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 September 30, 2001
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Lakes Drive, Northfield, Illinois 60093
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 646-2000
--------------------
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X* No
--- ---
* The registrant became subject to the Securities Exchange Act of 1934
on June 12, 2001.
At October 31, 2001, there were 1,735,000,000 shares outstanding of the
registrant's common stock, no par value per share.
KRAFT FOODS INC.
TABLE OF CONTENTS
Page No.
--------
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets at
September 30, 2001 and December 31, 2000 3 - 4
Condensed Consolidated Statements of Earnings for the
Nine Months Ended September 30, 2001 and 2000 5
Three Months Ended September 30, 2001 and 2000 6
Condensed Consolidated Statements of Shareholders'
Equity for the Year Ended December 31, 2000 and the
Nine Months Ended September 30, 2001 7
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 8 - 9
Notes to Condensed Consolidated Financial Statements 10 - 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 21 - 41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 42
Item 6. Exhibits and Reports on Form 8-K. 44
Signature 45
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
September 30, December 31,
2001 2000
------------------- -------------------
ASSETS
Cash and cash equivalents $ 175 $ 191
Receivables (less allowances of
$118 and $152) 3,121 3,231
Inventories:
Raw materials 1,395 1,175
Finished product 1,878 1,866
------- -------
3,273 3,041
Deferred income tax benefits 547 504
Other current assets 232 185
------- -------
Total current assets 7,348 7,152
Property, plant and equipment, at cost 13,078 13,042
Less accumulated depreciation 3,988 3,637
------- -------
9,090 9,405
Goodwill and other intangible assets
(less accumulated amortization of
$6,857 and $6,100) 31,472 31,584
Prepaid pension assets 2,872 2,623
Assets held for sale 230 276
Other assets 811 1,031
------- -------
TOTAL ASSETS $51,823 $52,071
======= =======
See notes to condensed consolidated financial statements.
Continued
-3-
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars)
(Unaudited)
September 30, December 31,
2001 2000
------------------- -------------------
LIABILITIES
Short-term borrowings $ 670 $ 146
Current portion of long-term debt 46 713
Due to parent and affiliates 2,361 865
Accounts payable 1,558 1,971
Accrued liabilities:
Marketing 1,280 1,601
Employment costs 578 625
Other 1,578 1,411
Income taxes 348 258
------- -------
Total current liabilities 8,419 7,590
Long-term debt 4,654 2,695
Deferred income taxes 1,660 1,446
Accrued postretirement health care costs 1,882 1,867
Notes payable to parent and affiliates 9,000 21,407
Other liabilities 2,901 3,018
------- -------
Total liabilities 28,516 38,023
Contingencies (Note 6)
SHAREHOLDERS' EQUITY
Class A common stock, no par value (555,000,000 shares issued
and outstanding)
Class B common stock, no par value (1,180,000,000 shares issued
and outstanding)
Additional paid-in capital 23,655 15,230
Earnings reinvested in the business 2,069 992
Accumulated other comprehensive losses (primarily currency
translation adjustments) (2,417) (2,174)
------- -------
Total shareholders' equity 23,307 14,048
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $51,823 $52,071
======= =======
See notes to condensed consolidated financial statements.
-4-
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Nine Months Ended
September 30,
----------------------------
2001 2000
---------- -------
Operating revenues $25,115 $19,649
Cost of sales 12,883 10,195
------- -------
Gross profit 12,232 9,454
Marketing, administration and research costs 7,880 5,964
Amortization of goodwill 719 403
------- -------
Operating income 3,633 3,087
Interest and other debt expense, net 1,189 381
------- -------
Earnings before income taxes 2,444 2,706
Provision for income taxes 1,110 1,120
------- -------
Net earnings $ 1,334 $ 1,586
======= =======
Per share data:
Basic earnings per share $ 0.85 $ 1.09
======= =======
Diluted earnings per share $ 0.85 $ 1.09
======= =======
Dividends declared $ 0.13
=======
See notes to condensed consolidated financial statements.
-5-
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Three Months Ended
September 30,
--------------------------
2001 2000
---- ----
Operating revenues $8,056 $6,215
Cost of sales 4,224 3,257
------ ------
Gross profit 3,832 2,958
Marketing, administration and research costs 2,417 1,765
Amortization of goodwill 239 136
------ ------
Operating income 1,176 1,057
Interest and other debt expense, net 256 122
------ ------
Earnings before income taxes 920 935
Provision for income taxes 417 387
------ ------
Net earnings $ 503 $ 548
====== ======
Per share data:
Basic earnings per share $ 0.29 $ 0.38
====== ======
Diluted earnings per share $ 0.29 $ 0.38
====== ======
Dividends declared $ 0.13
======
See notes to condensed consolidated financial statements.
-6-
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
For the Year Ended December 31, 2000 and
the Nine Months Ended September 30, 2001
(in millions of dollars)
(Unaudited)
Accumulated Other
Comprehensive Losses
------------------------------
Class Total
A and B Additional Earnings Currency Share-
Common Paid-in Reinvested in Translation holders'
Stock Capital the Business Adjustments Other Total Equity
----- ------- ------------ ----------- ----- ----- ------
Balances, January 1, 2000 $ - $15,230 $ - $(1,741) $ (28) $(1,769) $13,461
Comprehensive earnings:
Net earnings 2,001 2,001
Other comprehensive losses,
net of income taxes:
Currency translation adjustments (397) (397) (397)
Additional minimum pension liability (8) (8) (8)
--------
Total other comprehensive losses (405)
-------
Total comprehensive earnings 1,596
-------
Dividends declared (1,009) (1,009)
----- ------- ------ ------- ----- ------- -------
Balances, December 31, 2000 - 15,230 992 (2,138) (36) (2,174) 14,048
Comprehensive earnings:
Net earnings 1,334 1,334
Other comprehensive losses,
net of income taxes:
Currency translation adjustments (228) (228) (228)
Change in fair value of derivatives
accounted for as hedges (15) (15) (15)
-------
Total other comprehensive losses (243)
-------
Total comprehensive earnings 1,091
-------
Sale of Class A common stock to public 8,425 8,425
Dividends declared (257) (257)
----- ------- ------ ------- ----- ------- -------
Balances, September 30, 2001 $ - $23,655 $2,069 $(2,366) $ (51) $(2,417) $23,307
===== ======= ====== ======= ===== ======= =======
Total comprehensive earnings, which represents net earnings partially offset
by currency translation adjustments and the change in fair value of
derivatives accounted for as hedges, were $525 million and $360 million,
respectively, for the quarters ended September 30, 2001 and 2000 and $1,225
million for the first nine months of 2000.
See notes to condensed consolidated financial statements.
-7-
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Nine Months Ended
September 30,
---------------------------------
2001 2000
---------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings $ 1,334 $ 1,586
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization 1,224 776
Deferred income tax provision 230 143
Gain on sales of businesses (8) (172)
Loss on sale of a North American food factory and integration costs 66
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net 57 145
Inventories (319) (10)
Accounts payable (363) (298)
Income taxes 212 230
Other working capital items (610) (201)
Increase in pension assets and postretirement
liabilities, net (122) (138)
(Decrease) increase in amounts due to parent and affiliates (114) 63
Other (175) (2)
---------- --------
Net cash provided by operating activities 1,412 2,122
---------- --------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures (691) (568)
Purchases of businesses, net of acquired cash (107) (365)
Proceeds from sales of businesses 9 300
Other 66 (30)
---------- --------
Net cash used in investing activities (723) (663)
---------- --------
See notes to condensed consolidated financial statements.
Continued
-8-
Kraft Foods Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
For the Nine Months Ended
September 30,
----------------------------------------
2001 2000
---------- ----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net issuance (repayment) of short-term borrowings $ 2,535 $ (11)
Long-term debt proceeds 60 65
Long-term debt repaid (677) (90)
Net proceeds from sale of Class A common stock 8,435
Repayment of notes payable to parent and affiliates (12,407) (124)
Increase (decrease) in amounts due to parent and affiliates 1,354 (285)
Dividends paid (1,000)
-------- -------
Net cash used in financing activities (700) (1,445)
-------- -------
Effect of exchange rate changes on cash and
cash equivalents (5) (3)
-------- -------
Cash and cash equivalents:
(Decrease) increase (16) 11
Balance at beginning of period 191 95
-------- -------
Balance at end of period $ 175 $ 106
======== ========
See notes to condensed consolidated financial statements.
-9-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation:
- ---------------------------------------------
The interim condensed consolidated financial statements of Kraft Foods Inc. (the
"Company") are unaudited. It is the opinion of the Company's management that all
adjustments necessary for a fair statement of the interim results presented have
been reflected therein. All such adjustments were of a normal recurring nature.
For interim reporting purposes, certain expenses are charged to results of
operations as a percentage of sales. Operating revenues and net earnings for any
interim period are not necessarily indicative of results that may be expected
for the entire year.
These statements should be read in conjunction with the Company's consolidated
financial statements and related notes as of December 31, 2000 and for each of
the three years in the period then ended, as included in the Company's Form 8-K
filed with the Securities and Exchange Commission on August 10, 2001.
Note 2. Initial Public Offering:
- --------------------------------
Prior to June 13, 2001, the Company was a wholly-owned subsidiary of Philip
Morris Companies Inc. ("Philip Morris"). On June 13, 2001, the Company completed
an initial public offering ("IPO") of 280,000,000 shares of its Class A common
stock at a price of $31.00 per share. The IPO proceeds, net of the underwriting
discount and expenses, of $8.4 billion were used to retire a portion of an $11.0
billion long-term note payable to Philip Morris incurred in connection with the
acquisition of Nabisco Holdings Corp. ("Nabisco"). After the IPO, Philip Morris
owns approximately 83.9% of the outstanding shares of the Company's capital
stock through its ownership of 49.5% of the Company's outstanding Class A common
stock and 100% of the Company's Class B common stock. The Company's Class A
common stock has one vote per share while the Company's Class B common stock has
ten votes per share. Therefore, Philip Morris holds 97.7% of the combined voting
power of the Company's outstanding common stock.
Note 3. Related Party Transactions:
- -----------------------------------
Philip Morris and certain of its affiliates provide the Company with various
services, including planning, legal, treasury, accounting, auditing, insurance,
human resources, office of the secretary, corporate affairs, information
technology and tax services. Billings to the Company were $234 million and $166
million for the nine months ended September 30, 2001 and 2000, respectively, and
$80 million and $60 million for the three months ended September 30, 2001 and
2000, respectively. During 2001, the Company entered into a formal agreement
with Philip Morris providing for a continuation of these services, the cost of
which is expected to increase to approximately $300 million in 2001 from $248
million in 2000, as Philip Morris provides additional information technology and
financial services that the Company previously performed internally.
-10-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company also has long-term notes payable to Philip Morris and its affiliates
as follows:
September 30, December 31,
2001 2000
---------------- -----------
(in millions)
Notes payable in 2009, interest at 7.00% $ 5,000 $ 5,000
Notes payable in 2001, interest at 3.56125% 4,000
Notes payable in 2002, interest at 7.75% 11,000
Notes payable in 2002, interest at 7.40% 4,000
Swiss franc notes payable in 2008, interest at 4.58% 715
Swiss franc notes payable in 2006, interest at 3.58% 692
-------- -------
$ 9,000 $21,407
======== =======
During the second quarter of 2001, the Company used the IPO proceeds, net of the
underwriting discount and expenses, of $8.4 billion to retire a portion of the
$11.0 billion long-term note payable to Philip Morris. The remainder of this
note was repaid with the proceeds from commercial paper borrowings during the
third quarter of 2001. In addition, during the second quarter of 2001, the
Company refinanced the two long-term Swiss franc notes payable to Philip Morris
with short-term Swiss franc borrowings from Philip Morris at variable interest
rates.
During the third quarter of 2001, in anticipation of a public bond offering, the
Company converted the $4.0 billion, 7.40% note payable to Philip Morris,
originally maturing in December 2002, into a 3.56125% note payable to Philip
Morris maturing in November 2001. This short-term note has been reclassified as
long-term on the Company's condensed consolidated balance sheet at September 30,
2001 based upon the Company's ability and intention to refinance these
borrowings on a long-term basis. On November 2, 2001, the Company completed a
$4.0 billion public global bond offering, the net proceeds of which were used to
repay the 3.56125% short-term note payable to Philip Morris.
Note 4. Acquisitions and Divestitures:
- --------------------------------------
Nabisco:
On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco for $55 per share in cash. The acquisition has been accounted for as a
purchase. Nabisco's balance sheet has been consolidated with the Company's
balance sheet since December 31, 2000, and, beginning January 1, 2001, Nabisco's
earnings have been included in the combined operating results of the Company.
-11-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Assuming the acquisition of Nabisco occurred on January 1, 2000, and that
effective January 1, 2000, the net proceeds of the IPO were used to retire a
portion of an $11.0 billion long-term note payable to Philip Morris and that the
shares issued immediately following the IPO were outstanding since January 1,
2000, pro forma operating revenues, net earnings, basic earnings per share and
diluted earnings per share would have been as follows:
For the Nine Months Ended
September 30, 2000
------------------
(in millions, except per share data)
Operating revenues $ 25,171
========
Net earnings $ 1,329
========
Basic earnings per share $ 0.77
========
Diluted earnings per share $ 0.77
========
For the Three Months Ended
September 30, 2000
------------------
(in millions, except per share data)
Operating revenues $ 8,110
=======
Net earnings $ 420
=======
Basic earnings per share $ 0.24
=======
Diluted earnings per share $ 0.24
=======
The pro forma results do not give effect to any synergies expected to result
from the merger of Nabisco's operations with those of the Company. Accordingly,
the pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been consummated, and the IPO completed, on
January 1, 2000, nor are they necessarily indicative of future consolidated
operating results.
The excess of the purchase price of Nabisco over the estimated fair value of the
net assets purchased was approximately $17.0 billion and is currently being
amortized over 40 years by the straight-line method, pending the Company's
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," which the Company anticipates will
eliminate substantially all of the charges to earnings for goodwill
amortization. The allocation of excess purchase price is based upon preliminary
estimates and assumptions and is subject to revision when appraisals and
integration plans have been finalized. Revisions to the allocation will be
reported in the fourth quarter of 2001 as increases or decreases to amounts
reported as goodwill, assets held for sale, other intangible assets (including
trade names), deferred income taxes and amortization of goodwill.
-12-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company plans to sell a number of Nabisco businesses that do not align
strategically with its operations. Accordingly, the estimated selling prices of
these businesses, less costs of disposal, plus the estimated results of
operations through the estimated sales dates, are shown as assets held for sale
on the Company's condensed consolidated balance sheets and total $230 million at
September 30, 2001. Assets held for sale at September 30, 2001, decreased by $46
million from December 31, 2000, due primarily to a revision of estimated
proceeds from the sales of these businesses. Interest allocated to assets held
for sale was offset by earnings of the related businesses for the nine month
period ended September 30, 2001. During 2001, the Company will finalize the
Nabisco acquisition balance sheet, including the completion of fair value
appraisals of Nabisco's assets. During this process, the Company will also
finalize its plans to integrate the operations of Nabisco. The Company
anticipates closing a number of Nabisco manufacturing facilities. Charges to
close these facilities and integrate Nabisco, estimated to be in the range of
$500 million to $600 million, will not be recorded in the Company's consolidated
statement of earnings, but as adjustments to excess purchase price on the
consolidated balance sheet when plans are finalized and announced to employees.
The integration of Nabisco's operations will result in the closure of several of
the Company's existing facilities. During the third quarter of 2001, the Company
incurred pre-tax integration costs of $37 million to consolidate production
lines in the United States. In October 2001, the Company announced that it was
offering a voluntary retirement program to certain salaried employees in the
United States. The program is expected to eliminate 1,000 employees and will
result in an estimated pre-tax charge of approximately $160 million upon final
employee acceptance in the first quarter of 2002. The aggregate charges to the
Company's consolidated statement of earnings to close or reconfigure its
facilities and integrate Nabisco are estimated to be in the range of $200
million to $300 million. The Company anticipates that the remainder of these
charges will occur over the next nine months. In addition, during the first
quarter of 2001, the Company sold a North American food factory which resulted
in a pre-tax loss of $29 million.
Other acquisitions and divestitures:
During 2001, the Company purchased coffee businesses in Romania, Morocco and
Bulgaria. The aggregate cost of these acquisitions was $80 million. The
operating results of these businesses were not material to the consolidated
operating results of the Company in any of the periods presented.
During the third quarter of 2001, the Company announced plans to acquire
confectionery businesses in Russia, Poland and Hungary. The acquisition is
subject to regulatory approval in each of the respective countries. This
transaction is not expected to have a material effect on the Company's
consolidated operating results.
During 2000, the Company purchased the outstanding common stock of Balance Bar
Co., a maker of energy and nutrition snack products. In a separate transaction,
the Company also acquired Boca Burger, Inc., a privately held manufacturer and
marketer of soy-based meat alternatives. The total cost of these acquisitions
was $358 million. The operating results of these businesses were not material to
the consolidated operating results of the Company in any of the periods
presented.
During 2001 and 2000, the Company sold a few small domestic and international
food businesses, including a French confectionery business in 2000. The
aggregate proceeds received in these transactions during the first nine months
of 2001 and 2000 were $9 million and $300 million, respectively. The Company
recorded pre-tax gains in these transactions during the first nine months of
2001 and 2000 of $8 million and $172 million, respectively. The operating
results of businesses divested were not material to the consolidated operating
results of the Company in any of the periods presented.
-13-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5. Earnings Per Share:
- ---------------------------
Basic and diluted earnings per share ("EPS") were calculated using the
following:
For the Nine Months Ended
September 30,
--------------------------
2001 2000
------ ------
(in millions)
Net earnings $1,334 $1,586
====== ======
Weighted average shares for basic and diluted EPS 1,568 1,455
====== ======
For the Three Months Ended
September 30,
---------------------------
2001 2000
------ ------
(in millions)
Net earnings $ 503 $ 548
===== =====
Weighted average shares for basic and diluted EPS 1,735 1,455
===== ======
For the first nine months and the third quarter of 2001, outstanding options had
an immaterial effect on the calculation of weighted average shares for diluted
EPS. There were no options outstanding in 2000.
Note 6. Contingencies:
- ----------------------
The Company and its subsidiaries are parties to a variety of legal proceedings
arising out of the normal course of business, including a few cases in which
substantial amounts of damages are sought. The Company believes that it has
valid defenses and is vigorously defending the litigation pending against it.
While the results of litigation cannot be predicted with certainty, management
believes that the final outcome of these proceedings will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Prior to the effectiveness of the registration statement covering the shares of
the Company's Class A common stock being sold in the IPO, some of the
underwriters of the IPO provided written copies of a "pre-marketing feedback"
form to certain potential purchasers of the Company's Class A common stock. The
feedback form was for internal use only and was designed to elicit orally
certain information from designated accounts as part of designing strategy in
connection with the IPO. This form may have constituted a prospectus that did
not meet the requirements of the Securities Act of 1933.
If the distribution of this form by the underwriters did constitute a violation
of the Securities Act of 1933, persons who received this form, directly or
indirectly, and who purchased the Company's Class A common stock in the IPO may
have the right, for a period of one year from the date of the violation, to
obtain recovery of the consideration paid in connection with their purchase of
the Company's Class A common stock or, if they had already sold the stock,
attempt to recover losses resulting from their purchase of the Class A common
stock. The Company cannot determine the amount of Class A common stock that was
purchased by recipients of the "pre-marketing feedback" form. However, the
Company does not believe that any attempts to rescind these purchases or to
recover these losses will have a material adverse effect on its consolidated
financial position or results of operations.
-14-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7. Segment Reporting:
- --------------------------
The Company manufactures and markets packaged retail food products, consisting
principally of beverages, cheese, snacks, convenient meals and various grocery
products through its North American and international food businesses.
Reportable segments for the North American business are organized and managed
principally by product category. The North American food segments are Cheese,
Meals and Enhancers; Biscuits, Snacks and Confectionery; Beverages, Desserts and
Cereals; and Oscar Mayer and Pizza. Kraft Foods North America's foodservice
business within the United States and its businesses in Canada and Mexico are
managed through the Cheese, Meals and Enhancers segment. International
operations are organized and managed by geographic location. The international
food segments are Europe, Middle East and Africa; and Latin America and Asia
Pacific.
The Company's management reviews operating companies income to evaluate segment
performance and allocate resources. Operating companies income excludes general
corporate expenses and amortization of goodwill. Interest and other debt
expense, net, and provision for income taxes are centrally managed and,
accordingly, such items are not presented by segment since they are excluded
from the measure of segment profitability reviewed by management.
Reportable segment data were as follows:
For the Nine Months Ended
September 30,
-------------------------
2001 2000
------ ------
(in millions)
Operating revenues:
Cheese, Meals and Enhancers $ 7,680 $ 6,976
Biscuits, Snacks and Confectionery 4,310 222
Beverages, Desserts and Cereals 4,106 4,015
Oscar Mayer and Pizza 2,759 2,609
------- -------
Total Kraft Foods North America 18,855 13,822
------- -------
Europe, Middle East and Africa 4,477 4,912
Latin America and Asia Pacific 1,783 915
------- -------
Total Kraft Foods International 6,260 5,827
------- -------
Total operating revenues $25,115 $19,649
======= =======
-15-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Nine Months Ended
September 30,
---------------------------------
2001 2000
-------- ---------
(in millions)
Operating companies income:
Cheese, Meals and Enhancers $ 1,587 $ 1,437
Biscuits, Snacks and Confectionery 689 64
Beverages, Desserts and Cereals 947 870
Oscar Mayer and Pizza 456 425
------- -------
Total Kraft Foods North America 3,679 2,796
------- -------
Europe, Middle East and Africa 563 715
Latin America and Asia Pacific 251 130
------- -------
Total Kraft Foods International 814 845
------- -------
Total operating companies income 4,493 3,641
Amortization of goodwill (719) (403)
General corporate expenses (141) (151)
------- -------
Total operating income 3,633 3,087
Interest and other debt expense, net (1,189) (381)
------- -------
Earnings before income taxes $ 2,444 $ 2,706
======= =======
For the Three Months Ended
September 30,
----------------------------------
2001 2000
-------- --------
(in millions)
Operating revenues:
Cheese, Meals and Enhancers $2,438 $2,237
Biscuits, Snacks and Confectionery 1,479 82
Beverages, Desserts and Cereals 1,225 1,188
Oscar Mayer and Pizza 913 872
------- -------
Total Kraft Foods North America 6,055 4,379
------- -------
Europe, Middle East and Africa 1,427 1,552
Latin America and Asia Pacific 574 284
------- -------
Total Kraft Foods International 2,001 1,836
------- -------
Total operating revenues $8,056 $6,215
======= =======
-16-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Three Months Ended
September 30,
----------------------------------
2001 2000
-------- ---------
(in millions)
Operating companies income:
Cheese, Meals and Enhancers $ 494 $ 456
Biscuits, Snacks and Confectionery 278 24
Beverages, Desserts and Cereals 267 240
Oscar Mayer and Pizza 144 134
------- -------
Total Kraft Foods North America 1,183 854
------- -------
Europe, Middle East and Africa 199 350
Latin America and Asia Pacific 78 39
------- -------
Total Kraft Foods International 277 389
------- -------
Total operating companies income 1,460 1,243
Amortization of goodwill (239) (136)
General corporate expenses (45) (50)
------- -------
Total operating income 1,176 1,057
Interest and other debt expense, net (256) (122)
------- -------
Earnings before income taxes $ 920 $ 935
======= =======
Operating revenues by consumer sector for Kraft Foods International were as
follows:
For the Nine Months Ended
September 30,
----------------------------------
2001 2000
-------- ---------
(in millions)
Consumer Sector:
Snacks $ 2,259 $ 1,888
Beverages 2,223 2,342
Cheese 937 926
Grocery 628 431
Convenient Meals 213 240
------- -------
Total Kraft Foods International $ 6,260 $ 5,827
======= =======
For the Three Months Ended
September 30,
----------------------------------
2001 2000
-------- ---------
(in millions)
Consumer Sector:
Snacks $ 713 $ 566
Beverages 707 749
Cheese 301 295
Grocery 203 138
Convenient Meals 77 88
------- -------
Total Kraft Foods International $ 2,001 $ 1,836
======= =======
During the third quarter of 2001, the Company incurred pre-tax integration costs
of $37 million to consolidate production lines in the United States. These costs
were included in the Cheese, Meals and Enhancers segment
-17-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($31 million) and the Beverages, Desserts and Cereals segment ($6 million). In
addition, during the first quarter of 2001, the Company sold a North America
food factory which resulted in a pre-tax loss of $29 million. The loss was
included in the Cheese, Meals and Enhancers segment.
During the third quarter of 2000, the Company sold a French confectionery
business for proceeds of $251 million on which a pre-tax gain of $139 million
was recorded. The pre-tax gain is included in the operating results of the
Europe, Middle East and Africa segment.
Note 8. Recently Adopted Accounting Standards:
- ----------------------------------------------
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and its related amendment, SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" (collectively referred to as "SFAS No. 133"). These standards
require that all derivative financial instruments be recorded on the
consolidated balance sheets at their fair value as either assets or liabilities.
Changes in the fair value of derivatives are recorded each period in earnings or
accumulated other comprehensive losses, depending on whether a derivative is
designated and effective as part of a hedge transaction and, if it is, the type
of hedge transaction. Gains and losses on derivative instruments reported in
accumulated other comprehensive losses are included in earnings in the periods
in which earnings are affected by the hedged item. The adoption of these new
standards did not have a material effect on net earnings (less than $1 million)
or accumulated other comprehensive losses (less than $1 million).
The Company operates internationally, with manufacturing and sales facilities in
various locations around the world and utilizes certain financial instruments to
manage its foreign currency and commodity exposures, primarily related to
forecasted transactions. For a derivative to qualify as a hedge at inception and
throughout the hedged period, the Company formally documents the nature and
relationships between the hedging instruments and hedged items, as well as its
risk-management objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. Additionally, for
hedges of forecasted transactions, the significant characteristics and expected
terms of a forecasted transaction must be specifically identified, and it must
be probable that each forecasted transaction will occur. If it were deemed
probable that the forecasted transaction will not occur, the gain or loss would
be recognized in earnings currently. Financial instruments qualifying for hedge
accounting must maintain a specified level of effectiveness between the hedging
instrument and the item being hedged, both at inception and throughout the
hedged period.
The Company uses forward contracts to mitigate its exposure to changes in
foreign currency exchange rates from third-party and intercompany forecasted
transactions. The primary currencies to which the Company is exposed and to
which it hedges the exposure include the Euro and certain Asian currencies. The
effective portion of unrealized gains and losses associated with forward
contracts are deferred as a component of accumulated other comprehensive losses
until the underlying hedged transactions are reported on the Company's
consolidated statement of earnings.
The Company uses commodity forward contracts, as cash flow hedges, primarily for
coffee, cocoa, milk, cheese and wheat. Commodity futures and options are also
used to hedge the price of certain commodities, including milk, coffee, cocoa,
wheat, corn, sugar, soybean and energy. In general, commodity forward contracts
qualify for the normal purchase exception under SFAS No. 133 and are, therefore,
not subject to the provisions of the statement. The effective portion of
unrealized gains and losses on commodity futures and option contracts is
deferred as a component of accumulated other comprehensive losses and is
recognized as a component of cost of sales in the Company's consolidated
statement of earnings when the related inventory is sold.
The Company uses interest rate swaps to hedge the fair value of an insignificant
portion of its long-term debt. During the nine months and three months ended
September 30, 2001, there was no ineffectiveness relating to
-18-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
these fair value hedges. Accordingly, there was no net impact on interest and
other debt expense for the nine months and three months ended September 30,
2001, from the use of these interest rate swaps.
During the nine months ended September 30, 2001, a pre-tax gain of $9 million
was reported in the consolidated statement of earnings due to cash flow hedge
ineffectiveness. Ineffectiveness from cash flow hedges was not material (less
than $1 million) during the three months ended September 30, 2001. The Company
is hedging forecasted transactions for no more than the next fifteen months and
expects substantially all amounts reported in accumulated other comprehensive
losses to be reclassified to the consolidated statement of earnings within the
next twelve months.
Hedging activity affected accumulated other comprehensive losses during the nine
months and the three months ended September 30, 2001, as follows:
For the Nine Months Ended For the Three Months Ended
September 30, 2001 September 30, 2001
---------------------------------- ---------------------------------
(in millions)
Balance at beginning of period $ - $(12)
Impact of adoption
Derivative losses transferred to earnings 11 4
Change in fair value (26) (7)
---- ----
Balance as of September 30, 2001 $(15) $(15)
==== ====
The Company does not engage in trading or other speculative use of financial
instruments. Derivative losses reported in accumulated other comprehensive
losses are a result of qualifying hedging activity. Transfers of these losses
from accumulated other comprehensive losses to earnings are offset by gains on
the underlying hedged activity.
Note 9. Stock Plans:
- --------------------
The Company's Board of Directors has adopted the 2001 Kraft Performance
Incentive Plan (the "Plan"), which was established concurrently with the IPO.
Under the Plan, the Company may grant stock options, stock appreciation rights,
restricted stock and other awards based on the Company's Class A common stock,
as well as performance-based annual and long-term incentive awards. Up to 75
million shares of the Company's Class A common stock may be issued under the
Plan. The Company's Board of Directors granted options for 21,029,777 shares of
Class A common stock concurrent with the closing date of the IPO (June 13, 2001)
at an exercise price equal to the IPO price of $31.00 per share. A portion of
the shares granted (18,904,637) becomes exercisable on January 31, 2003, and
will expire ten years from the date of the grant. The remainder of the shares
granted (2,125,140) may become exercisable on a schedule based on total
shareholder return for the Company's Class A common stock during the three years
following the date of the grant, or will become exercisable five years from
the date of the grant. These options will also expire ten years from the date of
the grant.
The Company's Board of Directors has also adopted the Kraft Director Plan. Under
the Kraft Director Plan, only members of the Board of Directors who are not
full-time employees of the Company or Philip Morris or their subsidiaries are
granted awards. Up to 500,000 shares of Class A common stock may be awarded
under
-19-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the Kraft Director Plan. During the third quarter of 2001, 8,945 stock options
were granted under the Kraft Director Plan.
The Company accounts for employee stock compensation plans in accordance with
the intrinsic value-based method permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," which does not result in compensation cost.
Note 10. Recently Issued Accounting Pronouncements:
- ---------------------------------------------------
The Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting
for Certain Sales Incentives." EITF Issue No. 00-14 addresses the recognition,
measurement and statement of earnings classification for certain sales
incentives and will be effective in the first quarter of 2002. As a result,
certain items previously included in cost of sales and in marketing,
administration and research costs on the consolidated statement of earnings will
be recorded as a reduction of operating revenues. The Company has determined
that the impact of adoption or subsequent application of EITF Issue No. 00-14
will not have a material effect on its consolidated financial position or
results of operations. Upon adoption, prior period amounts, which are not
expected to be significant, will be reclassified to conform to the new
requirements. In addition, the EITF reached a consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products." EITF Issue No. 00-25 requires that certain expenses
included in marketing, administration and research costs be recorded as a
reduction of operating revenues and will be effective in the first quarter of
2002. The Company is currently in the process of determining the impact of
EITF Issue No. 00-25.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." Effective January 1, 2002, the Company will no longer be required to
amortize goodwill and certain other intangible assets as a charge to earnings.
In addition, the Company will be required to review goodwill and other
intangible assets for potential impairment. The Company is currently in the
process of quantifying the impact of the new standards. However, the Company
anticipates that substantially all amortization of goodwill as a charge to
earnings will be eliminated.
-20-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Environment
The Company is the largest branded food and beverage company headquartered in
the United States. Prior to June 13, 2001, the Company was a wholly-owned
subsidiary of Philip Morris Companies Inc. ("Philip Morris"). On June 13, 2001,
the Company completed an initial public offering ("IPO") of 280,000,000 shares
of its Class A common stock at a price of $31.00 per share. The IPO proceeds,
net of the underwriting discount and expenses, of $8.4 billion were used to
retire a portion of an $11.0 billion long-term note payable to Philip Morris
incurred in connection with the acquisition of Nabisco Holdings Corp.
("Nabisco"). After the IPO, Philip Morris owns approximately 83.9% of the
outstanding shares of the Company's capital stock through its ownership of 49.5%
of the Company's outstanding Class A common stock, and 100% of the Company's
Class B common stock. The Class A common stock has one vote per share while the
Company's Class B common stock has ten votes per share. Therefore, Philip Morris
holds 97.7% of the combined voting power of the Company's outstanding common
stock.
The Company conducts its global business through two units: Kraft Foods North
America and Kraft Foods International. Kraft Foods North America manages its
operations by product category, while Kraft Foods International manages its
operations by geographic region. Kraft Foods North America's segments are
Cheese, Meals and Enhancers; Biscuits, Snacks and Confectionery; Beverages,
Desserts and Cereals; and Oscar Mayer and Pizza. Kraft Foods North America's
foodservice business within the United States and its businesses in Canada and
Mexico are managed through the Cheese, Meals and Enhancers segment. Kraft Foods
International's segments are Europe, Middle East and Africa; and Latin America
and Asia Pacific.
Kraft Foods North America and Kraft Foods International are subject to
fluctuating commodity costs, currency movements and competitive challenges in
various product categories and markets, including a trend toward increasing
consolidation in the retail trade and changing consumer preferences. To confront
these challenges, the Company continues to take steps to build the value of its
brands and improve its food business portfolio with new products and marketing
initiatives.
Fluctuations in commodity costs can cause retail price volatility, intensify
price competition and influence consumer and trade buying patterns. The North
American and international food businesses are subject to fluctuating commodity
costs, including dairy, coffee bean and cocoa costs. Dairy commodity costs on
average have been higher than the levels seen in 2000. Cocoa bean prices have
also been higher, while coffee bean prices have been lower than in 2000. During
the latter part of 2000 and into 2001, energy costs rose in response to higher
prices charged for oil and natural gas. However, this increase in energy costs
did not have a material adverse effect on operating results of the Company.
On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco for $55 per share in cash. The acquisition has been accounted for as a
purchase. Nabisco's balance sheet has been consolidated with the Company's
balance sheet since December 31, 2000 and, beginning January 1, 2001, Nabisco's
earnings have been included in the consolidated operating results of the
Company.
The Company plans to sell a number of Nabisco businesses that do not align
strategically with its operations. Accordingly, the estimated selling prices of
these businesses less costs of disposal plus the estimated results of operations
through the estimated sales dates are shown as assets held for sale on the
Company's consolidated balance sheets. During 2001, the Company will finalize
its plans to integrate the operations of Nabisco. The Company anticipates
closing a number of Nabisco manufacturing facilities. Charges to close these
facilities and integrate Nabisco, estimated to be in the range of $500 million
to $600 million, will not be recorded in the Company's consolidated statement of
earnings, but as adjustments to excess purchase price on the consolidated
balance sheet when plans are finalized and announced to employees.
-21-
The integration of Nabisco's operations will result in the closure of several of
the Company's existing facilities. During the third quarter of 2001, the Company
incurred pre-tax integration costs of $37 million to consolidate production
lines in the United States. In October 2001, the Company announced that it was
offering a voluntary retirement program to certain salaried employees in the
United States. The program is expected to eliminate 1,000 employees and will
result in an estimated pre-tax charge of approximately $160 million upon final
employee acceptance in the first quarter of 2002. The aggregate charges to the
Company's consolidated statement of earnings to close or reconfigure its
facilities and integrate Nabisco are estimated to be in the range of $200
million to $300 million. The Company anticipates that the remainder of these
charges will occur over the next nine months. In addition, during the first
quarter of 2001, the Company sold a North American food factory which resulted
in a pre-tax loss of $29 million.
During 2001, the Company purchased coffee businesses in Romania, Morocco and
Bulgaria. The aggregate cost of these acquisitions was $80 million. The
operating results of these businesses were not material to the consolidated
operating results of the Company in any of the periods presented.
During the third quarter of 2001, the Company announced plans to acquire
confectionery businesses in Russia, Poland and Hungary. The acquisition is
subject to regulatory approval in each of the respective countries. This
transaction is not expected to have a material effect on the Company's
consolidated operating results.
During 2000, the Company purchased the outstanding common stock of Balance Bar
Co., a maker of energy and nutrition snack products. In a separate transaction,
the Company also acquired Boca Burger, Inc., a privately held manufacturer and
marketer of soy-based meat alternatives. The total cost of these acquisitions
was $358 million. The operating results of these businesses were not material to
the consolidated operating results of the Company in any of the periods
presented.
During 2001 and 2000, the Company sold a few small domestic and international
food businesses, including a French confectionery business in 2000. The
aggregate proceeds received in these transactions during the first nine
months of 2001 and 2000 were $9 million and $300 million, respectively. The
Company recorded pre-tax gains in these transactions during the first nine
months of 2001 and 2000 of $8 million and $172 million, respectively. The
operating results of businesses divested were not material to the consolidated
operating results of the Company in any of the periods presented.
Consolidated Operating Results
- ------------------------------
The following tables and the subsequent discussion of the Company's consolidated
operating results will refer to results on a reported and pro forma basis.
Reported results include the operating results of Nabisco in 2001, but not in
2000. Reported results also reflect average shares of common stock outstanding
during 2001 and assume an average of 1.455 billion shares outstanding during
2000. Pro forma results assume the Company owned Nabisco for all of 2000, rather
than from the actual acquisition date of December 11, 2000. In addition, pro
forma results reflect common shares outstanding of 1.735 billion based on the
assumption that shares issued immediately following the IPO were outstanding
during all periods presented and that, effective January 1, 2000, the net
proceeds of the IPO were used to retire a portion of a long-term note payable
used to finance the Nabisco acquisition. These results also adjust for certain
items as detailed on the tables, including results from operations divested
since the beginning of 2000.
-22-
For the Nine Months Ended September 30,
---------------------------------------
2001 2000
---- ----
(in millions, except per share data)
Reported volume (in pounds) 12,996 9,744
Volume of businesses sold (10) (73)
Estimated impact of century date change 55
Nabisco volume 2,854
-------- --------
Pro forma volume (in pounds) 12,986 12,580
======== ========
Reported operating revenues $ 25,115 $ 19,649
Operating revenues of businesses sold (4) (157)
Estimated impact of century date change 97
Nabisco operating revenues 5,582
-------- --------
Pro forma operating revenues $ 25,111 $ 25,171
======== ========
Reported operating companies income $ 4,493 $ 3,641
Operating companies income of businesses sold (1) (37)
Estimated impact of century date change 40
Loss on the sale of a North American food factory
and integration costs 66
Gain on sale of a French confectionery business (139)
Nabisco operating companies income 713
-------- --------
Pro forma operating companies income $ 4,558 $ 4,218
======== ========
Reported net earnings $ 1,334 $ 1,586
Nabisco results * (472)
Lower after-tax interest expense
assuming a January 1, 2000 IPO date 165 273
After-tax effect of estimated impact of century date change,
the gain on sale of a French confectionery business in 2000
and a loss on the sale of a North American food factory and
integration costs in 2001 37 (58)
-------- --------
Pro forma net earnings $ 1,536 $ 1,329
======== ========
Weighted average shares outstanding 1,568 1,455
Adjustment to reflect shares
outstanding after IPO 167 280
-------- --------
Pro forma shares outstanding 1,735 1,735
======== ========
Pro forma diluted earnings per share $ 0.89 $ 0.77
======== ========
* Nabisco results include goodwill amortization and interest expense as if
Nabisco had been acquired on January 1, 2000.
-23-
Results of Operations for the Nine Months Ended September 30, 2001
Reported volume for the first nine months of 2001 increased 3,252 million pounds
(33.4%) over the comparable 2000 period, due primarily to the acquisition of
Nabisco. Pro forma volume increased 3.2% over the first nine months of 2000, due
to increases in all segments.
Reported operating revenues for the first nine months of 2001 increased $5,466
million (27.8%) over the comparable 2000 period, due primarily to the
acquisition of Nabisco. The operating revenue comparison for the first nine
months was affected by approximately $97 million of incremental sales made
during the fourth quarter of 1999, as the Company's customers planned for
potential business failures related to the Century Date Change ("CDC"). These
incremental CDC sales would have normally been made during the first quarter of
2000. Pro forma operating revenues decreased slightly from the first nine months
of 2000 as the adverse effects of currency exchange rates and lower sales prices
on coffee products (driven by commodity-related price declines) were mostly
offset by higher volume.
Reported operating companies income, which is defined as operating income before
general corporate expenses and amortization of goodwill, was affected by the
following unusual items during the first nine months of 2001 and 2000:
o Sale of Food Factory and Integration Costs - The Company sold a North
American food factory during the first quarter of 2001, resulting in a
pre-tax loss of $29 million that was recorded in the Cheese, Meals and
Enhancers segment. In the third quarter of 2001, the Company incurred pre-tax
integration costs of $37 million to consolidate production lines in the
United States. These costs were included in the Cheese, Meals and Enhancers
segment ($31 million) and the Beverages, Desserts and Cereals segment
($6 million).
o Sale of French Confectionery Business - In August 2000, the Company sold a
French confectionery business ("French Confectionery Sale") for proceeds of
$251 million on which a pre-tax gain of $139 million was recorded. The
pre-tax gain is included in the Europe, Middle East and Africa segment's
marketing, administration and research costs in the consolidated statement of
earnings.
The operating companies income comparison was also affected by approximately $40
million of operating income from the previously mentioned CDC sales.
Reported operating companies income increased $852 million (23.4%) over the
first nine months of 2000, due primarily to the acquisition of Nabisco. On a pro
forma basis, operating companies income increased $340 million (8.1%), due to
higher results in all segments.
Currency movements have decreased operating revenues by $521 million and
operating companies income by $64 million from the first nine months of 2000.
Declines in operating revenues and operating companies income are due to the
strength of the U.S. dollar against the Euro and certain Asian and Latin
American currencies. Although the Company cannot predict future movements in
currency exchange rates, the strength of the U.S. dollar, primarily against the
Euro, if sustained during the remainder of 2001, could continue to have an
unfavorable impact on operating revenues and operating companies income
comparisons with 2000.
Reported interest and other debt expense, net, increased $808 million in the
first nine months of 2001 over $381 million in the first nine months of 2000.
This increase was due primarily to notes issued to Philip Morris in the fourth
quarter of 2000 in connection with the acquisition of Nabisco. On a pro forma
basis, interest and other debt expense, net, decreased $108 million in the first
nine months of 2001 from $995 million in the first nine months of 2000. This
decrease in pro forma interest expense is due to the reduction of debt and
ongoing efforts to externally refinance debt payable to Philip Morris in the
current low interest rate environment.
During the first nine months of 2001, the Company's reported effective tax rate
increased by 4.0 percentage points to 45.4% as compared to the first nine months
of 2000, due primarily to higher goodwill amortization, which is not tax
deductible, related to the acquisition of Nabisco.
-24-
Reported diluted and basic earnings per share ("EPS"), which were both $0.85 for
the first nine months of 2001, decreased by 22.0% from the first nine months of
2000, due primarily to higher levels of goodwill amortization and interest
expense associated with the acquisition of Nabisco. Reported net earnings of
$1,334 million for the first nine months of 2001 decreased $252 million (15.9%)
from the comparable period of 2000. On a pro forma basis, diluted and basic EPS,
which were both $0.89 for the first nine months of 2001, increased by 15.6% from
the first nine months of 2000, due primarily to higher operating results in all
segments. Pro forma net earnings of $1,536 million for the first nine months of
2001 increased $207 million (15.6%) from the comparable period of 2000.
For the Three Months Ended September 30,
----------------------------------------
2001 2000
---- ----
(in millions, except per share data)
Reported volume (in pounds) 4,204 3,123
Volume of businesses sold (22)
Nabisco volume 980
------- -------
Pro forma volume (in pounds) 4,204 4,081
======= =======
Reported operating revenues $ 8,056 $ 6,215
Operating revenues of businesses sold (40)
Nabisco operating revenues 1,935
------- -------
Pro forma operating revenues $ 8,056 $ 8,110
======= =======
Reported operating companies income $ 1,460 $ 1,243
Operating companies income of businesses sold (13)
Integration costs 37
Gain on sale of a French confectionery business (139)
Nabisco operating companies income 272
------- -------
Pro forma operating companies income $ 1,497 $ 1,363
======= =======
-25-
For the Three Months Ended September 30,
----------------------------------------
2001 2000
---- -----
(in millions, except per share data)
Reported net earnings $ 503 $ 548
Nabisco results * (137)
Lower after-tax interest expense
assuming a January 1, 2000 IPO date 91
After-tax effect of the gain on sale of a French confectionery
business in 2000 and integration costs in 2001 19 (82)
------- -------
Pro forma net earnings $ 522 $ 420
======= =======
Weighted average shares outstanding 1,735 1,455
Adjustment to reflect shares
outstanding after IPO 280
------- -------
Pro forma shares outstanding 1,735 1,735
======= =======
Pro forma diluted earnings per share $ 0.30 $ 0.24
======= =======
* Nabisco results include goodwill amortization and interest expense as if
Nabisco had been acquired on January 1, 2000.
Results of Operations for the Three Months Ended September 30, 2001
Reported volume for the third quarter of 2001 increased 1,081 million pounds
(34.6%) over the comparable 2000 period, due primarily to the acquisition of
Nabisco. Pro forma volume increased 3.0% from the third quarter of 2000, due to
increases in Kraft Foods North America and Kraft Foods International.
Reported operating revenues for the third quarter of 2001 increased $1,841
million (29.6%) over the comparable 2000 period, due primarily to the
acquisition of Nabisco. Pro forma operating revenues decreased slightly from the
third quarter of 2000, as the adverse effect of currency exchange rates and
lower sales prices on coffee products (driven primarily by commodity-related
price declines) and unfavorable product mix were mostly offset by higher volume.
Reported operating companies income increased $217 million (17.5%) over the
third quarter of 2000, due primarily to the acquisition of Nabisco. On a pro
forma basis, operating companies income increased $134 million (9.8%), due
primarily to higher results in all segments.
Currency movements have decreased operating revenues by $161 million and
operating companies income by $17 million from the third quarter of 2000.
Declines in operating revenues and operating companies income are primarily due
to the strength of the U.S. dollar against the Euro and certain Asian and Latin
American currencies. Although the Company cannot predict future movements in
currency rates, the strength of the U.S. dollar, primarily against the Euro, if
sustained during the remainder of 2001, could continue to have an unfavorable
impact on operating revenues and operating companies income comparisons with
2000.
Reported interest and other debt expense, net, increased $134 million in the
third quarter of 2001 over $122 million in the third quarter of 2000. This
increase was due primarily to notes issued to Philip Morris in the fourth
quarter of 2000 in connection with the acquisition of Nabisco. On a pro forma
basis, interest and other debt expense, net, decreased $71 million in the third
quarter of 2001 from $327 million in the third quarter of 2000. This decrease in
pro forma interest expense is due to the reduction of debt and the ongoing
efforts to externally refinance debt payable to Philip Morris in the current low
interest rate environment.
During the third quarter of 2001, the Company's effective tax rate increased by
3.9 percentage points to 45.3% as compared to the third quarter of 2000, due
primarily to higher goodwill amortization, which is not tax deductible, related
to the acquisition of Nabisco.
-26-
Reported diluted and basic EPS, which were both $0.29 for the third quarter of
2001, decreased by 23.7% from the third quarter of 2000, due primarily to higher
levels of goodwill amortization and interest expense associated with the
acquisition of Nabisco. Reported net earnings of $503 million for the third
quarter of 2001 decreased $45 million (8.2%) from the comparable period of 2000.
However, on a pro forma basis, diluted and basic EPS, which were both $0.30 for
the third quarter of 2001, increased by 25.0% from the third quarter of 2000,
due primarily to higher operating results in all segments. Pro forma net
earnings of $522 million for the third quarter of 2001 increased $102 million
(24.3%) from the comparable period of 2000.
Euro
- ----
Twelve of the fifteen member countries of the European Union have established
fixed conversion rates between their existing currencies ("legacy currencies")
and one common currency--the Euro. Beginning in January 2002, new
Euro-denominated currency (bills and coins) will be issued, and legacy
currencies will be withdrawn from circulation. The Company's operating
subsidiaries affected by the Euro conversion have addressed the systems and
business issues raised by the Euro currency conversion. These issues include,
among others: (1) the need to adapt computer and other business systems and
equipment to accommodate Euro-denominated transactions; and (2) the competitive
impact of cross-border price transparency, which may make it more difficult for
businesses to charge different prices for the same products on a country-by-
country basis, particularly once the Euro currency is issued in 2002. The Euro
conversion has not had, and the Company currently anticipates that it will not
have, a material adverse impact on its financial condition or results of
operations.
Operating Results by Business Segment
- -------------------------------------
Kraft Foods North America
- -------------------------
Operating Results
For the Nine Months Ended September 30,
---------------------------------------
2001 2000
---- ----
(in millions)
Reported volume (in pounds):
Cheese, Meals and Enhancers 3,945 3,609
Biscuits, Snacks and Confectionery 1,720 37
Beverages, Desserts and Cereals 2,649 2,386
Oscar Mayer and Pizza 1,184 1,138
------ ------
Total reported volume (in pounds) 9,498 7,170
Volume of businesses sold:
Cheese, Meals and Enhancers (6)
Estimated impact of century date change:
Cheese, Meals and Enhancers 16
Biscuits, Snacks and Confectionery 1
Beverages, Desserts and Cereals 19
Oscar Mayer and Pizza 5
Nabisco volume:
Cheese, Meals and Enhancers 317
Biscuits, Snacks and Confectionery 1,663
Beverages, Desserts and Cereals 49
------ ------
Pro forma volume (in pounds) 9,498 9,234
====== ======
-27-
For the Nine Months Ended September 30,
---------------------------------------
2001 2000
---- ----
(in millions)
Reported operating revenues:
Cheese, Meals and Enhancers $ 7,680 $ 6,976
Biscuits, Snacks and Confectionery 4,310 222
Beverages, Desserts and Cereals 4,106 4,015
Oscar Mayer and Pizza 2,759 2,609
-------- --------
Total reported operating revenues 18,855 13,822
Operating revenues of businesses sold:
Cheese, Meals and Enhancers (10)
Estimated impact of century date change:
Cheese, Meals and Enhancers 34
Biscuits, Snacks and Confectionery 3
Beverages, Desserts and Cereals 22
Oscar Mayer and Pizza 12
Nabisco operating revenues:
Cheese, Meals and Enhancers 649
Biscuits, Snacks and Confectionery 3,976
Beverages, Desserts and Cereals 105
-------- --------
Pro forma operating revenues $18,855 $18,613
======== ========
Reported operating companies income:
Cheese, Meals and Enhancers $ 1,587 $ 1,437
Biscuits, Snacks and Confectionery 689 64
Beverages, Desserts and Cereals 947 870
Oscar Mayer and Pizza 456 425
-------- --------
Total reported operating companies income 3,679 2,796
Operating companies income of businesses sold:
Cheese, Meals and Enhancers (4)
Estimated impact of century date change:
Cheese, Meals and Enhancers 15
Biscuits, Snacks and Confectionery 1
Beverages, Desserts and Cereals 7
Oscar Mayer and Pizza 4
Loss on sale of a North American food factory and
integration costs:
Cheese, Meals and Enhancers 60
Beverages, Desserts and Cereals 6
Nabisco operating companies income:
Cheese, Meals and Enhancers 152
Biscuits, Snacks and Confectionery 484
Beverages, Desserts and Cereals 12
-------- -------
Pro forma operating companies income $ 3,745 $ 3,467
======== =======
Reported volume for the first nine months of 2001 increased 32.5% over the
comparable period of 2000, due primarily to the acquisition of Nabisco. On a pro
forma basis, volume for the first nine months of 2001 increased 2.9% over the
comparable period of 2000, due primarily to increased shipments in the
Beverages, Desserts and Cereals segment and the Oscar Mayer and Pizza segment,
as well as contributions from new products.
-28-
During the first nine months of 2001, reported operating revenues increased
$5,033 million (36.4%) over the first nine months of 2000, due primarily to the
acquisition of Nabisco ($4,843 million), higher volume/mix ($184 million) and
the shift in CDC revenues ($71 million), partially offset by unfavorable
currency movements ($68 million). On a pro forma basis, operating revenues
increased 1.3%, due primarily to higher revenues from the Biscuits, Snacks and
Confectionery segment and the Oscar Mayer and Pizza segment.
Reported operating companies income for the first nine months of 2001 increased
$883 million (31.6%) over the comparable period of 2000, due primarily to the
acquisition of Nabisco ($834 million), higher volume/mix ($131 million), lower
marketing, administration and research costs ($101 million) and the shift in CDC
income ($27 million), partially offset by unfavorable margins due primarily to
higher dairy commodity costs ($88 million) and the loss on the sale of a North
American food factory and integration costs ($66 million). On a pro forma basis,
operating companies income increased 8.0%.
The following discusses operating results within each of Kraft Foods North
America's business segments.
Cheese, Meals and Enhancers. Reported volume in the first nine months of 2001
increased 9.3% over the comparable period of 2000, due primarily to the
acquisition of Nabisco. On a pro forma basis, volume in the first nine months of
2001 increased slightly over the comparable period of 2000, as increased
shipments to grocery customers were partially offset by lower U.S. foodservice
volume. Meals recorded volume gains, reflecting higher shipments of macaroni and
cheese dinners. In Canada, shipments increased as a result of higher consumption
of branded products and new product introductions. Cheese shipments declined due
to the Company's decision to exit the lower-margin, non-branded cheese business.
During the first nine months of 2001, reported operating revenues increased $704
million (10.1%) over the first nine months of 2000, due primarily to the
acquisition of Nabisco ($654 million), higher pricing ($47 million), higher
volume/mix ($31 million) and the shift in CDC revenues ($34 million), partially
offset by unfavorable currency movements ($54 million). On a pro forma basis,
operating revenues increased slightly over the comparable period of 2000, as
higher pricing and volume were mostly offset by unfavorable currency.
Reported operating companies income for the first nine months of 2001 increased
$150 million (10.4%) over the comparable period of 2000, due primarily to the
acquisition of Nabisco ($175 million), lower marketing, administration and
research costs ($88 million), higher volume/mix ($55 million) and the shift in
CDC income ($15 million), partially offset by unfavorable margins due to higher
dairy commodity costs ($100 million) and the loss on the sale of a North
American food factory and integration costs ($60 million). On a pro forma basis,
operating companies income increased 2.9%.
Biscuits, Snacks and Confectionery. Reported volume in the first nine months of
2001 increased more than 100% over the comparable period of 2000, due to the
acquisition of Nabisco. On a pro forma basis, volume in the first nine months of
2001 increased 1.1% over the comparable period in 2000, due primarily to new
product introductions in biscuits and confectionery. In salty snacks, volume
declined due primarily to lower shipments of nuts to non-grocery channels.
During the first nine months of 2001, reported operating revenues increased
$4,088 million or more than 100% over the first nine months of 2000, due to the
acquisition of Nabisco. On a pro forma basis, operating revenues increased 2.6%,
due primarily to higher volume driven by new biscuit and confectionery products.
Reported operating companies income for the first nine months of 2001 increased
$625 million, or more than 100% over the comparable period of 2000, due to the
acquisition of Nabisco ($650 million), partially offset by higher marketing,
administration and research costs ($27 million). On a pro forma basis, operating
companies income increased 25.5%, due primarily to higher volume from new
biscuit and confectionery products and productivity and synergy savings
resulting from the Nabisco acquisition.
Beverages, Desserts and Cereals. Reported volume in the first nine months of
2001 increased 11.0% over the comparable period in 2000, including the
acquisition of Nabisco. On a pro forma basis, volume in the first nine
-29-
months of 2001 increased 7.9% over the comparable period of 2000, due primarily
to beverages, where volume increased due primarily to increased shipments of
ready-to-drink products. Volume in coffee declined slightly as lower shipments
of Maxwell House were partially offset by an increase in Starbucks coffee sold
through grocery stores. In the desserts business, volume was below the prior
year, as lower shipments of dry packaged and refrigerated ready-to-eat desserts
were partially offset by increases in shelf-stable puddings and nutrition and
energy snack bars. Cereal volume declined due primarily to increased competition
in the ready-to-eat cereal category.
During the first nine months of 2001, reported operating revenues increased $91
million (2.3%) over the first nine months of 2000, due primarily to higher
volume/mix ($22 million), the acquisition of Nabisco ($88 million), the
acquisition of Balance Bar Co. ($19 million) and the shift in CDC revenues ($22
million), partially offset by lower pricing ($60 million, due primarily to lower
coffee commodity-related price reductions). On a pro forma basis, operating
revenues decreased 0.9%, reflecting commodity-related price reductions on coffee
products and lower shipments in desserts and cereals.
Reported operating companies income for the first nine months of 2001 increased
$77 million (8.9%) over the comparable period of 2000, primarily reflecting
lower marketing, administration and research costs ($47 million), higher margins
($41 million), the acquisition of Nabisco ($9 million) and the shift in CDC
income ($7 million), partially offset by integration costs ($6 million). On a
pro forma basis, operating companies income increased 7.2%.
Oscar Mayer and Pizza. Reported volume in the first nine months of 2001
increased 4.0% over the comparable period of 2000, due to volume gains in
processed meats and pizza. Adjusting for the shift in CDC shipments, volume in
the first nine months of 2001 increased 3.6%. The processed meats business
recorded volume gains in luncheon meats, hot dogs, bacon and soy-based meat
alternatives. Volume in the pizza business also increased, driven by new
products.
During the first nine months of 2001, reported operating revenues increased $150
million (5.7%) over the first nine months of 2000 due primarily to higher
volume/mix ($131 million), the shift in CDC revenues ($12 million) and the
acquisition of Boca Burger, Inc. Adjusting for the shift in CDC revenues,
operating revenues increased 5.3%.
Reported operating companies income for the first nine months of 2001 increased
$31 million (7.3%) over the comparable period of 2000 primarily reflecting
higher volume/mix ($72 million) and the shift in CDC income ($4 million),
partially offset by unfavorable margins ($29 million, due primarily to higher
meat and cheese commodity costs) and higher marketing, administration and
research costs. Adjusting for the shift in CDC income, operating companies
income increased 6.3%.
-30-
Kraft Foods International
- -------------------------
Operating Results
For the Nine Months Ended September 30,
---------------------------------------
2001 2000
------ ------
(in millions)
Reported volume (in pounds):
Europe, Middle East and Africa 1,999 1,996
Latin America and Asia Pacific 1,499 578
--------- --------
Total reported volume (in pounds) 3,498 2,574
Volume of businesses sold:
Europe, Middle East and Africa (38)
Latin America and Asia Pacific (10) (29)
Estimated impact of century date change:
Europe, Middle East and Africa 7
Latin America and Asia Pacific 7
Nabisco volume:
Europe, Middle East and Africa 28
Latin America and Asia Pacific 797
-------- --------
Pro forma volume (in pounds) 3,488 3,346
======== ========
Reported operating revenues:
Europe, Middle East and Africa $ 4,477 $ 4,912
Latin America and Asia Pacific 1,783 915
-------- --------
Total reported operating revenues 6,260 5,827
Operating revenues of businesses sold:
Europe, Middle East and Africa (130)
Latin America and Asia Pacific (4) (17)
Estimated impact of century date change:
Europe, Middle East and Africa 14
Latin America and Asia Pacific 12
Nabisco operating revenues:
Europe, Middle East and Africa 32
Latin America and Asia Pacific 820
-------- -------
Pro forma operating revenues $ 6,256 $ 6,558
======== =======
Reported operating companies income:
Europe, Middle East and Africa $ 563 $ 715
Latin America and Asia Pacific 251 130
-------- -------
Total reported operating companies income 814 845
Operating companies income of businesses sold:
Europe, Middle East and Africa (31)
Latin America and Asia Pacific (1) (2)
Estimated impact of century date change:
Europe, Middle East and Africa 8
Latin America and Asia Pacific 5
Gain on sale of a French confectionery business:
Europe, Middle East and Africa (139)
Nabisco operating companies income:
Latin America and Asia Pacific 65
-------- -------
Pro forma operating companies income $ 813 $ 751
======== =======
-31-
Reported volume for the first nine months of 2001 increased 35.9% over the first
nine months of 2000, due primarily to the acquisition of Nabisco. On a pro forma
basis, volume for the first nine months of 2001 increased 4.2% over the
comparable period of 2000, benefiting from gains across most consumer sectors
and driven by continued growth in the developing markets of Central and Eastern
Europe, Latin America and Asia Pacific.
During the first nine months of 2001, reported operating revenues increased $433
million (7.4%) over the first nine months of 2000, due primarily to the
acquisition of Nabisco ($880 million), higher volume/mix ($46 million) and the
shift in CDC revenues ($26 million), partially offset by unfavorable currency
movements ($453 million), the revenues of divested businesses ($143 million) and
lower pricing (due primarily to commodity-related coffee price decreases). On a
pro forma basis, operating revenues decreased 4.6%, reflecting unfavorable
currency movements and commodity-related coffee price decreases.
Reported operating companies income for the first nine months of 2001 decreased
$31 million (3.7%) from the first nine months of 2000, due primarily to the gain
on the French Confectionery Sale in 2000 ($139 million), unfavorable currency
($54 million), and income of divested businesses ($32 million), partially offset
by the acquisition of Nabisco ($69 million), lower marketing, administration and
research costs ($47 million), higher volume/mix ($25 million), favorable margins
($27 million) and the shift in CDC income ($13 million). On a pro forma basis,
operating companies income increased 8.3%.
The following discusses operating results within each of Kraft Foods
International's business segments.
Europe, Middle East and Africa. Reported and pro forma volume for the first nine
months of 2001 increased slightly from the comparable period of 2000, as gains
in the developing markets of Central and Eastern Europe and growth in many
Western European markets were mostly offset by lower volume in Germany,
reflecting increased price competition and trade inventory reductions, and lower
canned meats volume in Italy. In beverages, volume increased in both coffee and
refreshment beverages. Coffee volume grew in many markets including Romania,
Morocco and Bulgaria, which benefited from recent acquisitions. Refreshment
beverages volume increased, driven by higher sales to the Middle East and
Africa. Snacks volume increased, driven by confectionery and salty snacks.
Cheese volume grew, driven primarily by cream cheese in Italy and process cheese
spreads in the United Kingdom, partially offset by lower cheese volume in
Germany reflecting increased price competition. In grocery, lower volume in
Germany was partially offset by higher shipments of dressings in Spain, Greece
and the United Kingdom.
Reported operating revenues for the first nine months of 2001 decreased $435
million (8.9%) from the comparable period of 2000, due primarily to unfavorable
currency movements ($309 million), revenues from divested businesses ($130
million) and lower pricing ($73 million, primarily coffee pricing), partially
offset by the acquisition of Nabisco ($32 million), higher volume/mix ($13
million), the 2001 acquisitions of coffee businesses in Romania, Morocco and
Bulgaria ($18 million) and the shift in CDC revenues ($14 million). On a pro
forma basis, operating revenues decreased 7.3%, reflecting unfavorable currency
movements and commodity-related coffee price decreases.
Reported operating companies income for the first nine months of 2001 decreased
$152 million (21.3%) from the comparable period of 2000, due primarily to the
gain on the French Confectionery Sale in 2000 ($139 million), unfavorable
currency movements ($34 million) and income from divested businesses ($31
million), partially offset by higher volume/mix ($21 million), favorable margins
($17 million) and the shift in CDC income ($8 million). On a pro forma basis,
operating companies income increased 1.8%.
Latin America and Asia Pacific. Reported volume for the first nine months of
2001 increased more than 100% from the comparable period in 2000, due primarily
to the acquisition of Nabisco. On a pro forma basis, volume for the first nine
months of 2001 increased 10.1% over the comparable period of 2000, due to gains
across most consumer sectors. Beverages volume increased, due primarily to
growth in refreshment beverages, including powdered soft drinks in Brazil, China
and the Philippines and juice concentrate in Brazil. Snacks volume increased,
driven primarily by higher biscuits volume in Brazil and China, partially offset
by lower volume in
-32-
Argentina, due to economic weakness. In confectionery, volume was lower, as a
decline in chocolate confectionery in Brazil was partially offset by gains in
chewy candy in China. Cheese volume increased due primarily to cream cheese in
Australia and the Caribbean, and process cheese in the Philippines. Grocery
volume was higher, due primarily to gains in Latin America.
During the nine months of 2001, reported operating revenues increased $868
million (94.9%) over the first nine months of 2000, due primarily to the
acquisition of Nabisco ($848 million), higher volume/mix ($33 million) and the
shift in CDC revenues ($12 million), partially offset by unfavorable currency
movements ($144 million). On a pro forma basis, operating revenues increased
2.8%.
Reported operating companies income for the first nine months of 2001 increased
$121 million (93.1%) over the comparable period of 2000, due primarily to the
acquisition of Nabisco ($71 million), lower marketing, administration and
research costs ($41 million), higher margins ($10 million), higher volume/mix
and the shift in CDC income ($5 million), partially offset by unfavorable
currency movements ($20 million). On a pro forma basis, operating companies
income increased 26.3%.
Kraft Foods North America
- -------------------------
Operating Results
For the Three Months Ended September 30,
----------------------------------------
2001 2000
------ ------
(in millions)
Reported volume (in pounds):
Cheese, Meals and Enhancers 1,221 1,125
Biscuits, Snacks and Confectionery 584 13
Beverages, Desserts and Cereals 853 760
Oscar Mayer and Pizza 384 372
-------- -------
Total reported volume (in pounds) 3,042 2,270
Nabisco volume:
Cheese, Meals and Enhancers 107
Biscuits, Snacks and Confectionery 573
Beverages, Desserts and Cereals 18
--------- ---------
Pro forma volume (in pounds) 3,042 2,968
========= =========
Reported operating revenues:
Cheese, Meals and Enhancers $ 2,438 $ 2,237
Biscuits, Snacks and Confectionery 1,479 82
Beverages, Desserts and Cereals 1,225 1,188
Oscar Mayer and Pizza 913 872
---------- ---------
Total reported operating revenues 6,055 4,379
Nabisco operating revenues:
Cheese, Meals and Enhancers 210
Biscuits, Snacks and Confectionery 1,397
Beverages, Desserts and Cereals 38
--------- ---------
Pro forma operating revenues $ 6,055 $ 6,024
========= =========
-33-
For the Three Months Ended September 30,
----------------------------------------
2001 2000
------ ------
(in millions)
Reported operating companies income:
Cheese, Meals and Enhancers $ 494 $ 456
Biscuits, Snacks and Confectionery 278 24
Beverages, Desserts and Cereals 267 240
Oscar Mayer and Pizza 144 134
-------- -------
Total reported operating companies income 1,183 854
Integration Costs:
Cheese, Meals and Enhancers 31
Beverages, Desserts and Cereals 6
Nabisco operating companies income:
Cheese, Meals and Enhancers 51
Biscuits, Snacks and Confectionery 196
Beverages, Desserts and Cereals 6
-------- -------
Pro forma operating companies income $ 1,220 $ 1,107
======== =======
Reported volume for the third quarter of 2001 increased 34.0% over the
comparable period of 2000, due primarily to the acquisition of Nabisco. On a pro
forma basis, volume for the third quarter of 2001 increased 2.5%, due primarily
to higher volume in the Beverages, Desserts and Cereals segment and the Oscar
Mayer and Pizza segment, as well as contributions from new products.
During the third quarter of 2001, reported operating revenues increased $1,676
million (38.3%) over the third quarter of 2000, due primarily to the acquisition
of Nabisco ($1,639 million) and higher volume/mix ($36 million), partially
offset by unfavorable currency movements ($19 million). On a pro forma basis,
operating revenues increased slightly, as the impact of higher volume was
partially offset by unfavorable currency movements, lower coffee pricing due to
declines in commodity costs and unfavorable product mix.
Reported operating companies income for the third quarter of 2001 increased $329
million (38.5%) over the comparable period of 2000, primarily reflecting the
acquisition of Nabisco ($321 million), lower marketing, administration and
research costs ($107 million) and higher volume/mix ($28 million), partially
offset by unfavorable margins ($79 million) and integration costs ($37 million).
On a pro forma basis, operating companies income increased 10.2%.
The following discusses operating results within each of Kraft Foods North
America's business segments.
Cheese, Meals and Enhancers. Reported volume in the third quarter of 2001
increased 8.5% over the comparable period of 2000, due primarily to the
acquisition of Nabisco. On a pro forma basis, volume in the third quarter of
2001 decreased 0.9% from the comparable period in 2000, due to the Company's
decision to exit lower-margin, non-branded businesses in both cheese and U.S.
Foodservice. Volume gains in meals reflected higher shipments of dinners. In
Canada, increased shipments were driven by higher consumption of branded
products and new product introductions.
During the third quarter of 2001, reported operating revenues increased $201
million (9.0%) over the third quarter of 2000, due primarily to the acquisition
of Nabisco ($207 million) and higher pricing ($29 million), partially offset by
lower volume/mix ($22 million) and unfavorable currency movements ($14 million).
On a pro forma basis, operating revenues decreased 0.4%.
Reported operating companies income for the third quarter of 2001 increased $38
million (8.3%) over the comparable period of 2000, due primarily to the
acquisition of Nabisco ($58 million), lower marketing, administration and
research costs ($89 million), partially offset by higher costs ($76 million,
driven by higher
-34-
cheese commodity costs) and integration costs ($31 million). On a pro forma
basis, operating companies income increased 3.6%.
Biscuits, Snacks and Confectionery. Reported volume in the third quarter of 2001
increased more than 100% over the comparable period in 2000, due to the
acquisition of Nabisco. On a pro forma basis, volume in the third quarter of
2001 decreased 0.3% from the comparable period in 2000, due primarily to lower
volume in confectionery and snacks, partially offset by volume gains in
biscuits. In salty snacks, volume declined, due primarily to lower shipments of
nuts to non-grocery channels. In biscuits, volume was higher, driven by crackers
and pet snacks as well as new product introductions.
During the third quarter of 2001, reported operating revenues increased $1,397
million, more than 100% over the third quarter of 2000, due to the acquisition
of Nabisco. On a pro forma basis, operating revenues were equal with the results
from the comparable period of 2000.
Reported operating companies income for the third quarter of 2001 increased $254
million, more than 100%, from the comparable period of 2000, primarily
reflecting the acquisition of Nabisco. On a pro forma basis, operating companies
income increased 26.4%, due primarily to productivity and synergy savings
resulting from the Nabisco acquisition.
Beverages, Desserts and Cereals. Reported volume in the third quarter of 2001
increased 12.2% over the comparable period of 2000, due primarily to volume
gains in beverages and the acquisition of Nabisco. On a pro forma basis, volume
in the third quarter of 2001 increased 9.6% over the comparable period of 2000,
due primarily to volume gains in ready-to-drink refreshment beverages, resulting
from new product introductions. Powdered soft drinks volume also increased due
to merchandising programs. Desserts volume was down as lower shipments of dry
packaged desserts were partially offset by gains in ready-to-eat desserts.
Cereal volume declined due primarily to increased competition in the
ready-to-eat cereal category.
During the third quarter of 2001, reported operating revenues increased $37
million (3.1%) from the third quarter of 2000, due primarily to higher
volume/mix ($19 million) and the acquisition of Nabisco ($29 million), partially
offset by lower pricing ($11 million, resulting from commodity-related price
decreases on coffee). On a pro forma basis, operating revenues decreased 0.1%.
Reported operating companies income for the third quarter of 2001 increased $27
million (11.3%) over the comparable period of 2000, primarily reflecting
favorable margins ($22 million) and lower marketing, administration and research
costs ($18 million), partially offset by integration costs ($6 million). On a
pro forma basis, operating companies income increased 11.0%.
Oscar Mayer and Pizza. Volume in the third quarter of 2001 increased 3.2% over
the comparable period in 2000, due to gains across all major categories. The
processed meats business recorded volume gains in luncheon meats, hot dogs,
lunch combinations and soy-based meat alternatives. Volume in the pizza business
benefited from new products.
During the third quarter of 2001, operating revenues increased $41 million
(4.7%) over the third quarter of 2000, due primarily to higher volume/mix ($40
million).
Operating companies income for the third quarter of 2001 increased $10 million
(7.5%) over the comparable period of 2000, primarily reflecting lower marketing,
administration and research costs ($18 million) and higher volume/mix ($17
million), partially offset by unfavorable margins ($25 million, driven by higher
meat and cheese commodity costs).
-35-
Kraft Foods International
- -------------------------
Operating Results
For the Three Months Ended September 30,
----------------------------------------
2001 2000
---- ----
(in millions)
Reported volume (in pounds):
Europe, Middle East and Africa 657 658
Latin America and Asia Pacific 505 195
-------- --------
Total reported volume (in pounds) 1,162 853
Volume of businesses sold:
Europe, Middle East and Africa (10)
Latin America and Asia Pacific (12)
Nabisco volume:
Europe, Middle East and Africa 9
Latin America and Asia Pacific 273
-------- --------
Pro forma volume (in pounds) 1,162 1,113
======== ========
Reported operating revenues:
Europe, Middle East and Africa $ 1,427 $ 1,552
Latin America and Asia Pacific 574 284
-------- --------
Total reported operating revenues 2,001 1,836
Operating revenues of businesses sold:
Europe, Middle East and Africa (33)
Latin America and Asia Pacific (7)
Nabisco operating revenues:
Europe, Middle East and Africa 10
Latin America and Asia Pacific 280
-------- --------
Pro forma operating revenues $ 2,001 $ 2,086
======== ========
Reported operating companies income:
Europe, Middle East and Africa $ 199 $ 350
Latin America and Asia Pacific 78 39
-------- --------
Total reported operating companies income 277 389
Operating companies income of businesses sold:
Europe, Middle East and Africa (12)
Latin America and Asia Pacific (1)
Gain on sale of a French confectionery business:
Europe, Middle East and Africa (139)
Nabisco operating companies income:
Europe, Middle East and Africa (1)
Latin America and Asia Pacific 20
-------- --------
Pro forma operating companies income $ 277 $ 256
======== ========
Reported volume for the third quarter of 2001 increased 36.2% over the
comparable period in 2000, due primarily to the acquisition of Nabisco. On a pro
forma basis, volume for the third quarter of 2001 increased 4.4% over the
comparable period of 2000, due primarily to gains across most consumer sectors
and growth in the developing markets of Central and Eastern Europe, Latin
America and Asia Pacific.
-36-
Reported operating revenues for the third quarter of 2001 increased $165 million
(9.0%) over the third quarter of 2000, due primarily to the acquisition of
Nabisco ($289 million) and higher volume/mix, partially offset by unfavorable
currency movements ($142 million) and revenues from divested businesses ($40
million). On a pro forma basis, operating revenues decreased 4.1%, reflecting
unfavorable currency movements and commodity-related coffee price decreases.
Reported operating companies income for the third quarter of 2001 decreased $112
million (28.8%) from the third quarter of 2000, due primarily to the gain on the
French Confectionery Sale in 2000 ($139 million), unfavorable currency ($14
million) and income from divested businesses ($13 million), partially offset by
the acquisition of Nabisco ($22 million), favorable margins ($14 million) and
lower marketing, administration and research costs ($13 million). On a pro forma
basis, operating companies income increased 8.2%.
The following discusses operating results within each of Kraft Foods
International's business segments.
Europe, Middle East and Africa. Reported volume for the third quarter of 2001
decreased 0.2% from the comparable period of 2000. On a pro forma basis, volume
in the third quarter of 2001 was equal with the results from the comparable
period in 2000, as gains in the developing markets of Central and Eastern Europe
and growth in Austria, Greece, Norway, Spain, Sweden and the United Kingdom were
offset by lower volumes in Germany and Italy. Snacks volume increased, driven by
confectionery and salty snacks. Overall growth in confectionery, which included
several new product introductions was moderated by a shortfall in Germany, due
to increased price competition and trade inventory reductions. Volume for salty
snacks also grew, driven by gains in Lithuania and the Ukraine. In beverages,
volume growth was driven by coffee and refreshment beverages. Coffee volume grew
in many markets including Romania, Morocco and Bulgaria, which benefited from
recent acquisitions. In Germany, coffee volume declined reflecting trade
inventory reductions. Refreshment beverages volume increased, driven by higher
shipments to the Middle East and Africa. Cheese volume declined, as lower volume
in Germany, reflecting increased price competition, was partially offset by
higher cream cheese volume in Belgium, Italy, Spain and Away from Home markets.
In grocery, lower volume was due to a shortfall in Germany, reflecting
aggressive competition and a difficult trade environment. Convenient meals
volume was down, due to lower canned meats volume in Italy, partially offset by
new lunch combination products in the United Kingdom.
Reported operating revenues for the third quarter of 2001 decreased $125 million
(8.1%) from the comparable period of 2000, due primarily to unfavorable currency
movements ($85 million), revenues from divested businesses ($33 million) and
lower pricing ($18 million, primarily coffee pricing), partially offset by the
acquisition of Nabisco ($10 million). On a pro forma basis, operating revenues
decreased 6.7%, reflecting unfavorable currency movements and commodity-related
coffee price decreases.
Reported operating companies income for the third quarter of 2001 decreased $151
million (43.1%) from the comparable period of 2000, primarily reflecting a gain
on the French Confectionery Sale in 2000 ($139 million), income from divested
businesses ($12 million) and unfavorable currency movements ($7 million),
partially offset by favorable margins. On a pro forma basis, operating companies
income increased 0.5%.
Latin America and Asia Pacific. Reported volume for the third quarter of 2001
increased more than 100% over the comparable period of 2000, due primarily to
the acquisition of Nabisco. On a pro forma basis, volume for the third quarter
of 2001 increased 10.7%, driven by gains across most consumer sectors and in
several countries including Australia, Brazil, China, Peru and the Philippines,
partially offset by a decline in Argentina due to economic weakness. Snacks
volume increased driven primarily by higher biscuits volume in Brazil, China and
Peru. Beverages volume also increased due primarily to growth in refreshment
beverages, including powdered soft drinks in Brazil and the Philippines and
juice concentrate in Brazil. In cheese, volume increased due primarily to cream
cheese volume in Australia and process cheese in the Philippines.
During the third quarter of 2001, reported operating revenues increased $290
million or more than 100% over the third quarter of 2000, due primarily to the
acquisition of Nabisco ($279 million), higher volume/mix and
-37-
higher pricing ($16 million), partially offset by unfavorable currency movements
($57 million). On a pro forma basis, operating revenues increased 3.1%.
Reported operating companies income for the third quarter of 2001 increased $39
million (100.0%) over the comparable period of 2000, due primarily to the
acquisition of Nabisco ($23 million) and lower marketing, administration and
research costs ($16 million). On a pro forma basis, operating companies income
increased 34.5%.
Financial Review
- ----------------
Net Cash Provided by Operating Activities
- -----------------------------------------
During the first nine months of 2001, net cash provided by operating activities
was $1.4 billion compared with $2.1 billion in the comparable 2000 period. The
decrease in net cash provided by operating activities reflects unusual timing of
payments and receipts as follows:
o The estimated $155 million shift in cash outflows from the first quarter of
2000 to the fourth quarter of 1999 attributable to the century date change.
o The 53rd week in the fourth quarter of 2000 resulted in the collection of
$80 million of accounts receivable from holiday sales. The Company would
normally collect these receivables in the first quarter of 2001.
o The Company paid taxes of $76 million in the first quarter of 2001 related
to the gain on the French Confectionery Sale in 2000.
o Interest payments in 2001 increased due primarily to an increase in debt
related to the Nabisco acquisition.
Net Cash Used in Investing Activities
- -------------------------------------
During the first nine months of 2001, net cash used in investing activities was
$723 million, up from $663 million in 2000. This increase in net cash used
primarily reflects an increase in capital expenditures and a decline in cash
proceeds from businesses sold, partially offset by a decline in cash used for
acquisitions.
Capital expenditures for the first nine months of 2001 were $691 million, up
from $568 million in 2000. These additional expenditures were due primarily to
the acquisition of Nabisco.
During the first nine months of 2000, the Company purchased Boca Burger, Inc.
and Balance Bar Co. for an aggregate cost of $358 million. During the first nine
months of 2001, the Company purchased coffee businesses in Romania, Morocco and
Bulgaria for an aggregate purchase price of $80 million.
Net Cash Used in Financing Activities
- -------------------------------------
During the first nine months of 2001, net cash used in financing activities was
$700 million, down from $1.4 billion in 2000. The decline in the cash outflow
was due primarily to the absence of any dividend payments in 2001 versus
dividends paid to Philip Morris in 2000 when the Company was a wholly-owned
subsidiary of Philip Morris.
Working Capital, Debt and Liquidity
- -----------------------------------
The Company's working capital deficit at September 30, 2001 was $1.1 billion, as
compared to a deficit of $438 million at December 31, 2000. Contributing to the
2001 deficit was the refinancing of two long-term Swiss franc notes payable to
Philip Morris with short-term Swiss franc borrowings from Philip Morris,
partially offset by a decrease in accounts payable, due primarily to the timing
of payments; higher raw material purchases; and a decrease in accrued marketing
costs.
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The Company's total debt, including intercompany accounts payable to Philip
Morris, was $16.7 billion at September 30, 2001, and $25.8 billion at December
31, 2000. The decrease was due primarily to the repayment of $8.4 billion of
long-term notes payable to Philip Morris with the net proceeds from the IPO. The
Company's debt-to-equity ratio was 0.72 at September 30, 2001 and 1.84 at
December 31, 2000.
During the third quarter of 2001, the Company declared its first regular
quarterly dividend of $0.13 per share on its Class A and Class B common stock,
payable in October 2001. The present annualized dividend rate is $0.52 per
common share. The declaration of dividends is subject to the discretion of the
Company's board of directors and will depend on various factors, including the
Company's net earnings, financial condition, cash requirements, future prospects
and other factors deemed relevant by the Company's board of directors.
During the third quarter of 2001, the Company refinanced the remaining portion
of an $11.0 billion long-term note-payable to Philip Morris with the proceeds
from commercial paper borrowings. In addition, during the second quarter of
2001, the Company refinanced the two long-term Swiss franc notes payable to
Philip Morris with short-term Swiss franc borrowings from Philip Morris at
variable interest rates.
During the third quarter of 2001, in anticipation of a public bond offering, the
Company converted the $4.0 billion, 7.40% note payable to Philip Morris,
originally maturing in December 2002, into a 3.56125% note payable to Philip
Morris maturing in November 2001. This short-term note has been reclassified as
long-term on the Company's condensed consolidated balance sheet at September 30,
2001 based upon the Company's ability and intention to refinance these
borrowings on a long-term basis. On November 2, 2001, the Company completed a
$4.0 billion public global bond offering, the net proceeds of which were used to
repay the 3.56125% short-term note payable to Philip Morris.
In July 2001, reflecting the Company's reduced requirements for credit
facilities following the IPO, Philip Morris terminated an existing $9.0 billion
364-day revolving credit agreement that could have been transferred to the
Company. Upon termination of this facility, the Company entered into agreements
for a $2.0 billion 5-year revolving credit facility maturing in July 2006 and a
$4.0 billion 364-day revolving credit facility maturing in July 2002. The
Company intends to use these credit facilities to support commercial paper
borrowings, the proceeds of which will be used for general corporate purposes.
At September 30, 2001, $2.0 billion of commercial paper borrowings that the
Company intends to refinance were reclassified as long-term debt. The Company
may continue to refinance long-term and short-term debt from time to time. The
nature and amount of the Company's long-term and short-term debt and the
proportionate amount of each can be expected to vary as a result of future
business requirements, market conditions and other factors. In addition, the
Company maintains credit lines with a number of lending institutions amounting
to approximately $430 million. The Company maintains these facilities primarily
to meet short-term working capital needs of its international businesses. The
Company believes that its cash from operations and existing credit facilities
will be sufficient to meet its working capital needs, planned capital
expenditures and payment of its anticipated quarterly dividends.
Market Risk
- -----------
The Company is exposed to market risk, primarily related to foreign exchange
rates, commodity prices and interest rates. These exposures are actively
monitored by management. To manage these exposures, the Company enters into a
variety of derivative financial instruments. The Company's objective is to
reduce, where it is deemed appropriate to do so, fluctuations in earnings and
cash flows associated with changes in foreign currency rates, commodity prices
and interest rates. It is the Company's policy and practice to use derivative
financial instruments only to the extent necessary to manage exposures. Since
the Company uses currency rate-sensitive and commodity price-sensitive
instruments to hedge a certain portion of its existing and anticipated
transactions, the Company expects that any loss in value for the hedge
instruments generally would be offset by increases in the value of the hedged
transactions. The Company does not use derivative financial instruments for
speculative purposes.
Foreign exchange rates. The Company is exposed to foreign currency exchange
movements, primarily in European, Canadian, Asian and Latin American currencies.
Consequently, it enters into various contracts,
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which change in value as foreign currency exchange rates fluctuate, to preserve
the value of commitments and forecasted transactions. The Company uses foreign
currency option and forward contracts to hedge certain transaction exposures and
forecasted foreign currency cash flows. The Company also enters into short-term
foreign currency swap contracts, primarily to hedge intercompany transactions
denominated in foreign currencies. At September 30, 2001 and December 31, 2000,
the Company had option and forward foreign exchange contracts with an aggregate
notional amount of $611 million and $237 million, respectively, for both the
purchase and/or sale of foreign currencies.
Commodities. The Company is exposed to price risk related to forecasted
purchases of certain commodities used as raw materials by the Company's
businesses. Accordingly, the Company enters into commodity future, forward and
option contracts to manage fluctuations in prices of forecasted purchases,
primarily cheese, coffee, cocoa, milk, sugar, wheat, soybean, corn and energy.
At September 30, 2001 and December 31, 2000, the Company had net long commodity
positions of $672 million and $617 million, respectively. Unrealized
gains/losses on net commodity positions were immaterial at September 30, 2001
and December 31, 2000.
Interest rates. The Company intends to manage its exposure to interest rate risk
through the proportion of fixed rate debt and variable rate debt in its total
debt portfolio. At December 31, 2000, nearly all of the Company's debt was
long-term at fixed rates, with the majority of it being indebtedness to Philip
Morris maturing in 2002 and 2009. During the second quarter of 2001, the Company
repaid a portion of that debt with proceeds from the IPO. In addition, the
Company refinanced two long-term Swiss franc notes payable to Philip Morris with
short-term Swiss franc borrowings from Philip Morris at variable interest rates.
During the third quarter of 2001, the Company refinanced the remaining portion
of an $11.0 billion long-term note-payable to Philip Morris with the proceeds
from commercial paper borrowings.
During the third quarter of 2001, in anticipation of a public bond offering, the
Company converted the $4.0 billion, 7.40% note payable to Philip Morris,
originally maturing in December 2002, into a 3.56125% note payable to Philip
Morris maturing in November 2001. This short-term note has been reclassified as
long-term on the Company's condensed consolidated balance sheet at September 30,
2001 based upon the Company's ability and intention to refinance these
borrowings on a long-term basis. On November 2, 2001, the Company completed a
$4.0 billion public global bond offering, the net proceeds of which were used to
repay the 3.56125% short-term note payable to Philip Morris.
At September 30, 2001, the Company had interest rate swap agreements which
converted $102 million of fixed rate debt to variable rate debt of which $29
million will mature in 2003 and $73 million will mature in 2004.
-------------------
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Company's financial position at September 30, 2001 and
December 31, 2000, or the Company's results of operations for the three and nine
months ended September 30, 2001 or the year ended December 31, 2000.
-------------------
Contingencies
- -------------
See Note 6 to the Condensed Consolidated Financial Statements for a discussion
of contingencies.
New Accounting Standards
- ------------------------
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and its related amendment, SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". These standards require
that all derivative financial instruments be recorded on the consolidated
balance sheets at their fair value as either assets or liabilities. Changes in
the fair value of derivatives are recorded each period in earnings or
accumulated other comprehensive losses, depending on whether a derivative is
designated and effective as part
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of a hedge transaction and, if it is, the type of hedge transaction. Gains and
losses on derivative instruments reported in accumulated other comprehensive
losses are included in earnings in the periods in which earnings are affected by
the hedged item. The adoption of these new standards did not have a material
effect on net earnings (less than $1 million) or accumulated other comprehensive
losses (less than $1 million).
The Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting
for Certain Sales Incentives". EITF Issue No. 00-14 addresses the recognition,
measurement and statement of earnings classification for certain sales
incentives and will be effective in the first quarter of 2002. As a result,
certain items previously included in cost of sales and in marketing,
administration and research costs on the consolidated statement of earnings will
be recorded as a reduction of operating revenues. The Company has determined
that the impact of adoption or subsequent application of EITF Issue No. 00-14
will not have a material effect on its consolidated financial position or
results of operations. Upon adoption, prior period amounts, which are not
expected to be significant, will be reclassified to conform to the new
requirements. In addition, the EITF reached a consensus on EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products". EITF Issue No. 00-25 requires that certain
expenses included in marketing, administration and research costs be recorded as
a reduction of operating revenues and will be effective in the first quarter of
2002. The Company is currently in the process of determining the impact of EITF
Issue No. 00-25.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". Effective January 1, 2002, the Company will no longer be required to
amortize goodwill and certain other intangible assets as a charge to earnings.
In addition, the Company will be required to review goodwill and other
intangible assets for potential impairment. The Company is currently in the
process of quantifying the impact of the new standards. However, the Company
anticipates that substantially all amortization of goodwill as a charge to
earnings will be eliminated.
Forward-Looking and Cautionary Statements
- -----------------------------------------
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
shareholders. One can identify these forward-looking statements by use of words
such as "strategy," "expects," "plans," "believes," "will," "estimates,"
"intends," "projects," "goals," "targets" and other words of similar meaning.
One can also identify them by the fact that they do not relate strictly to
historical or current facts. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results and outcomes to
differ materially from those contained in any forward-looking statement made by
or on behalf of the Company; any such statement is qualified by reference to the
following cautionary statements.
Each of the Company's segments is subject to intense competition, changes in
consumer preferences, the effects of changing prices for its raw materials and
local economic conditions. Their results are dependent upon their continued
ability to promote brand equity successfully, to anticipate and respond to new
consumer trends, to develop new products and markets and to broaden brand
portfolios, in order to compete effectively with lower priced products in a
consolidating environment at the retail and manufacturing levels, and to improve
productivity. The Company's results are also dependent on its ability to
successfully integrate and derive cost savings from the integration of Nabisco's
operations with the Company. In addition, the Company is subject to the effects
of foreign economies, currency movements and fluctuations in levels of customer
inventories. The food industry continues to be subject to the possibility that
consumers could lose confidence in the safety and quality of certain food
products. Developments in any of these areas, which are more fully described
above and which descriptions are incorporated into this section by reference,
could cause the Company's results to differ materially from results that have
been or may be projected by or on behalf of the Company. The Company cautions
that the foregoing list of important factors is not exclusive. The Company does
not undertake to update any forward-looking statement that may be made from time
to time by or on behalf of the Company.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Legal Proceedings
-----------------
The Company's subsidiaries are parties to a variety of legal
proceedings arising out of the normal course of business, including
the matters discussed below. While the results of litigation cannot be
predicted with certainty, management believes that the final outcome
of these proceedings will not have a material adverse effect on our
results of operations or financial position.
National Cheese Exchange Cases: Since 1996, seven putative class
actions have been filed by various dairy farmers alleging that the
Company and others engaged in a conspiracy to fix and depress the
prices of bulk cheese and milk through their trading activity on the
National Cheese Exchange. Plaintiffs seek injunctive and equitable
relief and unspecified treble damages. Two of the actions were
voluntarily dismissed by plaintiffs after class certification was
denied. Three cases were consolidated in state court in Wisconsin, and
in November 1999, the court granted the Company's motion for summary
judgment. In June 2001, the Wisconsin Court of Appeals affirmed the
trial court's ruling, but, on October 23, 2001, the Wisconsin
Supreme Court granted plaintiffs' petition for further review. The
Company's motions to dismiss were granted in the cases pending in
Illinois state court and in the United States District Court for the
Central District of California. Appellate courts have reversed and
remanded both cases for further proceedings. No classes have been
certified in any of the cases.
Environmental Matters
---------------------
In May 2001, the Attorney General for the State of Ohio notified the
Company that we may be subject to an enforcement action for alleged
violations of the state's water pollution control law at the Company's
cottage cheese and sour cream production facility in Farmdale, Ohio.
The Ohio Attorney General has alleged that this facility has exceeded
its water permit effluent limits and violated its reporting
requirements. The Attorney General has offered to attempt to negotiate
a settlement of this matter, and the Company has accepted the offer to
do so. The Company has received no indication from the state what
relief it is seeking in this matter. The Company recently installed
additional waste water treatment equipment at the facility, and the
facility currently is operating in compliance with its waste water
discharge permit.
In March 2000, the State of Missouri filed a civil enforcement action
in the Circuit Court of Boone County, Missouri against the Company and
affiliated companies alleging that the defendants' practice from 1995
through 1999 of sending spent wiener casings to a farm site near
Columbia, Missouri for recycling violated Missouri's solid waste and
clean water laws. The state is seeking civil penalties and injunctive
relief, including the removal of the spent casings from the farm site
and disposal in a permitted solid waste facility. The Company is
currently involved in settlement discussions with the state. The
Company believes that the ultimate resolution of this matter will not
have a material adverse impact on the Company.
The Company is potentially liable for certain environmental matters
arising from the operations of Nabisco's former wholly-owned
subsidiary, Rowe Industries. Rowe operated a small engine
manufacturing facility in Sag Harbor, New York in the 1950s, 1960s and
early 1970s that used various solvents. About 20 homes downgradient
from the site were connected to public drinking water in the mid-1980s
after solvents were detected in their individual wells. Since 1996,
three toxic tort cases have been brought against Nabisco in New York
state court, collectively by or on behalf of approximately 80
individuals, including 17 minors. The first case, filed on March 6,
1996 in Supreme Court of the State of New York, was dismissed as
barred by the statute of limitations. This decision
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has now been affirmed on appeal. The other two cases were both filed
on January 3, 2000, in Supreme Court of the State of New York. Each
complaint states that the relief sought by the plaintiffs is $10
million in compensatory and $100 million in punitive damages. The
primary claims are based on alleged personal injury, diminution of
property value and fear or risk of cancer. On May 16, 2001, the trial
court granted our summary judgment motion as to all but one of the
plaintiffs in each of these cases. The plaintiffs are appealing this
decision. Discovery is proceeding as to the two remaining plaintiffs.
The Company is also potentially liable for certain environmental
matters arising from Nabisco's or a former affiliate's connection with
Del Monte Corporation in the 1970s and 1980s. Del Monte Corporation
operated a plantation on Oahu, Hawaii, which used various pesticides
for crop application over an extended time period. A pesticide spill
at the site led to the closure of nearby drinking water wells and an
investigation, under the oversight of the United States Environmental
Protection Agency, of soil and groundwater contamination associated
with the site. Upon completion of this investigation, the EPA will be
selecting a plan to remedy the contamination.
In addition, two lawsuits were filed in 1999 against Del Monte
Corporation and approximately six other Oahu growers and pesticide
manufacturers seeking unspecified compensatory and punitive damages
for alleged pesticide contamination of drinking water supplies. The
Board of Water Supply of the City and County of Honolulu filed the
first lawsuit on September 27, 1999 in the Circuit Court of the First
Circuit of the State of Hawaii. The second lawsuit, which was filed on
October 7, 1999 in the Circuit Court of the First Circuit of the State
of Hawaii, was brought by numerous area residents alleging bodily
injury, emotional distress and wrongful death. Both cases are in the
early stages of discovery and, to our knowledge, Del Monte Corporation
has not received a settlement demand in either case.
The Company believes that a third party has indemnification
obligations for these potential Del Monte Corporation environmental
liabilities. In June 2001, the Company entered into an agreement with
this third party, under which the third party will fully indemnify the
Company for the Hawaii matters described above.
-43-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12 Statement regarding computation of ratios of earnings to
fixed charges.
(b) Reports on Form 8-K. The Registrant filed with the Securities and
Exchange Commission (i) a Current Report on Form 8-K on August 10,
2001 covering Item 5 (Other Events) which contained portions of the
prospectus (dated June 12, 2001) in connection with the initial public
offering of 280,000,000 shares of the Registrant's Class A common
stock at an initial public offering price of $31.00 per share; (ii) a
Current Report on Form 8-K on October 18, 2001 covering Item 5 (Other
Events) and Item 7C (Financial Statements, Pro Forma Financial
Information and Exhibits) which contained the press release announcing
the Company's financial results for the third quarter ended September
30, 2001; and (iii) a Current Report on Form 8-K on November 2, 2001
covering Item 5 (Other Events) and Item 7C (Financial Statements,
Pro Forma Financial Information and Exhibits) which contained the
terms agreement and certain other documents related to the Company's
public offering of debt.
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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/ JAMES P. DOLLIVE
James P. Dollive, Senior Vice President and
Chief Financial Officer
November 13, 2001
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