Mondelēz International, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2019, compared with the same periods in 2018. Mondelēz sells snacks and related products in more than 150 countries. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenues | $6,062 | $6,112 | $12,600 | $12,877 |
| Gross profit | $2,469 | $2,540 | $5,062 | $5,389 |
| Operating income | $1,025 | $481 | $2,061 | $1,705 |
| Net earnings attributable to Mondelēz | $807 | $318 | $1,721 | $1,364 |
| Diluted EPS | $0.55 | $0.21 | $1.18 | $0.91 |
| Operating cash flow | — | $1,046 | $1,182 |
- Revenue and margins: GAAP revenue declined 0.8% in Q2 and 2.2% year to date. Organic Net Revenue, a non-GAAP measure, grew 4.6% in Q2 and 4.1% year to date, supported by pricing and favorable volume/mix. GAAP gross margin was approximately 40.7% in Q2 versus 41.6% and 40.2% year to date versus 41.8%. GAAP operating margin was 16.9% versus 7.9% in Q2 and 16.4% versus 13.2% year to date.
- Adjusted performance: Adjusted Operating Income was $1,008 million in Q2, down 0.8%; constant-currency adjusted operating income rose 4.0%. For six months, adjusted operating income was $2,098 million, down 2.1%; constant currency increased 4.2%. Adjusted EPS was $0.57 in Q2, up 3.6%, and $1.22 year to date, up 4.3%; constant-currency adjusted EPS grew 9.1% and 12.0%, respectively. These are company-defined non-GAAP measures.
- Cash flow and investment: First-half operating cash flow was $1,046 million, down from $1,182 million, primarily due to higher working-capital requirements and tax payments. Capital expenditures were $465 million. Investing cash outflow was $267 million, compared with $1,041 million, reflecting the prior-year Tate’s Bake Shop acquisition, divestiture proceeds and lower capital spending. Financing cash outflow was $639 million; cash and equivalents ended at $1,248 million.
- Debt and liquidity: Total debt was $19.2 billion at June 30, 2019, versus $18.4 billion at year-end 2018; debt-to-capitalization was 0.42. Total debt less cash was approximately $18.0 billion. Short-term borrowings were $3.78 billion and current long-term debt was $3.68 billion; long-term debt was $11.76 billion. The company reported $4.5 billion and $1.5 billion undrawn revolving facilities and said cash flow, facilities and financing access should cover operating and planned funding needs. Approximately $3.7 billion of long-term debt was expected to mature over the following 12 months.
Material changes and unusual items
- Revenue was pressured by unfavorable currency translation ($333 million in Q2; $831 million in the first half) and the Middle East and Africa cheese-business divestiture. Pricing and volume/mix more than offset these effects on an organic basis. Tate’s Bake Shop contributed $15 million of Q2 and $35 million of first-half revenue.
- GAAP earnings growth substantially reflects comparison with prior-year charges, notably a $408 million pension participation/withdrawal-related charge in Q2 2018, as well as lower restructuring costs, the absence of the prior-year $140 million debt-extinguishment loss, and a $41 million divestiture gain in 2019. Q2 2019 also included a $25 million loss on equity-method investment transactions. Adjusted and GAAP results therefore tell different stories.
- Most of the Middle East and Africa cheese business was sold on May 28, 2019, for $158 million cash proceeds; the company recorded a $41 million pre-tax gain and $11 million of Q2 divestiture-related costs.
- The company received a $526 million assessment for withdrawal from a multiemployer pension plan, payable monthly over 20 years beginning in the second half of 2019. The discounted liability at June 30 was $396 million, including $22 million current; a $35 million Q2 2019 adjustment was recorded.
- Operating lease accounting adoption added $710 million of lease assets and $730 million of lease liabilities at January 1, 2019. The filing reports $644 million of operating lease liabilities at June 30.
Outlook, management commentary and risks
- The filing provides no specific full-year revenue, operating-income or EPS guidance. Management expected 2019 capital expenditures of up to $1.0 billion and a slightly higher aggregate commodity-cost environment with continued price volatility.
- Management cited continued growth in snack categories, while noting higher input costs, foreign-exchange volatility and consumer and market uncertainty. Pricing, productivity, hedging and cost controls are among the stated responses; hedging and pricing may not fully or promptly offset cost increases.
- Brexit was a significant uncertainty: the UK represented 8.4% of first-half revenue, and import reliance exposes the business to potential tariffs, customs delays, supply disruption and currency effects. The company said it had increased logistics resources and inventory protections.
- Argentina was treated as highly inflationary from July 2018; management noted that future effects depend on exchange rates and the monetary position. The company also highlighted U.S. tax-reform implementation and foreign-exchange, commodity, interest-rate, pension, supply-chain and legal risks.
- A $0.285-per-share quarterly dividend, a 10% increase, was declared July 30, 2019, payable October 14, 2019, subject to the board’s discretion. Share repurchases totaled about $1.0 billion in the first half; $3.7 billion of authorization remained.
- Contingencies include Indian excise-tax disputes with demands for taxes and penalties totaling $220 million, plus interest, which the company contests; possible deposits could be required as the appeals proceed. Wheat-trading litigation and a CFTC matter remained unresolved, with the company expecting to bear monetary payments under its agreement with Kraft Foods Group. The company did not expect the Virginia environmental notice to have a material financial effect.
Most important facts for investors to verify
- Whether organic growth and constant-currency adjusted gains persist after separating them from currency, divestiture, pricing and other non-GAAP adjustments.
- The drivers of first-half operating cash-flow decline, working-capital needs and funding for the approximately $3.7 billion of near-term maturities.
- The final payment schedule and any changes in the assessed $526 million pension withdrawal liability.
- The effect of commodity inflation, pricing elasticity, foreign exchange and Brexit-related supply or trade disruption on margins and cash flow.
- Developments in the Indian excise-tax appeals and wheat-related proceedings, including potential deposits, penalties or other remedies.