KRAFT FOODS INC. (Exact Name of Registrant As Specified in Its Charter)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 2004 COMMISSION FILE NUMBER 1-16483 KRAFT FOODS INC. (Exact name of registrant as specified in its charter) Virginia 52-2284372 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Three Lakes Drive, Northfield, Illinois 60093 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: 847-646-2000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Class A Common Stock, no par value New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No អ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ፤ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No អ The aggregate market value of the shares of Class A Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on June 30, 2004, was approximately $8 billion. At February 28, 2005, there were 526,741,988 shares of the registrant’s Class A Common Stock outstanding, and 1,180,000,000 shares of the registrant’s Class B Common Stock outstanding. Documents Incorporated by Reference Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of shareholders to be held on April 26, 2005, filed with the Securities and Exchange Commission (the ‘‘SEC’’) on March 4, 2005, are incorporated in Part III hereof and made a part hereof. PART I Item 1. Business. (a) General Development of Business General Kraft Foods Inc. (‘‘Kraft’’) was incorporated in 2000 in the Commonwealth of Virginia. Kraft, through its subsidiaries (Kraft and its subsidiaries are hereinafter referred to as the ‘‘Company’’), is engaged in the manufacture and sale of branded foods and beverages in the United States, Canada, Europe, Latin America, Asia Pacific, the Middle East and Africa. Prior to June 13, 2001, Kraft was a wholly owned subsidiary of Altria Group, Inc. On June 13, 2001, Kraft completed an initial public offering (‘‘IPO’’) of 280,000,000 shares of its Class A common stock at a price of $31.00 per share. At December 31, 2004, Altria Group, Inc. held 98.0% of the combined voting power of Kraft’s outstanding capital stock and owned 85.4% of the outstanding shares of Kraft’s capital stock. On November 15, 2004, the Company announced the sale of substantially all of its sugar confectionery business for approximately $1.5 billion. The transaction, which is subject to regulatory approval, is expected to be completed in the second quarter of 2005. The Company has reflected the results of its sugar confectionery business as discontinued operations on the consolidated statements of earnings for all years presented. Accordingly, historical statements of earnings amounts included in this Form 10-K have been restated to reflect the discontinued operation. The assets related to the sugar confectionery business were reflected as assets of discontinued operations held for sale on the consolidated balance sheet at December 31, 2004. In January 2004, the Company announced a three-year restructuring program with the objectives of leveraging the Company’s global scale, realigning and lowering the cost structure, and optimizing capacity utilization. As part of this program, the Company anticipates the closing or sale of up to 20 plants and the elimination of approximately 6,000 positions. In 2004, the Company announced the closure of 13 plants. Specific programs announced during 2004, as part of the overall restructuring program, will result in the elimination of approximately 3,500 positions. From 2004 through 2006, the Company expects to incur up to $1.2 billion in pre-tax charges, reflecting asset disposals, severance and other implementation costs, including $641 million incurred in 2004. Approximately one-half of the pre-tax charges are expected to require cash payments. In addition, the Company expects to incur approximately $140 million in capital expenditures from 2004 through 2006 to implement the restructuring program, including $46 million spent in 2004. Cost savings as a result of this program were approximately $127 million in 2004, are expected to increase by an incremental amount of approximately $120 million to $140 million in 2005, and are anticipated to reach annualized cost savings of approximately $400 million by 2006. All of these cost savings are expected to be used in support of brand-building initiatives. Source of Funds—Dividends Because Kraft is a holding company, its principal source of funds is dividends from its subsidiaries. Kraft’s principal wholly owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock. 1 (b) Financial Information About Segments The Company manufactures and markets packaged food products, consisting principally of beverages, cheese, snacks, convenient meals and various packaged grocery products. The Company manages and reports operating results through two units: Kraft North America Commercial and Kraft International Commercial. The Company has operations in 68 countries and sells its products in more than 155 countries. Kraft North America Commercial operates in the United States and Canada, and manages its operations principally by product category, while Kraft International Commercial manages its operations by geographic region. During January 2004, the Company announced a new global organization structure, which resulted in new segments. During the fourth quarter of 2004, following the sale of its sugar confectionery business, the Company realigned its North American segments. Kraft North America Commercial’s new segments are U.S. Beverages; U.S. Cheese, Canada & North America Foodservice; U.S. Convenient Meals; U.S. Grocery; and U.S. Snacks & Cereals. Kraft International Commercial’s segments are Europe, Middle East & Africa; and Latin America & Asia Pacific. The new segment structure in North America reflects a shift of certain divisions and brands among segments to more closely align these businesses to consumer sectors, to provide more focus on the separate beverage and grocery businesses, and to benefit from synergies in grain based products. Historical data have been restated to reflect the new segment structure. Net revenues and operating companies income* attributable to each segment (together with a reconciliation to consolidated operating income) for each of the last three years are set forth in Note 14 to the Company’s consolidated financial statements contained in Part II hereof. The relative percentages of operating companies income attributable to each reportable segment were as follows: For the Years Ended December 31, 2004 2003 2002 Kraft North America Commercial: U.S. Beverages ......................................... 10.0% 10.4% 9.4% U.S. Cheese, Canada & North America Foodservice .............. 20.6% 21.0% 20.5% U.S. Convenient Meals ................................... 16.1% 13.5% 12.8% U.S. Grocery .......................................... 18.6% 14.8% 14.4% U.S. Snacks & Cereals ................................... 15.3% 17.3% 19.1% Kraft International Commercial: Europe, Middle East & Africa ............................... 14.2% 16.5% 15.5% Latin America & Asia Pacific ............................... 5.2% 6.5% 8.3% Total Kraft Foods Inc. .................................. 100.0% 100.0% 100.0% * The Company’s management uses operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze business performance and trends of the various business segments. 2 (c) Narrative Description of Business Markets and Products The Company’s brands span five consumer sectors, as follows: • Snacks—primarily cookies, crackers, salted snacks and confectionery; • Beverages—primarily coffee, aseptic juice drinks and powdered beverages; • Cheese & Dairy—primarily natural, process and cream cheeses; • Grocery—primarily ready-to-eat cereals, enhancers and desserts; and • Convenient Meals—primarily frozen pizza, packaged dinners, lunch combinations and processed meats. The following table shows each reportable segment’s participation in these five core consumer sectors. Percentage of 2004 Net Revenues by Consumer Sector(2) Cheese & Convenient Segment(1) Snacks Beverages Dairy Grocery Meals Total Kraft North America Commercial: U.S. Beverages ................ 39.3% 7.9% U.S. Cheese, Canada & North America Foodservice .......... 8.0% 6.7% 75.4% 19.8% 10.4% 23.1% U.S. Convenient Meals ........... 0.1% 82.4% 13.2% U.S. Grocery .................. 2.1% 42.1% 7.6% U.S. Snacks & Cereals ........... 46.6% 1.2% 21.4% 16.8% Total Kraft North America Commercial ............... 56.7% 46.0% 76.6% 83.4% 92.8% 68.6% Kraft International Commercial: Europe, Middle East & Africa ...... 32.1% 44.8% 16.5% 7.7% 5.8% 23.4% Latin America & Asia Pacific ....... 11.2% 9.2% 6.9% 8.9% 1.4% 8.0% Total Kraft International Commercial ............... 43.3% 54.0% 23.4% 16.6% 7.2% 31.4% Total Kraft Foods Inc. ............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Consumer Sector Percentage of Total Kraft Foods Inc.