Filing summary
Issuer and period: The supplied filing is Kraft Foods Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed February 27, 2012. Although the request metadata names Mondelez International, Inc., that name does not appear as the registrant in this filing; the filing describes a planned separation into a global snacks business and a North American grocery business.
Business context and reporting period
Kraft manufactured and marketed packaged food and beverage products in about 170 countries, with approximately 126,000 employees and 220 manufacturing and processing facilities. Its 2011 reporting segments covered North American beverages, cheese, convenient meals, grocery, snacks and foodservice, as well as Europe and Developing Markets. The 2011 results include a 53rd week and accounting-calendar changes; management estimated these added about $920 million to revenue and $150 million to operating income.
Financial performance
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Net revenue | $54.365 billion | $49.207 billion | +10.5%; organic revenue +6.6% to $51.533 billion |
| Operating income | $6.657 billion | $5.666 billion | +17.5%; reported operating margin 12.2%, versus 11.5% |
| Continuing-operations earnings | $3.547 billion | $2.495 billion | +42.2% |
| Diluted EPS, continuing operations | $1.99 | $1.44 | +38.2% |
| Net earnings attributable to Kraft | $3.527 billion | $4.114 billion | -14.3%; 2010 included the frozen-pizza divestiture gain |
| Diluted EPS, total | $1.99 | $2.39 | -16.7%; 2010 included $0.95 from discontinued operations |
| Operating EPS (non-GAAP) | $2.29 | $2.02 | +13.4% |
| Operating cash flow | $4.520 billion | $3.748 billion | Higher earnings and no prior-year pizza-sale tax payment helped; inventory, interest, integration spending and pension contributions were offsets |
| Capital expenditure | $1.771 billion | $1.661 billion | 2012 estimate: approximately $2 billion |
| Adjusted free cash flow (non-GAAP) | $3.244 billion | $3.263 billion | Nearly flat; measure excludes voluntary pension contributions |
| Total debt at year-end | $26.931 billion | $28.724 billion | Debt-to-capitalization ratio 0.43, versus 0.44 |
At December 31, 2011, cash and equivalents were $1.974 billion, current assets $16.202 billion and current liabilities $18.445 billion. The company had an undrawn $4.5 billion revolving facility maturing in 2015 and reported $3.654 billion of long-term debt due in 2012. It expected to fund upcoming maturities through operating cash, commercial paper and additional debt. Dividends declared were $1.16 per share for the year.
For the fourth quarter of 2011, revenue was $14.688 billion, continuing-operations earnings were $842 million and diluted EPS was $0.47. The fourth-quarter tax result benefited from lower-than-projected taxes on non-U.S. earnings and an $85 million true-up.
Material changes and notable items
- Revenue growth reflected 6.0 percentage points from pricing and 0.6 points from volume/mix, plus foreign currency, the Cadbury acquisition and calendar effects. Divestitures, including the Starbucks packaged-coffee business for reporting purposes, reduced growth.
- Commodity costs rose approximately $2.6 billion year over year. Management’s operating-income bridge showed $2.914 billion from higher pricing offset by $2.540 billion from higher input costs.
- Cadbury integration charges were $521 million in 2011; cumulative charges were about $1.2 billion against an expected total of about $1.5 billion. Management raised its expected cost savings by the end of the third year after acquisition to approximately $800 million from $750 million.
- The 2010 frozen-pizza sale generated $3.7 billion in proceeds and a $1.596 billion after-tax discontinued-operations gain, materially affecting comparisons of total earnings and EPS.
- The company announced plans for a tax-free spin-off of the North American grocery business, targeted before year-end 2012, subject to regulatory approvals, an IRS ruling and other conditions. The filing warned that timing or terms could change.
Outlook, risks and contingencies
For 2012, management forecast organic revenue growth of approximately 5%, including up to a one-percentage-point negative impact from North American product pruning, and Operating EPS growth of at least 9% on a constant-currency basis. Management cited weak consumer and category growth alongside significant input-cost inflation. It expected commodity volatility and the elevated cost environment to continue.
- Key business risks include further commodity and packaging cost increases, inability to pass costs through pricing, competition and retailer brands, customer consolidation, changing consumer preferences, product safety or recalls, foreign-exchange exposure, and operating risks in developing markets.
- Wal-Mart represented approximately 12% of 2011 revenue; the five largest customers together represented about 21%.
- A dispute with Starbucks over the packaged-coffee business was pending arbitration; Starbucks had counterclaimed for unspecified damages. The company was seeking contractual remedies.
- The SEC had subpoenaed the company in an FCPA investigation primarily concerning a Cadbury facility in India. Kraft said it was cooperating; the outcome was uncertain. The filing also described continuing Cadbury compliance investigations in certain jurisdictions, including India.
- A German antitrust matter concerning instant cappuccino was resolved with a €2.2 million fine (about $3 million) for the subsidiary. The company said it did not expect the ultimate costs of its legal matters to materially affect financial results.
- Defined-benefit pension obligations were sensitive to market returns and discount rates. The combined pension deficit was $3.624 billion at year-end, and 2011 other comprehensive losses included $2.3 billion of pre-tax actuarial losses. Management estimated 2012 pension contributions of about $480 million in its liquidity discussion.
- The company reported 68 active U.S. Superfund-related actions and an immaterial environmental remediation accrual. It did not expect environmental matters to materially affect results.
PricewaterhouseCoopers issued an unqualified audit opinion on the financial statements and internal control over financial reporting; management also concluded internal controls were effective at year-end.
Important facts for investors to verify
- Confirm the issuer identity and whether the intended subject is Kraft Foods Inc. or the later Mondelez International, Inc.; this filing is Kraft’s 2011 10-K.
- Separate organic growth and Operating EPS from GAAP results, and account for the 53rd week, accounting-calendar changes, currency, Cadbury and divestitures when comparing periods.
- Assess whether pricing can continue to offset commodity inflation without worsening volume, mix or market share.
- Review the timing, tax treatment, approvals and separation costs of the proposed spin-off, and the effect on each business’s debt, cash flow and dividend capacity.
- Track 2012 debt maturities and refinancing plans, pension funding and expense, and progress toward Cadbury integration savings.
- Monitor the Starbucks arbitration, the SEC/FCPA investigation and any changes in management’s assessment of legal or tax contingencies.