Business context and reporting period
The filing is Kraft Foods Inc.’s Form 10-K for the fiscal year ended December 31, 2009, with unaudited quarterly data including the fourth quarter. Although the request identifies Mondelez International, Inc., the supplied filing is for Kraft Foods Inc.; it does not report results under the Mondelez name. Kraft was a global packaged-food company operating in approximately 160 countries, with snacks, beverages, cheese, convenient meals and grocery products.
Financial performance and position
Amounts are in U.S. dollars; annual figures are for fiscal 2009 unless stated otherwise.
| Metric | 2009 | 2008 |
|---|---|---|
| Net revenue | $40.386 billion | $41.932 billion |
| Organic revenue growth | 1.5% | 6.8% |
| Operating income | $5.524 billion | $3.843 billion |
| Operating margin | 13.7% | 9.2% |
| Continuing-operations pretax earnings | $4.287 billion | $2.603 billion |
| Net earnings attributable to Kraft | $3.021 billion | $2.884 billion |
| Diluted EPS | $2.03 | $1.90 |
| Cash from operating activities | $5.084 billion | $4.141 billion |
| Capital expenditures | $1.330 billion | $1.367 billion |
| Free cash flow (non-GAAP) | $3.754 billion | $2.774 billion |
Fourth-quarter 2009 revenue was $11.025 billion and net earnings attributable to Kraft were $710 million; diluted EPS was $0.48. Fourth-quarter 2008 revenue was $10.681 billion, continuing-operations earnings were $103 million and diluted EPS from continuing operations was $0.07.
- Revenue and earnings: Reported revenue fell 3.7%, chiefly from unfavorable currency translation (4.5 percentage points) and divestitures (0.7 points); organic revenue rose 1.5%, reflecting higher pricing of 1.9 points, partly offset by lower volume/mix. Net earnings rose 4.8%; continuing-operations earnings and diluted EPS from continuing operations increased substantially from 2008.
- Profitability: Operating income increased 43.7%. The improvement included lower restructuring charges, favorable pricing and hedging changes, and lower impairment and divestiture losses. Higher marketing, administration and research costs and unfavorable currency partly offset gains. Lower input costs contributed; aggregate commodity costs were about $150 million below 2008.
- Balance sheet and liquidity: Cash was $2.101 billion; current assets were $12.454 billion and current liabilities $11.491 billion. Total debt was $18.990 billion, down from $20.251 billion; long-term debt was $18.024 billion. The debt-to-capitalization ratio declined to 0.42 from 0.48. Kraft reported a $4.5 billion undrawn revolving facility and said operating cash, credit access and authorized financing should meet expected needs.
- Other measures: Total assets were $66.714 billion and total equity $25.972 billion. Dividends declared were $1.16 per share; cash dividends paid were $1.712 billion.
Material changes versus the prior comparable period
- Revenue declined despite higher organic revenue, as the stronger U.S. dollar and divestitures reduced reported sales.
- Operating margin recovered to 13.7% from 9.2%, partly because 2008 included $989 million of restructuring charges; 2009 included an $85 million reversal of prior restructuring accruals. Kraft also recorded $318 million of costs for cost-saving initiatives in 2009.
- 2008 net earnings included $1.045 billion from discontinued operations, including a $926 million gain on the Post cereals split-off. Thus, 2009 total net earnings growth was much lower than the increase in continuing-operations earnings.
- Effective January 1, 2009, Kraft changed U.S. inventory costing from LIFO to average cost and conformed prior periods. The change reduced 2009 reported diluted EPS by $0.04 versus LIFO. The filing also changed excise-tax presentation; it said the reclassification did not materially affect reported revenue or cost of sales.
- Segment reporting and European operations were reorganized in 2009. U.S. Cheese, Kraft Foods Europe and Developing Markets illustrate mixed performance: U.S. Cheese revenue fell 10.0% while operating income rose 18.5%; Europe revenue fell 9.9% while segment operating income rose to $785 million from $182 million.
Outlook, commentary, risks and unusual items
- Base-business outlook: Management targeted organic revenue growth of at least 4% and the high end of its 7–9% long-term EPS growth objective. It aimed for productivity above 4% of cost of goods sold and operating margins in the mid-teens by 2011.
- Cadbury: The acquisition became effective February 2, 2010, after year-end. By February 15, acceptances represented 91.02% of ordinary shares; Kraft said it was pursuing compulsory acquisition of remaining shares. The filing valued the offer at approximately $19.4 billion. Kraft issued $9.5 billion of senior unsecured notes in February to help finance the transaction and expected to issue approximately 260 million shares. Management targeted at least $675 million in annual pretax cost savings by the end of 2012, with approximately $1.3 billion in one-time implementation cash costs, and approximately $0.05 of 2011 cash EPS accretion. These are targets, not reported results.
- Frozen pizza sale: Kraft agreed to sell its North American frozen pizza business to Nestlé for $3.7 billion, subject to customary conditions and regulatory clearances, with closing expected in first-quarter 2010. The business generated 2009 revenue of $1.632 billion and net earnings of $218 million, excluding specified stranded overheads. Management estimated an annual diluted EPS reduction of about $0.05, assuming proceeds were used for debt reduction and share repurchases.
- Risks and contingencies: Key exposures include commodity-price volatility, currency movements, competition and private-label substitution, retailer concentration (Wal-Mart represented about 16% of revenue), consumer demand and product mix, acquisition integration and increased debt. Kraft expected 2010 commodity costs to remain volatile. It estimated a $75–$100 million adverse effect on 2010 operating results from Venezuela’s currency devaluation and highly inflationary accounting. Pension-plan assets were $8.9 billion against projected obligations of $10.6 billion; management expected 2010 contributions of about $240 million, excluding Cadbury. EU competition investigations and other ordinary-course legal matters remained unresolved; Kraft said their ultimate costs were not expected to materially affect results, but outcomes were uncertain.
- Credit and unusual items: Following the Cadbury financing, ratings agencies downgraded Kraft’s long-term debt ratings to investment-grade lower tiers (BBB- at S&P and Fitch; Baa2 at Moody’s, with a negative outlook). 2009 also included $225 million of net tax benefits, a $14 million loss on early debt redemption, and a $50 million charge for certain European legal matters.
Important facts for investors to verify
- Whether reported revenue trends and volume/mix improve, and how much margin expansion is attributable to sustainable operations versus lower restructuring charges, hedging and other comparability items.
- Cadbury’s final purchase accounting, financing and share issuance, realization and timing of synergies, integration costs, and required confectionery divestitures in Poland and Romania.
- Completion and proceeds of the frozen-pizza sale, its discontinued-operations presentation, stranded overheads and the use of proceeds.
- Post-acquisition leverage, debt ratings, covenant headroom and liquidity needs, including pension contributions and debt maturities.
- Developments in EU competition investigations, tax audits, environmental matters, pension funding and Venezuela’s currency and accounting effects.