Mondelez International, Inc. — Q1 2015 Form 10-Q
Business context and period: Global snack food and beverage company reporting unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Figures are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $7,762 | $8,641 | -10.2% |
| Gross profit / margin | $2,941 / 37.9% | $3,204 / 37.1% | Profit -8.2% |
| Operating income / margin | $811 / 10.4% | $843 / 9.8% | -3.8% |
| Net earnings attributable to Mondelez | $324 | $163 | +98.8% |
| Diluted EPS | $0.19 | $0.09 | +111.1% |
| Operating cash flow | $(282) | $(577) | Use narrowed |
| Capital expenditures | $439 | $326 | +$113 |
| Cash and equivalents | $1,835 | $1,631 at Dec. 31, 2014 | +$204 |
| Total debt | $18,705 | $16,700 at Dec. 31, 2014 | +$2,005 |
Management’s non-GAAP measures showed organic net revenue of $8,969, up 3.8%; adjusted operating income of $1,072, up 1.8% (19.1% at constant currency); and adjusted EPS of $0.41, up 5.1% (25.6% at constant currency). The company reported that higher pricing added 6.5 percentage points to organic revenue growth, while volume/mix reduced it by 2.7 points. Unfavorable currency reduced reported revenue growth by 14.5 points.
Gross margin and operating margin percentages above are calculated from reported figures. Q1 operating cash flow was negative despite improved year-over-year cash use; cash flow included substantial noncash debt-extinguishment and coffee-hedge items.
Material changes and segment performance
- Currency and geography: Revenue fell in all segments except North America. Europe revenue declined 16.4%, EEMEA 17.1%, Latin America 7.3%, and Asia Pacific 5.7%; North America increased 0.9%. Management attributed the overall reported decline primarily to the stronger U.S. dollar.
- Underlying revenue: Organic growth was driven by pricing and Power Brands, which grew 5.9%. Emerging markets grew 10.8% and accounted for all organic growth. Pricing elasticity and exits of some low-margin products contributed to unfavorable volume/mix.
- Profitability: Adjusted operating income growth reflected pricing, productivity and lower overhead, offset by higher input costs, weaker volume/mix and currency. Reported operating income included $224 million of 2014–2018 restructuring and implementation costs.
- Debt and financing: The company issued euro- and sterling-denominated notes and Swiss-franc notes, and tendered $2.5 billion of higher-coupon U.S.-dollar debt. The transactions generated a $713 million loss on extinguishment and related expenses. Weighted-average debt interest rate was 3.1%, down from 4.3% at year-end 2014; debt-to-capitalization rose to 0.43 from 0.38.
- Equity returns: The company repurchased $1.5 billion of shares and paid $249 million in dividends. Approximately $1.6 billion remained under its repurchase authorization.
Outlook, commentary, risks and unusual items
- Outlook: No specific full-year revenue or EPS guidance is provided in the supplied filing text. Management expected 2015 capital expenditures of up to $1.8 billion and a slightly higher aggregate commodity-cost environment with continued price volatility.
- Coffee transactions: Mondelez expected the planned combination of most of its coffee business with D.E Master Blenders to close in Q3 2015, subject to approvals and other conditions. It expected approximately €4 billion in cash and a roughly 49% interest in the new company. The transaction remained subject to EU antitrust review. Coffee-related currency hedges generated $311 million realized and $240 million unrealized gains in Q1; the unrealized gain was recognized in earnings. The company reported an additional $296 million realized gain when it monetized hedges in April, after quarter-end.
- Restructuring and acquisitions: The 2014–2018 restructuring program has a stated $3.5 billion cost, with most charges expected in 2015 and 2016 and completion targeted by year-end 2018. Enjoy Life Foods was acquired for $81 million. The planned Vietnam biscuit acquisition, with consideration expected up to $596 million, was expected to begin closing in mid-2015.
- Currency exposure: The filing describes significant volatility in Venezuela, Argentina, Russia and Ukraine. Venezuela contributed $218 million of Q1 revenue; Mondelez recorded an $11 million remeasurement loss there. Further exchange-rate changes or restrictions could cause significant losses. Cash of $313 million in Venezuela was described as restricted in accessibility, though management did not expect this to materially impair overall liquidity.
- Liquidity and maturities: Current liabilities were $16.5 billion versus current assets of $11.9 billion. The company reported an undrawn $4.5 billion revolving facility and said it expected operating cash, financing capacity and authorized borrowing to meet needs. It identified $2.179 billion of long-term debt maturities over the next 12 months.
- Legal matters: Indian authorities confirmed tax and penalty demands of approximately $94 million relating to a facility; the company planned to appeal and continued to contest additional claims. The CFTC filed a wheat-market complaint in April 2015, followed by related class-action complaints. The ultimate outcomes and exposure were uncertain; management did not expect legal matters generally to have a material effect, but said it expected to predominantly bear monetary payments connected with the CFTC action.
- Controls: Disclosure controls were deemed ineffective at March 31 because of a continuing material weakness in income-tax accounting controls. Management reported remediation work and additional review procedures, and stated the financial statements fairly present the reported periods.
- Other unusual items: Comprehensive loss attributable to Mondelez was $1.566 billion, driven mainly by currency translation losses. A North America accounting-calendar change added $39 million to revenue and $19 million to operating income in Q1; prior periods were not revised. Q1 effective tax rate was 26.6%, including $25 million of net discrete tax expense; the estimated 2015 annual effective tax rate was 20.5%.
Important facts for investors to verify
- Reconcile GAAP EPS of $0.19 with adjusted EPS of $0.41, particularly the debt-extinguishment loss, restructuring charges and coffee-hedge gains excluded or adjusted in non-GAAP measures.
- Track whether organic growth, pricing and volume/mix trends persist as currency translation continues to weigh on reported revenue and earnings.
- Confirm completion, regulatory clearance, proceeds and final accounting for the JDE coffee transaction, including the effects of subsequent hedge settlements.
- Monitor restructuring spending and benefits, capital expenditure against the up-to-$1.8 billion plan, and the effect on operating cash flow and leverage.
- Assess refinancing of near-term maturities, commercial-paper reliance, liquidity, and compliance with the revolving-credit covenant.
- Follow developments in Venezuela and other exposed markets, the India tax appeal, CFTC and class-action proceedings, and remediation of the income-tax controls material weakness.