Mondelēz International, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Unaudited consolidated results are in U.S. dollars. Mondelēz manufactures and markets snacks and related products globally. The filing reports four segments: Latin America, AMEA, Europe and North America.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $6.530B | $6.396B | $18.930B | $19.153B |
| Gross profit | $2.552B | $2.488B | $7.401B | $7.539B |
| Operating income | $1.181B | $702M | $2.662B | $2.062B |
| Net earnings attributable to Mondelēz | $992M | $548M | $2.120B | $1.566B |
| Diluted EPS | $0.65 | $0.35 | $1.38 | $0.99 |
| Adjusted EPS (non-GAAP) | $0.57 | $0.50 | $1.57 | $1.42 |
- Reported operating margin was 18.1% in Q3 versus 11.0% a year earlier, and 14.1% for the first nine months versus 10.8%. Adjusted operating margin was 16.9% and 16.5%, respectively, compared with 15.6% and 15.4% in 2016.
- Organic Net Revenue, a non-GAAP measure, increased 2.8% in Q3 to $6.416B and 0.3% in the first nine months to $18.766B. Q3 growth reflected higher pricing and favorable volume/mix; year-to-date pricing gains were partly offset by unfavorable volume/mix.
- Operating cash flow was $797M for the first nine months, down from $1.138B. Investing cash outflow was $128M, compared with $521M; financing cash outflow was $1.648B, compared with $830M.
- Cash and equivalents were $844M at September 30, versus $1.741B at year-end 2016. Current assets were $8.155B and current liabilities $16.035B.
- Total debt was $18.633B, up from $17.199B at year-end; short-term borrowings were $4.551B, including $4.370B of commercial paper. Debt-to-capitalization was 0.42 versus 0.41; weighted-average debt interest rate was 2.0%.
- Capital expenditures were $721M year to date. The company paid $869M in dividends and spent approximately $1.817B on share repurchases during the period. The quarterly dividend was increased 16% to $0.22 per share.
Material changes and drivers
- Q3 reported revenue rose 2.1%, aided by favorable currency and recovery of delayed shipments; divestitures partly offset growth. Year-to-date revenue fell 1.2%, reflecting divestitures and unfavorable currency.
- Q3 adjusted operating income rose 12.9% to $1.100B; constant-currency growth was 10.9%. For nine months, adjusted operating income increased 6.7% to $3.075B, or 8.5% at constant currency. Management cited lower overhead and ongoing cost reductions, partly offset by input costs and, year to date, unfavorable volume/mix.
- Reported earnings included substantial unusual benefits: a $187M gain on the sale of most of the Australia/New Zealand grocery business, and $215M of Q3 benefits from resolution of tax matters. The latter included a $212M Brazilian indirect-tax accrual reversal ($153M in operating income and $59M in interest and other expense) and $3M related to a Cadbury tax matter. Nine-month tax-resolution benefits totaled $273M. These items materially boosted reported operating income and EPS; adjusted measures exclude specified items.
- Q3 segment operating income increased in Latin America, Europe and North America, but declined in AMEA. Latin America’s result included the $153M Brazilian tax benefit. AMEA was pressured by impairment charges, raw-material costs, restructuring and divestitures. North America revenue and segment income declined year to date, with management citing shipments not recovered after the malware incident.
Outlook, risks and contingencies
- The company expected 2017 capital expenditures of up to $1.1B and planned to fund them from operations. It expected a slightly higher aggregate commodity-cost environment and continued price volatility in 2017. The filing gives no specific full-year revenue or EPS guidance.
- The June 2017 malware incident disrupted global sales, distribution and financial networks. Management estimated a 0.6% favorable Q3 revenue-growth effect from shipment recovery, but said North America recovery took longer and resulted in additional lost revenue for the year. Incremental incident expenses were $47M in Q3 and $54M year to date; further expenses were expected in Q4. The company reported no known external release of company or personal data and said it continued security enhancements.
- The $5.7B 2014–2018 restructuring program had incurred $3.1B in restructuring and related implementation charges through September 30; management expected the full $4.1B of program charges by year-end 2018. Q3 restructuring and implementation costs totaled $175M; nine-month costs were $597M.
- Risks include weak category growth, commodity and currency volatility, Brexit, potential highly inflationary accounting in countries including Argentina, and cyber disruption. The company also cited ongoing labor negotiations at eight U.S. facilities. Management said liquidity was expected to be sufficient, supported by operating cash, commercial paper and revolving facilities; $4.5B and $1.5B revolving facilities had no amounts drawn at quarter-end.
- Contingencies include disputed Indian excise-tax demands and penalties (the filing describes a confirmed $90M tax-and-penalty order under appeal and later notices seeking additional taxes and penalties), plus CFTC and related class-action wheat-market litigation. The company said outcomes could not be predicted; it did not expect legal matters overall to have a material financial effect, while stating it expected to bear monetary payments in the CFTC action under its agreement with Kraft Foods Group.
Important facts for investors to verify
- How much reported earnings growth came from the Australian/New Zealand divestiture gain and tax-matter benefits, versus recurring operations; compare GAAP results with the company’s non-GAAP reconciliations.
- Whether organic revenue, volume/mix and North American shipment recovery improve, particularly after the malware disruption.
- Whether operating cash flow recovers from the year-to-date decline and how working capital, capital spending, dividends and repurchases affect cash and borrowing needs.
- Progress against restructuring costs and savings, and the effect of commodity costs, pricing and segment performance—especially AMEA and North America.
- Developments in the Indian excise-tax dispute, wheat-market litigation, cyber remediation and the company’s tax and currency exposures.