Mondelēz International, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Amounts are in U.S. dollars unless noted. The company makes and sells biscuits, chocolate, gum and candy, beverages, and cheese and grocery products in about 165 countries.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $5.986B | $6.302B | $12.400B | $12.757B |
| Organic net revenue (non-GAAP) | $6.011B; down 2.7% | $6.180B | $12.389B; down 1.0% | $12.512B |
| Operating income | $641M | $638M | $1.481B | $1.360B |
| Net earnings attributable to Mondelēz | $498M | $464M | $1.128B | $1.018B |
| Diluted EPS | $0.32 | $0.29 | $0.73 | $0.64 |
| Adjusted EPS (non-GAAP) | $0.48 | $0.43 | $1.01 | $0.92 |
- Q2 revenue fell 5.0% year over year; the organic decline reflected unfavorable volume/mix of 3.8 percentage points, partly offset by higher net pricing of 1.1 points. The company attributed an estimated 2.3-point impact on revenue growth to malware-related delayed shipments.
- First-half revenue fell 2.8%; organic revenue declined 1.0%, with unfavorable volume/mix of 2.1 points partly offset by higher net pricing of 1.1 points. Currency reduced first-half revenue by $216M.
- Reported operating margin was 10.7% in Q2 versus 10.1% a year earlier, and 11.9% for the first half versus 10.7%. Adjusted operating margin was 15.8% in Q2 versus 14.9%, and 16.3% for the first half versus 15.4%.
- Adjusted operating income rose 1.3% in Q2 and 3.4% in the first half; on a constant-currency basis, it rose 7.8% and 7.2%, respectively. Management cited lower overhead and advertising costs, pricing and productivity; unfavorable volume/mix, input costs and currency were offsets.
- Cash provided by operating activities was $262M in the first half, down from $337M. Investing activities used $286M, including $488M of capital expenditures and $169M net divestiture proceeds. Financing activities used $376M. Cash and cash equivalents were $1.397B at June 30, down $344M from year-end.
Balance sheet, debt and capital allocation
- Total debt was $18.8B at June 30, compared with $17.2B at December 31, 2016; debt-to-capitalization was 0.42 versus 0.41. Short-term borrowings rose to $4.813B from $2.531B, including $4.219B of commercial paper. Weighted-average interest rate on total debt was 2.1%.
- Current assets were $8.193B and current liabilities $15.563B. The company reported $13.226B of long-term debt and $742M of current long-term debt. It said cash from operations, credit facilities and authorized financing should fund working capital, planned capital expenditures, obligations, repurchases and dividends.
- Available revolving credit facilities totaled $6.0B, with none drawn at quarter-end. The company reported compliance with its minimum-equity covenant.
- First-half share repurchases were approximately $1.109B; $1.7B of authorization remained. Dividends paid were $581M. On August 2, 2017, the company approved a 16% increase in the quarterly dividend to $0.22 per share, a subsequent event.
Material changes and unusual items
- A malware incident beginning June 27 disrupted a significant portion of global Windows-based applications and sales, distribution and financial networks. Management estimated a 2.3% negative effect on Q2 net revenue growth and 2.4% on organic growth, plus $7.1M of incremental expense. It expected to recover most delayed shipments in Q3, acknowledged some revenue was permanently lost, and expected most recovery-related incremental expense in the second half of 2017. The company reported no evidence that company or personal data had been released externally.
- Q2 included $148M of restructuring charges and $63M of implementation costs; first-half amounts were $305M and $117M. Since the 2014–2018 program began, $2.9B of restructuring and related implementation charges had been incurred. The company expects total program charges of $4.1B by year-end 2018.
- First-half results included a $58M pre-tax benefit from resolution of a Cadbury-related Spanish tax matter, a $38M gum trademark impairment, $97M of mark-to-market derivative losses, and an $11M debt-extinguishment loss. Q2’s effective tax rate was 16.2%, benefiting from $47M of discrete tax benefits; the first-half rate was 19.2%, benefiting from $83M of discrete items. Management estimated a 25.8% annual effective tax rate for 2017.
- On April 28, the company sold French manufacturing facilities and local confectionery brands for net cash proceeds of about €157M ($169M). On July 4, after quarter-end, it completed the sale of most of its Australia and New Zealand grocery business for A$456M (about $347M).
Outlook, commentary and risks
- The filing does not provide a clear full-year revenue or EPS guidance figure. Management expects 2017 capital expenditures of up to $1.1B and continued commodity price volatility. It described weak category growth and ongoing currency and commodity volatility.
- Management’s stated priorities include growing core snacks and Power Brands, innovation, e-commerce, product and portfolio changes, and cost reduction through supply-chain reinvention and zero-based budgeting.
- Key exposures include foreign exchange, commodity prices, interest rates, cyberattacks and business disruption, consumer and category weakness, and execution of restructuring and transformation initiatives. The company monitors Brexit and inflation/currency risks in Argentina and Ukraine.
- Contingencies include Indian excise-tax demands and related penalties and interest, with the company contesting the claims; CFTC and investor litigation over 2011 wheat futures trading, which remained in discovery; and a Brazilian tax matter whose potential amount and timing could not yet be reasonably estimated. The company stated it did not expect the ultimate cost of its legal matters to materially affect financial results.
Investor items to verify
- How much of the Q2 shipment shortfall was recovered in Q3, what revenue was permanently lost, and the total cost and duration of malware remediation.
- Whether organic revenue, volume/mix and regional performance improve, particularly in North America, where Q2 revenue fell 8.5% and segment operating income fell 27.5%.
- Cash conversion and operating cash flow, short-term borrowing levels, and funding needs for debt maturities, capital spending, repurchases and dividends.
- Progress and remaining costs of the 2014–2018 restructuring program, and whether cost savings translate into durable margin improvement.
- Developments in Indian excise proceedings, the wheat-related litigation, the Brazilian tax matter, and the completed Australia and New Zealand divestiture and its final working-capital adjustment.