UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-16483
Mondelēz International, Inc.
(Exact name of registrant as specified in its charter)
Virginia | 52-2284372 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
Three Parkway North, Deerfield, Illinois |
60015 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (847) 943-4000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At July 31, 2013, there were 1,780,665,630 shares of the registrants Class A common stock outstanding.
Mondelēz International, Inc.
Page No. | ||||||
PART I FINANCIAL INFORMATION | ||||||
Item 1. | ||||||
1 | ||||||
2 | ||||||
Condensed Consolidated Balance Sheets |
3 | |||||
4 | ||||||
Condensed Consolidated Statements of Cash Flows |
5 | |||||
6 | ||||||
Item 2. | Managements Discussion and Analysis of Financial |
26 | ||||
Item 3. | 53 | |||||
Item 4. | 53 | |||||
PART II OTHER INFORMATION | ||||||
Item 1. | 54 | |||||
Item 1A. | 54 | |||||
Item 2. | 54 | |||||
Item 6. | 55 | |||||
Signature | 56 |
In this report, for all periods presented, we, us, our, and Mondelēz International refer to Mondelēz International, Inc. and subsidiaries (formerly Kraft Foods Inc. and subsidiaries). References to Common Stock refer to our Class A common stock.
i
PART I FINANCIAL INFORMATION
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of U.S. dollars, except per share data)
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net revenues |
$ | 8,595 | $ | 8,527 | $ | 17,339 | $ | 17,194 | ||||||||
Cost of sales |
5,364 | 5,316 | 10,866 | 10,788 | ||||||||||||
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Gross profit |
3,231 | 3,211 | 6,473 | 6,406 | ||||||||||||
Selling, general and administrative expenses |
2,269 | 2,194 | 4,601 | 4,386 | ||||||||||||
Asset impairment and exit costs |
48 | 27 | 92 | 71 | ||||||||||||
Gains on acquisition and divestitures, net |
(6 | ) | | (28 | ) | | ||||||||||
Amortization of intangibles |
55 | 53 | 109 | 109 | ||||||||||||
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Operating income |
865 | 937 | 1,699 | 1,840 | ||||||||||||
Interest and other expense, net |
235 | 344 | 514 | 831 | ||||||||||||
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Earnings from continuing operations before income taxes |
630 | 593 | 1,185 | 1,009 | ||||||||||||
Provision / (benefit) for income taxes |
13 | 103 | (6 | ) | 180 | |||||||||||
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Earnings from continuing operations |
617 | 490 | 1,191 | 829 | ||||||||||||
Earnings from discontinued operations, net of income taxes |
| 544 | | 1,024 | ||||||||||||
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Net earnings |
617 | 1,034 | 1,191 | 1,853 | ||||||||||||
Noncontrolling interest |
1 | 5 | 7 | 11 | ||||||||||||
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Net earnings attributable to Mondelēz International |
$ | 616 | $ | 1,029 | $ | 1,184 | $ | 1,842 | ||||||||
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Per share data: |
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Basic earnings per share attributable to |
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Continuing operations |
0.34 | 0.27 | 0.66 | 0.46 | ||||||||||||
Discontinued operations |
| 0.31 | | 0.58 | ||||||||||||
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Net earnings attributable to Mondelēz International |
$ | 0.34 | $ | 0.58 | $ | 0.66 | $ | 1.04 | ||||||||
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Diluted earnings per share attributable to |
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Continuing operations |
0.34 | 0.27 | 0.66 | 0.46 | ||||||||||||
Discontinued operations |
| 0.31 | | 0.57 | ||||||||||||
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Net earnings attributable to Mondelēz International |
$ | 0.34 | $ | 0.58 | $ | 0.66 | $ | 1.03 | ||||||||
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Dividends declared |
$ | 0.13 | $ | 0.29 | $ | 0.26 | $ | 0.58 |
See accompanying notes to the condensed consolidated financial statements.
1
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Earnings
(in millions of U.S. dollars)
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net earnings |
$ | 617 | $ | 1,034 | $ | 1,191 | $ | 1,853 | ||||||||
Other comprehensive earnings / (losses): |
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Currency translation adjustment: |
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Translation adjustment |
(938 | ) | (1,358 | ) | (1,709 | ) | (198 | ) | ||||||||
Tax (expense) / benefit |
7 | (28 | ) | (30 | ) | 9 | ||||||||||
Pension and other benefits: |
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Net actuarial gain / (loss) arising during period |
(9 | ) | 80 | (3 | ) | 109 | ||||||||||
Reclassification of losses / (gains) into net earnings: |
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Amortization of experience losses and |
47 | 117 | 97 | 249 | ||||||||||||
Settlement losses |
2 | 40 | 5 | 60 | ||||||||||||
Tax (expense) / benefit |
(9 | ) | (87 | ) | (26 | ) | (140 | ) | ||||||||
Derivatives accounted for as hedges: |
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Net derivative gains / (losses) |
92 | (390 | ) | 123 | (356 | ) | ||||||||||
Reclassification of losses / (gains) into net earnings |
22 | 18 | 45 | 143 | ||||||||||||
Tax (expense) / benefit |
(42 | ) | 151 | (58 | ) | 71 | ||||||||||
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Total other comprehensive earnings / (losses) |
(828 | ) | (1,457 | ) | (1,556 | ) | (53 | ) | ||||||||
Comprehensive earnings / (losses) |
(211 | ) | (423 | ) | (365 | ) | 1,800 | |||||||||
less: Comprehensive earnings / (losses) attributable to noncontrolling interests |
1 | (10 | ) | | 5 | |||||||||||
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Comprehensive earnings / (losses) attributable to Mondelēz International |
$ | (212 | ) | $ | (413 | ) | $ | (365 | ) | $ | 1,795 | |||||
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See accompanying notes to the condensed consolidated financial statements.
2
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of U.S. dollars, except share data)
(Unaudited)
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
ASSETS |
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Cash and cash equivalents |
$ | 2,476 | $ | 4,475 | ||||
Receivables (net of allowances of $98 in 2013 and $118 in 2012) |
5,989 | 6,129 | ||||||
Inventories, net |
3,937 | 3,741 | ||||||
Deferred income taxes |
478 | 542 | ||||||
Other current assets |
858 | 735 | ||||||
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Total current assets |
13,738 | 15,622 | ||||||
Property, plant and equipment, net |
9,703 | 10,010 | ||||||
Goodwill |
25,181 | 25,801 | ||||||
Intangible assets, net |
21,869 | 22,552 | ||||||
Prepaid pension assets |
27 | 18 | ||||||
Other assets |
1,305 | 1,475 | ||||||
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TOTAL ASSETS |
$ | 71,823 | $ | 75,478 | ||||
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LIABILITIES |
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Short-term borrowings |
$ | 756 | $ | 274 | ||||
Current portion of long-term debt |
2,319 | 3,577 | ||||||
Accounts payable |
4,316 | 4,642 | ||||||
Accrued marketing |
2,104 | 2,484 | ||||||
Accrued employment costs |
981 | 1,038 | ||||||
Other current liabilities |
2,657 | 2,858 | ||||||
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Total current liabilities |
13,133 | 14,873 | ||||||
Long-term debt |
14,986 | 15,574 | ||||||
Deferred income taxes |
6,084 | 6,302 | ||||||
Accrued pension costs |
2,720 | 2,885 | ||||||
Accrued postretirement health care costs |
458 | 451 | ||||||
Other liabilities |
2,893 | 3,038 | ||||||
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TOTAL LIABILITIES |
40,274 | 43,123 | ||||||
Commitments and Contingencies (Note 12) |
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EQUITY |
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Common Stock, no par value (1,996,537,778 shares issued in 2013 and 2012) |
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Additional paid-in capital |
31,472 | 31,548 | ||||||
Retained earnings |
11,117 | 10,457 | ||||||
Accumulated other comprehensive losses |
(4,182 | ) | (2,633 | ) | ||||
Treasury stock, at cost |
(7,000 | ) | (7,157 | ) | ||||
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Total Mondelēz International Shareholders Equity |
31,407 | 32,215 | ||||||
Noncontrolling interest |
142 | 140 | ||||||
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TOTAL EQUITY |
31,549 | 32,355 | ||||||
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TOTAL LIABILITIES AND EQUITY |
$ | 71,823 | $ | 75,478 | ||||
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See accompanying notes to the condensed consolidated financial statements.
3
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(in millions of U.S. dollars, except per share data)
(Unaudited)
Mondelēz International Shareholders Equity | ||||||||||||||||||||||||||||
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Earnings / (Losses) |
Treasury Stock |
Noncontrolling Interest |
Total Equity |
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Balances at January 1, 2012 |
$ | | $ | 31,318 | $ | 18,012 | $ | (6,637 | ) | $ | (7,476 | ) | $ | 111 | $ | 35,328 | ||||||||||||
Comprehensive earnings / (losses): |
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Net earnings |
| | 3,028 | | | 27 | 3,055 | |||||||||||||||||||||
Other comprehensive earnings / (losses), net of income taxes |
| | | (304 | ) | | 6 | (298 | ) | |||||||||||||||||||
Exercise of stock options and issuance of other stock awards |
| 141 | (53 | ) | | 319 | | 407 | ||||||||||||||||||||
Cash dividends declared |
| | (1,775 | ) | | | | (1,775 | ) | |||||||||||||||||||
Spin-Off of Kraft Foods Group, Inc. |
| 89 | (8,755 | ) | 4,308 | | | (4,358 | ) | |||||||||||||||||||
Dividends paid on noncontrolling interest and other activities |
| | | | | (4 | ) | (4 | ) | |||||||||||||||||||
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Balances at December 31, 2012 |
$ | | $ | 31,548 | $ | 10,457 | $ | (2,633 | ) | $ | (7,157 | ) | $ | 140 | $ | 32,355 | ||||||||||||
Comprehensive earnings / (losses): |
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Net earnings |
| | 1,184 | | | 7 | 1,191 | |||||||||||||||||||||
Other comprehensive earnings / (losses), net of income taxes |
| | | (1,549 | ) | | (7 | ) | (1,556 | ) | ||||||||||||||||||
Exercise of stock options and issuance of other stock awards |
| (75 | ) | (60 | ) | | 254 | | 119 | |||||||||||||||||||
Cash dividends declared |
| | (464 | ) | | | | (464 | ) | |||||||||||||||||||
Common Stock repurchased |
| | | | (97 | ) | | (97 | ) | |||||||||||||||||||
Acquisitions of noncontrolling interest and other activities |
| (1 | ) | | | | 2 | 1 | ||||||||||||||||||||
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Balances at June 30, 2013 |
$ | | $ | 31,472 | $ | 11,117 | $ | (4,182 | ) | $ | (7,000 | ) | $ | 142 | $ | 31,549 | ||||||||||||
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See accompanying notes to the condensed consolidated financial statements.
4
Mondelēz International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of U.S. dollars)
(Unaudited)
For the Six Months Ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES |
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Net earnings |
$ | 1,191 | $ | 1,853 | ||||
Adjustments to reconcile net earnings to operating cash flows: |
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Depreciation and amortization |
532 | 709 | ||||||
Stock-based compensation expense |
68 | 93 | ||||||
Deferred income tax benefit |
(166 | ) | (90 | ) | ||||
Gains on acquisition and divestitures, net |
(28 | ) | | |||||
Asset impairments |
27 | 75 | ||||||
Other non-cash expense, net |
97 | 14 | ||||||
Change in assets and liabilities: |
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Receivables, net |
25 | (298 | ) | |||||
Inventories, net |
(337 | ) | (514 | ) | ||||
Accounts payable |
(170 | ) | (384 | ) | ||||
Other current assets |
(22 | ) | (2 | ) | ||||
Other current liabilities |
(807 | ) | (429 | ) | ||||
Change in pension and postretirement assets and liabilities, net |
8 | 181 | ||||||
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Net cash provided by operating activities |
418 | 1,208 | ||||||
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CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES |
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Capital expenditures |
(568 | ) | (740 | ) | ||||
Acquisition, net of cash received |
(119 | ) | | |||||
Proceeds from divestitures, net of disbursements |
48 | | ||||||
Cash received from Kraft Foods Group related to the Spin-Off |
55 | | ||||||
Other |
2 | 96 | ||||||
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Net cash used in investing activities |
(582 | ) | (644 | ) | ||||
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CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES |
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Net (repayments) / issuance of short-term borrowings |
497 | 66 | ||||||
Long-term debt proceeds |
| 6,772 | ||||||
Long-term debt repaid |
(1,749 | ) | (3,542 | ) | ||||
Repurchase of Common Stock |
(92 | ) | | |||||
Dividends paid |
(464 | ) | (1,025 | ) | ||||
Other |
80 | (145 | ) | |||||
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Net cash (used in) / provided by financing activities |
(1,728 | ) | 2,126 | |||||
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Effect of exchange rate changes on cash and cash equivalents |
(107 | ) | (21 | ) | ||||
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Cash and cash equivalents: |
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Increase / (decrease) |
(1,999 | ) | 2,669 | |||||
Balance at beginning of period |
4,475 | 1,974 | ||||||
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Balance at end of period |
$ | 2,476 | $ | 4,643 | ||||
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See accompanying notes to the condensed consolidated financial statements.
5
Mondelēz International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include Mondelēz International as well as our wholly owned and majority owned subsidiaries.
Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted. It is managements opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of our financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results.
The condensed consolidated balance sheet data as of December 31, 2012 were derived from audited financial statements, but do not include all disclosures required by U.S. GAAP. You should read these statements in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2012.
Accounting Calendar Change:
In connection with moving toward a common consolidation date across the company, in the first quarter of 2013, we changed the consolidation date for our Europe segment. Previously, this segment primarily reported results as of the last Saturday of each period. Subsequent to the change, our Europe segment reports results as of the last calendar day of the period. At this time, the majority of our operating subsidiaries report results as of the last calendar day of the period. Our North American operating subsidiaries report results as of the last Saturday of the period. The change in the consolidation date for our Europe segment did not have a material impact on our financial results for the three and six months ended June 30, 2013.
Discontinued Operation:
On October 1, 2012, we completed the spin-off of our former North American grocery business, Kraft Foods Group, Inc. (Kraft Foods Group) by distributing 100% of the outstanding shares of common stock of Kraft Foods Group to holders of our Common Stock (the Spin-Off). We retained our global snacks business along with other food and beverage categories. The divested Kraft Foods Group is presented as a discontinued operation on the condensed consolidated statements of earnings for the three and six months ended June 30, 2012. The other comprehensive earnings and cash flows of Kraft Foods Group are included within our condensed consolidated statements of equity, comprehensive earnings and cash flows in the prior-year period through October 1, 2012. The results from the discontinued operation are discussed in additional detail in Note 2, Divestitures and Acquisition.
Segment Reorganization:
Effective January 1, 2013, we reorganized our operations, management and segments into five reportable segments:
| Latin America (formerly in our Developing Markets segment) |
| Asia Pacific (formerly in our Developing Markets segment) |
| Eastern Europe, Middle East & Africa (EEMEA) (formerly in our Developing Markets segment) |
| Europe (now includes certain European operations formerly in our Developing Markets segment) |
| North America. |
We changed and flattened our operating structure to reflect our greater concentration of operations in high-growth emerging markets and to further enhance collaboration across regions, expedite decision making and drive greater efficiencies to fuel our growth. Coincident with the change in segment structure, segment operating income for our North America region also changed to include all U.S. pension plan expenses, a portion of which was previously excluded from segment operating results evaluated by management as the costs were centrally managed. We have presented our segment results reflecting these changes for all periods presented.
6
Highly Inflationary Accounting:
On February 8, 2013, the Venezuelan government announced the devaluation of the official Venezuelan bolivar exchange rate from 4.30 bolivars to 6.30 bolivars to the U.S. dollar and the elimination of the second-tier, government-regulated SITME exchange rate previously applied to value certain types of transactions. In connection with the announced changes, which were effective on February 13, 2013, we recorded a $54 million unfavorable foreign currency charge related to the devaluation of our net monetary assets in Venezuela in selling, general and administrative expenses within our Latin America segment in the three months ended March 31, 2013. We also incurred net unfavorable devaluation-related foreign currency impacts within our pretax earnings of approximately $17 million during the three months and $24 million during the six months ended June 30, 2013 related to translating the earnings of our Venezuelan subsidiary to the U.S. dollar at the new exchange rate.
We began accounting for the results of our Venezuelan subsidiaries in U.S. dollars effective January 1, 2010, as prescribed under U.S. GAAP for highly inflationary economies. We use the official Venezuelan bolivar exchange rate to translate the results of our Venezuelan operations into U.S. dollars. During 2012, we recorded immaterial foreign currency impacts in connection with highly inflationary accounting for Venezuela.
New Accounting Pronouncements:
In February 2013, the Financial Accounting Standards Board (FASB) issued an accounting standards update, clarifying the reporting of significant reclassifications from components of accumulated other comprehensive income (AOCI) and the related impacts on primarily the statement of earnings. The guidance is effective for fiscal years and interim reporting periods beginning after December 15, 2012. We adopted the guidance effective January 1, 2013 and disclose reclassifications from accumulated other comprehensive income and their impact on our condensed consolidated financial statements in Note 13, Reclassifications from Accumulated Other Comprehensive Income.
In February 2013, the FASB issued an accounting standards update, clarifying how entities are required to measure obligations resulting from joint and several liability arrangements. The guidance is effective for us on January 1, 2014. We do not expect it to have a material effect on our consolidated financial results as our joint and several guarantee of indebtedness discussed in Note 12, Commitments and Contingencies, expires prior to the effective date. We have no other material arrangements that fall within the scope of the update at this time.
In March 2013, the FASB issued an accounting standards update on a parent companys accounting for the cumulative translation adjustment (CTA) upon derecognition of certain subsidiaries or groups of assets within a foreign entity or an investment in a foreign entity. The guidance is effective for us on January 1, 2014. We plan to comply with the new requirement in connection with dispositions that occur after that date and are within the scope of the standard. Application of the standard will impact the net gain or loss recognized on future dispositions.
Subsequent Events:
We evaluated subsequent events and included all accounting and disclosure requirements related to material subsequent events in our condensed consolidated financial statements and related notes. See Note 11, Stock Plans, Note 12, Commitments and Contingencies and Note 17, Subsequent Events.
Note 2. Divestitures and Acquisition
On October 1, 2012, we completed the Spin-Off of our North American grocery business, Kraft Foods Group, to our shareholders. On October 1, 2012, each of our shareholders of record as of the close of business on September 19, 2012 (the Record Date), received one share of Kraft Foods Group common stock for every three shares of our Common Stock held as of the Record Date. The distribution was structured to be tax free to our U.S. shareholders for U.S. federal income tax purposes.
Kraft Foods Group is now an independent public company trading on The NASDAQ Global Select Market under the symbol KRFT. After the Spin-Off, we do not beneficially own any shares of Kraft Foods Group common stock.
7
Summary results of operations for Kraft Foods Group through June 30, 2012 were as follows:
For the Three Months Ended |
For the Six Months Ended |
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June 30, 2012 | June 30, 2012 | |||||||
(in millions) | (in millions) | |||||||
Net revenues |
$ | 4,759 | $ | 9,185 | ||||
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Earnings before income taxes |
$ | 857 | $ | 1,579 | ||||
Provision for income taxes |
313 | 555 | ||||||
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Earnings from discontinued operations, net of income taxes |
$ | 544 | $ | 1,024 | ||||
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The results of the Kraft Foods Group discontinued operation exclude certain corporate and business unit costs, which we allocated to Kraft Foods Group historically and which continued at Mondelēz International after the Spin-Off. These costs include primarily corporate overheads, information systems and sales force support. On a pre-tax basis, these costs were estimated to be $48 million for the three months and $102 million for the six months ended June 30, 2012.
In March 2013, we collected $55 million from Kraft Foods Group related to the net cash settlement of stock awards held by our respective employees at the time of the Spin-Off.
Spin-Off Costs:
Our results include one-time Spin-Off transaction, transition and financing and related costs (Spin-Off Costs) we have incurred to date. We recorded Spin-Off Costs of $15 million in the three months and $24 million in the six months ended June 30, 2013 and $128 million in the three months and $301 million in the six months ended June 30, 2012. The Spin-Off Costs were recorded within pre-tax earnings as follows:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Selling, general and administrative expenses |
$ | 15 | $ | 100 | $ | 24 | $ | 139 | ||||||||
Interest and other expense, net |
| 28 | | 162 | ||||||||||||
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|
|
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|
|||||||||
Spin-Off Costs |
$ | 15 | $ | 128 | $ | 24 | $ | 301 | ||||||||
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We expect to incur Spin-Off Costs of approximately $100 million in 2013 related primarily to human resources, customer service and logistics and information systems and processes as well as legal costs associated with revising intellectual property and other long-term agreements.
Acquisition, Other Divestitures and Sale of Property:
During the three months ended June 30, 2013, we completed two divestitures within our EEMEA segment which generated cash proceeds of $48 million during the quarter and pre-tax gains of $6 million. The divestitures included a salty snacks business in Turkey and a confectionery business in South Africa. The aggregate operating results of these divestitures were not material to our condensed consolidated financial statements during the periods presented.
On February 22, 2013, we acquired the remaining interest in a biscuit operation in Morocco, which is now a wholly-owned subsidiary within our EEMEA segment. We paid net cash consideration of $119 million, consisting of $155 million purchase price net of cash acquired of $36 million. Prior to the acquisition, our interest in the operation was accounted for under the equity method. As a result of obtaining a controlling interest, we consolidated the operation and recorded a preliminary estimate of the fair value of acquired assets (including estimated identifiable intangible assets of $111 million), the liabilities assumed and estimated goodwill of $159 million. We also recorded a pre-tax gain of $22 million related to the remeasurement of our previously-held equity interest in the operation to fair value in accordance with U.S. GAAP. Acquisition costs of $7 million were included within selling, general and administrative expenses and interest and other expense, net during the six months ended June 30, 2013. The operating results of the acquisition were not material to our condensed consolidated financial statements as of and for the three and six months ended June 30, 2013.
8
During the three months ended December 31, 2012, we also completed several divestitures within our Europe segment which generated cash proceeds of $200 million and pre-tax gains of $107 million. The divestitures primarily included a dinners and sauces grocery business in Germany and Belgium and a canned meat business in Italy. The aggregate operating results of these divestitures were not material to our condensed consolidated financial statements as of and for the three and six months ended June 30, 2012.
In 2012, we sold property in Russia and Turkey within our EEMEA segment. The Turkey property sale generated a $22 million pre-tax gain in the second quarter of 2012 and $29 million of cash proceeds which were received primarily in the fourth quarter of 2012 upon finalization of certain terms and conditions of the sale. The Russia property sale generated a $55 million pre-tax gain and $72 million of cash proceeds in the first quarter of 2012. The gains were recorded within selling, general and administrative expenses and the cash proceeds from the Russia property sale were recorded in cash flows from other investing activities in the six months ended June 30, 2012.
Note 3. Inventories
Inventories at June 30, 2013 and December 31, 2012 were:
June 30, 2013 |
December 31, 2012 |
|||||||
(in millions) | ||||||||
Raw materials |
$ | 1,254 | $ | 1,213 | ||||
Finished product |
2,683 | 2,528 | ||||||
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|
|
|
|||||
Inventories, net |
$ | 3,937 | $ | 3,741 | ||||
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|
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Note 4. Property, Plant and Equipment
Property, plant and equipment at June 30, 2013 and December 31, 2012 were:
June 30, 2013 |
December 31, 2012 |
|||||||
(in millions) | ||||||||
Land and land improvements |
$ | 618 | $ | 643 | ||||
Buildings and building improvements |
3,127 | 3,199 | ||||||
Machinery and equipment |
11,791 | 11,992 | ||||||
Construction in progress |
1,097 | 1,022 | ||||||
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|
|||||
16,633 | 16,856 | |||||||
Accumulated depreciation |
(6,930 | ) | (6,846 | ) | ||||
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|
|||||
Property, plant and equipment, net |
$ | 9,703 | $ | 10,010 | ||||
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Note 5. Goodwill and Intangible Assets
Goodwill by reportable segment at June 30, 2013 and December 31, 2012, revised to reflect our new segment structure, was:
June 30, 2013 |
December 31, 2012 |
|||||||
(in millions) | ||||||||
Latin America |
$ | 1,331 | $ | 1,413 | ||||
Asia Pacific |
2,570 | 2,738 | ||||||
EEMEA |
2,750 | 2,767 | ||||||
Europe |
9,468 | 9,777 | ||||||
North America |
9,062 | 9,106 | ||||||
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|
|||||
Goodwill |
$ | 25,181 | $ | 25,801 | ||||
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9
Intangible assets at June 30, 2013 and December 31, 2012 were:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
Non-amortizable intangible assets |
$ | 19,874 | $ | 20,408 | ||||
Amortizable intangible assets |
2,795 | 2,861 | ||||||
|
|
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|
|||||
22,669 | 23,269 | |||||||
Accumulated amortization |
(800 | ) | (717 | ) | ||||
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|
|||||
Intangible assets, net |
$ | 21,869 | $ | 22,552 | ||||
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Non-amortizable intangible assets consist substantially of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of trademarks, customer-related intangibles, process technology, licenses and non-compete agreements. At June 30, 2013, the weighted-average life of our amortizable intangible assets was 13.3 years.
Amortization expense was $55 million for the three months and $109 million for the six months ended June 30, 2013 and $53 million for the three months and $109 million for the six months ended June 30, 2012. We currently estimate annual amortization expense for each of the next five years to be approximately $215 million.
Changes in goodwill and intangible assets consisted of:
Intangible | ||||||||
Goodwill | Assets, at Cost | |||||||
(in millions) | ||||||||
Balance at January 1, 2013 |
$ | 25,801 | $ | 23,269 | ||||
Changes due to: |
||||||||
Foreign currency |
(766 | ) | (705 | ) | ||||
Acquisition |
159 | 111 | ||||||
Divestitures |
(10 | ) | (6 | ) | ||||
Other |
(3 | ) | | |||||
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|
|||||
Balance at June 30, 2013 |
$ | 25,181 | $ | 22,669 | ||||
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Refer to Note 2, Divestitures and Acquisition, for additional information related to the acquisition and divestitures.
During the six months ended June 30, 2012, we recorded an impairment charge of $20 million within asset impairment and exit costs for the impairment of an intangible asset in Japan in our Asia Pacific segment.
In connection with our 2012 annual impairment testing and subsequent impairment reviews, we noted one of our reporting units, U.S. Confections, was more sensitive to near-term changes in discounted cash flow assumptions. U.S. Confections, consisting of primarily U.S. gum and candy operations, has $2,177 million of goodwill as of June 30, 2013. While the reporting unit passed the first step of the 2012 annual impairment test with an estimated excess fair value over the carrying value of net assets of 9%, if the segment operating income or other valuation assumptions were to deteriorate significantly in the future, it could adversely affect the estimated fair value of the reporting unit. We are currently evaluating our gum operations and implementing a long-term plan to improve gum operating results. If we are unsuccessful in maintaining or increasing the profitability of this business, the estimated fair value of the reporting unit may fall below carrying value and lead to a potential goodwill impairment in the future. However, we believe that it is more likely than not that the fair value of U.S. Confections exceeds its carrying value.
10
Note 6. 2012-2014 Restructuring Program
In 2012, our Board of Directors approved $1.5 billion of restructuring and related implementation costs (2012-2014 Restructuring Program) reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the restructuring and implementation activities was to ensure that both Mondelēz International and Kraft Foods Group were each set up to operate efficiently and execute on our respective business strategies upon separation and in the future.
Of the $1.5 billion of 2012-2014 Restructuring Program costs, we retained approximately $925 million after the Spin-Off. Since the inception of the 2012-2014 Restructuring Program, we have incurred $209 million of the estimated $925 million total 2012-2014 Restructuring Program charges.
Restructuring Costs:
We recorded restructuring charges of $48 million in the three months and $88 million in the six months ended June 30, 2013 and $27 million in the three months and $50 million in the six months ended June 30, 2012 within asset impairment and exit costs.
Liability activity for the 2012-2014 Restructuring Program for the six months ended June 30, 2013 was (in millions):
Severance and related costs |
Asset Write-downs |
Total | ||||||||||
(in millions) | ||||||||||||
Liability balance, January 1, 2013 |
$ | 36 | $ | | $ | 36 | ||||||
Charges |
65 | 23 | 88 | |||||||||
Cash spent |
(21 | ) | | (21 | ) | |||||||
Non-cash settlements |
(9 | ) | (23 | ) | (32 | ) | ||||||
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|
|
|
|
|||||||
Liability balance, June 30, 2013 |
$ | 71 | $ | | $ | 71 | ||||||
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|
|
|
|
We spent $17 million in the three months and $21 million in the six months ended June 30, 2013 in cash severance and related costs. We also recognized non-cash pension plan settlement losses (see Note 10, Benefit Plans) and non-cash asset write-downs (including accelerated depreciation and asset impairments) totaling $23 million in the three months and $32 million in the six months ended June 30, 2013. At June 30, 2013, a $71 million restructuring liability was recorded within other current liabilities.
Implementation Costs:
Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities. We believe the disclosure of implementation costs provides readers of our financial statements greater transparency to the total costs of our 2012-2014 Restructuring Program. We recorded implementation costs of $7 million in the three months and $11 million in the six months ended June 30, 2013 and $2 million in the three months and $1 million in the six months ended June 30, 2012. We recorded these costs within cost of sales and selling, general and administrative expenses within our Europe and North America segments. These costs primarily include reorganization costs to integrate and reorganize our operations and facilities, the discontinuance of certain product lines and the incremental expenses related to the closure of facilities, replicating our information systems infrastructure and reorganizing costs related to our sales function.
11
Restructuring and Implementation Costs in Operating Income:
During the three and six months ended June 30, 2013 and 2012, we recorded restructuring and implementation costs within operating income as follows:
For the Three Months Ended June 30, 2013 | For the Six Months Ended June 30, 2013 | |||||||||||||||||||||||
Restructuring | Implementation | Restructuring | Implementation | |||||||||||||||||||||
Costs | Costs | Total | Costs | Costs | Total | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Latin America |
$ | | | $ | | $ | | $ | | $ | | |||||||||||||
Asia Pacific |
| | | | | | ||||||||||||||||||
EEMEA |
3 | | 3 | 4 | | 4 | ||||||||||||||||||
Europe |
18 | 2 | 20 | 37 | 4 | 41 | ||||||||||||||||||
North America |
26 | 5 | 31 | 46 | 7 | 53 | ||||||||||||||||||
Corporate expenses |
1 | | 1 | 1 | | 1 | ||||||||||||||||||
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|
|
|
|
|
|
|||||||||||||
Total |
$ | 48 | $ | 7 | $ | 55 | $ | 88 | $ | 11 | $ | 99 | ||||||||||||
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|
|
For the Three Months Ended June 30, 2012 | For the Six Months Ended June 30, 2012 | |||||||||||||||||||||||
Restructuring | Implementation | Restructuring | Implementation | |||||||||||||||||||||
Costs | Costs | Total | Costs | Costs | Total | |||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Latin America |
$ | 5 | $ | | $ | 5 | $ | 5 | $ | | $ | 5 | ||||||||||||
Asia Pacific |
| | | | | | ||||||||||||||||||
EEMEA |
| | | | | | ||||||||||||||||||
Europe |
| | | | | | ||||||||||||||||||
North America |
22 | 2 | 24 | 45 | 1 | 46 | ||||||||||||||||||
Corporate Expenses |
| | | | | | ||||||||||||||||||
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|
|||||||||||||
Total |
$ | 27 | $ | 2 | $ | 29 | $ | 50 | $ | 1 | $ | 51 | ||||||||||||
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Note 7. Integration Costs
Cadbury Integration Program:
As a result of our combination with Cadbury Limited (formerly, Cadbury plc or Cadbury) in 2010, we launched an integration program to realize expected annual cost savings of approximately $750 million by the end of 2013 and revenue synergies from investments in distribution, marketing and product development. In order to achieve these cost savings and synergies and combine and integrate the two businesses, we expect to incur total integration charges of approximately $1.5 billion through the end of 2013 (the Integration Program).
Integration Program costs include the costs associated with combining the Cadbury operations with our operations and are separate from the costs related to the acquisition. Since the inception of the Integration Program, we have incurred approximately $1.4 billion of the estimated $1.5 billion total integration charges.
Changes in the Integration Program liability during the six months ended June 30, 2013 were (in millions):
Balance at January 1, 2013 |
$ | 202 | ||
Charges |
73 | |||
Cash spent |
(96 | ) | ||
Currency / other |
(1 | ) | ||
|
|
|||
Balance at June 30, 2013 |
$ | 178 | ||
|
|
We recorded Integration Program charges of $52 million during the three months and $73 million during the six months ended June 30, 2013 and $35 million during the three months and $78 million during the six months ended June 30, 2012. We recorded these charges in operations, as a part of selling, general and administrative expenses within our Europe, Asia Pacific, Latin America and EEMEA segments.
12
Other Integration Costs:
In connection with our acquisition of a biscuit operation in Morocco in February 2013, we recorded integration charges of $1 million during the three months ended June 30, 2013. We recorded these charges in selling, general and administrative expenses within our EEMEA segment. See Note 2, Divestitures and Acquisition, for more information on the acquisition.
Note 8. Debt
Borrowing Arrangements:
We maintain a revolving credit facility that we have historically used for general corporate purposes, including for working capital purposes and to support our commercial paper program. Our $4.5 billion four-year senior unsecured revolving credit facility expires on April 1, 2015. On April 4, 2013, we amended a debt covenant in the credit facility agreement to reflect our new capital structure following the divestiture of Kraft Foods Group. We are now required to maintain a minimum total shareholders equity, excluding accumulated other comprehensive earnings / (losses), of at least $24.6 billion. At June 30, 2013, we met the covenant as our total shareholders equity, excluding accumulated other comprehensive earnings / (losses), was $35.6 billion. The revolving credit facility agreement also contains customary representations, covenants and events of default. However, there are no other financial covenants, credit rating triggers or provisions that could require us to post collateral as security. We intend to use the revolving credit facility for general corporate purposes, including for working capital purposes and to support our commercial paper program. As of June 30, 2013, no amounts were drawn on this credit facility.
Long-Term Debt:
On May 8, 2013, $1 billion of our 2.625% notes matured. The notes and accrued interest to date were paid with cash on hand and the issuance of commercial paper.
On February 11, 2013, $750 million of our 6.00% notes matured. The notes and accrued interest to date were paid with cash on hand.
Fair Value of Our Debt:
The fair value of our short-term borrowings at June 30, 2013 and December 31, 2012 reflects current market interest rates and approximates the amounts we have recorded on our condensed consolidated balance sheet. The fair value of our long-term debt was determined using quoted prices in active markets for the publicly traded debt obligations (Level 1 valuation data). At June 30, 2013, the aggregate fair value of our total debt was $20,348 million and its carrying value was $18,061 million. At December 31, 2012, the aggregate fair value of our total debt was $22,946 million and its carrying value was $19,425 million.
Note 9. Financial Instruments
Derivative instruments were recorded at fair value in the condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012 as follows:
June 30, 2013 | December 31, 2012 | |||||||||||||||
Derivative | Derivative | Derivative | Derivative | |||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
(in millions) | ||||||||||||||||
Derivatives designated as |
||||||||||||||||
Foreign exchange contracts |
$ | 8 | $ | | $ | 6 | $ | 10 | ||||||||
Commodity contracts |
| 16 | 3 | 34 | ||||||||||||
Interest rate contracts |
146 | | 16 | | ||||||||||||
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|
|
|
|
|
|||||||||
$ | 154 | $ | 16 | $ | 25 | $ | 44 | |||||||||
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|
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|
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|
|||||||||
Derivatives not designated as |
||||||||||||||||
Foreign exchange contracts |
$ | 43 | $ | 32 | $ | 16 | $ | 33 | ||||||||
Commodity contracts |
93 | 77 | 106 | 103 | ||||||||||||
Interest rate contracts |
72 | 45 | 93 | 61 | ||||||||||||
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|
|
|
|
|
|||||||||
$ | 208 | $ | 154 | $ | 215 | $ | 197 | |||||||||
|
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|
|
|
|
|
|
|||||||||
Total fair value |
$ | 362 | $ | 170 | $ | 240 | $ | 241 | ||||||||
|
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|
|
|
|
13
We record derivative assets and liabilities on a gross basis in our condensed consolidated balance sheet. The fair value of our derivative assets is recorded within other current assets and the fair value of our derivative liabilities is recorded within other current liabilities. See our consolidated financial statements and Note 1 and Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 for additional information on our risk management strategies and our use of and accounting for derivatives.
The fair values (asset / (liability)) of our derivative instruments at June 30, 2013 were determined using:
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Other Observable | Unobservable | ||||||||||||||
Total | Assets | Inputs | Inputs | |||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(in millions) | ||||||||||||||||
Foreign exchange contracts |
$ | 19 | $ | | $ | 19 | $ | | ||||||||
Commodity contracts |
| (39 | ) | 39 | | |||||||||||
Interest rate contracts |
173 | | 173 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivatives |
$ | 192 | $ | (39 | ) | $ | 231 | $ | | |||||||
|
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|
|
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|
|
The fair values (asset / (liability)) of our derivative instruments at December 31, 2012 were determined using:
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Other Observable | Unobservable | ||||||||||||||
Total | Assets | Inputs | Inputs | |||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(in millions) | ||||||||||||||||
Foreign exchange contracts |
$ | (21 | ) | $ | | $ | (21 | ) | $ | | ||||||
Commodity contracts |
(28 | ) | (53 | ) | 25 | | ||||||||||
Interest rate contracts |
48 | | 48 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivatives |
$ | (1 | ) | $ | (53 | ) | $ | 52 | $ | | ||||||
|
|
|
|
|
|
|
|
Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges. Our exchange-traded derivatives are generally subject to master netting arrangements which permit net settlement of transactions with the same counterparty when certain criteria are met, such as in the event of default. We also are required to maintain cash margin accounts in connection with funding the settlement of our open positions and the margin requirements generally fluctuate daily based on market conditions. We have recorded margin deposits related to our exchange-traded derivatives of $72 million as of June 30, 2013 and $107 million as of December 31, 2012 within other current assets. Based on our net asset or liability positions with individual counterparties, in the event of default and immediate net settlement of all of our open positions, at June 30, 2013 and December 31, 2012, all of our net derivative liabilities would be fully offset by either our derivative assets or margin accounts held by counterparties.
Level 2 financial assets and liabilities consist primarily of over-the-counter (OTC) foreign exchange forwards, options and swaps; commodity forwards and options; and interest rate swaps. These derivative transactions are governed by International Swap Dealers Association (ISDA) agreements and other standard industry contracts. Under our ISDA agreements, we do not post nor require collateral from our counterparties. Also, in the event of default, our gross OTC derivative asset and liability positions could be net settled, except for substantially all of our commodity OTC derivatives which do not have a legal right of set-off. In connection with our OTC derivatives that could be net-settled in the event of default, and assuming all parties were to fail to comply with the terms of the agreements, for the derivatives we have in a net liability position, we would owe $58 million as of June 30, 2013 and $88 million as of December 31, 2012, and for the derivatives we have in a net asset position, our counterparties would owe us a total of $250 million as of June 30, 2013 and $114 million as of December 31, 2012. We manage the credit risk we bear in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties. Our foreign currency contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that
14
rely on market observable inputs such as commodity prices. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.
Derivative Volume:
The net notional values of our derivative instruments as of June 30, 2013 and December 31, 2012 were:
Notional Amount | ||||||||
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
Foreign exchange contracts: |
||||||||
Intercompany loans and forecasted interest payments |
$ | 2,592 | $ | 3,743 | ||||
Forecasted transactions |
1,181 | 1,663 | ||||||
Commodity contracts |
442 | 620 | ||||||
Interest rate contracts |
2,210 | 2,259 | ||||||
Net investment hedge euro notes |
1,106 | 1,121 | ||||||
Net investment hedge pound sterling notes |
989 | 1,057 |
Cash Flow Hedges:
Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings / (losses) included:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Accumulated gain / (loss) at |
$ | | $ | (218 | ) | $ | (38 | ) | $ | (297 | ) | |||||
Transfer of realized losses / (gains) |
15 | (8 | ) | 32 | 56 | |||||||||||
Unrealized gain / (loss) in fair value |
57 | (44 | ) | 78 | (43 | ) | ||||||||||
Discontinued operations |
| (169 | ) | | (155 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated gain / (loss) at June 30 |
$ | 72 | $ | (439 | ) | $ | 72 | $ | (439 | ) | ||||||
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|
|
|
|
|
|
|||||||||
After-tax gains / (losses) reclassified from accumulated other comprehensive earnings / (losses) into net earnings were: | ||||||||||||||||
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Foreign exchange contracts |
$ | (4 | ) | $ | 26 | $ | (12 | ) | $ | 47 | ||||||
Commodity contracts |
(10 | ) | (4 | ) | (19 | ) | (6 | ) | ||||||||
Interest rate contracts |
(1 | ) | (14 | ) | (1 | ) | (97 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (15 | ) | $ | 8 | $ | (32 | ) | $ | (56 | ) | |||||
|
|
|
|
|
|
|
|
Within the interest rate contracts, in the three months ended March 31, 2012, we recognized a $130 million loss in interest and other expense, net, related to certain forward-starting interest rate swaps for which the planned timing of the related forecasted debt was changed in March 2012 in connection with our Spin-Off plans and related debt capitalization plan. Amounts excluded from effectiveness testing during the three and six months ended June 30, 2013 were not material.
15
After-tax gains / (losses) recognized in other comprehensive earnings / (losses) were:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Foreign exchange contracts forecasted transactions |
$ | (2 | ) | $ | 23 | $ | 4 | $ | | |||||||
Commodity contracts |
(4 | ) | 27 | (8 | ) | 3 | ||||||||||
Interest rate contracts |
63 | (94 | ) | 82 | (46 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 57 | $ | (44 | ) | $ | 78 | $ | (43 | ) | ||||||
|
|
|
|
|
|
|
|
Ineffectiveness for our cash flow hedges was not material for all periods presented. We record pre-tax (i) gains or losses reclassified from accumulated other comprehensive earnings / (losses) into earnings, (ii) gains or losses on ineffectiveness, and (iii) gains or losses on amounts excluded from effectiveness testing in:
| cost of sales for commodity contracts; |
| cost of sales for foreign exchange contracts related to forecasted transactions; and |
| interest and other expense, net for interest rate contracts and foreign exchange contracts related to intercompany loans. |
We expect to transfer unrealized losses of $17 million (net of taxes) for commodity cash flow hedges, unrealized gains of $8 million (net of taxes) for foreign currency cash flow hedges and unrealized losses of $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.
Hedge Coverage:
As of June 30, 2013, we hedged transactions forecasted to impact cash flows over the following periods:
| commodity transactions for periods not exceeding the next 9 months; |
| interest rate transactions for periods not exceeding the next 33 years and 8 months; and |
| foreign currency transactions for periods not exceeding the next 5 months. |
Economic Hedges:
Pre-tax gains / (losses) recorded in net earnings for economic hedges which are not designated as hedging instruments were:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
Location of Gain / (Loss) | ||||||||||||||||
2013 | 2012 | 2013 | 2012 | in Earnings | ||||||||||||||
(in millions) | (in millions) | |||||||||||||||||
Foreign exchange contracts: |
||||||||||||||||||
Intercompany loans and forecasted interest payments |
$ | (17 | ) | $ | 80 | $ | 3 | $ | 51 | Interest expense | ||||||||
Forecasted purchases |
38 | 10 | 26 | 18 | Cost of sales | |||||||||||||
Forecasted transactions |
| (8 | ) | | (17 | ) | Interest expense | |||||||||||
Forecasted transactions |
4 | | 3 | | Selling, general and administrative expenses | |||||||||||||
Interest rate contracts |
| | (2 | ) | | Interest expense | ||||||||||||
Commodity contracts |
17 | 33 | 34 | 67 | Cost of sales | |||||||||||||
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Total |
$ | 42 | $ | 115 | $ | 64 | $ | 119 | ||||||||||
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|
16
Hedges of Net Investments in Foreign Operations:
After-tax gains / (losses) related to hedges of net investments in foreign operations in the form of euro and pound sterling-denominated debt were:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
Location of Gain / (Loss) | ||||||||||||||||
2013 | 2012 | 2013 | 2012 | AOCI | ||||||||||||||
(in millions) | (in millions) | |||||||||||||||||
Euro notes |
$ | (10 | ) | $ | 36 | $ | 10 | $ | (13 | ) | Currency Translation Adjustment | |||||||
Pound sterling notes |
(1 | ) | 12 | 43 | (7 | ) | Currency Translation Adjustment |
Note 10. Benefit Plans
Pension Plans
Components of Net Periodic Pension Cost:
Net periodic pension cost for the three and six months ended June 30, 2013 and 2012 consisted of:
U.S. Plans | Non-U.S. Plans | |||||||||||||||
For the Three Months Ended June 30, |
For the Three Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost |
$ | 19 | $ | 37 | $ | 43 | $ | 45 | ||||||||
Interest cost |
15 | 87 | 88 | 110 | ||||||||||||
Expected return on plan assets |
(17 | ) | (113 | ) | (107 | ) | (129 | ) | ||||||||
Amortization: |
||||||||||||||||
Net loss from experience differences |
13 | 70 | 33 | 34 | ||||||||||||
Prior service cost |
| 2 | 1 | | ||||||||||||
Settlement losses(1) |
2 | 40 | | | ||||||||||||
Net pension costs related to discontinued operations |
| (86 | ) | | (9 | ) | ||||||||||
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Net periodic pension cost |
$ | 32 | $ | 37 | $ | 58 | $ | 51 | ||||||||
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U.S. Plans | Non-U.S. Plans | |||||||||||||||
For the Six Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost |
$ | 36 | $ | 81 | $ | 86 | $ | 90 | ||||||||
Interest cost |
30 | 176 | 177 | 219 | ||||||||||||
Expected return on plan assets |
(34 | ) | (228 | ) | (215 | ) | (257 | ) | ||||||||
Amortization: |
||||||||||||||||
Net loss from experience differences |
27 | 154 | 68 | 68 | ||||||||||||
Prior service cost |
1 | 4 | 1 | 1 | ||||||||||||
Settlement losses(1) |
5 | 60 | | | ||||||||||||
Net pension costs related to discontinued operations |
| (166 | ) | | (18 | ) | ||||||||||
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Net periodic pension cost |
$ | 65 | $ | 81 | $ | 117 | $ | 103 | ||||||||
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(1) | Includes settlement losses of $9 million in the three and six months ended June 30, 2013 and $19 million in the three and six months ended June 30, 2012 related to employees who elected to take lump-sum payments in connection with our 2012-2014 Restructuring Program. These costs are reflected within asset impairments and exit costs on the condensed consolidated statement of earnings and within the charges related to severance and related costs in Note 6, 2012-2014 Restructuring Program. In the six months ended June 30, 2013, these were partially offset by $4 million of gains due to improvements in current market rates for routine settlement losses. |
17
Employer Contributions:
We make contributions to our U.S. and non-U.S. pension plans primarily to the extent that they are tax deductible and do not generate an excise tax liability. During the six months ended June 30, 2013, we contributed $11 million to our U.S. plans and $175 million to our non-U.S. Plans. Based on current tax law, we plan to make further contributions of approximately $5 million to our U.S. plans and approximately $134 million to our non-U.S. plans during the remainder of 2013. However, our actual contributions may differ due to many factors, including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.
Postretirement Benefit Plans
Net postretirement health care costs during the three and six months ended June 30, 2013 and 2012 consisted of:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Service cost |
$ | 4 | $ | 8 | $ | 8 | $ | 19 | ||||||||
Interest cost |
4 | 39 | 9 | 79 | ||||||||||||
Amortization: |
||||||||||||||||
Net loss from experience differences |
3 | 21 | 6 | 40 | ||||||||||||
Prior service credit |
(3 | ) | (10 | ) | (6 | ) | (18 | ) | ||||||||
Net postretirement health care costs related to discontinued operation |
| (42 | ) | | (86 | ) | ||||||||||
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Net postretirement health care costs |
$ | 8 | $ | 16 | $ | 17 | $ | 34 | ||||||||
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Postemployment Benefit Plans
Net postemployment costs during the three and six months ended June 30, 2013 and 2012 consisted of:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Service cost |
$ | 2 | $ | 4 | $ | 4 | $ | 7 | ||||||||
Interest cost |
2 | 2 | 3 | 4 | ||||||||||||
Net postemployment costs related to discontinued operation |
| (3 | ) | | (4 | ) | ||||||||||
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Net postemployment costs |
$ | 4 | $ | 3 | $ | 7 | $ | 7 | ||||||||
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Note 11. Stock Plans
Stock Options:
In February 2013, as part of our annual equity program, we granted 11.6 million stock options to eligible employees at an exercise price of $27.05 per share on the grant date. During the six months ended June 30, 2013, we issued 0.5 million of additional stock options with a weighted-average exercise price of $28.38 per share. In total, 12.1 million stock options were granted with a weighted-average exercise price of $27.10 per share. During the six months ended June 30, 2013, 4.4 million stock options, with an intrinsic value of $41.8 million, were exercised.
Restricted and Deferred Stock:
In January 2013, in connection with our long-term incentive plan, we granted 1.5 million shares of restricted and deferred stock at a market value on the grant date of $26.24 per share. In February 2013, as part of our annual equity program, we issued 2.3 million shares of restricted and deferred stock to eligible employees at a market value on the grant date of $27.05 per share. During the six months ended June 30, 2013, we issued 1.2 million of additional restricted and deferred
18
shares with a weighted-average market value on the grant date of $20.69 per share. Included in the 1.2 million of additional shares issued were 0.8 million shares for awards related to long-term incentive plan awards granted in 2010 which were issued and vested during the first quarter of 2013. The 2010 long-term incentive plan awards had a weighted-average market value of $17.97 per share, which is based on the stock price on the grant date in 2010 and adjusted to reflect the Spin-Off and related splitting of the equity awards. In total, 5.0 million restricted and deferred shares were issued with a weighted-average market value of $25.36 per share. During the six months ended June 30, 2013, 5.2 million shares of restricted and deferred stock vested with a market value on the vesting date of $141.1 million.
Stock Repurchase Program:
On March 12, 2013, our Board of Directors authorized the repurchase of up to the lesser of 40 million shares or $1.2 billion of our Common Stock through March 12, 2016. Repurchases under the program are determined by management and are wholly discretionary. During the three months ended June 30, 2013, we repurchased 3.2 million shares of Common Stock at an average cost of $30.21 per share, or an aggregate cost of $97.5 million, of which $92 million was paid during the three months ended June 30, 2013. All share repurchases were funded through available cash and commercial paper and the repurchased shares are held in treasury. On August 6, 2013, our Audit Committee, with authorization from the Board of Directors, increased the repurchase program capacity to $6.0 billion of repurchases of our Common Stock and extended the expiration date to December 31, 2016. The primary purposes of the program are to return cash to shareholders and to offset dilution from our equity compensation plans. As of August 7, 2013 we have $5.9 billion in remaining share repurchase capacity.
Note 12. Commitments and Contingencies
Legal Proceedings:
We routinely are involved in legal proceedings, claims, and governmental inspections or investigations (Legal Matters) arising in the ordinary course of our business.
A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success. Accordingly, after we acquired Cadbury in February 2010 we began reviewing and adjusting, as needed, Cadburys operations in light of applicable standards as well as our policies and practices. We initially focused on such high priority areas as food safety, the Foreign Corrupt Practices Act (FCPA) and antitrust. Based upon Cadburys pre-acquisition policies and compliance programs and our post-acquisition reviews, our preliminary findings indicated that Cadburys overall state of compliance was sound. Nonetheless, through our reviews, we determined that in certain jurisdictions, including India, there appeared to be facts and circumstances warranting further investigation. We are continuing our investigations in certain jurisdictions, including in India, and we continue to cooperate with governmental authorities.
As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are cooperating with the U.S. and Indian governments in their investigations of these matters. In addition, on February 28, 2013, Cadbury India Limited, a subsidiary of Mondelēz International, and other parties received a show cause notice from the Indian Department of Central Excise Authority. The notice calls upon the parties to demonstrate why the Authority should not collect approximately $46 million of unpaid excise tax as well as approximately $46 million of penalties and interest related to production at the same Indian facility. We believe that the decision to claim the excise tax benefit is valid and we are contesting the show cause notice through the administrative and judicial process.
As we previously disclosed, on March 1, 2011, the Starbucks Coffee Company (Starbucks) took control of the Starbucks packaged coffee business (Starbucks CPG business) in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorneys fees. Starbucks has counterclaimed for damages. Testimony and post-hearing briefing in the arbitration proceeding are completed. We await the arbitrators decision. Kraft Foods Group remains the named party in the proceeding. Under the Separation and Distribution Agreement between Kraft Foods Group and us, Kraft Foods Group will direct any recovery awarded in the arbitration proceeding to us. We will reimburse Kraft Foods Group for any costs and expenses it incurs in connection with the arbitration.
19
While we cannot predict with certainty the results of these or any other Legal Matters in which we are currently involved, we do not expect that the ultimate costs to resolve any of these Legal Matters, individually or in the aggregate, will have a material effect on our financial results.
Third-Party Guarantees:
We enter into third-party guarantees primarily to cover the long-term obligations of our vendors. As part of these transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At June 30, 2013, we had no material third-party guarantees recorded on our condensed consolidated balance sheet.
As of June 30, 2013, two of our indirect wholly owned subsidiaries and one of Kraft Foods Groups subsidiaries are joint and several guarantors of $1.0 billion of indebtedness issued by an unrelated third party, Cadbury Schweppes U.S. Finance LLC, and maturing on October 1, 2013. We have agreed to indemnify Kraft Foods Group pursuant to a separation and distribution agreement, in the event its subsidiary is called upon to satisfy its obligation under the guarantee.
As part of our 2010 Cadbury acquisition, we became the responsible party for tax matters under the Cadbury Schweppes Plc and Dr Pepper Snapple Group, Inc. (DPSG) Tax Sharing and Indemnification Agreement dated May 1, 2008 (Tax Indemnity) for certain 2007 and 2008 transactions relating to the demerger of Cadburys Americas Beverage business. A U.S. federal tax audit of DPSG for the 20062008 tax years was concluded with the IRS in August 2013. As a result, we will report income during the third quarter of 2013 in the amount of $385 million ($375 million net of tax) due to the reversal of the accrued liability in excess of the amount which we will pay to DPSG under the Tax Indemnity.
Note 13. Reclassifications from Accumulated Other Comprehensive Income
The components of accumulated other comprehensive earnings / (losses) attributable to Mondelēz International were:
Currency | Derivatives | |||||||||||||||
Translation | Pension and | Accounted for | ||||||||||||||
Adjustments | Other Benefits | as Hedges | Total | |||||||||||||
(in millions) | ||||||||||||||||
Balances at January 1, 2013 |
$ | (366 | ) | $ | (2,229 | ) | $ | (38 | ) | $ | (2,633 | ) | ||||
Other comprehensive earnings / (losses), before reclassifications: |
||||||||||||||||
Currency translation adjustment(1) |
(1,846 | ) | 61 | | (1,785 | ) | ||||||||||
Pension and other benefits |
| (3 | ) | | (3 | ) | ||||||||||
Derivatives accounted for as hedges |
83 | | 123 | 206 | ||||||||||||
Losses / (gains) reclassified into |
| 102 | 45 | 147 | ||||||||||||
Tax (expense) / benefit |
(30 | ) | (26 | ) | (58 | ) | (114 | ) | ||||||||
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Total other comprehensive earnings / (losses)(1) |
(1,549 | ) | ||||||||||||||
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Balances at June 30, 2013 |
$ | (2,159 | ) | $ | (2,095 | ) | $ | 72 | $ | (4,182 | ) | |||||
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(1) | The condensed consolidated statement of comprehensive earnings for the six months ended June 30, 2013 includes $7 million of net earnings and $(7) million of currency translation adjustment attributable to noncontrolling interests. |
20
Amounts reclassified from accumulated other comprehensive earnings / (losses) during the three and six months ended June 30, 2013 and their locations in the condensed consolidated financial statements were as follows:
Location of Gain / (Loss) Recognized in Net Earnings | ||||||||||
For the Three Months Ended |
For the Six Months Ended |
|||||||||
June 30, 2013 | June 30, 2013 | |||||||||
(in millions) | ||||||||||
Pension and other benefits: |
||||||||||
Reclassification of losses / (gains) into net earnings: |
||||||||||
Amortization of experience losses |
$ | 23 | $ | 47 | Cost of Sales | |||||
Amortization of experience losses |
24 | 50 | Selling, general and | |||||||
Settlement losses |
4 | 7 | administrative expenses | |||||||
Settlement losses |
(2 | ) | (2 | ) | Cost of Sales | |||||
Tax impact |
(12 | ) | (29 | ) | Provision for income taxes | |||||
Derivatives accounted for as hedges: |
||||||||||
Reclassification of losses / (gains) into net earnings: |
||||||||||
Foreign exchange contracts forecasted transactions |
5 | 14 | Cost of sales | |||||||
Commodity contracts |
16 | 30 | Cost of sales | |||||||
Interest rate contracts |
1 | 1 | Interest and other expense | |||||||
Tax impact |
(7 | ) | (13 | ) | Provision for income taxes | |||||
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Total reclassifications into net earnings, net of tax |
$ | 52 | $ | 105 | ||||||
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Note 14. Income Taxes
Our effective tax rate was 2.1% in the second quarter of 2013 and (0.5)% for the first six months of 2013. The 2013 second quarter effective tax rate was favorably impacted by the mix of pre-tax income in various foreign jurisdictions and reflects the impact of favorable discrete items, which totaled $108 million in the quarter. These discrete items primarily resulted from net favorable tax audit settlements and expirations of the statutes of limitations in several jurisdictions of $52 million, tax benefits from a business divestiture of $39 million and corrections of prior-year amounts of $11 million. For the first six months of 2013, our effective tax rate was favorably impacted by the mix of pre-tax income in various foreign jurisdictions and net favorable discrete items totaling $233 million, arising principally from net favorable tax audit settlements, expirations of the statutes of limitations in several jurisdictions of $132 million, tax benefits from a business divestiture of $39 million and corrections of prior-year amounts of $47 million.
Our effective tax rate was 17.4% in the second quarter of 2012 and 17.8% for the first six months of 2012. The 2012 second quarter effective tax rate was favorably impacted by the mix of pre-tax income in various foreign jurisdictions and net favorable discrete items totaling $15 million which primarily related to the resolution of outstanding tax matters, principally in foreign jurisdictions. For the first six months of 2012, our effective tax rate was favorably impacted by the mix of pre-tax income in various foreign jurisdictions and net favorable discrete items totaling $21 million which primarily related to the resolution of outstanding tax matters, principally in foreign jurisdictions, expiration of the statute of limitations in various foreign jurisdictions and net favorable foreign and state audit settlements.
21
Note 15. Earnings Per Share
Basic and diluted earnings per share (EPS) were calculated using the following:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Earnings from continuing operations |
$ | 617 | $ | 490 | $ | 1,191 | $ | 829 | ||||||||
Earnings from discontinued operations, |
| 544 | | 1,024 | ||||||||||||
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Net earnings |
617 | 1,034 | 1,191 | 1,853 | ||||||||||||
Noncontrolling interest |
1 | 5 | 7 | 11 | ||||||||||||
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Net earnings attributable to |
$ | 616 | $ | 1,029 | $ | 1,184 | $ | 1,842 | ||||||||
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Weighted-average shares for basic EPS |
1,788 | 1,777 | 1,786 | 1,775 | ||||||||||||
Plus incremental shares from assumed |
15 | 9 | 14 | 10 | ||||||||||||
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Weighted-average shares for diluted EPS |
1,803 | 1,786 | 1,800 | 1,785 | ||||||||||||
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Basic earnings per share attributable to |
||||||||||||||||
Continuing operations |
$ | 0.34 | $ | 0.27 | $ | 0.66 | $ | 0.46 | ||||||||
Discontinued operations |
| 0.31 | | 0.58 | ||||||||||||
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Net earnings attributable to |
$ | 0.34 | $ | 0.58 | $ | 0.66 | $ | 1.04 | ||||||||
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Diluted earnings per share attributable to |
||||||||||||||||
Continuing operations |
$ | 0.34 | $ | 0.27 | $ | 0.66 | $ | 0.46 | ||||||||
Discontinued operations |
| 0.31 | | 0.57 | ||||||||||||
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Net earnings attributable to |
$ | 0.34 | $ | 0.58 | $ | 0.66 | $ | 1.03 | ||||||||
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We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded 8.1 million antidilutive stock options for the three months and 8.6 million antidilutive stock options for the six months ended June 30, 2013, and we excluded 13.3 million antidilutive stock options for the three months and 9.4 million antidilutive stock options for the six months ended June 30, 2012.
Note 16. Segment Reporting
Effective January 1, 2013, we reorganized our operations, management and segments into five reportable segments:
| Latin America (formerly in our Developing Markets segment) |
| Asia Pacific (formerly in our Developing Markets segment) |
| EEMEA (formerly in our Developing Markets segment) |
| Europe (now includes certain European operations formerly in our Developing Markets segment) |
| North America. |
We changed and flattened our operating structure to reflect our greater concentration of operations in high-growth emerging markets and to further enhance collaboration across regions, expedite decision making and drive greater efficiencies to fuel our growth. We have presented our segment results reflecting the changes for all periods presented.
We manage the operations of Latin America, Asia Pacific and EEMEA by location and Europe and North America by product category.
22
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. Coincident with the change in reportable segment structure, segment operating income for our North America region also changed to include all U.S. pension plan expenses, a portion of which was previously excluded from segment operating results evaluated by management as the costs were centrally managed. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), general corporate expenses (which are a component of selling, general and administrative expenses), amortization of intangibles, gains and losses on divestitures or acquisitions, and acquisition-related costs (which are a component of selling, general and administrative expenses) for all periods presented. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, the gains and losses on hedging activities are recorded within segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.
Our segment net revenues and earnings consisted of:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Net revenues: |
||||||||||||||||
Latin America |
$ | 1,339 | $ | 1,340 | $ | 2,737 | $ | 2,710 | ||||||||
Asia Pacific |
1,240 | 1,222 | 2,607 | 2,542 | ||||||||||||
EEMEA |
1,039 | 965 | 1,902 | 1,814 | ||||||||||||
Europe |
3,273 | 3,315 | 6,731 | 6,809 | ||||||||||||
North America |
1,704 | 1,685 | 3,362 | 3,319 | ||||||||||||
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Net revenues |
$ | 8,595 | $ | 8,527 | $ | 17,339 | $ | 17,194 | ||||||||
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Earnings before income taxes: |
||||||||||||||||
Operating income: |
||||||||||||||||
Latin America |
$ | 162 | $ | 206 | $ | 254 | $ | 369 | ||||||||
Asia Pacific |
129 | 150 | 318 | 327 | ||||||||||||
EEMEA |
112 | 141 | 173 | 279 | ||||||||||||
Europe |
369 | 432 | 775 | 858 | ||||||||||||
North America |
194 | 184 | 364 | 332 | ||||||||||||
Unrealized gains / (losses) on hedging activities |
24 | 23 | 43 | 41 | ||||||||||||
General corporate expenses |
(76 | ) | (146 | ) | (145 | ) | (257 | ) | ||||||||
Amortization of intangibles |
(55 | ) | (53 | ) | (109 | ) | (109 | ) | ||||||||
Gains on acquisition and divestitures, net |
6 | | 28 | | ||||||||||||
Acquisition-related costs |
| | (2 | ) | | |||||||||||
|
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Operating income |
865 | 937 | 1,699 | 1,840 | ||||||||||||
Interest and other expense, net |
(235 | ) | (344 | ) | (514 | ) | (831 | ) | ||||||||
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Earnings before income taxes |
$ | 630 | $ | 593 | $ | 1,185 | $ | 1,009 | ||||||||
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Items impacting our segment operating results are discussed in Note 1, Basis of Presentation, including the Venezuelan currency devaluation, Note 2, Divestitures and Acquisition, Note 5, Goodwill and Intangible Assets, Note 6, 2012-2014 Restructuring Program, and Note 7, Integration Costs.
Unrealized gains / (losses) on hedging activities were $24 million for the three months ended June 30, 2013 and $23 million for the three months ended June 30, 2012. Unrealized gains / (losses) on hedging activities were $43 million for the six months ended June 30, 2013 and $41 million for the six months ended June 30, 2012. In all periods, the net gains were primarily related to gains on foreign currency contracts and commodity hedging activity.
23
The decrease in interest and other expense, net for the three months ended June 30, 2013 was due primarily to a benefit from a statutory interest rate change impacting an accrued non-income tax liability, a reduction in long-term debt and the absence of Spin-Off Costs within interest expense as we recorded $28 million of Spin-Off Costs within interest expense in the three months ended June 30, 2012. The decrease in interest and other expense, net for the six months ended June 30, 2013 was due primarily to the absence of Spin-Off Costs within interest expense as we recorded $162 million of Spin-Off Costs within interest expense in the six months ended June 30, 2012, a reduction in long-term debt and a benefit from a statutory interest rate change impacting an accrued non-income tax liability.
Net revenues by consumer sector were:
For the Three Months Ended June 30, 2013 | ||||||||||||||||||||||||
Latin | Asia | North | ||||||||||||||||||||||
America | Pacific | EEMEA | Europe | America | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Biscuits |
$ | 334 | $ | 355 | $ | 174 | $ | 780 | $ | 1,349 | $ | 2,992 | ||||||||||||
Chocolate |
270 | 363 | 240 | 1,062 | 58 | 1,993 | ||||||||||||||||||
Gum & Candy |
363 | 207 | 190 | 246 | 278 | 1,284 | ||||||||||||||||||
Beverages |
212 | 145 | 353 | 835 | | 1,545 | ||||||||||||||||||
Cheese & Grocery |
160 | 170 | 82 | 350 | 19 | 781 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net revenues |
$ | 1,339 | $ | 1,240 | $ | 1,039 | $ | 3,273 | $ | 1,704 | $ | 8,595 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
For the Three Months Ended June 30, 2012 | ||||||||||||||||||||||||
Latin | Asia | North | ||||||||||||||||||||||
America | Pacific | EEMEA | Europe | America | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Biscuits |
$ | 309 | $ | 340 | $ | 149 | $ | 739 | $ | 1,298 | $ | 2,835 | ||||||||||||
Chocolate |
255 | 353 | 221 | 1,023 | 56 | 1,908 | ||||||||||||||||||
Gum & Candy |
371 | 214 | 197 | 260 | 312 | 1,354 | ||||||||||||||||||
Beverages |
229 | 132 | 322 | 850 | 1 | 1,534 | ||||||||||||||||||
Cheese & Grocery |
176 | 183 | 76 | 443 | 18 | 896 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net revenues |
$ | 1,340 | $ | 1,222 | $ | 965 | $ | 3,315 | $ | 1,685 | $ | 8,527 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
For the Six Months Ended June 30, 2013 | ||||||||||||||||||||||||
Latin | Asia | North | ||||||||||||||||||||||
America | Pacific | EEMEA | Europe | America | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Biscuits |
$ | 624 | $ | 743 | $ | 325 | $ | 1,481 | $ | 2,642 | $ | 5,815 | ||||||||||||
Chocolate |
648 | 812 | 512 | 2,456 | 131 | 4,559 | ||||||||||||||||||
Gum & Candy |
696 | 429 | 345 | 475 | 556 | 2,501 | ||||||||||||||||||
Beverages |
455 | 272 | 589 | 1,640 | | 2,956 | ||||||||||||||||||
Cheese & Grocery |
314 | 351 | 131 | 679 | 33 | 1,508 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net revenues |
$ | 2,737 | $ | 2,607 | $ | 1,902 | $ | 6,731 | $ | 3,362 | $ | 17,339 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
For the Six Months Ended June 30, 2012 | ||||||||||||||||||||||||
Latin | Asia | North | ||||||||||||||||||||||
America | Pacific | EEMEA | Europe | America | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Biscuits |
$ | 569 | $ | 700 | $ | 286 | $ | 1,397 | $ | 2,537 | $ | 5,489 | ||||||||||||
Chocolate |
637 | 806 | 488 | 2,359 | 132 | 4,422 | ||||||||||||||||||
Gum & Candy |
705 | 433 | 359 | 512 | 617 | 2,626 | ||||||||||||||||||
Beverages |
470 | 243 | 544 | 1,707 | 1 | 2,965 | ||||||||||||||||||
Cheese & Grocery |
329 | 360 | 137 | 834 | 32 | 1,692 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net revenues |
$ | 2,710 | $ | 2,542 | $ | 1,814 | $ | 6,809 | $ | 3,319 | $ | 17,194 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
24
Note 17. Subsequent Events
As part of our 2010 Cadbury acquisition, we became the responsible party for tax matters under the Cadbury Schweppes Plc and Dr Pepper Snapple Group, Inc. (DPSG) Tax Sharing and Indemnification Agreement dated May 1, 2008 (Tax Indemnity) for certain 2007 and 2008 transactions relating to the demerger of Cadburys Americas Beverage business. A U.S. federal tax audit of DPSG for the 20062008 tax years was concluded with the IRS in August 2013. As a result, we will report income during the third quarter of 2013 in the amount of $385 million ($375 million net of tax) due to the reversal of the accrued liability in excess of the amount which we will pay to DPSG under the Tax Indemnity.
On August 6, 2013, our Audit Committee, with authorization from the Board of Directors, approved a quarterly dividend of $0.14 per common share, payable on October 15, 2013 to shareholders of record on September 30, 2013.
On August 6, 2013, our Audit Committee, with authorization from the Board of Directors, increased our stock repurchase program capacity from $1.2 billion to $6.0 billion of repurchases of our Common Stock and extended the expiration date from March 12, 2016 to December 31, 2016. The primary purposes of the program are to return cash to shareholders and to offset dilution from our equity compensation plans.
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Description of the Company
We manufacture and market primarily snack food and beverage products, including biscuits, chocolate, gum & candy, beverages and various cheese & grocery products. We have operations in more than 80 countries and sell our products in approximately 165 countries.
On October 1, 2012, we completed the spin-off of our North American grocery business, Kraft Foods Group, Inc. (Kraft Foods Group), to our shareholders (the Spin-Off). We retained our global snacks business along with other food and beverage categories. The divested Kraft Foods Group is presented as a discontinued operation on the condensed consolidated statements of earnings for the three and six months ended June 30, 2012. The Kraft Foods Group equity transactions, other comprehensive earnings and cash flows are included within our condensed consolidated statements of equity, comprehensive earnings and cash flows through October 1, 2012. For more information on the Spin-Off and impact on our continuing results of operations, see Note 2, Divestitures and Acquisition.
Effective as of January 1, 2013, we reorganized our operations, management and segments into five reportable segments:
| Latin America |
| Asia Pacific |
| Eastern Europe, Middle East & Africa (EEMEA) |
| Europe |
| North America |
We changed and flattened our operating structure to reflect our greater concentration of operations in high-growth emerging markets and to further enhance collaboration across regions, expedite decision making and drive greater efficiencies to fuel our growth. Coincident with the change in segment structure, segment operating income for our North America region also changed to include all U.S. pension plan expenses, a portion of which was previously excluded from segment operating results evaluated by management as the costs were centrally managed. See Note 16, Segment Reporting, for additional segment information. Our segment results reflect our new segment structure for all periods presented.
Subsequent Events
As part of our 2010 Cadbury acquisition, we became the responsible party for tax matters under the Cadbury Schweppes Plc and Dr Pepper Snapple Group, Inc. (DPSG) Tax Sharing and Indemnification Agreement dated May 1, 2008 (Tax Indemnity) for certain 2007 and 2008 transactions relating to the demerger of Cadburys Americas Beverage business. A U.S. federal tax audit of DPSG for the 20062008 tax years was concluded with the IRS in August 2013. As a result, we will report income during the third quarter of 2013 in the amount of $385 million ($375 million net of tax) due to the reversal of the accrued liability in excess of the amount which we will pay to DPSG under the Tax Indemnity. We will exclude this income from our non-GAAP financial measures Adjusted Operating Income and Adjusted EPS.
On August 6, 2013, our Audit Committee, with authorization from the Board of Directors, declared a quarterly dividend of $0.14 per common share, an increase of $0.01 per share, or 8 percent. The dividend is payable on October 15, 2013 to shareholders of record as of September 30, 2013.
On August 6, 2013, our Audit Committee, with authorization from the Board of Directors, increased our stock repurchase program capacity from $1.2 billion to $6.0 billion of repurchases of our Common Stock and extended the expiration date from March 12, 2016 to December 31, 2016. The primary purposes of the program are to return cash to shareholders and to offset dilution from our equity compensation plans.
26
Summary of Results and Other Highlights
| Net revenues increased 0.8% to $8.6 billion in the second quarter of 2013 and increased 0.8% to $17.3 billion in the first six months of 2013 as compared to the same periods in the prior year. Our reported net revenues were impacted by unfavorable foreign currency and divestitures, offset in part by an acquisition completed in the first quarter of 2013. |
| Organic Net Revenues increased 3.8% to $8.7 billion in the second quarter of 2013 and increased 3.8% to $17.6 billion in the first six months of 2013 as compared to the same periods in the prior year. Organic Net Revenues is a non-GAAP financial measure we use to evaluate our underlying results (see the definition of Organic Net Revenues and our reconciliation with net revenues within Non-GAAP Financial Measures later in this section). Organic Net Revenues is on a constant currency basis and excludes the impact of divestitures and the acquisition last quarter. |
| Diluted EPS attributable to Mondelēz International decreased 41.4% to $0.34 in the second quarter of 2013 and decreased 35.9% to $0.66 in the first six months of 2013 as compared to the same periods in the prior year. Excluding the results of discontinued operations in 2012, our diluted EPS attributable to Mondelēz International from continuing operations increased 25.9% to $0.34 in the second quarter of 2013 and increased 43.5% to $0.66 in the first six months of 2013 as compared to the same periods in the prior year. Included within our continuing results of operations were one-time Spin-Off Costs, 2012-2014 Restructuring Program costs, Integration Program and other acquisition integration costs, net gains on divestitures and acquisition and acquisition-related costs. Diluted EPS was also significantly impacted by a lower effective tax rate in 2013 due to the impact of favorable discrete items. |
| Adjusted EPS (previously referred to as Operating EPS) increased 2.8% to $0.37 in the second quarter of 2013 and increased 6.0% to $0.71 in the first six months of 2013 as compared to the same periods in the prior year. Adjusted EPS is a non-GAAP financial measure we use to evaluate our underlying results (see the definition of Adjusted EPS and our reconciliation with Diluted EPS within Non-GAAP Financial Measures later in this section). Adjusted EPS provides transparency of our underlying results and excludes Spin-Off Costs, 2012-2014 Restructuring Program costs, Integration Program and other acquisition integration costs, net earnings from divestitures, net gains on acquisition and divestitures and acquisition-related costs. Adjusted EPS was also significantly impacted by a lower effective tax rate in 2013 due to the impact of favorable discrete items. |
| During the three months ended June 30, 2013, under our Stock Repurchase Program (see Note 11, Stock Plans) we repurchased 3.2 million shares of common stock at an aggregate cost of $97.5 million, or an average cost of $30.21 per share. All share repurchases were funded through available cash and commercial paper and the repurchased shares are held in treasury. |
| On May 8, 2013, $1 billion of our 2.625% notes matured. The notes and accrued interest to date were paid with cash on hand and the issuance of commercial paper. |
| On February 11, 2013, $750 million of our 6.00% notes matured and were paid with cash on hand. |
| In February 2013, we recorded a $54 million unfavorable foreign currency charge related to the devaluation of our net monetary assets in Venezuela. We also incurred net unfavorable devaluation-related foreign currency charges within our pretax earnings of $17 million during the second quarter of 2013 and $24 million during the first six months of 2013 related to translating the earnings of our Venezuelan subsidiary to the U.S. dollar at the new exchange rate. |
27
Discussion and Analysis
Items Affecting Comparability of Financial Results
Spin-Off of Kraft Foods Group
On October 1, 2012, we completed the Spin-Off of Kraft Foods Group to our shareholders. The results of Kraft Foods Group are presented as a discontinued operation on the condensed consolidated statements of earnings for the three and six months ended June 30, 2012. Certain corporate and business unit costs, which we historically allocated to Kraft Foods Group and which continued at Mondelēz International following the Spin-Off, were included in our results from continuing operations. These costs include primarily corporate overheads, information systems and sales force support and, on a pre-tax basis, were estimated to be $48 million for the three months and $102 million for the six months ended June 30, 2012.
Our results of continuing operations include one-time Spin-Off transaction, transition, financing and related costs (Spin-Off Costs) we have incurred to date. Spin-Off Costs were $15 million, or $0.01 per diluted share, for the three months and $24 million, or $0.01 per diluted share, for the six months ended June 30, 2013. Spin-Off Costs were $128 million, or $0.05 per diluted share, for the three months, and $301 million, or $0.11 per diluted share, for the six months ended June 30, 2012. We expect to incur Spin-Off Costs of approximately $100 million in 2013 related primarily to human resources, customer service and logistics and information systems and processes as well as legal costs associated with revising intellectual property and other long-term agreements.
For additional information on the Spin-Off of Kraft Foods Group, see Note 2, Divestitures and Acquisition.
Acquisition, Other Divestitures and Sale of Property
During the three months ended June 30, 2013, we completed two divestitures within our EEMEA segment which generated cash proceeds of $48 million during the quarter and pre-tax gains of $6 million. The divestitures included a salty snacks business in Turkey and a confectionery business in South Africa. The aggregate operating results of these divestitures were not material to our condensed consolidated financial statements during the periods presented.
On February 22, 2013, we acquired the remaining interest in a biscuit operation in Morocco, which is now a wholly-owned subsidiary within our EEMEA segment. We paid net cash consideration of $119 million, consisting of $155 million purchase price net of cash acquired of $36 million. We also recorded a pre-tax gain of $22 million related to the remeasurement of our previously-held equity interest in the operation to fair value in accordance with U.S. GAAP. Acquisition costs of $7 million were included within selling, general and administrative expenses and interest and other expense, net during the six months ended June 30, 2013. We also incurred $1 million of integration costs during the three months ended June 30, 2013, which were included in selling, general and administrative expenses within our EEMEA segment. The operating results of the acquisition were not material to our consolidated financial operating results for the three and six months ended June 30, 2013.
During the three months ended December 31, 2012, we also completed several divestitures within our Europe segment which generated cash proceeds of $200 million and pre-tax gains of $107 million. The divestitures primarily included a dinners and sauces grocery business in Germany and Belgium and a canned meat business in Italy. The aggregate operating results of the divestitures were not material to our consolidated financial operating results for the three and six months ended June 30, 2012.
In 2012, we sold property in Russia and Turkey within our EEMEA segment. The Turkey property sale generated a $22 million pre-tax gain in the second quarter of 2012 and $29 million of cash proceeds which were received primarily in the fourth quarter of 2012 upon finalization of certain terms and conditions of the sale. The Russia property sale generated a $55 million pre-tax gain and $72 million of cash proceeds in the first quarter of 2012. The gains were recorded within selling, general and administrative expenses and the cash proceeds from the Russia property sale were recorded in cash flows from other investing activities in the six months ended June 30, 2012.
2012-2014 Restructuring Program
In 2012, our Board of Directors approved $1.5 billion of restructuring and related implementation costs (2012-2014 Restructuring Program) reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the restructuring and implementation activities is to ensure that both Mondelēz International and Kraft Foods Group were each set up to operate efficiently and execute on our respective business strategies upon separation and in the future.
28
Of the $1.5 billion of 2012-2014 Restructuring Program costs, we retained approximately $925 million after the Spin-Off. Since the inception of the 2012-2014 Restructuring Program, we have incurred $209 million of the estimated $925 million total 2012-2014 Restructuring Program charges.
We recorded restructuring charges of $48 million, or $0.02 per diluted share, for the three months and $88 million, or $0.04 per diluted share, for the six months ended June 30, 2013, and $27 million, or $0.01 per diluted share, for the three months and $50 million, or $0.02 per diluted share, for the six months ended June 30, 2012, within asset impairment and exit costs. We also incurred implementation costs of $7 million for the three months and $11 million for the six months ended June 30, 2013 and $2 million for the three months and $1 million for the six months ended June 30, 2012. The implementation costs were recorded within cost of sales and selling, general and administrative expenses. See Note 6, 2012-2014 Restructuring Program, for additional information.
Integration Program
As a result of our combination with Cadbury Limited (formerly, Cadbury plc or Cadbury) in 2010, we launched an integration program to realize annual cost savings of approximately $750 million by the end of 2013 and revenue synergies from investments in distribution, marketing and product development. In order to achieve these cost savings and synergies and combine and integrate the two businesses, we expect to incur total integration charges of approximately $1.5 billion through the end of 2013 (the Integration Program).
Integration Program costs include the costs associated with combining the Cadbury operations with our operations and are separate from the costs related to the acquisition. Since the inception of the Integration Program, we have incurred approximately $1.4 billion of the estimated $1.5 billion total integration charges. In 2012, we met and exceeded our annual cost savings target of $750 million and achieved approximately $800 million of annual costs savings one year ahead of schedule.
We recorded Integration Program charges of $52 million, or $0.02 per diluted share, for the three months and $73 million, or $0.03 per diluted share, for the six months ended June 30, 2013 and $35 million, or $0.02 per diluted share, for the three months and $78 million, or $0.04 per diluted share, for the six months ended June 30, 2012. We recorded these charges in operations, as a part of selling, general and administrative expenses within our Europe, Asia Pacific, Latin America and EEMEA segments.
Provision for Income Taxes
Our effective tax rate was 2.1% in the second quarter of 2013 and (0.5)% for the first six months of 2013. The 2013 second quarter effective tax rate was favorably impacted by the mix of pre-tax income in various foreign jurisdictions and reflects the impact of favorable discrete items, which totaled $108 million in the quarter. These discrete items primarily resulted from net favorable tax audit settlements and expirations of the statutes of limitations in several jurisdictions of $52 million, tax benefits from a business divestiture of $39 million and corrections of prior-year amounts of $11 million. For the first six months of 2013, our effective tax rate was favorably impacted by the mix of pre-tax income in various foreign jurisdictions and net favorable discrete items totaling $233 million, arising principally from net favorable tax audit settlements, expirations of the statutes of limitations in several jurisdictions of $132 million, tax benefits from a business divestiture of $39 million and corrections of prior-year amounts of $47 million.
Our effective tax rate was 17.4% in the second quarter of 2012 and 17.8% for the first six months of 2012. The 2012 second quarter effective tax rate was favorably impacted by the mix of pre-tax income in various foreign jurisdictions and net favorable discrete items totaling $15 million which primarily related to the resolution of outstanding tax matters, principally in foreign jurisdictions. For the first six months of 2012, our effective tax rate was favorably impacted by the mix of pre-tax income in various foreign jurisdictions and net favorable discrete items totaling $21 million which primarily related to the resolution of outstanding tax matters, principally in foreign jurisdictions, expiration of the statute of limitations in various foreign jurisdictions and net favorable foreign and state audit settlements.
Our effective tax rate could be significantly affected by a shift in pre-tax income between foreign jurisdictions, from foreign jurisdictions to the U.S. or by changes in foreign and/or U.S. tax laws that apply to the earnings of foreign subsidiaries.
29
Consolidated Results of Operations
The following discussion compares our consolidated results of operations for the three and six months ended June 30, 2013 and 2012.
Three Months Ended June 30:
For the Three Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Net revenues |
$ | 8,595 | $ | 8,527 | $ | 68 | 0.8% | |||||||||
Operating income |
$ | 865 | $ | 937 | $ | (72 | ) | (7.7% | ) | |||||||
Net earnings attributable to |
$ | 616 | $ | 1,029 | $ | (413 | ) | (40.1% | ) | |||||||
Diluted earnings per share attributable to Mondelēz International from continuing operations |
$ | 0.34 | $ | 0.27 | $ | 0.07 | 25.9% | |||||||||
Diluted earnings per share attributable to Mondelēz International |
$ | 0.34 | $ | 0.58 | $ | (0.24 | ) | (41.4% | ) |
Net Revenues Net revenues increased $68 million (0.8%) to $8,595 million in the second quarter of 2013, and Organic Net Revenues(1) increased $321 million (3.8%) to $8,733 million as follows:
Change in net revenues (by percentage point) |
||||
Favorable volume/mix |
3.6 | pp | ||
Higher net pricing |
0.2 | pp | ||
|
|
|||
Total change in Organic Net Revenues(1) |
3.8 | % | ||
Unfavorable foreign currency |
(1.9 | )pp | ||
Impact of divestitures |
(1.4 | )pp | ||
Impact of acquisition |
0.3 | pp | ||
|
|
|||
Total change in net revenues |
0.8 | % | ||
|
|
(1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
Organic Net Revenues growth was driven by favorable volume/mix and higher net pricing. Favorable volume/mix was driven primarily by higher shipments in North America, EEMEA and Europe. Higher net pricing in Latin America was mostly offset by lower net pricing in Europe and EEMEA due to lower coffee prices. Unfavorable foreign currency decreased net revenues by $163 million, due primarily to the devaluation of the Venezuelan bolivar and the strength of the U.S. dollar relative to most foreign currencies, primarily the Argentinean peso, Brazilian real, British pound sterling and South African rand, partially offset by the strength of the euro relative the U.S. dollar. The impact of divestitures resulted in a year-over-year decrease in net revenues of $114 million. The acquisition of a biscuit operation in Morocco added $24 million in net revenues this quarter.
30
Operating Income Operating income decreased $72 million (7.7%) to $865 million in the second quarter of 2013, Adjusted Operating Income decreased $125 million (11.3%) to $982 million, and Adjusted Operating Income (on a constant currency basis)(1) decreased $103 million (9.3%) to $1,004 million due to the following:
Operating | ||||||||
Income | Change | |||||||
(in millions) | (percentage point) | |||||||
Operating Income for the Three Months Ended June 30, 2012 |
$ | 937 | ||||||
Integration Program |
35 | 2.7 | pp | |||||
Spin-Off Costs |
100 | 8.6 | pp | |||||
Spin-Off pension expense adjustment(2) |
23 | 2.2 | pp | |||||
2012-2014 Restructuring Program |
29 | 2.2 | pp | |||||
Operating income from divestitures |
(17 | ) | (1.4 | )pp | ||||
|
|
|||||||
Adjusted Operating
Income(1) for the |
$ | 1,107 | ||||||
Favorable volume/mix |
139 | 12.5 | pp | |||||
Higher net pricing |
13 | 1.2 | pp | |||||
Higher input costs |
(49 | ) | (4.6 | )pp | ||||
Higher selling, general and administrative expenses |
(187 | ) | (16.7 | )pp | ||||
Gain on sale of property in 2012 |
(22 | ) | (2.0 | )pp | ||||
Impact from acquisition |
3 | 0.3 | pp | |||||
Change in unrealized gains / (losses) on hedging activities |
1 | 0.1 | pp | |||||
Other, net |
(1 | ) | (0.1 | )pp | ||||
|
|
|
|
|||||
Total change in Adjusted Operating Income (constant currency)(1) |
(103 | ) | (9.3 | %) | ||||
|
|
|
|
|||||
Unfavorable foreign currency |
(22 | ) | (2.0 | )pp | ||||
|
|
|
|
|||||
Total change in Adjusted Operating Income(1) |
(125 | ) | (11.3 | %) | ||||
|
|
|
|
|||||
Adjusted Operating
Income(1) for the |
$ | 982 | ||||||
Integration Program and other acquisition integration costs |
(53 | ) | (4.7 | )pp | ||||
Spin-Off Costs |
(15 | ) | (1.5 | )pp | ||||
2012-2014 Restructuring Program |
(55 | ) | (5.1 | )pp | ||||
Gains on divestitures, net |
6 | 0.6 | pp | |||||
Operating income from divestitures |
| | ||||||
|
|
|
|
|||||
Operating Income for the Three Months Ended June 30, 2013 |
$ | 865 | (7.7 | %) | ||||
|
|
|
|
(1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
(2) | Represents the estimated benefit plan expense for the three months ended June 30, 2012 associated with certain benefit plan obligations transferred to Kraft Foods Group in the Spin-Off. |
31
Favorable volume/mix was driven primarily by volume gains in North America, Europe and EEMEA. During the quarter, increased input costs outpaced higher net pricing. Pricing primarily reflected actions taken last year mostly offset by lower coffee pricing. The increase in input costs was driven by higher raw material costs, in part due to higher foreign exchange realized losses, partially offset by lower manufacturing costs. Total selling, general and administrative expenses increased $75 million from the second quarter of 2012, due in part to a gain on sale of property in 2012, higher 2012-2014 Restructuring Program costs, the inclusion of the acquired biscuit operations in Morocco, which were more than offset by lower Spin-Off Costs, a favorable foreign currency impact and the net impact of businesses divested in 2013 and 2012. Excluding these factors, selling, general and administrative expenses increased $187 million from the second quarter of 2012, driven primarily by higher overhead costs, including investments in sales capabilities and route-to-market expansion in emerging markets, higher advertising and consumer promotion costs in Europe, EEMEA and Asia Pacific, as well as prior-year proceeds from insurance settlements. In the second quarter of 2012, we divested a property in Turkey and recorded a pre-tax gain of $22 million. The acquisition of a biscuit operation in Morocco added $3 million in operating income this quarter. Unfavorable foreign currency decreased operating income by $22 million, due primarily to the devaluation of the Venezuelan bolivar and the strength of the U.S. dollar relative to most foreign currencies, primarily the Brazilian real, South African rand, Argentinian peso and British pound sterling, partially offset by the strength of the euro relative to the U.S. dollar.
As a result of the net effect of these drivers, operating income margin decreased from 11.0% in the second quarter of 2012 to 10.1% in the second quarter of 2013. While gross margins were essentially flat for the quarter, the decrease in operating margin was driven primarily by higher overheads, including investments in sales capabilities and route-to-market expansion in emerging markets, higher advertising and consumer promotion costs, prior-year proceeds from insurance settlements, higher 2012-2014 Restructuring Program costs and higher Integration Program and other integration costs. These factors were partially offset by lower Spin-Off costs.
32
Net Earnings and Diluted Earnings per Share Attributable to Mondelēz International Net earnings attributable to Mondelēz International of $616 million decreased by $413 million (40.1%) in the second quarter of 2013. Diluted EPS attributable to Mondelēz International was $0.34 in the second quarter of 2013, down $0.24 (41.4%) from the second quarter of 2012. Diluted EPS from continuing operations attributable to Mondelēz International was $0.34 in the second quarter of 2013, up $0.07 (25.9%) from the second quarter of 2012. Adjusted EPS(1) was $0.37 in the second quarter of 2013, up $0.01 (2.8%) from the second quarter of 2012. Adjusted EPS (on a constant currency basis)(1) was $0.38 in the second quarter of 2013, up $0.02 (5.6%) from the second quarter of 2012. These changes, shown net of tax below, were due to the following:
Diluted EPS | ||||
Diluted EPS Attributable to Mondelēz International for the Three Months Ended June 30, 2012 |
$ | 0.58 | ||
Discontinued operations |
0.31 | |||
|
|
|||
Diluted EPS Attributable to Mondelēz International from Continuing Operations for the Three Months Ended June 30, 2012 |
$ | 0.27 | ||
Spin-Off Costs(2) |
0.05 | |||
Spin-Off pension expense adjustment(3) |
0.01 | |||
Spin-Off interest expense adjustment(4) |
0.01 | |||
2012-2014 Restructuring Program |
0.01 | |||
Integration Program |
0.02 | |||
Net earnings from divestitures |
(0.01 | ) | ||
|
|
|||
Adjusted EPS for the Three Months Ended June 30, 2012(1) |
$ | 0.36 | ||
Decrease in operations |
(0.03 | ) | ||
Gain on sale of property in 2012 |
(0.01 | ) | ||
Change in unrealized gains / (losses) on hedging activities |
| |||
Lower interest and other expense, net(5) |
0.02 | |||
Changes in income taxes |
0.04 | |||
|
|
|||
Adjusted EPS for the Three Months Ended June 30, 2013 (constant currency)(1) |
$ | 0.38 | ||
Unfavorable foreign currency |
(0.01 | ) | ||
|
|
|||
Adjusted EPS for the Three Months Ended June 30, 2013(1) |
$ | 0.37 | ||
Spin-Off Costs(2) |
(0.01 | ) | ||
2012-2014 Restructuring Program |
(0.02 | ) | ||
Integration Program and other acquisition integration costs |
(0.02 | ) | ||
Gains on divestitures, net |
0.02 | |||
Net earnings from divestitures |
| |||
|
|
|||
Diluted EPS Attributable to Mondelēz International for the Three Months Ended June 30, 2013 |
$ | 0.34 | ||
|
|
(1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
(2) | Spin-Off Costs include $15 million of pre-tax Spin-Off Costs in selling, general and administrative expense for the three months ended June 30, 2013 and $100 million of pre-tax Spin-Off Costs in selling, general and administrative expense and $28 million of pre-tax Spin-Off Costs in interest expense for the three months ended June 30, 2012. |
(3) | Represents the estimated benefit plan expense for the three months ended June 30, 2012 associated with certain benefit plan obligations transferred to Kraft Foods Group in the Spin-Off. |
(4) | Represents interest expense associated with the assumed reduction of $6 billion of our debt on January 1, 2012 from the utilization of funds received from Kraft Foods Group in 2012 in connection with our Spin-Off capitalization plan. Note during the year ended December 31, 2012, a portion of the $6 billion of debt was retired. As such, we adjusted interest expense during this period as if this debt had been paid on January 1, 2012 to ensure consistency of our assumption and related results. |
(5) | Excludes the favorable foreign currency impact on interest expense related to our foreign denominated debt, the change in interest expense included in Spin-Off costs and the change in interest expense associated with the assumed reduction of $6 billion of our debt on January 1, 2012 from the utilization of funds received from the $6 billion of notes Kraft Foods Group issued directly and cash proceeds distributed to us in June 2012 in connection with our Spin-Off capitalization plan. |
33
Six Months Ended June 30:
For the Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||||
(in millions, except per share data) | ||||||||||||||||
Net revenues |
$ | 17,339 | $ | 17,194 | $ | 145 | 0.8% | |||||||||
Operating income |
$ | 1,699 | $ | 1,840 | $ | (141 | ) | (7.7% | ) | |||||||
Net earnings attributable to Mondelēz International |
$ | 1,184 | $ | 1,842 | $ | (658 | ) | (35.7% | ) | |||||||
Diluted earnings per share attributable to Mondelēz International from continuing operations |
$ | 0.66 | $ | 0.46 | $ | 0.20 | 43.5% | |||||||||
Diluted earnings per share attributable to Mondelēz International |
$ | 0.66 | $ | 1.03 | $ | (0.37 | ) | (35.9% | ) |
Net Revenues Net revenues increased $145 million (0.8%) to $17,339 million in the first six months of 2013, and Organic Net Revenues(1) increased $648 million (3.8%) to $17,643 million as follows:
Change in net revenues (by percentage point) |
||||
Favorable volume/mix |
3.1 | pp | ||
Higher net pricing |
0.7 | pp | ||
|
|
|||
Total change in Organic Net Revenues(1) |
3.8 | % | ||
Unfavorable foreign currency |
(2.1 | )pp | ||
Impact of divestitures |
(1.1 | )pp | ||
Impact of acquisition |
0.2 | pp | ||
|
|
|||
Total change in net revenues |
0.8 | % | ||
|
|
(1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
Organic Net Revenues growth was driven by favorable volume/mix and higher net pricing. Favorable volume/mix was driven primarily by higher shipments across all segments. Higher net pricing, primarily due to pricing actions taken last year, was realized in most segments, except Europe and EEMEA due to lower coffee prices. Unfavorable foreign currency decreased net revenues by $360 million, due primarily to the devaluation of the Venezuelan bolivar and the strength of the U.S. dollar relative to most foreign currencies, primarily the Brazilian real, Argentinean peso, British pound sterling, South Africa rand and Indian rupee, partially offset by the strength of the euro relative the U.S. dollar. The impact of divestitures resulted in a year-over-year decrease in net revenues of $179 million. The acquisition of a biscuit operation in Morocco added $36 million in net revenues in the first six months of 2013.
34
Operating Income Operating income decreased $141 million (7.7%) to $1,699 million in the first six months of 2013. Adjusted Operating Income decreased $250 million (11.8%) to $1,877 million, and Adjusted Operating Income (on a constant currency basis)(1) decreased $144 million (6.8%) to $1,983 million due to the following:
Operating | ||||||||
Income | Change | |||||||
(in millions) | (percentage point) | |||||||
Operating Income for the Six Months Ended June 30, 2012 |
$ | 1,840 | ||||||
Integration Program |
78 | 3.2 | pp | |||||
Spin-Off Costs |
139 | 6.2 | pp | |||||
Spin-Off pension expense adjustment(2) |
46 | 2.2 | pp | |||||
2012-2014 Restructuring Program |
51 | 2.1 | pp | |||||
Operating income from divestitures |
(27 | ) | (1.1 | )pp | ||||
|
|
|||||||
Adjusted Operating
Income(1) for the |
$ | 2,127 | ||||||
Favorable volume/mix |
258 | 12.0 | pp | |||||
Higher net pricing |
121 | 5.6 | pp | |||||
Higher input costs |
(157 | ) | (7.4 | )pp | ||||
Higher selling, general and administrative expenses |
(320 | ) | (14.8 | )pp | ||||
Gains on sales of property in 2012 |
(77 | ) | (3.6 | )pp | ||||
Intangible asset impairment charge in 2012 |
20 | 0.9 | pp | |||||
Impact from acquisition |
6 | 0.3 | pp | |||||
Change in unrealized gains / (losses) on hedging activities |
2 | 0.1 | pp | |||||
Other, net |
3 | 0.1 | pp | |||||
|
|
|
|
|||||
Total change in Adjusted Operating Income (constant currency)(1) |
(144 | ) | (6.8 | %) | ||||
|
|
|
|
|||||
Unfavorable foreign currency |
(106 | ) | (5.0 | )pp | ||||
|
|
|
|
|||||
Total change in Adjusted Operating Income(1) |
(250 | ) | (11.8 | %) | ||||
|
|
|
|
|||||
Adjusted Operating
Income(1) for the |
$ | 1,877 | ||||||
Integration Program and other acquisition integration costs |
(74 | ) | (3.4 | )pp | ||||
Spin-Off Costs |
(24 | ) | (1.2 | )pp | ||||
2012-2014 Restructuring Program |
(99 | ) | (4.8 | )pp | ||||
Gains on acquisition and divestitures, net |
28 | 1.4 | pp | |||||
Acquisition-related costs |
(2 | ) | (0.1 | )pp | ||||
Operating income from divestitures |
(7 | ) | (0.4 | )pp | ||||
|
|
|
|
|||||
Operating Income for the Six Months Ended June 30, 2013 |
$ | 1,699 | (7.7 | %) | ||||
|
|
|
|
(1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
(2) | Represents the estimated benefit plan expense for the six months ended June 30, 2012 associated with certain benefit plan obligations transferred to Kraft Foods Group in the Spin-Off. |
35
Favorable volume/mix was driven primarily by volume gains across all segments. During the first six months, increased input costs marginally outpaced higher net pricing, which primarily reflected pricing actions taken last year partially offset by lower coffee pricing. The increase in input costs was driven by higher raw material costs, in part due to higher foreign exchange realized losses, partially offset by lower manufacturing costs. Total selling, general and administrative expenses increased $215 million from the first six months of 2012, due in part to gains on sales of properties in 2012, higher 2012-2014 Restructuring Program costs and the inclusion of the acquired biscuit operations in Morocco. These items were more than offset by lower Spin-Off Costs, a favorable foreign currency impact net of the negative impact from the devaluation of our net monetary assets in Venezuela, lower Integration Program costs and the impact of businesses divested in 2013 and 2012. Excluding these factors, selling, general and administrative expenses increased $320 million from the first six months of 2012, driven primarily by higher overhead costs, including investments in sales capabilities and route-to-market expansion in emerging markets, higher advertising and consumer promotion costs in EEMEA, Asia Pacific and Europe, and prior-year proceeds from insurance settlements. In the first six months of 2012, we divested properties in Russia and Turkey and recorded pre-tax gains of $77 million. Within asset impairment and exit costs, we also recorded an asset impairment charge of $20 million related to a trademark in Japan in the first six months of 2012. The acquisition of a biscuit operation in Morocco added $6 million in operating income for the first six months of 2013. Unfavorable foreign currency decreased operating income by $106 million, due primarily to the devaluation of the Venezuelan bolivar (including the devaluation of our net monetary assets in Venezuela) and the strength of the U.S. dollar relative to most foreign currencies, primarily the Brazilian real, Argentinean peso, British pound sterling, South African rand and Indian rupee, partially offset by the strength of the euro relative to the U.S. dollar.
As a result of the net effect of these drivers, operating income margin decreased from 10.7% in the first six months of 2012 to 9.8% in the first six months of 2013. While gross margins were essentially flat for the first six months of 2013, the decrease in operating margin was driven primarily by higher overheads, including investments in sales capabilities and route-to-market expansion in emerging markets, the unfavorable currency impact due to the devaluation of our net monetary assets in Venezuela, the impact from the 2012 gains on the sales of property in Russia and Turkey, higher 2012-2014 Restructuring Program costs and prior-year proceeds from insurance settlements. These factors were partially offset by lower Spin-Off costs and the net gain on divestitures and acquisitions.
36
Net Earnings and Diluted Earnings per Share Attributable to Mondelēz International Net earnings attributable to Mondelēz International of $1,184 million decreased by $658 million (35.7%) in the first six months of 2013. Diluted EPS attributable to Mondelēz International was $0.66 in the first six months of 2013, down $0.37 (35.9%) from the first six months of 2012. Diluted EPS from continuing operations attributable to Mondelēz International was $0.66 in the first six months of 2013, up $0.20 (43.5%) from the first six months of 2012. Adjusted EPS(1) was $0.71 in the first six months of 2013, up $0.04 (6.0%) from the first six months of 2012. Adjusted EPS (on a constant currency basis)(1) was $0.76 in the first six months of 2013, up $0.09 (13.4%) from the first six months of 2012. These changes, shown net of tax below, were due to the following:
Diluted EPS | ||||
Diluted EPS Attributable to Mondelēz International for the Six Months Ended June 30, 2012 |
$ | 1.03 | ||
Discontinued operations |
0.57 | |||
|
|
|||
Diluted EPS Attributable to Mondelēz International from Continuing Operations for the |
$ | 0.46 | ||
Spin-Off Costs(2) |
0.11 | |||
Spin-Off pension expense adjustment(3) |
0.01 | |||
Spin-Off interest expense adjustment(4) |
0.04 | |||
2012-2014 Restructuring Program |
0.02 | |||
Integration Program |
0.04 | |||
Net earnings from divestitures |
(0.01 | ) | ||
|
|
|||
Adjusted EPS for the Six Months Ended June 30, 2012(1) |
$ | 0.67 | ||
Decrease in operations |
(0.04 | ) | ||
Gains on sales of property in 2012 |
(0.03 | ) | ||
Intangible asset impairment charge in 2012 |
0.01 | |||
Change in unrealized gains / (losses) on hedging activities |
| |||
Lower interest and other expense, net(5) |
0.02 | |||
Changes in income taxes |
0.13 | |||
|
|
|||
Adjusted EPS for the Six Months Ended June 30, 2013 (constant currency)(1) |
$ | 0.76 | ||
Unfavorable foreign currency |
(0.05 | ) | ||
|
|
|||
Adjusted EPS for the Six Months Ended June 30, 2013(1) |
$ | 0.71 | ||
Spin-Off Costs(2) |
(0.01 | ) | ||
2012-2014 Restructuring Program |
(0.04 | ) | ||
Integration Program and other acquisition integration costs |
(0.03 | ) | ||
Gains on acquisition and divestitures, net |
0.04 | |||
Acquisition-related costs |
(0.01 | ) | ||
Net earnings from divestitures |
| |||
|
|
|||
Diluted EPS Attributable to Mondelēz International for the Six Months Ended June 30, 2013 |
$ | 0.66 | ||
|
|
(1) | Please see the Non-GAAP Financial Measures section at the end of this item. |
(2) | Spin-Off Costs include $24 million of pre-tax Spin-Off Costs in selling, general and administrative expense for the six months ended June 30, 2013 and $139 million of pre-tax Spin-Off Costs in selling, general and administrative expense and $162 million of pre-tax Spin-Off Costs in interest expense for the six months ended June 30, 2012. |
(3) | Represents the estimated benefit plan expense for the six months ended June 30, 2012 associated with certain benefit plan obligations transferred to Kraft Foods Group in the Spin-Off. |
(4) | Represents interest expense associated with the assumed reduction of $6 billion of our debt on January 1, 2012 from the utilization of funds received from Kraft Foods Group in 2012 in connection with our Spin-Off capitalization plan. Note during the year ended December 31, 2012, a portion of the $6 billion of debt was retired. As such, we adjusted interest expense during this period as if this debt had been paid on January 1, 2012 to ensure consistency of our assumption and related results. |
(5) | Excludes the favorable foreign currency impact on interest expense related to our foreign denominated debt, the change in interest expense included in Spin-Off costs and the change in interest expense associated with the assumed reduction of $6 billion of our debt on January 1, 2012 from the utilization of funds received from the $6 billion of notes Kraft Foods Group issued directly and cash proceeds distributed to us in June 2012 in connection with our Spin-Off capitalization plan. |
37
Results of Operations by Reportable Segment
Effective January 1, 2013, we reorganized our operations and management into five reportable segments:
| Latin America |
| Asia Pacific |
| EEMEA |
| Europe |
| North America |
We changed and flattened our operating structure to reflect our greater concentration of operations in high-growth emerging markets and to further enhance collaboration across regions, expedite decision making and drive greater efficiencies to fuel our growth. We have presented our segment results reflecting the changes for all periods presented.
We manage the operations of Latin America, Asia Pacific and EEMEA by location and Europe and North America by product category.
The following discussion compares the net revenues and earnings of each of our reportable segments for the three and six months ended June 30, 2013 and 2012.
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Net revenues: |
||||||||||||||||
Latin America |
$ | 1,339 | $ | 1,340 | $ | 2,737 | $ | 2,710 | ||||||||
Asia Pacific |
1,240 | 1,222 | 2,607 | 2,542 | ||||||||||||
EEMEA |
1,039 | 965 | 1,902 | 1,814 | ||||||||||||
Europe |
3,273 | 3,315 | 6,731 | 6,809 | ||||||||||||
North America |
1,704 | 1,685 | 3,362 | 3,319 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net revenues |
$ | 8,595 | $ | 8,527 | $ | 17,339 | $ | 17,194 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings before income taxes: |
||||||||||||||||
Operating income: |
||||||||||||||||
Latin America |
$ | 162 | $ | 206 | $ | 254 | $ | 369 | ||||||||
Asia Pacific |
129 | 150 | 318 | 327 | ||||||||||||
EEMEA |
112 | 141 | 173 | 279 | ||||||||||||
Europe |
369 | 432 | 775 | 858 | ||||||||||||
North America |
194 | 184 | 364 | 332 | ||||||||||||
Unrealized gains / (losses) on hedging activities |
24 | 23 | 43 | 41 | ||||||||||||
General corporate expenses |
(76 | ) | (146 | ) | (145 | ) | (257 | ) | ||||||||
Amortization of intangibles |
(55 | ) | (53 | ) | (109 | ) | (109 | ) | ||||||||
Gains on acquisition and divestitures, net |
6 | | 28 | | ||||||||||||
Acquisition-related costs |
| | (2 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
865 | 937 | 1,699 | 1,840 | ||||||||||||
Interest and other expense, net |
(235 | ) | (344 | ) | (514 | ) | (831 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings before income taxes |
$ | 630 | $ | 593 | $ | 1,185 | $ | 1,009 | ||||||||
|
|
|
|
|
|
|
|
As discussed in Note 16, Segment Reporting, management uses 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. Coincident with the change in reportable segment structure, segment operating income for our North America region also changed to include all U.S. pension plan expenses, a portion of which was previously excluded from segment operating results evaluated by management as the costs were centrally managed. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), general corporate expenses (which are a component of selling, general and administrative expenses), amortization of
38
intangibles, gains and losses on divestitures and acquisitions, and acquisition-related costs (which are a component of selling, general and administrative expenses) for all periods presented. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, we record the gains and losses on hedging activities within segment operating results. We exclude general corporate expenses, amortization of intangibles, gains and losses on divestitures and acquisitions and acquisition-related costs from segment operating income in order to provide better transparency of our segment operating results.
During the three months ended June 30, 2013, we completed two divestitures within our EEMEA segment which generated cash proceeds of $48 million and pre-tax gains of $6 million. The divestitures included a salty snacks business in Turkey and a confectionery business in South Africa. The aggregate operating results of these divestitures were not material to our condensed consolidated financial statements during the periods presented.
On February 22, 2013, we acquired the remaining interest in a biscuit operation in Morocco, which is now a wholly-owned subsidiary within our EEMEA segment. We paid net cash consideration of $119 million, consisting of $155 million purchase price net of cash acquired of $36 million. We also recorded a pre-tax gain of $22 million related to the remeasurement of our previously-held equity interest in the operation to fair value in accordance with U.S. GAAP. Acquisition costs of $7 million were included within selling, general and administrative expenses and interest and other expense, net. We also incurred $1 million of integration costs during the three months ended June 30, 2013, which were included in selling, general and administrative expenses within our EEMEA segment.
During the three months ended December 31, 2012, we completed several divestitures within our Europe segment which generated cash proceeds of $200 million and pre-tax gains of $107 million. The divestitures primarily included a dinners and sauces grocery business in Germany and Belgium and a canned meat business in Italy. The aggregate operating results of these divestitures were not material to our condensed consolidated financial statements as of and for the three and six months ended June 30, 2012.
In 2012, we sold properties located in Russia and Turkey within our EEMEA segment. The Turkey property sale generated a $22 million pre-tax gain in the second quarter of 2012 and the Russia property sale generated a $55 million pre-tax gain in the first quarter of 2012. The gains were recorded within selling, general and administrative expenses in our EEMEA segment.
In February 2013, the Venezuela government announced the devaluation of the official Venezuelan bolivar exchange rate from 4.30 bolivars to 6.30 bolivars to the U.S. dollar and the elimination of the second-tier, government-regulated SITME exchange rate previously applied to value certain types of transactions. In connection with the announced changes, which were effective on February 13, 2013, we recorded a $54 million unfavorable foreign currency charge related to the devaluation of our net monetary assets in Venezuela in selling, general and administrative expenses within our Latin America segment in the three months ended March 31, 2013. We also incurred net unfavorable devaluation-related foreign currency impacts within our pretax earnings of $17 million during the second quarter of 2013 and $24 million during the first six months of 2013 related to translating the earnings of our Venezuelan subsidiary to the U.S. dollar at the new exchange rate.
In connection with our 2012-2014 Restructuring Program, we recorded restructuring charges of $48 million for the three months and $88 million during the six months ended June 30, 2013, and $27 million for the three months and $50 million during the six months ended June 30, 2012, within asset impairment and exit costs. We also recorded implementation costs of $7 million for the three months and $11 million for the six months ended June 30, 2013 and $2 million in the three months and $1 million in the six months ended June 30, 2012 within cost of sales and selling, general and administrative expenses. The restructuring charges and implementation costs are recorded primarily within our North America and Europe segments.
We recorded Integration Program charges of $52 million during the three months and $73 million during the six months ended June 30, 2013 and $35 million for the three months and $78 million for the six months ended June 30, 2012. We recorded these charges in operations, as a part of selling, general and administrative expenses within our Europe, Asia Pacific, Latin America and EEMEA segments.
Unrealized gains / (losses) on hedging activities were $24 million for the three months ended June 30, 2013 and $23 million for the three months ended June 30, 2012. Unrealized gains / (losses) on hedging activities were $43 million for the six months ended June 30, 2013 and $41 million for the six months ended June 30, 2012. In all periods, the net gains were primarily related to gains on foreign currency contracts and commodity hedging activity.
39
The decrease in general corporate expenses for the three months ended June 30, 2013 was due primarily to lower Spin-Off Costs within general corporate expenses, as we recorded $15 million of Spin-Off Costs in the three months ended June 30, 2013 as compared to $100 million in the three months ended June 30, 2012. The decrease in general corporate expenses for the six months ended June 30, 2013 was due primarily to lower Spin-Off Costs within general corporate expenses, as we recorded $24 million of Spin-Off Costs in the six months ended June 30, 2013 as compared to $139 million in the six months ended June 30, 2012.
The decrease in interest and other expense, net for the three months ended June 30, 2013 was due primarily to a benefit from a statutory interest rate change impacting an accrued non-income tax liability, a reduction in long-term debt and the absence of Spin-Off Costs within interest expense as we recorded $28 million of Spin-Off Costs within interest expense in the three months ended June 30, 2012. The decrease in interest and other expense, net for the six months ended June 30, 2013 was due primarily to the absence of Spin-Off Costs within interest expense as we recorded $162 million of Spin-Off Costs within interest expense in the six months ended June 30, 2012, a reduction in long-term debt and a benefit from a statutory interest rate change impacting an accrued non-income tax liability.
40
Latin America
For the Three Months Ended June 30, |
||||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues |
$ | 1,339 | $ | 1,340 | $ | (1 | ) | (0.1% | ) | |||||||
Segment operating income |
162 | 206 | (44 | ) | (21.4% | ) | ||||||||||
For the Six Months Ended June 30, |
||||||||||||||||
2013 | 2012 | $ change | % change | |||||||||||||
(in millions) | ||||||||||||||||
Net revenues |
$ | 2,737 | $ | 2,710 | $ | 27 | 1.0% | |||||||||
Segment operating income |
254 | 369 | (115 | ) | (31.2% | ) |
Three Months Ended June 30:
Net revenues decreased $1 million (0.1%), due to unfavorable foreign currency (9.7 pp) and unfavorable volume/mix (2.0 pp), mostly offset by higher net pricing (11.6 pp). Unfavorable foreign currency was due primarily to the Venezuelan bolivar devaluation and the strength of the U.S. dollar relative to the Argentinean peso and Brazilian real, partially offset by the strength of the Mexican peso relative to the U.S. dollar. Unfavorable volume/mix was driven primarily by Mexico and Argentina, partially offset by volume/mix gains in Brazil. Higher net pricing was reflected across most of the region, primarily in Venezuela, Brazil and Argentina.
Segment operating income decreased $44 million (21.4%), due primarily to higher raw material costs, higher other selling, general and administrative expenses (including prior-year proceeds from an insurance settlement), higher manufacturing costs, unfavorable volume/mix and unfavorable foreign currency, partially offset by higher net pricing and lower 2012-2014 Restructuring Program costs.
Six Months Ended June 30:
Net revenues increased $27 million (1.0%), due to higher net pricing (10.5 pp) and favorable volume/mix (0.6 pp), partially offset by unfavorable foreign currency (10.1 pp). Higher net pricing was reflected across the entire region, except in Mexico. Favorable volume/mix was driven primarily by Brazil and Venezuela, partially offset by volume/mix declines in Mexico and Argentina. Unfavorable foreign currency was due primarily to the Venezuelan bolivar devaluation and the strength of the U.S. dollar relative to the Brazilian real and Argentinean peso, partially offset by the strength of the Mexican peso relative to the U.S. dollar.
Segment operating income decreased $115 million (31.2%), due primarily to higher raw material costs, higher other selling, general and administrative expenses (including prior-year proceeds from an insurance settlement), unfavorable foreign currency including the impact from the devaluation of net monetary assets in Venezuela and higher manufacturing costs, partially offset by higher net pricing, lower advertising and consumer promotion costs, lower Integration Program costs and lower 2012-2014 Restructuring Program costs.
41
Asia Pacific
For the Three Months Ended June 30, |
||||||||||||||||