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 | ||
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
Kraft Foods Inc.
(Exact name of registrant as specified in its charter)
Virginia | 52-2284372 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
Three Lakes Drive, Northfield, Illinois | 60093 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(847) 646-2000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer¨ (Do not check if a smaller reporting company) | 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 SeptemberApril 30, 2009,2010, there were 1,475,836,5251,743,483,521 shares of the registrant’s common stock outstanding.
Kraft Foods Inc.
Table of Contents
Page No. | ||||
PART I – | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements (Unaudited) | |||
Condensed Consolidated Statements of Earnings for the | 1 | |||
Condensed Consolidated Balance Sheets at | 2 | |||
Condensed Consolidated Statements of Equity | 3 | |||
Condensed Consolidated Statements of Cash Flows for the | 4 | |||
Notes to Condensed Consolidated Financial Statements | 5 | |||
Item 2. | Management’s Discussion and Analysis of Financial | |||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |||
Item 4. | Controls and Procedures | |||
PART II – | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | |||
Item 1A. | Risk Factors | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||
Item 6. | Exhibits | |||
Signature |
In this report, “Kraft Foods,” “we,” “us” and “our” refers to Kraft Foods Inc. and subsidiaries, and “Common Stock” refers to Kraft Foods’ Class A common stock.
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Three Months Ended | |||||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | March 31, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2010 | 2009 | ||||||||||||||
Net revenues | $ | 9,803 | $ | 10,401 | $ | 29,361 | $ | 31,251 | $ | 11,318 | $ | 8,979 | |||||||
Cost of sales | 6,262 | 7,096 | 18,890 | 20,777 | 7,229 | 5,879 | |||||||||||||
Gross profit | 3,541 | 3,305 | 10,471 | 10,474 | 4,089 | 3,100 | |||||||||||||
Marketing, administration and research costs | 2,116 | 2,151 | 6,247 | 6,544 | 2,850 | 1,919 | |||||||||||||
Asset impairment and exit costs | – | 123 | (26 | ) | 306 | ||||||||||||||
Losses on divestitures, net | – | 1 | 17 | 93 | |||||||||||||||
Amortization of intangibles | 6 | 7 | 15 | 18 | 33 | 6 | |||||||||||||
Operating income | 1,419 | 1,023 | 4,218 | 3,513 | 1,206 | 1,175 | |||||||||||||
Interest and other expense, net | 323 | 298 | 915 | 934 | 624 | 280 | |||||||||||||
Earnings from continuing operations before | 1,096 | 725 | 3,303 | 2,579 | 582 | 895 | |||||||||||||
Provision for income taxes | 270 | 205 | 986 | 834 | 333 | 292 | |||||||||||||
Earnings from continuing operations | 826 | 520 | 2,317 | 1,745 | 249 | 603 | |||||||||||||
Earnings and gain from discontinued | – | 845 | – | 968 | 1,644 | 59 | |||||||||||||
Net earnings | 826 | 1,365 | 2,317 | 2,713 | 1,893 | 662 | |||||||||||||
Noncontrolling interest | 2 | 3 | 6 | 7 | 10 | 2 | |||||||||||||
Net earnings attributable to Kraft Foods | $ | 824 | $ | 1,362 | $ | 2,311 | $ | 2,706 | $ | 1,883 | $ | 660 | |||||||
Per share data: | |||||||||||||||||||
Basic earnings per share attributable to | |||||||||||||||||||
Continuing operations | $ | 0.56 | $ | 0.34 | $ | 1.56 | $ | 1.15 | $ | 0.15 | $ | 0.41 | |||||||
Discontinued operations | – | 0.57 | – | 0.63 | 1.02 | 0.04 | |||||||||||||
Net earnings attributable to Kraft Foods | $ | 0.56 | $ | 0.91 | $ | 1.56 | $ | 1.78 | $ | 1.17 | $ | 0.45 | |||||||
Diluted earnings per share attributable to | |||||||||||||||||||
Continuing operations | $ | 0.55 | $ | 0.34 | $ | 1.56 | $ | 1.14 | $ | 0.15 | $ | 0.41 | |||||||
Discontinued operations | – | 0.57 | – | 0.63 | 1.01 | 0.04 | |||||||||||||
Net earnings attributable to Kraft Foods | $ | 0.55 | $ | 0.91 | $ | 1.56 | $ | 1.77 | $ | 1.16 | $ | 0.45 | |||||||
Dividends declared | $ | 0.29 | $ | 0.29 | $ | 0.87 | $ | 0.83 | $ | 0.29 | $ | 0.29 | |||||||
See notes to condensed consolidated financial statements.
1
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2009 | 2008 | 2010 | 2009 | |||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 2,996 | $ | 1,244 | $ | 3,878 | $ | 2,101 | ||||||||
Receivables (less allowances of $137 in 2009 and $129 in 2008) | 4,720 | 4,704 | ||||||||||||||
Receivables (less allowances of $181 in 2010 and $121 in 2009) | 6,575 | 5,197 | ||||||||||||||
Inventories, net | 4,073 | 3,881 | 5,097 | 3,775 | ||||||||||||
Deferred income taxes | 654 | 804 | 839 | 730 | ||||||||||||
Other current assets | 575 | 828 | 826 | 651 | ||||||||||||
Total current assets | 13,018 | 11,461 | 17,215 | 12,454 | ||||||||||||
Property, plant and equipment, net | 10,409 | 9,917 | 13,896 | 10,693 | ||||||||||||
Goodwill | 28,617 | 27,581 | 37,119 | 28,764 | ||||||||||||
Intangible assets, net | 13,319 | 12,926 | 25,648 | 13,429 | ||||||||||||
Prepaid pension assets | 122 | 56 | 140 | 115 | ||||||||||||
Other assets | 1,184 | 1,232 | 1,691 | 1,259 | ||||||||||||
TOTAL ASSETS | $ | 66,669 | $ | 63,173 | $ | 95,709 | $ | 66,714 | ||||||||
LIABILITIES | ||||||||||||||||
Short-term borrowings | $ | 1,359 | $ | 897 | $ | 891 | $ | 453 | ||||||||
Current portion of long-term debt | 1,258 | 765 | 633 | 513 | ||||||||||||
Accounts payable | 3,264 | 3,373 | 5,422 | 3,766 | ||||||||||||
Accrued marketing | 1,967 | 1,803 | 2,154 | 2,181 | ||||||||||||
Accrued employment costs | 1,020 | 951 | 1,223 | 1,175 | ||||||||||||
Other current liabilities | 3,188 | 3,255 | 5,258 | 3,403 | ||||||||||||
Total current liabilities | 12,056 | 11,044 | 15,581 | 11,491 | ||||||||||||
Long-term debt | 18,108 | 18,589 | 29,496 | 18,024 | ||||||||||||
Deferred income taxes | 4,314 | 4,064 | 7,561 | 4,508 | ||||||||||||
Accrued pension costs | 2,204 | 2,367 | 2,565 | 1,765 | ||||||||||||
Accrued postretirement health care costs | 2,682 | 2,678 | 2,878 | 2,816 | ||||||||||||
Other liabilities | 2,094 | 2,075 | 3,134 | 2,138 | ||||||||||||
TOTAL LIABILITIES | 41,458 | 40,817 | 61,215 | 40,742 | ||||||||||||
Contingencies (Note 11) | ||||||||||||||||
Contingencies (Note 13) | ||||||||||||||||
EQUITY | ||||||||||||||||
Common Stock, no par value (1,735,000,000 shares | – | – | ||||||||||||||
Common Stock, no par value (1,990,695,311 shares issued | – | – | ||||||||||||||
Additional paid-in capital | 23,570 | 23,563 | 30,915 | 23,611 | ||||||||||||
Retained earnings | 14,394 | 13,440 | 15,971 | 14,636 | ||||||||||||
Accumulated other comprehensive losses | (4,355 | ) | (5,994 | ) | (4,422 | ) | (3,955 | ) | ||||||||
Treasury stock, at cost | (8,484 | ) | (8,714 | ) | (8,286 | ) | (8,416 | ) | ||||||||
Total Kraft Foods Shareholders’ Equity | 25,125 | 22,295 | 34,178 | 25,876 | ||||||||||||
Noncontrolling interest | 86 | 61 | 316 | 96 | ||||||||||||
TOTAL EQUITY | 25,211 | 22,356 | 34,494 | 25,972 | ||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 66,669 | $ | 63,173 | $ | 95,709 | $ | 66,714 | ||||||||
See notes to condensed consolidated financial statements.
2
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(in millions of dollars, except per share data)
(Unaudited)
Kraft Foods Shareholders’ Equity | |||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Earnings / (Losses) | Treasury Stock | Noncontrolling Interest | Total Equity | |||||||||||||||||||||
Balances at January 1, 2008 | $ | – | $ | 23,445 | $ | 12,321 | $ | (1,835 | ) | $ | (6,524 | ) | $ | 38 | $ | 27,445 | |||||||||||
Comprehensive earnings / (losses): | |||||||||||||||||||||||||||
Net earnings | – | – | 2,884 | – | – | 9 | 2,893 | ||||||||||||||||||||
Other comprehensive losses, net | – | – | – | (4,159 | ) | – | (9 | ) | (4,168 | ) | |||||||||||||||||
Total comprehensive losses * | – | (1,275 | ) | ||||||||||||||||||||||||
Adoption of new benefit plan guidance | – | – | (8 | ) | – | – | – | (8 | ) | ||||||||||||||||||
Exercise of stock options and issuance of other stock awards | – | 118 | (81 | ) | – | 231 | – | 268 | |||||||||||||||||||
Cash dividends declared | – | – | (1,676 | ) | – | – | – | (1,676 | ) | ||||||||||||||||||
Acquisitions of noncontrolling | – | – | – | – | – | 23 | 23 | ||||||||||||||||||||
Common Stock repurchased | – | – | – | – | (777 | ) | – | (777 | ) | ||||||||||||||||||
Common Stock tendered | – | – | – | – | (1,644 | ) | – | (1,644 | ) | ||||||||||||||||||
Balances at December 31, 2008 | $ | – | $ | 23,563 | $ | 13,440 | $ | (5,994 | ) | $ | (8,714 | ) | $ | 61 | $ | 22,356 | |||||||||||
Comprehensive earnings / (losses): | |||||||||||||||||||||||||||
Net earnings | – | – | 2,311 | – | – | 6 | 2,317 | ||||||||||||||||||||
Other comprehensive earnings, net | – | – | – | 1,639 | – | 25 | 1,664 | ||||||||||||||||||||
Total comprehensive earnings * | 31 | 3,981 | |||||||||||||||||||||||||
Exercise of stock options and issuance of other stock awards | – | 8 | (71 | ) | – | 230 | – | 167 | |||||||||||||||||||
Cash dividends declared | – | – | (1,286 | ) | – | – | – | (1,286 | ) | ||||||||||||||||||
Dividends paid on noncontrolling | – | (1 | ) | – | – | – | (6 | ) | (7 | ) | |||||||||||||||||
Balances at September 30, 2009 | $ | – | $ | 23,570 | $ | 14,394 | $ | (4,355 | ) | $ | (8,484 | ) | $ | 86 | $ | 25,211 | |||||||||||
Kraft Foods Shareholders’ Equity | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Additional | Comprehensive | |||||||||||||||||||||||||||
Common | Paid-in | Retained | Earnings / | Treasury | Noncontrolling | Total | ||||||||||||||||||||||
Stock | Capital | Earnings | (Losses) | Stock | Interest | Equity | ||||||||||||||||||||||
Balances at January 1, 2009 | $ | – | $ | 23,563 | $ | 13,440 | $ | (5,994 | ) | $ | (8,714 | ) | $ | 61 | $ | 22,356 | ||||||||||||
Comprehensive earnings: | ||||||||||||||||||||||||||||
Net earnings | – | – | 3,021 | – | – | 7 | 3,028 | |||||||||||||||||||||
Other comprehensive earnings, net of | – | – | – | 2,039 | – | 34 | 2,073 | |||||||||||||||||||||
Total comprehensive earnings * | 41 | 5,101 | ||||||||||||||||||||||||||
Exercise of stock options and | – | 49 | (110 | ) | – | 298 | – | 237 | ||||||||||||||||||||
Cash dividends declared | – | – | (1,715 | ) | – | – | – | (1,715 | ) | |||||||||||||||||||
Dividends paid on noncontrolling | – | (1 | ) | – | – | – | (6 | ) | (7 | ) | ||||||||||||||||||
Balances at December 31, 2009 | $ | – | $ | 23,611 | $ | 14,636 | $ | (3,955 | ) | $ | (8,416 | ) | $ | 96 | $ | 25,972 | ||||||||||||
Comprehensive earnings / (losses): | ||||||||||||||||||||||||||||
Net earnings | – | – | 1,883 | – | – | 10 | 1,893 | |||||||||||||||||||||
Other comprehensive losses, net | – | – | – | (467 | ) | – | (19 | ) | (486 | ) | ||||||||||||||||||
Total comprehensive earnings / | (9 | ) | 1,407 | |||||||||||||||||||||||||
Exercise of stock options and | – | (14 | ) | (43 | ) | – | 130 | – | 73 | |||||||||||||||||||
Cash dividends declared | – | – | (505 | ) | – | – | – | (505 | ) | |||||||||||||||||||
Noncontrolling interest recorded | – | – | – | – | – | 5,420 | 5,420 | |||||||||||||||||||||
Acquisition of noncontrolling | – | 38 | – | – | – | (5,191 | ) | (5,153 | ) | |||||||||||||||||||
Issuance of Common Stock | – | 7,280 | – | – | – | – | 7,280 | |||||||||||||||||||||
Balances at March 31, 2010 | $ | – | $ | 30,915 | $ | 15,971 | $ | (4,422 | ) | $ | (8,286 | ) | $ | 316 | $ | 34,494 | ||||||||||||
* |
** | For the quarter ended |
See notes to condensed consolidated financial statements.
3
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Three Months Ended | ||||||||||||||||
For the Nine Months Ended September 30, | March 31, | |||||||||||||||
2009 | 2008 | 2010 | 2009 | |||||||||||||
CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES | ||||||||||||||||
Net earnings | $ | 2,317 | $ | 2,713 | $ | 1,893 | $ | 662 | ||||||||
Adjustments to reconcile net earnings to operating cash flows: | ||||||||||||||||
Depreciation and amortization | 659 | 752 | 313 | 215 | ||||||||||||
Stock-based compensation expense | 123 | 135 | 40 | 40 | ||||||||||||
Deferred income tax provision / (benefit) | 127 | (77 | ) | |||||||||||||
Losses on divestitures, net | 17 | 93 | ||||||||||||||
Deferred income tax provision | 116 | 7 | ||||||||||||||
Gain on discontinued operations (Note 2) | – | (849 | ) | (1,596 | ) | – | ||||||||||
Asset impairment and exit costs, net of cash paid | 9 | 167 | ||||||||||||||
Other non-cash expense, net | 189 | 75 | ||||||||||||||
Other non-cash (income) / expense, net | (166 | ) | 104 | |||||||||||||
Change in assets and liabilities, excluding the effects of | ||||||||||||||||
Receivables, net | 410 | 373 | (176 | ) | 251 | |||||||||||
Inventories, net | (27 | ) | (814 | ) | (163 | ) | (232 | ) | ||||||||
Accounts payable | (351 | ) | (216 | ) | 24 | (174 | ) | |||||||||
Other current assets | 233 | (134 | ) | 168 | 49 | |||||||||||
Other current liabilities | (363 | ) | 283 | (498 | ) | (530 | ) | |||||||||
Change in pension and postretirement assets and liabilities, net | (74 | ) | 28 | 40 | 31 | |||||||||||
Net cash provided by operating activities | 3,269 | 2,529 | ||||||||||||||
Net cash (used in) / provided by operating activities | (5 | ) | 423 | |||||||||||||
CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES | ||||||||||||||||
Capital expenditures | (749 | ) | (901 | ) | (241 | ) | (207 | ) | ||||||||
Acquisitions, net of cash received | – | (99 | ) | (9,591 | ) | – | ||||||||||
Proceeds from divestitures | 6 | 38 | ||||||||||||||
Proceeds from divestitures, net of disbursements | 3,700 | – | ||||||||||||||
Other | 43 | 38 | 2 | 33 | ||||||||||||
Net cash used in investing activities | (700 | ) | (924 | ) | (6,130 | ) | (174 | ) | ||||||||
CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES | ||||||||||||||||
Net issuance / (repayment) of short-term borrowings | 461 | (5,834 | ) | |||||||||||||
Net (repayment) / issuance of short-term borrowings | (708 | ) | 145 | |||||||||||||
Long-term debt proceeds | 2 | 6,477 | 9,432 | – | ||||||||||||
Long-term debt repaid | (215 | ) | (65 | ) | (6 | ) | (9 | ) | ||||||||
Repurchase of Common Stock | – | (777 | ) | |||||||||||||
Dividends paid | (1,284 | ) | (1,236 | ) | (653 | ) | (426 | ) | ||||||||
Other | 75 | 32 | (72 | ) | (4 | ) | ||||||||||
Net cash used in financing activities | (961 | ) | (1,403 | ) | ||||||||||||
Net cash provided by / (used in) financing activities | 7,993 | (294 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 144 | (32 | ) | (81 | ) | (15 | ) | |||||||||
Cash and cash equivalents: | ||||||||||||||||
Increase | 1,752 | 170 | ||||||||||||||
Increase / (decrease) | 1,777 | (60 | ) | |||||||||||||
Balance at beginning of period | 1,244 | 567 | 2,101 | 1,244 | ||||||||||||
Balance at end of period | $ | 2,996 | $ | 737 | $ | 3,878 | $ | 1,184 | ||||||||
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.America (“U.S. GAAP”). It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of our financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results.
You should read these statements in conjunction with our revised consolidated financial statements and related notes in our Form 10-K for the year ended December 31, 2008 in the Form 8-K we filed with the SEC on November 3, 2009.
Inventories:Principles of Consolidation:
Our domestic operating subsidiaries report results as of the last Saturday of the quarter, and our international operating subsidiaries generally report results two weeks prior to the last Saturday of the quarter. The results of operations of the newly acquired Cadbury plc (“Cadbury”) are reported on the last day of the calendar month.
Highly Inflationary Accounting:
In the fourth quarter of 2009, the Venezuelan economy was classified as highly inflationary under U.S. GAAP. Effective January 1, 2009,2010, we changedare accounting for our methodVenezuelan subsidiaries under highly inflationary accounting rules, which principally means all transactions are recorded in U.S. dollars. Venezuela has three exchange rates: the official rate, the consumer staples rate and the secondary (or parallel) rate. We have historically used both the official rate and the secondary rate to translate our Venezuelan operations, based on the nature of valuing ourthe operations of each individual subsidiary. Additionally, we previously carried cash that we had exchanged into U.S. inventories to the average cost method. In prior years, principally all U.S. inventories were valueddollars using the last-in, first-out (“LIFO”) method. With thissecondary market at that rate. Upon the change to highly inflationary accounting, we value all of our inventorieswere then required to translate those U.S. dollars on hand using the average cost method. We usedofficial rate, which resulted in a charge of $34 million in the LIFO methodfirst quarter of 2010.
On January 8, 2010, the Venezuelan government devalued its currency. Accordingly, we were required to determine the cost of 35% of inventories at December 31, 2008. We believe that the average cost method of accounting for U.S. inventories is preferable and will improve financial reporting by better matching revenues and expenses to current costs, by better aligning our external reporting with our competitors, and by aligning our external reporting with our tax basis of accounting. We revised prior years’ financial statements to conform to the change in accounting policy.
The following line items within the statements of earnings were affected by the change in accounting policy:
For the Three Months Ended September 30, 2009 | ||||||||||||||
As Computed under LIFO | As Reported under Average Cost | Favorable / (Unfavorable) | ||||||||||||
(in millions, except per share data) | ||||||||||||||
Cost of sales | $ | 6,253 | $ | 6,262 | $ | (9 | ) | |||||||
Provision for income taxes | 273 | 270 | 3 | |||||||||||
Earnings from continuing operations | 832 | 826 | (6 | ) | ||||||||||
Net earnings attributable to Kraft Foods | 830 | 824 | (6 | ) | ||||||||||
Basic earnings per share attributable | ||||||||||||||
Continuing operations | $ | 0.56 | $ | 0.56 | $ | – | ||||||||
Discontinued operations | – | – | – | |||||||||||
Net earnings attributable to Kraft Foods | $ | 0.56 | $ | 0.56 | $ | – | ||||||||
Diluted earnings per share attributable | ||||||||||||||
Continuing operations | $ | 0.56 | $ | 0.55 | $ | (0.01 | ) | |||||||
Discontinued operations | – | – | – | |||||||||||
Net earnings attributable to Kraft Foods | $ | 0.56 | $ | 0.55 | $ | (0.01 | ) | |||||||
5
For the Three Months Ended September 30, 2008 | ||||||||||||||
As Computed under LIFO | As Reported under Average Cost | Favorable / (Unfavorable) | ||||||||||||
(in millions, except per share data) | ||||||||||||||
Cost of sales | $ | 7,079 | $ | 7,096 | $ | (17 | ) | |||||||
Provision for income taxes | 192 | 205 | (13 | ) | ||||||||||
Earnings from continuing operations | 550 | 520 | (30 | ) | ||||||||||
Earnings and gain from discontinued | 852 | 845 | (7 | ) | ||||||||||
Net earnings attributable to Kraft Foods | 1,399 | 1,362 | (37 | ) | ||||||||||
Basic earnings per share attributable | ||||||||||||||
Continuing operations | $ | 0.37 | $ | 0.34 | $ | (0.03 | ) | |||||||
Discontinued operations | 0.57 | 0.57 | – | |||||||||||
Net earnings attributable to Kraft Foods | $ | 0.94 | $ | 0.91 | $ | (0.03 | ) | |||||||
Diluted earnings per share attributable | ||||||||||||||
Continuing operations | $ | 0.36 | $ | 0.34 | $ | (0.02 | ) | |||||||
Discontinued operations | 0.57 | 0.57 | – | |||||||||||
Net earnings attributable to Kraft Foods | $ | 0.93 | $ | 0.91 | $ | (0.02 | ) | |||||||
For the Nine Months Ended September 30, 2009 | ||||||||||||||
As Computed under LIFO | As Reported under Average Cost | Favorable / (Unfavorable) | ||||||||||||
(in millions, except per share data) | ||||||||||||||
Cost of sales | $ | 18,826 | $ | 18,890 | $ | (64 | ) | |||||||
Provision for income taxes | 1,009 | 986 | 23 | |||||||||||
Earnings from continuing operations | 2,358 | 2,317 | (41 | ) | ||||||||||
Net earnings attributable to Kraft Foods | 2,352 | 2,311 | (41 | ) | ||||||||||
Basic earnings per share attributable | ||||||||||||||
Continuing operations | $ | 1.59 | $ | 1.56 | $ | (0.03 | ) | |||||||
Discontinued operations | – | – | – | |||||||||||
Net earnings attributable to Kraft Foods | $ | 1.59 | $ | 1.56 | $ | (0.03 | ) | |||||||
Diluted earnings per share attributable | ||||||||||||||
Continuing operations | $ | 1.58 | $ | 1.56 | $ | (0.02 | ) | |||||||
Discontinued operations | – | – | – | |||||||||||
Net earnings attributable to Kraft Foods | $ | 1.58 | $ | 1.56 | $ | (0.02 | ) | |||||||
6
For the Nine Months Ended September 30, 2008 | ||||||||||||||
As Computed | As Reported under | Favorable / | ||||||||||||
under LIFO | Average Cost | (Unfavorable) | ||||||||||||
(in millions, except per share data) | ||||||||||||||
Cost of sales | $ | 20,769 | $ | 20,777 | $ | (8 | ) | |||||||
Provision for income taxes | 818 | 834 | (16 | ) | ||||||||||
Earnings from continuing operations | 1,769 | 1,745 | (24 | ) | ||||||||||
Earnings and gain from discontinued | 975 | 968 | (7 | ) | ||||||||||
Net earnings attributable to Kraft Foods | 2,737 | 2,706 | (31 | ) | ||||||||||
Basic earnings per share attributable | ||||||||||||||
Continuing operations | $ | 1.16 | $ | 1.15 | $ | (0.01 | ) | |||||||
Discontinued operations | 0.65 | 0.63 | (0.02 | ) | ||||||||||
Net earnings attributable to Kraft Foods | $ | 1.81 | $ | 1.78 | $ | (0.03 | ) | |||||||
Diluted earnings per share attributable | ||||||||||||||
Continuing operations | $ | 1.15 | $ | 1.14 | $ | (0.01 | ) | |||||||
Discontinued operations | 0.64 | 0.63 | (0.01 | ) | ||||||||||
Net earnings attributable to Kraft Foods | $ | 1.79 | $ | 1.77 | $ | (0.02 | ) | |||||||
The following line items within the balance sheets were affected by the change in accounting policy:
| ||||||||||||||
September 30, 2009 | ||||||||||||||
As Computed under LIFO | As Reported under Average Cost | Favorable / (Unfavorable) | ||||||||||||
(in millions) | ||||||||||||||
Inventories, net | $ | 3,985 | $ | 4,073 | $ | (88 | ) | |||||||
Deferred income tax asset | 688 | 654 | 34 | |||||||||||
Retained earnings | 14,340 | 14,394 | 54 | |||||||||||
December 31, 2008 | ||||||||||||||
As Computed under LIFO | As Reported under Average Cost | Favorable / (Unfavorable) | ||||||||||||
(in millions) | ||||||||||||||
Inventories, net | $ | 3,729 | $ | 3,881 | $ | (152 | ) | |||||||
Deferred income tax asset | 861 | 804 | 57 | |||||||||||
Retained earnings | 13,345 | 13,440 | 95 |
As a result of the accounting change, retained earnings as of January 1, 2008, increased from $12,209 million, as computed using the LIFO method, to $12,321 million using the average cost method.
There was no impact to net cash provided by operating activities as a result of this change in accounting policy.
Excise Taxes:
Effective January 1, 2009, we changed our classification of certain excise taxes to a net presentation within cost of sales. In prior years, excise taxes were classified gross within net revenues and cost of sales. With this change, we report all of our excise and similar taxes using the net presentation method. We made this change to better alignrevalue our net revenues between various countriesassets in Venezuela, and to provide better clarity to net revenues and margins. We revised prior years’ financial statements to conform to this change. As a result, we removed $61 million forrecorded an insignificant loss in the three months and $183 million for the nine months ended September 30, 2008 from net revenues, and netted the amounts within costfirst quarter of sales. If we had not made this change, during the three months ended September 30, 2009, net revenues of $9,803 million would have been $9,859 million, and cost of sales of $6,262 million would have been $6,318 million; and during the nine months ended September 30, 2009, net revenues of $29,361 million would have been $29,513 million, and cost of sales of $18,890 million would have been $19,042 million. This change did not have a material impact on our net revenues or cost of sales.
7
Reclassification:
Effective January 1, 2009, we changed our cost assignment methodology for headquarter functional costs across our operating structure. As a result, we reclassified $44 million for the three months and $139 million for the nine months ended September 30, 2008 from marketing, administration and research costs to cost of sales. This change did not have an impact on net earnings.
Financial Instruments:
Interest rate cash flow and fair value hedges – We manage interest rate volatility by modifying the repricing or maturity characteristics of certain liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate liabilities appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by our gains or losses on the derivative instruments that are linked to these hedged liabilities.
We use derivative instruments, including interest rate swaps that have indices related to the pricing of specific liabilities as part of our interest rate risk management strategy. As a matter of policy, we do not use highly leveraged derivative instruments for interest rate risk management. We use interest rate swaps to economically convert a portion of our nonprepayable fixed-rate debt into variable rate debt. Under the interest rate swap contracts, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts, which is calculated based on an agreed-upon notional amount. We also use interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment.
For those derivative instruments that are highly effective and qualify for hedge accounting treatment, we either record the impacts in current period earnings or defer the effective portion of unrealized gains and losses as a component of accumulated other comprehensive earnings / (losses), depending on whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge. For fair value hedges, we record both (i) the gains or losses on interest rate swaps and (ii) the corresponding changes in fair value of the hedged long-term debt directly as a component of interest and other expense, net. For cash flow hedges, we recognize the deferred portion as a component of interest and other expense, net when we incur the interest expense. The ineffective portion is directly recorded as a component of interest and other expense, net. For the derivative instruments that we consider economic hedges but do not designate for hedge accounting treatment, we recognize gains and losses directly as a component of interest and other expense, net.
Refer to our revised consolidated financial statements for the year ended December 31, 2008 for information on all other types of financial instruments we use to hedge exposures.2010.
New Accounting Pronouncements:
In September 2006,June 2009, new guidance was issued on fair value measurements. The guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The effective datethe consolidation of the guidance for items recognized or disclosed at fair value on an annual or more frequently recurring basis was January 1, 2008. The effective date of the guidance for all other nonfinancial assets and liabilities was January 1, 2009. As such, we partially adopted the guidance effective January 1, 2008. The partial adoption of this guidance did not have a material impact on our financial statements. We adopted the remaining provisions effective January 1, 2009. This adoption affects the way that we calculate fair value for our annual impairment review of goodwill and non-amortizable intangible assets, and when conditions exist that require us to calculate the fair value of long-lived assets; however, this adoption did not have a material impact on our financial statements.
In December 2007, new guidance was issued on business combinations.variable interest entities. We adopted the guidance effective January 1, 2009. The2010. This guidance requiresincreases the acquiring entity inlikelihood of an enterprise being classified as a business combination to recognize all assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose all information needed by investors to understand the nature and financial effect of the business combination.variable interest entity. The adoption of this guidance did not have a material impact on our financial statements.
In December 2007, new guidance was also issued on noncontrolling interests in consolidated financial statements. We adopted the guidance effective January 1, 2009. The guidance requires us to classify noncontrolling interests in subsidiaries as a separate component of equity instead of within other liabilities. Additionally, transactions between an entity and noncontrolling interests must be treated as equity transactions. Therefore, they no longer are removed from net income, but rather are accounted for as equity. The adoption of this guidance did not have a material impact on our financial statements.
8
In March 2008, new guidance was issued on required disclosures for derivative instruments and hedging activities.We adopted the guidance effective January 1, 2009. The guidance requires enhanced disclosures about (i) how and why we use derivative instruments, (ii) how we account for derivative instruments and related hedged items, and (iii) how derivative instruments and related hedged items affect our financial results. The adoption of this guidance did not have an impact on our financial statements.
In June 2008, new guidance was issued to assist in determining whether instruments granted in share-based payment transactions are participating securities. We adopted the guidance effective January 1, 2009. The guidance considers unvested share-based payment awards with the right to receive nonforfeitable dividends or their equivalents participating securities that should be included in the calculation of EPS under the two-class method. Accordingly, our restricted and deferred stock awards are now considered participating units in our calculation of EPS. The adoption of this guidance did not have a material impact on our financial statements.
In December 2008, new guidance was issued on employers’ disclosures for postretirement benefit plan assets, which is effective for fiscal years ending after December 15, 2009. The literature provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. We do not expect our adoption of this guidance to have a material impact on our financial statements.
In May 2009, new guidance was issued on subsequent events that requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the company’s expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users. Companies are required to disclose the date through which subsequent events have been evaluated. We adopted the guidance effective June 30, 2009.
Note 2. Acquisitions and Divestitures:
Post Cereals Split-off:Cadbury Acquisition:
On January 19, 2010, we announced the terms of our final offer for each outstanding ordinary share of Cadbury, including each ordinary share represented by an American Depositary Share (“Cadbury ADS”), and the Cadbury Board of Directors recommended that Cadbury shareholders accept the terms of the final offer. On February 2, 2010, all of the conditions to the offer were satisfied or validly waived, the initial offer period expired and a subsequent offer period immediately began. At that point, we had received acceptances of 71.73% of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs (“Cadbury Shares”). The combination of Kraft Foods and Cadbury will create a global powerhouse in snacks, confectionery and quick meals with a rich portfolio of iconic brands.
5
Under the terms of our final offer and the subsequent offer, we agreed to pay Cadbury shareholders 500 pence in cash and 0.1874 shares of Kraft Foods Common Stock per Cadbury ordinary share validly tendered and 2,000 pence in cash and 0.7496 shares of Kraft Foods Common Stock per Cadbury ADS validly tendered. This valued Cadbury at $18.5 billion, or approximately £11.6 billion (based on the average price of $28.36 for a share of Kraft Foods Common Stock on February 2, 2010 and an exchange rate of $1.595 per £1.00).
The subsequent offer period closed on April 16, 2010, at which time we owned 99.95% of the outstanding Cadbury Shares. As we have received acceptances of over 90% of Cadbury Shares, we are in the process of acquiring the remaining Cadbury Shares that were not tendered during the offer period through a compulsory acquisition procedure under the United Kingdom Companies Act of 2006, as amended.
The EU Commission requires, as a condition of the offer, that we divest the Cadbury confectionary operations in Poland and Romania. We are in the process of divesting these operations.
As part of our Cadbury acquisition, we expensed and incurred $203 million in transaction related fees in the first quarter of 2010. We recorded these expenses within marketing, administration and research costs. We also incurred $96 million in acquisition financing fees in the first quarter of 2010. We recorded these expenses within interest and other expense, net.
Cadbury contributed net revenues of $1,693 million and net earnings of $60 million from February 2, 2010 through March 31, 2010. The following unaudited pro forma summary presents Kraft Foods’ consolidated information as if Cadbury had been acquired on January 1, 2009. These amounts were calculated after conversion to U.S. GAAP, applying our accounting policies, and adjusting Cadbury’s results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment, and intangible assets had been applied from January 1, 2009, together with the consequential tax effects. These adjustments also reflect the additional interest expense incurred on the debt to finance the purchase.
Pro forma for the Three | ||||||||||||||
Months Ended March 31, | ||||||||||||||
2010 | 2009 | |||||||||||||
(in millions; unaudited) | ||||||||||||||
Net revenues | $ | 11,999 | $ | 10,987 | ||||||||||
Net earnings attributable to Kraft Foods | 1,610 | 587 |
On February 2, 2010, we acquired 71.73% of Cadbury’s Shares for $13.1 billion and the value attributed to noncontrolling interests was $5.4 billion. From February 2, 2010 through March 31, 2010, we acquired an additional 27.03% of Cadbury’s Shares for $5.2 billion. We had a $38 million gain on noncontrolling interest acquired and recorded it within additional paid in capital.
6
Our February 2, 2010 Cadbury acquisition was valued at $18,546 million, or $17,485 million net of cash and cash equivalents. As part of that acquisition, we acquired the following assets and assumed the following liabilities (in millions):
Receivables(1) | $ 1,387 | ||||||||||||||
Inventories | 1,317 | ||||||||||||||
Other current assets | 491 | ||||||||||||||
Property, plant and equipment | 3,700 | ||||||||||||||
Goodwill(2) | 9,151 | ||||||||||||||
Intangible assets(3) | 12,637 | ||||||||||||||
Other assets | 424 | ||||||||||||||
Short-term borrowings | (1,206 | ) | |||||||||||||
Accounts payable | (1,620 | ) | |||||||||||||
Other current liabilities | (1,523 | ) | |||||||||||||
Long-term debt | (2,309 | ) | |||||||||||||
Deferred income taxes | (3,098 | ) | |||||||||||||
Accrued pension costs | (838 | ) | |||||||||||||
Other liabilities | (1,028 | ) | |||||||||||||
(1) The gross amount due under the receivables we acquired is $1,457 million, of which $70 million is expected to be uncollectable. (2) Goodwill will not be deductible for statutory tax purposes and is attributable to Cadbury’s workforce and the significant synergies we expect from the acquisition. (3) $10.1 billion of the intangible assets acquired are expected to be indefinite lived. |
The above amounts represent the preliminary allocation of purchase price and are subject to revision when appraisals are finalized, which will occur during 2010.
Pizza Divestiture:
On August 4, 2008,March 1, 2010, we completed the split-offsale of the assets of our North American frozen pizza business (“Frozen Pizza”) to Nestlé USA, Inc. (“Nestlé”) for $3.7 billion. Our Frozen Pizza business was a component of our U.S. Convenient Meals and Canada & North America Foodservice segments. The sale included thePostDiGiorno,Tombstone cerealsandJack’s brands in the U.S., theDelissio brand in Canada and theCalifornia Pizza Kitchen trademark license. It also included two Wisconsin manufacturing facilities (Medford and Little Chute) and the leases for the pizza depots and delivery trucks. Approximately 3,600 of our employees transferred with the business into Ralcorp Holdings, Inc., after an exchange with our shareholders.to Nestlé. Accordingly, the prior period results of thePost cerealsour Frozen Pizza business werehave been reflected as discontinued operations on the condensed consolidated statement of earnings.earnings, and prior period results have been revised in a consistent manner.
Pursuant to the Frozen Pizza business Transition Services Agreement, we agreed to provide certain sales, co-manufacturing, distribution, information technology, accounting and finance services to Nestlé for up to two years. We can agree with Nestlé to extend the term of the agreement.
Summary results of operations for thePost cereals Frozen Pizza business for the three and nine months ended September 30, 2008 were as follows:through March 1, 2010 were:
For the Three Months Ended September 30, 2008 | For the Nine Months Ended September 30, 2008 | |||||||||||||||
(in millions; as revised) | ||||||||||||||||
Net revenues | $ | 90 | $ | 666 | ||||||||||||
(Loss) / earnings before income taxes | (7 | ) | 189 | |||||||||||||
Benefit / (provision) for income taxes | 3 | (70 | ) | |||||||||||||
Gain on discontinued operations, | 849 | 849 | ||||||||||||||
Earnings and gain from discontinued | $ | 845 | $ | 968 | ||||||||||||
For the Periods Ended | ||||||||||||||||
March 1, | March 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
(in millions) | ||||||||||||||||
Net revenues | $ | 335 | $ | 417 | ||||||||||||
Earnings before income taxes | 73 | 93 | ||||||||||||||
Provision for income taxes | (25 | ) | (34 | ) | ||||||||||||
Gain on discontinued operations, net of | 1,596 | – | ||||||||||||||
Earnings and gain from discontinued | $ | 1,644 | $ | 59 | ||||||||||||
During
7
Earnings before income taxes as presented exclude associated allocated overheads of $25 million in the fourthfirst quarter of 2008, we increased our2010 and $27 million in the first quarter of 2009.
The gain on discontinued operations by $77 million to correct for a deferred tax liability related toin the split-offfirst quarter of thePostcereals business. As such, our gain2010 from the split-offsale of thePostcereal Frozen Pizza business was $926 million. Refer to our revised consolidated financial statements forincluded tax expense of $1.2 billion.
The following assets of the year ended December 31, 2008 for further details of this transaction.
Other Divestitures:
In September 2009, we reached an agreement to divest a snack bars operationFrozen Pizza business were included in the U.S. The transaction is subject to customary closing conditions, including regulatory approvals, and we expect it to close in the fourth quarter of 2009 at a small gain.
For the nine months ended September 30, 2009, we received $6 million in proceeds and recorded pre-tax losses of $17 million on the divestitures of a juice operation in Brazil and a plant in Spain.Frozen Pizza divestiture (in millions):
Inventories, net | $ | 102 | ||||||||||||
Property, plant and equipment, net | 317 | |||||||||||||
Goodwill | 475 | |||||||||||||
Distributed assets of the Frozen | $ | 894 | ||||||||||||
Note 3. Inventories: | ||||||||||||||
Inventories at March 31, 2010 and December 31, 2009 were: | ||||||||||||||
March 31, | December 31, | |||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Raw materials | $ | 1,894 | $ | 1,410 | ||||||||||
Finished product | 3,203 | 2,365 | ||||||||||||
Inventories, net | $ | 5,097 | $ | 3,775 | ||||||||||
Note 4. Property, Plant and Equipment: | ||||||||||||||
Property, plant and equipment at March 31, 2010 and December 31, 2009 were: | ||||||||||||||
March 31, | December 31, | |||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Land and land improvements | $ | 769 | $ | 492 | �� | |||||||||
Buildings and building equipment | 4,736 | 4,231 | ||||||||||||
Machinery and equipment | 16,187 | 13,872 | ||||||||||||
Construction in progress | 1,236 | 828 | ||||||||||||
22,928 | 19,423 | |||||||||||||
Accumulated depreciation | (9,032 | ) | (8,730 | ) | ||||||||||
Property, plant and equipment, net | $ | 13,896 | $ | 10,693 | ||||||||||
9
8
Note 3. Inventories:5. Goodwill and Intangible Assets:
InventoriesGoodwill by reportable segment at September 30, 2009March 31, 2010 and December 31, 20082009 was:
March 31, | December 31, | |||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Kraft Foods North America: | ||||||||||||||
U.S. Beverages | $ | 1,290 | $ | 1,290 | ||||||||||
U.S. Cheese | 3,000 | 3,000 | ||||||||||||
U.S. Convenient Meals | 985 | 1,460 | ||||||||||||
U.S. Grocery | 3,046 | 3,046 | ||||||||||||
U.S. Snacks | 8,845 | 6,948 | ||||||||||||
Canada & N.A. Foodservice | 3,352 | 2,340 | ||||||||||||
Kraft Foods Europe | 8,985 | 6,756 | ||||||||||||
Kraft Foods Developing Markets | 7,616 | 3,924 | ||||||||||||
Total goodwill | $ | 37,119 | $ | 28,764 | ||||||||||
Intangible assets at March 31, 2010 and December 31, 2009 were: | ||||||||||||||
March 31, | December 31, | |||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Non-amortizable intangible assets | $ | 22,966 | $ | 13,262 | ||||||||||
Amortizable intangible assets | 2,825 | 278 | ||||||||||||
25,791 | 13,540 | |||||||||||||
Accumulated amortization | (143 | ) | (111 | ) | ||||||||||
Intangible assets, net | $ | 25,648 | $ | 13,429 | ||||||||||
Non-amortizable intangible assets consist substantially of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the globalLU biscuit business of Groupe Danone S.A. and Cadbury. Amortizable intangible assets consist primarily of trademark licenses, customer-related intangibles and non-compete agreements. At March 31, 2010, the weighted-average life of our amortizable intangible assets was 17.0 years.
The movements in goodwill and intangible assets were:
| ||||||||||||||
Goodwill | Intangible Assets, at Cost | |||||||||||||
(in millions) | ||||||||||||||
Balance at January 1, 2010 | $ | 28,764 | $ | 13,540 | ||||||||||
Changes due to: | ||||||||||||||
Foreign currency | (321 | ) | (386 | ) | ||||||||||
Acquisitions | 9,151 | 12,637 | ||||||||||||
Divestitures | (475 | ) | – | |||||||||||
Balance at March 31, 2010 | $ | 37,119 | $ | 25,791 | ||||||||||
Changes to goodwill and intangible assets during the first quarter of 2010 were:
September 30, 2009 | December 31, 2008 | |||||||||||||
(in millions; 2008 revised) | ||||||||||||||
Raw materials | $ | 1,587 | $ | 1,568 | ||||||||||
Finished product | 2,486 | 2,313 | ||||||||||||
Inventories, net | $ | 4,073 | $ | 3,881 | ||||||||||
Refer to Note 1,Summary of Significant Accounting Policies, for information on the change in our valuation method for U.S. inventories to the average cost method.
Note 4. Goodwill and Intangible Assets:
Goodwill by reportable segment was:
| ||||||||||||||
September 30, 2009 | December 31, 2008 | |||||||||||||
(in millions; 2008 revised) | ||||||||||||||
Kraft Foods North America: | ||||||||||||||
U.S. Beverages | $ | 1,290 | $ | 1,290 | ||||||||||
U.S. Cheese | 3,000 | 3,000 | ||||||||||||
U.S. Convenient Meals | 1,460 | 1,460 | ||||||||||||
U.S. Grocery | 3,046 | 3,046 | ||||||||||||
U.S. Snacks | 6,965 | 6,965 | ||||||||||||
Canada & N.A. Foodservice | 2,336 | 2,306 | ||||||||||||
Kraft Foods Europe(1) | 6,626 | 5,893 | ||||||||||||
Kraft Foods Developing Markets | 3,894 | 3,621 | ||||||||||||
Total goodwill | $ | 28,617 | $ | 27,581 | ||||||||||
(1) This segment was formerly known as European Union. | ||||||||||||||
As discussed in Note 14,Segment Reporting, we implemented changes to our operating structure in 2009. As a result of these changes, we aligned the reporting of our Central Europe operations into our Kraft Foods Developing Markets segment and moved $1,534 million of goodwill from Kraft Foods Europe to Kraft Foods Developing Markets as of January 1, 2009. We revised prior period segment results in a consistent manner.
Intangible assets were:
| ||||||||||||||
September 30, 2009 | December 31, 2008 | |||||||||||||
(in millions) | ||||||||||||||
Non-amortizable intangible assets | $ | 13,145 | $ | 12,758 | ||||||||||
Amortizable intangible assets | 273 | 254 | ||||||||||||
13,418 | 13,012 | |||||||||||||
Accumulated amortization | (99 | ) | (86 | ) | ||||||||||
Intangible assets, net | $ | 13,319 | $ | 12,926 | ||||||||||
Non-amortizableAcquisitions – We increased goodwill by $9,151 million and intangible assets consist substantiallyby $12,637 million related to preliminary allocations of brand names purchasedpurchase price for our Cadbury acquisition. The allocations are based upon preliminary estimates and assumptions and are subject to revision when appraisals are finalized, which will occur during 2010. We assigned $1,897 million of the acquired goodwill to our U.S. Snacks segment, $945 million to our Canada & N.A. Foodservice segment, $2,576 million to our Kraft Foods Europe segment and $3,733 million to our Kraft Foods Developing Markets segment.
9
Divestitures – We reduced goodwill by $475 million due to our Frozen Pizza business divestiture.
Amortization expense was $33 million for the first quarter of 2010. We currently estimate amortization expense for each of the next five years to be approximately $180 million or less, including the estimated impact of our Cadbury acquisition. Our estimated amortization for each of the next five years is subject to revision when appraisals are finalized for our Cadbury acquisition.
Note 6. Restructuring Costs:
Integration Charges:
We believe our combination with Cadbury has the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development. We expect to incur total integration charges of approximately $1.3 billion in the first three years following the acquisition to combine and integrate the two businesses. Integration costs include the costs associated with combining the operations of Kraft Foods and Cadbury and are separate from those costs related to the acquisition. In the first quarter of 2010, we incurred $43 million of the $1.3 billion in expected charges, which were primarily recorded within general corporate expenses.
Cost Savings Initiatives:
Cost savings initiatives generally include exit, disposal and other project savings costs. In the first quarter of 2010, we incurred $24 million in charges associated with our cost savings initiatives. We recorded these charges in operations, primarily within the segment operating income of Kraft Foods Europe and Canada & N.A. Foodservice. These charges primarily included other project savings costs associated with the Kraft Foods Europe Reorganization. Even though other project savings costs were directly attributable to exit and disposal costs, they did not qualify for special accounting treatment as exit or disposal activities.
Cadbury VIA Program:
In 2007, Cadbury initiated a Vision into Action (“VIA”) restructuring program that was planned to run through 2011. We are evaluating the previous expectation of the remaining $250 million in pre-tax charges associated with the VIA restructuring program. We may modify the program in future quarters as we evaluate it in conjunction with the overall integration program. In the first quarter of 2010, we incurred $15 million in charges related to the program. We recorded these charges in operations, primarily within the segment operating income of Kraft Foods Europe and Kraft Foods Developing Markets. At March 31, 2010, we had an accrual of $158 million related to the program.
Liability activity for the VIA program in the first quarter of 2010 was (in millions):
Liability assumed upon acquisition | $ | 190 | ||||||||||
Charges | 15 | |||||||||||
Cash spent | (39 | ) | ||||||||||
Write-offs | (1 | ) | ||||||||||
Currency | (7 | ) | ||||||||||
Liability balance, March 31, 2010 | $ | 158 | ||||||||||
2004 – 2008 Restructuring Program:
In 2008, we completed our acquisitionsfive-year restructuring program (the “Restructuring Program”). The Restructuring Program’s objectives were to leverage our global scale, realign and lower our cost structure, and optimize capacity. As part of Nabisco Holdings Corp., the globalLU biscuit businessRestructuring Program, we:
incurred $3.0 billion in pre-tax charges reflecting asset disposals, severance and implementation costs;
announced the closure of Groupe Danone S.A.35 facilities and the Spanishelimination of approximately 18,600 positions; and Portuguese operations
will use cash to pay for $2.0 billion of United Biscuits. Amortizable intangible assets consist primarilythe $3.0 billion in charges.
Since the inception of trademark licenses, customer-related intangibles and non-compete agreements.the Restructuring Program, we have paid cash for $1.7 billion of the $2.0 billion in expected cash payments, including $22 million paid in the first quarter of 2010. At March 31, 2010, we had an accrual of $236 million related to the program.
10
Restructuring liability activity for the three months ended March 31, 2010 was:
Severance | Other | Total | ||||||||||||||
(in millions) | ||||||||||||||||
Liability balance, January 1, 2010 | $ | 245 | $ | 25 | $ | 270 | ||||||||||
Cash spent | (21 | ) | (1 | ) | (22 | ) | ||||||||||
Currency | (12 | ) | – | (12 | ) | |||||||||||
Liability balance, March 31, 2010 | $ | 212 | $ | 24 | $ | 236 | ||||||||||
Our 2010 activity was related to cash outflows on prior year Restructuring Program charges. Our prior year severance charges included the cost of benefits received by terminated employees. Other prior year costs related primarily to the renegotiation of supplier contract costs, workforce reductions associated with facility closings and the termination of leasing agreements.
Note 7. Debt:
Short-Term Borrowings: At March 31, 2010 and December 31, 2009, our short-term borrowings and related weighted-average interest rates consisted of:
| ||||||||||||||||
March 31, 2010 | December 31, 2009 | |||||||||||||||
Amount | Weighted- | Amount | Weighted- | |||||||||||||
Outstanding | Average Rate | Outstanding | Average Rate | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Commercial paper | $ | 604 | 0.5% | $ | 262 | 0.5% | ||||||||||
Bank loans | 287 | 6.0% | 191 | 10.5% | ||||||||||||
Total short-term borrowings | $ | 891 | $ | 453 | ||||||||||||
The movementsfair values of our short-term borrowings at March 31, 2010 and December 31, 2009, based upon current market interest rates, approximate the amounts disclosed above.
Borrowing Arrangements:
We maintain a revolving credit facility that we have historically used for general corporate purposes, including for working capital purposes, and to support our commercial paper issuances. Our $4.5 billion three-year senior unsecured revolving credit facility expires in goodwillNovember 2012. No amounts have been drawn on the facility.
The revolving credit facility agreement includes a covenant that we maintain a minimum total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), of at least $28.5 billion. This covenant increased by $5.5 billion due to our Cadbury acquisition. It will continue to increase by 75% of any increase in our total shareholders’ equity if we refinance certain indebtedness. At March 31, 2010, our total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), was $38.6 billion. We expect to continue to meet this covenant. The revolving credit facility agreement also contains customary representations, covenants and intangible assets were:events of default. However, there are no other financial covenants, credit rating triggers or provisions that could require us to post collateral as security.
Cadbury maintains a three-year, £450 million senior unsecured revolving credit facility that expires in June 2012. No amounts have been drawn on the facility, and we currently maintain it for general corporate purposes. This revolving credit agreement includes a covenant that our subsidiary, Cadbury plc Group, maintain a minimum EBITDA to adjusted net interest ratio of 3.5 to 1 and a maximum net debt to adjusted EBITDA ratio of 3.6 to 1. At March 31, 2010, we were in compliance with and expect to continue to meet these covenants.
Intangible | ||||||||||||||||
Goodwill | Assets, at Cost | |||||||||||||||
(in millions) | ||||||||||||||||
Balance at December 31, 2008 | $ | 27,581 | $ | 13,012 | ||||||||||||
Changes due to: | ||||||||||||||||
Foreign currency | 1,036 | 411 | ||||||||||||||
Other | – | (5 | ) | |||||||||||||
Balance at September 30, 2009 | $ | 28,617 | $ | 13,418 | ||||||||||||
Amortization expense for intangible assets was $6 million for the three months and $15 million for the nine months ended September 30, 2009. We currently estimate amortization expense for each of the next five years to be approximately $21 million or less.
Note 5. Restructuring Costs:
2004 – 2008 Restructuring Program: In 2008, we completed our five-year restructuring program (the “Restructuring Program”). The Restructuring Program’s objectives were to leverage our global scale, realign and lower our cost structure, and optimize capacity. As part of the Restructuring Program, we:
• incurred $3.0 billion in pre-tax charges reflecting asset disposals, severance and implementation costs; • announced the closure of 35 facilities and announced the elimination of approximately 18,800 positions; and • will use cash to pay for $2.0 billion of the $3.0 billion in charges.
In the second quarter of 2009, we sold a plant in Spain that we previously announced we would close under our Restructuring Program. Accordingly, we reversed $35 million in Restructuring Program charges, primarily related to severance, and recorded a $17 million loss on the divestiture of the plant in the second quarter of 2009. The reversal of the Restructuring Program costs, which affected the segment operating income of the Kraft Foods Europe segment, was recorded within asset impairment and exit costs. Since the inception of the Restructuring Program, we have paid cash for $1.6 billion of the $2.0 billion in expected cash payments, including $123 million paid in the first nine months of 2009. At September 30, 2009, we had an accrual of $366 million, and we had eliminated approximately 16,500 positions under the Restructuring Program.
Restructuring liability activity for the nine months ended September 30, 2009 was:
| ||||||||||||||||
Severance | Other | Total | ||||||||||||||
(in millions) | ||||||||||||||||
Liability balance, January 1, 2009 | $ | 444 | $ | 45 | $ | 489 | ||||||||||
Reversal of charges | (32 | ) | (3 | ) | (35 | ) | ||||||||||
Cash spent | (117 | ) | (6 | ) | (123 | ) | ||||||||||
Currency | 36 | (1 | ) | 35 | ||||||||||||
Liability balance, September 30, 2009 | $ | 331 | $ | 35 | $ | 366 | ||||||||||
Our 2009 activity was relatedIn addition to the aforementioned reversalabove, some of $35our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $2.2 billion at March 31, 2010. Borrowings on these lines amounted to $287 million at March 31, 2010 and cash outflows$191 million at December 31, 2009.
As part of our Cadbury acquisition, on prior year Restructuring Program charges. Our prior year severance charges included the cost of benefits received by terminated employees. Other prior year costs related primarily to the renegotiation of supplier contract costs, workforce reductions associated with facility closings and the termination of leasing agreements.
Note 6. Debt:
On September 3,November 9, 2009, we redeemedentered into an agreement for a 364-day senior unsecured bridge facility (the “Cadbury Bridge Facility”). During the first quarter of 2010, we borrowed £807 million under the Cadbury Bridge Facility, and later repaid it ($1,205 million at the time of repayment) with proceeds from the divestiture of our November 2011, 7% $200 million debenture at par value.Frozen Pizza business. Upon redemption, we recorded a loss of $14 million within interest and other expense, net which representedrepayment, the write-off of the remaining discount.Cadbury Bridge Facility was terminated.
11
Note 7. Accumulated Other Comprehensive Losses:Long-Term Debt:
On February 8, 2010, we issued $9.5 billion of senior unsecured notes at a weighted-average effective rate of 5.364% and used the net proceeds ($9,379 million) to finance the Cadbury acquisition and for general corporate purposes. The componentsgeneral terms of accumulated other comprehensive earnings / (losses) were:the $9.5 billion notes are:
Currency | Derivatives | |||||||||||||||||
Translation | Pension and | Accounted for | ||||||||||||||||
Adjustments | Other Benefits | as Hedges | Total | |||||||||||||||
(in millions) | ||||||||||||||||||
Balances at December 31, 2008 | $ | (2,399 | ) | $ | (3,572 | ) | $ | (23 | ) | $ | (5,994 | ) | ||||||
Other comprehensive earnings / | ||||||||||||||||||
Currency translation adjustments | 1,598 | (116 | ) | – | 1,482 | |||||||||||||
Amortization of experience losses | – | 96 | – | 96 | ||||||||||||||
Settlement losses | – | 50 | – | 50 | ||||||||||||||
Net actuarial loss arising during | – | (12 | ) | – | (12 | ) | ||||||||||||
Change in fair value of cash flow | – | – | 23 | 23 | ||||||||||||||
Total other comprehensive earnings | 1,639 | |||||||||||||||||
Balances at September 30, 2009 | $ | (801 | ) | $ | (3,554) | $ | – | $ | (4,355 | ) | ||||||||
$1.00 billion total principal notes due May 8, 2013 at a fixed, annual interest rate of 2.625%. Interest is payable semiannually beginning November 8, 2010.
$1.75 billion total principal notes due February 9, 2016 at a fixed, annual interest rate of 4.125%. Interest is payable semiannually beginning August 9, 2010.
$3.75 billion total principal notes due February 10, 2020 at a fixed, annual interest rate of 5.375%. Interest is payable semiannually beginning August 10, 2010.
$3.00 billion total principal notes due February 9, 2040 at a fixed, annual interest rate of 6.500%. Interest is payable semiannually beginning August 9, 2010.
In addition, these notes include covenants that restrict our ability to incur debt secured by liens above a certain threshold. We also must offer to purchase these notes at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of repurchase, if both of the following occur:
(i) | a “change of control” triggering event, and |
(ii) | a downgrade of these notes below an investment grade rating by each of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services and Fitch, Inc. within a specified period. |
The fair value of the long-term debt we acquired as part of our Cadbury acquisition was $2,432 million at February 2, 2010. The acquired debt has the following terms:
£77 million (approximately $117 million) total principal notes due December 1, 2010 at a fixed, annual interest rate of 4.875%.
C$150 million (approximately $147 million) Canadian bank loan agreement expiring August 30, 2012 at a variable interest rate. The interest rate at March 31, 2010 was 0.795%.
$1.00 billion total principal notes due October 1, 2013 at a fixed, annual interest rate of 5.125%.
£300 million (approximately $456 million) total principal notes due December 11, 2014 at a fixed, annual interest rate of 5.375%.
£350 million (approximately $532 million) total principal notes due July 18, 2018 at a fixed, annual interest rate of 7.250%.
We expect to continue to comply with our long-term debt covenants.
12
At March 31, 2010 and December 31, 2009, our long-term debt consisted of (interest rates were as of March 31, 2010):
March 31, | December 31, | |||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Notes, 0.90% to 7.55% (average effective rate 5.81%), due through 2040 | $ | 24,877 | $ | 14,395 | ||||||||||
Euro notes, 5.75% to 6.25% (average effective rate 5.98%), | 3,842 | 4,072 | ||||||||||||
Sterling notes, 4.88% to 7.25% (average effective rate 4.42%), | 1,191 | – | ||||||||||||
Other foreign currency obligations | 152 | 5 | ||||||||||||
Capital leases and other | 67 | 65 | ||||||||||||
Total | 30,129 | 18,537 | ||||||||||||
Less current portion of long-term debt | (633 | ) | (513 | ) | ||||||||||
Long-term debt | $ | 29,496 | $ | 18,024 | ||||||||||
Aggregate maturities of our long-term debt for the years ended March 31 were (in millions):
|
| |||||||||||||
2011 | $ | 633 | ||||||||||||
2012 | 4,712 | |||||||||||||
2013 | 2,407 | |||||||||||||
2014 | 3,306 | |||||||||||||
2015 | 1,610 | |||||||||||||
Thereafter | 17,453 | |||||||||||||
Fair Value: The aggregate fair value of total debt, based on quoted prices in active markets for identical liabilities, at March 31, 2010, was $32,762 million as compared with the carrying value of $31,020 million. The aggregate fair value of our total debt, based on quoted prices in active markets for identical liabilities, at December 31, 2009, was $20,222 million as compared with the carrying value of $18,990 million.
Interest and Other Expense: Interest and other expense was:
|
| |||||||||||||
For the Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Interest and other expense, net: | ||||||||||||||
Interest expense, external debt | $ | 378 | $ | 305 | ||||||||||
Acquisition-related financing fees | 247 | – | ||||||||||||
Other income, net | (1 | ) | (25 | ) | ||||||||||
Total interest and other expense, net | $ | 624 | $ | 280 | ||||||||||
Acquisition-related financing fees include hedging and foreign currency impacts associated with the Cadbury acquisition and other fees associated with the Cadbury Bridge Facility.
13
Note 8. Capital Stock:
Our articles of incorporation authorize 3.0 billion shares of Class A common stock, 2.0 billion shares of Class B common stock and 500 million shares of preferred stock. There were no Class B common shares or preferred shares issued and outstanding at March 31, 2010. Shares of Class A common stock issued, repurchased and outstanding were:
Shares | Shares | |||||||||||||||||
Shares Issued | Repurchased | Outstanding | ||||||||||||||||
Balance at January 1, 2010 | 1,735,000,000 | (257,115,097 | ) | 1,477,884,903 | ||||||||||||||
Shares issued | 255,695,311 | – | 255,695,311 | |||||||||||||||
Exercise of stock options and | – | 3,796,755 | 3,796,755 | |||||||||||||||
Balance at March 31, 2010 | 1,990,695,311 | (253,318,342 | ) | 1,737,376,969 | ||||||||||||||
In the first quarter of 2010, we issued 256 million additional shares of our Common Stock as part of the Cadbury acquisition. The issued stock had a total fair value of $7,280 million based on the average of the high and low market prices on the dates of issuance. | ||||||||||||||||||
Note 9. Accumulated Other Comprehensive Earnings / (Losses): |
| |||||||||||||||||
The components of accumulated other comprehensive earnings / (losses) were: | ||||||||||||||||||
Currency | Derivatives | |||||||||||||||||
Translation | Pension and | Accounted for | ||||||||||||||||
Adjustments | Other Benefits | as Hedges | Total | |||||||||||||||
(in millions) | ||||||||||||||||||
Balances at December 31, 2009 | $ | (506 | ) | $ | (3,550 | ) | $ | 101 | $ | (3,955 | ) | |||||||
Other comprehensive earnings / | ||||||||||||||||||
Currency translation adjustments | (447 | ) | 7 | – | (440 | ) | ||||||||||||
Amortization of experience | – | 45 | – | 45 | ||||||||||||||
Settlement losses | – | 44 | – | 44 | ||||||||||||||
Net actuarial loss arising during | – | (83 | ) | – | (83 | ) | ||||||||||||
Change in fair value of cash flow | – | – | (33 | ) | (33 | ) | ||||||||||||
Total other comprehensive losses | (467 | ) | ||||||||||||||||
Balances at March 31, 2010 | $ | (953 | ) | $ | (3,537 | ) | $ | 68 | $ | (4,422 | ) | |||||||
Note 10. Stock Plans:
At our annual meeting of shareholders held on May 20, 2009, our shareholders approved the Kraft Foods Inc. AmendedRestricted and Restated 2005 Performance Incentive Plan. The amended plan includes, among other provisions, a limit on the number of shares that may be granted under the plan, vesting restrictions and a prohibition on stock option repricing. Under the amended plan, we are authorized to issue a maximum of 168.0 million shares of our Common Stock. As of the effective date of the amendment, there were 92.1 million shares available to be granted under the plan, of which no more than 27.5 million shares may be awarded as restricted or deferred stock.Deferred Stock:
In January 2009,2010, we granted 1.41.6 million shares of stock in connection with our long-term incentive plan. Theplan, and the market value per share was $27.00$27.33 on the date of grant. The unvested shares have no voting rights and do not pay dividends.
In February 2009,2010, as part of our annual incentiveequity program, we issued 4.12.5 million shares of restricted and deferred stock to eligible U.S.employees, and non-U.S. employees. Thethe market value per restricted or deferred share was $23.64$29.15 on the date of grant. Also, as partDuring the first quarter of our annual incentive program,2010, we granted 16.3issued an additional 0.6 million stock options to eligible U.S. and non-U.S. employees at an exercise price of $23.64.
We also issued 0.2 million off-cycle shares of restricted and deferred stock, duringand the first nine months of 2009. The weighted-average market value per restricted or deferred share was $25.45$29.22 on the date of grant. In aggregate, we issued 5.74.7 million restricted and deferred shares during the first nine monthsquarter of 2009,2010, including those issued as part of our long-term incentive plan.
During the first nine monthsquarter of 2009, 5.42010, 3.8 million shares of restricted and deferred stock vested at a market value of $136$110 million.
14
Stock Options:
In February 2010, as part of our annual equity program, we granted 15.0 million stock options to eligible employees at an exercise price of $29.15. During the first quarter of 2010, we granted an additional 0.7 million stock options at a weighted-average exercise price of $29.54. In aggregate, we granted 15.7 million stock options in the first quarter of 2010.
There were 4.02.3 million stock options exercised during the first nine monthsquarter of 20092010 with a total intrinsic value of $44$34 million.
12
Note 9.11. Benefit Plans:
Pension Plans
Components of Net Periodic Pension Cost:
Net periodic pension cost consisted of the following for the three and nine months ended September 30, 2009 and 2008:March 31, 2010:
U.S. Plans | Non-U.S. Plans | |||||||||||||||||
For the Three Months Ended September 30, | For the Three Months Ended September 30, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
(in millions) | ||||||||||||||||||
Service cost | $ | 36 | $ | 37 | $ | 15 | $ | 23 | ||||||||||
Interest cost | 92 | 93 | 54 | 56 | ||||||||||||||
Expected return on plan assets | (122 | ) | (131 | ) | (60 | ) | (73 | ) | ||||||||||
Amortization: | ||||||||||||||||||
Net loss from experience differences | 41 | 21 | 6 | 7 | ||||||||||||||
Prior service cost | 2 | 2 | 1 | 2 | ||||||||||||||
Settlement losses | 15 | 20 | – | 1 | ||||||||||||||
Net periodic pension cost | $ | 64 | $ | 42 | $ | 16 | $ | 16 | ||||||||||
U.S. Plans | Non-U.S. Plans | |||||||||||||||||
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
(in millions) | ||||||||||||||||||
Service cost | $ | 114 | $ | 112 | $ | 45 | $ | 70 | ||||||||||
Interest cost | 276 | 279 | 156 | 169 | ||||||||||||||
Expected return on plan assets | (364 | ) | (394 | ) | (175 | ) | (219 | ) | ||||||||||
Amortization: | ||||||||||||||||||
Net loss from experience differences | 120 | 64 | 17 | 22 | ||||||||||||||
Prior service cost | 5 | 5 | 4 | 6 | ||||||||||||||
Settlement losses | 81 | 41 | – | 1 | ||||||||||||||
Net periodic pension cost | $ | 232 | $ | 107 | $ | 47 | $ | 49 | ||||||||||
U.S. Plans | Non-U.S. Plans | |||||||||||||||||
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
March 31, | March 31, | |||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||
(in millions) | ||||||||||||||||||
Service cost | $ | 37 | $ | 39 | $ | 36 | $ | 15 | ||||||||||
Interest cost | 92 | 92 | 86 | 51 | ||||||||||||||
Expected return on plan assets | (121 | ) | (121 | ) | (97 | ) | (57 | ) | ||||||||||
Amortization: | ||||||||||||||||||
Net loss from experience differences | 43 | 39 | 18 | 5 | ||||||||||||||
Prior service cost | 1 | 2 | 2 | 1 | ||||||||||||||
Other expenses | 47 | 26 | – | – | ||||||||||||||
Net periodic pension cost | $ | 99 | $ | 77 | $ | 45 | $ | 15 | ||||||||||
The following costs areA significant portion of the 2010 increase in non-U.S. net periodic pension cost related to the Cadbury acquisition. Other expenses above included within settlement losses above. Severance payments from our cost savings initiatives and retired employees who elected lump-sum payments resulted in settlement losses forunder our U.S. plans from lump-sum payments made to retired employees of $15$42 million forin the three monthsfirst quarter of 2010 and $81$26 million forin the nine months ended September 30,first quarter of 2009, and $20 million for the three months and $41 million for the nine months ended September 30, 2008. Our non-U.S. plans also incurred a $1$5 million curtailment charge in the thirdfirst quarter of 20082010 related to the split-offdivestiture of thePostcerealsour 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 nine monthsquarter of 2009,2010, we contributed $225$11 million to our U.S. plans (including a $200 million contribution made on May 1, 2009) and $124$80 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $15$40 million to our U.S. plans and approximately $45$200 million to our non-U.S. plans during the remainder of 2009.2010. However, our actual contributions may differ due to many factors, including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.
1315
Postretirement Benefit Plans
Net postretirement health care costs consisted of the following for the three and nine months ended September 30, 2009March 31, 2010 and 2008:2009:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
(in millions) | ||||||||||||||||||
Service cost | $ | 7 | $ | 11 | $ | 26 | $ | 33 | ||||||||||
Interest cost | 43 | 46 | 130 | 137 | ||||||||||||||
Amortization: | ||||||||||||||||||
Net loss from experience differences | 11 | 14 | 33 | 42 | ||||||||||||||
Prior service credit | (8 | ) | (7 | ) | (24 | ) | (21 | ) | ||||||||||
Net postretirement health care costs | $ | 53 | $ | 64 | $ | 165 | $ | 191 | ||||||||||
Postemployment Benefit Plans
|
| |||||||||||||||||
Net postemployment costs consisted of the following for the three and nine months ended September 30, 2009 and 2008: |
| |||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
(in millions) | ||||||||||||||||||
Service cost | $ | 2 | $ | 1 | $ | 6 | $ | 3 | ||||||||||
Interest cost | 3 | 2 | 6 | 5 | ||||||||||||||
Amortization of net (gains) / losses | (1 | ) | – | 2 | (1 | ) | ||||||||||||
Other (credits) / costs | – | 22 | (7 | ) | 145 | |||||||||||||
Net postemployment costs | $ | 4 | $ | 25 | $ | 7 | $ | 152 | ||||||||||
For the Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Service cost | $ | 10 | $ | 9 | ||||||||||
Interest cost | 42 | 44 | ||||||||||||
Amortization: | ||||||||||||||
Net loss from experience differences | 13 | 11 | ||||||||||||
Prior service credit | (8 | ) | (8 | ) | ||||||||||
Net postretirement health care costs | $ | 57 | $ | 56 | ||||||||||
Postemployment Benefit Plans
Net postemployment costs consisted of the following for the three months ended March 31, 2010 and 2009:
| ||||||||||||||
For the Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Service cost | $ | 3 | $ | 2 | ||||||||||
Interest cost | 2 | 3 | ||||||||||||
Amortization of net gains | – | (1 | ) | |||||||||||
Net postemployment costs | $ | 5 | $ | 4 | ||||||||||
Note 12. Financial Instruments:
Fair Value of Derivative Instruments: The fair values of derivative instruments recorded in the condensed consolidated balance sheet as of March 31, 2010 and December 31, 2009 were:
| ||||||||||||||
March 31, 2010 | December 31, 2009 | |||||||||||||
Asset | Liability | Asset | Liability | |||||||||||
Derivatives | Derivatives | Derivatives | Derivatives | |||||||||||
(in millions) | ||||||||||||||
Derivatives designated as | ||||||||||||||
Foreign exchange contracts | $ | 10 | $ | 137 | $ 8 | $ 158 | ||||||||
Commodity contracts | 15 | 38 | 25 | 14 | ||||||||||
Interest rate contracts | 139 | – | 153 | – | ||||||||||
$ | 164 | $ | 175 | $ 186 | $ 172 | |||||||||
Derivatives not designated | ||||||||||||||
Foreign exchange contracts | $ | 124 | $ | 149 | $ 2 | $ – | ||||||||
Commodity contracts | 97 | 88 | 71 | 62 | ||||||||||
Interest rate contracts | 88 | 16 | – | – | ||||||||||
$ | 309 | $ | 253 | $ 73 | $ 62 | |||||||||
Total fair value | $ | 473 | $ | 428 | $ 259 | $ 234 | ||||||||
The following costs are included within other (credits) / costs above. We incurred severance chargesmajority of $25 million during the second quarter of 2009 related to our Kraft Foods Europe Reorganization. We also reversed $32 millionincrease in severance charges in the second quarter of 2009 related to our Restructuring Program as we sold a plant in Spain that we previously announced we would close under the program. Additionally, the postemployment cost of workforce reduction initiatives announced under the Restructuring Program was $22 million during the three months and $145 million during the nine months ended September 30, 2008.
14
Note 10. Financial Instruments:
Fair Value of Derivative Instruments:
The fair values of derivative instruments recorded in the condensed consolidated balance sheet as of September 30, 2009 were:
September 30, 2009 | ||||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||||
(in millions) | ||||||||||||||||||
Derivatives designated as | ||||||||||||||||||
Foreign exchange contracts | $ | 7 | $ | 239 | ||||||||||||||
Commodity contracts | 12 | 64 | ||||||||||||||||
Interest rate contracts | 29 | – | ||||||||||||||||
$ | 48 | $ | 303 | |||||||||||||||
Derivatives not designated as | ||||||||||||||||||
Foreign exchange contracts | $ | 1 | $ | 4 | ||||||||||||||
Commodity contracts | 83 | 134 | ||||||||||||||||
$ | 84 | $ | 138 | |||||||||||||||
Total fair value | $ | 132 | $ | 441 | ||||||||||||||
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 September 30, 2009 were determined using:
|
| |||||||||||||||||
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 | $ | (235 | ) | $ | – | $ | (235 | ) | $ | – | ||||||||
Commodity contracts | (103 | ) | (106 | ) | 3 | – | ||||||||||||
Interest rate contracts | 29 | – | 29 | – | ||||||||||||||
Total derivatives | $ | (309 | ) | $ | (106 | ) | $ | (203 | ) | $ | – | |||||||
Cash Flow Hedges: Cash flow hedges affected accumulated other comprehensive earnings / (losses), net of income taxes, as follows:
|
| |||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
(in millions) | ||||||||||||||||||
Accumulated gain / (loss) at beginning of period | $ | 29 | $ | 48 | $ | (23 | ) | $ | 27 | |||||||||
Transfer of realized (gains) / losses in fair value to earnings | (2 | ) | (2 | ) | 87 | (4 | ) | |||||||||||
Unrealized loss in fair value | (27 | ) | (30 | ) | (64 | ) | (7 | ) | ||||||||||
Accumulated gain at September 30 | $ | – | $ | 16 | $ | – | $ | 16 | ||||||||||
15
The effect of cash flow hedges for the three and nine months ended September 30, 2009 was:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||
September 30, 2009 | September 30, 2009 | |||||||||||||||||
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 – | $ | 4 | $ | – | $ | 5 | $ | – | ||||||||||
Foreign exchange contracts – | (13 | ) | (11 | ) | (36 | ) | (39 | ) | ||||||||||
Commodity contracts | (11 | ) | 9 | (47 | ) | 126 | ||||||||||||
Interest rate contracts | (7 | ) | – | 14 | – | |||||||||||||
Total | $ | (27 | ) | $ | (2 | ) | $ | (64 | ) | $ | 87 | |||||||
Gain /(Loss) on Ineffectiveness Recognized in Earnings | Gain / (Loss) on Amount Excluded from Effectiveness Testing Recognized in Earnings | |||||||||||||||||
For the Three Months Ended September 30, 2009 | For the Nine Months Ended September 30, 2009 | For the Three Months Ended September 30, 2009 | For the Nine Months Ended September 30, 2009 | |||||||||||||||
(in millions) | ||||||||||||||||||
Foreign exchange contracts – | $ | – | $ | – | $ | – | $ | – | ||||||||||
Foreign exchange contracts – | – | – | – | – | ||||||||||||||
Commodity contracts | – | 2 | 1 | 1 | ||||||||||||||
Interest rate contracts | – | – | – | – | ||||||||||||||
Total | $ | – | $ | 2 | $ | 1 | $ | 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 or marketing, administration and research costs for foreign exchange contracts related to forecasted transactions, depending on the type of transaction; and
interest and other expense, net for interest rate contracts and foreign exchange contracts related to intercompany loans.
We expect to transfer unrealized losses of $35 million (net of taxes) for commodity cash flow hedges and unrealized gains of $3 million (net of taxes) for foreign currency cash flow hedges to earnings during the next 12 months. As of September 30, 2009, we had hedged forecasted:
commodity transactions for periods not exceeding the next 15 months;
interest rate transactions for periods not exceeding the next 145 months; and
foreign currency transactions for periods not exceeding the next 27 months, and excluding intercompany loans, we had hedged forecasted foreign currency transactions for periods not exceeding the next 9 months.
16
Fair Value Hedges:
The effect of fair value hedges for the three and nine months ended September 30, 2009 was:
For the Three Months Ended September 30, 2009 | For the Nine Months Ended September 30, 2009 | ||||||||||||||||
Gain / (Loss) Recognized in Income on Derivatives | Gain / (Loss) Recognized in Income on Borrowings | Gain / (Loss) Recognized in Income on Derivatives | Gain / (Loss) Recognized in Income on Borrowings | ||||||||||||||
(in millions) | |||||||||||||||||
Interest rate contracts | $ | 8 | $ | (8 | ) | $ | 7 | $ | (7 | ) | |||||||
We include the gain or loss on hedged long-term debt and the offsetting loss or gain on the related interest rate swap in interest and other expense, net. | |||||||||||||||||
Hedges of Net Investments in Foreign Operations: | |||||||||||||||||
The effect of hedges of net investments in foreign operations for the three and nine months ended September 30, 2009 was: | |||||||||||||||||
Gain / (Loss) Recognized in OCI | |||||||||||||||||
For the Three Months Ended September 30, 2009 | For the Nine Months Ended September 30, 2009 | Location of Gain / (Loss) Recorded in AOCI | |||||||||||||||
(in millions) | |||||||||||||||||
| Currency Translation | ||||||||||||||||
Euro notes | $ | (110 | ) | $ | (122 | ) | Adjustment | ||||||||||
Economic Hedges: | |||||||||||||||||
The effect of economic hedges, derivatives that are not designated as hedging instruments, for the three and nine months ended September 30, 2009 was: | |||||||||||||||||
Gain / (Loss) Recognized in Earnings | |||||||||||||||||
For the Three Months Ended September 30, 2009 | For the Nine Months Ended September 30, 2009 | Location of Gain / (Loss) Recognized in Earnings | |||||||||||||||
(in millions) | |||||||||||||||||
Foreign exchange contracts – intercompany | $ | (4 | ) | $ | (12 | ) | Interest expense | ||||||||||
Foreign exchange contracts – | (2 | ) | (8 | ) | Cost of sales | ||||||||||||
Commodity contracts | (7 | ) | 9 | Cost of sales | |||||||||||||
Total | $ | (13 | ) | $ | (11 | ) | |||||||||||
For commodity contracts not designated as hedging instruments, we recognized net losses of approximately $128 million during the three months and net gains of approximately $149 million during the nine months ended September 30, 2008, directly as a component of cost of sales. See our revised consolidated financial statements for the year ended December 31, 2008 for additional information on our purpose for entering into derivatives not designated as hedging instruments was a result of the Cadbury acquisition as we did not re-designate them for hedge accounting. We include the fair value of our asset derivatives within other current assets and the fair value of our overall risk management strategies.liability derivatives within other current liabilities.
16
The fair values (asset / (liability)) of our derivative instruments at March 31, 2010 were determined using:
Quoted Prices in | ||||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||||
for Identical | Other Observable | Unobservable | ||||||||||||||||
Total | Assets | Inputs | Inputs | |||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
(in millions) | ||||||||||||||||||
Foreign exchange contracts | $ | (152 | ) | $ | – | $ | (152 | ) | $ | – | ||||||||
Commodity contracts | (14 | ) | (19 | ) | 4 | 1 | ||||||||||||
Interest rate contracts | 211 | – | 211 | – | ||||||||||||||
Total derivatives | $ | 45 | $ | (19 | ) | $ | 63 | $ | 1 | |||||||||
Cash Flow Hedges: |
| |||||||||||||||||
Cash flow hedges affected accumulated other comprehensive earnings / (losses), net of income taxes, as follows:
|
| |||||||||||||||||
For the Three Months Ended | ||||||||||||||||||
March 31, | ||||||||||||||||||
2010 | 2009 | |||||||||||||||||
(in millions) | ||||||||||||||||||
Accumulated gain / (loss) at beginning | $ | 101 | $ | (23 | ) | |||||||||||||
Transfer of realized (gains) / losses in | (3 | ) | 35 | |||||||||||||||
Unrealized loss in fair value | (30 | ) | (17 | ) | ||||||||||||||
Accumulated gain / (loss) at March 31 | $ | 68 | $ | (5 | ) | |||||||||||||
The effects of cash flow hedges for the three months ended March 31, 2010 and 2009 were:
|
| |||||||||||||||||
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
March 31, 2010 | March 31, 2009 | |||||||||||||||||
(Gain) / Loss | (Gain) / Loss | |||||||||||||||||
Gain / (Loss) | Reclassified | Gain / (Loss) | Reclassified | |||||||||||||||
Recognized | from AOCI | Recognized | from AOCI | |||||||||||||||
in OCI | into Earnings | in OCI | into Earnings | |||||||||||||||
(in millions) | ||||||||||||||||||
Foreign exchange contracts – | $ | 3 | $ | – | $ | – | $ | – | ||||||||||
Foreign exchange contracts – | 12 | (6 | ) | 15 | (22 | ) | ||||||||||||
Commodity contracts | (12 | ) | 3 | (32 | ) | 57 | ||||||||||||
Interest rate contracts | (33 | ) | – | – | – | |||||||||||||
Total | $ | (30 | ) | $ | (3 | ) | $ | (17 | ) | $ | 35 | |||||||
17
For the Three Months Ended March 31, 2010 | For the Three Months Ended March 31, 2009 | ||||||||||||||||
Gain/(Loss) on Ineffectiveness Recognized in Earnings | Gain / (Loss) on Amount Excluded from Effectiveness Testing Recognized in Earnings | Gain /(Loss) on Ineffectiveness Recognized in Earnings | Gain /(Loss) on Amount Excluded from Effectiveness Testing Recognized in Earnings | ||||||||||||||
(in millions) | |||||||||||||||||
Foreign exchange contracts – | $ | – | $ | – | $ | – | $ | – | |||||||||
Foreign exchange contracts – | – | – | – | – | |||||||||||||
Commodity contracts | (9 | ) | (1 | ) | (2 | ) | – | ||||||||||
Interest rate contracts | – | – | – | – | |||||||||||||
Total | $ | (9 | ) | $ | (1 | ) | $ | (2 | ) | $ | – | ||||||
We record (i) the gain or loss reclassified from accumulated other comprehensive earnings / (losses) into earnings, (ii) the gain or loss on ineffectiveness, and (iii) the gain or loss on the amount excluded from effectiveness testing in:
• cost of sales for commodity contracts; • cost of sales for foreign exchange contracts related to forecasted transactions; and • interest and other expense, net for interest rate contracts and foreign exchange contracts related to intercompany loans.
We expect to transfer unrealized losses of $9 million (net of taxes) for commodity cash flow hedges, unrealized gains of $13 million (net of taxes) for foreign currency cash flow hedges and unrealized losses of $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.
Hedge Coverage: As of March 31, 2010, we had hedged forecasted transactions for the following durations:
• commodity transactions for periods not exceeding the next 21 months; • interest rate transactions for periods not exceeding the next 32 years and 10 months; and • foreign currency transactions for periods not exceeding the next 22 months.
Fair Value Hedges: The effects of fair value hedges for the three months ended March 31, 2010 were:
| |||||||||||||||||
For the Three Months Ended March 31, 2010 | |||||||||||||||||
Gain /(Loss) Recognized in Income on Derivatives | Gain / (Loss) Recognized in Income on Borrowings | ||||||||||||||||
(in millions) | |||||||||||||||||
Interest rate contracts | $ | 5 | $ | (5 | ) |
We include the gain or loss on hedged long-term debt and the offsetting loss or gain on the related interest rate swap in interest and other expense, net. We had no fair value hedges in the first quarter of 2009.
18
Volume:Hedges of Net Investments in Foreign Operations:
AsThe effects of September 30,hedges of net investments in foreign operations for the three months ended March 31, 2010 and 2009 we had the following outstanding hedges:were:
| |||||||||||||
| |||||||||||||
| |||||||||||||
| |||||||||||||
|
Gain / (Loss) Recognized in OCI | Location of Gain / (Loss) Recorded in AOCI | |||||||||||||
For the Three Months Ended March 31, 2010 | For the Three Months Ended March 31, 2009 | |||||||||||||
(in millions) | ||||||||||||||
Euro notes | $ | 147 | $ | 131 | Currency Translation Adjustment | |||||||||
Economic Hedges: The effects of economic hedges, derivatives that are not designated as hedging instruments, for the three months ended March 31, 2010 and 2009 were:
| ||||||||||||||
Gain / (Loss) Recognized in Earnings | Location of | |||||||||||||
For the Three Months Ended March 31, 2010 | For the Three Months Ended March 31, 2009 | Gain / (Loss) Recognized in Earnings | ||||||||||||
(in millions) | ||||||||||||||
Foreign exchange contracts: | ||||||||||||||
Intercompany loans and forecasted | $ | 7 | $ | (19 | ) | Interest expense | ||||||||
Forecasted transactions | – | 1 | Cost of sales | |||||||||||
Forecasted transactions | (17 | ) | – | Interest expense | ||||||||||
Cadbury acquisition-related | (395 | ) | – | Interest expense | ||||||||||
Interest rate contracts | 9 | – | Interest expense | |||||||||||
Commodity contracts | (24 | ) | 26 | Cost of sales | ||||||||||
Total | $ | (420 | ) | $ | 8 | |||||||||
The hedging losses related to the Cadbury acquisition were economically offset by foreign exchange movement net gains of $241 million on the British pound cash, Cadbury Bridge Facility and payable balances associated with the acquisition. See our consolidated financial statements for the year ended December 31, 2009 for additional information on our purpose for entering into derivatives not designated as hedging instruments and our overall risk management strategies. | ||||||||||||||
Volume: | ||||||||||||||
As of March 31, 2010 and December 31, 2009, we had the following outstanding hedges:
| ||||||||||||||
Notional Amount | ||||||||||||||
March 31, 2010 | December 31, 2009 | |||||||||||||
(in millions) | ||||||||||||||
Foreign exchange contracts: | ||||||||||||||
Intercompany loans and forecasted | $ | 4,625 | $ | 1,376 | ||||||||||
Forecasted transactions | 2,577 | 631 | ||||||||||||
Cadbury acquisition-related | – | – | ||||||||||||
Commodity contracts | 2,080 | 1,832 | ||||||||||||
Interest rate contracts | 4,020 | 2,350 | ||||||||||||
Net investment hedge – euro notes | 3,850 | 4,081 |
19
Note 11.13. Commitments and Contingencies:
Legal Proceedings:
We routinely are involved from time to time, 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 these matters,Currently, we do not expectbelieve that the ultimate costs to resolve these mattersany of the Legal Matters will have a material effect on our financial results.
Third-Party Guarantees:
We have third-party guarantees primarily covering the long-term obligations of our vendors. As part of those transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At September 30, 2009,March 31, 2010, the carrying amount of our third-party guarantees on our condensed consolidated balance sheet and the maximum potential payment under these guarantees was $30$29 million. Substantially all of these guarantees expire at various times through 2018.
Leases:
As of March 31, 2010, minimum rental commitments under non-cancelable operating leases in effect at quarter-end were (in millions):
2011 | $ | 363 | |||||||||
2012 | 301 | ||||||||||
2013 | 238 | ||||||||||
2014 | 171 | ||||||||||
2015 | 146 | ||||||||||
Thereafter | 335 |
Note 12.14. Income Taxes:
As of January 1, 2009,2010, our unrecognized tax benefits were $807$829 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $612$661 million. During the nine months ended September 30, 2009, we recognized $173 million of previouslyOur unrecognized tax benefits duewere $1,217 million at March 31, 2010, and if we had recognized all of these benefits, the net impact to an agreement we reached with the IRS on specific matters, settlements with various foreign and stateour income tax authorities, and the expiration of the statute of limitations in various jurisdictions. In addition, unrecognized tax benefits increased $110 million during the nine months ended September 30, 2009 for additions based on current year tax positions, prior year tax positions and adjustments for currency. As a result, our net unrecognized tax benefits decreased $63 million during the nine months ended September 30, 2009.provision would have been $1,017 million. We expect that the amount of unrecognized tax benefits will decrease by $60approximately $50 million during the next 12 months due to various audit settlementsthe potential resolution of certain foreign, U.S. federal and state examinations. Furthermore, we recorded $319 million of unrecognized tax benefits and $33 million of accrued interest and penalties as part of our preliminary purchase price allocations for Cadbury, which are subject to revision when the expiration of statutes of limitations.purchase price allocations are finalized in 2010. We include accrued interest and penalties related to uncertain tax positions in our tax provision. As of January 1, 2009, weWe had $239 million of accrued interest and penalties. The decrease in accrued interest and penalties duringof $210 million as of January 1, 2010 and $248 million as of March 31, 2010.
The changes in our unrecognized tax benefits for the ninethree months ended September 30,March 31, 2010 and 2009 was $53 million.
We are regularly examined by various federal, state and foreign tax authorities. The U.S. federal statute of limitations remains open for the year 2000 and onward. Years 2000 through 2003 are currently under examination by the IRS, and during the third quarter of 2009, we reached an agreement with the IRS on specific matters relating to those tax years. We expect the years under audit by the IRS to close during 2010. We 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. Years still open to examination by foreign tax authorities in major jurisdictions include Germany (1999 onward), Brazil (2002 onward), Canada (2003 onward), Spain (2002 onward) and France (2006 onward).were (in millions):
2010 | 2009 | |||||||||||||
January 1 | $ | 829 | $ | 807 | ||||||||||
Increases from positions taken during prior periods | – | 2 | ||||||||||||
Decreases from positions taken during prior periods | (10 | ) | (8 | ) | ||||||||||
Increases from positions taken during the current period | 99 | 36 | ||||||||||||
Increases from acquisition adjustments | 319 | – | ||||||||||||
Decreases relating to settlements with taxing authorities | (2 | ) | – | |||||||||||
Reductions resulting from the lapse of the | (7 | ) | (7 | ) | ||||||||||
Currency / other | (11 | ) | (9 | ) | ||||||||||
March 31 | $ | 1,217 | $ | 821 | ||||||||||
18
20
Note 13. Earnings Per Share:
BasicThe tax effects of temporary differences that gave rise to deferred income tax assets and diluted EPS were calculated usingliabilities consisted of the following:following at March 31, 2010 and December 31, 2009:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
(in millions, except per share data; 2008 revised) | ||||||||||||||
Earnings from continuing operations | $ | 826 | $ | 520 | $ | 2,317 | $ | 1,745 | ||||||
Earnings and gain from discontinued | – | 845 | – | 968 | ||||||||||
Net earnings | 826 | 1,365 | 2,317 | 2,713 | ||||||||||
Noncontrolling interest | 2 | 3 | 6 | 7 | ||||||||||
Net earnings attributable to Kraft Foods | $ | 824 | $ | 1,362 | $ | 2,311 | $ | 2,706 | ||||||
Weighted-average shares for basic EPS | 1,479 | 1,493 | 1,477 | 1,516 | ||||||||||
Plus incremental shares from assumed | 8 | 10 | 8 | 11 | ||||||||||
Weighted-average shares for diluted EPS | 1,487 | 1,503 | 1,485 | 1,527 | ||||||||||
Basic earnings per share attributable | ||||||||||||||
Continuing operations | $ | 0.56 | $ | 0.34 | $ | 1.56 | $ | 1.15 | ||||||
Discontinued operations | – | 0.57 | – | 0.63 | ||||||||||
Net earnings attributable to Kraft Foods | $ | 0.56 | $ | 0.91 | $ | 1.56 | $ | 1.78 | ||||||
Diluted earnings per share attributable | ||||||||||||||
Continuing operations | $ | 0.55 | $ | 0.34 | $ | 1.56 | $ | 1.14 | ||||||
Discontinued operations | – | 0.57 | – | 0.63 | ||||||||||
Net earnings attributable to Kraft Foods | $ | 0.55 | $ | 0.91 | $ | 1.56 | $ | 1.77 | ||||||
March 31, 2010 | December 31, 2009 | |||||||||||||
(in millions) | ||||||||||||||
Deferred income tax assets: | ||||||||||||||
Accrued postretirement and postemployment benefits | $ | 1,356 | $ | 1,472 | ||||||||||
Accrued pension costs | 717 | 456 | ||||||||||||
Other | 2,086 | 1,997 | ||||||||||||
Total deferred income tax assets | 4,159 | 3,925 | ||||||||||||
Valuation allowance | (307 | ) | (97 | ) | ||||||||||
Net deferred income tax assets | $ | 3,852 | $ | 3,828 | ||||||||||
Deferred income tax liabilities: | ||||||||||||||
Trade names | $ | (7,451 | ) | $ | (4,431 | ) | ||||||||
Property, plant and equipment | (2,141 | ) | (2,029 | ) | ||||||||||
Other | (689 | ) | (1,055 | ) | ||||||||||
Total deferred income tax liabilities | (10,281 | ) | (7,515 | ) | ||||||||||
Net deferred income tax liabilities | $ | (6,429 | ) | $ | (3,687 | ) | ||||||||
Note 15. Earnings Per Share: |
| |||||||||||||
Basic and diluted EPS were calculated using the following: | ||||||||||||||
For the Three Months Ended March 31, | ||||||||||||||
2010 | 2009 | |||||||||||||
(in millions, except per share data; 2009 revised) | ||||||||||||||
Earnings from continuing operations | $ | 249 | $ | 603 | ||||||||||
Earnings and gain from discontinued | 1,644 | 59 | ||||||||||||
Net earnings | 1,893 | 662 | ||||||||||||
Noncontrolling interest | 10 | 2 | ||||||||||||
Net earnings attributable to Kraft | $ | 1,883 | $ | 660 | ||||||||||
Weighted-average shares for basic EPS | 1,614 | 1,475 | ||||||||||||
Plus incremental shares from assumed | 6 | 8 | ||||||||||||
Weighted-average shares for diluted EPS | 1,620 | 1,483 | ||||||||||||
Basic earnings per share attributable | ||||||||||||||
Continuing operations | $ | 0.15 | $ | 0.41 | ||||||||||
Discontinued operations | 1.02 | 0.04 | ||||||||||||
Net earnings attributable to Kraft Foods | $ | 1.17 | $ | 0.45 | ||||||||||
Diluted earnings per share attributable | ||||||||||||||
Continuing operations | $ | 0.15 | $ | 0.41 | ||||||||||
Discontinued operations | 1.01 | 0.04 | ||||||||||||
Net earnings attributable to Kraft Foods | $ | 1.16 | $ | 0.45 | ||||||||||
21
We exclude antidilutive Kraft Foods stock options from our calculation of weighted-average shares for diluted EPS. We excluded 23.237.9 million antidilutive stock options for the three months and 23.3 million antidilutive options for the nine months ended September 30, 2009,March 31, 2010, and we excluded 0.324.2 million antidilutive stock options for the three months and 0.6 million antidilutive options for the nine months ended September 30, 2008.March 31, 2009.
Note 14.16. Segment Reporting:
Effective January 2009, we began implementing changes to our operating structure based on ourOrganizing For Growthinitiative and the Kraft Foods Europe Reorganization. In line with our strategies, we are reorganizing our European operations to function on a pan-European centralized category management and value chain model, and we changed how we work in Europe in two key ways:
We transitioned our European Biscuit, Chocolate, Coffee and Cheese categories to fully integrated business units, further strengthening our focus on these core categories. To ensure decisions are made faster and closer to our customers and consumers, each category is fully accountable for its financial results, including marketing, manufacturing and R&D. Category leadership, based in Zurich, Switzerland, reports to the Kraft Foods Europe President. These business units now comprise the Kraft Foods Europe segment.
We aligned the reporting of our Central Europe operations into our Kraft Foods Developing Markets segment to help build critical scale in these countries. We operate a country-led model in these markets.
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 commercialgeographic 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 geographic location. Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery, U.S. Snacks, Canada & North AmericaN.A. Foodservice, Kraft Foods Europe (formerly known as European Union) and Kraft Foods Developing Markets. The results from our Cadbury acquisition are reflected within our U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets segments.
19
Management uses segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of our U.S. pension plan cost (which is a component of cost of sales and marketing, administration and research costs), general corporate expenses (which are a component of marketing, administration and research costs) and amortization of intangibles for all periods presented. In 2009, we began excludingWe exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, thewe record gains and losses on hedging activities are recorded within segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.
Segment data were:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||
September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
(in millions; 2008 revised) | ||||||||||||||
Net revenues: | ||||||||||||||
Kraft Foods North America: | ||||||||||||||
U.S. Beverages | $ | 754 | $ | 743 | $ | 2,373 | $ | 2,304 | ||||||
U.S. Cheese | 824 | 919 | 2,605 | 2,848 | ||||||||||
U.S. Convenient Meals | 1,135 | 1,081 | 3,418 | 3,202 | ||||||||||
U.S. Grocery | 778 | 802 | 2,569 | 2,506 | ||||||||||
U.S. Snacks | 1,232 | 1,274 | 3,717 | 3,736 | ||||||||||
Canada & N.A. Foodservice | 1,055 | 1,109 | 2,989 | 3,279 | ||||||||||
Kraft Foods Europe | 2,070 | 2,338 | 6,081 | 7,239 | ||||||||||
Kraft Foods Developing Markets | 1,955 | 2,135 | 5,609 | 6,137 | ||||||||||
Net revenues | $ | 9,803 | $ | 10,401 | $ | 29,361 | $ | 31,251 | ||||||
For the Three Months Ended March 31, | ||||||||||||
2010 | 2009 | |||||||||||
(in millions; 2009 revised) | ||||||||||||
Net revenues: | ||||||||||||
Kraft Foods North America: | ||||||||||||
U.S. Beverages | $ | 821 | $ | 783 | ||||||||
U.S. Cheese | 845 | 894 | ||||||||||
U.S. Convenient Meals | 770 | 735 | ||||||||||
U.S. Grocery | 816 | 818 | ||||||||||
U.S. Snacks | 1,392 | 1,197 | ||||||||||
Canada & N.A. Foodservice | 1,044 | 872 | ||||||||||
Kraft Foods Europe | 2,709 | 1,928 | ||||||||||
Kraft Foods Developing Markets | 2,921 | 1,752 | ||||||||||
Net revenues | $ | 11,318 | $ | 8,979 | ||||||||
2022
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
(in millions; 2008 revised) | ||||||||||||||||||
Earnings from continuing operations | ||||||||||||||||||
Operating income: | ||||||||||||||||||
Segment Operating Income: | ||||||||||||||||||
Kraft Foods North America: | ||||||||||||||||||
U.S. Beverages | $ | 133 | $ | 83 | $ | 443 | $ | 363 | ||||||||||
U.S. Cheese | 166 | 148 | 463 | 373 | ||||||||||||||
U.S. Convenient Meals | 127 | 79 | 409 | 275 | ||||||||||||||
U.S. Grocery | 258 | 236 | 859 | 781 | ||||||||||||||
U.S. Snacks | 196 | 190 | 530 | 532 | ||||||||||||||
Canada & N.A. Foodservice | 156 | 153 | 386 | 391 | ||||||||||||||
Kraft Foods Europe | 211 | 115 | 565 | 348 | ||||||||||||||
Kraft Foods Developing Markets | 285 | 279 | 745 | 715 | ||||||||||||||
Unrealized gains / (losses) on | 19 | (141 | ) | 140 | (38 | ) | ||||||||||||
Certain U.S. pension plan costs | (27 | ) | – | (121 | ) | – | ||||||||||||
General corporate expenses | (99 | ) | (112 | ) | (186 | ) | (209 | ) | ||||||||||
Amortization of intangibles | (6 | ) | (7 | ) | (15 | ) | (18 | ) | ||||||||||
Operating income | 1,419 | 1,023 | 4,218 | 3,513 | ||||||||||||||
Interest and other expense, net | 323 | 298 | 915 | 934 | ||||||||||||||
Earnings from continuing operations | $ | 1,096 | $ | 725 | $ | 3,303 | $ | 2,579 | ||||||||||
Asset Impairment Charges –In the second quarter of 2009, we recorded a $9 million asset impairment charge to write-off an investment in Norway. The charge was recorded within asset impairment and exit costs within the segment operating income of Kraft Foods Europe.
Unrealized Gains / (Losses) on Hedging Activities – We recognized gains on the change in unrealized hedging positions of $19 million for the three months and $140 million for the nine months ended September 30, 2009, and losses of $141 million for the three months and $38 million for the nine months ended September 30, 2008.
Net revenues by consumer sector, which includesKraft macaroni and cheese dinners in the Convenient Meals sector and the separation of Canada & N.A. Foodservice, and Kraft Foods Europe and Kraft Foods Developing Markets into sector components, were:
|
| |||||||||||||||||
For the Three Months Ended September 30, 2009 | ||||||||||||||||||
Kraft Foods | ||||||||||||||||||
Kraft Foods | Kraft Foods | Developing | ||||||||||||||||
North America | Europe | Markets | Total | |||||||||||||||
(in millions) | ||||||||||||||||||
Snacks | $ | 1,486 | $ | 1,077 | $ | 1,051 | $ | 3,614 | ||||||||||
Beverages | 881 | 572 | 518 | 1,971 | ||||||||||||||
Cheese | 1,174 | 244 | 216 | 1,634 | ||||||||||||||
Grocery | 706 | 96 | 140 | 942 | ||||||||||||||
Convenient Meals | 1,531 | 81 | 30 | 1,642 | ||||||||||||||
Total net revenues | $ | 5,778 | $ | 2,070 | $ | 1,955 | $ | 9,803 | ||||||||||
For the Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(in millions; 2009 revised) | ||||||||||||||||
Earnings from continuing operations | ||||||||||||||||
Operating income: | ||||||||||||||||
Kraft Foods North America: | ||||||||||||||||
U.S. Beverages | $ | 172 | $ | 162 | ||||||||||||
U.S. Cheese | 134 | 131 | ||||||||||||||
U.S. Convenient Meals | 84 | 61 | ||||||||||||||
U.S. Grocery | 286 | 262 | ||||||||||||||
U.S. Snacks | 207 | 129 | ||||||||||||||
Canada & N.A. Foodservice | 100 | 72 | ||||||||||||||
Kraft Foods Europe | 289 | 146 | ||||||||||||||
Kraft Foods Developing Markets | 359 | 207 | ||||||||||||||
Unrealized gains / (losses) on | (38 | ) | 87 | |||||||||||||
Certain U.S. pension plan costs | (56 | ) | (40 | ) | ||||||||||||
General corporate expenses | (298 | ) | (36 | ) | ||||||||||||
Amortization of intangibles | (33 | ) | (6 | ) | ||||||||||||
Operating income | 1,206 | 1,175 | ||||||||||||||
Interest and other expense, net | 624 | 280 | ||||||||||||||
Earnings from continuing operations | $ | 582 | $ | 895 | ||||||||||||
Unrealized Gains / (Losses) on Hedging Activities – We recognized losses on the change in unrealized hedging positions of $38 million for the three months ended March 31, 2010 and gains of $87 million for the three months ended March 31, 2009.
General Corporate Expenses –The 2010 increase in general corporate expenses was primarily due to acquisition-related transaction fees and integration costs.
Restructuring Costs – In the first quarter of 2010, we incurred $43 million in integration charges to combine and integrate Kraft Foods and Cadbury. We recorded these charges primarily within general corporate expenses. We also incurred charges associated with our cost savings initiatives of $24 million in the first quarter of 2010. We recorded these charges in operations, primarily within the segment operating income of Kraft Foods Europe and Canada & N.A. Foodservice. In addition, in the first quarter of 2010, we incurred $15 million in charges related to the Cadbury VIA program. We recorded these charges in operations, primarily within the segment operating income of Kraft Foods Europe and Kraft Foods Developing Markets.
2123
For the Three Months Ended September 30, 2008 | ||||||||||||||
Kraft Foods North America | Kraft Foods Europe | Kraft Foods Developing Markets | Total | |||||||||||
(in millions; as revised) | ||||||||||||||
Snacks | $ | 1,525 | $ | 1,233 | $ | 1,205 | $ | 3,963 | ||||||
Beverages | 871 | 629 | 547 | 2,047 | ||||||||||
Cheese | 1,298 | 280 | 207 | 1,785 | ||||||||||
Grocery | 748 | 106 | 149 | 1,003 | ||||||||||
Convenient Meals | 1,486 | 90 | 27 | 1,603 | ||||||||||
Total net revenues | $ | 5,928 | $ | 2,338 | $ | 2,135 | $ | 10,401 | ||||||
For the Nine Months Ended September 30, 2009 | ||||||||||||||
Kraft Foods North America | Kraft Foods Europe | Kraft Foods Developing Markets | Total | |||||||||||
(in millions) | ||||||||||||||
Snacks | $ | 4,379 | $ | 3,213 | $ | 3,043 | $ | 10,635 | ||||||
Beverages | 2,727 | 1,676 | 1,476 | 5,879 | ||||||||||
Cheese | 3,593 | 706 | 604 | 4,903 | ||||||||||
Grocery | 2,408 | 271 | 400 | 3,079 | ||||||||||
Convenient Meals | 4,564 | 215 | 86 | 4,865 | ||||||||||
Total net revenues | $ | 17,671 | $ | 6,081 | $ | 5,609 | $ | 29,361 | ||||||
For the Nine Months Ended September 30, 2008 | ||||||||||||||
Kraft Foods North America | Kraft Foods Europe | Kraft Foods Developing Markets | Total | |||||||||||
(in millions; as revised) | ||||||||||||||
Snacks | $ | 4,414 | $ | 3,858 | $ | 3,466 | $ | 11,738 | ||||||
Beverages | 2,688 | 1,943 | 1,564 | 6,195 | ||||||||||
Cheese | 3,999 | 865 | 614 | 5,478 | ||||||||||
Grocery | 2,450 | 307 | 416 | 3,173 | ||||||||||
Convenient Meals | 4,324 | 266 | 77 | 4,667 | ||||||||||
Total net revenues | $ | 17,875 | $ | 7,239 | $ | 6,137 | $ | 31,251 | ||||||
Total assets by segment were:
March 31, 2010 | December 31, 2009 | |||||||||||||
(in millions) | ||||||||||||||
Total assets: | ||||||||||||||
Kraft Foods North America: | ||||||||||||||
U.S. Beverages | $ | 2,364 | $ | 2,382 | ||||||||||
U.S. Cheese | 4,499 | 4,589 | ||||||||||||
U.S. Convenient Meals | 2,186 | 3,063 | ||||||||||||
U.S. Grocery | 5,587 | 5,565 | ||||||||||||
U.S. Snacks | 22,230 | 16,418 | ||||||||||||
Canada & N.A. Foodservice | 6,501 | 5,051 | ||||||||||||
Kraft Foods Europe | 26,739 | 16,073 | ||||||||||||
Kraft Foods Developing Markets | 20,816 | 11,087 | ||||||||||||
Unallocated assets(1) | 4,787 | 2,486 | ||||||||||||
Total assets | $ | 95,709 | $ | 66,714 | ||||||||||
(1) Unallocated assets consist primarily of cash and cash equivalents, deferred income taxes, centrally held property, plant and equipment, prepaid pension assets and derivative financial instrument balances. | ||||||||||||||
Net revenues by consumer sector, which includesKraft macaroni and cheese dinners in the Convenient Meals sector and the separation of Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets into sector components, were: | ||||||||||||||
For the Three Months Ended March 31, 2010 | ||||||||||||||
Kraft Foods North America | Kraft Foods Europe | Kraft Foods Developing Markets | Total | |||||||||||
(in millions) | ||||||||||||||
Snacks(1) | $ | 1,366 | $ | 559 | $ | 604 | $ | 2,529 | ||||||
Confectionery | 307 | 1,197 | 1,381 | 2,885 | ||||||||||
Beverages | 940 | 587 | 571 | 2,098 | ||||||||||
Cheese | 1,211 | 242 | 209 | 1,662 | ||||||||||
Grocery | 747 | 74 | 127 | 948 | ||||||||||
Convenient Meals | 1,117 | 50 | 29 | 1,196 | ||||||||||
Total net revenues | $ | 5,688 | $ | 2,709 | $ | 2,921 | $ | 11,318 | ||||||
For the Three Months Ended March 31, 2009 | ||||||||||||||
Kraft Foods North America | Kraft Foods Europe | Kraft Foods Developing Markets | Total | |||||||||||
(in millions; as revised) | ||||||||||||||
Snacks(1) | $ | 1,334 | $ | 520 | $ | 538 | $ | 2,392 | ||||||
Confectionery | 46 | 540 | 461 | 1,047 | ||||||||||
Beverages | 881 | 525 | 421 | 1,827 | ||||||||||
Cheese | 1,207 | 221 | 190 | 1,618 | ||||||||||
Grocery | 752 | 72 | 116 | 940 | ||||||||||
Convenient Meals | 1,079 | 50 | 26 | 1,155 | ||||||||||
Total net revenues | $ | 5,299 | $ | 1,928 | $ | 1,752 | $ | 8,979 | ||||||
(1) The Snacks sector formerly included Confectionery brands. With the Cadbury acquisition, the Confectionery brands have been separately broken out. Confectionery primarily includes our chocolate and gum brands. |
24
Note 15.17. Subsequent Events:
On September 7, 2009, we disclosed that we approached the Board of Cadbury plc (“Cadbury”) with a proposal to combine the two companies. The Board of Cadbury has rejected this proposal. We remain interested in working toward a recommended transaction. We proposed an offer for Cadbury (the “Possible Offer”) of 300 pence in cash and 0.2589 new Kraft Foods shares per Cadbury share. This valued each Cadbury share at 745 pence (based on the closing price of $28.10 for a Kraft Foods share on September 4, 2009 and an exchange rate of 1.6346 $/£) and valued the entire issued share capital of Cadbury at £10.2 billion (approximately $16.7 billion). The combination would build on Kraft Foods’ position as a global powerhouse in snacks, confectionery and quick meals with a rich portfolio of iconic brands.
The Possible Offer contained several criteria, including our ability to obtain satisfactory financing, that we would maintain an investment-grade credit rating, and the right to change our offer at any time.
Pursuant to the U.K. City Code on Takeovers and Mergers, the U.K. Takeover Panel set a deadline of November 9, 2009 for us to formally make an offer for Cadbury, or walk away.
We evaluated subsequent events through November 3, 2009 and included all accounting and disclosure requirements related to subsequent events in our financial statements.
22
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 7080 countries and sell our products in approximately 150170 countries.
Executive Summary
This executive summary provides significant highlights of the Discussion and Analysis that follows.
Net revenues decreased 5.7%increased 26.0% to $9.8 billion in the third quarter of 2009 and decreased 6.0% to $29.4$11.3 billion in the first nine monthsquarter of 20092010 as compared to the same periodsperiod in the prior year.
Diluted EPS decreased 39.6%attributable to $0.55 in the third quarter of 2009 and decreased 11.9%Kraft Foods increased 100.0+% to $1.56$1.16 in the first nine monthsquarter of 20092010 as compared to the same periodsperiod in the prior year. Diluted EPS attributable to Kraft Foods from continuing operations decreased 63.4% in the first quarter of 2010 as compared to the same period in the prior year.
Diluted EPS from continuing operations increased 61.8%On February 2, 2010, we had received acceptances to our offer of 71.73% of the outstanding ordinary shares of Cadbury. The subsequent offer period closed on April 16, 2010, at which time we owned 99.95% of the outstanding Cadbury Shares. We are in the third quarterprocess of 2009 and increased 36.8% inacquiring the first nine monthsremaining outstanding Cadbury Shares through a compulsory acquisition procedure. As of 2009March 31, 2010, we had issued 256 million shares of our Common Stock as compared to the same periods in the prior year.part of our Cadbury acquisition.
|
On February 8, 2010, we issued $9.5 billion of senior unsecured notes at a weighted-average effective rate of 5.364% and primarily used the net proceeds ($9,379 million) to finance the Cadbury acquisition.
Our $5.0 billion share repurchase authority expiredOn March 1, 2010, we completed the sale of the assets of our North American frozen pizza business to Nestlé USA, Inc. for $3.7 billion. Accordingly, the results of our Frozen Pizza business have been reflected as discontinued operations on March 30, 2009. Prior to the expiration, we repurchased 130.9 million shares for $4.3 billion under the program. Wecondensed consolidated statement of earnings, and prior period results have not repurchased any sharesbeen revised in 2009.a consistent manner.
Discussion and Analysis
Items Affecting Comparability of Financial Results
Acquisitions and Divestitures
Post Cereals Split-off:Cadbury Acquisition:
On January 19, 2010, we announced the terms of our final offer for each outstanding ordinary share of Cadbury plc (“Cadbury”), including each ordinary share represented by an American Depositary Share (“Cadbury ADS”), and the Cadbury Board of Directors recommended that Cadbury shareholders accept the terms of the final offer. On February 2, 2010, all of the conditions to the offer were satisfied or validly waived, the initial offer period expired and a subsequent offer period immediately began. At that point, we had received acceptances of 71.73% of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs (“Cadbury Shares”). The combination of Kraft Foods and Cadbury will create a global powerhouse in snacks, confectionery and quick meals with a rich portfolio of iconic brands.
25
Under the terms of our final offer and the subsequent offer, we agreed to pay Cadbury shareholders 500 pence in cash and 0.1874 shares of Kraft Foods Common Stock per Cadbury ordinary share validly tendered and 2,000 pence in cash and 0.7496 shares of Kraft Foods Common Stock per Cadbury ADS validly tendered. This valued Cadbury at $18.5 billion, or approximately £11.6 billion (based on the average price of $28.36 for a share of Kraft Foods Common Stock on February 2, 2010 and an exchange rate of $1.595 per £1.00).
The subsequent offer period closed on April 16, 2010, at which time we owned 99.95% of the outstanding Cadbury Shares. As we have received acceptances of over 90% of Cadbury Shares, we are in the process of acquiring the remaining Cadbury Shares that were not tendered during the offer period through a compulsory acquisition procedure under the United Kingdom Companies Act of 2006, as amended.
The EU Commission requires, as a condition of the offer, that we divest the Cadbury confectionary operations in Poland and Romania. We are in the process of divesting these operations.
As part of our Cadbury acquisition, we expensed and incurred $203 million in transaction related fees in the first quarter of 2010. We recorded these expenses within marketing, administration and research costs. We also incurred $96 million in acquisition financing fees in the first quarter of 2010. We recorded these expenses within interest and other expense, net.
Cadbury contributed net revenues of $1,693 million and net earnings of $60 million from February 2, 2010 through March 31, 2010. The following unaudited pro forma summary presents Kraft Foods’ consolidated information as if Cadbury had been acquired on January 1, 2009. 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, 2009, together with the consequential tax effects. These adjustments also reflect the additional interest expense incurred on the debt to finance the purchase.
Pro forma for the Three Months Ended March 31, | |||||||||||||||
2010 | 2009 | ||||||||||||||
(in millions; unaudited) | |||||||||||||||
Net revenues | $ | 11,999 | $ | 10,987 | |||||||||||
Net earnings attributable to Kraft Foods | 1,610 | 587 | |||||||||||||
On February 2, 2010, we acquired 71.73% of Cadbury’s Shares for $13.1 billion and the value attributed to noncontrolling interests was $5.4 billion. From February 2, 2010 through March 31, 2010, we acquired an additional 27.03% of Cadbury’s Shares for $5.2 billion. We had a $38 million gain on noncontrolling interest acquired and recorded it within additional paid in capital.
Our February 2, 2010 Cadbury acquisition was valued at $18,546 million, or $17,485 million net of cash and cash equivalents. As part of that acquisition, we acquired the following assets and assumed the following liabilities (in millions): | |||||||||||||||
Receivables(1) | $ | 1,387 | |||||||||||||
Inventories | 1,317 | ||||||||||||||
Other current assets | 491 | ||||||||||||||
Property, plant and equipment | 3,700 | ||||||||||||||
Goodwill(2) | 9,151 | ||||||||||||||
Intangible assets(3) | 12,637 | ||||||||||||||
Other assets | 424 | ||||||||||||||
Short-term borrowings | (1,206 | ) | |||||||||||||
Accounts payable | (1,620 | ) | |||||||||||||
Other current liabilities | (1,523 | ) | |||||||||||||
Long-term debt | (2,309 | ) | |||||||||||||
Deferred income taxes | (3,098 | ) | |||||||||||||
Accrued pension costs | (838 | ) | |||||||||||||
Other liabilities | (1,028 | ) | |||||||||||||
(1) The gross amount due under the receivables we acquired is $1,457 million, of which $70 million is expected to be uncollectable. (2) Goodwill will not be deductible for statutory tax purposes and is attributable to Cadbury’s workforce and the significant synergies we expect from the acquisition. (3) $10.1 billion of the intangible assets acquired are expected to be indefinite lived. |
26
The above amounts represent the preliminary allocation of purchase price and are subject to revision when appraisals are finalized, which will occur during 2010.
Pizza Divestiture:
On August 4, 2008,March 1, 2010, we completed the split-offsale of the assets of our North American frozen pizza business (“Frozen Pizza”) to Nestlé USA, Inc. (“Nestlé”) for $3.7 billion. Our Frozen Pizza business was a component of our U.S. Convenient Meals and Canada & North America Foodservice segments. The sale included thePostDiGiorno,Tombstone cerealsandJack’s brands in the U.S., theDelissio brand in Canada and theCalifornia Pizza Kitchen trademark license. It also included two Wisconsin manufacturing facilities (Medford and Little Chute) and the leases for the pizza depots and delivery trucks. Approximately 3,600 of our employees transferred with the business into Ralcorp Holdings, Inc., after an exchange with our shareholders.to Nestlé. Accordingly, the prior period results of thePost cerealsour Frozen Pizza business werehave been reflected as discontinued operations on the condensed consolidated statement of earnings.earnings, and prior period results have been revised in a consistent manner.
Pursuant to the Frozen Pizza business Transition Services Agreement, we agreed to provide certain sales, co-manufacturing, distribution, information technology, accounting and finance services to Nestlé for up to two years. We can agree with Nestlé to extend the term of the agreement.
Summary results of operations for thePost cereals Frozen Pizza business for the three and nine months ended September 30, 2008 were as follows:through March 1, 2010 were:
For the Three Months Ended September 30, 2008 | For the Nine Months Ended September 30, 2008 | |||||||||||||
(in millions; as revised) | ||||||||||||||
Net revenues | $ | 90 | $ | 666 | ||||||||||
(Loss) / earnings before income taxes | (7 | ) | 189 | |||||||||||
Benefit / (provision) for income taxes | 3 | (70 | ) | |||||||||||
Gain on discontinued operations, | 849 | 849 | ||||||||||||
Earnings and gain from discontinued | $ | 845 | $ | 968 | ||||||||||
23
During the fourth quarter of 2008, we increased our gain on discontinued operations by $77 million to correct for a deferred tax liability related to the split-off of thePostcereals business. As such, our gain from the split-off of thePostcereal business was $926 million. Refer to our revised Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2008 in the Form 8-K we filed with the SEC on November 3, 2009 for further details of this transaction.
Other Divestitures:
In September 2009, we reached an agreement to divest a snack bars operation in the U.S. The transaction is subject to customary closing conditions, including regulatory approvals, and we expect it to close in the fourth quarter of 2009 at a small gain.
During the first nine months of 2009, we received $6 million in proceeds and recorded pre-tax losses of $17 million, or $0.01 per diluted share, on the divestitures of a juice operation in Brazil and a plant in Spain.
During the first nine months of 2008, we recorded pre-tax losses of $93 million, or $0.04 per diluted share, primarily related to the divestitures of several operations in Spain. In aggregate, we received $38 million in net proceeds from divestitures, which included $38 million of disbursements made for transaction fees related to the split-off of thePostcereals business. Separately, we divested a biscuit operation in Spain and a trademark in Hungary that we previously acquired as part of the acquisition of the globalLU biscuit business of Groupe Danone S.A. (“LU Biscuit”). Accordingly, we reflected the impacts as adjustments to the purchase price allocations.
The operating results of these divestitures were not material to our financial statements in any of the periods presented, neither individually nor in the aggregate.
For the Periods Ended | ||||||||||||||
March 1, | March 31, | |||||||||||||
2010 | 2009 | |||||||||||||
(in millions) | ||||||||||||||
Net revenues | $ | 335 | $ | 417 | ||||||||||
Earnings before income taxes | 73 | 93 | ||||||||||||
Provision for income taxes | (25 | ) | (34 | ) | ||||||||||
Gain on discontinued operations, net of | 1,596 | – | ||||||||||||
Earnings and gain from discontinued | $ | 1,644 | $ | 59 | ||||||||||
Earnings before income taxes as presented exclude associated allocated overheads of $25 million in the first quarter of 2010 and $27 million in the first quarter of 2009.
The gain on discontinued operations in the first quarter of 2010 from the sale of the Frozen Pizza business included tax expense of $1.2 billion.
The following assets of the Frozen Pizza business were included in the Frozen Pizza divestiture (in millions):
| ||||||||||||||
Inventories, net | $ | 102 | ||||||||||||
Property, plant and equipment, net | 317 | |||||||||||||
Goodwill | 475 | |||||||||||||
Distributed assets of the Frozen | $ | 894 | ||||||||||||
Restructuring Costs
Integration Charges:
We believe our combination with Cadbury has the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development. In addition, we expect to realize annual costs savings of at least $675 million by the end of the third year following completion of the acquisition. We expect to incur total integration charges of approximately $1.3 billion in the first three years following the acquisition to combine and integrate the two businesses. Integration costs include the costs associated with combining the operations of Kraft Foods and Cadbury and are separate from those costs related to the acquisition. In the first quarter of 2010, we incurred $43 million of the $1.3 billion in expected charges, which were primarily recorded within general corporate expenses.
27
Cost Savings Initiatives:
Cost savings initiatives generally include exit, disposal and other project savings costs. In the first quarter of 2010, we incurred $24 million in charges associated with our cost savings initiatives. We recorded these charges in operations, primarily within the segment operating income of Kraft Foods Europe and Canada & N.A. Foodservice. These charges primarily included other project savings costs associated with the Kraft Foods Europe Reorganization. Even though other project savings costs were directly attributable to exit and disposal costs, they did not qualify for special accounting treatment as exit or disposal activities.
Cadbury VIA Program:
In 2007, Cadbury initiated a Vision into Action (“VIA”) restructuring program that was planned to run through 2011. We are evaluating the previous expectation of the remaining $250 million in pre-tax charges associated with the VIA restructuring program. We may modify the program in future quarters as we evaluate it in conjunction with the overall integration program. In the first quarter of 2010, we incurred $15 million in charges related to the program. We recorded these charges in operations, primarily within the segment operating income of Kraft Foods Europe and Kraft Foods Developing Markets. At March 31, 2010, we had an accrual of $158 million related to the program.
2004 – 2008 Restructuring Program:
In 2008, we completed our five-year restructuring program (the “Restructuring Program”). The Restructuring Program’s objectives were to leverage our global scale, realign and lower our cost structure, and optimize capacity. As part of the Restructuring Program, we:
incurred $3.0 billion in pre-tax charges reflecting asset disposals, severance and implementation costs;
announced the closure of 35 facilities and announced the elimination of approximately 18,80018,600 positions;
will use cash to pay for $2.0 billion of the $3.0 billion in charges; and
anticipate reaching cumulative, annualized savings of $1.4 billion for the total program.
In the second quarter of 2009, we sold a plant in Spain that we previously announced we would close under our Restructuring Program. Accordingly, we reversed $35 million in Restructuring Program charges, primarily related to severance (resulting in a favorable impact to diluted EPS of $0.02), and recorded a $17 million loss on the divestiture of the plant (resulting in an unfavorable impact to diluted EPS of $0.01) in the second quarter of 2009. The reversal of the Restructuring Program costs, which affected the segment operating income of the Kraft Foods Europe segment, was recorded within asset impairment and exit costs. We incurred charges under the Restructuring Program of $90 million, or $0.04 per diluted share, during the three months and $309 million, or $0.14 per diluted share, during the nine months ended September 30, 2008. Since the inception of the Restructuring Program, we have paid cash for $1.6$1.7 billion of the $2.0 billion in expected cash payments, including $123$22 million paid in the first nine monthsquarter of 2009.2010. At September 30, 2009,March 31, 2010, we had an accrual of $366$236 million and we had eliminated approximately 16,500 positions under the Restructuring Program.
Under the Restructuring Program, we recorded asset impairment and exit costs of $68 million during the three months and $251 million during nine months ended September 30, 2008. We recorded implementation costs of $22 million during the three months and $58 million during the nine months ended September 30, 2008 within cost of sales and marketing, administration and research costs. Implementation costs are directly attributable to exit costs; however, they do not qualify for treatment under guidance related to accounting for costs associated with exit or disposal activities. These costs primarily included the discontinuation of less profitable product lines, incremental expenses related to the closure of facilities, the Electronic Data Systems transition and the reorganization of our European operations. Management believes the disclosure of implementation charges provides readers of our financial statements greater transparency to the total costs of our Restructuring Program.program.
Asset Impairment Charges
In October 2008, we divested a Nordic and Baltic snacks operation. We recorded an asset impairment charge of $55 million, or $0.03 per diluted share, in the third quarter of 2008 in connection with the anticipated divestiture. This charge primarily included the write-off of associated goodwill of $34 million and property, plant and equipment of $16 million, and was recorded within asset impairment and exit costs.
24
Provision for Income Taxes
Our effective tax rate was 24.6% for the third quarter of 2009 and 29.9%57.2% for the first nine monthsquarter of 2010 and 32.6% for the first quarter of 2009. Our thirdfirst quarter 2010 effective tax rate included $72 million of net unfavorable tax rate items, primarily due to the $137 million write-off of deferred tax assets as a result of the U.S. health care legislation enacted in March 2010, partially offset by the tax impacts of the highly inflationary accounting adjustments related to our Venezuelan subsidiaries. Our first quarter 2009 effective tax rate included net tax benefits of $143$25 million, primarily due to an agreement we reached with the IRS on specific matters, settlements with variousresulting from corrections of federal, state and foreign and state tax authorities, and the expiration of the statute of limitations in various jurisdictions. For the first nine months of 2009, our effective tax rate included net tax benefits of $205 million primarily due to an agreement we reached with the IRS on specific matters, settlements with various foreign and state tax authorities, and the expiration of the statute of limitations in various jurisdictions.
Our effective tax rate was 28.3% for the third quarter of 2008 and 32.3% for the first nine months of 2008. Our effective tax rate included net tax benefits of $23 million in the third quarter of 2008, primarily related to the impact of a return-to-provision adjustment and a reconciliation of our inventory of deferred tax items that resulted in a write-down of our net deferred tax liabilities. For the first nine months of 2008, our effective tax rate included net tax benefits of $102 million, primarily related to the tax impact from the divestitures of several operations in Spain, the resolution of state tax auditstaxes and the resolution of tax audits and outstanding items in our international operations.
28
Consolidated Results of Operations
The following discussion compares our consolidated results of operations for the three months ended September 30, 2009March 31, 2010 and 2008, and for the nine months ended September 30, 2009 and 2008.2009.
Three Months Ended September 30:
For the Three Months Ended September 30, | |||||||||||||
2009 | 2008 | $ change | % change | ||||||||||
(in millions, except per share data; 2008 revised) | |||||||||||||
Net revenues | $ | 9,803 | $ | 10,401 | $ | (598) | (5.7%) | ||||||
Operating income | 1,419 | 1,023 | 396 | 38.7% | |||||||||
Earnings from continuing operations | 826 | 520 | 306 | 58.8% | |||||||||
Net earnings attributable to Kraft Foods | 824 | 1,362 | (538) | (39.5%) | |||||||||
Diluted earnings per share attributable | 0.55 | 0.91 | (0.36) | (39.6%) | |||||||||
Net Revenues – Net revenues decreased $598 million (5.7%) to $9,803 million in the third quarter of 2009, due to the following:
| |||||||||||||
Change in net revenues (by percentage point) | |||||||||||||
Unfavorable foreign currency | (5.6)pp | ||||||||||||
Impact of divestitures | (0.6)pp | ||||||||||||
2008 favorable resolution of Brazilian value added | (0.2)pp | ||||||||||||
Favorable volume/mix | 0.7pp | ||||||||||||
Total change in net revenues | (5.7)% | ||||||||||||
For the Three Months Ended | $ change | % change | |||||||||||
March 31, | |||||||||||||
2010 | 2009 | ||||||||||||
(in millions, except per share data; 2009 revised) | |||||||||||||
Net revenues | $ | 11,318 | $ | 8,979 | $ | 2,339 | 26.0% | ||||||
Operating income | 1,206 | 1,175 | 31 | 2.6% | |||||||||
Earnings from continuing operations | 249 | 603 | (354) | (58.7%) | |||||||||
Net earnings attributable to Kraft Foods | 1,883 | 660 | 1,223 | 100.0+% | |||||||||
Diluted earnings per share from continuing | 0.15 | 0.41 | (0.26) | (63.4%) | |||||||||
Diluted earnings per share attributable | 1.16 | 0.45 | 0.71 | 100.0+% | |||||||||
Net Revenues – Net revenues increased $2,339 million (26.0%) to $11,318 million in the first quarter of 2010, and organic net revenues increased $291 million (3.3%) to $9,242 million as follows. Please see Non-GAAP Financial Measures section at the end of this item. | |||||||||||||
Change in net revenues (by percentage point) | |||||||||||||
Favorable volume/mix | 3.1pp | ||||||||||||
Higher net pricing | 0.2pp | ||||||||||||
Total change in organic net revenues | 3.3% | ||||||||||||
Impact from the Cadbury acquisition | 18.9pp | ||||||||||||
Favorable foreign currency | 4.2pp | ||||||||||||
Impact of divestitures | (0.4)pp | ||||||||||||
Total change in net revenues | 26.0% | ||||||||||||
UnfavorableFavorable foreign currency decreasedincreased net revenues by $578$383 million, due primarily to the strength of the U.S.euro, Canadian dollar, Brazilian real, Australian dollar, Russian ruble, British pound and Polish zloty against the euro, Ukrainian hryvnia, Russian ruble, Brazilian real, Canadian dollar, Polish zloty and British pound.U.S. dollar. The impact of divestitures and the absenceCadbury acquisition added $1,693 million in net revenues. The balance of the 2008 favorable resolution of a Brazilian value added tax claim also had an unfavorable impact on revenues. The decreaseincrease in net revenues was partially offsetdriven by favorable volume/mix.mix and higher net pricing. The favorable volume/mix impact on revenues was driven primarily by improved product mixhigher volume across all reportable segments except U.S. Snacks, U.S. Cheese and Canada & N.A. Foodservice. This was partially offset by volume declines in Kraft Foods Developing Markets, U.S. Beverages, U.S. Grocery and Kraft Foods Europe, in part due toU.S. Cheese. In addition, the discontinuationimpact of less profitable product lines.divestitures had an unfavorable impact on revenues.
2529
Operating Income – Operating income increased $396$31 million (38.7%(2.6%) to $1,419$1,206 million in the thirdfirst quarter of 2009,2010, due to the following:
Operating | |||||||||
Income | Change | ||||||||
(in millions) | (percentage point) | ||||||||
Operating Income for the Three Months Ended | $ | 1,023 | |||||||
Change in operating income | |||||||||
Lower input costs | 213 | 17.2pp | |||||||
Favorable volume/mix | 89 | 7.2pp | |||||||
Higher marketing, administration and research costs | (133) | (9.5)pp | |||||||
Change in unrealized gains on hedging activities | 160 | 12.9pp | |||||||
Lower Restructuring Program costs | 90 | 11.2pp | |||||||
Lower asset impairment charges | 55 | 6.0pp | |||||||
Lower charges from certain legal matters | 33 | 3.1pp | |||||||
2008 favorable resolution of Brazilian value added tax claim | (21) | (1.7)pp | |||||||
Unfavorable foreign currency | (96) | (7.9)pp | |||||||
Other, net | 6 | 0.2pp | |||||||
Total change in operating income | 396 | 38.7% | |||||||
Operating Income for the Three Months Ended | $ | 1,419 | |||||||
Operating | |||||||||||
Income | Change | ||||||||||
(in millions) | (percentage point) | ||||||||||
Operating Income for the Three Months Ended | $ | 1,175 | |||||||||
Change in operating income | |||||||||||
Lower input costs | 159 | 13.3pp | |||||||||
Favorable volume/mix | 143 | 11.9pp | |||||||||
Higher net pricing | 16 | 1.3pp | |||||||||
Increased operating income from the Cadbury acquisition | 213 | 17.8pp | |||||||||
Acquisition-related costs associated with Cadbury | (259) | (21.6)pp | |||||||||
Integration costs associated with the Cadbury acquisition | (43) | (3.5)pp | |||||||||
Higher marketing, administration and research costs | (148) | (12.4)pp | |||||||||
Change in unrealized gains on hedging activities | (125) | (10.4)pp | |||||||||
Favorable foreign currency | 77 | 6.4pp | |||||||||
Other, net | (2) | (0.2)pp | |||||||||
Total change in operating income | 31 | 2.6% | |||||||||
Operating Income for the Three Months Ended | $ | 1,206 | |||||||||
Our input costs decreased during the quarter, driven bydue to lower raw material costs (including higherand lower manufacturing costs. The favorable volume/mix was primarily driven by strong contributions from Kraft Foods Europe, Kraft Foods Developing Markets, U.S. Snacks, U.S. Convenient Meals and U.S. Beverages. The Cadbury acquisition, net realized gains from certain commodity hedging activities), partially offsetof integration and acquisition-related costs, decreased operating income by higher manufacturing costs.$89 million. Total marketing, administration and research costs, as recorded in the condensed consolidated statement of earnings, decreased $35increased $931 million from the thirdfirst quarter of 2008,2009, but excluding the impacts of divestitures, foreign currency charges for certain legal matters and prior year Restructuring Programour Cadbury acquisition, including integration and acquisition-related costs, increased $133$148 million over the thirdfirst quarter of 2008,2009, primarily due to further investments in our brands. We recognized gains of $19 million on the change in unrealized hedging positions in the third quarter of 2009, versus losses of $141 million in the third quarter of 2008. During the third quarter of 2009, we did not recognize any Restructuring Program charges, versus the $90 million in Restructuring Program charges recognized in the third quarter of 2008. We did not record any asset impairment charges in the third quarter of 2009, versus a $55 million asset impairment charge related to the divestiture of our Nordic and Baltic snacks operation that was recorded in the third quarter of 2008. During the third quarter of 2009, we recorded charges of $22 million for legal matters related to certain of our European operations, versus the $55 million in charges we recorded during the third quarter of 2008 for legal matters related to certain of our U.S. and European operations, including U.S. coffee operations. In addition, unfavorable foreign currency decreased operating income by $96 million, due primarily to the strength of the U.S. dollar against the euro, Russian ruble, Ukrainian hryvnia and Canadian dollar.
26
Net Earnings and Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $824 million decreased by $538 million (39.5%) in the third quarter of 2009. Diluted EPS from continuing operations attributable to Kraft Foods were $0.55 in the third quarter of 2009, up 61.8% from $0.34 in the third quarter of 2008. Diluted EPS attributable to Kraft Foods were $0.55 in the third quarter of 2009, down 39.6% from $0.91 in the third quarter of 2008, due to the following:
Net Earnings Attributable to Kraft Foods | Diluted EPS Attributable to Kraft Foods | |||||||||||||
(in millions, except per share data) | ||||||||||||||
Net Earnings Attributable to Kraft Foods for the Three Months Ended September 30, 2008 (as revised) | $ | 1,362 | $ | 0.91 | ||||||||||
Change in net earnings attributable to Kraft Foods | ||||||||||||||
Operating gains | 0.08 | |||||||||||||
Lower charges from certain legal matters | 0.01 | |||||||||||||
Change in unrealized gains on hedging activities | 0.07 | |||||||||||||
Lower Restructuring Program costs | 0.04 | |||||||||||||
Lower asset impairment charges | 0.03 | |||||||||||||
2008 favorable resolution of Brazilian value added tax claim | (0.01 | ) | ||||||||||||
Unfavorable foreign currency | (0.04 | ) | ||||||||||||
Higher interest and other expense, net | (0.01 | ) | ||||||||||||
Other changes in taxes, including tax settlements | 0.03 | |||||||||||||
Change in net earnings from continuing operations | 0.20 | |||||||||||||
2008 gain on split-off of ourPost cereals business | (0.57 | ) | ||||||||||||
Change in net earnings from discontinued operations | (0.57 | ) | ||||||||||||
Fewer shares outstanding | 0.01 | |||||||||||||
Total change in net earnings attributable to Kraft Foods | (538 | ) | (0.36 | ) | ||||||||||
Net Earnings Attributable to Kraft Foods for the Three Months Ended September 30, 2009 | $ | 824 | $ | 0.55 | ||||||||||
Nine Months Ended September 30:
|
| |||||||||||||
For the Nine Months Ended September 30, | ||||||||||||||
2009 | 2008 | $ change | % change | |||||||||||
(in millions, except per share data; 2008 revised) | ||||||||||||||
Net revenues | $ 29,361 | $ 31,251 | $ | (1,890 | ) | (6.0% | ) | |||||||
Operating income | 4,218 | 3,513 | 705 | 20.1% | ||||||||||
Earnings from continuing operations | 2,317 | 1,745 | 572 | 32.8% | ||||||||||
Net earnings attributable to Kraft Foods | 2,311 | 2,706 | (395 | ) | (14.6% | ) | ||||||||
Diluted earnings per share attributable | 1.56 | 1.77 | (0.21 | ) | (11.9% | ) |
27
Net Revenues – Net revenues decreased $1,890 million (6.0%) to $29,361 million in the first nine months of 2009, due to the following:
| ||||||||
| ||||||||
| ||||||||
| ||||||||
|
| |||||||
| ||||||||
| ||||||||
Unfavorable foreign currency decreased net revenues by $2,235 million, due primarily to the strength of the U.S. dollar against the euro, Canadian dollar, Brazilian real, Russian ruble, Ukrainian hryvnia, British pound and Polish zloty. The unfavorable volume/mix impact on revenues was driven by volume declines across all reportable segments, except U.S. Beverages and U.S. Convenient Meals, in part due to the discontinuation of less profitable product lines and by unfavorable mix in Kraft Foods North America. The impact of divestitures and the absence of the 2008 favorable resolution of a Brazilian value added tax claim also had an unfavorable impact on revenues. The decrease in net revenues was partially offset by higher input cost-driven pricing.
Operating Income – Operating income increased $705 million (20.1%) to $4,218 million in the first nine months of 2009, due to the following:
Operating Income | Change | ||||||||
(in millions) | (percentage point) | ||||||||
Operating Income for the Nine Months Ended September 30, 2008 (as revised) | $ | 3,513 | |||||||
Change in operating income | |||||||||
Higher pricing | 904 | 22.3pp | |||||||
Favorable volume/mix | 59 | 1.5pp | |||||||
Higher input costs | (274) | (6.8)pp | |||||||
Lower Restructuring Program costs | 344 | 10.2pp | |||||||
Change in unrealized gains on hedging activities | 178 | 4.4pp | |||||||
Lower losses on divestitures, net | 76 | 2.7pp | |||||||
Lower asset impairment charges | 46 | 1.3pp | |||||||
Lower charges from certain legal matters | 26 | 0.7pp | |||||||
2008 favorable resolution of Brazilian value added tax claim | (64) | (1.6)pp | |||||||
Higher marketing, administration and research costs | (224) | (5.2)pp | |||||||
Unfavorable foreign currency | (350) | (8.8)pp | |||||||
Other, net | (16) | (0.6)pp | |||||||
Total change in operating income | 705 | 20.1% | |||||||
Operating Income for the Nine Months Ended September 30, 2009 | $ | 4,218 | |||||||
Higher pricing more than offset our input cost increases during the first nine months of 2009, as we recovered some of our cumulative cost increases from prior years. The increase in input costs was driven by higher raw material costs (including higher net realized losses from certain commodity hedging activities) and higher manufacturing costs. During the first nine months of 2009, we reversed $35 million in Restructuring Program charges recorded in the prior year, versus the $309 million in Restructuring Program charges recognized in the first nine months of 2008. We recognized gains of $140$38 million on the change in unrealized hedging positions in the first nine monthsquarter of 2009,2010, versus lossesgains of $38$87 million in the first nine monthsquarter of 2008. We recorded $17 million of net losses on divestitures in the first nine months of 2009, versus $93 million of net losses on divestitures that were recorded in the first nine months of 2008. We recorded a $9 million asset impairment charge to write-off an investment in Norway in the first nine months of 2009, versus a $55 million asset impairment charge related to the divestiture of our Nordic and Baltic snacks operation that was recorded in the first nine months of 2008. During the first nine months of 2009, we recorded charges of $29 million for legal matters related to certain of our European operations, versus the $55 million in charges we recorded during the first nine months of 2008 for legal matters related to certain of our U.S. and European operations, including U.S. coffee operations. Total marketing, administration and research costs, as recorded in the condensed consolidated statement of earnings, decreased $297 million from the first nine months of 2008, but excluding the impacts of divestitures,2009. In addition, favorable foreign currency charges for certain legal matters and prior year Restructuring Program costs, increased $224 million over the first nine months of 2008, primarily due to further investments in our brands. In addition, unfavorable foreign currency decreased operating income by $350$77 million, due primarily to the strength of the U.S.Brazilian real, euro, Canadian dollar and Australian dollar against the euro, Canadian dollar, British pound, Brazilian real, Russian ruble, Korean won, Ukrainian hryvnia and Polish zloty.U.S. dollar.
2830
Net Earnings and Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $2,311$1,883 million decreasedincreased by $395$1,223 million (14.6%(100.0+%) in the first nine monthsquarter of 2009.2010. Diluted EPS from continuing operations attributable to Kraft Foods were $1.56$0.15 in the first nine monthsquarter of 2009, up 36.8%2010, down 63.4% from $1.14$0.41 in the first nine monthsquarter of 2008.2009. Diluted EPS attributable to Kraft Foods were $1.56$1.16 in the first nine monthsquarter of 2009, down 11.9%2010, up $0.71 from $1.77$0.45 in the first nine monthsquarter of 2008,2009. These changes were due to the following:
Net Earnings Attributable to Kraft Foods | Diluted EPS Attributable to Kraft Foods | |||||||||
(in millions, except per share data) | ||||||||||
Net Earnings Attributable to Kraft Foods for the Nine Months Ended September 30, 2008 (as revised) | $ | 2,706 | $ | 1.77 | ||||||
Change in net earnings attributable to Kraft Foods | ||||||||||
Operating gains | 0.18 | |||||||||
Lower charges from certain legal matters | 0.01 | |||||||||
Lower Restructuring Program costs | 0.16 | |||||||||
Change in unrealized gains on hedging activities | 0.08 | |||||||||
Lower asset impairment charges | 0.03 | |||||||||
Lower losses on divestitures, net | 0.03 | |||||||||
2008 favorable resolution of Brazilian value added tax claim | (0.03 | ) | ||||||||
Unfavorable foreign currency | (0.15 | ) | ||||||||
Lower interest and other expense, net | 0.01 | |||||||||
Other changes in taxes, including tax settlements | 0.06 | |||||||||
Change in net earnings from continuing operations | 0.38 | |||||||||
2008 gain on the split-off of ourPost cereals business | (0.56 | ) | ||||||||
Decreased earnings from discontinued operations | (0.07 | ) | ||||||||
Change in net earnings from discontinued operations | (0.63 | ) | ||||||||
Fewer shares outstanding | 0.04 | |||||||||
Total change in net earnings attributable to Kraft Foods | (395 | ) | (0.21 | ) | ||||||
Net Earnings Attributable to Kraft Foods for the Nine Months Ended September 30, 2009 | $ | 2,311 | $ | 1.56 | ||||||
Net Earnings | Diluted EPS | ||||||||||
Attributable to | Attributable to | ||||||||||
Kraft Foods | Kraft Foods | ||||||||||
(in millions, except per share data) | |||||||||||
Net Earnings Attributable to Kraft Foods for the Three | $ | 660 | $ | 0.45 | |||||||
Net earnings from discontinued operations | 59 | 0.04 | |||||||||
Net Earnings from continuing operations for the Three | 601 | 0.41 | |||||||||
Increases in operations | 0.08 | ||||||||||
Impact to operations from the Cadbury acquisition | 0.07 | ||||||||||
Change in unrealized gains on hedging activities | (0.05 | ) | |||||||||
Favorable foreign currency | 0.03 | ||||||||||
Higher interest and other expense, net(1) | (0.04 | ) | |||||||||
Changes in taxes (2) | 0.03 | ||||||||||
Higher shares outstanding | (0.04 | ) | |||||||||
Operating EPS(3) for the Three Months Ended March 31, 2010 | 0.49 | ||||||||||
Acquisition-related costs | (0.14 | ) | |||||||||
Acquisition-related interest and other expense, net | (0.10 | ) | |||||||||
Integration costs associated with the Cadbury acquisition | (0.02 | ) | |||||||||
U.S. health care legislation impact on deferred taxes | (0.08 | ) | |||||||||
Net Earnings from continuing operations for the Three | 239 | 0.15 | |||||||||
2010 gain on the divestiture of our Frozen Pizza business | 1,596 | 0.98 | |||||||||
Net earnings from discontinued operations | 48 | 0.03 | |||||||||
Net Earnings Attributable to Kraft Foods for the Three | $ | 1,883 | $ | 1.16 | |||||||
(1) Excludes impacts of acquisition-related interest and other expense, net. (2) Excludes the impacts of the U.S. health care legislation impact on deferred taxes. (3) Please see Non-GAAP Financial Measures section at the end of this item. | |||||||||||
Results of Operations by Reportable Segment
Effective January 2009, we began implementing changes to our operating structure based on ourOrganizing For Growthinitiative and the Kraft Foods Europe Reorganization. In line with our strategies, we are reorganizing our European operations to function on a pan-European centralized category management and value chain model, and we changed how we work in Europe in two key ways:
We transitioned our European Biscuit, Chocolate, Coffee and Cheese categories to fully integrated business units, further strengthening our focus on these core categories. To ensure decisions are made faster and closer to our customers and consumers, each category is fully accountable for its financial results, including marketing, manufacturing and R&D. Category leadership, based in Zurich, Switzerland, reports to the Kraft Foods Europe President. These business units now comprise the Kraft Foods Europe segment.
We aligned the reporting of our Central Europe operations into our Kraft Foods Developing Markets segment to help build critical scale in these countries. We operate a country-led model in these markets.
On March 26, 2009, we filed a Form 8-K with the SEC related to our new operating structure. Refer to the Form 8-K for additional information reconciling our prior period reportable segments to our new reportable segments.
29
We manage and report operating results through three commercialgeographic 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 geographic location. Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery, U.S. Snacks, Canada & North AmericaN.A. Foodservice, Kraft Foods Europe (formerly known as European Union) and Kraft Foods Developing Markets.
The following discussion comparesresults from our operating results of each of our reportable segments for the three months ended September 30, 2009 and 2008, and for the nine months ended September 30, 2009 and 2008.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
(in millions; 2008 revised) | ||||||||||||||||||
Net revenues: | ||||||||||||||||||
Kraft Foods North America: | ||||||||||||||||||
U.S. Beverages | $ | 754 | $ | 743 | $ | 2,373 | $ | 2,304 | ||||||||||
U.S. Cheese | 824 | 919 | 2,605 | 2,848 | ||||||||||||||
U.S. Convenient Meals | 1,135 | 1,081 | 3,418 | 3,202 | ||||||||||||||
U.S. Grocery | 778 | 802 | 2,569 | 2,506 | ||||||||||||||
U.S. Snacks | 1,232 | 1,274 | 3,717 | 3,736 | ||||||||||||||
Canada & N.A. Foodservice | 1,055 | 1,109 | 2,989 | 3,279 | ||||||||||||||
Kraft Foods Europe(1) | 2,070 | 2,338 | 6,081 | 7,239 | ||||||||||||||
Kraft Foods Developing Markets | 1,955 | 2,135 | 5,609 | 6,137 | ||||||||||||||
Net revenues | $ | 9,803 | $ | 10,401 | $ | 29,361 | $ | 31,251 | ||||||||||
(1) This segment was formerly known as European Union. | ||||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
(in millions; 2008 revised) | ||||||||||||||||||
Operating income: | ||||||||||||||||||
Segment Operating Income: | ||||||||||||||||||
Kraft Foods North America: | ||||||||||||||||||
U.S. Beverages | $ | 133 | $ | 83 | $ | 443 | $ | 363 | ||||||||||
U.S. Cheese | 166 | 148 | 463 | 373 | ||||||||||||||
U.S. Convenient Meals | 127 | 79 | 409 | 275 | ||||||||||||||
U.S. Grocery | 258 | 236 | 859 | 781 | ||||||||||||||
U.S. Snacks | 196 | 190 | 530 | 532 | ||||||||||||||
Canada & N.A. Foodservice | 156 | 153 | 386 | 391 | ||||||||||||||
Kraft Foods Europe | 211 | 115 | 565 | 348 | ||||||||||||||
Kraft Foods Developing Markets | 285 | 279 | 745 | 715 | ||||||||||||||
Unrealized gains / (losses) on hedging activities | 19 | (141 | ) | 140 | (38 | ) | ||||||||||||
Certain U.S. pension plan costs | (27 | ) | – | (121 | ) | – | ||||||||||||
General corporate expenses | (99 | ) | (112 | ) | (186 | ) | (209 | ) | ||||||||||
Amortization of intangibles | (6 | ) | (7 | ) | (15 | ) | (18 | ) | ||||||||||
Operating income | $ | 1,419 | $ | 1,023 | $ | 4,218 | $ | 3,513 | ||||||||||
As discussed in Note 14,Segment Reporting, our 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 (whichCadbury acquisition are a component of cost of sales), certain components ofreflected within our U.S. pension plan cost (which is a component of cost of salesSnacks, Canada & N.A. Foodservice, Kraft Foods Europe and marketing, administration and research costs), general corporate expenses (which are a component of marketing, administration and research costs) and amortization of intangibles for all periods presented. In 2009, we began excluding certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, the gains and losses on hedging activities are recorded within segment operating results. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.Kraft Foods Developing Markets segments.
30
U.S. Beverages
For the Three Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 754 | $ | 743 | $ | 11 | 1.5% | ||||||||||
Segment operating income | 133 | 83 | 50 | 60.2% | |||||||||||||
For the Nine Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 2,373 | $ | 2,304 | $ | 69 | 3.0% | ||||||||||
Segment operating income | 443 | 363 | 80 | 22.0% | |||||||||||||
Three Months Ended September 30: Net revenues increased $11 million (1.5%), due to higher net pricing (2.6 pp), partially offset by unfavorable volume/mix (1.1 pp). Higher net pricing was primarily related to ready-to-drink beverages, partially offset by lower input cost-driven pricing in coffee. The unfavorable volume/mix impact on net revenue was primarily driven by lower shipments in ready-to-drink beverages, including the discontinuation of a less profitable product line and management’s decision to forego unprofitable volume in coffee. These factors were partially offset by volume gains inStarbucks coffee andKool-Aid powdered beverages.
Segment operating income increased $50 million (60.2%), due primarily to lower costs due to the completion of the Restructuring Program, higher net pricing and lower raw material costs, partially offset by higher marketing support costs.
Nine Months Ended September 30: Net revenues increased $69 million (3.0%), due to favorable volume/mix (2.6 pp) and higher net pricing (0.4 pp). Favorable volume/mix was driven by higher shipments in all categories. Ready-to-drink beverages grew behind successful quality and marketing investments inCapri Sun,partially offset by the discontinuation of less profitable ready-to-drink product lines. Coffee volume increased primarily due to strong growth inMaxwell House, while powdered beverages volume increased due to gains inKool-Aid. These favorable factors were partially offset by unfavorable mix driven by the higher ready-to-drink volume. Higher net pricing was primarily related to ready-to-drink beverages, partially offset by lower input cost-driven pricing in coffee.
Segment operating income increased $80 million (22.0%), due primarily to lower costs due to the completion of the Restructuring Program, favorable volume/mix (higher shipments, net of unfavorable product mix), lower marketing, administration and research costs and higher net pricing, partially offset by higher marketing support costs.
U.S. Cheese | |||||||||||||||||
For the Three Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 824 | $ | 919 | $ | (95 | ) | (10.3% | ) | ||||||||
Segment operating income | 166 | 148 | 18 | 12.2% | |||||||||||||
For the Nine Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 2,605 | $ | 2,848 | $ | (243 | ) | (8.5% | ) | ||||||||
Segment operating income | 463 | 373 | 90 | 24.1% |
31
Three Months Ended September 30:
Net revenues decreased $95 million (10.3%), due to lower net pricing (17.1 pp), partially offset by favorable volume/mix (6.8 pp). Lower net pricing was due to input cost-driven pricing combined with increases in promotional spending. Favorable volume/mix was driven by higher shipments in sandwich cheese, cream cheese, natural cheese, recipe cheese and grated cheese.
Segment operating income increased $18 million (12.2%), due primarily to lower raw material costs (primarily lower dairy costs), favorable volume/mix (higher shipments and improved product mix) and lower manufacturing costs, partially offset by lower net pricing and higher marketing, administration and research costs (including higher marketing support costs).
Nine Months Ended September 30:
Net revenues decreased $243 million (8.5%), due to lower net pricing (7.2 pp) and unfavorable volume/mix (1.3 pp). Lower net pricing was due to lower input cost-driven pricing combined with increases in promotional spending. Net revenues also declined in the first nine months due to lower shipments, primarily due to cultured and natural cheese products.
Segment operating income increased $90 million (24.1%), due primarily to lower raw material costs (primarily lower dairy costs), lower manufacturing costs, lower costs due to the completion of the Restructuring Program and lower marketing, administration and research costs, partially offset by lower net pricing.
U.S. Convenient Meals
For the Three Months Ended | |||||||||||||||
September 30, | |||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||
(in millions; 2008 revised) | |||||||||||||||
Net revenues | $ | 1,135 | $ | 1,081 | $ | 54 | 5.0% | ||||||||
Segment operating income | 127 | 79 | 48 | 60.8% | |||||||||||
For the Nine Months Ended | |||||||||||||||
September 30, | |||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||
(in millions; 2008 revised) | |||||||||||||||
Net revenues | $ | 3,418 | $ | 3,202 | $ | 216 | 6.7% | ||||||||
Segment operating income | 409 | 275 | 134 | 48.7% |
Three Months Ended September 30:
Net revenues increased $54 million (5.0%), due to favorable volume/mix (5.9 pp), partially offset by lower net pricing (0.9 pp). Net revenues increased in meats, driven by higher shipments in bacon, hot dogs and cold cuts. In addition, meats net revenue growth reflected higher pricing, net of increased promotional spending. In pizza, net revenues increased due to volume growth in ourDiGiornoandCalifornia Pizza Kitchen premium brands, primarily behind theFor One product platform andDiGiorno Crispy Flatbread Pizza, as well as growth in ourJack’sandTombstone Pizza brands, partially offset by the unfavorable impact of the discontinuation of less profitable product lines. Also, pizza net revenue growth was negatively impacted by lower net pricing, driven by increased promotional spending.
Segment operating income increased $48 million (60.8%), due primarily to lower raw material costs, favorable volume/mix (higher shipments and improved product mix), lower costs due to the completion of the Restructuring Program and lower manufacturing costs, partially offset by higher marketing support costs, lower net pricing, and higher marketing, administration and research costs.
Nine Months Ended September 30:
Net revenues increased $216 million (6.7%), due to favorable volume/mix (3.5 pp) and higher net pricing (3.2 pp). Net revenues increased in meats, driven by higher net pricing, due to input cost-driven pricing, net of increased promotional spending. Also, total shipments increased slightly for the first nine months due to higher shipments in bacon, which offset the discontinuation of less profitable product lines. In pizza, net revenues increased due to the volume growth in ourDiGiornoandCalifornia Pizza Kitchen premium brands, primarily behind theFor One product platform andDiGiorno Crispy Flatbread Pizza, as well as growth in ourJack’sandTombstone Pizza brands, partially offset by the unfavorable impact of the discontinuation of less profitable product lines. Also contributing to higher pizza net revenues was higher input cost-driven pricing, net of increased promotional spending.
Segment operating income increased $134 million (48.7%), due primarily to higher net pricing, favorable volume/mix (improved product mix and higher shipments) and lower costs due to the completion of the Restructuring Program, partially offset by higher marketing support costs, higher marketing, administration and research costs and higher input costs (primarily higher raw material costs).
The following discussion compares our operating results of each of our reportable segments for the three months ended March 31, 2010 and 2009.
| ||||||||||||||
For the Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
2010 | 2009 | |||||||||||||
(in millions; 2009 revised) | ||||||||||||||
Net revenues: | ||||||||||||||
Kraft Foods North America: | ||||||||||||||
U.S. Beverages | $ | 821 | $ | 783 | ||||||||||
U.S. Cheese | 845 | 894 | ||||||||||||
U.S. Convenient Meals | 770 | 735 | ||||||||||||
U.S. Grocery | 816 | 818 | ||||||||||||
U.S. Snacks | 1,392 | 1,197 | ||||||||||||
Canada & N.A. Foodservice | 1,044 | 872 | ||||||||||||
Kraft Foods Europe | 2,709 | 1,928 | ||||||||||||
Kraft Foods Developing Markets | 2,921 | 1,752 | ||||||||||||
Net revenues | $ | 11,318 | $ | 8,979 | ||||||||||
For the Three Months Ended | ||||||||||||||
March 31, | ||||||||||||||
2010 | 2009 | |||||||||||||
(in millions; 2009 revised) | ||||||||||||||
Operating income: | ||||||||||||||
Kraft Foods North America: | ||||||||||||||
U.S. Beverages | $ | 172 | $ | 162 | ||||||||||
U.S. Cheese | 134 | 131 | ||||||||||||
U.S. Convenient Meals | 84 | 61 | ||||||||||||
U.S. Grocery | 286 | 262 | ||||||||||||
U.S. Snacks | 207 | 129 | ||||||||||||
Canada & N.A. Foodservice | 100 | 72 | ||||||||||||
Kraft Foods Europe | 289 | 146 | ||||||||||||
Kraft Foods Developing Markets | 359 | 207 | ||||||||||||
Unrealized gains / (losses) on | (38 | ) | 87 | |||||||||||
Certain U.S. pension plan costs | (56 | ) | (40 | ) | ||||||||||
General corporate expenses | (298 | ) | (36 | ) | ||||||||||
Amortization of intangibles | (33 | ) | (6 | ) | ||||||||||
Operating income | $ | 1,206 | $ | 1,175 | ||||||||||
As discussed in Note 16,Segment Reporting, management uses segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of our U.S. pension plan cost (which is a component of cost of sales and marketing, administration and research costs), general corporate expenses (which are a component of marketing, administration and research costs) and amortization of intangibles for all periods presented. We exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, we record the gains and losses on hedging activities within segment operating results. |
32
The 2010 increase in general corporate expenses was primarily due to acquisition-related transaction fees and integration costs. In the first quarter of 2010, we incurred $43 million in integration charges to combine and integrate Kraft Foods and Cadbury. We recorded these charges primarily within general corporate expenses. We also incurred charges associated with our cost savings initiatives of $24 million in the first quarter of 2010. We recorded these charges in operations, primarily within the segment operating income of Kraft Foods Europe and Canada & N.A. Foodservice. In addition, in the first quarter of 2010, we incurred $15 million in charges related to the Cadbury VIA program. We recorded these charges in operations, primarily within the segment operating income of Kraft Foods Europe and Kraft Foods Developing Markets.
U.S. Beverages | |||||||||||||||||
For the Three Months Ended | |||||||||||||||||
March 31, | |||||||||||||||||
2010 | 2009 | $ change | % change | ||||||||||||||
(in millions) | |||||||||||||||||
Net revenues | $ | 821 | $ | 783 | $ | 38 | 4.9% | ||||||||||
Segment operating income | 172 | 162 | 10 | 6.2% | |||||||||||||
Net revenues increased $38 million (4.9%), due to favorable volume/mix (4.1 pp) and higher net pricing (0.8 pp). The favorable volume/mix impact on net revenue was primarily driven by higher shipments in coffee, reflecting volume gains inMaxwell House andStarbucks. Higher net pricing was primarily related to ready-to-drink beverages, partially offset by lower input cost-driven pricing in coffee.
Segment operating income increased $10 million (6.2%), due primarily to favorable volume/mix, higher net pricing and lower raw material costs, partially offset by higher marketing support costs.
U.S. Cheese | |||||||||||||||||
For the Three Months Ended | |||||||||||||||||
March 31, | |||||||||||||||||
2010 | 2009 | $ change | % change | ||||||||||||||
(in millions) | |||||||||||||||||
Net revenues | $ | 845 | $ | 894 | $ | (49 | ) | (5.5% | ) | ||||||||
Segment operating income | 134 | 131 | 3 | 2.3% | |||||||||||||
Net revenues decreased $49 million (5.5%), due to lower net pricing (3.2 pp) and unfavorable volume/mix (2.3 pp). Lower net pricing was due to increased promotional spending. Unfavorable volume/mix was driven by lower shipments in natural cheese and snacking cheese, partially offset by higher shipments in cream cheese and recipe cheese.
Segment operating income increased $3 million (2.3%), due to lower raw material costs (primarily lower dairy costs) and lower manufacturing costs, partially offset by lower net pricing and higher marketing, administration and research costs (including higher marketing support costs).
U.S. Convenient Meals | |||||||||||||||||
For the Three Months Ended | |||||||||||||||||
March 31, | |||||||||||||||||
2010 | 2009 | $ change | % change | ||||||||||||||
(in millions; 2009 revised) | |||||||||||||||||
Net revenues | $ | 770 | $ | 735 | $ | 35 | 4.8% | ||||||||||
Segment operating income | 84 | 61 | 23 | 37.7% | |||||||||||||
Net revenues increased $35 million (4.8%), due to favorable volume/mix (4.7 pp) and higher net pricing (0.1 pp). Favorable volume/mix was driven by higher shipments in bacon, hot dogs andLunchables.
Segment operating income increased $23 million (37.7%), due primarily to favorable volume/mix (higher shipments, net of unfavorable product mix), lower manufacturing costs and lower marketing, administration and research costs. |
33
U.S. Grocery
For the Three Months Ended September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 778 | $ | 802 | $ | (24 | ) | (3.0% | ) | ||||||||
Segment operating income | 258 | 236 | 22 | 9.3% | |||||||||||||
For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 2,569 | $ | 2,506 | $ | 63 | 2.5% | ||||||||||
Segment operating income | 859 | 781 | 78 | 10.0% |
For the Three Months Ended | |||||||||||||||||
March 31, | |||||||||||||||||
2010 | 2009 | $ change | % change | ||||||||||||||
(in millions) | |||||||||||||||||
Net revenues | $ | 816 | $ | 818 | $ | (2 | ) | (0.2% | ) | ||||||||
Segment operating income | 286 | 262 | 24 | 9.2% | |||||||||||||
Net revenues decreased $2 million (0.2%), due to unfavorable volume/mix (1.0 pp), partially offset by higher net pricing (0.8 pp). Unfavorable volume/mix was due primarily to lower shipments in pourable dressings, spoonable dressings andJell-O ready-to-eat-desserts. Higher net pricing was primarily related toKraftmacaroni and cheese dinners and spoonable dressings, partially offset by increased promotional spending.
Segment operating income increased $24 million (9.2%), due primarily to lower raw material costs, higher net pricing and lower manufacturing costs, partially offset by higher marketing support costs.
U.S. Snacks | |||||||||||||||||
For the Three Months Ended | |||||||||||||||||
March 31, | |||||||||||||||||
2010 | 2009 | $ change | % change | ||||||||||||||
(in millions) | |||||||||||||||||
Net revenues | $ | 1,392 | $ | 1,197 | $ | 195 | 16.3% | ||||||||||
Segment operating income | 207 | 129 | 78 | 60.5% | |||||||||||||
Net revenues increased $195 million (16.3%), due to our Cadbury acquisition (15.1 pp) and favorable volume/mix (3.3 pp), partially offset by the impact of divestitures (1.2 pp) and lower net pricing (0.9 pp). Biscuits net revenues increased, driven by favorable volume/mix, partially offset by lower net pricing, due primarily to higher promotional spending. Biscuits volume/mix gains were due primarily to higher shipments inOreocookies,Ritzcrackers,Premium crackers andTriscuitcrackers. Snack bars net revenues decreased, primarily due to volume declines in breakfast bars. Snack nuts net revenues increased, as favorable volume/mix (higher shipments and improved product mix) more than offset lower net pricing, including increased promotional spending.
Segment operating income increased $78 million (60.5%), due primarily to our Cadbury acquisition, favorable volume/mix (higher shipments and improved product mix), lower raw material costs and lower manufacturing costs, partially offset by higher marketing support costs.
Canada & N.A. Foodservice | |||||||||||||||||
For the Three Months Ended | |||||||||||||||||
March 31, | |||||||||||||||||
2010 | 2009 | $ change | % change | ||||||||||||||
(in millions; 2009 revised) | |||||||||||||||||
Net revenues | $ | 1,044 | $ | 872 | $ | 172 | 19.7% | ||||||||||
Segment operating income | 100 | 72 | 28 | 38.9% |
Three Months Ended September 30:
Net revenues decreased $24 million (3.0%), due to unfavorable volume/mix (2.3 pp) and lower net pricing (0.7 pp). Unfavorable volume/mix primarily reflected the 2008 exit ofHandi-Snacks ready-to-eat desserts, as well as lower shipments inKraft macaroni and cheese dinners,Jell-O ready-to-eat-desserts andCool Whip. This was partially offset by growth in spoonable salad dressings and dry packaged desserts. In addition, net revenues decreased due to lower net pricing, driven by higher promotional spending.
Segment operating income increased $22 million (9.3%), due primarily to lower raw material costs and lower manufacturing costs, partially offset by higher marketing support costs and lower net pricing.
Nine Months Ended September 30:
Net revenues increased $63$172 million (2.5%), due to higher net pricing (4.3 pp), partially offset by unfavorable volume/mix (1.8 pp). Net revenues increased due to higher input cost-driven pricing across our key categories, primarily spoonable and pourable salad dressings, ready-to-eat desserts and dry packaged desserts. Net revenues growth was partially offset by lower volume, net of favorable product mix. This reflected the 2008 exit ofHandi-Snacks ready-to-eat desserts, as well as lower shipments in pourable and spoonable salad dressings, barbeque sauce andJell-O ready-to-eat-desserts, which were partially offset by growth inKraft macaroni and cheese dinners.
Segment operating income increased $78 million (10.0%), due primarily to higher net pricing, lower manufacturing costs, lower marketing, administration and research costs and lower costs due to the completion of the Restructuring Program, partially offset by higher raw material costs, higher marketing support costs and unfavorable volume/mix (lower shipments, net of improved product mix).
U.S. Snacks
For the Three Months Ended September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 1,232 | $ | 1,274 | $ | (42 | ) | (3.3% | ) | ||||||||
Segment operating income | 196 | 190 | 6 | 3.2% | |||||||||||||
For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 3,717 | $ | 3,736 | $ | (19 | ) | (0.5% | ) | ||||||||
Segment operating income | 530 | 532 | (2 | ) | (0.4% | ) |
Three Months Ended September 30:
Net revenues decreased $42 million (3.3%), due to lower net pricing (3.3 pp). Biscuits net revenues decreased, driven by lower net pricing, including higher promotional spending, partially offset by favorable volume/mix. Biscuits volume gains were due to higher shipments inChips Ahoy!cookies, Oreocookies,Ritzcrackers andTriscuitcrackers. Snack bars net revenues decreased, primarily due to volume declines in breakfast bars. Snack nuts net revenues decreased, as favorable volume/mix (improved product mix and higher shipments) was more than offset by lower net pricing, primarily due to increased promotional spending.
33
Segment operating income increased $6 million (3.2%), due primarily to lower manufacturing costs, lower raw material costs (including lower realized losses from certain commodity hedging activities) and lower marketing support costs, partially offset by lower net pricing and higher marketing, administration and research costs.
Nine Months Ended September 30:
Net revenues decreased $19 million (0.5%), due to unfavorable volume/mix (2.2 pp), partially offset by higher net pricing (1.7 pp). Biscuits net revenues increased, driven by higher input cost-driven pricing, partially offset by unfavorable volume/mix (unfavorable product mix, net of higher shipments). Biscuits volume gain was due to higher shipments inOreo cookies,RitzandTriscuit crackers andChips Ahoy!cookies. Snack bars net revenues decreased, primarily due to volume declines in breakfast bars. Snack nuts net revenues decreased, primarily driven by lower net pricing, due to higher promotional spending, and lower volume due to the recall of certain products containing pistachios in March 2009.
Segment operating income decreased $2 million (0.4%), due primarily to higher raw material costs (including lower realized gains from certain commodity hedging activities) and unfavorable volume/mix (unfavorable product mix and lower shipments, including the recall of certain products containing pistachios), partially offset by higher net pricing, lower marketing support costs, lower manufacturing costs, lower marketing, administration and research costs and lower costs due to the completion of the Restructuring Program.
Canada & N.A. Foodservice
For the Three Months Ended September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 1,055 | $ | 1,109 | $ | (54 | ) | (4.9% | ) | ||||||||
Segment operating income | 156 | 153 | 3 | 2.0% | |||||||||||||
For the Nine Months Ended September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 2,989 | $ | 3,279 | $ | (290 | ) | (8.8% | ) | ||||||||
Segment operating income | 386 | 391 | (5 | ) | (1.3% | ) |
Three Months Ended September 30:
Net revenues decreased $54 million (4.9%(19.7%), due to the significant impact of unfavorablefavorable foreign currency (3.9(11.2 pp), our Cadbury acquisition (7.7 pp), favorable volume/mix (0.5 pp) and lowerhigher net pricing (1.4 pp), partially offset by favorable volume/mix (0.4(0.3 pp). In Canada, net revenues increased, driven by favorable foreign currency, our Cadbury acquisition, higher net pricing and favorable volume/mix, reflecting volume gains across all retail businesses and higher net pricing, partially offset by unfavorable foreign currency.businesses. In N.A. Foodservice, net revenues decreased, driven by lower input cost-driven pricing and lower volume, due to industry wide declines in restaurant traffic, and the discontinuation of less profitable product lines, lower input cost-driven pricing and unfavorablepartially offset by favorable foreign currency.
Segment operating income increased $3$28 million (2.0%(38.9%), due primarily to favorable foreign currency, lower inputmanufacturing costs (primarily lower raw material costs) and lower costs due to the completion of the Restructuring Program,our Cadbury acquisition, partially offset by lower net pricing, unfavorable foreign currency, higher marketing support costs, unfavorable volume/mix (unfavorable product mix partially offset by higher shipments) and higher marketing, administration and research costs.
Nine Months Ended September 30:
Net revenues decreased $290 million (8.8%), due to the significant impact(higher shipments, net of unfavorable foreign currency (8.5 pp) and unfavorable volume/mix (1.1 pp), partially offset by higher net pricing (0.8 pp)mix). In Canada, net revenues decreased, driven by unfavorable foreign currency, partially offset by volume gains across all retail businesses and higher net pricing. In N.A. Foodservice, net revenues decreased, driven by lower volume, due to industry wide declines in restaurant traffic and the discontinuation of less profitable product lines, unfavorable foreign currency and lower net pricing.
Segment operating income decreased $5 million (1.3%), due primarily to unfavorable foreign currency, higher manufacturing costs and unfavorable volume/mix (lower volume, net of improved product mix), partially offset by lower costs due to the completion of the Restructuring Program, higher net pricing, lower marketing, administration and research costs and lower raw material costs.
34
Kraft Foods Europe
For the Three Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 2,070 | $ | 2,338 | $ | (268 | ) | (11.5% | ) | ||||||||
Segment operating income | 211 | 115 | 96 | 83.5% | |||||||||||||
For the Nine Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 6,081 | $ | 7,239 | $ | (1,158 | ) | (16.0% | ) | ||||||||
Segment operating income | 565 | 348 | 217 | 62.4% |
Three Months Ended September 30:
For the Three Months Ended March 31, | |||||||||||||||
2010 | 2009 | $ change | % change | ||||||||||||
(in millions) | |||||||||||||||
Net revenues | $ | 2,709 | $ | 1,928 | $ | 781 | 40.5% | ||||||||
Segment operating income | 289 | 146 | 143 | 97.9% |
Net revenues decreased $268increased $781 million (11.5%(40.5%), due to our Cadbury acquisition (30.7 pp), the significant impact of unfavorablefavorable foreign currency (8.7(7.8 pp) and favorable volume/mix (4.8 pp), unfavorable volume/mix (2.4partially offset by lower net pricing (2.3 pp) and the impact of divestitures (2.0 pp), partially offset by higher net pricing (1.6(0.5 pp). UnfavorableFavorable foreign currency primarily reflected the strength of the U.S. dollar versus the euro and British pound.pound versus the U.S. dollar. In addition, volume declinesvolume/mix gains in biscuits, chocolate, coffee and cheese and the discontinuation of less profitable product linescoffee drove net revenues lower.higher. These unfavorablefavorable revenue drivers were partially offset by higherlower net pricing, primarily in chocolatecheese, coffee and coffee.biscuits.
Segment operating income increased $96$143 million (83.5%(97.9%), due primarily to a 2008 asset impairment charge related to the divestiture of our Nordic and Baltic snacks operation, higher net pricing, lower costs due to the completion of the Restructuring Program, lower manufacturing costs andCadbury acquisition, favorable volume/mix (improved product mix net of lowerand higher shipments). These, favorable variances were partially offset by unfavorable foreign currency, higher marketing support costs, higher raw materiallower manufacturing costs and higher non-recurring costs associated with the Kraft Foods Europe Reorganization discussed below.
Nine Months Ended September 30:
Net revenues decreased $1,158 million (16.0%), due to the significant impact of unfavorable foreign currency (12.3 pp), unfavorable volume/mix (3.7 pp) and the impact of divestitures (2.5 pp), partially offset by higher net pricing (2.5 pp). Unfavorable foreign currency primarily reflected the strength of the U.S. dollar versus the euro and British pound. In addition, volume declines in coffee, chocolate, biscuits and cheese and the discontinuation of less profitable product lines drove net revenues lower. These unfavorable revenue drivers were partially offset by higher net pricing, primarily in chocolate, coffee and biscuits.
Segment operating income increased $217 million (62.4%), due primarily to higher net pricing, lower costs due to the completion of the Restructuring Program (including the reversal of prior year costs), the 2008 net loss on the divestitures of several operations in Spain, a 2008 asset impairment charge related to the divestiture of our Nordic and Baltic snacks operation and lower manufacturingraw material costs. These favorable variances were partially offset by unfavorable foreign currency, higher non-recurring costs associated with the Kraft Foods Europe Reorganization discussed below, unfavorable volume/mix (lower shipments,lower net of improved product mix),pricing and higher marketing support costs, the net loss on the divestiture of a plant in Spain, the impact of divestitures, higher raw material costs and an asset impairment charge to write-off an investment in Norway.costs.
Kraft Foods Europe Reorganization – We are in the processThe reorganization of reorganizing our European operations to function on a pan-European centralized category management and value chain model.model was completed in 2009 for our Chocolate, Coffee and Cheese categories. Significant progress has been made related to the integration of our Europe Biscuits business, and we expect the integration to be completed by mid-2010. The European Principal Company (“EPC”) will manage the European categories centrally and make decisions for all aspects of the value chain, except for sales and distribution. The European subsidiaries will execute sales and distribution locally, and the local production companies will act as toll manufacturers on behalf of the EPC. The EPC legal entity has been incorporated as Kraft Foods Europe GmbH in Zurich, Switzerland. As part of thisthe reorganization, we recorded chargesincurred $15 million of $63 million inother project savings costs during the first nine monthsquarter of 2009, related to severance2010 and $17 million of other non-recurring costs. These charges were recorded within cost of sales and marketing, administration and research costs. Inproject savings costs during the first nine monthsquarter of 2008, we incurred $27 million of implementation costs and $6 million of non-recurring costs. The implementation costs were recorded as part of our overall Restructuring Program and the other non-recurring costs2009. These charges were recorded within marketing, administration and research costs in the first nine months of 2008.costs. Management believes the disclosure of implementation and other non-recurring chargesproject savings costs provides readers of our financial statements greater transparency to the total costs of our Kraft Foods Europe Reorganization. We expect to incur approximately $25 million in additional charges in 2010 to complete the integration of the Europe Biscuits business.
35
Kraft Foods Developing Markets
For the Three Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 1,955 | $ | 2,135 | $ | (180 | ) | (8.4% | ) | ||||||||
Segment operating income | 285 | 279 | 6 | 2.2% | |||||||||||||
For the Nine Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2009 | 2008 | $ change | % change | ||||||||||||||
(in millions; 2008 revised) | |||||||||||||||||
Net revenues | $ | 5,609 | $ | 6,137 | $ | (528 | ) | (8.6% | ) | ||||||||
Segment operating income | 745 | 715 | 30 | 4.2% |
Three Months Ended September 30:
For the Three Months Ended March 31, | |||||||||||||||
2010 | 2009 | $ change | % change | ||||||||||||
(in millions) | |||||||||||||||
Net revenues | $ | 2,921 | $ | 1,752 | $ | 1,169 | 66.7% | ||||||||
Segment operating income | 359 | 207 | 152 | 73.4% |
Net revenues decreased $180increased $1,169 million (8.4%(66.7%), due to our Cadbury acquisition (49.2 pp), the significant impact of unfavorablefavorable foreign currency (15.8(7.7 pp), the absence of the 2008 favorable resolution of a Brazilian value added tax claim (1.0volume/mix (5.9 pp) and higher net pricing (4.8 pp), partially offset by the impact of divestitures (0.7 pp), partially offset by higher net pricing (8.4 pp) and favorable volume/mix (0.7(0.9 pp). In Central and Eastern Europe, Middle East and Africa, net revenues decreased,increased, driven by unfavorablefavorable foreign currency, and unfavorable volume/mix (lower shipments, net of favorable product mix), partially offset by higher net pricing across most of the region.region and favorable volume/mix (higher shipments, net of unfavorable product mix). In Latin America, net revenues decreased,increased, driven by unfavorable foreign currency and the absence of the 2008 favorable resolution of a Brazilian value added tax claim, partially offset by higher net pricing across the region, and favorable volume/mix due to improved product mix,(higher shipments, net of lower shipments.unfavorable product mix) and favorable foreign currency, partially offset by the impact of divestitures. In Asia Pacific, net revenues increased, due primarily to higher net pricing across the region and favorable volume/mix, which was driven by higher shipments, and improved product mix, primarily in Southeast Asia, China and Australia/New Zealand partially offset by unfavorableand favorable foreign currency.
35
Segment operating income increased $6$152 million (2.2%(73.4%), due primarily to our Cadbury acquisition, higher net pricing, favorable volume/mix (improved(higher shipments and improved product mix, net of lower shipments)mix), lower marketing support costs and lower costs due to the completion of the Restructuring Program, partially offset by higher manufacturing costs, unfavorable foreign currency, higher raw material costs, the absence of the 2008 favorable resolution of a Brazilian value added tax claim and higher marketing, administration and research costs.
Nine Months Ended September 30:
Net revenues decreased $528 million (8.6%), due to the significant impact of unfavorable foreign currency (17.9 pp), the absence of the 2008 favorable resolution of a Brazilian value added tax claim (1.1 pp) and the impact of divestitures (0.4 pp), partially offset by higher net pricing (10.3 pp) and favorable volume/mix (0.5 pp). In Central and Eastern Europe, Middle East and Africa, net revenues decreased, driven by unfavorable foreign currency and unfavorable volume/mix (lower shipments, net of improved product mix),lower raw material costs. These favorable variances were partially offset by higher net pricing across the region. In Latin America, net revenues decreased, driven by unfavorable foreign currency and the absence of the 2008 favorable resolution of a Brazilian value added tax claim, partially offset by higher net pricing across the region and favorable volume/mix (lower shipments, net of improved product mix). In Asia Pacific, net revenues decreased, due primarily to unfavorable foreign currency, partially offset by higher net pricing across the region and favorable volume/mix, which was driven by improved product mix, net of lower shipments, primarily in Southeast Asia and Australia/New Zealand.
Segment operating income increased $30 million (4.2%), due primarily to higher net pricing, favorable volume/mix (improved product mix, net of lower shipments) and lower costs due to the completion of the Restructuring Program, partially offset by higher raw material costs, unfavorable foreign currency, higher manufacturing costs, the absence of the 2008 favorable resolution of a Brazilian value added tax claim, higher marketing, administration and research costs, higher marketing support costs and the impact of divestitures.
Critical Accounting Policieshigher manufacturing costs
There were no significant changes to our critical accounting policies disclosed in our revised Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2008, other than those discussed below.
Inventories:Venezuela –
In the fourth quarter of 2009, the Venezuelan economy was classified as highly inflationary under U.S. GAAP. Effective January 1, 2009,2010, we changedare accounting for our methodVenezuelan subsidiaries under highly inflationary accounting rules, which principally means all transactions are recorded in U.S. dollars. Venezuela has three exchange rates: the official rate, the consumer staples rate and the secondary (or parallel) rate. We have historically used both the official rate and the secondary rate to translate our Venezuelan operations, based on the nature of valuing ourthe operations of each individual subsidiary. Additionally, we previously carried cash that we had exchanged into U.S. inventories to the average cost method. In prior years, principally all U.S. inventories were valueddollars using the last-in, first-out (“LIFO”) method. With thissecondary market at that rate. Upon the change to highly inflationary accounting, we value all of our inventorieswere then required to translate those U.S. dollars on hand using the average cost method.official rate, which resulted in a charge of $34 million in the first quarter of 2010.
On January 8, 2010, the Venezuelan government devalued its currency. Accordingly, we were required to revalue our net assets in Venezuela, and we recorded an insignificant loss in the first quarter of 2010. We used the LIFO methodexpect our 2010 full year operating results to determine the cost of 35% of inventories at December 31, 2008. We believe that the average cost method of accounting for U.S. inventories is preferable and will improve financial reportingbe negatively impacted by better matching revenues and expenses to current costs, by better aligning our external reporting with our competitors, and by aligning our external reporting with our tax basis of accounting. We revised prior years’ financial statements to conform to the change in accounting policy.
36
Refer to Note 1,Summary of Significant Accounting Policies, for further details of this change in accounting policy.
Financial Instruments:
Interest rate cash flow and fair value hedges – We manage interest rate volatility by modifying the repricing or maturity characteristics of certain liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As$100 million as a result of interest rate fluctuations, hedged fixed-rate liabilities appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation is expectedthe change to be substantially offset by our gains or losses onhighly inflationary accounting and the derivative instruments that are linked to these hedged liabilities.
We use derivative instruments, including interest rate swaps that have indices related to the pricing of specific liabilities as part of our interest rate risk management strategy. As a matter of policy, we do not use highly leveraged derivative instruments for interest rate risk management. We use interest rate swaps to economically convert a portion of our nonprepayable fixed-rate debt into variable rate debt. Under the interest rate swap contracts, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts, which is calculated based on an agreed-upon notional amount. We also use interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment.
For those derivative instruments that are highly effective and qualify for hedge accounting treatment, we either record the impacts in current period earnings or defer the effective portion of unrealized gains and losses as a component of accumulated other comprehensive earnings / (losses), depending on whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge. For fair value hedges, we record both (i) the gains or losses on interest rate swaps and (ii) the corresponding changes in fair valuedevaluation of the hedged long-term debt directly as a component of interest and other expense, net. For cash flow hedges, we recognize the deferred portion as a component of interest and other expense, net when we incur the interest expense. The ineffective portion is directly recorded as a component of interest and other expense, net. For the derivative instruments that we consider economic hedges but do not designate for hedge accounting treatment, we recognize gains and losses directly as a component of interest and other expense, net.Venezuelan bolivar.
Commodity Trends
We are a major purchaser of dairy, coffee, cocoa, wheat, corn products, soybean and vegetable oils, nuts, meat products, and sugar and other sweeteners. We also use significant quantities of plastic, glass and cardboard to package our products, and natural gas for our factories and warehouses. We continually monitor worldwide supply and cost trends of these commodities so we can act quickly to obtain ingredients and packaging needed for production.
During the first nine monthsquarter of 2009,2010, our aggregate commodity costs increaseddecreased primarily as a result of higher cocoa, sugar, grain, oil, energy and oildairy costs. OurIn the first quarter of 2010, our commodity costs were approximately $180 million higher for the nine months ended September 30, 2009, even though they were approximately $240$80 million lower forthan the three months ended September 30, 2009, withfirst quarter of 2009. The costs of grain, oil, energy, dairy, cocoa and sugar grain and oil costs accountingaccounted for the majority of the overall volatility in prices. Overall, we expect commodity prices to continue to be volatile over the remainder of the year.
Liquidity
We believe that our cash from operations, our existing $4.4$4.5 billion revolving credit facility (which supports our commercial paper program) and our authorized long-term financing will provide sufficient liquidity to meet our working capital needs, (including the cash requirements of the Restructuring Program), planned capital expenditures, future contractual obligations and payment of our anticipated quarterly dividends. We continue to use our commercial paper program and primarily uncommitted international credit lines for daily funding requirements. We also use short-term intercompany loans from foreign subsidiaries to improve financial flexibility, which have been made more feasible by recent, temporary U.S. tax law changes.flexibility. Overall, we do not expect any impactnegative effects to our funding sources that would have a material effect on our liquidity.
Net Cash Provided by / (Used in) Operating Activities:
During the first nine monthsquarter of 2009,2010, net cash used in operating activities provided $3,269was $5 million, net cash, compared with $2,529$423 million inprovided during the first nine monthsquarter of 2008.2009. The increasedecrease in operating cash flows primarily relates to higher working capital improvementscosts over the prior year (primarily due to improved inventory positions, partially offset by higher interest payments, principally due toacquisition-related financing fees and the first annual payment on our euro notes)timing of receivables). The increasedecrease in operating cash flows was partially offset by higher pension contributions.increased earnings.
37
During the first nine monthsquarter of 2009,2010, we contributed $225$11 million to our U.S. pension plans (including a $200 million contribution made on May 1, 2009) and $124$80 million to our non-U.S. pension plans. We plan to make further contributions of approximately $15$40 million to our U.S. plans and approximately $45$200 million to our non-U.S. plans during the remainder of 2009.2010. We expect to fund these contributions from operations.
36
Net Cash Used in Investing Activities:
During the first nine monthsquarter of 2009,2010, net cash used in investing activities was $700 million,$6.1 billion, compared with $924$174 million in the first nine monthsquarter of 2008.2009. The decreaseincrease in cash used in investing activities primarily relates to lower capital expenditures and a payment made to Groupe Danone S.A. in 2008 to refund excess cash received in the Cadbury acquisition, ofLU Biscuit, partially offset by lowerhigher proceeds from divestitures. During the first nine monthsquarter of 2009,2010, we divested a juice operationpaid $9.6 billion in Brazilcash for the Cadbury acquisition, and a plant in Spain and received $6 million in proceeds. During the first nine months of 2008, we received $76 million$3.7 billion in net proceeds onfrom the divestitures of several operations in Spain and disbursed $38 million for transaction fees related to the split-offsale of thePost cereals Frozen Pizza business.
Capital expenditures, which were funded by operating activities, were $749$241 million in the first nine monthsquarter of 2009,2010, compared with $901$207 million in the first nine monthsquarter of 2008.2009. Cadbury accounted for $67 million of first quarter 2010 capital expenditures. We expect full-year capital expenditures to be in line with 2008 expenditures of $1.4approximately $1.7 billion, including capital expenditures for Cadbury and required for systems’ investments. We expect to fund these expenditures from operations.
Net Cash Used inProvided by / (Used in) Financing Activities:
During the first nine monthsquarter of 2009,2010, net cash used inprovided by financing activities was $961 million,$8.0 billion, compared with $1,403$294 million used in the first nine monthsquarter of 2008.2009. The net cash provided by financing activities in the first quarter of 2010 primarily related to proceeds from our long-term debt issuance of $9.4 billion, partially offset by $708 million in net repayments of short-term borrowings and $653 million in dividends paid. The net cash used in financing activities in the first nine monthsquarter of 2009 primarily related to $1.3 billion$426 million in dividends paid, and the redemption of our $200 million debenture, partially offset by $540$145 million in net commercial paper issuances. The net cash used in financing activities in the first nine monthsissuances of 2008 primarily related to $5.9 billion in payments made on the bridge facility used to fund ourLU Biscuit acquisition, $1.2 billion in dividends paid and $777 million in Common Stock share repurchases, partially offset by $6.4 billion in proceeds from our long-term debt offerings.short-term borrowings.
In November 2009, $750August 2010, $500 million of our long-term debt matures, and in AugustDecember 2010, $500£77 million (approximately $117 million) of our long-term debt matures. We expect to fund the repayments with cash from operations or through the issuance of commercial paper.short-term borrowings.
Borrowing Arrangements:
We maintain a revolving credit facility that we have historically used for general corporate purposes, including for working capital purposes, and to support our commercial paper issuances. We intend to renegotiate our $4.4Our $4.5 billion three-year senior unsecured revolving credit facility before it expires in April 2010.November 2012. No amounts have been drawn on thisthe facility. In October 2008, one of the syndicate banks under our
The revolving credit facility Lehman Commercial Paper, Inc., filed for bankruptcy protection. In September 2009,agreement includes a covenant that we terminated Lehman’s commitment under our credit facility. We do not expect to replace Lehman, and our credit facility capacity was reduced by their commitment of approximately $136 million. Accordingly, our credit facility was reduced to approximately $4.4 billion. We do not expect this to have a current or future adverse affect on our liquidity.
We must maintain a net worthminimum total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), of at least $20.0$28.5 billion. This covenant increased by $5.5 billion under the termsdue to our Cadbury acquisition. It will continue to increase by 75% of any increase in our revolving credit facility.total shareholders’ equity if we refinance certain indebtedness. At September 30, 2009,March 31, 2010, our net worthtotal shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), was $25.1$38.6 billion. We expect to continue to meet this covenant. The revolving credit facility hasagreement also contains customary representations, covenants and events of default. However, there are no other financial covenants, credit rating triggers or provisions that could require us to post collateral as security.
Cadbury maintains a three-year, £450 million senior unsecured revolving credit facility that expires in June 2012. No amounts have been drawn on the facility, and we currently maintain it for general corporate purposes. This revolving credit agreement includes a covenant that our subsidiary, Cadbury plc Group, maintain a minimum EBITDA to adjusted net interest ratio of 3.5 to 1 and a maximum net debt to adjusted EBITDA ratio of 3.6 to 1. At March 31, 2010, we were in compliance with and expect to continue to meet these covenants.
In addition to the above, some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $1.5$2.2 billion at September 30, 2009.March 31, 2010. Borrowings on these lines amounted to $213$287 million at September 30, 2009March 31, 2010 and $291$191 million at December 31, 2008.2009.
Under the terms
37
As part of theour Cadbury acquisition, on November 9, 2009, we entered into an agreement for a 364-day senior unsecured bridge facility agreement we used to acquireLU Biscuit (“LU Biscuit(the “Cadbury Bridge Facility”),. During the first quarter of 2010, we were required to repay borrowingsborrowed £807 million under the facility with the net cash proceeds from debt offerings having a maturity of greater than one year. As such, weCadbury Bridge Facility, and later repaid the €3.8 billion outstanding at December 31, 2007 (approximately $5.9 billionit ($1,205 million at the time of repayments)repayment) with proceeds from the divestiture of our May 22, 2008 and March 20, 2008 debt issuances discussed below.Frozen Pizza business. Upon repayment, this facilitythe Cadbury Bridge Facility was terminated.
Debt:
Our total debt was $20.7$31.0 billion at September 30, 2009March 31, 2010 and $20.3$19.0 billion at December 31, 2008.2009. Our debt-to-capitalization ratio was 0.450.48 at September 30, 2009March 31, 2010 and 0.480.42 at December 31, 2008.2009. At March 31, 2010, the weighted-average term of our outstanding long-term debt was 10.0 years.
On September 3, 2009, we redeemed our November 2011, 7% $200 million debenture at par value. Upon redemption, we recorded a loss of $14 million within interest and other expense, net which represented the write-off of the remaining discount.
38
On May 22, 2008,February 8, 2010, we issued $2.0$9.5 billion of senior unsecured notes and on March 20, 2008, we issued €2.85 billion (approximately $4.5 billion)at a weighted-average effective rate of senior unsecured notes. We5.364% and used the net proceeds from these issuances ($1,967 million in May9,379 million) to finance the Cadbury acquisition and approximately $4,470 million in March) for general corporate purposes, including the repayment of borrowings under ourLUBiscuit Bridge Facility and other short-term borrowings.purposes.
TheThese notes from the above issuances include covenants that restrict our ability to incur debt secured by liens above a certain threshold. We are also required tomust offer to purchase these notes at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of repurchase, if we experience both of the following:following occur:
(i) | a “change of control” triggering event; and |
(ii) | a downgrade of these notes below an investment grade rating by each of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services and Fitch, Inc. within a specified period. |
The fair value of the long-term debt we acquired as part of our Cadbury acquisition was $2,432 million at February 2, 2010. The acquired debt has the following terms:
£77 million (approximately $117 million) total principal notes due December 1, 2010 at a fixed, annual interest rate of 4.875%.
C$150 million (approximately $147 million) Canadian bank loan agreement expiring August 30, 2012 at a variable interest rate. The interest rate at March 31, 2010 was 0.795%.
$1.00 billion total principal notes due October 1, 2013 at a fixed, annual interest rate of 5.125%.
£300 million (approximately $456 million) total principal notes due December 11, 2014 at a fixed, annual interest rate of 5.375%.
£350 million (approximately $532 million) total principal notes due July 18, 2018 at a fixed, annual interest rate of 7.250%.
We expect to continue to comply with our long-term debt covenants. Refer to our revised Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2008Note 7,Debt, for further details of these debt offerings.
WeFrom time to time we refinance long-term and short-term debt from time to time.debt. The nature and amount of our long-term and short-term debt and the proportionate amount of each varies as a result of future business requirements, market conditions and other factors. At September 30, 2009,March 31, 2010, we had approximately $3.0 billion remaining in general long-term financing authority and £0.2 billion remaining in Cadbury financing authority from our Board of Directors.
Debt Ratings:
At September 30, 2009,May 7, 2010, our debt ratings by major credit rating agencies were:
Short-term | Long-term | Short-term | Long-term | |||||||||
Moody’s | P-2 | Baa2 | P-2 | Baa2 | ||||||||
Standard & Poor’s | A-2 | A-2 | BBB | |||||||||
Fitch | F3 | BBB- |
During the first quarter, our debt ratings were downgraded due to the increased level of our indebtedness incurred in connection with our Cadbury acquisition. On February 2, 2010, Moody’s affirmed our short-term debt rating of P-2 and our long-term debt rating Baa2, and revised the outlook from stable to negative. On February 2, 2010, Standard & Poor’s affirmed our short-term debt rating of A-2 and downgraded our long-term debt rating from BBB+ to BBB-, with a positive outlook. On January 20, 2010, Fitch downgraded our short-term debt rating from F2 to F3 and downgraded our long-term debt rating from BBB to BBB-, with a stable outlook. Since the acquisition, Cadbury’s debt ratings have remained unchanged. As of November 3, 2009,May 7, 2010, Moody’s and Fitch had ourCadbury’s short-term and long-term debt ratings on negative watch, and Standard & Poor’s had ourCadbury’s long-term debt rating on negative watch. Our debt ratings were placed on negative watch due to our September 7, 2009 Possible Offer to the Board of Cadbury plc. SeeRecent Developments for further details.
38
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We have no off-balance sheet arrangements other than the guarantees and contractual obligations that are discussed below and in our revised Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2008.below.
Guarantees:
As discussed in Note 11,13,Commitments and Contingencies, 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 September 30, 2009,March 31, 2010, the carrying amount of our third-party guarantees on our condensed consolidated balance sheet and the maximum potential payment under our third-party guarantees was $30$29 million. Substantially all of these guarantees expire at various times through 2018.
In addition, at September 30, 2009,March 31, 2010, we were contingently liable for $281had contingent liabilities of $353 million ofrelated to guarantees related toof our own performance. These include letters of credit related to dairy commodity purchases and guarantees related to the payment of custom duties and taxes, and other letters of credit.
Guarantees do not have, and we do not expect them to have, a material effect on our liquidity.
Aggregate Contractual Obligations:
On September 3, 2009, we redeemedThe following table summarizes our November 2011, 7% $200 million debenture at par value. Other than the early redemption, there were no material changes to our aggregate contractual obligations disclosed in our From 10-K for the year ended Decemberat March 31, 2008.2010:
Payments Due for the year ended March 31, | |||||||||||||||
2016 and | |||||||||||||||
Total | 2011 | 2012-13 | 2014-15 | Thereafter | |||||||||||
(in millions) | |||||||||||||||
Long-term debt(1) | $ | 30,063 | $ | 624 | $ | 7,101 | $ | 4,906 | $ | 17,432 | |||||
Interest expense(2) | 19,074 | 1,749 | 3,109 | 2,444 | 11,772 | ||||||||||
Capital leases (3) | 75 | 13 | 22 | 13 | 27 | ||||||||||
Operating leases(4) | 1,554 | 363 | 539 | 317 | 335 | ||||||||||
Purchase obligations: (5) | |||||||||||||||
Inventory and production costs | 6,757 | 5,082 | 1,217 | 440 | 18 | ||||||||||
Other | 1,367 | 885 | 337 | 139 | 6 | ||||||||||
8,124 | 5,967 | 1,554 | 579 | 24 | |||||||||||
Other long-term liabilities (6) | 2,256 | 232 | 477 | 449 | 1,098 | ||||||||||
$ | 61,146 | $ | 8,948 | $ | 12,802 | $ | 8,708 | $ | 30,688 | ||||||
(1) | Amounts represent the expected cash payments of our long-term debt and do not include unamortized bond premiums or discounts. |
(2) | Amounts represent the expected cash payments of our interest expense on our long-term debt. Interest calculated on our variable-rate debt was forecasted using a LIBOR rate forward curve analysis as of March 31, 2010. Interest calculated on our euro notes was forecasted using the euro to U.S. dollar exchange rate as of March 31, 2010. An insignificant amount of interest expense was excluded from the table for a portion of our foreign debt due to the complexities involved in forecasting expected interest payments. |
(3) | Amounts represent the expected cash payments of our capital leases, including the expected cash payments of interest expense of approximately $17 million on our capital leases. |
(4) | Operating leases represent the minimum rental commitments under non-cancelable operating leases. |
(5) | Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 days). Any amounts reflected on the condensed consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above. |
39
(6) | Other long-term liabilities primarily consist of estimated future benefit payments for our postretirement health care plans through March 31, 2020 of approximately $2.2 billion. We are unable to reliably estimate the timing of the payments beyond March 31, 2020; accordingly, they are excluded from the above table. In addition, the following long-term liabilities included on the condensed consolidated balance sheet are excluded from the table above: accrued pension costs, income taxes, insurance accruals and other accruals. We are unable to reliably estimate the timing of the payments (or contributions beyond 2010, in the case of accrued pension costs) for these items. We contributed $91 million to our pension plans in the first quarter of 2010, and we plan to make further contributions of approximately $240 million during the remainder of the year. We also expect that our net pension cost will increase by approximately $50 million in 2010 to approximately $440 million. As of March 31, 2010, our total liability for income taxes, including uncertain tax positions and associated accrued interest and penalties, was $2.9 billion, of which we expect to pay approximately $1.5 billion in the next 12 months. During 2009, we reached an agreement with the IRS on specific matters related to years 2000 through 2003. Our returns for those years are still under examination, and the IRS recently began its examination of years 2004 through 2006. We are not able to reasonably estimate the timing of future cash flows beyond 12 months due to uncertainties in the timing of these and other tax audit outcomes. |
Equity and Dividends
Stock Repurchases:
Our $5.0 billion share repurchase authority expired on March 30, 2009. Prior to the expiration, we repurchased 130.9 million shares for $4.3 billion under the program. We have not repurchased any shares in 2009.
39
Stock Plans:
At our annual meeting of shareholders held on May 20, 2009, our shareholders approved the Kraft Foods Inc. Amended and Restated 2005 Performance Incentive Plan. The amended plan includes, among other provisions, a limit on the number of shares that may be granted under the plan, vesting restrictions and a prohibition on stock option repricing. Under the amended plan, we are authorized to issue a maximum of 168.0 million shares of our Common Stock. As of the effective date of the amendment, there were 92.1 million shares available to be granted under the plan, of which no more than 27.5 million shares may be awarded as restricted or deferred stock.
In January 2009,2010, we granted 1.41.6 million shares of stock in connection with our long-term incentive plan. Theplan, and the market value per share was $27.00$27.33 on the date of grant. The unvested shares have no voting rights and do not pay dividends.
In February 2009,2010, as part of our annual incentiveequity program, we issued 4.12.5 million shares of restricted and deferred stock to eligible U.S.employees, and non-U.S. employees. Thethe market value per restricted or deferred share was $23.64$29.15 on the date of grant. Also, as partDuring the first quarter of our annual incentive program,2010, we granted 16.3issued an additional 0.6 million stock options to eligible U.S. and non-U.S. employees at an exercise price of $23.64.
We also issued 0.2 million off-cycle shares of restricted and deferred stock, duringand the first nine months of 2009. The weighted-average market value per restricted or deferred share was $25.45$29.22 on the date of grant. In aggregate, we issued 5.74.7 million restricted and deferred shares during the first nine monthsquarter of 2009,2010, including those issued as part of our long-term incentive plan.
As part of our annual equity program, we also granted 15.0 million stock options to eligible employees in February 2010 at an exercise price of $29.15. During the first quarter of 2010, we granted an additional 0.7 million stock options at a weighted-average exercise price of $29.54. In aggregate, we granted 15.7 million stock options in the first quarter of 2010.
Dividends:
We paid dividends of $1,284$653 million in the first nine monthsquarter of 20092010 and $1,236$426 million in the first nine monthsquarter of 2008.2009. The 3.9%53.3% increase reflects the $224 million payment of a higherten pence per share dividend rate in 2009, partially offset by a lower number of sharesthat Cadbury declared and accrued on the Cadbury Shares that were outstanding resulting fromat the split-offtime of thePost cereals business. acquisition. The present annualized dividend rate is $1.16 per common share. The declaration of dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net earnings, financial condition, cash requirements, future prospects and other factors that our Board of Directors deems relevant to its analysis and decision making.
Recent Developments
On September 7, 2009, we disclosed that we approached the Board of Cadbury plc (“Cadbury”) with a proposal to combine the two companies. The Board of Cadbury has rejected this proposal. We remain interested in working toward a recommended transaction. We proposed an offer for Cadbury (the “Possible Offer”) of 300 pence in cash and 0.2589 new Kraft Foods shares per Cadbury share. This valued each Cadbury share at 745 pence (based on the closing price of $28.10 for a Kraft Foods share on September 4, 2009 and an exchange rate of 1.6346 $/£) and valued the entire issued share capital of Cadbury at £10.2 billion (approximately $16.7 billion). The combination would build on Kraft Foods’ position as a global powerhouse in snacks, confectionery and quick meals with a rich portfolio of iconic brands.
The Possible Offer contained several criteria, including our ability to obtain satisfactory financing, that we would maintain an investment-grade credit rating, and the right to change our offer at any time. Refer to the Form 8-K we filed with the SEC on September 8, 2009 for further details of the Possible Offer.
Pursuant to the U.K. City Code on Takeovers and Mergers, the U.K. Takeover Panel set a deadline of November 9, 2009 for us to formally make an offer for Cadbury, or walk away.
2009 Outlook
We increased our guidance for 2009 dilutedDiluted EPS is expected to be at least $1.97 versus the previous expectation$2.35 in 2010. This includes:
Operating EPS of at least $1.93. This guidance$2.00;
Integration costs of approximately $0.30;
Acquisition-related costs and financing fees of approximately $0.22;
U.S. health care legislation charge of $0.08; and
Earnings and gain on the sale of the Frozen Pizza business of $0.95.
Operating EPS reflects strong year-to-date profitEPS growth of the Kraft Foods’ base business at the high end of our 7 percent to 9 percent long-term EPS growth target, solid earnings performance from Cadbury as it benefits from past cost savings initiatives and a reductionmodest contribution from cost synergies. Earnings growth will be tempered in our full-year effective tax rate to approximately 30.0% versus the previous expectationnear term by stepped-up levels of approximately 31.5%. The new guidance also reflects further investments in marketing to drive future growthbrand support across the portfolio, as well as an estimate for certain costsincremental interest and shares outstanding as a result of the Cadbury acquisition.
For 2011, we expect to deliver our long-term target of at least 5 percent organic net revenue growth and mid-teens growth in connectionOperating EPS. Growth in Operating EPS is consistent with our possible combination with Cadbury.
The factors described in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2008 represent continuing risks to these forecasts.previous Kraft Foods’ base business EPS growth target.
40
Please see Non-GAAP Financial Measures section below.
Significant Accounting Estimates
We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Our significant accounting policies are described in Note 1 to our revised consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008.2009. Our significant accounting estimates are described in our revised Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.2009. The impact of new accounting standards is discussed in the following section. There were no changes in our accounting policies in the current period that had a material impact on our financial statements, other than those discussed in Note 1,Summary of Significant Accounting Policies.statements.
New Accounting Guidance
See Note 1,Summary of Significant Accounting Policies, for a discussion of new accounting guidance.
Contingencies
See Note 11,13,Commitments and Contingencies, and Part II, Item 1.Legal Proceedings for a discussion of contingencies.
Non-GAAP Financial Measures
We use the non-U.S. GAAP financial measure “organic net revenues” and corresponding growth ratios. The difference between “organic net revenues” and “net revenues,” which is the most comparable U.S. GAAP financial measure, is that organic net revenues excludes the impact of acquisitions, divestitures and currency. Organic net revenues is used by our management to budget, make operating and strategic decisions and evaluate our performance. We have disclosed this measure so that you have the same financial data that management uses with the intention of assisting you in making comparisons to our historical operating results and analyzing our underlying performance. Our management believes that organic net revenues better reflect the underlying growth from the ongoing activities of our business and provide improved comparability of results because they exclude the impact of fluctuations in foreign currency exchange rates, which are not under our control, and also exclude the one-time impacts of acquisitions and divestitures on net revenues. The limitation of this measure is that it excludes items that have an impact on net revenues. The best way that this limitation can be addressed is by using organic net revenues in combination with our U.S. GAAP reported net revenues. Our management believes that the presentation of this non-U.S. GAAP financial measure, when considered together with our U.S. GAAP financial measures and the reconciliations to the corresponding U.S. GAAP financial measures, provides you with a more complete understanding of the factors and trends affecting Kraft Foods than could be obtained absent these disclosures. Because organic net revenues calculations may vary among other companies, the organic net revenues figures presented in the Consolidated Results of Operations section may not be comparable with similarly titled measures of other companies. Organic net revenues are not meant to be considered in isolation or as a substitute for U.S. GAAP financial measures. You should carefully evaluate the following table reconciling U.S. GAAP reported net revenues to organic net revenues.
41
For the Three Months Ended | |||||||||||||||||||
March 31, | |||||||||||||||||||
2010 | 2009 | $ Change | % Change | ||||||||||||||||
(in millions) | |||||||||||||||||||
Organic net revenues | $ | 9,242 | $ | 8,951 | $ | 291 | 3.3 % | ||||||||||||
Impact of divestitures | – | 28 | (28) | (0.4)pp | |||||||||||||||
Impact of acquisitions | 1,693 | – | 1,693 | 18.9pp | |||||||||||||||
Favorable foreign | 383 | – | 383 | 4.2 pp | |||||||||||||||
Reported net revenues | $ | 11,318 | $ | 8,979 | $ | 2,339 | 26.0% | ||||||||||||
We use the non-U.S. GAAP financial measure “Operating EPS” and corresponding growth ratios. The difference between “Operating EPS” and “diluted EPS attributable to Kraft Foods,” which is the most comparable U.S. GAAP financial measure, is that Operating EPS excludes costs related to: the integration of Cadbury; acquisition-related costs, including transaction advisory fees, U.K. stamp taxes and the impact of the Cadbury inventory revaluation; acquisition-related financing fees, including hedging and foreign currency impacts associated with the Cadbury acquisition and other fees associated with the Cadbury Bridge Facility; and the impact of a deferred tax charge resulting from the recently enacted U.S. health care legislation. Operating EPS is used by our management to budget, make operating and strategic decisions and evaluate our performance on a go-forward basis, and our management believes it provides improved comparability of results because it excludes the volatility of currency; certain impacts related to the Cadbury acquisition; other one-time impacts; and divestitures from earnings per share. The limitation of this measure is that it excludes items that have an impact on diluted EPS attributable to Kraft Foods. The best way that this limitation can be addressed is by using Operating EPS in combination with our U.S. GAAP reported diluted EPS attributable to Kraft Foods. Our management believes that the presentation of this non-U.S. GAAP financial measure, when considered together with our U.S. GAAP financial measures and the reconciliations to the corresponding U.S. GAAP financial measures, provides you with a more complete understanding of the factors and trends affecting Kraft Foods than could be obtained absent these disclosures. Because Operating EPS calculations may vary among other companies, the Operating EPS figures presented in the Consolidated Results of Operations section may not be comparable with similarly titled measures of other companies. Operating EPS is not meant to be considered in isolation or as a substitute for U.S. GAAP financial measures. You should carefully evaluate the following table reconciling U.S. GAAP reported diluted EPS attributable to Kraft Foods to Operating EPS. | |||||||||||||||||||
For the Three Months Ended March 31, 2010 | |||||||||||||||||||
Acquisition- | U.S. Healthcare | ||||||||||||||||||
Related | Legislation | ||||||||||||||||||
As Reported | Integration | Costs (1) and | Impact on | Operating EPS | |||||||||||||||
(GAAP) | Costs | Financing Fees (2) | Deferred Taxes | (Non-GAAP) | |||||||||||||||
Diluted earnings per share | |||||||||||||||||||
Continuing operations | $ | 0.15 | $ | 0.02 | $ | 0.24 | $ | 0.08 | $ | 0.49 | |||||||||
Discontinued operations | 1.01 | ||||||||||||||||||
Net earnings attributable | $ | 1.16 | |||||||||||||||||
(1) (2) | Acquisition-related costs include transaction advisory fees, U.K. stamp taxes and the impact of the Cadbury inventory revaluation. Acquisition-related financing fees include hedging and foreign currency impacts associated with the Cadbury acquisition and other fees associated with the Cadbury Bridge Facility. |
42
Forward-Looking Statements
This report contains a number of forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition,The forward-looking statements contained in this report contains forward-looking statements regarding the sale and expected closing of the sale of a U.S. snack bars operation andinclude that we do not expect it to close at a small gain;material impact on our financial results from the impactadoption of certain accounting pronouncements onpronouncements; our financial results;estimated amortization expense for each of the next five years; our expectation to transfer unrealized losses and gains related to cash flow hedges this year; our expectation that our unrecognized tax benefits will decrease by approximately $50 million during the next 12 months; our intent to acquire the remaining Cadbury Shares through compulsory acquisition procedures; that our Cadbury acquisition will create a global powerhouse in snacks, confectionary and quick meals with a rich portfolio of iconic brands; our expectation that a portion of the gross amount due under receivables acquired from Cadbury will be uncollectable; the amount of intangible assets acquired from Cadbury that we believe will be indefinite lived; our belief that our Cadbury acquisition has the potential for meaningful revenue synergies over time; our expectation about the annual cost savings we will realize by the end of the third year following our Cadbury acquisition; the amount of integration charges we expect to incur in the first three years following our Cadbury acquisition; that we may modify the Cadbury VIA restructuring program and the amount of related pre-tax charges; with regard to our Restructuring Program, that we will use cash to pay for a portion of the charges and our expected cumulative annualized savings; why we report segment operating income; our expectation to complete the integration of our Europe Biscuits business into our European operations by mid-2010 and the additional amount of related charges we expect to incur in 2010; why we disclose other project savings costs; our expectations regarding how the effect of unrealized appreciation or depreciation;Venezuelan devaluation will affect our belief2010 operating results; our expectation that commodity prices will continue to be volatile over the remainder of the year; our belief regarding our liquidity; our belief regardingthat we expect no negative effects to our funding sources;sources that would have a material effect on our expectation regarding 2009 funding ofliquidity; our plan to make further contributions to pension plans during 2010 and our expectation to fund these contributions from operations; our expectation regarding the amount of our full-year capital expenditures and our expectation to fund capital expenditures from operations; our expectation to repayfund repayment of our long-term debt that matures in November 2009August and December 2010 with cash from operations or through the issuance of commercial paper; our expectation to renegotiate our revolving credit facility before it expires in April 2010; the effect of the termination of Lehman’s participation on our revolving credit facility;short-term borrowings; our expectation to continue to meet the financial covenantcovenants under our revolving credit facility and the Cadbury revolving credit facility; our expectation to continue to comply with our long-term debt covenants; theour expectation that guarantees will not have a material effect of guarantees on our liquidity; statements about our possible combination with Cadbury,expectations regarding our aggregate contractual obligations; our Outlook, including that the possible combination will build on our position as a global powerhouse in snacks, confectionary and quick meals with a rich portfolio of iconic brands; our 2009 Outlook specifically, diluted EPS and thatoperating EPS, amounts of integration and acquisition-related costs and financing fees, U.S. health care legislation charges and earnings and gains on the sale of the Frozen Pizza business; our increase in 2009 diluted EPS reflects strong year-to-date profit performance, our full-year effective tax rate, further investments in marketingexpectation to drive future growth and an estimate for certain costs in connection with our possible combination with Cadbury;complete the catalyst transition by 2011; and our belief that the final outcomeultimate costs to resolve any of our legal proceedings will not materially affect our financial results.
These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in the “Risk Factors” found in our Annual Report on Form 10-K for the year ended December 31, 2008,2009 identify important factors that could cause actual results to differ materially from those predicted in ourany of these forward-looking statements. SuchThese factors include, but are not limited to, continued volatility in inputcommodity costs, pricing actions, increased competition, our ability to differentiate our products from private label products, increased costs of sales, our indebtedness and our ability to repaypay our indebtedness, theunexpected safety or manufacturing issues, U.S. Food and Drug Administration or other regulatory actions or delays, unanticipated expenses such as litigation or legal settlement expenses, a shift in our product mix to lower margin offerings, the possibility that the proposed combination with Cadbury will not be pursued, failure to obtain necessary regulatory approvals or required financing or to satisfy any of the other criteria to the possible combination, adverse effects on the market price of our common stock and on our operating results because of a failure to complete the possible combination, failure to realize the expected benefits of the possible combination, negative effects of announcement or consummation of the possible combination on the market price of our common stock, significant transaction costs and/or unknown liabilities and general economic and business conditions that affect the combined companies following the possible combination, unanticipated expenses such as litigation or legal settlement expenses, failure to expand into certain emerging markets, risks from operating internationally,globally, our failure to successfully integrate the Cadbury business and tax law changes. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this Quarterly Report on Form 10-Q.
41
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As Kraft Foods operates globally, we use certain financial instruments to manage our foreign currency exchange rate, commodity price and interest rate risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. We maintain foreign currency, commodity price and interest rate risk management policies that principally use derivative instruments to reduce significant, unanticipated earnings fluctuations that may arise from volatility in foreign currency exchange rates, commodity prices and interest rates. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes. With the Cadbury acquisition, we added significant volumes of foreign currency and cocoa commodity hedges, in addition to the acquisition-related hedges we utilized during the quarter. Refer to Note 10,12,Financial Instruments, for further information on the types of derivative instruments we used to hedge our exposures. ThereWith the exception of our Cadbury acquisition and its hedging program, there were no significant changes in our exposures or the types of derivative instruments we use to hedge those exposures since December 31, 2008, other than those discussed in Note 1,Summary of Significant Accounting Policies.2009.
43
Item 4. Controls and Procedures.
a) | Evaluation of Disclosure Controls and Procedures |
Management, together with our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rule 13a-15(e)) as of the end of the period covered by this report. We acquired Cadbury plc (“Cadbury”) in the first quarter of 2010, and it represented approximately 31% of our total assets as of March 31, 2010. As the acquisition occurred in the first quarter of 2010, the scope of our assessment of the effectiveness of internal control over financial reporting does not include Cadbury. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective.
b) | Changes in Internal Control Over Financial Reporting |
Management, together with our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended September 30, 2009,March 31, 2010, and noted the following significant changes.
In 2008, we began implementing “Catalyst,” a business initiative to simplify and harmonize our systems processes. This multi-year program includes the delivery of SAP enterprise software applications and business solutions. During the quarter ended September 30, 2009,March 31, 2010, we transitioned some of our processes and procedures into the SAP control environment.environment in Kraft Foods North America. As we migrate to the SAP environment, our management sees to it that our key controls are mapped to applicable SAP controls, tests transition controls prior to the migration date of those controls, and as appropriate, maintains and evaluates controls over the flow of information to and from SAP. We expect the transition period to be completed in 2011.
We determined that there were no other changes in our internal control over financial reporting during the quarter ended September 30, 2009,March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We routinely are involved from time to time, in legal proceedings, claims and governmental inspections or investigations (“Legal Matters”) arising in the ordinary course of our business. While
Competition authorities in the European Union have opened various investigations into possible anticompetitive activity in the fast moving consumer goods (“FMCG”) sector, which includes products such as chocolate and coffee. In Germany, the Federal Cartel Office (“FCO”) is investigating a number of FMCG companies, including Kraft Foods. We are cooperating and in contact with the FCO. At this time, we cannot predict with certainty the resultscourse or the outcome of these matters,investigations.
Currently, we do not expectbelieve that the ultimate costs to resolve these mattersany of the Legal Matters will have a material effect on our financial results.
Item 1A. Risk Factors.
There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008, in response to Item 1A,Risk Factors, to Part I of our report.2009.
4244
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following activity represents shares tendered to us by employees who used shares to exercise options, and shares tendered to us by employees who vested in restricted and deferred stock and used shares to pay the related taxes. As such,taxes for grants of restricted and deferred stock that vested. Accordingly, these are non-cash transactions.
Total Number of Shares | Average Price per Share | ||||||||
July 1–31, 2009 | 69,238 | $ | 26.15 | ||||||
August 1–31, 2009 | 11,173 | $ | 28.53 | ||||||
September 1-30, 2009 | 2,229 | $ | 28.29 | ||||||
For the Quarter Ended September 30, 2009 | 82,640 | $ | 26.53 | ||||||
Total Number | Average Price | ||||||||||
of Shares | per Share | ||||||||||
January 1–31, 2010 | 35,717 | $ | 28.04 | ||||||||
February 1–28, 2010 | 1,167,555 | $ | 28.82 | ||||||||
March 1–31, 2010 | 16,325 | $ | 28.50 | ||||||||
For the Quarter Ended March 31, 2010 | 1,219,597 | $ | 28.80 | ||||||||
Item 6. Exhibits.
Exhibit Number | Description | |||
2.1 | ||||
12 | Statement regarding computation of ratios of earnings to fixed charges. | |||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. | |||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. | |||
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
101.1 | The following materials from Kraft Foods’ Quarterly Report on Form 10-Q for the quarter ended |
4345
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KRAFT FOODS INC. | ||
/s/ TIMOTHY R. MCLEVISH | ||
Timothy R. McLevish | ||
Executive Vice President and | ||
Chief Financial Officer | ||
| May 7, 2010 |
4446