01—Abstract
Summary
Summary of the 10-K filed March 14, 2002. Cited figures are marked; the original filing is the authoritative source.
Kraft Foods Inc.'s first annual report as a public company covers fiscal 2001, a year transformed by the December 2000 Nabisco acquisition ($15.2 billiona purchase price, plus about $4.0 billion of assumed Nabisco debt) and the June 2001 IPO, which raised $8.4 billion net and was used to repay Philip Morris notes.
Reported net revenue rose 27.7% to $33.9 billionb and operating companies income rose 26.9% to $6.0 billion, but the comparison is distorted by Nabisco's inclusion from January 1, 2001. On a pro forma basis, operating companies income grew 8.9% and pro forma diluted EPS grew 19.8% to $1.21. Reported diluted EPS fell 15.2% to $1.17 because of heavy goodwill amortization ($962 million) and interest expense ($1.44 billion, up from $597 million).
The balance sheet and capital structure changed sharply. Total debt fell to $16.0 billionc from $25.8 billion, and the debt-to-equity ratio improved to 0.68 from 1.84. Philip Morris still holds about 83.9% of the economic interest and 97.7% of the voting power through its Class B shares, so Kraft remains a controlled company.
The 2002 outlook depends on Nabisco synergies ($300 milliond in 2002, $475 million in 2003, and $600 million annually thereafter), roughly $200 to $300 million of integration charges, and the removal of goodwill amortization under SFAS 142 from January 1, 2002. Several risks remain, including commodity cost swings (dairy and cocoa), currency weakness against the dollar, Argentina's economic weakness, and the ongoing litigation.
For investors, the central questions are how quickly Nabisco synergies and the accounting change lift reported EPS, and how much of the reported 2001 growth reflects a single large acquisition rather than organic performance. Pro forma and underlying figures suggest steady organic growth of about 2 to 3% in volume and mid-single-digit operating income growth, though these figures exclude the 53-week effects and divestitures.
02—Key points
Key Highlights
- Reported operating revenues rose 27.7% to $33.9 billion, driven primarily by the Nabisco acquisition. Pro forma revenue declined slightly, reflecting currency headwinds and lower coffee prices.
- Operating companies income reached $6.0 billion, up 26.9% reported and 8.9% pro forma, with Nabisco synergies and productivity gains offsetting currency drag.
- Reported diluted EPS was $1.17, down 15.2%, due to Nabisco-related goodwill amortization of $962 million and interest expense that more than doubled to $1.44 billion. Pro forma diluted EPS rose 19.8% to $1.21.
- The June 2001 IPO raised $8.4 billion net, which was used to repay Philip Morris notes. Total debt fell to $16.0 billion from $25.8 billion, and shareholders' equity rose to $23.5 billion.
- Philip Morris retains about 83.9% of the economic interest and 97.7% of the voting power, which limits minority shareholder influence.
- Nabisco synergies are targeted at $300 million in 2002, $475 million in 2003, and $600 million per year thereafter, with $200 to $300 million in total integration charges.
- Accounting change: SFAS 142 eliminates most goodwill amortization from January 1, 2002, which the company estimates would have added roughly $1.76 to 2001 diluted EPS on a pro forma basis.
03—Questions
Frequently Asked Questions
Why did reported EPS decline in 2001 even though operating income rose sharply?
Reported diluted EPS fell 15.2% to $1.17 because the Nabisco acquisition brought roughly $962 million of goodwill and intangible amortization and about $1.44 billion of interest and other debt expense, up from $597 million. Operating income rose 21.7%, but these below-the-line costs absorbed most of the gain. Pro forma EPS, which assumes a full year of Nabisco and the IPO proceeds used for debt repayment, rose 19.8% to $1.21.
How much debt does Kraft carry, and is the balance sheet improving?
Total debt was $16.0 billion at December 31, 2001, down from $25.8 billion a year earlier, after the IPO proceeds repaid $8.4 billion of Philip Morris notes. The debt-to-equity ratio fell to 0.68 from 1.84. About $4.9 billion of debt is due in 2002, to be covered by short-term borrowings, refinancing, and operating cash flow. The company holds $6.8 billion of credit facilities, of which about $6.5 billion was undrawn.
What drove the growth in the business, and what is organic growth?
Reported growth is mostly acquisition-driven. Nabisco added about $7.6 billion of 2000 pro forma revenue. On a pro forma basis, volume rose 2.5% and operating companies income rose 8.9%, helped by new product launches, developing-market volume, and Nabisco cost synergies. Pro forma revenue fell slightly because of currency and lower coffee prices, and the 2000 comparison included an extra 53rd week.
What are the main risks flagged in the filing?
Key risks include commodity cost volatility (higher dairy and cocoa costs in 2001, lower coffee), currency weakness against the U.S. dollar in Europe and Asia, economic deterioration in Argentina, and the ability to deliver Nabisco integration savings and close about 7,500 positions' worth of facilities. Litigation includes National Cheese Exchange antitrust class actions, environmental matters including Superfund sites, and a Nicaraguan DBCP lawsuit seeking about $720 million, which the company says it will defend with third-party indemnity.
Is the dividend sustainable, and how does Philip Morris affect investors?
The company declared two quarterly dividends of $0.13 per share in 2001, for an annualized rate of $0.52, about 22% of 2001 diluted EPS. Philip Morris controls 97.7% of the vote, so minority holders have little ability to influence board decisions or a future sale of the company. Kraft also has $5.0 billion of notes outstanding to Philip Morris due in 2009, with no prepayment penalty, which the company may repay using external debt proceeds.
04—Continue