Mondelez International, Inc. annual report, FY2019

Business context and reporting period

Mondelēz International, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. The company sells snacks and other food products in more than 150 countries, organized into Latin America, AMEA, Europe and North America. Its major categories include biscuits and chocolate.

Financial performance and position

Amounts are in U.S. dollars unless noted. Results below compare fiscal 2019 with fiscal 2018.

• Organic net revenue, a non-GAAP measure excluding currency and acquisition/divestiture effects, rose 4.1% to $26.879 billion, reflecting 2.2 percentage points from pricing and 1.9 points from volume/mix. Reported revenue declined 0.3%, including a $1.154 billion unfavorable currency effect.
• Adjusted operating income was $4.264 billion, down 0.9% reported but up 4.4% at constant currency; adjusted operating margin declined to 16.5% from 16.7%. Adjusted EPS was $2.47, up 2.1%, or $2.62 at constant currency, up 8.3%.
• Operating cash flow less capital expenditures was approximately $3.040 billion in 2019, calculated from the reported figures. The current ratio was approximately 0.50, based on current assets of $7.630 billion and current liabilities of $15.322 billion.
• Debt-to-capitalization was 0.40 versus 0.42. Commercial paper outstanding was $2.6 billion; the weighted-average interest rate on total debt was 2.2%. About $1.5 billion of long-term debt was expected to mature in 2020.
• The fourth quarter reported net revenue of $6.913 billion, net earnings attributable to Mondelēz of $726 million and diluted EPS of $0.50.

Material changes versus the prior comparable period

• GAAP operating income increased 16.0% and diluted EPS increased 16.2%, but the gains were affected substantially by unusual items, notably Swiss tax reform and lower prior-year pension-related charges.
• A $767 million net benefit from Swiss tax reform drove the reported 2019 effective tax rate down to 0.1%. Excluding that benefit, the company reported an effective tax rate of 22.4%.
• Higher pricing and favorable volume/mix supported underlying revenue growth, while currency translation and the sale of most of the Middle East and Africa cheese business weighed on reported revenue. Perfect Snacks was acquired in July 2019; the company also acquired Tate’s Bake Shop in 2018.
• Adjusted operating margin eased as higher raw-material costs, including packaging, energy, dairy, grains, cocoa and oils, largely offset pricing and productivity benefits. Latin America revenue fell 5.7% and segment operating income fell 16.8%; North America segment operating income rose sharply, in part because 2018 included pension participation charges.
• Operating cash flow was broadly stable year over year. Capital expenditures fell from $1.095 billion to $925 million, while dividends paid increased to $1.542 billion from $1.359 billion. Share repurchases were approximately $1.5 billion in 2019.

Outlook, commentary, risks and unusual items

• Management provided no specific numerical 2020 growth or earnings guidance in the supplied filing text. It expected 2020 capital expenditures of up to $0.9 billion and anticipated continued commodity-price volatility and a higher aggregate cost environment.
• Management said the emerging coronavirus outbreak originating in China could negatively affect results in the short term; the extent was uncertain at the filing date. The company also identified Brexit-related supply-chain, tariff and currency risks, with 8.6% of 2019 revenue generated in the United Kingdom.
• The Simplify to Grow restructuring program was extended through 2022. Since inception, restructuring and implementation charges totaled approximately $4.3 billion; management described cost reduction, supply-chain reinvention and overhead efficiency as ongoing priorities.
• The company recorded $57 million of brand intangible-asset impairment charges in 2019 and identified 14 brands with $635 million of aggregate book value whose fair values were within 10% of book value. No goodwill impairment was recorded.
• The Bakery and Confectionery Union and Industry International Pension Fund withdrawal liability was assessed at $526 million undiscounted; the remaining discounted liability was $391 million at year-end, payable over 20 years. Pension obligations, commodity costs, currency movements, competition, consumer preferences, cybersecurity, global disruptions and tax matters are material risks.
• Legal matters include a European Commission competition investigation and wheat-market litigation related to conduct before the Kraft Foods Group spin-off. The filing says outcomes cannot be predicted; management did not expect the proceedings, individually or in aggregate, to materially harm financial position, results or cash flows. An Indian excise-tax matter was resolved through an amnesty, with payments made in January 2020.
• The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The auditor identified impairment testing of non-amortizable intangible assets as a critical audit matter.

Important facts for investors to verify

• Assess the sustainability of reported earnings growth separately from the $767 million Swiss tax benefit and other comparability adjustments; compare GAAP results with the company’s non-GAAP reconciliations.
• Track whether organic growth, pricing and volume/mix persist, and whether pricing can offset input-cost increases without damaging volume or market share.
• Review cash conversion, working-capital needs, debt maturities, commercial-paper reliance, dividends and repurchases against operating cash flow and liquidity facilities.
• Monitor the coronavirus and Brexit exposures, currency effects, and legal and tax contingencies for developments after the filing date.
• Evaluate restructuring-program costs and realized savings, pension funding and withdrawal-liability payments, and potential further impairment of brands.