Kraft 2005 Annual Report Download - page 48

MERRILL CORPORATION MBLOUNT// 9-MAR-06 12:42 DISK126:[06CHI5.06CHI1135]DM1135A.;12
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KRAFT FOODS-FSC CERTIFIED-10K/AR Proj: P1102CHI06 Job: 06CHI1135 File: DM1135A.;12
Merrill Corporation/Chicago [phone] Page Dim: 8.250 X 10.750Copy Dim: 38. X 54.3
exercise of outstanding stock options and vesting of non-U.S. rights to receive equivalent shares was
19.9 million, or 1.2% of total Class A and Class B shares outstanding.
Dividends paid in 2005 and 2004 were $1,437 million and $1,280 million, respectively, an increase of
12.3%, reflecting a higher dividend rate in 2005, partially offset by a lower number of shares outstanding
as a result of Class A share repurchases. During the third quarter of 2005, the Company’s Board of
Directors approved a 12.2% increase in the current quarterly dividend rate to $0.23 per share on its
Class A and Class B common stock. As a result, the present annualized dividend rate is $0.92 per
common share. The declaration of dividends is subject to the discretion of the Company’s Board of
Directors and will depend on various factors, including the Company’s net earnings, financial condition,
cash requirements, future prospects and other factors deemed relevant by the Company’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. 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.
During the years ended December 31, 2005, 2004 and 2003, ineffectiveness related to cash flow
hedges was not material. At December 31, 2005, the Company was hedging forecasted transactions for
periods not exceeding the next fifteen months. The Company estimates that derivative losses of
approximately $2 million, net of income taxes, reported in accumulated other comprehensive earnings
(losses) at December 31, 2005 will be reclassified to the consolidated statement of earnings within the
next twelve months.
Foreign Exchange Rates. 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 businesses, include the euro, Swiss franc, British pound and Canadian
dollar. At December 31, 2005 and 2004, the Company had foreign exchange option and forward
contracts with aggregate notional amounts of $2.2 billion and $2.9 billion, respectively. The effective
portion of unrealized gains and losses associated with forward and option 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.
Commodities. The Company is exposed to price risk related to forecasted purchases of certain
commodities used as raw materials by its businesses. Accordingly, the Company uses commodity
forward contracts as cash flow hedges, primarily for coffee and cocoa. 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, 2005 and 2004, the Company had net long commodity positions of $521 million and
$443 million, respectively. Unrealized gains or losses on net commodity positions were immaterial at
December 31, 2005 and 2004. 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.
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