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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 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, 2016, 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.
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 24, 2017
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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)
| 2016 | 2015 | 2014 | ||||||||||
| Net revenues | $ | 25,923 | $ | 29,636 | $ | 34,244 | ||||||
| Cost of sales | 15,795 | 18,124 | 21,647 | |||||||||
| Gross profit | 10,128 | 11,512 | 12,597 | |||||||||
| Selling, general and administrative expenses | 6,540 | 7,577 | 8,457 | |||||||||
| Asset impairment and exit costs | 852 | 901 | 692 | |||||||||
| Gains on divestitures | (9 | ) | (6,822 | ) | – | |||||||
| Loss on deconsolidation of Venezuela | – | 778 | – | |||||||||
| Amortization of intangibles | 176 | 181 | 206 | |||||||||
| Operating income | 2,569 | 8,897 | 3,242 | |||||||||
| Interest and other expense, net | 1,115 | 1,013 | 688 | |||||||||
| Earnings before income taxes | 1,454 | 7,884 | 2,554 | |||||||||
| Provision for income taxes | (129 | ) | (593 | ) | (353 | ) | ||||||
| Gain on equity method investment exchange | 43 | – | – | |||||||||
| Equity method investment net earnings | 301 | – | – | |||||||||
| Net earnings | 1,669 | 7,291 | 2,201 | |||||||||
| Noncontrolling interest earnings | (10 | ) | (24 | ) | (17 | ) | ||||||
| Net earnings attributable to Mondelēz International | $ | 1,659 | $ | 7,267 | $ | 2,184 | ||||||
| Per share data: | ||||||||||||
| Basic earnings per share attributable to Mondelēz International | $ | 1.07 | $ | 4.49 | $ | 1.29 | ||||||
| Diluted earnings per share attributable to Mondelēz International | $ | 1.05 | $ | 4.44 | $ | 1.28 | ||||||
| Dividends declared | $ | 0.72 | $ | 0.64 | $ | 0.58 | ||||||
See accompanying notes to the consolidated financial statements.
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Mondelēz International, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
For the Years Ended December 31
(in millions of U.S. dollars)
| 2016 | 2015 | 2014 | ||||||||||
| Net earnings | $ | 1,669 | $ | 7,291 | $ | 2,201 | ||||||
| Other comprehensive earnings / (losses), net of tax: | ||||||||||||
| Currency translation adjustment | (925 | ) | (2,990 | ) | (3,661 | ) | ||||||
| Pension and other benefit plans | (153 | ) | 340 | (682 | ) | |||||||
| Derivative cash flow hedges | (75 | ) | (44 | ) | (119 | ) | ||||||
| Total other comprehensive earnings / (losses) | (1,153 | ) | (2,694 | ) | (4,462 | ) | ||||||
| Comprehensive earnings / (losses) | 516 | 4,597 | (2,261 | ) | ||||||||
| less: Comprehensive earnings / (losses) attributable to noncontrolling interests | (7 | ) | (2 | ) | (16 | ) | ||||||
| Comprehensive earnings / (losses) attributable to Mondelēz International | $ | 523 | $ | 4,599 | $ | (2,245 | ) | |||||
See accompanying notes to the consolidated financial statements.
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Mondelēz International, Inc. and Subsidiaries
Consolidated Balance Sheets, as of December 31
(in millions of U.S. dollars, except share data)
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,741 | $ | 1,870 | ||||
| Trade receivables (net of allowances of $58 at December 31, 2016 and $54 at December 31, 2015) | 2,611 | 2,634 | ||||||
| Other receivables (net of allowances of $93 at December 31, 2016 and $109 at December 31, 2015) | 859 | 1,212 | ||||||
| Inventories, net | 2,469 | 2,609 | ||||||
| Other current assets | 800 | 633 | ||||||
| Total current assets | 8,480 | 8,958 | ||||||
| Property, plant and equipment, net | 8,229 | 8,362 | ||||||
| Goodwill | 20,276 | 20,664 | ||||||
| Intangible assets, net | 18,101 | 18,768 | ||||||
| Prepaid pension assets | 159 | 69 | ||||||
| Deferred income taxes | 358 | 277 | ||||||
| Equity method investments | 5,585 | 5,387 | ||||||
| Other assets | 350 | 358 | ||||||
| TOTAL ASSETS | $ | 61,538 | $ | 62,843 | ||||
| LIABILITIES | ||||||||
| Short-term borrowings | $ | 2,531 | $ | 236 | ||||
| Current portion of long-term debt | 1,451 | 605 | ||||||
| Accounts payable | 5,318 | 4,890 | ||||||
| Accrued marketing | 1,745 | 1,634 | ||||||
| Accrued employment costs | 736 | 844 | ||||||
| Other current liabilities | 2,636 | 2,713 | ||||||
| Total current liabilities | 14,417 | 10,922 | ||||||
| Long-term debt | 13,217 | 14,557 | ||||||
| Deferred income taxes | 4,721 | 4,750 | ||||||
| Accrued pension costs | 2,014 | 2,183 | ||||||
| Accrued postretirement health care costs | 382 | 499 | ||||||
| Other liabilities | 1,572 | 1,832 | ||||||
| TOTAL LIABILITIES | 36,323 | 34,743 | ||||||
| Commitments and Contingencies (Note 12) | ||||||||
| EQUITY | ||||||||
| Common Stock, no par value (5,000,000,000 shares authorized and 1,996,537,778 shares issued at December 31, 2016 and December 31, 2015) | – | – | ||||||
| Additional paid-in capital | 31,847 | 31,760 | ||||||
| Retained earnings | 21,149 | 20,700 | ||||||
| Accumulated other comprehensive losses | (11,122 | ) | (9,986 | ) | ||||
| Treasury stock, at cost (468,172,237 shares at December 31, 2016 and 416,504,624 shares at December 31, 2015) | (16,713 | ) | (14,462 | ) | ||||
| Total Mondelēz International Shareholders’ Equity | 25,161 | 28,012 | ||||||
| Noncontrolling interest | 54 | 88 | ||||||
| TOTAL EQUITY | 25,215 | 28,100 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 61,538 | $ | 62,843 | ||||
See accompanying notes to the consolidated financial statements.
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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, 2014 | $ | – | $ | 31,396 | $ | 13,419 | $ | (2,889 | ) | $ | (9,553 | ) | $ | 159 | $ | 32,532 | ||||||||||||
| Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
| Net earnings | – | – | 2,184 | – | – | 17 | 2,201 | |||||||||||||||||||||
| Other comprehensive losses, net of income taxes | – | – | – | (4,429 | ) | – | (33 | ) | (4,462 | ) | ||||||||||||||||||
| Exercise of stock options and issuance of other stock awards | – | 271 | (98 | ) | – | 332 | – | 505 | ||||||||||||||||||||
| Common Stock repurchased | – | – | – | – | (1,891 | ) | – | (1,891 | ) | |||||||||||||||||||
| Cash dividends declared ($0.58 per share) | – | – | (976 | ) | – | – | – | (976 | ) | |||||||||||||||||||
| Dividends paid on noncontrolling interest and other activities | – | (16 | ) | – | – | – | (40 | ) | (56 | ) | ||||||||||||||||||
| Balances at December 31, 2014 | $ | – | $ | 31,651 | $ | 14,529 | $ | (7,318 | ) | $ | (11,112 | ) | $ | 103 | $ | 27,853 | ||||||||||||
| Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
| Net earnings | – | – | 7,267 | – | – | 24 | 7,291 | |||||||||||||||||||||
| Other comprehensive losses, net of income taxes | – | – | – | (2,668 | ) | – | (26 | ) | (2,694 | ) | ||||||||||||||||||
| Exercise of stock options and issuance of other stock awards | – | 109 | (70 | ) | – | 272 | – | 311 | ||||||||||||||||||||
| Common Stock repurchased | – | – | – | – | (3,622 | ) | – | (3,622 | ) | |||||||||||||||||||
| Cash dividends declared ($0.64 per share) | – | – | (1,026 | ) | – | – | – | (1,026 | ) | |||||||||||||||||||
| Dividends paid on noncontrolling interest and other activities | – | – | – | – | – | (13 | ) | (13 | ) | |||||||||||||||||||
| Balances at December 31, 2015 | $ | – | $ | 31,760 | $ | 20,700 | $ | (9,986 | ) | $ | (14,462 | ) | $ | 88 | $ | 28,100 | ||||||||||||
| Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
| Net earnings | – | – | 1,659 | – | – | 10 | 1,669 | |||||||||||||||||||||
| Other comprehensive earnings / (losses), net of income taxes | – | – | – | (1,136 | ) | – | (17 | ) | (1,153 | ) | ||||||||||||||||||
| Exercise of stock options and issuance of other stock awards | – | 87 | (94 | ) | – | 350 | – | 343 | ||||||||||||||||||||
| Common Stock repurchased | – | – | – | – | (2,601 | ) | – | (2,601 | ) | |||||||||||||||||||
| Cash dividends declared ($0.72 per share) | – | – | (1,116 | ) | – | – | – | (1,116 | ) | |||||||||||||||||||
| Dividends paid on noncontrolling interest and other activities | – | – | – | – | – | (27 | ) | (27 | ) | |||||||||||||||||||
| Balances at December 31, 2016 | $ | – | $ | 31,847 | $ | 21,149 | $ | (11,122 | ) | $ | (16,713 | ) | $ | 54 | $ | 25,215 | ||||||||||||
See accompanying notes to the consolidated financial statements.
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Mondelēz International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31
(in millions of U.S. dollars)
| 2016 | 2015 | 2014 | ||||||||||
| CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES | ||||||||||||
| Net earnings | $ | 1,669 | $ | 7,291 | $ | 2,201 | ||||||
| Adjustments to reconcile net earnings to operating cash flows: | ||||||||||||
| Depreciation and amortization | 823 | 894 | 1,059 | |||||||||
| Stock-based compensation expense | 140 | 136 | 141 | |||||||||
| Deferred income tax benefit | (141 | ) | (30 | ) | (186 | ) | ||||||
| Asset impairments and accelerated depreciation | 446 | 345 | 240 | |||||||||
| Loss on early extinguishment of debt | 428 | 748 | 493 | |||||||||
| Loss on deconsolidation of Venezuela | – | 778 | – | |||||||||
| Gains on divestitures and JDE coffee business transactions | (9 | ) | (6,822 | ) | – | |||||||
| JDE coffee business transactions currency-related net gains | – | (436 | ) | (628 | ) | |||||||
| Gain on equity method investment exchange | (43 | ) | – | – | ||||||||
| Equity method investment net earnings | (301 | ) | (56 | ) | (113 | ) | ||||||
| Distributions from equity method investments | 75 | 58 | 63 | |||||||||
| Other non-cash items, net | (43 | ) | 199 | (134 | ) | |||||||
| Change in assets and liabilities, net of acquisitions and divestitures: | ||||||||||||
| Receivables, net | 31 | 44 | 184 | |||||||||
| Inventories, net | 62 | (49 | ) | (188 | ) | |||||||
| Accounts payable | 409 | 659 | 387 | |||||||||
| Other current assets | (176 | ) | 28 | (86 | ) | |||||||
| Other current liabilities | 60 | 152 | 135 | |||||||||
| Change in pension and postretirement assets and liabilities, net | (592 | ) | (211 | ) | (6 | ) | ||||||
| Net cash provided by operating activities | 2,838 | 3,728 | 3,562 | |||||||||
| CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES | ||||||||||||
| Capital expenditures | (1,224 | ) | (1,514 | ) | (1,642 | ) | ||||||
| Proceeds from JDE coffee business transactions currency hedge settlements | – | 1,050 | – | |||||||||
| Acquisitions, net of cash received | (246 | ) | (527 | ) | (7 | ) | ||||||
| Proceeds from JDE coffee business transaction and divestitures, net of disbursements | 303 | 4,735 | – | |||||||||
| Reduction of cash due to Venezuela deconsolidation | – | (611 | ) | – | ||||||||
| Capital contribution to JDE | – | (544 | ) | – | ||||||||
| Proceeds from sale of property, plant and equipment and other assets | 138 | 60 | 7 | |||||||||
| Net cash (used in) / provided by investing activities | (1,029 | ) | 2,649 | (1,642 | ) | |||||||
| CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES | ||||||||||||
| Issuances of commercial paper, maturities greater than 90 days | 1,540 | 613 | 2,082 | |||||||||
| Repayments of commercial paper, maturities greater than 90 days | (1,031 | ) | (710 | ) | (2,713 | ) | ||||||
| Net (repayments) / issuances of other short-term borrowings | 1,741 | (931 | ) | 398 | ||||||||
| Long-term debt proceeds | 5,640 | 4,624 | 3,032 | |||||||||
| Long-term debt repaid | (6,186 | ) | (4,975 | ) | (3,017 | ) | ||||||
| Repurchase of Common Stock | (2,601 | ) | (3,622 | ) | (1,700 | ) | ||||||
| Dividends paid | (1,094 | ) | (1,008 | ) | (964 | ) | ||||||
| Other | 129 | 126 | 194 | |||||||||
| Net cash used in financing activities | (1,862 | ) | (5,883 | ) | (2,688 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (76 | ) | (255 | ) | (223 | ) | ||||||
| Cash and cash equivalents: | ||||||||||||
| (Decrease) / increase | (129 | ) | 239 | (991 | ) | |||||||
| Balance at beginning of period | 1,870 | 1,631 | 2,622 | |||||||||
| Balance at end of period | $ | 1,741 | $ | 1,870 | $ | 1,631 | ||||||
| Cash paid: | ||||||||||||
| Interest | $ | 630 | $ | 747 | $ | 827 | ||||||
| Income taxes | $ | 527 | $ | 745 | $ | 1,238 | ||||||
See accompanying notes to the consolidated financial statements.
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Mondelēz International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Description of Business:
Mondelēz International, 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 approximately 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 an equity interest (collectively, the “JDE coffee business transactions”). Historically, our coffee businesses and the income from equity method investments were recorded within our operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig Green Mountain Inc. (“Keurig”) and Dongsuh Foods Corporation (“DSF”), and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income and segment income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income and segment income. 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 are not shown on our consolidated statement of earnings for this period. Please see Note 2, Divestitures and Acquisitions – JDE Coffee Business Transactions and Keurig Transaction, and Note 16, 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.
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.
Segment Change:
On October 1, 2016, we integrated our Eastern Europe, Middle East, and Africa (“EEMEA”) operating segment into our Europe and Asia Pacific operating segments to further leverage and optimize the operating scale built within the Europe and Asia Pacific regions. Russia, Ukraine, Turkey, Belarus, Georgia and Kazakhstan were combined within our Europe region, while the remaining Middle East and African countries were combined within our Asia Pacific region to form a new Asia, Middle East and Africa (“AMEA”) operating segment. We have reflected the segment change as if it had occurred in all periods presented.
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As of October 1, 2016, our operations and management structure was organized into four reportable operating segments:
| • | Latin America |
|---|
| • | AMEA |
|---|
| • | Europe |
|---|
| • | North America |
|---|
See Note 16, Segment Reporting, for additional information on our segments.
Currency Translation and Highly Inflationary Accounting:
We translate the results of operations of our subsidiaries from multiple currencies using average exchange rates during each period and translate balance sheet accounts using exchange rates at the end of each period. We record currency translation adjustments as a component of equity (except for highly inflationary currencies) and realized exchange gains and losses on transactions in earnings. In 2016, none of our consolidated subsidiaries were subject to highly inflationary accounting.
United Kingdom. On June 23, 2016, the United Kingdom (“U.K.”) voted by referendum to exit the European Union; this vote is commonly referred to as “Brexit.” The referendum is non-binding and the exit from the European Union is not immediate. Once the United Kingdom invokes E.U. Article 50, there is a two-year window in which the United Kingdom and the European Commission can negotiate the future terms for imports, exports, taxes, employment, immigration and other areas.
Brexit has caused volatility in global stock markets and currency exchange rates, affecting the markets in which we operate. The implications of Brexit could adversely affect demand for our products, our financial results and operations, and our relationships with customers, suppliers and employees in the short or long-term. On June 24, 2016, the value of the British pound sterling relative to the U.S. dollar fell by 9%. Since that date, the value of the British pound sterling relative to the U.S. dollar declined an additional 11% through December 31, 2016. Further volatility in the exchange rate is expected over the transition period.
As the business operating environment remains uncertain, we continue to monitor our investments and currency exposures abroad. As the United Kingdom is not a highly-inflationary economy, we record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings. While we did not experience significant business disruptions in our U.K. businesses immediately following the referendum, the devaluation of the British pound sterling in 2016 adversely affected our translated results reported in U.S. dollars. We have a natural hedge in the form of pound sterling-denominated debt that acts as a net investment hedge, moving counter to adverse pound sterling currency translation impacts. British pound sterling currency transaction risks are largely mitigated due to our global chocolate businesses buying cocoa in British pound sterling. Our U.K. operations contributed $2.2 billion, or 8.6% of consolidated net revenues for the year ended December 31, 2016.
Venezuela. From January 1, 2010 through December 31, 2015, we accounted for the results of our Venezuelan subsidiaries using the U.S. dollar as the functional currency as prescribed by U.S. GAAP for highly inflationary economies.
Effective as of the close of the 2015 fiscal year, we concluded that we no longer met the accounting criteria for consolidation of our Venezuelan subsidiaries due to a loss of control over our Venezuelan operations and an other-than-temporary lack of currency exchangeability. During the fourth quarter of 2015, representatives of the Venezuelan government arbitrarily imposed pricing restrictions on our local operations that resulted in our inability to recover operating costs. We immediately began an appeal process with the Venezuelan authorities to demonstrate that our pricing was in line with the regulatory requirements. In January 2016, local officials communicated that some of the pricing restrictions had been lifted; however, the legally required administrative order had not been issued and it was uncertain when it would be issued. The legal and regulatory environment also became more unreliable. While we had been complying with the Venezuelan law governing pricing and profitability controls and followed the legal process for appeal, the appeal process was not available to us as outlined under law. Additionally, we were increasingly facing issues procuring raw materials and packaging. Taken together, these actions, the economic environment in Venezuela and the progressively limited access to dollars to import goods through the use of any of the available currency mechanisms impaired our ability to operate and control our Venezuelan businesses. As a result of these factors, we concluded that we no longer met the criteria for the consolidation of our Venezuelan subsidiaries.
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As of the close of the 2015 fiscal year, we deconsolidated and changed to the cost method of accounting for our Venezuelan operations. We recorded a $778 million pre-tax loss on December 31, 2015 as we reduced the value of our cost method investment in Venezuela and all Venezuelan receivables held by our other subsidiaries to realizable fair value, resulting in full impairment. The recorded loss also included historical cumulative translation adjustments related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity. The fair value of our investments in our Venezuelan subsidiaries was estimated based on discounted cash flow projections of current and expected operating losses in the foreseeable future and our ability to operate the business on a sustainable basis. Our fair value estimate included U.S. dollar exchange and discount rate assumptions that reflect the inflation and economic uncertainty in Venezuela.
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 | |||||||
| (in millions) | ||||||||
| Net revenues | $ | 1,217 | $ | 760 | ||||
| Operating income (excluding remeasurement and deconsolidation losses) | 266 | 181 | ||||||
| Remeasurement losses: | ||||||||
| 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. |
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Beginning in 2016, we no longer include net revenues, earnings or net assets of our Venezuelan subsidiaries within our consolidated financial statements. Under the cost method of accounting, earnings are only recognized to the extent cash is received. Given the current and ongoing difficult economic, regulatory and business environment in Venezuela, there continues to be significant uncertainty related to our operations in Venezuela, and we expect these conditions will continue for the foreseeable future. We will monitor the extent of our ability to control our Venezuelan operations and the liquidity and availability of U.S. dollars at different rates, as our current situation in Venezuela may change over time and lead to consolidation at a future date.
Argentina. On December 16, 2015, the new Argentinean government fiscal authority announced the lifting of strict currency controls and reduced restrictions on exports and imports. The next day, the value of the Argentinean peso relative to the U.S. dollar fell by 36%. In 2016, the value of the Argentinean peso relative to the U.S. dollar declined an additional 23%. Further volatility in the exchange rate is expected. While the business operating environment remains challenging, we continue to monitor and actively manage our investment and exposures in Argentina. We continue executing our hedging programs and refining our product portfolio to improve our product offerings, mix and profitability. We also continue to implement additional cost reduction initiatives to optimize and streamline our manufacturing facilities and commercial operations to protect the business together with pricing strategy to offset inflationary pressures. While further currency declines could have an adverse impact on our ongoing results of operations, we believe the actions by the government to reduce economic controls and business restrictions will provide favorable opportunities for our Argentinean subsidiaries. Our Argentinean operations contributed $583 million, or 2.2% of consolidated net revenues for the year ended December 31, 2016. As of December 31, 2016, the net monetary liabilities of our Argentina operations were not material. Argentina is not designated as a highly-inflationary economy for accounting purposes, so we record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings.
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Other Countries. Since we have operations in over 80 countries and sell in approximately 165 countries, we monitor economic and currency-related risks and seek to take protective measures in response to these exposures. Some of the countries in which we do business have recently experienced periods of significant economic uncertainty. These include Brazil, China, Mexico, Russia, Turkey, Egypt, Nigeria, Ukraine and South Africa, most of which have had either currency devaluation or volatility in exchange rates. We continue to monitor operations, currencies and net monetary exposures in these countries. At this time, we do not anticipate any risk to our operating results from changing to highly inflationary accounting in these countries.
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, such as uncommitted revolving non-recourse accounts receivable factoring arrangements, when we have surrendered control over the related assets. Determining whether control has transferred requires an evaluation of relevant legal considerations, an assessment of the nature and extent of our continuing involvement with the assets transferred and any other relevant considerations. We use receivable factoring arrangements periodically when circumstances are favorable to manage liquidity. We have a factoring arrangement with a major global bank for a maximum combined capacity of $802 million. Under the program, we may sell eligible short-term trade receivables to the bank in exchange for cash. We then continue to collect the receivables sold, acting solely as a collecting agent on behalf of the bank. We also enter into arrangements with customers to achieve earlier collection of receivables. The total incremental cost of factoring receivables for all regions was $9 million in 2016, $7 million in 2015 and $7 million in 2014 and was recorded in net revenue. The outstanding principal amount of receivables under all arrangements amounted to $745 million as of December 31, 2016, $666 million as of December 31, 2015 and $421 million as of December 31, 2014.
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 $76 million on net revenues and $36 million on operating income in 2015. As a result of this change, each of our operating subsidiaries now reports results as of the last calendar day of the period. As the effect to prior-period results was not material, we have not revised prior-period results.
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 discounted 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.
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Goodwill and Non-Amortizable Intangible Assets:
We test goodwill and non-amortizable intangible assets for impairment on an annual basis on October 1. We assess goodwill impairment risk throughout the year by performing a qualitative review of entity-specific, industry, market and general economic factors affecting our goodwill reporting units. We review our operating segment and reporting unit structure for goodwill testing annually or as significant changes in the organization occur. Annually, we may perform qualitative testing, or depending on factors such as prior-year test results, current year developments, current risk evaluations and other practical considerations, we may elect to do quantitative testing instead. 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 6.7% to discount the projected cash flows of those operations. For our Latin America and AMEA reporting units, we used a risk-rated discount rate of 9.7%. 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 $1,396 million in 2016, $1,542 million in 2015 and $1,552 million in 2014. Advertising declined in 2016 due primarily to the deconsolidation of our historical global coffee business and due to currency changes. We expense product research and development costs as incurred. Research and development expense was $376 million in 2016, $409 million in 2015 and $455 million in 2014. Our total research and development expense was lower in 2016 and 2015 primarily due to the deconsolidation of our global coffee business in July 2015, currency and cost optimization initiatives. We record marketing and research and development expenses within selling, general and administrative expenses.
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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 8, Financial Instruments, 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, sugar and other sweeteners, wheat, packaging, dairy, corn, and soybean and vegetable oils. 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.
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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, Canadian dollar and Mexican peso.
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. Most recently in October 2016, we executed cross-currency interest rate swaps that we use to hedge interest payment cash flows on newly issued debt denominated in a different currency than the functional currency of the borrowing entity. 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:
Our provision for income taxes includes amounts payable or refundable for the current year, the effect of deferred tax and impacts from uncertain tax positions. We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of our assets and liabilities, operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those differences are expected to reverse.
The realization of certain deferred tax assets is dependent on generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. 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. When assessing the need for a valuation allowance, we consider any carryback potential, future reversals of existing taxable temporary differences (including liabilities for unrecognized tax benefits), future taxable income and tax planning strategies.
We recognize tax benefits in our financial statements from uncertain tax positions only if it is more likely than not that the tax position will be sustained by the taxing authorities based on the technical merits of the position. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Future changes in judgment related to the expected resolution of uncertain tax positions could affect income in the period when the change occurs.
New Accounting Pronouncements:
In January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business may affect many areas of accounting including acquisitions, disposals, goodwill and consolidation. The ASU is applied on a prospective basis and is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. We are currently assessing the ASU and potential prospective impact on our consolidated financial statements.
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In November 2016, the FASB issued an ASU that requires the change in restricted cash or cash equivalents to be included with other changes in cash and cash equivalents in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We anticipate adopting this standard at the same time as the cash flow statement classification changes described below go into effect on January 1, 2018. We are currently assessing the impact on our consolidated financial statements.
In October 2016, the FASB issued an ASU to amend the consolidation guidance on the treatment of indirect interests held through related parties that are under common control. Under the amendments, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties_._ The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We adopted the new standard on December 31, 2016 and it did not have a material impact on our consolidated financial statements.
In October 2016, the FASB issued an ASU that requires the recognition of tax consequences of intercompany asset transfers other than inventory when the transfer occurs and removes the exception to postpone recognition until the asset has been sold to an outside party. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We anticipate adopting on January 1, 2018 and do not expect the ASU to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued an ASU to provide guidance on eight specific cash flow classification issues and reduce diversity in practice in how some cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We anticipate adopting this standard on January 1, 2018. We are currently assessing the impact on our consolidated statements of cash flows.
In March 2016, the FASB issued an ASU to simplify the accounting for stock-based compensation. The ASU addresses several areas of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and cash flow statement presentation. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We will adopt the standard on January 1, 2017. Following adoption and on a prospective basis, we anticipate greater volatility in our consolidated statements of earnings as we will record certain stock-based compensation tax impacts in earnings (within the provision for income taxes) while under the former guidance and for periods prior to January 1, 2017, the tax impacts were recorded directly to equity (within additional paid-in capital).
In March 2016, the FASB issued an ASU that simplifies the transition accounting for increases in investments that require a change from the cost basis to the equity method of accounting. U.S. GAAP currently requires the impact of such changes in accounting method to be retroactively applied to all prior periods that the investment was held. Under the new standard, adjustments to the investor’s basis in the investment should be recorded on the date the investment becomes qualified for equity method accounting. The equity method of accounting is then applied prospectively from that date. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We early adopted this standard on December 31, 2016 and it did not have an impact on our consolidated financial statements.
In March 2016, the FASB issued an ASU that clarifies whether contingent put and call options meet the “clearly and closely related” criteria in connection with accounting for embedded derivatives. U.S GAAP requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. The criteria include determining that the economic characteristics and risks of the embedded derivatives are not “clearly and closely related” to those of the host contract. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We adopted the new standard on December 31, 2016 and it did not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued an ASU that applies when there is a contract novation to a new counterparty for a derivative designated as an accounting hedge. The ASU clarifies that such a change in counterparty does not, in and of itself, require de-designation of the hedging relationship, provided that all other hedge accounting criteria continue to be met. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We adopted the new standard on December 31, 2016 and it did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued an ASU on lease accounting. The ASU revises existing U.S. GAAP and outlines a new model for lessors and lessees to use in accounting for lease contracts. The guidance requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases. In the consolidated statement of earnings, lessees will classify leases as either operating (resulting in straight-line expense) or financing (resulting in a front-loaded expense pattern). The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We anticipate adopting the new standard on January 1, 2019. We have made progress in our due diligence and continue to assess the impact of the new standard across our operations and on our consolidated financial statements.
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In January 2016, the FASB issued an ASU that provides updated guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. The standard requires that equity investments (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) be measured at fair value, with changes in fair value recognized in net income. The standard also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017. This ASU is not expected to have a significant impact on our consolidated financial statements.
In May 2014, the FASB issued an ASU on revenue recognition from contracts with customers. The ASU outlines a new, single comprehensive model for companies to use in accounting for revenue. The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for the goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows from customer contracts, including significant judgments made in recognizing revenue. In 2016, the FASB issued several ASUs that clarified principal versus agent (gross versus net) revenue presentation considerations, confirmed certain prepaid stored-value products should be accounted for under the new revenue recognition ASU and not under other U.S. GAAP and clarified the guidance for identifying performance obligations within a contract and the accounting for licenses. The FASB also issued two ASUs providing technical corrections, narrow scope exceptions and practical expedients to clarify and improve the implementation of the new revenue recognition guidance. The revenue guidance is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date (annual reporting periods beginning after December 15, 2016). The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption. We plan to adopt the new standard on January 1, 2018 on a full retrospective basis. We continue to make significant progress on quantifying the impact of the ASU on our consolidated financial statements and planning the final process, policy and disclosure changes that will go into effect on January 1, 2018. At this time, we do not expect a material impact from adopting the new revenue standards.
Reclassifications:
Certain amounts previously reported have been reclassified to conform to current-year presentation. See Segment Change above and Notes 5, Goodwill and Intangible Assets, 6, Restructuring Programs, and 16, Segment Reporting, for information on changes in prior-period segment goodwill, segment earnings and segment net asset reclassifications made in connection with the segment change that went into effect on October 1, 2016. We also reclassified certain amounts previously reported within our consolidated statements of comprehensive earnings and Note 13, Reclassifications from Accumulated Other Comprehensive Income, to be consistent with the current-year presentation.
Note 2. Divestitures and Acquisitions
JDE Coffee Business Transactions:
On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, JDE. Following the exchange of a portion of our investment in JDE for an interest in Keurig in March 2016, we held a 26.5% equity interest in JDE. (See discussion of the Keurig Transaction below.) The remaining 73.5% equity interest in JDE was held by a subsidiary of Acorn Holdings B.V. (“AHBV,” owner of DEMB prior to July 2, 2015). Following the transactions discussed under JDE Stock-Based Compensation Arrangements below, as of December 31, 2016, we hold a 26.4% equity interest in JDE.
The consideration we received in the JDE coffee business transactions completed on July 2, 2015 consisted of €3.8 billion of cash ($4.2 billion as of July 2, 2015), a 43.5% equity interest in JDE (prior to the decrease in ownership due to the Keurig transaction and the compensation arrangements discussed below_)_ and $794 million in receivables (related to sales price adjustments and tax formation cost payments). During the third quarter of 2015, we also recorded $283 million of cash and receivables from JDE related to reimbursement of costs that we incurred in separating our coffee businesses. The cash and equity consideration we received at closing reflects our retaining our interest in our Korea-based joint venture, DSF. During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”). In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from this sale as part of the overall JDE coffee business transactions. See Other Divestitures and Acquisitions for a discussion of the AGF divestiture.
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On July 5, 2016, we received an expected cash payment of $275 million from JDE to settle the receivable related to tax formation costs that were part of the initial sales price.
In connection with the contribution of our global coffee businesses to JDE on July 2, 2015, we recorded a final pre-tax gain of $6.8 billion (or $6.6 billion after-tax) in 2015 after final adjustments described below. As previously reported, we deconsolidated net assets totaling $2.9 billion and reduced accumulated other comprehensive losses for the transfer of coffee business-related pension obligations by $90 million. We also recorded approximately $1.0 billion of pre-tax net gains related to hedging the expected cash proceeds from the transactions as described further below. During the fourth quarter of 2015, we and JDE concluded negotiations of a sales price adjustment and completed the valuation of our investment in JDE. Primarily due to the negotiated resolution of the sales price adjustment in the fourth quarter of 2015, we recorded a $313 million reduction in the pre-tax gain on the coffee transaction, reducing the $7.1 billion estimated gain in the third quarter of 2015 to the $6.8 billion final gain for 2015. As part of our sales price negotiations, we retained the right to collect future cash payments if certain estimated pension liabilities are realized over an agreed amount in the future. As such, we may recognize additional income related to this negotiated term in the future.
The final value of our 43.5% investment in JDE on July 2, 2015 was €4.1 billion ($4.5 billion as of July 2, 2015). The fair value of the JDE investment was determined using both income-based and market-based valuation techniques. The discounted cash flow analysis reflected growth, discount and tax rates and other assumptions reflecting the underlying combined businesses and countries in which the combined coffee businesses operate. The fair value of the JDE investment also included the fair values of the Carte Noire and Merrild businesses, which JDE agreed to divest to comply with the conditioned approval by the European Commission related to the JDE coffee business transactions. As of the end of the first quarter of 2016, these businesses were sold by JDE. As the July 2, 2015 fair values for these businesses were recorded by JDE at their pending sales values, we did not record any gain or loss on the sales of these businesses in our share of JDE’s earnings.
In 2014 and 2015, 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 to lock in an equivalent expected value in U.S. dollars as of the date the JDE coffee business transactions were first announced in May 2014. Cumulatively, we realized aggregate net gains and received cash of approximately $1.0 billion on these hedging contracts that increased the cash we received in connection with the JDE coffee business transactions from $4.2 billion in cash consideration received to $5.2 billion. In connection with these currency contracts and the transfer of the sale proceeds to our subsidiaries that deconsolidated net assets and shares, we recognized a net gain of $436 million in 2015 and $628 million in 2014 within interest and other expense, net.
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 general corporate expenses.
JDE Capital Increase:
On December 18, 2015, AHBV and we agreed to provide JDE additional capital to pay down some of its debt with lenders. Our pro rata share of the capital increase was €499 million ($544 million as of December 18, 2015) and was made in return for a pro rata number of additional shares in JDE such that our ownership in JDE did not change following the capital increase. To fund our share of the capital increase, we contributed €460 million ($501 million) of JDE receivables and made a €39 million ($43 million) cash payment.
JDE Stock-Based Compensation Arrangements:
On June 30, 2016, we entered into agreements with AHBV and its affiliates to establish a new stock-based compensation arrangement tied to the issuance of JDE equity compensation awards to JDE employees. This arrangement replaced a temporary equity compensation program tied to the issuance of AHBV equity compensation to JDE employees. New Class C, D and E JDE shares were authorized and issued for investments made by and vested stock-based compensation awards granted to JDE employees. Under these arrangements, dilution of the JDE shares is limited to 2%. Upon execution of the agreements and the creation of the Class C, D and E JDE shares, as a percentage of the total JDE issued shares, our Class B shares decreased from 26.5% to 26.4% and AHBV’s Class A shares decreased from 73.5% to 73.22%, while the Class C, D and E shares, held by AHBV and its affiliates until the JDE employee awards vest, comprised 0.38% of JDE’s shares. Additional Class C shares are available to be issued when planned long-term incentive plan (“JDE LTIP”) awards vest, generally over the next five years. When the JDE Class C shares are issued in connection with the vested JDE LTIP awards, the Class A and B relative ownership interests will decrease. Based on estimated achievement and forfeiture assumptions, we do not expect our JDE ownership interest to decrease below 26.27%. Following vesting of stock awards and new employee stock investments, as of December 31, 2016, our ownership interest in JDE was 26.4%.
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JDE Tax Matter Resolution:
On July 19, 2016, the Supreme Court of Spain reached a final resolution on a challenged JDE tax position held by a predecessor DEMB company that resulted in an unfavorable tax expense of €114 million. As a result, our share of JDE’s equity earnings during the third quarter of 2016 was negatively affected by €30 million ($34 million).
Keurig Transaction:
On March 3, 2016, a subsidiary of AHBV completed a $13.9 billion acquisition of all of the outstanding common stock of Keurig through a merger transaction. On March 7, 2016, we exchanged with a subsidiary of AHBV a portion of our equity interest in JDE with a carrying value of €1.7 billion (approximately $2.0 billion as of March 7, 2016) for an interest in Keurig with a fair value of $2.0 billion based on the merger consideration per share for Keurig. We recorded the difference between the fair value of Keurig and our basis in JDE shares as a $43 million gain on the equity method investment exchange in March 2016. Immediately following the exchange, our ownership interest in JDE was 26.5% and our interest in Keurig was 24.2%. Both AHBV and we hold our investments in Keurig through a combination of equity and interests in a shareholder loan, with pro-rata ownership of each. Our initial $2.0 billion investment in Keurig includes a $1.6 billion Keurig equity interest and a $0.4 billion shareholder loan receivable, which are reported on a combined basis within equity method investments on our consolidated balance sheet as of December 31, 2016. The shareholder loan has a 5.5% interest rate and is payable at the end of a seven-year term on February 27, 2023. Within equity method investment net earnings, we recorded equity earnings of $77 million and interest income from the shareholder loan of $20 million in 2016. Additionally, we received $14 million of interest payments on the shareholder loan and $4 million in dividends on our investment in Keurig for the year ended December 31, 2016. We continue to account for our investments in JDE and Keurig under the equity method and recognize our share of their earnings within equity method investment earnings and our share of their dividends within our cash flows. As of December 31, 2016, Keurig reflected a preliminary acquisition purchase price allocation and related remeasurement updates that we have recorded in our fourth quarter 2016 results. We anticipate the purchase price allocation work will be finalized in the first quarter of 2017.
Coffee Business Equity Earnings:
We have reflected the results of our historical coffee businesses and equity earnings from JDE, Keurig and DSF in our results from continuing operations as the coffee category continues to be a significant part of our net earnings and business strategy going forward. Historically, our coffee businesses and the income from equity method investments were recorded within our operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig and DSF, and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income.
Of the $301 million equity method investment net earnings in 2016, the contribution from JDE was $100 million, from Keurig was $97 million (since March 7, 2016), from DSF was $75 million and from all other equity investments was $29 million. In 2015, JDE incurred a $58 million loss, which was fully offset by earnings of $38 million from DSF and $21 million from other equity method investments. Within operating income for the first half of 2015, $296 million after-tax ($342 million pre-tax) earnings related to our legacy coffee business, $40 million was from DSF and $16 million was from our other equity method investments. In 2014, $572 million ($646 million pre-tax) earnings related to our legacy coffee business, $83 million was from DSF and $30 million was from our other equity method investments.
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Summary Financial Information for Equity Method Investments:
Summarized financial information for JDE, Keurig, DSF and our other equity method investments is reflected below.
| As of December 31, | ||||||||||||
| 2016 | 2015 | |||||||||||
| (in millions) | ||||||||||||
| Current assets | $ | 4,458 | $ | 3,943 | ||||||||
| Noncurrent assets | 35,089 | 20,936 | ||||||||||
| Total assets | $ | 39,547 | $ | 24,879 | ||||||||
| Current liabilities | $ | 4,148 | $ | 2,779 | ||||||||
| Noncurrent liabilities | 16,472 | 9,880 | ||||||||||
| Total liabilities | $ | 20,620 | $ | 12,659 | ||||||||
| Total net equity of investees | $ | 18,927 | $ | 12,220 | ||||||||
| Mondelēz International ownership interests | 24%-50% | 40%-50% | ||||||||||
| Mondelēz International share of investee net equity (1) | $ | 5,145 | $ | 5,387 | ||||||||
| Keurig shareholder loan | 440 | – | ||||||||||
| Equity method investments | $ | 5,585 | $ | 5,387 | ||||||||
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Net revenues | $ | 10,923 | $ | 4,993 | $ | 2,721 | ||||||
| Gross profit | 4,219 | 1,551 | 921 | |||||||||
| Income from continuing operations | 839 | 96 | 226 | |||||||||
| Net income | 839 | 97 | 226 | |||||||||
| Net income attributable to investees | $ | 838 | $ | 97 | $ | 226 | ||||||
| Mondelēz International ownership interests | 24%-50% | 40%-50% | 40%-50% | |||||||||
| Mondelēz International share of investee net income | $ | 281 | $ | 56 | $ | 113 | ||||||
| Keurig shareholder loan interest income | 20 | – | – | |||||||||
| Equity method investment net earnings (2) | $ | 301 | $ | 56 | $ | 113 | ||||||
| (1) | Includes approximately $325 million of basis differences between the U.S. GAAP accounting basis for our equity method investments and the U.S. GAAP accounting basis of our investees’ 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 and $113 million for the year ended December 31, 2014. See Note 1, Summary of Significant Accounting Policies – Principles of Consolidation, for additional information. |
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Spin-Off of Kraft Foods Group:
On October 1, 2012, we divested the Kraft Foods Group grocery business in a spin-off (“Spin-Off”). In 2014, we concluded our Spin-Off-related transition plans and recorded final Spin-Off transaction, transition and financing and related costs (“Spin-Off Costs”) of $35 million in 2014 in pre-tax earnings within selling, general and administrative expenses.
Other Divestitures and Acquisitions:
On January 18, 2017, we reached an agreement to sell most of our grocery business in Australia and New Zealand to Bega Cheese Limited for approximately $460 million Australian dollars ($346 million as of January 18, 2017). As of December 31, 2016, the asset group to be sold consisted of approximately $25 million of current assets and approximately $125 million of non-current assets based on the December 31, 2016 Australian-to-U.S. dollar exchange rate. We expect the transaction to close in 2017.
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On March 31, 2016, we received a binding offer totaling €176 million ($185 million as of December 31, 2016) for the sale of several manufacturing facilities in France and the sale or license of several local confectionery brands. Taking into account agreed upon sales price adjustments related to cash, employee-related liabilities and working capital to be transferred at closing, we currently estimate a sales price of €225 million ($237 million as of December 31, 2016) based on net book values as of December 31, 2016. The final sales price is subject to change as working capital and other account balances may change at the time of closing. The transactions are subject to E.U. and local regulatory approvals, completion of employee consultation requirements and additional steps to prepare the assets for transfer. During the fourth quarter, we received the Works Council approval and the buyer obtained anti-trust clearance in all markets where it was required. As of December 31, 2016, the held for sale assets and liabilities consisted of $125 million of current assets, $174 million of non-current assets, $33 million of current liabilities and $29 million of non-current liabilities based on the December 31, 2016 euro-to-U.S. dollar exchange rate. On March 31, 2016, we recorded a $14 million impairment charge for a gum & candy trademark as a portion of its carrying value would not be recoverable based on future cash flows expected under a planned license agreement with the buyer. In May 2016, we recorded an additional $5 million impairment charge for another candy trademark to reduce the overall net assets to the estimated net sales proceeds after transaction costs. Additionally, in 2016, we incurred and accrued $86 million of incremental expenses to ready the business for the sale transactions expected to close in 2017. We recorded these costs within cost of sales and selling, general and administrative expenses of our Europe segment.
During the year ended December 31, 2016, we also completed the following sale transactions:
| • | On December 31, 2016, we completed the sale of a chocolate factory in Belgium. In connection with this transaction, we recorded a pre-tax loss of €65 million ($68 million as of December 31, 2016), within asset impairment and exit costs in our Europe segment. The loss includes a fixed asset impairment charge of €30 million ($31 million as of December 31, 2016), a loss on disposal of €22 million ($23 million as of December 31, 2016) and incremental expenses we incurred and accrued of €13 million ($14 million as of December 31, 2016) related to selling the factory. |
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| • | On December 1, 2016, we completed the sale of a confectionery business in Costa Rica represented by a local brand. The sales price was $28 million and we recorded a pre-tax gain of $9 million within gains on divestiture within our Latin America segment. We divested approximately $11 million of property, plant and equipment, $4 million of goodwill and $2 million of inventory. In connection with this transaction, we incurred $2 million of transaction costs and accrued expenses. |
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| • | On August 26, 2016, we recorded a $7 million gain for the sale of a U.S.-owned biscuit trademark. The gain was recorded within selling, general and administrative expenses in 2016. |
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| • | On May 2, 2016, we completed the sale of certain local biscuit brands in Finland as part of our strategic decisions to exit select small and local brands and shift investment towards our Power Brands. The sales price was €14 million ($16 million as of May 2, 2016) and we recorded a pre-tax gain of $6 million ($5 million after-tax) within selling, general and administrative expenses of our Europe segment in the year ended December 31, 2016. We divested $8 million of indefinite-lived intangible assets and less than $1 million of other assets. We received cash proceeds of €12 million ($14 million as of May 2, 2016) upon closing and another €2 million ($2 million as of October 31, 2016) of consideration following the completion of post-closing requirements. The additional $2 million of consideration increased the pre-tax gain to $8 million ($6 million after-tax) through December 31, 2016. |
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On November 2, 2016, we purchased from Burton’s Biscuit Company certain intangibles, which include the license to manufacture, market and sell Cadbury-branded biscuits in additional key markets around the world, including in the United Kingdom, France, Ireland, North America and Saudi Arabia. The transaction was accounted for as a business combination. Total cash paid for the acquired assets was £199 million ($246 million as of December 31, 2016). We are working to complete the valuation work and have recorded a preliminary purchase price allocation of $72 million to definite-life intangible assets, $156 million to goodwill, $14 million to property, plant and equipment and $4 million to inventory as of December 31, 2016.
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During the third quarter of 2016, we completed the acquisition of a Vietnamese biscuit operation within our AMEA segment. On July 15, 2015, we acquired an 80% interest in the biscuit operation and on August 22, 2016, we acquired the remaining 20% interest. Total cash paid for the biscuit operation, intellectual property, non-compete and consulting agreements less purchase price adjustments was 12,404 billion Vietnamese dong ($569 million using applicable exchange rates on July 15, 2015, November 27, 2015 and August 22, 2016). On August 22, 2016, in connection with acquiring the remaining 20% interest in the biscuit operation, we released escrowed funds of $70 million and retained an agreed $20 million related to two outstanding acquisition-related matters that are expected to be resolved in 2017. As of December 31, 2016, we released an additional $5 million of the escrowed funds and are holding $15 million until the outstanding acquisition matters are resolved. On August 22, 2016, we also made a final payment of 759 billion Vietnamese dong ($35 million as of August 22, 2016) for the non-compete and consulting agreements. The non-compete and consulting agreements were recorded as prepaid contracts within other current and non-current assets and will be amortized into net earnings over the term of the agreements. During the third quarter of 2016, we also finalized the valuation and purchase price allocation of the acquired net assets of the business, which included $10 million of inventory, $49 million of property, plant and equipment, $86 million of intangible assets, $385 million of goodwill and $31 million of other net liabilities. In periods following the initial July 15, 2015 first closing date, the allocation of the net asset fair values had an immaterial impact on our operating results. The acquisition added incremental net revenues of $71 million in 2016 and $121 million in 2015 and added incremental operating income of $5 million in 2016 and $21 million in 2015. Within selling, general and administrative expenses, we recorded integration costs of $7 million in 2016 and $9 million in 2015 and acquisition costs of $7 million in 2015 and $2 million in 2014.
On April 23, 2015, we completed the divestiture of our 50% equity interest in AGF, our Japanese coffee joint venture, to our joint venture partner, which generated cash proceeds of 27 billion Japanese yen ($225 million as of April 23, 2015) and a pre-tax gain of $13 million (after-tax loss of $9 million) in the second quarter of 2015. Upon closing, we divested our $99 million investment in the joint venture, $65 million of goodwill and $41 million of accumulated other comprehensive losses. We also incurred approximately $7 million of transaction costs in 2015.
On February 16, 2015, we acquired a U.S. snack food company, Enjoy Life Foods, within our North America segment. We paid cash and settled debt totaling $81 million in connection with the acquisition. Upon finalizing the valuation of the acquired net assets during the second quarter of 2015, we recorded an $81 million purchase price allocation of $58 million in identifiable intangible assets, $20 million of goodwill and $3 million of other net assets. The acquisition-related costs and operating results of the acquisition were not material to our consolidated financial statements for the years ended December 31, 2016 and 2015.
Sales of Property:
On November 9, 2016, we completed the sale of a manufacturing plant in Russia and recorded total expenses of $12 million, including a related fixed asset impairment charge of $4 million within asset impairments and exit costs. The sale of the land, buildings and equipment generated cash proceeds of $6 million.
In 2016, we also sold property within our North America segment and from our centrally held corporate assets. In the third quarter, we sold property in North America that generated cash proceeds of $10 million and a pre-tax gain of $6 million and we sold a corporate aircraft hangar that generated cash proceeds of $3 million and a pre-tax gain of $1 million. In the second quarter, we also sold separate property in North America that generated cash proceeds of $40 million and a pre-tax gain of $33 million and we sold a corporate aircraft that generated cash proceeds of $20 million and a pre-tax gain of $6 million. The gains were recorded within selling, general and administrative expenses and cash proceeds were recorded in cash flows from other investing activities in year ended December 31, 2016.
Note 3. Inventories
Inventories consisted of the following:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Raw materials | $ | 722 | $ | 782 | ||||
| Finished product | 1,865 | 1,930 | ||||||
| 2,587 | 2,712 | |||||||
| Inventory reserves | (118 | ) | (103 | ) | ||||
| Inventories, net | $ | 2,469 | $ | 2,609 | ||||
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Note 4. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Land and land improvements | $ | 471 | $ | 495 | ||||
| Buildings and building improvements | 2,801 | 2,753 | ||||||
| Machinery and equipment | 10,302 | 10,044 | ||||||
| Construction in progress | 1,113 | 1,262 | ||||||
| 14,687 | 14,554 | |||||||
| Accumulated depreciation | (6,458 | ) | (6,192 | ) | ||||
| Property, plant and equipment, net | $ | 8,229 | $ | 8,362 | ||||
Capital expenditures of $1.2 billion for the year ended December 31, 2016 exclude $343 million of accrued capital expenditures remaining unpaid at December 31, 2016 and include payment for $322 million of capital expenditures that were accrued and unpaid at December 31, 2015.
In connection with our restructuring program, we recorded non-cash asset write-downs (including accelerated depreciation and asset impairments) of $301 million in 2016, $264 million in 2015 and $173 million in 2014 (see Note 6, Restructuring Programs). These charges were recorded in the consolidated statements of earnings within asset impairment and exit costs and in the following segment results as follows:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Latin America | $ | 22 | $ | 46 | $ | 14 | ||||||
| AMEA | 44 | 88 | 34 | |||||||||
| Europe | 122 | 65 | 42 | |||||||||
| North America | 111 | 65 | 83 | |||||||||
| Corporate | 2 | – | – | |||||||||
| Total non-cash asset write-downs | $ | 301 | $ | 264 | $ | 173 | ||||||
Note 5. Goodwill and Intangible Assets
Goodwill by segment below reflects our latest segment structure for both periods presented:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Latin America | $ | 897 | $ | 858 | ||||
| AMEA | 3,324 | 3,537 | ||||||
| Europe | 7,170 | 7,404 | ||||||
| North America | 8,885 | 8,865 | ||||||
| Goodwill | $ | 20,276 | $ | 20,664 | ||||
Intangible assets consisted of the following:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Non-amortizable intangible assets | $ | 17,004 | $ | 17,527 | ||||
| Amortizable intangible assets | 2,315 | 2,320 | ||||||
| 19,319 | 19,847 | |||||||
| Accumulated amortization | (1,218 | ) | (1,079 | ) | ||||
| Intangible assets, net | $ | 18,101 | $ | 18,768 | ||||
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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, 2016, the weighted-average life of our amortizable intangible assets was 13.5 years.
Amortization expense for intangible assets was $176 million in 2016, $181 million in 2015 and $206 million in 2014. We currently estimate annual amortization expense for each of the next five years to be approximately $171 million, estimated using December 31, 2016 exchange rates.
Changes in goodwill and intangible assets consisted of:
| 2016 | 2015 | |||||||||||||||
| Goodwill | Intangible Assets, at cost | Goodwill | Intangible Assets, at cost | |||||||||||||
| (in millions) | ||||||||||||||||
| Balance at January 1 | $ | 20,664 | $ | 19,847 | $ | 23,389 | $ | 21,335 | ||||||||
| Changes due to: | ||||||||||||||||
| Currency | (464 | ) | (540 | ) | (1,477 | ) | (1,462 | ) | ||||||||
| Coffee business transactions and divestitures | (4 | ) | (8 | ) | (1,729 | ) | – | |||||||||
| Acquisitions | 80 | 158 | 481 | 58 | ||||||||||||
| Asset impairments | – | (137 | ) | – | (83 | ) | ||||||||||
| Other | – | (1 | ) | – | (1 | ) | ||||||||||
| Balance at December 31 | $ | 20,276 | $ | 19,319 | $ | 20,664 | $ | 19,847 | ||||||||
Changes to goodwill and intangibles were:
| • | Coffee business transactions and divestitures – On December 1, 2016, we divested $4 million of goodwill related to the sale of a confectionery business in Costa Rica. On May 2, 2016, we sold $8 million of non-amortizable intangible assets in Finland. 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. See Note 2, Divestitures and Acquisitions, for additional information on these transactions. |
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| • | Acquisitions – On November 2, 2016, we purchased from Burton’s Biscuit Company certain intangibles, which include a license to manufacture, market and sell Cadbury-branded biscuits in additional key markets. As a result of the acquisition, we recorded a preliminary purchase price allocation of $156 million to goodwill and $72 million to amortizable intangible assets. In connection with the completion of the Vietnam biscuit operation in 2016, we finalized the purchase price allocation of the consideration paid to the net assets acquired and recorded $25 million of amortizable intangible assets and $61 million of non-amortizable intangible assets related to acquired trademarks and customer-related intangible assets. A preliminary goodwill balance was recorded in the third quarter of 2015 and subsequently adjusted by $76 million to $385 million during the first nine months of 2016 to reflect finalized intangible asset and other asset fair valuations. On February 16, 2015, we also acquired Enjoy Life Foods and recorded $20 million of goodwill and $58 million in identifiable intangible assets. See Note 2, Divestitures and Acquisitions – Other Divestitures and Acquisitions, for additional information. |
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| • | Asset impairments – We recorded $137 million of intangible asset impairments in 2016, $83 million in 2015 and $57 million in 2014. Charges related to our annual testing of non-amortizable intangible assets are described further below. Additionally, during 2016, $20 million of impairments recorded in our Europe segment related to the planned sale of a confectionery business in France (see Note 2, Divestitures and Acquisitions – Other Divestitures and Acquisitions, for additional information). In 2016, we also recorded $19 million of charges in our Europe, North America and AMEA segments resulting from the discontinuation of four biscuit products and one candy product. Additionally, in 2015, 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. |
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In 2016, 2015 and 2014, there were no impairments of goodwill. In connection with our 2016 annual impairment testing, each of our reporting units had sufficient fair value in excess of carrying value. While all reporting units passed our annual impairment testing, if planned business performance 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 2016 annual testing of non-amortizable intangible assets, we recorded $98 million of impairment charges related to five trademarks. The impairments arose due to lower than expected product growth in part driven by decisions to redirect support from these trademarks to other regional and global brands, as well as slowdowns in local economies. We recorded charges related to biscuits, candy and gum trademarks of $41 million in AMEA, $32 million in North America, $22 million in Europe, and $3 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 2016 intangible asset impairment review, we noted nine brands, including the five impaired trademarks, with $630 million of aggregate book value as of December 31, 2016 that each had a fair value in excess of book value of 10% or less. While the other four 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 the product line expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future. In 2015, we recorded a $44 million charge related to candy and biscuit trademarks in our AMEA segment, $22 million in Europe and $5 million in Latin America. In 2014, we recorded a $48 million charge related to a biscuit trademark in our AMEA segment and a $9 million charge related to a candy trademark in our Europe segment.
Note 6. Restructuring Programs
On May 6, 2014, our Board of Directors approved a $3.5 billion restructuring program, comprised of approximately $2.5 billion in cash costs and $1 billion in non-cash costs (the “2014-2018 Restructuring Program”) and up to $2.2 billion of capital expenditures. On August 31, 2016, our Board of Directors approved a reallocation within the $5.7 billion total cost of the programs of $600 million of previously approved capital expenditures to be spent on restructuring program cash costs. There was no change to the total $5.7 billion cost of the programs and no change to the total $4.7 billion of cash outlays. The $5.7 billion total cost of the programs is now comprised of approximately $4.1 billion of restructuring program costs ($3.1 billion cash costs and $1 billion non-cash costs) and up to $1.6 billion of capital expenditures. The primary objective of the 2014-2018 Restructuring Program is to reduce our operating cost structure in both our supply chain and overhead costs. The program is intended primarily to cover severance as well as asset disposals and other manufacturing-related one-time costs. Since inception, we have incurred total restructuring and related implementation charges of $2.5 billion related to the 2014-2018 Restructuring Program. We have incurred the majority of the program’s charges through 2016 and we expect to complete the program by year-end 2018.
Restructuring Costs:
We recorded restructuring charges of $714 million in 2016, $711 million 2015 and $274 million in 2014 within asset impairment and exit costs. The 2014-2018 Restructuring Program liability activity for the years ended December 31, 2016 and 2015 was:
| Severance | ||||||||||||
| and related | Asset | |||||||||||
| costs | Write-downs | Total | ||||||||||
| (in millions) | ||||||||||||
| Liability balance, January 1, 2015 | $ | 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 | ||||||
| Charges | 402 | 312 | 714 | |||||||||
| Cash spent | (315 | ) | – | (315 | ) | |||||||
| Non-cash settlements / adjustments | (9 | ) | (312 | ) | (321 | ) | ||||||
| Currency | (9 | ) | – | (9 | ) | |||||||
| Liability balance, December 31, 2016 | $ | 464 | $ | – | $ | 464 | ||||||
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We spent $315 million in 2016 and $243 million in 2015 in cash severance and related costs. We also recognized non-cash pension settlement losses (See Note 9, Benefit Plans), non-cash asset write-downs (including accelerated depreciation and asset impairments) and other non-cash adjustments totaling $321 million in 2016 and $273 million in 2015. At December 31, 2016, $379 million of our net restructuring liability was recorded within other current liabilities and $85 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 $372 million in 2016, $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 2016, 2015 and 2014, we recorded restructuring and implementation costs related to the 2014-2018 Restructuring Program within operating income by segment (as revised to reflect our new segment structure) as follows:
| Latin | North | |||||||||||||||||||||||
| America | AMEA | Europe | America (1) | Corporate (2) | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| For the Year Ended December 31, 2016 | ||||||||||||||||||||||||
| Restructuring Costs | $ | 111 | $ | 96 | $ | 310 | $ | 183 | $ | 14 | $ | 714 | ||||||||||||
| Implementation Costs | 54 | 48 | 88 | 121 | 61 | 372 | ||||||||||||||||||
| Total | $ | 165 | $ | 144 | $ | 398 | $ | 304 | $ | 75 | $ | 1,086 | ||||||||||||
| For the Year Ended December 31, 2015 | ||||||||||||||||||||||||
| Restructuring Costs | $ | 145 | $ | 181 | $ | 243 | $ | 114 | $ | 28 | $ | 711 | ||||||||||||
| Implementation Costs | 39 | 26 | 78 | 69 | 79 | 291 | ||||||||||||||||||
| Total | $ | 184 | $ | 207 | $ | 321 | $ | 183 | $ | 107 | $ | 1,002 | ||||||||||||
| For the Year Ended December 31, 2014 | ||||||||||||||||||||||||
| Restructuring Costs | $ | 81 | $ | 30 | $ | 96 | $ | 57 | $ | 10 | $ | 274 | ||||||||||||
| Implementation Costs | 16 | 12 | 38 | 5 | 36 | 107 | ||||||||||||||||||
| Total | $ | 97 | $ | 42 | $ | 134 | $ | 62 | $ | 46 | $ | 381 | ||||||||||||
| Total Project 2014-2016 (3) | ||||||||||||||||||||||||
| Restructuring Costs | $ | 337 | $ | 307 | $ | 649 | $ | 354 | $ | 52 | $ | 1,699 | ||||||||||||
| Implementation Costs | 109 | 86 | 204 | 195 | 176 | 770 | ||||||||||||||||||
| Total | $ | 446 | $ | 393 | $ | 853 | $ | 549 | $ | 228 | $ | 2,469 | ||||||||||||
| (1) | During 2016, our North America region implementation costs included incremental costs that we incurred related to re-negotiating collective bargaining agreements that expired at the end of February 2016 for eight U.S. facilities and related to executing business continuity plans for the North America business. |
|---|
| (2) | Includes adjustment for rounding. |
|---|
| (3) | Includes all charges recorded since program inception on May 6, 2014 through December 31, 2016. |
|---|
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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 restructuring and related 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 in 2015 related to accruals no longer required. We recorded restructuring charges of $360 million in 2014 within asset impairment and exit costs. During 2014, we 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 2012-2014 Restructuring Program liability activity for the years ended December 31, 2016 and 2015 was:
| Severance | ||||||||||||
| and related | Asset | |||||||||||
| costs | Write-downs | Total | ||||||||||
| (in millions) | ||||||||||||
| Liability balance, January 1, 2015 | $ | 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 | ||||||
| Charges | – | – | – | |||||||||
| Cash spent | (21 | ) | – | (21 | ) | |||||||
| Non-cash settlements / adjustments | (6 | ) | – | (6 | ) | |||||||
| Currency | (1 | ) | – | (1 | ) | |||||||
| Liability balance, December 31, 2016 | $ | 19 | $ | – | $ | 19 | ||||||
We spent $21 million in 2016 and $66 million in 2015 in cash severance and related costs. We also recognized non-cash pension plan settlement losses (See Note 9, Benefit Plans) and non-cash adjustments totaling $6 million in 2016 and $4 million in 2015. At December 31, 2016, $18 million of our net restructuring liability was recorded within other current liabilities and less than $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 Kraft Foods Group 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. We recorded these costs within cost of sales and selling, general and administrative expenses.
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Restructuring and Implementation Costs in Operating Income:
During 2014 and since inception of the 2012-2014 Restructuring Program, we recorded restructuring and implementation costs within operating income by segment (as revised to reflect our new segment structure) as follows:
| Latin | North | |||||||||||||||||||||||
| America | AMEA | Europe | America | Corporate (1) | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| For the Year Ended December 31, 2014 | ||||||||||||||||||||||||
| Restructuring Costs | $ | 8 | $ | 77 | $ | 162 | $ | 113 | $ | – | $ | 360 | ||||||||||||
| Implementation Costs | 3 | 6 | 54 | 32 | 4 | 99 | ||||||||||||||||||
| Total | $ | 11 | $ | 83 | $ | 216 | $ | 145 | $ | 4 | $ | 459 | ||||||||||||
| Total Project 2012-2014 (2) | ||||||||||||||||||||||||
| Restructuring Costs | $ | 36 | $ | 83 | $ | 271 | $ | 337 | $ | 2 | $ | 729 | ||||||||||||
| Implementation Costs | 3 | 8 | 90 | 65 | 4 | 170 | ||||||||||||||||||
| Total | $ | 39 | $ | 91 | $ | 361 | $ | 402 | $ | 6 | $ | 899 | ||||||||||||
| (1) | Includes adjustment for rounding. |
|---|
| (2) | Includes all charges recorded since program inception in 2012 through conclusion on December 31, 2014. |
|---|
Note 7. Debt and Borrowing Arrangements
Short-Term Borrowings:
Our short-term borrowings and related weighted-average interest rates consisted of:
| As of December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Amount | Weighted- | Amount | Weighted- | |||||||||||||
| Outstanding | Average Rate | Outstanding | Average Rate | |||||||||||||
| (in millions) | (in millions) | |||||||||||||||
| Commercial paper | $ | 2,371 | 1.0% | $ | – | 0.0% | ||||||||||
| Bank loans | 160 | 10.6% | 236 | 9.5% | ||||||||||||
| Total short-term borrowings | $ | 2,531 | $ | 236 | ||||||||||||
As of December 31, 2016, the commercial paper issued and outstanding had between 3 and 88 days remaining to maturity. Bank loans include borrowings on primarily uncommitted credit lines maintained by some of our international subsidiaries to meet short-term working capital needs.
Borrowing Arrangements:
We maintain a $4.5 billion multi-year senior unsecured revolving credit facility for general corporate purposes, including working capital needs, and to support our commercial paper program. On October 14, 2016, the revolving credit agreement, which was scheduled to expire on October 11, 2018, was extended through October 11, 2021. The revolving credit agreement includes a covenant that we maintain a minimum shareholders’ equity of at least $24.6 billion, excluding accumulated other comprehensive earnings / (losses) and the cumulative effects of any changes in accounting principles. At December 31, 2016, we complied with this covenant as our shareholders’ equity, as defined by the covenant, was $36.3 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, 2016, no amounts were drawn on the facility.
Some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $1.8 billion at December 31, 2016 and $1.9 billion at December 31, 2015. Borrowings on these lines amounted to $160 million at December 31, 2016 and $236 million at December 31, 2015.
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Long-Term Debt:
Our long-term debt consisted of (interest rates are as of December 31, 2016):
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| U.S. dollar notes, 0.881% to 7.000% (weighted-average effective rate 3.527%), due through 2040 | $ | 8,812 | $ | 8,371 | ||||
| Euro notes, 1.000% to 2.375% (weighted-average effective rate 1.808%), due through 2035 | 3,980 | 4,305 | ||||||
| Pound sterling notes, 3.875% to 7.250% (weighted-average effective rate 4.441%), due through 2045 | 418 | 1,399 | ||||||
| Swiss franc notes, 0.000% to 1.125% (weighted-average effective rate 0.636%), due through 2025 | 1,449 | 1,075 | ||||||
| Capital leases and other obligations | 9 | 12 | ||||||
| Total | 14,668 | 15,162 | ||||||
| Less current portion of long-term debt | (1,451 | ) | (605 | ) | ||||
| Long-term debt | $ | 13,217 | $ | 14,557 | ||||
Deferred debt issuance costs of $40 million as of December 31, 2016 and $46 million as of December 31, 2015 are netted against the related debt in the table above. These amounts were reclassified from long-term other assets to offset the related debt in the fourth quarter of 2015, except for deferred financing costs related to our revolving credit facility which remain in long-term other assets and were immaterial for all periods presented.
As of December 31, 2016, 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 $(69) million, were (in millions):
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||
| $1,451 | $1,144 | $2,650 | $658 | $3,260 | $5,574 | $14,737 |
On December 16, 2016, we redeemed $850 million of 2.250% fixed rate notes, maturing on February 1, 2019, that were issued on January 16, 2014. The notes were redeemed at a redemption cost equal to $866 million, plus accrued and unpaid interest of $7 million. In connection with this redemption, during the three months ended December 31, 2016, we recorded a $19 million loss on debt extinguishment within interest and other expense, net.
On October 31, 2016, we completed a cash tender offer and retired $3.18 billion of U.S. dollar, euro and British pound sterling-denominated notes. We financed the repurchase of the notes, including the payment of accrued interest and other costs incurred, from net proceeds received on October 28, 2016 from the $3.75 billion note issuance and the term loans described below. In connection with retiring this debt, during the three months ended December 31, 2016, we recorded a $409 million loss on debt extinguishment 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, 2016. We also recognized $1 million in interest income related to the partial settlement of fair value hedges due to the tender.
On October 19, 2016, Mondelez International Holdings Netherlands B.V. (“MIHN”), a wholly owned subsidiary of Mondelēz International, Inc., launched an offering of $3.75 billion of notes, guaranteed by Mondelēz International, Inc. The $1.75 billion of 1.625% notes and the $500 million of floating rate notes will mature on October 28, 2019 and the $1.5 billion of 2.0% notes will mature on October 28, 2021. On October 28, 2016, we received proceeds, net of discounts and associated financing costs, of $3.73 billion. Proceeds from the notes issuance were used for general corporate purposes, including to grant loans or make distributions to Mondelēz International, Inc. or its subsidiaries to fund the October 2016 cash tender offer and near-term debt maturities. We recorded approximately $20 million of deferred financing costs and discounts, which will be amortized into interest expense over the life of the notes. We entered into cross-currency swaps, serving as cash flow hedges, so that the U.S. dollar-denominated debt payments will effectively be paid in euros over the life of the debt.
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On October 14, 2016, MIHN executed a $1.5 billion bank term loan facility. The loan facility consists of two $750 million loans, one with a three-year maturity and the other with a five-year maturity. The term loans can be drawn at any time for 60 days after signing. On October 25, 2016, we gave notice of our intent to fully draw on the loan with a five-year maturity, and funding occurred on October 28, 2016. Proceeds from the $750 million term loan may be used for general corporate purposes, including funding of the tender offer or other debt. On October 25, 2016, we also gave notice of our intent to terminate the $750 million loan with the three-year maturity.
On February 9, 2016, $1,750 million of our 4.125% U.S. dollar notes matured. The notes and accrued interest to date were paid with net proceeds from the fr.400 million Swiss franc-denominated notes issued on January 26, 2016 and the €700 million euro-denominated notes issued on January 21, 2016, as well as cash on hand and the issuance of commercial paper. As we refinanced $1,150 million of the matured notes with net proceeds from the long-term debt issued in January 2016, we reflected this amount within long-term debt as of December 31, 2015.
On January 26, 2016, we issued fr.400 million of Swiss franc-denominated notes, or $399 million in U.S. dollars locked in with a forward currency contract on January 12, 2016, consisting of:
| • | fr.250 million (or $249 million) of 0.080% fixed rate notes that mature on January 26, 2018 |
|---|
| • | fr.150 million (or $150 million) of 0.650% fixed rate notes that mature on July 26, 2022 |
|---|
We received proceeds, net of premiums and deferred financing costs, of $398 million that were used to partially fund the February 2016 note maturity and for other general corporate purposes. We recorded approximately $1 million of premiums and deferred financing costs, which will be amortized into interest expense over the life of the notes.
On January 21, 2016, we issued €700 million of euro-denominated 1.625% notes, or $760 million in U.S. dollars locked in with a forward currency contract on January 13, 2016. The euro-denominated notes will mature on January 20, 2023. We received proceeds, net of discounts and deferred financing costs, of $752 million that were used to partially fund the February 2016 note maturity and for other general corporate purposes. We recorded approximately $8 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.
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.
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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 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.
Our weighted-average interest rate on our total debt was 2.2% as of December 31, 2016, 3.7% as of December 31, 2015 and 4.3% as of December 31, 2014.
Fair Value of Our Debt:
The fair value of our short-term borrowings at December 31, 2016 and December 31, 2015 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, 2016, the aggregate fair value of our total debt was $17,882 million and its carrying value was $17,199 million. At December 31, 2015, the aggregate fair value of our total debt was $15,908 million and its carrying value was $15,398 million.
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Interest and Other Expense, net:
Interest and other expense, net within our results of continuing operations consisted of:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Interest expense, debt | $ | 515 | $ | 609 | $ | 778 | ||||||
| Loss on debt extinguishment and related expenses | 427 | 753 | 495 | |||||||||
| JDE coffee business transactions currency-related net gains | – | (436 | ) | (628 | ) | |||||||
| Loss related to interest rate swaps | 97 | 34 | – | |||||||||
| Other expense, net | 76 | 53 | 43 | |||||||||
| Interest and other expense, net | $ | 1,115 | $ | 1,013 | $ | 688 | ||||||
See Note 2, Divestitures and Acquisitions, and Note 8, Financial Instruments, for information on the currency exchange forward contracts associated with the JDE coffee business transactions. Also see Note 8, Financial Instruments, for information on the loss related to U.S. dollar interest rate swaps no longer designated as accounting cash flow hedges during the first quarters of 2016 and 2015.
Note 8. Financial Instruments
Fair Value of Derivative Instruments:
Derivative instruments were recorded at fair value in the consolidated balance sheets as follows:
| As of December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Asset | Liability | Asset | Liability | |||||||||||||
| Derivatives | Derivatives | Derivatives | Derivatives | |||||||||||||
| (in millions) | ||||||||||||||||
| Derivatives designated as accounting hedges: | ||||||||||||||||
| Currency exchange contracts | $ | 19 | $ | 8 | $ | 20 | $ | 7 | ||||||||
| Commodity contracts | 17 | 22 | 37 | 35 | ||||||||||||
| Interest rate contracts | 108 | 19 | 12 | 57 | ||||||||||||
| $ | 144 | $ | 49 | $ | 69 | $ | 99 | |||||||||
| Derivatives not designated as accounting hedges: | ||||||||||||||||
| Currency exchange contracts | $ | 29 | $ | 43 | $ | 61 | $ | 33 | ||||||||
| Commodity contracts | 112 | 167 | 70 | 56 | ||||||||||||
| Interest rate contracts | 27 | 19 | 43 | 28 | ||||||||||||
| $ | 168 | $ | 229 | $ | 174 | $ | 117 | |||||||||
| Total fair value | $ | 312 | $ | 278 | $ | 243 | $ | 216 | ||||||||
During 2016 and 2015, derivatives designated as accounting hedges include cash flow and fair value hedges and derivatives not designated as accounting hedges include economic hedges. Non-U.S. dollar denominated debt designated as a hedge of our net investments in non-U.S. operations is not reflected in the table above, but is included in long-term debt summarized in Note 7, Debt and Borrowing Arrangements. We record derivative assets and liabilities on a gross basis in our 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.
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The fair values (asset / (liability)) of our derivative instruments were determined using:
| As of December 31, 2016 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant | Significant | ||||||||||||||
| Total | for Identical | Other Observable | Unobservable | |||||||||||||
| Fair Value of Net | Assets | Inputs | Inputs | |||||||||||||
| Asset / (Liability) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (in millions) | ||||||||||||||||
| Currency exchange contracts | $ | (3 | ) | $ | – | $ | (3 | ) | $ | – | ||||||
| Commodity contracts | (60 | ) | (86 | ) | 26 | – | ||||||||||
| Interest rate contracts | 97 | – | 97 | – | ||||||||||||
| Total derivatives | $ | 34 | $ | (86 | ) | $ | 120 | $ | – | |||||||
| 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 | ) | $ | – | |||||||
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 $133 million as of December 31, 2016 and margin deposits of $22 million as of December 31, 2015 within other current assets. Based on our net asset or liability positions with individual counterparties, in the event of default and immediate net settlement of all of our open positions, for derivatives we have in a net asset position, our counterparties would owe us a total of $48 million as of December 31, 2016 and $52 million as of December 31, 2015. For derivatives we have in a net liability position, we would owe $2 million as of December 31, 2016. As of December 31, 2015, there were no Level 1 derivatives in a net liability position.
Level 2 financial assets and liabilities consist primarily of over-the-counter (“OTC”) currency exchange forwards, options and swaps; commodity forwards and options; and interest rate swaps. Our currency exchange contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk. Our OTC derivative transactions are governed by International Swap Dealers Association agreements and other standard industry contracts. Under these agreements, we do not post nor require collateral from our counterparties. The majority of our commodity and currency exchange OTC derivatives do not have a legal right of set-off. In connection with our OTC derivatives that could be net-settled in the event of default, assuming all parties were to fail to comply with the terms of the agreements, for derivatives we have in a net liability position, we would owe $40 million as of December 31, 2016 and $101 million as of December 31, 2015, and for derivatives we have in a net asset position, our counterparties would owe us a total of $162 million as of December 31, 2016 and $64 million as of December 31, 2015. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.
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Derivative Volume:
The net notional values of our derivative instruments were:
| Notional Amount | ||||||||
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Currency exchange contracts: | ||||||||
| Intercompany loans and forecasted interest payments | $ | 3,343 | $ | 4,148 | ||||
| Forecasted transactions | 1,452 | 1,094 | ||||||
| Commodity contracts | 837 | 732 | ||||||
| Interest rate contracts | 6,365 | 3,033 | ||||||
| Net investment hedge – euro notes | 4,012 | 4,345 | ||||||
| Net investment hedge – pound sterling notes | 419 | 1,404 | ||||||
| Net investment hedge – Swiss franc notes | 1,447 | 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, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Accumulated gain / (loss) at January 1 | $ | (45 | ) | $ | (2 | ) | $ | 117 | ||||
| Transfer of realized losses / (gains) in fair value to earnings | 53 | – | (40 | ) | ||||||||
| Unrealized gain / (loss) in fair value | (129 | ) | (43 | ) | (79 | ) | ||||||
| Accumulated gain / (loss) at December 31 | $ | (121 | ) | $ | (45 | ) | $ | (2 | ) | |||
After-tax gains / (losses) reclassified from accumulated other comprehensive earnings / (losses) into net earnings were:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Currency exchange contracts – forecasted transactions | $ | (1 | ) | $ | 83 | $ | 26 | |||||
| Commodity contracts | (4 | ) | (52 | ) | 16 | |||||||
| Interest rate contracts | (48 | ) | (31 | ) | (2 | ) | ||||||
| Total | $ | (53 | ) | $ | – | $ | 40 | |||||
After-tax gains / (losses) recognized in other comprehensive earnings / (losses) were:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Currency exchange contracts – forecasted transactions | $ | 8 | $ | 40 | $ | 82 | ||||||
| Commodity contracts | (34 | ) | (35 | ) | (2 | ) | ||||||
| Interest rate contracts | (103 | ) | (48 | ) | (159 | ) | ||||||
| Total | $ | (129 | ) | $ | (43 | ) | $ | (79 | ) | |||
Pre-tax gains / (losses) on ineffectiveness recognized in net earnings from continuing operations were:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Commodity contracts | $ | 2 | $ | (4 | ) | $ | (10 | ) |
Within interest and other expense, net, we recorded pre-tax losses of $97 million in the first quarter of 2016 and $34 million in the first quarter of 2015 related to amounts excluded from effectiveness testing. These amounts relate to interest rate swaps no longer designated as cash flow hedges due to changes in financing plans. Due to lower overall costs and our decision to hedge a greater portion of our net investments in operations that use currencies other than the U.S. dollar as their functional currencies, we changed our plans to issue U.S. dollar-denominated debt and instead issued euro and Swiss franc-denominated notes in the current year first quarter, and euro, British pound sterling and Swiss franc-denominated notes in the prior-year first quarter. Amounts excluded from effectiveness testing were not material for the remainder of 2016 and 2015 and prior year periods.
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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; |
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| • | cost of sales for currency exchange contracts related to forecasted transactions; and |
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| • | interest and other expense, net for interest rate contracts and currency exchange contracts related to intercompany loans. |
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Based on current market conditions, we would expect to transfer losses of $31 million (net of taxes) for commodity cash flow hedges, unrealized gains of $10 million (net of taxes) for currency cash flow hedges and unrealized losses of $2 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.
Hedge Coverage:
As of December 31, 2016, we hedged transactions forecasted to impact cash flows over the following periods:
| • | commodity transactions for periods not exceeding the next 12 months; |
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| • | interest rate transactions for periods not exceeding the next 6 years and 10 months; and |
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| • | currency exchange transactions for periods not exceeding the next 12 months. |
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Fair Value Hedges:
Pre-tax gains / (losses) due to changes in fair value of our interest rate swaps and related hedged long-term debt were recorded in interest and other expense, net:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Derivatives | $ | (6 | ) | $ | (1 | ) | $ | 13 | ||||
| Borrowings | 6 | 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 | |||||||||||||||
| 2016 | 2015 | 2014 | in Earnings | |||||||||||||
| (in millions) | ||||||||||||||||
| Currency exchange contracts: | ||||||||||||||||
| Intercompany loans and forecasted interest payments | $ | 21 | $ | 29 | $ | 4 | Interest and other expense, net | |||||||||
| Forecasted transactions | (76 | ) | 29 | 29 | Cost of sales | |||||||||||
| Forecasted transactions | 11 | 435 | 610 | Interest and other expense, net | ||||||||||||
| Forecasted transactions | 7 | (12 | ) | (4 | ) | Selling, general and administrative expenses | ||||||||||
| Commodity contracts | (101 | ) | (38 | ) | (136 | ) | Cost of sales | |||||||||
| Total | $ | (138 | ) | $ | 443 | $ | 503 | |||||||||
In connection with the coffee business transactions, we entered into a number of consecutive euro to U.S. dollar currency exchange forward contracts in 2015 and 2014 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 — JDE Coffee Business Transactions, for additional information.
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Hedges of Net Investments in International Operations:
After-tax gains / (losses) related to hedges of net investments in international operations in the form of euro, pound sterling and Swiss franc-denominated debt were:
| Location of | ||||||||||||||
| For the Years Ended December 31, | Gain / (Loss) | |||||||||||||
| 2016 | 2015 | 2014 | Recognized in AOCI | |||||||||||
| (in millions) | ||||||||||||||
| Euro notes | $ | 73 | $ | 268 | $ | 328 | Currency | |||||||
| Pound sterling notes | 148 | 42 | 39 | Translation | ||||||||||
| Swiss franc notes | 12 | 9 | – | Adjustment |
Note 9. Benefit Plans
Pension Plans
Prior to the July 2, 2015 closing of the coffee business transactions, certain active employees who transitioned to JDE participated in our Non-U.S. pension plans. Following the transactions, benefits began to be provided directly by JDE to participants continuing with JDE. JDE assumed certain pension plan obligations and received the related plan assets. In 2015, we reduced our net benefit plan liabilities by $131 million and the related deferred tax assets by $24 million. 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 | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (in millions) | ||||||||||||||||
| Benefit obligation at January 1 | $ | 1,566 | $ | 1,606 | $ | 9,547 | $ | 10,854 | ||||||||
| Service cost | 57 | 64 | 147 | 188 | ||||||||||||
| Interest cost | 61 | 67 | 229 | 307 | ||||||||||||
| Benefits paid | (32 | ) | (35 | ) | (425 | ) | (435 | ) | ||||||||
| Settlements paid | (91 | ) | (88 | ) | – | 1 | ||||||||||
| Actuarial (gains) / losses | 52 | (49 | ) | 1,284 | (262 | ) | ||||||||||
| Deconsolidation of JDE coffee business | – | – | – | (261 | ) | |||||||||||
| Divestiture | – | – | (5 | ) | – | |||||||||||
| Currency | – | – | (979 | ) | (766 | ) | ||||||||||
| Other | 1 | 1 | 16 | (79 | ) | |||||||||||
| Benefit obligation at December 31 | 1,614 | 1,566 | 9,814 | 9,547 | ||||||||||||
| Fair value of plan assets at January 1 | 1,247 | 1,216 | 7,721 | 8,362 | ||||||||||||
| Actual return on plan assets | 118 | (71 | ) | 1,079 | 192 | |||||||||||
| Contributions | 378 | 225 | 419 | 318 | ||||||||||||
| Benefits paid | (32 | ) | (35 | ) | (425 | ) | (435 | ) | ||||||||
| Settlements paid | (91 | ) | (88 | ) | – | – | ||||||||||
| Deconsolidation of JDE coffee business | – | – | – | (130 | ) | |||||||||||
| Divestiture | – | – | (4 | ) | – | |||||||||||
| Currency | – | – | (863 | ) | (579 | ) | ||||||||||
| Other | – | – | (1 | ) | (7 | ) | ||||||||||
| Fair value of plan assets at December 31 | 1,620 | 1,247 | 7,926 | 7,721 | ||||||||||||
| Net pension assets (liability) at December 31 | $ | 6 | $ | (319 | ) | $ | (1,888 | ) | $ | (1,826 | ) | |||||
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The accumulated benefit obligation, which represents benefits earned to the measurement date, was $1,540 million at December 31, 2016 and $1,463 million at December 31, 2015 for the U.S. pension plans. The accumulated benefit obligation for the non-U.S. pension plans was $9,531 million at December 31, 2016 and $9,267 million at December 31, 2015.
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 $1,882 million at December 31, 2016 and $2,145 million at December 31, 2015. We recognized these amounts in our consolidated balance sheets as follows:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Prepaid pension assets | $ | 159 | $ | 69 | ||||
| Other accrued liabilities | (27 | ) | (31 | ) | ||||
| Accrued pension costs | (2,014 | ) | (2,183 | ) | ||||
| $ | (1,882 | ) | $ | (2,145 | ) | |||
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, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (in millions) | ||||||||||||||||
| Projected benefit obligation | $ | 96 | $ | 1,566 | $ | 8,386 | $ | 8,139 | ||||||||
| Accumulated benefit obligation | 88 | 1,463 | 8,168 | 7,920 | ||||||||||||
| Fair value of plan assets | 2 | 1,247 | 6,451 | 6,252 |
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, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Discount rate | 4.19% | 4.50% | 2.31% | 3.11% | ||||||||||||
| Expected rate of return on plan assets | 6.25% | 6.75% | 5.14% | 5.87% | ||||||||||||
| Rate of compensation increase | 4.00% | 4.00% | 3.29% | 3.18% |
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 measured 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 provided a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. The impact of this change was a decrease in net periodic pension cost of approximately $64 million for the year ended December 31, 2016. This change did not affect the measurement of our plan obligations. We accounted for this change as a change in accounting estimate and, accordingly, accounted for it on a prospective basis.
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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, | |||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Service cost | $ | 57 | $ | 64 | $ | 57 | $ | 147 | $ | 188 | $ | 184 | ||||||||||||
| Interest cost | 61 | 67 | 67 | 229 | 307 | 388 | ||||||||||||||||||
| Expected return on plan assets | (97 | ) | (93 | ) | (81 | ) | (418 | ) | (478 | ) | (485 | ) | ||||||||||||
| Amortization: | ||||||||||||||||||||||||
| Net loss from experience differences | 42 | 43 | 29 | 120 | 141 | 106 | ||||||||||||||||||
| Prior service cost (1) | 2 | 2 | 2 | (3 | ) | 15 | – | |||||||||||||||||
| Settlement losses and other expenses (2) | 30 | 19 | 28 | 6 | 2 | 14 | ||||||||||||||||||
| Net periodic pension cost | $ | 95 | $ | 102 | $ | 102 | $ | 81 | $ | 175 | $ | 207 | ||||||||||||
| (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 – JDE Coffee Business Transactions_, for more information. |
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| (2) | Settlement losses include $15 million for the year ended December 31, 2016 and $9 million for the year ended December 31, 2015 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 2016 of $15 million for our U.S. plans and $6 million for our non-U.S. plans and 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. In addition, we incurred special termination benefit costs of $2 million in 2014 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 – JDE Coffee Business Transactions_, for more information. |
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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, 2016, 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 2017:
| • | an estimated $202 million of net loss from experience differences; and |
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| • | $1 million of estimated prior service credit. |
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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, | |||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
| Discount rate | 4.50% | 4.20% | 5.10% | 3.11% | 2.99% | 4.03% | ||||||||||||||||||
| Expected rate of return on plan assets | 6.75% | 7.25% | 7.75% | 5.87% | 5.96% | 6.17% | ||||||||||||||||||
| Rate of compensation increase | 4.00% | 4.00% | 4.00% | 3.18% | 3.26% | 3.63% |
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Plan Assets:
The fair value of pension plan assets was determined using the following fair value measurements:
| As of December 31, 2016 | ||||||||||||||||
| 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 | $ | 1 | $ | 1 | $ | – | $ | – | ||||||||
| Non-U.S. equity securities | 427 | 427 | – | – | ||||||||||||
| Pooled funds - equity securities | 1,524 | 286 | 1,235 | 3 | ||||||||||||
| Total equity securities | 1,952 | 714 | 1,235 | 3 | ||||||||||||
| Government bonds | 3,009 | 37 | 2,972 | – | ||||||||||||
| Pooled funds - fixed-income securities | 756 | 103 | 618 | 35 | ||||||||||||
| Corporate bonds and other fixed-income securities | 852 | 357 | (43 | ) | 538 | |||||||||||
| Total fixed-income securities | 4,617 | 497 | 3,547 | 573 | ||||||||||||
| Real estate | 170 | 98 | 50 | 22 | ||||||||||||
| Hedge funds | – | – | – | – | ||||||||||||
| Private equity | 2 | – | – | 2 | ||||||||||||
| Cash | 73 | 72 | 1 | – | ||||||||||||
| Other | 3 | 1 | – | 2 | ||||||||||||
| Total assets in the fair value hierarchy | $ | 6,817 | $ | 1,382 | $ | 4,833 | $ | 602 | ||||||||
| Investments measured at net asset value | 2,667 | |||||||||||||||
| Total Investments at fair value | $ | 9,484 | ||||||||||||||
| 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 | 498 | 412 | 86 | – | ||||||||||||
| Pooled funds - equity securities | 1,468 | 275 | 1,193 | – | ||||||||||||
| Total equity securities | 1,968 | 689 | 1,279 | – | ||||||||||||
| Government bonds | 1,770 | 35 | 1,735 | – | ||||||||||||
| Pooled funds - fixed-income securities | 575 | 118 | 431 | 26 | ||||||||||||
| Corporate bonds and other fixed-income securities | 1,686 | 320 | 701 | 665 | ||||||||||||
| Total fixed-income securities | 4,031 | 473 | 2,867 | 691 | ||||||||||||
| Real estate | 339 | 109 | – | 230 | ||||||||||||
| Hedge funds | – | – | – | – | ||||||||||||
| Private equity | 2 | – | – | 2 | ||||||||||||
| Cash | 138 | 138 | – | – | ||||||||||||
| Other | 2 | 1 | – | 1 | ||||||||||||
| Total assets in the fair value hierarchy | $ | 6,480 | $ | 1,410 | $ | 4,146 | $ | 924 | ||||||||
| Investments measured at net asset value | 2,422 | |||||||||||||||
| Total investments at fair value | $ | 8,902 | ||||||||||||||
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We excluded plan assets of $62 million at December 31, 2016 and $66 million at December 31, 2015 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | 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. |
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| • | Net asset value – primarily includes real estate funds, hedge funds and private equity investments for which net asset values are normally used. |
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Changes in our Level 3 plan assets, which are recorded in other comprehensive earnings / (losses), included:
| Asset Category | January 1, 2016 Balance | Net Realized and Unrealized Gains/ (Losses) | Net Purchases, Issuances and Settlements | Net Transfers Into/(Out of) Level 3 | Currency Impact | December 31, 2016 Balance | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Non-U.S. equity | $ | – | $ | – | $ | – | $ | 3 | $ | – | 3 | |||||||||||||
| Pooled funds- fixed-income securities | 26 | 6 | 15 | (7 | ) | (5 | ) | 35 | ||||||||||||||||
| Corporate bond and other fixed-income securities | 665 | 21 | (41 | ) | – | (107 | ) | 538 | ||||||||||||||||
| Real estate | 230 | – | (184 | ) | (3 | ) | (21 | ) | 22 | |||||||||||||||
| Hedge funds | – | – | – | – | – | – | ||||||||||||||||||
| Private equity | 3 | – | – | 1 | – | 4 | ||||||||||||||||||
| Total Level 3 investments | $ | 924 | $ | 27 | $ | (210 | ) | $ | (6 | ) | $ | (133 | ) | $ | 602 | |||||||||
| 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 | $ | (89 | ) | $ | (6 | ) | $ | 26 | |||||||||
| Corporate bond and other fixed-income securities | 749 | 4 | (50 | ) | – | (38 | ) | 665 | ||||||||||||||||
| Real estate | 292 | 19 | 61 | (125 | ) | (17 | ) | 230 | ||||||||||||||||
| Hedge funds | 829 | 13 | (312 | ) | (499 | ) | (31 | ) | – | |||||||||||||||
| Private equity | 240 | 17 | (36 | ) | (206 | ) | (12 | ) | 3 | |||||||||||||||
| Total Level 3 investments | $ | 2,207 | $ | 52 | $ | (312 | ) | $ | (919 | ) | $ | (104 | ) | $ | 924 | |||||||||
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The decreases in Level 3 pension plan investments during 2016 were primarily due to net settlements in real estate funds and the effects of currency. 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 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 | 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Equity securities | 33% | 32% | 29% | 32% | ||||||||||||
| Fixed-income securities | 63% | 65% | 57% | 50% | ||||||||||||
| Real estate | 4% | 3% | 5% | 6% | ||||||||||||
| Hedge funds | – | – | 6% | 7% | ||||||||||||
| Private equity | – | – | 2% | 3% | ||||||||||||
| Cash | – | – | 1% | 1% | ||||||||||||
| Other | – | – | – | 1% | ||||||||||||
| 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. 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 34% equity securities (including investments in real estate), approximately 64% fixed-income securities and approximately 2% other alternative securities. Our investment strategy for our largest non-U.S. plan, which comprises 63% 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 24% in equity securities, 21% credit, 6% private markets, 9% other diversifying assets, and 40% 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 2016, we contributed $378 million (of which, $350 million was voluntarily contributed) to our U.S. pension plans and $403 million (of which, $100 million was a non-recurring contribution related to merging our legacy Cadbury plans in the United Kingdom) 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 2017, we estimate that our pension contributions will be $13 million to our U.S. plans and $455 million to our non-U.S. plans based on current tax laws. Of the total 2017 pension contributions, $250 million is expected to be non-recurring. 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.
Future Benefit Payments:
The estimated future benefit payments from our pension plans at December 31, 2016 were (in millions):
| Year ending: | 2017 | 2018 | 2019 | 2020 | 2021 | 2022-2026 | ||||||||||||||||||
| U.S. Plans | $ | 89 | $ | 97 | $ | 103 | $ | 107 | $ | 108 | $ | 568 | ||||||||||||
| Non-U.S. Plans | 357 | 356 | 363 | 378 | 400 | 2,138 |
Multiemployer Pension Plans:
In accordance with obligations we have under collective bargaining agreements, we made contributions to multiemployer pension plans of $25 million in 2016, $31 million in 2015 and $32 million in 2014. There are risks of participating in multiemployer pension plans that are different from single employer plans. Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan are borne by the remaining participating employers. If the Company stops participating in its multi-employer pension plans, the Company may be required to pay those plans an amount based on its allocable share of the unfunded vested benefits of the plans, referred to as a withdrawal liability.
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The only individually significant multiemployer plan we participate in as of December 31, 2016 is the Bakery and Confectionery Union and Industry International Pension Fund (the “Fund”). Our contributions to the Fund exceeded 5% of total contributions to the Fund for fiscal years 2016, 2015 and 2014. Our contributions to the Fund were $21 million in 2016, $27 million in 2015 and $25 million in 2014. Our contributions to other multiemployer pension plans that were not individually significant were $4 million in 2016, $4 million in 2015 and $7 million in 2014. Our contributions are based on our contribution rates under our collective bargaining agreements, the number of our eligible employees and Fund surcharges.
| 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 and Confectionery Union and Industry International Pension Fund | 526118572 | Red | Implemented | Yes | 2/29/2016 |
Effective January 1, 2012, the Fund’s zone status changed to “Red”. As a result of this certification, beginning in July 2012, we were charged a 10% surcharge on our contribution rates. The Fund subsequently adopted a rehabilitation plan on November 7, 2012 that required contribution increases and reductions to benefit provisions. Although our collective bargaining agreements with the Fund expired during 2016, we are obligated to make contributions to the Fund and we continue to work with the union toward reaching an agreement. The Fund’s actuarial valuation was last completed as of January 1, 2016. As of August 28, 2016, the 10% surcharge is no longer applicable but we are required to pay higher contributions under the Fund’s rehabilitation plan.
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 $44 million in 2016, $45 million in 2015 and $46 million in 2014.
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, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Accrued benefit obligation at January 1 | $ | 511 | $ | 538 | ||||
| Service cost | 12 | 15 | ||||||
| Interest cost | 20 | 22 | ||||||
| Benefits paid | (14 | ) | (10 | ) | ||||
| Plan amendments (1) | (149 | ) | – | |||||
| Currency | 3 | (22 | ) | |||||
| Assumption changes | 34 | (30 | ) | |||||
| Actuarial (gains) / losses | (23 | ) | (2 | ) | ||||
| Accrued benefit obligation at December 31 | $ | 394 | $ | 511 | ||||
| (1) | Plan amendments included a change in eligibility requirements related to medical and life insurance benefits and a change in benefits for Medicare-eligible participants. |
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The current portion of our accrued postretirement benefit obligation of $12 million at December 31, 2016 and $11 million at December 31, 2015 was included in other accrued liabilities.
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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, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Discount rate | 4.14% | 4.60% | 4.55% | 4.77% | ||||||||||||
| Health care cost trend rate assumed for next year | 6.50% | 6.50% | 5.50% | 5.37% | ||||||||||||
| Ultimate trend rate | 5.00% | 5.00% | 5.68% | 5.55% | ||||||||||||
| Year that the rate reaches the ultimate trend rate | 2020 | 2020 | 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 measured 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 provided a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. The impact of this change was a decrease in net periodic postretirement cost of approximately $4 million for the year ended December 31, 2016. This change does not affect the measurement of our plan obligations. We accounted for this change as a change in accounting estimate and, accordingly, 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, 2016 | ||||||||||||
| One-Percentage-Point | ||||||||||||
| Increase | Decrease | |||||||||||
| (in millions) | ||||||||||||
| Effect on postretirement benefit obligation | $ | 41 | $ | (33 | ) | |||||||
| Effect on annual service and interest cost | 3 | (2 | ) |
Components of Net Periodic Postretirement Health Care Costs:
Net periodic postretirement health care costs consisted of the following:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Service cost | $ | 12 | $ | 15 | $ | 13 | ||||||
| Interest cost | 20 | 22 | 22 | |||||||||
| Amortization: | ||||||||||||
| Net loss from experience differences | 10 | 13 | 5 | |||||||||
| Prior service credit (1) | (20 | ) | (7 | ) | (10 | ) | ||||||
| Net periodic postretirement health care costs | $ | 22 | $ | 43 | $ | 30 | ||||||
| (1) | For the year ended December 31, 2016, amortization of prior service credit includes $9 million of curtailment gain related to a change in the eligibility requirement. |
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As of December 31, 2016, we expected to amortize from accumulated other comprehensive earnings / (losses) into pre-tax net periodic postretirement health care costs during 2017:
| • | an estimated $15 million of net loss from experience differences, and |
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| • | an estimated $40 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, | |||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||
| Discount rate | 4.60% | 4.20% | 5.10% | 4.77% | 4.52% | 5.17% | ||||||
| Health care cost trend rate | 6.50% | 6.50% | 7.00% | 5.50% | 5.18% | 5.11% |
Future Benefit Payments:
Our estimated future benefit payments for our postretirement health care plans at December 31, 2016 were (in millions):
| Year ending: | 2017 | 2018 | 2019 | 2020 | 2021 | 2022-2026 | ||||||
| U.S. Plans | $8 | $10 | $11 | $12 | $13 | $80 | ||||||
| Non-U.S. Plans | 5 | 5 | 5 | 6 | 6 | 34 |
Other Costs:
We made contributions to multiemployer medical plans totaling $19 million in 2016, $20 million in 2015 and $18 million in 2014. 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, 2016 and 2015 were:
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Accrued benefit obligation at January 1 | $ | 95 | $ | 94 | ||||
| Service cost | 7 | 7 | ||||||
| Interest cost | 6 | 5 | ||||||
| Benefits paid | (9 | ) | (7 | ) | ||||
| Assumption changes | (21 | ) | (3 | ) | ||||
| Actuarial gains | (7 | ) | (1 | ) | ||||
| Accrued benefit obligation at December 31 | $ | 71 | $ | 95 | ||||
The accrued benefit obligation was determined using a weighted-average discount rate of 6.2% in 2016 and 2015, an assumed weighted-average ultimate annual turnover rate of 0.3% in 2016 and 2015, assumed compensation cost increases of 4.0% in 2016 and 2015 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, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Service cost | $ | 7 | $ | 7 | $ | 9 | ||||||
| Interest cost | 6 | 5 | 6 | |||||||||
| Amortization of net gains | (1 | ) | – | – | ||||||||
| Net periodic postemployment costs | $ | 12 | $ | 12 | $ | 15 | ||||||
As of December 31, 2016, 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 2017 was approximately $4 million.
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Note 10. Stock Plans
Under our Amended and Restated 2005 Performance Incentive Plan (the “Plan”), we are authorized through May 21, 2024 to issue a maximum of 243.7 million shares of our Common Stock to employees and non-employee directors. As of December 31, 2016, there were 74.2 million shares available to be granted under the Plan.
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 $57 million in 2016, $50 million in 2015 and $47 million in 2014 in our results from continuing operations. The deferred tax benefit recorded related to this compensation expense was $15 million in 2016, $13 million in 2015 and $12 million in 2014. The unamortized compensation expense related to our employee stock options was $52 million at December 31, 2016 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 | ||||||||||||||||
| 2016 | 1.40% | 6 years | 23.11% | 1.61% | $ | 7.86 | ||||||||||||||
| 2015 | 1.70% | 6 years | 18.51% | 1.61% | $ | 6.12 | ||||||||||||||
| 2014 | 1.87% | 6 years | 21.48% | 1.64% | $ | 6.60 |
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.
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Stock option activity is reflected below:
| Weighted- | ||||||||||||||||
| Average | Average | |||||||||||||||
| Exercise or | Remaining | Aggregate | ||||||||||||||
| Shares Subject | Grant Price | Contractual | Intrinsic | |||||||||||||
| to Option | Per Share | Term | Value | |||||||||||||
| Balance at January 1, 2014 | 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 (2) | 57,034,108 | 26.12 | $ | 1,068 million | ||||||||||||
| Annual grant to eligible employees | 7,517,290 | 39.70 | ||||||||||||||
| Additional options issued | 115,800 | 42.26 | ||||||||||||||
| Total options granted | 7,633,090 | 39.74 | ||||||||||||||
| Options exercised (1) | (8,883,101 | ) | 24.09 | $ | 174 million | |||||||||||
| Options cancelled | (2,182,485 | ) | 35.23 | |||||||||||||
| Balance at December 31, 2016 | 53,601,612 | 28.02 | 6 years | $ | 874 million | |||||||||||
| Exercisable at December 31, 2016 | 39,016,883 | 24.43 | 5 years | $ | 777 million | |||||||||||
| (1) | Cash received from options exercised was $221 million in 2016, $148 million in 2015 and $168 million in 2014. The actual tax benefit realized for the tax deductions from the option exercises totaled $31 million in 2016, $58 million in 2015 and $29 million in 2014. |
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| (2) | Prior-year aggregate intrinsic value has been revised. |
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Deferred Stock Units, Performance Share Units and Restricted Stock:
Historically we have made grants of deferred stock units, performance share units and restricted stock. Beginning in 2016, we only grant deferred stock units and performance share units and no longer grant restricted stock. We may grant shares of 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 deferred stock units are subject to forfeiture if certain employment conditions are not met. Deferred stock units generally vest on the third anniversary of the grant date. 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 deferred stock units, performance share units and restricted stock at the date of grant is amortized to earnings over the restriction period. We recorded compensation expense related to deferred stock units, performance share units and restricted stock of $83 million in 2016, $86 million in 2015 and $94 million in 2014 in our results from continuing operations. The deferred tax benefit recorded related to this compensation expense was $22 million in 2016, $24 million in 2015 and $26 million in 2014. The unamortized compensation expense related to our deferred stock units, performance share units and restricted stock was $111 million at December 31, 2016 and is expected to be recognized over a weighted-average period of 2 years.
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Our deferred stock unit, performance share unit and restricted stock activity is reflected below:
| Weighted-Average | Weighted-Average | |||||||||||||||
| Number | Fair Value | Aggregate | ||||||||||||||
| of Shares | Grant Date | Per Share | Fair Value | |||||||||||||
| Balance at January 1, 2014 | 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 (2) | (4,380,452 | ) | 22.98 | $ | 101 million | |||||||||||
| Forfeited (2) | (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 (2) | (3,905,745 | ) | 37.83 | $ | 148 million | |||||||||||
| Forfeited (2) | (1,197,841 | ) | 32.51 | |||||||||||||
| Balance at December 31, 2015 | 9,418,216 | 28.00 | ||||||||||||||
| Annual grant to eligible employees: | Feb. 22, 2016 | |||||||||||||||
| Performance share units | 1,406,500 | 39.70 | ||||||||||||||
| Deferred stock units | 1,040,790 | 39.70 | ||||||||||||||
| Additional shares granted (1) | 864,851 | Various | 31.29 | |||||||||||||
| Total shares granted | 3,312,141 | 37.50 | $ | 124 million | ||||||||||||
| Vested (2) | (3,992,902 | ) | 40.22 | $ | 161 million | |||||||||||
| Forfeited (2) | (1,143,828 | ) | 37.49 | |||||||||||||
| Balance at December 31, 2016 | 7,593,627 | 24.29 | ||||||||||||||
| (1) | Includes performance share units, deferred stock units and restricted stock. |
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| (2) | Includes performance share units, deferred stock units and restricted stock. The actual tax benefit realized for the tax deductions from the shares vested totaled $18 million in 2016, $18 million in 2015 and $20 million in 2014. |
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Note 11. 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, 2016, 2015 and 2014. Shares of Common Stock issued, in treasury and outstanding were:
| Shares | ||||||||||||
| Shares Issued | Treasury Shares | Outstanding | ||||||||||
| Balance at January 1, 2014 | 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 | ||||||||
| Shares repurchased | – | (61,972,713 | ) | (61,972,713 | ) | |||||||
| Exercise of stock options and issuance of other stock awards | – | 10,305,100 | 10,305,100 | |||||||||
| Balance at December 31, 2016 | 1,996,537,778 | (468,172,237 | ) | 1,528,365,541 | ||||||||
Stock plan awards to employees and non-employee directors are issued from treasury shares. At December 31, 2016, 134 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. Prior to January 1, 2016, we had repurchased $8.2 billion of Common Stock pursuant to this authorization. During 2016, we repurchased 62.0 million shares of Common Stock at an average cost of $41.97 per share, or an aggregate cost of $2.6 billion, all of which was paid during 2016. All share repurchases were funded through available cash and commercial paper issuances. 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. As of December 31, 2016, we have $2.8 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 12. 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.
As we previously disclosed in February 2011, we received a subpoena from the SEC in connection with an investigation under the Foreign Corrupt Practices Act (“FCPA”), primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requested information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. In January 2017, we reached an agreement with the SEC to settle charges related to internal controls and books-and-records provisions of the FCPA without admitting or denying the charges. As part of the settlement, Mondelēz International Inc. agreed to pay a civil penalty of $13 million to resolve the investigation. We do not anticipate any material adverse effect on our business or financial condition as a result of resolving this matter.
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In February 2013 and March 2014, Cadbury India Limited (now known as Mondelez India Foods Private Limited), a subsidiary of Mondelēz International, and other parties received show cause notices from the Indian Central Excise Authority (the “Excise Authority”) calling upon the parties to demonstrate why the Excise Authority should not collect a total of 3.7 billion Indian rupees ($55 million as of December 31, 2016) of unpaid excise tax and an equivalent amount of penalties, as well as interest, related to production at the same Indian facility. We contested these demands for unpaid excise taxes, penalties and interest. On March 27, 2015, after several hearings, the Commissioner of the Excise Authority issued an order denying the excise exemption that we claimed for the Indian facility and confirming the Excise Authority’s demands for total taxes and penalties in the amount of 5.8 billion Indian rupees ($86 million as of December 31, 2016). We have appealed this order. In addition, the Excise Authority issued additional show cause notices in February 2015 and December 2015 on the same issue but covering the periods January to October 2014 and November 2014 to September 2015, respectively. These notices added a total of 2.4 billion Indian rupees ($35 million as of December 31, 2016) of unpaid excise taxes as well as penalties to be determined up to an amount equivalent to that claimed by the Excise Authority and interest. We believe that the decision to claim the excise tax benefit is valid and we are continuing to contest the show cause notices through the administrative and judicial process.
In April 2013, the staff of the U.S. Commodity Futures Trading Commission (“CFTC”) advised us and Kraft Foods Group that it was investigating activities related to the trading of December 2011 wheat futures contracts that occurred prior to the Spin-Off of Kraft Foods Group. We cooperated with the staff in its investigation. On April 1, 2015, the CFTC filed a complaint against Kraft Foods Group and Mondelēz Global LLC (“Mondelēz Global”) in the U.S. District Court for the Northern District of Illinois, Eastern Division (the “CFTC action”). The complaint alleges that Kraft Foods Group and Mondelēz Global (1) manipulated or attempted to manipulate the wheat markets during the fall of 2011; (2) violated position limit levels for wheat futures and (3) engaged in non-competitive trades by trading both sides of exchange-for-physical Chicago Board of Trade wheat contracts. The CFTC seeks civil monetary penalties of either triple the monetary gain for each violation of the Commodity Exchange Act (the “Act”) or $1 million for each violation of Section 6(c)(1), 6(c)(3) or 9(a)(2) of the Act and $140,000 for each additional violation of the Act, plus post-judgment interest; an order of permanent injunction prohibiting Kraft Foods Group and Mondelēz Global from violating specified provisions of the Act; disgorgement of profits; and costs and fees. In December 2015, the court denied Mondelēz Global and Kraft Foods Group’s motion to dismiss the CFTC’s claims of market manipulation and attempted manipulation, and the parties are now in discovery. Additionally, several class action complaints were filed against Kraft Foods Group and Mondelēz Global in the U.S. District Court for the Northern District of Illinois by investors in wheat futures and options on behalf of themselves and others similarly situated. The complaints make similar allegations as those made in the CFTC action and seek class action certification; an unspecified amount for damages, interest and unjust enrichment; costs and fees; and injunctive, declaratory and other unspecified relief. In June 2015, these suits were consolidated in the Northern District of Illinois. In June 2016, the court denied Mondelēz Global and Kraft Foods Group’s motion to dismiss, and the parties are now in discovery. It is not possible to predict the outcome of these matters; however, based on our Separation and Distribution Agreement with Kraft Foods Group dated as of September 27, 2012, we expect to predominantly bear any monetary penalties or other payments in connection with the CFTC action.
While we cannot predict with certainty the results of any Legal Matters in which we are currently involved, we do not expect that the ultimate costs to resolve any of these Legal Matters, individually or in the aggregate, will have a material effect on our financial results.
Third-Party Guarantees:
We enter into third-party guarantees primarily to cover the long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At December 31, 2016, we had no material third-party guarantees recorded on our consolidated balance sheet.
Leases:
Rental expenses recorded in continuing operations were $317 million in 2016, $331 million in 2015 and $399 million in 2014. As of December 31, 2016, minimum rental commitments under non-cancelable operating leases in effect at year-end were (in millions):
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||
| $ 241 | $ | 175 | $ | 143 | $ | 115 | $ | 90 | $ | 157 | $ | 921 |
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Note 13. Reclassifications from Accumulated Other Comprehensive Income
The following table summarizes the changes in the accumulated balances of each component of accumulated other comprehensive earnings / (losses) attributable to Mondelēz International. Amounts reclassified from accumulated other comprehensive earnings / (losses) to net earnings (net of tax) were net losses of $250 million in 2016, $350 million in 2015 and $79 million in 2014.
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Currency Translation Adjustments: | ||||||||||||
| Balance at beginning of period | $ | (8,006 | ) | $ | (5,042 | ) | $ | (1,414 | ) | |||
| Currency translation adjustments | (847 | ) | (2,905 | ) | (3,433 | ) | ||||||
| Reclassification to earnings related to: | ||||||||||||
| Venezuela deconsolidation | – | 99 | – | |||||||||
| Equity method investment exchange | 57 | – | – | |||||||||
| Tax (expense) / benefit | (135 | ) | (184 | ) | (228 | ) | ||||||
| Other comprehensive earnings / (losses) | (925 | ) | (2,990 | ) | (3,661 | ) | ||||||
| Less: loss attributable to noncontrolling interests | 17 | 26 | 33 | |||||||||
| Balance at end of period | (8,914 | ) | (8,006 | ) | (5,042 | ) | ||||||
| Pension and Other Benefit Plans: | ||||||||||||
| Balance at beginning of period | $ | (1,934 | ) | $ | (2,274 | ) | $ | (1,592 | ) | |||
| Net actuarial gain / (loss) arising during period | (491 | ) | (60 | ) | (1,388 | ) | ||||||
| Tax (expense) / benefit on net actuarial gain / (loss) | 70 | 3 | 442 | |||||||||
| Losses / (gains) reclassified into net earnings: | ||||||||||||
| Amortization of experience losses and prior service costs (1) | 150 | 207 | 132 | |||||||||
| Settlement losses (1) | 36 | 111 | 42 | |||||||||
| Venezuela deconsolidation | – | 2 | – | |||||||||
| Tax (expense) / benefit on reclassifications (2) | (46 | ) | (69 | ) | (56 | ) | ||||||
| Currency impact | 128 | 146 | 146 | |||||||||
| Other comprehensive earnings / (losses) | (153 | ) | 340 | (682 | ) | |||||||
| Balance at end of period | (2,087 | ) | (1,934 | ) | (2,274 | ) | ||||||
| Derivative Cash Flow Hedges: | ||||||||||||
| Balance at beginning of period | $ | (46 | ) | $ | (2 | ) | $ | 117 | ||||
| Net derivative gains / (losses) | (151 | ) | (75 | ) | (166 | ) | ||||||
| Tax (expense) / benefit on net derivative gain / (loss) | 20 | 30 | 86 | |||||||||
| Losses / (gains) reclassified into net earnings: | ||||||||||||
| Currency exchange contracts – forecasted transactions (3) | 3 | (90 | ) | (27 | ) | |||||||
| Commodity contracts (3) | 9 | 64 | (21 | ) | ||||||||
| Interest rate contracts (4) | 83 | 47 | 3 | |||||||||
| Tax (expense) / benefit on reclassifications (2) | (42 | ) | (21 | ) | 6 | |||||||
| Currency impact | 3 | 1 | – | |||||||||
| Other comprehensive earnings / (losses) | (75 | ) | (44 | ) | (119 | ) | ||||||
| Balance at end of period | (121 | ) | (46 | ) | (2 | ) | ||||||
| Accumulated other comprehensive income attributable to Mondelēz International: | ||||||||||||
| Balance at beginning of period | $ | (9,986 | ) | $ | (7,318 | ) | $ | (2,889 | ) | |||
| Total other comprehensive earnings / (losses) | (1,153 | ) | (2,694 | ) | (4,462 | ) | ||||||
| Less: loss attributable to noncontrolling interests | 17 | 26 | 33 | |||||||||
| Other comprehensive earnings / (losses) attributable to Mondelēz International | (1,136 | ) | (2,668 | ) | (4,429 | ) | ||||||
| Balance at end of period | $ | (11,122 | ) | $ | (9,986 | ) | $ | (7,318 | ) | |||
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| (1) | These reclassified gains or losses are included in the components of net periodic benefit costs disclosed in Note 9, Benefit Plans. Settlement losses include the transfer of coffee business-related pension obligations in the amount of $90 million in 2015. |
|---|
| (2) | Taxes related to reclassified gains or losses are recorded within the provision for income taxes. |
|---|
| (3) | These reclassified gains or losses are recorded within cost of sales. |
|---|
| (4) | These reclassified gains or losses are recorded within interest and other expense, net. |
|---|
Note 14. Income Taxes
Earnings / (losses) from continuing operations before income taxes and the provision for income taxes consisted of:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Earnings / (losses) from continuing operations before income taxes: | ||||||||||||
| United States | $ | (364 | ) | $ | 43 | $ | (135 | ) | ||||
| Outside United States | 1,818 | 7,841 | 2,689 | |||||||||
| Total | $ | 1,454 | $ | 7,884 | $ | 2,554 | ||||||
| Provision for income taxes: | ||||||||||||
| United States federal: | ||||||||||||
| Current | $ | (227 | ) | $ | (90 | ) | $ | (125 | ) | |||
| Deferred | 141 | 136 | 28 | |||||||||
| (86 | ) | 46 | (97 | ) | ||||||||
| State and local: | ||||||||||||
| Current | 7 | 6 | 20 | |||||||||
| Deferred | 8 | (3 | ) | 11 | ||||||||
| 15 | 3 | 31 | ||||||||||
| Total United States | (71 | ) | 49 | (66 | ) | |||||||
| Outside United States: | ||||||||||||
| Current | 490 | 707 | 644 | |||||||||
| Deferred | (290 | ) | (163 | ) | (225 | ) | ||||||
| Total outside United States | 200 | 544 | 419 | |||||||||
| Total provision for income taxes | $ | 129 | $ | 593 | $ | 353 | ||||||
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.
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, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| 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 | 0.8% | (0.1)% | 0.3% | |||||||||
| Foreign rate differences | (18.6)% | (2.5)% | (14.5)% | |||||||||
| Reversal of other tax accruals no longer required | (7.7)% | (1.4)% | (10.5)% | |||||||||
| Tax accrual on investment in Keurig | 2.3% | – | – | |||||||||
| Tax legislation | (4.0)% | (0.5)% | – | |||||||||
| Gains on coffee business transactions and divestitures | – | (26.9)% | – | |||||||||
| Loss on deconsolidation of Venezuela | – | 3.5% | – | |||||||||
| Remeasurement of net monetary assets in Venezuela | – | – | 1.7% | |||||||||
| Non-deductible expenses | 0.9% | 0.3% | 1.5% | |||||||||
| Other | 0.2% | 0.1% | 0.3% | |||||||||
| Effective tax rate | 8.9% | 7.5% | 13.8% | |||||||||
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Our 2016 effective tax rate of 8.9% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from $161 million of discrete one-time events. The discrete net tax benefits related to favorable audit settlements and statutes of limitations in various jurisdictions and the net reduction of our U.K. and French deferred tax liabilities resulting from tax legislation enacted during 2016 that reduced the corporate income tax rates in each country.
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.
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions) | ||||||||
| Deferred income tax assets: | ||||||||
| Accrued postretirement and postemployment benefits | $ | 214 | $ | 230 | ||||
| Accrued pension costs | 370 | 414 | ||||||
| Other employee benefits | 237 | 265 | ||||||
| Accrued expenses | 379 | 343 | ||||||
| Loss carryforwards | 619 | 636 | ||||||
| Other | 331 | 352 | ||||||
| Total deferred income tax assets | 2,150 | 2,240 | ||||||
| Valuation allowance | (310 | ) | (303 | ) | ||||
| Net deferred income tax assets | $ | 1,840 | $ | 1,937 | ||||
| Deferred income tax liabilities: | ||||||||
| Intangible assets | $ | (5,174 | ) | $ | (5,365 | ) | ||
| Property, plant and equipment | (557 | ) | (636 | ) | ||||
| Other | (472 | ) | (409 | ) | ||||
| Total deferred income tax liabilities | (6,203 | ) | (6,410 | ) | ||||
| Net deferred income tax liabilities | $ | (4,363 | ) | $ | (4,473 | ) | ||
At December 31, 2016, the company has pre-tax loss carryforwards of $3,517 million, of which $1,223 million will expire at various dates between 2017 and 2036 and the remaining $2,294 million can be carried forward indefinitely.
Our significant valuation allowances relate to loss carryforwards in Mexico and Ireland where we do not currently expect to generate gains of the proper character to utilize the carryforwards in the future.
At December 31, 2016, neither applicable U.S. federal income taxes nor foreign withholding taxes have been provided on approximately $19.8 billion of accumulated earnings of non-U.S. subsidiaries that are expected to be indefinitely reinvested. It is impracticable 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.
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The changes in our unrecognized tax benefits were:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| January 1 | $ | 756 | $ | 852 | $ | 1,189 | ||||||
| Increases from positions taken during prior periods | 18 | 34 | 143 | |||||||||
| Decreases from positions taken during prior periods | (123 | ) | (74 | ) | (247 | ) | ||||||
| Increases from positions taken during the current period | 90 | 84 | 147 | |||||||||
| Decreases relating to settlements with taxing authorities | (75 | ) | (13 | ) | (203 | ) | ||||||
| Reductions resulting from the lapse of the applicable statute of limitations | (43 | ) | (41 | ) | (64 | ) | ||||||
| Currency / other | (13 | ) | (86 | ) | (113 | ) | ||||||
| December 31 | $ | 610 | $ | 756 | $ | 852 | ||||||
As of January 1, 2016, our unrecognized tax benefits were $756 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $652 million. Our unrecognized tax benefits were $610 million at December 31, 2016, and if we had recognized all of these benefits, the net impact on our income tax provision would have been $549 million. Within the next 12 months, our unrecognized tax benefits could increase by approximately $40 million due to unfavorable audit developments or decrease by approximately $160 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 $185 million as of January 1, 2016 and $189 million as of December 31, 2016. Our 2016 provision for income taxes included $15 million for interest and penalties.
Our income tax filings are regularly examined by federal, state and non-U.S. tax authorities. Examination by the IRS of our 2013-2015 U.S. federal income tax filings will begin in the first quarter of 2017. 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 (2011), China (2007), France (2010), Germany (2010), India (2005), Italy (2011) and the United Kingdom (2013).
Note 15. Earnings Per Share
Basic and diluted earnings per share (“EPS”) were calculated as follows:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions, except per share data) | ||||||||||||
| Net earnings | $ | 1,669 | $ | 7,291 | $ | 2,201 | ||||||
| Noncontrolling interest | (10 | ) | (24 | ) | (17 | ) | ||||||
| Net earnings attributable to Mondelēz International | $ | 1,659 | $ | 7,267 | $ | 2,184 | ||||||
| Weighted-average shares for basic EPS | 1,556 | 1,618 | 1,691 | |||||||||
| Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares | 17 | 19 | 18 | |||||||||
| Weighted-average shares for diluted EPS | 1,573 | 1,637 | 1,709 | |||||||||
| Basic earnings per share attributable to Mondelēz International | $ | 1.07 | $ | 4.49 | $ | 1.29 | ||||||
| Diluted earnings per share attributable to Mondelēz International: | $ | 1.05 | $ | 4.44 | $ | 1.28 | ||||||
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We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded 7.8 million antidilutive stock options for the year ended December 31, 2016, 5.1 million antidilutive stock options for the year ended December 31, 2015 and 8.6 million antidilutive stock options for the year ended December 31, 2014.
Note 16. 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 four reportable operating segments:
| • | Latin America |
|---|
| • | AMEA |
|---|
| • | Europe |
|---|
| • | North America |
|---|
On October 1, 2016, we integrated our EEMEA operating segment into our Europe and Asia Pacific operating segments to further leverage and optimize the operating scale built within the Europe and Asia Pacific regions. Russia, Ukraine, Turkey, Belarus, Georgia and Kazakhstan were combined within our Europe operating segment, while the remaining Middle East and African countries were combined within our Asia Pacific region to form the AMEA regional operating segment. We have reflected the segment change as if it had occurred in all periods presented.
We manage our operations by region to leverage regional operating scale, manage different and changing business environments more effectively and pursue growth opportunities as they arise in our key markets. Our regional management teams have responsibility for the business, product categories and financial results in the regions.
Historically, we have recorded income from equity method investments within our operating income as these investments were part of our base business. Beginning in the third quarter of 2015, to align with the accounting for our new coffee equity method investment in JDE, we began to record the earnings from our equity method investments in equity method investment earnings outside of segment operating income. 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 $52 million in AMEA and $4 million in North America. For the year ended December 31, 2014, these earnings were $104 million in AMEA and $9 million in North America. See Note 1, Summary of Significant Accounting Policies – Principles of Consolidation, and Note 2, Divestitures and Acquisitions, for additional information.
In 2015, we also began to report stock-based compensation for our corporate employees within general corporate expenses that were reported within our North America region. We reclassified $32 million of corporate stock-based compensation expense in 2015 from the North America segment to general corporate expenses.
We use segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), general corporate expenses (which are a component of selling, general and administrative expenses), amortization of intangibles, gains and losses on divestitures or acquisitions, gain on the JDE coffee business transactions, loss on deconsolidation of Venezuela and acquisition-related costs (which are a component of selling, general and administrative expenses) in all periods presented. We exclude these items from segment operating income in order to provide better transparency of our segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.
Table of Contents
Our segment net revenues and earnings, revised to reflect our new segment structure, were:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Net revenues: | ||||||||||||
| Latin America (1) | $ | 3,392 | $ | 4,988 | $ | 5,153 | ||||||
| AMEA (2) | 5,816 | 6,002 | 6,367 | |||||||||
| Europe (2) | 9,755 | 11,672 | 15,788 | |||||||||
| North America | 6,960 | 6,974 | 6,936 | |||||||||
| Net revenues | $ | 25,923 | $ | 29,636 | $ | 34,244 | ||||||
| (1) | Net revenues of $1,217 million for 2015 and $760 million for 2014 from our Venezuelan subsidiaries are included in our consolidated financial statements. Beginning in 2016, we account for our Venezuelan subsidiaries using the cost method of accounting and no longer include net revenues of our Venezuelan subsidiaries within our consolidated financial statements. Refer to Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting: Venezuela, for more information. |
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| (2) | On July 2, 2015, we contributed our global coffee businesses primarily from our Europe and AMEA segments. Net revenues of our global coffee business were $1,561 million in Europe and $66 million in AMEA for the year ended December 31, 2015. Refer to Note 2, Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information. |
|---|
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Earnings before income taxes: | ||||||||||||
| Operating income: | ||||||||||||
| Latin America | $ | 271 | $ | 485 | $ | 475 | ||||||
| AMEA | 506 | 389 | 530 | |||||||||
| Europe | 1,267 | 1,350 | 1,952 | |||||||||
| North America | 1,078 | 1,105 | 922 | |||||||||
| Unrealized (losses) / gains on hedging activities (mark-to-market impacts) | (94 | ) | 96 | (112 | ) | |||||||
| General corporate expenses | (291 | ) | (383 | ) | (317 | ) | ||||||
| Amortization of intangibles | (176 | ) | (181 | ) | (206 | ) | ||||||
| Gains on divestitures and JDE coffee business transactions | 9 | 6,822 | – | |||||||||
| Loss on deconsolidation of Venezuela | – | (778 | ) | – | ||||||||
| Acquisition-related costs | (1 | ) | (8 | ) | (2 | ) | ||||||
| Operating income | 2,569 | 8,897 | 3,242 | |||||||||
| Interest and other expense, net | (1,115 | ) | (1,013 | ) | (688 | ) | ||||||
| Earnings before income taxes | $ | 1,454 | $ | 7,884 | $ | 2,554 | ||||||
No single customer accounted for 10% or more of our net revenues from continuing operations in 2016. Our five largest customers accounted for 16.6% and our ten largest customers accounted for 22.9% of net revenues from continuing operations in 2016.
Items impacting our segment operating results are discussed in Note 1, Summary of Significant Accounting Policies, including the Venezuela deconsolidation and currency devaluation, Note 2, Divestitures and Acquisitions, Note 5, Goodwill and Intangible Assets, and Note 6, Restructuring Programs. Also see Note 7, Debt and Borrowing Arrangements, and Note 8, Financial Instruments, for more information on our interest and other expense, net for each period.
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Total assets, depreciation expense and capital expenditures by segment, revised to reflect our new segment structure, were:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Total assets: | ||||||||||||
| Latin America | $ | 5,156 | $ | 4,673 | $ | 6,470 | ||||||
| AMEA | 10,031 | 10,460 | 10,549 | |||||||||
| Europe | 19,934 | 21,026 | 27,240 | |||||||||
| North America | 20,694 | 21,175 | 21,287 | |||||||||
| Equity method investments | 5,585 | 5,387 | 662 | |||||||||
| Unallocated assets (1) | 138 | 122 | 563 | |||||||||
| Total assets | $ | 61,538 | $ | 62,843 | $ | 66,771 | ||||||
| (1) | 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 $40 million as of December 31, 2016, $46 million as of December 31, 2015 and $44 million as of December 31, 2014. |
|---|
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Depreciation expense: | ||||||||||||
| Latin America | $ | 92 | $ | 94 | $ | 118 | ||||||
| AMEA | 161 | 155 | 154 | |||||||||
| Europe | 253 | 299 | 407 | |||||||||
| North America | 141 | 165 | 174 | |||||||||
| Total depreciation expense | $ | 647 | $ | 713 | $ | 853 | ||||||
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Capital Expenditures: | ||||||||||||
| Latin America | $ | 321 | $ | 354 | $ | 460 | ||||||
| AMEA | 349 | 381 | 451 | |||||||||
| Europe | 294 | 517 | 553 | |||||||||
| North America | 260 | 262 | 178 | |||||||||
| Total capital expenditures | $ | 1,224 | $ | 1,514 | $ | 1,642 | ||||||
Geographic data for net revenues (recognized in the countries where products are sold) and long-lived assets, excluding deferred tax, goodwill, intangible assets and equity method investments, were:
| For the Years Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Net revenues: | ||||||||||||
| United States | $ | 6,329 | $ | 6,302 | $ | 6,143 | ||||||
| Other | 19,594 | 23,334 | 28,101 | |||||||||
| Total net revenues | $ | 25,923 | $ | 29,636 | $ | 34,244 | ||||||
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions) | ||||||||||||
| Long-lived assets: | ||||||||||||
| United States | $ | 1,508 | $ | 1,551 | $ | 1,564 | ||||||
| Other | 7,229 | 7,238 | 8,801 | |||||||||
| Total long-lived assets | $ | 8,737 | $ | 8,789 | $ | 10,365 | ||||||
No individual country within Other exceeded 10% of our net revenues or long-lived assets for all periods presented.
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Net revenues by product category, revised to reflect our new segment structure, were:
| For the Year Ended December 31, 2016 | ||||||||||||||||||||
| Latin | North | |||||||||||||||||||
| America (1) | AMEA | Europe | America | Total (1) | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Biscuits | $ | 734 | $ | 1,588 | $ | 2,703 | $ | 5,565 | $ | 10,590 | ||||||||||
| Chocolate | 743 | 1,901 | 4,840 | 255 | 7,739 | |||||||||||||||
| Gum & Candy | 938 | 953 | 916 | 1,140 | 3,947 | |||||||||||||||
| Beverages | 657 | 611 | 177 | – | 1,445 | |||||||||||||||
| Cheese & Grocery | 320 | 763 | 1,119 | – | 2,202 | |||||||||||||||
| Total net revenues | $ | 3,392 | $ | 5,816 | $ | 9,755 | $ | 6,960 | $ | 25,923 | ||||||||||
| For the Year Ended December 31, 2015 | ||||||||||||||||||||
| Latin | North | |||||||||||||||||||
| America (1) | AMEA | Europe (3) | America | Total (1) | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Biscuits | $ | 1,605 | $ | 1,539 | $ | 2,680 | $ | 5,569 | $ | 11,393 | ||||||||||
| Chocolate | 840 | 1,928 | 5,050 | 256 | 8,074 | |||||||||||||||
| Gum & Candy | 1,091 | 1,003 | 1,015 | 1,149 | 4,258 | |||||||||||||||
| Beverages (2) | 767 | 730 | 1,763 | – | 3,260 | |||||||||||||||
| Cheese & Grocery | 685 | 802 | 1,164 | – | 2,651 | |||||||||||||||
| Total net revenues | $ | 4,988 | $ | 6,002 | $ | 11,672 | $ | 6,974 | $ | 29,636 | ||||||||||
| For the Year Ended December 31, 2014 | ||||||||||||||||||||
| Latin | North | |||||||||||||||||||
| America (1) | AMEA | Europe (3) | America | Total (1) | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Biscuits | $ | 1,322 | $ | 1,442 | $ | 3,259 | $ | 5,486 | $ | 11,509 | ||||||||||
| Chocolate | 1,054 | 2,073 | 5,997 | 296 | 9,420 | |||||||||||||||
| Gum & Candy | 1,176 | 1,098 | 1,232 | 1,154 | 4,660 | |||||||||||||||
| Beverages (2) | 940 | 836 | 3,902 | – | 5,678 | |||||||||||||||
| Cheese & Grocery | 661 | 918 | 1,398 | – | 2,977 | |||||||||||||||
| Total net revenues | $ | 5,153 | $ | 6,367 | $ | 15,788 | $ | 6,936 | $ | 34,244 | ||||||||||
| (1) | In 2015 and 2014, our consolidated net revenues included Venezuela net revenues of $763 million in biscuits, $340 million in cheese & grocery, $66 million in gum & candy and $48 million in beverages and 2014 Venezuela net revenues of $422 million in biscuits, $216 million in cheese & grocery, $91 million in beverages and $30 million in gum & candy. Following the deconsolidation of our Venezuela operations at the end of 2015, in 2016 our consolidated net revenues no longer include the net revenues of our Venezuelan subsidiaries. Refer to Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting: Venezuela, for more information. |
|---|
| (2) | On July 2, 2015, we contributed our global coffee businesses primarily from our Europe and AMEA segment beverage categories. Net revenues of our global coffee business were $1,561 million in Europe and $66 million in AMEA for the year ended December 31, 2015. Refer to Note 2, Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information. |
|---|
| (3) | During 2016, we realigned some of our products across product categories primarily within our Europe segment and as such, we reclassified the product category net revenues on a basis consistent with the 2016 presentation. |
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Note 17. Quarterly Financial Data (Unaudited)
Our summarized operating results by quarter are detailed below.
| 2016 Quarters | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (in millions, except per share data) | ||||||||||||||||
| Net revenues | $ | 6,455 | $ | 6,302 | $ | 6,396 | $ | 6,770 | ||||||||
| Gross profit | 2,535 | 2,516 | 2,488 | 2,589 | ||||||||||||
| Provision for income taxes | (49 | ) | (118 | ) | (40 | ) | 78 | |||||||||
| Gain on equity method investment exchange | 43 | – | – | – | ||||||||||||
| Equity method investment net earnings (1) | 85 | 102 | 31 | 83 | ||||||||||||
| Net earnings (2) | $ | 557 | $ | 471 | $ | 548 | $ | 93 | ||||||||
| Noncontrolling interest | (3 | ) | (7 | ) | – | – | ||||||||||
| Net earnings attributable to Mondelēz International | $ | 554 | $ | 464 | $ | 548 | $ | 93 | ||||||||
| Weighted-average shares for basic EPS | 1,569 | 1,557 | 1,557 | 1,540 | ||||||||||||
| Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares | 18 | 19 | 19 | 19 | ||||||||||||
| Weighted-average shares for diluted EPS | 1,587 | 1,576 | 1,576 | 1,559 | ||||||||||||
| Per share data: | ||||||||||||||||
| Basic EPS attributable to Mondelēz International: | $ | 0.35 | $ | 0.30 | $ | 0.35 | $ | 0.06 | ||||||||
| Diluted EPS attributable to Mondelēz International: | $ | 0.35 | $ | 0.29 | $ | 0.35 | $ | 0.06 | ||||||||
| Dividends declared | $ | 0.17 | $ | 0.17 | $ | 0.19 | $ | 0.19 | ||||||||
| Market price - high | $ | 44.45 | $ | 45.75 | $ | 46.36 | $ | 46.40 | ||||||||
| - low | $ | 35.88 | $ | 39.53 | $ | 41.96 | $ | 40.50 |
| 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 (2) | – | – | (72 | ) | 72 | |||||||||||
| Net earnings / (loss) (1) | $ | 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 |
Table of Contents
| (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. Equity method investment net earnings were lower in the third quarter of 2016 due to the JDE unfavorable tax expense disclosed in Note 2, Divestitures and Acquisitions – JDE Tax Matter Resolution. |
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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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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 2016 and 2015, we recorded the following pre-tax (charges) / gains in earnings from continuing operations:
| 2016 Quarters | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (in millions) | ||||||||||||||||
| Asset impairment and exit costs | $ | (154 | ) | $ | (166 | ) | $ | (190 | ) | $ | (342 | ) | ||||
| Loss related to interest rate swaps | (97 | ) | – | – | – | |||||||||||
| Divestiture-related costs | – | (84 | ) | – | (2 | ) | ||||||||||
| Loss on early extinguishment of debt and related expenses | – | – | – | (427 | ) | |||||||||||
| $ | (251 | ) | $ | (250 | ) | $ | (190 | ) | $ | (771 | ) | |||||
| 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 JDE coffee business transactions and divestiture | – | 13 | 7,122 | (313 | ) | |||||||||||
| JDE coffee business transactions currency- related net gain / (loss) | 551 | (144 | ) | 29 | – | |||||||||||
| Loss related to interest rate swaps | (34 | ) | ||||||||||||||
| Loss on early extinguishment of debt and related expenses | (713 | ) | – | – | (40 | ) | ||||||||||
| $ | (367 | ) | $ | (362 | ) | $ | 6,996 | $ | (1,486 | ) | ||||||
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 JDE coffee business transactions, Note 5, Goodwill and Intangible Assets, Note 6, Restructuring Programs, and Note 7, Debt and Borrowing Arrangements.
Table of Contents
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