Mondelez International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; amounts are in U.S. dollars unless noted.
Business context and key financial results
Mondelez makes and markets snack foods, including biscuits, chocolate, gum and candy, cheese and grocery products, and powdered beverages. It operates in more than 80 countries and sells in approximately 160.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $6.288 billion | $6.530 billion | $19.165 billion | $18.930 billion |
| Gross profit | $2.414 billion | $2.549 billion | $7.803 billion | $7.381 billion |
| Operating income | $737 million | $1.171 billion | $2.442 billion | $2.632 billion |
| Net earnings attributable to Mondelez | $1.194 billion | $981 million | $2.558 billion | $2.133 billion |
| Diluted EPS | $0.81 | $0.64 | $1.72 | $1.39 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $1.885 billion | $797 million |
Gross margin was approximately 38.4% in Q3 2018 versus 39.0% a year earlier, and 40.7% for the first nine months versus 39.0%. Operating margin was 11.7% versus 17.9% in Q3, and 12.7% versus 13.9% for the nine-month period. Adjusted operating income margin, a non-GAAP measure, was 17.1% in Q3 and 16.8% for the first nine months, compared with 16.7% and 16.2%, respectively.
Material changes versus prior comparable periods
- Q3 revenue fell 3.7%, largely due to $323 million of unfavorable currency effects and lower volume/mix; organic net revenue rose 1.2%, reflecting 1.6 percentage points of higher pricing partly offset by 0.4 points of unfavorable volume/mix.
- Nine-month revenue rose 1.2%; organic net revenue increased 2.3%, with higher pricing and favorable volume/mix. Currency added $40 million, while prior-year divestitures reduced revenue by $264 million.
- Reported operating income declined in both periods. Q3 was affected by the absence of the prior-year $187 million divestiture gain and by a $140 million adverse year-over-year change in derivative mark-to-market results. For nine months, the $408 million multiemployer pension withdrawal charge and the lapping of prior-year divestiture and tax benefits also weighed on reported results.
- Adjusted EPS increased 10.7% to $0.62 in Q3 and 13.9% to $1.80 for nine months. Constant-currency adjusted EPS increased 17.9% and 12.7%, respectively. These are non-GAAP measures and should be considered alongside GAAP results.
- Reported EPS includes a $573 million after-tax gain from the Keurig Dr Pepper (KDP) transaction, equivalent to approximately $0.39 per share. The transaction reduced Mondelez’s investment from 24.2% in Keurig to 13.8% in KDP; the company continues equity-method accounting.
Cash, debt and liquidity
- Cash and cash equivalents were $1.373 billion at September 30, 2018, up from $761 million at year-end 2017. Nine-month operating cash flow was $1.885 billion; investing cash outflow was $1.202 billion and financing cash outflow was $7 million.
- Total debt was $20.064 billion, up from $17.652 billion at December 31, 2017; debt-to-capitalization was 0.44 versus 0.40. Debt comprised $4.811 billion of short-term borrowings and $15.253 billion of current and long-term debt. The weighted-average interest rate was 2.3%.
- The company reported no borrowings on its $4.5 billion multi-year revolving facility or its $1.5 billion 364-day facility at quarter-end, and stated that it complied with debt covenants. It cited operating cash flow, credit facilities and debt issuance as expected sources of liquidity.
- Nine-month capital expenditures were $810 million. The company expected full-year 2018 capital expenditures of up to $1.0 billion. It repurchased approximately $1.7 billion of shares and paid $980 million in dividends during the first nine months.
Outlook, management commentary, risks and unusual items
- No specific full-year revenue or EPS guidance is provided in the filing. Management reported continued snack-category growth, but expected price volatility and a slightly higher aggregate commodity-cost environment to continue in 2018. It cited pricing, hedging, productivity and cost controls as responses.
- The company extended and expanded its Simplify to Grow restructuring program through 2022. The total program is now $7.7 billion: $5.4 billion of charges and $2.3 billion of capital expenditures. It had incurred $3.7 billion of restructuring and implementation charges since inception.
- In Q2, withdrawal from a multiemployer pension fund for employees under seven collective bargaining agreements resulted in a $408 million discounted charge and liability ($305 million after tax). The estimated withdrawal liability was $567 million before discounting; the final assessment may differ. Payment is expected in installments over 20 years after assessment.
- Argentina became a highly inflationary economy for accounting purposes effective July 1, 2018. The company recorded a $13 million Q3 remeasurement loss and noted that future effects are difficult to predict. Currency volatility, Brexit, commodity costs, tax reform, cybersecurity, competition and execution of restructuring initiatives are among the disclosed risks.
- Q3 included $68 million of trademark impairment charges; seven brands with $546 million aggregate book value had fair value no more than 10% above book value. No goodwill impairment was recorded. The company identified possible future impairment if performance expectations or valuation assumptions worsen.
- The company reported disputed Indian excise tax demands, including an order confirming $81 million of taxes and penalties and additional notices seeking $68 million of tax plus potential penalties and interest. It also disclosed ongoing U.S. CFTC and related class-action litigation concerning 2011 wheat trading; outcomes are uncertain. Management said the overall outcome of current proceedings was not expected to materially harm financial position, results or cash flows, but warned that an unfavorable outcome could be material.
Important facts for investors to verify
- Final KDP transaction valuation and the resulting gain, tax effects, and future equity-method earnings.
- Final assessment and payment terms for the multiemployer pension withdrawal liability, and progress in labor negotiations.
- Underlying organic growth, pricing versus volume/mix, and the persistence of adjusted margin improvement amid currency and input-cost pressures.
- Cash generation, debt levels, commercial-paper dependence, capital spending, dividends and share repurchases.
- Argentina currency exposure, potential trademark impairments, and developments in the Indian tax and wheat-trading legal matters.