Business context and reporting period
Mondelēz International, Inc. manufactures and markets snack and beverage products across more than 80 countries. This unaudited Form 10-Q covers the three months ended March 31, 2014; comparisons are with the first quarter of 2013 unless stated otherwise. Unless noted, amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net revenue | $8.641 billion | $8.744 billion |
| Gross profit / margin | $3.204 billion / 37.1% | $3.242 billion / 37.1% |
| Operating income / margin | $843 million / 9.8% | $834 million / 9.5% |
| Net earnings attributable to Mondelēz | $163 million | $536 million |
| Diluted EPS | $0.09 | $0.30 |
| Operating cash flow | $(577) million | $(385) million |
| Capital expenditures | $326 million | $235 million |
Organic net revenue, a non-GAAP measure, rose 2.8% to $8.951 billion, reflecting 2.5 percentage points from pricing and 0.3 points from volume/mix. Currency reduced reported revenue by 3.7 percentage points; divestitures reduced it by 0.4 points. Adjusted operating income increased 11.7% to $1.053 billion, or 15.8% on a constant-currency basis; adjusted margin was 12.2%, versus 10.8%. Adjusted EPS was $0.39, up 11.4%, and $0.41 on a constant-currency basis, up 17.1%.
Balance sheet at March 31: cash was $2.422 billion; current assets were $13.702 billion and current liabilities $15.325 billion. Total debt was $18.949 billion, compared with $17.121 billion at year-end 2013; debt-to-capitalization was 0.37 versus 0.35. Shareholders’ equity was $31.649 billion. The $4.5 billion revolving credit facility was undrawn, and the company reported compliance with its equity covenant. Management said operating cash, credit facilities and financing access were expected to meet liquidity needs.
Material changes and notable items
- Reported revenue fell 1.2%, while organic revenue grew, as currency weakness—particularly in emerging markets—more than offset pricing and volume/mix. Operating income edged up 1.1%, but attributable net earnings fell 69.6% and diluted EPS fell 70.0%.
- Results included a $142 million Venezuelan currency remeasurement loss in SG&A. The company changed to the SICAD I rate of 10.70 bolivars per U.S. dollar to remeasure Venezuelan net monetary assets; it planned to translate operating results at that rate beginning in Q2. Venezuelan operations generated $237 million of Q1 revenue, and cash in the country was $236 million; management warned that further currency losses could be significant and access to cash was limited.
- The February debt tender generated a $492 million GAAP extinguishment loss; management described $494 million including related expenses. The company issued $3.0 billion of notes, retired $1.56 billion of higher-coupon debt, and repaid $500 million of notes at maturity. Weighted-average debt interest cost was 4.14% at quarter-end, down from 4.8% at year-end.
- Operating cash use increased to $577 million, primarily reflecting taxes paid, higher inventories and changes in other current liabilities. Financing provided $679 million, including debt issuance, while the company repurchased $492 million of stock and paid $238 million in dividends.
- Regional results were mixed: Europe operating income rose 14.0% and North America rose 19.4%; Latin America fell 52.2%, Asia Pacific declined 0.5%, and EEMEA rose 4.9%. Higher input costs, currency and volume/mix pressures affected several regions.
Outlook, risks and contingencies
For 2014, management expected organic revenue growth of approximately 3%, in line with global category growth; low-double-digit adjusted operating income growth at constant currency; adjusted operating margin in the high-12% range; and adjusted EPS of $1.73–$1.78, representing double-digit constant-currency growth. Management anticipated revenue growth similar to Q1 in Q2, with modest improvement in the second half. It cited weak emerging markets, consumer and category trends, commodity volatility, currency movements and possible disruption from strategic initiatives.
Management expected 2014 capital expenditures of up to $2.0 billion and approximately $30 million of remaining Spin-Off costs. Cocoa, dairy, packaging and energy costs, as well as currency-related input costs, increased in Q1; management expected price volatility and a slightly higher aggregate cost environment for the rest of 2014. The filing also disclosed an announced coffee-business combination, expected to close in 2015 subject to approvals, under which Mondelēz expected approximately $5 billion after-tax cash proceeds and a 49% interest in the proposed company. A newly approved 2014–2018 restructuring program was expected to cost $3.5 billion and generate at least $1.5 billion in annualized savings by 2018.
Contingencies include Indian excise-tax show-cause notices seeking about $66 million in excise tax plus about $66 million in penalties and interest, with an additional ongoing claim as products leave the facility; the company is contesting the claims. The company also disclosed an SEC/FCPA investigation concerning an Indian facility and a CFTC wheat-futures investigation; it expected predominantly to bear any CFTC monetary penalties. Management said it did not expect legal matters to materially affect financial results.
A material weakness remained in income-tax controls, involving monitoring and oversight of tax accounting, reconciliations, deferred-tax calculations, uncertain tax positions and classifications. Disclosure controls were therefore deemed ineffective at March 31, 2014. Management performed additional substantive procedures and said the statements fairly presented results; remediation was underway but not yet complete. Q1 2013 comparative results were revised for non-cash tax-related errors deemed immaterial to previously reported periods; revised attributable earnings were $536 million and EPS $0.30, versus originally reported $568 million and $0.32.
Important facts for investors to verify
- Whether organic growth and adjusted results translate into sustained GAAP earnings and cash generation; assess the company’s non-GAAP exclusions alongside reported results.
- Venezuelan exchange-rate access, the SICAD I translation impact from Q2, exposure to further devaluation, and the recoverability or use of Venezuelan cash and net assets.
- Debt maturities, short-term borrowing needs, and the effect of continued buybacks and dividends alongside negative quarterly operating cash flow.
- Execution, costs, savings and timing of the new restructuring program, and completion and proceeds of the proposed coffee transaction.
- Progress remediating the income-tax control weakness and developments in the Indian excise, FCPA and CFTC matters.