Mondelez International, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Comparisons are with Q1 2017 unless otherwise noted. Mondelez sells snack and food products in approximately 160 countries and reports four geographic segments.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenue | $6.765 billion | $6.414 billion | +5.5% |
| Organic net revenue | $6.428 billion | $6.278 billion | +2.4% |
| Gross profit | $2.849 billion | $2.518 billion | +$331 million |
| Operating income | $1.224 billion | $825 million | +48.4% |
| Net earnings attributable to Mondelez | $938 million | $630 million | +48.9% |
| Diluted EPS | $0.62 | $0.41 | +51.2% |
| Operating cash flow | $407 million | $(557) million | +$964 million |
| Capital expenditures | $284 million | $306 million | $(22) million |
Organic net revenue excludes currency and divestitures. Reported revenue growth reflected $337 million of favorable currency translation and $150 million of organic growth, partly offset by $136 million of revenue lost from divestitures. Organic growth reflected favorable volume/mix, including Easter-related shipment timing, and higher net pricing.
GAAP operating margin was 18.1%, versus 12.9%; adjusted operating margin was 16.7%, versus 16.5%. GAAP operating income included a $206 million favorable mark-to-market impact from derivatives, compared with a $51 million loss in Q1 2017. Adjusted operating income rose 9.7% to $1.133 billion, but increased 3.0% to $1.064 billion on a constant-currency basis. Adjusted EPS was $0.62, up 19.2%; constant-currency adjusted EPS was $0.57, up 9.6%.
The effective tax rate was 26.5%, including discrete net tax expense of $46 million. The company recorded an additional $89 million discrete net tax cost related to U.S. tax reform, primarily reflecting a $94 million increase in its transition-tax liability, partly offset by tax benefits. Management’s estimated 2018 annual effective tax rate was 22.5%, excluding discrete items.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $1.130 billion at March 31, 2018, up from $761 million at year-end 2017.
- Total debt was $18.8 billion, compared with $17.7 billion at year-end; debt-to-capitalization was 0.42 versus 0.40. Short-term borrowings were $4.779 billion, including $4.459 billion of commercial paper. The weighted-average interest rate on total debt was 2.3%.
- Current assets were $8.370 billion and current liabilities $16.798 billion. The company said operating cash, credit facilities and financing authority should provide sufficient liquidity for working capital, investment, debt service, dividends and repurchases. It reported compliance with debt covenants.
- Operating cash flow improved to $407 million from a $557 million use, primarily due to improved working capital, higher earnings and lower pension contributions. Cash flow less capital expenditures was $123 million, calculated from reported figures.
- Q1 financing included $500 million of common-stock repurchases and $330 million of dividends paid. The repurchase authorization was increased to $19.7 billion and extended through 2020; $6.1 billion remained available at quarter-end.
Material changes and segment performance
- Europe revenue rose 14.4% to $2.706 billion and segment operating income increased 26.5% to $497 million, supported by currency and volume/mix, partly offset by divestitures and lower pricing.
- AMEA revenue increased 3.4% to $1.542 billion and segment operating income rose 26.0% to $228 million. Divestitures reduced revenue, while lower advertising and restructuring costs supported earnings.
- Latin America revenue declined 2.1% to $891 million, while segment operating income rose 13.5% to $126 million, helped by pricing and lower costs. Currency and volume/mix weighed on revenue.
- North America revenue fell 1.3% to $1.626 billion and segment operating income declined 5.8% to $275 million, reflecting weaker volume/mix, lower pricing and higher manufacturing costs.
- Q1 restructuring charges were $52 million and implementation costs were $62 million, down from $157 million and $54 million, respectively, in Q1 2017. Cumulative restructuring and implementation costs since program inception were approximately $3.4 billion; management expected to incur the full $4.1 billion of program charges by year-end 2018.
Outlook, commentary and risks
- No specific full-year revenue or EPS guidance is stated in the provided filing text. Management expected 2018 capital expenditures of up to $1.0 billion and a slightly higher aggregate commodity-cost environment, with price volatility continuing.
- Management cited higher dairy, packaging, energy and grain costs, partly offset by lower cocoa and nut costs. Pricing, hedging and productivity measures may not fully offset input-cost increases, and pricing actions can lag cost changes.
- The company expected liquidity sources to remain adequate. Approximately $829 million of long-term debt was scheduled to mature over the following 12 months. After quarter-end, the company borrowed $714 million under a new revolving facility to fund a debt tender; it retired $570 million of notes on April 17, 2018. The related extinguishment loss was to be finalized in Q2.
- The planned Keurig–Dr Pepper merger was expected to close in mid-2018, subject to regulatory requirements. Mondelez expected to hold a 13%–14% interest in the combined company and continue equity-method accounting.
- Risks highlighted include currency volatility and possible highly inflationary accounting in Argentina, Brexit, commodity prices, U.S. tax-reform implementation, collective bargaining at eight U.S. facilities, business disruption and cyber risks, and the execution of restructuring initiatives.
- Contingencies include a disputed Indian excise-tax matter: an order confirmed taxes and penalties of 5.8 billion rupees (about $90 million), with additional notices covering 4.9 billion rupees (about $75 million) in taxes plus potential penalties and interest. The company is contesting the claims. It also faces CFTC and related class-action litigation over historical wheat futures trading; the filing says the outcome cannot be predicted. Management believed legal matters would not ultimately materially harm results, but noted adverse outcomes could be material.
Most important facts for investors to verify
- How much of reported revenue, operating-income and EPS growth reflects currency, derivative mark-to-market gains, shipment timing and other nonrecurring items versus underlying performance.
- Whether pricing and productivity can offset continued commodity-cost inflation without further weakening volumes or margins.
- Progress on the restructuring program, including remaining costs, cash requirements and realized savings.
- Final U.S. tax-reform accounting and the resulting effective tax rate and transition-tax obligations.
- Debt, commercial-paper usage, scheduled maturities and capital returns, particularly alongside planned capital expenditures.
- Developments in the Indian excise-tax dispute, wheat-related litigation and the Keurig Dr Pepper transaction.