Kraft 2002 Annual Report Download - page 65

Substantially all of the Company’s derivative financial instruments
are effective as hedges under SFAS No. 133. The fair value of all
derivative financial instruments has been calculated based on
market quotes.
The Company uses forward foreign exchange contracts and
foreign currency options to mitigate its exposure to changes
in foreign currency exchange rates from third-party and
intercompany forecasted transactions. The primary currencies to
which the Company is exposed include the Euro, British pound
and Canadian dollar. At December 31, 2002 and 2001, the
Company had option and forward foreign exchange contracts
with aggregate notional amounts of $575 million and $431 million,
respectively, which are comprised of contracts for the purchase
and sale of foreign currencies. The effective portion of unrealized
gains and losses associated with forward contracts is deferred as
a component of accumulated other comprehensive earnings
(losses) until the underlying hedged transactions are reported on
the Company’s consolidated statement of earnings.
The Company is exposed to price risk related to forecasted
purchases of certain commodities used as raw materials by the
Company’s businesses. Accordingly, the Company uses
commodity forward contracts, as cash flow hedges, primarily for
coffee, cocoa, milk and cheese. Commodity futures and options
are also used to hedge the price of certain commodities,
including milk, coffee, cocoa, wheat, corn, sugar and soybean oil.
In general, commodity forward contracts qualify for the normal
purchase exception under SFAS No. 133 and are, therefore, not
subject to the provisions of SFAS No. 133. At December 31, 2002
and 2001, the Company had net long commodity positions of
$544 million and $589 million, respectively. Unrealized gains or
losses on net commodity positions were immaterial at December
31, 2002 and 2001. The effective portion of unrealized gains and
losses on commodity futures and option contracts is deferred as
a component of accumulated other comprehensive earnings
(losses) and is recognized as a component of cost of sales in the
Company’s consolidated statement of earnings when the related
inventory is sold.
Derivative gains or losses reported in accumulated other
comprehensive earnings (losses) are a result of qualifying
hedging activity. Transfers of these gains or losses from
accumulated other comprehensive earnings (losses) to earnings
are offset by corresponding gains or losses on the underlying
hedged items. During the years ended December 31, 2002
and 2001, ineffectiveness related to cash flow hedges was
not material. At December 31, 2002, the Company is hedging
forecasted transactions for periods not exceeding fifteen
months and expects substantially all amounts reported in
accumulated other comprehensive earnings (losses) to be
reclassified to the consolidated statement of earnings within
the next twelve months.
Hedging activity affected accumulated other comprehensive
earnings (losses), net of income taxes, during the years ended
December 31, 2002 and 2001, as follows:
(in millions)
Balance as of January 1, 2001 $ —
Derivative losses transferred to earnings 15
Change in fair value (33)
Balance as of December 31, 2001 (18)
Derivative losses transferred to earnings 21
Change in fair value 10
Balance as of December 31, 2002 $13
Credit exposure and credit risk: The Company is exposed to
credit loss in the event of nonperformance by counterparties.
However, the Company does not anticipate nonperformance,
and such exposure was not material at December 31, 2002.
Fair value: The aggregate fair value, based on market quotes,
of the Company’s third-party debt at December 31, 2002 was
$11,764 million as compared with its carrying value of
$10,988 million. The aggregate fair value of the Company’s third-
party debt at December 31, 2001 was $9,360 million as compared
with its carrying value of $9,355 million. Based on interest rates
available to the Company for issuances of debt with similar terms
and remaining maturities, the aggregate fair value and carrying
value of the Company’s long-term notes payable to Altria Group,
Inc. and its affiliates were $2,764 million and $2,560 million,
respectively, at December 31, 2002 and $5,325 million and
$5,000 million, respectively, at December 31, 2001.
See Notes 3, 7 and 8 for additional disclosures of fair value for
short-term borrowings and long-term debt.
Note 17. Contingencies:
The Company and its subsidiaries are parties to a variety of legal
proceedings arising out of the normal course of business,
including a few cases in which substantial amounts of damages
are sought. While the results of litigation cannot be predicted with
certainty, management believes that the final outcome of these
proceedings will not have a material adverse effect on the
Company’s consolidated financial position or results of operations.
Guarantees: At December 31, 2002, the Company’s third-party
guarantees, which are primarily derived from acquisition and
divestiture activities, approximated $36 million. Substantially all
of these guarantees expire through 2012, with $12 million expiring
in 2003. The Company is required to perform under these
guarantees in the event that a third-party fails to make contractual
payments or achieve performance measures. The Company has
recorded a liability of $21 million at December 31, 2002 relating to
these guarantees.
61