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Mondelez International, Inc. 10-Q 2017
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2017

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      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      No  

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

 

Large accelerated filer       Accelerated filer   
Non-accelerated filer       Smaller reporting company   
(Do not check if a smaller reporting company)                       Emerging growth company   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

At July 28, 2017, there were 1,507,639,931 shares of the registrant’s Class A Common Stock outstanding.

 

 

 


Table of Contents

Mondelēz International, Inc.

Table of Contents

 

         Page No.  
PART I - FINANCIAL INFORMATION   
Item 1.  

Financial Statements (Unaudited)

  
 

Condensed Consolidated Statements of Earnings
for the Three and Six Months Ended June 30, 2017 and 2016

     1  
 

Condensed Consolidated Statements of Comprehensive Earnings
for the Three and Six Months Ended June  30, 2017 and 2016

     2  
 

Condensed Consolidated Balance Sheets
at June 30, 2017 and December 31, 2016

     3  
 

Condensed Consolidated Statements of Equity
for the Year Ended December  31, 2016 and
the Six Months Ended June 30, 2017

     4  
 

Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2017 and 2016

     5  
 

Notes to Condensed Consolidated Financial Statements

     6  
Item 2.  

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

     28  
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     53  
Item 4.  

Controls and Procedures

     54  

PART II -

 

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     55  
Item 1A.  

Risk Factors

     55  
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     55  
Item 6.  

Exhibits

     56  

Signature

     57  

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
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  

Net revenues

   $ 5,986      $ 6,302      $ 12,400      $ 12,757  

Cost of sales

     3,662        3,786        7,551        7,706  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     2,324        2,516        4,849        5,051  

Selling, general and administrative expenses

     1,449        1,668        2,924        3,283  

Asset impairment and exit costs

     187        166        353        320  

Loss on divestiture

     3               3         

Amortization of intangibles

     44        44        88        88  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     641        638        1,481        1,360  

Interest and other expense, net

     124        151        243        395  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     517        487        1,238        965  

Provision for income taxes

     (84      (118      (238      (167

Gain on equity method investment exchange

                          43  

Equity method investment net earnings

     67        102        133        187  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

     500        471        1,133        1,028  

Noncontrolling interest earnings

     (2      (7      (5      (10
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to Mondelēz International

   $ 498      $ 464      $ 1,128      $ 1,018  
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share data:

           

Basic earnings per share attributable to
Mondelēz International

   $ 0.33      $ 0.30      $ 0.74      $ 0.65  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to
Mondelēz International

   $ 0.32      $ 0.29      $ 0.73      $ 0.64  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared

   $ 0.19      $ 0.17      $ 0.38      $ 0.34  
  

 

 

    

 

 

    

 

 

    

 

 

 

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
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  

Net earnings

   $ 500      $ 471      $ 1,133      $ 1,028  

Other comprehensive earnings/(losses), net of tax:

           

Currency translation adjustment

     380        (528      923        103  

Pension and other benefit plans

     (33      110        (32      104  

Derivative cash flow hedges

     12        17        30        10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive earnings/(losses)

     359        (401      921        217  

Comprehensive earnings

     859        70        2,054        1,245  

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

     14        (7      21        9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive earnings attributable to
Mondelēz International

   $ 845      $ 77      $ 2,033      $ 1,236  
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

2


Table of Contents

Mondelēz International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

(Unaudited)

 

                                     
     June 30,      December 31,  
     2017      2016  

ASSETS

     

Cash and cash equivalents

   $ 1,397      $ 1,741  

Trade receivables (net of allowances of $47 at June 30, 2017
and $58 at December 31, 2016)

     2,395        2,611  

Other receivables (net of allowances of $99 at June 30, 2017
and $93 at December 31, 2016)

     913        859  

Inventories, net

     2,710        2,469  

Other current assets

     778        800  
  

 

 

    

 

 

 

Total current assets

     8,193        8,480  

Property, plant and equipment, net

     8,444        8,229  

Goodwill

     20,915        20,276  

Intangible assets, net

     18,514        18,101  

Prepaid pension assets

     144        159  

Deferred income taxes

     347        358  

Equity method investments

     5,853        5,585  

Other assets

     347        350  
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 62,757      $ 61,538  
  

 

 

    

 

 

 

LIABILITIES

     

Short-term borrowings

   $ 4,813      $ 2,531  

Current portion of long-term debt

     742        1,451  

Accounts payable

     5,012        5,318  

Accrued marketing

     1,574        1,745  

Accrued employment costs

     603        736  

Other current liabilities

     2,819        2,636  
  

 

 

    

 

 

 

Total current liabilities

     15,563        14,417  

Long-term debt

     13,226        13,217  

Deferred income taxes

     4,587        4,721  

Accrued pension costs

     1,708        2,014  

Accrued postretirement health care costs

     393        382  

Other liabilities

     1,488        1,572  
  

 

 

    

 

 

 

TOTAL LIABILITIES

     36,965        36,323  

Commitments and Contingencies (Note 11)

     

EQUITY

     

Common Stock, no par value (5,000,000,000 shares authorized and
1,996,537,778 shares issued at June 30, 2017 and December 31, 2016)

             

Additional paid-in capital

     31,860        31,847  

Retained earnings

     21,648        21,149  

Accumulated other comprehensive losses

     (10,217      (11,122

Treasury stock, at cost (485,738,865 shares at June 30, 2017 and
468,172,237 shares at December 31, 2016)

     (17,571      (16,713
  

 

 

    

 

 

 

Total Mondelēz International Shareholders’ Equity

     25,720        25,161  

Noncontrolling interest

     72        54  
  

 

 

    

 

 

 

TOTAL EQUITY

     25,792        25,215  
  

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 62,757      $ 61,538  
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


Table of Contents

Mondelēz International, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

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

(Unaudited)

 

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

Balances at January 1, 2016

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

Comprehensive earnings/(losses):

                

Net earnings

                   1,659                   10       1,669  

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

                         (1,136           (17     (1,153

Exercise of stock options and issuance of other stock awards

            87        (94           350             343  

Common Stock repurchased

                               (2,601           (2,601

Cash dividends declared ($0.72 per share)

                   (1,116                       (1,116

Dividends paid on noncontrolling interest and other activities

                                     (27     (27
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2016

   $      $ 31,847      $ 21,149     $ (11,122   $ (16,713   $ 54     $ 25,215  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings/(losses):

                

Net earnings

                   1,128                   5       1,133  

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

                         905             16       921  

Exercise of stock options and issuance of other stock awards

            13        (48           251             216  

Common Stock repurchased

                               (1,109           (1,109

Cash dividends declared ($0.38 per share)

                   (581                       (581

Dividends paid on noncontrolling interest and other activities

                                     (3     (3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2017

   $      $ 31,860      $ 21,648     $ (10,217   $ (17,571   $ 72     $ 25,792  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  * Noncontrolling interest as of June 30, 2016 was $84 million, as compared to $88 million as of January 1, 2016. The change of $(4) million during the six months ended June 30, 2016 was due to $(13) million of dividends paid, $(1) million of other comprehensive earnings, net of taxes offset by $10 million of net earnings.

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 Six Months Ended  
     June 30,  
     2017      2016  

CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES

     

Net earnings

   $ 1,133      $ 1,028  

Adjustments to reconcile net earnings to operating cash flows:

     

Depreciation and amortization

     395        408  

Stock-based compensation expense

     77        72  

Deferred income tax provision/(benefit)

            (86

Asset impairments and accelerated depreciation

     168        142  

Loss on early extinguishment of debt

     11         

Gain on equity method investment exchange

            (43

Loss on divestiture

     3         

Equity method investment net earnings

     (133      (187

Distributions from equity method investments

     132        58  

Other non-cash items, net

     (29      126  

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

     

Receivables, net

     153        (27

Inventories, net

     (181      (63

Accounts payable

     (430      (319

Other current assets

     (88      23  

Other current liabilities

     (646      (457

Change in pension and postretirement assets and liabilities, net

     (303      (338
  

 

 

    

 

 

 

Net cash provided by operating activities

     262        337  
  

 

 

    

 

 

 

CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES

     

Capital expenditures

     (488      (604

Proceeds from divestiture, net of disbursements

     169         

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

     33        99  
  

 

 

    

 

 

 

Net cash used in investing activities

     (286      (505
  

 

 

    

 

 

 

CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES

     

Issuances of commercial paper, maturities greater than 90 days

     1,150        491  

Repayments of commercial paper, maturities greater than 90 days

     (1,141      (68

Net issuances of other short-term borrowings

     2,230        2,008  

Long-term debt proceeds

     350        1,149  

Long-term debt repaid

     (1,469      (1,757

Repurchase of Common Stock

     (1,069      (1,312

Dividends paid

     (581      (537

Other

     154        54  
  

 

 

    

 

 

 

Net cash (used in)/provided by financing activities

     (376      28  
  

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     56        25  
  

 

 

    

 

 

 

Cash and cash equivalents:

     

Decrease

     (344      (115

Balance at beginning of period

     1,741        1,870  
  

 

 

    

 

 

 

Balance at end of period

   $ 1,397      $ 1,755  
  

 

 

    

 

 

 

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

Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of our results of operations, financial position and cash flows. Results of operations for any interim period are not necessarily indicative of future or annual results. For a complete set of consolidated financial statements and related notes, refer to our Annual Report on Form 10-K for the year ended December 31, 2016.

Principles of Consolidation:

The condensed consolidated financial statements include Mondelēz International, Inc. as well as our wholly owned and majority owned subsidiaries, except our Venezuelan subsidiaries. As of the close of the 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations. As such, for all periods presented, we have excluded the results of operations, financial position and cash flows of our Venezuelan subsidiaries from our condensed consolidated financial statements.

Segment Change:

On October 1, 2016, we integrated our Eastern Europe, Middle East, and Africa (“EEMEA”) operating segment into our Europe and Asia Pacific operating segments to further leverage and optimize the operating scale built within the Europe and Asia Pacific regions. Russia, Ukraine, Turkey, Belarus, Georgia and Kazakhstan were combined within our Europe region, while the remaining Middle East and African countries were combined within our Asia Pacific region to form a new Asia, Middle East and Africa (“AMEA”) operating segment. We have reflected the segment change as if it had occurred in all periods presented.

As of October 1, 2016, our operations and management structure were organized into four reportable operating segments:

    Latin America
    AMEA
    Europe
    North America

See Note 15, Segment Reporting, for additional information on our segments.

Currency Translation and Highly Inflationary Accounting:

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

Highly inflationary accounting is triggered when a country’s three-year cumulative inflation rate exceeds 100%. It requires the remeasurement of financial statements of subsidiaries in the country, from the functional currency of the subsidiary to our U.S. dollar reporting currency, with currency remeasurement gains or losses recorded in earnings. As of June 30, 2017, none of our consolidated subsidiaries were subject to highly inflationary accounting.

Argentina. We continue to closely monitor inflation and the potential for the economy to become highly inflationary for accounting purposes. As of June 30, 2017, the Argentinian economy was not designated as highly inflationary. At this time, we continue to record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings. Our Argentinian operations contributed $159 million, or 2.7% of consolidated net revenues in the three months and $301 million, or 2.4% of consolidated net revenues in the six months ended June 30, 2017, and our Argentinian operations had a net monetary liability position as of June 30, 2017.

 

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Ukraine. In the second quarter of 2017, based on projected inflation data published by the National Bank of Ukraine, Ukraine’s three-year cumulative inflation rate dropped below 100% and it is projected to stay below 100% in late 2017. As such, Ukraine is no longer designated highly inflationary and we continue to record currency translation adjustments

within equity and realized exchange gains and losses on transactions in earnings. Our Ukraine operations contributed $15 million, or 0.3%, of consolidated net revenues in the three months and $30 million, or 0.2% of consolidated net revenues in the six months ended June 30, 2017, and our Ukraine net monetary assets as of June 30, 2017 were not material.

Other Countries. Since we sell in approximately 165 countries and have operations in over 80 countries, we monitor economic and currency-related risks and seek to take protective measures in response to these exposures. Some of the countries in which we do business have recently experienced periods of significant economic uncertainty. These include Brazil, China, Mexico, Russia, United Kingdom (Brexit), Turkey, Egypt, Nigeria and South Africa, most of which have had exchange rate volatility. We continue to monitor operations, currencies and net monetary exposures in these countries. At this time, we do not anticipate a 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 $1.0 billion. Under the program, we may sell eligible short-term trade receivables to the bank in exchange for cash. We then continue to collect the receivables sold, acting solely as a collecting agent on behalf of the bank. The outstanding principal amount of receivables under this arrangement amounted to $594 million as of June 30, 2017 and $644 million as of December 31, 2016. The incremental cost of factoring receivables under this arrangement was recorded in net revenue and was approximately $2 million in the three months and $3 million in the six months ended June 30, 2017 and was $1 million in the three months and $2 million in the six months ended June 30, 2016. During our contract negotiations with customers, we also work with our customers to achieve earlier collection of receivables. The outstanding principal amount of receivables under these arrangements amounted to $38 million as of June 30, 2017 and $101 million as of December 31, 2016. The incremental cost of these arrangements was recorded in net revenue and was less than $1 million in the three months and $1 million in the six months ended June 30, 2017 and was $2 million in the three months and $3 million in the six months ended June 30, 2016.

New Accounting Pronouncements:

In May 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to clarify when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The ASU is applied prospectively to awards that are modified on or after the adoption date. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently assessing the impact on our consolidated financial statements and do not anticipate a material impact to our consolidated financial statements.

In March 2017, the FASB issued an ASU to amend the amortization period for certain purchased callable debt securities held at a premium, shortening the period to the earliest call date instead of the maturity date. The standard does not impact securities held at a discount as the discount continues to be amortized to maturity. The ASU is applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact on our consolidated financial statements and do not anticipate a material impact to our consolidated financial statements.

In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The standard requires employers to disaggregate the service cost component from the other components of net benefit cost and disclose the amount and location where the net benefit cost is recorded in the income statement or capitalized in assets. The standard is to be applied on a retrospective basis for the change in presentation in the income statement and prospectively for the change in presentation on the balance sheet. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently assessing the impact on our consolidated financial statements.

 

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In January 2017, the FASB issued an ASU that clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business may affect many areas of accounting including acquisitions, disposals, goodwill and consolidation. The ASU is applied on a prospective basis and is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We continue to assess the ASU based on any pending or new transactions that may arise prior to the January 1, 2018 adoption date. At this time, we do not anticipate early adopting nor a material impact on our consolidated financial statements.

In November 2016, the FASB issued an ASU that requires the change in restricted cash or cash equivalents to be included with other changes in cash and cash equivalents in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We anticipate adopting this standard at the same time as the cash flow statement classification changes described below go into effect on January 1, 2018. We continue to assess the impact on our consolidated statement of cash flows.

In October 2016, the FASB issued an ASU that requires the recognition of tax consequences of intercompany asset transfers other than inventory when the transfer occurs and removes the exception to postpone recognition until the asset has been sold to an outside party. The standard is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We anticipate adopting on January 1, 2018 and do not expect the ASU to have a material impact on our consolidated financial statements.

In August 2016, the FASB issued an ASU to provide guidance on eight specific cash flow classification issues and reduce diversity in practice in how some cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We anticipate adopting this standard on January 1, 2018. We continue to assess the impact on our consolidated statement of cash flows.

In February 2016, the FASB issued an ASU on lease accounting. The ASU revises existing U.S. GAAP and outlines a new model for lessors and lessees to use in accounting for lease contracts. The guidance requires lessees to recognize 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 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 anticipate adopting the new standard on January 1, 2019. We continue to make progress in our due diligence and assess the impact of the new standard across our operations and on our consolidated financial statements, which will consist primarily of recording lease assets and liabilities on our balance sheet for our operating leases.

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

In May 2014, the FASB issued an ASU on revenue recognition from contracts with customers. The ASU outlines a new, single comprehensive model for companies to use in accounting for revenue. The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for the goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows from customer contracts, including significant judgments made in recognizing revenue. In 2016 and early 2017, the FASB issued several ASUs that clarified principal versus agent (gross versus net) revenue presentation considerations, confirmed the accounting for certain prepaid stored-value products and clarified the guidance for identifying performance obligations within a contract, the accounting for licenses and partial sales of nonfinancial assets. The FASB also issued two ASUs providing technical corrections, narrow scope exceptions and practical expedients to clarify and improve the implementation of the new revenue recognition guidance. The revenue guidance is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date (annual reporting periods beginning after December 15, 2016). The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption. We plan to adopt the new standard on January 1, 2018 on a full retrospective basis. We are

 

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finalizing reviews and working on implementing the process, policy and disclosure changes that will go into effect on January 1, 2018. At this time, we do not expect a material financial impact from adopting the new revenue standards.

Reclassifications:

Certain amounts previously reported have been reclassified to conform to current-year presentation. In connection with the October 1, 2016 segment change described above, see Notes 5, Goodwill and Intangible Assets; 6, 2014-2018 Restructuring Program; and 15, Segment Reporting for information on related changes made to prior-period segment goodwill, net revenues and earnings aligned with the new segment structure. We also reclassified certain amounts previously reported within our condensed consolidated statements of cash flows, condensed consolidated statements of comprehensive earnings and Note 12, Reclassifications from Accumulated Other Comprehensive Income, to be consistent with the current-year presentation.

Note 2.   Divestitures and Acquisitions

JDE Coffee Business Transactions:

On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, Jacobs Douwe Egberts (“JDE”). Following the exchange of a portion of our investment in JDE for an interest in Keurig Green Mountain, Inc. (“Keurig”) in March 2016, we held a 26.5% equity interest in JDE. (See discussion under Keurig Transaction below.) 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). Following the transactions discussed under JDE Stock-Based Compensation Arrangements below, as of June 30, 2017, we hold a 26.5% voting interest, a 26.4% ownership interest and a 26.2% profit and dividend sharing interest in JDE. We recorded $19 million of JDE equity earnings for three months and $38 million for the six months ended June 30, 2017 and $45 million for the three months and $92 million for the six months ended June 30, 2016. We also recorded $49 million of cash dividends received during the first quarter of 2017.

JDE Stock-Based Compensation Arrangements:

On June 30, 2016, we entered into agreements with AHBV and its affiliates to establish a new stock-based compensation arrangement tied to the issuance of JDE equity compensation awards to JDE employees. This arrangement replaced a temporary equity compensation program tied to the issuance of AHBV equity compensation to JDE employees. New Class C, D and E JDE shares were authorized and issued for investments made by, and vested stock-based compensation awards granted to, JDE employees. Under these arrangements, share ownership dilution from the JDE Class C, D and E shareholders is limited to 2%. We retained our 26.5% voting rights and have a slightly lower portion of JDE’s profits and dividends than our shareholder ownership interest as certain employee shareholders receive a slightly larger share. Upon execution of the agreements and the creation of the Class C, D and E JDE shares, as a percentage of the total JDE issued shares, our Class B shares decreased from 26.5% to 26.4% and AHBV’s Class A shares decreased 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%.

Keurig Transaction:

On March 3, 2016, a subsidiary of AHBV completed a $13.9 billion acquisition of all of the outstanding common stock of Keurig through a merger transaction. On March 7, 2016, we exchanged with a subsidiary of AHBV a portion of our equity interest in JDE with a carrying value of 1.7 billion (approximately $2.0 billion as of March 7, 2016) for an interest in Keurig with a fair value of $2.0 billion based on the merger consideration per share for Keurig. We recorded the difference between the fair value of Keurig and our basis in JDE shares as a $43 million gain on the equity method investment exchange in March 2016. Immediately 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 June 30, 2017. The shareholder loan has a 5.5% interest rate and is payable at the end of a seven-year term on February 27, 2023. We recorded Keurig equity earnings, shareholder loan interest and dividends of $15 million, $6 million and $2 million during the three months and $29 million, $12 million and $6 million during the six months ended June 30, 2017. In 2016, we recorded Keurig equity earnings, shareholder loan interest and dividends of $21 million, $6 million and no dividends during the three months and $29 million, $8 million and $2 million during the four months ended June 30, 2016.

 

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Other Divestitures and Acquisitions:

On July 4, 2017, we completed the sale of most of our grocery business in Australia and New Zealand to Bega Cheese Limited for $456 million Australian dollars ($347 million as of July 4, 2017) and we expect to make a final working capital adjustment next quarter. We divested approximately $25 million of current assets, approximately $135 million of non-current assets and approximately $5 million of current liabilities based on the July 4, 2017 exchange rate.

On April 28, 2017, we completed the sale of several manufacturing facilities in France and the sale or license of several local confectionery brands. We received net cash of approximately 157 million ($169 million as of April 28, 2017) at the transaction date, for proceeds net of cash in the businesses which transferred to the buyer. Sales price adjustments related to employee-related liabilities and working capital transferred at closing will be settled in the remainder of 2017. The sale was subject to E.U. and local regulatory approvals, completion of employee consultation requirements and additional steps to prepare the assets for transfer. During the fourth quarter of 2016, the buyer obtained anti-trust clearance in all markets where it was required and we received the Works Council approval. On April 28, 2017, we divested $44 million of current assets, $155 million of non-current assets, $8 million of current liabilities and $22 million of non-current liabilities based on the April 28, 2017 euro-to-U.S. dollar exchange rate. We recorded a $3 million loss on the sale during the three months ended June 30, 2017. We also incurred divestiture-related costs of $3 million in the three months and $21 million in the six months ended June 30, 2017, and $84 million for the three and six months ended June 30, 2016. These costs were recorded within cost of sales and selling, general and administrative expenses of our Europe segment. In prior periods, we recorded a $5 million impairment charge in May 2016 for a candy trademark to reduce the overall net assets to the estimated net sales proceeds after transaction costs. On March 31, 2016, we recorded a $14 million impairment charge for another 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.

On November 2, 2016, we purchased from Burton’s Biscuit Company certain intangibles, which include the license to manufacture, market and sell Cadbury-branded biscuits in additional key markets around the world, including in the U.K., France, Ireland, North America and Saudi Arabia. The transaction was accounted for as a business combination. Total cash paid for the acquired assets was £199 million ($245 million as of November 2, 2016). We have recorded a preliminary purchase price allocation of $72 million to definite-lived intangible assets, $155 million to goodwill, $14 million to property, plant and equipment and $4 million to inventory, reflecting a November 2, 2016 exchange rate.

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 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 another 2 million ($2 million as of October 31, 2016) following the completion of post-closing requirements. The additional $2 million of consideration increased the pre-tax gain of $6 million recorded in the second quarter of 2016 to a total 2016 pre-tax gain of $8 million.

Sales of Property:

In the second quarter of 2016, we sold property within our North America segment and from our centrally held corporate assets. The North America sale generated cash proceeds of $40 million and a pre-tax gain of $33 million. The corporate aircraft sale 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 six months ended June 30, 2016.

Note 3.   Inventories

Inventories consisted of the following:

 

                                     
     As of June 30,      As of December 31,  
     2017      2016  
     (in millions)  

Raw materials

   $ 757      $ 722  

Finished product

     2,087        1,865  
  

 

 

    

 

 

 
     2,844        2,587  

Inventory reserves

     (134      (118
  

 

 

    

 

 

 

Inventories, net

   $                 2,710      $ 2,469  
  

 

 

    

 

 

 

 

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Note 4.   Property, Plant and Equipment

Property, plant and equipment consisted of the following:

 

     As of June 30,      As of December 31,  
     2017      2016  
     (in millions)  

Land and land improvements

   $ 484      $ 471  

Buildings and building improvements

     2,946        2,801  

Machinery and equipment

     10,920        10,302  

Construction in progress

     1,027        1,113  
  

 

 

    

 

 

 
     15,377        14,687  

Accumulated depreciation

     (6,933      (6,458
  

 

 

    

 

 

 

Property, plant and equipment, net

   $                      8,444      $                   8,229  
  

 

 

    

 

 

 

For the six months ended June 30, 2017, capital expenditures of $488 million excluded $190 million of accrued capital expenditures remaining unpaid at June 30, 2017 and included payment for a portion of the $343 million of capital expenditures that were accrued and unpaid at December 31, 2016. For the six months ended June 30, 2016, capital expenditures of $604 million excluded $222 million of accrued capital expenditures remaining unpaid at June 30, 2016 and included 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 $47 million in the three months and $118 million in the six months ended June 30, 2017 and $61 million in the three months and $113 million in the six months ended June 30, 2016 (see Note 6, 2014-2018 Restructuring Program). These charges were recorded in the condensed consolidated statements of earnings within asset impairment and exit costs and in the segment results as follows:

 

     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2017      2016      2017      2016  
     (in millions)  

Latin America

   $ 6      $ 8      $ 12      $ 13  

AMEA

     30        12        42        21  

Europe

     4        17        42        38  

North America

     7        22        22        39  

Corporate

            2               2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-cash asset write-downs

   $                             47      $                             61      $                          118      $                          113  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5.   Goodwill and Intangible Assets

Goodwill by segment reflects our current segment structure for both periods presented:

 

     As of June 30,      As of December 31,  
     2017      2016  
     (in millions)  

Latin America

   $ 925      $ 897  

AMEA

     3,413        3,324  

Europe

     7,667        7,170  

North America

     8,910        8,885  
  

 

 

    

 

 

 

Goodwill

   $                      20,915      $                   20,276  
  

 

 

    

 

 

 

 

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Intangible assets consisted of the following:

 

                                                               
     As of June 30,      As of December 31,  
     2017      2016  
       (in millions)  

Non-amortizable intangible assets

   $ 17,465      $ 17,004  

Amortizable intangible assets

     2,389        2,315  
  

 

 

    

 

 

 
     19,854        19,319  

Accumulated amortization

     (1,340      (1,218
  

 

 

    

 

 

 

Intangible assets, net

   $ 18,514      $ 18,101  
  

 

 

    

 

 

 

Non-amortizable intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of trademarks, customer-related intangibles, process technology, licenses and non-compete agreements. At June 30, 2017, the weighted-average life of our amortizable intangible assets was 13.6 years.

Amortization expense for intangible assets was $44 million in each of the three months and $88 million in each of the six months ended June 30, 2017 and June 30, 2016. For the next five years, we currently estimate annual amortization expense of approximately $175 million for the next four years and approximately $85 million in year five, reflecting June 30, 2017 exchange rates.

Changes in goodwill and intangible assets consisted of:

 

                                                               
         Goodwill               Intangible    
    Assets, at cost    
 
     (in millions)  

Balance at January 1, 2017

   $ 20,276      $ 19,319  

Currency

     651        634  

Divestiture

     (23      (62

Acquisition

     12         

Asset impairment

            (38

Other

     (1      1  
  

 

 

    

 

 

 

Balance at June 30, 2017

   $ 20,915      $ 19,854  
  

 

 

    

 

 

 

Changes to goodwill and intangibles were:

    Divestiture – During the second quarter of 2017, we divested several manufacturing facilities primarily in France and as a result of the divestiture, $23 million of goodwill and $62 million of amortizable and non-amortizable intangible assets. See Note 2, Divestitures and Acquisitions, for additional information.
    Acquisition – During the second quarter of 2017, we recorded a $12 million adjustment to goodwill in connection with our preliminary purchase price allocation for the Burton’s Biscuit Company purchase completed in the fourth quarter of 2016. See Note 2, Divestitures and Acquisitions, for additional information.
    Asset impairment – During the second quarter of 2017, we recorded a $38 million intangible asset impairment charge resulting from a category decline and lower than expected product growth related to a gum trademark in our North America segment.

During our 2016 annual testing of non-amortizable intangible assets, we recorded $98 million of impairment charges in the fourth quarter of 2016 related to five trademarks recorded across all regions. We also noted nine brands, including the five impaired trademarks, with $630 million of aggregate book value as of December 31, 2016 that each had a fair value in excess of book value of 10% or less. We believe our current plans for each of these brands will allow them to continue to not be impaired, but if the product line expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future.

 

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Note 6.  2014-2018 Restructuring Program

On May 6, 2014, our Board of Directors approved a $3.5 billion restructuring program and up to $2.2 billion of capital expenditures. On August 31, 2016, our Board of Directors approved a $600 million reallocation between restructuring program cash costs and capital expenditures so that now the $5.7 billion program consists of approximately $4.1 billion of restructuring program costs ($3.1 billion cash costs and $1 billion non-cash costs) and up to $1.6 billion of capital expenditures. The primary objective of the 2014-2018 Restructuring Program is to reduce our operating cost structure in both our supply chain and overhead costs. The program is intended primarily to cover severance as well as asset disposals and other manufacturing-related one-time costs. Since inception, we have incurred total restructuring and related implementation charges of $2.9 billion related to the 2014-2018 Restructuring Program. We expect to incur the full $4.1 billion of program charges by year-end 2018.

Restructuring Costs:

We recorded restructuring charges of $148 million in the three months and $305 million in the six months ended June 30, 2017 and $154 million in the three months and $293 million in the six months ended June 30, 2016 within asset impairment and exit costs. The 2014-2018 Restructuring Program liability activity for the six months ended June 30, 2017 was:

 

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

Liability balance, January 1, 2017

   $ 464      $      $ 464  

Charges

     184        121        305  

Cash spent

     (162             (162

Non-cash settlements/adjustments

     (5      (121      (126

Currency

     19               19  
  

 

 

    

 

 

    

 

 

 

Liability balance, June 30, 2017

   $ 500      $      $ 500  
  

 

 

    

 

 

    

 

 

 

We spent $78 million in the three months and $162 million in the six months ended June 30, 2017 and $86 million in the three months and $160 million in the six months ended June 30, 2016 in cash severance and related costs. We also recognized non-cash pension settlement losses (See Note 9, Benefit Plans), non-cash asset write-downs (including accelerated depreciation and asset impairments) and other non-cash adjustments totaling $54 million in the three months and $126 million in the six months ended June 30, 2017 and $72 million in the three months and $124 million in the six months ended June 30, 2016. At June 30, 2017, $435 million of our net restructuring liability was recorded within other current liabilities and $65 million was recorded within other long-term liabilities.

Implementation Costs:

Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities. We believe the disclosure of implementation costs provides readers of our financial statements with more information on the total costs of our 2014-2018 Restructuring Program. Implementation costs primarily relate to reorganizing our operations and facilities in connection with our supply chain reinvention program and other identified productivity and cost saving initiatives. The costs include incremental expenses related to the closure of facilities, costs to terminate certain contracts and the simplification of our information systems. Within our continuing results of operations, we recorded implementation costs of $63 million in the three months and $117 million in the six months ended June 30, 2017 and $74 million in the three months and $172 million in the six months ended June 30, 2016. We recorded these costs within cost of sales and general corporate expense within selling, general and administrative expenses.

 

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Restructuring and Implementation Costs in Operating Income:

During the three and six months ended June 30, 2017 and June 30, 2016, and since inception of the 2014-2018 Restructuring Program, we recorded restructuring and implementation costs within operating income by segment (as revised to reflect our current segment structure) as follows:

 

                                                                                                                 
     Latin                    North                
     America      AMEA      Europe      America (1)      Corporate (2)      Total  
     (in millions)  

For the Three Months Ended
June 30, 2017

                 

Restructuring Costs

   $ 8      $ 48      $ 50      $ 33      $ 9      $ 148  

Implementation Costs

     10        10        19        13        11        63  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18      $ 58      $ 69      $ 46      $ 20      $ 211  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Six Months Ended
June 30, 2017

                 

Restructuring Costs

   $ 31      $ 73      $ 119      $ 72      $ 10      $ 305  

Implementation Costs

     20        20        31        25        21        117  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51      $ 93      $ 150      $ 97      $ 31      $ 422  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Three Months Ended
June 30, 2016

                 

Restructuring Costs

   $ 32      $ 34      $ 45      $ 36      $ 7      $ 154  

Implementation Costs

     12        10        3        35        14        74  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44      $ 44      $ 48      $ 71      $ 21      $ 228  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the Six Months Ended
June 30, 2016

                 

Restructuring Costs

   $ 44      $ 63      $ 112      $ 68      $ 6      $ 293  

Implementation Costs

     19        18        33        72        30        172  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 63      $ 81      $ 145      $ 140      $ 36      $ 465  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Project 2014-2017 (3)

                 

Restructuring Costs

   $ 369      $ 382      $ 768      $ 425      $ 60      $ 2,004  

Implementation Costs

     128        104        235        221        199        887  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 497      $ 486      $ 1,003      $ 646      $ 259      $ 2,891  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) During 2017 and 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.
  (2) Includes adjustment for rounding.
  (3) Includes all charges recorded since program inception on May 6, 2014 through June 30, 2017.

Note 7.  Debt and Borrowing Arrangements

Short-Term Borrowings:

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

 

                                                                           
     As of June 30, 2017      As of December 31, 2016  
     Amount      Weighted-      Amount      Weighted-  
     Outstanding      Average Rate      Outstanding      Average Rate  
     (in millions)             (in millions)         

Commercial paper

   $ 4,219        1.2%      $ 2,371        1.0%  

Bank loans

     594        6.9%        160        10.6%  
  

 

 

       

 

 

    

Total short-term borrowings

   $ 4,813         $ 2,531     
  

 

 

       

 

 

    

As of June 30, 2017, commercial paper issued and outstanding had between 3 and 89 days remaining to maturity. Commercial paper borrowings increased since year-end primarily as a result of issuances to finance the payment of long-term debt maturities, dividend payments and share repurchases during the quarter.

 

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Some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $2.2 billion at June 30, 2017 and $1.8 billion at December 31, 2016. Borrowings on these lines were $594 million at June 30, 2017 and $160 million at December 31, 2016. Short-term bank loans and cash and cash equivalents increased at the end of the second quarter as scheduled cash sweeps, which normally transfer cash between accounts to fund obligations, did not occur. As a result, temporary bank overdrafts resulted in the accounts scheduled to be funded and were recorded within short-term bank loans and funded in early July.

Borrowing Arrangements:

On March 1, 2017, to supplement our commercial paper program, we entered into a $1.5 billion revolving credit agreement for a 364-day senior unsecured credit facility that is scheduled to expire on February 28, 2018. The agreement includes the same terms and conditions as our existing $4.5 billion multi-year credit facility discussed below. As of June 30, 2017, no amounts were drawn on the facility.

We also maintain a $4.5 billion multi-year senior unsecured revolving credit facility for general corporate purposes, including working capital needs, and to support our commercial paper program. On October 14, 2016, the revolving credit agreement, which was scheduled to expire on October 11, 2018, was extended through October 11, 2021. The revolving credit agreement includes a covenant that we maintain a minimum shareholders’ equity of at least $24.6 billion, excluding accumulated other comprehensive earnings/(losses) and the cumulative effects of any changes in accounting principles. At June 30, 2017, we complied with this covenant as our shareholders’ equity, as defined by the covenant, was $35.9 billion. The revolving credit facility agreement also contains customary representations, covenants and events of default. There are no credit rating triggers, provisions or other financial covenants that could require us to post collateral as security. As of June 30, 2017, no amounts were drawn on the facility.

Long-Term Debt:

On April 12, 2017, we discharged $488 million of our 6.500% U.S. dollar-denominated debt. We paid $504 million, representing principal as well as past and future interest accruals from February 2017 through the August 2017 maturity date. We recorded an $11 million loss on debt extinguishment within interest expense and a $5 million reduction in accrued interest.

On March 30, 2017, fr.175 million of our 0.000% Swiss franc-denominated notes matured. The notes and accrued interest to date were paid with net proceeds from the fr.350 million Swiss franc-denominated notes issued on March 13, 2017.

On March 13, 2017, we launched an offering of fr.350 million of Swiss franc-denominated notes, or $349 million in U.S. dollars as of March 31, 2017, consisting of:

    fr.225 million (or $224 million) of 0.050% fixed rate notes that mature on March 30, 2020
    fr.125 million (or $125 million) of 0.617% fixed rate notes that mature on September 30, 2024

On March 30, 2017, we received net proceeds of fr.349 million (or $349 million) that were used for general corporate purposes.

On January 26, 2017, 750 million of our 1.125% euro-denominated notes matured. The notes and accrued interest to date were paid with the issuance of commercial paper and cash on hand.

Our weighted-average interest rate on our total debt was 2.1% as of June 30, 2017 and 2.2% as of December 31, 2016, down from 3.7% as of December 31, 2015.

Fair Value of Our Debt:

The fair value of our short-term borrowings at June 30, 2017 and December 31, 2016 reflects current market interest rates and approximates the amounts we have recorded on our condensed consolidated balance sheets. The fair value of our long-term debt was determined using quoted prices in active markets (Level 1 valuation data) for the publicly traded debt obligations. At June 30, 2017, the aggregate fair value of our total debt was $19,477 million and its carrying value was $18,781 million. At December 31, 2016, the aggregate fair value of our total debt was $17,882 million and its carrying value was $17,199 million.

 

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Interest and Other Expense, net:

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

 

                                                                           
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
         2017              2016              2017              2016      
     (in millions)  

Interest expense, debt

   $ 103      $ 135      $ 206      $ 271  

Loss on debt extinguishment

     11               11         

Loss related to interest rate swaps

                          97  

Other expense, net

     10        16        26        27  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest and other expense, net

   $ 124      $ 151      $ 243      $ 395  
  

 

 

    

 

 

    

 

 

    

 

 

 

See Note 8, Financial Instruments, for information on the loss related to U.S. dollar interest rate swaps no longer designated as accounting cash flow hedges during the first quarter of 2016.

Note 8.  Financial Instruments

Fair Value of Derivative Instruments:

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

 

                                                                           
     As of June 30, 2017      As of December 31, 2016  
     Asset      Liability      Asset      Liability  
     Derivatives      Derivatives      Derivatives      Derivatives  
     (in millions)  

Derivatives designated as
accounting hedges:

           

Currency exchange contracts

   $ 2      $ 1      $ 19      $ 8  

Commodity contracts

     1        9        17        22  

Interest rate contracts

     22        246        108        19  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25      $ 256      $ 144      $ 49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as
accounting hedges:

           

Currency exchange contracts

   $ 51      $ 49      $ 29      $ 43  

Commodity contracts

     57        234        112        167  

Interest rate contracts

     22        15        27        19  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 130      $ 298      $ 168      $ 229  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fair value

   $ 155      $ 554      $ 312      $ 278  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 on our condensed consolidated balance sheets. The fair value of our asset derivatives is recorded within other current assets and the fair value of our liability derivatives is recorded within other current liabilities.

 

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

 

                                                                           
     As of June 30, 2017  
            Quoted Prices in                
            Active Markets      Significant      Significant  
     Total      for Identical      Other Observable      Unobservable  
     Fair Value of Net      Assets      Inputs      Inputs  
     Asset/(Liability)      (Level 1)      (Level 2)      (Level 3)  
     (in millions)  

Currency exchange contracts

   $ 3      $      $ 3      $  

Commodity contracts

     (185      (175      (10       

Interest rate contracts

     (217             (217       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ (399    $ (175    $ (224    $  
  

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2016  
            Quoted Prices in                
            Active Markets      Significant      Significant  
     Total      for Identical      Other Observable      Unobservable  
     Fair Value of Net      Assets      Inputs      Inputs  
     Asset/(Liability)      (Level 1)      (Level 2)      (Level 3)  
     (in millions)  

Currency exchange contracts

   $ (3    $      $ (3    $  

Commodity contracts

     (60      (86      26         

Interest rate contracts

     97               97         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 34      $ (86    $ 120      $  
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges. Our exchange-traded derivatives are generally subject to master netting arrangements that permit net settlement of transactions with the same counterparty when certain criteria are met, such as in the event of default. We also are required to maintain cash margin accounts in connection with funding the settlement of our open positions, and the margin requirements generally fluctuate daily based on market conditions. We have recorded margin deposits related to our exchange-traded derivatives of $270 million as of June 30, 2017 and $133 million as of December 31, 2016 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 $95 million as of June 30, 2017 and $48 million as of December 31, 2016. As of June 30, 2017, we have no derivatives in a net liability position, and as of December 31, 2016 we would have owed $2 million for derivatives we have 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 $257 million as of June 30, 2017 and $40 million as of December 31, 2016, and for derivatives we have in a net asset position, our counterparties would owe us a total of $30 million as of June 30, 2017 and $162 million as of December 31, 2016. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.

 

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Derivative Volume:

The net notional values of our derivative instruments were:

 

                                     
    Notional Amount  
    As of June 30,     As of December 31,  
                   2017                                    2016                  
    (in millions)  

Currency exchange contracts:

   

Intercompany loans and forecasted interest payments

  $ 2,992     $ 3,343  

Forecasted transactions

    1,432       1,452  

Commodity contracts

    1,174       837  

Interest rate contracts

    6,480       6,365  

Net investment hedge – euro notes

    3,844       4,012  

Net investment hedge – pound sterling notes

    442       419  

Net investment hedge – Swiss franc notes

    1,723       1,447  

Cash Flow Hedges:

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

 

                                                                           
    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2017     2016     2017     2016  
    (in millions)  

Accumulated (loss)/gain at January 1

  $ (103   $ (53   $ (121   $ (45

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

    (4     8       3       66  

Unrealized gain/(loss) in fair value

    16       9       27       (57
 

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated (loss)/gain at June 30

  $ (91   $ (36   $ (91   $ (36
 

 

 

   

 

 

   

 

 

   

 

 

 
After-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings were:  
    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2017     2016     2017     2016  
    (in millions)  

Currency exchange contracts – forecasted transactions

  $ 1     $ (2   $ 1     $ 3  

Commodity contracts

    3       (6     (4     (9

Interest rate contracts

                      (60
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4     $ (8   $ (3   $ (66
 

 

 

   

 

 

   

 

 

   

 

 

 
After-tax gains/(losses) recognized in other comprehensive earnings/(losses) were:  
    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2017     2016     2017     2016  
    (in millions)  

Currency exchange contracts – forecasted transactions

  $ (14   $ 2     $ (26   $ (10

Commodity contracts

    6       14       6       9  

Interest rate contracts

    24       (7     47       (56
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 16     $ 9     $ 27     $ (57
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

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 losses of $20 million (net of taxes) for commodity cash flow hedges, unrealized gains of $1 million (net of taxes) for currency cash flow hedges and unrealized losses of $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Cash Flow Hedge Coverage:

As of June 30, 2017, we hedged transactions forecasted to impact cash flows over the following periods:

    commodity transactions for periods not exceeding the next 6 months;
    interest rate transactions for periods not exceeding the next 6 years and 4 months; and
    currency exchange transactions for periods not exceeding the next 6 months.

Fair Value Hedges:

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

 

                                                                                              
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
     
     2017      2016      2017      2016    
     (in millions)    

Derivatives

   $ 1      $ 4      $ (2    $ 9    

Borrowings

     (1      (4      2        (9  

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

Economic Hedges:

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

 

                                                                                              
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
    

Location of
Gain/(Loss)
Recognized

in Earnings

     2017      2016      2017      2016     
     (in millions)       

Currency exchange contracts:

              

Intercompany loans and
forecasted interest payments

   $ 3      $ 6      $ 5      $ 11      Interest and other expense, net

Forecasted transactions

     18        (46      2        (77    Cost of sales

Forecasted transactions

     1               (2      8      Interest and other expense, net

Forecasted transactions

     2        8        2        12      Selling, general and administrative expenses

Commodity contracts

     (97      31        (160      (13    Cost of sales
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ (73    $ (1    $ (153    $ (59   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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Hedges of Net Investments in International Operations:

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

 

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

Recognized in AOCI
     2017      2016      2017      2016     
     (in millions)       

Euro notes

   $ (168    $ 82      $ (196    $ (72    Currency

Pound sterling notes

     (10      63        (15      86      Translation

Swiss franc notes

     (49      14        (64      (29    Adjustment

Note 9.  Benefit Plans

Pension Plans

Components of Net Periodic Pension Cost:

Net periodic pension cost consisted of the following:

 

                                                                           
    U.S. Plans     Non-U.S. Plans  
    For the Three Months Ended
June 30,
    For the Three Months Ended
June 30,
 
    2017     2016     2017     2016  
    (in millions)  

Service cost

  $ 10     $ 14     $ 38     $ 39  

Interest cost

    16       15       49       62  

Expected return on plan assets

    (25     (24     (108     (111

Amortization:

       

Net loss from experience differences

    9       9       40       31  

Prior service cost/(credit)

          1             (1

Settlement losses/(gains) and other expenses

    18       12       1       (1
 

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

  $ 28     $ 27     $ 20     $ 19  
 

 

 

   

 

 

   

 

 

   

 

 

 
    U.S. Plans     Non-U.S. Plans  
    For the Six Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2017     2016     2017     2016  
    (in millions)  

Service cost

  $ 22     $ 27     $ 77     $ 77  

Interest cost

    31       31       97       122  

Expected return on plan assets

    (50     (48     (212     (221

Amortization:

       

Net loss from experience differences

    17       18       81       62  

Prior service cost/(credit)

    1       1       (1     (2

Settlement losses/(gains) and other expenses

    21       16       2       (1
 

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

  $ 42     $ 45     $ 44     $ 37  
 

 

 

   

 

 

   

 

 

   

 

 

 

Within settlement losses/(gains) and other expenses are losses of $11 million for the three and six months ended June 30, 2017 and $9 million for the three and six months ended June 30, 2016, that are related to our 2014-2018 Restructuring Program and are recorded within asset impairment and exit costs on our condensed consolidated statements of earnings.

 

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Table of Contents

Employer Contributions:

During the six months ended June 30, 2017, we contributed $9 million to our U.S. pension plans and $369 million to our non-U.S. pension plans. The non-U.S. amount included a non-recurring $250 million contribution made in connection with a new funding agreement for a Company plan in the U.K. We make contributions to our pension plans in accordance with local funding arrangements and statutory minimum funding requirements. Discretionary contributions are made to the extent that they are tax deductible and do not generate an excise tax liability.

As of June 30, 2017, we plan to make further contributions of approximately $4 million to our U.S. plans and approximately $86 million to our non-U.S. plans during the remainder of 2017. Our actual contributions may be different due to many factors, including changes in tax and other benefit laws, 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
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  
     (in millions)  

Service cost

   $ 2      $ 3      $ 4      $ 6  

Interest cost

     3        5        7        10  

Amortization:

           

Net loss from experience differences

     4        1        7        3  

Prior service credit (1)

     (10      (1      (20      (3
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic postretirement health care costs

   $ (1    $ 8      $ (2    $ 16  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) For the three and six months ended June 30, 2017, amortization of prior service credit includes an $8 million and $16 million gain respectively, related to a change in the eligibility requirement and a change in benefits to Medicare-eligible participants.

Postemployment Benefit Plans

Net periodic postemployment costs consisted of the following:

 

                                                                           
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  
     (in millions)  

Service cost

   $ 2      $ 1      $ 3      $ 3  

Interest cost

     1        2        2        3  

Amortization of net gains

     (1             (2       
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic postemployment costs                 

   $ 2      $ 3      $ 3      $ 6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 10.  Stock Plans

Stock Options:

Stock option activity is reflected below:

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

Balance at January 1, 2017

     53,601,612      $ 28.02        6 years      $ 874 million  
  

 

 

          

Annual grant to eligible employees

     6,012,140        43.20        

Additional options issued

     26,600        44.30        
  

 

 

          

Total options granted

     6,038,740        43.20        

Options exercised (1)

     (6,099,149      27.38         $ 109 million  

Options cancelled

     (1,270,978      38.80        
  

 

 

          

Balance at June 30, 2017

     52,270,225        29.59        6 years      $ 711 million  
  

 

 

          

 

  (1) Cash received from options exercised was $113 million in the three months and $170 million in the six months ended June 30, 2017. The actual tax benefit realized and recorded in the provision for income taxes for the tax deductions from the option exercises totaled $10 million in the three months and $18 million in the six months ended June 30, 2017.

 

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Table of Contents

Performance Share Units and Other Stock-Based Awards:

Our performance share unit, deferred stock unit and historically granted restricted stock activity is reflected below:

 

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

Balance at January 1, 2017

    7,593,627       $ 24.29    
 

 

 

       

Annual grant to eligible employees:

      Feb. 16, 2017      

Performance share units

    1,087,010         43.20    

Deferred stock units

    845,550         43.20    

Additional shares granted (1)

    304,961       Various       40.39    
 

 

 

       

Total shares granted

    2,237,521         42.82     $ 96 million  

Vested (2)

    (2,443,709       43.01     $ 105 million  

Forfeited (2)

    (569,922       39.59    
 

 

 

       

Balance at June 30, 2017

    6,817,517         22.38    
 

 

 

       

 

  (1) Includes performance share units and deferred stock units.
  (2) Includes performance share units, deferred stock units and historically granted restricted stock. The actual tax benefit realized and recorded in the provision for income taxes for the tax deductions from the shares vested totaled $1 million in the three months and $7 million for six months ended June 30, 2017.

Share Repurchase Program:

During 2013, our Board of Directors authorized the repurchase of $7.7 billion of our Common Stock through December 31, 2016. On July 29, 2015, our Finance Committee, with authorization delegated from our Board of Directors, approved an increase of $6.0 billion in the share repurchase program, raising the authorization to $13.7 billion of Common Stock repurchases, and extended the program through December 31, 2018. Repurchases under the program are determined by management and are wholly discretionary. Prior to January 1, 2017, we had repurchased $10.8 billion of Common Stock pursuant to this authorization. During the six months ended June 30, 2017, we repurchased approximately 25 million shares of Common Stock at an average cost of $44.61 per share, or an aggregate cost of approximately $1,109 million, all of which was paid during the period except for approximately $40 million settled in July 2017. All share repurchases were funded through available cash and commercial paper issuances. As of June 30, 2017, we have $1.7 billion in remaining share repurchase capacity.

Note 11.  Commitments and Contingencies

Legal Proceedings:

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

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 ($58 million as of June 30, 2017) of unpaid excise tax and an equivalent amount of penalties, as well as interest, related to production at the same Indian facility. We contested these demands for unpaid excise taxes, penalties and interest. On March 27, 2015, after several hearings, the Commissioner of the Excise Authority issued an order denying the excise exemption that we claimed for the Indian facility and confirming the Excise Authority’s demands for total taxes and penalties in the amount of 5.8 billion Indian rupees ($90 million as of June 30, 2017). We have appealed this order. In addition, the Excise Authority issued additional show cause notices in February 2015 and December 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 ($37 million as of June 30, 2017) of unpaid excise taxes as well as penalties to be determined up to an amount equivalent to that claimed by the Excise Authority and interest. We believe that the decision to claim the excise tax benefit is valid and we are continuing to contest the show cause notices through the administrative and judicial process.

 

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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 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 long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At June 30, 2017, we had no material third-party guarantees recorded on our condensed consolidated balance sheet.

Tax Matters:

As part of our 2010 Cadbury acquisition, we became the responsible party for tax matters under a February 2, 2006 dated Deed of Tax Covenant between the Cadbury Schweppes PLC and related entities (“Schweppes”) and Black Lion Beverages and related entities. The tax matters included an ongoing transfer pricing case with the Spanish tax authorities related to the Schweppes businesses Cadbury divested prior to our acquisition of Cadbury. During the first quarter of 2017, the Spanish Supreme Court decided the case in our favor. As a result of the final ruling, during the first quarter of 2017, we recorded a favorable earnings impact of $46 million in selling, general and administrative expenses and $12 million in interest and other expense, net, for a total pre-tax impact of $58 million due to the non-cash reversal of Cadbury-related accrued liabilities related to this matter.

During the first quarter of 2017, the Brazilian Supreme Court (the “Court”) ruled against the Brazilian tax authorities in a case related to the computation of certain social taxes. The Court ruled that the social tax base should not include a value-added tax known as ICMS. By removing the ICMS from the tax base, the Court effectively eliminated a “tax on a tax.” Our Brazilian subsidiary received an injunction against making payments for the “tax on a tax” in 2008 and since that time until December 2016, we have accrued for the ICMS tax each quarter in the event that the ICMS tax was reaffirmed by the Brazilian courts. The decision of the Court has not yet been published and we are awaiting further instructions from the Court and tax authorities related to amounts previously paid and accrued for the ICMS tax. We cannot reasonably estimate the amount and timing of the impact at this time.

 

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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 $67 million in the three months and $110 million in the six months ended June 30, 2017 and $38 million in the three months and $178 million in the six months ended June 30, 2016.

 

                                                                           
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  
     (in millions)  

Currency Translation Adjustments:

           

Balance at beginning of period

   $ (8,375    $ (7,388    $ (8,914    $ (8,006

Currency translation adjustments

     252        (436      764        38  

Reclassification to earnings related to:

           

Equity method investment exchange

                          57  

Tax benefit/(expense)

     128        (92      159        8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive earnings/(losses)

     380        (528      923        103  

Less: (gain)/loss attributable to noncontrolling interests

     (12      14        (16      1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     (8,007      (7,902      (8,007      (7,902
  

 

 

    

 

 

    

 

 

    

 

 

 

Pension and Other Benefit Plans:

           

Balance at beginning of period

   $ (2,086    $ (1,940    $ (2,087    $ (1,934

Net actuarial (loss)/gain arising during period

     16        24        9        24  

Tax benefit/(expense) on net actuarial loss

     (2      (9             (9

Losses/(gains) reclassified into net earnings:

           

Amortization of experience losses and prior service costs (1)

     42        34        83        63  

Settlement losses and other expenses (1)

     15        11        18        15  

Tax benefit on reclassifications (2)

     (12      (15      (21      (24

Currency impact

     (92      65        (121      35  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive (losses)/earnings

     (33      110        (32      104  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     (2,119      (1,830      (2,119      (1,830
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Cash Flow Hedges:

           

Balance at beginning of period

   $ (103    $ (53    $ (121    $ (46

Net derivative gains/(losses)

     22        6        29        (83

Tax benefit on net derivative gain/(loss)

     (1      3        4        27  

Losses/(gains) reclassified into net earnings:

           

Currency exchange contracts – forecasted transactions (3)

     (1      2               (4

Commodity contracts (3)

     (2      10        6        15  

Interest rate contracts (4)

                          96  

Tax benefit on reclassifications (2)

     (1      (4      (3      (40

Currency impact

     (5             (6      (1
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive earnings/(losses)

     12        17        30        10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     (91      (36      (91      (36
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated other comprehensive income attributable to Mondelēz International:

           

Balance at beginning of period

   $ (10,564    $ (9,381    $ (11,122    $ (9,986

Total other comprehensive earnings/(losses)

     359        (401      921        217  

Less: loss/(gain) attributable to noncontrolling interests

     (12      14        (16      1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive earnings/(losses) attributable to Mondelēz International

     347        (387      905        218  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ (10,217    $ (9,768    $ (10,217    $ (9,768
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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  (1) These reclassified losses are included in the components of net periodic benefit costs disclosed in Note 9, Benefit Plans.
  (2) Taxes reclassified to earnings are recorded within the provision for income taxes.
  (3) These reclassified gains or losses are recorded within cost of sales.
  (4) These reclassified 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 2017 is 25.8%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions, partially offset by an increase in domestic earnings as compared to the prior year. Our 2017 second quarter effective tax rate of 16.2% was favorably impacted by net tax benefits of $47 million from discrete one-time events. The discrete net tax benefits primarily consisted of a $46 million benefit from the release of uncertain tax positions due to expirations of statutes of limitations and audit settlements in several jurisdictions. Our effective tax rate for the six months ended June 30, 2017 of 19.2% was favorably impacted by net tax benefits of $83 million from discrete one-time events. The discrete net tax benefits primarily consisted of a $62 million benefit from the release of uncertain tax positions due to expirations of statutes of limitations and audit settlements in various jurisdictions and a $16 million benefit related to the U.S. domestic production activities deduction.

As of the end of the second quarter of 2016, our estimated annual effective tax rate for 2016 was 22.5%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions. Our 2016 second quarter effective tax rate of 24.2% included net expense from discrete one-time events of $6 million, mainly due to interest accruals on uncertain tax positions. Our effective tax rate for the six months ended June 30, 2016 of 17.3% was favorably impacted by net tax benefits of $49 million from discrete one-time events. The discrete net tax benefits primarily consisted of a $39 million benefit from the release of uncertain tax positions due to expirations of statutes of limitations in several jurisdictions.

Note  14. Earnings Per Share

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

 

                                                       
     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  
     (in millions, except per share data)  

Net earnings

   $ 500      $ 471      $ 1,133      $ 1,028  

Noncontrolling interest (earnings)

     (2      (7      (5      (10
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to Mondelēz International

   $ 498      $ 464      $ 1,128      $ 1,018  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for basic EPS

     1,519        1,557        1,524        1,563  

Plus incremental shares from assumed conversions

of stock options and long-term incentive plan shares

     20        19        20        18  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares for diluted EPS

     1,539        1,576        1,544        1,581  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to Mondelēz International

   $ 0.33      $ 0.30      $ 0.74      $ 0.65  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to Mondelēz International

   $ 0.32      $ 0.29      $ 0.73      $ 0.64  
  

 

 

    

 

 

    

 

 

    

 

 

 

We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded antidilutive stock options of 8.6 million for the three months and 7.7 million for the six months ended June 30, 2017 and 6.5 million for the three months and 10.2 million for the six months ended June 30, 2016.

Note  15. Segment Reporting

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

 

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

    Latin America
    AMEA
    Europe
    North America

On October 1, 2016, we integrated our EEMEA operating segment into our Europe and Asia Pacific operating segments to further leverage and optimize the operating scale built within the Europe and Asia Pacific regions. Russia, Ukraine, Turkey, Belarus, Georgia and Kazakhstan were combined within our Europe operating segment, while the remaining Middle East and African countries were combined within our Asia Pacific region to form the AMEA operating segment. We have reflected the segment change as if it had occurred in all periods presented.

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

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 and loss on divestiture in all periods presented. We exclude these items from segment operating income in order to provide better transparency of our segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.

Our segment net revenues and earnings, revised to reflect our new segment structure, were:

 

                                                                           
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2017      2016      2017      2016  
     (in millions)  

Net revenues:

           

Latin America

   $ 848      $ 843      $ 1,758      $ 1,660  

AMEA

     1,394        1,446        2,885        2,961  

Europe

     2,171        2,293        4,536        4,741  

North America

     1,573        1,720        3,221        3,395  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues

   $ 5,986      $ 6,302      $ 12,400      $ 12,757  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes:

           

Operating income:

           

Latin America

   $ 103      $ 32      $ 214      $ 99  

AMEA

     162        149        343        339  

Europe

     339        256        748        608  

North America

     214        295        506        566  

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

     (46      17        (97      (37

General corporate expenses

     (84      (67      (142      (127

Amortization of intangibles

     (44      (44      (88      (88

Loss on divestiture

     (3             (3       
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     641        638        1,481        1,360  

Interest and other expense, net

     (124      (151      (243      (395
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

   $ 517      $ 487      $ 1,238      $ 965  
  

 

 

    

 

 

    

 

 

    

 

 

 

Items impacting our segment operating results are discussed in Note 1, Basis of Presentation, Note 2, Divestitures and Acquisitions, Note 4, Property, Plant and Equipment, Note 5, Goodwill and Intangible Assets, Note 6, 2014-2018 Restructuring Program and Note 11, Commitments and Contingencies. Also see Note 7, Debt and Borrowing Arrangements, and Note 8, Financial Instruments, for more information on our interest and other expense, net for each period.

 

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Net revenues by product category, revised to reflect our new segment structure, were:

 

                                                                                              
     For the Three Months Ended June 30, 2017  
     Latin
America
     AMEA      Europe      North
America
     Total  
     (in millions)  

Biscuits

   $ 200      $ 355      $ 718      $ 1,301      $ 2,574  

Chocolate

     194        425        946        50        1,615  

Gum & Candy

     241        238        204        222        905  

Beverages

     129        189        24               342  

Cheese & Grocery

     84        187        279               550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 848      $ 1,394      $ 2,171      $ 1,573      $ 5,986  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Three Months Ended June 30, 2016  
     Latin
America
     AMEA      Europe      North
America
     Total  
     (in millions)  

Biscuits

   $ 196      $ 356      $ 719      $ 1,398      $ 2,669  

Chocolate

     179        392        981        43        1,595  

Gum & Candy

     250        250        254        279        1,033  

Beverages

     138        229        39               406  

Cheese & Grocery

     80        219        300               599  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 843      $ 1,446      $ 2,293      $ 1,720      $ 6,302  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                              
     For the Six Months Ended June 30, 2017  
     Latin
America
     AMEA      Europe      North
America
     Total  
     (in millions)  

Biscuits

   $ 370      $ 754      $ 1,369      $ 2,634      $ 5,127  

Chocolate

     453        940        2,169        120        3,682  

Gum & Candy

     454        467        397        467        1,785  

Beverages

     322        362        65               749  

Cheese & Grocery

     159        362        536               1,057  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 1,758      $ 2,885      $ 4,536      $ 3,221      $ 12,400  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Six Months Ended June 30, 2016  
     Latin
America
     AMEA      Europe      North
America
     Total  
     (in millions)  

Biscuits

   $ 360      $ 763      $ 1,362      $ 2,759      $ 5,244  

Chocolate

     377        885        2,244        88        3,594  

Gum & Candy

     466        506        470        548        1,990  

Beverages

     302        406        87               795  

Cheese & Grocery

     155        401        578               1,134  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 1,660      $ 2,961      $ 4,741      $ 3,395      $ 12,757  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Description of the Company

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

We aim to deliver strong, profitable long-term growth by accelerating our core snacks business and expanding the reach of our Power Brands globally. Leveraging our Power Brands and our innovation platforms, we plan to innovate boldly and connect with our consumers wherever they are, including new markets around the world, using both traditional and digital channels. As consumer consumption patterns change to more accessible, frequent and better-for-you snacking, we are enhancing the goodness of many of our brands (including providing simpler and wholesome ingredient-focused snacks), expanding the well-being offerings in our portfolio and inspiring consumers to snack mindfully by providing clear and simple nutrition information. As shopping expands further online, we are also working to grow our e-commerce platform and on-line presence with consumers. To fuel these investments, we have been working to optimize our cost structure. These efforts consist of reinventing our supply chain, including adding and upgrading to more efficient production lines, while reducing the complexity of our product offerings, ingredients and number of suppliers. We also continue to aggressively manage our overhead costs. We have embraced and embedded zero-based budgeting practices across the organization to identify potential areas of cost reductions and capture and sustain savings within our ongoing operating budgets. Through these actions, we’re leveraging our brands, platforms and capabilities to drive long-term value and return on investment for our shareholders.

Malware Incident

On June 27, 2017, a global malware incident impacted our business. The malware affected a significant portion of our global Windows-based applications and our sales, distribution and financial networks across our business. During the last four days of the second quarter and early third quarter, we executed business continuity and contingency plans to contain the impact and minimize the damages from the malware and restore our systems. This allowed us to service customer needs and continue sales and production at a reduced capacity while progressing recovery activities. Based on the nature of the malware and its impact to our technology, we did not expect nor to date have we found any instances of Company or personal data released externally. Although we believe we have now largely contained the disruption and restored a majority of our affected systems, we anticipate additional work during the second half of 2017 as we continue to recover and further enhance the security of our systems.

For the second quarter, we estimate that the malware incident had a negative impact of 2.3% on our net revenue growth and 2.4% on our Organic Net Revenue growth. We also incurred incremental expenses of $7.1 million as a result of the incident. We expect to be able to recognize the majority of delayed second quarter shipments in our third quarter results, although we permanently lost some revenue. We continue to address the recovery of our systems in a couple of key markets and are also assessing longer-term investments that we will make to strengthen our IT environment against potential future disruptions. We expect to incur the majority of incremental expenses related to the malware incident and recovery process during the second half of 2017.

Summary of Results

 

    Net revenues decreased 5.0% to $6.0 billion in the second quarter of 2017 and decreased 2.8% to $12.4 billion in the first six months as compared to the same period in the prior year. During the second quarter of 2017, net revenue growth was adversely affected by delayed shipments stemming from the malware incident and unfavorable currency translation as the U.S. dollar strengthened against most currencies in which we operate compared to exchange rates in the prior year.

 

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    Organic Net Revenue, a non-GAAP financial measure on a constant currency basis, decreased 2.7% to $6.0 billion in the second quarter of 2017 and decreased 1.0% to $12.4 billion in the first six months of 2017 as compared to the same period in the prior year after recasting all periods to exclude the operating results from divestitures and an acquisition. (Refer to Non-GAAP Financial Measures appearing later in this section and Note 2, Divestitures and Acquisitions, for additional information). We use Organic Net Revenue as it provides improved year-over-year comparability of our underlying results (see the definition of Organic Net Revenue and our reconciliation with net revenues within Non-GAAP Financial Measures appearing later in this section).

 

    Diluted EPS attributable to Mondelēz International increased 10.3% to $0.32 in the second quarter of 2017 and increased 14.1% to $0.73 in the first six months of 2017 as compared to the same period in the prior year. A number of significant items affected the comparability of our reported results, as further described in the Discussion and Analysis of Historical Results appearing later in this section and in the notes to the condensed consolidated financial statements.

 

    Adjusted EPS, a non-GAAP financial measure, increased 11.6% to $0.48 in the second quarter of 2017 and increased 9.8% to $1.01 in the first six months of 2017 as compared to the same period in the prior year after recasting all periods to exclude the operating results from divestitures and historical mark-to-market impacts. On a constant currency basis, Adjusted EPS increased 18.6% to $0.51 in the second quarter of 2017 and increased 13.0% to $1.04 in the first six months of 2017. We use Adjusted EPS as it provides improved year-over-year comparability of our underlying results (see the definition of Adjusted EPS and our reconciliation with diluted EPS within Non-GAAP Financial Measures appearing later in this section).

Financial Outlook

We seek to achieve profitable, long-term growth and manage our business to attain 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 and to 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 gain 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 developments and trends that could impact our revenue and profitability objectives, similar to those we highlighted in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2016. Weak category growth and volatility in the global commodity and currency markets continue. As noted above, the malware incident resulted in a significant unfavorable impact to our second quarter 2017 revenue that we expect to be partially mitigated in the third quarter when the majority of sales from the end of the second quarter are shipped. We also expect to incur the majority of incremental expenses related to the incident and recovery process during the second half of 2017. We continue to monitor the U.K. planned exit from the E.U. (Brexit) and its impact on our results as well as currencies at risk of potential highly inflationary accounting, such as the Argentinian peso and the Ukrainian hryvnia. In Brazil, we are monitoring a pending tax matter that could have a significant favorable impact on future results, and we are not yet able to reasonably estimate the timing or amount at this time. In connection with collective bargaining agreements covering eight U.S. facilities that expired on February 29, 2016, we continue to work toward reaching an agreement with the union and have made plans to ensure business continuity during the re-negotiations. For more information on these items, refer to our Discussion and Analysis of Historical Results and Commodity Trends appearing later in this section, as well as Note 1, Basis of Presentation – Currency Translation and Highly Inflationary Accounting, Note 6, 2014-2018 Restructuring Program, and Note 11, Commitments and Contingencies – Tax Matters.

 

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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 after-tax per share impacts of these items.

 

                                                                                              
            For the Three Months Ended     For the Six Months Ended  
            June 30,     June 30,  
     See Note      2017     2016     2017     2016  
            (in millions, except percentages)  

Gain on equity method investment exchange

     Note 2      $     $     $     $ 43  

2014-2018 Restructuring Program:

     Note 6           

Restructuring charges

        (148     (154     (305     (293

Implementation charges

        (63     (74     (117     (172

Loss related to interest rate swaps

     Note 7 & 8                          (97

Loss on debt extinguishment

     Note 7        (11           (11      

Intangible asset impairment charges

     Note 5        (38     (12     (38     (26

Divestiture-related costs

     Note 2           

Loss on divestiture

        (3           (3      

Gain on sale of intangible asset

              6             6  

Divestiture-related costs

        (9     (84     (28     (84

Gains on sales of property

              39             39  

Mark-to-market (losses)/gains from derivatives

     Note 15        (46     17       (97     (37

Benefit from the settlement of a Cadbury tax matter (1)

     Note 11                    58        

Malware incident incremental expenses

        (7           (7      

Effective tax rate

     Note 13        16.2     24.2     19.2     17.3

 

  (1) Refer to Note 11, Commitments and Contingencies – Tax Matters, for more information. The $58 million benefit from the settlement of a Cadbury tax matter in the first quarter of 2017 includes $46 million recorded within selling, general and administrative expenses and $12 million within interest and other expense, net.

 

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Consolidated Results of Operations

The following discussion compares our consolidated results of operations for the three months ended June 30, 2017 and 2016.

Three Months Ended June 30:

 

                                                                           
     For the Three Months Ended                
     June 30,                
     2017      2016      $ change      % change  
     (in millions, except per share data)         

Net revenues

   $ 5,986      $ 6,302      $ (316      (5.0)%  

Operating income

     641        638        3        0.5%  

Net earnings attributable to

   Mondelēz International

     498        464        34        7.3%  

Diluted earnings per share attributable to

   Mondelēz International

     0.32        0.29        0.03        10.3%  

Net Revenues – Net revenues decreased $316 million (5.0%) to $5,986 million in the second quarter of 2017, and Organic Net Revenue (1) decreased $169 million (2.7%) to $6,011 million. Power Brands net revenues decreased 3.0%, including an unfavorable currency impact, and Power Brands Organic Net Revenue decreased 1.8%. Emerging markets net revenues decreased 1.5%, including an unfavorable currency impact, and emerging markets Organic Net Revenue decreased 0.3%. The underlying changes in net revenues and Organic Net Revenue are detailed below:

 

                                                        
         2017      

Change in net revenues (by percentage point)

      

Total change in net revenues

       (5.0 )%   

Add back the following items affecting comparability:

      

Unfavorable currency

       2.0 pp   

Impact of divestitures

       0.5 pp   

Impact of acquisition

       (0.2 )pp   
    

 

 

   

Total change in Organic Net Revenue (1)

       (2.7 )%   
    

 

 

   

Unfavorable volume/mix

       (3.8 )pp   

Higher net pricing

       1.1 pp   

 

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

Net revenue decline of 5.0% was driven by our underlying Organic Net Revenue decline of 2.7%, unfavorable currency and the impact of divestitures, partially offset by the impact of an acquisition. Our underlying Organic Net Revenue decline was driven by unfavorable volume/mix, primarily due to delayed shipments as a result of the June 27, 2017 malware incident which we estimate had a negative impacts of 2.3% on our net revenue growth and 2.4% on our Organic Net Revenue growth, partially offset by higher net pricing. Unfavorable year-over-year currency impacts decreased net revenues by $124 million, due primarily to the strength of the U.S. dollar relative to several currencies, including the British pound sterling, euro, Egyptian pound and Argentinian peso, partially offset by the strength of several currencies, including the Brazilian real, Russian ruble and South African rand, relative to the U.S. dollar. The impact of divestitures resulted in a year-over-year decline in net revenues of $39 million for the second quarter of 2017. The November 2, 2016 acquisition of a business and license to manufacture, market and sell Cadbury-branded biscuits in additional key markets added $16 million (constant currency basis) of incremental net revenues for the second quarter of 2017. Unfavorable volume/mix was reflected across all segments. Net pricing was up, which includes the benefit of carryover pricing from the second half of 2016 and the first quarter of 2017 as well as the effects of input cost-driven pricing actions taken during the second quarter of 2017. Higher net pricing was reflected in all segments except North America.

 

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Operating Income – Operating income increased $3 million (0.5%) to $641 million in the second quarter of 2017, Adjusted Operating Income (1) increased $12 million (1.3%) to $933 million and Adjusted Operating Income on a constant currency basis (1) increased $72 million (7.8%) to $993 million due to the following:

 

                                     
     Operating
Income
     % Change  
     (in millions)         

Operating Income for the Three Months Ended June 30, 2016

   $ 638     

2014-2018 Restructuring Program costs (2)

     228     

Intangible asset impairment charge (3)

     12     

Acquisition integration costs (4)

     3     

Mark-to-market gains from derivatives (5)

     (17   

Divestiture-related costs (6)

     84     

Operating income from divestitures (6)

     (22   

Gain on sale of intangible asset (7)

     (6   

Other/rounding

     1     
  

 

 

    

Adjusted Operating Income (1) for the
Three Months Ended June 30, 2016

   $ 921     

Higher net pricing

     65     

Higher input costs

     (17   

Unfavorable volume/mix

     (123   

Lower selling, general and administrative expenses

     154     

Gains on sales of property (8)

     (39   

Property insurance recovery

     27     

Impact from acquisition (8)

     5     

Other

         
  

 

 

    

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

     72        7.8%  

Unfavorable currency – translation

     (60   
  

 

 

    

Total change in Adjusted Operating Income (1)

     12        1.3%  
  

 

 

    

Adjusted Operating Income (1) for
the Three Months Ended June 30, 2017

   $ 933     

2014-2018 Restructuring Program costs (2)

     (211   

Intangible asset impairment charge (3)

     (38   

Mark-to-market losses from derivatives (5)

     (46   

Malware incident incremental expenses

     (7   

Divestiture-related costs (6)

     (4   

Operating income from divestitures (6)

     18     

Loss on divestiture (6)

     (3   

Other/rounding

     (1   
  

 

 

    

Operating Income for the Three Months Ended June 30, 2017

   $ 641        0.5%  
  

 

 

    

 

 

 

 

  (1) Refer to the Non-GAAP Financial Measures section at the end of this item.
  (2) Refer to Note 6, 2014-2018 Restructuring Program, for more information.
  (3) Refer to Note 2, Divestitures and Acquisitions, and Note 5, Goodwill and Intangible Assets, for more information on the impairment charges recorded in 2017 and 2016 related to trademarks.
  (4) Refer to our Annual Report on Form 10-K for the year ended December 31, 2016, for more information on the acquisition of a biscuit business in Vietnam.
  (5) Refer to Note 8, Financial Instruments, Note 15, Segment Reporting, and Non-GAAP Financial Measures appearing later in this section for more information on the unrealized gains/losses on commodity and forecasted currency transaction derivatives.
  (6) Refer to Note 2, Divestitures and Acquisitions, for more information on the 2017 sales of a confectionery business in France and a grocery business in Australia and New Zealand. Note that we completed the sale of most of our grocery business in Australia and New Zealand on July 4, 2017 and we have also removed the historical operating results of the business for all periods presented. Refer to our Annual Report on Form 10-K for the year ended December 31, 2016 for more information on the 2016 sale of a confectionery business in Costa Rica.
  (7) Refer to Note 2, Divestitures and Acquisitions, for more information on the 2016 intangible asset sale in Finland.
  (8) Refer to Note 2, Divestitures and Acquisitions, for more information on the 2016 purchase of a license to manufacture, market and sell Cadbury-branded biscuits in additional key markets and other property sales in 2016.

 

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During the second quarter, unfavorable volume/mix, primarily due to the delayed shipments resulting from the malware incident, was reflected across all segments. We realized higher net pricing as input costs increased. Higher net pricing, which included the carryover impact of pricing actions taken in the second half of 2016 and the first quarter of 2017, was reflected in all segments, except North America. The increase in input costs was driven by higher raw material costs, which were partially offset by lower manufacturing costs due to productivity gains.

Total selling, general and administrative expenses decreased $219 million from the second quarter of 2016, due to a number of factors noted in the table above, including in part, lower divestiture-related costs associated with the sale of a confectionery business in France, a property insurance recovery in AMEA and lower implementation costs incurred for the 2014-2018 Restructuring Program. The decreases were partially offset by the gains on sales of property in 2016, an unfavorable currency impact and incremental expenses caused by the malware incident.

Excluding the factors noted above, selling, general and administrative expenses decreased $154 million from the second quarter of 2016. The decrease was driven primarily by lower advertising and consumer promotion costs and lower overhead costs due to continued cost reduction efforts in both areas.

Unfavorable currency impacts decreased operating income by $60 million due primarily to the strength of the U.S. dollar relative to several currencies, including the Egyptian pound, British pound sterling and euro, partially offset by the strength of several currencies relative to the U.S. dollar, including the Brazilian real, Russian ruble and South African rand.

Operating income margin increased from 10.1% in the second quarter of 2016 to 10.7% in the second quarter of 2017. The increase in operating income margin was driven primarily by an increase in our Adjusted Operating Income margin and lower divestiture-related costs associated with the sale of a confectionery business in France, partially offset by the year-over-year unfavorable impact of unrealized gains/(losses) on currency and commodity hedging activities and higher intangible asset impairment charges. Adjusted Operating Income margin increased from 14.9% in the second quarter of 2016 to 15.8% in the second quarter of 2017. The increase in Adjusted Operating Income margin was driven primarily by lower advertising and consumer promotion costs and lower overheads from continued cost reduction efforts in both areas.

 

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Net Earnings and Earnings per Share Attributable to Mondelēz International – Net earnings attributable to Mondelēz International of $498 million increased by $34 million (7.3%) in the second quarter of 2017. Diluted EPS attributable to Mondelēz International was $0.32 in the second quarter of 2017, up $0.03 (10.3%) from the second quarter of 2016. Adjusted EPS (1) was $0.48 in the second quarter of 2017, up $0.05 (11.6%) from the second quarter of 2016. Adjusted EPS on a constant currency basis (1) was $0.51 in the second quarter of 2017, up $0.08 (18.6%) from the second quarter of 2016.

 

                  
     Diluted EPS  

Diluted EPS Attributable to Mondelēz International for the
Three Months Ended June 30, 2016

   $ 0.29  

2014-2018 Restructuring Program costs (2)

     0.11  

Intangible asset impairment charge (2)

      

Acquisition integration costs (2)

      

Mark-to-market gains from derivatives (2)

      

Divestiture-related costs (2)

     0.04  

Net earnings from divestitures (2)

     (0.01

Gain on sale of intangible asset (2)

      
  

 

 

 

Adjusted EPS (1) for the Three Months Ended June 30, 2016

   $ 0.43  

Increase in operations

     0.05  

Decrease in equity method investment net earnings

     (0.01

Gains on sales of property (2)

     (0.02

Property insurance recovery

     0.01  

Impact from acquisition (2)

      

Lower interest and other expense, net (3)

     0.02  

Changes in shares outstanding (4)

     0.01  

Changes in income taxes (5)

     0.02