XMEX:KFT Quarterly Report 10-Q Filing - 6/30/2012
Effective Date 6/30/2012
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One)
For the quarterly period ended June 30, 2012 OR
For the transition period from to Commission file number 1-16483
Kraft Foods Inc. (Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (847) 646-2000 Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x At July 31, 2012, there were 1,774,648,852 shares of the registrant’s Class A common stock outstanding.
Kraft Foods Inc. Table of Contents
In this report, “Kraft Foods,” “we,” “us” and “our” refers to Kraft Foods Inc. and subsidiaries, and “Common Stock” refers to Kraft Foods’ Class A common stock.
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PART I – FINANCIAL INFORMATION Item 1. Financial Statements. Kraft Foods Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (in millions of U.S. dollars, except per share data) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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Kraft Foods Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Earnings (in millions of U.S. dollars) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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Kraft Foods Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions of U.S. dollars, except share data) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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Kraft Foods Inc. and Subsidiaries Condensed Consolidated Statements of Equity (in millions of U.S. dollars, except per share data) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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Kraft Foods Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in millions of U.S. dollars) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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Kraft Foods Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Basis of Presentation The condensed consolidated financial statements include Kraft Foods, as well as our wholly owned and majority owned subsidiaries. Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of our financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results. The condensed consolidated balance sheet data as of December 31, 2011 were derived from audited financial statements, but do not include all disclosures required by U.S. GAAP. You should read these statements in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2011. The majority of our operating subsidiaries report results as of the last Saturday of the period. A portion of our international operating subsidiaries report results as of the last calendar day of the period. In the second quarter of 2011, we changed the consolidation date for certain operations of our Kraft Foods Europe segment and in the Latin America, Central and Eastern Europe (“CEE”) and Middle East and Africa (“MEA”) regions within our Kraft Foods Developing Markets segment. Previously, these operations primarily reported results two weeks prior to the end of the period. Now, our Kraft Foods Europe segment reports results as of the last Saturday of each period. Certain operations within our Kraft Foods Developing Markets segment now report results as of the last calendar day of the period or the last Saturday of the period. These changes resulted in a favorable impact to net revenues of approximately $360 million and a favorable impact of approximately $50 million to operating income in the second quarter of 2011. Subsequent Events: We evaluated subsequent events and have reflected accounting and disclosure requirements related to material subsequent events in our financial statements and related notes. Note 2. Proposed Spin-Off Transaction On August 4, 2011, we announced that our Board of Directors intends to create two independent public companies: (i) a global snacks business (the “Global Snacks Business”) and (ii) a North American grocery business (the “North American Grocery Business”). We expect to create these companies through a spin-off of the North American Grocery Business to our shareholders (“Spin-Off”). Following the Spin-Off, we will hold the Global Snacks Business and change our name to Mondelēz International, Inc. (“Mondelēz”). Mondelēz will primarily consist of our current Kraft Foods Europe and Developing Markets segments as well as our North American snack and confectionery businesses and related categories in our Canada & N.A. Foodservice segment. Our subsidiary, Kraft Foods Group, Inc. (“Kraft Foods Group”) will hold the North American Grocery Business, which will primarily consist of our current U.S. Beverages, U.S. Cheese, U.S. Convenient Meals and U.S. Grocery segments, grocery-related categories in our Canada & N.A. Foodservice segment as well as the Planters and Corn Nuts brands and businesses. We have received a private letter ruling from the Internal Revenue Service (“IRS”) confirming that, based on certain representations, assumptions and undertakings, the Spin-Off will be tax-free to our U.S. shareholders for U.S. federal income tax purposes.
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On March 14, 2012, our Board of Directors approved $1.7 billion of one-time costs and $0.4 billion in capital expenditures to facilitate the Spin-Off and optimize both the North American Grocery Business and Global Snacks Business. Of the $1.7 billion of one-time costs, approximately $0.6 billion relates to Spin-Off transaction and transition costs such as professional service fees within our finance, legal and information system functions. (See “2012 – 2014 Restructuring Program” below for information on the $1.1 billion of restructuring and related implementation costs.) In addition to Spin-Off transaction and transition costs, we also anticipate incurring an estimated $400 million to $800 million of Spin-Off financing and related costs to redistribute debt and secure investment grade credit ratings for both the North American Grocery Business and the Global Snacks Business. We refer to one-time Spin-Off transaction, transition and financing and related costs collectively as “Spin-Off Costs”. During the three months ended June 30, 2012, we recorded Spin-Off Costs of $100 million within selling, general and administrative expenses and $28 million in interest and other expenses, net. During the six months ended June 30, 2012 we recorded Spin-Off Costs of $139 million within selling, general and administrative expenses and $162 million in interest and other expenses, net. On April 2, 2012, Kraft Foods Group filed the initial registration statement on Form 10 with the U.S. Securities and Exchange Commission (“SEC”). On August 2, 2012, we announced that we expect to complete the Spin-Off at 5:00 p.m., Eastern Daylight Time, on October 1, 2012. The Spin-Off transaction is subject to a number of conditions, including the continued validity of the private letter ruling that we received from the IRS, the receipt and continued validity of a ruling from the Canada Revenue Agency related to the Spin-Off, the effectiveness of the registration statement on Form 10 that was filed with the SEC in connection with the Spin-Off, the execution of agreements between our Global Snacks Business and the North American Grocery Business related to the Spin-Off, further diligence as appropriate and final approval from our Board of Directors. While our current target is to complete the Spin-Off on October 1, 2012, we cannot assure that the Spin-Off will be completed on the anticipated timeline or at all or that the terms of the Spin-Off will not change. Note 3. Inventories Inventories at June 30, 2012 and December 31, 2011 were:
Note 4. Property, Plant and Equipment Property, plant and equipment at June 30, 2012 and December 31, 2011 were:
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Note 5. Goodwill and Intangible Assets Goodwill by reportable segment at June 30, 2012 and December 31, 2011 was:
Intangible assets at June 30, 2012 and December 31, 2011 were:
Non-amortizable intangible assets consist substantially of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited (“Cadbury”). Amortizable intangible assets consist primarily of trademark licenses, customer-related intangibles, process technology and non-compete agreements. At June 30, 2012, the weighted-average life of our amortizable intangible assets was 13.2 years. The movements in goodwill and intangible assets were:
During the six months ended June 30, 2012, we recorded an impairment charge of $20 million within asset impairment and exit costs for the impairment of an intangible asset in Japan. Amortization expense was $53 million for the three months and $109 million for the six months ended June 30, 2012 and $57 million for the three months and $114 million for the six months ended June 30, 2011. We currently estimate annual amortization expense for each of the next five years to be approximately $215 million.
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Note 6. 2012-2014 Restructuring Program On March 14, 2012, our Board of Directors approved $1.1 billion of restructuring and related implementation costs (“2012-2014 Restructuring Program”) reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the restructuring and implementation activities is to ensure that both the North American Grocery Business and Global Snacks Business are set up to operate efficiently and execute their respective business strategies upon separation of the companies and prospectively. The program is expected to be completed by the end of 2014. Restructuring Costs: We anticipate incurring approximately $950 million of restructuring charges, of which approximately $560 million are expected to be cash expenditures through 2014. We recorded one-time restructuring charges of $83 million in the three months and $161 million in the six months ended June 30, 2012 within asset impairment and exit costs. We also recorded a $1 million final adjustment related to our former restructuring program in the quarter. We spent $30 million in the three months and $42 million in the six months ended June 30, 2012 in cash, and we also recognized non-cash asset write-downs totaling $21 million in the three months and $55 million in the six months ended June 30, 2012. At June 30, 2012, a $45 million restructuring liability was recorded within other current liabilities.
Implementation Costs: Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities. We believe the disclosure of implementation costs provides readers of our financial statements greater transparency to the total costs of our 2012-2014 Restructuring Program. Through the end of 2014, we expect to incur approximately $150 million of implementation costs. To date, we recorded implementation costs of $7 million in the three months and $8 million in the six months ended June 30, 2012 within cost of sales and selling, general and administrative expense across our North American segments. These costs primarily relate to reorganization costs related to our sales function and the optimization of information systems infrastructure. Restructuring and Implementation Costs by Segment: During the three and six months ended June 30, 2012, we recorded restructuring and implementation costs within segment operating income as follows:
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Note 7. Integration Program Our combination with Cadbury continues to provide meaningful synergies and cost savings. We expect to realize annual cost savings of approximately $800 million by the end of 2013. Additionally, we expect to create revenue synergies from investments in distribution, marketing and product development. In order to achieve these cost savings and synergies and combine and integrate the two businesses, we expect to incur total integration charges of approximately $1.5 billion through the end of 2013 (the “Integration Program”). Integration Program costs include the costs associated with combining our operations with Cadbury’s and are separate from the costs related to the acquisition. We incurred charges under the Integration Program of $35 million for the three months and $78 million for the six months ended June 30, 2012 and $136 million for the three months and $240 million for the six months ended June 30, 2011. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as within general corporate expenses. Since the inception of the Integration Program, we have incurred $1.3 billion of the $1.5 billion in expected charges. Liability activity for the Integration Program for the six months ended June 30, 2012 was (in millions):
Note 8. Debt Borrowing Arrangements: On March 8, 2012, in connection with the Spin-Off, we, as a guarantor, with Kraft Foods Group, entered into a $4.0 billion 364-day senior unsecured revolving credit facility that expires on March 7, 2013. On July 18, 2012, we effected a mandatory $2.6 billion reduction of the unused commitment under the facility, leaving us with $1.4 billion of borrowing capacity under the facility. We intend to use the proceeds of this facility, as necessary, to support working capital needs and for other general corporate purposes. As of June 30, 2012, no amounts were drawn on this credit facility. On May 18, 2012, in connection with the Spin-Off, we, as a guarantor, with Kraft Foods Group, entered into a $3.0 billion five-year senior unsecured revolving credit facility that expires on May 17, 2017. All committed pro rata borrowings under the facility will bear interest at a variable annual rate based on the London Inter-Bank Offered Rate (“LIBOR”) or a defined base rate, at the election of Kraft Foods Group, plus an applicable margin based on (i) for any date prior to the consummation of the Spin-Off, the ratings of our long-term senior unsecured indebtedness and (ii) for any date on or following the consummation of the Spin-Off, the ratings of Kraft Foods Group indebtedness. The revolving credit agreement requires Kraft Foods Group to maintain a minimum total shareholders’ equity (excluding accumulated other comprehensive income or losses and any income or losses recognized in connection with “mark-to-market” accounting in respect of pension and other retirement plans). The revolving credit agreement also contains customary representations, covenants and events of default. We intend to use the proceeds of this facility for general corporate purposes. As of June 30, 2012, no amounts were drawn on this credit facility.
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Long-Term Debt: On January 10, 2012, we issued $800 million of floating rate notes which mature on July 10, 2013 and bear interest at a rate equal to the three-month LIBOR plus 0.875%. We received net proceeds of $798.8 million from the issuance. The notes have a special mandatory redemption. Upon public announcement of the record date for the proposed Spin-Off, we will be required to issue a notice of redemption of all of the notes at a redemption price equal to 100% of the aggregate principal amount of the notes, plus accrued and unpaid interest through the day prior to the redemption date. On June 1, 2012, $900 million of our 6.25% notes matured. The notes were repaid using primarily commercial paper borrowings which were subsequently repaid on June 4, 2012 in connection with the Kraft Foods Group $6.0 billion notes issuance. On June 4, 2012, Kraft Foods Group issued $6.0 billion of senior unsecured notes at a weighted-average effective rate of 3.938%. We received net proceeds of $5.9 billion which we used to pay $3.6 billion of outstanding commercial paper borrowings and expect to use the remaining cash proceeds to pay down additional debt over time or for general corporate purposes. We also recorded approximately $260 million of deferred financing costs which will be recognized in interest expense over the life of the notes. The general terms of the $6.0 billion notes are:
On July 18, 2012, we completed a debt exchange in which $3.6 billion of our debt was exchanged for debt of Kraft Foods Group in connection with our Spin-Off capitalization plan. No cash was generated from the exchange. The debt exchange will be reflected in our consolidated financial statements next quarter. The general terms of the $3.6 billion notes issued by Kraft Foods Group are:
Fair Value of Our Debt: The fair value of our short-term borrowings at June 30, 2012 and December 31, 2011 is based upon current market interest rates and approximates the amounts recorded. The fair value of our long-term debt was determined using Level 1 quoted prices in active markets for the publicly traded debt obligations. The aggregate fair value of our total debt was $36,654 million as compared with the carrying value of $30,249 million at June 30, 2012, and $31,113 million as compared with the carrying value of $26,931 million at December 31, 2011.
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Note 9. Stock Plans Restricted and Deferred Stock: In January 2012, we granted 1.3 million shares of stock in connection with our long-term incentive plan, and the market value per share was $37.63 on the date of grant. In February 2012, as part of our annual equity program, we issued 2.2 million shares of restricted and deferred stock to eligible employees, and the market value per restricted or deferred share was $38.00 on the date of grant. During the six months ended June 30, 2012, we issued 0.7 million shares of additional restricted and deferred shares with a weighted-average market value of $30.91 per share primarily in connection with our long-term incentive plan and awards granted in 2009 which vested during the first quarter of 2012. In aggregate, we issued 4.2 million restricted and deferred shares during the six months ended June 30, 2012, including those issued as part of our long-term incentive plan, with a weighted-average market value per share of $36.63. During the six months ended June 30, 2012, 4.8 million shares of restricted and deferred stock vested at a market value of $183 million. Stock Options: In February 2012, as part of our annual equity program, we granted 12.8 million stock options to eligible employees at an exercise price of $38.00. During the six months ended June 30, 2012, we issued 0.6 million of additional stock options with a weighted-average exercise price of $37.99 per share on the date of grant. In aggregate, we granted 13.4 million stock options during the six months ended June 30, 2012 at a weighted-average exercise price of $37.99. During the six months ended June 30, 2012, there were 4.2 million stock options exercised with a total intrinsic value of $46 million. Note 10. Pension, Postretirement and Postemployment Benefit Plans Pension Plans Components of Net Periodic Pension Cost: Net periodic pension cost consisted of the following for the three and six months ended June 30, 2012 and 2011:
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Employer Contributions: We make contributions to our U.S. and non-U.S. pension plans primarily to the extent that they are tax deductible and do not generate an excise tax liability. During the first six months of 2012, we contributed $22 million to our U.S. plans and $182 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $33 million to our U.S. plans and approximately $243 million to our non-U.S. plans during the remainder of 2012. However, our actual contributions may differ due to many factors, including changes in tax and other benefit laws, significant differences between expected and actual pension asset performance or interest rates and considerations related to the Spin-Off. We may make additional contributions to primarily U.S. and Canadian pension plans in preparation for the separation of the Kraft Foods Group and Mondelēz plans. Postretirement Benefit Plans Net postretirement health care costs during the three and six months ended June 30, 2012 and 2011 consisted of:
Postemployment Benefit Plans Net postemployment costs during the three and six months ended June 30, 2012 and 2011 consisted of:
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Note 11. Financial Instruments See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2011 for additional information on our accounting and purpose for entering into derivatives and our overall risk management strategies. Fair Value of Derivative Instruments: Derivative instruments were recorded at fair value in the condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011 as follows:
The fair value of our asset derivatives is recorded within other current assets and the fair value of our liability derivatives is recorded within other current liabilities. The fair value (asset / (liability)) of our derivative instruments at June 30, 2012 was determined using:
The fair value (asset / (liability)) of our derivative instruments at December 31, 2011 was determined using:
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Level 2 financial assets and liabilities consist of commodity forwards and options; foreign exchange forwards; currency swaps; and interest rate swaps. Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount or based on pricing models that rely on market observable inputs such as commodity prices. Foreign currency contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk. Derivative Volume: The net notional values of our derivative instruments as of June 30, 2012 and December 31, 2011 were:
Cash Flow Hedges: Cash flow hedge activity, net of taxes, within accumulated other comprehensive earnings / (losses) included:
After-tax gains / (losses) recognized in other comprehensive earnings / (losses) were:
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After-tax gains / (losses) reclassified from accumulated other comprehensive earnings / (losses) into net earnings were:
Pre-tax gains / (losses) on ineffectiveness recognized in net earnings were:
Pre-tax gains / (losses) on amounts excluded from effectiveness testing recognized in net earnings were:
In the first quarter of 2012, we recognized a loss of $130 million in interest and other expenses, net related to certain forward-starting interest rate swaps for which the planned timing of the related forecasted debt was changed in March 2012 in connection with our Spin-Off plans and related debt capitalization plans. We record pre-tax (i) gains or losses reclassified from accumulated other comprehensive earnings / (losses) into earnings, (ii) gains or losses on ineffectiveness, and (iii) gains or losses on amounts excluded from effectiveness testing in:
We expect to transfer unrealized losses of $29 million (net of taxes) for commodity cash flow hedges, unrealized gains of $20 million (net of taxes) for foreign currency cash flow hedges and unrealized losses of $13 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months. Hedge Coverage: As of June 30, 2012, we had hedged forecasted transactions for the following durations:
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Fair Value Hedges: Pre-tax gains / (losses) due to changes in fair value of our interest rate swaps and related hedged long-term debt were recorded in interest and other expense, net:
Economic Hedges: Pre-tax gains / (losses) recorded in net earnings for economic hedges which are not designated as hedging instruments included:
Hedges of Net Investments in Foreign Operations: After-tax gains / (losses) related to hedges of net investments in foreign operations included:
Note 12. Commitments and Contingencies Legal Proceedings: We routinely are involved in legal proceedings, claims and governmental inspections or investigations (“Legal Matters”) arising in the ordinary course of our business. A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success. Accordingly, after we acquired Cadbury in February 2010 we began reviewing and adjusting, as needed, Cadbury’s operations in light of U.S. and international standards as well as our policies and practices. We initially focused on such high priority areas as food safety, the Foreign Corrupt Practices Act (“FCPA”) and antitrust. Based upon Cadbury’s pre-acquisition policies and compliance programs and our post-acquisition reviews, our preliminary findings indicated that Cadbury’s overall state of compliance was sound. Nonetheless, through our reviews, we determined that in certain jurisdictions, including India, there appeared to be facts and circumstances warranting further investigation. We are continuing our investigations in certain jurisdictions, including in India, and we continue to cooperate with governmental authorities.
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As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a Cadbury facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are cooperating with the U.S. and Indian governments in their investigations of these matters. On March 1, 2011, the Starbucks Coffee Company (“Starbucks”) took control of the Starbucks packaged coffee business (“Starbucks CPG business”) in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. The arbitration proceeding began on July 11, 2012 and is ongoing. If the final determination of this dispute is not made prior to the date of the Spin-Off, Kraft Foods Group will continue prosecuting and defending the dispute. Kraft Foods Group will direct any recovery awarded in the arbitration proceeding to us. We will reimburse Kraft Foods Group for any costs and expenses it incurs in connection with the arbitration proceeding following the Spin-Off. While we cannot predict with certainty the results of any Legal Matters in which we are currently involved, we do not expect that the ultimate costs to resolve any of these Legal Matters individually and in the aggregate will have a material adverse effect on our financial results. Third-Party Guarantees: We have third-party guarantees primarily covering the long-term obligations of our vendors. As part of those transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At June 30, 2012, the carrying amount of our third-party guarantees on our condensed consolidated balance sheet and the maximum potential payment under these guarantees was $21 million. Substantially all of these guarantees expire at various times through 2018. As of June 30, 2012, we and three of our indirect wholly owned subsidiaries are joint and several guarantors of $1.0 billion of indebtedness issued by Cadbury Schweppes US Finance LLC and maturing on October 1, 2013. Following the Spin-Off, one of the guarantors of the indebtedness issued by Cadbury Schweppes US Finance LLC will become an indirect wholly owned subsidiary of Kraft Foods Group. We have agreed to indemnify Kraft Foods Group pursuant to a separation and distribution agreement, in the event its subsidiary is called upon to satisfy its obligation under the guarantee.
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Note 13. Earnings Per Share Basic and diluted earnings per share (“EPS”) were calculated using the following:
We exclude antidilutive Kraft Foods stock options from our calculation of weighted-average shares for diluted EPS. We excluded 13.3 million antidilutive stock options for the three months and 9.4 million antidilutive stock options for the six months ended June 30, 2012, and we excluded 16.0 million antidilutive stock options for the three months and 17.6 million antidilutive stock options for the six months ended June 30, 2011. Note 14. Segment Reporting We manufacture and market packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. We manage and report operating results through three geographic units: Kraft Foods North America, Kraft Foods Europe and Kraft Foods Developing Markets. We manage the operations of Kraft Foods North America and Kraft Foods Europe by product category and we manage the operations of Kraft Foods Developing Markets by location. Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery, U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets.
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We use segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of our U.S. pension plan cost (which is a component of cost of sales and selling, general and administrative expenses), general corporate expenses (which are a component of selling, general and administrative expenses) and amortization of intangibles for all periods presented. We exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, the gains and losses on hedging activities are recorded within segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews. Our segment net revenues and earnings consisted of:
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On March 1, 2011, Starbucks took control of the Starbucks CPG business in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. The arbitration proceeding began on July 11, 2012 and is ongoing. If the final determination of this dispute is not made prior to the date of the Spin-Off, Kraft Foods Group will continue prosecuting and defending the dispute. Kraft Foods Group will direct any recovery awarded in the arbitration proceeding to us. We will reimburse Kraft Foods Group for any costs and expenses it incurs in connection with the arbitration proceeding following the Spin-Off. In March 2012, we divested property of a Kraft Foods Developing Markets subsidiary located in Russia for approximately $72 million in net proceeds and recorded a $55 million pre-tax gain within selling, general and administrative expenses. Net changes in unrealized gains / (losses) on hedging activities were favorable, primarily related to gains on foreign currency contracts and commodity hedging activity of $29 million for the three months ended June 30, 2012, and were unfavorable due to losses of $100 million for the three months ended June 30, 2011. Net changes in unrealized gains / (losses) on hedging activities were favorable, primarily related to gains on foreign currency contracts and commodity hedging activity of $47 million for the six months ended June 30, 2012, and were unfavorable due to losses of $38 million for the six months ended June 30, 2011. In connection with our 2012-2014 Restructuring Program, we recorded restructuring charges of $83 million for the three months and $161 million for the six months ended June 30, 2012. We also recorded implementation costs of $7 million for the three months and $8 million for the six months ended June 30, 2012. We recorded the restructuring charges in operations, as a part of asset impairment and exit costs, and recorded the implementation costs in operations, as a part of cost of sales and selling, general and administrative expenses. These charges are recorded primarily within our Kraft Foods North America geographic unit. We incurred charges under the Integration Program of $35 million for the three months and $78 million for the six months ended June 30, 2012 and $136 million for the three months and $240 million for the six months ended June 30, 2011. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as within general corporate expenses. The increase in general corporate expenses for the three months ended June 30, 2012 was due primarily to $100 million of Spin-Off Costs incurred during the quarter, partially offset by lower Integration Program costs. The increase in general corporate expenses for the six months ended June 30, 2012 was due primarily to $139 million of Spin-Off Costs incurred during the quarter, partially offset by lower Integration Program costs. The decrease in interest and other expense, net for the three months ended June 30, 2012 was due primarily to lower average outstanding debt during the quarter, partially offset by Spin-Off Costs within interest expense of $28 million. The increase in interest and other expense, net for the six months ended June 30, 2012 was due primarily to Spin-Off Costs within interest expense of $162 million.
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Net revenues by consumer sector, which includes Kraft macaroni and cheese dinners in the Convenient Meals sector and the separation of Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets into sector components, were:
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Description of the Company We manufacture and market packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. We have operations in more than 80 countries and sell our products in approximately 170 countries. Proposed Spin-Off Transaction On August 4, 2011, we announced that our Board of Directors intends to create two independent public companies: (i) a global snacks business (the “Global Snacks Business”) and (ii) a North American grocery business (the “North American Grocery Business”). We expect to create these companies through a spin-off of the North American Grocery Business to our shareholders (“Spin-Off”). Following the Spin-Off, we will hold the Global Snacks Business and change our name to Mondelēz International, Inc. (“Mondelēz”). Mondelēz will primarily consist of our current Kraft Foods Europe and Developing Markets segments as well as our North American snack and confectionery businesses and related categories in our Canada & N.A. Foodservice segment. Our subsidiary, Kraft Foods Group, Inc. (“Kraft Foods Group”) will hold the North American Grocery Business, which will primarily consist of our current U.S. Beverages, U.S. Cheese, U.S. Convenient Meals and U.S. Grocery segments, grocery-related categories in our Canada & N.A. Foodservice segment as well as the Planters and Corn Nuts brands and businesses. We have received a private letter ruling from the Internal Revenue Service (“IRS”) confirming that, based on certain representations, assumptions and undertakings, the Spin-Off will be tax-free to our U.S. shareholders for U.S. federal income tax purposes. On April 2, 2012, Kraft Foods Group filed the initial registration statement on Form 10 with the U.S. Securities and Exchange Commission (“SEC”). On August 2, 2012, we announced that we expect to complete the Spin-Off at 5:00 p.m., Eastern Daylight Time, on October 1, 2012. The Spin-Off transaction is subject to a number of conditions, including the continued validity of the private letter ruling that we received from the IRS, the receipt and continued validity of a ruling from the Canada Revenue Agency related to the Spin-Off, the effectiveness of the registration statement on Form 10 that was filed with the SEC in connection with the Spin-Off, the execution of agreements between our Global Snacks Business and the North American Grocery Business related to the Spin-Off, further diligence as appropriate and final approval from our Board of Directors. While our current target is to complete the Spin-Off on October 1, 2012, we cannot assure that the Spin-Off will be completed on the anticipated timeline or at all or that the terms of the Spin-Off will not change. Summary of Results and Other Highlights This summary provides highlights of the Discussion and Analysis that follows.
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Discussion and Analysis Items Affecting Comparability of Financial Results Spin-Off Costs On March 14, 2012, our Board of Directors approved $1.7 billion of one-time costs and $0.4 billion in capital expenditures to facilitate the Spin-Off and optimize both the North American Grocery Business and Global Snacks Business. Of the $1.7 billion of one-time costs, approximately $0.6 billion relates to Spin-Off transaction and transition costs such as professional service fees within our finance, legal and information system functions. (See “2012 – 2014 Restructuring Program” below for information on the $1.1 billion of restructuring and related implementation costs.) In addition to Spin-Off transaction and transition costs, we also anticipate incurring an estimated $400 million to $800 million of Spin-Off financing and related costs to redistribute debt and secure investment grade credit ratings for both the North American Grocery Business and the Global Snacks Business. We refer to one-time Spin-Off transaction, transition and financing and related costs collectively as “Spin-Off Costs.” During the three months ended June 30, 2012, we recorded Spin-Off Costs of $100 million within selling, general and administrative expenses and $28 million in interest and other expenses, net. During the six months ended June 30, 2012, we recorded Spin-Off Costs of $139 million within selling, general and administrative expenses and $162 million in interest and other expenses, net. 2012-2014 Restructuring Program On March 14, 2012, our Board of Directors approved $1.1 billion of restructuring and related implementation costs (“2012-2014 Restructuring Program”) reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the restructuring and implementation activities is to ensure that both the North American Grocery Business and Global Snacks Business are set up to operate efficiently and execute their respective business strategies upon separation of the companies and prospectively. The program is expected to be completed by the end of 2014, and we expect to fund the restructuring and implementation costs with cash from operations and financing activities. We anticipate incurring approximately $950 million of restructuring charges, of which approximately $560 million are expected to be cash expenditures through 2014. We recorded one-time restructuring charges of $83 million, or $0.03 per diluted share, for the three months ended and $161 million, or $0.06 per diluted share, for the six months ended June 30, 2012 within asset impairment and exit costs. We spent $30 million in the three months and $42 million in the six months ended June 30, 2012 in cash, and we also recognized non-cash asset write-downs totaling $21 million in the three months and $55 million in the six months ended June 30, 2012. We also incurred implementation costs of $7 million for the three months and $8 million for the six months ended June 30, 2012, which had an immaterial impact per diluted share. These costs were recorded within cost of sales and selling, general and administrative expenses. See Note 6, “2012-2014 Restructuring Program,” for additional information. Integration Program Our combination with Cadbury continues to provide meaningful synergies and cost savings. We expect to realize annual cost savings of approximately $800 million by the end of 2013. Additionally, we expect to create revenue synergies from investments in distribution, marketing and product development. In order to achieve these cost savings and synergies and combine and integrate the two businesses, we expect to incur total integration charges of approximately $1.5 billion through the end of 2013 (the “Integration Program”). Integration Program costs include the costs associated with combining our operations with Cadbury’s and are separate from the costs related to the acquisition. We incurred charges under the Integration Program of $35 million for the three months and $78 million for the six months ended June 30, 2012 and $136 million for the three months and $240 million for the six months ended June 30, 2011. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as within general corporate expenses. Since the inception of the Integration Program, we have incurred $1.3 billion of the $1.5 billion in expected charges. At June 30, 2012, we had an accrual of $307 million related to the Integration Program. Refer to Note 7, Integration Program, for further details of our Integration Program.
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Accounting Calendar Changes in 2011 In the second quarter of 2011, we changed the consolidation date for certain operations of our Kraft Foods Europe segment and in the Latin America, Central and Eastern Europe (“CEE”) and Middle East and Africa (“MEA”) regions within our Kraft Foods Developing Markets segment. Previously, these operations primarily reported results two weeks prior to the end of the period. Now, our Kraft Foods Europe segment reports results as of the last Saturday of each period. Certain operations within our Kraft Foods Developing Markets segment now report results as of the last calendar day of the period or the last Saturday of the period. These changes resulted in a favorable impact to net revenues of approximately $360 million and a favorable impact of approximately $50 million to operating income in the second quarter of 2011. Starbucks CPG Business On March 1, 2011, the Starbucks Coffee Company (“Starbucks”) took control of the Starbucks packaged coffee business (“Starbucks CPG business”) in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. The arbitration proceeding began on July 11, 2012 and is ongoing. If the final determination of this dispute is not made prior to the date of the Spin-Off, Kraft Foods Group will continue prosecuting and defending the dispute. Kraft Foods Group will direct any recovery awarded in the arbitration proceeding to us. We will reimburse Kraft Foods Group for any costs and expenses it incurs in connection with the arbitration proceeding following the Spin-Off. Provision for Income Taxes Our effective tax rate was 28.7% in the second quarter of 2012 and 28.4% for the first six months of 2012. The 2012 second quarter effective tax rate was favorably impacted by net discrete items totaling $19 million which primarily related to the resolution of outstanding tax matters, principally in foreign jurisdictions. For the first six months of 2012, our effective tax rate was favorably impacted by net discrete items totaling $26 million which primarily related to the resolution of outstanding tax matters, principally in foreign jurisdictions, expiration of the statute of limitations in various foreign jurisdictions and net favorable foreign and state audit settlements. Our effective tax rate was 28.5% in the second quarter of 2011 and 30.7% in the first six months of 2011. The 2011 second quarter effective tax rate was favorably impacted by net discrete items totaling $52 million, arising principally from the favorable resolution with foreign tax authorities of several tax positions taken in prior years. For the first six months of 2011, our effective tax rate was favorably impacted by net discrete items totaling $58 million, primarily from favorable resolutions reached with foreign tax authorities in the second quarter.
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Consolidated Results of Operations The following discussion compares our consolidated results of operations for the three and six months ended June 30, 2012 and 2011. Three Months Ended June 30:
Net Revenues – Net revenues decreased $592 million (4.3%) to $13,286 million in the second quarter of 2012, and Organic Net Revenues(1) increased $454 million (3.4%) to $13,971 million as follows:
Organic Net Revenues growth was driven by higher net pricing, partially offset by unfavorable volume/mix (including a detriment of approximately 1.2 pp due to the Easter shift which benefited the first quarter this year). Higher net pricing, primarily due to pricing actions taken in prior quarters, was realized across all reportable business segments, as we increased pricing to offset higher input costs. Unfavorable volume/mix was driven by lower shipments across all reportable business segments within Kraft Foods North America, except U.S. Cheese, and in Kraft Foods Europe, partially offset by higher shipments in Kraft Foods Developing Markets. Unfavorable foreign currency decreased net revenues by $685 million, due primarily to the strength of the U.S. dollar relative to most foreign currencies, primarily the euro, Brazilian real, Canadian dollar, Indian rupee and Mexican peso. In addition, non-recurring accounting calendar changes made in the second quarter of 2011 resulted in a year-over-year decrease in net revenues of $361 million.
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Operating Income – Operating income increased $73 million (4.0%) to $1,879 million in the second quarter of 2012, and Adjusted Operating Income(1) increased $162 million (8.3%) to $2,104 million due to the following:
Higher net pricing, which reflected primarily pricing actions taken in prior quarters, outpaced increased input costs during the quarter. The increase in input costs was driven by higher raw material costs, partially offset by lower manufacturing costs. Unfavorable volume/mix was driven by declines in all reportable segments in Kraft Foods North America, except U.S. Convenient Meals, and was partially offset by favorable contributions from Kraft Foods Developing Markets and Kraft Foods Europe. Total selling, general and administrative expenses decreased $154 million from the second quarter of 2011, due primarily to benefits from a favorable impact of foreign currency on expenses, lower Integration Program costs, and higher expenses in the prior year related to accounting calendar changes, partially offset by the Spin-Off Costs and 2012-2014 Restructuring Program costs incurred in the second quarter of 2012. Excluding these factors, selling, general and administrative expenses increased $72 million from the second quarter of 2011, driven primarily by Kraft Foods Developing Markets in support of its business growth. The change in unrealized gains / (losses) on hedging activities increased operating income by $129 million, as we recognized gains of $29 million in the second quarter of 2012, versus losses of $100 million in the second quarter of 2011. Unfavorable foreign currency decreased operating income by $75 million, due primarily to the strength of the U.S. dollar relative to most foreign currencies, primarily the euro, Brazilian real, Canadian dollar and Mexican peso. Accounting calendar changes made in the second quarter of 2011 resulted in a year-over-year decrease in operating income of $51 million. As a result of the net effect of these drivers, operating income margin increased, from 13.0% in the second quarter of 2011 to 14.1% in the second quarter of 2012. The margin increase was due primarily to the favorable change in unrealized gains, the impact of pricing actions taken in prior quarters net of increased input costs, and lower Integration Program costs, partially offset by 2012-2014 Restructuring Program costs and Spin-Off Costs.
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Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $1,029 million increased by $53 million (5.4%) in the second quarter of 2012. Diluted EPS attributable to Kraft Foods was $0.58 in the second quarter of 2012, up $0.03 (5.5%) from $0.55 in the second quarter of 2011. Operating EPS(1) was $0.68 in the second quarter of 2012, up $0.06 (9.7%) from $0.62 in the second quarter of 2011. These changes were due to the following:
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Six Months Ended June 30:
Net Revenues – Net revenues decreased $72 million (0.3%) to $26,379 million in the first six months of 2012, and Organic Net Revenues(1) increased $1,264 million (4.9%) to $27,263 million as follows:
Organic Net Revenues growth was driven by higher net pricing and favorable volume/mix. Higher net pricing, including the impact of pricing from prior periods, was reflected across all reportable business segments as we increased pricing to offset higher input costs. Favorable volume/mix was driven by higher shipments in Kraft Foods Developing Markets and Kraft Foods Europe, mostly offset by lower shipments across all reportable business segments within Kraft Foods North America. Unfavorable foreign currency decreased net revenues by $884 million, due primarily to the strength of the U.S. dollar relative to most foreign currencies, primarily the euro, Brazilian real and Indian rupee. In addition, non-recurring accounting calendar changes made in the second quarter of 2011 resulted in a year-over-year decrease in net revenues of $361 million. The Starbucks CPG business cessation also decreased net revenues by $91 million.
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Operating Income – Operating income increased $118 million (3.4%) to $3,570 million in the first six months of 2012, and Adjusted Operating Income(1) increased $264 million (7.2%) to $3,956 million due to the following:
Higher net pricing, including the impact of pricing actions taken in previous periods, outpaced increased input costs during the first six months of 2012. The increase in input costs was driven by higher raw material costs, partially offset by lower manufacturing costs. Unfavorable volume/mix was driven by declines in all reportable segments in Kraft Foods North America, except U.S. Convenient Meals, mostly offset by strong contributions from Kraft Foods Developing Markets and Kraft Foods Europe. Total selling, general and administrative expenses decreased $265 million from the first six months of 2011, due primarily to benefits from a favorable impact of foreign currency on expenses, lower Integration Program costs, higher expenses in the prior year related to accounting calendar changes, a gain on the sale of property in Russia and the Starbucks CPG business cessation, partially offset by the Spin-Off Costs and 2012-2014 Restructuring Program costs incurred in the first six months of 2012. Excluding these factors, selling, general and administrative expenses increased $113 million from the first six months of 2011, driven entirely by Kraft Foods Developing Markets in support of its business growth. The change in unrealized gains / (losses) on hedging activities increased operating income by $85 million, as we recognized gains of $47 million in the first six months of 2012, versus losses of $38 million in the first six months of 2011. Unfavorable foreign currency decreased operating income by $84 million, due primarily to the strength of the U.S. dollar relative to most foreign currencies, primarily the euro, Brazilian real, partially offset by the impact of adjustments in the prior year related to the highly inflationary Venezuelan economy. Accounting calendar changes made in the second quarter of 2011 resulted in a decrease in operating income of $51 million. During the first quarter of 2012, we recorded an asset impairment charge of $20 million related to a trademark in Japan. The Starbucks CPG cessation, which occurred on March 1, 2011, decreased operating income by $15 million. As a result of the net effect of these drivers, operating income margin increased, from 13.1% in the first six months of 2011 to 13.5% in the first six months of 2012. The margin increase was due primarily to overhead leverage, lower Integration Program costs and the impact of pricing actions taken in prior quarters net of increased input costs, partially offset by 2012-2014 Restructuring Program costs and Spin-Off Costs.
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Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $1,842 million increased by $67 million (3.8%) in the first six months of 2012. Diluted EPS attributable to Kraft Foods was $1.03 in the first six months of 2012, up $0.02 (2.0%) from $1.01 in the first six months of 2011. Operating EPS(1) was $1.25 in the first six months of 2012, up $0.11 (9.6%) from $1.14 in the first six months of 2011. These changes were due to the following:
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Results of Operations by Reportable Segment We manage and report operating results through three geographic units: Kraft Foods North America, Kraft Foods Europe and Kraft Foods Developing Markets. We manage the operations of Kraft Foods North America and Kraft Foods Europe by product category and we manage the operations of Kraft Foods Developing Markets by location. Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery, U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets. The following discussion compares the net revenues and earnings of each of our reportable segments for the three and six months ended June 30, 2012 and 2011.
As discussed in Note 14, Segment Reporting, management uses segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of our U.S. pension plan cost (which are a component of cost of sales and selling, general and administrative expenses), general corporate expenses (which are a component of selling, general and administrative expenses) and amortization of intangibles for all periods presented.
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We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, we record the gains and losses on hedging activities within segment operating results. We exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. On March 1, 2011, Starbucks took control of the Starbucks CPG business in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. The arbitration proceeding began on July 11, 2012 and is ongoing. If the final determination of this dispute is not made prior to the date of the Spin-Off, Kraft Foods Group will continue prosecuting and defending the dispute. Kraft Foods Group will direct any recovery awarded in the arbitration proceeding to us. We will reimburse Kraft Foods Group for any costs and expenses it incurs in connection with the arbitration proceeding following the Spin-Off. In March 2012, we divested property of a Kraft Foods Developing Markets subsidiary located in Russia for approximately $72 million in net proceeds and recorded a $55 million pre-tax gain within selling, general and administrative expenses. Net changes in unrealized gains / (losses) on hedging activities were favorable, primarily related to gains on foreign currency contracts and commodity hedging activity of $29 million for the three months ended June 30, 2012, and were unfavorable due to losses of $100 million for the three months ended June 30, 2011. Net changes in unrealized gains / (losses) on hedging activities were favorable, primarily related to gains on foreign currency contracts and commodity hedging activity of $47 million for the six months ended June 30, 2012, and were unfavorable due to losses of $38 million for the six months ended June 30, 2011. In connection with our 2012-2014 Restructuring Program, we recorded restructuring charges of $83 million for the three months and $161 million for the six months ended June 30, 2012. We also recorded implementation costs of $7 million for the three months and $8 million for the six months ended June 30, 2012. We recorded the restructuring charges in operations, as a part of asset impairment and exit costs, and recorded the implementation costs in operations, as a part of cost of sales and selling, general and administrative expenses. These charges are recorded primarily within our Kraft Foods North America geographic unit. We incurred charges under the Integration Program of $35 million for the three months and $78 million for the six months ended June 30, 2012 and $136 million for the three months and $240 million for the six months ended June 30, 2011. We recorded these charges in operations, as a part of selling, general and administrative expenses primarily within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as within general corporate expenses. The increase in general corporate expenses for the three months ended June 30, 2012 was due primarily to $100 million of Spin-Off Costs incurred during the quarter, partially offset by lower Integration Program costs. The increase in general corporate expenses for the six months ended June 30, 2012 was due primarily to $139 million of Spin-Off Costs incurred during the quarter, partially offset by lower Integration Program costs. The decrease in interest and other expense, net for the three months ended June 30, 2012 was due primarily to lower average outstanding debt during the quarter, partially offset by Spin-Off Costs within interest expense of $28 million. The increase in interest and other expense, net for the six months ended June 30, 2012 was due primarily to Spin-Off Costs within interest expense of $162 million.
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U.S. Beverages
Three Months Ended June 30: Net revenues decreased $1 million (0.1%), due to unfavorable volume/mix (0.9 pp, including a detriment of approximately 0.6 pp due to the Easter shift), partially offset by higher net pricing (0.8 pp). Unfavorable volume/mix was driven primarily by lower shipments in Capri Sun ready-to-drink beverages and powdered beverages, partially offset by higher shipments in Kool-Aid ready-to-drink beverages and MiO liquid concentrate. Higher net pricing was due primarily to higher input cost-driven pricing in ready-to-drink and powdered beverages, partially offset by lower input cost-driven pricing in coffee. Segment operating income decreased $4 million (2.9%), due primarily to unfavorable volume/mix, costs incurred for the 2012-2014 Restructuring Program and higher raw material costs. These unfavorable drivers were mostly offset by lower manufacturing costs and higher net pricing. Six Months Ended June 30: Net revenues decreased $114 million (7.1%), due to the impact of the Starbucks CPG business cessation (5.3 pp) and unfavorable volume/mix (3.6 pp), partially offset by higher net pricing (1.8 pp). Unfavorable volume/mix was driven primarily by lower shipments in Capri Sun ready-to-drink beverages due to higher sales in the fourth quarter of 2011 in advance of an announced increase in list prices, Maxwell House coffee and powdered beverages, which was partially offset by higher shipments in Kool-Aid ready-to-drink beverages, Gevalia coffee due to its introduction into the retail market and MiO liquid concentrate. Higher net pricing was due primarily to higher input cost-driven pricing in ready-to-drink and powdered beverages, partially offset by lower input cost-driven pricing in coffee. Segment operating income decreased $67 million (22.4%), due primarily to higher raw material costs, unfavorable volume/mix, costs incurred for the 2012-2014 Restructuring Program and the impact of the Starbucks CPG business cessation. These unfavorable drivers were partially offset by higher net pricing, lower advertising and consumer promotion costs and lower manufacturing costs.
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U.S. Cheese
Three Months Ended June 30: Net revenues increased $25 million (2.9%), due to higher net pricing (2.9 pp), as volume/mix was flat (including detriments of approximately 3.2 pp due to the Easter shift and approximately 1.0 pp due to product pruning). Higher net pricing across all major cheese categories, except natural cheese, was due to input cost-driven pricing actions. Volume/mix was flat driven primarily by lower shipments in cultured and cream cheese categories, offset by higher shipments in natural and processed cheese categories. Segment operating income increased $13 million (9.1%), due primarily to higher net pricing, lower manufacturing costs and lower other selling, general and administrative expenses (excluding advertising and consumer promotion costs), partially offset by costs incurred for the 2012-2014 Restructuring Program, higher advertising and consumer promotion costs and unfavorable volume/mix. Six Months Ended June 30: Net revenues increased $83 million (4.7%), due to higher net pricing (7.9 pp), partially offset by unfavorable volume/mix (3.2 pp, including a detriment of approximately 0.7 pp due to product pruning). Higher net pricing, across all major cheese categories, was due to input cost-driven pricing actions. Unfavorable volume/mix was driven primarily by lower shipments in cultured, natural cheese, processed cheese and cream cheese categories, partially offset by higher shipments in snacking cheeses. Segment operating income increased $46 million (16.6%), due primarily to higher net pricing, lower manufacturing costs and lower other selling, general and administrative expenses (excluding advertising and consumer promotion costs), partially offset by higher raw material costs (primarily higher dairy costs), costs incurred for the 2012-2014 Restructuring Program, unfavorable volume/mix and higher advertising and consumer promotion costs.
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U.S. Convenient Meals
Three Months Ended June 30: Net revenues increased $22 million (2.5%), due to favorable volume/mix (1.3 pp, including detriments of approximately 2.0 pp due to product pruning and approximately 0.9 pp due to the Easter shift) and higher net pricing (1.2 pp). Higher net pricing was due to input cost-driven pricing actions primarily related to Lunchables and hot dogs. Favorable volume/mix was driven primarily by higher shipments in lunch meats and bacon, partially offset by lower shipments in hot dogs and Lunchables. Segment operating income increased $30 million (30.3%), due to higher net pricing, lower manufacturing costs, lower other selling, general and administrative expenses (excluding advertising and consumer promotion costs) and favorable volume/mix, partially offset by costs incurred for the 2012-2014 Restructuring Program. Six Months Ended June 30: Net revenues increased $37 million (2.2%), due to higher net pricing (2.0 pp) and favorable volume/mix (0.2 pp, including a detriment of approximately 2.0 pp due to product pruning). Higher net pricing was due to input cost-driven pricing actions primarily related to hot dogs and Lunchables. Favorable volume/mix was primarily driven by higher shipments in lunch meats and bacon, partially offset by lower shipments in hot dogs. Segment operating income increased $18 million (8.8%), due primarily to higher net pricing, lower manufacturing costs and lower other selling, general and administrative expenses (excluding advertising and consumer promotion costs), partially offset by higher raw material costs and costs incurred for the 2012-2014 Restructuring Program.
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U.S. Grocery
Three Months Ended June 30: Net revenues increased $16 million (1.6%), due to higher net pricing (4.9 pp), partially offset by unfavorable volume/mix (3.3 pp, including a detriment of approximately 2.9 pp due to the Easter shift). Higher net pricing was realized across most key categories, including Kraft macaroni and cheese dinners, pourable dressings and spoonable dressings. Unfavorable volume/mix was driven by lower shipments in pourable dressings, barbecue sauce, dessert toppings, spoonable dressings and ready-to-eat desserts, partially offset by higher shipments in Kraft macaroni and cheese dinners and Planters peanut butter. Segment operating income increased $2 million (0.5%), due to higher net pricing, lower advertising and consumer promotion costs and lower other selling, general and administrative expenses, partially offset by unfavorable volume/mix, higher raw material costs and costs incurred for the 2012-2014 Restructuring Program. Six Months Ended June 30: Net revenues increased $74 million (4.2%), due to higher net pricing (3.9 pp) and favorable volume/mix (0.3 pp). Higher net pricing was realized across most key categories, including Kraft macaroni and cheese dinners, pourable dressings, spoonable dressings and ready-to-eat desserts. Favorable volume/mix was driven by higher shipments in Kraft macaroni and cheese dinners, Planters peanut butter and dry packaged desserts, mostly offset by lower shipments in barbecue sauce, ready-to-eat desserts and pourable dressings. Segment operating income increased $19 million (2.8%), due to higher net pricing, lower advertising and consumer promotion costs and lower other selling, general and administrative expenses, partially offset by higher raw material costs, unfavorable volume/mix and costs incurred for the 2012-2014 Restructuring Program.
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U.S. Snacks
Three Months Ended June 30: Net revenues increased $45 million (3.0%), due to higher net pricing (7.4 pp), partially offset by unfavorable volume/mix (4.4 pp, including a detriment of approximately 0.3 pp due to product pruning). Biscuits net revenues increased due to higher net pricing across most key products, partially offset by unfavorable volume/mix including the impact of package size changes across certain products. Biscuits unfavorable volume/mix was due primarily to lower shipments in cookies, primarily Chips Ahoy!, 100 Calorie Packs and Oreo, partially offset by the introduction of belVita and higher shipments in crackers, primarily Honey Maid and Triscuits. Snack nuts net revenues decreased slightly, due to unfavorable volume/mix, mostly offset by higher net pricing. Confectionery net revenues decreased, due to unfavorable volume/mix and lower net pricing. Segment operating income increased $6 million (3.1%), due to higher net pricing, lower advertising and consumer promotion costs, lower Integration Program costs and lower manufacturing costs, partially offset by higher raw material costs, unfavorable volume/mix, costs incurred for the 2012-2014 Restructuring Program and higher other selling, general and administrative expenses. Six Months Ended June 30: Net revenues increased $93 million (3.1%), due to higher net pricing (7.4 pp), partially offset by unfavorable volume/mix (4.3 pp, including a detriment of approximately 0.3 pp due to product pruning). Biscuits net revenues increased due to higher net pricing across most key products, partially offset by unfavorable volume/mix including the impact of package size changes across certain products. Biscuits unfavorable volume/mix was due primarily to lower shipments in crackers, primarily Premium, 100 Calorie Packs and Wheat Thins, and cookies, primarily Chips Ahoy!, partially offset by higher shipments due to the introduction of belVita and volume gains in Newtons and Oreo. Snack nuts net revenues increased, due to higher net pricing, partially offset by unfavorable volume/mix. Confectionery net revenues decreased, due to unfavorable volume/mix, partially offset by higher net pricing. Segment operating income increased $17 million (4.4%), due to higher net pricing, lower advertising and consumer promotion costs, lower Integration Program costs and lower manufacturing costs, partially offset by higher raw material costs, unfavorable volume/mix, costs incurred for the 2012-2014 Restructuring Program and higher other selling, general and administrative expenses.
39
Canada & N.A. Foodservice
Three Months Ended June 30: Net revenues decreased $34 million (2.6%), due to unfavorable foreign currency (2.8 pp) and unfavorable volume/mix (2.0 pp including a detriment of 3.2 pp due to product pruning), partially offset by higher net pricing (2.2 pp). In Canada, net revenues decreased driven by unfavorable foreign currency and unfavorable volume/mix, partially offset by higher net pricing. Unfavorable volume/mix was due primarily to the completion of a co-manufacturing agreement from a previous divestiture, the Del Monte ready-to-drink product exit and lower shipments in grocery and confections, partially offset by higher shipments in beverages, biscuits and cheese. In N.A. Foodservice, net revenues decreased driven by unfavorable volume/mix and unfavorable foreign currency. Segment operating income decreased $12 million (6.4%), due primarily to costs incurred for the 2012-2014 Restructuring Program, unfavorable volume/mix, higher other selling, general and administrative expenses (excluding advertising and consumer promotion costs) and higher raw material costs, partially offset by higher net pricing, lower Integration Program costs and lower manufacturing costs. Six Months Ended June 30: Net revenues decreased $24 million (1.0%), due to unfavorable volume/mix (2.3 pp, including a detriment of 2.9 pp due to product pruning), unfavorable foreign currency (1.8 pp) and the impact of the Starbucks CPG business cessation (0.2 pp), partially offset by higher net pricing (3.3 pp). In Canada, net revenues decreased driven by unfavorable foreign currency, unfavorable volume/mix and the impact of the Starbucks CPG business cessation, partially offset by higher net pricing. Unfavorable volume/mix was due primarily to the completion of a co-manufacturing agreement from a previous divestiture, the Del Monte ready-to-drink product exit and lower shipments in grocery, beverages and confections, partially offset by higher shipments in biscuits and cheese. In N.A. Foodservice, net revenues decreased driven by unfavorable volume/mix and unfavorable foreign currency, mostly offset by higher net pricing. Segment operating income decreased $39 million (11.5%), due to higher raw material costs, costs incurred for the 2012-2014 Restructuring Program, higher other selling, general and administrative expenses (excluding advertising and consumer promotion costs), unfavorable volume/mix and unfavorable foreign currency, partially offset by higher net pricing and lower Integration Program costs.
40
Kraft Foods Europe
Three Months Ended June 30: Net revenues decreased $521 million (14.8%), due to unfavorable foreign currency (8.4 pp), the impact of prior year’s accounting calendar changes (7.8 pp) and unfavorable volume/mix (1.1 pp, including a detriment of approximately 1.8 pp due to the Easter shift), partially offset by higher net pricing (2.5 pp). Unfavorable foreign currency primarily reflected the strength of the U.S. dollar relative to the euro, British pound and Swedish krona. Unfavorable volume/mix was driven primarily by lower shipments in coffee and gum & candy, partially offset by higher shipments in biscuits. Higher net pricing was reflected across all categories except chocolate. Segment operating income decreased $19 million (4.6%), due primarily to higher raw material costs, the impact of prior year’s accounting calendar changes, unfavorable foreign currency and higher advertising and consumer promotion costs, partially offset by higher net pricing, lower Integration Program costs and lower manufacturing costs. Six Months Ended June 30: Net revenues decreased $386 million (5.9%), due to unfavorable foreign currency (5.8 pp) and the impact of prior year’s accounting calendar changes (4.3 pp), partially offset by higher net pricing (2.6 pp) and favorable volume/mix (1.6 pp). Unfavorable foreign currency primarily reflected the strength of the U.S. dollar relative to the euro, pounds sterling and Swedish krona. Favorable volume/mix was driven primarily by higher shipments in chocolate and biscuits, partially offset by lower shipments in gum & candy. Higher net pricing was reflected across all categories except chocolate and gum & candy. Segment operating income increased $57 million (7.9%), due to higher net pricing, lower manufacturing costs, lower Integration Program costs, favorable volume/mix and lower other selling, general and administrative expenses, partially offset by higher raw material costs, higher advertising and consumer promotion costs, unfavorable foreign currency and the impact of prior year’s accounting calendar changes.
41
Kraft Foods Developing Markets
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