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How฀we฀will฀grow฀grow฀ourour฀future฀future..
Kraft฀Foods฀Inc.฀2003฀Annual฀Report

Table of contents

  • Page 1
    Kraft฀Foods฀Inc.฀2003฀Annual฀Report How฀we฀will฀grow฀ grow฀our our฀future ฀future. .

  • Page 2
    We฀can฀say฀it฀in฀six฀simple฀words.฀Value.฀Transform We฀are฀committed฀to฀delivering฀sustainable฀growth฀-฀top฀ must฀delight฀the฀world฀with฀the฀right฀benefits฀at฀the฀right฀ a฀step฀ahead฀of฀tomorrow.฀We฀must฀expand฀our฀global...

  • Page 3
    ....฀ line,฀bottom฀line฀and฀cash฀ï¬,ow.฀To฀do฀it,฀we฀know฀our฀brands฀ price.฀We฀must฀continuously฀transform฀our฀products฀ scale.฀We฀must฀capture฀cost฀savings฀to฀fuel฀our฀growth.฀ we฀must฀act฀responsibly฀throughout฀the฀world...

  • Page 4
    ...Oscar฀Mayer฀and฀Pizza ฀฀฀Net฀revenues Operating฀companies฀income*฀ Total฀North฀America ฀฀฀Net฀revenues Operating฀companies฀income*฀ International Europe,฀Middle฀East฀and฀Africa ฀฀฀Net฀revenues Operating฀companies฀income*฀ Latin฀America...

  • Page 5
    ...฀of฀commodities,฀ packaging฀and฀energy,฀and฀pensions฀and฀medical฀benefits.฀We฀tried฀to฀recover฀ those฀costs฀through฀higher฀pricing฀in฀several฀categories.฀However,฀as฀a฀result฀of฀ these฀higher฀prices,฀along฀with฀several฀new-product...

  • Page 6
    ...฀-฀a฀Global฀Marketing฀ &฀Category฀Development฀group฀to฀create฀global฀category฀strategies฀and฀newproduct฀growth฀platforms;฀North฀America฀Commercial฀and฀International฀Commercial฀ units฀to฀drive฀sales฀and฀marketing฀execution฀country...

  • Page 7
    ..."฀organization,฀we're฀set฀up฀to฀deliver฀฀ our฀four-point฀Sustainable฀Growth฀Plan.฀ First,฀to฀build฀superior฀brand฀value,฀we฀must฀deliver฀more฀product฀benefits฀for฀฀ the฀price฀paid฀than฀our฀competitors.฀ We฀have฀an฀exceptional...

  • Page 8
    ...฀to฀build฀a฀stronger฀company฀and฀meet฀our฀responsibilities฀to฀the฀greatest฀ number฀of฀employees,฀investors฀and฀communities. We฀believe฀our฀Sustainable฀Growth฀Plan฀will฀deliver฀consistent฀results฀over฀฀ the฀long฀term.฀In฀2004,฀we...

  • Page 9
    ...to฀thank฀our฀employees฀for฀their฀ unwavering฀efforts฀on฀behalf฀of฀our฀business,฀and฀our฀investors฀for฀their฀continued฀ confidence฀in฀Kraft. Louis฀C.฀Camilleri฀฀ Chairman฀฀ February฀27,฀2004 Roger฀K.฀Deromedi Chief฀Executive฀Officer

  • Page 10
    Value.฀The฀ultimate฀measure฀of฀a฀brand. Value. 8

  • Page 11
    ...฀the฀optimal฀ level฀of฀marketing.฀The฀additional฀funds฀we฀reinvested฀in฀marketing฀and฀ price฀management฀in฀2003฀helped฀restore฀brand฀value฀in฀our฀focus฀ categories.฀The฀progress฀was฀encouraging,฀and฀we're฀planning฀on฀an฀ increase...

  • Page 12
    Transformation. Transformation .฀Growing฀the฀next฀generation฀of฀products. 10

  • Page 13
    ...bringing฀to฀market฀a฀generation฀of฀new฀products฀to฀help฀consumers฀ meet฀a฀range฀of฀health฀and฀wellness฀needs฀-฀weight฀management,฀natural฀ and฀organic฀foods,฀performance฀nutrition,฀health฀management฀and฀general฀ nutrition.฀To฀answer...

  • Page 14
    Scale. Scale .฀Extending฀our฀global฀reach. 12

  • Page 15
    ...in฀China฀we฀are฀building฀our฀biscuits฀business฀with฀new฀ introductions฀that฀leverage฀our฀global฀technologies฀but฀deliver฀a฀local฀taste. We're฀also฀expanding฀our฀core฀categories฀into฀current฀markets฀where฀ they฀don't฀yet฀exist.฀For...

  • Page 16
    Cost. Cost .฀How฀we฀fund฀our฀future. Grow Save Invest 14

  • Page 17
    ...lowering฀our฀cost฀structure฀and฀optimizing฀ our฀capacity฀utilization,฀we฀expect฀this฀program฀to฀generate฀about฀฀ $400฀million฀in฀annual฀pre-tax฀savings฀by฀2006฀to฀invest฀back฀in฀our฀ brands฀and฀accelerate฀top-line-driven฀earnings...

  • Page 18
    Organization. Organization .฀The฀best฀of฀global,฀best฀of฀local. world. company. team. 16

  • Page 19
    ...฀and฀customers฀around฀the฀world. Our฀new฀structure฀brings฀together฀three฀organizational฀dimensions฀-฀a฀new฀ global฀marketing฀and฀category฀development฀group,฀our฀geographic-based฀ commercial฀units฀and฀our฀key฀global฀functions.฀ The฀power...

  • Page 20
    Responsibility. Responsibility .฀Helping฀people฀eat฀and฀live฀better. 18

  • Page 21
    ...for฀ employees฀around฀the฀world.฀Second,฀we฀provided฀more฀than฀$90฀million฀ in฀food฀and฀financial฀support฀to฀communities฀worldwide.฀And฀third,฀we฀took฀ important฀steps฀to฀address฀key฀societal฀issues฀relevant฀to฀our฀business.฀ Two...

  • Page 22
    ...฀ outside฀the฀box฀-฀and฀inside฀the฀cup,฀bottle,฀ packet฀or฀jar.฀No฀matter฀what฀form฀or฀flavor,฀ Kraft฀innovations฀in฀quality฀and฀taste฀are฀as฀ close฀as฀the฀nearest฀grocery฀aisle. Convenient฀Meals Net฀Revenues฀$4.9฀Billion To...

  • Page 23
    ...฀grow฀฀ ฀ the฀natural฀cheese฀business฀and฀maintain฀our฀number฀one฀branded฀share฀position฀in฀chunk฀cheese฀in฀the฀U.S. •฀Launched฀in฀Australia฀in฀August,฀two฀new฀Kraft฀Individually฀Wrapped฀Singles฀flavors฀-฀Swiss฀Style฀and...

  • Page 24
    ...฀Flows฀...฀฀42 Consolidated฀Statements฀of฀Shareholders'฀Equity฀...฀฀43 Notes฀to฀Consolidated฀Financial฀Statements฀...฀฀44 Report฀of฀Independent฀Auditors฀...฀฀60 Company฀Report฀on฀Financial฀Statements฀...฀฀60 Kraft฀Foods฀Inc.฀Guide...

  • Page 25
    ..., Desserts and Cereals; and Oscar Mayer and Pizza. KFNA's food service business within the United States and its businesses in Canada, Mexico and Puerto Rico were reported through the Cheese, Meals and Enhancers segment. KFI's segments were Europe, Middle East and Africa; and Latin America and Asia...

  • Page 26
    ... been discussed with the Company's Audit Committee. The following is a review of the more significant assumptions and estimates, as well as the accounting policies and methods used in the preparation of the Company's consolidated financial statements: Employee Benefit Plans: As discussed in Note...

  • Page 27
    ...developed from historical information. Related Party Transactions: As discussed in Note 3 to the consolidated financial statements, Altria Group, Inc.'s subsidiary, Altria Corporate Services, Inc., provides the Company with various services, including planning, legal, treasury, accounting, auditing...

  • Page 28
    ...to develop innovative new products, to effectively manage price gaps and to build closer relationships with consumers. The second element of the plan is to accelerate the shift in the Company's brand portfolio to address growing consumer demand for products meeting their health and wellness concerns...

  • Page 29
    ... companies income: Cheese, Meals and Enhancers Biscuits, Snacks and Confectionery Beverages, Desserts and Cereals Oscar Mayer and Pizza Europe, Middle East and Africa Latin America and Asia Pacific Amortization of intangibles General corporate expenses Operating income Net earnings Weighted average...

  • Page 30
    ...Cereals Oscar Mayer and Pizza Europe, Middle East and Africa Latin America and Asia Pacific Asset impairment and exit costs 2003 2002 $ 60 3 47 25 5 2 $142 $6 $6 Gains on Sales of Businesses: During 2003, the Company sold a European rice business and a branded fresh cheese business in Italy for...

  • Page 31
    ... Results by Reportable Segment Kraft Foods North America (in millions) For the Years Ended December 31, Volume (in pounds): Cheese, Meals and Enhancers Biscuits, Snacks and Confectionery Beverages, Desserts and Cereals Oscar Mayer and Pizza Volume (in pounds) Net revenues: Cheese, Meals and...

  • Page 32
    ... in the third quarter of 2003. Volume for the food service business in the United States also increased, due to higher shipments to national accounts. Volume in Canada and Mexico increased, driven by new beverage product introductions. Operating companies income decreased $164 million (15.6%), due...

  • Page 33
    ... and research costs ($24 million, including higher benefit costs) and higher manufacturing costs. Kraft Foods International (in millions) For the Years Ended December 31, Volume (in pounds): Europe, Middle East and Africa Latin America and Asia Pacific Volume (in pounds) Net revenues: Europe...

  • Page 34
    ...fiting from new products in Australia and promotional programs in the Philippines, partially offset by declines in Latin America. In convenient meals, volume grew, benefiting from gains in Argentina. Volume decreased 1.6%, due to the divestiture of a Latin American bakery ingredients business in...

  • Page 35
    ... markets including Italy, the United Kingdom, Sweden, the Ukraine, the Middle East and Poland, partially offset by declines in Germany and Romania. Snacks volume increased, benefiting from confectionery acquisitions in Russia and Poland, a snacks acquisition in Turkey and new product introductions...

  • Page 36
    ... to liquidity and capital resources. The information provided below about the Company's debt, credit facilities, guarantees and future commitments is included here to facilitate a review of the Company's liquidity. Type Credit Lines Amount Drawn Commercial Paper Outstanding 364-day (expires...

  • Page 37
    ... nonemployee directors, and other plans where options to purchase Kraft's Class A common stock are granted to employees of the Company. On December 3, 2003, Kraft completed the $500 million Class A common stock repurchase program, acquiring 15,308,458 Class A shares at an average price of $32.66 per...

  • Page 38
    ...other factors deemed relevant by Kraft's Board of Directors. Market Risk The Company operates globally, with manufacturing and sales facilities in various locations around the world, and utilizes certain financial instruments to manage its foreign currency and commodity exposures, which primarily...

  • Page 39
    ... a component of cost of sales in the Company's consolidated statement of earnings when the related inventory is sold. Value at Risk: The Company uses a value at risk ("VAR") computation to estimate the potential one-day loss in the fair value of its interest rate-sensitive financial instruments and...

  • Page 40
    ... the credit ratings of Altria Group, Inc. The Company's benefit expense is subject to the investment performance of pension plan assets, interest rates and cost increases for medical benefits offered to employees and retirees. The food industry continues to be subject to recalls if products become...

  • Page 41
    ...)-Basic Weighted average shares (millions)-Diluted Capital expenditures Depreciation Property, plant and equipment, net Inventories Total assets Long-term debt Notes payable to Altria Group, Inc. and affiliates Total debt Total deferred income taxes Shareholders' equity Common dividends declared as...

  • Page 42
    ... Less accumulated depreciation Goodwill Other intangible assets, net Prepaid pension assets Other assets Total Assets Liabilities Short-term borrowings Current portion of long-term debt Due to Altria Group, Inc. and affiliates Accounts payable Accrued liabilities: Marketing Employment costs Other...

  • Page 43
    Kraft Foods Inc. Consolidated Statements of Earnings (in millions of dollars, except per share data) For the years ended December 31, Net revenues Cost of sales Gross profit Marketing, administration and research costs Integration costs and a loss on sale of a food factory Asset impairment and ...

  • Page 44
    ... food factory, net of cash paid Asset impairment and exit costs, net of cash paid Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net Inventories Accounts payable Income taxes Amounts due to Altria Group, Inc. and affiliates Other working capital items...

  • Page 45
    ... stock to public Cash dividends declared ($0.26 per share) Balances, December 31, 2001 Comprehensive earnings: Net earnings Other comprehensive earnings (losses), net of income taxes: Currency translation adjustments Additional minimum pension liability Change in fair value of derivatives accounted...

  • Page 46
    ... used to retire a portion of an $11.0 billion long-term note payable to Altria Group, Inc., incurred in connection with the acquisition of Nabisco Holdings Corp. ("Nabisco"). After the IPO, Altria Group, Inc. owned approximately 83.9% of the outstanding shares of the Company's capital stock through...

  • Page 47
    ... 252 4,334 $24,911 Cheese, Meals and Enhancers Biscuits, Snacks and Confectionery Beverages, Desserts and Cereals Oscar Mayer and Pizza Total Kraft Foods North America Europe, Middle East and Africa Latin America and Asia Pacific Total Kraft Foods International Total goodwill $ 8,834 8,963 2,143...

  • Page 48
    ... plant and equipment on the consolidated balance sheets and amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed five years. Stock-based compensation: The Company accounts for employee stock compensation plans in accordance with the intrinsic value...

  • Page 49
    ... consolidated statements of cash ï¬,ows. The Company had long-term notes payable to Altria Group, Inc. and its affiliates as follows: (in millions) Net earnings, as reported Deduct: Total stock-based employee compensation expense determined under fair value method for all stock option awards, net...

  • Page 50
    ... fair values of the Company's short-term borrowings at December 31, 2003 and 2002, based upon current market interest rates, approximate the amounts disclosed above. Following a $10.1 billion judgment on March 21, 2003 against Altria Group, Inc.'s domestic tobacco subsidiary, Philip Morris USA Inc...

  • Page 51
    ..., Altria Group, Inc. holds 97.9% of the combined voting power of the Company's outstanding capital stock at December 31, 2003. At December 31, 2003, 71,662,879 shares of common stock were reserved for stock options and other stock awards. Concurrent with the IPO, certain employees of Altria Group...

  • Page 52
    ...permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," which did not result in compensation cost for stock options. The Company's employees held options to purchase the following number of shares of Altria Group, Inc. stock: 39,241,651 shares at an average exercise price of $37.25 per...

  • Page 53
    ... and managed principally by product category. KFNA's segments are Cheese, Meals and Enhancers; Biscuits, Snacks and Confectionery; Beverages, Desserts and Cereals; and Oscar Mayer and Pizza. KFNA's food service business within the United States and its businesses in Canada and Mexico are reported...

  • Page 54
    ...Latin America and Asia Pacific Total Kraft Foods International Net revenues Earnings before income taxes and minority interest: Operating companies income: Kraft Foods North America: Cheese, Meals and Enhancers Biscuits, Snacks and Confectionery Beverages, Desserts and Cereals Oscar Mayer and Pizza...

  • Page 55
    ...than goodwill, other intangible assets, net, and prepaid pension assets) were as follows: (in millions) 2003 2002 $ 60 3 47 25 5 2 $142 Cheese, Meals and Enhancers Biscuits, Snacks and Confectionery Beverages, Desserts and Cereals Oscar Mayer and Pizza Europe, Middle East and Africa Latin America...

  • Page 56
    ...2003 2002 2003 2002 The combined U.S. and non-U.S. pension plans resulted in a net prepaid pension asset of $1,985 million and $1,691 million at December 31, 2003 and 2002, respectively. These amounts were recognized in the Company's consolidated balance sheets at December 31, 2003 and 2002, as...

  • Page 57
    ... or below the assumed long-term rate of return Discount rate 6.50% 7.00% 7.75% 5.56% 5.80% 5.88% on pension assets. Expected rate of return on plan assets Rate of compensation increase 9.00 4.00 9.00 4.50 9.00 4.50 Retiring employees elected lump-sum payments, resulting in settlement losses of $51...

  • Page 58
    ...consolidated balance sheets. The following weighted-average assumptions were used to determine the Company's postretirement benefit obligations at December 31: U.S. Plans Canadian Plans 2003 2002 6.50% 8.00 5.00 2006 2003 6.50% 8.00 5.00 2010 2002 6.75% 7.00 4.00 2006 Discount rate Health care...

  • Page 59
    .... Derivative financial instruments are used by the Company, principally to reduce exposures to market risks resulting from ï¬,uctuations in foreign exchange rates and commodity prices by creating offsetting exposures. The Company is not a party to leveraged derivatives and, by policy, does...

  • Page 60
    Kraft Foods Inc. Notes to Consolidated Financial Statements 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 ï¬,ow hedges, primarily for ...

  • Page 61
    ... for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the total year. The principal stock exchange, on which the Company's Class A common stock is listed, is the New York Stock Exchange. At January 30, 2004, there were approximately 2,400...

  • Page 62
    ..., careful selection and training of personnel, and audits by a professional staff of internal auditors. PricewaterhouseCoopers LLP, independent auditors, have audited and reported on the Company's consolidated financial statements. Their audits were performed in accordance with generally accepted...

  • Page 63
    ...Technology & Quality Franz-Josef Vogelsang Executive Vice President, Global Supply Chain Chairman and Chief Executive Officer, Illinois Tool Works Inc. Glenview, IL Betsy D. Holden President, Global Marketing & Category Development Kraft Foods Inc. John C. Pope 1,2 Chairman, PFI Group, LLC Chicago...

  • Page 64
    ...do not have Internet access, you can call our Shareholder Publications Center toll-free: 1-800-295-1255. Stock Exchange Listing Kraft Foods Inc. is listed on the New York Stock Exchange (ticker symbol KFT). C Printed in the U.S.A. on Recycled Paper © Copyright 2004 Kraft Foods Inc. Concept and...

  • Page 65

  • Page 66
    Delivering฀sustainable฀growth. www.kraft.com