Mondelēz International, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless stated otherwise. Mondelēz sells snacks and related food products across approximately 80 countries and more than 150 markets.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $6.707 billion | $6.538 billion | +2.6% |
| Gross profit | $2.451 billion | $2.593 billion | Down $142 million |
| Operating income | $856 million | $1.036 billion | −17.4% |
| Net earnings attributable to Mondelēz | $753 million | $914 million | −17.6% |
| Diluted EPS | $0.52 | $0.63 | −17.5% |
| Operating cash flow | $284 million | $465 million | Down $181 million |
| Capital expenditures | $214 million | $265 million | Down $51 million |
Gross margin was approximately 36.6% versus 39.7%; operating margin was 12.8% versus 15.8%. Management’s non-GAAP measures showed organic net revenue growth of 6.4%, adjusted operating income growth of 1.5% (5.7% at constant currency), and adjusted EPS of $0.69, up 6.2% (constant-currency adjusted EPS of $0.72, up 10.8%). These measures exclude specified items and should be considered alongside GAAP results.
Revenue growth reflected favorable volume/mix (+4.6 percentage points) and pricing (+1.8 points), offset in reported results by unfavorable currency (−3.8 points) and the prior-year divestiture; Perfect Snacks added $32 million of revenue. North America revenue rose 15.1% and segment operating income rose 19.4%, while Latin America and AMEA revenue and segment income declined. Europe revenue increased 1.3%, but segment operating income fell 5.6%.
Cash, debt and liquidity
Cash and cash equivalents were $1.925 billion at March 31, 2020, compared with $1.291 billion at year-end; cash, cash equivalents and restricted cash totaled $1.952 billion. Operating cash flow less capital expenditures was $70 million. Operating cash flow fell year over year, primarily due to cash settlements on interest-rate swaps and payments for indirect tax matters resolved in India.
Total debt was $19.790 billion, versus $18.426 billion at December 31, 2019; the debt-to-capitalization ratio rose to 0.44 from 0.40. Short-term borrowings were $4.764 billion, including $3.695 billion of commercial paper and $1.0 billion drawn on a revolving facility. Current liabilities were $17.004 billion against current assets of $9.068 billion. At quarter-end, the company reported $9.25 billion of available net borrowing capacity and said it complied with debt covenants.
Financing cash flow was $455 million; investing cash flow used $55 million. The company paid $409 million in dividends and repurchased approximately $720 million of shares during the quarter, but suspended its share repurchase program in March as a precaution. Quarterly dividend was $0.285 per share. Long-term debt maturities in the 12 months after quarter-end were approximately $1.6 billion.
Material changes and unusual items
- COVID-19 drove elevated in-home demand in developed markets, particularly North America, modern retail and e-commerce. Lockdowns affected some emerging-market traditional trade, travel retail and foodservice. The company reported temporary operating disruptions in some emerging markets, not material to Q1 consolidated results.
- Reported operating income included $185 million of unfavorable derivative mark-to-market impacts, compared with $16 million of gains in Q1 2019. Interest and other expense rose to $190 million from $80 million, including a $103 million pre-tax loss on interest-rate swaps after planned financing changed. These items materially affected GAAP earnings.
- A KDP share sale generated $185 million of proceeds and a $71 million pre-tax gain; Mondelēz retained a 13.1% interest. Equity-method investment earnings were $138 million versus $113 million.
- After quarter-end, on April 1, the company acquired a significant majority interest in Give & Go for approximately $1.2 billion, funded with cash and borrowings. It also issued $1.0 billion of notes on April 13 and used the proceeds to repay revolving borrowings.
- The company reduced expected 2020 capital expenditures from up to $900 million to up to $800 million. It did not provide a specific full-year earnings or revenue forecast in the supplied filing text, citing uncertainty around COVID-19.
- Currency translation reduced reported revenue by $249 million and operating income by $46 million. Other comprehensive loss was $1.372 billion, mainly from a $1.511 billion currency translation adjustment.
Outlook, risks and contingencies
Management said it expected to continue meeting consumer demand barring material disruptions, but warned that elevated in-home demand may not persist. It anticipated lower revenue in certain emerging markets, travel retail and foodservice, and possible demand declines in developed markets. It also expected higher labor, customer-service and logistics costs, mix pressure, and continued commodity-cost volatility. Management stated it believed available cash and financing were sufficient for planned needs, while warning that a broader economic or credit crisis could impair financing access and liquidity.
Key risks include the duration and severity of COVID-19, supply-chain and workforce disruption, currency weakness, volatile input costs and capital markets, Brexit-related trade or supply-chain disruption, and potential asset impairment. The company reported no COVID-related impairment indicators at quarter-end but said it would continue monitoring asset values. Fourteen brands with $616 million of aggregate book value had fair value no more than 10% above carrying value, creating potential impairment sensitivity if expectations or valuation assumptions deteriorate.
Contingencies include the CFTC wheat-trading matter and related investor class actions; the CFTC settlement was vacated and a new agreement in principle was submitted for court approval, while a class was certified in January 2020. The company also disclosed a European Commission competition investigation and a Virginia environmental notice of violation, for which it expected a penalty below $100,000. Management said it could not predict the outcomes of the major proceedings.
Important facts for investors to verify
- Whether COVID-era in-home demand persists and how sharply traditional trade, travel retail and foodservice recover or decline.
- Subsequent-quarter operating cash generation, working-capital movements and liquidity after the Give & Go acquisition and related borrowing changes.
- How much reported earnings remain affected by derivative mark-to-market volatility, interest-rate swap losses, currency and commodity costs.
- Progress against the reduced 2020 capital-expenditure plan, debt maturities and management’s decision on resuming share repurchases.
- Give & Go purchase-price allocation, integration performance, and developments in the CFTC, class-action and EU competition matters.