Mondelez International, Inc. — Q2 2014 Form 10-Q
Business context and period: The filing covers the three and six months ended June 30, 2014. Mondelez makes and sells snacks, beverages, coffee, and cheese and grocery products in more than 165 countries. Amounts below are U.S. dollars; financial statement figures are unaudited.
Financial performance
- Second quarter: Net revenue fell 1.8% to $8.436 billion, while organic net revenue, a non-GAAP measure, grew 1.2% to $8.683 billion. Higher pricing (3.6 percentage points) was partly offset by lower volume/mix (2.4 points); currency reduced reported revenue by 2.9 points.
- Gross profit was $3.105 billion, down from $3.231 billion. Operating income rose 10.6% to $957 million; operating margin increased to 11.3% from 10.1%. Net earnings attributable to Mondelez increased 3.5% to $622 million, and diluted EPS rose to $0.36 from $0.33. Adjusted EPS was $0.40, up 11.1%; on a constant-currency basis it was $0.43, up 19.4%.
- First half: Net revenue declined 1.5% to $17.077 billion; organic net revenue grew 2.0% to $17.634 billion. Currency reduced reported revenue by 3.3 points, while higher pricing (3.1 points) outweighed unfavorable volume/mix (1.1 points).
- Operating income increased 5.9% to $1.800 billion, with operating margin of 10.5% versus 9.8%. Net earnings attributable to Mondelez fell 31.0% to $785 million, and diluted EPS fell 27.0% to $0.46. The $493 million debt-extinguishment loss was a major factor. Adjusted EPS was $0.79, up 9.7%; constant-currency adjusted EPS was $0.83, up 15.3%.
- Cash flow and investment: First-half operating cash flow was $368 million versus $418 million. Capital expenditures were $724 million versus $568 million; investing cash outflow was $698 million. Financing cash outflow was $163 million, compared with $1.728 billion in the prior-year period.
- Liquidity and debt at June 30: Cash was $2.132 billion. Current assets of $13.1 billion were below current liabilities of $14.915 billion. Total debt was $18.541 billion, versus $17.121 billion at year-end 2013; debt-to-capitalization was 0.36. The weighted-average debt interest rate was 4.2%, down from 4.8%. The $4.5 billion revolving facility was undrawn; the company reported compliance with its equity covenant.
- Margins and costs: Management cited pricing and lower advertising, promotion, and overhead costs as supports to adjusted operating income. Higher raw-material costs and unfavorable volume/mix were offsets. The reported results also reflect currency and commodity hedge movements.
Material changes, outlook, and commentary
- Management said global category growth had slowed, particularly in emerging markets, and expected near-term weakness. It also warned that price increases to offset input inflation could cause consumer or customer dislocation.
- 2014 outlook: Organic net revenue growth of 2%–2.5%; high-single-digit adjusted operating income growth on a constant-currency basis; adjusted operating margin in the high-12% range; and adjusted EPS of $1.73–$1.78, with double-digit constant-currency growth. The EPS outlook uses average 2013 exchange rates.
- Restructuring: A new 2014–2018 program totals $3.5 billion in charges (about $2.5 billion cash and $1 billion non-cash), plus up to $2.2 billion of capital expenditures. Management expects at least $1.5 billion of annualized savings by completion at year-end 2018, with most charges in 2015–2016. 2014 capital expenditures are expected to be up to $2.0 billion.
- Coffee transaction: Mondelez agreed to combine most of its coffee business with D.E Master Blenders 1753 and separately offered its French coffee business to the buyer’s owner. On completion, expected during 2015 subject to approvals and consultations, Mondelez expects about $5 billion cash and a 49% interest in the new company. Q2 transaction-readiness costs were $12 million.
- Currency exposure: The company remeasured Venezuelan net monetary assets at the SICAD I rate in March and recorded a $142 million loss. It reported no significant additional SICAD I remeasurement charge in Q2. Venezuela exchange-rate availability and policy remain uncertain; further currency gains or losses could be significant. The Argentine peso declined 25% against the U.S. dollar from year-end 2013 through June 30, 2014.
- Other unusual items: First-half interest and other expense was $944 million versus $514 million, principally reflecting the debt-extinguishment loss. The company issued $3.0 billion of notes and retired $1.56 billion of higher-coupon debt. First-half share repurchases were $0.9 billion; $4.0 billion of authorized repurchase capacity remained at June 30.
- Tax and controls: The estimated 2014 annual effective tax rate was 19.6%; reported rates were 12.4% for Q2 and 7.5% for the first half, affected by discrete tax benefits. The filing revised 2013 comparative results for non-cash tax errors, reducing first-half 2013 net earnings by $47 million; management said the errors were not material to prior periods. A material weakness in income-tax controls remained, and disclosure controls were deemed ineffective as of June 30. Management described remediation steps and said additional substantive procedures supported the fair presentation of the statements.
- Contingencies and risks: Mondelez disclosed an ongoing SEC/FCPA investigation relating mainly to an Indian facility and Indian excise show-cause claims of approximately $132 million in taxes, penalties, and interest, including a further notice covering 2013. It is contesting the claims. The CFTC was considering a possible formal action over pre-spin-off wheat futures trading; Mondelez expected to bear most potential monetary payments under its agreement with Kraft Foods Group. Management did not expect legal matters, individually or in aggregate, to materially affect results. The filing reported no material change to the prior annual report’s risk factors.
Investor facts to verify
- Whether organic growth, pricing, and volume/mix develop in line with guidance, particularly amid weaker category demand.
- Venezuelan exchange-rate access, the applicable SICAD rates, and potential effects on reported results and assets.
- Execution, costs, savings, and capital spending under the 2014–2018 restructuring program.
- Completion terms and timing of the coffee transactions, including regulatory approvals and the expected cash proceeds and 49% ownership interest.
- Progress in remediating the income-tax control material weakness and any further revisions or out-of-period adjustments.
- Developments in the Indian excise and FCPA matters and the CFTC wheat investigation.
- Debt maturities, working-capital needs, cash generation, and the balance between capital investment, dividends, and share repurchases.