Business context and reporting period
This is Kraft Foods Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The filing identifies Kraft Foods Inc. as the registrant; it does not identify the company as Mondelez International, Inc.
Kraft manufactures and markets packaged foods globally. Results include Cadbury from February 2, 2010, following its acquisition, and classify the North American frozen pizza business as discontinued operations after its sale to Nestlé on March 1, 2010.
Key financial metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended September 30, 2010 | Three months ended September 30, 2009 | Nine months ended September 30, 2010 | Nine months ended September 30, 2009 |
|---|---|---|---|---|
| Net revenues | $11,863 | $9,397 | $35,434 | $28,157 |
| Gross profit | $4,321 | $3,378 | $13,104 | $9,990 |
| Operating income | $1,519 | $1,339 | $4,426 | $3,970 |
| Continuing-operations earnings | $760 | $774 | $1,948 | $2,158 |
| Net earnings attributable to Kraft Foods | $754 | $824 | $3,574 | $2,311 |
| Diluted EPS from continuing operations | $0.43 | $0.52 | $1.13 | $1.45 |
| Diluted EPS, total | $0.43 | $0.55 | $2.09 | $1.56 |
- Gross margin was approximately 36.4% for Q3 2010 versus 36.0% a year earlier, and 37.0% for the first nine months versus 35.5%.
- Operating margin was approximately 12.8% for Q3 2010 versus 14.2% a year earlier, and 12.5% for the first nine months versus 14.1%.
- Operating cash flow was $1,224 for the first nine months, down from $3,269. Investing cash use was $6,811; financing provided $5,888. Cash at September 30 was $2,288.
- Current assets were $15,824 and current liabilities $13,626, a current ratio of approximately 1.16. Total debt was approximately $30.0 billion; debt-to-capitalization was 0.46, compared with 0.42 at year-end 2009.
- Dividends declared were $0.29 per share in Q3 and $0.87 for the first nine months, unchanged from 2009 on a per-share basis.
Material changes versus the prior comparable period
- Q3 reported revenue rose 26.2%, but organic revenue increased 2.5%; the Cadbury acquisition contributed $2,453 million and foreign currency reduced revenue by $214 million. For the first nine months, reported revenue increased 25.8%, while organic revenue grew 2.6%; Cadbury contributed $6,376 million.
- Q3 operating income rose 13.4%, supported by pricing and Cadbury, but continuing-operations earnings fell 1.8% and continuing-operations diluted EPS fell 17.3%. Higher input costs, integration spending, foreign exchange and increased interest expense weighed on results.
- For the first nine months, operating income rose 11.5%, but continuing-operations earnings declined 9.7% and continuing-operations diluted EPS declined 22.1%. Total net earnings and EPS increased largely because of the $1,596 million after-tax gain on the frozen pizza sale; that gain included $1.2 billion of tax expense.
- Cadbury was acquired for a stated value of approximately $18.5 billion. Kraft issued 262 million shares and paid cash; the acquisition added $9,174 million of goodwill and $12,769 million of intangible assets. The purchase price allocation was substantially complete but still subject to finalization.
- Debt increased from $19.0 billion at December 31, 2009 to $30.0 billion at September 30, 2010, principally reflecting acquisition financing. Kraft issued $9.5 billion of notes at a weighted-average effective rate of 5.364%.
- Operating cash flow declined substantially, with management citing taxes paid on the frozen pizza divestiture, higher inventories and acquisition-related financing fees. Capital expenditures rose to $1,020 million from $749 million.
Outlook, commentary, risks and unusual items
- Kraft confirmed 2010 guidance of 3% to 4% organic revenue growth and Operating EPS of at least $2.00. Operating EPS is a non-GAAP measure that excludes specified acquisition, integration, financing and deferred-tax items.
- Management expected at least $750 million of annualized Cadbury cost savings by the end of year three, with approximately $1.5 billion of integration charges over the first three years after acquisition. Integration charges were $284 million for the first nine months.
- Management expected full-year capital expenditures of approximately $1.7 billion and projected a $100 million to $150 million adverse impact on 2010 operating results from Venezuelan hyperinflation accounting and currency devaluation. Commodity prices were expected to remain volatile.
- Management said operating cash, available credit and authorized financing were expected to meet liquidity needs. The $4.5 billion revolving facility was undrawn; Kraft reported compliance with its minimum equity covenant. The board had authorized $12 billion of long-term financing, all remaining available at quarter-end.
- Other items to monitor include the $1.193 billion of unrecognized tax benefits, approximately $140 million of cumulative Cadbury-related tax exposure disclosed in Developing Markets, pension obligations and estimated remaining 2010 pension contributions of about $120 million. Routine legal matters were not expected by management to materially affect results; a separate EPA matter was settled for $102,900.
- Risk factors were reported as unchanged from the 2009 Form 10-K. Cited risks include commodity-cost volatility, pricing and competition, substantial indebtedness, global operations, Cadbury integration and realizing expected synergies, and tax-law changes.
Important facts for investors to verify
- Confirm the filing entity and issuer identity: this source is Kraft Foods Inc.’s 2010 10-Q, not a filing under the Mondelez International, Inc. name.
- Separate acquisition-driven reported growth and the frozen-pizza divestiture gain from underlying performance; review organic revenue and continuing-operations EPS alongside GAAP results.
- Assess whether Cadbury integration costs, expected savings, final purchase accounting and the related tax exposures develop as management anticipated.
- Monitor debt, interest expense, operating cash flow, inventory levels, planned financing and the company’s ability to maintain covenant compliance.
- Compare the 2010 guidance with subsequent results, particularly given Venezuelan currency exposure, commodity volatility and the stated non-GAAP exclusions.