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Divestitures and Acquisitions | 9 Months Ended
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Sep. 30, 2016
Divestitures and Acquisitions | Note 2. Divestitures and Acquisitions JDE Coffee Business Transactions: On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, JDE. Following the exchange of a portion of our investment in JDE for an interest in Keurig in March 2016, we held a 26.5% equity interest in JDE. The remaining 73.5% equity interest in JDE was held by a subsidiary of Acorn Holdings B.V. (“AHBV,” owner of DEMB prior to July 2, 2015). Please see discussion of the acquisition of an interest in Keurig below under Keurig Transaction. As of September 30, 2016, we hold a 26.4% equity interest in JDE following the transactions discussed under JDE Stock-Based Compensation Arrangements below. The consideration we received in the JDE coffee business transactions completed on July 2, 2015 consisted of €3.8 billion of cash ($4.2 billion as of July 2, 2015), a 43.5% equity interest in JDE (prior to the decrease in ownership due to the Keurig transaction and the compensation arrangements discussed below) and $794 million in receivables (related to sales price adjustments and tax formation cost payments). During the third quarter of 2015, we also recorded $283 million of cash and receivables from JDE related to reimbursement of costs that we incurred in separating our coffee businesses. The cash and equity consideration we received at closing reflects that we retained our interest in a Korea-based joint venture, DSF. During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”). In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from this sale as part of the overall JDE coffee business transactions. Please see discussion of the divestiture of AGF below under Other Divestitures and Acquisitions. On July 5, 2016, we received an expected cash payment of $275 million from JDE to settle the receivable related to tax formation costs that were part of the initial sales price. In connection with the contribution of our global coffee businesses to JDE on July 2, 2015, we recorded a final pre-tax gain of $6.8 billion (or $6.6 billion after taxes) in 2015 after final adjustments as described below. We also recorded approximately $1.0 billion of pre-tax net gains related to hedging the expected cash proceeds from the transactions as described further below. During the fourth quarter of 2015, we and JDE concluded negotiations of a sales price adjustment and completed the valuation of our investment in JDE. Primarily due to the negotiated resolution of the sales price adjustment in the fourth quarter of 2015, we recorded a $313 million reduction in the pre-tax gain on the coffee transaction, reducing the $7.1 billion estimated gain in the third quarter of 2015 to the $6.8 billion final gain for 2015. As part of our sales price negotiations, we retained the right to collect future cash payments if certain estimated pension liabilities are realized over an agreed amount in the future. As such, we may recognize additional income related to this negotiated term in the future. The final value of our investment in JDE on July 2, 2015 was €4.1 billion ($4.5 billion as of July 2, 2015). The fair value of the JDE investment was determined using both income-based and market-based valuation techniques. The discounted cash flow analysis reflected growth, discount and tax rates and other assumptions reflecting the underlying combined businesses and countries in which the combined coffee businesses operate. The fair value of the JDE investment also included the fair values of the Carte Noire and Merrild businesses, which JDE agreed to divest to comply with the conditioned approval by the European Commission related to the JDE coffee business transactions. As of the end of the first quarter of 2016, these businesses were sold by JDE. As the July 2, 2015 fair values for these businesses were recorded by JDE at their pending sales values, we did not record any gain or loss on the sales of these businesses in our share of JDE’s earnings. In connection with the expected receipt of cash in euros at the time of closing, we entered into a number of consecutive currency exchange forward contracts in 2014 and 2015 to lock in an equivalent expected value in U.S. dollars as of the date the JDE coffee business transactions were first announced in May 2014. Cumulatively, we realized aggregate net gains and received cash of approximately $1.0 billion on these hedging contracts that increased the cash we received in connection with the JDE coffee business transactions from $4.2 billion in cash consideration received to $5.2 billion. In connection with these currency contracts, we recognized net gains of $29 million in the three months and $436 million in the nine months ended September 30, 2015 within interest and other expense, net. We also incurred incremental expenses related to readying our global coffee businesses for the transactions that totaled $54 million in the three months and $239 million in the nine months ended September 30, 2015. These expenses were recorded within selling, general and administrative expenses of primarily our Europe segment, as well as within our Eastern Europe, Middle East and Africa (“EEMEA”) segment and general corporate expenses. JDE Capital Increase: On December 18, 2015, AHBV and we agreed to provide JDE additional capital to pay down some of its debt with lenders. Our pro rata share of the capital increase was €499 million ($544 million as of December 18, 2015) and was made in return for a pro rata number of additional shares in JDE such that our ownership in JDE did not change following the capital increase. To fund our share of the capital increase, we contributed €460 million ($501 million) of JDE receivables and made a €39 million ($43 million) cash payment. JDE Stock-Based Compensation Arrangements: At the close of June 30, 2016, we entered into agreements with AHBV and its affiliates to establish a new stock-based compensation arrangement tied to the issuance of JDE equity compensation awards to JDE employees. This arrangement replaced a temporary equity compensation program tied to the issuance of AHBV equity compensation to JDE employees. New Class C, D and E JDE shares were authorized and issued for investments made by JDE employees. Under these arrangements, dilution of the JDE shares is limited to 2%. Upon execution of the agreements and the creation of the Class C, D and E JDE shares, as a percentage of the total JDE issued shares, our Class B shares changed from 26.5% to 26.4% and AHBV’s Class A shares changed from 73.5% to 73.22%, while the Class C, D and E shares, held by AHBV and its affiliates until the JDE employee awards vest, comprised 0.38% of JDE’s shares. Additional Class C shares are available to be issued when planned long-term incentive plan (“JDE LTIP”) awards vest, generally over the next five years. When the JDE Class C shares are issued in connection with the vested JDE LTIP awards, the Class A and B relative ownership interests will decrease. Based on estimated achievement and forfeiture assumptions, we do not expect our JDE ownership interest to decrease below 26.27%. As of September 30, 2016, our ownership interest in JDE was 26.4%. JDE Tax Matter Resolution: On July 19, 2016, the Supreme Court of Spain reached a final resolution on a challenged JDE tax position held by a predecessor DEMB company that resulted in an unfavorable tax expense of €114 million ($128 million as of September 30, 2016). As a result, our earnings in the third quarter of 2016 were negatively affected by €30 million ($34 million as of September 30, 2016). Keurig Transaction: On March 3, 2016, a subsidiary of AHBV completed the $13.9 billion acquisition of all of the outstanding common stock of Keurig through a merger transaction. On March 7, 2016, we exchanged with a subsidiary of AHBV a portion of our equity interest in JDE with a carrying value of €1.7 billion (approximately $2.0 billion as of March 7, 2016) for an interest in Keurig with a fair value of $2.0 billion based on the merger consideration per share for Keurig. We recorded the difference between the fair value of Keurig and our basis in JDE shares as a $43 million gain on equity method investment exchange in March 2016. Following the exchange, our ownership interest in JDE was 26.5% and our interest in Keurig was 24.2%. Both AHBV and we hold our investments in Keurig through a combination of equity and interests in a shareholder loan, with pro-rata ownership of each. Our initial $2.0 billion investment in Keurig includes a $1.6 billion Keurig equity interest and a $0.4 billion shareholder loan receivable, which are reported on a combined basis within equity method investments on our condensed consolidated balance sheet as of September 30, 2016. The shareholder loan has a 5.5% interest rate and is payable at the end of a seven-year term on February 27, 2023. We recorded equity earnings of $10 million for the three months and $39 million for the seven months ended September 30, 2016 and interest income from the shareholder loan of $6 million for the three months and $14 million for the seven months ended September 30, 2016 within equity method earnings. Additionally, we received $2 million in the three months ended and $4 million in the seven months ended September 30, 2016 of dividends on our investment in Keurig. We continue to account for our investments in JDE and Keurig under the equity method and recognize our share of their earnings within equity method investment earnings and our share of their dividends within our cash flows. As of September 30, 2016, Keurig is working to finalize the acquisition purchase price allocation. Coffee Business Equity Earnings: We have reflected the results of our historical coffee businesses and equity earnings from JDE, Keurig and DSF in our results from continuing operations as the coffee category continues to be a significant part of our net earnings and business strategy going forward. Historically, our coffee businesses and the income from equity method investments were recorded within our operating income as these businesses were part of our base business. While we retain an ongoing interest in coffee through equity method investments including JDE, Keurig and DSF, and we have significant influence with our equity method investments, we do not control these operations directly. As such, in the third quarter of 2015, we began to recognize equity method investment earnings, consisting primarily of investments in coffee businesses, outside of operating income. For periods prior to the third quarter of 2015, our historical coffee business and equity method investment earnings were included within our operating income. The equity method investment earnings and interest income contributed by our coffee investments included losses of $3 million from JDE, earnings of $16 million from Keurig and $11 million from DSF for the three months and earnings of $89 million from JDE, $53 million from Keurig (since March 7, 2016) and $56 million from DSF for the nine months ended September 30, 2016. For the three and nine months ended September 30, 2015, the equity method investment losses contributed by our coffee investments included $105 million from JDE and the equity method investment earnings contributed by our coffee investments included $20 million from DSF. For the nine months ended September 30, 2015, after-tax earnings were $296 million for the coffee businesses we contributed to JDE on July 2, 2015 and $40 million for DSF. Other Divestitures and Acquisitions: During the nine months ended September 30, 2016, we entered into the following transactions that as of September 30, 2016, met the qualifications of held for sale accounting. These transactions included pending sales of:
| • |  | Several manufacturing facilities in France and sale or license of several local confectionery brands. On March 31, 2016, we received a binding offer totaling €176 million ($198 million as of September 30, 2016). Taking into account agreed upon sales price adjustments related to cash, employee-related liabilities and working capital to be transferred at closing, we currently estimate a sales price of €220 million ($247 million as of September 30, 2016) based on net book values as of September 30, 2016. The final sales price is subject to change as working capital and other account balances may change at the time of closing. The transactions are subject to E.U. and local regulatory approvals, completion of employee consultation requirements and additional steps to prepare the assets for transfer. Prior to closing, together with the buyer, we will undertake consultations with all Works Councils and employee representatives required in connection with the transactions. During the third quarter, we made progress on the pre-closing sale conditions. On March 31, 2016, we recorded a $14 million impairment charge for a gum & candy trademark as a portion of its carrying value would not be recoverable based on future cash flows expected under a planned license agreement with the buyer. In May 2016, we recorded an additional $5 million impairment charge for another candy trademark to reduce the overall net assets to the estimated net sales proceeds after transaction costs. Additionally, in the nine months ended September 30, 2016, we incurred and accrued $84 million of incremental expenses to ready the business for the sale transactions expected to close in 2017. We recorded these costs within cost of sales and selling, general and administrative expenses of our Europe segment.
| • |  | A chocolate factory in Belgium. We entered into this transaction in the third quarter of 2016 and expect the transaction to close in the fourth quarter of 2016. In connection with this transaction, we incurred and accrued €29 million ($33 million as of September 30, 2016) of incremental expenses related to selling the factory within cost of goods sold and selling, general and administrative expense and we recorded a €30 million ($34 million as of September 30, 2016) fixed asset impairment charge within asset impairments and exit costs.
| • |  | A confectionery business in Costa Rica. We entered into this transaction in the third quarter of 2016 and expect the transaction to close in the fourth quarter of 2016.
| • |  | A manufacturing plant in Russia. During the third quarter of 2016, we recorded a related fixed asset impairment charge of $4 million within asset impairments and exit costs.
As of September 30, 2016, the total held for sale assets and liabilities consisted of $139 million of current assets, $243 million of non-current assets, $39 million of current liabilities and $34 million of non-current liabilities. During the nine months ended September 30, 2016, we also completed the following asset sales:
| • |  | On August 26, 2016, we recorded a $7 million gain for the sale of a U.S.-owned biscuit trademark. The gain was recorded within selling, general and administrative expenses in the three and nine months ended September 30, 2016.
| • |  | On May 2, 2016, we completed the sale of certain local biscuit brands in Finland as part of our strategic decisions to exit select small and local brands and shift investment towards our Power Brands. The sales price was €14 million ($16 million as of May 2, 2016) and we recorded a pre-tax gain of $6 million ($5 million after-tax) within selling, general and administrative expenses of our Europe segment in the nine months ended September 30, 2016. We divested $8 million of indefinite lived intangible assets and less than $1 million of other assets. We received cash proceeds of €12 million ($14 million as of May 2, 2016) upon closing and expect to receive the remaining consideration in the fourth quarter of 2016 upon the completion of post-closing conditions.
On August 12, 2016, we announced an agreement to purchase from Burton’s Biscuit Company the license that enables us to manufacture, market and sell Cadbury-branded biscuits around the world, including in the U.K., France, Ireland, North America and Saudi Arabia. The transaction remains subject to regulatory approval. We expect that this transaction will close in the fourth quarter of 2016. During the third quarter of 2016, we completed the acquisition of a Vietnamese biscuit operation within our Asia Pacific segment. On July 15, 2015, we acquired an 80% interest in the biscuit operation and on August 22, 2016, we acquired the remaining 20% interest. Total cash paid for the biscuit operation, intellectual property, non-compete and consulting agreements less purchase price adjustments was 12,404 billion Vietnamese dong ($569 million using applicable exchange rates on July 15, 2015, November 27, 2015 and August 22, 2016). We have made and received the following cash payments in connection with the acquisition:
| • |  | On November 10, 2014, we deposited $46 million in escrow upon signing the purchase agreement.
| • |  | On July 15, 2015, we made a 9,122 billion Vietnamese dong ($418 million as of July 15, 2015) payment for the biscuit operation, a $44 million additional escrow deposit and a 759 billion Vietnamese dong ($35 million as of July 15, 2015) partial payment for the non-compete and continued consulting agreements.
| • |  | On November 27, 2015, we received 197 billion Vietnamese dong ($9 million as of November 27, 2015) as a purchase price adjustment related to working capital adjustments at closing.
| • |  | On August 22, 2016, in connection with acquiring the remaining 20% interest in the biscuit operation, we released escrowed funds of $70 million and retained an agreed $20 million related to two outstanding acquisition-related matters that are expected to be resolved in the upcoming year. We also made a final payment of 759 billion Vietnamese dong ($35 million as of August 22, 2016) for the non-compete and consulting agreements.
As of September 30, 2016, we have recorded a final allocation of the consideration paid including $10 million to inventory, $49 million to property, plant and equipment, $86 million of intangible assets, $385 million of goodwill and $31 million to other net liabilities. The allocation of the fair values had an immaterial impact on operating results in periods following the initial July 15, 2015 closing date. We recorded the non-compete and consulting agreements as prepaid contracts within other current and non-current assets and they are amortized into net earnings over the contract terms. For the nine months ended September 30, 2016, the acquisition added $71 million in incremental net revenues and $5 million in incremental operating income. For the three and nine months ended September 30, 2015, the acquisition added $70 million in incremental revenues and $16 million in incremental operating income. Within selling, general and administrative expenses, we recorded integration costs of $6 million for the nine months ended September 30, 2016 and $4 million for the three months and $5 million for the nine months ended September 30, 2015. We also recorded acquisition costs of $6 million for the three months and $7 million for the nine months ended September 30, 2015. On April 23, 2015, we completed the divestiture of our 50% equity interest in AGF, our Japanese coffee joint venture, to our joint venture partner, which generated cash proceeds of 27 billion Japanese yen ($225 million as of April 23, 2015) and a pre-tax gain of $13 million (after-tax loss of $9 million) in the second quarter of 2015. Upon closing, we divested our $99 million investment in the joint venture, $65 million of goodwill and $41 million of accumulated other comprehensive losses. We also incurred approximately $7 million of transaction costs. The operating results of the divestiture were not material to our condensed consolidated financial statements for the three and nine months ended September 30, 2015. On February 16, 2015, we acquired a U.S. snack food company, Enjoy Life Foods, within our North America segment. We paid cash and settled debt totaling $81 million in connection with the acquisition. Upon finalizing the valuation of the acquired net assets during the second quarter of 2015, we recorded an $81 million purchase price allocation of $58 million in identifiable intangible assets, $20 million of goodwill and $3 million of other net assets. The acquisition-related costs and operating results of the acquisition were not material to our condensed consolidated financial statements for the three and nine months ended September 30, 2016 and 2015. Sales of Property: In the nine months ended September 30, 2016, we sold property within our North America segment and from our centrally held corporate assets. In the third quarter, we sold property in North America that generated cash proceeds of $10 million and a pre-tax gain of $6 million and we sold a corporate aircraft hangar that generated cash proceeds of $3 million and a pre-tax gain of $1 million. In the second quarter of 2016, we also sold separate property in North America that generated cash proceeds of $40 million and a pre-tax gain of $33 million and we sold a corporate aircraft that generated cash proceeds of $20 million and a pre-tax gain of $6 million. The gains were recorded within selling, general and administrative expenses and cash proceeds were recorded in cash flows from other investing activities in the nine months ended September 30, 2016.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References No definition available. + Details
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