Business context and reporting period
This is Kraft Foods Inc.’s unaudited Form 10-Q for the three months ended March 31, 2011—not a filing under the Mondelez International name. Kraft manufactured and marketed packaged food products across North America, Europe and developing markets. Unless noted otherwise, financial amounts below are in millions of dollars.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net revenues | $12,573 | $11,318 |
| Gross profit | $4,636 | $4,089 |
| Operating income | $1,646 | $1,206 |
| Continuing-operations earnings | $802 | $249 |
| Net earnings attributable to Kraft Foods | $799 | $1,883 |
| Diluted EPS, continuing operations | $0.45 | $0.15 |
| Diluted EPS, including discontinued operations | $0.45 | $1.16 |
| Net cash used in operating activities | $(986) | $(5) |
| Cash and cash equivalents at quarter-end | $2,088 | $3,878 |
| Total debt at quarter-end | $30.0 billion | $28.7 billion at Dec. 31, 2010 |
Gross margin was approximately 36.9%, versus 36.1%; operating margin was approximately 13.1%, versus 10.7%. Reported revenue rose 11.1%; organic revenue, excluding acquisitions, divestitures, currency and calendar changes, increased 4.6% to $11.664 billion. Higher pricing contributed 3.7 percentage points and favorable volume/mix 0.9 points. Cadbury contributed $697 million of incremental revenue in the comparison.
Cash used in operations reflected pension contributions and working-capital needs, including inventory growth. First-quarter pension contributions were $634 million. Capital expenditures were $237 million. Current assets were $17.529 billion and current liabilities $19.779 billion at March 31. The reported debt-to-capitalization ratio was 0.45, versus 0.44 at year-end 2010.
Material changes versus the prior comparable period
- Operating income increased 36.5%; management’s non-GAAP underlying operating income rose 16.0% to $1.750 billion. Operating EPS, also non-GAAP, rose 6.1% to $0.52 from $0.49.
- Net earnings attributable to Kraft fell 57.6%, and diluted EPS fell to $0.45 from $1.16, principally because Q1 2010 included $1.01 per diluted share from the Frozen Pizza divestiture and discontinued operations. Continuing-operations diluted EPS increased to $0.45 from $0.15.
- Q1 2010 comparisons included Cadbury acquisition costs and financing fees; those costs reduced the prior-year comparison base for operating income. Q1 2011 included $104 million of Cadbury integration charges, versus $43 million in Q1 2010.
- Commodity costs were approximately $375 million higher than a year earlier, led by coffee, dairy and packaging. Higher pricing more than offset higher input costs overall, though the company said pricing did not preserve margins in certain segments.
- Operating cash use increased from $5 million to $986 million, driven mainly by higher pension contributions and inventory levels. Total debt increased from year-end, while cash declined.
Outlook, management commentary, risks and unusual items
- For 2011, management expected organic net revenue growth of at least 4% and Operating EPS of at least $2.20. These are company-defined non-GAAP measures.
- Management expected at least $750 million in annual Cadbury cost savings by the end of the third year after acquisition, alongside revenue synergies. Expected integration charges were approximately $1.5 billion over the first three years; $761 million had been incurred by March 31.
- Management expected commodity price volatility and elevated costs to continue through the rest of 2011. It forecast approximately $1.9 billion of full-year capital expenditures.
- The company expected $10 million to $30 million of 2011 operating-result impact from the prior-year Venezuelan bolivar devaluation; it recorded $18 million of unfavorable Venezuelan foreign-currency impacts in Q1.
- Starbucks terminated agreements relating to packaged coffee distribution effective March 1, 2011. Kraft disputed the action and initiated arbitration seeking remedies, including fair market value and a contractual premium; any damages would be recognized when proceedings are completed.
- Kraft’s German subsidiary agreed to an €18 million fine to resolve proceedings involving an exchange of competitively sensitive information. The company said it did not expect the ultimate costs of its legal matters, considered generally, to materially affect financial results.
- On April 1, 2011, Kraft entered into a new $4.5 billion, four-year revolving credit facility; none was drawn. It had a minimum-equity covenant of $28.6 billion and reported covenant equity of $40.1 billion at March 31.
- Management cited risks including commodity cost volatility, pricing and competition, indebtedness, global operations and tax-law changes. It reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Confirm the filing entity and period: the supplied document is Kraft Foods Inc.’s Q1 2011 10-Q, not a Mondelez International filing.
- Assess whether organic revenue and Operating EPS growth are sustainable, and review their non-GAAP definitions alongside GAAP results.
- Track input-cost inflation, the ability to pass costs through pricing, and volume/mix—especially in segments with shipment declines or margin pressure.
- Review operating cash generation, working-capital changes, pension funding, debt maturities and liquidity; Q1 operating cash flow was negative.
- Monitor Cadbury integration charges against expected total costs and whether targeted savings and revenue synergies are achieved.
- Follow the Starbucks arbitration and any potential recovery, as well as the €18 million German antitrust fine and other legal proceedings.
- Compare subsequent results with 2011 guidance, including the Venezuelan currency impact and planned capital expenditures.