Business context and reporting period
This is Kraft Foods Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2012. The filing identifies the registrant as Kraft Foods Inc., not Mondelez International, Inc.; investors should verify the company and filing identity. Kraft reported packaged-food operations across North America, Europe and developing markets. The quarter is compared with the three months ended March 31, 2011.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenues | $13.093 billion | $12.573 billion | +4.1% |
| Organic net revenues (non-GAAP) | $13.292 billion | $12.482 billion | +6.5% |
| Gross profit | $4.667 billion | $4.636 billion | +$31 million |
| Operating income | $1.691 billion | $1.646 billion | +2.7% |
| Net earnings attributable to Kraft Foods | $813 million | $799 million | +1.8% |
| Diluted EPS | $0.46 | $0.45 | +2.2% |
| Operating EPS (non-GAAP) | $0.57 | $0.52 | +9.6% |
| Net cash used in operating activities | $851 million | $986 million | $135 million less cash used |
| Capital expenditures | $335 million | $237 million | +$98 million |
Gross margin was approximately 35.6%, versus 36.9% a year earlier; reported operating margin declined to 12.9% from 13.1%. Higher pricing supported revenue and operating results, but raw-material inflation, restructuring and Spin-Off costs weighed on margins. The effective tax rate fell to 28.0% from 33.2%, helping net earnings rise despite lower pretax earnings ($1.138 billion versus $1.200 billion) and higher interest and other expense ($553 million versus $446 million).
At March 31, 2012, cash and cash equivalents were $1.852 billion. Total debt was $28.341 billion, versus $26.931 billion at year-end; the reported debt-to-capitalization ratio was 0.43. Current assets of $17.693 billion were below current liabilities of $19.298 billion. Short-term borrowings increased to $3.320 billion from $182 million. The company reported $4.5 billion of undrawn revolving credit capacity and a separate $4.0 billion undrawn facility for Kraft Foods Group. Cash dividends paid were $514 million; dividends declared were $0.29 per share for the quarter.
Material changes and segment trends
- Organic revenue growth reflected 5.5 percentage points from higher net pricing and 1.0 point from favorable volume/mix. Foreign currency reduced reported growth by 1.6 points, and the cessation of the Starbucks packaged-coffee business reduced it by 0.8 point.
- Developing Markets revenue increased 8.5% and segment operating income rose 29.6%; Europe revenue increased 4.5% and operating income rose 24.7%. Pricing and volume/mix were key drivers, with currency a partial offset.
- North American results were mixed. U.S. Cheese, Grocery and Snacks operating income increased, while U.S. Beverages fell 39.1%, Convenient Meals fell 11.4%, and Canada & N.A. Foodservice fell 17.9%. Management cited input costs, volume/mix and restructuring costs among the factors affecting these businesses.
- Operating cash use remained substantial, although it improved year over year. Management attributed the improvement primarily to increased cash earnings and lower pension contributions, partly offset by working-capital and other payment timing.
Outlook, management commentary and risks
- Management maintained 2012 guidance for organic net revenue growth of approximately 5% and Operating EPS growth of at least 9% on a constant-currency basis. These are non-GAAP measures.
- Full-year capital expenditures were expected to be approximately $2 billion. The company planned further 2012 pension contributions of about $40 million to U.S. plans and $307 million to non-U.S. plans.
- The proposed tax-free Spin-Off of the North American Grocery Business was targeted for completion before year-end 2012, subject to conditions including IRS and SEC processes and Board approval. The filing cautions that timing, completion and terms are not assured.
- The Board approved $1.7 billion of one-time Spin-Off-related and optimization costs and $0.4 billion in capital expenditures. The $1.7 billion includes approximately $1.1 billion for the 2012–2014 restructuring program and $0.6 billion for transaction and transition costs. Management separately estimated $400–$800 million of financing and related costs for debt redistribution and credit ratings. First-quarter charges included $39 million of transaction/transition costs, $78 million of restructuring charges, $1 million of implementation costs, and a $130 million loss related to interest-rate swaps following a change in anticipated debt timing.
- Management expected approximately $800 million in annual Cadbury-related cost savings by the end of 2013, with total integration charges of about $1.5 billion through 2013; $1.2 billion had been incurred by quarter-end.
- Management cited continued commodity-price volatility and inflation, weak consumer and category growth, foreign-exchange movements, competition, indebtedness and Spin-Off execution as risks. It expected to address cost increases through pricing, manufacturing savings and overhead controls.
- The Starbucks packaged-coffee dispute was pending arbitration, scheduled to begin July 11, 2012. Kraft sought contractual remedies; Starbucks counterclaimed. The filing reports publicly disclosed claims of up to $62.9 million by Starbucks and Kraft’s disclosed potential claim of up to $2.9 billion, including contractual premium and interest; outcomes were uncertain.
- The company said routine legal matters were not expected to have a material adverse effect, and reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective at March 31, 2012.
Important facts for investors to verify
- Confirm that this Kraft Foods Inc. filing is the intended filing for the requested company and period.
- Track Spin-Off approvals, timing, final debt allocation, financing costs and the separation’s effect on each business’s liquidity and credit ratings.
- Assess whether pricing can continue to offset commodity inflation without further volume or margin deterioration.
- Compare progress against 2012 organic revenue and constant-currency Operating EPS guidance, noting the non-GAAP definitions and reconciliations.
- Monitor operating cash flow, working capital, upcoming debt maturities and the company’s planned capital expenditures and pension funding.
- Follow the Starbucks arbitration and related claims, as well as actual restructuring, transition and Cadbury integration costs versus estimates.