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Mondelez International, Inc. 10-Q 2011

Documents found in this filing:

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

 

 

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, 2011
   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

  60093-2753
(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 (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  ¨

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 April 29, 2011, there were 1,757,876,206 shares of the registrant’s common stock outstanding.

 

 

 


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 Ended March 31, 2011 and 2010

     1   
 

Condensed Consolidated Balance Sheets at
March 31, 2011 and December 31, 2010

     2   
 

Condensed Consolidated Statements of Equity
for the Year Ended December 31, 2010 and the
Three Months Ended March 31, 2011

     3   
 

Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2011 and 2010

     4   
 

Notes to Condensed Consolidated Financial Statements

     5   
Item 2.  

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

     18   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     34   
Item 4.  

Controls and Procedures

     34   
PART II –  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     35   
Item 1A.  

Risk Factors

     35   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     35   
Item 6.  

Exhibits

     35   
Signature      37   

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.

 

i


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  
     March 31,  
     2011      2010  

Net revenues

   $     12,573       $     11,318   

Cost of sales

     7,937         7,229   
                 

Gross profit

     4,636         4,089   

Selling, general and administrative expenses

     2,933         2,850   

Amortization of intangibles

     57         33   
                 

Operating income

     1,646         1,206   

Interest and other expenses, net

     446         624   
                 

Earnings from continuing operations before income taxes

     1,200         582   

Provision for income taxes

     398         333   
                 

Earnings from continuing operations

     802         249   

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

             1,644   
                 

Net earnings

     802         1,893   

Noncontrolling interest

     3         10   
                 

Net earnings attributable to Kraft Foods

   $ 799       $ 1,883   
                 

Per share data:

     

Basic earnings per share attributable to Kraft Foods:

     

Continuing operations

   $ 0.46       $ 0.15   

Discontinued operations

             1.02   
                 

Net earnings attributable to Kraft Foods

   $ 0.46       $ 1.17   
                 

Diluted earnings per share attributable to Kraft Foods:

     

Continuing operations

   $ 0.45       $ 0.15   

Discontinued operations

             1.01   
                 

Net earnings attributable to Kraft Foods

   $ 0.45       $ 1.16   
                 

Dividends declared

   $ 0.29       $ 0.29   

See notes to condensed consolidated financial statements.

 

1


Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)

 

     March 31,     December 31,  
     2011     2010  

ASSETS

    

Cash and cash equivalents

   $ 2,088      $ 2,481   

Receivables (less allowances of $241 in 2011 and $246 in 2010)

     7,131        6,539   

Inventories, net

     6,116        5,310   

Deferred income taxes

     969        898   

Other current assets

     1,225        993   
                

Total current assets

     17,529        16,221   

Property, plant and equipment, net

     14,003        13,792   

Goodwill

     38,592        37,856   

Intangible assets, net

     26,351        25,963   

Prepaid pension assets

     117        86   

Other assets

     1,677        1,371   
                

TOTAL ASSETS

   $      98,269      $      95,289   
                

LIABILITIES

    

Short-term borrowings

   $ 1,812      $ 750   

Current portion of long-term debt

     3,945        1,115   

Accounts payable

     5,535        5,409   

Accrued marketing

     2,893        2,515   

Accrued employment costs

     1,194        1,292   

Other current liabilities

     4,400        4,579   
                

Total current liabilities

     19,779        15,660   

Long-term debt

     24,288        26,859   

Deferred income taxes

     8,252        7,984   

Accrued pension costs

     1,881        2,382   

Accrued postretirement health care costs

     3,052        3,046   

Other liabilities

     3,518        3,416   
                

TOTAL LIABILITIES

     60,770        59,347   

Contingencies (Note 12)

    

EQUITY

    

Common Stock, no par value (1,996,537,778 shares
issued in 2011 and 2010)

              

Additional paid-in capital

     31,182        31,231   

Retained earnings

     16,876        16,619   

Accumulated other comprehensive losses

     (2,744     (3,890

Treasury stock, at cost

     (7,933     (8,126
                

Total Kraft Foods Shareholders’ Equity

     37,381        35,834   

Noncontrolling interest

     118        108   
                

TOTAL EQUITY

     37,499        35,942   
                

TOTAL LIABILITIES AND EQUITY

   $ 98,269      $ 95,289   
                

See notes to condensed consolidated financial statements.

 

2


Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(in millions of dollars, except per share data)

(Unaudited)

 

    Kraft Foods Shareholders’ Equity              
                      Accumulated                    
                      Other                    
          Additional           Comprehensive                    
    Common     Paid-in     Retained     Earnings /     Treasury     Noncontrolling     Total  
    Stock     Capital     Earnings     (Losses)     Stock     Interest     Equity  

Balances at January 1, 2010

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

Comprehensive earnings / (losses):

             

Net earnings

                  4,114                      25        4,139   

Other comprehensive earnings, net
of income taxes

                         65               (19     46   
                         

Total comprehensive earnings *

              6        4,185   
                         

Exercise of stock options and
issuance of other stock awards

           153        (106            290               337   

Cash dividends declared
($1.16 per share)

                  (2,025                          (2,025

Net impact of noncontrolling
interests from Cadbury acquisition

           38                             33        71   

Purchase from noncontrolling
interest, dividends paid and other
activities

           (28                          (27     (55

Issuance of Common Stock

           7,457                                    7,457   
                                                       

Balances at December 31, 2010

  $                    –      $ 31,231      $ 16,619      $ (3,890   $ (8,126   $ 108      $ 35,942   

Comprehensive earnings / (losses):

             

Net earnings

                  799                      3        802   

Other comprehensive earnings, net of income taxes

                         1,146               10        1,156   
                         

Total comprehensive earnings**

              13        1,958   
                         

Exercise of stock options and
issuance of other stock awards

           (52     (33            193               108   

Cash dividends declared
($0.29 per share)

                  (509                          (509

Purchase from noncontrolling
interest, dividends paid and other
activities

           3                             (3       
                                                       

Balances at March 31, 2011

  $      $           31,182      $           16,876      $           (2,744   $           (7,933   $            118      $          37,499   
                                                       

 

* For the three months ended March 31, 2010 total comprehensive earnings were $1,407 million, and comprehensive earnings attributable to Kraft Foods were $1,416 million.
** For the three months ended March 31, 2011, comprehensive earnings attributable to Kraft Foods were $1,945 million.

See notes to condensed consolidated financial statements.

 

3


Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)

 

     For the Three Months Ended  
   March 31,  
     2011     2010  

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES

    

Net earnings

   $ 802      $ 1,893   

Adjustments to reconcile net earnings to operating cash flows:

    

Depreciation and amortization

     372        313   

Stock-based compensation expense

     44        40   

Deferred income tax provision

     (177     116   

Gain on discontinued operations (Note 2)

            (1,596

Other non-cash expense, net

     30        (166

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

    

Receivables, net

     (464     (176

Inventories, net

     (694     (163

Accounts payable

     (122     24   

Other current assets

     (233     168   

Other current liabilities

     (33     (498

Change in pension and postretirement assets and liabilities, net

     (511     40   
                

Net cash used in operating activities

     (986     (5
                

CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES

    

Capital expenditures

     (237     (241

Acquisitions, net of cash received

            (9,591

Proceeds from divestitures

            3,700   

Other

     (7     2   
                

Net cash used in investing activities

     (244     (6,130
                

CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES

    

Net issuance / (repayments) of short-term borrowings

     1,054        (708

Long-term debt proceeds

     10        9,432   

Long-term debt repaid

     (3     (6

Dividends paid

     (507     (653

Other

     241        (72
                

Net cash provided by financing activities

     795        7,993   
                

Effect of exchange rate changes on cash and cash equivalents

     42        (81
                

Cash and cash equivalents:

    

(Decrease) / Increase

     (393     1,777   

Balance at beginning of period

     2,481        2,101   
                

Balance at end of period

   $         2,088      $         3,878   
                

See notes to condensed consolidated financial statements.

 

4


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, 2010.

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 period, and our international operating subsidiaries generally report results two weeks prior to the last Saturday of the period.

During 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 and Latin America, which are included within our Kraft Foods Developing Markets segment. Previously, these operations primarily reported period-end results one month or two weeks prior to the end of the period. Now our Kraft Foods Europe segment primarily reports period-end results two weeks prior to the last Saturday of the period, and certain of our operations in Asia Pacific and Latin America report results through the last day of the period. We believe these changes are preferable and will improve financial reporting by better matching the close dates of the operating subsidiaries within our Kraft Foods Europe segment and those operations within Asia Pacific and Latin America within our consolidated reporting. 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. Generally, our domestic operating subsidiaries continue to report period-end results as of the Saturday closest to the end of each period, and our international operating subsidiaries continue to report period-end results two weeks prior to the Saturday closest to the end of each period.

Highly Inflationary Accounting:

We account for our Venezuelan subsidiaries under highly inflationary accounting rules, which principally means all transactions are recorded in U.S. dollars. Venezuela has two exchange rates: the official rate and the government-regulated Transaction System for Foreign Currency Denominate Securities (“SITME”) rate. We used both the official rate and the SITME rate to translate our Venezuelan operations into U.S. dollars, based on the nature of the operations of each individual subsidiary.

We recorded approximately $18 million of unfavorable foreign currency impacts relating to highly inflationary accounting in Venezuela during the first quarter of 2011.

Note 2.  Acquisitions and Divestitures:

Cadbury Acquisition:

On February 2, 2010 we acquired 71.73% of Cadbury Limited (“Cadbury”) and as of June 1, 2010 we owned 100% of all outstanding Cadbury Shares. The Cadbury acquisition was valued at $18,547 million, or $17,503 million net of cash and cash equivalents.

As part of our Cadbury acquisition, we expensed and incurred transaction related fees of $203 million in the first quarter of 2010. We recorded these expenses within selling, general and administrative expenses. 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.

 

5


Cadbury contributed net revenues of $1,693 million and net earnings of $60 million from February 2, 2010 through March 31, 2010. The following unaudited pro forma summary presents Kraft Foods’ consolidated information as if Cadbury had been acquired on January 1, 2010. 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, 2010, 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         
           Ended March 31,         
         2010       
         (in millions)       
 

Net revenues

   $ 11,999      
 

Net earnings attributable to Kraft Foods

     1,610      

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. Accordingly, the results of the Frozen Pizza business have been reflected as discontinued operations on the condensed consolidated statement of earnings in the prior period results.

Summary results of operations for the Frozen Pizza business through March 31, 2010 were:

 

             For the Three          
             Months Ended          
             March 31, 2010          
           (in millions)        
 

Net revenues

   $         335     
            
 

Earnings before income taxes

     73     
 

Provision for income taxes

     (25  
 

Gain on discontinued operations, net of
income taxes

     1,596     
            
 

Earnings and gain from discontinued
operations, net of income taxes

   $ 1,644     
            

Earnings before income taxes as presented exclude associated allocated overheads of $25 million in the first quarter of 2010.

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

Other Divestitures (including Starbucks CPG business):

Effective March 1, 2011, Starbucks unilaterally took control of the sale and distribution of the packaged coffee business in grocery stores and other channels by terminating its agreements with us without valid grounds and in a manner we believe violates the terms of those agreements ( “Agreements”). We are vigorously contesting Starbucks action and are seeking appropriate remedies under the Agreements, including payment of the fair market value of the business plus the premium the Agreements specify. In accordance with our rights under the Agreements, we initiated an arbitration proceeding in Chicago, Illinois. Arbitration proceedings are underway and will ultimately determine the parties’ respective rights and obligations, including the amount of any damages the arbitrator determines Starbucks must pay us. Any award of damages would be recognized as the arbitration proceedings are completed.

 

6


Note 3.  Inventories:

Inventories at March 31, 2011 and December 31, 2010 were:

 

           March 31,       December 31,                  
           2011       2010                  
         (in millions)                  
 

Raw materials

   $ 2,006      $ 1,743           
 

Finished product

     4,110        3,567           
                          
 

Inventories, net

   $        6,116      $ 5,310           
                          

 

Note 4.  Property, Plant and Equipment:

 

Property, plant and equipment at March 31, 2011 and December 31, 2010 were:

 

           March 31,       December 31,                  
           2011       2010                  
         (in millions)                  
 

Land and land improvements

   $ 814      $ 795           
 

Buildings and building equipment

     5,084        4,934           
 

Machinery and equipment

     16,631        16,147           
 

Construction in progress

     1,183        1,154           
                          
       23,712        23,030           
 

Accumulated depreciation

     (9,709     (9,238        
                          
 

Property, plant and equipment, net                             

   $      14,003      $   13,792           
                          

 

Note 5.  Goodwill and Intangible Assets:

 

Goodwill by reportable segment at March 31, 2011 and December 31, 2010 was:

 

           March 31,       December 31,                  
           2011       2010                  
         (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        985           
 

U.S. Grocery

     3,046        3,046           
 

U.S. Snacks

     9,125        9,125           
 

Canada & N.A. Foodservice

     3,508        3,430           
 

Kraft Foods Europe

     9,479        9,023           
 

Kraft Foods Developing Markets

     8,159        7,957           
                          
 

Total goodwill

   $      38,592      $ 37,856           
                          

 

7


Intangible assets at March 31, 2011 and December 31, 2010 were:

 

         March 31,     December 31,                  
         2011     2010                  
         (in millions)                  
 

Non-amortizable intangible assets                                     

   $ 23,711      $ 23,351           
 

Amortizable intangible assets

     3,022        2,928           
                          
       26,733        26,279           
 

Accumulated amortization

     (382     (316        
                          
 

Intangible assets, net

   $       26,351      $ 25,963           
                          

 

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, process technology and non-compete agreements. At March 31, 2011, the weighted-average life of our amortizable intangible assets was 13.2 years.

 

The movements in goodwill and intangible assets were:

 

               Intangible                  
         Goodwill     Assets, at Cost                  
         (in millions)                  
 

Balance at January 1, 2011

   $ 37,856      $ 26,279           
 

Changes due to:

            
 

Foreign currency

     736        454           
                          
 

Balance at March 31, 2011

   $      38,592      $ 26,733           
                          

Amortization expense was $57 million for the first quarter of 2011. We currently estimate annual amortization expense for each of the next five years to be approximately $230 million.

Note 6.  Integration Program:

Our combination with Cadbury has the potential for meaningful synergies and cost savings. We expect to recognize annual cost savings of at least $750 million by the end of the third year following completion of the acquisition. Additionally, we expect to create revenue synergies from investments in distribution, marketing and product development. In order to achieve these cost savings and synergies, 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”).

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 $104 million for the three months ended March 31, 2011 and $43 million for the three months ended March 31, 2010. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as general corporate expenses. Since the inception of the Integration Program, we have incurred $761 million of the $1.5 billion in expected charges.

 

8


Liability activity for Integration Program for the three months ended March 31, 2011 was (in millions):

 

00 00 00 00 00
 

Liability balance, January 1, 2011

   $ 406         
 

Charges

     104         
 

Cash spent

     (112      
 

Write-offs

     (4      
 

Currency / other

     12         
                
 

Liability balance, March 31, 2011

   $     406         
                

 

Within our Integration Program, we include certain costs along with exit and disposal costs that are directly attributable to those activities although they do not qualify for treatment as exit or disposal costs under U.S. GAAP. These costs, which we commonly refer to as other project costs or implementation costs, generally include the integration and reorganization of operations and facilities, the discontinuance of certain product lines and the incremental expenses related to the closure of facilities. Management believes the disclosure and inclusion of these charges provides readers of our financial statements greater transparency to the total costs of our Integration Program.

 

Note 7.  Debt:

 

Borrowing Arrangements:

On April 1, 2011, we entered into a revolving credit agreement for a $4.5 billion four-year senior unsecured revolving credit facility. The agreement replaced our former revolving credit agreement, which was terminated upon the signing of the new agreement. We intend to use the revolving credit facility for general corporate purposes, including for working capital purposes, and to support our commercial paper issuances. 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. We expect to continue to meet this covenant. At March 31, 2011, our total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), was $40.1 billion. 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.

 

Note 8.  Accumulated Other Comprehensive Earnings / (Losses):

 

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

 

       

  

  

     

       

  

  

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

Balances at January 1, 2011

   $ (311   $ (3,658   $ 79      $ (3,890
 

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

        
 

Currency translation adjustments                

     1,136        (50            1,086   
 

Amortization of experience
losses and prior service costs

            62               62   
 

Settlement losses

            11               11   
 

Net changes in cash flow
hedges

                   (13     (13
                
 

Total other comprehensive earnings

           1,146   
                                  
 

Balances at March 31, 2011

   $ 825      $ (3,635   $ 66      $     (2,744
                                  

Note 9.  Stock Plans:

Restricted and Deferred Stock:

In January 2011, we granted 1.527 million shares of stock in connection with our long-term incentive plan, and the market value per share was $31.62 on the date of grant. In February 2011, as part of our annual equity program, we issued 2.647 million shares of restricted and deferred stock to eligible employees, and the market value per restricted or deferred share was $31.83 on the date of grant. In aggregate, we issued 4.476 million restricted and deferred shares during the first quarter of 2011, including those issued as part of our long-term incentive plan, with a weighted-average market value per share of $31.78.

 

9


During the first quarter of 2011, 3.997 million shares of restricted and deferred stock vested at a market value of $122 million.

Stock Options:

In February 2011, as part of our annual equity program, we granted 15.806 million stock options to eligible employees at an exercise price of $31.83. In aggregate, we granted 15.811 million stock options in the first quarter of 2011 at a weighted-average exercise price of $31.82.

There were 3.440 million stock options exercised during the first quarter of 2011 with a total intrinsic value of $30 million.

Note 10.  Benefit Plans:

Pension Plans

Components of Net Periodic Pension Cost:

Net periodic pension cost consisted of the following for the three months ended March 31, 2011 and 2010:

 

         U.S. Plans     Non-U.S. Plans  
         For the Three Months Ended     For the Three Months Ended  
     March 31,     March 31,  
         2011     2010     2011     2010  
         (in millions)  
 

Service cost

   $ 40      $ 37      $ 44      $ 36   
 

Interest cost

     91        92        113        86   
 

Expected return on plan assets

     (124     (121     (132     (97
 

Amortization:

        
 

Net loss from experience differences

     56        43        24        18   
 

Prior service cost

     2        1               2   
 

Other expenses

     17        47                 
                                  
 

Net periodic pension cost

   $            82      $            99      $            49      $            45   
                                  

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 $17 million for the three months ended March 31, 2011, and $42 million for the three months ended March 31, 2010. Our U.S. plans also incurred a $5 million curtailment expense 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 quarter of 2011, we contributed $517 million to our U.S. plans and $117 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $25 million to our U.S. plans and approximately $285 million to our non-U.S. plans during the remainder of 2011. 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.

 

10


Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the three months ended March 31, 2011 and 2010:

 

         For the Three Months Ended              
         March 31,              
         2011     2010              
         (in millions)              
 

Service cost

   $ 10      $ 10       
 

Interest cost

     42        42       
 

Amortization:

        
 

Net loss from experience differences                                         

     16        13       
 

Prior service credit

     (8     (8    
                      
 

Net postretirement health care costs

   $ 60      $ 57       
                      

 

Postemployment Benefit Plans

 

Net postemployment costs consisted of the following for the three months ended March 31, 2011 and 2010:

 

  

  

         For the Three Months Ended              
         March 31,              
         2011     2010              
         (in millions)              
 

Service cost

   $ 2      $ 3       
 

Interest cost

     3        2       
                      
 

Net postemployment costs

   $ 5      $ 5       
                      

 

Note 11.  Financial Instruments:

 

Fair Value of Derivative Instruments:

The fair values of derivative instruments recorded in the condensed consolidated balance sheet as of March 31, 2011 and December 31, 2010 were:

 

  

  

   

         March 31, 2011     December 31, 2010  
         Asset     Liability     Asset     Liability  
         Derivatives     Derivatives     Derivatives     Derivatives  
         (in millions)  
 

Derivatives designated as
hedging instruments:

        
 

Foreign exchange contracts

   $ 3      $ 150      $ 24      $ 115   
 

Commodity contracts

     61        15        74        5   
 

Interest rate contracts

     107        4        58        13   
                                  
     $ 171      $ 169           $ 156      $ 133   
                                  
 

Derivatives not designated as
hedging instruments:

        
 

Foreign exchange contracts

   $ 19      $ 29      $ 21      $ 48   
 

Commodity contracts

     317        203        202        114   
 

Interest rate contracts

     48        12        59        21   
                                  
     $ 384      $ 244      $ 282      $ 183   
                                  
 

Total fair value

   $ 555      $ 413      $ 438         $ 316   
                                  

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.

 

11


The fair values (asset / (liability)) of our derivative instruments at March 31, 2011 were determined using:

 

000 000 000 000 000
              Quoted Prices in              
              Active Markets     Significant     Significant  
              for Identical     Other Observable        Unobservable     
        Total     Assets     Inputs     Inputs  
        Fair Value     (Level 1)     (Level 2)     (Level 3)  
        (in millions)  
 

Foreign exchange contracts

  $ (157   $      $ (157   $   
 

Commodity contracts

    160        139        21          
 

Interest rate contracts

    139               139          
                                 
 

Total derivatives

  $ 142      $ 139      $ 3      $   
                                 

 

Level 2 financial assets and liabilities consist of commodity forwards; foreign exchange forwards, currency swaps, and options; and interest rate swaps.

 

Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.

 

Cash Flow Hedges:

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

 

   

       

  

  

        For the Three Months Ended              
    March 31,              
                  2011                2010              
        (in millions)              
 

Accumulated gain at beginning of period

  $ 79      $ 101       
 

Transfer of realized gains in fair value
to earnings

    (14     (3    
 

Unrealized gain / (loss) in fair value

    1        (30    
                     
 

Accumulated gain at March 31

  $ 66      $ 68       
                     

 

The effects of cash flow hedges for the three months ended March 31, 2011 and 2010 were:

  

        For the Three Months Ended     For the Three Months Ended  
        March 31, 2011     March 31, 2010  
              (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      $      $ 3      $   
 

Foreign exchange contracts –
forecasted transactions

    (51     5        12        (6
 

Commodity contracts

    14        (19     (12     3   
 

Interest rate contracts

    37               (33       
                                 
 

Total

  $ 1      $ (14   $ (30   $ (3
                                 

 

12


         For the Three Months Ended     For the Three Months Ended  
         March 31, 2011     March 31, 2010  
               Gain / (Loss) on           Gain / (Loss) on  
           Gain / (Loss) on       Amount Excluded      Gain / (Loss) on      Amount Excluded  
         Ineffectiveness     from Effectiveness     Ineffectiveness     from Effectiveness  
         Recognized     Testing Recognized     Recognized     Testing Recognized  
         in Earnings     in Earnings     in Earnings     in Earnings  
         (in millions)  
 

Foreign exchange contracts –
intercompany loans

   $      $      $      $   
 

Foreign exchange contracts –
forecasted transactions

                            
 

Commodity contracts

     4               (9     (1
 

Interest rate contracts

     (1                     
                                  
 

Total

   $           3      $      $           (9   $ (1
                                  

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 $53 million (net of taxes) for commodity cash flow hedges, unrealized losses of $28 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 March 31, 2011, we had hedged forecasted transactions for the following durations:

 

•      commodity transactions for periods not exceeding the next 21 months;

•      interest rate transactions for periods not exceeding the next 32 years and 1 month; and

•      foreign currency transactions for periods not exceeding the next 12 months.

 

Fair Value Hedges:

The effects of fair value hedges for the three months ended March 31, 2011 and 2010 were:

 

   

     

     

      

    

  

  

     

     

     

  

  

         For the Three Months Ended     For the Three Months Ended  
         March 31, 2011     March 31, 2010  
         Gain / (Loss)     Gain / (Loss)     Gain / (Loss)     Gain / (Loss)  
         Recognized     Recognized     Recognized     Recognized  
         in Income on     in Income on     in Income on     in Income on  
         Derivatives     Borrowings     Derivatives     Borrowings  
         (in millions)  
 

Interest rate contracts

   $         1      $       (1   $         5      $       (5

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.

 

13


Hedges of Net Investments in Foreign Operations:

The effects of hedges of net investments in foreign operations for the three months ended March 31, 2011 and 2010 were:

 

         Gain / (Loss) Recognized in OCI     Location of       
         For the Three     For the Three     Gain / (Loss)       
         Months Ended     Months Ended     Recorded in       
         March 31, 2011     March 31, 2010    

            AOCI             

      
         (in millions)             
           Currency Translation      
 

Euro notes

   $ (141   $ 147           Adjustment      
           Currency Translation      
 

Pound sterling notes

     (17            Adjustment      

 

Economic Hedges:

The effects of economic hedges, derivatives that are not designated as hedging instruments, for the three months ended March 31, 2011 and 2010 were:

 

         Gain / (Loss) Recognized in Earnings     Location of       
         For the Three     For the Three     Gain / (Loss)       
         Months Ended     Months Ended     Recognized       
         March 31, 2011     March 31, 2010    

      in Earnings      

      
         (in millions)             
 

Foreign exchange contracts:

         
 

Intercompany loans and
forecasted interest payments

   $ (5   $ 7        Interest expense      
 

Forecasted transactions

     1               Cost of sales      
 

Forecasted transactions

     1        (17     Interest expense      
 

Cadbury acquisition related

            (395     Interest expense      
 

Interest rate contracts

     (2     9        Interest expense      
 

Commodity contracts

     48        (24     Cost of sales      
                       
 

Total

   $ 43      $ (420     
                       

 

The 2010 hedging losses related to the Cadbury acquisition were economically offset by foreign exchange movement net gains of $241 million on the British pound cash, borrowings on the senior unsecured bridge facility utilized for the Cadbury acquisition, and other payable balances associated with the acquisition. See our consolidated financial statements for the year ended December 31, 2010 for additional information on our purpose for entering into derivatives not designated as hedging instruments and our overall risk management strategies.

 

Volume:

As of March 31, 2011 and December 31, 2010, we had the following outstanding hedges:

 

         Notional Amount             
         March 31,     December 31,             
        

          2011          

   

          2010          

            
         (in millions)             
 

Foreign exchange contracts:

         
 

Intercompany loans and forecasted
interest payments

   $ 2,869      $ 2,183        
 

Forecasted transactions

     2,011        1,946        
 

Commodity contracts

     477        630        
 

Interest rate contracts

     5,264        5,167        
 

Net investment hedge – euro notes                   

     4,035        3,814        
 

Net investment hedge – pound sterling
notes

     1,042        1,015        

 

14


Note 12.  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.

While we cannot predict with certainty the results of any legal matters in which we are currently involved, we do not expect that the ultimate costs to resolve any of these 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 March 31, 2011, the carrying amount of our third-party guarantees on our condensed consolidated balance sheet and the maximum potential payment under these guarantees was $26 million. Substantially all of these guarantees expire at various times through 2018.

Note 13.  Earnings Per Share:

Basic and diluted EPS were calculated using the following:

 

             For the Three Months Ended                  
         March 31,              
         2011          2010                  
          (in millions, except per share data)       
 

Earnings from continuing operations                                         

   $ 802       $ 249         
 

Earnings and gain from discontinued
operations, net of income taxes

             1,644         
                         
 

Net earnings

     802         1,893         
             
 

Noncontrolling interest

     3         10         
                         
 

Net earnings attributable to Kraft Foods

   $ 799       $ 1,883         
                         
 

Weighted-average shares for basic EPS

     1,754         1,614         
 

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

     6         6         
                         
 

Weighted-average shares for diluted EPS

     1,760         1,620         
                         
 

Basic earnings per share attributable
to Kraft Foods:

           
 

Continuing operations

   $ 0.46       $ 0.15         
 

Discontinued operations

             1.02         
                         
 

Net earnings attributable to Kraft Foods

   $ 0.46       $ 1.17         
                         
 

Diluted earnings per share attributable
to Kraft Foods:

           
 

Continuing operations

   $ 0.45       $ 0.15         
 

Discontinued operations

             1.01         
                         
 

Net earnings attributable to Kraft Foods

   $ 0.45       $ 1.16         
                         

We exclude antidilutive Kraft Foods stock options from our calculation of weighted-average shares for diluted EPS. We excluded 18 million antidilutive stock options for the three months ended March 31, 2011, and we excluded 37.9 million antidilutive stock options for the three months ended March 31, 2010.

 

15


Note 14.  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.

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 selling, general and administrative expenses), general corporate expenses (which are a component of selling, general and administrative expenses) 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, the gains and losses on hedging activities are recorded 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                   
     March 31,                   
         2011      2010                   
         (in millions)                   
 

Net revenues:

              
 

Kraft Foods North America:

              
 

U.S. Beverages

   $ 821       $ 821            
 

U.S. Cheese

     874         845            
 

U.S. Convenient Meals

     792         770            
 

U.S. Grocery

     794         816            
 

U.S. Snacks

     1,492         1,392            
 

Canada & N.A. Foodservice

     1,163         1,044            
 

Kraft Foods Europe

     3,016         2,709            
 

Kraft Foods Developing Markets                             

     3,621         2,921            
                            
 

Net revenues

   $      12,573       $      11,318            
                            

 

16


         For the Three Months Ended                  
         March 31,                  
         2011     2010                  
         (in millions)                  
 

Earnings from continuing operations
before income taxes:

            
 

Operating income:

            
 

Kraft Foods North America:                                 

            
 

U.S. Beverages

   $ 161      $ 172           
 

U.S. Cheese

     134        134           
 

U.S. Convenient Meals

     105        84           
 

U.S. Grocery

     292        286           
 

U.S. Snacks

     193        207           
 

Canada & N.A. Foodservice

     151        100           
 

Kraft Foods Europe

     308        289           
 

Kraft Foods Developing Markets

     405        359           
 

Unrealized gains / (losses) on
hedging activities

     62        (38        
 

Certain U.S. pension plan costs

     (42     (56        
 

General corporate expenses

     (66     (298        
 

Amortization of intangibles

     (57     (33        
                          
 

Operating income

     1,646        1,206           
 

Interest and other expense, net

     446        624           
                          
 

Earnings from continuing operations
before income taxes

   $        1,200      $           582           
                          

General Corporate Expenses – The 2011 decrease in general corporate expenses was primarily due to the 2010 Cadbury acquisition-related transaction fees.

Integration Program – We incurred charges under the Integration Program of $104 million for the three months ended March 31, 2011 and $43 million for the three months ended March 31, 2010. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as general corporate expenses.

 

17


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 March 31, 2011  
                       Kraft Foods         
         Kraft Foods      Kraft Foods      Developing         
         North America      Europe      Markets      Total  
         (in millions)  
 

Biscuits

   $ 1,398       $ 567       $ 730       $ 2,695   
 

Confectionery

     426         1,405         1,878         3,709   
 

Beverages

     964         665         621         2,250   
 

Cheese

     1,269         260         226         1,755   
 

Grocery

     718         69         136         923   
 

Convenient Meals

     1,161         50         30         1,241   
                                     
 

Total net revenues

   $ 5,936       $ 3,016       $ 3,621       $ 12,573   
                                     
         For the Three Months Ended March 31, 2010  
                       Kraft Foods         
         Kraft Foods      Kraft Foods      Developing         
         North America      Europe      Markets      Total  
         (in millions; as revised)  
 

Biscuits(1)

   $ 1,366       $ 557       $ 601       $ 2,524   
 

Confectionery(1)

     307         1,186         1,385         2,878   
 

Beverages(1)

     940         600         570         2,110   
 

Cheese

     1,211         242         209         1,662   
 

Grocery

     747         74         127         948   
 

Convenient Meals

     1,117         50         29         1,196   
                                     
 

Total net revenues

   $        5,688       $          2,709       $          2,921       $          11,318   
                                     
 

 

(1) Within the above sector revenues disclosures we reclassified certain net revenues as of March 31, 2010 to conform to the current quarter’s presentation.

   

Note 15.  Subsequent Events:

We evaluated subsequent events and included all accounting and disclosure requirements related to subsequent events in our financial statements.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Description of the Company

We manufacture and market packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. We have operations in more than 75 countries and sell our products in approximately 170 countries.

 

18


Executive Summary

This executive summary provides significant highlights of the Discussion and Analysis that follows.

 

   

Net revenues increased 11.1% to $12.6 billion in the first quarter of 2011 as compared to the same period in the prior year. Organic net revenues increased 4.6% to $11.7 billion in the first quarter of 2011 as compared to the same period in prior year.

 

   

Diluted EPS attributable to Kraft Foods decreased 61.2% to $0.45 in the first quarter of 2011 as compared to $1.16 from the same period in the prior year. The first quarter of 2010 included the discontinued operations impact of $1.01 from the Frozen Pizza divestiture.

 

   

Operating EPS attributable to Kraft Foods increased 6.1% to $0.52 in the first quarter of 2011 as compared to $0.49 from the same period in the prior year.

Discussion and Analysis

Items Affecting Comparability of Financial Results

Acquisitions and Divestitures

Cadbury Acquisition:

On February 2, 2010 we acquired 71.73% of Cadbury Limited (“Cadbury”) and as of June 1, 2010 we owned 100% of all outstanding Cadbury Shares. The Cadbury acquisition was valued at $18,547 million, or $17,503 million net of cash and cash equivalents.

As part of our Cadbury acquisition, we expensed and incurred transaction related fees of $203 million in the first quarter of 2010. We recorded these expenses within selling, general and administrative expenses. 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 $1,693 million and net earnings of $60 million from February 2, 2010 through March 31, 2010. The following unaudited pro forma summary presents Kraft Foods’ consolidated information as if Cadbury had been acquired on January 1, 2010. These amounts were calculated after conversion to accounting principles generally accepted in the United States of America (“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, 2010, 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                       
           Ended March 31,                         
         2010                       
         (in millions)                       
 

Net revenues

   $ 11,999            
 

Net earnings attributable to Kraft Foods

     1,610            

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. Accordingly, the results of the Frozen Pizza business have been reflected as discontinued operations on the condensed consolidated statement of earnings in the prior period results.

 

19


Summary results of operations for the Frozen Pizza business through March 31, 2010 were:

 

         For the Three                      
         Months Ended                      
           March 31, 2010                        
         (in millions)                      
 

Net revenues

   $ 335           
                  
 

Earnings before income taxes

     73           
 

Provision for income taxes

     (25        
 

Gain on discontinued operations, net of
income taxes

     1,596           
                  
 

Earnings and gain from discontinued
operations, net of income taxes

   $ 1,644           
                  

Earnings before income taxes, as presented, exclude associated allocated overheads of $25 million in the first quarter of 2010.

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

Other Divestitures (including Starbucks CPG business):

Effective March 1, 2011, Starbucks unilaterally took control of the sale and distribution of the packaged coffee business in grocery stores and other channels by terminating its agreements with us without valid grounds and in a manner we believe violates the terms of those agreements ( “Agreements”). We are vigorously contesting Starbucks action and are seeking appropriate remedies under the Agreements, including payment of the fair market value of the business plus the premium the Agreements specify. In accordance with our rights under the Agreements, we initiated an arbitration proceeding in Chicago, Illinois. Arbitration proceedings are underway and will ultimately determine the parties’ respective rights and obligations, including the amount of any damages the arbitrator determines Starbucks must pay us. Any award of damages would be recognized as the arbitration proceedings are completed.

Integration Program

Our combination with Cadbury has the potential for meaningful synergies and cost savings. We expect to recognize annual cost savings of at least $750 million by the end of the third year following completion of the acquisition. Additionally, we expect to create revenue synergies from investments in distribution, marketing and product development. In order to achieve these cost savings and synergies, 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”).

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 $104 million for the three months ended March 31, 2011 and $43 million for the three months ended March 31, 2010. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as general corporate expenses. Since the inception of the Integration Program, we have incurred $761 million of the $1.5 billion in expected charges. At March 31, 2011, we had an accrual of $406 million related to the Integration Program.

Within our Integration Program, we include certain costs along with exit and disposal costs that are directly attributable to those activities although they do not qualify for treatment as exit or disposal costs under U.S. GAAP. These costs, which we commonly refer to as other project costs or implementation costs, generally include the integration and reorganization of operations and facilities, the discontinuance of certain product lines and the incremental expenses related to the closure of facilities. Management believes the disclosure and inclusion of these charges provides readers of our financial statements greater transparency to the total costs of our Integration Program.

 

20


Provision for Income Taxes

Our effective tax rate was 33.2% for the first quarter of 2011 and 57.2% for the first quarter of 2010. The effective tax rate was impacted by discrete items in both years. The 2011 first quarter effective tax rate was favorably impacted by net discrete items totaling $5 million, arising principally from net favorable state and foreign audit settlements and the expiration of the statute of limitations in various foreign jurisdictions. The 2010 first quarter effective tax rate was unfavorably impacted by $72 million of net tax costs, primarily due to a $137 million write-off of deferred tax assets as a result of the U.S. health care legislation enacted in March 2010, partially offset by favorable one-time tax impacts of highly inflationary accounting adjustments related to our Venezuelan subsidiaries and favorable foreign audit settlements.

Consolidated Results of Operations

The following discussion compares our consolidated results of operations for the three months ended March 31, 2011 and 2010.

Our domestic operating subsidiaries report results as of the last Saturday of the period, and our international operating subsidiaries generally report results two weeks prior to the last Saturday of the period. During 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 and Latin America, which are included within our Kraft Foods Developing Markets segment. Previously, these operations primarily reported period-end results one month or two weeks prior to the end of the period. Now our Kraft Foods Europe segment primarily reports period-end results two weeks prior to the last Saturday of the period, and certain of our operations in Asia Pacific and Latin America report results through the last day of the period.

Three Months Ended March 31:

 

        For the Three Months Ended              
        March 31,              
        2011     2010     $ change     % change  
        (in millions, except per share data)              
 

Net revenues

  $ 12,573      $ 11,318      $ 1,255        11.1%   
 

Operating income

    1,646        1,206        440        36.5%   
 

Earnings from continuing operations

    802        249        553        100+%   
 

Net earnings attributable to Kraft Foods

    799        1,883        (1,084     (57.6%
 

Diluted earnings per share attributable to
Kraft Foods from continuing operations

    0.45        0.15        0.30        100+%   
 

Diluted earnings per share attributable
to Kraft Foods

    0.45        1.16        (0.71     (61.2%
Net Revenues – Net revenues increased $1,255 million (11.1%) to $12,573 million in the first quarter of 2011, and organic net revenues increased $517 million (4.6%) to $11,664 million as follows.    
 

Change in net revenues (by percentage point)

       
 

Higher net pricing

      3.7pp       
 

Favorable volume/mix

      0.9pp       
               
 

Total change in organic net revenues (1)

      4.6%       
 

Impact from the Cadbury acquisition (2)

      6.3pp       
 

Favorable foreign currency

      1.0pp       
 

Impact of divestitures (including Starbucks CPG business)

      (0.8)pp       
               
 

Total change in net revenues

      11.1%       
               
 

(1)    Please see the Non-GAAP Financial Measures section at the end of this item.

(2)    Impact of acquisition reflects the incremental January 2011 operating results from our Cadbury acquisition.

       

       

 

21


The increase in net revenues was primarily driven by the Cadbury acquisition, which added $697 million in net revenues. Favorable foreign currency increased net revenues by $121 million, due primarily to the strength of the Brazilian real, Canadian dollar, Australian dollar and British pound versus the U.S. dollar, partially offset by the strength of the U.S. dollar against the euro and the impact of the highly inflationary Venezuelan economy. These gains were partially offset by the impact of divestitures (including Starbucks CPG business). Additionally, increased organic net revenues were driven by higher net pricing and favorable volume/mix. Higher net pricing was reflected across all reportable business segments as we increased pricing to offset higher input costs. Favorable volume/mix was driven by higher base business shipments across all reportable business segments, except U.S. Grocery and U.S. Convenient Meals.

Operating Income – Operating income increased $440 million (36.5%) to $1,646 million in the first quarter of 2011, due to the following:

 

         Operating                             
         Income     Change                       
         (in millions)     (percentage point)                       
 

Operating Income for the Three Months Ended
March 31, 2010

   $ 1,206              
 

Integration Program costs

     43        2.5pp            
 

2010 acquisition-related costs associated with Cadbury

     260        24.1pp            
                           
 

Underlying Operating Income for the Three Months
Ended March 31, 2010
(1)

   $ 1,509              
 

Higher net pricing

     407        27.6pp            
 

Higher input costs

     (389     (26.4)pp            
 

Favorable volume/mix

     54        3.6pp            
 

Incremental operating income from the
Cadbury acquisition
(2)

     83        5.5pp            
 

Lower selling, general and administrative expenses

     6        0.4pp            
 

Change in unrealized gains on hedging activities

     100        6.8pp            
 

Favorable foreign currency

     5        0.4pp            
 

Decreased operating income from divestitures (including
Starbucks CPG business)

     (19     (1.5)pp            
 

Other, net

     (6     (0.4)pp            
                           
 

Total change in underlying operating income

     241        16.0%            
                           
 

Underlying Operating Income for the Three Months
Ended March 31, 2011
(1)

   $ 1,750              
 

Integration Program costs

     (104     (6.1)pp            
                           
 

Operating Income for the Three Months Ended
March 31, 2011

   $                 1,646        36.5%            
                           
 

(1)    Please see the Non-GAAP Financial Measures section at the end of this item.

(2)    Impact of acquisition reflects the incremental January 2011 operating results from our Cadbury acquisition.

       

       

Higher pricing outpaced increased input costs during the quarter. The increase in input costs was driven by significantly higher raw material costs and to a lesser extent higher manufacturing costs. The favorable volume/mix was primarily driven by strong contributions from Kraft Foods Developing Markets, Kraft Foods Europe and U.S. Snacks, partially offset by declines in U.S. Grocery and Canada & N.A. Foodservice. The Cadbury acquisition, net of changes in acquisition-related and Integration Program costs, increased operating income by $282 million. Total selling, general and administrative expenses, as recorded in the condensed consolidated statement of earnings, increased $83 million from the first quarter of 2010, but excluding the impacts of divestitures (including Starbucks CPG business), foreign currency and our Cadbury acquisition (including Integration Program and acquisition-related costs), decreased $6 million over the first quarter of 2010. Although higher pricing outpaced higher input costs, our price increases were not sufficient for us to maintain operating income margins in certain segments. We recognized gains of $62 million on the change in unrealized hedging positions in the first quarter of 2011, versus losses of $38 million in the first quarter of 2010. Favorable foreign currency increased operating income by $5 million, due primarily to the strength of the Brazilian real, Canadian dollar, British pound and Australian dollar versus the U.S. dollar, partially offset by the impact of the highly inflationary Venezuelan economy and the strength of the U.S. dollar against the euro. In addition, the impact of divestitures includes Starbucks unilaterally taking control of significant coffee contracts, and the 2010 divestitures of certain Cadbury confectionery operations in Poland and Romania.

 

22


Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $799 million decreased by $1,084 million (57.6%) in the first quarter of 2011. Diluted EPS attributable to Kraft Foods from continuing operations was $0.45 in the first quarter of 2011, up $0.30 from $0.15 in the first quarter of 2010. Diluted EPS attributable to Kraft Foods was $0.45 in the first quarter of 2011, down $0.71 from $1.16 in the first quarter of 2010. These changes were due to the following:

 

         Diluted EPS                      
 

Diluted EPS Attributable to Kraft Foods for the Three
Months Ended March 31, 2010

   $ 1.16           
 

Earnings and gain from discontinued operations, net of income taxes

     1.01           
                  
 

Diluted EPS Attributable to Kraft Foods from continuing
operations for the Three Months Ended March 31, 2010

     0.15           
 

Acquisition-related costs

     0.14           
 

Acquisition-related interest and other expense, net

     0.10           
 

Integration Program costs

     0.02           
 

U.S. health care legislation impact on deferred taxes

     0.08           
                  
 

Operating EPS(1) for the Three Months Ended March 31, 2010

     0.49           
 

Increases in operations

     0.03           
 

Increases in operations from the Cadbury acquisition (2)

     0.04           
 

Decreased operating income from divestitures (including
Starbucks CPG business)

     (0.01        
 

Change in unrealized gains on hedging activities

     0.04           
 

Higher interest and other expense, net (3)

     (0.03        
 

Changes in taxes (4)

               
 

Higher shares outstanding

     (0.04        
                  
 

Operating EPS(1) for the Three Months Ended March 31, 2011

     0.52           
 

Integration Program costs

     (0.07        
                  
 

Diluted EPS Attributable to Kraft Foods for the Three
Months Ended March 31, 2011

   $           0.45           
                  
 

 

(1)    Please see the Non-GAAP Financial Measures section at the end of this item.

(2)    Impact of acquisition reflects the incremental January 2011 operating results from our Cadbury acquisition.

(3)    Excludes impacts of acquisition-related interest and other expense, net.

(4)    Excludes the impact of the 2010 U.S. health care legislation on deferred taxes.

       

       

       

       

Results of Operations by Reportable Segment

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.

 

23


The following discussion compares the operating results of each of our reportable segments for the three months ended March 31, 2011 and 2010.

 

         For the Three Months Ended               
     March 31,               
         2011     2010               
         (in millions)               
 

Net revenues:

         
 

Kraft Foods North America:

         
 

U.S. Beverages

   $ 821      $ 821        
 

U.S. Cheese

     874        845        
 

U.S. Convenient Meals

     792        770        
 

U.S. Grocery

     794        816        
 

U.S. Snacks

     1,492        1,392        
 

Canada & N.A. Foodservice

     1,163        1,044        
 

Kraft Foods Europe

     3,016        2,709        
 

Kraft Foods Developing Markets

     3,621        2,921        
                       
 

Net revenues

   $ 12,573      $ 11,318        
                       
         For the Three Months Ended               
         March 31,               
         2011     2010               
         (in millions)               
 

Operating income:

         
 

Kraft Foods North America:

         
 

U.S. Beverages

   $ 161      $ 172        
 

U.S. Cheese

     134        134        
 

U.S. Convenient Meals

     105        84        
 

U.S. Grocery

     292        286        
 

U.S. Snacks

     193        207        
 

Canada & N.A. Foodservice

     151        100        
 

Kraft Foods Europe

     308        289        
 

Kraft Foods Developing Markets

     405        359        
 

Unrealized gains / (losses) on hedging activities

     62        (38     
 

Certain U.S. pension plan costs

     (42     (56     
 

General corporate expenses

     (66     (298     
 

Amortization of intangibles

     (57     (33     
                       
 

Operating income

   $         1,646      $         1,206        
                       

 

24


As discussed in Note 14, Segment Reporting, 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 selling, general and administrative expenses), general corporate expenses (which are a component of selling, general and administrative expenses) 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 the gains and losses on hedging activities within segment operating results.

The 2011 decrease in general corporate expenses was primarily due to the 2010 Cadbury acquisition-related transaction fees. We incurred charges under the Integration Program of $104 million for the three months ended March 31, 2011 and $43 million for the three months ended March 31, 2010. We recorded these charges in operations, primarily as a part of selling, general and administrative expenses within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as general corporate expenses. We also reversed $20 million of previously accrued costs savings initiative charges during the three months ended March 31, 2011. We recorded these reversals, which were primarily related to severance charges for previously announced and planned position eliminations that did not occur, in operations, primarily within selling, general and administrative expenses across all reportable business segments, except Kraft Foods Europe. We incurred charges associated with our cost savings initiatives of $24 million for the three months ended March 31, 2010.

U.S. Beverages

 

         For the Three Months Ended               
         March 31,               
         2011      2010         $ change          % change    
         (in millions)               
 

Net revenues

   $ 821       $ 821       $        0.0%   
 

Segment operating income

     161         172         (11     (6.4%

Net revenues were flat versus prior year, as higher net pricing (5.4 pp) was offset by the impact of divestitures (including Starbucks CPG business) (4.0 pp) and unfavorable volume/mix (1.4 pp, which includes a negative 0.9 pp impact due to the Easter shift). Higher net pricing was due primarily to input cost-driven pricing in coffee. The impact of divestitures related to Starbucks unilaterally taking control of significant coffee contracts. Unfavorable volume/mix was primarily driven by lower shipments in Maxwell House coffee, which was partially offset by the introduction of MiO liquid concentrate and higher shipments in powdered beverages, reflecting volume gains in Tang, Country Time and Crystal Light; ready-to-drink beverages reflecting volume gains in Kool-Aid and Capri Sun; and Tassimo coffee.

 

Segment operating income decreased $11 million (6.4%), due primarily to higher raw material costs and the impact of divestitures (including Starbucks CPG business), partially offset by higher net pricing and lower manufacturing costs.

 

U.S. Cheese

 

        

   

  

         For the Three Months Ended               
         March 31,               
         2011      2010         $ change          % change    
         (in millions)               
 

Net revenues

   $ 874       $ 845       $ 29        3.4%   
 

Segment operating income

     134         134                0.0%   

Net revenues increased $29 million (3.4%), due to higher net pricing (2.3 pp) and favorable volume/mix (1.7 pp, net of a negative 2.8 pp impact due to the Easter shift), partially offset by the impact of divestitures (0.6 pp). Higher net pricing, across cream, natural and process cheeses, was due to input cost-driven pricing. Favorable volume/mix was driven primarily by higher shipments in process and natural cheese, partially offset by lower shipments in cultured and cream cheese.

      

 

25


Segment operating income was flat versus prior year, as higher net pricing, lower manufacturing costs, lower other selling, general and administrative expenses and favorable volume/mix were offset by higher raw material costs (primarily higher dairy costs), higher advertising and consumer support costs, and the impact of divestitures.

U.S. Convenient Meals

 

         For the Three Months Ended               
         March 31,               
         2011      2010         $ change          % change    
         (in millions)               
 

Net revenues

   $ 792       $ 770       $ 22        2.9%   
 

Segment operating income

     105         84         21        25.0%   

Net revenues increased $22 million (2.9%), due to higher net pricing (4.5 pp), partially offset by unfavorable volume/mix (1.6 pp, which includes a negative 1.0 pp impact due to the Easter shift). Higher net pricing was due to input cost-driven pricing primarily related to bacon, Lunchables combination meals, hot dogs and cold cuts. Unfavorable volume/mix was primarily driven by lower shipments in bacon, partially offset by higher shipments in cold cuts.

 

Segment