Mondelez International, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Unless stated otherwise, amounts are in millions of U.S. dollars. Comparisons are with Q1 2012. The company retained its global snacks and other food and beverage businesses after spinning off Kraft Foods Group on October 1, 2012; the prior-year comparison includes Kraft Foods Group as discontinued operations.
Financial results and liquidity
- Revenue: Net revenue was $8,744, up 0.9%. Organic net revenue, a non-GAAP measure, increased 3.8% to $8,910, reflecting volume/mix growth of 2.5 percentage points and pricing of 1.3 points. Foreign currency reduced reported revenue by $197 (2.2 points); divestitures reduced it by $65, partly offset by $12 from the Morocco acquisition.
- Profit and margins: Gross profit was $3,242 versus $3,195; gross margin was approximately 37.1% versus 36.9%. Operating income declined 7.6% to $834 and operating margin fell to 9.5% from 10.4%. Net earnings attributable to Mondelez were $568 versus $813. The prior-year figure included $480 of discontinued-operation earnings. Continuing-operations diluted EPS rose to $0.32 from $0.19; total diluted EPS was $0.32 versus $0.46. Non-GAAP Operating EPS was $0.34 versus $0.31.
- Cash flow: Operating activities used $385, compared with $851 used in Q1 2012. Investing activities used $298, including $119 net cash paid for the Morocco acquisition; capital expenditures were $235. Financing activities used $993. Cash declined $1,716 during the quarter to $2,759.
- Debt and liquidity: Total debt was $18,501 at March 31, down from $19,425 at year-end; debt-to-capitalization was 0.37 versus 0.38. The company repaid $750 of notes at maturity using cash. It had no borrowings under its $4.5 billion revolving facility, which expires in April 2015, and reported $203 of short-term borrowings. Approximately $3.3 billion of long-term debt matures over the next 12 months. Management expects to fund maturities through operating cash, commercial paper, or additional debt and believes available sources will meet liquidity needs.
Changes and business drivers
- Reported revenue growth was modest despite 3.8% organic growth, principally because of currency headwinds and prior-year divestitures. Higher input costs were essentially offset by pricing, but increased overhead and selling expenses weighed on operating income. Adjusted Operating Income declined 4.0% on a constant-currency basis and 12.3% as reported, per the company’s non-GAAP measure.
- Results varied by segment: revenue increased in Latin America, Asia Pacific, EEMEA, and North America, but declined in Europe. Segment operating income fell 43.6% in Latin America and 55.8% in EEMEA; it rose 6.8% in Asia Pacific and 14.9% in North America, and declined 4.7% in Europe. The EEMEA comparison included a $55 gain on a Russia property sale in Q1 2012.
- Effective January 1, 2013, the company reorganized reporting into five segments: Latin America, Asia Pacific, EEMEA, Europe, and North America; prior periods were recast. It also changed the Europe segment’s consolidation date, with no material reported impact.
- Interest and other expense fell to $279 from $487, principally because Q1 2012 included $134 of Spin-Off costs in interest expense. The 2013 effective tax rate was negative 3.4%, including $125 of favorable discrete tax items; the prior-year rate was 18.5%. These items materially affect period-to-period earnings comparisons.
Outlook, commentary, and risks
- Management maintained its expectation that 2013 Organic Net Revenue growth would be at the low end of its long-term 5%–7% target. It raised 2013 Operating EPS guidance to $1.55–$1.60, reflecting a portion of favorable discrete tax items. Guidance uses 2012 average exchange rates and includes an estimated $0.04 adverse impact from Venezuela’s devaluation.
- The company said commodity prices and cost volatility were expected to continue through the rest of 2013, particularly for packaging, grains, and oils; it cited pricing, manufacturing-cost reductions, and overhead control as responses. It had achieved approximately $800 of annual Cadbury integration cost savings in 2012, ahead of its schedule, against a stated target of approximately $750 annually by end-2013.
- The company recorded a $54 unfavorable foreign-currency charge from Venezuela’s devaluation and approximately $7 of additional unfavorable pretax currency impacts. It expected approximately $100 of Spin-Off costs in 2013. Its retained portion of the 2012–2014 restructuring program was estimated at $925, of which $154 had been incurred; total program costs were approved at $1.5 billion. The Cadbury integration program had incurred approximately $1.3 billion of its estimated $1.5 billion charges.
- Contingencies include an Indian excise-tax show-cause notice seeking approximately $46 of tax plus approximately $46 of penalties and interest, which the company intends to contest; an ongoing U.S. and Indian investigation concerning a Cadbury India facility; and an unresolved arbitration dispute with Starbucks. Management said it did not expect the ultimate costs of legal matters to materially affect financial results. The company and related entities also guaranteed $1.0 billion of third-party debt due October 2013 and agreed to indemnify Kraft Foods Group for its subsidiary’s guarantee obligation.
- Other identified risks include volatile input costs, pricing and competition, customer and supplier changes, product quality or recalls, global operating and economic conditions, regulation and litigation, and foreign-exchange exposure. Management reported no material change in previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Assess reported earnings separately from discontinued operations, non-GAAP adjustments, and the $125 of favorable discrete tax items; verify the reconciliation and durability of the $1.55–$1.60 Operating EPS outlook.
- Track organic growth versus reported growth, currency effects, pricing, volume/mix, and margin performance—especially in Latin America and EEMEA—and compare segment results on the recast basis.
- Review liquidity and refinancing plans for the approximately $3.3 billion of maturities over the next 12 months, alongside operating cash flow, cash balances, and the $1.0 billion third-party guarantee due in October 2013.
- Monitor Venezuela currency and operating exposure, continuing commodity-cost pressure, restructuring and Spin-Off spending, and the outcome or potential exposure from the Indian tax notice and legal matters.