Mondelēz International, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. Financial amounts are in U.S. dollars. The company manufactures and markets snack foods and beverages across more than 80 countries.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $8.337bn | $8.472bn | $25.414bn | $25.811bn |
| Operating income | $853m | $1.262bn | $2.653bn | $2.961bn |
| Net earnings attributable to Mondelēz | $899m | $1.012bn | $1.684bn | $2.149bn |
| Diluted EPS | $0.53 | $0.56 | $0.98 | $1.20 |
- Organic net revenue, a non-GAAP measure, rose 2.7% in Q3 and 2.2% year to date. Higher pricing was partly offset by unfavorable volume/mix; currency reduced reported revenue by $331m in Q3 and $902m year to date.
- Q3 gross margin was approximately 37.7%, versus 37.1%; operating margin was 10.2%, versus 14.9%. Year-to-date operating margin was 10.4%, versus 11.5%. Adjusted operating margin was 13.6% in Q3 and 12.8% year to date, compared with 12.2% and 11.5%, respectively.
- Adjusted EPS (non-GAAP) increased 25.0% to $0.50 in Q3 and 15.2% to $1.29 year to date; constant-currency growth was 32.5% and 22.3%, respectively. These measures exclude specified items and are not directly comparable to GAAP EPS.
- Operating cash flow for the first nine months was $1.149bn, compared with $1.198bn. Capital expenditures were $1.129bn, versus $1.028bn. Cash and equivalents were $1.704bn at quarter-end, down from $2.664bn at year-end 2013.
- Total debt was $17.879bn, versus $17.121bn at year-end 2013; the debt-to-capitalization ratio was 0.37, versus 0.35. Weighted-average debt interest rate was 4.3%, down from 4.8%. Current assets were $12.846bn and current liabilities $14.615bn.
- The $4.5bn revolving credit facility was undrawn. Approximately $2.065bn of long-term debt matures in the next 12 months. Management said operations, financing access and the facility should provide sufficient liquidity.
Material changes and unusual items
- Reported revenue and GAAP earnings declined despite growth in organic revenue and adjusted results. Pricing gains were offset by weak volume/mix, higher input costs and substantial currency headwinds.
- Q3 operating income included $186m of 2012–2014 restructuring costs, $67m of 2014–2018 program costs, $19m of Venezuelan currency remeasurement charges and $10m of JDE transaction costs. Comparability with Q3 2013 was also affected by the prior-year $336m operating benefit from a Cadbury-related indemnification resolution.
- For the first nine months, the company recorded a $493m loss on extinguishment of debt, Venezuelan remeasurement charges totaling $161m, and $325m of 2012–2014 restructuring costs. A $413m unrealized gain on euro forward contracts hedging the expected coffee-sale proceeds materially benefited interest and other expense; the Q3 gain was $420m.
- In May 2014, Mondelēz announced a proposed coffee combination with D.E Master Blenders 1753 and related French coffee transaction. If completed, the company expects approximately €4bn cash and a 49% interest in Jacobs Douwe Egberts. Completion is expected during 2015, subject to approvals and other conditions.
- A new 2014–2018 restructuring program carries estimated costs of $3.5bn ($2.5bn cash and $1bn non-cash), plus up to $2.2bn of capital expenditures. Management targets at least $1.5bn in annualized savings by completion at year-end 2018; most charges are expected in 2015–2016.
- The company revised 2013 comparative financial statements for non-cash income-tax errors; the revision reduced 2013 nine-month net earnings by $59m. Management said the errors were not material to prior periods and no amendments were required.
Outlook, risks and contingencies
- 2014 outlook: organic net revenue growth of 2%–2.5%; adjusted operating income growth of approximately 10% on a constant-currency basis and adjusted operating margin of approximately 13%; adjusted EPS of $1.82–$1.87 on a constant-currency basis. Management cited soft near-term global retail and consumer demand.
- Management expects a slightly higher aggregate commodity-cost environment for the rest of 2014. Cocoa, dairy, packaging, energy and currency-related costs increased; lower sugar, grains, oils and coffee costs partly offset them. Pricing, hedging and cost controls may not fully offset cost increases.
- Venezuela remains exposed to variable exchange rates, limited U.S.-dollar availability and economic and political uncertainty. Venezuelan net monetary assets were $271m; management warned further exchange-rate changes could cause significant additional gains or losses. Argentine peso volatility and declines were also noted.
- Legal matters include U.S. and Indian investigations concerning acquired Cadbury operations and Indian excise-tax claims, including approximately $66m in claimed taxes and a comparable amount of penalties and interest in the notices described. The CFTC advised in October 2014 that it intended to bring a formal action concerning 2011 wheat futures trading; Mondelēz expects to bear most potential monetary payments under its agreement with Kraft Foods Group. The company contests the matters and does not expect legal costs to materially affect results.
- Disclosure controls were deemed ineffective at September 30, 2014 because of a material weakness in income-tax accounting controls. Management reported remediation efforts and additional substantive procedures, but the weakness was not yet considered fully remediated.
Important facts for investors to verify
- Whether organic growth, pricing and cost savings can offset weaker volumes, input-cost pressure and foreign-exchange effects.
- Progress, regulatory approvals, timing and final economics of the proposed coffee transactions, including the euro hedge and expected proceeds.
- Restructuring charges, capital spending and whether the targeted $1.5bn annualized savings are achieved without disrupting operations.
- Cash conversion, working-capital needs, upcoming debt maturities and the company’s ability to maintain liquidity while funding repurchases and dividends.
- Developments in Venezuela and Argentina, including exchange-rate access and potential remeasurement losses.
- Remediation of the income-tax control weakness, and outcomes or exposure updates in the India, FCPA and CFTC matters.