Business context and reporting period
Mondelēz International, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2015. The company manufactures and markets snack and beverage products across five geographic segments. Unless noted, amounts below are in U.S. dollars; financial statement figures are in millions.
On July 2, 2015, after quarter-end, Mondelēz completed the combination of its wholly owned coffee businesses with D.E Master Blenders 1753 to form Jacobs Douwe Egberts (JDE). Mondelēz received €3.8 billion in cash, a 43.5% JDE interest, a $275 million receivable, and $76 million reimbursement of separation costs. Coffee results through June 30 remain in the reported period.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $7,661 | $8,436 | $15,423 | $17,077 |
| Gross profit | $3,066 | $3,105 | $6,007 | $6,309 |
| Operating income | $841 | $957 | $1,652 | $1,800 |
| Net earnings attributable to Mondelēz | $406 | $622 | $730 | $785 |
| Diluted EPS | $0.25 | $0.36 | $0.44 | $0.46 |
| Operating margin | 11.0% | 11.3% | 10.7% | 10.5% |
- Underlying growth: Organic Net Revenue, a non-GAAP measure, increased 4.3% in Q2 and 4.0% in the first half. Pricing rose 6.6% and 6.5%, respectively, partly offset by unfavorable volume/mix of 2.3 and 2.5 percentage points. Currency reduced reported revenue by $1.148 billion in Q2 and $2.399 billion in the first half.
- Adjusted results: Adjusted Operating Income increased 10.2% in Q2 to $1.165 billion and 6.0% in the first half to $2.237 billion; on a constant-currency basis, increases were 24.8% and 22.0%. Adjusted EPS rose 17.5% to $0.47 in Q2 and 11.4% to $0.88 in the first half; constant-currency gains were 37.5% and 30.4%. These are company-defined non-GAAP measures.
- Cash flow: First-half operating cash flow was $571 million versus $368 million. Investing activities provided $583 million, including $1.235 billion from coffee-transaction currency-hedge settlements and $219 million net proceeds from the AGF divestiture. Capital expenditures were $790 million, so operating cash flow less capex was negative $219 million. Financing activities used $297 million. Cash ended at $1.958 billion, including $442 million classified as held for sale.
- Debt and liquidity: Total debt was $19.337 billion at June 30, up from $16.700 billion at year-end; cash was $1.958 billion. Short-term borrowings rose to $4.483 billion from $1.305 billion. Debt-to-capitalization was 0.44 versus 0.38, and the weighted-average debt rate was 3.1% versus 4.3%. The $4.5 billion revolving facility was undrawn; the company reported compliance with its equity covenant.
- Balance sheet: Current assets were $11.888 billion and current liabilities $16.788 billion; both included coffee-business assets and liabilities held for sale. The filing reports total assets of $65.118 billion and total liabilities of $40.384 billion.
Material changes versus the prior comparable period
- Reported revenue fell 9.2% in Q2 and 9.7% in the first half, primarily due to currency translation, despite positive organic revenue growth. A stronger U.S. dollar was a significant reported-results headwind.
- Q2 attributable earnings declined 34.7% and diluted EPS 30.6%; first-half attributable earnings declined 7.0% and diluted EPS 4.3%. By contrast, adjusted earnings measures increased, reflecting pricing, productivity and hedging-related comparisons.
- Currency translation reduced first-half revenue by $2.399 billion and adjusted operating income by $337 million. Higher pricing outpaced higher input costs, while unfavorable volume/mix reflected price elasticity and exits of certain low-margin products.
- Q2 operating margin slipped to 11.0% from 11.3%; first-half operating margin improved to 10.7% from 10.5%. Adjusted operating margin rose to 15.2% in Q2 and 14.5% in the first half, according to management.
- Europe and EEMEA reported notable first-half segment revenue declines of 16.5% and 15.3%, respectively; North America revenue was broadly flat. First-half segment operating income rose in Latin America and North America but fell in Asia Pacific, EEMEA and Europe.
Outlook, management commentary, risks and unusual items
- Management expects 2015 capital expenditures of up to $1.8 billion and a slightly higher aggregate commodity-cost environment with continued price volatility. It expects to fund capital spending from operations. No specific full-year revenue or EPS guidance is stated in the supplied filing text.
- The 2014–2018 restructuring program has a total planned cost of $3.5 billion, including approximately $2.5 billion cash costs and $1 billion non-cash costs, plus up to $2.2 billion of capital expenditures. Most charges are expected in 2015 and 2016; completion is expected by year-end 2018. Charges and implementation costs totaled $406 million in the first half of 2015.
- Unusual items included a $708 million first-half loss on early extinguishment of debt; $185 million of first-half costs preparing coffee businesses for divestiture; restructuring and implementation charges; and volatile coffee-transaction currency-hedge gains and losses. The coffee divestiture’s final sale adjustments and investment valuation remained subject to completion after closing.
- Venezuela remained exposed to exchange-rate and operating restrictions. The company used the SICAD rate of 12 bolivars per U.S. dollar for its reported Venezuelan results; $388 million of local cash was described as having limited accessibility. Further exchange-rate changes could cause significant currency gains or losses.
- Legal matters include an ongoing U.S. FCPA investigation relating primarily to an Indian facility; Indian excise-tax demands, penalties and interest that the company is contesting; and CFTC and related class-action claims alleging wheat-market manipulation and trading violations. The company stated that outcomes cannot be predicted and that it did not expect legal matters, individually or in aggregate, to materially affect financial results.
- Controls: Management concluded disclosure controls were not effective at June 30, 2015 because of a continuing material weakness in income-tax accounting controls. The company reported remediation efforts and additional procedures for this filing, but said the new controls still required sustained operation and evaluation.
- Subsequent capital-allocation actions included a July 2015 13% increase in the quarterly dividend to $0.17 per share and a $6.0 billion increase in share-repurchase authorization, bringing total authorization to $13.7 billion through December 31, 2018.
Important facts for investors to verify
- Reconcile reported revenue and earnings trends with currency effects, pricing, volume/mix, and the company’s non-GAAP adjustments.
- Track the final coffee-divestiture consideration, JDE investment valuation, sale adjustments, and subsequent equity-method earnings treatment.
- Assess debt growth, short-term borrowing levels, upcoming maturities, and cash availability, including restrictions on Venezuelan cash.
- Monitor restructuring costs, expected savings, implementation spending, and the company’s stated capital-expenditure outlook.
- Review developments in the income-tax control material weakness and the Indian tax, FCPA, CFTC and related litigation matters.