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Documents found in this filing:

  1. 10-Q
  2. Ex-12
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  6. Graphic
  7. Graphic
Form 10-Q
Table of Contents

 

 

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, 2010
   OR
¨    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

LOGO

Kraft Foods Inc.

(Exact name of registrant as specified in its charter)

 

Virginia   52-2284372

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Three Lakes Drive,

Northfield, Illinois

  60093
(Address of principal executive offices)   (Zip Code)

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

Not Applicable

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

Indicate by check mark whether the registrant: (i) 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 (ii) has been subject to such filing requirements for the past 90 days. Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No   ¨

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

 

Large accelerated filer  x      Accelerated filer ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
     (Do not check if a smaller reporting company)        

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

At July 30, 2010, there were 1,744,057,736 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

Kraft Foods Inc.

Table of Contents

 

         Page No.
PART I –  

FINANCIAL INFORMATION

  
Item 1.  

Financial Statements (Unaudited)

  
 

Condensed Consolidated Statements of Earnings for the Three
Months and Six Months Ended June 30, 2010 and 2009

   1
 

Condensed Consolidated Balance Sheets at
June 30, 2010 and December 31, 2009

   2
 

Condensed Consolidated Statements of Equity
for the Year Ended December 31, 2009 and the
Six Months Ended June 30, 2010

   3
 

Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2010 and 2009

   4
 

Notes to Condensed Consolidated Financial Statements

   5
Item 2.  

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

   27
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

   51
Item 4.  

Controls and Procedures

   51
PART II –  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

   52
Item 1A.  

Risk Factors

   52
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   53
Item 6.  

Exhibits

   53
Signature    54

In this report, “Kraft Foods,” “we,” “us” and “our” refers to Kraft Foods Inc. and subsidiaries, and “Common Stock” refers to Kraft Foods’ Class A common stock.

 

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.   Financial Statements.

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)

 

       For the Three Months Ended           For the Six Months Ended      
     June 30,     June 30,  
     2010      2009     2010      2009  

Net revenues

   $ 12,253      $   9,781      $   23,571      $   18,760   

Cost of sales

     7,559        6,269        14,788        12,148   
                                  

Gross profit

     4,694        3,512        8,783        6,612   

Marketing, administration and research costs

     2,933        2,062        5,783        3,981   

Asset impairment and exit costs

            (26            (26

Losses on divestitures, net

            17               17   

Amortization of intangibles

     60        3        93        9   
                                  

Operating income

     1,701        1,456        2,907        2,631   

Interest and other expense, net

     439        312        1,063        592   
                                  

Earnings from continuing operations
before income taxes

     1,262        1,144        1,844        2,039   

Provision for income taxes

     323        363        656        655   
                                  

Earnings from continuing operations

     939        781        1,188        1,384   

Earnings from discontinued operations, net
of income taxes (Note 2)

            48        1,644        107   
                                  

Net earnings

     939        829        2,832        1,491   

Noncontrolling interest

     2        2        12        4   
                                  

Net earnings attributable to Kraft Foods

   $ 937      $ 827      $ 2,820      $ 1,487   
                                  

Per share data:

              

Basic earnings per share attributable to
Kraft Foods:

              

Continuing operations

   $ 0.54      $ 0.53      $ 0.70      $ 0.93   

Discontinued operations

            0.03        0.98        0.08   
                                  

Net earnings attributable to Kraft Foods

   $ 0.54      $ 0.56      $ 1.68      $ 1.01   
                                  

Diluted earnings per share attributable to
Kraft Foods:

              

Continuing operations

   $ 0.53      $ 0.53      $ 0.70      $ 0.93   

Discontinued operations

            0.03        0.97        0.07   
                                  

Net earnings attributable to Kraft Foods

   $ 0.53      $ 0.56      $ 1.67      $ 1.00   
                                  

Dividends declared

   $     0.29      $ 0.29      $       0.58      $       0.58   
                                  

See notes to condensed consolidated financial statements.

 

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Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)

 

     June 30,     December 31,  
     2010     2009  

ASSETS

    

Cash and cash equivalents

   $ 2,854      $ 2,101   

Receivables (less allowances of $180 in 2010 and $121 in 2009)

     5,606        5,197   

Inventories, net

     5,167        3,775   

Deferred income taxes

     828        730   

Other current assets

     796        651   
                

Total current assets

     15,251        12,454   

Property, plant and equipment, net

     13,047        10,693   

Goodwill

     36,439        28,764   

Intangible assets, net

     25,230        13,429   

Prepaid pension assets

     162        115   

Other assets

     1,461        1,259   
                

TOTAL ASSETS

   $ 91,590      $ 66,714   
                

LIABILITIES

    

Short-term borrowings

   $ 291      $ 453   

Current portion of long-term debt

     636        513   

Accounts payable

     4,913        3,766   

Accrued marketing

     1,954        2,181   

Accrued employment costs

     1,056        1,175   

Other current liabilities

     4,919        3,403   
                

Total current liabilities

     13,769        11,491   

Long-term debt

     29,103        18,024   

Deferred income taxes

     7,353        4,508   

Accrued pension costs

     2,466        1,765   

Accrued postretirement health care costs

     2,910        2,816   

Other liabilities

     2,630        2,138   
                

TOTAL LIABILITIES

     58,231        40,742   

Contingencies (Note 13)

    

EQUITY

    

Common Stock, no par value (1,996,537,778 shares issued
in 2010 and 1,735,000,000 shares issued in 2009)

              

Additional paid-in capital

     31,131        23,611   

Retained earnings

     16,393        14,636   

Accumulated other comprehensive losses

     (5,959     (3,955

Treasury stock, at cost

     (8,266     (8,416
                

Total Kraft Foods Shareholders’ Equity

     33,299        25,876   

Noncontrolling interest

     60        96   
                

TOTAL EQUITY

     33,359        25,972   
                

TOTAL LIABILITIES AND EQUITY

   $     91,590      $ 66,714   
                

See notes to condensed consolidated financial statements.

 

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Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(in millions of dollars, except per share data)

(Unaudited)

 

    Kraft Foods Shareholders’ Equity              
    Common
Stock
   Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Earnings  /

(Losses)
    Treasury
Stock
    Noncontrolling
Interest
    Total
Equity
 

Balances at January 1, 2009

  $    $ 23,563      $ 13,440      $ (5,994   $ (8,714   $ 61      $ 22,356   

Comprehensive earnings:

              

Net earnings

                3,021                      7        3,028   

Other comprehensive earnings, net
of income taxes

                       2,039               34        2,073   
                          

Total comprehensive earnings *

               41        5,101   
                          

Exercise of stock options and
issuance of other stock awards

         49        (110            298               237   

Cash dividends declared
($1.16 per share)

                (1,715                          (1,715

Dividends paid on noncontrolling
interest and other activities

         (1                          (6     (7
                                                      

Balances at December 31, 2009

  $    $ 23,611      $ 14,636      $ (3,955   $ (8,416   $ 96      $ 25,972   

Comprehensive earnings / (losses):

              

Net earnings

                2,820                      12        2,832   

Other comprehensive losses, net
of income taxes

                       (2,004            (29     (2,033
                          

Total comprehensive earnings /
(losses) *

               (17     799   
                          

Exercise of stock options and
issuance of other stock awards

         38        (52            150               136   

Cash dividends declared
($0.58 per share)

                (1,011                          (1,011

Net impact of noncontrolling
interests from Cadbury acquisition

         38                                    38   

Purchase from noncontrolling
interest, dividends paid and other
activities

         (13                          (19     (32

Issuance of Common Stock

         7,457                                    7,457   
                                                      

Balances at June 30, 2010

  $                     –    $             31,131      $             16,393      $ (5,959   $         (8,266   $ 60      $             33,359   
                                                      

 

* Total comprehensive earnings / (losses) were $(608) million for the quarter ended and $799 million for the six months ended June 30, 2010, as compared to $2,274 million for the quarter ended and $2,784 million for the six months ended June 30, 2009. Comprehensive earnings / (losses) attributable to Kraft Foods were $(600) million for the quarter ended and $816 million for the six months ended June 30, 2010, as compared to $2,250 million for the quarter ended and $2,758 million for the six months ended June 30, 2009.

See notes to condensed consolidated financial statements.

 

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Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)

 

     For the Six Months Ended  
   June 30,  
     2010     2009  

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES

    

Net earnings

   $ 2,832      $ 1,491   

Adjustments to reconcile net earnings to operating cash flows:

    

Depreciation and amortization

     679        432   

Stock-based compensation expense

     81        84   

Deferred income tax provision

     106        110   

Losses on divestitures, net

            17   

Gain on discontinued operations (Note 2)

     (1,596       

Asset impairment and exit costs, net of cash paid

            9   

Other non-cash (income) / expense, net

     (360     147   

Change in assets and liabilities, excluding the effects of
acquisitions and divestitures:

    

Receivables, net

     488        373   

Inventories, net

     (425     (22

Accounts payable

     (302     (303

Other current assets

     210        197   

Other current liabilities

     (1,032     (701

Change in pension and postretirement assets and liabilities, net

     98        (114
                

Net cash provided by operating activities

     779        1,720   
                

CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES

    

Capital expenditures

     (608     (474

Acquisitions, net of cash received

     (9,844       

Proceeds from divestitures

     3,697        6   

Other

     (24     37   
                

Net cash used in investing activities

     (6,779     (431
                

CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES

    

Net repayments of short-term borrowings

     (1,310     (41

Long-term debt proceeds

     9,422        1   

Long-term debt repaid

     (9     (12

Dividends paid

     (1,156     (855

Other

     46        10   
                

Net cash provided by / (used in) financing activities

     6,993        (897
                

Effect of exchange rate changes on cash and cash equivalents

     (240     95   
                

Cash and cash equivalents:

    

Increase

     753        487   

Balance at beginning of period

     2,101        1,244   
                

Balance at end of period

   $         2,854      $         1,731   
                

See notes to condensed consolidated financial statements.

 

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Table of Contents

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.  Summary of Significant Accounting Policies:

Basis of Presentation:

Our interim condensed consolidated financial statements are unaudited. We prepared the condensed consolidated financial statements following SEC rules for interim reporting. As permitted under those rules, we have condensed or omitted a number of footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of our financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results.

You should read these statements in conjunction with our consolidated financial statements and related notes in our Form 10-K for the year ended December 31, 2009.

Principles of Consolidation:

The consolidated financial statements include Kraft Foods, as well as our wholly owned and majority owned subsidiaries. Our domestic operating subsidiaries report results as of the last Saturday of the quarter, and our international operating subsidiaries generally report results two weeks prior to the last Saturday of the quarter. The results of operations of the newly acquired Cadbury Limited (formerly, Cadbury plc) (“Cadbury”) are reported on the last day of the calendar month.

In the second quarter of 2010, we changed the consolidation date for certain European Biscuits operations, which are included within our Kraft Foods Europe segment, and certain operations in Asia Pacific, which are included within our Kraft Foods Developing Markets segment. Previously, these operations primarily reported period-end results one month prior to the end of the quarter and now report period-end results two weeks prior to the last Saturday of the quarter. We believe the change is preferable and will improve financial reporting by better matching the close dates of each subsidiary to our other international operating subsidiaries, which operate similarly. This change resulted in a favorable impact to net revenues of approximately $70 million and had an insignificant impact on net earnings. As the impacts to prior period results were not material to our financial results, we have not revised the prior period results for this change.

Highly Inflationary Accounting:

In the fourth quarter of 2009, the Venezuelan economy was classified as highly inflationary under U.S. GAAP. Effective January 1, 2010, we are accounting for our Venezuelan subsidiaries under highly inflationary accounting rules, which principally means all transactions are recorded in U.S. dollars. Venezuela has three exchange rates: the official rate, the consumer staples rate and the secondary (or parallel) rate. We used both the official rate and the secondary rate to translate our Venezuelan operations into U.S. dollars, based on the nature of the operations of each individual subsidiary. Additionally, we previously carried cash that we had exchanged into U.S. dollars using the secondary market at that rate. Upon the change to highly inflationary accounting, we were then required to translate those U.S. dollars on hand using the official rate, which resulted in a charge of $34 million in the first quarter of 2010.

On January 8, 2010, the Venezuelan government devalued its currency. Accordingly, we were required to revalue our net assets in Venezuela. Through the first six months of 2010, we recorded approximately $65 million of unfavorable foreign currency impacts relating to highly inflationary accounting in Venezuela (which included the one-time impact to translate cash of $34 million).

 

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Table of Contents

New Accounting Pronouncements:

In June 2009, new guidance was issued on the consolidation of variable interest entities. We adopted the guidance effective January 1, 2010. This guidance increases the likelihood of an enterprise being classified as a variable interest entity. The adoption of this guidance did not have a material impact on our financial results.

Note 2.  Acquisitions and Divestitures:

Cadbury Acquisition:

On January 19, 2010, we announced the terms of our final offer for each outstanding ordinary share of Cadbury, including each ordinary share represented by an American Depositary Share (“Cadbury ADS”), and the Cadbury Board of Directors recommended that Cadbury shareholders accept the terms of the final offer. On February 2, 2010, all of the conditions to the offer were satisfied or validly waived, the initial offer period expired and a subsequent offer period immediately began. At that point, we had received acceptances of 71.73% of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs (“Cadbury Shares”). As of June 1, 2010, we owned 100% of all outstanding Cadbury Shares. We believe the combination of Kraft Foods and Cadbury will create a global snacks powerhouse and an unrivaled portfolio of brands people love.

Under the terms of our final offer and the subsequent offer, we agreed to pay Cadbury shareholders 500 pence in cash and 0.1874 shares of Kraft Foods Common Stock per Cadbury ordinary share validly tendered and 2,000 pence in cash and 0.7496 shares of Kraft Foods Common Stock per Cadbury ADS validly tendered. This valued Cadbury at $18.5 billion, or approximately £11.6 billion (based on the average price of $28.36 for a share of Kraft Foods Common Stock on February 2, 2010 and an exchange rate of $1.595 per £1.00).

The EU Commission required, as a condition of the offer, that we divest the Cadbury confectionery operations in Poland and Romania. In June 2010, we entered into an agreement to divest the confectionery operations in Poland, and we expect the sale to close in the third quarter of 2010. In July 2010, we entered into an agreement to divest the confectionery operations in Romania, and we expect the sale to close in the third quarter of 2010. Both sales are subject to customary closing conditions, including regulatory approvals. The estimated impacts of these divestitures were reflected as adjustments to the purchase price allocations.

As part of our Cadbury acquisition, we expensed and incurred transaction related fees of $12 million for the three months and $215 million for the six months ended June 30, 2010. We recorded these expenses within marketing, administration and research costs. We also incurred acquisition financing fees of $96 million in the first quarter of 2010. We recorded these expenses within interest and other expense, net.

Cadbury contributed net revenues of $3,922 million and net earnings of $175 million from February 2, 2010 through June 30, 2010. The following unaudited pro forma summary presents Kraft Foods’ consolidated information as if Cadbury had been acquired on January 1, 2009. These amounts were calculated after conversion to U.S. GAAP, applying our accounting policies, and adjusting Cadbury’s results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment, and intangible assets had been applied from January 1, 2009, together with the consequential tax effects. These adjustments also reflect the additional interest expense incurred on the debt to finance the purchase.

 

         Pro forma for the                    
         Three Months    Pro forma for the Six          
         Ended June 30,   

Months Ended June 30,

         
         2009   

2010

   2009          
         (in millions)          
 

Net revenues

   $ 11,887    $        24,252    $         22,870      
 

Net earnings attributable to Kraft Foods

     663    2,533      1,251      

On February 2, 2010, we acquired 71.73% of Cadbury’s Shares for $13.1 billion and the value attributed to noncontrolling interests was $5.4 billion. From February 2, 2010 through June 1, 2010, we acquired the remaining 28.27% of Cadbury’s Shares for $5.4 billion. We had a $38 million gain on noncontrolling interest acquired and recorded it within additional paid in capital.

 

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Our February 2, 2010 Cadbury acquisition was valued at $18,547 million, or $17,500 million net of cash and cash equivalents. As part of that acquisition, we acquired the following assets and assumed the following liabilities (in millions):
 

Receivables (1)

   $ 1,324           
 

Inventories

     1,298           
 

Other current assets

     703           
 

Property, plant and equipment

     3,365           
 

Goodwill (2)

     9,431           
 

Intangible assets (3)

     12,723           
 

Other assets

     221           
 

Short-term borrowings

     (1,206        
 

Accounts payable

     (1,689        
 

Other current liabilities

     (1,602        
 

Long-term debt

     (2,432        
 

Deferred income taxes

     (2,884        
 

Accrued pension costs

     (795        
 

Other liabilities

     (957        
  (1)   The gross amount due under the receivables we acquired is $1,402 million, of which $78 million is expected to be uncollectable.
  (2)   Goodwill will not be deductible for statutory tax purposes and is attributable to Cadbury’s workforce and the significant synergies we expect from the acquisition.
  (3)   $10.1 billion of the intangible assets acquired are expected to be indefinite lived.
The above amounts represent the allocation of purchase price and are subject to revision when appraisals are finalized, which will occur during the third quarter of 2010.

 

Pizza Divestiture:

On March 1, 2010, we completed the sale of the assets of our North American frozen pizza business (“Frozen Pizza”) to Nestlé USA, Inc. (“Nestlé”) for $3.7 billion. Our Frozen Pizza business was a component of our U.S. Convenient Meals and Canada & North America Foodservice segments. The sale included the DiGiorno, Tombstone and Jack’s brands in the U.S., the Delissio brand in Canada and the California Pizza Kitchen trademark license. It also included two Wisconsin manufacturing facilities (Medford and Little Chute) and the leases for the pizza depots and delivery trucks. Approximately 3,600 of our employees transferred with the business to Nestlé. Accordingly, the results of our Frozen Pizza business have been reflected as discontinued operations on the condensed consolidated statement of earnings, and prior period results have been revised in a consistent manner.

 

Pursuant to the Frozen Pizza business Transition Services Agreement, we agreed to provide certain sales, co-manufacturing, distribution, information technology, accounting and finance services to Nestlé for up to two years.

 

Summary results of operations for the Frozen Pizza business through June 30, 2010 were:

 

              For the Three 
Months Ended
    For the Six Months Ended          
             June 30,
2009
    June 30,
2010
    June 30,
2009
         
            

(in millions)

         
 

Net revenues

   $ 381      $ 335      $ 798       
                                
 

 

Earnings before income taxes

     75        73        168       
 

Provision for income taxes

     (27     (25     (61    
 

Gain on discontinued operations, net of
income taxes

            1,596              
                                
 

Earnings and gain from discontinued
operations, net of income taxes

   $                 48      $           1,644      $              107       
                                

 

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Earnings before income taxes as presented exclude associated allocated overheads of $25 million for the six months ended June 30, 2010, $26 million for the three months ended June 30, 2009 and $53 million for the six months ended June 30, 2009.

The 2010 gain on discontinued operations from the sale of the Frozen Pizza business included tax expense of $1.2 billion.

The following assets of the Frozen Pizza business were included in the Frozen Pizza divestiture (in millions):

 

 

Inventories, net

   $ 102          
 

Property, plant and equipment, net

     317          
 

Goodwill

     475          
                 
 

Distributed assets of the Frozen
Pizza business

   $      894          
                 

 

Note 3.  Inventories:

 

Inventories at June 30, 2010 and December 31, 2009 were:

 

  

  

    
         June 30,
2010
    December 31,
2009
          
         (in millions)           
 

Raw materials

   $ 1,916      $ 1,410        
 

Finished product

     3,251        2,365        
                       
 

Inventories, net

   $ 5,167      $   3,775        
                       

 

Note 4.  Property, Plant and Equipment:

 

Property, plant and equipment at June 30, 2010 and December 31, 2009 were:

 

  

   

    
         June 30,
2010
    December 31,
2009
          
         (in millions)           
 

Land and land improvements

   $ 714      $ 492        
 

Buildings and building equipment

     4,509        4,231        
 

Machinery and equipment

     14,907        13,872        
 

Construction in progress

     1,247        828        
                       
       21,377        19,423        
 

Accumulated depreciation

     (8,330     (8,730     
                       
 

Property, plant and equipment, net

   $     13,047      $     10,693        
                       

 

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Note 5.  Goodwill and Intangible Assets:

Goodwill by reportable segment at June 30, 2010 and December 31, 2009 was:

 

         June 30,     December 31,           
         2010     2009           
         (in millions)           
 

Kraft Foods North America:

         
 

U.S. Beverages

   $ 1,290      $ 1,290        
 

U.S. Cheese

     3,000        3,000        
 

U.S. Convenient Meals

     985        1,460        
 

U.S. Grocery

     3,046        3,046        
 

U.S. Snacks

     9,115        6,948        
 

Canada & N.A. Foodservice

     3,314        2,340        
 

Kraft Foods Europe

     8,368        6,756        
 

Kraft Foods Developing Markets

     7,321        3,924        
                       
 

Total goodwill

   $ 36,439      $ 28,764        
                       

Intangible assets at June 30, 2010 and December 31, 2009 were:

         June 30,     December 31,           
         2010     2009           
         (in millions)           
 

Non-amortizable intangible assets

   $ 22,572      $ 13,262        
 

Amortizable intangible assets

     2,854        278        
                       
       25,426        13,540        
 

Accumulated amortization

     (196     (111     
                       
 

Intangible assets, net

   $ 25,230      $ 13,429        
                       

 

Non-amortizable intangible assets consist substantially of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury. Amortizable intangible assets consist primarily of trademark licenses, customer-related intangibles and non-compete agreements. At June 30, 2010, the weighted-average life of our amortizable intangible assets was 13.4 years.

 

The movements in goodwill and intangible assets were:

           
         Goodwill     Intangible
Assets, at  Cost
          
                   
         (in millions)           
 

Balance at January 1, 2010

   $ 28,764      $ 13,540        
 

Changes due to:

         
 

Foreign currency

     (1,281     (837     
 

Acquisitions

     9,431        12,723        
 

Divestitures

     (475            
                       
 

Balance at June 30, 2010

   $       36,439      $       25,426        
                       

Changes to goodwill and intangible assets during the six months ended June 30, 2010 were:

 

   

Acquisitions – We increased goodwill by $9,431 million and intangible assets by $12,723 million related to allocations of purchase price for our Cadbury acquisition, including the second quarter impacts of our refinements to preliminary allocations, which are substantially complete; however, these allocations are subject to revision upon their finalization in the third quarter of 2010. We recorded $2,167 million of the acquired goodwill in our U.S. Snacks segment, $929 million in our Canada & N.A. Foodservice segment, $2,612 million in our Kraft Foods Europe segment and $3,723 million in our Kraft Foods Developing Markets segment.

   

Divestitures – We reduced goodwill by $475 million due to our Frozen Pizza business divestiture.

 

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Amortization expense was $60 million for the three months and $93 million for the six months ended June 30, 2010. We currently estimate amortization expense for each of the next five years to be approximately $210 million, including the estimated impact of our Cadbury acquisition. Our estimated amortization is subject to revision when appraisals are finalized for our Cadbury acquisition.

Note 6.  Restructuring Costs:

Integration Program:

We believe our combination with Cadbury has the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development. In order to achieve these synergies and cost savings, we expect to incur total integration charges of approximately $1.5 billion in the first three years following the acquisition to combine and integrate the two businesses (the “Integration Program”), which also represents an increase over our previous expectation of approximately $1.3 billion.

Integration Program costs include the costs associated with combining our operations with Cadbury’s and are separate from the costs related to the acquisition. We incurred charges under the Integration Program of $149 million for the three months and $192 million for the six months ended June 30, 2010. We recorded these charges in operations, primarily within general corporate expenses and the segment operating income of Kraft Foods Europe and Kraft Foods Developing Markets.

During the second quarter of 2010, we evaluated Cadbury’s Vision into Action (“VIA”) restructuring program and began managing it within our overall Integration Program. Cadbury initiated the VIA restructuring program in 2007 and planned to run it through 2011. Accordingly, we acquired an accrual of $248 million relating to charges taken in previous periods. In evaluating their program as part of our corporate strategies and our integration plans, we included the remaining charges within our overall Integration Program. As we move forward on a combined company basis, we do not intend to manage these programs separately.

Liability activity for Integration Program in the first six months of 2010 was (in millions):

 

  Liability assumed upon acquisition    $  248           
 

Charges

     192           
 

Cash spent

     (176        
 

Write-offs

     (8        
 

Currency

     (15        
                  
 

Liability balance, June 30, 2010

   $         241           
                  

Cost Savings Initiatives:

Cost savings initiatives generally include exit, disposal and other project savings costs. We incurred charges associated with our cost savings initiatives of $42 million for the three months and $76 million for the six months ended June 30, 2010. We recorded these charges in operations, primarily within general corporate expenses and the segment operating income of Kraft Foods Europe and Canada & N.A. Foodservice. These charges primarily included other project savings costs associated with the Kraft Foods Europe Reorganization. Even though other project savings costs were directly attributable to exit and disposal costs, they did not qualify for special accounting treatment as exit or disposal activities.

2004 – 2008 Restructuring Program:

In 2008, we completed our five-year restructuring program (the “Restructuring Program”). The Restructuring Program’s objectives were to leverage our global scale, realign and lower our cost structure, and optimize capacity. As part of the Restructuring Program, we:

 

   

incurred $3.0 billion in pre-tax charges reflecting asset disposals, severance and implementation costs;

   

announced the closure of 35 facilities and the elimination of approximately 18,600 positions; and

   

will use cash to pay for $2.0 billion of the $3.0 billion in charges.

 

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Since the inception of the Restructuring Program, we have paid cash for $1.7 billion of the $2.0 billion in expected cash payments, including $41 million paid in the first six months of 2010.

Restructuring liability activity for the six months ended June 30, 2010 was (in millions):

 

 

Liability balance, January 1, 2010

   $     270           
 

Cash spent

     (41        
 

Currency

     (33        
                  
 

Liability balance, June 30, 2010

   $     196           
                  
            

Our 2010 activity was related to cash outflows on prior year Restructuring Program charges. Our prior year charges included severance benefits received by terminated employees. Other prior year costs related primarily to the renegotiation of supplier contract costs, workforce reductions associated with facility closings and the termination of leasing agreements.

 

Note 7.  Debt:

 

Short-Term Borrowings:

At June 30, 2010 and December 31, 2009, our short-term borrowings and related weighted-average interest rates consisted of:

 

         June 30, 2010    December 31, 2009
         Amount
  Outstanding  
    Weighted-
  Average Rate  
   Amount
  Outstanding  
   Weighted-
  Average Rate  
         (in millions)          (in millions)     
 

Commercial paper

   $      –       $ 262    0.5%
 

Bank loans

     291      5.9%      191    10.5%
                      
 

Total short-term borrowings

   $ 291         $ 453   
                      

The fair values of our short-term borrowings at June 30, 2010 and December 31, 2009, based upon current market interest rates, approximate the amounts disclosed above.

Borrowing Arrangements:

We maintain a revolving credit facility that we have historically used for general corporate purposes, including for working capital purposes, and to support our commercial paper issuances. Our $4.5 billion three-year senior unsecured revolving credit facility expires in November 2012. No amounts have been drawn on the facility.

The revolving credit facility agreement includes a covenant that we maintain a minimum total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), of at least $28.6 billion. This covenant was increased by $5.6 billion to $28.6 billion due to our Cadbury acquisition. At June 30, 2010, our total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), was $39.3 billion. We expect to continue to meet this covenant. The revolving credit facility agreement also contains customary representations, covenants and events of default. However, there are no other financial covenants, credit rating triggers or provisions that could require us to post collateral as security.

Cadbury maintained a three-year, £450 million senior unsecured revolving credit facility that we terminated effective June 30, 2010.

In addition to the above, some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $2.2 billion at June 30, 2010. Borrowings on these lines amounted to $291 million at June 30, 2010 and $191 million at December 31, 2009.

As part of our Cadbury acquisition, on November 9, 2009, we entered into an agreement for a 364-day senior unsecured bridge facility (the “Cadbury Bridge Facility”). During the first quarter of 2010, we borrowed £807 million under the Cadbury Bridge Facility, and later repaid it ($1,205 million at the time of repayment) with proceeds from the divestiture of our Frozen Pizza business. Upon repayment, the Cadbury Bridge Facility was terminated.

 

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Long-Term Debt:

On February 8, 2010, we issued $9.5 billion of senior unsecured notes at a weighted-average effective rate of 5.364% and used the net proceeds ($9,379 million) to finance the Cadbury acquisition and for general corporate purposes. The general terms of the $9.5 billion notes are:

 

   

$1.00 billion total principal notes due May 8, 2013 at a fixed, annual interest rate of 2.625%. Interest is payable semiannually beginning November 8, 2010.

   

$1.75 billion total principal notes due February 9, 2016 at a fixed, annual interest rate of 4.125%. Interest is payable semiannually beginning August 9, 2010.

   

$3.75 billion total principal notes due February 10, 2020 at a fixed, annual interest rate of 5.375%. Interest is payable semiannually beginning August 10, 2010.

   

$3.00 billion total principal notes due February 9, 2040 at a fixed, annual interest rate of 6.500%. Interest is payable semiannually beginning August 9, 2010.

In addition, these notes include covenants that restrict our ability to incur debt secured by liens above a certain threshold. We also must offer to purchase these notes at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of repurchase, if both of the following occur:

 

   (i) a “change of control” triggering event, and
  (ii) a downgrade of these notes below an investment grade rating by each of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services and Fitch, Inc. within a specified period.

The fair value of the long-term debt we acquired as part of our Cadbury acquisition was $2,432 million at February 2, 2010. The acquired debt has the following terms:

 

   

£77 million (approximately $115 million) total principal notes due December 1, 2010 at a fixed, annual interest rate of 4.875%.

   

C$150 million (approximately $141 million) Canadian bank loan agreement expiring August 30, 2012 at a variable interest rate. The interest rate at June 30, 2010 was 0.735%.

   

$1.00 billion total principal notes due October 1, 2013 at a fixed, annual interest rate of 5.125%.

   

£300 million (approximately $448 million) total principal notes due December 11, 2014 at a fixed, annual interest rate of 5.375%.

   

£350 million (approximately $523 million) total principal notes due July 18, 2018 at a fixed, annual interest rate of 7.250%.

We expect to continue to comply with our long-term debt covenants.

At June 30, 2010 and December 31, 2009, our long-term debt consisted of (interest rates were as of June 30, 2010):

 

             June 30,         December 31,  
         2010     2009  
         (in millions)  
 

Notes, 0.93% to 7.55% (average effective rate 5.81%), due through 2040

   $ 24,874      $ 14,395   
 

Euro notes, 5.75% to 6.25% (average effective rate 5.98%),
due through 2015

     3,480        4,072   
 

Sterling notes, 4.88% to 7.25% (average effective rate 4.59%),
due through 2018

     1,180          
 

Other foreign currency obligations

     144        5   
 

Capital leases and other

     61        65   
                  
 

Total

     29,739        18,537   
 

Less current portion of long-term debt

     (636     (513
                  
 

Long-term debt

   $ 29,103      $ 18,024   
                  

 

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Aggregate maturities of our long-term debt for the years ended June 30 were (in millions):

 

 

2011

   $ 636         
 

2012

     5,958         
 

2013

     1,901         
 

2014

     2,306         
 

2015

     1,893         
 

Thereafter

     17,043         

 

Fair Value:

The aggregate fair value of our total debt, based on quoted prices in active markets for identical liabilities, at June 30, 2010, was $32,688 million as compared with the carrying value of $30,030 million. The aggregate fair value of our total debt, based on quoted prices in active markets for identical liabilities, at December 31, 2009, was $20,222 million as compared with the carrying value of $18,990 million.

 

Interest and Other Expense:

Interest and other expense was:

 

  

     

  

  

         For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
         2010     2009     2010     2009  
         (in millions)  
 

Interest and other expense, net:

        
 

Interest expense, external debt

   $ 444      $ 309      $ 822      $ 614   
 

Acquisition-related financing fees

     4               251          
 

Other (income) / expense, net

     (9     3        (10     (22
                                  
 

Total interest and other expense, net

   $ 439      $           312      $ 1,063      $                592   
                                  

 

Acquisition-related financing fees include hedging and foreign currency impacts associated with the Cadbury acquisition and other fees associated with the Cadbury Bridge Facility.

 

Note 8.  Capital Stock:

 

Our articles of incorporation authorize 3.0 billion shares of Class A common stock, 2.0 billion shares of Class B common stock and 500 million shares of preferred stock. There were no Class B common shares or preferred shares issued and outstanding at June 30, 2010. Shares of Class A common stock issued, repurchased and outstanding were:

   

  

     

         Shares Issued     Shares
Repurchased
    Shares
Outstanding
       
 

Balance at January 1, 2010

     1,735,000,000        (257,115,097     1,477,884,903     
 

Shares issued

     261,537,778               261,537,778     
 

Exercise of stock options and
issuance of other stock awards

            4,387,294        4,387,294     
                            
 

Balance at June 30, 2010

     1,996,537,778        (252,727,803     1,743,809,975     
                            

In the first six months of 2010, we issued 262 million additional shares of our Common Stock as part of the Cadbury acquisition. The issued stock had a total fair value of $7,457 million based on the average of the high and low market prices on the dates of issuance.

 

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Note 9.  Accumulated Other Comprehensive Earnings / (Losses):

The components of accumulated other comprehensive earnings / (losses) were:

 

          
         Currency
Translation
  Adjustments  
    Pension and
  Other Benefits  
    Derivatives
  Accounted for  
as Hedges
            Total          
         (in millions)  
 

Balances at December 31, 2009

   $ (506   $ (3,550   $ 101      $ (3,955
 

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

        
 

Currency translation adjustments

     (1,953     64               (1,889
 

Amortization of experience
losses and prior service costs

            90               90   
 

Settlement losses

            53               53   
 

Net actuarial loss arising during
period

            (91            (91
 

Change in fair value of cash flow
hedges

                   (167     (167
                
 

Total other comprehensive losses

           (2,004
                                  
 

Balances at June 30, 2010

   $           (2,459   $           (3,434   $           (66   $           (5,959
                                  

Note 10.  Stock Plans:

Restricted and Deferred Stock:

In January 2010, we granted 1.9 million shares of stock in connection with our long-term incentive plan, and the market value per share was $27.33 on the date of grant. In February 2010, as part of our annual equity program, we issued 2.5 million shares of restricted and deferred stock to eligible employees, and the market value per restricted or deferred share was $29.15 on the date of grant. During the first six months of 2010, we issued an additional 0.8 million shares of restricted and deferred stock, including shares issued to Cadbury employees in the second quarter of 2010 under our annual equity program. The weighted-average market value per restricted or deferred share was $29.54 on the date of grant. In aggregate, we issued 5.2 million restricted and deferred shares during the first six months of 2010, including those issued as part of our long-term incentive plan.

During the first six months of 2010, 3.9 million shares of restricted and deferred stock vested at a market value of $112 million.

Stock Options:

In February 2010, as part of our annual equity program, we granted 15.0 million stock options to eligible employees at an exercise price of $29.15. During the first six months of 2010, we granted an additional 3.0 million stock options, including options granted to Cadbury employees in the second quarter of 2010 under our annual equity program. The weighted-average exercise price was $29.72. In aggregate, we granted 18.0 million stock options in the first six months of 2010.

There were 3.1 million stock options exercised during the first six months of 2010 with a total intrinsic value of $41 million.

 

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Note 11.  Benefit Plans:

Pension Plans

Components of Net Periodic Pension Cost:

Net periodic pension cost consisted of the following for the three and six months ended June 30, 2010 and 2009:

 

         U.S. Plans     Non-U.S. Plans  
         For the Three Months Ended
June 30,
    For the Three Months Ended
June 30,
 
             2010             2009             2010             2009      
         (in millions)  
 

Service cost

   $ 35      $ 39      $ 41      $ 15   
 

Interest cost

     91        92        99        51   
 

Expected return on plan assets

     (124     (121     (110     (58
 

Amortization:

        
 

Net loss from experience differences

     42        40        18        6   
 

Prior service cost

     2        1        1        2   
 

Other expenses

     14        40                 
                                  
 

Net periodic pension cost

   $ 60      $ 91      $ 49      $ 16   
                                  
         U.S. Plans     Non-U.S. Plans  
         For the Six Months Ended
June 30,
    For the Six Months Ended
June 30,
 
         2010     2009     2010     2009  
         (in millions)  
 

Service cost

   $ 72      $ 78      $ 77      $ 30   
 

Interest cost

     183        184        185        102   
 

Expected return on plan assets

     (245     (242     (207     (115
 

Amortization:

        
 

Net loss from experience differences

     85        79        36        11   
 

Prior service cost

     3        3        3        3   
 

Other expenses

     61        66                 
                                  
 

Net periodic pension cost

   $ 159      $ 168      $ 94      $ 31   
                                  

A significant portion of the 2010 increase in non-U.S. net periodic pension cost related to the Cadbury acquisition. The following costs are included within other expenses above. Severance payments related to our cost savings initiatives and lump-sum payments made to retired employees resulted in settlement losses under our U.S. plans of $14 million for the three months and $56 million for the six months ended June 30, 2010, and $40 million for the three months and $66 million for the six months ended June 30, 2009. Our U.S. plans also incurred a $5 million curtailment charge in the first quarter of 2010 related to the divestiture of our Frozen Pizza business.

Employer Contributions:

We make contributions to our U.S. and non-U.S. pension plans, primarily to the extent that they are tax deductible and do not generate an excise tax liability. During the first six months of 2010, we contributed $24 million to our U.S. plans and $132 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $30 million to our U.S. plans and approximately $150 million to our non-U.S. plans during the remainder of 2010. However, our actual contributions may differ due to many factors, including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.

 

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Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the three and six months ended June 30, 2010 and 2009:

 

         For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
         2010     2009     2010     2009  
         (in millions)  
 

Service cost

   $ 10      $ 10      $ 20      $ 19   
 

Interest cost

     44        43        86        87   
 

Amortization:

        
 

Net loss from experience differences

     14        11        27        22   
 

Prior service credit

     (8     (8     (16     (16
                                  
 

Net postretirement health care costs

   $     60      $     56      $         117      $         112   
                                  

 

Postemployment Benefit Plans

 

Net postemployment costs consisted of the following for the three and six months ended June 30, 2010 and 2009:

 

  

  

         For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
         2010     2009     2010     2009  
         (in millions)  
 

Service cost

   $ 1      $ 2      $ 4      $ 4   
 

Interest cost

     2               4        3   
 

Amortization of net losses

            4               3   
 

Other credits, net

            (7            (7
                                  
 

Net postemployment costs

   $     3      $ (1   $     8      $     3   
                                  

The following items are included in other credits above. We incurred severance charges of $25 million during the second quarter of 2009 related to our Kraft Foods Europe Reorganization. We also reversed $32 million of severance charges in the second quarter of 2009 related to our Restructuring Program as we sold a plant in Spain that we previously announced we would close under the program.

 

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Note 12.  Financial Instruments:

Fair Value of Derivative Instruments:

The fair values of derivative instruments recorded in the condensed consolidated balance sheet as of June 30, 2010 and December 31, 2009 were:

 

         June 30, 2010     December 31, 2009
         Asset     Liability     Asset     Liability
             Derivatives             Derivatives             Derivatives             Derivatives    
         (in millions)
 

Derivatives designated as
hedging instruments:

        
 

Foreign exchange contracts

   $ 15      $ 108      $              8      $          158
 

Commodity contracts

     33        23        25        14
 

Interest rate contracts

     10        107        153       
                                
     $ 58      $ 238      $          186      $          172
                                
 

Derivatives not designated
as hedging instruments:

        
 

Foreign exchange contracts

   $ 66      $ 114      $              2      $              –
 

Commodity contracts

     102        104        71        62
 

Interest rate contracts

     60        22              
                                
     $ 228      $ 240      $            73      $            62
                                
 

Total fair value

   $           286      $          478      $          259      $          234
                                

 

The majority of the increase in derivatives not designated as hedging instruments was a result of the Cadbury acquisition as we did not re-designate them for hedge accounting. We include the fair value of our asset derivatives within other current assets and the fair value of our liability derivatives within other current liabilities.

 

The fair values (asset / (liability)) of our derivative instruments at June 30, 2010 were determined using:

 

               Quoted Prices in     Significant      
               Active Markets    

Other

    Significant
               for Identical     Observable     Unobservable
         Total     Assets     Inputs     Inputs
         Fair Value     (Level 1)     (Level 2)     (Level 3)
         (in millions)
 

Foreign exchange contracts

   $          (141   $      $     (141   $               –
 

Commodity contracts

     8        (3     11       
 

Interest rate contracts

     (59            (59    
                                
 

Total derivatives

   $          (192   $ (3   $       (189   $                 –
                                

 

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Cash Flow Hedges:

Cash flow hedges affected accumulated other comprehensive earnings / (losses), net of income taxes, as follows:

 

         For the Three Months Ended     For the Six Months Ended  
     June 30,     June 30,  
         2010     2009     2010     2009  
         (in millions)  
 

Accumulated gain / (loss) at beginning
of period

   $ 68      $ (5   $ 101      $ (23
 

Transfer of realized (gains) / losses in
fair value to earnings

     (3     54        (6     89   
 

Unrealized loss in fair value

     (131     (20     (161     (37
                                  
 

Accumulated gain / (loss) at June 30

   $ (66   $ 29      $ (66   $ 29   
                                  
The effects of cash flow hedges for the three and six months ended June 30, 2010 and 2009 were:  
         For the Three Months Ended     For the Three Months Ended  
         June 30, 2010     June 30, 2009  
               (Gain) / Loss           (Gain) / Loss  
         Gain / (Loss)     Reclassified     Gain / (Loss)     Reclassified  
         Recognized     from AOCI     Recognized     from AOCI  
         in OCI     into Earnings     in OCI     into Earnings  
         (in millions)  
 

Foreign exchange contracts –
intercompany loans

   $ (2   $      $ 1      $   
 

Foreign exchange contracts –
forecasted transactions

     13        (7     (38     (5
 

Commodity contracts

     8        4        (4     59   
 

Interest rate contracts

     (150            21          
                                  
 

Total

   $ (131   $ (3   $ (20   $ 54   
                                  
         For the Six Months Ended     For the Six Months Ended  
         June 30, 2010     June 30, 2009  
               (Gain) / Loss           (Gain) / Loss  
         Gain / (Loss)     Reclassified     Gain / (Loss)     Reclassified  
         Recognized     from AOCI     Recognized     from AOCI  
         in OCI     into Earnings     in OCI     into Earnings  
         (in millions)  
 

Foreign exchange contracts –
intercompany loans

   $ 1      $      $ 1      $   
 

Foreign exchange contracts –
forecasted transactions

     25        (14     (23     (27
 

Commodity contracts

     (3     7        (36     116   
 

Interest rate contracts

     (184     1        21          
                                  
 

Total

   $ (161   $ (6   $ (37   $ 89   
                                  

 

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Table of Contents
         For the Three Months Ended
June 30, 2010
    For the Three Months Ended
June 30, 2009
         Gain / (Loss) on
Ineffectiveness
Recognized
in Earnings
    Gain / (Loss) on
Amount Excluded
from Effectiveness
Testing  Recognized
in Earnings
    Gain / (Loss) on
Ineffectiveness
Recognized
in Earnings
   Gain / (Loss) on
Amount Excluded
from Effectiveness
Testing  Recognized
in Earnings
         (in millions)
 

Foreign exchange contracts –
intercompany loans

   $      $      $    $     –
 

Foreign exchange contracts –
forecasted transactions

                         –                                   –     
 

Commodity contracts

                   4     
 

Interest rate contracts

                       
                               
 

Total

   $      $      $ 4    $     –
                               
         For the Six Months Ended
June 30, 2010
    For the Six Months Ended
June 30, 2009
         Gain / (Loss) on
Ineffectiveness
Recognized
in Earnings
    Gain / (Loss) on
Amount Excluded
from Effectiveness
Testing  Recognized
in Earnings
    Gain / (Loss) on
Ineffectiveness
Recognized
in Earnings
   Gain / (Loss) on
Amount Excluded
from Effectiveness
Testing  Recognized
in Earnings
         (in millions)
 

Foreign exchange contracts –
intercompany loans

   $      $      $    $     –
 

Foreign exchange contracts –
forecasted transactions

                         –                                   –     
 

Commodity contracts

     (9     (1     2     
 

Interest rate contracts

                       
                               
 

Total

   $ (9   $ (1   $ 2    $     –
                               

We record (i) the gain or loss reclassified from accumulated other comprehensive earnings / (losses) into earnings, (ii) the gain or loss on ineffectiveness, and (iii) the gain or loss on the amount excluded from effectiveness testing in:

 

   

cost of sales for commodity contracts;

   

cost of sales for foreign exchange contracts related to forecasted transactions; and

   

interest and other expense, net for interest rate contracts and foreign exchange contracts related to intercompany loans.

We expect to transfer unrealized gains of $4 million (net of taxes) for commodity cash flow hedges, unrealized gains of $18 million (net of taxes) for foreign currency cash flow hedges and unrealized losses of $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Hedge Coverage:

As of June 30, 2010, we had hedged forecasted transactions for the following durations:

 

   

commodity transactions for periods not exceeding the next 18 months;

   

interest rate transactions for periods not exceeding the next 32 years and 10 months; and

   

foreign currency transactions for periods not exceeding the next 19 months.

 

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Fair Value Hedges:

The effects of fair value hedges for the three and six months ended June 30, 2010 and 2009 were:

 

         For the Three Months Ended
June 30, 2010
    For the Three Months Ended
June 30, 2009
     
         Gain / (Loss)
Recognized
in Income on
Derivatives
    Gain / (Loss)
Recognized
in Income on
Borrowings
    Gain / (Loss)
Recognized
in Income on
Derivatives
    Gain / (Loss)
Recognized
in Income on
Borrowings
     
         (in millions)      
 

Interest rate contracts

   $ (2   $ 2      $ (1   $ 1     
         For the Six Months Ended
June 30, 2010
    For the Six Months Ended
June 30, 2009
     
         Gain / (Loss)
Recognized
in Income on
Derivatives
    Gain / (Loss)
Recognized
in Income on
Borrowings
    Gain / (Loss)
Recognized
in Income on
Derivatives
    Gain / (Loss)
Recognized
in Income on
Borrowings
     
         (in millions)      
 

Interest rate contracts

   $ 3      $ (3   $ (1   $ 1     

 

We include the gain or loss on hedged long-term debt and the offsetting loss or gain on the related interest rate swap in interest and other expense, net.

 

Hedges of Net Investments in Foreign Operations:

The effects of hedges of net investments in foreign operations for the three and six months ended June 30, 2010 and 2009 were:

         Gain / (Loss) Recognized in OCI     Location of
Gain / (Loss)
Recorded
in AOCI
         For the Three
Months Ended
June 30, 2010
    For the Three
Months Ended
June 30, 2009
    For the Six
Months Ended
June  30, 2010
    For the Six
Months Ended
June 30, 2009
   
         (in millions)      
 

Euro notes

   $ 231      $ (143   $ 378      $ (12   Currency Translation
Adjustment

 

Economic Hedges:

The effects of economic hedges, derivatives that are not designated as hedging instruments, for the three and six months ended June 30, 2010 and 2009 were:

 

         Gain / (Loss) Recognized in Earnings     Location of
Gain / (Loss)
Recognized
in Earnings
         For the Three
Months Ended
June 30, 2010
    For the Three
Months Ended
June 30, 2009
    For the Six
Months Ended
June 30, 2010
    For the Six
Months Ended
June 30, 2009
   
         (in millions)      
 

Foreign exchange contracts:

          
 

Intercompany loans and
forecasted interest payments

   $ 17      $ 11      $ 23      $ (8   Interest expense
 

Forecasted transactions

     1        (7     2        (6   Cost of sales
 

Forecasted transactions

                   (17          Interest expense
 

Cadbury acquisition related

                   (395          Interest expense
 

Interest rate contracts

     (4            5             Interest expense
 

Commodity contracts

     35        (10     11        16      Cost of sales
                                    
 

Total

   $ 49      $ (6   $ (371   $ 2     
                                    

The hedging losses related to the Cadbury acquisition were economically offset by foreign exchange movement net gains of $240 million on the British pound cash, Cadbury Bridge Facility and payable balances associated with the acquisition. See our consolidated financial statements for the year ended December 31, 2009 for additional information on our purpose for entering into derivatives not designated as hedging instruments and our overall risk management strategies.

 

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Volume:                

As of June 30, 2010 and December 31, 2009, we had the following outstanding hedges:

 

  
         Notional Amount          
             June 30,    
2010
     December 31,
2009
         
         (in millions)          
 

Foreign exchange contracts:

             
 

Intercompany loans and forecasted
interest payments

   $         4,823      $         1,376      
 

Forecasted transactions

     2,226        631      
 

Commodity contracts

     1,191        1,832      
 

Interest rate contracts

     5,272        2,350      
 

Net investment hedge – euro notes

     3,488        4,081      

 

Note 13.  Commitments and Contingencies:

 

Legal Proceedings:

We routinely are involved in legal proceedings, claims and governmental inspections or investigations (“Legal Matters”) arising in the ordinary course of our business. Currently, we do not believe that the ultimate costs to resolve any of the Legal Matters will have a material effect on our financial results.

 

Third-Party Guarantees:

We have third-party guarantees primarily covering the long-term obligations of our vendors. As part of those transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At June 30, 2010, the carrying amount of our third-party guarantees on our condensed consolidated balance sheet and the maximum potential payment under these guarantees was $29 million. Substantially all of these guarantees expire at various times through 2018.

 

Leases:

As of June 30, 2010, minimum rental commitments under non-cancelable operating leases in effect at quarter-end were (in millions):

 

  2011    $         381           
 

2012

     378           
 

2013

     239           
 

2014

     170           
 

2015

     125           
 

Thereafter

     314           

Note 14.  Income Taxes:

As of January 1, 2010, our unrecognized tax benefits were $829 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $661 million. Our unrecognized tax benefits were $1,155 million at June 30, 2010, and if we had recognized all of these benefits, the net impact to our income tax provision would have been $887 million. The amount of unrecognized tax benefits could decrease by approximately $50 million during the next 12 months due to the potential resolution of certain foreign, U.S. federal and state examinations. Furthermore, we recorded $301 million of unrecognized tax benefits and $35 million of accrued interest and penalties as part of our purchase price allocations for Cadbury, which are subject to revision when the purchase price allocations are finalized in the third quarter of 2010. We include accrued interest and penalties related to uncertain tax positions in our tax provision. We had accrued interest and penalties of $210 million as of January 1, 2010 and $213 million as of June 30, 2010.

 

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The changes in our unrecognized tax benefits for the six months ended June 30, 2010 and 2009 were (in millions):

 

         2010     2009           
 

January 1

   $ 829      $ 807        
 

Increases from positions taken during prior periods

     7        25        
 

Decreases from positions taken during prior periods

     (78     (55     
 

Increases from positions taken during the current period

     145        75        
 

Increases from acquisition adjustments

     301               
 

Decreases relating to settlements with taxing authorities

     (3     (10     
 

Reductions resulting from the lapse of the applicable
statute of limitations

     (11     (7     
 

Currency / other

     (35     13        
                       
 

June 30

   $     1,155      $        848        
                       

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at June 30, 2010 and December 31, 2009:

 

         June 30,
2010
    December 31,
2009
          
         (in millions)           
 

Deferred income tax assets:

         
 

Accrued postretirement and postemployment benefits

   $ 1,351      $ 1,472        
 

Accrued pension costs

     701        456        
 

Other

     1,828        1,997        
                       
 

Total deferred income tax assets

     3,880        3,925        
                       
 

Valuation allowance

     (264     (97     
                       
 

Net deferred income tax assets

   $ 3,616      $ 3,828        
                       
 

Deferred income tax liabilities:

         
 

Trade names

   $ (7,349   $ (4,431     
 

Property, plant and equipment

     (2,000     (2,029     
 

Other

     (640     (1,055     
                       
 

Total deferred income tax liabilities

     (9,989     (7,515     
                       
 

Net deferred income tax liabilities

   $ (6,373   $ (3,687     
                       

 

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Note 15.   Earnings Per Share:

 

Basic and diluted EPS were calculated using the following:

         For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
         2010    2009    2010    2009
         (in millions, except per share data; 2009 revised)
 

Earnings from continuing operations

   $ 939    $ 781    $ 1,188    $ 1,384
 

Earnings and gain from discontinued
operations, net of income taxes

          48      1,644      107
                             
 

Net earnings

     939      829      2,832      1,491
             
 

Noncontrolling interest

     2      2      12      4
                             
 

Net earnings attributable to Kraft Foods

   $ 937    $ 827    $ 2,820    $ 1,487
                             
 

Weighted-average shares for basic EPS

     1,747      1,478      1,681      1,476
 

Plus incremental shares from assumed
conversions of stock options and
long-term incentive plan shares

     5      6      5      8
                             
 

Weighted-average shares for diluted EPS

     1,752      1,484      1,686      1,484
                             
 

Basic earnings per share attributable
to Kraft Foods:

           
 

Continuing operations

   $ 0.54    $ 0.53    $ 0.70    $ 0.93
 

Discontinued operations

          0.03      0.98      0.08
                             
 

Net earnings attributable to Kraft Foods

   $ 0.54    $ 0.56    $ 1.68    $ 1.01
                             
 

Diluted earnings per share attributable
to Kraft Foods:

           
 

Continuing operations

   $ 0.53    $ 0.53    $ 0.70    $ 0.93
 

Discontinued operations

          0.03      0.97      0.07
                             
 

Net earnings attributable to Kraft Foods

   $         0.53    $         0.56    $         1.67    $         1.00
                             

We exclude antidilutive Kraft Foods stock options from our calculation of weighted-average shares for diluted EPS. We excluded 31.1 million antidilutive stock options for the three months and 33.9 million antidilutive stock options for the six months ended June 30, 2010, and we excluded 23.8 million antidilutive stock options for the three months and six months ended June 30, 2009.

Note 16.   Segment Reporting:

We manufacture and market packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. We manage and report operating results through three geographic units: Kraft Foods North America, Kraft Foods Europe and Kraft Foods Developing Markets. We manage the operations of Kraft Foods North America and Kraft Foods Europe by product category, and we manage the operations of Kraft Foods Developing Markets by location. Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery, U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets. The results from our Cadbury acquisition are reflected within our U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets segments.

 

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Table of Contents

Management uses segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of our U.S. pension plan cost (which is a component of cost of sales and marketing, administration and research costs), general corporate expenses (which are a component of marketing, administration and research costs) and amortization of intangibles for all periods presented. We exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, we record gains and losses on hedging activities within segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.

Segment data were:

 

         For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
         2010    2009    2010    2009
         (in millions; 2009 revised)
 

Net revenues:

           
 

Kraft Foods North America:

           
 

U.S. Beverages

   $ 886    $ 836    $ 1,707    $ 1,619
 

U.S. Cheese

     797      887      1,642      1,781
 

U.S. Convenient Meals

     839      826      1,609      1,561
 

U.S. Grocery

     923      973      1,739      1,791
 

U.S. Snacks

     1,516      1,288      2,908      2,485
 

Canada & N.A. Foodservice

     1,200      986      2,244      1,858
 

Kraft Foods Europe

     2,793      2,083      5,502      4,011
 

Kraft Foods Developing Markets

     3,299      1,902      6,220      3,654
                             
 

Net revenues

   $     12,253    $       9,781    $     23,571    $     18,760
                             

 

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Table of Contents
         For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
         2010     2009     2010     2009  
         (in millions; 2009 revised)  
 

Earnings from continuing operations
before income taxes:

        
 

Operating income:

        
 

Kraft Foods North America:

        
 

U.S. Beverages

   $ 178      $ 148      $ 350      $ 310   
 

U.S. Cheese

     136        166        270        297   
 

U.S. Convenient Meals

     101        84        185        145   
 

U.S. Grocery

     357        339        643        601   
 

U.S. Snacks

     240        205        447        334   
 

Canada & N.A. Foodservice

     175        127        275        199   
 

Kraft Foods Europe

     335        208        624        354   
 

Kraft Foods Developing Markets

     429        253        788        460   
 

Unrealized gains / (losses) on
hedging activities

     22        34        (16     121   
 

Certain U.S. pension plan costs

     (25     (54     (81     (94
 

General corporate expenses

     (187     (51     (485     (87
 

Amortization of intangibles

     (60     (3     (93     (9
                                  
 

Operating income

     1,701        1,456        2,907        2,631   
 

Interest and other expense, net

     439        312        1,063        592   
                                  
 

Earnings from continuing operations
before income taxes

   $   1,262      $   1,144      $   1,844      $   2,039   
                                  

Unrealized Gains / (Losses) on Hedging Activities – We recognized gains on the change in unrealized hedging positions of $22 million for the three months and losses of $16 million for the six months ended June 30, 2010, and gains of $34 million for the three months and $121 million for the six months ended June 30, 2009.

General Corporate Expenses – The 2010 increase in general corporate expenses was primarily due to acquisition-related transaction fees, Integration Program costs and the impact of Cadbury’s corporate charges.

Restructuring Costs – We incurred charges under the Integration Program of $149 million for the three months and $192 million for the six months ended June 30, 2010. We recorded these charges in operations, primarily within general corporate expenses and the segment operating income of Kraft Foods Europe and Kraft Foods Developing Markets. We also incurred charges associated with our cost savings initiatives of $42 million for the three months and $76 million for the six months ended June 30, 2010. We recorded these charges in operations, primarily within general corporate expenses and the segment operating income of Kraft Foods Europe and Canada & N.A. Foodservice.

 

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Total assets by segment were:

 

         June 30,
2010
   December 31,
2009
         
         (in millions)          
 

Total assets:

           
 

Kraft Foods North America:

           
 

U.S. Beverages

   $ 2,348    $ 2,382      
 

U.S. Cheese

     4,519      4,589      
 

U.S. Convenient Meals

     2,046      3,063      
 

U.S. Grocery

     5,633      5,565      
 

U.S. Snacks

     22,969      16,418      
 

Canada & N.A. Foodservice

     6,552      5,051      
 

Kraft Foods Europe

     24,054      16,073      
 

Kraft Foods Developing Markets

     19,831      11,087      
 

Unallocated assets (1)

     3,638      2,486      
                     
 

Total assets

   $     91,590    $      66,714      
                     
 

 

(1)       Unallocated assets consist primarily of cash and cash equivalents, deferred income taxes, centrally held property, plant and equipment, prepaid pension assets and derivative financial instrument balances.

Net revenues by consumer sector, which includes Kraft macaroni and cheese dinners in the Convenient Meals sector and the separation of Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets into sector components, were:
         For the Three Months Ended June 30, 2010
         Kraft Foods
North America
   Kraft Foods
Europe
   Kraft Foods
Developing
Markets
   Total
         (in millions)
 

Biscuits (1)

   $ 1,398    $ 660    $ 673    $ 2,731
 

Confectionery (1)

     469      1,138      1,566      3,173
 

Beverages

     1,022      582      668      2,272
 

Cheese

     1,181      240      216      1,637
 

Grocery

     916      94      144      1,154
 

Convenient Meals

     1,175      79      32      1,286
                             
 

Total net revenues

   $ 6,161    $       2,793    $         3,299    $       12,253
                             
         For the Three Months Ended June 30, 2009
         Kraft Foods
North America
   Kraft Foods
Europe
   Kraft Foods
Developing
Markets
   Total
         (in millions; as revised)
 

Biscuits (1)

   $ 1,446    $ 596    $ 595    $ 2,637
 

Confectionery (1)

     67      480      398      945
 

Beverages

     965      579      537      2,081
 

Cheese

     1,212      241      198      1,651
 

Grocery

     950      103      144      1,197
 

Convenient Meals

     1,156      84      30      1,270
                             
 

Total net revenues

   $ 5,796    $ 2,083    $ 1,902    $ 9,781
                             

 

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         For the Six Months Ended June 30, 2010
         Kraft Foods
North America