Mondelēz International, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company makes and sells snacks, including biscuits, chocolate, gum and candy, across four segments: Latin America, AMEA, Europe and North America. Financial statements are unaudited.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $6.355 billion | $6.288 billion | $18.955 billion | $19.165 billion |
| Operating income | $876 million | $737 million | $2.937 billion | $2.442 billion |
| Net earnings attributable to Mondelēz | $1.423 billion | $1.194 billion | $3.144 billion | $2.558 billion |
| Diluted EPS | $0.98 | $0.81 | $2.15 | $1.72 |
| Adjusted diluted EPS, non-GAAP | $0.64 | $0.62 | $1.86 | $1.79 |
- Revenue and underlying growth: GAAP revenue rose 1.1% in Q3 but declined 1.1% for the nine months. Organic revenue, a non-GAAP measure excluding currency and acquisition/divestiture effects, grew 4.2% in both periods. Growth reflected higher pricing and favorable volume/mix; currency translation and the cheese-business divestiture weighed on reported revenue.
- Profit and margins: GAAP operating income increased 18.9% in Q3 and 20.3% year to date. Operating margin was 13.8% in Q3 versus 11.7%, and 15.5% year to date versus 12.7%. Adjusted operating income fell 0.3% in Q3 and 1.5% year to date, but rose 4.3% in each period on a constant-currency basis. Adjusted operating margin was 16.8% in Q3 versus 17.1%, and 16.7% year to date versus 16.8%.
- Cash flow: Operating cash flow was $1.882 billion for the first nine months, essentially flat with $1.885 billion in 2018. Capital expenditures were $686 million; investing cash outflow was $735 million and financing cash outflow was $686 million. Cash and equivalents were $1.537 billion at September 30, up from $1.100 billion at year-end 2018.
- Debt and liquidity: Total debt was $19.520 billion, up from $18.372 billion at December 31, 2018; the debt-to-capitalization ratio was 0.42. Short-term borrowings were $3.253 billion, including $3.080 billion of commercial paper. The company reported no borrowings under its $4.5 billion multi-year or $1.5 billion 364-day revolving facilities at quarter-end and said available funding sources should cover planned needs. Approximately $3.7 billion of debt was expected to mature over the following 12 months.
- Shareholder returns: The company repurchased approximately $1.2 billion of shares and paid $1.131 billion in dividends during the first nine months. Remaining authorized repurchase capacity was $3.5 billion. The quarterly dividend was increased 10% to $0.285 per share.
Material changes and unusual items
- Swiss tax reform: A $767 million net tax benefit was recorded in Q3, contributing about $0.53 to diluted EPS. The reported effective tax rate was (92.5)% for Q3 and (8.8)% year to date; excluding the Swiss reform benefit, the company reported rates of 20.0% and 20.9%, respectively. The benefit materially boosts GAAP earnings and is excluded from adjusted measures.
- Cost pressures: Higher pricing was partly offset by higher raw-material costs, including packaging, energy, dairy and grains. Management cited productivity-related manufacturing savings. Adjusted operating margin declined slightly in both comparative periods.
- Regional performance: Q3 segment operating income rose in AMEA and North America but declined in Latin America and Europe. Year-to-date North America operating income increased sharply, in part because 2018 included pension participation charges; Europe was nearly flat, while Latin America declined.
- Portfolio actions: The July acquisition of a majority interest in Perfect Snacks cost $284 million net of cash acquired and contributed $26 million of revenue through September 30. The sale of most Middle East and Africa cheese operations generated a $44 million pretax gain and $161 million in proceeds received by quarter-end.
- Restructuring and impairment: The Simplify to Grow program generated $117 million of restructuring charges and $193 million of implementation costs in the first nine months. The program had incurred $4.2 billion in total charges since inception and is expected to continue through 2022. Q3 included $57 million of brand intangible impairments; no goodwill impairment was recorded.
- Interest-rate swaps: Q3 interest and other expense rose to $205 million from $86 million, including a $111 million loss on interest-rate swaps after changes to planned financing and hedging.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue or EPS guidance. Management expected 2019 capital expenditures of up to $0.9 billion and said it anticipated price volatility and a higher aggregate cost environment for the remainder of 2019.
- Key exposures include currency movements, commodity costs, consumer demand, and Brexit-related tariffs, customs delays or supply-chain disruption. The U.K. generated 8.4% of nine-month revenue; the company increased U.K. inventory and logistics resources as precautions.
- Argentina is accounted for as a highly inflationary economy. Management noted that future effects depend on exchange rates and the mix of monetary assets and liabilities.
- The company recorded a discounted $394 million withdrawal liability for a multiemployer pension plan, payable over 20 years; $14 million was current at September 30.
- Indian excise-tax disputes involve confirmed tax and penalty demands totaling approximately $214 million, plus interest, across five notices. The company is appealing and stated it may be required to deposit amounts pending resolution.
- The CFTC wheat-trading settlement was vacated by the court on October 23, 2019, after quarter-end; pending motions were reinstated and oral argument was scheduled for November 20 unless the parties renegotiated. Related class actions remain unresolved. The filing says outcomes cannot be predicted.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $767 million Swiss tax benefit and other adjustments; compare GAAP EPS with adjusted EPS.
- Whether pricing and volume/mix can continue to offset input-cost inflation, and whether adjusted margins stabilize.
- Debt refinancing plans for the approximately $3.7 billion of maturities expected within 12 months, including subsequent financing: the company drew $1.0 billion under term loans on October 25, after quarter-end.
- Developments in the Indian excise appeals, CFTC proceedings and related wheat-trading class actions, including any required deposits or potential losses.
- Execution and costs of the restructuring program, the multiemployer pension withdrawal payments, and future impairment risk for brands with limited fair-value headroom.