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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, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-16483
Kraft Foods Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 52-2284372
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Lakes Drive, Northfield, Illinois 60093
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 646-2000
-----------------------------
- --------------------------------------------------------------------------------
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
----- -----
At October 31, 2002, there were 552,027,550 shares of the registrant's
Class A Common Stock outstanding, and 1,180,000,000 shares of the registrant's
Class B Common Stock outstanding.
KRAFT FOODS INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 2002 and December 31, 2001 3 - 4
Condensed Consolidated Statements of Earnings for the:
Nine Months Ended September 30, 2002 and 2001 5
Three Months Ended September 30, 2002 and 2001 6
Condensed Consolidated Statements of Shareholders'
Equity for the Year Ended December 31, 2001 and the
Nine Months Ended September 30, 2002 7
Condensed Consolidated Statements of Cash Flows for the:
Nine Months Ended September 30, 2002 and 2001 8 - 9
Notes to Condensed Consolidated Financial Statements 10 - 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18 - 38
Item 4. Controls and Procedures 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 40 - 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
Signature 42
Certifications 43 - 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,
2002 2001
------------- ------------
ASSETS
Cash and cash equivalents $ 127 $ 162
Receivables (less allowances of
$114 and $151) 3,138 3,131
Inventories:
Raw materials 1,514 1,281
Finished product 2,074 1,745
------- -------
3,588 3,026
Deferred income taxes 323 466
Other current assets 255 221
------- -------
Total current assets 7,431 7,006
Property, plant and equipment, at cost 14,073 13,272
Less accumulated depreciation 4,706 4,163
------- -------
9,367 9,109
Goodwill and other intangible assets, net 36,363 35,957
Prepaid pension assets 2,721 2,675
Other assets 880 1,051
------- -------
TOTAL ASSETS $56,762 $55,798
======= =======
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,
2002 2001
------------- ------------
LIABILITIES
Short-term borrowings $ 239 $ 681
Current portion of long-term debt 359 540
Due to parent and affiliates 1,744 1,652
Accounts payable 1,709 1,897
Accrued liabilities:
Marketing 1,245 1,398
Employment costs 567 658
Other 1,617 1,821
Income taxes 567 228
------- -------
Total current liabilities 8,047 8,875
Long-term debt 8,871 8,134
Deferred income taxes 5,106 5,031
Accrued postretirement health care costs 1,885 1,850
Notes payable to parent and affiliates 4,000 5,000
Other liabilities 3,524 3,430
------- -------
Total liabilities 31,433 32,320
Contingencies (Note 6)
SHAREHOLDERS' EQUITY
Class A common stock, no par value (555,000,000 shares issued)
Class B common stock, no par value (1,180,000,000 shares issued
and outstanding)
Additional paid-in capital 23,655 23,655
Earnings reinvested in the business 4,143 2,391
Accumulated other comprehensive losses (primarily currency
translation adjustments) (2,384) (2,568)
------- -------
25,414 23,478
Less cost of repurchased stock (2,179,450 Class A common shares) (85)
------- -------
Total shareholders' equity 25,329 23,478
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $56,762 $55,798
======= =======
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,
-------------------------
2002 2001
------- -------
Net revenues $21,876 $21,688
Cost of sales 12,914 12,910
------- -------
Gross profit 8,962 8,778
Marketing, administration and research costs 4,474 4,426
Amortization of intangibles 5 719
------- -------
Operating income 4,483 3,633
Interest and other debt expense, net 661 1,189
------- -------
Earnings before income taxes and minority interest 3,822 2,444
Provision for income taxes 1,357 1,110
------- -------
Earnings before minority interest 2,465 1,334
Minority interest 2
------- -------
Net earnings $ 2,463 $ 1,334
======= =======
Per share data:
Basic earnings per share $ 1.42 $ 0.85
======= =======
Diluted earnings per share $ 1.42 $ 0.85
======= =======
Dividends declared $ 0.41 $ 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,
--------------------------
2002 2001
-------- ------
Net revenues $7,216 $7,018
Cost of sales 4,245 4,233
------ ------
Gross profit 2,971 2,785
Marketing, administration and research costs 1,410 1,370
Amortization of intangibles 1 239
------ ------
Operating income 1,560 1,176
Interest and other debt expense, net 210 256
------ ------
Earnings before income taxes and minority interest 1,350 920
Provision for income taxes 480 417
------ ------
Earnings before minority interest 870 503
Minority interest 1
------ ------
Net earnings $ 869 $ 503
====== ======
Per share data:
Basic earnings per share $ 0.50 $ 0.29
====== ======
Diluted earnings per share $ 0.50 $ 0.29
====== ======
Dividends declared $ 0.15 $ 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, 2001 and
the Nine Months Ended September 30, 2002
(in millions of dollars, except per share data)
(Unaudited)
Accumulated Other
Comprehensive Earnings/(Losses)
-------------------------------
Class Total
A and B Additional Earnings Currency Cost of Share-
Common Paid-in Reinvested in Translation Repurchased holders'
Stock Capital the Business Adjustments Other Total Stock Equity
----- --------- -------------- ------------ ----- ----- ----------- --------
Balances, January 1, 2001 $ - $15,230 $ 992 $(2,138) $ (36) $(2,174) $ - $14,048
Comprehensive earnings:
Net earnings 1,882 1,882
Other comprehensive losses,
net of income taxes:
Currency translation adjustments (298) (298) (298)
Additional minimum pension
liability (78) (78) (78)
Change in fair value of
derivatives accounted for as
hedges (18) (18) (18)
-------
Total other comprehensive losses (394)
-------
Total comprehensive earnings 1,488
-------
Sale of Class A common stock to public 8,425 8,425
Dividends declared ($0.26 per share) (483) (483)
------- ------- ------ ------- ----- ------- ------ -------
Balances, December 31, 2001 - 23,655 2,391 (2,436) (132) (2,568) - 23,478
Comprehensive earnings:
Net earnings 2,463 2,463
Other comprehensive earnings (losses),
net of income taxes:
Currency translation adjustments 155 155 155
Additional minimum pension
liability (5) (5) (5)
Change in fair value of derivatives
accounted for as hedges 34 34 34
-------
Total other comprehensive earnings 184
-------
Total comprehensive earnings 2,647
-------
Class A common stock repurchased (85) (85)
Dividends declared ($0.41 per share) (711) (711)
------- ------- ------ ------- ----- ------- ------ -------
Balances, September 30, 2002 $ - $23,655 $4,143 $(2,281) $(103) $(2,384) $(85) $25,329
======= ======= ====== ======= ===== ======= ==== =======
Total comprehensive earnings, which represent net earnings adjusted for currency
translation adjustments, additional minimum pension liability and the change in
fair value of derivatives accounted for as hedges, were $835 million and $525
million, respectively, for the quarters ended September 30, 2002 and 2001 and
$1,091 million for the first nine months of 2001.
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,
----------------------------
2002 2001
-------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings $2,463 $1,334
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization 522 1,224
Deferred income tax provision 115 230
Gains on sales of businesses (3) (8)
Integration costs in 2002 and 2001 and loss on sale
of a North American food factory in 2001 119 66
Voluntary retirement programs 142
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net 61 57
Inventories (435) (319)
Accounts payable (326) (363)
Income taxes 350 212
Other working capital items (506) (610)
Increase in pension assets and postretirement
liabilities, net (1) (122)
Decrease in amounts due to parent and affiliates (232) (114)
Other (43) (175)
------ ------
Net cash provided by operating activities 2,226 1,412
------ ------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures (757) (691)
Purchases of businesses, net of acquired cash (119) (107)
Proceeds from sales of businesses 84 9
Other 24 66
------ ------
Net cash used in investing activities (768) (723)
------ ------
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,
----------------------------
2002 2001
------ ------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net (repayment) issuance of short-term borrowings $(1,849) $ 2,535
Long-term debt proceeds 2,555 60
Long-term debt repaid (581) (677)
Net proceeds from sale of Class A common stock 8,435
Repayment of notes payable to parent and affiliates (3,100) (12,407)
Increase in amounts due to parent and affiliates 2,237 1,354
Repurchase of Class A common stock (77)
Dividends paid (676)
------- --------
Net cash used in financing activities (1,491) (700)
------- --------
Effect of exchange rate changes on cash and
cash equivalents (2) (5)
------- --------
Cash and cash equivalents:
Decrease (35) (16)
Balance at beginning of period 162 191
------- --------
Balance at end of period $ 127 $ 175
======= ========
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.
("Kraft"), together with its subsidiaries (collectively referred to as 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. Net 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, and management's discussion and analysis
of financial condition and results of operations, which appear in the Company's
Annual Report to Shareholders and which are incorporated by reference into the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the
"2001 Form 10-K").
Note 2. Recently Adopted Accounting Standards:
- -----------------------------------------------
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." As a result, the Company stopped recording the
amortization of goodwill and indefinite life intangible assets as a charge to
earnings as of January 1, 2002. The Company estimates that net earnings and
diluted earnings per share ("EPS") would have been affected as follows for 2001
had the provisions of the new standards been applied as of January 1, 2001:
Nine Months Ended Three Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
(in millions, except per share data)
Net earnings, as previously reported $1,334 $ 503
Adjustment for amortization of goodwill 713 237
------ -----
Net earnings, as adjusted $2,047 $ 740
====== =====
Diluted earnings per share, as previously reported $ 0.85 $0.29
Adjustment for amortization of goodwill 0.46 0.14
------ -----
Diluted earnings per share, as adjusted $ 1.31 $0.43
====== =====
In addition, the Company is required to conduct an annual review of goodwill and
intangible assets for potential impairment. The Company completed its review in
the first quarter of 2002 and did not have to record a charge to earnings for an
impairment of goodwill or other intangible assets as a result of these new
standards.
At September 30, 2002, goodwill by reportable segment was as follows (in
millions):
Cheese, Meals and Enhancers $ 8,554
Biscuits, Snacks and Confectionery 9,339
Beverages, Desserts and Cereals 2,144
Oscar Mayer and Pizza 618
-------
Total Kraft Foods North America 20,655
-------
Europe, Middle East and Africa 3,932
Latin America and Asia Pacific 261
-------
Total Kraft Foods International 4,193
-------
Total goodwill $24,848
=======
-10-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Intangible assets as of September 30, 2002 were as follows:
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
(in millions)
Non-amortizable intangible assets $11,487
Amortizable intangible assets 55 $27
------- ---
Total intangible assets $11,542 $27
======= ===
Non-amortizable intangible assets substantially comprise brand names purchased
through the Nabisco acquisition. Amortizable intangible assets consist primarily
of certain trademark licenses and non-compete agreements. The pre-tax
amortization expense for intangible assets was $5 million for the nine months
ended September 30, 2002 and $1 million for the three months ended September 30,
2002. Based upon the amortizable intangible assets recorded in the balance sheet
at September 30, 2002, amortization expense for each of the next five years is
estimated to be $8 million or less.
The increase in goodwill and other intangible assets, net, during the nine
months ended September 30, 2002 of $406 million is primarily related to currency
translation.
Effective January 1, 2002, the Company also adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of." SFAS No. 144 provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets, expands the scope of a discontinued operation to include a
component of an entity and eliminates the exemption to consolidation when
control over a subsidiary is likely to be temporary. The adoption of this new
standard did not have a material impact on the Company's financial position,
results of operations or cash flows.
Effective January 1, 2002, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products." The adoption of EITF Issues No. 00-14
and No. 00-25 resulted in a reduction of revenues of approximately $3.4 billion
in the first nine months of 2001 and approximately $1.0 billion for the three
months ended September 30, 2001. In addition, the adoption reduced marketing,
administration and research costs in the first nine months of 2001 by
approximately $3.4 billion and for the three months ended September 30, 2001 by
approximately $1.0 billion, while cost of sales increased by an insignificant
amount for both periods. The adoption of these EITF Issues had no impact on net
earnings or basic and diluted EPS.
Note 3. Related Party Transactions:
- -----------------------------------
Philip Morris Companies Inc. ("Philip Morris") owns approximately 84.0% of the
Company's outstanding shares of capital stock. An affiliate of Philip Morris
provides 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 for these
services, which were based on the cost to provide such services and a management
fee, were $227 million and $234 million for the nine months ended September 30,
2002 and 2001, respectively, and $69 million and $80 million for the three
months ended September 30, 2002 and 2001, respectively.
-11-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Notes payable to parent and affiliates consisted of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
(in millions)
Notes payable in 2009, interest at 7.0% $1,900 $5,000
Short-term due to parent and affiliates
reclassified as long-term 2,100
------ ------
$4,000 $5,000
====== ======
The 7.0% note has no prepayment penalty. During the first quarter of 2002, the
Company prepaid $1.0 billion of the 7.0% long-term note payable to Philip Morris
and, in May 2002, the Company prepaid an additional $2.1 billion. During the
second quarter of 2002, the Company borrowed $2.1 billion from Philip Morris to
retire commercial paper. Interest on these borrowings is based on the average
one-month London Interbank Offered Rate. This short-term obligation due to
Philip Morris of $2.1 billion was reclassified on the condensed consolidated
balance sheet as long-term notes due to parent and affiliates based upon the
Company's ability and intention to refinance these borrowings on a long-term
basis.
Note 4. Acquisitions and Divestitures:
- --------------------------------------
During the third quarter of 2002, the Company acquired a snacks business in
Turkey and, during the first quarter of 2002, the Company acquired a biscuits
business in Australia. During the first nine months of 2001, the Company
purchased coffee businesses in Romania, Morocco and Bulgaria for an aggregate
cost of $80 million. The total cost of these and other small businesses
purchased during the first nine months of 2002 and 2001 was $119 million and
$107 million, respectively. In addition, during the fourth quarter of 2001,
the Company acquired confectionery businesses in Russia and Poland.
During the first half of 2002, the Company sold several small North American
food businesses, which were previously classified as businesses held for sale.
The net revenues and operating results of the businesses held for sale, which
were not significant, were excluded from the Company's consolidated statements
of earnings and no gain or loss was recognized on these sales. During the
first nine months of 2001, the Company sold several small domestic and
international food businesses. The aggregate proceeds received from sales of
businesses during the first nine months of 2002 and 2001 were $84 million and $9
million, respectively. The Company recorded pre-tax gains on these transactions
during the first nine months of 2002 and 2001 of $3 million and $8 million,
respectively.
On October 31, 2002, the Company sold its Latin American yeast and industrial
bakery ingredients business for approximately $110 million. The resulting gain
will be recorded in the fourth quarter of 2002.
The operating results of businesses acquired and divested were not material to
the consolidated operating results of the Company in any of the periods
presented.
-12-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5. Earnings Per Share:
- ---------------------------
Basic and diluted EPS were calculated using the following:
For the Nine Months Ended
September 30,
------------------------------
2002 2001
------ -------
(in millions)
Net earnings $2,463 $1,334
====== ======
Weighted average shares for basic EPS 1,735 1,568
Plus: Incremental shares from assumed
conversions of stock options 2
------ ------
Weighted average shares for diluted EPS 1,737 1,568
====== ======
For the Three Months Ended
September 30,
-------------------------------
2002 2001
------ -------
(in millions)
Net earnings $ 869 $ 503
===== =====
Weighted average shares for basic EPS 1,734 1,735
Plus: Incremental shares from assumed
conversions of stock options 3
------ ------
Weighted average shares for diluted EPS 1,737 1,735
====== ======
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.
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. 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.
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 Kraft Foods North America, Inc. and Kraft Foods International,
Inc. Reportable segments for Kraft Foods North America, Inc. are organized and
managed principally by product category. Kraft Foods North America, Inc.'s food
segments are Cheese, Meals and Enhancers; Biscuits, Snacks and Confectionery;
Beverages, Desserts and Cereals; and Oscar Mayer and
-13-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Pizza. Kraft Foods North America, Inc.'s food service business within the United
States and its businesses in Canada and Mexico are reported through the Cheese,
Meals and Enhancers segment. Kraft Foods International, Inc.'s operations are
organized and managed by geographic location. Kraft Foods International, Inc.'s
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 intangibles. 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 not included
in the measure of segment profitability reviewed by management.
Reportable segment data were as follows:
For the Nine Months Ended
September 30,
-------------------------
2002 2001
---- ----
(in millions)
Net revenues:
Cheese, Meals and Enhancers $ 6,616 $ 6,543
Biscuits, Snacks and Confectionery 3,768 3,707
Beverages, Desserts and Cereals 3,385 3,282
Oscar Mayer and Pizza 2,318 2,281
------- -------
Total Kraft Foods North America 16,087 15,813
------- -------
Europe, Middle East and Africa 4,269 4,161
Latin America and Asia Pacific 1,520 1,714
------- -------
Total Kraft Foods International 5,789 5,875
------- -------
Total net revenues $21,876 $21,688
======= =======
Operating companies income:
Cheese, Meals and Enhancers $ 1,639 $ 1,587
Biscuits, Snacks and Confectionery 785 689
Beverages, Desserts and Cereals 889 947
Oscar Mayer and Pizza 457 456
------- -------
Total Kraft Foods North America 3,770 3,679
------- -------
Europe, Middle East and Africa 622 563
Latin America and Asia Pacific 229 251
------- -------
Total Kraft Foods International 851 814
------- -------
Total operating companies income 4,621 4,493
Amortization of intangibles (5) (719)
General corporate expenses (133) (141)
------- -------
Total operating income 4,483 3,633
Interest and other debt expense, net (661) (1,189)
------- -------
Earnings before income taxes and minority interest $ 3,822 $ 2,444
======= =======
-14-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Three Months Ended
September 30,
--------------------------
2002 2001
------ ------
(in millions)
Net revenues:
Cheese, Meals and Enhancers $2,113 $2,126
Biscuits, Snacks and Confectionery 1,310 1,286
Beverages, Desserts and Cereals 1,040 985
Oscar Mayer and Pizza 762 754
------ ------
Total Kraft Foods North America 5,225 5,151
------ ------
Europe, Middle East and Africa 1,502 1,328
Latin America and Asia Pacific 489 539
------ ------
Total Kraft Foods International 1,991 1,867
------ ------
Total net revenues $7,216 $7,018
====== ======
Operating companies income:
Cheese, Meals and Enhancers $ 553 $ 494
Biscuits, Snacks and Confectionery 295 278
Beverages, Desserts and Cereals 290 267
Oscar Mayer and Pizza 165 144
------ ------
Total Kraft Foods North America 1,303 1,183
------ ------
Europe, Middle East and Africa 235 199
Latin America and Asia Pacific 65 78
------ ------
Total Kraft Foods International 300 277
------ ------
Total operating companies income 1,603 1,460
Amortization of intangibles (1) (239)
General corporate expenses (42) (45)
------ ------
Total operating income 1,560 1,176
Interest and other debt expense, net (210) (256)
------ ------
Earnings before income taxes and minority interest $1,350 $ 920
====== ======
Within its two segments, Kraft Foods International, Inc.'s brand portfolio spans
five core consumer sectors. The following table shows net revenues for Kraft
Foods International, Inc. by consumer sector:
For the Nine Months Ended
September 30,
-------------------------
2002 2001
------ ------
(in millions)
Consumer Sector:
Snacks $2,118 $2,123
Beverages 2,029 2,069
Cheese 873 891
Grocery 558 597
Convenient Meals 211 195
------ ------
Total Kraft Foods International $5,789 $5,875
====== ======
-15-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Three Months Ended
September 30,
---------------------------
2002 2001
------ ------
(in millions)
Consumer Sector:
Snacks $ 715 $ 661
Beverages 701 660
Cheese 299 285
Grocery 193 193
Convenient Meals 83 68
------ ------
Total Kraft Foods International $1,991 $1,867
====== ======
During the second quarter of 2002, the Company recorded a pre-tax integration
related charge of $92 million for the closing of a Kraft facility and other
consolidation programs. This charge was included in marketing, administration
and research costs for the following segments: Cheese, Meals and Enhancers, $8
million; Biscuits, Snacks and Confectionery, $1 million; Beverages, Desserts and
Cereals, $59 million; Oscar Mayer and Pizza, $7 million; and Latin America and
Asia Pacific, $17 million. During the first quarter of 2002, the Company
recorded a pre-tax integration related charge of $27 million to consolidate
production lines in North America. This charge was included in marketing,
administration and research costs for the Cheese, Meals and Enhancers segment.
The 2002 integration related charges of $119 million included $21 million
relating to severance, $82 million relating to asset write-offs and $16 million
relating to other cash exit costs. Cash payments relating to this charge will
approximate $37 million, of which $4 million has been paid through September 30,
2002. The majority of the remaining payments are expected to be made throughout
the remainder of 2002 and 2003.
In addition, during the first quarter of 2002, the Company recorded a pre-tax
charge of $142 million related to employee acceptances under the previously
announced voluntary retirement program. This charge was included in marketing,
administration and research costs for the following segments: Cheese, Meals and
Enhancers, $60 million; Biscuits, Snacks and Confectionery, $3 million;
Beverages, Desserts and Cereals, $47 million; Oscar Mayer and Pizza, $25
million; Europe, Middle East and Africa, $5 million; and Latin America and Asia
Pacific, $2 million. 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 charges were included in marketing, administration and
research costs for the Cheese, Meals and Enhancers segment ($31 million) and the
Beverages, Desserts and Cereals segment ($6 million).
The above charges were part of the previously announced $200 million to $300
million original estimate to close or reconfigure existing Kraft facilities and
integrate Nabisco. As of September 30, 2002, the aggregate pre-tax charges to
the consolidated statement of earnings to close or reconfigure facilities and
integrate Nabisco were $314 million, slightly above the original estimate.
During the first quarter of 2001, the Company sold a North American food factory
which resulted in a pre-tax loss of $29 million. The loss was included in
marketing, administration and research costs for the Cheese, Meals and Enhancers
segment.
-16-
Kraft Foods Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8. Financial Instruments:
- ------------------------------
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." As of January 1, 2001, 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).
Ineffectiveness from cash flow hedges was not material during the nine months
ended September 30, 2002. 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 ineffectiveness. Ineffectiveness from cash flow hedges
was not material during the three months ended September 30, 2002 and September
30, 2001. At September 30, 2002, the Company is hedging forecasted transactions
for periods not exceeding 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 earnings/(losses), net
of income taxes, as follows:
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in millions) (in millions)
Loss at beginning of period $(18) $ - $(11) $(12)
Derivative losses transferred to earnings 20 11 7 4
Change in fair value 14 (26) 20 (7)
---- ---- ---- ----
Gain (loss) as of September 30 $ 16 $(15) $ 16 $(15)
==== ==== ==== ====
Note 9. Recently Issued Accounting Pronouncements:
- --------------------------------------------------
On July 30, 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Costs covered by SFAS No. 146 include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing or other exit or disposal
activity. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. Accordingly, the Company will apply the
provisions of SFAS No. 146 prospectively to exit or disposal activities
initiated after December 31, 2002.
-17-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Environment
Kraft Foods Inc. ("Kraft"), together with its subsidiaries (collectively
referred to as 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. After the IPO, Philip Morris
owned 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. As of September 30, 2002, Philip Morris holds 97.8% of the
combined voting power of the Company's outstanding common stock and owns
approximately 84.0% of the outstanding shares of the Company's capital stock.
The Company conducts its global business through two subsidiaries: Kraft Foods
North America, Inc. ("KFNA") and Kraft Foods International, Inc. ("KFI"). KFNA
manages its operations by product category, while KFI manages its operations by
geographic region. KFNA's segments are Cheese, Meals and Enhancers; Biscuits,
Snacks and Confectionery; Beverages, Desserts and Cereals; and Oscar Mayer and
Pizza. KFNA's food service business within the United States and its businesses
in Canada and Mexico are reported through the Cheese, Meals and Enhancers
segment. KFI's segments are Europe, Middle East and Africa; and Latin America
and Asia Pacific.
The Company is 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 consequent
inventory reductions, and changing consumer preferences. In addition, certain
competitors may have different profit objectives, and some competitors may be
more or less susceptible to currency exchange rates. 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 lead to retail price volatility, intensify
price competition and influence consumer and trade buying patterns. KFNA's and
KFI's businesses are subject to fluctuating commodity costs, including dairy,
coffee bean and cocoa costs. Dairy and coffee commodity costs on average have
been lower than those incurred in 2001, while cocoa bean prices have been higher
than in 2001. Recently, coffee commodity prices have been increasing due to
drought concerns in the Brazilian coffee belt and cocoa commodity prices have
increased further due to political and military unrest in the Ivory Coast.
The food industry is subject to the possibility that consumers could lose
confidence in the safety and quality of certain food products. Products that
become adulterated or misbranded may need to be recalled. Manufacturers are
subject to product liability claims if consumption of their products causes
injury. The industry is also subject to rigorous food safety, ingredient
disclosure and labeling laws and regulations.
On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco for an aggregate purchase price, including assumed debt, of
approximately $19.2 billion. The acquisition has been accounted for as a
purchase. During 2001, certain Nabisco businesses were reclassified to
businesses held for sale, including their estimated results of operations
through anticipated sale dates. These businesses have subsequently been sold
with the exception of one business that had been held for sale since the
acquisition of Nabisco. This business, which is no longer held for sale, has
been included in 2002 consolidated operating results since January 1, 2002. The
closure of a number of Nabisco domestic and international facilities resulted in
severance and other exit costs of $379 million, which were included in the
adjustments for the allocation of the Nabisco purchase price. The closures will
result in the termination of approximately 7,500 employees and
-18-
will require total cash payments of $373 million, of which approximately $190
million has been spent through September 30, 2002. Substantially all of the
closures will be completed by the end of 2002.
The integration of Nabisco into the operations of the Company has also resulted
in the closure or reconfiguration of several of the Company's existing
facilities. The aggregate charges to the Company's consolidated statement of
earnings to close or reconfigure its facilities and integrate Nabisco were
originally estimated to be in the range of $200 million to $300 million. In the
fourth quarter of 2001, the Company announced that it was offering a voluntary
retirement program to certain United States salaried employees. During the first
quarter of 2002, approximately 700 salaried employees accepted the benefits
offered by this program and elected to retire or terminate employment. The
Company recorded a pre-tax charge of $142 million related to the voluntary
retirement programs. In addition, during the first quarter of 2002, the Company
recorded pre-tax integration related charges of $27 million to consolidate
production lines in North America. During the second quarter of 2002, the
Company recorded a pre-tax integration related charge of $92 million for the
closing of a Kraft facility and other consolidation programs. The 2002
integration related charges of $119 million included $21 million relating to
severance, $82 million relating to asset write-offs and $16 million relating to
other cash exit costs. Cash payments relating to this charge will approximate
$37 million, of which $4 million has been paid through September 30, 2002. The
majority of the remaining payments are expected to be made throughout the
remainder of 2002 and 2003. 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 charges were included in marketing,
administration and research costs for the Cheese, Meals and Enhancers segment
($31 million) and the Beverages, Desserts and Cereals segment ($6 million). As
of September 30, 2002, the aggregate pre-tax charges to the consolidated
statement of earnings to close or reconfigure its facilities and integrate
Nabisco were $314 million, slightly above the original estimate.
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 the third quarter of 2002, the Company acquired a snacks business in
Turkey and, during the first quarter of 2002, the Company purchased a biscuits
business in Australia. During the first nine months of 2001, the Company
purchased coffee businesses in Romania, Morocco and Bulgaria for an aggregate
cost of $80 million. The total cost of these and other small businesses
purchased during the first nine months of 2002 and 2001 was $119 million and
$107 million, respectively. In addition, during the fourth quarter of 2001,
the Company acquired confectionery businesses in Russia and Poland.
During the first half of 2002, the Company sold several small North American
food businesses, which were previously classified as businesses held for sale.
The net revenues and operating results of the businesses held for sale, which
were not significant, were excluded from the Company's consolidated statements
of earnings and no gain or loss was recognized on these sales. During the
first nine months of 2001, the Company sold several small domestic and
international food businesses. The aggregate proceeds received from sales of
businesses during the first nine months of 2002 and 2001 were $84 million and $9
million, respectively. The Company recorded pre-tax gains on these transactions
during the first nine months of 2002 and 2001 of $3 million and $8 million,
respectively.
On October 31, 2002, the Company sold its Latin American yeast and industrial
bakery ingredients business for approximately $110 million. The resulting gain
will be recorded in the fourth quarter of 2002.
The operating results of businesses acquired and divested were not material to
the consolidated operating results of the Company in any of the periods
presented.
Consolidated Operating Results
- ------------------------------
Several events occurred during the first nine months of 2002 and 2001 that
affected the comparability of earnings. In order to isolate the financial
effects of these events, and to provide a more meaningful comparison of the
Company's results of operations, the following tables and the subsequent
discussion of the Company's
-19-
consolidated operating results will refer to results on a reported and pro forma
basis. Reported results reflect average shares of common stock outstanding
during 2001. Pro forma results reflect average common shares outstanding for
2001 based on the assumption that shares issued immediately following the IPO
were outstanding throughout 2001 and that, effective January 1, 2001, the net
proceeds of the IPO were used to retire a portion of a long-term note payable
used to finance the Nabisco acquisition. Pro forma results also adjust for the
results of operations divested since the beginning of 2001 and certain other
unusual items as detailed on the following tables, including the cessation of
goodwill amortization as if Statements of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets" had been in effect during 2001.
Consolidated Operating Results
- ------------------------------
For the Nine Months Ended September 30,
---------------------------------------
2002 2001
------- -------
(in millions, except per share data)
Reported volume (in pounds) 13,779 12,996
Volume of businesses sold (11)
Changes due to businesses held for sale 442
------- -------
Pro forma volume (in pounds) 13,779 13,427
======= =======
Reported net revenues $21,876 $21,688
Net revenues of businesses sold (14)
Changes due to businesses held for sale 170
------- -------
Pro forma net revenues $21,876 $21,844
======= =======
Reported operating companies income $ 4,621 $ 4,493
Operating companies income of businesses sold (2)
Integration costs in 2002 and 2001 and loss on the sale
of a North American food factory in 2001 119 66
Voluntary retirement programs 142
Changes due to businesses held for sale 23
------- -------
Pro forma operating companies income $ 4,882 $ 4,580
======= =======
Reported net earnings $ 2,463 $ 1,334
Interest reduction assuming full year IPO, net of tax 165
Voluntary retirement programs, net of tax 92
Integration costs in 2002 and 2001 and loss on the sale
of a North American food factory in 2001, net of tax 76 37
Cessation of goodwill amortization 713
------- -------
Pro forma net earnings $ 2,631 $ 2,249
======= =======
Weighted average diluted shares outstanding 1,737 1,568
Adjustment to reflect additional shares
outstanding after IPO 167
------- -------
Pro forma diluted shares outstanding 1,737 1,735
======= =======
Reported diluted earnings per share $ 1.42 $ 0.85
======= =======
Pro forma diluted earnings per share $ 1.51 $ 1.30
======= =======
-20-
Consolidated Operating Results
- ------------------------------
For the Three Months Ended September 30,
---------------------------------------
2002 2001
------ -----
(in millions, except per share data)
Reported volume (in pounds) 4,494 4,204
Changes due to businesses held for sale 146
------ ------
Pro forma volume (in pounds) 4,494 4,350
====== ======
Reported net revenues $7,216 $7,018
Net revenues of businesses sold (4)
Changes due to businesses held for sale 56
------ ------
Pro forma net revenues $7,216 $7,070
====== ======
Reported operating companies income $1,603 $1,460
Operating companies income of businesses sold (1)
Integration costs 37
Changes due to businesses held for sale 10
------ ------
Pro forma operating companies income $1,603 $1,506
====== ======
Reported net earnings $ 869 $ 503
Integration costs, net of tax 19
Cessation of goodwill amortization 237
------ ------
Pro forma net earnings $ 869 $ 759
====== ======
Weighted average diluted shares outstanding 1,737 1,735
====== ======
Pro forma diluted shares outstanding 1,737 1,735
====== ======
Reported diluted earnings per share $ 0.50 $ 0.29
====== ======
Pro forma diluted earnings per share $ 0.50 $ 0.44
====== ======
Reported operating companies income, which is defined as operating income before
general corporate expenses and amortization of intangibles, was affected by the
following unusual items during the first nine months and third quarter of 2002
and 2001:
o Integration Charges- During the first nine months of 2002, the Company
recorded $119 million of pre-tax integration related charges relating to the
consolidation of production lines, the closing of a facility and other
consolidation programs. These charges were included in marketing,
administration and research costs for the Cheese, Meals and Enhancers
segment; the Biscuits, Snacks and Confectionery segment; the Beverages,
Desserts and Cereals segment; the Oscar Mayer and Pizza segment; and the
Latin America and Asia Pacific segment. In addition, 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 charges were
included in marketing, administration and research costs for the Cheese,
Meals and Enhancers segment and the Beverages, Desserts and Cereals segment.
o Voluntary Retirement Programs- In the fourth quarter of 2001, the Company
announced that it was offering a voluntary retirement program to certain
United States salaried employees. During the first quarter of 2002,
approximately 700 salaried employees accepted the benefits offered by these
programs and elected to retire or
-21-
terminate employment. As a result, the Company recorded a pre-tax charge of
$142 million in the first quarter of 2002.
o Businesses Held for Sale- During 2001, certain Nabisco businesses were
reclassified to businesses held for sale, including their estimated results
of operations through anticipated sale dates. These businesses have
subsequently been sold with the exception of one business that had been held
for sale since the acquisition of Nabisco. This business, which is no longer
held for sale, has been included in 2002 reported operating results and has
been included as an adjustment to arrive at pro forma results for 2001.
o Sale of Food Factory- The Company sold a North American food factory during
the first quarter of 2001, resulting in a pre-tax loss of $29 million
recorded in the Cheese, Meals and Enhancers segment.
In addition, reported net earnings were also affected by the following during
the first nine months and third quarter of 2002:
o Amortization of Intangibles- On January 1, 2002, the Company adopted SFAS No.
141 and SFAS No. 142. As a result, the Company stopped recording the
amortization of goodwill and indefinite life intangible assets as a charge to
earnings. The Company estimates that reported net earnings and diluted
earnings per share ("EPS") would have been approximately $2.0 billion and
$1.31, respectively, for the nine months ended September 30, 2001, and $740
million and $0.43, respectively, for the three months ended September 30,
2001, had the provisions of the new standards been applied in that period.
Results of Operations for the Nine Months Ended September 30, 2002
Reported volume for the first nine months of 2002 increased 783 million pounds
(6.0%) over the comparable 2001 period. On a pro forma basis, volume increased
2.6% over the first nine months of 2001, due primarily to increases in the
Beverages, Desserts and Cereals segment and the Europe, Middle East and Africa
segment, as well as contributions from new products and acquisitions.
Reported net revenues for the first nine months of 2002 increased $188 million
(0.9%) over the comparable 2001 period. On a pro forma basis, net revenues
increased 0.1% over the first nine months of 2001 as the impact of acquisitions
and higher volume/mix were mostly offset by the adverse effects of currency
exchange rates and lower sales prices on cheese and coffee products (driven by
commodity-related price declines).
Reported operating companies income increased $128 million (2.8%) over the first
nine months of 2001, due primarily to lower marketing, administration and
research costs, favorable margins, higher volume/mix and productivity and
synergy savings, partially offset by the pre-tax charges related to the
voluntary retirement programs and integration related costs. On a pro forma
basis, operating companies income increased $302 million (6.6%), due to higher
operating companies income in all segments except Latin America and Asia
Pacific.
Currency movements decreased net revenues by $259 million and operating
companies income by $11 million from the first nine months of 2001. Decreases in
net revenues and operating companies income are due primarily to the strength of
the U.S. dollar against certain Latin American currencies, partially offset by
the weakness of the U.S. dollar against the euro and other currencies.
Reported interest and other debt expense, net, decreased $528 million from the
first nine months of 2001. This decrease was due primarily to lower debt levels
after the repayment of Nabisco acquisition borrowings with the proceeds from the
Company's IPO. On a pro forma basis, interest and other debt expense, net,
decreased $226 million in 2002 from $887 million in the first nine months of
2001. This decrease in pro forma interest expense is due to the use of free cash
flow to repay debt, ongoing efforts to refinance higher-rate notes payable to
Philip Morris and lower short-term interest rates.
-22-
During the first nine months of 2002, the Company's reported effective tax rate
decreased by 9.9 percentage points to 35.5% as compared with the first nine
months of 2001, due primarily to the adoption of SFAS No. 141 and SFAS No. 142,
under which the Company is no longer required to amortize goodwill and
indefinite life intangible assets as a charge to earnings.
Reported diluted and basic EPS, which were both $1.42 for the first nine months
of 2002, increased by 67.1% from 2001, due primarily to lower interest expense
and the elimination of substantially all goodwill amortization in accordance
with the Company's adoption of SFAS No. 141 and No. 142. Reported net earnings
of $2.5 billion for the first nine months of 2002 increased $1.1 billion (84.6%)
over the comparable period of 2001. On a pro forma basis, diluted and basic EPS,
which were $1.51 and $1.52, respectively, for the first nine months of 2002,
increased by 16.2% and 16.9%, respectively, over the first nine months of 2001,
due primarily to higher operating results in all segments except Latin America
and Asia Pacific, and lower interest expense. Pro forma net earnings of $2.6
billion for the first nine months of 2002 increased $382 million (17.0%) over
the comparable period of 2001.
Results of Operations for the Three Months Ended September 30, 2002
Reported volume for the third quarter of 2002 increased 290 million pounds
(6.9%) over the comparable 2001 period. On a pro forma basis, volume increased
3.3% over the third quarter of 2001, due primarily to increases in the
Beverages, Desserts and Cereals segment and the Europe, Middle East and Africa
segment, as well as contributions from new products and acquisitions.
Reported net revenues for the third quarter of 2002 increased $198 million
(2.8%) over the comparable 2001 period. On a pro forma basis, net revenues
increased 2.1% over the third quarter of 2001, as the impact of volume growth
was partially offset by the adverse effects of lower selling prices reflecting
lower commodity costs.
Reported operating companies income increased $143 million (9.8%) over the third
quarter of 2001. On a pro forma basis, operating companies income increased $97
million (6.4%), due to volume gains, and productivity and synergy savings.
Currency movements have decreased net revenues by $11 million and increased
operating companies income by $3 million from the third quarter of 2001.
Decreases in net revenues are due primarily to the strength of the U.S. dollar
against certain Latin American currencies, partially offset by the weakness of
the U.S. dollar against the euro and other currencies. Increases in operating
companies income are due primarily to the weakness of the U.S. dollar against
the euro and other currencies, partially offset by the unfavorable impact from
certain Latin American currencies.
Reported and pro forma interest and other debt expense, net, decreased $46
million from the third quarter of 2001. This decrease in interest expense is due
to the use of free cash flow to repay debt and ongoing efforts to refinance
higher-rate notes payable to Philip Morris.
During the third quarter of 2002, the Company's reported effective tax rate
decreased by 9.7 percentage points to 35.6% as compared with the third quarter
of 2001, due primarily to the adoption of SFAS No. 141 and SFAS No. 142, under
which the Company is no longer required to amortize goodwill and indefinite life
intangible assets as a charge to earnings.
Reported diluted and basic EPS, which were both $0.50 for the third quarter of
2002, increased by 72.4% over 2001, due primarily to the elimination of
substantially all goodwill amortization in accordance with the Company's
adoption of SFAS No. 141 and No. 142, growth in operating companies income and
lower interest expense. Reported net earnings of $869 million for the third
quarter of 2002 increased $366 million (72.8%) over the comparable period of
2001. On a pro forma basis, diluted and basic EPS, which were both $0.50 for the
third quarter of 2002, increased by 13.6% over the third quarter of 2001, due
primarily to volume growth,
-23-
productivity and synergy savings, and lower interest expense. Pro forma net
earnings of $869 million for the third quarter of 2002 increased $110 million
(14.5%) over the comparable period of 2001.
Operating Results by Business Segment
- -------------------------------------
Kraft Foods North America, Inc.
- -------------------------------
Operating Results
For the Nine Months Ended September 30,
---------------------------------------
2002 2001
------- -------
(in millions)
Reported volume (in pounds):
Cheese, Meals and Enhancers 4,397 3,945
Biscuits, Snacks and Confectionery 1,730 1,720
Beverages, Desserts and Cereals 2,874 2,649
Oscar Mayer and Pizza 1,199 1,184
------- -------
Total reported volume (in pounds) 10,200 9,498
Volume of businesses sold:
Beverages, Desserts and Cereals (1)
Changes due to businesses held for sale:
Cheese, Meals and Enhancers 474
Beverages, Desserts and Cereals (17)
------- -------
Pro forma volume (in pounds) 10,200 9,954
======= =======
Reported net revenues:
Cheese, Meals and Enhancers $ 6,616 $ 6,543
Biscuits, Snacks and Confectionery 3,768 3,707
Beverages, Desserts and Cereals 3,385 3,282
Oscar Mayer and Pizza 2,318 2,281
------- -------
Total reported net revenues 16,087 15,813
Net revenues of businesses sold:
Beverages, Desserts and Cereals (10)
Changes due to businesses held for sale:
Cheese, Meals and Enhancers 185
Beverages, Desserts and Cereals (23)
------- -------
Pro forma net revenues $16,087 $15,965
======= =======
-24-
For the Nine Months Ended September 30,
---------------------------------------
2002 2001
------- -------
(in millions)
Reported operating companies income:
Cheese, Meals and Enhancers $1,639 $1,587
Biscuits, Snacks and Confectionery 785 689
Beverages, Desserts and Cereals 889 947
Oscar Mayer and Pizza 457 456
------ ------
Total reported operating companies income 3,770 3,679
Operating companies income of businesses sold:
Beverages, Desserts and Cereals (1)
Voluntary retirement programs:
Cheese, Meals and Enhancers 60
Biscuits, Snacks and Confectionery 3
Beverages, Desserts and Cereals 47
Oscar Mayer and Pizza 25
Changes due to businesses held for sale:
Cheese, Meals and Enhancers 16
Beverages, Desserts and Cereals 6
Integration costs in 2002 and 2001 and loss on sale
of a North American food factory in 2001:
Cheese, Meals and Enhancers 35 60
Biscuits, Snacks and Confectionery 1
Beverages, Desserts and Cereals 59 6
Oscar Mayer and Pizza 7
------ ------
Pro forma operating companies income $4,007 $3,766
====== ======
Reported volume for the first nine months of 2002 increased 7.4% over the
comparable period of 2001. On a pro forma basis, volume for the first nine
months of 2002 increased 2.5% over the comparable period of 2001, due primarily
to increased shipments in the Beverages, Desserts and Cereals segment, as well
as contributions from new products.
During the first nine months of 2002, reported net revenues increased $274
million (1.7%) over the first nine months of 2001, due primarily to higher
volume/mix ($262 million) and the inclusion in 2002 of a business that was
previously held for sale ($162 million), partially offset by lower net pricing
($137 million). On a pro forma basis, net revenues increased 0.8%.
Reported operating companies income for the first nine months of 2002 increased
$91 million (2.5%) over the comparable period of 2001, due primarily to higher
volume/mix ($117 million), favorable margins ($95 million, including
productivity savings) and lower marketing, administration and research costs
($83 million, including synergy savings), partially offset by the 2002 charge
for voluntary retirement programs ($135 million) and higher charges in 2002
related to integration costs ($36 million). On a pro forma basis, operating
companies income increased 6.4%, driven by higher volume/mix, favorable margins
and lower marketing, administration and research costs.
The following discusses operating results within each of KFNA's reportable
segments.
Cheese, Meals and Enhancers. Reported volume in the first nine months of 2002
increased 11.5% over the comparable period of 2001, due primarily to the
inclusion in 2002 of a business that was previously held for sale. On a pro
forma basis, volume in the first nine months of 2002 decreased 0.5% from the
comparable period of 2001, due primarily to lower shipments in cheese and U.S.
food service. Cheese volume declined as
-25-
lower dairy costs in the second and third quarters resulted in aggressive
competitive activity by private label manufacturers as they reduced prices and
increased merchandising levels. Shipments to food service customers were also
lower, driven primarily by the exit of low-margin businesses and distributor
consolidation in the food service industry. In Enhancers, volume increased, led
by higher shipments of pourable dressings, barbecue sauce and steak sauce. Meals
volume increased, reflecting the 2001 acquisition of It's Pasta Anytime.
During the first nine months of 2002, reported net revenues increased $73
million (1.1%) over the first nine months of 2001, due primarily to the impact
of businesses held for sale ($185 million), partially offset by lower net
pricing ($86 million) and lower volume/mix ($25 million). On a pro forma basis,
net revenues decreased 1.7% from the comparable period of 2001, due primarily to
lower net pricing and lower volume/mix.
Reported operating companies income for the first nine months of 2002 increased
$52 million (3.3%) over the comparable period of 2001, due primarily to
favorable margins ($53 million), lower marketing, administration and research
costs ($35 million) and lower integration related costs in 2002 ($25 million),
partially offset by the 2002 charge for voluntary retirement programs ($60
million). On a pro forma basis, operating companies income increased 4.3%,
driven by favorable margins and lower marketing, administration and research
costs.
Biscuits, Snacks and Confectionery. Reported and pro forma volume in the first
nine months of 2002 increased 0.6% from the comparable period of 2001. Biscuits
volume increased, driven by new product initiatives in both cookies and
crackers. In snacks, volume also increased, due primarily to higher shipments of
nuts to non-grocery channels. Confectionery volume declined, resulting primarily
from competitive activity in the breath freshening category.
During the first nine months of 2002, reported and pro forma net revenues
increased $61 million (1.6%) over the first nine months of 2001, due primarily
to higher volume/mix ($34 million) and higher net pricing ($29 million).
Reported operating companies income for the first nine months of 2002 increased
$96 million (13.9%) over the comparable period of 2001, due to lower marketing,
administration and research costs ($65 million, including synergy savings),
higher volume/mix and favorable margins. On a pro forma basis, operating
companies income increased 14.5%.
Beverages, Desserts and Cereals. Reported volume in the first nine months of
2002 increased 8.5% over the comparable period in 2001. On a pro forma basis,
volume in the first nine months of 2002 increased 9.2% over the comparable
period of 2001, due primarily to higher shipments of ready-to-drink beverages.
Coffee volume also increased, driven by merchandising programs and packaging
innovations. In the desserts business, volume increased in dry packaged desserts
and frozen toppings, which benefited from holiday programs, and in ready-to-eat
desserts, aided by new products. Cereals volume also increased, resulting from
merchandising programs and a new product introduction.
During the first nine months of 2002, reported net revenues increased $103
million (3.1%) over the first nine months of 2001, due primarily to higher
volume/mix ($202 million), partially offset by lower net pricing ($66 million,
due primarily to coffee commodity-related price reductions) and the impact of
businesses held for sale ($23 million). On a pro forma basis, net revenues
increased 4.2%.
Reported operating companies income for the first nine months of 2002 decreased
$58 million (6.1%) from the comparable period of 2001, primarily reflecting the
charge for integration costs ($53 million), the charge for the voluntary
retirement programs ($47 million) and unfavorable margins ($23 million),
partially offset by higher volume/mix ($82 million). On a pro forma basis,
operating companies income increased 3.9%, due primarily to higher volume/mix.
Oscar Mayer and Pizza. Reported and pro forma volume in the first nine months of
2002 increased 1.3% over the comparable period of 2001, due to volume gains in
processed meats and frozen pizza. The processed meats
-26-
business recorded volume gains in hot dogs, bacon, and soy-based meat
alternatives. Volume in the frozen pizza business also increased, benefiting
from new products.
During the first nine months of 2002, reported and pro forma net revenues
increased $37 million (1.6%) over the first nine months of 2001, due primarily
to higher volume/mix ($51 million), partially offset by lower net pricing ($14
million, due primarily to commodity-related price declines).
Reported operating companies income for the first nine months of 2002 increased
slightly (0.2%) over the comparable period of 2001, due primarily to favorable
margins ($24 million) and higher volume/mix ($14 million), partially offset by
the charges for voluntary retirement programs ($25 million) and integration
related costs ($7 million). On a pro forma basis, operating companies income
increased 7.2%, due primarily to favorable margins and higher volume/mix.
Kraft Foods International, Inc.
- -------------------------------
Operating Results
For the Nine Months Ended September 30,
---------------------------------------
2002 2001
------- -------
(in millions)
Reported volume (in pounds):
Europe, Middle East and Africa 2,090 1,999
Latin America and Asia Pacific 1,489 1,499
------ ------
Total reported volume (in pounds) 3,579 3,498
Volume of businesses sold:
Latin America and Asia Pacific (10)
Changes due to businesses held for sale:
Latin America and Asia Pacific (15)
------ ------
Pro forma volume (in pounds) 3,579 3,473
====== ======
Reported net revenues:
Europe, Middle East and Africa $4,269 $4,161
Latin America and Asia Pacific 1,520 1,714
------ ------
Total reported net revenues 5,789 5,875
Net revenues of businesses sold:
Latin America and Asia Pacific (4)
Changes due to businesses held for sale:
Latin America and Asia Pacific 8
------ ------
Pro forma net revenues $5,789 $5,879
====== ======
-27-
For the Nine Months Ended September 30,
---------------------------------------
2002 2001
------- -------
(in millions)
Reported operating companies income:
Europe, Middle East and Africa $622 $563
Latin America and Asia Pacific 229 251
---- ----
Total reported operating companies income 851 814
Operating companies income of businesses sold:
Latin America and Asia Pacific (1)
Integration costs:
Latin America and Asia Pacific 17
Voluntary retirement programs:
Europe, Middle East and Africa 5
Latin America and Asia Pacific 2
Changes due to businesses held for sale:
Latin America and Asia Pacific 1
---- ----
Pro forma operating companies income $875 $814
==== ====
Reported volume for the first nine months of 2002 increased 2.3% over the first
nine months of 2001, due to volume growth in the Europe, Middle East and Africa
segment. On a pro forma basis, volume for the first nine months of 2002
increased 3.1% over the comparable period of 2001, benefiting from growth in
developing markets, acquisitions and new product introductions.
During the first nine months of 2002, reported net revenues decreased $86
million (1.5%) from the first nine months of 2001, due primarily to unfavorable
currency movements ($245 million), partially offset by the impact of
acquisitions ($113 million) and higher net pricing ($54 million). On a pro forma
basis, net revenues also decreased 1.5%.
Reported operating companies income for the first nine months of 2002 increased
$37 million (4.5%) over the first nine months of 2001, due primarily to lower
marketing, administration and research costs ($54 million, including synergy
savings), favorable margins ($23 million) and the impact of acquisitions ($13
million), partially offset by unfavorable volume/mix ($23 million), the charges
for integration costs ($17 million) and voluntary retirement programs ($7
million) and unfavorable currency movements ($8 million). On a pro forma basis,
operating companies income increased 7.5%.
The following discusses operating results within each of KFI's reportable
segments.
Europe, Middle East and Africa. Reported and pro forma volume for the first nine
months of 2002 increased 4.6% over the comparable period of 2001, benefiting
from acquisitions and driven by volume growth in most countries across the
segment. Snacks volume increased, driven by growth in several markets, including
France, Hungary and the Ukraine, and from confectionery acquisitions in Russia
and Poland, partially offset by lower volume in Germany and Romania. In
beverages, coffee volume grew, driven by Germany, Austria, Sweden and Poland,
and acquisitions in Romania, Morocco and Bulgaria. Refreshment beverages volume
also increased, driven by powdered beverages in the Middle East, the Slovak and
Czech Republics and Morocco. In convenient meals, volume increased driven by
lunch combinations in the United Kingdom and canned meats volume in Italy
against a weak comparison in 2001. Grocery volume also increased, benefiting
from higher sales in South Africa and spoonable dressings in Germany. Cheese
volume was flat in comparison with 2001.
Reported and pro forma net revenues for the first nine months of 2002 increased
$108 million (2.6%) over the comparable period of 2001, due primarily to the
2001 acquisitions of coffee businesses in Romania, Morocco and Bulgaria and
confectionery businesses in Russia and Poland ($89 million), favorable currency
movements
-28-
($59 million) and higher volume/mix ($33 million), partially offset by lower net
pricing ($73 million, due primarily to commodity-driven coffee price decreases).
Reported operating companies income for the first nine months of 2002 increased
$59 million (10.5%) over the comparable period of 2001, due primarily to
favorable margins ($36 million), favorable currency movements ($14 million),
higher volume/mix ($12 million) and acquisitions ($12 million), partially offset
by higher marketing, administration and research costs ($10 million) and the
charge for voluntary retirement programs. On a pro forma basis, operating
companies income increased 11.4%.
Latin America and Asia Pacific. Reported volume for the first nine months of
2002 decreased 0.7% from the comparable period in 2001, due primarily to the
impact of businesses held for sale, divested businesses, weak economies in
certain countries and lower results in China, partially offset by gains across a
number of markets and the acquisition of a biscuits business in Australia. On a
pro forma basis, volume for the first nine months of 2002 increased 1.0% over
the comparable period of 2001. Snacks volume increased, driven primarily by
higher biscuits and confectionery volume in Brazil and the 2002 acquisition of a
biscuits business in Australia, partially offset by the negative impact of the
continued economic weakness in Argentina and distributor inventory reductions in
China. Beverages volume increased, due primarily to growth in refreshment
beverages in Brazil, Argentina, the Philippines and Venezuela. Cheese and
grocery volume decreased due to lower sales in both Latin America and Asia
Pacific.
During the first nine months of 2002, reported net revenues decreased $194
million (11.3%) from the first nine months of 2001, due primarily to unfavorable
currency movements ($304 million) and lower volume/mix ($62 million), partially
offset by higher net pricing ($127 million) and the 2002 acquisition of a
biscuits business in Australia. On a pro forma basis, net revenues decreased
11.5%.
Reported operating companies income for the first nine months of 2002 decreased
$22 million (8.8%) from the comparable period of 2001, due primarily to lower
volume/mix ($35 million), unfavorable currency ($22 million), the charge for
integration costs ($17 million) and unfavorable costs, net of higher pricing
($13 million), partially offset by lower marketing, administration and research
costs ($64 million, including synergy savings). On a pro forma basis, operating
companies income decreased 1.2%.
Kraft Foods North America, Inc.
- -------------------------------
Operating Results
For the Three Months Ended September 30,
---------------------------------------
2002 2001
------- -------
(in millions)
Reported volume (in pounds):
Cheese, Meals and Enhancers 1,387 1,221
Biscuits, Snacks and Confectionery 582 584
Beverages, Desserts and Cereals 933 853
Oscar Mayer and Pizza 386 384
----- -----
Total reported volume (in pounds) 3,288 3,042
Changes due to businesses held for sale:
Cheese, Meals and Enhancers 157
Beverages, Desserts and Cereals (6)
----- -----
Pro forma volume (in pounds) 3,288 3,193
===== =====
-29-
For the Three Months Ended September 30,
---------------------------------------
2002 2001
------- -------
(in millions)
Reported net revenues:
Cheese, Meals and Enhancers $2,113 $2,126
Biscuits, Snacks and Confectionery 1,310 1,286
Beverages, Desserts and Cereals 1,040 985
Oscar Mayer and Pizza 762 754
------ ------
Total reported net revenues 5,225 5,151
Net revenues of businesses sold:
Beverages, Desserts and Cereals (4)
Changes due to businesses held for sale:
Cheese, Meals and Enhancers 61
Beverages, Desserts and Cereals (7)
------ ------
Pro forma net revenues $5,225 $5,201
====== ======
Reported operating companies income:
Cheese, Meals and Enhancers $ 553 $ 494
Biscuits, Snacks and Confectionery 295 278
Beverages, Desserts and Cereals 290 267
Oscar Mayer and Pizza 165 144
------ ------
Total reported operating companies income 1,303 1,183
Operating companies income of businesses sold:
Beverages, Desserts and Cereals (1)
Changes due to businesses held for sale:
Cheese, Meals and Enhancers 7
Beverages, Desserts and Cereals 3
Integration costs:
Cheese, Meals and Enhancers 31
Beverages, Desserts and Cereals 6
------ ------
Pro forma operating companies income $1,303 $1,229
====== ======
Reported volume for the third quarter of 2002 increased 8.1% over the comparable
period of 2001. On a pro forma basis, volume for the third quarter of 2002
increased 3.0% over the comparable period of 2001, due primarily to increased
shipments in the Beverages, Desserts and Cereals segment and new products across
all segments.
During the third quarter of 2002, reported net revenues increased $74 million
(1.4%) over the third quarter of 2001, due primarily to higher volume/mix ($155
million) and the impact of businesses held for sale ($54 million), partially
offset by lower net pricing ($125 million). On a pro forma basis, net revenues
increased 0.5%, as the favorable impact of volume growth was partially offset by
reduced prices in response to lower commodity costs.
Reported operating companies income for the third quarter of 2002 increased $120
million (10.1%) over the comparable period of 2001, due primarily to higher
volume/mix ($87 million), favorable margins ($64 million, including productivity
savings), synergy savings, the charge for integration costs in 2001 ($37
million) and the impact of businesses held for sale ($10 million), partially
offset by higher marketing, administration and research costs ($45 million). On
a pro forma basis, operating companies income increased 6.0%, driven by volume
growth and productivity and synergy savings, partially offset by higher
marketing, administration and research costs.
-30-
The following discusses operating results within each of KFNA's reportable
segments.
Cheese, Meals and Enhancers. Reported volume in the third quarter of 2002
increased 13.6% over the comparable period of 2001, due primarily to the
inclusion in 2002 of a business that was previously held for sale. On a pro
forma basis, volume in the third quarter of 2002 increased 0.7% over the
comparable period of 2001, as volume gains in enhancers and the food service
business were partially offset by declines in the cheese and meals businesses.
In enhancers, volume increased reflecting higher shipments of pourable and
spoonable dressings, and barbecue sauce. Food service volume also increased led
by higher shipments of pourable dressings, snacks and ingredients. In cheese,
volume declined as dairy costs remained low and private label manufacturers were
aggressive in spending back the commodity favorability through promotions and
merchandising activities. Meals volume also decreased, primarily reflecting
lower dinners shipments, partially offset by the 2001 acquisition of It's Pasta
Anytime.
During the third quarter of 2002, reported net revenues decreased $13 million
(0.6%) from the third quarter of 2001, due primarily to lower net pricing ($85
million), partially offset by the impact of businesses held for sale ($61
million) and higher volume/mix ($17 million). On a pro forma basis, net revenues
decreased 3.4% from the comparable period of 2001, due primarily to lower net
pricing, partially offset by higher volume/mix.
Reported operating companies income for the third quarter of 2002 increased $59
million (11.9%) over the comparable period of 2001, due primarily to lower dairy
commodity costs and productivity savings ($35 million), the charge in 2001 for
integration costs ($31 million) and higher volume/mix ($16 million), partially
offset by higher marketing, administration and research costs ($20 million). On
a pro forma basis, operating companies income increased 3.9%, driven by higher
volume, lower dairy commodity costs and productivity savings, partially offset
by higher marketing, administration and research costs.
Biscuits, Snacks and Confectionery. Reported and pro forma volume in the third
quarter of 2002 decreased 0.3% from the comparable period of 2001. In
confectionery, volume declined due to trade inventory reductions and increased
competitive activity in the breath freshening category, partially offset by new
products in the non-chocolate confectionery business. Snacks volume decreased
slightly due primarily to trade inventory reductions. In biscuits, volume
increased due primarily to an increase in cookie and cracker volume, driven by
new product introductions.
During the third quarter of 2002, reported and pro forma net revenues increased
$24 million (1.9%) over the third quarter of 2001, due primarily to higher
volume/mix ($27 million).
Reported and pro forma operating companies income for the third quarter of 2002
increased $17 million (6.1%) over the comparable period of 2001, due primarily
to higher volume/mix ($20 million), higher margins ($9 million, due primarily to
lower nut commodity costs) and lower marketing, administration and research
costs (including synergy savings), partially offset by higher manufacturing
costs.
Beverages, Desserts and Cereals. Reported volume in the third quarter of 2002
increased 9.4% over the comparable period in 2001. On a pro forma basis, volume
in the third quarter of 2002 increased 10.2% over the comparable period of 2001,
due primarily to higher shipments of ready-to-drink beverages. Coffee volume
also increased, driven by promotional programs and packaging innovation. Cereals
volume increased due primarily to merchandising programs and a new product
introduction. In desserts, volume increased due primarily to volume gains in dry
packaged and refrigerated ready-to-eat desserts.
During the third quarter of 2002, reported net revenues increased $55 million
(5.6%) over the third quarter of 2001, due primarily to higher volume/mix ($94
million), partially offset by lower net pricing ($28 million) and the impact of
businesses held for sale ($7 million). On a pro forma basis, net revenues
increased 6.8%.
Reported operating companies income for the third quarter of 2002 increased $23
million (8.6%) from the comparable period of 2001, due primarily to higher
volume/mix ($42 million), partially offset by higher marketing, administration
and research costs ($20 million). On a pro forma basis, operating companies
income
-31-
increased 5.5%, driven primarily by higher volume/mix, partially offset by
higher marketing, administration and research costs.
Oscar Mayer and Pizza. Reported and pro forma volume in the third quarter of
2002 increased 0.5% over the comparable period of 2001, due to volume gains in
frozen pizza that were driven by stuffed crust pizza and the introduction of
deep dish pizza. In the processed meats business, volume declined slightly, as
consumption declines in luncheon meats were mostly offset by gains in soy-based
meat alternatives, hot dogs and bacon.
During the third quarter of 2002, reported and pro forma net revenues increased
$8 million (1.1%) over the third quarter of 2001, due primarily to higher
volume/mix ($17 million), partially offset by lower net pricing ($9 million).
Reported and pro forma operating companies income for the third quarter of 2002
increased $21 million (14.6%) over the comparable period of 2001, due primarily
to favorable margins ($32 million, due primarily to lower meat and cheese
commodity costs, and productivity savings) and higher volume/mix ($9 million),
partially offset by higher marketing, administration and research costs ($20
million).
Kraft Foods International, Inc.
- -------------------------------
Operating Results
For the Three Months Ended September 30,
----------------------------------------
2002 2001
---- ----
(in millions)
Reported volume (in pounds):
Europe, Middle East and Africa 699 657
Latin America and Asia Pacific 507 505
------ ------
Total reported volume (in pounds) 1,206 1,162
Changes due to businesses held for sale:
Latin America and Asia Pacific (5)
------ ------
Pro forma volume (in pounds) 1,206 1,157
====== ======
Reported net revenues:
Europe, Middle East and Africa $1,502 $1,328
Latin America and Asia Pacific 489 539
------ ------
Total reported net revenues 1,991 1,867
Changes due to businesses held for sale:
Latin America and Asia Pacific 2
------ ------
Pro forma net revenues $1,991 $1,869
====== ======
Reported and pro forma operating companies income:
Europe, Middle East and Africa $ 235 $ 199
Latin America and Asia Pacific 65 78
------ ------
Total reported and pro forma operating companies income $ 300 $ 277
====== ======
Reported volume for the third quarter of 2002 increased 3.8% over the third
quarter of 2001. On a pro forma basis, volume for the third quarter of 2002
increased 4.2% over the comparable period of 2001, with gains in both segments,
benefiting from acquisitions, new products and marketing programs.
-32-
During the third quarter of 2002, reported net revenues increased $124 million
(6.6%) from the third quarter of 2001, due primarily to higher net pricing ($62
million), the impact of acquisitions ($39 million) and higher volume/mix ($31
million). On a pro forma basis, net revenues increased 6.5%.
Reported operating companies income for the third quarter of 2002 increased $23
million (8.3%) over the third quarter of 2001, due primarily to favorable
margins ($30 million, including productivity and synergy savings), favorable
currency movement ($6 million) and the impact of acquisitions, partially offset
by higher marketing, administration and research costs ($22 million, primarily
marketing). On a pro forma basis, operating companies income increased 8.3%.
The following discusses operating results within each of KFI's reportable
segments.
Europe, Middle East and Africa. Reported and pro forma volume for the third
quarter of 2002 increased 6.4% over the comparable period of 2001, driven by
acquisitions, volume growth in numerous markets, including France, Italy, the
United Kingdom, Russia, the Middle East, and an improvement in Germany. Snacks
volume increased, driven by higher confectionery volume benefiting from new
product launches, and the integration and growth of businesses acquired in
Russia and Poland, moderated by a decline in Germany, reflecting a difficult
competitive price environment. Beverages volume also increased, driven by growth
in coffee and refreshment beverages. Cheese volume increased due to higher
volume across the region, except Germany and Austria. In convenient meals,
volume increased driven by higher canned meats volume in Italy, against a weak
comparison in 2001, and lunch combinations in the United Kingdom. Grocery volume
increased due primarily to higher spoonable dressings volume in Germany and
Italy.
Reported and pro forma net revenues for the third quarter of 2002 increased $174
million (13.1%) over the comparable period of 2001, due primarily to favorable
currency movements ($131 million), higher volume/mix ($38 million) and the 2001
acquisition of confectionery businesses in Russia and Poland ($31 million),
partially offset by lower net pricing ($26 million, due primarily to
commodity-driven coffee price decreases).
Reported and pro forma operating companies income for the third quarter of 2002
increased $36 million (18.1%) over the comparable period of 2001, due primarily
to favorable currency movements ($17 million), favorable margins ($10 million)
and higher volume/mix ($10 million).
Latin America and Asia Pacific. Reported volume for the third quarter of 2002
increased 0.4% over the comparable period in 2001. On a pro forma basis, volume
for the third quarter of 2002 increased 1.4% over the comparable period of 2001,
as growth in several markets and the acquisition of a biscuits business in
Australia were partially offset by declines in certain countries due to the
impact of weak economies, notably Argentina. Snacks volume increased, driven by
gains in biscuits, which benefited from line extensions and continued geographic
expansion of cookies and crackers and the acquisition of a biscuits business in
Australia, partially offset by a decline in Argentina due to the impact of a
weak economy, lower biscuits volume in China due to distributor inventory
reductions and biscuit market softness in Indonesia. Beverages volume increased,
due primarily to the growth of powdered beverages in numerous markets,
particularly in Brazil, China and Venezuela, which benefited from new product
introductions. Convenient meals increased due to higher volume in Argentina. In
cheese, volume decreased due to lower sales in Latin America and the
Philippines. Grocery volume decreased due primarily to lower sales in both Latin
America and Asia Pacific.
During the third quarter of 2002, reported net revenues decreased $50 million
(9.3%) from the third quarter of 2001, due primarily to unfavorable currency
movements ($133 million), partially offset by higher net pricing ($88 million).
On a pro forma basis, net revenues decreased 9.6%.
Reported and pro forma operating companies income for the third quarter of 2002
decreased $13 million (16.7%) from the comparable period of 2001, due primarily
to higher marketing, administration and research costs, unfavorable currency
movements ($11 million) and lower volume/mix ($8 million), partially offset by
higher net pricing ($20 million) and productivity and synergy savings.
-33-
Financial Review
- ----------------
Net Cash Provided by Operating Activities
- -----------------------------------------
During the first nine months of 2002, net cash provided by operating activities
was $2.2 billion compared with $1.4 billion in the comparable 2001 period. The
increase in net cash provided by operating activities is due primarily to higher
net earnings and reduced working capital in 2002.
Net Cash Used in Investing Activities
- -------------------------------------
One element of the growth strategy of the Company is to strengthen its brand
portfolios through active programs of selective acquisitions and divestitures.
The Company is constantly investigating potential acquisition candidates and
from time to time sells businesses that are outside its core categories or that
do not meet its growth or profitability targets.
During the first nine months of 2002, net cash used in investing activities was
$768 million, compared with $723 million in the first nine months of 2001. The
increase in net cash used primarily reflects increased capital expenditures.
Net Cash Used in Financing Activities
- -------------------------------------
During the first nine months of 2002, net cash used in financing activities was
$1.5 billion, compared with $700 million during the first nine months of 2001.
The increase in cash used was due primarily to dividends paid during 2002 and
repurchases of the Company's Class A common stock. During 2002, the Company
issued $2.5 billion of global bonds, the proceeds of which were used to repay
outstanding indebtedness. In 2001, the proceeds from the sale of Class A common
stock were used to repay notes payable to parent and affiliates and, as a
result, had no impact on financing cash flows.
Debt and Liquidity
- ------------------
Debt. The Company's total debt, including intercompany amounts payable to Philip
Morris, was $15.2 billion at September 30, 2002 and $16.0 billion at December
31, 2001. Aggregate prepayments of $3.1 billion on the 7.0% note payable to
Philip Morris and payments on short-term borrowings were partially offset by an
increase in amounts due to parent and affiliates and long-term debt. The
Company's debt-to-equity ratio was 0.60 at September 30, 2002 and 0.68 at
December 31, 2001.
In April 2002, the Company filed a Form S-3 shelf registration statement with
the Securities and Exchange Commission, under which the Company may sell debt
securities and/or warrants to purchase debt securities in one or more offerings
up to a total amount of $5.0 billion. In May 2002, the Company issued $2.5
billion of global bonds under the shelf registration. The bond offering included
$1.0 billion of five-year notes bearing interest at a rate of 5.25% and $1.5
billion of 10-year notes bearing interest at a rate of 6.25%. The net proceeds
from the offering were used to retire maturing long-term debt in the amount of
$400 million and to prepay a portion (approximately $2.1 billion) of the
Company's 7.0% long-term note payable to Philip Morris. At September 30, 2002,
the Company had $2.5 billion of capacity remaining under its existing $5.0
billion shelf registration statement.
During the second quarter of 2002, the Company borrowed $2.1 billion from Philip
Morris to retire a portion of its commercial paper, $2.0 billion of which had
previously been reclassified as long-term debt. Interest on these borrowings is
based on the average one-month London Interbank Offered Rate. This short-term
obligation due to Philip Morris of $2.1 billion was reclassified on the
condensed consolidated balance sheet as long-term notes due to parent and
affiliates based upon the Company's ability and intention to refinance these
borrowings on a long-term basis.
-34-
Credit Lines. At September 30, 2002, the Company and its subsidiaries maintained
credit lines with a number of lending institutions amounting to approximately
$5.8 billion. Certain of these credit lines were used to support commercial
paper borrowings of $574 million at September 30, 2002, the proceeds of which
were used for general corporate purposes. Approximately $800 million of these
credit lines are used to meet the short-term working capital needs of the
Company's international businesses. In July 2002, $4.0 billion of 364-day
revolving credit facilities was terminated and replaced by $3.0 billion of new
364-day revolving credit facilities expiring in July 2003. At September 30,
2002, the Company's credit facilities also included a $2.0 billion, 5-year
revolving credit facility expiring in July 2006. These credit facilities require
the maintenance of a minimum net worth, as defined, of $18.2 billion, which the
Company exceeded at September 30, 2002. The Company does not currently
anticipate any difficulty in continuing to exceed this covenant requirement. The
foregoing revolving credit facilities do not include any other financial tests,
any credit rating triggers or any provisions that could require the posting of
collateral. The five-year revolving credit facility enables the Company to
reclassify short-term debt to non-related parties, on a long-term basis. At
September 30, 2002 and December 31, 2001, $574 million and $2.0 billion,
respectively, of commercial paper borrowings that the Company intends to
refinance were reclassified as long-term debt. The Company expects to 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.
Guarantees and Commitments. At September 30, 2002, the Company was contingently
liable for guarantees and commitments of $69 million. These include surety bonds
related to dairy commodity purchases and guarantees related to letters of
credit. Guarantees do not have, and are not expected to have, a significant
impact on the Company's liquidity.
-------------------
The Company believes that its cash from operations, existing credit facilities
and access to global capital markets will provide sufficient liquidity to meet
its working capital needs, planned capital expenditures and payment of its
anticipated quarterly dividends.
-------------------
Equity and Dividends
- --------------------
Dividends paid in the first nine months of 2002 were $676 million. During the
third quarter of 2002, the Company's board of directors approved a 15.4%
increase in the current quarterly dividend rate to $0.15 per share on its Class
A and Class B common stock. As a result, the present annualized dividend rate is
$0.60 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.
On June 21, 2002, the Company's board of directors approved the repurchase from
time to time of up to $500 million of the Company's Class A common stock solely
to satisfy the obligations of the Company to provide shares under its 2001
Performance Incentive Plan, 2001 Compensation Plan for non-employee directors,
and other plans where options to purchase the Company's Class A common stock are
granted to employees of the Company. In the third quarter of 2002, the Company
repurchased approximately 2.2 million shares of its Class A common stock at a
cost of $85 million.
Concurrent with the IPO, certain Philip Morris employees received a one-time
grant of options to purchase shares of the Company's Class A common stock held
by Philip Morris at the IPO price of $31.00 per share. In order to satisfy this
obligation and retain its current percentage ownership of the Company, Philip
Morris plans to purchase approximately 1.6 million shares of the Company's Class
A common stock in open market transactions during the remainder of 2002.
-35-
Market Risk
- -----------
The Company operates globally, with manufacturing and sales facilities in
various locations around the world, and utilizes certain financial instruments
to manage its foreign currency and commodity exposures, which primarily relate
to forecasted transactions and interest rate exposures. Derivative financial
instruments are used by the Company, principally to reduce exposures to market
risks resulting from fluctuations in foreign exchange rates, commodity prices
and interest rates by creating offsetting exposures. The Company is not a party
to leveraged derivatives. 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. 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 does not use derivative financial
instruments for speculative purposes.
Substantially all of the Company's derivative financial instruments are
effective as hedges under accounting principles generally accepted in the United
States of America. Accordingly, the Company decreased accumulated other
comprehensive losses by $34 million during the nine months ended September 30,
2002. This reflects an increase in the fair value of derivatives of $14 million
and the transfer of deferred losses to earnings of $20 million. For the three
months ended September 30, 2002, the Company decreased accumulated other
comprehensive losses by $27 million. This reflects an increase in the fair value
of derivatives of $20 million and the transfer of deferred losses to earnings of
$7 million. The fair value of all derivative financial instruments has been
calculated based on active market quotes. Ineffectiveness from cash flow hedges
was not material during the nine months ended September 30, 2002. 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 ineffectiveness.
Ineffectiveness from cash flow hedges was not material during the three months
ended September 30, 2002 and September 30, 2001.
Foreign exchange rates. The Company uses forward foreign exchange contracts and
foreign currency options to mitigate its exposure to changes in foreign currency
exchange rates from third-party and intercompany forecasted transactions. At
September 30, 2002 and December 31, 2001, the Company had option and forward
foreign exchange contracts with aggregate notional amounts of $568 million and
$431 million, respectively, for the purchase 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 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 and soybean oil. At September
30, 2002 and December 31, 2001, the Company had net long commodity positions of
$486 million and $589 million, respectively.
-------------------
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Company's financial position at September 30, 2002 and
December 31, 2001, or the Company's results of operations for the three and nine
months ended September 30, 2002 or the year ended December 31, 2001.
-------------------
Contingencies
- -------------
See Note 6 to the Condensed Consolidated Financial Statements and Part II -
Other Information, Item 1. Legal Proceedings for a discussion of contingencies.
-36-
New Accounting Standards
- ------------------------
On July 30, 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Costs covered by SFAS No. 146 include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing or other exit or disposal
activity. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. Accordingly, the Company will apply the
provisions of SFAS No. 146 prospectively to exit or disposal activities
initiated after December 31, 2002.
On January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, the
Company stopped recording the amortization of goodwill and indefinite life
intangible assets as a charge to earnings as of January 1, 2002. The Company
estimates that net earnings and diluted EPS would have been affected as follows
for 2001 had the provisions of the new standards been applied as of January 1,
2001:
Nine Months Ended Three Months Ended
September 30, 2001 September 30, 2001
------------------ -------------------
(in millions, except per share data)
Net earnings, as previously reported $1,334 $ 503
Adjustment for amortization of goodwill 713 237
------ -----
Net earnings, as adjusted $2,047 $ 740
====== =====
Diluted earnings per share, as previously reported $ 0.85 $0.29
Adjustment for amortization of goodwill 0.46 0.14
------ -----
Diluted earnings per share, as adjusted $ 1.31 $0.43
====== =====
In addition, the Company is required to conduct an annual review of goodwill and
intangible assets for potential impairment. The Company completed its review in
the first quarter of 2002 and did not have to record a charge to earnings for an
impairment of goodwill or other intangible assets as a result of these new
standards.
Effective January 1, 2002, the Company also adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of." SFAS No. 144 provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets, expands the scope of a discontinued operation to include a
component of an entity and eliminates the current exemption to consolidation
when control over a subsidiary is likely to be temporary. The adoption of this
new standard did not have a material impact on the Company's financial position,
results of operations or cash flows.
Effective January 1, 2002, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products." The adoption of EITF Issues No. 00-14
and No. 00-25 resulted in a reduction of revenues of approximately $3.4 billion
in the first nine months of 2001 and approximately $1.0 billion for the three
months ended September 30, 2001. In addition, the adoption reduced marketing,
administration and research costs in the first nine months of 2001 by
approximately $3.4 billion and for the three months ended September 30, 2001 by
approximately $1.0 billion, while cost of sales increased by an insignificant
amount for both periods. The adoption of these EITF Issues had no impact on net
earnings or basic and diluted EPS.
-37-
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, including this Quarterly Report on Form 10-Q. One can identify
these forward-looking statements by use of words such as "strategy," "expects,"
"plans," "anticipates," "believes," "will," "continues," "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
consummate and successfully integrate acquisitions, including its ability to
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 recalls if products
become adulterated or misbranded, liability if product consumption causes
injury, ingredient disclosure and labeling laws and regulations and 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.
-38-
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman, Co-Chief Executive Officers, and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, the Chairman,
Co-Chief Executive Officers, and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
the controls.
-39-
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 the Company's
results of operations or financial position.
In May 2002, the Company was served with a lawsuit filed in California
by the American Environmental Safety Institute against several major
chocolate manufacturers alleging that the defendants' chocolate products
contain "potentially dangerous levels of lead and cadmium." The suit
alleges that these levels, which are not disclosed on the product
labels, are a violation of California's Proposition 65, which requires a
warning on products containing chemicals "known to the State" to be
carcinogens or reproductive toxicants. The suit is in its early stages,
and various procedural motions and defenses are being pursued. The
Company believes that the suit is without merit, and the California
Attorney General has publicly stated that the case is without merit.
This case is in discovery.
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 milk through their trading
activity on the National Cheese Exchange. Plaintiffs sought 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 dismissing the cases. In April 2002, the Wisconsin
Supreme Court affirmed the intermediate appellate court's ruling.
Plaintiffs in that case have filed a petition for certiorari to the
United States Supreme Court, which petition is pending. In April 2002,
the Company's motion for summary judgment dismissing the case was
granted in a case pending in the United States District Court for the
Central District of California. In June 2002, the parties settled the
California case on an individual (non-class) basis, and plaintiffs
dismissed their appeal. A case in Illinois state court has been settled
and dismissed.
Environmental Matters
---------------------
In May 2001, the State of Ohio notified the Company that it may be
subject to an enforcement action for alleged past violations of the
Company's wastewater discharge permit at its production facility in
Farmdale, Ohio. The State has offered to attempt to negotiate a
settlement of this matter, and the Company has accepted the offer to do
so. The State has not yet identified the relief it may seek in this
matter.
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 was filed on March 6, 1996, in the Supreme Court of the
State of New York and was subsequently dismissed by the trial court.
That decision was affirmed on appeal. The other two cases both were
filed on January 3, 2000, also in the Supreme Court of the State of New
York. That court granted defendant's summary judgment motion
-40-
as to all but one of the plaintiffs in each of the remaining cases, and
the plaintiffs have now withdrawn their appeal of this ruling. In August
2002, the court entered summary judgment against the remaining two
plaintiffs.
Item 5. Other Information.
The Audit Committee has reviewed and approved the non-audit services to
be provided by the independent accountants during 2002 to assure
compliance with the Company's and the Committee's policies restricting
the independent accountants from performing services that might impair
their independence.
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 a Current Report on Form 8-K on August 13, 2002,
covering Item 9 (Regulation FD Disclosure) in connection with
certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-41-
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, 2002
-42-
Certifications
I, Betsy D. Holden, Co-Chief Executive Officer of Kraft Foods Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Kraft Foods Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ BETSY D. HOLDEN
---------------------
Betsy D. Holden
Co-Chief Executive Officer
-43-
I, Roger K. Deromedi, Co-Chief Executive Officer of Kraft Foods Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Kraft Foods Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ ROGER K. DEROMEDI
----------------------
Roger K. Deromedi
Co-Chief Executive Officer
-44-
I, James P. Dollive, Senior Vice President and Chief Financial Officer of Kraft
Foods Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kraft Foods Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ JAMES P. DOLLIVE
-------------------------
James P. Dollive
Senior Vice President and
Chief Financial Officer
-45-