Kraft 2003 Annual Report Download - page 36

Kraft Foods Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations
During 2003, 2002 and 2001, net cash used in investing activities
was $1.0 billion, $1.1 billion and $1.2 billion, respectively. The
decrease in 2003 primarily reflected lower capital expenditures
and lower purchases of businesses, partially offset by the reduction
in the cash received from the sales of businesses. The decrease
in 2002 primarily reflected lower purchases of businesses and
an increase in the cash received from the sales of businesses,
partially offset by higher capital expenditures related to the
integration of Nabisco.
Capital expenditures, which were funded by operating activities,
were $1.1 billion, $1.2 billion and $1.1 billion in 2003, 2002 and 2001,
respectively. The capital expenditures were primarily to modernize
manufacturing facilities, lower cost of production and expand
production capacity for growing product lines. In 2004, capital
expenditures are currently expected to be at or slightly above
2003 expenditures, including capital expenditures required for
the restructuring program announced in January 2004. These
expenditures are expected to be funded from operations.
Net Cash Used in Financing Activities
During 2003, net cash of $2.8 billion was used in financing activities,
compared with $2.6 billion during 2002. The increase in cash used in
2003 was due primarily to an increase in the Company’s Class A
share repurchases and an increase in dividend payments, partially
offset by a decrease in net debt repayments in 2003 (including
amounts due to Altria Group, Inc. and affiliates). During 2003, the
Company issued $1.5 billion of third-party long-term debt, the net
proceeds of which were used to repay outstanding related party
indebtedness. Financing activities included net debt repayments
of approximately $1.4 billion in 2003.
During 2002, net cash of $2.6 billion was used in financing activities,
compared with $2.1 billion during 2001. The increase in cash used
was due primarily to dividends paid during 2002 and repurchases of
the Company’s Class A common stock. During 2002, Kraft issued
$2.5 billion of global bonds and $750 million of floating rate notes,
the net proceeds of which were used to repay outstanding related
party indebtedness. Financing activities included net debt
repayments of approximately $1.5 billion in 2002.
Debt and Liquidity
Financial Reporting Release No. 61 sets forth the views of the
Securities and Exchange Commission (“SEC”) regarding enhanced
disclosures relating 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.
Debt: The Company’s total debt, including amounts due to Altria
Group, Inc. and affiliates, was $13.5 billion at December 31, 2003
and $14.4 billion at December 31, 2002. The decrease in total debt is
due primarily to the repayment of amounts due to Altria Group, Inc.
and affiliates, partially offset by an increase in third-party borrowings.
The Company’s debt-to-equity ratio was 0.47 at December 31, 2003
and 0.56 at December 31, 2002.
During 2003, the Company repaid the remaining $1,150 million of the
7.0% long-term notes payable to Altria Group, Inc. and affiliates, as
well as the $1,410 million of short-term borrowings reclassified to
long-term. In September 2003, Kraft issued $1.5 billion of third-party
long-term debt, including $700 million of 5-year notes bearing
interest at a rate of 4.0% and $800 million of 10-year notes bearing
interest at 5.25%. The net proceeds from the offering were used
to repay outstanding related party indebtedness. At December 31,
2003 and 2002, the Company had short-term amounts payable
to Altria Group, Inc. of $543 million and $895 million, respectively.
Interest on these borrowings is based on the applicable London
Interbank Offered Rate.
Credit Ratings: Following a $10.1 billion judgment on March 21,
2003 against Altria Group, Inc.’s domestic tobacco subsidiary,
Philip Morris USA Inc., the three major credit rating agencies took a
series of ratings actions resulting in the lowering of the Company’s
short-term and long-term debt ratings, despite the fact the
Company is neither a party to, nor has exposure to, this litigation.
Moody’s lowered the Company’s short-term debt rating from “P-1”
to “P-2” and its long-term debt rating from “A2” to “A3,” with stable
outlook. Standard & Poor’s lowered the Company’s short-term debt
rating from “A-1” to “A-2” and its long-term debt rating from “A-” to
“BBB+,” with stable outlook. Fitch Rating Services lowered the
Company’s short-term debt rating from “F-1” to “F-2” and its long-
term debt rating from “A” to “BBB+,” with stable outlook. As a result
of the credit rating agencies’ actions, the Company temporarily
lost access to the commercial paper market, and borrowing costs
increased. None of the Company’s debt agreements requires
accelerated repayment in the event of a decrease in credit ratings.
Credit Lines: The Company maintains revolving credit facilities that
have historically been used to support the issuance of commercial
paper. At December 31, 2003, credit lines for the Company and the
related activity were as follows:
(in billions of dollars)
Commercial
Credit Amount Paper
Type Lines Drawn Outstanding
364-day (expires July 2004) $2.5 $ — $0.3
Multi-year (expires July 2006) 2.0 1.9
$4.5 $ — $2.2
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