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Mondelez International, Inc. 10-Q 2006

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)

x

 

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

 

 

EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended September 30, 2006

 

 

 

 

 

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

 

 

 

(I.R.S. Employer

incorporation or organization)

 

 

 

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  
x   No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   x

 

Accelerated filer   o

 

Non-accelerated filer   o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  
o   No   x

At October 31, 2006, there were 463,780,369 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
September 30, 2006 and December 31, 2005

 

3 - 4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings for the
Nine Months Ended September 30, 2006 and 2005

 

5

 

 

Three Months Ended September 30, 2006 and 2005

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’
Equity for the Year Ended December 31, 2005 and the
Nine Months Ended September 30, 2006

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2006 and 2005

 

8 - 9

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

10 - 29

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

 

30 - 55

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

56

 

 

 

 

 

PART II -

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

57

 

 

 

 

 

Item 1A.

 

Risk Factors

 

58

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

 

Item 6.

 

Exhibits

 

59

 

 

 

 

 

Signature

 

 

 

60

 

2




 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)

 

 

September 30,
2006

 

December 31,
2005

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

655

 

$

316

 

Receivables (less allowances of $84 in 2006 and $92 in 2005)

 

3,573

 

3,385

 

 

 

 

 

 

 

Inventories:

 

 

 

 

 

Raw materials

 

1,554

 

1,363

 

Finished product

 

2,303

 

1,980

 

 

 

3,857

 

3,343

 

 

 

 

 

 

 

Deferred income taxes

 

549

 

879

 

Other current assets

 

325

 

230

 

Total current assets

 

8,959

 

8,153

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

17,363

 

16,598

 

Less accumulated depreciation

 

7,554

 

6,781

 

 

 

9,809

 

9,817

 

 

 

 

 

 

 

Goodwill

 

25,740

 

24,648

 

Other intangible assets, net

 

10,075

 

10,516

 

 

 

 

 

 

 

Prepaid pension assets

 

3,632

 

3,617

 

 

 

 

 

 

 

Other assets

 

625

 

877

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

58,840

 

$

57,628

 

 

 

See notes to condensed consolidated financial statements.

Continued

3




 

Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars)
(Unaudited)

 

 

September 30,
2006

 

December 31,
2005

 

LIABILITIES

 

 

 

 

 

Short-term borrowings

 

$

1,046

 

$

805

 

Current portion of long-term debt

 

2,666

 

1,268

 

Due to Altria Group, Inc. and affiliates

 

475

 

652

 

Accounts payable

 

2,376

 

2,270

 

Accrued liabilities:

 

 

 

 

 

Marketing

 

1,462

 

1,529

 

Employment costs

 

746

 

625

 

Other

 

1,648

 

1,338

 

Income taxes

 

452

 

237

 

Total current liabilities

 

10,871

 

8,724

 

 

 

 

 

 

 

Long-term debt

 

7,081

 

8,475

 

Deferred income taxes

 

5,689

 

6,067

 

Accrued postretirement health care costs

 

1,994

 

1,931

 

Other liabilities

 

2,807

 

2,838

 

Total liabilities

 

28,442

 

28,035

 

 

 

 

 

 

 

Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Class A common stock, no par value (555,000,000 shares issued in 2006 and 2005)

 

 

 

 

 

 

 

 

 

 

 

Class B common stock, no par value (1,180,000,000 shares issued and outstanding in
2006 and 2005)

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

23,580

 

23,835

 

 

 

 

 

 

 

Earnings reinvested in the business

 

10,914

 

9,453

 

 

 

 

 

 

 

Accumulated other comprehensive losses (including currency translation of $(824) in
2006 and $(1,290) in 2005)

 

(1,256)

 

(1,663)

 

 

 

33,238

 

31,625

 

 

 

 

 

 

 

Less cost of repurchased stock (90,844,488 Class A shares in 2006 and 65,119,245
Class A shares in 2005)

 

(2,840)

 

   (2,032)

 

 

 

 

 

 

 

Total shareholders’ equity

 

30,398

 

29,593

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

58,840

 

$

57,628

 

 

See notes to condensed consolidated financial statments.

4




 

Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)

 

 

For the Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Net revenues

 

$

24,985

 

$

24,450

 

 

 

 

 

 

 

Cost of sales

 

15,869

 

15,580

 

 

 

 

 

 

 

Gross profit

 

9,116

 

8,870

 

 

 

 

 

 

 

Marketing, administration and research costs

 

5,242

 

5,216

 

 

 

 

 

 

 

Asset impairment and exit costs

 

553

 

205

 

 

 

 

 

 

 

Gain on redemption of United Biscuits investment

 

(251

)

 

 

 

 

 

 

 

 

Losses (gains) on sales of businesses, net

 

14

 

(115

)

 

 

 

 

 

 

Amortization of intangibles

 

6

 

9

 

 

 

 

 

 

 

Operating income

 

3,552

 

3,555

 

 

 

 

 

 

 

Interest and other debt expense, net

 

377

 

489

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes and minority interest

 

3,175

 

3,066

 

 

 

 

 

 

 

Provision for income taxes

 

735

 

932

 

 

 

 

 

 

 

Earnings from continuing operations before minority interest

 

2,440

 

2,134

 

 

 

 

 

 

 

Minority interest in earnings from continuing operations, net

 

4

 

3

 

 

 

 

 

 

 

Earnings from continuing operations

 

2,436

 

2,131

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

 

 

(272

)

 

 

 

 

 

 

Net earnings

 

$

2,436

 

$

1,859

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

1.48

 

$

1.26

 

Discontinued operations

 

 

 

(0.16

)

Net earnings

 

$

1.48

 

$

1.10

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

1.47

 

$

1.26

 

Discontinued operations

 

 

 

(0.16

)

Net earnings

 

$

1.47

 

$

1.10

 

 

 

 

 

 

 

Dividends declared

 

$

0.71

 

$

0.64

 

 

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

 

 

 

September 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Net revenues

 

$

8,243

 

$

8,057

 

 

 

 

 

 

 

Cost of sales

 

5,243

 

5,201

 

 

 

 

 

 

 

Gross profit

 

3,000

 

2,856

 

 

 

 

 

 

 

Marketing, administration and research costs

 

1,765

 

1,678

 

 

 

 

 

 

 

Asset impairment and exit costs

 

125

 

26

 

 

 

 

 

 

 

Gain on redemption of United Biscuits investment

 

(251

)

 

 

 

 

 

 

 

 

Losses on sales of businesses

 

3

 

 

 

 

 

 

 

 

 

Amortization of intangibles

 

1

 

4

 

 

 

 

 

 

 

Operating income

 

1,357

 

1,148

 

 

 

 

 

 

 

Interest and other debt expense, net

 

134

 

139

 

 

 

 

 

 

 

Earnings before income taxes and minority interest

 

1,223

 

1,009

 

 

 

 

 

 

 

Provision for income taxes

 

473

 

334

 

 

 

 

 

 

 

Earnings before minority interest

 

750

 

675

 

 

 

 

 

 

 

Minority interest in earnings, net

 

2

 

1

 

 

 

 

 

 

 

Net earnings

 

$

748

 

$

674

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.46

 

$

0.40

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.45

 

$

0.40

 

 

 

 

 

 

 

Dividends declared

 

$

0.25

 

$

0.23

 

 

See notes to condensed consolidated financial statments.

6




Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
For the Year Ended December 31, 2005 and
the Nine Months Ended September 30, 2006
(in millions of dollars, except per share data)
(Unaudited)

 

 

 

 

 

 

 

 

Accumulated Other
Comprehensive Earnings/(Losses)

 

 

 

 

 

 

 

Class
A and B
Common
Stock

 

Additional
Paid-in
Capital

 

Earnings
Reinvested in
the Business

 

Currency
Translation
Adjustments

 

Other

 

Total

 

Cost of
Repurchased
Stock

 

Total
Share-
holders’
Equity

 

Balances, January 1, 2005

 

$

 

$

23,762

 

$

8,304

 

$

(890

)

$

(315

)

$

(1,205

)

$

(950

)

$

29,911

 

Comprehensive earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

2,632

 

 

 

 

 

 

 

 

 

2,632

 

Other comprehensive losses, net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

(400

)

 

 

(400

)

 

 

(400

)

Additional minimum pension liability

 

 

 

 

 

 

 

 

 

(48

)

(48

)

 

 

(48

)

Change in fair value of derivatives accounted for as hedges

 

 

 

 

 

 

 

 

 

(10

)

(10

)

 

 

(10

)

Total other comprehensive losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(458

)

Total comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,174

 

Exercise of stock options and
issuance of other stock awards

 

 

 

52

 

(12

)

 

 

 

 

 

 

118

 

158

 

Cash dividends declared ($0.87 per share)

 

 

 

 

 

(1,471

)

 

 

 

 

 

 

 

 

(1,471

)

Class A common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,200

)

(1,200

)

Other

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

21

 

Balances, December 31, 2005

 

 

23,835

 

9,453

 

(1,290

)

(373

)

(1,663

)

(2,032

)

29,593

 

Comprehensive earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

2,436

 

 

 

 

 

 

 

 

 

2,436

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

466

 

 

 

466

 

 

 

466

 

Additional minimum pension liability

 

 

 

 

 

 

 

 

 

(25

)

(25

)

 

 

(25

)

Change in fair value of derivatives accounted for as hedges

 

 

 

 

 

 

 

 

 

(34

)

(34

)

 

 

(34

)

Total other comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

407

 

Total comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,843

 

Exercise of stock options and
issuance of other stock awards

 

 

 

(255

)

202

 

 

 

 

 

 

 

129

 

76

 

Cash dividends declared ($0.71 per share)

 

 

 

 

 

(1,177

)

 

 

 

 

 

 

 

 

(1,177

)

Class A common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

(937

)

(937

)

Balances, September 30, 2006

 

$

 

$

23,580

 

$

10,914

 

$

(824

)

$

(432

)

$

(1,256

)

$

(2,840

)

$

30,398

 

 

Total comprehensive earnings were $697 million and $671 million, respectively, for the quarters ended September 30, 2006 and 2005 and $1,628 million for the first nine months of 2005.

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 Nine Months Ended

 

 

 

September 30,

 

 

 

2006

 

2005

 

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

2,436

 

$

1,859

 

 

 

 

 

 

 

Adjustments to reconcile net earnings to operating cash flows:

 

 

 

 

 

Depreciation and amortization

 

654

 

651

 

Deferred income tax benefit

 

(29

)

(280

)

Integration costs, net of cash paid

 

 

 

(1

)

Gain on redemption of United Biscuits investment

 

(251

)

 

 

Losses (gains) on sales of businesses, net

 

14

 

(115

)

Loss on sale of discontinued operations

 

 

 

32

 

Asset impairment and exit costs, net of cash paid

 

389

 

86

 

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

 

 

 

 

 

Receivables, net

 

38

 

163

 

Inventories

 

(526

)

(409

)

Accounts payable

 

84

 

(30

)

Income taxes

 

130

 

212

 

Amounts due to Altria Group, Inc. and affiliates

 

(214

)

96

 

Other working capital items

 

(139

)

(308

)

Change in pension assets and postretirement liabilities, net

 

75

 

(55

)

Other

 

135

 

137

 

 

 

 

 

 

 

Net cash provided by operating activities

 

2,796

 

2,038

 

 

 

 

 

 

 

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(687

)

(784

)

Proceeds from sales of businesses

 

674

 

1,652

 

Other

 

82

 

21

 

 

 

 

 

 

 

Net cash provided by investing activities

 

69

 

889

 

 

See notes to condensed consolidated financial statements.

Continued

8




Kraft Foods Inc. and Subsidiaries
  Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

 

2006

 

2005

 

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net repayment of short-term borrowings

 

$

(317

)

$

(772

)

Long-term debt proceeds

 

49

 

52

 

Long-term debt repaid

 

(57

)

(761

)

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

 

9

 

170

 

Repurchase of Class A common stock

 

(943

)

(783

)

Dividends paid

 

(1,150

)

(1,049

)

Other

 

(147

)

165

 

 

 

 

 

 

 

Net cash used in financing activities

 

(2,556

)

(2,978

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

30

 

4

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease)

 

339

 

(47

)

 

 

 

 

 

 

Balance at beginning of period

 

316

 

282

 

 

 

 

 

 

 

Balance at end of period

 

$

655

 

$

235

 

 

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, 2005.

In June 2005, the Company sold substantially all of its sugar confectionery business for pre-tax proceeds of 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.

In October 2005, the Company announced that, effective January 1, 2006, its Canadian business will be realigned to better integrate it into the Company’s North American business by product category. Beginning in the first quarter of 2006, the operating results of the Canadian business are being reported throughout the North American food segments. In addition, in the first quarter of 2006, the Company’s international businesses were realigned to reflect the reorganization announced within Europe in November 2005. The two revised international segments, which are reflected in these condensed consolidated financial statements and notes, are European Union; and Developing Markets, Oceania & North Asia, the latter to reflect the Company’s increased management focus on developing markets. Accordingly, prior period segment results have been restated.

Stock-Based Compensation Expense

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service periods for awards expected to vest. The fair value of restricted stock and rights to receive shares of stock is determined based on the number of shares granted and the market value at date of grant. The fair value of stock options is determined using a modified Black-Scholes methodology. The impact of adoption was not material.

The adoption of SFAS No. 123(R) in the first quarter of 2006 resulted in a cumulative effect gain of $6 million, which is net of $3 million in taxes, in the condensed consolidated statements of earnings for the nine months ended September 30, 2006. This gain resulted from the impact of estimating future forfeitures on restricted stock and rights to receive shares of stock in the determination of periodic expense for unvested awards, rather than recording forfeitures only when they occur. The gross cumulative effect was recorded in marketing, administration and research costs in the first quarter of 2006.

10




Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company previously applied the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and provided the pro forma disclosures required by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). No compensation expense for employee stock options was reflected in net earnings in 2005, 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 the grant. Historical condensed consolidated statements of earnings already include the compensation expense for restricted stock and rights to receive shares of stock. 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 stock option awards in 2005:

 

 

 

For the Nine Months

 

For the Three Months

 

 

 

Ended September 30, 2005

 

Ended September 30, 2005

 

 

 

(in millions, except per share data)

 

Net earnings, as reported

 

$

1,859

 

$

674

 

Deduct:

 

 

 

 

 

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

 

6

 

2

 

Pro forma net earnings

 

$

1,853

 

$

672

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic – as reported

 

$

1.10

 

$

0.40

 

Basic – pro forma

 

$

1.10

 

$

0.40

 

 

 

 

 

 

 

Diluted – as reported

 

$

1.10

 

$

0.40

 

Diluted – pro forma

 

$

1.09

 

$

0.40

 

 

The Company elected to calculate the initial pool of tax benefits resulting from tax deductions in excess of the stock-based employee compensation expense recognized in the statement of earnings under Financial Accounting Standards Board (“FASB”) Staff Position 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” Under SFAS No. 123(R), tax shortfalls occur when actual tax deductible compensation expense is less than cumulative stock-based compensation expense recognized in the financial statements. Tax shortfalls of $9 million were recognized for the nine months ended September 30, 2006, and were recorded in additional paid-in capital.

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. In January 2006, the Company announced plans to expand its restructuring efforts through 2008. The entire restructuring program is expected to result in $3.7 billion in pre-tax charges reflecting asset disposals, severance and implementation costs. As part of this program, the Company anticipates the closure of up to 40 facilities and the elimination of approximately 14,000 positions. Approximately $2.3 billion of the $3.7 billion in pre-tax charges are expected to require cash payments. Pre-tax restructuring program charges during 2006 are expected to be approximately $1 billion, including $496 million incurred for the nine months ended September 30, 2006. Total pre-tax restructuring charges incurred since the inception of the program in January 2004 were $1.4 billion.

 

11




Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

During the second quarter of 2006, the Company announced a seven-year, $1.7 billion agreement to receive information technology services from Electronic Data Systems (“EDS”). The agreement, which includes data centers, web hosting, telecommunications and IT workplace services, began on June 1, 2006. Pursuant to the agreement, approximately 670 employees, who provided certain IT support to the Company, were transitioned to EDS. As a result, the Company incurred pre-tax asset impairment and exit costs of $49 million and $46 million, and implementation costs of $30 million and $19 million, related to the transition for the nine months and three months ended September 30, 2006, respectively. These costs were included in the pre-tax restructuring program charges discussed above.

Restructuring Costs:

During the nine months and three months ended September 30, 2006, pre-tax charges under the restructuring program of $443 million and $125 million, respectively, were recorded as asset impairment and exit costs on the condensed consolidated statements of earnings. During the nine months and three months ended September 30, 2005, pre-tax charges under the restructuring program of $112 million and $26 million, respectively, were recorded as asset impairment and exit costs on the condensed consolidated statements of earnings. The pre-tax charges for the nine months ended September 30, 2006 resulted from the announcement of the closing of seven plants, for a total of 26 since January 2004, and the continuation of a number of workforce reduction programs. Approximately $243 million of the pre-tax charges incurred during the first nine months of 2006 will require cash payments.

Pre-tax restructuring liability activity for the nine months ended September 30, 2006 was as follows:

 

Severance

 

Asset
Write-downs

 

Other

 

Total

 

 

 

(in millions)

 

Liability balance, January 1, 2006

 

$

114

 

$

 

$

1

 

$

115

 

Charges

 

186

 

204

 

53

 

443

 

Cash spent

 

(149

)

 

 

(15

)

(164

)

Charges against assets

 

(11

)

(204

)

(4

)

(219

)

Currency

 

4

 

 

 

 

 

4

 

Liability balance, September 30, 2006

 

$

144

 

$

 

$

35

 

$

179

 

 

Severance costs in the above schedule, which relate to the workforce reduction programs, include the cost of related benefits. Specific programs announced since 2004, as part of the overall restructuring program, will result in the elimination of approximately 9,200 positions. At September 30, 2006, approximately 7,800 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. Severance costs taken against assets relate to incremental pension costs, which reduce prepaid pension assets.

 

12




Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 and streamlining of functions and closure of facilities. Substantially all implementation costs incurred in 2006 will require cash payments. These costs were recorded on the condensed consolidated statements of earnings as follows:

 

For the Nine Months Ended

 

For the Three Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

 

$

1

 

$

 

$

 

Cost of sales

 

13

 

34

 

2

 

8

 

Marketing, administration and research costs

 

40

 

26

 

21

 

8

 

 

 

 

 

 

 

 

 

 

 

Implementation Costs

 

$

53

 

$

61

 

$

23

 

$

16

 

 

Asset Impairment Charges:

During the third quarter of 2006, the Company completed the sale of its pet snacks brand and assets for $580 million and recorded tax expense of $57 million related to the sale. The Company incurred a pre-tax asset impairment charge of $86 million in the first quarter of 2006 in recognition of this sale. The charge, which included the write-off of a portion of the associated goodwill and intangible and fixed assets, was recorded as asset impairment and exit costs on the condensed consolidated statement of earnings.

During the first quarter of 2006, the Company completed its annual review of goodwill and intangible assets and recorded non-cash pre-tax charges of $24 million related to an intangible asset impairment for biscuits assets in Egypt and hot cereal assets in the United States. These charges were 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 second quarter of 2005, the Company completed the sale of its fruit snacks assets. The Company incurred a pre-tax asset impairment charge of $93 million in the first quarter of 2005 in recognition of the sale. The charge, which included the write-off of all associated intangible assets, was recorded as asset impairment and exit costs on the condensed consolidated statement of earnings.

 

13




Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Total:

The pre-tax asset impairment, exit and implementation costs discussed above, for the nine months and three months ended September 30, 2006 and 2005, were included in the operating companies income of the following segments:

 

 

For the Nine Months Ended September 30, 2006

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

17

 

$

 

$

17

 

$

6

 

$

23

 

North America Cheese & Foodservice

 

80

 

 

 

80

 

7

 

87

 

North America Convenient Meals

 

74

 

 

 

74

 

9

 

83

 

North America Grocery

 

18

 

 

 

18

 

7

 

25

 

North America Snacks & Cereals

 

28

 

99

 

127

 

9

 

136

 

European Union

 

161

 

 

 

161

 

11

 

172

 

Developing Markets, Oceania & North Asia

 

65

 

11

 

76

 

4

 

80

 

Total

 

$

443

 

$

110

 

$

553

 

$

53

 

$

606

 

 

 

 

For the Nine Months Ended September 30, 2005

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

3

 

$

 

$

3

 

$

5

 

$

8

 

North America Cheese & Foodservice

 

9

 

 

 

9

 

6

 

15

 

North America Convenient Meals

 

2

 

 

 

2

 

2

 

4

 

North America Grocery

 

12

 

93

 

105

 

1

 

106

 

North America Snacks & Cereals

 

5

 

 

 

5

 

29

 

34

 

European Union

 

67

 

 

 

67

 

14

 

81

 

Developing Markets, Oceania & North Asia

 

14

 

 

 

14

 

4

 

18

 

Total

 

$

112

 

$

93

 

$

205

 

$

61

 

$

266

 

 

14




Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 

 

 

For the Three Months Ended September 30, 2006

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset 
Impairment 
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

8

 

$

 

$

8

 

$

2

 

$

10

 

North America Cheese & Foodservice

 

14

 

 

 

14

 

6

 

20

 

North America Convenient Meals

 

22

 

 

 

22

 

5

 

27

 

North America Grocery

 

5

 

 

 

5

 

3

 

8

 

North America Snacks & Cereals

 

13

 

 

 

13

 

5

 

18

 

European Union

 

62

 

 

 

62

 

2

 

64

 

Developing Markets, Oceania & North Asia

 

1

 

 

 

1

 

 

 

1

 

Total

 

$

125

 

$

 

$

125

 

$

23

 

$

148

 

 

 

 

 

For the Three Months Ended September 30, 2005

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset 
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

(1

)

$

 

$

(1

)

$

2

 

$

1

 

North America Cheese & Foodservice

 

1

 

 

 

1

 

2

 

3

 

North America Convenient Meals

 

 

 

 

 

 

 

 

 

 

 

North America Grocery

 

1

 

 

 

1

 

1

 

2

 

North America Snacks & Cereals

 

1

 

 

 

1

 

6

 

7

 

European Union

 

20

 

 

 

20

 

4

 

24

 

Developing Markets, Oceania & North Asia

 

4

 

 

 

4

 

1

 

5

 

Total

 

$

26

 

$

 

$

26

 

$

16

 

$

42

 

 

Note 3. Related Party Transactions:

At September 30, 2006, Altria Group, Inc. owned 88.6% of the Company’s outstanding shares of capital stock. Altria Group, Inc.’s subsidiary, Altria Corporate Services, Inc., provides the Company with various services, including planning, legal, treasury, auditing, insurance, human resources, office of the secretary, corporate affairs, information technology, aviation and tax services. Billings for these services, which were based on the cost to Altria Corporate Services, Inc. to provide such services and a 5% management fee based on wages and benefits, were $140 million and $188 million for the nine months ended September 30, 2006 and 2005, respectively, and $38 million and $62 million for the three months ended September 30, 2006 and 2005, respectively.

 

15




Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 

At September 30, 2006, the Company had short-term amounts payable to Altria Group, Inc. of $475 million. The amounts payable to Altria Group, Inc. generally include accrued dividends, taxes and service fees. Interest on intercompany borrowings is based on the applicable London Interbank Offered Rate.

In the second quarter of 2006, the Company purchased certain real estate and certain personal property located in Wilkes Barre, Pennsylvania, from Altria Corporate Services, Inc., for an aggregate purchase price of $9.3 million. In addition, during the second quarter of 2006, the Company assumed all of Altria Corporate Services, Inc.’s rights under a lease for certain real property located in San Antonio, Texas. The Company also purchased certain personal property located in San Antonio, Texas from Altria Corporate Services, Inc., for an aggregate purchase price of $6.0 million.

Also, see Note 13. Income Taxes regarding the favorable impact to the Company of the closure of an Internal Revenue Service review of Altria Group, Inc.’s consolidated federal income tax return recorded during the first quarter of 2006.

Note 4. Acquisitions:

During the third quarter of 2006, the Company acquired the Spanish and Portuguese operations of United Biscuits (“UB”) and rights to all Nabisco trademarks in the European Union, Eastern Europe, the Middle East and Africa, which UB has held since 2000, for a total cost of approximately $1.1 billion.

The Spanish and Portuguese operations of UB include its biscuits, dry desserts, canned meats, tomato and fruit juice businesses as well as seven manufacturing facilities and 1,300 employees. Together, these businesses generated net revenues of approximately $400 million in 2005. Due to the timing of the closing of the acquisition, these financial statements do not reflect earnings from these operations, the amounts of which were not material.

The non-cash acquisition was financed by the Company’s assumption of approximately $541 million of debt issued by the acquired business immediately prior to the acquisition, as well as $530 million of value for the redemption of the Company’s outstanding investment in UB, primarily deep-discount securities. The redemption of the Company’s investment in UB resulted in a pre-tax gain on closing of approximately $251 million ($148 million after-tax or $0.09 per diluted share).