Business context and reporting period
Mondelēz International, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company manufactures and markets snack foods and beverages in more than 80 countries, selling in approximately 165. Following the October 2012 spin-off of Kraft Foods Group, the 2013 business is continuing operations; 2012 results include Kraft Foods Group as a discontinued operation in earnings, so total net earnings and EPS are not directly comparable.
Effective January 2013, the company reorganized reporting into five segments: Latin America, Asia Pacific, EEMEA, Europe and North America. Prior-period segment results were recast. Europe’s consolidation-calendar change added $19 million to 2013 revenue and $3 million to operating income for both the quarter and nine-month period.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $8,472 | $8,326 | $25,811 | $25,520 |
| Gross profit | $3,144 | $3,120 | $9,617 | $9,526 |
| Operating income | $1,262 | $838 | $2,961 | $2,678 |
| Net earnings attributable to Mondelēz | $1,024 | $652 | $2,208 | $2,494 |
| Diluted EPS attributable to Mondelēz | $0.57 | $0.36 | $1.23 | $1.40 |
| Adjusted EPS (non-GAAP) | $0.41 | $0.36 | $1.12 | $1.03 |
Reported gross margin was approximately 37.1% in Q3 2013 versus 37.5% in Q3 2012; for the first nine months it was approximately 37.3% in both years. Reported operating margin was 14.9% in Q3 versus 10.1%, and 11.5% for the nine months versus 10.5%. Q3 operating income includes a $385 million pretax benefit from resolving a Cadbury-related tax indemnification matter; reported margin and earnings therefore include a material unusual item.
Organic net revenue, a non-GAAP measure, grew 5.3% in Q3 to $8.660 billion and 4.3% for the nine months to $26.303 billion. Growth was driven mainly by volume/mix; pricing was essentially flat in Q3 and contributed 0.5 percentage points for the nine months. Reported revenue growth was only 1.8% and 1.1%, respectively, reflecting unfavorable currency and divestitures. Adjusted operating income was down 3.0% in Q3 (up 0.8% at constant currency) and down 8.8% for the nine months (down 4.3% at constant currency).
Operating cash flow was $1.198 billion for the first nine months, versus $2.175 billion in 2012; capital expenditures were $1.028 billion, compared with $1.229 billion. Investing cash outflow was $1.015 billion, and financing cash outflow was $881 million. Cash and equivalents were $3.692 billion at September 30, down from $4.475 billion at year-end 2012.
Total debt was $19.919 billion at September 30, 2013, versus $19.425 billion at December 31, 2012; cash was $3.692 billion. Short-term borrowings increased to $2.527 billion from $274 million, including $2.288 billion of commercial paper. The debt-to-capitalization ratio was 0.38. Current assets were $15.463 billion and current liabilities $15.269 billion. The company reported a new $4.5 billion five-year revolving credit facility entered into October 11, 2013, with no amounts drawn as of September 30 on the facility then in place.
Material changes and management commentary
- Q3 adjusted EPS increased 13.9%; nine-month adjusted EPS increased 8.7%. Reported nine-month EPS fell 12.1%, primarily reflecting the absence of $0.85 per share of 2012 discontinued-operation earnings; continuing-operations EPS increased from $0.55 to $1.23.
- The $385 million pretax indemnification-resolution benefit contributed $0.21 per diluted share. The nine-month effective tax rate was only 0.4%, reflecting this item, favorable tax items and jurisdictional income mix; management cautioned that tax rates can shift with earnings mix and tax-law changes.
- Segment results were mixed. Q3 revenue and operating income declined in Asia Pacific; operating income also declined in Latin America and Europe. North America operating income rose 19.2% in Q3 and 13.6% for the nine months. Nine-month operating income decreased in Latin America, Asia Pacific, EEMEA and Europe.
- Higher raw-material costs outpaced pricing in the quarter and nine-month period. Management cited dairy, packaging, grain and oil costs as contributors to higher commodity costs and expected volatility and elevated costs to continue through the rest of 2013.
- The company repurchased 27.4 million shares for $853 million in the first nine months and had $5.1 billion of remaining authorization. It declared a quarterly dividend of $0.14 per share.
Guidance, risks and contingencies
Management expected 2013 organic net revenue growth of approximately 4%, reduced from its prior outlook of the low end of 5%–7%, citing weak biscuit sales in China, continued lower coffee prices and slower global category growth, particularly in key emerging markets. It raised adjusted EPS guidance to $1.57–$1.62 from $1.55–$1.60, reflecting tax favorability. Guidance used 2012 average exchange rates and included an estimated $0.04 adverse Venezuelan impact; currency effects recorded to date and October 31 spot rates implied adjusted EPS about $0.05 below the stated range.
Risks include foreign-exchange weakness, further Venezuelan currency devaluation, commodity-cost volatility, consumer and category weakness, competition, customer and supplier concentration, product quality or recall issues, legal and regulatory matters, and changes in tax laws or geographic earnings mix. The 2013 bolivar devaluation generated a $54 million charge on net monetary assets and additional unfavorable pre-tax translation impacts of $20 million in Q3 and $44 million in the first nine months; Venezuelan bolivar net monetary assets were $280 million at quarter-end.
The company was continuing to cooperate with U.S. and Indian authorities in an FCPA investigation concerning a facility in India. An Indian excise notice sought approximately $46 million in tax plus approximately $46 million in penalties and interest; the company is contesting it. A Starbucks license and supply agreement dispute remained in arbitration, with a decision pending. Management did not expect the ultimate costs of these or other legal matters to materially affect financial results. A $1.0 billion third-party debt guarantee was extinguished when the debt was repaid on October 1, 2013.
Management noted that U.S. Confections goodwill of $2.177 billion was sensitive to changes in valuation assumptions; failure to improve gum profitability could create future impairment risk, although management believed fair value was more likely than not above carrying value. The 2012–2014 restructuring program had an estimated $925 million of costs retained after the spin-off, of which $272 million had been incurred. The Cadbury integration program had incurred approximately $1.4 billion of an estimated $1.5 billion in charges; the company reported achieving about $800 million in annual cost savings in 2012, ahead of its target.
Important facts for investors to verify
- Separate underlying performance from unusual items, especially the $385 million indemnification benefit and the unusually low effective tax rate; review the reconciliation of GAAP results to adjusted measures.
- Assess whether the 4% organic revenue and $1.57–$1.62 adjusted EPS outlook remained achievable given China biscuit weakness, slower emerging-market growth, coffee prices and the additional currency sensitivity described.
- Track operating cash generation, working-capital needs, commercial-paper usage and the refinancing or repayment of upcoming debt maturities.
- Monitor commodity-cost recovery through pricing and productivity, and the direction of operating income in Asia Pacific, Europe and Latin America.
- Follow Venezuelan exchange-rate exposure, the Indian excise and FCPA matters, the Starbucks arbitration and the sensitivity of U.S. Confections goodwill.
- Consider the effects of share repurchases, dividends and restructuring/integration spending on liquidity and per-share results.