Mondelez International, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Mondelez makes and markets snacks, including biscuits, chocolate, gum and candy, cheese and grocery products, and powdered beverages. The company reports four regions: Latin America, AMEA, Europe and North America. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $6.414 billion | $6.455 billion | Down 0.6% |
| Gross profit / gross margin | $2.525 billion / 39.4% | $2.535 billion / 39.3% | Margin up slightly |
| Operating income / operating margin | $840 million / 13.1% | $722 million / 11.2% | Up 16.3% |
| Net earnings attributable to Mondelez | $630 million | $554 million | Up 13.7% |
| Diluted EPS | $0.41 | $0.35 | Up 17.1% |
| Operating cash flow | $(557) million | $(454) million | Cash use increased |
| Capital expenditures | $306 million | $335 million | Down $29 million |
| Cash and cash equivalents | $1.307 billion at Mar. 31 | $1.741 billion at Dec. 31, 2016 | Down $434 million |
| Total debt | $18.374 billion at Mar. 31 | $17.199 billion at Dec. 31, 2016 | Up $1.175 billion |
GAAP diluted EPS was $0.41; adjusted EPS, a non-GAAP measure, was $0.53, up 3.9% from $0.51. Adjusted EPS on a constant-currency basis was $0.54, up 5.9%. Adjusted operating income was $1.075 billion, up 4.6% (6.0% at constant currency). The company reported an effective tax rate of 21.4%, versus 10.3% a year earlier.
Operating cash use reflected working-capital movements and higher pension contributions, including a non-recurring $250 million contribution to a U.K. plan. Capital expenditures exceeded operating cash inflow; operating cash flow less capital expenditures was negative $863 million, compared with negative $789 million in Q1 2016. The company reported a cash conversion cycle of negative 11 days, improved from negative 3 days.
At March 31, current assets were $8.415 billion and current liabilities were $15.057 billion. Short-term borrowings rose to $4.250 billion from $2.531 billion at year-end, including $3.835 billion of commercial paper. Long-term debt was $12.906 billion. The debt-to-capitalization ratio was 0.42, versus 0.41 at year-end; the weighted-average interest rate on total debt was 2.2%.
Material changes and drivers
- Reported revenue fell 0.6%, primarily due to $94 million of unfavorable currency translation. Organic net revenue, a non-GAAP measure excluding currency and specified business changes, increased 0.6%, reflecting 1.1 percentage points of higher net pricing partly offset by 0.5 points of unfavorable volume/mix.
- Pricing supported results as input costs rose. Management cited higher costs for cocoa, sugar, dairy, grains and oils, packaging and other materials, partly offset by lower nut and energy costs. Cost savings and lower overheads contributed to adjusted operating income growth.
- Regional revenue and segment operating income: Latin America $910 million and $111 million (revenue up 11.4%; income up 65.7%); AMEA $1.491 billion and $181 million (down 1.6% and 4.7%); Europe $2.365 billion and $409 million (down 3.4% and up 16.2%); North America $1.648 billion and $292 million (down 1.6% and up 7.7%). Segment income is a company-defined measure and excludes specified corporate, hedging and amortization items.
- Reported operating income benefited from lower restructuring and implementation costs than the prior year, a $58 million pre-tax favorable resolution of a Cadbury-related tax matter, and the absence of a prior-year $14 million intangible impairment. Results also included $211 million of restructuring and implementation costs, $19 million of divestiture-related costs, and $51 million of mark-to-market derivative losses. These and other adjustments explain why GAAP and adjusted growth differ.
- Interest and other expense declined to $119 million from $244 million, mainly because Q1 2016 included a $97 million loss on interest rate swaps. Q1 2017 included a $58 million non-cash benefit from reversal of Cadbury-related accrued liabilities following a favorable Spanish Supreme Court decision.
Outlook, risks and unusual items
- No specific full-year revenue or EPS forecast is stated in the provided filing text. Management expects 2017 capital expenditures of up to $1.2 billion, primarily for manufacturing modernization and productivity, funded from operations. It expects to complete the $5.7 billion 2014–2018 restructuring program by year-end 2018; $2.7 billion of restructuring and related implementation charges had been incurred through Q1 2017.
- Management said it believes operating cash, credit facilities and authorized financing will be sufficient for working capital, planned investment, contractual obligations, repurchases and dividends. It cited continued weak category growth and volatility in commodity and currency markets. Commodity price volatility was expected to continue in 2017, and hedging may not fully offset cost increases or timing gaps before pricing actions.
- Key exposures include foreign exchange, commodity prices and interest rates. Brexit-related uncertainty could affect demand, operations and relationships; management continued monitoring currency exposure. Argentina remained challenging and inflation-sensitive. Venezuela was deconsolidated and accounted for under the cost method; Ukraine met highly inflationary criteria, but the company did not adopt that accounting in Q1 and continued monitoring.
- The company agreed to sell most of its Australia and New Zealand grocery business for approximately A$460 million, with closing expected in mid-2017. It completed the sale of French manufacturing facilities and local confectionery brands on April 28, 2017, after quarter-end, for approximately €185 million; $18 million of incremental expense and impairment was recorded in Q1 in connection with the transaction.
- Contingencies include Indian excise-tax demands and CFTC and related class-action litigation concerning 2011 wheat futures trading. The company said outcomes could not be predicted and expected the ultimate costs of legal matters not to materially affect results; under an agreement with Kraft Foods Group, it expects to bear monetary penalties or other payments related to the CFTC action. A Brazilian tax ruling may have a favorable impact, but the company could not estimate its amount or timing.
- Other notable items: Q1 included a $14 million tax benefit from adopting stock-compensation accounting guidance, which management said could increase earnings volatility. The company repurchased approximately $0.5 billion of shares and paid $292 million of dividends. The quarterly dividend was $0.19 per share. The filing reported no material changes to the risk factors in its 2016 Form 10-K.
Most important facts for investors to verify
- How much of future revenue and earnings growth is supported by underlying volume and mix versus pricing, currency, acquisitions and non-GAAP adjustments?
- Whether cost savings and restructuring benefits can offset rising input costs without further weakening volume or requiring additional pricing.
- Liquidity and refinancing needs: short-term borrowing increased substantially, cash declined, and the company expects to refinance upcoming debt maturities.
- The sustainability of cash generation given negative Q1 operating cash flow, pension funding and planned capital expenditures of up to $1.2 billion.
- Potential outcomes and financial exposure from the Indian excise disputes, wheat-trading litigation, and unresolved Brazilian tax matter.
- Execution and proceeds from the announced divestitures, and the effects of currency, Brexit and country-specific economic conditions.