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Mondelez International, Inc. 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-12.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Graphic
  7. Graphic
Form 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 September 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 October 23, 2015, there were 1,589,167,484 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 Nine Months Ended September 30, 2015 and 2014

     1   
 

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

     2   
 

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

     3   
 

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

     4   
 

Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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

     34   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     63   
Item 4.  

Controls and Procedures

     63   
PART II – OTHER INFORMATION   
Item 1.  

Legal Proceedings

     65   
Item 1A.  

Risk Factors

     65   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     65   
Item 6.  

Exhibits

     66   
Signature        67   

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
September 30,
     For the Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Net revenues

   $ 6,849       $ 8,337       $ 22,272       $ 25,414   

Cost of sales

     4,179         5,195         13,595         15,963   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     2,670         3,142         8,677         9,451   

Selling, general and administrative expenses

     1,790         2,053         5,675         6,356   

Asset impairment and exit costs

     155         188         546         285   

Gains on coffee business transactions and divestiture

     (7,122              (7,135        

Amortization of intangibles

     45         48         137         157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     7,802         853         9,454         2,653   

Interest and other expense / (income)

     114         (227      814         717   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     7,688         1,080         8,640         1,936   

Provision for income taxes

     348         178         561         242   

Equity method investment net losses

     72                 72           
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

     7,268         902         8,007         1,694   

Noncontrolling interest

     2         3         11         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to Mondelēz International

   $ 7,266       $ 899       $ 7,996       $ 1,684   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share data:

           

Basic earnings per share attributable to
Mondelēz International

   $ 4.52       $ 0.53       $ 4.91       $ 0.99   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to
Mondelēz International

   $ 4.46       $ 0.53       $ 4.86       $ 0.98   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared

   $ 0.17       $ 0.15       $ 0.47       $ 0.43   

See accompanying notes to the condensed consolidated financial statements.

 

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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 Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  

Net earnings

   $ 7,268       $ 902       $ 8,007       $ 1,694   

Other comprehensive earnings / (losses):

           

Currency translation adjustment:

           

Translation adjustment

     (1,047      (1,755      (2,371      (1,615

Tax (expense) / benefit

     (23      (147      (111      (150

Pension and other benefits:

           

Net actuarial gain / (loss) arising during period

     127         16         99         16   

Reclassification of (gains) / losses into
net earnings:

           

Amortization of experience losses and prior service costs

     46         31         165         100   

Settlement losses

     51         9         64         25   

Tax (expense) / benefit

     (68      (26      (99      (47

Derivatives accounted for as hedges:

           

Net derivative gains / (losses)

     (113      34         (103      (78

Reclassification of (gains) / losses into
net earnings

     75         (18      27         (22

Tax (expense) / benefit

     29         14         16         57   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive earnings / (losses)

     (923      (1,842      (2,313      (1,714

Comprehensive earnings / (losses)

     6,345         (940      5,694         (20

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

     (4      (15      (11      (9
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive earnings / (losses) attributable to Mondelēz International

   $ 6,349       $ (925    $ 5,705       $ (11
  

 

 

    

 

 

    

 

 

    

 

 

 

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)

 

                                     
     September 30,      December 31,  
     2015      2014  

ASSETS

     

Cash and cash equivalents

   $            2,039       $            1,631   

Trade receivables (net of allowances of $61 at September 30, 2015
and $66 at December 31, 2014)

     3,352         3,802   

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

     2,566         949   

Inventories, net

     3,029         3,480   

Deferred income taxes

     550         480   

Other current assets

     638         1,408   
  

 

 

    

 

 

 

Total current assets

     12,174         11,750   

Property, plant and equipment, net

     8,564         9,827   

Goodwill

     20,963         23,389   

Intangible assets, net

     19,115         20,335   

Prepaid pension assets

     42         53   

Equity method investments

     4,895         662   

Other assets

     637         799   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 66,390       $ 66,815   
  

 

 

    

 

 

 

LIABILITIES

     

Short-term borrowings

   $ 1,571       $ 1,305   

Current portion of long-term debt

     1,759         1,530   

Accounts payable

     4,875         5,299   

Accrued marketing

     1,563         2,047   

Accrued employment costs

     932         946   

Other current liabilities

     2,937         2,880   
  

 

 

    

 

 

 

Total current liabilities

     13,637         14,007   

Long-term debt

     13,029         13,865   

Deferred income taxes

     5,137         5,512   

Accrued pension costs

     2,132         2,912   

Accrued postretirement health care costs

     541         526   

Other liabilities

     1,962         2,140   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     36,438         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 September 30, 2015 and December 31, 2014)

               

Additional paid-in capital

     31,727         31,651   

Retained earnings

     21,707         14,529   

Accumulated other comprehensive losses

     (9,609      (7,318

Treasury stock, at cost (405,346,755 shares at September 30, 2015
and 332,896,779 shares at December 31, 2014)

     (13,957      (11,112
  

 

 

    

 

 

 

Total Mondelēz International Shareholders’ Equity

     29,868         27,750   

Noncontrolling interest

     84         103   
  

 

 

    

 

 

 

TOTAL EQUITY

     29,952         27,853   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 66,390       $ 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

                     7,996                         11         8,007   

Other comprehensive losses, net of income taxes

                             (2,291              (22      (2,313

Exercise of stock options and issuance of other stock awards

             76         (60              239                 255   

Common Stock repurchased

                                     (3,084              (3,084

Cash dividends declared ($0.47 per share)

                     (758                              (758

Dividends paid on noncontrolling interest and other activities

                                             (8      (8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at September 30, 2015

   $       $ 31,727       $ 21,707       $ (9,609    $ (13,957    $ 84       $ 29,952   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  * Noncontrolling interest as of September 30, 2014 was $112 million, as compared to $159 million as of January 1, 2014. The change of $(47) million during the nine months ended September 30, 2014 was due to $(38) million of dividends paid, $10 million of net earnings and $(19) million of other comprehensive losses, net of taxes.

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

Mondelēz International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of U.S. dollars)

(Unaudited)

 

                                     
     For the Nine Months Ended  
     September 30,  
     2015      2014  

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES

     

Net earnings

   $ 8,007       $ 1,694   

Adjustments to reconcile net earnings to operating cash flows:

     

Depreciation and amortization

     663         797   

Stock-based compensation expense

     98         104   

Deferred income tax benefit

     (81      (255

Asset impairments

     195         77   

Loss on early extinguishment of debt

     708         493   

Gains on coffee business transactions and divestiture

     (7,135        

Coffee business transactions currency-related net gains

     (436      (413

Loss/(income) from equity method investments

     16         (83

Distributions from equity method investments

     58         61   

Other non-cash items, net

     142         (6

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

     

Receivables, net

     (868      (163

Inventories, net

     (314      (625

Accounts payable

     496         19   

Other current assets

     36         (106

Other current liabilities

     11         (430

Change in pension and postretirement assets and liabilities, net

     (184      (15
  

 

 

    

 

 

 

Net cash provided by operating activities

     1,412         1,149   
  

 

 

    

 

 

 

CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES

     

Capital expenditures

     (1,178      (1,129

Proceeds from coffee business transactions and divestiture, net of disbursements

     4,091           

Proceeds from coffee business transactions currency hedge settlements

     1,050           

Acquisitions, net of cash received

     (536        

Proceeds from sale of property, plant and equipment and other

     33         29   
  

 

 

    

 

 

 

Net cash provided by / (used in) investing activities

     3,460         (1,100
  

 

 

    

 

 

 

CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES

     

Issuances of commercial paper, maturities greater than 90 days

     613         1,986   

Repayments of commercial paper, maturities greater than 90 days

     (710      (2,072

Net issuances of other short-term borrowings

     396         236   

Long-term debt proceeds

     3,606         3,032   

Long-term debt repaid

     (4,543      (2,524

Repurchase of Common Stock

     (3,003      (1,020

Dividends paid

     (736      (713

Other

     107         163   
  

 

 

    

 

 

 

Net cash used in financing activities

     (4,270      (912
  

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (194      (140
  

 

 

    

 

 

 

Cash and cash equivalents:

     

Increase / (decrease)

     408         (1,003

Balance at beginning of period

     1,631         2,622   
  

 

 

    

 

 

 

Balance at end of period

   $ 2,039       $ 1,619   
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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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 we 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.

Equity Method Investments:

We account for investments in which we exercise significant influence (20%-50% ownership interest) under the equity method of accounting. On July 2, 2015, we contributed our global coffee businesses to a new company, Jacobs Douwe Egberts (“JDE”), in which we now hold a 43.5% equity interest (collectively, the “coffee business transactions”). Historically, our coffee businesses and the income from primarily coffee-related and smaller equity method investments were recorded within our operating income as these businesses operated as direct extensions of our base business. Following the coffee business transactions, while we retain an ongoing interest in coffee through significant equity method investments, and we have significant influence with JDE and other equity method investments, we do not have control over these operations directly. As such, beginning in the third quarter, we began to recognize the investment earnings in after-tax equity method investment earnings outside of operating income and segment income. For periods prior to the July 2, 2015 closing, the coffee and other equity method investment earnings were included within our operating income and segment income. Please see Note 2, Divestitures and Acquisitions – Coffee Business Transactions, and Note 15, Segment Reporting, for more information on these transactions.

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 $19 million on net revenues and $8 million on operating income in the three months and $58 million on net revenues and $27 million on operating income in the nine months ended September 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.

 

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Table of Contents

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. Through September 30, 2014, we recognized $19 million of additional remeasurement charges related primarily to changes in the SICAD I rate.

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 September 30, 2015 is the prevailing SICAD rate until our specific industry group auctions make U.S. dollars available at another offered SICAD 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 September 30, 2015, the SIMADI exchange rate was 199.42 bolivars to the U.S. dollar.

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. The large majority of imports continue to be sourced at the 6.30 official rate. Availability of U.S. dollars at the SICAD rate has been limited, and while we were able to secure U.S. dollars at the SICAD rate in the first six months of the year, we were not able to secure any U.S. dollars at this rate during the third quarter. Availability of U.S. dollars at the SIMADI rate has also been limited and to date we have not sourced U.S. dollars at this rate.

Based on our current sourcing of goods and services, 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. 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. We will also continue to monitor liquidity and availability of U.S. dollars at different rates as this situation may change in the future.

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 nine months ended September 30, 2015 (measured at the SICAD rate), and cash, net monetary assets and net assets of our Venezuelan subsidiaries as of September 30, 2015 (translated at a SICAD rate of 12.00 bolivars to the U.S. dollar):

 

Venezuela operations

  

Three Months Ended September 30, 2015

Net revenues    $315 million or 4.6% of consolidated net revenues
    

Nine Months Ended September 30, 2015

Net revenues    $834 million or 3.7% of consolidated net revenues
    

As of September 30, 2015

Cash    $401 million
Net monetary assets    $352 million
Net assets    $617 million

 

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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.

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 September 30, 2015, the value of the peso relative to the U.S. dollar declined 11%. 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 have an adverse impact on our ongoing results of operations. Our Argentinian operations contributed approximately $205 million, or 3.0% of consolidated net revenues for the three months and $565 million, or 2.5% of consolidated net revenues for the nine months ended September 30, 2015. As of September 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, so we 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 September 30, 2015, the value of the ruble relative to the U.S. dollar decreased 11%. 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 $145 million, or 2.1% of consolidated net revenues for the three months and $525 million, or 2.4% of consolidated net revenues for the nine months ended September 30, 2015. As of September 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, so we 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 Brazil, Ukraine, Turkey and Nigeria, 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 to our operating results from changing to highly inflationary accounting in these countries.

New Accounting Pronouncements:

In September 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under the new guidance, measurement-period adjustments should be accounted for during the period in which the entity determines the amount of the adjustment. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted, and should be applied prospectively to open measurement periods after the effective date, regardless of the acquisition date. We plan to early adopt and to apply the standard in our accounting for the acquisitions that we closed this quarter. See Note 2, Divestitures and Acquisitions, for more information.

In July 2015, the FASB issued an ASU that simplifies the guidance on the subsequent measurement of inventory. U.S. GAAP currently requires an entity to measure inventory at the lower of cost or market. Previously, market could be replacement cost, net realizable value or net realizable value less an approximate normal profit margin. Under the new standard, inventory should be valued at the lower of cost or net realizable value. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact of the ASU across our operations and on our consolidated financial statements.

 

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In May 2015, the FASB issued an ASU that applies to reporting entities that 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. In August 2015, the FASB issued an update clarifying that for line-of-credit arrangements, entities may continue to defer debt issuance costs as an asset. The ASU represents a change in accounting principle and requires retrospective application. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. We plan to adopt the new standard as of December 31, 2015.

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 January 1, 2016 and are currently assessing the impact across our operations and 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 guidance in the areas of licenses and identifying performance obligations. In August 2015, the FASB issued an ASU that defers 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 across our operations and on our consolidated financial statements.

Reclassifications:

Certain amounts previously reported have been reclassified to conform to current-year presentation. We reclassified equity method investments on the condensed consolidated balance sheets to conform with the current-year presentation. We also reclassified cash flows related to our historical equity method investees on the condensed consolidated statements of cash flows. Refer to the Equity Method Investments section in this Note for additional discussion of the presentation of our equity method investment earnings.

 

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Note 2.  Divestitures and Acquisitions

Coffee Business Transactions:

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 or JDE. We now hold a 43.5% equity interest in JDE and Acorn Holdings B.V., owner of DEMB, holds a 56.5% share. In connection with the transaction, we recorded a preliminary pre-tax gain of $7.1 billion (or $6.9 billion after-taxes) on the contribution of our global coffee businesses during the three months ended September 30, 2015. In addition, we recorded approximately $1 billion of net gains on currency exchange forward contracts related to the hedging of proceeds for the transaction as described further below in this Note. The consideration we received to date for our coffee businesses consists of 3.8 billion of cash ($4.2 billion U.S. dollars as of July 2, 2015), a 43.5 percent equity interest in JDE and $1.1 billion in receivables related to estimated sales price adjustments and tax formation cost payments expected to be paid in 2016. During the third quarter, we also recorded $283 million of cash and receivables related to the reimbursement of costs from JDE which we incurred related to separating our coffee businesses. The cash and equity consideration we received reflects an adjustment for retaining our interest in a Korea-based joint venture, Dongsuh Foods Corporation, which was part of the original transaction and valuation. 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”), which had also been considered in the original transaction and valuation. 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.

During the third quarter we completed a preliminary valuation of our investment in JDE as of the closing date and recorded a $4.5 billion estimated investment in JDE within equity method investments on the condensed consolidated balance sheet. We and JDE are currently in the process of finalizing the value of JDE and our investment in JDE as of the closing date. The value of our investment in JDE is also affected by the estimated sales price adjustment that will be settled in 2016. As such, the contribution proceeds we recorded, including the values for our investment in JDE and the sales price adjustment, are estimated and subject to further adjustment as we work with Acorn Holdings B.V. and JDE to address the remaining terms of the agreement. As a result, the final amount of consideration we receive and the gain we recognize on the transactions may change materially until we conclude these matters.

As a result of the transaction, our snacks product categories, consisting of biscuits, chocolate, gum and candy, make up the majority of our business portfolio, contributing approximately 84% of our 2015 year to date and 85% of our 2014 net revenues after excluding coffee net revenues. By retaining a significant stake in JDE, the coffee category will continue to be significant to our results. As such, we have reflected our historical coffee results and equity earnings from JDE in results from continuing operations reflecting the fact that results from the coffee category continue to be a significant part of our net earnings and strategy going forward.

Additionally, we recorded currency-related net gains of $29 million in the three months and $436 million in the nine months ended September 30, 2015 and $420 million in the three months and $413 million in the nine months ended September 30, 2014 due to currency exchange forward contracts related to the receipt of the coffee business transaction proceeds and the subsequent transfers of these funds to our subsidiaries, as detailed below. To lock in an expected pre-tax 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. We recognized a $19 million gain on the final settlement of the forward contracts during the three months ended September 30, 2015 and a net gain of $405 million on these contracts during 2015. In 2014, we recognized $420 million of gains in the three months and $413 million in the nine months ended September 30, 2014. The currency hedge gains and losses were recorded in interest and other expense / (income). Cumulatively over 2014 and through the final settlement of the forward contracts on July 6, 2015, we realized aggregate net gains and received cash of approximately $1.0 billion on these currency exchange forward contracts. In addition to the receipt of $4.2 billion of cash consideration to date, we received $1 billion of cash from realized hedges for a total of $5.2 billion of cash received to date related to the coffee business transactions.

During the second quarter of 2015, we 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 deconsolidated. During July 2015, we settled these forward contracts with a notional value of 1.6 billion and realized a net loss of $4 million in the three months ended and a net gain of $17 million in the nine months ended September 30, 2015. In connection with transferring the funds to our subsidiaries that deconsolidated net assets and shares, we incurred additional currency gains of $14 million in the third quarter. These currency-related gains and losses were recorded within interest and other expense / (income).

 

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Our coffee business results are reflected in our consolidated financial statements for all periods prior to the July 2, 2015 closing date. The pre-tax earnings of the coffee businesses were:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (in millions)  

Earnings before income taxes

   $       $ 184       $ 342       $ 494   

We also incurred incremental expenses related to readying our global coffee businesses for the transactions that totaled $54 million in the three months and $239 million in the nine months ended September 30, 2015 and $10 million in the three months and $15 million in the nine months ended September 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.

Prior to the July 2, 2015 closing, 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 the majority of the EU-based Carte Noire business and DEMB’s Merrild business, primarily in France and Denmark. Those businesses have been transferred to JDE. JDE will complete the sale of these businesses in line with the European Commission agreements. As these businesses were recorded at their fair value as of July 2, 2015 reflecting the then pending sales values, we did not and will not record any gain or loss on the sale of these businesses in our share of JDE’s earnings.

On July 2, 2015, we deconsolidated the following assets and liabilities:

 

                  
     As of July 2,  
     2015  
     (in millions)  

Assets

  

Cash and cash equivalents

   $ 488   

Trade receivables

     468   

Other receivables

     24   

Inventories, net

     469   

Deferred income taxes

     6   

Other current assets

     44   
  

 

 

 

Current assets

     1,499   

Property, plant and equipment, net

     751   

Goodwill

     1,664   

Intangible assets, net

       

Other assets

     35   
  

 

 

 

Noncurrent assets

     2,450   
  

 

 

 

Total assets

   $ 3,949   
  

 

 

 

Liabilities

  

Accounts payable

   $ 438   

Accrued marketing

     290   

Accrued employment costs

     29   

Other current liabilities

     63   
  

 

 

 

Current liabilities

     820   

Deferred income taxes

     63   

Accrued pension costs

     146   

Other liabilities

     4   
  

 

 

 

Noncurrent liabilities

     213   
  

 

 

 

Total liabilities

   $ 1,033   
  

 

 

 

Net assets deconsolidated

   $ 2,916   
  

 

 

 

 

 

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Additionally, we recorded pension settlement losses of $49 million related to our historical coffee businesses within accumulated other comprehensive losses.

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. 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.

We are in the process of completing the valuation work for the acquired net assets. We have recorded a preliminary allocation of the consideration paid including $10 million to inventory, $35 million to property, plant and equipment, $17 million to other net liabilities and $480 million of estimated goodwill. We recorded the non-compete and consulting agreements as prepaid contracts within other current and non-current assets and they will be amortized into net earnings over the remaining contract terms. The acquisition added $70 million in incremental net revenues and $16 million in incremental operating income for the quarter. Additionally, we recorded acquisition costs of $6 million for the three months and $7 million for the nine months ended September 30, 2015 and integration costs of $4 million for the three months and $5 million for the nine months ended September 30, 3015 within selling, general and administrative expenses.

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 nine months ended September 30, 2015.

Note 3.  Inventories

Inventories consisted of the following:

 

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

Raw materials

   $ 967       $ 1,122   

Finished product

     2,062         2,358   
  

 

 

    

 

 

 

Inventories, net

   $ 3,029       $ 3,480   
  

 

 

    

 

 

 

On July 2, 2015, we deconsolidated $469 million of net inventory with the coffee business transactions. See Note 2, Divestitures and Acquisitions, for additional information.

 

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Note 4.  Property, Plant and Equipment

Property, plant and equipment consisted of the following:

 

                                                                           
                  

As of

September 30,

    

As of

December 31,

 
                   2015      2014  
                   (in millions)  

Land and land improvements

         $ 502       $ 574   

Buildings and building improvements

           2,731         3,117   

Machinery and equipment

           9,983         11,737   

Construction in progress

           1,572         1,484   
        

 

 

    

 

 

 
           14,788         16,912   

Accumulated depreciation

           (6,224      (7,085
        

 

 

    

 

 

 

Property, plant and equipment, net

         $ 8,564       $ 9,827   
        

 

 

    

 

 

 

 

On July 2, 2015, we deconsolidated $751 million of net property, plant and equipment with the coffee business transactions. 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 $56 million in the three months and $191 million in the nine months ended September 30, 2015 and $48 million in the three months and $74 million in the nine months ended September 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 Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (in millions)                

Latin America

   $ 6       $       $ 40       $   

Asia Pacific

     18         18         46         18   

EEMEA

     2         4         4         5   

Europe

     14         13         51         14   

North America

     16         13         50         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-cash asset write-downs

   $ 56       $ 48       $ 191       $ 74   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Note 5.  Goodwill and Intangible Assets

 

Goodwill by reportable segment was:

 

  

  

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

Latin America

         $ 865       $ 1,127   

Asia Pacific

           2,517         2,395   

EEMEA

           1,373         1,942   

Europe

           7,316         8,952   

North America

           8,892         8,973   
        

 

 

    

 

 

 

Goodwill

         $ 20,963       $ 23,389   
        

 

 

    

 

 

 

 

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Intangible assets consisted of the following:

 

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

Non-amortizable intangible assets

   $ 17,812       $ 18,810   

Amortizable intangible assets

     2,351         2,525   
  

 

 

    

 

 

 
     20,163         21,335   

Accumulated amortization

     (1,048      (1,000
  

 

 

    

 

 

 

Intangible assets, net

   $ 19,115       $ 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 September 30, 2015, the weighted-average life of our amortizable intangible assets was 13.6 years.

Amortization expense for intangible assets was $45 million in the three months and $137 million in the nine months ended September 30, 2015 and $48 million in the three months and $157 million in the nine months ended September 30, 2014. We currently estimate annual amortization expense for each of the next five years to be approximately $184 million, estimated using September 30, 2015 exchange rates.

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:

 

                                     
            Intangible  
     Goodwill      Assets, at Cost  
     (in millions)  

Balance at January 1, 2015

   $ 23,389       $ 21,335   

Changes due to:

     

Currency

     (1,196      (1,229

Deconsolidation and divestiture

     (1,729        

Acquisitions

     500         58   

Other

     (1      (1
  

 

 

    

 

 

 

Balance at September 30, 2015

   $ 20,963       $ 20,163   
  

 

 

    

 

 

 

Changes to goodwill and intangibles were:

    Deconsolidation and divestiture – On July 2, 2015, we deconsolidated $1,664 million of goodwill and less than $1 million of intangible assets in connection with the coffee business transactions. On April 23, 2015, we completed the divestiture of our 50 percent interest in AGF, which resulted in divesting $65 million of goodwill.
    Acquisitions – On July 15, 2015, we acquired an 80% interest in a biscuit operation in Vietnam and recorded a preliminary allocation of $480 million of goodwill as we complete the final valuation work for the 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.

 

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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 $1.0 billion related to the 2014-2018 Restructuring Program.

Restructuring Costs:

We recorded restructuring charges of $146 million in the three months and $442 million in the nine months ended September 30, 2015 and $25 million in the three months and $26 million in the nine months ended September 30, 2014 within asset impairment and exit costs. The activity for the 2014-2018 Restructuring Program liability for the nine months ended September 30, 2015 was:

 

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

Liability balance, January 1, 2015

   $ 224       $       $ 224   

Charges

     252         190         442   

Cash spent

     (156              (156

Non-cash settlements / adjustments

     (6      (190      (196

Currency

     (15              (15
  

 

 

    

 

 

    

 

 

 

Liability balance, September 30, 2015

   $ 299       $       $ 299   
  

 

 

    

 

 

    

 

 

 

We spent $51 million in the three months and $156 million in the nine months ended September 30, 2015 and $25 million in the three months and $26 million in the nine months ended September 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 $56 million in the three months and $196 million in the nine months ended September 30, 2015. At September 30, 2015, $267 million of our net restructuring liability was recorded within other current liabilities and $32 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 $75 million in the three months and $185 million in the nine months ended September 30, 2015 and $42 million in the three months and $51 million in the nine months ended September 30, 2014. We recorded these costs within cost of sales and general corporate expense within selling, general and administrative expenses.

 

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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
September 30, 2015

                    

Restructuring Costs

   $ 30       $ 33       $ 7       $ 35       $ 39       $ 2       $ 146   

Implementation Costs

     6         3         1         19         19         27         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36       $ 36       $ 8       $ 54       $ 58       $ 29       $ 221   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Nine Months Ended
September 30, 2015

                    

Restructuring Costs

   $ 79       $ 78       $ 21       $ 190       $ 70       $ 4       $ 442   

Implementation Costs

     27         12         7         47         40         52         185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 106       $ 90       $ 28       $ 237       $ 110       $ 56       $ 627   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Three Months Ended
September 30, 2014

                    

Restructuring Costs

   $ 25       $       $       $       $       $       $ 25   

Implementation Costs

     7         4         3         14         1         13         42   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32       $ 4       $ 3       $ 14       $ 1       $ 13       $ 67   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Nine Months Ended
September 30, 2014

                    

Restructuring Costs

   $ 26       $       $       $       $       $       $ 26   

Implementation Costs

     8         4         3         14         1         21         51   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34       $ 4       $ 3       $ 14       $ 1       $ 21       $ 77   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Project 2014-2015 (2)

                    

Restructuring Costs

   $ 158       $ 94       $ 40       $ 283       $ 124       $ 18       $ 717   

Implementation Costs

     45         21         11         82         48         84         291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 203       $ 115       $ 51       $ 365       $ 172       $ 102       $ 1,008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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Restructuring Costs:

We recorded reversals to the restructuring charges of $3 million in the nine months ended September 30, 2015 related to accruals no longer required. We recorded restructuring charges of $163 million in the three months and $259 million in the nine months ended September 30, 2014 within asset impairment and exit costs. The activity for the 2012-2014 Restructuring Program liability for the nine months ended September 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

     (57              (57

Non-cash settlements / adjustments

                       

Currency

     (6              (6
  

 

 

    

 

 

    

 

 

 

Liability balance, September 30, 2015

   $ 62       $       $ 62   
  

 

 

    

 

 

    

 

 

 

We spent $14 million in the three months and $57 million in the nine months ended September 30, 2015 and $44 million in the three months and $110 million in the nine months ended September 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 $53 million in the three months and $77 million in the nine months ended September 30, 2014. At September 30, 2015, $47 million of our net restructuring liability was recorded within other current liabilities and $15 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 $23 million in the three months and $66 million in the nine months ended September 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 nine months ended September 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
September 30, 2014

                    

Restructuring Costs

   $ 3       $ 27       $ 14       $ 85       $ 34       $       $ 163   

Implementation Costs

             1                 14         7         1         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3       $ 28       $ 14       $ 99       $ 41       $ 1       $ 186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Nine Months Ended
September 30, 2014

                    

Restructuring Costs

   $ 7       $ 28       $ 26       $ 128       $ 70       $       $ 259   

Implementation Costs

     1         1         2         42         20                 66   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8       $ 29       $ 28       $ 170       $ 90       $       $ 325   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Note 7. Debt

Short-Term Borrowings:

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

 

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

Commercial paper

   $ 1,279         0.5%       $ 1,101         0.4%   

Bank loans

     292         9.0%         204         8.8%   
  

 

 

       

 

 

    

Total short-term borrowings

   $ 1,571          $ 1,305      
  

 

 

       

 

 

    

As of September 30, 2015, the commercial paper issued and outstanding had between 1 and 55 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:

We 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 September 30, 2015, we complied with the covenant as our shareholders’ equity as defined by the covenant was $39.5 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 September 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 $1.9 billion at September 30, 2015 and $2.1 billion at December 31, 2014. Borrowings on these lines amounted to $292 million at September 30, 2015 and $204 million at December 31, 2014.

Long-Term Debt:

On September 21, 2015, we priced an offering of fr.400 million of Swiss franc-denominated notes, or approximately $414 million in U.S. dollars as of the October 6, 2015 settlement date, consisting of:

    fr.135 million (or $140 million) of 0.625% fixed rate notes that mature on October 6, 2020
    fr.265 million (or $274 million) of 1.125% fixed rate notes that mature on December 21, 2023

On October 6, 2015, we received net proceeds of $410 million that were used for general corporate purposes and to fund upcoming debt maturities. On this date, we recorded the fr.400 million of Swiss franc-denominated notes and less than $1 million of premiums and deferred financing costs, which will be amortized into interest expense over the life of the notes.

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.

 

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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 nine months ended September 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 3.5% as of September 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 September 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 September 30, 2015, the aggregate fair value of our total debt was $16,874 million and its carrying value was $16,359 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 / (Income):

Interest and other expense / (income) within our results of continuing operations consisted of:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (in millions)  

Interest expense, debt

   $ 139       $ 188       $ 461       $ 582   

Loss on debt extinguishment and
related expenses

                     713         495   

Coffee business transactions
currency-related net gains

     (29      (420      (436      (413

Loss related to interest rate swaps

                     34           

Other expense, net

     4         5         42         53   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest and other expense / (income)

   $ 114       $ (227    $ 814       $ 717   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Derivatives designated as
accounting hedges:

           

Currency exchange contracts

   $ 23       $ 4       $ 69       $ 17   

Commodity contracts

     12         25         12         33   

Interest rate contracts

     22         69         13         42   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 57       $ 98       $ 94       $ 92   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as
accounting hedges:

           

Currency exchange contracts

   $ 61       $ 23       $ 735       $ 24   

Commodity contracts

     80         98         90         194   

Interest rate contracts

     44         29         59         39   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 185       $ 150       $ 884       $ 257   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value

   $ 242       $ 248       $ 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 September 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

   $ 57       $       $ 57       $   

Commodity contracts

     (31      (7      (24        

Interest rate contracts

     (32              (32        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ (6    $ (7    $ 1       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                           
     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       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 $40 million as of September 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 $32 million as of September 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 $117 million as of September 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 $66 million as of September 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 September 30,        As of December 31,  
     2015        2014  
     (in millions)  

Currency exchange contracts:

       

Intercompany loans and forecasted interest payments

   $ 3,657         $ 3,640   

Forecasted transactions

     1,660           6,681   

Commodity contracts

     617           1,569   

Interest rate contracts

     3,051           3,970   

Net investment hedge – euro notes

     4,471           3,932   

Net investment hedge – pound sterling notes

     1,210           545   

Net investment hedge – Swiss franc notes

     694             

Cash Flow Hedges:

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

 

                                                                           
     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (in millions)  

Accumulated gain / (loss) at beginning of period

   $ (53    $ 44       $ (2    $ 117   

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

     60         (17      6         (20

Unrealized gain / (loss) in fair value

     (69      47         (66      (23
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated gain / (loss) at end of period

   $ (62    $ 74       $ (62    $ 74   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

                                                                           
     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
   2015      2014      2015      2014  
     (in millions)  

Currency exchange contracts –
forecasted transactions

   $ (11    $ 12       $ 73       $ 8   

Commodity contracts

     (49      5         (53      14   

Interest rate contracts

                     (26      (2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (60    $ 17       $ (6    $ 20   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

                                                                           
     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
   2015      2014      2015      2014  
     (in millions)  

Currency exchange contracts –
forecasted transactions

   $ 8       $ 58       $ 33       $ 65   

Commodity contracts

     (38      7         (61      10   

Interest rate contracts

     (39      (18      (38      (98
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (69    $ 47       $ (66    $ (23
  

 

 

    

 

 

    

 

 

    

 

 

 

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 / (income) 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 and third quarters 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 / (income) for interest rate contracts and currency exchange contracts related to intercompany loans.

Based on current market conditions, we would expect to transfer unrealized losses of $28 million (net of taxes) for commodity cash flow hedges, unrealized gains of $10 million (net of taxes) for currency cash flow hedges and unrealized losses of $2 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Hedge Coverage:

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

    commodity transactions for periods not exceeding the next 15 months;
    interest rate transactions for periods not exceeding the next 30 years and 5 months; and
    currency exchange transactions for periods not exceeding the next 15 months.

 

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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 / (income):

 

                                                                           
     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (in millions)  

Derivatives

   $ 4       $ (13    $ 8       $ 1   

Borrowings

     (4      13         (8      (1

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

Economic Hedges:

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

 

                                                                                              
     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
    

Location of

Gain / (Loss)

Recognized

in Earnings

     2015      2014      2015      2014     
     (in millions)       

Currency exchange contracts:

              

Intercompany loans and forecasted interest payments

   $ 8       $ 4       $ 22       $ 5      

Interest and other

expense / (income)

Forecasted transactions

     43         29         33         (11    Cost of sales

Forecasted transactions

     36         419         437         405       Interest and other expense / (income)

Forecasted transactions

     5         (4      (11      (7   

Selling, general and

administrative expenses

Interest rate contracts

             (1                    Interest and other expense / (income)

Commodity contracts

     (99      (36      (158      (4    Cost of sales
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ (7    $ 411       $ 323       $ 388      
  

 

 

    

 

 

    

 

 

    

 

 

    

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. The mark-to-market gains and losses on the derivatives were recorded in earnings. We recorded net gains of $19 million for the three months and $405 million for the nine months ended September 30, 2015 and $420 million for the three months and $413 million for the nine months ended September 30, 2014 within interest and other expense / (income) 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 deconsolidated. The hedges with a notional value of 1.6 billion generated net losses of $4 million in the three months and net gains of $17 million in the nine months ended September 30, 2015. The currency hedge gains and losses were recorded within interest and other expense / (income). See Note 2, Divestitures and Acquisitions — Coffee Business Transactions, for additional information on our currency exchange forward contracts transactions in the first nine months of 2015.

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
September 30,
     For the Nine Months Ended
September 30,
     Location of
Gain / (Loss)
Recognized in
AOCI
     2015      2014      2015      2014     
     (in millions)       

Euro notes

   $ (8    $ 219       $ 188       $ 219       Currency

Pound sterling notes

     30         37         17         14       Translation

Swiss franc notes

     18                 (13            Adjustment

 

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Note 9. Benefit Plans

Pension Plans

Prior to the July 2, 2015 closing of the coffee business transactions, certain active employees who transitioned to JDE participated in our Non-U.S. pension plans. Following the transactions, benefits began to be provided directly by JDE to participants continuing with JDE. JDE assumed certain pension plan obligations and received the related plan assets. As of July 2, 2015, we reduced our net benefit plan liabilities by $146 million and the related deferred tax assets by $25 million. Refer to Note 2, Divestitures and Acquisitions – Coffee Business Transactions, 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 September 30,          For the Three Months Ended September 30,    
     2015      2014      2015      2014  
     (in millions)  

Service cost

   $ 16       $ 14       $ 44       $ 47   

Interest cost

     16         16         77         99   

Expected return on
plan assets

     (23      (21      (120      (123

Amortization:

           

Net loss from experience differences

     11         7         33         26   

Prior service cost (1)

                               

Settlement losses (2)

     2         14                 (5
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 22       $ 30       $ 34       $ 44   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Service cost

   $ 48       $ 42       $ 145       $ 136   

Interest cost

     50         49         231         296   

Expected return on
plan assets

     (70      (61      (358      (371

Amortization:

           

Net loss from experience differences

     33         22         110         80   

Prior service cost (1)

     1         1         16         1   

Settlement losses (2)

     15         20                 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 77       $ 73       $ 144       $ 147   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) For the nine months ended September 30, 2015, amortization of prior service cost includes $17 million of pension curtailment losses related to employees who transitioned to JDE upon the contribution of our global coffee business. Refer to Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for more information.
  (2) Settlement losses include $1 million for the three months and $7 million for the nine months ended September 30, 2015 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. We recorded an additional $49 million of pension settlement losses related to the coffee business transactions within the gain on the coffee business transactions. Refer to Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for more information.

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 nine months ended September 30, 2015, we contributed $211 million to our U.S. plans and $212 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 $114 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.

 

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Postretirement Benefit Plans

Net postretirement health care costs consisted of the following:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (in millions)  

Service cost

   $ 4       $ 4       $ 11       $ 10   

Interest cost

     5         5         17         16   

Amortization:

           

Net loss from experience differences

     3         1         10         4   

Prior service credit

     (1      (3      (5      (8
  

 

 

    

 

 

    

 

 

    

 

 

 

Net postretirement health care costs

   $ 11       $ 7       $ 33       $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Postemployment Benefit Plans

Net postemployment costs consisted of the following:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (in millions)  

Service cost

   $ 2       $ 2       $ 5       $ 6   

Interest cost

     1         2         4         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net postemployment costs

   $ 3       $ 4       $ 9       $ 11   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     880,500         35.70      
  

 

 

       

Total options granted

     9,780,030         36.83      

Options exercised

     (5,573,601      23.03       $ 88 million   

Options cancelled

     (2,435,433      32.21      
  

 

 

       

Balance at September 30, 2015

     58,202,547         26.09       $ 233 million   
  

 

 

       

 

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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)

     845,809       Various      37.44      
  

 

 

          

Total shares granted

     3,697,649            37.05       $ 137 million   

Vested

     (3,442,710         37.18       $ 128 million   

Forfeited

     (1,160,533         32.17      
  

 

 

          

Balance at September 30, 2015

     9,677,046            28.31      
  

 

 

          

 

  (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. 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. Repurchases under the program are determined by management and are wholly discretionary. During the nine months ended September 30, 2015, we repurchased 79.7 million shares of Common Stock at an average cost of $38.69 per share, or an aggregate cost of $3.1 billion, of which $3.0 billion was paid during the period. All share repurchases were funded through available cash and commercial paper issuances. Through September 30, 2015, we have repurchased $7.7 billion of shares ($3.1 billion in the first nine months of 2015, $1.9 billion in 2014 and $2.7 billion in 2013) and we have $6.0 billion in remaining share repurchase capacity.

Note 11.  Commitments and Contingencies

Legal Proceedings:

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

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

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

 

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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 $57 million U.S. dollars as of September 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 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 $89 million U.S. dollars as of September 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 September 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 September 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 that it was investigating activities related to the trading of December 2011 wheat futures contracts that occurred prior to the Spin-Off of Kraft Foods Group. We cooperated with the staff in its investigation. On April 1, 2015, the CFTC filed a complaint against Kraft Foods Group and Mondelēz Global LLC (“Mondelēz Global”) in the U.S. District Court for the Northern District of Illinois, Eastern Division (the “CFTC action”). The complaint alleges that Kraft Foods Group and Mondelēz Global (1) manipulated or attempted to manipulate the wheat markets during the fall of 2011; (2) violated position limit levels for wheat futures and (3) engaged 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 Foods Group 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 Foods Group filed a motion to dismiss the CFTC’s claims of market manipulation and attempted manipulation. Additionally, several class action complaints were filed against Kraft Foods Group and Mondelēz Global in the U.S. District Court for the Northern District of Illinois by investors in wheat futures and options on behalf of themselves and others similarly situated. The complaints make similar allegations as those made in the CFTC action and seek class action certification; an unspecified amount for damages, interest and unjust enrichment; costs and fees; and injunctive, declaratory, and other unspecified relief. 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 Foods Group dated as of September 27, 2012, we expect to predominantly bear any monetary penalties or other payments in connection with the CFTC action.

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

Third-Party Guarantees:

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

 

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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             Derivatives         
     Translation      Pension and      Accounted for         
     Adjustments      Other Benefits      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)

     (2,069      90                 (1,979

Pension and other benefits

             16                 16   

Derivatives accounted for as hedges

     383                 (78      305   

Losses / (gains) reclassified into
net earnings

             125         (22      103   

Tax (expense) / benefit

     (150      (47      57         (140
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive earnings / (losses)

              (1,695
           

 

 

 

Balances at September 30, 2014

   $ (3,250    $ (1,408    $ 74       $ (4,584
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances at January 1, 2015

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

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive earnings / (losses), before reclassifications:

           

Currency translation adjustment (1)

     (2,749      97                 (2,652

Pension and other benefits

             99                 99   

Derivatives accounted for as hedges

     303                 (103      200   

Losses / (gains) reclassified into
net earnings

             229         27         256   

Tax (expense) / benefit

     (111      (99      16         (194
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive earnings / (losses)

              (2,291
           

 

 

 

Balances at September 30, 2015

   $ (7,599    $ (1,948    $ (62    $ (9,609
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) The condensed consolidated statement of other comprehensive earnings includes currency translation adjustment attributable to noncontrolling interests of $(22) million for the nine months ended September 30, 2015 and $(19) million for the nine months ended September 30, 2014.

 

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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 Nine Months Ended    

Location of

Gain / (Loss)

    September 30,     September 30,     Recognized
    2015     2014     2015     2014    

in Net Earnings

    (in millions)      

Pension and other benefits:

         

Reclassification of losses / (gains) into net earnings:

         

Amortization of experience losses
and prior service costs (1)

  $ 46      $ 31      $ 165      $ 100     

Settlement losses (1)

    51        9        64        25     

Tax impact

    (28     (26     (64     (47   Provision for income taxes

Derivatives accounted for as hedges:

         

Reclassification of losses / (gains) into net earnings:

         

Currency exchange contracts - forecasted transactions

    13        (13     (79     (9   Cost of sales

Commodity contracts

    62        (5     65        (16   Cost of sales

Interest rate contracts

                  41        3     

Interest and other

expense / (income)

Tax impact

    (10     2        (20     3      Provision for income taxes
 

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications into net earnings, net of tax

  $ 134      $ (2   $ 172      $ 59     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

  (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 immaterial out-of-period adjustments of $5 million benefit for the three months and $6 million expense for the nine months ended September 30, 2015. During 2014, we recorded immaterial out-of-period adjustments of $20 million for the three months and $15 million for the nine months ended September 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 2015 estimated annual effective tax rate, excluding impacts from the third quarter gain on the disposition of our coffee business, is 23.1%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions. Our 2015 third quarter effective tax rate of 4.5% benefitted from the one-time third quarter sale of our coffee business that resulted in a pre-tax gain of $7,122 million and $197 million of related tax expense, as well as $21 million of tax costs incurred to remit proceeds up from lower-tier foreign subsidiaries to allow cash to be redeployed within our retained foreign operations. Other discrete one-time events, which partially offset the costs associated with the sale of our coffee business, of $40 million primarily related to favorable audit settlements and expirations of statutes of limitations in several jurisdictions. Our effective tax rate for the nine months ended September 30, 2015 of 6.5% was favorably impacted by the sale of our coffee business in the third quarter. Other significant discrete one-time events 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), and $75 million from favorable audit settlements and expirations of statutes of limitations in several jurisdictions.

As of the third quarter of 2014, our estimated annual effective tax rate for 2014 was 21.2%, 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 third quarter effective tax rate of 16.5% was favorably impacted by net tax benefits from $65 million of discrete one-time events. The discrete net tax benefits primarily related to $109 million from favorable tax audit settlements and expirations of statutes of limitations in several jurisdictions, partially offset by $20 million of out-of-period adjustments. Our effective tax rate for the nine months ended September 30, 2014 of 12.5% was favorably impacted by net tax benefits from $169 million of discrete one-time events. The discrete net tax benefits primarily related to favorable tax audit settlements and expirations of statutes of limitations in several jurisdictions.

 

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Note 14.  Earnings Per Share

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

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (in millions, except share and per share data)  

Net earnings

   $ 7,268       $ 902       $ 8,007       $ 1,694   

Noncontrolling interest

     2         3         11         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to
Mondelēz International

   $ 7,266       $ 899       $ 7,996       $ 1,684   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for basic EPS

     1,609         1,688         1,627         1,695   

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

     20         17         19         18   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for diluted EPS

     1,629         1,705         1,646         1,713   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to Mondelēz International

   $ 4.52       $ 0.53       $ 4.91       $ 0.99   

Diluted earnings per share attributable to Mondelēz International

   $ 4.46       $ 0.53       $ 4.86       $ 0.98   

We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded less than 1 million antidilutive stock options for the three months and 10.8 million antidilutive stock options for the nine months ended September 30, 2015 and we excluded 9.7 million antidilutive stock options for the three months and 8.1 million antidilutive stock options for the nine months ended September 30, 2014.

Note 15. Segment Reporting

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

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

    Latin America
    Asia Pacific
    EEMEA
    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. Historically, we have recorded income from equity method investments within our operating income as these investments operated as extensions of our base business. Beginning in the third quarter of 2015, to align with the accounting for our new coffee equity method investment in JDE, we began to record the earnings from our equity method investments in after-tax equity method investment earnings outside of segment operating income. Earnings from equity method investments through July 2, 2015 recorded within segment operating income were $49 million in Asia Pacific, $3 million in EEMEA and $4 million in North America. For the three months ended September 30, 2014, these earnings were $19 million in Asia Pacific, $1 million in EEMEA and $3 million in North America. For the nine months ended September 30, 2014, these earnings were $73 million in Asia Pacific, $3 million in EEMEA and $7 million in North America. Also 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 $7 million during the three months and $22 million during the nine months ended September 30, 2015.

 

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We use segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), general corporate expenses (which are a component of selling, general and administrative expenses), amortization of intangibles, gains and losses on divestitures or acquisitions, gain on the coffee business transactions 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 / (income). 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      For the Nine Months Ended  
   September 30,      September 30,  
     2015      2014      2015      2014  
     (in millions)  

Net revenues:

           

Latin America

   $ 1,233       $ 1,315       $ 3,730       $ 3,913   

Asia Pacific

     1,101         1,153         3,278         3,460   

EEMEA

     586         894         2,150         2,740   

Europe

     2,173         3,215         7,963         10,151   

North America

     1,756         1,760         5,151         5,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

   $ 6,849       $ 8,337       $ 22,272       $ 25,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (in millions)  

Earnings before income taxes:

           

Operating income:

           

Latin America

   $ 134       $ 120       $ 422       $ 304   

Asia Pacific

     71         65         321         364   

EEMEA

     52         93         184         303   

Europe

     298         368         885         1,294   

North America

     275         272         817         744   

Unrealized gains / (losses) on
hedging activities

     (4      39         75         (8

General corporate expenses

     (95      (56      (240      (191

Amortization of intangibles

     (45      (48      (137      (157

Gains on coffee business transactions and divestiture

     7,122                 7,135           

Acquisition-related costs

     (6              (8        
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     7,802         853         9,454         2,653   

Interest and other (expense) / income

     (114      227         (814      (717
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

   $ 7,688       $ 1,080       $ 8,640       $ 1,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 / (income) for each period.

 

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Total assets by segment were:

 

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

Total assets (1):

   

Latin America

  $ 5,654      $ 6,470   

Asia Pacific (2)

    8,057        8,068   

EEMEA (2)

    4,100        5,153   

Europe (2)

    21,993        24,568   

North America

    21,332        21,287   

Equity method investments

    4,895        662   

Unallocated assets (3)

    359        607   
 

 

 

   

 

 

 

Total assets

  $ 66,390      $ 66,815   
 

 

 

   

 

 

 

 

  (1) Beginning in the third quarter of 2015, earnings from equity method investees are reported outside of segment operating income, as discussed above in this Note and Note 1, Basis of Presentation – Equity Method Investments, and outside of segment assets. We reclassified equity method investments above as of December 31, 2014 on a basis consistent with the 2015 presentation.
  (2) On July 2, 2015, we deconsolidated our global coffee businesses, primarily from our Europe, EEMEA and Asia Pacific segments. See Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for more information.
  (3) Unallocated assets consist primarily of cash and cash equivalents, deferred income taxes, centrally held property, plant and equipment, prepaid pension assets and derivative financial instrument balances.

Net revenues by product category were:

 

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

Biscuits

   $ 428       $ 356       $ 125       $ 592       $ 1,403       $ 2,904   

Chocolate

     184         370         232         1,086         64         1,936   

Gum & Candy

     262         171         134         177         289         1,033   

Beverages (1)

     178         76         45         43                 342   

Cheese & Grocery

     181         128         50         275                 634   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 1,233       $ 1,101       $ 586       $ 2,173       $ 1,756       $ 6,849   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Biscuits

   $ 338       $ 294       $ 165       $ 712       $ 1,382       $ 2,891   

Chocolate

     253         408         287         1,214         76         2,238   

Gum & Candy

     314         191         152         216         302         1,175   

Beverages (1)

     232         100         227         723                 1,282   

Cheese & Grocery

     178         160         63         350                 751   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 1,315       $ 1,153       $ 894       $ 3,215       $ 1,760       $ 8,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Biscuits

   $ 1,144       $ 940       $ 396       $ 1,828       $ 4,161       $ 8,469   

Chocolate

     680         1,074         627         3,204         161         5,746   

Gum & Candy

     852         550         418         558         829         3,207   

Beverages (1)

     570         324         502         1,493                 2,889   

Cheese & Grocery

     484         390         207         880                 1,961   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 3,730       $ 3,278       $ 2,150       $ 7,963       $ 5,151       $ 22,272   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
                                                                                                                 
     For the Nine Months Ended September 30, 2014 (2)  
     Latin      Asia                    North         
   America      Pacific      EEMEA      Europe      America      Total  
     (in millions)  

Biscuits

   $ 998       $ 898       $ 483       $ 2,228       $ 4,121       $ 8,728   

Chocolate

     833         1,155         751         3,804         189         6,732   

Gum & Candy

     893         585         499         677         840         3,494   

Beverages (1)

     684         359         782         2,348                 4,173   

Cheese & Grocery

     505         463         225         1,094                 2,287   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 3,913       $ 3,460       $ 2,740       $ 10,151       $ 5,150       $ 25,414   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) On July 2, 2015, we contributed our global coffee businesses primarily from our Europe, EEMEA and Asia Pacific segment beverage categories. The year-over-year decrease in beverages primarily reflects the coffee business transactions and unfavorable currency on our remaining beverage business. The impact of deconsolidating our coffee businesses on July 2, 2015 was $670 million in Europe, $169 million in EEMEA and $16 million in Asia Pacific on a year-over-year third quarter and constant currency basis. The impact of deconsolidating our coffee businesses on July 2, 2015 was $824 million in Europe, $250 million in EEMEA, $10 million in Asia Pacific and $2 million in Latin America on a year-over-year nine month period and constant currency basis. Refer to Note 2, Divestitures and Acquisitions – Coffee Business Transactions, 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.

 

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

Description of the Company

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

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.

Coffee Business Transactions

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 or JDE. We now hold a 43.5% equity interest in JDE and Acorn Holdings B.V., owner of DEMB, holds a 56.5% share. In connection with the transaction, we recorded a preliminary pre-tax gain of $7.1 billion (or $6.9 billion after-taxes) on the contribution of our global coffee businesses during the three months ended September 30, 2015. In addition, we recorded approximately $1 billion of net gains on currency exchange forward contracts related to the hedging of proceeds for the transaction as described further below in this section. The consideration we received to date for our coffee businesses consists of 3.8 billion of cash ($4.2 billion U.S. dollars as of July 2, 2015), a 43.5 percent equity interest in JDE and $1.1 billion in receivables related to estimated sales price adjustments and tax formation cost payments expected to be paid in 2016. During the third quarter, we also recorded $283 million of cash and receivables related to the reimbursement of costs from JDE which we incurred related to separating our coffee businesses. The cash and equity consideration we received reflects an adjustment for retaining our interest in a Korea-based joint venture, Dongsuh Foods Corporation, which was part of the original transaction and valuation. 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”), which had also been considered in the original transaction and valuation. 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 refer to Note 2, Divestitures and Acquisitions, for more information on the divestiture of AGF.

During the third quarter we completed a preliminary valuation of our investment in JDE as of the closing date and recorded a $4.5 billion estimated investment in JDE within equity method investments on the condensed consolidated balance sheet. We and JDE are currently in the process of finalizing the value of JDE and our investment in JDE as of the closing date. The value of our investment in JDE is also affected by the estimated sales price adjustment that will be settled in 2016. As such, the contribution proceeds we recorded, including the values for our investment in JDE and the sales price adjustment, are estimated and subject to further adjustment as we work with Acorn Holdings B.V. and JDE to address the remaining terms of the agreement. As a result, the final amount of consideration we receive and the gain we recognize on the transactions may change materially until we conclude these matters.

As a result of the transaction, our snacks product categories, consisting of biscuits, chocolate, gum and candy, make up the majority of our business portfolio, contributing approximately 84% of our 2015 year to date and 85% of our 2014 net revenues after excluding coffee net revenues. By retaining a significant stake in JDE, the coffee category will continue to be significant to our results. As such, we have reflected our historical coffee results and equity earnings from JDE in results from continuing operations reflecting the fact that results from the coffee category continue to be a significant part of our net earnings and strategy going forward.

 

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Additionally, we recorded currency-related net gains of $29 million in the three months and $436 million in the nine months ended September 30, 2015 and $420 million in the three months and $413 million in the nine months ended September 30, 2014 due to currency exchange forward contracts related to the receipt of the coffee business transaction proceeds and the subsequent transfers of these funds to our subsidiaries, as detailed below. To lock in an expected pre-tax 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. We recognized a $19 million gain on the final settlement of the forward contracts during the three months ended September 30, 2015 and a net gain of $405 million on these contracts during 2015. In 2014, we recognized $420 million of gains in the three months and $413 million in the nine months ended September 30, 2014. The currency hedge gains and losses were recorded in interest and other expense / (income). Cumulatively over 2014 and through the final settlement of the forward contracts on July 6, 2015, we realized aggregate net gains and received cash of approximately $1.0 billion on these currency exchange forward contracts. In addition to the receipt of $4.2 billion of cash consideration to date, we received $1 billion of cash from realized hedges for a total of $5.2 billion of cash received to date related to the coffee business transactions.

During the second quarter of 2015, we 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 deconsolidated. During July 2015, we settled these forward contracts with a notional value of 1.6 billion and realized a net loss of $4 million in the three months ended and a net gain of $17 million in the nine months ended September 30, 2015. In connection with transferring the funds to our subsidiaries that deconsolidated net assets and shares, we incurred additional currency gains of $14 million in the third quarter. These currency-related gains and losses were recorded within interest and other expense / (income).

Summary of Results

 

    Net revenues decreased 17.8% to $6.8 billion in the third quarter of 2015 and decreased 12.4% to $22.3 billion in the first nine 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, and the July 2, 2015 deconsolidation of our global coffee business.

 

    Organic Net Revenue increased 3.7% to $7.8 billion in the third quarter of 2015 and increased 3.4% to $23.5 billion in the first nine 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 increased 741.5% to $4.46 in the third quarter of 2015 and increased 395.9% to $4.86 in the first nine months of 2015 as compared to the same periods in the prior year. A number of significant items 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 decreased 16.0% to $0.42 in the third quarter of 2015 and increased 0.8% to $1.30 in the first nine months of 2015 as compared to the same periods in the prior year. On a constant currency basis, Adjusted EPS remained flat at $0.50 in the third quarter of 2015 and increased 18.6% to $1.53 in the first nine 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.

 

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We also monitor a number of factors and trends that we expect may affect our revenues and profitability. During the first nine 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.

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
September 30,
    For the Nine Months Ended
September 30,
 
    See Note      2015     2014     2015     2014  
           (in millions)  

Coffee business transactions

  Note 2           

Gain on contribution

       $ 7,122      $      $ 7,122      $   

Incremental costs for readying
the businesses

         (54     (10     (239     (15

Currency-related net gains (1)

         29        420        436        413   

2014-2018 Restructuring Program:

  Note 6           

Restructuring charges

         (146     (25     (442     (26

Implementation charges

         (75     (42     (185     (51

2012-2014 Restructuring Program:

  Note 6           

Restructuring charges

                (163     3        (259

Implementation charges

                (23            (66

Remeasurement of Venezuelan
net monetary assets:

  Note 1           

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

                              (161

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

                       (11       

Loss on debt extinguishment and related expenses

  Note 7                      (713     (495