Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 31, 2017)
  • 10-Q (Aug 2, 2017)
  • 10-Q (May 3, 2017)
  • 10-Q (Oct 26, 2016)
  • 10-Q (Apr 28, 2016)
  • 10-Q (Oct 29, 2015)

 
8-K

 
Other

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 March 31, 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 April 28, 2006, there were 480,956,670 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 March 31, 2006 and December 31, 2005

 

3-4

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2006 and 2005    

 

5

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Year Ended December 31, 2005 and the Three Months Ended March 31, 2006

 

6

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 

 

7-8

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

9-23

 

 

 

 

 

 

 

Item 2.

 

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

 

24

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

 

 

PART II -

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

41

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

42

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

43

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

44

 

 

 

 

 

 

 

Signature

 

45

 

 

2




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

267

 

$

316

 

 

 

 

 

 

 

Receivables (less allowances of $86 in 2006 and $92 in 2005)

 

3,431

 

3,385

 

 

 

 

 

 

 

Inventories:

 

 

 

 

 

Raw materials

 

1,456

 

1,363

 

Finished product

 

2,131

 

1,980

 

 

 

3,587

 

3,343

 

 

 

 

 

 

 

Deferred income taxes

 

756

 

879

 

Other current assets

 

277

 

230

 

Total current assets

 

8,318

 

8,153

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

16,756

 

16,598

 

Less accumulated depreciation

 

6,976

 

6,781

 

 

 

9,780

 

9,817

 

 

 

 

 

 

 

Goodwill

 

24,663

 

24,648

 

Other intangible assets, net

 

10,436

 

10,516

 

 

 

 

 

 

 

Prepaid pension assets

 

3,708

 

3,617

 

 

 

 

 

 

 

Other assets

 

909

 

877

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

57,814

 

$

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)

 

 

 

 

March 31,

 

December 31,

 

 

 

2006

 

2005

 

LIABILITIES

 

 

 

 

 

Short-term borrowings

 

$

1,102

 

$

805

 

Current portion of long-term debt

 

1,269

 

1,268

 

Due to Altria Group, Inc. and affiliates

 

472

 

652

 

Accounts payable

 

2,020

 

2,270

 

Accrued liabilities:

 

 

 

 

 

Marketing

 

1,388

 

1,529

 

Employment costs

 

550

 

625

 

Other

 

1,459

 

1,338

 

Income taxes

 

441

 

237

 

 

 

 

 

 

 

Total current liabilities

 

8,701

 

8,724

 

 

 

 

 

 

 

Long-term debt

 

8,476

 

8,475

 

Deferred income taxes

 

5,959

 

6,067

 

Accrued postretirement health care costs

 

1,965

 

1,931

 

Other liabilities

 

2,736

 

2,838

 

 

 

 

 

 

 

Total liabilities

 

27,837

 

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

 

23,493

 

23,835

 

 

 

 

 

 

 

Earnings reinvested in the business

 

10,277

 

9,453

 

 

 

 

 

 

 

Accumulated other comprehensive losses (including currency translation of $(1,195) in 2006 and $(1,290) in 2005)

 

(1,566

)

(1,663

)

 

 

32,204

 

31,625

 

 

 

 

 

 

 

Less cost of repurchased stock (72,037,025 Class A shares in 2006 and 65,119,245 Class A shares in 2005)

 

(2,227

)

(2,032

)

 

 

 

 

 

 

Total shareholders’ equity

 

29,977

 

29,593

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

57,814

 

$

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 Three Months Ended March 31,

 

 

 

2006

 

2005

 

Net revenues

 

$

8,123

 

$

8,059

 

 

 

 

 

 

 

Cost of sales

 

5,191

 

5,104

 

 

 

 

 

 

 

Gross profit

 

2,932

 

2,955

 

 

 

 

 

 

 

Marketing, administration and research costs

 

1,707

 

1,761

 

 

 

 

 

 

 

Asset impairment and exit costs

 

202

 

150

 

 

 

 

 

 

 

Losses (gains) on sales of businesses

 

3

 

(116

)

 

 

 

 

 

 

Amortization of intangibles

 

2

 

3

 

 

 

 

 

 

 

Operating income

 

1,018

 

1,157

 

 

 

 

 

 

 

Interest and other debt expense, net

 

96

 

176

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes and minority interest

 

922

 

981

 

 

 

 

 

 

 

(Benefit) provision for income taxes

 

(85

)

282

 

 

 

 

 

 

 

Earnings from continuing operations before minority interest

 

1,007

 

699

 

 

 

 

 

 

 

Minority interest in earnings from continuing operations, net

 

1

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

1,006

 

699

 

 

 

 

 

 

 

Earnings from discontinued operations, net of income taxes

 

 

 

14

 

 

 

 

 

 

 

Net earnings

 

$

1,006

 

$

713

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.61

 

$

0.41

 

Discontinued operations

 

 

 

0.01

 

Net earnings

 

$

0.61

 

$

0.42

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.61

 

$

0.41

 

Discontinued operations

 

 

 

0.01

 

Net earnings

 

$

0.61

 

$

0.42

 

 

 

 

 

 

 

Dividends declared

 

$

0.23

 

$

0.205

 

 

See notes to condensed consolidated financial statements.

5




Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

For the Year Ended December 31, 2005 and

the Three Months Ended March 31, 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

 

 

 

 

 

1,006

 

 

 

 

 

 

 

 

 

1,006

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

 

 

95

 

 

 

95

 

 

 

95

 

Additional minimum pension liability

 

 

 

 

 

 

 

 

 

(2

)

(2

)

 

 

(2

)

Change in fair value of derivatives accounted for as hedges

 

 

 

 

 

 

 

 

 

4

 

4

 

 

 

4

 

Total other comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

97

 

Total comprehensive earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,103

 

Exercise of stock options and issuance of other stock awards

 

 

 

(342

)

202

 

 

 

 

 

 

 

117

 

(23

)

Cash dividends declared ($0.23 per share)

 

 

 

 

 

(384

)

 

 

 

 

 

 

 

 

(384

)

Class A common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

(312

)

(312

)

Balances, March 31, 2006

 

$             —

 

$      23,493

 

$      10,277

 

$      (1,195

)

$         (371

)

$      (1,566

)

$      (2,227

)

$      29,977

 

 

Total comprehensive earnings were $695 million for the quarter ended March 31, 2005.

 

See notes to condensed consolidated financial statements.

6




Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)

 

 

For the Three Months Ended
March 31,

 

 

 

2006

 

2005

 

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

1,006

 

$

713

 

 

 

 

 

 

 

Adjustments to reconcile net earnings to operating cash flows:

 

 

 

 

 

Depreciation and amortization

 

216

 

218

 

Deferred income tax benefit

 

(26

)

(24

)

Losses (gains) on sales of businesses

 

3

 

(116

)

Asset impairment and exit costs, net of cash paid

 

168

 

104

 

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

 

 

 

 

 

Receivables, net

 

(15

)

(93

)

Inventories

 

(294

)

(269

)

Accounts payable

 

(243

)

(251

)

Income taxes

 

126

 

139

 

Amounts due to Altria Group, Inc. and affiliates

 

(216

)

77

 

Other working capital items

 

(247

)

(141

)

Change in pension assets and postretirement liabilities, net

 

(44

)

(145

)

Other

 

46

 

30

 

 

 

 

 

 

 

Net cash provided by operating activities

 

480

 

242

 

 

 

 

 

 

 

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(185

)

(139

)

Proceeds from sales of businesses

 

88

 

190

 

Other

 

4

 

4

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

(93

)

55

 

 

See notes to condensed consolidated financial statements.

 

Continued

7




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

 

 

For the Three Months Ended
March 31,

 

 

 

 

 

 

 

 

 

2006

 

2005

 

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuance of short-term borrowings

 

$

288

 

$

377

 

Long-term debt proceeds

 

11

 

17

 

Long-term debt repaid

 

(14

)

(321

)

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

 

34

 

112

 

Repurchase of Class A common stock

 

(315

)

(167

)

Dividends paid

 

(385

)

(350

)

Other

 

(62

)

(34

)

 

 

 

 

 

 

Net cash used in financing activities

 

(443

)

(366

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

7

 

7

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Decrease

 

(49

)

(62

)

 

 

 

 

 

 

Balance at beginning of period

 

316

 

282

 

 

 

 

 

 

 

Balance at end of period

 

$

267

 

$

220

 

 

 

See notes to condensed consolidated financial statements.

8




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 the 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 previously 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 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 outstanding stock-based option awards for the quarter ended March 31, 2005 (in millions, except per share data):

9




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

 

 

 

2005

 

Net earnings, as reported

 

$713

 

Deduct:

 

 

 

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

 

2

 

Pro forma net earnings

 

$711

 

 

 

 

 

Earnings per share:

 

 

 

Basic — as reported

 

$0.42

 

Basic — pro forma

 

$0.42

 

 

 

 

 

Diluted — as reported

 

$0.42

 

Diluted — pro forma

 

$0.42

 

 

The adoption of SFAS No. 123(R) resulted in a cumulative effect gain of $6 million, which is net of $3 million in taxes, in the condensed consolidated statement of earnings for the quarter ended March 31, 2006. This gain results 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.

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 three months ended March 31, 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 $1.3 billion, including $105 million incurred in the first quarter of 2006. Total pre-tax restructuring charges incurred since the inception of the program in January 2004 were $1.043 billion.

Restructuring Costs:

During the first quarter of 2006 and 2005, pre-tax charges under the restructuring program of $92 million and $57 million, respectively, were recorded as asset impairment and exit costs on the condensed consolidated statements of earnings. The first quarter 2006 pre-tax charges resulted from the announcement of the closing of 4 plants, for a total of 23 since January 2004, and the continuation of a number of workforce reduction programs. Approximately $56 million of the first quarter 2006 pre-tax charges will require cash payments.

10




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

Pre-tax restructuring liability activity for the quarter ended March 31, 2006 was as follows:

 

Asset

 

 

 

 

 

 

 

 

 

Severance

 

Write-downs

 

Other

 

Total

 

 

 

(in millions)

 

Liability balance, January 1, 2006

 

$

114

 

$

 

$

1

 

$

115

 

Charges

 

53

 

34

 

5

 

92

 

Cash spent

 

(33

)

 

 

(1

)

(34

)

Charges against asset

 

 

 

(34

)

 

 

(34

)

Currency

 

 

 

 

 

(2

)

(2

)

Liability balance, March 31, 2006

 

$

134

 

$

 

$

3

 

$

137

 

 

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 6,800 positions. At March 31, 2006, approximately 5,400 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 Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

(in millions)

 

Cost of sales

 

$

6

 

$

15

 

Marketing, administration and research costs

 

7

 

4

 

Total implementation costs

 

$

13

 

$

19

 

 

Asset Impairment Charges:

During March 2006, the Company reached an agreement to sell its pet snacks brand and assets for $580 million. The transaction is subject to regulatory approval. The Company incurred a pre-tax asset impairment charge of $86 million in the first quarter of 2006 in recognition of the pending sale. The charge, which includes 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. Upon completion of the transaction, the Company expects to record additional taxes of approximately $60 million related to the sale.

During March 2005, the Company reached an agreement to sell its fruit snacks assets for approximately $30 million. The transaction closed in the second quarter of 2005. 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.

11




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

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 three months ended March 31, 2006 and March 31, 2005, were included in the operating companies income of the following segments:

 

 

For the Three Months Ended March 31, 2006

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

2

 

$

 

$

2

 

$

1

 

$

3

 

North America Cheese & Foodservice

 

6

 

 

 

6

 

4

 

10

 

North America Convenient Meals

 

17

 

 

 

17

 

 

 

17

 

North America Grocery

 

5

 

 

 

5

 

1

 

6

 

North America Snacks & Cereals

 

5

 

99

 

104

 

1

 

105

 

European Union

 

18

 

 

 

18

 

3

 

21

 

Developing Markets, Oceania & North Asia

 

39

 

11

 

50

 

3

 

53

 

Total

 

$

92

 

$

110

 

$

202

 

$

13

 

$

215

 

 

 

 

For the Three Months Ended March 31, 2005

 

 

 

Restructuring
Costs

 

Asset
Impairment

 

Total
Asset
Impairment
and Exit
Costs

 

Implementation
Costs

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Beverages

 

$

3

 

$

 

$

3

 

$

1

 

$

4

 

North America Cheese & Foodservice

 

7

 

 

 

7

 

3

 

10

 

North America Convenient Meals

 

2

 

 

 

2

 

1

 

3

 

North America Grocery

 

8

 

93

 

101

 

 

 

101

 

North America Snacks & Cereals

 

4

 

 

 

4

 

9

 

13

 

European Union

 

30

 

 

 

30

 

4

 

34

 

Developing Markets, Oceania & North Asia

 

3

 

 

 

3

 

1

 

4

 

Total

 

$

57

 

$

93

 

$

150

 

$

19

 

$

169

 

 

12




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

Note 3. Related Party Transactions:

At March 31, 2006, Altria Group, Inc. owned 87.6% 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 $52 million and $63 million for the three months ended March 31, 2006 and 2005, respectively.

At March 31, 2006, the Company had short-term amounts payable to Altria Group, Inc. of $472 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.

Also, see Note 12. Income Taxes regarding the impact to the Company of the recent closure of an Internal Revenue Service review of Altria Group, Inc.’s consolidated federal income tax return.

Note 4. Divestitures:

Discontinued Operations:

In June 2005, the Company sold substantially all of its sugar confectionery business for pre-tax proceeds of approximately $1.4 billion. The sale included the Life Savers, Creme Savers, Altoids, Trolli and Sugus brands. 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.

Summary results of operations for the sugar confectionery business for the three months ended March 31, 2005 were as follows (in millions):

Net revenues

 

$

116

 

 

 

 

 

Earnings before income taxes

 

$

22

 

Provision for income taxes

 

(8

)

Earnings from discontinued operations, net of income taxes

 

$

14

 

 

Other:

During the first quarter of 2006, the Company sold certain Canadian assets and a small U.S. biscuit brand. In recognition of these sales, the Company incurred pre-tax asset impairment charges of $176 million in the fourth quarter of 2005. During the first quarter of 2005, the Company sold its U.K. desserts assets, its U.S. yogurt assets and a minor trademark in Mexico. The aggregate proceeds received from these sales during the first quarter of 2006 and 2005 were $88 million and $190 million, respectively. The Company recorded pre-tax losses from sales of businesses of $3 million during the first quarter of 2006, and recorded pre-tax gains from sales of businesses of $116 million during the first quarter of 2005.

During March 2006, the Company reached an agreement to sell its pet snacks brand and assets for $580 million. The transaction is subject to regulatory approval. The Company incurred a pre-tax asset impairment charge of $86 million in the first quarter of 2006 in recognition of the pending sale. Upon completion of the transaction, the Company expects to record additional taxes of approximately $60 million related to the sale.

13




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

During March 2005, the Company reached an agreement to sell its fruit snacks assets for approximately $30 million. The transaction closed in the second quarter of 2005. The Company incurred a pre-tax asset impairment charge of $93 million in the first quarter of 2005 in recognition of the sale.

In April 2006, the Company announced an agreement to sell its industrial coconut assets. The transaction is expected to close in the second quarter of 2006.

The operating results of the other divestitures, discussed above, in the aggregate, were not material to the Company’s consolidated financial position, results of operations or cash flows in any of the periods presented.

Note 5. Stock Plans:

Under the Kraft 2005 Performance Incentive Plan (the “2005 Plan”), the Company may grant to eligible employees awards of stock options, stock appreciation rights, restricted stock, restricted and deferred stock units, and other awards based on the Company’s Class A common stock, as well as performance-based annual and long-term incentive awards. A maximum of 150 million shares of the Company’s Class A common stock may be issued under the 2005 Plan, of which no more than 45 million shares may be awarded as restricted stock. In addition, the Company may grant up to 500,000 shares of Class A common stock to members of the Board of Directors who are not full-time employees of the Company or Altria Group, Inc., or their subsidiaries, under the Kraft Directors Plan (the “2001 Directors Plan”). Shares available to be granted under the 2005 Plan and the 2001 Directors Plan at March 31, 2006, were 143,618,430 and 439,367, respectively. Restricted shares available for grant under the 2005 Plan at March 31, 2006, were 38,618,430.

In February 2006, the Company’s Board of Directors adopted, and in April 2006, the stockholders approved, the Kraft 2006 Stock Compensation Plan for Non-Employee Directors (the “2006 Directors Plan”). The 2006 Directors Plan replaced the 2001 Directors Plan. Under the 2006 Directors Plan, the Company may grant up to 500,000 shares of Class A common stock to members of the Board of Directors who are not full-time employees of the Company or Altria Group, Inc., or their subsidiaries, over a five-year period.

Generally, stock options are granted at an exercise price equal to the fair value of the underlying stock on the date of the grant, become exercisable on the first anniversary of the grant date and have a maximum term of ten years. However, the Company has not granted stock options to its employees since 2002. Restricted stock generally vests on the third anniversary of the grant date.

Stock Option Plan

Stock option activity was as follows for the three months ended March 31, 2006:

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

Aggregate

 

 

 

Shares Subject

 

Average

 

Contractual

 

Intrinsic

 

 

 

to Option

 

Exercise Price

 

Term

 

Value

 

Balance at January 1, 2006

 

15,145,840

 

$

31.00

 

 

 

 

 

Options cancelled

 

(182,310

)

31.00

 

 

 

 

 

Balance at March 31, 2006

 

14,963,530

 

31.00

 

        5 years

 

$

 

Exercisable at March 31, 2006

 

14,307,559

 

31.00

 

        5

 

 

 

No options were exercised during the three months ended March 31, 2006. The total intrinsic value of options exercised during the three months ended March 31, 2005 was $0.4 million.

14




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

Prior to the initial public offering (“IPO”), certain employees of the Company participated in Altria Group, Inc.’s stock compensation plans. Altria Group, Inc. does not intend to issue additional Altria Group, Inc. stock compensation to the Company’s employees, except for reloads of previously issued options.

Pre-tax compensation cost and the related tax benefit for stock option awards totaled $1.4 million and $0.5 million, respectively, for the three months ended March 31, 2006. The fair value of the awards was determined using a modified Black-Scholes methodology using the following assumptions for Altria Group, Inc. common stock:

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Expected

 

Fair Value

 

 

 

Risk-Free

 

Expected

 

Expected

 

Dividend

 

at Grant

 

 

 

Interest Rate

 

Life

 

Volatility

 

Yield

 

Date

 

2006 Altria Group, Inc.

 

4.59

%

      4 years

 

30.34

%

4.39

%

$

14.49

 

2005 Altria Group, Inc.

 

3.68

 

      4

 

34.44

 

4.44

 

14.15

 

 

The Company’s employees held options to purchase the following number of shares of Altria Group, Inc. stock at March 31, 2006:

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

Aggregate

 

 

 

Shares Subject

 

Average

 

Contractual

 

Intrinsic

 

 

 

to Option

 

Exercise Price

 

Term

 

Value

 

Balance at March 31, 2006

 

19,540,343

 

$

39.95

 

       3 years

 

$

604 million

 

Exercisable at March 31, 2006

 

19,426,378

 

39.76

 

       3

 

   604

 

 

Restricted Stock Plans

The Company may grant shares of restricted stock and rights to receive shares of stock to eligible employees, giving them in most instances all of the rights of stockholders, 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.

The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restriction period. The Company recorded pre-tax compensation expense related to restricted stock and rights of $23 million, including the pre-tax cumulative effect gain of $9 million from the adoption of SFAS No. 123(R), and $38 million for the three months ended March 31, 2006 and 2005, respectively. The tax benefit recorded related to this compensation expense was $8 million and $14 million for the three months ended March 31, 2006 and 2005, respectively. The unamortized compensation expense related to the Company’s restricted stock and rights was $329 million at March 31, 2006 and is expected to be recognized over a weighted average period of 2 years.

15




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

The Company’s restricted stock and rights activity was as follows for the three months ended March 31, 2006:

 

 

 

Weighted-Average

 

 

 

Number of

 

Grant Date Fair Value

 

 

 

Shares

 

Per Share

 

 

 

 

 

 

 

Balance at January 1, 2006

 

15,085,116

 

$

33.80

 

Granted

 

6,365,540

 

29.00

 

Vested

 

(3,950,590

)

36.56

 

Forfeited

 

(1,026,770

)

32.97

 

Balance at March 31, 2006

 

16,473,296

 

31.33

 

 

The weighted-average grant date fair value of restricted stock and rights granted during the three months ended March 31, 2006 and 2005 was $185 million and $196 million, respectively, or $29.00 and $33.32 per restricted share or right, respectively. The total fair value of restricted stock and rights vested during the three months ended March 31, 2006 was $115 million. No restricted stock and rights vested during the three months ended March 31, 2005.

Note 6. Earnings Per Share:

Basic and diluted EPS from continuing and discontinued operations were calculated using the following:

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2006

 

2005

 

 

 

(in millions)

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

1,006

 

$

699

 

Earnings from discontinued operations

 

 

 

14

 

Net earnings

 

$

1,006

 

$

713

 

 

 

 

 

 

 

Weighted average shares for basic EPS

 

1,657

 

1,696

 

 

 

 

 

 

 

Plus incremental shares from assumed conversions of stock options, restricted stock and stock rights

 

5

 

7

 

 

 

 

 

 

 

Weighted average shares for diluted EPS

 

1,662

 

1,703

 

 

For the quarter ended March 31, 2006, all of the Class A common stock options were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive (i.e. the cash that would be received upon exercise is greater than the average market price of the stock during the period). For the quarter ended March 31, 2005, the number of stock options excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive was immaterial.

Note 7. Contingencies:

Kraft and its subsidiaries are parties to a variety of legal proceedings arising out of the normal course of business, including a few cases in which substantial amounts of damages are sought. While the results of litigation cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

16




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

Third-Party Guarantees: At March 31, 2006, the Company’s third-party guarantees, which are primarily derived from acquisition and divestiture activities, approximated $25 million. Substantially all of these guarantees expire through 2013, with $12 million expiring through March 31, 2007. The Company is required to perform under these guarantees in the event that a third party fails to make contractual payments or achieve performance measures. The Company has a liability of $16 million on its condensed consolidated balance sheet at March 31, 2006, relating to these guarantees.

Note 8. Goodwill and Other Intangible Assets, Net:

Goodwill by reportable segment was as follows:

 

March 31, 2006

 

December 31, 2005

 

 

 

(in millions)

 

North America Beverages

 

$

1,372

 

$

1,372

 

North America Cheese & Foodservice

 

4,221

 

4,216

 

North America Convenient Meals

 

2,167

 

2,167

 

North America Grocery

 

3,058

 

3,058

 

North America Snacks & Cereals

 

8,965

 

8,990

 

European Union

 

3,881

 

3,858

 

Developing Markets, Oceania & North Asia

 

999

 

987

 

Total goodwill

 

$

24,663

 

$

24,648

 

 

Intangible assets were as follows:

 

 

March 31, 2006

 

December 31, 2005

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

 

 

(in millions)

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Non-amortizable intangible assets

 

$

10,404

 

 

 

$

10,482

 

 

 

Amortizable intangible assets

 

95

 

$

63

 

95

 

$

61

 

Total intangible assets

 

$

10,499

 

$

63

 

$

10,577

 

$

61

 

 

Non-amortizable intangible assets consist substantially of brand names purchased through the Nabisco acquisition. Amortizable intangible assets consist primarily of certain trademark licenses and non-compete agreements. Amortization expense for intangible assets was $2 million and $3 million for the quarters ended March 31, 2006 and 2005, respectively. Amortization expense for each of the next five years is currently estimated to be approximately $7 million or less.

17




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

The movement in goodwill and gross carrying amount of intangible assets from December 31, 2005, is as follows:

 

 

Goodwill

 

Intangible
Assets

 

 

 

(in millions)

 

Balance at December 31, 2005

 

$

24,648

 

$

10,577

 

Changes due to:

 

 

 

 

 

Currency

 

40

 

3

 

Asset impairment

 

(25

)

(79

)

Other

 

 

 

(2

)

Balance at March 31, 2006

 

$

24,663

 

$

10,499

 

 

Note 9. Segment Reporting:

The Company manufactures and markets packaged food products, consisting principally of beverages, cheese, snacks, convenient meals and various packaged grocery products. Kraft manages and reports operating results through two units, Kraft North America Commercial and Kraft International Commercial. Reportable segments for Kraft North America Commercial are organized and managed principally by product category. Kraft International Commercial’s operations are organized and managed by geographic location.

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 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.

The Company’s management uses operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments. Interest and other debt expense, net, and provision for income taxes are centrally managed and, accordingly, such items are not presented by segment since they are not included in the measure of segment profitability reviewed by management.

Segment data were as follows:

 

 

For the Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

(in millions)

 

Net revenues:

 

 

 

 

 

North America Beverages

 

$

795

 

$

772

 

North America Cheese & Foodservice

 

1,469

 

1,490

 

North America Convenient Meals

 

1,214

 

1,140

 

North America Grocery

 

632

 

719

 

North America Snacks & Cereals

 

1,533

 

1,432