Why did reported EPS jump so much in 2002, and which figure reflects the underlying trend?

Reported diluted EPS rose to $1.96 from $1.17, but much of that increase reflects the January 1, 2002 adoption of SFAS 142, which stopped goodwill and indefinite-lived intangible amortization. Pro forma EPS, which adjusts 2001 for that change and other items, rose 15.4% to $2.02 for 2002 from $1.75 for 2001. The pro forma figure is the better gauge of underlying performance.

How exposed is Kraft to the Altria Group tobacco litigation?

The filing states that Kraft is not a party to the $10.1 billion judgment against Philip Morris USA and has no direct exposure to that litigation. However, Kraft's credit ratings are linked to Altria's, so both companies' ratings were placed on watch with negative implications in March 2003. The company says none of its debt agreements require accelerated repayment if its ratings decline, but its short-term borrowing costs are expected to rise.

What are the main headwinds Kraft expects in 2003?

Management expects higher benefit costs, reflecting lower pension asset returns, a lower discount rate of 6.5%, and higher retiree medical costs, to reduce 2003 EPS by about $0.07. Stock compensation costs from new restricted stock awards are expected to reduce EPS by about $0.02. Political unrest in Venezuela and currency devaluations in Latin America are also expected to weigh on results. Partly offsetting these are additional Nabisco synergies of $140-150 million.

How concentrated is Kraft's customer base and product portfolio?

Wal-Mart Stores accounted for about 12.2% of 2002 net revenues, and the five largest customers accounted for about 26.9%. By product, cheese (18%), biscuits (15%), and coffee (12%) were the largest contributors to net revenues. North America generated about 72% of 2002 revenues, with Kraft Foods North America accounting for about 79% of operating companies income.

What is the Nabisco acquisition's impact on the balance sheet and the outlook?

Kraft acquired Nabisco in December 2000 for approximately $15.2 billion in cash, plus $4.0 billion of assumed debt, financed through notes payable to Altria. Goodwill and intangible assets total $36.4 billion, about 64% of total assets of $57.1 billion. Integration charges totaled $310 million, which the company says is slightly above its original estimate, and no further charges are expected. Management targets $600 million in annualized synergies by 2004, but the large intangible base means future impairment testing is an ongoing consideration.

MDLZ 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 25, 2003. Cited figures are marked; the original filing is the authoritative source.

Kraft Foods Inc. (the predecessor entity of today's Mondelez International, which carries the MDLZ ticker; Kraft traded as KFT in 2003) reported strong fiscal 2002 results.

Net revenues rose 1.7% to $29.7 billion^a, and operating income increased 25.2% to $6.1 billion. Reported net earnings more than doubled-to-nearly-tripled in a sense, rising 80.3% to $3.4 billion, or $1.96 per diluted share, versus $1.17 in 2001. The 2001 comparison was depressed by Nabisco-related goodwill amortization, so pro forma diluted EPS of $2.02 (up 15.4%) is the cleaner measure of underlying growth.

Pro forma operating companies income grew 5.5%, driven mainly by volume growth and favorable margins. The company achieved $425 million^b in annualized Nabisco cost synergies through 2002 and targets $600 million by 2004. The balance sheet remains heavily leveraged but is improving.

Total debt fell to $14.4 billion^c from $16.0 billion, largely due to prepayments of the 7.0% note owed to parent Altria Group, Inc. Shareholders' equity rose to $25.8 billion. Altria controls 97.8% of voting power and about 84.2% of economic ownership, which limits minority shareholder influence. Investors should also note the risks flagged in the filing: on March 21, 2003, rating agencies placed Altria's ratings on negative watch following a $10.1 billion judgment against its tobacco subsidiary, and Kraft's ratings were placed on watch as well.

Management expects higher short-term borrowing costs as a result. Management also guided to roughly $0.09^d per share of 2003 headwinds from higher benefit and stock compensation costs, and cited weak Latin American economies, particularly Argentina, Brazil, and Venezuela.

02—Key points

Key Highlights

Net revenues of $29.7 billion in 2002, up 1.7% from $29.2 billion in 2001; pro forma net revenues up 0.9%, driven by higher volume/mix and acquisitions.
Reported operating income of $6.1 billion, up 25.2% from $4.9 billion, reflecting the cessation of goodwill amortization under SFAS 142 and Nabisco integration benefits.
Reported diluted EPS of $1.96 vs. $1.17 in 2001 (up 67.5%); pro forma diluted EPS of $2.02, up 15.4%.
Nabisco integration delivered $425 million in annualized net cost synergies through 2002, with an additional $140-150 million expected in 2003 and a $600 million target by 2004.
Total debt reduced to $14.4 billion from $16.0 billion, including $3.85 billion of prepayments on the 7.0% note payable to Altria Group; $4.3 billion of debt matures in 2003.
Altria Group owns 97.8% of voting power and about 84.2% of economic interest; credit ratings were placed on negative watch in March 2003 after Altria's $10.1 billion tobacco judgment, implying higher short-term borrowing costs.
Quarterly dividend raised 15.4% to $0.15 per share in 2002 (annualized $0.60); $500 million share repurchase program authorized, with $170 million used in 2002.

03—Questions

Frequently Asked Questions

Why did reported EPS jump so much in 2002, and which figure reflects the underlying trend?
Reported diluted EPS rose to $1.96 from $1.17, but much of that increase reflects the January 1, 2002 adoption of SFAS 142, which stopped goodwill and indefinite-lived intangible amortization. Pro forma EPS, which adjusts 2001 for that change and other items, rose 15.4% to $2.02 for 2002 from $1.75 for 2001. The pro forma figure is the better gauge of underlying performance.
How exposed is Kraft to the Altria Group tobacco litigation?
The filing states that Kraft is not a party to the $10.1 billion judgment against Philip Morris USA and has no direct exposure to that litigation. However, Kraft's credit ratings are linked to Altria's, so both companies' ratings were placed on watch with negative implications in March 2003. The company says none of its debt agreements require accelerated repayment if its ratings decline, but its short-term borrowing costs are expected to rise.
What are the main headwinds Kraft expects in 2003?
Management expects higher benefit costs, reflecting lower pension asset returns, a lower discount rate of 6.5%, and higher retiree medical costs, to reduce 2003 EPS by about $0.07. Stock compensation costs from new restricted stock awards are expected to reduce EPS by about $0.02. Political unrest in Venezuela and currency devaluations in Latin America are also expected to weigh on results. Partly offsetting these are additional Nabisco synergies of $140-150 million.
How concentrated is Kraft's customer base and product portfolio?
Wal-Mart Stores accounted for about 12.2% of 2002 net revenues, and the five largest customers accounted for about 26.9%. By product, cheese (18%), biscuits (15%), and coffee (12%) were the largest contributors to net revenues. North America generated about 72% of 2002 revenues, with Kraft Foods North America accounting for about 79% of operating companies income.
What is the Nabisco acquisition's impact on the balance sheet and the outlook?
Kraft acquired Nabisco in December 2000 for approximately $15.2 billion in cash, plus $4.0 billion of assumed debt, financed through notes payable to Altria. Goodwill and intangible assets total $36.4 billion, about 64% of total assets of $57.1 billion. Integration charges totaled $310 million, which the company says is slightly above its original estimate, and no further charges are expected. Management targets $600 million in annualized synergies by 2004, but the large intangible base means future impairment testing is an ongoing consideration.

04—Continue

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