Mondelēz International, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing was signed February 25, 2013. Results reflect a major business change: on October 1, 2012, Mondelēz spun off Kraft Foods Group (KFG), its North American grocery business. KFG is presented as discontinued operations in the income statement for all periods; balance-sheet and cash-flow information includes KFG through the spin-off date. Consequently, year-over-year comparisons are affected by the separation.
Business context
Mondelēz is a global snacks and food company operating in more than 80 countries and selling in approximately 165. Its principal categories include biscuits, chocolate, gum and candy, beverages, and cheese and grocery. The company reported leading global positions in biscuits, chocolate, candy and powdered beverages. From 2013, it planned to report five operating segments rather than the three geographic segments used in this filing.
Financial highlights
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net revenue from continuing operations | $35.015 billion | $35.810 billion |
| Gross profit | $13.076 billion | $13.100 billion |
| Operating income | $3.637 billion | $3.498 billion |
| Earnings from continuing operations | $1.567 billion | $1.737 billion |
| Diluted EPS from continuing operations | $0.86 | $0.97 |
| Net earnings attributable to Mondelēz, including discontinued operations | $3.028 billion | $3.527 billion |
| Operating cash flow | $3.923 billion | $4.520 billion |
| Capital expenditures | $1.610 billion | $1.771 billion |
| Total debt at year-end | $19.4 billion | $26.9 billion |
| Cash and cash equivalents | $4.475 billion | $1.974 billion |
- Reported revenue declined 2.2%, while non-GAAP Organic Net Revenue rose 4.4% to $36.347 billion. Growth reflected 3.3 percentage points from pricing and 1.1 points from volume/mix; currency, prior-year calendar effects and divestitures reduced reported growth.
- Operating income rose 4.0%; reported operating margin increased to 10.4% from 9.8%. Gross profit was nearly flat. Management attributed operating improvement principally to pricing exceeding higher input costs, with higher advertising and promotional spending among the offsets.
- Non-GAAP Operating EPS was $1.39, up 0.7%; on a constant-currency basis it was $1.45, up 5.1%. GAAP diluted EPS from continuing operations fell 11.3%. The non-GAAP measure excludes significant items and should be considered alongside GAAP results.
- Net cash from operations declined 13.2%. Management cited higher spin-off and restructuring spending, partly offset by lower working-capital costs. Capital expenditures were $1.610 billion; cash from operations less capital expenditures was approximately $2.313 billion, a simple derived measure.
- Year-end current assets were $15.622 billion and current liabilities $14.873 billion. The company reported an undrawn $4.5 billion revolving facility expiring April 2015 and maintained investment-grade credit ratings. Debt-to-capitalization was 0.38, versus 0.43 in 2011.
- Segment operating income increased in Developing Markets to $2.067 billion (up 3.2%), Europe to $1.613 billion (up 14.7%), and North America to $873 million (up 1.2%). Europe revenue fell 6.7%, largely due to currency and prior-year calendar effects.
Material changes and unusual items
- The spin-off transferred approximately $10 billion of debt to or retained by KFG; Mondelēz ended 2012 with materially lower debt. The company recorded $1.053 billion of spin-off costs in 2012, including $609 million in interest and other expense and $444 million in selling, general and administrative expense. It expected about $100 million more in 2013.
- The company recorded $102 million of 2012 restructuring charges and $8 million of implementation costs. The total 2012–2014 restructuring program was estimated at $1.5 billion, of which approximately $925 million was expected to be borne by Mondelēz.
- The Cadbury integration program had incurred approximately $1.3 billion of an estimated $1.5 billion total charges. Management said annual cost savings reached approximately $800 million in 2012, exceeding the $750 million target one year early.
- 2011 included an extra operating week and accounting-calendar changes that added $679 million to revenue and $93 million to operating income. This makes reported comparisons less directly comparable.
- 2012 included a $107 million net gain on divestitures, a $55 million gain on a Russian property sale, and a $52 million trademark impairment in Japan. A $556 million loss on interest-rate swaps was included in spin-off-related financing costs.
Outlook, risks and contingencies
- For 2013, management expected Organic Net Revenue growth at the low end of its long-term 5%–7% target and Operating EPS of $1.52–$1.57, using average 2012 foreign-exchange rates and reflecting the announced Venezuelan bolivar devaluation. The devaluation was expected to create a one-time $30 million unfavorable impact in the first quarter of 2013.
- Management expected approximately $2 billion of 2013 capital expenditures, funded from operations, and projected pension contributions of approximately $320 million. It estimated 2013 net pension cost at approximately $370 million. These are forward-looking estimates.
- Input-cost volatility remains a key exposure. 2012 commodity costs rose, particularly for packaging, energy, grains and oils. The company expected a slightly higher cost environment and continued price volatility in 2013; pricing, cost controls and hedging were its stated responses, but it does not fully hedge commodity exposure.
- Other principal risks include foreign-exchange movements and emerging-market instability; competition, retailer bargaining power and private-label products; consumer preference changes; product safety and recalls; regulatory and legal exposure; supply-chain and IT disruptions; and pension funding and investment risks.
- Legal matters include an ongoing SEC FCPA investigation related primarily to a facility in India acquired with Cadbury, with the company cooperating with authorities; a Starbucks packaged-coffee arbitration awaiting a decision, including a counterclaim; and a German antitrust matter resolved with a €21.7 million fine for a subsidiary. Management did not expect the ultimate costs of legal matters, individually or in aggregate, to materially affect results.
- The company had a $1.0 billion joint-and-several guarantee of unrelated third-party debt maturing October 1, 2013, and agreed to indemnify KFG for a related subsidiary guarantee obligation. It also reported $516 million of guarantees related to its own performance.
- Goodwill testing identified U.S. Confections and Europe Biscuits as more sensitive to changes in valuation assumptions; their fair values exceeded carrying values by 9% and 16%, respectively. No goodwill impairment was recorded in 2012.
Most important facts for investors to verify
- How post-spin-off revenue, margins and cash generation compare on a standalone basis, given that 2012 results and prior-year comparisons include substantial separation and calendar effects.
- Whether organic growth, pricing and volume/mix trends support the 2013 outlook, particularly as currency movements and input costs affect reported results.
- Actual 2013 spin-off, restructuring, capital-expenditure and pension cash costs versus management estimates.
- Debt repayment and refinancing progress, including 2013 maturities, the use of cash, and compliance with the revolving-credit facility’s minimum-equity covenant.
- Developments in the India FCPA investigation, Starbucks arbitration and the $1.0 billion guarantee, as well as any changes in expected exposure.
- Whether earnings and margins remain resilient without recurring adjustments excluded from non-GAAP Operating EPS and Adjusted Operating Income.