Kraft 2004 Annual Report Download - page 82

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Note 16. Additional Information:
The amounts shown below are for continuing operations.
For the Years Ended
December 31,
2004 2003 2002
(in millions)
Research and development expense ........................ $ 388 $ 374 $ 354
Advertising expense .................................... $1,258 $1,142 $1,111
Interest and other debt expense, net:
Interest (income) expense, Altria Group, Inc. and affiliates ....... $ (2) $ 31 $ 243
Interest expense, external debt .......................... 679 647 611
Interest income ..................................... (11) (13) (7)
$ 666 $ 665 $ 847
Rent expense ........................................ $ 448 $ 450 $ 436
Minimum rental commitments under non-cancelable operating leases in effect at December 31,
2004, were as follows (in millions):
2005 ............................................................... $ 283
2006 ............................................................... 221
2007 ............................................................... 182
2008 ............................................................... 132
2009 ............................................................... 99
Thereafter ........................................................... 193
$1,110
Note 17. Financial Instruments:
Derivative financial instruments
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. Derivative financial instruments are used by the Company, principally to reduce exposures to
market risks resulting from fluctuations in foreign exchange rates and commodity prices by creating
offsetting exposures. The Company is not a party to leveraged derivatives and, by policy, does not use
financial instruments for speculative purposes. Financial instruments qualifying for hedge accounting
must maintain a specified level of effectiveness between the hedging instrument and the item being
hedged, both at inception and throughout the hedged period. The Company formally documents the
nature of and relationships between the hedging instruments and hedged items, as well as its
risk-management objectives, strategies for undertaking the various hedge transactions and method of
assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant
characteristics and expected terms of the forecasted transaction must be specifically identified, and it
must be probable that each forecasted transaction will occur. If it were deemed probable that the
forecasted transaction will not occur, the gain or loss would be recognized in earnings currently.
The Company uses forward foreign exchange contracts and foreign currency options to mitigate its
exposure to changes in exchange rates from third-party and intercompany actual and forecasted
transactions. Substantially all of the Company’s derivative financial instruments are effective as hedges.
The primary currencies to which the Company is exposed, based on the size and location of its
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