Kraft Foods Inc. Form 10-Q Summary
Filing identity: The supplied filing is for Kraft Foods Inc., not a filing under the name Mondelez International, Inc. It covers the quarter ended June 30, 2009, and reports unaudited second-quarter and first-half results. Unless noted, amounts are in millions of dollars. Prior-period figures were restated for accounting and presentation changes and to show Post cereals as discontinued operations.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net revenue | $10,162 | $10,804 | $19,558 | $20,850 |
| Gross profit | $3,665 | $3,868 | $6,930 | $7,169 |
| Operating income | $1,531 | $1,423 | $2,799 | $2,490 |
| Continuing-operations earnings | $829 | $678 | $1,491 | $1,225 |
| Net earnings attributable to Kraft Foods | $827 | $745 | $1,487 | $1,344 |
| Diluted EPS | $0.56 | $0.49 | $1.00 | $0.87 |
- Revenue declined 5.9% in Q2 and 6.2% in the first half. Foreign exchange was the largest headwind: 8.1 percentage points in Q2 and 8.0 points for the half. Higher pricing partly offset currency and, in the first half, weaker volume/mix.
- Gross margin was approximately 36.1% in Q2 versus 35.8% a year earlier; operating margin was approximately 15.1% versus 13.2%. Operating income rose despite lower revenue, mainly on higher pricing, lower restructuring costs, and lower divestiture losses.
- First-half operating cash flow was $1,720 versus $1,349. Capital expenditures were $474 versus $590; cash dividends paid were $855. Cash increased to $1,731 from $1,244 at year-end 2008.
- At June 30, total debt was $20.2 billion, versus $20.3 billion at year-end; debt-to-capitalization was 0.45 versus 0.48. Current assets were $11,688 and current liabilities $10,303, a current ratio of about 1.13. The $4.5 billion revolving facility had no borrowings; effective capacity was about $4.4 billion after a bank’s bankruptcy-related commitment reduction.
Changes, business drivers, and unusual items
- Pricing more than offset higher input costs at the consolidated level. Management reported first-half commodity costs about $420 million above the prior year, with increases in grains, oils, cocoa, sugar, meat, and packaging partly offset by lower dairy costs. Commodity prices were expected to remain volatile.
- Q2 revenue was supported by higher pricing and slightly favorable volume/mix; first-half volume/mix was unfavorable. Europe and Developing Markets revenue fell sharply in reported dollars, substantially reflecting currency effects. U.S. Convenient Meals grew revenue and operating income; U.S. Snacks operating income declined, partly due to raw material costs and the pistachio-product recall. North American Foodservice revenue was affected by weaker restaurant traffic.
- The completed 2004–2008 restructuring program had incurred $3.0 billion of pretax charges and was expected to produce $1.4 billion of cumulative annualized savings. By June 30, $1.6 billion had been paid, about 16,000 positions eliminated, and $399 million remained accrued. In Q2, Kraft reversed $35 million of prior restructuring charges after selling a Spanish plant and recorded a $17 million divestiture loss.
- Q2 included a $9 million impairment of an investment in Norway and $56 million of first-half non-recurring costs for the Kraft Foods Europe reorganization. The Q2 effective tax rate was 32.0%, including $37 million of net tax benefits; the first-half rate was 32.4%, including $62 million of net tax benefits.
- Effective January 2009, Kraft changed U.S. inventory accounting from LIFO to average cost and restated prior periods. The change reduced reported Q2 2009 earnings by $17 million, or $0.01 per share, and first-half earnings by $35 million, or $0.02–$0.03 per share depending on EPS measure; it did not affect operating cash flow. Excise-tax presentation and segment cost allocations also changed, with prior periods reclassified.
Outlook, liquidity, and risks
- Management raised 2009 diluted EPS guidance to at least $1.93 from at least $1.88, citing year-to-date performance alongside incremental marketing and cost-saving investments. Full-year effective tax-rate guidance remained 31.5%.
- Management expected full-year capital expenditures to be in line with 2008’s $1.4 billion and planned further 2009 pension contributions of approximately $20 million to U.S. plans and $80 million to non-U.S. plans. A $750 million debt maturity was due in November 2009, to be funded with operating cash or commercial paper.
- In July 2009, Kraft announced its intention to redeem at par a $200 million, 7% debenture due November 2011; it expected an approximately $14 million loss on early extinguishment.
- Key disclosed risks include currency movements, volatile input costs, pricing and competition, private-label products, supply and demand disruptions, product mix, international operations, indebtedness, regulatory or manufacturing issues, litigation, and tax-law changes. The company said ordinary-course legal matters were not expected to materially affect results. Third-party guarantees were $30 million; guarantees related to Kraft’s own performance totaled $270 million.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting. System and European-organization transitions were ongoing.
Important facts for investors to verify
- Confirm the issuer and entity scope: this is Kraft Foods Inc.’s 2009 filing, despite the request metadata naming Mondelez International, Inc.
- Assess how much of earnings growth came from recurring operations versus restructuring reversals, divestiture comparisons, hedge gains, and tax benefits.
- Review organic volume/mix, pricing sustainability, currency exposure, and whether pricing can continue to offset commodity inflation.
- Track execution of the European reorganization, remaining restructuring accruals and cash costs, and the effect of the pistachio recall and weaker foodservice demand.
- Evaluate debt maturities, liquidity-facility renewal before its April 2010 expiry, pension funding needs, and delivery against the raised EPS outlook.