Mondelez International, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with the three months ended March 31, 2015 unless noted. Unaudited results. Dollar amounts are in U.S. dollars.
Business context
Mondelez manufactures and markets snack foods across more than 80 countries and sells in 165. Its reportable segments are Latin America, Asia Pacific, EEMEA, Europe and North America. Comparability is materially affected by the 2015 contribution of the global coffee business to Jacobs Douwe Egberts (JDE), the deconsolidation of Venezuela, currency movements and changes in accounting presentation.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net revenue | $6.455 billion | $7.762 billion |
| Organic net revenue (non-GAAP) | $6.899 billion; up 2.1% | $6.754 billion |
| Gross profit / gross margin | $2.535 billion / 39.3% | $2.941 billion / 37.9% |
| Operating income / margin | $722 million / 11.2% | $811 million / 10.4% |
| Adjusted operating income (non-GAAP) | $974 million; up 12.7% (20.0% constant currency) | $864 million |
| Net earnings attributable to Mondelez | $554 million | $324 million |
| Diluted EPS | $0.35 | $0.19 |
| Adjusted EPS (non-GAAP) | $0.48; up 23.1% (30.8% constant currency) | $0.39 |
| Cash from operations | $(454) million | $(282) million |
| Capital expenditures | $335 million | $439 million |
- GAAP revenue fell 16.8%, while organic net revenue grew 2.1%, reflecting higher net pricing of 2.8 percentage points, partly offset by unfavorable volume/mix of 0.7 points. Power Brand organic revenue grew 3.8%; emerging-market organic revenue grew 3.6%.
- Operating income declined 11.0%, despite higher adjusted operating income. Management cited pricing, productivity and overhead savings as positive factors; currency, hedging losses, restructuring costs and the removal of coffee and Venezuela results affected reported performance.
- Cash and cash equivalents were $1.338 billion at March 31, down from $1.870 billion at year-end 2015. Current assets were $9.009 billion and current liabilities $13.178 billion.
- Total debt was $17.399 billion, compared with $15.398 billion at December 31, 2015; debt-to-capitalization was 0.39 versus 0.35. The weighted-average interest rate was 3.1%. The $4.5 billion revolving credit facility was undrawn, and the company reported covenant compliance.
- The company repurchased $1.187 billion of shares and paid $269 million in dividends. The quarterly dividend declared was $0.17 per share.
Material changes and unusual items
- Net revenue was reduced by the absence of $752 million of prior-year coffee-business revenue, $218 million of Venezuelan revenue, $487 million of unfavorable currency effects and a $38 million prior-year North America calendar-change benefit. The Vietnam biscuit acquisition contributed incremental revenue.
- In March 2016, Mondelez exchanged part of its JDE interest for a 24.2% interest in Keurig; it retained a 26.5% interest in JDE. The exchange generated a $43 million gain. Q1 equity-method earnings were $85 million, including earnings from JDE, Dongsuh Foods and Keurig.
- Venezuela was deconsolidated at year-end 2015 after loss of control and currency-exchangeability concerns. No Venezuelan results were included in Q1 2016. The company had recorded a $778 million pre-tax impairment loss in 2015; ongoing operations remain subject to substantial economic, regulatory and currency uncertainty.
- Q1 restructuring charges were $139 million and related implementation costs were $98 million. The company’s 2014–2018 restructuring program had incurred $1.6 billion through the quarter; it expected most remaining charges in 2016 and completion by year-end 2018.
- The Q1 2016 effective tax rate was 10.3%, favorably affected by $56 million of discrete tax benefits, primarily a $39 million release of uncertain tax positions. Management estimated a 22.0% annual effective tax rate for 2016.
Outlook, risks and contingencies
- Management gave no specific full-year revenue, earnings or EPS guidance in the supplied filing text. It expected 2016 capital expenditures of up to $1.4 billion, funded primarily from operations.
- Management expected price volatility and a slightly higher aggregate commodity-cost environment to continue in 2016. It cited global currency and commodity volatility, pricing elasticity, consumer spending, competition and execution of cost-saving initiatives as relevant risks.
- Eight U.S. facilities were in collective-bargaining negotiations, which continued into Q2; the company expected additional related costs and business-continuity expenditures in 2016.
- Legal matters include an SEC Wells notice concerning potential books-and-records and internal-controls violations related to the India facility investigation; Indian excise-tax and penalty demands; and CFTC and related class-action litigation concerning 2011 wheat futures trading. Mondelez said outcomes were uncertain and did not expect the ultimate costs of legal matters to materially affect financial results.
- The company accepted a binding offer to sell several French manufacturing facilities and sell or license certain confectionery brands for approximately €175 million; closing was expected in Q2 2017, subject to conditions and approvals. A $14 million trademark impairment was recorded in connection with the planned transaction.
Important facts for investors to verify
- How much of the reported revenue decline reflects structural portfolio changes and currency, versus underlying demand, pricing and volume/mix.
- Whether organic growth, adjusted operating margin and adjusted EPS remain sustainable; these non-GAAP measures exclude specified items and may not be comparable with other companies’ measures.
- Cash conversion and funding needs, including negative operating cash flow, increased short-term borrowings, planned capital expenditure, debt maturities, dividends and share repurchases.
- Progress and realized savings from the restructuring program, and the costs and outcomes of U.S. labor negotiations.
- Developments in Venezuela and Argentina, currency exposure, and the SEC, India excise and CFTC legal matters.