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Mondelez International, Inc. 10-Q 2016

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, 2016

OR

 

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

For the transition period from                     to                    

Commission file number 1-16483

 

LOGO

Mondelēz International, Inc.

(Exact name of registrant as specified in its charter)

 

Virginia   52-2284372

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Three Parkway North,

Deerfield, Illinois

  60015
(Address of principal executive offices)   (Zip Code)

(Registrant’s telephone number, including area code) (847) 943-4000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

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 21, 2016, there were 1,544,411,707 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, 2016 and 2015

     1   
 

Condensed Consolidated Statements of Comprehensive Earnings
for the Three and Nine Months Ended September 30, 2016 and 2015

     2   
 

Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015

     3   
 

Condensed Consolidated Statements of Equity
for the Year Ended December 31, 2015 and
the Nine Months Ended September 30, 2016

     4   
 

Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2016 and 2015

     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

     65   
Item 4.  

Controls and Procedures

     66   

PART II - OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     67   
Item 1A.  

Risk Factors

     67   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     67   
Item 6.  

Exhibits

     68   

Signature

     69   

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.


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      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  

Net revenues

   $ 6,396       $ 6,849       $ 19,153       $ 22,272   

Cost of sales

     3,908         4,179         11,614         13,595   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     2,488         2,670         7,539         8,677   

Selling, general and administrative expenses

     1,552         1,790         4,835         5,675   

Asset impairment and exit costs

     190         155         510         546   

Gain on divestiture

             (7,122              (7,135

Amortization of intangibles

     44         45         132         137   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     702         7,802         2,062         9,454   

Interest and other expense, net

     145         114         540         814   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     557         7,688         1,522         8,640   

Provision for income taxes

     (40      (348      (207      (561

Gain on equity method investment exchange

                     43           

Equity method investment net (losses) / earnings

     31         (72      218         (72
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

     548         7,268         1,576         8,007   

Noncontrolling interest earnings

             (2      (10      (11
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to Mondelēz International

   $ 548       $ 7,266       $ 1,566       $ 7,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share data:

           

Basic earnings per share attributable to
Mondelēz International

   $ 0.35       $ 4.52       $ 1.00       $ 4.91   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to
Mondelēz International

   $ 0.35       $ 4.46       $ 0.99       $ 4.86   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared

   $ 0.19       $ 0.17       $ 0.53       $ 0.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

1


Table of Contents

Mondelēz International, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Earnings

(in millions of U.S. dollars)

(Unaudited)

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  

Net earnings

   $ 548       $ 7,268       $ 1,576       $ 8,007   

Other comprehensive earnings / (losses):

           

Currency translation adjustment

     35         (1,070      173         (2,482

Pension and other benefit plans

     30         156         99         229   

Derivative cash flow hedges

     2         (9      12         (60
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive earnings / (losses)

     67         (923      284         (2,313

Comprehensive earnings / (losses)

     615         6,345         1,860         5,694   

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

     (2      (4      7         (11
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive earnings / (losses) attributable to
Mondelēz International

   $ 617       $ 6,349       $ 1,853       $ 5,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

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,  
     2016      2015  

ASSETS

     

Cash and cash equivalents

   $ 1,686       $ 1,870   

Trade receivables (net of allowances of $64 at September 30, 2016
and $54 at December 31, 2015)

     3,019         2,634   

Other receivables (net of allowances of $103 at September 30, 2016
and $109 at December 31, 2015)

     895         1,212   

Inventories, net

     2,776         2,609   

Other current assets

     479         633   
  

 

 

    

 

 

 

Total current assets

     8,855         8,958   

Property, plant and equipment, net

     8,465         8,362   

Goodwill

     20,751         20,664   

Intangible assets, net

     18,721         18,768   

Prepaid pension assets

     83         69   

Deferred income taxes

     289         277   

Equity method investments

     5,717         5,387   

Other assets

     384         358   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 63,265       $ 62,843   
  

 

 

    

 

 

 

LIABILITIES

     

Short-term borrowings

   $ 2,490       $ 236   

Current portion of long-term debt

     1,511         605   

Accounts payable

     4,884         4,890   

Accrued marketing

     1,624         1,634   

Accrued employment costs

     779         844   

Other current liabilities

     2,669         2,713   
  

 

 

    

 

 

 

Total current liabilities

     13,957         10,922   

Long-term debt

     13,105         14,557   

Deferred income taxes

     4,762         4,750   

Accrued pension costs

     1,654         2,183   

Accrued postretirement health care costs

     501         499   

Other liabilities

     1,709         1,832   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     35,688         34,743   

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, 2016 and December 31, 2015)

               

Additional paid-in capital

     31,805         31,760   

Retained earnings

     21,366         20,700   

Accumulated other comprehensive losses

     (9,699      (9,986

Treasury stock, at cost (450,941,657 shares at September 30, 2016 and
416,504,624 shares at December 31, 2015)

     (15,963      (14,462
  

 

 

    

 

 

 

Total Mondelēz International Shareholders’ Equity

     27,509         28,012   

Noncontrolling interest

     68         88   
  

 

 

    

 

 

 

TOTAL EQUITY

     27,577         28,100   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 63,265       $ 62,843   
  

 

 

    

 

 

 

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 Equity

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

(Unaudited)

 

     Mondelēz International Shareholders’ Equity                
     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Earnings /
(Losses)
     Treasury
Stock
     Noncontrolling
Interest*
     Total
Equity
 

Balances at January 1, 2015

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

Comprehensive earnings / (losses):

                    

Net earnings

                     7,267                         24         7,291   

Other comprehensive losses, net of income taxes

                             (2,668              (26      (2,694

Exercise of stock options and
issuance of other stock awards

             109         (70              272                 311   

Common Stock repurchased

                                     (3,622              (3,622

Cash dividends declared ($0.64 per share)

                     (1,026                              (1,026

Dividends paid on noncontrolling interest and other activities

                                             (13      (13
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at December 31, 2015

   $       $ 31,760       $ 20,700       $ (9,986    $ (14,462    $ 88       $ 28,100   

Comprehensive earnings / (losses):

                    

Net earnings

                     1,566                         10         1,576   

Other comprehensive earnings / (losses),
net of income taxes

                             287                 (3      284   

Exercise of stock options and
issuance of other stock awards

             45         (74              286                 257   

Common Stock repurchased

                                     (1,787              (1,787

Cash dividends declared ($0.53 per share)

                     (826                              (826

Dividends paid on noncontrolling interest and other activities

                                             (27      (27
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at September 30, 2016

   $       $ 31,805       $ 21,366       $ (9,699    $ (15,963    $ 68       $ 27,577   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  * Noncontrolling interest as of September 30, 2015 was $84 million, as compared to $103 million as of January 1, 2015. The change of $(19) million during the nine months ended September 30, 2015 was due to $(22) million of other comprehensive losses, net of taxes, $11 million of net earnings and $(8) million of dividends paid.

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,  
     2016      2015  

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES

     

Net earnings

   $ 1,576       $ 8,007   

Adjustments to reconcile net earnings to operating cash flows:

     

Depreciation and amortization

     615         663   

Stock-based compensation expense

     102         98   

Deferred income tax benefit

     (163      (81

Gains on JDE coffee business transactions and divestiture

             (7,135

Asset impairments

     262         195   

Loss on early extinguishment of debt

             708   

JDE coffee business transactions currency-related net gains

             (436

Gain on equity method investment exchange

     (43        

Equity method investment net (earnings) / losses

     (218      16   

Distributions from equity method investments

     75         58   

Other non-cash items, net

     10         142   

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

     

Receivables, net

     (265      (868

Inventories, net

     (121      (314

Accounts payable

     (143      496   

Other current assets

     79         36   

Other current liabilities

     (266      11   

Change in pension and postretirement assets and liabilities, net

     (362      (184
  

 

 

    

 

 

 

Net cash provided by operating activities

     1,138         1,412   
  

 

 

    

 

 

 

CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES

     

Capital expenditures

     (909      (1,178

Proceeds from JDE coffee business transactions currency hedge settlements

             1,050   

Acquisitions, net of cash received

             (536

Proceeds from JDE coffee business transaction and divestiture, net of disbursements

     275         4,091   

Proceeds from sale of property, plant and equipment and other assets

     113         33   
  

 

 

    

 

 

 

Net cash (used in) / provided by investing activities

     (521      3,460   
  

 

 

    

 

 

 

CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES

     

Issuances of commercial paper, maturities greater than 90 days

     1,028         613   

Repayments of commercial paper, maturities greater than 90 days

     (337      (710

Net issuances of other short-term borrowings

     1,533         396   

Long-term debt proceeds

     1,149         3,606   

Long-term debt repaid

     (1,757      (4,543

Repurchase of Common Stock

     (1,727      (3,003

Dividends paid

     (801      (736

Other

     82         107   
  

 

 

    

 

 

 

Net cash used in financing activities

     (830      (4,270
  

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     29         (194
  

 

 

    

 

 

 

Cash and cash equivalents:

     

(Decrease) / increase

     (184      408   

Balance at beginning of period

     1,870         1,631   
  

 

 

    

 

 

 

Balance at end of period

   $ 1,686       $ 2,039   
  

 

 

    

 

 

 

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, 2015 from audited financial statements but do not include all disclosures required by U.S. GAAP. You should read these statements in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2015.

Principles of Consolidation:

As of the close of the fourth quarter of 2015, we deconsolidated our Venezuelan operations from our consolidated financial statements. As such, the results of our Venezuelan subsidiaries are not included in our condensed consolidated financial statements for the three and nine months ended September 30, 2016. The operating results of our Venezuelan subsidiaries are included in our condensed consolidated financial statements for the three and nine months ended September 30, 2015. See Currency Translation and Highly Inflationary Accounting: Venezuela below for more information.

On July 2, 2015, we contributed our global coffee businesses to a new company, Jacobs Douwe Egberts (“JDE”), in which we now hold an equity interest (collectively, the “JDE coffee business transactions”). Historically, our coffee businesses and the income from equity method investments were recorded within our operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig Green Mountain Inc. (“Keurig”) and Dongsuh Foods Corporation (“DSF”), and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income and segment income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income and segment income. Please see Note 2, Divestitures and Acquisitions – JDE Coffee Business Transactions and Keurig Transaction, and Note 15, Segment Reporting, for more information on these transactions.

Currency Translation and Highly Inflationary Accounting:

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

United Kingdom. On June 23, 2016, the United Kingdom (“U.K.”) voted by referendum to exit the European Union (“E.U.”); this vote is commonly referred to as “Brexit.” The referendum is non-binding and the exit from the E.U. is not immediate. Once the U.K. invokes E.U. Article 50, there is a two-year window in which the U.K. and European Commission can negotiate the future terms for imports, exports, taxes, employment, immigration and other areas.

Brexit has caused volatility in global stock markets and currency exchange rates, affecting the markets in which we operate. The implications of Brexit could adversely affect demand for our products, our financial results and operations, and our relationships with customers, suppliers and employees in the short or long-term. On June 24, 2016, the value of the British pound sterling relative to the U.S. dollar fell by 9%. Since that date, the value of the British pound sterling relative to the U.S. dollar declined an additional 5% through September 30, 2016. Further volatility in the exchange rate is expected over the transition period.

 

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As the business operating environment remains uncertain, we continue to monitor our investments and currency exposures abroad. As the U.K. is not a highly-inflationary economy, we record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings. While we did not experience significant business disruptions in our U.K. businesses immediately following the referendum, the devaluation of the British pound sterling in late June adversely affected our translated results reported in U.S. dollars. We have a natural hedge in the form of pound sterling-denominated debt that acts as a net investment hedge, moving counter to adverse pound sterling currency translation impacts. British pound sterling currency transaction risks are largely mitigated due to our global chocolate businesses buying cocoa in British pound sterling. Our U.K. operations contributed $505 million, or 7.9% of consolidated net revenues in the three months and $1.6 billion, or 8.4% of consolidated net revenues in the nine months ended September 30, 2016.

Venezuela. From January 1, 2010 through December 31, 2015, we accounted for the results of our Venezuelan subsidiaries using the U.S. dollar as the functional currency as prescribed by U.S. GAAP for highly inflationary economies.

Effective as of the close of the 2015 fiscal year, we concluded that we no longer met the accounting criteria for consolidation of our Venezuelan subsidiaries due to a loss of control over our Venezuelan operations and an other-than-temporary lack of currency exchangeability. During the fourth quarter of 2015, representatives of the Venezuelan government arbitrarily imposed pricing restrictions on our local operations that resulted in our inability to recover operating costs. We immediately began an appeal process with the Venezuelan authorities to demonstrate that our pricing was in line with the regulatory requirements. In January 2016, local officials communicated that some of the pricing restrictions had been lifted; however, the legally required administrative order had not been issued and it was uncertain when it would be issued. The legal and regulatory environment also became more unreliable. While we had been complying with the Venezuelan law governing pricing and profitability controls and followed the legal process for appeal, the appeal process was not available to us as outlined under law. Additionally, we were increasingly facing issues procuring raw materials and packaging. Taken together, these actions, the economic environment in Venezuela and the progressively limited access to dollars to import goods through the use of any of the available currency mechanisms impaired our ability to operate and control our Venezuelan businesses. As a result of these factors, we concluded that we no longer met the criteria for the consolidation of our Venezuelan subsidiaries.

As of the close of the 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations. We recorded a $778 million pre-tax loss on December 31, 2015 as we reduced the value of our cost method investment in Venezuela and all Venezuelan receivables held by our other subsidiaries to realizable fair value, resulting in full impairment. The recorded loss also included historical cumulative translation adjustments related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity. The fair value of our investments in our Venezuelan subsidiaries was estimated based on discounted cash flow projections of current and expected operating losses in the foreseeable future and our ability to operate the business on a sustainable basis. Our fair value estimate included U.S. dollar exchange and discount rate assumptions that reflect the inflation and economic uncertainty in Venezuela.

Beginning in 2016, we no longer include net revenues, earnings or net assets of our Venezuelan subsidiaries within our condensed consolidated financial statements. Under the cost method of accounting, earnings are only recognized to the extent cash is received. Given the current and ongoing difficult economic, regulatory and business environment in Venezuela, there continues to be significant uncertainty related to our operations in Venezuela, and we expect these conditions will continue for the foreseeable future. We will monitor the extent of our ability to control our Venezuelan operations and the liquidity and availability of U.S. dollars at different rates, including the changes to the currency exchange systems in March 2016, as our current situation in Venezuela may change over time and lead to consolidation at a future date.

We recorded no revenues, earnings or other financial results from our Venezuelan subsidiaries during the three and nine months ended September 30, 2016, and we continue to monitor the business, economic and regulatory climate in Venezuela. For the three and nine months ended September 30, 2015, the operating results of our Venezuelan operations were included in our condensed consolidated statements of earnings. During the first quarter of 2015, we recognized an $11 million currency-related remeasurement loss resulting from a devaluation of the Venezuela bolivar exchange rate we historically used to source U.S. dollars for purchases of imported raw materials, packaging and other goods and services.

 

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The following table sets forth net revenues and operating income (including the impact of remeasurement losses) for our Venezuelan operations for the three and nine months ended September 30, 2015:

 

Venezuela operations

  

Three Months Ended September 30, 2015

Net revenues

   $315 million or 4.6% of consolidated net revenues

Operating income

   $73 million or 0.9% of consolidated operating income
    

Nine Months Ended September 30, 2015

Net revenues

   $834 million or 3.7% of consolidated net revenues

Operating income

   $188 million or 2.0% of consolidated operating income

Argentina. On December 16, 2015, the new Argentinean government fiscal authority announced the lifting of strict currency controls and reduced restrictions on exports and imports. The next day, the value of the Argentinean peso relative to the U.S. dollar fell by 36%. In the first nine months of 2016, the value of the Argentinean peso relative to the U.S. dollar declined 18%. Further volatility in the exchange rate is expected. While the business operating environment remains challenging, we continue to monitor and actively manage our investment and exposures in Argentina. We continue executing our hedging programs and refining our product portfolio to improve our product offerings, mix and profitability. We also continue to implement additional cost initiatives to protect the business. While further currency declines could have an adverse impact on our ongoing results of operations, we believe the actions by the new government to reduce economic controls and business restrictions will provide favorable opportunities for our Argentinean subsidiaries. Our Argentinean operations contributed $145 million, or 2.3% of consolidated net revenues in the three months and $439 million, or 2.3% of consolidated net revenues in the nine months ended September 30, 2016. As of September 30, 2016, the net monetary liabilities of our Argentina operations were not material. Argentina is not designated as a highly-inflationary economy for accounting purposes, so we record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings.

Other Countries. Since we have operations in over 80 countries and sell in 165 countries, we regularly monitor economic and currency-related risks and seek to take protective measures in response to these exposures. Some of the countries in which we do business have recently experienced periods of significant economic uncertainty. These include Brazil, China, Mexico, Russia, Turkey, Egypt, Nigeria and Ukraine, most of which have had either currency devaluation or volatility in exchange rates. We continue to monitor operations, currencies and net monetary exposures in these countries. At this time, we do not anticipate any risk to our operating results from changing to highly inflationary accounting in these countries.

Transfers of Financial Assets:

We account for transfers of financial assets, such as uncommitted revolving non-recourse accounts receivable factoring arrangements, when we have surrendered control over the related assets. Determining whether control has transferred requires an evaluation of relevant legal considerations, an assessment of the nature and extent of our continuing involvement with the assets transferred and any other relevant considerations. We use receivable factoring arrangements periodically when circumstances are favorable to manage liquidity. We have a factoring arrangement with a major global bank for a maximum combined capacity of $820 million. Under the program, we may sell eligible short-term trade receivables to the bank in exchange for cash. We then continue to collect the receivables sold, acting solely as a collecting agent on behalf of the bank. We also enter into arrangements with customers to achieve earlier collection of receivables. The incremental cost of factoring receivables for all regions was $2 million in the three months and $6 million in the nine months ended September 30, 2016 and $1 million in the three months and $4 million in the nine months ended September 30, 2015 and was recorded in net revenue. The outstanding principal amount of receivables under these arrangements amounted to $589 million as of September 30, 2016 and $401 million as of September 30, 2015.

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 $9 million on operating income in the three months and $57 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.

 

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New Accounting Pronouncements:

In August 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to provide guidance on eight specific cash flow classification issues and reduce diversity in practice in how some cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently assessing the impact on our condensed consolidated financial statements.

In March 2016, the FASB issued an ASU to simplify the accounting for stock-based compensation. The ASU addresses several areas of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and cash flow statement presentation. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact on our condensed consolidated financial statements. We anticipate the impact of adopting the standard on January 1, 2017 will be greater volatility in our condensed consolidated income statement in subsequent reporting periods. We will begin recording certain stock-based compensation tax impacts in our provision for income taxes prospectively which, under current guidance, are recorded directly to equity.

In March 2016, the FASB issued an ASU that simplifies the transition accounting for increases in investments that require a change from the cost basis to the equity method of accounting. U.S. GAAP currently requires the impact of such changes in accounting method to be retroactively applied to all prior periods that the investment was held. Under the new standard, adjustments to the investor’s basis in the investment should be recorded on the date the investment becomes qualified for equity method accounting. The equity method of accounting is then applied prospectively from that date. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. This ASU is not expected to have a significant impact on our condensed consolidated financial statements. We plan to adopt when the ASU becomes effective or earlier if an in-scope transaction arises.

In March 2016, the FASB issued an ASU that clarifies whether contingent put and call options meet the “clearly and closely related” criteria in connection with accounting for embedded derivatives. U.S GAAP requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. The criteria include determining that the economic characteristics and risks of the embedded derivatives are not “clearly and closely related” to those of the host contract. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We plan to adopt the new standard as of December 31, 2016 and do not expect this ASU to have a significant impact on our condensed consolidated financial statements.

In March 2016, the FASB issued an ASU that applies when there is a contract novation to a new counterparty for a derivative designated as an accounting hedge. The ASU clarifies that such a change in counterparty does not, in and of itself, require de-designation of the hedging relationship, provided that all other hedge accounting criteria continue to be met. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We plan to adopt the new standard as of December 31, 2016 and do not expect this ASU to have a significant impact on our condensed consolidated financial statements.

In February 2016, the FASB issued an ASU on lease accounting. The ASU revises existing U.S. GAAP and outlines a new model for lessors and lessees to use in accounting for lease contracts. The guidance requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases. In the condensed consolidated statement of earnings, lessees will classify leases as either operating (resulting in straight-line expense) or financing (resulting in a front-loaded expense pattern). The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact across our operations and on our condensed consolidated financial statements.

In January 2016, the FASB issued an ASU that provides updated guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. The standard requires that equity investments (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) be measured at fair value, with changes in fair value recognized in net income. The standard also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017. This ASU is not expected to have a significant impact on our condensed consolidated financial statements.

 

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In May 2014, the FASB issued an ASU on revenue recognition from contracts with customers. The new ASU outlines a new, single comprehensive model for companies to use in accounting for revenue. The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for the goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows from customer contracts, including significant judgments made in recognizing revenue. In 2016, the FASB issued several ASUs that clarified principal versus agent (gross versus net) revenue presentation considerations, confirmed certain prepaid stored-value products should be accounted for under the new revenue recognition ASU and not under other U.S. GAAP and clarified the guidance for identifying performance obligations within a contract and the accounting for licenses. The FASB also issued an ASU providing narrow scope exceptions and practical expedients to clarify and improve the implementation of the new revenue recognition guidance. 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 make progress on our efforts to assess the impact of the ASU across our operations and on our condensed consolidated financial statements. We anticipate adopting the new standard on January 1, 2018 on a full retrospective basis.

Note 2.   Divestitures and Acquisitions

JDE Coffee Business Transactions:

On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, JDE. Following the exchange of a portion of our investment in JDE for an interest in Keurig in March 2016, we held a 26.5% equity interest in JDE. The remaining 73.5% equity interest in JDE was held by a subsidiary of Acorn Holdings B.V. (“AHBV,” owner of DEMB prior to July 2, 2015). Please see discussion of the acquisition of an interest in Keurig below under Keurig Transaction. As of September 30, 2016, we hold a 26.4% equity interest in JDE following the transactions discussed under JDE Stock-Based Compensation Arrangements below.

The consideration we received in the JDE coffee business transactions completed on July 2, 2015 consisted of 3.8 billion of cash ($4.2 billion as of July 2, 2015), a 43.5% equity interest in JDE (prior to the decrease in ownership due to the Keurig transaction and the compensation arrangements discussed below) and $794 million in receivables (related to sales price adjustments and tax formation cost payments). During the third quarter of 2015, we also recorded $283 million of cash and receivables from JDE related to reimbursement of costs that we incurred in separating our coffee businesses. The cash and equity consideration we received at closing reflects that we retained our interest in a Korea-based joint venture, DSF. During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”). In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from this sale as part of the overall JDE coffee business transactions. Please see discussion of the divestiture of AGF below under Other Divestitures and Acquisitions.

On July 5, 2016, we received an expected cash payment of $275 million from JDE to settle the receivable related to tax formation costs that were part of the initial sales price.

In connection with the contribution of our global coffee businesses to JDE on July 2, 2015, we recorded a final pre-tax gain of $6.8 billion (or $6.6 billion after taxes) in 2015 after final adjustments as described below. We also recorded approximately $1.0 billion of pre-tax net gains related to hedging the expected cash proceeds from the transactions as described further below. During the fourth quarter of 2015, we and JDE concluded negotiations of a sales price adjustment and completed the valuation of our investment in JDE. Primarily due to the negotiated resolution of the sales price adjustment in the fourth quarter of 2015, we recorded a $313 million reduction in the pre-tax gain on the coffee transaction, reducing the $7.1 billion estimated gain in the third quarter of 2015 to the $6.8 billion final gain for 2015. As part of our sales price negotiations, we retained the right to collect future cash payments if certain estimated pension liabilities are realized over an agreed amount in the future. As such, we may recognize additional income related to this negotiated term in the future.

The final value of our investment in JDE on July 2, 2015 was 4.1 billion ($4.5 billion as of July 2, 2015). The fair value of the JDE investment was determined using both income-based and market-based valuation techniques. The discounted cash flow analysis reflected growth, discount and tax rates and other assumptions reflecting the underlying combined businesses and countries in which the combined coffee businesses operate. The fair value of the JDE investment also included the fair values of the Carte Noire and Merrild businesses, which JDE agreed to divest to comply with the conditioned approval by the European Commission related to the JDE coffee business transactions. As of the end of the first quarter of 2016, these businesses were sold by JDE. As the July 2, 2015 fair values for these businesses were recorded by JDE at their pending sales values, we did not record any gain or loss on the sales of these businesses in our share of JDE’s earnings.

 

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In connection with the expected receipt of cash in euros at the time of closing, we entered into a number of consecutive currency exchange forward contracts in 2014 and 2015 to lock in an equivalent expected value in U.S. dollars as of the date the JDE coffee business transactions were first announced in May 2014. Cumulatively, we realized aggregate net gains and received cash of approximately $1.0 billion on these hedging contracts that increased the cash we received in connection with the JDE coffee business transactions from $4.2 billion in cash consideration received to $5.2 billion. In connection with these currency contracts, we recognized net gains of $29 million in the three months and $436 million in the nine months ended September 30, 2015 within interest and other expense, net.

We also incurred incremental expenses related to readying our global coffee businesses for the transactions that totaled $54 million in the three months and $239 million in the nine months ended September 30, 2015. These expenses were recorded within selling, general and administrative expenses of primarily our Europe segment, as well as within our Eastern Europe, Middle East and Africa (“EEMEA”) segment and general corporate expenses.

JDE Capital Increase:

On December 18, 2015, AHBV and we agreed to provide JDE additional capital to pay down some of its debt with lenders. Our pro rata share of the capital increase was 499 million ($544 million as of December 18, 2015) and was made in return for a pro rata number of additional shares in JDE such that our ownership in JDE did not change following the capital increase. To fund our share of the capital increase, we contributed 460 million ($501 million) of JDE receivables and made a 39 million ($43 million) cash payment.

JDE Stock-Based Compensation Arrangements:

At the close of June 30, 2016, we entered into agreements with AHBV and its affiliates to establish a new stock-based compensation arrangement tied to the issuance of JDE equity compensation awards to JDE employees. This arrangement replaced a temporary equity compensation program tied to the issuance of AHBV equity compensation to JDE employees. New Class C, D and E JDE shares were authorized and issued for investments made by JDE employees. Under these arrangements, dilution of the JDE shares is limited to 2%. Upon execution of the agreements and the creation of the Class C, D and E JDE shares, as a percentage of the total JDE issued shares, our Class B shares changed from 26.5% to 26.4% and AHBV’s Class A shares changed from 73.5% to 73.22%, while the Class C, D and E shares, held by AHBV and its affiliates until the JDE employee awards vest, comprised 0.38% of JDE’s shares. Additional Class C shares are available to be issued when planned long-term incentive plan (“JDE LTIP”) awards vest, generally over the next five years. When the JDE Class C shares are issued in connection with the vested JDE LTIP awards, the Class A and B relative ownership interests will decrease. Based on estimated achievement and forfeiture assumptions, we do not expect our JDE ownership interest to decrease below 26.27%. As of September 30, 2016, our ownership interest in JDE was 26.4%.

JDE Tax Matter Resolution:

On July 19, 2016, the Supreme Court of Spain reached a final resolution on a challenged JDE tax position held by a predecessor DEMB company that resulted in an unfavorable tax expense of 114 million ($128 million as of September 30, 2016). As a result, our earnings in the third quarter of 2016 were negatively affected by 30 million ($34 million as of September 30, 2016).

Keurig Transaction:

On March 3, 2016, a subsidiary of AHBV completed the $13.9 billion acquisition of all of the outstanding common stock of Keurig through a merger transaction. On March 7, 2016, we exchanged with a subsidiary of AHBV a portion of our equity interest in JDE with a carrying value of 1.7 billion (approximately $2.0 billion as of March 7, 2016) for an interest in Keurig with a fair value of $2.0 billion based on the merger consideration per share for Keurig. We recorded the difference between the fair value of Keurig and our basis in JDE shares as a $43 million gain on equity method investment exchange in March 2016. Following the exchange, our ownership interest in JDE was 26.5% and our interest in Keurig was 24.2%. Both AHBV and we hold our investments in Keurig through a combination of equity and interests in a shareholder loan, with pro-rata ownership of each. Our initial $2.0 billion investment in Keurig includes a $1.6 billion Keurig equity interest and a $0.4 billion shareholder loan receivable, which are reported on a combined basis within equity method investments on our condensed consolidated balance sheet as of September 30, 2016. The shareholder loan has a 5.5% interest rate and is payable at the end of a seven-year term on February 27, 2023. We recorded equity earnings of $10 million for the three months and $39 million for the seven months ended September 30, 2016 and interest income from the shareholder loan of $6 million for the three months and $14 million for the seven months ended September 30, 2016 within equity method earnings. Additionally, we received $2 million in the three months ended and $4 million in the seven months ended September 30, 2016 of dividends on our investment in Keurig. We continue to account for our investments in JDE and Keurig under the equity method and recognize our share of their earnings within equity method investment earnings and our share of their dividends within our cash flows. As of September 30, 2016, Keurig is working to finalize the acquisition purchase price allocation.

 

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Coffee Business Equity Earnings:

We have reflected the results of our historical coffee businesses and equity earnings from JDE, Keurig and DSF in our results from continuing operations as the coffee category continues to be a significant part of our net earnings and business strategy going forward. Historically, our coffee businesses and the income from equity method investments were recorded within our operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig and DSF, and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income.

The equity method investment earnings and interest income contributed by our coffee investments included losses of $3 million from JDE, earnings of $16 million from Keurig and $11 million from DSF for the three months and earnings of $89 million from JDE, $53 million from Keurig (since March 7, 2016) and $56 million from DSF for the nine months ended September 30, 2016. For the three and nine months ended September 30, 2015, the equity method investment losses contributed by our coffee investments included $105 million from JDE and the equity method investment earnings contributed by our coffee investments included $20 million from DSF. For the nine months ended September 30, 2015, after-tax earnings were $296 million for the coffee businesses we contributed to JDE on July 2, 2015 and $40 million for DSF.

Other Divestitures and Acquisitions:

During the nine months ended September 30, 2016, we entered into the following transactions that as of September 30, 2016, met the qualifications of held for sale accounting. These transactions included pending sales of:

    Several manufacturing facilities in France and sale or license of several local confectionery brands. On March 31, 2016, we received a binding offer totaling 176 million ($198 million as of September 30, 2016). Taking into account agreed upon sales price adjustments related to cash, employee-related liabilities and working capital to be transferred at closing, we currently estimate a sales price of 220 million ($247 million as of September 30, 2016) based on net book values as of September 30, 2016. The final sales price is subject to change as working capital and other account balances may change at the time of closing. The transactions are subject to E.U. and local regulatory approvals, completion of employee consultation requirements and additional steps to prepare the assets for transfer. Prior to closing, together with the buyer, we will undertake consultations with all Works Councils and employee representatives required in connection with the transactions. During the third quarter, we made progress on the pre-closing sale conditions. On March 31, 2016, we recorded a $14 million impairment charge for a gum & candy trademark as a portion of its carrying value would not be recoverable based on future cash flows expected under a planned license agreement with the buyer. In May 2016, we recorded an additional $5 million impairment charge for another candy trademark to reduce the overall net assets to the estimated net sales proceeds after transaction costs. Additionally, in the nine months ended September 30, 2016, we incurred and accrued $84 million of incremental expenses to ready the business for the sale transactions expected to close in 2017. We recorded these costs within cost of sales and selling, general and administrative expenses of our Europe segment.
    A chocolate factory in Belgium. We entered into this transaction in the third quarter of 2016 and expect the transaction to close in the fourth quarter of 2016. In connection with this transaction, we incurred and accrued 29 million ($33 million as of September 30, 2016) of incremental expenses related to selling the factory within cost of goods sold and selling, general and administrative expense and we recorded a 30 million ($34 million as of September 30, 2016) fixed asset impairment charge within asset impairments and exit costs.
    A confectionery business in Costa Rica. We entered into this transaction in the third quarter of 2016 and expect the transaction to close in the fourth quarter of 2016.
    A manufacturing plant in Russia. During the third quarter of 2016, we recorded a related fixed asset impairment charge of $4 million within asset impairments and exit costs.

As of September 30, 2016, the total held for sale assets and liabilities consisted of $139 million of current assets, $243 million of non-current assets, $39 million of current liabilities and $34 million of non-current liabilities.

During the nine months ended September 30, 2016, we also completed the following asset sales:

    On August 26, 2016, we recorded a $7 million gain for the sale of a U.S.-owned biscuit trademark. The gain was recorded within selling, general and administrative expenses in the three and nine months ended September 30, 2016.

 

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    On May 2, 2016, we completed the sale of certain local biscuit brands in Finland as part of our strategic decisions to exit select small and local brands and shift investment towards our Power Brands. The sales price was 14 million ($16 million as of May 2, 2016) and we recorded a pre-tax gain of $6 million ($5 million after-tax) within selling, general and administrative expenses of our Europe segment in the nine months ended September 30, 2016. We divested $8 million of indefinite lived intangible assets and less than $1 million of other assets. We received cash proceeds of 12 million ($14 million as of May 2, 2016) upon closing and expect to receive the remaining consideration in the fourth quarter of 2016 upon the completion of post-closing conditions.

On August 12, 2016, we announced an agreement to purchase from Burton’s Biscuit Company the license that enables us to manufacture, market and sell Cadbury-branded biscuits around the world, including in the U.K., France, Ireland, North America and Saudi Arabia. The transaction remains subject to regulatory approval. We expect that this transaction will close in the fourth quarter of 2016.

During the third quarter of 2016, we completed the acquisition of a Vietnamese biscuit operation within our Asia Pacific segment. On July 15, 2015, we acquired an 80% interest in the biscuit operation and on August 22, 2016, we acquired the remaining 20% interest. Total cash paid for the biscuit operation, intellectual property, non-compete and consulting agreements less purchase price adjustments was 12,404 billion Vietnamese dong ($569 million using applicable exchange rates on July 15, 2015, November 27, 2015 and August 22, 2016). We have made and received the following cash payments in connection with the acquisition:

    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 as of July 15, 2015) payment for the biscuit operation, a $44 million additional escrow deposit and a 759 billion Vietnamese dong ($35 million as of July 15, 2015) partial payment for the non-compete and continued consulting agreements.
    On November 27, 2015, we received 197 billion Vietnamese dong ($9 million as of November 27, 2015) as a purchase price adjustment related to working capital adjustments at closing.
    On August 22, 2016, in connection with acquiring the remaining 20% interest in the biscuit operation, we released escrowed funds of $70 million and retained an agreed $20 million related to two outstanding acquisition-related matters that are expected to be resolved in the upcoming year. We also made a final payment of 759 billion Vietnamese dong ($35 million as of August 22, 2016) for the non-compete and consulting agreements.

As of September 30, 2016, we have recorded a final allocation of the consideration paid including $10 million to inventory, $49 million to property, plant and equipment, $86 million of intangible assets, $385 million of goodwill and $31 million to other net liabilities. The allocation of the fair values had an immaterial impact on operating results in periods following the initial July 15, 2015 closing date. We recorded the non-compete and consulting agreements as prepaid contracts within other current and non-current assets and they are amortized into net earnings over the contract terms. For the nine months ended September 30, 2016, the acquisition added $71 million in incremental net revenues and $5 million in incremental operating income. For the three and nine months ended September 30, 2015, the acquisition added $70 million in incremental revenues and $16 million in incremental operating income. Within selling, general and administrative expenses, we recorded integration costs of $6 million for the nine months ended September 30, 2016 and $4 million for the three months and $5 million for the nine months ended September 30, 2015. We also recorded acquisition costs of $6 million for the three months and $7 million for the nine months ended September 30, 2015.

On April 23, 2015, we completed the divestiture of our 50% equity interest in AGF, our Japanese coffee joint venture, to our joint venture partner, which generated cash proceeds of 27 billion Japanese yen ($225 million as of April 23, 2015) and a pre-tax gain of $13 million (after-tax loss of $9 million) in the second quarter of 2015. Upon closing, we divested our $99 million investment in the joint venture, $65 million of goodwill and $41 million of accumulated other comprehensive losses. We also incurred approximately $7 million of transaction costs. The operating results of the divestiture were not material to our condensed consolidated financial statements for the three and nine months ended September 30, 2015.

On February 16, 2015, we acquired a U.S. snack food company, Enjoy Life Foods, within our North America segment. We paid cash and settled debt totaling $81 million in connection with the acquisition. Upon finalizing the valuation of the acquired net assets during the second quarter of 2015, we recorded an $81 million purchase price allocation of $58 million in identifiable intangible assets, $20 million of goodwill and $3 million of other net assets. The acquisition-related costs and operating results of the acquisition were not material to our condensed consolidated financial statements for the three and nine months ended September 30, 2016 and 2015.

 

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Sales of Property:

In the nine months ended September 30, 2016, we sold property within our North America segment and from our centrally held corporate assets. In the third quarter, we sold property in North America that generated cash proceeds of $10 million and a pre-tax gain of $6 million and we sold a corporate aircraft hangar that generated cash proceeds of $3 million and a pre-tax gain of $1 million. In the second quarter of 2016, we also sold separate property in North America that generated cash proceeds of $40 million and a pre-tax gain of $33 million and we sold a corporate aircraft that generated cash proceeds of $20 million and a pre-tax gain of $6 million. The gains were recorded within selling, general and administrative expenses and cash proceeds were recorded in cash flows from other investing activities in the nine months ended September 30, 2016.

Note 3. Inventories

Inventories consisted of the following:

 

                                     
     As of September 30,      As of December 31,  
     2016      2015  
     (in millions)  

Raw materials

   $ 819       $ 782   

Finished product

     2,063         1,930   
  

 

 

    

 

 

 
     2,882         2,712   

Inventory reserves

     (106      (103
  

 

 

    

 

 

 

Inventories, net

   $ 2,776       $ 2,609   
  

 

 

    

 

 

 

 

Note 4. Property, Plant and Equipment

 

Property, plant and equipment consisted of the following:

 

     
     As of September 30,      As of December 31,  
     2016      2015  
     (in millions)  

Land and land improvements

   $ 502       $ 495   

Buildings and building improvements

     2,872         2,753   

Machinery and equipment

     10,411         10,044   

Construction in progress

     1,383         1,262   
  

 

 

    

 

 

 
     15,168         14,554   

Accumulated depreciation

     (6,703      (6,192
  

 

 

    

 

 

 

Property, plant and equipment, net

   $ 8,465       $ 8,362   
  

 

 

    

 

 

 

Capital expenditures of $909 million for the nine months ended September 30, 2016 exclude $274 million of accrued capital expenditures remaining unpaid at September 30, 2016 and include payment for $322 million of capital expenditures that were accrued and unpaid at December 31, 2015.

In connection with our restructuring program, we recorded non-cash asset write-downs (including accelerated depreciation and asset impairments) of $120 million in the three months and $233 million in the nine months ended September 30, 2016 and $56 million in the three months and $191 million in the nine months ended September 30, 2015 (see Note 6, 2014-2018 Restructuring Program). These charges were recorded in the condensed consolidated statements of earnings within asset impairment and exit costs as follows:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  

Latin America

   $ 3       $ 6       $ 16       $ 40   

Asia Pacific

     6         18         24         46   

EEMEA

     10         2         16         4   

Europe

     42         14         77         51   

North America

     59         16         98         50   

Corporate

                     2           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-cash asset write-downs

   $ 120       $ 56       $ 233       $ 191   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 5.   Goodwill and Intangible Assets

Goodwill by reportable segment was:

 

                                     
     As of September 30,      As of December 31,  
     2016      2015  
     (in millions)  

Latin America

   $ 917       $ 858   

Asia Pacific

     2,489         2,520   

EEMEA

     1,337         1,304   

Europe

     7,107         7,117   

North America

     8,901         8,865   
  

 

 

    

 

 

 

Goodwill

   $ 20,751       $ 20,664   
  

 

 

    

 

 

 

 

Intangible assets consisted of the following:

 

  

     As of September 30,      As of December 31,  
     2016      2015  
     (in millions)  

Non-amortizable intangible assets

   $ 17,603       $ 17,527   

Amortizable intangible assets

     2,340         2,320   
  

 

 

    

 

 

 
     19,943         19,847   

Accumulated amortization

     (1,222      (1,079
  

 

 

    

 

 

 

Intangible assets, net

   $ 18,721       $ 18,768   
  

 

 

    

 

 

 

 

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, 2016, the weighted-average life of our amortizable intangible assets was 13.6 years.

 

Amortization expense for intangible assets was $44 million in the three months and $132 million in the nine months ended September 30, 2016 and $45 million in the three months and $137 million in the nine months ended September 30, 2015. We currently estimate annual amortization expense for each of the next five years to be approximately $185 million, estimated using September 30, 2016 exchange rates.

 

Changes in goodwill and intangible assets consisted of:

 

      

     

  

            Intangible  
     Goodwill      Assets, at cost  
     (in millions)  

Balance at January 1, 2016

   $ 20,664       $ 19,847   

Changes due to:

     

Currency

     163         48   

Acquisition

     (76      86   

Asset impairments

             (30

Sale of business and assets

             (8
  

 

 

    

 

 

 

Balance at September 30, 2016

   $ 20,751       $ 19,943   
  

 

 

    

 

 

 

Changes to goodwill and intangibles were:

    Acquisition – During the first nine months of 2016, in connection with the acquisition of a biscuit operation in Vietnam, we recorded a final allocation of the consideration paid including $25 million of amortizable intangible assets and $61 million of non-amortizable intangible assets. Intangible assets acquired included trademarks and customer-related intangibles with definite and indefinite lives. A preliminary goodwill balance recorded in the third quarter of 2015 was adjusted during the first nine months of 2016 to reflect intangible asset and other asset fair valuations. See Note 2, Divestitures and Acquisitions – Other Divestitures and Acquisitions, for additional information.

 

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    Asset impairments – During the nine months ended September 30, 2016, in connection with our global supply chain reinvention initiatives, we made a determination to discontinue manufacturing a candy product that resulted in a $7 million impairment charge in our North America segment, we discontinued one biscuit product that resulted in a $4 million intangible asset impairment charge in our EEMEA segment and we recorded $19 million of impairment charges related to two gum & candy trademarks in our Europe segment, both related to the planned sale of a confectionery business in France (see Note 2, Divestitures and Acquisitions – Other Divestitures and Acquisitions, for additional information).
    Sale of business and assets – During the first nine months of 2016, we sold $8 million of non-amortizable intangible assets in Finland. See Note 2, Divestitures and Acquisitions, for additional information.

During our 2015 annual testing of non-amortizable intangible assets, we recorded $71 million of impairment charges in the three months ended December 31, 2015 related to four trademarks in Asia Pacific, Europe and Latin America. We also noted seven brands, including the four impaired trademarks, with $598 million of aggregate book value as of December 31, 2015 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.

Note 6.  2014-2018 Restructuring Program

On May 6, 2014, our Board of Directors approved a $3.5 billion restructuring program, comprised of approximately $2.5 billion in cash costs and $1 billion in non-cash costs (the “2014-2018 Restructuring Program”), and up to $2.2 billion of capital expenditures. On August 31, 2016, our Board of Directors approved a reallocation within the program of $600 million of previously approved capital expenditures to be spent on restructuring program cash costs, resulting in $3.1 billion of cash costs to be expensed and up to $1.6 billion of capital expenditures. There was no change to the total $5.7 billion of total program costs and no change to the total $4.7 billion of cash outlays. The primary objective of the 2014-2018 Restructuring Program is to reduce our operating cost structure in both our supply chain and overhead costs. The program is intended primarily to cover severance as well as asset disposals and other manufacturing-related one-time costs. Since inception, we have incurred total restructuring and related implementation charges of $2.1 billion related to the 2014-2018 Restructuring Program. We have incurred the majority of the program’s charges through the third quarter of 2016 and we expect to complete the program by year-end 2018.

Restructuring Costs:

We recorded restructuring charges of $187 million in the three months and $480 million in the nine months ended September 30, 2016 and $146 million in the three months and $442 million in the nine months ended September 30, 2015 within asset impairment and exit costs. The activity for the 2014-2018 Restructuring Program liability for the nine months ended September 30, 2016 was:

 

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

Liability balance, January 1, 2016

   $ 395       $       $ 395   

Charges

     246         234         480   

Cash spent

     (249              (249

Non-cash settlements / adjustments

     (10      (234      (244

Currency

     7                 7   
  

 

 

    

 

 

    

 

 

 

Liability balance, September 30, 2016

   $ 389       $       $ 389   
  

 

 

    

 

 

    

 

 

 

We spent $89 million in the three months and $249 million in the nine months ended September 30, 2016 and $51 million in the three months and $156 million in the nine months ended September 30, 2015 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 of $120 million in the three months and $244 million in the nine months ended September 30, 2016 and $56 million in the three months and $196 million in the nine months ended September 30, 2015. At September 30, 2016, $302 million of our net restructuring liability was recorded within other current liabilities and $87 million was recorded within other long-term liabilities.

 

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Implementation Costs:

Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities. We believe the disclosure of implementation costs provides readers of our financial statements with more information on the total costs of our 2014-2018 Restructuring Program. Implementation costs primarily relate to reorganizing our operations and facilities in connection with our supply chain reinvention program and other identified productivity and cost saving initiatives. The costs include incremental expenses related to the closure of facilities, costs to terminate certain contracts and the simplification of our information systems. Within our continuing results of operations, we recorded implementation costs of $114 million in the three months and $286 million in the nine months ended September 30, 2016 and $75 million in the three months and $185 million in the nine months ended September 30, 2015. We recorded these costs within cost of sales and general corporate expense within selling, general and administrative expenses.

Restructuring and Implementation Costs in Operating Income:

During the three and nine months ended September 30, 2016 and 2015 and since inception of the 2014-2018 Restructuring Program, we recorded restructuring and implementation costs within operating income as follows:

 

                                                                     
    Latin     Asia                 North              
  America     Pacific     EEMEA     Europe     America (1)     Corporate (2)     Total  
                      (in millions)                    

For the Three Months Ended
September 30, 2016

             

Restructuring Costs

  $ 27      $ 10      $ 6      $ 69      $ 75      $      $ 187   

Implementation Costs

    15        7        2        45        30        15        114   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 42      $ 17      $ 8      $ 114      $ 105      $ 15      $ 301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Nine Months Ended
September 30, 2016

             

Restructuring Costs

  $ 71      $ 51      $ 37      $ 172      $ 144      $ 5      $ 480   

Implementation Costs

    34        18        13        74        101        46        286   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 105      $ 69      $ 50      $ 246      $ 245      $ 51      $ 766   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Project 2014-2016 (3)

             

Restructuring Costs

  $ 297      $ 199      $ 120      $ 491      $ 313      $ 45      $ 1,465   

Implementation Costs

    89        47        28        184        177        159        684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 386      $ 246      $ 148      $ 675      $ 490      $ 204      $ 2,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) During the nine months ended September 30, 2016, our North America region implementation costs included incremental costs that we incurred related to re-negotiating collective bargaining agreements that expired at the end of February 2016 for eight U.S. facilities and related to executing business continuity plans for the North America business. We expect to incur additional costs related to these activities in the fourth quarter of 2016.
  (2) Includes adjustment for rounding.
  (3) Includes all charges recorded since program inception on May 6, 2014 through September 30, 2016.

 

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Note 7.  Debt and Borrowing Arrangements

Short-Term Borrowings:

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

 

                                                                           
     As of September 30, 2016      As of December 31, 2015  
     Amount      Weighted-      Amount      Weighted-  
     Outstanding      Average Rate      Outstanding      Average Rate  
     (in millions)             (in millions)         

Commercial paper

   $ 2,175         0.8%       $         0.0%   

Bank loans

     315         8.9%         236         9.5%   
  

 

 

       

 

 

    

Total short-term borrowings

   $ 2,490          $ 236      
  

 

 

       

 

 

    

As of September 30, 2016, the commercial paper issued and outstanding had between 3 and 88 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 $4.5 billion multi-year senior unsecured revolving credit facility for general corporate purposes, including working capital needs, and to support our commercial paper program. On October 14, 2016, the revolving credit agreement, which was scheduled to expire on October 11, 2018, was extended through October 11, 2021. The revolving credit agreement includes a covenant that we maintain a minimum shareholders’ equity of at least $24.6 billion, excluding accumulated other comprehensive earnings / (losses) and the cumulative effects of any changes in accounting principles. At September 30, 2016, we complied with this covenant as our shareholders’ equity, as defined by the covenant, was $37.2 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, 2016, no amounts were drawn on the facility.

Some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $1.8 billion at September 30, 2016 and $1.9 billion at December 31, 2015. Borrowings on these lines amounted to $315 million at September 30, 2016 and $236 million at December 31, 2015.

Long-Term Debt:

On October 17, 2016, we announced a cash tender offer to retire some of our long-term debt. We expect to complete the tender in the fourth quarter of 2016. We have not yet determined the notes to be retired and the full impact to our operating results. We expect to finance the repurchase of these notes, including the payment of accrued interest and other costs incurred, from net proceeds received from the $3.75 billion note issuance, expected to close on October 28, 2016, and the term loans, both described below.

On October 19, 2016, Mondelez International Holdings Netherlands B.V. (“MIHN”), a wholly owned subsidiary of Mondelēz International, Inc., launched an offering of $3.75 billion of notes, guaranteed by Mondelēz International, Inc. The $1.75 billion of 1.625% notes and the $500 million of floating rate notes will mature on October 28, 2019 and the $1.5 billion of 2.0% notes will mature on October 28, 2021. On October 28, 2016, we expect to receive proceeds, net of discounts and associated financing costs, of $3.73 billion. Proceeds from the notes issuance will be used for general corporate purposes, including to grant loans or make distributions to Mondelēz International, Inc. or its subsidiaries to fund all or a portion of the October 2016 cash tender offer and near-term debt maturities. We expect to amortize deferred financing costs into interest expense over the life of the notes. We entered into cross-currency swaps, serving as cash flow hedges, so that the U.S. dollar-denominated debt payments will effectively be paid in euros over the life of the debt.

On October 14, 2016, MIHN executed a $1.5 billion bank term loan facility. The loan facility consists of two $750 million loans, one with a three-year maturity and the other with a five-year maturity. The term loans can be drawn at any time for 60 days after signing. On October 25, 2016, we gave notice of our intent to fully draw on the loan with a five-year maturity, and we expect funding to occur on October 28, 2016. Proceeds from the $750 million term loan may be used for general corporate purposes, including funding of the tender offer or other debt. On October 25, 2016, we also gave notice of our intent to terminate the $750 million loan with the three-year maturity.

On February 9, 2016, $1,750 million of our 4.125% U.S. dollar notes matured. The notes and accrued interest to date were paid with net proceeds from the fr.400 million Swiss franc-denominated notes issued on January 26, 2016 and the 700 million euro-denominated notes issued on January 21, 2016, as well as cash on hand and the issuance of commercial paper. As we refinanced $1,150 million of the matured notes with net proceeds from the long-term debt issued in January 2016, we reflected this amount within long-term debt as of December 31, 2015.

 

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On January 26, 2016, we issued fr.400 million of Swiss franc-denominated notes, or $399 million in U.S. dollars locked in with a forward currency contract on January 12, 2016, consisting of:

    fr.250 million (or $249 million) of 0.080% fixed rate notes that mature on January 26, 2018
    fr.150 million (or $150 million) of 0.650% fixed rate notes that mature on July 26, 2022

We received proceeds, net of premiums and deferred financing costs, of $398 million that were used to partially fund the February 2016 note maturity and for other general corporate purposes. We recorded approximately $1 million of premiums and deferred financing costs, which will be amortized into interest expense over the life of the notes.

On January 21, 2016, we issued 700 million of euro-denominated 1.625% notes, or $760 million in U.S. dollars locked in with a forward currency contract on January 13, 2016. The euro-denominated notes will mature on January 20, 2023. We received proceeds, net of discounts and deferred financing costs, of $752 million that were used to partially fund the February 2016 note maturity and for other general corporate purposes. We recorded approximately $8 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.

Our weighted-average interest rate on our total debt was 3.1% as of September 30, 2016, following the refinancing of the February 9, 2016 debt maturity. Our weighted-average interest rate on our total debt was 3.7% as of December 31, 2015, down from 4.3% as of December 31, 2014.

Fair Value of Our Debt:

The fair value of our short-term borrowings at September 30, 2016 and December 31, 2015 reflects current market interest rates and approximates the amounts we have recorded on our condensed consolidated balance sheet. The fair value of our long-term debt was determined using quoted prices in active markets (Level 1 valuation data) for the publicly traded debt obligations. At September 30, 2016, the aggregate fair value of our total debt was $18,616 million and its carrying value was $17,106 million. At December 31, 2015, the aggregate fair value of our total debt was $15,908 million and its carrying value was $15,398 million.

Interest and Other Expense, net:

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

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  

Interest expense, debt

   $ 129       $ 139       $ 400       $ 461   

Loss on debt extinguishment and related expenses

                             713   

JDE coffee business transactions currency-related net gain

             (29              (436

Loss related to interest rate swaps

                     97         34   

Other expense, net

     16         4         43         42   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest and other expense, net

   $ 145       $ 114       $ 540       $ 814   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Note 2, Divestitures and Acquisitions, and Note 8, Financial Instruments, for information on the currency exchange forward contracts associated with the JDE coffee business transactions. Also see Note 8, Financial Instruments, for information on the loss related to U.S. dollar interest rate swaps no longer designated as accounting cash flow hedges during the first quarters of 2016 and 2015.

 

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Note 8.   Financial Instruments

Fair Value of Derivative Instruments:

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

 

                                                                           
     As of September 30, 2016      As of December 31, 2015  
     Asset      Liability      Asset      Liability  
     Derivatives      Derivatives      Derivatives      Derivatives  
     (in millions)  

Derivatives designated as
accounting hedges:

           

Currency exchange contracts

   $ 4       $ 8       $ 20       $ 7   

Commodity contracts

     38         16         37         35   

Interest rate contracts

     10         16         12         57   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 52       $ 40       $ 69       $ 99   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as
accounting hedges:

           

Currency exchange contracts

   $ 14       $ 57       $ 61       $ 33   

Commodity contracts

     52         47         70         56   

Interest rate contracts

     29         20         43         28   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 95       $ 124       $ 174       $ 117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value

   $ 147       $ 164       $ 243       $ 216   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the first nine months of 2016 and 2015, derivatives designated as accounting hedges include cash flow and fair value hedges and derivatives not designated as accounting hedges include economic hedges. Non-U.S. dollar denominated debt designated as a hedge of our net investments in non-U.S. operations is not reflected in the table above, but is included in long-term debt summarized in Note 7, Debt and Borrowing Arrangements. We record derivative assets and liabilities on a gross basis 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.

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

 

                                                                           
     As of September 30, 2016  
            Quoted Prices in                
            Active Markets      Significant      Significant  
     Total      for Identical      Other Observable      Unobservable  
     Fair Value of Net      Assets      Inputs      Inputs  
     Asset / (Liability)      (Level 1)      (Level 2)      (Level 3)  
     (in millions)  

Currency exchange contracts

   $ (47    $       $ (47    $   

Commodity contracts

     27         17         10           

Interest rate contracts

     3                 3           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ (17    $ 17       $ (34    $   
  

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2015  
            Quoted Prices in                
            Active Markets      Significant      Significant  
     Total      for Identical      Other Observable      Unobservable  
     Fair Value of Net      Assets      Inputs      Inputs  
     Asset / (Liability)      (Level 1)      (Level 2)      (Level 3)  
     (in millions)  

Currency exchange contracts

   $ 41       $       $ 41       $   

Commodity contracts

     16         29         (13        

Interest rate contracts

     (30              (30        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 27       $ 29       $ (2    $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges. Our exchange-traded derivatives are generally subject to master netting arrangements that permit net settlement of transactions with the same counterparty when certain criteria are met, such as in the event of default. We also are required to maintain cash margin accounts in connection with funding the settlement of our open positions, and the margin requirements generally fluctuate daily based on market conditions. We have recorded margin deposits related to our exchange-traded derivatives of $16 million as of September 30, 2016 and margin deposits of $22 million as of December 31, 2015 within other current assets. Based on our net asset or liability positions with individual counterparties, in the event of default and immediate net settlement of all of our open positions, for derivatives we have in a net asset position, our counterparties would owe us a total of $32 million as of September 30, 2016 and $52 million as of December 31, 2015. For derivatives we have in a net liability position, we would owe less than $1 million as of September 30, 2016. As of December 31, 2015, there were no Level 1 derivatives in a net liability position.

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 $36 million as of September 30, 2016 and $101 million as of December 31, 2015, and for derivatives we have in a net asset position, our counterparties would owe us a total of $54 million as of September 30, 2016 and $64 million as of December 31, 2015. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.

Derivative Volume:

The net notional values of our derivative instruments were:

 

                                     
     Notional Amount  
     As of September 30,      As of December 31,  
     2016      2015  
     (in millions)  

Currency exchange contracts:

     

Intercompany loans and forecasted interest payments

   $ 3,211       $ 4,148   

Forecasted transactions

     1,318         1,094   

Commodity contracts

     654         732   

Interest rate contracts

     2,050         3,033   

Net investment hedge – euro notes

     5,280         4,345   

Net investment hedge – pound sterling notes

     1,236         1,404   

Net investment hedge – Swiss franc notes

     1,518         1,073   

 

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Cash Flow Hedges:

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

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  

Accumulated gain / (loss) at
beginning of period

   $ (36    $ (53    $ (45    $ (2

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

     (2      60         64         6   

Unrealized gain / (loss) in fair value

     4         (69      (53      (66
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated gain / (loss) at
end of period

   $ (34    $ (62    $ (34    $ (62
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

   

     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  

Currency exchange contracts – forecasted transactions

   $ (6    $ (11    $ (3    $ 73   

Commodity contracts

     8         (49      (1      (53

Interest rate contracts

                     (60      (26
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2       $ (60    $ (64    $ (6
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

  

     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  

Currency exchange contracts – forecasted transactions

   $ (11    $ 8       $ (21    $ 33   

Commodity contracts

     10         (38      19         (61

Interest rate contracts

     5         (39      (51      (38
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4       $ (69    $ (53    $ (66
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Within interest and other expense, net, we recorded pre-tax losses of $97 million in the first quarter of 2016 and $34 million in the first quarter of 2015 related to amounts excluded from effectiveness testing. These amounts relate to interest rate swaps no longer designated as cash flow hedges due to changes in financing plans. Due to lower overall costs and our decision to hedge a greater portion of our net investments in operations that use currencies other than the U.S. dollar as their functional currencies, our plans to issue U.S. dollar-denominated debt changed and we instead issued euro and Swiss franc-denominated notes in the current year first quarter, and euro, British pound sterling and Swiss franc-denominated notes in the prior-year first quarter. Amounts excluded from effectiveness testing were not material for the third quarter of 2016 and 2015.

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

    cost of sales for commodity contracts;
    cost of sales for currency exchange contracts related to forecasted transactions; and
    interest and other expense, net for interest rate contracts and currency exchange contracts related to intercompany loans.

Based on current market conditions, we would expect to transfer unrealized gains of $11 million (net of taxes) for commodity cash flow hedges, unrealized losses of $11 million (net of taxes) for currency cash flow hedges and unrealized losses of less than $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

 

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Hedge Coverage:

As of September 30, 2016, 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 7 years and 2 months; and
    currency exchange transactions for periods not exceeding the next 15 months.

Fair Value Hedges:

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

 

                                                                                              
     For the Three Months Ended      For the Nine Months Ended         
     September 30,      September 30,     
     2016      2015      2016      2015     
     (in millions)     
                                

Derivatives

   $ (11    $ 4       $ (2    $ 8      

Borrowings

     11         (4      2         (8   

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

 

Economic Hedges:

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

 

   

  

  

                                 Location of  
     For the Three Months Ended      For the Nine Months Ended      Gain / (Loss)  
     September 30,      September 30,      Recognized  
     2016      2015      2016      2015      in Earnings  
     (in millions)         
                                    

Currency exchange contracts:

              

Intercompany loans and forecasted interest payments

   $ 7       $ 8       $ 18       $ 22        
 
Interest and other
expense, net
  
  

Forecasted transactions

     (14      43         (91      33         Cost of sales   

Forecasted transactions

     2         36         10         437        
 
Interest and other
expense, net
  
  

Forecasted transactions

     4         5         16         (11     
 
 
Selling, general and
administrative
expenses
  
  
  

Interest rate contracts

                                    
 
Interest and other
expense, net
  
  

Commodity contracts

     (13      (99      (26      (158      Cost of sales   
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ (14    $ (7    $ (73    $ 323      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

In connection with the JDE coffee business transactions, we entered into a number of consecutive euro to U.S. dollar currency exchange forward contracts in 2015 to lock in an equivalent expected value in U.S. dollars. The mark-to-market gains and losses on the derivatives were recorded in earnings. We recorded net gains of $29 million for the three months and $436 million for the nine months ended September 30, 2015 within interest and other expense, net in connection with the forward contracts and the transferring of proceeds to our subsidiaries where coffee net assets and shares were deconsolidated. The currency hedge and related gains and losses were recorded within interest and other expense, net. See Note 2, Divestitures and Acquisitions — JDE Coffee Business Transactions, for additional information.

 

Hedges of Net Investments in International Operations:

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

 

        

  

   

                   Location of  
     For the Three Months Ended      For the Nine Months Ended      Gain / (Loss)  
     September 30,      September 30,      Recognized in  
     2016      2015      2016      2015      AOCI  
     (in millions)         
                                    

Euro notes

   $ (38    $ (8    $ (110    $ 188         Currency   

Pound sterling notes

     21         30         107         17         Translation   

Swiss franc notes

     (4      18         (33      (13      Adjustment   

 

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Note 9. Benefit Plans

Pension Plans

Components of Net Periodic Pension Cost:

Net periodic pension cost consisted of the following:

 

                                                                           
     U.S. Plans      Non-U.S. Plans  
     For the Three Months Ended      For the Three Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  
                             

Service cost

   $ 15       $ 16       $ 37       $ 44   

Interest cost

     15         16         57         77   

Expected return on plan assets

     (24      (23      (105      (120

Amortization:

           

Net loss from experience differences

     12         11         31         33   

Prior service cost / (credit)

                               

Settlement losses and other expenses

     9         2                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 27       $ 22       $ 20       $ 34   
  

 

 

    

 

 

    

 

 

    

 

 

 
     U.S. Plans      Non-U.S. Plans  
     For the Nine Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  
                             

Service cost

   $ 42       $ 48       $ 114       $ 145   

Interest cost

     46         50         179         231   

Expected return on plan assets

     (72      (70      (326      (358

Amortization:

           

Net loss from experience differences

     30         33         93         110   

Prior service cost / (credit)

     1         1         (2      16   

Settlement losses / (gains) and other expenses

     25         15         (1        
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 72       $ 77       $ 57       $ 144   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost decreased in the nine months ended September 30, 2016 due to a combination of factors, including a decreased number of plan participants, changes in discount rates, company contributions to the plans and a change in our approach to measuring service and interest costs. For 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, we have elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. The impact of this change was a decrease in net periodic pension cost of approximately $16 million for the three months and $48 million for the nine months ended September 30, 2016. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.

Net pension costs of our non-U.S. plans in the three and nine months ended September 30, 2016 were also favorably impacted by the reduction in our pension plan obligations due to the JDE coffee business transactions. Prior to the July 2, 2015 closing of the JDE coffee business transactions, certain active employees who transitioned to JDE participated in our non-U.S. pension plans. Following the transactions, benefits began to be provided directly by JDE to participants continuing with JDE. JDE assumed certain pension plan obligations and received the related plan assets. In 2015, we reduced our net benefit plan liabilities by $131 million and the related deferred tax assets by $24 million. Prior to the transactions, for the nine months ended September 30, 2015, amortization of prior service cost includes $17 million of pension curtailment losses related to employees who subsequently transitioned to JDE. Refer to Note 2, Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information. For participants that elected not to transfer into the JDE plans, we retained the plan obligations and related plan assets.

 

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Settlement losses also include pension settlement losses for employees who elected lump-sum payments in connection with our 2014-2018 Restructuring Program. These settlement losses were $3 million for the three months and $12 million for the nine months ended September 30, 2016 and $1 million for the three months and $7 million for the nine months ended September 30, 2015. See Note 6, 2014-2018 Restructuring Program, for more information. We also recorded an additional $49 million of pension settlement losses in the nine months ended September 30, 2015 related to the JDE coffee business transactions within the gain on the JDE coffee business transactions.

Employer Contributions:

During the nine months ended September 30, 2016, we contributed $169 million (of which, $150 million was voluntarily contributed) to our U.S. plans and $329 million (of which, $100 million was a non-recurring contribution related to merging our and legacy Cadbury plans in the U.K.) to our non-U.S. plans. As of September 30, 2016, we plan to make further contributions of approximately $6 million to our U.S. plans and approximately $50 million to our non-U.S. plans during the remainder of 2016. However, our actual contributions may differ due to many factors, including changes in tax and other benefit laws or significant differences between expected and actual pension asset performance or interest rates.

Postretirement Benefit Plans

Net periodic postretirement health care costs consisted of the following:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  
                             

Service cost

   $ 3       $ 4       $ 9       $ 11   

Interest cost

     6         5         16         17   

Amortization:

           

Net loss from experience differences

     2         3         5         10   

Prior service credit (1)

     (11      (1      (14      (5
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic postretirement health care costs

   $       $ 11       $ 16       $ 33   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   For the three and nine months ended September 30, 2016, amortization of prior service credit includes $8 million of curtailment gain related to a change in the eligibility requirement.

 

Net periodic postretirement health care costs decreased in the three and nine months ended September 30, 2016 due to a combination of factors, including a decreased number of plan participants, changes in discount rates, company contributions to the plans and a change in our approach to measuring service and interest costs. For 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. The impact of this change was a decrease in net periodic postretirement health care costs of approximately $1 million for the three months and $3 million for the nine months ended September 30, 2016. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.

 

Postemployment Benefit Plans

 

Net periodic postemployment costs consisted of the following:

 

   

            

  

  

     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  
                             

Service cost

   $ 2       $ 2       $ 5       $ 5   

Interest cost

     1         1         4         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic postemployment costs

   $ 3       $ 3       $ 9       $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 10.  Stock Plans

Stock Options:

Stock option activity is reflected below:

 

                                                                           
            Weighted-                
            Average      Average         
            Exercise or      Remaining      Aggregate  
     Shares Subject      Grant Price      Contractual      Intrinsic  
     to Option      Per Share      Term      Value  

Balance at January 1, 2016

     57,034,108       $ 26.12         6 years       $ 229 million   
  

 

 

          

Annual grant to eligible employees

     7,517,290         39.70         

Additional options issued

     97,680         43.32         
  

 

 

          

Total options granted

     7,614,970         39.75         

Options exercised

     (7,094,555      24.01          $ 139 million   

Options cancelled

     (1,735,698      35.39         
  

 

 

          

Balance at September 30, 2016

     55,818,825         27.95         6 years       $ 252 million   
  

 

 

          

 

Deferred Stock Units, Performance Share Units and Restricted Stock:

Historically we have made grants of deferred stock units, performance share units and restricted stock. Beginning in 2016, we only grant deferred stock units and performance share units and no longer grant restricted stock. Our deferred stock unit, performance share unit and restricted stock activity is reflected below:

 

  

    

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

Balance at January 1, 2016

     9,418,216          $ 28.00      
  

 

 

          

Annual grant to eligible employees:

        Feb. 22, 2016         

Performance share units

     1,406,500            39.70      

Deferred stock units

     1,040,790            39.70      

Additional shares granted (1)

     755,171         Various         29.51      
  

 

 

          

Total shares granted

     3,202,461            37.30       $ 119 million   

Vested (2)

     (3,903,681         40.13       $ 157 million   

Forfeited (2)

     (1,019,864         37.47      
  

 

 

          

Balance at September 30, 2016

     7,697,132            24.46      
  

 

 

          

 

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

 

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Share Repurchase Program:

During 2013, our Board of Directors authorized the repurchase of $7.7 billion of our Common Stock through December 31, 2016. On July 29, 2015, our Finance Committee, with authorization delegated from our Board of Directors, approved an increase of $6.0 billion in the share repurchase program, raising the authorization to $13.7 billion of Common Stock repurchases, and extended the program through December 31, 2018. Repurchases under the program are determined by management and are wholly discretionary. Prior to January 1, 2016, we had repurchased $8.2 billion of Common Stock pursuant to this authorization. During the nine months ended September 30, 2016, we repurchased 42.9 million shares of Common Stock at an average cost of $41.64 per share, or an aggregate cost of $1.8 billion, of which $1.7 billion was paid during the period. All share repurchases were funded through available cash and commercial paper issuances. As of September 30, 2016, we have $3.7 billion in remaining share repurchase capacity.

Note 11. Commitments and Contingencies

Legal Proceedings:

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

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

As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are continuing to cooperate with the U.S. and Indian governments in their investigations of these matters. On February 11, 2016, we received a “Wells” notice from the SEC indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against us for violations of the books and records and internal controls provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the investigation. On March 18, 2016, we made a submission to the staff of the SEC in response to the notice. We have engaged in discussions with the SEC and with the U.S. Department of Justice to discuss potential resolution of their respective investigations. We have not reached a settlement to resolve these investigations, and we are unable to predict when or if we can reach a mutually satisfactory resolution.

In February 2013 and March 2014, Cadbury India Limited (now known as Mondelez India Foods Private Limited), a subsidiary of Mondelēz International, and other parties received show cause notices from the Indian Central Excise Authority (the “Excise Authority”) calling upon the parties to demonstrate why the Excise Authority should not collect a total of 3.7 billion Indian rupees ($56 million as of September 30, 2016) 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 ($88 million as of September 30, 2016). We have appealed this order. In addition, the Excise Authority issued additional show cause notices on February 6, 2015 and December 8, 2015 on the same issue but covering the periods January to October 2014 and November 2014 to September 2015, respectively. These notices added a total of 2.4 billion Indian rupees ($36 million as of September 30, 2016) of unpaid excise taxes as well as penalties to be determined up to an amount equivalent to that claimed by the Excise Authority and interest. We believe that the decision to claim the excise tax benefit is valid and we are continuing to contest the show cause notices through the administrative and judicial process.

 

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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. In December 2015, the court denied Mondelēz Global and Kraft Foods Group’s motion to dismiss the CFTC’s claims of market manipulation and attempted manipulation, and the parties are now in discovery. Additionally, several class action complaints were filed against Kraft Foods Group and Mondelēz Global in the U.S. District Court for the Northern District of Illinois by investors in wheat futures and options on behalf of themselves and others similarly situated. The complaints make similar allegations as those made in the CFTC action and seek class action certification; an unspecified amount for damages, interest and unjust enrichment; costs and fees; and injunctive, declaratory, and other unspecified relief. In June 2015, these suits were consolidated in the Northern District of Illinois. In June 2016, the court denied Mondelēz Global and Kraft Foods Group’s motion to dismiss, and the parties are now in discovery. It is not possible to predict the outcome of these matters; however, based on our Separation and Distribution Agreement with Kraft Foods Group dated as of September 27, 2012, we expect to predominantly bear any monetary penalties or other payments in connection with the CFTC action.

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

Third-Party Guarantees:

We enter into third-party guarantees primarily to cover the long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At September 30, 2016, we had no material third-party guarantees recorded on our condensed consolidated balance sheet.

 

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Note 12. Reclassifications from Accumulated Other Comprehensive Income

The following table summarizes the changes in the accumulated balances of each component of accumulated other comprehensive earnings / (losses) attributable to Mondelēz International. Amounts reclassified from accumulated other comprehensive earnings / (losses) to net earnings (net of tax) were net losses of $28 million in the three months and $206 million for the nine months ended September 30, 2016 and $134 million in the three months and $172 million in the nine months ended September 30, 2015.

 

                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  

Currency Translation Adjustments:

           

Balance at beginning of period

   $ (7,867    $ (6,438    $ (8,006    $ (5,042

Currency translation adjustments attributable to:

           

Translation of international operations (1)

     52         (1,149      171         (2,749

Pension and other benefit plans

     7         46         42         97   

Derivatives accounted for as net investment hedges

     (35      62         (58      303   

Noncontrolling interests

     (2      (6      (3      (22

Tax (expense) / benefit

     13         (23      21         (111
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive earnings / (losses)

     35         (1,070      173         (2,482

Less: portion attributable to noncontrolling interests

     (2      (6      (3      (22
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     (7,830      (7,502      (7,830      (7,502
  

 

 

    

 

 

    

 

 

    

 

 

 

Pension and Other Benefit Plans:

           

Balance at beginning of period

   $ (1,865    $ (2,201    $ (1,934    $ (2,274

Net actuarial gain / (loss) arising during period

             127         24         99   

Tax (expense) / benefit on net actuarial gain / (loss)

             (40      (9      (35

Losses / (gains) reclassified into net earnings:

           

Amortization of experience losses and
prior service costs (2)

     30         46         93         165   

Settlement losses (2)

     10         51         25         64   

Tax (expense) / benefit on reclassifications (3)

     (10      (28      (34      (64
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive earnings / (losses)

     30         156         99         229   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     (1,835      (2,045      (1,835      (2,045
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Cash Flow Hedges:

           

Balance at beginning of period

   $ (36    $ (53    $ (46    $ (2

Net derivative gains / (losses)

     6         (113      (78      (103

Tax (expense) / benefit on net derivative gain / (loss)

     (2      39         25         36   

Losses / (gains) reclassified into net earnings:

           

Currency exchange contracts –
forecasted transactions (4)

     7         13         3         (79

Commodity contracts (4)

     (8      62         7         65   

Interest rate contracts (5)

                     96         41   

Tax (expense) / benefit on reclassifications (3)

     (1      (10      (41      (20
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive earnings / (losses)

     2         (9      12         (60
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     (34      (62      (34      (62
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated other comprehensive income attributable to Mondelēz International:

           

Balance at beginning of period

   $ (9,768    $ (8,692    $ (9,986    $ (7,318

Total other comprehensive earnings / (losses)

     67         (923      284         (2,313

Less: portion attributable to noncontrolling interests

     (2      (6      (3      (22
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive earnings / (losses) attributable to Mondelēz International

     69         (917      287         (2,291
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ (9,699    $ (9,609    $ (9,699    $ (9,609
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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  (1) For the nine months ended September 30, 2016 includes $57 million of historical cumulative transaction adjustments reclassified to net earnings within the gain on equity method investment exchange in the first quarter. See Note 2, Divestitures and Acquisitions – Keurig Transaction.
  (2) These reclassified gains or losses are included in the components of net periodic benefit costs disclosed in Note 9, Benefit Plans, and equity method investment net earnings.
  (3) Taxes related to reclassified gains or losses are recorded within the provision for income taxes.
  (4) These reclassified gains or losses are recorded within cost of sales.
  (5) These reclassified gains or losses are recorded within interest and other expense, net.

Note 13.  Income Taxes

Based on current tax laws, our estimated annual effective tax rate for 2016 is 20.8%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions. Our 2016 third quarter effective tax rate of 7.2% includes net benefit from discrete one-time events of $60 million, mainly due to $35 million from expirations of statutes of limitations and favorable audit settlements in several jurisdictions and a $17 million benefit from the reduction of U.K. net deferred tax liabilities resulting from tax legislation enacted during 2016 Q3 that reduced the U.K. corporate income tax rate. Our effective tax rate for the nine months ended September 30, 2016 of 13.6% was favorably impacted by net tax benefit from $109 million of discrete one-time events. The discrete net tax benefit primarily consisted of benefits of $73 million due to expirations of statutes of limitations and favorable audit settlements in several jurisdictions and a $17 million benefit from the reduction of U.K. net deferred tax liabilities resulting from tax legislation enacted during the third quarter of 2016 that reduced the U.K. corporate income tax rate.

As of the third quarter of 2015, our estimated annual effective tax rate for 2015 was 23.1%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions. Our 2015 third quarter effective tax rate of 4.5% benefitted from the one-time third quarter sale of our coffee business that resulted in a pre-tax gain of $7,122 million and $197 million of related tax expense, as well as $21 million of tax costs incurred to remit proceeds up from lower-tier foreign subsidiaries to allow cash to be redeployed within our retained foreign operations. Other discrete one-time events, which partially offset the costs associated with the sale of our coffee business, of $40 million primarily related to favorable audit settlements and expirations of statutes of limitations in several jurisdictions. Our effective tax rate for the 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.

Note 14.  Earnings Per Share

Basic and diluted earnings per share (“EPS”) were calculated as follows:

 

                                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions, except per share data)  

Net earnings

   $ 548       $ 7,268       $ 1,576       $ 8,007   

Noncontrolling interest earnings

             (2      (10      (11
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to
Mondelēz International

   $ 548       $ 7,266       $ 1,566       $ 7,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for basic EPS

     1,557         1,609         1,561         1,627   

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

     19         20         18         19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for diluted EPS

     1,576         1,629         1,579         1,646   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to
Mondelēz International

   $ 0.35       $ 4.52       $ 1.00       $ 4.91   

Diluted earnings per share attributable to
Mondelēz International

   $ 0.35       $ 4.46       $ 0.99       $ 4.86   

 

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We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded antidilutive stock options of 4.3 million for the three months and 7.7 million for the nine months ended September 30, 2016 and less than 1 million for the three months and 10.8 million for the nine months ended September 30, 2015.

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

On October 1, 2016, we integrated our EEMEA business into our Europe and Asia Pacific segments. Russia, Ukraine, Turkey, Belarus, Georgia and Kazakhstan were combined within our Europe operating segment, while the remaining Middle East and African countries were combined within our Asia Pacific operating segment to form a new Asia, Middle East and Africa (“AMEA”) regional operating segment.

We manage our operations by region to leverage regional operating scale, manage different and changing business environments more effectively and pursue growth opportunities as they arise in our key markets. Our regional management teams have responsibility for the business, product categories and financial results in the regions.

Historically, we have recorded income from equity method investments within our operating income as these investments were part of our base business. Beginning in the third quarter of 2015, to align with the accounting for our new coffee equity method investment in JDE, we began to record the earnings from our equity method investments in equity method investment earnings outside of segment operating income. Within segment operating income, equity method investment net earnings were $56 million for the nine months ended September 30, 2015, including $49 million in Asia Pacific, $3 million in EEMEA and $4 million in North America. See Note 1, Basis of Presentation – Principles of Consolidation, and Note 2, Divestitures and Acquisitions, for additional information.

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

 

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Our segment net revenues and earnings were:

 

                                                           
     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  

Net revenues:

           

Latin America (1)

   $ 868       $ 1,233       $ 2,528       $ 3,730   

Asia Pacific (2)

     1,128         1,101         3,278         3,278   

EEMEA (2)

     543         586         1,738         2,150   

Europe (2)

     2,104         2,173         6,461         7,963   

North America

     1,753         1,756         5,148         5,151   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

   $ 6,396       $ 6,849       $ 19,153       $ 22,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Net revenues of $315 million for the three months and $834 million for the nine months ended September 30, 2015 from our Venezuelan subsidiaries are included in our condensed consolidated financial statements. Beginning in 2016, we account for our Venezuelan subsidiaries using the cost method of accounting and no longer include net revenues of our Venezuelan subsidiaries within our condensed consolidated financial statements. Refer to Note 1, Basis of Presentation – Currency Translation and Highly Inflationary Accounting: Venezuela, for more information.

(2)   On July 2, 2015, we contributed our global coffee businesses primarily from our Europe, EEMEA and Asia Pacific segments. Net revenues of our global coffee business were $1,348 million in Europe, $246 million in EEMEA and $33 million in Asia Pacific for the nine months ended September 30, 2015. Refer to Note 2, Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information.

 

      

    

     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (in millions)  

Earnings before income taxes:

           

Operating income:

           

Latin America

   $ 92       $ 134       $ 191       $ 422   

Asia Pacific

     135         71         378         321   

EEMEA

     44         52         154         184   

Europe

     302         298         896         885   

North America

     274         275         840         817   

Unrealized gains / (losses) on hedging activities (mark-to-market impacts)

     (12      (4      (49      75   

General corporate expenses

     (89      (95      (216      (240

Amortization of intangibles

     (44      (45      (132      (137

Gains on JDE coffee business transactions and divestiture

             7,122                 7,135   

Acquisition-related costs

             (6              (8
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     702         7,802         2,062         9,454   

Interest and other expense, net

     (145      (114      (540      (814
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

   $ 557       $ 7,688       $ 1,522       $ 8,640   
  

 

 

    

 

 

    

 

 

    

 

 

 

Items impacting our segment operating results are discussed in Note 1, Basis of Presentation, including the Venezuela deconsolidation and currency devaluation, Note 2, Divestitures and Acquisitions, Note 5, Goodwill and Intangible Assets, and Note 6, 2014-2018 Restructuring Program. Also see Note 7, Debt and Borrowing Arrangements, and Note 8, Financial Instruments, for more information on our interest and other expense, net for each period.

 

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Net revenues by product category were:

 

                                                                                                                 
     For the Three Months Ended September 30, 2016  
     Latin      Asia                    North         
   America      Pacific      EEMEA      Europe      America      Total  
     (in millions)  

Biscuits

   $ 191       $ 360       $ 125       $ 608       $ 1,403       $ 2,687   

Chocolate

     185         388         223         1,021         65         1,882   

Gum & Candy

     247         174         120         163         285         989   

Beverages (1)

     164         77         31         36                 308   

Cheese & Grocery

     81         129         44         276                 530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 868       $ 1,128       $ 543       $ 2,104       $ 1,753       $ 6,396   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Three Months Ended September 30, 2015  
     Latin      Asia                    North         
   America (2)      Pacific      EEMEA      Europe (3)      America      Total  
     (in millions)  

Biscuits

   $ 431       $ 356       $ 125       $ 592       $ 1,403       $ 2,907   

Chocolate

     184         370         232         1,074         64         1,924   

Gum & Candy

     262         171         134         177         289         1,033   

Beverages (1)

     178         76         45         43                 342   

Cheese & Grocery

     178         128         50         287                 643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended September 30, 2016  
     Latin      Asia                    North         
   America      Pacific      EEMEA      Europe      America      Total  
     (in millions)  

Biscuits

   $ 551       $ 991       $ 379       $ 1,848       $ 4,162       $ 7,931   

Chocolate

     562         1,088         549         3,124         153         5,476   

Gum & Candy

     713         538         383         512         833         2,979   

Beverages (1)

     466         285         229         123                 1,103   

Cheese & Grocery

     236         376         198         854                 1,664   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 2,528       $ 3,278       $ 1,738       $ 6,461       $ 5,148       $ 19,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended September 30, 2015  
     Latin      Asia                    North         
   America (2)      Pacific      EEMEA      Europe (3)      America      Total  
     (in millions)  

Biscuits

   $ 1,147       $ 940       $ 396       $ 1,828       $ 4,161       $ 8,472   

Chocolate

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

Gum & Candy

     852         550         418         558         829         3,207   

Beverages (1)

     570         324         502         1,493                 2,889   

Cheese & Grocery

     481         390         207         880                 1,958   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) On July 2, 2015, we contributed our global coffee businesses primarily from our Europe, EEMEA and Asia Pacific segment beverage categories. Net revenues of our global coffee business were $1,348 million in Europe, $246 million in EEMEA and $33 million in Asia Pacific for the nine months ended September 30, 2015. Refer to Note 2, Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information.
  (2) Our Venezuelan subsidiaries net revenues of $209 million in biscuits, $95 million in cheese & grocery, $6 million in beverages and $5 million in gum & candy for the three months and $496 million in biscuits, $231 million in cheese & grocery, $66 million in gum & candy and $41 million in beverages for the nine months ended September 30, 2015 are included in our condensed consolidated financial statements. Beginning in 2016, we account for our Venezuelan subsidiaries using the cost method of accounting and no longer include net revenues of our Venezuelan subsidiaries within our condensed consolidated financial statements. Refer to Note 1, Basis of Presentation – Currency Translation and Highly Inflationary Accounting: Venezuela, for more information.
  (3) During 2016, we realigned some of our products across product categories primarily within our Europe segment and as such, we reclassified the product category net revenues on a basis consistent with the 2016 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 165 countries.

Over the last several years, we have built a presence in the snacking category. We have expanded geographically and continue to invest in product quality, marketing and innovation behind our iconic brands while also 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.

Significant Items Affecting Comparability of Financial Results

JDE Coffee Business Transactions:

On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, Jacobs Douwe Egberts (“JDE”). Following the exchange of a portion of our investment in JDE for an interest in Keurig Green Mountain Inc. (“Keurig”) in March 2016, we held a 26.5% equity interest in JDE. The remaining 73.5% equity interest in JDE was held by a subsidiary of Acorn Holdings B.V. (“AHBV,” owner of DEMB prior to July 2, 2015). Please see discussion of the acquisition of an interest in Keurig below under Keurig Transaction. As of September 30, 2016, we hold a 26.4% equity interest in JDE following the transactions discussed under JDE Stock-Based Compensation Arrangements below.

The consideration we received in the JDE coffee business transactions completed on July 2, 2015, consisted of 3.8 billion of cash ($4.2 billion as of July 2, 2015), a 43.5% equity interest in JDE (prior to the decrease in ownership due to the Keurig transaction and the compensation arrangements discussed below) and $794 million in receivables (related to sales price adjustments and tax formation cost payments). During the third quarter of 2015, we also recorded $283 million of cash and receivables from JDE related to reimbursement of costs that we incurred in separating our coffee businesses. The cash and equity consideration we received at closing reflects that we retained our interest in a Korea-based joint venture, Dongsuh Foods Corporation (“DSF”). During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”). In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from the sale as part of the overall JDE coffee business transactions. Please see Note 2, Divestitures and Acquisitions – Other Divestitures and Acquisitions, for discussion of the divestiture of AGF.

On July 5, 2016, we received an expected cash payment of $275 million from JDE to settle the receivable related to tax formation costs that were part of the initial sales price.

In connection with the contribution of our global coffee businesses to JDE on July 2, 2015, we recorded a final pre-tax gain of $6.8 billion (or $6.6 billion after taxes) in 2015 after final adjustments as described below. We also recorded approximately $1.0 billion of pre-tax net gains related to hedging the expected cash proceeds from the transactions as described further below. During the fourth quarter of 2015, we and JDE concluded negotiations of a sales price adjustment and completed the valuation of our investment in JDE. Primarily due to the negotiated resolution of the sales price adjustment in the fourth quarter of 2015, we recorded a $313 million reduction in the pre-tax gain on the coffee transaction, reducing the $7.1 billion estimated gain in the third quarter of 2015 to the $6.8 billion final gain for 2015. As part of our sales price negotiations, we retained the right to collect future cash payments if certain estimated pension liabilities are realized over an agreed amount in the future. As such, we may recognize additional income related to this negotiated term in the future.

The final value of our investment in JDE on July 2, 2015 was 4.1 billion ($4.5 billion as of July 2, 2015). The fair value of the JDE investment was determined using both income-based and market-based valuation techniques. The discounted cash flow analysis reflected growth, discount and tax rates and other assumptions reflecting the underlying combined businesses and countries in which the combined coffee businesses operate. The fair value of the JDE investment also included the fair values of the Carte Noire and Merrild businesses, which JDE agreed to divest to comply with the conditioned approval by the European Commission related to the JDE coffee business transactions. As of the end of the first quarter of 2016, these businesses were sold by JDE. As the July 2, 2015 fair values for these businesses were recorded by JDE at their pending sales values, we did not record any gain or loss on the sales of these businesses in our share of JDE’s earnings.

 

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In connection with the expected receipt of cash in euros at the time of closing, we entered into a number of consecutive currency exchange forward contracts in 2014 and 2015 to lock in an equivalent expected value in U.S. dollars as of the date the JDE coffee business transactions were first announced in May 2014. Cumulatively, we realized aggregate net gains and received cash of approximately $1.0 billion on these hedging contracts that increased the cash we received in connection with the JDE coffee business transactions from $4.2 billion in cash consideration received to $5.2 billion. In connection with these currency contracts, we recognized net gains of $29 million in the three months and $436 million in the nine months ended September 30, 2015 within interest and other expense, net.

JDE Stock-Based Compensation Arrangements:

At the close of June 30, 2016, we entered into agreements with AHBV and its affiliates to establish a new stock-based compensation arrangement tied to the issuance of JDE equity compensation awards to JDE employees. This arrangement replaced a temporary equity compensation program tied to the issuance of AHBV equity compensation to JDE employees. New Class C, D and E JDE shares were authorized and issued for investments made by JDE employees. Under these arrangements, dilution of the JDE shares is limited to 2%. Upon execution of the agreements and the creation of the Class C, D and E JDE shares, as a percentage of the total JDE issued shares, our Class B shares changed from 26.5% to 26.4% and AHBV’s Class A shares changed from 73.5% to 73.22%, while the Class C, D and E shares, held by AHBV and its affiliates until the JDE employee awards vest, comprised 0.38% of JDE’s shares. Additional Class C shares are available to be issued when planned long-term incentive plan (“JDE LTIP”) awards vest, generally over the next five years. When the JDE Class C shares are issued in connection with the vested JDE LTIP awards, the Class A and B relative ownership interests will decrease. Based on estimated achievement and forfeiture assumptions, we do not expect our JDE ownership interest to decrease below 26.27%. As of September 30, 2016, our ownership interest in JDE was 26.4%.

JDE Tax Matter Resolution:

On July 19, 2016, the Supreme Court of Spain reached a final resolution on a challenged JDE tax position held by a predecessor DEMB company that resulted in an unfavorable tax expense of 114 million ($128 million as of September 30, 2016). As a result, our earnings in the third quarter of 2016 were negatively affected by 30 million ($34 million as of September 30, 2016).

Keurig Transaction:

On March 3, 2016, a subsidiary of AHBV completed the $13.9 billion acquisition of all of the outstanding common stock of Keurig through a merger transaction. On March 7, 2016, we exchanged with a subsidiary of AHBV a portion of our equity interest in JDE with a carrying value of 1.7 billion (approximately $2.0 billion as of March 7, 2016) for an interest in Keurig with a fair value of $2.0 billion based on the merger consideration per share for Keurig. We recorded the difference between the fair value of Keurig and our basis in JDE shares as a $43 million gain on equity method investment exchange in March 2016. Following the exchange, our ownership interest in JDE was 26.5% and our interest in Keurig was 24.2%. Both AHBV and we hold our investments in Keurig through a combination of equity and interests in a shareholder loan, with pro-rata ownership of each. Our initial $2.0 billion investment in Keurig includes a $1.6 billion Keurig equity interest and a $0.4 billion shareholder loan receivable, which are reported on a combined basis within equity method investments on our condensed consolidated balance sheet as of September 30, 2016. The shareholder loan has a 5.5% interest rate and is payable at the end of a seven-year term on February 27, 2023. We recorded equity earnings of $10 million for the three months and $39 million for the seven months ended September 30, 2016 and interest income from the shareholder loan of $6 million for the three months and $14 million for the seven months ended September 30, 2016 within equity method earnings. Additionally, we received $2 million in the three months ended and $4 million in the seven months ended September 30, 2016 of dividends on our investment in Keurig. We continue to account for our investments in JDE and Keurig under the equity method and recognize our share of their earnings within equity method investment earnings and our share of their dividends within our cash flows. As of September 30, 2016, Keurig is working to finalize the acquisition purchase price allocation.

Coffee Business Equity Earnings:

We have reflected the results of our historical coffee businesses and equity earnings from JDE, Keurig and DSF in our results from continuing operations as the coffee category continues to be a significant part of our net earnings and business strategy going forward. Historically, our coffee businesses and the income from equity method investments were recorded within our operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig and DSF, and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income. See Note 2, Divestitures and Acquisitions, for more information.

 

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Venezuela Deconsolidation:

Effective as of the close of the 2015 fiscal year, we concluded that we no longer met the accounting criteria for consolidation of our Venezuelan subsidiaries due to a loss of control over our Venezuelan operations and an other-than-temporary lack of currency exchangeability. As of the close of the 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations. We recorded a $778 million pre-tax loss on December 31, 2015 as we reduced the value of our cost method investment in Venezuela and all Venezuelan receivables held by our other subsidiaries to realizable fair value, resulting in full impairment. The recorded loss also included historical cumulative translation adjustments related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity.

Beginning in 2016, we no longer include net revenues, earnings or net assets of our Venezuelan subsidiaries within our condensed consolidated financial statements. Under the cost method of accounting, earnings are only recognized to the extent cash is received. Given the current and ongoing difficult economic, regulatory and business environment in Venezuela, there continues to be significant uncertainty related to our operations in Venezuela, and we expect these conditions will continue for the foreseeable future. We will monitor the extent of our ability to control our Venezuelan operations and the liquidity and availability of U.S. dollars at different rates as our current situation in Venezuela may change over time and lead to consolidation at a future date. See below Discussion and Analysis of Historical Results – Items Affecting Comparability of Financial Results, and Note 1, Basis of PresentationCurrency Translation and Highly Inflationary Accounting: Venezuela, for more information on our historical Venezuelan operating results, including the remeasurement loss recorded in the first quarter of 2015.

Financial Outlook

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. We use these non-GAAP financial metrics and related computations such as margins internally to evaluate and manage our business, plan and make near and long-term operating and strategic decisions. As such, we believe these metrics are useful to investors as they provide supplemental information in addition to our U.S. GAAP financial results. We believe providing investors with the same financial information that we use internally ensures that investors have the same data to make comparisons of our historical operating results, identify trends in our underlying operating results and have additional insight and transparency on how we evaluate our business. We believe our non-GAAP financial measures should always be considered in relation to our GAAP results and we have provided reconciliations between our GAAP and non-GAAP financial measures in Non-GAAP Financial Measures which appears later in this section.

In addition to monitoring our key operating metrics, we monitor a number of developments or trends that could impact our revenue and profitability objectives.

    Following the June 2016 “Brexit”referendum vote, the United Kingdom (“U.K.”) is moving forward with plans to exit the European Union (“E.U.”). When announced, Brexit caused volatility in global stock markets and currency exchange rates, affecting the markets in which we conduct business. Also, the value of the British pound sterling relative to the U.S. dollar declined, and the value of primarily the pound sterling continued to be negatively affected following the vote. Further volatility in the exchange rate is expected over the transition period. While we have not experienced significant business disruptions in our U.K. businesses immediately following the referendum, the devaluation of the British pound sterling adversely affected our translated results reported in U.S. dollars. We have a natural hedge in the form of pound-sterling denominated debt that acts as a net investment hedge, moving counter to adverse pound sterling currency translation impacts. British pound sterling currency transaction risks are also mitigated in part due to our global chocolate businesses buying cocoa in British pound sterling. In recent months, cocoa prices in British pound sterling have been volatile and trading above historic levels, largely in response to the recent devaluation of the pound. On a global basis, the impact to our chocolate businesses is mitigated as we purchase cocoa at a higher cost but with less expensive British pound sterling. We may not be able to fully offset the increased risks within the U.K., which could impact profitability in the near-term or longer should these conditions continue. While we continue to monitor and work to safeguard our business, the U.K. decision to leave the E.U. could adversely affect future demand for our products, our financial results and operations, and our relationships with customers, suppliers and employees in the short or long-term.

 

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    On February 29, 2016, the collective bargaining agreements covering eight U.S. facilities expired and we began the re-negotiation of these agreements. We continue to work toward reaching an agreement with the union and have made plans to ensure business continuity during the re-negotiations.
    In the fourth quarter of 2016, we began the integration of our EEMEA business into our Europe and Asia Pacific segments. We expect this change to have a favorable impact on our operating performance beginning in late 2016 and prospectively due to the consolidation of offices and overhead reduction.

We also continue to note trends similar to those we highlighted in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2015. In particular, volatility in the global commodity and currency markets continued through the third quarter of 2016, including most recently the impact from Brexit and currency devaluation issues noted in other countries. Refer 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. Also refer to Note 6, 2014-2018 Restructuring Program, for additional information on the North America region collective bargaining agreement re-negotiations, and Note 15, Segment Reporting, for information on our segments and information on our EEMEA segment.

Summary of Results

 

    Net revenues decreased 6.6% to $6.4 billion in the third quarter of 2016 and decreased 14.0% to $19.2 billion in the first nine months of 2016 as compared to the same periods in the prior year. Net revenues in 2016 were significantly affected by the July 2, 2015 contribution of our global coffee business to JDE, unfavorable currency translation as the U.S. dollar strengthened against most currencies in which we operate compared to exchange rates in the prior year, the deconsolidation of our historical Venezuelan operations and the year-over-year impact of last year’s accounting calendar change and the deconsolidation of our Venezuelan subsidiaries.

 

    Organic Net Revenue increased 1.1% to $6.6 billion in the third quarter of 2016 and increased 1.6% to $20.1 billion in the first nine months of 2016 as compared to the same periods in the prior year. Organic Net Revenue is a non-GAAP financial measure we use to evaluate our underlying results (see the definition of Organic Net Revenue and our reconciliation with net revenues within Non-GAAP Financial Measures appearing later in this section).

 

    Diluted EPS attributable to Mondelēz International decreased 92.2% to $0.35 in the third quarter of 2016 and decreased 79.6% to $0.99 in the first nine months of 2016 as compared to the same periods in the prior year. A number of significant items also affected the comparability of our reported results, as further described in the Discussion and Analysis of Historical Results appearing later in this section and in the notes to the condensed consolidated financial statements.

 

    Adjusted EPS increased 36.8% to $0.52 in the third quarter of 2016 and increased 22.5% to $1.47 in the first nine months of 2016 as compared to the same periods in the prior year. On a constant currency basis, Adjusted EPS increased 42.1% to $0.54 in the third quarter of 2016 and increased 27.5% to $1.53 in the first nine months of 2016. Adjusted EPS and Adjusted EPS on a constant currency basis are non-GAAP financial measures 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).

 

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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     For the Nine Months Ended  
          September 30,     September 30,  
     See Note    2016     2015     2016     2015  
          (in millions)