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Mondelez International, Inc. 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended June 30, 2005

 

 

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from                                    to                                    

 

Commission file number  1-16483

 

Kraft Foods Inc.

(Exact name of registrant as specified in its charter)

 

Virginia

 

52-2284372

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

Three Lakes Drive, Northfield, Illinois

 

60093

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code            (847) 646-2000

 

 

 

Former name, former address and former fiscal year, if changed since last report

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   ý          No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes    ý          No   o

 

At July 29, 2005, there were 1,695,025,530 shares of the registrant’s Class A Common Stock outstanding, and 1,180,000,000 shares of the registrant’s Class B Common Stock outstanding.

 

 



 

KRAFT FOODS INC.

 

TABLE OF CONTENTS

 

 

 

Page No.

PART I -

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets at
June 30, 2005 and December 31, 2004

3 - 4

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings for the

 

 

 

Six Months Ended June 30, 2005 and 2004

5

 

 

Three Months Ended June 30, 2005 and 2004

6

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’

 

 

 

Equity for the Year Ended December 31, 2004 and the

 

 

 

Six Months Ended June 30, 2005

7

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the

 

 

 

Six Months Ended June 30, 2005 and 2004

8 - 9

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

10 - 27

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial

 

 

 

Condition and Results of Operations

28 - 53

 

 

 

 

 

Item 4.

Controls and Procedures

54

 

 

 

 

 

PART II -

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

55

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

 

 

Item 6.

Exhibits

57

 

 

 

 

 

Signature

 

58

 

 

2



 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

396

 

$

282

 

 

 

 

 

 

 

Receivables (less allowances of $96 in 2005 and $118 in 2004)

 

3,461

 

3,541

 

 

 

 

 

 

 

Inventories:

 

 

 

 

 

Raw materials

 

1,589

 

1,367

 

Finished product

 

2,089

 

2,080

 

 

 

3,678

 

3,447

 

 

 

 

 

 

 

Deferred income taxes

 

726

 

749

 

Assets of discontinued operations held for sale

 

 

 

1,458

 

Other current assets

 

263

 

245

 

Total current assets

 

8,524

 

9,722

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

16,395

 

16,483

 

Less accumulated depreciation

 

6,665

 

6,498

 

 

 

9,730

 

9,985

 

 

 

 

 

 

 

Goodwill

 

24,906

 

25,177

 

Other intangible assets, net

 

10,565

 

10,634

 

 

 

 

 

 

 

Prepaid pension assets

 

3,661

 

3,569

 

 

 

 

 

 

 

Other assets

 

821

 

841

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

58,207

 

$

59,928

 

 

See notes to condensed consolidated financial statements.

 

Continued

 

3



 

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Continued)

(in millions of dollars)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

868

 

$

1,818

 

Current portion of long-term debt

 

19

 

750

 

Due to Altria Group, Inc. and affiliates

 

501

 

227

 

Accounts payable

 

1,995

 

2,207

 

Accrued liabilities:

 

 

 

 

 

Marketing

 

1,552

 

1,637

 

Employment costs

 

594

 

732

 

Other

 

1,452

 

1,537

 

Income taxes

 

839

 

170

 

 

 

 

 

 

 

Total current liabilities

 

7,820

 

9,078

 

 

 

 

 

 

 

Long-term debt

 

9,723

 

9,723

 

Deferred income taxes

 

5,562

 

5,850

 

Accrued postretirement health care costs

 

1,910

 

1,887

 

Other liabilities

 

3,336

 

3,479

 

 

 

 

 

 

 

Total liabilities

 

28,351

 

30,017

 

 

 

 

 

 

 

Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Class A common stock, no par value (555,000,000 shares issued in 2005 and 2004)

 

 

 

 

 

 

 

 

 

 

 

Class B common stock, no par value (1,180,000,000 shares issued and outstanding in 2005 and 2004)

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

23,821

 

23,762

 

 

 

 

 

 

 

Earnings reinvested in the business

 

8,690

 

8,304

 

 

 

 

 

 

 

Accumulated other comprehensive losses (including currency translation of $(1,140) in 2005 and $(890) in 2004)

 

(1,433

)

(1,205

)

 

 

31,078

 

30,861

 

 

 

 

 

 

 

Less cost of repurchased stock (37,907,689 Class A shares in 2005 and 29,644,926 Class A shares in 2004)

 

(1,222

)

(950

)

 

 

 

 

 

 

Total shareholders’ equity

 

29,856

 

29,911

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

58,207

 

$

59,928

 

 

See notes to condensed consolidated financial statements.

 

4



 

 Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)

 

 

 

For the Six Months Ended
June 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Net revenues

 

$

16,393

 

$

15,666

 

 

 

 

 

 

 

Cost of sales

 

10,379

 

9,783

 

 

 

 

 

 

 

Gross profit

 

6,014

 

5,883

 

 

 

 

 

 

 

Marketing, administration and research costs

 

3,538

 

3,275

 

 

 

 

 

 

 

Asset impairment and exit costs

 

179

 

420

 

 

 

 

 

 

 

Gains on sales of businesses, net

 

(115

)

 

 

 

 

 

 

 

 

Amortization of intangibles

 

5

 

6

 

 

 

 

 

 

 

Operating income

 

2,407

 

2,182

 

 

 

 

 

 

 

Interest and other debt expense, net

 

350

 

324

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes and minority interest

 

2,057

 

1,858

 

 

 

 

 

 

 

Provision for income taxes

 

598

 

629

 

 

 

 

 

 

 

Earnings from continuing operations before minority interest

 

1,459

 

1,229

 

 

 

 

 

 

 

Minority interest in earnings from continuing operations, net

 

2

 

3

 

 

 

 

 

 

 

Earnings from continuing operations

 

1,457

 

1,226

 

 

 

 

 

 

 

(Loss) earnings from discontinued operations, net of income taxes

 

(272

)

32

 

 

 

 

 

 

 

Net earnings

 

$

1,185

 

$

1,258

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.86

 

$

0.71

 

Discontinued operations

 

(0.16

)

0.02

 

Net earnings

 

$

0.70

 

$

0.73

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.86

 

$

0.71

 

Discontinued operations

 

(0.16

)

0.02

 

Net earnings

 

$

0.70

 

$

0.73

 

 

 

 

 

 

 

Dividends declared

 

$

0.41

 

$

0.36

 

 

See notes to condensed consolidated financial statements.

 

5



 

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Net revenues

 

$

8,334

 

$

8,091

 

 

 

 

 

 

 

Cost of sales

 

5,275

 

5,107

 

 

 

 

 

 

 

Gross profit

 

3,059

 

2,984

 

 

 

 

 

 

 

Marketing, administration and research costs

 

1,777

 

1,642

 

 

 

 

 

 

 

Asset impairment and exit costs

 

29

 

129

 

 

 

 

 

 

 

Losses on sales of businesses, net

 

1

 

 

 

 

 

 

 

 

 

Amortization of intangibles

 

2

 

4

 

 

 

 

 

 

 

Operating income

 

1,250

 

1,209

 

 

 

 

 

 

 

Interest and other debt expense, net

 

174

 

159

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes and minority interest

 

1,076

 

1,050

 

 

 

 

 

 

 

Provision for income taxes

 

316

 

372

 

 

 

 

 

 

 

Earnings from continuing operations before minority interest

 

760

 

678

 

 

 

 

 

 

 

Minority interest in earnings from continuing operations, net

 

2

 

2

 

 

 

 

 

 

 

Earnings from continuing operations

 

758

 

676

 

 

 

 

 

 

 

(Loss) earnings from discontinued operations, net of income taxes

 

(286

)

22

 

 

 

 

 

 

 

Net earnings

 

$

472

 

$

698

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.45

 

$

0.40

 

Discontinued operations

 

(0.17

)

0.01

 

Net earnings

 

$

0.28

 

$

0.41

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.45

 

$

0.40

 

Discontinued operations

 

(0.17

)

0.01

 

Net earnings

 

$

0.28

 

$

0.41

 

 

 

 

 

 

 

Dividends declared

 

$

0.205

 

$

0.18

 

 

See notes to condensed consolidated financial statements.

 

6



 

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

For the Year Ended December 31, 2004 and

the Six Months Ended June 30, 2005

(in millions of dollars, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

 

 

 

Class

 

 

 

 

 

Comprehensive Earnings (Losses)

 

Total

 

 

 

A and B

 

Additional

 

Earnings

 

Currency

 

 

 

 

 

Cost of

 

Share-

 

 

 

Common

 

Paid-in

 

Reinvested in

 

Translation

 

 

 

 

 

Repurchased

 

holders’

 

 

 

Stock

 

Capital

 

the Business

 

Adjustments

 

Other

 

Total

 

Stock

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2004

 

$

 

$

23,704

 

$

7,020

 

$

(1,494

)

$

(298

)

$

(1,792

)

$

(402

)

$

28,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

2,665

 

 

 

 

 

 

 

 

 

2,665

 

Other comprehensive earnings (losses), net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

604

 

 

 

604

 

 

 

604

 

Additional minimum pension liability

 

 

 

 

 

 

 

 

 

(22

)

(22

)

 

 

(22

)

Change in fair value of derivatives accounted for as hedges

 

 

 

 

 

 

 

 

 

5

 

5

 

 

 

5

 

Total other comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

587

 

Total comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,252

 

Exercise of stock options and issuance  of other stock awards

 

 

 

58

 

(61

)

 

 

 

 

 

 

152

 

149

 

Cash dividends declared ($0.77 per share)

 

 

 

 

 

(1,320

)

 

 

 

 

 

 

 

 

(1,320

)

Class A common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

(700

)

(700

)

Balances, December 31, 2004

 

 

23,762

 

8,304

 

(890

)

(315

)

(1,205

)

(950

)

29,911

 

Comprehensive earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

1,185

 

 

 

 

 

 

 

 

 

1,185

 

Other comprehensive earnings (losses), net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

(250

)

 

 

(250

)

 

 

(250

)

Additional minimum pension liability

 

 

 

 

 

 

 

 

 

14

 

14

 

 

 

14

 

Change in fair value of derivatives accounted for as hedges

 

 

 

 

 

 

 

 

 

8

 

8

 

 

 

8

 

Total other comprehensive losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(228

)

Total comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

957

 

Exercise of stock options and issuance of other stock awards

 

 

 

59

 

(101

)

 

 

 

 

 

 

128

 

86

 

Cash dividends declared ($0.41 per share)

 

 

 

 

 

(698

)

 

 

 

 

 

 

 

 

(698

)

Class A common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

(400

)

(400

)

Balances, June 30, 2005

 

$

 

$

23,821

 

$

8,690

 

$

(1,140

)

$

(293

)

$

(1,433

)

$

(1,222

)

$

29,856

 

 

Total comprehensive earnings were $262 million and $510 million, respectively, for the quarters ended June 30, 2005 and 2004 and $1,223 million for the first six months of 2004.

 

See notes to condensed consolidated financial statements.

 

7



 

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)

 

 

 

For the Six Months Ended
June 30,

 

 

 

2005

 

2004

 

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

1,185

 

$

1,258

 

 

 

 

 

 

 

Adjustments to reconcile net earnings to operating cash flows:

 

 

 

 

 

Depreciation and amortization

 

436

 

424

 

Deferred income tax (benefit) provision

 

(222

)

59

 

Integration costs, net of cash paid

 

 

 

(1

)

Gains on sales of businesses, net

 

(115

)

 

 

Loss on sale of discontinued operations

 

32

 

 

 

Asset impairment and exit costs, net of cash paid

 

92

 

394

 

Cash effects of changes, net of the effects from acquired and divested companies:

 

 

 

 

 

Receivables, net

 

80

 

27

 

Inventories

 

(296

)

(275

)

Accounts payable

 

(193

)

(113

)

Income taxes

 

591

 

48

 

Amounts due to Altria Group, Inc. and affiliates

 

84

 

62

 

Other working capital items

 

(392

)

(350

)

Change in pension assets and postretirement liabilities, net

 

(101

)

(340

)

Other

 

111

 

139

 

 

 

 

 

 

 

Net cash provided by operating activities

 

1,292

 

1,332

 

 

 

 

 

 

 

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(441

)

(353

)

Purchases of businesses, net of acquired cash

 

 

 

(130

)

Proceeds from sales of businesses

 

1,640

 

 

 

Other

 

16

 

18

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

1,215

 

(465

)

 

See notes to condensed consolidated financial statements.

 

8



 

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(in millions of dollars)

(Unaudited)

 

 

 

For the Six Months Ended
June 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net (repayment) issuance of short-term borrowings

 

$

(945

)

$

28

 

Long-term debt proceeds

 

34

 

28

 

Long-term debt repaid

 

(739

)

(34

)

Increase (decrease) in amounts due to Altria Group, Inc. and affiliates

 

187

 

(297

)

Repurchase of Class A common stock

 

(375

)

(314

)

Dividends paid

 

(700

)

(620

)

Other

 

144

 

(20

)

 

 

 

 

 

 

Net cash used in financing activities

 

(2,394

)

(1,229

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

1

 

12

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease)

 

114

 

(350

)

 

 

 

 

 

 

Balance at beginning of period

 

282

 

514

 

 

 

 

 

 

 

Balance at end of period

 

$

396

 

$

164

 

 

See notes to condensed consolidated financial statements.

 

9



 

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1.  Accounting Policies:

 

Basis of Presentation

 

The interim condensed consolidated financial statements of Kraft Foods Inc. (“Kraft”), together with its subsidiaries (collectively referred to as the “Company”), are unaudited.  It is the opinion of the Company’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein.  All such adjustments were of a normal recurring nature.  Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.

 

These statements should be read in conjunction with the Company’s consolidated financial statements and related notes, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

In June 2005, the Company sold substantially all of its sugar confectionery business for approximately $1.4 billion.  The Company has reflected the results of its sugar confectionery business prior to the closing date as discontinued operations on the condensed consolidated statements of earnings for all periods presented.  The assets related to the sugar confectionery business were reflected as assets of discontinued operations held for sale on the consolidated balance sheet at December 31, 2004.  Accordingly, historical statements of earnings amounts included in the notes to the condensed consolidated financial statements have been restated to reflect the discontinued operation.  The Company recorded a loss on sale of discontinued operations of $297 million in the second quarter of 2005, related largely to taxes on the transaction.

 

During the fourth quarter of 2004, following the announcement of the sale of its sugar confectionery business, the Company realigned its North American segments.  The Company’s new segments, which are reflected in these condensed consolidated financial statements and notes, are U.S. Beverages; U.S. Cheese, Canada & North America Foodservice; U.S. Convenient Meals; U.S. Grocery; U.S. Snacks & Cereals; Europe, Middle East & Africa; and Latin America & Asia Pacific.  The new segment structure in North America reflects a shift of certain divisions and brands between segments to more closely align these businesses to consumer sectors, to provide more focus on the separate beverage and grocery businesses, and to benefit from synergies in grain based products.  Historical data have been restated to reflect the new segment structure.

 

Stock-Based Compensation Expense

 

The Company accounts for employee stock compensation plans in accordance with the intrinsic value-based method permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” which has not resulted in compensation cost for stock options.  The market value at date of grant of restricted stock and rights to receive shares of stock is recorded as compensation expense over the period of restriction (three years).

 

During the first quarter of 2005 and 2004, the Company granted shares of restricted stock and rights to receive shares of stock to eligible employees, giving them in most instances all of the rights of shareholders, except that they may not sell, assign, pledge or otherwise encumber such shares and rights.  Such shares and rights are subject to forfeiture if certain employment conditions are not met.

 

During the first quarter of 2005, the Company granted approximately 4.1 million restricted Class A shares to eligible U.S.-based employees and also issued to eligible non-U.S. employees rights to receive approximately 1.8 million Class A equivalent shares.  The market value of the shares and rights granted to the Company’s employees was approximately $196 million, or $33.32 per restricted share or right, on the date of grant.  Restrictions on the stock and rights lapse in the first quarter of 2008.

 

10



 

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The fair value of the shares of restricted stock and rights to receive shares of stock at the date of grant is amortized to expense ratably over the restriction period.  The Company recorded compensation expense related to the restricted stock and rights of $76 million and $38 million, respectively, for the six months and three months ended June 30, 2005, and $52 million and $27 million, respectively, for the six months and three months ended June 30, 2004.  The unamortized portion, which is reported on the condensed consolidated balance sheets as a reduction of earnings reinvested in the business, was $291 million at June 30, 2005.

 

In addition to restricted stock, at June 30, 2005, the Company had stock-based employee compensation plans that permit the issuance of stock options to employees. The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for stock options within those plans.  No compensation expense for employee stock options is reflected in net earnings, as all stock options granted under those plans had an exercise price equal to the market value of the common stock on the date of grant.  The following table illustrates the effect on net earnings and earnings per share (“EPS”) if the Company had applied the fair value recognition provisions of SFAS No. 123 to measure stock-based compensation expense for outstanding stock option awards for the six months and three months ended June 30, 2005 and 2004:

 

 

 

For the Six Months Ended
June 30,

 

 

 

2005

 

2004

 

 

 

(in millions, except per share data)

 

 

 

 

 

 

 

Net earnings, as reported

 

$

1,185

 

$

1,258

 

Deduct:

 

 

 

 

 

Total stock-based employee compensation expense determined under fair value method for all stock option awards, net of related tax effects

 

4

 

4

 

Pro forma net earnings

 

$

1,181

 

$

1,254

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic – as reported

 

$

0.70

 

$

0.73

 

Basic – pro forma

 

$

0.70

 

$

0.73

 

 

 

 

 

 

 

Diluted – as reported

 

$

0.70

 

$

0.73

 

Diluted – pro forma

 

$

0.69

 

$

0.73

 

 

11



 

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

 

 

2005

 

2004

 

 

 

(in millions, except per share data)

 

 

 

 

 

 

 

Net earnings, as reported

 

$

472

 

$

698

 

Deduct:

 

 

 

 

 

Total stock-based employee compensation expense determined under fair value method for all stock option awards, net of related tax effects

 

2

 

2

 

Pro forma net earnings

 

$

470

 

$

696

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic – as reported

 

$

0.28

 

$

0.41

 

Basic – pro forma

 

$

0.28

 

$

0.41

 

 

 

 

 

 

 

Diluted – as reported

 

$

0.28

 

$

0.41

 

Diluted – pro forma

 

$

0.28

 

$

0.41

 

 

In 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”).  SFAS No. 123R requires companies to measure compensation cost for share-based payments at fair value.  The Company will adopt this new standard prospectively, on January 1, 2006, and does not expect the adoption of SFAS No. 123R to have a material impact on its consolidated financial position, results of operations or cash flows.

 

Note 2.  Asset Impairment, Exit and Implementation Costs:

 

Restructuring Program:

 

In January 2004, the Company announced a three-year restructuring program with the objectives of leveraging the Company’s global scale, realigning and lowering its cost structure, and optimizing capacity utilization.  As part of this program, the Company anticipates the closing or sale of up to twenty plants and the elimination of approximately six thousand positions.  From 2004 through 2006, the Company expects to incur up to $1.2 billion in pre-tax charges, reflecting asset disposals, severance and other implementation costs, including $772 million incurred from January 2004 through June 30, 2005.  Pre-tax restructuring program charges during 2005 are expected to be between $440 million and $470 million, including $131 million incurred in the first six months of 2005.  Approximately one-half of the pre-tax charges are expected to require cash payments.

 

Restructuring Costs:

 

During the six months and three months ended June 30, 2005, pre-tax charges under the restructuring program of $86 million and $29 million, respectively, were recorded as asset impairment and exit costs on the condensed consolidated statements of earnings.  During the six months and three months ended June 30, 2004, pre-tax charges under the restructuring program of $408 million and $129 million, respectively, were recorded as asset impairment and exit costs on the condensed consolidated statements of earnings.  The pre-tax charges for the six months ended June 30, 2005 resulted from the announcement of the closing of three plants, for a total of sixteen since January 2004, and the continuation of a number of workforce reduction programs.  Approximately $60 million of the pre-tax charges incurred during the first six months of 2005 will require cash payments.

 

12



 

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Pre-tax restructuring liability activity for the six months ended June 30, 2005 was as follows:

 

 

 

 

 

Asset

 

 

 

 

 

 

 

Severance

 

Write-downs

 

Other

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Liability balance, January 1, 2005

 

$

91

 

$

 

$

19

 

$

110

 

Charges

 

59

 

11

 

16

 

86

 

Cash spent

 

(54

)

 

 

(33

)

(87

)

Charges against assets

 

(14

)

(11

)

 

 

(25

)

Currency

 

(2

)

 

 

 

 

(2

)

Liability balance, June 30, 2005

 

$

80

 

$

 

$

2

 

$

82

 

 

Severance costs in the above schedule, which relate to the workforce reduction programs, include the cost of related benefits.  Specific programs announced during 2004 and the first six months of 2005, as part of the overall restructuring program, will result in the elimination of approximately 4,400 positions.  At June 30, 2005, approximately 3,300 of these positions have been eliminated.  Asset write-downs relate to the impairment of assets caused by the plant closings and related activity.  Other costs incurred relate primarily to contract termination costs associated with the plant closings and the termination of leasing agreements.

 

Implementation Costs:

 

The Company recorded pre-tax implementation costs associated with the restructuring program.  These costs include the discontinuance of certain product lines and incremental costs related to the integration of functions and closure of facilities.  These costs were recorded on the condensed consolidated statements of earnings as follows:

 

 

 

For the Six Months Ended
June 30,

 

For the Three Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Net Revenues

 

$

1

 

$

 

$

1

 

$

 

Cost of sales

 

26

 

10

 

11

 

9

 

Marketing, administration and research costs

 

18

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

Implementation Costs

 

$

45

 

$

10

 

$

26

 

$

9

 

 

Asset Impairment Charges:

 

During the second quarter of 2005, the Company sold its fruit snacks business for approximately $30 million.  The Company incurred a pre-tax asset impairment charge of $93 million in the first quarter of 2005 in recognition of the sale of this business.  The charge, which includes the write-off of all intangibles associated with this business, was recorded as asset impairment and exit costs on the condensed consolidated statement of earnings.

 

During the first quarter of 2005, the Company completed its annual review of goodwill and intangible assets and no charges resulted from this review.  During the first quarter of 2004, the Company recorded non-cash pre-tax charges of $29 million related to an intangible asset impairment for a small confectionery business in the United States and certain brands in Mexico.  A portion of this charge, $17 million, was reclassified to

 

13



 

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

earnings from discontinued operations on the consolidated statement of earnings in the fourth quarter of 2004.  The remaining charge was recorded as asset impairment and exit costs on the condensed consolidated statement of earnings.

 

Total:

 

The pre-tax asset impairment, exit and implementation costs discussed above, for the six months and three months ended June 30, 2005 and 2004, were included in the operating companies income of the following segments:

 

 

 

 

For the Six Months Ended June 30, 2005

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Beverages

 

$

3

 

$

 

$

3

 

$

 

$

3

 

U.S. Cheese, Canada & North America Foodservice

 

18

 

 

 

18

 

7

 

25

 

U.S. Convenient Meals

 

2

 

 

 

2

 

2

 

4

 

U.S. Grocery

 

2

 

93

 

95

 

 

 

95

 

U.S. Snacks & Cereals

 

4

 

 

 

4

 

23

 

27

 

Europe, Middle East & Africa

 

47

 

 

 

47

 

13

 

60

 

Latin America & Asia Pacific

 

10

 

 

 

10

 

 

 

10

 

Total – Continuing Operations

 

$

86

 

$

93

 

$

179

 

$

45

 

$

224

 

 

 

 

For the Six Months Ended June 30, 2004

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Beverages

 

$

10

 

$

 

$

10

 

$

 

$

10

 

U.S. Cheese, Canada & North America Foodservice

 

89

 

 

 

89

 

1

 

90

 

U.S. Convenient Meals

 

8

 

 

 

8

 

 

 

8

 

U.S. Grocery

 

9

 

 

 

9

 

2

 

11

 

U.S. Snacks & Cereals

 

168

 

 

 

168

 

6

 

174

 

Europe, Middle East & Africa

 

113

 

 

 

113

 

1

 

114

 

Latin America & Asia Pacific

 

11

 

12

 

23

 

 

 

23

 

Total – Continuing Operations

 

408

 

12

 

420

 

10

 

430

 

Discontinued Operations

 

 

 

17

 

17

 

 

 

17

 

Total

 

$

408

 

$

29

 

$

437

 

$

10

 

$

447

 

 

14



 

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

For the Three Months Ended June 30, 2005

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Beverages

 

$

1

 

$

 

$

1

 

$

 

$

1

 

U.S. Cheese, Canada & North America Foodservice

 

4