Mondelēz International, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. On October 1, 2012, Kraft Foods Inc. changed its name to Mondelēz International and completed the spin-off of Kraft Foods Group. Historical results in this filing still include the North American grocery business; it is to be presented as a discontinued operation beginning in Q4 2012. Accordingly, these results are not directly comparable to the post-spin company.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenues | $12.909B | $13.226B | $39.288B | $39.677B |
| Operating income | $1.652B | $1.698B | $5.222B | $5.150B |
| Net earnings attributable to Mondelēz | $652M | $922M | $2.494B | $2.697B |
| Diluted EPS | $0.36 | $0.52 | $1.40 | $1.52 |
- Revenue and margins: Reported revenue fell 2.4% in Q3 and 1.0% year to date. Organic revenue, a company-defined non-GAAP measure, grew 2.1% and 3.9%, respectively, with higher pricing the main driver. Currency reduced Q3 revenue by $589M and nine-month revenue by $1.473B; prior-year calendar changes and the Starbucks packaged-coffee business cessation also affected nine-month comparisons. Q3 operating margin was 12.8%, unchanged year over year; nine-month margin rose to 13.3% from 13.0%. Gross margin was approximately 36.5% in Q3 versus 34.9%.
- Earnings: Q3 GAAP diluted EPS declined 30.8%, while Operating EPS, a non-GAAP measure excluding specified costs, increased 10.3% to $0.64. For nine months, Operating EPS rose 9.3% to $1.88. Spin-off, restructuring and Cadbury integration costs materially reduced reported earnings. Q3 effective tax rate was 16.4%, favorably affected by discrete tax items; the nine-month rate was 25.6%.
- Cash flow: Nine-month operating cash flow was $2.175B, up from $1.665B. Capital expenditures were $1.229B; operating cash flow less capital expenditures was approximately $946M. Cash and cash equivalents were $3.873B at September 30, versus $1.974B at year-end 2011. Dividends paid were $1.542B.
- Debt and liquidity: Total debt was $29.5B, up from $26.9B at December 31, 2011; debt-to-capitalization was 0.45 versus 0.43. Current assets were $19.517B and current liabilities $15.845B. The company reported no borrowings on its $4.5B revolving credit facility, which supports its commercial-paper program. It expected to repay approximately $1.9B of long-term debt maturing over the next 12 months using cash, operations and commercial paper. The filing says cash generation, credit facilities and financing authority should provide adequate liquidity.
Material changes and unusual items
- Spin-off transaction, transition and financing costs were $683M in Q3 and $984M for the nine months, including $457M and $619M, respectively, in interest and other expense. These costs were a major reason reported EPS fell despite growth in adjusted operating measures.
- Reported Q3 operating income declined 2.7%, while Adjusted Operating Income rose 6.8% to $1.933B. Nine-month reported operating income increased 1.4%, versus 7.0% growth in Adjusted Operating Income to $5.889B. These are non-GAAP measures; the company’s exclusions should be considered alongside GAAP results.
- The board approved an additional $400M of restructuring and implementation programs on October 23, raising expected 2012–2014 program costs to $1.5B. Mondelēz expects to retain approximately $925M of those costs; approximately $575M is attributable to Kraft Foods Group. Nine-month restructuring charges were $218M, plus $20M of implementation costs.
- The Cadbury integration program targets approximately $800M in annual savings by end-2013, with total charges expected at about $1.5B. Approximately $1.3B had been incurred by September 30.
- Benefit-plan revaluations increased U.S. and Canadian benefit liabilities by $1.5B, with a related $576M deferred-tax asset and $927M after-tax increase in accumulated other comprehensive losses. Management said the revaluation did not significantly affect Q3 earnings but would increase future benefit expense.
- Nine-month results included a $55M pretax gain on a Russian property sale and a $20M impairment charge on a Japan intangible asset. The company also recognized a $436M Q3 loss related to forward-starting interest-rate swaps after changing its refinancing plans.
Outlook, risks and contingencies
- 2013 outlook: Standalone organic revenue growth expected at the low end of the long-term 5%–7% target. Operating EPS guidance was $1.50–$1.55 using average August 2012 exchange rates; October 2012 rates would add approximately $0.05, according to management. Both are company-defined non-GAAP measures.
- Management expected commodity-price volatility and elevated costs to continue, citing packaging and energy, nuts, cocoa, sugar, grains and oils. Pricing, manufacturing efficiencies and overhead controls were identified as responses.
- Forward-looking risks include commodity inflation, pricing and competition, weak economic conditions—particularly in developing markets and parts of Europe—foreign exchange, global operations and tax-law changes.
- The Starbucks packaged-coffee contract dispute remained in arbitration; testimony and briefing were complete, with a decision pending. Starbucks counterclaimed for damages. Management did not expect legal matters, individually or collectively, to materially adversely affect financial results.
- The company and subsidiaries remained joint and several guarantors of $1.0B of third-party debt due October 2013; following the spin-off, one guarantor became a Kraft Foods Group subsidiary, and Mondelēz agreed to indemnify Kraft Foods Group for specified guarantee exposure. Unrecognized tax benefits were $1.351B at September 30; $35M–$60M could reverse within 12 months.
Important facts for investors to verify
- Reconcile the pre-spin historical results to the standalone continuing business and assess the impact of the discontinued-operation reclassification.
- Review the composition, timing and cash impact of spin-off, restructuring and integration costs, and the assumptions behind non-GAAP Organic Net Revenue, Adjusted Operating Income and Operating EPS.
- Track standalone leverage, debt maturities, cash generation and liquidity after the spin-off and debt migration; confirm the expected lower annualized dividend rate of $0.52 after separation.
- Monitor whether pricing and cost savings offset commodity inflation, currency headwinds and volume or mix weakness, and whether the 2013 outlook is achieved.
- Follow the Starbucks arbitration, tax audits and the $1.0B third-party guarantee exposure.