Mondelez International, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 3, 2014. This is an annual report, not a standalone fourth-quarter filing. The company’s former North American grocery business, Kraft Foods Group, was spun off in October 2012 and is presented as a discontinued operation.
Business context and financial performance
Mondelez is a global snacks and beverage company selling in approximately 165 countries. Its portfolio includes biscuits, chocolate, gum and candy, beverages, and cheese and grocery products. Approximately 83% of 2013 revenue came from outside the United States.
| Metric | 2013 | 2012 |
|---|---|---|
| Net revenue | $35.299 billion | $35.015 billion |
| Organic net revenue growth | 3.9% | 4.4% |
| Operating income | $3.971 billion | $3.637 billion |
| Operating margin | 11.2% | 10.4% |
| Adjusted operating income | $4.213 billion | $4.214 billion |
| Adjusted operating margin | 12.0% | 12.2% |
| Earnings from continuing operations | $2.332 billion | $1.606 billion |
| Diluted EPS from continuing operations | $1.29 | $0.88 |
| Adjusted EPS | $1.51 | $1.41 |
| Operating cash flow | $6.410 billion | $3.923 billion |
| Capital expenditures | $1.622 billion | $1.610 billion |
Reported revenue rose 0.8%, while organic growth reflected 3.4 percentage points from volume and mix and 0.5 points from pricing. Currency reduced revenue by 2.4 percentage points; divestitures reduced it by 1.0 point. Gross profit was $13.110 billion, a 37.1% gross margin. Operating cash flow was boosted by approximately $2.6 billion of net cash from the Starbucks arbitration resolution; operating cash flow less capital expenditures was approximately $4.8 billion.
Net earnings attributable to Mondelez were $3.915 billion, or diluted EPS of $2.19, including $1.603 billion of after-tax earnings from discontinued operations. The discontinued-operation result included the $1.6 billion after-tax Starbucks arbitration gain. Fourth-quarter continuing-operations earnings were $170 million; fourth-quarter diluted EPS from continuing operations was $0.09. Fourth-quarter discontinued-operation earnings were $1.603 billion.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $2.664 billion, total current assets were $13.216 billion and current liabilities were $14.396 billion. Total debt was approximately $17.1 billion, down from $19.4 billion a year earlier; long-term debt, excluding its current portion, was $14.482 billion. The debt-to-capitalization ratio declined to 0.35 from 0.38. The company reported a 4.8% weighted-average debt interest rate and a 9.8-year weighted-average term on long-term debt.
The company had an undrawn $4.5 billion five-year revolving credit facility and said available operating cash, credit facilities and financing authority should cover working capital, capital spending, contractual obligations, repurchases and dividends. It repurchased $2.7 billion of shares in 2013 and paid $943 million in dividends. Planned 2014 capital expenditures were up to $2.0 billion.
Material changes and unusual items
- Adjusted operating income was essentially flat as reported, but increased 4.7% at constant currency. Higher volume and pricing were offset by higher input costs, higher SG&A and currency effects. Adjusted operating margin declined 0.2 percentage points.
- A $612 million pre-tax loss on extinguishment of debt from the December 2013 tender offer weighed on continuing-operations results. The company retired $3.4 billion of U.S. dollar debt and issued €2.4 billion of notes to help fund the tender.
- A favorable Cadbury-related tax indemnification resolution contributed $363 million after tax to 2013 continuing-operations earnings. The effective tax rate was 2.5%, reflecting foreign income mix and discrete tax benefits, among other items.
- The Starbucks arbitration produced a $2.8 billion cash award, directed to Mondelez under the separation arrangements; the company recorded a $1.6 billion after-tax gain in discontinued operations.
- Management identified non-cash income-tax errors in prior periods and revised quarterly and prior-year financial statements. It said the errors were not material to previously reported periods; revisions reduced 2013 year-to-date net earnings through the third quarter by $59 million and increased cumulative pre-2013 net earnings by $94 million.
- The company reported a material weakness in internal controls over income-tax accounting, including monitoring and oversight of tax provision and related balances. Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2013; the auditor nevertheless opined that the financial statements were fairly presented under U.S. GAAP. Remediation was underway but not yet fully established as effective.
- Venezuela’s currency devaluation led to a $54 million charge on net monetary assets and $67 million of additional unfavorable pre-tax translation effects. Further devaluation or wider use of the less favorable SICAD rate could cause additional charges.
Outlook, risks and contingencies
For 2014, management forecast organic net revenue growth of approximately 4%, low-double-digit adjusted operating income growth at constant currency, an adjusted operating margin in the high-12% range, and adjusted EPS of $1.73–$1.78. The EPS outlook used average 2013 exchange rates. Management expected slightly higher aggregate commodity costs and continued price volatility.
Management’s strategy emphasized growth in emerging markets and Power Brands, productivity and supply-chain reinvention. It targeted $3 billion in gross productivity gains and $1 billion of incremental free cash flow over 2014–2016 for reinvestment. The Cadbury integration program was completed, with approximately $800 million in annual cost savings achieved ahead of schedule; the company had incurred approximately $1.5 billion in related charges.
Key risks include foreign exchange and political volatility, especially in emerging markets; commodity availability and pricing; competition and retailer bargaining power; consumer demand and product mix; execution of restructuring and supply-chain changes; product safety and regulation; pension funding and market volatility; and access to capital markets. The company was contesting an Indian excise-tax notice seeking approximately $46 million in tax plus approximately $46 million in penalties and interest, and cooperating with U.S. and Indian authorities in an FCPA investigation related to an acquired Indian facility. Management did not expect legal matters, individually or in aggregate, to materially affect results, but outcomes remain uncertain.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the Starbucks gain, debt-extinguishment loss, tax indemnification benefit, restructuring charges and other adjustments; review the company’s non-GAAP reconciliations.
- Track remediation and independent testing of the material weakness in income-tax controls, including whether revised processes operate effectively over time.
- Assess the quality and repeatability of 2013 operating cash flow, given the substantial arbitration-related receipt and working-capital effects.
- Compare 2014 guidance with actual organic growth, adjusted margins and EPS, including currency and commodity-cost impacts.
- Monitor Venezuela and Argentina exposures, exchange-rate restrictions, and any resulting charges or limitations on cash repatriation.
- Verify debt maturities, refinancing costs, share repurchases and liquidity needs against the company’s planned capital spending and dividend commitments.