filings.toolsItem 8. Financial Statements and Supplementary Data.
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Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Mondelēz International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, comprehensive earnings, equity and cash flows present fairly, in all material respects, the financial position of Mondelēz International, Inc. and its subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the financial statements, the Company changed the manner in which it classifies deferred income taxes in 2015.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 19, 2016
Mondelēz International, Inc. and Subsidiaries
Consolidated Statements of Earnings
For the Years Ended December 31
(in millions of U.S. dollars, except per share data)
| 2015 | 2014 | 2013 | ||||||||||
| Net revenues | $ | 29,636 | $ | 34,244 | $ | 35,299 | ||||||
| Cost of sales | 18,124 | 21,647 | 22,189 | |||||||||
| Gross profit | 11,512 | 12,597 | 13,110 | |||||||||
| Selling, general and administrative expenses | 7,577 | 8,457 | 8,679 | |||||||||
| Asset impairment and exit costs | 901 | 692 | 273 | |||||||||
| Gains on coffee business transactions and divestitures | (6,822 | ) | – | (30 | ) | |||||||
| Loss on deconsolidation of Venezuela | 778 | – | – | |||||||||
| Amortization of intangibles | 181 | 206 | 217 | |||||||||
| 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 | |||||||||
| Provision for income taxes | 593 | 353 | 60 | |||||||||
| Earnings from continuing operations | 7,291 | 2,201 | 2,332 | |||||||||
| Earnings from discontinued operations, net of income taxes | – | – | 1,603 | |||||||||
| Net earnings | 7,291 | 2,201 | 3,935 | |||||||||
| Noncontrolling interest | 24 | 17 | 20 | |||||||||
| Net earnings attributable to Mondelēz International | $ | 7,267 | $ | 2,184 | $ | 3,915 | ||||||
| Per share data: | ||||||||||||
| Basic earnings per share attributable to Mondelēz International: | ||||||||||||
| Continuing operations | $ | 4.49 | $ | 1.29 | $ | 1.30 | ||||||
| Discontinued operations | – | – | 0.91 | |||||||||
| Net earnings attributable to Mondelēz International | $ | 4.49 | $ | 1.29 | $ | 2.21 | ||||||
| Diluted earnings per share attributable to Mondelēz International: | ||||||||||||
| Continuing operations | $ | 4.44 | $ | 1.28 | $ | 1.29 | ||||||
| Discontinued operations | – | – | 0.90 | |||||||||
| Net earnings attributable to Mondelēz International | $ | 4.44 | $ | 1.28 | $ | 2.19 | ||||||
| Dividends declared | $ | 0.64 | $ | 0.58 | $ | 0.54 |
See accompanying notes to the consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
For the Years Ended December 31
(in millions of U.S. dollars)
| 2015 | 2014 | 2013 | ||||||||||
| Net earnings | $ | 7,291 | $ | 2,201 | $ | 3,935 | ||||||
| Other comprehensive earnings / (losses): | ||||||||||||
| Currency translation adjustment: | ||||||||||||
| Translation adjustment | (2,759 | ) | (3,287 | ) | (1,080 | ) | ||||||
| Reclassification to earnings related to Venezuela deconsolidation | 99 | – | – | |||||||||
| Tax (expense) / benefit | (184 | ) | (228 | ) | 36 | |||||||
| Pension and other benefits: | ||||||||||||
| Net actuarial gain / (loss) arising during period | (60 | ) | (1,388 | ) | 713 | |||||||
| Reclassification of (gains) / losses into net earnings: | ||||||||||||
| Amortization of experience losses and prior service costs | 207 | 132 | 193 | |||||||||
| Settlement losses | 111 | 42 | 4 | |||||||||
| Venezuela deconsolidation | 2 | – | – | |||||||||
| Tax (expense) / benefit | (66 | ) | 386 | (244 | ) | |||||||
| Derivatives accounted for as hedges: | ||||||||||||
| Net derivative gains / (losses) | (74 | ) | (166 | ) | 169 | |||||||
| Reclassification of (gains) / losses into net earnings | 21 | (45 | ) | 72 | ||||||||
| Tax (expense) / benefit | 9 | 92 | (86 | ) | ||||||||
| Total other comprehensive earnings / (losses) | (2,694 | ) | (4,462 | ) | (223 | ) | ||||||
| Comprehensive earnings / (losses) | 4,597 | (2,261 | ) | 3,712 | ||||||||
| less: Comprehensive earnings / (losses) attributable to noncontrolling interests | (2 | ) | (16 | ) | 20 | |||||||
| Comprehensive earnings / (losses) attributable to Mondelēz International | $ | 4,599 | $ | (2,245 | ) | $ | 3,692 | |||||
See accompanying notes to the consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Consolidated Balance Sheets, as of December 31
(in millions of U.S. dollars, except share data)
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,870 | $ | 1,631 | ||||
| Trade receivables (net of allowances of $54 at December 31, 2015 and $66 at December 31, 2014) | 2,634 | 3,802 | ||||||
| Other receivables (net of allowances of $109 at December 31, 2015 and $91 at December 31, 2014) | 1,212 | 949 | ||||||
| Inventories, net | 2,609 | 3,480 | ||||||
| Deferred income taxes | – | 480 | ||||||
| Other current assets | 633 | 1,408 | ||||||
| Total current assets | 8,958 | 11,750 | ||||||
| Property, plant and equipment, net | 8,362 | 9,827 | ||||||
| Goodwill | 20,664 | 23,389 | ||||||
| Intangible assets, net | 18,768 | 20,335 | ||||||
| Prepaid pension assets | 69 | 53 | ||||||
| Equity method investments | 5,387 | 662 | ||||||
| Other assets | 635 | 755 | ||||||
| TOTAL ASSETS | $ | 62,843 | $ | 66,771 | ||||
| LIABILITIES | ||||||||
| Short-term borrowings | $ | 236 | $ | 1,305 | ||||
| Current portion of long-term debt | 605 | 1,530 | ||||||
| Accounts payable | 4,890 | 5,299 | ||||||
| Accrued marketing | 1,634 | 2,047 | ||||||
| Accrued employment costs | 844 | 946 | ||||||
| Other current liabilities | 2,713 | 2,880 | ||||||
| Total current liabilities | 10,922 | 14,007 | ||||||
| Long-term debt | 14,557 | 13,821 | ||||||
| Deferred income taxes | 4,750 | 5,512 | ||||||
| Accrued pension costs | 2,183 | 2,912 | ||||||
| Accrued postretirement health care costs | 499 | 526 | ||||||
| Other liabilities | 1,832 | 2,140 | ||||||
| TOTAL LIABILITIES | 34,743 | 38,918 | ||||||
| Commitments and Contingencies (Note 13) | ||||||||
| EQUITY | ||||||||
| Common Stock, no par value (5,000,000,000 shares authorized and 1,996,537,778 shares issued at December 31, 2015 and December 31, 2014) | – | – | ||||||
| Additional paid-in capital | 31,760 | 31,651 | ||||||
| Retained earnings | 20,700 | 14,529 | ||||||
| Accumulated other comprehensive losses | (9,986 | ) | (7,318 | ) | ||||
| Treasury stock, at cost (416,504,624 shares at December 31, 2015 and 332,896,779 shares at December 31, 2014) | (14,462 | ) | (11,112 | ) | ||||
| Total Mondelēz International Shareholders’ Equity | 28,012 | 27,750 | ||||||
| Noncontrolling interest | 88 | 103 | ||||||
| TOTAL EQUITY | 28,100 | 27,853 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 62,843 | $ | 66,771 | ||||
See accompanying notes to the consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Consolidated Statements of Equity
(in millions of U.S. dollars, except per share data)
| Mondelēz International Shareholders’ Equity | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Additional | Comprehensive | |||||||||||||||||||||||||||
| Common | Paid-in | Retained | Earnings / | Treasury | Noncontrolling | Total | ||||||||||||||||||||||
| Stock | Capital | Earnings | (Losses) | Stock | Interest | Equity | ||||||||||||||||||||||
| Balances at January 1, 2013 | $ | – | $ | 31,548 | $ | 10,551 | $ | (2,666 | ) | $ | (7,157 | ) | $ | 140 | $ | 32,416 | ||||||||||||
| Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
| Net earnings | – | – | 3,915 | – | – | 20 | 3,935 | |||||||||||||||||||||
| Other comprehensive losses, net of income taxes | – | – | – | (223 | ) | – | – | (223 | ) | |||||||||||||||||||
| Exercise of stock options and issuance of other stock awards | – | 10 | (97 | ) | – | 343 | – | 256 | ||||||||||||||||||||
| Common Stock repurchased | – | (161 | ) | – | – | (2,739 | ) | – | (2,900 | ) | ||||||||||||||||||
| Cash dividends declared ($0.54 per share) | – | – | (950 | ) | – | – | – | (950 | ) | |||||||||||||||||||
| Dividends paid on noncontrolling interest and other activities | – | (1 | ) | – | – | – | (1 | ) | (2 | ) | ||||||||||||||||||
| Balances at December 31, 2013 | $ | – | $ | 31,396 | $ | 13,419 | $ | (2,889 | ) | $ | (9,553 | ) | $ | 159 | $ | 32,532 | ||||||||||||
| Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
| Net earnings | – | – | 2,184 | – | – | 17 | 2,201 | |||||||||||||||||||||
| Other comprehensive losses, net of income taxes | – | – | – | (4,429 | ) | – | (33 | ) | (4,462 | ) | ||||||||||||||||||
| Exercise of stock options and issuance of other stock awards | – | 271 | (98 | ) | – | 332 | – | 505 | ||||||||||||||||||||
| Common Stock repurchased | – | – | – | – | (1,891 | ) | – | (1,891 | ) | |||||||||||||||||||
| Cash dividends declared ($0.58 per share) | – | – | (976 | ) | – | – | – | (976 | ) | |||||||||||||||||||
| Dividends paid on noncontrolling interest and other activities | – | (16 | ) | – | – | – | (40 | ) | (56 | ) | ||||||||||||||||||
| Balances at December 31, 2014 | $ | – | $ | 31,651 | $ | 14,529 | $ | (7,318 | ) | $ | (11,112 | ) | $ | 103 | $ | 27,853 | ||||||||||||
| Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
| Net earnings | – | – | 7,267 | – | – | 24 | 7,291 | |||||||||||||||||||||
| Other comprehensive losses, net of income taxes | – | – | – | (2,668 | ) | – | (26 | ) | (2,694 | ) | ||||||||||||||||||
| Exercise of stock options and issuance of other stock awards | – | 109 | (70 | ) | – | 272 | – | 311 | ||||||||||||||||||||
| Common Stock repurchased | – | – | – | – | (3,622 | ) | – | (3,622 | ) | |||||||||||||||||||
| Cash dividends declared ($0.64 per share) | – | – | (1,026 | ) | – | – | – | (1,026 | ) | |||||||||||||||||||
| Dividends paid on noncontrolling interest and other activities | – | – | – | – | – | (13 | ) | (13 | ) | |||||||||||||||||||
| Balances at December 31, 2015 | $ | – | $ | 31,760 | $ | 20,700 | $ | (9,986 | ) | $ | (14,462 | ) | $ | 88 | $ | 28,100 | ||||||||||||
See accompanying notes to the consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31
(in millions of U.S. dollars)
| 2015 | 2014 | 2013 | ||||||||||
| CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES | ||||||||||||
| Net earnings | $ | 7,291 | $ | 2,201 | $ | 3,935 | ||||||
| Adjustments to reconcile net earnings to operating cash flows: | ||||||||||||
| Depreciation and amortization | 894 | 1,059 | 1,077 | |||||||||
| Stock-based compensation expense | 136 | 141 | 128 | |||||||||
| Deferred income tax benefit | (30 | ) | (186 | ) | (64 | ) | ||||||
| Asset impairments | 345 | 240 | 97 | |||||||||
| Benefit from indemnification resolution | – | – | (385 | ) | ||||||||
| Loss on early extinguishment of debt | 748 | 493 | 608 | |||||||||
| Gains on coffee business transactions, divestitures and acquisition, net | (6,822 | ) | – | (30 | ) | |||||||
| Loss on deconsolidation of Venezuela | 778 | – | – | |||||||||
| Coffee business transactions currency-related net gains | (436 | ) | (628 | ) | – | |||||||
| Income from equity method investments | (56 | ) | (113 | ) | (107 | ) | ||||||
| Distributions from equity method investments | 58 | 63 | 66 | |||||||||
| Other non-cash items, net | 199 | (134 | ) | 22 | ||||||||
| Change in assets and liabilities, net of acquisitions and divestitures: | ||||||||||||
| Receivables, net | 44 | 184 | 492 | |||||||||
| Inventories, net | (49 | ) | (188 | ) | (116 | ) | ||||||
| Accounts payable | 659 | 387 | 793 | |||||||||
| Other current assets | 28 | (86 | ) | (42 | ) | |||||||
| Other current liabilities | 152 | 135 | 62 | |||||||||
| Change in pension and postretirement assets and liabilities, net | (211 | ) | (6 | ) | (126 | ) | ||||||
| Net cash provided by operating activities | 3,728 | 3,562 | 6,410 | |||||||||
| CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES | ||||||||||||
| Capital expenditures | (1,514 | ) | (1,642 | ) | (1,622 | ) | ||||||
| Proceeds from coffee business transactions and divestiture, net of disbursements | 4,735 | – | 60 | |||||||||
| Proceeds from coffee business transactions currency hedge settlements | 1,050 | – | – | |||||||||
| Acquisitions, net of cash received | (527 | ) | (7 | ) | (119 | ) | ||||||
| Reduction of cash due to Venezuela deconsolidation | (611 | ) | – | – | ||||||||
| Capital contribution to JDE | (544 | ) | – | – | ||||||||
| Cash received from Kraft Foods Group related to the Spin-Off | – | – | 55 | |||||||||
| Proceeds from sale of property, plant and equipment and other | 60 | 7 | 143 | |||||||||
| Net cash provided by / (used in) investing activities | 2,649 | (1,642 | ) | (1,483 | ) | |||||||
| CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES | ||||||||||||
| Issuances of commercial paper, maturities greater than 90 days | 613 | 2,082 | 1,329 | |||||||||
| Repayments of commercial paper, maturities greater than 90 days | (710 | ) | (2,713 | ) | (607 | ) | ||||||
| Net (repayments) / issuances of other short-term borrowings | (931 | ) | 398 | 613 | ||||||||
| Long-term debt proceeds | 4,624 | 3,032 | 3,248 | |||||||||
| Long-term debt repaid | (4,975 | ) | (3,017 | ) | (7,559 | ) | ||||||
| Repurchase of Common Stock | (3,622 | ) | (1,700 | ) | (2,900 | ) | ||||||
| Dividends paid | (1,008 | ) | (964 | ) | (943 | ) | ||||||
| Other | 126 | 194 | 132 | |||||||||
| Net cash used in financing activities | (5,883 | ) | (2,688 | ) | (6,687 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (255 | ) | (223 | ) | (93 | ) | ||||||
| Cash and cash equivalents: | ||||||||||||
| Increase / (decrease) | 239 | (991 | ) | (1,853 | ) | |||||||
| Balance at beginning of period | 1,631 | 2,622 | 4,475 | |||||||||
| Balance at end of period | $ | 1,870 | $ | 1,631 | $ | 2,622 | ||||||
| Cash paid: | ||||||||||||
| Interest | $ | 747 | $ | 827 | $ | 1,150 | ||||||
| Income taxes | $ | 745 | $ | 1,238 | $ | 760 | ||||||
See accompanying notes to the consolidated financial statements.
Mondelēz International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Description of Business:
Mondelēz International, Inc. (formerly Kraft Foods Inc.) was incorporated in 2000 in the Commonwealth of Virginia. Mondelēz International, Inc., through its subsidiaries (collectively “Mondelēz International,” “we,” “us” and “our”), sells food and beverage products to consumers in 165 countries.
Principles of Consolidation:
The consolidated financial statements include Mondelēz International, Inc. as well as our wholly owned and majority owned subsidiaries. For all periods presented through December 31, 2015, the operating results of our Venezuelan subsidiaries are included in our consolidated financial statements. As of the close of the fourth quarter of 2015, we deconsolidated our Venezuelan operations from our consolidated financial statements and recognized a loss on deconsolidation. See Currency Translation and Highly Inflationary Accounting: Venezuela below for more information.
We account for investments in which we exercise significant influence (20%-50% ownership interest) under the equity method of accounting. On July 2, 2015, we contributed our global coffee businesses to a new company, Jacobs Douwe Egberts (“JDE”), in which we now hold a 43.5% equity interest (collectively, the “coffee business transactions”). Historically, our coffee businesses and the income from primarily coffee-related and smaller equity method investments were recorded within our operating income as these businesses operated as direct extensions of our base business. Following the coffee business transactions, while we retain an ongoing interest in coffee through significant equity method investments, and we have significant influence with JDE and other equity method investments, we do not have control over these operations directly. As such, beginning in the third quarter of 2015, we began to recognize the investment earnings in after-tax equity method investment earnings outside of operating income and segment 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 and thus is not shown on our consolidated statement of earnings for this period. For periods prior to the July 2, 2015 closing, the coffee and other equity method investment earnings were included within our operating income and segment income. Please see Note 2, Divestitures and Acquisitions – Coffee Business Transactions, and Note 17, Segment Reporting, for more information on these transactions.
We use the cost method of accounting for investments in which we have an ownership interest of less than 20% and in which we do not exercise significant influence. The noncontrolling interest represents the noncontrolling investors’ interests in the results of subsidiaries that we control and consolidate. All intercompany transactions are eliminated.
Discontinued Operation:
On October 1, 2012 (the “Distribution Date”), we completed the spin-off of our former North American grocery business, Kraft Foods Group, Inc. (“Kraft Foods Group”; which is now part of The Kraft Heinz Company), by distributing 100% of the outstanding shares of common stock of Kraft Foods Group to holders of our Common Stock (the “Spin-Off”). We retained our global snacks business along with other food and beverage categories. The divested Kraft Foods Group business is presented as a discontinued operation on the consolidated statements of earnings in 2013. See Note 2, Divestitures and Acquisitions, for additional information.
Accounting Calendar Change:
In connection with moving toward a common consolidation date across the Company, in the first quarter of 2015, we changed the consolidation date for our North America segment from the last Saturday of each period to the last calendar day of each period. The change had a favorable impact of $78 million on net revenues and $37 million on operating income in 2015. In the first quarter of 2013, we changed the consolidation date for our Europe segment, from predominantly the last Saturday of each period to the last calendar day of each period. The change had a favorable impact of $37 million on net revenues and $6 million on operating income in 2013.
As a result of these changes, each of our operating subsidiaries now reports results as of the last calendar day of the period. We believe the change will improve business planning and financial reporting by better matching the close dates of the operating subsidiaries and bringing the reporting dates to the period-end date. As the effect to prior-period results was not material, we have not revised prior-period results.
Use of Estimates:
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require us to make estimates and assumptions that affect a number of amounts in our consolidated financial statements. Significant accounting policy elections, estimates and assumptions include, among others, pension and benefit plan assumptions, valuation assumptions of goodwill and intangible assets, useful lives of long-lived assets, restructuring program liabilities, marketing program accruals, insurance and self-insurance reserves and income taxes. We base our estimates on historical experience and other assumptions that we believe are reasonable. If actual amounts differ from estimates, we include the revisions in our consolidated results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material effect on our consolidated financial statements.
Currency Translation and Highly Inflationary Accounting:
We translate the results of operations of our subsidiaries from multiple currencies using average exchange rates during each period and translate balance sheet accounts using exchange rates at the end of each period. We record currency translation adjustments as a component of equity (except for highly inflationary currencies such as in Venezuela) and realized exchange gains and losses on transactions in earnings.
Venezuela. From January 1, 2010 through December 31, 2015, we accounted for the results of our Venezuelan subsidiaries using the U.S. dollar as the functional currency as prescribed by U.S. GAAP for highly inflationary economies.
Effective as of the close of the 2015 fiscal year, we concluded that we no longer met the accounting criteria for consolidation of our Venezuela subsidiaries due to a loss of control over our Venezuelan operations and an other-than-temporary lack of currency exchangeability. During the fourth quarter of 2015, representatives of the Venezuelan government arbitrarily imposed pricing restrictions on our local operations that resulted in our inability to recover operating costs. We immediately began an appeal process with the Venezuelan authorities to demonstrate that our pricing was in line with the regulatory requirements. In January 2016, local officials verbally lifted some of the pricing restrictions; however, it is uncertain when the legally required administrative order will be issued. The legal and regulatory environment has become more unreliable. While we had been complying with the Venezuelan law governing pricing and profitability controls and had followed the legal process for appeal, the appeal process was not available to us as outlined under law. Additionally, we have been increasingly facing issues procuring raw materials and packaging. Taken together, these actions, the economic environment in Venezuela and the progressively limited access to dollars to import goods through the use of any of the available currency mechanisms have impaired our ability to operate and control our Venezuelan businesses. We therefore concluded that we no longer met the criteria for the consolidation of our Venezuelan subsidiaries.
As of the close of the 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations. We recorded a $778 million pre-tax loss as we reduced the value of our cost method investment in Venezuela and all Venezuelan receivables held by our other subsidiaries to realizable fair value, resulting in full impairment. The recorded loss also included historical cumulative translation adjustments related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity. The fair value of our investments in our Venezuelan subsidiaries was estimated based on discounted cash flow projections of current and expected operating losses in the foreseeable future and our ability to operate the business on a sustainable basis. Our fair value estimate reflects U.S. dollar exchange and discount rate assumptions that reflect the inflation and economic uncertainty in Venezuela.
Beginning in 2016, we will no longer include net revenues, earnings or net assets of 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.
For 2015 and prior periods presented, the operating results of our Venezuela operations were included in our consolidated statements of earnings. During this time, we recognized a number of currency-related remeasurement losses resulting from devaluations of the Venezuela bolivar exchange rates we historically used to source U.S. dollars for purchases of imported raw materials, packaging and other goods and services. The following table sets forth a history of the remeasurement losses, the deconsolidation loss and historical operating results and financial position of our Venezuelan subsidiaries for the periods presented:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Net Revenues | $ | 1,217 | $ | 760 | $ | 795 | ||||||
| Operating income (excluding remeasurement and deconsolidation losses) | 266 | 181 | 211 | |||||||||
| 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 | ) | – | – | ||||||||
| As of December 31, | ||||||||||||
| 2015 | 2014 | |||||||||||
| (in millions) | ||||||||||||
| Cash (1) | $ | 611 | $ | 278 | ||||||||
| Net monetary assets (1) | 405 | 236 | ||||||||||
| Net assets (1) | 658 | 500 |
| (1) | Represents the financial position of our Venezuelan subsidiaries prior to the accounting change on December 31, 2015. |
|---|
Argentina. On December 16, 2015, the new Argentinean government fiscal authority announced the lifting of strict currency controls and reduced restrictions of exports and imports. The next day, the value of the Argentine peso relative to the U.S. dollar fell by 36% and remained relatively stable at this level through December 31, 2015. Further volatility in the exchange rate is expected. While the business operating environment remains challenging, we continue to monitor and actively manage our investment and exposures in Argentina. Although our ability to effectively hedge against currency fluctuations was reduced during the presidential transition in December, the hedging markets have returned to normal operating levels, allowing us to continue executing our hedging programs. We continue refining our product portfolio to improve our product offerings, mix and profitability. We also continue to implement additional cost initiatives to protect the business. While further currency declines could have an adverse impact on our ongoing results of operations, we believe the actions by the new government to reduce economic controls and business restrictions will provide favorable opportunities for our Argentinean subsidiaries. Our Argentinian operations contributed approximately $755 million, or 2.5% of consolidated net revenues and approximately $45 million, or 0.5% of consolidated operating income for the year ended December 31, 2015. As of December 31, 2015, the net monetary liabilities of our Argentina operations were not material. Argentina is not designated as a highly-inflationary economy for accounting purposes, so we record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings.
Other Countries. Since we have operations in over 80 countries and sell in 165 countries, we regularly monitor economic and currency-related risks and seek to take protective measures in response to these exposures. Some of the countries in which we do business have had significant economic uncertainty recently. These include Brazil, China, Russia, Turkey and Ukraine, most of which have had either currency devaluation or volatility. We continue to monitor operations, currencies and net monetary exposures in these countries. At this time, we do not have material net monetary asset exposures or risk to our operating results from changing to highly inflationary accounting in these countries.
Cash and Cash Equivalents:
Cash and cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less.
Transfers of Financial Assets:
We account for transfers of financial assets as sales when we have surrendered control over the related assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of our continuing involvement with the assets transferred. We use these programs periodically when circumstances are favorable to manage liquidity. Gains and losses stemming from transfers reported as sales are included as an offset to net revenue in the consolidated statements of earnings. Assets obtained and liabilities incurred in connection with transfers reported as sales are initially recognized on the consolidated balance sheets at fair value.
On December 19, 2013 in Europe and on December 22, 2015 in the United States, we entered into uncommitted revolving non-recourse accounts receivable factoring arrangements with a major global bank. The facilities, whose maximum combined capacity is $820 million, will remain available unless terminated by either party.
Under the arrangements, we may sell eligible short-term trade receivables to the bank in exchange for cash. The transfers are reported as sales of trade receivables within our consolidated financial statements. We continue to service the receivables sold, acting solely as a collecting agent on behalf of the bank. We recorded losses on these sales of $3 million in 2015 and $2 million in 2014. The outstanding principal amount of receivables sold under the combined facilities amounted to $570 million in 2015 and $211 million in 2014.
Inventories:
We value our inventory using the average cost method. We also record inventory allowances for overstock and obsolete inventories due to ingredient and packaging changes.
Long-Lived Assets:
Property, plant and equipment are stated at historical cost and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from 3 to 20 years and buildings and building improvements over periods up to 40 years.
We review long-lived assets, including amortizable intangible assets, for realizability on an ongoing basis. Changes in depreciation, generally accelerated depreciation, are determined and recorded when estimates of the remaining useful lives or residual values of long-term assets change. We also review for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. In those circumstances, we perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for asset impairment, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. Any impairment loss is calculated as the excess of the asset’s carrying value over its estimated fair value. Fair value is estimated based on the undiscounted cash flows for the asset group over the remaining useful life or based on the expected cash proceeds for the asset less costs of disposal. Any significant impairment losses would be recorded within asset impairment and exit costs in the consolidated statements of earnings.
Software Costs:
We capitalize certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are included in property, plant and equipment and amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed seven years.
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 elect to do quantitative testing instead, depending on prior test results, current year developments, current risk evaluations and other practical considerations. In the event that significant potential goodwill impairment risk exists for a specific reporting unit, we apply a two-step quantitative test. The first step compares the 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, 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.
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. We determine estimated fair value using planned growth rates, market-based discount rates and estimates of royalty rates. If the carrying value of the asset exceeds its fair value, we consider the asset impaired and reduce its carrying value to the estimated fair value. We amortize definite-lived intangible assets over their estimated useful lives and evaluate them for impairment as we do other long-lived assets.
Insurance and Self-Insurance:
We use a combination of insurance and self-insurance for a number of risks, including workers’ compensation, general liability, automobile liability, product liability and our obligation for employee healthcare benefits. We estimate the liabilities associated with these risks on an undiscounted basis by evaluating and making judgments about historical claims experience and other actuarial assumptions and the estimated impact on future results.
Revenue Recognition:
We recognize revenues when title and risk of loss pass to customers, which generally occurs upon delivery or shipment of goods. Revenues are recorded net of sales incentives and trade promotions and include all shipping and handling charges billed to customers. Our shipping and handling costs are classified as part of cost of sales. Provisions for product returns and other trade allowances are also recorded as reductions to revenues within the same period that the revenue is recognized.
Marketing and Research and Development:
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. Advertising expense was $1,542 million in 2015, $1,552 million in 2014 and $1,721 million in 2013. We expense product research and development costs as incurred. Research and development expense was $409 million in 2015, $455 million in 2014 and $471 million in 2013. We record marketing and research and development expenses within selling, general and administrative expenses.
Employee Benefit Plans:
We provide a range of benefits to our current and retired employees. These include pension benefits, postretirement health care benefits and postemployment benefits depending upon jurisdiction, tenure, job level and other factors. Local statutory requirements govern many of the benefit plans we provide around the world. Local government plans generally cover health care benefits for retirees outside the United States, Canada and United Kingdom. Our U.S., Canadian and U.K. subsidiaries provide health care and other benefits to most retired employees. Our postemployment benefit plans provide primarily severance benefits for eligible salaried and certain hourly employees. The cost for these plans is recognized in earnings primarily over the working life of the covered employee.
Financial Instruments:
We use financial instruments to manage our currency exchange rate, commodity price and interest rate risks. We monitor and manage these exposures as part of our overall risk management program, which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. A principal objective of our risk management strategies is to reduce significant, unanticipated earnings fluctuations that may arise from volatility in currency exchange rates, commodity prices and interest rates, principally through the use of derivative instruments.
We use a combination of primarily currency forward contracts, futures, options and swaps; commodity forward contracts, futures and options; and interest rate swaps to manage our exposure to cash flow variability, protect the value of our existing currency assets and liabilities and protect the value of our debt. See Note 9, Financial Instruments, to the consolidated financial statements for more information on the types of derivative instruments we use.
We record derivative financial instruments on a gross basis and at fair value in our consolidated balance sheets within other current assets or other current liabilities due to their relatively short-term duration. Cash flows from derivative instruments are classified in the consolidated statements of cash flows based on the nature of the derivative instrument. Changes in the fair value of a derivative that is designated as a cash flow hedge, to the extent that the hedge is effective, are recorded in accumulated other comprehensive earnings / (losses) and reclassified to earnings when the hedged item affects earnings. Changes in fair value of economic hedges and the ineffective portion of all hedges are recognized in current period earnings. Changes in the fair value of a derivative that is designated as a fair value hedge, along with the changes in the fair value of the related hedged asset or liability, are recorded in earnings in the same period. We use
non-U.S. dollar denominated debt to hedge a portion of our net investment in non-U.S. operations against adverse movements in exchange rates, with currency movements related to the debt and net investment and the related deferred taxes recorded within currency translation adjustment in accumulated other comprehensive earnings / (losses).
In order to qualify for hedge accounting, a specified level of hedging effectiveness between the derivative instrument and the item being hedged must exist at inception and throughout the hedged period. We must also formally document the nature of and relationship between the derivative and the hedged item, as well as our risk management objectives, strategies for undertaking the hedge transaction and method of assessing hedge effectiveness. Additionally, for a hedge of a forecasted transaction, the significant characteristics and expected term of the forecasted transaction must be specifically identified, and it must be probable that the forecasted transaction will occur. If it is no longer probable that the hedged forecasted transaction will occur, we would recognize the gain or loss related to the derivative in earnings.
When we use derivatives, we are exposed to credit and market risks. Credit risk exists when a counterparty to a derivative contract might fail to fulfill its performance obligations under the contract. We reduce our credit risk by entering into transactions with counterparties with high quality, investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties. We also maintain a policy of requiring that all significant, non-exchange traded derivative contracts with a duration of one year or longer are governed by an International Swaps and Derivatives Association master agreement. Market risk exists when the value of a derivative or other financial instrument might be adversely affected by changes in market conditions and commodity prices, currency exchange rates or interest rates. We manage derivative market risk by limiting the types of derivative instruments and derivative strategies we use and the degree of market risk that we plan to hedge through the use of derivative instruments.
Commodity cash flow hedges. We are exposed to price risk related to forecasted purchases of certain commodities that we primarily use as raw materials. We enter into commodity forward contracts primarily for wheat, sugar and other sweeteners, soybean and vegetable oils and cocoa. Commodity forward contracts generally are not subject to the accounting requirements for derivative instruments and hedging activities under the normal purchases exception. We also use commodity futures and options to hedge the price of certain input costs, including cocoa, energy costs, wheat, sugar and other sweeteners, soybean and vegetable oils and dairy. Some of these derivative instruments are highly effective and qualify for hedge accounting treatment. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes.
Currency exchange cash flow hedges. We use various financial instruments to mitigate our exposure to changes in exchange rates from third-party and intercompany current and forecasted transactions. These instruments may include currency exchange forward contracts, futures, options and swaps. Based on the size and location of our businesses, we use these instruments to hedge our exposure to certain currencies, including the euro, pound sterling, Swiss franc and Canadian dollar.
Interest rate cash flow and fair value hedges. We manage interest rate volatility by modifying the pricing or maturity characteristics of certain liabilities so that the net impact on expense is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate liabilities appreciate or depreciate in market value. We expect the effect of this unrealized appreciation or depreciation to be substantially offset by our gains or losses on the derivative instruments that are linked to these hedged liabilities. We use derivative instruments, including interest rate swaps that have indices related to the pricing of specific liabilities as part of our interest rate risk management strategy. As a matter of policy, we do not use highly leveraged derivative instruments for interest rate risk management. We use interest rate swaps to economically convert a portion of our fixed-rate debt into variable-rate debt. Under the interest rate swap contracts, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts, which is calculated based on an agreed-upon notional amount. We also use interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment.
Hedges of net investments in non-U.S. operations. We have numerous investments outside the United States. The net assets of these subsidiaries are exposed to changes and volatility in currency exchange rates. We use local currency denominated debt to hedge our non-U.S. net investments against adverse movements in exchange rates. We designated our euro, pound sterling and Swiss franc denominated borrowings as a net investment hedge of a portion of our overall European operations. The gains and losses on our net investment in these designated European operations are economically offset by losses and gains on our euro, pound sterling and Swiss franc denominated borrowings. The change in the debt’s value, net of deferred taxes, is recorded in the currency translation adjustment component of accumulated other comprehensive earnings / (losses).
Income Taxes:
We recognize tax benefits in our financial statements when uncertain tax positions are assessed more likely than not to be sustained upon audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
We recognize deferred tax assets for deductible temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.
New Accounting Pronouncements:
In January 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which provides updated guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. The ASU is effective for fiscal years beginning after December 15, 2017. We are currently assessing the impact across our operations and on our consolidated financial statements.
In November 2015, the FASB issued an ASU that requires all deferred tax liabilities and assets be classified as noncurrent in the balance sheet. The new standard did not change the current requirement to offset deferred tax liabilities and assets within a tax-paying component of an entity. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. It can also be applied either prospectively or retrospectively to all periods presented. We early adopted the new standard on December 31, 2015 on a prospective basis. We classified deferred taxes as non-current on our consolidated balance sheets as of December 31, 2015. No prior periods were retrospectively adjusted.
In September 2015, the FASB issued an ASU that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under the new guidance, measurement-period adjustments should be accounted for during the period in which the entity determines the amount of the adjustment. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted, and should be applied prospectively to open measurement periods after the effective date, regardless of the acquisition date. We elected to early adopt and will apply the standard in our accounting for the acquisitions that we closed during the third quarter of 2015. See Note 2, Divestitures and Acquisitions, for more information.
In July 2015, the FASB issued an ASU that simplifies the guidance on the subsequent measurement of inventory. U.S. GAAP currently requires an entity to measure inventory at the lower of cost or market. Previously, market could be replacement cost, net realizable value or net realizable value less an approximate normal profit margin. Under the new standard, inventory should be valued at the lower of cost or net realizable value. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We early adopted the new standard on January 1, 2016 on a prospective basis. The adoption of the standard is not expected to have a material impact on our consolidated financial statements.
In May 2015, the FASB issued an ASU that applies to reporting entities that elect to measure the fair value of an investment using the net asset value (“NAV”) per share (or its equivalent) practical expedient. This ASU removes the requirement to include investments measured using the practical expedient within fair value hierarchy disclosures. Also, practical expedient disclosures previously required for all eligible investments are now only required for investments for which the practical expedient has been elected. The update is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. As we measure certain defined benefit plan assets using the NAV practical expedient, we adopted the new standard on January 1, 2016. The new standard will impact our future pension disclosures and is not expected to otherwise have an impact on our consolidated financial statements.
In April 2015, the FASB issued an ASU that provides guidance on evaluating whether a cloud computing arrangement includes a software license. If there is a software license component, software licensing accounting should be applied; otherwise, service contract accounting should be applied. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. We adopted the new standard on January 1, 2016 and on a prospective basis. The standard is not expected to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued an ASU that simplifies the presentation of debt issuance costs. The standard requires debt issuance costs related to a recognized debt obligation to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt instead of being presented as an asset, similar to the presentation of debt discounts.
In August 2015, the FASB issued an update clarifying that for line-of-credit arrangements entities may continue to defer debt issuance costs as an asset. The ASU represents a change in accounting principle and requires retrospective application. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. We early adopted the new standard on December 31, 2015 and reclassified historical deferred debt issuance costs related to debt other than line-of-credit arrangements from long-term other assets to offset the related debt obligations.
In February 2015, the FASB issued an ASU that amends current consolidation guidance related to the evaluation of whether certain legal entities should be consolidated. The standard modifies both the variable interest entity (“VIE”) model and the voting interest model, including analyses of whether limited partnerships are VIEs and the impact of service fees and related party interests in determining if an entity is a VIE to the reporting entity. The guidance is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. We adopted the new standard on January 1, 2016 and we do not expect the standard to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued an ASU on revenue recognition from contracts with customers. The new ASU outlines a new, single comprehensive model for companies to use in accounting for revenue. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for the goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows from customer contracts, including significant judgments made in recognizing revenue. In May 2015, the FASB proposed changes to the new guidance in the areas of licenses and identifying performance obligations. In August 2015, the FASB issued an ASU that defers the effective date by one year to annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date which was for annual reporting periods beginning after December 15, 2016. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption. We have made progress in our due diligence and scoping reviews and continue to assess the impact of the new standard across our operations and on our consolidated financial statements. We anticipate adopting the new standard on January 1, 2018.
Reclassifications:
Certain amounts previously reported have been reclassified to conform to current-year presentation. See above for reclassifications made related to deferred debt issuance costs.
Note 2. Divestitures and Acquisitions
Coffee Business Transactions:
On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses (including our coffee portfolio in France) with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, Jacobs Douwe Egberts or JDE. We 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 discussion of the divestiture of AGF below under Other Divestitures, Acquisitions and Sales of Property.
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.
Prior to the July 2, 2015 closing, we received conditional approval for the coffee business combination from the European Commission following their antitrust evaluation. The European Commission’s ruling was conditioned upon JDE’s divestiture of the majority of the EU-based Carte Noire business and DEMB’s Merrild business, primarily in France and Denmark. Those businesses have been transferred to JDE. JDE is completing the sales of these businesses in line with the European Commission agreements. As these businesses were recorded at their fair value as of July 2, 2015, reflecting the then pending sale values, we did not and will not record any gain or loss on the sale of these businesses in our share of JDE’s earnings.
In our historical consolidated results, the pre-tax earnings of the coffee businesses we contributed to JDE were included in periods prior to the July 2, 2015 closing date and as reflected below for the periods presented:
| For the Six Months Ended July 2, | For the Years Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | (in millions) | |||||||||||
| Earnings before income taxes | $ | 342 | $ | 646 | $ | 700 |
We also incurred incremental expenses related to readying our global coffee businesses for the transactions that totaled $278 million for the year ended December 31, 2015 and $77 million for the year ended December 31, 2014. Of these total expenses, $123 million was recorded within asset impairment and exit costs in 2015 and the remainder was recorded within selling, general and administrative expenses of primarily our Europe segment, as well as within our Eastern Europe, Middle East and Africa (“EEMEA”) segment and general corporate expenses.
On July 2, 2015, we deconsolidated the following assets and liabilities in connection with the deconsolidation of our global coffee businesses (in millions). The amounts below also include the fourth quarter final settlement of coffee business-related pension obligations as further described below.
| Assets | ||||
| Cash and cash equivalents | $ | 488 | ||
| Trade receivables | 468 | |||
| Other receivables | 24 | |||
| Inventories, net | 469 | |||
| Deferred income taxes | 6 | |||
| Other current assets | 44 | |||
| Current assets | 1,499 | |||
| Property, plant and equipment, net | 751 | |||
| Goodwill | 1,664 | |||
| Intangible assets, net | – | |||
| Other assets | 35 | |||
| Noncurrent assets | 2,450 | |||
| Total assets | $ | 3,949 | ||
| Liabilities | ||||
| Accounts payable | $ | 438 | ||
| Accrued marketing | 290 | |||
| Accrued employment costs | 29 | |||
| Other current liabilities | 63 | |||
| Current liabilities | 820 | |||
| Deferred income taxes | 63 | |||
| Accrued pension costs | 131 | |||
| Other liabilities | 4 | |||
| Noncurrent liabilities | 198 | |||
| Total liabilities | $ | 1,018 | ||
| Net assets deconsolidated | $ | 2,931 | ||
In addition to the net assets we deconsolidated, we also reduced accumulated other comprehensive losses for the transfer of coffee business-related pension obligations in the amount of $90 million in 2015. The timing of these reductions during the third and fourth quarters of 2015 corresponded to when the Company was discharged from the obligations under the plans.
As a result of the transaction, our snacks product categories, consisting of biscuits, chocolate, gum and candy, make up the majority of our business portfolio, contributing approximately 85% of our 2015 and 2014 net revenues after excluding coffee net revenues. By retaining a significant stake in JDE, the coffee category will continue to be significant to our results. As such, we have reflected our historical coffee results and equity earnings from JDE in results from continuing operations reflecting the fact that results from the coffee category continue to be a significant part of our net earnings and business strategy going forward.
Summary Financial Information for Equity Method Investments:
Summarized financial information for JDE and our other equity method investments is reflected below.
| As of December 31, | ||||||||||||
| 2015 | 2014 | |||||||||||
| (in millions) | ||||||||||||
| Current assets | $ | 3,943 | $ | 1,120 | ||||||||
| Noncurrent assets | 20,936 | 835 | ||||||||||
| Total assets | $ | 24,879 | $ | 1,955 | ||||||||
| Current liabilities | $ | 2,779 | $ | 564 | ||||||||
| Noncurrent liabilities | 9,880 | 62 | ||||||||||
| Total liabilities | $ | 12,659 | $ | 626 | ||||||||
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Net revenues | $ | 4,993 | $ | 2,721 | $ | 2,749 | ||||||
| Gross profit | 1,551 | 921 | 952 | |||||||||
| Income from continuing operations | 96 | 226 | 214 | |||||||||
| Net income | 97 | 226 | 214 | |||||||||
| Net income attributable to investees (1) | $ | 97 | $ | 226 | $ | 214 | ||||||
| Mondelēz International ownership interests | 40%-50% | 40%-50% | 40%-50% | |||||||||
| Mondelēz International share of investee net income (2) | $ | 56 | $ | 113 | $ | 107 | ||||||
| (1) | Includes $33 million of amortization expense related to a basis difference between the U.S. GAAP accounting basis for our equity method investments and the U.S. GAAP accounting basis of their equity. |
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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. 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 recorded within segment operating income were $56 million for the six months ended July 2, 2015, $113 million for the year ended December 31, 2014 and $107 million for the year ended December 31, 2013. See Note 1, Summary of Significant Accounting Policies – Principles of Consolidation, for additional information. |
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Additionally, our proportionate share of JDE’s and our other equity method investments’ other comprehensive losses was $137 million in 2015, $28 million in 2014 and $1 million in 2013 which were recorded within our consolidated statement of other comprehensive earnings.
JDE Capital Increase:
On December 18, 2015, AHBV and we agreed to provide JDE additional capital to pay down some of its debt with lenders. Our pro rata share of the capital increase was €499 million ($544 million 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.
Planned Keurig Transaction:
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.
Spin-Off of Kraft Foods Group:
We divested the Kraft Foods Group grocery business in a spin-off completed on October 1, 2012. In 2013, in connection with the Kraft Foods Group business, we received cash and recorded income from the resolution of the legal matter described below and we received cash and retired a receivable related to a Spin-Off stock award cash settlement with Kraft Foods Group. We also incurred Spin-Off transaction, transition and financing and related costs (“Spin-Off Costs”) through the end of 2014 as noted below.
On December 13, 2013, an independent arbitrator in our dispute with the Starbucks Coffee Company (“Starbucks”) issued a decision and Final Award that Kraft Foods Global, Inc. (which became Kraft Foods Group in the Spin-Off), the named party in the proceeding, had proven that it was entitled to recover and that Starbucks was required to pay $2,764 million in total cash compensation for Starbucks’ unilateral termination of the Starbucks packaged coffee business license and supply agreement. The award included compensation for 135% of the determined fair market value of the agreement for improper termination as well as prejudgment interest of $521 million and Kraft Foods Group’s attorney’s fees, which the parties agreed would equal $15 million. Starbucks has paid all of the amount owed pursuant to the ruling. Under the Separation and Distribution Agreement between Kraft Foods Group and us, Kraft Foods Group directed the recovery awarded in the arbitration proceeding to us in connection with the Spin-Off recapitalization plans. Accordingly, the pre-tax gain on the resolution of the Starbucks arbitration of $2.5 billion ($1.6 billion net of tax) was recorded in earnings from discontinued operations during the fourth quarter of 2013.
In March 2013, we also collected $55 million from Kraft Foods Group related to the cash settlement of stock awards held by our respective employees at the time of the Spin-Off as further described in Note 11, Stock Plans.
In 2014, we concluded our Spin-Off transition plans. We recorded Spin-Off Costs of $35 million in 2014 and $62 million in 2013 in pre-tax earnings within selling, general and administrative expenses. Through the end of 2014, we incurred total Spin-Off Costs of approximately $1.2 billion.
Other Divestitures, Acquisitions and Sales of Property:
On July 15, 2015, we acquired an 80% interest in a biscuit operation in Vietnam, which is now a subsidiary within our Asia Pacific segment. Total cash paid to date for the biscuit operation, intellectual property, non-compete and consulting agreements less purchase price adjustments received was 11,645 billion Vietnamese dong ($534 million U.S. dollars using applicable exchange rates on July 15 and November 27). We have made, received and expect to make the following cash payments in connection with the acquisition:
| • | On November 10, 2014, we deposited $46 million in escrow upon signing the purchase agreement. |
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| • | On July 15, 2015, we made a 9,122 billion Vietnamese dong ($418 million U.S. dollars as of July 15, 2015) payment for the biscuit operation, a $44 million additional escrow deposit and a 759 billion Vietnamese dong ($35 million U.S. dollars as of July 15, 2015) partial payment for the non-compete and continued consulting agreements. |
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| • | On November 27, 2015, we received 197 billion Vietnamese dong ($9 million U.S. dollars as of November 27, 2015) as a purchase price adjustment related to working capital adjustments at closing. |
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| • | Subject to the satisfaction of final conditions, including the resolution of warranty, other claims and further purchase price adjustments, we expect to release previously escrowed funds of $90 million for the remaining 20% interest in the biscuit operation and to make a final payment of 759 billion Vietnamese dong ($34 million U.S. dollars using a December 31, 2015 exchange rate) for the non-compete and consulting agreements. We anticipate resolution of these conditions by the end of the third quarter of 2016. |
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We are in the process of completing the valuation work for the acquired net assets. We have recorded a preliminary allocation of the consideration paid including $10 million to inventory, $47 million to property, plant and equipment, $19 million to other net liabilities and $461 million of estimated goodwill. We recorded the non-compete and consulting agreements as prepaid contracts within other current and non-current assets and they will be amortized into net earnings over the remaining contract terms. The acquisition added $121 million in incremental net revenues and $21 million in incremental operating income in 2015. Additionally, we recorded acquisition costs of $7 million in 2015 and $2 million in 2014 and integration costs of $9 million for the year ended December 31, 2015 within selling, general and administrative expenses.
On April 23, 2015, we completed the divestiture of our 50% equity interest in AGF, our Japanese coffee joint venture, to our joint venture partner, which generated cash proceeds of 27 billion Japanese yen ($225 million U.S. dollars as of April 23, 2015) and a pre-tax gain of $13 million (after-tax loss of $9 million). Upon closing, we divested our $99 million investment in the joint venture, $65 million of goodwill and $41 million of accumulated other comprehensive losses. We also incurred approximately $7 million of transaction costs.
On February 16, 2015, we acquired a U.S. snack food company, Enjoy Life Foods, within our North America segment. We paid cash and settled debt totaling $81 million in connection with the acquisition. Upon finalizing the valuation of the acquired net assets during the second quarter, we recorded an $81 million purchase price allocation of $58 million in identifiable intangible assets, $20 million of goodwill and $3 million of other net assets. The acquisition-related costs and operating results of the acquisition were not material to our consolidated financial statements for the year ended December 31, 2015.
On February 22, 2013, we acquired the remaining interest in a biscuit operation in Morocco, which is now a wholly-owned subsidiary within our EEMEA segment. We paid net cash consideration of $119 million, consisting of $155 million purchase price net of cash acquired of $36 million. Prior to the acquisition, our interest in the operation was accounted for under the equity method. As a result of obtaining a controlling interest, we consolidated the operation and upon finalizing the valuation of the acquired net assets in the fourth quarter of 2013, we recorded the fair value of acquired assets (including identifiable intangible assets of $48 million), the liabilities assumed and goodwill of $209 million. During the quarter ended March 31, 2013, we also recorded a pre-tax gain of $22 million related to the remeasurement of our previously-held equity interest in the operation to fair value in accordance with U.S. GAAP and acquisition costs of $7 million in interest and other expense, net and selling, general and administrative expenses. We recorded integration charges of $4 million in 2014 and $4 million in 2013 within cost of sales and selling, general and administrative expenses.
In 2013, we completed several divestitures primarily in our EEMEA and Europe segments that generated cash proceeds of $60 million and pre-tax gains of $8 million. The divestitures included a salty snacks business in Turkey, a confectionery business in South Africa and a chocolate business in Spain. The aggregate operating results of the 2013 divestitures were not material to our financial statements in any of the periods presented.
In 2013, we sold properties in India within our Asia Pacific segment and in Italy, the United Kingdom and Norway within our Europe segment. The India property sale generated a $39 million pre-tax gain and $53 million of cash proceeds. The Europe property sales generated $29 million in pre-tax net gains and $37 million of cash proceeds. We also have a $27 million receivable as of December 31, 2015 related to the United Kingdom property sale in 2013, of which $25 million was received in January 2016, with approximately $2 million to be received within a year. The gains were recorded within selling, general and administrative expenses and cash proceeds were recorded in cash flows from other investing activities in the year ended December 31, 2013.
Note 3. Inventories
Inventories consisted of the following:
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Raw materials | $ | 782 | $ | 1,215 | ||||
| Finished product | 1,930 | 2,434 | ||||||
| 2,712 | 3,649 | |||||||
| Inventory reserves | (103 | ) | (169 | ) | ||||
| Inventories, net | $ | 2,609 | $ | 3,480 | ||||
On July 2, 2015, we deconsolidated $469 million of net inventory with the coffee business transactions. See Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for additional information.
Note 4. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Land and land improvements | $ | 495 | $ | 574 | ||||
| Buildings and building improvements | 2,753 | 3,117 | ||||||
| Machinery and equipment | 10,044 | 11,737 | ||||||
| Construction in progress | 1,262 | 1,484 | ||||||
| 14,554 | 16,912 | |||||||
| Accumulated depreciation | (6,192 | ) | (7,085 | ) | ||||
| Property, plant and equipment, net | $ | 8,362 | $ | 9,827 | ||||
On July 2, 2015, we deconsolidated $751 million of net property, plant and equipment with the coffee business transactions. See Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for additional information.
Capital expenditures of $1,514 million for the year ended December 31, 2015 exclude $322 million of accrued capital expenditures remaining unpaid at December 31, 2015 and include payment for $388 million of capital expenditures that were accrued and unpaid at December 31, 2014.
In connection with our restructuring programs, we recorded non-cash asset write-downs (including accelerated depreciation and asset impairments) of $264 million in 2015, $173 million in 2014 and $89 million in 2013 (see Note 6, Restructuring Programs). These charges were recorded in the consolidated statements of earnings within asset impairment and exit costs as follows:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Latin America | $ | 46 | $ | 14 | $ | – | ||||||
| Asia Pacific | 80 | 23 | 2 | |||||||||
| EEMEA | 9 | 16 | – | |||||||||
| Europe | 64 | 37 | 27 | |||||||||
| North America | 65 | 83 | 60 | |||||||||
| Total non-cash asset write-downs | $ | 264 | $ | 173 | $ | 89 | ||||||
Note 5. Goodwill and Intangible Assets
Goodwill by reportable segment was:
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Latin America | $ | 858 | $ | 1,127 | ||||
| Asia Pacific | 2,520 | 2,395 | ||||||
| EEMEA | 1,304 | 1,942 | ||||||
| Europe | 7,117 | 8,952 | ||||||
| North America | 8,865 | 8,973 | ||||||
| Goodwill | $ | 20,664 | $ | 23,389 | ||||
Intangible assets consisted of the following:
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Non-amortizable intangible assets | $ | 17,527 | $ | 18,810 | ||||
| Amortizable intangible assets | 2,320 | 2,525 | ||||||
| 19,847 | 21,335 | |||||||
| Accumulated amortization | (1,079 | ) | (1,000 | ) | ||||
| Intangible assets, net | $ | 18,768 | $ | 20,335 | ||||
Non-amortizable intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of trademarks, customer-related intangibles, process technology, licenses and non-compete agreements. At December 31, 2015, the weighted-average life of our amortizable intangible assets was 13.6 years.
Amortization expense for intangible assets was $181 million in 2015, $206 million in 2014 and $217 million in 2013. We currently estimate annual amortization expense for each of the next five years to be approximately $180 million, estimated using December 31, 2015 exchange rates.
Changes in goodwill and intangible assets consisted of:
| 2015 | 2014 | |||||||||||||||
| Goodwill | Intangible Assets, at cost | Goodwill | Intangible Assets, at cost | |||||||||||||
| (in millions) | ||||||||||||||||
| Balance at January 1 | $ | 23,389 | $ | 21,335 | $ | 25,597 | $ | 22,919 | ||||||||
| Changes due to: | ||||||||||||||||
| Currency | (1,477 | ) | (1,462 | ) | (2,256 | ) | (1,528 | ) | ||||||||
| Coffee business transactions and divestiture | (1,729 | ) | – | – | – | |||||||||||
| Acquisitions | 481 | 58 | – | – | ||||||||||||
| Asset impairments | – | (83 | ) | – | (57 | ) | ||||||||||
| Other | – | (1 | ) | 48 | 1 | |||||||||||
| Balance at December 31 | $ | 20,664 | $ | 19,847 | $ | 23,389 | $ | 21,335 | ||||||||
Changes to goodwill and intangibles were:
| • | Coffee business transactions and divestiture – On July 2, 2015, we deconsolidated $1,664 million of goodwill and less than $1 million of intangible assets in connection with the coffee business transactions. On April 23, 2015, we completed the divestiture of our 50% equity interest in AGF, which resulted in divesting $65 million of goodwill. |
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| • | Acquisitions – On July 15, 2015, we acquired an 80% interest in a biscuit operation in Vietnam and recorded a preliminary allocation of $461 million of goodwill as we complete the final valuation work for the acquisition. On February 16, 2015, we acquired Enjoy Life Foods and recorded $20 million of goodwill and $58 million in identifiable intangible assets. |
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| • | Asset Impairments – On December 31, 2015, in connection with the deconsolidation of Venezuela, we recorded $12 million of impairment charges as described below. We recorded $71 million of charges related to four trademarks in 2015 and $57 million of charges related to two trademarks in 2014 as described below. |
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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.
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.
Note 6. Restructuring Programs
2014-2018 Restructuring Program
On May 6, 2014, our Board of Directors approved a $3.5 billion restructuring program, comprised of approximately $2.5 billion in cash costs and $1 billion in non-cash costs (the “2014-2018 Restructuring Program”), and up to $2.2 billion of capital expenditures. The primary objective of the 2014-2018 Restructuring Program is to reduce our operating cost structure in both our supply chain and overhead costs. The program is intended primarily to cover severance as well as asset disposals and other manufacturing-related one-time costs. Since inception, we have incurred total restructuring and related implementation charges of $1.4 billion related to the 2014-2018 Restructuring Program. We expect to incur the majority of the program’s remaining charges in 2016 and to complete the program by year-end 2018.
Restructuring Costs:
We recorded restructuring charges of $711 million 2015 and $274 million in 2014 within asset impairment and exit costs. The activity for the 2014-2018 Restructuring Program liability for the years ended December 31, 2015 and 2014 was:
| Severance | ||||||||||||
| and related | Asset | |||||||||||
| costs | Write-downs | Total | ||||||||||
| (in millions) | ||||||||||||
| Liability balance, January 1, 2014 | $ | – | $ | – | $ | – | ||||||
| Charges | 251 | 23 | 274 | |||||||||
| Cash spent | (17 | ) | – | (17 | ) | |||||||
| Non-cash settlements / adjustments | (5 | ) | (23 | ) | (28 | ) | ||||||
| Currency | (5 | ) | – | (5 | ) | |||||||
| Liability balance, December 31, 2014 | $ | 224 | $ | – | $ | 224 | ||||||
| Charges | 442 | 269 | 711 | |||||||||
| Cash spent | (243 | ) | – | (243 | ) | |||||||
| Non-cash settlements / adjustments | (4 | ) | (269 | ) | (273 | ) | ||||||
| Currency | (24 | ) | – | (24 | ) | |||||||
| Liability balance, December 31, 2015 | $ | 395 | $ | – | $ | 395 | ||||||
We spent $243 million in 2015 and $17 million in 2014 in cash severance and related costs. We also recognized non-cash pension settlement losses (See Note 10, Benefit Plans), non-cash asset write-downs (including accelerated depreciation and asset impairments) and other non-cash adjustments totaling $273 million in 2015 and $28 million in 2014. At December 31, 2015, $351 million of our net restructuring liability was recorded within other current liabilities and $44 million was recorded within other long-term liabilities.
Implementation Costs:
Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities. We believe the disclosure of implementation costs provides readers of our financial statements with more information on the total costs of our 2014-2018 Restructuring Program. Implementation costs primarily relate to reorganizing our operations and facilities in connection with our supply chain reinvention program and other identified productivity and cost saving initiatives. The costs include incremental expenses related to the closure of facilities, costs to terminate certain contracts and the simplification of our information systems. Within our continuing results of operations, we recorded implementation costs of $291 million in 2015 and $107 million in 2014. We recorded these costs within cost of sales and general corporate expense within selling, general and administrative expenses.
Restructuring and Implementation Costs in Operating Income:
During 2015 and 2014, we recorded restructuring and implementation costs related to the 2014-2018 Restructuring Program within operating income as follows:
| For the Years Ended December 31, | Latin | Asia | North | |||||||||||||||||||||||||
| America | Pacific | EEMEA | Europe | America | Corporate (1) | Total | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||
| 2015 | ||||||||||||||||||||||||||||
| Restructuring Costs | $ | 145 | $ | 133 | $ | 63 | $ | 228 | $ | 114 | $ | 28 | $ | 711 | ||||||||||||||
| Implementation Costs | 39 | 19 | 12 | 73 | 69 | 79 | 291 | |||||||||||||||||||||
| Total | $ | 184 | $ | 152 | $ | 75 | $ | 301 | $ | 183 | $ | 107 | $ | 1,002 | ||||||||||||||
| 2014 | ||||||||||||||||||||||||||||
| Restructuring Costs | $ | 81 | $ | 16 | $ | 19 | $ | 91 | $ | 57 | $ | 10 | $ | 274 | ||||||||||||||
| Implementation Costs | 16 | 9 | 4 | 37 | 5 | 36 | 107 | |||||||||||||||||||||
| Total | $ | 97 | $ | 25 | $ | 23 | $ | 128 | $ | 62 | $ | 46 | $ | 381 | ||||||||||||||
| Total Project 2014-2015 (2) | ||||||||||||||||||||||||||||
| Restructuring Costs | $ | 226 | $ | 149 | $ | 82 | $ | 319 | $ | 171 | $ | 38 | $ | 985 | ||||||||||||||
| Implementation Costs | 55 | 28 | 16 | 110 | 74 | 115 | 398 | |||||||||||||||||||||
| Total | $ | 281 | $ | 177 | $ | 98 | $ | 429 | $ | 245 | $ | 153 | $ | 1,383 | ||||||||||||||
| (1) | Includes adjustment for rounding. |
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| (2) | Includes all charges recorded since program inception on May 6, 2014 through December 31, 2015. |
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2012-2014 Restructuring Program
On October 1, 2012, we completed the Spin-Off of our North American grocery business, Kraft Foods Group, to our shareholders. Prior to this transaction, in 2012, our Board of Directors approved $1.5 billion of related restructuring and implementation costs (the “2012-2014 Restructuring Program”) reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the 2012-2014 Restructuring Program was to ensure that Mondelēz International and Kraft Foods Group were each set up to operate efficiently and execute on our respective business strategies upon separation and in the future.
Of the $1.5 billion of 2012-2014 Restructuring Program costs, we retained approximately $925 million and Kraft Foods Group retained the balance of the program. Through the end of 2014, we incurred total restructuring and related implementation charges of $899 million and completed incurring planned charges on the 2012-2014 Restructuring Program.
Restructuring Costs:
We recorded reversals to the restructuring charges of $4 million 2015 related to accruals no longer required. We recorded restructuring charges of $360 million in 2014 and $267 million in 2013 within asset impairment and exit costs. During 2014, we also recorded out-of-period accruals for $73 million of severance ($52 million related to 2014 and $21 million related to 2013) in connection with a change in the timing of accruals for ongoing negotiations with workers’ councils and labor unions.
The activity for the 2012-2014 Restructuring Program liability for the years ended December 31, 2015 and 2014 was:
| Severance | ||||||||||||
| and related | Asset | |||||||||||
| costs | Write-downs | Total | ||||||||||
| (in millions) | ||||||||||||
| Liability balance, January 1, 2014 | $ | 68 | $ | – | $ | 68 | ||||||
| Charges | 201 | 159 | 360 | |||||||||
| Cash spent | (130 | ) | – | (130 | ) | |||||||
| Non-cash settlements / adjustments | (2 | ) | (159 | ) | (161 | ) | ||||||
| Currency | (9 | ) | – | (9 | ) | |||||||
| Liability balance, December 31, 2014 | $ | 128 | $ | – | $ | 128 | ||||||
| Charges | (4 | ) | – | (4 | ) | |||||||
| Cash spent | (66 | ) | – | (66 | ) | |||||||
| Non-cash settlements / adjustments | (4 | ) | – | (4 | ) | |||||||
| Currency | (7 | ) | – | (7 | ) | |||||||
| Liability balance, December 31, 2015 | $ | 47 | $ | – | $ | 47 | ||||||
We spent $66 million in 2015 and $130 million in 2014 in cash severance and related costs. We also recognized non-cash pension plan settlement losses (See Note 10, Benefit Plans), non-cash asset write-downs (including accelerated depreciation and asset impairments) and other non-cash adjustments totaling $4 million in 2015 and $161 million in 2014. At December 31, 2015, $46 million of our net restructuring liability was recorded within other current liabilities and $1 million was recorded within other long-term liabilities.
Implementation Costs:
Implementation costs related to our 2012-2014 Restructuring Program primarily relate to activities in connection with the Spin-Off such as reorganizing our operations and facilities, the discontinuance of certain product lines and incremental expenses related to the closure of facilities, replicating our information systems infrastructure and reorganizing our sales function. Within our continuing results of operations, we recorded implementation costs of $99 million in 2014 and $63 million in 2013. We recorded these costs within cost of sales and selling, general and administrative expenses.
Restructuring and Implementation Costs in Operating Income:
During 2014 and 2013 and since inception of the 2012-2014 Restructuring Program, we recorded restructuring and implementation costs within operating income as follows:
| For the Years Ended December 31, | Latin | Asia | North | |||||||||||||||||||||||||
| America | Pacific | EEMEA | Europe | America | Corporate (1) | Total | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||
| 2014 | ||||||||||||||||||||||||||||
| Restructuring Costs | $ | 8 | $ | 34 | $ | 57 | $ | 148 | $ | 113 | $ | – | $ | 360 | ||||||||||||||
| Implementation Costs | 3 | 6 | 2 | 52 | 32 | 4 | 99 | |||||||||||||||||||||
| Total | $ | 11 | $ | 40 | $ | 59 | $ | 200 | $ | 145 | $ | 4 | $ | 459 | ||||||||||||||
| 2013 | ||||||||||||||||||||||||||||
| Restructuring Costs | $ | 21 | $ | 2 | $ | 12 | $ | 95 | $ | 135 | $ | 2 | $ | 267 | ||||||||||||||
| Implementation Costs | – | – | 2 | 36 | 25 | – | 63 | |||||||||||||||||||||
| Total | $ | 21 | $ | 2 | $ | 14 | $ | 131 | $ | 160 | $ | 2 | $ | 330 | ||||||||||||||
| Total Project 2012-2014 (2) | ||||||||||||||||||||||||||||
| Restructuring Costs | $ | 36 | $ | 36 | $ | 69 | $ | 249 | $ | 337 | $ | 2 | $ | 729 | ||||||||||||||
| Implementation Costs | 3 | 6 | 4 | 88 | 65 | 4 | 170 | |||||||||||||||||||||
| Total | $ | 39 | $ | 42 | $ | 73 | $ | 337 | $ | 402 | $ | 6 | $ | 899 | ||||||||||||||
| (1) | Includes adjustment for rounding. |
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| (2) | Includes all charges recorded since program inception in 2012 through conclusion on December 31, 2014. |
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Note 7. Integration Program and Cost Savings Initiatives
Cadbury Integration Program:
As a result of our combination with Cadbury Limited (formerly, Cadbury Plc or “Cadbury”) in 2010, we launched an integration program (the “Integration Program”) to combine the Cadbury operations with our operations and realize expected annual cost savings of approximately $750 million by the end of 2013 and revenue synergies from investments in distribution, marketing and product development. We achieved cost savings of approximately $800 million in 2012, a year ahead of schedule, and achieved our planned revenue synergies in 2013. Through the end of 2013, we incurred total integration charges of approximately $1.5 billion and completed incurring planned charges on the Integration Program.
In 2013, we recorded Integration Program charges of $216 million in 2013 in cost of sales and selling, general and administrative expenses within our Europe, EEMEA, Asia Pacific and Latin America segments and we recorded reversals of Integration Program charges of $8 million in 2014 related to accruals no longer required. Changes in the Integration Program liability during 2015 and 2014 were:
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Balance at January 1 | $ | 58 | $ | 145 | ||||
| Charges | – | (8 | ) | |||||
| Cash spent | (15 | ) | (69 | ) | ||||
| Currency / other | (7 | ) | (10 | ) | ||||
| Balance at December 31 | $ | 36 | $ | 58 | ||||
At December 31, 2015, $10 million of our net Integration Program liability was recorded within other current liabilities and $26 million, primarily related to leased facilities no longer in use, was recorded within other long-term liabilities.
Other Integration Costs:
In connection with our acquisition of a biscuit operation in Vietnam in July 2015, we recorded integration charges of $9 million in 2015 in our Asia Pacific segment and in connection with our acquisition of a biscuit operation in Morocco in February 2013, we recorded integration charges of $4 million in 2014 and $4 million in 2013 in our EEMEA segment. We recorded these charges in cost of sales and selling, general and administrative expenses. See Note 2, Divestitures and Acquisitions, for more information on the acquisition.
Cost Savings Initiatives:
Cost savings initiatives generally include exit, disposal and other project costs outside of our restructuring programs, the Cadbury Integration Program and our other integration program costs. In 2013, we recorded a $20 million charge primarily within Latin America related to severance benefits provided to terminated employees and one-time charges and within North America related to supply chain reinvention team expenses.
Note 8. Debt and Borrowing Arrangements
Short-Term Borrowings:
Our short-term borrowings and related weighted-average interest rates consisted of:
| As of December 31, | ||||||||||||||||
| 2015 | 2014 | |||||||||||||||
| Amount | Weighted- | Amount | Weighted- | |||||||||||||
| Outstanding | Average Rate | Outstanding | Average Rate | |||||||||||||
| (in millions) | (in millions) | |||||||||||||||
| Commercial paper | $ | – | 0.0% | $ | 1,101 | 0.4% | ||||||||||
| Bank loans | 236 | 9.5% | 204 | 8.8% | ||||||||||||
| Total short-term borrowings | $ | 236 | $ | 1,305 | ||||||||||||
Bank loans include borrowings on primarily uncommitted credit lines maintained by some of our international subsidiaries to meet short-term working capital needs.
Borrowing Arrangements:
We maintain a revolving credit facility for general corporate purposes, including working capital needs, and to support our commercial paper program. Our $4.5 billion multi-year senior unsecured revolving credit facility expires on October 11, 2018. The revolving credit agreement includes a covenant that we maintain a minimum shareholders’ equity of at least $24.6 billion, excluding accumulated other comprehensive earnings / (losses) and the cumulative effects of any changes in accounting principles. At December 31, 2015, we complied with the covenant as our shareholders’ equity as defined by the covenant was $38.0 billion. The revolving credit facility agreement also contains customary representations, covenants and events of default. There are no credit rating triggers, provisions or other financial covenants that could require us to post collateral as security. As of December 31, 2015, no amounts were drawn on the facility.
Some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $1.9 billion at December 31, 2015 and $2.1 billion at December 31, 2014. Borrowings on these lines amounted to $236 million at December 31, 2015 and $204 million at December 31, 2014.
Long-Term Debt:
Our long-term debt consisted of (interest rates are as of December 31, 2015):
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| U.S. dollar notes, 0.37% to 7.00% (weighted-average effective rate 4.75%), due through 2040 | $ | 8,371 | $ | 10,836 | ||||
| Euro notes, 1.08% to 2.55% (weighted-average effective rate 1.97%), due through 2035 | 4,305 | 3,911 | ||||||
| Pound sterling notes, 3.88% to 7.25% (weighted-average effective rate 4.35%), due through 2045 | 1,399 | 573 | ||||||
| Swiss franc notes, 0.00% to 1.125% (weighted-average effective rate 0.73%), due through 2025 | 1,075 | – | ||||||
| Capital leases and other obligations | 12 | 31 | ||||||
| Total | 15,162 | 15,351 | ||||||
| Less current portion of long-term debt | (605 | ) | (1,530 | ) | ||||
| Long-term debt | $ | 14,557 | $ | 13,821 | ||||
Deferred debt issuance costs of $46 million as of December 31, 2015 and $44 million as of December 31, 2014 are netted against the related debt in the table above. As noted in Note 1, Summary of Significant Accounting Policies – New Accounting Pronouncements, these amounts were reclassified from long-term other assets to offset the related debt in the fourth quarter of 2015.
As of December 31, 2015, aggregate maturities of our debt and capital leases based on stated contractual maturities, excluding unamortized non-cash bond premiums, discounts, bank fees and mark-to-market adjustments of $(70) million, were (in millions):
| 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||
| $1,755 | $1,481 | $1,110 | $1,250 | $827 | $8,809 | $15,232 |
On February 9, 2016, $1,750 million of our 4.125% U.S. dollar notes matured. The notes and accrued interest to date were paid with net proceeds from the fr.400 million Swiss franc-denominated notes issuance on January 26, 2016 and the €700 million euro-denominated notes issuance on January 21, 2016, as well as cash on hand and the issuance of commercial paper. As we refinanced $1,150 million of the matured notes with long-term debt issued in January 2016, we reflected this amount within long-term debt as of December 31, 2015.
On January 26, 2016, we issued fr.400 million of Swiss franc-denominated notes, or $399 million in U.S. dollars locked in with a forward currency contract on January 12, 2016, consisting of:
| • | fr.250 million (or $249 million) of 0.080% fixed rate notes that mature on January 26, 2018 |
|---|
| • | fr.150 million (or $150 million) of 0.650% fixed rate notes that mature on July 26, 2022 |
|---|
We received proceeds net of premiums and deferred financing costs of $398 million that were used to partially fund the February 2016 note maturity and for other general corporate purposes. We recorded approximately $1 million of premiums and deferred financing costs, which will be amortized into interest expense over the life of the notes.
On January 21, 2016, we issued €700 million of euro-denominated 1.625% notes, or $760 million in U.S. dollars locked in with a forward currency contract on January 13, 2016, that mature on January 20, 2023. We received proceeds net of discounts and deferred financing costs of $752 million that were used to partially fund the February 2016 note maturity and for other general corporate purposes. We recorded approximately $8 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.
On November 30, 2015, we completed a cash tender offer and retired £247 million of British pound sterling-denominated 7.250% notes, or approximately $372 million in U.S. dollars as of November 30, 2015, due in July 2018. We financed the repurchase of these notes, including the payment of accrued interest and other costs incurred, from net proceeds received from the £400 million British pound sterling-denominated notes issuance on November 25, 2015 described below. In connection with retiring this debt, during the three months ended December 31, 2015, we recorded a $40 million loss on extinguishment of debt within interest expense related to the amount we paid to retire the debt in excess of its carrying value and from recognizing unamortized premiums and deferred financing costs in earnings at the time of the debt extinguishment. Cash costs related to tendering the debt are included in long-term debt repayments in the consolidated statement of cash flows for the year ended December 31, 2015.
On November 25, 2015, we issued £400 million of British pound sterling-denominated 4.500% notes, or $609 million in U.S. dollars locked in with a forward currency contract on November 19, 2015, that mature on December 3, 2035. We received proceeds net of discounts and deferred financing costs of $604 million that were used to fund the November 2015 cash tender offer and for other general corporate purposes. We recorded approximately $5 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.
On October 6, 2015 we issued fr.400 million of Swiss franc-denominated notes, or $410 million in U.S. dollars locked in with a forward currency contract on September 21, 2015, consisting of:
| • | fr.135 million (or $138 million) of 0.625% fixed rate notes that mature on October 6, 2020 |
|---|
| • | fr.265 million (or $272 million) of 1.125% fixed rate notes that mature on December 21, 2023 |
|---|
We received proceeds net of premiums and deferred financing costs of $410 million that were used for general corporate purposes and to fund upcoming debt maturities. We recorded the fr.400 million of Swiss franc-denominated notes and less than $1 million of premiums and deferred financing costs, which will be amortized into interest expense over the life of the notes.
On June 11, 2015, €400 million of our floating rate euro-denominated notes matured. The notes and accrued interest to date were paid with cash on hand and the issuance of commercial paper.
On March 30, 2015, we issued fr.675 million of Swiss franc-denominated notes, or approximately $694 million in U.S. dollars as of March 31, 2015, consisting of:
| • | fr.175 million (or $180 million) of 0.000% fixed rate notes that mature on March 30, 2017 |
|---|
| • | fr.300 million (or $308 million) of 0.625% fixed rate notes that mature on December 30, 2021 |
|---|
| • | fr.200 million (or $206 million) of 1.125% fixed rate notes that mature on December 30, 2025 |
|---|
We received net proceeds of $675 million that were used for general corporate purposes. We recorded approximately $2 million of premiums and deferred financing costs, which will be amortized into interest expense over the life of the notes.
On March 20, 2015, €850 million of our 6.250% euro-denominated notes matured. The notes and accrued interest to date were paid with the issuance of commercial paper and cash on hand.
On March 20, 2015, we completed a cash tender offer and retired $2.5 billion of our long-term U.S. dollar debt consisting of:
| • | $102 million of our 6.500% Notes due in August 2017 |
|---|
| • | $115 million of our 6.125% Notes due in February 2018 |
|---|
| • | $80 million of our 6.125% Notes due in August 2018 |
|---|
| • | $691 million of our 5.375% Notes due in February 2020 |
|---|
| • | $201 million of our 6.500% Notes due in November 2031 |
|---|
| • | $26 million of our 7.000% Notes due in August 2037 |
|---|
| • | $71 million of our 6.875% Notes due in February 2038 |
|---|
| • | $69 million of our 6.875% Notes due in January 2039 |
|---|
| • | $1,143 million of our 6.500% Notes due in February 2040 |
|---|
We financed the repurchase of these notes, including the payment of accrued interest and other costs incurred, from net proceeds received from the $2.8 billion notes issuance on March 6, 2015 described below and the issuance of commercial paper. In connection with retiring this debt, during the first three months of 2015, we recorded a $708 million loss on extinguishment of debt within interest expense related to the amount we paid to retire the debt in excess of its carrying value and from recognizing unamortized discounts and deferred financing costs in earnings at the time of the debt extinguishment. Cash costs related to tendering the debt are included in long-term debt repayments in the consolidated statement of cash flows for the year ended December 31, 2015. We also recognized $5 million of charges within interest expense from hedging instruments related to the retired debt. Upon extinguishing the debt, the deferred cash flow hedge amounts were recorded in earnings.
On March 6, 2015, we issued €2.0 billion of euro-denominated notes and £450 million of British pound sterling-denominated notes, or approximately $2.8 billion in U.S. dollars as of March 31, 2015, consisting of:
| • | €500 million (or $537 million) of 1.000% fixed rate notes that mature on March 7, 2022 |
|---|
| • | €750 million (or $805 million) of 1.625% fixed rate notes that mature on March 8, 2027 |
|---|
| • | €750 million (or $805 million) of 2.375% fixed rate notes that mature on March 6, 2035 |
|---|
| • | £450 million (or $667 million) of 3.875% fixed rate notes that mature on March 6, 2045 |
|---|
We received net proceeds of $2,890 million that were used to fund the March 2015 tender offer and for other general corporate purposes. We recorded approximately $29 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.
On December 11, 2014, £300 million of our 5.375% British pound sterling bonds matured. The bonds and accrued interest to date were paid with cash on hand and the issuance of commercial paper.
On February 19, 2014, $500 million of our 6.75% U.S. dollar notes matured. The notes and accrued interest to date were paid with cash on hand and the issuance of commercial paper.
On February 6, 2014, we completed a cash tender offer and retired $1.56 billion of our long-term U.S. dollar debt consisting of:
| • | $393 million of our 7.000% Notes due in August 2037 |
|---|
| • | $382 million of our 6.875% Notes due in February 2038 |
|---|
| • | $250 million of our 6.875% Notes due in January 2039 |
|---|
| • | $535 million of our 6.500% Notes due in February 2040 |
|---|
We financed the repurchase of these notes, including the payment of accrued interest and other costs incurred, from net proceeds received from the $3.0 billion notes issuance on January 16, 2014. In connection with retiring this debt, during the first six months of 2014, we recorded a $493 million loss on extinguishment of debt within interest expense related to the amount we paid to retire the debt in excess of its carrying value and from recognizing unamortized discounts and deferred financing costs in earnings at the time of the debt extinguishment. Cash costs related to tending the debt are included in long-term debt repayments in the 2014 consolidated statement of cash flows. We also recognized $2 million in interest expense related to interest rate cash flow hedges that were deferred in accumulated other comprehensive losses and recognized into earnings over the life of the debt. Upon extinguishing the debt, the deferred cash flow hedge amounts were recorded in earnings.
On January 16, 2014, we issued $3.0 billion of U.S. dollar notes, consisting of:
| • | $400 million of floating rate notes that bear interest at three-month LIBOR plus 0.52% and mature on February 1, 2019 |
|---|
| • | $850 million of 2.250% fixed rate notes that mature on February 1, 2019 |
|---|
| • | $1,750 million of 4.000% fixed rate notes that mature on February 1, 2024 |
|---|
We received net proceeds of $2,982 million that were used to fund the February 2014 tender offer, pay down commercial paper borrowings and for other general corporate purposes. We recorded approximately $18 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.
Our weighted-average interest rate on our total debt was 3.7% as of December 31, 2015, down from 4.3%, as of December 31, 2014.
Fair Value of Our Debt:
The fair value of our short-term borrowings at December 31, 2015 and 2014 reflects current market interest rates and approximates the amounts we have recorded on our consolidated balance sheet. The fair value of our long-term debt was determined using quoted prices in active markets (Level 1 valuation data) for the publicly traded debt obligations. At December 31, 2015, the aggregate fair value of our total debt was $15,908 million and its carrying value was $15,398 million. At December 31, 2014, the aggregate fair value of our total debt was $18,463 million and its carrying value was $16,656 million.
Interest and Other Expense, net:
Interest and other expense, net within our results of continuing operations consisted of:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Interest expense, debt | $ | 609 | $ | 778 | $ | 1,017 | ||||||
| Loss on debt extinguishment and related expenses | 753 | 495 | 612 | |||||||||
| Coffee business transactions currency-related net gains | (436 | ) | (628 | ) | – | |||||||
| Loss related to interest rate swaps | 34 | – | – | |||||||||
| Benefit from indemnification resolution | – | – | (49 | ) | ||||||||
| Other expense / (income), net | 53 | 43 | (1 | ) | ||||||||
| Interest and other expense, net | $ | 1,013 | $ | 688 | $ | 1,579 | ||||||
See Note 2, Divestitures and Acquisitions, and Note 9, Financial Instruments, for information on the currency exchange forward contracts associated with the coffee business transactions. Also see Note 9, Financial Instruments, for information on the loss related to U.S. dollar interest rate swaps no longer designated as accounting cash flow hedges during the first quarter of 2015 and the first quarter of 2016. See Note 13, Commitments and Contingencies, for information on the benefit from the resolution of the Cadbury acquisition-related indemnification.
Note 9. Financial Instruments
Fair Value of Derivative Instruments:
Derivative instruments were recorded at fair value in the consolidated balance sheets as follows:
| As of December 31, | ||||||||||||||||
| 2015 | 2014 | |||||||||||||||
| Asset | Liability | Asset | Liability | |||||||||||||
| Derivatives | Derivatives | Derivatives | Derivatives | |||||||||||||
| (in millions) | ||||||||||||||||
| Derivatives designated as accounting hedges: | ||||||||||||||||
| Currency exchange contracts | $ | 20 | $ | 7 | $ | 69 | $ | 17 | ||||||||
| Commodity contracts | 37 | 35 | 12 | 33 | ||||||||||||
| Interest rate contracts | 12 | 57 | 13 | 42 | ||||||||||||
| $ | 69 | $ | 99 | $ | 94 | $ | 92 | |||||||||
| Derivatives not designated as accounting hedges: | ||||||||||||||||
| Currency exchange contracts | $ | 61 | $ | 33 | $ | 735 | $ | 24 | ||||||||
| Commodity contracts | 70 | 56 | 90 | 194 | ||||||||||||
| Interest rate contracts | 43 | 28 | 59 | 39 | ||||||||||||
| $ | 174 | $ | 117 | $ | 884 | $ | 257 | |||||||||
| Total fair value | $ | 243 | $ | 216 | $ | 978 | $ | 349 | ||||||||
During 2015 and 2014, derivatives designated as accounting hedges include cash flow and fair value hedges and derivatives not designated as accounting hedges include economic hedges. Non-U.S. debt designated as a hedge of our net investments in non-U.S. operations is not reflected in the table above, but is included in long-term debt summarized in Note 8, Debt and Borrowing Arrangements. We record derivative assets and liabilities on a gross basis in our consolidated balance sheet. The fair value of our asset derivatives is recorded within other current assets and the fair value of our liability derivatives is recorded within other current liabilities.
The fair values (asset / (liability)) of our derivative instruments were determined using:
| As of December 31, 2015 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant | Significant | ||||||||||||||
| Total | for Identical | Other Observable | Unobservable | |||||||||||||
| Fair Value of Net | Assets | Inputs | Inputs | |||||||||||||
| Asset / (Liability) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (in millions) | ||||||||||||||||
| Currency exchange contracts | $ | 41 | $ | – | $ | 41 | $ | – | ||||||||
| Commodity contracts | 16 | 29 | (13 | ) | – | |||||||||||
| Interest rate contracts | (30 | ) | – | (30 | ) | – | ||||||||||
| Total derivatives | $ | 27 | $ | 29 | $ | (2 | ) | $ | – | |||||||
| As of December 31, 2014 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant | Significant | ||||||||||||||
| Total | for Identical | Other Observable | Unobservable | |||||||||||||
| Fair Value of Net | Assets | Inputs | Inputs | |||||||||||||
| Asset / (Liability) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (in millions) | ||||||||||||||||
| Currency exchange contracts | $ | 763 | $ | – | $ | 763 | $ | – | ||||||||
| Commodity contracts | (125 | ) | (49 | ) | (76 | ) | – | |||||||||
| Interest rate contracts | (9 | ) | – | (9 | ) | – | ||||||||||
| Total derivatives | $ | 629 | $ | (49 | ) | $ | 678 | $ | – | |||||||
Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges. Our exchange-traded derivatives are generally subject to master netting arrangements that permit net settlement of transactions with the same counterparty when certain criteria are met, such as in the event of default. We also are required to maintain cash margin accounts in connection with funding the settlement of our open positions, and the margin requirements generally fluctuate daily based on market conditions. We have recorded margin deposits related to our exchange-traded derivatives of $22 million as of December 31, 2015 and $84 million as of December 31, 2014 within other current assets. Based on our net asset or liability positions with individual counterparties, in the event of default and immediate net settlement of all of our open positions, for derivatives we have in a net liability position, we would owe $3 million as of December 31, 2014, and for derivatives we have in a net asset position, our counterparties would owe us a total of $52 million as of December 31, 2015 and $38 million as of December 31, 2014.
Level 2 financial assets and liabilities consist primarily of over-the-counter (“OTC”) currency exchange forwards, options and swaps; commodity forwards and options; and interest rate swaps. Our currency exchange contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk. Our OTC derivative transactions are governed by International Swap Dealers Association agreements and other standard industry contracts. Under these agreements, we do not post nor require collateral from our counterparties. The majority of our commodity and currency exchange OTC derivatives do not have a legal right of set-off. In connection with our OTC derivatives that could be net-settled in the event of default, assuming all parties were to fail to comply with the terms of the agreements, for derivatives we have in a net liability position, we would owe $101 million as of December 31, 2015 and $156 million as of December 31, 2014, and for derivatives we have in a net asset position, our counterparties would owe us a total of $64 million as of December 31, 2015 and $72 million as of December 31, 2014. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.
Derivative Volume:
The net notional values of our derivative instruments were:
| Notional Amount | ||||||||
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Currency exchange contracts: | ||||||||
| Intercompany loans and forecasted interest payments | $ | 4,148 | $ | 3,640 | ||||
| Forecasted transactions | 1,094 | 6,681 | ||||||
| Commodity contracts | 732 | 1,569 | ||||||
| Interest rate contracts | 3,033 | 3,970 | ||||||
| Net investment hedge – euro notes | 4,345 | 3,932 | ||||||
| Net investment hedge – pound sterling notes | 1,404 | 545 | ||||||
| Net investment hedge – Swiss franc notes | 1,073 | – |
Cash Flow Hedges:
Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings / (losses) included:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Accumulated gain / (loss) at January 1 | $ | (2 | ) | $ | 117 | $ | (38 | ) | ||||
| Transfer of realized losses / (gains) to earnings | – | (40 | ) | 53 | ||||||||
| Unrealized gain / (loss) in fair value | (43 | ) | (79 | ) | 102 | |||||||
| Accumulated gain / (loss) at December 31 | $ | (45 | ) | $ | (2 | ) | $ | 117 | ||||
After-tax gains / (losses) reclassified from accumulated other comprehensive earnings / (losses) into net earnings were:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions ) | ||||||||||||
| Currency exchange contracts – forecasted transactions | $ | 83 | $ | 26 | $ | (26 | ) | |||||
| Commodity contracts | (52 | ) | 16 | (23 | ) | |||||||
| Interest rate contracts | (31 | ) | (2 | ) | (4 | ) | ||||||
| Total | $ | – | $ | 40 | $ | (53 | ) | |||||
After-tax gains / (losses) recognized in other comprehensive earnings / (losses) were:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Currency exchange contracts – forecasted transactions | $ | 40 | $ | 82 | $ | (23 | ) | |||||
| Commodity contracts | (35 | ) | (2 | ) | 3 | |||||||
| Interest rate contracts | (48 | ) | (159 | ) | 122 | |||||||
| Total | $ | (43 | ) | $ | (79 | ) | $ | 102 | ||||
Pre-tax gains / (losses) on ineffectiveness recognized in net earnings from continuing operations were:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Commodity contracts | $ | (4 | ) | $ | (10 | ) | $ | 1 |
Pre-tax gains / (losses) on amounts excluded from effectiveness testing recognized in net earnings from continuing operations included a pre-tax loss of $34 million recognized in the first quarter of 2015 within interest and other expense, net related to certain U.S. dollar interest rate swaps that we no longer designated as accounting cash flow hedges due to a change in financing and hedging plans. Our plans to issue U.S. dollar debt changed and we issued euro, British pound sterling and Swiss franc-denominated notes due to lower overall cost and our decision to hedge a greater portion of our net investments in operations that use these currencies as their functional currencies. Amounts excluded from effectiveness testing were not material for the remainder of 2015 and prior-year periods.
In January 2016, we recorded a pre-tax loss of $97 million within interest and other expense, net related to certain U.S. dollar interest rate swaps that we no longer designated as accounting cash flow hedges due to a change in financing and hedging plans. In the first quarter of 2016, our plans to issue U.S. dollar debt changed and we issued euro and Swiss franc-denominated notes due to lower overall cost and our decision to hedge a greater portion of our net investments in operations that use these currencies as their functional currencies.
We record pre-tax and after-tax (i) gains or losses reclassified from accumulated other comprehensive earnings / (losses) into earnings, (ii) gains or losses on ineffectiveness and (iii) gains or losses on amounts excluded from effectiveness testing in:
| • | cost of sales for commodity contracts; |
|---|
| • | cost of sales for currency exchange contracts related to forecasted transactions; and |
|---|
| • | interest and other expense, net for interest rate contracts and currency exchange contracts related to intercompany loans. |
|---|
Based on current market conditions, we would expect to transfer unrealized losses of $17 million (net of taxes) for commodity cash flow hedges, unrealized gains of $8 million (net of taxes) for currency cash flow hedges and unrealized losses of $3 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.
Hedge Coverage:
As of December 31, 2015, we hedged transactions forecasted to impact cash flows over the following periods:
| • | commodity transactions for periods not exceeding the next 12 months; |
|---|
| • | interest rate transactions for periods not exceeding the next 30 years and 2 months; and |
|---|
| • | currency exchange transactions for periods not exceeding the next 12 months. |
|---|
Fair Value Hedges:
Pre-tax gains / (losses) due to changes in fair value of our interest rate swaps and related hedged long-term debt were recorded in interest and other expense, net:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Derivatives | $ | (1 | ) | $ | 13 | $ | – | |||||
| Borrowings | 1 | (13 | ) | – |
Fair value hedge ineffectiveness and amounts excluded from effectiveness testing were not material for all periods presented.
Economic Hedges:
Pre-tax gains / (losses) recorded in net earnings for economic hedges were:
| For the Years Ended December 31, | Location of Gain / (Loss) Recognized | |||||||||||||||
| 2015 | 2014 | 2013 | in Earnings | |||||||||||||
| (in millions) | ||||||||||||||||
| Currency exchange contracts: | ||||||||||||||||
| Intercompany loans and forecasted interest payments | $ | 29 | $ | 4 | $ | 18 | Interest and other expense, net | |||||||||
| Forecasted transactions | 29 | 29 | 65 | Cost of sales | ||||||||||||
| Forecasted transactions | 435 | 610 | 9 | Interest and other expense, net | ||||||||||||
| Forecasted transactions | (12 | ) | (4 | ) | 4 | Selling, general and administrative expenses | ||||||||||
| Commodity contracts | (38 | ) | (136 | ) | (40 | ) | Cost of sales | |||||||||
| Total | $ | 443 | $ | 503 | $ | 56 | ||||||||||
In connection with the coffee business transactions, we entered into a number of consecutive euro to U.S. dollar currency exchange forward contracts in 2014 and 2015 to lock in an equivalent expected value in U.S. dollars. The mark-to-market gains and losses on the derivatives were recorded in earnings. We recorded net gains of $436 million for the year ended December 31, 2015 and $628 million for the year ended December 31, 2014 within interest and other expense, net in connection with the forward contracts and the transferring of proceeds to our subsidiaries where coffee net assets and shares were deconsolidated. The currency hedge and related gains and losses were recorded within interest and other expense, net. See Note 2, Divestitures and Acquisitions — Coffee Business Transactions, for additional information.
Hedges of Net Investments in International Operations:
After-tax gains / (losses) related to hedges of net investments in international operations in the form of euro, pound sterling and Swiss franc-denominated debt were:
| Location of | ||||||||||||||
| For the Years Ended December 31, | Gain / (Loss) | |||||||||||||
| 2015 | 2014 | 2013 | Recognized in AOCI | |||||||||||
| (in millions) | ||||||||||||||
| Euro notes | $ | 268 | $ | 328 | $ | (50 | ) | Currency | ||||||
| Pound sterling notes | 42 | 39 | (13 | ) | Translation | |||||||||
| Swiss franc notes | 9 | – | – | Adjustment |
Note 10. Benefit Plans
Pension Plans
Prior to the July 2, 2015 closing of the coffee business transactions, certain active employees who transitioned to JDE participated in our Non-U.S. pension plans. Following the transactions, benefits began to be provided directly by JDE to participants continuing with JDE. JDE assumed certain pension plan obligations and received the related plan assets. Through December 31, 2015, we reduced our net benefit plan liabilities by $131 million and the related deferred tax assets by $24 million. Refer to Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for more information. For participants that elected not to transfer into the JDE plans, we retained the plan obligations and related plan assets.
Obligations and Funded Status:
The projected benefit obligations, plan assets and funded status of our pension plans were:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| (in millions) | ||||||||||||||||
| Benefit obligation at January 1 | $ | 1,606 | $ | 1,266 | $ | 10,854 | $ | 9,920 | ||||||||
| Service cost | 64 | 57 | 188 | 184 | ||||||||||||
| Interest cost | 67 | 67 | 307 | 388 | ||||||||||||
| Benefits paid | (35 | ) | (20 | ) | (435 | ) | (446 | ) | ||||||||
| Settlements paid | (88 | ) | (52 | ) | 1 | – | ||||||||||
| Actuarial (gains) / losses | (49 | ) | 266 | (262 | ) | 1,604 | ||||||||||
| Deconsolidation of coffee business | – | – | (261 | ) | – | |||||||||||
| Currency | – | – | (766 | ) | (949 | ) | ||||||||||
| Other | 1 | 22 | (79 | ) | 153 | |||||||||||
| Benefit obligation at December 31 | 1,566 | 1,606 | 9,547 | 10,854 | ||||||||||||
| Fair value of plan assets at January 1 | 1,216 | 1,118 | 8,362 | 8,122 | ||||||||||||
| Actual return on plan assets | (71 | ) | 159 | 192 | 971 | |||||||||||
| Contributions | 225 | 11 | 318 | 353 | ||||||||||||
| Benefits paid | (35 | ) | (20 | ) | (435 | ) | (446 | ) | ||||||||
| Settlements paid | (88 | ) | (52 | ) | – | – | ||||||||||
| Deconsolidation of coffee business | – | – | (130 | ) | – | |||||||||||
| Currency | – | – | (579 | ) | (681 | ) | ||||||||||
| Other | – | – | (7 | ) | 43 | |||||||||||
| Fair value of plan assets at December 31 | 1,247 | 1,216 | 7,721 | 8,362 | ||||||||||||
| Net pension liability at December 31 | $ | (319 | ) | $ | (390 | ) | $ | (1,826 | ) | $ | (2,492 | ) | ||||
The accumulated benefit obligation, which represents benefits earned to the measurement date, was $1,463 million at December 31, 2015 and $1,474 million at December 31, 2014 for the U.S. pension plans. The accumulated benefit obligation for the non-U.S. pension plans was $9,267 million at December 31, 2015 and $10,462 million at December 31, 2014.
For salaried and non-union hourly employees hired after January 1, 2009, we discontinued benefits under our U.S. pension plans and replaced them with an enhanced Company contribution to our employee defined contribution plan. Effective December 31, 2019, benefit accruals will cease under the U.S. non-union pension plan. For non-union employees participating in that plan on December 31, 2019, we will calculate the pension benefit obligation based on pay and service as of that date and no longer accrue new benefits.
The combined U.S. and non-U.S. pension plans resulted in a net pension liability of $2,145 million at December 31, 2015 and $2,882 million at December 31, 2014. We recognized these amounts in our consolidated balance sheets as follows:
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Prepaid pension assets | $ | 69 | $ | 53 | ||||
| Other accrued liabilities | (31 | ) | (23 | ) | ||||
| Accrued pension costs | (2,183 | ) | (2,912 | ) | ||||
| $ | (2,145 | ) | $ | (2,882 | ) | |||
Certain of our U.S. and non-U.S. plans are underfunded and have accumulated benefit obligations in excess of plan assets. For these plans, the projected benefit obligations, accumulated benefit obligations and the fair value of plan assets were:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| (in millions) | ||||||||||||||||
| Projected benefit obligation | $ | 1,566 | $ | 1,606 | $ | 8,139 | $ | 10,108 | ||||||||
| Accumulated benefit obligation | 1,463 | 1,474 | 7,920 | 9,763 | ||||||||||||
| Fair value of plan assets | 1,247 | 1,216 | 6,252 | 7,576 |
We used the following weighted-average assumptions to determine our benefit obligations under the pension plans:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Discount rate | 4.50% | 4.20% | 3.11% | 2.99% | ||||||||||||
| Expected rate of return on plan assets | 6.75% | 7.25% | 5.87% | 5.96% | ||||||||||||
| Rate of compensation increase | 4.00% | 4.00% | 3.18% | 3.26% |
Year-end discount rates for our U.S., Canadian, Eurozone and U.K. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the benefit obligations. Year-end discount rates for our remaining non-U.S. plans were developed from local bond indices that match local benefit obligations as closely as possible. Changes in our discount rates were primarily the result of changes in bond yields year-over-year. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class.
At the end of 2015, we changed the approach used to measure service and interest costs for pension benefits. For 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, we have elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.
Components of Net Periodic Pension Cost:
Net periodic pension cost consisted of the following:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||
| Service cost | $ | 64 | $ | 57 | $ | 71 | $ | 188 | $ | 184 | $ | 172 | ||||||||||||
| Interest cost | 67 | 67 | 60 | 307 | 388 | 358 | ||||||||||||||||||
| Expected return on plan assets | (93 | ) | (81 | ) | (67 | ) | (478 | ) | (485 | ) | (435 | ) | ||||||||||||
| Amortization: | ||||||||||||||||||||||||
| Net loss from experience differences | 43 | 29 | 55 | 141 | 106 | 136 | ||||||||||||||||||
| Prior service cost (1) | 2 | 2 | 2 | 15 | – | 1 | ||||||||||||||||||
| Settlement losses and other expenses (2) | 19 | 28 | 1 | 2 | 14 | 3 | ||||||||||||||||||
| Net periodic pension cost | $ | 102 | $ | 102 | $ | 122 | $ | 175 | $ | 207 | $ | 235 | ||||||||||||
| (1) | For the year ended December 31, 2015, amortization of prior service cost includes $17 million of pension curtailment losses related to employees who transitioned to JDE upon the contribution of our global coffee business. Refer to Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for more information. |
|---|
| (2) | Settlement losses include $9 million for year ended December 31, 2015 and $12 million for the year ended December 31, 2014 of pension settlement losses for employees who elected lump-sum payments in connection with our 2014-2018 Restructuring Program. Retired employees who elected lump-sum payments resulted in net settlement losses in 2015 of $10 million for our U.S. plans and $2 million for our non-U.S. plans. Employees who elected lump-sum payments in connection with our 2012-2014 Restructuring Program and cost saving initiatives and retired employees who elected lump-sum payments resulted in net settlement losses for our U.S. plans of $28 million in 2014 and $1 million in 2013. Non-U.S. plant closures and early retirement benefits resulted in curtailment and settlement losses of $2 million in 2013. In addition, we incurred special termination benefit costs of $2 million in 2014 and $1 million in 2013 in the non-U.S. plans related to the 2012-2014 Restructuring Program. See Note 6, Restructuring Programs, for more information. We recorded an additional $90 million of pension settlement losses related to the coffee business transactions within the gain on the coffee business transactions. Refer to Note 2_, Divestitures and Acquisitions – Coffee Business Transactions_, for more information. |
|---|
For the U.S. plans, we determine the expected return on plan assets component of net periodic benefit cost using a calculated market return value that recognizes the cost over a four year period. For our non-U.S. plans, we utilize a similar approach with varying cost recognition periods for some plans, and with others, we determine the expected return on plan assets based on asset fair values as of the measurement date.
As of December 31, 2015, for the combined U.S. and non-U.S. pension plans, we expected to amortize from accumulated other comprehensive earnings / (losses) into net periodic pension cost during 2016:
| • | an estimated $166 million of net loss from experience differences; and |
|---|
| • | $1 million of estimated prior service credit. |
|---|
We used the following weighted-average assumptions to determine our net periodic pension cost:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Discount rate | 4.20% | 5.10% | 4.20% | 2.99% | 4.03% | 3.81% | ||||||||||||||||||
| Expected rate of return on plan assets | 7.25% | 7.75% | 7.75% | 5.96% | 6.17% | 6.08% | ||||||||||||||||||
| Rate of compensation increase | 4.00% | 4.00% | 4.00% | 3.26% | 3.63% | 3.47% |
Plan Assets:
The fair value of pension plan assets was determined using the following fair value measurements:
| As of December 31, 2015 | ||||||||||||||||
| Quoted Prices | Significant | |||||||||||||||
| Asset Category | Total Fair Value | in Active Markets for Identical Assets (Level 1) | Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | ||||||||||||||||
| U.S. equity securities | $ | 2 | $ | 2 | $ | – | $ | – | ||||||||
| Non-U.S. equity securities | 413 | 413 | – | – | ||||||||||||
| Pooled funds - equity securities | 2,411 | 569 | 1,842 | – | ||||||||||||
| Total equity securities | 2,826 | 984 | 1,842 | – | ||||||||||||
| Government bonds | 1,788 | 53 | 1,735 | – | ||||||||||||
| Pooled funds - fixed-income securities | 1,182 | 311 | 759 | 112 | ||||||||||||
| Corporate bonds and other fixed-income securities | 1,691 | 325 | 701 | 665 | ||||||||||||
| Total fixed-income securities | 4,661 | 689 | 3,195 | 777 | ||||||||||||
| Real estate | 477 | 115 | 7 | 355 | ||||||||||||
| Hedge funds | 499 | – | – | 499 | ||||||||||||
| Private equity | 204 | – | – | 204 | ||||||||||||
| Cash | 140 | 137 | 3 | – | ||||||||||||
| Other | 95 | 55 | 36 | 4 | ||||||||||||
| Total | $ | 8,902 | $ | 1,980 | $ | 5,083 | $ | 1,839 | ||||||||
| As of December 31, 2014 | ||||||||||||||||
| Quoted Prices | Significant | |||||||||||||||
| Asset Category | Total Fair Value | in Active Markets for Identical Assets (Level 1) | Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | ||||||||||||||||
| U.S. equity securities | $ | 124 | $ | 124 | $ | – | $ | – | ||||||||
| Non-U.S. equity securities | 698 | 698 | – | – | ||||||||||||
| Pooled funds - equity securities | 2,192 | 538 | 1,654 | – | ||||||||||||
| Total equity securities | 3,014 | 1,360 | 1,654 | – | ||||||||||||
| Government bonds | 2,283 | 234 | 2,049 | – | ||||||||||||
| Pooled funds - fixed-income securities | 1,151 | 311 | 743 | 97 | ||||||||||||
| Corporate bonds and other fixed-income securities | 1,174 | 314 | 111 | 749 | ||||||||||||
| Total fixed-income securities | 4,608 | 859 | 2,903 | 846 | ||||||||||||
| Real estate | 406 | 110 | 4 | 292 | ||||||||||||
| Hedge funds | 829 | – | – | 829 | ||||||||||||
| Private equity | 237 | – | – | 237 | ||||||||||||
| Cash | 253 | 246 | 7 | – | ||||||||||||
| Other | 157 | 124 | 30 | 3 | ||||||||||||
| Total | $ | 9,504 | $ | 2,699 | $ | 4,598 | $ | 2,207 | ||||||||
We excluded plan assets of $66 million at December 31, 2015 and $74 million at December 31, 2014 from the above tables related to certain insurance contracts as they are reported at contract value, in accordance with authoritative guidance.
Fair value measurements:
| • | Level 1 – includes primarily U.S and non-U.S. equity securities and government bonds valued using quoted prices in active markets. |
|---|
| • | Level 2 – includes primarily pooled funds, including assets in real estate pooled funds, valued using net asset values of participation units held in common collective trusts, as reported by the managers of the trusts and as supported by the unit prices of actual purchase and sale transactions. Level 2 plan assets also include corporate bonds and other fixed-income securities, valued using independent observable market inputs, such as matrix pricing, yield curves and indices. |
|---|
| • | Level 3 – includes investments valued using unobservable inputs that reflect the plans’ assumptions that market participants would use in pricing the assets, based on the best information available. |
|---|
| • | Fair value estimates for pooled funds are calculated by the investment advisor when reliable quotations or pricing services are not readily available for certain underlying securities. The estimated value is based on either cost, or last sale price for most of the securities valued in this fashion. |
|---|
| • | Fair value estimates for private equity investments are calculated by the general partners using the market approach to estimate the fair value of private investments. The market approach utilizes prices and other relevant information generated by market transactions, type of security, degree of liquidity, restrictions on the disposition, latest round of financing data, company financial statements, relevant valuation multiples and discounted cash flow analyses. |
|---|
| • | Fair value estimates for real estate investments are calculated by the investment managers using the present value of future cash flows expected to be received from the investments, based on valuation methodologies such as appraisals, local market conditions, and current and projected operating performance. |
|---|
| • | Fair value estimates for investments in hedge fund-of-funds are calculated by the investment managers using the net asset value per share of the investment as reported by the money managers of the underlying funds. |
|---|
| • | Fair value estimates for certain fixed-income securities such as insurance contracts are calculated based on the future stream of benefit payments discounted using prevailing interest rates based on the valuation date. |
|---|
Changes in our Level 3 plan assets, which are recorded in other comprehensive earnings / (losses), included:
| Asset Category | January 1, 2015 Balance | Net Realized and Unrealized Gains/ (Losses) | Net Purchases, Issuances and Settlements | Net Transfers Into/(Out of) Level 3 | Currency Impact | December 31, 2015 Balance | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Pooled funds- fixed-income securities | $ | 97 | $ | (1 | ) | $ | 25 | $ | (3 | ) | $ | (6 | ) | $ | 112 | |||||||||
| Corporate bond and other fixed-income securities | 749 | 4 | (50 | ) | – | (38 | ) | 665 | ||||||||||||||||
| Real estate | 292 | 19 | 61 | – | (17 | ) | 355 | |||||||||||||||||
| Hedge funds | 829 | 13 | (312 | ) | – | (31 | ) | 499 | ||||||||||||||||
| Private equity | 240 | 17 | (36 | ) | (1 | ) | (12 | ) | 208 | |||||||||||||||
| Total Level 3 investments | $ | 2,207 | $ | 52 | $ | (312 | ) | $ | (4 | ) | $ | (104 | ) | $ | 1,839 | |||||||||
| Asset Category | January 1, 2014 Balance | Net Realized and Unrealized Gains/ (Losses) | Net Purchases, Issuances and Settlements | Net Transfers Into/(Out of) Level 3 | Currency Impact | December 31, 2014 Balance | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Pooled funds- fixed-income securities | $ | 15 | $ | (15 | ) | $ | 15 | $ | 87 | $ | (5 | ) | $ | 97 | ||||||||||
| Corporate bond and other fixed-income securities | 780 | 80 | (64 | ) | – | (47 | ) | 749 | ||||||||||||||||
| Real estate | 267 | 37 | (2 | ) | 10 | (20 | ) | 292 | ||||||||||||||||
| Hedge funds | 820 | 40 | 20 | – | (51 | ) | 829 | |||||||||||||||||
| Private equity | 227 | 45 | (19 | ) | 2 | (15 | ) | 240 | ||||||||||||||||
| Total Level 3 investments | $ | 2,109 | $ | 187 | $ | (50 | ) | $ | 99 | $ | (138 | ) | $ | 2,207 | ||||||||||
The decreases in Level 3 pension plan investments during 2015 were primarily due to net settlements in hedge funds and the effects of currency. The increases in Level 3 pension plan investments during 2014 were primarily due to unrealized net gains across most of the Level 3 asset categories and net transfers into pooled funds-fixed income securities offset by the effects of currency.
The percentage of fair value of pension plan assets was:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| Asset Category | 2015 | 2014 | 2015 | 2014 | ||||||||||||
| Equity securities | 32% | 45% | 32% | 30% | ||||||||||||
| Fixed-income securities | 65% | 52% | 50% | 48% | ||||||||||||
| Real estate | 3% | 3% | 6% | 4% | ||||||||||||
| Hedge funds | – | – | 7% | 10% | ||||||||||||
| Private equity | – | – | 3% | 3% | ||||||||||||
| Cash | – | – | 1% | 3% | ||||||||||||
| Other | – | – | 1% | 2% | ||||||||||||
| Total | 100% | 100% | 100% | 100% | ||||||||||||
For our U.S. plans, our investment strategy is to reduce the risk of underfunded plans in part through appropriate asset allocation within our plan assets. We attempt to maintain our target asset allocation by rebalancing between asset classes as we make contributions and monthly benefit payments. Due to the nature and timing of our expected pension liabilities, in the first quarter of 2015, we strategically reduced the risk level of the investment portfolio by lowering our target allocation for equity securities (including investments in real estate) to 35% and increasing the fixed-income allocation target to 65%. The strategy involves using indexed U.S. equity and international equity securities and actively managed U.S. investment grade fixed-income securities (which constitute 95% or more of fixed-income securities) with smaller allocations to high yield fixed-income securities.
For our non-U.S. plans, the investment strategy is subject to local regulations and the asset / liability profiles of the plans in each individual country. In aggregate, the asset allocation targets of our non-U.S. plans are broadly characterized as a mix of approximately 37% equity securities (including investments in real estate), approximately 50% fixed-income securities and approximately 13% other alternative securities. Our investment strategy for our largest non-U.S. plan, which comprises 51% of our non-U.S. pension assets, is designed to balance risk and return by diversifying across a wide range of return-seeking and liability matching assets, invested in a range of both active and passive mandates. We target an allocation of approximately 15% in equity securities, 19% credit, 12% private markets, 17% other diversifying assets, and 37% liability matching assets. The strategy uses indexed global developed equities, actively managed global investment grade and alternative credit, global private equity and real estate, other diversifying assets including hedge funds, and other liability matching assets including a buy-in annuity policy.
Employer Contributions:
In 2015, we contributed $225 million to our U.S. pension plans and $302 million to our non-U.S. pension plans. In addition, employees contributed $16 million to our non-U.S. plans. We make contributions to our U.S. and non-U.S. pension plans primarily to the extent that they are tax deductible and do not generate an excise tax liability.
In 2016, we estimate that our pension contributions will be $170 million to our U.S. plans and $279 million to our non-U.S. plans based on current tax laws. Of the total 2016 pension contributions, $150 million is expected to be voluntary. Our actual contributions may be different due to many factors, including changes in tax and other benefit laws, significant differences between expected and actual pension asset performance or interest rates, or other factors.
Future Benefit Payments:
The estimated future benefit payments from our pension plans at December 31, 2015 were (in millions):
| Year ending: | 2016 | 2017 | 2018 | 2019 | 2020 | 2021-2025 | ||||||||||||||||||
| U.S. Plans | $ | 91 | $ | 84 | $ | 95 | $ | 105 | $ | 109 | $ | 562 | ||||||||||||
| Non-U.S. Plans | $ | 401 | $ | 403 | $ | 410 | $ | 423 | $ | 435 | $ | 2,352 |
Multiemployer Pension Plans:
We made contributions to multiemployer pension plans of $31 million in 2015, $32 million in 2014 and $32 million in 2013. These plans provide pension benefits to retirees under certain collective bargaining agreements. The following is the only individually significant multiemployer plan we participate in as of December 31, 2015:
| Expiration Date | ||||||||||||||||
| Pension | FIP / RP | of Collective- | ||||||||||||||
| EIN / Pension | Protection Act | Status Pending / | Surcharge | Bargaining | ||||||||||||
| Pension Fund | Plan Number | Zone Status | Implemented | Imposed | Agreements | |||||||||||
| Bakery, Confectionery, Tobacco Workers and Grain Miller International Pension Fund | 526118572 | Red | Implemented | Yes | 2/29/2016 |
Our contributions exceeded 5% of total contributions to the Bakery, Confectionery, Tobacco Workers and Grain Millers International Pension Fund (the “Fund”) for fiscal years 2015, 2014 and 2013. Our contributions to the Fund were $27 million in 2015, $25 million in 2014 and $26 million in 2013. Our contribution to the Fund is based on our contribution rates under our collective bargaining agreements, the number of our eligible employees and Fund surcharges. Our collective bargaining agreements with the Fund, under which we are obligated to make contributions to the Fund, expire during 2016. These current collective bargaining agreements obligate us to contribute approximately $30 million to the Pension Fund on an annual basis, including 2016. The Fund’s actuarial valuation has been completed and the zone status was changed to “Red” in 2012. As a result of this certification, we are being charged a 10% surcharge on our contribution rates. Our expected future contributions include the surcharge. The Fund adopted a rehabilitation plan on November 7, 2012 that requires contribution increases and reduction to benefit provisions.
Our contributions to other multiemployer pension plans that were not individually significant were $4 million in 2015, $7 million in 2014 and $6 million in 2013.
Other Costs:
We sponsor and contribute to employee defined contribution plans. These plans cover eligible salaried, non-union and union employees. Our contributions and costs are determined by the matching of employee contributions, as defined by the plans. Amounts charged to expense in continuing operations for defined contribution plans totaled $45 million in 2015, $46 million in 2014 and $66 million in 2013.
Postretirement Benefit Plans
Obligations:
Our postretirement health care plans are not funded. The changes in and the amount of the accrued benefit obligation were:
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Accrued benefit obligation at January 1 | $ | 538 | $ | 422 | ||||
| Service cost | 15 | 13 | ||||||
| Interest cost | 22 | 22 | ||||||
| Benefits paid | (10 | ) | (9 | ) | ||||
| Currency | (22 | ) | (11 | ) | ||||
| Assumption changes | (30 | ) | 75 | |||||
| Actuarial (gains) / losses | (2 | ) | 14 | |||||
| Other | – | 12 | ||||||
| Accrued benefit obligation at December 31 | $ | 511 | $ | 538 | ||||
The current portion of our accrued postretirement benefit obligation of $11 million at December 31, 2015 and 2014 was included in other accrued liabilities.
We used the following weighted-average assumptions to determine our postretirement benefit obligations:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Discount rate | 4.60% | 4.20% | 4.77% | 4.52% | ||||||||||||
| Health care cost trend rate assumed for next year | 6.50% | 6.50% | 5.37% | 5.18% | ||||||||||||
| Ultimate trend rate | 5.00% | 5.00% | 5.55% | 5.53% | ||||||||||||
| Year that the rate reaches the ultimate trend rate | 2020 | 2018 | 2018 | 2018 |
Year-end discount rates for our U.S., Canadian and U.K. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the benefit obligations. Year-end discount rates for our remaining non-U.S. plans were developed from local bond indices that match local benefit obligations as closely as possible. Changes in our discount rates were primarily the result of changes in bond yields year-over-year. Our expected health care cost trend rate is based on historical costs.
At the end 2015, we changed the approach used to measure service and interest costs for other postretirement benefits. 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. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis.
Assumed health care cost trend rates have a significant impact on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| As of December 31, 2015 | ||||||||||
| One-Percentage-Point | ||||||||||
| Increase | Decrease | |||||||||
| (in millions) | ||||||||||
| Effect on postretirement benefit obligation | $ | 88 | $ | (69 | ) | |||||
| Effect on annual service and interest cost | 7 | (6 | ) |
Components of Net Periodic Postretirement Health Care Costs:
Net periodic postretirement health care costs consisted of the following:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Service cost | $ | 15 | $ | 13 | $ | 15 | ||||||
| Interest cost | 22 | 22 | 20 | |||||||||
| Amortization: | ||||||||||||
| Net loss from experience differences | 13 | 5 | 12 | |||||||||
| Prior service credit | (7 | ) | (10 | ) | (12 | ) | ||||||
| Net periodic postretirement health care costs | $ | 43 | $ | 30 | $ | 35 | ||||||
As of December 31, 2015, we expected to amortize from accumulated other comprehensive earnings / (losses) into pre-tax net periodic postretirement health care costs during 2016:
| • | an estimated $9 million of net loss from experience differences, and |
|---|
| • | an estimated $7 million of prior service credit. |
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We used the following weighted-average assumptions to determine our net periodic postretirement health care cost:
| U.S. Plans | Non-U.S. Plans | |||||||||||
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||
| Discount rate | 4.20% | 5.10% | 4.20% | 4.52% | 5.17% | 4.39% | ||||||
| Health care cost trend rate | 6.50% | 7.00% | 7.50% | 5.18% | 5.11% | 6.47% |
Future Benefit Payments:
Our estimated future benefit payments for our postretirement health care plans at December 31, 2015 were (in millions):
| Year ending: | 2016 | 2017 | 2018 | 2019 | 2020 | 2021-2025 | ||||||
| U.S. Plans | $8 | $9 | $10 | $12 | $13 | $85 | ||||||
| Non-U.S. Plans | $5 | $5 | $5 | $6 | $6 | $33 |
Other Costs:
We made contributions to multiemployer medical plans totaling $20 million in 2015, $18 million in 2014 and $18 million in 2013. These plans provide medical benefits to active employees and retirees under certain collective bargaining agreements.
Postemployment Benefit Plans
Obligations:
Our postemployment plans are primarily not funded. The changes in and the amount of the accrued benefit obligation at December 31, 2015 and 2014 were:
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Accrued benefit obligation at January 1 | $ | 94 | $ | 103 | ||||
| Service cost | 7 | 9 | ||||||
| Interest cost | 5 | 6 | ||||||
| Benefits paid | (7 | ) | (17 | ) | ||||
| Assumption changes | (3 | ) | 2 | |||||
| Actuarial losses | (1 | ) | (9 | ) | ||||
| Accrued benefit obligation at December 31 | $ | 95 | $ | 94 | ||||
The accrued benefit obligation was determined using a weighted-average discount rate of 6.2% in 2015 and 5.6% in 2014, an assumed weighted-average ultimate annual turnover rate of 0.3% in 2015 and 2014, assumed compensation cost increases of 4.0% in 2015 and 2014 and assumed benefits as defined in the respective plans.
Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.
Components of Net Periodic Postemployment Costs:
Net periodic postemployment costs consisted of the following:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Service cost | $ | 7 | $ | 9 | $ | 8 | ||||||
| Interest cost | 5 | 6 | 5 | |||||||||
| Amortization of net gains | – | – | (1 | ) | ||||||||
| Other | – | – | (1 | ) | ||||||||
| Net periodic postemployment costs | $ | 12 | $ | 15 | $ | 11 | ||||||
As of December 31, 2015, the estimated net gain for the postemployment benefit plans that we expected to amortize from accumulated other comprehensive earnings / (losses) into net periodic postemployment costs during 2016 was insignificant.
Note 11. Stock Plans
On May 21, 2014, our shareholders approved the Amended and Restated 2005 Performance Incentive Plan (the “2005 Plan”). Under the amended plan, we make grants to non-employee directors under the 2005 Plan, and we no longer make any grants under the Amended and Restated 2006 Stock Compensation Plan for Non-Employee Directors (the “2006 Directors Plan”). We also increased the number of shares available for issuance under the 2005 Plan by 75.7 million, which includes the shares remaining available for issuance under the 2006 Directors Plan as of March 14, 2014. Under the 2005 Plan, we are authorized to issue a maximum of 243.7 million shares of our Common Stock. We may not make any grants under the 2005 Plan after May 21, 2024. As of December 31, 2015, there were 81.8 million shares available to be granted under the 2005 Plan.
In connection with the Spin-Off and divestiture of Kraft Foods Group, under the provisions of our existing plans, employee stock option and restricted stock and deferred stock unit grants were adjusted to preserve the fair value of the awards immediately before and after the Spin-Off. As such, we did not record any incremental compensation expense related to the conversion of the awards. In connection with the stock awards held by our respective employees at the time of the Spin-Off, we collected a $55 million cash net settlement for the awards from Kraft Foods Group in March 2013.
Stock Options:
Stock options (including stock appreciation rights) are granted at an exercise price equal to the market value of the underlying stock on the grant date, generally become exercisable in three annual installments beginning on the first anniversary of the grant date and have a maximum term of ten years.
We account for our employee stock options under the fair value method of accounting using a Black-Scholes methodology to measure stock option expense at the date of grant. The fair value of the stock options at the date of grant is amortized to expense over the vesting period. We recorded compensation expense related to stock options held by our employees of $50 million in 2015, $47 million in 2014 and $39 million in 2013 in our results from continuing operations. The deferred tax benefit recorded related to this compensation expense was $13 million in 2015, $12 million in 2014 and $11 million in 2013. The unamortized compensation expense related to our employee stock options was $62 million at December 31, 2015 and is expected to be recognized over a weighted-average period of 1 year.
Our weighted-average Black-Scholes fair value assumptions were:
| Risk-Free Interest Rate | Expected Life | Expected Volatility | Expected Dividend Yield | Fair Value at Grant Date | ||||||||||||||||
| 2015 | 1.70% | 6 years | 18.51% | 1.61% | $ | 6.12 | ||||||||||||||
| 2014 | 1.87% | 6 years | 21.48% | 1.64% | $ | 6.60 | ||||||||||||||
| 2013 | 1.15% | 6 years | 20.36% | 1.94% | $ | 4.31 |
The risk-free interest rate represents the constant maturity U.S. government treasuries rate with a remaining term equal to the expected life of the options. The expected life is the period over which our employees are expected to hold their options. Volatility reflects historical movements in our stock price for a period commensurate with the expected life of the options. The dividend yield reflects the dividend yield in place at the time of the historical grants.
Stock option activity is reflected below:
| Weighted- | ||||||||||||||
| Average | Average | |||||||||||||
| Shares Subject | Exercise or Grant Price | Remaining Contractual | Aggregate Intrinsic | |||||||||||
| to Option | Per Share | Term | Value | |||||||||||
| Balance at January 1, 2013 | 52,753,039 | $ | 20.45 | $ | 264 million | |||||||||
| Annual grant to eligible employees | 11,644,280 | 27.05 | ||||||||||||
| Additional options issued | 762,512 | 29.69 | ||||||||||||
| Total options granted | 12,406,792 | 27.21 | ||||||||||||
| Options exercised (1) | (7,185,616 | ) | 19.41 | $ | 79 million | |||||||||
| Options cancelled | (2,190,776 | ) | 23.86 | |||||||||||
| Balance at December 31, 2013 | 55,783,439 | 21.96 | $ | 744 million | ||||||||||
| Annual grant to eligible employees | 9,919,810 | 34.17 | ||||||||||||
| Additional options issued | 500,250 | 33.65 | ||||||||||||
| Total options granted | 10,420,060 | 34.14 | ||||||||||||
| Options exercised (1) | (8,076,550 | ) | 20.85 | $ | 125 million | |||||||||
| Options cancelled | (1,695,398 | ) | 27.65 | |||||||||||
| Balance at December 31, 2014 | 56,431,551 | 24.19 | $ | 685 million | ||||||||||
| Annual grant to eligible employees | 8,899,530 | 36.94 | ||||||||||||
| Additional options issued | 901,340 | 35.84 | ||||||||||||
| Total options granted | 9,800,870 | 36.84 | ||||||||||||
| Options exercised (1) | (6,444,515 | ) | 22.94 | $ | 108 million | |||||||||
| Options cancelled | (2,753,798 | ) | 32.35 | |||||||||||
| Balance at December 31, 2015 | 57,034,108 | 26.12 | 6 years | $ | 229 million | |||||||||
| Exercisable at December 31, 2015 | 38,658,921 | 22.33 | 5 years | $ | 870 million | |||||||||
| (1) | Cash received from options exercised was $148 million in 2015, $168 million in 2014 and $139 million in 2013. The actual tax benefit realized for the tax deductions from the option exercises totaled $58 million in 2015, $29 million in 2014 and $14 million in 2013. |
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Restricted Stock, Deferred Stock Units and Performance Share Units:
We may grant shares of restricted stock or deferred stock units to eligible employees, giving them, in most instances, all of the rights of shareholders, except that they may not sell, assign, pledge or otherwise encumber the shares and our deferred stock units do not have voting rights until vested. Shares of restricted stock and deferred stock units are subject to forfeiture if certain employment conditions are not met. Restricted stock and deferred stock units generally vest on the third anniversary of the grant date. Beginning in 2016, we will only grant deferred stock units and no longer grant restricted stock.
Performance share units granted under our 2005 Plan vest based on varying performance, market and service conditions. The unvested performance share units have no voting rights and do not pay dividends. Dividend equivalents accumulated over the vesting period are paid only after the performance share units vest.
The fair value of the restricted stock, deferred stock units and performance share units at the date of grant is amortized to earnings over the restriction period. We recorded compensation expense related to restricted stock, deferred stock units and performance share units of $86 million in 2015, $94 million in 2014 and $94 million in 2013 in our results from continuing operations. The deferred tax benefit recorded related to this compensation expense was $24 million in 2015, $26 million in 2014 and $28 million in 2013. The unamortized compensation expense related to our restricted stock, deferred stock units and performance share units was $138 million at December 31, 2015 and is expected to be recognized over a weighted-average period of 2 years.
Our restricted stock, deferred stock unit and performance share unit activity is reflected below:
| Weighted-Average | Weighted-Average | |||||||||||||
| Number | Fair Value | Aggregate | ||||||||||||
| of Shares | Grant Date | Per Share | Fair Value | |||||||||||
| Balance at January 1, 2013 | 12,815,911 | $ | 21.55 | |||||||||||
| Annual grant to eligible employees: | Feb. 20, 2013 | |||||||||||||
| Performance share units | 1,542,600 | 26.24 | ||||||||||||
| Restricted stock | 949,030 | 27.05 | ||||||||||||
| Deferred stock units | 1,386,750 | 27.05 | ||||||||||||
| Additional shares granted (1) | 1,353,057 | Various | 22.47 | |||||||||||
| Total shares granted | 5,231,437 | 25.63 | $ | 134 million | ||||||||||
| Vested | (5,350,073 | ) | 18.82 | $ | 101 million | |||||||||
| Forfeited | (1,048,688 | ) | 23.23 | |||||||||||
| Balance at December 31, 2013 | 11,648,587 | 24.48 | ||||||||||||
| Annual grant to eligible employees: | Feb. 19, 2014 | |||||||||||||
| Performance share units | 1,143,620 | 34.97 | ||||||||||||
| Restricted stock | 750,410 | 34.17 | ||||||||||||
| Deferred stock units | 1,240,820 | 34.17 | ||||||||||||
| Additional shares granted (1) | 935,463 | Various | 33.15 | |||||||||||
| Total shares granted | 4,070,313 | 34.16 | $ | 139 million | ||||||||||
| Vested | (4,380,452 | ) | 22.98 | $ | 101 million | |||||||||
| Forfeited | (755,808 | ) | 28.14 | |||||||||||
| Balance at December 31, 2014 | 10,582,640 | 28.56 | ||||||||||||
| Annual grant to eligible employees: | Feb. 18, 2015 | |||||||||||||
| Performance share units | 1,598,290 | 36.94 | ||||||||||||
| Restricted stock | 386,910 | 36.94 | ||||||||||||
| Deferred stock units | 866,640 | 36.94 | ||||||||||||
| Additional shares granted (1) | 1,087,322 | Various | 39.35 | |||||||||||
| Total shares granted | 3,939,162 | 37.61 | $ | 148 million | ||||||||||
| Vested | (3,905,745 | ) | 37.83 | $ | 148 million | |||||||||
| Forfeited | (1,197,841 | ) | 32.51 | |||||||||||
| Balance at December 31, 2015 | 9,418,216 | 28.00 | ||||||||||||
| (1) | Includes performance share units, restricted stock and deferred stock units. |
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Note 12. Capital Stock
Our amended and restated articles of incorporation authorize 5.0 billion shares of Class A common stock (“Common Stock”) and 500 million shares of preferred stock. There were no preferred shares issued and outstanding at December 31, 2015, 2014 and 2013. Shares of Common Stock issued, in treasury and outstanding were:
| Shares | ||||||||||||
| Shares Issued | Treasury Shares | Outstanding | ||||||||||
| Balance at January 1, 2013 | 1,996,537,778 | (218,541,936 | ) | 1,777,995,842 | ||||||||
| Shares repurchased | – | (82,799,448 | ) | (82,799,448 | ) | |||||||
| Exercise of stock options and issuance of other stock awards | – | 10,200,200 | 10,200,200 | |||||||||
| Balance at December 31, 2013 | 1,996,537,778 | (291,141,184 | ) | 1,705,396,594 | ||||||||
| Shares repurchased | – | (51,931,864 | ) | (51,931,864 | ) | |||||||
| Exercise of stock options and issuance of other stock awards | – | 10,176,269 | 10,176,269 | |||||||||
| Balance at December 31, 2014 | 1,996,537,778 | (332,896,779 | ) | 1,663,640,999 | ||||||||
| Shares repurchased | – | (91,875,878 | ) | (91,875,878 | ) | |||||||
| Exercise of stock options and issuance of other stock awards | – | 8,268,033 | 8,268,033 | |||||||||
| Balance at December 31, 2015 | 1,996,537,778 | (416,504,624 | ) | 1,580,033,154 | ||||||||
Stock plan awards to employees and non-employee directors are issued from treasury shares. At December 31, 2015, 146 million shares of Common Stock held in treasury were reserved for stock options and other stock awards.
Share Repurchase Program:
During 2013, our Board of Directors authorized the repurchase of $7.7 billion of our Common Stock through December 31, 2016. On July 29, 2015, our Finance Committee, with authorization delegated from our Board of Directors, approved an increase of $6.0 billion in the share repurchase program, raising the authorization to $13.7 billion of Common Stock repurchases, and extended the program through December 31, 2018. Repurchases under the program are determined by management and are wholly discretionary. During 2015, we repurchased 91.9 million shares of Common Stock at an average cost of $39.43 per share, or an aggregate cost of $3.6 billion, all of which was paid during 2015. All share repurchases were funded through available cash and commercial paper issuances. During 2014, we repurchased 51.9 million shares of Common Stock at an average cost of $36.43 per share, or an aggregate cost of $1.9 billion. As of December 31, 2015, we have $5.4 billion in remaining share repurchase capacity.
In December 2013, we initiated an accelerated share repurchase (“ASR”) program. On December 3, 2013, we paid $1.7 billion and received an initial delivery of 44.8 million shares of Common Stock valued at $1.5 billion. We increased treasury stock by $1.5 billion, and the remaining $0.2 billion was recorded against additional paid in capital. In May 2014, the ASR program concluded and we received an additional 5.1 million shares, valued at $0.2 billion, for a total of 49.9 million shares with an average repurchase price of $34.10 per share over the life of the ASR program. The final settlement was based on the volume-weighted average price of our Common Stock during the purchase period less a fixed per share discount. Upon conclusion of the ASR program and receipt of the remaining repurchased shares, the $0.2 billion recorded in additional paid in capital was reclassified to treasury stock.
Note 13. Commitments and Contingencies
Legal Proceedings:
We routinely are involved in legal proceedings, claims and governmental inspections or investigations (“Legal Matters”) arising in the ordinary course of our business.
A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success. Accordingly, after we acquired Cadbury in February 2010, we began reviewing and adjusting, as needed, Cadbury’s operations in light of applicable standards as well as our policies and practices. We initially focused on such high priority areas as food safety, the Foreign Corrupt Practices Act (“FCPA”) and antitrust. Based upon Cadbury’s pre-acquisition policies and compliance programs and our post-acquisition reviews, our preliminary findings indicated that Cadbury’s overall state of compliance was sound. Nonetheless, through our reviews, we determined that in certain jurisdictions, including India, there appeared to be facts and circumstances warranting further investigation. We are continuing our investigations in certain jurisdictions, including in India, and we continue to cooperate with governmental authorities.
As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are continuing to cooperate with the U.S. and Indian governments in their investigations of these matters, including through ongoing meetings with the U.S. government to discuss potential conclusion of the U.S. government investigation. On February 11, 2016, we received a “Wells” notice from the SEC indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against us for violations of the books and records and internal controls provisions of the Exchange Act in connection with the investigation. We intend to make a submission to the staff of the SEC in response to the notice.
In February 2013 and March 2014, Cadbury India Limited (now known as Mondelez India Foods Private Limited), a subsidiary of Mondelēz International, and other parties received show cause notices from the Indian Central Excise Authority (the “Excise Authority”) calling upon the parties to demonstrate why the Excise Authority should not collect a total of 3.7 billion Indian rupees (approximately $57 million U.S. dollars as of December 31, 2015) of unpaid excise tax and an equivalent amount of penalties, as well as interest, related to production at the same Indian facility. We contested these demands for unpaid excise taxes, penalties and interest. On March 27, 2015, after several hearings, the Commissioner of the Excise Authority issued an order denying the excise exemption that we claimed for the Indian facility and confirming the Excise Authority’s demands for total taxes and penalties in the amount of 5.8 billion Indian rupees (approximately $88 million U.S. dollars as of December 31, 2015). We have appealed this order. In addition, the Excise Authority issued additional show cause notices on February 6, 2015 and December 8, 2015 on the same issue but covering the periods January to October 2014 and November 2014 to September 2015, respectively. These notices added a total of 2.4 billion Indian rupees (approximately $36 million U.S. dollars as of December 31, 2015) of unpaid excise taxes as well as penalties to be determined up to an amount equivalent to that claimed by the Excise Authority and interest. We believe that the decision to claim the excise tax benefit is valid and we are continuing to contest the show cause notices through the administrative and judicial process.
In April 2013, the staff of the U.S. Commodity Futures Trading Commission (“CFTC”) advised us and Kraft Foods Group that it was investigating activities related to the trading of December 2011 wheat futures contracts that occurred prior to the Spin-Off of Kraft Foods Group. We cooperated with the staff in its investigation. On April 1, 2015, the CFTC filed a complaint against Kraft Foods Group and Mondelēz Global LLC (“Mondelēz Global”) in the U.S. District Court for the Northern District of Illinois, Eastern Division (the “CFTC action”). The complaint alleges that Kraft Foods Group and Mondelēz Global (1) manipulated or attempted to manipulate the wheat markets during the fall of 2011; (2) violated position limit levels for wheat futures and (3) engaged in non-competitive trades by trading both sides of exchange-for-physical Chicago Board of Trade wheat contracts. The CFTC seeks civil monetary penalties of either triple the monetary gain for each violation of the Commodity Exchange Act (the “Act”) or $1 million for each violation of Section 6(c)(1), 6(c)(3) or 9(a)(2) of the Act and $140,000 for each additional violation of the Act, plus post-judgment interest; an order of permanent injunction prohibiting Kraft Foods Group and Mondelēz Global from violating specified provisions of the Act; disgorgement of profits; and costs and fees. In December 2015, the court denied Mondelēz Global and Kraft Foods Group’s motion to dismiss the CFTC’s claims of market manipulation and attempted manipulation, and the parties are now in discovery. Additionally, several class action complaints were filed against Kraft Foods Group and Mondelēz Global in the U.S. District Court for the Northern District of Illinois by investors in wheat futures and options on behalf of themselves and others similarly situated. The complaints make similar allegations as those made in the CFTC action and seek class action certification; an unspecified amount for damages, interest and unjust enrichment; costs and fees; and injunctive, declaratory, and other unspecified relief. In June 2015, these suits were consolidated in the Northern District of Illinois. It is not possible to predict the outcome of these matters; however, based on our Separation and Distribution Agreement with Kraft Foods Group dated as of September 27, 2012, we expect to predominantly bear any monetary penalties or other payments in connection with the CFTC action.
While we cannot predict with certainty the results of any Legal Matters in which we are currently involved, we do not expect that the ultimate costs to resolve any of these Legal Matters, individually or in the aggregate, will have a material effect on our financial results.
Third-Party Guarantees:
We enter into third-party guarantees primarily to cover the long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At December 31, 2015, we had no material third-party guarantees recorded on our consolidated balance sheet.
As part of our 2010 Cadbury acquisition, we became the responsible party for tax matters under the Cadbury Schweppes Plc and Dr Pepper Snapple Group, Inc. (“DPSG”) Tax Sharing and Indemnification Agreement dated May 1, 2008 (“Tax Indemnity”) for certain 2007 and 2008 transactions relating to the demerger of Cadbury’s Americas Beverage business. A U.S. federal tax audit of Cadbury for the 2006-2008 tax years was concluded with the IRS in August 2013. As a result, we recorded a favorable impact of $336 million in selling, general and administrative expenses and $49 million in interest and other expense, net for a total pre-tax impact of $385 million ($363 million net of tax) in the three months ended September 30, 2013 due to the reversal of the accrued liability in excess of the amount we paid to DPSG under the Tax Indemnity in the third quarter of 2013.
Leases:
Rental expenses recorded in continuing operations were $331 million in 2015, $399 million in 2014 and $386 million in 2013. As of December 31, 2015, minimum rental commitments under non-cancelable operating leases in effect at year-end were (in millions):
| 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||
| $ | 311 | $ | 202 | $ | 145 | $ | 111 | $ | 98 | $ | 127 | $ | 994 |
Note 14. Reclassifications from Accumulated Other Comprehensive Income
The components of accumulated other comprehensive earnings / (losses) attributable to Mondelēz International were:
| Mondelēz International Shareholders’ Equity | ||||||||||||||||
| Currency | Derivatives | |||||||||||||||
| Translation | Pension and | Accounted for | ||||||||||||||
| Adjustments | Other Benefits | as Hedges | Total | |||||||||||||
| (in millions) | ||||||||||||||||
| Balances at January 1, 2013 | $ | (399 | ) | $ | (2,229 | ) | $ | (38 | ) | $ | (2,666 | ) | ||||
| Other comprehensive earnings / (losses), before reclassifications: | ||||||||||||||||
| Currency translation adjustment | (952 | ) | (29 | ) | – | (981 | ) | |||||||||
| Pension and other benefits | – | 713 | – | 713 | ||||||||||||
| Derivatives accounted for as hedges | (99 | ) | – | 169 | 70 | |||||||||||
| Losses / (gains) reclassified into net earnings | – | 197 | 72 | 269 | ||||||||||||
| Tax (expense) / benefit | 36 | (244 | ) | (86 | ) | (294 | ) | |||||||||
| Total other comprehensive earnings / (losses) | (223 | ) | ||||||||||||||
| Balances at December 31, 2013 | $ | (1,414 | ) | $ | (1,592 | ) | $ | 117 | $ | (2,889 | ) | |||||
| Other comprehensive earnings / (losses), before reclassifications: | ||||||||||||||||
| Currency translation adjustment (1) | (3,995 | ) | 146 | – | (3,849 | ) | ||||||||||
| Pension and other benefits | – | (1,388 | ) | – | (1,388 | ) | ||||||||||
| Derivatives accounted for as hedges | 595 | – | (166 | ) | 429 | |||||||||||
| Losses / (gains) reclassified into net earnings | – | 174 | (45 | ) | 129 | |||||||||||
| Tax (expense) / benefit | (228 | ) | 386 | 92 | 250 | |||||||||||
| Total other comprehensive earnings / (losses) | (4,429 | ) | ||||||||||||||
| Balances at December 31, 2014 | $ | (5,042 | ) | $ | (2,274 | ) | $ | (2 | ) | $ | (7,318 | ) | ||||
| Other comprehensive earnings / (losses), before reclassifications: | ||||||||||||||||
| Currency translation adjustment (1)(2) | (3,382 | ) | 146 | – | (3,236 | ) | ||||||||||
| Pension and other benefits | – | (60 | ) | – | (60 | ) | ||||||||||
| Derivatives accounted for as hedges | 503 | – | (74 | ) | 429 | |||||||||||
| Losses / (gains) reclassified into net earnings | – | 318 | 21 | 339 | ||||||||||||
| Reclassification to earnings related to Venezuelan deconsolidation | 99 | 2 | – | 101 | ||||||||||||
| Tax (expense) / benefit | (184 | ) | (66 | ) | 9 | (241 | ) | |||||||||
| Total other comprehensive earnings / (losses) | (2,668 | ) | ||||||||||||||
| Balances at December 31, 2015 | $ | (8,006 | ) | $ | (1,934 | ) | $ | (46 | ) | $ | (9,986 | ) | ||||
| (1) | The consolidated statement of other comprehensive earnings includes currency translation adjustment attributable to noncontrolling interests of $(26) million for the year ended December 31, 2015 and $(33) million for the year ended December 31, 2014. |
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| (2) | The 2015 translation adjustment of $(2,759) million on the consolidated statement of other comprehensive earnings includes translation adjustments related to pensions of $146 million, derivatives of $503 million, noncontrolling interests of $(26) million and currency impacts of $(3,382) million related to translating our international operations. |
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Amounts reclassified from accumulated other comprehensive earnings / (losses) and their locations in the consolidated financial statements were as follows:
| Location of | ||||||||||||||
| Gain / (Loss) | ||||||||||||||
| For the Years Ended December 31, | Recognized | |||||||||||||
| 2015 | 2014 | 2013 | in Net Earnings | |||||||||||
| (in millions) | ||||||||||||||
| Pension and other benefits: | ||||||||||||||
| Reclassification of losses / (gains) into net earnings: | ||||||||||||||
| Amortization of experience losses and prior service costs (1) | $ | 207 | $ | 132 | $ | 193 | ||||||||
| Settlement losses (1)(2) | 111 | 42 | 4 | |||||||||||
| Venezuela deconsolidation | 2 | – | – | Loss on deconsolidation of Venezuela | ||||||||||
| Tax impact | (69 | ) | (56 | ) | (50 | ) | Provision for income taxes | |||||||
| Derivatives accounted for as hedges: | ||||||||||||||
| Reclassification of losses / (gains) into net earnings: | ||||||||||||||
| Currency exchange contracts - forecasted transactions | (90 | ) | (27 | ) | 28 | Cost of sales | ||||||||
| Commodity contracts | 64 | (21 | ) | 38 | Cost of sales | |||||||||
| Interest rate contracts | 47 | 3 | 6 | Interest and other expense, net | ||||||||||
| Tax impact | (21 | ) | 6 | (19 | ) | Provision for income taxes | ||||||||
| Currency translation: | ||||||||||||||
| Reclassification to earnings related to Venezuela deconsolidation | 99 | – | – | Loss on deconsolidation of Venezuela | ||||||||||
| Total reclassifications into net earnings, net of tax | $ | 350 | $ | 79 | $ | 200 | ||||||||
| (1) | These items are included in the components of net periodic benefit costs disclosed in Note 10, Benefit Plans. |
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| (2) | Settlement losses include the transfer of coffee business-related pension obligations in the amount of $90 million in 2015. See Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for additional information. |
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Note 15. Income Taxes
Earnings / (losses) from continuing operations before income taxes and the provision for income taxes consisted of the following:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Earnings / (losses) from continuing operations before income taxes: | ||||||||||||
| United States | $ | 43 | $ | (135 | ) | $ | (799 | ) | ||||
| Outside United States | 7,841 | 2,689 | 3,191 | |||||||||
| Total | $ | 7,884 | $ | 2,554 | $ | 2,392 | ||||||
| Provision for income taxes: | ||||||||||||
| United States federal: | ||||||||||||
| Current | $ | (90 | ) | $ | (125 | ) | $ | (489 | ) | |||
| Deferred | 136 | 28 | 103 | |||||||||
| 46 | (97 | ) | (386 | ) | ||||||||
| State and local: | ||||||||||||
| Current | 6 | 20 | (35 | ) | ||||||||
| Deferred | (3 | ) | 11 | 22 | ||||||||
| 3 | 31 | (13 | ) | |||||||||
| Total United States | 49 | (66 | ) | (399 | ) | |||||||
| Outside United States: | ||||||||||||
| Current | 707 | 644 | 648 | |||||||||
| Deferred | (163 | ) | (225 | ) | (189 | ) | ||||||
| Total outside United States | 544 | 419 | 459 | |||||||||
| Total provision for income taxes | $ | 593 | $ | 353 | $ | 60 | ||||||
See Note 2, Divestitures and Acquisitions, for information on taxes presented as part of the Kraft Foods Group discontinued operation and related to the resolution of the Starbucks arbitration.
We recorded out-of-period adjustments of $14 million net expense in 2015 and $31 million net expense in 2014 that had an immaterial impact on the annual provision for income taxes. In addition, during the fourth quarter of 2014, we recorded a tax benefit of $43 million associated with the lapse of a statute of limitations that related to the third quarter of 2014. The out-of-period adjustments were not material to the consolidated financial statements for any prior period.
The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| U.S. federal statutory rate | 35.0% | 35.0% | 35.0% | |||||||||
| Increase / (decrease) resulting from: | ||||||||||||
| State and local income taxes, net of federal tax benefit excluding IRS audit impacts | (0.1)% | 0.3% | (0.5)% | |||||||||
| Foreign rate differences | (2.5)% | (14.5)% | (16.3)% | |||||||||
| Reversal of other tax accruals no longer required | (1.4)% | (10.5)% | (9.6)% | |||||||||
| Indemnification resolution | – | – | (4.7)% | |||||||||
| Tax legislation | (0.5)% | – | (2.2)% | |||||||||
| Gains on coffee business transactions and divestitures | (26.9)% | – | (2.1)% | |||||||||
| Loss on deconsolidation of Venezuela | 3.5% | – | – | |||||||||
| Remeasurement of net monetary assets in Venezuela | – | 1.7% | 1.0% | |||||||||
| Non-deductible expenses | 0.3% | 1.5% | 1.1% | |||||||||
| Other | 0.1% | 0.3% | 0.8% | |||||||||
| Effective tax rate | 7.5% | 13.8% | 2.5% | |||||||||
Our 2015 effective tax rate of 7.5% was favorably impacted by the one-time third quarter sale of our coffee business that resulted in a pre-tax gain of $6,809 million and $184 million of related tax expense, as well as $27 million of tax costs incurred to remit proceeds up from lower-tier foreign subsidiaries to allow cash to be redeployed within our retained foreign operations. The benefit of the third quarter transaction was partially offset by the tax costs associated with the sale of our interest in AGF in the first half of the year and the impact of deconsolidating our Venezuelan operations on December 31, 2015. Excluding the impacts of these transactions, our effective tax rate would have been 17.8%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from $119 million of discrete one-time events. The remaining discrete one-time events primarily related to favorable tax audit settlements and expirations of statutes of limitations in several jurisdictions and the net reduction of U.K. deferred tax liabilities resulting from tax legislation enacted during 2015 that reduced the U.K. corporate income tax rate.
Our 2014 effective tax rate of 13.8% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from $206 million of discrete one-time events. The discrete net tax benefits primarily related to favorable tax audit settlements and expirations of statues of limitations in several jurisdictions.
Our 2013 effective tax rate of 2.5% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions, net tax benefits from discrete one-time events and the non-taxable portion of the Cadbury acquisition related indemnification resolution, partially offset by an unfavorable tax law change. The $299 million of discrete one-time events primarily related to favorable tax audit settlements and expirations of statutes of limitations in several jurisdictions and the net reduction of U.K. deferred tax liabilities resulting from tax legislation enacted during 2013 that reduced the U.K. corporate income tax rate.
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Deferred income tax assets: | ||||||||
| Accrued postretirement and postemployment benefits | $ | 230 | $ | 227 | ||||
| Accrued pension costs | 414 | 588 | ||||||
| Other employee benefits | 265 | 272 | ||||||
| Accrued expenses | 343 | 410 | ||||||
| Loss carryforwards | 636 | 656 | ||||||
| Other | 352 | 431 | ||||||
| Total deferred income tax assets | 2,240 | 2,584 | ||||||
| Valuation allowance | (303 | ) | (345 | ) | ||||
| Net deferred income tax assets | $ | 1,937 | $ | 2,239 | ||||
| Deferred income tax liabilities: | ||||||||
| Intangible assets | $ | (5,365 | ) | $ | (5,843 | ) | ||
| Property, plant and equipment | (636 | ) | (784 | ) | ||||
| Other | (409 | ) | (439 | ) | ||||
| Total deferred income tax liabilities | (6,410 | ) | (7,066 | ) | ||||
| Net deferred income tax liabilities | $ | (4,473 | ) | $ | (4,827 | ) | ||
At December 31, 2015, the company has pre-tax loss carryforwards of $3,393 million, of which $1,160 million will expire at various dates between 2016 and 2029 and the remaining $2,233 million can be carried forward indefinitely.
Our significant valuation allowances reside in Mexico and Ireland.
At December 31, 2015, neither applicable U.S. federal income taxes nor foreign withholding taxes have been provided on approximately $19.2 billion of accumulated earnings of non-U.S. subsidiaries that are expected to be indefinitely reinvested. It is impractical for us to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. Future tax law changes or changes in the needs of our non-U.S. subsidiaries could require us to recognize deferred tax liabilities on a portion, or all, of our accumulated earnings that were previously expected to be indefinitely reinvested.
The changes in our unrecognized tax benefits were:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| January 1 | $ | 852 | $ | 1,189 | $ | 1,164 | ||||||
| Increases from positions taken during prior periods | 34 | 143 | 94 | |||||||||
| Decreases from positions taken during prior periods | (74 | ) | (247 | ) | (132 | ) | ||||||
| Increases from positions taken during the current period | 84 | 147 | 131 | |||||||||
| Decreases relating to settlements with taxing authorities | (13 | ) | (203 | ) | (7 | ) | ||||||
| Reductions resulting from the lapse of the applicable statute of limitations | (41 | ) | (64 | ) | (55 | ) | ||||||
| Currency / other | (86 | ) | (113 | ) | (6 | ) | ||||||
| December 31 | $ | 756 | $ | 852 | $ | 1,189 | ||||||
As of January 1, 2015, our unrecognized tax benefits were $852 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $744 million. Our unrecognized tax benefits were $756 million at December 31, 2015, and if we had recognized all of these benefits, the net impact on our income tax provision would have been $652 million. Within the next 12 months, our unrecognized tax benefits could increase by approximately $80 million due to unfavorable audit developments or decrease by approximately $260 million due to audit settlements and the expiration of statutes of limitations in various jurisdictions. We include accrued interest and penalties related to uncertain tax positions in our tax provision. We had accrued interest and penalties of $184 million as of January 1, 2015 and $185 million as of December 31, 2015. Our 2015 provision for income taxes included $32 million for interest and penalties.
Our income tax filings are regularly examined by federal, state and non-U.S. tax authorities. Our 2010-2012 U.S. federal income tax filings are currently under examination by the IRS. U.S. state and non-U.S. jurisdictions have statutes of limitations generally ranging from three to five years; however, these statutes are often extended by mutual agreement with the tax authorities. Years still open to examination by non-U.S. tax authorities in major jurisdictions include (earliest open tax year in parentheses): Brazil (2010), France (2010), Germany (2005), India (2005), Italy (2010) and the United Kingdom (2013).
Note 16. Earnings Per Share
Basic and diluted earnings per share (“EPS”) from continuing and discontinued operations were calculated using the following:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions, except per share data) | ||||||||||||
| Earnings from continuing operations (1) | $ | 7,291 | $ | 2,201 | $ | 2,332 | ||||||
| Earnings from discontinued operations, net of income taxes | – | – | 1,603 | |||||||||
| Net earnings | 7,291 | 2,201 | 3,935 | |||||||||
| Noncontrolling interest | 24 | 17 | 20 | |||||||||
| Net earnings attributable to Mondelēz International | $ | 7,267 | $ | 2,184 | $ | 3,915 | ||||||
| Weighted-average shares for basic EPS | 1,618 | 1,691 | 1,774 | |||||||||
| Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares | 19 | 18 | 15 | |||||||||
| Weighted-average shares for diluted EPS | 1,637 | 1,709 | 1,789 | |||||||||
| Basic earnings per share attributable to Mondelēz International: | ||||||||||||
| Continuing operations | $ | 4.49 | $ | 1.29 | $ | 1.30 | ||||||
| Discontinued operations | – | – | 0.91 | |||||||||
| Net earnings attributable to Mondelēz International | $ | 4.49 | $ | 1.29 | $ | 2.21 | ||||||
| Diluted earnings per share attributable to Mondelēz International: | ||||||||||||
| Continuing operations | $ | 4.44 | $ | 1.28 | $ | 1.29 | ||||||
| Discontinued operations | – | – | 0.90 | |||||||||
| Net earnings attributable to Mondelēz International | $ | 4.44 | $ | 1.28 | $ | 2.19 | ||||||
| (1) | Earnings from continuing operations for the year ended December 31, 2015 includes a pre-tax charge of $778 million related to the deconsolidation of our Venezuelan operations. See Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting: Venezuela, for additional information. |
|---|
We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded 5.1 million antidilutive stock options for the year ended December 31, 2015, 8.6 million antidilutive stock options for the year ended December 31, 2014 and 7.0 million antidilutive stock options for the year ended December 31, 2013.
Note 17. Segment Reporting
We manufacture and market primarily snack food products, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy and various cheese & grocery products, as well as powdered beverage products. We manage our global business and report operating results through geographic units.
Our operations and management structure are organized into five reportable operating segments:
| • | Latin America |
|---|
| • | Asia Pacific |
|---|
| • | EEMEA |
|---|
| • | Europe |
|---|
| • | North America |
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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 new coffee equity method investment in JDE, we began to record the earnings from our equity method investments in after-tax equity method investment earnings outside of segment operating income. 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.
Also in 2015, we began to report stock-based compensation for our corporate employees, which was previously reported within our North America region, within general corporate expenses. We reclassified $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. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), general corporate expenses (which are a component of selling, general and administrative expenses), amortization of intangibles, the benefit from the Cadbury acquisition-related indemnification resolution (which is a component of selling, general and administrative expenses), gains and losses on divestitures or acquisitions, gain on the coffee business transactions, loss on deconsolidation of Venezuela and acquisition-related costs (which are a component of selling, general and administrative expenses) in all periods presented. We exclude these items from segment operating income in order to provide better transparency of our segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.
Our segment net revenues and earnings 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, we contributed 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 | ||||||
No single customer accounted for 10% or more of our net revenues from continuing operations in 2015. Our five largest customers accounted for 17.0% and our ten largest customers accounted for 24.0% of net revenues from continuing operations in 2015.
Items impacting our segment operating results are discussed in Note 1, Summary of Significant Accounting Policies, including the Venezuela deconsolidation and currency devaluations, Note 2, Divestitures and Acquisitions, Note 5, Goodwill and Intangible Assets, Note 6, Restructuring Programs and Note 7, Integration Program and Cost Saving Initiatives. Also see Note 8, Debt and Borrowing Arrangements, and Note 9, Financial Instruments, for more information on our interest and other expense, net for each period.
Total assets, depreciation expense and capital expenditures by segment were:
| As of December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Total assets (1): | ||||||||||||
| Latin America (2) | $ | 4,673 | $ | 6,470 | $ | 6,860 | ||||||
| Asia Pacific (3) | 7,936 | 8,068 | 8,487 | |||||||||
| EEMEA (3) | 3,867 | 5,153 | 6,951 | |||||||||
| Europe (3) | 19,683 | 24,568 | 27,599 | |||||||||
| North America | 21,175 | 21,287 | 21,705 | |||||||||
| Equity method investments | 5,387 | 662 | 659 | |||||||||
| Unallocated assets (4) | 122 | 563 | 203 | |||||||||
| Total assets | $ | 62,843 | $ | 66,771 | $ | 72,464 | ||||||
| (1) | Beginning in the third quarter of 2015, earnings from equity method investees were reported outside of segment operating income, as discussed above in this Note and Note 1, Summary of Significant Accounting Policies – Principles of Consolidation, and outside of segment assets. We reclassified equity method investments above as of December 31, 2014 and 2013 on a basis consistent with the 2015 presentation. |
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| (2) | The change in total assets as of December 31, 2015 reflects a decrease of $1.1 billion related to the loss on deconsolidation of Venezuela. See Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting: Venezuela, for more information. |
|---|
| (3) | On July 2, 2015, we deconsolidated our global coffee businesses, primarily from our Europe, EEMEA and Asia Pacific segments. See Note 2, Divestitures and Acquisitions – Coffee Business Transactions, for more information. |
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| (4) | Unallocated assets consist primarily of cash and cash equivalents, deferred income taxes, centrally held property, plant and equipment, prepaid pension assets and derivative financial instrument balances. We had debt issuance costs related to recognized debt liabilities of $46 million as of December 31, 2015, $44 million as of December 31, 2014 and $51 million as of December 31, 2013, which have been reclassified from long-term other assets to a deduction from the related debt obligations on the consolidated balance sheets. |
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| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Depreciation expense: | ||||||||||||
| Latin America | $ | 94 | $ | 118 | $ | 107 | ||||||
| Asia Pacific | 114 | 112 | 107 | |||||||||
| EEMEA | 66 | 90 | 88 | |||||||||
| Europe | 274 | 359 | 359 | |||||||||
| North America | 165 | 174 | 199 | |||||||||
| Total depreciation expense | $ | 713 | $ | 853 | $ | 860 | ||||||
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Capital Expenditures: | ||||||||||||
| Latin America | $ | 354 | $ | 460 | $ | 412 | ||||||
| Asia Pacific | 311 | 356 | 268 | |||||||||
| EEMEA | 197 | 219 | 254 | |||||||||
| Europe | 390 | 429 | 478 | |||||||||
| North America | 262 | 178 | 210 | |||||||||
| Total capital expenditures | $ | 1,514 | $ | 1,642 | $ | 1,622 | ||||||
Geographic data for net revenues and long-lived assets, excluding deferred tax, goodwill, intangible assets and equity method investments were:
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Net revenues: | ||||||||||||
| United States | $ | 6,302 | $ | 6,143 | $ | 5,965 | ||||||
| Other | 23,334 | 28,101 | 29,334 | |||||||||
| Total net revenues | $ | 29,636 | $ | 34,244 | $ | 35,299 | ||||||
| As of December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in millions) | ||||||||||||
| Long-lived assets (1): | ||||||||||||
| United States | $ | 1,551 | $ | 1,564 | $ | 1,607 | ||||||
| Other | 7,238 | 8,801 | 9,201 | |||||||||
| Total long-lived assets | $ | 8,789 | $ | 10,365 | $ | 10,808 | ||||||
| (1) | Long-lived assets no longer includes debt issuance costs related to recognized debt liabilities of $46 million as of December 31, 2015, $44 million as of December 31, 2014 and $51 million as of December 31, 2013, which have been reclassified from long-term other assets to a deduction from the related debt obligations on the consolidated balance sheets. |
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No individual country within Other exceeded 10% of our net revenues or long-lived assets for all periods presented.
Net revenues by product category were:
| For the Year Ended December 31, 2015 | ||||||||||||||||||||||||
| Latin | Asia | North | ||||||||||||||||||||||
| America | Pacific | EEMEA | Europe | America | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Biscuits | $ | 1,605 | $ | 1,264 | $ | 535 | $ | 2,420 | $ | 5,569 | $ | 11,393 | ||||||||||||
| Chocolate | 840 | 1,444 | 896 | 4,638 | 256 | 8,074 | ||||||||||||||||||
| Gum & Candy | 1,091 | 717 | 544 | 757 | 1,149 | 4,258 | ||||||||||||||||||
| Beverages (1) | 767 | 401 | 543 | 1,549 | – | 3,260 | ||||||||||||||||||
| Cheese & Grocery | 685 | 534 | 268 | 1,164 | – | 2,651 | ||||||||||||||||||
| Total net revenues | $ | 4,988 | $ | 4,360 | $ | 2,786 | $ | 10,528 | $ | 6,974 | $ | 29,636 | ||||||||||||
| For the Year Ended December 31, 2014 (2) | ||||||||||||||||||||||||
| Latin | Asia | North | ||||||||||||||||||||||
| America | Pacific | EEMEA | Europe | America | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Biscuits | $ | 1,322 | $ | 1,177 | $ | 642 | $ | 2,882 | $ | 5,486 | $ | 11,509 | ||||||||||||
| Chocolate | 1,054 | 1,555 | 1,082 | 5,394 | 296 | 9,381 | ||||||||||||||||||
| Gum & Candy | 1,176 | 776 | 646 | 908 | 1,154 | 4,660 | ||||||||||||||||||
| Beverages (1) | 940 | 465 | 981 | 3,292 | – | 5,678 | ||||||||||||||||||
| Cheese & Grocery | 661 | 632 | 287 | 1,436 | – | 3,016 | ||||||||||||||||||
| Total net revenues | $ | 5,153 | $ | 4,605 | $ | 3,638 | $ | 13,912 | $ | 6,936 | $ | 34,244 | ||||||||||||
| For the Year Ended December 31, 2013 (2) | ||||||||||||||||||||||||
| Latin | Asia | North | ||||||||||||||||||||||
| America | Pacific | EEMEA | Europe | America | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Biscuits | $ | 1,288 | $ | 1,311 | $ | 677 | $ | 2,940 | $ | 5,480 | $ | 11,696 | ||||||||||||
| Chocolate | 1,143 | 1,632 | 1,181 | 5,385 | 326 | 9,667 | ||||||||||||||||||
| Gum & Candy | 1,380 | 849 | 673 | 968 | 1,185 | 5,055 | ||||||||||||||||||
| Beverages (1) | 907 | 470 | 1,113 | 3,340 | – | 5,830 | ||||||||||||||||||
| Cheese & Grocery | 664 | 690 | 271 | 1,426 | – | 3,051 | ||||||||||||||||||
| Total net revenues | $ | 5,382 | $ | 4,952 | $ | 3,915 | $ | 14,059 | $ | 6,991 | $ | 35,299 | ||||||||||||
| (1) | On July 2, 2015, we contributed our global coffee businesses primarily from our Europe, EEMEA and Asia Pacific segment beverage categories. The decrease in beverages net revenues in 2015 compared to 2014 primarily reflects the coffee business transactions and unfavorable currency on our remaining beverage business. The impact of deconsolidating our coffee businesses on July 2, 2015 was $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. |
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| (2) | During 2014, we realigned some of our products across product categories and as such, we reclassified the product category net revenues on a basis consistent with the 2015 presentation. |
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Note 18. Quarterly Financial Data (Unaudited)
Our summarized operating results by quarter are detailed below.
| 2015 Quarters | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (in millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 7,762 | $ | 7,661 | $ | 6,849 | $ | 7,364 | ||||||||
| Gross profit | 2,941 | 3,066 | 2,670 | 2,835 | ||||||||||||
| Provision for income taxes | 113 | 100 | 348 | 32 | ||||||||||||
| Equity method investment net losses / (earnings) (1) | – | – | 72 | (72 | ) | |||||||||||
| Net earnings / (loss) (2) | $ | 312 | $ | 427 | $ | 7,268 | $ | (716 | ) | |||||||
| Noncontrolling interest | (12 | ) | 21 | 2 | 13 | |||||||||||
| Net earnings / (loss) attributable to Mondelēz International | $ | 324 | $ | 406 | $ | 7,266 | $ | (729 | ) | |||||||
| Weighted-average shares for basic EPS | 1,648 | 1,625 | 1,609 | 1,589 | ||||||||||||
| Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares | 17 | 18 | 20 | 21 | ||||||||||||
| Weighted-average shares for diluted EPS | 1,665 | 1,643 | 1,629 | 1,610 | ||||||||||||
| Per share data: | ||||||||||||||||
| Basic EPS attributable to Mondelēz International: | $ | 0.20 | $ | 0.25 | $ | 4.52 | $ | (0.46 | ) | |||||||
| Diluted EPS attributable to Mondelēz International (3): | $ | 0.19 | $ | 0.25 | $ | 4.46 | $ | (0.46 | ) | |||||||
| Dividends declared | $ | 0.15 | $ | 0.15 | $ | 0.17 | $ | 0.17 | ||||||||
| Market price - high | $ | 37.88 | $ | 41.81 | $ | 48.58 | $ | 47.42 | ||||||||
| - low | $ | 33.97 | $ | 35.93 | $ | 38.91 | $ | 41.55 |
| 2014 Quarters | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (in millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 8,641 | $ | 8,436 | $ | 8,337 | $ | 8,830 | ||||||||
| Gross profit | 3,204 | 3,105 | 3,142 | 3,146 | ||||||||||||
| (Benefit) / provision for income taxes (4) | (27 | ) | 91 | 178 | 111 | |||||||||||
| Net earnings (2) | $ | 150 | $ | 642 | $ | 902 | $ | 507 | ||||||||
| Noncontrolling interest | (13 | ) | 20 | 3 | 7 | |||||||||||
| Net earnings attributable to Mondelēz International | $ | 163 | $ | 622 | $ | 899 | $ | 500 | ||||||||
| Weighted-average shares for basic EPS | 1,704 | 1,694 | 1,688 | 1,677 | ||||||||||||
| Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares | 18 | 18 | 17 | 18 | ||||||||||||
| Weighted-average shares for diluted EPS | 1,722 | 1,712 | 1,705 | 1,695 | ||||||||||||
| Per share data: | ||||||||||||||||
| Basic EPS attributable to Mondelēz International: | $ | 0.10 | $ | 0.37 | $ | 0.53 | $ | 0.30 | ||||||||
| Diluted EPS attributable to Mondelēz International: | $ | 0.09 | $ | 0.36 | $ | 0.53 | $ | 0.29 | ||||||||
| Dividends declared | $ | 0.14 | $ | 0.14 | $ | 0.15 | $ | 0.15 | ||||||||
| Market price - high | $ | 36.05 | $ | 38.47 | $ | 39.54 | $ | 39.42 | ||||||||
| - low | $ | 31.84 | $ | 34.03 | $ | 33.93 | $ | 31.83 |
| (1) | 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. As the after-tax equity method investment net earnings for the six months ended December 31, 2015 was less than $1 million, this line item is not shown on our consolidated statement of earnings. Pre-tax earnings from equity method investments recorded within segment operating income were $56 million for the six months ended July 2, 2015. See Note 1, Summary of Significant Accounting Policies – Principles of Consolidation, for additional information. |
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| (2) | See the following table for significant items that affected the comparability of earnings each quarter. |
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| (3) | In the fourth quarter of 2015, we recorded a net loss, primarily due to the loss on deconsolidation of Venezuela and coffee business transaction final sales price adjustment. In accordance with U.S. GAAP, due to the net loss in the quarter, diluted EPS was equal to basic EPS. |
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| (4) | In the fourth quarter of 2014, we recorded a tax benefit of $43 million associated with the lapse of a statute of limitations that related to the third quarter of 2014. |
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Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not equal the total for the year.
During 2015 and 2014, we recorded the following pre-tax (charges) / gains in earnings from continuing operations:
| 2015 Quarters | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (in millions) | ||||||||||||||||
| Asset impairment and exit costs | $ | (160 | ) | $ | (231 | ) | $ | (155 | ) | $ | (355 | ) | ||||
| Remeasurement of net monetary assets in Venezuela | (11 | ) | – | – | – | |||||||||||
| Loss on deconsolidation of Venezuela | – | – | – | (778 | ) | |||||||||||
| Gains / (loss) on coffee business transactions and divestiture | – | 13 | 7,122 | (313 | ) | |||||||||||
| Coffee business transactions currency- related net gain / (loss) | 551 | (144 | ) | 29 | – | |||||||||||
| Loss on early extinguishment of debt and related expenses | (713 | ) | – | – | (40 | ) | ||||||||||
| $ | (333 | ) | $ | (362 | ) | $ | 6,996 | $ | (1,486 | ) | ||||||
| 2014 Quarters | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (in millions) | ||||||||||||||||
| Asset impairment and exit costs | $ | (42 | ) | $ | (55 | ) | $ | (188 | ) | $ | (407 | ) | ||||
| Remeasurement of net monetary assets in Venezuela | (142 | ) | – | (19 | ) | (6 | ) | |||||||||
| Coffee business transactions currency- related net (loss) / gain | – | (7 | ) | 420 | 215 | |||||||||||
| Loss on early extinguishment of debt and related expenses | (494 | ) | (1 | ) | – | – | ||||||||||
| $ | (678 | ) | $ | (63 | ) | $ | 213 | $ | (198 | ) | ||||||
Items impacting our operating results are discussed in Note 1, Summary of Significant Accounting Policies, including the Venezuela deconsolidation and currency devaluations, Note 2, Divestitures and Acquisitions, including the coffee business transactions, Note 5, Goodwill and Intangible Assets, Note 6, Restructuring Program, and Note 8, Debt and Borrowing Arrangements.
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