staff in its investigation. On April 1, 2015, the CFTC filed a complaint against Kraft Foods Group and Mondelēz Global LLC (“Mondelēz Global”) in the U.S. District Court for the Northern District of Illinois, Eastern Division (the “CFTC action”). The complaint alleges that Kraft Foods Group and Mondelēz Global (1) manipulated or attempted to manipulate the wheat markets during the fall of 2011; (2) violated position limit levels for wheat futures and (3) engaged innon-competitive trades by trading both sides ofexchange-for-physical Chicago Board of Trade wheat contracts. The CFTC seeks civil monetary penalties of either triple the monetary gain for each violation of the Commodity Exchange Act (the “Act”) or $1 million for each violation of Section 6(c)(1), 6(c)(3) or 9(a)(2) of the Act and $140,000 for each additional violation of the Act, plus post-judgment interest; an order of permanent injunction prohibiting Kraft Foods Group and Mondelēz Global from violating specified provisions of the Act; disgorgement of profits; and costs and fees. In December 2015, the court denied Mondelēz Global and Kraft Foods Group’s motion to dismiss the CFTC’s claims of market manipulation and attempted manipulation, and the parties are now in discovery. Additionally, several class action complaints were filed against Kraft Foods Group and Mondelēz Global in the U.S. District Court for the Northern District of Illinois by investors in wheat futures and options on behalf of themselves and others similarly situated. The complaints make similar allegations as those made in the CFTC action and seek class action certification; an unspecified amount for damages, interest and unjust enrichment; costs and fees; and injunctive, declaratory and other unspecified relief. In June 2015, these suits were consolidated in the Northern District of Illinois. In June 2016, the court denied Mondelēz Global and Kraft Foods Group’s motion to dismiss, and the parties are now in discovery. It is not possible to predict the outcome of these matters; however, based on our Separation and Distribution Agreement with Kraft Foods Group dated as of September 27, 2012, we expect to predominantly bear any monetary penalties or other payments in connection with the CFTC action.
While we cannot predict with certainty the results of any Legal Matters in which we are currently involved, we do not expect that the ultimate costs to resolve any of these Legal Matters, individually or in the aggregate, will have a material effect on our financial results.
Third-Party Guarantees:
We enter into third-party guarantees primarily to cover the long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At SeptemberJune 30, 2016,2017, we had no material third-party guarantees recorded on our condensed consolidated balance sheet.
Tax Matters:
As part of our 2010 Cadbury acquisition, we became the responsible party for tax matters under a February 2, 2006 dated Deed of Tax Covenant between the Cadbury Schweppes PLC and related entities (“Schweppes”) and Black Lion Beverages and related entities. The tax matters included an ongoing transfer pricing case with the Spanish tax authorities related to the Schweppes businesses Cadbury divested prior to our acquisition of Cadbury. During the first quarter of 2017, the Spanish Supreme Court decided the case in our favor. As a result of the final ruling, during the first quarter of 2017, we recorded a favorable earnings impact of $46 million in selling, general and administrative expenses and $12 million in interest and other expense, net, for a totalpre-tax impact of $58 million due to thenon-cash reversal of Cadbury-related accrued liabilities related to this matter.
During the first quarter of 2017, the Brazilian Supreme Court (the “Court”) ruled against the Brazilian tax authorities in a case related to the computation of certain social taxes. The Court ruled that the social tax base should not include a value-added tax known as ICMS. By removing the ICMS from the tax base, the Court effectively eliminated a “tax on a tax.” Our Brazilian subsidiary received an injunction against making payments for the “tax on a tax” in 2008 and since that time until December 2016, we have accrued for the ICMS tax each quarter in the event that the ICMS tax was reaffirmed by the Brazilian courts. The decision of the Court has not yet been published and we are awaiting further instructions from the Court and tax authorities related to amounts previously paid and accrued for the ICMS tax. We cannot reasonably estimate the amount and timing of the impact at this time.
Note 12. Reclassifications from Accumulated Other Comprehensive Income
The following table summarizes the changes in the accumulated balances of each component of accumulated other comprehensive earnings / earnings/(losses) attributable to Mondelēz International. Amounts reclassified from accumulated other comprehensive earnings / earnings/(losses) to net earnings (net of tax) were net losses of $28$67 million in the three months and $206$110 million forin the ninesix months ended SeptemberJune 30, 20162017 and $134$38 million in the three months and $172$178 million in the ninesix months ended SeptemberJune 30, 2015.2016.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in millions) | ||||||||||||||||
Currency Translation Adjustments: | ||||||||||||||||
Balance at beginning of period | $ | (7,867 | ) | $ | (6,438 | ) | $ | (8,006 | ) | $ | (5,042 | ) | ||||
Currency translation adjustments attributable to: | ||||||||||||||||
Translation of international operations(1) | 52 | (1,149 | ) | 171 | (2,749 | ) | ||||||||||
Pension and other benefit plans | 7 | 46 | 42 | 97 | ||||||||||||
Derivatives accounted for as net investment hedges | (35 | ) | 62 | (58 | ) | 303 | ||||||||||
Noncontrolling interests | (2 | ) | (6 | ) | (3 | ) | (22 | ) | ||||||||
Tax (expense) / benefit | 13 | (23 | ) | 21 | (111 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive earnings / (losses) | 35 | (1,070 | ) | 173 | (2,482 | ) | ||||||||||
Less: portion attributable to noncontrolling interests | (2 | ) | (6 | ) | (3 | ) | (22 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | (7,830 | ) | (7,502 | ) | (7,830 | ) | (7,502 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Pension and Other Benefit Plans: | ||||||||||||||||
Balance at beginning of period | $ | (1,865 | ) | $ | (2,201 | ) | $ | (1,934 | ) | $ | (2,274 | ) | ||||
Net actuarial gain / (loss) arising during period | – | 127 | 24 | 99 | ||||||||||||
Tax (expense) / benefit on net actuarial gain / (loss) | – | (40 | ) | (9 | ) | (35 | ) | |||||||||
Losses / (gains) reclassified into net earnings: | ||||||||||||||||
Amortization of experience losses and | 30 | 46 | 93 | 165 | ||||||||||||
Settlement losses(2) | 10 | 51 | 25 | 64 | ||||||||||||
Tax (expense) / benefit on reclassifications (3) | (10 | ) | (28 | ) | (34 | ) | (64 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive earnings / (losses) | 30 | 156 | 99 | 229 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | (1,835 | ) | (2,045 | ) | (1,835 | ) | (2,045 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Derivative Cash Flow Hedges: | ||||||||||||||||
Balance at beginning of period | $ | (36 | ) | $ | (53 | ) | $ | (46 | ) | $ | (2 | ) | ||||
Net derivative gains / (losses) | 6 | (113 | ) | (78 | ) | (103 | ) | |||||||||
Tax (expense) / benefit on net derivative gain / (loss) | (2 | ) | 39 | 25 | 36 | |||||||||||
Losses / (gains) reclassified into net earnings: | ||||||||||||||||
Currency exchange contracts – | 7 | 13 | 3 | (79 | ) | |||||||||||
Commodity contracts(4) | (8 | ) | 62 | 7 | 65 | |||||||||||
Interest rate contracts(5) | – | – | 96 | 41 | ||||||||||||
Tax (expense) / benefit on reclassifications (3) | (1 | ) | (10 | ) | (41 | ) | (20 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive earnings / (losses) | 2 | (9 | ) | 12 | (60 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | (34 | ) | (62 | ) | (34 | ) | (62 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated other comprehensive income attributable to Mondelēz International: | ||||||||||||||||
Balance at beginning of period | $ | (9,768 | ) | $ | (8,692 | ) | $ | (9,986 | ) | $ | (7,318 | ) | ||||
Total other comprehensive earnings / (losses) | 67 | (923 | ) | 284 | (2,313 | ) | ||||||||||
Less: portion attributable to noncontrolling interests | (2 | ) | (6 | ) | (3 | ) | (22 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive earnings / (losses) attributable to Mondelēz International | 69 | (917 | ) | 287 | (2,291 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (9,699 | ) | $ | (9,609 | ) | $ | (9,699 | ) | $ | (9,609 | ) | ||||
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in millions) | ||||||||||||||||
Currency Translation Adjustments: | ||||||||||||||||
Balance at beginning of period | $ | (8,375 | ) | $ | (7,388 | ) | $ | (8,914 | ) | $ | (8,006 | ) | ||||
Currency translation adjustments | 252 | (436 | ) | 764 | 38 | |||||||||||
Reclassification to earnings related to: | ||||||||||||||||
Equity method investment exchange | – | – | – | 57 | ||||||||||||
Tax benefit/(expense) | 128 | (92 | ) | 159 | 8 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive earnings/(losses) | 380 | (528 | ) | 923 | 103 | |||||||||||
Less: (gain)/loss attributable to noncontrolling interests | (12 | ) | 14 | (16 | ) | 1 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | (8,007 | ) | (7,902 | ) | (8,007 | ) | (7,902 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Pension and Other Benefit Plans: | ||||||||||||||||
Balance at beginning of period | $ | (2,086 | ) | $ | (1,940 | ) | $ | (2,087 | ) | $ | (1,934 | ) | ||||
Net actuarial (loss)/gain arising during period | 16 | 24 | 9 | 24 | ||||||||||||
Tax benefit/(expense) on net actuarial loss | (2 | ) | (9 | ) | – | (9 | ) | |||||||||
Losses/(gains) reclassified into net earnings: | ||||||||||||||||
Amortization of experience losses and prior service costs(1) | 42 | 34 | 83 | 63 | ||||||||||||
Settlement losses and other expenses(1) | 15 | 11 | 18 | 15 | ||||||||||||
Tax benefit on reclassifications (2) | (12 | ) | (15 | ) | (21 | ) | (24 | ) | ||||||||
Currency impact | (92 | ) | 65 | (121 | ) | 35 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive (losses)/earnings | (33 | ) | 110 | (32 | ) | 104 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | (2,119 | ) | (1,830 | ) | (2,119 | ) | (1,830 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Derivative Cash Flow Hedges: | ||||||||||||||||
Balance at beginning of period | $ | (103 | ) | $ | (53 | ) | $ | (121 | ) | $ | (46 | ) | ||||
Net derivative gains/(losses) | 22 | 6 | 29 | (83 | ) | |||||||||||
Tax benefit on net derivative gain/(loss) | (1 | ) | 3 | 4 | 27 | |||||||||||
Losses/(gains) reclassified into net earnings: | ||||||||||||||||
Currency exchange contracts – forecasted transactions(3) | (1 | ) | 2 | – | (4 | ) | ||||||||||
Commodity contracts(3) | (2 | ) | 10 | 6 | 15 | |||||||||||
Interest rate contracts(4) | – | – | – | 96 | ||||||||||||
Tax benefit on reclassifications (2) | (1 | ) | (4 | ) | (3 | ) | (40 | ) | ||||||||
Currency impact | (5 | ) | – | (6 | ) | (1 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive earnings/(losses) | 12 | 17 | 30 | 10 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | (91 | ) | (36 | ) | (91 | ) | (36 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Accumulated other comprehensive income attributable to Mondelēz International: | ||||||||||||||||
Balance at beginning of period | $ | (10,564 | ) | $ | (9,381 | ) | $ | (11,122 | ) | $ | (9,986 | ) | ||||
Total other comprehensive earnings/(losses) | 359 | (401 | ) | 921 | 217 | |||||||||||
Less: loss/(gain) attributable to noncontrolling interests | (12 | ) | 14 | (16 | ) | 1 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive earnings/(losses) attributable to Mondelēz International | 347 | (387 | ) | 905 | 218 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | (10,217 | ) | $ | (9,768 | ) | $ | (10,217 | ) | $ | (9,768 | ) | ||||
|
|
|
|
|
|
|
|
(1) |
These reclassified |
Taxes |
These reclassified gains or losses are recorded within cost of sales. |
These reclassified |
Note 13. Income Taxes
Based on current tax laws, our estimated annual effective tax rate for 20162017 is 20.8%25.8%, reflecting favorable impacts from the mix ofpre-tax income in variousnon-U.S. tax jurisdictions.jurisdictions, partially offset by an increase in domestic earnings as compared to the prior year. Our 2016 third2017 second quarter effective tax rate of 7.2% includes net benefit from discrete one-time events of $60 million, mainly due to $35 million from expirations of statutes of limitations and favorable audit settlements in several jurisdictions and a $17 million benefit from the reduction of U.K. net deferred tax liabilities resulting from tax legislation enacted during 2016 Q3 that reduced the U.K. corporate income tax rate. Our effective tax rate for the nine months ended September 30, 2016 of 13.6%16.2% was favorably impacted by net tax benefitbenefits of $47 million from $109 million of discreteone-time events. The discrete net tax benefitbenefits primarily consisted of benefitsa $46 million benefit from the release of $73 millionuncertain tax positions due to expirations of statutes of limitations and favorable audit settlements in several jurisdictions and a $17 million benefit from the reduction of U.K. net deferred tax liabilities resulting from tax legislation enacted during the third quarter of 2016 that reduced the U.K. corporate income tax rate.
As of the third quarter of 2015, our estimated annual effective tax rate for 2015 was 23.1%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions. Our 2015 third quarter effective tax rate of 4.5% benefitted from the one-time third quarter sale of our coffee business that resulted in a pre-tax gain of $7,122 million and $197 million of related tax expense, as well as $21 million of tax costs incurred to remit proceeds up from lower-tier foreign subsidiaries to allow cash to be redeployed within our retained foreign operations. Other discrete one-time events, which partially offset the costs associated with the sale of our coffee business, of $40 million primarily related to favorable audit settlements and expirations of statutes of limitations in several jurisdictions. Our effective tax rate for the ninesix months ended SeptemberJune 30, 20152017 of 6.5%19.2% was favorably impacted by the salenet tax benefits of our coffee business in the third quarter. Other significant$83 million from discreteone-time events events. The discrete net tax benefits primarily consisted of $54a $62 million benefit from the release of uncertain tax chargespositions due to expirations of statutes of limitations and audit settlements in various jurisdictions and a $16 million benefit related to the sale of our interest in AGF ($32 million in the first quarter upon the investment’s change to held-for-sale status and an additional $22 million upon the closingU.S. domestic production activities deduction.
As of the sale inend of the second quarter)quarter of 2016, our estimated annual effective tax rate for 2016 was 22.5%, and $75reflecting favorable impacts from the mix ofpre-tax income in variousnon-U.S. tax jurisdictions. Our 2016 second quarter effective tax rate of 24.2% included net expense from discreteone-time events of $6 million, mainly due to interest accruals on uncertain tax positions. Our effective tax rate for the six months ended June 30, 2016 of 17.3% was favorably impacted by net tax benefits of $49 million from favorable audit settlements anddiscreteone-time events. The discrete net tax benefits primarily consisted of a $39 million benefit from the release of uncertain tax positions due to expirations of statutes of limitations in several jurisdictions.
Note 14. Earnings Per Share
Basic and diluted earnings per share (“EPS”) were calculated as follows:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Net earnings | $ | 548 | $ | 7,268 | $ | 1,576 | $ | 8,007 | ||||||||
Noncontrolling interest earnings | – | (2 | ) | (10 | ) | (11 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net earnings attributable to | $ | 548 | $ | 7,266 | $ | 1,566 | $ | 7,996 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted-average shares for basic EPS | 1,557 | 1,609 | 1,561 | 1,627 | ||||||||||||
Plus incremental shares from assumed conversions | 19 | 20 | 18 | 19 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted-average shares for diluted EPS | 1,576 | 1,629 | 1,579 | 1,646 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Basic earnings per share attributable to | $ | 0.35 | $ | 4.52 | $ | 1.00 | $ | 4.91 | ||||||||
Diluted earnings per share attributable to | $ | 0.35 | $ | 4.46 | $ | 0.99 | $ | 4.86 |
Net earnings Noncontrolling interest (earnings) Net earnings attributable to Mondelēz International Weighted-average shares for basic EPS Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares Weighted-average shares for diluted EPS Basic earnings per share attributable to Mondelēz International Diluted earnings per share attributable to Mondelēz International For the Three Months Ended
June 30, For the Six Months Ended
June 30, 2017 2016 2017 2016 (in millions, except per share data) $ 500 $ 471 $ 1,133 $ 1,028 (2 ) (7 ) (5 ) (10 ) $ 498 $ 464 $ 1,128 $ 1,018 1,519 1,557 1,524 1,563 20 19 20 18 1,539 1,576 1,544 1,581 $ 0.33 $ 0.30 $ 0.74 $ 0.65 $ 0.32 $ 0.29 $ 0.73 $ 0.64
We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded antidilutive stock options of 4.38.6 million for the three months and 7.7 million for the ninesix months ended SeptemberJune 30, 20162017 and less than 16.5 million for the three months and 10.810.2 million for the ninesix months ended SeptemberJune 30, 2015.2016.
Note 15. Segment Reporting
We manufacture and market primarily snack food products, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy and various cheese & grocery products, as well as powdered beverage products. We manage our global business and report operating results through geographic units.
Our operations and management structure are organized into fivefour reportable operating segments:
On October 1, 2016, we integrated our EEMEA businessoperating segment into our Europe and Asia Pacific segments.operating segments to further leverage and optimize the operating scale built within the Europe and Asia Pacific regions. Russia, Ukraine, Turkey, Belarus, Georgia and Kazakhstan were combined within our Europe operating segment, while the remaining Middle East and African countries were combined within our Asia Pacific operating segmentregion to form a new Asia, Middle East and Africa (“AMEA”) regionalthe AMEA operating segment. We have reflected the segment change as if it had occurred in all periods presented.
We manage our operations by region to leverage regional operating scale, manage different and changing business environments more effectively and pursue growth opportunities as they arise in our key markets. Our regional management teams have responsibility for the business, product categories and financial results in the regions.
Historically, we have recorded income from equity method investments within our operating income as these investments were part of our base business. Beginning in the third quarter of 2015, to align with the accounting for our new coffee equity method investment in JDE, we began to record the earnings from our equity method investments in equity method investment earnings outside of segment operating income. Within segment operating income, equity method investment net earnings were $56 million for the nine months ended September 30, 2015, including $49 million in Asia Pacific, $3 million in EEMEA and $4 million in North America. See Note 1,Basis of Presentation – Principles of Consolidation,and Note 2,Divestitures and Acquisitions, for additional information.
We use segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), general corporate expenses (which are a component of selling, general and administrative expenses), amortization of intangibles gains and losses on divestitures or acquisitions, gain on the JDE coffee business transactions, loss on deconsolidation of Venezuela and acquisition-related costs (which are a component of selling, general and administrative expenses)divestiture in all periods presented. We exclude these items from segment operating income in order to provide better transparency of our segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.
Our segment net revenues and earnings, revised to reflect our new segment structure, were:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | June 30, | June 30, | |||||||||||||||||||||||||||||
September 30, | September 30, | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | (in millions) | ||||||||||||||||||||||||||||
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Net revenues: | ||||||||||||||||||||||||||||||||
Latin America(1) | $ | 868 | $ | 1,233 | $ | 2,528 | $ | 3,730 | ||||||||||||||||||||||||
Asia Pacific(2) | 1,128 | 1,101 | 3,278 | 3,278 | ||||||||||||||||||||||||||||
EEMEA(2) | 543 | 586 | 1,738 | 2,150 | ||||||||||||||||||||||||||||
Latin America | $ | 848 | $ | 843 | $ | 1,758 | $ | 1,660 | ||||||||||||||||||||||||
AMEA | 1,394 | 1,446 | 2,885 | 2,961 | ||||||||||||||||||||||||||||
Europe | 2,104 | 2,173 | 6,461 | 7,963 | 2,171 | 2,293 | 4,536 | 4,741 | ||||||||||||||||||||||||
North America | 1,753 | 1,756 | 5,148 | 5,151 | 1,573 | 1,720 | 3,221 | 3,395 | ||||||||||||||||||||||||
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Net revenues | $ | 6,396 | $ | 6,849 | $ | 19,153 | $ | 22,272 | $ | 5,986 | $ | 6,302 | $ | 12,400 | $ | 12,757 | ||||||||||||||||
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(1) Net revenues of $315 million for the three months and $834 million for the nine months ended September 30, 2015 from our Venezuelan subsidiaries are included in our condensed consolidated financial statements. Beginning in 2016, we account for our Venezuelan subsidiaries using the cost method of accounting and no longer include net revenues of our Venezuelan subsidiaries within our condensed consolidated financial statements. Refer to Note 1,Basis of Presentation – Currency Translation and Highly Inflationary Accounting: Venezuela,for more information. (2) On July 2, 2015, we contributed our global coffee businesses primarily from our Europe, EEMEA and Asia Pacific segments. Net revenues of our global coffee business were $1,348 million in Europe, $246 million in EEMEA and $33 million in Asia Pacific for the nine months ended September 30, 2015. Refer to Note 2,Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information.
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2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
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Earnings before income taxes: | ||||||||||||||||||||||||||||||||
Operating income: | ||||||||||||||||||||||||||||||||
Latin America | $ | 92 | $ | 134 | $ | 191 | $ | 422 | $ | 103 | $ | 32 | $ | 214 | $ | 99 | ||||||||||||||||
Asia Pacific | 135 | 71 | 378 | 321 | ||||||||||||||||||||||||||||
EEMEA | 44 | 52 | 154 | 184 | ||||||||||||||||||||||||||||
AMEA | 162 | 149 | 343 | 339 | ||||||||||||||||||||||||||||
Europe | 302 | 298 | 896 | 885 | 339 | 256 | 748 | 608 | ||||||||||||||||||||||||
North America | 274 | 275 | 840 | 817 | 214 | 295 | 506 | 566 | ||||||||||||||||||||||||
Unrealized gains / (losses) on hedging activities (mark-to-market impacts) | (12 | ) | (4 | ) | (49 | ) | 75 | |||||||||||||||||||||||||
Unrealized (losses)/gains on hedging activities(mark-to-market impacts) | (46 | ) | 17 | (97 | ) | (37 | ) | |||||||||||||||||||||||||
General corporate expenses | (89 | ) | (95 | ) | (216 | ) | (240 | ) | (84 | ) | (67 | ) | (142 | ) | (127 | ) | ||||||||||||||||
Amortization of intangibles | (44 | ) | (45 | ) | (132 | ) | (137 | ) | (44 | ) | (44 | ) | (88 | ) | (88 | ) | ||||||||||||||||
Gains on JDE coffee business transactions and divestiture | – | 7,122 | – | 7,135 | ||||||||||||||||||||||||||||
Acquisition-related costs | – | (6 | ) | – | (8 | ) | ||||||||||||||||||||||||||
Loss on divestiture | (3 | ) | – | (3 | ) | – | ||||||||||||||||||||||||||
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Operating income | 702 | 7,802 | 2,062 | 9,454 | 641 | 638 | 1,481 | 1,360 | ||||||||||||||||||||||||
Interest and other expense, net | (145 | ) | (114 | ) | (540 | ) | (814 | ) | (124 | ) | (151 | ) | (243 | ) | (395 | ) | ||||||||||||||||
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Earnings before income taxes | $ | 557 | $ | 7,688 | $ | 1,522 | $ | 8,640 | $ | 517 | $ | 487 | $ | 1,238 | $ | 965 | ||||||||||||||||
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Items impacting our segment operating results are discussed in Note 1,Basis of Presentation including the Venezuela deconsolidation and currency devaluation,, Note 2,Divestitures and Acquisitions, Note 4,Property, Plant and Equipment,Note 5,Goodwill and Intangible Assets,and Note 6,2014-2018 Restructuring Program and Note 11,Commitments and Contingencies. Also see Note 7,Debt and Borrowing Arrangements, and Note 8,Financial Instruments, for more information on our interest and other expense, net for each period.
Net revenues by product category, revised to reflect our new segment structure, were:
For the Three Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||
Latin | Asia | North | For the Three Months Ended June 30, 2017 | |||||||||||||||||||||||||||||||||||||||||
America | Pacific | EEMEA | Europe | America | Total | Latin America | AMEA | Europe | North America | Total | ||||||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||
Biscuits | $ | 191 | $ | 360 | $ | 125 | $ | 608 | $ | 1,403 | $ | 2,687 | $ | 200 | $ | 355 | $ | 718 | $ | 1,301 | $ | 2,574 | ||||||||||||||||||||||
Chocolate | 185 | 388 | 223 | 1,021 | 65 | 1,882 | 194 | 425 | 946 | 50 | 1,615 | |||||||||||||||||||||||||||||||||
Gum & Candy | 247 | 174 | 120 | 163 | 285 | 989 | 241 | 238 | 204 | 222 | 905 | |||||||||||||||||||||||||||||||||
Beverages(1) | 164 | 77 | 31 | 36 | – | 308 | ||||||||||||||||||||||||||||||||||||||
Beverages | 129 | 189 | 24 | – | 342 | |||||||||||||||||||||||||||||||||||||||
Cheese & Grocery | 81 | 129 | 44 | 276 | – | 530 | 84 | 187 | 279 | – | 550 | |||||||||||||||||||||||||||||||||
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Total net revenues | $ | 868 | $ | 1,128 | $ | 543 | $ | 2,104 | $ | 1,753 | $ | 6,396 | $ | 848 | $ | 1,394 | $ | 2,171 | $ | 1,573 | $ | 5,986 | ||||||||||||||||||||||
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For the Three Months Ended September 30, 2015 | For the Three Months Ended June 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||
Latin | Asia | North | Latin America | AMEA | Europe | North America | Total | |||||||||||||||||||||||||||||||||||||
America (2) | Pacific | EEMEA | Europe (3) | America | Total | (in millions) | ||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Biscuits | $ | 431 | $ | 356 | $ | 125 | $ | 592 | $ | 1,403 | $ | 2,907 | $ | 196 | $ | 356 | $ | 719 | $ | 1,398 | $ | 2,669 | ||||||||||||||||||||||
Chocolate | 184 | 370 | 232 | 1,074 | 64 | 1,924 | 179 | 392 | 981 | 43 | 1,595 | |||||||||||||||||||||||||||||||||
Gum & Candy | 262 | 171 | 134 | 177 | 289 | 1,033 | 250 | 250 | 254 | 279 | 1,033 | |||||||||||||||||||||||||||||||||
Beverages(1) | 178 | 76 | 45 | 43 | – | 342 | ||||||||||||||||||||||||||||||||||||||
Beverages | 138 | 229 | 39 | – | 406 | |||||||||||||||||||||||||||||||||||||||
Cheese & Grocery | 178 | 128 | 50 | 287 | – | 643 | 80 | 219 | 300 | – | 599 | |||||||||||||||||||||||||||||||||
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Total net revenues | $ | 1,233 | $ | 1,101 | $ | 586 | $ | 2,173 | $ | 1,756 | $ | 6,849 | $ | 843 | $ | 1,446 | $ | 2,293 | $ | 1,720 | $ | 6,302 | ||||||||||||||||||||||
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America | Pacific | EEMEA | Europe | America | Total | |||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Biscuits | $ | 551 | $ | 991 | $ | 379 | $ | 1,848 | $ | 4,162 | $ | 7,931 | ||||||||||||||||||||||||||||||||
Chocolate | 562 | 1,088 | 549 | 3,124 | 153 | 5,476 | ||||||||||||||||||||||||||||||||||||||
Gum & Candy | 713 | 538 | 383 | 512 | 833 | 2,979 | ||||||||||||||||||||||||||||||||||||||
Beverages(1) | 466 | 285 | 229 | 123 | – | 1,103 | ||||||||||||||||||||||||||||||||||||||
Cheese & Grocery | 236 | 376 | 198 | 854 | – | 1,664 | ||||||||||||||||||||||||||||||||||||||
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Total net revenues | $ | 2,528 | $ | 3,278 | $ | 1,738 | $ | 6,461 | $ | 5,148 | $ | 19,153 | ||||||||||||||||||||||||||||||||
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America (2) | Pacific | EEMEA | Europe (3) | America | Total | |||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Biscuits | $ | 1,147 | $ | 940 | $ | 396 | $ | 1,828 | $ | 4,161 | $ | 8,472 | ||||||||||||||||||||||||||||||||
Chocolate | 680 | 1,074 | 627 | 3,204 | 161 | 5,746 | ||||||||||||||||||||||||||||||||||||||
Gum & Candy | 852 | 550 | 418 | 558 | 829 | 3,207 | ||||||||||||||||||||||||||||||||||||||
Beverages(1) | 570 | 324 | 502 | 1,493 | – | 2,889 | ||||||||||||||||||||||||||||||||||||||
Cheese & Grocery | 481 | 390 | 207 | 880 | – | 1,958 | ||||||||||||||||||||||||||||||||||||||
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Total net revenues | $ | 3,730 | $ | 3,278 | $ | 2,150 | $ | 7,963 | $ | 5,151 | $ | 22,272 | ||||||||||||||||||||||||||||||||
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For the Six Months Ended June 30, 2017 | ||||||||||||||||||||
Latin America | AMEA | Europe | North America | Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Biscuits | $ | 370 | $ | 754 | $ | 1,369 | $ | 2,634 | $ | 5,127 | ||||||||||
Chocolate | 453 | 940 | 2,169 | 120 | 3,682 | |||||||||||||||
Gum & Candy | 454 | 467 | 397 | 467 | 1,785 | |||||||||||||||
Beverages | 322 | 362 | 65 | – | 749 | |||||||||||||||
Cheese & Grocery | 159 | 362 | 536 | – | 1,057 | |||||||||||||||
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Total net revenues | $ | 1,758 | $ | 2,885 | $ | 4,536 | $ | 3,221 | $ | 12,400 | ||||||||||
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For the Six Months Ended June 30, 2016 | ||||||||||||||||||||
Latin America | AMEA | Europe | North America | Total | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Biscuits | $ | 360 | $ | 763 | $ | 1,362 | $ | 2,759 | $ | 5,244 | ||||||||||
Chocolate | 377 | 885 | 2,244 | 88 | 3,594 | |||||||||||||||
Gum & Candy | 466 | 506 | 470 | 548 | 1,990 | |||||||||||||||
Beverages | 302 | 406 | 87 | – | 795 | |||||||||||||||
Cheese & Grocery | 155 | 401 | 578 | – | 1,134 | |||||||||||||||
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Total net revenues | $ | 1,660 | $ | 2,961 | $ | 4,741 | $ | 3,395 | $ | 12,757 | ||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Description of the Company
We manufacture and market primarily snack food products, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy and various cheese & grocery products, as well as powdered beverage products. We have operations in more than 80 countries and sell our products in approximately 165 countries.
OverWe aim to deliver strong, profitable long-term growth by accelerating our core snacks business and expanding the last several years,reach of our Power Brands globally. Leveraging our Power Brands and our innovation platforms, we plan to innovate boldly and connect with our consumers wherever they are, including new markets around the world, using both traditional and digital channels. As consumer consumption patterns change to more accessible, frequent andbetter-for-you snacking, we are enhancing the goodness of many of our brands (including providing simpler and wholesome ingredient-focused snacks), expanding the well-being offerings in our portfolio and inspiring consumers to snack mindfully by providing clear and simple nutrition information. As shopping expands further online, we are also working to grow oure-commerce platform andon-line presence with consumers. To fuel these investments, we have built a presence inbeen working to optimize our cost structure. These efforts consist of reinventing our supply chain, including adding and upgrading to more efficient production lines, while reducing the snacking category.complexity of our product offerings, ingredients and number of suppliers. We also continue to aggressively manage our overhead costs. We have expanded geographicallyembraced and continueembeddedzero-based budgeting practices across the organization to invest in product quality, marketing and innovation behind our iconic brands while also implementing a seriesidentify potential areas of cost saving initiatives. Our goals are to achieve industry-leading revenue growth over time driven by the higher expected growth rates of advantaged snack categories; leveragereductions and capture and sustain savings within our cost structure through supply chain reinvention, productivity programs, overhead streamlining, volume growthongoing operating budgets. Through these actions, we’re leveraging our brands, platforms and improved product mixcapabilities to drive margin gains;long-term value and grow earnings per share in the top-tier ofreturn on investment for our peer group.shareholders.
Significant Items Affecting Comparability of Financial Results
JDE Coffee Business Transactions:Malware Incident
On July 2, 2015, we completed transactions to combineJune 27, 2017, a global malware incident impacted our wholly owned coffee businesses with those of D.E Master Blenders 1753 B.V. (“DEMB”) to createbusiness. The malware affected a new company, Jacobs Douwe Egberts (“JDE”). Following the exchange of asignificant portion of our investment in JDE for an interest in Keurig Green Mountain Inc. (“Keurig”) in March 2016, we held a 26.5% equity interest in JDE. The remaining 73.5% equity interest in JDE was held by a subsidiary of Acorn Holdings B.V. (“AHBV,” owner of DEMB prior to July 2, 2015). Please see discussionglobal Windows-based applications and our sales, distribution and financial networks across our business. During the last four days of the acquisitionsecond quarter and early third quarter, we executed business continuity and contingency plans to contain the impact and minimize the damages from the malware and restore our systems. This allowed us to service customer needs and continue sales and production at a reduced capacity while progressing recovery activities. Based on the nature of an interestthe malware and its impact to our technology, we did not expect nor to date have we found any instances of Company or personal data released externally. Although we believe we have now largely contained the disruption and restored a majority of our affected systems, we anticipate additional work during the second half of 2017 as we continue to recover and further enhance the security of our systems.
For the second quarter, we estimate that the malware incident had a negative impact of 2.3% on our net revenue growth and 2.4% on our Organic Net Revenue growth. We also incurred incremental expenses of $7.1 million as a result of the incident. We expect to be able to recognize the majority of delayed second quarter shipments in Keurig below underKeurig Transaction. Asour third quarter results, although we permanently lost some revenue. We continue to address the recovery of September 30, 2016,our systems in a couple of key markets and are also assessing longer-term investments that we hold a 26.4% equity interest in JDE followingwill make to strengthen our IT environment against potential future disruptions. We expect to incur the transactions discussed underJDE Stock-Based Compensation Arrangementsbelow.majority of incremental expenses related to the malware incident and recovery process during the second half of 2017.
The consideration we receivedSummary of Results
On July 5, 2016, we received an expected cash payment of $275 million from JDE to settle the receivable related to tax formation costs that were part of the initial sales price.
• | Organic Net Revenue, anon-GAAP financial measure on a constant currency basis, decreased 2.7% to $6.0 billion in the second quarter of 2017 and decreased 1.0% to $12.4 billion in the first six months of 2017 as compared to the same period in the prior year after recasting all periods to exclude the operating results from divestitures and an acquisition. (Refer toNon-GAAP Financial Measures appearing later in this section and Note 2,Divestitures and Acquisitions,for additional information). We use Organic Net Revenue as it provides improved year-over-year comparability of our underlying results (see the definition of Organic Net Revenue and our reconciliation with net revenues withinNon-GAAP Financial Measures appearing later in this section). |
• | Diluted EPS attributable to Mondelēz International increased 10.3% to $0.32 in the second quarter of 2017 and increased 14.1% to $0.73 in the first six months of 2017 as compared to the same period in the prior year. A number of significant items affected the comparability of our reported results, as further described in theDiscussion and Analysis of Historical Results appearing later in this section and in the notes to the condensed consolidated financial statements. |
In connection with the contribution of our global coffee businesses to JDE on July 2, 2015, we recorded a final pre-tax gain of $6.8 billion (or $6.6 billion after taxes) in 2015 after final adjustments as described below. We also recorded approximately $1.0 billion of pre-tax net gains related to hedging the expected cash proceeds from the transactions as described further below. During the fourth quarter of 2015, we and JDE concluded negotiations of a sales price adjustment and completed the valuation of our investment in JDE. Primarily due to the negotiated resolution of the sales price adjustment in the fourth quarter of 2015, we recorded a $313 million reduction in the pre-tax gain on the coffee transaction, reducing the $7.1 billion estimated gain in the third quarter of 2015 to the $6.8 billion final gain for 2015. As part of our sales price negotiations, we retained the right to collect future cash payments if certain estimated pension liabilities are realized over an agreed amount in the future. As such, we may recognize additional income related to this negotiated term in the future.
The final value of our investment in JDE on July 2, 2015 was€4.1 billion ($4.5 billion as of July 2, 2015). The fair value of the JDE investment was determined using both income-based and market-based valuation techniques. The discounted cash flow analysis reflected growth, discount and tax rates and other assumptions reflecting the underlying combined businesses and countries in which the combined coffee businesses operate. The fair value of the JDE investment also included the fair values of theCarte Noire andMerrild businesses, which JDE agreed to divest to comply with the conditioned approval by the European Commission related to the JDE coffee business transactions. As of the end of the first quarter of 2016, these businesses were sold by JDE. As the July 2, 2015 fair values for these businesses were recorded by JDE at their pending sales values, we did not record any gain or loss on the sales of these businesses in our share of JDE’s earnings.
In connection with the expected receipt of cash in euros at the time of closing, we entered into a number of consecutive currency exchange forward contracts in 2014 and 2015 to lock in an equivalent expected value in U.S. dollars as of the date the JDE coffee business transactions were first announced in May 2014. Cumulatively, we realized aggregate net gains and received cash of approximately $1.0 billion on these hedging contracts that increased the cash we received in connection with the JDE coffee business transactions from $4.2 billion in cash consideration received to $5.2 billion. In connection with these currency contracts, we recognized net gains of $29 million in the three months and $436 million in the nine months ended September 30, 2015 within interest and other expense, net.
JDE Stock-Based Compensation Arrangements:
At the close of June 30, 2016, we entered into agreements with AHBV and its affiliates to establish a new stock-based compensation arrangement tied to the issuance of JDE equity compensation awards to JDE employees. This arrangement replaced a temporary equity compensation program tied to the issuance of AHBV equity compensation to JDE employees. New Class C, D and E JDE shares were authorized and issued for investments made by JDE employees. Under these arrangements, dilution of the JDE shares is limited to 2%. Upon execution of the agreements and the creation of the Class C, D and E JDE shares, as a percentage of the total JDE issued shares, our Class B shares changed from 26.5% to 26.4% and AHBV’s Class A shares changed from 73.5% to 73.22%, while the Class C, D and E shares, held by AHBV and its affiliates until the JDE employee awards vest, comprised 0.38% of JDE’s shares. Additional Class C shares are available to be issued when planned long-term incentive plan (“JDE LTIP”) awards vest, generally over the next five years. When the JDE Class C shares are issued in connection with the vested JDE LTIP awards, the Class A and B relative ownership interests will decrease. Based on estimated achievement and forfeiture assumptions, we do not expect our JDE ownership interest to decrease below 26.27%. As of September 30, 2016, our ownership interest in JDE was 26.4%.
JDE Tax Matter Resolution:
On July 19, 2016, the Supreme Court of Spain reached a final resolution on a challenged JDE tax position held by a predecessor DEMB company that resulted in an unfavorable tax expense of€114 million ($128 million as of September 30, 2016). As a result, our earnings in the third quarter of 2016 were negatively affected by€30 million ($34 million as of September 30, 2016).
Keurig Transaction:
On March 3, 2016, a subsidiary of AHBV completed the $13.9 billion acquisition of all of the outstanding common stock of Keurig through a merger transaction. On March 7, 2016, we exchanged with a subsidiary of AHBV a portion of our equity interest in JDE with a carrying value of€1.7 billion (approximately $2.0 billion as of March 7, 2016) for an interest in Keurig with a fair value of $2.0 billion based on the merger consideration per share for Keurig. We recorded the difference between the fair value of Keurig and our basis in JDE shares as a $43 million gain on equity method investment exchange in March 2016. Following the exchange, our ownership interest in JDE was 26.5% and our interest in Keurig was 24.2%. Both AHBV and we hold our investments in Keurig through a combination of equity and interests in a shareholder loan, with pro-rata ownership of each. Our initial $2.0 billion investment in Keurig includes a $1.6 billion Keurig equity interest and a $0.4 billion shareholder loan receivable, which are reported on a combined basis within equity method investments on our condensed consolidated balance sheet as of September 30, 2016. The shareholder loan has a 5.5% interest rate and is payable at the end of a seven-year term on February 27, 2023. We recorded equity earnings of $10 million for the three months and $39 million for the seven months ended September 30, 2016 and interest income from the shareholder loan of $6 million for the three months and $14 million for the seven months ended September 30, 2016 within equity method earnings. Additionally, we received $2 million in the three months ended and $4 million in the seven months ended September 30, 2016 of dividends on our investment in Keurig. We continue to account for our investments in JDE and Keurig under the equity method and recognize our share of their earnings within equity method investment earnings and our share of their dividends within our cash flows. As of September 30, 2016, Keurig is working to finalize the acquisition purchase price allocation.
Coffee Business Equity Earnings:
We have reflected the results of our historical coffee businesses and equity earnings from JDE, Keurig and DSF in our results from continuing operations as the coffee category continues to be a significant part of our net earnings and business strategy going forward. Historically, our coffee businesses and the income from equity method investments were recorded within our operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig and DSF, and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income. See Note 2,Divestitures and Acquisitions, for more information.
Venezuela Deconsolidation:
Effective as of the close of the 2015 fiscal year, we concluded that we no longer met the accounting criteria for consolidation of our Venezuelan subsidiaries due to a loss of control over our Venezuelan operations and an other-than-temporary lack of currency exchangeability. As of the close of the 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations. We recorded a $778 million pre-tax loss on December 31, 2015 as we reduced the value of our cost method investment in Venezuela and all Venezuelan receivables held by our other subsidiaries to realizable fair value, resulting in full impairment. The recorded loss also included historical cumulative translation adjustments related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity.
Beginning in 2016, we no longer include net revenues, earnings or net assets of our Venezuelan subsidiaries within our condensed consolidated financial statements. Under the cost method of accounting, earnings are only recognized to the extent cash is received. Given the current and ongoing difficult economic, regulatory and business environment in Venezuela, there continues to be significant uncertainty related to our operations in Venezuela, and we expect these conditions will continue for the foreseeable future. We will monitor the extent of our ability to control our Venezuelan operations and the liquidity and availability of U.S. dollars at different rates as our current situation in Venezuela may change over time and lead to consolidation at a future date. See belowDiscussion and Analysis of Historical Results – Items Affecting Comparability of Financial Results, and Note 1,Basis of Presentation –Currency Translation and Highly Inflationary Accounting: Venezuela, for more information on our historical Venezuelan operating results, including the remeasurement loss recorded in the first quarter of 2015.
• | Adjusted EPS, anon-GAAP financial measure, increased 11.6% to $0.48 in the second quarter of 2017 and increased 9.8% to $1.01 in the first six months of 2017 as compared to the same period in the prior year after recasting all periods to exclude the operating results from divestitures and historicalmark-to-market impacts. On a constant currency basis, Adjusted EPS increased 18.6% to $0.51 in the second quarter of 2017 and increased 13.0% to $1.04 in the first six months of 2017. We use Adjusted EPS as it provides improved year-over-year comparability of our underlying results (see the definition of Adjusted EPS and our reconciliation with diluted EPS withinNon-GAAP Financial Measures appearing later in this section). |
Financial Outlook
We seek to achieve top-tier financial performance. Weprofitable, long-term growth and manage our business to achieveattain this goal using our key operating metrics: Organic Net Revenue, Adjusted Operating Income and Adjusted EPS. We use thesenon-GAAP financial metrics and related computations such as margins internally to evaluate and manage our business and to plan and make nearnear- and long-term operating and strategic decisions. As such, we believe these metrics are useful to investors as they provide supplemental information in addition to our U.S. GAAP financial results. We believe providing investors with the same financial information that we use internally ensures that investors have the same data to make comparisons of our historical operating results, identify trends in our underlying operating results and havegain additional insight and transparency on how we evaluate our business. We believe ournon-GAAP financial measures should always be considered in relation to our GAAP results, and we have provided reconciliations between our GAAP andnon-GAAP financial measures inNon-GAAP Financial Measures, which appears later in this section.
In addition to monitoring our key operating metrics, we monitor a number of developments orand trends that could impact our revenue and profitability objectives.
We also continue to note trends similar to those we highlighted in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2015. In particular, volatility in the global commodity and currency markets continued through the third quarter of 2016, including most recently the impact from Brexit and currency devaluation issues noted in other countries. Refer toCommodity Trends appearing later in this section, andas well as Note 1,Basis of Presentation – Currency Translation and Highly Inflationary Accounting, for additional information on our commodity costs and specific currency risks we are monitoring. Also refer to Note 6,2014-2018 Restructuring Program, for additional information on the North America region collective bargaining agreement re-negotiations, and Note 15, S11,egment Reporting, for information on our segmentsCommitments and information on our EEMEA segment.Contingencies – Tax Matters.
Summary of Results
Discussion and Analysis of Historical Results
Items Affecting Comparability of Financial Results
The following table includes significant income or (expense) items that affected the comparability of ourpre-tax results of operations and our effective tax rates. Please refer to the notes to the condensed consolidated financial statements indicated below for more information. Refer also to theConsolidated Results of Operations– Net Earnings and Earnings per Share Attributable to MondelēMondelēz International table for theafter-tax per share impacts of these items.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
See Note | 2016 | 2015 | 2016 | 2015 | ||||||||||||||
(in millions) | ||||||||||||||||||
Coffee business transactions: | Note 2 | |||||||||||||||||
Gain on contribution | $ | – | $ | 7,122 | $ | – | $ | 7,122 | ||||||||||
Incremental costs for readying | – | (54 | ) | – | (239 | ) | ||||||||||||
Currency-related hedging net gain | – | 29 | – | 436 | ||||||||||||||
Gain on Keurig equity method investment exchange(1) | – | – | 43 | – | ||||||||||||||
Venezuela: | Note 1 | |||||||||||||||||
Historical operating income(2) | – | 73 | – | 188 | ||||||||||||||
Remeasurement of net | – | – | – | (11 | ) | |||||||||||||
2014-2018 Restructuring Program: | Note 6 | |||||||||||||||||
Restructuring charges | (187 | ) | (146 | ) | (480 | ) | (442 | ) | ||||||||||
Implementation charges | (114 | ) | (75 | ) | (286 | ) | (185 | ) | ||||||||||
Loss on debt extinguishment and related expenses | Note 7 | – | – | – | (713 | ) | ||||||||||||
Loss related to interest rate swaps | Note 7 | – | – | (97 | ) | (34 | ) | |||||||||||
Intangible asset impairment charges | Note 5 | (4 | ) | – | (30 | ) | – | |||||||||||
Divestitures, Acquisitions and Sales of Property | Note 2 | |||||||||||||||||
Gain on sale of trademarks | 7 | – | 13 | – | ||||||||||||||
Gain on divestiture | – | – | – | 13 | ||||||||||||||
Divestiture-related costs | – | – | (84 | ) | – | |||||||||||||
Gains on sales of property | 7 | – | 46 | – | ||||||||||||||
Mark-to-market gains (losses) from derivatives(3) | Note 8 & 15 | (12 | ) | (4 | ) | (49 | ) | 35 | ||||||||||
Effective tax rate | Note 13 | 7.2 | % | 4.5 | % | 13.6 | % | 6.5 | % |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
See Note | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||
(in millions, except percentages) | ||||||||||||||||||||
Gain on equity method investment exchange | Note 2 | $ | – | $ | – | $ | – | $ | 43 | |||||||||||
2014-2018 Restructuring Program: | Note 6 | |||||||||||||||||||
Restructuring charges | (148 | ) | (154 | ) | (305 | ) | (293 | ) | ||||||||||||
Implementation charges | (63 | ) | (74 | ) | (117 | ) | (172 | ) | ||||||||||||
Loss related to interest rate swaps | Note 7 & 8 | – | – | – | (97 | ) | ||||||||||||||
Loss on debt extinguishment | Note 7 | (11 | ) | – | (11 | ) | – | |||||||||||||
Intangible asset impairment charges | Note 5 | (38 | ) | (12 | ) | (38 | ) | (26 | ) | |||||||||||
Divestiture-related costs | Note 2 | |||||||||||||||||||
Loss on divestiture | (3 | ) | – | (3 | ) | – | ||||||||||||||
Gain on sale of intangible asset | – | 6 | – | 6 | ||||||||||||||||
Divestiture-related costs | (9 | ) | (84 | ) | (28 | ) | (84 | ) | ||||||||||||
Gains on sales of property | – | 39 | – | 39 | ||||||||||||||||
Mark-to-market (losses)/gains from derivatives | Note 15 | (46 | ) | 17 | (97 | ) | (37 | ) | ||||||||||||
Benefit from the settlement of a Cadbury tax matter(1) | Note 11 | – | – | 58 | – | |||||||||||||||
Malware incident incremental expenses | (7 | ) | – | (7 | ) | – | ||||||||||||||
Effective tax rate | Note 13 | 16.2 | % | 24.2 | % | 19.2 | % | 17.3 | % |
(1) | Refer to Note 11,Commitments and Contingencies – Tax Matters, for more information. The |
Consolidated Results of Operations
The following discussion compares our consolidated results of operations for the three and nine months ended SeptemberJune 30, 20162017 and 2015.2016.
Three Months Ended SeptemberJune 30:
For the Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2016 | 2015 | $ change | % change | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Net revenues | $ | 6,396 | $ | 6,849 | $ | (453 | ) | (6.6 | )% | |||||||
Operating income | 702 | 7,802 | (7,100 | ) | (91.0 | )% | ||||||||||
Net earnings attributable to | 548 | 7,266 | (6,718 | ) | (92.5 | )% | ||||||||||
Diluted earnings per share attributable to Mondelēz International | 0.35 | 4.46 | (4.11 | ) | (92.2 | )% | ||||||||||
Net Revenues – Net revenues decreased $453 million (6.6%) to $6,396 million in the third quarter of 2016, and Organic Net Revenue(1) increased $74 million (1.1%) to $6,589 million. Power Brands net revenues decreased 5.2%, due to the deconsolidation of our historical Venezuelan operations and unfavorable currency, and Power Brands Organic Net Revenue increased 2.5%. Emerging markets net revenues decreased 14.6%, due to the deconsolidation of our historical Venezuelan operations and unfavorable currency, and emerging markets Organic Net Revenue increased 2.0%. The underlying changes in net revenues and Organic Net Revenue are detailed below:
|
| |||||||||||||||
2016 | ||||||||||||||||
Change in net revenues (by percentage point) | ||||||||||||||||
Higher net pricing | 0.6 | pp | ||||||||||||||
Favorable volume/mix | 0.5 | pp | ||||||||||||||
|
| |||||||||||||||
Total change in Organic Net Revenue(1) | 1.1% | |||||||||||||||
Historical Venezuelan operations(2) | (4.5 | )pp | ||||||||||||||
Unfavorable currency | (2.9 | )pp | ||||||||||||||
Impact of accounting calendar changes | (0.3 | )pp | ||||||||||||||
|
| |||||||||||||||
Total change in net revenues | (6.6 | )% | ||||||||||||||
|
|
For the Three Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2017 | 2016 | $ change | % change | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Net revenues | $ | 5,986 | $ | 6,302 | $ | (316 | ) | (5.0)% | ||||||||
Operating income | 641 | 638 | 3 | 0.5% | ||||||||||||
Net earnings attributable to Mondelēz International | 498 | 464 | 34 | 7.3% | ||||||||||||
Diluted earnings per share attributable to Mondelēz International | 0.32 | 0.29 | 0.03 | 10.3% |
Net Revenues– Net revenues decreased $316 million (5.0%) to $5,986 million in the second quarter of 2017, and Organic Net Revenue(1) decreased $169 million (2.7%) to $6,011 million. Power Brands net revenues decreased 3.0%, including an unfavorable currency impact, and Power Brands Organic Net Revenue decreased 1.8%. Emerging markets net revenues decreased 1.5%, including an unfavorable currency impact, and emerging markets Organic Net Revenue decreased 0.3%. The underlying changes in net revenues and Organic Net Revenue are detailed below:
2017 | ||||||||
Change in net revenues (by percentage point) | ||||||||
Total change in net revenues | (5.0 | )% | ||||||
Add back the following items affecting comparability: | ||||||||
Unfavorable currency | 2.0 | pp | ||||||
Impact of divestitures | 0.5 | pp | ||||||
Impact of acquisition | (0.2 | )pp | ||||||
Total change in Organic Net Revenue(1) | (2.7 | )% | ||||||
Unfavorable volume/mix | (3.8 | )pp | ||||||
Higher net pricing | 1.1 | pp |
(1) | Please see theNon-GAAP Financial Measures section at the end of this item. |
Net revenue decline of 6.6%5.0% was driven by the deconsolidation of our historical Venezuelan operations, unfavorable currency and the year-over-year impact of last year’s accounting calendar change, partially offset by our underlying Organic Net Revenue decline of 2.7%, unfavorable currency and the impact of divestitures, partially offset by the impact of an acquisition. Our underlying Organic Net Revenue decline was driven by unfavorable volume/mix, primarily due to delayed shipments as a result of the June 27, 2017 malware incident which we estimate had a negative impacts of 2.3% on our net revenue growth of 1.1%. The deconsolidation ofand 2.4% on our historical Venezuelan operations resulted in aOrganic Net Revenue growth, partially offset by higher net pricing. Unfavorable year-over-year decrease in net revenues of $315 million for the quarter. Unfavorable currency impacts decreased net revenues by $193$124 million, due primarily to the strength of the U.S. dollar relative to several currencies, including the British pound sterling, Argentinean pesoeuro, Egyptian pound and MexicanArgentinian peso, partially offset by the strength of several currencies, including the Brazilian real, Australian dollarRussian ruble and Japanese yenSouth African rand, relative to the U.S. dollar. The North America segment accounting calendar change made in 2015impact of divestitures resulted in a year-over-year decreasedecline in net revenues of $19$39 million for the second quarter of 2017. The November 2, 2016 acquisition of a business and license to manufacture, market and sell Cadbury-branded biscuits in additional key markets added $16 million (constant currency basis) of incremental net revenues for the quarter. Our underlying Organic Net Revenue growthsecond quarter of 2017. Unfavorable volume/mix was driven by higher net pricing and favorable volume/mix.reflected across all segments. Net pricing was up, which includes the benefit of carryover pricing from 2015the second half of 2016 and the first quarter of 2017 as well as the effects of input cost-driven pricing actions taken during the quarter.second quarter of 2017. Higher net pricing was reflected in Latin America and EEMEA, partially offset by lower net pricing in Europe,all segments except North America and Asia Pacific. Favorable volume/mix was reflected in Europe, North America and Asia Pacific, partially offset by unfavorable volume/mix in Latin America and EEMEA. Unfavorable volume/mix in Latin America and EEMEA was largely due to price elasticity as well as strategic decisions to exit certain low-margin product lines.America.
Operating Income– Operating income decreased $7,100increased $3 million (91.0%(0.5%) to $702$641 million in the thirdsecond quarter of 2016,2017, Adjusted Operating Income(1) increased $120$12 million (13.5%(1.3%) to $1,011$933 million and Adjusted Operating Income on a constant currency basis(1) increased $151$72 million (16.9%(7.8%) to $1,042$993 million due to the following:
Operating | ||||||||
Income | Change | |||||||
(in millions) | (percentage point) | |||||||
Operating Income for the Three Months Ended September 30, 2015 | $ | 7,802 | ||||||
2014-2018 Restructuring Program costs(2) | 221 | 28.9pp | ||||||
Operating income from Venezuelan subsidiaries(3) | (78 | ) | (13.4)pp | |||||
Costs associated with the JDE coffee business transactions(4) | 54 | 9.6pp | ||||||
Gain on the JDE coffee business transactions(4) | (7,122 | ) | (94.2)pp | |||||
Acquisition integration costs(5) | 4 | 0.5pp | ||||||
Acquisition-related costs(5) | 6 | 0.7pp | ||||||
Mark-to-market losses from derivatives(6) | 4 | 0.5pp | ||||||
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Adjusted Operating Income(1) for the | $ | 891 | ||||||
Higher net pricing | 41 | 4.7pp | ||||||
Higher input costs | (23 | ) | (2.7)pp | |||||
Favorable volume/mix | 25 | 2.8pp | ||||||
Lower selling, general and administrative expenses | 75 | 8.5pp | ||||||
VAT-related settlements | 34 | 3.9pp | ||||||
Gains on sales of property(5) | 7 | 0.8pp | ||||||
Impact from accounting calendar changes | (9 | ) | (1.2)pp | |||||
Impact from acquisition(5) | 1 | 0.1pp | ||||||
|
|
|
| |||||
Total change in Adjusted Operating Income (constant currency)(1) | 151 | 16.9% | ||||||
Unfavorable currency—translation | (31 | ) | (3.4)pp | |||||
|
|
|
| |||||
Total change in Adjusted Operating Income(1) | 120 | 13.5% | ||||||
|
| |||||||
Adjusted Operating Income(1) for the | $ | 1,011 | ||||||
2014-2018 Restructuring Program costs(2) | (301 | ) | (36.3)pp | |||||
Intangible asset impairment charges(7) | (4 | ) | (0.4)pp | |||||
Gain on sale of intangible asset(5) | 7 | 0.8pp | ||||||
Mark-to-market losses from derivatives (6) | (12 | ) | (1.4)pp | |||||
Other / rounding | 1 | 0.2pp | ||||||
|
|
|
| |||||
Operating Income for the Three Months Ended September 30, 2016 | $ | 702 | (91.0)% | |||||
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|
|
Operating Income | % Change | |||||||
(in millions) | ||||||||
Operating Income for the Three Months Ended June 30, 2016 | $ | 638 | ||||||
2014-2018 Restructuring Program costs(2) | 228 | |||||||
Intangible asset impairment charge(3) | 12 | |||||||
Acquisition integration costs(4) | 3 | |||||||
Mark-to-market gains from derivatives(5) | (17 | ) | ||||||
Divestiture-related costs(6) | 84 | |||||||
Operating income from divestitures(6) | (22 | ) | ||||||
Gain on sale of intangible asset(7) | (6 | ) | ||||||
Other/rounding | 1 | |||||||
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| |||||||
Adjusted Operating Income(1) for the | $ | 921 | ||||||
Higher net pricing | 65 | |||||||
Higher input costs | (17 | ) | ||||||
Unfavorable volume/mix | (123 | ) | ||||||
Lower selling, general and administrative expenses | 154 | |||||||
Gains on sales of property(8) | (39 | ) | ||||||
Property insurance recovery | 27 | |||||||
Impact from acquisition(8) | 5 | |||||||
Other | – | |||||||
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| |||||||
Total change in Adjusted Operating Income (constant currency)(1) | 72 | 7.8% | ||||||
Unfavorable currency – translation | (60 | ) | ||||||
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| |||||||
Total change in Adjusted Operating Income(1) | 12 | 1.3% | ||||||
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Adjusted Operating Income(1) for | $ | 933 | ||||||
2014-2018 Restructuring Program costs(2) | (211 | ) | ||||||
Intangible asset impairment charge(3) | (38 | ) | ||||||
Mark-to-market losses from derivatives(5) | (46 | ) | ||||||
Malware incident incremental expenses | (7 | ) | ||||||
Divestiture-related costs(6) | (4 | ) | ||||||
Operating income from divestitures(6) | 18 | |||||||
Loss on divestiture(6) | (3 | ) | ||||||
Other/rounding | (1 | ) | ||||||
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Operating Income for the Three Months Ended June 30, 2017 | $ | 641 | 0.5% | |||||
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(1) | Refer to theNon-GAAP Financial Measures section at the end of this item. |
(2) | Refer to Note 6,2014-2018 Restructuring Program, for more |
(3) |
Refer to Note 2,Divestitures and Acquisitions, and Note 5,Goodwill and Intangible Assets, for more information on the impairment charges recorded in 2017 and 2016 related to trademarks. |
(4) | Refer to our Annual Report on Form10-K for the year ended December 31, 2016, for more information on the acquisition of a |
(5) | Refer to Note 8,Financial Instruments, Note 15,Segment Reporting, andNon-GAAP Financial Measures appearing later in this section for more information on the unrealized gains/losses on commodity and forecasted currency transaction derivatives. |
(6) | Refer to Note 2,Divestitures and Acquisitions, for more information on the 2017 sales of a |
(7) | Refer to Note 2,Divestitures and Acquisitions, for more information on the 2016 intangible asset sale in Finland. |
(8) | Refer to Note 2,Divestitures and Acquisitions, for more information on the 2016 purchase of a license to manufacture, market and sell Cadbury-branded biscuits in additional key markets and other property sales in 2016. |
During the second quarter, weunfavorable volume/mix, primarily due to the delayed shipments resulting from the malware incident, was reflected across all segments. We realized higher net pricing whileas input costs increased modestly.increased. Higher net pricing, which included the carryover impact of pricing actions taken in 2015,the second half of 2016 and the first quarter of 2017, was reflected in Latin America and EEMEA, partially offset by lower net pricing in Europe,all segments, except North America and Asia Pacific.America. The increase in input costs was driven by higher raw material costs, in part due to higher currency exchange transaction costs on imported materials, which were partially offset by lower manufacturing costs due to productivity. Favorable volume/mix was driven by Europe, North America and Asia Pacific, partially offset by unfavorable volume/mix in Latin America and EEMEA.productivity gains.
Total selling, general and administrative expenses decreased $238$219 million from the thirdsecond quarter of 2015,2016, due to a number of factors noted in the table above, including in part, lower divestiture-related costs associated with the JDE coffeesale of a confectionery business transactions,in France, a favorable currency impact, value-added tax (VAT)-related settlements,property insurance recovery in AMEA and lower implementation costs incurred for the deconsolidation of our Venezuelan operations,2014-2018 Restructuring Program. The decreases were partially offset by the gains on sales of property gain onin 2016, an unfavorable currency impact and incremental expenses caused by the sale of an intangible asset and the absence of acquisition-related costs.malware incident.
Excluding the factors noted above, selling, general and administrative expenses decreased $75$154 million from the thirdsecond quarter of 2015.2016. The decrease was driven primarily by lower advertising and consumer promotion costs and lower overhead costs due to continued cost reduction efforts and lower advertising and consumer promotions costs.
The change in mark-to-market gains / (losses) from derivatives decreased operating income by $8 million in the third quarter of 2016. In the third quarter of 2016, the net unrealized losses on commodity and forecasted currency transaction derivatives were $12 million, as compared to net unrealized losses of $4 million in the third quarter of 2015.both areas.
Unfavorable currency impacts decreased operating income by $31$60 million due primarily to the strength of the U.S. dollar relative to several currencies, including the Egyptian pound, British pound sterling and Argentinean peso,euro, partially offset by the strength of the Brazilian real, Australian dollar and Japanese yenseveral currencies relative to the U.S. dollar.dollar, including the Brazilian real, Russian ruble and South African rand.
Operating income margin decreasedincreased from 113.9%10.1% in the thirdsecond quarter of 20152016 to 11.0%10.7% in the thirdsecond quarter of 2016.2017. The decreaseincrease in operating income margin was driven primarily by last year’s pre-tax gain on the JDE coffee business transactions, higher costs incurred for the 2014-2018 Restructuring Program and the deconsolidation of our Venezuelan operations. The items that decreased our operating income margin were partially offset by an increase in our Adjusted Operating Income margin and the absence oflower divestiture-related costs associated with the JDE coffeesale of a confectionery business transactions.in France, partially offset by the year-over-year unfavorable impact of unrealized gains/(losses) on currency and commodity hedging activities and higher intangible asset impairment charges. Adjusted Operating Income margin increased from 13.6%14.9% in the thirdsecond quarter of 20152016 to 15.8% in the thirdsecond quarter of 2016.2017. The increase in Adjusted Operating Income margin was driven primarily by lower overhead costs resulting from our cost reduction programs, lower advertising and consumer promotion costs and improved gross margin reflecting productivity efforts.lower overheads from continued cost reduction efforts in both areas.
Net Earnings and Earnings per Share Attributable to MondelēMondelēz International– Net earnings attributable to Mondelēz International of $548$498 million decreasedincreased by $6,718$34 million (92.5%(7.3%) in the thirdsecond quarter of 2016.2017. Diluted EPS attributable to Mondelēz International was $0.35$0.32 in the thirdsecond quarter of 2016, down $4.11 (92.2%2017, up $0.03 (10.3%) from the thirdsecond quarter of 2015.2016. Adjusted EPS(1) was $0.52$0.48 in the thirdsecond quarter of 2016,2017, up $0.14 (36.8%$0.05 (11.6%) tofrom the thirdsecond quarter of 2015.2016. Adjusted EPS on a constant currency basis(1) was $0.54$0.51 in the thirdsecond quarter of 2016,2017, up $0.16 (42.1%$0.08 (18.6%) from the thirdsecond quarter of 2015.2016.
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Diluted EPS | ||||
Diluted EPS Attributable to Mondelēz International for the | $ | 0.29 | ||
2014-2018 Restructuring Program costs (2) | 0.11 | |||
Intangible asset impairment charge(2) | – | |||
Acquisition integration costs(2) | – | |||
Mark-to-market gains from derivatives(2) | – | |||
Divestiture-related costs(2) | 0.04 | |||
Net earnings from divestitures(2) | (0.01 | ) | ||
Gain on sale of intangible asset(2) | – | |||
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Adjusted EPS(1) for the Three Months Ended June 30, 2016 | $ | 0.43 | ||
Increase in operations | 0.05 | |||
Decrease in equity method investment net earnings | (0.01 | ) | ||
Gains on sales of property(2) | (0.02 | ) | ||
Property insurance recovery | 0.01 | |||
Impact from acquisition (2) | – | |||
Lower interest and other expense, net(3) | 0.02 | |||
Changes in shares outstanding(4) | 0.01 | |||
Changes in income taxes (5) | 0.02 | |||
|
| |||
Adjusted EPS (constant currency) (1) for the Three Months Ended June 30, 2017 | $ | 0.51 | ||
Unfavorable currency – translation | (0.03 | ) | ||
|
| |||
Adjusted EPS(1) for the Three Months Ended June 30, 2017 | $ | 0.48 | ||
2014-2018 Restructuring Program costs (2) | (0.10 | ) | ||
Intangible asset impairment charge(2) | (0.02 | ) | ||
Mark-to-market losses from derivatives(2) | (0.03 | ) | ||
Malware incident incremental expenses | – | |||
Divestiture-related costs(2) | – | |||
Net earnings from divestitures(2) | 0.01 | |||
Loss on divestiture(2) | – | |||
Loss on debt extinguishment(6) | (0.01 | ) | ||
Equity method investee acquisition-related and other adjustments (7) | (0.01 | ) | ||
|
| |||
Diluted EPS Attributable to Mondelēz International for the | $ | 0.32 | ||
|
|
(1) | Refer to theNon-GAAP Financial Measures section |
(2) |
Excludes the favorable currency impact on interest expense related to ournon-U.S. dollar-denominated debt which is included in currency translation. |
Refer to Note 10,Stock Plans, for more information on our equity compensation programs and share repurchase program and Note 14,Earnings Per Share, for earnings per share weighted-average share information. |
Refer to Note 10,Stock Plans, for more information on an $11 million earnings impact (in the provision for income taxes) in the second quarter of 2017 from adopting the new stock-based compensation accounting standard and Note 13,Income Taxes, for more information on the change in our income taxes and effective tax rate. |
Nine Months Ended September 30:
For the Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2016 | 2015 | $ change | % change | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Net revenues | $ | 19,153 | $ | 22,272 | $ | (3,119 | ) | (14.0)% | ||||||||
Operating income | 2,062 | 9,454 | (7,392 | ) | (78.2)% | |||||||||||
Net earnings attributable to | 1,566 | 7,996 | (6,430 | ) | (80.4)% | |||||||||||
Diluted earnings per share attributable to | 0.99 | 4.86 | (3.87 | ) | (79.6)% | |||||||||||
Net Revenues– Net revenues decreased $3,119 million (14.0%) to $19,153 million in the first nine months of 2016, and Organic Net Revenue(1) increased $319 million (1.6%) to $20,073 million. Power Brands net revenues decreased 13.5%, primarily due to the deconsolidation of our historical coffee business, unfavorable currency and the deconsolidation of our historical Venezuelan operations, and Power Brands Organic Net Revenue increased 3.1%. Emerging markets net revenues decreased 20.1%, primarily due to the deconsolidation of our historical coffee business, unfavorable currency and the deconsolidation of our historical Venezuelan operations, and emerging markets Organic Net Revenue increased 3.1%. The underlying changes in net revenues and Organic Net Revenue are detailed below:
|
| |||||||||||||||
2016 | ||||||||||||||||
Change in net revenues (by percentage point) | ||||||||||||||||
Higher net pricing | 1.7 | pp | ||||||||||||||
Unfavorable volume/mix | (0.1 | )pp | ||||||||||||||
|
| |||||||||||||||
Total change in Organic Net Revenue(1) | 1.6% | |||||||||||||||
Historical coffee business(2) | (7.4 | )pp | ||||||||||||||
Unfavorable currency | (5.0 | )pp | ||||||||||||||
Historical Venezuelan operations(3) | (3.3 | )pp | ||||||||||||||
Impact of accounting calendar change | (0.3 | )pp | ||||||||||||||
Impact of acquisitions | 0.4 | pp | ||||||||||||||
|
| |||||||||||||||
Total change in net revenues | (14.0 | )% | ||||||||||||||
|
|
Net revenue decline of 14.0% was driven by the impact of the deconsolidation of our historical coffee business, unfavorable currency, the deconsolidation of our historical Venezuelan operations and the year-over-year impact of last year’s accounting calendar change, partially offset by our underlying Organic Net Revenue growth of 1.6% and the impact of last year’s acquisitions. The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $1,627 million for the first nine months of 2016. Unfavorable currency impacts decreased net revenues by $996 million, due primarily to the strength of the U.S. dollar relative to several currencies, including the Argentinean peso, British pound sterling, Brazilian real, Mexican peso, Russian ruble and Chinese yuan. The deconsolidation of our historical Venezuelan operations resulted in a year-over-year decrease in net revenues of $834 million for the first nine months of 2016. The North America segment accounting calendar change made in 2015 resulted in a year-over-year decrease in net revenues of $57 million for the first nine months of 2016. Our underlying Organic Net Revenue growth was driven by higher net pricing, partially offset by unfavorable volume/mix. Net pricing was up, which includes the benefit of carryover pricing from 2015 as well as the effects of input cost-driven pricing actions taken during the first nine months of 2016. Higher net pricing was reflected in Latin America, EEMEA, and Asia Pacific, partially offset by lower net pricing in Europe and North America. Unfavorable volume/mix was reflected in Latin America and EEMEA, mostly offset by favorable volume/mix in all other segments. Unfavorable volume/mix in Latin America and EEMEA was largely due to price elasticity as well as strategic decisions to exit certain low-margin product lines. The impact of acquisitions primarily includes the July 15, 2015 acquisition of a biscuit operation in Vietnam, which added $71 million of incremental net revenues for the first nine months of 2016.
Operating Income– Operating income decreased $7,392 million (78.2%) to $2,062 million in the first nine months of 2016, Adjusted Operating Income(1) increased $416 million (16.2%) to $2,982 million and Adjusted Operating Income on a constant currency basis(1) increased $548 million (21.4%) to $3,114 million due to the following:
Operating | ||||||||
Income | Change | |||||||
(in millions) | (percentage point) | |||||||
Operating Income for the Nine Months Ended September 30, 2015 | $ | 9,454 | ||||||
2012-2014 Restructuring Program costs(2) | (3 | ) | (0.2)pp | |||||
2014-2018 Restructuring Program costs(2) | 627 | 27.1pp | ||||||
Operating income from Venezuelan subsidiaries(3) | (208 | ) | (8.8)pp | |||||
Remeasurement of net monetary assets in Venezuela(3) | 11 | 0.5pp | ||||||
Operating income from historical coffee business(4) | (342 | ) | (18.9)pp | |||||
Costs associated with the JDE coffee business transactions(5) | 239 | 14.8pp | ||||||
Gain on the JDE coffee business transactions(5) | (7,122 | ) | (66.6)pp | |||||
Reclassification of equity method investment earnings(6) | (51 | ) | (3.5)pp | |||||
Operating income from divestiture(7) | (5 | ) | (0.3)pp | |||||
Gain on divestiture(7) | (13 | ) | (0.5)pp | |||||
Acquisition integration costs(8) | 5 | 0.3pp | ||||||
Acquisition-related costs(8) | 8 | 0.3pp | ||||||
Mark-to-market gains from derivatives(9) | (35 | ) | (1.5)pp | |||||
Other / rounding | 1 | 0.1pp | ||||||
|
| |||||||
Adjusted Operating Income(1) for the | $ | 2,566 | ||||||
Higher net pricing | 339 | 13.3pp | ||||||
Higher input costs | (63 | ) | (2.5)pp | |||||
Favorable volume/mix | 23 | 0.9pp | ||||||
Lower selling, general and administrative expenses | 192 | 7.6pp | ||||||
Gains on sales of property(8) | 46 | 1.8pp | ||||||
VAT-related settlements | 34 | 1.3pp | ||||||
Impact of accounting calendar change(10) | (27 | ) | (1.2)pp | |||||
Impact from acquisitions(8) | 5 | 0.2pp | ||||||
Other | (1 | ) | – | |||||
|
|
|
| |||||
Total change in Adjusted Operating Income (constant currency)(1) | 548 | 21.4% | ||||||
Unfavorable currency—translation | (132 | ) | (5.2)pp | |||||
|
|
|
| |||||
Total change in Adjusted Operating Income(1) | 416 | 16.2% | ||||||
|
| |||||||
Adjusted Operating Income(1) for the | $ | 2,982 | ||||||
2014-2018 Restructuring Program costs(2) | (766 | ) | (31.2)pp | |||||
Intangible asset impairment charges(11) | (30 | ) | (1.1)pp | |||||
Gain on sale of intangible asset(8) | 13 | 0.5pp | ||||||
Divestiture-related costs(12) | (84 | ) | (3.3)pp | |||||
Acquisition integration costs(8) | (6 | ) | (0.3)pp | |||||
Mark-to-market losses from derivatives(9) | (49 | ) | (1.9)pp | |||||
Other / rounding | 2 | 0.1pp | ||||||
|
|
|
| |||||
Operating Income for the Nine Months Ended September 30, 2016 | $ | 2,062 | (78.2)% | |||||
|
|
|
|
During the first nine months of 2016, we realized higher net pricing while input costs increased modestly. Higher net pricing, which included the carryover impact of pricing actions taken in 2015, was reflected across all segments except Europe and North America. The increase in input costs was driven by higher raw material costs, in part due to higher currency exchange transaction costs on imported materials, which were partially offset by lower manufacturing costs due to productivity. Favorable volume/mix was driven by Europe, North America and Asia Pacific, which was mostly offset by unfavorable volume/mix in Latin America and EEMEA.
Total selling, general and administrative expenses decreased $840 million from the first nine months of 2015, due to a number of factors noted in the table above, including in part, the deconsolidation of our historical coffee business, a favorable currency impact, lower costs associated with the JDE coffee business transactions, the deconsolidation of our Venezuelan operations, gains on the sales of property, VAT-related settlements and the absence of devaluation charges related to our net monetary assets in Venezuela in 2016. The decreases were partially offset by increases from divestiture-related costs associated with the planned sale of a confectionery business in France, the reclassification of equity method investment earnings, higher costs incurred for the 2014-2018 Restructuring Program and the impact of acquisitions.
Excluding the factors noted above, selling, general and administrative expenses decreased $192 million from the first nine months of 2015. The decrease was driven primarily by lower overhead costs due to continued cost reduction efforts, partially offset by higher advertising and consumer promotions support, particularly behind our Power Brands.
Excluding the portion related to deconsolidating our historical coffee business, the change in mark-to-market gains / (losses) from derivatives decreased operating income by $84 million in the first nine months of 2016. In the first nine months of 2016, the net unrealized losses on commodity and forecasted currency transaction derivatives were $49 million, as compared to net unrealized gains of $35 million ($75 million including coffee related activity) in the first nine months of 2015.
Unfavorable currency impacts decreased operating income by $132 million, due primarily to the strength of the U.S. dollar relative to most currencies, including the British pound sterling, Argentinean peso and Brazilian real.
Operating income margin decreased from 42.4% in the first nine months of 2015, to 10.8% in the first nine months of 2016. The decrease in operating income margin was driven primarily by last year’s pre-tax gain on the JDE coffee business transactions, the deconsolidation of our historical coffee business, higher costs incurred for the 2014-2018 Restructuring Program, the deconsolidation of our Venezuelan operations, divestiture-related costs associated with the planned sale of a confectionery business in France, the change in mark-to-market gains/losses from derivatives, the reclassification of equity method earnings and intangible asset impairment charges. The items that decreased our operating income margin were partially offset by the absence of costs associated with the JDE coffee business transactions and an increase in our Adjusted Operating Income margin. Adjusted Operating Income margin increased from 13.0% in the first nine months of 2015 to 15.6% in the first nine months of 2016. The increase in Adjusted Operating Income margin was driven primarily by lower overheads from cost reduction programs, improved gross margin reflecting productivity efforts, gains on sales of property and VAT-related settlements.
Net Earnings and Earnings per Share Attributable to Mondelēz International– Net earnings attributable to Mondelēz International of $1,566 million decreased by $6,430 million (80.4%) in the first nine months of 2016. Diluted EPS attributable to Mondelēz International was $0.99 in the first nine months of 2016, down $3.87 (79.6%) from the first nine months of 2015. Adjusted EPS(1) was $1.47 in the first nine months of 2016, up $0.27 (22.5%) from the first nine months of 2015. Adjusted EPS on a constant currency basis(1) was $1.53 in the first nine months of 2016, up $0.33 (27.5%) from the first nine months of 2015.
Diluted EPS | ||||
Diluted EPS Attributable to Mondelēz International for the | $ | 4.86 | ||
2012-2014 Restructuring Program costs (2) | – | |||
2014-2018 Restructuring Program costs (2) | 0.29 | |||
Net earnings from Venezuelan subsidiaries(3) | (0.08 | ) | ||
Remeasurement of net monetary assets in Venezuela(3) | 0.01 | |||
(Income) / costs associated with the JDE coffee business transactions (4) | (0.03 | ) | ||
Gain on the JDE coffee business transactions (4) | (4.21 | ) | ||
Net earnings from divestiture (5) | 0.02 | |||
Loss on divestiture (5) | 0.01 | |||
Acquisition integration costs(6) | – | |||
Acquisition-related costs(6) | – | |||
Loss on debt extinguishment and related expenses(7) | 0.28 | |||
Loss related to interest rate swaps (8) | 0.01 | |||
Mark-to-market gains from derivatives(9) | (0.02 | ) | ||
Equity method investee acquisition-related and other adjustments (10) | 0.06 | |||
Other / rounding | – | |||
|
| |||
Adjusted EPS(1) for the Nine Months Ended September 30, 2015 | $ | 1.20 | ||
Increase in operations | 0.22 | |||
Decrease in operations from historical coffee business and equity method investments(11) | (0.06 | ) | ||
Gains on sales of property(6) | 0.02 | |||
VAT-related settlements | 0.03 | |||
Impact of accounting calendar change (12) | (0.01 | ) | ||
Impact of acquisitions (6) | – | |||
Lower interest and other expense, net(13) | 0.01 | |||
Changes in shares outstanding(14) | 0.06 | |||
Changes in income taxes (15) | 0.06 | |||
|
| |||
Adjusted EPS (constant currency)(1) for the Nine Months Ended September 30, 2016 | $ | 1.53 | ||
Unfavorable currency—translation | (0.06 | ) | ||
|
| |||
Adjusted EPS(1) for the Nine Months Ended September 30, 2016 | $ | 1.47 | ||
2014-2018 Restructuring Program costs (2) | (0.36 | ) | ||
Intangible asset impairment charges(16) | (0.01 | ) | ||
Gain on sale of intangible asset(6) | – | |||
Divestiture-related costs(17) | (0.04 | ) | ||
Acquisition integration costs(6) | – | |||
Gain on equity method investment exchange (6) | 0.03 | |||
Loss related to interest rate swaps(8) | (0.04 | ) | ||
Mark-to-market losses from derivatives(9) | (0.03 | ) | ||
Equity method investee acquisition-related and other adjustments (10) | (0.03 | ) | ||
Other / rounding | – | |||
|
| |||
Diluted EPS Attributable to Mondelēz International for the | $ | 0.99 | ||
|
|
(6) | Refer to Note |
Includes our proportionate share of unusual or infrequent items, such as acquisition and divestiture-related costs and restructuring program costs, recorded by our JDE and Keurig equity method investees. |
Six Months Ended June 30:
For the Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2017 | 2016 | $ change | % change | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Net revenues | $ | 12,400 | $ | 12,757 | $ | (357 | ) | (2.8)% | ||||||||
Operating income | 1,481 | 1,360 | 121 | 8.9% | ||||||||||||
Net earnings attributable to Mondelēz International | 1,128 | 1,018 | 110 | 10.8% | ||||||||||||
Diluted earnings per share attributable to Mondelēz International | 0.73 | 0.64 | 0.09 | 14.1% |
Net Revenues– Net revenues decreased $357 million (2.8%) to $12,400 million in the first six months of 2017, and Organic Net Revenue(1) decreased $123 million (1.0%) to $12,389 million. Power Brands net revenues decreased 0.6%, including an unfavorable currency impact, and Power Brands Organic Net Revenue increased 0.4%. Emerging markets net revenues increased 1.4%, including an unfavorable currency impact, and emerging markets Organic Net Revenue increased 1.6%. The underlying changes in net revenues and Organic Net Revenue are detailed below:
2017 | ||||||||||
Change in net revenues (by percentage point) | ||||||||||
Total change in net revenues | (2.8 | )% | ||||||||
Add back the following items affecting comparability: | ||||||||||
Unfavorable currency | 1.8 | pp | ||||||||
Impact of divestitures | 0.3 | pp | ||||||||
Impact of acquisitions | (0.3 | )pp | ||||||||
Total change in Organic Net Revenue(1) | (1.0 | )% | ||||||||
Unfavorable volume/mix | (2.1 | )pp | ||||||||
Higher net pricing | 1.1 | pp |
Net revenue decline of 2.8% was driven by unfavorable currency, our underlying Organic Net Revenue decline of 1.0% and the impact of divestitures, partially offset by the impact of an acquisition. Unfavorable year-over-year currency impacts decreased net revenues by $216 million, due primarily to the strength of the U.S. dollar relative to several currencies, including the British pound sterling, euro, Egyptian pound, Argentinian peso, Nigerian naira, Chinese yuan, Mexican peso and Turkish lira, partially offset by the strength of several currencies, including the Brazilian real, Russian ruble, South African rand and Australian dollar, relative to the U.S. dollar. Our underlying Organic Net Revenue decline was driven by unfavorable volume/mix, partially offset by higher net pricing. Unfavorable volume/mix, primarily due to delayed shipments caused by the malware incident, was reflected in all segments except Europe. Net pricing was up, which includes the benefit of carryover pricing from the second half of 2016 and the first quarter of 2017 as well as the effects of input cost-driven pricing actions taken during the second quarter of 2017. Higher net pricing was reflected in Latin America and AMEA, partially offset by lower net pricing in North America and Europe. The impact of divestitures resulted in a year-over-year decline in net revenues of $48 million for the first six months of 2017. The November 2, 2016 acquisition of a business and license to manufacture, market and sell Cadbury-branded biscuits in additional key markets added $30 million (constant currency basis) of incremental net revenues for the first six months of 2017.
Operating Income– Operating income increased $121 million (8.9%) to $1,481 million in the first six months of 2017, Adjusted Operating Income(1) increased $66 million (3.4%) to $1,988 million and Adjusted Operating Income on a constant currency basis(1) increased $139 million (7.2%) to $2,061 million due to the following:
Operating | ||||||||
Income | % Change | |||||||
(in millions) | ||||||||
Operating Income for the Six Months Ended June 30, 2016 | $ | 1,360 | ||||||
2014-2018 Restructuring Program costs(2) | 465 | |||||||
Intangible asset impairment charges(3) | 26 | |||||||
Acquisition integration costs(4) | 6 | |||||||
Mark-to-market losses from derivatives(5) | 37 | |||||||
Divestiture-related costs(6) | 84 | |||||||
Operating income from divestitures(6) | (49 | ) | ||||||
Gain on sale of intangible asset(7) | (6 | ) | ||||||
Other/rounding | (1 | ) | ||||||
|
| |||||||
Adjusted Operating Income(1) for the | $ | 1,922 | ||||||
Higher net pricing | 141 | |||||||
Higher input costs | (48 | ) | ||||||
Unfavorable volume/mix | (155 | ) | ||||||
Lower selling, general and administrative expenses | 208 | |||||||
Gains on sales of property(8) | (39 | ) | ||||||
Property insurance recovery | 27 | |||||||
Impact from acquisitions(8) | 6 | |||||||
Other | (1 | ) | ||||||
|
| |||||||
Total change in Adjusted Operating Income (constant currency)(1) | 139 | 7.2% | ||||||
Unfavorable currency – translation | (73 | ) | ||||||
|
| |||||||
Total change in Adjusted Operating Income(1) | 66 | 3.4% | ||||||
|
| |||||||
Adjusted Operating Income(1) for the | $ | 1,988 | ||||||
2014-2018 Restructuring Program costs(2) | (422 | ) | ||||||
Intangible asset impairment charge(3) | (38 | ) | ||||||
Acquisition integration costs(4) | (1 | ) | ||||||
Mark-to-market losses from derivatives(5) | (97 | ) | ||||||
Malware incident incremental expenses | (7 | ) | ||||||
Divestiture-related costs(6) | (23 | ) | ||||||
Operating income from divestitures(6) | 38 | |||||||
Loss on divestiture(6) | (3 | ) | ||||||
Benefit from the settlement of a Cadbury tax matter(9) | 46 | |||||||
|
| |||||||
Operating Income for the Six Months Ended June 30, 2017 | $ | 1,481 | 8.9% | |||||
|
|
|
|
(1) | Refer to theNon-GAAP Financial Measures section at the end of this item. |
(2) | Refer to Note 6,2014-2018 Restructuring Program, for more information. |
(3) | Refer to Note 2,Divestitures and Acquisitions, and Note 5,Goodwill and Intangible Assets, for more information on the impairment charges recorded in 2017 and 2016 related to trademarks. |
(4) | Refer to our Annual Report on Form10-K for the year ended December 31, 2016, for more information on the acquisition of a biscuit business in Vietnam. |
(5) | Refer to Note 8,Financial Instruments, Note 15,Segment Reporting, andNon-GAAP Financial Measures appearing later in this section for more |
Refer to Note |
Refer to Note 2,Divestitures and Acquisitions, for more information on the 2016 intangible asset sale in Finland. |
(8) | Refer to Note 2,Divestitures and Acquisitions, for more information on the 2016 purchase of a license to manufacture, market and sell Cadbury-branded biscuits in additional key markets and other property sales in 2016. |
(9) | Refer to Note 11,Commitments and Contingencies, for more information on the benefit from the settlement of a Cadbury tax matter. |
During the first six months of 2017, unfavorable volume/mix, in part due to the delayed shipments resulting from the malware incident, was driven by North America, Latin America and AMEA, which was partially offset by favorable volume/mix in Europe. We realized higher net pricing while input costs increased modestly. Higher net pricing, which included the carryover impact of pricing actions taken in the second half of 2016 and the first quarter of 2017, was driven by Latin America and AMEA, partially offset by lower net pricing in North America and Europe. The increase in input costs was driven by higher raw material costs, which were partially offset by lower manufacturing costs due to productivity.
Total selling, general and administrative expenses decreased $359 million from the first six months of 2016, due to a number of factors noted in the table above, including in part, lower divestiture-related costs associated with the sale of a confectionery business in France, the benefit from the settlement of a Cadbury tax matter, lower implementation costs incurred for the 2014-2018 Restructuring Program, a property insurance recovery in AMEA and a favorable currency impact. The decreases were partially offset by the gains on sales of property in 2016 and incremental expenses incurred due to the malware incident.
Excluding the factors noted above, selling, general and administrative expenses decreased $208 million from the first six months of 2016. The decrease was driven primarily by lower overhead costs and lower advertising and consumer promotion costs due to continued cost reduction efforts in both areas.
Unfavorable currency impacts decreased operating income by $73 million, due primarily to the strength of the U.S. dollar relative to several currencies, including the Egyptian pound, British pound sterling and euro, partially offset by the strength of several currencies relative to the U.S. dollar, including the Brazilian real, Russian ruble, Australian dollar and South African rand.
Operating income margin increased from 10.7% in the first six months of 2016 to 11.9% in the first six months of 2017. The increase in operating income margin was driven primarily by an increase in our Adjusted Operating Income margin, lower divestiture-related costs associated with the sale of a confectionery business in France, the benefit from the settlement of a Cadbury tax matter and lower costs incurred for the 2014-2018 Restructuring Program, partially offset by the year-over-year unfavorable impact of unrealized gains/(losses) on currency and commodity hedging activities and higher intangible asset impairment charges. Adjusted Operating Income margin increased from 15.4% in the first six months of 2016 to 16.3% in the first six months of 2017. The increase in Adjusted Operating Income margin was driven primarily by lower overheads and lower advertising and consumer promotion costs due to continued cost reduction efforts in both areas.
Net Earnings and Earnings per Share Attributable to Mondelēz International– Net earnings attributable to Mondelēz International of $1,128 million increased by $110 million (10.8%) in the first six months of 2017. Diluted EPS attributable to Mondelēz International was $0.73 in the first six months of 2017, up $0.09 (14.1%) from the first six months of 2016. Adjusted EPS(1) was $1.01 in the first six months of 2017, up $0.09 (9.8%) from the first six months of 2016. Adjusted EPS on a constant currency basis(1) was $1.04 in the first six months of 2017, up $0.12 (13.0%) from the first six months of 2016.
Diluted EPS | ||||
Diluted EPS Attributable to Mondelēz International for the | $ | 0.64 | ||
2014-2018 Restructuring Program costs (2) | 0.22 | |||
Intangible asset impairment charges(2) | 0.01 | |||
Acquisition integration costs(2) | 0.01 | |||
Mark-to-market losses from derivatives(2) | 0.02 | |||
Divestiture-related costs(2) | 0.04 | |||
Net earnings from divestitures(2) | (0.03 | ) | ||
Gain on sale of intangible asset(2) | – | |||
Loss related to interest rate swaps(3) | 0.04 | |||
Gain on equity method investment exchange (4) | (0.03 | ) | ||
|
| |||
Adjusted EPS(1) for the Six Months Ended June 30, 2016 | $ | 0.92 | ||
Increase in operations | 0.09 | |||
Decrease in equity method investment earnings | (0.01 | ) | ||
Gains on sales of property(2) | (0.02 | ) | ||
Property insurance recovery | 0.01 | |||
Impact of acquisition(2) | – | |||
Lower interest and other expense, net(5) | 0.03 | |||
Changes in shares outstanding(6) | 0.02 | |||
Changes in income taxes(7) | – | |||
|
| |||
Adjusted EPS (constant currency) (1) for the Six Months Ended June 30, 2017 | $ | 1.04 | ||
Unfavorable currency – translation | (0.03 | ) | ||
|
| |||
Adjusted EPS(1) for the Six Months Ended June 30, 2017 | $ | 1.01 | ||
2014-2018 Restructuring Program costs (2) | (0.21 | ) | ||
Intangible asset impairment charges(2) | (0.02 | ) | ||
Acquisition integration costs(2) | – | |||
Mark-to-market losses from derivatives(2) | (0.06 | ) | ||
Malware incident incremental expenses | – | |||
Divestiture-related costs(2) | (0.01 | ) | ||
Net earnings from divestitures(2) | 0.02 | |||
Loss on debt extinguishment(8) | (0.01 | ) | ||
Benefit from the settlement of a Cadbury tax Matter(2) | 0.04 | |||
Equity method investee acquisition-related and other adjustments (9) | (0.03 | ) | ||
|
| |||
Diluted EPS Attributable to Mondelēz International for the | $ | 0.73 | ||
|
|
(1) | Refer to theNon-GAAP Financial Measures section at the end of this item. |
(2) | See theOperating Income table above and the related footnotes for more information. |
(3) | Refer to Note 8,Financial Instruments, for more information on our interest rate swaps, which we no longer designated as cash flow hedges during the first quarter of 2016 due to changes in financing and hedging plans. |
(4) | Refer to Note 2,Divestitures and Acquisitions – Keurig Transaction, for more information on the 2016 acquisition of an interest in Keurig. |
(5) | Excludes the favorable currency impact on interest expense related to ournon-U.S. dollar-denominated debt which is included in currency translation. |
Refer to Note 10,Stock Plans, for more information on our equity compensation programs and share repurchase program and Note 14,Earnings Per Share, for earnings per share weighted-average share information. |
Refer to Note 10,Stock Plans, for more information on a $25 million earnings impact (in the provision for income taxes) in the first half of 2017 from adopting the new stock-based compensation accounting standard and Note 13,Income Taxes, for more information on the change in our income taxes and effective tax rate. |
Refer to Note |
Includes our proportionate share of unusual or infrequent items, such as acquisition and divestiture-related costs |
Results of Operations by Reportable Segment
Our operations and management structure are organized into fivefour reportable operating segments:
On October 1, 2016, we integrated our EEMEA businessoperating segment into our Europe and Asia Pacific segments.operating segments to further leverage and optimize the operating scale built within the Europe and Asia Pacific regions. Russia, Ukraine, Turkey, Belarus, Georgia and Kazakhstan were combined within our Europe operating segment, while the remaining Middle East and African countries were combined within our Asia Pacific operating segmentregion to form a new Asia, Middle East and Africa (“AMEA”) regionalAMEA operating segment. We have reflected the segment change as if it had occurred in all periods presented.
We manage our operations by region to leverage regional operating scale, manage different and changing business environments more effectively and pursue growth opportunities as they arise in our key markets. Our regional management teams have responsibility for the business, product categories and financial results in the regions.
Historically, we have recorded income from equity method investments within our operating income as these investments were part of our base business. Beginning in the third quarter of 2015, to align with the accounting for our new coffee equity method investment in JDE, we began to record the earnings from our equity method investments in equity method investment earnings outside of segment operating income. Within segment operating income, equity method investment net earnings were $56 million for the nine months ended September 30, 2015, including $49 million in Asia Pacific, $3 million in EEMEA and $4 million in North America. See Note 1,Basis of Presentation – Principles of Consolidation,and Note 2,Divestitures and Acquisitionsfor additional information.
We use segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. See Note 15, Segment Reporting,for additional information on our segments andItems Affecting Comparability of Financial Results earlier in this section for items affecting our segment operating results.
Our segment net revenues and earnings, revised to reflect our new segment structure in all periods, were:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
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(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||||||
Latin America | $ | 868 | $ | 1,233 | $ | 2,528 | $ | 3,730 | $ | 848 | $ | 843 | $ | 1,758 | $ | 1,660 | ||||||||||||||||
Asia Pacific(2) | 1,128 | 1,101 | 3,278 | 3,278 | ||||||||||||||||||||||||||||
EEMEA(2) | 543 | 586 | 1,738 | 2,150 | ||||||||||||||||||||||||||||
Europe(2) | 2,104 | 2,173 | 6,461 | 7,963 | ||||||||||||||||||||||||||||
AMEA | 1,394 | 1,446 | 2,885 | 2,961 | ||||||||||||||||||||||||||||
Europe | 2,171 | 2,293 | 4,536 | 4,741 | ||||||||||||||||||||||||||||
North America | 1,753 | 1,756 | 5,148 | 5,151 | 1,573 | 1,720 | 3,221 | 3,395 | ||||||||||||||||||||||||
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Net revenues | $ | 6,396 | $ | 6,849 | $ | 19,153 | $ | 22,272 | $ | 5,986 | $ | 6,302 | $ | 12,400 | $ | 12,757 | ||||||||||||||||
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(1) Net revenues of $315 million for the three months and $834 million for the nine months ended September 30, 2015 from our Venezuelan subsidiaries are included in our condensed consolidated financial statements. Beginning in 2016, we account for our Venezuelan subsidiaries using the cost method of accounting and no longer include net revenues of our Venezuelan subsidiaries within our condensed consolidated financial statements. Refer to Note 1,Basis of Presentation – Currency Translation and Highly Inflationary Accounting: Venezuela,for more information. (2) On July 2, 2015, we contributed our global coffee businesses primarily from our Europe, EEMEA and Asia Pacific segments. Net revenues of our global coffee business were $1,348 million in Europe, $246 million in EEMEA and $33 million in Asia Pacific for the nine months ended September 30, 2015. Refer to Note 2,Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information.
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Operating income: | ||||||||||||||||||||||||||||||||
Latin America | $ | 92 | $ | 134 | $ | 191 | $ | 422 | $ | 103 | $ | 32 | $ | 214 | $ | 99 | ||||||||||||||||
Asia Pacific | 135 | 71 | 378 | 321 | ||||||||||||||||||||||||||||
EEMEA | 44 | 52 | 154 | 184 | ||||||||||||||||||||||||||||
AMEA | 162 | 149 | 343 | 339 | ||||||||||||||||||||||||||||
Europe | 302 | 298 | 896 | 885 | 339 | 256 | 748 | 608 | ||||||||||||||||||||||||
North America | 274 | 275 | 840 | 817 | 214 | 295 | 506 | 566 | ||||||||||||||||||||||||
Unrealized gains / (losses) on hedging activities (mark-to-market impacts) | (12 | ) | (4 | ) | (49 | ) | 75 | |||||||||||||||||||||||||
Unrealized (losses)/gains on hedging activities(mark-to-market impacts) | (46 | ) | 17 | (97 | ) | (37 | ) | |||||||||||||||||||||||||
General corporate expenses | (89 | ) | (95 | ) | (216 | ) | (240 | ) | (84 | ) | (67 | ) | (142 | ) | (127 | ) | ||||||||||||||||
Amortization of intangibles | (44 | ) | (45 | ) | (132 | ) | (137 | ) | (44 | ) | (44 | ) | (88 | ) | (88 | ) | ||||||||||||||||
Gains on JDE coffee business transactions and divestiture | – | 7,122 | – | 7,135 | ||||||||||||||||||||||||||||
Acquisition-related costs | – | (6 | ) | – | (8 | ) | ||||||||||||||||||||||||||
Loss on divestiture | (3 | ) | – | (3 | ) | – | ||||||||||||||||||||||||||
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Operating income | 702 | 7,802 | 2,062 | 9,454 | 641 | 638 | 1,481 | 1,360 | ||||||||||||||||||||||||
Interest and other expense, net | (145 | ) | (114 | ) | (540 | ) | (814 | ) | (124 | ) | (151 | ) | (243 | ) | (395 | ) | ||||||||||||||||
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Earnings before income taxes | $ | 557 | $ | 7,688 | $ | 1,522 | $ | 8,640 | $ | 517 | $ | 487 | $ | 1,238 | $ | 965 | ||||||||||||||||
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Latin America
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||||
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2016 | 2015 | $ change | % change | 2017 | 2016 | $ change | % change | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Net revenues | $ | 868 | $ | 1,233 | $ | (365 | ) | (29.6)% | $ | 848 | $ | 843 | $ | 5 | 0.6% | |||||||||||||||||
Segment operating income | 92 | 134 | (42 | ) | (31.3)% | 103 | 32 | 71 | 221.9% | |||||||||||||||||||||||
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | $ change | % change | 2017 | 2016 | $ change | % change | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Net revenues | $ | 2,528 | $ | 3,730 | $ | (1,202 | ) | (32.2)% | $ | 1,758 | $ | 1,660 | $ | 98 | 5.9% | |||||||||||||||||
Segment operating income | 191 | 422 | (231 | ) | (54.7)% | 214 | 99 | 115 | 116.2% |
Three Months Ended SeptemberJune 30:
Net revenues increased $5 million (0.6%), due to higher net pricing (7.5 pp) and favorable currency (1.3 pp), partially offset by unfavorable volume/mix (8.0 pp) and the impact of a divestiture (0.2 pp). Higher net pricing was reflected across all categories driven primarily by Argentina, Brazil and Mexico. Favorable currency impacts were due primarily to the strength of several currencies in the region relative to the U.S. dollar, primarily the Brazilian real, partially offset by the strength of the U.S. dollar relative to the Argentinean peso and Mexican peso. Unfavorable volume/mix, which occurred across most of the region, was largely due to the impact of pricing-related elasticity and delayed shipments caused by the malware incident. Unfavorable volume/mix was driven by declines in all categories except candy. On December 1, 2016, we sold a small confectionery business in Costa Rica.
Segment operating income increased $71 million (221.9%), primarily due to higher net pricing, lower costs incurred for the 2014-2018 Restructuring Program, lower advertising and consumer promotion costs, lower manufacturing costs, lower other selling, general and administrative expenses and favorable currency. These favorable items were partially offset by higher raw material costs and unfavorable volume/mix.
Six Months Ended June 30:
Net revenues increased $98 million (5.9%), due to higher net pricing (6.9 pp) and favorable currency (4.6 pp), partially offset by unfavorable volume/mix (5.3 pp) and the impact of a divestiture (0.3 pp). Higher net pricing was reflected across all categories driven primarily by Argentina, Brazil and Mexico. Favorable currency impacts were due primarily to the strength of several currencies in the region relative to the U.S. dollar, primarily the Brazilian real, partially offset by the strength of the U.S. dollar relative to the Argentinean peso and Mexican peso. Unfavorable volume/mix, which occurred across most of the region, was largely due to the impact of pricing-related elasticity and delayed shipments caused by the malware incident. Unfavorable volume/mix was driven by declines in all categories except chocolate. On December 1, 2016, we sold a small confectionery business in Costa Rica.
Segment operating income increased $115 million (116.2%), primarily due to higher net pricing, lower advertising and consumer promotion costs, lower manufacturing costs, lower other selling, general and administrative expenses, favorable currency, and lower costs incurred for the 2014-2018 Restructuring Program. These favorable items were partially offset by higher raw material costs and unfavorable volume/mix.
AMEA
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June 30, | ||||||||||||||||
2017 | 2016 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues | $ | 1,394 | $ | 1,446 | $ | (52) | (3.6)% | |||||||||
Segment operating income | 162 | 149 | 13 | 8.7% |
For the Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2017 | 2016 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues | $ | 2,885 | $ | 2,961 | $ | (76) | (2.6)% | |||||||||
Segment operating income | 343 | 339 | 4 | 1.2% |
Three Months Ended June 30:
Net revenues decreased $365$52 million (29.6%(3.6%), due to the deconsolidation of our Venezuelan operations (24.2 pp), unfavorable currency (8.3(3.2 pp) and unfavorable volume/mix (7.1(2.5 pp), partially offset by higher net pricing (10.0(1.8 pp). The deconsolidation and the favorable impact of our Venezuelan operations resulted in a year-over-year decrease in net revenues of $315 million.businesses divested (0.3 pp). Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to mostseveral currencies in the region, including the Argentinean pesoEgyptian pound, Nigerian naira and Mexican peso,Chinese yuan, partially offset by the strength of several other currencies in the Brazilian realregion, including the South African rand and Indian rupee, relative to the U.S. dollar. Unfavorable volume/mix which primarily occurred in Brazil and Argentina, was largely due to the impact of pricing-related elasticity as well as strategic decisions to exit certain low-margin product lines. Unfavorable volume/mix was driven by declines in biscuits, refreshment beverages, cheese & grocery, gum and candy, partially offset by gains in chocolate and gum.biscuits. The unfavorable volume/mix also reflected the impact from the trade implementation of the new Goods and Services Tax (“GST”) in India and delayed shipments due to the malware incident. Higher net pricing was reflected across all categories drivenexcept cheese & grocery and candy. Businesses divested primarily by Argentinaincludes the favorable Organic Net Revenue growth related to the grocery & cheese business in Australia and Brazil.New Zealand that was divested on July 4, 2017.
Segment operating income decreased $42increased $13 million (31.3%(8.7%), primarily due to higher raw material costs, the deconsolidation of our Venezuelan operations, unfavorable volume/mix, unfavorable currency and higher costs incurred for the 2014-2018 Restructuring Program. These unfavorable items were partially offset by higher net pricing, lower other selling, general and administrative expenses (including $34 million of VAT-related settlements)a property insurance recovery), higher net pricing and lower advertising and consumer promotionspromotion costs. These favorable items were partially offset by unfavorable currency, higher raw material costs, higher costs incurred for the 2014-2018 Restructuring Program and lower manufacturing costs.unfavorable volume/mix.
NineSix Months Ended SeptemberJune 30:
Net revenues decreased $1,202$76 million (32.2%(2.6%), due to the deconsolidation of our Venezuelan operations (19.5 pp), unfavorable currency (17.8(3.2 pp) and unfavorable volume/mix (5.8(1.8 pp), partially offset by higher net pricing (10.9(2.3 pp). The deconsolidation and the favorable impact of our Venezuelan operations resulted in a year-over-year decrease in net revenues of $834 million.businesses divested (0.1 pp). Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to mostseveral currencies in the region, including the Argentinean peso, Brazilian realEgyptian pound, Nigerian naira and Mexican peso. Unfavorable volume/mix, which primarily occurredChinese yuan, partially offset by the strength of several other currencies in Brazilthe region, including the South African rand, Australian dollar and Argentina, was largely dueIndian rupee, relative to the impact of pricing-related elasticity as well as strategic decisions to exit certain low-margin product lines.U.S. dollar. Unfavorable volume/mix was driven by declines in cheese & grocery, refreshment beverages, chocolate, biscuits, gum and candy.candy, partially offset by gains in chocolate and biscuits. The unfavorable volume/mix also reflected the impact from the trade implementation of the new GST in India and delayed shipments due to the malware incident. Higher net pricing was reflected across all categories drivenexcept cheese & grocery. Businesses divested primarily by Argentinaincludes the favorable Organic Net Revenue growth related to the grocery & cheese business in Australia and Brazil.New Zealand that was divested on July 4, 2017.
Segment operating income decreased $231increased $4 million (54.7%(1.2%), primarily due to higher raw material costs, the deconsolidation of our Venezuelan operations, unfavorable volume/mix and unfavorable currency. These unfavorable items were partially offset by higher net pricing, lower other selling, general and administrative expenses (including $34 million of VAT-related settlements)a property insurance recovery), higher net pricing, lower manufacturing costs lower advertising and consumer promotion costs and the absence of remeasurement losses in the first nine months of 2016 related to our net monetary assets in Venezuela.
Asia Pacific
For the Three Months Ended September 30, |
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2016 | 2015 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues | $ | 1,128 | $ | 1,101 | $ | 27 | 2.5% | |||||||||
Segment operating income | 135 | 71 | 64 | 90.1% | ||||||||||||
For the Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2016 | 2015 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues | $ | 3,278 | $ | 3,278 | $ | – | 0.0% | |||||||||
Segment operating income | 378 | 321 | 57 | 17.8% |
Three Months Ended September 30:
Net revenues increased $27 million (2.5%), due to favorable volume/mix (2.0 pp) and favorable currency (1.0 pp), partially offset by lower net pricing (0.5 pp). Favorable volume/mix, including the unfavorable impact of strategic decisions to exit certain low-margin product lines, was driven by gains in chocolate, biscuits, and refreshments beverages, partially offset by declines in cheese & grocery, candy and gum. Favorable currency impacts were due primarily to the strength of the Australian dollar and Japanese yen relative to the U.S. dollar, partially offset by the strength of the U.S. dollar relative to the Chinese yuan and Indian rupee. Lower net pricing was driven by chocolate, gum and refreshment beverages, partially offset by higher net pricing in candy and biscuits.
Segment operating income increased $64 million (90.1%), primarily due to lower manufacturing costs, lower other selling, general and administrative expenses, lower costs incurred for the 2014-2018 Restructuring Program and lower advertising and consumer promotionacquisition integration costs. These favorable items were partially offset by lower net pricing and higher raw material costs.
Nine Months Ended September 30:
Net revenues were flat to the prior year, due to the impact of an acquisition (2.1 pp), favorable volume/mix (1.6 pp) and higher net pricing (0.6 pp), offset by unfavorable currency (3.3 pp) and the adjustment for deconsolidating our historical coffee business (1.0 pp). The acquisition of a biscuit operation in Vietnam in July 2015 added net revenues of $71 million. Favorable volume/mix, including the unfavorable impact of strategic decisions to exit certain low-margin product lines, was driven by gains in chocolate, biscuits, gum and refreshment beverages, partially offset by declines in candy and cheese & grocery. Higher net pricing was driven by chocolate, candy, biscuits and refreshment beverages, partially offset by lower net pricing in gum. Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to most currencies in the region, including the Chinese yuan, Indian rupee and Australian dollar, partially offset by the strength of the Japanese yen relative to the U.S. dollar. The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $33 million.
Segment operating income increased $57 million (17.8%), primarily due to lower manufacturing costs, lower other selling, general and administrative expenses, lower costs incurred for the 2014-2018 Restructuring Program, higher net pricing, favorable volume/mix and the impact of the Vietnam acquisition. These favorable items were partially offset by the reclassification of equity method investment earnings, higher raw material costs, unfavorable currency, and the deconsolidation of our historical coffee business and the impact of divestitures.
EEMEA
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September 30, | ||||||||||||||||
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Net revenues | $ | 543 | $ | 586 | $ | (43 | ) | (7.3)% | ||||||||
Segment operating income | 44 | 52 | (8 | ) | (15.4)% | |||||||||||
For the Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2016 | 2015 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues | $ | 1,738 | $ | 2,150 | $ | (412 | ) | (19.2)% | ||||||||
Segment operating income | 154 | 184 | (30 | ) | (16.3)% |
Three Months Ended September 30:
Net revenues decreased $43 million (7.3%), due to unfavorable volume/mix (6.7 pp) and unfavorable currency (6.1 pp), partially offset by higher net pricing (5.5 pp). Unfavorable volume/mix was largely due to the impact of pricing-related elasticity as well as strategic decisions to exit certain low-margin product lines. Unfavorable volume/mix was driven by declines in all categories. Unfavorable currency impacts were due to the strength of the U.S. dollar relative to most currencies in the region, primarily the Nigerian naira, Egyptian pound, South African rand and Ukrainian hryvnia. Higher net pricing was reflected across all categories.
Segment operating income decreased $8 million (15.4%), primarily due to higher raw material costs, unfavorable volume/mix, higher advertising and consumer promotion costs and unfavorable currency. These unfavorable items were mostly offset by higher net pricing, lower manufacturing costs and the absence of costs associated with the JDE coffee business transactions.
Nine Months Ended September 30:
Net revenues decreased $412 million (19.2%), due to the adjustment for deconsolidating our historical coffee business (10.5 pp), unfavorable currency (8.8 pp) and unfavorable volume/mix (5.7 pp), partially offset by higher net pricing (5.8 pp). The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $246 million. Unfavorable currency impacts were due to the strength of the U.S. dollar relative to most currencies in the region, primarily the Russian ruble, South African rand, Egyptian pound, Nigerian naira, Turkish lira and Ukrainian hryvnia. Unfavorable volume/mix was largely due to the impact of pricing-related elasticity as well as strategic decisions to exit certain low-margin product lines. Unfavorable volume/mix was driven by declines in all categories. Higher net pricing was reflected across all categories.
Segment operating income decreased $30 million (16.3%), primarily due to higher raw material costs, the deconsolidation of our historical coffee business, unfavorable volume/mix, higher costs incurred for the 2014-2018 Restructuring Program and unfavorable currency. These unfavorable items were partially offset by higher net pricing, lower manufacturing costs, lower other selling, generaladvertising and administrative expenses and the absence of costs associated with the JDE coffee business transactions.consumer promotion costs.
Europe
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||||
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(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Net revenues | $ | 2,104 | $ | 2,173 | $ | (69 | ) | (3.2)% | $ | 2,171 | $ | 2,293 | $ | (122) | (5.3)% | |||||||||||||||||
Segment operating income | 302 | 298 | 4 | 1.3% | 339 | 256 | 83 | 32.4% | ||||||||||||||||||||||||
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Net revenues | $ | 6,461 | $ | 7,963 | $ | (1,502 | ) | (18.9)% | ||||||||||||||||||||||||
Segment operating income | 896 | 885 | 11 | 1.2% |
For the Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2017 | 2016 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues | $ | 4,536 | $ | 4,741 | $ | (205) | (4.3)% | |||||||||
Segment operating income | 748 | 608 | 140 | 23.0% |
Three Months Ended SeptemberJune 30:
Net revenues decreased $69$122 million (3.2%(5.3%), due to unfavorable currency (4.2(3.7 pp), the impact of divestitures (1.6 pp) and lower net pricing (2.3unfavorable volume/mix (0.8 pp), partially offset by favorable volume/mix (3.3the impact of an acquisition (0.7 pp) and higher net pricing (0.1 pp). Unfavorable currency impacts reflected the strength of the U.S. dollar against most currencies in the region, primarily the British pound sterling. Lower net pricing was reflected across all categories except refreshment beverages. Favorable volume/mix, includingsterling and euro, partially offset by the unfavorablestrength of the Russian ruble relative to the U.S. dollar. The impact of strategic decisionsdivestitures was primarily due to exit certain low-margin product lines,the sale of a confectionery business in France. Unfavorable volume/mix, caused by delayed shipments due to the malware incident, was driven by biscuits, chocolate,gum, candy, cheese & grocery and gum,refreshment beverages, partially offset by declinesgains in chocolate and biscuits. The acquisition of a business and license to manufacture, market and sell Cadbury-branded biscuits in November 2016 added net revenues of $16 million (constant currency basis). Higher net pricing was driven by chocolate, candy and refreshment beverages.beverages, mostly offset by lower net pricing in biscuits and cheese & grocery.
Segment operating income increased $4$83 million (1.3%(32.4%), primarily due to lower divestiture-related costs, lower manufacturing costs, favorable volume/mix, the absence oflower advertising and consumer promotion costs, associated with the JDE coffee business transactions, lower other selling, general and administrative expenses and lower raw material costs.a prior-year second quarter intangible asset impairment charge. These favorable items were mostlypartially offset by higher raw material costs, unfavorable currency, higher costs incurred for the 2014-2018 Restructuring Program, lower net pricingunfavorable volume/mix, the impact of divestitures and higher advertising and consumer promotion costs.a prior-year second quarter gain on the sale of an intangible asset.
NineSix Months Ended SeptemberJune 30:
Net revenues decreased $1,502$205 million (18.9%(4.3%), due to the adjustment for deconsolidating our historical coffee business (16.6unfavorable currency (4.3 pp), unfavorable currency (2.7the impact of divestitures (0.8 pp) and lower net pricing (1.3(0.1 pp), partially offset by the impact of an acquisition (0.6 pp) and favorable volume/mix (1.7(0.3 pp). The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $1,348 million. Unfavorable currency impacts reflected the strength of the U.S. dollar against most currencies in the region, primarily the British pound sterling.sterling, euro and Turkish lira, partially offset by the strength of the Russian ruble relative to the U.S. dollar. The impact of divestitures was primarily due to the sale of a confectionery business in France. Lower net pricing was reflected across all categories exceptdriven by biscuits and cheese & grocery, mostly offset by higher net pricing in chocolate, candy, refreshment beverages.beverages and gum. The acquisition of a business and license to manufacture, market and sell Cadbury-branded biscuits in November 2016 added net revenues of $30 million (constant currency basis). Favorable volume/mix, including the unfavorablenegative impact of strategic decisionsdelayed shipments in the second quarter due to exit certain low-margin product lines,the malware incident, was driven by biscuits, chocolate and cheese & grocery,biscuits, partially offset by declines in gum, cheese & grocery, refreshment beverages candy and gum.candy.
Segment operating income increased $11$140 million (1.2%(23.0%), primarily due to the absence of costs associated with the JDE coffee business transactions, lower manufacturing costs, lower divestiture-related costs, the benefit from the settlement of a Cadbury tax matter, lower other selling, general and administrative expenses, favorable volume/mixlower advertising and the gain on the sale of anconsumer promotion costs and prior-year intangible asset in Finland.impairment charges. These favorable items were mostlypartially offset by higher raw material costs, unfavorable currency, the deconsolidationimpact of our historical coffee business, divestiture-related costs and intangible asset impairment charges related to the planned sale of a confectionery business in France,divestitures, lower net pricing unfavorable currency, higher advertising and consumer promotion costs and higher costs incurred for the 2014-2018 Restructuring Program.
North America
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||||
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2016 | 2015 | $ change | % change | 2017 | 2016 | $ change | % change | |||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Net revenues | $ | 1,753 | $ | 1,756 | $ | (3 | ) | (0.2)% | $ | 1,573 | $ | 1,720 | $ | (147 | ) | (8.5 | )% | |||||||||||||||
Segment operating income | 274 | 275 | (1 | ) | (0.4)% | 214 | 295 | (81 | ) | (27.5 | )% | |||||||||||||||||||||
For the Nine Months Ended | ||||||||||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||||||||||
2016 | 2015 | $ change | % change | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Net revenues | $ | 5,148 | $ | 5,151 | $ | (3 | ) | (0.1)% | ||||||||||||||||||||||||
Segment operating income | 840 | 817 | 23 | 2.8% |
For the Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2017 | 2016 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues | $ | 3,221 | $ | 3,395 | $ | (174 | ) | (5.1 | )% | |||||||
Segment operating income | 506 | 566 | (60 | ) | (10.6 | )% |
Three Months Ended SeptemberJune 30:
Net revenues decreased $3$147 million (0.2%(8.5%), due to unfavorable volume/mix (6.6 pp), lower net pricing (1.7(1.5 pp) and the impact of an accounting calendar change made in the prior year (1.1unfavorable currency (0.4 pp), partially offset by favorable. Unfavorable volume/mix, (2.6 pp). Lower net pricingprimarily caused by delayed shipments due to the malware incident, was reflecteddriven by declines in biscuits, gum and candy, partially offset by a gain in chocolate. Lower net pricing was reflected in biscuits and chocolate, partially offset by higher net pricing in chocolate. The prior-year change in North America’s accounting calendar resulted in a year-over-year decrease in net revenues of $19 million. Favorable volume/mix, including the unfavorable impact of strategic decisions to exit certain low-margin product lines, was driven by gains in biscuits and candy, partially offset by declines in gum and chocolate.
Segment operating income decreased $1 million (0.4%), primarily due to higher costs incurred for the 2014-2018 Restructuring Program, lower net pricing and higher raw material costs. These unfavorable items were mostly offset by lower manufacturing costs, lower other selling, general and administrative expenses (including the gain on sale of property), favorable volume/mix and the gain on the sale of an intangible asset.
Nine Months Ended September 30:
Net revenues decreased $3 million (0.1%), due to the impact of an accounting calendar change made in the prior year (1.1 pp), unfavorable currency (0.5 pp) and lower net pricing (0.4 pp), mostly offset by favorable volume/mix (1.8 pp) and an acquisition (0.1 pp). The prior-year change in North America’s accounting calendar resulted in a year-over-year decrease in net revenues of $57 million.gum. Unfavorable currency impact was due to the strength of the U.S. dollar relative to the Canadian dollar.
Segment operating income decreased $81 million (27.5%), primarily due to unfavorable volume/mix, higher intangible asset impairment charges, lower net pricing, higher other selling, general and administrative expenses (including the prior year’s gain on sale of property) and higher raw material costs. These unfavorable items were partially offset by lower manufacturing costs, lower costs incurred for the 2014-2018 Restructuring Program and lower advertising and consumer promotion costs.
Six Months Ended June 30:
Net revenues decreased $174 million (5.1%), due to unfavorable volume/mix (4.0 pp), lower net pricing (1.0 pp) and unfavorable currency (0.1 pp). Unfavorable volume/mix, primarily caused by delayed shipments due to the malware incident, was driven by declines in biscuits, gum and candy, partially offset by a gain in chocolate. Lower net pricing was reflected in biscuits, gum and candy,chocolate, partially offset by higher net pricing in chocolate and gum. Favorable volume/mix, includingcandy. Unfavorable currency impact was due to the unfavorable impactstrength of strategic decisionsthe U.S. dollar relative to exit certain low-margin product lines, was driven by gains in biscuits and candy, partially offset by declines in gum and chocolate. The acquisition of Enjoy Life Foods in March 2015 added net revenues of $5 million.the Canadian dollar.
Segment operating income increased $23decreased $60 million (2.8%(10.6%), primarily due to unfavorable volume/mix, lower other selling, generalnet pricing, higher intangible asset impairment charges and administrative expenses (including gains on sales of property), lower manufacturing costs and favorable volume/mix.higher raw material costs. These favorableunfavorable items were partially offset by higherlower manufacturing costs, lower costs incurred for the 2014-2018 Restructuring Program the year-over-year impact of the prior-year accounting calendar change, higherand lower advertising and consumer promotion costs and lower net pricing.costs.
Liquidity and Capital Resources
We believe that cash from operations, our $4.5 billion revolving credit facilityfacilities and our authorized long-term financing will provide sufficient liquidity for our working capital needs, planned capital expenditures, future contractual obligations, share repurchases and payment of our anticipated quarterly dividends. We continue to utilize our commercial paper program, international credit lines and long-term debt issuances for regular funding requirements. We also use intercompany loans with our international subsidiaries to improve financial flexibility. Earnings outside of the U.S. are considered indefinitely reinvested and no material tax liability has been accrued as of June 30, 2017. Overall, we do not expect any negative effects to our funding sources that would have a material effect on our liquidity, including the indefinite reinvestment of our earnings outside of the United States.U.S.
Net Cash Provided Byby Operating Activities:
Net cash provided by operating activities was $1,138$262 million in the first ninesix months of 20162017 and $1,412$337 million in the first nine months of 2015. The deconsolidation of our coffee businesses impacted our operating cash flows, as well as higher contributions related to our pension benefit plans in 2016 to date, including discretionary contributions of $250 million in 2016 and $200 million in 2015. After converting our coffee holdings into equity method investments, we will only recognize cash flows from coffee when the investments pay dividends. We received $4 million of dividends from our investment in Keurig in the first ninesix months of 2016. Our coffee investmentThe decrease in JDE did not distribute dividendsnet cash provided by operating activities was due primarily to higher tax payments in 2017, partially offset by higher earnings and improvements in our cash conversion cycle. In the second quarter of 2017, we continued to improve our cash conversion cycle to negative 21 days from negative 4 days in the first nine monthssecond quarter of 2016.
Net Cash (Used in) / Provided byUsed in Investing Activities:
Net cash used in investing activities was $521$286 million in the first ninesix months of 20162017 and net cash provided by investing activities was $3,460$505 million in the first ninesix months of 2015. In the first nine months of 2015, we2016. The decrease in net cash used in investing activities primarily relates to net proceeds received $4.1 billion of cash, net of transaction costs, from the deconsolidation of our coffee business and thea divestiture of AGF$169 million and $1.1 billion of cash related to the settlement of currency exchange forward contracts related to our JDE coffee business transactions. This was partially offset by $536 million of payments to acquire a biscuit operation in Vietnam and Enjoy Life Foods in 2015, lower planned capital expenditures in 2016 and $73 million of proceeds from the sales of property in 2016.
Capital expenditures were $909$488 million for the ninesix months ended SeptemberJune 30, 2016 and $1,1782017 compared to $604 million for the ninesix months ended SeptemberJune 30, 2015.2016. We continue to make capital expenditures primarily to modernize manufacturing facilities and support new product and productivity initiatives. We expect 20162017 capital expenditures to be up to $1.4$1.1 billion, including capital expenditures in connection with our 2014-2018 Restructuring Program. We expect to continue to fund these expenditures from operations.
Net Cash Used Inin/Provided by Financing Activities:
Net cash used in financing activities was $830$376 million the first six months of 2017 and net cash provided by financing activities was $28 million in the first ninesix months of 2016 and $4,270 million2016. The increase in the first nine months of 2015. Cash flowsnet cash used in financing activities were lowerrelative to the comparable prior-year period was primarily due to higher short-term financing to fund working capital requirements, lower share repurchases in 2016 to datenet payments of long-term and lower net repaymentsissuances of long-termshort-term debt, due to the decision to refinance maturing debt in 2016 to date than in the first nine months of 2015.offset by lower share repurchases.
Debt:
From time to time we refinance long-term and short-term debt. Refer to Note 7,Debt and Borrowing Arrangements, for details of our debt issuances and maturitiesactivity during the first ninesix months of 2016 and for the subsequent debt activity in October 2016.2017. The nature and amount of our long-term and short-term debt and the proportionate amount of each varies as a result of current and expected business requirements, market conditions and other factors. Generally,Due to seasonality, in the first and second quarters of the year, our working capital requirements grow, increasing the need for short-term financing. The third and fourth quarters of the year typically generate higher cash flows. As such, we may issue commercial paper or secure other forms of financing throughout the year to meet short-term working capital needs.
In July 2015,During 2016, one of our subsidiaries, Mondelez International Holdings Netherlands B.V. (“MIHN”), issued debt totaling $4.5 billion. The operations held by MIHN generated approximately 74.3 percent (or $9.2 billion) of the $12.4 billion of consolidated net revenue in the six months ended June 30, 2017. The operations held by MIHN represented approximately 87.7 percent (or $22.6 billion) of the $25.8 billion of net assets as of June 30, 2017 and 81.7 percent (or $20.6 billion) of the $25.2 billion of net assets as of December 31, 2016.
On February 3, 2017, our Board of Directors approved a new $5 billion long-term financing authority to replace the prior authority. As of SeptemberJune 30, 2016,2017, we had $2.8$4.7 billion of long-term financing authority remaining.
Following our most recent October 2016 debt activity, inIn the next 12 months, we expect $1.5 billion$739 million of long-term debt will mature as follows:€750 million ($843 million as of September 30, 2016) in January 2017,fr.175250 million Swiss franc notes ($180261 million as of SeptemberJune 30, 2016)2017) in March 2017January 2018 and $488$478 million in August 2017.February 2018. We expect to fund these repayments with a combination of cash from operations and the issuance of commercial paper or long-term debt.
Our total debt was $17.1$18.8 billion at SeptemberJune 30, 20162017 and $15.4$17.2 billion at December 31, 2015.2016. Ourdebt-to-capitalization ratio was 0.380.42 at SeptemberJune 30, 20162017 and 0.350.41 at December 31, 2015.2016. At SeptemberJune 30, 2016,2017, the weighted-average term of our outstanding long-term debt was 8.46.7 years. Our average daily commercial paper borrowings outstanding were $2.1$4.2 billion forin the ninefirst six months ended September 30, 20162017 and $2.6$2.0 billion forin the ninefirst six months ended September2016. We had commercial paper outstanding totaling $4.2 billion as of June 30, 2015.2017 and $2.4 billion as of December 31, 2016. We expect to continue to use commercial paper to finance various short-term financing needs. We continue to comply with our long-term debt covenants. Refer to Note 7,Debt and Borrowing Arrangements, for more information on our debt and debt covenants.
Commodity Trends
We regularly monitor worldwide supply, commodity cost and currency trends so we can cost-effectively secure ingredients, packaging and fuel required for production. During the ninesix months ended SeptemberJune 30, 2016,2017, the primary drivers of the increase in our aggregate commodity costs were higher commodity market pricing and currency-related costs on our commodity purchases and increased costs fordairy, cocoa, sugar, packaging, oils, grains and other raw materials, partially offset by lower costs for dairy, nuts grains and oils, energy, sugar and cocoa.energy.
A number of external factors such as weather conditions, commodity market conditions, currency fluctuations and the effects of governmental agricultural or other programs affect the cost and availability of raw materials and agricultural materials used in our products. We address higher commodity costs and currency impacts primarily through hedging, higher pricing and manufacturing and overhead cost control. We use hedging techniques to limit the impact of fluctuations in the cost of our principal raw materials; however, we may not be able to fully hedge against commodity cost changes, and our hedging strategies may not protect us from increases in specific raw material costs. Due to competitive or market conditions, planned trade or promotional incentives, fluctuations in currency exchange rates or other factors, our pricing actions may also lag commodity cost changes temporarily.
We expect commodity price volatility and a slightly higher aggregate cost environment to continue in 2016. While2017. Given that the costs of our principalkey raw materials fluctuate significantly over time, we periodically enter into hedging instruments to ensure reliability of supplies and to lock in costs. As such, our actual commodity costs could vary from commodity spot market pricing over the hedged period. We believe there will continue to be an adequate supply of the raw materials we use and that they will generally remain available from numerous sources.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
See Note 7,Debt and Borrowing Arrangements, for information on debt transactions during the first ninesix months of 2016 and subsequent debt activity in October 2016, February 9, 2016 refinancing and repayment of $1,750 million of matured U.S. dollar debt, the January 26, 2016 issuance offr.400 million of Swiss franc notes and the January 21, 2016 issuance of€700 million of euro notes.2017. There were no other material changes to ouroff-balance sheet arrangements and aggregate contractual obligations disclosed in our Annual Report on Form10-K for the year ended December 31, 2015.2016. We also do not expect a material change in the effect of these arrangements and obligations will have on our liquidity. See Note 11,Commitments and Contingencies, for a discussion of guarantees.
Equity and Dividends
Stock Plans and Share Repurchases:
See Note 10,Stock Plans, for more information on our stock plans, grant activity and share repurchase program for the ninesix months ended SeptemberJune 30, 2016.2017.
We intend to continue to use a portion of our cash for share repurchases. On July 29, 2015, our Finance Committee, with authorization delegated from our Board of Directors, approved an increase of $6.0 billion in the share repurchase program, raising the authorization to $13.7 billion of Common Stock repurchases, and extended the program through December 31, 2018.
We repurchased $10.0 billion$11,965 million of shares ($1.8 billion1,109 million in the first ninesix months of 2017, $2,601 million in 2016, $3.6 billion$3,623 million in 2015, $1.9 billion$1,892 million in 2014 and $2.7 billion$2,740 in 2013) through SeptemberJune 30, 2016.2017. The number of shares that we ultimately repurchase under our share repurchase program may vary depending on numerous factors, including share price and other market conditions, our ongoing capital allocation planning, levels of cash and debt balances, other demands for cash, such as acquisition activity, general economic or business conditions and board and management discretion. Additionally, our share repurchase activity during any particular period may fluctuate. We may accelerate, suspend, delay or discontinue our share repurchase program at any time, without notice.
Dividends:
We paid dividends of $801$581 million in the first ninesix months of 20162017 and $736$537 million in the first ninesix months of 2015.2016. On July 19, 2016,August 2, 2017, the Finance Committee, with authorization delegated from our Board of Directors, approved a 12%16% increase in the quarterly dividend to $0.19$0.22 per common share or $0.76$0.88 per common share on an annual basis. On July 23, 2015, our Board of Directors approved a 13% increase at that time in the quarterly dividend to $0.17 per common share or $0.68 per common share on an annualannualized basis. The declaration of dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net earnings, financial condition, cash requirements, future prospects and other factors that our Board of Directors deems relevant to its analysis and decision making.
We will make a determination as to whether 20162017 distributions are taxablecharacterized as dividends, a return of basis, or both under U.S. federal income tax rules after the 20162017 calendaryear-end. This determination will be reflected on an IRS Form1099-DIV issued in early 2017.2018.
Significant Accounting Estimates
We prepare our condensed consolidated financial statements in accordanceconformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Our significant accounting policies are described in Note 1 to our consolidated financial statements in our Annual Report on Form10-K for the year ended December 31, 2015.2016. Our significant accounting estimates are described in ourManagement’s Discussion and Analysis ofFinancial Condition and Results of Operationsin our Annual Report on Form10-K for the year ended December 31, 2015.2016. See Note 1,Basis of Presentation, for a discussion of the impact of new accounting standards. There were no changes in our accounting policies in the current period that had a material impact on our financial statements.
New Accounting GuidanceGuidance:
See Note 1,Basis of Presentation, for a discussion of new accounting guidance.standards.
ContingenciesContingencies:
See Note 11,Commitments and Contingencies, and Part II, Item 1.Legal Proceedingsfor a discussion of contingencies.
Forward-Looking Statements
This report contains a number of forward-looking statements. Words, and variations of words, such as “will,” “may,” “expect,” “would,” “could”,“could,” “intend,” “plan,” “believe,” “estimate,” “anticipate,” “deliver,” “seek,” “aim,” “potential,” “objective,” “project,” “outlook” and similar expressions are intended to identify our forward-looking statements, including but not limited to statements about: our future performance, including our future revenue growth, margins and earnings per share; our goal to deliver top-tier financial performance; price volatility and pricing actions; the cost environment and measures to address increased costs; the U.K. vote toUnited Kingdom’s planned exit from the E.U.European Union and its effectimpact on demand for our products and our financial results and operations;results; the costs of, timing of expenditures under and completion of our restructuring program; snack category growth; consumer snacking behaviors; commodity prices and supply; investments; innovation; political and economic conditions;conditions and volatility; currency exchange rates, controls and restrictions; our operations in Venezuela and Argentina; pension liabilities related to the JDE coffee business transactions;Ukraine; overhead costs; our JDE ownership interest; the significance of the coffee category to our future results; completion of our biscuit brand divestiture, purchase of a license related to Cadbury-branded biscuits, and sales of a chocolate factory and a confectionery business; completion of the sale of several manufacturing facilities in France and sale or license of several local confectionery brands; costs we could incur related to re-negotiating collective bargaining agreements and executing business continuity plans for the North America business; legal matters; the estimated value of goodwill andintangible assets; amortization expense for intangible assets; impairment of goodwill and intangible assets and our projections of operating results and other factors that may affect our impairment testing; our accounting estimates and judgments;judgments and the impact of new accounting pronouncements; pension expenses, contributions and assumptions; our tax rate and tax positions; the potential impact of amounts previously paid and accrued for ICMS tax in Brazil; remediation efforts related to and the financial and other impacts of the malware incident; our liquidity, funding sources and uses of funding;funding, including our tender offer and MIHN’s note issuance and term loan facility;use of commercial paper; reinvestment of earnings; our risk management program, including the use of financial instruments and the effectiveness of our hedging activities; capital expenditures and funding; share repurchases; dividends; compliance with financiallong-term value and long-term debt covenants; taxes; guarantees;return on investment for our shareholders; and our contractual obligations.
These forward-looking statements involve risks and uncertainties, many of which are beyond our control. Important factors that could cause actual results to differ materially from those described in our forward-looking statements include, but are not limited to, risks from operating globally including in emerging markets; changes in currency exchange rates, controls and restrictions; continued volatility of commodity and other input costs; weakness in economic conditions; weakness in consumer spending; pricing actions; unanticipated disruptions to our business;business, such as the malware incident, cyberattacks or other security breaches; competition; acquisitions and divestitures; the restructuring program and our other
transformation initiatives not yielding the anticipated benefits; changes in the assumptions on which the restructuring program is based; protection of our reputation and brand image; management of our workforce; consolidation of retail customers and competition with retailer and other economy brands; changes in our relationships with suppliers or customers; legal, regulatory, tax or benefit law changes, claims or actions; strategic transactions; our ability to innovate and differentiate our products; significant changes in valuation factors that may adversely affect our impairment testing of goodwill and intangible assets; perceived or actual product quality issues or product recalls; failure to maintain effective internal control over financial reporting; volatility of and access to capital or other markets; pension costs; use of information technology and third party service providers; our ability to protect our intellectual property and intangible assets; a shift in ourpre-tax income among jurisdictions, including the United States; and tax law changes. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this report except as required by applicable law or regulation.
Non-GAAP Financial Measures
We usenon-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identify trends in our underlying operating results and provide additional insight and transparency on how we evaluate our business. We usenon-GAAP financial measures to budget, make operating and strategic decisions and evaluate our performance. We have detailed thenon-GAAP adjustments that we make in ournon-GAAP definitions below. The adjustments generally fall within the following categories: acquisition & divestiture activities, gains and losses on intangible asset sales andnon-cash impairments, major program restructuring activities, constant currency and related adjustments, major program financing and hedging activities and other major items affecting comparability of operating results. We believe thenon-GAAP measures should always be considered along with the related U.S. GAAP financial measures. We have provided the reconciliations between the GAAP andnon-GAAP financial measures below, and we also discuss our underlying GAAP results throughout ourManagement’s Discussion and Analysis of Financial Condition and Results of Operations in this Form10-Q.
Our primarynon-GAAP financial measures are listed below and reflect how we evaluate our current and prior-year operating results. As new events or circumstances arise, these definitions could change. When our definitions change, we provide the updated definitions and present the relatednon-GAAP historical results on a comparable basis.basis(1).
• | “Organic Net Revenue” is defined as net revenues excluding the impacts of acquisitions, divestitures |
• | Our Power Brands include some of our largest global and regional brands such asOreo,Chips Ahoy!, Ritz, TUC/Club Social andbelVita biscuits;Cadbury Dairy Milk, Milka andLacta chocolate;Tridentgum; |
• | “Adjusted Operating Income” is defined as operating income excluding the impacts of |
• | “Adjusted EPS” is defined as diluted EPS attributable to Mondelēz International from continuing operations excluding the impacts of |
(1) | When items no longer impact our current or future presentation ofnon-GAAP operating results, we remove these items from ournon-GAAP definitions. For the first quarter of 2017, we added to thenon-GAAP definitions the exclusion of the benefit from the settlement of a Cadbury tax matter – see footnote (8) below. In the second quarter of 2017, we added the exclusion of incremental expenses related to the malware incident. |
(2) | Divestitures include completed sales of businesses and exits of major product lines upon completion of a sale or licensing agreement. Note that we completed the sale of most of our grocery business in Australia and New Zealand on July 4, 2017 and we have also removed the historical operating results of the business from our Organic Net Revenue and adjusted results for all periods presented. |
Constant currency operating results are calculated by dividing or multiplying, as appropriate, the |
(5) | Non-GAAP adjustments related to the 2014-2018 Restructuring Program reflect costs incurred that relate to the objectives of our program to transform our supply chain network and organizational structure. Costs that do not meet the program objectives are not reflected in thenon-GAAP adjustments. Refer to our Annual Report on Form10-K for the year ended December 31, 2016 for more information on the 2012-2014 Restructuring Program. |
(6) | During the third quarter of 2016, we began to exclude unrealized gains and losses |
(7) | Historically, we have recorded income from equity method investments within our operating income as these investments operated as extensions of our base business. Beginning in the third quarter of 2015, we began to record the earnings from our equity method investments inafter-tax equity method investment earnings outside of operating income following the deconsolidation of our coffee business. |
(8) | During the first quarter of 2017, we recorded a $58 million gain on the settlement of apre-acquisition Cadbury tax matter further disclosed in Note 11,Commitments and Contingencies – Tax Matters. |
(9) | We have excluded our proportionate share of our equity method investees’ unusual or infrequent items in order to |
We believe that the presentation of thesenon-GAAP financial measures, when considered together with our U.S. GAAP financial measures and the reconciliations to the corresponding U.S. GAAP financial measures, provides you with a more complete understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Becausenon-GAAP financial measures vary among companies, thenon-GAAP financial measures presented in this report may not be comparable to similarly titled measures used by other companies. Our use of thesenon-GAAP financial measures is not meant to be considered in isolation or as a substitute for any U.S. GAAP financial measure. A limitation of thesenon-GAAP financial measures is they exclude items detailed below that have an impact on our U.S. GAAP reported results. The best way this limitation can be addressed is by evaluating ournon-GAAP financial measures in combination with our U.S. GAAP reported results and carefully evaluating the following tables that reconcile U.S. GAAP reported figures to thenon-GAAP financial measures in this Form10-Q.
Organic Net Revenue:
Applying the definition of “Organic Net Revenue”, the adjustments made to “net revenues” (the most comparable U.S. GAAP financial measure) were to exclude the impact of currency, the adjustment for deconsolidating our historical coffee business, our historical Venezuelan operations, an accounting calendar changeacquisition and acquisitions.divestitures. We believe that Organic Net Revenue reflects the underlying growth from the ongoing activities of our business and provides improved comparability of results. We also evaluate our Organic Net Revenue growth from emerging markets and Power Brands, and these underlying measures are also reconciled to U.S. GAAP below.
For the Three Months Ended June 30, 2017 | For the Three Months Ended June 30, 2016 | |||||||||||||||||||||||
Emerging | Developed | Emerging | Developed | |||||||||||||||||||||
Markets | Markets | Total | Markets | Markets | Total | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Net Revenue | $ | 2,304 | $ | 3,682 | $ | 5,986 | $ | 2,339 | $ | 3,963 | $ | 6,302 | ||||||||||||
Impact of currency | 26 | 98 | 124 | – | – | – | ||||||||||||||||||
Impact of acquisition | – | (16 | ) | (16 | ) | – | – | – | ||||||||||||||||
Impact of divestitures | – | (83 | ) | (83 | ) | (2 | ) | (120 | ) | (122 | ) | |||||||||||||
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Organic Net Revenue | $ | 2,330 | $ | 3,681 | $ | 6,011 | $ | 2,337 | $ | 3,843 | $ | 6,180 | ||||||||||||
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For the Three Months Ended June 30, 2017 | For the Three Months Ended June 30, 2016 (1) | |||||||||||||||||||||||
Power | Non-Power | Power | Non-Power | |||||||||||||||||||||
Brands | Brands | Total | Brands | Brands | Total | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Net Revenue | $ | 4,295 | $ | 1,691 | $ | 5,986 | $ | 4,426 | $ | 1,876 | $ | 6,302 | ||||||||||||
Impact of currency | 69 | 55 | 124 | – | – | – | ||||||||||||||||||
Impact of acquisition | (16 | ) | – | (16 | ) | – | – | – | ||||||||||||||||
Impact of divestitures | – | (83 | ) | (83 | ) | – | (122 | ) | (122 | ) | ||||||||||||||
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Organic Net Revenue | $ | 4,348 | $ | 1,663 | $ | 6,011 | $ | 4,426 | $ | 1,754 | $ | 6,180 | ||||||||||||
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Organic Net Revenue Impact of currency Historical Venezuelan operations(1) Impact of accounting calendar change Net revenues Organic Net Revenue Impact of currency Historical Venezuelan operations(1) Impact of accounting calendar change Net revenues Organic Net Revenue Impact of currency Historical coffee business(2) Historical Venezuelan operations(1) Impact of accounting calendar change Impact of acquisitions Net revenues Organic Net Revenue Impact of currency Historical coffee business(2) Historical Venezuelan operations(1) Impact of accounting calendar change Impact of acquisitions Net revenues For the Three Months Ended
September 30, 2016 For the Three Months Ended
September 30, 2015 Emerging Developed Emerging Developed Markets Markets Total Markets Markets Total (in millions) (in millions) $ 2,475 $ 4,114 $ 6,589 $ 2,427 $ 4,088 $ 6,515 (133 ) (60 ) (193 ) – – – – – – 315 – 315 – – – – 19 19 $ 2,342 $ 4,054 $ 6,396 $ 2,742 $ 4,107 $ 6,849 For the Three Months Ended
September 30, 2016 For the Three Months Ended
September 30, 2015(3) Power Non-Power Power Non-Power Brands Brands Total Brands Brands Total (in millions) (in millions) $ 4,520 $ 2,069 $ 6,589 $ 4,409 $ 2,106 $ 6,515 (125 ) (68 ) (193 ) – – – – – – 211 104 315 – – – 15 4 19 $ 4,395 $ 2,001 $ 6,396 $ 4,635 $ 2,214 $ 6,849 For the Nine Months Ended
September 30, 2016 For the Nine Months Ended
September 30, 2015 Emerging Developed Emerging Developed Markets Markets Total Markets Markets Total (in millions) (in millions) $ 7,713 $ 12,360 $ 20,073 $ 7,478 $ 12,276 $ 19,754 (792 ) (204 ) (996 ) – – – – – – 442 1,185 1,627 – – – 834 – 834 – – – – 57 57 71 5 76 – – – $ 6,992 $ 12,161 $ 19,153 $ 8,754 $ 13,518 $ 22,272 For the Nine Months Ended
September 30, 2016 For the Nine Months Ended
September 30, 2015(3) Power Non-Power Power Non-Power Brands Brands Total Brands Brands Total (in millions) (in millions) $ 13,974 $ 6,099 $ 20,073 $ 13,552 $ 6,202 $ 19,754 (688 ) (308 ) (996 ) – – – – – – 1,179 448 1,627 – – – 576 258 834 – – – 44 13 57 – 76 76 – – – $ 13,286 $ 5,867 $ 19,153 $ 15,351 $ 6,921 $ 22,272
For the Six Months Ended June 30, 2017 | For the Six Months Ended June 30, 2016 | |||||||||||||||||||||||
Emerging | Developed | Emerging | Developed | |||||||||||||||||||||
Markets | Markets | Total | Markets | Markets | Total | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Net Revenue | $ | 4,706 | $ | 7,694 | $ | 12,400 | $ | 4,642 | $ | 8,115 | $ | 12,757 | ||||||||||||
Impact of currency | 8 | 208 | 216 | – | – | – | ||||||||||||||||||
Impact of acquisition | – | (30 | ) | (30 | ) | – | – | – | ||||||||||||||||
Impact of divestitures | – | (197 | ) | (197 | ) | (4 | ) | (241 | ) | (245 | ) | |||||||||||||
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Organic Net Revenue | $ | 4,714 | $ | 7,675 | $ | 12,389 | $ | 4,638 | $ | 7,874 | $ | 12,512 | ||||||||||||
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For the Six Months Ended June 30, 2017 | For the Six Months Ended June 30, 2016 (1) | |||||||||||||||||||||||
Power | Non-Power | Power | Non-Power | |||||||||||||||||||||
Brands | Brands | Total | Brands | Brands | Total | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Net Revenue | $ | 9,013 | $ | 3,387 | $ | 12,400 | $ | 9,070 | $ | 3,687 | $ | 12,757 | ||||||||||||
Impact of currency | 125 | 91 | 216 | – | – | – | ||||||||||||||||||
Impact of acquisition | (30 | ) | – | (30 | ) | – | – | – | ||||||||||||||||
Impact of divestitures | – | (197 | ) | (197 | ) | – | (245 | ) | (245 | ) | ||||||||||||||
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Organic Net Revenue | $ | 9,108 | $ | 3,281 | $ | 12,389 | $ | 9,070 | $ | 3,442 | �� | $ | 12,512 | |||||||||||
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(1) |
Each year we reevaluate our Power Brands and confirm the brands in which we will continue to make disproportionate investments. As such, we may make changes in our planned investments in primarily regional Power Brands following our annual review cycles. For |
Adjusted Operating Income:
Applying the definition of “Adjusted Operating Income”, the adjustments made to “operating income” (the most comparable U.S. GAAP financial measure) were to exclude 2012-2014 Restructuring Program costs, 2014-2018 Restructuring Program costs, Venezuela historical operating results and remeasurement loss, operating income from our historical coffee business, the JDE coffee business transactions gain and net incremental costs, equity method investment earnings reclassified to after-tax earnings in Q3 2015 in connection with the coffee business transactions, impairment charges related to intangible assets, gain on sale of an intangible asset, operating results of the AGF divestiture, pre-tax gain on the AGF divestiture,costs; divestiture-related costs incurred for the planned sale of a confectionery business in France and the sale of a grocery business in Australia; impairment charges related to intangible assets; other acquisition integration costs, acquisition-related costs and costs; the operating results of divestitures; loss on divestiture;mark-to-market impacts from commodity and forecasted currency transaction derivative contracts.contracts; incremental expenses related to the malware incident; gain on sale of intangible assets and the benefit from the settlement of a Cadbury tax matter. We also present “Adjusted Operating Income margin,” which is subject to the same adjustments as Adjusted Operating Income. We alsoIncome, and evaluate Adjusted Operating Income on a constant currency basis. We believe these measures provide improved comparability of underlying operating results.
For the Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2016 | 2015 | $ Change | % Change | |||||||||||||
(in millions) | ||||||||||||||||
Adjusted Operating Income (constant currency) | $ | 1,042 | $ | 891 | $ | 151 | 16.9% | |||||||||
Impact of unfavorable currency | (31 | ) | – | (31 | ) | |||||||||||
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Adjusted Operating Income | $ | 1,011 | $ | 891 | $ | 120 | 13.5% | |||||||||
2014-2018 Restructuring Program costs(1) | (301 | ) | (221 | ) | (80 | ) | ||||||||||
Operating income from Venezuelan subsidiaries(2) | – | 78 | (78 | ) | ||||||||||||
Costs associated with JDE coffee business transactions(3) | – | (54 | ) | 54 | ||||||||||||
Gain on the JDE coffee business transactions(3) | – | 7,122 | (7,122 | ) | ||||||||||||
Intangible asset impairment charges(4) | (4 | ) | – | (4 | ) | |||||||||||
Gain on sale of intangible asset(5) | 7 | – | 7 | |||||||||||||
Acquisition integration costs(5) | – | (4 | ) | 4 | ||||||||||||
Acquisition-related costs(5) | – | (6 | ) | 6 | ||||||||||||
Mark-to-market losses from derivatives(6) | (12 | ) | (4 | ) | (8 | ) | ||||||||||
Other / rounding | 1 | – | 1 | |||||||||||||
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Operating income | $ | 702 | $ | 7,802 | $ | (7,100 | ) | (91.0)% | ||||||||
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For the Three Months Ended June 30, | ||||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||||
(in millions) | ||||||||||||||||
Operating Income | $ | 641 | $ | 638 | $ | 3 | 0.5% | |||||||||
2014-2018 Restructuring Program costs(1) | 211 | 228 | (17 | ) | ||||||||||||
Divestiture-related costs(2) | 4 | 84 | (80 | ) | ||||||||||||
Intangible asset impairment charges(3) | 38 | 12 | 26 | |||||||||||||
Acquisition integration costs(4) | – | 3 | (3 | ) | ||||||||||||
Operating income from divestitures(2) | (18 | ) | (22 | ) | 4 | |||||||||||
Loss on divestiture(2) | 3 | – | 3 | |||||||||||||
Mark-to-market losses/(gains) from derivatives (5) | 46 | (17 | ) | 63 | ||||||||||||
Malware incident incremental expenses | 7 | – | 7 | |||||||||||||
Gain on sale of intangible assets(6) | – | (6 | ) | 6 | ||||||||||||
Other/rounding | 1 | 1 | – | |||||||||||||
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Adjusted Operating Income | $ | 933 | $ | 921 | $ | 12 | 1.3% | |||||||||
Impact of unfavorable currency | 60 | – | 60 | |||||||||||||
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Adjusted Operating Income (constant currency) | $ | 993 | $ | 921 | $ | 72 | 7.8% | |||||||||
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For the Six Months Ended June 30, | ||||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||||
(in millions) | ||||||||||||||||
Operating Income | $ | 1,481 | $ | 1,360 | $ | 121 | 8.9% | |||||||||
2014-2018 Restructuring Program costs(1) | 422 | 465 | (43 | ) | ||||||||||||
Divestiture-related costs(2) | 23 | 84 | (61 | ) | ||||||||||||
Intangible asset impairment charges(3) | 38 | 26 | 12 | |||||||||||||
Acquisition integration costs(4) | 1 | 6 | (5 | ) | ||||||||||||
Operating income from divestitures(2) | (38 | ) | (49 | ) | 11 | |||||||||||
Loss on divestiture(2) | 3 | – | 3 | |||||||||||||
Mark-to-market losses from derivatives(5) | 97 | 37 | 60 | |||||||||||||
Malware incident incremental expenses | 7 | – | 7 | |||||||||||||
Gain on sale of intangible assets(6) | – | (6 | ) | 6 | ||||||||||||
Benefit from the settlement of a Cadbury tax matter(7) | (46 | ) | – | (46 | ) | |||||||||||
Other/rounding | – | (1 | ) | 1 | ||||||||||||
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Adjusted Operating Income | $ | 1,988 | $ | 1,922 | $ | 66 | 3.4% | |||||||||
Impact of unfavorable currency | 73 | – | 73 | |||||||||||||
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Adjusted Operating Income (constant currency) | $ | 2,061 | $ | 1,922 | $ | 139 | 7.2% | |||||||||
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Adjusted Operating Income (constant currency) Impact of unfavorable currency Adjusted Operating Income 2012-2014 Restructuring Program costs (1) 2014-2018 Restructuring Program costs(1) Operating income from Venezuelan subsidiaries(2) Remeasurement of net monetary assets in Venezuela(2) Operating income from historical coffee business (7) Costs associated with JDE coffee business transactions (3) Gain on the JDE coffee business transactions(3) Reclassification of equity method earnings(8) Intangible asset impairment charges(4) Gain on sale of intangible asset(5) Operating income from divestiture(9) Gain on divestiture(9) Divestiture-related costs(10) Acquisition integration costs(5) Acquisition-related costs(5) Mark-to-market gains / (losses) from derivatives(6) Other / rounding Operating income For the Nine Months Ended September 30, 2016 2015 $ Change % Change (in millions) $ 3,114 $ 2,566 $ 548 21.4% (132 ) – (132 ) $ 2,982 $ 2,566 $ 416 16.2% – 3 (3 ) (766 ) (627 ) (139 ) – 208 (208 ) – (11 ) 11 – 342 (342 ) – (239 ) 239 – 7,122 (7,122 ) – 51 (51 ) (30 ) – (30 ) 13 – 13 – 5 (5 ) – 13 (13 ) (84 ) – (84 ) – (5 ) 5 (6 ) (8 ) 2 (49 ) 35 (84 ) 2 (1 ) 3 $ 2,062 $ 9,454 $ (7,392 ) (78.2)%
(1) | Refer to Note 6,2014-2018 Restructuring Program, for more information. |
(2) | Refer to Note 2,Divestitures and Acquisitions, for more information on the 2017 sales of a confectionery business in France and a grocery business in Australia and New Zealand. Note that we completed the sale of most of our |
(3) | Refer to Note 2,Divestitures and Acquisitions, for more information on the |
(4) | Refer to |
(5) | Refer to Note 8,Financial Instruments, Note 15,Segment Reporting, andNon-GAAP Financial Measures appearing earlier in this section for more information on these unrealized losses/gains on commodity and forecasted currency transaction derivatives. |
(6) | Refer to Note 2,Divestitures and Acquisitions, for more information on the 2016 |
(7) |
Adjusted EPS:
Applying the definition of “Adjusted EPS”(1), the adjustments made to “diluted EPS attributable to Mondelēz International” (the most comparable U.S. GAAP financial measure) were to exclude 2012-2014 Restructuring Program costs, 2014-2018 Restructuring Program costs, Venezuela historical operating results and remeasurement loss, the JDE coffee business transactions hedging gains and incremental costs, gain on the equity method investment exchange, acquisition integration costs, acquisition-related costs, impairment charges related to intangible assets, gain on sale of an intangible asset, net earnings from the AGF divestiture, after-tax loss on the AGF divestiture,costs; divestiture-related costs incurred for the planned sale of a confectionery business in France and the sale of a grocery business in Australia; impairment charges related to intangible assets; acquisition integration costs; net earnings from divestiture; loss on debt extinguishmentdivestiture;mark-to-market impacts from commodity and forecasted currency transaction derivative contracts; incremental expenses related expenses,to the malware incident; losses on interest rate swaps no longer designated as accounting cash flow hedges due to changed financing and hedging plans, mark-to-market impactsplans; losses on debt extinguishment and related expenses; the benefit from commodity and forecasted currency transaction derivative contractsthe settlement of a Cadbury tax matter; gain on the equity method investment exchange; and our proportionate share of unusual or infrequent items recorded by our JDE and Keurig equity method investees. We also evaluate Adjusted EPS on a constant currency basis. We believe Adjusted EPS provides improved comparability of underlying operating results.
For the Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2016 | 2015 | $ Change | % Change | |||||||||||||
Adjusted EPS (constant currency) | $ | 0.54 | $ | 0.38 | $ | 0.16 | 42.1% | |||||||||
Impact of unfavorable currency | (0.02 | ) | – | (0.02 | ) | |||||||||||
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Adjusted EPS | $ | 0.52 | $ | 0.38 | $ | 0.14 | 36.8% | |||||||||
2014-2018 Restructuring Program costs | (0.14 | ) | (0.11 | ) | (0.03 | ) | ||||||||||
Net earnings from Venezuelan subsidiaries | – | 0.04 | (0.04 | ) | ||||||||||||
Income / (costs) associated with the JDE coffee business transactions(2) | – | (0.04 | ) | 0.04 | ||||||||||||
Gain on the JDE coffee business transactions(2) | – | 4.25 | (4.25 | ) | ||||||||||||
Intangible asset impairment charges | – | – | – | |||||||||||||
Gain on sale of intangible asset | – | – | – | |||||||||||||
Acquisition integration costs | – | – | – | |||||||||||||
Acquisition-related costs | – | – | – | |||||||||||||
Mark-to-market gains / (losses) from derivatives | – | – | – | |||||||||||||
Equity method investee acquisition-related and other adjustments(3) | (0.03 | ) | (0.06 | ) | 0.03 | |||||||||||
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Diluted EPS attributable to Mondelēz International | $ | 0.35 | $ | 4.46 | $ | (4.11 | ) | (92.2)% | ||||||||
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For the Three Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||||
Diluted EPS attributable to Mondelēz International | $ | 0.32 | $ | 0.29 | $ | 0.03 | 10.3% | |||||||||
2014-2018 Restructuring Program costs(2) | 0.10 | 0.11 | (0.01 | ) | ||||||||||||
Divestiture-related costs(2) | – | 0.04 | (0.04 | ) | ||||||||||||
Intangible asset impairment charge(2) | 0.02 | – | 0.02 | |||||||||||||
Net earnings from divestitures(2) | (0.01 | ) | (0.01 | ) | – | |||||||||||
Loss on divestiture(2) | – | – | – | |||||||||||||
Mark-to-market losses from derivatives(2) | 0.03 | – | 0.03 | |||||||||||||
Malware incident incremental expenses | – | – | – | |||||||||||||
Loss related to interest rate swaps(3) | – | – | – | |||||||||||||
Loss on debt extinguishment(4) | 0.01 | – | 0.01 | |||||||||||||
Equity method investee acquisition-related and | 0.01 | – | 0.01 | |||||||||||||
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Adjusted EPS | $ | 0.48 | $ | 0.43 | $ | 0.05 | 11.6% | |||||||||
Impact of unfavorable currency | 0.03 | – | 0.03 | |||||||||||||
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Adjusted EPS (constant currency) | $ | 0.51 | $ | 0.43 | $ | 0.08 | 18.6% | |||||||||
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Adjusted EPS (constant currency) Impact of unfavorable currency Adjusted EPS 2012-2014 Restructuring Program costs 2014-2018 Restructuring Program costs Net earnings from Venezuelan subsidiaries Remeasurement of net monetary assets in Venezuela Income / (costs) associated with the JDE coffee business transactions(2) Gain on the JDE coffee business transactions(2) Gain on equity method investment exchange(4) Acquisition integration costs Acquisition-related costs Intangible asset impairment charges Gain on sale of intangible asset Net earnings from divestiture(5) Loss on divestiture (5) Divestiture-related costs(6) Loss on debt extinguishment and Loss related to interest rate swaps Mark-to-market gains / (losses) from derivatives Equity method investee acquisition-related and other adjustments(3) Diluted EPS attributable to Mondelēz International Diluted EPS attributable to Mondelēz International 2014-2018 Restructuring Program costs(2) Divestiture-related costs(2) Intangible asset impairment charges(2) Acquisition integration costs(2) Net earnings from divestitures(2) Loss on divestiture(2) Mark-to-market losses from derivatives(2) Malware incident incremental expenses Loss related to interest rate swaps(3) Loss on debt extinguishment(4) Benefit from the settlement of a Cadbury tax matter (2) Gain on equity method investment exchange(6) Equity method investee acquisition-related and Adjusted EPS Impact of unfavorable currency Adjusted EPS (constant currency) For the Nine Months Ended September 30, 2016 2015 $ Change % Change $ 1.53 $ 1.20 $ 0.33 27.5% (0.06 ) – (0.06 ) $ 1.47 $ 1.20 $ 0.27 22.5% – – – (0.36 ) (0.29 ) (0.07 ) – 0.08 (0.08 ) – (0.01 ) 0.01 – 0.03 (0.03 ) – 4.21 (4.21 ) 0.03 – 0.03 – – – – – – (0.01 ) – (0.01 ) – – – – (0.02 ) 0.02 – (0.01 ) 0.01 (0.04 ) – (0.04 )
related expenses – (0.28 ) 0.28 (0.04 ) (0.01 ) (0.03 ) (0.03 ) 0.02 (0.05 ) (0.03 ) (0.06 ) 0.03 $ 0.99 $ 4.86 $ (3.87 ) (79.6)% For the Six Months Ended June 30, 2017 2016 $ Change % Change $ 0.73 $ 0.64 $ 0.09 14.1% 0.21 0.22 (0.01 ) 0.01 0.04 (0.03 ) 0.02 0.01 0.01 – 0.01 (0.01 ) (0.02 ) (0.03 ) 0.01 – – – 0.06 0.02 0.04 – – – – 0.04 (0.04 ) 0.01 – 0.01 (0.04 ) – (0.04 ) – (0.03 ) 0.03
other adjustments(5) 0.03 – 0.03 $ 1.01 $ 0.92 $ 0.09 9.8% 0.03 – 0.03 $ 1.04 $ 0.92 $ 0.12 13.0%
(1) | The tax |
(2) | See theAdjusted Operating Income table above and the related footnotes for more information. |
(3) | Refer to Note |
Refer to Note 7, Debt and Borrowing Arrangements, for more information on our loss on debt extinguishment and related expenses in connection with our debt discharge. |
(5) | Includes our proportionate share of unusual or infrequent items, such as acquisition and divestiture-related costs and restructuring program costs, recorded by our JDE and Keurig equity method |
Refer to Note 2,Divestitures and Acquisitions – Keurig Transaction, for more information on the 2016 acquisition of an interest in Keurig. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As we operate globally, we are primarily exposed to currency exchange rate, commodity price and interest rate market risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. We principally utilize derivative instruments to reduce significant, unanticipated earnings fluctuations that may arise from volatility in currency exchange rates, commodity prices and interest rates. For additional information on our derivative activity and the types of derivative instruments we use to hedge our currency exchange, commodity price and interest rate exposures, see Note 8,Financial Instruments.
Many of ournon-U.S. subsidiaries operate in functional currencies other than the U.S. dollar. Fluctuations in currency exchange rates create volatility in our reported results as we translate the balance sheets, operating results and cash flows of these subsidiaries into the U.S. dollar for consolidated reporting purposes. The translation ofnon-U.S. dollar denominated balance sheets and statements of earnings of our subsidiaries into the U.S. dollar for consolidated reporting generally results in a cumulative translation adjustment to other comprehensive income within equity. A stronger U.S. dollar relative to other functional currencies adversely affects our consolidated earnings and net assets while a weaker U.S. dollar benefits our consolidated earnings and net assets. While we hedge significant forecasted currency exchange transactions as well as certain net assets ofnon-U.S. operations and other currency impacts, we cannot fully predict or eliminate volatility arising from changes in currency exchange rates on our consolidated financial results. SeeConsolidated Results of Operations andResults of Operations by Reportable Segment underDiscussion and Analysis of Historical Results for currency exchange effects on our financial results during the ninesix months ended SeptemberJune 30, 2016.2017. For additional information on the impact of currency policies, the recent U.K. referendum to exit the E.U.,Brexit and recent currency devaluations, the deconsolidation of our Venezuelan operation and the historical remeasurement of our Venezuelan net monetary assetsvolatility on our financial condition and results of operations, also see Note 1,Basis of Presentation – Currency Translation and Highly Inflationary Accounting.
We also continually monitor the market for commodities that we use in our products. Input costs may fluctuate widely due to international demand, weather conditions, government policy and regulation and unforeseen conditions. To manage the input cost volatility, we enter into forward purchase agreements and other derivative financial instruments. We also pursue productivity and cost saving measures and take pricing actions when necessary to mitigate the impact of higher input costs on earnings.
We regularly evaluate our variable and fixed-rate debt as well as current and expected interest rates in the markets in which we raise capital. Our primary exposures include movements in U.S. Treasury rates, corporate credit spreads, London Interbank Offered Rates (“LIBOR”), Euro Interbank Offered Rate (“EURIBOR”) and commercial paper rates. We periodically use interest rate swaps and forward interest rate contracts to achieve a desired proportion of variable versus fixed rate debt based on current and projected market conditions. In addition to using interest rate derivatives to manage future interest payments, in the first quarter of 2016, we retired $1.8 billion of our long-term debt and issued $1.2 billion of lower borrowing cost debt. Our weighted-average interest rate on our total debt was 2.1% as of SeptemberJune 30, 2016 was 3.1%, down from 3.7%2017 and 2.2% as of December 31, 2015.2016. For more information on our 2017 debt activity, see Note 7,Debt and Borrowing Arrangements.
There were no significant changes in the types of derivative instruments we use to hedge our exposures between
December 31, 20152016 and SeptemberJune 30, 2016.2017. See Note 8,Financial Instruments, for more information on 2016our 2017 derivative activity. For additional information on our hedging strategies, policies and practices on an ongoing basis, also refer to our Annual Report on Form10-K for the year ended December 31, 2015.2016.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. Management, together with our CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures as of SeptemberJune 30, 2016.2017. Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2016.2017.
Changes in Internal Control Over Financial Reporting
Management, together with our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 2016.2017. During the quarter ended SeptemberJune 30, 2016,2017, due to the malware incident, we workedsupplemented or temporarily replaced some of our normal control procedures in order to maintain our existing IT and financial controls over financial reporting. Additionally, we continued to work with outsourced partners to further simplify and standardize processes and focus on scalable, transactional processes across all regions. We continued to migratemigrated some of our procurementhuman resource processes, including compensation administration, functions for a number of countries in AMEA and Europe to our shared service centers in Manila, Philippines and the EEMEA, Europe and Asia Pacific regions to an outsourced partner.U.K. Additionally, we continued to transition some of our transactional data processing as well as financial and financiallocal tax reporting for a number of countries inacross all regions (including order-to-cash in our Europe and Latin America regions) to three outsourced partners. Pursuant to our service agreements, the controls previously established around these accounting functions will be maintained by our outsourced partners or by us, and they are subject to management’s internal control testing. During the quarter, we also transitioned some of our human resources data processing performed in country and marketing procurement administration processes to our internal shared service centers in the Asia Pacific and Europe regions. Additionally, we successfully transitioned the Argentina, Uruguay and Chile entities onto our accounting system. There were no other changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 2016,2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—II – OTHER INFORMATION
Information regarding legal proceedings is available in Note 11,Commitments and Contingencies, to the condensed consolidated financial statements in this report.
There were no material changes to the risk factors disclosed in our Annual Report on Form10-K for the year ended December 31, 2015.2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Our stock repurchase activity for each of the three months in the quarter ended SeptemberJune 30, 20162017 was:
Issuer Purchases of Equity Securities | ||||||||||||||||
Total Number of | ||||||||||||||||
Total | Shares Purchased | Approximate Dollar Value | ||||||||||||||
Number | Average | as Part of Publicly | of Shares That May Yet | |||||||||||||
of Shares | Price Paid | Announced Plans | Be Purchased Under the | |||||||||||||
Period | Purchased(1) | per Share | or Programs(2) | Plans or Programs(2) | ||||||||||||
July 1-31, 2016 | 4,845 | $ | 44.44 | – | $ | 4,134,056,806 | ||||||||||
August 1-31, 2016 | 464,530 | 45.65 | 445,411 | 4,114,056,828 | ||||||||||||
September 1-30, 2016 | 10,541,973 | 43.23 | 10,523,964 | 3,659,128,984 | ||||||||||||
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For the Quarter Ended | 11,011,348 | 43.33 | 10,969,375 | |||||||||||||
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Issuer Purchases of Equity Securities | ||||||||||||||||
Total Number of | ||||||||||||||||
Total | Shares Purchased | Approximate Dollar Value | ||||||||||||||
Number | Average | as Part of Publicly | of Shares That May Yet | |||||||||||||
of Shares | Price Paid | Announced Plans | Be Purchased Under the | |||||||||||||
Period | Purchased(1) | per Share (1) | or Programs(2) | Plans or Programs(2) | ||||||||||||
April1-30, 2017 | 4,410,982 | $ | 44.44 | 4,394,421 | $ | 2,177,744,713 | ||||||||||
May1-31, 2017 | 4,885,344 | 45.34 | 4,857,898 | 1,957,484,340 | ||||||||||||
June1-30, 2017 | 4,871,543 | 45.69 | 4,864,003 | 1,735,234,924 | ||||||||||||
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For the Quarter Ended | 14,167,869 | 45.18 | 14,116,322 | |||||||||||||
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(1) | The total number of shares purchased |
(2) | Our Board of Directors authorized the repurchase of $13.7 billion of our Common Stock through December 31, 2018. Specifically, on March 12, 2013, our Board of Directors authorized the repurchase of up to the lesser of 40 million shares or $1.2 billion of our Common Stock through March 12, 2016. On August 6, 2013, our Audit Committee, with authorization delegated from our Board of Directors, increased the repurchase program capacity to $6.0 billion of Common Stock repurchases and extended the expiration date to December 31, 2016. On December 3, 2013, our Board of Directors approved an increase of $1.7 billion to the program related to a new accelerated share repurchase program, which concluded in May 2014. On July 29, 2015, our Finance Committee, with authorization delegated from our Board of Directors, approved a $6.0 billion increase that raised the repurchase program capacity to $13.7 billion and extended the program through December 31, 2018. See related information in Note 10,Stock Plans |
+ Indicates a management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MONDELĒZ INTERNATIONAL, INC. | ||
By: /s/ BRIAN T. GLADDEN | ||
Brian T. Gladden | ||
Executive Vice President and | ||
Chief Financial Officer | ||
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