Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the common stock held by non-affiliates of the registrant (assuming for purposes of this computation only that the W. K. Kellogg Foundation Trust, directors and executive officers may be affiliates) as of the close of business on June 30, 201829, 2019 was approximately $19.1$14.7 billion based on the closing price of $68.71$53.57 for one share of common stock, as reported for the New York Stock Exchange on that date.
PART I
ITEM 1. BUSINESS
The Company. Kellogg Company, founded in 1906 and incorporated in Delaware in 1922, and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods.
The address of the principal business office of Kellogg Company is One Kellogg Square, P.O. Box 3599, Battle Creek, Michigan 49016-3599. Unless otherwise specified or indicated by the context, “Kellogg,” “we,” “us” and “our” refer to Kellogg Company, its divisions and subsidiaries.
Financial Information About Segments. Information on segments is located in Note 1817 within Notes to the Consolidated Financial Statements.
Principal Products. Our principal products are snacks, such as crackers, cookies, savory snacks, toaster pastries, cereal bars, granola bars and bites, fruit-flavored snacks;bites; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles. These products were, as of February 25, 2019,24, 2020, manufactured by us in 21 countries and marketed in more than 180 countries. They are sold to retailers through direct sales forces for resale to consumers. We use broker and distributor arrangements for certain products and channels, as well as less-developed market areas or in those market areas outside of our focus.
Our snacks brands are marketed under brands such as Kellogg’s, Keebler, Cheez-It, Pringles, Murray, Austin, Famous Amos,Parati,and RXBAR. Our cereals and cereal bars are generally marketed under the Kellogg’s name, with some under the Kashi and Bear Naked brands. Our frozen foods are marketed under theEggo and Morningstar Farms brands.
We also market cookies, crackers, crisps, and other convenience foods, under brands such as Kellogg’s, Keebler, Cheez-It, Pringles, Murray,and Austin, and Famous Amos, to supermarkets in the United States through a variety of distribution methods.
Additional information pertaining to the relative sales of our products for the years 20162017 through 20182019 is located in Note 1817 within Notes to the Consolidated Financial Statements, which are included herein under Part II, Item 8.
Corporate responsibility and sustainability. Climate change and food security are core business issues for Kellogg to ensure the long-term health and viability of the ingredients we use in our products. The Social Responsibility & Public Policy Committee of our Board of Directors oversees the company's sustainability efforts and climate policy. All four committee members are independent. At the executive level, environmental and social issues in our supply chain are overseen by our Chief Sustainability Officer and are aligned and included in parallel work streams within internal audit and audit committee.our Audit Committee. Policies and strategies regarding these topics are aligned in the organization’s lobbying, advocacy, and membership efforts. In multi-stakeholder initiatives, Kellogg partners with suppliers, customers, governments and non-governmental organizations, including the World Business Council for Sustainable Development and the Consumer Goods Forum.
Kellogg Company relies on natural capital including energy for product manufacturing and distribution, water as an ingredient, for facility cleaning and steam power, and food crops and commodities as an ingredient. These natural capital dependencies are at risk of shortage, price volatility, regulation, and quality impacts due to climate change which is assessed as part of Kellogg’s overall enterprise risk management approach. Specific risks including water stress and social accountability are specifically identified and assessed on a regular basis, especially in emerging market expansion that fuels company growth. Due to these risks, Kellogg has implemented major short- and long-term initiatives to mitigate and adapt to these environmental pressures, as well as the resulting challenge of food security.
Global sustainability commitments. Kellogg has committed to improving efficiency in its owned manufacturing footprint by reducing water use, total waste, energy use, and greenhouse gas (GHG) emissions by 15% per metric tonne of food produced by the end of 2020 from a 2015 baseline. We will report 20182019 energy, GHG, and water use reductions in our 2018/20192019/2020 Corporate Responsibility Report. The goal is to reduce the risk of disruptions from unexpected constraints in natural resource availability or impacts on raw material pricing. Additionally, Kellogg is committed to implement water reuse projects in at least 25% of our plants by the end of 2020 from a 2015 baseline, with a specific focus on plants located in water stressed areas. Kellogg has committed to responsibly sourcing our ten priority ingredients as determined by environmental, social, and business risk by the end of 2020 by partnering with suppliers and farmers to
measure continuous improvement. In addition, Kellogg established third-party approved science-based targets to reduce absolute Scope 1 and 2 greenhouse emissions by 65% and Scope 3
greenhouse emissions by 50% by 2050 from a 2015 baseline. Through these commitments, Kellogg supports the United Nations Sustainable Development Goal #13 to take urgent action to combat climate change and its impacts.
In 2017,Through December 29, 2018, the manufacturing organization led sustainability efforts that resulted in a reduction in water use by 1.8%13.4%, energy use by 2.1%9.4%, and GHG emissions by 11.4%12.9% per metric tonne of food produce compared to aour 2015 baseline. In the first year of our science-based targets, we’ve2018, we reduced absolute Scope 1 and 2 emissions by 13.6%.5.8% versus the previous year. In September 2017, Kellogg joined RE100, an industry platform working together towards 100% renewable electricity. Increasing our use of renewable electricity will lower business risk and reduce GHG emissions. In 2018, we sourced 23% of our electricity from renewable sources. While we have made progress to date, our ability to reduce energy use has been slower than expected. As our company continues to look for opportunities to optimize our production network, invest in small-size on-the-go foods packaged for immediate consumption, and invest in emerging markets, more energy may be needed to produce food for our changing portfolio.
Food Loss and Waste: As a global food company, Kellogg is committed to addressing the critical issues of climate and food security, and we’re committed to address food loss and waste. Kellogg supports the United Nations Sustainable Development Goal (SDG) 12.3, to halve per capita global food waste at the retail and consumer levels and reduce food losses along production and supply chains, including post-harvest losses, by 2030. Kellogg has joined Champions 12.3, a coalition of executives from governments, businesses, international organizations, research institutions, farmer groups, and civil society dedicated to inspiring ambition, mobilizing action, and accelerating progress toward achieving SDG Target 12.3 by 2030. These goals are aligned with Kellogg commitments to reduce waste, with a focus on food waste across our end-to-end supply chain. And through our global signature cause platform, Breakfasts for Better Days™ we’re donating food for hunger relief that may otherwise go to waste.
Breakfasts for Better Days: In 2016, this global social purpose platform expanded with the intent to contribute to food security - aligned to United Nations Sustainable Development Goal #2 (SDG 2): End hunger, achieve food security and improved nutrition, and promote sustainable agriculture. The goal of the program is to create 3 billion Better Days by 2025 to address food security risks that can impact the Company as well as create opportunity to engage consumers. The Company’s five key commitments include food donations, expansion of breakfast clubs, supporting 500,000 farmers, committing to 45,000 employee volunteer days, and engaging 300 million people to join Kellogg in its hunger relief efforts. Through Breakfasts for Better Days, Kellogg has helped make billions of days better for people in need, providing 2.5more than 3 billion servings of food since 2013.
As a grain-based food company, the success of Kellogg Company is dependent on having timely access to high quality, low cost ingredients, water and energy for manufacturing globally. Risks are identified annually through annual reporting and evaluated in the short (<3 years), medium (3 - 6 years) and long terms (>6 years). The Company has incorporated the risks and opportunities of climate change and food security as part of the Global 2020 Growth Strategy and global Heart and Soul Strategy by continuing to identify risk, incorporate sustainability indicators into strategic priorities, and report regularly to leadership, the Board, and publicly. While these risks are not currently impacting business growth, they must be monitored, evaluated, and mitigated.
Raw Materials. Agricultural commodities, including corn, wheat, rice, potato flakes, vegetable oils, sugar and cocoa, are the principal raw materials used in our products. Cartonboard, corrugate, and plastic are the principal packaging materials used by us. We continually monitor world supplies and prices of such commodities (which include such packaging materials), as well as government trade policies. The cost of such commodities may fluctuate widely due to government policy and regulation, weather conditions, climate change or other unforeseen circumstances. Continuous efforts are made to maintain and improve the quality and supply of such commodities for purposes of our short-term and long-term requirements.
The principal ingredients in the products produced by us in the United States include corn grits, wheat and wheat derivatives, potato flakes, oats, rice, cocoa and chocolate, soybeans and soybean derivatives, various fruits, sweeteners, vegetable oils, dairy products, eggs, and other ingredients, which are obtained from various sources. While most of these ingredients are purchased from sources in the United States, some materials are imported due to regional availability and specification requirements.
We enter into long-term contracts for the materials described in this section and purchase these items on the open market, depending on our view of possible price fluctuations, supply levels, and our relative negotiating power. While the cost of some of these materials has, and may continue to increase over time, we believe that we will be
able to purchase an adequate supply of these items as needed. As further discussed herein under Part II, Item 7A, we also use commodity futures and options to hedge some of our costs.
Raw materials and packaging needed for internationally based operations are available in adequate supply and are sourced both locally and imported from countries other than those where used in manufacturing.
Natural gas and propane are the primary sources of energy used to power processing ovensequipment at major domestic and international facilities, although certain locations may use electricity, oil, propane or solar cells on a back-up or alternative basis. In addition, considerable amounts of diesel fuel are used in connection with the distribution of our products.
Trademarks.Generally, our products are marketed under trademarks we own. Our principal trademarks are our housemarks, brand names, slogans, and designs related to cereals, snacks and various other foods manufactured and marketed by us, and we also grant licenses to third parties to use these marks on various goods. These trademarks include Kellogg’sfor cereals, convenience foods and our other products, and the brand names of certain ready-to-eat cereals, including All-Bran, Apple Jacks, Choco Zucaritas, Cocoa Krispies, Kellogg’s Corn Flakes, Corn Pops, Cracklin’ Oat Bran, Crispix, Eggo, Froot Loops, Kellogg’s Frosted Flakes, Krave, Frosted Krispies, Frosted Mini-Wheats, Mueslix, Pops, Kellogg's Raisin Bran, Raisin Bran Crunch, Rice Krispies, Rice Krispies Treats, Smacks/Honey Smacks, Special K, Special K Nourish, Special K Red Berriesand ZucaritasSmart Start in the United States and elsewhere; Sucrilhos, Krunchy Granola, Kellogg's Extra, Kellness,Radkau, Zoo Cartoon, Müsli, and Choco Krispisfor cereals in Latin America; Vector and Kashi Joi in Canada; Ancient Legends, Coco Pops, Choco Krispies, Frosties, Fruit ‘N‘n Fibre, Kellogg’s Crunchy Nut, Krave, Honey Loops, Kellogg’s Extra, Country Store, Smacks, Pops, Honey Bsss, Croco Copters, Chombos, W.K. Kellogg, Toppasand Tresorfor cereals in Europe; and Froot Ring, Guardian, Just Right, Sultana Bran, Frosties, Rice Bubbles, Nutri-Grain, and Sustainfor cereals in Asia and Australia. Additional trademarks are the names of certain combinations of ready-to-eat Kellogg’scereals, including Fun Pak and Variety.
Other brand names include Kellogg’sCorn Flake Crumbs; All-Bran, Choco Krispis, Crunchy Nut, Frutela,Kashi, Nutri-Grain, Special K, Squares, Zucaritasand Sucrilhosfor cereal bars; Pop-Tartsfor toaster pastries; Eggoand Nutri-Grainfor frozen waffles and pancakes; Eggo, andSpecial K and MorningStar Farms for breakfast sandwiches; Rice Krispies Treatsfor convenience foods; Special Kprotein shakes; Nutri-Graincereal bars for convenience foods in the United States and elsewhere; K-Time, Split Stix, Be Natural Sunibriteand LCMsfor convenience foods in Australia; Choco Krispies, Coco Pops, and Rice Krispies Squaresfor convenience foods in Europe; Kashifor certain cereals, convenience foods, and frozen foods, powders and pilaf; GoLeanfoods; Kashi Go for cereals and nutrition bars; Special Kand Vectorfor meal bars; Bear Nakedfor granola cereal and snack bites, Pringlesfor potato crisps, corn crisps, graincrisps; and vegetable crisps and potato sticks; and Morningstar Farms andGardenburgerfor certain meat alternatives.
We also market convenience foods under trademarks and tradenames which include Keebler, Austin, Bisco, Cheez-It, Chips Deluxe, Club, E. L. Fudge, Famous Amos, Fudge Shoppe, Gripz, Krispy, Luxe, Minueto, Mother’s, Murray, Murray Sugar Free, Parati, Ready Crust, RXBAR, Sandies, Special K, Soft Batch, Simply Made, Stretch Island, Sunshine, Toasteds, Town House, Trink, Vienna Fingers, Zesta and Zoo Cartoon.Cartoon and beverages under the Trink trademark. One of our subsidiaries is also the exclusive licensee of the Carr’scracker line in the United States.
Our trademarks also include logos and depictions of certain animated characters in conjunction with our products, including Snap! Crackle! Pop!for Cocoa Krispiesand Rice Krispiescereals and Rice Krispies Treatsconvenience foods; Tony the Tigerfor Kellogg’s Frosted Flakes, Zucaritas, Sucrilhosand Frostiescereals and convenience foods; ErnieKeebler for cookies, convenience foods and other products; the Hollow Tree logo for certain convenience foods; Toucan Samfor Froot Loops and Froot Rings cereal; Dig ‘Emfor Smacks/Honey Smackscereal; Sunnyfor Kellogg’s Raisin Branand Raisin Bran Crunchcereals; Cocothe Monkey for Coco Pops, Choco Krispies and Chocoscereal; Cornelius (aka(aka Cornelio) for Kellogg’s Corn Flakes; Melvinthe Elephant for certain cereal and convenience foods; Chocovore, Nula the Narwhal and Sammythe Seal (aka (aka Smaxeythe Seal) for certain cereal products; and Mr. Por Julius Pringlesfor Pringles potato crisps, corn crisps, grain and vegetable crisps and potato sticks.crisps.
The slogans The Original & Best, They’re Gr-r-reat!, Show Your Stripesand Follow Your Nose,are used in connection with our ready-to-eat cereals, along with L’ Eggo my Eggo, used in connection with our frozen waffles, pancakes, French toast sticks and breakfast sandwiches, Uncommonly Goodand It Takes Heart To Make a Good Cookie used in connection with convenience food products, Taste It To Believe It used in connection with meat alternatives and Pop Play Eat used in connection with potato crisps are also important Kellogg trademarks.
The trademarks listed above, among others, when taken as a whole, are important to our business. Certain individual trademarks are also important to our business. Depending on the jurisdiction, trademarks are generally valid as long as they are in use and/or their registrations are properly maintained and they have not been found to
have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use.
We consider that, taken as a whole, the rights under our various patents, which expire from time to time, are a valuable asset, but we do not believe that our businesses are materially dependent on any single patent or group of related patents. Our activities under licenses or other franchises or concessions which we hold are similarly a valuable asset, but are not believed to be material.
Seasonality. Demand for our products has generally been approximately level throughout the year, although some of our convenience foods have a bias for stronger demand in the second half of the year due to events and holidays. We also custom-bake cookies under a trademark license agreement with the Girl Scouts of the U.S.A., which cookies are principally sold in the first quarter of the year.
Working Capital. A description of our working capital is included in the Liquidity section of MD&A within Item 7 of this report.
Customers. Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 19% of consolidated net sales during 2018,2019, comprised principally of sales within the United States. No other customer accounted for greater than 10% of net sales in 2018.2019. During 2018,2019, our top five customers, collectively, including Wal-Mart, accounted for approximately 33% of our consolidated net sales and approximately 49%50% of U.S. net sales. There has been significant worldwide consolidation in the grocery industry and we believe that this trend is likely to continue. Although the loss of any large customer for an extended length of time could negatively impact our sales and profits, we do not anticipate that this will occur to a significant extent due to the consumer demand for our products and our relationships with our customers. Our products have been generally sold through our own sales forces and through broker and distributor arrangements, and have been generally resold to consumers in retail stores, restaurants, and other food service establishments.
Backlog. For the most part, orders are filled within a few days of receipt and are subject to cancellation at any time prior to shipment. The backlog of any unfilled orders at December 29, 201828, 2019 and December 30, 201729, 2018 was not material to us.
Competition. We have experienced, and expect to continue to experience, intense competition for sales of all of our principal products in our major product categories, both domestically and internationally. Our products compete with advertised and branded products of a similar nature as well as unadvertised and private label products, which are typically distributed at lower prices, and generally with other food products. Principal methods and factors of competition include new product introductions, product quality, taste, convenience, nutritional value, price, advertising and promotion.
Research and Development. Research to support and expand the use of our existing products and to develop new food products is carried on at the W. K. Kellogg Institute for Food and Nutrition Research in Battle Creek, Michigan, and at other locations around the world. Our expenditures for research and development were approximately (in millions): 2019-$144; 2018-$154; 2017-$148; 2016-$182.148.
Regulation. Our activities in the United States are subject to regulation by various government agencies, including the Food and Drug Administration, Federal Trade Commission and the Departments of Agriculture, Commerce and Labor, as well as voluntary regulation by other bodies. Various state and local agencies also regulate our activities. Other agencies and bodies outside of the United States, including those of the European Union and various countries, states and municipalities, also regulate our activities.
Environmental Matters. Our facilities are subject to various U.S. and foreign, federal, state, and local laws and regulations regarding the release of material into the environment and the protection of the environment in other ways. We are not a party to any material proceedings arising under these regulations. We believe that compliance with existing environmental laws and regulations will not materially affect our consolidated financial condition or our competitive position.
Employees. At December 29, 2018,28, 2019, we had approximately 34,00031,000 employees.
Financial Information About Geographic Areas.Information on geographic areas is located in Note 1817 within Notes to the Consolidated Financial Statements, which are included herein under Part II, Item 8.
Executive Officers. The names, ages, and positions of our executive officers (as of February 25, 2019)24, 2020) are listed below, together with their business experience. Executive officers are elected annually by the Board of Directors.
Senior Vice President, Kellogg Company
President, Kellogg Latin America
Mr. Amaya assumed his current position in November 2019. Mr. Amaya joined Kellogg Company in 2001 as a Marketing Intern for Eggo in the United States. Since then, he has held a variety of leadership positions in the U.S. and Latin America across the cereal, frozen and snacks businesses. Among his many contributions, Mr. Amaya led the complex and challenging regional integration of Pringles in 2012. In April 2013, he was appointed General Manager, Snacks and Growth Platforms for Latin America, and in 2015, he stepped up to the role of Vice President and General Manager, Category Marketing and Innovation, Latin America. He was promoted to Vice President and General Manager for Mexico in October 2016. Prior to Kellogg, Mr. Amaya held various marketing roles at Unilever Andina in the personal care division.
Senior Vice President Kellogg Company
President, Asia Pacificand Chief Financial Officer
Mr. Banati assumed his current positionhas been Senior Vice President, Chief Financial Officer and Principal Financial Officer, Kellogg Company, since July 2019. Mr. Banati joined Kellogg in March 2012. Prior2012 as President, Asia Pacific, and his responsibilities were expanded to President, Asia Pacific, Middle East and Africa in July 2018. Before joining Kellogg Company, heMr. Banati served in a variety of boardfinance, general management and leadershipboard roles at Kraft Foods, Cadbury Schweppes and Procter & Gamble. Mr. BanatiHe has worked extensively across the Asia Pacific region, particularly in Australia, India, China, Japan, Korea, Southeast Asia and Singapore.Africa region. At Kraft Foods he was President, North Asia and Asia Pacific strategy, leading the company’s operations in Japan, Korea, Taiwan, Hong Kong and Singapore.Strategy. Prior to that, Mr. Banati served as President, Pacific, for Cadbury Schweppes leading its Australia, New Zealand, Japan and Singapore operations. He was also Chairman of Cadbury Schweppes Australia Limited.Australia. He was a member of the company’s Chief Executive Committee. He also served as the Chief Financial Officer for Cadbury Schweppes Asia Pacific.
Chairman and Chief Executive Officer
Mr. Cahillane has been Chairman of the Board of Kellogg Company since March 2018, and President and Chief Executive Officer since October 2017. He has also served as a Kellogg Director since October 2017. Prior to joining Kellogg, Mr. Cahillane served as Chief Executive Officer and President, and as member of the board of directors, of Alphabet Holding Company, Inc., and its wholly-owned operating subsidiary, The Nature’s Bounty Co., untilfrom September 2014. Prior to that, Mr. Cahillane served as Executive Vice President of The Coca-Cola Company from February 2013 to February 2014 and President of Coca-Cola Americas, the global beverage maker’s largest business, with $25 billion in annual sales at that time, from January 2013 to February 2014. Mr. Cahillane served as President of various Coca-Cola operating groups from 2007 to 2012. He has also been a trustee of the W. K. Kellogg Foundation Trust since 2018.
Vice President and Corporate Controller
Mr. Forche was appointed Vice President and Corporate Controller, Kellogg Company, in July 2018. Previously, Mr. Forche served as Vice President, Assistant Corporate Controller since December 2016. Mr. Forche joined Kellogg as an internal auditor in 1997, subsequently holding a number of Finance roles in the North American business until being named SrSenior Director, Corporate Financial Reporting in April 2014. Prior to joining Kellogg in 1997, he spent four years at Price Waterhouse as an auditor.
Senior Vice President, Global Supply Chain
Mr. Hirst assumed his current position in April 2012. He joined the company in 1984 as a Food Technologist at the Springs, South Africa, plant. While at the facility, he was promoted to Quality Assurance Manager and Production Manager. From 1993 to 2001, Mr. Hirst held numerous positions in South Africa and Australia, including Production Manager, Plant Manager, and Director, Supply Chain. In 2001, Mr. Hirst was promoted to Director, Procurement at the Manchester, England, facility and was later named European Logistics Director. In 2005, he transferred to the U.S. when promoted to Vice President, Global Procurement. In 2008, he was promoted to Senior Vice President, Snacks Supply Chain and to Senior Vice President, North America Supply Chain, in October 2011.
Senior Vice President, Kellogg Company
President, Kellogg North America
Mr. Hood assumed his current position in July 2018. He most recently served as President, Kellogg Europe.Europe from 2013 to 2018. Mr. Hood joined Kellogg Company in 2012 as the Vice President of European Snacks. Prior to Kellogg, he served The Procter and Gamble Company starting in 1993, and had a distinguished 19-year career in Marketing and General Management, based in Cincinnati, Ohio. Mr. Hood has held a number of Board roles across the Food and Beverage Industry. He currently serves on the GMAConsumer Brands Association Board of Directors and FMI Foundation Board of Trustees.
Senior Vice President, Global Human Services
Ms. Howell assumed her current position in June 2016. Prior to joining Kellogg, she was Chief Human ResourceResources Officer for Rockford, Michigan-based Wolverine Worldwide since 2014. Prior to Wolverine, Ms. Howell spent 24 years with General Motors where she led a team of 2,800 Human Resource professionals worldwide, supporting a global business at one of the top automotive companies in the world, and also among the largest public corporations. Ms. Howell joined General Motors as a Labor Relations Representative at its Ypsilanti, Michigan, assembly plant in 1990. Over the following years, she served in a series of key human resource leadership roles in Europe, Asia and U.S. leading teams on six continents across an array of functional areas. Ms. Howell was promoted to Executive Director of North American Human Resources in 2011 and subsequently promoted to Senior Vice President of Global Human Resources.
Senior Vice President and Chief Financial Officer
Mr. Khan has been Senior Vice President, Chief Financial Officer and Principal Financial Officer, Kellogg Company since February 22, 2017. Mr. Khan joined Kellogg in February 2017. Before joining the Company, he served as Chief Financial Officer of US Foods Holding Corp. since 2013. Prior to that, Mr. Khan had been Senior Vice President and Chief Financial Officer of United Stationers Inc. since July 2011. Prior to United Stationers Inc., he spent twelve years with USG Corporation, where he most recently served as Executive Vice President, Finance and Strategy. Before joining USG Corporation in 1999, Mr. Khan was a consultant with McKinsey & Company, where he served global clients on a variety of projects.
Senior Vice President, Kellogg Company
President, Kellogg Europe
Mr. Lawlor assumed his current position in July 2018. He most recently served as Vice President, European Cereal from November 2017 to June 2018. Mr. Lawlor began his career at Kellogg in 1991, joining as a sales manager in its Dublin office. Following this, he held a number of senior roles, including running the company’s Middle Eastern business, setting up its Dubai office and helping to launch its joint venture in Turkey with domestic food company Ulker.office. Mr. Lawlor then served as General Manager of Kellogg Russia from October
2008 to August 2016 and led the integration of United Bakers Group, a local biscuit and cracker manufacturer. In August 2016, he was appointed Managing Director, UK/ROI where he refocused the company’sKellogg’s efforts to stabilize and grow its core cereal business.
Senior Vice President, Kellogg Company
President, Kellogg Latin America
Ms. Mejia assumed her current position in November 2011. She previously held a variety of global marketing and management roles at the Colgate-Palmolive Company, including Corporate Vice President and General Manager, Global Personal Care and Corporate Fragrance Development, Corporate Vice President of Marketing and Innovation for Europe/South Pacific, and President and CEO of Colgate-Palmolive Spain. She joined Colgate in 1989.
Senior Vice President, Kellogg Company
Chief Growth Officer
Ms. McGurk assumed her current position in January 2019. Ms. McGurk began her career at Kellogg in July 2018, serving as Chief Revenue and eCommerce Officer. Prior to Kellogg, Ms. McGurk was the Chief Growth Officer for Tyson Foods, Inc. through September 2017, having previously joined the company in 2016 as Executive Vice President of Strategy and New Ventures & President of Foodservice. Prior to joining Tyson Foods, Inc., Ms. McGurk worked for The Coca-Cola Company as Senior Vice President, Strategy, Decision Support and eCommerce, North America Group from 2014 to 2016, and as Vice President, Strategy &and eCommerce from 2012 to 2014.
Vice Chairman, Corporate Development
and Chief Legal Officer
Mr. Pilnick was appointed Vice Chairman, Corporate Development and Chief Legal Officer in January 2016. In August 2003, he was appointed Senior Vice President, General Counsel and Secretary and assumed responsibility for Corporate Development in June 2004. He joined Kellogg as Vice President — Deputy General Counsel and Assistant Secretary in September 2000 and served in that position until August 2003. Before joining Kellogg, he served as Vice President and Chief Counsel of Sara Lee Branded Apparel and as Vice President and Chief Counsel, Corporate Development and Finance at Sara Lee Corporation.
Availability of Reports; Website Access; Other Information. Our internet address is http://www.kelloggcompany.com. Through “Investor Relations” — “Financial Reports” — “SEC Filings” on our home page, we make available free of charge our proxy statements, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our reports filed with the Securities and Exchange Commission are also made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov.
Copies of the Corporate Governance Guidelines, the Charters of the Audit, Compensation and Talent Management, and Nominating and Governance Committees of the Board of Directors, the Code of Conduct for Kellogg Company directors and Global Code of Ethics for Kellogg Company employees (including the chief executive officer, chief financial officer and corporate controller) can also be found on the Kellogg Company website. Any amendments or waivers to the Global Code of Ethics applicable to the chief executive officer, chief financial officer and corporate controller can also be found in the “Investor Relations” section of the Kellogg Company website. Shareowners may also request a free copy of these documents from: Kellogg Company, P.O. Box CAMB, Battle Creek, Michigan 49016-9935 (phone: (800) 961-1413), Investor Relations Department at that same address (phone: (269) 961-2800) or investor.relations@kellogg.com.
Forward-Looking Statements. This Report contains “forward-looking statements” with projections concerning, among other things, the Company’s global growth and efficiency program (Project K),restructuring programs, the integration of acquired businesses, our strategy, zero-based budgeting, financial principles, and plans; initiatives, improvements and
growth; sales, margins, advertising, promotion, merchandising, brand building, operating profit, and earnings per share; innovation; investments; capital expenditures; asset write-offs and expenditures and costs related to productivity or efficiency initiatives; the impact of accounting changes and significant accounting estimates; our ability to meet interest and debt principal repayment obligations; minimum contractual obligations; future common stock repurchases or debt reduction; effective income tax rate; cash flow and core working capital improvements; interest expense; commodity and energy prices; and employee benefit plan costs and funding. Forward-looking statements include predictions of future results or activities and may contain the words “expect,” “believe,” “will,” “can,” “anticipate,” “estimate,” “project,” “should,” or words or phrases of similar meaning. For example, forward-looking statements are found in
this Item 1 and in several sections of Management’s Discussion and Analysis. Our actual results or activities may differ materially from these predictions. Our future results could be affected by a variety of factors, including the expected benefits and costs of the divestiture of selected cookies, fruit and fruit flavored-snacks, pie crusts, and ice-cream cones businesses of the Company, the risk that disruptions from the divestiture will divert management's focus or harm the Company’s business, risks relating to any unforeseen changes to or effects on liabilities, future capital expenditures, revenues, expenses, earnings, synergies, indebtedness, financial condition, losses and future prospects, risks associated with the Company’s provision of transition services to the divested businesses post-closing, the ability to implement Project K, including exiting our Direct-Store-Door distribution system,restructurings as planned, whether the expected amount of costs associated with Project Krestructurings will exceeddiffer from forecasts, whether the Company will be able to realize the anticipated benefits from Project Krestructurings in the amounts and times expected, the ability to realize the benefits we expect from the adoption of zero-based budgeting in the amounts and at the times expected, the ability to realize anticipated benefits from revenue growth management, the ability to realize the anticipated benefits and synergies from acquired businessesbusiness acquisitions in the amounts and at the times expected, the impact of competitive conditions;conditions, the effectiveness of pricing, advertising, and promotional programs; the success of innovation, renovation and new product introductions; the recoverability of the carrying value of goodwill and other intangibles;intangibles, the success of productivity improvements and business transitions;transitions, commodity and energy prices;prices, transportation costs, labor costs;costs, disruptions or inefficiencies in supply chain;chain, the availability of and interest rates on short-term and long-term financing;financing, actual market performance of benefit plan trust investments;investments, the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs;costs, changes in consumer behavior and preferences;preferences, the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability;availability, legal and regulatory factors including changes in food safety, advertising and labeling laws and regulations;regulations, the ultimate impact of product recalls; adverse changes in global climate or extreme weather conditions; business disruption or other losses from natural disasters, war, terrorist acts or political unrest; and the risks and uncertainties described in Item 1A below. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.
ITEM 1A. RISK FACTORS
In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially adversely affect our business, financial condition and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and financial condition.
If we pursue strategic acquisitions, alliances, divestitures or joint ventures, we may not be able to successfully consummate favorable transactions or successfully integrate acquired businesses.
From time to time, we may evaluate potential acquisitions, alliances, divestitures or joint ventures that would further our strategic objectives. With respect to acquisitions, we may not be able to identify suitable candidates, consummate a transaction on terms that are favorable to us, or achieve expected returns, expected synergies and other benefits as a result of integration challenges, or may not achieve those objectives on a timely basis. Future acquisitions of foreign companies or new foreign ventures would subject us to local laws and regulations and could potentially lead to risks related to, among other things, increased exposure to foreign exchange rate changes, government price control, repatriation of profits and liabilities relating to the U.S. Foreign Corrupt Practices Act.
With respect to proposed divestitures of assets or businesses, we may encounter difficulty in finding acquirers or alternative exit strategies on terms that are favorable to us, which could delay the accomplishment of our strategic objectives, or our divestiture activities may require us to recognize impairment charges. Companies or operations acquired or joint ventures created may not be profitable or may not achieve sales levels and profitability that justify the investments made. Our corporate development activities may present financial and operational risks, including diversion of management attention from existing core businesses, integrating or separating personnel and financial and other systems, and adverse effects on existing business relationships with suppliers and customers. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to certain intangible assets and increased operating expenses, which could adversely affect our results of operations and financial condition.
The proposed divestiture (the "Divestiture") of our cookiesselected cookie, fruit and fruitfruit-flavored snacks, businesses is subject to various risks and uncertainties, and may not be completed on the terms or timeline currently contemplated, if at all.
On November 12, 2018, we announced our intention to explore a sale of our cookies business (including the Keebler, Famous Amos, Mother’s and Murray brands), fruit snacks business (including the Stretch Island brand), and our pie crustcrusts, and ice cream cone businesses. There can be no assurance of the terms, timing or structure of any transaction involving such businesses, whether we will be able to identify buyers for the businessesconsummated on favorable terms or at all, or whether any such transaction will take place at all. In addition, any such transaction is subject to risks and uncertainties, including unanticipated developments, regulatory approvals or clearances and uncertainty in the financial markets, that could delay or prevent the completion of any such transaction.
The proposed divestiture of our cookies and fruit snacks businesses July 28, 2019 (the "Divested Business")may not achieve some or all of the anticipated benefits.
Executingbenefits, the proposed divestiture of our cookies, fruit snacks, pie crust and ice cream cone businesses will require us to incur costs and will require the time and attention of our senior management and key employees, which could distract them from operating our business, disrupt operations, and result in the loss of business opportunities, each of which couldDivestiture may adversely affect our business, financial condition, and results of operations. We may also experience increased difficulty in attracting, retaining and motivating key employees during the pendency of the divestiture and following its completion, which could harm our business. Even if the proposed divestiture is completed, we may not realize some or all of the anticipated benefits from the divestiture and the divestiture may in fact adversely affect our business.
We may not realize the benefits that we expect from our global efficiency and effectiveness program (Project K).
In November 2013, the Company announced a global efficiency and effectiveness program (Project K). While wethere are in the final year of Project K and many of the initiatives under the program have been successfully implemented or are nearing completion, we may not be able to conclude Project K as planned. Events and circumstances, such as financial or strategic difficulties, delays and unexpected costs may occur that could result in our not realizing the remaining anticipated benefits or our not realizing the anticipated benefits on our expected timetable. Any failure to conclude Project K in accordanceexecution risks associated with our expectations could adversely affect our financial condition, resultscontinued provision of operations and cash flows.transition services to the Divested Business.
We may not realize the benefits we expect from revenue growth management.
We are utilizing formal revenue growth management practices to help us realize price in a more effective way. This approach addresses price strategy, price-pack architecture, promotion strategy, mix management, and trade strategies. Revenue growth management involves changes to the way we do business and may not always be accepted by our customers, consumers or third party providers causing us not to realize the anticipated benefits. In addition, the complexity of the execution requires a substantial amount of management and operational resources. These and related demands on our resources may divert the organization's attention from other business issues and have adverse effects on existing business relationships with suppliers and customers. Any failure to execute revenue growth management in accordance with our plans could adversely affect our business or financial condition.
Our results may be materially and adversely impacted as a result of increases in the price of raw materials, including agricultural commodities, fuel and labor.
Agricultural commodities, including corn, wheat, rice, potato flakes, vegetable oils, sugar and cocoa, are the principal raw materials used in our products. Cartonboard, corrugated, and plastic are the principal packaging materials used by us. The cost of such commodities may fluctuate widely due to government policy, regulation, and/or shutdown, import and export requirements (including tariffs), global geopolitical conditions, drought and other weather conditions (including the potential effects of climate change) or other unforeseen circumstances. To the extent that any of the foregoing factors affect the prices of such commodities and we are unable to increase our prices or adequately hedge against such changes in prices in a manner that offsets such changes, the results of our operations could be materially and adversely affected. In addition, we use derivatives to hedge price risk associated with forecasted purchases of raw materials. Our hedged price could exceed the spot price on the date of purchase, resulting in an unfavorable impact on both gross margin and net earnings. Also, sustained price increases may lead to declines in volume as competitors may not adjust their prices or consumers may decide not to pay the higher prices, which could lead to sales declines and loss of market share.
Cereal processing ovensequipment at major domestic and international facilities are regularly fueled by electricity, natural gas or propane, which are obtained from local utilities or other local suppliers. Short-term stand-by propane storage exists at several plants for use in case of interruption in natural gas supplies. Oil may also be used to fuel certain operations at various plants. In addition, considerable amounts of diesel fuel are used in connection with the
distribution of our products. The cost of fuel may fluctuate widely due to economic and political conditions, government policy, regulation and/or shutdown, war, or other unforeseen circumstances which could have a material adverse effect on our consolidated operating results or financial condition.
Our results may be adversely affected by increases in transportation costs and reduced availability of or increases in the price of oil or other fuels.
We rely on trucking and railroad operators to deliver incoming ingredients to our manufacturing locations and to deliver finished products to our customers. Shortages of truck drivers and railroad workers have contributed to increased freight costs, which has had a material and adverse effect on our business, financial condition and results of operations. In particular, compliance with the electronic device logging mandate has increased the cost of transportation for us and many other companies. Transportation costs are further increasing as a result of high levels of long-haul driver turnover and increased railroad traffic and service issues. Additionally, energy and fuel costs can fluctuate dramatically and, at times, have resulted in significant cost increases, particularly for the price of oil and gasoline. An increase in the price of oil increases our transportation costs for distribution and costs to purchase our products from suppliers. Increases in transportation and energy and fuel costs has, and may continue to affect our profitability and may increase the cost of our products, which may reduce consumer demand.
A shortage in the labor pool, failure to successfully negotiate collectively bargained agreements, or other general inflationary pressures or changes in applicable laws and regulations could increase labor cost, which could have a material adverse effect on our consolidated operating results or financial condition.
Our labor costs include the cost of providing benefits for employees. We sponsor a number of benefit plans for employees in the United States and various foreign locations, including pension, retiree health and welfare, active health care, severance and other postemployment benefits. We also participate in a number of multiemployer pension plans for certain of our manufacturing locations. Our major pension plans and U.S. collectively bargained retiree health and welfare plans are funded with trust assets invested in a globally diversified portfolio of equity securities with smaller holdings of bonds, real estate and other investments. The annual cost of benefits can vary significantly from year to
year and is materially affected by such factors as changes in the assumed or actual rate of return on major plan assets, a change in the weighted-average discount rate used to measure obligations, the rate or trend of health care cost inflation, and the outcome of collectively-bargained wage and benefit agreements. Many of our employees are covered by collectively-bargained agreements and other employees may seek to be covered by collectively-bargained agreements. Strikes or work stoppages and interruptions could occur if we are unable to renew these agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could adversely impact our operating results. The terms and conditions of existing, renegotiated or new agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency.
Multiemployer pension plans could adversely affect our business.
We participate in various “multiemployer” pension plans administered by labor unions representing some of our employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. Our required contributions to these funds could increase because of a shrinking contribution base as a result of the insolvency or withdrawal of other companies that currently contribute to these funds, inability or failure of withdrawing companies to pay their withdrawal liability, lower than expected returns on pension fund assets or other funding deficiencies. In the event that we withdraw from participation in one of these plans,
then applicable law could require us to make an additional lump-sum contribution to the plan,withdrawal liability payments, and we would have to reflect that as an expense in our consolidated statement of operations and as a liability on our consolidated balance sheet. There is the potential that the sale of our cookies, fruit snacks, pie crust and ice cream cone businesses may result in withdrawal liability under certain multiemployer pension plans and any such withdrawal could have a material adverse effect on our consolidated operating results or financial condition. Our withdrawal liability for anyfrom a multiemployer plan would depend on the extent of the plan’s funding of vested benefits. In the ordinary course of our renegotiation of collective bargaining agreements with labor unions that maintain these plans, we may decide to discontinue participation in a plan, and in that event, we could face a withdrawal liability. SomeOne of the multiemployer plans in which we participate areis reported to have significant underfunded liabilities. Such underfunding could increase the size of our potential withdrawal liability.
We withdrew from two multiemployer pension plans in 2019 and recorded an estimate of the related withdrawal liability. While this is our best estimate of the ultimate cost of withdrawing from the plans at this time, we have not yet reached agreement on the ultimate amount of the withdrawal liability. As a result, the actual cost could differ from our estimate based on final funding assessments.
We operate in the highly competitive food industry.
We face competition across our product lines, including snacks, ready-to-eat cereals and other convenience foods, from other companies which have varying abilities to withstand changes in market conditions. The principal aspects of our business where we face competition include brand recognition, taste, nutritional value, price, promotion, innovation, shelf space, navigating the growing e-commerce marketplace, convenient ordering and delivery to the consumer and customer service. Most of our competitors have substantial financial, marketing and other resources, and some of our competitors may spend more aggressively on advertising and promotional activities than we do. Our competition with other companies in our various markets and product lines could cause us to reduce prices, increase capital, marketing or other expenditures, or lose category share, any of which could have a material adverse effect on our business and financial results.
Our ability to compete also depends upon our ability to predict, identify, and interpret the tastes and dietary habits of consumers and to offer products that appeal to those preferences. There are inherent marketplace risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance. If we do not succeed in offering products that consumers want to buy, our sales and market share will decrease, resulting in reduced profitability. If we are unable to accurately predict which shifts in consumer preferences will be long-lasting, or are unable to introduce new and improved products to satisfy those preferences, our sales will decline. In addition, given the variety of backgrounds and identities of consumers in our consumer base, we must offer a sufficient array of products to satisfy the broad spectrum of consumer preferences.
In some cases, our competitors may be able to respond to changing business and economic conditions or consumer preferences more quickly than us. Category share and growth could also be adversely impacted if we are not successful in introducing new products, anticipating changes in consumer preferences with respect to dietary trends or purchasing behaviors or in effectively assessing, changing and setting proper pricing.
The changing retail environment and the growing presence of alternative retail channels, could negatively impact our sales and profits.
Our businesses are largely concentrated in the traditional retail grocery trade. Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 19% of consolidated net sales during 2018,2019, comprised principally of sales within the United States. No other customer accounted for greater than 10% of net sales in 2018.2019. During 2018,2019, our top five customers, collectively, including Wal-Mart, accounted for approximately 33% of our consolidated net sales and approximately 49%50% of U.S. net sales. There can be no assurances that our largest customers will continue to purchase our products in the same mix or quantities or on the same terms as in the past. As the retail grocery trade continues to consolidate and retailers become larger, our large retail customers have sought, and may continue to seek in the future, to use their position to improve their profitability through improved efficiency, lower pricing, increased promotional programs funded by their suppliers and more favorable terms. 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 private label products. If we are unable to use our scale, marketing expertise, product innovation and category leadership positions to respond, our profitability or volume growth could be negatively affected. The loss of any large customer or severe adverse impact on the business operations of any large customer for an extended length of time could negatively impact our sales and profits.
Additionally, alternative retail channels, such as internet-basede-commerce retailers mobile applications,(including as a result of the integration of traditional and digital operations at key retailers), subscription services, discount and dollar stores, direct-to-consumer brands, drug stores and club stores, have become more prevalent. This trend away from traditional retail grocery, and towards such channels, is expected to continue in the future. If we are not successful in expanding sales in alternative retail channels, our business or financial results may be negatively impacted. In particular, substantial growth in e-commerce has encouraged the entry of new competitors and business models, intensifying competition by simplifying distribution and lowering barriers to entry. The expanding presence of e-commerce retailers has impacted, and may continue to impact, consumer preferences and market dynamics, which in turn may negatively affect our sales or profits. In addition, these alternative retail channels may create consumer price deflation, affecting our retail customer relationships and presenting additional challenges to increasing prices in response to commodity or other cost increases. Also, if these alternative retail channels, such as internet-basede-commerce retailers were to take significant share away from traditional retailers that could have a flow over effect on our business and our financial results could be negatively impacted.
Our results may be negatively impacted if consumers do not maintain their favorable perception of our brands.
We have a number of iconic brands with significant value. Maintaining and continually enhancing the value of these brands is critical to the success of our business. Brand value is based in large part on consumer perceptions. Success in promoting and enhancing brand value depends in large part on our ability to provide high-quality products. Brand value could diminish significantly due to a number of factors, including consumer perception that we, or any of our employees, have acted in an irresponsible manner, adverse publicity about our products (whether or not valid), our failure to maintain the quality of our products, the failure of our products to deliver consistently positive consumer experiences, the products becoming unavailable to consumers, or the failure to meet the nutrition expectations of our products or particular ingredients in our products (whether or not valid), including whether certain of our products are perceived to contribute to obesity. In addition, due to our varied and geographically diverse consumer base, we must be responsive to local consumer needs, including with respect to when and how consumers consume food products and their desire for premium or value offerings, provide an array of products that satisfy the broad spectrum of consumer preferences. Accordingly, we might fail to anticipate consumer preferences with respect to dietary trends or purchasing behaviors, invest sufficiently in maintaining, extending and expanding our brand image or achieve the desired efforts of our marketing efforts.efforts or use data-driven marketing and advertising to reach consumers at the right time with the right message. The growing use of social and digital media by consumers, Kellogg and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about Kellogg, our brands, our products or any of our employees on social or digital media could seriously damage our brands, reputation and brand loyalty, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity for redress or correction. Brand recognition and loyalty can also be impacted by the effectiveness of our advertising campaigns, marketing programs and sponsorships, as well as our use of social media. If we do not maintain the favorable perception of our brands, our results could be negatively impacted.
Tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions where the Company’s subsidiaries are organized. Due to economic and political conditions (including shifts in the geopolitical landscape), tax rates in the U.S. and various foreign jurisdictions have been and may be subject to significant change. The future effective tax rate could be effected by changes in mix of earnings in countries with differing statutory tax rates, changes in valuation of deferred tax asset and liabilities, or changes in tax laws or their interpretation which includes recently enacted U.S. tax reform and contemplated changes in other countries of long-standing tax principles if finalized and adopted could have a material impact on our income tax expense and deferred tax balances.
We are also subject to regular reviews, examinations and audits by the Internal Revenue Service and other taxing authorities with respect to taxes inside and outside of the U.S. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position.
We also need to comply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, including value added tax, or other changes in the application of existing taxes, in markets in which we are currently active, or may be active in the future, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on our results of operations.
If our food products become adulterated, misbranded or mislabeled, we might need to recall those items and may experience product liability if consumers are injured as a result.
Selling food products involves a number of legal and other risks, including product contamination, food borne illnesses, spoilage, product tampering, allergens, or other adulteration. We may need to recall some of our products if they become adulterated or misbranded. We may also be liable if the consumption of any of our products causes injury, illness or death. 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 product for a period of time. We could also suffer losses from a significant product liability judgment against us. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our food products, which could have a material adverse effect on our business results and the value of our brands. Moreover, even if a product liability or consumer fraud claim is meritless, does not prevail or is not pursued, the negative publicity surrounding assertions against our company and our products or processes could adversely affect our reputation or brands.
We could also be adversely affected if consumers lose confidence in the safety and quality of certain food products or ingredients, or the food safety system generally. If another company recalls or experiences negative publicity related to a product in a category in which we compete, consumers might reduce their overall consumption of
products in this category. Adverse publicity about these types of concerns, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions.
Unanticipated business disruptions could have an adverse effect on our business, financial condition and results of operations.
We manufacture and source products and materials on a global scale. We have a complex network of suppliers, owned manufacturing locations, contract manufacturer locations, warehousing and distribution networks and information systems that support our ability to provide our products to our customers consistently. Our ability to make, move and sell products globally is critical to our success. Factors that are hard to predict or beyond our control, such as product or raw material scarcity, weather (including any potential effects of climate change), natural disasters, fires or explosions, terrorism, political unrest, unrest or government shutdowns, tariffs and other trade restrictions, cybersecurity breaches, health pandemics, disruptions in logistics, loss or impairment of key manufacturing sites, supplier capacity constraints, or strikes, could damage or disrupt our operations or our suppliers', their suppliers or our contract manufacturers' operations. If we do not effectively prepare for and respond to disruptions in our operations, for example, by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or cannot quickly repair damage to our information, technology, production or supply systems, we may be late in delivering or unable to deliver products to our customers. If that occurs, we may lose our customers' confidence, and long-term consumer demand for our products could decline. In addition, insurance policies that may provide coverage with regard to such events may not cover any or all of the resulting financial losses. These events could adversely affect our business, financial condition and results of operations.
Evolving tax, environmental, food quality and safety or other regulations or failure to comply with existing licensing, labeling, trade, food quality and safety and other regulations and laws could have a material adverse effect on our consolidated financial condition.
Our activities or products, both in and outside of the United States, are subject to regulation by various federal, state, provincial and local laws, regulations and government agencies, including the U.S. Food and Drug Administration, U.S. Federal Trade Commission, the U.S. Departments of Agriculture, Commerce and Labor, as well as similar and other authorities outside of the United States, International Accords and Treaties and others, including voluntary regulation by other bodies. Legal and regulatory systems can change quickly, as demonstrated by the events of the Brexit vote. In addition, legal and regulatory systems in emerging and developing markets may be less developed, and less certain. These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic, regulatory or social events. In addition, the enforcement of remedies in certain foreign jurisdictions may be less certain, resulting in varying abilities to enforce intellectual property and contractual rights.
The manufacturing, marketing and distribution of food products are subject to governmental regulation that impose additional regulatory requirements. Those regulations control such matters as food quality and safety, ingredients, advertising, product or production requirements, labeling, sustainability of packaging (including plastics), import or export of our products or ingredients, relations with distributors and retailers, health and safety, the environment,
and restrictions on the use of government programs, such as Supplemental Nutritional Assistance Program, to purchase certain of our products.
The marketing of food products has come under increased regulatory scrutiny in recent years, and the food industry has been subject to an increasing number of proceedings and claims relating to alleged false or deceptive marketing under federal, state and foreign laws or regulations. We are also regulated with respect to matters such as licensing requirements, trade and pricing practices, tax, anticorruption standards, advertising and claims, and environmental matters. The need to comply with new, evolving or revised tax, environmental, food quality and safety, labeling or other laws or regulations, or new, evolving or changed interpretations or enforcement of existing laws or regulations, may have a material adverse effect on our business and results of operations. Governmental and administrative bodies within the U.S. are considering a variety of trade and other regulatory reforms. Changes in legal or regulatory requirements (such as new food safety requirements and revised nutrition facts labeling and serving size regulations), or evolving interpretations of existing legal or regulatory requirements, may result in increased compliance costs, capital expenditures and other financial obligations that could adversely affect our business or financial results. If we are found to be out of compliance with applicable laws and regulations in these areas, we could be subject to civil remedies, including fines, injunctions, termination of necessary licenses or permits, or recalls, as well as potential criminal sanctions, any of which could have a material adverse effect on our business. Even if regulatory review does not result in these types of determinations, it could potentially create negative publicity or perceptions which could harm our business or reputation. Further, modifications to international trade policy, including changes to or repealthe expected ratification of the North American Free TradeUnited States-Mexico-Canada Agreement, changes in the European Union (such as Brexit) or the imposition of increased or new tariffs, quotas or trade barriers on key commodities,
could have a negative impact on us or the industries we serve, including as a result of related uncertainty, and could materially and adversely impact our business, financial condition, results of operations and cash flows.
Our operations face significant foreign currency exchange rate exposure and currency restrictions which could negatively impact our operating results.
We hold assets and incur liabilities, earn revenue and pay expenses in a variety of currencies other than the U.S. dollar, including the euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Brazilian Real, Nigerian Naira, and Russian ruble. Because our consolidated financial statements are presented in U.S. dollars, we must translate our assets, liabilities, revenue and expenses into U.S. dollars at then-applicable exchange rates and face exposure to adverse movements in foreign currency exchange rates. For example, the announcement and implementation of Brexit has caused, and may continue to cause, significant volatility in currency exchange rate fluctuations. Consequently, changes in the value of the U.S. dollar may unpredictably and negatively affect the value of these items in our consolidated financial statements, even if their value has not changed in their original currency.
Potential liabilities and costs from litigation could adversely affect our business.
There is no guarantee that we will be successful in defending our self in civil, criminal or regulatory actions (inclusive of class action lawsuits and foreign litigation), including under general, commercial, employment, environmental, data privacy or security, intellectual property, food quality and safety, anti-trust and trade, advertising and claims, and environmental laws and regulations, or in asserting our rights under various laws. For example, our marketing or claims could face allegations of false or deceptive advertising or other criticisms which could end up in litigation and result in potential liabilities or costs. In addition, we could incur substantial costs and fees in defending our self or in asserting our rights in these actions or meeting new legal requirements. The costs and other effects of potential and pending litigation and administrative actions against us, and new legal requirements, cannot be determined with certainty and may differ from expectations.
Our consolidated financial results and demand for our products are dependent on the successful development of new products and processes.
There are a number of trends in consumer preferences which may impact us and the industry as a whole. These include changing consumer dietary trends and the availability of substitute products.
Our success is dependent on anticipating changes in consumer preferences and on successful new product and process development and product relaunches in response to such changes. Trends within the food industry change often, and failure to identify and react to changes in these trends could lead to, among other things, reduced loyalty, reduced demand and price reductions for our brands and products. We aim to introduce products or new or improved production processes on a timely basis in order to counteract obsolescence and decreases in sales of
existing products. While we devote significant focus to the development of new products and to the research, development and technology process functions of our business, we may not be successful in developing new products or our new products may not be commercially successful. In addition, if sales generated by new products cause a decline in sales of the Company's existing products, the Company's financial condition and results of operations could be materially adversely affected. Our future results and our ability to maintain or improve our competitive position will depend on our capacity to gauge the direction of our key markets and upon our ability to successfully identify, develop, manufacture, market and sell new or improved products in these changing markets.
Our postretirement benefit-related costs and funding requirements could increase as a result of volatility in the financial markets, changes in interest rates and actuarial assumptions.
Increases in the costs of postretirement medical and pension benefits may continue and negatively affect
our business as a result of increased usage of medical benefits by retired employees and medical cost inflation, an increase in participants enrolled, the effect of potential declines in the stock and bond markets on the performance of our pension and post-retirement plan assets, potential reductions in the discount rate used to determine the present value of our benefit obligations, and changes to our investment strategy that may impact our expected return on pension and post-retirement plan assets assumptions. U.S. generally accepted accounting principles require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. The Company’s accounting policy for defined benefit plans may subject earnings to volatility due to the recognition of actuarial gains and losses, particularly those due to the change in the fair value of pension and post-retirement plan assets and interest rates. In addition, funding requirements for our plans may become more significant. However,
the ultimate amounts to be contributed are dependent upon, among other things, interest rates, underlying asset returns, and the impact of legislative or regulatory changes related to pension and post-retirement funding obligations.
We use available borrowings under the credit facilities and other available debt financing for cash to operate our business, which subjects us to market and counter-party risk, some of which is beyond our control.
In addition to cash we generate from our business, our principal existing sources of cash are borrowings available under our credit facilities and other available debt financing. If our access to such financing was unavailable or reduced, or if such financing were to become significantly more expensive for any reason, we may not be able to fund daily operations, which would cause material harm to our business or could affect our ability to operate our business as a going concern. In addition, if certain of our lenders experience difficulties that render them unable to fund future draws on the facilities, we may not be able to access all or a portion of these funds, which could have similar adverse consequences.
From time to time, we issue variable rate securities based on interbank offered rates (IBORs) and enter into interest rate swaps that contain a variable element based on an IBOR. There is currently uncertainty whether certain IBORs (such as LIBOR) will continue to be available after 2021. If certain IBORs cease to be available, we may need to amend affected agreements, and we cannot predict what alternative index would be negotiated with our counterparties and security holders. As a result, our interest expense could increase and our available cash flow for general corporate requirements may be adversely affected.
We utilize extended payment terms for customers and suppliers supplemented with third party financing programs to assist in effectively managing our core working capital. If the extension of payment terms are reversed or financial institutions terminate their participation, our ability to maintain current levels of core working capital could be adversely impacted.
Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. We utilize third-party financing programs to offset the negative impact of offering extended customer payment terms. In addition, in combination with extending supplier payment terms, structured payables programs are available to our suppliers which enable suppliers, at their sole discretion, to enter bilateral agreements to sell Company payment obligations to designated third-party financial institutions.
Changes in financial markets or interest rates could make these third party financing programs less attractive to the financial institutions purchasing trade accounts receivables and Company payment obligations thereunder and these financial institutions may seek to terminate their participation. In the event of such termination or if our extended payment terms are reversed, our ability to effectively manage core working capital could be adversely impacted.
We have a substantial amount of indebtedness.
We have indebtedness that is substantial in relation to our shareholders’ equity,and we may incur additional indebtedness in the future, or enter into off-balance sheet financing, which would increase our leverage risks. As of December 29, 2018,28, 2019, we had total debt of approximately $9.4$7.9 billion and total Kellogg Company equity of $2.6$2.7 billion.
Our substantial indebtedness could have important consequences, including:
impairing the ability to access global capital markets to obtain additional financing for working capital, capital expenditures or general corporate purposes, particularly if the ratings assigned to our debt securities by rating organizations were revised downward or if a rating organization announces that our ratings are under review for a potential downgrade;
a downgrade in our credit ratings, particularly our short-term credit rating, would likely reduce the amount of commercial paper we could issue, increase our commercial paper borrowing costs, or both;
restricting our flexibility in responding to changing market conditions or making us more vulnerable in the event of a general downturn in economic conditions or our business;
requiring a substantial portion of the cash flow from operations to be dedicated to the payment of principal and interest on our debt, reducing the funds available to us for other purposes such as expansion through acquisitions, paying dividends, repurchasing shares, marketing and other spending and expansion of our product offerings; and
causing us to be more leveraged than some of our competitors, which may place us at a competitive disadvantage.
Our ability to make scheduled payments or to refinance our obligations with respect to indebtedness or incur new indebtedness will depend on our financial and operating performance, which in turn, is subject to prevailing economic conditions, the availability of, and interest rates on, short-term financing, and financial, business and other factors beyond our control.
Our performance is affected by general economic, political and social conditions and taxation policies.
Customer and consumer demand for our products may be impacted by recession, financial and credit market disruptions, or other economic downturns in the United States or other nations. Our results in the past have been, and in the future may continue to be, materially affected by changes in general economic, political and social conditions in the United States and other countries, including the interest rate environment in which we conduct business, the financial markets through which we access capital and currency, trade policy, political and social unrest and terrorist acts in the United States or other countries in which we carry on business. The economic, political and social conditions resulting from Brexit, among other events, may adversely impact our overall performance.
Current economic conditions globally may delay or reduce purchases by our customers and consumers. This could result in reductions in sales of our products, reduced acceptance of innovations, and increased price competition. Deterioration in economic conditions in any of the countries in which we do business could also cause slower collections on accounts receivable which may adversely impact our liquidity and financial condition. Financial institutions may be negatively impacted by economic conditions and may consolidate or cease to do business which could result in a tightening in the credit markets, a low level of liquidity in many financial markets, and increased volatility in fixed income, credit, currency and equity markets. There could be a number of effects from a financial institution credit crisis on our business, which could include impaired credit availability and financial stability of our customers, including our suppliers, co-manufacturers and distributors. A disruption in financial markets may also have an effect on our derivative counterparties and could also impair our banking partners on which we rely for operating cash management. Any of these events would likely harm our business, results of operations and financial condition.
We may not be able to attract, develop and retain the highly skilled people we need to support our business.
We depend on the skills and continued service of key personnel, including our experienced management team. In addition, our ability to achieve our strategic and operating goals depends on our ability to identify, recruit, 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, recruit, train, develop and retain other talented personnel. Any such loss, failure or negative perception with respect to these individuals may adversely affect our business or financial results. In addition, activities related to identifying, recruiting, hiring and integrating qualified individuals may require significant time and expense. We may not be able to locate suitable replacements for any
key employees who leave, or offer employment to potential replacements on reasonable terms, each of which may adversely affect our business and financial results. Additionally, changes in immigration laws and policies could also make it more difficult for us to recruit or relocate skilled employees.
An impairment of the carrying value of goodwill or other acquired intangibles could negatively affect our consolidated operating results and net worth.
The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of trademarks, trade names, and other acquired intangibles as of the acquisition date. Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by management at least annually for impairment. If carrying value exceeds current fair value, the intangible is considered impaired and is reduced to fair value via a charge to earnings. Factors which could result in an impairment include, but are not limited to: (i) reduced demand for our products; (ii) higher commodity prices; (iii) lower prices for our products or increased marketing as a result of increased competition; and (iv) significant disruptions to our operations as a result of both internal and external events. Should the value of one or more of the acquired intangibles become impaired, our consolidated earnings and net worth may be materially adversely affected.
As of December 29, 2018,28, 2019, the carrying value of intangible assets totaled approximately $9.4$8.4 billion, of which $6.1$5.8 billion was goodwill and $3.3$2.6 billion represented trademarks, tradenames, and other acquired intangibles compared to total assets of $17.8$17.5 billion and total Kellogg Company equity of $2.6$2.7 billion.
Competition against retailerprivate label brands could negatively impact our business.
In nearly all of our product categories, we facecompete against branded and price-based competition.products as well as private label products. 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 brandsprivate label products change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer retailer brands,private label products, which are typically sold at lower prices, then we could lose category share or sales volumes or shift our product mix to lower margin
offerings, which could have a material effect on our business and consolidated financial position and on the consolidated results of our operations and profitability.
We may not achieve our targeted cost savings and efficiencies from cost reduction initiatives.
Our success depends in part on our ability to be an efficient producer in a highly competitive industry. We have invested a significant amount in capital expenditures to improve our operational facilities. Ongoing operational issues are likely to occur when carrying out major production, procurement, or logistical changes and these, as well as any failure by us to achieve our planned cost savings and efficiencies, could have a material adverse effect on our business and consolidated financial position and on the consolidated results of our operations and profitability.
Technology failures, cyber attacks, privacy breaches or data breaches could disrupt our operations, reputation and negatively impact our business.
We increasingly rely on information technology systems and third party service providers, including through the internet, to process, transmit, and store electronic information. For example, our production and distribution facilities and inventory management utilize information technology to increase efficiencies and limit costs. Information technology systems are also integral to the reporting of our results of operations. Furthermore, a significant portion of the communications between, and storage of personal data of, our personnel, customers, consumers and suppliers depends on information technology. Our information technology systems, and the systems of the parties we communicate and collaborate with, may be vulnerable to a variety of interruptions, as a result of updating our enterprise platform or due to events beyond our or their control, including, but not limited to, network or hardware failures, malicious or disruptive software, unintentional or malicious actions of employees or contractors, cyberattacks by common hackers, criminal groups or nation-state organizations or social-activist (hacktivist) organizations, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events.
Moreover, our computer systems have been, and will likely continue to be subjected to computer viruses, malware, ransomware or other malicious codes, social engineering attacks, unauthorized access attempts, password theft, physical breaches, employee or inside error, malfeasance and cyber- or phishing-attacks. Cyber threats are constantly evolving, are becoming more sophisticated and are being made by groups and individuals with a wide
range of expertise and motives, and this increases the difficulty of detecting and successfully defending against them. These events could compromise our confidential information, impede or interrupt our business operations, and may result in other negative consequences, including remediation costs, loss of revenue, litigation and reputational damage. Furthermore, if a breach or other breakdown results in disclosure of confidential or personal information, we may suffer reputational, competitive and/or business harm. To date, we have not experienced a material breach of cyber security. While we have implemented administrative and technical controls and taken other preventive actions, such as the maintenance of an information security program that includes updating our technology and security policies, cyber insurance, employee training, and monitoring and routinely testing our information technology systems to reduce the risk of cyber incidents and protect our information technology, they may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems.
The Company offers promotions, rebates, customer loyalty and other programs through which it may receive personal information, and it or its vendors could experience cyber-attacks, privacy breaches, data breaches or other incidents that result in unauthorized disclosure of consumer, customer, employee or Company information.The Company must also successfully integrate the technology systems of acquired companies into the Company’s existing and future technology systems. In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the United States and other jurisdictions regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. There is significant uncertainty with respect to compliance with such privacy and data protection laws and regulations, including with respect to the European Union General Data Protection Regulation (GDPR) (whichand the California Consumer Privacy Act of 2018 (CCPA), which went into effect on January 1, 2020 (each of which imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored), because they are continuously evolving and developing and may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. Additionally, our efforts to comply with privacy and data protection laws, including the GDPR and CCPA, may impose significant costs and challenges that are likely to increase over time.
If the Company suffers a loss as a result of a breach or other breakdown in its technology, including such cyber-attack, privacy breaches, data breaches, issues with or errors in system maintenance or security, migration of applications to the cloud, power outages, hardware or software failures, denial of service, telecommunication or
other incident involving one of the Company's vendors, that result in unauthorized disclosure or significant unavailability of business, financial, personal or stakeholder information, the Company may suffer reputational, competitive and/or business harm and may be exposed to legal liability and government investigations, which may adversely affect the Company's results of operations and/or financial condition. The misuse, leakage or falsification of information could result in violations of data privacy laws, the Company may become subject to legal action and increased regulatory oversight. The Company could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems. In addition, if the Company's suppliers or customers experience such a breach or unauthorized disclosure or system failure, their businesses could be disrupted or otherwise negatively affected, which may result in a disruption in the Company's supply chain or reduced customer orders, which would adversely affect the Company's business operations. We have also outsourced several information technology support services and administrative functions to third-party service providers, including cloud-based service providers, and may outsource other functions in the future to achieve cost savings and efficiencies. If these service providers do not perform effectively due to breach or system failure, we may not be able to achieve the expected benefits and our business may be disrupted.
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 including 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, our technology, or any other form of intellectual property, 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 or operations. In addition, if, in the course of developing new products or improving the quality of existing products, we are found to have infringed the intellectual property rights of others, directly or indirectly, such finding could have an adverse impact on our business, financial condition or results of operations and may limit our ability to introduce new products or improve the quality of existing 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.
We are subject to risks generally associated with companies that operate globally.
We are a global company and generated 40%, 37%,42% and 35%40% of our net sales for 2018, 20172019 and 2016,2018, respectively outside the United States. We manufacture our products in 21 countries and have operations in more than 180 countries, so we are subject to risks inherent in multinational operations. Those risks include:
compliance with U.S. laws affecting operations outside of the United States, such as OFAC trade sanction regulations and Anti-Boycott regulations,
compliance with anti-corruption laws, including U.S. Foreign Corrupt Practices Act (FCPA) and U.K. Bribery Act (UKBA),
compliance with antitrust and competition laws, data privacy laws, and a variety of other local, national and multi-national regulations and laws in multiple regimes,
changes in tax laws, interpretation of tax laws and tax audit outcomes,
fluctuations or devaluations in currency values, especially in emerging markets,
changes in capital controls, including currency exchange controls, government currency policies or other limits on our ability to import raw materials or finished product or repatriate cash from outside the United States,
changes in local regulations and laws, the lack of well-established, reliable and/or impartial legal systems in certain countries in which we operate and the uncertainty of enforcement of remedies in foreignsuch jurisdictions, and foreign ownership restrictions and the potential for nationalization or expropriation of property or other resources,
Laws relating to information security, privacy (including the GDPR), cashless payments, and consumer protection,
| |
| • | laws relating to information security, privacy (including the GDPR), cashless payments, and consumer protection, |
uncertainty relating to the future trading relationship between the United Kingdom and European Union as a result of Brexit and its impact on the local and international markets, the flow of goods and materials across borders, and political environments,
discriminatory or conflicting fiscal policies,
challenges associated with cross-border product distribution,
increased sovereign risk, such as default by or deterioration in the economies and credit worthiness of local governments,
varying abilities to enforce intellectual property, contractual, and contractualother legal rights,
greater risk of uncollectible accounts and longer collection cycles,
loss of ability to manage our operations in certain markets which could result in the deconsolidation of such businesses,
design and implementation of effective control environment processes across our diverse operations and employee base,
imposition of more or new tariffs, quotas, trade barriers, price controls, and similar restrictions onin the countries in which we or our salessuppliers or manufacturers operate or regulations, taxes or policies that might negatively affect our sales, and
changes in trade policies and trade relations.
Please refer to Note 16 for more information regarding our operations in Venezuela, including the impact on our operations from currency restrictions and our decision to deconsolidate our Venezuelan operations effective December 31, 2016.
In addition, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest and government shutdowns, civil strife, acts of war, public corruption, expropriation and other economic or political or social uncertainties could interrupt and negatively affect our business operations or customer demand. The slowdown in economic growth or high unemployment in some emerging markets could constrain consumer spending, and declining consumer purchasing power could adversely impact our profitability. Continued instability in the banking and governmental sectors of certain countries in the European Union or the dynamics associated with the federal and state debt and budget challenges in the United States could adversely affect us. All of these factors could result in increased costs or decreased revenues, and could materially and adversely affect our product sales, financial condition and results of operations.
There may be uncertainty as a result of key global events during 2018.2020. For example, the continuing uncertainty related to the future trading relationship between the United Kingdom and the European Union arising from the Brexit referendum in the United Kingdomand international trade disputes, as well as ongoing terrorist activity, may adversely impact global stock markets (including The New York Stock Exchange on which our common shares are traded) and general global economic conditions. All of these factors are outside of our control, but may nonetheless cause us to adjust our strategy in order to compete effectively in global markets.
The results of the United Kingdom's referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
In JuneFollowing the result of a referendum in 2016, a majority of voters in the United Kingdom elected to withdraw fromleft the European Union in a national referendum. In February 2017,on January 31, 2020, commonly referred to as Brexit. Pursuant to the British Parliament voted in favor of allowing the British government to begin negotiating the terms of the United Kingdom’sformal withdrawal from the European Union, and, in March 2017, the British government invoked Article 50 of the Treaty on European Union, which, per the terms of the treaty, formally triggered a two-year negotiation process and putsarrangements agreed between the United Kingdom on a course to withdraw from theand European Union, by the end of March 2019. In January 2019, the draft of the withdrawal agreement that was previously published in November 2018 was rejected by UK parliament. If no agreement is concluded by March 29, 2019 the United Kingdom will leavebe subject to a transition period until December 31, 2020 (the “Transition Period”), during which time European Union rules will continue to apply. Negotiations between the United Kingdom and the European Union at such time. Accordingly,are expected to continue in relation to the referendum has created significant uncertainty about the futurecustoms and trading relationship between the United Kingdom and the European Union includingfollowing the expiration of the Transition Period.
The uncertainty concerning the United Kingdom’s legal, political and economic relationship with respect to the European Union after the Transition Period may be a source of instability in the international markets, create significant currency fluctuations, and/or otherwise adversely affect trading agreements or similar cross-border co-operation arrangements (whether economic, tax, fiscal, legal, regulatory or otherwise). We may also face new regulatory costs and challenges as a result of Brexit (including potentially divergent national laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal.
The economic conditions and outlook in the United Kingdom, the European Union and elsewhere could be further adversely affected by (i) the uncertainty concerning the timing and terms of the exit, (ii) new or modified trading arrangements between the United Kingdom and other countries. Any of these developments, or the perceptionEuropean Union) that any of these developments are likely to occur, could affect economic growth or business activity inhave an adverse effect on our operations. For example, the United Kingdom orcould lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers that could make our doing business in the European Union and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, compliance risks, interest rates, financial institutions, and political, financial and monetary systems.European Economic Area more difficult. Any of these developments, or the perception that any of them could occur, could depress economic activity and restrict our access to capital, which could materially and adversely affect our product sales, financial condition and results of operations.
Potential impacts to our business include: (i) reduced efficiency in processing of product shipments between the United Kingdom and other countries that could impact our ability to have sufficient products in the appropriate market for sale to customers, (ii) requirement to increase inventory levels maintained in both the United Kingdom and other countries to ensure adequate supply of product to support both base and promotional activities normally executed with our customers, (iii) increased costs related to incremental warehousing and logistics services required to adequately service our customers, (iv) significant financial impact resulting from tariffs that are implemented between the United Kingdom and other countries as the location of our European production facilities and the markets we sell in regularly require significant import and export shipments involving the United Kingdom, (v) our ability to realize future benefit from other assets on our balance sheet, such as deferred tax assets, may be impacted which could result in additional valuation allowances or reserves being established.
Our operations in certain emerging markets expose us to political, economic and regulatory risks.
Our growth strategy depends in part on our ability to expand our operations in emerging markets. However, some emerging markets have greater political, economic and currency volatility and greater vulnerability to infrastructure and labor disruptions than more established markets. In many countries outside of the United States, particularly those with emerging economies, it may be common for others to engage in business practices prohibited by laws and regulations with extraterritorial reach, such as the FCPA and the UKBA, or local anti-bribery laws. These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials, including in connection with obtaining permits or engaging in other actions necessary to do business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially and adversely affect our reputation, financial condition and results of operations.
In addition, competition in emerging markets is increasing as our competitors grow their global operations and low cost local manufacturers expand and improve their production capacities. Our success in emerging markets is critical to our growth strategy. If we cannot successfully increase our business in emerging markets and manage associated political, economic and regulatory risks, our product sales, financial condition and results of operations could be materially and adversely affected.
Adverse changes in the global climate or extreme weather conditions could adversely affect our business or operations.
Climate change is a core business issue for Kellogg to ensure the long-term health and viability of the ingredients we use in our products. As set forth in the Intergovernmental Panel on Climate Change Fifth Assessment Report, there is continuing scientific evidence, as well as concern from members of the general public, that emissions of greenhouse gases and contributing human activities have caused and will continue to cause significant changes in global temperatures and weather patterns and increase the frequency or severity of weather events, wildfires and flooding. As the pressures from climate change and global population growth lead to increased demand, the food system and global supply chain is becoming increasingly vulnerable to acute shocks, leading to increased prices and volatility, especially in the energy and commodity markets. Adverse changes such as these could:
unfavorably impact the cost or availability of raw or packaging materials, especially if such events have a negative impact on agricultural productivity or on the supply of water;
disrupt production schedules and our ability, or the ability of our suppliers or contract manufacturers, to manufacture or distribute our products;
reduce crop size or quality;
disrupt the retail operations of our customers; or
unfavorably impact the demand for, or the consumer's ability to purchase, our products.
Foreign,There is an increased focus by foreign, federal, state and local regulatory and legislative bodies have proposed various legislative and regulatory measuresregarding environmental policies relating to climate change, regulating greenhouse gas emissions, energy policies and energy policies. In the eventsustainability, including single use plastics. This new or increased focus may result in new or increased laws and regulations that such regulation is enacted, we may experiencecould cause significant increases in our costs of operation and delivery. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. Lastly, consumers and customers may put an increased priority on purchasing products that are sustainably grown and made, requiring us to incur increased costs for additional transparency, due diligence and reporting. As a result, climate change could negatively affect our business and operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters and principal research and development facilities are located in Battle Creek, Michigan.
We operated, as of February 25, 2019,24, 2020, offices, manufacturing plants and distribution and warehousing facilities totaling more than 4139 million square feet of building area in the United States and other countries. Our plants have been designed and constructed to meet our specific production requirements, and we periodically invest money for capital and technological improvements. At the time of its selection, each location was considered to be favorable, based on the location of markets, sources of raw materials, availability of suitable labor, transportation facilities, location of our other plants producing similar products, and other factors. Our manufacturing facilities in the United States include four cereal plants and warehouses located in Battle Creek, Michigan; Lancaster, Pennsylvania; Memphis, Tennessee; and Omaha, Nebraska and other plants or facilities in San Jose, California; Atlanta, Augusta, and Rome, Georgia; Chicago, Illinois; Kansas City, Kansas; Florence, Louisville and Pikeville, Kentucky; Grand Rapids and Wyoming, Michigan; Blue Anchor, New Jersey; Cary, North Carolina; Cincinnati and Zanesville, Ohio; Muncy, Pennsylvania; Jackson and Rossville, Tennessee; and Allyn, Washington.Tennessee.
Outside the United States, we had, as of February 25, 2019,24, 2020, additional manufacturing locations, some with warehousing facilities, in Australia, Austria, Belgium, Brazil, Canada, Colombia, Ecuador, Egypt, Great Britain, India, Japan, Malaysia, Mexico, Poland, Russia, South Africa, South Korea, Spain, Thailand, and Turkey. We also have joint ventures in China, Nigeria, and Ghana which own or operate manufacturing or warehouse facilities.
We generally own our principal properties, including our major office facilities in the United States, although some manufacturing facilities are leased, and no owned property is subject to any major lien or other encumbrance. Distribution facilities (including related warehousing facilities) and offices of non-plant locations typically are leased. In general, we consider our facilities, taken as a whole, to be suitable, adequate, and of sufficient capacity for our current operations.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings, claims, and governmental inspections, audits or investigations arising out of our business which cover matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, employment and other actions. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Information on the market for our common stock, number of shareowners and dividends is located in Note 1716 within Notes to Consolidated Financial Statements.
In December 2017, the board of directors approved an authorization to repurchase up to $1.5 billion of our common stock beginning in January 2018 through December 2019. ThisIn February 2020, the board of directors approved a new authorization isto repurchase up to $1.5 billion of the Company's common stock through December 2022. These authorizations are intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs. During the fourth quarter 2018, the Company repurchased 3.2 million shares for a total of $200 million.
The following table provides information with respect to purchases of common shares under programs authorized by our board of directors during the quarter ended December 29, 2018.28, 2019.
|
| | | | | | | | | | | | | | |
| (millions, except per share data) | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid Per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
Month #1: 9/30/18-10/27/18 | | — |
| | — |
| | — |
| | $ | 1,380 |
|
Month #2: 10/28/18-11/24/18 | | 2.4 |
| | $ | 62.16 |
| | 2.4 |
| | $ | 1,230 |
|
Month #3: 11/25/18-12/29/18 | | 0.8 |
| | $ | 59.42 |
| | 0.8 |
| | $ | 1,180 |
|
|
| | | | | | | | | | | | | | |
| (millions, except per share data) | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid Per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
Month #1: 9/29/19-10/26/19 | | — |
| | $ | — |
| | — |
| | $ | 960 |
|
Month #2: 10/27/19-11/23/19 | | — |
| | $ | — |
| | — |
| | $ | 960 |
|
Month #3: 11/24/19-12/28/19 | | — |
| | $ | — |
| | — |
| | $ | 960 |
|
ITEM 6. SELECTED FINANCIAL DATA
Kellogg Company and Subsidiaries
Selected Financial Data
| | | (millions, except per share data and number of employees) | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Operating trends | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 13,547 |
| | $ | 12,854 |
| | $ | 12,965 |
| | $ | 13,525 |
| | $ | 14,580 |
| | $ | 13,578 |
| | $ | 13,547 |
| | $ | 12,854 |
| | $ | 12,965 |
| | $ | 13,525 |
|
| Gross profit as a % of net sales | | 34.9 | % | | 36.6 | % | | 37.3 | % | | 35.4 | % | | 37.5 | % | | 32.3 | % | | 34.9 | % | | 36.6 | % | | 37.3 | % | | 35.4 | % |
| Depreciation | | 493 |
| | 469 |
| | 510 |
| | 526 |
| | 494 |
| | 457 |
| | 493 |
| | 469 |
| | 510 |
| | 526 |
|
| Amortization | | 23 |
| | 12 |
| | 7 |
| | 8 |
| | 9 |
| | 27 |
| | 23 |
| | 12 |
| | 7 |
| | 8 |
|
| Advertising expense (a) | | 752 |
| | 732 |
| | 736 |
| | 898 |
| | 1,094 |
| | 676 |
| | 752 |
| | 732 |
| | 736 |
| | 898 |
|
Research and development expense (a)(b) | | 154 |
| | 148 |
| | 182 |
| | 193 |
| | 199 |
| | 144 |
| | 154 |
| | 148 |
| | 182 |
| | 193 |
|
| Operating profit | | 1,706 |
| | 1,387 |
| | 1,483 |
| | 1,268 |
| | 1,693 |
| | 1,401 |
| | 1,706 |
| | 1,387 |
| | 1,483 |
| | 1,268 |
|
| Operating profit as a % of net sales | | 12.6 | % | | 10.8 | % | | 11.4 | % | | 9.4 | % | | 11.6 | % | | 10.3 | % | | 12.6 | % | | 10.8 | % | | 11.4 | % | | 9.4 | % |
| Interest expense | | 287 |
| | 256 |
| | 406 |
| | 227 |
| | 209 |
| | 284 |
| | 287 |
| | 256 |
| | 406 |
| | 227 |
|
| Net income attributable to Kellogg Company | | 1,336 |
| | 1,254 |
| | 699 |
| | 614 |
| | 632 |
| | 960 |
| | 1,336 |
| | 1,254 |
| | 699 |
| | 614 |
|
| Average shares outstanding: | | | | | | | | | | | | | | | | | | | | |
| Basic | | 347 |
| | 348 |
| | 350 |
| | 354 |
| | 358 |
| | 341 |
| | 347 |
| | 348 |
| | 350 |
| | 354 |
|
| Diluted | | 348 |
| | 350 |
| | 354 |
| | 356 |
| | 360 |
| | 343 |
| | 348 |
| | 350 |
| | 354 |
| | 356 |
|
| Per share amounts: | | | | | | | | | | | | | | | | | | | | |
| Basic | | 3.85 |
| | 3.61 |
| | 1.99 |
| | 1.74 |
| | 1.76 |
| | 2.81 |
| | 3.85 |
| | 3.61 |
| | 1.99 |
| | 1.74 |
|
| Diluted | | 3.83 |
| | 3.58 |
| | 1.97 |
| | 1.72 |
| | 1.75 |
| | 2.80 |
| | 3.83 |
| | 3.58 |
| | 1.97 |
| | 1.72 |
|
| Cash flow trends | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | $ | 1,536 |
| | $ | 403 |
| | $ | 1,271 |
| | $ | 1,691 |
| | $ | 1,793 |
| | $ | 1,176 |
| | $ | 1,536 |
| | $ | 403 |
| | $ | 1,271 |
| | $ | 1,691 |
|
| Capital expenditures | | 578 |
| | 501 |
| | 507 |
| | 553 |
| | 582 |
| | 586 |
| | 578 |
| | 501 |
| | 507 |
| | 553 |
|
Net cash provided by (used in) operating activities reduced by capital expenditures (b)(c) | | 958 |
| | (98 | ) | | 764 |
| | 1,138 |
| | 1,211 |
| | 590 |
| | 958 |
| | (98 | ) | | 764 |
| | 1,138 |
|
| Net cash provided by (used in) investing activities | | (948 | ) | | 149 |
| | (392 | ) | | (1,127 | ) | | (573 | ) | | 774 |
| | (948 | ) | | 149 |
| | (392 | ) | | (1,127 | ) |
| Net cash provided by (used in) used in financing activities | | (566 | ) | | (604 | ) | | (786 | ) | | (706 | ) | | (1,063 | ) | | (1,905 | ) | | (566 | ) | | (604 | ) | | (786 | ) | | (706 | ) |
Interest coverage ratio (c)(d) | | 8.1 |
| | 9.4 |
| | 4.6 |
| | 6.8 |
| | 7.3 |
| | 7.2 |
| | 8.1 |
| | 9.4 |
| | 4.6 |
| | 6.8 |
|
| Capital structure trends | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 17,780 |
| | $ | 16,351 |
| | $ | 15,111 |
| | $ | 15,251 |
| | $ | 15,139 |
| | $ | 17,564 |
| | $ | 17,780 |
| | $ | 16,351 |
| | $ | 15,111 |
| | $ | 15,251 |
|
| Property, net | | 3,731 |
| | 3,716 |
| | 3,569 |
| | 3,621 |
| | 3,769 |
| | 3,612 |
| | 3,731 |
| | 3,716 |
| | 3,569 |
| | 3,621 |
|
| Short-term debt and current maturities of long-term debt | | 686 |
| | 779 |
| | 1,069 |
| | 2,470 |
| | 1,435 |
| | 727 |
| | 686 |
| | 779 |
| | 1,069 |
| | 2,470 |
|
| Long-term debt | | 8,207 |
| | 7,836 |
| | 6,698 |
| | 5,275 |
| | 5,921 |
| | 7,195 |
| | 8,207 |
| | 7,836 |
| | 6,698 |
| | 5,275 |
|
| Total Kellogg Company equity | | 2,601 |
| | 2,178 |
| | 1,891 |
| | 2,128 |
| | 2,789 |
| | 2,747 |
| | 2,601 |
| | 2,178 |
| | 1,891 |
| | 2,128 |
|
| Share price trends | | | | | | | | | | | | | | | | | | | | |
| Stock price range | | $56-75 |
| | $59-76 |
| | $70-87 |
| | $61-74 |
| | $57-69 |
| | $52-69 |
| | $56-75 |
| | $59-76 |
| | $70-87 |
| | $61-74 |
|
| Cash dividends per common share | | 2.20 |
| | 2.12 |
| | 2.04 |
| | 1.98 |
| | 1.90 |
| | 2.26 |
| | 2.20 |
| | 2.12 |
| | 2.04 |
| | 1.98 |
|
| Number of employees | | 34,000 |
| | 33,000 |
| | 37,000 |
| | 34,000 |
| | 30,000 |
| | 31,000 |
| | 34,000 |
| | 33,000 |
| | 37,000 |
| | 34,000 |
|
The above amounts have been restated to include the impact of Accounting Standard Updates adopted in Q1the first quarter of 2018 with the exception of 2015, and 2014, which werewas not restated for the Revenue Recognition ASU. See additional discussionAdditionally, the above prior year amounts have not been restated to include the impact of the Leases ASU in Footnote 1.the first quarter of 2019.
| |
| (a) | Recent declines in advertising were the result of foreign currency translation, implementation of efficiency and effectiveness programs including zero-based budgeting, the change in media landscape migrating investment to digital,digital. |
| |
| (b) | Research and development cost declines are due primarily to shifting investment to food innovation and renovation. |
| |
(b)(c) | We use this non-GAAP financial measure, which is reconciled above, to focus management and investors on the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, and share repurchase. |
| |
(c)(d) | Interest coverage ratio is calculated based on net income attributable to Kellogg Company before interest expense, income taxes, depreciation and amortization, divided by interest expense. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kellogg Company and Subsidiaries
RESULTS OF OPERATIONS
Business overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Kellogg Company, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 8 of this report.report, as well as Part II, 'Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year ended December 29, 2018, which provides additional information on comparisons of years 2018 and 2017.
For more than 100110 years, consumers have counted on Kellogg for great-tasting, high-quality and nutritious foods. These foods include snacks, such as cookies, crackers, savory snacks, toaster pastries, cereal bars and bites, fruit-flavored snacks;bites; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles.
Kellogg products are manufactured and marketed globally. Consumption and share data noted within is based on Nielsen x-AOC or other comparable source, for the applicable period. Unless otherwise noted, consumption and shipment trends are materially consistent.
Segments
On December 30, 2018 we reorganized our North American business. The reorganization eliminated the legacy business unit structure and internal reporting. In addition, we changed the internal reporting provided to the chief operating decision maker (CODM) and segment manager. As a result, we reevaluated our operating segments. In conjunction with the reorganization, certain global research and development resources and related activities were transferred from the North America business to Corporate. Prior period segment results were not restated for the transfer as the impacts were not considered material.
In addition, we transferred our Middle East, North Africa, and Turkey businesses (MENAT) from Kellogg Europe to Kellogg AMEA, effective December 30, 2018. This consolidated all of the Company's Africa business under a single regional management team. All comparable prior periods have been restated to reflect the change. For the years ended December 29, 2018 and December 30, 2017, the change resulted in $273 million and $241 million, respectively, of reported net sales and $46 million and $56 million, respectively, of reported operating profit transferring from Europe to AMEA.
On July 28, 2019, we completed the sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero International S.A. (“Ferrero”) for $1.3 billion in cash, on a cash-free, debt-free basis and subject to a working capital adjustment mechanism. The operating results for these businesses were included primarily in our North America reporting segment prior to the sale.
We manage our operations through tenfour operating segments that are based primarily on product category or geographic location.location - North America which includes the U.S. businesses and Canada; Europe which consists principally of European countries; Latin America which consists of Central and South America and includes Mexico; and AMEA (Asia Middle East Africa) which consists of Africa, Middle East, Australia and other Asian and Pacific markets. These operating segments have been evaluated for similarity with regards to economic characteristics, products, production processes, types or classes of customers, distribution methods and regulatory environments to determine if they can be aggregated into reportable segments. For the periods presented we have the following reportable segments: U.S. Snacks; U.S. Morning Foods; U.S. Specialty Channels; North America Other; Europe; Latin America; and Asia Pacific. The operating segments will change beginning in 2019.
On November 12, 2018, we announced that we would be exploring the sale ofalso represent our cookies business (including the Keebler, Famous Amos, Mother's and Murray brands), fruit snacks business (including the Stretch Island brand) pie crust and ice cream cone businesses to enable us to bring a sharper focus to our core businesses. This exploration was driven by our need to make strategic choices about our business and the brands within our portfolio. Nevertheless, we believe these iconic and beloved brands can thrive in the portfolio of another organization that can focus on driving growth in these particular categories. The financial impact of the potential sale of businesses will be addressed upon the announcement of any transaction.
Restatement of financial statements
Financial statements for 2017 and 2016 were restated to reflect changes in accounting standards that were adopted on a retrospective basis, as well as product transfer between reportable segments.
Non-GAAP Financial Measures
This filing includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Items excluded from our non-GAAP financial measures are discussed in the "Significant items impacting comparability" section of this filing. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions, including incentive compensation. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors’ understanding of our underlying operating performance and in their analysis of ongoing
operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.
Non-GAAP Financial Measures
Non-GAAP financial measures used for evaluation of performance include currency-neutral and organic net sales, adjusted and currency-neutral adjusted operating profit, adjusted and currency-neutral adjusted diluted earnings per share (EPS), currency-neutral adjusted gross profit, currency neutral adjusted gross margin, adjusted other income (expense), and cash flow. We determine currency-neutral results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.
| |
| • | Currency-neutral net sales and organic net sales: We adjust the GAAP financial measure to exclude the impact of foreign currency, resulting in currency-neutral net sales. In addition, we exclude the impact of acquisitions, divestitures, foreign currency, and differences in shipping days resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions. |
Currency-neutral net sales and organic net sales: We adjust the GAAP financial measure to exclude the impact of foreign currency, resulting in currency-neutral sales. In addition, we exclude the impact of acquisitions, dispositions, related integration costs, shipping day differences, and foreign currency, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions.
| |
| • | Adjusted operating profit and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, multi-employer pension plan exit liabilities, the gain on divestiture of our cookies, fruit snacks, pie crusts, and ice cream cone businesses, and other costs impacting comparability. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments. |
| |
| • | Currency-neutral adjusted gross profit, gross margin, operating profit, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, multi-employer pension plan exit liabilities, the gain on divestiture of our cookies, fruit snacks, pie crusts, and ice cream cone businesses, and other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments. |
| |
| • | Adjusted Other income (expense), net: We adjust the GAAP financial measure to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets,and other net periodic pension costs are not excluded), the gain on the divestiture of our selected cookies, fruit snacks, pie crusts, and ice cream cone businesses, and other costs impacting comparability. We excluded the items which we believe may obscure trends in our underlying profitability. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's other income (expense), net, excluding the impact of the items noted above, for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability. |
Adjusted: operating profit, net income, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, and other costs impacting comparability resulting in adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, such as Project K, Zero Based Budgeting (ZBB), and Revenue Growth Management, to assess performance of newly acquired businesses, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
Currency-neutral adjusted: gross profit, gross margin, operating profit, net income, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, such as Project K, Zero Based Budgeting (ZBB), and Revenue Growth Management, to assess performance of newly acquired businesses, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
Adjusted effective income tax rate: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts. In addition, we have excluded an adjustment for the transitional estimates related to the adoption of U.S. Tax Reform. We excluded the items which we believe may obscure trends in our pre-tax income and the related tax effect of those items on our adjusted effective income tax rate. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's effective tax rate, excluding the pre-tax income and tax effect of the items noted above, for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate.
Cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. Cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount
of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure.
| |
| • | Adjusted effective income tax rate: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, multi-employer pension plan exit liabilities, the gain on divestiture of our selected cookies, fruit snacks, pie crusts, and ice cream cone businesses, and other costs impacting comparability. We excluded the items which we believe may obscure trends in our pre-tax income, the related tax effect of those items, and other impacts to tax expense, including U.S Tax Reform and certain out-of-period adjustments, on our adjusted effective income tax rate. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's effective tax rate, excluding the impact of items noted above, for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate. |
| |
| • | Cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. Cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure. |
These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.
Significant items impacting comparability
Mark-to-market accounting for pension plans, commodities and certain foreign currency contracts
We recognize mark-to-market adjustments for pension plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans arewere recognized in the year they occur. Changes between contract and market prices for commodities contracts and certain foreign currency contracts result in gains/losses that arewere recognized in the quarter they occur. We recorded a total pre-tax mark-to-market charge of $104 million for 2019, a total pre-tax mark-to-market charge of $343 million for 2018 and a total pre-tax mark-to-market benefit of $45 million in 2017 and2017. Included within the aforementioned totals was a total pre-tax mark-to-market charge of $261 million in 2016. Within these totals, the pre-tax mark-to-market charge for pension plans wasof $98 million for 2019, a pre-tax mark-to-market charge for pension plans of $335 million for 2018 and a pre-tax mark-to-market benefit for pension plans wasof $86 million for 2017 and a pre-tax mark-to-market charge for pension plans was $314 million for 2016.2017.
Project K and cost reduction activities
Project K continued generating savings used to invest in key strategic areas of focus for the business. We recorded pre-tax charges related to this program of $54 million in 2019, $143 million in 2018 and $263 million in 2017, and $325 million in 2016.2017.
See the Restructuring and cost reduction activities section for more information.
Brexit impacts
With the uncertainty ofassociated with the United KingdomKingdom's (U.K.) exitingexit from the European Union (EU), commonly referred to as Brexit, we have begun preparations to proactively prepare for the potential adverse impacts of Brexit, such as delays at ports of entry and departure. As a result, we incurred pre-tax charges of $9 million in 2019 and a pre-tax charge of $3 million for the year ended December 29,in 2018.
Business and portfolio realignment
Up front and/or one-timeOne-time costs related to: pending and prospectiveto divestitures and acquisitions, including our previously announced proposedthe divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses.businesses; reorganizations in support of our Deploy for Growth priorities and a reshaped portfolio; and investments in enhancing capabilities prioritized by our Deploy for Growth strategy. As a result, we incurred pre-tax charges, primarily related to reorganizations of $156 million in 2019 and $5 million in 2018.
Multi-employer pension plan exit liability
During the third quarter of 2019, the Company incurred a pre-tax charge of $132 million due to withdrawing from two multi-employer pension plans.
Divestitures
On July 28, 2019, the Company completed its sale of selected cookies, fruit and fruit flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately $1.3 billion in cash, subject to a working capital adjustment mechanism. Both the total assets and net assets of the businesses were approximately $1.3 billion, resulting in a net pre-tax gain of $38 million during the third quarter, recorded in other income and (expense). Additionally, the company recognized curtailment gains related to the divestiture totaling $17 million in our U.S. pension and nonpension postretirement plans.
The operating results for the divested businesses were primarily included in the North America reporting segment prior to the sale. Reported net sales for the divested businesses totaled $308 million for the last five months of the year ended December 29, 2018.
Debt redemption
During the quarter ended April 2, 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031. In connection with the debt redemption, we incurred $153 million of interest expense, consisting primarily of a premium on the tender offer and also including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees related to the tender offer.
Venezuela
As of December 31, 2016, we deconsolidated and changed to the cost method of accounting for our Venezuelan subsidiary. We recorded a $72 million pre-tax charge in Other income (expense), net as we fully impaired the value of our cost method investment in Venezuela. The deconsolidation charge included the historical cumulative translation losses of approximately $63 million related to our Venezuelan operations that had previously been recorded in accumulated other comprehensive losses within equity. Additionally, the deconsolidation reduced net sales by $31 million for the year ended December 31, 2016 which impacted the comparability of 2017 to 2016 reported results.
In 2015 we concluded that we were no longer able to obtain sufficient U.S. dollars on a timely basis through the DIPRO exchange resulting in a decision to remeasure our Venezuela subsidiary's financial statements using the DICOM (formerly SIMADI) rate. Following the change to the DICOM (formerly SIMADI) rate in 2015, certain non-monetary assets related to our Venezuelan subsidiary continued to be remeasured at historical exchange rates. As these assets were utilized by our Venezuelan subsidiary during 2016 they were recognized in the income statement at historical exchange rates resulting in an unfavorable impact. We experienced an unfavorable pre-tax impact of approximately $11 million in 2016 related to the utilization of these remaining non-monetary assets, primarily impacting COGS.
Acquisitions
In December 2016, the Company acquired Ritmo Investimentos, controlling shareholder of Parati S/A, Afical Ltda and Padua Ltda ("Parati Group"), a leading Brazilian food group. In our Latin America reportable segment for the year ended December 30, 2017, the acquisition added $203 million in net sales that impacted the comparability to 2016 reported results.
In October of 2017, the Company acquired Chicago Bar Company LLC manufacturer of RXBAR, a high protein snack bar made of simple ingredients. In our North America Other reportable segmentreported segments for the year ended December 29, 2018, the acquisition added $186 million in net sales that impacted the comparability of 2017 reported results. Additionally, for the year ended December 30, 2017, the acquisition added $27 million in net sales that impacted the comparability of 2016 reported results.
In May of 2018, the Company acquired an incremental 1% ownership interest in Multipro, which along with concurrent changes to the shareholders' agreement, resulted in the Company now having a 51% controlling interest in and began consolidating Multipro, a leading distributor of a variety of food products in Nigeria and Ghana. In our Asia PacificAMEA reportable segment, year ended December 28, 2019, the acquisition added $271 million in net sales that impacted the comparability of 2018 reported results. Additionally, for the year ended December 30,29, 2018, the acquisition added $536 million in net sales that impacted the comparability of 2017 reported results.
Shipping day differences
In December 2017, we eliminated a one-month timing difference in reporting of the financial results for the Parati Group. This update resulted in an additional month of financial results being reported in the year ended December 30, 2017, which included $14 million of net sales that impacted the comparability of 2018 versus 2017 and 2017 versus 2016 reported results.2017.
AdoptionOut-of-period adjustment
During the fourth quarter of 2019, we recorded an out-of-period adjustment to correct an error related to a prior year which increased income tax expense by $39 million. See Note 13 to the Consolidated Financial Statements.
U.S. Tax Reform
In conjunction with theThe adoption of U.S. Tax Reform we finalized our provisional estimatesimpacted income tax expense in 2018 resulting in a net $11 million reduction of income tax expense for the year ended December 29, 2018, primarily related to the transition tax and assertion on foreign earnings. Additionally, for the year ended December 30, 2017, we recorded net tax expense totaling $8 million related primarily to the remeasurement of deferred tax assets and liabilities, as well as the transition tax on foreign earnings.
Gain on unconsolidated entities, net
In connection with the Multipro business combination, the Company recognized a one-time, non-cash gain on the disposition of our previously held equity interest in Multipro of $245 million. Additionally, the Company exercised its call option to acquire a 50% interest in Tolaram Africa Foods, PTE LTD, a holding company with a 49% equity interest in an affiliated food manufacturer, resulting in the Company having a 24.5% interest in the affiliated food manufacturer. In conjunction with the exercise, the Company recognized a one-time, non-cash loss of $45 million, which represents an other than temporary excess of cost over fair value of the investment. These amounts were recorded within Earnings (loss) from unconsolidated entities during the second quarter of 2018.
Foreign currency translation
We evaluate the operating results of our business on a currency-neutral basis. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. Organic net sales exclude the impact of acquisitions, including the foreign currency impact calculated by applying the prior year foreign currency rates to current period results.
Financial results
For the full year 2018,2019, our reported net sales increased by 5.4% due primarily to acquisition of RX (October 2017) and the consolidation0.2% as a full year of Multipro (May 2018) partiallyresults and organic net sales growth were largely offset by unfavorable foreign currency asand the U.S. Dollar strengthened against key currencies.absence of results from the businesses divested in July. Organic net sales were flat compared toincreased 1.9% after excluding the prior year as underlying growth was offset by the negative impact of list-price adjustmentsacquisitions, divestitures, and rationalization of stock-keeping units related to the mid-2017 transition from Direct-Store Delivery (DSD)foreign currency, with growth in U.S. Snacks.all four regions.
Reported operating profit increased by 23%decreased 18% due primarily to lower restructuringhigher business and portfolio realignment charges, the consolidationmulti-employer pension plan exit liability and the absence of Multipro results and favorable year-over-year mark-to-market impacts.from the businesses divested in July partially offset by lower Project K costs. Currency-neutral adjusted operating profit was up slightly compared to the prior year due to cost savings that funded and offset a substantial planned increase in advertising and promotion investment as well as higher freight costs, and adverse mix and incremental costs, much of which
was related to growth in new pack formats. Currency-neutral adjusted operating profit excludesdecreased 4.9% after excluding the impact of restructuring, mark-to-market,business and portfolio realignment, multi-employer pension plan exit liability, Project K and foreign currency and other expenses related to the proposed divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses, as well as preparing for potential Brexit.currency.
Reported diluted EPS of $3.83$2.80 was up 7%down 27% compared to the prior year of $3.58$3.83 due primarily to a one-time non-cash gain related to our transaction in West Africa a lower effective tax rate as a resultin the prior year, higher business and portfolio realignment charges, the multi-employer pension plan exit liability and the absence of U.S. Tax Reform as well as benefitsresults from discrete tax items, and lower restructuring chargesthe businesses divested in July partially offset by unfavorablelower Project K costs and favorable mark-to-market impacts. Currency-neutral adjusted diluted EPS of $4.32 was up 8%$4.00 decreased 7.6% compared to $4.33 in the prior year, of $4.00, after excluding the impact of mark-to-market, restructuring, the adoption of U.S. Tax Reform,business and portfolio realignment, multi-employer pension plan exit liability, gain from unconsolidated entities, costs related to proposed divestituresProject K, mark-to-market, and Brexit.foreign currency.
Reconciliation of certain non-GAAP Financial Measures
| | | Consolidated results (dollars in millions, except per share data) | | 2018 | | 2017 | | 2019 | | 2018 |
| Reported net income attributable to Kellogg Company | | $ | 1,336 |
| | $ | 1,254 |
| | $ | 960 |
| | $ | 1,336 |
|
| Mark-to-market (pre-tax) | | (343 | ) | | 45 |
| | (104 | ) | | (343 | ) |
| Project K and cost reduction activities (pre-tax) | | (143 | ) | | (263 | ) | |
| Project K (pre-tax) | | | (54 | ) | | (143 | ) |
| Brexit impacts (pre-tax) | | (3 | ) | | — |
| | (9 | ) | | (3 | ) |
| Business and portfolio realignment (pre-tax) | | (5 | ) | | — |
| | (156 | ) | | (5 | ) |
| Multi-employer pension plan exit liability (pre-tax) | | | (132 | ) | | — |
|
| Gain on divestiture (pre-tax) | | | 55 |
| | — |
|
| Income tax impact applicable to adjustments, net* | | 109 |
| | 80 |
| | 50 |
| | 109 |
|
| Adoption of U.S. Tax Reform | | 11 |
| | (8 | ) | | — |
| | 11 |
|
| Out-of-period adjustment | | | (39 | ) | | — |
|
| Gain from unconsolidated entities, net | | 200 |
| | — |
| | — |
| | 200 |
|
| Adjusted net income attributable to Kellogg Company | | $ | 1,510 |
| | $ | 1,400 |
| | $ | 1,349 |
| | $ | 1,510 |
|
| Foreign currency impact | | 4 |
| | | | (22 | ) | | |
| Currency-neutral adjusted net income attributable to Kellogg Company | | $ | 1,506 |
| | $ | 1,400 |
| | $ | 1,371 |
| | $ | 1,510 |
|
| Reported diluted EPS | | $ | 3.83 |
| | $ | 3.58 |
| | $ | 2.80 |
| | $ | 3.83 |
|
| Mark-to-market (pre-tax) | | (0.98 | ) | | 0.13 |
| | (0.30 | ) | | (0.98 | ) |
| Project K and cost reduction activities (pre-tax) | | (0.41 | ) | | (0.75 | ) | |
| Project K (pre-tax) | | | (0.15 | ) | | (0.41 | ) |
| Brexit impacts (pre-tax) | | (0.01 | ) | | — |
| | (0.02 | ) | | (0.01 | ) |
| Business and portfolio realignment (pre-tax) | | (0.01 | ) | | — |
| | (0.46 | ) | | (0.01 | ) |
| Multi-employer pension plan exit liability (pre-tax) | | | (0.39 | ) | | — |
|
| Gain on divestiture (pre-tax) | | | 0.16 |
| | — |
|
| Income tax impact applicable to adjustments, net* | | 0.30 |
| | 0.22 |
| | 0.14 |
| | 0.30 |
|
| Adoption of U.S. Tax Reform | | 0.04 |
| | (0.02 | ) | | — |
| | 0.04 |
|
| Out-of-period adjustment | | | (0.12 | ) | | — |
|
| Gain from unconsolidated entities, net | | 0.57 |
| | — |
| | — |
| | 0.57 |
|
| Adjusted diluted EPS | | $ | 4.33 |
| | $ | 4.00 |
| | $ | 3.94 |
| | $ | 4.33 |
|
| Foreign currency impact | | 0.01 |
| | | | (0.06 | ) | | |
| Currency-neutral adjusted diluted EPS | | $ | 4.32 |
| | $ | 4.00 |
| | $ | 4.00 |
| | $ | 4.33 |
|
| Currency-neutral adjusted diluted EPS growth | | 8.0 | % | | | | (7.6 | )% | | |
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
Net sales and operating profit
2019 compared to 2018
The following tables provide an analysis of net sales and operating profit performance for 2019 versus 2018:
|
| | | | | | | | |
| Consolidated results (dollars in millions, except per share data) | | 2017 | | 2016 |
| Reported net income attributable to Kellogg Company | | $ | 1,254 |
| | $ | 699 |
|
| Mark-to-market (pre-tax) | | 45 |
| | (261 | ) |
| Project K and cost reduction activities (pre-tax) | | (263 | ) | | (325 | ) |
| Debt redemption (pre-tax) | | — |
| | (153 | ) |
| Venezuela deconsolidation (pre-tax) | | — |
| | (72 | ) |
| Venezuela remeasurement (pre-tax) | | — |
| | (11 | ) |
| Income tax impact applicable to adjustments, net* | | 80 |
| | 198 |
|
| Adoption of U.S. Tax Reform | | (8 | ) | | — |
|
| Adjusted net income attributable to Kellogg Company | | $ | 1,400 |
| | $ | 1,323 |
|
| Foreign currency impact | | (6 | ) | | |
| Currency-neutral adjusted net income attributable to Kellogg Company | | $ | 1,406 |
| | $ | 1,323 |
|
| Reported diluted EPS | | $ | 3.58 |
| | $ | 1.97 |
|
| Mark-to-market (pre-tax) | | 0.13 |
| | (0.74 | ) |
| Project K and cost reduction activities (pre-tax) | | (0.75 | ) | | (0.92 | ) |
| Debt redemption (pre-tax) | | — |
| | (0.43 | ) |
| Venezuela deconsolidation (pre-tax) | | — |
| | (0.20 | ) |
| Venezuela remeasurement (pre-tax) | | — |
| | (0.03 | ) |
| Income tax impact applicable to adjustments, net* | | 0.22 |
| | 0.55 |
|
| Adoption of U.S. Tax Reform | | (0.02 | ) | | — |
|
| Adjusted diluted EPS | | $ | 4.00 |
| | $ | 3.74 |
|
| Foreign currency impact | | (0.02 | ) | | |
| Currency-neutral adjusted diluted EPS | | $ | 4.02 |
| | $ | 3.74 |
|
| Currency-neutral adjusted diluted EPS growth | | 7.5 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 28, 2019 | | | | | | |
| (millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported net sales | | $ | 8,390 |
| | $ | 2,092 |
| | $ | 940 |
| | $ | 2,156 |
| | $ | — |
| | $ | 13,578 |
|
| Foreign currency impact on total business (inc)/dec | | (11 | ) | | (101 | ) | | (33 | ) | | (87 | ) | | — |
| | (231 | ) |
| Currency-neutral net sales | | $ | 8,400 |
| | $ | 2,193 |
| | $ | 973 |
| | $ | 2,243 |
| | $ | — |
| | $ | 13,810 |
|
| Acquisitions | | — |
| | — |
| | — |
| | 271 |
| | — |
| | 271 |
|
| Foreign currency impact on acquisitions (inc)/dec | | — |
| | — |
| | — |
| | 49 |
| | — |
| | 49 |
|
| Organic net sales | | $ | 8,400 |
| | $ | 2,193 |
| | $ | 973 |
| | $ | 1,922 |
| | $ | — |
| | $ | 13,489 |
|
| | | | | | | | | | | | | |
| Year ended December 29, 2018 | | | | | | |
| (millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported net sales | | $ | 8,688 |
| | $ | 2,122 |
| | $ | 947 |
| | $ | 1,790 |
| | $ | — |
| | $ | 13,547 |
|
| Divestitures | | 305 |
| | — |
| | 4 |
| | — |
| | — |
| | 308 |
|
| Organic net sales | | $ | 8,383 |
| | $ | 2,122 |
| | $ | 943 |
| | $ | 1,790 |
| | $ | — |
| | $ | 13,239 |
|
| | | | | | | | | | | | | |
| % change - 2019 vs. 2018: | | | | | | | | | | | | |
| Reported growth | | (3.4 | )% | | (1.4 | )% | | (0.7 | )% | | 20.4 | % | | — | % | | 0.2 | % |
| Foreign currency impact on total business (inc)/dec | | (0.1 | )% | | (4.7 | )% | | (3.5 | )% | | (4.9 | )% | | — | % | | (1.7 | )% |
| Currency-neutral growth | | (3.3 | )% | | 3.3 | % | | 2.8 | % | | 25.3 | % | | — | % | | 1.9 | % |
| Acquisitions | | — | % | | — | % | | — | % | | 15.2 | % | | — | % | | 2.0 | % |
| Divestitures | | (3.5 | )% | | — | % | | (0.4 | )% | | — | % | | — | % | | (2.4 | )% |
| Foreign currency impact on acquisitions/divestitures (inc)/dec | | — | % | | — | % | | — | % | | 2.7 | % | | — | % | | 0.4 | % |
| Organic growth | | 0.2 | % | | 3.3 | % | | 3.2 | % | | 7.4 | % | | — | % | | 1.9 | % |
| Volume (tonnage) | | (1.8 | )% | | 1.7 | % | | — | % | | 2.2 | % | | | | (0.2 | )% |
| Pricing/mix | | 2.0 | % | | 1.6 | % | | 3.2 | % | | 5.2 | % | | | | 2.1 | % |
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 28, 2019 | | | | | | | | | | | |
| (millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate* | | Kellogg Consolidated |
| Reported operating profit | | $ | 1,215 |
| | $ | 223 |
| | $ | 85 |
| | $ | 195 |
| | $ | (316 | ) | | $ | 1,401 |
|
| Mark-to-market | | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
| Project K | | (29 | ) | | (3 | ) | | (15 | ) | | (4 | ) | | (4 | ) | | (54 | ) |
| Brexit impacts | | — |
| | (9 | ) | | — |
| | — |
| | — |
| | (9 | ) |
| Business and portfolio realignment | | (58 | ) | | (46 | ) | | (4 | ) | | (12 | ) | | (42 | ) | | (161 | ) |
| Multi-employer pension plan exit liability | | (132 | ) | | — |
| | — |
| | — |
| | — |
| | (132 | ) |
| Adjusted operating profit | | $ | 1,434 |
| | $ | 280 |
| | $ | 104 |
| | $ | 211 |
| | $ | (264 | ) | | $ | 1,764 |
|
| Foreign currency impact | | (1 | ) | | (13 | ) | | (1 | ) | | (8 | ) | | — |
| | (23 | ) |
| Currency-neutral adjusted operating profit | | $ | 1,434 |
| | $ | 293 |
| | $ | 105 |
| | $ | 219 |
| | $ | (264 | ) | | $ | 1,788 |
|
| | | | | | | | | | | | | |
| Year ended December 29, 2018 | | | | | | | | | | | |
| (millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate* | | Kellogg Consolidated |
| Reported operating profit | | $ | 1,397 |
| | $ | 251 |
| | $ | 102 |
| | $ | 174 |
| | $ | (218 | ) | | $ | 1,706 |
|
| Mark-to-market | | — |
| | — |
| | — |
| | — |
| | 7 |
| | 7 |
|
| Project K | | (107 | ) | | (26 | ) | | (15 | ) | | (18 | ) | | (7 | ) | | (173 | ) |
| Brexit impacts | | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Business and portfolio realignment | | (3 | ) | | — |
| | — |
| | — |
| | (2 | ) | | (5 | ) |
| Adjusted operating profit | | $ | 1,507 |
| | $ | 280 |
| | $ | 117 |
| | $ | 192 |
| | $ | (216 | ) | | $ | 1,880 |
|
| | | | | | | | | | | | | |
| % change - 2019 vs. 2018: | | | | | | | | | | | |
| Reported growth | | (13.0 | )% | | (11.2 | )% | | (16.8 | )% | | 11.9 | % | | (44.6 | )% | | (17.8 | )% |
| Mark-to-market | | — | % | | — | % | | — | % | | — | % | | (7.7 | )% | | (0.7 | )% |
| Project K | | 4.3 | % | | 7.5 | % | | (2.7 | )% | | 8.6 | % | | 2.6 | % | | 4.8 | % |
| Brexit impacts | | — | % | | (2.4 | )% | | — | % | | 0.2 | % | | — | % | | (0.4 | )% |
| Business and portfolio realignment | | (3.6 | )% | | (16.4 | )% | | (3.0 | )% | | (6.3 | )% | | (18.1 | )% | | (8.3 | )% |
| Multi-employer pension plan exit liability | | (8.8 | )% | | — | % | | — | % | | — | % | | — | % | | (7.1 | )% |
| Adjusted growth | | (4.9 | )% | | 0.1 | % | | (11.1 | )% | | 9.4 | % | | (21.4 | )% | | (6.1 | )% |
| Foreign currency impact | | — | % | | (4.5 | )% | | (1.2 | )% | | (4.4 | )% | | 0.1 | % | | (1.2 | )% |
| Currency-neutral adjusted growth | | (4.9 | )% | | 4.6 | % | | (9.9 | )% | | 13.8 | % | | (21.5 | )% | | (4.9 | )% |
Note: Tables may not foot due to rounding.
* RepresentsCorporate in 2019 includes the estimated income tax effectcost of certain global research and development activities that were previously included in the North America reportable segment in 2018 that totaled approximately $48 million.
For more information on the reconciling items using weighted-average statutory tax rates, depending uponin the applicable jurisdiction.table above, please refer to the Significant items impacting comparability section.
North America
Reported net sales decreased 3.4% versus the prior year due primarily to the absence of results from the businesses divested in July partially offset by favorable price/mix. Organic net sales increased 0.2% after excluding the impact of the divestiture and foreign currency.
|
| | | | | | | | | | |
| Net sales % change - 2019 vs. 2018: | | | |
| North America | Reported Net Sales | Foreign Currency | Currency-Neutral Net Sales | Divestitures | Organic Net Sales |
| Snacks | (4.1 | )% | (0.1 | )% | (4.0 | )% | (7.1 | )% | 3.1 | % |
| Cereal | (4.1 | )% | (0.2 | )% | (3.9 | )% | — | % | (3.9 | )% |
| Frozen | 1.6 | % | (0.1 | )% | 1.7 | % | — | % | 1.7 | % |
North America snacks reported net sales decreased 4.1% due primarily to the divestitures. Organic net sales increased 3.1% from the prior year due primarily to sustained momentum and innovations in key brands, including Cheez-It, Rice Krispies Treats, Pringles and Pop-Tarts partially offset by the first quarter supplier-related recall of RXBAR.
North America cereal reported net sales declined by 4.1% largely due to reduced advertising and promotional activity during two waves of pack-size harmonization during the first half of the year as well as softness in Special K and Mini-Wheats.
North America frozen foods reported net sales increased by 1.6%, lapping strong year-ago growth and negative impact of phasing out certain SKU’s. More than offsetting these factors was accelerated growth in MorningStar Farms as net sales, consumption, and share grew during the year on innovation and strong commercial programs.
North America reported operating profit decreased 13% due primarily to higher business and portfolio realignment charges, the multi-employer pension plan exit liability and the absence of results from the businesses divested in July partially offset by lower Project K costs. Currency-neutral adjusted operating profit declined 4.9% as growth in the base business was more than offset by the impact of the divestiture. Additionally, North America operating profit benefited from the transfer of certain global research and development activities from North America to Corporate at the beginning of 2019.
Europe
Reported net sales decreased 1.4% due to unfavorable foreign currency partially offset by higher volume and favorable pricing/mix. Organic net sales increased 3.3% after excluding the impact of foreign currency.
Growth was driven by snacks, led by Pringles, with increased net sales and consumption in key markets behind innovation, effective brand-building, and new pack formats.
Cereal net sales decreased slightly, moderating from recent years' declines. Our share was relatively flat across the region.
As reported operating profit decreased 11% due primarily to higher one-time costs and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 4.6% after excluding the impact of foreign currency and one-time costs.
Latin America
Reported net sales decreased 0.7% due to unfavorable foreign currency and the impact of the divestiture, partially offset by favorable pricing/mix. Organic net sales increased 3.2% after excluding the impact of the divestiture and foreign currency, led by growth in Mexico and Brazil.
Cereal net sales growth in Mexico for the year, despite lapping strong prior year comparisons. Cereal net sales in Brazil also increased despite category softness.
Snacks net sales growth was led by Pringles, led by increased net sales and consumption growth in Mexico for the year.
Reported operating profit decreased 17% due primarily to higher input costs and investments as well as higher one-time costs and unfavorable foreign currency. Currency-neutral adjusted operating profit decreased 10% after excluding the impact of foreign currency and one-time costs.
Net
AMEA
Reported net sales improved 20% primarily due to a full year of Multipro results, Pringles growth across the region, and favorable pricing/mix, partially offset by unfavorable foreign currency. Organic net sales increased 7.4% after excluding the acquisition impact of Multipro and foreign currency.
Multipro posted double-digit reported net sales growth during the year and contributed to organic growth beginning in May, lapping last year's consolidation of the business.
Snacks posted solid growth led by sustained momentum in Pringles, which grew net sales and consumption collectively across the region.
Reported operating profit increased 12% due to a full year of Multipro results, higher organic net sales, and the reversal of indirect excise tax liabilities largely the result of participating in a tax amnesty program, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit improved 14% after excluding the impact of foreign currency, Project K, and business and portfolio realignment.
Corporate
Reported operating profit decreased $98 million versus the prior year due primarily to higher business and portfolio realignment costs, unfavorable mark-to-market impacts, and the transfer of certain global research and development activities from North America to Corporate at the beginning of 2019. These impacts were partially offset by lower Project K costs. Currency-neutral adjusted operating profit decreased $48 million after excluding the impact of mark-to-market, Project K, and business and portfolio realignment costs.
2018 compared to 2017
The following tables provide an analysis of net sales and operating profit performance for 2018 versus 2017:
| | | Year ended December 29, 2018 | Year ended December 29, 2018 | | | | | | | | | | | | | Year ended December 29, 2018 | | | | | | |
| (millions) | | U.S. Snacks | | U.S. Morning Foods | | U.S. Specialty Channels | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported net sales | | $ | 2,957 |
| | $ | 2,643 |
| | $ | 1,235 |
| | $ | 1,853 |
| | $ | 2,395 |
| | $ | 947 |
| | $ | 1,517 |
| | $ | — |
| | $ | 13,547 |
| | $ | 8,688 |
| | $ | 2,122 |
| | $ | 947 |
| | $ | 1,790 |
| | $ | — |
| | $ | 13,547 |
|
| Foreign currency impact on total business (inc)/dec | | — |
| | — |
| | — |
| | (3 | ) | | 46 |
| | (47 | ) | | (102 | ) | | — |
| | (106 | ) | | (3 | ) | | 46 |
| | (47 | ) | | (102 | ) | | — |
| | (106 | ) |
| Currency-neutral net sales | | $ | 2,957 |
| | $ | 2,643 |
| | $ | 1,235 |
| | $ | 1,856 |
| | $ | 2,349 |
| | $ | 994 |
| | $ | 1,619 |
| | $ | — |
| | $ | 13,653 |
| | $ | 8,691 |
| | $ | 2,076 |
| | $ | 994 |
| | $ | 1,892 |
| | $ | — |
| | $ | 13,653 |
|
| Acquisitions | | — |
| | — |
| | — |
| | 186 |
| | — |
| | — |
| | 536 |
| | — |
| | 722 |
| | 186 |
| | — |
| | — |
| | 536 |
| | — |
| | 722 |
|
| Foreign currency impact on acquisitions (inc)/dec | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 89 |
| | — |
| | 89 |
| | — |
| | — |
| | — |
| | 89 |
| | — |
| | 89 |
|
| Organic net sales | | $ | 2,957 |
| | $ | 2,643 |
| | $ | 1,235 |
| | $ | 1,670 |
| | $ | 2,349 |
| | $ | 994 |
| | $ | 994 |
| | $ | — |
| | $ | 12,842 |
| | $ | 8,505 |
| | $ | 2,076 |
| | $ | 994 |
| | $ | 1,267 |
| | $ | — |
| | $ | 12,842 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 30, 2017 | Year ended December 30, 2017 | | | | | | | | | | | | | Year ended December 30, 2017 | | | | | | |
| (millions) | | U.S.
Snacks | | U.S.
Morning
Foods | | U.S. Specialty Channels | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported net sales | | $ | 3,110 |
| | $ | 2,709 |
| | $ | 1,242 |
| | $ | 1,612 |
| | $ | 2,291 |
| | $ | 944 |
| | $ | 946 |
| | $ | — |
| | $ | 12,854 |
| | $ | 8,673 |
| | $ | 2,050 |
| | $ | 944 |
| | $ | 1,187 |
| | $ | — |
| | $ | 12,854 |
|
| Shipping day differences | | — |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | — |
| | 14 |
| | — |
| | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Organic net sales | | $ | 3,110 |
| | $ | 2,709 |
| | $ | 1,242 |
| | $ | 1,612 |
| | $ | 2,291 |
| | $ | 930 |
| | $ | 946 |
| | $ | — |
| | $ | 12,840 |
| | $ | 8,673 |
| | $ | 2,050 |
| | $ | 930 |
| | $ | 1,187 |
| | $ | — |
| | $ | 12,840 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % change - 2018 vs. 2017: | % change - 2018 vs. 2017: | | | | | | | | | | | | | | | % change - 2018 vs. 2017: | | | | | | | | |
| Reported growth | | (4.9 | )% | | (2.4 | )% | | (0.6 | )% | | 15.0 | % | | 4.5 | % | | 0.3 | % | | 60.4 | % | | — | % | | 5.4 | % | | 0.2 | % | | 3.5 | % | | 0.3 | % | | 50.8 | % | | — | % | | 5.4 | % |
| Foreign currency impact | | — | % | | — | % | | — | % | | (0.2 | )% | | 1.9 | % | | (5.0 | )% | | (10.7 | )% | | — | % | | (0.8 | )% | | — | % | | 2.2 | % | | (5.0 | )% | | (8.6 | )% | | — | % | | (0.8 | )% |
| Currency-neutral growth | | (4.9 | )% | | (2.4 | )% | | (0.6 | )% | | 15.2 | % | | 2.6 | % | | 5.3 | % | | 71.1 | % | | — | % | | 6.2 | % | | 0.2 | % | | 1.3 | % | | 5.3 | % | | 59.4 | % | | — | % | | 6.2 | % |
| Acquisitions | | — | % | | — | % | | — | % | | 11.5 | % | | — | % | | — | % | | 56.6 | % | | — | % | | 5.6 | % | | 2.1 | % | | — | % | | — | % | | 45.2 | % | | — | % | | 5.6 | % |
| Shipping day differences | | — | % | | — | % | | — | % | | — | % | | — | % | | (1.6 | )% | | — | % | | — | % | | (0.1 | )% | | — | % | | — | % | | (1.6 | )% | | — | % | | — | % | | (0.1 | )% |
| Foreign currency impact on acquisitions (inc)/dec | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 9.5 | % | | — | % | | 0.7 | % | | — | % | | — | % | | — | % | | 7.5 | % | | — | % | | 0.7 | % |
| Organic growth | | (4.9 | )% | | (2.4 | )% | | (0.6 | )% | | 3.7 | % | | 2.6 | % | | 6.9 | % | | 5.0 | % | | — | % | | — | % | | (1.9 | )% | | 1.3 | % | | 6.9 | % | | 6.7 | % | | — | % | | — | % |
| Volume (tonnage) | | | (0.2 | )% | | 1.9 | % | | 6.6 | % | | 9.3 | % | | — | % | | 1.9 | % |
| Pricing/mix | | | (1.7 | )% | | (0.6 | )% | | 0.3 | % | | (2.6 | )% | | — | % | | (1.9 | )% |
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
| | | Year ended December 29, 2018 | Year ended December 29, 2018 | | | | | | | | | | | | | Year ended December 29, 2018 | | | | | | | | | | | |
| (millions) | | U.S. Snacks | | U.S. Morning Foods | | U.S. Specialty Channels | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported operating profit | | $ | 446 |
| | $ | 478 |
| | $ | 251 |
| | $ | 222 |
| | $ | 297 |
| | $ | 102 |
| | $ | 128 |
| | $ | (218 | ) | | $ | 1,706 |
| | $ | 1,397 |
| | $ | 251 |
| | $ | 102 |
| | $ | 174 |
| | $ | (218 | ) | | $ | 1,706 |
|
| Mark-to-market | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | 7 |
|
| Project K and cost reduction activities | | (28 | ) | | (50 | ) | | (4 | ) | | (25 | ) | | (33 | ) | | (15 | ) | | (11 | ) | | (7 | ) | | (173 | ) | |
| Project K | | | (107 | ) | | (26 | ) | | (15 | ) | | (18 | ) | | (7 | ) | | (173 | ) |
| Brexit impacts | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Business and portfolio realignment | | (3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (5 | ) | | (3 | ) | | — |
| | — |
| | — |
| | (2 | ) | | (5 | ) |
| Adjusted operating profit | | $ | 477 |
| | $ | 528 |
| | $ | 255 |
| | $ | 247 |
| | $ | 333 |
| | $ | 117 |
| | $ | 139 |
| | $ | (216 | ) | | $ | 1,880 |
| | $ | 1,507 |
| | $ | 280 |
| | $ | 117 |
| | $ | 192 |
| | $ | (216 | ) | | $ | 1,880 |
|
| Foreign currency impact | | — |
| | — |
| | — |
| | (2 | ) | | 6 |
| | (3 | ) | | (7 | ) | | 3 |
| | (3 | ) | | (2 | ) | | 6 |
| | (3 | ) | | (7 | ) | | 3 |
| | (3 | ) |
| Currency-neutral adjusted operating profit | | $ | 477 |
| | $ | 528 |
| | $ | 255 |
| | $ | 249 |
| | $ | 327 |
| | $ | 120 |
| | $ | 146 |
| | $ | (219 | ) | | $ | 1,883 |
| | $ | 1,509 |
| | $ | 274 |
| | $ | 120 |
| | $ | 199 |
| | $ | (219 | ) | | $ | 1,883 |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Year ended December 30, 2017 | Year ended December 30, 2017 | | | | | | | | | | | |
| Year ended December 30, 2017 | | | | | | | | | | | |
| (millions) | | U.S.
Snacks | | U.S.
Morning
Foods | | U.S. Specialty Channels | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg
Consolidated | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg
Consolidated |
| Reported operating profit | | $ | 138 |
| | $ | 567 |
| | $ | 312 |
| | $ | 229 |
| | $ | 276 |
| | $ | 108 |
| | $ | 84 |
| | $ | (327 | ) | | $ | 1,387 |
| | $ | 1,246 |
| | $ | 220 |
| | $ | 108 |
| | $ | 140 |
| | $ | (327 | ) | | $ | 1,387 |
|
| Mark-to-market | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (81 | ) | | (81 | ) | | — |
| | — |
| | — |
| | — |
| | (81 | ) | | (81 | ) |
| Project K and cost reduction activities | | (309 | ) | | (18 | ) | | (2 | ) | | (16 | ) | | (40 | ) | | (8 | ) | | (11 | ) | | (7 | ) | | (411 | ) | |
| Project K | | | (345 | ) | | (37 | ) | | (8 | ) | | (14 | ) | | (7 | ) | | (411 | ) |
| Adjusted operating profit | | $ | 447 |
| | $ | 585 |
| | $ | 314 |
| | $ | 245 |
| | $ | 316 |
| | $ | 116 |
| | $ | 95 |
| | $ | (239 | ) | | $ | 1,879 |
| | $ | 1,591 |
| | $ | 257 |
| | $ | 116 |
| | $ | 154 |
| | $ | (239 | ) | | $ | 1,879 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % change - 2018 vs. 2017: | % change - 2018 vs. 2017: | | | | | | | | | | | | | | | % change - 2018 vs. 2017: | | | | | | | | | | | |
| Reported growth | | 224.4 | % | | (15.7 | )% | | (19.8 | )% | | (3.0 | )% | | 7.8 | % | | (5.2 | )% | | 50.7 | % | | 33.1 | % | | 22.9 | % | | 12.1 | % | | 14.6 | % | | (5.2 | )% | | 23.0 | % | | 33.1 | % | | 22.9 | % |
| Mark-to-market | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 25.2 | % | | 7.3 | % | | — | % | | — | % | | — | % | | — | % | | 25.2 | % | | 7.3 | % |
| Project K and cost reduction activities | | 218.3 | % | | (6.0 | )% | | (0.7 | )% | | (3.9 | )% | | 3.1 | % | | (5.6 | )% | | 6.1 | % | | (0.5 | )% | | 16.1 | % | |
| Project K | | | 17.6 | % | | 6.4 | % | | (5.6 | )% | | (0.7 | )% | | (0.5 | )% | | 16.1 | % |
| Brexit impacts | | — | % | | — | % | | — | % | | — | % | | (0.9 | )% | | — | % | | — | % | | — | % | | (0.2 | )% | | — | % | | (1.0 | )% | | — | % | | — | % | | — | % | | (0.2 | )% |
| Business and portfolio realignment | | (0.8 | )% | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | (0.8 | )% | | (0.3 | )% | | (0.2 | )% | | — | % | | — | % | | — | % | | (0.8 | )% | | (0.3 | )% |
| Adjusted growth | | 6.9 | % | | (9.7 | )% | | (19.1 | )% | | 0.9 | % | | 5.6 | % | | 0.4 | % | | 44.6 | % | | 9.2 | % | | — | % | | (5.3 | )% | | 9.2 | % | | 0.4 | % | | 23.7 | % | | 9.2 | % | | — | % |
| Foreign currency impact | | — | % | | — | % | | — | % | | (0.4 | )% | | 1.9 | % | | (2.8 | )% | | (7.2 | )% | | 0.6 | % | | (0.1 | )% | | (0.1 | )% | | 2.3 | % | | (2.8 | )% | | (4.6 | )% | | 0.6 | % | | (0.1 | )% |
| Currency-neutral adjusted growth | | 6.9 | % | | (9.7 | )% | | (19.1 | )% | | 1.3 | % | | 3.7 | % | | 3.2 | % | | 51.8 | % | | 8.6 | % | | 0.1 | % | | (5.2 | )% | | 6.9 | % | | 3.2 | % | | 28.3 | % | | 8.6 | % | | 0.1 | % |
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
U.S. SnacksNorth America
This segment consists primarily of crackers, cookies, savory snacks, wholesome snacks and fruit-flavored snacks.
Reported net sales declined 4.9%increased 0.2% primarily due to the RX acquisition partially offset by unfavorable price/mix as a result of the year-on-year impact of list-price adjustments and rationalization of stock-keeping units related to the DSD exittransition out of Direct-Store Delivery (DSD) in the back half of 2017, and a slight decrease in volume. These impacts were partially offset by improved performance of key brands like Cheez-it, Pringles, and Rice Krispies Treats, all of which grew consumption and share during the year.
All of our ex-DSD categories experienced year-over-year gains in velocity, as we now have a stronger set of SKUs on the shelf which are being supported with brand building.
Overall, the cookie category was flat compared to the prior year. We lost both consumption and share on lower volume. However, Keebler Fudge Shoppe, Keebler Grahams, Mother's and Famous Amos grew both consumption and share during the year behind resumed investment support.
Reported operating profit increased significantlyOrganic net sales decreased 1.9% from the prior year due primarily to lower restructuring charges as the prior year included costs associated with our DSD transition. Currency-neutral adjusted operating profit increased 6.9% after excluding the impact of restructuring chargesacquisitions and foreign currency.
|
| | | | | | | | | | |
| Net sales % change - 2018 vs. 2017: | | | |
| North America | Reported Net Sales | Foreign Currency | Currency-Neutral Net Sales | Acquisitions | Organic Net Sales |
| Snacks | 0.4 | % | — | % | 0.4 | % | 3.7 | % | (3.3 | )% |
| Cereal | (2.7 | )% | (0.1 | )% | (2.6 | )% | — | % | (2.6 | )% |
| Frozen | 7.4 | % | (0.1 | )% | 7.5 | % | — | % | 7.5 | % |
North America snacks reported net sales increased 0.4% due to lower overhead expensethe RX acquisition partially offset by unfavorable price/mix as a result of our transition outthe year-on-year impact of DSD in mid-2017.list-price adjustments and rationalization of stock-keeping units
U.S. Morning Foods
This segment consists primarilyrelated to the DSD exit in the back half of 2017. Organic net sales decreased 3.3% from the prior year after excluding the impact of acquisitions.
North America cereal and toaster pastries. Reportedreported net sales declined 2.4% as a result of decreased volume and unfavorable pricing/mix.
Cereal net sales were downby 2.7% on lower volume and unfavorable pricing/mix as consumption and share were impacted by category-wide softness and the mid-year supply chain disruption for Honey Smacks, which returned to shelves in the fourth quarter, but offset improving performance elsewhere in the portfolio. Cereal share excluding Honey Smacks was roughly flat compared to the prior year as we continued to make progress toward stabilizing key health and wellness brands by emphasizing their wellness attributes and our Core 6 cereal brands collectively grew share during 2018.
Additionally, Pop-Tarts posted a slight increase in net sales on higher volume while returning to consumption growth in the second half of the year.
Reported operating profit decreased 16% due to higher restructuring charges, lower net sales and adverse mix and costs related to launching new pack formats. Currency-neutral adjusted operating profit decreased 9.7% after eliminating the impact of restructuring charges.
U.S. Specialty Channels
This segment sells the full line of Kellogg products to channels such as food service, convenience stores, vending and others.
Reported net sales declined 0.6% as a result of lower volume and unfavorable pricing/mix as it lapped hurricane-related shipments in the back-half of 2017. The hurricane impact was mainly in the food service channel, offsetting growth in the segment's other major channels.
Reported operating profit decreased 20% due to revised allocation of costs between U.S. operating segments. Currency-neutral adjusted operating profit decreased 19% after excluding the impact of restructuring charges.
North America Other
This segment is composed of our U.S. Frozen Foods, Kashi Company, Canada, and RX businesses.
Reportedfrozen foods reported net sales increased 15% due primarily to the RXBAR acquisition and growth in U.S. Frozen and Canada. Organic net sales increased 3.7% on higher volume and favorable pricing/mix after excluding the impact of the RX acquisition and foreign currency.
U.S. Frozen net sales for the year grewby 7.4% on higher volume and favorable price/mix. Eggo® grew share and consumption during the year, benefiting from renovated food and packaging, including the relaunch of our premium Thick N' Fluffy line as well as continued success with Disney-shaped waffles. Morningstar Farms' consumption accelerated in 2018, as we refocused on our core offerings, renovating our food for cleaner labeling and honing our message around plant-based protein.
In Canada we posted sales growth on favorable pricing/mix offset by slightly lower volume as we gained share in most of our categories.
Kashi Company reported slightly lower net sales on lower volume partially offset by favorable pricing/mix. Kashi cereals increased both consumption and share during 2018 as a result of strong innovation and effective messaging. Innovations like Kashi by kids and new offerings under the GoLean line are gaining traction, and the business benefited from the continued success of our Bear Naked brand which grew consumption during the year. The improvements in cereal were offset by lower consumption and share in wholesome snacks during 2018.
Reported operating profit decreased 3.0%increased 12% from the prior year primarily due to higherlower restructuring charges andas the prior year included costs associated with our DSD transition partially offset by a double-digit increase in brand building. These impacts were partially offset by higher net sales and Project K savings. Currency-neutral adjusted operating profit increased 1.3%decreased 5.2% after excluding the impact of restructuring and foreign currency.charges.
Europe
Reported net sales increased 4.5%3.5% due primarily to higher volume and favorable foreign currency partially offset by unfavorable pricing/mix. Organic net sales increased 2.6%1.3% after excluding the impact of foreign currency.
The return to organic net sales growth in 2018 was led by broad-based growth in Pringles, and by expansion in emerging markets like Russia and the Middle East.Russia.
In Pringles, we ran a successful campaign during the World Cup in the summer and sustained the brand with new pack formats and effective media. The brand grew share in seven of our eight major markets.
Cereal net sales declines moderated during 2018 due to improving share performance in markets across the region. Most notably, we grew share in both the U.K. and France, continuing its improving trend with growth in several brands.
Emerging markets were a driver of Europe's growth in both cereal and snacks, led by Northern Africa, Russia, and the Middle East.
Reported operating profit increased 7.8%14.6% due to higher net sales, lower restructuring charges, and favorable foreign currency. Currency-neutral adjusted operating profit increased 3.7%6.9% after excluding the impact of restructuring charges and foreign currency.
Latin America
Reported net sales increased 0.3% due to higher volume partially offset by shipping day differences, unfavorable pricing/mix and unfavorable foreign currency. Organic net sales increased 6.9%, led by Mexico and Mercosur markets, after excluding the impact of foreign currency and shipping days.
Mexico posted net sales growth during the year on higher volume and favorable pricing/mix, growing consumption and share in cereal. Across the region, our cereal sales grew at a mid-single digit rate in 2018.
Our snacks business posted growth, leadled by Pringles in Mexico and Caribbean/Central America.
Parati net sales grew on higher volume and favorable pricing/mix, and continued to grow consumption and share in Brazil, despite the trucker strike and volatile political environment.
Reported operating profit decreased 5.2%, primarily due to higher restructuring charges and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 3.2% after excluding the impact of restructuring and foreign currency.
Asia PacificAMEA
Reported net sales increased 60%51% due primarily to the consolidation of the Multipro business partially offset by unfavorable foreign currency. Organic net sales increased 5.0%6.7% on higher volume and slightly favorable pricing/mix after excluding Multipro results and the impact of foreign currency.
Organic growth was led by cereal, whose broad-based growth accelerated in 2018. Our cereal business held share in the stabilized Australia market, gained share in markets like Japan and Korea, and continued to generate double-digit growth in emerging markets like India and Southeast Asia.
Our Pringles business posted high single-digit growth for the year as we continue to expand product offerings in certain markets while launching new pack-formats in others, extending the brand's distribution reach.
Reported operating profit increased 51%23% due primarily to the consolidation of the Multipro business beginning in May of 2018, as well as productivity and brand buildingbrand-building efficiencies as a result of Project K, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit improved 52%28% after excluding the impact of restructuring and foreign currency.
Corporate
ReportedAs reported operating expense improved 33% due primarily to favorable year-over-year mark-to-market impacts. Currency-neutral adjusted operating profit improvedincreased 8.6% due primarily to lower pension costs, after excluding the impact of mark-to-market, restructuring foreign currency and business and portfolio realignment activities.
2017 compared to 2016
The following tables provide an analysis of net sales and operating profit performance for 2017 versus 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 30, 2017 | | | | | | | | | | | | |
| (millions) | | U.S. Snacks | | U.S. Morning Foods | | U.S. Specialty Channels | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated |
| Reported net sales | | $ | 3,110 |
| | $ | 2,709 |
| | $ | 1,242 |
| | $ | 1,612 |
| | $ | 2,291 |
| | $ | 944 |
| | $ | 946 |
| | $ | — |
| | $ | 12,854 |
|
| Foreign currency impact on total business (inc)/dec | | — |
| | — |
| | — |
| | 12 |
| | (18 | ) | | 17 |
| | 25 |
| | — |
| | 36 |
|
| Currency-neutral net sales | | $ | 3,110 |
| | $ | 2,709 |
| | $ | 1,242 |
| | $ | 1,600 |
| | $ | 2,309 |
| | $ | 927 |
| | $ | 921 |
| | $ | — |
| | $ | 12,818 |
|
| Acquisitions | | — |
| | — |
| | — |
| | 28 |
| | 11 |
| | 203 |
| | — |
| | — |
| | 242 |
|
| Shipping day differences | | — |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
| Foreign currency impact on acquisitions (inc)/dec | | — |
| | — |
| | — |
| | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
| Organic net sales | | $ | 3,110 |
| | $ | 2,709 |
| | $ | 1,242 |
| | $ | 1,572 |
| | $ | 2,298 |
| | $ | 723 |
| | $ | 921 |
| | $ | — |
| | $ | 12,575 |
|
| | | | | | | | | | | | | | | | | | |
|
| Year ended December 31, 2016 | | | | | | | | | | | |
|
| (millions) | | U.S.
Snacks | | U.S.
Morning
Foods | | U.S. Specialty Channels | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg
Consolidated |
| Reported net sales | | $ | 3,197 |
| | $ | 2,917 |
| | $ | 1,207 |
| | $ | 1,593 |
| | $ | 2,383 |
| | $ | 772 |
| | $ | 896 |
| | $ | — |
| | $ | 12,965 |
|
| Venezuela operations impact | | — |
| | — |
| | — |
| | — |
| | — |
| | 31 |
| | — |
| | — |
| | 31 |
|
| Organic net sales | | $ | 3,197 |
| | $ | 2,917 |
| | $ | 1,207 |
| | $ | 1,593 |
| | $ | 2,383 |
| | $ | 741 |
| | $ | 896 |
| | $ | — |
| | $ | 12,934 |
|
| | |
| |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| % change - 2017 vs. 2016: | | | | | | | | | | | | | | |
| Reported growth | | (2.8 | )% | | (7.1 | )% | | 2.9 | % | | 1.2 | % | | (3.9 | )% | | 22.2 | % | | 5.6 | % | | — | % | | (0.9 | )% |
| Foreign currency impact on total business (inc)/dec | | — | % | | — | % | | — | % | | 0.8 | % | | (0.8 | )% | | 2.1 | % | | 2.8 | % | | — | % | | 0.2 | % |
| Currency-neutral growth | | (2.8 | )% | | (7.1 | )% | | 2.9 | % | | 0.4 | % | | (3.1 | )% | | 20.1 | % | | 2.8 | % | | — | % | | (1.1 | )% |
| Acquisitions | | — | % | | — | % | | — | % | | 1.8 | % | | 0.5 | % | | 26.2 | % | | — | % | | — | % | | 1.9 | % |
| Venezuela operations impact | | — | % | | — | % | | — | % | | — | % | | — | % | | (3.9 | )% | | — | % | | — | % | | (0.2 | )% |
| Shipping day differences | | — | % | | — | % | | — | % | | — | % | | — | % | | 1.9 | % | | — | % | | — | % | | 0.1 | % |
| Foreign currency impact on acquisitions (inc)/dec | | — | % | | — | % | | — | % | | — | % | | — | % | | (1.8 | )% | | — | % | | — | % | | (0.1 | )% |
| Organic growth | | (2.8 | )% | | (7.1 | )% | | 2.9 | % | | (1.4 | )% | | (3.6 | )% | | (2.3 | )% | | 2.8 | % | | — | % | | (2.8 | )% |
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 30, 2017 | | | | | | | | | | | | |
| (millions) | | U.S. Snacks | | U.S. Morning Foods | | U.S. Specialty Channels | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated |
| Reported operating profit | | $ | 138 |
| | $ | 567 |
| | $ | 312 |
| | $ | 229 |
| | $ | 276 |
| | $ | 108 |
| | $ | 84 |
| | $ | (327 | ) | | $ | 1,387 |
|
| Mark-to-market | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (81 | ) | | (81 | ) |
| Project K and cost reduction activities | | (309 | ) | | (18 | ) | | (2 | ) | | (16 | ) | | (40 | ) | | (8 | ) | | (11 | ) | | (7 | ) | | (411 | ) |
| Adjusted operating profit | | $ | 447 |
| | $ | 585 |
| | $ | 314 |
| | $ | 245 |
| | $ | 316 |
| | $ | 116 |
| | $ | 95 |
| | $ | (239 | ) | | $ | 1,879 |
|
| Foreign currency impact | | — |
| | — |
| | — |
| | 1 |
| | (6 | ) | | — |
| | 2 |
| | 2 |
| | (1 | ) |
| Currency-neutral adjusted operating profit | | $ | 447 |
| | $ | 585 |
| | $ | 314 |
| | $ | 244 |
| | $ | 322 |
| | $ | 116 |
| | $ | 93 |
| | $ | (241 | ) | | $ | 1,880 |
|
| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2016 | | | | | | | | | | | | |
| (millions) | | U.S.
Snacks | | U.S.
Morning
Foods | | U.S. Specialty Channels | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated |
| Reported operating profit | | $ | 325 |
| | $ | 597 |
| | $ | 279 |
| | $ | 181 |
| | $ | 208 |
| | $ | 84 |
| | $ | 69 |
| | $ | (260 | ) | | $ | 1,483 |
|
| Mark-to-market | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 43 |
| | 43 |
|
| Project K and cost reduction activities | | (76 | ) | | (23 | ) | | (8 | ) | | (38 | ) | | (126 | ) | | (8 | ) | | (7 | ) | | (38 | ) | | (324 | ) |
| Venezuela remeasurement | | — |
| | — |
| | — |
| | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
| Adjusted operating profit | | $ | 401 |
| | $ | 620 |
| | $ | 287 |
| | $ | 219 |
| | $ | 334 |
| | $ | 105 |
| | $ | 76 |
| | $ | (265 | ) | | $ | 1,777 |
|
| | | | | | | | | | | | | | | | | | | |
| % change - 2017 vs. 2016: | | | | | | | | | | | | | | |
| Reported growth | | (57.7 | )% | | (5.0 | )% | | 12.0 | % | | 26.3 | % | | 32.0 | % | | 28.2 | % | | 22.9 | % | | (25.2 | )% | | (6.4 | )% |
| Mark-to-market | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | (44.4 | )% | | (8.4 | )% |
| Project K and cost reduction activities | | (69.1 | )% | | 0.6 | % | | 2.5 | % | | 14.3 | % | | 37.8 | % | | 2.5 | % | | (3.3 | )% | | 9.1 | % | | (4.6 | )% |
| Venezuela remeasurement | | — | % | | — | % | | — | % | | — | % | | — | % | | 15.3 | % | | — | % | | — | % | | 0.8 | % |
| Adjusted growth | | 11.4 | % | | (5.6 | )% | | 9.5 | % | | 12.0 | % | | (5.8 | )% | | 10.4 | % | | 26.2 | % | | 10.1 | % | | 5.8 | % |
| Foreign currency impact | | — | % | | — | % | | — | % | | 0.9 | % | | (2.1 | )% | | (0.1 | )% | | 3.8 | % | | 0.5 | % | | (0.1 | )% |
| Currency-neutral adjusted growth | | 11.4 | % | | (5.6 | )% | | 9.5 | % | | 11.1 | % | | (3.7 | )% | | 10.5 | % | | 22.4 | % | | 9.6 | % | | 5.9 | % |
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
U.S. Snacks
This segment consists primarily of crackers, cookies, savory snacks, wholesome snacks and fruit-flavored snacks.
Reported and Organic net sales declined 2.8% on lower volume and unfavorable price/mix primarily due to impacts related to our conversion from DSD to warehouse distribution; specifically, reduced merchandising during the transition, reduction of SKUs, and a list-price adjustment to eliminate the premium charged for DSD services.
Crackers, Cookies and Wholesome Snacks declined in consumption and share for the year due to the reduction of promotion activity related to our efforts to smoothly transition out of DSD during the second and third quarters. Net sales for these categories also declined as a result of unfavorable pricing/mix due primarily to the list-price adjustment to eliminate the premium formerly charged for DSD services.
Savory snacks consumption was pulled down, in part, by the elimination of a promotion-sized can. Focused marketing investment behind key brands resulted in improved consumption in the second half for Cheez-it and Club crackers, Keebler Fudge Shoppe cookies, and Rice Krispies Treats wholesome snacks.
Reported operating profit declined 58% due to increased Project K restructuring charges associated with our DSD transition. Currency-neutral adjusted operating profit increased 11% after excluding the impact of restructuring charges; this was driven by DSD-related overhead reductions partially offset by increased brand investment.
U.S. Morning Foods
This segment consists primarily of cereal and toaster pastries. Reported and Organic net sales declined 7.1% as a result of decreased volume partially offset by favorable pricing/mix.
Cereal category consumption declined for the year, particularly in the health and wellness segment. Our kid-oriented brands performed well. Frosted Flakes grew consumption and share during the year behind effective media and innovation, including new Cinnamon Frosted Flakes. Special Kreturned to share growth as a result of an effective media campaign and in-store activation.
Toaster pastries net sales declined on lower volume partially offset by slightly favorable pricing/mix. Despite overall weakness in the category, we grew share during the year.
Reported operating profit decreased 5.0% due to lower net sales partially offset by productivity initiatives and lower restructuring charges. Currency-neutral adjusted operating profit decreased 5.6% after eliminating the impact of restructuring charges.
U.S. Specialty Channels
This segment sells the full line of Kellogg products to channels such as food service, vending, convenience stores, and Girl Scouts.
Reported and Organic net sales improved 2.9% as a result of higher volume and improved pricing/mix aided by innovation and expansion in core and emerging growth channels. In addition, the back half of the year benefited from hurricane-related shipments.
Reported operating profit increased 12.0% due to the higher net sales, savings from Project K and ZBB initiatives, and lower restructuring charges. Currency-neutral adjusted operating profit increased 9.5% after excluding the impact of restructuring charges.
North America Other
This segment is composed of our U.S. Frozen Foods, Kashi Company, Canada, and RX businesses.
Reported net sales increased 1.2% due primarily to the RXBAR acquisition, U.S. Frozen growth, and foreign currency. Organic net sales declined 1.4% on lower volume and slightly unfavorable pricing/mix, after excluding the impact of acquisitions and foreign currency.
In U.S. Frozen, Eggo® grew share and consumption during the year, benefiting from the removal of artificial ingredients and the success of Disney-shaped waffles, as well as the exit of a competitor. Our frozen veggie business, under the Morningstar Farms® and Gardenburger® brands, returned to consumption and share growth during the second half of the year, driven by marketing and in-store support focused on core grilling items.
In Canada, consumption and share performance continued to improve in both cereal and in snacks during the back half of the year. Share gains in cereal were the result of effective innovation and commercial programs.
Kashi Company reported net sales and operating profit were lower versus the prior year, as we continued to stabilize the Kashi brand outside of the natural channel. The business benefited from the continued success of our Bear Naked brand, which is the #1 granola brand in the U.S. behind on-trend innovation and expanded distribution. Bear Naked grew both consumption and share for the year.
Reported operating profit increased 26.3% due to lower restructuring charges and by Project K and ZBB savings. Currency-neutral adjusted operating profit increased 11.1% after excluding the impact of restructuring charges and foreign currency.
Europe
Reported net sales declined 3.9% due to lower volume partially offset by the favorable impact of foreign currency, pricing/mix and acquisitions. Organic net sales declined 3.6% after excluding the impact of foreign currency and acquisitions.
Pringles volume was lower due primarily to prolonged negotiations with our customers as we sought to price behind our food and packaging upgrades. These negotiations were resolved by April but caused us to miss out on several first and second quarter merchandising programs. Promotional activity resumed in the third quarter and the brand returned to growth during the back half of the year with a particularly strong fourth quarter.
Cereal sales declined versus the prior year across the region but improved during the second half of the year. In the U.K., our largest market in the region, consumption and share turned positive in the second half of the year as a result of increased advertising behind our core brands, most notably Special K.
Reported operating profit increased 32% due to lower restructuring charges and incremental Project K savings, partially offset by lower sales and unfavorable foreign currency. Currency-neutral adjusted operating profit declined 3.7% after excluding the impact of restructuring charges and foreign currency.
Latin America
Reported net sales improved 22% due to increased volume as a result of the Parati acquisition, favorable pricing/mix, and foreign currency. This was partially offset by lower volume in the Caribbean/Central America business and prior year Venezuela results. Organic net sales declined 2.3% after excluding the impact of the Parati acquisition, prior year Venezuela results, and foreign currency.
This decline was due primarily to the Caribbean/Central America sub-region, where first half distributor transitions and economic softness were followed during the back half of the year by shipment disruptions due to hurricanes Maria and Irma.
We did post solid growth for the year in Mexico and the Mercosur region. Our Mexico business continued to perform well with consumption and sales increasing versus the prior year in both cereal and snacks. Mercosur posted particularly strong growth in Pringles.
The integration of Parati, our acquisition in Brazil, continued to progress well, and the business posted double digit growth for the year.
Reported operating profit increased 28.2%, primarily due to the impact of the Parati acquisition partially offset by lower sales in the Caribbean/Central America business. Currency-neutral adjusted operating profit increased 10.5% after excluding the impact of restructuring costs, integration costs, Venezuela remeasurement, and foreign currency.
Asia Pacific
Reported net sales improved 5.6% due to favorable foreign currency and pricing/mix as well as higher volume. Currency-neutral and Organic net sales increased 2.8%, after excluding the impact of foreign currency.
Growth in cereal was led by India and Korea. Australia, our largest market in the region, gained share during the second half of the year, reflecting continued stabilization. We experienced growth in consumption and share through food news and media behind our health and wellness brands, as well as innovation and brand building behind our taste-oriented brands.
Our Pringles business posted solid growth for the year across the region, driven by emerging markets as well as Australia and Korea. We also realized the benefits from the expansion of our wholesome snacks business in the region.
Reported operating profit increased 23% due to higher net sales and brand-building efficiencies. Currency-neutral adjusted operating profit improved 22% after excluding the impact of restructuring and foreign currency.
Outside of our reported results, our joint ventures in West Africa and China continued to perform extremely well. Double-digit growth was driven by strong noodles volume in West Africa and e-commerce sales in China.
Corporate
As reported operating expense declined 25% due primarily to unfavorable mark-to-market impacts partially offset by lower restructuring charges. Currency-neutral adjusted operating profit increased 9.6%, after excluding the impact of mark-to-market, restructuring and foreign currency.
Margin performance
20182019 versus 20172018 gross margin performance was as follows:
|
| | | | | | |
| | | Change vs. prior year (pts.) |
| 2018 | 2017 | |
| Reported gross margin (a) | 34.9 | % | 36.6 | % | (1.7 | ) |
| Mark-to-market (COGS) | 0.1 | % | (0.6 | )% | 0.7 |
|
| Project K and cost reduction activities (COGS) | (0.8 | )% | (0.9 | )% | 0.1 |
|
| Brexit impacts (COGS) | — | % | — | % | — |
|
| Business and portfolio realignment (COGS) | — | % | — | % | — |
|
| Foreign currency impact | 0.1 | % | — | % | 0.1 |
|
| Currency-neutral adjusted gross margin | 35.5 | % | 38.1 | % | (2.6 | ) |
|
| | | | | | |
| | | Change vs. prior year (pts.) |
| 2019 | 2018 | |
| Reported gross margin (a) | 32.3 | % | 34.9 | % | (2.6 | ) |
| Mark-to-market | — | % | 0.1 | % | (0.1 | ) |
| Project K | (0.3 | )% | (0.8 | )% | 0.5 |
|
| Brexit impacts | — | % | — | % | — |
|
| Business and portfolio realignment | (0.1 | )% | — | % | (0.1 | ) |
| Multi-employer pension plan exit liability | (1.0 | )% | — | % | (1.0 | ) |
| Foreign currency impact | — | % | — | % | — |
|
| Currency-neutral adjusted gross margin | 33.7 | % | 35.6 | % | (1.9 | ) |
Note: Tables may not foot due to rounding.
For information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Reported gross margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold.
Reported gross margin for the year ended December 28, 2019, was unfavorable 260 basis points due primarily to the recognition of a $132 million liability related to our exit from two multi-employer pension plans. Additionally, margins were negatively impacted by the consolidation of Multipro results, higher input costs, mix shifts and costs related to growth in new pack formats. Currency-neutral adjusted gross margin was unfavorable 190 basis points compared to the prior year after eliminating the impact of the multi-employer pension plan exit liability, mark-to-market, Project K, and business and portfolio realignment.
Our 2019 and 2018 currency-neutral adjusted gross profit is reconciled to the most comparable U.S. GAAP measures as follows:
|
| | | | | | | | |
| (dollars in millions) | | 2019 | | 2018 |
| Reported gross profit (a) | | $ | 4,381 |
| | $ | 4,726 |
|
| Mark-to-market | | (4 | ) | | 6 |
|
| Project K | | (35 | ) | | (99 | ) |
| Brexit impacts | | (9 | ) | | (2 | ) |
| Business and portfolio realignment | | (17 | ) | | — |
|
| Multi-employer pension plan exit liability | | (132 | ) | | — |
|
| Foreign currency impact | | (73 | ) | | — |
|
| Currency-neutral adjusted gross profit | | $ | 4,651 |
| | $ | 4,821 |
|
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Gross profit is equal to net sales less cost of goods sold.
2018 versus 2017 gross margin performance was as follows:
|
| | | | | | |
| | | Change vs. prior year (pts.) |
| 2018 | 2017 | |
| Reported gross margin (a) | 34.9 | % | 36.6 | % | (1.7 | ) |
| Mark-to-market | 0.1 | % | (0.6 | )% | 0.7 |
|
| Project K | (0.8 | )% | (0.9 | )% | 0.1 |
|
| Brexit impacts | — | % | — | % | — |
|
| Foreign currency impact | 0.1 | % | — | % | 0.1 |
|
| Currency-neutral adjusted gross margin | 35.5 | % | 38.1 | % | (2.6 | ) |
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
Reported gross margin for the year was unfavorable 170 basis points due primarily to the consolidation of Multipro results, the impact of U.S. Snacksthe snacks transition out of DSD, distribution, and adverse mix and distribution costs, much of which was related to growth in new pack formats. Productivity and cost savings combined to offset rising inflation in distribution and packaging. These impacts were offset somewhat by favorable mark-to-market, lower restructuring costs and favorable foreign currency. Currency-neutral adjusted gross margin was unfavorable 260 basis points compared to the prior year after eliminating the impact of mark-to-market, restructuring and foreign currency.
Our 2018 and 2017 currency-neutral adjusted gross profit is reconciled to the most comparable U.S. GAAP measures as follows:
|
| | | | | | | | |
| (dollars in millions) | | 2018 | | 2017 |
| Reported gross profit (a) | | $ | 4,726 |
| | $ | 4,699 |
|
| Mark-to-market (COGS) | | 6 |
| | (79 | ) |
| Project K and cost reduction activities (COGS) | | (99 | ) | | (115 | ) |
| Brexit impacts (COGS) | | (2 | ) | | — |
|
| Business and portfolio realignment (COGS) | | — |
| | — |
|
| Foreign currency impact | | (19 | ) | | — |
|
| Currency-neutral adjusted gross profit | | $ | 4,840 |
| | $ | 4,893 |
|
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Gross profit is equal to net sales less cost of goods sold.
2017 versus 2016 gross margin performance was as follows:
|
| | | | | | |
| | | Change vs. prior year (pts.) |
| 2017 | 2016 | |
| Reported gross margin (a) | 36.6 | % | 37.3 | % | (0.7 | ) |
| Mark-to-market (COGS) | (0.6 | )% | 0.3 | % | (0.9 | ) |
| Project K and cost reduction activities (COGS) | (0.9 | )% | (1.3 | )% | 0.4 |
|
| Venezuela remeasurement (COGS) | — | % | (0.1 | )% | 0.1 |
|
| Foreign currency impact | 0.1 | % | — | % | 0.1 |
|
| Currency-neutral adjusted gross margin | 38.0 | % | 38.4 | % | (0.4 | ) |
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
Reported gross margin for the year was unfavorable 70 basis points due primarily to our U.S. Snacks transition out of DSD distribution, namely the list price adjustment and increased resources in warehouse logistics due to the DSD transition partially offset by productivity and cost savings under Project K. Currency-neutral adjusted gross
margin was 40 basis points lower compared to the prior year after eliminating the impact of mark-to-market, restructuring, Venezuela remeasurement, and foreign currency.
Our 2017 and 2016 currency-neutral adjusted gross profit is reconciled to the most comparable U.S. GAAP measures as follows:
| | | (dollars in millions) | | 2017 | | 2016 | | 2018 | | 2017 |
| Reported gross profit (a) | | $ | 4,699 |
| | $ | 4,834 |
| | $ | 4,726 |
| | $ | 4,699 |
|
| Mark-to-market (COGS) | | (79 | ) | | 36 |
| |
| Project K and cost reduction activities (COGS) | | (115 | ) | | (172 | ) | |
| Venezuela remeasurement (COGS) | | — |
| | (12 | ) | |
| Mark-to-market | | | 6 |
| | (79 | ) |
| Project K | | | (99 | ) | | (115 | ) |
| Brexit impacts | | | (2 | ) | | — |
|
| Foreign currency impact | | 18 |
| | — |
| | (19 | ) | | — |
|
| Currency-neutral adjusted gross profit | | $ | 4,875 |
| | $ | 4,982 |
| | $ | 4,840 |
| | $ | 4,893 |
|
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
Restructuring and cost reduction activitiesprograms
We view our restructuring and cost reduction activities as part of our operating principles to provide greater visibility in achieving our long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a three to five-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.
Project K
As of the end of 2019, the Company has completed implementation of all Project K is expected to continue generating a significant amount ofinitiatives. Total project charges, after-tax cash costs and annual savings that may be investeddelivered by Project K were in key strategic areas of focus for the business or utilized to achieve our growth initiatives.line with expectations.
Since inception, Project K has reduced the Company’s cost structure, and is expected to provideprovided enduring benefits, including an optimized supply chain infrastructure, an efficient global business services model, a global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market models. These benefits are intended to strengthenhave strengthened existing businesses in core markets, increaseincreased growth in developing and emerging markets, and drivedriven an increased level of value-added innovation.
As of the end of 2018, the Company has approved all remainingCumulatively, Project K initiatives and implementation of these remaining initiatives will be completed in 2019. Project charges, after-tax cash costs and annual savings remain in line with expectations.
We currently anticipate that Project K will resultresulted in total pre-tax charges once all phases are implemented, of approximately $1.6 billion, with after-tax cash costs, including incremental capital investments estimated to beof approximately $1.2 billion. Cash expenditures of approximately $1,150 million have been incurred through the end of fiscal year 2018. As we complete the implementation of previously approved Project K initiatives in 2019, we expect to incur additional charges of approximately $50 million.
We expect annualAnnual cost savings generated from Project K will beare approximately $700 million in 2019. Themillion. These savings will bewere realized primarily in selling, general and administrative expense with additional benefit realized in gross profit as cost of goods sold savings are partially offset by negative volume and price impacts resulting from go-to-market business model changes. The overall savings profile of the project reflects our go-to-market initiatives that will impact both selling, general and administrative expense and gross profit. We have realized approximately $650 million of annual savings through the end of 2018. Cost savings have been utilized to offset inflation and fund investments in areas such as in-store execution, sales capabilities, including adding sales representatives, re-establishing the Kashi business unit, and in the design and quality of our products. We have also invested in production capacity in developing and emerging markets, and in global category teams.
We funded much of the initial cash requirements for Project K through our supplier financing initiative and subsequently were able to fund much of the cash costs for the project through cash on hand as we have started to realize cash savings from the project.
We also expect that the project will have an impact on our consolidated effective income tax rate during the execution of the project due to the timing of charges being taken in different tax jurisdictions. The impact of this project on our consolidated effective income tax rate will be excluded from the adjusted income tax rate that will be disclosed on a quarterly basis.
Refer to Note 5 within Notes to Consolidated Financial Statements for further information related to Project K and other restructuring activities.
Other Programs
Other Projects
In 2017During 2019, the Company announced a reorganization plan for the European reportable segment designed to simplify the organization, increase organizational efficiency, and enhance key processes. The overall project is expected to be substantially completed by the implementationend of a global zero-based budgeting (ZBB) program. We have realized annual savings from the ZBB program of approximately $450 million through 2018, realized largelyfiscal year 2020.
The project is expected to result in selling, general and administrative expense. Final project charges, after-tax cash costs and annual savings were in line with expectations.
In support of the ZBB initiative, we incurred pre-taxcumulative pretax net charges of approximately $3$40 million, including certain non-cash credits. Cash costs are expected to be approximately $50 million. The total expected charges will include severance and $25 million during 2017other termination benefits and 2016, respectively. Totalcharges related to relocation, third party legal and consulting fees, and contract termination costs.
The Company recorded total net charges of $40$38 million were recognized related to this initiative during 2019, with $43 million recorded in SG&A expense and $(5) million recorded in OIE.
Also during 2019, the implementationCompany announced a reorganization plan which primarily impacts the North America reportable segment. The reorganization plan is designed to simplify the organization that supports the remaining North America reportable segment after the divestiture and related transition. The overall project is expected to be substantially completed by the end of fiscal year 2020.
The overall project is expected to result in cumulative pretax charges of approximately $30 million. Cash costs are expected to approximate the ZBB program which consisted primarilypretax charges. Total expected charges will include severance and other termination benefits and charges related to third party consulting fees.
The Company recorded total charges of the design and implementation of business capabilities.$21 million related to this initiative during 2019. These charges were recorded in SG&A expense.
Foreign currency translation
The reporting currency for our financial statements is the U.S. dollar. Certain of our assets, liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar, primarily in the euro, British pound, Mexican peso, Australian dollar, Canadian dollar, Brazilian Real, Nigerian Naira, and Russian ruble. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have significant impact on our results if such increase or decrease in the value of the U.S. dollar is substantial.
Interest expense
Interest expense was (in millions) 2018-$287; 2017-$256; 2016-$406$284 million and interest$287 million for the years ended December 28, 2019 and December 29, 2018, respectively. Interest expense capitalized as part of the construction cost of fixed assets was immaterial for all periods presented. Interest expense was higher in 2018both periods. The slight decrease from the prior year is due primarily to interest savings related to the issuance ofdebt redemption and the $600 million of ten-year 4.30% Senior Notes due 2028 and $400 million of three-year 3.25% Senior Notes due 2021. The decrease from 2016 to 2017 was due to a $153 million pre-tax charge in 2016 to redeem $475 million of 7.45% U.S. Dollar Debentures due 2031. The charge consisted primarilyimpact of a premium on the tender offer and also included accelerated losses on pre-issuancefavorable settlement of tax-related interest rate hedges, acceleration of fees andpartially offset by debt discount on the redeemed debt and fees.redemption costs.
Interest income (recorded in other income (expense), net) was (in millions), 2018-$16; 2017-$9; 2016-$5. We currently expect that our$24 million and $16 million for the years ended December 28, 2019 gross interest expense will increase slightly fromand December 29, 2018, due to the issuance of the $600 million of ten-year 4.30% Senior Notes due 2028 and $400 million of three-year 3.25% Senior Notes due 2021 issued in May 2018.respectively.
Income taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code which impacted our year ended December 30, 2017 including but not limited to, reducing the corporateOur reported effective tax rate from 35% to 21%for 2019 and 2018 was 24.6% and 13.6%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may be electively paid over eight years, and accelerating first year expensing of certain capital expenditures.respectively.
Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provided a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company may complete the accounting for the impacts of the Tax Act under ASC Topic 740.
Our 2018The 2019 effective income tax provision includes an $11 million reduction to income tax expense due to changes in estimates related to the Tax Act. The reduction is primarily related torate was unfavorably impacted by a reductionpermanent basis difference in the transition tax estimate and additional tax associated with the final assessment of changes in our indefinite reinvestment assertion and resulting tax.
Our 2017 income tax provision includes $8 million of net additional income tax expense during the quarter ended December 30, 2017, driven by the reduction in the U.S. corporate tax rate and the transition tax on foreign earnings.
Transition tax on foreign earnings: The transition tax is a tax on the previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. In orderassets sold to determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries,Ferrero as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to
retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. As of December 30, 2017, based on accumulated foreign earnings and profits of approximately $2.6 billion, which are primarily in Europe, we were able to make a reasonable estimate of the transition tax and recorded a transition tax obligation of $157 million, which we elected to pay over eight years. In the third quarter of 2018, we recorded a $16 million reduction to the transition tax liability and tax expense based on updated estimates of E&P.an out-of-period correction. During the fourth quarter of 2018,2019, we recorded an out-of-period adjustment to correct an error in the Company, as part of completing its accounting under SAB 118, revised its estimate of the transition tax liabilityrate applied to $94 million, and recorded $47 million ofa deferred tax reserves related to uncertaintyasset arising from an intellectual property transfer in our interpretation of the statute and associated regulations.
Indefinite reinvestment assertion: Prior to the Tax Act, we treated a significant portion of our undistributed foreign earnings as indefinitely reinvested. In light of the Tax Act, which included a new territorial tax regime, as of the period ended December 30, 2017, Management determined that the Company would analyze its global capital structure and working capital strategy and considered the indefinite reinvestment assertion to be provisional under SAB 118. In the fourth quarter of 2018, we finished analyzing our global capital structure and working capital strategy and determined that $2.4 billion of foreign earnings as of December 30, 2017, were no longer considered to be indefinitely invested. Accordingly,prior year. The adjustment increased income tax expense of $5and decreased deferred tax assets by $39 million, was recorded inrespectively. We determined the fourth quarter of 2018. We have completedadjustment to be immaterial to our assessment and accounting under SAB 118 for our indefinite investment assertion.
In conjunction with SAB 118, we have completed the accountingConsolidated Financial Statements for the Tax Act in the fourth quarter 2018.year ended December 28, 2019 and related prior annual and quarterly periods.
Our reported effective tax rates for 2018, 2017 and 2016 were 13.6%, 24.8%, and 25.2%, respectively. Adjusted effective tax rates for 2018, 2017 and 2016 were 16.5%, 25.8%, and 24.7%, respectively.
The 2018 effective income tax rate benefited from the reduction of the U.S. corporate tax rate as well as an $11 million net reduction of income tax expense due to a changes in estimates related to our adoption of U.S. Tax Reform, the Tax Act, thefavorable impact of discretionary pension contributions totaling $250 million, in 2018, which were designated as 2017 tax year contributions, and a $44 million discrete tax benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring.
For the year ended December 30, 2017, theAdjusted effective tax rate benefited fromrates for 2019 and 2018 and were 19.5% and 16.5%, respectively.
The following table provides a deferred tax benefitreconciliation of $39 million resulting from the intercompany transfer of intellectual property. The 2016reported to adjusted income taxes and effective income tax rate benefited from excess tax benefits from share-based compensation totaling $36 million. Referfor 2019 and 2018. |
| | | | | | | | |
| Consolidated results (dollars in millions) | | 2019 | | 2018 |
| Reported income taxes | | $ | 321 |
| | $ | 181 |
|
| Mark-to-market | | (24 | ) | | (75 | ) |
| Project K | | (14 | ) | | (33 | ) |
| Brexit impacts | | (1 | ) | | — |
|
| Business and portfolio realignment | | (35 | ) | | (1 | ) |
| Multi-employer pension plan exit liability | | (31 | ) | | — |
|
| Gain on divestiture | | 55 |
| | — |
|
| Out-of-period adjustment | | 39 |
| | — |
|
| Adoption of U.S. Tax Reform | | — |
| | (11 | ) |
| Adjusted income taxes | | $ | 333 |
| | $ | 301 |
|
| Reported effective income tax rate | | 24.6 | % | | 13.6 | % |
| Mark-to-market | | 0.1 |
| | (1.7 | ) |
| Project K | | (0.1 | ) | | (0.6 | ) |
| Brexit impacts | | 0.1 |
| | — |
|
| Business and portfolio realignment | | (0.1 | ) | | — |
|
| Multi-employer pension plan exit liability | | (0.1 | ) | | — |
|
| Gain on divestiture | | 2.5 |
| | — |
|
| Out-of-period adjustment | | 2.7 |
| | — |
|
| Adoption of U.S. Tax Reform | | — | % | | (0.6 | )% |
| Adjusted effective income tax rate | | 19.5 | % | | 16.5 | % |
Note: Tables may not foot due to Note 13 within Notesrounding.
For more information on reconciling items in the table above, please refer to Consolidated Financial Statements for further information.the Significant items impacting comparability section.
Fluctuations in foreign currency exchange rates could impact the expected effective income tax rate as it is dependent upon U.S. dollar earnings of foreign subsidiaries doing business in various countries with differing statutory tax rates. Additionally, the rate could be impacted by tax legislation and if pending uncertain tax matters, including tax positions that could be affected by planning initiatives, are resolved more or less favorably than we currently expect.
Brexit
The following table provides a reconciliation of reported to adjusted income taxesUnited Kingdom left the European Union on January 31, 2020, and effective income tax rate for 2018 and 2017. |
| | | | | | | | |
| Consolidated results (dollars in millions) | | 2018 | | 2017 |
| Reported income taxes | | $ | 181 |
| | $ | 410 |
|
| Mark-to-market | | (75 | ) | | 6 |
|
| Project K and cost reduction activities | | (33 | ) | | (86 | ) |
| Business and portfolio realignment | | (1 | ) | | — |
|
| Adoption of U.S. Tax Reform | | (11 | ) | | 8 |
|
| Adjusted income taxes | | $ | 301 |
| | $ | 482 |
|
| Reported effective income tax rate | | 13.6 | % | | 24.8 | % |
| Mark-to-market | | (1.7 | ) | | (0.3 | ) |
| Project K and cost reduction activities | | (0.6 | ) | | (1.1 | ) |
| Business and portfolio realignment | | — |
| | — |
|
| Adoption of U.S. Tax Reform | | (0.6 | ) | | 0.4 |
|
| Adjusted effective income tax rate | | 16.5 | % | | 25.8 | % |
For more information on reconciling itemsmoved into the 11 month transition period in which the table above, please refercountry will remain subject to the Significant items impacting comparability section.
European Union's Custom Union and Single Market rules while negotiating a future trade deal. The following table provides a reconciliation of reported to adjusted income taxes and effective income tax rate for 2017 and 2016.
|
| | | | | | | | |
| Consolidated results (dollars in millions) | | 2017 | | 2016 |
| Reported income taxes | | $ | 410 |
| | $ | 235 |
|
| Mark-to-market | | 6 |
| | (59 | ) |
| Project K and cost reduction activities | | (86 | ) | | (85 | ) |
| Debt redemption | | — |
| | (54 | ) |
| Venezuela deconsolidation | | — |
| | — |
|
| Venezuela remeasurement | | — |
| | — |
|
| Adoption of U.S. Tax Reform | | 8 |
| | — |
|
| Adjusted income taxes | | $ | 482 |
| | $ | 433 |
|
| Reported effective income tax rate | | 24.8 | % | | 25.2 | % |
| Mark-to-market | | (0.3 | ) | | 0.5 |
|
| Project K and cost reduction activities | | (1.1 | ) | | (0.3 | ) |
| Debt redemption | | — |
| | (0.9 | ) |
| Venezuela deconsolidation | | — |
| | 1.0 |
|
| Venezuela remeasurement | | — |
| | 0.2 |
|
| Adoption of U.S. Tax Reform | | 0.4 |
| | — |
|
| Adjusted effective income tax rate | | 25.8 | % | | 24.7 | % |
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
Brexit
In June 2016, a majority of voters intransition may be extended, if no trade deal or extension is reached by December 31, 2020, the United Kingdom electedwill move to withdraw fromWorld Trade Organization trade terms with the European Union in a national referendum. In February 2017, the British Parliament voted in favor of allowing the British government to begin negotiating the terms of the United Kingdom’s withdrawal from the European Union, and, in March 2017, the British government invoked Article 50 of the Treaty on European Union, which, per the terms of the treaty, formally triggered a two-year negotiation process and puts the United Kingdom on a course to withdraw from the European Union by the end of March 2019. With no agreement concluded as yet, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal.Union.
The impact to the financial trends of our European and Consolidated businesses resulting from Brexit is currently being evaluated.the future trading relationship between the United Kingdom and the European Union will continue to be monitored and evaluated over the course of 2020. During 20182019, we generated approximately 5% of our net sales and hold approximately 3% of consolidated assets in the United Kingdom as of December 29, 2018.28, 2019. As details of the United Kingdom’s withdrawal from the European Union are finalized, in March 2019, we will continue to evaluate the impacts to our business. Brexit may impact our future financial trends in areas such as:
Net sales could be negatively impacted by reduced efficiency in processing of product shipments between the United Kingdom and other countries resulting in insufficient products in the appropriate market for sale to customers,
Cost of goods sold could increase due to increased costs related to incremental warehousing and logistics services required to adequately service our customers,
Cost of goods sold could increase significantly due to tariffs that are implemented between the United Kingdom and other countries as the location of our European production facilities and the markets we sell in regularly require significant import and export shipments involving the United Kingdom,
Profitability may be impacted as we update our conclusions on our ability to realize future benefit from other assets, such as deferred tax assets, or as we evaluate the effectiveness of existing or future derivative contracts. This may result in additional valuation allowances or reserves being established, or require changes in the notional value of derivative contracts,
Cash flow could decrease as a result of the requirement to increase inventory levels maintained in both the United Kingdom and other countries to ensure adequate supply of product to support both base and promotional activities normally executed with our customers.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating and investing needs.
We have historically reported negative working capital primarily as the result of our focus to improve core working capital by reducing our levels of trade receivables and inventory while extending the timing of payment of our trade payables. The impacts of the extended customer terms programs and of the monetization and securitization programs which are designed to effectively offset the impact of extended terms, are included in our calculation of core working capital and are largely offsetting. Core working capital was improved by the extension of supplier payment terms. These programs are all part of our ongoing working capital management.
We have a substantial amount of indebtedness which results in current maturities of long-term debt and notes payable which can have a significant impact on working capital as a result of the timing of these required payments. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, pay dividends, fund acquisition opportunities, and repurchase our common stock, reduce our working capital amounts.
We had negative working capital of $1.3 billion and $1.4 billion as of December 28, 2019 and December 29, 2018, respectively.
In conjunction with the July 28, 2019 closing of the sale of selected cookies, fruit and December 30, 2017. fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately $1.3 billion in cash, after-tax proceeds of approximately $1.0 billion were used to redeem outstanding debt, which reduced our leverage and provides additional financial flexibility for future operating and investing needs.
We believe that our operating cash flows, together with our credit facilities and other available debt financing, including commercial paper, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that volatility and/or disruption in the global capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all.
As of December 29, 2018 and December 30, 2017, we had $252 million and $204 million, respectively, of cash and cash equivalents held in international jurisdictions. The cash we generate outside the U.S. is principally to be used to fund our international development. If the funds generated by our U.S. business are not sufficient to meet our need for cash in the U.S., we may need to repatriate a portion of our international earnings to the U.S. which may be subject to additional taxes.
The following table sets forth a summary of our cash flows:
| | | (dollars in millions) | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 |
| Net cash provided by (used in): | Net cash provided by (used in): | | | | | Net cash provided by (used in): | | |
| Operating activities | | $ | 1,536 |
| | $ | 403 |
| | $ | 1,271 |
| | $ | 1,176 |
| | $ | 1,536 |
|
| Investing activities | | (948 | ) | | 149 |
| | (392 | ) | | 774 |
| | (948 | ) |
| Financing activities | | (566 | ) | | (604 | ) | | (786 | ) | | (1,905 | ) | | (566 | ) |
| Effect of exchange rates on cash and cash equivalents | | 18 |
| | 53 |
| | (64 | ) | | 31 |
| | 18 |
|
| Net increase (decrease) in cash and cash equivalents | | $ | 40 |
| | $ | 1 |
| | $ | 29 |
| | $ | 76 |
| | $ | 40 |
|
Operating activities
The principal source of our operating cash flows is net earnings, primarily cash receipts from the sale of our products, net of costs to manufacture and market our products.
Our net cash provided by operating activities for 20182019 totaled $1,536 million, an increase of $1.1 billion as compared to 2017. The increase was due primarily to the termination of our accounts receivable securitization program at the end of 2017. Collections of deferred purchase price on securitized trade receivables, totaled $1,243 million in 2017 versus zero in the current year. Additionally, cash provided by operating activities benefited by lower tax cash payments due primarily to U.S. Tax Reform. These year-over-year benefits were partially offset by the pre-tax discretionary pension contribution of $250 million in 2018.
Our net cash provided by operating activities for 2017 totaled $403$1,176 million, a decrease of $868$360 million as compared to 2016.2018. The decrease was due primarily to the difference incurrent year impact of the divestiture, including related taxes paid and restructuring costs, and the year-over-year utilizationimpact of our accounts receivable securitization program entered into in July 2016. Collections of deferred purchase price on securitized trade receivables totaled $1,243 million in 2017 versus $501 million in 2016.partially offset by lower pension contributions.
Our cash conversion cycle (defined as days of inventory and trade receivables outstanding less days of trade payables outstanding, based on a trailing 12 month average), is approximately negative 5 and negative 6 days for 20182019 and 2017,2018, respectively. Core working capital in 20182019 averaged 2.4%1.7% of net sales compared to 2.9%2.4% in 2017 and 4.0% in 2016. In 2017, both our cash conversion cycle and core working capital showed improvements in days of trade payables outstanding which includes the positive impact of a supplier terms initiative. Days of trade receivables and inventory on hand were flat in 2017 compared to 2016.2018.
Our total pension and postretirement benefit plan funding amounted to $28 million and $287 million $44 millionfor the years ended December 28, 2019 and $33 million, inDecember 29, 2018, 2017 and 2016, respectively. The 2018 contributions included $250 million of pre-tax discretionary contributions to U.S. plans designated for the 2017 tax year.
The Pension Protection Act (PPA), and subsequent regulations, determines defined benefit plan minimum funding requirements in the United States. We believe that we will not be required to make any contributions under PPA requirements until 2022 or beyond. Our projections concerning timing of PPA funding requirements are subject to change primarily based on general market conditions affecting trust asset performance, future discount rates based on average yields of high quality corporate bonds and our decisions regarding certain elective provisions of the PPA.
We currently project that we will make total U.S. and foreign benefit plan contributions in 20192020 of approximately $25$26 million. Actual 20192020 contributions could be different from our current projections, as influenced by our decision to undertake discretionary funding of our benefit trusts versus other competing investment priorities, future changes in government requirements, trust asset performance, renewals of union contracts, or higher-than-expected health care claims cost experience.
We measure cash flow as net cash provided by operating activities reduced by expenditures for property additions. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available over time for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow metric is reconciled to the most comparable GAAP measure, as follows:
| | | (dollars in millions) | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 |
| Net cash provided by operating activities | | $ | 1,536 |
| | $ | 403 |
| | $ | 1,271 |
| | $ | 1,176 |
| | $ | 1,536 |
|
| Additions to properties | | (578 | ) | | (501 | ) | | (507 | ) | | (586 | ) | | (578 | ) |
| Cash flow | | $ | 958 |
| | $ | (98 | ) | | $ | 764 |
| | $ | 590 |
| | $ | 958 |
|
| year-over-year change | | 1,078 | % | | (113 | )% | | | |
Investing activities
Our net cash used inprovided by investing activities for 20182019 totaled $774 million compared to cash used of $948 million an increase of $1.1 billion compared with 2017.in 2018. The increasechange was due primarily to the 2018divestiture of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately $1.3 billion of cash as well as our acquisition of an ownership interest in Tolaram Africa Foods, PTE LTD (TAF) for $381 million and the year-over-year impact of collections of deferred purchase price on securitized trade receivables during 2017. This program was terminated at the end of 2017. Additionally, we acquired Chicago Bar Co., LLC, the manufacturer of RXBAR, for $596 million in 2017.2018.
In 2016, we acquired Parati, a manufacturer of biscuit, powdered beverage and pasta brands in Brazil for $381 million.
Capital spending in 20182019 included investments in our supply chain infrastructure, including new plants in emerging markets, network optimization, and packaging flexibility in global manufacturing and distribution.
Cash paid for additions to properties as a percentage of net sales was 4.3% in 2018both 2019 and 3.9% in both 2017 and 2016.2018.
In November 2018, the Company announced that it will begin to explore the potential sale of the cookie, fruit snacks, pie crust, and ice cream cone businesses. These businesses are primarily reported as part of the U.S. Snacks, U.S. Specialty and North America Other reportable segments and represent approximately $900 million in net sales for the year ended December 29, 2018. If the divestiture occurs, we expect to use the proceeds to reduce debt for opportunistic share repurchases or potential future acquisitions.
Financing activities
Our net cash used by financing activities was $1,905 million and $566 million $604 millionfor the years ended December 28, 2019 and $786 million forDecember 29, 2018, 2017 and 2016, respectively.
Total debt was $8.9$7.9 billion and $8.6$8.9 billion at year-end 20182019 and 2017,2018, respectively.
In August 2019, the Company redeemed $191 million of its 4.15% U.S. Dollar Notes due November 2019, $248 million of its 4.00% U.S. Dollar Notes due 2020, $202 million of its 3.25% U.S. Dollar Notes due 2021, and $50 million of its 2.65% U.S. Dollar Notes due 2023. In September 2019, the Company redeemed $309 million of its 4.15% U.S. Dollar Notes due November 2019, the remaining principal balance subsequent to the August redemption.
In May 2018, we issued $600 million of ten-year 4.30% Senior Notes due 2028 and $400 million of three-year 3.25% Senior Notes due 2021, resulting in aggregate net proceeds after debt discount of $994 million. The proceeds from these Notes were used for general corporate purposes, including the repayment of our $400 million, seven-year 3.25% U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of our commercial paper borrowings used to finance our acquisition of ownership interests in TAF and Multipro.
In November 2017, we issued $600 million of ten-year 3.4% Senior Notes to pay down commercial paper issued in conjunction with the purchase of Chicago Bar Co., LLC, manufacturer of RXBAR.
In May 2017, we issued €600 million of five-year 0.80% Euro Notes due 2022 and repaid our 1.75% fixed rate $400 million U.S. Dollar Notes due 2017 at maturity. Additionally, we repaid our 2.05% fixed rate Cdn. $300 million Canadian Dollar Notes at maturity.
In November 2016, we issued $600 million of seven-year 2.65% U.S. Dollar Notes and repaid our 1.875% $500 million U.S. Dollar Notes due 2016 at maturity.
In May 2016, we issued €600 million of eight-year 1.00% Euro Notes due 2024 and repaid our 4.45% fixed rate $750 million U.S. Dollar Notes due 2016 at maturity.
In March 2016, we issued $750 million of ten-year 3.25% U.S. Dollar Notes and $650 million of thirty-year 4.50% U.S. Dollar Notes. Also in March 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031 at a pre-tax cash cost of $144 million.
In December 2017, the board of directors approved a new authorization to repurchase up to $1.5 billion in shares beginning in 2018 through December 2019. During 2018, we purchased 5 million shares totaling $320 million. During 2017, we purchased 7 million shares totaling $516 million. During 2016, we purchased 6 million shares totaling $426 million.
We paid quarterly dividends to shareholders totaling $2.20$2.26 per share in 2018, $2.12 per share in 2017, and $2.04 per share in 2016.2019. Total cash paid for dividends increased by 3.5%2.7% in 2018 and 4.0% in 2017.2019. On February 22, 2019,21, 2020, the board of directors declared a dividend of $.56$.57 per common share, payable on March 15, 201916, 2020 to shareholders of record at the close of business on March 5, 2019.
3, 2020.
We entered into an unsecured Five-Year Credit Agreement in January 2018, allowing us to borrow, on a revolving credit basis, up to $1.5 billion and expiring in January 2023.
In January 2019,2020, we entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to $1.0 billion at any time outstanding, to replace the $1.0 billion 364-day facility that expired in January 2019. 2020.
The new credit facilities containsFive-Year and 364 Day Credit Agreements which had no outstanding borrowings as December 28, 2019, contain customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agentagents may terminate the commitments under the credit facility,facilities, accelerate any outstanding loans under the agreement,agreements, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest. There are no borrowings outstanding
During the third quarter of 2019, in connection with the divestiture of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses, the Company withdrew from two multi-employer pension plans and recorded withdrawal liabilities of $132 million. While this represents our best estimate of the cost of withdrawing from the plans at this time, we have not yet reached agreement on the ultimate amount of the withdrawal liability. Subsequent to the end of the year, the Company and the lenders under the new credit facilities.Five-Year and 364-Day Credit agreements entered into a waiver agreement addressing any matters that arose or may arise from these liabilities under the agreements, as long as the aggregate amount of such liabilities does not exceed $250 million. The Company was in compliance with all financial covenants contained in these agreements at December 28, 2019.
Our long-term debt agreementsNotes contain customary covenants that limit Kelloggthe ability of the Company and some of its restricted subsidiaries from incurring(as defined) to incur certain liens or from enteringenter into certain sale and lease-back transactions. Some agreementstransactions and also contain a change of control provision. There are no significant restrictions on the payment of dividends. We were in control provisions. However, theycompliance with all covenants as of December 28, 2019.
The Notes do not contain acceleration of maturity clauses that are dependent on credit ratings. A change in our credit ratings could limit our access to the U.S. short-term debt market and/or increase the cost of refinancing long-term debt in the future. However, even under these circumstances, we would continue to have access to our 364-Day Credit Facility, which expires in January 2020,2021, as well as our Five-Year Credit Agreement, which expires in January 2023. This source of liquidity is unused and available on an unsecured basis, although we do not currently plan to use it.
We monitor the financial strength of our third-party financial institutions, including those that hold our cash and cash equivalents as well as those who serve as counterparties to our credit facilities, our derivative financial instruments, and other arrangements.
We are in compliance with all covenants as of December 29, 2018.
We continue to believe that we will be able to meet our interest and principal repayment obligations and maintain our debt covenants for the foreseeable future, while still meeting our operational needs, including the pursuit of select acquisitions. This will be accomplished through our strong cash flow, our short-term borrowings, and our maintenance of credit facilities on a global basis.
Monetization and securitizationAccounts Payable programs
During 2016, we initiatedWe have a program in which customers could extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program). In order to mitigate the net working capital impact of the Extended Terms Program for discrete customers, we entered into agreements to sell, on a revolving basis, certain trade accounts receivable balances to third party financial institutions (Monetization Programs). Transfers under the Monetization Programs are accounted for as sales of receivables resulting in the receivables being de-recognized from our Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum funding from receivables that may be sold at any time is currently $1,033 million, (increased from $800 million from December 30, 2017, reflecting the execution of a second monetization program during 2018), but may be increased or decreased as customers move in or out of the Extended Terms Program and as additional financial institutions move in or out of the Monetization Programs. Accounts receivable sold of $900$774 million and $601$900 million remained outstanding under this arrangement as of December 28, 2019 and December 29, 2018, and December 30, 2017, respectively.
If financial institutions were to terminate their participation in the
The Monetization Programs and we were unable secure alternative arrangements, our abilityare designed to offer ourdirectly offset the impact the Extended Terms Program and effectively manage ourwould have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital could be negatively impacted.
Previously, in ordercapital. Current DSO levels within North America are consistent with DSO levels prior to mitigate the net working capital impactexecution of the Extended TermsTerm Program for certain customers, we entered into agreements with financial institutions (Securitization Program) to sell these receivables resulting in the receivables being de-recognized from our consolidated balance sheet. The maximum funding from receivables that may be sold at any time was $600 million. In December 2017, we terminated the Securitization Program, such that no receivables were sold after December 28, 2017. In March 2018 we substantially replaced the securitization program with a second monetization program.and Monetization Programs.
As of December 30, 2017, approximately $433 million of accounts receivable sold under the Securitization Program remained outstanding, for which we received cash of approximately $412 million and a deferred purchase price asset of approximately $21 million.
Refer to Note 2 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.
Additionally we have agreements with third parties (Accounts Payable Program) to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected, sell our payment obligations to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more of our payment obligations prior to their scheduled due dates at a discounted price to participating financial institutions. Our goal is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, our right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers.
Refer to Note 1 within Notes to Consolidated Financial Statements for further information related to accounts payable.
If financial institutions were to terminate their participation in the Monetization or Accounts Payable Programs, working capital could be negatively impacted. In addition, a downgrade in our credit rating could result in higher costs to participating Accounts Payable Programs suppliers or our extended payment terms being reversed, the latter of which could negatively impact working capital. If working capital is negatively impacted as a result of these events and we were unable to secure alternative programs, we may have to utilize our various financing arrangements for short-term liquidity or increase our long-term borrowings.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off-balance sheet arrangements
At December 29, 2018,28, 2019, we did not have any material off-balance sheet arrangements. Refer to Note 2 within Notes to Consolidated Financial Statements for information on our accounts receivable securitization and factoring programs.
Contractual obligations
The following table summarizes our contractual obligations at December 29, 2018:28, 2019:
| | | Contractual obligations | | Payments due by period | | Payments due by period |
| (millions) | | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and beyond | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and beyond |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal | | $ | 8,785 |
| | 507 |
| | $ | 851 |
| | $ | 973 |
| | $ | 1,045 |
| | $ | 811 |
| | $ | 4,598 |
| | $ | 7,838 |
| | 620 |
| | 835 |
| | 1,039 |
| | 771 |
| | 677 |
| | 3,896 |
|
| Interest (a) | | 2,359 |
| | 260 |
| | 250 |
| | 215 |
| | 193 |
| | 172 |
| | 1,269 |
| | 2,100 |
| | 250 |
| | 216 |
| | 193 |
| | 172 |
| | 158 |
| | 1,111 |
|
| Capital leases (b) | | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Finance leases (b) | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Operating leases (c) | | 525 |
| | 121 |
| | 97 |
| | 73 |
| | 57 |
| | 48 |
| | 129 |
| | 610 |
| | 129 |
| | 98 |
| | 80 |
| | 67 |
| | 55 |
| | 181 |
|
| Purchase obligations (d) | | 1,239 |
| | 1,057 |
| | 117 |
| | 27 |
| | 9 |
| | 5 |
| | 24 |
| | 1,522 |
| | 1,011 |
| | 227 |
| | 101 |
| | 59 |
| | 42 |
| | 82 |
|
| Uncertain tax positions (e) | | 4 |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | 19 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other long-term obligations (f) | | 640 |
| | 122 |
| | 51 |
| | 50 |
| | 96 |
| | 98 |
| | 223 |
| | 709 |
| | 132 |
| | 77 |
| | 78 |
| | 77 |
| | 75 |
| | 270 |
|
| Total | | $ | 13,553 |
| | $ | 2,072 |
| | $ | 1,366 |
| | $ | 1,338 |
| | $ | 1,400 |
| | $ | 1,134 |
| | $ | 6,243 |
| | $ | 12,798 |
| | $ | 2,161 |
| | $ | 1,453 |
| | $ | 1,491 |
| | $ | 1,146 |
| | $ | 1,007 |
| | $ | 5,540 |
|
| |
| (a) | Includes interest payments on our long-term debt and payments on our interest rate swaps. Interest calculated on our variable rate debt was forecasted using the LIBOR forward rate curve as of December 29, 2018.28, 2019. |
| |
| (b) | The total expected cash payments on our capitalfinance leases include interest expense totaling less than $1 million over the periods presented above. |
| |
| (c) | Operating leases represent the minimum rental commitments under non-cancelable operating leases. |
| |
| (d) | Purchase obligations consist primarily of fixed commitments for raw materials to be utilized in the normal course of business and for marketing, advertising and other services. The amounts presented in the table do not include items already recorded in accounts payable or other current liabilities at year-end 2018,2019, nor does the table reflect cash flows we are likely to incur based on our plans, but are not obligated to incur. Therefore, it should be noted that the exclusion of these items from the table could be a limitation in assessing our total future cash flows under contracts. |
| |
| (e) | As of December 29, 2018,28, 2019, our total liability for uncertain tax positions was $97$90 million, of which $4$19 million is expectedscheduled to be paid in the next twelve months. We are not able to reasonably estimate the timing of future cash flows related to the remaining $93$71 million. |
| |
| (f) | Other long-term obligations are those associated with noncurrent liabilities recorded within the Consolidated Balance Sheet at year-end 20182019 and consist principally of projected commitments under deferred compensation arrangements, multiemployer plans, and supplemental employee retirement benefits. The table also includes our current estimate of minimum contributions to defined benefit pension and postretirement benefit plans through 2024 as follows: 2019-$42; 2020-$37;46; 2021-$39; 2022-$83;40; 2023-$78;39; 2024-$103.48; 2025-$68. |
In addition, the total remaining$80 million of insurance loss reserves and $26 million of tax repatriation payable of $80 million which isare expected to be paid over the next 7four and seven years, isrespectively, are included in the total above.
CRITICAL ACCOUNTING ESTIMATES
Promotional expenditures
Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, contests and loyalty programs. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally immaterial and recognized as a change in management estimate in a subsequent period. On a full-year basis, these subsequent period adjustments represent approximately 0.3% of our company’s net sales. However, our company’s total promotional expenditures (including amounts classified as a revenue reduction) are significant, so it is likely our results would be materially different if different assumptions or conditions were to prevail.
Property
Long-lived assets such as property, plant and equipment are tested for impairment when conditions indicate that the carrying value may not be recoverable. Management evaluates several conditions, including, but not limited to, the following: a significant decrease in the market price of an asset or an asset group; a significant adverse change in the extent or manner in which a long-lived asset is being used, including an extended period of idleness; and a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. For assets to be held and used, we project the expected future undiscounted cash flows generated by the long-lived asset or asset group over the remaining useful life of the primary asset. If the cash flow analysis yields an amount less than the carrying amount we determine the fair value of the asset or asset group by using comparable market data. There are inherent uncertainties associated with the judgments and estimates we use in these analyses.
At December 29, 2018,28, 2019, we have property, plant and equipment of $3.7$3.6 billion, net of accumulated depreciation, on our balance sheet.
Goodwill and other intangible assets
We perform an impairment evaluation of goodwill and intangible assets with indefinite useful lives at least annually during the fourth quarter of each year in conjunction with our annual budgeting process.
Goodwill impairment testing first requires a comparison between the carrying value and fair value of a reporting unit with associated goodwill. Carrying value is based on the assets and liabilities associated with the operations of that reporting unit, which often requires allocation of shared or corporate items among reporting units. For the 20182019 goodwill impairment test, the fair value of the reporting units was estimated based on market multiples. Our approach employs market multiples based onof sales, if applicable, and/or earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings for companies comparable to our reporting units. In the event the fair value determined using the market multiples approach is close to the carrying value, we may also supplement our fair value determination using discounted cash flows. Management believes the assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for our reporting units.
Similarly, impairment testing of indefinite-lived intangible assets requires a comparison of carrying value to fair value of that particular asset. Fair values of non-goodwill intangible assets are based primarily on projections of future cash flows to be generated from that asset. For instance, cash flows related to a particular trademark would be based on a projected royalty stream attributable to branded product sales discounted at rates consistent with rates used by market participants. These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables.
We also evaluate the useful life over which a non-goodwill intangible asset with a finite life is expected to contribute directly or indirectly to our cash flows. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.
On December 30, 2018 the Company reorganized our North American business. The reorganization eliminated the legacy business unit structure and internal reporting. In addition, the Company changed the internal reporting provided to the chief operating decision maker (CODM) and segment manager. As a result, the Company reevaluated its operating segments and reporting units.
In addition, we transferred the management of our Middle East, North Africa, and Turkey businesses from Kellogg Europe to Kellogg AMEA, effective December 30, 2018.
Refer to Note 4, Goodwill and Other Intangibles, and Note 17, Reportable Segments for further details on these changes.
As a result of these changes in operating segments and related reporting units, the Company re-allocated goodwill between reporting units where necessary and compared the carrying value to the fair value of each impacted reporting unit on a before and after basis. This evaluation was only required to be performed on reporting units impacted by the changes noted above.
Effective December 30, 2018 in North America, the previous U.S. Snacks, U.S. Morning Foods, U.S. Specialty Channels, U.S. Frozen Foods, Kashi, Canada and RX operating segments are now a single operating segment (Kellogg North America). At the beginning of 2019, the Company evaluated the related impacted reporting units for impairment on a before and after basis and concluded that the fair values of each reporting unit exceeded their carrying values.
Approximately $46 million of goodwill was re-allocated between the impacted reporting units within Kellogg Europe and Kellogg AMEA related to the transfer of businesses between these operating segments. The Company performed a goodwill evaluation of the impacted reporting units on a before and after basis and concluded that the fair value of the impacted reporting units exceeded their carrying values.
Additionally, during the first quarter of 2019, the Company determined that it was more likely than not that the Company would be selling selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses within the North America reporting unit. As a result, the Company performed a goodwill impairment evaluation on the North America reporting unit in the first quarter of 2019 and concluded that the fair value
exceeded the carrying value of the reporting unit. During the second quarter of 2019, the Company entered into a definitive agreement to sell the businesses to Ferrero. The sale was completed during the third quarter of 2019 and resulted in the divestiture of the net assets and liabilities of these businesses, included in the North America reporting unit, including $191 million of Goodwill and $765 million of Net Intangibles. In addition to the cash consideration received, the Company entered into a perpetual royalty-free licensing agreement with Ferrero, allowing Kellogg the use of certain brand names for cracker products. The license agreement was fair valued at $18 million and recorded as an indefinite-lived intangible asset.
At December 29, 2018,28, 2019, goodwill and other intangible assets amounted to $9.4$8.4 billion, consisting primarily of goodwill and brands originally associated with the 2001 acquisition of Keebler Foods Company and the 2012 acquisition of Pringles. Within this total, approximately $2.8$2.1 billion of non-goodwill intangible assets were classified as indefinite-lived, including $1.7 billion related to trademarks, comprised principally of KeeblerPringles and Pringlescracker-related trademarks. The majority of these intangible assets are recorded in our U.S. SnacksNorth America reporting unit. WeThe Company currently believe thatbelieves the fair value of our goodwill and other intangible assets exceeds their carrying value and that those intangibles so classified will contribute indefinitely to our cash flows. Through impairment testing performed during the fourth quarter of 2019, no heightened risk of impairment of individual intangible assets or reporting units was identified.
Additionally the Company has goodwill of $606 million and $373 million at December 28, 2019 related to the Multipro and RX reporting units, respectively. The percentage of excess fair value over carrying value of the U.S. Snacks reporting unit was approximately 62% and 57% in 2018 and 2017, respectively. However, if we had used materially different assumptions, which we do not believe are reasonably possible, regarding the future performance of our business or a differentCompany performed additional goodwill impairment testing for Multipro using both an EBITDA market multiple inand discounted cash flow method. The Company performed additional goodwill impairment testing for RX using both a sales market multiple and discounted cash flow method. Significant assumptions utilized within the valuation, this could have resulted inMultipro discounted cash flow model include forecasted net sales growth and gross margin. The significant impairment losses.
On November 12, 2018, we announced that we would be exploringassumption utilized within the sale of our cookies business (includingRX discounted cash flow model is forecasted net sales growth. The Company determined the Keebler, Famous Amos, Mother's and Murray brands), fruit snacks business (including the Stretch Island brand) pie crust and ice cream cone businesses.
Additionally, we have $207 million of goodwill related to our Kashi reporting unit, which was primarily a result of establishing Kashi as a separate operating segment in 2015, which required an allocation of goodwill from our U.S.
Snacks operating segment. The 2018 fair value of the Kashi reporting unit was estimated primarily based on a multiple of net salesMultipro and discounted cash flows. The percentage of excess over fair value was approximately 12% and 9%, in 2018 and 2017, respectively, usingRX exceed the same methodology on a year-on-year basis. The use of modestly different assumptions in the valuation could have resulted in an impairment.
We also have $616 million and $798 million of goodwill and other intangible assets, respectively, related to our Multipro operating segment as a result of the acquisition of this business in May 2018. Consistent with our expectations given the recent acquisition, the 2018 fair value approximates carrying value and no heightened risk of impairment exists for both goodwill and the indefinitely lived assets. The use of modestly different assumptions in these valuations could have resulted in an impairment.
Factors which could result in an impairment include, but are not limited to: (i) reduced demand for our products; (ii) higher commodity prices; (iii) lower prices for our products or increased marketing as a result of increased competition; and (iv) significant disruptions to our operations as a result of both internal and external events.
reporting units.
Retirement benefits
Our company sponsors a number of U.S. and foreign defined benefit employee pension plans and also provides retiree health care and other welfare benefits in the United States and Canada. Plan funding strategies are influenced by tax regulations and asset return performance. A substantial majority of plan assets are invested in a globally diversified portfolio of debt and equity securities with smaller holdings of debt securities and other investments. We recognize the cost of benefits provided during retirement over the employees’ active working life to determine the obligations and expense related to our retiree benefit plans. Inherent in this concept is the requirement to
use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and accumulated obligation include the long-term rates of return on plan assets, the health care cost trend rates, the mortality table and improvement scale, and the interest rates used to discount the obligations for our major plans, which cover employees in the United States, United Kingdom and Canada.
Our expense recognition policy for pension and nonpension postretirement benefits is to immediately recognize actuarial gains and losses in our operating results in the year in which they occur. Actuarial gains and losses are recognized annually as of our measurement date, which is our fiscal year-end, or when remeasurement is otherwise required under generally accepted accounting principles.
Additionally, for purposes of calculating the expected return on plan assets related to pension and nonpension postretirement benefits we use the fair value of plan assets.
To conduct our annual review of the long-term rate of return on plan assets, we model expected returns over a 20-year investment horizon with respect to the specific investment mix of each of our major plans. The return assumptions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets including consideration of current yields on long-term bonds, price-earnings ratios of the major stock market indices, and long-term inflation. Our U.S. plan model, corresponding to approximately 72% of our trust assets globally, currently incorporates a long-term inflation assumption of 2.5% and ana 2019 weighted-average active management premium of 1%0.93% (net of fees) validated by historical analysis and future return expectations. Although we review our expected long-term rates of return annually, our benefit trust investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return have generally not been revised, provided these rates continue to fall within a “more likely than not” corridor of between the 25th and 75th percentile of expected long-term returns, as determined by our modeling process. Our assumed rate of return for U.S. plans in 20182019 was 7.5% prior to the mid-year remeasurement, and 7.0% after the mid-year
remeasurement, based on an updated target portfolio mix with an active management premium of 7.5%0.80% (net of fees), equated to approximately the 39th53rd percentile and 54th percentile expectation of our model.model, respectively. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. Foreign trust investments represent approximately 28% of our global benefit plan assets.
Based on consolidated benefit plan assets at December 29, 2018,28, 2019, a 100 basis point increase or decrease in the assumed rate of return would correspondingly increase or decrease 20192020 benefits expense by approximately $57$64 million. For each of the three fiscal years ended December 28, 2019 and December 29, 2018, our actual return on plan assets exceeded (was less than) the recognized assumed return by the following amounts (in millions): 2018-$(845); 2017-$415; 2016-$84.$730 million and $(845) million, respectively.
To conduct our annual review of health care cost trend rates, we model our actual claims cost data over a five-year historical period, including an analysis of pre-65 versus post-65 age groups and other important demographic
components in our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial health care cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. In comparison to our actual five-year compound annual claims cost growth rate of approximately 4.98%5.12%, our initial trend rate for 20192020 of 5.50%5.25% reflects the expected future impact of faster-growing claims experience for certain demographic groups within our total employee population. Our initial rate is trended downward by 0.25% per year, until the ultimate trend rate of 4.5% is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Based on consolidated obligations at December 29, 2018,28, 2019, a 100 basis point increase in the assumed health care cost trend rates would increase 20192020 benefits expense by approximately $6$3 million and generate an immediate loss recognition of $97$7 million. A one percent increase in 20192020 health care claims cost over that projected from the assumed trend rate would result in an experience loss of approximately $7 million and would increase 20192020 expense by $0.3 million. Any arising health care claims cost-related experience gain or loss is recognized in the year in which they occur. The experience gain arising from recognition of 20182019 claims experience was approximately $27$15 million.
Assumed mortality rates of plan participants are a critical estimate in measuring the expected payments a participant will receive over their lifetime and the amount of expense we recognize. At the end of 2014, we revised our mortality assumption after consideringIn 2019, the Society of Actuaries'Actuaries (SOA) published updated mortality tables and an updated improvement scale,scale. The expectations of future mortality rates in the new SOA tables were consistent with prior Kellogg mortality assumptions. In determining the appropriate mortality assumptions as well as otherof 2019 fiscal year-end, we adopted the new SOA tables with collar adjustments based on Kellogg’s current population. In addition, based on mortality information available from the Social Security Administration to developand other sources, we developed assumptions alignedfor future mortality improvement in line with our expectation ofexpectations for future improvement rates. In determining the appropriate mortality assumptions as of December 29, 2018, we considered the SOA's 2018 updated improvement scale.experience. The SOA's 2018 scale incorporates changes consistent with our view of future mortality improvements established in 2014. Therefore, we adopted the 2018 SOA improvement scale. This change to the mortality assumption decreasedimpacted the year-end U.S. pension and other postretirement benefit obligations by $10$77 million and $2($13) million, respectively.
To conduct our annual review of discount rates, we selected the discount rate based on a cash-flow matching analysis using Willis Towers Watson’s proprietary RATE:Link tool and projections of the future benefit payments constituting the projected benefit obligation for the plans. RATE:Link establishes the uniform discount rate that produces the same present value of the estimated future benefit payments, as is generated by discounting each year’s benefit payments by a spot rate applicable to that year. The spot rates used in this process are derived from a yield curve created from yields on the 40th to 90th percentile of U.S. high quality bonds. A similar methodology is applied in Canada and Europe, except the smaller bond markets imply that yields between the 10th and 90th percentiles are preferable and in the U.K. the underlying yield curve was derived after further adjustments to the universe of bonds to remove government backed bonds. We use a December 31 measurement date for our defined benefit plans. Accordingly, we select yield curves to measure our benefit obligations that are consistent with market indices during December of each year.
Based on consolidated obligations at December 29, 2018,28, 2019, a 25 basis point decline in the yield curve used for benefit plan measurement purposes would decrease 20192020 benefits expense by approximately $6$8 million and would result in an immediate loss recognition of $201$238 million. All obligation-related actuarial gains and losses are recognized immediately in the year in which they occur.
Despite the previously-described policies for selecting major actuarial assumptions, we periodically experience material actuarial gains or losses due to differences between assumed and actual experience and due to changing economic conditions. During 2018,2019, we recognized a net actuarial loss of approximately $346$94 million compared to a net actuarial gainloss of approximately $126$346 million in 2017.2018. The total net loss recognized in 20182019 was driven by a $845$730 million lossgain from worsebetter than expected asset returns, offset by a gainloss of approximately $499$824 million of plan
experience and assumption changes, including increasesdecreases in the discount rate and the change in mortality assumptions. During 2018,2019, we also recognized curtailment gains of $30$19 million related to benefit changes and certain events affecting our benefit programs.
Of the total net gain recognized in 2017, approximately $415 million was from better than expected asset returns. The gain was offset by a $289 million loss from plan experience and assumption changes, including declines in the discount rate which were partially offset by the change in mortality assumptions. During 2017, we also recognized curtailment gains of $153 million related to benefit changes and certain events affecting our benefit programs.
During 2018,2019, we made contributions in the amount of $270$10 million to Kellogg’s global tax-qualified pension programs. This amount includes discretionary contributions totaling $250 million designated for the 2017 tax year.was mostly non-discretionary. Additionally, we contributed $17$18 million to our retiree medical programs.
Income taxes
Our consolidated effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we operate. The calculation of our income tax provision and deferred income tax assets and liabilities is complex and requires the use of estimates and judgment.
We recognize tax benefits associated with uncertain tax positions when, in our judgment, it is more likely than not that the positions will be sustained upon examination by a taxing authority. For tax positions that meet the more likely than not recognition threshold, we initially and subsequently measure the tax benefits as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, new or emerging legislation and tax planning. The tax position will be derecognized when it is no longer more likely than not of being sustained. Significant adjustments to our liability for unrecognized tax benefits impacting our effective tax rate are separately presented in the rate reconciliation table of Note 13 within Notes to Consolidated Financial Statements.
Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration as well as the reinvestment assertion regarding our undistributed foreign earnings. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes a provision designed to tax currently global intangible low taxed income (GILTI) starting in 2018. Under the provision, a U.S. shareholder is required to include in gross income the amount of its GILTI, which is 50% of the excess of the shareholder’s net tested income of its controlled foreign corporation over the deemed tangible income return. The amount of GILTI included by a U.S. shareholder is computed by aggregating all controlled foreign corporations (CFC). Shareholders are allowed to claim a foreign tax credit for 80 percent of the taxes paid or accrued with respect to the tested income of each CFC, subject to some limitations.
The FASB staff has indicated that a company should make and disclose a policy election as to whether it will (1) recognize deferred taxes for basis differences expected to reverse as GILTI or (2) account for GILTI as a period cost if and when incurred. During 2018, the Company elected to account for the GILTI as a period cost and has included an estimate for GILTI in its effective tax rate.
ACCOUNTING STANDARDS TO BE ADOPTED IN FUTURE PERIODS
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) permitting a company to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 on items within accumulated other comprehensive income (AOCI). The reclassification is optional. Regardless of whether or not a company opts to make the reclassification, the new guidance requires all companies to include certain disclosures in their financial statements. The guidance is effective for all fiscal years beginning after December 15, 2018. Early adoption is permitted. We will adopt the ASU in the first quarter of 2019.
Leases. In February 2016, the FASB issued an ASU which will require the recognition of lease assets and lease liabilities by lessees for all leases with terms greater than 12 months. The distinction between finance leases and operating leases will remain, with similar classification criteria as current GAAP to distinguish between capital and operating leases. The principal difference from current guidance is that the lease assets and lease liabilities arising from operating leases will be recognized on the Consolidated Balance Sheet. Lessor accounting remains substantially similar to current GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company will adopt the ASU in the first quarter of 2019, and expects to elect certain practical expedients permitted under the transition guidance. Additionally, the Company will elect the optional transition method that allows for a cumulative-effect adjustment in
the period of adoption and will not restate prior periods. The Company continues to evaluate the effect of adoption to its Consolidated Financial Statements and disclosures, however the Company currently estimates total assets and liabilities will increase approximately $450 million to $500 million upon adoption. This estimate could change as the Company continues to progress with implementation and will also fluctuate based on the lease portfolio and discount rates as of the adoption date. We do not expect a material impact to the Company’s Consolidated Statements of Income or Cash Flows.
Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and can be applied retrospectively or prospectively. Early adoption is permitted. We are currently assessing whenThe Company plans to adopt the ASU in the first quarter of 2020 and apply it prospectively. The adoption is not expected to have a material impact to the impact of adoption.Company's Consolidated Financial Statements.
Compensation Retirement Benefits. In August 2018, the FASB issued ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removed disclosures that no longer are considered cost beneficial, clarified the specific requirements of disclosures, and added disclosure requirements identified as relevant. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020 and can be applied retrospectively or prospectively. Early adoption is permitted. We are currently assessing when to adopt the ASU and the impact of adoption.
FUTURE OUTLOOK
We provide net salesThe Company issued its initial financial guidance on a currency-neutral basis. On this basis, we expect currency-neutralfor 2020. Specifically, the Company is projecting:
Organic net sales to be up 3-4% in 2019. This includes an additional four months of Multipro net sales and an improved organic growth rate ofincrease by 1-2%. The Company expects gradual improvement over the year with balanced contributions from volume and price/mix, driven by recent revenue-growth management actions.
From a profitability standpoint, we expect currency-neutralCurrency-neutral adjusted operating profit to bedecline approximately flat during 2019. The Company plans another year(4)%, as the absence of investment in pack formats, advertising, and capabilities. Underlying cost inflation is expected to accelerate in 2019, but will largely be offset by productivity savings and revenue growth management actions. Negative mix and cost impactsthe results from the expansion of alternative pack formats and channels, particularly on-the-go offerings, will be a headwind to gross profit margin, moderatingdivested businesses more than offsets growth in the second half.base business.
We expect currency-neutralCurrency-neutral adjusted EPSearnings per share to decreasedecline by approximately (3)-(4)%, as the absence of results from the divested businesses more than offset growth in the range of 5 to 7% in 2019. This decline reflects the 2018 discrete tax benefits, especially in the first half, as well as the impact on OIE of the financial markets' decline in late 2018, which reduced the value of pension assets entering the new year.base business.
We expect that full-year non-GAAPNon-GAAP operating cash flow will be roughly flat compared to the prior year. The positive impact of the 2018 voluntary pension contribution is offset by increased tax cash payments and capital expenditures. The latter will support growth initiatives, including investments in capacity and technology.improve to $0.9-1.0 billion.
Additionally, due to front-weighted investments and cost pressures and the lapping of discrete tax benefits noted previously, we expect to see a double-digit decline in currency-neutral adjusted EPS for the first half of the year, with the first quarter down more than the second quarter. During the back half of the year, we expect to return to growth in both currency-neutral adjusted operating profit and currency-neutral adjusted EPS.
We are unable to reasonably estimate the potential full-year financial impact of mark-to-market adjustments costs associated with Brexit and business and portfolio realignment because these impacts are dependent on future changes in market conditions (interest rates, return on assets, and commodity prices) or future decisions to be made by our management team and Board of Directors.. Similarly, because of volatility in foreign exchange rates and shifts in country mix of our international earnings, we are unable to reasonably estimate the potential full-year financial impact of foreign currency translation.
As a result, these impacts are not included in the guidance provided. Therefore, we are unable to provide a full reconciliation of these non-GAAP measures used in our guidance without unreasonable effort as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.
See the table below that outlines the projected impact of certain other items that are excluded from non-GAAP guidance for 2019:2020: |
| | | |
| Impact of certain items excluded from Non-GAAP guidance: | Net Sales | Operating Profit | Earnings Per Share |
Project KBusiness and cost restructuring activitiesportfolio realignment (pre-tax) | | ~$45-55M60-$70M | ~$0.13-0.160.17-$0.20 |
| Income tax impact applicable to adjustments, net** | | | ~$0.03-0.040.04 |
| Currency-neutral adjusted guidance* | 3-4%(2)%-0% | ~Flat(4)% | (5)-(7)~(3)% |
AcquisitionsAbsence of results from divested businesses | ~2%4% | | |
| 53rd week | (1)%-(2)% | | |
| Organic guidance | 1-2%1%-2% | | |
* 20192020 full year guidance for net sales, operating profit, and earnings per share are provided on a non-GAAP basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. These items for 20192020 include impacts of Brexit, costs associated with the business and portfolio realignment, and mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts. The Company is providing quantification of known adjustment items where available.
** Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
|
| |
| Reconciliation of Non-GAAP amounts - Cash Flow Guidance | |
| (billions) | |
| | Full Year 20192020 |
| Net cash provided by (used in) operating activities | ~$1.5-1.61.5-$1.6 |
| Additions to properties | ~($0.6) |
| Cash Flow | ~$0.9-1.00.9-$1.0 |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our company is exposed to certain market risks, which exist as a part of our ongoing business operations. We use derivative financial and commodity instruments, where appropriate, to manage these risks. As a matter of policy, we do not engage in trading or speculative transactions. Refer to Note 14 within Notes to Consolidated Financial Statements for further information on our derivative financial and commodity instruments.
Foreign exchange risk
Our company is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases, intercompany transactions, and when applicable, nonfunctional currency denominated third-party debt. Our company is also exposed to fluctuations in the value of foreign currency investments in subsidiaries and cash flows related to repatriation of these investments. Additionally, our company is exposed to volatility in the translation of foreign currency denominated earnings to U.S. dollars. Primary exposures include the U.S. dollar versus the euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Brazilian real, Nigerian naira, Russian ruble and Egyptian pound, and in the case of inter-subsidiary transactions, the British pound versus the euro.
The impact of possible currency devaluations in countries experiencing high inflation rates or significant exchange fluctuations, including Argentina, can impact our results and financial guidance. Effective July 1, 2018, we have accounted for Argentina as a highly inflationary economy, as the projected three-year cumulative inflation rate exceeds 100%. Accordingly, our Argentina subsidiary will use the U.S. dollar as its functional currency. Accordingly, changes in the value of the Argentine Peso versus the U.S. dollar applied to our peso-denominated net monetary asset position is recorded in income at the time of the change. Net monetary assets denominated in Argentine Pesos arewere not material as of December 29, 2018.28, 2019.
There have also been periods of increased market volatility and currency exchange rate fluctuations specifically within the United Kingdom and Europe, as a result of the UK referendum held on June 23, 2016, in which voters approved anUK's exit from the European Union, commonly referredUnion. We expect this uncertainty to continue over 2020 as Brexit. As a result of the referendum, the British government formally initiated the process for withdrawal in March 2017. In January 2019, the draft of the withdrawal agreement, that was previously published in November 2018, was rejected by the UK parliament. The terms of withdrawal have not been established. If no agreement is concluded by March 29, 2019, the United Kingdom will leave the European Union at such time. Accordingly, the referendum has created significant uncertainty aboutnegotiations evolve regarding the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal.trading relationship. We recognize that there are still significant uncertainties surrounding the ultimate resolutionnegotiation of Brexit negotiations,a trade deal with the European Union, and we will continue to monitor any changes that may arise and assess their potential impact on our business.
We assess foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contracts, options, and currency swaps to reduce fluctuations in long or short currency positions. Forward contracts and options are generally less than 18 months duration. Currency swap agreements may be established in conjunction with the term of underlying debt issuances.
The total notional amount of foreign currency derivative instruments, including cross currency swaps, at year-end 20182019 was $3.1$4.2 billion, representing a settlement receivable of $78$79 million. The total notional amount of foreign currency derivative instruments at year-end 20172018 was $2.2$3.1 billion, representing a settlement obligationreceivable of $4$78 million. All of these derivatives were hedges of anticipated transactions, translational exposure, or existing assets or liabilities. Foreign currency contracts generally mature within 18 months and cross currency contracts mature with the related debt. Assuming an unfavorable 10% change in year-end exchange rates, the settlement receivable would have decreased by $199$245 million, resulting in a net settlement obligation of $121$166 million at year-end 20182019 and the settlement obligation would have increased by $71$199 million at year-end 2017.2018. These unfavorable changes would generally have been offset by favorable changes in the values of the underlying exposures.
Interest rate risk
Our company is exposed to interest rate volatility with regard to future issuances of fixed rate debt and existing and future issuances of variable rate debt. Primary exposures include movements in U.S. Treasury rates, London Interbank Offered Rates (LIBOR), and commercial paper rates. We periodically use interest rate swaps and forward interest rate contracts to reduce interest rate volatility and funding costs associated with certain debt issues, and to achieve a desired proportion of variable versus fixed rate debt, based on current and projected market conditions.
During 20182019 and 2017,2018, we entered into interest rate swaps, and in some instances terminated interest rate swaps, in connection with certain U.S. Dollar and Euro Notes. Refer to Note 8 within Notes to Consolidated Financial Statements. The total notional amount of interest rate swaps at year-end 20182019 was $1.6$1.9 billion, representing a settlement obligation of $5$6 million. The total notional amount of interest rate swaps at year-end 20172018 was $2.3$1.6 billion, representing a settlement obligation of $54$5 million. Assuming average variable rate debt levels during the year, a one percentage point increase in interest rates would have increased interest expense by approximately $22$13 million and $27$22 million at year-end 20182019 and 2017,2018, respectively.
Price risk
Our company is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials, fuel, and energy. Primary exposures include corn, wheat, potato flakes, soybean oil, sugar, cocoa, cartonboard, natural gas, and diesel fuel. We have historically used the combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months.
The total notional amount of commodity derivative instruments at year-end 20182019 was $417$524 million, representing a settlement obligationreceivable of approximately $6$8 million. The total notional amount of commodity derivative instruments at year-end 20172018 was $544$417 million, representing a settlement obligation of approximately $1$6 million. Assuming a 10% decrease in year-end commodity prices, the settlement obligation would have increased by $34$40 million at year-end 2018,2019, and the settlement obligation would have increased by approximately $41$34 million at year-end 2017,2018, generally offset by a reduction in the cost of the underlying commodity purchases.
In addition to the commodity derivative instruments discussed above, we use long-term contracts with suppliers to manage a portion of the price exposure associated with future purchases of certain raw materials, including rice, sugar, cartonboard, and corrugated boxes. It should be noted the exclusion of these contracts from the analysis above could be a limitation in assessing the net market risk of our company.
Reciprocal collateralization agreements
In some instances we have reciprocal collateralization agreements with counterparties regarding fair value positions in excess of certain thresholds. These agreements call for the posting of collateral in the form of cash, treasury securities or letters of credit if a net liability position to us or our counterparties exceeds a certain amount. We were not required to post collateral as of December 29, 201828, 2019 and collected approximately $20$19 million of collateral at December 29, 201828, 2019 in the form of cash, which was reflected as an increase in other liabilities, net on the Consolidated Balance Sheet. As of December 30, 2017,29, 2018, we had postedwere not required to post collateral ofand collected approximately $20 million
of collateral, in the form of cash, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet. As of December 28, 2019 and December 29, 2018, and December 30, 2017, we posted $18$12 million and $17$18 million, respectively, in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
| | | (millions, except per share data) | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 |
| Net sales | | $ | 13,547 |
| | $ | 12,854 |
| | $ | 12,965 |
| | $ | 13,578 |
| | $ | 13,547 |
| | $ | 12,854 |
|
| Cost of goods sold | | 8,821 |
| | 8,155 |
| | 8,131 |
| | 9,197 |
| | 8,821 |
| | 8,155 |
|
| Selling, general and administrative expense | | 3,020 |
| | 3,312 |
| | 3,351 |
| | 2,980 |
| | 3,020 |
| | 3,312 |
|
| Operating profit | | $ | 1,706 |
| | $ | 1,387 |
| | $ | 1,483 |
| | $ | 1,401 |
| | $ | 1,706 |
| | $ | 1,387 |
|
| Interest expense | | 287 |
| | 256 |
| | 406 |
| | 284 |
| | 287 |
| | 256 |
|
| Other income (expense), net | | (90 | ) | | 526 |
| | (143 | ) | | $ | 188 |
| | $ | (90 | ) | | $ | 526 |
|
| Income before income taxes | | 1,329 |
| | 1,657 |
| | 934 |
| | 1,305 |
| | 1,329 |
| | 1,657 |
|
| Income taxes | | 181 |
| | 410 |
| | 235 |
| | 321 |
| | 181 |
| | 410 |
|
| Earnings (loss) from unconsolidated entities | | 196 |
| | 7 |
| | 1 |
| | (7 | ) | | 196 |
| | 7 |
|
| Net income | | $ | 1,344 |
| | $ | 1,254 |
| | $ | 700 |
| | $ | 977 |
| | $ | 1,344 |
| | $ | 1,254 |
|
| Net income (loss) attributable to noncontrolling interests | | 8 |
| | — |
| | 1 |
| | 17 |
| | 8 |
| | — |
|
| Net income attributable to Kellogg Company | | $ | 1,336 |
| | $ | 1,254 |
| | $ | 699 |
| | $ | 960 |
| | $ | 1,336 |
| | $ | 1,254 |
|
| Per share amounts: | | | | | | | | | | | | |
| Basic | | $ | 3.85 |
| | $ | 3.61 |
| | $ | 1.99 |
| | $ | 2.81 |
| | $ | 3.85 |
| | $ | 3.61 |
|
| Diluted | | $ | 3.83 |
| | $ | 3.58 |
| | $ | 1.97 |
| | $ | 2.80 |
| | $ | 3.83 |
| | $ | 3.58 |
|
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| | | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 |
| (millions) | | Pre-tax amount | Tax (expense) benefit | After-tax amount | | Pre-tax amount | Tax (expense) benefit | After-tax amount | | Pre-tax amount | Tax (expense) benefit | After-tax amount | | Pre-tax amount | Tax (expense) benefit | After-tax amount | | Pre-tax amount | Tax (expense) benefit | After-tax amount | | Pre-tax amount | Tax (expense) benefit | After-tax amount |
| Net income | | | $ | 1,344 |
| | | $ | 1,254 |
| | | $ | 700 |
| | | $ | 977 |
| | | $ | 1,344 |
| | | $ | 1,254 |
|
| Other comprehensive income: | | | | | | | | | | | | |
| Foreign currency translation adjustments | | $ | 5 |
| $ | (53 | ) | (48 | ) | | $ | (34 | ) | $ | 113 |
| 79 |
| | $ | (230 | ) | $ | (24 | ) | (254 | ) | | $ | 100 |
| $ | (19 | ) | 81 |
| | $ | 5 |
| $ | (53 | ) | (48 | ) | | $ | (34 | ) | $ | 113 |
| 79 |
|
| Cash flow hedges: | | | | | | | | | | | | |
| Unrealized gain (loss) on cash flow hedges | | 3 |
| (1 | ) | 2 |
| | — |
| — |
| — |
| | (55 | ) | 22 |
| (33 | ) | | 5 |
| (1 | ) | 4 |
| | 3 |
| (1 | ) | 2 |
| | — |
| — |
| — |
|
| Reclassification to net income | | 8 |
| (2 | ) | 6 |
| | 9 |
| (3 | ) | 6 |
| | 11 |
| (6 | ) | 5 |
| | 4 |
| (1 | ) | 3 |
| | 8 |
| (2 | ) | 6 |
| | 9 |
| (3 | ) | 6 |
|
| Postretirement and postemployment benefits: | | | | | | | | | | | | |
| Amounts arising during the period: | | | | | | | | | | | | |
| Net experience gain (loss) | | (8 | ) | 1 |
| (7 | ) | | 44 |
| (12 | ) | 32 |
| | 25 |
| (9 | ) | 16 |
| | (16 | ) | 5 |
| (11 | ) | | (8 | ) | 1 |
| (7 | ) | | 44 |
| (12 | ) | 32 |
|
| Prior service credit (cost) | | 1 |
| — |
| 1 |
| | — |
| — |
| — |
| | (4 | ) | 2 |
| (2 | ) | | 3 |
| (1 | ) | 2 |
| | 1 |
| — |
| 1 |
| | — |
| — |
| — |
|
| Reclassification to net income: | | | | | | | | | | | | |
| Net experience (gain) loss | | (5 | ) | 1 |
| (4 | ) | | — |
| — |
| — |
| | 3 |
| (1 | ) | 2 |
| | (5 | ) | 1 |
| (4 | ) | | (5 | ) | 1 |
| (4 | ) | | — |
| — |
| — |
|
| Prior service (credit) cost | | — |
| — |
| — |
| | 1 |
| — |
| 1 |
| | 5 |
| (1 | ) | 4 |
| | (1 | ) | — |
| (1 | ) | | — |
| — |
| — |
| | 1 |
| — |
| 1 |
|
| Venezuela deconsolidation loss | | — |
| — |
| — |
| | — |
| — |
| — |
| | 63 |
| — |
| 63 |
| |
| Available-for-sale securities: | | | | | | | |
| Unrealized gain (loss) | | | 4 |
| — |
| 4 |
| | — |
| — |
| — |
| | — |
| — |
| — |
|
| Reclassification to net income | | | (4 | ) | — |
| (4 | ) | | — |
| — |
| — |
| | — |
| — |
| — |
|
| Other comprehensive income (loss) | | $ | 4 |
| $ | (54 | ) | $ | (50 | ) | | $ | 20 |
| $ | 98 |
| $ | 118 |
| | $ | (182 | ) | $ | (17 | ) | $ | (199 | ) | | $ | 90 |
| $ | (16 | ) | $ | 74 |
| | $ | 4 |
| $ | (54 | ) | $ | (50 | ) | | $ | 20 |
| $ | 98 |
| $ | 118 |
|
| Comprehensive income | | | $ | 1,294 |
| | | $ | 1,372 |
| | | $ | 501 |
| | | $ | 1,051 |
| | | $ | 1,294 |
| | | $ | 1,372 |
|
| Net income (loss) attributable to noncontrolling interests | | | 8 |
| | | — |
| | | 1 |
| | | 17 |
| | | 8 |
| | | — |
|
| Other comprehensive income (loss) attributable to noncontrolling interests | | | (7 | ) | | | — |
| | | — |
| | | — |
| | | (7 | ) | | | — |
|
| Comprehensive income attributable to Kellogg Company | | | $ | 1,293 |
| | | $ | 1,372 |
| | | $ | 500 |
| | | $ | 1,034 |
| | | $ | 1,293 |
| | | $ | 1,372 |
|
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
| | | (millions, except share data) | | 2018 | | 2017 | | 2019 | | 2018 |
| Current assets | | | | | | | | |
| Cash and cash equivalents | | $ | 321 |
| | $ | 281 |
| | $ | 397 |
| | $ | 321 |
|
| Accounts receivable, net | | 1,375 |
| | 1,389 |
| | 1,576 |
| | 1,375 |
|
| Inventories | | 1,330 |
| | 1,217 |
| | 1,226 |
| | 1,330 |
|
| Other current assets | | 131 |
| | 149 |
| | 232 |
| | 131 |
|
| Total current assets | | 3,157 |
| | 3,036 |
| | 3,431 |
| | 3,157 |
|
| Property, net | | 3,731 |
| | 3,716 |
| | 3,612 |
| | 3,731 |
|
| Operating lease right-of-use assets | | | 541 |
| | — |
|
| Goodwill | | 6,050 |
| | 5,504 |
| | 5,861 |
| | 6,050 |
|
| Other intangibles, net | | 3,361 |
| | 2,639 |
| | 2,576 |
| | 3,361 |
|
| Investment in unconsolidated entities | | 413 |
| | 429 |
| | 404 |
| | 413 |
|
| Other assets | | 1,068 |
| | 1,027 |
| | 1,139 |
| | 1,068 |
|
| Total assets | | $ | 17,780 |
| | $ | 16,351 |
| | $ | 17,564 |
| | $ | 17,780 |
|
| Current liabilities | | | | | | | | |
| Current maturities of long-term debt | | $ | 510 |
| | $ | 409 |
| | $ | 620 |
| | $ | 510 |
|
| Notes payable | | 176 |
| | 370 |
| | 107 |
| | 176 |
|
| Accounts payable | | 2,427 |
| | 2,269 |
| | 2,387 |
| | 2,427 |
|
| Current operating lease liabilities | | | 114 |
| | — |
|
| Other current liabilities | | 1,416 |
| | 1,474 |
| | 1,550 |
| | 1,416 |
|
| Total current liabilities | | 4,529 |
| | 4,522 |
| | 4,778 |
| | 4,529 |
|
| Long-term debt | | 8,207 |
| | 7,836 |
| | 7,195 |
| | 8,207 |
|
| Operating lease liabilities | | | 433 |
| | — |
|
| Deferred income taxes | | 730 |
| | 355 |
| | 596 |
| | 730 |
|
| Pension liability | | 651 |
| | 839 |
| | 705 |
| | 651 |
|
| Other liabilities | | 504 |
| | 605 |
| | 543 |
| | 504 |
|
| Commitments and contingencies | |
| |
| |
| |
|
| Equity | | | | | | | | |
Common stock, $.25 par value, 1,000,000,000 shares authorized Issued: 420,666,780 shares in 2018 and 420,514,582 shares in 2017 | | 105 |
| | 105 |
| |
Common stock, $.25 par value, 1,000,000,000 shares authorized Issued: 420,829,201 shares in 2019 and 420,666,780 shares in 2018 | | | 105 |
| | 105 |
|
| Capital in excess of par value | | 895 |
| | 878 |
| | 921 |
| | 895 |
|
| Retained earnings | | 7,652 |
| | 7,069 |
| | 7,859 |
| | 7,652 |
|
Treasury stock, at cost 76,801,314 shares in 2018 and 74,911,865 shares in 2017 | | (4,551 | ) | | (4,417 | ) | |
Treasury stock, at cost 79,286,171 shares in 2019 and 76,801,314 shares in 2018 | | | (4,690 | ) | | (4,551 | ) |
| Accumulated other comprehensive income (loss) | | (1,500 | ) | | (1,457 | ) | | (1,448 | ) | | (1,500 | ) |
| Total Kellogg Company equity | | 2,601 |
| | 2,178 |
| | 2,747 |
| | 2,601 |
|
| Noncontrolling interests | | 558 |
| | 16 |
| | 567 |
| | 558 |
|
| Total equity | | 3,159 |
| | 2,194 |
| | 3,314 |
| | 3,159 |
|
| Total liabilities and equity | | $ | 17,780 |
| | $ | 16,351 |
| | $ | 17,564 |
| | $ | 17,780 |
|
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
| | | (millions) | Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non- controlling interests | Total equity | Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non- controlling interests | Total equity |
| shares | amount | shares | amount | shares | amount | shares | amount |
| Balance, January 2, 2016 | 420 |
| $ | 105 |
| $ | 745 |
| $ | 6,573 |
| 70 |
| $ | (3,943 | ) | $ | (1,376 | ) | $ | 2,104 |
| $ | 10 |
| $ | 2,114 |
| |
| Common stock repurchases | | | 6 |
| (426 | ) | | (426 | ) | | (426 | ) | |
| Net income (loss) | | | 699 |
| | | 699 |
| 1 |
| 700 |
| |
| Acquisition of noncontrolling interest | | | | | — |
| 5 |
| 5 |
| |
| Dividends declared ($2.04 per share) | | | (716 | ) | | | (716 | ) |
| (716 | ) | |
| Other comprehensive income (loss) | | | | | (199 | ) | (199 | ) | — |
| (199 | ) | |
| Stock compensation | | | 63 |
| | | | 63 |
| | 63 |
| |
| Stock options exercised and other |
|
| | (2 | ) | (4 | ) | (7 | ) | 372 |
| | 366 |
| | 366 |
| |
| Balance, December 31, 2016 | 420 |
| $ | 105 |
| $ | 806 |
| $ | 6,552 |
| 69 |
| $ | (3,997 | ) | $ | (1,575 | ) | $ | 1,891 |
| $ | 16 |
| $ | 1,907 |
| 420 |
| $ | 105 |
| $ | 806 |
| $ | 6,552 |
| 69 |
| $ | (3,997 | ) | $ | (1,575 | ) | $ | 1,891 |
| $ | 16 |
| $ | 1,907 |
|
| Common stock repurchases | | | 7 |
| (516 | ) | | (516 | ) | | (516 | ) | | | 7 |
| (516 | ) | | (516 | ) | | (516 | ) |
| Net income (loss) | | | 1,254 |
| | | 1,254 |
| — |
| 1,254 |
| | | 1,254 |
| | | 1,254 |
| — |
| 1,254 |
|
| Acquisition of noncontrolling interest | | | | | — |
| — |
| — |
| |
| Dividends declared ($2.12 per share) | | | (736 | ) | | | (736 | ) | | (736 | ) | | | (736 | ) | | | (736 | ) |
| (736 | ) |
| Other comprehensive income (loss) | | | | | 118 |
| 118 |
| — |
| 118 |
| | | | | 118 |
| 118 |
| — |
| 118 |
|
| Stock compensation | | | 66 |
| | | | 66 |
| | 66 |
| | | 66 |
| | | | 66 |
| | 66 |
|
| Stock options exercised and other | 1 |
| | 6 |
| (1 | ) | (1 | ) | 96 |
| | 101 |
| | 101 |
| 1 |
| | 6 |
| (1 | ) | (1 | ) | 96 |
| | 101 |
| | 101 |
|
| Balance, December 30, 2017 | 421 |
| $ | 105 |
| $ | 878 |
| $ | 7,069 |
| 75 |
| $ | (4,417 | ) | $ | (1,457 | ) | $ | 2,178 |
| $ | 16 |
| $ | 2,194 |
| 421 |
| $ | 105 |
| $ | 878 |
| $ | 7,069 |
| 75 |
| $ | (4,417 | ) | $ | (1,457 | ) | $ | 2,178 |
| $ | 16 |
| $ | 2,194 |
|
| Common stock repurchases | | | 5 |
| (320 | ) | | (320 | ) | | (320 | ) | | | 5 |
| (320 | ) | | (320 | ) | | (320 | ) |
| Net income (loss) | | | 1,336 |
| | | 1,336 |
| 8 |
| 1,344 |
| | | 1,336 |
| | | 1,336 |
| 8 |
| 1,344 |
|
| Acquisition of noncontrolling interest | | | | | — |
| 552 |
| 552 |
| | | | | — |
| 552 |
| 552 |
|
| Dividends declared ($2.20 per share) | | | (762 | ) | | | (762 | ) | (11 | ) | (773 | ) | | | (762 | ) | | | (762 | ) | | (762 | ) |
| Distributions to noncontrolling interest | | | | | | — |
| (11 | ) | (11 | ) |
| Other comprehensive income (loss) | | | | | (43 | ) | (43 | ) | (7 | ) | (50 | ) | | | | | (43 | ) | (43 | ) | (7 | ) | (50 | ) |
| Stock compensation | | | 59 |
| | | | 59 |
| | 59 |
| | | 59 |
| | | | 59 |
| | 59 |
|
| Stock options exercised and other | — |
| | (42 | ) | 9 |
| (3 | ) | 186 |
| | 153 |
| | 153 |
| — |
| | (42 | ) | 9 |
| (3 | ) | 186 |
| | 153 |
| | 153 |
|
| Balance, December 29, 2018 | 421 |
| $ | 105 |
| $ | 895 |
| $ | 7,652 |
| 77 |
| $ | (4,551 | ) | $ | (1,500 | ) | $ | 2,601 |
| $ | 558 |
| $ | 3,159 |
| 421 |
| $ | 105 |
| $ | 895 |
| $ | 7,652 |
| 77 |
| $ | (4,551 | ) | $ | (1,500 | ) | $ | 2,601 |
| $ | 558 |
| $ | 3,159 |
|
| Common stock repurchases | | | | 4 |
| (220 | ) | | (220 | ) | | (220 | ) |
| Net income (loss) | | | | 960 |
| | | 960 |
| 17 |
| 977 |
|
| Sale of subsidiary shares to noncontrolling interest | | | | | | — |
| 1 |
| 1 |
|
| Dividends declared ($2.26 per share) | | | | (769 | ) | | | (769 | ) | — |
| (769 | ) |
| Distributions to noncontrolling interest | | | | | | — |
| (9 | ) | (9 | ) |
| Other comprehensive income (loss) | | | | | | 74 |
| 74 |
| — |
| 74 |
|
| Reclassification of tax effects relating to U.S. tax reform | | | | 22 |
| | | (22 | ) | — |
| | — |
|
| Stock compensation | | | | 56 |
| | | | 56 |
| | 56 |
|
| Stock options exercised and other | | — |
| | (30 | ) | (6 | ) | (2 | ) | 81 |
| | 45 |
| | 45 |
|
| Balance, December 28, 2019 | | 421 |
| $ | 105 |
| $ | 921 |
| $ | 7,859 |
| 79 |
| $ | (4,690 | ) | $ | (1,448 | ) | $ | 2,747 |
| $ | 567 |
| $ | 3,314 |
|
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | (millions) | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 |
| Operating activities | | | | | | | | | | | | |
| Net income | | $ | 1,344 |
| | $ | 1,254 |
| | $ | 700 |
| | $ | 977 |
| | $ | 1,344 |
| | $ | 1,254 |
|
| Adjustments to reconcile net income to operating cash flows: | | | | | | | | | | | | |
| Depreciation and amortization | | 516 |
| | 481 |
| | 517 |
| | 484 |
| | 516 |
| | 481 |
|
| Postretirement benefit plan expense (benefit) | | 170 |
| | (427 | ) | | 198 |
| | (89 | ) | | 170 |
| | (427 | ) |
| Deferred income taxes | | 46 |
| | (58 | ) | | (24 | ) | | 47 |
| | 46 |
| | (58 | ) |
| Stock compensation | | 59 |
| | 66 |
| | 63 |
| | 56 |
| | 59 |
| | 66 |
|
| Venezuela deconsolidation | | — |
| | — |
| | 72 |
| |
| Venezuela remeasurement | | — |
| | — |
| | 11 |
| |
| Multi-employer pension plan exit liability | | | 132 |
| | 7 |
| | 26 |
|
| Gain from unconsolidated entities, net | | (200 | ) | | — |
| | — |
| | — |
| | (200 | ) | | — |
|
| Noncurrent income taxes payable | | (23 | ) | | 144 |
| | (12 | ) | | (35 | ) | | (23 | ) | | 144 |
|
| Other | | (40 | ) | | 27 |
| | 82 |
| | (1 | ) | | (47 | ) | | 1 |
|
| Tax payment related to divestitures | | | (255 | ) | | — |
| | — |
|
| Postretirement benefit plan contributions | | (287 | ) | | (44 | ) | | (33 | ) | | (28 | ) | | (287 | ) | | (44 | ) |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | |
| Trade receivables | | 76 |
| | (1,300 | ) | | (480 | ) | | (145 | ) | | 76 |
| | (1,300 | ) |
| Inventories | | (86 | ) | | 80 |
| | 7 |
| | 2 |
| | (86 | ) | | 80 |
|
| Accounts payable | | 115 |
| | 193 |
| | 124 |
| | (9 | ) | | 115 |
| | 193 |
|
| All other current assets and liabilities | | (154 | ) | | (13 | ) | | 46 |
| | 40 |
| | (154 | ) | | (13 | ) |
| Net cash provided by (used in) operating activities | | $ | 1,536 |
| | $ | 403 |
| | $ | 1,271 |
| | $ | 1,176 |
| | $ | 1,536 |
| | $ | 403 |
|
| Investing activities | | | | | | | | | | | | |
| Additions to properties | | $ | (578 | ) | | $ | (501 | ) | | $ | (507 | ) | | $ | (586 | ) | | $ | (578 | ) | | $ | (501 | ) |
| Collections of deferred purchase price on securitized trade receivables | | — |
| | 1,243 |
| | 501 |
| | — |
| | — |
| | 1,243 |
|
| Acquisitions, net of cash acquired | | (28 | ) | | (592 | ) | | (398 | ) | | (8 | ) | | (28 | ) | | (592 | ) |
| Reduction of cash due to Venezuela deconsolidation | | — |
| | — |
| | (2 | ) | |
| Divestiture | | | 1,332 |
| | — |
| | — |
|
| Investments in unconsolidated entities | | (389 | ) | | — |
| | 27 |
| | — |
| | (389 | ) | | — |
|
| Acquisition of cost method investments | | (8 | ) | | (7 | ) | | (2 | ) | | (1 | ) | | (8 | ) | | (7 | ) |
| Purchases of available for sale securities | | | (18 | ) | | — |
| | — |
|
| Sales of available for sale securities | | | 83 |
| | — |
| | — |
|
| Other | | 55 |
| | 6 |
| | (11 | ) | | (28 | ) | | 55 |
| | 6 |
|
| Net cash provided by (used in) investing activities | | $ | (948 | ) | | $ | 149 |
| | $ | (392 | ) | | $ | 774 |
| | $ | (948 | ) | | $ | 149 |
|
| Financing activities | | | | | | | | | | | | |
| Net increase (reduction) of notes payable, with maturities less than or equal to 90 days | | (264 | ) | | 153 |
| | (918 | ) | | (18 | ) | | (264 | ) | | 153 |
|
| Issuances of notes payable, with maturities greater than 90 days | | 62 |
| | 17 |
| | 1,961 |
| | 62 |
| | 62 |
| | 17 |
|
| Reductions of notes payable, with maturities greater than 90 days | | (23 | ) | | (238 | ) | | (1,831 | ) | | (69 | ) | | (23 | ) | | (238 | ) |
| Issuances of long-term debt | | 993 |
| | 1,251 |
| | 2,657 |
| | 80 |
| | 993 |
| | 1,251 |
|
| Reductions of long-term debt | | (408 | ) | | (632 | ) | | (1,737 | ) | | (1,009 | ) | | (408 | ) | | (632 | ) |
| Debt extinguishment costs | | — |
| | — |
| | (144 | ) | |
| Debt redemption costs | | | (17 | ) | | — |
| | — |
|
| Net issuances of common stock | | 167 |
| | 97 |
| | 368 |
| | 64 |
| | 167 |
| | 97 |
|
| Common stock repurchases | | (320 | ) | | (516 | ) | | (426 | ) | | (220 | ) | | (320 | ) | | (516 | ) |
| Cash dividends | | (762 | ) | | (736 | ) | | (716 | ) | | (769 | ) | | (762 | ) | | (736 | ) |
| Other | | (11 | ) | | — |
| | — |
| | (9 | ) | | (11 | ) | | — |
|
| Net cash provided by (used in) financing activities | | $ | (566 | ) | | $ | (604 | ) | | $ | (786 | ) | | $ | (1,905 | ) | | $ | (566 | ) | | $ | (604 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | 18 |
| | 53 |
| | (64 | ) | | 31 |
| | 18 |
| | 53 |
|
| Increase (decrease) in cash and cash equivalents | | $ | 40 |
| | $ | 1 |
| | $ | 29 |
| | $ | 76 |
| | $ | 40 |
| | $ | 1 |
|
| Cash and cash equivalents at beginning of period | | 281 |
| | 280 |
| | 251 |
| | 321 |
| | 281 |
| | 280 |
|
| Cash and cash equivalents at end of period | | $ | 321 |
| | $ | 281 |
| | $ | 280 |
| | $ | 397 |
| | $ | 321 |
| | $ | 281 |
|
| | | | | | | | | | | | | |
| Supplemental cash flow disclosures: | | | | | | | | | | | | |
| Interest paid | | $ | 280 |
| | $ | 258 |
| | $ | 405 |
| | $ | 284 |
| | $ | 280 |
| | $ | 258 |
|
| Income taxes paid | | $ | 188 |
| | $ | 352 |
| | $ | 256 |
| | $ | 537 |
| | $ | 188 |
| | $ | 352 |
|
| | | | | | | | | | | | | |
| Supplemental cash flow disclosures of non-cash investing activities: | | | | | | | | | | | | |
| Beneficial interests obtained in exchange for securitized trade receivables | | $ | — |
| | $ | 1,222 |
| | $ | 538 |
| | $ | — |
| | $ | — |
| | $ | 1,222 |
|
| Additions to properties included in accounts payable | | $ | 162 |
| | $ | 151 |
| | $ | 161 |
| | $ | 128 |
| | $ | 162 |
| | $ | 151 |
|
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1
ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Kellogg Company, those of the subsidiaries that it controls due to ownership of a majority voting interest (Kellogg or the Company). The Company continually evaluates its involvement with variable interest entities (VIEs) to determine whether it has variable interests and is the primary beneficiary of the VIE. When these criteria are met, the Company is required to consolidate the VIE. The Company’s share of earnings or losses of nonconsolidated affiliates is included in its consolidated operating results using the equity method of accounting when it is able to exercise significant influence over the operating and financial decisions of the affiliate. The Company uses the cost method of accounting if it is not able to exercise significant influence over the operating and financial decisions of the affiliate. Intercompany balances and transactions are eliminated.
The Company’s fiscal year normally ends on the Saturday closest to December 31 and as a result, a 53rd week is added approximately every sixth year. The Company’s 2019, 2018 2017 and 20162017 fiscal years each contained 52 weeks and ended on December 28, 2019, December 29, 2018,, and December 30, 2017, and December 31, 2016, respectively.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates.
Cash and cash equivalents
Highly liquid investments with remaining stated maturities of three months or less when purchased are considered cash equivalents and recorded at cost.
Accounts receivable
Accounts receivable consists principally of trade receivables, which are recorded at the invoiced amount, net of allowances for doubtful accounts and prompt payment discounts. Trade receivables do not bear interest. The allowance for doubtful accounts represents management’s estimate of the amount of probable credit losses in existing accounts receivable, as determined from a review of past due balances and other specific account data. Account balances are written off against the allowance when management determines the receivable is uncollectible. As of year-endFor the years ended 2019 and 2018 the Company did not have off-balance sheet credit exposure related to its customers. As of year-end 2017, the Company's off-balance sheet credit exposure related to its customers was immaterial. Please refer to Note 2 for information on sales of accounts receivable.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined on an average cost basis.
Property
The Company’s property consists mainly of plants and equipment used for manufacturing activities. These assets are recorded at cost and depreciated over estimated useful lives using straight-line methods for financial reporting and accelerated methods, where permitted, for tax reporting. Major property categories are depreciated over various periods as follows (in years): manufacturing machinery and equipment 15-30; office equipment 5; computer equipment and capitalized software 3-7; building components 20; building structures 10-50. Cost includes interest associated with significant capital projects. Plant and equipment are reviewed for impairment when conditions indicate that the carrying value may not be recoverable. Such conditions include an extended period of idleness or a plan of disposal. Assets to be disposed of at a future date are depreciated over the remaining period of use. Assets to be sold are written down to realizable value at the time the assets are being actively marketed for sale and a sale is expected to occur within one year. There were no assets held for sale at the year-end 2019 or 2018. As of year-end 2017, the carrying value of assets held for sale was immaterial.
Goodwill and other intangible assets
Goodwill and indefinite-lived intangibles are not amortized, but are tested at least annually for impairment of value and whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. An intangible asset with a finite life is amortized on a straight-line basis over the estimated useful life, which materially approximates the pattern of economic benefit.
For the goodwill impairment test, the fair value of the reporting units are estimated based on market multiples. This approach employs market multiples based on either sales or earnings before interest, taxes, depreciation and amortization for companies that are comparable to the Company’s reporting units. In the event the fair value determined using the market multiple approach is close to carrying value, the Company may supplement the fair value determination using discounted cash flows. The assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for the Company’s reporting units.
Similarly, impairment testing of other intangible assets requires a comparison of carrying value to fair value of that particular asset. Fair values of non-goodwill intangible assets are based primarily on projections of future cash flows to be generated from that asset. For instance, cash flows related to a particular trademark would be based on a projected royalty stream attributable to branded product sales, discounted at rates consistent with rates used by market participants.
These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables.
Accounts payable
The Company has agreements with third parties to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. The Company has no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers. The payment of these obligations by the Company is included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of December 28, 2019, $812 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $605 million of those payment obligations to participating financial institutions. As of December 29, 2018, $893 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $701 million of those payment obligations to participating financial institutions. As of December 30, 2017, $850 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $674 million of those payment obligations to participating financial institutions.
Revenue recognition
The Company recognizes sales upon delivery of its products to customers. Revenue, which includes shipping and handling charges billed to the customer, is reported net of applicable discounts, returns, allowances, and various government withholding taxes. Methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to reimbursement based on actual occurrence or performance. Where applicable, future reimbursements are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance.
The Company recognizes revenue from the sale of food products which are sold to retailers through direct sales forces, broker and distributor arrangements. The Company also recognizes revenue from the license of our trademarks granted to third parties who uses these trademarks on their merchandise and revenue from hauling services provided to third parties within certain markets. Revenue from these licenses and hauling services is not material to the Company.
Contract balances recognized in the current period that are not the result of current period performance are not material to the Company. The Company also does not incur costs to obtain or fulfill contracts.
The Company does not adjust the promised amount of consideration for the effects of significant financing components as the Company expects, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
The Company accounts for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service.
The Company excludes from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer for sales taxes.
Performance obligations
The Company recognizes revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. At the time of delivery, theThe customer is invoiced with payment terms which are commensurate with the customer’s credit profile. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.
The Company assesses the goods and services promised in its customers’ purchase orders and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Company considers all the goods or services promised, whether explicitly stated or implied based on customary business practices. For a purchase order that has more than one performance obligation, the Company allocates the total consideration to each distinct performance obligation on a relative standalone selling price basis.
Significant Judgments
The Company offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Where applicable, future provisions are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance.
OurThe Company's promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, contests and loyalty programs. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally immaterial and recognized as a change in management estimate in a subsequent period.
Advertising and promotion
The Company expenses production costs of advertising the first time the advertising takes place. Advertising expense is classified in selling, general and administrative (SGA) expense.
The Company classifies promotional payments to its customers, the cost of consumer coupons, and other cash redemption offers in net sales. Promotional allowances are estimated using various techniques including historical cash expenditure and redemption experience and patterns. Differences between estimated expense and actual redemptions are normally immaterial and recognized as a change in management estimate in a subsequent period. The liability associated with these promotions are recorded in other current liabilities.
The cost of promotional package inserts is recorded in cost of goods sold (COGS). Other types of consumer promotional expenditures are recorded in SGA expense.
Research and development
The costs of research and development (R&D) are expensed as incurred and are classified in SGA expense. R&D includes expenditures for new product and process innovation, as well as significant technological improvements to existing products and processes. The Company’s R&D expenditures primarily consist of internal salaries, wages, consulting, and supplies attributable to time spent on R&D activities. Other costs include depreciation and maintenance of research facilities and equipment, including assets at manufacturing locations that are temporarily engaged in pilot plant activities.
Stock-based compensation
The Company uses stock-based compensation, including stock options, restricted stock, restricted stock units, and executive performance shares, to provide long-term performance incentives for its global workforce.
The Company classifies pre-tax stock compensation expense in SGA and COGS within its corporate operations. Expense attributable to awards of equity instruments is recorded in capital in excess of par value in the Consolidated Balance Sheet.
Certain of the Company’s stock-based compensation plans contain provisions that prorate vesting of awards upon retirement, disability, or death of eligible employees and directors. A stock-based award is considered vested for expense attribution purposes when the employee’s retention of the award is no longer contingent on providing subsequent service. Accordingly, the Company recognizes compensation cost immediately for awards granted to retirement-eligible individuals or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period.
The Company recognizes compensation cost for stock option awards that have a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Income taxes
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax-related interest and penalties as interest expense and SGA expense, respectively, on the Consolidated Statement of Income. The current portion of the Company’s unrecognized tax benefits is presented in the Consolidated Balance Sheet in other current assets and other current liabilities, and the amounts expected to be settled after one year are recorded in other assets and other liabilities.
Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration as well as the reinvestment assertion regarding our undistributed foreign earnings. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes a provision designed to tax currently global intangible low taxed income (GILTI) starting in 2018. Under the provision, a U.S. shareholder is required to include in gross income the amount of its GILTI, which is 50% of the excess of the shareholder’s net tested income of its controlled foreign corporation over the deemed tangible income return. The amount of GILTI included by a U.S. shareholder is computed by aggregating all controlled foreign corporations (CFC). Shareholders are allowed to claim a foreign tax credit for 80 percent of the taxes paid or accrued with respect to the tested income of each CFC, subject to some limitations.
The Financial Accounting Standards Board (FASB) staff has indicated that a company should make and disclose a policy election as to whether it will (1) recognize deferred taxes for basis differences expected to reverse as GILTI or (2) account for GILTI as a period cost if and when incurred. During 2018, the Company elected to account for the GILTI as a period cost and has included an estimate for GILTI in its effective tax rate.
Derivative Instruments
The fair value of derivative instruments is recorded in other current assets, other assets, other current liabilities or other liabilities. Gains and losses representing either hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or hedges of translational exposure are recorded in the Consolidated Statement of Income in other income (expense), net (OIE) or interest expense. In the Consolidated Statement of Cash Flows, settlements of cash flow and fair value hedges are classified as an operating activity; settlements of all other derivative instruments, including instruments for which hedge accounting has been discontinued, are classified consistent with the nature of the instrument.
Cash flow hedges. Qualifying derivatives are accounted for as cash flow hedges when the hedged item is a forecasted transaction. Gains and losses on these instruments are recorded in other comprehensive income until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income (loss) (AOCI) to the Consolidated Statement of Income on the same line item as the underlying transaction.
Fair value hedges. Qualifying derivatives are accounted for as fair value hedges when the hedged item is a recognized asset, liability, or firm commitment. Gains and losses on these instruments are recorded in earnings, offsetting gains and losses on the hedged item.
Net investment hedges. Qualifying derivative and nonderivative financial instruments are accounted for as net investment hedges when the hedged item is a nonfunctional currency investment in a subsidiary. Gains and losses on these instruments are included in foreign currency translation adjustments in AOCI.
Derivatives not designated for hedge accounting. Gains and losses on these instruments are recorded in the Consolidated Statement of Income, on the same line item as the underlying hedged item.
Foreign currency exchange risk. The Company is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases, intercompany transactions and when applicable, nonfunctional currency denominated third-party debt. The Company is also exposed to fluctuations in the value of foreign currency investments in subsidiaries and cash flows related to repatriation of these investments. Additionally, the Company is exposed to volatility in the translation of foreign currency denominated earnings to U.S. dollars. Management assesses foreign currency risk based on transactional cash flows and translational volatility and may enter into forward contracts, options, and currency swaps to reduce fluctuations in long or short currency positions.
Forward contracts and options are generally less than 18 months duration. Currency swap agreements are established in conjunction with the term of underlying debt issues.
For foreign currency cash flow and fair value hedges, the assessment of effectiveness is generally based on changes in spot rates. Changes in time value are reported in OIE.
Interest rate risk. The Company is exposed to interest rate volatility with regard to future issuances of fixed rate debt and existing and future issuances of variable rate debt. The Company periodically uses interest rate swaps, including forward-starting swaps, to reduce interest rate volatility and funding costs associated with certain debt issues, and to achieve a desired proportion of variable versus fixed rate debt, based on current and projected market conditions.
Fixed-to-variable interest rate swaps are accounted for as fair value hedges and the assessment of effectiveness is based on changes in the fair value of the underlying debt, using incremental borrowing rates currently available on loans with similar terms and maturities.
Price risk. The Company is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials, fuel, and energy. The Company has historically used the combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months.
Pension benefits, nonpension postretirement and postemployment benefits
The Company sponsors a number of U.S. and foreign plans to provide pension, health care, and other welfare benefits to retired employees, as well as salary continuance, severance, and long-term disability to former or inactive employees.
The recognition of benefit expense is based on actuarial assumptions, such as discount rate, long-term rate of compensation increase, and long-term rate of return on plan assets and health care cost trend rate. Service cost is reported in COGS and SGA expense on the Consolidated Statement of Income. All other components of net periodic pension cost are included in OIE.
Postemployment benefits. The Company recognizes an obligation for postemployment benefit plans that vest or accumulate with service. Obligations associated with the Company’s postemployment benefit plans, which are unfunded, are included in other current liabilities and other liabilities on the Consolidated Balance Sheet. All gains and losses are recognized over the average remaining service period of active plan participants.
Postemployment benefits that do not vest or accumulate with service or benefits to employees in excess of those specified in the respective plans are expensed as incurred.
Pension and nonpension postretirement benefits. The Company recognizes actuarial gains and losses in operating results in the year in which they occur. Experience gains and losses are recognized annually as of the measurement date, which is the Company’s fiscal year-end, or when remeasurement is otherwise required under generally accepted accounting principles. The Company uses the fair value of plan assets to calculate the expected return on plan assets.
Reportable segments are allocated service cost. All other components of pension and postretirement benefit expense, including interest cost, expected return on assets, prior service cost, and experience gains and losses are considered unallocated corporate costs and are not included in the measure of reportable segment operating results. See Note 1817 for more information on reportable segments. Management reviews the Company’s expected long-term rates of return annually; however, the benefit trust investment performance for one particular year does not, by itself, significantly influence this evaluation. The expected rates of return are generally not revised provided these rates fall between the 25th and 75th percentile of expected long-term returns, as determined by the Company’s modeling process.
For defined benefit pension and postretirement plans, the Company records the net overfunded or underfunded position as a pension asset or pension liability on the Consolidated Balance Sheet.
New accounting standards
Income Taxes.In October 2016, the Financial Accounting Standards Board (FASB), as part of their simplification initiative, issued an Accounting Standards Update (ASU) to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Current Generally Accepted Accounting Principles (GAAP) prohibit recognition of current and deferred income taxes for intra-entity asset transfers until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. The amendments in the ASU eliminate the exception, such that entities should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. That is, early adoption should be the first interim period if an entity issues interim financial statements. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the period of adoption. The Company early adopted the ASU in the first quarter of 2017. As a result of intercompany transfers of intellectual property, the Company recorded a $39 million reduction in income tax expense during the year ended December 30, 2017. Upon adoption, there was no cumulative effect adjustment to retained earnings.
Simplifying the Measurement of Inventory.In July 2015, the FASB issued an ASU to simplify the measurement of inventory. The ASU requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted the updated standard in the first quarter of 2017 with no material impact to the financial statements,
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued an ASU intended to simplify hedge accounting by better aligning an entity’s financial reporting for hedging relationships with its risk management activities. The ASU also simplifies the application of the hedge accounting guidance. The new guidance is effective fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified retrospective basis with a cumulative-effect adjustment to the Consolidated Balance Sheet as of the beginning of the year of adoption. The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. The Company adopted the ASU in the first quarter of 2018. The impact of adoption was immaterial to the financial statements.
Improving the Presentation of net Periodic Pension Cost and net Periodic Postretirement Benefit Cost. In March 2017, the FASB issued an ASU to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company adopted the ASU in the first quarter of 2018. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.
Simplifying the test for goodwill impairment. In January 2017, the FASB issued an ASU to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The ASU is effective for an entity's annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU should be applied on a prospective basis. The Company adopted the ASU in the first quarter of 2018 with no impact.
Statement of Cash Flows. In August 2016, the FASB issued an ASU to provide various cash flow statement classification guidance for certain cash receipts and payments of which the following amendments were most applicable to the Company: (a) debt prepayment or extinguishment costs; (b) contingent consideration payments made after a business combination; (c) insurance settlement proceeds; (d) distributions from equity method investees; (e) beneficial interests in securitization transactions and (f) application of the predominance principle for cash receipts and payments with aspects of more than one class of cash flows. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period, in which case adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The amendments in this ASU should be applied retrospectively. The Company adopted the new ASU in the first quarter of 2018. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.
Recognition and measurement of financial assets and liabilities. In January 2016, the FASB issued an ASU which requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and which updates certain presentation and disclosure requirements. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. Entities should apply the update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company adopted the updated standard in the first quarter of 2018. The impact of adoption was immaterial to the financial statements.
Revenue from contracts with customers. In May 2014, the FASB issued an ASU, as amended, which provides guidance for accounting for revenue from contracts with customers. The core principle of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. To achieve that core principle, an entity would be required to apply the following five steps: 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted the updated standard in the first quarter of 2018 using the full retrospective method and restated previously reported amounts. In connection with the adoption, the Company made reclassification of certain customer allowances. The adoption effects relate to the timing of recognition and classification of certain promotional allowances. The updated revenue standard also required additional disaggregated revenue disclosures. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.
Practical expedients
The Company elected the following practical expedients in accordance with ASU 2014-09:
Significant financing component - The Company elected not to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Shipping and handling costs - The Company elected to account for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service.
Measurement of transaction price - The Company has elected to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer for sales taxes.
Impacts to Previously Reported Results
Adoption of the standards related to revenue recognition, pension and cash flow impacted our previously reported 2017 results as follows:
|
| | | | | | | | | | | | |
| (Dollars in millions, except per share data) | Year ended December 30, 2017 |
| Consolidated Statement of Income | Previously Reported | Revenue Recognition ASU | Pension ASU | Restated |
| Net sales | $ | 12,923 |
| $ | (69 | ) | $ | — |
| $ | 12,854 |
|
| Cost of goods sold | $ | 7,901 |
| $ | (71 | ) | $ | 325 |
| $ | 8,155 |
|
| Selling, general and administrative expense | $ | 3,076 |
| $ | 19 |
| $ | 217 |
| $ | 3,312 |
|
| Other income (expense), net | $ | (16 | ) | $ | — |
| $ | 542 |
| $ | 526 |
|
| Income taxes | $ | 412 |
| $ | (2 | ) | $ | — |
| $ | 410 |
|
| Net income | $ | 1,269 |
| $ | (15 | ) | $ | — |
| $ | 1,254 |
|
| Per share amounts: | | | | |
| Basic earnings | $ | 3.65 |
| $ | (0.04 | ) | $ | — |
| $ | 3.61 |
|
| Diluted earnings | $ | 3.62 |
| $ | (0.04 | ) | $ | — |
| $ | 3.58 |
|
|
| | | | | | | | | |
| (Dollars in millions, except per share data) | As of December 30, 2017 |
| Consolidated Balance Sheet | Previously Reported | Revenue Recognition ASU | Restated |
| Other assets | $ | 1,026 |
| $ | 1 |
| $ | 1,027 |
|
| Other current liabilities | $ | 1,431 |
| $ | 43 |
| $ | 1,474 |
|
| Deferred income taxes | $ | 363 |
| $ | (8 | ) | $ | 355 |
|
| Retained earnings | $ | 7,103 |
| $ | (34 | ) | $ | 7,069 |
|
|
| | | | | | | | | | | | |
| (Dollars in millions, except per share data) | Year ended December 30, 2017 |
| Consolidated Statement of Cash Flows | Previously Reported | Revenue Recognition ASU | Cash Flow ASU | Restated |
| Net income | $ | 1,269 |
| $ | (15 | ) | $ | — |
| $ | 1,254 |
|
| Deferred income taxes | $ | (56 | ) | $ | (2 | ) | $ | — |
| $ | (58 | ) |
| Trade receivables | $ | (57 | ) | $ | — |
| $ | (1,243 | ) | $ | (1,300 | ) |
| All other current assets and liabilities, net | $ | (30 | ) | $ | 17 |
| $ | — |
| $ | (13 | ) |
| Net cash provided by (used in) operating activities | $ | 1,646 |
| $ | — |
| $ | (1,243 | ) | $ | 403 |
|
| Collections of deferred purchase price on securitized trade receivables | $ | — |
| $ | — |
| $ | 1,243 |
| $ | 1,243 |
|
| Net cash provided by (used in) investing activities | $ | (1,094 | ) | $ | — |
| $ | 1,243 |
| $ | 149 |
|
Adoption of the standards related to revenue recognition, pension and cash flow impacted our previously reported 2016 results as follows:
|
| | | | | | | | | | | | |
| (Dollars in millions, except per share data) | Year ended December 31, 2016 |
| Consolidated Statement of Income | Previously Reported | Revenue Recognition ASU | Pension ASU | Restated |
| Net sales | $ | 13,014 |
| $ | (49 | ) | $ | — |
| $ | 12,965 |
|
| Cost of goods sold | $ | 8,259 |
| $ | (73 | ) | $ | (55 | ) | $ | 8,131 |
|
| Selling, general and administrative expense | $ | 3,360 |
| $ | 17 |
| $ | (26 | ) | $ | 3,351 |
|
| Other income (expense), net | $ | (62 | ) | $ | — |
| $ | (81 | ) | $ | (143 | ) |
| Income taxes | $ | 233 |
| $ | 2 |
| $ | — |
| $ | 235 |
|
| Net income | $ | 695 |
| $ | 5 |
| $ | — |
| $ | 700 |
|
| Per share amounts: | | | | |
| Basic earnings | $ | 1.98 |
| $ | 0.01 |
| $ | — |
| $ | 1.99 |
|
| Diluted earnings | $ | 1.96 |
| $ | 0.01 |
| $ | — |
| $ | 1.97 |
|
|
| | | | | | | | | | | | |
| (Dollars in millions, except per share data) | Year ended December 31, 2016 |
| Consolidated Statement of Cash Flows | Previously Reported | Revenue Recognition ASU | Cash Flow ASU | Restated |
| Net income | $ | 695 |
| $ | 5 |
| $ | — |
| $ | 700 |
|
| Deferred income taxes | $ | (26 | ) | $ | 2 |
| $ | — |
| $ | (24 | ) |
| Other | $ | (62 | ) | $ | — |
| $ | 144 |
| $ | 82 |
|
| Trade receivables | $ | 21 |
| $ | — |
| $ | (501 | ) | $ | (480 | ) |
| All other current assets and liabilities, net | $ | 53 |
| $ | (7 | ) | $ | — |
| $ | 46 |
|
| Net cash provided by (used in) operating activities | $ | 1,628 |
| $ | — |
| $ | (357 | ) | $ | 1,271 |
|
| Collections of deferred purchase price on securitized trade receivables | $ | — |
| $ | — |
| $ | 501 |
| $ | 501 |
|
| Net cash provided by (used in) investing activities | $ | (893 | ) | $ | — |
| $ | 501 |
| $ | (392 | ) |
| Debt extinguishment costs | $ | — |
| $ | — |
| $ | (144 | ) | $ | (144 | ) |
Net cash provided by (used in) financing activities
| $ | (642 | ) | $ | — |
| $ | (144 | ) | $ | (786 | ) |
Accounting standards to be adopted in future periods
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASBFinancial Accounting Standards Board (FASB) issued an ASUAccounting Standard Update (ASU) permitting a company
to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 on items within accumulated other comprehensive income (AOCI). The reclassification is optional. Regardless of whether or not a company opts to make the reclassification, the new guidance requires all companiesretained earnings. We elected to include certain disclosures in their financial statements. The guidance is effective for all fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company will adopt the ASU effective in the first quarter of 2019.2019 and reclassified the disproportionate income tax effect recorded within AOCI to retained earnings. This resulted in a decrease to AOCI and an increase to retained earnings of $22 million. The adjustment primarily related to deferred taxes previously recorded for pension and other postretirement benefits, as well as hedging positions for debt and net investment hedges.
Leases. In February 2016, the FASB issued an ASU which will requirerequires the recognition of lease assets and lease liabilities by lessees for all leases with terms greater than 12 months. The distinction between finance leases and operating leases will remain,remains, with similar classification criteria as current GAAP to distinguish between capital and operating leases. The principal difference from currentprevious guidance is that the lease assets and lease liabilities arising from operating leases will beare recognized on the Consolidated Balance Sheet. Lessor accounting remains substantially similar to currentprevious GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted.
The Company will adoptadopted the ASU in the first quarter of 2019, and expects to elect certain practical expedients permitted under the transition guidance. Additionally, the Company will electusing the optional transition method that allows for a cumulative-effect adjustment in
the period of adoption and will not restatewith no restatement of prior periods. The Company continueselected the package of practical expedients permitted under the transition guidance that allows for the carry forward of historical lease classifications and consistent treatment of initial direct costs for existing leases. The Company also elected to evaluateapply the effectpractical expedient that allows the continued historical treatment of land easements. The Company did not elect the practical expedient for the use of hindsight in evaluating the expected lease term of existing leases.
The adoption to its Consolidated Financial Statements and disclosures, howeverof the Company currently estimates totalASU resulted in the recording of operating lease assets and operating lease liabilities will increaseof approximately $450$453 million to $500$461 million upon adoption. This estimate could changerespectively, as of December 30, 2018. The difference between the Company continues to progress with implementationadditional lease assets and will also fluctuate basedlease liabilities, represents existing deferred rent and prepaid lease balances that were reclassified on the lease portfolio and discount rates asbalance sheet. The adoption of the adoption date. The Company doesASU did not expecthave a material impact to the Company’s Consolidated Statements of Income or Cash Flows.
Accounting standards to be adopted in future periods
Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company is currently assessing whenplans to adopt the ASU in the first quarter of 2020 and apply it prospectively. The adoption is not expected to have a material impact to the impact of adoption.Company's Consolidated Financial Statements.
Compensation Retirement Benefits. In August 2018, the FASB issued ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removed disclosures that no longer are considered cost beneficial, clarified the specific requirements of disclosures, and added disclosure requirements identified as relevant. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company is currently assessing when to adopt the ASU and the impact of adoption.
NOTE 2
SALE OF ACCOUNTS RECEIVABLE
During 2016, The Company initiatedhas a program in which a customer coulddiscrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).
The Company has two Receivable Sales Agreements (Monetization Programs) and previously had a separate U.S. accounts receivable securitization program (Securitization Program), both described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. The Company terminated the Securitization Program at the end of 2017 and entered into the second monetization program during the quarter ended March 31, 2018. The Monetization and Securitization Programs are designed to effectively offset the impact on working capital of the Extended Terms Program.
The Company has no retained interest in the receivables sold, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of December 29, 2018 and December 30, 2017 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.
Monetization Program
The Company has two Monetization Programs for a discrete group of customers, to sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under this agreementthese agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold at any time is $1,033 million.
The Company has no retained interest in the receivables sold, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of December 28, 2019 and December 29, 2018 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.
Accounts receivable sold of $900$774 million and $601$900 million remained outstanding under these arrangements as of December 29, 201828, 2019 and December 30, 2017,29, 2018, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on sale of receivables was $25 million, $26 million $11 million and $5$11 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017, and December 31, 2016, respectively. The recorded loss is included in Other income and expense.
Securitization Program
Between July 2016 and December 2017, the Company had a Securitization Program with a third party financial institution. Under the program, the Company received cash consideration of up to $600 million and a deferred purchase price asset for the remainder of the purchase price. Transfers under the Securitization Program were accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. This Securitization Program utilized Kellogg Funding Company (Kellogg Funding), a wholly-owned subsidiary of the Company. Kellogg Funding's sole business consisted of the purchase of receivables, from its parent or other subsidiary and subsequent transfer of such receivables and related assets to financial institutions. Although Kellogg Funding is included in the Company's consolidated financial statements, it is a separate legal entity with separate creditors who will be entitled, upon its liquidation, to be satisfied out of Kellogg Funding assets prior to any assets or value in Kellogg Funding becoming available to the Company or its subsidiaries. The assets of Kellogg Funding are not available to pay creditors of the Company or its subsidiaries. The Securitization Program was structured to expire in July 2018, but was terminated at the end of 2017. In March 2018 the Company substantially replaced the securitization program with the second monetization program. Kellogg Funding had no creditors and held no assets at December 29, 2018.
As of December 30, 2017, approximately $433 million of accounts receivable sold to Kellogg Funding under the Securitization Program remained outstanding, for which the Company received net cash proceeds of approximately $412 million and a deferred purchase price asset of approximately $21 million. The portion of the purchase price for the receivables which is not paid in cash by the financial institutions is a deferred purchase price asset, which is paid to Kellogg Funding as payments on the receivables are collected from customers. The deferred purchase price asset represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price asset is included in Other current assets on the Consolidated Balance Sheet as of December 30, 2017. Upon final settlement of the program in March 2018, the outstanding deferred purchase price asset of $21 million was exchanged for previously sold trade accounts receivable.
The recorded net loss on sale of receivables is approximately $7 million for the year ended December 30, 2017 and is not material for year ended December 31, 2016. The recorded net loss on sale of receivables is included in Other income and expense.
Other programs
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable balances of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. Accounts receivable sold of $93$89 million and $86$93 million remained outstanding under these programs as of December 29, 201828, 2019 and December 30, 2017,29, 2018, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on the sale of these receivables is included in Other income and expense and is not material.
NOTE 3
ACQUISITIONS,DIVESTITURES, WEST AFRICA INVESTMENTS GOODWILL AND OTHER INTANGIBLE ASSETSACQUISITIONS
Divestiture
On July 28, 2019, the Company completed its sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero International S.A. (“Ferrero”) for approximately $1.3 billion in cash, subject to a working capital adjustment mechanism. Both the total assets and net assets of the businesses were approximately $1.3 billion, resulting in a net pre-tax gain of $38 million during the year ended December 28, 2019, recorded in Other income and (expense), after including related costs to sell of $14 million. Additionally, the Company recognized curtailment gains related to the divestiture totaling $17 million in our U.S. pension and nonpension postretirement plans. The operating results for these businesses were primarily included in the North America reporting segment prior to the sale.
Proceeds from the divestiture were used primarily to redeem $1.0 billion of debt during the third quarter. Additionally, the Company paid approximately $255 million of cash taxes on the divestiture in the fourth quarter of 2019.
In connection with the sale, the Company entered into a transition services agreement (TSA) with Ferrero, under which the Company will provide certain services to Ferrero to help facilitate an orderly transition of the businesses following the sale. In return for these services, Ferrero is required to pay certain agreed upon fees that are designed to reimburse the Company for certain costs incurred by the Company in providing such services, plus specified immaterial margins. The TSA provides for a term of services starting at the sale completion date and continuing for a period of up to 18 months.
Multipro acquisition
On May 2, 2018, the Company (i) acquired an incremental 1% ownership interest in Multipro, a leading distributor of a variety of food products in Nigeria and Ghana, and (ii) exercised its call option (Purchase Option) to acquire a 50% interest in Tolaram Africa Foods, PTE LTD (TAF), a holding company with a 49% equity interest in an affiliated food manufacturer, resulting in the Company having a 24.5% interest in the affiliated food manufacturer. The aggregate cash consideration paid was approximately $419 million and was funded through cash on hand and short-term borrowings, which was refinanced with long-term borrowings in May 2018. As part of the consideration for the acquisition, an escrow established in connection with the original Multipro investment in 2015, which represented a significant portion of the amount paid for the Company’s initial investment, was released by the Company. The amount paid to exercise the Purchase Option was subject to certain working capital and net debt adjustments based on the actual working capital and net debt existing on the exercise date compared to targeted amounts. These adjustments were finalized during 2018 and resulted in an increase in the purchase price of $1 million.
As a result of the Company’s incremental ownership interest in Multipro and concurrent changes to the shareholders' agreement, the Company now has a 51% controlling interest in and began consolidating Multipro.
Accordingly, the acquisition was accounted for as a business combination and the assets and liabilities of Multipro were included in the December 29, 2018 Consolidated Balance Sheet and the results of its operations have been included in the Consolidated Statement of Income subsequent to the acquisition date. The aggregate of the consideration paid and the fair value of previously held equity interest totaled $626 million, or $617 million net of cash acquired. The Multipro investment was previously accounted for under the equity method of accounting and the Company recorded our share of equity income or loss from Multipro within Earnings (loss) from unconsolidated entities. In connection with the business combination, the Company recognized a one-time, non-cash gain on the disposition of our previously held equity interest in Multipro of $245 million, which is included within Earnings (loss) from unconsolidated entities.
We utilized estimated fair values at the acquisition date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed.
The acquisition resulted in $616 million of non-tax deductible goodwill relating principally to planned growth in new markets, deferred taxes associated with intangible assets, and any intangible assets that did not qualify for separate recognition. We used the excess earnings method, a variation of the income approach, to value a perpetual distribution agreement indefinite lived intangible asset. We also valued customer relationships, using either the excess earnings method or with-and-without method, which is also a variation of the income approach. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each indefinite-lived or definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables.
We used carrying values as of the acquisition date to value certain current and non-current assets and liabilities, as we determined that they represented the fair value of those items at the acquisition date. Deferred income tax assets and liabilities as of the acquisition date represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. We estimated the fair value of non-controlling interests assumed consistent with the manner in which we valued all of the underlying assets and liabilities.
The assets and liabilities are included in the Consolidated Balance Sheet as of December 29, 2018 within the Asia-PacificKellogg AMEA reporting segment. The fair value of the acquired assets, assumed liabilities, and noncontrolling interest include the following:
|
| | | | | |
| (millions) | | | May 2, 2018 |
| Current assets | | | $ | 118 |
|
| Property | | | 41 |
|
| Goodwill | | | 616 |
|
| Intangible assets subject to amortization, primarily customer relationships | | | 425 |
|
| Intangible assets not subject to amortization, primarily distribution rights | | | 373 |
|
| Deferred tax liability | | | (254 | ) |
| Other liabilities | | | (150 | ) |
| Noncontrolling interest | | | (552 | ) |
| | | | $ | 617 |
|
The amounts in the above table represent the final allocation of purchase price as of December 29, 2018. During 2018, deferred tax liabilities were decreased by $2 million and other liabilities were increased by $2 million in conjunction with an updated allocation of the purchase price.
Multipro contributedFor the post-acquisition period ended December 29, 2018, the acquisition added net sales of $536 million and net earnings of $8 million, since the acquisition, including transaction fees and integration costs. The Company's consolidated unaudited pro forma historical net sales and net income, as if Multipro had been acquired at the beginning of 2017, exclusive of the non-cash $245 million gain on the disposition of the equity interest recognized in the second quarter of 2018, are estimated as follows:
| | | | Year-to-date period ended | Year ended |
| (millions) | December 29, 2018 | December 30, 2017 | December 29, 2018 | December 30, 2017 |
| Net sales | $ | 13,829 |
| $ | 13,511 |
| $ | 13,829 |
| $ | 13,511 |
|
| Net Income attributable to Kellogg Company | $ | 1,336 |
| $ | 1,255 |
| $ | 1,336 |
| $ | 1,255 |
|
Investment in TAF
The investment in TAF, our interest in an affiliated food manufacturer, is accounted for under the equity method of accounting with the Company’s share of equity income or loss being recognized within Earnings (loss) from unconsolidated entities. TheDuring 2018, when the call option was exercised for TAF, the $458 million aggregate of the consideration paid upon exercise and the historical cost value of the PutPurchase Option was compared to the estimated fair value of the Company’s ownership percentage of TAF and the Company recognized a one-time, non-cash loss of $45 million within Earnings (loss) from unconsolidated entities, which represents an other than temporary excess of cost over fair value of the investment. The difference between the carrying amount of TAF and the underlying equity in net assets is primarily attributable to brand and customer list intangible assets, a portion of which is being amortized over future periods, and goodwill.
TAF and certain other unconsolidated entities of the Company are suppliers of Multipro. The related trade payables are generally settled on a monthly basis. TAF’s net sales, totaling $581 million for the year ended December 28, 2019 and $350 million for the seven months ended December 29, 2018, consist primarily of inventory purchases by Multipro.
RX acquisition
In October 2017, the Company completed its acquisition of Chicago Bar Co., LLC, the manufacturer of RXBAR, for $600 million, or $596 million net of cash and cash equivalents. The purchase price was subject to certain working capital and net debt adjustments based on the actual working capital and net debt existing on the acquisition date compared to targeted amounts. These adjustments were finalized during 2018 and resulted in a purchase price reduction of $1 million. The acquisition was accounted for under the purchase price method and was financed with short-term borrowings.
For the post-acquisition period ended December 30, 2017, the acquisition added $27 million in net sales and less than $1 million of operating profit in the Company's North America Other reporting segment. The pro forma effects of this acquisition were not material.
The assets and liabilities are included in the Consolidated Balance Sheet as of December 29, 201828, 2019 within the North America Other reporting segment. The acquired assets and assumed liabilities include the following:
|
| | | | | |
| (millions) | | | October 27, 2017 |
| Current assets | | | $ | 42 |
|
| Goodwill | | | 373 |
|
| Intangible assets, primarily indefinite-lived brands | | | 203 |
|
| Current liabilities | | | (23 | ) |
| | | | $ | 595 |
|
|
| | | | | |
| (millions) | | | October 27, 2017 |
| Current assets | | | $ | 42 |
|
| Goodwill | | | 373 |
|
| Intangible assets, primarily indefinite-lived brands | | | 203 |
|
| Current liabilities | | | (23 | ) |
| | | | $ | 595 |
|
The amounts in the above table represent the final allocation of purchase price as of December 29, 2018, which resulted in a $2 million increase in amortizable intangible assets with a corresponding reduction of goodwill during 2018.
NOTE 4
GOODWILL AND OTHER INTANGIBLE ASSETS
Parati acquisition
In December 2016, the Company acquired Ritmo Investimentos, controlling shareholder of Parati S/A, Afical Ltda and Padua Ltda ("Parati Group"), a leading Brazilian food group for approximately BRL1.38 billion ($381 million) or $379 million, net of cash and cash equivalents. The purchase price was subject to certain working capital and net debt adjustments based on the actual working capital and net debt existing on the acquisition date compared to targeted amounts. These adjustments were finalized during 2017 and resulted in a purchase price reduction of BRL14 million ($4 million). The acquisition was accounted for under the purchase price method and was financed with cash on hand and short-term borrowings.
For the post-acquisition period ended December 31, 2016, the impacts to net sales and operating profit were not material. The pro forma effects of this acquisition were not material.
The assets and liabilities of the Parati Group are included in the Consolidated Balance Sheet as of December 30, 2017 within the Latin America segment. The acquired assets and assumed liabilities include the following:
|
| | | | | |
| (millions) | | | December 1, 2016 |
| Current assets | | | $ | 44 |
|
| Property | | | 72 |
|
| Goodwill | | | 165 |
|
| Intangible assets | | | 148 |
|
| Current liabilities | | | (48 | ) |
| Non-current deferred tax liability and other | | | (6 | ) |
| | | | $ | 375 |
|
During the year ended December 30, 2017, the value of intangible assets subject to amortization increased $39 million, resulting in an immaterial change to amortization expense, and intangible assets not subject to amortization decreased $11 million with an offsetting $28 million adjustment to goodwill in conjunction with an updated allocation of the purchase price. The Company also recognized $7 million for certain pre-acquisition contingencies which increased goodwill during 2017 and are considered to be probable of being incurred as of December 29, 2018 and December 30, 2017.
A portion of the acquisition price aggregating $67 million was placed in escrow in favor of the seller for general representations and warranties, as well as pending resolution of specified contingencies arising from the business prior to the acquisition. As of December 29, 2018, approximately $17 million remained in escrow related to specified contingencies, of which approximately $4 million and $1 million is scheduled to be released in 2019 and 2020, respectively. The remaining balance will be released only upon resolution of the related contingency.
During 2017, the Company finalized plans to merge the acquired and pre-existing Brazilian legal entities, which resulted in tax basis of the acquired intangible assets. Accordingly, deferred tax liabilities and goodwill were both reduced by $58 million.
The amounts in the above table represent the allocation of purchase price as of December 30, 2017 and represent the finalization of the valuations for intangible assets and the Company's evaluation of pre-acquisition contingencies and finalization of the merger.
Other acquisitions
In September 2016, the Company acquired a majority ownership interest in a natural, bio-organic certified breakfast company for €3 million, which was accounted for under the purchase method and financed with cash on hand. The assets, which primarily consist of indefinite lived intangible assets and goodwill, and liabilities, including non-controlling interests, are included in the Consolidated Balance Sheet as of December 30, 2017 and December 29, 2018 within the Europe segment.
In March 2016, the Company completed the acquisition of an organic and natural snack company for $18 million, which was accounted for under the purchase method and financed with cash on hand. The assets, which primarily consist of indefinite lived brands, and liabilities are included in the Consolidated Balance Sheet as of December 30, 2017 and December 29, 2018 within the North America Other segment.
Goodwill and Intangible Assets
Changes in the carrying amount of goodwill, intangible assets subject to amortization, consisting primarily of customer relationships, distribution agreements, and indefinite-lived intangible assets, consisting of brands and distribution agreements, are presented in the following tables:
Carrying amount of goodwill
|
| | | | | | | | | | | | | | | |
| (millions) | North America | Europe | Latin America | AMEA | Consoli- dated |
| December 30, 2017 | $ | 4,617 |
| $ | 368 |
| $ | 244 |
| $ | 275 |
| $ | 5,504 |
|
| Additions | — |
| — |
| — |
| 616 |
| 616 |
|
| Purchase price allocation adjustment | (2 | ) | — |
| — |
| — |
| (2 | ) |
| Purchase price adjustment | — |
| — |
| — |
| — |
| — |
|
| Currency translation adjustment | (4 | ) | (22 | ) | (26 | ) | (16 | ) | (68 | ) |
| December 29, 2018 | $ | 4,611 |
| $ | 346 |
| $ | 218 |
| $ | 875 |
| $ | 6,050 |
|
| Divestiture | (191 | ) | — |
| — |
| — |
| (191 | ) |
| Currency translation adjustment | 2 |
| 1 |
| (5 | ) | 4 |
| 2 |
|
| December 28, 2019 | $ | 4,422 |
| $ | 347 |
| $ | 213 |
| $ | 879 |
| $ | 5,861 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | U.S. Snacks | U.S. Morning Foods | U.S. Specialty Channels | North America Other | Europe | Latin America | Asia Pacific | Consoli- dated |
| December 31, 2016 | $ | 3,568 |
| $ | 131 |
| $ | 82 |
| $ | 457 |
| $ | 376 |
| $ | 328 |
| $ | 224 |
| $ | 5,166 |
|
| Additions | — |
| — |
| — |
| 375 |
| — |
| — |
| — |
| 375 |
|
| Purchase price allocation adjustment | — |
| — |
| — |
| — |
| — |
| (79 | ) | — |
| (79 | ) |
| Purchase price adjustment | — |
| — |
| — |
| — |
| — |
| (4 | ) | — |
| (4 | ) |
| Currency translation adjustment | — |
| — |
| — |
| 4 |
| 38 |
| (1 | ) | 5 |
| 46 |
|
| December 30, 2017 | $ | 3,568 |
| $ | 131 |
| $ | 82 |
| $ | 836 |
| $ | 414 |
| $ | 244 |
| $ | 229 |
| $ | 5,504 |
|
| Additions | — |
| — |
| — |
| — |
| — |
| — |
| 616 |
| 616 |
|
| Purchase price allocation adjustment | — |
| — |
| — |
| (2 | ) | — |
| — |
| — |
| (2 | ) |
| Purchase price adjustment | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Currency translation adjustment | — |
| — |
| — |
| (4 | ) | (22 | ) | (26 | ) | (16 | ) | (68 | ) |
| December 29, 2018 | $ | 3,568 |
| $ | 131 |
| $ | 82 |
| $ | 830 |
| $ | 392 |
| $ | 218 |
| $ | 829 |
| $ | 6,050 |
|
Intangible assets subject to amortization
|
| | | | | | | | | | | | | | | |
| Gross carrying amount | | | | | |
| (millions) | North America | Europe | Latin America | AMEA | Consoli- dated |
| December 30, 2017 | $ | 72 |
| $ | 45 |
| $ | 74 |
| $ | 10 |
| $ | 201 |
|
| Additions | — |
| — |
| — |
| 425 |
| 425 |
|
| Purchase price allocation adjustment | 2 |
| — |
| — |
| — |
| 2 |
|
| Currency translation adjustment | — |
| (2 | ) | (11 | ) | (7 | ) | (20 | ) |
| December 29, 2018 | $ | 74 |
| $ | 43 |
| $ | 63 |
| $ | 428 |
| $ | 608 |
|
| Additions | 2 |
| — |
| — |
| — |
| 2 |
|
| Divestiture | (12 | ) | — |
| — |
| — |
| (12 | ) |
| Currency translation adjustment | — |
| (2 | ) | (3 | ) | 1 |
| (4 | ) |
| December 28, 2019 | $ | 64 |
| $ | 41 |
| $ | 60 |
| $ | 429 |
| $ | 594 |
|
| | | | | | |
| Accumulated Amortization | | | | | |
| December 30, 2017 | $ | 35 |
| $ | 18 |
| $ | 10 |
| $ | 4 |
| $ | 67 |
|
| Amortization | 4 |
| 3 |
| 4 |
| 12 |
| 23 |
|
| Currency translation adjustment | — |
| (1 | ) | (2 | ) | — |
| (3 | ) |
| December 29, 2018 | $ | 39 |
| $ | 20 |
| $ | 12 |
| $ | 16 |
| $ | 87 |
|
| Amortization (a) | 4 |
| 2 |
| 3 |
| 18 |
| 27 |
|
| Divestiture | (12 | ) | — |
| — |
| — |
| (12 | ) |
| Currency translation adjustment | — |
| (1 | ) | — |
| — |
| (1 | ) |
| December 28, 2019 | $ | 31 |
| $ | 21 |
| $ | 15 |
| $ | 34 |
| $ | 101 |
|
| | | | | | |
| Intangible assets subject to amortization, net |
| December 30, 2017 | $ | 37 |
| $ | 27 |
| $ | 64 |
| $ | 6 |
| $ | 134 |
|
| Additions | — |
| — |
| — |
| 425 |
| 425 |
|
| Amortization | (4 | ) | (3 | ) | (4 | ) | (12 | ) | (23 | ) |
| Purchase price allocation adjustment | 2 |
| — |
| — |
| — |
| 2 |
|
| Currency translation adjustment | — |
| (1 | ) | (9 | ) | (7 | ) | (17 | ) |
| December 29, 2018 | $ | 35 |
| $ | 23 |
| $ | 51 |
| $ | 412 |
| $ | 521 |
|
| Additions | 2 |
| — |
| — |
| — |
| 2 |
|
| Amortization | (4 | ) | (2 | ) | (3 | ) | (18 | ) | (27 | ) |
| Divestiture | — |
| — |
| — |
| — |
| — |
|
| Currency translation adjustment | — |
| (1 | ) | (3 | ) | 1 |
| (3 | ) |
| December 28, 2019 | $ | 33 |
| $ | 20 |
| $ | 45 |
| $ | 395 |
| $ | 493 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Gross carrying amount | | | | | | | | |
| (millions) | U.S. Snacks | U.S. Morning Foods | U.S. Specialty Channels | North America Other | Europe | Latin America | Asia Pacific | Consoli- dated |
| December 31, 2016 | $ | 42 |
| $ | 8 |
| $ | — |
| $ | 5 |
| $ | 40 |
| $ | 36 |
| $ | 10 |
| $ | 141 |
|
| Additions | — |
| — |
| — |
| 17 |
| — |
| — |
| — |
| 17 |
|
| Purchase price allocation adjustment | — |
| — |
| — |
| — |
| — |
| 39 |
| — |
| 39 |
|
| Currency translation adjustment | — |
| — |
| — |
| — |
| 5 |
| (1 | ) | — |
| 4 |
|
| December 30, 2017 | $ | 42 |
| $ | 8 |
| $ | — |
| $ | 22 |
| $ | 45 |
| $ | 74 |
| $ | 10 |
| $ | 201 |
|
| Additions | — |
| — |
| — |
| — |
| — |
| — |
| 425 |
| 425 |
|
| Purchase price allocation adjustment | — |
| — |
| — |
| 2 |
| — |
| — |
| — |
| 2 |
|
| Currency translation adjustment | — |
| — |
| — |
| — |
| (2 | ) | (11 | ) | (7 | ) | (20 | ) |
| December 29, 2018 | $ | 42 |
| $ | 8 |
| $ | — |
| $ | 24 |
| $ | 43 |
| $ | 63 |
| $ | 428 |
| $ | 608 |
|
| | | | | | | | | |
| Accumulated Amortization | | | | | | | | |
| December 31, 2016 | $ | 19 |
| $ | 8 |
| $ | — |
| $ | 4 |
| $ | 14 |
| $ | 6 |
| $ | 3 |
| $ | 54 |
|
| Amortization | 3 |
| — |
| — |
| 1 |
| 3 |
| 4 |
| 1 |
| 12 |
|
| Currency translation adjustment | — |
| — |
| — |
| — |
| 1 |
| — |
| — |
| 1 |
|
| December 30, 2017 | $ | 22 |
| $ | 8 |
| $ | — |
| $ | 5 |
| $ | 18 |
| $ | 10 |
| $ | 4 |
| $ | 67 |
|
| Amortization (a) | 3 |
| — |
| — |
| 1 |
| 3 |
| 4 |
| 12 |
| 23 |
|
| Currency translation adjustment | — |
| — |
| — |
| — |
| (1 | ) | (2 | ) | — |
| (3 | ) |
| December 29, 2018 | $ | 25 |
| $ | 8 |
| $ | — |
| $ | 6 |
| $ | 20 |
| $ | 12 |
| $ | 16 |
| $ | 87 |
|
| | | | | | | | | |
| Intangible assets subject to amortization, net |
| December 31, 2016 | $ | 23 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | 26 |
| $ | 30 |
| $ | 7 |
| $ | 87 |
|
| Additions | — |
| — |
| — |
| 17 |
| — |
| — |
| — |
| 17 |
|
| Amortization | (3 | ) | — |
| — |
| (1 | ) | (3 | ) | (4 | ) | (1 | ) | (12 | ) |
| Purchase price allocation adjustment | — |
| — |
| — |
| — |
| — |
| 39 |
| — |
| 39 |
|
| Currency translation adjustment | — |
| — |
| — |
| — |
| 4 |
| (1 | ) | — |
| 3 |
|
| December 30, 2017 | $ | 20 |
| $ | — |
| $ | — |
| $ | 17 |
| $ | 27 |
| $ | 64 |
| $ | 6 |
| $ | 134 |
|
| Additions | — |
| — |
| — |
| — |
| — |
| — |
| 425 |
| 425 |
|
| Amortization | (3 | ) | — |
| — |
| (1 | ) | (3 | ) | (4 | ) | (12 | ) | (23 | ) |
| Purchase price allocation adjustment | — |
| — |
| — |
| 2 |
| — |
| — |
| — |
| 2 |
|
| Currency translation adjustment | — |
| — |
| — |
| — |
| (1 | ) | (9 | ) | (7 | ) | (17 | ) |
| December 29, 2018 | $ | 17 |
| $ | — |
| $ | — |
| $ | 18 |
| $ | 23 |
| $ | 51 |
| $ | 412 |
| $ | 521 |
|
(a) The currently estimated aggregate amortization expense for each of the next five succeeding fiscal periods is approximately $27$28 million per year through 2023.2024.
Intangible assets not subject to amortization
|
| | | | | | | | | | | | | | | |
| (millions) | North America | Europe | Latin America | AMEA | Consoli- dated |
December 30, 2017
| $ | 1,985 |
| $ | 420 |
| $ | 86 |
| $ | 14 |
| $ | 2,505 |
|
| Additions | — |
| — |
| — |
| 373 |
| 373 |
|
| Purchase price allocation adjustment | — |
| — |
| — |
| — |
| — |
|
| Currency translation adjustment | — |
| (19 | ) | (13 | ) | (6 | ) | (38 | ) |
December 29, 2018
| $ | 1,985 |
| $ | 401 |
| $ | 73 |
| $ | 381 |
| $ | 2,840 |
|
| Additions | 18 |
| — |
| — |
| — |
| 18 |
|
| Divestiture | (765 | ) | — |
| — |
| — |
| (765 | ) |
| Currency translation adjustment | — |
| (9 | ) | (3 | ) | 2 |
| (10 | ) |
| December 28, 2019 | $ | 1,238 |
| $ | 392 |
| $ | 70 |
| $ | 383 |
| $ | 2,083 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | U.S. Snacks | U.S. Morning Foods | U.S. Specialty Channels | North America Other | Europe | Latin America | Asia Pacific | Consoli- dated |
December 31, 2016
| $ | 1,625 |
| $ | — |
| $ | — |
| $ | 176 |
| $ | 383 |
| $ | 98 |
| $ | — |
| $ | 2,282 |
|
| Additions | — |
| — |
| — |
| 184 |
| — |
| — |
| — |
| 184 |
|
| Purchase price allocation adjustment | — |
| — |
| — |
| — |
| — |
| (11 | ) | — |
| (11 | ) |
| Currency translation adjustment | — |
| — |
| — |
| — |
| 51 |
| (1 | ) | — |
| 50 |
|
December 30, 2017
| $ | 1,625 |
| $ | — |
| $ | — |
| $ | 360 |
| $ | 434 |
| $ | 86 |
| $ | — |
| $ | 2,505 |
|
| Additions | — |
| — |
| — |
| — |
| — |
| — |
| 373 |
| 373 |
|
| Purchase price allocation adjustment | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Currency translation adjustment | — |
| — |
| — |
| — |
| (19 | ) | (13 | ) | (6 | ) | (38 | ) |
| December 29, 2018 | $ | 1,625 |
| $ | — |
| $ | — |
| $ | 360 |
| $ | 415 |
| $ | 73 |
| $ | 367 |
| $ | 2,840 |
|
Annual Impairment Testing
On December 30, 2018 the Company reorganized our North American business. The reorganization eliminated the legacy business unit structure and internal reporting. In addition, the Company changed the internal reporting provided to the chief operating decision maker (CODM) and segment manager. As a result, the Company reevaluated its operating segments and reporting units.
In addition, we transferred the management of our Middle East, North Africa, and Turkey businesses from Europe to AMEA, effective December 30, 2018.
Refer to Note 17 Reportable Segments for further details on these changes. As a result of these changes in operating segments and related reporting units, the Company re-allocated goodwill between reporting units where necessary and compared the carrying value to the fair value of each impacted reporting unit on a before and after basis. This evaluation was only required to be performed on reporting units impacted by the changes noted above.
Effective December 30, 2018 in North America, the previous U.S. Snacks, U.S. Morning Foods, U.S. Specialty Channels, U.S. Frozen Foods, Kashi, Canada and RX operating segments are now a single operating segment (Kellogg North America). At the beginning of 2019, the Company evaluated the related impacted reporting units for impairment on a before and after basis and concluded that the fair values of each reporting unit exceeded their carrying values.
Approximately $46 million of goodwill was re-allocated between the impacted reporting units within Europe and AMEA related to the transfer of businesses between these operating segments. The Company performed a goodwill evaluation of the impacted reporting units on a before and after basis and concluded that the fair value of the impacted reporting units exceeded their carrying values.
Additionally, during the first quarter of 2019, the Company determined that it was more likely than not that the Company would be selling selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses within the North America reporting unit. As a result, the Company performed a goodwill impairment evaluation on the North America reporting unit in the first quarter of 2019 and concluded that the fair value exceeded the carrying value of the reporting unit. During the second quarter of 2019, the Company entered into a definitive agreement to sell the businesses to Ferrero. The sale was completed during the third quarter of 2019 and resulted in the divestiture of the net assets and liabilities of these businesses, included in the North America reporting unit, including $191 million of Goodwill and $765 million of Net Intangibles. In addition to the cash consideration received, the Company entered into a perpetual royalty-free licensing agreement with Ferrero, allowing Kellogg the use of certain brand names for cracker products. The license agreement was fair valued at $18 million and recorded as an indefinite-lived intangible asset.
At December 29, 2018,28, 2019, goodwill and other intangible assets amounted to $9.4$8.4 billion, consisting primarily of goodwill and brands originally associated with the 2001 acquisition of Keebler Foods Company and the 2012 acquisition of Pringles. Within this total, approximately $2.8$2.1 billion of non-goodwill intangible assets were classified as indefinite-lived, including $1.7 billion related to trademarks, comprised principally of KeeblerPringles and Pringlescracker-related trademarks. The majority of these intangible assets are recorded in our U.S. SnacksNorth America reporting unit. The Company currently believes the fair value of goodwill and other intangible assets exceeds their carrying value and that those intangibles so classified will contribute indefinitely to cash flows. The percentageThrough impairment testing performed during the fourth quarter of excess fair value over carrying value2019, no heightened risk of the U.S. Snacksimpairment of individual intangible assets or reporting unitunits was approximately 62% and 57% in 2018 and 2017, respectively.identified.
Additionally, the Company has $207goodwill of $606 million of goodwilland $373 million at December 28, 2019 related to the KashiMultipro and RX reporting unit, which was primarilyunits, respectively. The Company performed goodwill impairment testing for Multipro using both an EBITDA market multiple and discounted cash flow (DCF) method. The Company performed goodwill impairment testing for RX using both a result of establishing Kashi as a separate operating segment in 2015, which required an allocation of goodwill from our U.S. Snacks operating segment.sales market multiple and discounted cash flow method. Significant assumptions utilized within the Multipro DCF model include forecasted net sales growth and gross margin. The 2018significant assumption utilized within the RX DCF model is forecasted net sales growth. The Company determined the fair value of the Kashi reporting unit was estimated primarily based on a multiple of net salesMultipro and discounted cash flows. The percentage of excess over fair value was approximately 12% and 9%, in 2018 and 2017, respectively, usingRX exceed the same methodology on a year-on-year basis.
The Company also has $616 million and $798 million of goodwill and other intangible assets, respectively, related to our Multipro operating segment as a result of the acquisition of this business in May 2018. Consistent with expectations given the recent acquisition, the 2018 fair value approximates carrying value for both goodwill and the indefinitely lived assets.
NOTE 4
INVESTMENTS IN UNCONSOLIDATED ENTITIES
On May 2, 2018, the Company (i) acquired an incremental 1% ownership interest in Multipro, a leading distributorno heightened risk of a variety of food products in Nigeria and Ghana, and (ii) exercised its call option (Purchase Option) to acquire a 50% interest in Tolaram Africa Foods, PTE LTD (TAF), a holding company with a 49% equity interest in an affiliated food manufacturer, resulting in the Company having a 24.5% interest in the affiliated food manufacturer.
As a result of the Company's incremental ownership interest in Multipro and concurrent changes to the shareholders' agreement, the Company now has a 51% controlling interest in and began consolidating Multipro. Accordingly, the acquisition was accounted for as a business combination and the assets and liabilities of Multipro were included in the June 30, 2018 Consolidated Balance Sheet and the results of its operations have been included in the Consolidated Statement of Income subsequent to the acquisition date.
TAF and other unconsolidated entities of the Company are suppliers of Multipro. The related trade payables are generally settled on a monthly basis. TAF’s net sales consist of inventory purchases by Multipro. Multipro’s cost of goods sold primarily consists of inventory purchases from TAF and other unconsolidated entities of the Company.
See discussion regarding the Multipro acquisition and Investment in TAF, in Note 3.
Summarized combined financial informationimpairment exists for the Company’s investments in unconsolidated entities is as follows (on a 100% basis, excluding amortization and before the elimination of intercompany accounts):reporting units.
|
| | | | | | | | | |
| Statement of Operations | | | |
| (millions) | 2018 | 2017 | 2016 |
| Net sales (a): | |
| |
| TAF | $ | 350 |
| $ | — |
| $ | — |
|
| Multipro | 281 |
| 754 |
| 662 |
|
| Others | 81 |
| 55 |
| 46 |
|
| Total net sales | $ | 712 |
| $ | 809 |
| $ | 708 |
|
| Gross profit (a): | |
| |
| TAF | $ | 70 |
| $ | — |
| $ | — |
|
| Multipro | 30 |
| 86 |
| 71 |
|
| Others | 12 |
| 14 |
| 10 |
|
| Total gross profit | $ | 112 |
| $ | 100 |
| $ | 81 |
|
| Income before income taxes (a) | 16 |
| 43 |
| 28 |
|
| Net income (a) | 9 |
| 25 |
| 15 |
|
| Balance sheets | December 29, 2018 | December 30,
2017 | |
| Current assets | $ | 312 |
| $ | 155 |
| |
| Non-current assets | 213 |
| 139 |
| |
| Current liabilities | (233 | ) | (181 | ) | |
| Non-current liabilities | (167 | ) | (37 | ) | |
(a) 2018 includes four months of results for Multipro and seven months of results for TAF.
NOTE 5
RESTRUCTURING AND COST REDUCTION ACTIVITIESPROGRAMS
The Company views its restructuring and cost reduction activities as part of its operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a 3 to 5-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.
Total projects
The Company recorded $143 million of costs in 2018 associated with cost reduction initiatives. The charges were comprised of $99 million being recorded in Cost of Goods Sold (COGS), $74 million recorded in Selling, General, Administrative (SG&A) expense and $(30) million recorded in Other (Income) Expense, net (OIE).
The Company recorded $263 million of costs in 2017 associated with all cost reduction initiatives. The charges were comprised of $115 million expense being recorded in COGS, a $296 million expense recorded in SGA expense, and a $(148) million gain recorded in OIE.
During 2016, the Company recorded $325 million of charges associated with all cost reduction initiatives. The charges were comprised of $172 million expense being recorded in COGS, a $152 million expense recorded in SGA expense, and a $1 million loss recorded in OIE.
Project K
As of the end of 2019, the Company has completed implementation of all Project K is expected to continue generating a significant amount ofinitiatives. Total project charges, after-tax cash costs and annual savings that may be investeddelivered by Project K were in key strategic areas of focus for the business or utilized to achieve our growth initiatives.line with expectations.
Since inception, Project K has reduced the Company’s cost structure, and is expected to provideprovided enduring benefits, including an optimized supply chain infrastructure, an efficient global business services model, a global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market models. These benefits are intended tohave strengthen existing businesses in core markets, increaseincreased growth in developing and emerging markets, and drivedriven an increased level of value-added innovation.
As of the end of 2018, the Company has approved all remaining Project K initiatives and implementation of these remaining initiatives will be completedThe total program resulted in 2019. Project charges, after-tax cash costs and annual savings remain in line with expectations.
The Company currently anticipates that the program will result in total pre-tax charges, once all phases are implemented, of approximately $1.6 billion, with after-tax cash costs, including incremental capital expenditures, estimated to beof approximately $1.2 billion. Based on current estimates and actual charges incurred to date, the Company expects the totalTotal project charges will consist of asset-related costs of approximately $500 million which consists primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs of approximately $400 million which includes severance, pension and other termination benefits; and other costs of approximately $700 million which consists primarily of charges related to the design and implementation of global business capabilities and a more efficient go-to-market model.
The Company currently expects that totalTotal pre-tax charges related to Project K will impactimpacted reportable segments as follows: U.S. Morning Foods (approximately 17%), U.S. Snacks (approximately 31%), U.S. Specialty Channels (approximately 1%), North America Other (approximately 16%65%), Europe (approximately 22%21%), Latin America (approximately 3%4%), Asia-PacificAMEA (approximately 6%), and Corporate (approximately 4%).
Since the inception of Project K, the Company has recognized charges of $1,520$1,574 million that have been attributed to the program. The charges were comprised of $6 million being recorded as a reduction of revenue, $893$928 million being recorded in COGS, $788$807 million recorded in SGA and $(167) million recorded in OIE.
Other projectsprograms
During 2019, the Company announced a reorganization plan for the European reportable segment designed to simplify the organization, increase organizational efficiency, and enhance key processes. The overall project is expected to be substantially completed by the end of fiscal year 2020.
The project is expected to result in cumulative pretax net charges of approximately $40 million, including certain non-cash credits. Cash costs are expected to be approximately $50 million. The total expected charges will include
severance and other termination benefits and charges related to relocation, third party legal and consulting fees, and contract termination costs.
The Company implemented a global zero-based budgeting (ZBB) program that has delivered annual savings. The Company completed implementationrecorded total net charges of the ZBB program$38 million related to this initiative during 2019, with $43 million recorded in 2017. Final project charges, after-tax cash costsSG&A expense and annual savings remain$(5) million recorded in line with expectations.OIE.
In support of the ZBB initiative,
Also during 2019, the Company incurred pre-taxannounced a reorganization plan which primarily impacts the North America reportable segment. The reorganization plan is designed to simplify the organization that supports the remaining North America reportable segment after the divestiture and related transition. The overall project is expected to be substantially completed by the end of fiscal year 2020.
The overall project is expected to result in cumulative pretax charges of approximately $3 million$30 million. Cash costs are expected to approximate the pretax charges. Total expected charges will include severance and $25 million for the years ended December 30, 2017other termination benefits and December 31, 2016, respectively. Totalcharges related to third party consulting fees.
The Company recorded total charges of $40$21 million were recognized related to implementationthis initiative during 2019. These charges were recorded in SG&A expense.
Total programs
During 2019, the Company recorded $113 million of the ZBB program.charges associated with all restructuring programs. The charges were comprised of $35 million expense being recorded in Cost of Goods Sold (COGS), a $83 million expense recorded in Selling, General, Administrative (SG&A), and $(5) million recorded in Other (Income) Expense, net (OIE).
The Company recorded $143 million of costs in 2018 associated with all restructuring programs. The charges were comprised of $99 million being recorded in COGS, $74 million recorded SG&A and $(30) million recorded in OIE.
The Company recorded $263 million of costs in 2017 associated with all restructuring programs. The charges were comprised of $115 million expense being recorded in COGS, a $296 million expense recorded in SGA expense, and a $(148) million gain recorded in OIE.
The tables below provide the details for the charges incurred during 2019, 2018 2017 and 20162017 and program costs to date for all programs currently active as of December 29, 2018.28, 2019.
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | Program costs to date |
| (millions) | | 2019 | | 2018 | | 2017 | | December 28, 2019 |
| Employee related costs | | $ | 49 |
| | $ | 63 |
| | $ | 177 |
| | $ | 646 |
|
| Pension curtailment (gain) loss, net | | (5 | ) | | (30 | ) | | (148 | ) | | (172 | ) |
| Asset related costs | | 21 |
| | 16 |
| | 77 |
| | 306 |
|
| Asset impairment | | — |
| | 14 |
| | — |
| | 169 |
|
| Other costs | | 48 |
| | 80 |
| | 157 |
| | 684 |
|
| Total | | $ | 113 |
| | $ | 143 |
| | $ | 263 |
| | $ | 1,633 |
|
| | | | | | | | | |
| | | | | | | | Program costs to date |
| (millions) | | 2019 | | 2018 | | 2017 | | December 28, 2019 |
| North America | | $ | 50 |
| | $ | 107 |
| | $ | 345 |
| | $ | 1,072 |
|
| Europe | | 47 |
| | 3 |
| | 40 |
| | 380 |
|
| Latin America | | 15 |
| | 15 |
| | 9 |
| | 57 |
|
| AMEA | | 3 |
| | 11 |
| | 11 |
| | 101 |
|
| Corporate | | (2 | ) | | 7 |
| | (142 | ) | | 23 |
|
| Total | | $ | 113 |
| | $ | 143 |
| | $ | 263 |
| | $ | 1,633 |
|
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | Program costs to date |
| (millions) | | 2018 | | 2017 | | 2016 | | December 29, 2018 |
| Employee related costs | | $ | 63 |
| | $ | 177 |
| | $ | 108 |
| | $ | 597 |
|
| Pension curtailment (gain) loss, net | | (30 | ) | | (148 | ) | | 1 |
| | (167 | ) |
| Asset related costs | | 16 |
| | 77 |
| | 46 |
| | 285 |
|
| Asset impairment | | 14 |
| | — |
| | 50 |
| | 169 |
|
| Other costs | | 80 |
| | 157 |
| | 120 |
| | 636 |
|
| Total | | $ | 143 |
| | $ | 263 |
| | $ | 325 |
| | $ | 1,520 |
|
| | | | | | | | | |
| | | | | | | | Program costs to date |
| (millions) | | 2018 | | 2017 | | 2016 | | December 29, 2018 |
| U.S. Morning Foods | | $ | 50 |
| | $ | 18 |
| | $ | 23 |
| | $ | 301 |
|
| U.S. Snacks | | 28 |
| | 309 |
| | 76 |
| | 531 |
|
| U.S. Specialty Channels | | 4 |
| | 2 |
| | 8 |
| | 25 |
|
| North America Other | | 25 |
| | 16 |
| | 38 |
| | 165 |
|
| Europe | | 3 |
| | 40 |
| | 126 |
| | 333 |
|
| Latin America | | 15 |
| | 9 |
| | 8 |
| | 42 |
|
| Asia Pacific | | 11 |
| | 11 |
| | 7 |
| | 98 |
|
| Corporate | | 7 |
| | (142 | ) | | 39 |
| | 25 |
|
| Total | | $ | 143 |
| | $ | 263 |
| | $ | 325 |
| | $ | 1,520 |
|
Employee related costs consisted of severance and pension charges. Pension curtailment (gain) loss consists of curtailment gains or losses that resulted from project initiatives. Asset impairments were recorded for fixed assets that were determined to be impaired and were written down to their estimated fair value. See Note 14 for more information. Asset related costs consist primarily of accelerated depreciation. Other costs incurred consist primarily of lease termination costs as well as third-party incremental costs related to the development and implementation of global business capabilities and a more efficient go-to-market model.
At December 29, 201828, 2019 total project reserves were $104$62 million, related to severance payments and other costs of which a substantial portion will be paid in 2019.2020. The following table provides details for exit cost reserves.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | | Employee Related Costs | | Curtailment Gain Loss, net | | Asset Impairment | | Asset Related Costs | | Other Costs | | Total |
| Liability as of December 30, 2017 | | $ | 97 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 63 |
| | $ | 160 |
|
| 2018 restructuring charges | | 63 |
| | (30 | ) | | 14 |
| | 16 |
| | 80 |
| | 143 |
|
| Cash payments | | (67 | ) | | — |
| | — |
| | (9 | ) | | (133 | ) | | (209 | ) |
| Non-cash charges and other | | — |
| | 30 |
| | (14 | ) | | (6 | ) | | — |
| | 10 |
|
| Liability as of December 29, 2018 | | $ | 93 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 10 |
| | $ | 104 |
|
| 2019 restructuring charges | | 49 |
| | (5 | ) | | — |
| | 21 |
| | 48 |
| | 113 |
|
| Cash payments | | (81 | ) | | — |
| | — |
| | (10 | ) | | (57 | ) | | (148 | ) |
| Non-cash charges and other | | — |
| | 5 |
| | — |
| | (12 | ) | | — |
| | (7 | ) |
| Liability as of December 28, 2019 | | $ | 61 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 62 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | | Employee Related Costs | | Curtailment Gain Loss, net | | Asset Impairment | | Asset Related Costs | | Other Costs | | Total |
Liability as of December 31, 2016
| | $ | 102 |
| | — |
| | $ | — |
| | $ | — |
| | $ | 29 |
| | $ | 131 |
|
| 2017 restructuring charges | | 177 |
| | (148 | ) | | — |
| | 77 |
| | 157 |
| | 263 |
|
| Cash payments | | (182 | ) | | — |
| | — |
| | (34 | ) | | (123 | ) | | (339 | ) |
| Non-cash charges and other | | — |
| | 148 |
| | — |
| | (43 | ) | | — |
| | 105 |
|
| Liability as of December 30, 2017 | | $ | 97 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 63 |
| | $ | 160 |
|
| 2018 restructuring charges | | 63 |
| | (30 | ) | | 14 |
| | 16 |
| | 80 |
| | 143 |
|
| Cash payments | | (67 | ) | | — |
| | — |
| | (9 | ) | | (133 | ) | | (209 | ) |
| Non-cash charges and other | | — |
| | 30 |
| | (14 | ) | | (6 | ) | | — |
| | 10 |
|
| Liability as of December 29, 2018 | | $ | 93 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 10 |
| | $ | 104 |
|
NOTE 6
EQUITY
Earnings per share
Basic earnings per share is determined by dividing net income attributable to Kellogg Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, restricted stock units, and to a lesser extent, certain contingently issuable performance shares. Basic earnings per share is reconciled to diluted earnings per share in the following table:
|
| | | | | | | | | | | |
| (millions, except per share data) | | Net income attributable to Kellogg Company | | Average shares outstanding | | Earnings per share |
| 2018 | | | | | | |
| Basic | | $ | 1,336 |
| | 347 |
| | $ | 3.85 |
|
| Dilutive potential common shares | | | | 1 |
| | (0.02 | ) |
| Diluted | | $ | 1,336 |
| | 348 |
| | $ | 3.83 |
|
| 2017 | | | | | | |
| Basic | | $ | 1,254 |
| | 348 |
| | $ | 3.61 |
|
| Dilutive potential common shares | | | | 2 |
| | (0.03 | ) |
| Diluted | | $ | 1,254 |
| | 350 |
| | $ | 3.58 |
|
| 2016 | | | | | | |
| Basic | | $ | 699 |
| | 350 |
| | $ | 1.99 |
|
| Dilutive potential common shares | | | | 4 |
| | (0.02 | ) |
| Diluted | | $ | 699 |
| | 354 |
| | $ | 1.97 |
|
The total number of anti-dilutive potential common shares excluded from the reconciliation for each period was (shares in millions): 2019-14.0; 2018-6.5; 2017-4.9; 2016-2.8.2017-4.9.
Stock transactions
The Company issues shares to employees and directors under various equity-based compensation and stock purchase programs, as further discussed in Note 9. The number of shares issued and outstanding during the periods presented was (shares in millions): 2019–15; 2018–8; 2017–7; 2016–7. The Company issued shares totaling less than one million in each of the years presented under Kellogg Direct™, a direct stock purchase and dividend reinvestment plan for U.S. shareholders.
In December 2017, the board of directors approved an authorization to repurchase up to $1.5 billion of the Company's common stock beginning in 2018 through December 2019. In February 2020, the board of directors approved a new authorization to repurchase up to $1.5 billion of the Company's common stock beginning in 2018 through December 2019.2022.
During 2019, the Company repurchased 4 million shares of common stock for a total of $220 million . During 2018, the Company repurchased 5 million shares of common stock for a total of $320 million .million. During 2017, the Company repurchased 7 million shares of common stock for a total of $516 million. During 2016, the Company repurchased 6 million shares of common stock at a total cost of $426$516 million.
Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income for all years presented consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges and adjustments for net experience gains (losses) and prior service credit (cost) related to employee benefit plans. ForDuring the years ended December 30, 201728, 2019 and December 31, 2016,30, 2017, the Company modified assumptions for a U.S. postemployment benefit plan. As a result, of the U.S. postemployment benefit plan assumption change, a net experience gain (loss) was recognized in other comprehensive income with an offsetting reduction in the accumulated postemployment benefit obligation. See Note 10 and Note 11 for further details.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | 2018 | 2017 |
| Pre-tax | Tax (expense) | After-tax | Pre-tax | Tax (expense) | After-tax | Pre-tax | Tax (expense) | After-tax |
| amount | benefit | amount | amount | benefit | amount | amount | benefit | amount |
| Net income |
|
| $ | 977 |
|
|
| $ | 1,344 |
|
|
| $ | 1,254 |
|
| Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| Foreign currency translation adjustments | $ | 100 |
| $ | (19 | ) | 81 |
| $ | 5 |
| $ | (53 | ) | $ | (48 | ) | $ | (34 | ) | 113 |
| 79 |
|
| Cash flow hedges: |
|
|
|
|
|
|
|
|
|
| Unrealized gain (loss) on cash flow hedges | 5 |
| (1 | ) | 4 |
| 3 |
| (1 | ) | 2 |
| — |
| — |
| — |
|
| Reclassification to net income | 4 |
| (1 | ) | 3 |
| 8 |
| (2 | ) | 6 |
| 9 |
| (3 | ) | 6 |
|
| Postretirement and postemployment benefits: |
|
|
|
|
|
|
|
|
|
| Amounts arising during the period: |
|
|
|
|
|
|
|
|
|
| Net experience gain (loss) | (16 | ) | 5 |
| (11 | ) | (8 | ) | 1 |
| (7 | ) | 44 |
| (12 | ) | 32 |
|
| Prior service credit (cost) | 3 |
| (1 | ) | 2 |
| 1 |
| — |
| 1 |
| — |
| — |
| — |
|
| Reclassification to net income: |
|
|
|
|
|
|
|
|
|
| Net experience (gain) loss | (5 | ) | 1 |
| (4 | ) | (5 | ) | 1 |
| (4 | ) | — |
| — |
| — |
|
| Prior service (credit) cost | (1 | ) | — |
| (1 | ) | — |
| — |
| — |
| 1 |
| — |
| 1 |
|
| Available-for-sale securities: | | | | | | | | | |
| Unrealized gain (loss) | 4 |
| — |
| 4 |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Reclassification to net income | (4 | ) | — |
| (4 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| Other comprehensive income (loss) | $ | 90 |
| $ | (16 | ) | $ | 74 |
| $ | 4 |
| $ | (54 | ) | $ | (50 | ) | $ | 20 |
| $ | 98 |
| $ | 118 |
|
| Comprehensive income |
|
| $ | 1,051 |
|
|
| $ | 1,294 |
|
|
| $ | 1,372 |
|
| Net income (loss) attributable to noncontrolling interests |
|
| 17 |
|
|
| 8 |
|
|
| — |
|
| Other comprehensive income (loss) attributable to noncontrolling interests |
|
| — |
|
|
| (7 | ) |
|
| — |
|
| Comprehensive income attributable to Kellogg Company |
|
| $ | 1,034 |
|
|
| $ | 1,293 |
|
|
| $ | 1,372 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | 2017 | 2016 |
| Pre-tax | Tax (expense) | After-tax | Pre-tax | Tax (expense) | After-tax | Pre-tax | Tax (expense) | After-tax |
| amount | benefit | amount | amount | benefit | amount | amount | benefit | amount |
| Net income |
|
| $ | 1,344 |
|
|
| $ | 1,254 |
|
|
| $ | 700 |
|
| Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| Foreign currency translation adjustments | $ | 5 |
| $ | (53 | ) | (48 | ) | $ | (34 | ) | $ | 113 |
| $ | 79 |
| $ | (230 | ) | (24 | ) | (254 | ) |
| Cash flow hedges: |
|
|
|
|
|
|
|
|
|
| Unrealized gain (loss) on cash flow hedges | 3 |
| (1 | ) | 2 |
| — |
| — |
| — |
| (55 | ) | 22 |
| (33 | ) |
| Reclassification to net income | 8 |
| (2 | ) | 6 |
| 9 |
| (3 | ) | 6 |
| 11 |
| (6 | ) | 5 |
|
| Postretirement and postemployment benefits: |
|
|
|
|
|
|
|
|
|
| Amounts arising during the period: |
|
|
|
|
|
|
|
|
|
| Net experience gain (loss) | (8 | ) | 1 |
| (7 | ) | 44 |
| (12 | ) | 32 |
| 25 |
| (9 | ) | 16 |
|
| Prior service credit (cost) | 1 |
| — |
| 1 |
| — |
| — |
| — |
| (4 | ) | 2 |
| (2 | ) |
| Reclassification to net income: |
|
|
|
|
|
|
|
|
|
| Net experience (gain) loss | (5 | ) | 1 |
| (4 | ) | — |
| — |
| — |
| 3 |
| (1 | ) | 2 |
|
| Prior service (credit) cost | — |
| — |
| — |
| 1 |
| — |
| 1 |
| 5 |
| (1 | ) | 4 |
|
| Venezuela deconsolidation loss | — |
| — |
| — |
| — |
| — |
| — |
| 63 |
| — |
| 63 |
|
| Other comprehensive income (loss) | $ | 4 |
| $ | (54 | ) | $ | (50 | ) | $ | 20 |
| $ | 98 |
| $ | 118 |
| $ | (182 | ) | $ | (17 | ) | $ | (199 | ) |
| Comprehensive income |
|
| $ | 1,294 |
|
|
| $ | 1,372 |
|
|
| $ | 501 |
|
| Net income (loss) attributable to noncontrolling interests |
|
| 8 |
|
|
| — |
|
|
| 1 |
|
| Other comprehensive income (loss) attributable to noncontrolling interests |
|
| (7 | ) |
|
| — |
|
|
| — |
|
| Comprehensive income attributable to Kellogg Company |
|
| $ | 1,293 |
|
|
| $ | 1,372 |
|
|
| $ | 500 |
|
Reclassifications from Accumulated Other Comprehensive Income (AOCI) for the year ended December 29, 201828, 2019 and December 30, 2017,29, 2018, consisted of the following: |
| | | | | | | | | | | | | | |
Details about AOCI Components | | Amount reclassified from AOCI | | Line item impacted within Income Statement |
| (millions) | | 2019 | | 2018 | | 2017 | | |
| (Gains) and losses on cash flow hedges: | | | | | | | | |
| Foreign currency exchange contracts | | $ | — |
| | $ | — |
| | $ | (1 | ) | | COGS |
| Interest rate contracts | | 4 |
| | 8 |
| | 10 |
| | Interest expense |
| | | $ | 4 |
| | $ | 8 |
| | $ | 9 |
| | Total before tax |
| | | (1 | ) | | (2 | ) | | (3 | ) | | Tax expense (benefit) |
| | | $ | 3 |
| | $ | 6 |
| | $ | 6 |
| | Net of tax |
| Amortization of postretirement and postemployment benefits: | | | | | | | | |
| Net experience (gains) | | $ | (5 | ) | | $ | (5 | ) | | $ | — |
| | OIE |
| Prior service (credit) cost | | (1 | ) | | — |
| | 1 |
| | OIE |
| | | $ | (6 | ) | | $ | (5 | ) | | $ | 1 |
| | Total before tax |
| | | 1 |
| | 1 |
| | — |
| | Tax expense (benefit) |
| | | $ | (5 | ) | | $ | (4 | ) | | $ | 1 |
| | Net of tax |
| (Gains) losses on available-for-sale securities | | | | | | | | |
| Corporate bonds | | $ | (4 | ) | | $ | — |
| | $ | — |
| | OIE |
| | | $ | (4 | ) | | $ | — |
| | $ | — |
| | Total before tax |
| | | — |
| | — |
| | — |
| | Tax expense (benefit) |
| | | $ | (4 | ) | | $ | — |
| | $ | — |
| | Net of tax |
| Total reclassifications | | $ | (6 | ) | | $ | 2 |
| | $ | 7 |
| | Net of tax |
|
| | | | | | | | | | | | | | |
Details about AOCI Components | | Amount reclassified from AOCI | | Line item impacted within Income Statement |
| (millions) | | 2018 | | 2017 | | 2016 | | |
| Gains and losses on cash flow hedges: | | | | | | | | |
| Foreign currency exchange contracts | | $ | — |
| | $ | (1 | ) | | $ | (14 | ) | | COGS |
| Foreign currency exchange contracts | | — |
| | — |
| | (1 | ) | | SGA |
| Interest rate contracts | | 8 |
| | 10 |
| | 13 |
| | Interest expense |
| Commodity contracts | | — |
| | — |
| | 13 |
| | COGS |
| | | $ | 8 |
| | $ | 9 |
| | $ | 11 |
| | Total before tax |
| | | (2 | ) | | (3 | ) | | (6 | ) | | Tax (expense) benefit |
| | | $ | 6 |
| | $ | 6 |
| | $ | 5 |
| | Net of tax |
| Amortization of postretirement and postemployment benefits: | | | | | | | | |
| Net experience loss | | $ | (5 | ) | | $ | — |
| | $ | 3 |
| | OIE |
| Prior service cost | | — |
| | 1 |
| | 5 |
| | OIE |
| | | $ | (5 | ) | | $ | 1 |
| | $ | 8 |
| | Total before tax |
| | | 1 |
| | — |
| | (2 | ) | | Tax (expense) benefit |
| | | $ | (4 | ) | | $ | 1 |
| | $ | 6 |
| | Net of tax |
| | | | | | | | | |
| Venezuela deconsolidation loss | | $ | — |
| | $ | — |
| | $ | 63 |
| | Other (income) expense |
| Total reclassifications | | $ | 2 |
| | $ | 7 |
| | $ | 74 |
| | Net of tax |
Accumulated other comprehensive income (loss) as of December 29, 201828, 2019 and December 30, 201729, 2018 consisted of the following:
|
| | | | | | | | |
| (millions) | | December 28, 2019 | | December 29, 2018 |
| Foreign currency translation adjustments | | $ | (1,399 | ) | | $ | (1,467 | ) |
| Cash flow hedges — unrealized net gain (loss) | | (60 | ) | | (53 | ) |
| Postretirement and postemployment benefits: | | | | |
| Net experience gain (loss) | | 7 |
| | 23 |
|
| Prior service credit (cost) | | 4 |
| | (3 | ) |
| Total accumulated other comprehensive income (loss) | | $ | (1,448 | ) | | $ | (1,500 | ) |
|
| | | | | | | | |
| (millions) | | December 29, 2018 | | December 30, 2017 |
| Foreign currency translation adjustments | | $ | (1,467 | ) | | $ | (1,426 | ) |
| Cash flow hedges — unrealized net gain (loss) | | (53 | ) | | (61 | ) |
| Postretirement and postemployment benefits: | | | | |
| Net experience gain (loss) | | 23 |
| | 34 |
|
| Prior service credit (cost) | | (3 | ) | | (4 | ) |
| Total accumulated other comprehensive income (loss) | | $ | (1,500 | ) | | $ | (1,457 | ) |
NOTE 7
LEASES AND OTHER COMMITMENTS
The Company’sCompany leases certain warehouses, equipment, vehicles, and office space primarily through operating lease agreements. Finance lease obligations and activity are not material to the Consolidated Financial Statements. Lease obligations are primarily for real estate assets, with the remainder related to manufacturing and distribution related equipment, vehicles, information technology equipment, and rail cars. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
A portion of the Company's real estate leases include future variable rental payments that include inflationary adjustment factors. The future variability of these adjustments is unknown and therefore not included in the minimum lease payments. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The leases have remaining terms which range from less than 1 year to 12 years and the majority of leases provide the Company with the option to exercise one or more renewal terms. The length of the lease term used in recording lease assets and lease liabilities is based on the contractually required lease term adjusted for any options to renew or early terminate the lease that are reasonably certain of being executed.
The Company combines lease and non-lease components together in determining the minimum lease payments for the majority of leases. The Company has elected to not combine lease and non-lease components for assets controlled indirectly through third party service-related agreements that include significant production related costs. The Company has closely analyzed these agreements to ensure any embedded costs related to the securing of the leased asset is properly segregated and accounted for in measuring the lease assets and liabilities.
The majority of the leases do not include a stated interest rate, and therefore the Company's periodic incremental borrowing rate is used to determine the present value of lease payments. This rate is calculated based on a collateralized rate for the specific currencies used in leasing activities and the borrowing ability of the applicable Company legal entity. For the initial implementation of the lease standard, the incremental borrowing rate at December 29, 2018 was used to present value operating lease assets and liabilities.
The Company recorded operating lease costs of $133 million for the year ended December 28, 2019. Lease related costs associated with variable rent, short-term leases, and sale-leaseback arrangements, as well as sublease income, are each immaterial.
|
| | | | |
| (millions) | | Year ended December 28, 2019 |
| Other information | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows from operating leases | | $ | 134 |
|
| Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 164 |
|
| | | |
| Weighted-average remaining lease term - operating leases | | 7 years |
| Weighted-average discount rate - operating leases | | 2.9% |
At December 28, 2019, future maturities of operating leases were as follows:
|
| | | | |
| (millions) | | Operating leases |
| 2020 | | $ | 129 |
|
| 2021 | | 98 |
|
| 2022 | | 80 |
|
| 2023 | | 67 |
|
| 2024 | | 55 |
|
| 2025 and beyond | | 181 |
|
| Total minimum payments | | $ | 610 |
|
| Less interest | | (63 | ) |
| Present value of lease liabilities | | $ | 547 |
|
Operating lease payments presented in the table above exclude $18 million of minimum lease payments for real-estate leases signed but not yet commenced. The leases are generally for equipment and warehouse space. Rent expense on all operating leases was (in millions): 2018-$133; 2017-$195; 2016-$176. During 2018, 2017 and 2016,expected to commence in 2020.
Under the Company entered into less than $1 million in capitalprevious lease agreements.
Atstandard (Topic 840), at December 29, 2018, future minimum annual lease commitments under non-cancelable operating leases were as follows:
|
| | | | |
| (millions) | | Operating leases |
| 2019 | | $ | 121 |
|
| 2020 | | 97 |
|
| 2021 | | 73 |
|
| 2022 | | 57 |
|
| 2023 | | 48 |
|
| 2024 and beyond | | 129 |
|
| Total minimum payments | | $ | 525 |
|
|
| | | | |
| (millions) | | Operating leases |
| 2019 | | 121 |
|
| 2020 | | 97 |
|
| 2021 | | 73 |
|
| 2022 | | 57 |
|
| 2023 | | 48 |
|
| 2024 and beyond | | 129 |
|
| Total minimum payments | | $ | 525 |
|
Rent expense on operating leases for the year ended December 29, 2018 and December 30, 2017 were $133 million and $195 million respectively.
At December 29, 2018, future minimum annual lease commitments under non-cancelable capitalfinance leases were immaterial.
The Company has provided various standard indemnifications in agreements to sell and purchase business assets and lease facilities over the past several years, related primarily to pre-existing tax, environmental, and employee benefit obligations. Certain of these indemnifications are limited by agreement in either amount and/or term and others are unlimited. The Company has also provided various “hold harmless” provisions within certain service type agreements. Because the Company is not currently aware of any actual exposures associated with these indemnifications, management is unable to estimate the maximum potential future payments to be made. At December 29, 2018,28, 2019, the Company had not recorded any liability related to these indemnifications.
NOTE 8
DEBT
The following table presents the components of notes payable at year end December 29, 201828, 2019 and December 30, 2017:29, 2018:
|
| | | | | | | | | | | | | | |
| (millions) | | 2019 | | 2018 |
| | Principal amount | | Effective interest rate | | Principal amount | | Effective interest rate |
| U.S. commercial paper | | $ | 3 |
| | 1.78 | % | | $ | 15 |
| | 2.75 | % |
| Europe commercial paper | | — |
| | — |
| | — |
| | — |
|
| Bank borrowings | | 104 |
| | | | 161 |
| | |
| Total | | $ | 107 |
| | | | $ | 176 |
| | |
|
| | | | | | | | | | | | | | |
| (millions) | | 2018 | | 2017 |
| | Principal amount | | Effective interest rate | | Principal amount | | Effective interest rate |
| U.S. commercial paper | | $ | 15 |
| | 2.75 | % | | $ | 196 |
| | 1.76 | % |
| Europe commercial paper | | — |
| | — |
| | 96 |
| | (0.32 | ) |
| Bank borrowings | | 161 |
| | | | 78 |
| | |
| Total | | $ | 176 |
| | | | $ | 370 |
| | |
The following table presents the components of long-term debt at year end December 29, 201828, 2019 and December 30, 2017:29, 2018:
| | | (millions) | | 2018 | | 2017 | | 2019 | | 2018 |
| (a) 4.50% U.S. Dollar Notes due 2046 | | $ | 638 |
| | $ | 637 |
| | $ | 638 |
| | $ | 638 |
|
| (b) 7.45% U.S. Dollar Debentures due 2031 | | 621 |
| | 620 |
| | 621 |
| | 621 |
|
| (c) 4.30% U.S. Dollar Notes due 2028 | | 595 |
| | — |
| | 595 |
| | 595 |
|
| (d) 3.40% U.S. Dollar Notes due 2027 | | 595 |
| | 595 |
| | 596 |
| | 595 |
|
| (e) 3.25% U.S. Dollar Notes due 2026 | | 731 |
| | 729 |
| | 741 |
| | 731 |
|
| (f) 1.25% Euro Notes due 2025 | | 693 |
| | 712 |
| | 689 |
| | 693 |
|
| (g) 1.00% Euro Notes due 2024 | | 697 |
| | 723 |
| | 692 |
| | 697 |
|
| (h) 2.65% U.S. Dollar Notes due 2023 | | 585 |
| | 589 |
| | 539 |
| | 585 |
|
| (i) 2.75% U.S. Dollar Notes due 2023 | | 198 |
| | 201 |
| | 201 |
| | 198 |
|
| (j) 3.125% U.S. Dollar Notes due 2022 | | 351 |
| | 354 |
| | 353 |
| | 351 |
|
| (k) 0.80% Euro Notes due 2022 | | 684 |
| | 717 |
| | 669 |
| | 684 |
|
| (l) 1.75% Euro Notes due 2021 | | 570 |
| | 597 |
| | 558 |
| | 570 |
|
| (m) 3.25% U.S. Notes Dollar Notes due 2021 | | 399 |
| | — |
| |
| (m) 3.25% U.S. Dollar Notes due 2021 | | | 198 |
| | 399 |
|
| (n) 4.0% U.S. Dollar Notes due 2020 | | 848 |
| | 847 |
| | 601 |
| | 848 |
|
| (o) 4.15% U.S. Dollar Notes due 2019 | | 503 |
| | 506 |
| | — |
| | 503 |
|
| (p) 3.25% U.S. Dollar Notes due 2018 | | — |
| | 402 |
| |
| | | | | | |
| | | | | | |
| Other | | 9 |
| | 16 |
| | 124 |
| | 9 |
|
| | | 8,717 |
| | 8,245 |
| | 7,815 |
| | 8,717 |
|
| Less current maturities | | (510 | ) | | (409 | ) | | (620 | ) | | (510 | ) |
| Balance at year end | | $ | 8,207 |
| | $ | 7,836 |
| | $ | 7,195 |
| | $ | 8,207 |
|
| |
| (a) | In March 2016, the Company issued $650 million of thirty-year 4.50% U.S. Dollar Notes, using the net proceeds for general corporate purposes, which included repayment of a portion of the Company's 7.45% U.S. Dollar Debentures due 2031 and a portion of its commercial paper borrowings. The effective interest rate on the Debentures,Notes, reflecting issuance discount and hedge settlement, was 4.59%. at December 28, 2019. |
| |
| (b) | In March 2001, the Company issued long-term debt instruments, primarily to finance the acquisition of Keebler Foods Company, of which $625 million of thirty-year 7.45% Debentures remain outstanding. The effective interest rate on the Debentures, reflecting issuance discount and hedge settlement, was 7.55%.7.56% at December 28, 2019. The Debentures contain standard events of default and covenants, and can be redeemed in whole or in part by the Company at any time at prices determined under a formula (but not less than 100% of the principal amount plus unpaid interest to the redemption date). In March 2016, the Company redeemed $475 million of the Debentures. In connection with the debt redemption, the Company incurred $153 million of interest expense, consisting primarily of a premium on the tender offer and also including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees related to the tender offer. |
| |
| (c) | In May 2018, the Company issued $600 million of ten-year 4.30% Senior Notes due 2028, using the net proceeds for general corporate purposes, which included repayment of the Company's $400 million, , seven-year 3.25% U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of the Company's commercial paper borrowings used to finance the acquisition of ownership interests in TAF and Multipro. The effective interest rate on the Debentures,Notes, reflecting issuance discount and hedge settlement, was 4.34%. at December 28, 2019. |
| |
| (d) | In November 2017, the Company issued $600 million of ten-year 3.40% U.S. Dollar Notes, using the net proceeds for general corporate purposes, which included repayment of a portion of the Company's commercial paper borrowings used to finance the acquisition of Chicago Bar Company LLC, the maker of RXBAR. The effective interest rate on the Debentures,Notes, reflecting issuance discount and hedge settlement, was 3.49%. at December 28, 2019. |
| |
| (e) | In March 2016, the Company issued $750 million of ten-year 3.25% U.S. Dollar Notes, using the net proceeds for general corporate purposes, which included repayment of a portion of the Company's 7.45% U.S. Dollar Debentures due 2031 and a portion of its commercial paper borrowings. The effective interest rate on these Notes, reflecting issuance discount, hedge settlement and interest rate swaps was 4.00%4.11% at December 29, 2018.28, 2019. In September 2016, the Company entered into interest rate swaps with notional amounts totaling $300 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. In October 2018, the Company entered into interest rate swaps with notional amounts totaling $450 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps, and the resulting unamortized gainloss of $8$6 million at December 29, 201828, 2019 will be amortized to interest expense over the remaining term of the Notes. The fair value adjustment for the interest rate swaps was $22 million at December 29, 2018, recorded as a decrease in the hedged debt balance. |
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| (f) | In March 2015, the Company issued €600 million (approximately $686$671 million at December 29, 2018,28, 2019, which reflects the discount, fees and translation adjustments) of ten-year 1.25% Euro Notes due 2025, using the proceeds from these Notes for general corporate purposes, which included repayment of a portion of the Company’s commercial paper borrowings. The effective interest rate on the Notes, reflecting issuance discount, and hedge settlement and interest rate swaps, was 1.32%1.58% at December 29, 2018.28, 2019. The Notes were designated as a net investment hedge of the Company’s investment in its Europe subsidiary when issued. In May 2017, the Company entered into interest rate swaps with notional amounts totaling €600 million, which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The fair value adjustment forCompany subsequently terminated the interest rate swaps, was $8and the resulting unamortized gain of $20 million at December 29, 2018, recorded as a decrease in28, 2019 will be amortized to interest expense over the hedged debt balance.remaining term of the Notes. |
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| (g) | In May 2016, the Company issued €600 million (approximately $686$671 million USD at December 29, 2018,28, 2019, which reflects the discount, fees and translation adjustments) of eight-year 1.00% Euro Notes due 2024. The proceeds from these Notes were used for general corporate purposes, including, together with cash on hand and additional commercial paper borrowings, repayment of the Company's $750 million, seven-year 4.45% U.S. Dollar Notes due 2016 at maturity. The Notes were designated as a net investment hedge of the Company’s investment in its Europe subsidiary when issued. The effective interest rate on these Notes, reflecting issuance discount, hedge settlement and interest rate swaps was 0.34%0.21% at December 29, 2018. During 2016, the Company entered into interest rate swaps which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps, and the resulting unamortized gain of $9 million at December 29, 2018 will be amortized to interest expense over the remaining term of the Notes.28, 2019. In November 2016, the Company entered into interest rate swaps with notional amounts totaling €300 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. In October 2018, the Company entered into interest rate swaps with notional amounts totaling €348 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The fair value adjustment for the interest rate swaps was $7 million at December 29, 2018, recorded as an increase in the hedged debt balance. |
entered into interest rate swaps with notional amounts totaling €300 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. The Company subsequently terminated these swaps. In May of 2019, the Company entered into interest rate swaps with notional amounts totaling €600 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The fair value adjustment for the interest rate swaps was $3 million at December 28, 2019, recorded as an increase in the hedged debt balance.
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| (h) | In November 2016, the Company issued $600 million of seven-year 2.65% U.S. Dollar Notes, using the net proceeds for general corporate purposes, which included repayment of the Company's 1.875% U.S. Dollar Notes due 2016 at maturity and a portion of its commercial paper borrowings. The effective interest rate on these Notes, reflecting issuance discount, hedge settlement and interest rate swaps was 3.43%3.39% at December 29, 2018.28, 2019. In November 2016, the Company entered into interest rate swaps with notional amounts totaling $300 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps, in the first quarter of 2018, and the resulting unamortized loss of $12$9 million at December 29, 201828, 2019 will be amortized to interest expense over the remaining term of the Notes. In 2019, the Company redeemed $50 million of the Notes. In connection with the debt redemption, the Company incurred $2 million of interest expense, consisting primarily of a premium on the tender offer. |
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| (i) | In February 2013, the Company issued $400 million ($189 million previously redeemed) of ten-year 2.75% U.S. Dollar Notes, using net proceeds from these Notes for general corporate purposes, including, together with cash on hand, to repay a portion of the Company’s $750 million 4.25% U.S. Dollar Notes that matured in March 2013. The effective interest rate on these Notes, reflecting issuance discount and hedge settlement was 4.04%. In March 2014, the Company redeemed $189 million of the Notes. In connection with the debt redemption, the Company reduced interest expense by $10 million, including $1 million of accelerated gains onand interest rate swaps, previously recorded in accumulated other comprehensive income, and incurred $2 million expense, recorded in Other Income, Expense (net), related to acceleration of fees on the redeemed debt and fees related to the tender offer.was 4.11%. In September 2016, the Company entered into interest rate swaps with notional amounts totaling $211 million, which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps, in the first quarter of 2018, and the resulting unamortized loss of $12$9 million at December 29, 201828, 2019 will be amortized to interest expense over the remaining term of the Notes. |
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| (j) | In May 2012, the Company issued $700 million ($342 million previously redeemed) of ten-year 3.125% U.S. Dollar Notes, using the net proceeds from these Notes for general corporate purposes, including financing a portion of the acquisition of Pringles. The effective interest rate on these Notes, reflecting issuance discount and interest rate swaps, was 3.72%3.74% at December 29, 2018. In March 2014, the Company redeemed $342 million of the Notes. In connection with the debt redemption, the Company reduced interest expense by $2 million28, 2019. During 2016 and incurred $2 million expense, recorded in Other Income, Expense (net), related to acceleration of fees on the redeemed debt and fees related to the tender offer. During 2016,2018, the Company entered into interest rate swaps which effectively converted these Notes fromall or a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedgesportion of the debt obligation. The Company subsequently terminated the interest rate swaps. In November 2016, the Company entered into interest rate swaps with notional amounts totaling $358 million, which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps, inand the first quarter of 2018. In October 2018, the Company entered into interest rate swaps with notional amounts totaling $358 million, which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps in the fourth quarter of 2018. The $6resulting $4 million loss on termination of the interest rate swaps at December 29, 201828, 2019 will be amortized to interest expense over the remaining term of the Notes. |
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| (k) | In May 2017, the Company issued €600 million (approximately $686$671 million USD at December 29, 2018,28, 2019, which reflects the discount and translation adjustments) of five-year 0.80% Euro Notes due 2022, resulting in aggregate net proceeds after debt discount of $656 million. Theusing the proceeds from these Notes were used for general corporate purposes, including, together with cash on hand and additional commercial paper borrowings, repayment of the Company's $400 million, five-year 1.75% U.S. Dollar Notes due 2017 at maturity. The effective interest rate on the Notes, reflecting issuance discount and hedge settlement, was 0.87%. The Notes were designated as a net investment hedge of the Company's investment in its Europe subsidiary when issued. |
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| (l) | In May 2014, the Company issued €500 million (approximately $572$559 million at December 29, 2018,28, 2019, which reflects the discount and translation adjustments) of seven-year 1.75% Euro Notes due 2021, using the proceeds from these Notes for general corporate purposes, which included repayment of a portion of the Company’s commercial paper borrowings. The effective interest rate on the Notes, reflecting issuance discount and hedge settlement, was 2.34%.2.37% at December 28, 2019. The Notes were designated as a net investment hedge of the Company’s investment in its Europe subsidiary when issued. |
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| (m) | In May 2018, the Company issued $400 million of three-year 3.25% Senior Notes due 2021, using the net proceeds for general corporate purposes, which included repayment of the Company's $400 million, seven-year 3.25% U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of the Company's commercial paper borrowings used to finance the acquisition of ownership interests in TAF and Multipro. The effective interest rate on the Debentures,Notes, reflecting issuance discount, and hedge settlement, was 3.40%.3.39% as December 28, 2019. In 2019, the Company redeemed $202 million of the Notes. In connection with the dept redemption, the Company incurred $6 million of interest expense, consisting primarily of a premium on the tender offer. |
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| (n) | In December 2010, the Company issued $1.0 billion ($150 million previously redeemed) of ten-year 4.0% fixed rate U.S. Dollar Notes, using the net proceeds from these Notes for incremental pension and postretirement benefit plan contributions and to retire a portion of its commercial paper. The effective interest rate on these Notes, reflecting issuance discount, hedge settlement and interest rate swaps, was 3.37% at December 29, 2018. In March 2014, the Company redeemed $150 million of the Notes. In connection with the debt redemption, the Company incurred $12 million of interest expense offset by $7 million of accelerated gains on interest rate swaps previously recorded in accumulated other comprehensive income, and incurred $1 million expense, recorded in Other Income, Expense (net), related to acceleration of fees on the redeemed debt and fees related to the tender offer.28, 2019. During 2016, the Company entered into interest rate swaps, with notional amounts of $600 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps.swaps and the resulting gain on termination at December 28, 2019 will be amortized to interest expense over the remaining term of the Notes. In July 2016,2019, the Company entered intoredeemed $248 million of the Notes. In connection with the debt redemption, the Company incurred $6 million of interest expense, consisting primarily of a premium on the tender offer, which was partially offset by accelerated gains on pre-issuance interest rate swaps with notional amounts totaling $700 million, which effectively converted a portion of thesehedges. |
Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The $1 million gain on termination of the 2016 and prior year interest rate swaps at December 29, 2018 will be amortized to interest expense over the remaining term of the Notes.
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| (o) | In November 2009, the Company issued $500 million of ten-year 4.15% fixed rate U.S. Dollar Notes, using net proceeds from these Notes to retire a portion of its 6.6% U.S. Dollar Notes due 2011. The effective interest rate on these Notes, reflecting issuance discount, hedge settlementIn 2012 and interest rate swaps was 3.41% at December 29, 2018. In 2012,2015, the Company entered into interest rate swaps which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. During 2015,In 2019, the Company entered into and terminated a seriesredeemed $191 million of the Notes. In connection with the August 2019 debt redemption, the Company incurred $1 million of interest rate swaps and asexpense, consisting primarily of December 29, 2018 had terminated all interest rate swaps. The $3a premium on the tender offer. In September of 2019, the Company redeemed the remaining $309 million gain on termination at December 29, 2018 will be amortized toof the Notes. In connection with the September 2019 debt redemption, the company incurred $1 million of interest expense, over the remaining term of the Notes. |
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(p) | In May 2011, the Company issued $400 million of seven-year 3.25% fixed rate U.S. Dollar Notes, using net proceeds from these Notes for general corporate purposes including repaymentconsisting primarily of a portion of its commercial paper. In 2011,premium on the Company entered into interest rate swaps which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. During 2013, the Company terminated all of the interest rate swaps and subsequently entered into interest rate swaps which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. During 2015, the Company terminated all interest rate swaps. The Company redeemed these Notes in May 2018.tender offer. |
In August 2019, the Company redeemed $191 million of its 4.15% U.S. Dollar Notes due November 2019, $248 million of its 4.00% U.S. Dollar Notes due 2020, $202 million of its 3.25% U.S. Dollar Notes due 2021, and $50 million of its 2.65% U.S. Dollar Notes due 2023. In connection with the debt redemption, the Company incurred $15 million of interest expense, consisting primarily of a premium on the tender offer, acceleration of unamortized debt discount on the redeemed debt, and fees related to the tender offer, partially offset by accelerated gains on pre-issuance interest rate hedges.
In September 2019, the Company redeemed $309 million of its 4.15% U.S. Dollar Notes due November 2019, the
remaining principal balance subsequent to the August redemption. In connection with the debt redemption, the
Company incurred $1 million of interest expense, consisting primarily of a premium and also including accelerated
losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees
related to the make whole call.
All of the Company’s Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions and also contain a change of control provision. There are no significant restrictions on the payment of dividends by the Company. The Company was in compliance with all these covenants as of December 28, 2019.
The Company and two of its subsidiaries (the Issuers) maintain a program under which the Issuers may issue euro-commercial paper notes up to a maximum aggregate amount outstanding at any time of $750 million or its equivalent in alternative currencies. The notes may have maturities ranging up to 364 days and will be senior unsecured obligations of the applicable Issuer. Notes issued by subsidiary Issuers will be guaranteed by the Company. The notes may be issued at a discount or may bear fixed or floating rate interest or a coupon calculated by reference to an index or formula. There were no0 commercial paper notes outstanding under this program as of December 28, 2019 and December 29, 2018 and $96 million outstanding under this program as of December 30, 2017.2018.
At December 29, 2018,28, 2019, the Company had $2.8$3.0 billion of short-term lines of credit virtually alland letters of credit, of which $2.9 billion were unused and available for borrowing primarily on an unsecured basis. These lines were comprised principally of anthe January 2018 unsecured $1.5 billion Five-Year Credit Agreement, which the Company entered into in January 2018 and expires in 2023, replacing the Company’sand an unsecured Five-year$1.0 billion 364-Day Credit Agreement, which would have expired in February 2019. Agreement.
The Five-Year Credit Agreement allows the Company to borrow, on a revolving credit basis, up to $1.5 billion, which includes the ability to obtain letters of credit in an aggregate stated amount up to $75 million and to obtain European swingline loans in an aggregate principal amount up to the equivalent of $300 million. The agreement contains customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agent may terminate the commitments under the credit facility, accelerate any outstanding loans under the agreement, and demand the deposit of cash collateral equal to the lender’s letter of credit exposure plus interest.
The Company was in compliance with all covenants as of December 29, 2018.
In January 2019,2020, the Company entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to $1.0 billion at any time outstanding, to replace the $1.0 billion 364-day facility that expired in January 2019. 2020.
The new credit facilities containsFive-Year and 364 Day Credit Agreements which had no outstanding borrowings as December 28, 2019, contain customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agentagents may terminate the commitments under the credit facility,facilities, accelerate any outstanding loans under the agreement,agreements, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest. There are no borrowings outstanding
During the third quarter of 2019, in connection with the divestiture of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses, the Company withdrew from two multi-employer pension plans and recorded withdrawal liabilities of $132 million. While this represents our best estimate of the cost of withdrawing from the plans at this time, we have not yet reached agreement on the ultimate amount of the withdrawal liability. Subsequent to the end of the year, the Company and the lenders under the new credit facilities.Five-Year and 364-Day Credit agreements entered into a waiver agreement addressing any matters that arose or may arise from these liabilities under the agreements, as long as the aggregate amount of such liabilities does not exceed $250 million. The Company was in compliance with all financial covenants contained in these agreements at December 28, 2019.
Scheduled principal repayments on long-term debt are (in millions): 2019–$507; 2020–$851;620; 2021–$973;835; 2022–$1,045;1,039; 2023–$811; 2024771; 2024–$677; 2025 and beyond–$4,598.3,896.
Financial institutions have issued standby letters of credit conditionally guaranteeing obligations on behalf of the Company totaling $87 million, including $52 million secured and $35 million unsecured, as of December 28, 2019. These obligations are related primarily to insurance programs. There were no amounts drawn down on the letters of credit as of December 28, 2019.
The Company has issued guarantees for a certain portion of debt of unconsolidated affiliates. These arrangements include cross guarantees back from the other shareholder in proportion to their ownership of the unconsolidated affiliates. These guarantees are not material to the Company.
Interest expense capitalized as part of the construction cost of fixed assets was immaterial for all periods presented.
NOTE 9
STOCK COMPENSATION
The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units and, to a lesser extent, executive performance shares. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. These awards are administered through several plans, as described within this Note.
The 2017 Long-Term Incentive Plan (2017 Plan), approved by shareholders in 2017, permits awards to employees and officers in the form of incentive and non-qualified stock options, performance units, restricted stock or restricted stock units, and stock appreciation rights. The 2017 Plan, which replaced the 2013 Long-Term Incentive Plan (2013 Plan), authorizes the issuance of a total of (a) 16 million shares; plus (b) the total number of shares remaining available for future grants under the 2013 Plan. The total number of shares remaining available for issuance under the 2017 Plan will be reduced by two2 shares for each share issued pursuant to an award under the 2017 Plan other than a stock option or stock appreciation right, or potentially issuable pursuant to an outstanding award other than a stock option or stock appreciation right, which will in each case reduce the total number of shares remaining by one1 share for each share issued. The 2017 Plan includes several limitations on awards or payments to individual participants. Options granted under the 2017 and 2013 Plans generally vest over three years. At December 29, 2018, there were 2017 million remaining authorized, but unissued, shares under the 2017 Plan.
The Non-Employee Director Stock Plan (2009 Director Plan) was approved by shareholders in 2009 and
allows each eligible non-employee director to receive shares of the Company’s common stock annually. The number of shares granted pursuant to each annual award will be determined by the Nominating and Governance Committee of the Board of Directors. The 2009 Director Plan, which replaced the 2000 Non-Employee Director Stock Plan (2000 Director Plan), reserves 500,000 shares for issuance, plus the total number of shares as to which awards granted under the 2009 Director Plan or the 2000 Director Plans expire or are forfeited, terminated or settled in cash. Under both the 2009 and 2000 Director Plans, shares (other than stock options) are placed in the Kellogg Company Grantor Trust for Non-Employee Directors (the Grantor Trust). Under the terms of the Grantor Trust, shares are available to a director only upon termination of service on the Board. Under the 2009 Director Plan, awards were as follows (number of shares): 2018-30,045; 2017-25,209; 2016-24,249.
The 2002 Employee Stock Purchase Plan was approved by shareholders in 2002 and permits eligible employees to purchase Company stock at a discounted price. This plan allows for a maximum of 2.5 million shares of Company stock to be issued at a purchase price equal to 95% of the fair market value of the stock on the last day of the quarterly purchase period. Total purchases through this plan for any employee are limited to a fair market value of $25,000 during any calendar year. At December 29, 2018, there were approximately 0.2 million remaining authorized, but unissued, shares under this plan. Shares were purchased by employees under this plan as follows (approximate number of shares): 2018–54,000; 2017–65,000; 2016–63,000. Options granted to employees to purchase discounted stock under this plan are included in the option activity tables within this note.
Additionally, an international subsidiary of the Company maintains a stock purchase plan for its employees. Subject to limitations, employee contributions to this plan are matched 1:1 by the Company. Under this plan, shares were granted by the Company to match an equal number of shares purchased by employees as follows (approximate number of shares): 2018–63,000; 2017–60,000; 2016–57,000.
Compensation expense for all types of equity-based programs and the related income tax benefit recognized were as follows:
|
| | | | | | | | | | | | |
| (millions) | | 2019 | | 2018 | | 2017 |
| Pre-tax compensation expense | | $ | 61 |
| | $ | 64 |
| | $ | 71 |
|
| Related income tax benefit | | $ | 16 |
| | $ | 16 |
| | $ | 26 |
|
|
| | | | | | | | | | | | |
| (millions) | | 2018 | | 2017 | | 2016 |
| Pre-tax compensation expense | | $ | 64 |
| | $ | 71 |
| | $ | 68 |
|
| Related income tax benefit | | $ | 16 |
| | $ | 26 |
| | $ | 25 |
|
As of December 29, 2018,28, 2019, total stock-based compensation cost related to non-vested awards not yet recognized was $85$87 million and the weighted-average period over which this amount is expected to be recognized was 2 years.
Cash flows realized upon exercise or vesting of stock-based awards in the periods presented are included in the following table. Tax benefitswindfall (shortfall) realized upon exercise or vesting of stock-based awards generally represent the tax benefit of the difference between the exercise pricegrant date fair value of an award and the strike pricetaxable compensation of the option.
an award.
Cash used by the Company to settle equity instruments granted under stock-based awards was not material.
|
| | | | | | | | | | | | |
| (millions) | | 2019 | | 2018 | | 2017 |
| Total cash received from option exercises and similar instruments | | $ | 64 |
| | $ | 167 |
| | $ | 97 |
|
| Tax windfall (shortfall) classified as cash flow from operating activities | | $ | (2 | ) | | $ | 11 |
| | $ | 4 |
|
|
| | | | | | | | | | | | |
| (millions) | | 2018 | | 2017 | | 2016 |
| Total cash received from option exercises and similar instruments | | $ | 167 |
| | $ | 97 |
| | $ | 368 |
|
| Tax benefits realized upon exercise or vesting of stock-based awards: | | | | | | |
| Windfall benefits classified as cash flow from operating activities | | $ | 11 |
| | $ | 4 |
| | $ | 36 |
|
Shares used to satisfy stock-based awards are normally issued out of treasury stock, although management is authorized to issue new shares to the extent permitted by respective plan provisions. Refer to Note 6 for information on shares issued during the periods presented to employees and directors under various long-term incentive plans and share repurchases under the Company’s stock repurchase authorizations. The Company does not currently have a policy of repurchasing a specified number of shares issued under employee benefit programs during any particular time period.
Stock options
During the periods presented, non-qualified stock options were granted to eligible employees under the 2017 and 2013 Plans with exercise prices equal to the fair market value of the Company’s stock on the grant date, a contractual term of ten years, and a three-year graded vesting period.
Management estimates the fair value of each annual stock option award on the date of grant using a lattice-based option valuation model. Composite assumptions are presented in the following table. Weighted-average values are disclosed for certain inputs which incorporate a range of assumptions. Expected volatilities are based principally on historical volatility of the Company’s stock, and to a lesser extent, on implied volatilities from traded options on the Company’s stock. Historical volatility corresponds to the contractual term of the options granted. The Company uses historical data to estimate option exercise and employee termination within the valuation models; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted represents the period of time that options granted are expected to
be outstanding; the weighted-average expected term for all employee groups is presented in the following table. The risk-free rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.
|
| | | | | | | | | | | | |
Stock option valuation model assumptions for grants within the year ended: | | 2019 | | 2018 | | 2017 |
| Weighted-average expected volatility | | 18.00 | % | | 18.00 | % | | 18.00 | % |
| Weighted-average expected term (years) | | 6.60 |
| | 6.60 |
| | 6.60 |
|
| Weighted-average risk-free interest rate | | 2.59 | % | | 2.82 | % | | 2.26 | % |
| Dividend yield | | 3.90 | % | | 3.00 | % | | 2.80 | % |
| Weighted-average fair value of options granted | | $ | 6.78 |
| | $ | 10.00 |
| | $ | 10.14 |
|
|
| | | | | | | | | | | | |
Stock option valuation model assumptions for grants within the year ended: | | 2018 | | 2017 | | 2016 |
| Weighted-average expected volatility | | 18.00 | % | | 18.00 | % | | 17.00 | % |
| Weighted-average expected term (years) | | 6.60 |
| | 6.60 |
| | 6.88 |
|
| Weighted-average risk-free interest rate | | 2.82 | % | | 2.26 | % | | 1.60 | % |
| Dividend yield | | 3.00 | % | | 2.80 | % | | 2.60 | % |
| Weighted-average fair value of options granted | | $ | 10.00 |
| | $ | 10.14 |
| | $ | 9.44 |
|
A summary of option activity for the year ended December 29, 201828, 2019 is presented in the following table:
| | Employee and director stock options | | Shares (millions) | | Weighted- average exercise price | | Weighted- average remaining contractual term (yrs.) | | Aggregate intrinsic value (millions) | | Shares (millions) | | Weighted- average exercise price | | Weighted- average remaining contractual term (yrs.) | | Aggregate intrinsic value (millions) |
| Outstanding, beginning of year | | 14 |
| | $ | 64 |
| | | | 14 |
| | $ | 66 |
| | |
| Granted | | 3 |
| | 70 |
| | | | 3 |
| | 57 |
| | |
| Exercised | | (2 | ) | | 58 |
| | | | (1 | ) | | 56 |
| | |
| Forfeitures and expirations | | (1 | ) | | 71 |
| | | | | | (2 | ) | | 67 |
| | | | |
| Outstanding, end of year | | 14 |
| | $ | 66 |
| | 6.3 | | $ | 7 |
| | 14 |
| | $ | 65 |
| | 4.9 | | $ | 55 |
|
| Exercisable, end of year | | 10 |
| | $ | 63 |
| | 5.3 | | $ | 7 |
| | 10 |
| | $ | 65 |
| | 6.1 | | $ | 86 |
|
Additionally, option activity for the comparable prior year periods is presented in the following table:
|
| | | | | | | | |
| (millions, except per share data) | | 2018 | | 2017 |
| Outstanding, beginning of year | | 14 |
| | 15 |
|
| Granted | | 3 |
| | 2 |
|
| Exercised | | (2 | ) | | (2 | ) |
| Forfeitures and expirations | | (1 | ) | | (1 | ) |
| Outstanding, end of year | | 14 |
| | 14 |
|
| Exercisable, end of year | | 10 |
| | 10 |
|
| Weighted-average exercise price: | | | | |
| Outstanding, beginning of year | | $ | 64 |
| | $ | 62 |
|
| Granted | | 70 |
| | 73 |
|
| Exercised | | 58 |
| | 57 |
|
| Forfeitures and expirations | | 71 |
| | 70 |
|
| Outstanding, end of year | | $ | 66 |
| | $ | 64 |
|
| Exercisable, end of year | | $ | 63 |
| | $ | 60 |
|
|
| | | | | | | | |
| (millions, except per share data) | | 2017 | | 2016 |
| Outstanding, beginning of year | | 15 |
| | 19 |
|
| Granted | | 2 |
| | 3 |
|
| Exercised | | (2 | ) | | (6 | ) |
| Forfeitures and expirations | | (1 | ) | | (1 | ) |
| Outstanding, end of year | | 14 |
| | 15 |
|
| Exercisable, end of year | | 10 |
| | 8 |
|
| Weighted-average exercise price: | | | | |
| Outstanding, beginning of year | | $ | 62 |
| | $ | 58 |
|
| Granted | | 73 |
| | 76 |
|
| Exercised | | 57 |
| | 56 |
|
| Forfeitures and expirations | | 70 |
| | 67 |
|
| Outstanding, end of year | | $ | 64 |
| | $ | 62 |
|
| Exercisable, end of year | | $ | 60 |
| | $ | 58 |
|
The total intrinsic value of options exercised during the periods presented was (in millions): 2019–$7; 2018–$33; 2017–$22; 2016���$145.22.
Other stock-based awards
During the periods presented, other stock-based awards consisted principally of executive performance shares and restricted stock granted under the 2017 and 2013 Plans.
In the first quarter of 2018,2019, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting.vesting, as well as dividend equivalent shares. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three-yearthree year currency-neutral net sales growth and total shareholder return (TSR) of the Company's common stock relative to a select group of peer companies. Dividend equivalents accrue and vest in accordance with the underlying award.
A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of currency-neutralcurrency-
neutral comparable operating margin expansion. Compensation cost related to currency-neutral net sales growth performance is revised for changes in the expected outcome. The 20182019 target grant currently corresponds to approximately 166,000223,000 shares, with a grant-date fair value of $72$59 per share.
In 2017,2018, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three-year currency-neutral comparable operating margin expansion and total shareholder return (TSR) of the Company's common stock relative to a select group of peer companies. The 20172018 target grant currently corresponds to approximately 100,000143,000 shares, with a grant-date fair value of $67$88 per share.
In 2016,2017, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three-year currency neutral adjusted operating profit growth and TSR of the Company's common stock relative to a select group of peer companies. The 20162017 target grant currently corresponds to approximately 129,000100,000 shares, with a grant-date fair value of $80$50 per share.
Based on the market price of the Company’s common stock at year-end 2018,2019, the maximum future value that could be awarded on the vesting date was (in millions): 2019 award–$31; 2018 award–$19; $20; and 2017 award– $11; and$13. The 2016 award–$15. The 2015 performance share award, payable in stock, was settled at 75%88% of target in February 20182019 for a total dollar equivalent of $8$7 million.
The Company also grants restricted stock and restricted stock units to eligible employees under the 2017 Plan. RestrictionsPlan, typically with respect to sale or transferability generally lapse after three yearsyear cliff vesting earning dividend equivalent units for awards granted beginning in 2019. Dividend equivalents accrue and vest in accordance with the case of restricted stock, the grantee is normally entitled to receive shareholder dividends during the vesting period.underlying award. Management estimates the fair value of restricted stock grants based on the market price of the underlying stock on the date of grant. A summary of restricted stock and restricted stock unit activity for the year ended December 29, 2018,28, 2019, is presented in the following table:
| | Employee restricted stock and restricted stock units | | Shares (thousands) | | Weighted- average grant-date fair value | | Shares (thousands) | | Weighted- average grant-date fair value |
| Non-vested, beginning of year | | 1,673 |
| | $ | 65 |
| | 1,708 |
| | $ | 65 |
|
| Granted | | 772 |
| | 63 |
| | 287 |
| | 55 |
|
| Vested | | (507 | ) | | 59 |
| | (469 | ) | | 68 |
|
| Forfeited | | (230 | ) | | 64 |
| | (340 | ) | | 62 |
|
| Non-vested, end of year | | 1,708 |
| | $ | 65 |
| | 1,186 |
| | $ | 61 |
|
Additionally, restricted stock and restricted stock unit activity for 20172018 and 20162017 is presented in the following table:
|
| | | | | | | | |
| Employee restricted stock and restricted stock units | | 2018 | | 2017 |
| Shares (in thousands): | | | | |
| Non-vested, beginning of year | | 1,673 |
| | 1,166 |
|
| Granted | | 772 |
| | 776 |
|
| Vested | | (507 | ) | | (109 | ) |
| Forfeited | | (230 | ) | | (160 | ) |
| Non-vested, end of year | | 1,708 |
| | 1,673 |
|
| Weighted-average exercise price: | | | | |
| Non-vested, beginning of year | | $ | 65 |
| | $ | 63 |
|
| Granted | | 63 |
| | 65 |
|
| Vested | | 59 |
| | 58 |
|
| Forfeited | | 64 |
| | 65 |
|
| Non-vested, end of year | | $ | 65 |
| | $ | 65 |
|
|
| | | | | | | | |
| Employee restricted stock and restricted stock units | | 2017 | | 2016 |
| Shares (in thousands): | | | | |
| Non-vested, beginning of year | | 1,166 |
| | 806 |
|
| Granted | | 776 |
| | 601 |
|
| Vested | | (109 | ) | | (116 | ) |
| Forfeited | | (160 | ) | | (125 | ) |
| Non-vested, end of year | | 1,673 |
| | 1,166 |
|
| Weighted-average exercise price: | | | | |
| Non-vested, beginning of year | | $ | 63 |
| | $ | 57 |
|
| Granted | | 65 |
| | 70 |
|
| Vested | | 58 |
| | 56 |
|
| Forfeited | | 65 |
| | 63 |
|
| Non-vested, end of year | | $ | 65 |
| | $ | 63 |
|
The total fair value of restricted stock and restricted stock units vesting in the periods presented was (in millions): 2019–$27; 2018–$35; 2017–$5; 2016–$7.5.
NOTE 10
PENSION BENEFITS
The Company sponsors a number of U.S. and foreign pension plans to provide retirement benefits for its employees. The majority of these plans are funded or unfunded defined benefit plans, although the Company does participate in a limited number of multiemployer or other defined contribution plans for certain employee groups. See Note 12 for more information regarding the Company’s participation in multiemployer plans. Defined benefits for salaried employees are generally based on salary and years of service, while union employee benefits are generally a negotiated amount for each year of service. The Company uses a December 31 measurement date for these plans and, when necessary, adjusts for plan contributions and significant events between December 31 and its fiscal year-end.
In September 2019, the Company provided a voluntary one-time lump-sum cash settlement offer to certain eligible terminated vested participants in our U.S. pension plans in order to reduce pension obligations and administrative costs. In December 2019, approximately $174 million was distributed from pension plan assets in connection with this offer.
In conjunction with the completion of the sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses on July 28, 2019, the Company recognized a curtailment gain in its U.S. pension plans of $11 million.
In September 2018, the Company recognized a curtailment gain of $30 million as certain European pension plans were frozen as of December 29, 2018 in conjunction with Project K restructuring.
In September 2017, the Company amended certain defined benefit pension plans in the U.S. and Canada for salaried employees. As of December 31, 2018, the amendment will freeze thefroze compensation and service periods used to calculate pension benefits for active salaried employees who participate in the affected pension plans. During the third quarter of 2017, the Company recognized related pension curtailment gains totaling $136 million included within Project K restructuring activity.
Beginning January 1, 2019, impacted employees will not accrue additional benefits for future service and eligible compensation received under these plans. Concurrently, the Company also amended its 401(k) savings plans effective January 1, 2019, to make previously ineligible salaried U.S. and Canada employees eligible for Company
retirement contributions, which range from 3% to 7% of eligible compensation based on the employee’s length of employment.
Obligations and funded status
The aggregate change in projected benefit obligation, plan assets, and funded status is presented in the following tables.
|
| | | | | | | | |
| (millions) | | 2019 | | 2018 |
| Change in projected benefit obligation | | | | |
| Beginning of year | | $ | 5,117 |
| | $ | 5,648 |
|
| Service cost | | 36 |
| | 87 |
|
| Interest cost | | 172 |
| | 165 |
|
| Plan participants’ contributions | | 1 |
| | 1 |
|
| Amendments | | 3 |
| | 6 |
|
| Actuarial (gain)loss | | 766 |
| | (384 | ) |
| Benefits paid | | (458 | ) | | (280 | ) |
| Curtailment and special termination benefits | | (13 | ) | | (36 | ) |
| Other | | — |
| | 1 |
|
| Foreign currency adjustments | | 30 |
| | (91 | ) |
| End of year | | $ | 5,654 |
| | $ | 5,117 |
|
| Change in plan assets | | | | |
| Fair value beginning of year | | $ | 4,677 |
| | $ | 5,043 |
|
| Actual return on plan assets | | 874 |
| | (299 | ) |
| Employer contributions | | 10 |
| | 270 |
|
| Plan participants’ contributions | | 1 |
| | 1 |
|
| Benefits paid | | (426 | ) | | (236 | ) |
| Other | | — |
| | (1 | ) |
| Foreign currency adjustments | | 34 |
| | (101 | ) |
| Fair value end of year | | $ | 5,170 |
| | $ | 4,677 |
|
| Funded status | | $ | (484 | ) | | $ | (440 | ) |
| Amounts recognized in the Consolidated Balance Sheet consist of | | | | |
| Other assets | | $ | 241 |
| | $ | 228 |
|
| Other current liabilities | | (20 | ) | | (17 | ) |
| Other liabilities | | (705 | ) | | (651 | ) |
| Net amount recognized | | $ | (484 | ) | | $ | (440 | ) |
| Amounts recognized in accumulated other comprehensive income consist of | | | | |
| Prior service cost | | $ | 37 |
| | $ | 41 |
|
| Net amount recognized | | $ | 37 |
| | $ | 41 |
|
|
| | | | | | | | |
| (millions) | | 2018 | | 2017 |
| Change in projected benefit obligation | | | | |
| Beginning of year | | $ | 5,648 |
| | $ | 5,510 |
|
| Service cost | | 87 |
| | 96 |
|
| Interest cost | | 165 |
| | 164 |
|
| Plan participants’ contributions | | 1 |
| | 1 |
|
| Amendments | | 6 |
| | 6 |
|
| Actuarial (gain)loss | | (384 | ) | | 264 |
|
| Benefits paid | | (280 | ) | | (395 | ) |
| Curtailment and special termination benefits | | (36 | ) | | (156 | ) |
| Other | | 1 |
| | 1 |
|
| Foreign currency adjustments | | (91 | ) | | 157 |
|
| End of year | | $ | 5,117 |
| | $ | 5,648 |
|
| Change in plan assets | | | | |
| Fair value beginning of year | | $ | 5,043 |
| | $ | 4,544 |
|
| Actual return on plan assets | | (299 | ) | | 666 |
|
| Employer contributions | | 270 |
| | 31 |
|
| Plan participants’ contributions | | 1 |
| | 1 |
|
| Benefits paid | | (236 | ) | | (364 | ) |
| Other | | (1 | ) | | 1 |
|
| Foreign currency adjustments | | (101 | ) | | 164 |
|
| Fair value end of year | | $ | 4,677 |
| | $ | 5,043 |
|
| Funded status | | $ | (440 | ) | | $ | (605 | ) |
| Amounts recognized in the Consolidated Balance Sheet consist of | | | | |
| Other assets | | $ | 228 |
| | $ | 252 |
|
| Other current liabilities | | (17 | ) | | (19 | ) |
| Other liabilities | | (651 | ) | | (838 | ) |
| Net amount recognized | | $ | (440 | ) | | $ | (605 | ) |
| Amounts recognized in accumulated other comprehensive income consist of | | | | |
| Prior service cost | | $ | 41 |
| | $ | 48 |
|
| Net amount recognized | | $ | 41 |
| | $ | 48 |
|
The accumulated benefit obligation for all defined benefit pension plans was $5.0$5.6 billion and $5.4$5.0 billion at December 29, 201828, 2019 and December 30, 2017,29, 2018, respectively. Information for pension plans with accumulated benefit obligations in excess of plan assets were:
|
| | | | | | | | |
| (millions) | | 2019 | | 2018 |
| Projected benefit obligation | | $ | 4,061 |
| | $ | 3,725 |
|
| Accumulated benefit obligation | | $ | 4,033 |
| | $ | 3,689 |
|
| Fair value of plan assets | | $ | 3,362 |
| | $ | 3,081 |
|
|
| | | | | | | | |
| (millions) | | 2018 | | 2017 |
| Projected benefit obligation | | $ | 3,725 |
| | $ | 4,119 |
|
| Accumulated benefit obligation | | $ | 3,689 |
| | $ | 4,051 |
|
| Fair value of plan assets | | $ | 3,081 |
| | $ | 3,279 |
|
Expense
The components of pension expense are presented in the following table. Service cost is recorded in COGS and SGA expense. All other components of net periodic benefit cost are included in OIE. Pension expense for defined contribution plans relates to certain foreign-based defined contribution plans and multiemployer plans in the United States in which the Company participates on behalf of certain unionized workforces.
|
| | | | | | | | | | | | |
| (millions) | | 2019 | | 2018 | | 2017 |
| Service cost | | $ | 36 |
| | $ | 87 |
| | $ | 96 |
|
| Interest cost | | 172 |
| | 165 |
| | 164 |
|
| Expected return on plan assets | | (340 | ) | | (361 | ) | | (371 | ) |
| Amortization of unrecognized prior service cost | | 7 |
| | 8 |
| | 9 |
|
| Recognized net (gain) loss | | 235 |
| | 269 |
| | (36 | ) |
| Net periodic benefit cost | | 110 |
| | 168 |
| | (138 | ) |
| Curtailment and special termination benefits | | (13 | ) | | (30 | ) | | (151 | ) |
| Pension (income) expense: | | | | | | |
| Defined benefit plans | | 97 |
| | 138 |
| | (289 | ) |
| Defined contribution plans | | 20 |
| | 27 |
| | 34 |
|
| Total | | $ | 117 |
| | $ | 165 |
| | $ | (255 | ) |
|
| | | | | | | | | | | | |
| (millions) | | 2018 | | 2017 | | 2016 |
| Service cost | | $ | 87 |
| | $ | 96 |
| | $ | 98 |
|
| Interest cost | | 165 |
| | 164 |
| | 174 |
|
| Expected return on plan assets | | (361 | ) | | (371 | ) | | (352 | ) |
| Amortization of unrecognized prior service cost | | 8 |
| | 9 |
| | 13 |
|
| Recognized net (gain) loss | | 269 |
| | (36 | ) | | 323 |
|
| Net periodic benefit cost | | 168 |
| | (138 | ) | | 256 |
|
| Curtailment and special termination benefits | | (30 | ) | | (151 | ) | | 1 |
|
| Pension (income) expense: | | | | | | |
| Defined benefit plans | | 138 |
| | (289 | ) | | 257 |
|
| Defined contribution plans | | 27 |
| | 34 |
| | 36 |
|
| Total | | $ | 165 |
| | $ | (255 | ) | | $ | 293 |
|
The estimated prior service cost for defined benefit pension plans that will be amortized from accumulated other comprehensive income into pension expense over the next fiscal year is approximately $7 million.
The Company and certain of its subsidiaries sponsor 401(k) or similar savings plans for active employees. Expense related to these plans was (in millions): 2019 – $39 million; 2018 – $38 million; 2017 – $41 million; 2016 – $39 million. These amounts are not included in the preceding expense table. Company contributions to these savings plans approximate annual expense. Company contributions to multiemployer and other defined contribution pension plans approximate the amount of annual expense presented in the preceding table.
Assumptions
The worldwide weighted-average actuarial assumptions used to determine benefit obligations were:
| | | | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 |
| Discount rate | | 3.9 | % | | 3.3 | % | | 3.6 | % | | 2.9 | % | | 3.9 | % | | 3.3 | % |
| Long-term rate of compensation increase | | 3.8 | % | | 3.9 | % | | 3.9 | % | | 3.4 | % | | 3.8 | % | | 3.9 | % |
The worldwide weighted-average actuarial assumptions used to determine annual net periodic benefit cost were:
To determine the overall expected long-term rate of return on plan assets, the Company models expected returns over a 20-year investment horizon with respect to the specific investment mix of its major plans. The return assumptions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets including consideration of current yields on long-term bonds, price-earnings ratios of the major stock market indices, and long-term inflation. The U.S. model, which corresponds to approximately 72% of consolidated pension and other postretirement benefit plan assets, incorporates a long-term inflation assumption of 2.5% and an active management premium of 1%0.8% (net of fees) validated by historical analysis. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. The expected rate of
To conduct the annual review of discount rates, the Company selected the discount rate based on a cash-flow matching analysis using Towers Watson’s proprietary RATE:Link tool and projections of the future benefit payments that constitute the projected benefit obligation for the plans. RATE:Link establishes the uniform discount rate that produces the same present value of the estimated future benefit payments, as is generated by discounting each year’s benefit payments by a spot rate applicable to that year. The measurement dates for the defined benefit plans are consistent with the Company’s fiscal year end. Accordingly, the Company selects yield curves to measure benefit obligations consistent with market indices during December of each year.
The Company categorized Plan assets within a three level fair value hierarchy described as follows:
Investments stated at fair value as determined by quoted market prices (Level 1) include:
Investments stated at estimated fair value using significant observable inputs (Level 2) include:
Investments stated at estimated fair value using significant unobservable inputs (Level 3) include:
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The Company’s practice regarding the timing of transfers between levels is to measure transfers in at the beginning of the month and transfers out at the end of the month. For the year ended December 29, 2018,28, 2019, the Company had no transfers between Levels 1 and 2.