EX-99.1 3 d317589dex991.htm PRELIMINARY INFORMATION STATEMENT OF KRAFT FOODS GROUP, INC. Preliminary Information Statement of Kraft Foods Group, Inc.
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EXHIBIT 99.1

 

LOGO

            , 2012

Dear Fellow Kraft Foods Inc. Shareholder,

The process for separating our company is proceeding smoothly. We believe the separation of our North American grocery business and global snacks business into two independent public companies will build long-term shareholder value by allowing each business to focus on its distinct growth profiles, product categories and strategic priorities.

On August 14, 2012, the Kraft Foods Inc. board of directors approved the spin-off of our North American grocery business. On October 1, 2012, the spin-off company, Kraft Foods Group, Inc., will be a separate public company that will be one of the largest and most admired consumer packaged food and beverage companies in North America. Also on that date, today’s Kraft Foods Inc. will change its name to Mondelēz International, Inc., and proceed as a global business concentrating on snacks categories, such as biscuits, chocolate, gum and candy.

Beginning on October 2, 2012, shares of Kraft Foods Group stock will trade on The NASDAQ Global Select Market under the ticker symbol “KRFT.” Mondelēz International’s common stock also will trade on The NASDAQ Global Select Market, under the ticker symbol “MDLZ.” Our current ticker symbol “KFT” will be retired at that time.

The spin-off does not require shareholder approval, nor do you need to take any action to receive your shares of Kraft Foods Group common stock. Immediately following the spin-off, you will own common stock in both Mondelēz International and Kraft Foods Group.

Kraft Foods Group has prepared an information statement that provides a description of the spin-off and includes important information about the company, including its historical financial data. Please read this information carefully. We are mailing to all Kraft Foods Inc. shareholders a notice with instructions on how to access the information statement online. We are doing this because we believe electronic delivery is faster, lowers costs and reduces the environmental impact.

I invite you to learn more about our exciting transformation on our website, at www.kraftfoodscompany.com/investors.

Thank you for your continued support as we launch these two great new companies – Mondelēz International and Kraft Foods Group.

Sincerely,

Irene B. Rosenfeld

Chairman of the Board and

Chief Executive Officer

Kraft Foods Inc.


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Kraft Foods Group, Inc.

            , 2012

Dear Future Kraft Foods Group, Inc. Shareholder,

On behalf of the new Kraft Foods Group, it is our great pleasure to welcome you as a shareholder of our company.

From our first day as an independent public company, Kraft Foods Group will be one of the largest and most admired consumer packaged food and beverage companies in North America. Our portfolio is filled with some of North America’s most beloved brands. Almost 80 percent of our 2011 U.S. retail net revenues were derived from product categories where we hold the number one branded share position.

Our company has a great heritage, and we believe it has an even greater future. Operating in the highly profitable North American food and beverage market, Kraft Foods Group will have a strong retail presence and significant scale across categories. With the spirit of a start-up and the soul of a powerhouse, we believe we’ll be a major player in grocery, cheese, convenient meals, beverages and food service. We currently have three brands with annual net revenues exceeding $1 billion each – Kraft cheeses, dinners and dressings, Oscar Mayer meats, and Maxwell House coffees – and more than 20 brands with annual net revenues between $100 million and $1 billion each.

The new Kraft Foods Group will aim to drive revenue growth in our key product categories and maintain our category-leading profit margins to deliver strong cash flows and pay a highly competitive dividend. We believe we will be a formidable innovator, driven by consumer insights and smart and effective marketing.

Our management team is excited to be a part of this great company. We invite you to get to know our company better by reading our information statement.

Thank you for your support of our new company. We look forward to having you as a fellow shareholder.

Sincerely,

Tony Vernon

Chief Executive Officer

Kraft Foods Group, Inc.


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION, DATED AUGUST 15, 2012

INFORMATION STATEMENT

KRAFT FOODS GROUP, INC.

Three Lakes Drive

Northfield, IL 60093

Common Stock

(no par value)

We are sending you this Information Statement in connection with Kraft Foods Inc.’s spin-off of its wholly owned subsidiary, Kraft Foods Group, Inc., or “Kraft Foods Group.” To effect the spin-off, Kraft Foods Inc., or “Kraft ParentCo,” will distribute all of the shares of Kraft Foods Group common stock on a pro rata basis to the holders of Kraft ParentCo common stock. We expect that the distribution of Kraft Foods Group common stock will be tax-free to Kraft ParentCo’s U.S. shareholders for U.S. federal income tax purposes, except for cash that shareholders receive in lieu of fractional shares.

If you are a record holder of Kraft ParentCo common stock as of the close of business on September 19, 2012, which is the record date for the distribution, you will be entitled to receive one share of Kraft Foods Group common stock for every three shares of Kraft ParentCo common stock you hold on that date. Kraft ParentCo will distribute the shares of Kraft Foods Group common stock in book-entry form, which means that we will not issue physical stock certificates. The distribution agent will not distribute any fractional shares of Kraft Foods Group common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to each holder (net of any required withholding for taxes applicable to each holder) who would otherwise have been entitled to receive a fractional share in the distribution.

The distribution will be effective as of 5:00 p.m., New York City time, on October 1, 2012. Immediately after the distribution becomes effective, we will be an independent, publicly traded company.

Kraft ParentCo’s shareholders are not required to vote on or take any other action in connection with the spin-off. We are not asking you for a proxy, and you are requested not to send us a proxy. Kraft ParentCo’s shareholders will not be required to pay any consideration for the shares of Kraft Foods Group common stock they receive in the spin-off, surrender or exchange their shares of Kraft ParentCo common stock or take any other action in connection with the spin-off.

Kraft ParentCo currently owns all of the outstanding shares of Kraft Foods Group common stock. Accordingly, no trading market for Kraft Foods Group common stock currently exists. We expect, however, that a limited trading market for Kraft Foods Group common stock, commonly known as a “when-issued” trading market, will develop as early as two trading days prior to the record date for the distribution, and we expect “regular-way” trading of Kraft Foods Group common stock will begin on the first trading day after the distribution date. We intend to list Kraft Foods Group common stock on The NASDAQ Global Select Market under the symbol “KRFT.”

In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 18 of this Information Statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this Information Statement is                     , 2012.

Kraft ParentCo mailed a Notice of Internet Availability of Information Statement Materials containing instructions on how to access this Information Statement to its shareholders on or about August 21, 2012. For shareholders who previously elected to receive a paper copy of Kraft ParentCo’s materials, Kraft ParentCo mailed the Information Statement on or about August 21, 2012.


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TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

RISK FACTORS

     18   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     33   

THE SPIN-OFF

     34   

DIVIDEND POLICY

     47   

CAPITALIZATION

     48   

SELECTED HISTORICAL COMBINED FINANCIAL DATA

     49   

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     52   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     60   

BUSINESS

     100   

MANAGEMENT

     111   

EXECUTIVE COMPENSATION

     120   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     166   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     169   

DESCRIPTION OF OUR CAPITAL STOCK

     177   

WHERE YOU CAN FIND MORE INFORMATION

     181   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

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SUMMARY

This summary highlights selected information from this Information Statement and provides an overview of our company, our separation from Kraft ParentCo and Kraft ParentCo’s distribution of our common stock to Kraft ParentCo’s shareholders. For a more complete understanding of our business and the spin-off, you should read the entire Information Statement carefully, particularly the discussion of “Risk Factors” beginning on page 18 of this Information Statement, and our audited and unaudited condensed historical combined financial statements and unaudited pro forma combined financial statements and the notes to those statements appearing elsewhere in this Information Statement.

In this Information Statement, unless the context otherwise requires:

 

   

“Kraft Foods Group,” “we,” “our” and “us” refer to Kraft Foods Group, Inc. and its combined subsidiaries, after giving effect to the Internal Reorganization and the Distribution, and

 

   

“Kraft ParentCo” refers to Kraft Foods Inc. and its consolidated subsidiaries, other than, for all periods following the Spin-Off, Kraft Foods Group.

“Internal Reorganization,” “Distribution” and “Spin-Off” are defined below. Coincident with the Spin-Off, Kraft ParentCo will change its name to Mondelēz International, Inc.

Prior to Kraft ParentCo’s distribution of the shares of our common stock to its shareholders, Kraft ParentCo will undertake a series of internal transactions, following which:

 

  (i) Kraft ParentCo will hold, in addition to the shares of our common stock:

 

  (a) its current U.S. and Canadian snacks and confectionery business, including the related foodservice operations, but excluding the Planters and Corn Nuts businesses, which we refer to collectively as the “Snacks Business Lines,” and

 

  (b) all of its current businesses conducted outside of the United States and Canada, except for the North American Grocery Export Business described below (we refer to these businesses and the Snacks Business Lines collectively as the “Global Snacks Business”), and

 

  (ii) we will hold:

 

  (a) Kraft ParentCo’s current U.S. and Canadian grocery, beverages, cheese, convenient meals, Planters and Corn Nuts businesses, including the related foodservice operations and the grocery business operations in Puerto Rico (excluding the powdered and liquid concentrate beverages businesses in Puerto Rico), which we refer to collectively as the “Grocery Business Lines,” and

 

  (b) Kraft ParentCo’s current export operations related to the Grocery Business Lines in the United States and Canada, except for the Philadelphia cream cheese and certain powdered and liquid concentrate beverage businesses in a number of jurisdictions and the businesses related to certain branded products that Kraft ParentCo will market and sell in a limited number of countries outside of the United States and Canada (we refer to these export operations collectively as the “North American Grocery Export Business” and to the Grocery Business Lines and the North American Grocery Export Business collectively as the “North American Grocery Business”).

 

 

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The Snacks Business Lines’ products are generally consistent with those types of products sold by the businesses conducted within Kraft ParentCo’s U.S. Snacks segment, excluding the Planters and Corn Nuts businesses, as reported in Kraft ParentCo’s annual report on Form 10-K for the year ended December 31, 2011, or “Kraft ParentCo’s Form 10-K.” The Grocery Business Lines’ products are generally consistent with those types of products sold by (i) the businesses conducted within Kraft ParentCo’s U.S. Beverages, U.S. Cheese, U.S. Convenient Meals and U.S. Grocery segments, in each case, as reported in Kraft ParentCo’s Form 10-K, and (ii) the Planters and Corn Nuts businesses. In addition, certain specified net liabilities will be allocated between Kraft ParentCo and us as described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement.”

We refer to:

 

   

the series of internal transactions described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” that will result in this division of businesses as the “Internal Reorganization,”

 

   

Kraft ParentCo’s distribution of the shares of our common stock to its shareholders as the “Distribution” and

 

   

the Internal Reorganization and the Distribution collectively as the “Spin-Off.”

Our Company

Kraft Foods Group operates one of the most admired food and beverage businesses in North America. Upon our Spin-Off from Kraft ParentCo, we will be one of the largest consumer packaged food and beverage companies in North America and one of the largest worldwide among publicly traded consumer packaged food and beverage companies, based on our 2011 combined net revenues of $18.7 billion. We manufacture and market food and beverage products, including convenient meals, refreshment beverages and coffee, cheese and other grocery products, primarily in the United States and Canada, under a host of iconic brands. Our product categories span breakfast, lunch and dinner meal occasions, both at home and in foodservice locations.

Our diverse brand portfolio consists of many of the most popular food brands in North America, including three brands with annual net revenues exceeding $1 billion each – Kraft cheeses, dinners and dressings; Oscar Mayer meats; and Maxwell House coffees – plus over 20 brands with annual net revenues of between $100 million and $1 billion each. In the United States, based on dollar share in 2011, we hold the number one branded share position in a majority of our 50 product categories, as well as in 18 of our top 20 product categories. These 18 product categories contributed approximately 75% of our 2011 U.S. retail net revenues. We hold the number two branded share position in the other two product categories.

We believe our competitive strengths include our:

 

   

superior brand portfolio,

 

   

significant scale in North America,

 

   

diverse category profile,

 

   

reputation for high quality products,

 

   

strong innovation culture and pipeline,

 

 

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deep consumer knowledge,

 

   

long-standing relationships with major retailers and

 

   

experienced management team.

As a result of these strengths, combined with our ongoing focus on productivity and operating efficiency, we believe we have achieved category-leading profit margins in almost all of our key product categories. Our business has generated significant cash flow, which we believe will enable us to continue to invest in the development and continual rejuvenation of our brands and return value to our shareholders. Our goal as an independent public company is to deliver superior operating income, strong cash flows and a highly competitive dividend payout while driving revenue growth in our key product categories. To achieve this goal, we intend to build on our leading market positions, remain sharply focused on cost structure and superior execution and invest in employee and organization excellence.

Other Information

We were initially organized as a Delaware corporation in 1980. In March 2012, we redomesticated to Virginia and changed our name from “Kraft Foods Global, Inc.” to “Kraft Foods Group, Inc.” After the Spin-Off, our principal executive offices will be located at Three Lakes Drive, Northfield, IL 60093. Our telephone number is (847) 646-2000. Our Web site address is www.kraftfoodsgroup.com. Information contained on, or connected to, our Web site or Kraft ParentCo’s Web site does not and will not constitute part of this Information Statement or the Registration Statement on Form 10 of which this Information Statement is a part.

 

 

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The Spin-Off

Overview

On August 4, 2011, Kraft ParentCo announced plans to create two independent public companies: the Global Snacks Business and the North American Grocery Business. To effect the separation, first, Kraft ParentCo will undertake the Internal Reorganization described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement.” Following the Internal Reorganization, Kraft ParentCo will hold the Global Snacks Business, and Kraft Foods Group, Kraft ParentCo’s wholly owned subsidiary, will hold the North American Grocery Business. Then, Kraft ParentCo will distribute all of Kraft Foods Group’s common stock to Kraft ParentCo’s shareholders, and Kraft Foods Group, holding the North American Grocery Business, will become an independent, publicly traded company.

Before the Spin-Off, we intend to enter into a Separation and Distribution Agreement and several other agreements with Kraft ParentCo related to the Spin-Off. These agreements will govern the relationship between Kraft ParentCo and us up to and after completion of the Spin-Off and allocate between Kraft ParentCo and us various assets, liabilities and obligations, including employee benefits, intellectual property and tax-related assets and liabilities. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo” for more detail.

The Spin-Off described in this Information Statement is subject to the satisfaction or waiver of a number of conditions. In addition, Kraft ParentCo has the right not to complete the Spin-Off if, at any time, Kraft ParentCo’s board of directors, or the “Kraft ParentCo Board,” determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kraft ParentCo or its shareholders or is otherwise not advisable. See “The Spin-Off—Conditions to the Spin-Off” for more detail.

Questions and Answers about the Spin-Off

The following provides only a summary of the terms of the Spin-Off. You should read the section entitled “The Spin-Off” in this Information Statement for a more detailed description of the matters described below.

 

Q: What is the Spin-Off?

 

A: The Spin-Off is the method by which we will separate from Kraft ParentCo. In the Spin-Off, Kraft ParentCo will distribute to its shareholders all of the shares of our common stock. Following the Spin-Off, we will be a separate company from Kraft ParentCo, and Kraft ParentCo will not retain any ownership interest in us.

 

Q: Will the number of Kraft ParentCo shares I own change as a result of the Distribution?

 

A: No, the number of shares of Kraft ParentCo common stock you own will not change as a result of the Distribution.

 

Q: What are the reasons for the Spin-Off?

 

A: The Kraft ParentCo Board believes that creating two public companies will present a number of opportunities:

 

   

The Spin-Off will allow each company to focus on its distinct growth profile, product categories, distribution systems and strategic priorities, with customized cultures, organizational structures, operating models and financial targets that best fit its own business, markets and unique opportunities.

 

 

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The Spin-Off will allow each company to allocate resources and deploy capital in a manner consistent with its distinct operational focus and strategic priorities in order to optimize total returns to shareholders.

 

   

The Spin-Off will allow investors to value Kraft ParentCo and Kraft Foods Group based on their particular operational and financial characteristics and thus invest accordingly.

 

Q: Why is the separation of Kraft Foods Group structured as a spin-off?

 

A: Kraft ParentCo believes that a distribution of our shares is the most efficient way to separate our business from Kraft ParentCo in a manner that will achieve the above objectives.

 

Q: What will I receive in the Spin-Off?

 

A: As a holder of Kraft ParentCo common stock, you will receive one share of our common stock for every three shares of Kraft ParentCo common stock you hold on the Record Date (as defined below). The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See “—How will fractional shares be treated in the Distribution?” for more information on the treatment of the fractional shares you are entitled to receive in the Distribution. Your proportionate interest in Kraft ParentCo will not change as a result of the Spin-Off. For a more detailed description, see “The Spin-Off.”

 

Q: What is being distributed in the Spin-Off?

 

A: Kraft ParentCo will distribute approximately 591 million shares of our common stock in the Spin-Off, based on the approximately 1.774 billion shares of Kraft ParentCo common stock outstanding as of June 30, 2012. The actual number of shares of our common stock that Kraft ParentCo will distribute will depend on the number of shares of Kraft ParentCo common stock outstanding on the Record Date. The shares of our common stock that Kraft ParentCo distributes will constitute all of the issued and outstanding shares of our common stock immediately prior to the Distribution. For more information on the shares being distributed in the Spin-Off, see “Description of Our Capital Stock—Common Stock.”

 

Q: What is the record date for the Distribution?

 

A: Kraft ParentCo will determine record ownership as of the close of business on September 19, 2012, which we refer to as the “Record Date.”

 

Q: When will the Distribution occur?

 

A: The Distribution will be effective as of 5:00 p.m., New York City time, on October 1, 2012, which we refer to as the “Distribution Date.” On or shortly after the Distribution Date, the whole shares of our common stock will be credited in book-entry accounts for shareholders entitled to receive the shares in the Distribution. We expect the distribution agent, acting on behalf of Kraft ParentCo, to take about one week after the Distribution Date to fully distribute to Kraft ParentCo shareholders any cash in lieu of the fractional shares they are entitled to receive. See “—How will Kraft ParentCo distribute shares of our common stock?” for more information on how to access your book-entry account or your bank, brokerage or other account holding the Kraft Foods Group common stock you receive in the Distribution.

 

 

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Q: What do I have to do to participate in the Distribution?

 

A: You are not required to take any action, but we urge you to read this document carefully. Shareholders of Kraft ParentCo common stock on the Record Date will not need to pay any cash or deliver any other consideration, including any shares of Kraft ParentCo common stock, in order to receive shares of our common stock in the Distribution.

 

Q: Is shareholder approval required for the Spin-Off?

 

A: No. Kraft ParentCo is a Virginia corporation governed by the Virginia Stock Corporation Act, or the “Virginia Act.” Under the Virginia Act, the Kraft ParentCo Board, acting in accordance with the directors’ legal duties, has the authority to approve Kraft ParentCo’s transactions, except for certain types of transactions that expressly require shareholder approval. The Spin-Off is not one of the types of transactions that require shareholder approval under the Virginia Act. Further, Kraft ParentCo will effect the Spin-Off by distributing all shares of our common stock pro rata to Kraft ParentCo’s shareholders. Under the Virginia Act and Kraft ParentCo’s amended and restated articles of incorporation and amended and restated bylaws, the Kraft ParentCo Board has the express authority to declare distributions to shareholders without shareholder approval. Accordingly, no shareholder approval of the Spin-Off is required under applicable law, and Kraft ParentCo is not seeking shareholder approval. Neither Kraft ParentCo nor we are asking you for a vote or requesting that you send us a proxy card.

 

Q: If I sell my shares of Kraft ParentCo common stock on or before the Distribution Date, will I still be entitled to receive shares of Kraft Foods Group common stock in the Distribution?

 

A: If you hold shares of Kraft ParentCo common stock on the Record Date and decide to sell them on or before the Distribution Date, you may choose to sell your Kraft ParentCo common stock with or without your entitlement to our common stock. You should discuss these alternatives with your bank, broker or other nominee. See “The Spin-Off—Trading Prior to the Distribution Date” for more information.

 

Q: How will Kraft ParentCo distribute shares of our common stock?

 

A: Registered shareholders: If you are a registered shareholder (meaning you hold physical Kraft ParentCo stock certificates or you own your shares of Kraft ParentCo common stock directly through an account with Kraft ParentCo’s transfer agent, Wells Fargo Shareowner Services), the distribution agent will credit the whole shares of our common stock you receive in the Distribution to your Wells Fargo book-entry account on or shortly after the Distribution Date. About one week after the Distribution Date, the distribution agent will mail you a Wells Fargo book-entry account statement that reflects the number of whole shares of our common stock you own, along with a check for any cash in lieu of fractional shares you are entitled to receive. You will be able to access information regarding your book-entry account holding the Kraft Foods Group shares at www.shareowneronline.com using the same credentials that you use to access your Kraft ParentCo account or via our transfer agent’s interactive voice response system at (866) 655-7238.

 

     “Street name” or beneficial shareholders: If you own your shares of Kraft ParentCo common stock beneficially through a bank, broker or other nominee, your bank, broker or other nominee will credit your account with the whole shares of our common stock you receive in the Distribution on or shortly after the Distribution Date. Please contact your bank, broker or other nominee for further information about your account.

 

 

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     We will not issue any physical stock certificates to any shareholders, even if requested. See “The Spin-Off—When and How You Will Receive Kraft Foods Group Shares” for a more detailed explanation.

 

Q: How will fractional shares be treated in the Distribution?

 

A: The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Kraft ParentCo shareholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and when-issued trades will generally settle within four trading days following the Distribution Date. See “—How will Kraft Foods Group common stock trade?” for additional information regarding when-issued trading and “The Spin-Off—Treatment of Fractional Shares” for a more detailed explanation of the treatment of fractional shares.

 

Q: What are the U.S. federal income tax consequences of the Distribution to me?

 

A: The Distribution is conditioned on the continued validity of the private letter ruling that Kraft ParentCo received from the U.S. Internal Revenue Service, or the “IRS,” and the receipt and continued validity of an opinion of tax counsel, each to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants:

 

  (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Internal Revenue Code of 1986, or the “Code” (except, in the case of the private letter ruling, to the extent the IRS generally will not rule on certain transfers of intellectual property, which will be covered solely by the opinion), and

 

  (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares.

 

     As described more fully in “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution,” a U.S. holder (as defined in that section) generally will not recognize any gain or loss, and will not include any amount in income, for U.S. federal income tax purposes, upon receiving our common stock in the Distribution, except for any gain or loss recognized with respect to cash the shareholder receives in lieu of fractional shares. In addition, each U.S. holder’s aggregate basis in its Kraft ParentCo common stock and our common stock received in the Distribution, including any fractional shares to which the U.S. holder is entitled, will equal the aggregate basis the U.S. holder had in its Kraft ParentCo common stock immediately prior to the Distribution, allocated in proportion to Kraft ParentCo’s and our common stock’s fair market value at the time of the Distribution. See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution” for information regarding the determination of fair market value for purposes of allocating basis.

 

    

Tax matters are complicated. The tax consequences to you of the Distribution depend on your individual situation. You should consult your own tax advisor regarding those consequences,

 

 

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  including the applicability and effect of any U.S. federal, state and local, as well as foreign, tax laws and of changes in applicable tax laws, which may result in the Distribution being taxable to you. See “Risk Factors—Risks Relating to the Spin-Off—If the Contribution, Internal Distribution or Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then Kraft ParentCo, we and our shareholders could be subject to significant tax liability,” “Risk Factors—Risks Relating to the Spin-Off—We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition” and “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution.”

 

Q: Does Kraft Foods Group intend to pay cash dividends?

 

A: Following the Spin-Off, we expect to pay a highly competitive cash dividend, although the timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of our board of directors, which we refer to as our “Board.” See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock” and “Dividend Policy” for more information.

 

Q: How will Kraft Foods Group common stock trade?

 

A: Currently, there is no public market for our common stock. We intend to list our common stock on The NASDAQ Global Select Market, or “NASDAQ,” under the symbol “KRFT.”

 

     We anticipate that trading in our common stock will begin on a “when-issued” basis as early as two trading days prior to the Record Date for the Distribution and will continue up to and including the Distribution Date. When-issued trading in the context of a spin-off refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. When-issued trades generally settle within four trading days after the Distribution Date. On the first trading day following the Distribution Date, any when-issued trading of our common stock will end and “regular-way” trading will begin. Regular-way trading refers to trading after the security has been distributed and typically involves a trade that settles on the third full trading day following the date of the trade. See “The Spin-Off—Trading Prior to the Distribution Date” for more information. We cannot predict the trading prices for our common stock before, on or after the Distribution Date.

 

Q: Will the Spin-Off affect the trading price of my Kraft ParentCo common stock?

 

A: We expect the trading price of shares of Kraft ParentCo common stock immediately following the Distribution to be lower than immediately prior to the Distribution because the trading price will no longer reflect the value of the North American Grocery Business. Furthermore, until the market has fully analyzed the value of Kraft ParentCo without the North American Grocery Business, the trading price of shares of Kraft ParentCo common stock may fluctuate. There can be no assurance that, following the Distribution, the combined trading prices of the Kraft ParentCo common stock and the Kraft Foods Group common stock will equal or exceed what the trading price of Kraft ParentCo common stock would have been in the absence of the Spin-Off.

 

     It is possible that after the Spin-Off, the combined equity value of Kraft ParentCo and Kraft Foods Group will be less than Kraft ParentCo’s equity value before the Spin-Off.

 

 

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Q: Will my shares of Kraft ParentCo common stock continue to trade following the Distribution?

 

A: Yes. Coincident with the distribution of our shares, Kraft ParentCo will change its name to Mondelēz International, Inc., and its common stock will trade on NASDAQ under the symbol “MDLZ.”

 

Q: Do I have appraisal rights in connection with the Spin-Off?

 

A: No. Holders of Kraft ParentCo common stock are not entitled to appraisal rights in connection with the Spin-Off.

 

Q: Who is the transfer agent and registrar for Kraft Foods Group common stock?

 

A: Following the Spin-Off, Wells Fargo Shareowner Services will serve as transfer agent and registrar for our common stock.

 

     Wells Fargo Shareowner Services has two additional roles in the Distribution.

 

   

Wells Fargo Shareowner Services currently serves and will continue to serve as Kraft ParentCo’s transfer agent and registrar.

 

   

In addition, Wells Fargo Shareowner Services will serve as the distribution agent in the Distribution and will assist Kraft ParentCo in the distribution of our common stock to Kraft ParentCo’s shareholders.

 

Q: Are there risks associated with owning shares of Kraft Foods Group common stock?

 

A: Yes. Our business faces both general and specific risks and uncertainties. Our business also faces risks relating to the Spin-Off. Following the Spin-Off, we will also face risks associated with being an independent, publicly traded company. Accordingly, you should read carefully the information set forth in the section entitled “Risk Factors” in this Information Statement.

 

Q: Where can I get more information?

 

A: If you have any questions relating to the mechanics of the Distribution, you should contact the distribution agent at:

Wells Fargo Shareowner Services

P.O. Box 64874

St. Paul, MN 55164-0874

(866) 655-7238

 

     Before the Spin-Off, if you have any questions relating to the Spin-Off, you should contact Kraft ParentCo at:

Investor Relations

Kraft Foods Inc.

Three Lakes Drive

Northfield, IL 60093

Phone: (847) 646-5494

Email: ir@kraftfoods.com

 

 

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     After the Spin-Off, if you have any questions relating to Kraft Foods Group, you should contact us at:

Investor Relations

Kraft Foods Group, Inc.

Three Lakes Drive

Northfield, IL 60093

Phone: (847) 646-5494

Email: ir@kraftfoods.com

 

     After the Spin-Off, if you have any questions relating to Kraft ParentCo, you should contact them at:

Investor Relations

Mondelēz International, Inc.

Three Parkway North

Deerfield, IL 60015

Phone: (847) 646-6299

Email: ir@mdlz.com

 

 

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Summary of the Spin-Off

 

Distributing Company

Kraft Foods Inc., a Virginia corporation that holds all of our common stock issued and outstanding prior to the Distribution. After the Distribution, Kraft ParentCo will not own any shares of our common stock. Coincident with the Spin-Off, Kraft ParentCo will change its name to Mondelēz International, Inc.

 

Distributed Company

Kraft Foods Group, Inc., a Virginia corporation and a wholly owned subsidiary of Kraft ParentCo. At the time of the Distribution, we will hold, directly or through our subsidiaries, the assets and liabilities of the North American Grocery Business. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo” for more detail. After the Spin-Off, we will be an independent, publicly traded company.

 

Distributed Securities

All of the shares of our common stock owned by Kraft ParentCo, which will be 100% of our common stock issued and outstanding immediately prior to the Distribution. Based on the approximately 1.774 billion shares of Kraft ParentCo common stock outstanding on June 30, 2012, and applying the distribution ratio of one share of Kraft Foods Group common stock for every three shares of Kraft ParentCo common stock, approximately 591 million shares of Kraft Foods Group common stock will be distributed.

 

Record Date

The Record Date is the close of business on September 19, 2012.

 

Distribution Date

The Distribution Date is 5:00 p.m., New York City time, on October 1, 2012.

 

Internal Reorganization

We currently, directly or through our wholly owned subsidiaries, hold both the North American Grocery Business and the Global Snacks Business. In connection with the Spin-Off, we will undertake the Internal Reorganization so that we hold only the North American Grocery Business and certain other specified net liabilities. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” for a description of the Internal Reorganization.

 

Distribution Ratio

Each holder of Kraft ParentCo common stock will receive one share of our common stock for every three shares of Kraft ParentCo common stock it holds on the Record Date. The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See “The Spin-Off—Treatment of Fractional Shares” for more detail. Please note that if you sell your shares of Kraft ParentCo common stock on or before the Distribution Date, the buyer of those shares may in some

 

 

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circumstances be entitled to receive the shares of our common stock issuable in respect of the Kraft ParentCo shares that you sold. See “The Spin-Off—Trading Prior to the Distribution Date” for more detail.

 

The Distribution

On the Distribution Date, Kraft ParentCo will release the shares of our common stock to the distribution agent to distribute to Kraft ParentCo shareholders. The distribution agent will distribute our shares in book-entry form. We will not issue any physical stock certificates. The distribution agent, or your bank, broker or other nominee, will credit your shares of our common stock to your book-entry account, or your bank, brokerage or other account, on or shortly after the Distribution Date. You will not be required to make any payment, surrender or exchange your shares of Kraft ParentCo common stock or take any other action to receive your shares of our common stock.

 

Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock to Kraft ParentCo shareholders. Instead, the distribution agent will first aggregate fractional shares into whole shares, then sell the whole shares in the open market at prevailing market prices on behalf of Kraft ParentCo shareholders entitled to receive a fractional share, and finally distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). If you receive cash in lieu of fractional shares, you will not be entitled to any interest on the payments. Your receipt of cash in lieu of fractional shares generally will, for U.S. federal income tax purposes, be taxable as described under “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution—Treatment of Fractional Shares.”

 

Conditions to the Spin-Off

The Spin-Off is subject to the satisfaction of the following conditions or the Kraft ParentCo Board’s waiver of the following conditions:

 

   

the Kraft ParentCo Board will, in its sole and absolute discretion, have authorized and approved (i) the Internal Reorganization (as described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement”), (ii) any other transfers of assets and assumptions of liabilities contemplated by the Separation and Distribution Agreement and any related agreements and (iii) the Distribution, and will not have withdrawn that authorization and approval;

 

   

the Kraft ParentCo Board will have declared the Distribution of all outstanding shares of our common stock to Kraft ParentCo’s shareholders;

 

 

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the U.S. Securities and Exchange Commission, or the “SEC,” will have declared our Registration Statement on Form 10, of which this Information Statement is a part, effective under the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” no stop order suspending the effectiveness of the Registration Statement will be in effect, no proceedings for that purpose will be pending before or threatened by the SEC and notice of Internet availability of this Information Statement or this Information Statement will have been mailed to Kraft ParentCo’s shareholders;

 

   

NASDAQ or another national securities exchange approved by the Kraft ParentCo Board will have accepted our common stock for listing, subject to official notice of issuance;

 

   

the Internal Reorganization will have been completed;

 

   

the private letter ruling that Kraft ParentCo received from the IRS to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code (except to the extent the IRS generally will not rule on certain transfers of intellectual property, which will be covered solely by the opinion described below) and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares, will not have been revoked or modified in any material respect as of the Distribution Date;

 

   

Kraft ParentCo will have received an opinion from its tax counsel, in form and substance satisfactory to Kraft ParentCo in its sole and absolute discretion, that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares;

 

 

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Kraft ParentCo will have received an advance income tax ruling from the Canada Revenue Agency, or the “CRA,” in form and substance satisfactory to Kraft ParentCo in its sole and absolute discretion, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants and based on the current provisions of the Income Tax Act (Canada), or the “Canadian Tax Act,” the separation of the assets and liabilities in Canada held in connection with the Global Snacks Business from the assets and liabilities in Canada held in connection with the North American Grocery Business will be treated for purposes of the Canadian Tax Act as resulting in a “butterfly” reorganization with no material Canadian federal income tax payable by Kraft ParentCo’s Canadian subsidiary, our Canadian subsidiary or their respective shareholders, and that advance income tax ruling will remain in effect as of the Distribution Date;

 

   

no order, injunction or decree that would prevent the consummation of the Distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the consummation of the Distribution will be in effect, and no other event outside the control of Kraft ParentCo will have occurred or failed to occur that prevents the consummation of the Distribution;

 

   

no other events or developments will have occurred prior to the Distribution that, in the judgment of the Kraft ParentCo Board, would result in the Distribution having a material adverse effect on Kraft ParentCo or its shareholders;

 

   

Kraft ParentCo and we will have executed and delivered the Separation and Distribution Agreement, Tax Sharing and Indemnity Agreement, Employee Matters Agreement, Master Ownership and License Agreement Regarding Patents, Trade Secrets and Related Intellectual Property, Master Ownership and License Agreement Regarding Trademarks and Related Intellectual Property, Transition Services Agreements, Master Supply Agreement, Canadian Asset Transfer Agreement and all other ancillary agreements related to the Spin-Off;

 

 

 

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our existing directors will have duly appointed the individuals to be listed as members of our post-Distribution Board in this Information Statement, and those individuals will become members of our Board in connection with the Distribution; provided, however, that to the extent required by law or any requirement of NASDAQ, our current directors will appoint one independent director and this director will begin his or her term prior to the Distribution in accordance with such law or requirement;

 

   

each individual who will be an employee of Kraft ParentCo after the Distribution and who is a director or officer of Kraft Foods Group will have resigned or been removed from the directorship and/or office held by that person, effective no later than immediately prior to the Distribution; and

 

   

immediately prior to the Distribution, our amended and restated articles of incorporation, or our “Articles of Incorporation,” and amended and restated bylaws, or our “Bylaws,” each in substantially the form filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, will be in effect.

 

  The fulfillment of the above conditions will not create any obligation on Kraft ParentCo’s part to effect the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than NASDAQ’s approval for listing of our common stock and the SEC’s declaration of the effectiveness of the Registration Statement, in connection with the Distribution. Kraft ParentCo has the right not to complete the Spin-Off if, at any time, the Kraft ParentCo Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kraft ParentCo or its shareholders or is otherwise not advisable.

 

Trading Market and Symbol

We intend to file an application to list our common stock on NASDAQ under the symbol “KRFT.” We anticipate that, as early as two trading days prior to the Record Date, trading of shares of our common stock will begin on a “when-issued” basis and will continue up to and including the Distribution Date, and we expect that “regular-way” trading of our common stock will begin the first trading day after the Distribution Date. See “The Spin-Off—Trading Prior to the Distribution Date.”

 

U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution

The Distribution is conditioned on the continued validity of the private letter ruling that Kraft ParentCo received from the IRS and the receipt and continued validity of an opinion of tax counsel, as described above under “—Conditions to the Spin-

 

 

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Off.” As described more fully in “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution,” a U.S. holder (as defined in that section) generally will not recognize any gain or loss, and will not include any amount in income, for U.S. federal income tax purposes, upon receiving our common stock in the Distribution, except for any gain or loss recognized with respect to cash the shareholder receives in lieu of fractional shares.

 

  Notwithstanding the receipt of the private letter ruling and the opinion of tax counsel, the IRS could determine that the Contribution, Internal Distribution and/or Distribution should be treated as taxable transactions if it determines that any of the representations, assumptions or covenants on which the private letter ruling is based are untrue or have been violated or if it disagrees with the tax opinion regarding matters not covered by the private letter ruling. See “Risk Factors—Risks Relating to the Spin-Off—If the Contribution, Internal Distribution or Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then Kraft ParentCo, we and our shareholders could be subject to significant tax liability” and “Risk Factors—Risks Relating to the Spin-Off—We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition.”

 

  Tax matters are complicated. The tax consequences to you of the Distribution depend on your individual situation. You should consult your own tax advisor as to the specific tax consequences of the Distribution to you, including the effect of any U.S. federal, state, local or foreign tax laws and of changes in applicable tax laws. See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution.”

 

Relationship with Kraft ParentCo
after the Spin-Off

We intend to enter into several agreements with Kraft ParentCo related to the Internal Reorganization and Distribution, which will govern the relationship between Kraft ParentCo and us up to and after completion of the Spin-Off and allocate between Kraft ParentCo and us various assets, liabilities, rights and obligations. These agreements include:

 

   

a Separation and Distribution Agreement that will set forth Kraft ParentCo’s and our agreements regarding the principal actions that we will take in connection with the Spin-Off and aspects of our relationship following the Spin-Off;

 

   

three Transition Services Agreements, pursuant to which Kraft ParentCo and we will provide each other specified

 

 

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services on a transitional basis to help ensure an orderly transition following the Spin-Off;

 

   

a Master Supply Agreement that will provide for reciprocal manufacturing and supply arrangements;

 

   

an Employee Matters Agreement that will address employee compensation and benefit matters;

 

   

a Tax Sharing and Indemnity Agreement that will allocate responsibility for taxes incurred before and after the Spin-Off and include indemnification rights with respect to tax matters and restrictions to preserve the tax-free status of the Spin-Off;

 

   

a Master Ownership and License Agreement Regarding Trademarks and Related Intellectual Property, a Master Ownership and License Agreement Regarding Patents, Trade Secrets and Related Intellectual Property and one or more other intellectual property agreements, in each case, that will provide for ownership, licensing and other arrangements to facilitate Kraft ParentCo’s and our ongoing use of intellectual property; and

 

   

a Canadian Asset Transfer Agreement that will provide for the transfer of assets and the assumption of liabilities related to the Global Snacks Business’ Canadian operations.

 

  We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo,” and describe some of the risks of these arrangements under “Risk Factors—Risks Relating to the Spin-Off.”

 

Dividend Policy

Following the Spin-Off, we expect to pay a highly competitive cash dividend, although the timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of our Board. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock” and “Dividend Policy.”

 

Transfer Agent

Wells Fargo Shareowner Services will serve as transfer agent for our common stock.

 

Risk Factors

Our business faces both general and specific risks and uncertainties. Our business also faces risks relating to the Spin-Off. Following the Spin-Off, we will also face risks associated with being an independent, publicly traded company. Accordingly, you should read carefully the information set forth under “Risk Factors.”

 

 

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RISK FACTORS

You should carefully consider all of the information in this Information Statement and each of the risks described below, which we believe are the principal risks that we face. Some of the risks relate to our business, others to the Spin-Off. Some risks relate principally to the securities markets and ownership of our common stock.

Any of the following risks could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Information Statement. While we believe we have identified and discussed below the material risks affecting our business, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect our business, financial condition and results of operations in the future.

Risks Relating to Our Business

We face the following risks in connection with our business and the general conditions and trends of the food and beverage industry in which we operate:

We operate in a highly competitive industry.

The food and beverage industry is highly competitive. We compete based on product innovation, price, product quality, brand recognition and loyalty, effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer preferences.

We may need to reduce our prices in response to competitive and customer pressures. Competition and customer pressures may also restrict our ability to increase prices in response to commodity and other cost increases. We may also need to increase or reallocate spending on marketing, retail trade incentives, advertising and new product innovation to maintain market share. These expenditures are subject to risks, including uncertainties about trade and consumer acceptance of our efforts. If we reduce prices or face increased costs, but cannot increase sales volumes to offset those changes, then our financial condition and results of operations will suffer.

Maintaining our reputation and brand image is essential to our business success.

We have many iconic brands with long-standing consumer recognition. Our success depends on our ability to maintain brand image for our existing products, extend our brands to new platforms and expand our brand image with new product offerings.

We seek to maintain, extend and expand our brand image through marketing investments, including advertising and consumer promotions, and product innovation. Increasing media attention to the role of food marketing could adversely affect our brand image or lead to stricter regulations and greater scrutiny of food marketing practices. Increased legal or regulatory restrictions on our advertising, consumer promotions and marketing, or our response to those restrictions, could limit our efforts to maintain, extend and expand our brands. Moreover, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.

In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. We increasingly rely on social media and online dissemination of advertising campaigns. Negative posts or comments about us on social networking Web sites or similar online activity could seriously damage our reputation and brand

 

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image. We are subject to a variety of legal and regulatory restrictions on how we market our products. These restrictions may limit our ability to maintain, extend and expand our brand image as the media and communications environment continues to evolve. If we do not maintain, extend and expand our brand image, then our product sales, financial condition and results of operations could be materially and adversely affected.

We must leverage our value proposition to compete against retailer brands and other economy brands.

Retailers are increasingly offering retailer and other economy brands that compete with some of our products. Our products must provide higher value and/or quality to our consumers than less expensive alternatives, particularly during periods of economic uncertainty such as those we continue to experience. Consumers may not buy our products if relative differences in value and/or quality between our products and retailer or other economy brands change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer retailer or other economy brands, then we could lose market share or sales volumes or shift our product mix to lower margin offerings. These events could materially and adversely affect our financial condition and results of operations.

The consolidation of retail customers could adversely affect us.

Retail customers, such as supermarkets, warehouse clubs and food distributors in our major markets, continue to consolidate, resulting in fewer customers on which we can rely for business. Consolidation also produces larger retail customers that may seek to leverage their position to improve their profitability by demanding improved efficiency, lower pricing, increased promotional programs or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Further retail consolidation and increasing retailer power could materially and adversely affect our product sales, financial condition and results of operations.

Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance will have a corresponding material and adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease or cancel purchases of our products, or delay or fail to pay us for previous purchases.

Changes in our relationships with significant customers or suppliers could adversely affect us.

During 2011, our five largest customers accounted for approximately 41% of our combined net revenues, with our largest customer, Wal-Mart Stores, Inc., accounting for approximately 24% of our combined net revenues. There can be no assurance that all significant customers will continue to purchase our products in the same quantities or on the same terms as in the past, particularly as increasingly powerful retailers may demand lower pricing and focus on developing their own brands. The loss of a significant customer or a material reduction in sales to a significant customer could materially and adversely affect our product sales, financial condition and results of operations.

Disputes with significant suppliers, including regarding pricing or performance, could adversely affect our ability to supply products to our customers and could materially and adversely affect our product sales, financial condition and results of operations.

We must correctly predict, identify and interpret changes in consumer preferences and demand, and offer new products to meet those changes.

Consumer preferences for food products change continually. Our success depends on our ability to predict, identify and interpret the tastes and dietary habits of consumers and to offer products that appeal to consumer preferences. If we do not offer products that appeal to consumers, our sales and market share will decrease and our profitability could suffer.

 

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We must distinguish between short-term fads, mid-term trends and long-term changes in consumer preferences. If we do not accurately predict which shifts in consumer preferences will be long-term, or if we fail to introduce new and improved products to satisfy those preferences, our sales could decline. In addition, because of our varied consumer base, we must offer an array of products that satisfy the broad spectrum of consumer preferences. If we fail to expand our product offerings successfully across product categories, or if we do not rapidly develop products in faster growing and more profitable categories, demand for our products will decrease and our profitability could suffer.

Prolonged negative perceptions concerning the health implications of certain food products could influence consumer preferences and acceptance of some of our products and marketing programs. We strive to respond to consumer preferences and social expectations, but we may not be successful in our efforts. Continued negative perceptions and failure to satisfy consumer preferences could materially and adversely affect our product sales, financial condition and results of operations.

We may be unable to drive revenue growth in our key product categories or add products that are in faster growing and more profitable categories.

The food and beverage industry’s overall growth is linked to population growth. Our future results will depend on our ability to drive revenue growth in our key product categories. Because our operations are concentrated in North America, where growth in the food and beverage industry has been moderate, our success also depends in part on our ability to enhance our portfolio by adding innovative new products in faster growing and more profitable categories. Our failure to drive revenue growth in our key product categories or develop innovative products for new and existing categories could materially and adversely affect our profitability, financial condition and results of operations.

Commodity, energy and other input prices are volatile and may rise significantly, and increases in the costs of producing, transporting and distributing our products could materially and adversely affect our financial condition.

We purchase large quantities of commodities, including dairy products, coffee beans, meat products, wheat, corn products, soybean and vegetable oils, nuts and sugar and other sweeteners. In addition, we purchase and use significant quantities of resins and cardboard to package our products and natural gas to operate our factories and warehouses. We are also exposed to changes in oil prices, which influence both our packaging and transportation costs. Prices for commodities, other supplies and energy are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, currency fluctuations, severe weather or global climate change, consumer, industrial or commodity investment demand and changes in governmental regulation and trade, alternative energy and agricultural programs. Rising commodity, energy and other input costs could materially and adversely affect our cost of operations, including the manufacture, transportation and distribution of our products, which could materially and adversely affect our financial condition and results of operations.

Although we monitor our exposure to commodity prices as an integral part of our overall risk management program, and seek to hedge against input price increases to the extent we deem appropriate, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in raw materials costs. For example, hedging our costs for one of our key inputs, dairy products, is difficult because dairy futures markets are not as developed as many other commodities futures markets. Continued volatility or sustained increases in the prices of commodities and other supplies we purchase could increase the costs of our products, and our profitability could suffer. Moreover, increases in the prices of our products to cover these increased costs may result in lower sales volumes. If we are not successful in our hedging activities, or if we are unable to price our products to cover increased costs, then commodity and other input price volatility or increases could materially and adversely affect our financial condition and results of operations.

 

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We rely on our management team and other key personnel, and the loss of one or more key employees or any difficulty in attracting, training and retaining other talented personnel could materially and adversely affect our financial condition and results of operations.

We depend on the skills, working relationships and continued services of key personnel, including our experienced management team. In addition, our ability to achieve our operating goals depends on our ability to identify, hire, train and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, train and retain other talented personnel. Any such loss or failure could materially and adversely affect our financial condition and results of operations.

Following the Spin-Off, we will no longer operate as part of a globally diversified food and beverage company and therefore may be more vulnerable to adverse events and trends in North America.

As a globally diversified food and beverage company, Kraft ParentCo has historically been insulated against adverse events and trends in any particular region. After separating from Kraft ParentCo, however, we may be more susceptible to adverse regulations, economic climate, consumer trends, market fluctuations, including commodity price fluctuations or supply shortages for certain of our key ingredients, and other adverse events that are specific to the United States and Canada. For example, because a majority of our operations and product sales are in the United States, we expect that regulatory changes or changes in consumer food preferences in the United States will have a more significant impact on us than these changes would have had when we were part of Kraft ParentCo. The concentration of our operations in North America will present a challenge and may increase the likelihood that an adverse event in North America will materially and adversely affect our financial condition and results of operations.

Changes in regulations could increase our costs and affect our profitability.

Our activities are highly regulated and subject to government oversight. Various federal, state, provincial and local laws and regulations govern food production and marketing, as well as licensing, trade, tax and environmental matters. Governing bodies regularly issue new regulations and changes to existing regulations. Our need to comply with new or revised regulations or their interpretation and application, including proposed requirements designed to enhance food safety or to regulate imported ingredients, could materially and adversely affect our product sales, financial condition and results of operations.

Legal claims or other regulatory enforcement actions could subject us to civil and criminal penalties that affect our product sales, reputation and profitability.

We are a large food and beverage company operating in a highly regulated environment and a constantly evolving legal and regulatory framework. Consequently, we are subject to heightened risk of legal claims or other regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies and procedures. Moreover, the failure to maintain effective control environment processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition and results of operations.

 

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Product recalls or other product liability claims could materially and adversely affect us.

Selling products for human consumption involves inherent risks. We could decide to, or be required to, recall products due to suspected or confirmed product contamination, spoilage or other adulteration, product misbranding, product tampering or other deficiencies. Any of these events could materially and adversely affect our reputation and product sales, financial condition and results of operations.

We may also suffer losses if our products or operations violate applicable laws or regulations, or if our products cause injury, illness or death. In addition, our marketing could face claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a widespread product recall, may materially and adversely affect our reputation and profitability. Moreover, even if a product liability or consumer fraud claim is unsuccessful, has no merit or is not pursued, the negative publicity surrounding assertions against our products or processes could materially and adversely affect our product sales, financial condition and results of operations.

Unanticipated business disruptions could affect our ability to provide our products to our customers as well as maintain our back-office systems.

We have a complex network of suppliers, owned manufacturing locations, co-manufacturing locations, distribution networks and information systems that support our ability to consistently provide our products to our customers. Factors that are hard to predict or beyond our control, like weather, natural disasters, fire, terrorism, generalized labor unrest or health pandemics, could damage or disrupt our operations, or our suppliers’ or co-manufacturers’ operations. If we cannot respond to disruptions in our operations, whether by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or are unable to quickly repair damage to our information, production or supply systems, we may be late in delivering, or unable to deliver, products to our customers and may also be unable to track orders, inventory, receivables and payables. If that occurs, our customers’ confidence in us and long-term demand for our products could decline. Any of these events could materially and adversely affect our product sales, financial condition and results of operations.

Our acquisition and divestiture activities may present financial, managerial and operational risks.

From time to time, we may identify acquisition candidates that we believe strategically fit our business objectives or we may seek to divest businesses that do not meet our strategic objectives or growth or profitability targets. Our acquisition or divestiture activities may present financial, managerial and operational risks. Those risks include diversion of management attention from existing core businesses, difficulties integrating or separating personnel and financial and other systems, inability to effectively and immediately implement control environment processes across a diverse employee population, adverse effects on existing customer and supplier business relationships, inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported earnings, potential loss of acquired businesses’ customers or key employees and indemnities and potential disputes with the buyers or sellers. In addition, while we anticipate that Kraft Foods Group will be a North American business focused on traditional grocery categories, to the extent we undertake acquisitions or other developments outside our core geography or in new categories, we may face additional risks related to such acquisitions or developments. In particular, risks related to foreign operations include compliance with U.S. laws affecting operations outside of the United States, such as the Foreign Corrupt Practices Act, currency rate fluctuations, compliance with foreign regulations and laws, including tax laws, and exposure to politically and economically volatile developing markets. Any of these factors could materially and adversely affect our financial condition and results of operations.

 

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Weak financial performance, downgrades in our credit ratings, illiquid capital markets and volatile economic conditions could limit our access to the capital markets, reduce our liquidity or increase our borrowing costs.

From time to time we may need to access the short-term and long-term capital markets to obtain financing. Our financial performance, our short-term and long-term credit ratings, the liquidity of the overall capital markets and the state of the economy, including the food and beverage industry, will affect our access to, and the availability of, financing on acceptable terms and conditions in the future. There can be no assurance that, as a new public company, we will have access to the capital markets on terms we find acceptable.

In particular, we intend to access the commercial paper market for regular funding requirements. A downgrade in our credit ratings would increase our borrowing costs and could affect our ability to issue commercial paper. Disruptions in the commercial paper market or other effects of volatile economic conditions on the credit markets also could reduce the amount of commercial paper that we could issue and could raise our borrowing costs for both short-term and long-term debt offerings. In response to these conditions, we may reduce or eliminate dividends on our common stock in order to conserve cash. Further, our inability to access the capital markets or an increase in our borrowing costs could materially and adversely affect our financial condition and results of operations.

Adverse changes in the equity markets or interest rates, changes in actuarial assumptions and legislative or other regulatory actions could substantially increase our pension costs and materially and adversely affect our profitability and results of operations.

In connection with the Spin-Off, we expect to assume pension plan obligations and related expenses for plans that provide benefits to substantially all of Kraft ParentCo’s former North American employees at the time of the Spin-Off. We will also retain pension plan obligations and related expenses related to the North American Grocery Business’ current and former employees. The difference between plan obligations and assets, or the funded status of the plans, significantly affects the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, investment returns, minimum funding requirements and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic pension cost, and consequently volatility in our reported net income, and increase our future funding requirements. Legislative and other governmental regulatory actions may also increase funding requirements for our pension plans’ benefits obligations. See “Unaudited Pro Forma Combined Financial Statements” and our “Pension and Other Postemployment Benefit Plans” notes to our historical combined financial statements included in this Information Statement. Volatile economic conditions increase the risk that we will be required to make additional cash contributions to the pension plans and recognize further increases in our net pension cost in the remainder of 2012 and beyond. A significant increase in our pension funding requirements could negatively affect our ability to pay dividends on our common stock or invest in our business or could require us to reduce spending on marketing, retail trade incentives, advertising and other similar activities.

Volatility in the market value of all or a portion of the derivatives we use to manage exposures to fluctuations in commodity prices will cause volatility in our gross profits and net earnings.

We use commodity futures and options to partially hedge the price of certain input costs, including dairy products, coffee beans, meat products, wheat, corn products, soybean oils, sugar and natural gas. For derivatives not designated as hedges, changes in the values of these derivatives are currently recorded in earnings, resulting in volatility in both gross profits and net earnings. We report these gains and losses in cost of sales in our combined statements of earnings to the extent we utilize the

 

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underlying input in our manufacturing process. We report these gains and losses in the unallocated corporate items line in our segment operating results until we utilize the underlying input in our manufacturing process, at which time we reclassify the gains and losses to segment operating profit. We may experience volatile earnings as a result of these accounting treatments.

We are increasingly dependent on information technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers and suppliers. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. Furthermore, the separation of our information technology networks and systems from Kraft ParentCo’s, or the duplication of any of these networks or systems, in connection with the Spin-Off may significantly increase our susceptibility to damage, disruptions or shutdowns. If our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.

In addition, if we are unable to prevent security breaches, we may suffer financial and reputational damage or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, consumers or suppliers. In addition, the disclosure of non-public sensitive information through external media channels could lead to the loss of intellectual property or damage our reputation and brand image.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.

We consider our intellectual property rights, particularly and most notably our trademarks, but also our patents, trade secrets, copyrights and licensing agreements, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements, third-party nondisclosure and assignment agreements and policing of third-party misuses of our intellectual property. Our failure to obtain or adequately protect our trademarks, products, new features of our products or our technology, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business.

We may be unaware of intellectual property rights of others that may cover some of our technology, brands or products. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third-party claims of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.

 

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Risks Relating to the Spin-Off

We face the following risks in connection with the Spin-Off:

If the Contribution, Internal Distribution or Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then Kraft ParentCo, we and our shareholders could be subject to significant tax liability.

The Distribution is conditioned on the continued validity of the private letter ruling that Kraft ParentCo received from the IRS and the receipt and continued validity of an opinion of tax counsel, each to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code (except, in the case of the private letter ruling, to the extent the IRS generally will not rule on certain transfers of intellectual property, which will be covered solely by the opinion) and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares.

Notwithstanding the receipt of the private letter ruling and the opinion of tax counsel, the IRS could determine that the Contribution, Internal Distribution and/or Distribution should be treated as taxable transactions if it determines that any of the representations, assumptions or covenants on which the private letter ruling is based are untrue or have been violated. Furthermore, as part of the IRS’s policy, the IRS did not determine whether the Internal Distribution or Distribution satisfies certain conditions that are necessary to qualify for non-recognition treatment. Rather, the private letter ruling is based on representations by Kraft ParentCo and us that these conditions have been satisfied. The opinion of tax counsel will address the satisfaction of these conditions. Similarly, the IRS generally will not rule on contributions of intellectual property that do not satisfy certain criteria. As a result, the private letter ruling does not address whether transfers of certain intellectual property included in the Contribution qualify for non-recognition treatment. Rather, the opinion of tax counsel will address such qualification.

The opinion of tax counsel is not binding on the IRS or the courts, and there is no assurance that the IRS or a court will not take a contrary position. In addition, the opinion of tax counsel will rely on certain representations and covenants to be delivered by Kraft ParentCo and us.

If the IRS ultimately determines that the Distribution is taxable, the Distribution could be treated as a taxable dividend or capital gain to you for U.S. federal income tax purposes, and you could incur significant U.S. federal income tax liabilities. In addition, if the IRS ultimately determines that the Contribution, Internal Distribution and/or Distribution are taxable, Kraft ParentCo and we could incur significant U.S. federal income tax liabilities, and we could have an indemnification obligation to Kraft ParentCo. For a more detailed discussion, see “—We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition” and “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution.”

If the Canadian aspects of the Internal Reorganization were to fail to qualify for tax-deferred treatment for Canadian federal and provincial income tax purposes, then Kraft ParentCo’s

and/or our Canadian subsidiaries could be subject to significant tax liability.

The Internal Reorganization includes steps to separate the assets and liabilities in Canada held in connection with the Global Snacks Business from the assets and liabilities in Canada held in connection with the North American Grocery Business.

 

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The Distribution is conditioned on the receipt and continued validity of an advance income tax ruling from the CRA, which Kraft ParentCo’s Canadian subsidiary has applied for, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants and based on the current provisions of the Canadian Tax Act, such separation will be treated for purposes of the Canadian Tax Act as resulting in a “butterfly” reorganization with no material Canadian federal income tax payable by Kraft ParentCo’s Canadian subsidiary, our Canadian subsidiary or their respective shareholders.

Notwithstanding the receipt of the advance income tax ruling, the CRA could determine that the separation should be treated as a taxable transaction if it determines that any of the representations, assumptions or covenants on which the advance income tax ruling is based are untrue or have been violated. If the CRA ultimately determines that the separation is taxable, Kraft ParentCo’s and/or our Canadian subsidiaries could incur significant Canadian federal and provincial income tax liabilities, and we are generally obligated to indemnify Kraft ParentCo and its affiliates against such Canadian federal and provincial income taxes. For a more detailed discussion, see “—We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition.”

We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition.

Generally, taxes resulting from the failure of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on Kraft ParentCo or Kraft ParentCo’s shareholders and, under the Tax Sharing and Indemnity Agreement, Kraft ParentCo is generally obligated to indemnify us against such taxes. However, under the Tax Sharing and Indemnity Agreement, we could be required, under certain circumstances, to indemnify Kraft ParentCo and its affiliates against all tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations, covenants or obligations under the Tax Sharing and Indemnity Agreement or any other agreement we enter into in connection with the Spin-Off. Events triggering an indemnification obligation under the agreement include events occurring after the Distribution that cause Kraft ParentCo to recognize a gain under Section 355(e) of the Code. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement.”

Generally, taxes resulting from the failure of the Canadian steps of the Internal Reorganization to qualify for tax-deferred treatment for Canadian federal and provincial income tax purposes could be imposed on Kraft ParentCo’s Canadian subsidiary, our Canadian subsidiary or both. Under the Tax Sharing and Indemnity Agreement, we are generally obligated to indemnify Kraft ParentCo and its affiliates against such Canadian federal and provincial income taxes, other than in certain circumstances where Kraft ParentCo is obligated to indemnify us. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement.”

We intend to agree to numerous restrictions to preserve the non-recognition treatment of the transactions, which may reduce our strategic and operating flexibility.

Even if the Distribution otherwise qualifies for non-recognition of gain or loss under Section 355 of the Code, it may be taxable to Kraft ParentCo, but not Kraft ParentCo’s shareholders, under Section 355(e) of the Code if 50% or more (by vote or value) of our common stock or Kraft ParentCo’s common stock is acquired as part of a plan or series of related transactions that include the Distribution. For this purpose, any acquisitions of Kraft ParentCo’s or our common stock within two years before or after the Distribution are presumed to be part of such a plan, although Kraft ParentCo

 

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or we may be able to rebut that presumption based on either applicable facts and circumstances or a “safe harbor” described in the tax regulations. As a consequence, we intend to agree in the Tax Sharing and Indemnity Agreement to covenants and indemnity obligations that address compliance with Section 355(e) of the Code. These covenants and indemnity obligations may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that you may consider favorable. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement.”

Similarly, even if the Canadian aspects of the Internal Reorganization otherwise qualify for tax-deferred treatment in Canada under the butterfly reorganization provisions of the Canadian Tax Act, this tax-deferred treatment may be lost upon the occurrence of certain events after the Spin-Off. These would include an acquisition of control of our Canadian subsidiary (which may occur upon an acquisition of control of us) that occurs as part of (or in some cases in contemplation of) a series of transactions or events that includes the butterfly reorganization. These post-butterfly transaction restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that you may consider favorable.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.

We believe that, as an independent, publicly traded company, we will be able to, among other matters, better focus our financial and operational resources on our specific business, growth profile and strategic priorities, design and implement corporate strategies and policies targeted to our operational focus and strategic priorities, streamline our processes and infrastructure to focus on our core “center of the store” strengths, implement and maintain a capital structure designed to meet our specific needs and more effectively respond to industry dynamics. However, we may be unable to achieve some or all of these benefits. For example, in order to position ourselves for the Spin-Off, we are undertaking a series of strategic, structural and process realignment and restructuring actions within our operations, including significant cost-cutting initiatives. These actions may not provide the cost benefits we currently expect, and could lead to disruption of our operations, loss of, or inability to recruit, key personnel needed to operate and grow our businesses following the Spin-Off, weakening of our internal standards, controls or procedures and impairment of our key customer and supplier relationships. In addition, completion of the proposed Spin-Off will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our businesses. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition and results of operations could be materially and adversely affected.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company.

We have historically operated as part of Kraft ParentCo’s corporate organization, and Kraft ParentCo has assisted us by providing various corporate functions. Following the Spin-Off, Kraft ParentCo will have no obligation to provide us with assistance other than the transition services described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo.” These services do not include every service we have received from Kraft ParentCo in the past, and Kraft ParentCo is only obligated to provide these services for limited periods from the date of the Spin-Off. Accordingly, following the Spin-Off, we will need to provide internally or obtain from unaffiliated third parties the services we currently receive from Kraft ParentCo. These services include information technology, research and development, finance, legal, insurance, compliance and human resources activities, the effective and appropriate performance of which is critical to our operations. We may be

 

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unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from Kraft ParentCo. In particular, Kraft ParentCo’s information technology networks and systems are complex, and duplicating these networks and systems will be challenging. Because our business previously operated as part of the wider Kraft ParentCo organization, we may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or we may incur additional costs that could adversely affect our business. If we fail to obtain the quality of administrative services necessary to operate effectively or incur greater costs in obtaining these services, our profitability, financial condition and results of operations may be materially and adversely affected.

We have no operating history as an independent, publicly traded company, and our historical and pro forma financial information is not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

We derived the historical and pro forma financial information included in this Information Statement from Kraft ParentCo’s consolidated financial statements and this information does not necessarily reflect the results of operations, financial position and cash flows we would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:

 

   

Prior to the Spin-Off, we operated as part of Kraft ParentCo’s broader corporate organization, rather than as an independent company. Kraft ParentCo performed various corporate functions for us, including information technology, research and development, finance, legal, insurance, compliance and human resources activities. Our historical and pro forma financial information reflects allocations of corporate expenses from Kraft ParentCo for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent company.

 

   

We will enter into transactions with Kraft ParentCo that did not exist prior to the Spin-Off. See “Certain Relationships and Related Party Transactions” for information regarding these transactions.

 

   

Our historical financial information does not reflect changes that we expect to experience in the future as a result of our separation from Kraft ParentCo, including changes in our cost structure, personnel needs, tax structure, financing and business operations. As part of Kraft ParentCo, we enjoyed certain benefits from Kraft ParentCo’s operating diversity, size, purchasing power and available capital for investments, and we will lose these benefits after the Spin-Off. After the Spin-Off, as an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, on terms as favorable to us as those we obtained as part of Kraft ParentCo prior to the Spin-Off.

Following the Spin-Off, we will also be responsible for the additional costs associated with being an independent, publicly traded company, including costs related to corporate governance, investor and public relations and public reporting. Therefore, our financial statements may not be indicative of our future performance as an independent company. While we have been profitable as part of Kraft ParentCo, we cannot assure you that our profits will continue at a similar level when we are a stand-alone company. For additional information about our past financial performance and the basis of presentation of our financial statements, see “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and accompanying notes included elsewhere in this Information Statement.

 

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The unaudited pro forma combined financial statements are subject to the assumptions and adjustments described in the accompanying notes. While we believe that these assumptions and adjustments are reasonable under the circumstances and given the information available at this time, these assumptions and adjustments are subject to change as Kraft ParentCo and we finalize the terms of the Spin-Off and our agreements related to the Spin-Off.

Kraft ParentCo has a significant understanding of our business and may be uniquely positioned to compete against us following the Spin-Off.

Prior to the Spin-Off, we have operated as part of Kraft ParentCo, and many of its officers, directors and employees have participated in the development and execution of our corporate strategy and the management of our day-to-day operations. Following the Spin-Off, Kraft ParentCo will have significant knowledge of our products, operations, strengths, weaknesses and strategies. It will also be one of the largest food and beverage companies in the world, with a strong presence in North America, and thus may be uniquely positioned to develop grocery products that compete against our products in North America. Though, following the Spin-Off, Kraft ParentCo generally will not have rights to use trademarks related to the North American Grocery Business in North America and will be restricted from using certain shared patents and trade secrets in North America for a period of time and under certain circumstances, it will not be restricted from developing products in the same product categories as our products and marketing these products under trademarks related to the Global Snacks Business or under new trademarks. Because of Kraft ParentCo’s competitive insight into our operations, competition from Kraft ParentCo may materially and adversely affect our product sales, financial condition and results of operations.

We will incur substantial indebtedness in connection with the Spin-Off, and the degree to which we will be leveraged following completion of the Spin-Off may materially and adversely affect our business, financial condition and results of operations.

We are incurring substantial indebtedness in connection with the Spin-Off. We have historically relied upon Kraft ParentCo for working capital requirements on a short-term basis and for other financial support functions. After the Spin-Off, we will not be able to rely on Kraft ParentCo’s earnings, assets or cash flow, and we will be responsible for servicing our own debt, obtaining and maintaining sufficient working capital and paying dividends.

Our ability to make payments on and to refinance our indebtedness, including the debt retained or incurred pursuant to the Spin-Off as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take disadvantageous actions, including reducing spending on marketing, retail trade incentives, advertising and new product innovation, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in the food and beverage industry could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.

In addition, our substantial leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our substantial leverage could also impede our ability to withstand downturns in our industry or the economy in general.

 

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We may increase our debt or raise additional capital in the future, which could affect our financial health and may decrease our profitability.

We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. In addition, our Board may issue shares of preferred stock without further action by holders of our common stock. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available to us on terms we find acceptable, if at all. If we incur additional debt or raise equity through the issuance of our preferred stock, the terms of the debt or our preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. If we raise funds through the issuance of additional equity, your ownership in us would be diluted. Also, regardless of the terms of our debt or equity financing, our agreements and obligations under the Tax Sharing and Indemnity Agreement may limit our ability to issue stock. For a more detailed discussion, see “—We intend to agree to numerous restrictions to preserve the non-recognition treatment of the transactions, which may reduce our strategic and operating flexibility.” If we are unable to raise additional capital when needed, our financial condition, and thus your investment in us, could be materially and adversely affected.

After the Spin-Off, certain of our directors and officers may have actual or potential conflicts of interest because of their Kraft ParentCo equity ownership or their former Kraft ParentCo positions.

Certain of the persons we expect to become our executive officers and directors have been, and will be until the Spin-Off, Kraft ParentCo officers, directors or employees and thus have professional relationships with Kraft ParentCo’s executive officers, directors or employees. In addition, because of their former Kraft ParentCo positions, following the Spin-Off, certain of our directors and executive officers may own Kraft ParentCo common stock or options to acquire shares of Kraft ParentCo common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. These relationships and financial interests may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for Kraft ParentCo and us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between Kraft ParentCo and us regarding the terms of the agreements governing the Spin-Off and the relationship thereafter between the companies.

Risks Relating to Our Common Stock and the Securities Market

You face the following risks in connection with ownership of our common stock:

No market for our common stock currently exists and an active trading market may not develop or be sustained after the Spin-Off. Following the Spin-Off, our stock price may fluctuate significantly.

There is currently no public market for our common stock. We intend to apply to list our common stock on NASDAQ. We anticipate that before the Distribution Date for the Spin-Off, trading of shares of our common stock will begin on a “when-issued” basis and this trading will continue up to and including the Distribution Date. However, an active trading market for our common stock may not develop as a result of the Spin-Off or may not be sustained in the future. The lack of an active market may make it more difficult for you to sell our shares and could lead to our share price being depressed or volatile.

 

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We cannot predict the prices at which our common stock may trade after the Spin-Off. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

   

actual or anticipated fluctuations in our operating results due to factors related to our business;

 

   

success or failure of our business strategies;

 

   

our quarterly or annual earnings, or those of other companies in our industry;

 

   

our ability to obtain financing as needed;

 

   

announcements by us or our competitors of significant new business awards;

 

   

announcements of significant acquisitions or dispositions by us or our competitors;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

the failure of securities analysts to cover our common stock after the Spin-Off;

 

   

changes in earnings estimates by securities analysts;

 

   

the operating and stock price performance of other comparable companies;

 

   

investor perception of our company and the food and beverage industry;

 

   

natural or environmental disasters that investors believe may affect us;

 

   

overall market fluctuations;

 

   

results from any material litigation or government investigation;

 

   

changes in laws and regulations, including tax laws and regulations, affecting our business;

 

   

changes in capital gains taxes and taxes on dividends affecting shareholders; and

 

   

general economic conditions and other external factors.

Furthermore, our business profile and market capitalization may not fit the investment objectives of some Kraft ParentCo shareholders and, as a result, these Kraft ParentCo shareholders may sell our shares after the Distribution. See “—Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.” Low trading volume for our stock, which may occur if an active trading market does not develop, among other reasons, would amplify the effect of the above factors on our stock price volatility.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could also adversely affect the trading price of our common stock.

Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.

Kraft ParentCo shareholders receiving shares of our common stock in the Distribution generally may sell those shares immediately in the public market. Although we have no actual knowledge of any plan or intention of any significant shareholder to sell our common stock following the Spin-Off, it is possible that some Kraft ParentCo shareholders, including some of our larger shareholders, will sell our common stock received in the Distribution if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or – in the case of index funds – we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock relating to the above events or the perception in the market that such sales will occur may decrease the market price of our common stock.

 

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We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.

Following the Spin-Off, we expect to pay regular cash dividends, although the timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payment of dividends. For more information, see “Dividend Policy.” There can be no assurance that we will pay a dividend in the future or that we will continue to pay any dividend if we do commence paying dividends. There can also be no assurance that, in the future, the combined annual dividends on Kraft ParentCo common stock, if any, and our common stock, if any, after the Spin-Off will equal the annual dividends on Kraft ParentCo common stock prior to the Spin-Off.

Your percentage ownership in Kraft Foods Group may be diluted in the future.

Your percentage ownership in Kraft Foods Group may be diluted in the future because of equity awards that we expect to grant to our directors, officers and employees. Prior to the Spin-Off, we expect to approve equity incentive plans that will provide for the grant of common stock-based equity awards to our directors, officers and other employees. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments we may make in the future.

Provisions of Virginia law and our Articles of Incorporation and Bylaws may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Several provisions of Virginia law and our Articles of Incorporation and Bylaws may discourage, delay or prevent a merger or acquisition that you may consider favorable. These include provisions that:

 

   

provide for staggered terms for the directors for a period following the Spin-Off;

 

   

provide that our directors can be removed only for cause;

 

   

authorize our Board to adopt a shareholder rights plan;

 

   

authorize our Board to establish one or more series of undesignated preferred stock without shareholder approval, and to determine the terms of such preferred stock at the time of issuance;

 

   

do not provide for cumulative voting in the election of directors;

 

   

limit the persons who may call special meetings of shareholders;

 

   

do not authorize our shareholders to act by less-than-unanimous written consent;

 

   

establish advance notice requirements for shareholder nominations and proposals; and

 

   

limit our ability to enter into business combination transactions with certain shareholders.

These and other provisions of Virginia law and our Articles of Incorporation and Bylaws may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of Kraft Foods Group, including unsolicited takeover attempts, even though the transaction may offer our shareholders the opportunity to sell their shares of our common stock at a price above the prevailing market price. See “Description of Our Capital Stock—Certain Provisions of Virginia Law and Our Articles of Incorporation and Bylaws” for more information.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Information Statement contains “forward-looking statements.” Words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and variations of such words and similar expressions are intended to identify our forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements, beliefs and expectations regarding the consummation of the Spin-Off and our business strategies, market potential, future financial performance, dividends, the impact of new accounting standards, costs to be incurred in connection with the Spin-Off, the 2012-2014 Restructuring Program (as described below in “Unaudited Pro Forma Combined Financial Statements”), unrealized losses on hedging activities, results of pending legal matters, our goodwill and other intangible assets, price volatility and cost environment, our liquidity, our funding sources, expected pension contributions, capital expenditures and funding, our financial covenants, repayments of debt, off-balance sheet arrangements and contractual obligations, our accounting policies, general views about future operating results and other events or developments that we expect or anticipate will occur in the future. These forward-looking statements are subject to a number of important factors, including those factors discussed in detail under “Risk Factors” in this Information Statement, that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to, increased competition; our ability to differentiate our products from retailer and economy brands; our ability to maintain our reputation and brand image; increasing consolidation of retail customers; changes in relationships with our significant customers and suppliers; continued volatility of, and sharp increases in, commodity and other input costs; pricing actions; increased costs of sales; regulatory or legal changes, restrictions or actions; unanticipated expenses such as litigation or legal settlement expenses; product recalls and product liability claims; unanticipated business disruptions; unexpected safety or manufacturing issues; our ability to predict, identify and interpret changes in consumer preferences and demand; a shift in our product mix to lower margin offerings; our ability to complete proposed divestitures or acquisitions; our ability to realize the expected benefits of acquisitions if they are completed; our indebtedness and our ability to pay our indebtedness; disruptions in our information technology networks and systems; our inability to protect our intellectual property rights; continued consumer weakness; weakness in economic conditions; tax law changes; the qualification of the Contribution, Internal Distribution or Distribution for non-recognition treatment for U.S. federal income tax purposes (as well as any related indemnification obligation to Kraft ParentCo in case such transactions do not so qualify); the qualification of the Canadian aspects of the Internal Reorganization for tax-deferred treatment for Canadian federal and provincial income tax purposes; our ability to achieve the benefits we expect to achieve from the Spin-Off and to do so in a timely and cost-effective manner; our lack of operating history as an independent, publicly traded company; future competition from Kraft ParentCo; potential conflicts of interest for certain of our directors and officers due to their equity ownership of or former service to Kraft ParentCo; and the incurrence of substantial indebtedness in connection with the Spin-Off and any potential related reductions in spending on our business activities. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this Information Statement, except as required by applicable law or regulation.

 

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THE SPIN-OFF

Background

On August 4, 2011, Kraft ParentCo announced plans to create two independent public companies: the Global Snacks Business and the North American Grocery Business. To effect the separation, Kraft ParentCo will undertake the Internal Reorganization described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement,” following which Kraft ParentCo will hold the Global Snacks Business and Kraft Foods Group, Kraft ParentCo’s wholly owned subsidiary, will hold the North American Grocery Business.

Following the Internal Reorganization, Kraft ParentCo will distribute all of its equity interest in us, consisting of all of the outstanding shares of our common stock, to Kraft ParentCo’s shareholders on a pro rata basis. Following the Spin-Off, Kraft ParentCo will not own any equity interest in us, and we will operate independently from Kraft ParentCo. No approval of Kraft ParentCo’s shareholders is required in connection with the Spin-Off, and Kraft ParentCo’s shareholders will not have any appraisal rights in connection with the Spin-Off.

The Spin-Off described in this Information Statement is subject to the satisfaction, or Kraft ParentCo’s waiver, of a number of conditions. In addition, Kraft ParentCo has the right not to complete the Spin-Off if, at any time, the Kraft ParentCo Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kraft ParentCo or its shareholders or is otherwise not advisable. For a more detailed description, see “—Conditions to the Spin-Off.”

Reasons for the Spin-Off

The Kraft ParentCo Board has regularly reviewed Kraft ParentCo’s businesses to ensure that Kraft ParentCo’s resources are utilized in a manner that is in the best interests of Kraft ParentCo and its shareholders. In this review process, the Kraft ParentCo Board, with input and advice from Kraft ParentCo’s management, has evaluated different alternatives, including potential opportunities for dispositions, acquisitions, business combinations and separations, with the goal of enhancing shareholder value. Because of the differences in the operations, geographical scope and strategic focus of the two businesses, a separation of the North American Grocery Business from the Global Snacks Business was one of the alternatives that the Kraft ParentCo Board evaluated from time to time. As part of this evaluation of a possible separation, the Kraft ParentCo Board considered a number of factors, including the strategic focus of and flexibility for the Global Snacks Business and the North American Grocery Business, the ability of the Global Snacks Business and the North American Grocery Business to compete and operate efficiently and effectively as separate public companies, the financial profile of the Global Snacks Business and the North American Grocery Business, the potential reaction of investors and the probability of successful execution of the various structural alternatives and the risks associated with those alternatives.

In 2011, the Kraft ParentCo Board again reviewed potential strategic alternatives, including a separation of the North American Grocery Business and the Global Snacks Business. As a result of this evaluation, after considering various factors in light of Kraft ParentCo’s businesses at that time and input from Goldman, Sachs & Co. and Centerview Partners, the Kraft ParentCo Board determined that proceeding with a spin-off of the North American Grocery Business at this time would be in the best interests of Kraft ParentCo and its shareholders. The Kraft ParentCo Board believes that creating two public companies will present a number of opportunities:

 

   

The Spin-Off will allow each company to focus on its distinct growth profile, product categories, distribution systems and strategic priorities, with customized cultures, organizational structures, operating models and financial targets that best fit its own business, markets and unique opportunities.

 

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The Spin-Off will allow each company to allocate resources and deploy capital in a manner consistent with its distinct operational focus and strategic priorities in order to optimize total returns to shareholders.

 

   

The Spin-Off will allow investors to value Kraft ParentCo and Kraft Foods Group based on their particular operational and financial characteristics and thus invest accordingly.

In determining whether to effect the Spin-Off, the Kraft ParentCo Board considered the costs and risks associated with the transaction, including the costs associated with preparing Kraft Foods Group to become an independent, publicly traded company, the risk of volatility in our stock price immediately following the Spin-Off due to sales by Kraft ParentCo’s shareholders whose investment objectives may not be met by our common stock, the time it may take for Kraft Foods Group to attract its optimal shareholder base, any potential negative impact on Kraft ParentCo’s credit ratings as a result of the divestiture of our assets, the possibility of disruptions in our business as a result of the Spin-Off, the risk that the combined trading prices of our common stock and Kraft ParentCo’s common stock after the Spin-Off may drop below the trading price of Kraft ParentCo’s common stock before the Spin-Off and the loss of synergies and scale from operating as one company. Notwithstanding these costs and risks, taking into account the factors discussed above, the Kraft ParentCo Board determined that the Spin-Off was the best alternative to achieve the above objectives and enhance shareholder value.

Separation of the North American Grocery Business and the Global Snacks Business

With the objective of creating two separate and strong businesses and with input and advice from Kraft ParentCo’s management, the Kraft ParentCo Board defined principles to implement the separation of the North American Grocery Business and the Global Snacks Business. These separation principles include ensuring that both Kraft ParentCo and we will each hold the assets needed to operate our respective businesses and have total liabilities immediately following the Spin-Off that support each of us obtaining investment grade credit ratings.

The Kraft ParentCo Board charged a steering committee comprising members of Kraft ParentCo’s senior management, or the “Steering Committee,” with overseeing the separation of the businesses in accordance with these separation principles. The Steering Committee includes both officers that we expect will continue to serve Kraft ParentCo and officers that we expect to employ after the Spin-Off. Guided by the separation principles and input from business units and strategy, tax and legal teams, as well as outside advisors, the Steering Committee considered, among other factors, each business’ historic ownership and usage of assets, incurrence of liabilities, relationships with other entities and accounting treatment, as well as administrative costs and efficiencies, to determine the terms of the separation of the North American Grocery Business and the Global Snacks Business.

When and How You Will Receive Kraft Foods Group Shares

Kraft ParentCo will distribute to its shareholders, pro rata, one share of our common stock for every three shares of Kraft ParentCo common stock outstanding as of September 19, 2012, the Record Date of the Distribution.

Prior to the Spin-Off, Kraft ParentCo will deliver all of the issued and outstanding shares of our common stock to the distribution agent. Wells Fargo Shareowner Services will serve as distribution agent in connection with the distribution of our common stock and as transfer agent and registrar for our common stock.

 

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If you own Kraft ParentCo common stock as of the close of business on September 19, 2012, the shares of our common stock that you are entitled to receive in the Distribution will be issued to your account as follows:

 

   

Registered shareholders. If you own your shares of Kraft ParentCo common stock directly, either through an account with Kraft ParentCo’s transfer agent or if you hold physical stock certificates, you are a registered shareholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Distribution by way of direct registration in book-entry form to your Wells Fargo account on or shortly after the Distribution Date. Registration in book-entry form refers to a method of recording share ownership where no physical stock certificates are issued to shareholders, as is the case in the Distribution. You will be able to access information regarding your book-entry account holding the Kraft Foods Group shares at www.shareowneronline.com using the same credentials that you use to access your Kraft ParentCo account or via our transfer agent’s interactive voice response system at (866) 655-7238.

About one week after the Distribution Date, the distribution agent will mail to you a Wells Fargo account statement and a check for any cash in lieu of fractional shares you are entitled to receive. See “—Treatment of Fractional Shares.” The Wells Fargo account statement will indicate the number of whole shares of our common stock that have been registered in book-entry form in your name.

 

   

“Street name” or beneficial shareholders. Most Kraft ParentCo shareholders own their shares of Kraft ParentCo common stock beneficially through a bank, broker or other nominee. In these cases, the bank, broker or other nominee holds the shares in “street name” and records your ownership on its books. If you own your shares of Kraft ParentCo common stock through a bank, broker or other nominee, your bank, broker or other nominee will credit your account with the whole shares of our common stock that you receive in the Distribution on or shortly after the Distribution Date. We encourage you to contact your bank, broker or other nominee if you have any questions concerning the mechanics of having shares held in street name.

If you sell any of your shares of Kraft ParentCo common stock on or before the Distribution Date, the buyer of those shares, and not you, may in some circumstances be entitled to receive the shares of our common stock issuable in respect of the shares sold. See “—Trading Prior to the Distribution Date” for more information.

We are not asking Kraft ParentCo shareholders to take any action in connection with the Spin-Off. No shareholder approval of the Spin-Off is required. We are not asking you for a proxy and request that you not send us a proxy. We are also not asking you to surrender any of your shares of Kraft ParentCo common stock for shares of our common stock. The number of outstanding shares of Kraft ParentCo common stock will not change as a result of the Spin-Off.

Number of Shares You Will Receive

On the Distribution Date, you will receive one share of our common stock for every three shares of Kraft ParentCo common stock you owned as of the Record Date.

Treatment of Equity-Based Compensation

The expected treatment of Kraft ParentCo equity awards that are outstanding on the Distribution Date in connection with the Spin-Off will depend on the type of award and whether the person holding the award is an employee of Kraft ParentCo or Kraft Foods Group following the Spin-Off. The different types of awards listed below are described in further detail under “Executive Compensation—

 

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Compensation Discussion & Analysis.” We expect that the treatment described below would become effective as of the Distribution Date.

Stock Options and Stock Appreciation Rights

Subject to certain exceptions, we expect that holders of Kraft ParentCo options and stock appreciation rights outstanding on the Distribution Date will receive, for each Kraft ParentCo option or stock appreciation right held on the Distribution Date, one adjusted Kraft ParentCo option or stock appreciation right, as applicable, and a number of options to purchase Kraft Foods Group common stock or stock appreciation rights with respect to Kraft Foods Group common stock, as applicable, based on the distribution ratio. All such adjusted Kraft ParentCo options and stock appreciation rights and Kraft Foods Group options and stock appreciation rights will be on substantially the same terms and vesting conditions as the original Kraft ParentCo options and stock appreciation rights, except for appropriate adjustments to the exercise price to preserve the intrinsic value of each option and stock appreciation right following the Spin-Off.

Restricted Stock and Deferred Stock Units

Subject to certain exceptions, we expect that holders of Kraft ParentCo restricted stock and deferred stock units that are outstanding on the Distribution Date will retain their Kraft ParentCo restricted stock or deferred stock units, as applicable, and receive, for each share of Kraft ParentCo restricted stock or deferred stock unit held on the Distribution Date, a number of Kraft Foods Group restricted stock or deferred stock units, as applicable, based on the distribution ratio. The Kraft ParentCo restricted stock and deferred stock units will continue to be subject to, and the Kraft Foods Group restricted stock and deferred stock units will be on, the same terms and vesting conditions as the original Kraft ParentCo restricted stock and deferred stock units.

Performance Share Awards

We expect to convert any Kraft ParentCo performance share awards that are outstanding on the Distribution Date into performance shares with respect to Kraft ParentCo common stock, to the extent such awards are held by Kraft ParentCo employees, or into performance shares with respect to Kraft Foods Group common stock, to the extent such awards are held by Kraft Foods Group employees. We will adjust the number of target shares based on the trading prices of Kraft ParentCo and Kraft Foods Group common stock on and following the Distribution Date. Kraft ParentCo’s and our compensation committees will determine any adjustments to the performance criteria applicable to the Kraft ParentCo and Kraft Foods Group performance shares.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Kraft ParentCo shareholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and when-issued trades will generally settle within four trading days following the Distribution Date. See “—Trading Prior to the Distribution Date” for additional information regarding when-issued trading. The distribution agent will, in its sole discretion, without any influence by Kraft ParentCo or us, determine when, how, through which broker-dealer and at what price to sell the whole shares. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Kraft ParentCo or us.

 

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The distribution agent will send to each registered holder of Kraft ParentCo common stock entitled to a fractional share a check in the cash amount deliverable in lieu of that holder’s fractional share as soon as practicable following the Distribution Date. We expect the distribution agent to take about one week after the Distribution Date to complete the distribution of cash in lieu of fractional shares to Kraft ParentCo shareholders. If you hold your shares through a bank, broker or other nominee, your bank, broker or nominee will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales. No interest will be paid on any cash you receive in lieu of fractional shares. The cash you receive in lieu of fractional shares will generally be taxable to you. See “—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution” below for more information.

Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution

The following is a summary of the material U.S. federal income tax consequences of the Contribution, Internal Distribution and Distribution. This discussion is based on the Code, the Treasury Regulations promulgated under the Code and judicial and administrative interpretations of these laws, in each case as in effect and available as of the date of this Information Statement, all of which are subject to change at any time, possibly with retroactive effect. Any change of this nature could affect the tax consequences described below.

The Distribution is conditioned on the continued validity of the private letter ruling that Kraft ParentCo received from the IRS and the receipt and continued validity of an opinion of Sutherland Asbill & Brennan LLP, or “Sutherland,” Kraft ParentCo’s tax counsel, each to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code (except, in the case of the private letter ruling, to the extent the IRS generally will not rule on certain transfers of intellectual property, which will be covered solely by the opinion) and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares.

Although a private letter ruling is generally binding on the IRS, the continued validity of a ruling is subject to the accuracy of and compliance with the representations, assumptions and covenants made by Kraft ParentCo and us in the ruling request. If the representations or assumptions made in the private letter ruling request are untrue or incomplete in any material respect, then Kraft ParentCo will not be able to rely on this ruling. Furthermore, as part of IRS policy, the IRS did not determine whether the Internal Distribution or Distribution satisfies certain conditions that are necessary to qualify for non-recognition treatment under Section 355 of the Code, including the requirements that the distributions have a valid corporate-level business purpose and that the distributions not be used principally as a device for the distribution of earnings and profits. Rather, the private letter ruling is based on representations by Kraft ParentCo and us that these conditions have been satisfied. Any inaccuracy in these representations could invalidate the private letter ruling. The opinion of tax counsel will address the satisfaction of these conditions. Similarly, the IRS generally will not rule on contributions of intellectual property that do not satisfy certain criteria. As a result, the private letter ruling does not address whether transfers of certain intellectual property included in the Contribution qualify for non-recognition treatment. Rather, the opinion of tax counsel will address such qualification.

The opinion of tax counsel will rely on the private letter ruling as to matters covered by the ruling. The opinion will assume that the Contribution, Internal Distribution and Distribution will be completed

 

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according to the terms of the Separation and Distribution Agreement and that the parties will report the transactions in a manner consistent with the opinion. The opinion will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Sharing and Indemnity Agreement and ancillary agreements, this Information Statement and a number of other documents. In rendering the opinion, Sutherland will require and rely on representations and covenants from Kraft ParentCo and us to be delivered at the time of closing (and will assume that any such representation that is qualified by belief, knowledge or materiality is true, correct and complete without such qualification). If any of the representations or assumptions were untrue or incomplete in any material respect, any covenants were not complied with, or the facts on which the opinion is based were materially different from the facts at the time of the transactions, the conclusions in the opinion may not be correct. Sutherland will have no obligation to advise us or our shareholders of changes in its opinion after the Distribution Date due to any subsequent changes in the matters stated, represented or assumed in the opinion or any subsequent changes in the applicable law. Opinions of tax counsel are not binding on the IRS. As a result, the IRS could challenge the conclusions expressed in the opinion of tax counsel, and if the IRS prevails in its challenge, the tax consequences to you could be materially less favorable than those described below.

The opinion will be based on statutory, regulatory and judicial authority existing as of the date of the opinion, any of which may be changed at any time with retroactive effect. Neither the opinion nor the ruling will address any state, local or foreign tax consequences of the Contribution, Internal Distribution or Distribution. The Distribution may be taxable to you under state, local or foreign tax laws.

Tax consequences of the Distribution for U.S. holders

This discussion is limited to holders of Kraft ParentCo common stock that are U.S. holders, as defined immediately below, that hold their Kraft ParentCo common stock as a capital asset. A U.S. holder is a beneficial owner of Kraft ParentCo common stock that is, for U.S. federal income tax purposes:

 

   

an individual who is a citizen or a resident of the United States;

 

   

a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) it was treated as a domestic trust under the law in effect before 1997 and a valid election is in place under applicable Treasury Regulations.

This discussion does not address all tax considerations that may be relevant to U.S. holders in light of their particular circumstances, nor does it address the consequences to U.S. holders subject to special treatment under the U.S. federal income tax laws, including but not limited to:

 

   

dealers or traders in securities or currencies;

 

   

tax-exempt entities;

 

   

banks, financial institutions or insurance companies;

 

   

real estate investment trusts, regulated investment companies or grantor trusts;

 

   

persons who acquired Kraft ParentCo common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

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holders who own, or are deemed to own, at least 10% or more, by voting power or value, of Kraft ParentCo equity;

 

   

holders who own Kraft ParentCo common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes;

 

   

former citizens or long-term residents of the United States;

 

   

holders who are subject to the alternative minimum tax; or

 

   

persons that own Kraft ParentCo common stock through partnerships or other pass-through entities.

This discussion does not address any state, local or foreign tax consequences or any estate, gift or other non-income tax consequences.

If a partnership, or any other entity treated as a partnership for U.S. federal income tax purposes, holds Kraft ParentCo common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to its tax consequences.

THIS SUMMARY IS FOR GENERAL INFORMATION PURPOSES ONLY, AND IT IS NOT INTENDED TO BE, AND IT SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR SHAREHOLDER.

YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL, AS WELL AS FOREIGN, INCOME AND OTHER TAX CONSEQUENCES OF THE DISTRIBUTION.

Assuming the continued validity of the private letter ruling and subject to qualifications and limitations described in this Information Statement (including the discussion below relating to the receipt of cash in lieu of fractional shares) and the tax opinion, Sutherland, Kraft ParentCo’s tax counsel, is of the opinion that for U.S. federal income tax purposes the consequences of the Distribution will be as described below.

 

   

A U.S. holder will not recognize any gain or loss, and will not include any amount in income, upon receiving our common stock in the Distribution;

 

   

Each U.S. holder’s aggregate basis in its Kraft ParentCo common stock and our common stock received in the Distribution (including any fractional shares to which the U.S. holder would be entitled) will equal the aggregate basis the U.S. holder had in the Kraft ParentCo common stock immediately prior to the Distribution, allocated in proportion to the fair market value of each; and

 

   

Each U.S. holder’s holding period in our common stock received in the Distribution will include the U.S. holder’s holding period in its Kraft ParentCo common stock on which the Distribution was made, provided that the Kraft ParentCo common stock is owned as a capital asset on the date of the Distribution.

U.S. holders that have acquired different blocks of Kraft ParentCo common stock at different times or at different prices should consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and their holding period of, shares of our common stock distributed with respect to such blocks of Kraft ParentCo common stock. Fair market value generally is the price at which a willing buyer and a willing seller, neither of whom is under any compulsion to buy or to sell and both having

 

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reasonable knowledge of the facts, would exchange property. U.S. federal income tax law does not specifically prescribe how U.S. holders should determine the fair market values of Kraft ParentCo common stock and our common stock for purposes of allocating basis. You should consult your tax advisor to determine what measure of fair market value is appropriate. For purposes of reporting to the IRS, Kraft ParentCo and we will calculate the fair market value of our respective common stock based on the mean of the highest and lowest trading prices of the stock on the first full trading day after the Distribution.

Cash in lieu of fractional shares

If a U.S. holder receives cash in lieu of a fractional share of common stock in the Distribution, the U.S. holder will be treated as though it first received a distribution of the fractional share in the Distribution and then sold it for the amount of cash it actually receives. Provided the fractional share is considered to be held as a capital asset, the U.S. holder will generally recognize capital gain or loss measured by the difference between the cash received for the fractional share and the tax basis in that fractional share, determined as described above. The capital gain or loss will be a long-term capital gain or loss if the U.S. holder’s holding period for the Kraft ParentCo common stock, with respect to which the U.S. holder received the fractional share, is more than one year on the Distribution Date.

Tax consequences for U.S. holders if the Distribution fails to qualify for non-recognition treatment

If the Distribution does not qualify for non-recognition treatment, each U.S. holder who receives our common stock in the Distribution would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock it receives (including any fractional shares received), which would generally result in:

 

   

a taxable dividend to the extent of the U.S. holder’s ratable share of Kraft ParentCo’s current and accumulated earnings and profits, as increased to reflect any gain recognized by Kraft ParentCo on a taxable distribution;

 

   

a reduction in the U.S. holder’s basis (but not below zero) in Kraft ParentCo common stock to the extent the amount received exceeds the U.S. holder’s share of Kraft ParentCo’s earnings and profits; and

 

   

a taxable gain from the exchange of Kraft ParentCo common stock to the extent the amount it receives exceeds both the U.S. holder’s share of Kraft ParentCo’s earnings and profits and the basis in the U.S. holder’s Kraft ParentCo common stock.

Any amounts withheld in respect of taxes from the payments of cash in lieu of fractional shares will be taken into account in determining each U.S. holder’s tax liability if the Distribution does not qualify for non-recognition treatment.

Information reporting and backup withholding

Payments of cash in lieu of a fractional share of our common stock may, under certain circumstances, be subject to “backup withholding,” unless a holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations and non-U.S. holders will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding does not constitute an additional tax, but is merely an advance payment that may be refunded or credited against a holder’s U.S. federal income tax liability if the required information is supplied to the IRS.

 

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U.S. Treasury Regulations require each U.S. holder that immediately before the Distribution owned 5% or more (by vote or value) of the total outstanding stock of Kraft ParentCo to attach to its U.S. federal income tax return for the year in which our common stock is received a statement setting forth certain information related to the Distribution.

Tax consequences for Kraft ParentCo, the New Snacks Company (as defined under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement”) and us of the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” and the Distribution

Assuming the continued validity of the private letter ruling and subject to qualifications and limitations set forth therein and in the tax opinion, Sutherland, Kraft ParentCo’s tax counsel, is of the opinion that, for U.S. federal income tax purposes, the consequences of the transactions will be as described below:

 

   

Kraft ParentCo will not recognize any gain or loss on the Internal Distribution and the Distribution;

 

   

We will not recognize any gain or loss on the Contribution and the Internal Distribution; and

 

   

The New Snacks Company will not recognize any gain or loss on the Contribution.

Tax consequences for Kraft ParentCo, the New Snacks Company and us if the Contribution and Internal Distribution fail to qualify for non-recognition treatment

If the Contribution and the Internal Distribution do not qualify for non-recognition treatment, we (or Kraft ParentCo, as the common parent of the consolidated group) would recognize taxable gain equal to the excess of the fair market value of the assets transferred to the New Snacks Company in the Contribution over our tax basis in those assets. Under the Tax Sharing and Indemnity Agreement, to the extent that we were liable for any such tax on the Contribution or Internal Distribution, Kraft ParentCo would generally be obligated to indemnify us against such tax liability. See, however, “—Indemnification obligation” below.

Tax consequences for Kraft ParentCo, the New Snacks Company and us if the Distribution fails to qualify for non-recognition treatment

If the Distribution does not qualify for non-recognition treatment, Kraft ParentCo would recognize taxable gain equal to the excess of the fair market value of our common stock distributed to Kraft ParentCo’s shareholders over Kraft ParentCo’s tax basis in our common stock. In that case, the gain recognized by Kraft ParentCo would be substantial.

Indemnification obligation

Even if the Distribution otherwise qualifies for non-recognition of gain or loss under Section 355 of the Code, it may be taxable to Kraft ParentCo, but not Kraft ParentCo’s shareholders, under Section 355(e) of the Code if 50% or more (by vote or value) of our common stock or Kraft ParentCo common stock is acquired as part of a plan or series of related transactions that include the Distribution. For this purpose, any acquisitions of Kraft ParentCo’s or our common stock within two years before or after the Distribution are presumed to be part of such a plan, although Kraft ParentCo or we may be able to rebut that presumption based on either applicable facts and circumstances or a “safe harbor” described in the tax regulations. If such an acquisition of Kraft ParentCo’s or our common stock triggers the application of Section 355(e) of the Code, Kraft ParentCo would recognize a gain equal to the excess of the fair market value of our common stock it holds immediately before the completion of the Distribution over Kraft ParentCo’s tax basis in that stock.

 

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Generally, taxes resulting from the failure of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on Kraft ParentCo or Kraft ParentCo’s shareholders, and Kraft ParentCo would generally be obligated to indemnify us against such taxes under the Tax Sharing and Indemnity Agreement. However, under the Tax Sharing and Indemnity Agreement, we could be required, under certain circumstances, to indemnify Kraft ParentCo and its affiliates against all tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations, covenants or obligations under the Tax Sharing and Indemnity Agreement or any other agreement we enter into in connection with the Spin-Off. Events triggering an indemnification obligation under the agreement include events occurring after the Distribution that cause Kraft ParentCo to recognize a gain under Section 355(e) of the Code. See “Risk Factors—Risks Relating to the Spin-Off—We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition” and “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement.”

Results of the Spin-Off

After the Spin-Off, we will be an independent, publicly traded company. Immediately following the Spin-Off, we expect to have approximately 73,000 registered holders of shares of our common stock and approximately 591 million shares of our common stock outstanding, based on the number of Kraft ParentCo registered shareholders and shares of Kraft ParentCo common stock outstanding on June 30, 2012. The actual number of shares of our common stock Kraft ParentCo will distribute in the Spin-Off will depend on the actual number of shares of Kraft ParentCo common stock outstanding on the Record Date, and will reflect any issuance of new shares or exercises of outstanding options pursuant to Kraft ParentCo’s equity plans on or prior to the Record Date. The Spin-Off will not affect the number of outstanding shares of Kraft ParentCo common stock or any rights of Kraft ParentCo shareholders, although we expect the trading price of shares of Kraft ParentCo common stock immediately following the Distribution to be lower than immediately prior to the Distribution because Kraft ParentCo’s trading price will no longer reflect the value of the North American Grocery Business. Furthermore, until the market has fully analyzed the value of Kraft ParentCo without the North American Grocery Business, the price of shares of Kraft ParentCo common stock may fluctuate.

Before our separation from Kraft ParentCo, we intend to enter into a Separation and Distribution Agreement and several other agreements with Kraft ParentCo related to the Spin-Off. These agreements will govern the relationship between Kraft ParentCo and us up to and after completion of the Spin-Off and allocate between Kraft ParentCo and us various assets, liabilities, rights and obligations, including employee benefits, intellectual property and tax-related assets and liabilities. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo.”

Listing and Trading of our Common Stock

As of the date of this Information Statement, we are a wholly owned subsidiary of Kraft ParentCo. Accordingly, no public market for our common stock currently exists, although a “when-issued” market in our common stock may develop prior to the Distribution. See “—Trading Prior to the Distribution Date” below for an explanation of a “when-issued” market. We intend to list our shares of common stock on NASDAQ under the symbol “KRFT.” Following the Spin-Off, Kraft ParentCo common stock will trade on NASDAQ under the symbol “MDLZ.”

Neither Kraft ParentCo nor we can assure you as to the trading price of Kraft ParentCo common stock or our common stock after the Spin-Off, or as to whether the combined trading prices of Kraft ParentCo common stock and our common stock after the Spin-Off will be less than, equal to or greater than the

 

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trading prices of Kraft ParentCo common stock prior to the Spin-Off. The trading price of our common stock may fluctuate significantly following the Spin-Off. See “Risk Factors—Risks Relating to our Common Stock and the Securities Market” for more detail.

The shares of our common stock distributed to Kraft ParentCo shareholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the Spin-Off include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act of 1933, or the “Securities Act,” or an exemption from the registration requirements of the Securities Act, such as those afforded by Section 4(1) of the Securities Act or Rule 144 thereunder.

We expect that Kraft ParentCo’s current directors and executive officers, including W. Anthony Vernon, Timothy R. McLevish and Sam B. Rovit, who will be among our executive officers following the Spin-Off, will voluntarily commit to hold 100% of the after-tax net shares of our common stock they receive in the Spin-Off and 100% of the after-tax net shares of Kraft ParentCo common stock they hold on the Distribution Date for at least one year following the Distribution Date. In addition, we expect that the other individuals who will serve as our executive officers following the Spin-Off will voluntarily commit to hold 100% of the after-tax net shares of our common stock they receive in the Spin-Off and at least 50% of the after-tax net shares of Kraft ParentCo common stock they hold on the Distribution Date for at least one year following the Distribution Date.

Trading Prior to the Distribution Date

We expect a “when-issued” market in our common stock to develop as early as two trading days prior to the Record Date for the Distribution and continue up to and including the Distribution Date. When-issued trading refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. If you own shares of Kraft ParentCo common stock on the Record Date, you will be entitled to receive shares of our common stock in the Distribution. You may trade this entitlement to receive shares of our common stock, without the shares of Kraft ParentCo common stock you own, on the when-issued market. We expect when-issued trades of our common stock to settle within four trading days after the Distribution Date. On the first trading day following the Distribution Date, we expect that when-issued trading of our common stock will end and “regular-way” trading will begin.

Following the Distribution Date, we expect shares of our common stock to be listed on NASDAQ under the trading symbol “KRFT.” If when-issued trading occurs, the listing for our common stock is expected to be under a trading symbol different from our regular-way trading symbol. We will announce our when-issued trading symbol when and if it becomes available. If the Spin-Off does not occur, all when-issued trading will be null and void.

 

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Conditions to the Spin-Off

We expect that the Spin-Off will be effective on the Distribution Date, provided that the following conditions have been satisfied or the Kraft ParentCo Board has waived the conditions:

 

   

the Kraft ParentCo Board will, in its sole and absolute discretion, have authorized and approved:

 

  (i) the Internal Reorganization,

 

  (ii) any other transfers of assets and assumptions of liabilities contemplated by the Separation and Distribution Agreement and any related agreements, and

 

  (iii) the Distribution,

and will not have withdrawn that authorization and approval;

 

   

the Kraft ParentCo Board will have declared the Distribution of all outstanding shares of our common stock to Kraft ParentCo’s shareholders;

 

   

the SEC will have declared our Registration Statement on Form 10, of which this Information Statement is a part, effective under the Exchange Act, no stop order suspending the effectiveness of the Registration Statement will be in effect, no proceedings for that purpose will be pending before or threatened by the SEC and notice of Internet availability of this Information Statement or this Information Statement will have been mailed to Kraft ParentCo’s shareholders;

 

   

NASDAQ or another national securities exchange approved by the Kraft ParentCo Board will have accepted our common stock for listing, subject to official notice of issuance;

 

   

the Internal Reorganization will have been completed;

 

   

the private letter ruling that Kraft ParentCo received from the IRS to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code (except to the extent the IRS generally will not rule on certain transfers of intellectual property, which will be covered solely by the opinion) and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares, will not have been revoked or modified in any material respect as of the Distribution Date;

 

   

Kraft ParentCo will have received an opinion from its tax counsel, in form and substance satisfactory to Kraft ParentCo in its sole and absolute discretion, that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares;

 

   

Kraft ParentCo will have received an advance income tax ruling from the CRA, in form and substance satisfactory to Kraft ParentCo in its sole and absolute discretion, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants and based on the current provisions of the Canadian Tax Act, the separation of the assets and liabilities in Canada held in connection with the Global Snacks Business from the assets and liabilities in Canada held in connection with the North American Grocery Business will be treated for purposes of the Canadian Tax Act as resulting in a “butterfly” reorganization

 

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with no material Canadian federal income tax payable by Kraft ParentCo’s Canadian subsidiary, our Canadian subsidiary or their respective shareholders, and that advance income tax ruling will remain in effect as of the Distribution Date;

 

   

no order, injunction or decree that would prevent the consummation of the Distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the consummation of the Distribution will be in effect, and no other event outside the control of Kraft ParentCo will have occurred or failed to occur that prevents the consummation of the Distribution;

 

   

no other events or developments will have occurred prior to the Distribution that, in the judgment of the Kraft ParentCo Board, would result in the Distribution having a material adverse effect on Kraft ParentCo or its shareholders;

 

   

Kraft ParentCo and we will have executed and delivered the Separation and Distribution Agreement, Tax Sharing and Indemnity Agreement, Employee Matters Agreement, Master Ownership and License Agreement Regarding Patents, Trade Secrets and Related Intellectual Property, Master Ownership and License Agreement Regarding Trademarks and Related Intellectual Property, Transition Services Agreements, Master Supply Agreement, Canadian Asset Transfer Agreement and all other ancillary agreements related to the Spin-Off;

 

   

our existing directors will have duly appointed the individuals to be listed as members of our post-Distribution Board in this Information Statement, and those individuals will become members of our Board in connection with the Distribution; provided, however, that to the extent required by law or any requirement of NASDAQ, our current directors will appoint one independent director and this director will begin his or her term prior to the Distribution in accordance with such law or requirement;

 

   

each individual who will be an employee of Kraft ParentCo after the Distribution and who is a director or officer of Kraft Foods Group will have resigned or been removed from the directorship and/or office held by that person, effective no later than immediately prior to the Distribution; and

 

   

immediately prior to the Distribution, our Articles of Incorporation and Bylaws, each in substantially the form filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, will be in effect.

The fulfillment of the above conditions will not create any obligation on Kraft ParentCo’s part to effect the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than NASDAQ’s approval for listing of our common stock and the SEC’s declaration of the effectiveness of the Registration Statement, in connection with the Distribution. Kraft ParentCo has the right not to complete the Spin-Off if, at any time, the Kraft ParentCo Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kraft ParentCo or its shareholders or is otherwise not advisable.

Reasons for Furnishing this Information Statement

We are furnishing this Information Statement solely to provide information to Kraft ParentCo’s shareholders who will receive shares of our common stock in the Distribution. You should not construe this Information Statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Kraft ParentCo. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither Kraft ParentCo nor we undertake any obligation to update the information except in the normal course of Kraft ParentCo’s and our public disclosure obligations and practices.

 

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DIVIDEND POLICY

We anticipate paying a highly competitive dividend. We currently expect that the equivalent of $0.64 of the existing $1.16 annual dividend per share paid by Kraft ParentCo would be attributable to us. The timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that we will pay a dividend in the future or that we will continue to pay any dividend if we do commence paying dividends. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.”

 

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CAPITALIZATION

The following table sets forth the unaudited cash and capitalization of Kraft Foods Group as of June 30, 2012, on an historical basis and on a pro forma basis to give effect to the Spin-Off and the transactions related to the Spin-Off as if they occurred on June 30, 2012. You can find an explanation of the pro forma adjustments made to our historical combined financial statements under “Unaudited Pro Forma Combined Financial Statements.” You should review the following table in conjunction with “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and accompanying notes included elsewhere in this Information Statement.

 

     As of June 30, 2012  
     Historical     Pro Forma  
    

(unaudited)

(in millions)

 

Cash and cash equivalents

   $ 3     $ 188   
  

 

 

   

 

 

 

Indebtedness:

    

Capital leases

   $ 32      $ 32   

Senior unsecured notes

     5,963       9,936   
  

 

 

   

 

 

 

Total indebtedness

   $ 5,995      $ 9,968   

Equity:

    

Common stock, no par value

   $ —       $ —    

Additional paid-in capital

     —         7,593   

Parent company investment

     11,473        —    

Accumulated other comprehensive earnings (losses)

     (515     (3,290
  

 

 

   

 

 

 

Total equity

   $ 10,958      $ 4,303   
  

 

 

   

 

 

 

Total capitalization

   $ 16,953      $ 14,271   
  

 

 

   

 

 

 

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

The following table presents our selected historical combined financial data as of June 30, 2012 and for the six months ended June 30, 2012 and 2011, and as of and for each of the fiscal years in the five-year period ended December 31, 2011. We derived the selected historical combined financial data as of June 30, 2012 and for the six months ended June 30, 2012 and 2011, and as of December 31, 2011 and 2010, and for each of the fiscal years in the three-year period ended December 31, 2011, from our unaudited condensed and audited combined financial statements included elsewhere in this Information Statement. We derived the selected historical combined financial data as of December 31, 2009, and as of and for the fiscal years ended December 31, 2008 and 2007, from our unaudited combined financial statements that are not included in this Information Statement. In our management’s opinion, the unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements and include all adjustments, consisting only of ordinary recurring adjustments, necessary for a fair presentation of the information for the periods presented.

Our historical combined financial statements include certain expenses of Kraft ParentCo that were allocated to us for certain functions, including general corporate expenses related to information technology, research and development, finance, legal, insurance, compliance and human resources activities. These costs may not be representative of the future costs we will incur as an independent public company. In addition, our historical financial information does not reflect changes that we expect to experience in the future as a result of our Spin-Off from Kraft ParentCo, including changes in our cost structure, personnel needs, tax structure, financing and business operations. Our historical combined financial statements also do not reflect the allocation of certain net liabilities between Kraft ParentCo and us as reflected under “Unaudited Pro Forma Combined Financial Statements” included elsewhere in this Information Statement. Consequently, the financial information included here may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented.

 

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You should read the selected historical combined financial data presented below in conjunction with our audited and unaudited condensed combined financial statements and accompanying notes, Unaudited Pro Forma Combined Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Information Statement.

 

     For the Six Months
Ended June 30,(1)
    For the Year Ended December 31,(2)(3)  
        2012           2011        2011     2010     2009     2008     2007  
    

(in millions)

 

Net revenues

   $ 9,239      $ 9,146      $ 18,655      $ 17,797      $ 17,278      $ 17,708      $ 17,023   

Cost of sales

     6,121        6,083        12,761        11,778        11,281        12,298        11,467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,118        3,063        5,894        6,019        5,997        5,410        5,556   

Selling, general and administrative expenses

     1,376        1,473        2,973        3,066        3,031        2,999        2,855   

Asset impairment and exit costs

     112        —          (2     (8     (9     244        269   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,630        1,590        2,923        2,961        2,975        2,167        2,432   

Operating margin

     17.6     17.4     15.7     16.6     17.2     12.2     14.3

Interest and other expense, net

     23        3        9        7        34        24        20   

Royalty (income) from affiliates

     (28     (23     (55     (43     (47     (38     (46
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     1,635        1,610        2,969        2,997        2,988        2,181        2,458   

Provision for income taxes

     564        589        1,130        1,110        1,036        728        841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations(1)(2)

     1,071        1,021        1,839        1,887        1,952        1,453        1,617   

Earnings and gains from discontinued operations,
net of income taxes
(3)

     —          —          —          1,644        218        1,209        371   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 1,071      $ 1,021      $ 1,839      $ 3,531      $ 2,170      $ 2,662      $ 1,988   

Net cash provided by operating activities

   $ 1,101      $ 1,158      $ 2,664      $ 828      $ 3,017      $ 2,920      $ 2,277   

Capital expenditures

     181        104        401        448        513        533        623   

Depreciation and amortization

     169        178        364        354        348        356        404   
           As of
June 30,
2012(1)
    As of December 31,(2)(3)  
       2011     2010     2009     2008     2007  
          

(in millions)

 

Inventories, net

     $ 2,048      $ 1,943      $ 1,773      $ 1,795      $ 1,828      $ 1,995   

Property, plant and equipment, net

       4,222        4,278        4,283        4,521        4,425        4,837   

Total assets

       21,889        21,539        21,598        22,189        22,052        24,339   

Long-term debt

       5,988        27        31        48        227        193   

Total debt

       5,995        35        39        55        231        200   

Total long-term liabilities

       8,334        2,368        2,193        2,247        2,356        2,505   

Total equity

       10,958        16,599        17,039        17,512        17,297        19,649   

 

(1) Significant items affecting comparability of earnings from continuing operations include the initiation of a restructuring program in 2012 and the cessation of the Starbucks CPG business in 2011. For more information, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our unaudited interim condensed combined financial statements, including Note 5, “2012-2014 Restructuring Program,” and Note 11, “Segment Reporting.”

 

(2)

Significant items affecting comparability of earnings from continuing operations include a 53rd week of operating results in 2011 and not in any of the other fiscal years presented; the cessation of the Starbucks

 

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  CPG business in 2011; and cost savings initiatives that we began in 2009 and that are included in cost of sales and selling, general and administrative expenses. For more information, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited combined financial statements, including Note 2, “Summary of Significant Accounting Policies,” Note 14, “Segment Reporting,” and Note 7, “Cost Savings Initiatives.” Costs incurred in connection with a 2004-2008 restructuring program are reflected within asset impairment and exit costs in 2007 and 2008.

 

(3) Earnings and gains from discontinued operations include the results and gains on the sales of our Frozen Pizza business in 2010 and our Post cereals business in 2008. Refer to Note 3, “Divestitures,” to our historical combined financial statements for more information on the Frozen Pizza business divestiture. In connection with the Post cereals divestiture, we reported earnings and a gain from discontinued operations, net of tax, of $1,039 million in 2008 and $232 million in 2007. Assets divested in the Post cereals divestiture included $94 million of inventory, $425 million of net property, plant and equipment and $1,234 million of goodwill. In addition, $11 million of other assets and $3 million of other liabilities were divested, totaling $1,761 million of divested net assets.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements as of June 30, 2012 and for the six months ended June 30, 2012 and for the year ended December 31, 2011 were derived from our unaudited interim condensed and audited combined financial statements included elsewhere in this Information Statement.

The unaudited pro forma combined financial statements reflect adjustments to our historical financial results in connection with the Spin-Off and related transactions. The unaudited pro forma combined statements of earnings give effect to these events as if they occurred on January 1, 2011, the beginning of our last fiscal year. The unaudited pro forma combined balance sheet gives effect to these events as if they occurred as of June 30, 2012, our latest balance sheet date. The pro forma adjustments are described in the accompanying notes and include the following:

 

   

Incurrence of the remaining $4 billion of the $10 billion total debt to be incurred as part of our plan to capitalize our company and secure an investment grade credit rating. On July 18, 2012, we issued $3.6 billion of aggregate principal amount of notes in a debt exchange for certain of Kraft ParentCo’s then outstanding notes. We also anticipate incurring approximately $400 million of long-term senior unsecured notes that are historically related to the Global Snacks Business and not allocated to us in our historical combined financial statements to complete the key elements of our capitalization plan in connection with the Spin-Off.

 

   

Distribution of substantially all of our cash from operations to Kraft ParentCo through the Distribution Date as part of our capitalization plan, except for approximately $185 million of operating cash within our Canadian subsidiary, based on our estimates as of June 30, 2012 and subject to provisions of final tax rulings.

 

   

Transfer of net liabilities between Kraft ParentCo and us, including certain employee benefit plan and other obligations, net of any related assets.

 

   

Removal of royalty income received from Kraft ParentCo’s affiliates that we will no longer receive following the Distribution Date. The royalty income relates to rights to intellectual property that we will not retain following the Distribution Date.

 

   

Issuance of approximately 591 million shares of our common stock. This number of shares is based on the number of Kraft ParentCo common shares outstanding on June 30, 2012 and a distribution ratio of one share of our common stock for every three shares of Kraft ParentCo common stock.

The unaudited pro forma combined financial statements are subject to the assumptions and adjustments described in the accompanying notes. Our management believes that these assumptions and adjustments are reasonable under the circumstances and given the information available at this time. However, these adjustments are subject to change as Kraft ParentCo and we finalize the terms of the Spin-Off and our agreements related to the Spin-Off.

The unaudited pro forma financial information is for illustrative and informational purposes only and is not intended to represent, or be indicative of, what our financial position or results of operations would have been had the Spin-Off and related transactions occurred on the dates indicated. The unaudited pro forma financial information also should not be considered representative of our financial position, and you should not rely on the financial information presented below as a representation of our future performance.

We expect to recognize one-time expenses related to restructuring, including employee and manufacturing facility costs, and costs to start up certain stand-alone functions and information technology systems. On March 14, 2012, the Kraft ParentCo Board approved $1.7 billion of one-time expenses (excluding costs to incur debt) and $0.4 billion in capital expenditures to facilitate the Spin-Off and optimize both the North American Grocery Business and Global Snacks Business. The one-time expenses include:

 

   

Spin-Off transaction and transition costs of approximately $0.6 billion. Kraft ParentCo currently expects to incur all Spin-Off transaction costs and most of the Spin-Off transition

 

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costs. In the historical and the pro forma combined statements of earnings through June 30, 2012, no Spin-Off transaction or transition costs incurred to date by Kraft ParentCo were allocated to us or otherwise reflected in our financial results.

 

   

Restructuring and related implementation costs of approximately $1.1 billion, which are expected to be incurred through the end of 2014. The primary objective of the restructuring and implementation activities is to ensure that both the North American Grocery Business and Global Snacks Business are set up to operate efficiently and execute their respective business strategies upon separation of the companies and prospectively. We expect to achieve this objective primarily by streamlining manufacturing and distribution networks and tailoring corporate and business units to optimize operations. While we cannot say with certainty what the allocation of the restructuring and implementation costs will be between Kraft ParentCo and us, we expect that a majority of these costs will be incurred either prior to the Spin-Off or by Kraft ParentCo, and we expect to fund our portion of the restructuring and implementation costs with cash from operations and financing activities. More information on the “2012-2014 Restructuring Program” is provided in Note 5 to our historical unaudited condensed combined financial statements as of and for the six months ended June 30, 2012. During the six months ended June 30, 2012, we incurred $116 million of one-time 2012-2014 Restructuring Program costs. The unaudited pro forma combined statement of earnings for the six months ended June 30, 2012 does not reflect the removal of these one-time costs from our historical results as the 2012-2014 Restructuring Program is not directly related to the Spin-Off in its entirety and will continue after the Distribution Date.

Kraft ParentCo also expects to incur an estimated $400 million to $800 million of Spin-Off financing and related costs to redistribute debt and secure investment grade credit ratings for both the North American Grocery Business and Global Snacks Business. Except for any one-time financing costs paid or expensed prior to the Spin-Off, which will be retained by Kraft ParentCo, Kraft ParentCo and we will each bear our own direct financing and related costs, which will be recognized in interest expense over the life of the related debt. In the historical statement of earnings through June 30, 2012, no one-time Spin-Off financing expenses and approximately $18 million of interest expense related to our June 4, 2012 $6.0 billion notes issuance were recorded. The unaudited pro forma combined financial statements reflect the expected recurring financing costs related to our incurring the $10 billion of debt. We refer to the one-time Spin-Off transaction, transition and financing and related costs collectively as “Spin-Off Costs.”

We also expect to experience changes in our ongoing cost structure when we become an independent, publicly traded company and as a result of our restructuring activities. For example, Kraft ParentCo currently provides many corporate functions on our behalf, including, but not limited to, information technology, research and development, finance, legal, insurance, compliance and human resource activities. Our historical combined financial statements include allocations of these expenses from Kraft ParentCo. However, these costs may not be representative of the future costs we will incur as an independent public company. We estimate that the overhead savings associated with the 2012-2014 Restructuring Program will offset the overhead dis-synergies resulting from our becoming an independent company. Further, we estimate that we will realize approximately $100 million of annual overhead cost savings from costs currently allocated to us that will be incurred by and remain in Kraft ParentCo. These anticipated cost changes have not been reflected in our unaudited pro forma combined statements of earnings. For a description of the allocation of Kraft ParentCo’s general and administrative corporate expenses to us, see Note 1, “Background and Basis of Presentation,” to our historical combined financial statements and Note 2, “Summary of Significant Accounting Policies,” to our audited combined financial statements as of December 31, 2011 and 2010 and for each of the three years ended December 31, 2011 included in this Information Statement.

The unaudited pro forma combined financial statements should be read in conjunction with our historical combined financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operationsincluded in this Information Statement.

 

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Kraft Foods Group, Inc.

Unaudited Pro Forma Combined Statement of Earnings

Six Months Ended June 30, 2012

(in millions, except per share amounts)

 

     Historical
Kraft Foods
Group, Inc.
    Pro Forma
Adjustments(1)
   

Notes

   Pro Forma
Kraft Foods
Group, Inc.
 

Net revenues

   $ 9,239           $ 9,239   

Cost of sales

     6,121        22      (b)      6,143   
  

 

 

        

 

 

 

Gross profit

     3,118             3,096   

Selling, general and administrative expenses

     1,376        23      (b)      1,399   

Asset impairment and exit costs

     112             112   
  

 

 

        

 

 

 

Operating income

     1,630             1,585   

Interest and other expense, net

     23        232      (a)      255   

Royalty income from affiliates

     (28     28      (d)      —    
  

 

 

        

 

 

 

Earnings before income taxes

     1,635             1,330   

Provision for income taxes

     564        (115   (h)      449   
  

 

 

        

 

 

 

Net earnings

   $ 1,071           $ 881   
  

 

 

        

 

 

 

Pro forma earnings per share:

         

Basic

       (f)    $ 1.49   

Diluted

       (g)    $ 1.48   

Pro forma weighted average shares outstanding:

         

Basic

       (f)      592   

Diluted

       (g)      595   

 

(1) The change in our annual costs related to our becoming an independent, publicly traded company is not reflected above.

As a result of becoming an independent company and due to our restructuring activities, we expect our annual overhead cost structure to change. We estimate that the overhead savings associated with our restructuring program will offset the overhead dis-synergies resulting from our becoming an independent company. Further, we estimate that we will realize approximately $100 million of annual overhead cost savings from costs currently allocated to us that will be incurred by and remain in Kraft ParentCo.

See accompanying notes to the unaudited pro forma combined financial statements.

 

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Kraft Foods Group, Inc.

Unaudited Pro Forma Combined Statement of Earnings

Year Ended December 31, 2011

(in millions, except per share amounts)

 

     Historical
Kraft Foods
Group, Inc.
    Pro Forma
Adjustments(1)
   

Notes

   Pro Forma
Kraft Foods
Group, Inc.
 

Net revenues

   $ 18,655           $ 18,655   

Cost of sales

     12,761        44      (b)      12,805   
  

 

 

        

 

 

 

Gross profit

     5,894             5,850   

Selling, general and administrative expenses

     2,973        46      (b)      3,019   

Asset impairment and exit costs

     (2          (2
  

 

 

        

 

 

 

Operating income

     2,923             2,833   

Interest and other expense, net

     9        500      (a)      509   

Royalty income from affiliates

     (55     55      (d)      —     
  

 

 

        

 

 

 

Earnings before income taxes

     2,969             2,324   

Provision for income taxes

     1,130        (243   (h)      887   
  

 

 

        

 

 

 

Net earnings

   $ 1,839           $ 1,437   
  

 

 

        

 

 

 

Pro forma earnings per share:

         

Basic

       (f)    $ 2.44   

Diluted

       (g)    $ 2.43   

Pro forma weighted average shares outstanding:

         

Basic

       (f)      588   

Diluted

       (g)      591   

 

(1) The change in our annual costs related to our becoming an independent, publicly traded company is not reflected above.

As a result of becoming an independent company and due to our restructuring activities, we expect our annual overhead cost structure to change. We estimate that the overhead savings associated with our restructuring program will offset the overhead dis-synergies resulting from our becoming an independent company. Further, we estimate that we will realize approximately $100 million of annual overhead cost savings from costs currently allocated to us that will be incurred by and remain in Kraft ParentCo.

See accompanying notes to the unaudited pro forma combined financial statements.

 

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Kraft Foods Group, Inc.

Unaudited Pro Forma Combined Balance Sheet

As of June 30, 2012

(in millions)

 

     Historical
Kraft Foods
Group, Inc.
    Pro Forma
Adjustments
   

Notes

  Pro Forma
Kraft Foods
Group, Inc.
 

ASSETS

        

Cash and cash equivalents

   $ 3        185     

(a)

  $ 188   

Receivables, net

     1,102        226     

(c)

    1,328   

Inventories, net

     2,048            2,048   

Deferred income taxes

     320            320   

Other current assets

     161            161   
  

 

 

       

 

 

 

Total current assets

     3,634            4,045   

Property, plant and equipment, net

     4,222            4,222   

Goodwill

     11,322            11,322   

Intangible assets, net

     2,632            2,632   

Prepaid pension assets

     16            16   

Deferred income taxes

     —             —     

Other assets

     63        97      (a)     160   
  

 

 

       

 

 

 

TOTAL ASSETS

   $ 21,889          $ 22,397   
  

 

 

       

 

 

 

LIABILITIES

        

Current portion of long-term debt

   $ 7          $ 7   

Due to Kraft ParentCo, net

     —          184      (c)     184   

Accounts payable

     1,336        297     

(c)

    1,633   

Accrued marketing

     411            411   

Accrued employment costs

     143            143   

Other current liabilities

     700        (112  

(b), (c)

    588   
  

 

 

       

 

 

 

Total current liabilities

     2,597            2,966   

Long-term debt

     5,988        3,973      (a)     9,961   

Deferred income taxes

     1,620        (1,201  

(a), (b), (c)

    419   

Accrued pension costs

     103        1,319     

(b)

    1,422   

Accrued postretirement costs

     —         2,823     

(b)

    2,823   

Other liabilities

     623        (120  

(b), (c)

    503   
  

 

 

       

 

 

 

TOTAL LIABILITIES

     10,931            18,094   

EQUITY

        

Common stock, no par value

     —         —      

(e)

    —    

Additional paid-in capital

     —         7,593     

(e)

    7,593   

Parent company investment

     11,473        (11,473  

(a), (b), (c), (e)

    —    

Accumulated other comprehensive losses

     (515     (2,775   (a), (b)     (3,290
  

 

 

       

 

 

 

TOTAL EQUITY

     10,958            4,303   
  

 

 

       

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 21,889          $ 22,397   
  

 

 

       

 

 

 

See accompanying notes to the unaudited pro forma combined financial statements.

 

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Kraft Foods Group, Inc.

Notes to Unaudited Pro Forma Combined Financial Statements

The unaudited pro forma combined financial statements as of June 30, 2012 and for the six months ended June 30, 2012 and for the year ended December 31, 2011 include the following adjustments:

 

  (a) In connection with our Spin-Off capitalization plan, which supports our and Kraft ParentCo obtaining investment grade credit ratings following the Spin-Off, we expect to incur a total of approximately $10 billion of borrowings. We also plan to distribute cash from operations to Kraft ParentCo through the Distribution Date, except for approximately $185 million of operating cash within our Canadian subsidiary, based on our estimates as of June 30, 2012 and subject to provisions of final tax rulings. Kraft ParentCo will apply the cash we distribute to it to reduce its debt over time while we increase our debt to the planned $10 billion level. To date, we have incurred and expect to incur the following debt comprised of long-term, fixed rate, senior unsecured notes:

 

Date Incurred

or to be Incurred

   Principal
Outstanding
     Weighted-Average
Interest Rate
   

Maturity

June 4, 2012

   $ 6.0 billion         3.9   $1 billion due in June 2015 and June 2017 and $2 billion due in June 2022 and June 2042

July 18, 2012

   $ 3.6 billion         6.5   $1.035 billion due in August 2018, $900 million due in February 2020, $878 million due in January 2039 and $787 million due in February 2040

Distribution Date

   $ 0.4 billion         7.9   June 2015
  

 

 

    

 

 

   
   $ 10.0 billion         5.0  

The $6.0 billion of notes issued on June 4, 2012 and the related deferred financing and related costs are reflected in our historical balance sheet as of June 30, 2012. See Note 6, “Debt,” to our unaudited interim condensed combined financial statements for additional information. On July 18, 2012, we issued $3.6 billion of notes in a debt exchange for certain of Kraft ParentCo’s then outstanding notes. In connection with the debt exchange, we have reflected the $3.6 billion of debt and approximately $126 million of debt issuance and related costs in long-term debt, long-term other assets and accumulated other comprehensive losses and a $410 million net long-term deferred tax liability related to the debt exchange. We have also reflected $400 million of senior unsecured notes related to the Global Snacks Business for which we have been and will continue to be the direct obligor. We have reflected approximately $4 million of debt issuance and related costs in long-term debt and long-term other assets related to the $400 million of notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information on our capitalization plan, our senior unsecured notes and the terms of Kraft ParentCo’s debt exchange.

Within our unaudited pro forma combined statements of earnings, we reflected pro forma interest expense based on a weighted-average 5.0% annual effective interest rate which relates to the $10 billion of debt we have incurred or expect to incur on or prior to the Distribution Date. Pro forma interest expense related to this debt was estimated to be approximately $500 million for the year ended December 31, 2011 and $250 million for the six months ended June 30, 2012.

 

  (b)

Certain of our eligible employees participate in the pension, postretirement and postemployment benefit plans offered by Kraft ParentCo. When we become a stand-alone,

 

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  independent company, we will assume these obligations and provide the benefits directly. Kraft ParentCo will transfer to us the plan liabilities and assets associated with our active and retired and other former employees. Additionally, we will assume certain net benefit plan liabilities for most of the Global Snacks Business’ retired and other former North American employees as of the Distribution Date. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Employee Matters Agreement.” The net benefit obligations we will assume will result in our recording estimated net benefit plan liabilities of $4,380 million, accumulated other comprehensive losses, net of tax, of $2,771 million, and $1,645 million of related deferred tax assets. The estimated incremental annual expense we expect to recognize is approximately $90 million, which reflects our estimate of the 2012 annual expense and is based on market conditions and benefit plan assumptions as of January 1, 2012. In the unaudited pro forma combined statements of earnings, we reflected this estimate for both the year ended December 31, 2011 and six months ended June 30, 2012, which reflects a prorated six-month $45 million incremental expense. Our estimates may change as we approach the Distribution Date and continue to refine our estimates of the net liability transfers as of that date. The actual assumed net benefit plan obligations and incremental expense could change significantly from our estimates.

 

  (c) While our historical financial statements reflect the allocation to us of certain assets and liabilities related to our North American Grocery Business, as of the Distribution Date, we anticipate assuming from, and transferring to, Kraft ParentCo certain obligations in their entirety to facilitate management, including the final payment or resolution, of these obligations. In total, based on our estimates and the value of these net liabilities as of June 30, 2012, we estimate transferring to Kraft ParentCo approximately $365 million of our net liabilities as follows:

 

   

We plan to assume an estimated $297 million related to certain North American trade accounts payable of the Global Snacks Business and to receive an estimated $226 million of certain North American trade accounts receivable of the Global Snacks Business. Within 60 days after the Distribution Date, there will be a true-up between Kraft ParentCo and us of the net cash associated with our assumption of the net trade payables and receivables of approximately $71 million; our targeted cash flows to distribute to Kraft ParentCo in connection with the Spin-Off of approximately $70 million; and a true-up of the net cash position in Canada of approximately $185 million. Based on these estimates, we anticipate net cash exchanged with Kraft ParentCo to be approximately $184 million to Kraft ParentCo. The actual amount of the net cash exchanged could vary based on operating activity and cash flows through the Distribution Date, but we do not expect any variance from our estimate to have a material impact on these pro forma financial statements.

 

   

We plan to transfer to Kraft ParentCo an estimated $298 million of primarily U.S. federal and certain foreign net tax liabilities and related deferred taxes. The obligation for U.S. state income taxes and Canadian federal and provincial income taxes attributable to the tax periods prior to the Spin-Off will be transferred to us, while the obligation for U.S. federal income taxes and substantially all foreign income taxes (excluding Canadian income taxes) attributable to the tax periods prior to the Spin-Off will be retained by Kraft ParentCo. Related deferred tax assets or deferred tax liabilities will also be transferred.

 

   

We plan to transfer to Kraft ParentCo an estimated $138 million of our workers’ compensation and other accrued insurance liabilities.

The transfers of these obligations to and from Kraft ParentCo will not impact our net earnings. The net liability amounts estimated as of June 30, 2012 may change substantially as we approach the Distribution Date. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” and “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement” for additional detail.

 

  (d)

Adjustment reflects the removal of royalty income Kraft ParentCo’s affiliates paid to us under various royalty arrangements. After the Spin-Off, we will no longer receive royalty income under these arrangements because we will not retain the rights to the intellectual property

 

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  underlying this royalty income. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Master Ownership and License Agreement Regarding Patents, Trade Secrets and Related Intellectual Property” and “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Master Ownership and License Agreement Regarding Trademarks and Related Intellectual Property” for more information.

 

  (e) Adjustment reflects the pro forma recapitalization of our equity. As of the Distribution Date, Kraft ParentCo’s net investment in our business will be exchanged to reflect the Distribution of our common stock to Kraft ParentCo’s shareholders. Kraft ParentCo’s shareholders will receive shares based on a distribution ratio of one share of our common stock for every three shares of Kraft ParentCo common stock owned as of the Record Date for the Distribution.

 

  (f) Pro forma basic earnings per share, or “EPS,” and pro forma weighted-average basic shares outstanding are based on the number of Kraft ParentCo weighted-average shares outstanding for basic EPS for the year ended December 31, 2011 and for the six months ended June 30, 2012, adjusted for the distribution ratio of one share of our common stock for every three shares of Kraft ParentCo common stock outstanding.

 

  (g) Pro forma diluted earnings per share and pro forma weighted-average diluted shares outstanding give effect to the potential dilution from common shares related to equity awards granted to our employees under Kraft ParentCo’s stock-based compensation programs. The actual effect on a go-forward basis will depend on various factors, including the employment of our personnel in one company or the other and the value of the equity awards at the time of the Spin-Off. We cannot fully estimate the dilutive effects at this time, though we believe an estimate based on applying the distribution ratio to the Kraft ParentCo weighted-average shares outstanding for diluted EPS provides a reasonable approximation of the potential dilutive effect of the equity awards.

 

  (h) The tax effects of adjustments made within the unaudited pro forma combined statements of earnings were estimated using a 37.6% marginal U.S. income tax rate for our primarily U.S.-related pro forma adjustments.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the other sections of this Information Statement, including our audited and unaudited condensed historical combined financial statements and the related notes, “Business” and “Unaudited Pro Forma Combined Financial Statements” and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. The forward-looking statements are subject to a number of important factors, including those factors discussed under “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements,” that could cause our actual results to differ materially from those indicated in the forward-looking statements.

Introduction

Management’s discussion and analysis of financial condition and results of operations accompanies our combined financial statements and provides additional information about our business, financial condition, liquidity and capital resources, cash flows and results of operations. We have organized the information as follows:

 

   

Overview. This section provides a brief description of the Spin-Off, our business, accounting basis of presentation and a brief summary of our results of operations.

 

   

Discussion and analysis. This section highlights items affecting the comparability of our financial results and provides an analysis of our combined and segment results of operations for the six months ended June 30, 2012 and 2011 and for each of the three years ended December 31, 2011.

 

   

Critical accounting policies and estimates. This section summarizes the accounting policies that we consider important to our financial condition and results of operations and which require significant judgment or estimates to be made in their application. We also discuss commodity cost trends impacting our historical results and which we expect will continue through the remainder of 2012.

 

   

Liquidity and capital resources. This section provides an overview of our historical and anticipated cash and financing activities in connection with the Spin-Off. We also review our historical sources and uses of cash in our operating, investing and financing activities. We summarize our current and planned debt and other long-term financial commitments.

 

   

Non-GAAP financial measures. This section discusses certain operational performance measures we use internally to evaluate our operating results and to make important decisions about our business. We also provide a reconciliation of these measures to the financial measures we have reported in our historical combined financial statements so you understand the adjustments we make to further evaluate our underlying operating performance.

 

   

Quantitative and qualitative disclosures about market risk. This section discusses how we monitor and manage market risk related to changing commodity prices, currency and interest rates. We also provide an analysis of how adverse changes in market conditions could impact our results based on certain assumptions we have provided. We discuss how we hedge certain of these risks to mitigate unplanned or adverse impacts to our operating results and financial condition.

 

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Overview

Spin-Off Transaction

On August 4, 2011, Kraft ParentCo announced plans to create two independent public companies: the Global Snacks Business and the North American Grocery Business. To effect the separation, Kraft ParentCo will undertake a series of transactions to separate net assets and entities. Following these transactions, Kraft ParentCo will hold the Global Snacks Business, and we, Kraft Foods Group, will hold the North American Grocery Business. Kraft ParentCo will then distribute our common stock pro rata to its shareholders. After the Spin-Off, we will operate as an independent, publicly traded company.

The Spin-Off is subject to a number of conditions, including the continued validity of the private letter ruling that Kraft ParentCo received from the IRS, the receipt and continued validity of a ruling from the CRA related to the Spin-Off, the effectiveness of the Registration Statement on Form 10 that was filed with the SEC in connection with the Spin-Off, the execution of agreements between the Global Snacks Business and the North American Grocery Business related to the Spin-Off, further diligence as appropriate and final approval from our Board. While our current target is to complete the Spin-Off on October 1, 2012, we cannot assure that the Spin-Off will be completed on the anticipated timeline or at all or that the terms of the Spin-Off will not change.

Description of the Company

Kraft Foods Group operates one of the largest consumer packaged food and beverage companies in North America. We manufacture and market convenient meals, refreshment beverages and coffee, cheese and other grocery products, primarily in the United States and Canada. Our product categories span all major meal occasions, both at home and in foodservice locations.

Over the last several years, we have made significant investments in product quality, marketing and innovation behind our iconic North American brands and have implemented a series of cost saving initiatives. The Spin-Off provides us the opportunity to further tailor our strategies for the North American Grocery Business to achieve greater operational focus and drive our return on investment. Our goals are to drive revenue growth in our key product categories and leverage category-leading profit margins to deliver strong free cash flow and a highly competitive dividend payout. To achieve these goals, we intend to build on our leading market positions, remain sharply focused on cost structure and superior execution and invest in employee and organization excellence.

Basis of Presentation

Our historical combined financial statements have been prepared on a stand-alone basis and are derived from Kraft ParentCo’s consolidated financial statements and accounting records. These historical combined financial statements reflect our financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States, or “U.S. GAAP.” The North American Grocery Business consists of Kraft ParentCo’s current U.S. and Canadian grocery, beverages, cheese, convenient meals, Planters and Corn Nuts businesses, including the related foodservice operations and certain of the grocery operations in Puerto Rico, as well as portions of its grocery export operations from the United States and Canada. See “Summary” and “Business” for additional information.

Our historical combined financial statements include certain expenses of Kraft ParentCo which were allocated to us for certain functions, including general corporate expenses related to finance, legal, information technology, human resources, compliance, shared services, insurance, employee benefits and incentives and stock-based compensation. These expenses have been allocated in our historical results of operations on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenue, operating income or headcount. We consider the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations may not be

 

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indicative of the actual expenses we would have incurred as an independent public company or of the costs we will incur in the future, and may differ substantially from the allocations we will agree to in the various separation agreements described under “Certain Relationships and Related Party Transactions.”

Certain of our eligible employees participate in the pension, postretirement and postemployment benefit plans offered by Kraft ParentCo. When we become a stand-alone, independent company, we will assume these obligations and provide the benefits directly. Kraft ParentCo will transfer to us the plan liabilities and assets associated with our active and retired and other former employees. Additionally, we will assume certain net benefit plan liabilities for most of the Global Snacks Business’ retired and other former North American employees as of the Distribution Date. The net benefit obligations we intend to assume will result in our recording estimated net benefit plan liabilities of $4,380 million, accumulated other comprehensive losses, net of tax, of $2,771 million, and $1,645 million of related deferred tax assets. The estimated incremental expense we expect to recognize is approximately $90 million for the year which is based on market conditions and benefit plan assumptions as of January 1, 2012. Our estimates may change as we approach the Distribution Date and continue to refine our estimates of the net liability transfers as of that date. The actual assumed net benefit plan obligations and incremental expense could change significantly from our estimates. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Employee Matters Agreement” and “Unaudited Pro Forma Combined Financial Statements” for additional information.

While our historical financial statements reflect the allocation to us of certain assets and liabilities related to our North American Grocery Business, as of the Distribution Date, we anticipate assuming from, and transferring to, Kraft ParentCo certain obligations in their entirety to facilitate management, including the final payment or resolution, of these obligations. In total, based on our estimates and the value of these net liabilities as of June 30, 2012, we estimate transferring to Kraft ParentCo approximately $365 million of our net liabilities. We plan to assume an estimated $71 million of net liabilities for certain North American trade accounts payable and receivables of the Global Snacks Business. We plan to transfer to Kraft ParentCo an estimated $298 million of primarily U.S. federal and certain foreign net tax liabilities and related deferred taxes. The obligation for U.S. state income taxes and Canadian federal and provincial income taxes attributable to the tax periods prior to the Spin-Off will be transferred to us, while the obligation for U.S. federal income taxes and substantially all foreign income taxes (excluding Canadian income taxes) attributable to the tax periods prior to the Spin-Off will be retained by Kraft ParentCo. Related deferred tax assets or deferred tax liabilities will also be transferred. We plan to transfer to Kraft ParentCo an estimated $138 million of our workers’ compensation and other accrued insurance liabilities. The transfers of these obligations to and from Kraft ParentCo will not impact our net earnings in any period. The net liability amounts estimated as of June 30, 2012 will change as we approach the Distribution Date and continue to update our estimates of the net transfers that we expect to occur as of the Distribution Date. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement,” “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement” and “Unaudited Pro Forma Combined Financial Statements” for additional information.

Also, in connection with the Spin-Off, Kraft ParentCo and we intend to redistribute Kraft ParentCo’s current debt between Kraft ParentCo and us such that both companies may have investment grade credit ratings following the Spin-Off. In addition, we expect to distribute substantially all of our cash, except for certain operating cash within our Canadian subsidiary, to Kraft ParentCo to allow Kraft ParentCo to reduce its debt over time while we increase our debt to the planned $10 billion level. To date, we issued $6.0 billion of aggregate principal amount of three-year, five-year, ten-year and thirty-year senior unsecured notes on June 4, 2012 and distributed the net proceeds from the unsecured notes to Kraft ParentCo following the issuance of the notes. In addition, on July 18, 2012, we issued

 

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$3.6 billion of aggregate principal amount of notes in a debt exchange for certain of Kraft ParentCo’s then outstanding notes. We also anticipate incurring approximately $400 million of long-term senior unsecured notes that are historically related to the Global Snacks Business and not allocated to us in our historical combined financial statements to complete the key elements of our capitalization plan in connection with the Spin-Off. See “—Liquidity and Capital Resources” for more information on our capitalization plan, our senior unsecured notes and Kraft ParentCo’s debt exchange.

On March 14, 2012, the Kraft ParentCo Board approved $1.7 billion of one-time expenses (excluding the costs to incur debt) and $0.4 billion in capital expenditures to facilitate the Spin-Off and optimize both the North American Grocery Business and Global Snacks Business. The one-time expenses include Spin-Off transaction and transition costs of approximately $0.6 billion to be incurred in 2012 and 2012-2014 Restructuring Program costs of approximately $1.1 billion expected to be incurred by the end of 2014. Kraft ParentCo currently expects to incur all Spin-Off transaction costs and most of the Spin-Off transition costs. While we cannot say with certainty what the allocation of the restructuring and implementation costs will be between Kraft ParentCo and us, we expect that a majority of these costs will be incurred either prior to the Spin-Off or by Kraft ParentCo, and we expect to fund our portion of the restructuring and implementation costs with cash from operations and financing activities. Kraft ParentCo also expects to incur an estimated $400 million to $800 million of Spin-Off financing and related costs to redistribute debt and secure investment grade credit ratings for both the North American Grocery Business and Global Snacks Business. Except for any one-time costs paid or expensed prior to the Spin-Off, which will be retained by Kraft ParentCo, Kraft ParentCo and we will each bear our own direct financing and related costs, which will be recognized in interest expense over the life of the related debt. We recorded $116 million of 2012-2014 Restructuring Program expenses, no one-time Spin-Off Costs and approximately $18 million of Spin-Off debt-related financing costs in our unaudited condensed combined statement of earnings for the six months ended June 30, 2012 and approximately $260 million of Spin-Off deferred financing and related costs in our unaudited condensed combined balance sheet as of June 30, 2012.

We expect to experience changes in our ongoing cost structure when we become an independent, publicly traded company and as a result of our restructuring activities. We estimate that the overhead savings associated with the 2012-2014 Restructuring Program will offset the overhead dis-synergies resulting from our becoming an independent company. Further, we estimate that we will realize approximately $100 million of annual overhead cost savings from costs currently allocated to us that will be incurred by and remain in Kraft ParentCo. See “Unaudited Pro Forma Combined Financial Statements” for additional information.

Kraft ParentCo and its affiliates pay royalties to us under various royalty arrangements. Amounts outstanding under these arrangements are considered settled for cash at the end of each reporting period and, as such, are included in parent company investment. Royalty income from affiliates was $28 million for the six months ended June 30, 2012, $23 million for the six months ended June 30, 2011, $55 million in 2011, $43 million in 2010 and $47 million in 2009. Following the Distribution Date, we will no longer receive this royalty income because we will not retain the rights to the intellectual property underlying this royalty income. See “Unaudited Pro Forma Combined Financial Statements,” “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Master Ownership and License Agreement Regarding Patents, Trade Secrets and Related Intellectual Property” and “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Master Ownership and License Agreement Regarding Trademarks and Related Intellectual Property” for additional information.

Due to these and other changes we anticipate in connection with the Spin-Off, the historical financial information included in this Information Statement may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented.

 

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Summary of Operating Results

The following summary is intended to provide a few highlights of the discussion and analysis that follows.

Six Months Ended June 30, 2012 and 2011

 

   

Net revenues increased 1.0% to $9.2 billion in the first six months of 2012 as compared to the same period in the prior year.

 

   

Organic Net Revenues, a non-GAAP financial measure we use to evaluate our underlying results, increased 2.4% to $9.3 billion in the first six months of 2012 as compared to the same period in the prior year. See “—Non-GAAP Financial Measures” below for a discussion of this financial measure and a reconciliation of Organic Net Revenues to net revenues.

 

   

Operating income increased 2.5% to $1.6 billion in the first six months of 2012 as compared to the same period in the prior year.

 

   

Adjusted Operating Income, a non-GAAP financial measure we use to evaluate our underlying results, increased 9.8% to $1.7 billion in the first six months of 2012 as compared to the same period in the prior year. See “—Non-GAAP Financial Measures” below for a discussion of this financial measure and a reconciliation of Adjusted Operating Income to operating income.

 

   

Net earnings increased 4.9% to $1.1 billion in the first six months of 2012 as compared to the same period in the prior year.

Years Ended December 31, 2011, 2010 and 2009

 

   

Net revenues increased 4.8% to $18.7 billion in 2011. In 2010, net revenues increased 3.0% to $17.8 billion.

 

   

Organic Net Revenues increased 5.8% to $18.2 billion in 2011 and increased 2.0% to $17.6 billion in 2010. See “—Non-GAAP Financial Measures” below for a discussion of this financial measure and a reconciliation of Organic Net Revenues to net revenues.

 

   

Operating income decreased 1.3% to $2.9 billion in 2011. In 2010, operating income decreased 0.5% to $3.0 billion.

 

   

Net earnings decreased 47.9% to $1.8 billion in 2011. In 2010, net earnings increased 62.7% to $3.5 billion. The 2011 decrease primarily related to the 2010 earnings and gain related to discontinued operations from the sale of the assets of our North American frozen pizza business.

 

   

Earnings from continuing operations decreased 2.5% to $1.8 billion in 2011. In 2010, earnings from continuing operations decreased 3.3% to $1.9 billion.

 

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Discussion and Analysis

Financial Results for the Six Months Ended June 30, 2012 and 2011

Items Affecting Comparability of Results for the Six Months Ended June 30, 2012 and 2011

2012-2014 Restructuring Program

On March 14, 2012, the Kraft ParentCo Board approved $1.1 billion of 2012-2014 Restructuring Program costs, reflecting primarily severance, asset disposals and other manufacturing-related one-time costs. The primary objective of the restructuring and implementation activities is to ensure that both the North American Grocery Business and Global Snacks Business are set up to operate efficiently and execute their respective business strategies upon separation of the companies and prospectively. The program is expected to be completed by the end of 2014.

While we cannot say with certainty what the allocation of the restructuring and implementation costs will be between Kraft ParentCo and us, we expect that a majority of these costs will be incurred either prior to the Spin-Off or by Kraft ParentCo, and we expect to fund our portion of the restructuring and implementation costs with cash from operations and financing activities.

During the six months ended June 30, 2012, we incurred restructuring costs of $112 million which were recorded within asset impairment and exit costs. See Note 5, “2012-2014 Restructuring Program,” to our unaudited condensed combined financial statements as of and for the six months ended June 30, 2012 for additional information.

Implementation Costs

Implementation costs are directly attributable to restructuring activities; however, they do not qualify for special accounting treatment as exit or disposal activities under U.S. GAAP. We believe the disclosure of implementation costs provides readers of our financial statements greater transparency to the total costs of our 2012-2014 Restructuring Program. We recorded implementation costs of $4 million in the six months ended June 30, 2012 within cost of sales and selling, general and administrative expenses. These costs primarily relate to reorganization costs related to our sales function and the optimization of information systems infrastructure.

Starbucks CPG Business

On March 1, 2011, the Starbucks Coffee Company, or “Starbucks,” took control of the Starbucks packaged coffee business, or the “Starbucks CPG business,” in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. The arbitration proceeding began on July 11, 2012 and is ongoing. The results of the Starbucks CPG business were included primarily in our U.S. Beverages and Canada & N.A. Foodservice segments through March 1, 2011. For additional details, see our discussion of legal proceedings in “Business—Legal Proceedings” and within our “Commitments and Contingencies” notes to our historical combined financial statements.

Provision for Income Taxes

Our effective tax rate was 34.5% for the six months ended June 30, 2012, compared to 36.6% for the six months ended June 30, 2011. The decrease in the effective tax rate is due to a higher estimated U.S. domestic production activities tax deduction in 2012, the anticipated availability of a U.S. foreign tax credit and comparable tax benefits against lower pre-tax earnings due to higher interest expense in the first six months of 2012 as compared to the same period in the prior year.

 

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Combined Results of Operations for the Six Months Ended June 30, 2012 and 2011

The following discussion compares our combined results of operations for the six months ended June 30, 2012 with the six months ended June 30, 2011.

 

     For the Six Months
Ended June 30,
               
     2012      2011      $ Change      % Change  
     (in millions)                

Net revenues

   $ 9,239       $ 9,146       $ 93         1.0

Operating income

     1,630         1,590         40         2.5

Net earnings

     1,071         1,021         50         4.9

Net Revenues. Net revenues increased $93 million (1.0%) to $9,239 million in the first six months of 2012, and Organic Net Revenues(1) increased $215 million (2.4%) to $9,270 million in the first six months of 2012, as follows.

 

Change in net revenues (by percentage point)

  

Higher net pricing

     4.4pp    

Unfavorable volume/mix

     (2.0)pp   
  

 

 

 

Total change in Organic Net Revenues (1)

     2.4%     

Impact of Starbucks CPG business cessation

     (1.0)pp    

Unfavorable foreign currency

     (0.4)pp    
  

 

 

 

Total change in net revenues

     1.0%     
  

 

 

 

 

(1) See “—Non-GAAP Financial Measures” for a reconciliation of Organic Net Revenues to net revenues.

Organic Net Revenue growth was driven by higher net pricing, partially offset by unfavorable volume/mix. Higher net pricing, primarily due to pricing actions taken in prior quarters, was realized across all reportable segments as we increased pricing to offset higher input costs. Unfavorable volume/mix, including a detriment of 1.3 pp due to the impact of product pruning, was driven primarily by lower shipments in all reportable business segments. The Starbucks CPG business cessation decreased net revenues by $91 million. Unfavorable foreign currency decreased net revenues by $31 million, due to the strength of the U.S. dollar relative to the Canadian dollar.

 

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Operating Income. Operating income increased $40 million (2.5%) to $1,630 million in the six months ended June 30, 2012, due to the following:

 

     Operating
Income
    Change  
     (in millions)     (percentage
point)
 

Operating Income for the Six Months Ended June 30, 2011

   $ 1,590     

Higher net pricing

     394        25.0pp   

Higher input costs

     (206     (13.1)pp   

Unfavorable volume/mix

     (128     (8.1)pp   

Lower selling, general and administrative expenses

     79        5.0pp   

Change in unrealized gains / losses on hedging activities

     37        2.3pp   

Decreased operating income from the Starbucks CPG business cessation

     (15     (1.0)pp   

Unfavorable foreign currency

     (5     (0.3)pp   
  

 

 

   

 

 

 

Total change in Adjusted Operating Income(1)

   $ 156        9.8%    
  

 

 

   

 

 

 

Adjusted Operating Income(1) for the Six Months Ended June 30, 2012

   $ 1,746     

2012-2014 Restructuring Program costs

     (116     (7.3)pp   
  

 

 

   

 

 

 

Operating Income for the Six Months Ended June 30, 2012

   $ 1,630        2.5%    
  

 

 

   

 

 

 

 

(1) See “—Non-GAAP Financial Measures” for a reconciliation of Adjusted Operating Income to operating income.

Higher net pricing, which reflected pricing actions taken in prior quarters, outpaced increased input costs during the first six months of 2012. The increase in input costs was driven by higher raw material costs partially offset by lower manufacturing costs. Unfavorable volume/mix was driven by lower shipments in all reportable segments. Total selling, general and administrative expenses decreased $97 million from the first six months of 2011. Excluding the impacts of the Starbucks CPG business cessation, foreign currency and 2012-2014 Restructuring Program costs, selling, general and administrative expenses decreased $79 million from the first six months of 2011 due primarily to timing of advertising and consumer promotion costs and effective overhead cost management. The change in unrealized gains / losses on hedging activities increased operating income by $37 million, as we recognized unrealized gains of $6 million in the first six months of 2012, versus unrealized losses of $31 million in the first six months of 2011. The impact of the Starbucks CPG business cessation decreased operating income by $15 million. Unfavorable foreign currency decreased operating income by $5 million, due to the strength of the U.S. dollar relative to the Canadian dollar.

As a result of the net effect of these drivers, operating income margin increased 0.2 percentage points, from 17.4% in the first six months of 2011 to 17.6% in the first six months of 2012. The margin increase was driven primarily by pricing actions taken in prior quarters, net of increased input costs and effective overhead cost management.

 

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Results of Operations by Reportable Segment for the Six Months Ended June 30, 2012 and 2011

Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery and Canada & N.A. Foodservice. In conjunction with the Spin-Off, we include the Planters and Corn Nuts businesses within our U.S. Grocery segment and our Puerto Rico and export operations within our Canada & N.A. Foodservice segment.

The following discussion compares our results of operations for each of our reportable segments for the six months ended June 30, 2012 with the six months ended June 30, 2011.

 

     For the Six Months
Ended June 30,
 
     2012      2011  
     (in millions)  

Net revenues:

     

U.S. Beverages

   $ 1,494       $ 1,610   

U.S. Cheese

     1,845         1,759   

U.S. Convenient Meals

     1,714         1,677   

U.S. Grocery

     2,315         2,229   

Canada & N.A. Foodservice

     1,871         1,871   
  

 

 

    

 

 

 

Net revenues

   $ 9,239       $ 9,146   
  

 

 

    

 

 

 

 

     For the Six Months
Ended June 30,
 
     2012     2011  
     (in millions)  

Operating income:

    

U.S. Beverages

   $ 232      $ 299   

U.S. Cheese

     323        277   

U.S. Convenient Meals

     222        204   

U.S. Grocery

     746        683   

Canada & N.A. Foodservice

     215        248   

Unrealized gains / (losses) on hedging activities

     6        (31

Certain U.S. pension plan costs

     (105     (66

General corporate expenses

     (9     (24
  

 

 

   

 

 

 

Operating income

   $ 1,630      $ 1,590   
  

 

 

   

 

 

 

As discussed in our “Segment Reporting” notes to our historical combined financial statements, management uses segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of our U.S. pension plan costs (which are a component of cost of sales and selling, general and administrative expenses) and general corporate expenses (which are a component of selling, general and administrative expenses). We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, the gains and losses on hedging activities are recorded within segment operating results. We exclude certain components of our U.S. pension plan costs from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets

 

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and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income.

On March 1, 2011, Starbucks took control of the Starbucks CPG business in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. The arbitration proceeding began on July 11, 2012 and is ongoing. The results of the Starbucks CPG business were included primarily in our U.S. Beverages and Canada & N.A. Foodservice segments through March 1, 2011.

In connection with our 2012-2014 Restructuring Program, we recorded restructuring charges of $112 million during the six months ended June 30, 2012. We also recorded implementation costs of $4 million for the six months ended June 30, 2012. We recorded the restructuring charges in operations, as a part of asset impairment and exit costs, while the implementation costs were recorded in cost of sales and operations, as a part of selling, general and administrative expenses. See Note 5, “2012-2014 Restructuring Program,” to our unaudited interim condensed combined financial statements for restructuring costs by segment.

Included within our segment results are intercompany sales with Kraft ParentCo subsidiaries which totaled $54 million in the first six months of 2012 and $49 million in the first six months of 2011.

U.S. Beverages

 

     For the Six Months
Ended June 30,
              
     2012      2011      $ Change     % Change  
     (in millions)        

Net revenues

   $ 1,494       $ 1,610       $ (116     (7.2 %) 

Segment operating income

     232         299         (67     (22.4 %) 

Net revenues decreased $116 million (7.2%), due to the impact of the Starbucks CPG business cessation (5.3 pp) and unfavorable volume/mix (3.7 pp), partially offset by higher net pricing (1.8 pp). Unfavorable volume/mix was driven primarily by lower shipments in Capri Sun ready-to-drink beverages due to higher sales in the fourth quarter of 2011 in advance of an announced increase in list prices, Maxwell House coffee and powdered beverages, which was partially offset by higher shipments in Kool-Aid ready-to-drink beverages, Gevalia coffee due to its introduction into the retail market and MiO liquid concentrate. Higher net pricing was due primarily to higher input cost-driven pricing in ready-to-drink and powdered beverages, partially offset by lower input cost-driven pricing in coffee.

Segment operating income decreased $67 million (22.4%), due primarily to higher raw material costs, unfavorable volume/mix, costs incurred for the 2012-2014 Restructuring Program and the impact of the Starbucks CPG business cessation. These unfavorable drivers were partially offset by higher net pricing and lower advertising and consumer promotion costs.

 

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U.S. Cheese

 

     For the Six Months
Ended June 30,
               
     2012      2011      $ Change      % Change  
     (in millions)         

Net revenues

   $ 1,845       $ 1,759       $ 86         4.9

Segment operating income

     323         277         46         16.6

Net revenues increased $86 million (4.9%), due to higher net pricing (7.8 pp), partially offset by unfavorable volume/mix (2.9 pp, including a detriment of approximately 0.7 pp due to product pruning). Higher net pricing, across all major cheese categories, was due to input cost-driven pricing actions. Unfavorable volume/mix was driven primarily by lower shipments in cultured, natural cheese, processed cheese and cream cheese categories, partially offset by higher shipments in snacking cheeses.

Segment operating income increased $46 million (16.6%), due primarily to higher net pricing, lower manufacturing costs and lower other selling, general and administrative expenses (excluding advertising and consumer promotion costs), partially offset by higher raw material costs (primarily higher dairy costs), costs incurred for the 2012-2014 Restructuring Program, unfavorable volume/mix and higher advertising and consumer promotion costs.

U.S. Convenient Meals

 

     For the Six Months
Ended June 30,
               
     2012      2011      $ Change      % Change  
     (in millions)         

Net revenues

   $ 1,714       $ 1,677       $ 37         2.2

Segment operating income

     222         204         18         8.8

Net revenues increased $37 million (2.2%), due to higher net pricing (2.0 pp) and favorable volume/mix (0.2 pp, net of a detriment of approximately 2.0 pp due to product pruning). Higher net pricing was due to input cost-driven pricing actions primarily related to hot dogs and Lunchables. Favorable volume/mix was primarily driven by higher shipments in lunch meats and bacon, partially offset by lower shipments in hot dogs.

Segment operating income increased $18 million (8.8%), due primarily to higher net pricing, lower manufacturing costs and lower other selling, general and administrative expenses (excluding advertising and consumer promotion costs), partially offset by higher raw material costs and costs incurred for the 2012-2014 Restructuring Program.

U.S. Grocery

 

     For the Six Months
Ended June 30,
               
     2012      2011      $ Change      % Change  
     (in millions)         

Net revenues

   $ 2,315       $ 2,229       $ 86         3.9

Segment operating income

     746         683         63         9.2

 

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Net revenues increased $86 million (3.9%), due to higher net pricing (6.0 pp), partially offset by unfavorable volume/mix (2.1 pp). Higher net pricing was realized across most key categories, including Planters nuts, Kraft macaroni & cheese dinners, pourable and spoonable dressings, ready-to-eat desserts and Cool Whip whipped topping. Unfavorable volume/mix was due primarily to lower shipments in Planters nuts, ready-to-eat desserts and pourable dressings, partially offset by higher shipments in Kraft macaroni & cheese dinners and dry packaged desserts.

Segment operating income increased $63 million (9.2%), due to higher net pricing, lower advertising and consumer promotion costs, lower other selling, general and administrative expenses and lower manufacturing costs, partially offset by higher raw material costs, unfavorable volume/mix and costs incurred for the 2012-2014 Restructuring Program.

Canada & N.A. Foodservice

 

     For the Six Months
Ended June 30,
              
     2012      2011      $ Change     % Change  
     (in millions)        

Net revenues

   $ 1,871       $ 1,871       $ —          0.0

Segment operating income

     215         248         (33     (13.3 %) 

Net revenues were flat as higher net pricing (3.3 pp) was offset by unfavorable volume/mix (1.4 pp, including a detriment of approximately 3.7 pp due to product pruning), unfavorable foreign currency (1.7 pp) and the impact of the Starbucks CPG business cessation (0.2 pp). In Canada, net revenues increased driven by higher net pricing and favorable volume/mix, partially offset by unfavorable foreign currency and the impact of the Starbucks CPG business cessation. In N.A. Foodservice, net revenues decreased due to unfavorable volume/mix and unfavorable foreign currency, partially offset by higher net pricing. In our Puerto Rico and export operations, net revenues increased driven by favorable volume/mix.

Segment operating income decreased $33 million (13.3%), due primarily to higher other selling, general and administrative expenses (excluding advertising and consumer promotion costs), higher raw material costs, expenses incurred for the 2012-2014 Restructuring Program, higher manufacturing costs, unfavorable volume/mix and unfavorable foreign currency, partially offset by higher net pricing and lower advertising and consumer promotion costs.

 

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Financial Results for the Years Ended December 31, 2011, 2010 and 2009

Items Affecting Comparability of Results for the Years Ended December 31, 2011, 2010

and 2009

Pizza Divestiture

On March 1, 2010, we completed the sale of the assets of our North American frozen pizza business, or “Frozen Pizza,” to Nestlé USA, Inc., or “Nestle,” for $3.7 billion. Our Frozen Pizza business was a component of our U.S. Convenient Meals and Canada & N.A. Foodservice segments. The sale included the DiGiorno, Tombstone and Jack’s brands in the United States, the Delissio brand in Canada and the California Pizza Kitchen trademark license. It also included two Wisconsin manufacturing facilities (Medford and Little Chute) and the leases for the pizza depots and delivery trucks. Approximately 3,600 of our employees transferred with the business to Nestlé. Accordingly, the results of our Frozen Pizza business have been reflected as discontinued operations on the combined statement of earnings, and prior period results of our continuing operations have been revised to exclude Frozen Pizza in a consistent manner. As a result of the divestiture, we recorded a gain on discontinued operations of $1,596 million, net of taxes, in 2010.

Pursuant to the Frozen Pizza business Transition Services Agreement, we agreed to provide certain sales, co-manufacturing, distribution, information technology, accounting and finance services to Nestlé for up to two years. As of December 31, 2011, these service agreements were substantially complete.

Summary results of operations for the Frozen Pizza business through March 1, 2010 were as follows:

 

     For the Years Ended December 31,  
             2010                     2009          
     (in millions)  

Net revenues

   $ 335      $ 1,632   
  

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     73        341   

Provision for income taxes

     (25     (123

Gain on discontinued operations, net of income taxes

     1,596        —     
  

 

 

   

 

 

 

Earnings and gain from discontinued operations, net of income taxes

   $ 1,644      $ 218   
  

 

 

   

 

 

 

Earnings from continuing operations before income taxes exclude allocated overheads related to the Frozen Pizza business of $25 million in 2010 and $108 million in 2009. The 2010 gain on discontinued operations from the sale of the Frozen Pizza business included tax expense of $1.2 billion.

The following assets of the Frozen Pizza business were divested (in millions):

 

                  

Inventories, net

   $ 102   

Property, plant and equipment, net

     317   

Goodwill

     475   
  

 

 

 

Divested assets of the Frozen Pizza business

   $    894   
  

 

 

 

Cost Savings Initiatives

Within our cost savings initiatives, we include certain costs along with exit and disposal costs that are directly attributable to those activities but that do not qualify for treatment as exit or disposal costs under U.S. GAAP. These costs, which we commonly refer to as other project costs or implementation

 

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costs, generally include the reorganization of operations and facilities, the discontinuance of product lines and the incremental expenses related to the closure of facilities. We believe the disclosure of these charges within our operating income provides greater transparency of the impact of these programs and initiatives on our operating results.

In connection with our cost savings initiatives in 2011, we reversed $18 million of cost savings initiative program costs across all segments. These reversals were primarily related to severance benefits that were accrued and not paid due to natural attrition or employees who accepted other open positions within Kraft ParentCo or our company.

In 2010, we recorded $33 million of charges, primarily severance costs for benefits for terminated employees, associated benefit plan costs and other related activities. These charges were recorded across all segments.

In 2009, we recorded $110 million of charges, primarily severance costs for benefits for terminated employees, associated benefit plan costs and other related activities. These charges were recorded across all segments.

Starbucks CPG Business

On March 1, 2011, Starbucks took control of the Starbucks CPG business in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of our supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. The arbitration proceeding began on July 11, 2012 and is ongoing. The results of the Starbucks CPG business were included primarily in our U.S. Beverages and Canada & N.A. Foodservice segments through March 1, 2011. For additional details, see our discussion of legal proceedings in “Business—Legal Proceedings” and within our “Commitments and Contingencies” notes to our historical combined financial statements.

Favorable Accounting Calendar Impact in 2011

Our fiscal year end is December 31. Our operating subsidiaries report results on the last Saturday of the fiscal year. Because we report results on the last Saturday of the year, and December 31, 2011 fell on a Saturday, our 2011 results included an extra week, or the “53rd week,” of operating results than in the prior two years which had 52 weeks. We estimate that the extra week positively impacted net revenues by approximately $225 million and operating income by approximately $63 million in 2011. The favorable impact to operating income was reinvested in the business.

Provision for Income Taxes

Our effective tax rate was 38.1% in 2011, 37.0% in 2010 and 34.7% in 2009. Our 2011 effective tax rate included net tax costs of $52 million from discrete one-time events, primarily from various U.S. federal and U.S. state tax audit developments during the year as well as the revaluation of state deferred tax assets and liabilities resulting from state tax legislation enacted in 2011.

Our 2010 effective tax rate included net tax costs of $32 million, primarily due to a $79 million write-off of deferred tax assets as a result of the U.S. health care legislation enacted in March 2010, partially offset by the federal and state impacts from the favorable resolution of a federal tax audit.

Our 2009 effective tax rate included net tax benefits of $52 million, primarily due to settlements with various state tax authorities and an agreement we reached with the IRS on specific matters related to years 2000 through 2003.

 

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Combined Results of Operations for the Years Ended December 31, 2011, 2010 and 2009

The following discussion compares our combined results of operations for 2011 with 2010 and 2010 with 2009.

2011 compared with 2010

 

     For the Years Ended
December 31,
              
     2011      2010      $ Change     % Change  
     (in millions)        

Net revenues

   $ 18,655       $ 17,797       $ 858        4.8%   

Operating income

     2,923         2,961         (38     (1.3%

Earnings from continuing operations

     1,839         1,887         (48     (2.5%

Net earnings

     1,839         3,531         (1,692     (47.9%

Net Revenues. Net revenues increased $858 million (4.8%) to $18,655 million in 2011, and Organic Net Revenues (1) increased $998 million (5.8%) to $18,248 million in 2011, as follows.

 

Change in net revenues (by percentage point)

  

Higher net pricing

     6.7pp    

Unfavorable volume/mix

     (0.9)pp   
  

 

 

 

Total change in Organic Net Revenues(1)

     5.8%     

Impact of divestitures

     (2.8)pp   

Impact of the 53rd week of shipments

     1.3pp    

Favorable foreign currency

     0.5pp    
  

 

 

 

Total change in net revenues

     4.8%     
  

 

 

 

 

(1) See “—Non-GAAP Financial Measures” for a reconciliation of Organic Net Revenues to net revenues.

Organic Net Revenue growth was driven by higher net pricing, partially offset by unfavorable volume/mix. Higher net pricing was reflected across all reportable segments as we increased pricing to offset higher input costs. Unfavorable volume/mix was driven primarily by lower shipments in all reportable business segments except U.S. Beverages. Divestitures (including for reporting purposes the Starbucks CPG business) had an unfavorable impact on net revenues. The 53rd week of shipments in 2011 increased net revenues by $225 million. Favorable foreign currency increased net revenues by $91 million, due to the strength of the Canadian dollar relative to the U.S. dollar.

 

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Operating Income. Operating income decreased $38 million (1.3%) to $2,923 million in 2011, due to the following:

 

     Operating
Income
    Change  
     (in millions)    

(percentage

point)

 

Operating Income for the Year Ended December 31, 2010

   $ 2,961     

Change in operating income

    

Higher pricing

     1,163        41.4pp    

Higher input costs

     (956     (34.0)pp   

Unfavorable volume/mix

     (151     (5.4)pp   

Lower selling, general and administrative expenses

     56        2.0pp    

Increased operating income from the 53rd week of shipments

     63        2.2pp    

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

     (130     (4.5)pp   

Change in unrealized gains/losses on hedging activities

     (92     (3.3)pp   

Favorable foreign currency

     15        0.5pp    

Other

     (6     (0.2)pp   
  

 

 

   

 

 

 

Total change in operating income

     (38     (1.3)%    
  

 

 

   

 

 

 

Operating Income for the Year Ended December 31, 2011

   $ 2,923     
  

 

 

   

Higher pricing outpaced increased input costs during 2011. The increase in input costs was driven by significantly higher raw material costs, partially offset by lower manufacturing costs. Unfavorable volume/mix was driven by declines in all reportable segments except U.S. Beverages. Total selling, general and administrative expenses decreased $93 million from 2010. Excluding the impact of the 53rd week of shipments, divestitures (including for reporting purposes the Starbucks CPG business) and foreign currency, selling, general and administrative expenses decreased $56 million from 2010. The 53rd week of shipments in 2011 added $63 million in operating income which was reinvested in the business. The impact of divestitures (including for reporting purposes the Starbucks CPG business) decreased operating income by $130 million. The change in unrealized gains/losses on hedging activities decreased operating income by $92 million, as we recognized unrealized losses of $63 million in 2011, versus unrealized gains of $29 million in 2010. Favorable foreign currency increased operating income by $15 million, due to the strength of the Canadian dollar versus the U.S. dollar. As a result of the net effect of these drivers, operating income margin decreased 0.9 percentage points, from 16.6% in 2010 to 15.7% in 2011. The margin decline was driven primarily by a decline in gross profit margin, reflecting the impact of the higher revenue base on the margin calculation, the unfavorable change in unrealized gains and the impact of divestitures (including for reporting purposes the Starbucks CPG business), partially offset by overhead leverage.

 

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2010 compared with 2009

 

     For the Years Ended
December 31,
              
     2010      2009      $ Change     % Change  
     (in millions)        

Net revenues

   $ 17,797       $ 17,278       $ 519        3.0%   

Operating income

     2,961         2,975         (14     (0.5%

Earnings from continuing operations

     1,887         1,952         (65     (3.3%

Net earnings

     3,531         2,170         1,361        62.7%   

Net Revenues. Net revenues increased $519 million (3.0%) to $17,797 million in 2010, and Organic Net Revenues(1) increased $341 million (2.0%) to $17,589 million in 2010 as follows.

 

Change in net revenues (by percentage point)

  

Higher net pricing

     1.6pp    

Favorable volume/mix

     0.4pp    
  

 

 

 

Total change in Organic Net Revenues(1)

     2.0%     

Favorable foreign currency

     1.1pp    

Impact of divestitures

     (0.1)pp   
  

 

 

 

Total change in net revenues

     3.0%     
  

 

 

 

 

(1) See “—Non-GAAP Financial Measures” for a reconciliation of Organic Net Revenues to net revenues.

Organic Net Revenue growth was driven by higher net pricing and favorable volume/mix. Higher net pricing was reflected across all reportable segments as we increased pricing to offset higher input costs. Favorable volume/mix was driven by higher shipments in U.S. Beverages, U.S. Convenient Meals and Canada & N.A. Foodservice, partially offset by lower shipments in U.S. Cheese and U.S. Grocery. Favorable foreign currency increased net revenues by $194 million, due to the strength of the Canadian dollar relative to the U.S. dollar. Divestitures during 2010 also had a small unfavorable impact on net revenues.

 

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Operating Income. Operating income decreased $14 million (0.5%) to $2,961 million in 2010, due to the following:

 

     Operating
Income
    Change  
     (in millions)     (percentage
point)
 

Operating Income for the Year Ended December 31, 2009

   $ 2,975     

Change in operating income

    

Higher pricing

     273        9.2pp    

Higher input costs

     (196     (6.5)pp   

Favorable volume/mix

     23        0.7pp    

Higher selling, general and administrative expenses

     (16     (0.6)pp   

Impact of divestitures

     6        0.2pp    

Change in unrealized gains on hedging activities

     (136     (4.6)pp   

Favorable foreign currency

     33        1.1pp    

Other

     (1     —         
  

 

 

   

 

 

 

Total change in operating income

     (14     (0.5)%   
  

 

 

   

 

 

 

Operating Income for the Year Ended December 31, 2010

   $ 2,961     
  

 

 

   

Higher pricing outpaced increased input costs during 2010. The increase in input costs was driven by significantly higher raw material costs, partially offset by lower manufacturing costs. Favorable volume/mix was driven by gains in U.S. Beverages, U.S. Convenient Meals and Canada & N.A. Foodservice, partially offset by declines in U.S. Grocery and U.S. Cheese. Total selling, general and administrative expenses increased $35 million from 2009. Excluding the impacts of divestitures and foreign currency, selling, general and administrative expenses increased $16 million versus the prior year due primarily to higher advertising and consumer promotion expenses. The change in unrealized gains on hedging activities decreased operating income by $136 million, as we recognized unrealized gains of $29 million in 2010, versus unrealized gains of $165 million in 2009. Favorable foreign currency increased operating income by $33 million, due to the strength of the Canadian dollar relative to the U.S. dollar. As a result of the net effect of these drivers, operating income margin decreased 0.6 percentage points, from 17.2% in 2009 to 16.6% in 2010. The margin decline was driven primarily by the decline in gross profit margin, reflecting the unfavorable change in unrealized gains on hedging activities, partially offset by overhead leverage.

 

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Results of Operations by Reportable Segment for the Years Ended December 31, 2011, 2010 and 2009

The following discussion compares our results of operations for each of our reportable segments for 2011 with 2010 and 2010 with 2009.

 

    For the Years Ended
December 31,
 
    2011     2010     2009  
    (in millions)  

Net revenues:

     

U.S. Beverages

  $ 3,028      $ 3,236      $ 3,081   

U.S. Cheese

    3,832        3,548        3,632   

U.S. Convenient Meals

    3,337        3,133        3,032   

U.S. Grocery

    4,593        4,333        4,298   

Canada & N.A. Foodservice

    3,865        3,547        3,235   
 

 

 

   

 

 

   

 

 

 

Net revenues

  $ 18,655      $ 17,797      $ 17,278   
 

 

 

   

 

 

   

 

 

 
    For the Years Ended
December 31,
 
    2011     2010     2009  
    (in millions)  

Operating income:

     

U.S. Beverages

  $ 450      $ 564      $ 511   

U.S. Cheese

    629        598        667   

U.S. Convenient Meals

    319        268        234   

U.S. Grocery

    1,316        1,246        1,187   

Canada & N.A. Foodservice

    482        474        405   

Unrealized gains / (losses) on hedging activities

    (63     29        165   

Certain U.S. pension plan costs

    (155     (144     (133

General corporate expenses

    (55     (74     (61
 

 

 

   

 

 

   

 

 

 

Operating income

  $ 2,923      $ 2,961      $ 2,975   
 

 

 

   

 

 

   

 

 

 

Included within our segment results are intercompany sales with Kraft ParentCo subsidiaries which totaled $100 million in 2011, $79 million in 2010 and $83 million in 2009.

On March 1, 2011, Starbucks took control of the Starbucks CPG business in grocery stores and other channels. Starbucks did so without our authorization and in what we contend is a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business. The dispute is in arbitration in Chicago, Illinois. We are seeking appropriate remedies, including payment of the fair market value of the supply and license agreement, plus the premium this agreement specifies, prejudgment interest under New York law and attorney’s fees. Starbucks has counterclaimed for damages. The arbitration proceeding began on July 11, 2012 and is ongoing. The results of the Starbucks CPG business were included primarily in our U.S. Beverages and Canada & N.A. Foodservice segments through March 1, 2011.

In 2011, the unfavorable $63 million net change in unrealized gains/(losses) on hedging activities primarily resulted from higher commodity hedge losses, partially offset by gains on currency forward contracts. In 2010, the favorable $29 million net change in unrealized gains/(losses) on hedging activities primarily resulted from gains associated with commodity hedge contracts. In 2009, the favorable $165 million net change in unrealized gains/(losses) on hedging activities primarily resulted from the transfer of unrealized losses on energy derivatives that were realized and reflected in segment operating income in 2009.

 

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U.S. Beverages

 

     For the Years Ended
December 31,
              
     2011      2010      $ Change     % Change  
     (in millions)        

Net revenues

   $ 3,028       $ 3,236       $ (208     (6.4%

Segment operating income

     450         564         (114     (20.2%
     For the Years Ended
December 31,
              
     2010      2009      $ Change     % Change  
     (in millions)        

Net revenues

   $ 3,236       $ 3,081       $ 155        5.0%   

Segment operating income

     564         511         53        10.4%   

2011 compared with 2010

Net revenues decreased $208 million (6.4%) in 2011, due to the impact of the Starbucks CPG business cessation (14.3 pp) and unfavorable volume/mix (0.2 pp), partially offset by higher net pricing (6.8 pp) and the impact of the 53rd week of shipments (1.3 pp). Unfavorable volume/mix was driven primarily by lower shipments in mainstream coffee, primarily Maxwell House and Gevalia coffee (in our direct-to-consumer business), partially offset by the introduction of MiO liquid concentrate and higher shipments in ready-to-drink beverages, primarily Capri Sun and Kool-Aid, and Tassimo coffee. Higher net pricing was due primarily to input cost-driven pricing actions in coffee.

Segment operating income decreased $114 million (20.2%) due primarily to the impact of the Starbucks CPG business cessation. Segment operating income benefited from the remaining effects of higher net pricing, lower manufacturing costs, favorable volume mix, the impact of the 53rd week of shipments and lower advertising and consumer promotion costs, which more than offset higher raw material costs.

2010 compared with 2009

Net revenues increased $155 million (5.0%) in 2010, due to favorable volume/mix (4.4 pp) and higher net pricing (0.6 pp). Favorable volume/mix was driven primarily by higher shipments in ready-to-drink beverages, primarily Kool-Aid and Capri Sun; coffee, primarily Maxwell House, Starbucks and Tassimo; and powdered beverages, primarily Tang.

Segment operating income increased $53 million (10.4%) due to favorable volume/mix, lower manufacturing costs, higher net pricing and lower other selling, general and administrative expenses, partially offset by higher raw material costs and higher advertising and consumer promotion costs.

 

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U.S. Cheese

 

     For the Years Ended
December 31,
              
     2011      2010      $ Change     % Change  
     (in millions)        

Net revenues

   $ 3,832       $ 3,548       $ 284        8.0%   

Segment operating income

     629         598         31        5.2%   
     For the Years Ended
December 31,
              
     2010      2009      $ Change     % Change  
     (in millions)        

Net revenues

   $ 3,548       $ 3,632       $ (84     (2.3%

Segment operating income

     598         667         (69     (10.3%

2011 compared with 2010

Net revenues increased $284 million (8.0%) in 2011, due to higher net pricing (8.2 pp) and the impact of the 53rd week of shipments (1.3 pp), partially offset by unfavorable volume/mix (1.1 pp) and the impact of divestitures (0.4 pp). Higher net pricing, across most major cheese categories, was due to input cost-driven pricing actions. Unfavorable volume/mix was driven primarily by lower shipments in sandwich, cream cheese and recipe cheese categories, partially offset by higher shipments in cultured, natural cheese and grated cheese categories.

Segment operating income increased $31 million (5.2%) due primarily to higher net pricing, lower other selling, general and administrative expenses (including a termination fee received due to the restructuring of a service contract), lower manufacturing costs, the impact of the 53rd week of shipments and the 2010 loss on the divestiture of our Bagelfuls operations, partially offset by higher raw material costs (primarily higher dairy costs), unfavorable volume/mix and higher advertising and consumer promotion costs.

2010 compared with 2009

Net revenues decreased $84 million (2.3%) in 2010, due to unfavorable volume/mix (4.9 pp) and the impact of divestitures (0.4 pp), partially offset by higher net pricing (3.0 pp). Unfavorable volume/mix was driven by lower shipments across most cheese categories. Higher net pricing, across all cheese categories, was due to input cost-driven pricing, partially offset by increased promotional spending.

Segment operating income decreased $69 million (10.3%) due to higher raw material costs (primarily higher dairy costs), unfavorable volume/mix, higher advertising and consumer promotion costs and a loss on the divestiture of our Bagelfuls operations, partially offset by higher net pricing, lower manufacturing costs, lower other selling, general and administrative expenses and the impact of divestitures.

 

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U.S. Convenient Meals

 

     For the Years Ended
December 31,
               
     2011      2010      $ Change      % Change  
     (in millions)         

Net revenues

   $ 3,337       $ 3,133       $ 204         6.5%   

Segment operating income

     319         268         51         19.0%   
     For the Years Ended
December 31,
               
     2010      2009      $ Change      % Change  
     (in millions)         

Net revenues

   $ 3,133       $ 3,032       $ 101         3.3%   

Segment operating income

     268         234         34         14.5%   

2011 compared with 2010

Net revenues increased $204 million (6.5%) in 2011, due to higher net pricing (5.9 pp) and the impact of the 53rd week of shipments (1.4 pp), partially offset by unfavorable volume/mix (0.8 pp). Higher net pricing was due to input cost-driven pricing actions primarily related to bacon, lunch meats, hot dogs and Lunchables combination meals. Unfavorable volume/mix was driven primarily by lower shipments in bacon and hot dogs, partially offset by higher shipments in lunch meats and Lunchables combination meals.

Segment operating income increased $51 million (19.0%) due primarily to higher net pricing, lower manufacturing costs, lower other selling, general and administrative expenses and the impact of the 53rd week of shipments, partially offset by higher raw material costs, higher advertising and consumer promotion costs and unfavorable volume/mix.

2010 compared with 2009

Net revenues increased $101 million (3.3%) in 2010, due to favorable volume/mix (3.0 pp) and higher net pricing (0.3 pp). Favorable volume/mix was driven by higher shipments in hot dogs, Lunchables combination meals and lunch meats. Higher net pricing was driven by input-cost driven pricing, mostly offset by increased promotional spending.

Segment operating income increased $34 million (14.5%) due to lower manufacturing costs, lower other selling, general and administrative expenses, favorable volume/mix and higher net pricing, partially offset by higher raw material costs and higher advertising and consumer promotion costs.

 

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U.S. Grocery

 

     For the Years Ended
December 31,
               
     2011      2010      $ Change      % Change  
     (in millions)         

Net revenues

   $ 4,593       $ 4,333       $ 260         6.0%   

Segment operating income

     1,316         1,246         70         5.6%   
     For the Years Ended
December 31,
               
     2010      2009      $ Change      % Change  
     (in millions)         

Net revenues

   $ 4,333       $ 4,298       $ 35         0.8%   

Segment operating income

     1,246         1,187         59         5.0%   

2011 compared with 2010

Net revenues increased $260 million (6.0%) in 2011, due to higher net pricing (6.9 pp) and the impact of the 53rd week of shipments (1.3 pp), partially offset by unfavorable volume/mix (2.2 pp). Higher net pricing was reflected across most grocery categories including Planters nuts, spoonable dressings, Kraft macaroni & cheese dinners, dry packaged desserts and ready-to-eat desserts. Unfavorable volume/mix was driven by lower shipments, primarily spoonable dressings, Planters nuts, ready-to-eat desserts, barbecue sauces, dessert toppings and dry packaged desserts, partially offset by the introduction of Planters peanut butter and higher shipments in Kraft macaroni & cheese dinners.

Segment operating income increased $70 million (5.6%) due primarily to higher net pricing, the impact of the 53rd week of shipments, lower other selling, general and administrative expenses, lower manufacturing costs and lower advertising and consumer promotion costs, partially offset by higher raw material costs and unfavorable volume/mix.

2010 compared with 2009

Net revenues increased $35 million (0.8%) in 2010, due to higher net pricing (1.4 pp), partially offset by unfavorable volume/mix (0.6 pp). Higher net pricing, across most key categories, was primarily related to Kraft macaroni & cheese dinners, pourable dressings, ready-to-eat desserts and dry packaged desserts. Unfavorable volume/mix was due primarily to lower shipments across most key categories, including pourable dressings, ready-to-eat desserts, spoonable dressings and dry packaged desserts, partially offset by higher shipments in Planters nuts.

Segment operating income increased $59 million (5.0%) due primarily to higher net pricing, lower manufacturing costs and lower other selling, general and administrative expenses, partially offset by unfavorable volume/mix and higher advertising and consumer promotion costs.

 

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Canada & N.A. Foodservice

 

     For the Years Ended
December 31,
               
     2011      2010      $ Change      % Change  
     (in millions)         

Net revenues

   $ 3,865       $ 3,547       $ 318         9.0%   

Segment operating income

     482         474         8         1.7%   
     For the Years Ended
December 31,
               
     2010      2009      $ Change      % Change  
     (in millions)         

Net revenues

   $ 3,547       $ 3,235       $ 312         9.6%   

Segment operating income

     474         405         69         17.0%   

2011 compared with 2010

Net revenues increased $318 million (9.0%) in 2011, due primarily to higher net pricing (5.9 pp), favorable foreign currency (2.6 pp) and the impact of the 53rd week of shipments (1.3 pp), partially offset by the impact of the cessation of the Starbucks CPG business (0.5 pp) and unfavorable volume/mix (0.3 pp). In Canada, net revenues increased, driven primarily by higher net pricing, favorable foreign currency and the impact of the 53rd week of shipments, partially offset by the impact of the cessation of the Starbucks CPG business. In N.A. Foodservice, net revenues increased, driven primarily by higher net pricing, the impact of the 53rd week of shipments and favorable foreign currency, partially offset by unfavorable volume/mix. In Puerto Rico and U.S. exports, net revenue increased due to higher shipments.

Segment operating income increased $8 million (1.7%) due primarily to higher net pricing, favorable foreign currency and the impact of the 53rd week of shipments, mostly offset by higher raw material costs, higher other selling, general and administrative expenses and unfavorable volume/mix.

2010 compared with 2009

Net revenues increased $312 million (9.6%) in 2010, due to the significant impact of favorable foreign currency (6.0 pp), higher net pricing (2.4 pp) and favorable volume/mix (1.2 pp). In Canada, net revenues increased, driven by favorable foreign currency, favorable volume/mix due to higher shipments in our Canadian grocery, cheese and convenient meals retail businesses and higher net pricing. In N.A. Foodservice, net revenues increased, driven by higher net pricing and favorable foreign currency, partially offset by unfavorable volume/mix (unfavorable product mix, net of higher shipments).

Segment operating income increased $69 million (17.0%) due primarily to higher net pricing, favorable volume/mix, favorable foreign currency and lower advertising and consumer promotion costs, partially offset by higher raw material costs.

 

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Critical Accounting Policies and Estimates

Note 2, “Summary of Significant Accounting Policies,” to our audited combined financial statements as of December 31, 2011 and 2010 and for each of the three years ended December 31, 2011, includes a summary of the significant accounting policies we used to prepare our historical combined financial statements. The following is a review of the more significant assumptions and estimates, as well as the accounting policies we used to prepare our historical combined financial statements.

Principles of Combination

The combined annual and interim financial statements include our net assets and results of our operations as described above. All significant intracompany transactions and accounts within our combined businesses have been eliminated.

Intercompany transactions between Kraft ParentCo and us are reflected in the historical combined financial statements. Intercompany transactions with Kraft ParentCo or its affiliates are reflected in the combined statements of cash flows as net transfers to Kraft ParentCo and its affiliates within financing activities and in the combined balance sheets within the parent company investment. The parent company investment equity balance represents Kraft ParentCo’s historical investment in us and the net effect of transactions with and allocations from Kraft ParentCo.

Our fiscal year end is December 31. Our operating subsidiaries report results on the last Saturday of the fiscal year. Because we report results on the last Saturday of the year, and December 31, 2011 fell on a Saturday, our 2011 results included the 53rd week of operating results. We estimate that the extra week positively impacted net revenues by approximately $225 million and operating income by approximately $63 million in 2011. The favorable impact to operating income was reinvested in the business.

Use of Estimates

We prepare our historical combined financial statements in accordance with U.S. GAAP, which requires us to make accounting policy elections, estimates and assumptions that affect a number of amounts in our historical combined financial statements. Significant accounting policy elections, estimates and assumptions include, among others, allocation methods used to allocate net assets and expenses from Kraft ParentCo, including defined benefit and stock-based compensation expenses; goodwill and intangible assets; long-lived assets; marketing program accruals; insurance and self-insurance reserves and income taxes. We base our estimates on historical experience and other assumptions that we believe are reasonable. If actual amounts differ from estimates, we include the revisions in our combined results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our historical combined financial statements.

Inventories

Inventories are stated at the lower of cost or market. We value all our inventories using the average cost method. We also record inventory allowances for overstocked and obsolete inventories due to ingredient and packaging changes.

Long-Lived Assets

We review long-lived assets, including amortizable intangible assets, for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of assets held for use, we group assets and liabilities at the lowest level for which cash

 

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flows are separately identifiable. If we determine an impairment exists, we calculate the loss based on estimated fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

Goodwill and Intangible Assets

We test goodwill and non-amortizable intangible assets for impairment at least once a year in the fourth quarter. We assess goodwill impairment risk by first performing a qualitative review of entity-specific, industry, market and general economic factors for each reporting unit. If significant potential goodwill impairment risk exists for a specific reporting unit, we apply a two-step quantitative test. The first step compares the reporting unit’s estimated fair value with its carrying value. We estimate a reporting unit’s fair value using a 20-year projection of discounted cash flows which incorporates planned growth rates, market-based discount rates and estimates of residual value. We used a market-based, weighted-average cost of capital of 6.8% to discount the projected cash flows of those operations. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, industry and economic conditions and our actual results and conditions may differ over time. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value. We test non-amortizable intangible assets for impairment by comparing the fair value of each intangible asset with its carrying value. We determine fair value of non-amortizable intangible assets using planned growth rates, market-based discount rates and estimates of royalty rates. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value.

Definite-lived intangible assets are amortized over their estimated useful lives and evaluated for impairment as long-lived assets.

In 2011, 2010 and 2009, there were no impairments of goodwill or non-amortizable intangible assets. In 2011, we noted one reporting unit in our goodwill testing, Planters and Corn Nuts within our U.S. Grocery segment, which continued to be sensitive primarily to ongoing significant input cost pressure. Planters and Corn Nuts had $1,170 million of goodwill as of December 31, 2011, and its excess fair value over the carrying value of its net assets improved from 12% in 2010 to 19% in 2011. While the reporting unit passed the first step of the impairment test by a substantial margin, if its operating income were to decline significantly in the future, it would adversely affect the estimated fair value of the reporting unit. If input costs were to continue to rise, we expect to take further pricing actions as we have done in 2011. However, if we are unsuccessful in these efforts, it would decrease profitability, negatively affect the estimated fair value of the Planters and Corn Nuts reporting unit and could lead to a potential impairment in the future.

Insurance and Self-Insurance

We use a combination of insurance and self-insurance for a number of risks, including workers’ compensation, general liability, automobile liability, product liability and our obligation for employee health care benefits. Liabilities associated with the risks are estimated by considering historical claims experience and other actuarial assumptions.

Revenue Recognition

We recognize revenues when title and risk of loss pass to customers, which generally occurs upon shipment or delivery of goods. Revenues are recorded net of consumer incentives and trade promotions and include all shipping and handling charges billed to customers. Provisions for product returns and customer allowances are also recorded as reductions to revenues within the same period that the revenue is recognized. Shipping and handling costs are classified as part of cost of sales.

 

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Marketing and Research and Development

We promote our products with advertising, consumer incentives and trade promotions. These programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. Consumer incentive and trade promotion activities are recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization and redemption rates. For interim reporting purposes, advertising and consumer incentive expenses are charged to operations as a percentage of volume, based on estimated volume and related expense for the full year. We do not defer costs on our year-end combined balance sheet and all marketing costs are recorded as an expense in the year incurred. Advertising expense was $535 million in 2011, $540 million in 2010 and $477 million in 2009. We expense costs as incurred for product research and development. Research and development expense was $198 million in 2011, $185 million in 2010 and $194 million in 2009. We record marketing and research and development expenses within selling, general and administrative expenses.

Environmental Costs

We are subject to laws and regulations relating to the protection of the environment. We accrue for environmental remediation obligations on an undiscounted basis when amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change. Recoveries of environmental remediation costs from third parties are recorded as assets when recovery of those costs is deemed probable. As of December 31, 2011, we were involved in 67 active actions and as of June 30, 2012, we were involved in 64 active actions in the United States under the Superfund legislation (and other similar actions and legislation) related to our current operations and certain closed, inactive or divested operations for which we retain liability. We are subject to applicable multi-national, national and local environmental laws and regulations in the countries in which we do business. We have specific programs across our business units designed to meet applicable environmental compliance requirements.

As of December 31, 2011 and June 30, 2012, we accrued an immaterial amount for environmental remediation. Based on information currently available, we believe that the ultimate resolution of existing environmental remediation actions and our compliance in general with environmental laws and regulations will not have a material effect on our financial condition. However, we cannot quantify with certainty the potential impact of future compliance efforts and environmental remediation actions.

Stock-based Compensation

Our employees have historically participated in Kraft ParentCo’s stock-based compensation plans. Stock-based compensation expense has been allocated to us based on the awards and terms previously granted to our employees. The stock-based compensation was initially measured at the fair value of the awards on the grant date and is recognized in the financial statements over the period the employees are required to provide services in exchange for the awards. The fair value of our option awards is measured on the grant date using the Black-Scholes option-pricing model. The fair value of performance awards of restricted stock is based on the Kraft ParentCo stock price at the grant date and the assessed probability of meeting future performance targets. The fair value of restricted and deferred stock awards is based on the number of units granted and Kraft ParentCo’s stock price on the grant date. See our “Stock Benefit Plans” notes to our historical combined financial statements for additional information. Stock-based compensation expense allocated to us was $27 million for the six months ended June 30, 2012, $25 million for the six months ended June 30, 2011, $51 million in 2011, $49 million in 2010 and $52 million in 2009.

 

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Pension and Other Postemployment Benefit Plans

Kraft ParentCo provides defined benefit pension, postretirement health care, defined contribution and multiemployer pension and medical benefits to our eligible employees and retirees. As such, these liabilities are not reflected in our combined balance sheets. As of the Distribution Date, we expect to record the net benefit plan obligations related to these plans and reflect them in our combined balance sheet. See “Unaudited Pro Forma Combined Financial Statements” for additional information.

Our combined statements of earnings include expense allocations for these benefits which were determined based on a review of personnel by business unit and based on allocations of corporate and other shared functional personnel. We consider the expense allocation methodology and results to be reasonable for all periods presented.

Total Kraft ParentCo benefit plan net expenses allocated to us were $497 million in 2011, $486 million in 2010 and $464 million in 2009 and are detailed below. The Kraft ParentCo benefit plan net expenses allocated to us were $314 million for the six months ended June 30, 2012 and $239 million for the six months ended June 30, 2011. These costs are reflected in our cost of sales and selling, general and administrative expenses. These costs were funded through intercompany transactions with Kraft ParentCo which are now reflected within the parent company investment equity balance.

 

     Allocated from
Kraft ParentCo Plans
 
         2011              2010              2009      
     (in millions)  

Pension plan cost

   $ 261       $ 248       $ 235   

Postretirement health care cost

     160         166         157   

Employee savings plan cost

     54         52         52   

Multiemployer pension plan cost

     2         2         2   

Multiemployer medical plan cost

     20         18         18   
  

 

 

    

 

 

    

 

 

 

Net expense

   $ 497       $ 486       $ 464   
  

 

 

    

 

 

    

 

 

 

Certain pension plans in our Canadian operations, or the “Canadian Pension Plans,” and our postemployment benefit plans, or collectively, the “Kraft Foods Group Plans,” are our direct obligations and have been recorded within our historical combined financial statements. We record amounts relating to these Kraft Foods Group Plans based on calculations specified by U.S. GAAP. These calculations require the use of various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases and turnover rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. As permitted by U.S. GAAP, we generally amortize any effect of the modifications over future periods. We believe that the assumptions used in recording our Canadian Pension Plan obligations are reasonable based on our experience and advice from our actuaries. See our “Pension and Other Postemployment Benefit Plans” notes to our historical combined financial statements for a discussion of the assumptions used.

We recorded the following amounts in earnings for the Kraft Foods Group Plans during the years ended December 31, 2011, 2010 and 2009:

 

        
     Kraft Foods Group Plans  
         2011              2010              2009      
     (in millions)  

Canadian Pension Plans costs

   $ 14       $ 9       $ 9   

Postemployment benefit plans costs

     19         4         5   
  

 

 

    

 

 

    

 

 

 

Net expense

   $ 33       $ 13       $ 14   
  

 

 

    

 

 

    

 

 

 

 

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The 2011 net expense of $33 million increased $20 million over the prior year. The cost increase primarily related to higher pension plan costs, including settlement costs and higher amortization of the net loss from experience differences, and the incorporation of a Canadian postemployment plan into our obligations. The 2010 net expense of $13 million decreased an insignificant amount over the 2009 amount.

In 2011, we contributed $22 million and our employees contributed $2 million to our Canadian Pension Plans. Based on current tax law and minimum funding requirements, we estimate that 2012 pension contributions would be approximately $39 million. Our actual contributions may be different due to many factors, including changes in tax and other benefit laws, significant differences between expected and actual pension asset performance or interest rates or other factors.

We expect our 2012 net expense for the Kraft Foods Group Plans to decrease, primarily due to the drop off of the one-time cost in 2011 of incorporating a Canadian postemployment plan into our obligations, partially offset by a weighted-average decrease of 75 basis points in our discount rate assumption for our Canadian Pension Plans. Our net expense for the Kraft Foods Group Plans was $13 million for the six months ended June 30, 2012 and $6 million for the six months ended June 30, 2011.

Our 2012 expected rate of return on plan assets decreased to 6.80% from 7.36% for our Canadian Pension Plans. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. We attempt to maintain our target asset allocation by rebalancing between asset classes as we make contributions and monthly benefit payments.

While we do not anticipate further changes in the 2012 assumptions for our Canadian Pension Plans, as a sensitivity measure, a fifty basis point change in our discount rate or a fifty basis point change in the expected rate of return on plan assets would have the following effects, increase / (decrease) in cost, as of December 31, 2011:

 

     Fifty Basis Point  
     Increase          Decrease  
     (in millions)  

Effect of change in discount rate on pension costs

   $ (5      $ 5   

Effect of change in expected rate of return on plan assets on pension costs

     (3        3   

Financial Instruments

As we operate primarily in North America but source our commodities on global markets and periodically enter into financing or other arrangements abroad, we use a variety of risk management strategies and financial instruments to manage commodity price, foreign currency exchange rate and interest rate risks. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. One way we do this is through actively hedging our risks through the use of derivative instruments.

Derivatives are recorded on our combined balance sheets at fair value, which fluctuates based on changing market conditions. Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive earnings / (losses) within equity until the underlying hedged items are recognized in net earnings. Accordingly, we record deferred cash flow hedge gains or losses in cost of sales when the related

 

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inventory is sold and in interest and other expense, net, when the related debt interest expense is recorded. Cash flows from derivative instruments are also classified in the same manner as the underlying hedged items in the combined statement of cash flows. For additional information on the location of derivative activity within our operating results, see our “Financial Instruments” notes to our historical combined financial statements.

To qualify for hedge accounting, a specified level of hedging effectiveness between the hedging instrument and the item being hedged must be achieved at inception and maintained throughout the hedged period. Any hedging ineffectiveness is recognized in net earnings when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. We formally document our risk management objectives, strategies for undertaking the various hedge transactions, the nature of and relationships between the hedging instruments and hedged items and method for assessing hedge effectiveness. Additionally, for qualified hedges of forecasted transactions, we specifically identify the significant characteristics and expected terms of the forecasted transactions. If it becomes probable that a forecasted transaction will not occur, the hedge will no longer be effective and all of the derivative gains or losses would be recognized in earnings in the current period.

When we use financial instruments, we are exposed to credit risk that a counterparty might fail to fulfill its performance obligations under the terms of our agreement. We minimize our credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure we have with each counterparty and monitoring the financial condition of our counterparties. We also maintain a policy of requiring that all significant, non-exchange traded derivative contracts with a duration of greater than one year be governed by an International Swaps and Derivatives Association master agreement. We are also exposed to market risk as the value of our financial instruments might be adversely affected by a change in foreign currency exchange rates, commodity prices or interest rates. We manage market risk by incorporating monitoring parameters within our risk management strategy that limit the types of derivative instruments and derivative strategies we use and the degree of market risk that we hedge with derivative instruments.

Commodity cash flow hedges. We are exposed to price risk related to forecasted purchases of certain commodities that we primarily use as raw materials. We enter into commodity forward contracts primarily for coffee beans, meat products, sugar, wheat and dairy products. Commodity forward contracts generally are not subject to the accounting requirements for derivative instruments and hedging activities under the normal purchases exception. We also use commodity futures and options to hedge the price of certain input costs, including dairy products, coffee beans, meat products, wheat, corn products, soybean oils, sugar and natural gas. Some of these derivative instruments are highly effective and qualify for hedge accounting treatment. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes.

Foreign currency cash flow hedges. We use various financial instruments to mitigate our exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. These instruments may include forward foreign exchange contracts and foreign currency options. We primarily use these instruments to hedge our exposure to the Canadian dollar.

Interest rate cash flow hedges. We use derivative instruments, including interest rate swaps, as part of our interest rate risk management strategy. As a matter of policy, we do not use highly leveraged derivative instruments for interest rate risk management. We primarily use interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment.

 

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Income Taxes

For purposes of the historical combined financial statements, our income tax expense and deferred tax balances have been estimated as if we filed income tax returns on a stand-alone basis separate from Kraft ParentCo. As a stand-alone entity, our deferred taxes and effective tax rate may differ from those in the historical periods.

We recognize tax benefits in our financial statements when our uncertain tax positions are more likely than not to be sustained upon audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

We recognize deferred tax assets for deductible temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.

New Accounting Guidance

See Note 2, “Summary of Significant Accounting Policies,” to our audited combined financial statements as of December 31, 2011 and 2010 and for each of the three years ended December 31, 2011, and Note 1, “Background and Basis of Presentation,” to our unaudited condensed combined financial statements as of June 30, 2012 and for the six months ended June 30, 2012 and 2011, for a discussion of new accounting standards and significant accounting policies.

Contingencies

See our “Commitments and Contingencies” notes to our historical combined financial statements.

Commodity Trends

We purchase large quantities of commodities, including dairy products, coffee beans, meat products, wheat, corn products, soybean and vegetable oils, nuts and sugar and other sweeteners. In addition, we use significant quantities of resins and cardboard to package our products, and natural gas to operate our factories and warehouses. We continuously monitor worldwide supply and cost trends of these commodities so we can act quickly to obtain ingredients and packaging needed for production.

The most significant cost component of our cheese products are dairy commodities, including milk and cheese. We purchase our dairy raw material requirements from independent third parties such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, substantially influence the price for milk and other dairy products. The most significant cost component of our coffee products is green coffee beans, which we purchase on world markets. Quality and availability of supply, changes in the value of the U.S. dollar in relation to certain other currencies and consumer demand for coffee products impact coffee bean prices. Significant cost components in our meat business include pork, beef and poultry, which we purchase on domestic markets. Livestock feed costs and the global demand for U.S. meats influence the prices of these meat products. Other significant cost components in our grocery products are grains, including wheat, sugar and soybean oil.

During 2011, our aggregate commodity costs increased primarily due to the higher costs of dairy products, coffee beans, meat products, packaging materials, grains and oils costs. We expect a higher cost environment and commodity cost volatility to continue in 2012. During the six months ended June 30, 2012, our aggregate commodity costs increased as compared to the same period in the prior year, primarily as a result of higher packaging, energy, grains, oils, cocoa, sugar, meat, coffee beans and dairy costs. As noted earlier in our discussion of our historical operating results, we have addressed higher commodity costs primarily through higher pricing, lower manufacturing costs due to our end-to-end cost management program and lower discretionary spending. We expect to continue to use these measures to address further commodity cost increases.

 

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Liquidity and Capital Resources

Historically, Kraft ParentCo has provided financing, cash management and other treasury services to us. Our cash balances are swept by Kraft ParentCo and historically, we have received funding from Kraft ParentCo for our operating and investing cash needs. We expect Kraft ParentCo will continue to sweep our cash balances until the Distribution Date, except for certain operating cash within our Canadian subsidiary estimated to be approximately $185 million as of June 30, 2012. Cash transferred to and from Kraft ParentCo has historically been recorded as intercompany payables and receivables which are reflected in the parent company investment in the accompanying historical combined financial statements.

In connection with the Spin-Off, we entered into a 364-day senior unsecured revolving credit facility on March 8, 2012, with borrowing capacity of $4.0 billion. On July 18, 2012, we effected a mandatory $2.6 billion reduction of the unused commitment under the facility, leaving us with $1.4 billion of borrowing capacity under the facility. Until the consummation of the Spin-Off, Kraft ParentCo guarantees our borrowings under the facility. We may borrow advances up to the aggregate amount of the unused commitments under the facility on or after March 8, 2012 and prior to the termination of the facility, which is scheduled for March 7, 2013. All committed borrowings under the facility will bear interest at a variable annual rate based on LIBOR or a defined base rate, at our election, plus an applicable margin based on (i) for any date prior to the consummation of the Spin-Off, the ratings of Kraft ParentCo’s long-term senior unsecured indebtedness and (ii) for any date on or following the consummation of the Spin-Off, the ratings of our long-term senior unsecured indebtedness. We intend to use the proceeds of this facility, as necessary, to support our working capital needs and for other general corporate purposes. As of August 15, 2012, no amounts were borrowed or outstanding under the credit facility.

In addition, we entered into a five-year senior unsecured revolving credit facility on May 18, 2012, with borrowing capacity of $3.0 billion. Until the consummation of the Spin-Off, Kraft ParentCo guarantees our borrowings under this facility. We may borrow advances up to the aggregate amount of the unused commitments under the facility on or after May 18, 2012 and prior to the termination of the facility, which is scheduled for May 17, 2017, unless the Spin-Off has not been consummated on or prior to March 29, 2013, in which case the facility will mature and the commitments thereunder will terminate on March 29, 2013. All committed borrowings under the facility will bear interest at a variable annual rate based on LIBOR or a defined base rate, at our election, plus an applicable margin based on (i) for any date prior to the consummation of the Spin-Off, the ratings of Kraft ParentCo’s long-term senior unsecured indebtedness and (ii) for any date on or following the consummation of the Spin-Off, the ratings of our long-term senior unsecured indebtedness. The revolving credit agreement requires us to maintain a minimum total shareholders’ equity (excluding accumulated other comprehensive income or losses and any income or losses recognized in connection with “mark-to-market” accounting in respect of pension and other retirement plans). The revolving credit agreement also contains customary representations, covenants and events of default. We intend to use the proceeds of this facility to support our working capital needs and for other general corporate purposes. As of August 15, 2012, no amounts were borrowed or outstanding under the credit facility.

Also, in connection with the Spin-Off, Kraft ParentCo and we intend to redistribute Kraft ParentCo’s current debt between Kraft ParentCo and us such that both companies may have investment grade credit ratings following the Spin-Off. To effect this redistribution, we have incurred or expect to incur $10 billion of debt through primarily long-term debt issuances, including debt exchanges with respect to certain of Kraft ParentCo’s existing debt obligations. In addition, we expect to distribute cash, including proceeds from any debt we incur, to Kraft ParentCo to allow Kraft ParentCo to reduce its debt over time while we increase our debt to the planned capital structure. As part of our capitalization plan, we issued $6.0 billion of aggregate principal amount of three-year, five-year, ten-year and thirty-year senior unsecured notes on June 4, 2012 and distributed the net proceeds from the unsecured notes to Kraft ParentCo following the issuance of the notes. In July, we incurred $3.6 billion of debt in a debt

 

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exchange with Kraft ParentCo’s noteholders. We also anticipate incurring approximately $400 million of long-term senior unsecured notes that are historically related to the Global Snacks Business and not allocated to us in our historical combined financial statements to complete the key elements of our capitalization plan in connection with the Spin-Off. None of the $4 billion of debt migrated from Kraft ParentCo after June 30, 2012 will generate cash proceeds. The terms of our senior unsecured notes and Kraft ParentCo’s debt exchange are described below under “—Debt.”

We believe that cash generated from our operating activities, our revolving credit facilities and financing available from Kraft ParentCo prior to the Distribution Date or other sources will provide sufficient liquidity to meet our working capital needs, planned capital expenditures and future contractual and other obligations.

Net Cash Used in / Provided by Operating Activities

Net cash provided by operating activities was $1,101 million in the first six months of 2012 and $1,158 million in the first six months of 2011. Cash provided by operating activities decreased in the first six months of 2012 over the corresponding period in the prior year primarily due to a higher level of accounts receivable resulting from increased sales as well as lower accrued liabilities, partially offset by favorable inventory positions and increased earnings.

Net cash provided by operating activities was $2.7 billion in 2011, $828 million in 2010 and $3.0 billion in 2009. The increase in operating cash flows in 2011 primarily related to the prior year payment of taxes in connection with the 2010 Frozen Pizza divestiture and the favorable timing of the collection of receivables and the payment of our accounts payable, partially offset by increased inventory levels. The decrease in operating cash flows in 2010 primarily related to payment of taxes in connection with the Frozen Pizza divestiture, the unfavorable timing of the collection of receivables and increased inventory levels, partially offset by increased earnings.

Net Cash Used in / Provided by Investing Activities

Net cash used in investing activities was $179 million in the first six months of 2012 as compared to $104 million in the first six months of 2011. The increase is attributable to capital expenditures which were $181 million in the first six months of 2012 and $104 million in the first six months of 2011. Capital expenditures include investments in our business for growth, new products and productivity initiatives as well as investments in our 2012-2014 Restructuring Program. We expect 2012 capital investments to be approximately $500 million. We expect to fund these expenditures with cash from operations.

Net cash used in investing activities was $401 million in 2011, net cash provided by investing activities was $3.3 billion in 2010 and net cash used in investing activities was $513 million in 2009. In 2010, we received $3.7 billion of proceeds from the sale of the Frozen Pizza business. Capital expenditures funded by operating activities were $401 million in 2011, $448 million in 2010 and $513 million in 2009. The 2011 capital expenditures were primarily made to modernize manufacturing facilities and support new product and productivity initiatives.

Net Cash Provided by / Used in Financing Activities

Net cash used in financing activities was $919 million in the first six months of 2012 and $1,049 million in the first six months of 2011. Net transfers to Kraft ParentCo and its affiliates were $6,606 million in the first six months of 2012 compared with $1,116 million in the first six months of 2011. The transfers to Kraft ParentCo and its affiliates in 2012 were primarily related to the net proceeds we received from our $6.0 billion debt issuance in June 2012 and cash generated from operating activities. The transfers to Kraft ParentCo and its affiliates in 2011 were primarily related to cash generated from operating activities.

 

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Net cash used in financing activities was $2.3 billion in 2011, $4.1 billion in 2010 and $2.5 billion in 2009. Net transfers to Kraft ParentCo and its affiliates were $2.2 billion in 2011, $4.0 billion in 2010 and $2.3 billion in 2009. The net cash used in 2009 also included $205 million in repayments of long-term debt.

Debt

Our total debt was $5,995 million at June 30, 2012, $35 million at December 31, 2011 and $39 million at December 31, 2010, and, prior to the debt issuance in the current year, consisted entirely of capital lease obligations. The weighted-average remaining term of our debt was 14.6 years at June 30, 2012 and 8.6 years at December 31, 2011. As of August 6, 2012, on a pro forma basis giving effect to the Spin-Off, we would have had approximately $10.0 billion of long-term debt. As of June 30, 2012, we had $1.4 billion of borrowing availability under our 364-day senior unsecured revolving credit facility and an additional $3.0 billion of borrowing availability under our five-year senior unsecured revolving credit facility.

In connection with the Spin-Off and our related capitalization plan, on June 4, 2012, we issued $1.0 billion aggregate principal amount of 1.625% Notes due June 2015, $1.0 billion aggregate principal amount of 2.250% Notes due June 2017, $2.0 billion aggregate principal amount of 3.500% Notes due June 2022 and $2.0 billion aggregate principal amount of 5.000% Notes due June 2042. The notes are subject to certain customary covenants, including limitations on our ability, with significant exceptions, to incur debt secured by liens above a certain threshold; engage in certain sale and leaseback transactions above a certain threshold; and consolidate, merge, convey or transfer our assets substantially as an entirety. In addition, upon a change of control, we will be required to make an offer to purchase the notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest to the date of repurchase. The notes will be our senior unsecured obligations and rank equally in right of payment with our existing and future senior unsecured indebtedness. In connection with the issuance of the notes, Kraft ParentCo and we also entered into a registration rights agreement dated as of June 4, 2012 with the initial purchasers of the notes, which sets forth our obligations to register the notes under the Securities Act within 365 days of June 4, 2012. Until the consummation of the Spin-Off, Kraft ParentCo will guarantee the notes on a senior unsecured basis. We distributed the net proceeds from the offering to Kraft ParentCo following the issuance of the notes to fund repurchases or redemptions by Kraft ParentCo of its indebtedness and for its general corporate purposes.

On July 18, 2012, Kraft ParentCo completed a debt exchange in which $3.6 billion of Kraft ParentCo’s debt was exchanged for our debt as part of the Spin-Off-related capitalization plans. No cash was generated from the exchange. The general terms of the $3.6 billion of notes are:

 

   

$1,035 million of notes due August 23, 2018 at a fixed annual interest rate of 6.125%. Interest is payable semiannually beginning August 23, 2012. This debt was issued in exchange for $596 million of Kraft ParentCo’s 6.125% Notes due in February 2018 and $439 million of Kraft ParentCo’s 6.125% Notes due in August 2018.

 

   

$900 million of notes due February 10, 2020 at a fixed annual interest rate of 5.375%. Interest is payable semiannually beginning August 10, 2012. This debt was issued in exchange for an approximately equal principal amount of Kraft ParentCo’s 5.375% Notes due in February 2020.

 

   

$878 million of notes due January 26, 2039 at a fixed annual interest rate of 6.875%. Interest is payable semiannually beginning July 26, 2012. This debt was issued in exchange for approximately $233 million of Kraft ParentCo’s 6.875% Notes due in January 2039, approximately $290 million of Kraft ParentCo’s 6.875% Notes due in February 2038, approximately $185 million of Kraft ParentCo’s 7.000% Notes due in August 2037 and approximately $170 million of Kraft ParentCo’s 6.500% Notes due in November 2031.

 

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$787 million of notes due February 9, 2040 at a fixed annual interest rate of 6.500%. Interest is payable semiannually beginning August 9, 2012. This debt was issued in exchange for an approximately equal principal amount of Kraft ParentCo’s 6.500% Notes due in 2040.

On the Distribution Date, prior to the Distribution, we also expect to incur approximately $400 million of senior unsecured notes historically related to the Global Snacks Business and not allocated to us in our historical combined financial statements for which we have been and will continue to be the direct obligor. The notes have a fixed 7.55% annual interest rate and mature in June 2015. The notes are subject to certain customary covenants, including limitations on our ability, with significant exceptions, to incur subsidiary debt or debt secured by liens above a certain threshold; engage in certain sale and leaseback transactions above a certain threshold; and consolidate, merge, convey or transfer our assets substantially as an entirety. The notes are our senior unsecured obligations and rank equally in right of payment with our existing and future senior unsecured indebtedness. This debt will be migrated from Kraft ParentCo and so we do not anticipate any cash proceeds from incurring this debt.

Guarantee of Kraft ParentCo Debt

As of June 30, 2012, Kraft ParentCo and three of its indirect wholly owned subsidiaries are joint and several guarantors of $1.0 billion of indebtedness issued by Cadbury Schweppes US Finance LLC, an indirect wholly owned subsidiary of Kraft ParentCo, and maturing on October 1, 2013. Following the Spin-Off, Cadbury Schweppes US Finance LLC and two of the subsidiary guarantors will be indirect wholly owned subsidiaries of Kraft ParentCo. The third subsidiary guarantor will become our indirect wholly owned subsidiary. Kraft ParentCo will agree to indemnify us pursuant to the Separation and Distribution Agreement in the event our subsidiary is called upon to satisfy its obligation under the guarantee.

Dividend Policy

We anticipate paying a highly competitive dividend. We currently expect that the equivalent of $0.64 of the existing $1.16 annual dividend per share paid by Kraft ParentCo would be attributable to us. The timing, declaration, amount and payment of any future dividends to shareholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that we will pay a dividend in the future or that we will continue to pay any dividend if we do commence paying dividends. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock” and “Dividend Policy.”

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

We have no material off-balance sheet arrangements other than the guarantees and contractual obligations that are discussed below.

Guarantees

As discussed in our “Commitments and Contingencies” notes to our historical combined financial statements, we have third-party guarantees primarily covering the long-term obligations of our vendors. As part of those transactions, we guarantee that third parties will make contractual payments or achieve performance measures. The carrying amount of our third-party guarantees on our combined

 

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balance sheet and the maximum potential payments under these guarantees was $21 million at June 30, 2012 and $22 million at December 31, 2011. Substantially all of these guarantees expire at various times through 2018.

In addition, we were contingently liable for guarantees related to our own performance totaling $195 million at June 30, 2012 and $154 million at December 31, 2011. These include letters of credit related to dairy commodity purchases and other letters of credit.

Guarantees do not have, and we do not expect them to have, a material effect on our liquidity.

Aggregate Contractual Obligations

During the first six months of 2012, our long-term debt and expected interest payments increased as we issued $6.0 billion of senior unsecured notes. See Note 6, “Debt,” to our unaudited condensed combined financial statements for additional information on our long-term debt issuances. The following table summarizes our contractual obligations at June 30, 2012 for our total long-term debt and interest expense for the periods presented and as adjusted for the changes in our long-term debt through June 30, 2012 and the related impact on our interest expense. Amounts in the table do not reflect the additional $4.0 billion of debt we have incurred or expect to incur after June 30, 2012 in connection with the Spin-Off, as described under “—Liquidity and Capital Resources.”

 

     Payments Due for the 12-Month Period Ending June 30,  
       Total           2013          2014-15          2016-17        2018 and
Thereafter
 
     (in millions)  

Long-term debt(1)

   $ 6,032       $ 7       $ 1,007       $ 1,006       $ 4,012   

Interest expense

     3,861         209         418         384         2,850   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,893       $ 216       $ 1,425       $ 1,390       $ 6,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts represent the expected cash payments of our long-term debt and capital leases and do not include unamortized bond premiums or discounts.

The following table summarizes our contractual obligations at December 31, 2011. Amounts in the table do not reflect the $10 billion of debt we have incurred or expect to incur in connection with the Spin-Off described under “—Liquidity and Capital Resources,” and the allocation of certain net liabilities between Kraft ParentCo and us described under “Unaudited Pro Forma Combined Financial Statements.”

 

     Payments Due  
     Total          2012          2013-14          2015-16          2017 and
Thereafter
 
     (in millions)  

Capital leases(1)

   $ 46         $ 10         $ 10         $ 8         $ 18   

Operating leases(2)

     503           118           175           93           117   

Purchase obligations(3):

                      

Inventory and production costs

     3,144           2,791           348           5           —     

Other

     303           153           150           —             —     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 
     3,447           2,944           498           5           —     

Other long-term liabilities(4)

     13           1           10           2           —     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 
   $ 4,009         $ 3,073         $ 693         $ 108         $ 135   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

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(1) Amounts represent the expected cash payments of our capital leases, which includes interest expenses.
(2) Operating leases represent the minimum rental commitments under non-cancelable operating leases.
(3) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 days). Any amounts reflected on the combined balance sheet as accounts payable and accrued liabilities are excluded from the table above.
(4) The following long-term liabilities included on the combined balance sheet are excluded from the table above: accrued pension costs, income taxes, insurance accruals and other accruals. We are unable to reliably estimate the timing of the payments (or contributions beyond 2012, in the case of accrued pension costs) for these items. Based on current tax law and minimum funding requirements, we estimate that pension contributions to our Canadian Pension Plans would be approximately $39 million in 2012. We also expect that our net pension cost will increase to approximately $20 million in 2012. As of December 31, 2011, our total liability for income taxes, including uncertain tax positions and associated accrued interest and penalties, was $339 million. We estimate that approximately $127 million will be paid in the next 12 months. We are not able to reasonably estimate the timing of future cash flows related to accrued tax liabilities beyond 12 months due to uncertainties in the timing and outcomes of current and future tax audits.

Non-GAAP Financial Measures

We use certain non-GAAP financial measures to budget, make operating and strategic decisions and evaluate our performance. We have disclosed the following measures so that you have the same financial data that we use to assist you in making comparisons to our historical operating results and analyzing our underlying performance.

We believe that the presentation of these non-GAAP financial measures, when considered together with our U.S. GAAP financial measures and the reconciliations to the corresponding U.S. GAAP financial measures, provides you with a more complete understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Because non-GAAP financial measures may vary among companies, the non-GAAP financial measures presented in this Information Statement may not be comparable to similarly titled measures used by other companies. Our use of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for any U.S. GAAP financial measure. A limitation of the non-GAAP financial measures is that they exclude items detailed below which have an impact on our U.S. GAAP reported results. The best way this limitation can be addressed is by evaluating our non-GAAP financial measures in combination with our U.S. GAAP reported results and carefully evaluating the following tables which reconcile U.S. GAAP reported figures to the non-GAAP financial measures.

 

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Organic Net Revenues

We use the non-GAAP financial measure “Organic Net Revenues” and corresponding growth measures. The difference between “Organic Net Revenues” and “net revenues” (the most comparable U.S. GAAP financial measure) is that Organic Net Revenues exclude the impact of divestitures (including for reporting purposes the Starbucks CPG business), the impact of the 53rd week of shipments in 2011 and currency. We believe that Organic Net Revenues better reflect the underlying growth from the ongoing activities of our business and provide improved comparability of results.

 

    For the Six Months Ended
June 30,
                  
    2012          2011          $ Change     % Change   
    (in millions)        
             

Organic Net Revenues

  $ 9,270         $ 9,055         $ 215        2.4

Impact of foreign currency

    (31        —             (31     (0.4 )pp 

Impact of the Starbucks CPG
business cessation

    —             91           (91     1.0 pp 
 

 

 

      

 

 

      

 

 

   

 

 

 

Net revenues

  $ 9,239         $ 9,146         $ 93        1.0
 

 

 

      

 

 

      

 

 

   

 

 

 
    For the Years Ended
December 31,
                  
    2011          2010          $ Change     % Change  
    (in millions)        

Organic Net Revenues

  $ 18,248         $ 17,250         $ 998        5.8

Impact of divestitures(1)

    91           547           (456     (2.8 )pp 

Impact of the 53rd week of shipments

    225           —             225        1.3 pp 

Impact of foreign currency

    91           —             91        0.5 pp 
 

 

 

      

 

 

      

 

 

   

 

 

 

Net revenues

  $ 18,655         $ 17,797         $ 858        4.8
 

 

 

      

 

 

      

 

 

   

 

 

 
    For the Years Ended
December 31,
                  
    2010          2009          $ Change     % Change  
    (in millions)        

Organic Net Revenues

  $ 17,589         $ 17,248         $ 341        2.0

Impact of divestitures(2)

    14           30           (16     (0.1 )pp 

Impact of foreign currency

    194           —             194        1.1 pp 
 

 

 

      

 

 

      

 

 

   

 

 

 

Net revenues

  $ 17,797         $ 17,278         $ 519        3.0
 

 

 

      

 

 

      

 

 

   

 

 

 

 

  (1) Impact of divestitures includes for reporting purposes the Starbucks CPG business.
  (2) The Starbucks CPG business net revenues were included in 2009 and 2010 within our Organic Net Revenues.

 

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Adjusted Operating Income

We use the non-GAAP financial measure “Adjusted Operating Income” and corresponding growth measures. The difference between “Adjusted Operating Income” and “operating income” (the most comparable U.S. GAAP financial measure) is that Adjusted Operating Income excludes 2012-2014 Restructuring Program costs and any allocated Spin-Off Costs that may be allocated to us in 2012. We believe that Adjusted Operating Income provides improved comparability of operating results.

 

     For the Six Months Ended
June  30,
                  
     2012          2011          $ Change     % Change  
     (in millions)  

Adjusted Operating Income

   $ 1,746         $ 1,590         $ 156        9.8

2012-2014 Restructuring Program

     (116        —             (116     (7.3 )pp 
  

 

 

      

 

 

      

 

 

   

 

 

 

Operating income

   $ 1,630         $ 1,590         $ 40        2.5 % 
  

 

 

      

 

 

      

 

 

   

 

 

 

Quantitative and Qualitative Disclosures about Market Risk

As we operate primarily in North America but source our commodities on global markets and periodically enter into financing or other arrangements abroad, we use financial instruments to manage commodity price, foreign currency exchange rate and interest rate risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. We maintain commodity price, foreign currency and interest rate risk management policies that principally use derivative instruments to reduce significant, unanticipated earnings fluctuations that may arise from volatility in commodity prices, foreign currency exchange rates and interest rates. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes. See Note 2, “Summary of Significant Accounting Policies,” to our audited combined financial statements and our “Financial Instruments” notes to our historical combined financial statements for further details of our commodity price, foreign currency and interest rate risk management policies and the types of derivative instruments we use to hedge those exposures.

 

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Value at Risk

We use a value at risk, or “VAR,” computation to estimate: 1) the potential one-day loss in pre-tax earnings of our commodity price and foreign currency-sensitive derivative financial instruments; and 2) the potential one-day loss in the fair value of our intere