Mondelez International, Inc. annual report, FY2014

Mondelez International, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Mondelez is a global snack and beverage company operating in approximately 165 countries, with five reportable segments: Latin America, Asia Pacific, EEMEA, Europe, and North America.

Financial performance

Metric	2014	2013	Change / context
Net revenue	$34.244 billion	$35.299 billion	Down 3.0%; unfavorable currency translation reduced revenue by 5.1 percentage points. Organic net revenue, a non-GAAP measure, rose 2.4%.
Operating income	$3.242 billion	$3.971 billion	Down 18.4%; reported operating margin was 9.5%, versus 11.2%.
Adjusted operating income	$4.416 billion	$4.267 billion	Up 3.5%; up 10.2% on a constant-currency basis. Adjusted margin rose to 12.9% from 12.1%.
Earnings from continuing operations	$2.201 billion	$2.332 billion	Down 5.6%.
Diluted EPS from continuing operations	$1.28	$1.29	Down 0.8%. Adjusted EPS, a non-GAAP measure, was $1.76, up 14.3% (up 23.4% constant currency).
Operating cash flow	$3.562 billion	$6.410 billion	Down primarily because 2013 included $2.6 billion of Starbucks arbitration proceeds, as well as higher tax payments and lower working-capital cash improvements in 2014.
Capital expenditures	$1.642 billion	$1.622 billion	Primarily for manufacturing modernization, new products, and productivity initiatives.

Higher net pricing contributed 4.5 percentage points to organic revenue growth, partly offset by unfavorable volume and mix of 2.1 points. The filing attributes pressure on volume partly to price elasticity, delayed competitor pricing responses, and pricing-related customer disruptions in Europe. Gross profit was $12.597 billion, compared with $13.110 billion.

Fourth-quarter 2014 revenue was $8.830 billion, versus $9.488 billion in fourth-quarter 2013. Diluted EPS was $0.29, versus $1.00; the prior-year quarter included $0.91 per share from discontinued operations, principally the Starbucks arbitration-related gain.

Balance sheet, debt, and liquidity

• At year-end, cash and cash equivalents were $1.631 billion, down from $2.622 billion; total assets were $66.815 billion, versus $72.515 billion.
• Total debt was approximately $16.7 billion, compared with $17.1 billion; debt-to-capitalization was 0.38, up from 0.35. The weighted-average interest rate on total debt was 4.3%, down from 4.8%.
• Long-term debt maturities in the next 12 months were $1.513 billion. The company expected to fund repayment with operating cash and commercial paper or additional debt.
• Management said cash from operations, its unused $4.5 billion revolving credit facility, and financing access should meet working-capital, investment, contractual, repurchase, and dividend needs. No amount was drawn on the revolver at year-end.
• Operating cash flow was $3.562 billion; financing activities used $2.688 billion, including $1.700 billion of share repurchases and $964 million of dividends paid.

Material changes and unusual items

• Currency was a major headwind: the stronger U.S. dollar reduced 2014 revenue by $1.806 billion. The company recorded $167 million of pretax Venezuelan currency remeasurement charges. Currency translation also contributed to a $4.462 billion comprehensive loss, despite positive net earnings.
• Reported operating income included $381 million of charges for the new 2014–2018 restructuring program, $459 million of 2012–2014 restructuring and implementation costs, $167 million of Venezuelan remeasurement charges, $77 million of coffee-transaction costs, and $57 million of trademark impairment charges.
• Interest and other expense included a $495 million loss on debt extinguishment, partly offset by a $628 million unrealized gain on euro hedges tied to the planned coffee transaction. The company reported a further $311 million realized hedge gain in first-quarter 2015.
• 2013 results included a $2.5 billion pretax Starbucks arbitration gain in discontinued operations and a $385 million pretax benefit from resolution of a Cadbury-related indemnification. These items make comparisons of reported net earnings and EPS less representative of underlying continuing performance.
• Regional segment operating income declined in Latin America, Asia Pacific, and EEMEA; it increased in Europe and North America. Europe remained the largest segment by revenue and operating income.

Outlook, strategy, and risks

• The company’s 2015 outlook included slightly higher aggregate commodity and related costs, with pricing actions expected as market conditions warrant. Management expected slower category growth to affect near-term revenue growth, while anticipating a later recovery; the filing does not provide a specific 2015 revenue or EPS forecast.
• Management expected 2015 capital expenditures of up to $1.8 billion and pension contributions of approximately $529 million. The 2014–2018 restructuring program carries an estimated $3.5 billion of restructuring costs, plus up to $2.2 billion of capital expenditures; it targets at least $1.5 billion in annualized savings by year-end 2018. Most program charges were expected in 2015 and 2016.
• The proposed coffee transactions with D.E Master Blenders 1753 remained subject to approvals and employee consultations. Mondelez expected approximately €4 billion in cash and a 49% interest in the combined business; the European Commission’s review was expected to conclude in the second half of 2015. The company also had a pending Vietnam biscuit-operation acquisition for consideration of up to approximately $600 million.
• Key exposures include foreign-exchange and political volatility in Venezuela, Argentina, Russia, and Ukraine; commodity costs and supply; weak consumer demand and price elasticity; retailer bargaining power and private-label competition; and execution risks from restructuring and strategic transactions.
• Control weakness: Management and the auditor concluded that a material weakness in income-tax accounting controls remained at December 31, 2014, and disclosure controls were not effective. Management reported substantial remediation progress and performed additional procedures; the auditor nevertheless concluded internal control over financial reporting was not effective.
• Contingencies include an Indian excise-tax dispute with claims for tax, penalties, and interest totaling approximately $118 million based on year-end exchange rates, an ongoing U.S. and Indian investigation concerning a Cadbury India facility, and a CFTC investigation that could result in formal action. Management did not expect the ultimate resolution of legal matters to materially affect results, but outcomes remain uncertain.

Most important facts for investors to verify

1. Whether organic growth, pricing, and volume/mix trends improve, and how much currency translation continues to affect reported results.
2. Whether adjusted operating income and adjusted EPS growth translate into stronger GAAP operating profit and cash generation, given the exclusions and unusual items.
3. Progress, cash costs, timing, and realized savings from the 2014–2018 restructuring program.
4. Completion terms and timing of the coffee transactions, including regulatory clearance, retained ownership, proceeds, and hedge outcomes.
5. Remediation and independent validation of the income-tax control material weakness, along with developments in tax audits and legal contingencies.
6. Debt refinancing and liquidity needs, pension contributions and funding status, and the sustainability of share repurchases and dividend increases.