10-QPeriod: Q1 FY2004

Mondelez International, Inc. Quarterly Report for Q1 Ended Mar 31, 2004

Filed May 10, 2004For Securities:MDLZ

Summary

Mondelez International, Inc. (MDLZ) (reported as Kraft Foods Inc. in this filing) reported its first-quarter 2004 results, demonstrating a challenging period marked by significant restructuring charges that impacted net earnings. Net revenues saw a modest increase year-over-year, driven by favorable currency movements and acquisitions, but were pressured by operational challenges. The company initiated a substantial three-year restructuring program aimed at optimizing its cost structure and global scale, which contributed $279 million in pre-tax charges during the quarter, alongside an additional $29 million for intangible asset impairment. Despite these headwinds, the company's core operations are a focus, with efforts to build brand value, shift its portfolio towards health and wellness, and expand in developing markets. Investors should note the impact of these restructuring costs on near-term profitability, while keeping an eye on the long-term strategic benefits anticipated from these initiatives. The company also provided an updated outlook for 2004, now expecting full-year diluted EPS at the lower end of its previously guided range due to higher commodity costs, particularly for cheese.

Key Highlights

  • 1Net revenues increased by 4.5% to $7.69 billion for the three months ended March 31, 2004, compared to $7.36 billion in the prior year period, primarily driven by favorable currency movements ($306 million) and acquisitions.
  • 2Operating income significantly decreased by 33.5% to $989 million, largely due to $308 million in pre-tax asset impairment and exit costs related to a new restructuring program and intangible asset impairments.
  • 3Net earnings decreased by 34.0% to $560 million ($0.33 per diluted share) from $848 million ($0.49 per diluted share) in the prior year period, heavily impacted by the aforementioned restructuring and impairment charges.
  • 4The company announced a new three-year restructuring program in January 2004, expecting up to $1.2 billion in pre-tax charges, with an estimated $750 million to $800 million in 2004, including plant closures and workforce reductions.
  • 5Effective tax rate decreased to 31.9% from 35.1% due to the reversal of tax provisions no longer required.
  • 6Cash provided by operating activities increased to $494 million from $315 million in the prior year, due to improved working capital management.
  • 7The company repurchased approximately 4.9 million shares of Class A common stock for $163 million during the quarter and maintained a debt-to-equity ratio of 0.47.

Frequently Asked Questions

The primary driver for the decrease in net earnings was the significant pre-tax asset impairment and exit costs totaling $308 million. These charges are a result of a new multi-year restructuring program announced in January 2004, which includes plant closings and workforce reductions, as well as an intangible asset impairment charge related to certain businesses and brands. Excluding these charges, the underlying operational performance would appear stronger, though still impacted by cost pressures.

The restructuring program significantly impacted the first quarter's operating income and net earnings due to $279 million in associated pre-tax charges. The company anticipates these charges will continue over the next three years, with an estimated $750 million to $800 million expected in 2004. This program is expected to lead to future cost savings, but it weighed heavily on the current period's results and contributed to the company's revised 2004 full-year EPS outlook being set at the lower end of its previous guidance.

The company maintained a debt-to-equity ratio of 0.47 and a debt-to-capitalization ratio of 0.32 as of March 31, 2004. Total debt was approximately $13.5 billion. The company reported an increase in cash provided by operating activities to $494 million, driven by improved working capital management. It believes its cash from operations and existing credit facilities provide sufficient liquidity for its needs.

The company is experiencing higher commodity costs, particularly for dairy and cheese, which are impacting profitability. To mitigate these pressures, the company is implementing pricing adjustments, increasing promotional spending, and focusing on cost savings through its restructuring program. The company also utilizes commodity forward contracts to hedge against price fluctuations for certain raw materials.