01—Abstract
Summary
Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.
This is Kraft Foods Inc.'s Form 10-K for fiscal 2003, filed March 12, 2004.
The filing identifies the registrant as Kraft Foods Inc., not Mondelez International (MDLZ), which adopted that name in 2012. Kraft reported 2003 net revenues of $31.0 billiona, up 4.3% from $29.7 billion, driven mostly by favorable currency (+$730 million) and higher pricing (+$471 million). Volume rose only 0.7%, and operating income fell 1.7% to $6.0 billion because of higher marketing, administration and research costs, fixed manufacturing costs and commodity inflation.
Net earnings rose 2.4% to $3.48 billionb, and diluted EPS was $2.01, up 2.6%. Lower interest expense ($665 million versus $847 million) and a lower effective tax rate (34.9%) supported earnings despite weaker operations. The most important forward-looking item is a three-year restructuring program announced in January 2004.
It targets up to 20 plant exits or closures and about 6,000 position eliminations, with up to $1.2 billionc in pre-tax charges (an estimated $750-800 million in 2004) and roughly $400 million in annual savings by 2006. Management plans to reinvest those savings in brand-building. The company also expects $500-600 million of higher 2004 spending across its businesses, so near-term margin relief will depend on how much of the savings is reinvested.
Balance sheet and governance risks are significant. Total debt was $13.5 billiond at year-end, with a debt-to-equity ratio of 0.47. Credit rating agencies downgraded Kraft after a $10.1 billion judgment against Philip Morris USA, its parent Altria's tobacco subsidiary, even though Kraft was not a party to it.
Altria Group holds about 84.6% of economic ownership and 97.9% of voting power through Class B shares, which limits minority shareholder influence. Walmart accounted for about 12% of revenues, and the five largest customers accounted for about 27%.
02—Key points
Key Highlights
- Net revenues rose 4.3% to $31.01 billion in 2003, but volume grew only 0.7%; growth came mainly from currency (+$730M) and pricing (+$471M).
- Operating income fell 1.7% to $6.01 billion as higher marketing, fixed manufacturing and benefit costs outpaced revenue gains.
- Net earnings increased 2.4% to $3.48 billion; diluted EPS was $2.01, up 2.6%, helped by lower interest expense ($665M versus $847M in 2002).
- A three-year restructuring program targets up to 20 plant exits, about 6,000 job cuts, up to $1.2B in pre-tax charges and roughly $400M in annual savings by 2006.
- Total debt was $13.5B at year-end (debt-to-equity 0.47), with 2003 net debt repayments of about $1.4B; credit ratings were cut after the Philip Morris judgment despite no direct exposure.
- Altria Group controls 97.9% of voting power and about 84.6% of shares outstanding, and Kraft's board approved a 20% dividend increase to $0.72 annualized.
- Customer concentration is high: Walmart was about 12% of 2003 revenues and the top five customers about 27%. Pending matters include a Canadian anti-dumping probe on frozen pizza and an SEC staff recommendation regarding the Fleming matter.
03—Questions
Frequently Asked Questions
Why did operating income decline even though revenues grew?
Revenue growth of $1.29 billion was mostly from currency and price increases rather than volume. Operating income fell $103 million, mainly because of $110 million in higher fixed manufacturing costs (including benefit costs), $104 million in higher marketing, administration and research spending, $94 million in net unfavorable costs after pricing (driven by dairy, coffee and cocoa), and $66 million in unfavorable volume/mix. Lower one-time charges partly offset these pressures.
What is the restructuring program, and what will it cost and save?
Announced in January 2004, the program aims to leverage global scale, lower the cost structure and optimize capacity. It involves exiting or closing up to 20 plants and eliminating about 6,000 positions. Kraft expects up to $1.2 billion in pre-tax charges over three years, including $750-800 million in 2004, with about half requiring cash. Capital spending of about $140 million is planned, and savings are expected to be $120-140 million in 2004 and about $400 million annually by 2006, which management intends to reinvest in brands.
How does Altria's control affect minority shareholders?
Altria holds 100% of the Class B shares, which carry ten votes each, and about 276.6 million Class A shares. That gives Altria 97.9% of the combined voting power while it owns about 84.6% of the equity. Altria can therefore control board elections and major corporate decisions. Kraft's credit ratings are also influenced by Altria's ratings, and Kraft is subject to shared services and tax arrangements with Altria, with about $318 million in related-party billings in 2003.
Why were Kraft's credit ratings lowered, and how serious is that?
After a $10.1 billion judgment against Philip Morris USA in March 2003, Moody's, S&P and Fitch lowered Kraft's ratings (S&P's long-term rating went to BBB+ from A-), even though Kraft was not a party to the case. Kraft temporarily lost commercial paper market access and faced higher borrowing costs. Its debt agreements do not require accelerated repayment on a downgrade, and it had $4.5 billion in credit lines, with $2.2 billion of commercial paper outstanding at year-end.
What legal or regulatory risks should investors watch?
Three matters stand out: (1) a Canadian investigation into alleged dumping of U.S.-made frozen self-rising crust pizza (Delissio), with a preliminary CBSA decision due around April 1, 2004, and possible duties for five years if injury is found; (2) an SEC staff recommendation that the company face a civil action for aiding and abetting Fleming's accounting; and (3) a $31 million claim in Morocco, where Kraft may seek recovery from the seller. Management says none of these is expected to have a material adverse effect on the company's financial position.
04—Continue