Business context and reporting period
Mondelēz International’s Form 10-K covers the fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. The company sells snacks and beverages in 165 countries and reports five geographic segments. In July 2015, it contributed its global coffee businesses to Jacobs Douwe Egberts (JDE), retaining a 43.5% interest. Biscuits, chocolate, gum and candy represented approximately 85% of 2015 net revenue excluding coffee.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net revenue | $29.636 billion | $34.244 billion |
| Gross profit | $11.512 billion | $12.597 billion |
| Operating income | $8.897 billion | $3.242 billion |
| Net earnings attributable to Mondelēz | $7.267 billion | $2.184 billion |
| Diluted EPS | $4.44 | $1.28 |
| Operating cash flow | $3.728 billion | $3.562 billion |
| Capital expenditures | $1.514 billion | $1.642 billion |
| Total debt | $15.4 billion | $16.7 billion |
- Revenue fell 13.5%, including a 12.6 percentage-point currency headwind and the effect of deconsolidating the historical coffee business. Organic Net Revenue, a company-defined non-GAAP measure, rose 3.7% to $31.599 billion.
- GAAP earnings included a $6.809 billion pretax gain on the JDE transaction and a $778 million pretax loss from Venezuela deconsolidation. Adjusted operating income was $3.830 billion, up 4.7% reported and 19.0% at constant currency; adjusted EPS was flat at $1.75, or up 18.9% at constant currency to $2.08.
- Reported operating margin was approximately 30.0%, versus 9.5% in 2014, substantially reflecting the JDE gain. Adjusted operating margin was 13.7%, versus 12.0%.
- Operating cash flow less capital expenditures was approximately $2.214 billion. Cash and equivalents were $1.870 billion; current assets were $8.958 billion and current liabilities $10.922 billion. The $4.5 billion revolving credit facility was undrawn at year-end. The reported debt-to-capitalization ratio was 0.35.
- The company paid $1.008 billion in dividends and repurchased $3.622 billion of shares. The declared annual dividend was $0.64 per share; the board raised the annualized rate to $0.68 in July 2015.
Material changes versus the prior comparable period
- The coffee contribution to JDE substantially changed the company’s revenue base and reporting: coffee results were consolidated only through July 2, 2015, while its retained JDE interest became an equity-method investment.
- Revenue declined despite higher pricing: organic growth reflected 6.8 percentage points from net pricing, offset by 3.1 points of unfavorable volume and mix. Management cited price elasticity and exits from low-margin products.
- Currency translation reduced revenue by $3.833 billion and adjusted operating income by $522 million. Adjusted operating income growth at constant currency was materially stronger than reported growth.
- Segment performance diverged: North America operating income rose 19.8% to $1.105 billion; Europe fell 27.9% to $1.277 billion, EEMEA fell 40.7% to $194 million, and Asia Pacific fell 30.4% to $268 million. Latin America rose 2.1% to $485 million.
- Fourth-quarter revenue was $7.364 billion and net loss attributable to Mondelēz was $729 million, or diluted EPS of negative $0.46. The quarter included the $778 million Venezuela deconsolidation loss and a $313 million reduction to the estimated coffee transaction gain.
Outlook, management commentary, risks and unusual items
- Management emphasized organic revenue growth, adjusted operating income and adjusted EPS, and its strategy of focusing the portfolio, reducing costs and investing behind brands and routes to market. The filing does not provide a specific 2016 revenue or EPS forecast.
- Management expected a slightly higher aggregate commodity cost environment in 2016 and anticipated further portfolio optimization and pricing adjustments as conditions changed. It forecast 2016 capital expenditures of up to $1.5 billion.
- The 2014–2018 restructuring program had incurred $1.4 billion in restructuring and implementation charges since inception; management expected most remaining charges in 2016 and completion by year-end 2018. Pension and postretirement costs were expected to decrease by approximately $135–$185 million in 2016; estimated 2016 pension contributions were approximately $449 million.
- Venezuela was deconsolidated at year-end following loss of control and an other-than-temporary lack of currency exchangeability. The company recorded a $778 million pretax loss, fully impaired Venezuelan receivables, and said future earnings under cost-method accounting would be recognized only when cash was received. It cited continuing economic, regulatory, pricing and supply uncertainty.
- Key risks include foreign-exchange volatility, commodity costs and supply, emerging-market instability, pricing and consumer demand, competition and retailer bargaining power, execution of restructuring and strategic transactions, and product, regulatory and legal matters. Approximately 78.7% of 2015 revenue came from outside the United States.
- Legal matters include a February 2016 SEC Wells notice recommending a possible enforcement action over books-and-records and internal-control provisions relating to an India facility investigation; the company said it intended to respond. Indian excise-tax assessments and further notices are contested. The CFTC and investor class actions concerning 2011 wheat trading were in litigation; the company said it expected to bear predominantly any monetary penalties or payments under its agreement with Kraft Foods Group.
- Management reported that the prior material weakness in income-tax accounting controls had been remediated by December 31, 2015. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Separate recurring operating performance from the JDE gain, Venezuela loss, debt-extinguishment charges, restructuring costs and other adjustments; review the company’s non-GAAP reconciliations.
- Assess organic revenue growth alongside the decline in reported revenue, including pricing, volume/mix, currency and the changed coffee consolidation perimeter.
- Monitor segment trends, particularly continued pressure in Europe, EEMEA and Asia Pacific, and whether pricing actions affect volumes.
- Track the JDE investment, its distributions and earnings contribution, and the status and terms of the proposed JDE-for-Keurig equity exchange.
- Follow Venezuela’s operating and cash-repatriation position, the SEC investigation and Wells notice, the contested India tax matters, and the CFTC and related investor litigation.
- Verify execution and cash costs of restructuring, planned capital spending, pension funding, debt maturities, share repurchases and dividend commitments.