10-K 1 krft10-k122813.htm 10-K KRFT 10-K 12.28.13
   

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 1-35491
Kraft Foods Group, Inc.
(Exact name of registrant as specified in its charter)
Virginia
36-3083135
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Three Lakes Drive, Northfield, Illinois
60093-2753
(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:
Title of each class
  
Name of each exchange on which registered
Common Stock, no par value
  
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  ¨    No  ý
Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those sections.
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes  
¨     No  ý
The aggregate market value of the shares of common stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock as of the last business day of the registrant's most recently completed second quarter, was $33 billion. At January 25, 2014, there were 596,311,563 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its annual meeting of shareholders expected to be held on May 6, 2014 are incorporated by reference into Part III hereof.
 
 
 
 
 


   

Kraft Foods Group, Inc
 
 
Page No.
Part I -
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II -
 
 
Item 5.
Item 6.
Item 7.
 
 
 
 
 
 
 
 
 
 
Item 7A.
Item 8.
 
 
 
 
 
 
 
Item 9.
Item 9A.
Item 9B.
Part III -
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV -
 
 
Item 15.
 
 
In this report, “Kraft Foods Group,” “we,” “us,” and “our” refers to Kraft Foods Group, Inc.

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Forward-looking Statements
This report contains a number of forward-looking statements. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “continue,” “believe,” “may,” “will,” and variations of such words and similar expressions are intended to identify our forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Examples of forward-looking statements include, but are not limited to, statements, beliefs, and expectations regarding our business, dividends, new accounting standards and accounting changes, commodity costs, cost savings initiatives, hedging activities, legal matters, goodwill and other intangible assets, price volatility and cost environment, liquidity, funding sources, postemployment benefit plans, including expected contributions, obligations, rates of return and costs, capital expenditures and funding, debt, off-balance sheet arrangements and contractual obligations, general views about future operating results, risk management program, and other events or developments that we expect or anticipate will occur in the future.
These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, many of which are beyond our control. We discuss certain factors that affect our business and operations and that may cause our actual results to differ materially from these forward-looking statements under “Risk Factors” below in this Annual Report on Form 10-K. These factors include, but are not limited to, increased competition; our ability to maintain, extend and expand our reputation and brand image; our ability to differentiate our products from other brands; increasing consolidation of retail customers; changes in relationships with our significant customers and suppliers; our ability to predict, identify and interpret changes in consumer preferences and demand; our ability to drive revenue growth in our key product categories, increase our market share, or add products; volatility in commodity, energy and other input costs; changes in our management team or other key personnel; our geographic focus in North America; changes in regulations; legal claims or other regulatory enforcement actions; product recalls or product liability claims; unanticipated business disruptions; our ability to complete or realize the benefits from potential acquisitions, alliances, divestitures or joint ventures; our indebtedness and our ability to pay our indebtedness; disruptions in our information technology networks and systems; our inability to protect our intellectual property rights; weak economic conditions; tax law changes; the tax treatment of the Spin-Off (as defined below); volatility of market-based impacts to postemployment benefit plans; pricing actions; and other factors. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this report, except as required by applicable law or regulation.
PART I
Item 1. Business.
General
Kraft Foods Group is one of the largest consumer packaged food and beverage companies in North America and worldwide, with net revenues of $18.2 billion and earnings from continuing operations before income taxes of $4.1 billion in 2013. We manufacture and market food and beverage products, including refrigerated meals, refreshment beverages, coffee, cheese, and other grocery products, primarily in the United States and Canada, under a host of iconic brands. Our product categories span breakfast, lunch, and dinner meal occasions, both at home and in foodservice locations. At December 28, 2013, we had assets of $23.1 billion. We are listed on the NASDAQ Stock Market and included in the Standard & Poor’s 500 Index.
Our diverse brand portfolio consists of many of the most popular food brands in North America, including two brands with annual net revenues exceeding $1 billion each—Kraft cheeses, dinners, and dressings and Oscar Mayer meats—plus over 25 brands with annual net revenues between $100 million and $1 billion each. In the United States, based on dollar share in 2013, we hold the number one or number two branded market share position in 16 of our top 17 product categories. We have 12 product categories with the number one branded share position that contributed in the aggregate approximately 60% of our 2013 U.S. retail net revenues, while our top 17 product categories contributed in the aggregate more than approximately 80% of our 2013 U.S. retail net revenues.
We were initially organized as a Delaware corporation in 1980. In March 2012, we redomesticated to Virginia and changed our name from “Kraft Foods Global, Inc.” to “Kraft Foods Group, Inc.” On October 1, 2012, Mondelēz International, Inc. ("Mondelēz International") spun-off Kraft Foods Group to Mondelēz International’s shareholders (the “Spin-Off”). We were a wholly owned subsidiary of Mondelēz International prior to the Spin-Off. To effect the Spin-Off, Mondelēz International distributed all of the shares of Kraft Foods Group common stock owned by

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Mondelēz International to its shareholders on October 1, 2012 (the “Distribution”). As a result of the Spin-Off, we began operating as an independent, publicly traded company on October 1, 2012.
Reportable Segments
Effective July 1, 2013, we began managing and reporting operating results through six reportable segments: Beverages, Cheese, Refrigerated Meals, Meals & Desserts, Enhancers & Snack Nuts, and Canada. Our remaining businesses, including our Foodservice and Exports businesses, are aggregated and disclosed as “Other Businesses”. Previously, we had managed and reported operating results through five reportable segments: Beverages, Cheese, Refrigerated Meals, Grocery, and International & Foodservice. We reflect this reorganization for all the historical periods presented.
Our principal brands and products at December 28, 2013 were:
 
 
 
Beverages
  
Maxwell House, Gevalia, and Yuban coffees; Tassimo hot beverage system (under license); Capri Sun (under license) and Kool-Aid packaged juice drinks; Crystal Light, Kool-Aid, and Country Time powdered beverages; and MiO, Crystal Light, and Kool-Aid liquid concentrates.
 
 
Cheese
  
Kraft and Cracker Barrel natural cheeses; Philadelphia cream cheese; Kraft and Deli Deluxe processed cheese slices; Velveeta and Cheez Whiz processed cheeses; Kraft grated and shredded cheeses; Polly-O and Athenos cheese; and Breakstone’s and Knudsen cottage cheese and sour cream.
 
 
Refrigerated Meals
  
Oscar Mayer cold cuts, hot dogs, and bacon; Lunchables lunch combinations; Claussen pickles; and Boca soy-based meat alternatives.
 
 
Meals & Desserts
  
Kraft and Kraft Deluxe macaroni and cheese dinners;Velveeta shells and cheese dinners; JELL-O dry packaged desserts; JELL-O refrigerated gelatin and pudding snacks; Cool Whip whipped topping; Stove Top stuffing mix; Jet-Puffed marshmallows; Velveeta Cheesy Skillets and Taco Bell Home Originals (under license) meal kits; Shake ‘N Bake coatings; and Baker’s chocolate and baking ingredients.
 
 
Enhancers & Snack Nuts
 
Planters nuts, peanut butter, and trail mixes; Kraft Mayo and Miracle Whip spoonable dressings; Kraft and Good Seasons salad dressings; A.1. steak sauce; Kraft and Bull’s-Eye barbecue sauces; and Grey Poupon premium mustards.
 
 
 
Canada
  
Canadian brand offerings include Kraft peanut butter and Nabob coffee, as well as a range of products bearing brand names similar to those marketed in the U.S.
 
 
 
Other Businesses
 
Our other businesses, including our Foodservice and Exports businesses, sell primarily branded products including Philadelphia cream cheese, A.1. steak sauce, and a broad array of Kraft sauces, dressings and cheeses.

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Net Revenues by Product Category
Product categories that contributed 10% or more to consolidated net revenues for the years ended December 28, 2013, December 29, 2012, or December 31, 2011, were:
 
 
For the Years Ended
 
 
December 28, 2013
 
December 29, 2012
 
December 31, 2011
Cheese and dairy
 
32
%
 
31
%
 
30
%
Meat and meat alternatives
 
15
%
 
15
%
 
15
%
Meals
 
11
%
 
11
%
 
10
%
Refreshment Beverages
 
10
%
 
10
%
 
11
%
Enhancers
 
9
%
 
10
%
 
10
%
See Note 15, Segment Reporting, to the consolidated financial statements for net revenues, earnings from continuing operations before income taxes, and total assets by segment.
Customers
We sell our products primarily to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, drug stores, value stores, and other retail food outlets in the United States and Canada.
Our five largest customers accounted for approximately 43% of our net revenues in 2013, while our ten largest customers accounted for approximately 56%. One of our customers, Wal-Mart Stores, Inc., accounted for approximately 26% of our net revenues in 2013.
Sales
Our direct customer teams work with the headquarter operations of our customers and manage our customer relationships. These teams collaborate with customers on developing strategies for new item introduction, category and assortment management, shopper insights, shopper marketing, trade and promotional planning, and retail pricing solutions. We have a dedicated headquarter customer team covering all of our product lines for many of our largest customers, and we pool resources across our product lines to provide support to regional retailers.
Our breadth of product lines and scale throughout the retail environment are supported by two sales agencies within our customers’ stores: Acosta Sales & Marketing for our grocery and mass channel customers and CROSSMARK for our convenience store retail partners. Both agencies act as extensions of our direct customer teams and are managed by our sales leadership. Both sales agencies provide in-store support of product placement, distribution and promotional execution.
We also utilize sales agencies, exporters, distributors, or other similar arrangements to sell our products in Puerto Rico and in markets outside of the United States and Canada.
Raw Materials and Packaging
We use large quantities of commodities, including dairy products, coffee beans, meat products, wheat, corn products, soybean and vegetable oils, nuts, and sugar and other sweeteners, to manufacture our products. In addition, we use significant quantities of resins and cardboard to package our products and natural gas to operate our facilities. For commodities that we use across many of our product categories, such as corrugated paper and energy, we coordinate sourcing requirements and centralize procurement to leverage our scale. In addition, some of our product lines and brands separately source raw materials that are specific to their operations.
We source these commodities from a variety of providers including large, international producers, and smaller, local independent sellers. We have preferred purchaser status and/or have developed strategic partnerships with many of our suppliers, and consequently enjoy favorable pricing and dependable supply for many of our commodities. The prices of raw materials and agricultural materials that we use in our products are affected by external factors, such as global competition for resources, currency fluctuations, severe weather or global climate change, consumer, industrial or commodity investment demand, and changes in governmental regulation and trade, alternative energy, and agricultural programs.

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The most significant cost components of our cheese products are dairy commodities, including milk and cheese. We purchase our dairy raw material requirements from independent third parties, such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, significantly influence the prices for milk and other dairy products. The most significant cost component of our coffee products is coffee beans, which we purchase on world markets. Quality and availability of supply, changes in the value of the U.S. dollar in relation to certain other currencies, and consumer demand for coffee products impact coffee bean prices. Significant cost components in our meat business include pork, beef, and poultry, which we purchase from domestic markets. Livestock feed costs and the global supply and demand for U.S. meats influence the prices of these meat products. Another significant cost component in our grocery products is grains, including wheat, sugar, and soybean oil.
Our risk management group works with our procurement teams to monitor worldwide supply and cost trends so we can obtain ingredients and packaging needed for production on favorable terms. Although the prices of our principal raw materials can be expected to fluctuate, we believe there will be an adequate supply of the raw materials we use and that they are generally available from numerous sources. Our risk management group uses a range of hedging techniques in an effort to limit the impact of price fluctuations in our principal raw materials. However, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw material costs. We actively monitor any changes to commodity costs so that we can mitigate the effect through pricing and other operational measures.
Manufacturing and Processing
We manufacture our products in our network of manufacturing and processing facilities located throughout North America. As of December 28, 2013, we operated 36 manufacturing and processing facilities, 34 in the United States and two in Canada. We own all 36 of these facilities.
While some of our plants are dedicated to the production of specific products or brands, other plants can accommodate multiple product lines. We manufacture our Beverages products in eight locations, our Cheese products in 12 locations, our Refrigerated Meals products in nine locations, our Meals & Desserts products in 10 locations, and our Enhancers & Snack Nuts products in eight locations. We maintain all of our manufacturing and processing facilities in good condition and believe they are suitable and adequate for our present needs. We also enter into co-manufacturing arrangements with third parties if we determine it is advantageous to outsource the production of any of our products.
Distribution
As of December 28, 2013, we distributed our products through 39 distribution centers, of which 36 are in the United States and three are in Canada. We own four and lease 35 of these distribution centers. In addition, third-party logistics providers perform storage and distribution services for us to support our distribution network.
We rely on common carriers and our private fleet to transport our products from our manufacturing and processing facilities to our distribution facilities and on to our customers. Our distribution facilities generally accommodate all of our product lines and have the capacity to store refrigerated, dry, and frozen goods. We assemble customer orders for multiple products at the distribution facilities and deliver them by common carrier or our private fleet to our customers. We maintain all of our distribution facilities in good condition and believe they have sufficient capacity to meet our expected distribution needs.
Competition
We face competition in all aspects of our business. Competitors include large national and international companies and numerous local and regional companies. We also compete with generic products and retailer brands, wholesalers, and cooperatives. We compete primarily on the basis of product quality and innovation, brand recognition and loyalty, service, the ability to identify and satisfy consumer preferences, the introduction of new products and the effectiveness of our advertising campaigns and marketing programs, and price. Improving our market position or introducing a new product requires substantial advertising and promotional expenditures.
Trademarks and Intellectual Property
Our trademarks are material to our business and are among our most valuable assets. Some of our significant trademarks include A.1., Baker’s, Cheez Whiz, Cool Whip, Country Time, Cracker Barrel, Crystal Light, Grey Poupon, JELL-O, Kool-Aid, Kraft, Lunchables, MiO, Miracle Whip, Oscar Mayer, Planters, Shake ‘N Bake, Stove

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Top, and Velveeta. We own the rights to these trademarks in the United States, Canada, and many other countries throughout the world. In addition, we own the trademark rights to Philadelphia in the United States and the Caribbean, and to Gevalia and Maxwell House throughout North America and Latin America. We protect our trademarks by registration or otherwise in the United States, Canada, and other markets. From time to time, we grant third parties licenses to use one or more of our trademarks in particular locations. Similarly, as of December 28, 2013, we sell some products under brands we license from third parties, including:
Capri Sun packaged juice drinks for sale in the United States; and
Taco Bell Home Originals Mexican-style food products for sale in U.S. grocery stores.
In connection with the Spin-Off, we granted Mondelēz International licenses to use some of our trademarks in particular locations outside of the United States and Canada and we will sell some products under brands we license from Mondelēz International. These agreements are governed by the Master Ownership and License Agreement Regarding Trademarks and Certain Related Intellectual Property.
Additionally, we own numerous patents worldwide. We consider our portfolio of patents, patent applications, patent licenses under patents owned by third parties, proprietary trade secrets, technology, know-how processes, and related intellectual property rights to be material to our operations. While our patent portfolio is material to our business, the loss of one patent or a group of related patents would not have a material adverse effect on our business. We either have been issued patents or have patent applications pending that relate to a number of current and potential products, including products licensed to others. Patents, issued or applied for, cover inventions ranging from basic packaging techniques to processes relating to specific products and to the products themselves.
Our issued patents extend for varying periods according to the date of patent application filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage as determined by the patent office or courts in the country, and the availability of legal remedies in the country. In connection with the Spin-Off, we granted Mondelēz International licenses to use some of our patents, and we also license certain patents from Mondelēz International.
Research and Development
Our research and development focuses on achieving the following four objectives:
growth through product improvements, new products and line extensions,
uncompromising product safety and quality,
superior customer satisfaction, and
cost reduction.
Our research and development specialists have historically focused on both major product innovation and more modestly-scaled line extensions, such as the introduction of new flavors, colors, or package designs for established products. We have approximately 525 food scientists, chemists, and engineers, with teams dedicated to particular brands and products.
We maintain three key technology centers, each equipped with pilot plants and state-of-the-art instruments. Research and development expense was approximately $118 million (including a benefit from market-based impacts related to our postemployment benefit plans of $55 million) in 2013, $178 million (including expense from market-based impacts related to our postemployment benefit plans of $6 million) in 2012, and $198 million in 2011. Market-based impacts related to our postemployment benefit plans recorded in research and development were insignificant in the year ended December 31, 2011.
Seasonality
Overall sales of our products are fairly balanced throughout the year, although demand for certain products may be influenced by holidays, changes in seasons, or other annual events.
Employees
We have approximately 22,500 employees, of whom approximately 20,400 are located in the United States and approximately 2,100 are located in Canada. Approximately one-third of our hourly employees are represented under contracts primarily with the United Food and Commercial Workers International Union and the International

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Brotherhood of Teamsters. These contracts expire at various times throughout the next several years. We believe that our relationships with employees and their representative organizations are generally good.
Regulation
Our U.S. food and beverage products and packaging materials are primarily regulated by the U.S. Food and Drug Administration ("FDA") or, for products containing meat and poultry, the U.S. Food Safety and Inspection Service of the U.S. Department of Agriculture. Our Canadian food products and packaging materials are primarily regulated by the Canadian Food Inspection Agency and Health Canada. These agencies enact and enforce regulations relating to the manufacturing, distribution, and labeling of food products.
The U.S. Food Safety Modernization Act and the Safe Food for Canadians Act, both of which became laws in 2011, provide additional food safety authority to the applicable regulatory agency. We do not expect the cost of complying with these laws, and the implementing regulations expected to result from these laws, to be material.
In addition, various U.S. states and Canadian provinces regulate our operations by licensing plants, enforcing standards for selected food products, grading food products, inspecting plants and warehouses, regulating trade practices related to the sale of dairy products, and imposing their own labeling requirements on food products. Many of the food commodities we use in our operations are subject to governmental agricultural programs. These programs have substantial effects on prices and supplies and are subject to periodic governmental and administrative review.
Environmental Regulation
We are subject to various federal, provincial, state, and local laws and regulations in the United States and Canada relating to the protection of the environment, including those governing discharges to air and water, the management and disposal of hazardous materials, and the cleanup of contaminated sites.
These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). CERCLA imposes joint and severable liability on each potentially responsible party. As of December 28, 2013, we were involved in 60 active proceedings in the United States under CERCLA (and other similar state actions and legislation) related to our current operations and certain closed, inactive, or divested operations for which we retain liability. We do not currently expect these to have a material effect on our earnings or financial condition.
As of December 28, 2013, we had accrued an amount we deemed appropriate for environmental remediation. Based on information currently available, we believe that the ultimate resolution of existing environmental remediation actions and our compliance in general with environmental laws and regulations will not have a material effect on our earnings or financial condition. However, it is difficult to predict with certainty the potential impact of future compliance efforts and environmental remedial actions and thus future costs associated with such matters may exceed current reserves.
Foreign Operations
We sell our products primarily to consumers in the United States and Canada, but also sell our products to many other countries and territories across the globe. We generated approximately 14% of our 2013 and 2012 consolidated net revenues, and 13% of our 2011 consolidated net revenues outside the United States, primarily in Canada. For additional information about our foreign operations, see Note 15, Segment Reporting, to the consolidated financial statements.

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Executive Officers of the Registrant
The following are our executive officers as of February 21, 2014:
Name
 
Age
 
Title
John T. Cahill
 
56

 
Executive Chairman
W. Anthony Vernon
 
58

 
Chief Executive Officer and Director
Dino J. Bianco
 
52

 
Executive Vice President and President, Beverages
Thomas F. Corley
 
51

 
Executive Vice President and President, U.S. Retail Sales and Foodservice
Charles W. Davis
 
57

 
Executive Vice President, Research, Development, Quality
and Innovation
Adrienne D. Elsner
 
50

 
Executive Vice President and Chief Marketing Officer
Georges El-Zoghbi
 
47

 
Executive Vice President and President, Cheese & Dairy and Exports
Robert J. Gorski
 
61

 
Executive Vice President, Integrated Supply Chain
Jane S. Hilk
 
53

 
Executive Vice President and President, Enhancers & Snack Nuts
Diane Johnson May
 
55

 
Executive Vice President, Human Resources
Christopher J. Kempczinski
 
45

 
Executive Vice President and President, Canada
Teri List-Stoll
 
51

 
Executive Vice President and Chief Financial Officer
Michael Osanloo
 
47

 
Executive Vice President and President, Meals & Desserts
Sam B. Rovit
 
56

 
Executive Vice President and President, Oscar Mayer and
Executive Vice President, Strategy
Kim K. W. Rucker
 
47

 
Executive Vice President, Corporate & Legal Affairs, General Counsel and Corporate Secretary
Mr. Cahill has served as our Executive Chairman since October 1, 2012. On March 8, 2014, Mr. Cahill will transition to non-executive chairman. He joined Mondelēz International, a food and beverage company and our former parent, on January 2, 2012 as the Executive Chairman, North American Grocery, and served in that capacity until the Spin-Off. Prior to that, he served as an Industrial Partner at Ripplewood Holdings LLC, a private equity firm, from 2008 to 2011. Mr. Cahill spent nine years with The Pepsi Bottling Group, Inc., a beverage manufacturing company, most recently as Chairman and Chief Executive Officer from 2003 to 2006 and Executive Chairman until 2007. Mr. Cahill previously spent nine years with PepsiCo, Inc., a food and beverage company, in a variety of leadership positions. He currently serves as lead director of American Airlines Group and is also a director at Colgate-Palmolive Company and Legg Mason, Inc.
Mr. Vernon has served as our Chief Executive Officer since October 1, 2012 and has been a member of our Board since September 2009 when he was appointed a director while we were a wholly owned subsidiary of Mondelēz International. Prior to that, he served as Mondelēz International’s Executive Vice President and President, Kraft Foods North America. Prior to joining Mondelēz International in August 2009, he was the Healthcare Industry Partner of Ripplewood Holdings LLC, a private equity firm, since 2006. Mr. Vernon spent 23 years with Johnson & Johnson, a pharmaceutical company, in a variety of leadership positions, most recently serving as Company Group Chairman of DePuy Inc., an orthopedics company and subsidiary of Johnson & Johnson, from 2004 to 2005. He is also a director of Medivation, Inc.
Mr. Bianco has served as our Executive Vice President and President, Beverages since February 2014. He served as Executive Vice President and President, Beverages and Canada from February 2013 to February 2014 and as Executive Vice President and President, National Businesses and Marketing Services from October 1, 2012 to February 2013. Prior to that, he served as Mondelēz International’s President, Kraft Foods Canada since November 2005. He also served in various marketing, sales and finance capacities at Mondelēz International, including Vice President of Marketing, Kraft Foods Canada from January 2002 to November 2005. He joined Mondelēz International in 1990.
Mr. Corley has served as our Executive Vice President and President, U.S. Retail Sales and Foodservice since February 2013. He served as Executive Vice President and President, U.S. Sales from October 1, 2012 to February 2013. Prior to that, he served as Mondelēz International’s President, U.S. Sales since April 2012. Mr. Corley also served as Mondelēz International’s Senior Vice President, U.S. Sales from 2009 to 2012, Senior Vice President, Wal-Mart Stores, Inc. Sales from 2008 to 2009 and Vice President, Wal-Mart Stores, Inc. Sales from 2007 to 2008. He joined Mondelēz International in 1985.

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Mr. Davis has served as our Executive Vice President, Research, Development, Quality and Innovation since October 1, 2012. Prior to that, he served as Mondelēz International’s Vice President, Research, Development & Quality, Kraft Foods Europe since 2007. Mr. Davis also served as Mondelēz International’s Vice President, Research, Development & Quality, North American Convenient Meals Sector from 2004 to 2007. He joined Mondelēz International in 1984.
Ms. Elsner has served as our Executive Vice President and Chief Marketing Officer since February 2013. She served as Executive Vice President and President, Beverages from October 1, 2012 to February 2013. Prior to that, she served as Mondelēz International’s President, Beverages since May 2010. She previously served as Vice President and President, Coffee, Kraft Foods Europe from 2007 to 2010, and as Vice President, Marketing Resources, Kraft Foods Europe from 2005 to 2007. Ms. Elsner joined Mondelēz International in 1992.
Mr. El-Zoghbi has served as our Executive Vice President and President, Cheese & Dairy and Exports since February 2013. He served as Executive Vice President and President, Cheese and Dairy from October 1, 2012 to February 2013. Prior to that, he served as Mondelēz International’s President, Cheese and Dairy since October 2009. He joined Mondelēz International in October 2007 as Vice President and Area Director, Kraft Foods Australia & New Zealand and served in that role until September 2009.
Mr. Gorski has served as our Executive Vice President, Integrated Supply Chain since October 1, 2012. Prior to that, Mr. Gorski served as Executive Vice President, Integrated Supply Chain, Kraft Foods North America, since August 2012. Prior to that, he worked for P&G for 34 years, in a variety of leadership positions in multiple categories in North America and Europe. He most recently served as Vice President, Supply Chain for P&G’s global baby care business from 2003 to 2012.
Ms. Hilk has served as our Executive Vice President and President, Enhancers & Snack Nuts since July 1, 2013. She served as Senior Vice President of Marketing, Oscar Mayer from October 1, 2012 to June 2013. Prior to that, she served as Mondelēz International’s Senior Vice President, Marketing, Oscar Mayer from April 2010 until October 2012 and Vice President, Marketing, Oscar Mayer from February 2008 to April 2010. Ms. Hilk joined Mondelēz International in 1991.
Ms. Johnson May has served as our Executive Vice President, Human Resources since October 1, 2012. Prior to that, she served as Mondelēz International’s Senior Vice President, Human Resources, Kraft Foods North America since September 2010. She joined Mondelēz International in 1980 and has served in various roles, including Vice President, Human Resources at various Mondelēz International units from December 2006 to September 2010 and Senior Director, Human Resources from 2002 to 2006.
Mr. Kempczinski has served as our Executive Vice President and President, Canada since January 29, 2014.  He served as Kraft’s President, Canada from July 2012 until assuming his current role.  From December 2008 until July 2012, he served as Mondelēz International’s Senior Vice President, Meals & Enhancers.  Prior to joining Mondelēz International in December 2008, Mr. Kempczinski was Vice President, Non-Carbonated Beverages at PepsiCo, Inc.
Ms. List-Stoll has served as our Executive Vice President and Chief Financial Officer since December 29, 2013. She joined Kraft on September 3, 2013 and served as Senior Vice President of Finance until assuming her current role. Prior to joining Kraft, Ms. List-Stoll worked for The Procter & Gamble Company (“P&G”), a consumer packaged goods company, for nearly 20 years, in various finance and accounting leadership positions. She had most recently served as Senior Vice President and Treasurer of P&G from 2009 to 2013 and Vice President, Finance, Global Operations from 2007 to 2009. Ms. List-Stoll also serves on the Board of Directors of Danaher Corporation.
Mr. Osanloo has served as our Executive Vice President and President, Meals & Desserts since July 1, 2013. Prior to that, he served as Executive Vice President and President, Grocery since October 1, 2012. From October 2010 until October 2012, Mr. Osanaloo served as Mondelēz International’s President, Grocery. Mr. Osanloo was Mondelēz International’s Executive Vice President, Strategy and M&A from April 2008 to September 2010. Prior to joining Mondelēz International, Mr. Osanloo was Senior Vice President, Marketing at Harrah’s Entertainment Inc., a provider of branded casino entertainment.
Mr. Rovit has served as our Executive Vice President and President, Oscar Mayer since September 18, 2013 and as Executive Vice President, Strategy since October 1, 2012. Mr. Rovit also led the Snack Nuts business from October 1, 2012 to June 2013. Prior to that, he served as Mondelēz International’s Executive Vice President, Strategy since February 2011. Prior to joining Mondelēz International, he served as a Director of Bain & Co., a management consulting firm, from January 2008 to January 2011 and from 1988 to June 2005. Mr. Rovit served as

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President, Chief Executive Officer and Director of Swift & Company, a meat processing company, from June 2005 to July 2007.
Ms. Rucker has served as our Executive Vice President, Corporate & Legal Affairs, General Counsel and Corporate Secretary since October 1, 2012. She joined Mondelēz International as Executive Vice President, Corporate & Legal Affairs, Kraft Foods North America in September 2012. Prior to that, Ms. Rucker served as Senior Vice President, General Counsel and Chief Compliance Officer of Avon Products, Inc., a global manufacturer of beauty and related products, since March 2008 and as Corporate Secretary since February 2009. Ms. Rucker also served as Senior Vice President, Secretary and Chief Governance Officer of Energy Future Holdings Corp. (formerly TXU Corp.), an energy company, from 2004 to 2008.
Available Information
Our Web site address is www.kraftfoodsgroup.com. The information on our Web site is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the Securities and Exchange Commission ("SEC"). Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") are or will be available free of charge on our Web site as soon as possible after we electronically file them with, or furnish them to, the SEC.
You can also read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference Room. In addition, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Kraft Foods Group, that are electronically filed with the SEC.
Item 1A. Risk Factors.
You should read the following risk factors carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. Any of the following risks could materially and adversely affect our business, financial condition, operating results and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be significant that may adversely affect our business, financial condition or operating results in the future.
We operate in a highly competitive industry.
The food and beverage industry is highly competitive and we face competition across all of our product offerings. We compete based on product innovation, price, product quality, brand recognition and loyalty, effectiveness of marketing and distribution, promotional activity, and the ability to identify and satisfy consumer preferences.
We may need to reduce our prices in response to competitive and customer pressures. Competition and customer pressures may also restrict our ability to increase prices in response to commodity and other cost increases. We may also need to increase or reallocate spending on marketing, retail trade incentives, advertising, and new product innovation to maintain or increase market share. These expenditures are subject to risks, including uncertainties about trade and consumer acceptance of our efforts. If we are unable to compete effectively, our profitability, financial condition, and operating results may suffer.
Maintaining, extending and expanding our reputation and brand image are essential to our business success.
We have many iconic brands with long-standing consumer recognition. Our success depends on our ability to maintain brand image for our existing products, extend our brands to new platforms, and expand our brand image with new product offerings.
We seek to maintain, extend, and expand our brand image through marketing investments, including advertising and consumer promotions, and product innovation. Increasing attention on the role of food and beverage marketing could adversely affect our brand image or lead to stricter regulations and greater scrutiny of marketing practices. Existing or increased legal or regulatory restrictions on our advertising, consumer promotions and marketing, or our response to those restrictions, could limit our efforts to maintain, extend and expand our brands. Moreover, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our

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customers’ confidence and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.
In addition, our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. We increasingly rely on social media and online dissemination of advertising campaigns. The growing use of social and digital media increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about Kraft, our brands or our products on social or digital media, whether or not valid, could seriously damage our brands and reputation. If we do not maintain, extend, and expand our brand image, then our product sales, financial condition and operating results could be materially and adversely affected.
We must leverage our brand value to compete against retailer brands and other economy brands.
In nearly all of our product categories, we compete with well-branded products as well as retailer and other economy brands. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and retailer or other economy brands change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer retailer or other economy brands, then we could lose market share or sales volumes or shift our product mix to lower margin offerings, which could materially and adversely affect our product sales, financial condition, and operating results.
The consolidation of retail customers could adversely affect us.
Retail customers, such as supermarkets, warehouse clubs, and food distributors in our major markets, may consolidate, resulting in fewer customers for our business. Consolidation also produces larger retail customers that may seek to leverage their position to improve their profitability by demanding improved efficiency, lower pricing, increased promotional programs, or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Retail consolidation and increasing retailer power could materially and adversely affect our product sales, financial condition, and operating results.
Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance will have a corresponding material and adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous purchases.
Changes in our relationships with significant customers or suppliers, or in the trade terms required by these customers or suppliers, could reduce sales and profits.
During 2013, our five largest customers accounted for approximately 43% of our net revenues, with our largest customer, Wal-Mart Stores, Inc., accounting for approximately 26% of our net revenues. There can be no assurance that all significant customers will continue to purchase our products in the same mix or quantities or on the same terms as in the past, particularly as increasingly powerful retailers may demand lower pricing and focus on developing their own brands. The loss of a significant customer or a material reduction in sales, or a change in the mix of products we sell, to a significant customer could materially and adversely affect our product sales, financial condition, and operating results.
Disputes with significant suppliers, including disputes related to pricing or performance, could adversely affect our ability to supply products to our customers and could materially and adversely affect our product sales, financial condition, and operating results.
Our financial success depends on our ability to correctly predict, identify, and interpret changes in consumer preferences and demand, to offer new products to meet those changes, and to respond to competitive innovation.
Consumer preferences for food and beverage products change continually. Our success depends on our ability to predict, identify, and interpret the tastes and dietary habits of consumers and to offer products that appeal to consumer preferences. If we do not offer products that appeal to consumers, our sales and market share will decrease, which could materially and adversely affect our product sales, financial condition, and operating results.
We must distinguish between short-term fads, mid-term trends, and long-term changes in consumer preferences. If we do not accurately predict which shifts in consumer preferences will be long-term, or if we fail to introduce new

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and improved products to satisfy those preferences, our sales could decline. In addition, because of our varied consumer base, we must offer an array of products that satisfy the broad spectrum of consumer preferences. If we fail to expand our product offerings successfully across product categories, or if we do not rapidly develop products in faster growing and more profitable categories, demand for our products could decrease, which could materially and adversely affect our product sales, financial condition, and operating results.
Prolonged negative perceptions concerning the health implications of certain food products could influence consumer preferences and acceptance of some of our products and marketing programs. We strive to respond to consumer preferences and social expectations, but we may not be successful in our efforts. Continued negative perceptions and failure to satisfy consumer preferences could materially and adversely affect our product sales, financial condition, and operating results.
In addition, achieving growth depends on our successful development, introduction, and marketing of innovative new products and line extensions. Successful innovation depends on our ability to correctly anticipate customer and consumer acceptance, to obtain, protect and maintain necessary intellectual property rights, and to avoid infringing the intellectual property rights of others. We must also be able to respond successfully to technological advances by and intellectual property rights of our competitors, and failure to do so could compromise our competitive position and impact our financial results.
We may be unable to drive revenue growth in our key product categories, increase our market share, or add products that are in faster growing and more profitable categories.
The food and beverage industry’s overall growth is generally linked to population growth. Our future results will depend on our ability to drive revenue growth in our key product categories. Because our operations are concentrated in North America, where growth in the food and beverage industry has been limited, our success also depends in part on our ability to enhance our portfolio by adding innovative new products in faster growing and more profitable categories. Our future results will also depend on our ability to increase market share in our existing product categories. Our failure to drive revenue growth, limit market share decreases in our key product categories or develop innovative products for new and existing categories could materially and adversely affect our profitability, financial condition, and operating results.
Commodity, energy, and other input prices are volatile and may rise significantly.
We purchase large quantities of commodities, including dairy products, coffee beans, meat products, wheat, corn products, soybean and vegetable oils, nuts, and sugar and other sweeteners. In addition, we use significant quantities of resins and cardboard to package our products and natural gas to operate our facilities. We are also exposed to changes in oil prices, which influence both our packaging and transportation costs. Prices for commodities, other supplies, and energy are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, currency fluctuations, severe weather or global climate change, consumer, industrial or commodity investment demand, and changes in governmental regulation and trade, alternative energy, and agricultural programs. Rising commodity, energy, and other input costs could materially and adversely affect our cost of operations, including the manufacture, transportation, and distribution of our products, which could materially and adversely affect our financial condition and operating results.
Although we monitor our exposure to commodity prices as an integral part of our overall risk management program, and seek to hedge against input price increases to the extent we deem appropriate, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw materials costs. For example, hedging our costs for one of our key commodities, dairy products, is difficult because dairy futures markets are not as developed as many other commodities futures markets. Continued volatility or sustained increases in the prices of commodities and other supplies we purchase could increase the costs of our products, and our profitability could suffer. Moreover, increases in the prices of our products to cover these increased costs may result in lower sales volumes. If we are not successful in our hedging activities, or if we are unable to price our products to cover increased costs, then commodity and other input price volatility or increases could materially and adversely affect our financial condition and operating results.
We rely on our management team and other key personnel.
We depend on the skills, working relationships and continued services of key personnel, including our experienced management team. In addition, our ability to achieve our operating goals depends on our ability to identify, hire, train, and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, train, and retain other talented personnel. Any

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such loss or failure could adversely affect our profitability, financial condition, and operating results.
Our geographic focus makes us particularly vulnerable to economic and other events and trends in North America.
We operate primarily in North America and, therefore, are particularly susceptible to adverse regulations, economic climate, consumer trends, market fluctuations, including commodity price fluctuations or supply shortages for certain of our key ingredients, and other adverse events that are specific to the United States and Canada. The concentration of our businesses in North America could present challenges and may increase the likelihood that an adverse event in North America would materially and adversely affect our profitability, financial condition, and operating results.
Changes in regulations could increase our costs.
Our activities are highly regulated and subject to government oversight. Various federal, state, provincial, and local laws and regulations govern food and beverage production and marketing, as well as licensing, trade, tax, and environmental matters. Governing bodies regularly issue new regulations and changes to existing regulations. Our need to comply with new or revised regulations or their interpretation and application, including proposed requirements designed to enhance food safety or to regulate imported ingredients, could materially and adversely affect our product sales, financial condition, and operating results.
Legal claims or other regulatory enforcement actions could subject us to civil and criminal penalties.
As a large food and beverage company, we operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to heightened risk of legal claims or other regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies and procedures. Moreover, a failure to maintain effective control processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition, and operating results.
Product recalls or other product liability claims could materially and adversely affect us.
Selling products for human consumption involves inherent legal and other risks, including product contamination, spoilage, product tampering, allergens, or other adulteration. We could decide to, or be required to, recall products due to suspected or confirmed product contamination, adulteration, misbranding, tampering, or other deficiencies. A widespread product recall or market withdrawal could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of the product for a period of time. We could be adversely affected if consumers lose confidence in the safety and quality of certain food products or ingredients, or the food safety system generally. Adverse attention about these types of concerns, whether or not valid, may damage our reputation, discourage consumers from buying our products, or cause production and delivery disruptions.
We may also suffer losses if our products or operations violate applicable laws or regulations, or if our products cause injury, illness, or death. In addition, our marketing could face claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a significant product recall, may materially and adversely affect our reputation and profitability. Moreover, even if a product liability or consumer fraud claim is unsuccessful, has no merit, or is not pursued, the negative publicity surrounding assertions against our products or processes could materially and adversely affect our product sales, financial condition, and operating results.
Unanticipated business disruptions could adversely affect our ability to provide our products to our customers.
We have a complex network of suppliers, owned manufacturing locations, co-manufacturing locations, distribution networks, and information systems that support our ability to consistently provide our products to our customers. Factors that are hard to predict or beyond our control, like weather, raw material shortage, natural disasters, fire or explosion, terrorism, generalized labor unrest, or health pandemics, could damage or disrupt our operations or our suppliers’ or co-manufacturers’ operations. These disruptions may require additional resources to restore our supply

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chain or distribution network. If we cannot respond to disruptions in our operations, whether by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or are unable to quickly repair damage to our information, production, or supply systems, we may be late in delivering, or unable to deliver, products to our customers and may also be unable to track orders, inventory, receivables, and payables. If that occurs, our customers’ confidence in us and long-term demand for our products could decline. Any of these events could materially and adversely affect our product sales, financial condition, and operating results.
We may not successfully identify or complete strategic acquisitions, alliances, divestitures or joint ventures.
From time to time, we may evaluate acquisition candidates, alliances or joint ventures that may strategically fit our business objectives or we may consider divesting businesses that do not meet our strategic objectives or growth or profitability targets. These activities may present financial, managerial, and operational risks including, but not limited to, diversion of management’s attention from existing core businesses, difficulties integrating or separating personnel and financial and other systems, inability to effectively and immediately implement control environment processes across a diverse employee population, adverse effects on existing or acquired customer and supplier business relationships, and potential disputes with buyers, sellers or partners. In addition, to the extent we undertake acquisitions, alliances or joint ventures or other developments outside our core geography or in new categories, we may face additional risks related to such developments. For example, risks related to foreign operations include compliance with U.S. laws affecting operations outside of the United States, such as the Foreign Corrupt Practices Act, currency rate fluctuations, compliance with foreign regulations and laws, including tax laws, and exposure to politically and economically volatile developing markets. Any of these factors could materially and adversely affect our financial condition and operating results.
Volatility of capital markets or macro-economic factors could adversely affect our business.
Changes in financial and capital markets, including market disruptions, limited liquidity, and interest rate volatility, may increase the cost of financing as well as the risks of refinancing maturing debt. In addition, our borrowing costs can be affected by short and long-term ratings assigned by rating organizations. A decrease in these ratings could limit our access to capital markets and increase our borrowing costs, which could materially and adversely affect our financial condition and operating results.
Adverse changes in the capital markets or interest rates, differences or changes in actuarial assumptions from actual experience, and legislative or other regulatory actions could substantially increase our postemployment obligations and materially and adversely affect our profitability and operating results.
We sponsor a number of benefit plans for employees in the United States and Canada, including defined benefit pension plans, retiree health and welfare, active health care, severance, and other postemployment benefits. As of December 28, 2013, the projected benefit obligation of our defined benefit pension plans was $7.2 billion and these plans had assets of $7.0 billion. The difference between plan obligations and assets, or the funded status of the plans, significantly affects the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, investment returns, minimum funding requirements, and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic pension cost, and consequently volatility in our reported net income, and increase our future funding requirements. Legislative and other governmental regulatory actions may also increase funding requirements for our pension plans’ benefits obligation.
We estimate the 2014 pension contributions will be approximately $200 million. Volatile economic conditions increase the risk that we will be required to make additional cash contributions to the pension plans and recognize further increases in our net pension cost. A significant increase in our pension funding requirements could require us to reduce spending on marketing, retail trade incentives, advertising, and other similar activities or could negatively affect our ability to invest in our business or pay dividends on our common stock.
Volatility in the market value of all or a portion of the derivatives we use to manage exposures to fluctuations in commodity prices may cause volatility in our operating results and net earnings.
We use commodity futures and options to partially hedge the price of certain input costs, including dairy products, coffee beans, meat products, wheat, corn products, soybean oils, sugar, and natural gas. For derivatives not designated as hedges, changes in the values of these derivatives are currently recorded in earnings, resulting in volatility in both gross profits and net earnings. We report these gains and losses in cost of sales in our consolidated statements of earnings to the extent we utilize the underlying input in our manufacturing process. We

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report these gains and losses in the unallocated corporate items line in our segment operating results until we utilize the underlying input in our manufacturing process, at which time we reclassify the gains and losses to segment operating profit. We may experience volatile earnings as a result of these accounting treatments.
We are significantly dependent on information technology.
We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic and financial information, to manage a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers, and suppliers. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions, or shutdowns due to hardware failures, computer viruses, hacker attacks, telecommunication failures, user errors, catastrophic events or other factors. If our information technology systems suffer severe damage, disruption, or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience business disruptions, transaction errors, processing inefficiencies, and the loss of customers and sales, causing our product sales, financial condition, and operating results to be adversely affected and the reporting of our financial results to be delayed.
In addition, if we are unable to prevent security breaches or disclosure of non-public information, we may suffer financial and reputational damage, litigation or remediation costs or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, consumers, or suppliers.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
We consider our intellectual property rights, particularly and most notably our trademarks, but also our patents, trade secrets, copyrights, and licensing agreements, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements, third-party nondisclosure and assignment agreements, and policing of third-party misuses of our intellectual property. Our failure to obtain or adequately protect our trademarks, products, new features of our products, or our technology, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business.
We may be unaware of intellectual property rights of others that may cover some of our technology, brands, or products. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third-party claims of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.
If the Distribution, together with certain related transactions, were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then we and our shareholders could be subject to significant tax liability.
Mondelēz International, our former parent, received a private letter ruling from the Internal Revenue Service (“IRS”) and an opinion of tax counsel, each substantially to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Distribution will qualify for non-recognition of gain or loss to Mondelēz International and Mondelēz International’s shareholders pursuant to Section 355 of the Internal Revenue Code of 1986, as amended (“Code”), except to the extent of cash received in lieu of fractional shares, and (ii) certain internal transactions undertaken in connection with the Distribution (“Internal Spin-Off Transactions”), qualify for non-recognition of gain or loss to us and Mondelēz International pursuant to Sections 355 and 368 of the Code (except, in the case of the private letter ruling, to the extent the IRS generally will not rule on certain transfers of intellectual property, which are covered solely by the opinion).
Notwithstanding the receipt of the private letter ruling and the opinion of tax counsel, the IRS could determine that the Distribution and Internal Spin-Off Transactions should be treated as taxable transactions if it determines that any of the representations, assumptions or covenants on which the private letter ruling is based are untrue or have been violated. Furthermore, as part of the IRS’s policy, the IRS did not determine whether the Distribution and Internal Spin-Off Transactions satisfy certain conditions that are necessary to qualify for non-recognition treatment. Rather, the private letter ruling is based on representations by us and Mondelēz International that these conditions have been satisfied. The opinion of tax counsel addressed the satisfaction of these conditions. Similarly, the IRS

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generally will not rule on contributions of intellectual property that do not satisfy certain criteria. As a result, the private letter ruling does not address whether transfers of certain intellectual property included in the Internal Spin-Off Transactions qualify for non-recognition treatment. Rather, the opinion of tax counsel addressed the qualification.
The opinion of tax counsel is not binding on the IRS nor the courts, and there is no assurance that the IRS or a court will not take a contrary position. In addition, the opinion of tax counsel relied on certain representations and covenants delivered by us and Mondelēz International.
If the IRS ultimately determines that the Distribution and/or the Internal Spin-Off Transactions are taxable, we and Mondelēz International could incur significant U.S. federal income tax liabilities. Generally, taxes resulting from the failure of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on Mondelēz International or Mondelēz International’s shareholders and, under the Tax Sharing and Indemnity Agreement we entered into in connection with the Spin-Off, Mondelēz International is generally obligated to indemnify us against such taxes. However, under the Tax Sharing and Indemnity Agreement, we could be required, under certain circumstances, to indemnify Mondelēz International and its affiliates against all tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations, covenants or obligations under the Tax Sharing and Indemnity Agreement, or any other agreement we entered into in connection with the Spin-Off.
If the Canadian aspects of the Internal Spin-Off Transactions were to fail to qualify for tax-deferred treatment for Canadian federal and provincial income tax purposes, then our Canadian subsidiaries could be subject to significant tax liability.
The Internal Spin-Off Transactions included steps to separate the assets and liabilities in Canada held in connection with Mondelēz International’s global snacks business from the assets and liabilities in Canada held in connection with our North American grocery business.
Our Canadian subsidiary received an advance income tax ruling from the Canada Revenue Agency (“CRA”) to the effect that, subject to the accuracy of and compliance with certain representations, assumptions, and covenants and based on the current provisions of the Canadian Tax Act, such separation is treated for purposes of the Canadian Tax Act as resulting in a “butterfly” reorganization with no material Canadian federal income tax payable by our Canadian subsidiary, Mondelēz International’s Canadian subsidiary or their respective shareholders.
Notwithstanding the receipt of the advance income tax ruling, the CRA could determine that the separation should be treated as a taxable transaction if it determines that any of the representations, assumptions, or covenants on which the advance income tax ruling is based are untrue or have been violated. If the CRA ultimately were to determine that the separation is taxable, our and/or Mondelēz International’s Canadian subsidiaries could incur significant Canadian federal and provincial income tax liabilities, and we are generally obligated to indemnify Mondelēz International and its affiliates against such Canadian federal and provincial income taxes under the Tax Sharing and Indemnity Agreement.
We have agreed to numerous restrictions to preserve the non-recognition treatment of the transactions, which may reduce our strategic and operating flexibility.
Even if the Distribution otherwise qualifies for non-recognition of gain or loss under Section 355 of the Code, it may be taxable to Mondelēz International, but not Mondelēz International’s shareholders, under Section 355(e) of the Code if 50% or more (by vote or value) of our common stock or Mondelēz International’s common stock is acquired as part of a plan or series of related transactions that include the Distribution. For this purpose, any acquisitions of our or Mondelēz International’s common stock within two years before or after the Distribution are presumed to be part of such a plan, although we or Mondelēz International may be able to rebut that presumption based on either applicable facts and circumstances or a “safe harbor” described in the tax regulations. As a consequence, we agreed in the Tax Sharing and Indemnity Agreement to covenants and indemnity obligations that address compliance with Section 355(e) of the Code. These covenants and indemnity obligations may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that you may consider favorable.
Similarly, even if the Canadian aspects of the Internal Spin-Off Transactions otherwise qualify for tax-deferred treatment in Canada under the butterfly reorganization provisions of the Canadian Tax Act, this tax-deferred treatment may be lost upon the occurrence of certain events after the Spin-Off. These would include an acquisition of control of our Canadian subsidiary (which may occur upon an acquisition of control of us) that occurs as part of

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(or in some cases in contemplation of) a series of transactions or events that includes the butterfly reorganization. These post-butterfly transaction restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that you may consider favorable.
Our indebtedness levels could impact our business.
As of December 28, 2013, we had total debt of approximately $10 billion. Our ability to make payments on and to refinance our indebtedness, including any future debt that we may incur, will depend on our ability to generate cash from operations, financings, or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take disadvantageous actions, including reducing spending on marketing, retail trade incentives, advertising and product innovation, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets, or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.
Our indebtedness could also impair our ability to obtain additional financing for working capital, capital expenditures, or general corporate purposes, especially if the ratings assigned to our debt securities by rating organizations were revised downward. In addition, our leverage could put us at a competitive disadvantage compared to less-leveraged competitors that could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our ability to withstand competitive pressures and to react to changes in the food and beverage industry could be impaired, making us more vulnerable in the event of a general downturn in economic conditions, in our industry, or in our business.
Item 1B.  Unresolved Staff Comments.
None.
Item 2.  Properties.
Our corporate headquarters are located in Northfield, Illinois. Our headquarters are leased and house our executive offices, certain U.S. business units, and our administrative, finance, and human resource functions. We maintain additional owned and leased offices and three technology centers in the United States and Canada.
We have 36 manufacturing and processing facilities, of which 34 are in the United States and two are in Canada. We own all 36 of these facilities. It is our practice to maintain all of our plants and properties in good condition, and we believe they are suitable and adequate for our present needs.
We also have 39 distribution centers, of which 36 are in the United States and three are in Canada. We own four and lease 35 of these distribution centers. These facilities are in good condition, and we believe they have sufficient capacity to meet our present distribution needs.
Item 3.  Legal Proceedings.
We are routinely involved in legal proceedings, claims, and governmental inquiries, inspections or investigations (“Legal Matters”) arising in the ordinary course of our business.
As we have previously disclosed, on March 1, 2011, the Starbucks Coffee Company (“Starbucks”) took control of the Starbucks packaged coffee business (“Starbucks CPG business”) in grocery stores and other channels. Starbucks did so without our authorization and in what we contended was a violation and breach of our license and supply agreement with Starbucks related to the Starbucks CPG business (the “Starbucks Agreement”). The dispute was arbitrated in Chicago, Illinois, and on November 12, 2013, the arbitrator issued a decision awarding us compensation for Starbucks’ unilateral termination of the Starbucks Agreement. While we remained the named party in the proceeding, pursuant to the Separation and Distribution Agreement between Mondelēz International and us, Mondelēz International paid any costs and expenses incurred in connection with the arbitration and we directed the payment of the recovery we were awarded in the arbitration proceeding to Mondelēz International. The arbitration’s outcome did not have a material financial impact on us.

16

   

While we cannot predict with certainty the results of Legal Matters in which we are currently involved or may in the future be involved, we do not expect that the ultimate costs to resolve any of the Legal Matters that are currently pending will have a material adverse effect on our financial condition or results of operations.
Item 4.  Mine Safety Disclosures.
Not applicable.
PART II
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”). At January 25, 2014, there were approximately 69,318 holders of record of our common stock.
Information regarding our common stock high and low sales prices as reported on NASDAQ and dividends declared is included in Note 16, Quarterly Financial Data (Unaudited), to the consolidated financial statements.
Comparison of Cumulative Total Return
The following graph compares the cumulative total return on our common stock with the cumulative total return of the Standard & Poor’s 500 Index and the performance peer group index. This graph covers the period from September 17, 2012 (the first day our common stock began “when-issued” trading on the NASDAQ) through December 27, 2013 (the last trading day of our fiscal year). The graph shows total shareholder return assuming $100 was invested on September 17, 2012 and dividends were reinvested.
Date
 
Kraft Foods
Group
 
S&P 500
 
Performance
Peer Group
September 17, 2012
 
$
100.00

 
$
100.00

 
$
100.00

December 28, 2012
 
99.59

 
96.64

 
101.55

December 27, 2013
 
125.20

 
129.60

 
136.61

The Kraft Foods Group performance peer group consists of the companies within the Standard & Poor's 500 Consumer Staples Food Products Index, which currently consists of the following companies: Archer Daniels Midland Company, Campbell Soup Company, ConAgra Foods, Inc., General Mills, Inc., The Hershey Company,

17

   

Hormel Foods Corporation, Kellogg Company, McCormick and Co. Inc., Mead Johnson Nutrition Company, Mondelēz International, Inc., The J.M. Smucker Company, and Tyson Foods, Inc. Companies included in the Standard & Poor's 500 Consumer Staples Food Products Index change periodically. Both Dean Foods Company and H.J. Heinz Company, which were included in the index in the prior year, were excluded from the index in the current year.
This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.
Issuer Purchases of Equity Securities during the Quarter ended December 28, 2013
Our share repurchase activity for the three months ended December 28, 2013 was:
 
 
Total Number
of Shares(1)
 
Average Price 
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program(2)
 
Dollar Value of Shares that May Yet be Purchased Under the Program(2)
October 2013
 
1,052

 
$
52.56

 
 
 
 
November 2013
 
365

 
53.45

 
 
 
 
December 2013
 
1,114

 
53.15

 

 
$
3,000,000,000

For the Quarter Ended December 28, 2013
 
2,531

 
52.95

 
 
 
 
(1) Includes shares tendered by individuals who used shares to exercise options or to pay the related taxes for grants of restricted stock, restricted stock units, and Performance Shares (as defined below) that vested.
(2) On December 17, 2013, our Board of Directors authorized a $3.0 billion share repurchase program with no expiration date. Under the share repurchase program, we are authorized to repurchase shares of our common stock in the open market or in privately negotiated transactions. The timing and amount of share repurchases are subject to management evaluation of market conditions, applicable legal requirements, and other factors. We are not obligated to repurchase any of our common stock and may suspend the program at our discretion. As of December 28, 2013, no shares have been repurchased under this program.

18

   

Item 6.  Selected Financial Data.
Kraft Foods Group, Inc.
Selected Financial Data – Five Year Review
 
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
 
December 31,
2010
 
December 31,
2009
 
 
(in millions of dollars, except per share data)
Year Ended:
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
18,218

 
$
18,271

 
$
18,576

 
$
17,739

 
$
17,232

Earnings from continuing operations
 
2,715

 
1,642

 
1,775

 
1,890

 
1,896

Earnings and gain from discontinued operations, net of income taxes
 

 

 

 
1,644

 
218

Net earnings
 
$
2,715

 
$
1,642

 
$
1,775

 
$
3,534

 
$
2,114

Earnings from continuing operations per share(1):
 
 
 
 
 
 
 
 
 
 
Basic
 
$
4.55

 
$
2.77

 
$
3.00

 
$
3.20

 
$
3.21

Diluted
 
$
4.51

 
$
2.75

 
$
3.00

 
$
3.20

 
$
3.21

Net cash provided by operating activities
 
$
2,043

 
$
3,035

 
$
2,664

 
$
828

 
$
3,017

Capital expenditures
 
557

 
440

 
401

 
448

 
513

Depreciation
 
393

 
428

 
364

 
354

 
348

As of:
 
 
 
 
 
 
 
 
 
 
Total assets
 
23,148

 
23,179

 
21,389

 
21,448

 
22,039

Long-term debt
 
9,976

 
9,966

 
27

 
31

 
48

Total equity
 
5,187

 
3,572

 
16,588

 
17,037

 
17,511

Dividends declared per share
 
$
2.05

 
$
0.50

 
$

 
$

 
$

(1)
On October 1, 2012, Mondelēz International distributed 592 million shares of Kraft Foods Group common stock to Mondelēz International’s shareholders. Basic and diluted earnings per common share and the average number of common shares outstanding were retrospectively restated for the years ended December 31, 2011, December 31, 2010, and December 31, 2009 for the number of Kraft Foods Group shares outstanding immediately following this transaction.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8.
Description of the Company
We manufacture and market food and beverage products, including refrigerated meals, refreshment beverages, coffee, cheese, and other grocery products, primarily in the United States and Canada. Our product categories span all major meal occasions, both at home and in foodservice locations.
We were a wholly owned subsidiary of Mondelēz International until October 1, 2012. On that date, Mondelēz International spun-off Kraft Foods Group, comprising the North American grocery business, to Mondelēz International’s shareholders. As a result of the Spin-Off, we now operate as an independent publicly traded company.

19

   

Items Affecting Comparability of Financial Results
Principles of Consolidation
Prior to the Spin-Off on October 1, 2012, our financial statements were prepared on a stand-alone basis and were derived from the consolidated financial statements and accounting records of Mondelēz International. Our financial statements for the years ended December 29, 2012 and December 31, 2011, included certain expenses of Mondelēz International that were allocated to us. These allocations were not necessarily indicative of the actual expenses we would have incurred as an independent public company or of the costs we will incur in the future, and may differ substantially from the allocations we agreed to in the various separation agreements.
Cost Savings Initiatives
We incurred cost savings initiatives expenses of $290 million in 2013 and $303 million in 2012. Our costs savings initiatives include a multi-year $650 million restructuring program consisting of restructuring costs, implementation costs, and Spin-Off transition costs (the “Restructuring Program”), which was approved by our Board of Directors on October 29, 2012. We have reduced our estimate of the total Restructuring Program costs to $625 million. Approximately one-half of these costs will be cash expenditures. We spent cash of $150 million in 2013 and $111 million in 2012 related to our Restructuring Program. We expect to complete the Restructuring Program by the end of 2014.
Debt
On May 18, 2012, we entered into a $3.0 billion five-year senior unsecured revolving credit facility in connection with the Spin-Off. The agreement expires on May 17, 2017. On June 4, 2012, we issued $6.0 billion of senior unsecured notes with a weighted average interest rate of 3.938% and transferred the net proceeds of $5.9 billion to Mondelēz International. On July 18, 2012, Mondelēz International completed a debt exchange in which $3.6 billion of Mondelēz International’s debt was exchanged for our debt as part of our Spin-Off-related capitalization plan. There were no cash proceeds from the exchange. On October 1, 2012, Mondelēz International also transferred approximately $0.4 billion of Mondelēz International’s 7.550% senior unsecured notes to us to complete the key elements of the capitalization plan in connection with the Spin-Off.
Postemployment Benefit Plans
We remeasure all of our postemployment benefit plans at least annually at the end of our fiscal year. The remeasurement as of December 28, 2013 resulted in an aggregate benefit from market-based impacts of $1.6 billion, primarily driven by an 80 basis point weighted average increase in the discount rate for our pension and postretirement plans and excess asset returns in our pension plans. The annual remeasurement resulted in expense from market-based impacts of $223 million as of December 29, 2012 and $70 million as of December 31, 2011. We disclose market-based impacts separately in order to provide better transparency of our operating results. We define market-based impacts as the costs or benefits resulting from the change in discount rates, the difference between our estimated and actual return on trust assets, and other assumption changes driven by changes in the law or other external factors.
Starbucks CPG Business
On March 1, 2011, Starbucks took control of the Starbucks CPG business in grocery stores and other channels. Starbucks did so without our authorization and in what we contended was a violation and breach of the Starbucks Agreement. The dispute was arbitrated in Chicago, Illinois, and on November 12, 2013, the arbitrator issued a decision awarding us compensation for Starbucks’ unilateral termination of the Starbucks Agreement. While we remained the named party in the proceeding, pursuant to the Separation and Distribution Agreement between Mondelēz International and us, Mondelēz International paid any costs and expenses incurred in connection with the arbitration and we directed the payment of the recovery we were awarded in the arbitration proceeding to Mondelēz International. The arbitration’s outcome did not have a material financial impact on us. The results of the Starbucks CPG business were included our Beverages and Canada segments through March 1, 2011.
Provision for Income Taxes
Our effective tax rate was 33.6% in 2013, 33.1% in 2012, and 38.3% in 2011. Our 2013 effective tax rate was unfavorably impacted by an increase in earnings due to the remeasurements of certain postemployment benefit plans and favorably impacted by net discrete items totaling $61 million primarily from various U.S. federal, foreign,

20

   

and state tax audit developments, statute of limitations expirations during the year, and valuation allowance reversals of $23 million.
Our 2012 effective tax rate was favorably impacted by net discrete items totaling $33 million, arising principally from U.S. federal, foreign, and state tax audit developments during the year.
Our 2011 effective tax rate was unfavorably impacted by net discrete items totaling $52 million, primarily from various U.S. federal and U.S. state tax audit developments during the year as well as the revaluation of state deferred tax assets and liabilities resulting from state tax legislation enacted in 2011.
Consolidated Results of Operations
The following discussion compares our consolidated results of operations for 2013 with 2012 and 2011.
Summary of Results
 
For the Years Ended
 
 
 
 
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
 
2013 v. 2012
 
2012 v. 2011
 
(in millions, except per share data)
 
 
 
 
Net revenues
$
18,218

 
$
18,271

 
18,576

 
(0.3
)%
 
(1.6
)%
Operating income
$
4,591

 
$
2,670

 
2,828

 
71.9
 %
 
(5.6
)%
Net earnings
$
2,715

 
$
1,642

 
1,775

 
65.3
 %
 
(7.5
)%
Diluted earnings per share(1)
$
4.51

 
$
2.75

 
3.00

 
64.0
 %
 
(8.3
)%
(1) Diluted earnings per share ("EPS") and the average number of common shares outstanding as of December 31, 2011 were retrospectively restated for the number of Kraft Foods Group shares outstanding immediately following the Spin-Off.
Net Revenues
 
For the Years Ended
 
 
 
December 28,
2013
 
December 29,
2012
 
% Change
 
(in millions)
 
 
Net revenues
$
18,218

 
$
18,271

 
(0.3
)%
Impact of foreign currency
73

 

 
0.4
pp
Sales to Mondelēz International
(147
)
 
(114
)
 
(0.2
)pp
Organic Net Revenues (1)
$
18,144

 
$
18,157

 
(0.1
)%
Volume/mix
 
 
 
 
0.5
pp
Net pricing
 
 
 
 
(0.6
)pp
 
For the Years Ended
 
 
 
December 29,
2012
 
December 31,
2011
 
% Change
 
(in millions)
 
 
Net revenues
$
18,271

 
$
18,576

 
(1.6
)%
Impact of divestitures

 
(91
)
 
0.4
pp
Impact of 53rd week of shipments in 2011

 
(225
)
 
1.3
pp
Impact of foreign currency
21

 

 
0.1
pp
Sales to Mondelēz International
(114
)
 
(100
)
 
(0.1
)pp
Organic Net Revenues (1)
$
18,178

 
$
18,160

 
0.1
 %
Volume/mix
 
 
 
 
(2.8
)pp
Net pricing
 
 
 
 
2.9
pp
(1)
Organic Net Revenues is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.

21

   

2013 compared with 2012:
Organic Net Revenues were flat as lower net pricing was generally offset by favorable volume/mix. Lower net pricing (0.6 pp) was due primarily to increased competitive activity in Beverages and Enhancers & Snack Nuts, partially offset by higher net pricing in Meals & Desserts and Refrigerated Meals. Favorable volume/mix (0.5 pp) was driven primarily by base business growth, despite an unfavorable product line pruning impact of approximately one percentage point. Higher sales to Mondelēz International increased net revenues by $33 million while foreign currency negatively impacted net revenues by $73 million due to the strength of the U.S. dollar relative to the Canadian dollar.
2012 compared with 2011:
Organic Net Revenues were flat as the impact of higher net pricing was generally offset by unfavorable volume/mix. Higher net pricing (2.9 pp), including the impact of pricing from prior periods, was realized across all business segments as we increased pricing to offset higher commodity costs. Unfavorable volume/mix (2.8 pp)reflected lower shipments in all segments except Meals & Desserts (including negative impacts from product line pruning of approximately one percentage point and customer trade inventory reductions). Sales to Mondelēz International increased net revenues by $14 million while unfavorable foreign currency lowered net revenues by $21 million, due to the strength of the U.S. dollar relative to the Canadian dollar. In 2011, net revenues included a 53rd week of shipments that added $225 million to net revenues and divestitures (including the Starbucks CPG business) that contributed $91 million to net revenues.
Operating Income
 
Operating Income
 
Operating Income
 
2013 v. 2012
 
2012 v. 2011
 
(in millions)
 
(percentage point)
Operating Income for the Years Ended December 29, 2012 and December 31, 2011
$
2,670

 
$
2,828

 
 
 
 
(Lower) / higher net pricing
(109
)
 
526

 
(3.4
)
 
18.7

Lower / (higher) product costs
72

 
(42
)
 
2.3

 
(1.5
)
Favorable / (unfavorable) volume/mix
40

 
(229
)
 
1.2

 
(8.1
)
Lower selling, general and administrative expenses
131

 
55

 
4.1

 
1.9

Lower / (higher) cost savings initiatives expenses
13

 
(303
)
 
0.8

 
(10.5
)
Impact of the 53rd week of shipments in 2011

 
(62
)
 

 
(2.5
)
Change in unrealized gains / (losses) on hedging activities
8

 
77

 
0.2

 
2.8

Change in market-based impacts to postemployment 
benefit plans
1,784

 
(153
)
 
67.2

 
(5.4
)
Other, net
(18
)
 
(27
)
 
(0.5
)
 
(1.0
)
Operating Income for the Years Ended December 28, 2013 and December 29, 2012
$
4,591

 
$
2,670

 
71.9
%
 
(5.6
)%
2013 compared with 2012:
Lower net pricing was due primarily to increased competitive activity in Beverages and Enhancers & Snack Nuts, partially offset by higher commodity cost-driven pricing in Meals & Desserts and Refrigerated Meals. Lower product costs reflected lower manufacturing costs driven by net productivity, partially offset by higher commodity costs (primarily dairy and meat products). Improved product mix drove favorable volume/mix, partially offset by lower volumes due to product line pruning.
Lower selling, general and administrative expenses reflected lower overhead costs driven by cost management efforts, partially offset by higher marketing spending and the costs of operating as an independent public company (which were not part of our cost profile in the first three quarters of 2012).
We incurred $290 million of costs related to our cost savings initiatives in 2013 compared to $303 million in 2012.
The change in unrealized gains / (losses) on hedging activities increased operating income by $8 million, as we recognized gains of $21 million in 2013 versus gains of $13 million in 2012.

22

   

The change in market-based impacts to postemployment benefit plans increased operating income by $1,784 million as we recorded income from market-based impacts to our postemployment benefit plans of $1,561 million in 2013 (which consisted of income of $1,635 million from changes in discount rates and excess asset returns, partially offset by expense of $74 million from changes in actuarial assumptions) compared to a net expense of $223 million in 2012 (which consisted of expense of $594 million from changes in actuarial assumptions, partially offset by excess asset returns of $371 million).
2012 compared with 2011:
Higher net pricing outpaced increased product costs during 2012. The increase in product costs was due to higher commodity costs, partially offset by lower manufacturing costs driven by net productivity. Unfavorable volume/mix reflected customer trade inventory reductions and the impact of higher pricing.
Total selling, general and administrative expenses decreased $55 million in 2012 from 2011, despite an increase in marketing spending. The 53rd week of shipments in 2011 had an unfavorable year-over-year impact on operating income of $62 million.
We recorded expenses related to our costs savings initiatives of $303 million in 2012, compared to none in 2011.
The change in unrealized gains/losses on hedging activities increased operating income by $77 million, as we recognized gains of $13 million in 2012, versus losses of $64 million in 2011.
The change in market-based impacts to postemployment benefit plans decreased operating income by $153 million, as we recorded a mark-to-market expense of $223 million in 2012 (which consists of expense of $594 million from changes in actuarial assumptions, partially offset by excess asset returns of $371 million), versus a mark-to-market expense of $70 million in 2011.
Included in other, net is the impact of divestitures (primarily the Starbucks CPG business cessation) which decreased operating income by $20 million.
Net Earnings and Diluted Earnings per Share
Net earnings increased 65.3% to $2,715 million in 2013 and decreased by 7.5% to $1,642 million in 2012. Diluted EPS was $4.51 in 2013, up $1.76 from $2.75 in 2012. Diluted EPS was down $0.25 in 2012 from $3.00 in 2011.
 
Diluted EPS
 
Diluted EPS
 
 
 
 
Diluted EPS for the Years Ended December 29, 2012 and December 31, 2011
$
2.75

 
$
3.00

Increase in operations
0.14

 
0.33

Change in cost savings initiatives expenses
0.02

 
(0.32
)
Impact of the 53rd week of shipments in 2011

 
(0.07
)
Change in unrealized gains / (losses) on hedging activities
0.01

 
0.08

Change in market-based impacts to postemployment benefit plans
1.90

 
(0.15
)
Higher interest and other expense, net
(0.27
)
 
(0.27
)
Royalty income from Mondelēz International
(0.04
)
 
(0.01
)
Changes in taxes
0.03

 
0.21

Other, net
(0.03
)
 
(0.05
)
Diluted EPS for the Years Ended December 28, 2013 and December 29, 2012
$
4.51

 
$
2.75

2013 compared with 2012:
In addition to the items impacting operating income, the increase in Diluted EPS in 2013 compared to 2012 was driven by the increase in interest and other expense, net. The increase in interest and other expense, net was due to the $6.0 billion debt issuance in June 2012, the $3.6 billion debt exchange in July 2012, and the $0.4 billion transfer of debt from Mondelēz International in October 2012. We incurred a full year of interest and other expense, net in 2013 compared to only a partial year in 2012 related to these debt instruments.

23

   

2012 compared with 2011:
In addition to the items impacting operating income, the decrease in Diluted EPS in 2012 compared to 2011 was driven by the increase in interest and other expense, net. The increase in interest and other expense, net was due to the $6.0 billion debt issuance in June 2012, the $3.6 billion debt exchange in July 2012, and the $0.4 billion transfer of debt from Mondelēz International in October 2012. As a result, we incurred a partial year of interest and other expense, net in 2012 related to these debt instruments compared to none in 2011.
Results of Operations by Reportable Segment
Effective July 1, 2013, we began managing and reporting operating results through six reportable segments: Beverages, Cheese, Refrigerated Meals, Meals & Desserts, Enhancers & Snack Nuts, and Canada. Our remaining businesses, including our Foodservice and Exports businesses, are aggregated and disclosed as “Other Businesses”. We reflect this reorganization for all the historical periods presented.
The following discussion compares our results of operations for each of our reportable segments for 2013 with 2012 and 2012 with 2011.
 
For the Years Ended
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
 
(in millions)
Net revenues:
 
 
 
 
 
Beverages
$
2,681

 
$
2,718

 
$
2,990

Cheese
3,925

 
3,829

 
3,788

Refrigerated Meals
3,334

 
3,280

 
3,313

Meals & Desserts
2,305

 
2,311

 
2,271

Enhancers & Snack Nuts
2,101

 
2,220

 
2,259

Canada
2,037

 
2,010

 
1,967

Other Businesses
1,835

 
1,903

 
1,988

Net revenues
$
18,218

 
$
18,271

 
$
18,576

 
For the Years Ended
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
 
(in millions)
Earnings before income taxes:
 
 
 
 
 
Operating income:
 
 
 
 
 
Beverages
$
349

 
$
260

 
$
450

Cheese
634

 
618

 
629

Refrigerated Meals
329

 
379

 
319

Meals & Desserts
665

 
712

 
722

Enhancers & Snack Nuts
529

 
592

 
594

Canada
373

 
301

 
302

Other Businesses
227

 
180

 
182

Unrealized gains / (losses) on hedging activities
21

 
13

 
(64
)
Certain postemployment benefit plan income / (costs)
1,622

 
(305
)
 
(240
)
General corporate expenses
(158
)
 
(80
)
 
(66
)
Operating income
$
4,591

 
$
2,670

 
$
2,828

Management uses segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities, certain components of our

24

   

postemployment benefit plans, and general corporate expenses (which are a component of selling, general and administrative expenses) for all periods presented.
We exclude the unrealized gains and losses on hedging activities (which are a component of cost of sales) from segment operating income in order to provide better transparency of our segment operating results. Once realized, the gains and losses on hedging activities are recorded within segment operating results.
We exclude certain components of our postemployment benefit plans (which are a component of cost of sales and selling, general and administrative expenses) from segment operating income because we centrally manage postemployment benefit plan funding decisions and the determination of discount rate, expected rate of return on plan assets, and other actuarial assumptions. We also manage market-based impacts to these benefit plans centrally. Therefore, we allocate only the service cost component of our pension plan expense to segment operating income.
Included within our segment results above are sales to Mondelēz International that totaled $147 million in 2013, $114 million in 2012, and $100 million in 2011. These sales are excluded from Organic Net Revenues.
Beverages
 
For the Years Ended
 
 
 
 
 
December 28,
2013
 
December 29,
2012
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
2,681

 
$
2,718

 
$
(37
)
 
(1.4
)%
Organic Net Revenues(1)
2,681

 
2,718

 
(37
)
 
(1.4
)%
Segment operating income
349

 
260

 
89

 
34.2
 %
 
 
 
 
 
 
 
 
 
For the Years Ended
 
 
 
 
 
December 29,
2012
 
December 31,
2011
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
2,718

 
$
2,990

 
$
(272
)
 
(9.1
)%
Organic Net Revenues(1)
2,718

 
2,866

 
(148
)
 
(5.2
)%
Segment operating income
260

 
450

 
(190
)
 
(42.2
)%
(1)
See the Non-GAAP Financial Measures section at the end of this item.
2013 compared with 2012:
Net revenues and Organic Net Revenues decreased 1.4%, due to lower net pricing (6.1 pp), partially offset by favorable volume/mix (4.7 pp). Lower net pricing was due primarily to lower commodity cost-driven pricing in coffee, increased promotions in ready-to-drink beverages, and increased competitive activity in liquid concentrates. Favorable volume/mix was driven primarily by growth in new on-demand coffee and liquid concentrate products as well as higher shipments of ready-to-drink beverages, partially offset by lower shipments of powdered beverages.
Segment operating income increased 34.2%, due to lower manufacturing costs driven by net productivity, favorable volume/mix, and lower overhead costs, partially offset by higher marketing spending on new products and unfavorable pricing net of commodity costs.
2012 compared with 2011:
Net revenues decreased 9.1%, which includes the impacts of the Starbucks CPG business cessation (2.7 pp) and the 53rd week of shipments in 2011 (1.2 pp). Organic Net Revenues declined 5.2%, due primarily to unfavorable volume/mix (5.5 pp, including a negative impact from customer trade inventory reductions). Unfavorable volume/mix was driven by lower shipments of ready-to-drink beverages, mainstream coffee, powdered beverages and Tassimo coffee, partially offset by favorable volume/mix from liquid concentrates, driven by new products, and the roll-out of Gevalia coffee.

25

   

Segment operating income decreased 42.2%, due primarily to costs incurred for the Restructuring Program, unfavorable volume/mix, unfavorable pricing net of commodity costs, and higher marketing spending. This was partially offset by lower overhead costs.
Cheese
 
For the Years Ended
 
 
 
 
 
December 28,
2013
 
December 29,
2012
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
3,925

 
$
3,829

 
$
96

 
2.5
 %
Organic Net Revenues(1)
3,874

 
3,817

 
57

 
1.5
 %
Segment operating income
634

 
618

 
16

 
2.6
 %
 
 
 
 
 
 
 
 
 
For the Years Ended
 
 
 
 
 
December 29,
2012
 
December 31,
2011
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
3,829

 
$
3,788

 
$
41

 
1.1
 %
Organic Net Revenues(1)
3,817

 
3,742

 
75

 
2.0
 %
Segment operating income
618

 
629

 
(11
)
 
(1.7
)%
(1)
See the Non-GAAP Financial Measures section at the end of this item.
2013 compared with 2012:
Net revenues increased 2.5%, which includes the impact of higher sales to Mondelēz International (1.0 pp). Organic Net Revenues increased 1.5%, driven primarily by favorable volume/mix (1.6 pp) as higher shipments of natural cheese and sandwich cheese were partially offset by lower shipments of snacking cheese, due in part to a voluntary string cheese recall.
Segment operating income increased 2.6% as lower marketing spending, lower overhead costs, favorable volume/mix, and lower manufacturing costs driven by net productivity were partially offset by unfavorable pricing net of commodity costs.
2012 compared with 2011:
Net revenues increased 1.1%, despite the impact of the 53rd week of shipments in 2011 (1.2 pp). Organic Net Revenues increased 2.0%, driven primarily by higher net pricing (2.4 pp) in the grated, specialty, recipe, and natural cheese categories.
Segment operating income decreased 1.7%, due primarily to costs incurred for the Restructuring Program and higher marketing spending, partially offset by higher net pricing and lower manufacturing costs driven by net productivity.


26

   

Refrigerated Meals
 
For the Years Ended
 
 
 
 
 
December 28,
2013
 
December 29,
2012
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
3,334

 
$
3,280

 
$
54

 
1.6
 %
Organic Net Revenues(1)
3,334

 
3,280

 
54

 
1.6
 %
Segment operating income
329

 
379

 
(50
)
 
(13.2
)%
 
For the Years Ended
 
 
 
 
 
December 29,
2012
 
December 31,
2011
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
3,280

 
$
3,313

 
$
(33
)
 
(1.0
)%
Organic Net Revenues(1)
3,280

 
3,270

 
10

 
0.3
 %
Segment operating income
379

 
319

 
60

 
18.8
 %
(1)
See the Non-GAAP Financial Measures section at the end of this item.
2013 compared with 2012:
Net revenues and Organic Net Revenues increased 1.6%, driven primarily by higher net pricing (1.9 pp), reflecting commodity cost-driven pricing actions in bacon. This increase was partially offset by unfavorable volume/mix in cold cuts and meat alternatives driven by lower shipments, offset by gains in lunch combinations.
Segment operating income decreased 13.2%, due primarily to unfavorable pricing net of commodity costs, as commodity cost increases were not fully reflected in our pricing, and higher marketing spending in lunch combinations and cold cuts. This decrease was partially offset by lower manufacturing costs driven by net productivity and lower overhead costs.
2012 compared with 2011:
Net revenues decreased 1.0%, which includes the impact of the 53rd week of shipments in 2011 (1.3 pp). Organic Net Revenues increased 0.3%, driven by higher net pricing (1.6 pp), partially offset by unfavorable volume/mix (1.3 pp, including a negative impact of approximately 0.7 pp due to product line pruning). Higher net pricing was due to commodity cost-driven pricing primarily related to lunch combinations and hot dogs. Unfavorable volume/mix was due primarily to product line pruning and lower shipments in hot dogs, partially offset by favorable mix in cold cuts.
Segment operating income increased 18.8%, driven primarily by lower manufacturing costs driven by net productivity and lower overhead costs, partially offset by costs incurred for the Restructuring Program.


27

   

Meals & Desserts
 
For the Years Ended
 
 
 
 
 
December 28,
2013
 
December 29,
2012
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
2,305

 
$
2,311

 
$
(6
)
 
(0.3
)%
Organic Net Revenues(1)
2,305

 
2,311

 
(6
)
 
(0.3
)%
Segment operating income
665

 
712

 
(47
)
 
(6.6
)%
 
For the Years Ended
 
 
 
 
 
December 29,
2012
 
December 31,
2011
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
2,311

 
$
2,271

 
$
40

 
1.8
 %
Organic Net Revenues(1)
2,311

 
2,242

 
69

 
3.1
 %
Segment operating income
712

 
722

 
(10
)
 
(1.4
)%
(1)
See the Non-GAAP Financial Measures section at the end of this item.
2013 compared with 2012:
Net revenues and Organic Net Revenues decreased 0.3%, due to unfavorable volume/mix (3.2 pp), partially offset by higher net pricing (2.9 pp). Unfavorable volume/mix was due primarily to lower shipments of ready-to-eat desserts. Higher net pricing was driven primarily by pricing actions in dinners.
Segment operating income decreased 6.6%, due primarily to higher marketing spending as well as unfavorable volume/mix. This decrease was partially offset by pricing actions in dinners and lower overhead costs.
2012 compared with 2011:
Net revenues increased 1.8%, despite the impact of the 53rd week of shipments in 2011 (1.3 pp). Organic Net Revenues increased 3.1%, driven by higher net pricing (1.6 pp) and favorable volume/mix (1.5 pp, including a favorable impact from customer trade inventory reductions). Higher net pricing was due primarily to pricing actions in dinners. Favorable volume/mix was driven by higher shipments in dinners due in part to new products, partially offset by lower shipments of ready-to-eat desserts.
Segment operating income decreased 1.4%, due primarily to costs incurred for the Restructuring Program, unfavorable volume/mix driven by ready-to-eat desserts, and unfavorable pricing net of commodity costs. This decrease was partially offset by lower overhead costs and lower manufacturing costs driven by net productivity.


28

   

Enhancers & Snack Nuts
 
For the Years Ended
 
 
 
 
 
December 28,
2013
 
December 29,
2012
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
2,101

 
$
2,220

 
$
(119
)
 
(5.4
)%
Organic Net Revenues(1)
2,093

 
2,217

 
(124
)
 
(5.6
)%
Segment operating income
529

 
592

 
(63
)
 
(10.6
)%
 
For the Years Ended
 
 
 
 
 
December 29,
2012
 
December 31,
2011
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
2,220

 
$
2,259

 
$
(39
)
 
(1.7
)%
Organic Net Revenues(1)
2,217

 
2,233

 
(16
)
 
(0.7
)%
Segment operating income
592

 
594

 
(2
)
 
(0.3
)%
(1)
See the Non-GAAP Financial Measures section at the end of this item.
2013 compared with 2012:
Net revenues decreased 5.4% and Organic Net Revenues decreased 5.6%, due to lower net pricing (3.3 pp) and unfavorable volume/mix (2.3 pp, including a negative impact of approximately 0.8 pp due to product line pruning in snack bars). Lower net pricing was due primarily to increased competitive activity in spoonable and pourable dressings and commodity cost-driven pricing in snack nuts. Unfavorable volume/mix was due primarily to lower shipments of pourable and spoonable dressings, partially offset by higher shipments of snack nuts.
Segment operating income decreased 10.6%, due to increased competitive spending in spoonable and pourable salad dressings, unfavorable pricing net of commodity costs in snack nuts, higher marketing spending in snack nuts, spoonable dressings, and pourable dressings, and unfavorable volume/mix. This decrease was partially offset by lower overhead costs and lower manufacturing costs driven by net productivity.
2012 compared with 2011:
Net revenues decreased 1.7%, which includes the impact of the 53rd week of shipments in 2011 (1.1 pp). Organic Net Revenues decreased 0.7%, due to unfavorable volume/mix (9.4 pp, including negative impacts from customer trade inventory reductions and approximately 0.8 pp due from product line pruning), partially offset by higher net pricing (8.7 pp). Unfavorable volume/mix was due primarily to lower shipments in snack nuts, spoonable dressings, and pourable dressings. Higher net pricing was due primarily to commodity cost-driven pricing actions in snack nuts, pourable dressings and spoonable dressings.
Segment operating income decreased 0.3%, due primarily to unfavorable volume/mix and costs incurred for the Restructuring Program, partially offset by favorable pricing net of commodity costs and lower overhead costs.


29

   

Canada
 
For the Years Ended
 
 
 
 
 
December 28,
2013
 
December 29,
2012
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
2,037

 
$
2,010

 
$
27

 
1.3
 %
Organic Net Revenues(1)
2,086

 
2,006

 
80

 
4.0
 %
Segment operating income
373

 
301

 
72

 
23.9
 %
 
For the Years Ended
 
 
 
 
 
December 29,
2012
 
December 31,
2011
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
2,010

 
$
1,967

 
$
43

 
2.2
 %
Organic Net Revenues(1)
2,024

 
1,939

 
85

 
4.4
 %
Segment operating income
301

 
302

 
(1
)
 
(0.3
)%
(1)
See the Non-GAAP Financial Measures section at the end of this item.
2013 compared with 2012:
Net revenues increased 1.3%, including the impacts of unfavorable foreign currency (3.3 pp) and higher sales to Mondelēz International (0.6 pp). Organic Net Revenues increased 4.0%, driven by favorable volume/mix (5.3 pp), partially offset by lower net pricing (1.3 pp). Favorable volume/mix was driven by higher shipments of peanut butter and natural cheese as well as favorable mix from coffee. Lower net pricing was due primarily to commodity cost-driven pricing in peanut butter.
Segment operating income increased 23.9%, driven primarily by favorable volume/mix and lower overhead costs, partially offset by investments in higher marketing spending driving volume/mix growth.
2012 compared with 2011:
Net revenues increased 2.2%, despite the impacts of the 53rd week of shipments in 2011 (1.2 pp) and unfavorable foreign currency (1.0 pp). Organic Net Revenues increased 4.4%, driven primarily by higher net pricing (4.3 pp), reflecting commodity cost-driven pricing in peanut butter.
Segment operating income was flat, as higher marketing spending, costs incurred for the Restructuring Program, and the impact of the 53rd week of shipments in 2011, was offset by favorable pricing net of commodity costs.


30

   

Other Businesses
 
For the Years Ended
 
 
 
 
 
December 28,
2013
 
December 29,
2012
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
1,835

 
$
1,903

 
$
(68
)
 
(3.6
)%
Organic Net Revenues(1)
1,771

 
1,808

 
(37
)
 
(2.0
)%
Segment operating income
227

 
180

 
47

 
26.1
 %
 
For the Years Ended
 
 
 
 
 
December 29,
2012
 
December 31,
2011
 
$ Change
 
% Change
 
(in millions)
 
 
Net revenues
$
1,903

 
$
1,988

 
$
(85
)
 
(4.3
)%
Organic Net Revenues(1)
1,811

 
1,868

 
(57
)
 
(3.1
)%
Segment operating income
180

 
182

 
(2
)
 
(1.1
)%
(1)
See the Non-GAAP Financial Measures section at the end of this item.
2013 compared with 2012:
Net revenues decreased 3.6%, which includes the impacts of lower sales to Mondelēz International (1.1 pp) and unfavorable foreign currency (0.5 pp). Organic Net Revenues decreased 2.0%, due to unfavorable volume/mix (3.5 pp, including a negative impact of approximately 6.2 pp from product line pruning), partially offset by higher net pricing (1.5 pp). Unfavorable volume/mix was due primarily to Foodservice product line pruning, partially offset by higher shipments in other international businesses. Higher net pricing was driven primarily by commodity cost- driven pricing in Foodservice.
Segment operating income increased 26.1%, driven primarily by favorable pricing net of commodity costs, lower manufacturing costs driven by net productivity, lower marketing spending, and favorable volume/mix due to growth in other international businesses.
2012 compared with 2011:
Net revenues decreased 4.3%, which includes the impact of the 53rd week of shipments in 2011 (1.0 pp). Organic Net Revenues decreased 3.1%, due primarily to unfavorable volume/mix (6.3 pp, including a negative impact of approximately 4.4 pp from product line pruning), partially offset by higher net pricing (3.2 pp). Unfavorable volume/mix was due primarily to Foodservice product line pruning. Higher net pricing was driven primarily by commodity cost-driven pricing in Foodservice and other international businesses.
Segment operating income decreased 1.1%, due primarily to unfavorable volume/mix, costs incurred for the Restructuring Program, and higher manufacturing costs despite net productivity, partially offset by favorable net pricing.
Critical Accounting Policies
Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements includes a summary of the significant accounting policies we used to prepare our consolidated financial statements. We have discussed the selection and disclosure of our critical accounting policies and estimates with our Audit Committee. The following is a review of the more significant assumptions and estimates, as well as the accounting policies we used to prepare our consolidated financial statements.
Principles of Consolidation:
The consolidated financial statements include Kraft Foods Group, as well as our wholly owned and majority owned subsidiaries. All intercompany transactions are eliminated.
Prior to the Spin-Off on October 1, 2012, our financial statements were prepared on a stand-alone basis and were derived from the consolidated financial statements and accounting records of Mondelēz International. Our financial statements included certain expenses of Mondelēz International that were allocated to us for certain functions,

31

   

including general corporate expenses related to finance, legal, information technology, human resources, compliance, shared services, insurance, employee benefits and incentives, and stock-based compensation. These expenses were allocated in our historical results of operations on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenue, operating income, or headcount. We consider the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations were not necessarily indicative of the actual expenses we would have incurred as an independent public company or of the costs we will incur in the future, and may differ substantially from the allocations we agreed to in the various separation agreements.
Prior to the Spin-Off, our period-end date was the last day of the calendar year. However, for reporting purposes, we have changed our period-end date to the last Saturday of the fiscal year, which aligns with the financial close dates of our operating segments. As the effect to prior period results was not material, we have not revised prior period results. Because our operating segments reported results on the last Saturday of the year and December 31, 2011 fell on a Saturday, our 2011 results included an extra week (“53rd week”) of operating results than in 2013 or 2012 which had 52 weeks.
Long-Lived Assets:
We review long-lived assets for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. Such conditions include significant adverse changes in the business climate, current period operating or cash flow losses, significant declines in forecasted operations or a current expectation that an asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of assets held for use, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. If we determine an impairment exists, we calculate the loss based on estimated fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Goodwill and Intangible Assets:
We test goodwill and indefinite-lived intangible assets for impairment at least once a year in the fourth quarter or when a triggering event occurs. The first step of the goodwill impairment test compares the reporting unit’s estimated fair value with its carrying value. We estimate a reporting unit’s fair value using planned growth rates, market-based discount rates, estimates of residual value, and estimates of market multiples. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value.
We test indefinite-lived intangible assets for impairment by comparing the fair value of each intangible asset with its carrying value. We determine fair value of non-amortizing intangible assets using planned growth rates, market-based discount rates, and estimates of royalty rates. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value.
There were no impairments of goodwill or indefinite-lived intangible assets in 2013, 2012, or 2011. During our 2013 intangible asset impairment review, we noted that a $261 million trademark within our Enhancers business had an excess fair value over its carrying value of 12%. While this trademark passed the first step of the impairment test, if its forecasted operating income were to decline significantly, it could adversely affect the estimated fair value of the trademark, leading to a potential impairment of a portion of the trademark in the future. 
Estimating the fair value of individual reporting units or intangible assets requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include projected revenues and income, interest rates, cost of capital, royalty rates, and tax rates. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments.
Insurance and Self-Insurance:
We use a combination of insurance for catastrophic events and self-insurance for a number of risks, including workers' compensation, general liability, automobile liability, product liability, and our obligation for employee health care benefits. We estimate the liabilities associated with these risks by considering historical claims experience and other actuarial assumptions. Accordingly, it is reasonably likely that these assumptions and estimates may change and these changes may impact our future financial condition or results of operations.

32

   

Revenue Recognition:
We recognize revenues when title and risk of loss pass to customers. We record revenues net of consumer incentives and trade promotions and include all shipping and handling charges billed to customers. We also record provisions for estimated product returns and customer allowances as reductions to revenues within the same period that the revenue is recognized. We base these estimates principally on historical and current period experience, however it is reasonably likely that actual experience will vary from the estimates we have made. Shipping and handling costs related to product returns are included in cost of sales and were not material in 2013, 2012 or 2011.
Marketing and Research and Development:
We promote our products with advertising, consumer incentives, and trade promotions. Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. Consumer incentive and trade promotion activities are recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization and redemption rates. For interim reporting purposes, we charge advertising and consumer incentive expenses to operations as a percentage of volume, based on estimated volume and related expense for the full year. We review and adjust these estimates each quarter based on actual experience and other information. We do not defer these costs on our year-end consolidated balance sheet and all marketing costs are recorded as an expense in the year incurred. Advertising expense was $747 million in 2013, $640 million in 2012, and $535 million in 2011. We record marketing expense in selling, general and administrative expense, except for consumer incentives and trade promotions, which are recorded in net revenues.
We expense costs as incurred for product research and development. Research and development expense was $118 million (including a benefit from market-based impacts related to our postemployment benefit plans of $55 million) in 2013, $178 million (including expense from market-based impacts related to our postemployment benefit plans of $6 million) in 2012, and $198 million in 2011. Market-based impacts related to our postemployment benefit plans recorded in research and development were insignificant in the year ended December 31, 2011. We record research and development expenses within selling, general and administrative expenses.
Environmental Costs:
We are subject to various laws and regulations in the United States and Canada relating to the protection of the environment. We accrue for environmental remediation obligations on an undiscounted basis when amounts are probable and can be reasonably estimated. The accruals are adjusted based on new information or as circumstances change. We record recoveries of environmental remediation costs from third parties as assets when we believe these amounts are receivable. As of December 28, 2013, we were involved in 60 active proceedings in the United States under CERCLA (and other similar state actions and legislation) related to our current operations and certain closed, inactive or divested operations for which we retain liability.
As of December 28, 2013, we had accrued an amount we deemed appropriate for environmental remediation. Based on information currently available, we believe that the ultimate resolution of existing environmental remediation actions and our compliance in general with environmental laws and regulations will not have a material effect on our financial condition or results from operations. However, we cannot quantify with certainty the potential impact of future compliance efforts and environmental remediation actions.
Postemployment Benefit Plans:
We provide a range of benefits to our employees and retirees. These include pension benefits, postretirement health care benefits, and other postemployment benefits, consisting primarily of severance. We recognize net actuarial gains or losses and changes in the fair value of plan assets immediately upon remeasurement, which is at least annually. The calculations of the amounts recorded require the use of various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, and turnover rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. We believe that the assumptions used in recording our pension, postretirement, and other postemployment benefit plan obligations are reasonable based on our experience and advice from our actuaries. See Note 9, Postemployment Benefit Plans, to the consolidated financial statements for a discussion of the assumptions used.

33

   

We recorded the following amounts in earnings for our postemployment benefit plans during the years ended December 28, 2013, December 29, 2012, and December 31, 2011:
 
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
 
 
(in millions)
U.S. pension plan benefit
 
$
(951
)
 
$
(43
)
 
$

Non-U.S. pension plan (benefit) / cost
 
(117
)
 
29

 
82

Postretirement health care (benefit) / cost
 
(219
)
 
221

 

Other postemployment benefit plan cost
 
1

 
7

 
42

Employee savings plan cost
 
61

 
12

 

Multiemployer pension plan contributions
 
2

 
1

 

Multiemployer medical plan contributions
 
27

 
5

 

Net (benefit) / expense for employee benefit plans
 
$
(1,196
)
 
$
232

 
$
124

The $1.4 billion change in the 2013 net benefit for postemployment benefit plans was due primarily to the remeasurements of all plans in 2013, which resulted in an aggregate benefit from market-based impacts of $1.6 billion, primarily driven by an 80 basis point weighted average increase in the discount rate for our pension and postretirement plans and excess asset returns in our pension plans. The cost increase in 2012 compared to 2011 primarily related to the transfer of pension and postretirement benefit plans from Mondelēz International as a result of the Spin-Off. The annual remeasurement resulted in expense from market-based impacts of $223 million as of December 29, 2012 and $70 million as of December 31, 2011.
In order to align cash flows with expenses and reduce volatility, we have executed a level funding strategy. For our U.S. qualified pension plans, in 2014, we currently are only required to make a nominal cash contribution under the Pension Protection Act of 2006. In 2013, we contributed $435 million to our U.S. pension plans and $176 million to our non-U.S. pension plans. Of the total 2013 pension contributions, approximately $518 million was voluntary. We make contributions to our U.S. and non-U.S. pension plans, primarily, to the extent that they are tax deductible. In addition, employees contributed $5 million to our non-U.S. plans.
For our postretirement plans, our 2014 health care cost trend rate assumption will be 7.28%. We established this rate based upon our most recent experience as well as our expectation for health care trend rates going forward. We anticipate that our health care cost trend rate assumption will be 5.03% by 2023. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 28, 2013:
 
 
One-Percentage-Point
 
 
Increase
 
Decrease
 
 
(in millions)
Effect on annual service and interest cost
 
$
21

 
$
(17
)
Effect on postretirement benefit obligation
 
340

 
(284
)
Our 2014 discount rate assumption is 4.69% for our postretirement plans. Our 2014 discount rate is 4.94% for our U.S. pension plans and 4.56% for our non-U.S. pension plans. We model these discount rates using a portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the benefit obligations. Changes in our discount rates were primarily the result of changes in bond yields year-over-year.
Our 2014 expected rate of return on plan assets is 5.75% for our U.S. pension plans and 5.00% for our non-U.S. pension plans. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current and future asset allocation, and estimates of future long-term returns by asset class. We attempt to maintain our target asset allocation by rebalancing between asset classes as we make contributions and monthly benefit payments.

34

   

While we do not anticipate further changes in the 2014 assumptions for our U.S. and non-U.S. pension and postretirement health care plans, as a sensitivity measure, a fifty-basis point change in our discount rate or a fifty-basis point change in the actual rate of return on plan assets would have the following effects, increase / (decrease) in cost, as of December 28, 2013:
 
U.S. Plans
 
Non-US. Plans
 
Fifty-Basis-Point
 
Fifty-Basis-Point
 
Increase
 
Decrease
 
Increase
 
Decrease
 
(in millions)
Effect of change in discount rate on pension costs
$
(393
)
 
$
439

 
$
(84
)
 
$
91

Effect of change in actual rate of return on plan assets on pension costs
(28
)
 
28

 
(6
)
 
6

Effect of change in discount rate on postretirement health care costs
(166
)
 
183

 
(10
)
 
12

Prior to the Spin-Off, Mondelēz International provided defined benefit pension, postretirement health care, defined contribution, and multiemployer pension and medical benefits to our eligible employees and retirees. Our consolidated statements of earnings for the years ended December 29, 2012 and December 31, 2011 included expense allocations for these benefits through September 30, 2012, which were determined based on a review of personnel by business unit and based on allocations of corporate or other shared functional personnel. We consider the expense allocation methodology and results to be reasonable for all periods presented.
Total Mondelēz International benefit plan costs allocated to us in the first nine months of 2012 prior to the Spin-Off and in the full year 2011 were as follows:
 
Allocated from Mondelēz International Plans
 
2012
 
2011
 
(in millions)
Pension plan cost
$
283

 
$
261

Postretirement health care cost
142

 
160

Employee savings plan cost
49

 
54

Multiemployer pension plan cost
2

 
2

Multiemployer medical plan cost
15

 
20

Net expense for employee benefit plans
$
491

 
$
497

These costs are reflected in our cost of sales and selling, general and administrative expenses. These costs were funded through intercompany transactions with Mondelēz International and were reflected within the parent company investment equity balance. The increase in benefit plan costs allocated to us from Mondelēz International in 2012 compared to 2011, on an annualized basis, is due to an increase in the benefit plan costs recognized by Mondelēz International in 2012 driven by a decrease in the discount rate used.
Income Taxes:
We recognize income taxes based on amounts refundable or payable for the current year and record deferred tax assets or liabilities for any difference between U.S. GAAP accounting and tax reporting.  We also recognize deferred tax assets for temporary differences, operating loss carryforwards, and tax credit carryforwards.  Inherent in determining our annual tax rate are judgments regarding business plans, planning opportunities and expectations about future outcomes. Realization of certain deferred tax assets, primarily net operating loss and other carryforwards, is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods.  See Note 12, Income Taxes, for additional information.
We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the quarter of such change.
New Accounting Guidance
See Note 1, Summary of Significant Accounting Policies, for a discussion of new accounting guidance.

35

   

Contingencies
See Note 11, Commitments and Contingencies, to the consolidated financial statements for a discussion of contingencies.
Commodity Trends
We purchase large quantities of commodities, including dairy products, coffee beans, meat products, wheat, corn products, soybean and vegetable oils, nuts, and sugar and other sweeteners. In addition, we use significant quantities of resins and cardboard to package our products and natural gas to operate our facilities. We continuously monitor worldwide supply and cost trends of these commodities.
During 2013, our aggregate commodity costs increased over the prior year period, primarily as a result of higher costs of dairy, meat products, packaging materials and flour and grain costs, partially offset by lower coffee, nuts, sugar and soy bean and vegetable oil costs. Our commodity costs increased approximately $119 million in 2013 and $248 million in 2012 compared to the prior year.
Despite higher commodity costs, our total product costs decreased in 2013 compared to the comparable prior year period driven by net productivity.
Liquidity and Capital Resources
We believe that cash generated from our operating activities, our $3.0 billion revolving credit facility, and our commercial paper program will provide sufficient liquidity to meet our working capital needs, expected cost savings initiatives expenditures, planned capital expenditures, planned contributions to our postemployment benefit plans, future contractual obligations, and payment of our anticipated quarterly dividends. We will use our cash on hand and our commercial paper program for daily funding requirements. Overall, we do not expect any negative effects on our funding sources that would have a material effect on our short-term or long-term liquidity.
Net Cash Provided by Operating Activities:
Operating activities provided net cash of $2.0 billion in 2013, $3.0 billion in 2012, and $2.7 billion in 2011. The decrease in cash provided by operating cash flows in 2013 primarily related to a $569 million increase in pension contributions, a $139 million increase in postretirement health care payments and higher cash paid for taxes and interest. The increase in operating cash flows in 2012 was primarily related to earnings, partially offset by higher interest payments on our long-term debt.
Net Cash Used in Investing Activities:
Net cash used in investing activities was $426 million in 2013, $422 million in 2012, and $401 million in 2011. An increase in capital expenditures in 2013 was offset by an increase in proceeds from the sale of property, plant and equipment. The increase in cash used in investing activities in 2012 primarily related to increased capital expenditures partially offset by proceeds from the sale of property, plant and equipment.

Capital expenditures were $557 million in 2013, $440 million in 2012, and $401 million in 2011. The increase in capital expenditures includes those required for our cost savings initiatives and additional investments in our business to modernize manufacturing facilities and support new product and productivity initiatives. We expect 2014 capital expenditures to be approximately $560 million, including capital expenditures required for our cost savings initiatives. We expect to fund these expenditures with cash from operations.
Net Cash Used in Financing Activities:
Net cash used in financing activities was $1.2 billion in 2013, $1.4 billion in 2012, and $2.3 billion in 2011. We paid dividends of $1.2 billion in 2013. The net cash used in 2012 primarily related to $7.2 billion of net transfers to Mondelēz International partially offset by the net proceeds we received from our $6.0 billion debt issuance. The net cash used in financing activities in 2011 primarily related to net transfers to Mondelēz International.
Borrowing Arrangements:
On May 18, 2012, we entered into a $3.0 billion five-year senior unsecured revolving credit facility that expires on May 17, 2017. All committed borrowings under the facility bear interest at a variable annual rate based on the London Inter-Bank Offered Rate or a defined base rate, at our election, plus an applicable margin based on the

36

   

ratings of our long-term senior unsecured indebtedness. The revolving credit agreement requires us to maintain a minimum total shareholders’ equity (excluding accumulated other comprehensive income or losses and any income or losses recognized in connection with “mark-to-market” accounting in respect of pension and other retirement plans) of at least $2.4 billion. At December 28, 2013, we were compliant. The revolving credit agreement also contains customary representations, covenants, and events of default. We intend to use the proceeds from this facility, if any, for general corporate purposes. As of December 28, 2013, no amounts were drawn on this credit facility.
Long-Term Debt:
On June 4, 2012, we issued $6.0 billion of senior unsecured notes at a weighted average effective rate of 3.938% and transferred the net proceeds of $5.9 billion to Mondelēz International. We also recorded approximately $260 million of deferred financing costs, including losses on hedging activities in advance of the debt issuance, which will be recognized in interest expense over the life of the notes. The general terms of the notes are:
$1 billion of notes due June 4, 2015 at a fixed, annual interest rate of 1.625%, paid semiannually.
$1 billion of notes due June 5, 2017 at a fixed, annual interest rate of 2.250%, paid semiannually.
$2 billion of notes due June 6, 2022 at a fixed, annual interest rate of 3.500%, paid semiannually.
$2 billion of notes due June 4, 2042 at a fixed, annual interest rate of 5.000%, paid semiannually.
On July 18, 2012, Mondelēz International completed a debt exchange in which $3.6 billion of Mondelēz International debt was exchanged for our debt as part of the Spin-Off capitalization plan. No cash was generated from the exchange. The general terms of the unsecured notes we received in connection with this exchange are:
$1,035 million of notes due August 23, 2018 at a fixed, annual interest rate of 6.125%, paid semiannually.
$900 million of notes due February 10, 2020 at a fixed, annual interest rate of 5.375%, paid semiannually.
$878 million of notes due January 26, 2039 at a fixed, annual interest rate of 6.875%, paid semiannually.
$787 million of notes due February 9, 2040 at a fixed, annual interest rate of 6.500%, paid semiannually.
On October 1, 2012, Mondelēz International transferred approximately $400 million of Mondelēz International's 7.550% senior unsecured notes maturing on June 15, 2015 to us in connection with the Spin-Off capitalization plan.
Total Debt:
Our total debt was $10.0 billion at December 28, 2013 and December 29, 2012. The weighted average remaining term of our debt was 13.3 years at December 28, 2013. Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all covenants as of December 28, 2013.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We have no material off-balance sheet arrangements other than the guarantees and contractual obligations that are discussed below.
As discussed in Note 11, Commitments and Contingencies, to the consolidated financial statements, we have third-party guarantees primarily covering long-term obligations related to leased properties. The carrying amount of our third-party guarantees on our consolidated balance sheet was $24 million at December 28, 2013 and $22 million at December 29, 2012. The maximum potential payment under these guarantees was $53 million at December 28, 2013 and $64 million at December 29, 2012. Substantially all of these guarantees expire at various times through 2027.
In addition, we were contingently liable for guarantees related to our own performance totaling $86 million at December 28, 2013 and $74 million at December 29, 2012. These include letters of credit related to dairy commodity purchases and other letters of credit.
Guarantees do not have, and we do not expect them to have, a material effect on our liquidity.

37

   

Aggregate Contractual Obligations:
The following table summarizes our contractual obligations at December 28, 2013.
 
 
Payments Due
 
 
Total
 
2014
 
2015-16
 
2017-18
 
2019 and
Thereafter
 
 
(in millions)
Long-term debt (1)
 
$
10,000

 
$

 
$
1,400

 
$
2,035

 
$
6,565

Interest expense (2)
 
7,120

 
462

 
855

 
798

 
5,005

Capital leases (3)
 
40

 
6

 
11

 
8

 
15

Operating leases (4)
 
496

 
109

 
156

 
105

 
126

Purchase obligations: (5)
 

 
 
 
 
 
 
 
 
Inventory and production costs
 
3,144

 
2,748

 
390

 
3

 
3

Other
 
435

 
162

 
194

 
53

 
26

 
 
3,579

 
2,910

 
584

 
56

 
29

Pension contributions (6)
 
1,000

 
200

 
400

 
400

 

Other long-term liabilities (7)
 
1,988

 
202

 
407

 
400

 
979

Total
 
$
24,223

 
$
3,889

 
$
3,813

 
$
3,802

 
$
12,719

 
(1)
Amounts represent the expected cash payments of our long-term debt and do not include unamortized bond premiums or discounts.
(2)
Amounts represent the expected cash payments of our interest expense on our long-term debt.
(3)
Amounts represent the expected cash payments of our capital leases, including the expected cash payments of interest expense of approximately $9 million on our capital leases. These amounts exclude a build-to-suit lease on a facility we expect to be completed in early 2015. Under this agreement, we have committed to pay approximately $70 million over a 21-year lease term.
(4)
Operating leases represent the minimum rental commitments under non-cancelable operating leases.
(5)
Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage, and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology, and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.
(6)
In order to align cash flows with expenses and reduce volatility, we have executed a level funding strategy. Based on our level funding strategy, we estimate that 2014 pension contributions would be approximately $200 million annually and for the next four years thereafter. We cannot reasonably estimate our contributions to our pension plans beyond 2018.
(7)
Other long-term liabilities primarily consist of estimated future benefit payments for our postretirement health care plans through 2023 of approximately $1,981 million. We are unable to reliably estimate the timing of the payments beyond 2023; as such, they are excluded from the above table. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: income taxes, insurance accruals, and other accruals. We are unable to reliably estimate the timing of the payments for these items. As of December 28, 2013, our total liability for income taxes, net of uncertain tax positions and associated accrued interest and penalties, was $282 million. We currently estimate paying up to approximately $98 million in the next 12 months related to our income tax obligations as of December 28, 2013.
Equity and Dividends
On December 17, 2013, our Board of Directors authorized a $3.0 billion share repurchase program with no expiration date. Under the share repurchase program, we are authorized to repurchase shares of our common stock in the open market or in privately negotiated transactions.  The timing and amount of share repurchases are subject to management evaluation of market conditions, applicable legal requirements, and other factors. We are not obligated to repurchase any of our common stock and may suspend the program at our discretion. As of December 28, 2013, no shares have been repurchased under this program.
See Note 8, Stock Plans, to the consolidated financial statements for a discussion of our share-based equity programs.

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Dividends:
We paid dividends of $1,207 million in 2013. On December 17, 2013, our Board of Directors declared a $0.525 per common share dividend, which was paid on January 17, 2014. In connection with this dividend, we recorded $313 million of dividends payable as of December 28, 2013. No dividends were paid in 2012 or 2011. The present annualized dividend rate is $2.10 per common share. The declaration of dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net earnings, financial condition, cash requirements, future prospects, and other factors that our Board of Directors deems relevant to its analysis and decision making.
Non-GAAP Financial Measures
To supplement our financial statements presented in accordance with U.S. GAAP, we present Organic Net Revenues, which is considered a non-GAAP financial measure. We define Organic Net Revenues as net revenues excluding the impact of transactions with Mondelēz International, acquisitions, divestitures (including the termination of a full line of business due to the loss of a licensing or distribution arrangement, and the complete exit of business out of a foreign country), currency and the 53rd week of shipments in 2011. We calculate the impact of currency on net revenues by holding exchange rates constant at the previous year's exchange rate. We believe that presenting Organic Net Revenues is useful because it (i) provides both management and investors more meaningful information regarding financial performance by excluding certain items, (ii) permits investors to view our performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our historical performance, and (iii) otherwise provides information that may be useful to investors in evaluating Kraft.
We believe that the presentation of Organic Net Revenues, when considered together with the corresponding GAAP financial measure and the reconciliation to that measure, provides investors with a more clear understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our results prepared in accordance with GAAP. In addition, the non-GAAP measures we use may differ from non-GAAP measures used by other companies, and other companies may not define the non-GAAP measures we use in the same way. A reconciliation of Organic Net Revenues to net revenues is set forth below.

39

   

 
2013 Compared to 2012
 
Net
Revenues
 
Impact of
Currency
 
Sales to
Mondelēz
International
 
Organic
Net Revenues
 
(in millions)
Year Ended December 28, 2013
 
 
 
 
 
 
 
Beverages
$
2,681

 
$

 
$

 
$
2,681

Cheese
3,925

 

 
(51
)
 
3,874

Refrigerated Meals
3,334

 

 

 
3,334

Meals & Desserts
2,305

 

 

 
2,305

Enhancers & Snack Nuts
2,101

 

 
(8
)
 
2,093

Canada
2,037

 
65

 
(16
)
 
2,086

Other Businesses
1,835

 
8

 
(72
)
 
1,771

Total
$
18,218

 
$
73

 
$
(147
)
 
$
18,144

Year Ended December 29, 2012
 
 
 
 
 
 
 
Beverages
$
2,718

 
$

 
$

 
$
2,718

Cheese
3,829

 

 
(12
)
 
3,817

Refrigerated Meals
3,280

 

 

 
3,280

Meals & Desserts
2,311

 

 

 
2,311

Enhancers & Snack Nuts
2,220

 

 
(3
)
 
2,217

Canada
2,010

 

 
(4
)
 
2,006

Other Businesses
1,903

 

 
(95
)
 
1,808

Total
$
18,271

 
$

 
$
(114
)
 
$
18,157

 
2012 Compared to 2011
 
Net
Revenues
 
Impact of
Currency
 
Sales to
Mondelēz
International
 
Impact of Divestitures
 
Impact of 53rd Week of Shipments in 2011
 
Organic
Net Revenues
 
(in millions)
Year Ended December 29, 2012
 
 
 
 
 
 
 
 
 
 
 
Beverages
$
2,718

 
$

 
$

 
$

 
$

 
$
2,718

Cheese
3,829

 

 
(12
)
 

 

 
3,817

Refrigerated Meals
3,280

 

 

 

 

 
3,280

Meals & Desserts
2,311

 

 

 

 

 
2,311

Enhancers & Snack Nuts
2,220

 

 
(3
)
 

 

 
2,217

Canada
2,010

 
18

 
(4
)
 

 

 
2,024

Other Businesses
1,903

 
3

 
(95
)
 

 

 
1,811

Total
$
18,271

 
$
21

 
$
(114
)
 
$

 
$

 
$
18,178

Year Ended December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Beverages
$
2,990

 
$

 
$

 
$
(87
)
 
$
(37
)
 
$
2,866

Cheese
3,788

 

 

 

 
(46
)
 
3,742

Refrigerated Meals
3,313

 

 

 

 
(43
)
 
3,270

Meals & Desserts
2,271

 

 

 

 
(29
)
 
2,242

Enhancers & Snack Nuts
2,259

 

 

 

 
(26
)
 
2,233

Canada
1,967

 

 

 
(4
)
 
(24
)
 
1,939

Other Businesses
1,988

 

 
(100
)
 

 
(20
)
 
1,868

Total
$
18,576

 
$

 
$
(100
)
 
$
(91
)
 
$
(225
)
 
$
18,160


40

   

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As we operate primarily in North America but source our commodities from global markets and periodically enter into financing or other arrangements abroad, we use financial instruments to manage our primary market risk exposures, which are commodity price, foreign currency exchange rate, and interest rate risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. We maintain commodity price, foreign currency, and interest rate risk management policies that principally use derivative instruments to reduce significant, unanticipated earnings fluctuations that may arise from volatility in commodity prices, foreign currency exchange rates, and interest rates. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes. Refer to Note 1, Summary of Significant Accounting Policies, and Note 10, Financial Instruments, to the consolidated financial statements for further details of our commodity price, foreign currency, and interest rate risk management policies and the types of derivative instruments we use to hedge those exposures.
Value at Risk:
We use a value at risk (“VAR”) computation to estimate: 1) the potential one-day loss in pre-tax earnings of our commodity price and foreign currency-sensitive derivative financial instruments; and 2) the potential one-day loss in the fair value of our interest rate-sensitive financial instruments. We included our debt, commodity futures, forwards and options, foreign currency forwards, and interest rate swaps in our VAR computation. Excluded from the computation were anticipated transactions and foreign currency trade payables and receivables which the financial instruments are intended to hedge.
We made the VAR estimates assuming normal market conditions, using a 95% confidence interval. We used a “variance / co-variance” model to determine the observed interrelationships between movements in interest rates and various currencies. These interrelationships were determined by observing interest rate and forward currency rate movements over the prior quarter for the calculation of VAR amounts at December 28, 2013 and December 29, 2012, and over each of the four prior quarters for the calculation of average VAR amounts during each year. The values of commodity options do not change on a one-to-one basis with the underlying currency or commodity, and were valued accordingly in the VAR computation.
As of December 28, 2013, the estimated potential one-day loss in pre-tax earnings from our commodity and foreign currency instruments and the estimated potential one-day loss in fair value of our interest rate-sensitive instruments, as calculated in the VAR model, were (in millions):
 
 
Pre-Tax Earnings Impact
 
Fair Value Impact
 
 
At 12/28/13
 
Average
 
High
 
Low
 
At 12/28/13
 
Average
 
High
 
Low
Instruments sensitive to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency rates
 
$
2

 
$
2

 
$
2

 
$
2

 
 
 
 
 
 
 
 
Commodity prices
 
7

 
7

 
8

 
7