filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements. It should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, “Forward-Looking Statements” and “Risk Factors” contained in Item 1A.
Description of the Company
We manufacture and market primarily snack food products, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy and various cheese & grocery products, as well as powdered beverage products. We have operations in more than 80 countries and sell our products in 165 countries.
Over the last several years, we have built a presence in the snacking category. We have expanded geographically and continue to invest in product quality, marketing and innovation behind our iconic brands while also implementing a series of cost saving initiatives. Our goals are to achieve industry-leading revenue growth over time driven by the higher expected growth rates of advantaged snack categories; leverage our cost structure through supply chain reinvention, productivity programs, overhead streamlining, volume growth and improved product mix to drive margin gains; and grow earnings per share in the top-tier of our peer group.
Coffee Business Transactions
On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses (including our coffee portfolio in France) with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, Jacobs Douwe Egberts or JDE. We currently hold a 43.5% equity interest in JDE and Acorn Holdings B.V. (“AHBV”), owner of DEMB, holds the remaining 56.5% equity interest.
In connection with the contribution of our global coffee businesses to JDE, we recorded a pre-tax gain of $6.8 billion (or $6.6 billion after taxes) in 2015. We also recorded approximately $1.0 billion of pre-tax net gains related to hedging the expected cash proceeds from the transactions as described further below.
The consideration we have received to date consists of €3.8 billion of cash ($4.2 billion U.S. dollars as of July 2, 2015), a 43.5% equity interest in JDE and $794 million in receivables (related to sales price adjustments and tax formation cost payments). During the third quarter of 2015, we also recorded $283 million of cash and receivables from JDE related to reimbursement of costs that we incurred in separating our coffee businesses. The cash and equity consideration we received at closing reflects that we retained our interest in a Korea-based joint venture, Dongsuh Foods Corporation. During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”). In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from the sale, and the transaction did not change the consideration received for our global coffee businesses. Please see Note 2, Divestitures and Acquisitions – Other Divestitures, Acquisitions and Sales of Property, for discussion of the divestiture of AGF.
During the fourth quarter, we and JDE concluded negotiations of a sales price adjustment and completed the valuation of our investment in JDE. Primarily related to the negotiated resolution of the sales price adjustment in the fourth quarter, we recorded a $313 million reduction in the pre-tax gain on the coffee transaction, reducing the $7.1 billion estimated gain in the third quarter to the $6.8 billion final gain for 2015. As part of our sales price negotiations, we retained the right to collect future cash payments if certain estimated pension liabilities come in over an agreed amount in the future. As such, we may recognize additional income related to this negotiated term in the future.
The final value of our investment in JDE on July 2, 2015 was €4.1 billion, or $4.5 billion. The fair value of the JDE investment was determined using both income-based and market-based valuation techniques. The discounted cash flow analysis reflected growth, discount and tax rates and other assumptions reflecting the underlying combined businesses and countries in which the combined coffee businesses operate.
In connection with the expected receipt of cash in euros at the time of closing, we entered into a number of consecutive currency exchange forward contracts in 2014 and 2015 to lock in an equivalent expected value in U.S. dollars as of the date the coffee business transactions were first announced in May 2014. Cumulatively, we realized aggregate net gains
and received cash of approximately $1.0 billion on these hedging contracts that increased the cash we received in connection with the coffee business transactions from $4.2 billion in cash consideration received to $5.2 billion. In connection with these currency contracts and the transfer of the sale proceeds to our subsidiaries that deconsolidated net assets and shares, we recognized a net gain of $628 million in 2014 and a net gain of $436 million in 2015 within interest and other expense, net. For additional information on the JDE coffee transactions, see Note 2, Divestitures and Acquisitions.
On December 18, 2015, AHBV and we agreed to provide JDE additional capital to pay down some of its debt with lenders. Our pro rata share of the capital increase was €499 million ($544 million U.S. dollars as of December 18, 2015) and was made in return for additional shares in JDE such that we retained our 43.5% interest in JDE following the capital increase. To fund our share of the capital increase, we contributed €460 million ($501 million) of JDE receivables and made a €39 million ($43 million) cash payment.
On December 6, 2015, we agreed to make an investment in Keurig Green Mountain Inc. (“Keurig”), which is contingent upon the successful completion of a planned acquisition of Keurig by JAB Holding Co. (“JAB” and parent company of AHBV). Following the close of JAB’s planned acquisition of Keurig in early 2016, we intend to exchange a portion of our equity interest in JDE for an equity interest in Keurig. Following the exchange of shares, we expect our ownership in JDE to decrease to approximately 26.5% and our interest in Keurig to be somewhat lower. We expect to account for both investments under the equity method, resulting in our recognizing our share of their earnings within our earnings and our share of their dividends within our cash flows. Our governance rights in JDE will not change significantly and we will have similar governance rights in Keurig following the transaction. Our investment in Keurig will follow the acquisition of Keurig by JAB, which is expected to be completed by the end of the first quarter of 2016 or early in the second quarter. As our exchange of shares in JDE for the investment in Keurig is conditioned upon the actions of JAB and Keurig’s existing shareholders and is subject to further regulatory antitrust reviews, we have not reflected the portion of our investment in JDE that would be exchanged for the Keurig investment as assets held for sale as of December 31, 2015.
Venezuela Deconsolidation
Effective as of the close of the 2015 fiscal year, we concluded that we no longer met the accounting criteria for consolidation of our Venezuela subsidiaries due to a loss of control over our Venezuelan operations and an other-than-temporary lack of currency exchangeability. As of the close of the 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations. We recorded a $778 million pre-tax loss as we reduced the value of our cost method investment in Venezuela and all Venezuelan receivables held by our other subsidiaries to realizable fair value, resulting in full impairment. The recorded loss also included historical cumulative translation adjustments related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity.
Beginning in 2016, we will no longer include net revenues, earnings or net assets from our Venezuelan subsidiaries within our consolidated financial statements. Under the cost method of accounting, we will recognize earnings only to the extent cash is received from our Venezuelan subsidiaries. Given the current and ongoing difficult economic, regulatory and business environment in Venezuela, there continues to be significant uncertainty related to our operations in Venezuela and we expect these conditions will continue for the foreseeable future. We will monitor the extent of our ability to control our Venezuelan operations and the liquidity and availability of U.S. dollars at different rates as our current situation in Venezuela may change over time and lead to consolidation at a future date. See below Discussion and Analysis of Historical Results – Items Affecting Comparability of Financial Results, and Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting: Venezuela, for more information on our historical Venezuela operating results, including the remeasurement losses and loss on deconsolidation.
Summary of Results
| • | Net revenues decreased 13.5% to $29.6 billion in 2015 and decreased 3.0% to $34.2 billion in 2014. Net revenues in 2015 were significantly affected by unfavorable currency translation as the U.S. dollar strengthened against most currencies in which we operate compared to exchange rates in the prior year and the July 2, 2015 deconsolidation of our global coffee business. |
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| • | Organic Net Revenue increased 3.7% to $31.6 billion in 2015 and increased 2.5% to $32.1 billion in 2014. Organic Net Revenue is a non-GAAP financial measure we use to evaluate our underlying results (see the definition of Organic Net Revenue and our reconciliation with net revenues within Non-GAAP Financial Measures appearing later in this section). |
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| • | Diluted EPS attributable to Mondelēz International increased 246.9% to $4.44 in 2015 and decreased 41.6% to $1.28 in 2014. Excluding the results of discontinued operations in 2013, our diluted EPS attributable to Mondelēz International from continuing operations decreased 0.8% to $1.28 in 2014. A number of significant items also affected the comparability of our reported results, as further described in the Discussion and Analysis of Historical Results appearing later in this section and in the notes to the consolidated financial statements. |
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| • | Adjusted EPS remained flat at $1.75 in 2015 and increased 13.6% to $1.75 in 2014. On a constant currency basis, Adjusted EPS increased 18.9% to $2.08 in 2015 and increased 22.7% to $1.89 in 2014. Adjusted EPS is a non-GAAP financial measure we use to evaluate our underlying results (see the definition of Adjusted EPS and our reconciliation with diluted EPS within Non-GAAP Financial Measures appearing later in this section). |
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Financial Outlook
We seek to achieve top-tier financial performance. We manage our business to achieve this goal using three key operating metrics: Organic Net Revenue, Adjusted Operating Income and Adjusted EPS. (Refer to Non-GAAP Financial Measures appearing later in this section for more information on these measures.) Additional metrics that we use or monitor include product quality measures, category growth, market share performance, margins, pricing net of commodity costs, net commodity inflation, volume growth, Power Brand Organic Net Revenue growth, gross and net productivity savings, brand support and related investments, capital spending, cash conversion cycle, free cash flow, return on invested capital and shareholder returns. We also monitor a number of factors and trends that we expect may impact our revenues and profitability objectives:
Long-Term Demographics and Consumer Trends – Snack food consumption is highly correlated to GDP growth, urbanization of the population and rising discretionary income levels associated with a growing middle class, particularly in emerging markets. Over the long-term, we expect these trends to continue leading to growth in key consumer behaviors, including increased snacking occasions, greater use of convenience food and migration to more frequent, smaller meals. In the near term, low GDP growth, high unemployment and weak consumer confidence in Europe and emerging markets have slowed category and our growth.
Demand – We monitor consumer spending and our market share within the food and beverage categories in which we sell our products. Growth in the global categories increased from approximately 3.6% in 2014 to 5.5% in 2015, and our Organic Net Revenue growth also increased from 2.5% in 2014 to 3.7% in 2015. Our Organic Net Revenue included a 90 basis point headwind from strategic decisions to improve revenue mix. In 2015, we began to improve our revenue mix by discontinuing certain low margin, customer-specific product lines, discontinuing certain low-margin licensed products and continuing to simplify our portfolio. We anticipate taking similar actions to optimize our portfolio in 2016. The improvement in global category growth was largely driven by price relating to higher commodity costs and currency-related inflationary impacts. Over the long-term, we expect category growth to return to levels more in line with historical growth rates when the macroeconomic environment in emerging markets recovers to a better balance between price and volume/mix. We continue to make investments in our brands and build strong routes to market to address the needs of consumers in emerging and developed markets. In doing so, we anticipate stimulating demand in our categories and growing our position in these markets.
Volatility of Global Markets – Our growth strategy depends in part on our ability to expand our operations, particularly in emerging markets. Some of these markets have greater political and economic volatility and vulnerability to infrastructure and labor disruptions, as we experienced this past year in markets including Argentina, Brazil, Russia, Ukraine and
Venezuela. Volatility in these markets affects demand for and the costs of our products and requires frequent changes in how we operate our business. There will likely be continued volatility across these and other markets in which we sell. As such, we are focused on continuing to manage our costs and adjusting prices as needed to recover changing costs while we continue to invest in our global Power Brands and routes to market.
Competition – We operate in highly competitive markets that include global, regional and local competitors. Our advantaged geographic footprint, operating scale and portfolio of brands have all significantly contributed to building our market-leading positions across most of the product categories in which we sell. To grow and maintain our market positions, we focus on product quality, bringing new products and innovations to market and effectively meeting consumer needs and preferences. We pursue growth opportunities such as expanding our global operations and growing our portfolio of Power Brands and innovative products. We continue to optimize our manufacturing and other operations and invest in our brands through ongoing research and development, advertising, marketing and consumer promotions.
Pricing – We adjust our product prices based on a number of variables including demand, the competitive environment and changes in our product input costs. Our net revenue growth and profitability may be affected as we adjust prices to address new conditions. In 2015, we generally increased prices in response to higher commodity costs, currency and other market factors. In 2016, we anticipate that we will adjust our prices in response to changing market conditions. Price competition or delayed price increases by competitors or customers may continue to affect net revenues or market share in the near term as the market adjusts to the changes in input costs and other market conditions.
Operating Costs – Our operating costs include raw materials, labor, selling, general and administrative expenses, taxes, currency impacts and financing costs. We manage these costs through cost saving and productivity initiatives, sourcing and hedging programs, pricing actions, refinancing and tax planning. We also continue to work on programs to expand our profitability and margins, such as our 2014-2018 Restructuring Program, which is designed to bring about significant reductions in our operating cost structure in both our supply chain and overhead costs.
Currency – As a global company with nearly 80% of our net revenues generated outside the United States, we are exposed to changes in global economic conditions and currency movements. In the last three years, the U.S. dollar strengthened relative to other currencies in which we operate, and several countries experienced significant declines in or devaluations of their currency. These currency movements had a significant negative effect on our reported results of operations. Our 2015 net revenues were $29.6 billion, down 13.5% from 2014, including a negative 12.6 percentage point impact from currency translation. Our 2014 net revenues were $34.2 billion, down 3.0% from 2013, including a negative 5.2 percentage point impact from currency translation. In 2013, net revenues were $35.3 billion, up 0.8%, including a negative 2.4 percentage point impact from currency translation. While we have net investment hedges in the form of local currency denominated debt to offset the translation of certain of our overseas operations, we generally do not hedge against currency translation. We primarily seek to hedge against economic losses on cross-currency transactions. Due to limited markets for hedging currency transactions and other factors, we may not be able to effectively hedge all of our cross-currency transaction risks. We have historically also been exposed to currency devaluation risks impacting earnings particularly in connection with our Venezuela operations, which as of December 31, 2015 has been deconsolidated. See Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting: Venezuela, for more information_._ The economy, monetary policies and other business restrictions in Venezuela, as well as in other developing countries, have created a challenging business environment in which to operate, and our ability to hedge against currency-related economic losses may be limited. While we work to mitigate our exposure to these currency risks, factors such as continued global market volatility, actions by foreign governments, political uncertainty and other external developments could lead to further unfavorable currency impacts in the future.
Financing Costs – We regularly evaluate our variable and fixed-rate debt. We continue to use lower cost short- and long-term debt to finance our ongoing working capital, capital expenditures and other investments, dividends and share repurchases. In 2015, 2014 and 2013, we repaid $15.6 billion of our long-term debt and issued lower-cost long-term euro, British pound sterling, Swiss franc and U.S. dollar-denominated debt. Our weighted-average interest rate on our total debt as of December 31, 2015 was 3.7%, down from 4.3% as of December 31, 2014 and down from 4.8% as of December 31, 2013. Refer to Note 8, Debt and Borrowing Arrangements, for additional debt activity in 2016.
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 consolidated financial statements indicated below for more information. Refer also to the Consolidated Results of Operations – Net Earnings and Earnings per Share Attributable to Mondelēz International table for the per share impacts of these items.
| For the Years Ended December 31, | ||||||||||||||
| See Note | 2015 | 2014 | 2013 | |||||||||||
| (in millions of U.S. dollars) | ||||||||||||||
| Coffee business transactions: | Note 2 | |||||||||||||
| Gain on contribution | $ | 6,809 | $ | – | $ | – | ||||||||
| Incremental costs for readying the businesses | (278 | ) | (77 | ) | – | |||||||||
| Currency-related net gains (1) | 436 | 628 | – | |||||||||||
| 2014-2018 Restructuring Program: | Note 6 | |||||||||||||
| Restructuring charges | (711 | ) | (274 | ) | – | |||||||||
| Implementation charges | (291 | ) | (107 | ) | – | |||||||||
| 2012-2014 Restructuring Program: | Note 6 | |||||||||||||
| Restructuring charges | 4 | (360 | ) | (267 | ) | |||||||||
| Implementation charges | – | (99 | ) | (63 | ) | |||||||||
| Venezuela: | Note 1 | |||||||||||||
| Remeasurement losses: | ||||||||||||||
| Q1 2013: 4.30 to 6.30 bolivars to the U.S. dollar | – | – | (54 | ) | ||||||||||
| Q1 2014: 6.30 to 10.70 bolivars to the U.S. dollar | – | (142 | ) | – | ||||||||||
| SICAD I remeasurements through December 31, 2014 | – | (25 | ) | – | ||||||||||
| Q1 2015: 11.50 to 12.00 bolivars to the U.S. dollar | (11 | ) | – | – | ||||||||||
| Loss on deconsolidation | (778 | ) | – | – | ||||||||||
| Loss on debt extinguishment and related expenses | Note 8 | (753 | ) | (495 | ) | (612 | ) | |||||||
| Benefit from indemnification resolution | Note 13 | – | – | 385 | ||||||||||
| Acquisitions, divestitures and sales of property: | Note 2 | |||||||||||||
| Gain on acquisition | – | – | 22 | |||||||||||
| Acquisition-related costs | (8 | ) | (2 | ) | (7 | ) | ||||||||
| Other acquisition integration costs | (9 | ) | (4 | ) | (4 | ) | ||||||||
| Gains on divestitures (2) | 13 | – | 8 | |||||||||||
| Gains on sales of properties | – | 7 | 68 | |||||||||||
| Spin-Off Costs | Note 2 | – | (35 | ) | (62 | ) | ||||||||
| Gain on resolution of Starbucks arbitration | Note 2 | – | – | 2,522 | ||||||||||
| Cadbury Integration Program charges | Note 7 | – | 8 | (216 | ) | |||||||||
| Effective tax rate | Note 15 | 7.5% | 13.8% | 2.5% |
| (1) | To lock in an expected U.S. dollar value of approximately $5 billion related to the estimated €4 billion cash receipt upon closing, we entered into currency exchange forward contracts beginning in May 2014, when the transaction was announced. We recognized net gains of $405 million on these contracts during 2015 and net gains of $628 million in 2014. We also monetized additional hedges during July 2015 and realized net pre-tax gains of $17 million. In connection with transferring the funds to our subsidiaries that deconsolidated net assets and shares, we incurred additional currency gains of $14 million in 2015. |
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| (2) | Includes the 2015 divestiture of AGF and the 2013 divestures of a salty snacks business in Turkey, a confectionary business in South Africa and a chocolate business in Spain and does not include the deconsolidation of our coffee businesses, which is presented separately in the table above. |
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Consolidated Results of Operations
The following discussion compares our consolidated results of operations for 2015 with 2014 and 2014 with 2013.
2015 compared with 2014
| For the Years Ended December 31, | ||||||||||||||||
| 2015 | 2014 | $ change | % change | |||||||||||||
| (in millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 29,636 | $ | 34,244 | $ | (4,608) | (13.5)% | |||||||||
| Operating income | 8,897 | 3,242 | 5,655 | 174.4% | ||||||||||||
| Earnings from continuing operations | 7,291 | 2,201 | 5,090 | 231.3% | ||||||||||||
| Net earnings attributable to Mondelēz International | 7,267 | 2,184 | 5,083 | 232.7% | ||||||||||||
| Diluted earnings per share attributable to Mondelēz International | 4.44 | 1.28 | 3.16 | 246.9% |
Net Revenues – Net revenues decreased $4,608 million (13.5%) to $29,636 million in 2015, and Organic Net Revenue (1) increased $1,131 million (3.7%) to $31,599 million. Organic Net Revenue growth from Power Brands was 5.4% and from emerging markets was 10.6%. The underlying changes in net revenues and Organic Net Revenue are detailed below:
| 2015 | ||||
| Change in net revenues (by percentage point) | ||||
| Higher net pricing | 6.8pp | |||
| Unfavorable volume/mix | (3.1)pp | |||
| Total change in Organic Net Revenue(1) | 3.7% | |||
| Unfavorable currency | (12.6)pp | |||
| Historical coffee business**(2)** | (5.4)pp | |||
| Impact of acquisitions | 0.5pp | |||
| Impact of accounting calendar change | 0.3pp | |||
| Total change in net revenues | (13.5)% | |||
| (1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
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| (2) | Includes our historical global coffee business prior to the July 2, 2015 coffee business transactions. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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Organic Net Revenue growth was driven by higher net pricing, partially offset by unfavorable volume/mix. Net pricing was up as we realized the effects of input cost-driven pricing actions taken during the year. Higher net pricing was reflected across all segments. Unfavorable volume/mix was largely due to price elasticity as well as strategic decisions to exit certain low-margin product lines. Unfavorable volume/mix was reflected in all segments except North America. Unfavorable currency impacts decreased net revenues by $3,833 million, due primarily to the strength of the U.S. dollar relative to several currencies, including the euro, Brazilian real, Russian ruble, Venezuelan bolivar, Australian dollar and British pound sterling. The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $2,149 million for the year. The July 15, 2015 acquisition of a biscuit operation in Vietnam added $128 million in incremental net revenues (constant currency basis) for the year. The North America segment accounting calendar change resulted in a year-over-year increase in net revenues of $78 million for the year. The February 16, 2015 acquisition of the Enjoy Life Foods snack food business in North America added $37 million in incremental net revenues for the year.
Operating Income – Operating income increased $5,655 million (174.4%) to $8,897 million in 2015, Adjusted Operating Income (1) increased $172 million (4.7%) to $3,830 million and Adjusted Operating Income on a constant currency basis (1) increased $694 million (19.0%) to $4,352 million due to the following:
| Operating | ||||||||
| Income | Change | |||||||
| (in millions) | (percentage point) | |||||||
| Operating Income for the Year Ended December 31, 2014 | $ | 3,242 | ||||||
| Spin-Off Costs (2) | 35 | 1.3pp | ||||||
| 2012-2014 Restructuring Program costs (3) | 459 | 14.9pp | ||||||
| 2014-2018 Restructuring Program costs (3) | 381 | 14.7pp | ||||||
| Integration Program and other acquisition integration costs (4) | (4 | ) | (0.2)pp | |||||
| Remeasurement of net monetary assets in Venezuela (5) | 167 | 6.9pp | ||||||
| Intangible asset impairment charges (6) | 57 | 2.2pp | ||||||
| Costs associated with the coffee business transactions (7) | 77 | 2.9pp | ||||||
| Operating income from historical coffee business (8) | (646 | ) | (21.9)pp | |||||
| Reclassification of equity method investment earnings (9) | (104 | ) | (4.1)pp | |||||
| Operating income from divestiture (10) | (8 | ) | (0.3)pp | |||||
| Acquisition-related costs (11) | 2 | 0.1pp | ||||||
| Adjusted Operating Income (1) for the Year Ended December 31, 2014 | $ | 3,658 | ||||||
| Higher net pricing | 2,066 | 56.5pp | ||||||
| Higher input costs | (840 | ) | (23.0)pp | |||||
| Unfavorable volume/mix | (332 | ) | (9.1)pp | |||||
| Higher selling, general and administrative expenses | (327 | ) | (8.9)pp | |||||
| Change in unrealized gains/losses on hedging activities | 129 | 3.5pp | ||||||
| Lower VAT-related settlements | (54 | ) | (1.5)pp | |||||
| Gain on sale of property in 2014 | (7 | ) | (0.2)pp | |||||
| Impact of accounting calendar change (5) | 37 | 1.0pp | ||||||
| Impact from acquisitions (11) | 20 | 0.6pp | ||||||
| Other, net | 2 | 0.1pp | ||||||
| Total change in Adjusted Operating Income (constant currency) (1) | 694 | 19.0% | ||||||
| Unfavorable currency - translation | (522 | ) | (14.3)pp | |||||
| Total change in Adjusted Operating Income (1) | 172 | 4.7% | ||||||
| Adjusted Operating Income (1) for the Year Ended December 31, 2015 | $ | 3,830 | ||||||
| 2012-2014 Restructuring Program costs (3) | 4 | 0.2pp | ||||||
| 2014-2018 Restructuring Program costs (3) | (1,002 | ) | (35.0)pp | |||||
| Acquisition integration costs (4) | (9 | ) | (0.2)pp | |||||
| Remeasurement of net monetary assets in Venezuela (5) | (11 | ) | (0.4)pp | |||||
| Loss on deconsolidation of Venezuela (5) | (778 | ) | (24.0)pp | |||||
| Intangible asset impairment charges (6) | (71 | ) | (2.2)pp | |||||
| Costs associated with the coffee business transactions (7) | (278 | ) | (10.8)pp | |||||
| Operating income from historical coffee business (8) | 342 | 13.2pp | ||||||
| Gain on the coffee business transactions (7) | 6,809 | 210.0pp | ||||||
| Reclassification of equity method investment earnings (9) | 51 | 2.1pp | ||||||
| Operating income from divestiture (10) | 5 | 0.2pp | ||||||
| Gain on divestiture (10) | 13 | 0.4pp | ||||||
| Acquisition-related costs (11) | (8 | ) | (0.3)pp | |||||
| Operating Income for the Year Ended December 31, 2015 | $ | 8,897 | 174.4% | |||||
| (1) | Refer to the Non-GAAP Financial Measures section at the end of this item. |
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| (2) | Refer to Note 2, Divestitures and Acquisitions, for more information on Spin-Off Costs incurred in 2014 following the 2012 Kraft Foods Group divestiture. |
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| (3) | Refer to Note 6, Restructuring Programs, for more information on our 2014-2018 Restructuring Program and our 2012-2014 Restructuring Program. |
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| (4) | Refer to Note 7, Integration Program and Cost Savings Initiatives, for more information on our integration costs in 2015 and 2014. |
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| (5) | Refer to Note 1, Summary of Significant Accounting Policies, for more information on the loss on deconsolidation of Venezuela in 2015, remeasurements of net monetary assets in Venezuela in 2015 and 2014 and the accounting calendar change in 2015. |
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| (6) | Refer to Note 5, Goodwill and Intangible Assets, for more information on the impairment charges recorded in 2015 and 2014 related to trademarks. |
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| (7) | Refer to Note 2, Divestitures and Acquisitions, for more information on the coffee business transactions. |
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| (8) | Includes our historical global coffee business prior to the July 2, 2015 divestiture. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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| (9) | Historically, we have recorded income from equity method investments within our operating income as these investments operated as extensions of our base business. Beginning in the third quarter of 2015, to align with the accounting for JDE earnings, we began to record the earnings from our equity method investments in after-tax equity method investment earnings outside of operating income. In periods prior to July 2, 2015, we have reclassified the equity method earnings from Adjusted Operating Income to evaluate our operating results on a consistent basis. |
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| (10) | Includes the divestiture of AGF that closed on April 23, 2015 and does not include the deconsolidation of our coffee businesses. The divestiture of AGF generated a pre-tax gain of $13 million and after-tax loss of $9 million in the second quarter. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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| (11) | Refer to Note 2, Divestitures and Acquisitions, for more information on the acquisitions of a biscuit operation in Vietnam and Enjoy Life Foods. |
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During 2015, higher net pricing outpaced increased input costs. Higher net pricing, due to input-cost driven pricing actions taken during the year, was reflected across all segments. The increase in input costs was driven by higher raw material costs, in part due to higher currency exchange transaction costs on imported materials, partially offset by lower manufacturing costs. Unfavorable volume/mix was reflected across all segments.
Total selling, general and administrative expenses decreased $880 million from 2014, due to a number of factors noted in the table above, including in part, a favorable currency impact, the adjustment for deconsolidating our historical coffee business, lower devaluation charges related to our net monetary assets in Venezuela and the absence of 2012-2014 Restructuring Program costs. The decreases were partially offset by increases from higher costs incurred for the 2014-2018 Restructuring Program, costs associated with the coffee business transactions, lower value-added tax (“VAT”)-related settlements, the reclassification of equity method investment earnings, the impact of acquisitions and a gain on a sale of property in 2014.
Excluding the factors noted above, selling, general and administrative expenses increased $327 million from 2014. The increase was driven primarily by higher advertising and consumer promotions support, particularly behind our Power Brands.
Excluding the portion related to deconsolidating our historical coffee business, the change in unrealized gains / (losses) increased operating income by $129 million in 2015. In 2015, the net unrealized gains on currency and commodity hedging activity were $56 million ($96 million including coffee related activity), as compared to net unrealized losses of $73 million ($112 million including coffee related activity) in 2014 related to currency and commodity hedging activity. We recorded a benefit of $30 million in 2015 from VAT-related settlements in Latin America as compared to $84 million in 2014.
Unfavorable currency impacts decreased operating income by $522 million, due primarily to the strength of the U.S. dollar relative to most currencies, including the euro, Brazilian real, Venezuelan bolivar, British pound sterling, Australian dollar and Russian ruble.
Operating income margin increased from 9.5% in 2014 to 30.0% in 2015. The increase in operating income margin was driven primarily by the pre-tax gain on the coffee business transactions, an increase in our Adjusted Operating Income margin, the absence of 2012-2014 Restructuring Program costs and lower devaluation charges related to our net monetary assets in Venezuela. The items that increased operating income margin were partially offset by the loss on deconsolidation of Venezuela, higher costs incurred for the 2014-2018 Restructuring Program and costs associated with the coffee business transactions. Adjusted Operating Income margin increased from 12.0% in 2014 to 13.7% in 2015. The increase in Adjusted Operating Income margin was driven primarily by improved gross margin, reflecting productivity efforts and the year-over-year favorable impact of unrealized gains / (losses) on currency and commodity hedging activities, and improved overhead leverage from cost reduction programs, partially offset by increased advertising and consumer promotions support.
Net Earnings and Earnings per Share Attributable to Mondelēz International – Net earnings attributable to Mondelēz International of $7,267 million increased by $5,083 million (232.7%) in 2015. Diluted EPS attributable to Mondelēz International was $4.44 in 2015, up $3.16 (246.9%) from 2014. Adjusted EPS (1) was $1.75 in 2015, flat to 2014. Adjusted EPS on a constant currency basis (1) was $2.08 in 2015, up $0.33 (18.9%) from 2014.
| Diluted EPS | ||||
| Diluted EPS Attributable to Mondelēz International for the Year Ended December 31, 2014 | $ | 1.28 | ||
| Spin-Off Costs (2) | 0.01 | |||
| 2012-2014 Restructuring Program costs (3) | 0.21 | |||
| 2014-2018 Restructuring Program costs (3) | 0.16 | |||
| Integration Program and other acquisition integration costs (4) | – | |||
| Remeasurement of net monetary assets in Venezuela (5) | 0.09 | |||
| Intangible asset impairment charges (6) | 0.02 | |||
| (Income) / costs associated with the coffee business transactions (7) | (0.19 | ) | ||
| Net earnings from divestiture (8) | (0.01 | ) | ||
| Acquisition-related costs (9) | – | |||
| Loss on debt extinguishment and related expenses (10) | 0.18 | |||
| Adjusted EPS (1) for the Year Ended December 31, 2014 | $ | 1.75 | ||
| Increase in operations | 0.25 | |||
| Decrease in operations from historical coffee business and equity method investments (11) | (0.08 | ) | ||
| Change in unrealized gains / (losses) on hedging activities | 0.06 | |||
| Impact of acquisitions (9) | 0.01 | |||
| Impact of accounting calendar change (5) | 0.01 | |||
| Gain on sale of property in 2014 | – | |||
| Lower VAT-related settlements | (0.03 | ) | ||
| Lower interest and other expense, net (12) | 0.06 | |||
| Changes in shares outstanding (13) | 0.08 | |||
| Changes in income taxes (14) | (0.03 | ) | ||
| Adjusted EPS (constant currency) (1) for the Year Ended December 31, 2015 | $ | 2.08 | ||
| Unfavorable currency - translation | (0.33 | ) | ||
| Adjusted EPS (1) for the Year Ended December 31, 2015 | $ | 1.75 | ||
| 2012-2014 Restructuring Program costs (3) | – | |||
| 2014-2018 Restructuring Program costs (3) | (0.45 | ) | ||
| Acquisition integration costs (4) | – | |||
| Remeasurement of net monetary assets in Venezuela (5) | (0.01 | ) | ||
| Loss on deconsolidation of Venezuela (5) | (0.48 | ) | ||
| Intangible asset impairment charges (6) | (0.03 | ) | ||
| Income / (costs) associated with the coffee business transactions (7) | 0.01 | |||
| Gain on the coffee business transactions (7) | 4.05 | |||
| Loss related to interest rate swaps (15) | (0.01 | ) | ||
| Net earnings from divestiture (8) | (0.02 | ) | ||
| Loss on divestiture (8) | (0.01 | ) | ||
| Equity method investee acquisition-related and other adjustments (16) | (0.07 | ) | ||
| Acquisition-related costs (9) | – | |||
| Loss on debt extinguishment and related expenses (10) | (0.29 | ) | ||
| Diluted EPS Attributable to Mondelēz International for the Year Ended December 31, 2015 | $ | 4.44 | ||
| (1) | Refer to the Non-GAAP Financial Measures section at the end of this item. |
|---|
| (2) | Refer to Note 2, Divestitures and Acquisitions, for more information on Spin-Off Costs incurred in 2014 following the 2012 Kraft Foods Group divestiture. |
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| (3) | Refer to Note 6, Restructuring Programs, for more information on our 2014-2018 Restructuring Program and our 2012-2014 Restructuring Program. |
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| (4) | Refer to Note 7, Integration Program and Cost Savings Initiatives, for more information on our integration costs in 2015 and 2014. |
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| (5) | Refer to Note 1, Summary of Significant Accounting Policies, for more information on the loss on deconsolidation of Venezuela in 2015, remeasurements of net monetary assets in Venezuela in 2015 and 2014 and the accounting calendar change in 2015. |
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| (6) | Refer to Note 5, Goodwill and Intangible Assets, for more information on the impairment charges recorded in 2015 and 2014 related to trademarks. |
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| (7) | Refer to Note 2, Divestitures and Acquisitions, for more information on the coffee business transactions. Net gains of $436 million in 2015 and $628 million in 2014 on the currency hedges related to the coffee business transactions were recorded in interest and other expense, net and are included in the income / (costs) associated with the coffee business transactions of $0.01 in 2015 and $(0.19) in 2014 above. |
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| (8) | Includes the divestiture of AGF that closed on April 23, 2015 and does not include deconsolidation of our coffee businesses. The divestiture of AGF generated a pre-tax gain of $13 million and after-tax loss of $9 million in the second quarter. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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| (9) | Refer to Note 2, Divestitures and Acquisitions, for more information on the acquisitions of a biscuit operation in Vietnam and Enjoy Life Foods. |
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| (10) | Refer to Note 8, Debt and Borrowing Arrangements, for more information on our loss on debt extinguishment and related expenses in connection with our debt tender offers in March 2015 and February 2014. |
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| (11) | Includes our historical coffee business results and equity earnings from JDE and our other equity method investees. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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| (12) | Excludes the favorable currency impact on interest expense related to our non-U.S. dollar-denominated debt which is included in currency translation. |
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| (13) | Refer to Note 11, Stock Plans, for more information on our equity compensation programs and share repurchase program and Note 16, Earnings Per Share, for earnings per share weighted-average share information. |
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| (14) | Refer to Note 15, Income Taxes, for more information on the change in our income taxes and effective tax rate. |
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| (15) | Refer to Note 9, Financial Instruments, for more information on our interest rate swaps, which we no longer designate as cash flow hedges during the three months ended March 31, 2015 due to a change in financing and hedging plans. |
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| (16) | Includes our proportionate share of unusual or infrequent items, such as acquisition and divestiture-related costs and restructuring program costs, recorded by our JDE equity method investee. |
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2014 compared with 2013
| For the Years Ended December 31, | ||||||||||||||||
| 2014 | 2013 | $ change | % change | |||||||||||||
| (in millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 34,244 | $ | 35,299 | $ | (1,055 | ) | (3.0 | )% | |||||||
| Operating income | 3,242 | 3,971 | (729 | ) | (18.4 | )% | ||||||||||
| Earnings from continuing operations | 2,201 | 2,332 | (131 | ) | (5.6 | )% | ||||||||||
| Net earnings attributable to Mondelēz International | 2,184 | 3,915 | (1,731 | ) | (44.2 | )% | ||||||||||
| Diluted earnings per share from continuing operations attributable to Mondelēz International | 1.28 | 1.29 | (0.01 | ) | (0.8 | )% | ||||||||||
| Diluted earnings per share attributable to Mondelēz International | 1.28 | 2.19 | (0.91 | ) | (41.6 | )% |
Net Revenues – Net revenues decreased $1,055 million (3.0%) to $34,244 million in 2014, and Organic Net Revenue (1) increased $785 million (2.5%) to $32,080 million. Organic Net Revenue growth from Power Brands was 4.4% and from emerging markets was 7.3%. The underlying changes in net revenues and Organic Net Revenue are detailed below:
| 2014 | ||||
| Change in net revenues (by percentage point) | ||||
| Higher net pricing | 5.1pp | |||
| Unfavorable volume/mix | (2.6)pp | |||
| Total change in Organic Net Revenue (1) | 2.5% | |||
| Unfavorable currency | (5.2)pp | |||
| Historical coffee business (2) | – | |||
| Impact of divestitures (3) | (0.3)pp | |||
| Impact of accounting calendar change | (0.1)pp | |||
| Impact of acquisition | 0.1pp | |||
| Total change in net revenues | (3.0)% | |||
| (1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
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| (2) | Includes our historical global coffee business prior to the July 2, 2015 coffee business transactions. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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| (3) | Includes the 2013 divestures of a salty snacks business in Turkey, a confectionary business in South Africa and a chocolate business in Spain and does not include the deconsolidation of our coffee businesses. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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Organic Net Revenue growth was driven by higher net pricing, partially offset by unfavorable volume/mix. Overall, net pricing was up as we realized the effects of input cost-driven pricing actions implemented over the course of the year. Higher net pricing was reflected primarily in Latin America, EEMEA, Europe and Asia Pacific. Unfavorable volume/mix was driven primarily by Europe, Asia Pacific and Latin America. In addition to price elasticity, the decline was largely due to a slow response by competitors to higher input costs as well as the impact of price-related customer disruptions in Europe. Unfavorable currency impacts decreased net revenues by $1,626 million, due primarily to the devaluation of the Venezuelan bolivar and the strength of the U.S. dollar relative to several currencies, including the Argentinean peso, Brazilian real, Russian ruble, Australian dollar and Ukrainian hryvnya, partially offset by the strength of the British pound sterling relative to the U.S. dollar. Our historical coffee business recorded a year-over-year decrease in net revenues of $128 million for the year. The impact of divestitures completed in 2013, including a salty snacks business in Turkey, a confectionery business in South Africa and a chocolate business in Spain, resulted in a year-over-year decrease in net revenues of $70 million. The accounting calendar change made in Europe in 2013 resulted in a year-over-year decrease in net revenues of $30 million. The acquisition of a biscuit operation in Morocco on February 22, 2013 added $14 million in incremental net revenues in 2014 for the period prior to the anniversary date of the acquisition.
Operating Income – Operating income decreased $729 million (18.4%) to $3,242 million in 2014, Adjusted Operating Income (1) increased $198 million (5.7%) to $3,658 million and Adjusted Operating Income on a constant currency basis (1) increased $446 million (12.9%) to $3,906 million due to the following:
| Operating | ||||||||
| Income | Change | |||||||
| (in millions) | (percentage point) | |||||||
| Operating Income for the Year Ended December 31, 2013 | $ | 3,971 | ||||||
| Spin-Off Costs (2) | 62 | 2.3pp | ||||||
| 2012-2014 Restructuring Program costs (3) | 330 | 11.4pp | ||||||
| Integration Program and other acquisition integration costs (4) | 220 | 7.2pp | ||||||
| Benefit from indemnification resolution (5) | (336 | ) | (11.5)pp | |||||
| Remeasurement of net monetary assets in Venezuela (6) | 54 | 1.6pp | ||||||
| Operating income from historical coffee business (7) | (700 | ) | (17.7)pp | |||||
| Reclassification of equity method earnings (8) | (101 | ) | (2.6)pp | |||||
| Gains on acquisition and divestitures, net (2) | (30 | ) | (0.7)pp | |||||
| Operating income from divestitures (9) | (12 | ) | (0.3)pp | |||||
| Acquisition-related costs (2) | 2 | – | ||||||
| Adjusted Operating Income (1) for the Year Ended December 31, 2013 | $ | 3,460 | ||||||
| Higher net pricing | 1,582 | 45.8pp | ||||||
| Higher input costs | (971 | ) | (28.1)pp | |||||
| Unfavorable volume/mix | (384 | ) | (11.1)pp | |||||
| Lower selling, general and administrative expenses | 306 | 8.9pp | ||||||
| Change in unrealized gains / (losses) on hedging activities | (116 | ) | (3.3)pp | |||||
| Gains on sale of property in 2013 (2) | (68 | ) | (2.0)pp | |||||
| VAT-related settlements | 84 | 2.4pp | ||||||
| Gains on sale of property in 2014 (2) | 7 | 0.2pp | ||||||
| Impact from acquisition (2) | 3 | 0.1pp | ||||||
| Other, net | 3 | – | ||||||
| Total change in Adjusted Operating Income (constant currency) (1) | 446 | 12.9% | ||||||
| Unfavorable currency - translation | (248 | ) | (7.2)pp | |||||
| Total change in Adjusted Operating Income (1) | 198 | 5.7% | ||||||
| Adjusted Operating Income (1) for the Year Ended December 31, 2014 | $ | 3,658 | ||||||
| Spin-Off Costs (2) | (35 | ) | (1.2)pp | |||||
| 2012-2014 Restructuring Program costs (3) | (459 | ) | (14.3)pp | |||||
| 2014-2018 Restructuring Program costs (3) | (381 | ) | (12.2)pp | |||||
| Integration Program and other acquisition integration costs (4) | 4 | 0.1pp | ||||||
| Remeasurement of net monetary assets in Venezuela (6) | (167 | ) | (5.2)pp | |||||
| Intangible asset impairment charges (10) | (57 | ) | (2.0)pp | |||||
| Costs associated with the coffee business transactions (11) | (77 | ) | (2.5)pp | |||||
| Operating income from historical coffee business (7) | 646 | 19.9pp | ||||||
| Reclassification of equity method earnings (8) | 104 | 3.3pp | ||||||
| Operating income from divestitures (9) | 8 | 0.3pp | ||||||
| Acquisition-related costs (2) | (2 | ) | – | |||||
| Operating Income for the Year Ended December 31, 2014 | $ | 3,242 | (18.4)% | |||||
| (1) | Refer to the Non-GAAP Financial Measures section at the end of this item. |
|---|
| (2) | Refer to Note 2, Divestitures and Acquisitions, for more information on Spin-Off Costs incurred in 2014 and 2013 following the 2012 Kraft Foods Group divestiture, divestitures and an acquisition in 2013 and other property sales in 2014 and 2013. |
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| (3) | Refer to Note 6, Restructuring Programs, for more information on our 2014-2018 Restructuring Program and our 2012-2014 Restructuring Program. |
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| (4) | Refer to Note 7, Integration Program and Cost Savings Initiatives, for more information on our integration costs in 2014 and 2013. |
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| (5) | See Note 13, Commitments and Contingencies, for information on the resolution of the Cadbury acquisition-related indemnification. |
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| (6) | Refer to Note 1, Summary of Significant Accounting Policies, for more information on the remeasurements of net monetary assets in Venezuela in 2014 and 2013. |
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| (7) | Includes our historical global coffee business prior to the July 2, 2015 coffee business transactions. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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| (8) | Historically, we have recorded income from equity method investments within our operating income as these investments operated as extensions of our base business. Beginning in the third quarter of 2015, to align with the accounting for JDE earnings, we began to record the earnings from our equity method investments in after-tax equity method investment earnings outside of operating income. In periods prior to July 2, 2015, we have reclassified the equity method earnings from Adjusted Operating Income to evaluate our operating results on a consistent basis. |
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| (9) | Includes the 2013 divestures of a salty snacks business in Turkey, a confectionary business in South Africa and a chocolate business in Spain and the 2013 acquisition of a biscuit operation in Morocco and does not include the deconsolidation of our coffee businesses. Refer to Note 2, Divestitures and Acquisitions, and Non-GAAP Financial Measures appearing later in this section for more information. |
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| (10) | Refer to Note 5, Goodwill and Intangible Assets, for information on the impairment charges in 2014 recorded related to two trademarks. |
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| (11) | Refer to Note 2, Divestitures and Acquisitions, for more information on the coffee business transactions. |
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During 2014, higher net pricing outpaced increased input costs. Higher net pricing was reflected across all segments. The increase in input costs was driven by higher raw material costs, in part due to higher currency exchange transaction costs on imported materials, partially offset by lower manufacturing costs. Unfavorable volume/mix was driven by Latin America, Asia Pacific, Europe and EEMEA, partially offset by gains in North America.
Total selling, general and administrative expenses decreased $222 million from 2013, due to a number of factors noted in the table above, including in part, a favorable currency impact, lower Integration Program costs, VAT-related settlements in 2014, lower costs associated with our historical coffee business, lower Spin-Off Costs, 2013 business divestitures and a gain on a sale of property in 2014. These decreases were more than offset by increases from a 2013 benefit received related to the resolution of a Cadbury acquisition indemnification, increased devaluation charges related to our net monetary assets in Venezuela, costs incurred for the 2014-2018 Restructuring Program, costs related to the coffee business transactions, gains on property sales in 2013 and higher 2012-2014 Restructuring Program costs.
Excluding the factors noted above, selling, general and administrative expenses decreased $306 million from 2013, driven primarily by lower overhead costs and lower advertising and consumer promotion costs. Overhead costs fell as a result of continued cost reduction efforts. Advertising and consumer promotion costs were lower due primarily to savings from consolidating media providers, reductions in non-working media costs and efficiencies gained by shifting spending to lower-cost, digital media outlets, while we increased our spending on our Power Brands and maintained working media spending.
Excluding the portion related to deconsolidating our historical coffee business, the change in unrealized gains / (losses) decreased operating income by $116 million in 2014. In 2014, the net unrealized losses on primarily commodity hedging activity were $73 million ($112 million including coffee-related activity), as compared to net unrealized gains of $43 million in 2013 ($62 million including coffee-related activity) related to currency and commodity hedging activity. In 2013, we recorded pre-tax gains of $68 million related to sales of properties in India and Europe. In 2014, we recorded a benefit of $84 million related to VAT-related settlements in Latin America. In 2014, we recorded a pre-tax gain of $7 million related to the sale of a property in Europe. The acquisition of a biscuit operation in Morocco on February 22, 2013 added $3 million in incremental operating income in 2014 for the period prior to the anniversary of the acquisition.
Unfavorable currency impacts decreased operating income by $248 million, due primarily to the devaluation of the Venezuelan bolivar in 2013 and 2014 and the strength of the U.S. dollar relative to several currencies, including the Argentinean peso, Brazilian real, Australian dollar, Russian ruble and Canadian dollar, partially offset by the strength of the British pound sterling relative to the U.S. dollar.
Operating income margin decreased from 11.2% in 2013 to 9.5% in 2014. The decrease in operating income margin was driven primarily by costs incurred for the 2014-2018 Restructuring Program, the year-over-year negative impact of the benefit from the resolution of the Cadbury acquisition-related indemnification recorded in 2013, higher costs for the 2012-2014 Restructuring Program, the impact from the devaluation of our net monetary assets in Venezuela and costs incurred associated with the coffee business transactions, partially offset by an increase in our Adjusted Operating Income margin and lower Integration Program costs. Adjusted Operating Income margin increased from 11.0% in 2013 to 12.0% in 2014. The increase in Adjusted Operating Income margin was driven primarily by lower overhead costs from continued cost reduction efforts and lower advertising and consumer promotion costs due primarily to productivity initiatives, partially offset by a decline in gross profit margin due entirely to the unfavorable impact of unrealized gains / (losses) on currency and commodity hedging activities.
Net Earnings and Earnings per Share Attributable to Mondelēz International – Net earnings attributable to Mondelēz International of $2,184 million in 2014 decreased by $1,731 million (44.2%) due primarily to the results of the discontinued operations in the prior year. Diluted EPS from continuing operations attributable to Mondelēz International was $1.28 in 2014, down $0.01 (0.8%) from $1.29 in 2013. Adjusted EPS (1) was $1.75 in 2014, up $0.21 (13.6%) from $1.54 in 2013. Adjusted EPS on a constant currency basis (1) was $1.89 in 2014, up $0.35 (22.7%) from $1.54 in 2013.
| Diluted EPS | ||||
| Diluted EPS Attributable to Mondelēz International for the Year Ended December 31, 2013 | $ | 2.19 | ||
| Discontinued operations | 0.90 | |||
| Diluted EPS Attributable to Mondelēz International from Continuing Operations for the Year Ended December 31, 2013 | $ | 1.29 | ||
| Spin-Off Costs (2) | 0.02 | |||
| 2012-2014 Restructuring Program costs (3) | 0.14 | |||
| Integration Program and other acquisition integration costs (4) | 0.10 | |||
| Net benefit from indemnification resolution (5) | (0.20 | ) | ||
| Remeasurement of net monetary assets in Venezuela (6) | 0.03 | |||
| Gains on acquisition and divestitures, net (2) | (0.04 | ) | ||
| Net earnings from divestitures (2) | – | |||
| Acquisition-related costs (2) | – | |||
| Loss on debt extinguishment and related expenses (7) | 0.22 | |||
| Residual tax benefit impact due to resolution of Starbucks arbitration (2) | (0.02 | ) | ||
| Adjusted EPS (1) for the Year Ended December 31, 2013 | $ | 1.54 | ||
| Increase in operations | 0.24 | |||
| Change in unrealized gains / (losses) on hedging activities | (0.05 | ) | ||
| Gain on sale of property in 2013 (2) | (0.03 | ) | ||
| VAT-related settlements | 0.04 | |||
| Gain on sale of property in 2014 (2) | – | |||
| Lower interest and other expense, net (8) | 0.07 | |||
| Changes in shares outstanding (9) | 0.08 | |||
| Changes in income taxes (10) | – | |||
| Adjusted EPS (constant currency) (1) for the Year Ended December 31, 2014 | $ | 1.89 | ||
| Unfavorable currency - translation | (0.14 | ) | ||
| Adjusted EPS (1) for the Year Ended December 31, 2014 | $ | 1.75 | ||
| Spin-Off Costs (2) | (0.01 | ) | ||
| 2012-2014 Restructuring Program costs (3) | (0.21 | ) | ||
| 2014-2018 Restructuring Program costs (3) | (0.16 | ) | ||
| Integration Program and other acquisition integration costs (4) | – | |||
| Remeasurement of net monetary assets in Venezuela (6) | (0.09 | ) | ||
| Income / (costs) associated with the coffee business transactions (2) | 0.19 | |||
| Net earnings from divestitures (2) | 0.01 | |||
| Intangible asset impairment charges (11) | (0.02 | ) | ||
| Loss on debt extinguishment and related expenses (7) | (0.18 | ) | ||
| Diluted EPS Attributable to Mondelēz International for the Year Ended December 31, 2014 | $ | 1.28 | ||
| (1) | Refer to the Non-GAAP Financial Measures section at the end of this item. |
|---|
| (2) | Refer to Note 2, Divestitures and Acquisitions, for more information on Spin-Off Costs following the 2012 Kraft Foods Group divestiture, the resolution of the Starbucks arbitration, the Coffee Business Transactions, other divestitures, an acquisition and other property sales. Note the $628 million unrealized gain on the currency hedges related to the JDE coffee transactions was recorded in interest and other expense, net and is included in the income /(costs) associated with the JDE coffee transactions of $0.19 above. |
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| (3) | Refer to Note 6, Restructuring Programs, for more information on our 2014-2018 Restructuring Program and our 2012-2014 Restructuring Program. |
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| (4) | Refer to Note 7, Integration Program and Cost Savings Initiatives, for information on our Cadbury acquisition integration program and other acquisition integration charges. |
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| (5) | Refer to Note 13, Commitments and Contingencies, for more information on the benefit related to the resolution of a Cadbury acquisition indemnification in 2013. |
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| (6) | Refer to Note 1, Summary of Significant Accounting Policies—Currency Translation and Highly Inflationary Accounting, for more information on the remeasurements of net monetary assets in Venezuela in 2014 and 2013. |
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| (7) | Refer to Note 8, Debt and Borrowing Arrangements, for more information on our loss on debt extinguishment and related expenses in connection with our debt tender offers in February 2014 and December 2013. |
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| (8) | Excludes the favorable currency impact on interest expense related to our non-U.S. dollar denominated debt which is included in currency translation. |
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| (9) | Refer to Note 11, Stock Plans, and Note 12, Capital Stock, for more information on our equity compensation programs and share repurchase program and Note 16, Earnings Per Share, for earnings per share weighted-average share information. |
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| (10) | Refer to Note 15, Income Taxes, for more information on the change in our income taxes and effective tax rate. |
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| (11) | Refer to Note 5, Goodwill and Intangible Assets, for more information on the impairment charges in 2014 recorded related to two trademarks. |
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Results of Operations by Reportable Segment
Our operations and management structure are organized into five reportable operating segments:
| • | Latin America |
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| • | Asia Pacific |
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| • | EEMEA |
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| • | Europe |
|---|
| • | North America |
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We manage our operations by region to leverage regional operating scale, manage different and changing business environments more effectively and pursue growth opportunities as they arise in our key markets. Our regional management teams have responsibility for the business, product categories and financial results in the regions.
Historically, we have recorded income from equity method investments within our operating income as these investments operated as extensions of our base business. Beginning in the third quarter of 2015, to align with the accounting for our deconsolidated coffee business and related investment in JDE, we began to record the earnings from our equity method investments in after-tax equity method investment earnings outside of segment operating income. For the six months ended December 31, 2015, after-tax equity method investment net earnings were less than $1 million on a combined basis. Earnings from equity method investments through July 2, 2015 recorded within segment operating income were $49 million in Asia Pacific, $3 million in EEMEA and $4 million in North America. For the year ended December 31, 2014 these earnings were $98 million in Asia Pacific, $6 million in EEMEA and $9 million in North America. For the year ended December 31, 2013 these earnings were $99 million in Asia Pacific, $7 million in EEMEA and $1 million in North America. See Note 1, Summary of Significant Accounting Policies – Principles of Consolidation, for additional information.
In 2015, we also began to report stock-based compensation for our corporate employees, which was previously reported within our North America region, within general corporate expenses. We reclassified $32 million of corporate stock-based compensation expense out of the North America segment in 2015.
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. See Note 17, Segment Reporting, for additional information on our segments and Items Affecting Comparability of Financial Results earlier in this section for items affecting our segment operating results.
Our segment net revenues and earnings for the following historical periods were:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Net revenues: | ||||||||||||
| Latin America (1) | $ | 4,988 | $ | 5,153 | $ | 5,382 | ||||||
| Asia Pacific (1) | 4,360 | 4,605 | 4,952 | |||||||||
| EEMEA (1) | 2,786 | 3,638 | 3,915 | |||||||||
| Europe (1) | 10,528 | 13,912 | 14,059 | |||||||||
| North America | 6,974 | 6,936 | 6,991 | |||||||||
| Net revenues | $ | 29,636 | $ | 34,244 | $ | 35,299 | ||||||
| (1) | On July 2, 2015, as part of the JDE coffee transactions, we deconsolidated our global coffee businesses primarily from our Europe, EEMEA and Asia Pacific segments. The impact of deconsolidating our coffee businesses on July 2, 2015 was $1,699 million in Europe, $413 million in EEMEA, $32 million in Asia Pacific and $5 million in Latin America on a year-over-year basis. Refer to Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for more information. |
|---|
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Earnings from continuing operations before income taxes: | ||||||||||||
| Operating income: | ||||||||||||
| Latin America | $ | 485 | $ | 475 | $ | 570 | ||||||
| Asia Pacific | 268 | 385 | 512 | |||||||||
| EEMEA | 194 | 327 | 379 | |||||||||
| Europe | 1,277 | 1,770 | 1,699 | |||||||||
| North America | 1,105 | 922 | 889 | |||||||||
| Unrealized gains / (losses) on hedging activities | 96 | (112 | ) | 62 | ||||||||
| General corporate expenses | (383 | ) | (317 | ) | (287 | ) | ||||||
| Amortization of intangibles | (181 | ) | (206 | ) | (217 | ) | ||||||
| Benefit from indemnification resolution | – | – | 336 | |||||||||
| Gains on coffee business transactions and divestitures | 6,822 | – | 30 | |||||||||
| Loss on deconsolidation of Venezuela | (778 | ) | – | – | ||||||||
| Acquisition-related costs | (8 | ) | (2 | ) | (2 | ) | ||||||
| Operating income | 8,897 | 3,242 | 3,971 | |||||||||
| Interest and other expense, net | (1,013 | ) | (688 | ) | (1,579 | ) | ||||||
| Earnings from continuing operations before income taxes | $ | 7,884 | $ | 2,554 | $ | 2,392 | ||||||
Latin America
| For the Years Ended December 31, | ||||||||||||||||
| 2015 | 2014 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 4,988 | $ | 5,153 | $ | (165 | ) | (3.2)% | ||||||||
| Segment operating income | 485 | 475 | 10 | 2.1% | ||||||||||||
| For the Years Ended December 31, | ||||||||||||||||
| 2014 | 2013 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 5,153 | $ | 5,382 | $ | (229 | ) | (4.3)% | ||||||||
| Segment operating income | 475 | 570 | (95 | ) | (16.7)% |
2015 compared with 2014:
Net revenues decreased $165 million (3.2%), due to unfavorable currency (23.0 pp), unfavorable volume/mix (8.2 pp) and the adjustment for deconsolidating our historical coffee business (0.1 pp), partially offset by higher net pricing (28.1 pp). Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to most currencies in the region, including the Brazilian real, Venezuelan bolivar, Mexican peso and Argentinean peso. Unfavorable volume/mix was largely due to the impact of pricing-related elasticity as well as strategic decisions to exit certain low-margin product lines. Unfavorable volume/mix was driven by declines in refreshment beverages, cheese & grocery, chocolate and biscuits, partially offset by gains in gum & candy. The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $5 million. Higher net pricing was reflected across all categories. Both the unfavorable volume/mix and higher net pricing were driven primarily by the higher inflationary countries of Venezuela and Argentina, as well as Brazil.
Segment operating income increased $10 million (2.1%), primarily due to higher net pricing, higher remeasurement losses in 2014 related to our net monetary assets in Venezuela, lower manufacturing costs and the absence of 2012-2014 Restructuring Program costs. These favorable items were partially offset by higher raw material costs, unfavorable currency, unfavorable volume/mix, higher other selling, general and administrative expenses (including lower year-over-year VAT-related settlements), higher advertising and consumer promotion costs and higher costs incurred for the 2014-2018 Restructuring Program and an intangible asset impairment charge in 2015 related to a biscuit trademark.
2014 compared with 2013:
Net revenues decreased $229 million (4.3%), due to unfavorable currency (19.4 pp) and unfavorable volume/mix (4.2 pp), partially offset by higher net pricing (19.3 pp). Unfavorable currency impacts were due primarily to the Venezuelan bolivar devaluation and the strength of the U.S. dollar relative to the Argentinean peso and Brazilian real. Unfavorable volume/mix was driven by declines in all categories except biscuits. In addition, unfavorable volume/mix was driven primarily by Mexico, Venezuela and Argentina, partially offset by gains in Brazil and the Western Andean countries. Higher net pricing was reflected primarily in the higher inflationary countries of Venezuela and Argentina, as well as in Brazil and Mexico.
Segment operating income decreased $95 million (16.7%), primarily due to higher raw material costs, unfavorable currency, unfavorable volume/mix, the year-over-year net impact from the remeasurement of net monetary assets in Venezuela, costs incurred for the 2014-2018 Restructuring Program and higher advertising and consumer promotion costs. These unfavorable items were partially offset by higher net pricing, lower manufacturing costs, the absence of Integration Program costs in 2014, lower other selling, general and administrative expenses (including $84 million related primarily to VAT-related settlements) and lower 2012-2014 Restructuring Program costs.
Asia Pacific
| For the Years Ended December 31, | ||||||||||||||||
| 2015 | 2014 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 4,360 | $ | 4,605 | $ | (245 | ) | (5.3)% | ||||||||
| Segment operating income | 268 | 385 | (117 | ) | (30.4)% | |||||||||||
| For the Years Ended December 31, | ||||||||||||||||
| 2014 | 2013 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 4,605 | $ | 4,952 | $ | (347 | ) | (7.0)% | ||||||||
| Segment operating income | 385 | 512 | (127 | ) | (24.8)% |
2015 compared with 2014:
Net revenues decreased $245 million (5.3%), due to unfavorable currency (9.2 pp), unfavorable volume/mix (2.2 pp) and the adjustment for deconsolidating our historical coffee business (0.6 pp), partially offset by higher net pricing (3.9 pp) and the impact of an acquisition (2.8 pp). Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to most currencies in the region, including the Australian dollar, Indian rupee and Japanese yen. Unfavorable volume/mix was due largely to the impact of pricing-related elasticity as well as strategic decisions to exit certain low-margin product lines. Unfavorable volume/mix was driven by declines in all categories except gum and biscuits. The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $32 million. Higher net pricing was reflected across all categories except refreshment beverages. The acquisition of a biscuit operation in Vietnam in July 2015 added net revenues of $128 million (constant currency basis).
Segment operating income decreased $117 million (30.4%), primarily due to higher costs incurred for the 2014-2018 Restructuring Program, higher raw material costs, higher advertising and consumer promotion costs, unfavorable currency, the reclassification of equity method investment earnings, unfavorable volume/mix, higher other selling, general and administrative expenses (including a phase-out of a local tax incentive program), the adjustment for deconsolidating our historical coffee business and other divestiture, other acquisition-related integration costs and costs associated with the coffee business transactions. These unfavorable items were partially offset by higher net pricing, lower manufacturing costs, the absence of 2012-2014 Restructuring Program costs, the impact of the Vietnam acquisition and lower intangible asset impairment charges (related to candy and biscuit trademarks in 2015 and a biscuit trademark in 2014).
2014 compared with 2013:
Net revenues decreased $347 million (7.0%), due to unfavorable volume/mix (5.7 pp), unfavorable currency (4.3 pp) and a decrease in our historical coffee business (0.4 pp), partially offset by higher net pricing (3.4 pp). Unfavorable volume/mix was driven by declines in all categories except gum. Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to the Australian dollar, Indian rupee, Indonesian rupiah and Japanese yen. A decline in our historical coffee business resulted in a $28 million decrease in net revenues. Higher net pricing was reflected across all categories except gum and candy.
Segment operating income decreased $127 million (24.8%), primarily due to higher raw material costs, unfavorable volume/mix, an intangible asset impairment charge related to a biscuit trademark, higher 2012-2014 Restructuring Program costs, costs incurred for the 2014-2018 Restructuring Program, the impact of our historical coffee business and unfavorable currency. These unfavorable items were partially offset by higher net pricing, lower manufacturing costs, lower advertising and consumer promotion costs, the absence of Integration Program costs in 2014 and lower other selling, general and administrative expenses (including an unfavorable year-over-year impact from the 2013 gain on a sale of property in India).
EEMEA
| For the Years Ended December 31, | ||||||||||||||||
| 2015 | 2014 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 2,786 | $ | 3,638 | $ | (852 | ) | (23.4)% | ||||||||
| Segment operating income | 194 | 327 | (133 | ) | (40.7)% | |||||||||||
| For the Years Ended December 31, | ||||||||||||||||
| 2014 | 2013 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 3,638 | $ | 3,915 | $ | (277 | ) | (7.1)% | ||||||||
| Segment operating income | 327 | 379 | (52 | ) | (13.7)% |
2015 compared with 2014:
Net revenues decreased $852 million (23.4%), due to unfavorable currency (20.7 pp), the adjustment for deconsolidating our historical coffee business (8.7 pp) and unfavorable volume/mix (5.4 pp), partially offset by higher net pricing (11.4 pp). Unfavorable currency impacts were due to the strength of the U.S. dollar relative to most currencies in the region, primarily the Russian ruble, Ukrainian hryvnya and South African rand. The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $413 million. Unfavorable volume/mix was driven by declines in all categories except biscuits. Higher net pricing was reflected across all categories.
Segment operating income decreased $133 million (40.7%), primarily due to higher raw material costs, the adjustment for deconsolidating our historical coffee business, higher costs incurred for the 2014-2018 Restructuring Program, unfavorable currency, higher advertising and consumer promotion costs, unfavorable volume/mix, higher other selling, general and administrative expenses and costs associated with the coffee business transactions. These unfavorable items were partially offset by higher net pricing, lower manufacturing costs and the absence of 2012-2014 Restructuring Program costs.
2014 compared with 2013:
Net revenues decreased $277 million (7.1%), due to unfavorable currency (11.2 pp), unfavorable mix (0.7 pp), a decrease in our historical coffee business (0.6 pp) and the impact of divestitures (0.6 pp), partially offset by higher net pricing (5.6 pp) and the impact of the February 2013 acquisition of a biscuit operation in Morocco (0.4 pp). Unfavorable currency impacts were due to the strength of the U.S. dollar relative to most currencies in the region, primarily the Russian ruble, Ukrainian hryvnya, South African rand and Turkish lira. Unfavorable volume/mix was driven by declines in chocolate and refreshment beverages, partially offset by gains in biscuits, gum & candy and cheese & grocery. A decline in our historical coffee business resulted in a $71 million decrease in net revenues. Divestitures completed in 2013 resulted in a $20 million decline in net revenues. Higher net pricing was reflected across all categories except refreshment beverages. The acquisition of a biscuit operation in Morocco in February 2013 added $14 million in incremental net revenues for 2014 for the period prior to the anniversary date of the acquisition.
Segment operating income decreased $52 million (13.7%), primarily due to higher raw material costs, higher 2012-2014 Restructuring Program costs, unfavorable currency, costs incurred for the 2014-2018 Restructuring Program, the impact of our historical coffee business, unfavorable volume/mix and costs associated with the JDE coffee transactions. These unfavorable items were partially offset by higher net pricing, lower manufacturing costs, lower Integration Program and other acquisition integration costs, lower advertising and consumer promotion costs and the impact of 2013 divestitures.
Europe
| For the Years Ended December 31, | ||||||||||||||||
| 2015 | 2014 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 10,528 | $ | 13,912 | $ | (3,384 | ) | (24.3)% | ||||||||
| Segment operating income | 1,277 | 1,770 | (493 | ) | (27.9)% | |||||||||||
| For the Years Ended December 31, | ||||||||||||||||
| 2014 | 2013 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 13,912 | $ | 14,059 | $ | (147 | ) | (1.0)% | ||||||||
| Segment operating income | 1,770 | 1,699 | 71 | 4.2% |
2015 compared with 2014:
Net revenues decreased $3,384 million (24.3%), due to unfavorable currency (13.6 pp), the adjustment for deconsolidating our historical coffee business (8.8 pp) and unfavorable volume/mix (2.7 pp), partially offset by higher net pricing (0.8 pp). Unfavorable currency impacts primarily reflected the strength of the U.S. dollar against most currencies in the region, including the euro and British pound sterling. The adjustment for deconsolidating our historical coffee business resulted in a year-over-year decrease in net revenues of $1,699 million. Unfavorable volume/mix was largely due to the impact of pricing-related elasticity as well as strategic decisions to exit certain low-margin product lines. Unfavorable volume/mix was driven by declines in chocolate, gum, refreshment beverages and cheese & grocery, partially offset by gains in biscuits and candy. Higher net pricing was driven by chocolate, partially offset by lower net pricing in biscuits, cheese & grocery, gum & candy and refreshment beverages.
Segment operating income decreased $493 million (27.9%), primarily due to unfavorable currency, the adjustment for deconsolidating our historical coffee business, higher costs incurred for the 2014-2018 Restructuring Program, costs associated with the coffee business transactions, unfavorable volume/mix, higher raw material costs, higher advertising and consumer promotion costs and higher intangible asset impairment charges related to a candy trademark. These unfavorable items were partially offset by the lower manufacturing costs, absence of 2012-2014 Restructuring Program costs, higher net pricing and lower other selling, general and administrative expenses (net of the unfavorable year-over-year impact from the 2014 gain on a sale of property in the United Kingdom).
2014 compared with 2013:
Net revenues decreased $147 million (1.0%), due to unfavorable volume/mix (2.8 pp), the impact of the prior year’s accounting calendar change (0.3 pp) and the impact of divestitures (0.1 pp), partially offset by higher net pricing (1.7 pp), favorable currency (0.4 pp) and the impact of our historical coffee business (0.1 pp). Unfavorable volume/mix was due to pricing-related elasticity across the region and certain pricing-related customer disruptions. Unfavorable volume/mix was driven by declines in all categories. The accounting calendar change made in 2013 resulted in a year-over-year decrease in net revenues of $30 million. In addition, divestitures completed in 2013 resulted in an $11 million decline in net revenues. Higher net pricing was driven by chocolate and cheese & grocery, partially offset by lower net pricing in all other categories. Favorable currency impacts primarily reflected the strength of the British pound sterling relative to the U.S. dollar, partially offset by the strength of the U.S. dollar against the Swedish krona, the euro and Norwegian krone. In addition, a decline in our historical coffee business, though at a lower rate than the rest of our European segment, resulted in a $29 million decrease in net revenues.
Segment operating income increased $71 million (4.2%), primarily due to lower manufacturing costs, higher net pricing, lower other selling, general and administrative expenses (net of the unfavorable year-over-year impact from the 2013 gains on the sales of property in the United Kingdom, Norway and Italy, and the benefit from a 2014 gain on a sale of property in the United Kingdom) lower advertising and consumer promotion costs, lower Integration Program costs (including the reversal of a prior-year accrual) and the impact of our historical coffee business. These favorable items were partially offset by higher raw material costs (primarily higher cocoa costs), costs incurred for the 2014-2018 Restructuring Program, unfavorable volume mix, higher 2012-2014 Restructuring Program costs, costs associated with the coffee business transactions, an intangible asset impairment charge related to a candy trademark and the year-over-year impact from the accounting calendar change made in 2013.
North America
| For the Years Ended December 31, | ||||||||||||||||
| 2015 | 2014 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 6,974 | $ | 6,936 | $ | 38 | 0.5 | % | ||||||||
| Segment operating income | 1,105 | 922 | 183 | 19.8 | % | |||||||||||
| For the Years Ended December 31, | ||||||||||||||||
| 2014 | 2013 | $ change | % change | |||||||||||||
| (in millions) | ||||||||||||||||
| Net revenues | $ | 6,936 | $ | 6,991 | $ | (55 | ) | (0.8) | % | |||||||
| Segment operating income | 922 | 889 | 33 | 3.7 | % |
2015 compared with 2014:
Net revenues increased $38 million (0.5%), due to an accounting calendar change (1.2 pp), an acquisition (0.5 pp), favorable volume/mix (0.5 pp) and higher net pricing (0.3 pp), partially offset by unfavorable currency (2.0 pp). The change in North America’s accounting calendar added net revenues of $78 million. The acquisition of the Enjoy Life Foods snack food business in February 2015 added net revenues of $37 million. Favorable volume/mix was driven by gains in biscuits and candy, partially offset by declines in gum and chocolate. Higher net pricing was reflected in gum and chocolate, partially offset by lower net pricing in biscuits and candy. Unfavorable currency impact was due to the strength of the U.S. dollar relative to the Canadian dollar.
Segment operating income increased $183 million (19.8%), primarily due to the absence of 2012-2014 Restructuring Program costs, lower manufacturing costs, lower other selling, general and administrative expenses (including the reclassification of corporate stock-based compensation), the impact of an accounting calendar change, higher net pricing and lower raw material costs. These favorable items were partially offset by higher costs incurred for the 2014-2018 Restructuring Program, unfavorable currency, higher advertising and consumer promotion costs, unfavorable volume/mix and the reclassification of equity method investment earnings.
2014 compared with 2013:
Net revenues decreased $55 million (0.8%), due to unfavorable currency (1.0 pp) and the impact of divestitures (0.6 pp), partially offset by favorable volume/mix (0.7 pp) and higher net pricing (0.1 pp). Unfavorable currency impact was due to the strength of the U.S. dollar relative to the Canadian dollar. Divestitures completed in 2013 resulted in a $39 million decline in net revenues. Favorable volume/mix was driven primarily by gains in all categories except gum. Higher net pricing was reflected primarily in biscuits and gum, partially offset by lower net pricing in chocolate and candy.
Segment operating income increased $33 million (3.7%), primarily due to lower raw material costs, lower other selling, general and administrative expenses (including higher equity method investment earnings), favorable volume/mix, lower 2012-2014 Restructuring Program costs, lower advertising and consumer promotion costs and higher net pricing. These favorable items were partially offset by costs incurred for the 2014-2018 Restructuring Program, higher manufacturing costs and the impact of divestitures.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements includes a summary of the significant accounting policies we used to prepare our consolidated financial statements. We have discussed the selection and disclosure of our critical accounting policies and estimates with our Audit Committee. The following is a review of our most significant assumptions and estimates.
Goodwill and Non-Amortizable Intangible Assets:
We test goodwill and non-amortizable intangible assets for impairment on an annual basis on October 1. We assess goodwill impairment risk throughout the year by performing a qualitative review of entity-specific, industry, market and general economic factors affecting our goodwill reporting units. We review our operating segment and reporting unit structure for goodwill testing annually or as significant changes in the organization occur. Annually, we may perform qualitative testing, or depending on factors such as prior-year test results, current year developments, current risk evaluations and other practical considerations, we may elect to do quantitative testing instead. Quantitative impairment testing consists of a two-step evaluation. The first step compares a reporting unit’s estimated fair value with its carrying value. We estimate a reporting unit’s fair value using a discounted cash flow method which incorporates planned growth rates, market-based discount rates and estimates of residual value. This year, for our Europe and North America reporting units, we used a market-based, weighted-average cost of capital of 6.8% to discount the projected cash flows of those operations. For our Latin America, Asia Pacific and EEMEA reporting units, we used a risk-rated discount rate of 9.8%. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans and industry and economic conditions, and our actual results and conditions may differ over time. If the carrying value of a reporting unit’s net assets exceeds its fair value, we would apply a second step to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is impaired and its carrying value is reduced to the implied fair value of the goodwill.
On July 2, 2015, we deconsolidated our global coffee businesses from our Europe, EEMEA and Asia Pacific segments. Goodwill was deconsolidated from the impacted reporting units based on relative fair values of the coffee and remaining businesses. Intangible assets contributed with the coffee business transactions were specifically identified. We deconsolidated total goodwill of $1,664 million and intangible assets of less than $1 million during the third quarter of 2015. Refer to Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for more information.
In 2015, 2014 and 2013, there were no impairments of goodwill. In connection with our 2015 annual impairment testing, each of our reporting units had sufficient fair value in excess of carrying value. In connection with the deconsolidation of our Venezuelan operations on December 31, 2015, we tested our Latin America reporting unit and determined the remaining businesses excluding Venezuela had sufficient fair value in excess of carrying value, such that there were no impairments of goodwill. While all reporting units passed our annual impairment testing, if expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then the estimated fair values of a reporting unit or reporting units might decline and lead to a goodwill impairment in the future.
Annually, we assess non-amortizable intangible assets for impairment by performing a qualitative review and assessing events and circumstances that could affect the fair value or carrying value of the indefinite-lived intangible assets. If significant potential impairment risk exists for a specific asset, we quantitatively test it for impairment by comparing its estimated fair value with its carrying value. Estimated fair value is determined using planned growth rates, market-based discount rates and estimates of royalty rates. If the carrying value of the asset exceeds its estimated fair value, the asset is impaired and its carrying value is reduced to the estimated fair value.
During our 2015 annual testing of non-amortizable intangible assets, we recorded $71 million of impairment charges related to four trademarks. The impairments arose due to lower than expected product growth partly driven by decisions made in the fourth quarter to redirect support for the products to other regional and global brands and slowdowns in local economies. We recorded charges related to candy and biscuit trademarks of $44 million in Asia Pacific, $22 million in Europe and $5 million in Latin America. The impairment charges were calculated as the excess of the carrying value over the estimated fair value of the intangible assets on a global basis and were recorded within asset impairment and exit costs. We primarily use a relief of royalty valuation method, which utilizes estimates of future sales, growth rates, royalty
rates and discount rates in determining a brand’s global fair value. During our 2015 intangible asset impairment review, we noted seven brands, including the four impaired trademarks, with $598 million of aggregate book value as of December 31, 2015 that each had a fair value in excess of book value of 10% or less. While these intangible assets passed our annual impairment testing and we believe our current plans for each of these brands will allow them to continue to not be impaired, if expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future. In 2014, we recorded a $48 million charge related to a biscuit trademark in our Asia Pacific segment and a $9 million charge related to a candy trademark in our Europe segment. Additionally, in connection with the deconsolidation of our Venezuelan operations on December 31, 2015, we recorded $12 million of impairment charges within the loss on deconsolidation of Venezuela related to a biscuit trademark.
Refer also to Note 5, Goodwill and Intangible Assets, for additional information.
Trade and marketing programs:
We promote our products with advertising, marketing, sales incentives and trade promotions. These programs include, but are not limited to, cooperative advertising, in-store displays, consumer promotions, new product introduction fees, discounts, coupons, rebates and volume-based incentives. We expense advertising costs either in the period the advertising first takes place or as incurred. Sales incentive and trade promotion activities are recorded as a reduction to revenues based on amounts estimated due to customers and consumers at the end of a period. We base these estimates principally on historical utilization and redemption rates. For interim reporting purposes, advertising expenses and sales incentives are charged to operations as a percentage of volume, based on estimated volume and estimated program spending. We do not defer costs on our year-end consolidated balance sheet and all marketing costs are recorded as an expense in the year incurred.
Employee Benefit Plans:
We sponsor various employee benefit plans throughout the world. These include primarily pension plans and postretirement healthcare benefits. For accounting purposes, we estimate the pension and post-retirement healthcare benefit obligations utilizing assumptions and estimates for discount rates; expected returns on plan assets; expected compensation increases; employee-related factors such as turnover, retirement age and mortality; and health care cost trends. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. Our assumptions also reflect our historical experiences and management’s best judgment regarding future expectations. These and other assumptions affect the annual expense and obligations recognized for the underlying plans.
In 2016, we expect pension and postretirement medical costs to decrease by approximately $135 million to $185 million due to a combination of factors, including a decreased number of plan participants, changes in discount rates, company contributions to the plans and a change in our approach to measuring service and interest costs. For 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations nor the funded status of our plans.
As permitted by U.S. GAAP, we generally amortize the effect of changes in the assumptions over future periods. The cost or benefit of plan changes, such as increasing or decreasing benefits for prior employee service (prior service cost), is deferred and included in expense on a straight-line basis over the average remaining service period of the employees expected to receive benefits.
Since pension and post-retirement liabilities are measured on a discounted basis, the discount rate significantly affects our plan obligations and expenses. The expected return on plan assets assumption affects our pension plan expenses, since many of our pension plans are partially funded. The assumptions for discount rates and expected rates of return and our process for setting these assumptions are described in Note 10, Benefit Plans, to the consolidated financial statements.
While we do not anticipate further changes in the 2016 assumptions for our U.S. and non-U.S. pension and postretirement health care plans, as a sensitivity measure, a fifty-basis point change in our discount rates or the expected rate of return on plan assets would have the following effects, increase / (decrease), on our annual benefit plan costs:
| As of December 31, 2015 | ||||||||||||||||
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| Fifty-Basis-Point | Fifty-Basis-Point | |||||||||||||||
| Increase | Decrease | Increase | Decrease | |||||||||||||
| (in millions) | ||||||||||||||||
| Effect of change in discount rate on pension costs | $ | (16 | ) | $ | 18 | $ | (47 | ) | $ | 58 | ||||||
| Effect of change in expected rate of return on plan assets on pension costs | (6 | ) | 6 | (37 | ) | 37 | ||||||||||
| Effect of change in discount rate on postretirement health care costs | (5 | ) | 5 | (1 | ) | 1 |
Income Taxes:
As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, tax planning opportunities available in each tax jurisdiction and the ultimate outcome of various tax audits.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized.
We recognize tax benefits in our financial statements from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by tax authorities based on the technical merits of the position. The amount we recognize is measured as the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement. We evaluate uncertain tax positions on an ongoing basis and adjust the related tax liabilities or assets in light of changing facts and circumstances, such as the progress of a tax audit or expiration of a statute of limitations. We believe the estimates and assumptions used to support our evaluation of uncertain tax positions are reasonable. However, final determination of historical tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different from estimates reflected on our consolidated balance sheet and historical income tax provisions. The outcome of these final determinations could have a material effect on our provision for income taxes, net earnings or cash flows in the period in which the determination is made. We believe our tax positions comply with applicable tax laws and that we have properly accounted for uncertain tax positions.
No taxes have been provided on undistributed foreign earnings that are planned to be indefinitely reinvested. If future events, such as material changes in long-term investment requirements, necessitate that these earnings be distributed, an additional provision for taxes may apply, which could materially affect our future effective tax rate.
See Note 15, Income Taxes, for additional information on our effective tax rate, current and deferred taxes, valuation allowances and unrecognized tax benefits.
Contingencies:
See Note 13, Commitments and Contingencies, to the consolidated financial statements.
New Accounting Guidance:
See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements for a discussion of new accounting standards.
Commodity Trends
We regularly monitor worldwide supply, commodity cost and currency trends so we can cost-effectively secure ingredients, packaging and fuel required for production. Prior to the July 2, 2015 coffee business transactions, increased costs for coffee beans were the highest driver of increased commodity costs for the first half of 2015. During 2015, the primary drivers of the increase in our aggregate commodity costs, excluding coffee, were increased costs for packaging, nuts, cocoa, energy, grains and oils and higher currency-related costs on our commodity purchases, partially offset by lower costs for dairy and sugar.
A number of external factors such as weather conditions, commodity market conditions, currency fluctuations and the effects of governmental agricultural or other programs affect the cost and availability of raw materials and agricultural materials used in our products. We address higher commodity costs and currency impacts primarily through hedging, higher pricing and manufacturing and overhead cost control. We use hedging techniques to limit the impact of fluctuations in the cost of our principal raw materials; however, we may not be able to fully hedge against commodity cost changes, and our hedging strategies may not protect us from increases in specific raw material costs. Due to competitive or market conditions, planned trade or promotional incentives, fluctuations in currency exchange rates or other factors, our pricing actions may also lag commodity cost changes temporarily.
We expect price volatility and a slightly higher aggregate cost environment to continue in 2016. While the costs of our principal raw materials fluctuate, we believe there will continue to be an adequate supply of the raw materials we use and that they will generally remain available from numerous sources.
Liquidity and Capital Resources
We believe that cash from operations, our $4.5 billion revolving credit facility and our authorized long-term financing will provide sufficient liquidity for our working capital needs, planned capital expenditures, future contractual obligations, share repurchases and payment of our anticipated quarterly dividends. We continue to utilize our commercial paper program, international credit lines and long-term debt issuances for regular funding requirements. We also use intercompany loans with our international subsidiaries to improve financial flexibility. Overall, we do not expect any negative effects to our funding sources that would have a material effect on our liquidity, including the indefinite reinvestment of our earnings outside of the United States.
Net Cash Provided by Operating Activities:
Operating activities provided net cash of $3,728 million in 2015, $3,562 million in 2014 and $6,410 million in 2013. Cash flows from operating activities in all years were impacted by our working capital improvements, primarily due to continually decreasing our cash conversion cycle (a metric that measures working capital efficiency and utilizes days sales outstanding, days inventory on hand and days payables outstanding) to negative 12 days in 2015, positive 10 days in 2014 and positive 20 days in 2013. Cash flows from operating activities were favorable in 2015 relative to 2014 primarily due to higher relative working capital cash improvements than in 2014 and significant tax payments in 2014 related to the $2.6 billion Starbucks arbitration award we received in late 2013, partially offset by higher contributions related to our pensions benefit plans. Cash flows from operating activities were unfavorable in 2014 relative to 2013 primarily related to our receipt of $2.6 billion of net cash from the resolution of the Starbucks arbitration in 2013 and higher related income taxes paid in 2014 and lower relative working capital cash improvements than in 2013, partially offset by lower interest payments in 2014 following the debt refinancing in the first quarter of 2014 and the fourth quarter of 2013.
Net Cash Provided by / (Used in) Investing Activities:
Net cash provided by investing activities was $2,649 million in 2015 and net cash used in investing activities was $1,642 million in 2014 and $1,483 million in 2013. The increase in net cash provided by investing activities in 2015 relative to 2014 primarily relates to $4.7 billion of proceeds, net of divested cash and transaction costs, from the contribution of our global coffee businesses and the divestiture of AGF, the cash receipt of $1.0 billion due to the settlement of currency exchange forward contracts related to our coffee business transactions and lower capital expenditures in 2015 of $128 million, partially offset by the $611 million reduction of cash due to the Venezuela deconsolidation, $501 million of contributed JDE receivables and a $43 million cash payment to fund a capital increase in JDE and $527 million of payments to acquire a biscuit operation in Vietnam and the Enjoy Life Foods snack food business in 2015. The increase in net cash used in investing activities in 2014 relative to 2013 relates to lower cash inflows to offset higher capital expenditures in 2014. In 2013, we received higher cash proceeds from property sales, net proceeds of $60 million from divestitures and $55 million in cash from Kraft Foods Group in connection with the Spin-Off, partially offset by $119 million of payments to acquire a biscuit operation in Morocco in 2013.
Capital expenditures were $1,514 million in 2015, $1,642 million in 2014 and $1,622 million in 2013. The 2015 capital expenditures were made primarily to modernize manufacturing facilities and support new product and productivity initiatives. We expect 2016 capital expenditures to be up to $1.5 billion, including capital expenditures required for investments in systems and the 2014-2018 Restructuring Program. We expect to continue to fund these expenditures from operations.
Net Cash Used in Financing Activities:
Net cash used in financing activities was $5,883 million in 2015, $2,688 million in 2014 and $6,687 million in 2013. The increase in net cash used in financing activities in 2015 relative to 2014 was primarily due to higher repayments of long-term debt in 2015 (including the tender offers and euro notes maturities), $1.9 billion of higher share repurchases and higher net short-term debt repayments, partially offset by higher proceeds received from long-term note issuances. The decrease in net cash used in financing activities in 2014 relative to 2013 was primarily due to significantly lower long-term debt repayments and lower share repurchases in 2014, offset in part by decreased proceeds from the issuance of long-term debt and other short-term borrowings and higher dividend payments in 2014.
Debt:
From time to time we refinance long-term and short-term debt. Refer to Note 8, Debt and Borrowing Arrangements, for details of our tender offers and debt issuances during 2015, 2014 and 2013. The nature and amount of our long-term and short-term debt and the proportionate amount of each varies as a result of current and expected business requirements, market conditions and other factors. Generally, in the first and second quarters of the year, our working capital requirements grow, increasing the need for short-term financing. The third and fourth quarters of the year typically generate higher cash flows. As such, we may issue commercial paper or secure other forms of financing throughout the year to meet short-term working capital needs.
In July 2015, our Board of Directors approved a $5 billion long-term financing authority to replace the prior authority. As of December 31, 2015, we had $4 billion of long-term financing authority remaining.
During 2016, $1,750 million of long-term debt matured in February. We funded this repayment with net proceeds from debt issuances in January 2016, cash from operations and the issuance of commercial paper. There are no other scheduled maturities of long-term debt within the 12 months following December 31, 2015.
Our total debt was $15.4 billion at December 31, 2015 and $16.7 billion at December 31, 2014. Our debt-to-capitalization ratio was 0.35 at December 31, 2015 and 0.38 at December 31, 2014. At December 31, 2015, the weighted-average term of our outstanding long-term debt was 8.6 years. Our average daily commercial borrowings were $2.2 billion in 2015, $1.9 billion in 2014 and $1.0 billion in 2013. We expect to continue to comply with our long-term debt covenants. Refer to Note 8, Debt and Borrowing Arrangements, for more information on our debt and debt covenants.
Equity and Dividends
Stock Plans:
See Note 11, Stock Plans, to the consolidated financial statements for more information on our stock plans and grant activity during 2015, 2014 and 2013.
Share Repurchases:
See Note 12, Capital Stock, to the consolidated financial statements for more information on our share repurchase and accelerated share repurchase programs.
We intend to continue to use a portion of our cash for share repurchases. 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. We repurchased $8.3 billion of shares ($3.6 billion in 2015, $1.9 billion in 2014 and $2.7 billion in 2013) through December 31, 2015. The number of shares that we ultimately repurchase under our share repurchase program may vary depending on numerous factors, including share price and other market conditions, our ongoing capital allocation planning, levels of cash and debt balances, other demands for cash, such as acquisition activity, general economic or business conditions and board and management discretion. Additionally, our share repurchase activity during any particular period may fluctuate. We may accelerate, suspend, delay or discontinue our share repurchase program at any time, without notice.
Dividends:
We paid dividends of $1,008 million in 2015, $964 million in 2014 and $943 million in 2013. Immediately following the Spin-Off of Kraft Foods Group on October 1, 2012, our annual dividend rate changed to $0.52 per common share. On August 6, 2013, our Audit Committee, with authorization from our Board of Directors, approved an 8% increase in the quarterly dividend to $0.14 per common share or $0.56 per common share on an annual basis. On August 5, 2014, our Audit Committee, with authorization from our Board of Directors, approved a 7% increase in the quarterly dividend to $0.15 per common share or $0.60 per common share on an annual basis. On July 23, 2015, our Board of Directors approved a 13% increase in the quarterly dividend to $0.17 per common share or $0.68 per common share on an annual basis. The declaration of dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net earnings, financial condition, cash requirements, future prospects and other factors that our Board of Directors deems relevant to its analysis and decision making.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We have no significant off-balance sheet arrangements other than the contractual obligations discussed below.
Guarantees:
As discussed in Note 13, Commitments and Contingencies, we enter into third-party guarantees primarily to cover the long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At December 31, 2015, we had no material third-party guarantees recorded on our consolidated balance sheet.
In addition, at December 31, 2015, we were contingently liable for $842 million of guarantees related to our own performance. These include letters of credit, surety bonds and guarantees related to the payment of custom duties and taxes.
Guarantees do not have, and we do not expect them to have, a material effect on our liquidity.
Aggregate Contractual Obligations:
The following table summarizes our contractual obligations at December 31, 2015.
| Payments Due | ||||||||||||||||||||
| Total | 2016 | 2017-18 | 2019-20 | 2021 and Thereafter | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Debt (1) | $ | 15,227 | $ | 1,750 | $ | 2,591 | $ | 2,077 | $ | 8,809 | ||||||||||
| Interest expense (2) | 5,465 | 505 | 878 | 668 | 3,414 | |||||||||||||||
| Capital leases | 5 | 5 | – | – | – | |||||||||||||||
| Operating leases (3) | 994 | 311 | 347 | 209 | 127 | |||||||||||||||
| Purchase obligations: (4) | ||||||||||||||||||||
| Inventory and production costs | 5,172 | 2,833 | 2,014 | 316 | 9 | |||||||||||||||
| Other | 887 | 816 | 70 | 1 | – | |||||||||||||||
| 6,059 | 3,649 | 2,084 | 317 | 9 | ||||||||||||||||
| Other long-term liabilities (5) | 575 | 31 | 105 | 242 | 197 | |||||||||||||||
| Total | $ | 28,325 | $ | 6,251 | $ | 6,005 | $ | 3,513 | $ | 12,556 | ||||||||||
| (1) | Amounts include the expected cash payments of our long-term debt excluding capital leases, which are presented separately in the table above. The amounts also exclude $(70) million of net unamortized non-cash bond premiums and discounts and mark-to-market adjustments related to our interest rate swaps recorded in total debt. |
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| (2) | Amounts represent the expected cash payments of our interest expense on our long-term debt. Interest calculated on our euro, British pound sterling and Swiss franc notes was forecasted using currency exchange rates as of December 31, 2015. An insignificant amount of interest expense was excluded from the table for a portion of our other non-U.S. debt obligations due to the complexities involved in forecasting expected interest payments. |
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| (3) | Operating lease payments represent the minimum rental commitments under non-cancelable operating leases. |
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| (4) | Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above. |
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| (5) | Other long-term liabilities include estimated future benefit payments for our postretirement health care plans through December 31, 2025 of $197 million. We are unable to reliably estimate the timing of the payments beyond 2025; as such, they are excluded from the above table. There are also another $300 million of various other long-term liabilities that are expected to be paid over the next 5 years. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued pension costs, income taxes, insurance accruals and other accruals. We are unable to reliably estimate the timing of the payments (or contributions beyond 2016, in the case of accrued pension costs) for these items. We currently expect to make approximately $449 million in contributions to our pension plans in 2016. As of December 31, 2015, our total liability for income taxes, including uncertain tax positions and associated accrued interest and penalties, was $1,046 million. We currently estimate payments of approximately $316 million related to these positions over the next 12 months. |
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Non-GAAP Financial Measures
We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identify trends in our underlying operating results and provide additional transparency on how we evaluate our business. We use certain non-GAAP financial measures to budget, make operating and strategic decisions and evaluate our performance. We disclose non-GAAP financial measures so that you have the same financial data that we use to assist you in making comparisons to our historical operating results and analyzing our underlying performance.
Our primary non-GAAP financial measures reflect how we evaluate our current and prior-year operating results. As new events or circumstances arise, these definitions could change over time.
| • | “Organic Net Revenue” is defined as net revenues excluding the impacts of acquisitions, divestitures (1), our historical global coffee business (2), Integration Program costs, accounting calendar changes and currency rate fluctuations. We also evaluate Organic Net Revenue growth from emerging markets and our Power Brands. |
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| • | Our emerging markets include our Latin America and EEMEA regions in their entirety; the Asia Pacific region, excluding Australia, New Zealand and Japan; and the following countries from the Europe region: Poland, Czech Republic, Slovak Republic, Hungary, Bulgaria, Romania, the Baltics and the East Adriatic countries. |
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| • | Our Power Brands include some of our largest global and regional brands such as Oreo, Chips Ahoy!, Ritz, TUC/Club Social and belVita biscuits; Cadbury Dairy Milk, Milka and Lacta chocolate; Trident gum; Hall’s candy; and Tang powdered beverages. |
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| • | “Adjusted Operating Income” is defined as operating income excluding the impacts of Spin-Off Costs, pension costs related to the obligations transferred in the Spin-Off, the 2012-2014 Restructuring Program, the 2014-2018 Restructuring Program, the Integration Program and other acquisition integration costs, the remeasurement of net monetary assets in Venezuela, loss on deconsolidation of Venezuela, the benefit from the Cadbury acquisition-related indemnification resolution, incremental costs associated with the coffee business transactions, impairment charges related to goodwill and intangible assets, gains or losses on divestitures (1) or acquisitions, gain on the coffee business transactions (2), divestiture-related costs, acquisition-related costs, the operating results of divestitures (1), our historical global coffee business operating results (2) and equity method investment earnings historically reported within operating income (3). We also evaluate growth in our Adjusted Operating Income on a constant currency basis. |
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| • | “Adjusted EPS” is defined as diluted EPS attributable to Mondelēz International from continuing operations excluding the impacts of Spin-Off Costs, pension costs related to the obligations transferred in the Spin-Off, the 2012-2014 Restructuring Program, the 2014-2018 Restructuring Program, the Integration Program and other acquisition integration costs, the remeasurement of net monetary assets in Venezuela, loss on deconsolidation of Venezuela, the net benefit from the Cadbury acquisition-related indemnification resolution, losses on debt extinguishment and related expenses, the residual tax benefit impact from the resolution of the Starbucks arbitration, hedging gains or losses and incremental costs associated with the coffee business transactions, impairment charges related to goodwill and intangible assets, gains or losses on interest rate swaps no longer designated as accounting cash flow hedges due to changed financing and hedging plans, gains or losses on divestitures (1) or acquisitions, gain on the coffee business transactions (2), divestiture-related costs, acquisition-related costs and net earnings from divestitures(1), and including an interest expense adjustment related to the |
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| Spin-Off transaction. In addition, we have adjusted our equity method investment earnings for our proportionate share of their unusual or infrequent items, such as acquisition and divestiture-related costs and restructuring program costs, recorded by our JDE equity method investee. We also evaluate growth in our Adjusted EPS on a constant currency basis. |
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| (1) | Divestitures include businesses under sale agreements for which we have cleared significant sale-related conditions such that the pending sale is probable as of the end of the reporting period and exits of major product lines under a sale or licensing agreement. See (2) below. |
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| (2) | In connection with the global coffee business transactions that closed on July 2, 2015, because we exchanged our coffee interests for similarly-sized coffee interests in JDE (which, following the July 2, 2015 closing, is 43.5% of our historical and DEMB’s combined global coffee businesses), we have deconsolidated and not included our historical global coffee business results within divestitures in our non-GAAP financial measures and in the related Management’s Discussion and Analysis of Financial Condition and Results of Operations. We continue to have an ongoing interest in the coffee business. Beginning in the third quarter of 2015, we have included the after-tax earnings of JDE and of our historical coffee business results within continuing results of operations. For Adjusted EPS, we have included these earnings in equity method investment earnings and have deconsolidated our historical coffee business results from Organic Net Revenue and Adjusted Operating Income to facilitate comparisons of past and future coffee operating results. |
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| (3) | Historically, we have recorded income from equity method investments within our operating income as these investments operated as extensions of our base business. Beginning in the third quarter of 2015, we began to record the earnings from our equity method investments in after-tax equity method investment earnings outside of operating income following the deconsolidation of our coffee business. See Note 1, Summary of Significant Accounting Policies – Principles of Consolidation, for more information. In periods prior to July 2, 2015, we have reclassified the equity method earnings from our Adjusted Operating Income to after-tax equity method investment earnings within Adjusted EPS to be consistent with the deconsolidation of our coffee business results on July 2 and in order to evaluate our operating results on a consistent basis. |
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We believe that the presentation of these non-GAAP financial measures, when considered together with our U.S. GAAP financial measures and the reconciliations to the corresponding U.S. GAAP financial measures, provides you with a more complete understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Because non-GAAP financial measures may vary among other companies, the non-GAAP financial measures presented in this report may not be comparable to similarly titled measures used by other companies. Our use of these non-GAAP financial measures is not meant to be considered in isolation or as a substitute for any U.S. GAAP financial measure. A limitation of these non-GAAP financial measures is they exclude items detailed below that have an impact on our U.S. GAAP reported results. The best way this limitation can be addressed is by evaluating our non-GAAP financial measures in combination with our U.S. GAAP reported results and carefully evaluating the following tables that reconcile U.S. GAAP reported figures to the non-GAAP financial measures in this Form 10-K.
Organic Net Revenue
Applying the definition of “Organic Net Revenue”, the adjustments made to “net revenues” (the most comparable U.S. GAAP financial measure) were to exclude the impact of currency, the adjustment for deconsolidating our historical coffee business, divestitures, acquisitions and accounting calendar changes. We believe that Organic Net Revenue better reflects the underlying growth from the ongoing activities of our business and provides improved comparability of results. We also evaluate our Organic Net Revenue growth from emerging markets and Power Brands, and these underlying measures are also reconciled to U.S. GAAP below.
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||
| Power Brands | Non-Power Brands | Total | Emerging Markets | Developed Markets | Total | |||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||
| 2015 | ||||||||||||||||||||||||
| Organic Net Revenue | $ | 21,532 | $ | 10,067 | $ | 31,599 | $ | 13,109 | $ | 18,490 | $ | 31,599 | ||||||||||||
| Impact of currency | (2,577 | ) | (1,256 | ) | (3,833 | ) | (2,094 | ) | (1,739 | ) | (3,833 | ) | ||||||||||||
| Historical coffee business (1) | 1,179 | 448 | 1,627 | 442 | 1,185 | 1,627 | ||||||||||||||||||
| Impact of acquisitions | – | 165 | 165 | 128 | 37 | 165 | ||||||||||||||||||
| Impact of accounting calendar change | 60 | 18 | 78 | – | 78 | 78 | ||||||||||||||||||
| Net revenues | $ | 20,194 | $ | 9,442 | $ | 29,636 | $ | 11,585 | $ | 18,051 | $ | 29,636 | ||||||||||||
| 2014 | ||||||||||||||||||||||||
| Organic Net Revenue | $ | 20,437 | $ | 10,031 | $ | 30,468 | $ | 11,855 | $ | 18,613 | $ | 30,468 | ||||||||||||
| Historical coffee business (1) | 2,726 | 1,050 | 3,776 | 1,106 | 2,670 | 3,776 | ||||||||||||||||||
| Net revenues | $ | 23,163 | $ | 11,081 | $ | 34,244 | $ | 12,961 | $ | 21,283 | $ | 34,244 | ||||||||||||
| % Change | ||||||||||||||||||||||||
| Organic Net Revenue | 5.4% | 0.4% | 3.7% | 10.6% | (0.7)% | 3.7% | ||||||||||||||||||
| Net Revenues | (12.8)% | (14.8)% | (13.5)% | (10.6)% | (15.2)% | (13.5)% | ||||||||||||||||||
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||
| Power Brands | Non-Power Brands | Total | Emerging Markets | Developed Markets | Total | |||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||
| 2014 | ||||||||||||||||||||||||
| Organic Net Revenue | $ | 21,496 | $ | 10,584 | $ | 32,080 | $ | 13,350 | $ | 18,730 | $ | 32,080 | ||||||||||||
| Impact of currency | (1,059 | ) | (567 | ) | (1,626 | ) | (1,509 | ) | (117 | ) | (1,626 | ) | ||||||||||||
| Historical coffee business (1) | 2,726 | 1,050 | 3,776 | 1,106 | 2,670 | 3,776 | ||||||||||||||||||
| Impact of acquisition | – | 14 | 14 | 14 | – | 14 | ||||||||||||||||||
| Net revenues | $ | 23,163 | $ | 11,081 | $ | 34,244 | $ | 12,961 | $ | 21,283 | $ | 34,244 | ||||||||||||
| 2013 | ||||||||||||||||||||||||
| Organic Net Revenue | $ | 20,593 | $ | 10,702 | $ | 31,295 | $ | 12,443 | $ | 18,852 | $ | 31,295 | ||||||||||||
| Historical coffee business (1) | 2,758 | 1,146 | 3,904 | 1,265 | 2,639 | 3,904 | ||||||||||||||||||
| Impact of divestitures (2) | – | 70 | 70 | 20 | 50 | 70 | ||||||||||||||||||
| Impact of accounting calendar change | 19 | 11 | 30 | – | 30 | 30 | ||||||||||||||||||
| Net revenues | $ | 23,370 | $ | 11,929 | $ | 35,299 | $ | 13,728 | $ | 21,571 | $ | 35,299 | ||||||||||||
| % Change | ||||||||||||||||||||||||
| Organic Net Revenue | 4.4% | (1.1)% | 2.5% | 7.3% | (0.6)% | 2.5% | ||||||||||||||||||
| Net Revenues | (0.9)% | (7.1)% | (3.0)% | (5.6)% | (1.3)% | (3.0)% |
| (1) | Includes our historical global coffee business prior to the July 2, 2015 coffee business transactions. Refer to Note 2, Divestitures and Acquisitions, and our non-GAAP definitions appearing earlier in this section for more information. |
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| (2) | Includes the 2013 divestures of a salty snacks business in Turkey, a confectionary business in South Africa and a chocolate business in Spain and does not include the deconsolidation of our coffee businesses. Refer to Note 2, Divestitures and Acquisitions, and our non-GAAP definitions appearing earlier in this section for more information. |
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Adjusted Operating Income
Applying the definition of “Adjusted Operating Income”, the adjustments made to “operating income” (the most comparable U.S. GAAP financial measure) were to exclude Spin-Off Costs, 2012-2014 Restructuring Program costs, 2014-2018 Restructuring Program costs, the Integration Program and other acquisition integration costs, the benefit from the Cadbury acquisition-related indemnification resolution, loss on deconsolidation of Venezuela, the remeasurement of net monetary assets in Venezuela, impairment charges related to intangible assets, incremental costs associated with the coffee business transactions, operating income from our historical coffee business, gain on the coffee business transactions, operating results of divestitures, gains on acquisitions and divestitures, acquisition-related costs and an adjustment for equity method investment earnings historically reported within operating income that were reclassified to after-tax earnings. We also evaluate Adjusted Operating Income on a constant currency basis. We believe these measures provide improved comparability of operating results.
| For the Years Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2015 | 2014 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Adjusted Operating Income (constant currency) | $ | 4,352 | $ | 3,658 | $ | 694 | 19.0% | |||||||||
| Impact of unfavorable currency | (522 | ) | – | (522 | ) | |||||||||||
| Adjusted Operating Income | $ | 3,830 | $ | 3,658 | $ | 172 | 4.7% | |||||||||
| Spin-Off Costs | – | (35 | ) | 35 | ||||||||||||
| 2012-2014 Restructuring Program costs | 4 | (459 | ) | 463 | ||||||||||||
| 2014-2018 Restructuring Program costs | (1,002 | ) | (381 | ) | (621 | ) | ||||||||||
| Integration Program and other acquisition integration costs | (9 | ) | 4 | (13 | ) | |||||||||||
| Remeasurement of net monetary assets in Venezuela | (11 | ) | (167 | ) | 156 | |||||||||||
| Loss on deconsolidation of Venezuela | (778 | ) | – | (778 | ) | |||||||||||
| Intangible asset impairment charges | (71 | ) | (57 | ) | (14 | ) | ||||||||||
| Costs associated with the coffee business transactions | (278 | ) | (77 | ) | (201 | ) | ||||||||||
| Operating income from historical coffee business (1) | 342 | 646 | (304 | ) | ||||||||||||
| Gain on the coffee business transactions | 6,809 | – | 6,809 | |||||||||||||
| Reclassification of equity method earnings (2) | 51 | 104 | (53 | ) | ||||||||||||
| Operating income from divestiture (3) | 5 | 8 | (3 | ) | ||||||||||||
| Gain on divestiture (3) | 13 | – | 13 | |||||||||||||
| Acquisition-related costs | (8 | ) | (2 | ) | (6 | ) | ||||||||||
| Operating income | $ | 8,897 | $ | 3,242 | $ | 5,655 | 174.4% | |||||||||
| For the Years Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2014 | 2013 | $ Change | % Change | |||||||||||||
| (in millions) | ||||||||||||||||
| Adjusted Operating Income (constant currency) | $ | 3,906 | $ | 3,460 | $ | 446 | 12.9% | |||||||||
| Impact of unfavorable currency | (248 | ) | – | (248 | ) | |||||||||||
| Adjusted Operating Income | $ | 3,658 | $ | 3,460 | $ | 198 | 5.7% | |||||||||
| Spin-Off Costs | (35 | ) | (62 | ) | 27 | |||||||||||
| 2012-2014 Restructuring Program | (459 | ) | (330 | ) | (129 | ) | ||||||||||
| 2014-2018 Restructuring Program | (381 | ) | – | (381 | ) | |||||||||||
| Integration Program and other acquisition integration costs | 4 | (220 | ) | 224 | ||||||||||||
| Benefit from indemnification resolution | – | 336 | (336 | ) | ||||||||||||
| Remeasurement of net monetary assets in Venezuela | (167 | ) | (54 | ) | (113 | ) | ||||||||||
| Intangible asset impairment charges | (57 | ) | – | (57 | ) | |||||||||||
| Costs associated with the coffee business transactions | (77 | ) | – | (77 | ) | |||||||||||
| Operating income from historical coffee business (1) | 646 | 700 | (54 | ) | ||||||||||||
| Reclassification of equity method earnings (2) | 104 | 101 | 3 | |||||||||||||
| Operating income from divestitures (4) | 8 | 12 | (4 | ) | ||||||||||||
| Gains on acquisition and divestitures, net | – | 30 | (30 | ) | ||||||||||||
| Acquisition-related costs | (2 | ) | (2 | ) | – | |||||||||||
| Operating Income | $ | 3,242 | $ | 3,971 | $ | (729 | ) | (18.4 | )% | |||||||
| (1) | Includes our historical global coffee business prior to the July 2, 2015 coffee business transactions. Refer to Note 2, Divestitures and Acquisitions, and our non-GAAP definitions appearing earlier in this section for more information. |
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| (2) | Historically, we have recorded income from equity method investments within our operating income as these investments operated as extensions of our base business. Beginning in the third quarter of 2015, to align with the accounting for JDE earnings, we began to record the earnings from our equity method investments in after-tax equity method investment earnings outside of operating income. In periods prior to July 2, 2015, we have reclassified the equity method earnings from Adjusted Operating Income to evaluate our operating results on a consistent basis. |
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| (3) | Includes the divestiture of AGF on April 23, 2015 and does not include the deconsolidation of our global coffee businesses or the gain on the coffee business transactions. The divestiture of AGF generated a pre-tax gain of $13 million and an after-tax loss of $9 million in the second quarter. Refer to Note 2, Divestitures and Acquisitions, and our non-GAAP definitions appearing earlier in this section for more information. |
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| (4) | Includes the 2013 divestures of a salty snacks business in Turkey, a confectionary business in South Africa and a chocolate business in Spain and does not include the deconsolidation of our coffee businesses. Refer to Note 2, Divestitures and Acquisitions, and our non-GAAP definitions appearing earlier in this section for more information. |
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Adjusted EPS
Applying the definition of “Adjusted EPS”, the adjustments made to “diluted EPS attributable to Mondelēz International” (the most comparable U.S. GAAP financial measure) were to exclude Spin-Off Costs, 2012-2014 Restructuring Program costs, 2014-2018 Restructuring Program costs, the Integration Program and other acquisition integration costs, the net benefit from the Cadbury acquisition-related indemnification resolution, the residual tax benefit impact from the resolution of the Starbucks arbitration, losses on debt extinguishment and related expenses, loss on deconsolidation of Venezuela, the remeasurement of net monetary assets in Venezuela, impairment charges related to intangible assets, hedging gains and incremental costs associated with the coffee business transactions, gain on the coffee business transactions, losses on interest rate swaps no longer designated as accounting cash flow hedges due to changed financing and hedging plans, net earnings from divestitures, after-tax gain/loss on divestitures, our proportionate share of unusual or infrequent items recorded by our JDE equity method investee and acquisition-related costs. We also evaluate Adjusted EPS on a constant currency basis. We believe Adjusted EPS provides improved comparability of operating results.
| For the Years Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2015 | 2014 | $ Change | % Change | |||||||||||||
| Adjusted EPS (constant currency) | $ | 2.08 | $ | 1.75 | $ | 0.33 | 18.9% | |||||||||
| Impact of unfavorable currency | (0.33 | ) | – | (0.33 | ) | |||||||||||
| Adjusted EPS | $ | 1.75 | $ | 1.75 | $ | – | – | |||||||||
| Spin-Off Costs | – | (0.01 | ) | 0.01 | ||||||||||||
| 2012-2014 Restructuring Program costs | – | (0.21 | ) | 0.21 | ||||||||||||
| 2014-2018 Restructuring Program costs | (0.45 | ) | (0.16 | ) | (0.29 | ) | ||||||||||
| Integration Program and other acquisition integration costs | – | – | – | |||||||||||||
| Loss on debt extinguishment and related expenses | (0.29 | ) | (0.18 | ) | (0.11 | ) | ||||||||||
| Remeasurement of net monetary assets in Venezuela | (0.01 | ) | (0.09 | ) | 0.08 | |||||||||||
| Loss on deconsolidation of Venezuela | (0.48 | ) | – | (0.48 | ) | |||||||||||
| Intangible asset impairment charges | (0.03 | ) | (0.02 | ) | (0.01 | ) | ||||||||||
| Income / (costs) associated with the coffee business transactions | 0.01 | 0.19 | (0.18 | ) | ||||||||||||
| Gain on the coffee business transactions | 4.05 | – | 4.05 | |||||||||||||
| Loss related to interest rate swaps | (0.01 | ) | – | (0.01 | ) | |||||||||||
| Net earnings from divestiture (1) | (0.02 | ) | 0.01 | (0.03 | ) | |||||||||||
| Loss on divestiture (1) | (0.01 | ) | – | (0.01 | ) | |||||||||||
| Equity method investee acquisition-related and other adjustments | (0.07 | ) | – | (0.07 | ) | |||||||||||
| Acquisition-related costs | – | – | – | |||||||||||||
| Diluted EPS attributable to Mondelēz International | $ | 4.44 | $ | 1.28 | $ | 3.16 | 246.9% | |||||||||
| (1) | Includes the divestiture of AGF on April 23, 2015 and does not include the deconsolidation of our global coffee businesses or the gain on the coffee business transactions. The divestiture of AGF generated a pre-tax gain of $13 million and an after-tax loss of $9 million in the second quarter. Refer to Note 2, Divestitures and Acquisitions, and our non-GAAP definitions appearing earlier in this section for more information. |
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| For the Years Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2014 | 2013 | $ Change | % Change | |||||||||||||
| Adjusted EPS (constant currency) | $ | 1.89 | $ | 1.54 | $ | 0.35 | 22.7% | |||||||||
| Impact of unfavorable currency | (0.14 | ) | – | (0.14 | ) | |||||||||||
| Adjusted EPS | $ | 1.75 | $ | 1.54 | $ | 0.21 | 13.6% | |||||||||
| Spin-Off Costs | (0.01 | ) | (0.02 | ) | 0.01 | |||||||||||
| 2012-2014 Restructuring Program | (0.21 | ) | (0.14 | ) | (0.07 | ) | ||||||||||
| 2014-2018 Restructuring Program | (0.16 | ) | – | (0.16 | ) | |||||||||||
| Integration Program and other acquisition integration costs | – | (0.10 | ) | 0.10 | ||||||||||||
| Net benefit from indemnification resolution | – | 0.20 | (0.20 | ) | ||||||||||||
| Residual tax benefit associated with Starbucks arbitration resolution | – | 0.02 | (0.02 | ) | ||||||||||||
| Loss on debt extinguishment and related expenses | (0.18 | ) | (0.22 | ) | 0.04 | |||||||||||
| Remeasurement of net monetary assets in Venezuela | (0.09 | ) | (0.03 | ) | (0.06 | ) | ||||||||||
| Intangible asset impairment charges | (0.02 | ) | – | (0.02 | ) | |||||||||||
| Income / (costs) associated with the coffee business transactions | 0.19 | – | 0.19 | |||||||||||||
| Net earnings from divestitures (1) | 0.01 | – | 0.01 | |||||||||||||
| Gains on acquisition and divestitures (1), net | – | 0.04 | (0.04 | ) | ||||||||||||
| Acquisition-related costs | – | – | – | |||||||||||||
| Diluted EPS attributable to Mondelēz International from continuing operations | $ | 1.28 | $ | 1.29 | $ | (0.01 | ) | (0.8)% | ||||||||
| Discontinued operations | – | 0.90 | (0.90 | ) | ||||||||||||
| Diluted EPS attributable to Mondelēz International | $ | 1.28 | $ | 2.19 | $ | (0.91 | ) | (41.6)% | ||||||||
| (1) | Includes the 2013 divestures of a salty snacks business in Turkey, a confectionary business in South Africa and a chocolate business in Spain and does not include the deconsolidation of our coffee businesses. Refer to Note 2, Divestitures and Acquisitions, and our non-GAAP definitions appearing earlier in this section for more information. |
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Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures about Market Risk.