10-Q 1 mdlz10q33118doc.htm 10-Q Document

 
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 March 31, 2018
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
mondelezlogo.jpg
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)
(Registrant’s 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
 
 
Accelerated filer   ¨
Non-accelerated filer  ¨
 
 
 
Smaller reporting company   ¨
(Do not check if a smaller reporting company)                    
 
Emerging growth company   ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
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 April 27, 2018, there were 1,475,068,042 shares of the registrant’s Class A Common Stock outstanding.
 



Mondelēz International, Inc.
Table of Contents
 
 
 
Page No.
PART I - 
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II -
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 

In this report, for all periods presented, “we,” “us,” “our,” “the Company” and “Mondelēz International” refer to Mondelēz International, Inc. and subsidiaries. References to “Common Stock” refer to our Class A Common Stock.




PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
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
March 31,
 
2018
 
2017
Net revenues
$
6,765

 
$
6,414

Cost of sales
3,916

 
3,896

Gross profit
2,849

 
2,518

Selling, general and administrative expenses
1,527

 
1,483

Asset impairment and exit costs
54

 
166

Amortization of intangibles
44

 
44

Operating income
1,224

 
825

Benefit plan non-service income
(13
)
 
(15
)
Interest and other expense, net
80

 
119

Earnings before income taxes
1,157

 
721

Provision for income taxes
(307
)
 
(154
)
Equity method investment net earnings
94

 
66

Net earnings
944

 
633

Noncontrolling interest earnings
(6
)
 
(3
)
Net earnings attributable to Mondelēz International
$
938

 
$
630

Per share data:
 
 
 
Basic earnings per share attributable to Mondelēz International
$
0.63

 
$
0.41

Diluted earnings per share attributable to Mondelēz International
$
0.62

 
$
0.41

Dividends declared
$
0.22

 
$
0.19


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
March 31,
 
2018
 
2017
Net earnings
$
944

 
$
633

Other comprehensive earnings/(losses), net of tax:
 
 
 
Currency translation adjustment
207

 
543

Pension and other benefit plans
(6
)
 
1

Derivative cash flow hedges
(46
)
 
18

Total other comprehensive earnings/(losses)
155

 
562

Comprehensive earnings
1,099

 
1,195

less: Comprehensive earnings/(losses) attributable to noncontrolling interests
21

 
7

Comprehensive earnings attributable to Mondelēz International
$
1,078

 
$
1,188


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)
 
March 31,
2018
 
December 31,
2017
ASSETS
 
 
 
Cash and cash equivalents
$
1,130

 
$
761

Trade receivables (net of allowances of $49 at March 31, 2018
 and $50 at December 31, 2017)
3,113

 
2,691

Other receivables (net of allowances of $83 at March 31, 2018
     and $98 at December 31, 2017)
841

 
835

Inventories, net
2,620

 
2,557

Other current assets
666

 
676

Total current assets
8,370

 
7,520

Property, plant and equipment, net
8,792

 
8,677

Goodwill
21,301

 
21,085

Intangible assets, net
18,810

 
18,639

Prepaid pension assets
160

 
158

Deferred income taxes
301

 
319

Equity method investments
6,347

 
6,345

Other assets
422

 
366

TOTAL ASSETS
$
64,503

 
$
63,109

LIABILITIES
 
 
 
Short-term borrowings
$
4,779

 
$
3,517

Current portion of long-term debt
829

 
1,163

Accounts payable
5,727

 
5,705

Accrued marketing
1,847

 
1,728

Accrued employment costs
617

 
721

Other current liabilities
2,999

 
2,959

Total current liabilities
16,798

 
15,793

Long-term debt
13,180

 
12,972

Deferred income taxes
3,419

 
3,376

Accrued pension costs
1,548

 
1,669

Accrued postretirement health care costs
419

 
419

Other liabilities
2,589

 
2,689

TOTAL LIABILITIES
37,953

 
36,918

Commitments and Contingencies (Note 12)

 

EQUITY
 
 
 
Common Stock, no par value (5,000,000,000 shares authorized and 1,996,537,778 shares issued at March 31, 2018 and December 31, 2017)

 

Additional paid-in capital
31,876

 
31,915

Retained earnings
23,315

 
22,749

Accumulated other comprehensive losses
(9,858
)
 
(9,998
)
Treasury stock, at cost (515,208,245 shares at March 31, 2018 and
    508,401,694 shares at December 31, 2017)
(18,881
)
 
(18,555
)
Total Mondelēz International Shareholders’ Equity
26,452

 
26,111

Noncontrolling interest
98

 
80

TOTAL EQUITY
26,550

 
26,191

TOTAL LIABILITIES AND EQUITY
$
64,503

 
$
63,109

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
 
Non-controlling
Interest*
 
Total
Equity
Balances at January 1, 2017
$

 
$
31,847

 
$
21,149

 
$
(11,122
)
 
$
(16,713
)
 
$
54

 
$
25,215

Comprehensive earnings/(losses):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 
2,922

 

 

 
14

 
2,936

Other comprehensive earnings/(losses), net of income taxes

 

 

 
1,124

 

 
28

 
1,152

Exercise of stock options and issuance of other stock awards

 
68

 
(83
)
 

 
360

 

 
345

Common Stock repurchased

 

 

 

 
(2,202
)
 

 
(2,202
)
Cash dividends declared ($0.82 per share)

 

 
(1,239
)
 

 

 

 
(1,239
)
Dividends paid on noncontrolling interest and other activities

 

 

 

 

 
(16
)
 
(16
)
Balances at December 31, 2017
$

 
$
31,915

 
$
22,749

 
$
(9,998
)
 
$
(18,555
)
 
$
80

 
$
26,191

Comprehensive earnings/(losses):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 
938

 

 

 
6

 
944

Other comprehensive earnings/(losses), net of income taxes

 

 

 
140

 

 
15

 
155

Exercise of stock options and issuance of other stock awards

 
(39
)
 
(51
)
 

 
174

 

 
84

Common Stock repurchased

 

 

 

 
(500
)
 

 
(500
)
Cash dividends declared ($0.22 per share)

 

 
(327
)
 

 

 

 
(327
)
Dividends paid on noncontrolling interest and other activities

 

 
6

 

 

 
(3
)
 
3

Balances at March 31, 2018
$

 
$
31,876

 
$
23,315

 
$
(9,858
)
 
$
(18,881
)
 
$
98

 
$
26,550


*
Noncontrolling interest as of March 31, 2017 was $61 million, as compared to $54 million as of January 1, 2017. The change of $7 million during the three months ended March 31, 2017 was due to $4 million of other comprehensive earnings, net of taxes, and $3 million of net earnings.

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 Three Months Ended
March 31,
 
2018
 
2017
CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES
 
 
 
Net earnings
$
944

 
$
633

Adjustments to reconcile net earnings to operating cash flows:
 
 
 
Depreciation and amortization
207

 
200

Stock-based compensation expense
28

 
39

U.S. tax reform transition tax
94

 

Deferred income tax provision
47

 
13

Asset impairments and accelerated depreciation
28

 
80

Equity method investment net earnings
(94
)
 
(66
)
Distributions from equity method investments
143

 
122

Other non-cash items, net
(14
)
 
43

Change in assets and liabilities, net of acquisitions and divestitures:
 
 
 
Receivables, net
(413
)
 
(454
)
Inventories, net
(38
)
 
(95
)
Accounts payable
(144
)
 
(443
)
Other current assets
46

 
126

Other current liabilities
(317
)
 
(478
)
Change in pension and postretirement assets and liabilities, net
(110
)
 
(277
)
Net cash provided by/(used in) operating activities
407

 
(557
)
CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES
 
 
 
Capital expenditures
(284
)
 
(306
)
Proceeds from sale of property, plant and equipment and other assets
10

 
19

Net cash used in investing activities
(274
)
 
(287
)
CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES
 
 
 
Issuances of commercial paper, maturities greater than 90 days
686

 
626

Repayments of commercial paper, maturities greater than 90 days
(433
)
 
(513
)
Net issuances of other short-term borrowings
1,016

 
1,587

Long-term debt proceeds
463

 
350

Long-term debt repaid
(738
)
 
(979
)
Repurchase of Common Stock
(527
)
 
(461
)
Dividends paid
(330
)
 
(292
)
Other
92

 
60

Net cash provided by financing activities
229

 
378

Effect of exchange rate changes on cash and cash equivalents
7

 
32

Cash and cash equivalents:
 
 
 
Increase/(decrease)
369

 
(434
)
Balance at beginning of period
761

 
1,741

Balance at end of period
$
1,130

 
$
1,307


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

Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of our results of operations, financial position and cash flows. Results of operations for any interim period are not necessarily indicative of future or annual results. For a complete set of consolidated financial statements and related notes, refer to our Annual Report on Form 10-K for the year ended December 31, 2017.

Principles of Consolidation:
The condensed consolidated financial statements include Mondelēz International, Inc. as well as our wholly owned and majority owned subsidiaries, except our Venezuelan subsidiaries. As of the close of the 2015 fiscal year, we deconsolidated and fully impaired our investment in our Venezuelan operations. As such, for all periods presented, we have excluded the results of operations, financial position and cash flows of our Venezuelan subsidiaries from our condensed consolidated financial statements. We account for investments over which we exercise significant influence under the equity method of accounting. Investments over which we do not have significant influence or control are not material and are carried at cost as there is no readily determinable fair value for the equity interests.

Currency Translation and Highly Inflationary Accounting:
We translate the results of operations of our subsidiaries from multiple currencies using average exchange rates during each period and translate balance sheet accounts using exchange rates at the end of each period. We record currency translation adjustments as a component of equity and realized exchange gains and losses on transactions in earnings.

Highly inflationary accounting is triggered when a country’s three-year cumulative inflation rate exceeds 100%. It requires the remeasurement of financial statements of subsidiaries in the country, from the functional currency of the subsidiary to our U.S. dollar reporting currency, with currency remeasurement gains or losses recorded in earnings. As of March 31, 2018, none of our consolidated subsidiaries were subject to highly inflationary accounting.

Argentina. We continue to closely monitor inflation and the potential for the economy to become highly inflationary for accounting purposes. As of March 31, 2018, the Argentinian economy was not designated as highly inflationary. At this time, we continue to record currency translation adjustments within equity and realized exchange gains and losses on transactions in earnings. Our Argentinian operations contributed $136 million, or 2.0% of consolidated net revenues in the three months ended March 31, 2018, and our Argentinian operations had a net monetary liability position as of March 31, 2018.

Other Countries. Since we sell in approximately 160 countries and have operations in over 80 countries, we monitor economic and currency-related risks and seek to take protective measures in response to these exposures. Some of the countries in which we do business have recently experienced periods of significant economic uncertainty and exchange rate volatility, including Brazil, China, Mexico, Russia, United Kingdom (Brexit), Ukraine, Turkey, Egypt, Nigeria and South Africa. We continue to monitor operations, currencies and net monetary exposures in these countries. At this time, we do not anticipate a risk to our operating results from changing to highly inflationary accounting in these countries.

Revenue Recognition:
We predominantly sell food and beverage products across several product categories and in all regions as detailed in Note 16, Segment Reporting. We recognize revenue when control over the products transfers to our customers, which generally occurs upon delivery or shipment of the products. A small percentage of our net revenues relates to the licensing of our intellectual property, predominantly brand and trade names, and we record these revenues over the license term. We account for product shipping, handling and insurance as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of sales. Any taxes collected on behalf of government authorities are excluded from net revenues.


6


Revenues are recorded net of trade and sales incentives and estimated product returns. Known or expected pricing or revenue adjustments, such as trade discounts, rebates or returns, are estimated at the time of sale. We base these estimates of expected amounts principally on historical utilization and redemption rates. Estimates that affect revenue, such as trade incentives and product returns, are monitored and adjusted each period until the incentives or product returns are realized.

Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with U.S. GAAP and our inventory policies. We generally do not have any unbilled receivables at the end of a period. Deferred revenues are not material and primarily include customer advance payments typically collected a few days before product delivery, at which time deferred revenues are reclassified and recorded as net revenues. We generally do not receive noncash consideration for the sale of goods nor do we grant payment financing terms greater than one year.

Transfers of Financial Assets:
We account for transfers of financial assets, such as uncommitted revolving non-recourse accounts receivable factoring arrangements, when we have surrendered control over the related assets. Determining whether control has transferred requires an evaluation of relevant legal considerations, an assessment of the nature and extent of our continuing involvement with the assets transferred and any other relevant considerations. We use receivable factoring arrangements periodically when circumstances are favorable to manage liquidity. We have non-recourse factoring arrangements in which we sell eligible short-term trade receivables primarily to banks in exchange for cash. We may then continue to collect the receivables sold, acting solely as a collecting agent on behalf of the banks. The outstanding principal amount of receivables under these arrangements amounted to $886 million as of March 31, 2018 and $843 million as of December 31, 2017. The incremental cost of factoring receivables under this arrangement was not material for all periods presented. The proceeds from the sales of receivables are included in cash from operating activities in the condensed consolidated statements of cash flows.

New Accounting Pronouncements:
In February 2018, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") that permits entities to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 enactment of U.S. tax reform legislation. The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently assessing the impact on our consolidated financial statements.

In August 2017, the FASB issued an ASU to better align hedge accounting with an entity’s risk management activities and improve disclosures surrounding hedging. For cash flow and net investment hedges as of the adoption date, the ASU requires a modified retrospective transition approach. Presentation and disclosure requirements related to this ASU are required prospectively. The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We early adopted the standard as of January 1, 2018 and there was no material impact to our consolidated financial statements upon adoption. Refer to Note 9, Financial Instruments, for additional information.

In May 2017, the FASB issued an ASU to clarify when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The ASU is applied prospectively to awards that are modified on or after the adoption date. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We adopted this standard on January 1, 2018 and there was no material impact to our consolidated financial statements upon adoption.

In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The standard requires employers to disaggregate the service cost component from the other components of net benefit cost and disclose the amount and location where the net benefit cost is recorded in the income statement or capitalized in assets. The standard is to be applied on a retrospective basis for the change in presentation in the income statement and prospectively for the change in presentation on the balance sheet. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We adopted this standard on January 1, 2018 using a retrospective approach for all periods presented. As a result of this adoption, we have disaggregated the components of our net periodic pension and postretirement benefit costs and moved components other than service costs to a new line item, benefit plan non-service income, located below operating income. For the three months ended March 31, 2017, $15 million of benefit plan non-service income was

7


reclassified from operating income ($7 million from cost of sales and $8 million from selling, general and administrative expenses) to benefit plan non-service income.

In January 2017, the FASB issued an ASU that clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business may affect many areas of accounting including acquisitions, disposals, goodwill and consolidation. The ASU is applied on a prospective basis and is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We adopted this standard on January 1, 2018 and there was no material impact to our consolidated financial statements upon adoption.

In November 2016, the FASB issued an ASU that requires the change in restricted cash or cash equivalents to be included with other changes in cash and cash equivalents in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We adopted this standard on January 1, 2018 and there was no material impact to our consolidated financial statements upon adoption.

In October 2016, the FASB issued an ASU that requires the recognition of tax consequences of intercompany asset transfers other than inventory when the transfer occurs and removes the exception to postpone recognition until the asset has been sold to an outside party. The standard is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We adopted this standard on January 1, 2018 and recorded an immaterial cumulative-effect adjustment to retained earnings upon adoption.

In August 2016, the FASB issued an ASU to provide guidance on eight specific cash flow classification issues and reduce diversity in practice in how some cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We adopted this standard on January 1, 2018 and there was no material impact to our consolidated financial statements upon adoption.

In February 2016, the FASB issued an ASU on lease accounting. The ASU revises existing U.S. GAAP and outlines a new model for lessors and lessees to use in accounting for lease contracts. The guidance requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases. In the statement of earnings, lessees will classify leases as either operating (resulting in straight-line expense) or financing (resulting in a front-loaded expense pattern). The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We anticipate adopting the new standard on January 1, 2019. We continue to make progress in our due diligence and assessment of the impact of the new standard across our operations and on our consolidated financial statements, which will consist primarily of recording lease assets and liabilities on our balance sheet for our operating leases.

In January 2016, the FASB issued an ASU that provides updated guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. The standard requires that equity investments (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) be measured at fair value, with changes in fair value recognized in net income. The standard also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017. We adopted this standard on January 1, 2018 and there was no material impact to our consolidated financial statements upon adoption.

In May 2014, the FASB issued an ASU on revenue recognition from contracts with customers. The ASU outlines a new, single comprehensive model for companies to use in accounting for revenue. The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for the goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows from customer contracts, including significant judgments made in recognizing revenue. In 2016 and 2017, the FASB issued several ASUs that clarified principal versus agent (gross versus net) revenue presentation considerations, confirmed the accounting for certain prepaid stored-value products and clarified the guidance for identifying performance obligations within a contract, the accounting for licenses and partial sales of nonfinancial assets. The FASB also issued two ASUs providing technical corrections, narrow scope exceptions and practical expedients to clarify and improve the implementation of the new revenue recognition guidance. The revenue guidance is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date (annual reporting periods beginning after December 15, 2016). We adopted the new

8


standard on January 1, 2018 on a full retrospective basis. There was no material financial impact from adopting the new revenue standards in any of the historical periods presented. Refer to the Revenue Recognition section above and Note 16, Segment Reporting, for additional information.

Note 2. Divestitures and Acquisitions

On December 28, 2017, we completed the sale of a confectionery business in Japan. We received cash proceeds of ¥2.8 billion ($24 million as of December 28, 2017) and recorded an immaterial pre-tax loss on the divestiture within our AMEA segment.

On October 2, 2017, we completed the sale of one of our equity method investments and received cash proceeds of $65 million. We recorded a pre-tax gain of $40 million within the gain on equity method investment transactions and $15 million of tax expense.

In connection with the 2012 spin-off of Kraft Foods Group, Inc. (now a part of The Kraft Heinz Company (“KHC”)), Kraft Foods Group and we each granted the other various licenses to use certain trademarks in connection with particular product categories in specified jurisdictions. On August 17, 2017, we entered into two agreements with KHC to terminate the licenses of certain KHC-owned brands used in our grocery business within our Europe region and to transfer to KHC inventory and certain other assets. On August 17, 2017, the first transaction closed and we received cash proceeds of €9 million ($11 million as of August 17, 2017) and on October 23, 2017, the second transaction closed and we received cash proceeds of €2 million ($3 million as of October 23, 2017). The gain on both transactions combined was immaterial.

On July 4, 2017, we completed the sale of most of our grocery business in Australia and New Zealand to Bega Cheese Limited for $456 million Australian dollars ($347 million as of July 4, 2017). We divested $27 million of current assets, $135 million of non-current assets and $4 million of current liabilities based on the July 4, 2017 exchange rate. We recorded a pre-tax gain of $247 million Australian dollars ($187 million as of July 4, 2017) on the sale. During the third and fourth quarters of 2017, we also recorded divestiture-related costs of $2 million and a foreign currency hedge loss of $3 million. In the fourth quarter of 2017, we recorded a final $3 million inventory-related working capital adjustment, increasing the pre-tax gain to $190 million in 2017.

On April 28, 2017, we completed the sale of several manufacturing facilities in France and the sale or license of several local confectionery brands. We received cash of approximately €157 million ($169 million as of April 28, 2017), net of cash divested with the businesses. On April 28, 2017, we divested $44 million of current assets, $155 million of non-current assets, $8 million of current liabilities and $22 million of non-current liabilities based on the April 28, 2017 exchange rate. During the three months ended March 31, 2018, we reversed $3 million of accrued expenses no longer required. We incurred $18 million of divestiture-related costs in the three months ended March 31, 2017. We recorded a $3 million loss on the sale during the three months ended June 30, 2017. Divestiture-related costs were recorded within cost of sales and selling, general and administrative expenses primarily within our Europe segment. In prior periods, we recorded a $5 million impairment charge in May 2016 for a candy trademark to reduce the overall net assets to the estimated net sales proceeds after transaction costs. On March 31, 2016, we recorded a $14 million impairment charge for another gum & candy trademark as a portion of its carrying value would not be recoverable based on future cash flows expected under a planned license agreement with the buyer.


9


Note 3. Inventories

Inventories consisted of the following:
 
As of March 31,
2018
 
As of December 31,
2017
 
(in millions)
Raw materials
$
736

 
$
711

Finished product
2,005

 
1,975

 
2,741

 
2,686

Inventory reserves
(121
)
 
(129
)
Inventories, net
$
2,620

 
$
2,557


Note 4. Property, Plant and Equipment

Property, plant and equipment consisted of the following:
 
As of March 31,
2018
 
As of December 31,
2017
 
(in millions)
Land and land improvements
$
457

 
$
458

Buildings and building improvements
3,086

 
2,979

Machinery and equipment
11,402

 
11,195

Construction in progress
998

 
1,048

 
15,943

 
15,680

Accumulated depreciation
(7,151
)
 
(7,003
)
Property, plant and equipment, net
$
8,792

 
$
8,677


For the three months ended March 31, 2018, capital expenditures of $284 million excluded $252 million of accrued capital expenditures remaining unpaid at March 31, 2018 and included payment for a portion of the $357 million of capital expenditures that were accrued and unpaid at December 31, 2017. For the three months ended March 31, 2017, capital expenditures of $306 million excluded $186 million of accrued capital expenditures remaining unpaid at March 31, 2017 and included payment for a portion of the $343 million of capital expenditures that were accrued and unpaid at December 31, 2016.

In connection with our restructuring program, we recorded non-cash property, plant and equipment write-downs (including accelerated depreciation and asset impairments) of $23 million in the three months ended March 31, 2018 and $71 million in the three months ended March 31, 2017 (see Note 7, 2014-2018 Restructuring Program). These charges related to property, plant and equipment were recorded in the condensed consolidated statements of earnings within asset impairment and exit costs and in the segment results as follows:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Latin America
$
8

 
$
6

AMEA
4

 
12

Europe
5

 
37

North America
6

 
15

Corporate

 
1

Non-cash property, plant and equipment write-downs
$
23

 
$
71



10


Note 5. Goodwill and Intangible Assets

Goodwill by segment was:
 
As of March 31,
2018
 
As of December 31,
2017
 
(in millions)
Latin America
$
924

 
$
901

AMEA
3,391

 
3,371

Europe
8,072

 
7,880

North America
8,914

 
8,933

Goodwill
$
21,301

 
$
21,085


Intangible assets consisted of the following:
 
As of March 31,
2018
 
As of December 31,
2017
 
(in millions)
Non-amortizable intangible assets
$
17,868

 
$
17,671

Amortizable intangible assets
2,426

 
2,386

 
20,294

 
20,057

Accumulated amortization
(1,484
)
 
(1,418
)
Intangible assets, net
$
18,810

 
$
18,639


Non-amortizable intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of trademarks, customer-related intangibles, process technology, licenses and non-compete agreements.

Amortization expense for intangible assets was $44 million for the three months ended March 31, 2018 and March 31, 2017. For the next five years, we currently estimate annual amortization expense of approximately $178 million for the next three years and approximately $87 million in years four and five (reflecting March 31, 2018 exchange rates).

Changes in goodwill and intangible assets consisted of:
 
Goodwill
 
Intangible
Assets, at cost
 
(in millions)
Balance at January 1, 2018
$
21,085

 
$
20,057

Currency/other
216

 
237

Balance at March 31, 2018
$
21,301

 
$
20,294


During our 2017 annual testing of non-amortizable intangible assets, we recorded $70 million of impairment charges in the third quarter of 2017 related to five trademarks recorded across all regions. During that annual review, we identified thirteen brands, including the five impaired trademarks, with $980 million of aggregate book value as of March 31, 2018 that each had a fair value in excess of book value of 10% or less. We believe our current plans for each of these brands will allow them to continue to not be impaired, but if the product line expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future.


11


Note 6. Equity Method Investments

Our investments accounted for under the equity method of accounting totaled $6,347 million as of March 31, 2018 and $6,345 million as of December 31, 2017. Our largest investments are in Jacobs Douwe Egberts (“JDE”) and Keurig Green Mountain, Inc. (“Keurig”).

JDE:
As of March 31, 2018, we held a 26.5% voting interest, a 26.4% ownership interest and a 26.2% profit and dividend sharing interest in JDE. We recorded JDE equity earnings of $46 million and received cash dividends of $73 million in the first quarter of 2018. In the first quarter of 2017, we recorded JDE equity earnings of $18 million and received cash dividends of $49 million.

Keurig:
As of March 31, 2018, we held a 24.2% ownership interest in Keurig. We recorded Keurig equity earnings of $16 million and shareholder loan interest income of $6 million and we received dividends of $3 million in the first quarter of 2018. In the first quarter of 2017, we recorded Keurig equity earnings of $14 million and shareholder loan interest income of $6 million and we received $12 million of interest payments on the shareholder loan and $4 million of dividends.

Planned Keurig Dr Pepper Transaction:
On January 29, 2018, Keurig announced that it had entered into a definitive merger agreement with Dr Pepper Snapple Group, Inc. to form Keurig Dr Pepper Inc. ("Keurig Dr Pepper"), contingent upon the successful satisfaction of certain regulatory requirements. Following the close of the merger in mid-2018, we expect our ownership in Keurig Dr Pepper to be 13% -14%. As we will continue to have significant influence over the merged entity, we will account for this investment under the equity method as we have for Keurig, resulting in recognizing our share of their earnings within our earnings and our share of their dividends within our cash flows. We will have the right to nominate two directors to the board of Keurig Dr Pepper and will have certain governance rights over Keurig Dr Pepper following the transaction.

Note 7. 2014-2018 Restructuring Program

On May 6, 2014, our Board of Directors approved a $3.5 billion restructuring program and up to $2.2 billion of capital expenditures. On August 31, 2016, our Board of Directors approved a $600 million reallocation between restructuring program cash costs and capital expenditures so that now the $5.7 billion program consists of approximately $4.1 billion of restructuring program costs ($3.1 billion cash costs and $1 billion non-cash costs) and up to $1.6 billion of capital expenditures. The primary objective of the 2014-2018 Restructuring Program is to reduce our operating cost structure in both our supply chain and overhead costs. The program is intended primarily to cover severance as well as asset disposals and other manufacturing-related one-time costs. Since inception, we have incurred total restructuring and related implementation charges of $3.4 billion related to the 2014-2018 Restructuring Program. We expect to incur the full $4.1 billion of program charges by year-end 2018.

Restructuring Costs:
We recorded restructuring charges of $52 million in the three months ended March 31, 2018 and $157 million in the three months ended March 31, 2017 within asset impairment and exit costs. The 2014-2018 Restructuring Program liability activity for the three months ended March 31, 2018 was:
 
Severance
and related
costs
 
Asset
Write-downs
 
Total
 
(in millions)
Liability balance, January 1, 2018
$
464

 
$

 
$
464

Charges
28

 
24

 
52

Cash spent
(79
)
 

 
(79
)
Non-cash settlements/adjustments
(1
)
 
(24
)
 
(25
)
Currency
4

 

 
4

Liability balance, March 31, 2018
$
416

 
$

 
$
416



12


We spent $79 million in the three months ended March 31, 2018 and $84 million in the three months ended March 31, 2017 in cash severance and related costs. We also recognized non-cash asset write-downs (including accelerated depreciation and asset impairments) and other non-cash adjustments totaling $25 million in the three months ended March 31, 2018 and $72 million in the three months ended March 31, 2017. At March 31, 2018, $372 million of our net restructuring liability was recorded within other current liabilities and $44 million was recorded within other long-term liabilities.

Implementation Costs:
Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities. We believe the disclosure of implementation costs provides readers of our financial statements with more information on the total costs of our 2014-2018 Restructuring Program. Implementation costs primarily relate to reorganizing our operations and facilities in connection with our supply chain reinvention program and other identified productivity and cost saving initiatives. The costs include incremental expenses related to the closure of facilities, costs to terminate certain contracts and the simplification of our information systems. Within our continuing results of operations, we recorded implementation costs of $62 million in the three months ended March 31, 2018 and $54 million in the three months ended March 31, 2017. We recorded these costs within cost of sales and general corporate expense within selling, general and administrative expenses.

Restructuring and Implementation Costs in Operating Income:
During the three months ended March 31, 2018 and March 31, 2017, and since inception of the 2014-2018 Restructuring Program, we recorded restructuring and implementation costs within operating income by segment as follows:
 
Latin
America
 
AMEA
 
Europe
 
North
America (1)
 
Corporate (2)
 
Total
 
(in millions)
For the Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Restructuring Costs
$
24

 
$
6

 
$
7

 
$
12

 
$
3

 
$
52

Implementation Costs
15

 
12

 
16

 
17

 
2

 
62

Total
$
39

 
$
18

 
$
23

 
$
29

 
$
5

 
$
114

For the Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Restructuring Costs
$
24

 
$
27

 
$
69

 
$
38

 
$
(1
)
 
$
157

Implementation Costs
9

 
8

 
12

 
13

 
12

 
54

Total
$
33

 
$
35

 
$
81

 
$
51

 
$
11

 
$
211

Total Project 2014-2018 (3)
 
 
 
 
 
 
 
 
 
 
 
Restructuring Costs
$
454

 
$
454

 
$
851

 
$
460

 
$
67

 
$
2,286

Implementation Costs
167

 
141

 
288

 
270

 
223

 
1,089

Total
$
621

 
$
595

 
$
1,139

 
$
730

 
$
290

 
$
3,375


(1)
During 2018 and 2017, our North America region implementation costs included incremental costs that we incurred related to renegotiating collective bargaining agreements that expired in February 2016 for eight U.S. facilities and related to executing business continuity plans for the North America business.
(2)
Includes adjustment for rounding.
(3)
Includes all charges recorded since program inception on May 6, 2014 through March 31, 2018.
 

13


Note 8. Debt and Borrowing Arrangements

Short-Term Borrowings:
Our short-term borrowings and related weighted-average interest rates consisted of:
 
As of March 31, 2018
 
As of December 31, 2017
 
Amount
Outstanding
 
Weighted-
Average Rate
 
Amount
Outstanding
 
Weighted-
Average Rate
 
(in millions)
 
 
 
(in millions)
 
 
Commercial paper
$
4,459

 
2.2
%
 
$
3,410

 
1.7
%
Bank loans
320

 
12.9
%
 
107

 
11.5
%
Total short-term borrowings
$
4,779

 
 
 
$
3,517

 
 

As of March 31, 2018, commercial paper issued and outstanding had between 2 and 118 days remaining to maturity. Commercial paper borrowings increased since year end primarily as a result of issuances to finance the payment of long-term debt maturities, dividend payments and share repurchases during the year.

Some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $1.8 billion at March 31, 2018 and $2.0 billion at December 31, 2017. Borrowings on these lines were $320 million at March 31, 2018 and $107 million at December 31, 2017.

Borrowing Arrangements:
On April 2, 2018, in connection with the tender offer described below, we entered into a $2.0 billion revolving credit agreement for a 364-day senior unsecured credit facility that is scheduled to expire on April 1, 2019. The agreement includes the same terms and conditions as our existing $4.5 billion multi-year credit facility discussed below. On April 17, 2018, we borrowed $714 million on this facility to fund the debt tender described below and availability under the facility was reduced to match the borrowed amount.

On February 28, 2018, to supplement our commercial paper program, we entered into a $1.5 billion revolving credit agreement for a 364-day senior unsecured credit facility that is scheduled to expire on February 27, 2019. The agreement replaces our previous credit agreement that matured on February 28, 2018 and includes the same terms and conditions as our existing $4.5 billion multi-year credit facility discussed below. As of March 31, 2018, no amounts were drawn on the facility.

We also maintain a $4.5 billion multi-year senior unsecured revolving credit facility for general corporate purposes, including working capital needs, and to support our commercial paper program. On October 14, 2016, the revolving credit agreement, which was scheduled to expire on October 11, 2018, was extended through October 11, 2021. The revolving credit agreement includes a covenant that we maintain a minimum shareholders’ equity of at least $24.6 billion, excluding accumulated other comprehensive earnings/(losses) and the cumulative effects of any changes in accounting principles. At March 31, 2018, we complied with this covenant as our shareholders’ equity, as defined by the covenant, was $36.3 billion. The revolving credit facility agreement also contains customary representations, covenants and events of default. There are no credit rating triggers, provisions or other financial covenants that could require us to post collateral as security. As of March 31, 2018, no amounts were drawn on the facility.

Long-Term Debt:
On April 17, 2018, we completed a cash tender offer and retired $570 million of the long-term U.S. dollar debt consisting of:
$241 million of our 6.500% notes due in February 2040
$97.6 million of our 5.375% notes due in February 2020
$75.8 million of our 6.500% notes due in November 2031
$72.1 million of our 6.875% notes due in February 2038
$42.6 million of our 6.125% notes due in August 2018
$29.3 million of our 6.875% notes due in January 2039
$11.7 million of our 7.000% notes due in August 2037

14


We financed the repurchase of the notes, including the payment of accrued interest and other costs incurred, from the $2.0 billion revolving credit agreement entered into on April 2, 2018. The related loss on debt extinguishment and related expenses will be finalized in the second quarter of 2018.

On March 2, 2018, we launched an offering of C$600 million of 3.250% Canadian-dollar denominated notes that mature on March 7, 2025. On March 7, 2018, we received C$595 million (or $461 million) of proceeds, net of discounts and underwriting fees, to be used for general corporate purposes. We recorded approximately $4 million of discounts and deferred financing costs, which will be amortized into interest expense over the life of the notes.

On February 1, 2018, $478 million of our 6.125% U.S. dollar notes matured. The notes and accrued interest to date were paid with the issuance of commercial paper and cash on hand.

On January 26, 2018, fr250 million (or $260 million) of our 0.080% Swiss franc notes matured. The notes and accrued interest to date were paid with the issuance of commercial paper and cash on hand.

Our weighted-average interest rate on our total debt was 2.3% as of March 31, 2018, 2.1% as of December 31, 2017 and 2.2% as of December 31, 2016.

Fair Value of Our Debt:
The fair value of our short-term borrowings at March 31, 2018 and December 31, 2017 reflects current market interest rates and approximates the amounts we have recorded on our condensed consolidated balance sheets. The fair value of our long-term debt was determined using quoted prices in active markets (Level 1 valuation data) for the publicly traded debt obligations. At March 31, 2018, the aggregate fair value of our total debt was $19,337 million and its carrying value was $18,788 million. At December 31, 2017, the aggregate fair value of our total debt was $18,354 million and its carrying value was $17,652 million.

Interest and Other Expense, net:
Interest and other expense, net consisted of:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Interest expense, debt
$
102

 
$
103

Gain related to interest rate swaps
(14
)
 

Other (income)/expense, net
(8
)
 
16

Interest and other expense, net
$
80

 
$
119


See Note 9, Financial Instruments, for information on the gain related to interest rate swaps during the first quarter of 2018.


15


Note 9. Financial Instruments

Fair Value of Derivative Instruments:
Derivative instruments were recorded at fair value in the condensed consolidated balance sheets as follows:
 
As of March 31, 2018
 
As of December 31, 2017
 
Asset
Derivatives
 
Liability
Derivatives
 
Asset
Derivatives
 
Liability
Derivatives
 
(in millions)
Derivatives designated as
accounting hedges:
 
 
 
 
 
 
 
Interest rate contracts
$
29

 
$
686

 
$
15

 
$
509

Net investment hedge contracts
45

 
55

 

 

 
$
74

 
$
741

 
$
15

 
$
509

Derivatives not designated as
   accounting hedges:
 
 
 
 
 
 
 
Currency exchange contracts
$
65

 
$
63

 
$
65

 
$
76

Commodity contracts
192

 
129

 
84

 
229

Interest rate contracts
8

 
5

 
15

 
11

 
$
265

 
$
197

 
$
164

 
$
316

Total fair value
$
339

 
$
938

 
$
179

 
$
825


Derivatives designated as accounting hedges include cash flow, fair value and net investment hedge contracts. Derivatives not designated as accounting hedges include our economic hedges. Non-U.S. dollar denominated debt, designated as a hedge of our net investments in non-U.S. operations, is not reflected in the table above, but is included in long-term debt summarized in Note 8, Debt and Borrowing Arrangements. We record derivative assets and liabilities on a gross basis on our condensed consolidated balance sheets. The fair value of our asset derivatives is recorded within other current assets and the fair value of our liability derivatives is recorded within other current liabilities.

The fair values (asset/(liability)) of our derivative instruments were determined using:
 
As of March 31, 2018
 
Total
Fair Value of Net
Asset/(Liability)
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in millions)
Currency exchange contracts
$
2

 
$

 
$
2

 
$

Commodity contracts
63

 
15

 
48

 

Interest rate contracts
(654
)
 

 
(654
)
 

Net investment hedge contracts
(10
)
 

 
(10
)
 

Total derivatives
$
(599
)
 
$
15

 
$
(614
)
 
$

 
As of December 31, 2017
 
Total
Fair Value of Net
Asset/(Liability)
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in millions)
Currency exchange contracts
$
(11
)
 
$

 
$
(11
)
 
$

Commodity contracts
(145
)
 
(138
)
 
(7
)
 

Interest rate contracts
(490
)
 

 
(490
)
 

Total derivatives
$
(646
)
 
$
(138
)
 
$
(508
)
 
$



16


Level 1 financial assets and liabilities consist of exchange-traded commodity futures and listed options. The fair value of these instruments is determined based on quoted market prices on commodity exchanges. Our exchange-traded derivatives are generally subject to master netting arrangements that permit net settlement of transactions with the same counterparty when certain criteria are met, such as in the event of default. We also are required to maintain cash margin accounts in connection with funding the settlement of our open positions, and the margin requirements generally fluctuate daily based on market conditions. We have recorded margin deposits related to our exchange-traded derivatives of $38 million as of March 31, 2018 and $171 million as of December 31, 2017 within other current assets. Based on our net asset or liability positions with individual counterparties, in the event of default and immediate net settlement of all of our open positions, for derivatives we have in a net asset position, our counterparties would owe us a total of $30 million as of March 31, 2018 and $34 million as of December 31, 2017. As of March 31, 2018, we would have owed $15 million for derivatives we have in a net liability position and as of December 31, 2017, we had no derivatives in a net liability position.

Level 2 financial assets and liabilities consist primarily of over-the-counter (“OTC”) currency exchange forwards, options and swaps; commodity forwards and options; and interest rate swaps. Our currency exchange contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk. Our OTC derivative transactions are governed by International Swap Dealers Association agreements and other standard industry contracts. Under these agreements, we do not post nor require collateral from our counterparties. The majority of our derivative contracts do not have a legal right of set-off. We manage the credit risk in connection with these and all our derivatives by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure with each counterparty and monitoring the financial condition of our counterparties.

Derivative Volume:
The net notional values of our hedging instruments were:
 
Notional Amount
 
As of March 31, 2018
 
As of December 31, 2017
 
(in millions)
Currency exchange contracts:
 
 
 
Intercompany loans and forecasted interest payments
$
4,279

 
$
7,089

Forecasted transactions
2,243

 
2,213

Commodity contracts
956

 
1,204

Interest rate contracts
7,477

 
6,532

Net investment hedge contracts
6,608

 

Net investment hedge debt:
 
 
 
Euro notes
3,777

 
3,679

British pound sterling notes
476

 
459

Swiss franc notes
1,468

 
1,694

    Canadian dollar notes
465

 



17


Cash Flow Hedges:
Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings/(losses) included:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Accumulated (loss)/gain at beginning of period
$
(113
)
 
$
(121
)
Transfer of realized (gains)/losses in fair value to earnings
(14
)
 
7

Unrealized gain/(loss) in fair value
(32
)
 
11

Accumulated (loss)/gain at end of period
$
(159
)
 
$
(103
)

After-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings were:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Commodity contracts
$

 
$
(7
)
Interest rate contracts
14

 

Total
$
14

 
$
(7
)

After-tax gains/(losses) recognized in other comprehensive earnings/(losses) were:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Currency exchange contracts – forecasted transactions
$

 
$
(6
)
Commodity contracts

 
(1
)
Interest rate contracts
(32
)
 
18

Total
$
(32
)
 
$
11


During the three months ended March 31, 2018, we recognized a gain of $14 million 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.

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 currency exchange contracts related to forecasted transactions;
cost of sales for commodity contracts; and
interest and other expense, net for interest rate contracts and currency exchange contracts related to intercompany loans.

Based on current market conditions, we would expect to transfer losses of less than $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Cash Flow Hedge Coverage:
As of March 31, 2018, our longest dated cash flow hedges were interest rate swaps that hedge forecasted interest rate payments over the next 5 years and 7 months.


18


Fair Value Hedges:
Pre-tax gains/(losses) due to changes in fair value of our interest rate swaps and related hedged long-term debt were recorded in interest and other expense, net:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Borrowings
$
1

 
$
4

Derivatives
(1
)
 
(4
)
Total
$

 
$


The carrying amount of our hedged fixed interest rate debt is detailed below and is recorded in the current portion of long-term debt as this debt will mature during the third quarter of 2018.
 
As of March 31, 2018
 
As of December 31, 2017
 
(in millions)
Notional value of borrowings (and related derivatives)
$
(322
)
 
$
(801
)
Cumulative fair value hedging adjustments
(1
)
 

Carrying amount of borrowings
$
(323
)
 
$
(801
)

Hedges of Net Investments in International Operations:
Beginning in the first quarter of 2018, we entered into cross-currency interest rate swaps and forwards with an aggregate notional value of $6.6 billion to hedge certain of our investments in our non-U.S. operations against adverse movements in exchange rates. The after-tax loss on these net investment hedge contracts was recorded in the cumulative translation adjustment section of other comprehensive income and was $11 million for the three months ended March 31, 2018. There were no after-tax gains/(losses) reclassified from accumulated other comprehensive earnings/(losses) into net earnings this quarter. We elected to record changes in the fair value of amounts excluded from the assessment of effectiveness in net earnings. Amounts excluded from the assessment of hedge effectiveness were $17 million for the three months ended March 31, 2018 and were recorded in interest and other expense, net.

After-tax gains/(losses) related to hedges of net investments in international operations in the form of euro, British pound sterling, Swiss franc and Canadian dollar-denominated debt were recorded within the cumulative translation adjustment section of other comprehensive income and were:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Euro notes
$
(75
)
 
$
(29
)
British pound sterling notes
(13
)
 
(5
)
Swiss franc notes
(26
)
 
(15
)
Canadian notes
(2
)
 


19



Economic Hedges:
Pre-tax gains/(losses) recorded in net earnings for economic hedges were:
 
For the Three Months Ended March 31,
 
Location of
Gain/(Loss)
Recognized
in Earnings
 
2018
 
2017
 
 
(in millions)
 
Currency exchange contracts:
 
 
 
 
 
Intercompany loans and
   forecasted interest payments
$
7

 
$
2

 
Interest and other expense, net
Forecasted transactions
(7
)
 
(17
)
 
Cost of sales
Forecasted transactions
(5
)
 
(2
)
 
Interest and other expense, net
Forecasted transactions
(3
)
 
(1
)
 
Selling, general and administrative expenses
Commodity contracts
149

 
(62
)
 
Cost of sales
Total
$
141

 
$
(80
)
 
 

Note 10. Benefit Plans

Pension Plans

Components of Net Periodic Pension Cost:
Net periodic pension cost consisted of the following:
 
U.S. Plans
 
Non-U.S. Plans
 
For the Three Months Ended
March 31,
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service cost
$
12

 
$
12

 
$
38

 
$
39

Interest cost
15

 
15

 
52

 
48

Expected return on plan assets
(22
)
 
(25
)
 
(117
)
 
(104
)
Amortization:
 
 
 
 
 
 
 
Net loss from experience differences
11

 
8

 
42

 
41

Prior service cost/(benefit)
1

 
1

 

 
(1
)
Settlement losses and other expenses
7

 
3

 

 
1

Net periodic pension cost
$
24

 
$
14

 
$
15

 
$
24


For retired employees who elected lump-sum payments in our U.S. plans, we recorded net settlement losses of $7 million for the three months ended March 31, 2018 and $3 million for the three months ended March 31, 2017.

Employer Contributions:
During the three months ended March 31, 2018, we contributed $1 million to our U.S. pension plans and $143 million to our non-U.S. pension plans, including $107 million to plans in the United Kingdom and Ireland. We make contributions to our pension plans in accordance with local funding arrangements and statutory minimum funding requirements. Discretionary contributions are made to the extent that they are tax deductible and do not generate an excise tax liability.

As of March 31, 2018, over the remainder of 2018, we plan to make further contributions of approximately $38 million to our U.S. plans and approximately $158 million to our non-U.S. plans. Our actual contributions may be different due to many factors, including changes in tax and other benefit laws, significant differences between expected and actual pension asset performance or interest rates.


20


Postretirement Benefit Plans

Net periodic postretirement health care benefit consisted of the following:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Service cost
$
2

 
$
2

Interest cost
4

 
4

Amortization:
 
 
 
     Net loss from experience differences
4

 
3

     Prior service credit (1)
(10
)
 
(10
)
Net periodic postretirement health care benefit
$

 
$
(1
)

(1)
For the three months ended March 31, 2018 and March 31, 2017, amortization of prior service credit included an $8 million gain related to a change in the eligibility requirement and a change in benefits to Medicare-eligible participants.

Postemployment Benefit Plans

Net periodic postemployment cost consisted of the following:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Service cost
$
2

 
$
1

Interest cost
1

 
1

Amortization of net gains
(1
)
 
(1
)
Net periodic postemployment cost
$
2

 
$
1


Note 11. Stock Plans

Stock Options:
Stock option activity is reflected below:
 
Shares Subject
to Option
 
Weighted-
Average
Exercise or
Grant Price
Per Share
 
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Balance at January 1, 2018
48,434,655

 
$29.92
 
5 years
 
$
626
 million
Annual grant to eligible employees
5,666,530

 
43.51
 
 
 
 
Additional options issued
10,820

 
43.92
 
 
 
 
Total options granted
5,677,350

 
43.51
 
 
 
 
Options exercised (1)
(3,520,671
)
 
24.92
 
 
 
$
68
 million
Options canceled
(282,433
)
 
35.81
 
 
 
 
Balance at March 31, 2018
50,308,901

 
31.77
 
6 years
 
$
520
 million

(1)
Cash received from options exercised was $85 million in the three months ended March 31, 2018. The actual tax benefit realized and recorded in the provision for income taxes for the tax deductions from the option exercises totaled $8 million in the three months ended March 31, 2018.

21



Performance Share Units and Other Stock-Based Awards:
Our performance share unit, deferred stock unit and historically granted restricted stock activity is reflected below:
 
Number
of Shares
 
Grant Date
 
Weighted-Average
Fair Value
Per Share (3)
 
Weighted-Average
Aggregate
Fair Value (3)
Balance at January 1, 2018
7,669,705

 
 
 
$39.74
 
 
Annual grant to eligible employees:
 
 
Feb 22, 2018
 
 
 
 
Performance share units
1,048,770

 
 
 
51.23
 
 
Deferred stock units
788,310

 
 
 
43.51
 
 
Additional shares granted (1)
103,743

 
Various
 
39.48
 
 
Total shares granted
1,940,823

 
 
 
47.47
 
$
92
 million
Vested (2)
(2,084,527
)
 
 
 
38.28
 
$
80
 million
Forfeited (2)
(195,028
)
 
 
 
38.80
 
 
Balance at March 31, 2018
7,330,973

 
 
 
42.23
 
 

(1)
Includes performance share units and deferred stock units.
(2)
Includes performance share units, deferred stock units and historically granted restricted stock. The actual tax benefit realized and recorded in the provision for income taxes for the tax deductions from the shares vested totaled $4 million in the three months ended March 31, 2018.
(3)
The grant date fair value of performance share units is determined based on the Monte Carlo simulation model for the market-based total shareholder return component and the closing market price of the Company’s stock on the grant date for performance-based components. The Monte Carlo simulation model incorporates the probability of achieving the total shareholder return market condition. Compensation expense is recognized using the grant date fair values regardless of whether the market condition is achieved, so long as the requisite service has been provided.

Share Repurchase Program:
Between 2013 and 2017, our Board of Directors authorized the repurchase of a total of $13.7 billion of our Common Stock through December 31, 2018. On January 31, 2018, our Finance Committee, with authorization delegated from our Board of Directors, approved an increase of $6.0 billion in the share repurchase program, raising the authorization to $19.7 billion of Common Stock repurchases, and extended the program through December 31, 2020. Repurchases under the program are determined by management and are wholly discretionary. Prior to January 1, 2018, we had repurchased $13.0 billion of Common Stock pursuant to this authorization. During the three months ended March 31, 2018, we repurchased approximately 11.5 million shares of Common Stock at an average cost of $43.51 per share, or an aggregate cost of approximately $0.5 billion, all of which was paid during the period. All share repurchases were funded through available cash and commercial paper issuances. As of March 31, 2018, we have $6.1 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.

In February 2013 and March 2014, Cadbury India Limited (now known as Mondelez India Foods Private Limited), a subsidiary of Mondelēz International, and other parties received show cause notices from the Indian Central Excise Authority (the “Excise Authority”) calling upon the parties to demonstrate why the Excise Authority should not collect a total of 3.7 billion Indian rupees ($57 million as of March 31, 2018) of unpaid excise tax and an equivalent amount of penalties, as well as interest, related to production at the same Indian facility. We contested these demands for unpaid excise taxes, penalties and interest. On March 27, 2015, after several hearings, the Commissioner of the Excise Authority issued an order denying the excise exemption that we claimed for the Indian facility and confirming the Excise Authority’s demands for total taxes and penalties in the amount of 5.8 billion Indian rupees ($90 million as of March 31, 2018). We have appealed this order. In addition, the Excise Authority issued additional show cause notices in February 2015, December 2015 and October 2017 on the same issue but covering the periods January to October 2014, November 2014 to September 2015 and October 2015 to June 2017, respectively. These notices added a total of 4.9 billion Indian rupees ($75 million as of March 31, 2018) of unpaid excise taxes as well as penalties to be determined up to an amount equivalent to that claimed by the Excise Authority plus interest. With the

22


implementation of the new Goods and Services Tax in India in July 2017, we will not receive any further show cause notices for additional amounts on this issue. We believe that the decision to claim the excise tax benefit is valid and we are continuing to contest the show cause notices through the administrative and judicial process.

On April 1, 2015, the CFTC filed a complaint against Kraft Foods Group and Mondelēz Global LLC (“Mondelēz Global”) in the U.S. District Court for the Northern District of Illinois, Eastern Division (the “CFTC action”) following its investigation of activities related to the trading of December 2011 wheat futures contracts that occurred prior to the spin-off of Kraft Foods Group. The complaint alleges that Kraft Foods Group and Mondelēz Global (1) manipulated or attempted to manipulate the wheat markets during the fall of 2011; (2) violated position limit levels for wheat futures and (3) engaged in non-competitive trades by trading both sides of exchange-for-physical Chicago Board of Trade wheat contracts. The CFTC seeks civil monetary penalties of either triple the monetary gain for each violation of the Commodity Exchange Act (the “Act”) or $1 million for each violation of Section 6(c)(1), 6(c)(3) or 9(a)(2) of the Act and $140,000 for each additional violation of the Act, plus post-judgment interest; an order of permanent injunction prohibiting Kraft Foods Group and Mondelēz Global from violating specified provisions of the Act; disgorgement of profits; and costs and fees. Additionally, several class action complaints were filed against Kraft Foods Group and Mondelēz Global in the U.S. District Court for the Northern District of Illinois by investors in wheat futures and options on behalf of themselves and others similarly situated. The complaints make similar allegations as those made in the CFTC action and seek class action certification; an unspecified amount for damages, interest and unjust enrichment; costs and fees; and injunctive, declaratory and other unspecified relief. In June 2015, these suits were consolidated in the Northern District of Illinois. It is not possible to predict the outcome of these matters; however, based on our Separation and Distribution Agreement with Kraft Foods Group dated as of September 27, 2012, we expect to bear any monetary penalties or other payments in connection with the CFTC action.

We are a party to various legal proceedings incidental to our business, including those noted above in this section. At present we believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, results of operations or cash flows. However, legal proceedings and government investigations are subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable resolutions could involve substantial monetary damages. In addition, in matters for which conduct remedies are sought, unfavorable resolutions could include an injunction or other order prohibiting us from selling one or more products at all or in particular ways, precluding particular business practices or requiring other remedies. An unfavorable outcome might result in a material adverse impact on our business, results of operations or financial position.

Third-Party Guarantees:
We enter into third-party guarantees primarily to cover 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 March 31, 2018, we had no material third-party guarantees recorded on our condensed consolidated balance sheet.

Tax Matters:
We are a party to various tax matter proceedings incidental to our business. These proceedings are subject to inherent uncertainties, and unfavorable outcomes could subject us to additional tax liabilities and could materially adversely impact our business, results of operations or financial position.

As part of our 2010 Cadbury acquisition, we became the responsible party for tax matters under a February 2, 2006 dated Deed of Tax Covenant between the Cadbury Schweppes PLC and related entities (“Schweppes”) and Black Lion Beverages and related entities. The tax matters included an ongoing transfer pricing case with the Spanish tax authorities related to the Schweppes businesses Cadbury divested prior to our acquisition of Cadbury. During the first quarter of 2017, the Spanish Supreme Court decided the case in our favor. As a result of the final ruling, during the first quarter of 2017, we recorded a favorable earnings impact of $46 million in selling, general and administrative expenses and $12 million in interest and other expense, net, for a total pre-tax impact of $58 million due to the non-cash reversal of Cadbury-related accrued liabilities related to this matter. We recorded a total of $4 million of income over the third and fourth quarters of 2017 in connection with the related bank guarantee releases.


23


Note 13. Reclassifications from Accumulated Other Comprehensive Income

The following table summarizes the changes in the accumulated balances of each component of accumulated other comprehensive earnings/(losses) attributable to Mondelēz International. Amounts reclassified from accumulated other comprehensive earnings/(losses) to net earnings (net of tax) were net losses of $27 million in the three months ended March 31, 2018 and $43 million in the three months ended March 31, 2017.
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Currency Translation Adjustments:
 
 
 
Balance at beginning of period
$
(7,741
)
 
$
(8,914
)
Currency translation adjustments
160

 
512

Tax (expense)/benefit
47

 
31

Other comprehensive earnings/(losses)
207

 
543

Less: (earnings)/loss attributable to noncontrolling interests
(15
)
 
(4
)
Balance at end of period
(7,549
)
 
(8,375
)
Pension and Other Benefit Plans:
 
 
 
Balance at beginning of period
$
(2,144
)
 
$
(2,087
)
Net actuarial gain/(loss) arising during period
7

 
(6
)
Tax (expense)/benefit on net actuarial gain/(loss)

 

Losses/(gains) reclassified into net earnings:
 
 
 
Amortization of experience losses and prior service costs (1)
47

 
41

Settlement losses and other expenses (1)
7

 
4

Tax expense/(benefit) on reclassifications (2)
(13
)
 
(9
)
Currency impact
(54
)
 
(29
)
Other comprehensive earnings/(losses)
(6
)
 
1

Balance at end of period
(2,150
)
 
(2,086
)
Derivative Cash Flow Hedges:
 
 
 
Balance at beginning of period
$
(113
)
 
$
(121
)
Net derivative gains/(losses)
(29
)
 
7

Tax (expense)/benefit on net derivative gain/(loss)

 
5

Losses/(gains) reclassified into net earnings:
 
 
 
Currency exchange contracts – forecasted transactions (3)

 
1

Commodity contracts (3)

 
8

Interest rate contracts (4)
(18
)
 

Tax expense/(benefit) on reclassifications (2)
4

 
(2
)
Currency impact
(3
)
 
(1
)
Other comprehensive earnings/(losses)
(46
)
 
18

Balance at end of period
(159
)
 
(103
)
Accumulated other comprehensive income attributable to
Mondelēz International:
 
 
 
Balance at beginning of period
$
(9,998
)
 
$
(11,122
)
Total other comprehensive earnings/(losses)
155

 
562

Less: (earnings)/loss attributable to noncontrolling interests
(15
)
 
(4
)
Other comprehensive earnings/(losses) attributable to Mondelēz International
140

 
558

Balance at end of period
$
(9,858
)
 
$
(10,564
)

(1)
These reclassified losses are included in the components of net periodic benefit costs disclosed in Note 10, Benefit Plans.
(2)
Taxes reclassified to earnings are recorded within the provision for income taxes.
(3)
These reclassified gains or losses are recorded within cost of sales.
(4)
These reclassified gains or losses are recorded within interest and other expense, net.


24


Note 14. Income Taxes

On December 22, 2017, the United States enacted tax reform legislation that included a broad range of business tax provisions, including a reduction in the U.S. federal tax rate from 35% to 21%. In addition to the tax rate reduction, the legislation establishes new provisions that affect our 2018 results, including but not limited to, the creation of a new minimum tax called the base erosion anti-abuse tax (BEAT); a new provision that taxes U.S. allocated expenses (e.g. interest and general administrative expenses) as well as currently taxes certain income from foreign operations (Global Intangible Low-Tax Income, or “GILTI”); a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; a new limitation on deductible interest expense; the repeal of the domestic manufacturing deduction; and limitations on the deductibility of certain employee compensation.

Certain impacts of the new legislation would have generally required accounting to be completed in the period of enactment, however in response to the complexities of this new legislation, the SEC issued guidance to provide companies with relief. The SEC provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation and we anticipate finalizing our accounting during 2018. While our accounting for the enactment of the new U.S. tax legislation is not complete, we have recorded an additional $89 million discrete net tax cost in the three months ended March 31, 2018. This is primarily comprised of an increase to our transition tax liability of $94 million as a result of additional guidance issued by the Internal Revenue Service and various state taxing authorities, new state legislation enacted during the period and further refinement of various components of the underlying calculations.

As of the first quarter of 2018, our estimated annual effective tax rate for 2018, excluding discrete tax impacts, is 22.5%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. jurisdictions and the reduction in the U.S. federal tax rate, partially offset by unfavorable provisions within the new U.S. tax reform legislation. Our 2018 first quarter effective tax rate of 26.5% was unfavorably impacted by discrete net tax expense of $46 million. The discrete net tax expense primarily consisted of $94 million of additional transition tax liability recognized as an adjustment to the prior provisional estimate, offset by an $18 million benefit from a pending Argentinean refund claim as well as a $16 million benefit from the release of uncertain tax positions due to expirations of statutes of limitations and audit settlements in several jurisdictions.

As of the first quarter of 2017, our estimated annual effective tax rate for 2017, excluding discrete tax impacts, was 26.3%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions. Our 2017 first quarter effective tax rate of 21.4% was favorably impacted by net tax benefits from $36 million of discrete one-time events. The discrete net tax benefits primarily consisted of a $16 million benefit from release of uncertain tax positions due to expirations of statutes of limitations and audit settlements in several jurisdictions and a $16 million benefit relating to the U.S. domestic production activities deduction.

Note 15. Earnings per Share

Basic and diluted earnings per share (“EPS”) were calculated as follows:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions, except per share data)
Net earnings
$
944

 
$
633

Noncontrolling interest (earnings)
(6
)
 
(3
)
    Net earnings attributable to Mondelēz International
$
938

 
$
630

Weighted-average shares for basic EPS
1,489

 
1,529

Plus incremental shares from assumed conversions
    of stock options and long-term incentive plan shares
16

 
21

Weighted-average shares for diluted EPS
1,505

 
1,550

Basic earnings per share attributable to
    Mondelēz International
$
0.63

 
$
0.41

Diluted earnings per share attributable to
    Mondelēz International
$
0.62

 
$
0.41



25


We exclude antidilutive Mondelēz International stock options from our calculation of weighted-average shares for diluted EPS. We excluded antidilutive stock options of 7.1 million for the three months ended March 31, 2018 and 6.7 million for the three months ended March 31, 2017.

Note 16. Segment Reporting

We manufacture and market primarily snack food products, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy and various cheese & grocery products, as well as powdered beverage products. We manage our global business and report operating results through geographic units.

We manage our operations by region to leverage regional operating scale, manage different and changing business environments more effectively and pursue growth opportunities as they arise in our key markets. Our regional management teams have responsibility for the business, product categories and financial results in the regions.

We use segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), general corporate expenses (which are a component of selling, general and administrative expenses) and amortization of intangibles in all periods presented. We exclude these items from segment operating income in order to provide better transparency of our segment operating results. Furthermore, we centrally manage benefit plan non-service income and interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.

Our segment net revenues and earnings were:
 
For the Three Months Ended
March 31,
 
2018
 
2017
 
(in millions)
Net revenues:
 
 
 
Latin America
$
891

 
$
910

AMEA
1,542

 
1,491

Europe
2,706

 
2,365

North America
1,626

 
1,648

Net revenues
$
6,765

 
$
6,414

Earnings before income taxes:
 
 
 
Operating income:
 
 
 
Latin America
$
126

 
$
111

AMEA
228

 
181

Europe
497

 
393

North America
275

 
292

Unrealized gains/(losses) on hedging activities (mark-to-market impacts)
206

 
(51
)
General corporate expenses
(64
)
 
(57
)
Amortization of intangibles
(44
)
 
(44
)
Operating income
1,224

 
825

Benefit plan non-service income
13

 
15

Interest and other expense, net
(80
)
 
(119
)
Earnings before income taxes
$
1,157

 
$
721


26



During the first quarter of 2018, in connection with adopting a new pension cost classification accounting standard (see Note 1, Basis of Presentation, for additional information), we reclassified certain of our benefit plan component costs other than service costs out of operating income into a new line item, benefit plan non-service income, on our condensed consolidated statements of earnings. As such, we have recast our historical operating income and segment operating income to reflect this reclassification, which had no impact to earnings before income taxes or net earnings.

Items impacting our segment operating results are discussed in Note 1, Basis of Presentation, Note 2, Divestitures and Acquisitions, Note 4, Property, Plant and Equipment, Note 5, Goodwill and Intangible Assets, Note 7, 2014-2018 Restructuring Program, and Note 12, Commitments and Contingencies. Also see Note 8, Debt and Borrowing Arrangements, and Note 9, Financial Instruments, for more information on our interest and other expense, net for each period.

Net revenues by product category were:
 
For the Three Months Ended March 31, 2018
 
Latin
America
 
AMEA
 
Europe
 
North
America
 
Total
 
(in millions)
Biscuits
$
183

 
$
442

 
$
795

 
$
1,333

 
$
2,753

Chocolate
243

 
573

 
1,423

 
57

 
2,296

Gum & Candy
224

 
235

 
186

 
236

 
881

Beverages
161

 
172

 
28

 

 
361

Cheese & Grocery
80

 
120

 
274

 

 
474

Total net revenues
$
891

 
$
1,542

 
$
2,706

 
$
1,626

 
$
6,765

 
For the Three Months Ended March 31, 2017 (1)
 
Latin
America
 
AMEA
 
Europe
 
North
America
 
Total
 
(in millions)
Biscuits
$
170

 
$
400

 
$
665

 
$
1,333

 
$
2,568

Chocolate
259

 
514

 
1,209

 
70

 
2,052

Gum & Candy
213

 
229

 
193

 
245

 
880

Beverages
193

 
173

 
41

 

 
407

Cheese & Grocery
75

 
175

 
257

 

 
507

Total net revenues
$
910

 
$
1,491

 
$
2,365

 
$
1,648

 
$
6,414

  
(1)
During the first quarter of 2018, we realigned some of our products across product categories and as such, we reclassified the product category net revenues on a basis consistent with the 2018 presentation.

27


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Description of the Company

We manufacture and market primarily snack food products, including biscuits (cookies, crackers and salted snacks), chocolate, gum & candy and various cheese & grocery products, as well as powdered beverage products. We have operations in more than 80 countries and sell our products in approximately 160 countries.

We aim to deliver strong, profitable long-term growth by accelerating our core snacks business and expanding the reach of our Power Brands globally. To fuel investments in our Power Brands and global and digital reach, we have been working to optimize our cost structure. These efforts include reinventing our supply chain operations and aggressively managing overhead costs. Through these actions, we’re leveraging our brands, platforms and capabilities to drive long-term value and return on investment for our shareholders.

U.S. Tax Reform

On December 22, 2017, the United States enacted tax reform legislation that included a broad range of business tax provisions, including but not limited to a reduction in the U.S. federal tax rate from 35% to 21% as well as provisions that limit or eliminate various deductions or credits. The legislation also causes U.S. allocated expenses (e.g. interest and general administrative expenses) to be taxed and imposes a new tax on U.S. cross-border payments. Furthermore, the legislation includes a one-time transition tax on accumulated foreign earnings and profits.

Certain impacts of the new legislation would have generally required accounting to be completed in the period of enactment, however in response to the complexities of this new legislation, the SEC issued guidance to provide companies with relief. The SEC provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation and we anticipate finalizing our accounting during 2018.

While our accounting for the enactment of the new U.S. tax legislation is not complete, we have recorded an additional $89 million discrete net tax cost in the three months ended March 31, 2018. This is primarily comprised of an increase to our transition tax liability of $94 million as a result of additional guidance issued by the Internal Revenue Service and various state taxing authorities, new state legislation enacted during the period and further refinement of various components of the underlying calculations. Our estimated annual effective tax rate for 2018 is 22.5%, which includes the new provisions of the legislation that are effective for the 2018 tax year but excludes discrete tax items such as the updates to the transition tax liability and the impacts of audit settlements.

Summary of Results

Net revenues increased 5.5% to $6.8 billion in the first quarter of 2018 as compared to the first quarter of 2017. During the first quarter of 2018, net revenues were positively affected by favorable currency translation as the U.S. dollar weakened against several currencies in which we operate compared to exchange rates in the prior year. Net revenue also grew due to favorable volume/mix, including the shift of Easter-related shipments into the first quarter, and higher net pricing. Net revenue growth was partially offset by the impact of several prior-year business divestitures, which reduced revenues in the first quarter of 2018 as compared to the prior year.

Organic Net Revenue, a non-GAAP financial measure, increased 2.4% to $6.4 billion in the first quarter of 2018 as compared to the first quarter of 2017. Organic Net Revenue increased as a result of both favorable volume/mix and higher net pricing than in the first quarter of 2017. Organic Net Revenue is on a constant currency basis and excludes revenue from divestitures. We use Organic Net Revenue as it provides improved year-over-year comparability of our underlying operating results (see the definition of Organic Net Revenue and our reconciliation with net revenues within Non-GAAP Financial Measures appearing later in this section).

Diluted EPS attributable to Mondelēz International increased 51.2% to $0.62 in the first quarter of 2018 as compared to the first quarter of 2017. Favorable mark-to-market impacts from currency and commodity derivatives, lower interest expense and share repurchases contributed significantly to the increase in diluted EPS.

28



Adjusted EPS, a non-GAAP financial measure, increased 19.2% to $0.62 in the first quarter of 2018 as compared to the first quarter of 2017. On a constant currency basis, Adjusted EPS increased 9.6% to $0.57 in the first quarter of 2018 as compared to the first quarter of 2017. Lower interest expense and lower shares outstanding were significant drivers of the growth. Adjusted EPS and Adjusted EPS on a constant currency basis are non-GAAP financial measures. We use these measures as they provide improved year-over-year comparability of our underlying results (see the definition of Adjusted EPS and our reconciliation with diluted EPS within Non-GAAP Financial Measures appearing later in this section).

Financial Outlook

We seek to achieve profitable, long-term growth and manage our business to attain this goal using our key operating metrics: Organic Net Revenue, Adjusted Operating Income and Adjusted EPS. We use these non-GAAP financial metrics and related computations such as margins internally to evaluate and manage our business and to plan and make near- and long-term operating and strategic decisions. As such, we believe these metrics are useful to investors as they provide supplemental information in addition to our U.S. GAAP financial results. We believe providing investors with the same financial information that we use internally ensures that investors have the same data to make comparisons of our historical operating results, identify trends in our underlying operating results and gain additional insight and transparency on how we evaluate our business. We believe our non-GAAP financial measures should always be considered in relation to our GAAP results, and we have provided reconciliations between our GAAP and non-GAAP financial measures in Non-GAAP Financial Measures, which appears later in this section.

In addition to monitoring our key operating metrics, we monitor developments and trends that could impact our revenue and profitability objectives, similar to those we highlighted in our most recently filed Annual Report on Form 10-K for the year ended December 31, 2017.
Market conditions. Snack category growth improved this quarter while volatility in the global commodity and currency markets continued.
Brexit and currency volatility. We continue to monitor the U.K. planned exit from the European Union (Brexit) and its impact on our results as well as currencies at risk of potential highly inflationary accounting, such as the Argentinian peso.
Collective bargaining agreements. We continue to renegotiate collective bargaining agreements covering eight U.S. facilities that expired in February 2016. We have made plans to ensure business continuity during the renegotiations.
U.S. tax reform. While the 2017 U.S. tax reform reduced the U.S. corporate tax rate and included some beneficial provisions, other provisions could have an adverse effect on our results. Specifically, new provisions that cause U.S. allocated expenses (e.g. interest and general administrative expenses) to be taxed and impose a tax on U.S. cross-border payments could adversely impact our effective tax rate. We continue to evaluate the impacts as additional guidance on implementing the legislation becomes available.
Net investment hedge contracts. In 2018, we entered into cross-currency interest rate swaps and forwards with an aggregate notional value of $6.6 billion to hedge our non-U.S. net investments against adverse movements in exchange rates. We expect a favorable impact as we reduce some of our financing costs and related currency impacts within our interest costs.
Pending Keurig Dr Pepper transaction. On January 29, 2018, Keurig announced that it had entered into a definitive merger agreement with Dr Pepper Snapple Group, Inc. to form Keurig Dr Pepper, Inc., contingent upon the successful satisfaction of certain regulatory requirements. We expect the merger to close in mid-2018.
For more information on these items, refer to our Discussion and Analysis of Historical Results and Commodity Trends appearing later in this section, as well as Note 1, Basis of Presentation – Currency Translation and Highly Inflationary Accounting, Note 6, Equity Method Investments, Note 7, 2014-2018 Restructuring Program, Note 9, Financial Instruments, and Note 14, Income Taxes.


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Discussion and Analysis of Historical Results

Items Affecting Comparability of Financial Results

The following table includes significant income or (expense) items that affected the comparability of our results of operations and our effective tax rates. Please refer to the notes to the condensed consolidated financial statements indicated below for more information. Refer also to the Consolidated Results of Operations – Net Earnings and Earnings per Share Attributable to Mondelēz International table for the after-tax per share impacts of these items.

 
 
 
For the Three Months Ended
March 31,
 
See Note