Mondelez International, Inc. — 2016 Q3 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2016, compared with the same 2015 periods. Mondelez sells snack foods and operates in more than 80 countries. Comparisons are materially affected by the July 2015 contribution of its global coffee businesses to Jacobs Douwe Egberts (JDE), the 2015 deconsolidation of Venezuela, currency movements, and a prior-year accounting calendar change.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $6.396B | $6.849B | $19.153B | $22.272B |
| Organic net revenue growth | 1.1% | — | 1.6% | — |
| Operating income | $702M | $7.802B | $2.062B | $9.454B |
| Net earnings attributable to Mondelez | $548M | $7.266B | $1.566B | $7.996B |
| Diluted EPS | $0.35 | $4.46 | $0.99 | $4.86 |
| Adjusted EPS | $0.52 | $0.38 | $1.47 | $1.20 |
| Adjusted operating income | $1.011B | $891M | $2.982B | $2.566B |
- Q3 reported revenue fell 6.6%; organic revenue rose 1.1%, reflecting higher pricing and favorable volume/mix. Year-to-date reported revenue fell 14.0%, while organic revenue rose 1.6%.
- Q3 adjusted operating margin was 15.8%, up from 13.6%; nine-month adjusted operating margin was 15.6%, up from 13.0%. GAAP operating margin was 11.0% for Q3 and 10.8% year to date; prior-year GAAP margins were elevated by the JDE transaction gain.
- Reported earnings comparisons are not like-for-like: 2015 included a $7.1B JDE transaction gain. 2016 also included significant restructuring costs, and coffee equity earnings are now reported outside operating income.
- Nine-month operating cash flow was $1.138B, versus $1.412B. Investing used $521M, compared with $3.460B provided in 2015, which included substantial coffee transaction proceeds. Financing used $830M, versus $4.270B. Cash at September 30 was $1.686B, down from $1.870B at year-end 2015.
- Capital expenditures were $909M for the first nine months. Current assets were $8.855B and current liabilities $13.957B at September 30.
- Total debt was $17.1B, up from $15.4B at December 31, 2015; debt-to-capitalization was 0.38 versus 0.35. Weighted-average debt interest rate was 3.1%. Short-term borrowings rose to $2.490B from $236M; the $4.5B revolving facility was undrawn.
- Dividends declared were $0.19 per share in Q3, versus $0.17 a year earlier. The company repurchased $1.8B of shares in the first nine months.
Material changes and management commentary
- Reported revenue was pressured by the loss of consolidated coffee sales, unfavorable currency translation and the absence of Venezuelan sales. For the first nine months, these factors reduced revenue by approximately $1.627B, $996M and $834M, respectively.
- Management attributed improved adjusted results mainly to pricing, lower overhead, productivity and manufacturing efficiencies. Higher raw material and currency-related input costs partly offset these benefits; pricing actions and volume/mix differed by region.
- The company exchanged part of its JDE stake for a 24.2% interest in Keurig in March 2016, recording a $43M gain. At September 30, it held 26.4% of JDE and reported its JDE and Keurig interests under the equity method.
- Restructuring charges were $480M and implementation costs $286M for the first nine months. The program’s total approved costs remain $5.7B, with completion expected by year-end 2018. The board reallocated $600M of approved capital spending to restructuring cash costs.
- Effective October 1, 2016, the company integrated EEMEA into Europe and Asia Pacific, forming a new AMEA reporting region. Management expected the consolidation of offices and overhead to benefit performance beginning in late 2016.
Outlook, risks and contingencies
- Management expected 2016 capital expenditures of up to $1.4B and a slightly higher aggregate commodity-cost environment with continued price volatility. The filing does not provide a clear numerical full-year revenue or earnings guidance target.
- Brexit-related pound weakness and currency volatility may adversely affect reported results, demand and business relationships. Management cited natural hedges but cautioned that exposures may not be fully offset. Currency volatility and difficult economic conditions in Argentina, Venezuela and other markets also remain concerns.
- The company deconsolidated Venezuela at year-end 2015 after loss of control and currency exchangeability issues; it recorded a $778M pre-tax loss in 2015. No Venezuelan revenue or earnings were included in 2016 results, and future consolidation remains uncertain.
- Commodity and currency risks are managed partly through derivatives, pricing and cost controls, but hedging may not fully protect against cost increases and pricing actions may lag. The company also cited consumer spending, competition, supply disruption, regulatory and product-quality risks.
- Legal matters include an SEC investigation concerning acquired Cadbury operations in India; the SEC staff issued a Wells notice recommending a potential enforcement action, and discussions with the SEC and DOJ had not produced a settlement. Indian excise authorities asserted taxes and penalties, including a confirmed demand of 5.8B rupees and further notices; the company contests the claims.
- A CFTC action and related investor class actions concerning 2011 wheat futures trading were in discovery. The company said it expects to bear predominantly any monetary penalties or other payments under its agreement with Kraft Foods Group; outcomes and amounts are uncertain.
- After quarter-end, the company extended its revolving credit facility to October 2021 and announced a $3.75B note issuance and a planned cash tender offer for debt. It also intended to draw a $750M five-year term loan and terminate a separate $750M three-year facility.
Most important facts for investors to verify
- Underlying growth and margin progress against reported results, including the reconciliations and assumptions behind non-GAAP organic revenue, adjusted operating income and adjusted EPS.
- Whether pricing, volume/mix and cost savings can offset commodity inflation and currency headwinds without damaging demand.
- Debt refinancing and tender-offer execution, short-term borrowing levels, upcoming maturities and the company’s liquidity after planned financing and shareholder returns.
- Progress, cash costs and realized benefits of the restructuring program and the EEMEA integration.
- Developments in the SEC/DOJ investigation, India tax disputes and wheat-trading litigation, including any potential financial exposure.
- Changes in the company’s ability to operate in Venezuela and the effects of Brexit, exchange rates and other emerging-market risks.