Edgar Filing: KRAFT FOODS INC

The gross amount due under the receivables we acquired is $1,402 million, of which $71 million is expected to be uncollectable.

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.

$10.2 billion of the intangible assets acquired are expected to be indefinite lived.

Within other current liabilities, a reserve for exposures related to taxes of approximately $70 million was established within our Developing Markets segment. The cumulative exposure was approximately $140 million at September 30, 2010.

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 September 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		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

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

Not Applicable

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

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 October 29, 2010, there were 1,746,773,569 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 Nine Months Ended September 30, 2010 and 2009		1

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

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

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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		28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		52

Item 4.	Controls and Procedures		52

PART II –	OTHER INFORMATION

Item 1.	Legal Proceedings		53

Item 1A.	Risk Factors		53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		54

Item 6.	Exhibits		54

Signature			55

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 September 30,					For the Nine Months Ended September 30,
	2010			2009		2010			2009

Net revenues	$	11,863		$	9,397	$	35,434		$	28,157
Cost of sales		7,542			6,019		22,330			18,167

Gross profit		4,321			3,378		13,104			9,990

Selling, general and administrative expenses		2,758			2,033		8,541			6,014
Asset impairment and exit costs		(9	)		–		(9	)		(26	)
Losses on divestitures, net		–			–		–			17
Amortization of intangibles		53			6		146			15

Operating income		1,519			1,339		4,426			3,970

Interest and other expenses, net		433			323		1,496			915

Earnings from continuing operations before income taxes		1,086			1,016		2,930			3,055

Provision for income taxes		326			242		982			897

Earnings from continuing operations		760			774		1,948			2,158

Earnings from discontinued operations, net of income taxes (Note 2)		–			52		1,644			159

Net earnings		760			826		3,592			2,317

Noncontrolling interest		6			2		18			6

Net earnings attributable to Kraft Foods	$	754		$	824	$	3,574		$	2,311


Per share data:
Basic earnings per share attributable to Kraft Foods:
Continuing operations	$	0.43		$	0.52	$	1.13		$	1.45
Discontinued operations		–			0.04		0.97			0.11

Net earnings attributable to Kraft Foods	$	0.43		$	0.56	$	2.10		$	1.56


Diluted earnings per share attributable to Kraft Foods:
Continuing operations	$	0.43		$	0.52	$	1.13		$	1.45
Discontinued operations		–			0.03		0.96			0.11

Net earnings attributable to Kraft Foods	$	0.43		$	0.55	$	2.09		$	1.56


Dividends declared	$	0.29		$	0.29	$	0.87		$	0.87

See notes to condensed consolidated financial statements.

Kraft Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)


	September 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents	$	2,288		$	2,101
Receivables (less allowances of $183 in 2010 and $121 in 2009)		6,013			5,197
Inventories, net		5,735			3,775
Deferred income taxes		901			730
Other current assets		887			651

Total current assets		15,824			12,454

Property, plant and equipment, net		13,710			10,693
Goodwill		36,764			28,764
Intangible assets, net		25,476			13,429
Prepaid pension assets		195			115
Other assets		1,651			1,259

TOTAL ASSETS	$	93,620		$	66,714


LIABILITIES
Short-term borrowings	$	331		$	453
Current portion of long-term debt		133			513
Accounts payable		5,130			3,766
Accrued marketing		1,947			2,181
Accrued employment costs		1,197			1,175
Other current liabilities		4,888			3,403

Total current liabilities		13,626			11,491

Long-term debt		29,571			18,024
Deferred income taxes		6,992			4,508
Accrued pension costs		2,424			1,765
Accrued postretirement health care costs		2,910			2,816
Other liabilities		3,115			2,138

TOTAL LIABILITIES		58,638			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		31,181			23,611
Retained earnings		16,621			14,636
Accumulated other comprehensive losses		(4,720	)		(3,955	)
Treasury stock, at cost		(8,202	)		(8,416	)

Total Kraft Foods Shareholders’ Equity		34,880			25,876
Noncontrolling interest		102			96

TOTAL EQUITY		34,982			25,972


TOTAL LIABILITIES AND EQUITY	$	93,620		$	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		–		–			3,574			–			–			18			3,592
Other comprehensive losses, net of income taxes		–		–			–			(765	)		–			(20	)		(785	)

Total comprehensive earnings / (losses) *																(2	)		2,807

Exercise of stock options and issuance of other stock awards		–		102			(70	)		–			214			–			246
Cash dividends declared ($0.87 per share)		–		–			(1,519	)		–			–			–			(1,519	)
Net impact of noncontrolling interests from Cadbury acquisition		–		38			–			–			–			33			71
Purchase from noncontrolling interest, dividends paid and other activities		–		(27	)		–			–			–			(25	)		(52	)
Issuance of Common Stock		–		7,457			–			–			–			–			7,457

Balances at September 30, 2010	$	–	$	31,181		$	16,621		$	(4,720	)	$	(8,202	)	$	102		$	34,982

Total comprehensive earnings / (losses) were $2,008 million for the quarter ended and $2,807 million for the nine months ended September 30, 2010, as compared to $1,197 million for the quarter ended and $3,981 million for the nine months ended September 30, 2009. Comprehensive earnings / (losses) attributable to Kraft Foods were $1,993 million for the quarter ended and $2,809 million for the nine months ended September 30, 2010, as compared to $1,192 million for the quarter ended and $3,950 million for the nine months ended September 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 Nine Months Ended September 30,
	2010			2009

CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES
Net earnings	$	3,592		$	2,317
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization		1,019			659
Stock-based compensation expense		132			123
Deferred income tax provision		127			127
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 expense, net		4			189
Change in assets and liabilities, excluding the effects of acquisitions and divestitures:
Receivables, net		264			410
Inventories, net		(870	)		(27	)
Accounts payable		(181	)		(351	)
Other current assets		(44	)		233
Other current liabilities		(1,383	)		(363	)
Change in pension and postretirement assets and liabilities, net		160			(74	)

Net cash provided by operating activities		1,224			3,269


CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES
Capital expenditures		(1,020	)		(749	)
Acquisitions, net of cash received		(9,843	)		–
Proceeds from divestitures		4,039			6
Other		13			43

Net cash used in investing activities		(6,811	)		(700	)


CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES
Net (repayments) / issuance of short-term borrowings		(1,285	)		461
Long-term debt proceeds		9,438			2
Long-term debt repaid		(512	)		(215	)
Dividends paid		(1,664	)		(1,284	)
Other		(89	)		75

Net cash provided by / (used in) financing activities		5,888			(961	)


Effect of exchange rate changes on cash and cash equivalents		(114	)		144


Cash and cash equivalents:
Increase		187			1,752
Balance at beginning of period		2,101			1,244

Balance at end of period	$	2,288		$	2,996

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 during the second quarter of 2010 and had an insignificant impact on net earnings in that quarter and on the year. 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. Our domestic operating subsidiaries will continue to report period-end results as of the Saturday closest to the end of each period, and our international operating subsidiaries will continue to report period-end results two weeks prior to the Saturday closest to the end of each period.

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 nine months of 2010, we recorded approximately $85 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).

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.

As part of our Cadbury acquisition, we expensed and incurred transaction related fees of $2 million for the three months, $217 million for the nine months ended September 30, 2010 and $11 million for the three and nine months ended September 30, 2009. We recorded these expenses within selling, general and administrative expenses. 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 $6,376 million and net earnings of $369 million from February 2, 2010 through September 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, and the divestitures of certain Cadbury confectionery operations in Poland and Romania, as required by the EU Commission as a condition of our Cadbury acquisition.


	Pro forma for the Three Months Ended September 30,		Pro forma for the Nine Months Ended September 30,
	2009		2010		2009
	(in millions)

Net revenues	$	11,812	$	35,997	$	34,599
Net earnings attributable to Kraft Foods		725		3,420		2,097

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⁾	$	1,331
Inventories		1,298
Other current assets		695
Property, plant and equipment		3,312
Goodwill ⁽²⁾		9,174
Intangible assets ⁽³⁾		12,769
Other assets		376
Short-term borrowings		(1,206	)
Accounts payable		(1,689	)
Other current liabilities⁽⁴⁾		(1,711	)
Long-term debt		(2,436	)
Deferred income taxes		(2,583	)
Accrued pension costs		(816	)
Other liabilities		(981	)
Noncontrolling interest		(33	)

The above amounts represent the allocation of purchase price and are substantially complete. We expect to finalize the purchase price allocations during the fourth 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 September 30, 2010 were:


		For the Three Months Ended			For the Nine Months Ended
		September 30, 2009			September 30, 2010			September 30, 2009
		(in millions)

	Net revenues	$	406		$	335		$	1,204

	Earnings before income taxes		80			73			248
	Provision for income taxes		(28	)		(25	)		(89	)
	Gain on discontinued operations, net of income taxes		–			1,596			–

	Earnings and gain from discontinued operations, net of income taxes	$	52		$	1,644		$	159


Earnings before income taxes as presented exclude associated allocated overheads of $25 million for the nine months ended September 30, 2010, $28 million for the three months ended September 30, 2009 and $81 million for the nine months ended September 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:
The EU Commission required, as a condition of our Cadbury acquisition, that we divest certain Cadbury confectionery operations in Poland and Romania. In the third quarter of 2010, we completed the sale of the assets of the confectionery operations in Poland and Romania. The total proceeds from the divestitures were $342 million and the impacts of these divestitures were reflected as adjustments to the purchase price allocations.

Note 3. Inventories:

Inventories at September 30, 2010 and December 31, 2009 were:

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

	Raw materials	$	1,861		$	1,410
	Finished product		3,874			2,365

	Inventories, net	$	5,735		$	3,775

Note 4. Property, Plant and Equipment:

Property, plant and equipment at September 30, 2010 and December 31, 2009 were:


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

Land and land improvements	$	755		$	492
Buildings and building equipment		4,690			4,231
Machinery and equipment		15,811			13,872
Construction in progress		1,388			828

		22,644			19,423
Accumulated depreciation		(8,934	)		(8,730	)

Property, plant and equipment, net	$	13,710		$	10,693

Note 5. Goodwill and Intangible Assets:

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


	September 30, 2010		December 31, 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		9,056		6,948
Canada & N.A. Foodservice		3,302		2,340
Kraft Foods Europe		8,708		6,756
Kraft Foods Developing Markets		7,377		3,924

Total goodwill	$	36,764	$	28,764

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


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

Non-amortizable intangible assets	$	22,873		$	13,262
Amortizable intangible assets		2,860			278

		25,733			13,540
Accumulated amortization		(257	)		(111	)

Intangible assets, net	$	25,476		$	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, process technology and non-compete agreements. At September 30, 2010, the weighted-average life of our amortizable intangible assets was 13.0 years.

The movements in goodwill and intangible assets were:


	Goodwill			Intangible Assets, at Cost
	(in millions)

Balance at January 1, 2010	$	28,764		$	13,540
Changes due to:
Foreign currency		(699	)		(538	)
Acquisitions		9,174			12,769
Divestitures		(475	)		(38	)

Balance at September 30, 2010	$	36,764		$	25,733

Changes to goodwill and intangible assets during the nine months ended September 30, 2010 were:

•

Acquisitions – We increased goodwill by $9,174 million and intangible assets by $12,769 million related to allocations of purchase price for our Cadbury acquisition, including the third quarter impacts of our refinements to preliminary allocations, which are substantially complete; however, these allocations are subject to revision upon their finalization in the fourth quarter of 2010. We recorded $2,108 million of the acquired goodwill in our U.S. Snacks segment, $903 million in our Canada & N.A. Foodservice segment, $2,541 million in our Kraft Foods Europe segment and $3,622 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 $53 million for the three months and $146 million for the nine months ended September 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”).

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 $92 million for the three months and $284 million for the nine months ended September 30, 2010. We recorded these charges in operations, primarily as a part of selling, general and administrative expenses within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as general corporate expenses.

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 nine months of 2010 was (in millions):


Liability assumed upon acquisition	$	248
Charges		284
Cash spent		(286	)
Write–offs		(8	)
Currency / other		(9	)

Liability balance, September 30, 2010	$	229

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 $17 million for the three months and $93 million for the nine months ended September 30, 2010. We recorded these charges in operations, primarily within selling, general and administrative expenses within our Kraft Foods Europe and Canada & N.A. Foodservice segments, as well as general corporate expenses. 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 $60 million paid in the first nine months of 2010.

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


Liability balance, January 1, 2010	$	270
Reversal of charges		(9	)
Cash spent		(60	)
Currency		(24	)

Liability balance, September 30, 2010	$	177

Our 2010 activity was related to cash outflows on prior year Restructuring Program charges and reversals relating to severance benefits and other charges. Our prior year charges to the liability included severance benefits received by terminated employees, other 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 September 30, 2010 and December 31, 2009, our short-term borrowings and related weighted-average interest rates consisted of:


	September 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		331		6.4%		191		10.5%

Total short-term borrowings	$	331			$	453

The fair values of our short-term borrowings at September 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 threshold was increased by $5.6 billion to $28.6 billion due to the equity we issued as part of our Cadbury acquisition. At September 30, 2010, our total shareholders’ equity, excluding accumulated other comprehensive earnings / (losses), was $39.6 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.

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 $2.5 billion at September 30, 2010. Borrowings on these lines amounted to $331 million at September 30, 2010 and $191 million at December 31, 2009.

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

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 $2,436 million at February 2, 2010. The acquired debt has the following terms:

•

£77 million (approximately $121 million) total principal notes due December 10, 2010 at a fixed, annual interest rate of 4.875%.

•

C$150 million (approximately $146 million) Canadian bank loan agreement expiring August 30, 2012 at a variable interest rate. The interest rate at September 30, 2010 was 1.153%.

•

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

•

£300 million (approximately $471 million) total principal notes due December 11, 2014 at a fixed, annual interest rate of 5.375%.

•

£350 million (approximately $550 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 September 30, 2010 and December 31, 2009, our long-term debt consisted of (interest rates were as of September 30, 2010):


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

	Notes, 2.625% to 7.55% (average effective rate 5.86%), due through 2040	$	24,377		$	14,395
	Euro notes, 5.75% to 6.25% (average effective rate 5.98%), due through 2015		3,879			4,072
	Sterling notes, 4.88% to 7.25% (average effective rate 4.59%), due through 2018		1,226			–
	Other foreign currency obligations		165			5
	Capital leases and other		57			65

	Total		29,704			18,537
	Less current portion of long-term debt		(133	)		(513	)

	Long-term debt	$	29,571		$	18,024

Aggregate maturities of our long-term debt for the years ended September 30 were (in millions):
	2011	$	133
	2012		6,395
	2013		1,760
	2014		2,307
	2015		2,035
	Thereafter		17,071

On August 11, 2010, we repaid $500 million of our long-term debt. This repayment was primarily financed from cash from operations.

Fair Value:

The aggregate fair value of our total debt, based on quoted prices in active markets for identical liabilities, at September 30, 2010, was $33,731 million as compared with the carrying value of $30,035 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 September 30,					For the Nine Months Ended September 30,
		2010		2009			2010			2009
		(in millions)

	Interest and other expense, net:
	Interest expense, debt	$	433	$	322		$	1,255		$	936
	Acquisition-related financing fees		–		–			251			–
	Other (income) / expense, net		–		1			(10	)		(21	)

	Total interest and other expense, net	$	433	$	323		$	1,496		$	915

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 September 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		–		6,337,532			6,337,532

	Balance at September 30, 2010		1,996,537,778		(250,777,565	)		1,745,760,213

In the first nine 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		(691	)		24			–			(667	)
Amortization of experience losses and prior service costs		–			148			–			148
Settlement losses		–			69			–			69
Net actuarial loss arising during period		–			(54	)		–			(54	)
Change in fair value of cash flow hedges		–			–			(261	)		(261	)

Total other comprehensive losses											(765	)

Balances at September 30, 2010	$	(1,197	)	$	(3,363	)	$	(160	)	$	(4,720	)

Note 10. Stock Plans:

Restricted and Deferred Stock:

In January 2010, we granted 1.7 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. During the first nine months of 2010, we granted an additional 0.6 million shares of stock in connection with our long-term incentive plan and market value per share was $29.15 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 nine months of 2010, we issued an additional 0.9 million shares of restricted and deferred stock at a weighted-average market value per restricted or deferred share of $29.54, including shares issued to Cadbury employees in the second quarter of 2010 under our annual equity program. In aggregate, we issued 5.7 million restricted and deferred shares during the first nine months of 2010, including those issued as part of our long-term incentive plan.

During the first nine months of 2010, 3.9 million shares of restricted and deferred stock vested at a market value of $114 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 nine months of 2010, we granted an additional 3.0 million stock options at a weighted-average exercise price of $29.71, including options granted to Cadbury employees in the second quarter of 2010 under our annual equity program. In aggregate, we granted 18.0 million stock options in the first nine months of 2010.

There were 5.2 million stock options exercised during the first nine months of 2010 with a total intrinsic value of $65 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 nine months ended September 30, 2010 and 2009:


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

Service cost	$	36		$	36		$	40		$	15
Interest cost		92			92			98			54
Expected return on plan assets		(122	)		(122	)		(111	)		(60	)
Amortization:
Net loss from experience differences		43			41			18			6
Prior service cost		1			2			2			1
Other expenses		30			15			–			–

Net periodic pension cost	$	80		$	64		$	47		$	16


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

Service cost	$	108		$	114		$	117		$	45
Interest cost		275			276			283			156
Expected return on plan assets		(367	)		(364	)		(318	)		(175	)
Amortization:
Net loss from experience differences		128			120			54			17
Prior service cost		4			5			5			4
Other expenses		91			81			–			–

Net periodic pension cost	$	239		$	232		$	141		$	47

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 $30 million for the three months and $86 million for the nine months ended September 30, 2010, and $15 million for the three months and $81 million for the nine months ended September 30, 2009. Our U.S. plans also incurred a $5 million curtailment expense 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 nine months of 2010, we contributed $33 million to our U.S. plans and $180 million to our non-U.S. plans. Based on current tax law, we plan to make further contributions of approximately $20 million to our U.S. plans and approximately $100 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 nine months ended September 30, 2010 and 2009:


		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2010			2009			2010			2009
		(in millions)

	Service cost	$	9		$	7		$	29		$	26
	Interest cost		42			43			128			130
	Amortization:
	Net loss from experience differences		14			11			41			33
	Prior service credit		(7	)		(8	)		(23	)		(24	)

	Net postretirement health care costs	$	58		$	53		$	175		$	165


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

	Service cost	$	2		$	2		$	6		$	6
	Interest cost		3			3			7			6
	Amortization of net (gains) / losses		(1	)		(1	)		(1	)		2
	Other credits, net		–			–			–			(7	)

	Net postemployment costs	$	4		$	4		$	12		$	7

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 September 30, 2010 and December 31, 2009 were:


		September 30, 2010					December 31, 2009
		Asset Derivatives			Liability Derivatives		Asset Derivatives			Liability Derivatives
		(in millions)
	Derivatives designated as hedging instruments:
	Foreign exchange contracts	$	8		$	200	$	8		$	158
	Commodity contracts		52			7		25			14
	Interest rate contracts		12			294		153			–

		$	72		$	501	$	186		$	172

	Derivatives not designated as hedging instruments:
	Foreign exchange contracts	$	69		$	69	$	2		$	–
	Commodity contracts		152			145		71			62
	Interest rate contracts		72			33		–			–

		$	293		$	247	$	73		$	62

	Total fair value	$	365		$	748	$	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 September 30, 2010 were determined using:
		Total Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
		(in millions)

	Foreign exchange contracts	$	(192	)	$	–	$	(192	)	$	–
	Commodity contracts		52			18		34			–
	Interest rate contracts		(243	)		–		(243	)		–

	Total derivatives	$	(383	)	$	18	$	(401	)	$	–

Level 2 financial assets and liabilities consist of commodity forwards; foreign exchange forwards, currency swaps, and options; and interest rate swaps.

Commodity derivatives are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Our calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the observable market interest rate curve. Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.

Cash Flow Hedges:

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


		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2010			2009			2010			2009
		(in millions)

	Accumulated gain / (loss) at beginning of period	$	(66	)	$	29		$	101		$	(23	)
	Transfer of realized (gains) / losses in fair value to earnings		(7	)		(2	)		(13	)		87
	Unrealized loss in fair value		(87	)		(27	)		(248	)		(64	)

	Accumulated loss at September 30	$	(160	)	$	–		$	(160	)	$	–


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

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

	Foreign exchange contracts – intercompany loans	$	2		$	–		$	4		$	–
	Foreign exchange contracts – forecasted transactions		(4	)		–			(13	)		(11	)
	Commodity contracts		32			(7	)		(11	)		9
	Interest rate contracts		(117	)		–			(7	)		–

	Total	$	(87	)	$	(7	)	$	(27	)	$	(2	)


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

	Foreign exchange contracts – intercompany loans	$	3		$	–		$	5		$	–
	Foreign exchange contracts – forecasted transactions		21			(14	)		(36	)		(39	)
	Commodity contracts		29			–			(47	)		126
	Interest rate contracts		(301	)		1			14			–

	Total	$	(248	)	$	(13	)	$	(64	)	$	87

For the Three Months Ended
September 30, 2010

For the Three Months Ended
September 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 Nine Months Ended
September 30, 2010

For the Nine Months Ended
September 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 $30 million (net of taxes) for commodity cash flow hedges, unrealized gains of $15 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 September 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 7 months; and

•

foreign currency transactions for periods not exceeding the next 15 months.

Fair Value Hedges:

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


		For the Three Months Ended September 30, 2010						For the Three Months Ended September 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	)	$	8		$	(8	)

		For the Nine Months Ended September 30, 2010						For the Nine Months Ended September 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	$	6		$	(6	)	$	7		$	(7	)
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 nine months ended September 30, 2010 and 2009 were:

		Gain / (Loss) Recognized in OCI												Location of Gain / (Loss) Recorded in AOCI
		For the Three Months Ended September 30, 2010			For the Three Months Ended September 30, 2009			For the Nine Months Ended September 30, 2010			For the Nine Months Ended September 30, 2009			Location of Gain / (Loss) Recorded in AOCI
		(in millions)

	Euro notes	$	(253	)	$	(110	)	$	125		$	(122	)	Currency Translation Adjustment
Economic Hedges: The effects of economic hedges, derivatives that are not designated as hedging instruments, for the three and nine months ended September 30, 2010 and 2009 were:
		Gain / (Loss) Recognized in Earnings												Location of
		For the Three			For the Three			For the Nine			For the Nine			Gain / (Loss)
		Months Ended			Months Ended			Months Ended			Months Ended			Recognized
		September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009			in Earnings
		(in millions)

	Foreign exchange contracts:
	Intercompany loans and forecasted interest payments	$	35		$	(4	)	$	58		$	(12	)	Interest expense
	Forecasted transactions		(3	)		(2	)		(1	)		(8	)	Cost of sales
	Forecasted transactions		–			–			(17	)		–		Interest expense
	Cadbury acquisition related		–			–			(395	)		–		Interest expense
	Interest rate contracts		(1	)		–			4			–		Interest expense
	Commodity contracts		29			(7	)		40			9		Cost of sales

	Total	$	60		$	(13	)	$	(311	)	$	(11	)

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 September 30, 2010 and December 31, 2009, we had the following outstanding hedges:


		Notional Amount
		September 30, 2010		December 31, 2009
		(in millions)
	Foreign exchange contracts:
	Intercompany loans and forecasted interest payments	$	3,365	$	1,376
	Forecasted transactions		1,351		631
	Commodity contracts		368		1,832
	Interest rate contracts		5,197		2,350
	Net investment hedge – euro notes		3,885		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 September 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 September 30, 2010, minimum rental commitments under non-cancelable operating leases in effect at quarter-end were (in millions):
	2011			$	387
	2012				359
	2013				243
	2014				159
	2015				125
	Thereafter				275

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 $1,193 million at September 30, 2010, and if we had recognized all of these benefits, the net impact to our income tax provision would have been $863 million. The amount of unrecognized tax benefits could decrease by approximately $55 million during the next 12 months due to the potential resolution of certain foreign, U.S. federal and state examinations. Furthermore, we recorded $302 million of unrecognized tax benefits and $47 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 fourth 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 $242 million as of September 30, 2010.

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


		2010			2009

	January 1	$	829		$	807
	Increases from positions taken during prior periods		8			29
	Decreases from positions taken during prior periods		(80	)		(196	)
	Increases from positions taken during the current period		186			107
	Increases from acquisition adjustments		302			–
	Decreases relating to settlements with taxing authorities		(15	)		(11	)
	Reductions resulting from the lapse of the applicable statute of limitations		(15	)		(14	)
	Currency / other		(22	)		22

	September 30	$	1,193		$	744

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

	Deferred income tax assets:
	Accrued postretirement and postemployment benefits	$	1,347		$	1,472
	Accrued pension costs		682			456
	Other		2,655			1,997

	Total deferred income tax assets		4,684			3,925

	Valuation allowance		(356	)		(97	)

	Net deferred income tax assets	$	4,328		$	3,828

	Deferred income tax liabilities:
	Trade names	$	(7,404	)	$	(4,431	)
	Property, plant and equipment		(1,964	)		(2,029	)
	Other		(701	)		(1,055	)

	Total deferred income tax liabilities		(10,069	)		(7,515	)

	Net deferred income tax liabilities	$	(5,741	)	$	(3,687	)

Note 15. Earnings Per Share:

Basic and diluted EPS were calculated using the following:


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

Earnings from continuing operations	$	760	$	774	$	1,948	$	2,158
Earnings and gain from discontinued operations, net of income taxes		–		52		1,644		159

Net earnings		760		826		3,592		2,317
Noncontrolling interest		6		2		18		6

Net earnings attributable to Kraft Foods	$	754	$	824	$	3,574	$	2,311


Weighted-average shares for basic EPS		1,748		1,479		1,702		1,477
Plus incremental shares from assumed conversions of stock options and long-term incentive plan shares		6		8		6		8

Weighted-average shares for diluted EPS		1,754		1,487		1,708		1,485

Basic earnings per share attributable to Kraft Foods:
Continuing operations	$	0.43	$	0.52	$	1.13	$	1.45
Discontinued operations		–		0.04		0.97		0.11

Net earnings attributable to Kraft Foods	$	0.43	$	0.56	$	2.10	$	1.56


Diluted earnings per share attributable to Kraft Foods:
Continuing operations	$	0.43	$	0.52	$	1.13	$	1.45
Discontinued operations		–		0.03		0.96		0.11

Net earnings attributable to Kraft Foods	$	0.43	$	0.55	$	2.09	$	1.56

We exclude antidilutive Kraft Foods stock options from our calculation of weighted-average shares for diluted EPS. We excluded 31.3 million antidilutive stock options for the three months and 27.8 million antidilutive stock options for the nine months ended September 30, 2010, and we excluded 23.2 million antidilutive stock options for the three months and 23.3 million antidilutive stock options for the nine months ended September 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 selling, general and administrative expenses), general corporate expenses (which are a component of selling, general and administrative expenses) and amortization of intangibles for all periods presented. We exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income. We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, 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 September 30,				For the Nine Months Ended September 30,
	2010		2009		2010		2009
	(in millions; 2009 as revised)
Net revenues:
Kraft Foods North America:
U.S. Beverages	$	756	$	754	$	2,463	$	2,373
U.S. Cheese		863		824		2,505		2,605
U.S. Convenient Meals		806		774		2,415		2,335
U.S. Grocery		779		778		2,518		2,569
U.S. Snacks		1,505		1,232		4,413		3,717
Canada & N.A. Foodservice		1,164		1,010		3,408		2,868
Kraft Foods Europe		2,670		2,070		8,172		6,081
Kraft Foods Developing Markets		3,320		1,955		9,540		5,609

Net revenues	$	11,863	$	9,397	$	35,434	$	28,157


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
	(in millions; 2009 as revised)
Earnings from continuing operations before income taxes:
Operating income:
Kraft Foods North America:
U.S. Beverages	$	131		$	133		$	481		$	443
U.S. Cheese		169			166			439			463
U.S. Convenient Meals		82			63			267			208
U.S. Grocery		244			258			887			859
U.S. Snacks		216			196			663			530
Canada & N.A. Foodservice		160			140			435			339
Kraft Foods Europe		332			211			956			565
Kraft Foods Developing Markets		370			285			1,158			745
Unrealized gains on hedging activities		16			19			–			140
Certain U.S. pension plan costs		(42	)		(27	)		(123	)		(121	)
General corporate expenses		(106	)		(99	)		(591	)		(186	)
Amortization of intangibles		(53	)		(6	)		(146	)		(15	)

Operating income		1,519			1,339			4,426			3,970
Interest and other expense, net		433			323			1,496			915

Earnings from continuing operations before income taxes	$	1,086		$	1,016		$	2,930		$	3,055

Unrealized Gains / (Losses) on Hedging Activities – We recognized gains on the change in unrealized hedging positions of $16 million for the three months ended September 30, 2010, and gains of $19 million for the three months and $140 million for the nine months ended September 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 $92 million for the three months and $284 million for the nine months ended September 30, 2010. We recorded these charges in operations, primarily as a part of selling, general and administrative expenses within our Kraft Foods Europe and Kraft Foods Developing Markets segments, as well as general corporate expenses. We also incurred charges associated with our cost savings initiatives of $17 million for the three months and $93 million for the nine months ended September 30, 2010. We recorded these charges in operations, primarily within selling, general and administrative expenses within our Kraft Foods Europe and Canada & N.A. Foodservice segments, as well as general corporate expenses.

Total assets by segment were:


		September 30, 2010		December 31, 2009
		(in millions)
	Total assets:
	Kraft Foods North America:
	U.S. Beverages	$	2,325	$	2,382
	U.S. Cheese		4,549		4,589
	U.S. Convenient Meals		2,023		3,063
	U.S. Grocery		5,602		5,565
	U.S. Snacks		20,653		16,418
	Canada & N.A. Foodservice		7,023		5,051
	Kraft Foods Europe		23,546		16,073
	Kraft Foods Developing Markets		24,445		11,087
	Unallocated assets ⁽¹⁾		3,454		2,486

	Total assets	$	93,620	$	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 September 30, 2010
		Kraft Foods North America		Kraft Foods Europe		Kraft Foods Developing Markets		Total
		(in millions)

	Biscuits ⁽¹⁾	$	1,394	$	514	$	681	$	2,589
	Confectionery ⁽¹⁾		481		1,203		1,674		3,358
	Beverages		895		561		595		2,051
	Cheese		1,226		233		209		1,668
	Grocery		700		86		130		916
	Convenient Meals		1,177		73		31		1,281

	Total net revenues	$	5,873	$	2,670	$	3,320	$	11,863


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

	Biscuits ⁽¹⁾	$	1,416	$	573	$	621	$	2,610
	Confectionery ⁽¹⁾		70		504		430		1,004
	Beverages		881		572		518		1,971
	Cheese		1,174		244		216		1,634
	Grocery		706		96		140		942
	Convenient Meals		1,125		81		30		1,236

	Total net revenues	$	5,372	$	2,070	$	1,955	$	9,397


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

Biscuits ⁽¹⁾	$	4,157	$	1,730	$	1,956	$	7,843
Confectionery ⁽¹⁾		1,258		3,541		4,623		9,422
Beverages		2,857		1,730		1,834		6,421
Cheese		3,618		715		634		4,967
Grocery		2,363		254		401		3,018
Convenient Meals		3,469		202		92		3,763

Total net revenues	$	17,722	$	8,172	$	9,540	$	35,434


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

Biscuits ⁽¹⁾	$	4,196	$	1,689	$	1,754	$	7,639
Confectionery ⁽¹⁾		183		1,524		1,289		2,996
Beverages		2,727		1,676		1,476		5,879
Cheese		3,593		706		604		4,903
Grocery		2,408		271		400		3,079
Convenient Meals		3,360		215		86		3,661

Total net revenues	$	16,467	$	6,081	$	5,609	$	28,157


(1) Biscuits and Confectionery were previously reported combined as Snacks. With the Cadbury acquisition, the Biscuits and Confectionery sectors have been broken out separately. 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 26.2% to $11.9 billion in the third quarter of 2010 and increased 25.8% to $35.4 billion in the first nine months of 2010 as compared to the same periods in the prior year.

•

Diluted EPS attributable to Kraft Foods decreased 21.8% to $0.43 in the third quarter of 2010 and increased 34.0% to $2.09 in the first nine months of 2010 as compared to the same periods in the prior year.

•

Diluted EPS attributable to Kraft Foods from continuing operations decreased 17.3% to 0.43 in the third quarter of 2010 and decreased 22.1% to $1.13 in the first nine 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 $6,376 million and net earnings of $369 million from February 2, 2010 through September 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, and the divestitures of certain Cadbury confectionery operations in Poland and Romania, as required by the EU Commission as a condition of our Cadbury acquisition.


		Pro forma for the Three Months Ended September 30,			Pro forma for the Nine Months Ended September 30,
		2009			2010		2009
		(in millions)

	Net revenues	$	11,812		$	35,997	$	34,599
	Net earnings attributable to Kraft Foods		725			3,420		2,097
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⁾	$	1,331
	Inventories		1,298
	Other current assets		695
	Property, plant and equipment		3,312
	Goodwill ⁽²⁾		9,174
	Intangible assets ⁽³⁾		12,769
	Other assets		376
	Short-term borrowings		(1,206	)
	Accounts payable		(1,689	)
	Other current liabilities ⁽⁴⁾		(1,711	)
	Long-term debt		(2,436	)
	Deferred income taxes		(2,583	)
	Accrued pension costs		(816	)
	Other liabilities		(981	)
	Noncontrolling interest		(33	)


		(1)		The gross amount due under the receivables we acquired is $1,402 million, of which $71 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)		$10.2 billion of the intangible assets acquired are expected to be indefinite lived.
		(4)		Within other current liabilities, a reserve for exposures related to taxes of approximately $70 million was established within our Developing Markets segment. The cumulative exposure was approximately $140 million at September 30, 2010.

The above amounts represent the allocation of purchase price and are substantially complete. We expect to finalize the purchase price allocation during the fourth quarter of 2010.

Pizza Divestiture:

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


		For the Three Months Ended			For the Nine Months Ended
		September 30, 2009			September 30, 2010			September 30, 2009
		(in millions)

	Net revenues	$	406		$	335		$	1,204

	Earnings before income taxes		80			73			248
	Provision for income taxes		(28	)		(25	)		(89	)
	Gain on discontinued operations, net of income taxes		–			1,596			–

	Earnings and gain from discontinued operations, net of income taxes	$	52		$	1,644		$	159

Earnings before income taxes, as presented, exclude associated allocated overheads of $25 million for the nine months ended September 30, 2010, $28 million for the three months ended September 30, 2009 and $81 million for the nine months ended September 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:

The EU Commission required, as a condition of our Cadbury acquisition, that we divest certain Cadbury confectionery operations in Poland and Romania. In the third quarter of 2010, we completed the sale of the assets of the confectionery operations in Poland and Romania. The total proceeds from the divestitures were $342 million and the impacts of these divestitures were reflected as adjustments to the purchase price allocations.

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 annualized costs savings of at least $750 million by the end of the third year following completion of the acquisition. 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”).

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 third quarter of 2010, we reversed $9 million in Restructuring Program charges relating to severance benefits and other charges. 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 $60 million paid in the first nine months of 2010. At September 30, 2010, we had accrued $177 million related to the Restructuring Program.

Provision for Income Taxes

Our effective tax rate was 30.0% in the third quarter of 2010 and 33.5% in the first nine months of 2010. Our third quarter 2010 effective tax rate included net tax benefits of $68 million, primarily resulting from several items in our international operations. For the first nine months of 2010, our effective tax rate included net tax benefits of $100 million. These net benefits were 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 23.8% in the third quarter of 2009 and 29.4% in the first nine months of 2009. Our third quarter 2009 effective tax rate included net tax benefits of $143 million, primarily due to an agreement we reached with the IRS on specific matters, settlements with various foreign and state tax authorities, and the expiration of the statute of limitations in various jurisdictions. For the first nine months of 2009, our effective tax rate included net tax benefits of $205 million primarily due to an agreement we reached with the IRS on specific matters, settlements with various foreign and state tax authorities, and the expiration of the statute of limitations in various jurisdictions.

Consolidated Results of Operations

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

Three Months Ended September 30:


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

	Net revenues	$	11,863	$	9,397		$	2,466			26.2%

	Operating income		1,519		1,339			180			13.4%

	Earnings from continuing operations		760		774			(14	)		(1.8%	)

	Net earnings attributable to Kraft Foods		754		824			(70	)		(8.5%	)

	Diluted earnings per share attributable to Kraft Foods from continuing operations		0.43		0.52			(0.09	)		(17.3%	)

	Diluted earnings per share attributable to Kraft Foods		0.43		0.55			(0.12	)		(21.8%	)

Net Revenues – Net revenues increased $2,466 million (26.2%) to $11,863 million in the third quarter of 2010, and organic net revenues increased $239 million (2.5%) to $9,624 million as follows.
	Change in net revenues (by percentage point)
	Favorable volume/mix				0.2	pp
	Higher net pricing				2.3	pp

	Total change in organic net revenues ⁽¹⁾				2.5	%
	Impact from the Cadbury acquisition				26.2	pp
	Unfavorable foreign currency				(2.3	)pp
	Impact of divestitures				(0.2	)pp

	Total change in net revenues				26.2	%


	(1) Please see the Non-GAAP Financial Measures section at the end of this item.

Unfavorable foreign currency decreased net revenues by $214 million, due primarily to the strength of the U.S. dollar against the euro and Venezuelan bolivar, partially offset by the strength of the Canadian dollar and Brazilian real versus the U.S. dollar. The Cadbury acquisition added $2,453 million in net revenues. The balance of the increase in net revenues was driven primarily by higher net pricing, mainly in Kraft Foods North America and Kraft Foods Developing Markets, and favorable volume/mix. The favorable volume/mix impact on revenues was driven primarily by higher base volume in Kraft Foods Developing Markets. In addition, the impact of prior year divestitures had an unfavorable impact on revenues.

Operating Income – Operating income increased $180 million (13.4%) to $1,519 million in the third quarter of 2010, due to the following:


	Operating Income		Change
	(in millions)		(percentage point)
Operating Income for the Three Months Ended September 30, 2009 (as revised)	$	1,339
Change in operating income
Higher net pricing		213		15.5pp
Favorable volume/mix		16		1.1pp
Higher input costs		(186)		(13.5)pp
Increased operating income from the Cadbury acquisition		290		21.5pp
Lower acquisition-related costs associated with Cadbury		9		0.8pp
Integration Program costs		(92)		(6.9)pp
Higher selling, general and administrative expenses		(40)		(2.9)pp
Change in unrealized gains on hedging activities		(3)		(0.2)pp
Reversal of asset impairment and exit costs		9		0.7pp
Unfavorable foreign currency		(38)		(2.9)pp
Other, net		2		0.2pp

Total change in operating income		180		13.4%

Operating Income for the Three Months Ended September 30, 2010	$	1,519

Our input costs increased during the quarter, due to higher raw material costs, partially offset by lower manufacturing costs. The favorable volume/mix was primarily driven by strong contributions from Kraft Foods Developing Markets, partially offset by declines in U.S. Grocery and Canada & N.A. Foodservice. The Cadbury acquisition, net of Integration Program and acquisition-related costs, increased operating income by $207 million. Total selling, general and administrative expenses, as recorded in the condensed consolidated statement of earnings, increased $725 million from the third quarter of 2009, but excluding the impacts of divestitures, foreign currency and our Cadbury acquisition (including Integration Program and acquisition-related costs), increased $40 million over the third quarter of 2009. We recognized gains of $16 million on the change in unrealized hedging positions in the third quarter of 2010, versus gains of $19 million in the third quarter of 2009. During the third quarter of 2010, we reversed $9 million in Restructuring Program charges recorded in prior years. In addition, unfavorable foreign currency decreased operating income by $38 million, due primarily to the strength of the U.S. dollar against the euro and Venezuelan bolivar, which more than offset the strength of the Canadian dollar and Brazilian real against the U.S. dollar.

Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $754 million decreased by $70 million (8.5%) in the third quarter of 2010. Diluted EPS attributable to Kraft Foods from continuing operations was $0.43 in the third quarter of 2010, down $0.09 from $0.52 in the third quarter of 2009. Diluted EPS attributable to Kraft Foods was $0.43 in the third quarter of 2010, down $0.12 from $0.55 in the third quarter of 2009. These changes were due to the following:


		Diluted EPS

	Diluted EPS Attributable to Kraft Foods for the Three Months Ended September 30, 2009 (as revised)	$	0.55
	Discontinued operations		0.03

	Diluted EPS Attributable to Kraft Foods from continuing operations for the Three Months Ended September 30, 2009 (as revised)		0.52
	Acquisition-related costs		0.01

	Operating EPS⁽¹⁾ for the Three Months Ended September 30, 2009		0.53
	Increases in operations		0.01
	Increases in operations from the Cadbury acquisition		0.12
	Change in unrealized gains on hedging activities		–
	Unfavorable foreign currency		(0.02	)
	Higher interest and other expense, net ⁽²⁾		(0.05	)
	Changes in taxes⁽³⁾		(0.06	)
	Higher shares outstanding		(0.06	)

	Operating EPS⁽³⁾ for the Three Months Ended September 30, 2010		0.47
	Acquisition-related costs		0.01
	Integration Program costs		(0.05	)

	Diluted EPS Attributable to Kraft Foods for the Three Months Ended September 30, 2010	$	0.43

	(1) Please see the Non-GAAP Financial Measures section at the end of this item. (2) Excludes impacts of acquisition-related interest and other expense, net. (3) Includes the impact of the 2009 U.S. federal tax audit agreement.

*Nine Months Ended September 30:*


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

Net revenues	$	35,434	$	28,157	$	7,277			25.8%

Operating income		4,426		3,970		456			11.5%

Earnings from continuing operations		1,948		2,158		(210	)		(9.7%	)

Net earnings attributable to Kraft Foods		3,574		2,311		1,263			54.7%

Diluted earnings per share attributable to Kraft Foods from continuing operations		1.13		1.45		(0.32	)		(22.1%	)

Diluted earnings per share attributable to Kraft Foods		2.09		1.56		0.53			34.0%

Net Revenues – Net revenues increased $7,277 million (25.8%) to $35,434 million in the first nine months of 2010, and organic net revenues increased $727 million (2.6%) to $28,817 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		1.9pp
	Higher net pricing		0.7pp

	Total change in organic net revenues		2.6%
	Impact from the Cadbury acquisition		22.7pp
	Favorable foreign currency		0.8pp
	Impact of divestitures		(0.3)pp

	Total change in net revenues		25.8%


Favorable foreign currency increased net revenues by $241 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 $6,376 million in net revenues. The balance of the increase in net revenues was driven by favorable volume/mix and higher net pricing. The favorable volume/mix impact on revenues was driven primarily by higher base volume in Kraft Foods Developing Markets and Kraft Foods Europe. In addition, we had higher net pricing across all reportable segments, except Kraft Foods Europe and U.S. Snacks. The impact of prior year divestitures had an unfavorable impact on revenues. Operating Income – Operating income increased $456 million (11.5%) to $4,426 million in the first nine months of 2010, due to the following:
		Operating Income		Change
		(in millions)		(percentage point)
	Operating Income for the Nine Months Ended September 30, 2009 (as revised)	$	3,970
	Change in operating income
	Lower input costs		1	0.2pp
	Favorable volume/mix		306	7.5pp
	Higher net pricing		210	5.1pp
	Increased operating income from the Cadbury acquisition		762	19.1pp
	Higher acquisition-related costs associated with Cadbury		(261)	(6.5)pp
	Integration Program costs		(284)	(7.1)pp
	Higher selling, general and administrative expenses		(159)	(3.9)pp
	Lower net reversals of asset impairment and exit costs		(17)	(0.5)pp
	Change in unrealized gains on hedging activities		(140)	(3.4)pp
	Lower losses on divestitures		17	0.5pp
	Favorable foreign currency		30	0.8pp
	Other, net		(9)	(0.3)pp

	Total change in operating income		456	11.5%

	Operating Income for the Nine Months Ended September 30, 2010	$	4,426

Our input costs were essentially flat during the first nine months of 2010, as lower manufacturing costs were offset by higher raw material costs. The favorable volume/mix was primarily driven by strong contributions from Kraft Foods Developing Markets, Kraft Foods Europe, U.S. Beverages and U.S. Convenient Meals, partially offset by declines in U.S. Grocery, U.S. Cheese and U.S. Snacks. The Cadbury acquisition, net of Integration Program and higher acquisition-related costs, increased operating income by $217 million. Total selling, general and administrative expenses, as recorded in the condensed consolidated statement of earnings, increased $2,527 million from the first nine months of 2009, but excluding the impacts of divestitures, foreign currency and our Cadbury acquisition (including Integration Program and acquisition-related costs), increased $159 million over the first nine months of 2009, primarily due to further investments in our brands. We recognized no net gain or loss on the change in unrealized hedging positions in the first nine months of 2010, versus gains of $140 million in the first nine months of 2009. During the first nine months of 2010, we reversed $9 million in Restructuring Program charges recorded in prior years, versus a reversal of $35 million in Restructuring Program charges recorded in the first nine months of 2009. We recorded an asset impairment charge of $9 million to write off an investment in Norway in the first nine months of 2009. In addition, favorable foreign currency increased operating income by $30 million, due primarily to the strength of the Canadian dollar, Brazilian real, Korean won and Australian dollar against the U.S. dollar, partially offset by the strength of the U.S. dollar against the Venezuelan bolivar and euro.

Net Earnings and Diluted Earnings per Share Attributable to Kraft Foods – Net earnings attributable to Kraft Foods of $3,574 million increased by $1,263 million (54.7%) in the first nine months of 2010. Diluted EPS attributable to Kraft Foods from continuing operations was $1.13 in the first nine months of 2010, down 22.1% from $1.45 in the first nine months of 2009. Diluted EPS attributable to Kraft Foods was $2.09 in the first nine months of 2010, up $0.53 from $1.56 in the first nine months of 2009. These changes were due to the following:


	Diluted EPS
Diluted EPS Attributable to Kraft Foods for the Nine Months Ended September 30, 2009 (as revised)	$	1.56
Discontinued operations		0.11

Diluted EPS Attributable to Kraft Foods from Continuing Operations for the Nine Months Ended September 30, 2009 (as revised)		1.45
Acquisition-related costs		0.01

Operating EPS⁽¹⁾ for the Nine Months Ended September 30, 2009		1.46

Increases in operations		0.17
Increases in operations from the Cadbury acquisition		0.30
Change in unrealized gains on hedging activities		(0.06	)
Favorable foreign currency		0.01
Higher interest and other expense, net ⁽²⁾		(0.14	)
Changes in taxes⁽³⁾		–
Higher shares outstanding		(0.18	)

Operating EPS⁽¹⁾ for the Nine Months Ended September 30, 2010		1.56

Acquisition-related costs		(0.12	)
Acquisition-related interest and other expense, net		(0.10	)
Integration Program costs		(0.13	)
U.S. health care legislation impact on deferred taxes		(0.08	) </