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Mondelez International, Inc. 10-Q 2012
Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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 number 1-16483

 

 

LOGO

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 Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x  

Accelerated filer  ¨

   Non-accelerated filer  ¨   Smaller reporting company  ¨
  (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

At October 31, 2012, there were 1,777,088,152 shares of the registrant’s Class A common stock outstanding.

 

 

 


Mondelēz International, Inc.

Table of Contents

 

         Page No.  
PART I  –  

FINANCIAL INFORMATION

  
Item 1.  

Financial Statements (Unaudited)

  
 

Condensed Consolidated Statements of Earnings
for the Three and Nine Months Ended September 30, 2012 and 2011

     1   
 

Condensed Consolidated Statements of Comprehensive Earnings
for the Three and Nine Months Ended September 30, 2012 and 2011

     2   
 

Condensed Consolidated Balance Sheets
at September 30, 2012 and December 31, 2011

     3   
 

Condensed Consolidated Statements of Equity
for the Year Ended December 31, 2011 and the
Nine Months Ended September 30, 2012

     4   
 

Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2012 and 2011

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   
Item 2.  

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

     25   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     53   
Item 4.  

Controls and Procedures

     53   
PART II  –  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     54   
Item 1A.  

Risk Factors

     54   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     54   
Item 6.  

Exhibits

     55   
Signature        57   

On October 1, 2012, Kraft Foods Inc. changed its name to Mondelēz International, Inc. In this report, for all periods presented, “we,” “us,” “our,” and “Mondelēz International” refer to Mondelēz International, Inc. and subsidiaries (formerly Kraft Foods Inc. and subsidiaries). References to “Common Stock” refer to our Class A common stock.

Our condensed consolidated financial results as of September 30, 2012 and for all prior periods presented include the results of Kraft Foods Group, Inc., our previously owned North American grocery business. On October 1, 2012, we completed the spin-off of Kraft Foods Group, Inc. The spin-off and divestiture of Kraft Foods Group, Inc. have not yet been reflected in our historical results and will be presented as a discontinued operation beginning in our fourth quarter which ends on December 31, 2012. See Notes 1 and 2 for additional information on our reporting Basis of Presentation and the Spin-Off Transaction.

 

i


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

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,  
     2012      2011     2012      2011  

Net revenues

   $ 12,909       $ 13,226      $ 39,288       $ 39,677   

Cost of sales

     8,191         8,611        25,033         25,555   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     4,718         4,615        14,255         14,122   

Selling, general and administrative expenses

     2,955         2,866        8,631         8,807   

Asset impairment and exit costs

     57         (7     239         (7

Amortization of intangibles

     54         58        163         172   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income

     1,652         1,698        5,222         5,150   

Interest and other expense, net

     864         425        1,846         1,312   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings before income taxes

     788         1,273        3,376         3,838   

Provision for income taxes

     129         346        864         1,133   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings

     659         927        2,512         2,705   

Noncontrolling interest

     7         5        18         8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings attributable to Mondelēz International

   $ 652       $ 922      $ 2,494       $ 2,697   
  

 

 

    

 

 

   

 

 

    

 

 

 

Per share data:

          

Basic earnings per share attributable to Mondelēz International

   $ 0.37       $ 0.52      $ 1.40       $ 1.53   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per share attributable to Mondelēz International

   $ 0.36       $ 0.52      $ 1.40       $ 1.52   
  

 

 

    

 

 

   

 

 

    

 

 

 

Dividends declared

   $ 0.29       $ 0.29      $ 0.87       $ 0.87   

See accompanying notes to the condensed consolidated financial statements.

 

1


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,  
     2012     2011     2012     2011  

Net earnings

   $ 659      $ 927      $ 2,512      $ 2,705   

Other comprehensive earnings / (losses):

        

Currency translation adjustment:

        

Translation adjustment

     726        (2,446     528        (722

Tax (expense) / benefit

     17        (126     26          

Pension and other benefits:

        

Net actuarial gain / (loss) arising during period

     (1,583     (6     (1,474     62   

Reclassification adjustment for losses / (gains) included in net earnings due to:

        

Amortization of experience losses and
prior service costs

     128        92        377        272   

Settlement losses

     53        31        113        67   

Tax (expense) / benefit

     519        (53     379        (152

Derivatives accounted for as hedges:

        

Net derivative losses

     (10     (590     (366     (742

Reclassification adjustment for losses / (gains) included in net earnings

     446        (9     589        (50

Tax (expense) / benefit

     (164     233        (93     291   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive earnings / (losses)

     132        (2,874     79        (974

Comprehensive earnings / (losses)

     791        (1,947     2,591        1,731   

less: Comprehensive earnings / (losses)
attributable to noncontrolling interests

     14        (10     19        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings / (losses) attributable to Mondelēz International

   $ 777      $ (1,937   $ 2,572      $ 1,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

2


Mondelēz International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of U.S. dollars, except share data)

(Unaudited)

 

                                     
             September 30,                 December 31,      
     2012     2011  

ASSETS

    

Cash and cash equivalents

   $ 3,873      $ 1,974   

Receivables (net of allowances of $136 in 2012 and $143 in 2011)

     7,110        6,361   

Inventories, net

     6,429        5,706   

Deferred income taxes

     1,074        912   

Other current assets

     1,031        1,249   
  

 

 

   

 

 

 

Total current assets

     19,517        16,202   

Property, plant and equipment, net

     14,049        13,813   

Goodwill

     37,531        37,297   

Intangible assets, net

     25,196        25,186   

Prepaid pension assets

     33        31   

Other assets

     1,453        1,308   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 97,779      $ 93,837   
  

 

 

   

 

 

 

LIABILITIES

    

Short-term borrowings

   $ 263      $ 182   

Current portion of long-term debt

     1,920        3,654   

Accounts payable

     5,499        5,525   

Accrued marketing

     2,716        2,863   

Accrued employment costs

     1,212        1,365   

Other current liabilities

     4,235        4,856   
  

 

 

   

 

 

 

Total current liabilities

     15,845        18,445   

Long-term debt

     27,323        23,095   

Deferred income taxes

     6,749        6,738   

Accrued pension costs

     4,107        3,597   

Accrued postretirement health care costs

     3,751        3,238   

Other liabilities

     3,326        3,396   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     61,101        58,509   

Commitments and Contingencies (Note 12)

    

EQUITY

    

Common Stock, no par value (1,996,537,778 shares
issued in 2012 and 2011)

              

Additional paid-in capital

     31,381        31,318   

Retained earnings

     18,921        18,012   

Accumulated other comprehensive losses

     (6,559     (6,637

Treasury stock, at cost

     (7,192     (7,476
  

 

 

   

 

 

 

Total Mondelēz International Shareholders’ Equity

     36,551        35,217   

Noncontrolling interest

     127        111   
  

 

 

   

 

 

 

TOTAL EQUITY

     36,678        35,328   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 97,779      $ 93,837   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


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, 2011

   $       $ 31,231       $ 16,619       $ (3,890    $ (8,126    $ 108       $ 35,942   

Comprehensive earnings / (losses):

                    

Net earnings

                     3,527                         20         3,547   

Other comprehensive losses, net of income taxes

                             (2,747              (10      (2,757

Exercise of stock options and issuance of other stock awards

             100         (86              650                 664   

Cash dividends declared ($1.16 per share)

                     (2,048                              (2,048

Dividends paid on noncontrolling interest and other activities

             (13                              (7      (20
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at December 31, 2011

   $       $ 31,318       $ 18,012       $ (6,637    $ (7,476    $ 111       $ 35,328   

Comprehensive earnings / (losses):

                    

Net earnings

                     2,494                         18         2,512   

Other comprehensive earnings, net of income taxes

                             78                 1         79   

Exercise of stock options and issuance of other stock awards

             63         (40              284                 307   

Cash dividends declared ($0.87 per share)

                     (1,545                              (1,545

Dividends paid on noncontrolling interest and other activities

                                             (3      (3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at September 30, 2012

   $       $ 31,381       $ 18,921       $ (6,559    $ (7,192    $ 127       $ 36,678   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

4


Mondelēz International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of U.S. dollars)

(Unaudited)

 

                                     
     For the Nine Months Ended  
     September 30,  
     2012     2011  

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES

    

Net earnings

   $ 2,512      $ 2,705   

Adjustments to reconcile net earnings to operating cash flows:

    

Depreciation and amortization

     1,065        1,117   

Stock-based compensation expense

     135        137   

Deferred income tax provision / (benefit)

     461        (429

Unrealized loss on discontinued cash flow hedges

     436          

Asset impairments

     94          

Other non-cash expense, net

     98        6   

Change in assets and liabilities:

    

Receivables, net

     (699     (437

Inventories, net

     (712     (1,188

Accounts payable

     (104     (61

Other current assets

     149        (278

Other current liabilities

     (1,284     489   

Change in pension and postretirement assets and liabilities, net

     24        (396
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,175        1,665   
  

 

 

   

 

 

 

CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES

    

Capital expenditures

     (1,229     (1,281

Proceeds from sale of property, plant and equipment and other

     100        37   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,129     (1,244
  

 

 

   

 

 

 

CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES

    

Net issuance of short-term borrowings

     81        145   

Long-term debt proceeds

     6,767        35   

Long-term debt repaid

     (4,336     (10

Dividends paid

     (1,542     (1,535

Other

     (142     522   
  

 

 

   

 

 

 

Net cash provided by / (used in) financing activities

     828        (843
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     25        (83
  

 

 

   

 

 

 

Cash and cash equivalents:

    

Increase / (decrease)

     1,899        (505

Balance at beginning of period

     1,974        2,481   
  

 

 

   

 

 

 

Balance at end of period

   $ 3,873      $ 1,976   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5


Mondelēz International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.  Basis of Presentation

On October 1, 2012, Kraft Foods Inc. changed its name to Mondelēz International, Inc. The condensed consolidated financial statements include Mondelēz International as well as our wholly owned and majority-owned subsidiaries. Our consolidated financial results as of September 30, 2012, and for all prior periods presented, include the results of Kraft Foods Group, Inc., our North American grocery business. The spin-off and divestiture of Kraft Foods Group, Inc. on October 1, 2012 have not yet been reflected in our historical results. See Note 2, Spin-Off Transaction, for additional information. Beginning in the fourth quarter which ends on December 31, 2012, we will present the historical results of Kraft Foods Group, Inc. as a discontinued operation and remove it from our results from continuing operations for all presented periods.

Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in 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 financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results.

The condensed consolidated balance sheet data as of December 31, 2011 were derived 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 in our Annual Report on Form 10-K for the year ended December 31, 2011.

The majority of our operating subsidiaries report results as of the last Saturday of the period. A portion of our international operating subsidiaries report results as of the last calendar day of the period.

In the second quarter of 2011, we changed the consolidation date for certain operations of our Europe segment and in the Latin America, Central and Eastern Europe (“CEE”) and Middle East and Africa (“MEA”) regions within our Developing Markets segment. Previously, these operations primarily reported results two weeks prior to the end of the period. Subsequent to the 2011 changes, our Europe segment reports results as of the last Saturday of each period. Certain operations within our Developing Markets segment now report results as of the last calendar day of the period or the last Saturday of the period. These changes resulted in a favorable impact of approximately $360 million on net revenues and approximately $50 million on operating income in the prior-year second quarter as well as in the nine months ended September 30, 2011.

New Accounting Pronouncements:

In July 2012, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update to simplify how entities test indefinite-lived intangible assets for impairment. An entity now has the option to first assess qualitative factors to determine whether it is “more likely than not” that the asset may be impaired. If, after assessing the totality of events and circumstances, impairment is determined to be not likely, then performing the quantitative two-step impairment test would not be required. The update is effective for annual indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We plan to adopt the accounting standard update in the quarter ended December 31, 2012 ahead of our annual intangible asset impairment testing. The new guidance will not have an impact on our financial results but is expected to simplify the indefinite-lived intangible asset testing we do on an annual basis.

Subsequent Events:

We evaluated subsequent events and have reflected accounting and disclosure requirements related to material subsequent events in our financial statements and related notes.

 

6


Note 2.  Spin-Off Transaction

On October 1, 2012 (the “Distribution Date”), we completed the spin-off of our North American grocery business, Kraft Foods Group, Inc. (“Kraft Foods Group” or the “North American Grocery Business”), to our shareholders (the “Spin-Off”). We continue to hold our global snacks business (the “Global Snacks Business”). On October 1, 2012, each of our shareholders of record as of the close of business on September 19, 2012 (“the Record Date”), received one share of Kraft Foods Group common stock for every three shares of our Common Stock held as of the Record Date. The distribution was structured to be tax free to our U.S. shareholders for U.S. federal income tax purposes.

Kraft Foods Group is now an independent public company trading on The NASDAQ Global Select Market under the symbol “KRFT.” After the Spin-Off, we do not beneficially own any shares of Kraft Foods Group common stock and beginning October 1, 2012, we will no longer consolidate Kraft Foods Group within our financial results or reflect the financial results of Kraft Foods Group within our continuing results of operations.

Our historical results include one-time Spin-Off transaction, transition and financing and related costs (“Spin-Off Costs”) we have incurred to date. We recorded Spin-Off Costs of $683 million in the three months and $984 million in the nine months ended September 30, 2012. We also recorded $46 million of Spin-Off Costs in the fourth quarter of 2011. We expect to reflect all one-time Spin-Off Costs within our reported results. During 2012, we incurred the Spin-Off costs within pre-tax earnings as follows:

 

                                     
     For the Three      For the Nine  
   Months Ended      Months Ended  
   September 30,      September 30,  
   2012      2012  
     (in millions)  

Selling, general and administrative expenses

   $ 226       $ 365   

Interest and other expense, net

     457         619   
  

 

 

    

 

 

 

Spin-Off Costs

   $ 683       $ 984   
  

 

 

    

 

 

 

On October 1, 2012, in connection with the completion of the Spin-Off, we also changed our name from Kraft Foods Inc. to Mondelēz International, Inc. On October 2, 2012, our shares began to trade on The NASDAQ Global Select Market, under the symbol “MDLZ.” Mondelēz International is now a standalone global snacks company and a world leader in chocolate, biscuits, gum, candy, coffee and powdered beverages.

Note 3.  Inventories

Inventories at September 30, 2012 and December 31, 2011 were:

 

                                     
     September 30,
2012
     December 31,
2011
 
     (in millions)  

Raw materials

   $ 2,024       $ 1,800   

Finished product

     4,405         3,906   
  

 

 

    

 

 

 

Inventories, net

   $ 6,429       $ 5,706   
  

 

 

    

 

 

 

 

7


Note 4.  Property, Plant and Equipment

Property, plant and equipment at September 30, 2012 and December 31, 2011 were:

 

                                     
     September 30,
2012
    December 31,
2011
 
     (in millions)  

Land and land improvements

   $ 764      $ 768   

Buildings and building improvements

     5,118        4,997   

Machinery and equipment

     17,641        16,934   

Construction in progress

     1,365        1,233   
  

 

 

   

 

 

 
     24,888        23,932   

Accumulated depreciation

     (10,839     (10,119
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 14,049      $ 13,813   
  

 

 

   

 

 

 

Note 5.  Goodwill and Intangible Assets

Goodwill by reportable segment at September 30, 2012 and December 31, 2011 was:

 

                                     
     September 30,      December 31,  
     2012      2011  
     (in millions)  

North America:

     

U.S. Beverages

   $ 1,290       $ 1,290   

U.S. Cheese

     3,000         3,000   

U.S. Convenient Meals

     985         985   

U.S. Grocery

     3,046         3,046   

U.S. Snacks

     9,125         9,125   

Canada & N.A. Foodservice

     3,488         3,385   

Europe

     9,085         9,003   

Developing Markets

     7,512         7,463   
  

 

 

    

 

 

 

Goodwill

   $ 37,531       $ 37,297   
  

 

 

    

 

 

 

Intangible assets at September 30, 2012 and December 31, 2011 were:

 

                                     
     September 30,     December 31,  
     2012     2011  
     (in millions)  

Non-amortizable intangible assets

   $ 23,022      $ 22,859   

Amortizable intangible assets

     2,863        2,853   
  

 

 

   

 

 

 
     25,885        25,712   

Accumulated amortization

     (689     (526
  

 

 

   

 

 

 

Intangible assets, net

   $ 25,196      $ 25,186   
  

 

 

   

 

 

 

Non-amortizable intangible assets consist substantially of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of trademark licenses, customer-related intangibles, process technology and non-compete agreements. At September 30, 2012, the weighted-average life of our amortizable intangible assets was 13.2 years.

Amortization expense was $54 million for the three months and $163 million for the nine months ended September 30, 2012 and $58 million for the three months and $172 million for the nine months ended September 30, 2011. We currently estimate annual amortization expense for each of the next five years to be approximately $216 million.

 

8


The movements in goodwill and intangible assets were:

 

                                     
            Intangible  
     Goodwill      Assets, at Cost  
     (in millions)  

Balance at January 1, 2012

   $ 37,297       $ 25,712   

Changes due to:

     

Foreign currency

     234         187   

Asset impairments

             (20

Other

             6   
  

 

 

    

 

 

 

Balance at September 30, 2012

   $ 37,531       $ 25,885   
  

 

 

    

 

 

 

During the three months ended March 31, 2012, we recorded an impairment charge of $20 million within asset impairment and exit costs for the impairment of an intangible asset in Japan.

Note 6.  2012-2014 Restructuring Program

On March 14, 2012, our Board of Directors approved $1.1 billion of restructuring and related implementation costs (“2012-2014 Restructuring Program”) reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the restructuring and implementation activities is to ensure that both Kraft Foods Group and Mondelēz International were each set up to operate efficiently and execute their business strategies upon separation of the companies and in the future. On October 23, 2012, our Board of Directors approved $400 million of additional restructuring and related implementation programs within Mondelēz International’s U.S. and European operations, totaling $1.5 billion of total expected 2012-2014 Restructuring Program costs.

Of the $1.5 billion of 2012-2014 Restructuring Program costs, Kraft Foods Group has or expects to incur approximately $575 million of restructuring and implementation costs. As such, these costs will not be included within our results of continuing operations in future periods. We will retain approximately $925 million of the 2012-2014 Restructuring Program.

Restructuring Costs:

On a consolidated historical basis, we recorded restructuring charges of $57 million in the three months and $218 million in the nine months ended September 30, 2012 within asset impairment and exit costs. We spent $19 million in the three months and $61 million in the nine months ended September 30, 2012 in cash severance and related costs. We also recognized non-cash pension plan settlement losses (see Note 10, Pension, Postretirement and Postemployment Benefit Plans) and non-cash asset write-downs (including accelerated depreciation and asset impairments) totaling $38 million in the three months and $112 million in the nine months ended September 30, 2012. At September 30, 2012, a $45 million restructuring liability was recorded within other current liabilities.

 

                                                        
     Severance
and related
costs
    Asset
Write-downs
    Total  
     (in millions)  

Liability balance, January 1, 2012

   $      $      $   

Charges

     143        75        218   

Cash spent

     (61            (61

Non-cash settlements

     (37     (75     (112
  

 

 

   

 

 

   

 

 

 

Liability balance, September 30, 2012

   $ 45      $      $ 45   
  

 

 

   

 

 

   

 

 

 

 

9


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 greater transparency to the total costs of our 2012-2014 Restructuring Program. On a consolidated historical basis, we recorded implementation costs of $12 million in the three months and $20 million in the nine months ended September 30, 2012 within cost of sales and selling, general and administrative expense across our North American segments. These costs primarily include reorganization costs related to our sales function and the optimization of information systems infrastructure.

Restructuring and Implementation Costs by Segment:

During the three and nine months ended September 30, 2012, we recorded restructuring and implementation costs within our consolidated segment operating income as follows:

 

                                                        
     For the Three Months Ended September 30, 2012  
     Restructuring      Implementation         
     Costs      Costs      Total  
     (in millions)  

North America:

        

U.S. Beverages

   $ 19       $ 5       $ 24   

U.S. Cheese

     10         1         11   

U.S. Convenient Meals

     5         1         6   

U.S. Grocery

     6         1         7   

U.S. Snacks

     14         3         17   

Canada & N.A. Foodservice

     1         1         2   

Europe

                       

Developing Markets

     2                 2   
  

 

 

    

 

 

    

 

 

 

Total

   $ 57       $ 12       $ 69   
  

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended September 30, 2012  
     Restructuring      Implementation         
     Costs      Costs      Total  
     (in millions)  

North America:

        

U.S. Beverages

   $ 35       $ 6       $ 41   

U.S. Cheese

     54         2         56   

U.S. Convenient Meals

     16         2         18   

U.S. Grocery

     22         2         24   

U.S. Snacks

     57         6         63   

Canada & N.A. Foodservice

     27         2         29   

Europe

                       

Developing Markets

     7                 7   
  

 

 

    

 

 

    

 

 

 

Total

   $ 218       $ 20       $ 238   
  

 

 

    

 

 

    

 

 

 

 

10


Note 7.  Integration Program

As a result of our combination with Cadbury Limited (formerly, Cadbury plc or “Cadbury”) in 2010, we launched an integration program to realize expected annual cost savings of approximately $800 million by the end of 2013 and revenue synergies from investments in distribution, marketing and product development. In order to achieve these cost savings and synergies and combine and integrate the two businesses, we expect to incur total integration charges of approximately $1.5 billion through the end of 2013 (the “Integration Program”).

Integration Program costs include the costs associated with combining the Cadbury operations within our Global Snacks Business and are separate from the costs related to the acquisition. Since the inception of the Integration Program, we have incurred approximately $1.3 billion of the estimated $1.5 billion total integration charges.

Changes in the Integration Program liability during the nine months ended September 30, 2012 were (in millions):

 

                  
               2012             

Balance at January 1, 2012

   $ 346   

Charges

     64   

Cash spent

     (184

Currency / other

     (4
  

 

 

 

Balance at September 30, 2012

   $ 222   
  

 

 

 

We recorded Integration Program charges of $29 million during the three months and $107 million during the nine months ended September 30, 2012. During the three months ended September 30, 2012, we also reversed $43 million of Integration Program charges previously accrued in the fourth quarter of 2010 primarily related to planned and announced position eliminations that did not occur within our Europe segment. The reversal was based on final negotiations with local workers councils, the majority of which were concluded in April 2012. In 2011, we recorded Integration Program charges of $112 million for the three months and $352 million for the nine months ended September 30, 2011. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Europe and Developing Markets segments, as well as within general corporate expenses.

Note 8.  Debt

Borrowing Arrangements:

On March 8, 2012, in connection with the Spin-Off, Kraft Foods Group entered into a $4.0 billion 364-day senior unsecured revolving credit facility that was set to expire on March 7, 2013. On July 18, 2012, we reduced the unused commitment under the facility to $1.4 billion of borrowing capacity. On September 24, 2012, after substantially completing the Kraft Foods Group Spin-Off financing plans, Kraft Foods Group paid the accrued facility fees and terminated the revolving credit agreement.

On May 18, 2012, in connection with the Spin-Off, Kraft Foods Group entered into a $3.0 billion five-year senior unsecured revolving credit facility that expires on May 17, 2017. Borrowings under the facility bear interest at a variable rate based on the London Inter-Bank Offered Rate (“LIBOR”) or a defined base rate, at the election of Kraft Foods Group plus an applicable margin based on certain debt credit ratings before or after the Spin-Off. Prior to the Spin-Off, we guaranteed any borrowings against this facility. As of September 30, 2012 and through the Spin-Off date, no amounts were drawn on this credit facility and as of the Spin-Off date, we no longer are a guarantor on the credit facility.

Long-Term Debt:

On January 10, 2012, we issued $800 million of floating rate notes which bear interest equal to the three-month LIBOR plus 0.875%. We received net proceeds of $798.8 million from the issuance. The notes were set to mature on July 10, 2013 or subject to a mandatory redemption tied to the public announcement of the Record Date for the Spin-Off. After announcing the Record Date, on September 24, 2012, the notes were redeemed at a redemption price equal to 100% of the aggregate principal amount of the notes, or $800 million, plus accrued and unpaid interest of $2 million.

 

11


On June 1, 2012, $900 million of our 6.25% notes matured and were repaid primarily from commercial paper borrowings which were subsequently repaid from proceeds received from the Kraft Foods Group $6.0 billion notes issued on June 4, 2012.

On June 4, 2012, Kraft Foods Group issued $6.0 billion of senior unsecured notes at a weighted-average effective rate of 3.938%. The net proceeds of $5.9 billion were used to pay $3.6 billion of outstanding commercial paper borrowings and we expect to use the remaining cash proceeds to pay down additional debt over time. Kraft Foods Group also recorded approximately $260 million of deferred financing costs which will be recognized in interest expense over the life of the notes. The general terms of the $6.0 billion notes are:

 

   

$1 billion notes due June 4, 2015 at a fixed, annual interest rate of 1.625%. Interest is payable semiannually beginning December 4, 2012.

   

$1 billion notes due June 5, 2017 at a fixed, annual interest rate of 2.250%. Interest is payable semiannually beginning December 5, 2012.

   

$2 billion notes due June 6, 2022 at a fixed, annual interest rate of 3.500%. Interest is payable semiannually beginning December 6, 2012.

   

$2 billion notes due June 4, 2042 at a fixed, annual interest rate of 5.000%. Interest is payable semiannually beginning December 4, 2012.

On July 18, 2012, we completed a debt exchange in which $3.6 billion of our debt was exchanged for debt of Kraft Foods Group in connection with our Spin-Off capitalization plan. No cash was generated from the exchange. The general terms of the $3.6 billion notes issued by Kraft Foods Group are:

 

   

$1,035 million notes due August 23, 2018 at a fixed, annual interest rate of 6.125%. Interest is payable semiannually beginning August 23, 2012. (This debt was issued in exchange for $596 million of our 6.125% Notes due in February 2018 and $439 million of our 6.125% Notes due in August 2018).

   

$900 million notes due February 10, 2020 at a fixed, annual interest rate of 5.375%. Interest is payable semiannually beginning August 10, 2012. (This debt was issued in exchange for an approximately equal principal amount of our 5.375% Notes due in February 2020).

   

$878 million notes due January 26, 2039 at a fixed, annual interest rate of 6.875%. Interest is payable semiannually beginning July 26, 2012. (This debt was issued in exchange for approximately $233 million of our 6.875% Notes due in January 2039, approximately $290 million of our 6.875% Notes due in February 2038, approximately $185 million of our 7.000% Notes due in August 2037 and approximately $170 million of our 6.500% Notes due in November 2031).

   

$787 million notes due February 9, 2040 at a fixed, annual interest rate of 6.500%. Interest is payable semiannually beginning August 9, 2012. (This debt was issued in exchange for an approximately equal principal amount of our 6.500% Notes due in 2040).

On August 30, 2012, we extended the term of a $150 million Canadian dollar loan (or $152 million in U.S. dollars as of September 30, 2012) to October 2, 2012 and paid off the loan on October 2, 2012.

On October 1, 2012, in connection with finalizing the Spin-Off and related debt capitalization plan for Kraft Foods Group, approximately $400 million of our 7.55% senior unsecured notes was retained by Kraft Foods Group. No cash was generated from the transaction which will also be reflected in our consolidated financial statements in the fourth quarter ended December 31, 2012.

Fair Value of Our Debt:

The fair value of our short-term borrowings at September 30, 2012 and December 31, 2011 reflects current market interest rates and approximates the amounts we have recorded on our condensed consolidated balance sheet. The fair value of our long-term debt was determined using quoted prices in active markets for the publicly traded debt obligations (Level 1 valuation data). At September 30, 2012, the aggregate fair value of our total debt was $34,789 million and its carrying value was $29,506 million. At December 31, 2011, the aggregate fair value of our total debt was $31,113 million and its carrying value was $26,931 million.

 

12


Note 9.  Stock Plans

Restricted and Deferred Stock:

In January 2012, in connection with our long-term incentive plan, we granted 1.3 million shares of restricted and deferred stock at a market value of $37.63 per share. In February 2012, as part of our annual equity program, we issued 2.2 million shares of restricted and deferred stock to eligible employees at a market value of $38.00 per share. During the nine months ended September 30, 2012, we issued 0.8 million of additional restricted and deferred shares with a weighted-average market value of $31.66 per share primarily in connection with our 2009 long-term incentive plan performance based awards which were issued and vested during the first quarter of 2012. In aggregate, we issued 4.3 million restricted and deferred shares during the nine months ended September 30, 2012 with a weighted-average market value of $36.69 per share. During the nine months ended September 30, 2012, 4.9 million shares of restricted and deferred stock vested at a market value of $186 million.

Stock Options:

In February 2012, as part of our annual equity program, we granted 12.8 million stock options to eligible employees at an exercise price of $38.00 per share. During the nine months ended September 30, 2012, we issued 0.7 million of additional stock options with a weighted-average exercise price of $38.13 per share. In aggregate, we granted 13.5 million stock options during the nine months ended September 30, 2012 at a weighted-average exercise price of $38.00 per share at the time of grant. During the nine months ended September 30, 2012, there were 7.2 million stock options exercised with a total intrinsic value of $84 million.

In connection with the Spin-Off and separation of Kraft Foods Group, restricted and deferred stock awards (excluding long-term incentive plan awards) and employee stock option awards were modified and converted into new equity awards using a formula designed to preserve the fair value of the awards immediately prior to the Spin-Off. On October 1, 2012, holders of restricted and deferred stock awards received one share of Kraft Foods Group restricted or deferred shares for every three restricted or deferred shares they held prior to the Record Date. Holders of stock options awards received Mondelēz International stock options to purchase the same number of shares of Mondelēz International common stock at a reduced exercise price and one new Kraft Foods Group stock option for every three Mondelēz International stock options to preserve the fair value of the overall awards granted. Long-term incentive plan awards held by Kraft Foods Group employees were converted to Kraft Foods Group awards. Long-term incentive plan awards held by Mondelēz International employees will remain Mondelēz International awards. The underlying performance conditions for the Mondelēz International long-term incentive plan awards were modified and are consistent with our original performance targets adjusted to reflect our standalone business.

Note 10.  Pension, Postretirement and Postemployment Benefit Plans

Pension Plans

Components of Net Periodic Pension Cost:

Net periodic pension cost for the three and nine months ended September 30, 2012 and 2011 consisted of:

 

                                                                           
     U.S. Plans     Non-U.S. Plans  
     For the Three Months Ended     For the Three Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (in millions)  

Service cost

   $ 42      $ 36      $ 41      $ 39   

Interest cost

     85        91        108        116   

Expected return on plan assets

     (113     (123     (126     (135

Amortization:

        

Net loss from experience differences

     83        57        31        26   

Prior service cost

     1        2        1          

Settlement losses(1)

     53        31               7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 151      $ 94      $ 55      $ 53   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

13


                                                                           
     U.S. Plans     Non-U.S. Plans  
     For the Nine Months Ended     For the Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (in millions)  

Service cost

   $ 123      $ 109      $ 131      $ 129   

Interest cost

     261        273        327        347   

Expected return on plan assets

     (341     (371     (383     (405

Amortization:

        

Net loss from experience differences

     237        169        99        76   

Prior service cost

     5        5        2        1   

Settlement losses(1)

     113        67               7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 398      $ 252      $ 176      $ 155   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Includes approximately $19 million for the three months and $38 million for the nine months ended September 30, 2012 of settlement losses related to employees who elected to take lump-sum payments in connection with our 2012-2014 Restructuring Program. These costs are reflected within asset impairments and exit costs on the condensed consolidated statement of earnings and within the charges related to severance and related costs in Note 6, 2012-2014 Restructuring Program.

Employer Contributions:

We make contributions to our U.S. and non-U.S. pension plans primarily to the extent that they are tax deductible and do not generate an excise tax liability. During the three months ended September 30, 2012, we contributed $325 million to our U.S. plans, including $315 million of voluntary contributions made ahead of the Spin-Off, and $65 million to our non-U.S. Plans. During the first nine months of 2012, we contributed $347 million to our U.S. plans and $247 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $8 million to our U.S. plans and approximately $178 million to our non-U.S. plans during the remainder of 2012. However, our actual contributions may differ 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 postretirement health care costs during the three and nine months ended September 30, 2012 and 2011 consisted of:

 

                                                                           
     For the Three Months Ended     For the Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Service cost

   $ 11      $ 10      $ 30      $ 28   

Interest cost

     38        42        117        125   

Amortization:

        

Net loss from experience differences

     22        15        62        46   

Prior service credit

     (10     (8     (28     (24

Other(1)

     23               23          
  

 

 

   

 

 

   

 

 

   

 

 

 

Net postretirement health care costs

   $ 84      $ 59      $ 204      $ 175   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) In August 2012, we recorded a $23 million unfunded U.S. postretirement plan obligation related to long-term disability benefits.

 

14


Postemployment Benefit Plans

Net postemployment costs during the three and nine months ended September 30, 2012 and 2011 consisted of:

 

                                                                           
     For the Three Months  Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2012     2011      2012     2011  
     (in millions)      (in millions)  

Service cost

   $ 3      $ 2       $ 10      $ 7   

Interest cost

     2        2         6        7   

Amortization of net gains

                           (1

Other

     (3             (3       
  

 

 

   

 

 

    

 

 

   

 

 

 

Net postemployment costs

   $ 2      $ 4       $ 13      $ 13   
  

 

 

   

 

 

    

 

 

   

 

 

 

Note 11.  Financial Instruments

See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2011 for additional information on our accounting and purpose for entering into derivatives and our overall risk management strategies.

Fair Value of Derivative Instruments:

Derivative instruments were recorded at fair value in the condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011 as follows:

 

                                                                           
     September 30, 2012      December 31, 2011  
     Asset      Liability      Asset      Liability  
     Derivatives      Derivatives      Derivatives      Derivatives  
     (in millions)  

Derivatives designated as hedging instruments:

           

Foreign exchange contracts

   $ 12       $ 22       $ 76       $ 5   

Commodity contracts

     34         31         14         27   

Interest rate contracts

                     2         519   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 46       $ 53       $ 92       $ 551   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

           

Foreign exchange contracts

   $ 12       $ 24       $ 13       $ 5   

Commodity contracts

     191         124         392         372   

Interest rate contracts

     91         495         86         51   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 294       $ 643       $ 491       $ 428   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value

   $ 340       $ 696       $ 583       $ 979   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

15


The fair value (asset / (liability)) of our derivative instruments at September 30, 2012 was determined using:

 

                                                                                                       
           Quoted Prices in               
           Active Markets      Significant     Significant  
           for Identical      Other Observable     Unobservable  
     Total     Assets      Inputs     Inputs  
     Fair Value     (Level 1)      (Level 2)     (Level 3)  
     (in millions)  

Foreign exchange contracts

   $ (22   $       $ (22   $   

Commodity contracts

     70        67         3          

Interest rate contracts

     (404             (404       
  

 

 

   

 

 

    

 

 

   

 

 

 

Total derivatives

   $ (356   $ 67       $ (423   $   
  

 

 

   

 

 

    

 

 

   

 

 

 

The fair value (asset / (liability)) of our derivative instruments at December 31, 2011 was determined using:

 

                                                                                                       
           Quoted Prices in              
           Active Markets     Significant     Significant  
           for Identical     Other Observable     Unobservable  
     Total     Assets     Inputs     Inputs  
     Fair Value     (Level 1)     (Level 2)     (Level 3)  
     (in millions)  

Foreign exchange contracts

   $ 79      $      $ 79      $   

Commodity contracts

     7        (41     48          

Interest rate contracts

     (482            (482       
  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives

   $ (396   $ (41   $ (355   $   
  

 

 

   

 

 

   

 

 

   

 

 

 

Level 2 financial assets and liabilities consist of commodity forwards and options; foreign exchange forwards and options; currency swaps; and interest rate swaps. 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. Foreign currency contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. 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.

Derivative Volume:

The net notional values of our derivative instruments as of September 30, 2012 and December 31, 2011 were:

 

                                     
     Notional Amount  
     September 30,      December 31,  
     2012      2011  
     (in millions)  

Foreign exchange contracts:

     

Intercompany loans and forecasted interest payments

   $ 3,320       $ 1,982   

Forecasted transactions

     2,246         1,181   

Commodity contracts

     1,289         1,287   

Interest rate contracts

     2,355         4,872   

Net investment hedge – euro notes

     1,093         3,694   

Net investment hedge – pound sterling notes

     1,051         1,010   

 

16


Cash Flow Hedges:

Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings / (losses) included:

 

                                                                           
     For the Three Months Ended     For the Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Accumulated gain / (loss) at beginning
of period

   $ (439   $ (56   $ (297   $ 79   

Transfer of realized losses / (gains) in
fair value to earnings

     277        (1     352        (18

Unrealized gain / (loss) in fair value

     (5     (365     (222     (483
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated gain / (loss) at September 30

   $ (167   $ (422   $ (167   $ (422
  

 

 

   

 

 

   

 

 

   

 

 

 

After-tax gains / (losses) recognized in other comprehensive earnings / (losses) were:

 

                                                                           
     For the Three Months Ended     For the Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Foreign exchange contracts –
intercompany loans

   $      $      $      $ 1   

Foreign exchange contracts –
forecasted transactions

     (12     59        (12     (14

Commodity contracts

     7        (33     (28     (37

Interest rate contracts

            (391     (182     (433
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (5   $ (365   $ (222   $ (483
  

 

 

   

 

 

   

 

 

   

 

 

 

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  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Foreign exchange contracts –
forecasted transactions

   $ 15      $ (12   $ 63      $ (45

Commodity contracts

     (14     13        (39     64   

Interest rate contracts

     (278            (376     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (277   $ 1      $ (352   $ 18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax gains / (losses) on ineffectiveness recognized in net earnings were:

 

                                                                           
     For the Three Months Ended     For the Nine Months Ended  
     September 30,     September 30,  
     2012      2011     2012     2011  
     (in millions)     (in millions)  

Foreign exchange contracts

   $       $      $      $   

Commodity contracts

     3         (2     (3     2   

Interest rate contracts

             4        (23     (2
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 3       $ 2      $ (26   $   
  

 

 

    

 

 

   

 

 

   

 

 

 

Pre-tax gains / (losses) on amounts excluded from effectiveness testing recognized in net earnings were:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2012     2011      2012     2011  
     (in millions)      (in millions)  

Foreign exchange contracts

   $      $       $      $   

Commodity contracts

     (4     4         (3     4   

Interest rate contracts

     (436             (566       
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (440   $ 4       $ (569   $ 4   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

17


During the three months ended September 30, 2012, we recognized a loss of $436 million in interest and other expense, net, related to recognizing certain forward-starting interest rate swaps in net earnings as we no longer plan to refinance the related debt in the future as a result of raising sufficient cash proceeds to repay the debt this year in connection with the Spin-Off and related financing plans. In October 2012, we paid approximately $425 million to terminate several interest rate swaps. In October 2012, we also entered into several interest rate swap agreements for a combined notional amount of $1.5 billion in debt we expect to secure in a future period and in order to hedge the related interest payments over a 10-30 year period. During the three months ended March 31, 2012, we recognized a $130 million loss in interest and other expense, net, related to certain forward-starting interest rate swaps for which the planned timing of the related forecasted debt was changed in March 2012 in connection with our Spin-Off plans and related debt capitalization plans.

We record pre-tax (i) gains or losses reclassified from accumulated other comprehensive earnings / (losses) into earnings, (ii) gains or losses on ineffectiveness, and (iii) gains or losses on amounts excluded from effectiveness testing in:

   

cost of sales for commodity contracts;

   

cost of sales for foreign exchange contracts related to forecasted transactions; and

   

interest and other expense, net for interest rate contracts and foreign exchange contracts related to intercompany loans.

We expect to transfer unrealized losses of $7 million (net of taxes) for commodity cash flow hedges, unrealized losses of $7 million (net of taxes) for foreign currency cash flow hedges and unrealized losses of $9 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Hedge Coverage:

As of September 30, 2012, we hedged transactions forecasted to impact cash flows over the following periods:

   

commodity transactions for periods not exceeding the next 14 months;

   

interest rate transactions for periods not exceeding the next 29 years and 8 months; and

   

foreign currency transactions for periods not exceeding the next 11 months.

Economic Hedges:

Pre-tax gains / (losses) recorded in net earnings for economic hedges which are not designated as hedging instruments were:

 

                                                                                              
     For the Three Months Ended     For the Nine Months Ended     Location of
Gain / (Loss)
     September 30,     September 30,     Recognized
     2012     2011     2012     2011     in Earnings
     (in millions)     (in millions)      

Foreign exchange contracts:

          

Intercompany loans and forecasted interest payments

   $ 13      $ 20      $ 64      $ (18   Interest expense

Forecasted transactions

     (8     15        10        9      Cost of sales

Forecasted transactions

            (2     (17     3      Interest expense

Interest rate contracts

     2        (3     2        (4   Interest expense

Commodity contracts

     111        40        177        195      Cost of sales
  

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ 118      $ 70      $ 236      $ 185     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

18


Hedges of Net Investments in Foreign Operations:

After-tax gains / (losses) related to hedges of net investments in foreign operations in the form of euro and pound sterling-denominated debt were:

 

                                                                                              
                  Location of
     For the Three Months Ended      For the Nine Months Ended     Gain / (Loss)
     September 30,      September 30,     Recorded in
     2012     2011      2012     2011     AOCI
     (in millions)      (in millions)      

Euro notes

   $ (10   $ 202       $ (23   $ (1   Currency Translation
Adjustment

Pound sterling notes

     (19     19         (26     1      Currency Translation
Adjustment

Note 12.  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.

On March 1, 2011, the Starbucks Coffee Company (“Starbucks”) took control of the Starbucks packaged coffee business (“Starbucks CPG business”) in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. Testimony and post-hearing briefing in the arbitration proceeding are completed, and we await the arbitrator’s decision. Kraft Foods Group remains the named party in the proceeding. Under the Separation and Distribution Agreement between Kraft Foods Group and us, Kraft Foods Group will direct any recovery awarded in the arbitration proceeding to us. We will reimburse Kraft Foods Group for any costs and expenses it incurs in connection with the arbitration.

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 and in the aggregate will have a material adverse effect on our financial results.

Third-Party Guarantees:

We have third-party guarantees primarily covering the long-term obligations of our vendors. As part of those transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At September 30, 2012, the carrying amount of our third-party guarantees on our condensed consolidated balance sheet and the maximum potential payment under these guarantees was $22 million. Substantially all of these guarantees expire at various times through 2018.

As of September 30, 2012, we and three of our indirect wholly owned subsidiaries are joint and several guarantors of $1.0 billion of indebtedness issued by an unrelated third party, Cadbury Schweppes US Finance LLC, and maturing on October 1, 2013. Following the Spin-Off, one of the guarantors of this indebtedness became an indirect wholly owned subsidiary of Kraft Foods Group. We have agreed to indemnify Kraft Foods Group pursuant to a separation and distribution agreement, in the event its subsidiary is called upon to satisfy its obligation under the guarantee.

 

19


Note 13.  Income Taxes

As of January 1, 2012, our unrecognized tax benefits were $1,538 million. If we had recognized all of these benefits, the net impact on our income tax provision would be $1,317 million. Our unrecognized tax benefits decreased $187 million during the nine months ended September 30, 2012 for decreases based on prior year tax positions and settlements with taxing authorities, partially offset by additions based on current year tax positions. As of September 30, 2012, our unrecognized tax benefits were $1,351 million. If we had recognized all of these benefits, the net impact on our income tax provision would be $1,197 million.

The amount of unrecognized tax benefits as of September 30, 2012 could decrease by approximately $35—$60 million during the next 12 months due to audit settlements and the expiration of statutes of limitations in various jurisdictions.

Our income tax returns are regularly examined by federal and various state and foreign tax authorities. In July 2012, we reached a final resolution on a federal tax audit of the 2004-2006 tax years. The U.S. federal statute of limitations remains open for all tax periods beginning with the 2007 tax year and we are currently under examination for the 2007-2009 tax years. Our income tax filings are also currently under examination by taxing authorities in various U.S. state and foreign jurisdictions. U.S. state and foreign jurisdictions have statutes of limitations generally ranging from three to five years, however these statutes are often extended by mutual agreement with the tax authorities. Years still open to examination by foreign tax authorities in major jurisdictions include (earliest open tax year in parentheses): Germany (2005), Brazil (2006), Canada (2005), France (2009), United Kingdom (2006), Australia (2008), Russia (2010) and India (2003).

Note 14.  Earnings Per Share

Basic and diluted earnings per share (“EPS”) were calculated using the following:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  
     (in millions, except per share data)  

Net earnings

   $ 659       $ 927       $ 2,512       $ 2,705   

Noncontrolling interest

     7         5         18         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to Mondelēz International

   $ 652       $ 922       $ 2,494       $ 2,697   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for basic EPS

     1,779         1,770         1,776         1,763   

Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares

     10         7         10         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for diluted EPS

     1,789         1,777         1,786         1,770   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to Mondelēz International

   $ 0.37       $ 0.52       $ 1.40       $ 1.53   

Diluted earnings per share attributable to Mondelēz International

   $ 0.36       $ 0.52       $ 1.40       $ 1.52   

We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded 8.8 million antidilutive stock options for the three months and 10.6 million antidilutive stock options for the nine months ended September 30, 2012, and we excluded 10.2 million antidilutive stock options for the three months and 13.5 million antidilutive stock options for the nine months ended September 30, 2011.

 

20


Note 15.  Segment Reporting

We manage and report operating results through three geographic units: North America, Europe and Developing Markets. We manage the operations of North America and Europe by product category and we manage the operations of Developing Markets by location. Our reportable segments reflect our organization as of September 30, 2012 and consist of U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery, U.S. Snacks, Canada & N.A. Foodservice, Europe and Developing Markets. In conjunction with the Spin-Off and divestiture of Kraft Foods Group, beginning on October 1, 2012, the following segments will no longer be included within our results of continuing operations: U.S. Beverage, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery and the Kraft Foods Group portions of the following segments: Canada & N.A. Foodservice, U.S. Snacks (Planters and Corn Nuts brands and businesses) and Developing Markets (Puerto Rico grocery operations and North American grocery export sales).

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), certain components of our U.S. pension plan cost (which is a component of cost of sales and selling, general and administrative expenses), general corporate expenses (which are a component of selling, general and administrative expenses) and amortization of intangibles for all periods presented. We exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, the gains and losses on hedging activities are recorded within 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 consisted of:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  
     (in millions)  

Net revenues:

           

North America:

           

U.S. Beverages

   $ 682       $ 681       $ 2,168       $ 2,281   

U.S. Cheese

     917         902         2,749         2,651   

U.S. Convenient Meals

     891         863         2,601         2,536   

U.S. Grocery

     898         836         2,739         2,603   

U.S. Snacks

     1,621         1,579         4,716         4,581   

Canada & N.A. Foodservice

     1,286         1,272         3,725         3,735   

Europe

     2,849         3,099         9,004         9,640   

Developing Markets

     3,765         3,994         11,586         11,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

   $ 12,909       $ 13,226       $ 39,288       $ 39,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


                                                                           
     For the Three Months Ended     For the Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (in millions)  

Earnings before income taxes:

        

Operating income:

        

North America:

        

U.S. Beverages

   $ 76      $ 101      $ 308      $ 400   

U.S. Cheese

     159        145        482        422   

U.S. Convenient Meals

     116        105        338        309   

U.S. Grocery

     284        292        974        963   

U.S. Snacks

     241        221        643        606   

Canada & N.A. Foodservice

     191        171        491        510   

Europe

     415        334        1,195        1,057   

Developing Markets

     539        582        1,608        1,505   

Unrealized gains / (losses) on hedging activities

     54        (4     101        (42

Certain U.S. pension plan costs

     (90     (57     (237     (143

General corporate expenses

     (279     (134     (518     (265

Amortization of intangibles

     (54     (58     (163     (172
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,652        1,698        5,222        5,150   

Interest and other expense, net

     864        425        1,846        1,312   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   $ 788      $ 1,273      $ 3,376      $ 3,838   
  

 

 

   

 

 

   

 

 

   

 

 

 

On March 1, 2011, Starbucks took control of the Starbucks CPG business in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The results of the Starbucks CPG Business were included primarily in our U.S. Beverage and Canada & N.A. Foodservice segments through March 1, 2011. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. Testimony and post-hearing briefing in the arbitration proceeding are completed, and we await the arbitrator’s decision. Kraft Foods Group remains the named party in the proceeding. Under the Separation and Distribution Agreement between Kraft Foods Group and us, Kraft Foods Group will direct any recovery awarded in the arbitration proceeding to us. We will reimburse Kraft Foods Group for any costs and expenses it incurs in connection with the arbitration.

In March 2012, we divested a property of a Developing Markets subsidiary located in Russia for approximately $72 million in net proceeds and recorded a $55 million pre-tax gain within selling, general and administrative expenses.

Net changes in unrealized gains / (losses) on hedging activities were favorable, primarily related to gains on foreign currency contracts and commodity hedging activity of $54 million for the three months ended September 30, 2012, and were unfavorable due to losses of $4 million for the three months ended September 30, 2011. Net changes in unrealized gains / (losses) on hedging activities were favorable, primarily related to gains on foreign currency contracts and commodity hedging activity of $101 million for the nine months ended September 30, 2012, and were unfavorable due to losses of $42 million for the nine months ended September 30, 2011.

In connection with our 2012-2014 Restructuring Program, we recorded restructuring charges of $57 million for the three months and $218 million for the nine months ended September 30, 2012. We also recorded implementation costs of $12 million for the three months and $20 million for the nine months ended September 30, 2012. We recorded the restructuring charges in operations, as a part of asset impairment and exit costs, and recorded the implementation costs in operations, as a part of cost of sales and selling, general and administrative expenses. These charges are recorded primarily within our North America geographic unit.

 

22


In September 2012, we recorded a $38 million benefit within our Europe segment related to the reversal of reserves carried over from the Cadbury acquisition in 2010 and not required.

We recorded Integration Program charges of $29 million during the three months and $107 million during the nine months ended September 30, 2012. During the three months ended September 30, 2012, we also reversed $43 million of Integration Program charges previously accrued in the fourth quarter of 2010 primarily related to planned and announced position eliminations that did not occur within our Europe segment. The reversal was based on final negotiations with local workers councils, the majority of which were concluded in April 2012. In 2011, we recorded Integration Program charges of $112 million for the three months and $352 million for the nine months ended September 30, 2011. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Europe and Developing Markets segments, as well as within general corporate expenses.

The increase in general corporate expenses for the three months ended September 30, 2012 was due primarily to $201 million of Spin-Off Costs within general corporate expenses, partially offset by lower Integration Program costs. The increase in general corporate expenses for the nine months ended September 30, 2012 was due primarily to $340 million of Spin-Off Costs within general corporate expenses, partially offset by lower Integration Program costs.

The increase in interest and other expense, net for the three months ended September 30, 2012 was due primarily to $457 million of Spin-Off Costs within interest expense. The increase in interest and other expense, net for the nine months ended September 30, 2012 was due primarily to $619 million of Spin-Off Costs within interest expense.

 

23


Net revenues by consumer sector, which includes Kraft macaroni and cheese dinners in the Convenient Meals sector and the separation of Canada & N.A. Foodservice, Europe and Developing Markets into sector components, were:

 

                                                                           
     For the Three Months Ended September 30, 2012  
     North
America
     Europe      Developing
Markets
     Total  
     (in millions)  

Biscuits

   $ 1,563       $ 575       $ 876       $ 3,014   

Confectionery

     479         1,246         1,792         3,517   

Beverages

     815         645         646         2,106   

Cheese

     1,356         250         241         1,847   

Grocery

     745         72         178         995   

Convenient Meals

     1,337         61         32         1,430   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 6,295       $ 2,849       $ 3,765       $ 12,909   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                           
     For the Three Months Ended September 30, 2011(1)  
     North
America
     Europe      Developing
Markets
     Total  
     (in millions)  

Biscuits

   $ 1,502       $ 638       $ 888       $ 3,028   

Confectionery

     500         1,286         1,948         3,734   

Beverages

     799         727         709         2,235   

Cheese

     1,319         288         249         1,856   

Grocery

     749         84         169         1,002   

Convenient Meals

     1,264         76         31         1,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 6,133       $ 3,099       $ 3,994       $ 13,226   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                           
     For the Nine Months Ended September 30, 2012  
     North
America
     Europe      Developing
Markets
     Total  
     (in millions)  

Biscuits

   $ 4,567       $ 1,808       $ 2,601       $ 8,976   

Confectionery

     1,328         3,854         5,483         10,665   

Beverages

     2,584         2,125         2,142         6,851   

Cheese

     4,005         790         743         5,538   

Grocery

     2,387         232         523         3,142   

Convenient Meals

     3,827         195         94         4,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 18,698       $ 9,004       $ 11,586       $ 39,288   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                           
     For the Nine Months Ended September 30, 2011(1)  
     North
America
     Europe      Developing
Markets
     Total  
     (in millions)  

Biscuits

   $ 4,358       $ 1,950       $ 2,492       $ 8,800   

Confectionery

     1,380         4,042         5,703         11,125   

Beverages

     2,696         2,260         2,158         7,114   

Cheese

     3,882         890         724         5,496   

Grocery

     2,403         271         477         3,151   

Convenient Meals

     3,668         227         96         3,991   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 18,387       $ 9,640       $ 11,650       $ 39,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) We reclassified certain sector net revenues for the three and nine months ended September 30, 2011 to conform to the current year presentation.

 

24


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Completed Spin-Off Transaction

On October 1, 2012 (the “Distribution Date”), we completed the spin-off of our North American grocery business, Kraft Foods Group, Inc. (“Kraft Foods Group” or the “North American Grocery Business”), to our shareholders (the “Spin-Off”). We continue to hold our global snacks business (the “Global Snacks Business.”) On October 1, 2012, each of our shareholders of record as of the close of business on September 19, 2012 (“the Record Date”) received one share of Kraft Foods Group common stock for every three shares of our Common Stock held as of the Record Date. The distribution was structured to be tax free to our U.S. shareholders for U.S. federal income tax purposes.

Kraft Foods Group is now an independent public company trading on The NASDAQ Global Select Market under the symbol “KRFT.” After the Spin-Off, we do not beneficially own any shares of Kraft Foods Group common stock.

On October 1, 2012, in connection with the completion of the Spin-Off, we also changed our name from Kraft Foods Inc. to Mondelēz International, Inc. On October 2, 2012, our shares began to trade on The NASDAQ Global Select Market, under the symbol “MDLZ.” Mondelēz International is now a standalone global snacks company and a world leader in chocolate, biscuits, gum, candy, coffee and powdered beverages.

Basis of Presentation

Our condensed consolidated financial results as of September 30, 2012 and for all prior periods presented include the results of Kraft Foods Group. The October 1, 2012 Spin-Off and divestiture of Kraft Foods Group have not yet been reflected in our historical results and will be presented as a discontinued operation beginning in our fourth quarter which ends on December 31, 2012.

Summary of Results and Other Highlights

 

   

Net revenues decreased 2.4% to $12.9 billion in the third quarter of 2012 and decreased 1.0% to $39.3 billion in the first nine months of 2012 as compared to the same period in the prior year. Our reported net revenues were significantly impacted by unfavorable foreign currency and the lapping of prior-year accounting calendar changes.

 

   

Organic Net Revenues, a non-GAAP financial measure we use to evaluate our underlying results (see our reconciliation with net revenues and a discussion of our non-GAAP financial measures later in this section), increased 2.1% to $13.5 billion in the third quarter of 2012 and increased 3.9% to $40.8 billion in the first nine months of 2012 as compared to the same period in prior year. Organic Net Revenues is on a constant currency basis and excludes the impact of accounting calendar changes and the Starbucks CPG business in the prior year.

 

   

Diluted EPS attributable to Mondelēz International decreased 30.8% to $0.36 in the third quarter of 2012 as compared to $0.52 from the same period in the prior year. Diluted EPS attributable to Mondelēz International decreased 7.9% to $1.40 in the first nine months of 2012 as compared to $1.52 from the same period in the prior year. Included within our reported results were one-time Spin-Off Costs, 2012-2014 Restructuring Program costs and Cadbury Integration Program costs.

 

   

Operating EPS, a non-GAAP financial measure we use to evaluate our underlying results (see our reconciliation with diluted EPS attributable to Mondelēz International and a discussion of our non-GAAP financial measures later in this section), increased 10.3% to $0.64 in the third quarter of 2012 as compared to the same period in the prior year. Operating EPS increased 9.3% to $1.88 in the first nine months of 2012 from the same period in the prior year. Operating EPS provides transparency of our underlying results and excludes Spin-Off Costs, 2012-2014 Restructuring Program costs and Cadbury Integration Program costs.

 

25


   

On January 10, 2012, we issued $800 million of floating rate notes maturing in 2013 that bear interest at a rate equal to the three-month London Inter-Bank Offered Rate (“LIBOR”) plus 0.875%. We received net proceeds of $798.8 million from the issuance. The notes were set to mature on July 10, 2013 or subject to a mandatory redemption tied to the public announcement of the Record Date for the Spin-Off. After announcing the Record Date, on September 24, 2012, the notes were redeemed at a redemption price equal to 100% of the aggregate principal amount of the notes, or $800 million, plus accrued and unpaid interest of $2 million.

 

   

On March 8, 2012, in connection with the Spin-Off, Kraft Foods Group entered into a $4.0 billion 364-day senior unsecured revolving credit facility that was set to expire on March 7, 2013. On July 18, 2012, we reduced the unused commitment under the facility to $1.4 billion of borrowing capacity. On September 24, 2012, after substantially completing the Kraft Foods Group Spin-Off financing plans, Kraft Foods Group paid the accrued facility fees and terminated the revolving credit agreement.

 

   

On May 18, 2012, in connection with the Spin-Off, Kraft Foods Group entered into a $3.0 billion five-year senior unsecured revolving credit facility. Prior to the Spin-Off, we guaranteed any borrowings against this facility. As of September 30, 2012 and through the Spin-Off date, no amounts were drawn on this credit facility and as of the Spin-Off date, we no longer are a guarantor on the credit facility.

 

   

On June 1, 2012, $900 million of our 6.25% notes matured and were repaid using primarily commercial paper borrowings which were subsequently repaid from proceeds received from the Kraft Foods Group $6.0 billion notes issued on June 4, 2012.

 

   

On June 4, 2012, Kraft Foods Group issued $6.0 billion of senior unsecured notes with a weighted-average effective interest rate of 3.938%. We received net proceeds of $5.9 billion which we used to pay $3.6 billion of outstanding commercial paper borrowings and expect to use the remaining cash proceeds to pay down additional debt over time.

 

   

On July 18, 2012, we completed a debt exchange in which $3.6 billion of our debt was exchanged for debt of Kraft Foods Group as part of our Spin-Off related capitalization plan. No cash was generated from the exchange. On October 1, we also transferred approximately $400 million of our 7.55% senior unsecured notes to Kraft Foods Group to complete the key elements of our debt migration plan in connection with the Spin-Off.

 

   

On September 1, 2012 and September 29, 2012, we revalued certain benefit plan obligations in connection with the Spin-Off and divestiture of Kraft Foods Group. Primarily due to lower discount rates in the current year, we recognized an increase in the U.S. and Canadian benefit plan liabilities of $1.5 billion, long-term deferred tax assets of $576 million and accumulated other comprehensive losses (net of tax) of $927 million. The revaluation of these benefit plans did not have a significant impact on our net earnings for the quarter ended September 30, 2012, but will increase benefit plan expenses in future quarters.

 

   

On October 1, 2012, we completed the Spin-Off of Kraft Foods Group in a distribution to shareholders of one share of Kraft Foods Group common stock for every three shares of our Common Stock held as of the Record Date. The distribution was structured to be tax free to our U.S. shareholders for U.S. federal income tax purposes.

 

26


Discussion and Analysis

Items Affecting Comparability of Financial Results

Spin-Off Costs

Our historical results include one-time Spin-Off transaction, transition and financing and related costs (“Spin-Off Costs”) we have incurred to date. We recorded Spin-Off Costs of $683 million, or $0.25 per diluted share, in the three months and $984 million, or $0.36 per diluted share, in the nine months ended September 30, 2012. We also recorded $46 million of Spin-Off Costs in the fourth quarter of 2011. We expect to reflect all one-time Spin-Off Costs within our reported results.

2012-2014 Restructuring Program

On March 14, 2012, our Board of Directors approved $1.1 billion of restructuring and related implementation costs (“2012-2014 Restructuring Program”) reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the restructuring and implementation activities is to ensure that both Kraft Foods Group and Mondelēz International were each set up to operate efficiently and execute their business strategies upon separation of the companies and in the future. On October 23, 2012, our Board of Directors approved $400 million of additional restructuring and related implementation programs within Mondelēz International’s U.S. and European operations, totaling $1.5 billion of total expected 2012-2014 Restructuring Program costs.

Of the $1.5 billion of 2012-2014 Restructuring Program costs, Kraft Foods Group has or expects to incur approximately $575 million of restructuring and implementation costs. As such, these costs will not be included within our results of continuing operations in future periods. We will retain approximately $925 million of the 2012-2014 Restructuring Program.

We recorded restructuring charges of $57 million, or $0.03 per diluted share, for the three months ended and $218 million, or $0.08 per diluted share, for the nine months ended September 30, 2012 within asset impairment and exit costs. We spent $19 million in the three months and $61 million in the nine months ended September 30, 2012 in cash and we also recognized non-cash severance and related costs and asset write-downs (including accelerated depreciation and asset impairments) totaling $38 million in the three months and $112 million in the nine months ended September 30, 2012. We also incurred implementation costs of $12 million for the three months and $20 million for the nine months ended September 30, 2012. The implementation costs were recorded within cost of sales and selling, general and administrative expenses. See Note 6, 2012-2014 Restructuring Program, for additional information.

Integration Program

As a result of our combination with Cadbury Limited (formerly, Cadbury plc or “Cadbury”) in 2010, we launched an integration program to realize expected annual cost savings of approximately $800 million by the end of 2013 and revenue synergies from investments in distribution, marketing and product development. In order to achieve these cost savings and synergies and combine and integrate the two businesses, we expect to incur total integration charges of approximately $1.5 billion through the end of 2013 (the “Integration Program”).

Integration Program costs include the costs associated with combining the Cadbury operations within our Global Snacks Business and are separate from the costs related to the acquisition. Since the inception of the Integration Program, we have incurred approximately $1.3 billion of the estimated $1.5 billion total integration charges.

We recorded Integration Program charges of $29 million during the three months and $107 million during the nine months ended September 30, 2012. During the three months ended September 30, 2012, we also reversed $43 million of Integration Program charges previously accrued in the fourth quarter of 2010 primarily related to planned and announced position eliminations that did not occur within our Europe segment. The reversal was based on final negotiations with local workers councils, the majority of which were concluded in April 2012. In 2011, we recorded Integration Program charges of $112 million for the three months and $352 million for the nine months ended September 30, 2011. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Europe and Developing Markets segments, as well as within general corporate expenses.

 

27


Accounting Calendar Changes in 2011

Accounting calendar changes we made in 2011 to more closely align the accounting dates for our international operating results had a favorable impact of approximately $360 million on net revenues and approximately $50 million on operating income in the prior-year second quarter and nine months ended September 30, 2011. In the second quarter of 2011, we changed the consolidation date for certain operations of our Europe segment and in the Latin America, Central and Eastern Europe (“CEE”) and Middle East and Africa (“MEA”) regions within our Developing Markets segment. Previously, these operations primarily reported results two weeks prior to the end of the period. Subsequent to the 2011 changes, our Europe segment reports results as of the last Saturday of each period. Certain operations within our Developing Markets segment now report results as of the last calendar day of the period or the last Saturday of the period.

Starbucks CPG Business

On March 1, 2011, the Starbucks Coffee Company (“Starbucks”) took control of the Starbucks packaged coffee business (“Starbucks CPG business”) in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The results of the Starbucks CPG Business were included primarily in our U.S. Beverage and Canada & N.A. Foodservice segments through March 1, 2011. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. Testimony and post-hearing briefing in the arbitration proceeding are completed, and we await the arbitrator’s decision. Kraft Foods Group remains the named party in the proceeding. Under the Separation and Distribution Agreement between Kraft Foods Group and us, Kraft Foods Group will direct any recovery awarded in the arbitration proceeding to us. We will reimburse Kraft Foods Group for any costs and expenses it incurs in connection with the arbitration.

Provision for Income Taxes

Our effective tax rate was 16.4% in the third quarter of 2012 and 25.6% for the first nine months of 2012. The 2012 effective tax rates are lower than in 2011 primarily due to a greater percentage of earnings in jurisdictions with lower tax rates. The effective tax rates for the third quarter and first nine months of 2012 were also favorably impacted by net discrete items total $116 million and $142 million, respectively. These favorable discrete items primarily resulted from the revaluation of U.K. deferred tax assets and liabilities resulting from tax legislation enacted during the quarter and net favorable tax audit settlements.

Our effective tax rate was 27.2% in the third quarter of 2011 and 29.5% in the first nine months of 2011. The 2011 third quarter effective tax rate was favorably impacted by net discrete items totaling $111 million, primarily from the revaluation of U.K. deferred tax assets and liabilities resulting from tax legislation enacted during the quarter that reduced U.K. corporate income tax rates, and the reversal of valuation allowances on certain foreign deferred tax assets that are now expected to be realized. For the first nine months of 2011, our effective tax rate was favorably impacted by net discrete items totaling $168 million, primarily from the revaluation of U.K. deferred tax assets and liabilities in the third quarter, the reversal of valuation allowances on certain foreign deferred tax assets in the third quarter and the net favorable impact from various U.S. federal, U.S. state and foreign tax audit developments year to date.

 

28


Consolidated Results of Operations

The following discussion compares our consolidated results of operations for the three and nine months ended September 30, 2012 and 2011.

Three Months Ended September 30:

 

                                                                           
     For the Three Months Ended               
     September 30,               
     2012      2011      $ change     % change  
     (in millions, except per share data)               

Net revenues

   $ 12,909       $ 13,226       $ (317     (2.4%

Operating income

   $ 1,652       $ 1,698       $ (46     (2.7%

Net earnings attributable to
Mondelēz International

   $ 652       $ 922       $ (270     (29.3%

Diluted earnings per share attributable to
Mondelēz International

   $ 0.36       $ 0.52       $ (0.16     (30.8%

Net Revenues – Net revenues decreased $317 million (2.4%) to $12,909 million in the third quarter of 2012, and Organic Net Revenues(1) increased $272 million (2.1%) to $13,498 million as follows:

 

                                     

Change in net revenues (by percentage point)

    

Higher net pricing

     1.5 pp   

Favorable volume/mix

     0.6 pp   
  

 

 

   

Total change in Organic Net Revenues(1)

     2.1  

Unfavorable foreign currency

     (4.5 )pp   
  

 

 

   

Total change in net revenues

     (2.4 )%   
  

 

 

   

 

  (1) Please see the Non-GAAP Financial Measures section at the end of this item.

Organic Net Revenues growth was driven by higher net pricing and favorable volume/mix. Higher net pricing, primarily due to pricing actions taken in prior quarters, was realized in Developing Markets, U.S. Snacks, U.S. Grocery and U.S. Convenient Meals as we increased pricing to offset higher input costs. Favorable volume/mix was realized in North America (including a favorable impact from customer inventory shifts related to the Spin-Off), due primarily to higher shipments in U.S. Cheese and U.S. Grocery as well as favorable product mix in Canada & N.A. Foodservice and U.S. Beverages, and in Europe. This was partially offset by lower shipments in certain regions within Developing Markets as well as due to higher shipments in the prior-year third quarter ahead of announced price increases that went into effect in the fourth quarter of 2011. Unfavorable foreign currency decreased net revenues by $589 million, due primarily to the strength of the U.S. dollar relative to most foreign currencies, primarily the euro, Brazilian real, Indian rupee, Russian ruble and Argentinean peso.

 

29


Operating Income – Operating income decreased $46 million (2.7%) to $1,652 million in the third quarter of 2012, and Adjusted Operating Income(1) increased $123 million (6.8%) to $1,933 million due to the following:

 

                                     
             Operating                
             Income                     Change          
     (in millions)     (percentage point)  

Operating Income for the Three Months Ended September 30, 2011

   $ 1,698     

Integration Program costs

     112        7.1 pp 
  

 

 

   

Adjusted Operating Income(1) for the
Three Months Ended September 30, 2011

   $ 1,810     

Higher net pricing

     203        11.3 pp 

Higher input costs

     (11     (0.7 )pp 

Favorable volume/mix

     22        1.2 pp 

Higher selling, general and administrative expenses

     (82     (4.6 )pp 

Unfavorable foreign currency

     (63     (3.5 )pp 

Change in unrealized gains / (losses) on hedging activities

     58        3.3 pp 

Other, net

     (4     (0.2 )pp 
  

 

 

   

 

 

 

Total change in Adjusted Operating Income(1)

   $ 123        6.8
  

 

 

   

 

 

 

Adjusted Operating Income(1) for the
Three Months Ended September 30, 2012

   $ 1,933     

Spin-Off Costs

     (226     (13.3 )pp 

2012-2014 Restructuring Program costs

     (69     (4.1 )pp 

Integration Program costs

     14        0.8 pp 
  

 

 

   

 

 

 

Operating Income for the Three Months Ended September 30, 2012

   $ 1,652        (2.7 %) 
  

 

 

   

 

 

 

 

  (1) Please see the Non-GAAP Financial Measures section at the end of this item.

Higher net pricing, which reflected primarily pricing actions taken in prior quarters, outpaced increased input costs during the quarter. The increase in input costs was driven by higher raw material costs, mostly offset by lower manufacturing costs. Favorable volume/mix was driven by gains in all reportable segments in North America, except U.S. Beverages, and was partially offset by unfavorable impacts in Developing Markets and Europe. Total selling, general and administrative expenses increased $89 million from the third quarter of 2011, including the impacts of Spin-Off Costs and 2012-2014 Restructuring Program costs incurred in the third quarter of 2012, which were essentially offset by benefits from a favorable impact of foreign currency on expenses and lower Integration Program costs (including the reversal of previously accrued Integration Program charges primarily related to planned and announced position eliminations that did not occur). Excluding these factors, selling, general and administrative expenses increased $82 million from the third quarter of 2011, driven primarily by higher advertising and consumer promotion costs in North America, partially offset by the reversal of reserves not required carried over from the Cadbury acquisition in 2010. Unfavorable foreign currency decreased operating income by $63 million, due primarily to the strength of the U.S. dollar relative to most foreign currencies, primarily the euro, Brazilian real, Indian rupee, Argentinean peso and Russian ruble. The change in unrealized gains / (losses) on hedging activities increased operating income by $58 million, as we recognized gains of $54 million in the third quarter of 2012, versus losses of $4 million in the third quarter of 2011.

As a result of the net effect of these drivers, operating income margin was flat, at 12.8% in both the third quarter of 2012 and the third quarter of 2011. The margin was unchanged as higher gross margin, reflecting the impact of pricing actions taken in prior quarters net of increased input costs and the favorable change in unrealized gains on hedging activities, as well as lower Integration Program costs and overhead leverage were offset by the impact of 2012-2014 Restructuring Program costs and Spin-Off Costs incurred in the third quarter of 2012.

 

30


Net Earnings and Diluted Earnings per Share Attributable to Mondelēz International – Net earnings attributable to Mondelēz International of $652 million decreased by $270 million (29.3%) in the third quarter of 2012. Diluted EPS attributable to Mondelēz International was $0.36 in the third quarter of 2012, down $0.16 (30.8%) from $0.52 in the third quarter of 2011. Operating EPS(1) was $0.64 in the third quarter of 2012, up $0.06 (10.3%) from $0.58 in the third quarter of 2011. These changes, shown net of tax below, were due to the following:

 

                  
     Diluted EPS  

Diluted EPS Attributable to Mondelēz International for the
Three Months Ended September 30, 2011

   $ 0.52   

Integration Program costs

     0.06   
  

 

 

 

Operating EPS(1) for the Three Months Ended September 30, 2011

   $ 0.58   

Increases in operations

     0.05   

Change in unrealized gains / (losses) on hedging activities

     0.02   

Lower interest and other expense, net(2)

     0.01   

Unfavorable foreign currency(3)

     (0.03

Changes in income taxes

     0.01   
  

 

 

 

Operating EPS(1) for the Three Months Ended September 30, 2012

   $ 0.64   

Spin-Off Costs(2)

     (0.25

2012-2014 Restructuring Program costs

     (0.03

Integration Program costs

       
  

 

 

 

Diluted EPS Attributable to Mondelēz International for the
Three Months Ended September 30, 2012

   $ 0.36   
  

 

 

 

 

  (1) Please see the Non-GAAP Financial Measures section at the end of this item.
  (2) Spin-Off Costs include $226 million of pre-tax Spin-Off Costs in selling, general and administrative expense and $457 million of pre-tax Spin-Off Costs in interest expense.
  (3) Includes the favorable foreign currency impact on interest expense related to our foreign denominated debt.

 

31


Nine Months Ended September 30:

 

                                                                           
     For the Nine Months Ended               
     September 30,               
     2012      2011      $ change     % change  
     (in millions, except per share data)               

Net revenues

   $ 39,288       $ 39,677       $ (389     (1.0%