Mondelez International, Inc. annual report, FY2010

Filing identity and reporting period

The supplied filing is Kraft Foods Inc.’s Form 10-K for the fiscal year ended December 31, 2010, filed February 28, 2011—not a filing under the name Mondelez International, Inc. The requested “2010 Q4” is covered in the filing’s quarterly data, but the filing primarily reports full-year results.

Business context and financial results

Kraft manufactured and marketed packaged food and beverages across approximately 170 countries. Its 2010 portfolio and reported results changed substantially following the acquisition of Cadbury, completed in full by June 1, 2010, and the March 2010 sale of its North American frozen-pizza business.

Fourth-quarter 2010 revenue was $13.773 billion, continuing-operations earnings were $547 million, and net earnings attributable to Kraft were $540 million; diluted EPS was $0.31 from continuing operations and $0.31 overall.

Balance sheet and liquidity

At December 31, 2010, cash and cash equivalents were $2.481 billion, total debt was $28.724 billion (versus $18.990 billion a year earlier), and total assets were $95.289 billion. The debt-to-capitalization ratio was 0.44, versus 0.42. The company reported a $4.5 billion undrawn revolving credit facility expiring in November 2012 and said available operating cash, the facility, and authorized financing would meet expected needs. The facility requires minimum shareholders’ equity, excluding accumulated other comprehensive income or loss, of $28.6 billion; reported equity for this covenant was $39.7 billion.

Material changes versus prior period

• Revenue rose 27.0%, but the Cadbury acquisition contributed $9.143 billion, or 23.7 percentage points of growth. Organic growth was 3.7%, reflecting higher pricing and favorable volume/mix.
• Operating income rose 9.3%, while operating margin fell 1.9 percentage points to 11.5%. Higher input costs reduced operating income by $487 million; pricing and volume/mix partly offset that pressure. Cadbury integration and acquisition costs also weighed on results.
• Continuing-operations earnings fell 11.2% and continuing-operations diluted EPS fell 23.8%, with higher interest and other expense a major factor. Total net earnings increased partly because the frozen-pizza sale generated a $1.596 billion after-tax discontinued-operations gain, or $0.92 per diluted share.
• Operating cash flow declined by $1.336 billion; management cited taxes on the pizza divestiture, higher inventory, and acquisition-related financing effects. Investing cash use increased to $7.462 billion, principally reflecting the Cadbury purchase.
• Cadbury financing included $9.5 billion of senior notes issued at a weighted-average effective rate of 5.364%. Kraft also repurchased $1.5 billion principal amount of notes in December 2010, paying $1.596 billion including accrued interest.

Outlook, commentary, risks, and unusual items

• For 2011, management expected organic net revenue growth of at least 5%, or approximately 4% excluding accounting-calendar changes, and Operating EPS growth of 11%–13%. Management characterized the environment as challenging, with weak consumer and category growth and significant input-cost inflation.
• Management expected commodity costs to rise further in 2011. Aggregate commodity costs were about $1.0 billion higher in 2010 than in 2009. Pricing may not fully offset costs, particularly if consumers remain weak.
• The Cadbury integration program incurred $657 million of charges in 2010. Kraft expected approximately $1.5 billion of total integration charges over the first three years and at least $750 million of cost savings by the end of year three.
• The company reported a $115 million unfavorable 2010 currency impact associated with highly inflationary accounting and Venezuelan currency changes, and forecast another $25 million–$50 million negative operating impact in 2011.
• The frozen-pizza sale produced a $1.596 billion after-tax gain and included $1.2 billion of tax expense. Continuing-operations diluted EPS also included acquisition and integration charges and a $137 million deferred-tax-asset write-off tied to U.S. health-care legislation.
• Cadbury-related compliance reviews led to further investigations in certain jurisdictions. Kraft received an SEC subpoena in February 2011 concerning possible Foreign Corrupt Practices Act issues relating primarily to a Cadbury facility in India and said it was cooperating. The filing also describes ongoing arbitration with Starbucks over termination of a retail coffee agreement; a request for a preliminary injunction was denied and the appeal upheld that ruling.
• Other material risks include retailer concentration and bargaining power (Wal-Mart represented about 14% of 2010 revenue), competition from private-label products, foreign-exchange exposure, pension funding and assumptions, product-safety and regulatory matters, and execution of the Cadbury integration. Kraft identified five reporting units as more sensitive to changes in impairment assumptions, though all passed the 2010 first-step goodwill review.

Important facts for investors to verify

• Confirm the issuer and security being analyzed: this is a Kraft Foods Inc. 2010 10-K, not a filing bearing the Mondelez International, Inc. name.
• Separate recurring performance from transaction effects: assess organic growth and continuing-operations earnings apart from Cadbury’s partial-year contribution and the frozen-pizza disposal gain.
• Review whether the projected Cadbury savings and revenue synergies are being achieved relative to remaining integration costs and the stated $1.5 billion program estimate.
• Check debt, refinancing, interest expense, cash generation, and planned 2011 pension contributions (approximately $940 million) against actual subsequent results.
• Monitor commodity-cost pass-through, consumer volumes, Venezuelan currency developments, goodwill sensitivities, and the outcomes of the India FCPA investigation and Starbucks arbitration.
• Note that Kraft excluded Cadbury, representing 32% of year-end assets and 19% of annual revenue, from its 2010 internal-control assessment under the acquired-business transition guidance; management and the auditor otherwise reported effective controls.