Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 31, 2017)
  • 10-Q (Aug 2, 2017)
  • 10-Q (May 3, 2017)
  • 10-Q (Oct 26, 2016)
  • 10-Q (Apr 28, 2016)
  • 10-Q (Oct 29, 2015)

 
8-K

 
Other

Mondelez International, Inc. 10-Q 2015
10-Q
Table of Contents

 

 

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 June 30, 2015

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)

(847) 943-4000

(Registrant’s telephone number, including area code)

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.

 

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 July 24, 2015, there were 1,611,307,164 shares of the registrant’s Class A Common Stock outstanding.

 

 

 


Table of Contents

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 Six Months Ended June 30, 2015 and 2014

     1   
 

Condensed Consolidated Statements of Comprehensive Earnings
for the Three and Six Months Ended June 30, 2015 and 2014

     2   
 

Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014

     3   
 

Condensed Consolidated Statements of Equity
for the Year Ended December 31, 2014 and
the Six Months Ended June 30, 2015

     4   
 

Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2015 and 2014

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   
Item 2.  

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

     32   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     57   
Item 4.  

Controls and Procedures

     57   
PART II – OTHER INFORMATION   
Item 1.  

Legal Proceedings

     59   
Item 1A.  

Risk Factors

     59   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     59   
Item 6.  

Exhibits

     60   
Signature        61   

In this report, for all periods presented, “we,” “us,” “our,” “the Company” and “Mondelēz International” refer to Mondelēz International, Inc. and subsidiaries. References to “Common Stock” refer to our Class A Common Stock.

 

i


Table of Contents

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
June 30,
     For the Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Net revenues

   $ 7,661       $ 8,436       $ 15,423       $ 17,077   

Cost of sales

     4,595         5,331         9,416         10,768   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     3,066         3,105         6,007         6,309   

Selling, general and administrative expenses

     1,961         2,038         3,885         4,303   

Asset impairment and exit costs

     231         55         391         97   

Gain on divestiture

     (13              (13        

Amortization of intangibles

     46         55         92         109   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     841         957         1,652         1,800   

Interest and other expense, net

     314         224         700         944   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     527         733         952         856   

Provision for income taxes

     100         91         213         64   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

     427         642         739         792   

Noncontrolling interest

     21         20         9         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to Mondelēz International

   $ 406       $ 622       $ 730       $ 785   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share data:

           

Basic earnings per share attributable to
Mondelēz International

   $ 0.25       $ 0.37       $ 0.45       $ 0.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to
Mondelēz International

   $ 0.25       $ 0.36       $ 0.44       $ 0.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared

   $ 0.15       $ 0.14       $ 0.30       $ 0.28   

See accompanying notes to the condensed consolidated financial statements.

 

1


Table of Contents

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 Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Net earnings

   $ 427       $ 642       $ 739       $ 792   

Other comprehensive earnings / (losses):

           

Currency translation adjustment:

           

Translation adjustment

     397         373         (1,324      140   

Tax (expense) / benefit

     104         (9      (88      (3

Pension and other benefits:

           

Net actuarial gain / (loss) arising
during period

     (28      (6      (28        

Reclassification of (gains) / losses into
net earnings:

           

Amortization of experience losses and prior service costs

     67         35         119         69   

Settlement losses

     10         9         13         16   

Tax (expense) / benefit

     (18      (8      (31      (21

Derivatives accounted for as hedges:

           

Net derivative gains / (losses)

     66         (56      10         (112

Reclassification of (gains) / losses into
net earnings

     (44      (2      (48      (4

Tax (expense) / benefit

     (29      20         (13      43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive earnings / (losses)

     525         356         (1,390      128   

Comprehensive earnings / (losses)

     952         998         (651      920   

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

     30         20         (7      6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive earnings / (losses) attributable to Mondelēz International

   $ 922       $ 978       $ (644    $ 914   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

2


Table of Contents

Mondelēz International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

(Unaudited)

 

                                     
     June 30,      December 31,  
     2015      2014  

ASSETS

     

Cash and cash equivalents

   $            1,958       $            1,631   

Trade receivables (net of allowances of $59 at June 30, 2015
and $66 at December 31, 2014)

     3,294         3,802   

Other receivables (net of allowances of $93 at June 30, 2015
and $91 at December 31, 2014)

     955         949   

Inventories, net

     3,000         3,480   

Deferred income taxes

     569         480   

Other current assets

     653         1,408   

Current assets held for sale

     1,459           
  

 

 

    

 

 

 

Total current assets

     11,888         11,750   

Property, plant and equipment, net

     8,728         9,827   

Goodwill

     21,055         23,389   

Intangible assets, net

     19,677         20,335   

Prepaid pension assets

     50         53   

Other assets

     1,281         1,461   

Noncurrent assets held for sale

     2,439           
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 65,118       $ 66,815   
  

 

 

    

 

 

 

LIABILITIES

     

Short-term borrowings

   $ 4,483       $ 1,305   

Current portion of long-term debt

     1,764         1,530   

Accounts payable

     4,499         5,299   

Accrued marketing

     1,483         2,047   

Accrued employment costs

     819         946   

Other current liabilities

     2,917         2,880   

Current liabilities held for sale

     823           
  

 

 

    

 

 

 

Total current liabilities

     16,788         14,007   

Long-term debt

     13,090         13,865   

Deferred income taxes

     5,289         5,512   

Accrued pension costs

     2,313         2,912   

Accrued postretirement health care costs

     534         526   

Other liabilities

     2,159         2,140   

Noncurrent liabilities held for sale

     211           
  

 

 

    

 

 

 

TOTAL LIABILITIES

     40,384         38,962   

Commitments and Contingencies (Note 11)

     

EQUITY

     

Common Stock, no par value (5,000,000,000 shares authorized and
1,996,537,778 shares issued at June 30, 2015 and December 31, 2014)

               

Additional paid-in capital

     31,690         31,651   

Retained earnings

     14,725         14,529   

Accumulated other comprehensive losses

     (8,692      (7,318

Treasury stock, at cost (385,085,976 shares at June 30, 2015 and
332,896,779 shares at December 31, 2014)

     (13,078      (11,112
  

 

 

    

 

 

 

Total Mondelēz International Shareholders’ Equity

     24,645         27,750   

Noncontrolling interest

     89         103   
  

 

 

    

 

 

 

TOTAL EQUITY

     24,734         27,853   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 65,118       $ 66,815   
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


Table of Contents

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, 2014

   $       $ 31,396       $ 13,419       $ (2,889    $ (9,553    $ 159       $ 32,532   

Comprehensive earnings / (losses):

                    

Net earnings

                     2,184                         17         2,201   

Other comprehensive losses, net of income taxes

                             (4,429              (33      (4,462

Exercise of stock options and issuance of other stock awards

             271         (98              332                 505   

Common Stock repurchased

                                     (1,891              (1,891

Cash dividends declared ($0.58 per share)

                     (976                              (976

Dividends paid on noncontrolling interest and other activities

             (16                              (40      (56
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at December 31, 2014

   $       $ 31,651       $ 14,529       $ (7,318    $ (11,112    $ 103       $ 27,853   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive earnings / (losses):

                    

Net earnings

                     730                         9         739   

Other comprehensive losses, net of income taxes

                             (1,374              (16      (1,390

Exercise of stock options and issuance of other stock awards

             38         (47              200                 191   

Common Stock repurchased

                                     (2,166              (2,166

Cash dividends declared ($0.30 per share)

                     (487                              (487

Dividends paid on noncontrolling interest and other activities

             1                                 (7      (6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at June 30, 2015

   $       $ 31,690       $ 14,725       $ (8,692    $ (13,078    $ 89       $ 24,734   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  * Noncontrolling interest as of June 30, 2014 was $139 million, as compared to $159 million as of January 1, 2014. The change of $(20) million during the six months ended June 30, 2014 was due to $(26) million of dividends paid, $7 million of net earnings and $(1) million of other comprehensive losses, net of taxes.

See accompanying notes to the condensed consolidated financial statements.

 

4


Table of Contents

Mondelēz International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of U.S. dollars)

(Unaudited)

 

                                     
     For the Six Months Ended  
     June 30,  
     2015      2014  

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES

     

Net earnings

   $ 739       $ 792   

Adjustments to reconcile net earnings to operating cash flows:

     

Depreciation and amortization

     457         533   

Stock-based compensation expense

     66         68   

Deferred income tax provision / (benefit)

     (52      (180

Gain on divestiture

     (13        

Asset impairments

     138         27   

Loss on early extinguishment of debt

     708         493   

Unrealized net loss on coffee business divestiture currency hedges

     200           

Gain on monetization of coffee business divestiture currency hedges

     (607        

Other non-cash items, net

     143         132   

Change in assets and liabilities, net of acquisition and divestitures:

     

Receivables, net

     (143      70   

Inventories, net

     (181      (353

Accounts payable

     (49      (18

Other current assets

     52         (60

Other current liabilities

     (694      (1,095

Change in pension and postretirement assets and liabilities, net

     (193      (41
  

 

 

    

 

 

 

Net cash provided by operating activities

     571         368   
  

 

 

    

 

 

 

CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES

     

Capital expenditures

     (790      (724

Proceeds from coffee business divestiture currency hedge settlements

     1,235           

Acquisition, net of cash received

     (81        

Proceeds from divestiture, net of disbursements

     219           

Proceeds from sale of property, plant and equipment and other

             26   
  

 

 

    

 

 

 

Net cash provided by / (used in) investing activities

     583         (698
  

 

 

    

 

 

 

CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES

     

Issuances of commercial paper, maturities greater than 90 days

     613         1,956   

Repayments of commercial paper, maturities greater than 90 days

     (405      (1,164

Net issuances / (repayments) of other short-term borrowings

     2,980         (394

Long-term debt proceeds

     3,606         3,029   

Long-term debt repaid

     (4,539      (2,516

Repurchase of Common Stock

     (2,132      (720

Dividends paid

     (495      (476

Other

     75         112   
  

 

 

    

 

 

 

Net cash used in financing activities

     (297      (173
  

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (88      (39
  

 

 

    

 

 

 

Cash and cash equivalents:

     

Increase / (decrease)

     769         (542

Cash balance included in current assets held for sale

     (442        

Balance at beginning of period

     1,631         2,622   
  

 

 

    

 

 

 

Balance at end of period

   $ 1,958       $ 2,080   
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5


Table of Contents

Mondelēz International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.  Basis of Presentation

The condensed consolidated financial statements include Mondelēz International, Inc. as well as our wholly owned and majority owned subsidiaries.

Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in 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.

We derived the condensed consolidated balance sheet data as of December 31, 2014 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, 2014.

Accounting Calendar Change:

In connection with moving toward a common consolidation date across the Company, in the first quarter of 2015, we changed the consolidation date for our North America segment from the last Saturday of each period to the last calendar day of each period. The change had a favorable impact of $39 million on net revenues and $19 million on operating income in the six months ended June 30, 2015.

As a result of this change, each of our operating subsidiaries now reports results as of the last calendar day of the period. We believe the change will improve business planning and financial reporting by better matching the close dates of the operating subsidiaries and bringing the reporting dates to the period-end date. As the effect to prior-period results was not material, we have not revised prior-period results.

Currency Translation and Highly Inflationary Accounting:

We translate the results of operations of our subsidiaries from multiple currencies using average exchange rates during each period and translate balance sheet accounts using exchange rates at the end of each period. We record currency translation adjustments as a component of equity (except for highly inflationary currencies such as in Venezuela) and realized exchange gains and losses on transactions in earnings.

Venezuela. As prescribed by U.S. GAAP for highly inflationary economies, we have been accounting for the results of our Venezuelan subsidiaries using the U.S. dollar as the functional currency since January 1, 2010.

On February 8, 2013, the Venezuelan government announced the devaluation of the official Venezuelan bolivar exchange rate from 4.30 bolivars to 6.30 bolivars to the U.S. dollar. The official rate of 6.30 is the rate applied to import food and other essential items, and we purchase a material portion of our imported raw materials using U.S. dollars secured at this rate.

On January 24, 2014, the Venezuelan government announced the expansion of a new auction-based currency transaction program, which became known as SICAD I, and new profit margin controls. The application of the SICAD I rate was extended to include foreign investments and significant operating activities, including contracts for leasing and services, use and exploitation of patents and trademarks, payments of royalties and contracts for technology import and technical assistance. On March 24, 2014, the Venezuelan government launched a new market-based currency exchange market, SICAD II, and at that time indicated that it may be used voluntarily to exchange bolivars into U.S. dollars.

As of March 31, 2014, we began to apply the SICAD I exchange rate to remeasure our bolivar-denominated net monetary assets, and we began translating our Venezuelan operating results at the SICAD I rate in the second quarter of 2014. On March 31, 2014, we recognized a $142 million currency remeasurement loss within selling, general and administrative expenses of our Latin America segment as a result of revaluing our bolivar-denominated net monetary assets from the official exchange rate of 6.30 bolivars to the U.S. dollar to the then-prevailing SICAD I exchange rate of 10.70 bolivars to the U.S. dollar.

 

6


Table of Contents

On February 10, 2015, the Venezuelan government combined the SICAD I and SICAD II (“SICAD”) exchange rate mechanisms and in addition created a new market-based SIMADI rate, while retaining the 6.30 official rate for food and other essentials. The Venezuelan government also announced an opening SICAD auction rate of 12.00 bolivars to the U.S. dollar, which as of June 30, 2015 is the prevailing SICAD rate until our specific industry group auctions make U.S. dollars available at another offered SICAD rate. We continue to expect to secure U.S. dollars at the SICAD rate in addition to the official rate. The SIMADI rate was designed as a free market exchange rate that makes U.S. dollars available for any transactions based on the available supply of U.S. dollars at the offered rate. As of June 30, 2015, the SIMADI exchange rate was 197.30 bolivars to the U.S. dollar and availability of U.S. dollars at the SIMADI rate was limited. At this time, we do not anticipate using the SIMADI rate frequently in managing our local operations.

Our Venezuelan operations produce a range of biscuit, cheese & grocery, confectionery and beverage products. Based on the currency exchange developments this year, we reviewed our domestic and international sourcing of goods and services and the exchange rates we believe will be applicable. We evaluated the level of primarily raw material imports that we believe would continue to be sourced in exchange for U.S. dollars converted at the official 6.30 exchange rate. Our remaining imported goods and services would primarily be valued at the SICAD exchange rate. Imports that do not currently qualify for either the official rate or SICAD rate could be sourced at the SIMADI rate.

We believe the SICAD rate continues to be the most economically representative rate for us to use to value our net monetary assets and translate our operating results in Venezuela. While some of our net monetary assets or liabilities qualify for settlement at the official exchange rate, other operations do not, and we have utilized and expect to utilize the SICAD auction process and expect to use the new SIMADI auctions on an as needed basis.

In the first quarter of 2015, we recognized an $11 million remeasurement loss, reflecting an increase in the SICAD exchange rate from 11.50 to 12.00 bolivars to the U.S. dollar.

The following table sets forth net revenues for our Venezuelan operations for the three and six months ended June 30, 2015 (measured at the SICAD rate), and cash, net monetary assets and net assets of our Venezuelan subsidiaries as of June 30, 2015 (translated at a SICAD rate of 12.00 bolivars to the U.S. dollar):

 

Venezuela operations

  

Three Months Ended June 30, 2015

Net revenues    $300 million or 3.9% of consolidated net revenues
    

Six Months Ended June 30, 2015

Net revenues    $519 million or 3.4% of consolidated net revenues
    

As of June 30, 2015

Cash    $388 million
Net monetary assets    $312 million
Net assets    $564 million

Unlike the official rate that is fixed at 6.30 bolivars to the U.S. dollar, the SICAD rate can vary over time. If any of the three-tier currency exchange rates, or the application of the rates to our business, were to change, we would recognize additional currency losses or gains, which could be significant.

In light of the ongoing difficult macroeconomic environment in Venezuela, we continue to monitor and actively manage our investment and exposures in Venezuela. We plan to continue to do business in the country as long as we can successfully operate our business there. We strive to locally source and produce a significant amount of the products we sell in Venezuela. We have taken other protective measures against currency devaluation, such as converting monetary assets into non-monetary assets that we can use in our business. However, suitable protective measures have become less available and more expensive and may not offset further currency devaluation that could occur.

Argentina. On January 23, 2014, the Central Bank of Argentina adjusted its currency policy, removed its currency stabilization measures and allowed the Argentine peso exchange rate to float relative to other currencies. On that day, the value of the Argentine peso relative to the U.S. dollar fell by 15%. In July 2014, Argentina had a technical default on its debt as the government was blocked from making payments on its restructured debt by certain creditors who did not participate in a debt restructuring in 2001. Further volatility in the exchange rate is expected. Since December 31, 2014 and through June 30, 2015, the value of the peso relative to the U.S. dollar declined 7%. While the business operating environment remains challenging, we continue to monitor and actively manage our investment and exposures in Argentina. We continue refining our product portfolio to improve our product offerings, mix and profitability. We also continue to implement additional cost initiatives to protect the business. Further currency declines, economic controls or other business restrictions could

 

7


Table of Contents

have an adverse impact on our ongoing results of operations. Our Argentinian operations contributed approximately $185 million, or 2.4% of consolidated net revenues for the three months and $360 million, or 2.3% of consolidated net revenues for the six months ended June 30, 2015. As of June 30, 2015, the net monetary liabilities of our Argentina operations were not material. Argentina is not designated as a highly-inflationary economy for accounting purposes and so we continue to record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings.

Russia. During the fourth quarter of 2014, the value of the Russian ruble relative to the U.S. dollar declined 50%. Since December 31, 2014 and through June 30, 2015, the value of the ruble relative to the U.S. dollar increased 6%. Due to the significant currency movements, we continue to take actions to protect our near-term operating results, financial condition and cash flow. Our operations in Russia contributed approximately $210 million, or 2.7% of consolidated net revenues for the three months and $380 million, or 2.5% of consolidated net revenues for the six months ended June 30, 2015. As of June 30, 2015, the net monetary assets of our Russia operations were not material. Russia is not designated as a highly-inflationary economy for accounting purposes and so we continue to record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings.

Other Countries. Since we have operations in over 80 countries and sell in approximately 165 countries, we regularly monitor economic and currency-related risks and seek to take protective measures in response to these exposures. Some of the countries in which we do business have had significant economic uncertainty recently. These include Ukraine, Greece, Nigeria and Turkey, most of which have had either currency devaluation or volatility. We continue to monitor operations, currencies and net monetary exposures in these countries. At this time, we do not have material net monetary asset exposures or risk of highly inflationary accounting in these countries.

New Accounting Pronouncements:

In May 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that applies to reporting entities who elect to measure the fair value of an investment using the net asset value (“NAV”) per share (or its equivalent) practical expedient. This ASU removes the requirement to include investments measured using the practical expedient within fair value hierarchy disclosures. Also, practical expedient disclosures previously required for all eligible investments are now only required for investments for which the practical expedient has been elected. The update is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. As we measure certain defined benefit plan assets using the NAV practical expedient, we plan to adopt the new standard on or by the January 1, 2016 effective date. The new standard will impact our disclosures as discussed above but is not otherwise expected to have an impact on our consolidated financial statements.

In April 2015, the FASB issued an ASU that provides guidance on evaluating whether a cloud computing arrangement includes a software license. If there is a software license component, software licensing accounting should be applied; otherwise, service contract accounting should be applied. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. We are currently assessing the impact on our consolidated financial statements.

In April 2015, the FASB issued an ASU that simplifies the presentation of debt issuance costs. The standard requires debt issuance costs related to a recognized debt obligation to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt instead of being presented as an asset, similar to the presentation of debt discounts. The ASU requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. We plan to adopt the new standard on or by the January 1, 2016 effective date.

In February 2015, the FASB issued an ASU that amends current consolidation guidance related to the evaluation of whether certain legal entities should be consolidated. The standard modifies both the variable interest entity (“VIE”) model and the voting interest model, including analyses of whether limited partnerships are VIEs and the impact of service fees and related party interests in determining if an entity is a VIE to the reporting entity. The guidance is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. We plan to adopt the new standard on the January 1, 2016 effective date and are currently assessing the impact on our consolidated financial statements.

In May 2014, the FASB issued an ASU on revenue recognition from contracts with customers. The new ASU outlines a new, single comprehensive model for companies to use in accounting for revenue. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for the goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows from customer contracts, including significant judgments made in recognizing revenue. In May 2015, the FASB proposed changes to the new

 

8


Table of Contents

guidance in the areas of licenses and identifying performance obligations. In July 2015, the FASB approved a deferral of the effective date by one year to annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date which was for annual reporting periods beginning after December 15, 2016. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption. We continue to assess the impact of the new standard on our consolidated financial statements.

Note 2.  Divestitures and Acquisitions

Divestiture of Coffee Business:

On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses (including our coffee portfolio in France) with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, Jacobs Douwe Egberts (“JDE”). Upon closing, the consideration we received for our coffee businesses was 3.8 billion ($4.2 billion U.S. dollars as of July 2, 2015), a 43.5 percent equity interest in JDE and a $275 million receivable related to an expected payment from JDE one year following the closing related to tax formation costs. We also received $76 million of cash related to the reimbursement of costs we incurred related to separating our coffee businesses. Acorn Holdings B.V., owner of DEMB, holds a 56.5% share in JDE. The cash and equity consideration we received was adjusted from previous estimates to reflect our retaining our interest in a Korea-based joint venture, Dongsuh Foods Corporation. During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”). In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from the sale, and the transaction did not change the consideration received for our global coffee businesses. Please see discussion of the divestiture of AGF below under Other Divestiture and Acquisitions.

We are currently in the process of determining the fair value of our investment in JDE as of the closing date. We expect to have a preliminary valuation completed in the third quarter of 2015. The sale proceeds are also subject to further adjustments, including finalization of working capital, net debt and other sale adjustments. We expect to finalize the sales price and related adjustments by the end of the second quarter of 2016. Some of the net asset and equity balances we divest in the third quarter may also change based on information that becomes available in the third quarter following the closing. As a result, the actual amount of consideration we receive and the gain we recognize on the divestiture may change until we conclude these matters.

Following the transactions, our snacks net revenues, consisting of biscuits, chocolate, gum and candy, were approximately 85% of our 2014 net revenues excluding coffee net revenues. By retaining a significant stake in JDE, we will also continue to have a significant contribution from the coffee category. We plan to reflect our divested historical coffee results and future equity earnings from JDE in results from continuing operations as the coffee category continues to be a significant part of our strategy and net earnings.

To lock in an expected U.S. dollar value of approximately $5 billion related to the estimated 4 billion cash receipt upon closing, we entered into currency exchange forward contracts beginning in May 2014, when the transaction was announced. On February 11, 2015, we monetized these forward contracts and realized total pre-tax gains of $939 million, of which $628 million was recognized in 2014 and $311 million was recognized in the first quarter of 2015. Additionally, we entered into new currency exchange forward contracts, which we monetized on April 17, 2015 and realized total pre-tax gains of $296 million, of which $56 million was recognized in the second quarter of 2015. On that date we executed new currency exchange contracts that generated unrealized losses of $221 million in the three and six months ended June 30, 2015. The currency hedge gains and losses were recorded in interest and other expense, net. The forward contracts were recorded on the consolidated balance sheet, with unrealized gains recorded in other current assets and unrealized losses recorded in other current liabilities. On July 6, 2015, we monetized the forward contracts and realized a $202 million pre-tax loss. Cumulatively over 2014 and through July 6, 2015, we realized aggregate net gains and received cash of approximately $1.0 billion on these currency exchange forward contracts. With the receipt of 3.8 billion on July 2, 2015 ($4.2 billion as of July 2, 2015), we have collected $5.2 billion.

During the second quarter of 2015, we also entered into currency exchange forward contracts to hedge a portion of the cash payments to be made to our subsidiaries in multiple countries where coffee net assets and shares were divested. These hedges with a notional value of 1.6 billion generated net unrealized gains of $21 million during the three months ended June 30, 2015. The net unrealized gain was recorded within interest and other expense, net and the forward contracts were recorded within other current assets. During July 2015, we settled these forward contracts and realized total pre-tax net gains of $17 million.

 

9


Table of Contents

Our coffee business results are reflected in our consolidated financial statements through June 30, 2015. The pre-tax earnings of the coffee businesses were:

 

                                                                           
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
     (in millions)  

Earnings before income taxes

   $ 212       $ 151       $ 342       $ 310   

We also incurred incremental expenses related to readying our global coffee businesses for the divestiture that totaled $157 million in the three months and $185 million in the six months ended June 30, 2015 and $5 million in the three and six months ended June 30, 2014. These expenses were recorded within asset impairment and exit costs and selling, general and administrative expenses of primarily our Europe and Eastern Europe, Middle East and Africa (“EEMEA”) segments and within general corporate expenses.

As of June 30, 2015, we have presented our global coffee businesses as held for sale on the consolidated balance sheet. We cleared the significant pre-closing sale conditions such that the planned divestiture was determined to be probable as of June 30, 2015. We received conditional approval for the transaction from the European Commission following their antitrust evaluation and made significant progress on our consultations with Work Councils and employee representations. The European Commission’s ruling was conditioned upon JDE’s divestiture of our contributed Carte Noire business and DEMB’s Merrild business, primarily in France and Denmark. Those businesses have been transferred and will be sold by JDE.

The major classes of the held for sale assets and liabilities consist of:

 

                  
     As of June 30,  
     2015  
     (in millions)  

Assets

  

Cash and cash equivalents

   $ 442   

Trade receivables

     471   

Other receivables

     26   

Inventories, net

     473   

Deferred income taxes

     5   

Other current assets

     42   
  

 

 

 

Current assets held for sale

     1,459   

Property, plant and equipment, net

     755   

Goodwill

     1,672   

Intangible assets, net

       

Other assets

     12   
  

 

 

 

Noncurrent assets held for sale

     2,439   
  

 

 

 

Total assets held for sale

   $ 3,898   
  

 

 

 

Liabilities

  

Accounts payable

   $ 439   

Accrued marketing

     292   

Accrued employment costs

     29   

Other current liabilities

     63   
  

 

 

 

Current liabilities held for sale

     823   

Deferred income taxes

     28   

Accrued pension costs

     179   

Other liabilities

     4   
  

 

 

 

Noncurrent liabilities held for sale

     211   
  

 

 

 

Total liabilities held for sale

   $ 1,034   
  

 

 

 

Net assets held for sale

   $ 2,864   
  

 

 

 

 

10


Table of Contents

Other Divestiture and Acquisitions:

On July 15, 2015, we acquired an 80% interest in a biscuit operation in Vietnam, which is now a subsidiary within our Asia Pacific segment. We will begin to account for the acquisition in the third quarter. Total cash paid to date for the biscuit operation, intellectual property, non-compete and consulting agreements was 11,843 billion Vietnamese dong ($543 million U.S. dollars as of July 15, 2015). We have made or expect to make the following cash payments in connection with the acquisition:

    On November 10, 2014, we deposited $46 million in escrow upon signing the purchase agreement.
    On July 15, 2015, we made a 9,122 billion Vietnamese dong ($418 million U.S. dollars as of July 15, 2015) payment for the biscuit operation, a $44 million additional escrow deposit and a 759 billion Vietnamese dong ($35 million U.S. dollars as of July 15, 2015) partial payment for the non-compete and continued consulting agreements.
    Subject to the satisfaction of final conditions, including the resolution of warranty or other claims or purchase price adjustments, we expect to release previously escrowed funds of $90 million for the remaining 20% interest in the biscuit operation and to make a final payment of 759 billion Vietnamese dong ($35 million U.S. dollars as of July 15, 2015) for the non-compete and consulting agreements. We anticipate resolution of these conditions by the end of the third quarter of 2016.

On April 23, 2015, we completed the divestiture of our 50 percent interest in AGF, our Japanese coffee joint venture, to our joint venture partner which generated cash proceeds of 27 billion Japanese yen ($225 million U.S. dollars as of April 23, 2015) and a pre-tax gain of $13 million (after-tax loss of $9 million). Upon closing, we divested our $99 million investment in the joint venture, $65 million of goodwill and $41 million of accumulated other comprehensive losses. We also incurred approximately $7 million of transaction costs.

On February 16, 2015, we acquired a U.S. snacking company, Enjoy Life Foods, within our North America segment. We paid cash and settled debt totaling $81 million in connection with the acquisition. Upon finalizing the valuation of the acquired net assets during the second quarter, as of June 30, 2015, we had recorded an $81 million purchase price allocation of $58 million in identifiable intangible assets, $20 million of goodwill and $3 million of other net assets. The acquisition-related costs and operating results of the acquisition were not material to our condensed consolidated financial statements as of and for the three and six months ended June 30, 2015.

Note 3.  Inventories

Inventories consisted of the following:

 

                                                     
     As of June 30,      As of December 31,  
     2015      2014  
     (in millions)  

Raw materials

   $ 1,008       $ 1,122   

Finished product

     1,992         2,358   
  

 

 

    

 

 

 

Inventories, net

   $ 3,000       $ 3,480   
  

 

 

    

 

 

 

The net inventory balance as of June 30, 2015 excludes our global coffee business net inventory that was presented within current assets held for sale, ahead of our July 2, 2015 divestiture of our global coffee businesses. See Note 2, Divestitures and Acquisitions, for additional information.

Note 4.  Property, Plant and Equipment

Property, plant and equipment consisted of the following:

 

                                                     
     As of June 30,      As of December 31,  
     2015      2014  
     (in millions)  

Land and land improvements

   $ 520       $ 574   

Buildings and building improvements

     2,743         3,117   

Machinery and equipment

     10,143         11,737   

Construction in progress

     1,478         1,484   
  

 

 

    

 

 

 
     14,884         16,912   

Accumulated depreciation

     (6,156      (7,085
  

 

 

    

 

 

 

Property, plant and equipment, net

   $ 8,728       $ 9,827   
  

 

 

    

 

 

 

 

11


Table of Contents

The net property, plant and equipment balance as of June 30, 2015 excludes our global coffee business net property, plant and equipment balance that was presented within noncurrent assets held for sale, ahead of our July 2, 2015 divestiture of our global coffee businesses. See Note 2, Divestitures and Acquisitions, for additional information.

In connection with our 2012-2014 Restructuring Program and 2014-2018 Restructuring Program, we recorded non-cash asset write-downs (including accelerated depreciation and asset impairments) of $57 million in the three months and $135 million in the six months ended June 30, 2015 and $14 million in the three months and $26 million in the six months ended June 30, 2014 (see Note 6, Restructuring Programs). These charges were recorded in the consolidated statements of earnings within asset impairment and exit costs as follows:

 

                                                                           
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
     (in millions)  

Latin America

   $ 21       $       $ 34       $   

Asia Pacific

     9                 28           

EEMEA

     2         1         2         1   

Europe

     12                 37         1   

North America

     13         13         34         24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-cash asset write-downs

   $ 57       $ 14       $ 135       $ 26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5.  Goodwill and Intangible Assets

Goodwill by reportable segment was:

 

                                     
    

As of

June 30,

    

As of

December 31,

 
     2015      2014  
     (in millions)  

Latin America

   $ 1,010       $ 1,127   

Asia Pacific

     2,189         2,395   

EEMEA

     1,456         1,942   

Europe

     7,463         8,952   

North America

     8,937         8,973   
  

 

 

    

 

 

 

Goodwill

   $ 21,055       $ 23,389   
  

 

 

    

 

 

 

Intangible assets consisted of the following:

 

                                     
    

As of

June 30,

   

As of

December 31,

 
     2015     2014  
     (in millions)  

Non-amortizable intangible assets

   $ 18,272      $ 18,810   

Amortizable intangible assets

     2,460        2,525   
  

 

 

   

 

 

 
     20,732        21,335   

Accumulated amortization

     (1,055     (1,000
  

 

 

   

 

 

 

Intangible assets, net

   $ 19,677      $ 20,335   
  

 

 

   

 

 

 

Non-amortizable intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of trademarks, customer-related intangibles, process technology, licenses and non-compete agreements. At June 30, 2015, the weighted-average life of our amortizable intangible assets was 13.5 years.

Amortization expense for intangible assets was $46 million in the three months and $92 million in the six months ended June 30, 2015 and $55 million in the three months and $109 million in the six months ended June 30, 2014. We currently estimate annual amortization expense for each of the next five years to be approximately $193 million, estimated using June 30, 2015 exchange rates.

 

12


Table of Contents

During our 2014 review of non-amortizable intangible assets, we recorded an impairment charge of $57 million within asset impairment and exit costs for the impairment of intangible assets in Asia Pacific and Europe. We also noted three brands with $341 million of aggregate book value as of December 31, 2014 that each had a fair value in excess of book value of 10% or less. While these intangible assets passed our annual impairment testing and we believe our current plans for each of these brands will allow them to continue to not be impaired, if expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future.

Changes in goodwill and intangible assets consisted of:

 

                                     
     Goodwill      Intangible
Assets, at Cost
 
     (in millions)  

Balance at January 1, 2015

   $ 23,389       $ 21,335   

Changes due to:

     

Currency

     (616      (659

Held for sale due to coffee business transactions

     (1,672        

Divestiture

     (65        

Acquisition

     20         58   

Other

     (1      (2
  

 

 

    

 

 

 

Balance at June 30, 2015

   $ 21,055       $ 20,732   
  

 

 

    

 

 

 

Changes to goodwill and intangibles were:

    Held for sale – On June 30, 2015, in connection with our July 2, 2015 contribution of our global coffee businesses to JDE, we reclassified $1,672 million of goodwill and less than $1 million of intangible assets to noncurrent assets held for sale.
    Divestiture – On April 23, 2015, we completed the divestiture of our 50 percent interest in AGF, which resulted in divesting $65 million of goodwill.
    Acquisition – On February 16, 2015, we acquired Enjoy Life Foods and recorded $20 million of goodwill and $58 million in identifiable intangible assets.

For more information on these transactions, refer to Note 2, Divestitures and Acquisitions.

Note 6.  Restructuring Programs

2014-2018 Restructuring Program

On May 6, 2014, our Board of Directors approved a $3.5 billion restructuring program, comprised of approximately $2.5 billion in cash costs and $1 billion in non-cash costs (the “2014-2018 Restructuring Program”), and up to $2.2 billion of capital expenditures. The primary objective of the 2014-2018 Restructuring Program is to reduce our operating cost structure in both our supply chain and overhead costs. The program is intended primarily to cover severance as well as asset disposals and other manufacturing-related one-time costs. We expect to incur the majority of the program’s charges in 2015 and 2016 and to complete the program by year-end 2018. Since inception, we have incurred total restructuring and related implementation charges of $787 million related to the 2014-2018 Restructuring Program.

 

13


Table of Contents

Restructuring Costs:

We recorded restructuring charges of $135 million in the three months and $297 million in the six months ended June 30, 2015 and $1 million in the three and six months ended June 30, 2014 within asset impairment and exit costs. The activity for the 2014-2018 Restructuring Program liability for the six months ended June 30, 2015 was:

 

                                                        
     Severance
and Related
Costs
     Asset
Write-downs
     Total  
     (in millions)  

Liability balance, January 1, 2015

   $ 224       $       $ 224   

Charges

     163         134         297   

Cash spent

     (105              (105

Non-cash settlements / adjustments

     (6      (134      (140

Currency

     (9              (9
  

 

 

    

 

 

    

 

 

 

Liability balance, June 30, 2015

   $ 267       $       $ 267   
  

 

 

    

 

 

    

 

 

 

We spent $66 million in the three months and $105 million in the six months ended June 30, 2015 and $1 million in the three and six months ended June 30, 2014 in cash severance and related costs. We also recognized non-cash pension settlement losses (See Note 9, Benefit Plans), non-cash asset write-downs (including accelerated depreciation and asset impairments) and other non-cash adjustments totaling $62 million in the three months and $140 million in the six months ended June 30, 2015. At June 30, 2015, $237 million of our net restructuring liability was recorded within other current liabilities and $30 million was recorded within other long-term liabilities.

Implementation Costs:

Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities. We believe the disclosure of implementation costs provides readers of our financial statements with more information on the total costs of our 2014-2018 Restructuring Program. Implementation costs primarily relate to reorganizing our operations and facilities in connection with our supply chain reinvention program and other identified productivity and cost saving initiatives. The costs include incremental expenses related to the closure of facilities, costs to terminate certain contracts and the simplification of our information systems. Within our continuing results of operations, we recorded implementation costs of $47 million in the three months and $109 million in the six months ended June 30, 2015 and $9 million in the three and six months ended June 30, 2014. We recorded these costs within cost of sales and general corporate expense within selling, general and administrative expenses.

 

14


Table of Contents

Restructuring and Implementation Costs in Operating Income:

During 2015 and 2014, we recorded restructuring and implementation costs related to the 2014-2018 Restructuring Program within operating income as follows:

 

     Latin
America
     Asia
Pacific
     EEMEA      Europe      North
America
     Corporate (1)      Total  
                          (in millions)                       

For the Three Months Ended
June 30, 2015

                    

Restructuring Costs

   $ 32       $ 18       $ 11       $ 48       $ 19       $ 7       $ 135   

Implementation Costs

     14         7         3         6         13         4         47   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46       $ 25       $ 14       $ 54       $ 32       $ 11       $ 182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Six Months Ended
June 30, 2015

                    

Restructuring Costs

   $ 47       $ 45       $ 14       $ 157       $ 28       $ 6       $ 297   

Implementation Costs

     23         9         6         26         24         21         109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70       $ 54       $ 20       $ 183       $ 52       $ 27       $ 406   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Three and Six Months
Ended June 30, 2014

                    

Restructuring Costs

   $ 1       $       $       $       $       $       $ 1   

Implementation Costs

     1                                         8         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2       $       $       $       $       $ 8       $ 10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Project 2014-2015 (2)

                    

Restructuring Costs

   $ 128       $ 61       $ 33       $ 248       $ 85       $ 16       $ 571   

Implementation Costs

     39         18         10         63         29         57         216   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 167       $ 79       $ 43       $ 311       $ 114       $ 73       $ 787   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Includes adjustment for rounding.
  (2) Includes all charges recorded since program inception on May 6, 2014 through June 30, 2015.

2012-2014 Restructuring Program

On October 1, 2012, we completed the Spin-Off of our North American grocery business, Kraft Foods Group, Inc. (“Kraft Foods Group”), to our shareholders (the “Spin-Off”). Prior to this transaction, in 2012, our Board of Directors approved $1.5 billion of related restructuring and implementation costs (the “2012-2014 Restructuring Program”) reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the 2012-2014 Restructuring Program was to ensure that Mondelēz International and Kraft Foods Group were each set up to operate efficiently and execute on our respective business strategies upon separation and in the future.

Of the $1.5 billion of 2012-2014 Restructuring Program costs, we retained approximately $925 million and Kraft Foods Group retained the balance of the program. Through the end of 2014, we incurred total restructuring and related implementation charges of $899 million and completed incurring planned charges on the 2012-2014 Restructuring Program.

 

15


Table of Contents

Restructuring Costs:

We recorded reversals to the restructuring charges of $1 million in the three months and $3 million in the six months ended June 30, 2015 related to accruals no longer required. We recorded restructuring charges of $54 million in the three months and $96 million in the six months ended June 30, 2014 within asset impairment and exit costs. The activity for the 2012-2014 Restructuring Program liability for the six months ended June 30, 2015 was:

 

                                                        
     Severance
and Related
Costs
     Asset
Write-downs
     Total  
            (in millions)         

Liability balance, January 1, 2015

   $ 128       $       $ 128   

Charges

     (3              (3

Cash spent

     (43              (43

Non-cash settlements / adjustments

     1                 1   

Currency

     (6              (6
  

 

 

    

 

 

    

 

 

 

Liability balance, June 30, 2015

   $ 77       $       $ 77   
  

 

 

    

 

 

    

 

 

 

We spent $24 million in the three months and $43 million in the six months ended June 30, 2015 and $38 million in the three months and $66 million in the six months ended June 30, 2014 in cash severance and related costs. We also recognized non-cash pension plan settlement losses (See Note 9, Benefit Plans), non-cash asset write-downs (including accelerated depreciation and asset impairments) and other non-cash adjustments totaling $11 million in the three months and $24 million in the six months ended June 30, 2014. At June 30, 2015, $63 million of our net restructuring liability was recorded within other current liabilities and $14 million was recorded within other long-term liabilities.

Implementation Costs:

Implementation costs related to our 2012-2014 Restructuring Program primarily relate to activities in connection with the Spin-Off such as reorganizing our operations and facilities, the discontinuance of certain product lines and incremental expenses related to the closure of facilities, replicating our information systems infrastructure and reorganizing our sales function. Within our continuing results of operations, we recorded implementation costs of $19 million in the three months and $43 million in the six months ended June 30, 2014. We recorded these costs within cost of sales and selling, general and administrative expenses.

Restructuring and Implementation Costs in Operating Income:

During the three and six months ended June 30, 2014 and since inception of the 2012-2014 Restructuring Program, we recorded restructuring and implementation costs within operating income as follows:

 

     Latin
America
     Asia
Pacific
     EEMEA      Europe      North
America
     Corporate (1)      Total  
                          (in millions)                       

For the Three Months Ended
June 30, 2014

                    

Restructuring Costs

   $ 3       $ 1       $ 8       $ 26       $ 16       $       $ 54   

Implementation Costs

     1                 1         13         6         (2      19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4       $ 1       $ 9       $ 39       $ 22       $ (2    $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Six Months Ended
June 30, 2014

                    

Restructuring Costs

   $ 4       $ 1       $ 12       $ 43       $ 36       $       $ 96   

Implementation Costs

     1                 2         28         13         (1      43   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5       $ 1       $ 14       $ 71       $ 49       $ (1    $ 139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Project 2012-2014 (2)

                    

Restructuring Costs

   $ 36       $ 36       $ 69       $ 249       $ 337       $ 2       $ 729   

Implementation Costs

     3         6         4         88         65         4         170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39       $ 42       $ 73       $ 337       $ 402       $ 6       $ 899   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Includes adjustment for rounding.
  (2) Includes all charges recorded since program inception in 2012 through conclusion on December 31, 2014.

 

16


Table of Contents

Note 7.  Debt

Short-Term Borrowings:

Our short-term borrowings and related weighted-average interest rates consisted of:

 

                                                                           
     As of June 30, 2015      As of December 31, 2014  
     Amount
Outstanding
     Weighted-
Average Rate
     Amount
Outstanding
     Weighted-
Average Rate
 
     (in millions)             (in millions)         

Commercial paper

   $ 4,211         0.5%       $ 1,101         0.4%   

Bank loans

     272         10.1%         204         8.8%   
  

 

 

       

 

 

    

Total short-term borrowings

   $ 4,483          $ 1,305      
  

 

 

       

 

 

    

As of June 30, 2015, the commercial paper issued and outstanding had between 1 and 90 days remaining to maturity. Bank loans include borrowings on primarily uncommitted credit lines maintained by some of our international subsidiaries to meet short-term working capital needs.

Borrowing Arrangements:

On June 11, 2015, we entered into a $500 million short-term senior unsecured revolving credit facility, which expired on July 31, 2015. The facility was intended to be used for general corporate purposes, including short-term working capital and other financing needs, supplementing our existing $4.5 billion revolving credit facility. The revolving credit agreement includes a covenant that we maintain a minimum shareholders’ equity of at least $24.6 billion, excluding accumulated other comprehensive earnings / (losses) and the cumulative effects of any changes in accounting principles. At June 30, 2015, we complied with the covenant as our shareholders’ equity as defined by the covenant was $33.3 billion. The revolving credit facility agreement also contains customary representations, covenants and events of default. As of June 30, 2015, no amounts were drawn on the facility.

We also maintain a revolving credit facility for general corporate purposes, including for working capital purposes and to support our commercial paper program. Our $4.5 billion multi-year senior unsecured revolving credit facility expires on October 11, 2018. The revolving credit agreement includes a covenant that we maintain a minimum shareholders’ equity of at least $24.6 billion, excluding accumulated other comprehensive earnings / (losses) and the cumulative effects of any changes in accounting principles. At June 30, 2015, we complied with the covenant as our shareholders’ equity as defined by the covenant was $33.3 billion. The revolving credit facility agreement also contains customary representations, covenants and events of default. There are no credit rating triggers, provisions or other financial covenants that could require us to post collateral as security. As of June 30, 2015, no amounts were drawn on the facility.

Some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $2.0 billion at June 30, 2015 and $2.1 billion at December 31, 2014. Borrowings on these lines amounted to $272 million at June 30, 2015 and $204 million at December 31, 2014.

Long-Term Debt:

On June 11, 2015, 400 million of our floating rate euro-denominated notes matured. The notes and accrued interest to date were paid with cash on hand and the issuance of commercial paper.

On March 30, 2015, we issued fr.675 million of Swiss franc-denominated notes, or approximately $694 million in U.S. dollars as of March 31, 2015, consisting of:

    fr.175 million (or $180 million) of 0.000% fixed rate notes that mature on March 30, 2017
    fr.300 million (or $308 million) of 0.625% fixed rate notes that mature on December 30, 2021
    fr.200 million (or $206 million) of 1.125% fixed rate notes that mature on December 30, 2025

We received net proceeds of $675 million that were used for general corporate purposes. We recorded approximately $2 million of premiums and deferred financing costs, which will be amortized into interest expense over the life of the notes.

On March 20, 2015, 850 million of our 6.250% euro-denominated notes matured. The notes and accrued interest to date were paid with the issuance of commercial paper and cash on hand.

 

17


Table of Contents

On March 20, 2015, we completed a cash tender offer and retired $2.5 billion of our long-term U.S. dollar debt consisting of:

    $102 million of our 6.500% Notes due in August 2017
    $115 million of our 6.125% Notes due in February 2018
    $80 million of our 6.125% Notes due in August 2018
    $691 million of our 5.375% Notes due in February 2020
    $201 million of our 6.500% Notes due in November 2031
    $26 million of our 7.000% Notes due in August 2037
    $71 million of our 6.875% Notes due in February 2038
    $69 million of our 6.875% Notes due in January 2039
    $1,143 million of our 6.500% Notes due in February 2040

We financed the repurchase of these notes, including the payment of accrued interest and other costs incurred, from net proceeds received from the $2.8 billion notes issuance on March 6, 2015 described below and the issuance of commercial paper. In connection with retiring this debt, during the first three months of 2015, we recorded a $708 million loss on extinguishment of debt within interest expense related to the amount we paid to retire the debt in excess of its carrying value and from recognizing unamortized discounts and deferred financing costs in earnings at the time of the debt extinguishment. The loss on extinguishment is included in long-term debt repayments in the condensed consolidated statement of cash flows for the six months ended June 30, 2015. We also recognized $5 million of charges within interest expense from hedging instruments related to the retired debt. Upon extinguishing the debt, the deferred cash flow hedge amounts were recorded in earnings.

On March 6, 2015, we issued 2.0 billion of euro-denominated notes and £450 million of British pound sterling-denominated notes, or approximately $2.8 billion in U.S. dollars as of March 31, 2015, consisting of:

    500 million (or $537 million) of 1.000% fixed rate notes that mature on March 7, 2022
    750 million (or $805 million) of 1.625% fixed rate notes that mature on March 8, 2027
    750 million (or $805 million) of 2.375% fixed rate notes that mature on March 6, 2035
    £450 million (or $667 million) of 3.875% fixed rate notes that mature on March 6, 2045

We received net proceeds of $2,890 million that were used to fund the March 2015 tender offer and for other general corporate purposes. We recorded approximately $29 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.

Our weighted-average interest rate on our total debt was 3.1% as of June 30, 2015, following the completion of our tender offer and debt issuances in the first quarter. Our weighted-average interest rate on our total debt as of December 31, 2014 was 4.3%, down from 4.8% as of December 31, 2013.

Fair Value of Our Debt:

The fair value of our short-term borrowings at June 30, 2015 and December 31, 2014 reflects current market interest rates and approximates the amounts we have recorded on our consolidated balance sheet. The fair value of our long-term debt was determined using quoted prices in active markets (Level 1 valuation data) for the publicly traded debt obligations. At June 30, 2015, the aggregate fair value of our total debt was $19,858 million and its carrying value was $19,337 million. At December 31, 2014, the aggregate fair value of our total debt was $18,463 million and its carrying value was $16,700 million.

Interest and Other Expense, Net:

Interest and other expense, net within our results of continuing operations consisted of:

 

                                                                           
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
     (in millions)  

Interest expense, debt

   $ 147       $ 192       $ 322       $ 394   

Loss on debt extinguishment and related expenses

             1         713         495   

Net loss / (gain) on coffee business divestiture currency hedges

     144         (7      (407      (7

Loss related to interest rate swaps

                     34           

Other expense, net

     23         38         38         62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and other expense, net

   $ 314       $ 224       $ 700       $ 944   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

See Note 2, Divestitures and Acquisitions, and Note 8, Financial Instruments, for information on the currency exchange forward contracts associated with the coffee business transactions. Also see Note 8, Financial Instruments, for information on the loss related to U.S. dollar interest rate swaps no longer designated as accounting cash flow hedges during the first quarter of 2015.

Note 8.  Financial Instruments

Fair Value of Derivative Instruments:

Derivative instruments were recorded at fair value in the consolidated balance sheets as follows:

 

                                                                           
     As of June 30, 2015      As of December 31, 2014  
     Asset
Derivatives
     Liability
Derivatives
     Asset
Derivatives
     Liability
Derivatives
 
     (in millions)  

Derivatives designated as
accounting hedges:

           

Currency exchange contracts

   $ 25       $ 26       $ 69       $ 17   

Commodity contracts

     43         85         12         33   

Interest rate contracts

     19         8         13         42   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 87       $ 119       $ 94       $ 92   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as
accounting hedges:

           

Currency exchange contracts

   $ 66       $ 247       $ 735       $ 24   

Commodity contracts

     107         72         90         194   

Interest rate contracts

     51         33         59         39   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 224       $ 352       $ 884       $ 257   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value

   $ 311       $ 471       $ 978       $ 349   
  

 

 

    

 

 

    

 

 

    

 

 

 

We record derivative assets and liabilities on a gross basis in our condensed consolidated balance sheet. 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. See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2014 for additional information on our risk management strategies and use of derivatives and related accounting.

The fair values (asset / (liability)) of our derivative instruments were determined using:

 

                                                                           
     As of June 30, 2015  
     Total
Fair Value of Net
Asset / (Liability)
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (in millions)  

Currency exchange contracts

   $ (182    $       $ (182    $   

Commodity contracts

     (7      (10      3           

Interest rate contracts

     29                 29           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ (160    $ (10    $ (150    $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents
                                                                           
     As of December 31, 2014  
     Total
Fair Value of Net
Asset / (Liability)
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (in millions)  

Currency exchange contracts

   $ 763       $       $ 763       $   

Commodity contracts

     (125      (49      (76        

Interest rate contracts

     (9              (9        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 629       $ (49    $ 678       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges. Our exchange-traded derivatives are generally subject to master netting arrangements that permit net settlement of transactions with the same counterparty when certain criteria are met, such as in the event of default. We also are required to maintain cash margin accounts in connection with funding the settlement of our open positions, and the margin requirements generally fluctuate daily based on market conditions. We have recorded margin deposits related to our exchange-traded derivatives of $57 million as of June 30, 2015 and $84 million as of December 31, 2014 within other current assets. Based on our net asset or liability positions with individual counterparties, in the event of default and immediate net settlement of all of our open positions, for derivatives we have in a net liability position, we would owe $3 million as of December 31, 2014, and for derivatives we have in a net asset position, our counterparties would owe us a total of $48 million as of June 30, 2015 and $38 million as of December 31, 2014.

Level 2 financial assets and liabilities consist primarily of over-the-counter (“OTC”) currency exchange forwards, options and swaps; commodity forwards and options; and interest rate swaps. Our currency exchange contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk. Our OTC derivative transactions are governed by International Swap Dealers Association agreements and other standard industry contracts. Under these agreements, we do not post nor require collateral from our counterparties. The majority of our commodity and currency exchange OTC derivatives do not have a legal right of set-off. In connection with our OTC derivatives that could be net-settled in the event of default, assuming all parties were to fail to comply with the terms of the agreements, for derivatives we have in a net liability position, we would owe $53 million as of June 30, 2015 and $156 million as of December 31, 2014, and for derivatives we have in a net asset position, our counterparties would owe us a total of $73 million as of June 30, 2015 and $72 million as of December 31, 2014. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.

Derivative Volume:

The net notional values of our derivative instruments were:

 

                                                     
     Notional Amount  
     As of June 30,      As of December 31,  
     2015      2014  
     (in millions)  

Currency exchange contracts:

     

Intercompany loans and forecasted interest payments

   $ 5,680       $ 3,640   

Forecasted transactions

     7,762         6,681   

Commodity contracts

     2,903         1,569   

Interest rate contracts

     3,078         3,970   

Net investment hedge – euro notes

     4,459         3,932   

Net investment hedge – pound sterling notes

     1,257         545   

Net investment hedge – Swiss franc notes

     722           

 

20


Table of Contents

Cash Flow Hedges:

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

 

                                                                           
    For the Three Months Ended     For the Six Months Ended  
  June 30,     June 30,  
    2015     2014     2015     2014  
    (in millions)  

Accumulated gain / (loss) at beginning of period

  $ (46   $ 82      $ (2   $ 117   

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

    (36     (2     (54     (3

Unrealized gain / (loss) in fair value

    29        (36     3        (70
 

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated gain / (loss) at end of period

  $ (53   $ 44      $ (53   $ 44   
 

 

 

   

 

 

   

 

 

   

 

 

 

After-tax gains / (losses) reclassified from accumulated other comprehensive earnings / (losses) into net earnings were:

 

                                                                           
    For the Three Months Ended     For the Six Months Ended  
  June 30,     June 30,  
    2015     2014     2015     2014  
    (in millions)  

Currency exchange contracts – forecasted transactions

  $ 38      $ (2   $ 84      $ (4

Commodity contracts

    (2     4        (4     9   

Interest rate contracts

                  (26     (2
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 36      $ 2      $ 54      $ 3   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

                                                                           
    For the Three Months Ended     For the Six Months Ended  
  June 30,     June 30,  
    2015     2014     2015     2014  
    (in millions)  

Currency exchange contracts – forecasted transactions

  $ (24   $ 5      $ 25      $ 7   

Commodity contracts

    15        (8     (23     3   

Interest rate contracts

    38        (33     1        (80
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 29      $ (36   $ 3      $ (70
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow hedge ineffectiveness was not material for all periods presented.

Pre-tax gains / (losses) on amounts excluded from effectiveness testing recognized in net earnings from continuing operations included a pre-tax loss of $34 million recognized in the three months ended March 31, 2015 within interest and other expense, net related to certain U.S. dollar interest rate swaps that we no longer designate as accounting cash flow hedges due to a change in financing and hedging plans. In the first quarter, our plans to issue U.S. dollar debt changed and we issued euro, British pound sterling and Swiss franc-denominated notes due to lower overall cost and our decision to hedge a greater portion of our net investments in operations that use these currencies as their functional currencies. In the second quarter of 2015 and the prior-year periods, amounts excluded from effectiveness testing were not material.

We record pre-tax and after-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 currency exchange contracts related to forecasted transactions; and
    interest and other expense, net for interest rate contracts and currency exchange contracts related to intercompany loans.

 

21


Table of Contents

Based on current market conditions, we would expect to transfer unrealized losses of $37 million (net of taxes) for commodity cash flow hedges, unrealized losses of $7 million (net of taxes) for currency cash flow hedges and unrealized losses of less than $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Hedge Coverage:

As of June 30, 2015, we hedged transactions forecasted to impact cash flows over the following periods:

    commodity transactions for periods not exceeding the next 18 months;
    interest rate transactions for periods not exceeding the next 30 years and 8 months; and
    currency exchange transactions for periods not exceeding the next 18 months.

Fair Value Hedges:

Pre-tax gains / (losses) due to changes in fair value of our interest rate swaps and related hedged long-term debt were recorded in interest and other expense, net:

 

                                                                           
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2015      2014      2015      2014  
     (in millions)  

Derivatives

   $       $ 14       $ 4       $ 14   

Borrowings

             (14      (4      (14

Fair value hedge ineffectiveness and amounts excluded from effectiveness testing were not material for all periods presented.

Economic Hedges:

Pre-tax gains / (losses) recorded in net earnings for economic hedges were:

                                                                                              
                                 Location of
     For the Three Months Ended      For the Six Months Ended      Gain / (Loss)
     June 30,      June 30,      Recognized
     2015      2014      2015      2014     

in Earnings

     (in millions)       

Currency exchange contracts:

              

Intercompany loans and forecasted
interest payments

   $ 7       $ 3       $ 14       $ 1       Interest and other expense, net

Forecasted transactions

     (7      (30      (10      (40    Cost of sales

Forecasted transactions

     (152      (9      401         (14    Interest and other expense, net

Forecasted transactions

     (5      (2      (16      (3    Selling, general and administrative expenses

Interest rate contracts

     (1      1                 1       Interest and other expense, net

Commodity contracts

     (18      (6      (59      32       Cost of sales
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ (176    $ (43    $ 330       $ (23   
  

 

 

    

 

 

    

 

 

    

 

 

    

In connection with the coffee business transactions, we entered into euro to U.S. dollar currency exchange forward contracts to hedge an expected cash receipt of approximately 4 billion upon closing. As the forward contracts relate to a business divestiture pending as of June 30, 2015, unrealized gains and losses on the derivative are recorded in earnings. We recorded net losses of $165 million for the three months and net gains of $386 million for the six months ended June 30, 2015 within interest and other expense, net in connection with the forward contracts. We also entered into currency exchange forward contracts to hedge a portion of the cash proceeds distributed to our subsidiaries in multiple countries where coffee net assets and shares were divested. During the three and six months ended June 30, 2015, the hedges with a notional value of 1.6 billion generated net unrealized gains of $21 million, which were recorded within interest and other expense, net. See Note 2, Divestitures and Acquisitions—Divestiture of Coffee Business, for additional information on our currency exchange forward contracts transactions in the first six months of 2015.

 

22


Table of Contents

Hedges of Net Investments in International Operations:

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

 

                                                                                              
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
     Location of
Gain / (Loss)
Recognized in
AOCI
     2015      2014      2015      2014     
     (in millions)       

Euro notes

   $ (118    $ 5       $ 196       $       Currency

Pound sterling notes

     (45      (19      (13      (23    Translation

Swiss franc notes

     (17              (30            Adjustment

Note 9. Benefit Plans

Pension Plans

Prior to the divestiture of our global coffee business, certain active employees who transitioned to JDE participated in our Non-U.S. pension plans. Following the divestiture, benefits will be provided directly by JDE to participants continuing with JDE. JDE assumed certain pension plan obligations and received the related plan assets. As of June 30, 2015, these amounts were reported as held for sale and included the net benefit plan liabilities of $179 million and the related deferred tax assets of $29 million. Refer to Note 2, Divestitures and Acquisitions – Divestiture of Coffee Business, for more information. For all remaining participants, we retained the plan obligations and related plan assets.

Components of Net Periodic Pension Cost:

Net periodic pension cost consisted of the following:

 

                                                                           
     U.S. Plans      Non-U.S. Plans  
     For the Three Months Ended June 30,      For the Three Months Ended June 30,  
     2015      2014      2015      2014  
     (in millions)  

Service cost

   $ 15       $ 13       $ 51       $ 45   

Interest cost

     17         16         77         100   

Expected return on plan assets

     (24      (20      (119      (125

Amortization:

           

Net loss from experience differences

     10         7         38         27   

Prior service cost (1)

     1         1         16         1   

Settlement losses (2)

     10         4                 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 29       $ 21       $ 63       $ 53   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                           
     U.S. Plans      Non-U.S. Plans  
       For the Six Months Ended June 30,          For the Six Months Ended June 30,    
     2015      2014      2015      2014  
     (in millions)  

Service cost

   $ 32       $ 28       $ 101       $ 89   

Interest cost

     34         33         154         197   

Expected return on plan assets

     (47      (40      (238      (248

Amortization:

           

Net loss from experience differences

     22         15         77         54   

Prior service cost (1)

     1         1         16         1   

Settlement losses (2)

     13         6                 10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 55       $ 43       $ 110       $ 103   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) For the three and six months ended June 30, 2015, amortization of prior service cost includes $17 million of pension curtailment losses related to employees who transitioned to JDE upon the divestiture of our global coffee business. Refer to Note 2, Divestitures and Acquisitions – Divestiture of Coffee Business, for more information.
  (2) For the three and six months ended June 30, 2015, settlement losses include $6 million of pension settlement losses for employees who elected lump-sum payments in connection with our 2014-2018 Restructuring Program. See Note 6, Restructuring Programs, for more information.

 

23


Table of Contents

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 six months ended June 30, 2015, we contributed $207 million to our U.S. plans and $164 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $3 million to our U.S. plans and approximately $154 million to our non-U.S. plans during the remainder of 2015. 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 consisted of the following:

 

                                                                           
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2015      2014      2015      2014  
     (in millions)  

Service cost

   $ 3       $ 3       $ 7       $ 6   

Interest cost

     6         6         12         11   

Amortization:

           

Net loss from experience differences

     4         1         7         3   

Prior service credit

     (2      (2      (4      (5
  

 

 

    

 

 

    

 

 

    

 

 

 

Net postretirement health care costs

   $ 11       $ 8       $ 22       $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Postemployment Benefit Plans

Net postemployment costs consisted of the following:

 

                                                                           
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
     (in millions)  

Service cost

   $ 1       $ 2       $ 3       $ 4   

Interest cost

     2         1         3         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net postemployment costs

   $ 3       $ 3       $ 6       $ 7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 10. Stock Plans

Stock Options:

Stock option activity consisted of the following:

 

                                                        
     Shares Subject
to Option
     Weighted-Average
Exercise or

Grant Price
Per Share
     Aggregate
Intrinsic
Value
 

Balance at January 1, 2015

     56,431,551       $ 24.19       $ 685 million   
  

 

 

       

Annual grants to eligible employees

     8,899,530         36.94      

Additional options granted

     868,730         35.59      
  

 

 

       

Total options granted

     9,768,260         36.82      

Options exercised

     (4,439,379      22.90       $ 65 million   

Options cancelled

     (1,167,068      31.72      
  

 

 

       

Balance at June 30, 2015

     60,593,364         26.18       $ 906 million   
  

 

 

       

 

24


Table of Contents

Restricted Stock, Deferred Stock Units and Performance Share Units:

Restricted stock, deferred stock unit and performance share unit activity consisted of the following:

 

                                                                           
    Number of
Shares
    Grant Date   Weighted-Average
Fair Value
Per Share
    Weighted-Average
Aggregate
Fair Value
 

Balance at January 1, 2015

    10,582,640        $ 28.56     
 

 

 

       

Annual grants to eligible employees:

       

Performance share units

    1,598,290      Feb. 18, 2015     36.94     

Restricted stock

    386,910      Feb. 18, 2015     36.94     

Deferred stock units

    866,640      Feb. 18, 2015     36.94     

Additional shares granted (1)

    775,579      Various     37.06     
 

 

 

       

Total shares granted

    3,627,419          36.97      $ 134 million   

Vested

    (3,286,055       36.97      $ 121 million   

Forfeited

    (737,151       31.81     
 

 

 

       

Balance at June 30, 2015

    10,186,853          28.61     
 

 

 

       

 

  (1) Includes performance share units, restricted stock and deferred stock units.

Share Repurchase Program:

During 2013, our Board of Directors authorized the repurchase of $7.7 billion of our Common Stock through December 31, 2016. Repurchases under the program are determined by management and are wholly discretionary. During the six months ended June 30, 2015, we repurchased 58.2 million shares of Common Stock at an average cost of $37.17 per share, or an aggregate cost of $2.2 billion, of which $2.1 billion was paid during the period. All share repurchases were funded through available cash and commercial paper issuances. As of June 30, 2015, we had $0.9 billion in remaining share repurchase capacity. On July 29, 2015, our Finance Committee, with authorization delegated from our Board of Directors, approved an increase of $6.0 billion in the share repurchase plan, raising the authorization to $13.7 billion of Common Stock repurchases, and extended the program through December 31, 2018.

Note 11.  Commitments and Contingencies

Legal Proceedings:

We routinely are involved in legal proceedings, claims and governmental inspections or investigations (“Legal Matters”) arising in the ordinary course of our business.

A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success. Accordingly, after we acquired Cadbury in February 2010, we began reviewing and adjusting, as needed, Cadbury’s operations in light of applicable standards as well as our policies and practices. We initially focused on such high priority areas as food safety, the Foreign Corrupt Practices Act (“FCPA”) and antitrust. Based upon Cadbury’s pre-acquisition policies and compliance programs and our post-acquisition reviews, our preliminary findings indicated that Cadbury’s overall state of compliance was sound. Nonetheless, through our reviews, we determined that in certain jurisdictions, including India, there appeared to be facts and circumstances warranting further investigation. We are continuing our investigations in certain jurisdictions, including in India, and we continue to cooperate with governmental authorities.

As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are continuing to cooperate with the U.S. and Indian governments in their investigations of these matters, including through ongoing meetings with the U.S. government to discuss potential conclusion of the U.S. government investigation.

In February 2013 and March 2014, Cadbury India Limited (now known as Mondelez India Foods Private Limited), a subsidiary of Mondelēz International, and other parties received show cause notices from the Indian Central Excise Authority (the “Excise Authority”) calling upon the parties to demonstrate why the Excise Authority should not collect a total of 3.7 billion Indian rupees (approximately $59 million U.S. dollars as of June 30, 2015) of unpaid excise tax and an equivalent amount of penalties, as well as interest, related to production at the same Indian facility. We contested these demands for unpaid excise taxes, penalties and interest. On March 27, 2015, after several hearings, the Commissioner of

 

25


Table of Contents

the Excise Authority issued an order denying the excise exemption that we claimed for the Indian facility and confirming the Excise Authority’s demands for total taxes and penalties in the amount of 5.8 billion Indian rupees (approximately $92 million U.S. dollars as of June 30, 2015). We have appealed this order. In addition, the Excise Authority issued another show cause notice, dated February 6, 2015, on the same issue but covering the period January to October 2014, thereby adding 1.0 billion Indian rupees (approximately $16 million U.S. dollars as of June 30, 2015) of unpaid excise taxes as well as penalties of up to 1.0 billion Indian rupees (approximately $16 million U.S. dollars as of June 30, 2015) and interest, to the amount claimed by the Excise Authority. We believe that the decision to claim the excise tax benefit is valid and we are continuing to contest the show cause notices through the administrative and judicial process.

In April 2013, the staff of the U.S. Commodity Futures Trading Commission (“CFTC”) advised us and Kraft Foods Group, Inc. (“Kraft”) that it was investigating activities related to the trading of December 2011 wheat futures contracts that occurred prior to the Spin-Off of Kraft. We cooperated with the staff in its investigation. On April 1, 2015, the CFTC filed a complaint against Kraft and Mondelēz Global LLC (“Mondelēz Global”) in the U.S. District Court for the Northern District of Illinois, Eastern Division (the “CFTC action”). The complaint alleges that Kraft and Mondelēz Global (1) manipulated or attempted to manipulate the wheat markets during the fall of 2011; (2) violated position limit levels for wheat futures and (3) engaged in non-competitive trades by trading both sides of exchange-for-physical Chicago Board of Trade wheat contracts. The CFTC seeks civil monetary penalties of either triple the monetary gain for each violation of the Commodity Exchange Act (the “Act”) or $1 million for each violation of Section 6(c)(1), 6(c)(3) or 9(a)(2) of the Act and $140,000 for each additional violation of the Act, plus post-judgment interest; an order of permanent injunction prohibiting Kraft and Mondelēz Global from violating specified provisions of the Act; disgorgement of profits; and costs and fees. On June 1, 2015, Mondelēz Global and Kraft filed a motion to dismiss the CFTC’s claims of market manipulation and attempted manipulation. Additionally, several class action complaints were filed against Kraft and Mondelēz Global in the U.S. District Court for the Northern District of Illinois by investors in wheat futures and options on behalf of themselves and others similarly situated. The complaints make similar allegations as those made in the CFTC action and seek class action certification; an unspecified amount for damages, interest and unjust enrichment; costs and fees; and injunctive, declaratory, and other unspecified relief. On June 4, 2015, these suits were consolidated in the Northern District of Illinois. It is not possible to predict the outcome of these matters; however, based on our Separation and Distribution Agreement with Kraft dated as of September 27, 2012, we expect to predominantly bear any monetary penalties or other payments in connection with the CFTC action.

While we cannot predict with certainty the results of any Legal Matters in which we are currently involved, we do not expect that the ultimate costs to resolve any of these Legal Matters, individually or in the aggregate, will have a material effect on our financial results.

Third-Party Guarantees:

We enter into third-party guarantees primarily to cover the long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At June 30, 2015, we had no material third-party guarantees recorded on our consolidated balance sheet.

 

26


Table of Contents

Note 12.  Reclassifications from Accumulated Other Comprehensive Income

The components of accumulated other comprehensive earnings / (losses) attributable to Mondelēz International were:

 

                                                                           
     Mondelēz International Shareholders’ Equity  
     Currency
Translation
Adjustments
    Pension and
Other Benefits
    Derivatives
Accounted for
as Hedges
    Total  
     (in millions)  

Balances at January 1, 2014

   $ (1,414   $ (1,592   $ 117      $ (2,889
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive earnings / (losses), before reclassifications:

        

Currency translation adjustment (1)

     167        (6            161   

Pension and other benefits

                            

Derivatives accounted for as hedges

     (20            (112     (132

Losses / (gains) reclassified into
net earnings

            85        (4     81   

Tax (expense) / benefit

     (3     (21     43        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive
earnings / (losses)

           129   
        

 

 

 

Balances at June 30, 2014

   $ (1,270   $ (1,534   $ 44      $ (2,760
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances at January 1, 2015

   $ (5,042   $ (2,274   $ (2   $ (7,318
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive earnings / (losses), before reclassifications:

        

Currency translation adjustment(1)

     (1,600     51               (1,549

Pension and other benefits

            (28            (28

Derivatives accounted for as hedges

     241               10        251   

Losses / (gains) reclassified into
net earnings

            132        (48     84   

Tax (expense) / benefit

     (88     (31     (13     (132
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive
earnings / (losses)

           (1,374
        

 

 

 

Balances at June 30, 2015

   $ (6,489   $ (2,150   $ (53   $ (8,692
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) The condensed consolidated statement of other comprehensive earnings includes currency translation adjustment attributable to noncontrolling interests of $(16) million for the six months ended June 30, 2015 and $(1) million for the six months ended June 30, 2014.

 

27


Table of Contents

Amounts reclassified from accumulated other comprehensive earnings / (losses) and their locations in the condensed consolidated financial statements were as follows:

 

    For the Three Months Ended     For the Six Months Ended     Location of
Gain / (Loss)
Recognized
in Net Earnings
    June 30,     June 30,    
    2015     2014     2015     2014    
    (in millions)      

Pension and other benefits:

         

Reclassification of losses / (gains) into net earnings:

         

Amortization of experience losses and prior service costs (1)

  $ 67      $ 35      $ 119      $ 69     

Settlement losses (1)

    10        9        13        16     

Tax impact

    (23     (8     (36     (21   Provision for income taxes

Derivatives accounted for as hedges:

         

Reclassification of losses / (gains) into net earnings:

         

Currency exchange contracts – forecasted transactions

    (42     2        (92     4      Cost of sales

Commodity contracts

    (2     (4     3        (11   Cost of sales

Interest rate contracts

                  41        3      Interest and other
expense, net

Tax impact

    3        1        (10     1      Provision for income taxes
 

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications into net earnings, net of tax

  $ 13      $ 35      $ 38      $ 61     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

  (1) These items are included in the components of net periodic benefit costs disclosed in Note 9, Benefit Plans.

Note 13.  Income Taxes

During 2015, as part of our ongoing remediation efforts related to the material weakness in internal controls over the accounting for income taxes, we recorded out-of-period adjustments that had an immaterial impact on the provision for income taxes of $4 million for the three months and $11 million for the six months ended June 30, 2015. During 2014, we recorded immaterial out-of-period adjustments of $5 million for the three and six months ended June 30, 2014. The out-of-period adjustments were not material to the consolidated financial statements for any prior period.

Based on current tax laws, our estimated annual effective tax rate for 2015 is 19.0%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions. Our 2015 second quarter effective tax rate of 19.0% included net tax expense from $8 million of discrete one-time events. The discrete net tax expense primarily consisted of $22 million related to the sale of our interest in AGF, partially offset by $11 million related to favorable audit settlements and expirations of statutes of limitations in several jurisdictions. Our effective tax rate for the six months ended June 30, 2015 of 22.4% was unfavorably impacted by net tax expense from $33 million of discrete one-time events. The discrete net tax expense primarily consisted of $54 million of tax charges related to the sale of our interest in AGF ($32 million in the first quarter upon the investment’s change to held-for-sale status and an additional $22 million upon the closing of the sale in the second quarter), partially offset by $33 million from favorable audit settlements and expirations of statutes of limitations in several jurisdictions.

 

28


Table of Contents

As of the second quarter of 2014, our estimated annual effective tax rate for 2014 was 19.6%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions, partially offset by the remeasurement of our Venezuelan net monetary assets. Our 2014 second quarter effective tax rate of 12.4% was favorably impacted by net tax benefits from $52 million of discrete one-time events, of which $37 million related to tax return to provision adjustments and $9 million related to favorable tax audit settlements and expirations of statutes of limitations in several jurisdictions. Our effective tax rate for the six months ended June 30, 2014 of 7.5% was due to tax benefits from discrete one-time events and lower pre-tax income due to the tender-related loss on debt extinguishment and the remeasurement of the Venezuela net monetary assets. Of the discrete net tax benefits of $104 million, $60 million related to favorable tax audit settlements and expirations of statutes of limitations in several jurisdictions and $37 million related to tax return to provision adjustments.

Note 14.  Earnings Per Share

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

 

                                                                           
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
     (in millions, except per share data)  

Net earnings

   $ 427       $ 642       $ 739       $ 792   

Noncontrolling interest

     21         20         9         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to
Mondelēz International

   $ 406       $ 622       $ 730       $ 785   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for basic EPS

     1,625         1,694         1,637         1,699   

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

     18         18         17         18   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for diluted EPS

     1,643         1,712         1,654         1,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to Mondelēz International

   $ 0.25       $ 0.37       $ 0.45       $ 0.46   

Diluted earnings per share attributable to Mondelēz International

   $ 0.25       $ 0.36       $ 0.44       $ 0.46   

We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded 12.6 million antidilutive stock options for the three months and 13.2 million antidilutive stock options for the six months ended June 30, 2015 and we excluded 9.9 million antidilutive stock options for the three months and 7.3 million antidilutive stock options for the six months ended June 30, 2014.

Note 15.  Segment Reporting

We manufacture and market primarily snack food and beverage products, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy, coffee & powdered beverages and various cheese & grocery products. We manage our global business and report operating results through geographic units.

Our operations and management structure are organized into five reportable operating segments:

    Latin America
    Asia Pacific
    Eastern Europe, Middle East and Africa
    Europe
    North America

We manage our operations by region to leverage regional operating scale, manage different and changing business environments more effectively and pursue growth opportunities as they arise in our key markets. In 2015, we began to report stock-based compensation for our corporate employees, which was previously reported within our North America region, within general corporate expenses. We reclassified corporate stock-based compensation expense out of the North America segment of $4 million during the three months and $15 million during the six months ended June 30, 2015.

 

29


Table of Contents

We use segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), general corporate expenses (which are a component of selling, general and administrative expenses), amortization of intangibles, gains and losses on divestitures or acquisitions and acquisition-related costs (which are a component of selling, general and administrative expenses) in all periods presented. We exclude these items from segment operating income in order to provide better transparency of our segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.

Our segment net revenues and earnings were:

 

                                                                           
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2015      2014      2015      2014  
     (in millions)  

Net revenues:

           

Latin America

   $ 1,240       $ 1,242       $ 2,497       $ 2,598   

Asia Pacific

     1,024         1,084         2,177         2,307   

EEMEA

     869         1,008         1,564         1,846   

Europe

     2,815         3,379         5,790         6,936   

North America

     1,713         1,723         3,395         3,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

   $ 7,661       $ 8,436       $ 15,423       $ 17,077   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                           
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2015      2014      2015      2014  
     (in millions)  

Earnings before income taxes:

           

Operating income:

           

Latin America

   $ 134       $ 140       $ 288       $ 184   

Asia Pacific

     104         111         250         299   

EEMEA

     100         146         132         210   

Europe

     261         463         587         926   

North America

     261         269         542         472   

Unrealized gains / (losses) on
hedging activities

     86         (54      79         (47

General corporate expenses

     (71      (63      (145      (135

Amortization of intangibles

     (46      (55      (92      (109

Gain on divestiture

     13                 13           

Acquisition-related costs

     (1              (2        
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     841         957         1,652         1,800   

Interest and other expense, net

     (314      (224      (700      (944
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

   $ 527       $ 733       $ 952       $ 856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Items impacting our segment operating results are discussed in Note 1, Basis of Presentation, including the Venezuelan currency devaluation, Note 2, Divestitures and Acquisitions, and Note 6, Restructuring Programs. Also see Note 7, Debt, and Note 8, Financial Instruments, for more information on our interest and other expense, net for each period.

 

30


Table of Contents

Net revenues by product category were:

 

                                                                                                                 
     For the Three Months Ended June 30, 2015  
     Latin      Asia                    North         
   America      Pacific      EEMEA      Europe      America      Total  
     (in millions)  

Biscuits

   $ 407       $ 268       $ 147       $ 642       $ 1,400       $ 2,864   

Chocolate

     202         302         196         890         41         1,631   

Gum & Candy

     295         188         166         198         272         1,119   

Beverages (1)

     178         133         272         776                 1,359   

Cheese & Grocery

     158         133         88         309                 688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 1,240       $ 1,024       $ 869       $ 2,815       $ 1,713       $ 7,661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                                 
     For the Three Months Ended June 30, 2014 (2)  
     Latin      Asia                    North         
   America      Pacific      EEMEA      Europe      America      Total  
     (in millions)  

Biscuits

   $ 333       $ 273       $ 171       $ 794       $ 1,398       $ 2,969   

Chocolate

     256         329         221         1,114         50         1,970   

Gum & Candy

     293         188         200         238         275         1,194   

Beverages (1)

     197         137         327         848                 1,509   

Cheese & Grocery

     163         157         89         385                 794   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 1,242       $ 1,084       $ 1,008       $ 3,379       $ 1,723       $ 8,436   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                                 
     For the Six Months Ended June 30, 2015  
     Latin      Asia                    North         
   America      Pacific      EEMEA      Europe      America      Total  
     (in millions)  

Biscuits

   $ 716       $ 584       $ 271       $ 1,236       $ 2,758       $ 5,565   

Chocolate

     496         704         395         2,118         97         3,810   

Gum & Candy

     590         379         284         381         540         2,174   

Beverages (1)

     392         248         457         1,450                 2,547   

Cheese & Grocery

     303         262         157         605                 1,327   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 2,497       $ 2,177       $ 1,564       $ 5,790       $ 3,395       $ 15,423   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                                 
     For the Six Months Ended June 30, 2014 (2)  
     Latin      Asia                    North         
   America      Pacific      EEMEA      Europe      America      Total  
     (in millions)  

Biscuits

   $ 660       $ 604       $ 318       $ 1,516       $ 2,739       $ 5,837   

Chocolate

     580         747         464         2,590         113         4,494   

Gum & Candy

     579         394         347         461         538         2,319   

Beverages (1)

     452         259         555         1,625                 2,891   

Cheese & Grocery

     327         303         162         744                 1,536   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 2,598       $ 2,307       $ 1,846       $ 6,936       $ 3,390       $ 17,077   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) On July 2, 2015, we divested our global coffee businesses from our Europe, EEMEA and Asia Pacific segment beverage categories. Refer to Note 2, Divestitures and Acquisitions – Divestiture of Coffee Business, for more information.
  (2) During 2014, we realigned some of our products across product categories and as such, we reclassified the product category net revenues on a basis consistent with the 2015 presentation.

 

31


Table of Contents

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

Description of the Company

We manufacture and market primarily snack food and beverage products, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy, coffee & powdered beverages and various cheese & grocery products. We have operations in more than 80 countries and sell our products in approximately 165 countries.

Over the last several years, we have been expanding geographically and building our presence in the snacking category. At the same time, we have continued to invest in product quality, marketing and innovation behind our iconic brands, while implementing a series of cost saving initiatives. Our goals are to achieve industry-leading revenue growth over time driven by the higher expected growth rates of advantaged snack categories; leverage our cost structure through supply chain reinvention, productivity programs, overhead streamlining, volume growth and improved product mix to drive margin gains; and grow earnings per share in the top-tier of our peer group.

Divestiture of Global Coffee Businesses

On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses (including our coffee portfolio in France) with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, Jacobs Douwe Egberts (“JDE”). Upon closing, the consideration we received for our coffee businesses was 3.8 billion ($4.2 billion U.S. dollars as of July 2, 2015), a 43.5 percent equity interest in JDE and a $275 million receivable related to an expected payment from JDE one year following the closing related to tax formation costs. We also received $76 million of cash related to the reimbursement of costs we incurred related to separating our coffee businesses. Acorn Holdings B.V., owner of DEMB, holds a 56.5% share in JDE. The cash and equity consideration we received was adjusted from previous estimates to reflect our retaining our interest in a Korea-based joint venture, Dongsuh Foods Corporation. During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”). In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from the sale, and the transaction did not change the consideration received for our global coffee businesses. Please refer to Note 2, Divestitures and Acquisitions, for more information on the divestiture of AGF.

We are currently in the process of determining the fair value of our investment in JDE as of the closing date. We expect to have a preliminary valuation completed in the third quarter of 2015. The sale proceeds are also subject to further adjustments, including finalization of working capital, net debt and other sale adjustments. We expect to finalize the sales price and related adjustments by the end of the second quarter of 2016. Some of the net asset and equity balances we divest in the third quarter may also change based on information that becomes available in the third quarter following the closing. As a result, the actual amount of consideration we receive and the gain we recognize on the divestiture may change until we conclude these matters.

Following the transactions, our snacks net revenues, consisting of biscuits, chocolate, gum and candy, were approximately 85% of our 2014 net revenues excluding coffee net revenues. By retaining a significant stake in JDE, we will also continue to have a significant contribution from the coffee category. We plan to reflect our divested historical coffee results and future equity earnings from JDE in results from continuing operations as the coffee category continues to be a significant part of our strategy and net earnings.

To lock in an expected U.S. dollar value of approximately $5 billion related to the estimated 4 billion cash receipt upon closing, we entered into currency exchange forward contracts beginning in May 2014, when the transaction was announced. On February 11, 2015, we monetized these forward contracts and realized total pre-tax gains of $939 million, of which $628 million was recognized in 2014 and $311 million was recognized in the first quarter of 2015. Additionally, we entered into new currency exchange forward contracts, which we monetized on April 17, 2015 and realized total pre-tax gains of $296 million, of which $56 million was recognized in the second quarter of 2015. On that date we executed new currency exchange contracts that generated unrealized losses of $221 million in the three and six months ended June 30, 2015. The currency hedge gains and losses were recorded in interest and other expense, net. The forward contracts were recorded on the consolidated balance sheet, with unrealized gains recorded in other current assets and unrealized losses recorded in other current liabilities. On July 6, 2015, we monetized the forward contracts and realized a $202 million pre-tax loss. Cumulatively over 2014 and through July 6, 2015, we realized aggregate net gains and received cash of approximately $1.0 billion on these currency exchange forward contracts. With the receipt of 3.8 billion on July 2, 2015 ($4.2 billion as of July 2, 2015), we have collected $5.2 billion.

 

32


Table of Contents

During the second quarter of 2015, we also entered into currency exchange forward contracts to hedge a portion of the cash payments to be made to our subsidiaries in multiple countries where coffee net assets and shares were divested. These hedges with a notional value of 1.6 billion generated net unrealized gains of $21 million during the three months ended June 30, 2015. The net unrealized gain was recorded within interest and other expense, net and the forward contracts were recorded within other current assets. During July 2015, we settled these forward contracts and realized total pre-tax net gains of $17 million.

We also incurred incremental expenses related to readying our global coffee businesses for the divestiture that totaled $157 million in the three months and $185 million in the six months ended June 30, 2015 and $5 million in the three and six months ended June 30, 2014. These expenses were recorded within asset impairment and exit costs and selling, general and administrative expenses of primarily our Europe and EEMEA segments and within general corporate expenses.

Summary of Results

 

    Net revenues decreased 9.2% to $7.7 billion in the second quarter of 2015 and decreased 9.7% to $15.4 billion in the first six months of 2015 as compared to the same periods in the prior year. Net revenues in 2015 were significantly affected by unfavorable currency translation as the U.S. dollar strengthened against most currencies in which we operate compared to exchange rates in the prior year.

 

    Organic Net Revenue increased 4.3% to $8.8 billion in the second quarter of 2015 and increased 4.0% to $17.8 billion in the first six months of 2015 as compared to the same periods in the prior year. Organic Net Revenue is a non-GAAP financial measure we use to evaluate our underlying results (see the definition of Organic Net Revenue and our reconciliation with net revenues within Non-GAAP Financial Measures appearing later in this section).

 

    Diluted EPS attributable to Mondelēz International decreased 30.6% to $0.25 in the second quarter of 2015 and decreased 4.3% to $0.44 in the first six months of 2015 as compared to the same periods in the prior year. A number of significant items also affected the comparability of our reported results, as further described in the Discussion and Analysis of Historical Results appearing later in this section and in the notes to the condensed consolidated financial statements.

 

    Adjusted EPS increased 17.5% to $0.47 in the second quarter of 2015 and increased 11.4% to $0.88 in the first six months of 2015 as compared to the same periods in the prior year. On a constant currency basis, Adjusted EPS increased 37.5% to $0.55 in the second quarter of 2015 and increased 30.4% to $1.03 in the first six months of 2015. Adjusted EPS is a non-GAAP financial measure we use to evaluate our underlying results (see the definition of Adjusted EPS and our reconciliation with diluted EPS within Non-GAAP Financial Measures appearing later in this section).

Financial Performance Measures

We seek to achieve top-tier financial performance. We manage our business to achieve this goal using our key operating metrics: Organic Net Revenue, Adjusted Operating Income and Adjusted EPS. As we evaluate our revenue growth, in addition to evaluating underlying revenue drivers such as pricing and volume/mix, we also evaluate revenue growth from emerging markets and our Power Brands. Refer to Non-GAAP Financial Measures appearing later in this section for more information on these measures.

We also monitor a number of factors and trends that we expect may affect our revenues and profitability. During the first six months of 2015, we continued to note trends similar to those we highlighted in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2014. In particular, volatility in the global commodity and currency markets continued. Refer to Commodity Trends appearing later in this section and Note 1, Basis of Presentation—Currency Translation and Highly Inflationary Accounting, for additional information on our commodity costs and specific currency risks we are monitoring.

 

33


Table of Contents

Discussion and Analysis of Historical Results

Items Affecting Comparability of Financial Results

The following table includes significant income or (expense) items that affected the comparability of our pre-tax results of operations and our effective tax rates. Please refer to the notes to the condensed consolidated financial statements indicated below for more information. Refer also to the Consolidated Results of Operations – Net Earnings and Earnings per Share Attributable to Mondelēz International table for the per share impacts of these items.

 

                                                                                              
          For the Three Months Ended June 30,     For the Six Months Ended June 30,  
     See Note    2015     2014     2015     2014  
          (in millions of U.S. dollars)  

Coffee business transactions

   Note 2         

Incremental costs for readying the businesses

      $ (157   $ (5   $ (185   $ (5

Net (loss) / gain on
currency hedges (1)

        (144     (7     407        (7

2014-2018 Restructuring Program:

   Note 6         

Restructuring charges

        (135     (1     (297     (1

Implementation charges

        (47     (9     (109     (9

2012-2014 Restructuring Program:

   Note 6         

Restructuring charges

        1        (54     3        (96

Implementation charges

               (19            (43

Remeasurement of Venezuelan net
monetary assets:

   Note 1         

Q1 2014: 6.30 to 10.70 bolivars to U.S. dollar

                             (142

Q1 2015: 11.50 to 12.00 bolivars to U.S. dollar

                      (11       

Loss on debt extinguishment and related expenses

   Note 7             (1     (713     (495

Gain on divestiture

   Note 2      13               13          

Effective tax rate

   Note 13      19.0     12.4     22.4     7.5

 

  (1) On February 11, 2015, we monetized certain currency hedges related to the anticipated cash receipt of 4 billion from the coffee business transactions, and we realized total pre-tax gains of $939 million, of which $311 million was recognized in the first quarter of 2015. On April 17, 2015, we monetized new forward contracts and realized total pre-tax gains of $296 million, of which $240 million was recognized in the first quarter and $56 million was recognized in the second quarter of 2015. During the second quarter, we entered into additional hedges which generated a net unrealized loss of $200 million through June 30, 2015. Refer to Note 2, Divestitures and Acquisitions–Divestiture of Coffee Business, for more information.

 

34


Table of Contents

Consolidated Results of Operations

The following discussion compares our consolidated results of operations for the three months and six months ended June 30, 2015 and 2014.

Three Months Ended June 30:

 

                                                                           
     For the Three Months Ended                
     June 30,                
     2015      2014      $ change      % change  
     (in millions, except per share data)         

Net revenues

   $ 7,661       $ 8,436       $ (775      (9.2)%   

Operating income

     841         957         (116      (12.1)%   

Net earnings attributable to
Mondelēz International

     406         622         (216      (34.7)%   

Diluted earnings per share attributable to Mondelēz International

     0.25         0.36         (0.11      (30.6)%   

Net Revenues – Net revenues decreased $775 million (9.2%) to $7,661 million in the second quarter of 2015, and Organic Net Revenue (1) increased $363 million (4.3%) to $8,799 million. Organic Net Revenue growth was driven entirely by our Power Brands, which grew 6.6%. In addition, emerging markets grew 9.7% and accounted for nearly the entire increase in our Organic Net Revenue. The underlying changes in net revenues and Organic Net Revenue are detailed below:

 

                  
     2015  

Change in net revenues (by percentage point)

  

Higher net pricing

     6.6 pp 

Unfavorable volume/mix

     (2.3 )pp 
  

 

 

 

Total change in Organic Net Revenue (1)

     4.3

Unfavorable currency

     (13.6 )pp 

Impact of acquisition

     0.1 pp 
  

 

 

 

Total change in net revenues

     (9.2 )% 
  

 

 

 

 

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

Organic Net Revenue growth was driven by higher net pricing, partially offset by unfavorable volume/mix. Net pricing was up, which includes the carryover benefit of pricing actions taken in 2014 as well as the effects of input cost-driven pricing actions taken during the first six months of 2015. Higher net pricing was reflected across all segments except North America. Unfavorable volume/mix was largely due to price elasticity as well as strategic decisions to exit certain low-margin product lines and the shift of Easter-related shipments into the first quarter. Unfavorable volume/mix was reflected across all segments except North America. Unfavorable currency impacts decreased net revenues by $1,148 million, due primarily to the strength of the U.S. dollar relative to several currencies, including the euro, Brazilian real, Russian ruble, British pound sterling and Australian dollar. The February 16, 2015 acquisition of the Enjoy Life Foods snacking business in North America added $10 million in incremental net revenues for the quarter.

 

35


Table of Contents

Operating Income – Operating income decreased $116 million (12.1%) to $841 million in the second quarter of 2015, Adjusted Operating Income (1) increased $108 million (10.2%) to $1,165 million and Adjusted Operating Income on a constant currency basis (1) increased $262 million (24.8%) to $1,319 million due to the following:

 

                                     
     Operating
Income
     Change  
     (in millions)      (percentage point)  

Operating Income for the Three Months Ended June 30, 2014

   $ 957      

Spin-Off Costs (2)

     16         2.0pp   

2012-2014 Restructuring Program costs (3)

     73         8.2pp   

2014-2018 Restructuring Program costs (3)

     10         1.1pp   

Integration Program and other acquisition integration costs (4)

     (1      (0.1)pp   

Costs associated with the coffee business transactions (5)

     5         0.5pp   

Operating income from divestiture (6)

     (3      (0.3)pp   
  

 

 

    

Adjusted Operating Income (1) for the

Three Months Ended June 30, 2014

   $ 1,057      

Higher net pricing

     553         52.3pp   

Higher input costs

     (242      (23.0)pp   

Unfavorable volume/mix

     (62      (5.8)pp   

Higher selling, general and administrative expenses

     (127      (12.0)pp   

Change in unrealized gains/losses on hedging activities

     140         13.3pp   

Other, net

               
  

 

 

    

 

 

 

Total change in Adjusted Operating Income (constant currency) (1)

     262         24.8%   

Unfavorable currency—translation

     (154      (14.6)pp   
  

 

 

    

 

 

 

Total change in Adjusted Operating Income (1)

     108         10.2%   
  

 

 

    

 

 

 

Adjusted Operating Income (1) for the
Three Months Ended June 30, 2015

   $ 1,165      

2012-2014 Restructuring Program costs (3)

     1         0.1pp   

2014-2018 Restructuring Program costs (3)

     (182      (18.8)pp   

Integration Program and other acquisition integration costs (4)

     (1      (0.1)pp   

Costs associated with the coffee business transactions (5)

     (157      (16.3)pp   

Operating income from divestiture (6)

     5         0.5pp   

Gain on divestiture (6)

     13