Kraft 2005 Annual Report Download - page 29

MERRILL CORPORATION ABLIJDE// 7-MAR-06 14:42 DISK126:[06CHI5.06CHI1135]DI1135A.;10
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DISK024:[PAGER.PSTYLES]UNIVERSAL.BST;51
KRAFT FOODS-FSC CERTIFIED-10K/AR Proj: P1102CHI06 Job: 06CHI1135 File: DI1135A.;10
Merrill Corporation/Chicago [phone] Page Dim: 8.250 X 10.750Copy Dim: 38. X 54.3
specific programs announced will result in the elimination of approximately 5,500 positions.
Approximately 60% of the pre-tax charges are expected to require cash payments.
In addition, the Company expects to incur approximately $170 million in capital expenditures from
2004 through 2006 to implement the restructuring program. From January 2004 through December 31,
2005, the Company spent $144 million, including $98 million spent in 2005, in capital to implement the
restructuring program. Cost savings as a result of the restructuring program were approximately
$131 million in 2005 and $127 million in 2004, and were anticipated to reach cumulative annualized cost
savings of approximately $450 million by 2006, all of which were expected to be used to support brand-
building initiatives.
In January 2006, the Company announced plans to expand its restructuring efforts beyond those
originally contemplated. Additional pre-tax charges are anticipated to be $2.5 billion from 2006 to 2009,
of which approximately $1.6 billion are expected to require cash payments. These charges will result in
the anticipated closure of up to 20 additional facilities and the elimination of approximately 8,000
additional positions. Initiatives under the expanded program include additional organizational
streamlining and facility closures. The expanded initiatives are expected to add approximately
$700 million in annualized cost savings by 2009. Capital expenditures required for the expanded
restructuring program will be included within the Company’s overall capital spending budget, which is
expected to remain flat in 2006 versus 2005 at $1.2 billion. The entire restructuring program is expected
to ultimately result in $3.7 billion in pre-tax charges, the closure of up to 40 facilities, the elimination of
approximately 14,000 positions and cumulative annualized cost savings at the completion of the
program of approximately $1.15 billion. Approximately $2.3 billion of the $3.7 billion in pre-tax charges
are expected to require cash payments.
Acquisitions and Dispositions:
One element of the Company’s growth strategy is to strengthen its brand portfolios through a
disciplined program of selective acquisitions and divestitures. The Company is constantly reviewing
potential acquisition candidates and from time to time sells businesses to accelerate the shift in its
portfolio toward businesses—whether global, regional or local—that offer the Company a sustainable
competitive advantage. The impact of any future acquisition or divestiture could have a material impact
on the Company’s consolidated financial position, results of operations or cash flows, and future sales of
businesses could in some cases result in losses on sale.
As previously discussed, the Company sold substantially all of its sugar confectionery business in
June 2005 for pre-tax proceeds of approximately $1.4 billion. The sale included the Life Savers, Creme
Savers, Altoids, Trolli and Sugus brands. The Company has reflected the results of its sugar
confectionery business prior to the closing date as discontinued operations on the consolidated
statements of earnings for all years presented. The assets related to the sugar confectionery business
were reflected as assets of discontinued operations held for sale on the consolidated balance sheet at
December 31, 2004. The Company recorded a loss on sale of discontinued operations of $297 million in
the second quarter of 2005, related largely to taxes on the transaction.
During 2004, the Company acquired a U.S.-based beverage business for a total cost of $137 million.
During 2003, the Company acquired a biscuits business in Egypt and trademarks associated with a
small U.S.-based natural foods business. The total cost of these and other smaller acquisitions was
$98 million.
During 2005, the Company sold its fruit snacks assets, and incurred a pre-tax asset impairment
charge of $93 million in recognition of this sale. Additionally, during 2005, the Company sold its U.K.
desserts assets, its U.S. yogurt assets, a small business in Colombia, a minor trademark in Mexico and a
small equity investment in Turkey. The aggregate proceeds received from these sales were $238 million,
on which the Company recorded pre-tax gains of $108 million. In December 2005, the Company
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