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Mondelez International, Inc. 10-Q 2011
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 June 30, 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 July 29, 2011, there were 1,766,106,763 shares of the registrant’s common stock outstanding.

 

 

 


Kraft Foods Inc.

 

           Page No.    

PART I –

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements (Unaudited)   
 

Condensed Consolidated Statements of Earnings
for the Three and Six Months Ended June 30, 2011 and 2010

     1   
 

Condensed Consolidated Balance Sheets
at June 30, 2011 and December 31, 2010

     2   
 

Condensed Consolidated Statements of Equity
for the Year Ended December 31, 2010 and the
Six Months Ended June 30, 2011

     3   
 

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

     22   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      46   

Item 4.

  Controls and Procedures      46   
PART II –   OTHER INFORMATION   

Item 1.

  Legal Proceedings      47   

Item 1A.

  Risk Factors      47   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      47   

Item 6.

  Exhibits      48   

Signature

     49   

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.


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)

 

$000,000 $000,000 $000,000 $000,000
     For the Three Months Ended
June  30,
     For the Six Months Ended
June  30,
 
     2011      2010      2011      2010  

Net revenues

   $ 13,878       $ 12,253       $ 26,451       $ 23,571   

Cost of sales

     9,007         7,559         16,944         14,788   
                                   

Gross profit

     4,871         4,694         9,507         8,783   

Selling, general and administrative expenses

     3,008         2,933         5,941         5,783   

Amortization of intangibles

     57         60         114         93   
                                   

Operating income

     1,806         1,701         3,452         2,907   

Interest and other expenses, net

     441         439         887         1,063   
                                   

Earnings from continuing operations
before income taxes

     1,365         1,262         2,565         1,844   

Provision for income taxes

     389         323         787         656   
                                   

Earnings from continuing operations

     976         939         1,778         1,188   

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

                             1,644   
                                   

Net earnings

     976         939         1,778         2,832   

Noncontrolling interest

             2         3         12   
                                   

Net earnings attributable to Kraft Foods

   $ 976       $ 937       $ 1,775       $ 2,820   
                                   

Per share data:

           

Basic earnings per share attributable to
Kraft Foods:

           

Continuing operations

   $ 0.55       $ 0.54       $ 1.01       $ 0.70   

Discontinued operations

                             0.98   
                                   

Net earnings attributable to Kraft Foods

   $ 0.55       $ 0.54       $ 1.01       $ 1.68   
                                   

Diluted earnings per share attributable to
Kraft Foods:

           

Continuing operations

   $ 0.55       $ 0.53       $ 1.01       $ 0.70   

Discontinued operations

                             0.97   
                                   

Net earnings attributable to Kraft Foods

   $ 0.55       $ 0.53       $ 1.01       $ 1.67   
                                   

Dividends declared

   $ 0.29       $ 0.29       $ 0.58       $ 0.58   

See notes to condensed consolidated financial statements.

 

1


Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars, except share data)

(Unaudited)

 

$000,000,0 $000,000,0
     June 30,
2011
    December 31,
2010
 

ASSETS

    

Cash and cash equivalents

   $ 2,267      $ 2,481   

Receivables (less allowances of $169 in 2011 and $246 in 2010)

     6,830        6,539   

Inventories, net

     6,414        5,310   

Deferred income taxes

     919        898   

Other current assets

     1,066        993   
                

Total current assets

     17,496        16,221   

Property, plant and equipment, net

     14,216        13,792   

Goodwill

     39,063        37,856   

Intangible assets, net

     26,509        25,963   

Prepaid pension assets

     153        86   

Other assets

     1,590        1,371   
                

TOTAL ASSETS

   $ 99,027      $ 95,289   
                

LIABILITIES

    

Short-term borrowings

   $ 1,242      $ 750   

Current portion of long-term debt

     4,918        1,115   

Accounts payable

     5,308        5,409   

Accrued marketing

     2,738        2,515   

Accrued employment costs

     1,215        1,292   

Other current liabilities

     4,859        4,812   
                

Total current liabilities

     20,280        15,893   

Long-term debt

     23,420        26,859   

Deferred income taxes

     7,993        7,984   

Accrued pension costs

     1,836        2,382   

Accrued postretirement health care costs

     3,001        3,046   

Other liabilities

     3,386        3,183   
                

TOTAL LIABILITIES

     59,916        59,347   

Commitments and Contingencies (Note 12)

    

EQUITY

    

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

              

Additional paid-in capital

     31,240        31,231   

Retained earnings

     17,300        16,619   

Accumulated other comprehensive losses

     (2,004     (3,890

Treasury stock, at cost

     (7,545     (8,126
                

Total Kraft Foods Shareholders’ Equity

     38,991        35,834   

Noncontrolling interest

     120        108   
                

TOTAL EQUITY

     39,111        35,942   
                

TOTAL LIABILITIES AND EQUITY

   $ 99,027      $ 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)

 

0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000
    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, 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

                  1,775                      3        1,778   

Other comprehensive earnings, net
of income taxes

                         1,886               15        1,901   
                         

Total comprehensive earnings*

              18        3,679   
                         

Exercise of stock options and
issuance of other stock awards

           4        (72            581               513   

Cash dividends declared
($0.58 per share)

                  (1,022                          (1,022

Purchase from noncontrolling
interest, dividends paid and other
activities

           5                             (6     (1
                                                       

Balances at June 30, 2011

  $      $ 31,240      $ 17,300      $ (2,004   $ (7,545   $ 120      $ 39,111   
                                                       

*   Total comprehensive earnings / (losses) were $1,721 million for the three months ended and $3,679 million for the six months ended June 30, 2011, as compared to $(622) million for the three months ended and $785 million for the six months ended June 30, 2010. Comprehensive earnings / (losses) attributable to Kraft Foods were $1,716 million for the three months ended and $3,661 million for the six months ended June 30, 2011, as compared to $(601) million for the three months ended and $815 million for the six months ended June 30, 2010.

See notes to condensed consolidated financial statements.

 

3


Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)

 

$000,000 $000,000
     For the Six Months Ended
June  30,
 
     2011     2010  

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES

    

Net earnings

   $ 1,778      $ 2,832   

Adjustments to reconcile net earnings to operating cash flows:

    

Depreciation and amortization

     742        679   

Stock-based compensation expense

     89        81   

Deferred income tax provision

     (166     106   

Gain on discontinued operations (Note 2)

            (1,596

Other non-cash expense / (income), net

     8        (360

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

    

Receivables, net

     (72     488   

Inventories, net

     (947     (425

Accounts payable

     (404     (302

Other current assets

     (164     210   

Other current liabilities

     (81     (1,032

Change in pension and postretirement assets and liabilities, net

     (487     98   
                

Net cash provided by operating activities

     296        779   
                

CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES

    

Capital expenditures

     (655     (608

Acquisitions, net of cash received

            (9,844

Proceeds from divestitures

            3,697   

Other

     30        (24
                

Net cash used in investing activities

     (625     (6,779
                

CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES

    

Net issuance / (repayments) of short-term borrowings

     477        (1,310

Long-term debt proceeds

     25        9,422   

Long-term debt repaid

     (7     (9

Dividends paid

     (1,017     (1,156

Proceeds from stock option exercises and other

     562        46   
                

Net cash provided by financing activities

     40        6,993   
                

Effect of exchange rate changes on cash and cash equivalents

     75        (240
                

Cash and cash equivalents:

    

(Decrease) / Increase

     (214     753   

Balance at beginning of period

     2,481        2,101   
                

Balance at end of period

   $ 2,267      $ 2,854   
                

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. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

You should read these statements in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2010. Certain revisions of prior-year amounts were made to conform with the current-year presentation.

Principles of Consolidation:

The consolidated financial statements include Kraft Foods, as well as our wholly-owned and majority-owned subsidiaries. The majority of our operating subsidiaries report results as of the last Saturday of the period. A portion of our international operating subsidiaries report results as of the last calendar day of the period or two weeks prior to the last Saturday of the period.

In the second quarter of 2011, we changed the consolidation date for certain operations of our Kraft Foods Europe segment and operations in certain regions of our Kraft Foods Developing Markets segment (Latin America, Eastern and Central Europe, Africa and the Middle East). Previously, these operations primarily reported results two weeks prior to the end of the period. Now, our Kraft Foods Europe segment reports results as of the last Saturday of each period. Our operations in Latin America and certain operations in Eastern and Central Europe, Africa and the Middle East region report results as of the last calendar day of the period. These changes resulted in a favorable impact to net revenues of $360 million and a favorable impact of $50 million to operating income.

In the second quarter of 2010, we changed the consolidation date for certain European biscuits operations within our Kraft Foods Europe segment and certain operations in Asia Pacific within our Kraft Foods Developing Markets segment. Previously, these operations primarily reported period-end results one month prior to the end of the period and moved to reporting results two weeks prior to the last Saturday of the period. These changes resulted in a favorable impact to net revenues of $70 million and had an insignificant impact on operating income.

We believe these changes are preferable and will improve business planning and financial reporting by better matching the close dates of the operating subsidiaries within our Kraft Foods Europe segment and Kraft Foods Developing Markets segment and by bringing the reporting date closer to the period-end date. As the impact to prior-period results was not material, we have not revised prior-period results.

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 Denominated 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 $15 million of favorable foreign currency impacts relating to highly inflationary accounting in Venezuela during the first six months of 2011 and approximately $65 million of unfavorable foreign currency impacts during the first six months of 2010. The 2010 loss included a one-time impact to translate cash of $34 million that we previously carried at the secondary market exchange rate. Upon the change to highly inflationary accounting in January 2010, we were required to translate those U.S. dollars on hand using the official rate.

 

5


New Accounting Pronouncements:

In June 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment related to statements of comprehensive income. This amendment requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This amended guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, this amended guidance requires retrospective application. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard will not have a material impact on our financial results, but will change the current financial presentation of other comprehensive income within our financial statements.

In May 2011, the FASB issued an amendment to revise fair value measurement and disclosure requirements. This amended guidance provides clarification about the application of existing fair value measurement and disclosure requirements and expands certain other disclosure requirements. The guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We are currently evaluating the impact of this amendment on our financial statements and disclosures.

Subsequent Events:

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

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 $12 million for the three months and $215 million for the six months ended June 30, 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 $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, 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.

 

0,000,000,000
     Pro forma for the
Six Months  Ended
June 30, 2010
 
     (in millions)  

Net revenues

   $ 24,252   

Net earnings attributable to Kraft Foods

     2,533   

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.

 

6


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

 

$000,0000
     For the Six
Months Ended
June 30, 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 for the first six months of 2010.

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

Note 3.  Inventories:

Inventories at June 30, 2011 and December 31, 2010 were:

 

$000,0000 $000,0000
     June 30,
2011
     December 31,
2010
 
     (in millions)  

Raw materials

   $ 2,137       $ 1,743   

Finished product

     4,277         3,567   
                 

Inventories, net

   $ 6,414       $ 5,310   
                 

Note 4.  Property, Plant and Equipment:

Property, plant and equipment at June 30, 2011 and December 31, 2010 were:

 

$000,0000 $000,0000
     June 30,
2011
    December 31,
2010
 
     (in millions)  

Land and land improvements

   $ 822      $ 795   

Buildings and building equipment

     5,171        4,934   

Machinery and equipment

     16,982        16,147   

Construction in progress

     1,290        1,154   
                
     24,265        23,030   

Accumulated depreciation

     (10,049     (9,238
                

Property, plant and equipment, net

   $ 14,216      $ 13,792   
                

 

7


Note 5. Goodwill and Intangible Assets:

Goodwill by reportable segment at June 30, 2011 and December 31, 2010 was:

 

$000,0000 $000,0000
     June 30,
2011
     December 31,
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

     3,501         3,430   

Kraft Foods Europe

     9,756         9,023   

Kraft Foods Developing Markets

     8,360         7,957   
                 

Total goodwill

   $ 39,063       $ 37,856   
                 

Intangible assets at June 30, 2011 and December 31, 2010 were:

 

$000,0000 $000,0000
     June 30,
2011
    December 31,
2010
 
     (in millions)  

Non-amortizable intangible assets

   $ 23,892      $ 23,351   

Amortizable intangible assets

     3,063        2,928   
                
     26,955        26,279   

Accumulated amortization

     (446     (316
                

Intangible assets, net

   $ 26,509      $ 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 June 30, 2011, the weighted-average life of our amortizable intangible assets was 13.2 years.

The movements in goodwill and intangible assets were:

 

$000,0000 $000,0000
     Goodwill      Intangible
Assets, at Cost
 
     (in millions)  

Balance at January 1, 2011

   $ 37,856       $ 26,279   

Changes due to:

     

Foreign currency

     1,207         676   
                 

Balance at June 30, 2011

   $ 39,063       $ 26,955   
                 

Amortization expense was $57 million for the three months and $114 million for the six months ended June 30, 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”).

 

8


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 $136 million for the three months and $240 million for the six months ended June 30, 2011, and $149 million for the three months and $192 million for the six months ended June 30, 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 $897 million of the $1.5 billion in expected charges.

Liability activity for Integration Program for the six months ended June 30, 2011 was (in millions):

 

$000,0000

Liability balance, January 1, 2011

   $ 406   

Charges

     240   

Cash spent

     (291

Write-offs

     (3

Currency / other

     16   
        

Liability balance, June 30, 2011

   $ 368   
        

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) and non-controlling interest, of at least $28.6 billion. At June 30, 2011, our total shareholders’ equity, excluding accumulated other comprehensive losses and non-controlling interest, was $41.0 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.

 

9


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

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

 

$000,0000 $000,0000 $000,0000 $000,0000
     Currency
Translation
Adjustments
    Pension and
Other Benefits
    Derivatives
Accounted for
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

     1,907        (71            1,836   

Amortization of experience
losses and prior service costs

            121               121   

Settlement losses

            22               22   

Net actuarial gain arising
during period

       42          42   

Net changes in cash flow hedges

                   (135     (135
              

Total other comprehensive earnings

           1,886   
                                

Balances at June 30, 2011

   $ 1,596      $ (3,544   $ (56   $ (2,004
                                

Note 9. Stock Plans:

At our annual meeting of shareholders held on May 24, 2011, our shareholders approved the Kraft Foods Inc. Amended and Restated 2006 Stock Compensation Plan for Non-Employee Directors. The amended plan includes, among other provisions, an increase to the number of shares we are authorized to issue to a maximum of 1.0 million shares of our Common Stock. As of the effective date of the amendment, there were 0.8 million shares available to be granted under the plan.

Restricted and Deferred Stock:

In January 2011, we granted 1.5 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 2.6 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 4.6 million restricted and deferred shares during the first six months of 2011, including those issued as part of our long-term incentive plan, with a weighted-average market value per share of $31.79.

During the first six months of 2011, 4.1 million shares of restricted and deferred stock vested at a market value of $125 million.

Stock Options:

In February 2011, as part of our annual equity program, we granted 15.8 million stock options to eligible employees at an exercise price of $31.83. In aggregate, we granted 16.3 million stock options in the first six months of 2011 at a weighted-average exercise price of $31.80.

There were 15.6 million stock options exercised during the first six months of 2011 with a total intrinsic value of $81 million.

 

10


Note 10. 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, 2011 and 2010:

 

0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000
     U.S. Plans     Non-U.S. Plans  
     For the Three Months Ended
June  30,
    For the Three Months Ended
June  30,
 
     2011     2010     2011     2010  
     (in millions)  

Service cost

   $ 33      $ 35      $ 46      $ 41   

Interest cost

     91        91        118        99   

Expected return on plan assets

     (124     (124     (138     (110

Amortization:

        

Net loss from experience differences

     56        42        26        18   

Prior service cost

     1        2        1        1   

Other expenses

     19        14                 
                                

Net periodic pension cost

   $ 76      $ 60      $ 53      $ 49   
                                
     U.S. Plans     Non-U.S. Plans  
     For the Six Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (in millions)  

Service cost

   $ 73      $ 72      $ 90      $ 77   

Interest cost

     182        183        231        185   

Expected return on plan assets

     (248     (245     (270     (207

Amortization:

        

Net loss from experience differences

     112        85        50        36   

Prior service cost

     3        3        1        3   

Other expenses

     36        61                 
                                

Net periodic pension cost

   $ 158      $ 159      $ 102      $ 94   
                                

Included within other expenses above are severance payments related to our cost savings initiatives and lump-sum payments made to retired employees which resulted in settlement losses under our U.S. plans of $19 million for the three months and $36 million for the six months ended June 30, 2011, and $14 million for the three months and $56 million for the six months ended June 30, 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 six months of 2011, we contributed $527 million to our U.S. plans and $185 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $15 million to our U.S. plans and approximately $215 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.

 

11


Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the three and six months ended June 30, 2011 and 2010:

 

$000,00000 $000,00000 $000,00000 $000,00000
     For the Three Months Ended
June  30,
    For the Six Months Ended
June  30,
 
     2011     2010     2011     2010  
     (in millions)  

Service cost

   $ 8      $ 10      $ 18      $ 20   

Interest cost

     41        44        83        86   

Amortization:

        

Net loss from experience differences

     15        14        31        27   

Prior service credit

     (8     (8     (16     (16
                                

Net postretirement health care costs

   $ 56      $ 60      $ 116      $ 117   
                                

Postemployment Benefit Plans

Net postemployment costs consisted of the following for the three and six months ended June 30, 2011 and 2010:

 

$000,00000 $000,00000 $000,00000 $000,00000
     For the Three Months Ended
June  30,
     For the Six Months Ended
June 30,
 
     2011     2010      2011     2010  
     (in millions)  

Service cost

   $ 3      $ 1       $ 5      $ 4   

Interest cost

     2        2         5        4   

Amortization of net gains

     (1             (1       
                                 

Net postemployment costs

   $ 4      $ 3       $ 9      $ 8   
                                 

Note 11.  Financial Instruments:

See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2010 for additional information on our accounting and purpose for entering into derivatives and our overall risk management strategies.

Fair Value of Derivative Instruments:

The fair values of derivative instruments recorded in the condensed consolidated balance sheet as of June 30, 2011 and December 31, 2010 were:

 

$000,00000, $000,00000, $000,00000, $000,00000,
     June 30, 2011      December 31, 2010  
     Asset
Derivatives
     Liability
Derivatives
     Asset
Derivatives
     Liability
Derivatives
 
     (in millions)  

Derivatives designated as
hedging instruments:

           

Foreign exchange contracts

   $ 10       $ 195       $ 24       $ 115   

Commodity contracts

     34         28         74         5   

Interest rate contracts

     21         49         58         13   
                                   
   $ 65       $ 272       $ 156       $ 133   
                                   

Derivatives not designated
as hedging instruments:

           

Foreign exchange contracts

   $ 48       $ 27       $ 21       $ 48   

Commodity contracts

     244         195         202         114   

Interest rate contracts

     62         25         59         21   
                                   
   $ 354       $ 247       $ 282       $ 183   
                                   

Total fair value

   $ 419       $ 519       $ 438       $ 316   
                                   

 

12


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, 2011 were determined using:

 

0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000
     Total
Fair Value
    Quoted Prices in
Active  Markets
for Identical
Assets
(Level 1)
     Significant
Other Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
     (in millions)  

Foreign exchange contracts

   $ (164   $       $ (164   $   

Commodity contracts

     55        31         24          

Interest rate contracts

     9                9          
                                 

Total derivatives

   $ (100   $ 31       $ (131   $   
                                 

Level 2 financial assets and liabilities consist of foreign exchange forwards and currency swaps; commodity forwards, and options; and interest rate swaps. Foreign currency contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. 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. 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.

Derivative Coverage:

As of June 30, 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 31 years and 10 months; and

   

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

Derivative Volume:

As of June 30, 2011 and December 31, 2010, we had the following outstanding hedges:

 

0,000,000,000 0,000,000,000
     Notional Amount  
     June 30,
2011
     December 31,
2010
 
     (in millions)  

Foreign exchange contracts:

     

Intercompany loans and forecasted
interest payments

   $ 3,436       $ 2,183   

Forecasted transactions

     1,746         1,946   

Commodity contracts

     465         630   

Interest rate contracts

     5,300         5,167   

Net investment hedge – euro notes

     4,133         3,814   

Net investment hedge – pound sterling notes

     1,044         1,015   

 

13


Cash Flow Hedges:

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

 

$000,000 $000,000 $000,000 $000,000
     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (in millions)  

Accumulated gain at beginning of period

   $ 66      $ 68      $ 79      $ 101   

Transfer of realized gains in fair value
to earnings

     (3     (3     (17     (6

Unrealized loss in fair value

     (119     (131     (118     (161
                                

Accumulated loss at June 30

   $ (56   $ (66   $ (56   $ (66
                                

The effects of cash flow hedges for the three and six months ended June 30, 2011 and 2010 were:

 

$000,000 $000,000 $000,000 $000,000
     For the Three Months Ended
June 30, 2011
    For the Three Months Ended
June 30, 2010
 
     Gain / (Loss)
Recognized
in OCI
    (Gain) / Loss
Reclassified
from AOCI
into Earnings
    Gain / (Loss)
Recognized
in OCI
    (Gain) / Loss
Reclassified
from AOCI
into Earnings
 
     (in millions)  

Foreign exchange contracts –
intercompany loans

   $      $      $ (2   $   

Foreign exchange contracts –
forecasted transactions

     (23     28        13        (7

Commodity contracts

     (18     (31     8        4   

Interest rate contracts

     (78            (150       
                                

Total

   $ (119   $ (3   $ (131   $ (3
                                
     For the Six Months Ended
June 30, 2011
    For the Six Months Ended
June 30, 2010
 
     Gain / (Loss)
Recognized
in OCI
    (Gain) / Loss
Reclassified
from AOCI
into Earnings
    Gain / (Loss)
Recognized
in OCI
    (Gain) / Loss
Reclassified
from AOCI
into Earnings
 
     (in millions)  

Foreign exchange contracts –
intercompany loans

   $ 1      $      $ 1      $   

Foreign exchange contracts –
forecasted transactions

     (73     33        25        (14

Commodity contracts

     (4     (51     (3     7   

Interest rate contracts

     (42     1        (184     1   
                                

Total

   $ (118   $ (17   $ (161   $ (6
                                

 

14


$000,000,00 $000,000,00 $000,000,00 $000,000,00
     For the Three Months Ended
June 30, 2011
     For the Three Months Ended
June 30, 2010
 
     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

                             

Interest rate contracts

     (5                      
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (5   $       $      $   
  

 

 

   

 

 

    

 

 

   

 

 

 
     For the Six Months Ended
June 30, 2011
     For the Six Months Ended
June 30, 2010
 
     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                (9     (1

Interest rate contracts

     (6                      
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (2   $       $ (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 $3 million (net of taxes) for commodity cash flow hedges, unrealized losses of $23 million (net of taxes) for foreign currency cash flow hedges and unrealized losses of $2 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

 

15


Fair Value Hedges:

The effects of fair value hedges for the three and six months ended June 30, 2011 and 2010 were:

 

0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000
     For the Three Months Ended
June 30, 2011
     For the Three Months Ended
June 30, 2010
 
     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       $ (2   $ 2   
     For the Six Months Ended
June 30, 2011
     For the Six Months Ended
June 30, 2010
 
     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       $ 3      $ (3

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.

Economic Hedges:

The effects of economic hedges which are not designated as hedging instruments for the three and six months ended June 30, 2011 and 2010 were:

 

0,000,000 0,000,000 0,000,000 0,000,000 0,000,000
     Gain / (Loss) Recognized in Earnings     Location of
Gain / (Loss)
Recognized
in Earnings
     For the Three Months  Ended
June 30,
    For the Six Months  Ended
June 30,
   
      
     2011     2010     2011     2010    
     (in millions)      

Foreign exchange contracts:

          

Intercompany loans and
forecasted interest
payments

   $ (34   $ 17      $ (38   $ 23      Interest expense

Forecasted transactions

     (7     1        (6     2      Cost of sales

Forecasted transactions

     4               5        (17   Interest expense

Cadbury acquisition related

                          (395   Interest expense

Interest rate contracts

     1        (4     (1     5      Interest expense

Commodity contracts

     108        35        155        11      Cost of sales
                                  

Total

   $ 72      $ 49      $ 115      $ (371  
                                  

The 2010 hedging losses related to the Cadbury acquisition were economically offset by foreign exchange movement net gains of $240 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.

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, 2011 and 2010 were:

 

     Gain / (Loss) Recognized in OCI      Location of
Gain / (Loss)
Recorded in
AOCI
     For the Three Months  Ended
June 30,
     For the Six Months  Ended
June 30,
    
        
     2011     2010      2011     2010     
     (in millions)       

Euro notes

   $ (62   $ 231       $ (203   $ 378       Currency Translation
Adjustment

Pound sterling notes

     (1             (18           Currency Translation
Adjustment

 

16


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.

Starbucks CPG Business:

As we previously disclosed, on November 29, 2010, we initiated an arbitration proceeding against Starbucks Coffee Company (“Starbucks”) to challenge Starbucks’ attempt to end our retail coffee agreement without compensating us pursuant to the agreement’s termination provisions. On March 1, 2011, Starbucks, without our authorization and in what we contend is a violation and breach of our agreements with Starbucks, unilaterally took control of the sale and distribution of the packaged coffee business in grocery stores and other channels by terminating its agreements (“Agreements”) with us without valid grounds. We are vigorously contesting Starbucks’ action and are seeking appropriate remedies under the Agreements, including but not limited to 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 in order to determine the parties’ respective rights and obligations under the Agreements. The arbitration proceeding is set for April 30 through May 18, 2012.

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, 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.  Income Taxes:

As of January 1, 2011, our unrecognized tax benefits were $1,281 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $1,062 million. Our unrecognized tax benefits increased $250 million during the six months ended June 30, 2011 for additions based on prior year tax positions, current year tax positions and adjustments for currency, partially offset by decreases from positions taken during prior periods. As of June 30, 2011, our unrecognized tax benefits were $1,531 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $1,306 million.

The amount of unrecognized tax benefits could decrease by approximately $150 – $200 million during the next 12 months due to audit settlements and the expiration of statutes of limitations in various jurisdictions.

We include accrued interest and penalties related to uncertain tax positions in our tax provision. As of January 1, 2011, we had $246 million of accrued interest and penalties. The increase in accrued interest and penalties during the six months ended June 30, 2011 was $35 million.

Our income tax returns are regularly examined by various federal, state and foreign tax authorities. The U.S. federal statute of limitations remains open for all tax periods beginning with the 2004 tax year. The IRS is currently examining our 2004 – 2006 tax returns and we expect this examination to close during 2012. Our income tax filings are also currently under examination by taxing authorities in various U.S. state and foreign jurisdictions. U.S. state and foreign jurisdictions have statutes of limitations generally ranging from three to five years, however these statutes are often extended by mutual agreement with the tax authorities. Years still open to examination by foreign tax authorities in major jurisdictions include (earliest open tax year in parentheses): Germany (1999), Brazil (2005), Canada (2003), Spain (2002), France (2006), United Kingdom (2006), Australia (2008), Russia (2004) and India (2003).

 

17


Note 14.  Earnings Per Share:

Basic and diluted EPS were calculated using the following:

 

0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2011      2010      2011      2010  
     (in millions, except per share data)  

Earnings from continuing operations

   $ 976       $ 939       $ 1,778       $ 1,188   

Earnings and gain from discontinued
operations, net of income taxes

                             1,644   
                                   

Net earnings

     976         939         1,778         2,832   

Noncontrolling interest

             2         3         12   
                                   

Net earnings attributable to Kraft Foods

   $ 976       $ 937       $ 1,775       $ 2,820   
                                   

Weighted-average shares for basic EPS

     1,764         1,747         1,759         1,681   

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

     7         5         7         5   
                                   

Weighted-average shares for diluted EPS

     1,771         1,752         1,766         1,686   
                                   

Basic earnings per share attributable
to Kraft Foods:

           

Continuing operations

   $ 0.55       $ 0.54       $ 1.01       $ 0.70   

Discontinued operations

                             0.98   
                                   

Net earnings attributable to Kraft Foods

   $ 0.55       $ 0.54       $ 1.01       $ 1.68   
                                   

Diluted earnings per share attributable
to Kraft Foods:

           

Continuing operations

   $ 0.55       $ 0.53       $ 1.01       $ 0.70   

Discontinued operations

                             0.97   
                                   

Net earnings attributable to Kraft Foods

   $ 0.55       $ 0.53       $ 1.01       $ 1.67   
                                   

We exclude antidilutive Kraft Foods stock options from our calculation of weighted-average shares for diluted EPS. We excluded 16.0 million antidilutive stock options for the three months and 17.6 million antidilutive stock options for the six months ended June 30, 2011, and 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.

Note 15. 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.

 

18


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 are 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 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. 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. 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:

 

0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000
     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2011      2010      2011      2010  
     (in millions)  

Net revenues:

           

Kraft Foods North America:

           

U.S. Beverages

   $ 779       $ 886       $ 1,600       $ 1,707   

U.S. Cheese

     875         797         1,749         1,642   

U.S. Convenient Meals

     881         839         1,673         1,609   

U.S. Grocery

     973         923         1,767         1,739   

U.S. Snacks

     1,510         1,516         3,002         2,908   

Canada & N.A. Foodservice

     1,300         1,200         2,463         2,244   

Kraft Foods Europe

     3,525         2,793         6,541         5,502   

Kraft Foods Developing Markets

     4,035         3,299         7,656         6,220   
                                   

Net revenues

   $ 13,878       $ 12,253       $ 26,451       $ 23,571   
                                   

 

19


0,000,000,00 0,000,000,00 0,000,000,00 0,000,000,00
     For the Three Months Ended
June 30,
    For the Six
Months Ended
June 30,
 
     2011     2010     2011     2010  
     (in millions)  

Earnings from continuing operations
before income taxes:

        

Operating income:

        

Kraft Foods North America:

        

U.S. Beverages

   $ 138      $ 178      $ 299      $ 350   

U.S. Cheese

     143        136        277        270   

U.S. Convenient Meals

     99        101        204        185   

U.S. Grocery

     379        357        671        643   

U.S. Snacks

     192        240        385        447   

Canada & N.A. Foodservice

     188        175        339        275   

Kraft Foods Europe

     415        335        723        624   

Kraft Foods Developing Markets

     518        429        923        788   

Unrealized gains / (losses) on
hedging activities

     (100     22        (38     (16

Certain U.S. pension plan costs

     (44     (25     (86     (81

General corporate expenses

     (65     (187     (131     (485

Amortization of intangibles

     (57     (60     (114     (93
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,806        1,701        3,452        2,907   

Interest and other expense, net

     441        439        887        1,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations
before income taxes

   $ 1,365      $ 1,262      $ 2,565      $ 1,844   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 $136 million for the three months and $240 million for the six months ended June 30, 2011, and $149 million for the three months and $192 million for the six months ended June 30, 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.

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:

 

0,000,000,00 0,000,000,00 0,000,000,00 0,000,000,00
     For the Three Months Ended June 30, 2011  
     Kraft Foods
North America
     Kraft Foods
Europe
     Kraft Foods
Developing
Markets
     Total  
     (in millions)  

Biscuits

   $ 1,459       $ 745       $ 877       $ 3,081   

Confectionery

     454         1,351         1,887         3,692   

Beverages

     934         868         815         2,617   

Cheese

     1,293         342         249         1,884   

Grocery

     938         119         172         1,229   

Convenient Meals

     1,240         100         35         1,375   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 6,318       $ 3,525       $ 4,035       $ 13,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


     For the Three Months Ended June 30, 2010  
     Kraft Foods
North America
     Kraft Foods
Europe
     Kraft Foods
Developing
Markets
     Total  
     (in millions; as revised)  

Biscuits(1)

   $ 1,397       $ 658       $ 673       $ 2,728   

Confectionery(1)

     470         1,125         1,567         3,162   

Beverages(1)

     1,022         597         667         2,286   

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 Six Months Ended June 30, 2011  
     Kraft Foods
North America
     Kraft Foods
Europe
     Kraft Foods
Developing
Markets
     Total  
     (in millions)  

Biscuits

   $ 2,857       $ 1,312       $ 1,607       $ 5,776   

Confectionery

     880         2,756         3,765         7,401   

Beverages

     1,898         1,533         1,436         4,867   

Cheese

     2,562         602         475         3,639   

Grocery

     1,656         188         308         2,152   

Convenient Meals

     2,401         150         65         2,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 12,254       $ 6,541       $ 7,656       $ 26,451   
  

 

 

    

 

 

    

 

 

    

 

 

 
     For the Six Months Ended June 30, 2010  
     Kraft Foods
North America
     Kraft Foods
Europe
     Kraft Foods
Developing
Markets
     Total  
     (in millions; as revised)  

Biscuits(1)

   $ 2,763       $ 1,215       $ 1,274       $ 5,252   

Confectionery(1)

     777         2,311         2,952         6,040   

Beverages(1)

     1,962         1,197         1,237         4,396   

Cheese

     2,392         482         425         3,299   

Grocery

     1,663         168         271         2,102   

Convenient Meals

     2,292         129         61         2,482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 11,849       $ 5,502       $ 6,220       $ 23,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)    Within the above sector revenues disclosures, we reclassified certain net revenues as of June 30, 2010 to conform to the current

        quarter’s presentation.

       

          

Note 16. Subsequent Events:

On August 4, 2011, we announced that our Board of Directors intends to create two independent public companies: (i) a high-growth global snacks business with estimated revenues of approximately $32 billion (the “Global Snacks Business”) and (ii) a high-margin North American grocery business with estimated revenues of approximately $16 billion (the “North American Grocery Business”). The Global Snacks Business will consist of our current Kraft Foods Europe and Developing Markets segments as well as our North American snack and confectionary brands. The North American Grocery Business will consist of our current U.S. Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in our Canada & N.A. Food Service segment. We expect to create these companies through a tax-free spin-off of the North American Grocery Business to our shareholders.

The transaction is subject to a number of conditions, including the receipt of regulatory approvals, an opinion from tax counsel and a favorable ruling from the Internal Revenue Service to ensure the tax-free status of the spin-off of the North American Grocery Business, execution of intercompany agreements, further diligence as appropriate and final approval from our Board of Directors. While our current target is to complete the spin-off before year-end 2012, we cannot assure that the spin-off will be completed on the anticipated timeline or that the terms of the spin-off will not change.

 

21


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.

Proposed Spin-Off Transaction

On August 4, 2011, we announced that our Board of Directors intends to create two independent public companies: (i) a high-growth global snacks business (the “Global Snacks Business”) and (ii) a high-margin North American grocery business (the “North American Grocery Business”). The Global Snacks Business will consist of our current Kraft Foods Europe and Developing Markets segments as well as our North American snack and confectionary brands. The North American Grocery Business will consist of our current U.S. Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in our Canada & N.A. Food Service segment. We expect to create these companies through a tax-free spin-off of the North American Grocery Business to our shareholders.

The transaction is subject to a number of conditions, including the receipt of regulatory approvals, an opinion from tax counsel and a favorable ruling from the Internal Revenue Service to ensure the tax-free status of the spin-off of the North American Grocery Business, execution of intercompany agreements, further diligence as appropriate and final approval from our Board of Directors. While our current target is to complete the spin-off before year-end 2012, we cannot assure that the spin-off will be completed on the anticipated timeline or that the terms of the spin-off will not change. See “Part II, Item 1A – Risk Factors” for certain risk factors relating to the proposed spin-off transaction. The disclosures within this Management Discussion and Analysis of Financial Condition and Results of Operations are on a consolidated Kraft Foods Inc. basis and do not take into account the proposed spin-off of the North American Grocery Business.

Executive Summary

Significant highlights of the three and six months ended June 30, 2011 are summarized below and discussed in the Discussion and Analysis that follows.

 

   

Net revenues increased 13.3% (including a 2.1 pp benefit from accounting calendar changes) to $13.9 billion in the second quarter of 2011 and increased 12.2% (including 3.0 pp due to an additional month of Cadbury results in 2011 than in the first six months of 2010 and a 1.1 pp benefit from accounting calendar changes) to $26.5 billion in the first six months of 2011 as compared to the same periods in the prior year.

 

   

Organic net revenues increased 7.1% to $12.9 billion in the second quarter of 2011 and increased 5.9% to $24.5 billion in the first six months of 2011 as compared to the same periods in the prior year.

 

   

Diluted EPS attributable to Kraft Foods increased 3.8% to $0.55 (including a $0.01 benefit from accounting calendar changes) in the second quarter of 2011 as compared to $0.53 for the same period in the prior year. Diluted EPS attributable to Kraft Foods decreased 39.5% to $1.01 (including a $0.01 benefit from accounting calendar changes) in the first six months of 2011 as compared to $1.67 for the same period in the prior year. The first six months of 2010 included the discontinued operations impact of $0.97 from the Frozen Pizza divestiture. Diluted EPS attributable to Kraft Foods from continuing operations increased 44.3% to $1.01 (including a $0.01 benefit from accounting calendar changes) in the first six months of 2011 as compared to $0.70 for the same period in the prior year.

 

   

Operating EPS attributable to Kraft Foods increased 3.3% to $0.62 (including a $0.01 benefit from accounting calendar changes) in the second quarter of 2011 as compared to $0.60 for the same period in the prior year. Operating EPS attributable to Kraft Foods increased 3.6% to $1.14 (including a $0.01 benefit from accounting calendar changes) in the first six months of 2011 as compared to $1.10 for the same period in the prior year.

 

22


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 $12 million for the three months and $215 million for the six months ended June 30, 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 $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, 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.

0,000,000,000
     Pro forma for the
Six Months Ended
June 30, 2010
 
     (in millions)  

Net revenues

   $ 24,252   

Net earnings attributable to Kraft Foods

     2,533   

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 June 30, 2010 were:

 

0,000,000,000
     For the Six
Months Ended
June 30, 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 for the first six months 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.

 

23


Starbucks CPG Business:

As we previously disclosed, on November 29, 2010, we initiated an arbitration proceeding against Starbucks Coffee Company (“Starbucks”) to challenge Starbucks’ attempt to end our retail coffee agreement without compensating us pursuant to the agreement’s termination provisions. On March 1, 2011, Starbucks, without our authorization and in what we contend is a violation and breach of our agreements with Starbucks, unilaterally took control of the sale and distribution of the packaged coffee business in grocery stores and other channels by terminating its agreements (“Agreements”) with us without valid grounds. We are vigorously contesting Starbucks’ action and are seeking appropriate remedies under the Agreements, including but not limited to 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 in order to determine the parties’ respective rights and obligations under the Agreements. The arbitration proceeding is set for April 30 through May 18, 2012.

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 $136 million for the three months and $240 for the six months ended June 30, 2011, and $149 million for the three months and $192 million for the six months ended June 30, 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 $897 million of the $1.5 billion in expected charges. At June 30, 2011, we had an accrual of $368 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.

Accounting Calendar Changes in 2011 and 2010

The majority of our operating subsidiaries report results as of the last Saturday of the period. A portion of our international operating subsidiaries report results as of the last calendar day of the period or two weeks prior to the last Saturday of the period.

In the second quarter of 2011, we changed the consolidation date for certain operations of our Kraft Foods Europe segment and operations in certain regions of our Kraft Foods Developing Markets segment (Latin America, Eastern and Central Europe, Africa and the Middle East). Previously, these operations primarily reported results two weeks prior to the end of the period. Now, our Kraft Foods Europe segment reports results as of the last Saturday of each period. Our operations in Latin America and certain operations in Central and Eastern Europe, Middle East and Africa region (“CEEMA”) report results as of the last calendar day of the period. These changes resulted in a favorable impact to net revenues of $360 million and a favorable impact of $50 million to operating income. For 2011, we plan to reinvest the favorable operating income impact realized from these accounting calendar changes.

In the second quarter of 2010, we changed the consolidation date for certain European biscuits operations within our Kraft Foods Europe segment and certain operations in Asia Pacific within our Kraft Foods Developing Markets segment. Previously, these operations primarily reported period-end results one month prior to the end of the period and moved to reporting results two weeks prior to the last Saturday of the period. These changes resulted in a favorable impact to net revenues of $70 million and had an insignificant impact on operating income.

We believe these changes are preferable and will improve business planning and financial reporting by better matching the close dates of the operating subsidiaries within our Kraft Foods Europe segment and Kraft Foods Developing Markets segment and by bringing the reporting date closer to the period-end date. As the impact to prior-period results was not material, we have not revised prior-period results.

 

24


Provision for Income Taxes

Our effective tax rate was 28.5% in the second quarter of 2011 and 30.7% in the first six months of 2011. The 2011 second quarter effective tax rate was favorably impacted by net discrete items totaling $52 million, arising principally from the favorable resolution with foreign tax authorities of several tax positions taken in prior years. For the first six months of 2011, our effective tax rate was favorably impacted by net discrete items totaling $58 million, primarily from favorable resolutions reached with foreign tax authorities in the second quarter.

Our effective tax rate was 25.6% in the second quarter of 2010 and 35.6% in the first six months of 2010. Our second quarter 2010 effective tax rate included net tax benefits of $104 million, primarily resulting from the resolution of a federal tax audit and several items in our international operations. For the first six months of 2010, our effective tax rate included net tax benefits of $32 million, primarily due to the second quarter resolution of a federal tax audit, the tax impacts of the highly inflationary accounting adjustments related to our Venezuelan subsidiaries, and the resolution of several items in our international operations, partially offset by a $137 million write-off of deferred tax assets as a result of the U.S. health care legislation enacted in March 2010.

Consolidated Results of Operations

The following discussion compares our consolidated results of operations for the three months ended June 30, 2011 and 2010 and for the six months ended June 30, 2011 and 2010.

Three Months Ended June 30:

 

     For the Three Months Ended
June  30,
               
     2011      2010      $ change      % change  
     (in millions, except per share data)                

Net revenues

   $ 13,878       $ 12,253       $ 1,625         13.3

Operating income

     1,806         1,701         105         6.2

Earnings from continuing operations

     976         939         37         3.9

Net earnings attributable to Kraft Foods

     976         937         39         4.2

Diluted earnings per share attributable to
Kraft Foods from continuing operations

     0.55         0.53         0.02         3.8

Diluted earnings per share attributable
to Kraft Foods

     0.55         0.53         0.02         3.8

Net Revenues – Net revenues increased $1,625 million (13.3%) to $13,878 million in the second quarter of 2011, and organic net revenues increased $852 million (7.1%) to $12,875 million as follows.

 

Change in net revenues (by percentage point)

  

Higher net pricing

     5.5 pp 

Favorable volume/mix

     1.6 pp 
  

 

 

 

Total change in organic net revenues (1)

     7.1

Favorable foreign currency

     5.7 pp 

Impact of accounting calendar changes

     2.1 pp 

Impact of divestitures (including the Starbucks
CPG business)

     (1.6 )pp 
  

 

 

 

Total change in net revenues

     13.3
  

 

 

 

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

       

Organic net revenues growth was 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 primarily by higher base business shipments in Kraft Foods Developing Markets. Favorable foreign currency increased net revenues by $687 million, due primarily to the strength of the euro, Brazilian real, Australian dollar, British pound, Canadian dollar, Swedish krona and Swiss franc versus the U.S. dollar. Excluding the effects of foreign currency, accounting calendar changes added $316 million in net revenues in the second quarter of 2011, as compared to $59 million in the second quarter of 2010. These gains were partially offset by the impact of divestitures (including the Starbucks CPG business).

 

25


Operating Income – Operating income increased $105 million (6.2%) to $1,806 million in the second quarter of 2011, due to the following:

 

     Operating
Income
    Change  
     (in millions)     (percentage point)  

Operating Income for the Three Months Ended
June 30, 2010

   $  1,701     

Integration Program costs

     149        8.6 pp 

2010 acquisition-related costs associated with Cadbury

     10        0.6 pp 
  

 

 

   

 

 

 

Underlying Operating Income for the Three Months
Ended June 30, 2010
(1)

   $ 1,860     

Higher net pricing

     661        36.5 pp 

Higher input costs

     (678     (37.4) pp 

Favorable volume/mix

     55        3.0 pp 

Lower selling, general and administrative expenses

     35        1.9 pp 

Increased operating income from accounting calendar changes

     34        1.9 pp 

Change in unrealized gains/losses on hedging activities

     (122     (6.7) pp 

Favorable foreign currency

     127        6.8 pp 

Decreased operating income from divestitures (including
the Starbucks CPG business)

     (39     (2.1) pp 

Other, net

     9        0.5 pp 
  

 

 

   

 

 

 

Total change in underlying operating income

     82        4.4
  

 

 

   

 

 

 

Underlying Operating Income for the Three Months
Ended June 30, 2011
(1)

   $ 1,942     

Integration Program costs

     (136     (7.4) pp 
  

 

 

   

 

 

 

Operating Income for the Three Months Ended
June 30, 2011

   $ 1,806        6.2
  

 

 

   

 

 

 

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

       

Higher input costs offset higher pricing during the quarter. The increase in input costs was driven by significantly higher raw material costs and to a lesser extent higher manufacturing costs, primarily in Kraft Foods Developing Markets. The favorable volume/mix was driven primarily by a strong contribution from Kraft Foods Developing Markets, which was partially offset by declines in all other reportable segments except U.S. Cheese. Total selling, general and administrative expenses increased $75 million over the second quarter of 2010. Excluding the impacts of divestitures (including the Starbucks CPG business), foreign currency, accounting calendar changes and our Cadbury acquisition (including Integration Program and acquisition-related costs), selling, general and administrative expenses decreased $35 million from the second quarter of 2010. Favorable foreign currency increased operating income by $127 million, due primarily to the impact of the highly inflationary Venezuelan economy and the strength of the euro, Australian dollar, Brazilian real and Canadian dollar versus the U.S. dollar. Accounting calendar changes added $34 million in operating income, as we realized operating income from accounting calendar changes of $44 million (excluding the effects of foreign currency) in the second quarter of 2011, versus $10 million in the second quarter of 2010. The change in unrealized gains/losses on hedging activities decreased operating income by $122 million, as we recognized losses of $100 million in the second quarter of 2011, versus gains of $22 million in the second quarter of 2010. 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. As a result of these changes, operating income margin decreased, from 13.9% in the second quarter of 2010 to 13.0% in the second quarter of 2011. The margin decline was driven primarily by the change in unrealized gains/losses on hedging activities and the impact of the higher revenue base on the margin calculation.

 

26


Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $976 million increased by $39 million (4.2%) in the second quarter of 2011. Diluted EPS attributable to Kraft Foods was $0.55 in the second quarter of 2011, up $0.02 from $0.53 in the second quarter of 2010. These changes were due to the following:

 

     Diluted EPS  

Diluted EPS Attributable to Kraft Foods for the Three
Months Ended June 30, 2010

   $  0.53   

Acquisition-related costs

     0.01   

Integration Program costs

     0.06   
  

 

 

 

Operating EPS for the Three Months Ended June 30, 2010 (1)

     0.60   

Increases in operations

     0.03   

Decreased operating income from divestitures (including the
Starbucks CPG business)

     (0.01

Increased operating income from accounting calendar changes

     0.01   

Change in unrealized gains/losses on hedging activities

     (0.05

Favorable foreign currency

     0.05   

Higher interest and other expense, net (2)

       

Changes in taxes

     (0.01

Higher shares outstanding

       
  

 

 

 

Operating EPS for the Three Months Ended June 30, 2011 (1)

     0.62   

Integration Program costs

     (0.07
  

 

 

 

Diluted EPS Attributable to Kraft Foods for the Three

        Months Ended June 30, 2011

   $ 0.55   
  

 

 

 

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

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

  

 

27


Six Months Ended June 30:

 

     For the Six Months Ended
June  30,
              
     2011      2010      $ change     % change  
     (in millions, except per share data)               

Net revenues

   $ 26,451       $ 23,571       $ 2,880        12.2

Operating income

     3,452         2,907         545        18.7

Earnings from continuing operations

     1,778         1,188         590        49.7

Net earnings attributable to Kraft Foods

     1,775         2,820         (1,045     (37.1 %) 

Diluted earnings per share attributable to
Kraft Foods from continuing operations

     1.01         0.70         0.31        44.3

Diluted earnings per share attributable
to Kraft Foods

     1.01         1.67         (0.66     (39.5 %) 

Net Revenues – Net revenues increased $2,880 million (12.2%) to $26,451 million in the first six months of 2011, and organic net revenues increased $1,369 million (5.9%) to $24,539 million as follows.

 

Change in net revenues (by percentage point)

  

Higher net pricing

     4.6 pp 

Favorable volume/mix

     1.3 pp 
        

Total change in organic net revenues (1)

     5.9

Favorable foreign currency

     3.5 pp 

Impact of the Cadbury acquisition (2)

     3.0 pp 

Impact of accounting calendar changes

     1.1 pp 

Impact of divestitures (including the Starbucks
CPG business)

     (1.3 )pp 
        

Total change in net revenues

     12.2
        

(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.

  

Organic net revenues growth was 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 primarily by higher base business shipments in Kraft Foods Developing Markets, Kraft Foods Europe and U.S. Cheese. Favorable foreign currency increased net revenues by $808 million, due primarily to the strength of the euro, Brazilian real, Australian dollar, Canadian dollar and British pound versus the U.S. dollar. The Cadbury acquisition, due to the incremental January 2011 operating results, added $697 million in net revenues. Excluding the effects of foreign currency, accounting calendar changes added $316 million in net revenues in the first six months of 2011, as compared to $63 million in the first six months of 2010. These gains were partially offset by the impact of divestitures (including the Starbucks CPG business).

 

28


Operating Income – Operating income increased $545 million (18.7%) to $3,452 million in the first six months of 2011, due to the following:

 

     Operating
Income
    Change  
     (in millions)     (percentage point)  

Operating Income for the Six Months Ended
June 30, 2010

   $ 2,907     

Integration Program costs

     192        7.3 pp 

2010 acquisition-related costs associated with Cadbury

     270        9.5 pp 
                

Underlying Operating Income for the Six Months
Ended June 30, 2010 (1)

   $ 3,369     

Higher net pricing

     1,068        32.5 pp 

Higher input costs

     (1,065     (32.4 )pp 

Favorable volume/mix

     108        3.3 pp 

Lower selling, general and administrative expenses

     40        1.2 pp 

Incremental operating income from the
Cadbury acquisition
(2)

     83        2.5 pp 

Increased operating income from accounting
calendar changes

     34        1.0 pp 

Change in unrealized gains/losses on hedging activities

     (22     (0.7 )pp 

Favorable foreign currency

     132        3.9 pp 

Decreased operating income from divestitures (including the
Starbucks CPG business)

     (58     (1.8 )pp 

Other, net

     3        0.1 pp 
                
    

Total change in underlying operating income

     323        9.6
                

Underlying Operating Income for the Six Months
Ended June 30, 2011 (1)

   $ 3,692     

Integration Program costs

     (240     (7.7 )pp 
                

Operating Income for the Six Months Ended
June 30, 2011

   $ 3,452        18.7
                

(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 offset higher input costs during the first six months of 2011. The increase in input costs was driven by significantly higher raw material costs and to a lesser extent higher manufacturing costs in Kraft Foods Developing Markets. The favorable volume/mix was driven primarily by strong contributions from Kraft Foods Developing Markets, Kraft Foods Europe and U.S. Cheese, partially offset by declines in all other reportable segments. Total selling, general and administrative expenses increased $158 million from the first six months of 2010. Excluding the impacts of divestitures (including the Starbucks CPG business), foreign currency, accounting calendar changes and our Cadbury acquisition (including Integration Program and acquisition-related costs), selling, general and administrative expenses decreased $40 million from the first six months of 2010. Favorable foreign currency increased operating income by $132 million, due primarily to the strength of the euro, Brazilian real, Canadian dollar, Australian dollar and British pound versus the U.S. dollar. The Cadbury acquisition, net of changes in acquisition-related and Integration Program costs, increased operating income by $83 million. Accounting calendar changes added $34 million in operating income, as we realized operating income from accounting calendar changes of $44 million (excluding the effects of foreign currency) in the first six months of 2011, versus $10 million in the first six months of 2010. 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. The change in unrealized gains/losses on hedging activities decreased operating income by $22 million, as we recognized losses of $38 million in the first six months of 2011, versus losses of $16 million in the first six months of 2010. As a result of these changes, operating income margin increased, from 12.3% in the first six months of 2010 to 13.1% in the first six months of 2011. The margin gain was driven primarily by lower corporate expenses reflecting lower Integration Program and acquisition-related costs. In certain reportable segments, operating margins declined, driven primarily by the impact of the higher revenue base on the margin calculation.

 

29


Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $1,775 million decreased by $1,045 million (37.1%) in the first six months of 2011. Diluted EPS attributable to Kraft Foods from continuing operations was $1.01 in the first six months of 2011, up $0.31 from $0.70 in the first six months of 2010. Diluted EPS attributable to Kraft Foods was $1.01 in the first six months of 2011, down $0.66 from $1.67 in the first six months of 2010. These changes were due to the following:

 

     Diluted EPS  

Diluted EPS Attributable to Kraft Foods for the Six
Months Ended June 30, 2010

   $ 1.67   

Earnings and gain from discontinued operations, net of income taxes

     0.97   
  

 

 

 

Diluted EPS Attributable to Kraft Foods from Continuing
    Operations for the Six Months Ended June 30, 2010

     0.70   

Acquisition-related costs

     0.14   

Acquisition-related interest and other expense, net

     0.10   

Integration Program costs

     0.08   

U.S. health care legislation impact on deferred taxes

     0.08   
  

 

 

 

Operating EPS for the Six Months Ended June 30, 2010 (1)

     1.10   

Increases in operations

     0.06   

Increases in operations from the Cadbury acquisition (2)

     0.04   

Decreased operating income from divestitures (including the
Starbucks CPG business)

     (0.02

Increased operating income from accounting calendar changes

     0.01   

Favorable foreign currency

     0.05   

Change in unrealized gains/losses on hedging activities

     (0.01

Higher interest and other expense, net (3)

     (0.03

Changes in taxes (4)

     (0.01

Higher shares outstanding

     (0.05
  

 

 

 

Operating EPS for the Six Months Ended June 30, 2011 (1)

     1.14   

Integration Program costs

     (0.13
  

 

 

 

Diluted EPS Attributable to Kraft Foods for the Six
Months Ended June 30, 2011

   $ 1.01   
  

 

 

 

(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.

       

       

       

       

 

 

30


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.

The following discussion compares the operating results of each of our reportable segments for the three and six months ended June 30, 2011 and 2010.

 

0,000,000,000 0,000,000,000 0,000,000,000 0,000,000,000
     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (in millions)  

Net revenues:

        

Kraft Foods North America:

        

U.S. Beverages

   $ 779      $ 886      $ 1,600      $ 1,707   

U.S. Cheese

     875        797        1,749        1,642   

U.S. Convenient Meals

     881        839        1,673        1,609