Mondelez International, Inc. — 2015 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; amounts in U.S. dollars. Mondelez manufactures and markets snacks and other food products across more than 80 countries. On July 2, it contributed its global coffee businesses to Jacobs Douwe Egberts (JDE), retaining a 43.5% equity interest.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenue | $6.849bn, down 17.8% | $22.272bn, down 12.4% |
| Organic net revenue (non-GAAP) | $7.761bn, up 3.7% | $23.469bn, up 3.4% |
| Gross profit | $2.670bn; 39.0% of revenue | $8.677bn; 39.0% of revenue |
| Operating income | $7.802bn | $9.454bn |
| Adjusted operating income (non-GAAP) | $965m, up 3.7%; constant currency up 17.7% | $2.809bn, up 5.0%; constant currency up 20.1% |
| Net earnings attributable to Mondelez | $7.266bn | $7.996bn |
| Diluted EPS | $4.46 | $4.86 |
| Adjusted EPS (non-GAAP) | $0.42, down 16.0%; constant currency $0.50, flat | $1.30, up 0.8%; constant currency $1.53, up 18.6% |
Reported earnings and operating margins were dominated by the preliminary $7.122bn pre-tax gain on the coffee transaction; reported EPS is therefore not representative of underlying operating performance. Adjusted operating margin rose to 14.1% from 12.4% in the quarter and to 13.6% from 11.8% year to date. Higher pricing supported organic revenue growth, but was partly offset by unfavorable volume/mix. Foreign currency and the removal of coffee revenue from consolidation substantially reduced reported revenue.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1.412bn, versus $1.149bn; capital expenditures were $1.178bn, versus $1.129bn. Management expected 2015 capital expenditures of up to $1.8bn.
- Investing activities provided $3.460bn, largely reflecting $4.1bn of net coffee transaction/divestiture proceeds and $1.0bn from related currency hedge settlements. Financing activities used $4.270bn, including debt repayments and $3.0bn of share repurchases.
- Cash and equivalents were $2.039bn at September 30. Total debt carrying value was $16.359bn, versus $16.700bn at year-end 2014; debt-to-capitalization was 0.35 versus 0.38. Weighted-average debt interest rate was 3.5%, down from 4.3%.
- The $4.5bn revolving credit facility was undrawn. The company reported compliance with its equity covenant. $1.750bn of long-term debt was due in February 2016; management expected to fund repayment with operating cash and/or new financing.
- The quarterly dividend was increased 13% to $0.17 per share. The repurchase authorization was raised to $13.7bn through 2018; $6.0bn of capacity remained at September 30.
Material changes and unusual items
- The coffee transaction generated a preliminary $7.1bn pre-tax gain ($6.9bn after tax). Consideration included €3.8bn cash, a 43.5% JDE interest and approximately $1.1bn in receivables for estimated adjustments and tax-formation costs. The company received about $5.2bn in cash to date, including hedge proceeds. Transaction valuation and consideration remained subject to finalization and could change materially.
- Reported net revenue fell mainly because of unfavorable currency translation (13.6 percentage points in the quarter; 13.2 points year to date) and coffee deconsolidation. Higher pricing contributed 7.4 points and 6.4 points, respectively, while volume/mix reduced growth by 3.7 points and 3.0 points.
- The company acquired an 80% interest in a Vietnamese biscuit operation for approximately $543m and acquired Enjoy Life Foods for $81m. The Vietnam purchase-price allocation, including $480m of estimated goodwill, was preliminary.
- Nine-month results included a $708m loss on early debt extinguishment and related expenses. The 2014–2018 restructuring program generated $442m of charges and $185m of implementation costs in the first nine months; management expected most program charges in 2015–2016 and completion by year-end 2018.
Outlook, commentary and risks
The filing provides no specific full-year revenue or EPS guidance. Management described its aims as long-term industry-leading revenue growth, margin improvement through productivity and cost programs, and top-tier peer-group EPS growth. It expected price volatility and a slightly higher aggregate commodity-cost environment to continue in 2015. Pricing, hedging and cost controls were identified as responses, though pricing may lag cost increases and hedges may not fully protect against them.
- Currency, commodity costs, consumer demand, pricing elasticity, restructuring execution and competition remain significant risks. Management cited unfavorable currency effects across most operating regions.
- Venezuela remained a material uncertainty: Mondelez could not obtain U.S. dollars at the SICAD rate in the third quarter, used 12 bolivars per U.S. dollar for reporting, and warned further rate or policy changes could cause significant gains or losses. Venezuela represented 4.6% of quarterly and 3.7% of nine-month revenue; $401m of cash there had limited accessibility.
- Legal matters include an ongoing SEC/U.S. and Indian government investigation concerning the acquired Cadbury facility in India; Indian excise tax and penalty claims, including an appealed $89m assessment and additional claims; and CFTC and related class-action litigation over 2011 wheat futures trading. Mondelez said it expected predominantly to bear monetary payments related to the CFTC action, but outcomes could not be predicted.
- Disclosure controls were deemed ineffective at September 30 because of a continuing material weakness in income-tax accounting controls. Management reported remediation work and additional procedures, but said the new controls needed to operate for a sustained period before remediation could be confirmed. The filing stated the financial statements fairly presented the periods shown.
- The company disclosed no material changes to the risk factors in its 2014 Form 10-K. It reported immaterial out-of-period income-tax adjustments in 2015.
Most important facts for investors to verify
- Final JDE investment valuation, transaction consideration and any resulting adjustment to the recorded gain or receivables.
- Underlying organic growth, volume/mix and adjusted EPS performance separately from currency effects, coffee deconsolidation and other non-GAAP adjustments.
- Progress on the income-tax control material weakness and whether remediation is sustained and effective.
- Developments in Venezuela currency access and valuation, and the India and wheat-trading legal matters.
- Funding plans for the February 2016 debt maturity, capital spending, restructuring costs and remaining share repurchase authorization.