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Mondelez International, Inc. 10-Q 2006

 

 

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 June 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 July 31, 2006, there were 471,739,795 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, 2006 and December 31, 2005

 

3 - 4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings for the

 

 

 

 

Six Months Ended June 30, 2006 and 2005

 

5

 

 

Three Months Ended June 30, 2006 and 2005

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’

 

 

 

 

Equity for the Year Ended December 31, 2005 and the

 

 

 

 

Six Months Ended June 30, 2006

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the

 

 

 

 

Six Months Ended June 30, 2006 and 2005

 

8 - 9

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

10 - 28

 

 

 

 

 

Item 2.

 

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

 

29 - 53

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

54

 

 

 

 

 

PART II -

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

55 - 56

 

 

 

 

 

Item 1A.

 

Risk Factors

 

57

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

 

 

 

 

 

Item 6.

 

Exhibits

 

58

 

 

 

 

 

Signature

 

 

 

59

 

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,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

402

 

$

316

 

 

 

 

 

 

 

Receivables (less allowances of $85 in 2006 and $92 in 2005)

 

3,549

 

3,385

 

 

 

 

 

 

 

Inventories:

 

 

 

 

 

Raw materials

 

1,484

 

1,363

 

Finished product

 

2,066

 

1,980

 

 

 

3,550

 

3,343

 

 

 

 

 

 

 

Deferred income taxes

 

625

 

879

 

Other current assets

 

248

 

230

 

Total current assets

 

8,374

 

8,153

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

17,046

 

16,598

 

Less accumulated depreciation

 

7,284

 

6,781

 

 

 

9,762

 

9,817

 

 

 

 

 

 

 

Goodwill

 

24,985

 

24,648

 

Other intangible assets, net

 

10,428

 

10,516

 

 

 

 

 

 

 

Prepaid pension assets

 

3,690

 

3,617

 

 

 

 

 

 

 

Other assets

 

983

 

877

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

58,222

 

$

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)

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

LIABILITIES

 

 

 

 

 

Short-term borrowings

 

$

1,105

 

$

805

 

Current portion of long-term debt

 

2,268

 

1,268

 

Due to Altria Group, Inc. and affiliates

 

485

 

652

 

Accounts payable

 

2,084

 

2,270

 

Accrued liabilities:

 

 

 

 

 

Marketing

 

1,451

 

1,529

 

Employment costs

 

637

 

625

 

Other

 

1,270

 

1,338

 

Income taxes

 

398

 

237

 

 

 

 

 

 

 

Total current liabilities

 

9,698

 

8,724

 

 

 

 

 

 

 

Long-term debt

 

7,478

 

8,475

 

Deferred income taxes

 

5,869

 

6,067

 

Accrued postretirement health care costs

 

1,980

 

1,931

 

Other liabilities

 

2,829

 

2,838

 

 

 

 

 

 

 

Total liabilities

 

27,854

 

28,035

 

 

 

 

 

 

 

Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

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

 

23,525

 

23,835

 

 

 

 

 

 

 

Earnings reinvested in the business

 

10,578

 

9,453

 

 

 

 

 

 

 

Accumulated other comprehensive losses (including currency translation of $(856) in 2006 and $(1,290) in 2005)

 

(1,205

)

(1,663

)

 

 

32,898

 

31,625

 

Less cost of repurchased stock (81,646,640 Class A shares in 2006 and 65,119,245 Class A shares in 2005)

 

(2,530

)

(2,032

)

 

 

 

 

 

 

Total shareholders’ equity

 

30,368

 

29,593

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

58,222

 

$

57,628

 

 

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,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Net revenues

 

$

16,742

 

$

16,393

 

 

 

 

 

 

 

Cost of sales

 

10,626

 

10,379

 

 

 

 

 

 

 

Gross profit

 

6,116

 

6,014

 

 

 

 

 

 

 

Marketing, administration and research costs

 

3,477

 

3,538

 

 

 

 

 

 

 

Asset impairment and exit costs

 

428

 

179

 

 

 

 

 

 

 

Losses (gains) on sales of businesses, net

 

11

 

(115

)

 

 

 

 

 

 

Amortization of intangibles

 

5

 

5

 

 

 

 

 

 

 

Operating income

 

2,195

 

2,407

 

 

 

 

 

 

 

Interest and other debt expense, net

 

243

 

350

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes and minority interest

 

1,952

 

2,057

 

 

 

 

 

 

 

Provision for income taxes

 

262

 

598

 

 

 

 

 

 

 

Earnings from continuing operations before minority interest

 

1,690

 

1,459

 

 

 

 

 

 

 

Minority interest in earnings from continuing operations, net

 

2

 

2

 

 

 

 

 

 

 

Earnings from continuing operations

 

1,688

 

1,457

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

 

 

(272

)

 

 

 

 

 

 

Net earnings

 

$

1,688

 

$

1,185

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

1.02

 

$

0.86

 

Discontinued operations

 

 

 

(0.16

)

Net earnings

 

$

1.02

 

$

0.70

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

1.02

 

$

0.86

 

Discontinued operations

 

 

 

(0.16

)

Net earnings

 

$

1.02

 

$

0.70

 

 

 

 

 

 

 

Dividends declared

 

$

0.46

 

$

0.41

 

 

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,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Net revenues

 

$

8,619

 

$

8,334

 

 

 

 

 

 

 

Cost of sales

 

5,435

 

5,275

 

 

 

 

 

 

 

Gross profit

 

3,184

 

3,059

 

 

 

 

 

 

 

Marketing, administration and research costs

 

1,770

 

1,777

 

 

 

 

 

 

 

Asset impairment and exit costs

 

226

 

29

 

 

 

 

 

 

 

Losses on sales of businesses, net

 

8

 

1

 

 

 

 

 

 

 

Amortization of intangibles

 

3

 

2

 

 

 

 

 

 

 

Operating income

 

1,177

 

1,250

 

 

 

 

 

 

 

Interest and other debt expense, net

 

147

 

174

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes and minority interest

 

1,030

 

1,076

 

 

 

 

 

 

 

Provision for income taxes

 

347

 

316

 

 

 

 

 

 

 

Earnings from continuing operations before minority interest

 

683

 

760

 

 

 

 

 

 

 

Minority interest in earnings from continuing operations, net

 

1

 

2

 

 

 

 

 

 

 

Earnings from continuing operations

 

682

 

758

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

 

 

(286

)

 

 

 

 

 

 

Net earnings

 

$

682

 

$

472

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.41

 

$

0.45

 

Discontinued operations

 

 

 

(0.17

)

Net earnings

 

$

0.41

 

$

0.28

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.41

 

$

0.45

 

Discontinued operations

 

 

 

(0.17

)

Net earnings

 

$

0.41

 

$

0.28

 

 

 

 

 

 

 

Dividends declared

 

$

0.23

 

$

0.205

 

 

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, 2005 and

the Six Months Ended June 30, 2006

(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, 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

 

 

 

 

 

1,688

 

 

 

 

 

 

 

 

 

1,688

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

434

 

 

 

434

 

 

 

434

 

Additional minimum pension liability

 

 

 

 

 

 

 

 

 

(21

)

(21

)

 

 

(21

)

Change in fair value of derivatives accounted for as hedges

 

 

 

 

 

 

 

 

 

1

 

1

 

 

 

1

 

Other

 

 

 

 

 

 

 

 

 

44

 

44

 

 

 

44

 

Total other comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

458

 

Total comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,146

 

Exercise of stock options and issuance of other stock awards

 

 

 

(310

)

202

 

 

 

 

 

 

 

127

 

19

 

Cash dividends declared ($0.46 per share)

 

 

 

 

 

(765

)

 

 

 

 

 

 

 

 

(765

)

Class A common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

(625

)

(625

)

Balances, June 30, 2006

 

$

 

$

23,525

 

$

10,578

 

$

(856

)

$

(349

)

$

(1,205

)

$

(2,530

)

$

30,368

 

 

Total comprehensive earnings were $1,043 million and $262 million, respectively, for the quarters ended June 30, 2006 and 2005 and $957 million for the first six 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 Six Months Ended

 

 

 

June 30,

 

 

 

2006

 

2005

 

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

1,688

 

$

1,185

 

 

 

 

 

 

 

Adjustments to reconcile net earnings to operating cash flows:

 

 

 

 

 

Depreciation and amortization

 

433

 

436

 

Deferred income tax benefit

 

(56

)

(222

)

Losses (gains) on sales of businesses, net

 

11

 

(115

)

Loss on sale of discontinued operations

 

 

 

32

 

Asset impairment and exit costs, net of cash paid

 

325

 

92

 

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

 

 

 

 

 

Receivables, net

 

(59

)

80

 

Inventories

 

(216

)

(296

)

Accounts payable

 

(93

)

(193

)

Income taxes

 

103

 

591

 

Amounts due to Altria Group, Inc. and affiliates

 

(202

)

84

 

Other working capital items

 

(442

)

(392

)

Change in pension assets and postretirement liabilities, net

 

14

 

(101

)

Other

 

100

 

111

 

 

 

 

 

 

 

Net cash provided by operating activities

 

1,606

 

1,292

 

 

 

 

 

 

 

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(450

)

(441

)

Proceeds from sales of businesses

 

91

 

1,640

 

Other

 

63

 

16

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

(296

)

1,215

 

 

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 Six Months Ended

 

 

 

June 30,

 

 

 

2006

 

2005

 

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuance (repayment) of short-term borrowings

 

$

294

 

$

(945

)

Long-term debt proceeds

 

32

 

34

 

Long-term debt repaid

 

(35

)

(739

)

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

 

35

 

187

 

Repurchase of Class A common stock

 

(633

)

(375

)

Dividends paid

 

(769

)

(700

)

Other

 

(173

)

144

 

 

 

 

 

 

 

Net cash used in financing activities

 

(1,249

)

(2,394

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

25

 

1

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Increase

 

86

 

114

 

 

 

 

 

 

 

Balance at beginning of period

 

316

 

282

 

 

 

 

 

 

 

Balance at end of period

 

$

402

 

$

396

 

 

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 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:

10




Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

For the Six Months

 

For the Three Months

 

 

 

Ended June 30, 2005

 

Ended June 30, 2005

 

 

 

(in millions, except per share data)

 

 

 

 

 

 

 

Net earnings, as reported

 

$

1,185

 

$

472

 

Deduct:

 

 

 

 

 

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

 

4

 

2

 

Pro forma net earnings

 

$

1,181

 

$

470

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic – as reported

 

$

0.70

 

$

0.28

 

Basic – pro forma

 

$

0.70

 

$

0.28

 

 

 

 

 

 

 

Diluted – as reported

 

$

0.70

 

$

0.28

 

Diluted – pro forma

 

$

0.69

 

$

0.28

 

 

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 six months ended June 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.

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 $10 million were recognized for the six months ended June 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 $348 million incurred for the six months ended June 30, 2006.  Total pre-tax restructuring charges incurred since the inception of the program in January 2004 were $1.3 billion.

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 provide certain IT support to the Company, were transitioned to EDS.  As a result, in the second quarter of 2006, the Company incurred pre-tax asset impairment and exit costs of $3 million and implementation costs of $11 million related to the transition.  These costs were included in the pre-tax restructuring program charges discussed above.

 

11




Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Restructuring Costs:

During the six months and three months ended June 30, 2006, pre-tax charges under the restructuring program of $318 million and $226 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, 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.  The pre-tax charges for the six months ended June 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 $133 million of the pre-tax charges incurred during the first six months of 2006 will require cash payments.

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

 

 

 

Asset

 

 

 

 

 

 

 

Severance

 

Write-downs

 

Other

 

Total

 

 

 

(in millions)

 

Liability balance, January 1, 2006

 

$

114

 

$

 

$

1

 

$

115

 

Charges

 

123

 

184

 

11

 

318

 

Cash spent

 

(97

)

 

 

(6

)

(103

)

Charges against assets

 

(3

)

(184

)

(1

)

(188

)

Currency

 

3

 

 

 

 

 

3

 

Liability balance, June 30, 2006

 

$

140

 

$

 

$

5

 

$

145

 

 

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 8,600 positions.  At June 30, 2006, approximately 7,200 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 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 Six Months Ended

 

For the Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

 

$

1

 

$

 

$

1

 

Cost of sales

 

11

 

26

 

5

 

11

 

Marketing, administration and research costs

 

19

 

18

 

12

 

14

 

 

 

 

 

 

 

 

 

 

 

Implementation Costs

 

$

30

 

$

45

 

$

17

 

$

26

 

 

12




 

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Asset Impairment Charges:

In July 2006, the Company completed the sale of its pet snacks brand and assets for $580 million and recorded additional taxes of approximately $60 million related to the sale.  This sale and the additional taxes were recorded in the third quarter of 2006.  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 second quarter of 2005, the Company completed the sale of its fruit snacks assets 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.  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.

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.

Total:

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

 

 

For the Six Months Ended June 30, 2006

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

9

 

$

 

$

9

 

$

4

 

$

13

 

North America Cheese & Foodservice

 

66

 

 

 

66

 

1

 

67

 

North America Convenient Meals

 

52

 

 

 

52

 

4

 

56

 

North America Grocery

 

13

 

 

 

13

 

4

 

17

 

North America Snacks & Cereals

 

15

 

99

 

114

 

4

 

118

 

European Union

 

99

 

 

 

99

 

9

 

108

 

Developing Markets, Oceania & North Asia

 

64

 

11

 

75

 

4

 

79

 

Total

 

$

318

 

$

110

 

$

428

 

$

30

 

$

458

 

 

13




 

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

For the Six Months Ended June 30, 2005

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

4

 

$

 

$

4

 

$

3

 

$

7

 

North America Cheese & Foodservice

 

8

 

 

 

8

 

4

 

12

 

North America Convenient Meals

 

2

 

 

 

2

 

2

 

4

 

North America Grocery

 

11

 

93

 

104

 

 

 

104

 

North America Snacks & Cereals

 

4

 

 

 

4

 

23

 

27

 

European Union

 

47

 

 

 

47

 

10

 

57

 

Developing Markets, Oceania & North Asia

 

10

 

 

 

10

 

3

 

13

 

Total

 

$

86

 

$

93

 

$

179

 

$

45

 

$

224

 

 

 

 

For the Three Months Ended June 30, 2006

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

7

 

$

 

$

7

 

$

3

 

$

10

 

North America Cheese & Foodservice

 

60

 

 

 

60

 

(3

)

57

 

North America Convenient Meals

 

35

 

 

 

35

 

4

 

39

 

North America Grocery

 

8

 

 

 

8

 

3

 

11

 

North America Snacks & Cereals

 

10

 

 

 

10

 

3

 

13

 

European Union

 

81

 

 

 

81

 

6

 

87

 

Developing Markets, Oceania & North Asia

 

25

 

 

 

25

 

1

 

26

 

Total

 

$

226

 

$

 

$

226

 

$

17

 

$

243

 

 

14