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Kraft Restructuring Program
In January 2004, Kraft announced a three-year restructuring program with the objectives of leveraging Kraft's global scale, realigning and lowering its cost structure, and optimizing capacity utilization. In January 2006, Kraft announced plans to expand its restructuring efforts through 2008. The entire restructuring program is expected to result in $3.0 billion in pre-tax charges, reflecting asset disposals, severance and implementation costs. The decline of $700 million from the $3.7 billion in pre-tax charges previously announced was due primarily to lower than projected severance costs, the cancellation of an initiative to generate sales efficiencies, and the sale of one plant that was originally planned to be closed. As part of the program, Kraft anticipates the closure of up to 40 facilities and the elimination of approximately 14,000 positions. Approximately $1.9 billion of the $3.0 billion in pre-tax charges are expected to require cash payments. Total pre-tax restructuring charges incurred since the inception of the program in January 2004 were $1.6 billion. The consolidated statements of earnings include asset impairment and exit costs at Kraft as follows:
Charges under the restructuring program for 2006 resulted from the announced closures of 8 plants, for a total of 27 since the commencement of the restructuring program in January 2004, and the continuation of a number of workforce reduction programs. Other asset impairment charges consist of write-downs in 2006 related to Kraft’s sale of its pet snacks brand and assets, the impairment of its Tassimo hot beverage business, and the impairment of its hot cereal assets and trademarks, as well as charges following its annual review of goodwill and intangible assets. Approximately $332 million of the pre-tax charges incurred in 2006 will require cash payments.
Charges under the restructuring program for 2005 resulted from the announced closures of 6 plants and the continuation of a number of workforce reduction programs. The other asset impairments in 2005 related to Kraft's sale of its fruit snacks assets and Kraft's sale of certain assets in Canada and a small biscuit brand in the United States.
Charges under the restructuring program for 2004 resulted from the announced closures of 13 plants, the termination of co-manufacturing agreements and the commencement of a number of workforce reduction programs. The other asset impairments in 2004 were composed of impairment charges related to intangible assets and the sale of Kraft's yogurt brand.
Pre-tax restructuring liability activity for 2006 and 2005 was as follows:
Severance costs in the above schedule, which relate to the workforce reduction programs, include the cost of related benefits. Specific programs announced since 2004, as part of the overall restructuring program, will result in the elimination of approximately 9,800 positions. At December 31, 2006, approximately 8,400 of these positions have been eliminated. Asset write-downs relate to the impairment of assets caused by the plant closings and related activity. Other costs incurred relate primarily to contract termination costs associated with the plant closings and the termination of leasing agreements. Severance charges taken against assets relate to incremental pension costs, which reduce prepaid pension assets.
During 2006, 2005 and 2004, Kraft recorded pre-tax implementation costs associated with the restructuring program. These costs include the discontinuance of certain product lines and incremental costs related to the integration and streamlining of functions and closure of facilities. Substantially all implementation costs incurred in 2006 will require cash payments. These costs were recorded on the consolidated statements of earnings as follows:
Kraft Asset Impairment Charges
During 2006, Kraft sold its pet snacks brand and assets, and recorded tax expense of $57 million and a pre-tax asset impairment charge of $86 million in recognition of the sale. In January 2007, Kraft announced the sale of its hot cereal assets and trademarks. In recognition of the sale, Kraft recorded a pre-tax asset impairment charge of $69 million in 2006 for these assets. These pre-tax asset impairment charges, which included the write-off of a portion of the associated goodwill, and intangible and fixed assets, were recorded as asset impairment and exit costs on the consolidated statement of earnings. During 2006, Kraft completed its annual review of goodwill and intangible assets, and recorded non-cash pre-tax charges of $24 million related to an intangible asset impairment for biscuits assets in Egypt and hot cereal assets in the United States. Also during 2006, Kraft re-evaluated the business model for its Tassimo hot beverage system, the revenues of which lagged Kraft's projections. This evaluation resulted in a $245 million non-cash pre-tax asset impairment charge related to lower utilization of existing manufacturing capacity. These charges were recorded as asset impairment and exit costs on the consolidated statement of earnings. In addition, Kraft anticipates that the impairment will result in related cash expenditures of approximately $3 million, primarily related to decommissioning of idle production lines.
During 2005, Kraft sold its fruit snacks assets and incurred a pre-tax asset impairment charge of $93 million in recognition of the sale. During December 2005, Kraft reached agreements to sell certain assets in Canada and a small biscuit brand in the United States. These transactions closed in 2006. Kraft incurred pre-tax asset impairment charges of $176 million in 2005 in recognition of these sales. These charges, which include the write-off of all associated intangible assets, were recorded as asset impairment and exit costs on the consolidated statement of earnings.
During 2004, Kraft recorded a $29 million non-cash pre-tax charge related to an intangible asset impairment for a small confectionery business in the United States and certain brands in Mexico. A portion of this charge, $17 million, was reclassified to earnings from discontinued operations on the consolidated statement of earnings in the fourth quarter of 2004.
In November 2004, following discussions between Kraft and its joint venture partner in Turkey, and an independent valuation of its equity investment, it was determined that a permanent decline in value had occurred. This valuation resulted in a $47 million non-cash pre-tax charge. This charge was recorded as marketing, administration and research costs on the consolidated statement of earnings. During 2005, Kraft's interest in the joint venture was sold.
In 2004, as a result of the anticipated sale of the sugar confectionery business in 2005, Kraft recorded non-cash asset impairments totaling $107 million. These charges were included in loss from discontinued operations on the consolidated statement of earnings.
In 2004, as a result of the anticipated sale of a yogurt brand in 2005, Kraft recorded asset impairments totaling $8 million. This charge was recorded as asset impairment and exit costs on the consolidated statement of earnings.
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