Business context and reporting period
The supplied filing is Kraft Foods Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2009—not a filing by Mondelez International, Inc. It reports the three and nine months ended September 30, 2009, with comparative 2008 results. Kraft manufactured and marketed packaged foods in more than 70 countries and sold products in approximately 150.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net revenues | $9,803 | $10,401 | $29,361 | $31,251 |
| Gross profit | $3,541 | $3,305 | $10,471 | $10,474 |
| Operating income | $1,419 | $1,023 | $4,218 | $3,513 |
| Net earnings attributable to Kraft | $824 | $1,362 | $2,311 | $2,706 |
| Diluted EPS, continuing operations | $0.55 | $0.34 | $1.56 | $1.14 |
| Diluted EPS, total | $0.55 | $0.91 | $1.56 | $1.77 |
- Gross margin was approximately 36.1% in Q3 versus 31.8% a year earlier; operating margin was approximately 14.5% versus 9.8%. Nine-month gross and operating margins were approximately 35.7% and 14.4%, compared with 33.5% and 11.2%.
- Operating cash flow for the first nine months was $3,269, up from $2,529. Capital expenditures were $749; investing cash outflow was $700 and financing cash outflow was $961. Cash at September 30 was $2,996, versus $1,244 at year-end 2008.
- Total debt was approximately $20.7 billion, compared with $20.3 billion at year-end 2008; debt-to-capitalization was 0.45 versus 0.48. Cash less total debt was approximately $17.7 billion. The current ratio was approximately 1.08, based on current assets of $13,018 and current liabilities of $12,056.
- Interest and other expense, net, was $323 in Q3 and $915 for the nine months. Dividends paid in the first nine months were $1,284; the stated annualized dividend rate was $1.16 per share.
Material changes versus the prior comparable period
- Revenue declined 5.7% in Q3 and 6.0% year to date. Foreign exchange was the largest reported drag: 5.6 percentage points in Q3 and 7.2 points year to date. Q3 volume/mix added 0.7 points; year-to-date volume/mix reduced revenue by 0.8 points, partly offset by 2.9 points from higher pricing.
- Operating income increased 38.7% in Q3 and 20.1% year to date, despite lower revenue. Management attributed the improvement principally to lower input costs in Q3, higher pricing year to date, improved hedge results, and lower restructuring, impairment and divestiture charges. These comparisons include substantial effects from unusual items.
- Total net earnings and EPS fell mainly because 2008 included the Post cereals split-off gain: discontinued operations added $845 million in Q3 2008 and $968 million in the first nine months of 2008. Excluding that comparison, diluted EPS from continuing operations increased 61.8% in Q3 and 36.8% year to date.
- The company changed U.S. inventory accounting from LIFO to average cost effective January 1, 2009 and revised prior periods. The change reduced reported nine-month 2009 continuing earnings by $41 million versus LIFO, with no impact on operating cash flow. It also revised excise-tax presentation and certain cost classifications without a material earnings effect.
- Segment performance was mixed: Q3 revenue fell in Europe, Developing Markets, U.S. Cheese, U.S. Snacks and Canada/N.A. Foodservice, while U.S. Convenient Meals grew. Segment operating income increased across most segments; U.S. Snacks and Canada/N.A. Foodservice were comparatively weak year to date.
Outlook, commentary, risks and unusual items
- Kraft raised 2009 diluted EPS guidance to at least $1.97 from at least $1.93, citing strong year-to-date profit performance and an expected full-year effective tax rate of approximately 30.0%, down from a prior expectation of 31.5%. Guidance also included increased brand marketing investment and estimated costs related to a possible Cadbury transaction.
- Kraft had proposed a Cadbury combination, valued at approximately £10.2 billion (about $16.7 billion) on the proposal terms. Cadbury’s board rejected the proposal; Kraft said it remained interested. The proposal depended on satisfactory financing, maintaining investment-grade credit ratings and other conditions. The U.K. Takeover Panel deadline to make an offer or withdraw was November 9, 2009. As of November 3, Moody’s and Fitch had short- and long-term ratings on negative watch, and S&P had its long-term rating on negative watch, due to the proposal.
- Management said available operating cash, a roughly $4.4 billion revolving credit facility supporting commercial paper, and authorized financing should provide sufficient liquidity. The facility expired in April 2010 and Kraft intended to renegotiate it. A minimum-net-worth covenant required $20.0 billion; reported net worth was $25.1 billion. Management expected to meet the covenant.
- Commodity prices remained volatile. Management reported aggregate commodity costs approximately $180 million higher for the first nine months, despite costs approximately $240 million lower in Q3, and expected continued volatility through year-end. Foreign exchange, input costs, pricing, competition, indebtedness and possible transaction financing or failure to complete the Cadbury proposal were identified risks.
- Unusual items included a $14 million loss on redemption of a $200 million debenture; $143 million of Q3 net tax benefits and $205 million for the first nine months, primarily related to tax settlements and expirations; and a $35 million reversal of prior restructuring charges partly offset by a $17 million plant-divestiture loss. The completed 2004–2008 restructuring program had incurred $3.0 billion in pretax charges; $366 million remained accrued at quarter-end.
- Legal proceedings and investigations arose in the ordinary course; management did not expect their ultimate resolution to materially affect results. Third-party guarantees had a maximum potential payment of $30 million; separate guarantees related to Kraft’s own performance totaled $281 million. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Confirm the issuer identity: this is a Kraft Foods Inc. filing, notwithstanding the Mondelez request metadata.
- Assess how much of the operating-income and continuing-EPS improvement reflects recurring performance versus lower restructuring and impairment charges, hedge gains, tax benefits and other comparison items.
- Review the Cadbury proposal’s financing, rating implications, transaction costs and potential effect on leverage, dividends and the 2009 EPS outlook.
- Monitor revenue trends excluding foreign exchange and divestitures, particularly volume/mix in Europe, Developing Markets, snacks and foodservice, alongside the sustainability of pricing and lower input costs.
- Check debt maturities, renewal of the revolving facility, pension funding needs, commodity and currency exposures, and the remaining restructuring cash commitments.