filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
146K characters. Original on sec.gov · Markdown
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements. It should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Forward-Looking Statements and Item 1A, Risk Factors.
Overview of Business and Strategy
We make and sell primarily snacks, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy, as well as various cheese & grocery and powdered beverage products. We have operations in approximately 80 countries and sell our products in over 150 countries.
We aim to be the global leader in snacking. Our strategy is to drive long-term growth by focusing on three strategic priorities: accelerating consumer-centric growth, driving operational excellence and creating a winning growth culture. We believe the successful implementation of our strategic priorities and the leveraging of our strong foundation of iconic global and local brands, an attractive global footprint, our market leadership in developed and emerging markets, our deep innovation, marketing and distribution capabilities, and our efficiency and sustainability efforts, will drive top- and bottom-line growth, enabling us to continue to create long-term value for our shareholders.
For more detailed information on our business and strategy, refer to Item 1, Business.
Recent Developments and Significant Items Affecting Comparability
Swiss and U.S. Tax Reform
On August 6, 2019, Switzerland published changes to its Federal tax law in the Official Federal Collection of Laws. On September 27, 2019, the Zurich Canton published their decision on the September 1, 2019 Zurich Canton public vote regarding the Cantonal changes associated with the Swiss Federal tax law change. The intent of these tax law changes was to replace certain preferential tax regimes with a new set of internationally accepted measures that are hereafter referred to as “Swiss tax reform”. Based on these Federal / Cantonal events, our position is the enactment of Swiss tax reform for U.S. GAAP purposes was met as of September 30, 2019, and we recorded the impacts in the third quarter 2019. The net impact was a benefit of $767 million, which consisted of a $769 million reduction in deferred tax expense from an allowed step-up of intangible assets for tax purposes and remeasurement of our deferred tax balances, partially offset by a $2 million indirect tax impact in selling, general and administrative expenses. The future rate impacts of these Swiss tax reform law changes are effective starting January 1, 2020. We will continue to monitor Swiss tax reform for any additional interpretative guidance that could result in changes to the amounts we have recorded.
On December 22, 2017, the United States enacted tax reform legislation ("U.S. tax reform") that included a broad range of business tax provisions, including but not limited to a reduction in the U.S. federal tax rate from 35% to 21%, as well as provisions that limit or eliminate various deductions or credits. The legislation causes certain U.S. allocated expenses (e.g. interest and general administrative expenses) to be taxed and imposes a tax on U.S. cross-border payments. Furthermore, the legislation included a one-time transition tax on accumulated foreign earnings and profits. While clarifying guidance was issued by the U.S. Treasury Department and Internal Revenue Service ("IRS") during 2018 and 2019, we continue to evaluate the impacts as additional guidance on implementing the legislation becomes available. The impact of adopting the new provisions was a discrete net tax expense of $5 million in 2019 and $19 million in 2018 and a discrete net tax benefit of $44 million in 2017.
Refer to Note 16, Income Taxes, for more information on our annual effective tax rates and Swiss and U.S. tax reform.
Multiemployer Pension Plan Withdrawal
In the United States, we contribute to multiemployer pension plans based on obligations arising from our collective
bargaining agreements. The most individually significant multiemployer plan we participated in prior to the second quarter of 2018 was the Bakery and Confectionery Union and Industry International Pension Fund (the "Fund"). Our obligation to contribute to the Fund arose with respect to 8 collective bargaining agreements covering most of our employees represented by the Bakery, Confectionery, Tobacco and Grain Millers Union ("BCTGM"). All of those collective bargaining agreements expired in 2016 and we continued to contribute to the Fund through 2018.
In 2018, we executed a complete withdrawal from the Fund and recorded a $429 million estimated withdrawal liability. On July 11, 2019, we received an undiscounted withdrawal liability assessment from the Fund totaling $526 million requiring pro-rata monthly payments over 20 years and we recorded a $35 million final adjustment to reduce our withdrawal liability as of June 30, 2019. We began making monthly payments during the third quarter of 2019. As of December 31, 2019, the remaining discounted withdrawal liability was $391 million, with $14 million recorded in other current liabilities and $377 million recorded in long-term other liabilities.
Adoption of New Lease Accounting Standard
As further described in Note 1, Summary of Significant Accounting Policies, we adopted the new lease accounting standard on January 1, 2019. The impact of adopting the standard included the initial recognition as of January 1, 2019, of $710 million of lease-related assets and $730 million of lease-related liabilities on our consolidated balance sheet. The transition method we elected for adoption required a cumulative effect adjustment to retained earnings as of January 1, 2019, which was not material. For additional information on leases, refer to Note 5, Leases.
Keurig Dr Pepper Transaction
On July 9, 2018, Keurig Green Mountain, Inc. ("Keurig") closed on its definitive merger agreement with Dr Pepper Snapple Group, Inc., and formed Keurig Dr Pepper Inc. (NYSE: "KDP"), a publicly traded company. Following the close of the transaction, our 24.2% investment in Keurig together with our shareholder loan receivable became a 13.8% investment in KDP. During 2018, we recorded a pre-tax gain of $778 million (or $586 million after-tax). Also, during the first quarter of 2019, we recognized a $23 million pre-tax gain related to the impact of a KDP acquisition that decreased our ownership interest from 13.8% to 13.6%. In connection with the KDP transaction, in the third quarter of 2018, we changed our accounting principle to reflect our share of Keurig's historical and KDP's ongoing earnings on a one-quarter lag basis for all periods presented while we continue to record dividends when cash is received. Refer to Note 7, Equity Method Investments, for additional information on KDP and the transaction.
Malware Incident
On June 27, 2017, a global malware incident impacted our business. The malware affected a significant portion of our global sales, distribution and financial networks. Following the incident, we executed business continuity and contingency plans to contain the impact, minimize damages and restore our systems environment. We also restored our main operating systems and processes and enhanced our system security. To date, we have not found, nor do we expect to find, any instances of Company or personal data released externally.
During 2017, we estimated the malware incident had a negative impact of 0.4% on our net revenue and Organic Net Revenue growth as we recognized the majority of delayed second quarter shipments in our third quarter 2017 results and we also permanently lost some revenue. We incurred total incremental expenses of $84 million predominantly during the second half of 2017 as part of the recovery effort. The recovery from the incident was largely resolved by the end of 2017 and we continued efforts to strengthen our security measures and enhance general information technology, business process and disclosure controls.
Summary of Results
| • | Net revenues were approximately $25.9 billion in both 2019 and 2018, a decrease of 0.3% in 2019 and an increase of 0.2% in 2018. In 2019, net revenues declined due to the impact of unfavorable currency translation and the impact of the divestiture of most of our cheese business in the Middle East and Africa. Net revenues were positively affected by higher net pricing and favorable volume/mix, as well as the acquisitions of a majority interest in Perfect Snacks in 2019 and a U.S. premium biscuit company, Tate's Bake Shop, in 2018. In 2018, net revenues grew due to higher net pricing and favorable volume/mix. Net revenues were also positively affected by the acquisition of Tate's Bake Shop. Net revenue growth was negatively affected by the impact of unfavorable currency translation and the impact of several business divestitures that occurred in 2017 which reduced net revenues in 2018 as compared to the prior year. |
| • | Organic Net Revenue increased 4.1% to $26.9 billion in 2019 and increased 2.4% to $26.1 billion in 2018. In both 2019 and 2018, Organic Net Revenue increased as a result of higher net pricing and favorable volume/mix. Organic Net Revenue is on a constant currency basis and excludes revenue from divestitures and acquisitions. We use Organic Net Revenue as it provides improved year-over-year comparability of our underlying operating results (see the definition of Organic Net Revenue and our reconciliation with net revenues within Non-GAAP Financial Measures appearing later in this section). |
| • | Diluted EPS attributable to Mondelēz International increased 16.2% to $2.65 in 2019 and increased 23.2% to $2.28 in 2018. Diluted EPS increased in 2019 primarily driven by the benefit from Swiss tax reform, lapping the prior-year impact from pension participation changes, operating gains, lower Simplify to Grow program costs, lapping the prior-year loss on debt extinguishment, fewer shares outstanding, a gain on divestiture, an increase in equity method investment earnings, lower interest expense and a benefit from current-year pension participation changes, partially offset by lapping the prior-year gain on equity method investment transactions, unfavorable currency translation, a loss related to interest rate swaps, the expense from the resolution of tax matters in 2019 and an unfavorable year-over-year change in mark-to-market impacts from currency and commodity derivatives. Diluted EPS increased in 2018 primarily driven by the after-tax gain on the KDP transaction, a favorable year-over-year change in mark-to-market impacts from currency and commodity derivatives, operating gains, lower costs incurred for the Simplify to Grow Program, fewer shares outstanding, lower taxes and increased equity method investment earnings, partially offset by the impact from pension participation changes, lapping the benefit from the resolution of tax matters and lapping a prior-year net gain on divestitures. See our Discussion and Analysis of Historical Results appearing later in this section for further details. |
| • | Adjusted EPS increased 2.1% to $2.47 in 2019 and increased 14.2% to $2.42 in 2018. On a constant currency basis, Adjusted EPS increased 8.3% to $2.62 in 2019 and increased 15.6% to $2.45 in 2018. For 2019, operating gains, fewer shares outstanding, increased equity method investment earnings, lower interest expense and lower taxes drove the Adjusted EPS growth. For 2018, operating gains, fewer shares outstanding, lower taxes, increased equity method investment earnings and lower interest expense drove the Adjusted EPS growth. Adjusted EPS and Adjusted EPS on a constant currency basis are non-GAAP financial measures. We use these measures as they provide improved year-over-year comparability of our underlying results (see the definition of Adjusted EPS and our reconciliation with diluted EPS within Non-GAAP Financial Measures appearing later in this section). |
Financial Outlook
We seek to achieve profitable, long-term growth and manage our business to attain this goal using our key operating metrics: Organic Net Revenue, Adjusted Operating Income and Adjusted EPS. We use these non-GAAP financial metrics and related computations, particularly growth in profit dollars, to evaluate and manage our business and to plan and make near-and long-term operating and strategic decisions. As such, we believe these metrics are useful to investors as they provide supplemental information in addition to our U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) financial results. We believe it is useful to provide investors with the same financial information that we use internally to make comparisons of our historical operating results, identify trends in our underlying operating results and evaluate our business. We believe our non-GAAP financial measures should always be considered in relation to our GAAP results. We have provided reconciliations between our GAAP and non-GAAP financial measures in Non-GAAP Financial Measures, which appears later in this section.
In addition to monitoring our key operating metrics, we monitor a number of developments and trends that could impact our revenue and profitability objectives.
Long-Term Demographics and Consumer Trends – Snack food consumption is highly correlated to GDP growth, urbanization of populations and rising discretionary income levels associated with a growing middle class, particularly in emerging markets. Snacking behavior is on the rise around the world according to the first annual “State of Snacking” report, commissioned by Mondelēz International and issued in November 2019, which summarizes the findings from interviews with thousands of consumers across 12 countries. A majority of adults, and an even higher percentage of Millennial consumers, indicated they prefer to eat small bites throughout the day as opposed to larger meals. The report concludes that consumer needs are evolving in response to busy modern lifestyles, the desire for community connections and a more holistic sense of well-being. Also, the way consumers snack and buy snacks around the world is diverse, with consumers purchasing snacks across evolving retail and digital landscapes. We expect these trends to continue and, in order to position ourselves for long-term growth, we are investing in our well-being and other snack offerings, product and marketing innovation and new routes to market including e-commerce.
Demand – We monitor consumer spending and our market share within the food and beverage categories in which we sell our products. Over the last three years, we have been seeing improvements in regional economic growth, consumer confidence and growth in our categories. However, geopolitical and economic uncertainties from time to time may continue to affect economic growth, consumer confidence and category growth. As part of our new strategic plan, we seek to drive category growth by offering snack innovations, leveraging our local and consumer-focused commercial approach, making investments in our brand and snacks portfolio, building strong routes to market in both emerging and developed markets and improving our position across multiple channels. We believe these actions will help drive demand in our categories and strengthen our positions across markets.
Volatility of Global Markets – Our growth strategy depends in part on our ability to expand our operations, including in emerging markets. Some emerging markets have greater political, economic and currency volatility and greater vulnerability to infrastructure and labor disruptions. Volatility in these markets affects demand for and the costs of our products and requires frequent changes in how we operate our business. See below for a discussion of Brexit as well as Argentina, which was designated a highly inflationary economy in 2018. In addition, the imposition of increased or new tariffs, quotas, trade barriers or similar restrictions on our sales or key commodities and potential changes in U.S. trade programs, trade relations, regulations, taxes or fiscal policies might negatively affect our sales or profitability. To help mitigate adverse effects of ongoing volatility across markets, we aim to protect profitability through the management of costs (including hedging) and pricing as well as targeted investments in our brands and new routes to market.
Coronavirus – We have been monitoring the outbreak of a new coronavirus that originated in China. We believe it could have a negative impact on our results in the short term and we are taking steps to protect our employees, consumers and business.
Competition – We operate in highly competitive markets that include global, regional and local competitors. Our advantaged geographic footprint, operating scale and portfolio of brands have all significantly contributed to building our market-leading positions across most of the product categories in which we sell. To grow and maintain our market positions, we focus on meeting consumer needs and preferences through a local-first commercial focus, new digital and other sales and marketing initiatives, product innovation and high standards of product quality. We
also continue to optimize our manufacturing and other operations and invest in our brands through ongoing research and development, advertising, marketing and consumer promotions.
Pricing – Our net revenue growth and profitability may be affected as we adjust prices to address new conditions. We adjust our product prices based on a number of variables including demand, the competitive environment and changes in our product input costs. We generally have increased prices in response to higher commodity costs, currency and other market factors. In 2020, we anticipate changing market conditions to continue to impact pricing. Price changes may affect net revenues or market share in the near term as the market adjusts to changes in input costs and other market conditions.
Operating Costs – Our operating costs include raw materials, labor, selling, general and administrative expenses, taxes, currency impacts and financing costs. We manage these costs through cost saving and productivity initiatives, sourcing and hedging programs, pricing actions, refinancing and tax planning. To remain competitive on our operating structure, we continue to work on programs to expand our profitability, such as our Simplify to Grow Program, which is designed to bring about significant reductions in our operating cost structure in both our supply chain and overhead costs.
Multiemployer pension plan – In 2018, we executed a complete withdrawal from the Fund and recorded a $429 million estimated withdrawal liability. On July 11, 2019, we received an undiscounted withdrawal liability assessment from the Fund totaling $526 million and we recorded a $35 million final adjustment to reduce our withdrawal liability at that time. During the third quarter of 2019, we began making monthly pro-rata payments on the 20-year obligation. As of December 31, 2019, the remaining discounted withdrawal liability was $391 million.
Taxes – During the third quarter of 2019, Swiss Federal and Zurich Cantonal tax events drove our recognition of a $767 million Swiss tax reform net benefit to our results of operations. The future tax rate impacts of the Swiss tax reform law changes became effective on January 1, 2020 and are not expected to have a material impact on our overall results of operations. We will continue to monitor Swiss tax reform for any additional interpretative guidance that could result in changes to the amounts we have recorded. In the United States, while the 2017 U.S. tax reform reduced the U.S. corporate tax rate and included some beneficial provisions, other provisions have, and in the future will have, an adverse effect on our results. We continue to evaluate the impacts as additional guidance on implementing the legislation becomes available. While additional guidance has been issued by the IRS and the U.S. Treasury Department, there are still some areas that may not be clarified for some time. Also, a number of U.S. states have not updated their laws to take into account the new federal legislation. As a result, there may be additional impacts of the new laws on our future results of operations and financial condition. It is possible that U.S. tax reform or related interpretations could change and have an adverse effect on us that could be material.
Currency – As a global company with 74.4% of our net revenues generated outside the United States, we are continually exposed to changes in global economic conditions and currency movements. While we hedge significant forecasted currency exchange transactions as well as currency translation impacts from certain net assets of our non-U.S. operations, including the United Kingdom, we cannot fully predict or eliminate all adverse impacts arising from changes in currency exchange rates on our consolidated financial results. To partially offset currency translation impacts arising from our overseas operations, we enter into net investment hedges primarily in the form of local currency-denominated debt, cross-currency swaps and other financial instruments. While we work to mitigate our exposure to currency risks, factors such as continued global and local market volatility, actions by foreign governments, political uncertainty, limited hedging opportunities and other factors could lead to unfavorable currency impacts in the future and could adversely affect our results of operations or financial position. See additional discussion of Brexit and Argentina below and refer also to Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting, and Note 10, Financial Instruments, for additional information on how we manage currency and related risks. As currency movements can make comparison of year-over-year operating performance challenging, we isolate the impact of currency and also report growth on a constant currency basis, holding prior-year currency exchange rates constant, so that prior-year and current-year results can be compared on a consistent basis.
Brexit – On January 31, 2020, the United Kingdom began the withdrawal process from the European Union under the European and U.K. Parliament approved Withdrawal Agreement. During a transition period currently scheduled to end on December 31, 2020, the United Kingdom will effectively remain in the E.U.’s customs union and single market while a trade deal with the European Union is negotiated. The deadline for extending the transition period ends on June 30, 2020. If the transition period is not extended, on December 31, 2020, the United Kingdom will either exit the European Union without a trade deal or will begin a new trade relationship with the European Union.
During the transition period, we continue to take protective measures in response to the potential impacts on our results of operations and financial condition. Our exposure to disruptions to our supply chain, the imposition of tariffs and currency devaluation in the United Kingdom could result in a material impact to our consolidated revenue, earnings and cash flow. In 2019, we generated 8.6% of our net revenues in the United Kingdom and our supply chain in this market relies on imports of raw and packaging materials as well as finished goods. Following the Brexit vote in June 2016, there was significant volatility in the global stock markets and currency exchange rates. The value of the British pound sterling relative to the U.S. dollar declined significantly and negatively affected our translated results reported in U.S. dollars. The volatility in foreign currencies and other markets is expected to continue as the United Kingdom executes its exit from the European Union. If the U.K.'s membership in the European Union terminates without trade and other cross-border operating agreements, there could be increased costs from re-imposition of tariffs on trade between the United Kingdom and other countries, including those in the European Union, shipping delays because of the need for customs inspections and procedures and shortages of certain goods. The United Kingdom will also need to negotiate its own tax and trade treaties with countries all over the world, which could take years to complete. If the ultimate terms of the U.K.’s separation from the European Union negatively impact the U.K. economy or result in disruptions to sales or our supply chain, the impact to our results of operations and financial condition could be material. We have taken measures to increase our resources in customer service & logistics together with increasing our inventory levels of imported raw materials, packaging and finished goods in the United Kingdom to help us manage through the Brexit transition and the inherent risks. Resulting impacts and market volatility can vary significantly depending on the final terms of the U.K.’s exit from the European Union.
Argentina – as further discussed in Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting, on July 1, 2018, we began to apply highly inflationary accounting for our Argentinean subsidiaries. As a result, we recorded a remeasurement gain of $4 million in 2019 and a remeasurement loss of $11 million in 2018 within selling, general and administrative expenses related to the revaluation of the Argentinean peso denominated net monetary position over these periods. The mix of monetary assets and liabilities and the exchange rate to convert Argentinean pesos to U.S. dollars could change over time, so it is difficult to predict the overall impact of the Argentina highly inflationary accounting on future net earnings.
Financing Costs – We regularly evaluate our variable and fixed-rate debt. We continue to use low-cost, short- and long-term debt to finance our ongoing working capital, capital expenditures and other investments, dividends and share repurchases. Our weighted-average interest rate on our total debt as of December 31, 2019 was 2.2%, down from 2.3% as of December 31, 2018 and up from 2.1% as of December 31, 2017, primarily reflecting changes in our interest rates on commercial paper borrowings over these periods. We continue to use interest rate swaps and other financial instruments to manage our exposure to interest rate and cash flow variability, protect the value of our existing currency assets and liabilities and protect the value of our debt. We also enter into cross-currency interest rate swaps and forwards to hedge our non-U.S. net investments against adverse movements in exchange rates. Our net investment hedge derivative contracts have had and are expected to have a favorable impact and reduce some of the financing costs and related currency impacts within our interest costs. Refer to Note 9, Debt and Borrowing Arrangements, and Note 10, Financial Instruments, for additional information on our debt and derivative activity.
Cybersecurity Risks – In 2017, the malware incident impacted our operating systems and results. We continue to devote focused resources to network security, backup and disaster recovery, enhanced training and other security measures to protect our systems and data. We also focus on enhancing the monitoring and detection of threats in our environment, including but not limited to the manufacturing environment and operational technologies, as well as adjusting information security controls based on updated threats. While we have taken a number of security measures to protect our systems and data, security measures cannot provide absolute certainty or guarantee that we will be successful in preventing or responding to every breach or disruption on a timely basis.
Discussion and Analysis of Historical Results
Items Affecting Comparability of Financial Results
The following table includes significant income or (expense) items that affected the comparability of our results of operations and our effective tax rates. Please refer to the notes to the consolidated financial statements indicated below for more information. Refer also to the Consolidated Results of Operations – Net Earnings and Earnings per Share Attributable to Mondelēz International table for the after-tax per share impacts of these items.
| For the Years Ended December 31, | |||||||||||||
| See Note | 2019 | 2018 | 2017 | ||||||||||
| (in millions, except percentages) | |||||||||||||
| Simplify to Grow Program | Note 8 | ||||||||||||
| Restructuring Charges | $ | (176 | ) | $ | (316 | ) | $ | (535 | ) | ||||
| Implementation Charges | (272 | ) | (315 | ) | (257 | ) | |||||||
| Intangible asset impairment charges | Note 6 | (57 | ) | (68 | ) | (109 | ) | ||||||
| Mark-to-market gains/(losses) from derivatives (1) | Note 10 | 90 | 142 | (96 | ) | ||||||||
| Malware incident incremental expenses | — | — | (84 | ) | |||||||||
| Acquisition and divestiture-related costs | Note 2 | ||||||||||||
| Acquisition integration costs | — | (3 | ) | (3 | ) | ||||||||
| Acquisition-related costs | (3 | ) | (13 | ) | — | ||||||||
| Divestiture-related costs | (6 | ) | 1 | (34 | ) | ||||||||
| Net gain on divestitures | 44 | — | 186 | ||||||||||
| Remeasurement of net monetary position | 4 | (11 | ) | — | |||||||||
| Impact from pension participation changes (1) | Note 11 | 29 | (429 | ) | — | ||||||||
| Impact from resolution of tax matters | Note 14 | (85 | ) | 11 | 281 | ||||||||
| CEO transition remuneration (2) | (9 | ) | (22 | ) | (14 | ) | |||||||
| (Loss)/gain related to interest rate swaps | Note 9 & 10 | (111 | ) | 10 | — | ||||||||
| Loss on debt extinguishment | Note 9 | — | (140 | ) | (11 | ) | |||||||
| Swiss tax reform net impacts | Note 16 | 767 | — | — | |||||||||
| U.S. tax reform discrete net tax impacts | Note 16 | (5 | ) | (19 | ) | 44 | |||||||
| Net (loss)/gain on equity method investment transactions (3) | Note 7 | (2 | ) | 778 | 40 | ||||||||
| Equity method investee acquisition-related and other (charges)/benefits (4) | (61 | ) | 54 | (69 | ) | ||||||||
| Effective tax rate | Note 16 | 0.1 | % | 27.2 | % | 21.3 | % |
| (1) | Includes impacts recorded in operating income and interest expense and other, net. |
| (2) | Please see the Non-GAAP Financial Measures section at the end of this item for additional information. |
| (3) | The net gain/(loss) on equity method investment transactions is recorded outside pre-tax operating results on the consolidated statement of earnings. |
| (4) | Amount for 2018 primarily relates to a deferred tax benefit Keurig recorded as a result of U.S. tax reform. |
Consolidated Results of Operations
The following discussion compares our consolidated results of operations for 2019 with 2018 and 2018 with 2017.
2019 compared with 2018
| For the Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | $ change | % change | |||||||||||
| (in millions, except per share data) | ||||||||||||||
| Net revenues | $ | 25,868 | $ | 25,938 | $ | (70 | ) | (0.3 | )% | |||||
| Operating income | 3,843 | 3,312 | 531 | 16.0 | % | |||||||||
| Earnings from continuing operations | 3,885 | 3,395 | 490 | 14.4 | % | |||||||||
| Net earnings attributable to Mondelēz International | 3,870 | 3,381 | 489 | 14.5 | % | |||||||||
| Diluted earnings per share attributable to Mondelēz International | 2.65 | 2.28 | 0.37 | 16.2 | % |
Net Revenues – Net revenues decreased $70 million (0.3%) to $25,868 million in 2019, and Organic Net Revenue (1) increased $1,067 million (4.1%) to $26,879 million. Emerging markets net revenues increased 0.2%, including an unfavorable currency impact, and emerging markets Organic Net Revenue increased 7.7%. The underlying changes in net revenues and Organic Net Revenue are detailed below:
| 2019 | ||
| Change in net revenues (by percentage point) | ||
| Total change in net revenues | (0.3 | )% |
| Add back the following items affecting comparability: | ||
| Unfavorable currency | 4.5 | pp |
| Impact of divestiture | 0.3 | pp |
| Impact of acquisitions | (0.4 | )pp |
| Total change in Organic Net Revenue (1) | 4.1 | % |
| Higher net pricing | 2.2 | pp |
| Favorable volume/mix | 1.9 | pp |
| (1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
Net revenue decrease of 0.3% was driven by unfavorable currency and the impact of a divestiture, partially offset by our underlying Organic Net Revenue growth of 4.1% and the impact of acquisitions. Unfavorable currency impacts decreased net revenues by $1,154 million, due primarily to the strength of the U.S. dollar relative to most currencies, including the Argentinean peso, euro, Brazilian real, British pound sterling, Australian dollar, Chinese yuan, Indian rupee, Turkish lira and South African rand. The impact of the divestiture of most of our cheese business in the Middle East and Africa on May 28, 2019 resulted in a year-over-year decline in net revenues of $71 million. Our underlying Organic Net Revenue growth was driven by higher net pricing and favorable volume/mix. Net pricing was up, which includes the benefit of carryover pricing from 2018 as well as the effects of input cost-driven pricing actions taken during 2019. Higher net pricing was reflected in Latin America, North America and AMEA as net pricing in Europe was flat. Favorable volume/mix was reflected in Europe and AMEA, partially offset by unfavorable volume/mix in Latin America and North America. The July 16, 2019 acquisition of a majority interest in Perfect Snacks added net revenues of $53 million and the June 7, 2018 acquisition of Tate’s Bake Shop added incremental net revenues of $35 million in 2019. Refer to Note 2, Divestitures and Acquisitions, for more information.
Operating Income – Operating income increased $531 million (16.0%) to $3,843 million in 2019, Adjusted Operating Income (1) decreased $38 million (0.9%) to $4,264 million and Adjusted Operating Income on a constant currency basis (1) increased $189 million (4.4%) to $4,491 million due to the following:
| Operating Income | Change | ||||||
| (in millions) | |||||||
| Operating Income for the Year Ended December 31, 2018 | $ | 3,312 | |||||
| Simplify to Grow Program (2) | 626 | ||||||
| Intangible asset impairment charges (3) | 68 | ||||||
| Mark-to-market gains from derivatives (4) | (141 | ) | |||||
| Acquisition integration costs (5) | 3 | ||||||
| Acquisition-related costs (6) | 13 | ||||||
| Divestiture-related costs (6) | (1 | ) | |||||
| Operating income from divestitures (6) | (19 | ) | |||||
| Remeasurement of net monetary position (7) | 11 | ||||||
| Impact from pension participation changes (8) | 423 | ||||||
| Impact from resolution of tax matters (9) | (15 | ) | |||||
| CEO transition remuneration (1) | 22 | ||||||
| Adjusted Operating Income (1) for the Year Ended December 31, 2018 | $ | 4,302 | |||||
| Higher net pricing | 576 | ||||||
| Higher input costs | (340 | ) | |||||
| Favorable volume/mix | 140 | ||||||
| Higher selling, general and administrative expenses | (173 | ) | |||||
| VAT-related settlements | (32 | ) | |||||
| Impact from acquisitions (6) | 6 | ||||||
| Other | 12 | ||||||
| Total change in Adjusted Operating Income (constant currency) (1) | 189 | 4.4 | % | ||||
| Unfavorable currency translation | (227 | ) | |||||
| Total change in Adjusted Operating Income (1) | (38 | ) | (0.9 | )% | |||
| Adjusted Operating Income (1) for the Year Ended December 31, 2019 | $ | 4,264 | |||||
| Simplify to Grow Program (2) | (442 | ) | |||||
| Intangible asset impairment charges (3) | (57 | ) | |||||
| Mark-to-market gains from derivatives (4) | 91 | ||||||
| Acquisition-related costs (6) | (3 | ) | |||||
| Divestiture-related costs (6) | (6 | ) | |||||
| Operating income from divestiture (6) | 9 | ||||||
| Net gain on divestiture (6) | 44 | ||||||
| Remeasurement of net monetary position (7) | 4 | ||||||
| Impact from pension participation changes (8) | 35 | ||||||
| Impact from resolution of tax matters (9) | (85 | ) | |||||
| CEO transition remuneration (1) | (9 | ) | |||||
| Swiss tax reform impact (10) | (2 | ) | |||||
| Operating Income for the Year Ended December 31, 2019 | $ | 3,843 | 16.0 | % |
| (1) | Refer to the Non-GAAP Financial Measures section at the end of this item. |
| (2) | Refer to Note 8, Restructuring Program*,* for more information. |
| (3) | Refer to Note 6, Goodwill and Intangible Assets*,* for more information on intangible asset impairments. |
| (4) | Refer to Note 10, Financial Instruments, Note 18, Segment Reporting, and Non-GAAP Financial Measures section at the end of this item for more information on the unrealized gains/losses on commodity and forecasted currency transaction derivatives. |
| (5) | Refer to our Annual Report on Form 10-K for the year ended December 31, 2018 for more information on the acquisition of a biscuit business in Vietnam. |
(6) Refer to Note 2, Divestitures and Acquisitions, for more information on the July 16, 2019 acquisition of a majority interest in Perfect Snacks, the May 28, 2019 divestiture of most of our cheese business in the Middle East and Africa and the June 7, 2018 acquisition of Tate's Bake Shop.
| (7) | Refer to Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting, for information on our application of highly inflationary accounting for Argentina. |
| (8) | Refer to Note 11, Benefit Plans, for more information. |
| (9) | Refer to Note 14, Commitments and Contingencies – Tax Matters, for more information. |
(10) Refer to Note 16, Income Taxes, for more information on Swiss tax reform.
During 2019, we realized higher net pricing, which was partially offset by increased input costs. Higher net pricing, which included the carryover impact of pricing actions taken in 2018 as well as the effects of input cost-driven pricing actions taken during 2019, was reflected in Latin America, North America and AMEA as net pricing in Europe was flat. The increase in input costs was driven by higher raw material costs, partially offset by lower manufacturing costs due to productivity efforts. Higher raw material costs were in part due to higher currency exchange transaction costs on imported materials, as well as higher packaging, energy, dairy, grains, cocoa and oils costs, partially offset by lower costs for sugar and nuts. Favorable volume/mix was driven by Europe and AMEA, which was partially offset by unfavorable volume/mix in Latin America and North America.
Total selling, general and administrative expenses decreased $339 million from 2018, due to a number of factors noted in the table above, including in part, the lapping of the prior-year impact from pension participation changes, favorable currency impact, the benefit from current-year pension participation changes, favorable change in remeasurement on net monetary position in Argentina (remeasurement gain in 2019 as compared to a remeasurement loss in 2018), the lapping of a prior-year expense from the resolution of a tax matter, lower CEO transition remuneration and lower acquisition-related costs. These decreases were partially offset by the expenses from the resolution of tax matters in 2019, higher implementation costs incurred for the Simplify to Grow program, the impact of acquisitions, the lapping of a benefit from a prior-year value-added tax (“VAT”) related settlement, a VAT cost settlement in 2019 and higher divestiture-related costs. Excluding these factors, selling, general and administrative expenses increased $173 million from 2018. The increase was driven primarily by higher overheads reflecting route-to-market investments and higher advertising and consumer promotion costs.
We recorded an expense of $11 million from a VAT-related settlement in Latin America in 2019 and a benefit of $21 million from a VAT-related settlement in Latin America in 2018. Unfavorable currency changes decreased operating income by $227 million due primarily to the strength of the U.S. dollar relative to most currencies, including the euro, Argentinean peso, British pound sterling, Brazilian real, Australian dollar, Chinese yuan and Indian rupee.
Operating income margin increased from 12.8% in 2018 to 14.9% in 2019. The increase in operating income margin was driven primarily by the lapping of the prior-year impact from pension participation changes, lower Simplify to Grow Program costs, a gain on divestiture, the benefit from current-year pension participation changes, the lapping of a prior-year expense from the resolution of a tax matter and lower CEO transition remuneration, partially offset by the expenses from the resolution of tax matters in 2019 and the year-over-year unfavorable change in mark-to-market gains/(losses) from currency and commodity hedging activities. Adjusted Operating Income margin decreased from 16.7% in 2018 to 16.5% in 2019. The decrease in Adjusted Operating Income margin was driven primarily by higher raw material costs, mostly offset by higher pricing and lower manufacturing costs.
Net Earnings and Earnings per Share Attributable to Mondelēz International – Net earnings attributable to Mondelēz International of $3,870 million increased by $489 million (14.5%) in 2019. Diluted EPS attributable to Mondelēz International was $2.65 in 2019, up $0.37 (16.2%) from 2018. Adjusted EPS (1) was $2.47 in 2019, up $0.05 (2.1%) from 2018. Adjusted EPS on a constant currency basis (1) was $2.62 in 2019, up $0.20 (8.3%) from 2018.
| Diluted EPS | |||
| Diluted EPS Attributable to Mondelēz International for the Year Ended December 31, 2018 | $ | 2.28 | |
| Simplify to Grow Program (2) | 0.32 | ||
| Intangible asset impairment charges (2) | 0.03 | ||
| Mark-to-market gains from derivatives (2) | (0.09 | ) | |
| Acquisition integration costs (2) | — | ||
| Acquisition-related costs (2) | 0.01 | ||
| Divestiture-related costs (2) | — | ||
| Net earnings from divestitures (2) | (0.01 | ) | |
| Remeasurement of net monetary position (2) | 0.01 | ||
| Impact from pension participation changes (2) | 0.22 | ||
| Impact from resolution of tax matters (2) | (0.01 | ) | |
| CEO transition remuneration (2) | 0.01 | ||
| Net gain related to interest rate swaps (3) | (0.01 | ) | |
| Loss on debt extinguishment (4) | 0.07 | ||
| U.S. tax reform discrete net tax expense (5) | 0.01 | ||
| Gain on equity method investment transaction (6) | (0.39 | ) | |
| Equity method investee acquisition-related and other charges/(benefits) (7) | (0.03 | ) | |
| Adjusted EPS (1) for the Year Ended December 31, 2018 | $ | 2.42 | |
| Increase in operations | 0.11 | ||
| Increase in equity method investment net earnings | 0.02 | ||
| VAT-related settlements | (0.01 | ) | |
| Changes in interest and other expense, net (8) | 0.02 | ||
| Changes in income taxes (9) | 0.01 | ||
| Changes in shares outstanding (10) | 0.05 | ||
| Adjusted EPS (constant currency) (1) for the Year Ended December 31, 2019 | $ | 2.62 | |
| Unfavorable currency translation | (0.15 | ) | |
| Adjusted EPS (1) for the Year Ended December 31, 2019 | $ | 2.47 | |
| Simplify to Grow Program (2) | (0.24 | ) | |
| Intangible asset impairment charges (2) | (0.03 | ) | |
| Mark-to-market gains from derivatives (2) | 0.05 | ||
| Divestiture-related costs (2) | (0.01 | ) | |
| Net earnings from divestiture (2) | 0.01 | ||
| Net gain on divestiture (2) | 0.03 | ||
| Impact from pension participation changes (2) | 0.02 | ||
| Impact from resolution of tax matters (2) | (0.05 | ) | |
| CEO transition remuneration (2) | (0.01 | ) | |
| Loss related to interest rate swaps (3) | (0.08 | ) | |
| Swiss tax reform net impacts (5) | 0.53 | ||
| U.S. tax reform discrete net tax expense (5) | — | ||
| Net loss on equity method investment transactions (6) | (0.01 | ) | |
| Equity method investee acquisition-related and other (charges)/benefits (7) | (0.03 | ) | |
| Diluted EPS Attributable to Mondelēz International for the Year Ended December 31, 2019 | $ | 2.65 |
| (1) | Refer to the Non-GAAP Financial Measures section appearing later in this section. |
| (2) | See the Operating Income table above and the related footnotes for more information. |
| (3) | Refer to Note 10, Financial Instruments, for information on interest rate swaps no longer designated as cash flow hedges. |
| (4) | Refer to Note 9, Debt and Borrowing Arrangements, for more information on losses on debt extinguishment. |
| (5) | Refer to Note 16, Income Taxes, for more information on the impacts of U.S. and Swiss tax reform. |
| (6) | Refer to Note 7, Equity Method Investments*,* for more information on the gain and net loss on equity method investment transactions. |
| (7) | Includes our proportionate share of unusual or infrequent items, such as acquisition and divestiture-related costs, restructuring program costs and discrete U.S. tax reform impacts recorded by our JDE and Keurig equity method investees. |
| (8) | Excludes the currency impact on interest expense related to our non-U.S. dollar-denominated debt which is included in currency translation. |
| (9) | Refer to Note 16, Income Taxes, for more information on the items affecting income taxes. |
(10) Refer to Note 12, Stock Plans, for more information on our equity compensation programs and share repurchase program and Note 17, Earnings per Share, for earnings per share weighted-average share information.
2018 compared with 2017
| For the Years Ended December 31, | ||||||||||||||
| 2018 | 2017 | $ change | % change | |||||||||||
| (in millions, except per share data) | ||||||||||||||
| Net revenues | $ | 25,938 | $ | 25,896 | $ | 42 | 0.2 | % | ||||||
| Operating income | 3,312 | 3,462 | (150 | ) | (4.3 | )% | ||||||||
| Earnings from continuing operations | 3,395 | 2,842 | 553 | 19.5 | % | |||||||||
| Net earnings attributable to Mondelēz International | 3,381 | 2,828 | 553 | 19.6 | % | |||||||||
| Diluted earnings per share attributable to Mondelēz International | 2.28 | 1.85 | 0.43 | 23.2 | % |
Net Revenues – Net revenues increased $42 million (0.2%) to $25,938 million in 2018, and Organic Net Revenue (1) increased $609 million (2.4%) to $26,103 million. Emerging markets net revenues decreased 0.5%, including an unfavorable currency impact, and emerging markets Organic Net Revenue increased 5.9%. The underlying changes in net revenues and Organic Net Revenue are detailed below:
| 2018 | ||
| Change in net revenues (by percentage point) | ||
| Total change in net revenues | 0.2 | % |
| Add back the following items affecting comparability: | ||
| Unfavorable currency | 1.4 | pp |
| Impact of acquisition | (0.2 | )pp |
| Impact of divestitures | 1.0 | pp |
| Total change in Organic Net Revenue (1) | 2.4 | % |
| Higher net pricing | 1.3 | pp |
| Favorable volume/mix | 1.1 | pp |
| (1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
Net revenue increase of 0.2% was driven by our underlying Organic Net Revenue growth of 2.4% and the impact of an acquisition, mostly offset by unfavorable currency and the impact of divestitures. Our underlying Organic Net Revenue growth was driven by higher net pricing and favorable volume/mix. Net pricing was up, which includes the benefit of carryover pricing from 2017 as well as the effects of input cost-driven pricing actions taken during 2018. Higher net pricing was reflected in Latin America, AMEA and North America, partially offset by lower net pricing in Europe. Favorable volume/mix was reflected in Europe and AMEA, partially offset by unfavorable volume/mix in Latin America and North America. The June 7, 2018 acquisition of a U.S. premium biscuit company, Tate’s Bake Shop, added net revenues of $52 million in 2018. Unfavorable currency impacts decreased net revenues by $343 million, due primarily to the strength of the U.S. dollar relative to several other currencies, including the Argentinean peso, Brazilian real, Russian ruble, Indian rupee and Turkish lira, partially offset by the strength of several currencies relative to the U.S. dollar, including the euro, British pound sterling and Chinese yuan. Businesses divested in 2019 and 2017 resulted in a decline in net revenues of $276 million. Refer to Note 2, Divestitures and Acquisitions, for more information.
Operating Income – Operating income decreased $150 million (4.3%) to $3,312 million in 2018, Adjusted Operating Income (1) increased $214 million (5.2%) to $4,302 million and Adjusted Operating Income on a constant currency basis (1) increased $269 million (6.6%) to $4,357 million due to the following:
| Operating Income | Change | ||||||
| (in millions) | |||||||
| Operating Income for the Year Ended December 31, 2017 | $ | 3,462 | |||||
| Simplify to Grow Program (2) | 777 | ||||||
| Intangible asset impairment charges (3) | 109 | ||||||
| Mark-to-market losses from derivatives (4) | 96 | ||||||
| Malware incident incremental expenses | 84 | ||||||
| Acquisition integration costs (5) | 3 | ||||||
| Divestiture-related costs (6) | 31 | ||||||
| Operating income from divestitures (6) | (92 | ) | |||||
| Net gain on divestitures (6) | (186 | ) | |||||
| Impact from resolution of tax matters (7) | (209 | ) | |||||
| CEO transition remuneration (1) | 14 | ||||||
| Other/rounding | (1 | ) | |||||
| Adjusted Operating Income (1) for the Year Ended December 31, 2017 | $ | 4,088 | |||||
| Higher net pricing | 322 | ||||||
| Higher input costs | (26 | ) | |||||
| Favorable volume/mix | 48 | ||||||
| Higher selling, general and administrative expenses | (75 | ) | |||||
| VAT-related settlement in 2018 | 21 | ||||||
| Property insurance recovery in 2017 | (27 | ) | |||||
| Impact from acquisition (6) | 7 | ||||||
| Other | (1 | ) | |||||
| Total change in Adjusted Operating Income (constant currency) (1) | 269 | 6.6 | % | ||||
| Unfavorable currency translation | (55 | ) | |||||
| Total change in Adjusted Operating Income (1) | 214 | 5.2 | % | ||||
| Adjusted Operating Income (1) for the Year Ended December 31, 2018 | $ | 4,302 | |||||
| Simplify to Grow Program (2) | (626 | ) | |||||
| Intangible asset impairment charges (3) | (68 | ) | |||||
| Mark-to-market gains from derivatives (4) | 141 | ||||||
| Acquisition integration costs (5) | (3 | ) | |||||
| Acquisition-related costs (6) | (13 | ) | |||||
| Divestiture-related costs (6) | 1 | ||||||
| Operating income from divestitures (6) | 19 | ||||||
| Remeasurement of net monetary position (8) | (11 | ) | |||||
| Impact from pension participation changes (9) | (423 | ) | |||||
| Impact from resolution of tax matters (7) | 15 | ||||||
| CEO transition remuneration (1) | (22 | ) | |||||
| Operating Income for the Year Ended December 31, 2018 | $ | 3,312 | (4.3 | )% |
| (1) | Refer to the Non-GAAP Financial Measures section at the end of this item. |
| (2) | Refer to Note 8, Restructuring Program*,* for more information. |
| (3) | Refer to Note 6, Goodwill and Intangible Assets*,* for more information on intangible asset impairments. |
| (4) | Refer to Note 10, Financial Instruments, Note 18, Segment Reporting, and Non-GAAP Financial Measures section at the end of this item for more information on the unrealized gains/losses on commodity and forecasted currency transaction derivatives. |
| (5) | Refer to our Annual Report on Form 10-K for the year ended December 31, 2018 for more information on the acquisition of a biscuit business in Vietnam. |
| (6) | Refer to Note 2, Divestitures and Acquisitions, for more information on the June 7, 2018 acquisition of Tate's Bake Shop and 2019 and 2017 divestitures. |
| (7) | Refer to Note 14, Commitments and Contingencies – Tax Matters, for more information. |
| (8) | Refer to Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting, for information on our application of highly inflationary accounting for Argentina. |
| (9) | Refer to Note 11, Benefit Plans, for more information. |
During 2018, we realized higher net pricing, which was partially offset by increased input costs. Higher net pricing, which included the carryover impact of pricing actions taken in 2017 as well as the effects of input cost-driven pricing actions taken during 2018, was reflected across all regions except Europe. The increase in input costs was driven by higher raw material costs, mostly offset by lower manufacturing costs due to productivity efforts. Higher raw material costs were primarily due to higher currency exchange transaction costs on imported materials, as well as higher packaging, dairy and energy, partially offset primarily by lower cocoa costs. Favorable volume/mix was driven by Europe and AMEA, which was partially offset by unfavorable volume/mix in North America and Latin America.
Total selling, general and administrative expenses increased $537 million from 2017, due to a number of factors noted in the table above, including in part, the impact from pension participation changes, lapping of prior-year benefits from the resolution of tax matters, lapping of a prior-year property insurance recovery, acquisition-related costs, remeasurement of net monetary position in Argentina, the impact of an acquisition and higher CEO transition remuneration. The increases were partially offset by favorable currency impact, lower implementation costs incurred for the Simplify to Grow Program, lower divestiture-related costs, the lapping of prior-year malware incident incremental costs, a VAT related settlement in 2018, the impact of divestitures and the net benefit from the resolution of tax matters in 2018. Excluding these factors, selling, general and administrative expenses increased $75 million from 2017. The increase was driven by the year-over year net unfavorable change in miscellaneous other income and expense items within selling, general and administrative expenses and higher overhead costs, which more than offset lower advertising and consumer promotion costs.
We recorded a benefit of $21 million from a VAT-related settlement in Latin America in 2018. We recorded a benefit of $27 million from an insurance recovery in AMEA in 2017. Unfavorable currency changes decreased operating income by $55 million due primarily to the strength of the U.S. dollar relative to several currencies, including the Brazilian real, Argentinean peso, Russian ruble and Turkish lira, partially offset by the strength of several currencies relative to the U.S. dollar, including the euro and British pound sterling.
Operating income margin decreased from 13.4% in 2017 to 12.8% in 2018. The decrease in operating income margin was driven by the impact from pension participation changes, the lapping of prior-year benefits from the resolution of tax matters, the lapping of a prior-year gain on divestiture and higher CEO transition remuneration. These unfavorable items were partially offset by the year-over-year favorable change in mark-to-market gains/(losses) from currency and commodity hedging activities, lower Simplify to Grow Program costs, an increase in our Adjusted Operating Income margin, the lapping of prior-year malware incident incremental costs, lower divestiture-related costs and lower intangible asset impairment charges. Adjusted Operating Income margin increased from 16.0% in 2017 to 16.7% in 2018. The increase in Adjusted Operating Income margin was driven primarily by higher net pricing, lower manufacturing costs due to continued cost reduction efforts and lower advertising and consumer promotion costs, partially offset by higher raw material costs.
Net Earnings and Earnings per Share Attributable to Mondelēz International – Net earnings attributable to Mondelēz International of $3,381 million increased by $553 million (19.6%) in 2018. Diluted EPS attributable to Mondelēz International was $2.28 in 2018, up $0.43 (23.2%) from 2017. Adjusted EPS (1) was $2.42 in 2018, up $0.30 (14.2%) from 2017. Adjusted EPS on a constant currency basis (1) was $2.45 in 2018, up $0.33 (15.6%) from 2017.
| Diluted EPS | |||
| Diluted EPS Attributable to Mondelēz International for the Year Ended December 31, 2017 | $ | 1.85 | |
| Simplify to Grow Program (2) | 0.39 | ||
| Intangible asset impairment charges (2) | 0.05 | ||
| Mark-to-market losses from derivatives (2) | 0.06 | ||
| Malware incident incremental expenses | 0.04 | ||
| Acquisition integration costs (2) | — | ||
| Divestiture-related costs (2) | 0.02 | ||
| Net earnings from divestitures (2) | (0.05 | ) | |
| Net gain on divestitures (2) | (0.11 | ) | |
| Impact from resolution of tax matters (2) | (0.13 | ) | |
| CEO transition remuneration (2) | 0.01 | ||
| U.S. tax reform discrete net tax benefit (3) | (0.03 | ) | |
| Gain on equity method investment transaction (4) | (0.02 | ) | |
| Equity method investee acquisition-related and other charges/(benefits) (5) | 0.04 | ||
| Adjusted EPS (1) for the Year Ended December 31, 2017 | $ | 2.12 | |
| Increase in operations | 0.13 | ||
| Increase in equity method investment net earnings | 0.05 | ||
| VAT-related settlements in 2018 | 0.01 | ||
| Property insurance recovery in 2017 | (0.01 | ) | |
| Impact from acquisition (2) | — | ||
| Changes in interest and other expense, net (6) | 0.02 | ||
| Changes in income taxes (7) | 0.06 | ||
| Changes in shares outstanding (8) | 0.07 | ||
| Adjusted EPS (constant currency) (1) for the Year Ended December 31, 2018 | $ | 2.45 | |
| Unfavorable currency translation | (0.03 | ) | |
| Adjusted EPS (1) for the Year Ended December 31, 2018 | $ | 2.42 | |
| Simplify to Grow Program (2) | (0.32 | ) | |
| Intangible asset impairment charges (2) | (0.03 | ) | |
| Mark-to-market gains from derivatives (2) | 0.09 | ||
| Acquisition integration costs (2) | — | ||
| Acquisition-related costs (2) | (0.01 | ) | |
| Divestiture-related costs (2) | — | ||
| Net earnings from divestitures (2) | 0.01 | ||
| Remeasurement of net monetary position (2) | (0.01 | ) | |
| Impact from pension participation changes (2) | (0.22 | ) | |
| Impact from resolution of tax matters (2) | 0.01 | ||
| CEO transition remuneration (2) | (0.01 | ) | |
| Net gain related to interest rate swaps (9) | 0.01 | ||
| Loss on debt extinguishment (10) | (0.07 | ) | |
| U.S. tax reform discrete net tax expense (3) | (0.01 | ) | |
| Gain on equity method investment transaction (4) | 0.39 | ||
| Equity method investee acquisition-related and other (charges)/benefits (5) | 0.03 | ||
| Diluted EPS Attributable to Mondelēz International for the Year Ended December 31, 2018 | $ | 2.28 |
| (1) | Refer to the Non-GAAP Financial Measures section appearing later in this section. |
| (2) | See the Operating Income table above and the related footnotes for more information. |
| (3) | Refer to Note 16, Income Taxes, for more information on the impact of the U.S. tax reform. |
| (4) | Refer to Note 7, Equity Method Investments*,* for more information on the KDP transaction in 2018 and the 2017 sale of an interest in one of our equity method investments. |
| (5) | Includes our proportionate share of unusual or infrequent items, such as acquisition and divestiture-related costs, restructuring program costs and discrete U.S. tax reform impacts recorded by our JDE and Keurig equity method investees. |
| (6) | Excludes the currency impact on interest expense related to our non-U.S. dollar-denominated debt which is included in currency translation. |
| (7) | Refer to Note 16, Income Taxes, for more information on the items affecting income taxes. |
| (8) | Refer to Note 12, Stock Plans, for more information on our equity compensation programs and share repurchase program and Note 17, Earnings per Share, for earnings per share weighted-average share information. |
| (9) | Refer to Note 10, Financial Instruments, for information on interest rate swaps no longer designated as cash flow hedges. |
(10) Refer to Note 9, Debt and Borrowing Arrangements, for more information on losses on debt extinguishment.
Results of Operations by Operating Segment
Our operations and management structure are organized into four operating segments:
| • | Latin America |
| • | AMEA |
| • | Europe |
| • | North America |
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 across our key markets. Our regional management teams have responsibility for the business, product categories and financial results in the regions.
We use segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. See Note 18, Segment Reporting*,* for additional information on our segments and Items Affecting Comparability of Financial Results earlier in this section for items affecting our segment operating results.
Our segment net revenues and earnings were:
| For the Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Net revenues: | |||||||||||
| Latin America | $ | 3,018 | $ | 3,202 | $ | 3,566 | |||||
| AMEA | 5,770 | 5,729 | 5,739 | ||||||||
| Europe | 9,972 | 10,122 | 9,794 | ||||||||
| North America | 7,108 | 6,885 | 6,797 | ||||||||
| Net revenues | $ | 25,868 | $ | 25,938 | $ | 25,896 |
| For the Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Earnings before income taxes: | |||||||||||
| Operating income: | |||||||||||
| Latin America | $ | 341 | $ | 410 | $ | 564 | |||||
| AMEA | 691 | 702 | 514 | ||||||||
| Europe | 1,732 | 1,734 | 1,610 | ||||||||
| North America | 1,451 | 849 | 1,144 | ||||||||
| Unrealized gains/(losses) on hedging activities (mark-to-market impacts) | 91 | 141 | (96 | ) | |||||||
| General corporate expenses | (330 | ) | (335 | ) | (282 | ) | |||||
| Amortization of intangibles | (174 | ) | (176 | ) | (178 | ) | |||||
| Net gains on divestitures | 44 | — | 186 | ||||||||
| Acquisition-related costs | (3 | ) | (13 | ) | — | ||||||
| Operating income | 3,843 | 3,312 | 3,462 | ||||||||
| Benefit plan non-service income | 60 | 50 | 44 | ||||||||
| Interest and other expense, net | (456 | ) | (520 | ) | (382 | ) | |||||
| Earnings before income taxes | $ | 3,447 | $ | 2,842 | $ | 3,124 |
Latin America
| For the Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | $ change | % change | |||||||||||
| (in millions) | ||||||||||||||
| Net revenues | $ | 3,018 | $ | 3,202 | $ | (184 | ) | (5.7 | )% | |||||
| Segment operating income | 341 | 410 | (69 | ) | (16.8 | )% | ||||||||
| For the Years Ended December 31, | ||||||||||||||
| 2018 | 2017 | $ change | % change | |||||||||||
| (in millions) | ||||||||||||||
| Net revenues | $ | 3,202 | $ | 3,566 | $ | (364 | ) | (10.2 | )% | |||||
| Segment operating income | 410 | 564 | (154 | ) | (27.3 | )% |
2019 compared with 2018**:**
Net revenues decreased $184 million (5.7%), due to unfavorable currency (13.5 pp) and unfavorable volume/mix (2.1 pp), partially offset by higher net pricing (9.9 pp). Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to most currencies in the region including the Argentinean peso and Brazilian real. Unfavorable volume/mix was due to the impact of pricing-related elasticity, and was driven by declines in refreshment beverages, candy, cheese & grocery and chocolate, partially offset by gains in biscuits and gum. Higher net pricing was reflected across all categories, driven primarily by Argentina, Brazil and Mexico.
Segment operating income decreased $69 million (16.8%), primarily due to higher raw material costs, unfavorable currency, unfavorable volume/mix, the lapping of the 2018 benefit from the resolution of a Brazilian indirect tax matter of $26 million, higher manufacturing costs and higher other selling, general and administrative expenses (including lapping the benefit from a VAT-related settlement in 2018 and the expense of a VAT-related settlement in 2019). These unfavorable items were partially offset by higher net pricing, lower costs incurred for the Simplify to Grow Program, favorable change in remeasurement on net monetary position in Argentina (remeasurement gain in 2019 as compared to a remeasurement loss in 2018) and lower advertising and consumer promotion costs.
2018 compared with 2017**:**
Net revenues decreased $364 million (10.2%), due to unfavorable currency (13.8 pp) and unfavorable volume/mix (2.6 pp), partially offset by higher net pricing (6.2 pp). Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to most currencies in the region including the Argentinean peso, Brazilian real and Mexican peso. Unfavorable volume/mix was due primarily to the impact of pricing-related elasticity, as well as in part due to the negative impact of the Brazil trucking strike that occurred in the second quarter. Unfavorable volume/mix was driven by declines in all categories except biscuits. Higher net pricing was reflected across all categories, driven primarily by Argentina, Mexico and Brazil.
Segment operating income decreased $154 million (27.3%), primarily due to lapping last year's benefit from the resolution of a Brazilian indirect tax matter of $153 million, higher raw material costs, unfavorable currency, higher other selling, general and administrative expenses (net of the benefit from a VAT-related settlement in 2018), unfavorable volume/mix and a loss from the remeasurement of the net monetary position in Argentina. These unfavorable items were partially offset by higher net pricing, lower manufacturing costs, the 2018 benefit from the resolution of a Brazilian tax matter of $26 million, lower advertising and consumer promotion costs, lower costs incurred for the Simplify to Grow Program and the lapping of the 2017 intangible asset impairment charges.
AMEA
| For the Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | $ change | % change | |||||||||||
| (in millions) | ||||||||||||||
| Net revenues | $ | 5,770 | $ | 5,729 | $ | 41 | 0.7 | % | ||||||
| Segment operating income | 691 | 702 | (11 | ) | (1.6 | )% | ||||||||
| For the Years Ended December 31, | ||||||||||||||
| 2018 | 2017 | $ change | % change | |||||||||||
| (in millions) | ||||||||||||||
| Net revenues | $ | 5,729 | $ | 5,739 | $ | (10 | ) | (0.2 | )% | |||||
| Segment operating income | 702 | 514 | 188 | 36.6 | % |
2019 compared with 2018**:**
Net revenues increased $41 million (0.7%), due to favorable volume/mix (3.6 pp) and higher net pricing (1.7 pp), mostly offset by unfavorable currency (3.3 pp) and the impact of a divestiture (1.3 pp). Favorable volume/mix was driven by gains across all categories except refreshment beverages and candy. Higher net pricing was reflected across all categories. Unfavorable currency impacts were due to the strength of the U.S. dollar relative to several currencies in the region, including the Australian dollar, Chinese yuan, Indian rupee and South African rand. The divestiture of most of our cheese business in the Middle East and Africa on May 28, 2019, resulted in a year-over-year decline in net revenues of $71 million.
Segment operating income decreased $11 million (1.6%), primarily due to higher raw material costs, expenses from the resolution of tax matters in India totaling $87 million, higher advertising and consumer promotion costs, unfavorable currency, higher other selling, general and administrative expenses, the impact of the divestiture and higher intangible asset impairment charges. These unfavorable items were partially offset by lower manufacturing costs, higher net pricing, lower costs incurred for the Simplify to Grow Program and favorable volume/mix.
2018 compared with 2017**:**
Net revenues decreased $10 million (0.2%), due to the impact of divestitures (2.6 pp) and unfavorable currency (1.3 pp), partially offset by favorable volume/mix (2.2 pp) and higher net pricing (1.5 pp). The impact of divestitures related to most of our cheese business in the Middle East and Africa on May 28, 2019, the grocery & cheese business in Australia and New Zealand that was divested on July 4, 2017 and the confectionery business in Japan that was divested on December 28, 2017, and resulted in a year-over-year decline in net revenues of $139 million for 2018. Unfavorable currency impacts were due primarily to the strength of the U.S. dollar relative to several currencies in the region, including the Indian rupee, Australian dollar and Philippine peso, partially offset by the strength of several currencies in the region relative to the U.S. dollar, including the Chinese yuan and Japanese yen. Favorable volume/mix was driven by gains in chocolate and biscuits, including the shift of volume into the first quarter of 2018 due to the timing of Chinese New Year, partially offset by declines in refreshment beverages, cheese & grocery, gum and candy. Higher net pricing was reflected across all categories except gum and candy.
Segment operating income increased $188 million (36.6%), primarily due to higher net pricing, lower costs incurred for the Simplify to Grow Program, lower manufacturing costs, lower intangible asset impairment charges, lower advertising and consumer promotion costs and favorable volume/mix. These favorable items were partially offset by higher raw material costs, the impact of divestitures, unfavorable currency and higher other selling, general and administrative expenses (net of prior-year property insurance recovery).
Europe
| For the Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | $ change | % change | |||||||||||
| (in millions) | ||||||||||||||
| Net revenues | $ | 9,972 | $ | 10,122 | $ | (150 | ) | (1.5 | )% | |||||
| Segment operating income | 1,732 | 1,734 | (2 | ) | (0.1 | )% | ||||||||
| For the Years Ended December 31, | ||||||||||||||
| 2018 | 2017 | $ change | % change | |||||||||||
| (in millions) | ||||||||||||||
| Net revenues | $ | 10,122 | $ | 9,794 | $ | 328 | 3.3 | % | ||||||
| Segment operating income | 1,734 | 1,610 | 124 | 7.7 | % |
2019 compared with 2018**:**
Net revenues decreased $150 million (1.5%), due to unfavorable currency (5.2 pp), partially offset by favorable volume/mix (3.7 pp), as net pricing was flat. Unfavorable currency impacts reflected the strength of the U.S. dollar relative to most currencies in the region, primarily the euro, British pound sterling, Turkish lira and Swedish krona. Favorable volume/mix was driven by gains across all categories except gum. Net pricing was flat as higher net pricing in gum and candy was offset by lower net pricing in all other categories.
Segment operating income decreased $2 million (0.1%), primarily due to unfavorable currency, higher raw material costs and higher advertising and consumer promotion costs. These unfavorable items were mostly offset by favorable volume/mix, lower manufacturing costs and lower intangible asset impairment charges.
2018 compared with 2017**:**
Net revenues increased $328 million (3.3%), due to favorable volume/mix (3.1 pp) and favorable currency (2.3 pp), partially offset by the impact of divestitures (1.5 pp) and lower net pricing (0.6 pp). Favorable volume/mix was driven by chocolate, biscuits and candy, partially offset by declines in cheese & grocery, gum and refreshment beverages. Favorable currency impacts reflected the strength of several currencies relative to the U.S. dollar, primarily the euro, British pound sterling, Polish zloty and Czech koruna, partially offset by the strength of the U.S. dollar relative to several currencies, primarily the Russian ruble and Turkish lira. The impact of divestitures, due to the sale of a confectionery business in France and the termination of certain Kraft Heinz Company-owned grocery brand licenses, resulted in a year-over-year decline in net revenues of $137 million for 2018. Lower net pricing was driven by chocolate and biscuits, partially offset by higher net pricing in cheese & grocery, candy and gum.
Segment operating income increased $124 million (7.7%), primarily due to favorable volume/mix, lower manufacturing costs, lower costs incurred for the Simplify to Grow Program, favorable currency, lower raw material costs, lower divestiture-related costs and the lapping of prior-year malware incident incremental costs. These favorable items were partially offset by higher advertising and consumer promotion costs, higher other selling, general and administrative expenses, lower net pricing, lapping the prior-year benefit from the settlement of a Cadbury tax matter, higher intangible asset impairment charges and the impact from divestitures.
North America
| For the Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | $ change | % change | |||||||||||
| (in millions) | ||||||||||||||
| Net revenues | $ | 7,108 | $ | 6,885 | $ | 223 | 3.2 | % | ||||||
| Segment operating income | 1,451 | 849 | 602 | 70.9 | % | |||||||||
| For the Years Ended December 31, | ||||||||||||||
| 2018 | 2017 | $ change | % change | |||||||||||
| (in millions) | ||||||||||||||
| Net revenues | $ | 6,885 | $ | 6,797 | $ | 88 | 1.3 | % | ||||||
| Segment operating income | 849 | 1,144 | (295 | ) | (25.8 | )% |
2019 compared with 2018**:**
Net revenues increased $223 million (3.2%), due to higher net pricing (2.3 pp) and the impact of acquisitions (1.3 pp), partially offset by unfavorable currency (0.3 pp) and unfavorable volume/mix (0.1 pp). Higher net pricing was reflected across all categories except chocolate. The July 16, 2019 acquisition of a majority interest in Perfect Snacks added net revenues of $53 million and the June 7, 2018 acquisition of Tate’s Bake Shop added incremental net revenues of $35 million in 2019. Unfavorable currency impact was due to the strength of the U.S. dollar relative to the Canadian dollar. Unfavorable volume/mix was driven by declines in gum, chocolate and candy, mostly offset by favorable volume/mix in biscuits.
Segment operating income increased $602 million (70.9%), primarily due to lapping prior-year pension participation changes, higher net pricing, lower manufacturing costs, lower costs incurred for the Simplify to Grow Program, benefit from current-year pension participation changes, lapping prior-year intangible asset impairment charges and the impact from the acquisitions of Perfect Snacks and Tate's Bake Shop. These favorable items were partially offset by higher raw material costs, higher other selling, general and administrative expenses and unfavorable volume/mix.
2018 compared with 2017**:**
Net revenues increased $88 million (1.3%), due to higher net pricing (1.1 pp) and the impact of an acquisition (0.8 pp), partially offset by unfavorable volume/mix (0.5 pp) and unfavorable currency (0.1 pp). Higher net pricing was reflected in biscuits and gum, partially offset by lower net pricing in chocolate and candy. The June 7, 2018 acquisition of a U.S. premium biscuit company, Tate’s Bake Shop, added net revenues of $52 million in 2018. Unfavorable volume/mix, which was net of the benefit from lapping last year's negative impact from the 2017 malware incident, reflected declines in gum and chocolate, partially offset by gains in biscuits and candy. Unfavorable currency impact was due to the strength of the U.S. dollar relative to the Canadian dollar.
Segment operating income decreased $295 million (25.8%), primarily due to the impact from pension participation changes, higher manufacturing costs, unfavorable volume/mix, higher raw material costs and higher other selling, general and administrative expenses. These unfavorable items were partially offset by lower advertising and consumer promotion costs, higher net pricing, the lapping of prior-year malware incident incremental costs, lower costs incurred for the Simplify to Grow Program, lower intangible asset impairment charges and the impact from the acquisition of Tate's Bake Shop.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements includes a summary of the significant accounting policies we used to prepare our consolidated financial statements. We have discussed the selection and disclosure of our critical accounting policies and estimates with our Audit Committee. The following is a review of our most significant assumptions and estimates.
Goodwill and Non-Amortizable Intangible Assets:
We test goodwill and non-amortizable intangible assets for impairment on an annual basis on July 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 our quantitative testing, we compare a reporting unit’s estimated fair value with its carrying value. We estimate a reporting unit’s fair value using a discounted cash flow method which incorporates planned growth rates, market-based discount rates and estimates of residual value. This year, for our Europe and North America reporting units, we used a market-based, weighted-average cost of capital of 5.9% 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 8.9%. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans and industry and economic conditions, and our actual results and conditions may differ over time. If the carrying value of a reporting unit’s net assets exceeds its fair value, we would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit fair value.
In 2019, 2018 and 2017, there were no impairments of goodwill. In connection with our 2019 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.
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 estimated fair value, the asset is impaired and its carrying value is reduced to the estimated fair value.
During our 2019 annual testing of non-amortizable intangible assets, we recorded $57 million of impairment charges in the third quarter of 2019 related to nine brands. The impairments arose due to lower than expected brand earnings growth. We recorded charges related to gum, chocolate, biscuits and candy brands of $39 million in Europe, $15 million in AMEA 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 use several accepted valuation methods, including relief of royalty, excess earnings and excess margin, that utilize estimates of future sales, earnings growth rates, royalty rates and discount rates in determining a brand's global fair value. We also identified fourteen brands, including the nine impaired brands, with $635 million of aggregate book value as of December 31, 2019 that each had a fair value in excess of book value of 10% or less. We believe our current plans for each of these brands will allow them to not be impaired, but if the brand earnings 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 2018, we recorded charges related to gum, chocolate, biscuits and candy brands of $45 million in Europe, $14 million in North America and $9 million in AMEA. In 2017, we recorded charges related to candy and gum brands of $52 million in AMEA, $11 million in Europe, $5 million in Latin America and $2 million in North America.
Refer to Note 6, Goodwill and Intangible Assets, for additional information.
Trade and marketing programs:
We promote our products with trade and sales incentives as well as marketing and advertising programs. These programs include, but are not limited to, new product introduction fees, discounts, coupons, rebates and volume-based incentives as well as cooperative advertising, in-store displays and consumer marketing promotions. Trade and sales incentives 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 and consumer promotion expenses are charged to operations as a percentage of volume, based on estimated sales volume and estimated program spending. We do not defer costs on our year-end consolidated balance sheet and all marketing and advertising costs are recorded as an expense in the year incurred.
Employee Benefit Plans:
We sponsor various employee benefit plans throughout the world. These include primarily pension plans and postretirement healthcare benefits. For accounting purposes, we estimate the pension and postretirement healthcare benefit obligations utilizing assumptions and estimates for discount rates; expected returns on plan assets; expected compensation increases; employee-related factors such as turnover, retirement age and mortality; and health care cost trends. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. Our assumptions also reflect our historical experiences and management’s best judgment regarding future expectations. These and other assumptions affect the annual expense and obligations recognized for the underlying plans.
As permitted by U.S. GAAP, we generally amortize the effect of changes in the assumptions over future periods. The cost or benefit of plan changes, such as increasing or decreasing benefits for prior employee service (prior service cost), is deferred and included in expense on a straight-line basis over the average remaining service period of the employees expected to receive benefits.
Since pension and postretirement liabilities are measured on a discounted basis, the discount rate significantly affects our plan obligations and expenses. For plans that have assets held in trust, the expected return on plan assets assumption affects our pension plan expenses. The assumptions for discount rates and expected rates of return and our process for setting these assumptions are described in Note 11, Benefit Plans, to the consolidated financial statements.
While we do not anticipate further changes in the 2020 assumptions for our U.S. and non-U.S. pension and postretirement health care plans, as a sensitivity measure, a fifty-basis point change in our discount rates or the expected rate of return on plan assets would have the following effects, increase/(decrease), on our annual benefit plan costs:
| As of December 31, 2019 | |||||||||||||||
| U.S. Plans | Non-U.S. Plans | ||||||||||||||
| Fifty-Basis-Point | Fifty-Basis-Point | ||||||||||||||
| Increase | Decrease | Increase | Decrease | ||||||||||||
| (in millions) | |||||||||||||||
| Effect of change in discount rate on pension costs | $ | (14 | ) | $ | 15 | $ | (30 | ) | $ | 62 | |||||
| Effect of change in expected rate of return on plan assets on pension costs | (8 | ) | 8 | (48 | ) | 48 | |||||||||
| Effect of change in discount rate on postretirement health care costs | (3 | ) | 3 | — | — |
In accordance with obligations we have under collective bargaining agreements, we participate in multiemployer pension plans. In 2017, the only individually significant multiemployer plan we contributed to was the Bakery and Confectionery Union and Industry International Pension Fund. Our obligation to contribute to the Fund arose with respect to 8 collective bargaining agreements covering most of our employees represented by the BCTGM. All of those collective bargaining agreements expired in 2016. In 2018, we executed a complete withdrawal from the Fund and recorded a $429 million estimated withdrawal liability. On July 11, 2019, we received an undiscounted withdrawal liability assessment from the Fund totaling $526 million requiring pro-rata monthly payments over 20 years and we recorded a $35 million final adjustment to reduce our withdrawal liability as of June 30, 2019. We
began making monthly payments during the third quarter of 2019. As of December 31, 2019, the remaining discounted withdrawal liability was $391 million.
See additional information on our employee benefit plans in Note 11, Benefit Plans.
Income Taxes:
As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, tax planning opportunities available in each tax jurisdiction and the ultimate outcome of various tax audits.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized.
We believe our tax positions comply with applicable tax laws and that we have properly accounted for uncertain tax positions. 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 resolution. We evaluate uncertain tax positions on an ongoing basis and adjust the amount recognized in light of changing facts and circumstances, such as the progress of a tax audit or expiration of a statute of limitations. We believe the estimates and assumptions used to support our evaluation of uncertain tax positions are reasonable. However, final determination of historical tax liabilities, whether by settlement with tax authorities, judicial or administrative ruling or due to expiration of statutes of limitations, could be materially different from estimates reflected on our consolidated balance sheet and historical income tax provisions. The outcome of these final determinations could have a material effect on our provision for income taxes, net earnings or cash flows in the period in which the determination is made.
As a result of Swiss and U.S. tax reform and the related SEC guidance, we finalized our accounting for the legislation based on guidance issued prior to 2019 year end. See Note 16, Income Taxes, for further discussion of the amounts recorded related to Swiss and U.S. tax reform in our financial statements, as well as additional information on our effective tax rate, current and deferred taxes, valuation allowances and unrecognized tax benefits.
Contingencies:
See Note 14, Commitments and Contingencies, to the consolidated financial statements.
New Accounting Guidance:
See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements for a discussion of new accounting standards.
Liquidity and Capital Resources
We believe that cash from operations, our revolving credit facilities, short-term borrowings and our authorized long-term financing will provide sufficient liquidity for our working capital needs, planned capital expenditures and future payments of our U.S. tax reform transition tax liability, contractual and benefit plan obligations, share repurchases and quarterly dividends. We continue to utilize our commercial paper program, international credit lines and long-term debt issuances for our funding requirements. We also use intercompany loans with our international subsidiaries to improve financial flexibility. Overall, we do not expect any negative effects to our funding sources that would have a material effect on our liquidity.
Net Cash Provided by Operating Activities:
Operating activities provided net cash of $3,965 million in 2019, $3,948 million in 2018 and $2,593 million in 2017. The increase in net cash provided by operating activities in 2019 relative to 2018 was due primarily to higher earnings, increased distributions from equity method investments and lower pension contributions, partially offset by increased working capital requirements including higher tax payments. Cash flows from operating activities were higher in 2018 than 2017 primarily due to higher cash flow from working capital, higher net earnings as well as lower pension contributions.
Net Cash Used in Investing Activities:
Net cash used in investing activities was $960 million in 2019, $1,224 million in 2018 and $301 million in 2017. The decrease in net cash used in investing activities in 2019 relative to 2018 was primarily due to less cash expended for acquisitions in 2019 than in 2018, lower capital expenditures and the 2019 cash proceeds from the divestiture of primarily our cheese business in the Middle East and Africa, partially offset by lower cash received as a result of the settlement and replacement of several net investment hedge derivative contracts and cash paid to settle our forward-starting interest rate swaps. The increase in net cash used in investing activities in 2018 relative to 2017 was primarily due to cash received in 2017 from proceeds from divestitures, cash expenditures in 2018 for an acquisition and higher capital expenditures in 2018, partially offset by cash received as a result of the settlement and replacement of several net investment hedge derivative contracts.
Capital expenditures were $925 million in 2019, $1,095 million in 2018 and $1,014 million in 2017. We continue to make capital expenditures primarily to modernize manufacturing facilities and support new product and productivity initiatives. We expect 2020 capital expenditures to be up to $0.9 billion, including capital expenditures in connection with our Simplify to Grow Program. We expect to continue to fund these expenditures from operations.
Net Cash Used in Financing Activities:
Net cash used in financing activities was $2,787 million in 2019, $2,329 million in 2018 and $3,361 million in 2017. The increase in net cash used in financing activities in 2019 relative to 2018 was primarily due to lower net debt issuances and higher dividends paid in 2019, partially offset by lower share repurchases. The decrease in net cash used in financing activities in 2018 relative to 2017 was primarily due to higher net debt issuances and lower share repurchases partially offset by higher dividends paid.
Debt:
From time to time we refinance long-term and short-term debt. Refer to Note 9, Debt and Borrowing Arrangements, for details of our recent tender offers, debt issuances and maturities. The nature and amount of our long-term and short-term debt and the proportionate amount of each varies as a result of current and expected business requirements, market conditions and other factors. Due to seasonality, in the first and second quarters of the year, our working capital requirements grow, increasing the need for short-term financing. The second half of the year typically generates higher cash flows. As such, we may issue commercial paper or secure other forms of financing throughout the year to meet short-term working capital or other financing needs.
One of our subsidiaries, Mondelez International Holdings Netherlands B.V. (“MIHN”), has outstanding debt. Refer to Note 9, Debt and Borrowing Arrangements. The operations held by MIHN generated approximately 73.0% (or $18.9 billion) of the $25.9 billion of consolidated net revenue during fiscal year 2019 and represented approximately 87.2% (or $23.9 billion) of the $27.4 billion of net assets as of December 31, 2019.
On February 7, 2019, our Board of Directors approved a new $5.0 billion long-term financing authority to replace the prior $5.0 billion authority. As of December 31, 2019, we had $1.8 billion of long-term financing authority remaining.
In the next 12 months, we expect approximately $1.5 billion of long-term debt will mature as follows: $427 million in February 2020, $233 million in March 2020, $750 million in May 2020 and $140 million in October 2020. We expect to fund these repayments with a combination of cash from operations, short-term debt, including issuance of commercial paper and long-term debt.
Our total debt was $18.4 billion at December 31, 2019 and $18.4 billion at December 31, 2018. Our debt-to-capitalization ratio was 0.40 at December 31, 2019 and 0.42 at December 31, 2018. At December 31, 2019, the weighted-average term of our outstanding long-term debt was 5.8 years. Our average daily commercial borrowings were $4.1 billion in 2019, $4.5 billion in 2018 and $4.4 billion in 2017. We had $2.6 billion of commercial paper borrowings outstanding at December 31, 2019 and $3.1 billion outstanding as of December 31, 2018. We expect to continue to use commercial paper to finance various short-term financing needs. We continue to comply with our debt covenants. Refer to Note 9, Debt and Borrowing Arrangements, for more information on our debt and debt covenants.
Commodity Trends
We regularly monitor worldwide supply, commodity cost and currency trends so we can cost-effectively secure ingredients, packaging and fuel required for production. During 2019, the primary drivers of the increase in our aggregate commodity costs were higher currency exchange transaction costs on imported materials, as well as increased costs for packaging, energy, dairy, grains, cocoa and oils, partially offset by lower costs for sugar and nuts.
A number of external factors such as weather conditions, commodity market conditions, currency fluctuations and the effects of governmental agricultural or other programs affect the cost and availability of raw materials and agricultural materials used in our products. We address higher commodity costs and currency impacts primarily through hedging, higher pricing and manufacturing and overhead cost control. We use hedging techniques to limit the impact of fluctuations in the cost of our principal raw materials; however, we may not be able to fully hedge against commodity cost changes, such as dairy, where there is a limited ability to hedge, and our hedging strategies may not protect us from increases in specific raw material costs. Due to competitive or market conditions, planned trade or promotional incentives, fluctuations in currency exchange rates or other factors, our pricing actions may also lag commodity cost changes temporarily.
We expect price volatility and a higher aggregate cost environment to continue in 2020. While the costs of our principal raw materials fluctuate, we believe there will continue to be an adequate supply of the raw materials we use and that they will generally remain available from numerous sources.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We have no significant off-balance sheet arrangements other than the contractual obligations discussed below.
Guarantees:
As discussed in Note 14, Commitments and Contingencies, we enter into third-party guarantees primarily to cover the long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At December 31, 2019, we had no material third-party guarantees recorded on our consolidated balance sheet.
Guarantees do not have, and we do not expect them to have, a material effect on our liquidity.
Aggregate Contractual Obligations:
The following table summarizes our contractual obligations at December 31, 2019.
| Payments Due | |||||||||||||||||||
| Total | 2020 | 2021-22 | 2023-24 | 2025 and Thereafter | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Debt (1) | $ | 15,741 | $ | 1,549 | $ | 5,038 | $ | 3,634 | $ | 5,520 | |||||||||
| Interest expense (2) | 3,253 | 390 | 658 | 476 | 1,729 | ||||||||||||||
| Finance leases (3) | 134 | 38 | 57 | 24 | 15 | ||||||||||||||
| Operating leases | 652 | 197 | 248 | 110 | 97 | ||||||||||||||
| Purchase obligations: (4) | |||||||||||||||||||
| Inventory and production costs | 4,613 | 3,412 | 652 | 207 | 342 | ||||||||||||||
| Other | 1,151 | 801 | 221 | 118 | 11 | ||||||||||||||
| 25,544 | 6,387 | 6,874 | 4,569 | 7,714 | |||||||||||||||
| U.S. tax reform transition liability (5) | 1,008 | 93 | 187 | 362 | 366 | ||||||||||||||
| Multiemployer pension plan withdrawal liability (6) | 515 | 26 | 53 | 53 | 383 | ||||||||||||||
| Other long-term liabilities (7) | 222 | 16 | 36 | 41 | 129 | ||||||||||||||
| Total | $ | 27,289 | $ | 6,522 | $ | 7,150 | $ | 5,025 | $ | 8,592 |
| (1) | Amounts include the expected cash payments of our long-term debt, including the current portion and excluding finance leases, which are presented separately in the table above. The amounts also exclude $76 million of net unamortized non-cash bond premiums, discounts, bank fees and mark-to-market adjustments related to our interest rate swaps recorded in total debt. |
| (2) | Amounts represent the expected cash payments of our interest expense on our long-term debt. Interest calculated on our non-U.S. dollar denominated debt was forecasted using currency exchange rates as of December 31, 2019. |
| (3) | Amounts exclude imputed interest on finance leases of $11 million. |
| (4) | Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above. |
| (5) | In connection with U.S. tax reform, we estimate paying a total $1.3 billion transition tax liability through 2026. As of December 31, 2019, the amount outstanding was $1.0 billion. The amounts and timing of our tax payments may change as a result of additional guidance issued. See Note 16, Income Taxes, for additional information on U.S. tax reform and its impact on our financial statements. |
| (6) | During 2018, we executed a complete withdrawal liability from our most individually significant multiemployer pension plan. On July 11, 2019, we received an undiscounted withdrawal liability assessment from the Fund totaling $526 million requiring pro-rata monthly payments over 20 years through 2039. See Note 11, Benefit Plans*,* for additional information on our multiemployer pension plan withdrawal liability. |
| (7) | Other long-term liabilities in the table above include the long-term liabilities and any current portion of these obligations. We have included the estimated future benefit payments for our postretirement health care plans through December 31, 2029 of $198 million. We are unable to reliably estimate the timing of the payments beyond 2029; as such, they are excluded from the above table. There are also another $1 million of various other long-term liabilities that are expected to be paid over the next 5 years. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued pension costs, unrecognized tax benefits, insurance accruals and other accruals. As of December 31, 2019, our unrecognized tax benefit, including associated interest and penalties, classified as a long-term payable is $507 million. We currently expect to make approximately $246 million in contributions to our pension plans in 2020. |
Equity and Dividends
Stock Plans:
See Note 12, Stock Plans, to the consolidated financial statements for more information on our stock plans and grant activity during 2017-2019.
Share Repurchases:
See Note 13, Capital Stock, to the consolidated financial statements for more information on our share repurchase program.
Between 2013 and 2017, our Board of Directors authorized the repurchase of a total of $13.7 billion of our Common Stock through December 31, 2018. On January 31, 2018, 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 $19.7 billion of Common Stock repurchases, and extended the program through December 31, 2020. Through December 31, 2019, we repurchased approximately $16.5 billion of shares ($1.5 billion in 2019, $2.0 billion in 2018, $2.2 billion in 2017, $2.6 billion in 2016, $3.6 billion in 2015, $1.9 billion in 2014 and $2.7 billion in 2013), at a weighted-average cost of $39.65 per share. The number of shares that we ultimately repurchase under our share repurchase program may vary depending on numerous factors, including share price and other market conditions, our ongoing capital allocation planning, levels of cash and debt balances, other demands for cash, such as acquisition activity, general economic or business conditions and board and management discretion. Additionally, our share repurchase activity during any particular period may fluctuate. We may accelerate, suspend, delay or discontinue our share repurchase program at any time, without notice.
Dividends:
We paid dividends of $1,542 million in 2019, $1,359 million in 2018 and $1,198 million in 2017. On July 30, 2019, the Finance Committee, with authorization delegated from our Board of Directors, declared a quarterly cash dividend of $0.285 per share of Class A Common Stock, an increase of 10 percent, which would be $1.14 per common share on an annualized basis. On July 25, 2018, the Finance Committee, with authorization delegated from our Board of Directors, declared a quarterly cash dividend of $0.26 per share of Class A Common Stock, an increase of 18 percent, which would be $1.04 per common share on an annualized basis. On August 2, 2017, the Finance Committee, with authorization delegated from our Board of Directors, approved a 16% increase in the quarterly dividend to $0.22 per common share or $0.88 per common share on an annualized basis. The declaration of dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net earnings, financial condition, cash requirements, future prospects and other factors that our Board of Directors deems relevant to its analysis and decision making.
For U.S. income tax purposes only, the Company has determined that 100% of the distributions paid to its shareholders in 2019 are characterized as a qualified dividend paid from U.S. earnings and profits. Shareholders should consult their tax advisors for a full understanding of the tax consequences of the receipt of dividends.
Non-GAAP Financial Measures
We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identify trends in our underlying operating results and provide additional insight and transparency on how we evaluate our business. We use non-GAAP financial measures to budget, make operating and strategic decisions and evaluate our performance. We have detailed the non-GAAP adjustments that we make in our non-GAAP definitions below. The adjustments generally fall within the following categories: acquisition & divestiture activities, gains and losses on intangible asset sales and non-cash impairments, major program restructuring activities, constant currency and related adjustments, major program financing and hedging activities and other major items affecting comparability of operating results. We believe the non-GAAP measures should always be considered along with the related U.S. GAAP financial measures. We have provided the reconciliations between the GAAP and non-GAAP financial measures below, and we also discuss our underlying GAAP results throughout our Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K.
Our primary non-GAAP financial measures are listed below and reflect how we evaluate our current and prior-year operating results. As new events or circumstances arise, these definitions could change. When our definitions change, we provide the updated definitions and present the related non-GAAP historical results on a comparable basis (1).
| • | “Organic Net Revenue” is defined as net revenues excluding the impacts of acquisitions, divestitures (2) and currency rate fluctuations (3). We also evaluate Organic Net Revenue growth from emerging and developed markets. |
| • | Our emerging markets include our Latin America region in its entirety; the AMEA region, excluding Australia, New Zealand and Japan; and the following countries from the Europe region: Russia, Ukraine, Turkey, Kazakhstan, Belarus, Georgia, Poland, Czech Republic, Slovak Republic, Hungary, Bulgaria, Romania, the Baltics and the East Adriatic countries. Our developed markets include the entire North America region, the Europe region excluding the countries included in the emerging markets definition, and Australia, New Zealand and Japan from the AMEA region. |
| • | “Adjusted Operating Income” is defined as operating income excluding the impacts of the Simplify to Grow Program (4); gains or losses (including non-cash impairment charges) on goodwill and intangible assets; divestiture (2) or acquisition gains or losses and related divestiture (2), acquisition and integration costs (2); the operating results of divestitures (2); remeasurement of net monetary position (5); mark-to-market impacts from commodity and forecasted currency transaction derivative contracts (6); impact from resolution of tax matters (7); CEO transition remuneration (8); impact from pension participation changes (9); Swiss tax reform impacts (10); and incremental expenses related to the 2017 malware incident. We also present “Adjusted Operating Income margin,” which is subject to the same adjustments as Adjusted Operating Income. We also evaluate growth in our Adjusted Operating Income on a constant currency basis (3). |
| • | “Adjusted EPS” is defined as diluted EPS attributable to Mondelēz International from continuing operations excluding the impacts of the items listed in the Adjusted Operating Income definition as well as losses on debt extinguishment and related expenses; gain on equity method investment transactions; net earnings from divestitures (2); gains or losses on interest rate swaps no longer designated as accounting cash flow hedges due to changed financing and hedging plans and U.S. and Swiss tax reform impacts (10). Similarly, within Adjusted EPS, our equity method investment net earnings exclude our proportionate share of our investees’ unusual or infrequent items (11). We also evaluate growth in our Adjusted EPS on a constant currency basis (3). |
| (1) | When items no longer impact our current or future presentation of non-GAAP operating results, we remove these items from our non-GAAP definitions. During 2019, we added to the non-GAAP definitions the exclusion of the impact from Swiss tax reform as described in footnote (10) below. During 2018, we added to the non-GAAP definitions the exclusion of: remeasurement gains or losses related to remeasuring net monetary assets or liabilities in Argentina (see footnote (5) below) and the impact from pension participation changes (see footnote (9) below). |
| (2) | Divestitures include completed sales of businesses and exits of major product lines upon completion of a sale or licensing agreement. See Note 2, Divestitures and Acquisitions, for information on divestitures and acquisitions impacting the comparability of our results. |
| (3) | Constant currency operating results are calculated by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate the financial statements in the comparable prior-year period to determine what the current-period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. |
| (4) | Non-GAAP adjustments related to the Simplify to Grow Program reflect costs incurred that relate to the objectives of our program to transform our supply chain network and organizational structure. Costs that do not meet the program objectives are not reflected in the non-GAAP adjustments. |
| (5) | During the third quarter of 2018, as we began to apply highly inflationary accounting for Argentina (refer to Note 1, Summary of Significant Accounting Policies), we excluded the remeasurement gains or losses related to remeasuring net monetary assets or liabilities in Argentina to be consistent with our prior accounting for these remeasurement gains/losses for Venezuela when it was subject to highly inflationary accounting prior to 2016. |
| (6) | During the third quarter of 2016, we began to exclude unrealized gains and losses (mark-to-market impacts) from outstanding commodity and forecasted currency transaction derivatives from our non-GAAP earnings measures until such time that the related exposures impact our operating results. Since we purchase commodity and forecasted currency transaction contracts to mitigate price volatility primarily for inventory requirements in future periods, we made this adjustment to remove the volatility of these future inventory purchases on current operating results to facilitate comparisons of our underlying operating performance across periods. We also discontinued designating commodity and forecasted currency transaction derivatives for hedge accounting treatment. To facilitate comparisons of our underlying operating results, we have recast all historical non-GAAP earnings measures to exclude the mark-to-market impacts. |
| (7) | See Note 14, Commitments and Contingencies – Tax Matters, for additional information. |
| (8) | On November 20, 2017, Dirk Van de Put succeeded Irene Rosenfeld as CEO of Mondelēz International in advance of her retirement at the end of March 2018. In order to incent Mr. Van de Put to join us, we provided him compensation with a total combined target value of $42.5 million to make him whole for incentive awards he forfeited or grants that were not made to him when he left his former employer. The compensation we granted took the form of cash, deferred stock units, performance share units and stock options. In connection with Irene Rosenfeld’s retirement, we made her outstanding grants of performance share units for the 2016-2018 and 2017-2019 performance cycles eligible for continued vesting and approved a $0.5 million salary for her service as Chairman from January through March 2018. We refer to these elements of Mr. Van de Put’s and Ms. Rosenfeld’s compensation arrangements together as “CEO transition remuneration.” We are excluding amounts we expense as CEO transition remuneration from our non-GAAP results because those amounts are not part of our regular compensation program and are incremental to amounts we would have incurred as ongoing CEO compensation. As a result, in 2017, we excluded amounts expensed for the cash payment to Mr. Van de Put and partial vesting of his equity grants. In 2018, we excluded amounts paid for Ms. Rosenfeld’s service as Chairman and partial vesting of Mr. Van de Put’s and Ms. Rosenfeld’s equity grants. In 2019, we excluded amounts related to the partial vesting of Mr. Van de Put’s equity grants. |
| (9) | The impact from pension participation changes represents the charges incurred when employee groups are withdrawn from multiemployer pension plans and other changes in employee group pension plan participation. We exclude these charges from our non–GAAP results because those amounts do not reflect our ongoing pension obligations. See Note 11, Benefit Plans, for more information on the multiemployer pension plan withdrawal. |
(10) We exclude the impact of the 2019 Swiss tax reform and 2017 U.S. tax reform. During the third quarter of 2019, Swiss Federal and Zurich Cantonal tax events drove our recognition of a Swiss tax reform net benefit to our results of operations. On December 22, 2017, the United States enacted tax reform legislation that included a broad range of business tax provisions. We exclude these tax reform impacts from our Adjusted EPS as they do not reflect our ongoing tax obligations under the new tax reforms. Refer to Note 16, Income Taxes, for more information on our current year estimated annual effective tax rate and U.S. and Swiss tax reform.
(11) We have excluded our proportionate share of our equity method investees’ unusual or infrequent items such as acquisition and divestiture related costs, restructuring program costs and discrete U.S. tax reform impacts, in order to provide investors with a comparable view of our performance across periods. Although we have shareholder rights and board representation commensurate with our ownership interests in our equity method investees and review the underlying operating results and unusual or infrequent items with them each reporting period, we do not have direct control over their operations or resulting revenue and expenses. Our use of equity method investment net earnings on an adjusted basis is not intended to imply that we have any such control. Our GAAP “diluted EPS attributable to Mondelēz International from continuing operations” includes all of the investees’ unusual and infrequent items.
We believe that the presentation of these non-GAAP financial measures, when considered together with our U.S. GAAP financial measures and the reconciliations to the corresponding U.S. GAAP financial measures, provides you with a more complete understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Because non-GAAP financial measures vary among companies, the non-GAAP financial measures presented in this report may not be comparable to similarly titled measures used by other companies. Our use of these non-GAAP financial measures is not meant to be considered in isolation or as a substitute for any U.S. GAAP financial measure. A limitation of these non-GAAP financial measures is they exclude items detailed below that have an impact on our U.S. GAAP reported results. The best way this limitation can be addressed is by evaluating our non-GAAP financial measures in combination with our U.S. GAAP reported results and carefully evaluating the following tables that reconcile U.S. GAAP reported figures to the non-GAAP financial measures in this Form 10-K.
Organic Net Revenue:
Applying the definition of “Organic Net Revenue”, the adjustments made to “net revenues” (the most comparable U.S. GAAP financial measure) were to exclude the impact of currency, acquisitions and divestitures. We believe that Organic Net Revenue reflects the underlying growth from the ongoing activities of our business and provides improved comparability of results. We also evaluate our Organic Net Revenue growth from emerging markets, and these underlying measures are also reconciled to U.S. GAAP below.
| For the Year Ended December 31, 2019 | For the Year Ended December 31, 2018 | ||||||||||||||||||||||
| Emerging Markets | Developed Markets | Total | Emerging Markets | Developed Markets | Total | ||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||
| Net Revenue | $ | 9,675 | $ | 16,193 | $ | 25,868 | $ | 9,659 | $ | 16,279 | $ | 25,938 | |||||||||||
| Impact of currency | 651 | 503 | 1,154 | — | — | — | |||||||||||||||||
| Impact of acquisitions | — | (88 | ) | (88 | ) | — | — | — | |||||||||||||||
| Impact of divestitures | (55 | ) | — | (55 | ) | (126 | ) | — | (126 | ) | |||||||||||||
| Organic Net Revenue | $ | 10,271 | $ | 16,608 | $ | 26,879 | $ | 9,533 | $ | 16,279 | $ | 25,812 | |||||||||||
| For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | ||||||||||||||||||||||
| Emerging Markets | Developed Markets | Total | Emerging Markets | Developed Markets | Total | ||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||
| Net Revenue | $ | 9,659 | $ | 16,279 | $ | 25,938 | $ | 9,707 | $ | 16,189 | $ | 25,896 | |||||||||||
| Impact of currency | 604 | (261 | ) | 343 | — | — | — | ||||||||||||||||
| Impact of acquisitions | — | (52 | ) | (52 | ) | — | — | — | |||||||||||||||
| Impact of divestitures | (126 | ) | — | (126 | ) | (132 | ) | (270 | ) | (402 | ) | ||||||||||||
| Organic Net Revenue | $ | 10,137 | $ | 15,966 | $ | 26,103 | $ | 9,575 | $ | 15,919 | $ | 25,494 |
Adjusted Operating Income:
Applying the definition of “Adjusted Operating Income”, the adjustments made to “operating income” (the most comparable U.S. GAAP financial measure) were to exclude Simplify to Grow Program; intangible asset impairment charges; mark-to-market impacts from commodity and forecasted currency transaction derivative contracts; malware incident incremental expenses, acquisition integration costs; acquisition and divestiture-related costs; operating income from divestitures; net gains from divestitures; the remeasurement of net monetary position; impact from pension participation changes; impact from the resolution of tax matters; CEO transition remuneration and Swiss tax reform impact. We also evaluate Adjusted Operating Income on a constant currency basis. We believe these measures provide improved comparability of underlying operating results.
| For the Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||
| (in millions) | ||||||||||||||
| Operating Income | $ | 3,843 | $ | 3,312 | $ | 531 | 16.0 | % | ||||||
| Simplify to Grow Program (1) | 442 | 626 | (184 | ) | ||||||||||
| Intangible asset impairment charges (2) | 57 | 68 | (11 | ) | ||||||||||
| Mark-to-market gains from derivatives (3) | (91 | ) | (141 | ) | 50 | |||||||||
| Acquisition integration costs (4) | — | 3 | (3 | ) | ||||||||||
| Acquisition-related costs (5) | 3 | 13 | (10 | ) | ||||||||||
| Divestiture-related costs (5) | 6 | (1 | ) | 7 | ||||||||||
| Operating income from divestiture (5) | (9 | ) | (19 | ) | 10 | |||||||||
| Net gain on divestiture (5) | (44 | ) | — | (44 | ) | |||||||||
| Remeasurement of net monetary position (6) | (4 | ) | 11 | (15 | ) | |||||||||
| Impact from pension participation changes (7) | (35 | ) | 423 | (458 | ) | |||||||||
| Impact from resolution of tax matters (8) | 85 | (15 | ) | 100 | ||||||||||
| CEO transition remuneration (9) | 9 | 22 | (13 | ) | ||||||||||
| Swiss tax reform impact (10) | 2 | — | 2 | |||||||||||
| Adjusted Operating Income | $ | 4,264 | $ | 4,302 | $ | (38 | ) | (0.9 | )% | |||||
| Unfavorable currency translation | 227 | — | 227 | |||||||||||
| Adjusted Operating Income (constant currency) | $ | 4,491 | $ | 4,302 | $ | 189 | 4.4 | % |
| For the Years Ended December 31, | ||||||||||||||
| 2018 | 2017 | $ Change | % Change | |||||||||||
| (in millions) | ||||||||||||||
| Operating Income | $ | 3,312 | $ | 3,462 | $ | (150 | ) | (4.3 | )% | |||||
| Simplify to Grow Program (1) | 626 | 777 | (151 | ) | ||||||||||
| Intangible asset impairment charges (2) | 68 | 109 | (41 | ) | ||||||||||
| Mark-to-market (gains)/losses from derivatives (3) | (141 | ) | 96 | (237 | ) | |||||||||
| Malware incident incremental expenses | — | 84 | (84 | ) | ||||||||||
| Acquisition integration costs (4) | 3 | 3 | — | |||||||||||
| Acquisition-related costs (5) | 13 | — | 13 | |||||||||||
| Divestiture-related costs (5) | (1 | ) | 31 | (32 | ) | |||||||||
| Operating income from divestitures (5) | (19 | ) | (92 | ) | 73 | |||||||||
| Net gain on divestitures (5) | — | (186 | ) | 186 | ||||||||||
| Remeasurement of net monetary position (6) | 11 | — | 11 | |||||||||||
| Impact from pension participation changes (7) | 423 | — | 423 | |||||||||||
| Impact from resolution of tax matters (8) | (15 | ) | (209 | ) | 194 | |||||||||
| CEO transition remuneration (9) | 22 | 14 | 8 | |||||||||||
| Other/rounding | — | (1 | ) | 1 | ||||||||||
| Adjusted Operating Income | $ | 4,302 | $ | 4,088 | $ | 214 | 5.2 | % | ||||||
| Unfavorable currency translation | 55 | — | 55 | |||||||||||
| Adjusted Operating Income (constant currency) | $ | 4,357 | $ | 4,088 | $ | 269 | 6.6 | % |
| (1) | Refer to Note 8, Restructuring Program*,* for more information. |
| (2) | Refer to Note 6, Goodwill and Intangible Assets*,* for more information on trademark impairments. |
| (3) | Refer to Note 10, Financial Instruments, Note 18, Segment Reporting, and Non-GAAP Financial Measures section at the end of this item for more information on the unrealized gains/losses on commodity and forecasted currency transaction derivatives. |
| (4) | Refer to Note 2, Divestitures and Acquisitions, for more information on the acquisition of a biscuit business in Vietnam. |
| (5) | Refer to Note 2, Divestitures and Acquisitions, for more information on prior-year divestitures, intangible asset sales and the June 7, 2018 acquisition of Tate's Bake Shop. |
| (6) | Refer to Note 1, Summary of Significant Accounting Policies – Currency Translation and Highly Inflationary Accounting, for information on our application of highly inflationary accounting for Argentina. |
| (7) | Refer to Note 11, Benefit Plans, for more information. |
| (8) | Refer to Note 14, Commitments and Contingencies – Tax Matters, for more information. |
(9) Refer to the Non-GAAP Financial Measures definition and related table notes.
(10) Refer to Note 16, Income Taxes, for more information on Swiss tax reform.
Adjusted EPS:
Applying the definition of “Adjusted EPS” (1), the adjustments made to “diluted EPS attributable to Mondelēz International” (the most comparable U.S. GAAP financial measure) were to exclude the impacts of the items listed in the Adjusted Operating Income tables above as well as gains/(losses) related to interest rate swaps; loss on debt extinguishment; U.S. tax reform discrete net tax impact; net gains/(losses) on equity method investment transactions; and our proportionate share of unusual or infrequent items recorded by our JDE and Keurig equity method investees. We also evaluate Adjusted EPS on a constant currency basis. We believe Adjusted EPS provides improved comparability of underlying operating results.
| For the Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||
| Diluted EPS attributable to Mondelēz International | $ | 2.65 | $ | 2.28 | $ | 0.37 | 16.2 | % | ||||||
| Simplify to Grow Program (2) | 0.24 | 0.32 | (0.08 | ) | ||||||||||
| Intangible asset impairment charges (2) | 0.03 | 0.03 | — | |||||||||||
| Mark-to-market gains from derivatives (2) | (0.05 | ) | (0.09 | ) | 0.04 | |||||||||
| Acquisition-related costs (2) | — | 0.01 | (0.01 | ) | ||||||||||
| Divestiture-related costs (2) | 0.01 | — | 0.01 | |||||||||||
| Net earnings from divestiture (2) | (0.01 | ) | (0.01 | ) | — | |||||||||
| Net gain on divestiture (2) | (0.03 | ) | — | (0.03 | ) | |||||||||
| Remeasurement of net monetary position (2) | — | 0.01 | (0.01 | ) | ||||||||||
| Impact from pension participation changes (2) | (0.02 | ) | 0.22 | (0.24 | ) | |||||||||
| Impact from resolution of tax matters (2) | 0.05 | (0.01 | ) | 0.06 | ||||||||||
| CEO transition remuneration (2) | 0.01 | 0.01 | — | |||||||||||
| Net loss/(gain) related to interest rate swaps (3) | 0.08 | (0.01 | ) | 0.09 | ||||||||||
| Loss on debt extinguishment (4) | — | 0.07 | (0.07 | ) | ||||||||||
| Swiss tax reform net impacts (2) | (0.53 | ) | — | (0.53 | ) | |||||||||
| U.S. tax reform discrete net tax expense (5) | — | 0.01 | (0.01 | ) | ||||||||||
| Net loss/(gain) on equity method investment transactions (6) | 0.01 | (0.39 | ) | 0.40 | ||||||||||
| Equity method investee acquisition-related and other charges/(benefits) (7) | 0.03 | (0.03 | ) | 0.06 | ||||||||||
| Adjusted EPS | $ | 2.47 | $ | 2.42 | $ | 0.05 | 2.1 | % | ||||||
| Unfavorable currency translation | 0.15 | — | 0.15 | |||||||||||
| Adjusted EPS (constant currency) | $ | 2.62 | $ | 2.42 | $ | 0.20 | 8.3 | % |
| For the Years Ended December 31, | ||||||||||||||
| 2018 | 2017 | $ Change | % Change | |||||||||||
| Diluted EPS attributable to Mondelēz International | $ | 2.28 | $ | 1.85 | $ | 0.43 | 23.2 | % | ||||||
| Simplify to Grow Program (2) | 0.32 | 0.39 | (0.07 | ) | ||||||||||
| Intangible asset impairment charges (2) | 0.03 | 0.05 | (0.02 | ) | ||||||||||
| Mark-to-market (gains)/losses from derivatives (2) | (0.09 | ) | 0.06 | (0.15 | ) | |||||||||
| Malware incident incremental expenses | — | 0.04 | (0.04 | ) | ||||||||||
| Acquisition integration costs (2) | — | — | — | |||||||||||
| Acquisition-related costs (2) | 0.01 | — | 0.01 | |||||||||||
| Divestiture-related costs (2) | — | 0.02 | (0.02 | ) | ||||||||||
| Net earnings from divestitures (2) | (0.01 | ) | (0.05 | ) | 0.04 | |||||||||
| Net gain on divestitures (2) | — | (0.11 | ) | 0.11 | ||||||||||
| Remeasurement of net monetary position (2) | 0.01 | — | 0.01 | |||||||||||
| Impact from pension participation changes (2) | 0.22 | — | 0.22 | |||||||||||
| Impact from resolution of tax matters (2) | (0.01 | ) | (0.13 | ) | 0.12 | |||||||||
| CEO transition remuneration (2) | 0.01 | 0.01 | — | |||||||||||
| Net gain related to interest rate swaps (3) | (0.01 | ) | — | (0.01 | ) | |||||||||
| Loss on debt extinguishment (4) | 0.07 | — | 0.07 | |||||||||||
| U.S. tax reform discrete net tax expense/(benefit) (5) | 0.01 | (0.03 | ) | 0.04 | ||||||||||
| Gains on equity method investment transactions (6) | (0.39 | ) | (0.02 | ) | (0.37 | ) | ||||||||
| Equity method investee acquisition-related and other charges/(benefits) (7) | (0.03 | ) | 0.04 | (0.07 | ) | |||||||||
| Adjusted EPS | $ | 2.42 | $ | 2.12 | $ | 0.30 | 14.2 | % | ||||||
| Unfavorable currency translation | 0.03 | — | 0.03 | |||||||||||
| Adjusted EPS (constant currency) | $ | 2.45 | $ | 2.12 | $ | 0.33 | 15.6 | % |
| (1) | The tax expense/(benefit) of each of the pre-tax items excluded from our GAAP results was computed based on the facts and tax assumptions associated with each item, and such impacts have also been excluded from Adjusted EPS. |
| • | 2019 taxes for the: Simplify to Grow Program were $(103) million, intangible asset impairment charges were $(14) million, mark-to-market gains from derivatives were $19 million, divestiture-related costs were zero, net earnings from divestiture were zero, net gain on divestiture were $3 million, impact from pension participation changes were $8 million, impact from resolution of tax matters were $(21) million, CEO transition remuneration were zero, net loss related to interest rate swaps were zero, Swiss tax reform were $(769) million, net loss on equity method investment transactions were $6 million and equity method investee and other charges/benefits were $(12) million. |
| • | 2018 taxes for the: Simplify to Grow Program were $(156) million, intangible asset impairment charges were $(16) million, mark-to-market gains from derivatives were $10 million, acquisition-related costs were $(3) million, net earnings from divestiture were zero, impact from pension participation changes were $(108) million, impact from resolution of tax matters were $(6) million, CEO transition remuneration were $(5) million, net gain related to interest rate swaps were $2 million, loss on debt extinguishment were $(35) million, U.S. tax reform were $19 million, gain on equity method investment transaction were $192 million and equity method investee and other charges/benefits were $16 million. |
| • | 2017 taxes for the: Simplify to Grow Program were $(190) million, intangible asset impairment charges were $(30) million, mark-to-market losses from derivatives were $(6) million, malware incident incremental costs were $(27) million, divestiture-related costs were $8 million, net earnings from divestitures were $16 million, net gain on divestitures were $7 million, impact from resolution of tax matters were $75 million, CEO transition remuneration were $(5) million, U.S. tax reform were $(44) million, gain on equity method investment transactions were $15 million and equity method investee and other charges/benefits were $(10) million. |
| (2) | See the Adjusted Operating Income table above and the related footnotes for more information. |
| (3) | Refer to Note 10, Financial Instruments, for information on interest rate swaps no longer designated as cash flow hedges. |
| (4) | Refer to Note 9, Debt and Borrowing Arrangements, for more information on losses on debt extinguishment. |
| (5) | Refer to Note 16, Income Taxes, for more information on the impact of U.S. tax reform. |
| (6) | Refer to Note 7, Equity Method Investments*,* for more information on the KDP transaction in 2018, the 2017 sale of an interest in one of our equity method investments and the 2016 acquisition of an interest in Keurig. |
| (7) | Includes our proportionate share of unusual or infrequent items, such as acquisition and divestiture-related costs, restructuring program costs and discrete U.S. tax reform impacts recorded by our JDE and Keurig equity method investees. |
Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures about Market Risk.