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Kraft Foods Group, Inc. (NASDAQ:KRFT) operates food and beverage businesses in North America including convenient meals, refreshment beverages and coffee, cheese and other grocery products. The company reported earnings after the market closed on 13Feb14 and on the surface all the results were pedestrian with the company reporting earnings of $1.54 per share (in-line with estimates) on revenue of $4.59 billion (missing estimates by $40 million). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenues (millions)

4Q13

4Q12

Y/Y

Beverages

$ 597

$ 566

5%

Cheese

$ 1,079

$ 1,096

-2%

Refrigerated Meals

$ 746

$ 695

7%

Meals & Desserts

$ 671

$ 635

6%

Enhancers & Snack Nuts

$ 494

$ 491

1%

Canada

$ 541

$ 547

-1%

Other Businesses

$ 467

$ 462

1%

Total

$ 4,595

$ 4,492

2%

Compared to last year total revenue has increased 2%. Honestly there really isn't anything of interest to me in this particular portion of the earnings report. It seems like everything is chugging along at a slow rate which is great for a high-yielding dividend payer.

Income Statement

Income Statement (millions)

4Q13

4Q12

Y/Y

Net Revenues

$ 4,595

$ 4,492

2%

Cost of sales

$ 2,663

$ 3,327

-20%

Gross Profit

$ 1,932

$ 1,165

66%

Selling, general and administrative expenses

$ 409

$ 865

-53%

Asset impairment and exit costs

$ 9

$ 39

-77%

Operating income

$ 1,514

$ 261

480%

Interest and other expense

$ (124)

$ (129)

-4%

Royalty income from Mondelez International

$ -

$ -

N/A

Earnings before income taxes

$ 1,390

$ 132

953%

Provision for income taxes

$ 459

$ 42

993%

Net earnings

$ 931

$ 90

934%

Avg. basic outstanding shares

595

591

1%

Avg. diluted outstanding shares

600

596

1%

Earnings per basic shares

$ 1.56

$ 0.15

927%

Earnings per diluted shares

$ 1.55

$ 0.15

928%

Looking at the income statement at first glance is very appealing as you look at the bottom line and notice that earnings increased by 928% from last year! I'd like to sift through the income statement to see why that was the case. Cost of sales decreased by 20% due to expenses of $39 million in cost savings initiatives in 4Q13 while the company recorded expenses of $133 million in cost savings initiatives in 4Q12. $782 million of income related to market-based impacts of certain post-employment benefit plans were also recorded in 4Q13 while $225 million was recorded in 4Q12. Because cost of sales decreased by as much as it did, gross profit was able to increase by an astounding 66%. Selling, general and administrative decreased by 53% and asset impairment and exit costs decreased by 77% helping operating income increase 480%. Earnings before income taxes increased 953%. Provision for income taxes increased 993% making net earnings increase an entire 934% from the prior year.

Balance Sheet

Balance Sheet (millions)

4Q13

4Q12

Y/Y

Cash and cash equivalents

$ 1,686

$ 1,255

34%

Receivables

$ 1,048

$ 1,089

-4%

Inventories

$ 1,616

$ 1,928

-16%

Deferred income taxes

$ 360

$ 420

-14%

Other current assets

$ 198

$ 131

51%

Total current assets

$ 4,908

$ 4,823

2%

Property, plant and equipment

$ 4,115

$ 4,204

-2%

Goodwill

$ 11,505

$ 11,599

-1%

Intangible assets

$ 2,229

$ 2,228

0%

Other assets

$ 391

$ 325

20%

Total assets

$ 23,148

$ 23,179

0%

Accounts payable

$ 1,548

$ 1,556

-1%

Accrued marketing

$ 685

$ 740

-7%

Accrued employment costs

$ 184

$ 194

-5%

Dividends payable

$ 313

$ 296

6%

Accrued postretirement health care costs

$ 197

$ 236

-17%

Other current liabilities

$ 483

$ 584

-17%

Total current liabilities

$ 3,410

$ 3,606

-5%

Long term debt

$ 9,976

$ 9,966

0%

Deferred income taxes

$ 662

$ 138

380%

Accrued pension costs

$ 405

$ 1,990

-80%

Accrued postretirement health care costs

$ 3,080

$ 3,502

-12%

Other liabilities

$ 428

$ 405

6%

Total liabilities

$ 17,961

$ 19,607

-8%

Additional paid-in capital

$ 4,434

$ 4,240

5%

Retained earnings

$ 1,281

$ (206)

722%

Accumulated other comprehensive losses

$ (499)

$ (460)

8%

Treasury stock

$ (29)

$ (2)

1350%

Total equity

$ 5,187

$ 3,572

45%

Total liabilities and equity

$ 23,148

$ 23,179

0%

On the current asset side of things cash and cash equivalents increased 34% while inventories decreased 16%, deferred income taxes decreased 14% and other current assets increased 51% helping total current assets increase 2%. Longer term other assets increased 20% but total assets remained flat from the prior year. On the short-term liability side of things we saw a 17% decrease in both accrued postretirement health care costs and other current liabilities which helped current liabilities decrease by 5%. On the longer term liabilities deferred income taxes increased 380%, accrued pension costs decreased 80%, accrued postretirement health care costs decreased 12% which all made total liabilities decrease 8%. I generally like to see assets increase over the past year, but I'll take the flat asset gains because the decrease in liabilities was pretty significant.

Conclusion

The company reported earnings which were 928% higher than the year before on slightly higher revenue while the share price was up 13.97% in the past year excluding dividends. The increase in earnings was due primarily to better operating efficiency. The share count actually increased by 1% and actually subtracted 6% from earnings. This earning report is okay because the increase in earnings was due to cost savings, but I'd like to see if the company can improve on revenues instead. On a fundamental basis I believe this company is fairly valued with respect to 2015 earnings. The stock was up 0.29% the day after reporting earnings in the face of an S&P500 which gained 0.48%. With all this the company was able to record free cash flow of $1.5 billion. I'm going to continue to buy the stock for now and collect the high yielding dividend.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Kraft's Earnings Increase 928%, But Is It A Buy?