Edgar Filing: KRAFT FOODS INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2010

		OR

¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number 1-16483

LOGO

Kraft Foods Inc.

(Exact name of registrant as specified in its charter)


Virginia		52-2284372
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Three Lakes Drive, Northfield, Illinois		60093
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (847) 646-2000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At July 30, 2010, there were 1,744,057,736 shares of the registrant’s common stock outstanding.

Kraft Foods Inc.

Table of Contents


		Page No.
PART I –	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Earnings for the Three Months and Six Months Ended June 30, 2010 and 2009	1

	Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009	2

	Condensed Consolidated Statements of Equity for the Year Ended December 31, 2009 and the Six Months Ended June 30, 2010	3

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

Item 4.	Controls and Procedures	51

PART II –	OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 6.	Exhibits	53

Signature		54

In this report, “Kraft Foods,” “we,” “us” and “our” refers to Kraft Foods Inc. and subsidiaries, and “Common Stock” refers to Kraft Foods’ Class A common stock.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)


	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2010		2009			2010		2009

Net revenues	$	12,253	$	9,781		$	23,571	$	18,760
Cost of sales		7,559		6,269			14,788		12,148

Gross profit		4,694		3,512			8,783		6,612

Marketing, administration and research costs		2,933		2,062			5,783		3,981
Asset impairment and exit costs		–		(26	)		–		(26	)
Losses on divestitures, net		–		17			–		17
Amortization of intangibles		60		3			93		9

Operating income		1,701		1,456			2,907		2,631

Interest and other expense, net		439		312			1,063		592

Earnings from continuing operations before income taxes		1,262		1,144			1,844		2,039

Provision for income taxes		323		363			656		655

Earnings from continuing operations		939		781			1,188		1,384

Earnings from discontinued operations, net of income taxes (Note 2)		–		48			1,644		107


Net earnings		939		829			2,832		1,491

Noncontrolling interest		2		2			12		4

Net earnings attributable to Kraft Foods	$	937	$	827		$	2,820	$	1,487


Per share data:
Basic earnings per share attributable to Kraft Foods:
Continuing operations	$	0.54	$	0.53		$	0.70	$	0.93
Discontinued operations		–		0.03			0.98		0.08

Net earnings attributable to Kraft Foods	$	0.54	$	0.56		$	1.68	$	1.01


Diluted earnings per share attributable to Kraft Foods:
Continuing operations	$	0.53	$	0.53		$	0.70	$	0.93
Discontinued operations		–		0.03			0.97		0.07

Net earnings attributable to Kraft Foods	$	0.53	$	0.56		$	1.67	$	1.00


Dividends declared	$	0.29	$	0.29		$	0.58	$	0.58

See notes to condensed consolidated financial statements.

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)


	June 30,			December 31,
	2010			2009

ASSETS
Cash and cash equivalents	$	2,854		$	2,101
Receivables (less allowances of $180 in 2010 and $121 in 2009)		5,606			5,197
Inventories, net		5,167			3,775
Deferred income taxes		828			730
Other current assets		796			651

Total current assets		15,251			12,454

Property, plant and equipment, net		13,047			10,693
Goodwill		36,439			28,764
Intangible assets, net		25,230			13,429
Prepaid pension assets		162			115
Other assets		1,461			1,259

TOTAL ASSETS	$	91,590		$	66,714


LIABILITIES
Short-term borrowings	$	291		$	453
Current portion of long-term debt		636			513
Accounts payable		4,913			3,766
Accrued marketing		1,954			2,181
Accrued employment costs		1,056			1,175
Other current liabilities		4,919			3,403

Total current liabilities		13,769			11,491

Long-term debt		29,103			18,024
Deferred income taxes		7,353			4,508
Accrued pension costs		2,466			1,765
Accrued postretirement health care costs		2,910			2,816
Other liabilities		2,630			2,138

TOTAL LIABILITIES		58,231			40,742

Contingencies (Note 13)

EQUITY
Common Stock, no par value (1,996,537,778 shares issued in 2010 and 1,735,000,000 shares issued in 2009)		–			–
Additional paid-in capital		31,131			23,611
Retained earnings		16,393			14,636
Accumulated other comprehensive losses		(5,959	)		(3,955	)
Treasury stock, at cost		(8,266	)		(8,416	)

Total Kraft Foods Shareholders’ Equity		33,299			25,876
Noncontrolling interest		60			96

TOTAL EQUITY		33,359			25,972


TOTAL LIABILITIES AND EQUITY	$	91,590		$	66,714

See notes to condensed consolidated financial statements.

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(in millions of dollars, except per share data)

(Unaudited)


	Kraft Foods Shareholders’ Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Earnings / (Losses)			Treasury Stock			Noncontrolling Interest			Total Equity

Balances at January 1, 2009	$	–	$	23,563		$	13,440		$	(5,994	)	$	(8,714	)	$	61		$	22,356
Comprehensive earnings:
Net earnings		–		–			3,021			–			–			7			3,028
Other comprehensive earnings, net of income taxes		–		–			–			2,039			–			34			2,073

Total comprehensive earnings *																41			5,101

Exercise of stock options and issuance of other stock awards		–		49			(110	)		–			298			–			237
Cash dividends declared ($1.16 per share)		–		–			(1,715	)		–			–			–			(1,715	)
Dividends paid on noncontrolling interest and other activities		–		(1	)		–			–			–			(6	)		(7	)

Balances at December 31, 2009	$	–	$	23,611		$	14,636		$	(3,955	)	$	(8,416	)	$	96		$	25,972
Comprehensive earnings / (losses):
Net earnings		–		–			2,820			–			–			12			2,832
Other comprehensive losses, net of income taxes		–		–			–			(2,004	)		–			(29	)		(2,033	)

Total comprehensive earnings / (losses) *																(17	)		799

Exercise of stock options and issuance of other stock awards		–		38			(52	)		–			150			–			136
Cash dividends declared ($0.58 per share)		–		–			(1,011	)		–			–			–			(1,011	)
Net impact of noncontrolling interests from Cadbury acquisition		–		38			–			–			–			–			38
Purchase from noncontrolling interest, dividends paid and other activities		–		(13	)		–			–			–			(19	)		(32	)
Issuance of Common Stock		–		7,457			–			–			–			–			7,457

Balances at June 30, 2010	$	–	$	31,131		$	16,393		$	(5,959	)	$	(8,266	)	$	60		$	33,359

Total comprehensive earnings / (losses) were $(608) million for the quarter ended and $799 million for the six months ended June 30, 2010, as compared to $2,274 million for the quarter ended and $2,784 million for the six months ended June 30, 2009. Comprehensive earnings / (losses) attributable to Kraft Foods were $(600) million for the quarter ended and $816 million for the six months ended June 30, 2010, as compared to $2,250 million for the quarter ended and $2,758 million for the six months ended June 30, 2009.

See notes to condensed consolidated financial statements.

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)


	For the Six Months Ended
	June 30,
	2010			2009

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES
Net earnings	$	2,832		$	1,491
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization		679			432
Stock-based compensation expense		81			84
Deferred income tax provision		106			110
Losses on divestitures, net		–			17
Gain on discontinued operations (Note 2)		(1,596	)		–
Asset impairment and exit costs, net of cash paid		–			9
Other non-cash (income) / expense, net		(360	)		147
Change in assets and liabilities, excluding the effects of acquisitions and divestitures:
Receivables, net		488			373
Inventories, net		(425	)		(22	)
Accounts payable		(302	)		(303	)
Other current assets		210			197
Other current liabilities		(1,032	)		(701	)
Change in pension and postretirement assets and liabilities, net		98			(114	)

Net cash provided by operating activities		779			1,720


CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES
Capital expenditures		(608	)		(474	)
Acquisitions, net of cash received		(9,844	)		–
Proceeds from divestitures		3,697			6
Other		(24	)		37

Net cash used in investing activities		(6,779	)		(431	)


CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES
Net repayments of short-term borrowings		(1,310	)		(41	)
Long-term debt proceeds		9,422			1
Long-term debt repaid		(9	)		(12	)
Dividends paid		(1,156	)		(855	)
Other		46			10

Net cash provided by / (used in) financing activities		6,993			(897	)


Effect of exchange rate changes on cash and cash equivalents		(240	)		95


Cash and cash equivalents:
Increase		753			487
Balance at beginning of period		2,101			1,244


Balance at end of period	$	2,854		$	1,731

See notes to condensed consolidated financial statements.

Kraft Foods Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies:

Basis of Presentation:

Our interim condensed consolidated financial statements are unaudited. We prepared the condensed consolidated financial statements following SEC rules for interim reporting. As permitted under those rules, we have condensed or omitted a number of footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of our financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results.

You should read these statements in conjunction with our consolidated financial statements and related notes in our Form 10-K for the year ended December 31, 2009.

Principles of Consolidation:

The consolidated financial statements include Kraft Foods, as well as our wholly owned and majority owned subsidiaries. Our domestic operating subsidiaries report results as of the last Saturday of the quarter, and our international operating subsidiaries generally report results two weeks prior to the last Saturday of the quarter. The results of operations of the newly acquired Cadbury Limited (formerly, Cadbury plc) (“Cadbury”) are reported on the last day of the calendar month.

In the second quarter of 2010, we changed the consolidation date for certain European Biscuits operations, which are included within our Kraft Foods Europe segment, and certain operations in Asia Pacific, which are included within our Kraft Foods Developing Markets segment. Previously, these operations primarily reported period-end results one month prior to the end of the quarter and now report period-end results two weeks prior to the last Saturday of the quarter. We believe the change is preferable and will improve financial reporting by better matching the close dates of each subsidiary to our other international operating subsidiaries, which operate similarly. This change resulted in a favorable impact to net revenues of approximately $70 million and had an insignificant impact on net earnings. As the impacts to prior period results were not material to our financial results, we have not revised the prior period results for this change.

Highly Inflationary Accounting:

In the fourth quarter of 2009, the Venezuelan economy was classified as highly inflationary under U.S. GAAP. Effective January 1, 2010, we are accounting for our Venezuelan subsidiaries under highly inflationary accounting rules, which principally means all transactions are recorded in U.S. dollars. Venezuela has three exchange rates: the official rate, the consumer staples rate and the secondary (or parallel) rate. We used both the official rate and the secondary rate to translate our Venezuelan operations into U.S. dollars, based on the nature of the operations of each individual subsidiary. Additionally, we previously carried cash that we had exchanged into U.S. dollars using the secondary market at that rate. Upon the change to highly inflationary accounting, we were then required to translate those U.S. dollars on hand using the official rate, which resulted in a charge of $34 million in the first quarter of 2010.

On January 8, 2010, the Venezuelan government devalued its currency. Accordingly, we were required to revalue our net assets in Venezuela. Through the first six months of 2010, we recorded approximately $65 million of unfavorable foreign currency impacts relating to highly inflationary accounting in Venezuela (which included the one-time impact to translate cash of $34 million).

New Accounting Pronouncements:

In June 2009, new guidance was issued on the consolidation of variable interest entities. We adopted the guidance effective January 1, 2010. This guidance increases the likelihood of an enterprise being classified as a variable interest entity. The adoption of this guidance did not have a material impact on our financial results.

Note 2. Acquisitions and Divestitures:

Cadbury Acquisition:

On January 19, 2010, we announced the terms of our final offer for each outstanding ordinary share of Cadbury, including each ordinary share represented by an American Depositary Share (“Cadbury ADS”), and the Cadbury Board of Directors recommended that Cadbury shareholders accept the terms of the final offer. On February 2, 2010, all of the conditions to the offer were satisfied or validly waived, the initial offer period expired and a subsequent offer period immediately began. At that point, we had received acceptances of 71.73% of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs (“Cadbury Shares”). As of June 1, 2010, we owned 100% of all outstanding Cadbury Shares. We believe the combination of Kraft Foods and Cadbury will create a global snacks powerhouse and an unrivaled portfolio of brands people love.

Under the terms of our final offer and the subsequent offer, we agreed to pay Cadbury shareholders 500 pence in cash and 0.1874 shares of Kraft Foods Common Stock per Cadbury ordinary share validly tendered and 2,000 pence in cash and 0.7496 shares of Kraft Foods Common Stock per Cadbury ADS validly tendered. This valued Cadbury at $18.5 billion, or approximately £11.6 billion (based on the average price of $28.36 for a share of Kraft Foods Common Stock on February 2, 2010 and an exchange rate of $1.595 per £1.00).

The EU Commission required, as a condition of the offer, that we divest the Cadbury confectionery operations in Poland and Romania. In June 2010, we entered into an agreement to divest the confectionery operations in Poland, and we expect the sale to close in the third quarter of 2010. In July 2010, we entered into an agreement to divest the confectionery operations in Romania, and we expect the sale to close in the third quarter of 2010. Both sales are subject to customary closing conditions, including regulatory approvals. The estimated impacts of these divestitures were reflected as adjustments to the purchase price allocations.

As part of our Cadbury acquisition, we expensed and incurred transaction related fees of $12 million for the three months and $215 million for the six months ended June 30, 2010. We recorded these expenses within marketing, administration and research costs. We also incurred acquisition financing fees of $96 million in the first quarter of 2010. We recorded these expenses within interest and other expense, net.

Cadbury contributed net revenues of $3,922 million and net earnings of $175 million from February 2, 2010 through June 30, 2010. The following unaudited pro forma summary presents Kraft Foods’ consolidated information as if Cadbury had been acquired on January 1, 2009. These amounts were calculated after conversion to U.S. GAAP, applying our accounting policies, and adjusting Cadbury’s results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment, and intangible assets had been applied from January 1, 2009, together with the consequential tax effects. These adjustments also reflect the additional interest expense incurred on the debt to finance the purchase.


	Pro forma for the
	Three Months		Pro forma for the Six
	Ended June 30,		Months Ended June 30,
	2009		2010	2009
	(in millions)

Net revenues	$	11,887	$ 24,252	$	22,870
Net earnings attributable to Kraft Foods		663	2,533		1,251

On February 2, 2010, we acquired 71.73% of Cadbury’s Shares for $13.1 billion and the value attributed to noncontrolling interests was $5.4 billion. From February 2, 2010 through June 1, 2010, we acquired the remaining 28.27% of Cadbury’s Shares for $5.4 billion. We had a $38 million gain on noncontrolling interest acquired and recorded it within additional paid in capital.


Our February 2, 2010 Cadbury acquisition was valued at $18,547 million, or $17,500 million net of cash and cash equivalents. As part of that acquisition, we acquired the following assets and assumed the following liabilities (in millions):

	Receivables ⁽¹⁾		$	1,324
	Inventories			1,298
	Other current assets			703
	Property, plant and equipment			3,365
	Goodwill ⁽²⁾			9,431
	Intangible assets ⁽³⁾			12,723
	Other assets			221
	Short-term borrowings			(1,206	)
	Accounts payable			(1,689	)
	Other current liabilities			(1,602	)
	Long-term debt			(2,432	)
	Deferred income taxes			(2,884	)
	Accrued pension costs			(795	)
	Other liabilities			(957	)

	(1)	The gross amount due under the receivables we acquired is $1,402 million, of which $78 million is expected to be uncollectable.
	(2)	Goodwill will not be deductible for statutory tax purposes and is attributable to Cadbury’s workforce and the significant synergies we expect from the acquisition.
	(3)	$10.1 billion of the intangible assets acquired are expected to be indefinite lived.

The above amounts represent the allocation of purchase price and are subject to revision when appraisals are finalized, which will occur during the third quarter of 2010.
Pizza Divestiture: On March 1, 2010, we completed the sale of the assets of our North American frozen pizza business (“Frozen Pizza”) to Nestlé USA, Inc. (“Nestlé”) for $3.7 billion. Our Frozen Pizza business was a component of our U.S. Convenient Meals and Canada & North America Foodservice segments. The sale included the DiGiorno, Tombstone and Jack’s brands in the U.S., 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 condensed consolidated statement of earnings, and prior period results have been revised in a consistent manner. Pursuant to the Frozen Pizza business Transition Services Agreement, we agreed to provide certain sales, co-manufacturing, distribution, information technology, accounting and finance services to Nestlé for up to two years. Summary results of operations for the Frozen Pizza business through June 30, 2010 were:
			For the Three Months Ended			For the Six Months Ended
			June 30, 2009			June 30, 2010			June 30, 2009
			(in millions)

	Net revenues		$	381		$	335		$	798

	Earnings before income taxes			75			73			168
	Provision for income taxes			(27	)		(25	)		(61	)
	Gain on discontinued operations, net of income taxes			–			1,596			–

	Earnings and gain from discontinued operations, net of income taxes		$	48		$	1,644		$	107

Earnings before income taxes as presented exclude associated allocated overheads of $25 million for the six months ended June 30, 2010, $26 million for the three months ended June 30, 2009 and $53 million for the six months ended June 30, 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 included in the Frozen Pizza divestiture (in millions):


	Inventories, net	$	102
	Property, plant and equipment, net		317
	Goodwill		475

	Distributed assets of the Frozen Pizza business	$	894

Note 3. Inventories: Inventories at June 30, 2010 and December 31, 2009 were:
		June 30, 2010			December 31, 2009
		(in millions)

	Raw materials	$	1,916		$	1,410
	Finished product		3,251			2,365

	Inventories, net	$	5,167		$	3,775

Note 4. Property, Plant and Equipment: Property, plant and equipment at June 30, 2010 and December 31, 2009 were:
		June 30, 2010			December 31, 2009
		(in millions)

	Land and land improvements	$	714		$	492
	Buildings and building equipment		4,509			4,231
	Machinery and equipment		14,907			13,872
	Construction in progress		1,247			828

			21,377			19,423
	Accumulated depreciation		(8,330	)		(8,730	)

	Property, plant and equipment, net	$	13,047		$	10,693

Note 5. Goodwill and Intangible Assets:

Goodwill by reportable segment at June 30, 2010 and December 31, 2009 was:


		June 30,			December 31,
		2010			2009
		(in millions)

	Kraft Foods North America:
	U.S. Beverages	$	1,290		$	1,290
	U.S. Cheese		3,000			3,000
	U.S. Convenient Meals		985			1,460
	U.S. Grocery		3,046			3,046
	U.S. Snacks		9,115			6,948
	Canada & N.A. Foodservice		3,314			2,340
	Kraft Foods Europe		8,368			6,756
	Kraft Foods Developing Markets		7,321			3,924

	Total goodwill	$	36,439		$	28,764


Intangible assets at June 30, 2010 and December 31, 2009 were:

		June 30,			December 31,
		2010			2009
		(in millions)

	Non-amortizable intangible assets	$	22,572		$	13,262
	Amortizable intangible assets		2,854			278

			25,426			13,540
	Accumulated amortization		(196	)		(111	)

	Intangible assets, net	$	25,230		$	13,429

Non-amortizable intangible assets consist substantially of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury. Amortizable intangible assets consist primarily of trademark licenses, customer-related intangibles and non-compete agreements. At June 30, 2010, the weighted-average life of our amortizable intangible assets was 13.4 years. The movements in goodwill and intangible assets were:

		Goodwill			Intangible Assets, at Cost
		Goodwill			Intangible Assets, at Cost
		(in millions)

	Balance at January 1, 2010	$	28,764		$	13,540
	Changes due to:
	Foreign currency		(1,281	)		(837	)
	Acquisitions		9,431			12,723
	Divestitures		(475	)		–

	Balance at June 30, 2010	$	36,439		$	25,426

Changes to goodwill and intangible assets during the six months ended June 30, 2010 were:

•

Acquisitions – We increased goodwill by $9,431 million and intangible assets by $12,723 million related to allocations of purchase price for our Cadbury acquisition, including the second quarter impacts of our refinements to preliminary allocations, which are substantially complete; however, these allocations are subject to revision upon their finalization in the third quarter of 2010. We recorded $2,167 million of the acquired goodwill in our U.S. Snacks segment, $929 million in our Canada & N.A. Foodservice segment, $2,612 million in our Kraft Foods Europe segment and $3,723 million in our Kraft Foods Developing Markets segment.

•

Divestitures – We reduced goodwill by $475 million due to our Frozen Pizza business divestiture.

Amortization expense was $60 million for the three months and $93 million for the six months ended June 30, 2010. We currently estimate amortization expense for each of the next five years to be approximately $210 million, including the estimated impact of our Cadbury acquisition. Our estimated amortization is subject to revision when appraisals are finalized for our Cadbury acquisition.

Note 6. Restructuring Costs:

Integration Program:

We believe our combination with Cadbury has the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development. In order to achieve these synergies and cost savings, we expect to incur total integration charges of approximately $1.5 billion in the first three years following the acquisition to combine and integrate the two businesses (the “Integration Program”), which also represents an increase over our previous expectation of approximately $1.3 billion.

Integration Program costs include the costs associated with combining our operations with Cadbury’s and are separate from the costs related to the acquisition. We incurred charges under the Integration Program of $149 million for the three months and $192 million for the six months ended June 30, 2010. We recorded these charges in operations, primarily within general corporate expenses and the segment operating income of Kraft Foods Europe and Kraft Foods Developing Markets.

During the second quarter of 2010, we evaluated Cadbury’s Vision into Action (“VIA”) restructuring program and began managing it within our overall Integration Program. Cadbury initiated the VIA restructuring program in 2007 and planned to run it through 2011. Accordingly, we acquired an accrual of $248 million relating to charges taken in previous periods. In evaluating their program as part of our corporate strategies and our integration plans, we included the remaining charges within our overall Integration Program. As we move forward on a combined company basis, we do not intend to manage these programs separately.

Liability activity for Integration Program in the first six months of 2010 was (in millions):


Liability assumed upon acquisition	$	248
Charges		192
Cash spent		(176	)
Write-offs		(8	)
Currency		(15	)

Liability balance, June 30, 2010	$	241

Cost Savings Initiatives:

Cost savings initiatives generally include exit, disposal and other project savings costs. We incurred charges associated with our cost savings initiatives of $42 million for the three months and $76 million for the six months ended June 30, 2010. We recorded these charges in operations, primarily within general corporate expenses and the segment operating income of Kraft Foods Europe and Canada & N.A. Foodservice. These charges primarily included other project savings costs associated with the Kraft Foods Europe Reorganization. Even though other project savings costs were directly attributable to exit and disposal costs, they did not qualify for special accounting treatment as exit or disposal activities.

2004 – 2008 Restructuring Program:

In 2008, we completed our five-year restructuring program (the “Restructuring Program”). The Restructuring Program’s objectives were to leverage our global scale, realign and lower our cost structure, and optimize capacity. As part of the Restructuring Program, we:

•

incurred $3.0 billion in pre-tax charges reflecting asset disposals, severance and implementation costs;

•

announced the closure of 35 facilities and the elimination of approximately 18,600 positions; and

•

will use cash to pay for $2.0 billion of the $3.0 billion in charges.

Since the inception of the Restructuring Program, we have paid cash for $1.7 billion of the $2.0 billion in expected cash payments, including $41 million paid in the first six months of 2010.

Restructuring liability activity for the six months ended June 30, 2010 was (in millions):



	Liability balance, January 1, 2010	$	270
	Cash spent		(41	)
	Currency		(33	)

	Liability balance, June 30, 2010	$	196


Our 2010 activity was related to cash outflows on prior year Restructuring Program charges. Our prior year charges included severance benefits received by terminated employees. Other prior year costs related primarily to the renegotiation of supplier contract costs, workforce reductions associated with facility closings and the termination of leasing agreements. Note 7. Debt: Short-Term Borrowings: At June 30, 2010 and December 31, 2009, our short-term borrowings and related weighted-average interest rates consisted of:
		June 30, 2010				December 31, 2009
		Amount Outstanding			Weighted- Average Rate	Amount Outstanding		Weighted- Average Rate
		(in millions)				(in millions)

	Commercial paper	$	–		–	$	262	0.5%
	Bank loans		291		5.9%		191	10.5%

	Total short-term borrowings	$	291			$	453

The fair values of our short-term borrowings at June 30, 2010 and December 31, 2009, based upon current market interest rates, approximate the amounts disclosed above.

Borrowing Arrangements:

We maintain a revolving credit facility that we have historically used for general corporate purposes, including for working capital purposes, and to support our commercial paper issuances. Our $4.5 billion three-year senior unsecured revolving credit facility expires in November 2012. No amounts have been drawn on the facility.

The revolving credit facility agreement includes a covenant that we maintain a minimum total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), of at least $28.6 billion. This covenant was increased by $5.6 billion to $28.6 billion due to our Cadbury acquisition. At June 30, 2010, our total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), was $39.3 billion. We expect to continue to meet this covenant. The revolving credit facility agreement also contains customary representations, covenants and events of default. However, there are no other financial covenants, credit rating triggers or provisions that could require us to post collateral as security.

Cadbury maintained a three-year, £450 million senior unsecured revolving credit facility that we terminated effective June 30, 2010.

In addition to the above, some of our international subsidiaries maintain primarily uncommitted credit lines to meet short-term working capital needs. Collectively, these credit lines amounted to $2.2 billion at June 30, 2010. Borrowings on these lines amounted to $291 million at June 30, 2010 and $191 million at December 31, 2009.

As part of our Cadbury acquisition, on November 9, 2009, we entered into an agreement for a 364-day senior unsecured bridge facility (the “Cadbury Bridge Facility”). During the first quarter of 2010, we borrowed £807 million under the Cadbury Bridge Facility, and later repaid it ($1,205 million at the time of repayment) with proceeds from the divestiture of our Frozen Pizza business. Upon repayment, the Cadbury Bridge Facility was terminated.

Long-Term Debt:

On February 8, 2010, we issued $9.5 billion of senior unsecured notes at a weighted-average effective rate of 5.364% and used the net proceeds ($9,379 million) to finance the Cadbury acquisition and for general corporate purposes. The general terms of the $9.5 billion notes are:

•

$1.00 billion total principal notes due May 8, 2013 at a fixed, annual interest rate of 2.625%. Interest is payable semiannually beginning November 8, 2010.

•

$1.75 billion total principal notes due February 9, 2016 at a fixed, annual interest rate of 4.125%. Interest is payable semiannually beginning August 9, 2010.

•

$3.75 billion total principal notes due February 10, 2020 at a fixed, annual interest rate of 5.375%. Interest is payable semiannually beginning August 10, 2010.

•

$3.00 billion total principal notes due February 9, 2040 at a fixed, annual interest rate of 6.500%. Interest is payable semiannually beginning August 9, 2010.

In addition, these notes include covenants that restrict our ability to incur debt secured by liens above a certain threshold. We also must offer to purchase these notes at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest to the date of repurchase, if both of the following occur:

(i)

a “change of control” triggering event, and

(ii)

a downgrade of these notes below an investment grade rating by each of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services and Fitch, Inc. within a specified period.

The fair value of the long-term debt we acquired as part of our Cadbury acquisition was $2,432 million at February 2, 2010. The acquired debt has the following terms:

•

£77 million (approximately $115 million) total principal notes due December 1, 2010 at a fixed, annual interest rate of 4.875%.

•

C$150 million (approximately $141 million) Canadian bank loan agreement expiring August 30, 2012 at a variable interest rate. The interest rate at June 30, 2010 was 0.735%.

•

$1.00 billion total principal notes due October 1, 2013 at a fixed, annual interest rate of 5.125%.

•

£300 million (approximately $448 million) total principal notes due December 11, 2014 at a fixed, annual interest rate of 5.375%.

•

£350 million (approximately $523 million) total principal notes due July 18, 2018 at a fixed, annual interest rate of 7.250%.

We expect to continue to comply with our long-term debt covenants.

At June 30, 2010 and December 31, 2009, our long-term debt consisted of (interest rates were as of June 30, 2010):


	June 30,			December 31,
	2010			2009
	(in millions)

Notes, 0.93% to 7.55% (average effective rate 5.81%), due through 2040	$	24,874		$	14,395
Euro notes, 5.75% to 6.25% (average effective rate 5.98%), due through 2015		3,480			4,072
Sterling notes, 4.88% to 7.25% (average effective rate 4.59%), due through 2018		1,180			–
Other foreign currency obligations		144			5
Capital leases and other		61			65

Total		29,739			18,537
Less current portion of long-term debt		(636	)		(513	)

Long-term debt	$	29,103		$	18,024

Aggregate maturities of our long-term debt for the years ended June 30 were (in millions):


	2011	$	636
	2012		5,958
	2013		1,901
	2014		2,306
	2015		1,893
	Thereafter		17,043
Fair Value: The aggregate fair value of our total debt, based on quoted prices in active markets for identical liabilities, at June 30, 2010, was $32,688 million as compared with the carrying value of $30,030 million. The aggregate fair value of our total debt, based on quoted prices in active markets for identical liabilities, at December 31, 2009, was $20,222 million as compared with the carrying value of $18,990 million. Interest and Other Expense: Interest and other expense was:
		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2010			2009			2010			2009
		(in millions)
	Interest and other expense, net:
	Interest expense, external debt	$	444		$	309		$	822		$	614
	Acquisition-related financing fees		4			–			251			–
	Other (income) / expense, net		(9	)		3			(10	)		(22	)

	Total interest and other expense, net	$	439		$	312		$	1,063		$	592

Acquisition-related financing fees include hedging and foreign currency impacts associated with the Cadbury acquisition and other fees associated with the Cadbury Bridge Facility. Note 8. Capital Stock: Our articles of incorporation authorize 3.0 billion shares of Class A common stock, 2.0 billion shares of Class B common stock and 500 million shares of preferred stock. There were no Class B common shares or preferred shares issued and outstanding at June 30, 2010. Shares of Class A common stock issued, repurchased and outstanding were:

		Shares Issued			Shares Repurchased			Shares Outstanding

	Balance at January 1, 2010		1,735,000,000			(257,115,097	)		1,477,884,903
	Shares issued		261,537,778			–			261,537,778
	Exercise of stock options and issuance of other stock awards		–			4,387,294			4,387,294

	Balance at June 30, 2010		1,996,537,778			(252,727,803	)		1,743,809,975

In the first six months of 2010, we issued 262 million additional shares of our Common Stock as part of the Cadbury acquisition. The issued stock had a total fair value of $7,457 million based on the average of the high and low market prices on the dates of issuance.

Note 9. Accumulated Other Comprehensive Earnings / (Losses):

The components of accumulated other comprehensive earnings / (losses) were:



	Currency Translation Adjustments			Pension and Other Benefits			Derivatives Accounted for as Hedges			Total
	(in millions)

Balances at December 31, 2009	$	(506	)	$	(3,550	)	$	101		$	(3,955	)
Other comprehensive earnings / (losses), net of income taxes:
Currency translation adjustments		(1,953	)		64			–			(1,889	)
Amortization of experience losses and prior service costs		–			90			–			90
Settlement losses		–			53			–			53
Net actuarial loss arising during period		–			(91	)		–			(91	)
Change in fair value of cash flow hedges		–			–			(167	)		(167	)

Total other comprehensive losses											(2,004	)

Balances at June 30, 2010	$	(2,459	)	$	(3,434	)	$	(66	)	$	(5,959	)

Note 10. Stock Plans:

Restricted and Deferred Stock:

In January 2010, we granted 1.9 million shares of stock in connection with our long-term incentive plan, and the market value per share was $27.33 on the date of grant. In February 2010, as part of our annual equity program, we issued 2.5 million shares of restricted and deferred stock to eligible employees, and the market value per restricted or deferred share was $29.15 on the date of grant. During the first six months of 2010, we issued an additional 0.8 million shares of restricted and deferred stock, including shares issued to Cadbury employees in the second quarter of 2010 under our annual equity program. The weighted-average market value per restricted or deferred share was $29.54 on the date of grant. In aggregate, we issued 5.2 million restricted and deferred shares during the first six months of 2010, including those issued as part of our long-term incentive plan.

During the first six months of 2010, 3.9 million shares of restricted and deferred stock vested at a market value of $112 million.

Stock Options:

In February 2010, as part of our annual equity program, we granted 15.0 million stock options to eligible employees at an exercise price of $29.15. During the first six months of 2010, we granted an additional 3.0 million stock options, including options granted to Cadbury employees in the second quarter of 2010 under our annual equity program. The weighted-average exercise price was $29.72. In aggregate, we granted 18.0 million stock options in the first six months of 2010.

There were 3.1 million stock options exercised during the first six months of 2010 with a total intrinsic value of $41 million.

Note 11. Benefit Plans:

Pension Plans

Components of Net Periodic Pension Cost:

Net periodic pension cost consisted of the following for the three and six months ended June 30, 2010 and 2009:


	U.S. Plans						Non-U.S. Plans
	For the Three Months Ended June 30,						For the Three Months Ended June 30,
	2010			2009			2010			2009
	(in millions)

Service cost	$	35		$	39		$	41		$	15
Interest cost		91			92			99			51
Expected return on plan assets		(124	)		(121	)		(110	)		(58	)
Amortization:
Net loss from experience differences		42			40			18			6
Prior service cost		2			1			1			2
Other expenses		14			40			–			–

Net periodic pension cost	$	60		$	91		$	49		$	16


	U.S. Plans						Non-U.S. Plans
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2010			2009			2010			2009
	(in millions)

Service cost	$	72		$	78		$	77		$	30
Interest cost		183			184			185			102
Expected return on plan assets		(245	)		(242	)		(207	)		(115	)
Amortization:
Net loss from experience differences		85			79			36			11
Prior service cost		3			3			3			3
Other expenses		61			66			–			–

Net periodic pension cost	$	159		$	168		$	94		$	31

A significant portion of the 2010 increase in non-U.S. net periodic pension cost related to the Cadbury acquisition. The following costs are included within other expenses above. Severance payments related to our cost savings initiatives and lump-sum payments made to retired employees resulted in settlement losses under our U.S. plans of $14 million for the three months and $56 million for the six months ended June 30, 2010, and $40 million for the three months and $66 million for the six months ended June 30, 2009. Our U.S. plans also incurred a $5 million curtailment charge in the first quarter of 2010 related to the divestiture of our Frozen Pizza business.

Employer Contributions:

We make contributions to our U.S. and non-U.S. pension plans, primarily to the extent that they are tax deductible and do not generate an excise tax liability. During the first six months of 2010, we contributed $24 million to our U.S. plans and $132 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $30 million to our U.S. plans and approximately $150 million to our non-U.S. plans during the remainder of 2010. However, our actual contributions may differ due to many factors, including changes in tax and other benefit laws, or significant differences between expected and actual pension asset performance or interest rates.

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the three and six months ended June 30, 2010 and 2009:


		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2010			2009			2010			2009
		(in millions)

	Service cost	$	10		$	10		$	20		$	19
	Interest cost		44			43			86			87
	Amortization:
	Net loss from experience differences		14			11			27			22
	Prior service credit		(8	)		(8	)		(16	)		(16	)

	Net postretirement health care costs	$	60		$	56		$	117		$	112

Postemployment Benefit Plans Net postemployment costs consisted of the following for the three and six months ended June 30, 2010 and 2009:
		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2010			2009			2010			2009
		(in millions)

	Service cost	$	1		$	2		$	4		$	4
	Interest cost		2			–			4			3
	Amortization of net losses		–			4			–			3
	Other credits, net		–			(7	)		–			(7	)

	Net postemployment costs	$	3		$	(1	)	$	8		$	3

The following items are included in other credits above. We incurred severance charges of $25 million during the second quarter of 2009 related to our Kraft Foods Europe Reorganization. We also reversed $32 million of severance charges in the second quarter of 2009 related to our Restructuring Program as we sold a plant in Spain that we previously announced we would close under the program.

Note 12. Financial Instruments:

Fair Value of Derivative Instruments:

The fair values of derivative instruments recorded in the condensed consolidated balance sheet as of June 30, 2010 and December 31, 2009 were:


		June 30, 2010						December 31, 2009
		Asset			Liability			Asset			Liability
		Derivatives			Derivatives			Derivatives			Derivatives
		(in millions)

	Derivatives designated as hedging instruments:
	Foreign exchange contracts	$	15		$	108		$	8		$	158
	Commodity contracts		33			23			25			14
	Interest rate contracts		10			107			153			–

		$	58		$	238		$	186		$	172

	Derivatives not designated as hedging instruments:
	Foreign exchange contracts	$	66		$	114		$	2		$	–
	Commodity contracts		102			104			71			62
	Interest rate contracts		60			22			–			–

		$	228		$	240		$	73		$	62

	Total fair value	$	286		$	478		$	259		$	234

The majority of the increase in derivatives not designated as hedging instruments was a result of the Cadbury acquisition as we did not re-designate them for hedge accounting. We include the fair value of our asset derivatives within other current assets and the fair value of our liability derivatives within other current liabilities. The fair values (asset / (liability)) of our derivative instruments at June 30, 2010 were determined using:
					Quoted Prices in			Significant
					Active Markets			Other			Significant
					for Identical			Observable			Unobservable
		Total			Assets			Inputs			Inputs
		Fair Value			(Level 1)			(Level 2)			(Level 3)
		(in millions)

	Foreign exchange contracts	$	(141	)	$	–		$	(141	)	$	–
	Commodity contracts		8			(3	)		11			–
	Interest rate contracts		(59	)		–			(59	)		–

	Total derivatives	$	(192	)	$	(3	)	$	(189	)	$	–

Cash Flow Hedges:

Cash flow hedges affected accumulated other comprehensive earnings / (losses), net of income taxes, as follows:


		For the Three Months Ended						For the Six Months Ended
		June 30,						June 30,
		2010			2009			2010			2009
		(in millions)

	Accumulated gain / (loss) at beginning of period	$	68		$	(5	)	$	101		$	(23	)
	Transfer of realized (gains) / losses in fair value to earnings		(3	)		54			(6	)		89
	Unrealized loss in fair value		(131	)		(20	)		(161	)		(37	)

	Accumulated gain / (loss) at June 30	$	(66	)	$	29		$	(66	)	$	29


The effects of cash flow hedges for the three and six months ended June 30, 2010 and 2009 were:

		For the Three Months Ended						For the Three Months Ended
		June 30, 2010						June 30, 2009
					(Gain) / Loss						(Gain) / Loss
		Gain / (Loss)			Reclassified			Gain / (Loss)			Reclassified
		Recognized			from AOCI			Recognized			from AOCI
		in OCI			into Earnings			in OCI			into Earnings
		(in millions)

	Foreign exchange contracts – intercompany loans	$	(2	)	$	–		$	1		$	–
	Foreign exchange contracts – forecasted transactions		13			(7	)		(38	)		(5	)
	Commodity contracts		8			4			(4	)		59
	Interest rate contracts		(150	)		–			21			–

	Total	$	(131	)	$	(3	)	$	(20	)	$	54


		For the Six Months Ended						For the Six Months Ended
		June 30, 2010						June 30, 2009
					(Gain) / Loss						(Gain) / Loss
		Gain / (Loss)			Reclassified			Gain / (Loss)			Reclassified
		Recognized			from AOCI			Recognized			from AOCI
		in OCI			into Earnings			in OCI			into Earnings
		(in millions)

	Foreign exchange contracts – intercompany loans	$	1		$	–		$	1		$	–
	Foreign exchange contracts – forecasted transactions		25			(14	)		(23	)		(27	)
	Commodity contracts		(3	)		7			(36	)		116
	Interest rate contracts		(184	)		1			21			–

	Total	$	(161	)	$	(6	)	$	(37	)	$	89

For the Three Months Ended
June 30, 2010

For the Three Months Ended
June 30, 2009

Gain / (Loss) on
Ineffectiveness
Recognized
in Earnings

Gain / (Loss) on
Amount Excluded
from Effectiveness
Testing Recognized
in Earnings

Gain / (Loss) on
Ineffectiveness
Recognized
in Earnings

Gain / (Loss) on
Amount Excluded
from Effectiveness
Testing Recognized
in Earnings

(in millions)

Foreign exchange contracts –
intercompany loans

–

Foreign exchange contracts –
forecasted transactions

–

Commodity contracts

–

Interest rate contracts

–

Total

–

For the Six Months Ended
June 30, 2010

For the Six Months Ended
June 30, 2009

Gain / (Loss) on
Ineffectiveness
Recognized
in Earnings

Gain / (Loss) on
Amount Excluded
from Effectiveness
Testing Recognized
in Earnings

Gain / (Loss) on
Ineffectiveness
Recognized
in Earnings

Gain / (Loss) on
Amount Excluded
from Effectiveness
Testing Recognized
in Earnings

(in millions)

Foreign exchange contracts –
intercompany loans

–

Foreign exchange contracts –
forecasted transactions

–

Commodity contracts

)

–

Interest rate contracts

–

Total

)

–

We record (i) the gain or loss reclassified from accumulated other comprehensive earnings / (losses) into earnings, (ii) the gain or loss on ineffectiveness, and (iii) the gain or loss on the amount excluded from effectiveness testing in:

•

cost of sales for commodity contracts;

•

cost of sales for foreign exchange contracts related to forecasted transactions; and

•

interest and other expense, net for interest rate contracts and foreign exchange contracts related to intercompany loans.

We expect to transfer unrealized gains of $4 million (net of taxes) for commodity cash flow hedges, unrealized gains of $18 million (net of taxes) for foreign currency cash flow hedges and unrealized losses of $1 million (net of taxes) for interest rate cash flow hedges to earnings during the next 12 months.

Hedge Coverage:

As of June 30, 2010, we had hedged forecasted transactions for the following durations:

•

commodity transactions for periods not exceeding the next 18 months;

•

interest rate transactions for periods not exceeding the next 32 years and 10 months; and

•

foreign currency transactions for periods not exceeding the next 19 months.

Fair Value Hedges:

The effects of fair value hedges for the three and six months ended June 30, 2010 and 2009 were:


		For the Three Months Ended June 30, 2010						For the Three Months Ended June 30, 2009
		Gain / (Loss) Recognized in Income on Derivatives			Gain / (Loss) Recognized in Income on Borrowings			Gain / (Loss) Recognized in Income on Derivatives			Gain / (Loss) Recognized in Income on Borrowings
		(in millions)

	Interest rate contracts	$	(2	)	$	2		$	(1	)	$	1

		For the Six Months Ended June 30, 2010						For the Six Months Ended June 30, 2009
		Gain / (Loss) Recognized in Income on Derivatives			Gain / (Loss) Recognized in Income on Borrowings			Gain / (Loss) Recognized in Income on Derivatives			Gain / (Loss) Recognized in Income on Borrowings
		(in millions)

	Interest rate contracts	$	3		$	(3	)	$	(1	)	$	1
We include the gain or loss on hedged long-term debt and the offsetting loss or gain on the related interest rate swap in interest and other expense, net. Hedges of Net Investments in Foreign Operations: The effects of hedges of net investments in foreign operations for the three and six months ended June 30, 2010 and 2009 were:
		Gain / (Loss) Recognized in OCI												Location of Gain / (Loss) Recorded in AOCI
		For the Three Months Ended June 30, 2010			For the Three Months Ended June 30, 2009			For the Six Months Ended June 30, 2010			For the Six Months Ended June 30, 2009			Location of Gain / (Loss) Recorded in AOCI
		(in millions)

	Euro notes	$	231		$	(143	)	$	378		$	(12	)	Currency Translation Adjustment
Economic Hedges: The effects of economic hedges, derivatives that are not designated as hedging instruments, for the three and six months ended June 30, 2010 and 2009 were:
		Gain / (Loss) Recognized in Earnings												Location of Gain / (Loss) Recognized in Earnings
		For the Three Months Ended June 30, 2010			For the Three Months Ended June 30, 2009			For the Six Months Ended June 30, 2010			For the Six Months Ended June 30, 2009			Location of Gain / (Loss) Recognized in Earnings
		(in millions)

	Foreign exchange contracts:
	Intercompany loans and forecasted interest payments	$	17		$	11		$	23		$	(8	)	Interest expense
	Forecasted transactions		1			(7	)		2			(6	)	Cost of sales
	Forecasted transactions		–			–			(17	)		–		Interest expense
	Cadbury acquisition related		–			–			(395	)		–		Interest expense
	Interest rate contracts		(4	)		–			5			–		Interest expense
	Commodity contracts		35			(10	)		11			16		Cost of sales

	Total	$	49		$	(6	)	$	(371	)	$	2

The hedging losses related to the Cadbury acquisition were economically offset by foreign exchange movement net gains of $240 million on the British pound cash, Cadbury Bridge Facility and payable balances associated with the acquisition. See our consolidated financial statements for the year ended December 31, 2009 for additional information on our purpose for entering into derivatives not designated as hedging instruments and our overall risk management strategies.


Volume:
As of June 30, 2010 and December 31, 2009, we had the following outstanding hedges:
		Notional Amount
		June 30, 2010		December 31, 2009
		(in millions)

	Foreign exchange contracts:
	Intercompany loans and forecasted interest payments	$	4,823	$	1,376
	Forecasted transactions		2,226		631
	Commodity contracts		1,191		1,832
	Interest rate contracts		5,272		2,350
	Net investment hedge – euro notes		3,488		4,081
Note 13. Commitments and Contingencies: Legal Proceedings: We routinely are involved in legal proceedings, claims and governmental inspections or investigations (“Legal Matters”) arising in the ordinary course of our business. Currently, we do not believe that the ultimate costs to resolve any of the Legal Matters will have a material effect on our financial results. Third-Party Guarantees: We have third-party guarantees primarily covering the long-term obligations of our vendors. As part of those transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At June 30, 2010, the carrying amount of our third-party guarantees on our condensed consolidated balance sheet and the maximum potential payment under these guarantees was $29 million. Substantially all of these guarantees expire at various times through 2018. Leases: As of June 30, 2010, minimum rental commitments under non-cancelable operating leases in effect at quarter-end were (in millions):
	2011	$	381
	2012		378
	2013		239
	2014		170
	2015		125
	Thereafter		314

Note 14. Income Taxes:

As of January 1, 2010, our unrecognized tax benefits were $829 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $661 million. Our unrecognized tax benefits were $1,155 million at June 30, 2010, and if we had recognized all of these benefits, the net impact to our income tax provision would have been $887 million. The amount of unrecognized tax benefits could decrease by approximately $50 million during the next 12 months due to the potential resolution of certain foreign, U.S. federal and state examinations. Furthermore, we recorded $301 million of unrecognized tax benefits and $35 million of accrued interest and penalties as part of our purchase price allocations for Cadbury, which are subject to revision when the purchase price allocations are finalized in the third quarter of 2010. We include accrued interest and penalties related to uncertain tax positions in our tax provision. We had accrued interest and penalties of $210 million as of January 1, 2010 and $213 million as of June 30, 2010.

The changes in our unrecognized tax benefits for the six months ended June 30, 2010 and 2009 were (in millions):


		2010			2009

	January 1	$	829		$	807
	Increases from positions taken during prior periods		7			25
	Decreases from positions taken during prior periods		(78	)		(55	)
	Increases from positions taken during the current period		145			75
	Increases from acquisition adjustments		301			–
	Decreases relating to settlements with taxing authorities		(3	)		(10	)
	Reductions resulting from the lapse of the applicable statute of limitations		(11	)		(7	)
	Currency / other		(35	)		13

	June 30	$	1,155		$	848


The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at June 30, 2010 and December 31, 2009:
		June 30, 2010			December 31, 2009
		(in millions)

	Deferred income tax assets:
	Accrued postretirement and postemployment benefits	$	1,351		$	1,472
	Accrued pension costs		701			456
	Other		1,828			1,997

	Total deferred income tax assets		3,880			3,925

	Valuation allowance		(264	)		(97	)

	Net deferred income tax assets	$	3,616		$	3,828


	Deferred income tax liabilities:
	Trade names	$	(7,349	)	$	(4,431	)
	Property, plant and equipment		(2,000	)		(2,029	)
	Other		(640	)		(1,055	)

	Total deferred income tax liabilities		(9,989	)		(7,515	)

	Net deferred income tax liabilities	$	(6,373	)	$	(3,687	)


Note 15. Earnings Per Share: Basic and diluted EPS were calculated using the following:

		For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2010		2009		2010		2009
		(in millions, except per share data; 2009 revised)

	Earnings from continuing operations	$	939	$	781	$	1,188	$	1,384
	Earnings and gain from discontinued operations, net of income taxes		–		48		1,644		107

	Net earnings		939		829		2,832		1,491

	Noncontrolling interest		2		2		12		4

	Net earnings attributable to Kraft Foods	$	937	$	827	$	2,820	$	1,487


	Weighted-average shares for basic EPS		1,747		1,478		1,681		1,476
	Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares		5		6		5		8


	Weighted-average shares for diluted EPS		1,752		1,484		1,686		1,484


	Basic earnings per share attributable to Kraft Foods:
	Continuing operations	$	0.54	$	0.53	$	0.70	$	0.93
	Discontinued operations		–		0.03		0.98		0.08

	Net earnings attributable to Kraft Foods	$	0.54	$	0.56	$	1.68	$	1.01


	Diluted earnings per share attributable to Kraft Foods:
	Continuing operations	$	0.53	$	0.53	$	0.70	$	0.93
	Discontinued operations		–		0.03		0.97		0.07

	Net earnings attributable to Kraft Foods	$	0.53	$	0.56	$	1.67	$	1.00

We exclude antidilutive Kraft Foods stock options from our calculation of weighted-average shares for diluted EPS. We excluded 31.1 million antidilutive stock options for the three months and 33.9 million antidilutive stock options for the six months ended June 30, 2010, and we excluded 23.8 million antidilutive stock options for the three months and six months ended June 30, 2009.

Note 16. Segment Reporting:

We manufacture and market packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. We manage and report operating results through three geographic units: Kraft Foods North America, Kraft Foods Europe and Kraft Foods Developing Markets. We manage the operations of Kraft Foods North America and Kraft Foods Europe by product category, and we manage the operations of Kraft Foods Developing Markets by location. Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery, U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets. The results from our Cadbury acquisition are reflected within our U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets segments.

Management uses segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of our U.S. pension plan cost (which is a component of cost of sales and marketing, administration and research costs), general corporate expenses (which are a component of marketing, administration and research costs) and amortization of intangibles for all periods presented. We exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, we record gains and losses on hedging activities within segment operating results. Furthermore, we centrally manage interest and other expense, net. Accordingly, we do not present these items by segment because they are excluded from the segment profitability measure that management reviews.

Segment data were:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2010		2009		2010		2009
	(in millions; 2009 revised)

Net revenues:
Kraft Foods North America:
U.S. Beverages	$	886	$	836	$	1,707	$	1,619
U.S. Cheese		797		887		1,642		1,781
U.S. Convenient Meals		839		826		1,609		1,561
U.S. Grocery		923		973		1,739		1,791
U.S. Snacks		1,516		1,288		2,908		2,485
Canada & N.A. Foodservice		1,200		986		2,244		1,858
Kraft Foods Europe		2,793		2,083		5,502		4,011
Kraft Foods Developing Markets		3,299		1,902		6,220		3,654

Net revenues	$	12,253	$	9,781	$	23,571	$	18,760


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2010			2009			2010			2009
	(in millions; 2009 revised)

Earnings from continuing operations before income taxes:
Operating income:
Kraft Foods North America:
U.S. Beverages	$	178		$	148		$	350		$	310
U.S. Cheese		136			166			270			297
U.S. Convenient Meals		101			84			185			145
U.S. Grocery		357			339			643			601
U.S. Snacks		240			205			447			334
Canada & N.A. Foodservice		175			127			275			199
Kraft Foods Europe		335			208			624			354
Kraft Foods Developing Markets		429			253			788			460
Unrealized gains / (losses) on hedging activities		22			34			(16	)		121
Certain U.S. pension plan costs		(25	)		(54	)		(81	)		(94	)
General corporate expenses		(187	)		(51	)		(485	)		(87	)
Amortization of intangibles		(60	)		(3	)		(93	)		(9	)

Operating income		1,701			1,456			2,907			2,631
Interest and other expense, net		439			312			1,063			592

Earnings from continuing operations before income taxes	$	1,262		$	1,144		$	1,844		$	2,039

Unrealized Gains / (Losses) on Hedging Activities – We recognized gains on the change in unrealized hedging positions of $22 million for the three months and losses of $16 million for the six months ended June 30, 2010, and gains of $34 million for the three months and $121 million for the six months ended June 30, 2009.

General Corporate Expenses – The 2010 increase in general corporate expenses was primarily due to acquisition-related transaction fees, Integration Program costs and the impact of Cadbury’s corporate charges.

Restructuring Costs – We incurred charges under the Integration Program of $149 million for the three months and $192 million for the six months ended June 30, 2010. We recorded these charges in operations, primarily within general corporate expenses and the segment operating income of Kraft Foods Europe and Kraft Foods Developing Markets. We also incurred charges associated with our cost savings initiatives of $42 million for the three months and $76 million for the six months ended June 30, 2010. We recorded these charges in operations, primarily within general corporate expenses and the segment operating income of Kraft Foods Europe and Canada & N.A. Foodservice.

Total assets by segment were:


		June 30, 2010		December 31, 2009
		(in millions)

	Total assets:
	Kraft Foods North America:
	U.S. Beverages	$	2,348	$	2,382
	U.S. Cheese		4,519		4,589
	U.S. Convenient Meals		2,046		3,063
	U.S. Grocery		5,633		5,565
	U.S. Snacks		22,969		16,418
	Canada & N.A. Foodservice		6,552		5,051
	Kraft Foods Europe		24,054		16,073
	Kraft Foods Developing Markets		19,831		11,087
	Unallocated assets ⁽¹⁾		3,638		2,486

	Total assets	$	91,590	$	66,714

	(1) Unallocated assets consist primarily of cash and cash equivalents, deferred income taxes, centrally held property, plant and equipment, prepaid pension assets and derivative financial instrument balances.

Net revenues by consumer sector, which includes Kraft macaroni and cheese dinners in the Convenient Meals sector and the separation of Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets into sector components, were:

		For the Three Months Ended June 30, 2010
		Kraft Foods North America		Kraft Foods Europe		Kraft Foods Developing Markets		Total
		(in millions)

	Biscuits ⁽¹⁾	$	1,398	$	660	$	673	$	2,731
	Confectionery ⁽¹⁾		469		1,138		1,566		3,173
	Beverages		1,022		582		668		2,272
	Cheese		1,181		240		216		1,637
	Grocery		916		94		144		1,154
	Convenient Meals		1,175		79		32		1,286

	Total net revenues	$	6,161	$	2,793	$	3,299	$	12,253


		For the Three Months Ended June 30, 2009
		Kraft Foods North America		Kraft Foods Europe		Kraft Foods Developing Markets		Total
		(in millions; as revised)

	Biscuits ⁽¹⁾	$	1,446	$	596	$	595	$	2,637
	Confectionery ⁽¹⁾		67		480		398		945
	Beverages		965		579		537		2,081
	Cheese		1,212		241		198		1,651
	Grocery		950		103		144		1,197
	Convenient Meals		1,156		84		30		1,270

	Total net revenues	$	5,796	$	2,083	$	1,902	$	9,781


	For the Six Months Ended June 30, 2010
	Kraft Foods North America		Kraft Foods Europe		Kraft Foods Developing Markets		Total
	(in millions)

Biscuits ⁽¹⁾	$	2,763	$	1,216	$	1,275	$	5,254
Confectionery ⁽¹⁾		777		2,338		2,949		6,064
Beverages		1,962		1,169		1,239		4,370
Cheese		2,392		482		425		3,299
Grocery		1,663		168		271		2,102
Convenient Meals		2,292		129		61		2,482

Total net revenues	$	11,849	$	5,502	$	6,220	$	23,571


	For the Six Months Ended June 30, 2009
	Kraft Foods North America		Kraft Foods Europe		Kraft Foods Developing Markets		Total
	(in millions; as revised)

Biscuits ⁽¹⁾	$	2,780	$	1,116	$	1,133	$	5,029
Confectionery ⁽¹⁾		113		1,020		859		1,992
Beverages		1,846		1,104		958		3,908
Cheese		2,419		462		388		3,269
Grocery		1,702		175		260		2,137
Convenient Meals		2,235		134		56		2,425

Total net revenues	$	11,095	$	4,011	$	3,654	$	18,760

(1) Biscuits and Confectionery were previously reported combined and known as Snacks. With the Cadbury acquisition, the Biscuits and Confectionery sectors have been separately broken out. The Biscuits sector primarily includes Cookies, Crackers and Nuts. The Confectionery sector primarily includes Chocolate, Gum and Candy.

Note 17. Subsequent Events:

We evaluated subsequent events and included all accounting and disclosure requirements related to subsequent events in our financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Description of the Company

We manufacture and market packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. We have operations in more than 80 countries and sell our products in approximately 170 countries.

Executive Summary

This executive summary provides significant highlights of the Discussion and Analysis that follows.

•

Net revenues increased 25.3% to $12.3 billion in the second quarter of 2010 and increased 25.6% to $23.6 billion in the first six months of 2010 as compared to the same periods in the prior year.

•

Diluted EPS attributable to Kraft Foods decreased 5.4% to $0.53 in the second quarter of 2010 and increased 67.0% to $1.67 in the first six months of 2010 as compared to the same periods in the prior year.

•

Diluted EPS attributable to Kraft Foods from continuing operations remained unchanged at $0.53 in the second quarter of 2010 and decreased 24.7% to $0.70 in the first six months of 2010 as compared to the same periods in the prior year.

•

On February 2, 2010, we had received acceptances to our offer of 71.73% of the outstanding ordinary shares of Cadbury. From February 2, 2010 through June 1, 2010, we acquired the remaining 28.27% of Cadbury’s Shares. In acquiring Cadbury, we issued 262 million shares of our Common Stock and paid $10.9 billion in cash.

•

On February 8, 2010, we issued $9.5 billion of senior unsecured notes at a weighted-average effective rate of 5.364% and primarily used the net proceeds ($9,379 million) to finance the Cadbury acquisition.

•

On March 1, 2010, we completed the sale of the assets of our North American frozen pizza business to Nestlé USA, Inc. for $3.7 billion. Accordingly, the results of our Frozen Pizza business have been reflected as discontinued operations on the condensed consolidated statement of earnings, and prior period results have been revised in a consistent manner.

Discussion and Analysis

Items Affecting Comparability of Financial Results

Acquisitions and Divestitures

Cadbury Acquisition:

On January 19, 2010, we announced the terms of our final offer for each outstanding ordinary share of Cadbury Limited (formerly, Cadbury plc) (“Cadbury”), including each ordinary share represented by an American Depositary Share (“Cadbury ADS”), and the Cadbury Board of Directors recommended that Cadbury shareholders accept the terms of the final offer. On February 2, 2010, all of the conditions to the offer were satisfied or validly waived, the initial offer period expired and a subsequent offer period immediately began. At that point, we had received acceptances of 71.73% of the outstanding Cadbury ordinary shares, including those represented by Cadbury ADSs (“Cadbury Shares”). As of June 1, 2010, we owned 100% of all outstanding Cadbury Shares. We believe the combination of Kraft Foods and Cadbury will create a global snacks powerhouse and an unrivaled portfolio of brands people love.

Cadbury contributed net revenues of $3,922 million and net earnings of $175 million from February 2, 2010 through June 30, 2010. The following unaudited pro forma summary presents Kraft Foods’ consolidated information as if Cadbury had been acquired on January 1, 2009. These amounts were calculated after conversion to accounting principles generally accepted in the United States of America (“U.S. GAAP”), applying our accounting policies, and adjusting Cadbury’s results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment, and intangible assets had been applied from January 1, 2009, together with the consequential tax effects. These adjustments also reflect the additional interest expense incurred on the debt to finance the purchase.


		Pro forma for the Three Months Ended June 30,			Pro forma for the Six Months Ended June 30,
		2009			2010		2009
		(in millions)

	Net revenues	$	11,887		$	24,252	$	22,870
	Net earnings attributable to Kraft Foods		663			2,533		1,251
On February 2, 2010, we acquired 71.73% of Cadbury’s Shares for $13.1 billion and the value attributed to noncontrolling interests was $5.4 billion. From February 2, 2010 through June 1, 2010, we acquired the remaining 28.27% of Cadbury’s Shares for $5.4 billion. We had a $38 million gain on noncontrolling interest acquired and recorded it within additional paid in capital. Our February 2, 2010 Cadbury acquisition was valued at $18,547 million, or $17,500 million net of cash and cash equivalents. As part of that acquisition, we acquired the following assets and assumed the following liabilities (in millions):

	Receivables ⁽¹⁾	$	1,324
	Inventories		1,298
	Other current assets		703
	Property, plant and equipment		3,365
	Goodwill ⁽²⁾		9,431
	Intangible assets ⁽³⁾		12,723
	Other assets		221
	Short-term borrowings		(1,206	)
	Accounts payable		(1,689	)
	Other current liabilities		(1,602	)
	Long-term debt		(2,432	)
	Deferred income taxes		(2,884	)
	Accrued pension costs		(795	)
	Other liabilities		(957	)


		(1)		The gross amount due under the receivables we acquired is $1,402 million, of which $78 million is expected to be uncollectable
		(2)		Goodwill will not be deductible for statutory tax purposes and is attributable to Cadbury’s workforce and the significant synergies we expect from the acquisition.
		(3)		$10.1 billion of the intangible assets acquired are expected to be indefinite lived.

The above amounts represent the allocation of purchase price and are subject to revision when appraisals are finalized, which will occur during the third quarter of 2010.

Pizza Divestiture:

On March 1, 2010, we completed the sale of the assets of our North American frozen pizza business (“Frozen Pizza”) to Nestlé USA, Inc. (“Nestlé”) for $3.7 billion. Our Frozen Pizza business was a component of our U.S. Convenient Meals and Canada & North America Foodservice segments. The sale included the DiGiorno, Tombstone and Jack’s brands in the U.S., 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 condensed consolidated statement of earnings, and prior period results have been revised in a consistent manner.

Pursuant to the Frozen Pizza business Transition Services Agreement, we agreed to provide certain sales, co-manufacturing, distribution, information technology, accounting and finance services to Nestlé for up to two years.

Summary results of operations for the Frozen Pizza business through June 30, 2010 were:


		For the Three Months Ended			For the Six Months Ended
		June 30,			June 30,			June 30,
		2009			2010			2009
		(in millions)

	Net revenues	$	381		$	335		$	798

	Earnings before income taxes		75			73			168
	Provision for income taxes		(27	)		(25	)		(61	)
	Gain on discontinued operations, net of income taxes		–			1,596			–

	Earnings and gain from discontinued operations, net of income taxes	$	48		$	1,644		$	107

Earnings before income taxes as presented exclude associated allocated overheads of $25 million for the six months ended June 30, 2010, $26 million for the three months ended June 30, 2009 and $53 million for the six months ended June 30, 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 included in the Frozen Pizza divestiture (in millions):
	Inventories, net	$	102
	Property, plant and equipment, net		317
	Goodwill		475

	Distributed assets of the Frozen Pizza business	$	894

Other Divestitures:

In the second quarter of 2009, we received $6 million in proceeds and recorded pre-tax losses of $17 million, or $0.01 per diluted share, on the divestitures of a juice operation in Brazil and a plant in Spain.

The operating results of these divestitures were not material to our financial results in any of the periods presented, neither individually nor in the aggregate.

Restructuring Costs

Integration Program:

We believe our combination with Cadbury has the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development. In addition, we expect to realize annual costs savings of at least $750 million by the end of the third year following completion of the acquisition; this represents an increase of $75 million over our previous expectation. In order to achieve these synergies and cost savings, we expect to incur total integration charges of approximately $1.5 billion in the first three years following the acquisition to combine and integrate the two businesses (the “Integration Program”), which also represents an increase over our previous expectation of approximately $1.3 billion.

Cost Savings Initiatives:

2004 – 2008 Restructuring Program:

•

incurred $3.0 billion in pre-tax charges reflecting asset disposals, severance and implementation costs;

•

announced the closure of 35 facilities and the elimination of approximately 18,600 positions;

•

will use cash to pay for $2.0 billion of the $3.0 billion in charges; and

•

anticipate reaching cumulative, annualized savings of $1.4 billion for the total program.

In the second quarter of 2009, we sold a plant in Spain that we previously announced we would close under our Restructuring Program. Accordingly, we reversed $35 million in Restructuring Program charges during the second quarter of 2009, primarily related to severance, and recorded a $17 million loss on the divestiture of the plant. The reversal of the Restructuring Program costs, which affected the segment operating income of the Kraft Foods Europe segment, was recorded within asset impairment and exit costs.

Since the inception of the Restructuring Program, we have paid cash for $1.7 billion of the $2.0 billion in expected cash payments, including $41 million paid in the first six months of 2010. At June 30, 2010, we had accrued $196 million related to the Restructuring Program.

Provision for Income Taxes

Our effective tax rate was 25.6% in the second quarter of 2010 and 35.6% in the first six months of 2010. Our second quarter 2010 effective tax rate included net tax benefits of $104 million, primarily resulting from the resolution of a federal tax audit and several items in our international operations. For the first six months of 2010, our effective tax rate included net tax benefits of $32 million, primarily due to the second quarter resolution of a federal tax audit, the tax impacts of the highly inflationary accounting adjustments related to our Venezuelan subsidiaries, and the resolution of several items in our international operations, partially offset by a $137 million write-off of deferred tax assets as a result of the U.S. health care legislation enacted in March 2010.

Our effective tax rate was 31.7% in the second quarter of 2009 and 32.1% in the first six months of 2009. Our second quarter 2009 effective tax rate included net tax benefits of $37 million, primarily resulting from the resolution of state tax audits and several items in our international operations. For the first six months of 2009, our effective tax rate included net tax benefits of $62 million, primarily resulting from the resolution of tax audits and outstanding items in our international operations, and corrections of federal, state and foreign deferred taxes in the first quarter.

Consolidated Results of Operations

The following discussion compares our consolidated results of operations for the three months ended June 30, 2010 and 2009 and for the six months ended June 30, 2010 and 2009.

Three Months Ended June 30:


		For the Three Months Ended
		June 30,
		2010		2009		$ change			% change
		(in millions, except per share data; 2009 revised)

	Net revenues	$	12,253	$	9,781	$	2,472		25.3%

	Operating income		1,701		1,456		245		16.8%

	Earnings from continuing operations		939		781		158		20.2%

	Net earnings attributable to Kraft Foods		937		827		110		13.3%

	Diluted earnings per share attributable to Kraft Foods from continuing operations		0.53		0.53		–		0.0%

	Diluted earnings per share attributable to Kraft Foods		0.53		0.56		(0.03	)	(5.4%	)

Net Revenues – Net revenues increased $2,472 million (25.3%) to $12,253 million in the second quarter of 2010, and organic net revenues increased $197 million (2.0%) to $9,951 million as follows. Please see the Non-GAAP Financial Measures section at the end of this item.

	Change in net revenues (by percentage point)
	Favorable volume/mix				2.2pp
	Lower net pricing				(0.2)pp

	Total change in organic net revenues				2.0%
	Impact from the Cadbury acquisition				22.8pp
	Favorable foreign currency				0.8pp
	Impact of divestitures				(0.3)pp

	Total change in net revenues				25.3%

Favorable foreign currency increased net revenues by $73 million, due primarily to the strength of the Canadian dollar, Brazilian real, Australian dollar and Russian ruble against the U.S. dollar, partially offset by the strength of the U.S. dollar against the Venezuelan bolivar and euro. The Cadbury acquisition added $2,229 million in net revenues. The balance of the increase in net revenues was driven by favorable volume/mix, partially offset by lower net pricing, primarily in Kraft Foods Europe. The favorable volume/mix impact on revenues was driven primarily by higher base volume across all reportable segments except U.S. Cheese, U.S. Grocery and U.S. Snacks. In addition, the impact of divestitures had an unfavorable impact on revenues.

Operating Income – Operating income increased $245 million (16.8%) to $1,701 million in the second quarter of 2010, due to the following:

Operating

Income

Change

(in millions)

(percentage point)

Operating Income for the Three Months Ended
June 30, 2009 (as revised)

1,456

Change in operating income

Lower input costs

2.0pp

Favorable volume/mix

147

9.8pp

Lower net pricing

(19

)

(1.3)pp

Increased operating income from the Cadbury acquisition

260

17.8pp

Acquisition-related costs associated with Cadbury

(11

)

(0.8)pp

Integration Program costs

(149

)

(10.2)pp

Lower marketing, administration and research costs

2.1pp

Change in unrealized gains on hedging activities

(12

)

(0.7)pp

Lower net reversals of asset impairment and exit costs

(26

)

(2.0)pp

Unfavorable foreign currency

)

(0.6)pp

Lower losses on divestitures

1.3pp

Other, net

)

(0.6)pp

Total change in operating income

245

16.8%

Operating Income for the Three Months Ended
June 30, 2010

1,701

Our input costs decreased during the quarter, due to lower manufacturing costs, partially offset by higher raw material costs. The favorable volume/mix was primarily driven by strong contributions from Kraft Foods Developing Markets, Kraft Foods Europe, Canada & N.A. Foodservice, U.S. Beverages and U.S. Convenient Meals. The Cadbury acquisition, net of Integration Program and acquisition-related costs, increased operating income by $100 million. Total marketing, administration and research costs, as recorded in the condensed consolidated statement of earnings, increased $871 million from the second quarter of 2009, but excluding the impacts of divestitures, foreign currency and our Cadbury acquisition (including Integration Program and acquisition-related costs), decreased $28 million over the second quarter of 2009. We recognized gains of $22 million on the change in unrealized hedging positions in the second quarter of 2010, versus gains of $34 million in the second quarter of 2009. During the second quarter of 2009, we reversed $35 million in Restructuring Program charges recorded in prior years and recorded an asset impairment charge of $9 million to write off an investment in Norway. In addition, unfavorable foreign currency decreased operating income by $9 million, due primarily to the strength of the U.S. dollar against the Venezuelan bolivar and euro, which more than offset the strength of the Canadian dollar, Brazilian real and Korean won against the U.S. dollar.

Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $937 million increased by $110 million (13.3%) in the second quarter of 2010. Diluted EPS attributable to Kraft Foods from continuing operations was $0.53 in the second quarter of 2010, flat to the second quarter of 2009. Diluted EPS attributable to Kraft Foods was $0.53 in the second quarter of 2010, down $0.03 from $0.56 in the second quarter of 2009. These changes were due to the following:


						Diluted EPS

	Diluted EPS Attributable to Kraft Foods for the Three Months Ended June 30, 2009 (as revised)					$	0.56
	Diluted EPS from discontinued operations						0.03

	Diluted EPS Attributable to Kraft Foods from continuing operations for the Three Months Ended June 30, 2009 (as revised)						0.53

	Increases in operations						0.08
	Increases in operations from the Cadbury acquisition						0.11
	Change in unrealized gains on hedging activities						(0.01	)
	Higher interest and other expense, net ⁽¹⁾						(0.06	)
	Changes in taxes⁽²⁾						0.03
	Higher shares outstanding						(0.08	)

	Operating EPS⁽³⁾ for the Three Months Ended June 30, 2010						0.60
	Acquisition-related costs						(0.01	)
	Integration Program costs						(0.06	)

	Diluted EPS Attributable to Kraft Foods for the Three Months Ended June 30, 2010					$	0.53

	(1) Excludes impacts of acquisition-related interest and other expense, net. (2) Includes the impact of the U.S. federal tax audit settlement. (3) Please see the Non-GAAP Financial Measures section at the end of this item.

*Six Months Ended June 30:*
		For the Six Months Ended
		June 30,
		2010		2009		$ change			% change
		(in millions, except per share data; 2009 revised)

	Net revenues	$	23,571	$	18,760	$	4,811		25.6%

	Operating income		2,907		2,631		276		10.5%

	Earnings from continuing operations		1,188		1,384		(196	)	(14.2%	)

	Net earnings attributable to Kraft Foods		2,820		1,487		1,333		89.6%

	Diluted earnings per share attributable to Kraft Foods from continuing operations		0.70		0.93		(0.23	)	(24.7%	)

	Diluted earnings per share attributable to Kraft Foods		1.67		1.00		0.67		67.0%

Net Revenues – Net revenues increased $4,811 million (25.6%) to $23,571 million in the first six months of 2010, and organic net revenues increased $489 million (2.6%) to $19,194 million as follows. Please see the Non-GAAP Financial Measures section at the end of this item.


	Change in net revenues (by percentage point)
	Favorable volume/mix		2.6pp
	Higher net pricing		–

	Total change in organic net revenues		2.6%
	Impact from the Cadbury acquisition		20.9pp
	Favorable foreign currency		2.4pp
	Impact of divestitures		(0.3)pp

	Total change in net revenues		25.6%

Favorable foreign currency increased net revenues by $455 million, due primarily to the strength of the Canadian dollar, Brazilian real, Australian dollar, euro, Russian ruble and Polish zloty against the U.S. dollar, partially offset by the strength of the U.S. dollar against the Venezuelan bolivar. The Cadbury acquisition added $3,922 million in net revenues. The balance of the increase in net revenues was driven by favorable volume/mix, which was due primarily to higher volume across all reportable segments except U.S. Cheese, U.S. Grocery and U.S. Snacks. In addition, the impact of divestitures had an unfavorable impact on revenues. Operating Income – Operating income increased $276 million (10.5%) to $2,907 million in the first six months of 2010, due to the following:

		Operating Income		Change
		(in millions)		(percentage point)
	Operating Income for the Six Months Ended June 30, 2009 (as revised)	$	2,631
	Change in operating income
	Lower input costs		186	6.9pp
	Favorable volume/mix		290	10.7pp
	Lower net pricing		(3)	(0.1)pp
	Increased operating income from the Cadbury acquisition		473	18.0pp
	Acquisition-related costs associated with Cadbury		(270)	(10.3)pp
	Integration Program costs		(192)	(7.3)pp
	Higher marketing, administration and research costs		(120)	(4.2)pp
	Lower net reversals of asset impairment and exit costs		(26)	(1.1)pp
	Change in unrealized gains on hedging activities		(137)	(5.0)pp
	Lower losses on divestitures		17	0.7pp
	Favorable foreign currency		68	2.6pp
	Other, net		(10)	(0.4)pp

	Total change in operating income		276	10.5%

	Operating Income for the Six Months Ended June 30, 2010	$	2,907

Our input costs decreased during the quarter, due to lower manufacturing costs and lower raw material costs. The favorable volume/mix was primarily driven by strong contributions from Kraft Foods Developing Markets, Kraft Foods Europe, U.S. Beverages, U.S. Convenient Meals and Canada & N.A. Foodservice. The Cadbury acquisition, net of Integration Program and acquisition-related costs, increased operating income by $11 million. Total marketing, administration and research costs, as recorded in the condensed consolidated statement of earnings, increased $1,802 million from the first six months of 2009, but excluding the impacts of divestitures, foreign currency and our Cadbury acquisition (including Integration Program and acquisition-related costs), increased $120 million over the first six months of 2009, primarily due to further investments in our brands. We recognized losses of $16 million on the change in unrealized hedging positions in the first six months of 2010, versus gains of $121 million in the first six months of 2009. During the first six months of 2009, we reversed $35 million in Restructuring Program charges recorded in prior years and recorded an asset impairment charge of $9 million to write off an investment in Norway. In addition, favorable foreign currency increased operating income by $68 million, due primarily to the strength of the Canadian dollar, Brazilian real, Korean won, Australian dollar and euro against the U.S. dollar, partially offset by the strength of the U.S. dollar against the Venezuelan bolivar.

Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $2,820 million increased by $1,333 million (89.6%) in the first six months of 2010. Diluted EPS attributable to Kraft Foods from continuing operations was $0.70 in the first six months of 2010, down 24.7% from $0.93 in the first six months of 2009. Diluted EPS attributable to Kraft Foods was $1.67 in the first six months of 2010, up $0.67 from $1.00 in the first six months of 2009. These changes were due to the following:


	Diluted EPS

Diluted EPS Attributable to Kraft Foods for the Six Months Ended June 30, 2009 (as revised)	$	1.00
Diluted EPS from discontinued operations		0.07

Diluted EPS Attributable to Kraft Foods from Continuing Operations for the Six Months Ended June 30, 2009 (as revised)		0.93

Increases in operations		0.16
Increases in operations from the Cadbury acquisition		0.18
Change in unrealized gains on hedging activities		(0.06	)
Favorable foreign currency		0.03
Higher interest and other expense, net ⁽¹⁾		(0.09	)
Changes in taxes⁽²⁾		0.07
Higher shares outstanding		(0.12	)

Operating EPS⁽³⁾ for the Six Months Ended June 30, 2010		1.10

Acquisition-related costs		(0.14	)
Acquisition-related interest and other expense, net		(0.10	)
Integration Program costs		(0.08	)
U.S. health care legislation impact on deferred taxes		(0.08	)

Diluted EPS Attributable to Kraft Foods from Continuing Operations for the Six Months Ended June 30, 2010		0.70
2010 gain on the divestiture of our Frozen Pizza business		0.94
Diluted EPS from discontinued operations		0.03

Diluted EPS Attributable to Kraft Foods for the Six Months Ended June 30, 2010	$	1.67

(1) Excludes impacts of acquisition-related interest and other expense, net. (2) Excludes the impacts of the U.S. health care legislation on deferred taxes and includes the impact of the U.S. federal tax audit settlement. (3) Please see the Non-GAAP Financial Measures section at the end of this item.

Results of Operations by Reportable Segment

We manage and report operating results through three geographic units: Kraft Foods North America, Kraft Foods Europe and Kraft Foods Developing Markets. We manage the operations of Kraft Foods North America and Kraft Foods Europe by product category, and we manage the operations of Kraft Foods Developing Markets by location. Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery, U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets. The results from our Cadbury acquisition are reflected within our U.S. Snacks, Canada & N.A. Foodservice, Kraft Foods Europe and Kraft Foods Developing Markets segments.

The following discussion compares our operating results of each of our reportable segments for the three months ended June 30, 2010 and 2009, and for the six months ended June 30, 2010 and 2009.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2010		2009		2010		2009
	(in millions; 2009 revised)
Net revenues:
Kraft Foods North America:
U.S. Beverages	$	886	$	836	$	1,707	$	1,619
U.S. Cheese		797		887		1,642		1,781
U.S. Convenient Meals		839		826		1,609		1,561
U.S. Grocery		923		973		1,739		1,791
U.S. Snacks		1,516		1,288		2,908		2,485
Canada & N.A. Foodservice		1,200		986		2,244		1,858
Kraft Foods Europe		2,793		2,083		5,502		4,011
Kraft Foods Developing Markets		3,299		1,902		6,220		3,654

Net revenues	$	12,253	$	9,781	$	23,571	$	18,760


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2010		2009		2010		2009
	(in millions; 2009 revised)
Operating income:
Kraft Foods North America:
U.S. Beverages	$	178	$	148	$	350	$	310
U.S. Cheese		136		166		270		297
U.S. Convenient Meals		101		84		185		145
U.S. Grocery		357		339		643		601
U.S. Snacks		240		205		447		334
Canada & N.A. Foodservice		175		127		275		199
Kraft Foods Europe		335		208		624		354
Kraft Foods Developing Markets		429		253		788		460
Unrealized gains / (losses) on hedging activities		22		34