UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended OctoberApril 2, 20102011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number 1-4171
KELLOGG COMPANY
State of Incorporation—Delaware | IRS Employer Identification No.38-0710690 |
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant’s telephone number: 269-961-2000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Common Stock outstanding as of OctoberApril 30, 20102011 — 368,213,884362,875,825 shares
INDEX
Page | ||||
Financial Statements | ||||
Consolidated Balance Sheet — | ||||
3 | ||||
4 | ||||
5 | ||||
Consolidated Statement of Cash Flows — quarters ended April 2, 2011 and April 3, 2010 | 6 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Quantitative and Qualitative Disclosures about Market Risk | ||||
Controls and Procedures | ||||
Risk Factors | ||||
Unregistered Sales of Equity Securities and Use of Proceeds | ||||
Exhibits | ||||
| ||||
| ||||
| ||||
|
Part I – FINANCIAL INFORMATION
Kellogg Company and Subsidiaries
(millions, except per share data)
October 2, 2010 (unaudited) | January 2, * | April 2, 2011 (unaudited) | January 1, * | |||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 559 | $ | 334 | $ | 404 | $ | 444 | ||||||||
Accounts receivable, net | 1,211 | 1,093 | 1,367 | 1,190 | ||||||||||||
Inventories: | ||||||||||||||||
Raw materials and supplies | 232 | 214 | 243 | 224 | ||||||||||||
Finished goods and materials in process | 720 | 696 | 732 | 832 | ||||||||||||
Deferred income taxes | 148 | 128 | 134 | 110 | ||||||||||||
Other prepaid assets | 135 | 93 | 171 | 115 | ||||||||||||
Total current assets | 3,005 | 2,558 | 3,051 | 2,915 | ||||||||||||
Property, net of accumulated depreciation of $4,666 and $4,520 | 3,015 | 3,010 | ||||||||||||||
Property, net of accumulated depreciation of $4,816 and $4,690 | 3,183 | 3,128 | ||||||||||||||
Goodwill | 3,644 | 3,643 | 3,630 | 3,628 | ||||||||||||
Other intangibles, net of accumulated amortization of $46 and $45 | 1,457 | 1,458 | ||||||||||||||
Other intangibles, net of accumulated amortization of $47 and $47 | 1,456 | 1,456 | ||||||||||||||
Pension | 208 | 160 | 463 | 333 | ||||||||||||
Other assets | 395 | 371 | 405 | 387 | ||||||||||||
Total assets | $ | 11,724 | $ | 11,200 | $ | 12,188 | $ | 11,847 | ||||||||
Current liabilities | ||||||||||||||||
Current maturities of long-term debt | $ | 948 | $ | 1 | $ | — | $ | 952 | ||||||||
Notes payable | 594 | 44 | 1,078 | 44 | ||||||||||||
Accounts payable | 1,145 | 1,077 | 1,199 | 1,149 | ||||||||||||
Accrued advertising and promotion | 454 | 409 | 462 | 405 | ||||||||||||
Accrued income taxes | 133 | 33 | 92 | 60 | ||||||||||||
Accrued salaries and wages | 161 | 322 | 179 | 153 | ||||||||||||
Other current liabilities | 344 | 402 | 408 | 421 | ||||||||||||
Total current liabilities | 3,779 | 2,288 | 3,418 | 3,184 | ||||||||||||
Long-term debt | 3,929 | 4,835 | 4,905 | 4,908 | ||||||||||||
Deferred income taxes | 431 | 425 | 749 | 697 | ||||||||||||
Pension liability | 441 | 430 | 176 | 265 | ||||||||||||
Other liabilities | 926 | 947 | 636 | 639 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Equity | ||||||||||||||||
Common stock, $.25 par value | 105 | 105 | 105 | 105 | ||||||||||||
Capital in excess of par value | 485 | 472 | 503 | 495 | ||||||||||||
Retained earnings | 6,087 | 5,481 | 6,325 | 6,122 | ||||||||||||
Treasury stock, at cost | (2,528 | ) | (1,820 | ) | (2,835 | ) | (2,650 | ) | ||||||||
Accumulated other comprehensive income (loss) | (1,931 | ) | (1,966 | ) | (1,789 | ) | (1,914 | ) | ||||||||
Total Kellogg Company equity | 2,218 | 2,272 | 2,309 | 2,158 | ||||||||||||
Noncontrolling interests | — | 3 | (5 | ) | (4 | ) | ||||||||||
Total equity | 2,218 | 2,275 | 2,304 | 2,154 | ||||||||||||
Total liabilities and equity | $ | 11,724 | $ | 11,200 | $ | 12,188 | $ | 11,847 | ||||||||
* Condensed from audited financial statements.
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
Quarter ended | Year-to-date period ended | Quarter ended | ||||||||||||||||||||||
(Results are unaudited) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | April 2, 2011 | April 3, 2010 | ||||||||||||||||||
Net sales | $ | 3,157 | $ | 3,277 | $ | 9,537 | $ | 9,675 | $ | 3,485 | $ | 3,318 | ||||||||||||
Cost of goods sold | 1,788 | 1,837 | 5,438 | 5,529 | 2,064 | 1,893 | ||||||||||||||||||
Selling, general and administrative expense | 828 | 873 | 2,438 | 2,497 | 849 | 788 | ||||||||||||||||||
Operating profit | 541 | 567 | 1,661 | 1,649 | 572 | 637 | ||||||||||||||||||
Interest expense | 62 | 65 | 188 | 199 | 67 | 65 | ||||||||||||||||||
Other income (expense), net | 1 | (10 | ) | 9 | (1 | ) | — | 1 | ||||||||||||||||
Income before income taxes | 480 | 492 | 1,482 | 1,449 | 505 | 573 | ||||||||||||||||||
Income taxes | 143 | 132 | 427 | 416 | 140 | 156 | ||||||||||||||||||
Earnings (loss) from joint ventures | — | — | — | (1 | ) | |||||||||||||||||||
Net income | $ | 337 | $ | 360 | $ | 1,055 | $ | 1,032 | $ | 365 | $ | 417 | ||||||||||||
Net income (loss) attributable to noncontrolling interests | (1 | ) | (1 | ) | (3 | ) | (4 | ) | (1 | ) | (1 | ) | ||||||||||||
Net income attributable to Kellogg Company | $ | 338 | $ | 361 | $ | 1,058 | $ | 1,036 | $ | 366 | $ | 418 | ||||||||||||
Per share amounts: | ||||||||||||||||||||||||
Basic | $ | 0.91 | $ | 0.94 | $ | 2.80 | $ | 2.71 | $ | 1.00 | $ | 1.10 | ||||||||||||
Diluted | $ | 0.90 | $ | 0.94 | $ | 2.78 | $ | 2.70 | $ | 1.00 | $ | 1.09 | ||||||||||||
Dividends per share | $ | 0.4050 | $ | 0.3750 | $ | 1.1550 | $ | 1.0550 | $ | 0.405 | $ | 0.375 | ||||||||||||
Average shares outstanding: | ||||||||||||||||||||||||
Basic | 373 | 382 | 378 | 382 | 365 | 380 | ||||||||||||||||||
Diluted | 376 | 384 | 381 | 383 | 368 | 384 | ||||||||||||||||||
Actual shares outstanding at period end | 368 | 379 | 362 | 380 | ||||||||||||||||||||
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
Capital in excess of par value | Retained earnings | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non- controlling interests | Total equity | Total comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital in par value | Retained | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non- controlling | Total | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock | Treasury stock | Common stock | Treasury stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(unaudited) | shares | amount | shares | amount | shares | amount | shares | amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 3, 2009 | 419 | $105 | $438 | $4,836 | 37 | ($1,790) | ($2,141) | $ 1,448 | $ 7 | $ 1,455 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 2, 2010 | 419 | $105 | $ | 472 | $ | 5,481 | 38 | $ | (1,820 | ) | $ | (1,966 | ) | $ 2,272 | $ 3 | $ | 2,275 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock repurchases | 4 | (187) | (187) | (187) | 21 | (1,057 | ) | (1,057 | ) | (1,057 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 1,212 | 1,212 | (4) | 1,208 | $1,208 | 1,247 | 1,247 | (7) | 1,240 | $ | 1,240 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends | (546) | (546) | (546) | (584) | (584 | ) | (584 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 175 | 175 | 175 | 175 | 52 | 52 | 52 | 52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock compensation | 37 | 37 | 37 | 19 | 19 | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised and other | (3) | (21) | (3) | 157 | 133 | 133 | 4 | (22) | (5) | 227 | 209 | 209 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 2, 2010 | 419 | $105 | $472 | $5,481 | 38 | ($1,820) | ($1,966) | $ 2,272 | $ 3 | $ 2,275 | $1,383 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2011 | 419 | $105 | $ | 495 | $ | 6,122 | 54 | $ | (2,650 | ) | $ | (1,914 | ) | $ 2,158 | $ (4) | $ | 2,154 | $ | 1,292 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock repurchases | 18 | (907) | (907) | (907) | 6 | (324 | ) | (324 | ) | (324 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 1,058 | 1,058 | (3) | 1,055 | 1,055 | 366 | 366 | (1) | 365 | 365 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends | (435) | (435) | (435) | (148) | (148 | ) | (148 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | 35 | 35 | 35 | 35 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 125 | 125 | 125 | 125 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock compensation | 16 | 16 | 16 | 3 | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock options exercised and other | (3) | (17) | (5) | 199 | 179 | 179 | 5 | (15) | (3) | 139 | 129 | 129 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, October 2, 2010 | 419 | $105 | $485 | $6,087 | 51 | ($2,528) | ($1,931) | $ 2,218 | $ — | $ 2,218 | $1,090 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, April 2, 2011 | 419 | $105 | $ | 503 | $ | 6,325 | 57 | $ | (2,835 | ) | $ | (1,789 | ) | $ 2,309 | $(5) | $ | 2,304 | $ | 490 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
Year-to-date period ended | Quarter ended | |||||||||||||||
(unaudited) | October 2, 2010 | October 3, 2009 | April 2, 2011 | April 3, 2010 | ||||||||||||
Operating activities | ||||||||||||||||
Net income | $ | 1,055 | $ | 1,032 | $ | 365 | $ | 417 | ||||||||
Adjustments to reconcile net income to operating cash flows: | ||||||||||||||||
Depreciation and amortization | 265 | 282 | 89 | 87 | ||||||||||||
Deferred income taxes | (53 | ) | (9 | ) | 6 | (11 | ) | |||||||||
Other | 116 | (18 | ) | 6 | 44 | |||||||||||
Postretirement benefit plan contributions | (45 | ) | (93 | ) | (178 | ) | (22 | ) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Trade receivables | (125 | ) | (240 | ) | (301 | ) | (203 | ) | ||||||||
Inventories | (43 | ) | 35 | 81 | 93 | |||||||||||
Accounts payable | 68 | (54 | ) | 50 | (48 | ) | ||||||||||
Accrued income taxes | 63 | 84 | 190 | 110 | ||||||||||||
Accrued interest expense | (18 | ) | (33 | ) | (16 | ) | (17 | ) | ||||||||
Accrued and prepaid advertising, promotion and trade allowances | 33 | 151 | 21 | (4 | ) | |||||||||||
Accrued salaries and wages | (161 | ) | 9 | 25 | (133 | ) | ||||||||||
All other current assets and liabilities | (76 | ) | 84 | (28 | ) | (63 | ) | |||||||||
Net cash provided by operating activities | 1,079 | 1,230 | 310 | 250 | ||||||||||||
Investing activities | ||||||||||||||||
Additions to properties | (252 | ) | (252 | ) | (103 | ) | (60 | ) | ||||||||
Other | 2 | 1 | 4 | 1 | ||||||||||||
Net cash used in investing activities | (250 | ) | (251 | ) | (99 | ) | (59 | ) | ||||||||
Financing activities | ||||||||||||||||
Net issuances (reductions) of notes payable | 547 | (915 | ) | |||||||||||||
Issuances of long-term debt | — | 745 | ||||||||||||||
Net issuances of notes payable | 1,031 | 80 | ||||||||||||||
Reductions of long-term debt | (1 | ) | — | (946 | ) | — | ||||||||||
Net issuances of common stock | 178 | 34 | 122 | 74 | ||||||||||||
Common stock repurchases | (907 | ) | (187 | ) | (329 | ) | (148 | ) | ||||||||
Cash dividends | (435 | ) | (403 | ) | (148 | ) | (142 | ) | ||||||||
Other | 7 | 2 | 4 | 2 | ||||||||||||
Net cash used in financing activities | (611 | ) | (724 | ) | (266 | ) | (134 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 7 | 17 | 15 | (4 | ) | |||||||||||
Increase in cash and cash equivalents | 225 | 272 | ||||||||||||||
Increase (decrease) in cash and cash equivalents | (40 | ) | 53 | |||||||||||||
Cash and cash equivalents at beginning of period | 334 | 255 | 444 | 334 | ||||||||||||
Cash and cash equivalents at end of period | $ | 559 | $ | 527 | $ | 404 | $ | 387 | ||||||||
Refer to Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
for the quarter ended OctoberApril 2, 20102011 (unaudited)
Note 1 Accounting policies
Basis of presentation
The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects normal recurring adjustments that management believes are necessary for a fair statement of the results of operations, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying notes contained on pages 27 to 5657 of the Company’s 20092010 Annual Report on Form 10-K.
The condensed balance sheet data at January 2, 20101, 2011 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly period ended OctoberApril 2, 20102011 are not necessarily indicative of the results to be expected for other interim periods or the full year.
New accounting standard
In December 2009, the FASB amended the Accounting Standards Codification related to the consolidation provisions that apply to variable interest entities. This guidance is effective for fiscal years that begin after November 15, 2009 and was adopted by the Company on a prospective basis as of January 3, 2010 without material impact to its consolidated financial statements.
Note 2 Goodwill and other intangible assets
Changes in the carrying amount of goodwill for the year-to-date periodquarter ended OctoberApril 2, 20102011 are presented in the following table. Certain of the Company’s goodwill balances are subject to foreign currency translation adjustments. Fluctuations in exchange rates contributed to the change in goodwill balance for the period.
Carrying amount of goodwill
(millions) | North America | Europe | Latin America | Asia Pacific (a) | Consolidated | North America | Europe | Latin America | Asia Pacific (a) | Consolidated | ||||||||||||||||||
January 2, 2010 | $3,539 | $62 | $— | $42 | $3,643 | |||||||||||||||||||||||
January 1, 2011 | $3,539 | $62 | $— | $27 | $3,628 | |||||||||||||||||||||||
Currency translation adjustment | — | (1) | — | 2 | 1 | — | 2 | — | — | 2 | ||||||||||||||||||
October 2, 2010 | $3,539 | $61 | $— | $44 | $3,644 | |||||||||||||||||||||||
April 2, 2011 | $3,539 | $64 | $— | $27 | $3,630 | |||||||||||||||||||||||
(a) Includes Australia, Asia and South Africa.
Intangible assets subject to amortization
Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | |||||||||||||
(millions) | October 2, 2010 | January 2, 2010 | October 2, 2010 | January 2, 2010 | April 2, 2011 | January 1, 2011 | April 2, 2011 | January 1, 2011 | ||||||||
Trademarks | $19 | $19 | $16 | $15 | $19 | $19 | $16 | $16 | ||||||||
Other | 41 | 41 | 30 | 30 | 41 | 41 | 31 | 31 | ||||||||
Total | $60 | $60 | $46 | $45 | $60 | $60 | $47 | $47 | ||||||||
For intangible assets in the preceding table, amortization was less than $1 million for each of the current and prior year comparable quarters. The currently estimated aggregate annual amortization expense for full-year 20102011 and each of the four succeeding fiscal years is approximately $2 million.
Intangible assets not subject to amortization
Total carrying amount | ||||
(millions) | October 2, 2010 | January 2, 2010 | ||
Trademarks | $1,443 | $1,443 | ||
Total carrying amount | ||||||||
(millions) | April 2, 2011 | January 1, 2011 | ||||||
Trademarks | $1,443 | $1,443 | ||||||
Note 3 Exit or disposal activities
The Company views its continued spending on cost-reduction activities as part of its ongoing 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 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.
20102011 activities
During the thirdfirst quarter of 2010,2011, the Company incurred exit costs related to two ongoing programs which will result in cost of goods sold (COGS) and selling, general and administrative (SGA) expense savings. The COGS program relates to Kellogg’s lean, efficient, and agile network (K LEAN). The SGA programs focus on the efficiency and effectiveness of various support functions.
Total charges incurred during the quarterquarters ended April 2, 2011 and year-to-date periods ended October 2,April 3, 2010 were as follows:
Quarter ended, October 2, 2010 | Year-to-date period ended, October 2, 2010 | Quarter ended, April 2, 2011 | Quarter ended, April 3, 2010 | |||||||||||||||||||||
(millions) | COGS program | SGA programs | Total | COGS program | SGA programs | Total | COGS program | SGA programs | Total | COGS program | SGA programs | Total | ||||||||||||
Employee severance | $— | $1 | $1 | $2 | $2 | $4 | $ 4 | $— | $ 4 | $2 | $1 | $3 | ||||||||||||
Other cash costs (a) | — | 1 | 1 | — | 6 | 6 | — | — | — | — | 4 | 4 | ||||||||||||
Retirement benefits (b) | — | 5 | 5 | 1 | 5 | 6 | ||||||||||||||||||
Asset write-offs | 1 | — | 1 | — | — | — | ||||||||||||||||||
Total | $— | $7 | $7 | $3 | $13 | $16 | $ 5 | $— | $ 5 | $2 | $5 | $7 | ||||||||||||
(a) | Includes cash costs for equipment removal and relocation. |
Total program costs incurred through OctoberApril 2, 20102011 were as follows:
Total program costs through October 2, 2010 | Total program costs through April 2, 2011 | |||||||||||
COGS program | SGA programs | Total | COGS program | SGA programs | Total | |||||||
Employee severance | $17 | $19 | $36 | $22 | $20 | $42 | ||||||
Other cash costs (a) | 6 | 14 | 20 | 6 | 15 | 21 | ||||||
Asset write-offs | 2 | — | 2 | |||||||||
Retirement benefits (b) | 4 | 5 | 9 | 3 | 5 | 8 | ||||||
Total | $27 | $38 | $65 | $33 | $40 | $73 | ||||||
(a) | Includes cash costs for equipment removal and relocation. |
(b) | Pension plan curtailment losses and special termination benefits. |
In 2009, the Company commenced K LEAN. Refer to page 3536 of the Company’s 20092010 Annual Report on Form 10-K for further information on this initiative. Based on forecasted foreign exchange rates,Costs for this program impacted the Company currently expects to incur $35 million in total exit costs; $27 million has been incurred to date which representsfollowing operating segments during the quarters ended April 2, 2011 and April 3, 2010.
COGS program | ||||||||
Quarter ended | ||||||||
(millions) | April 2, 2011 | April 3, 2010 | ||||||
North America | $— | $1 | ||||||
Europe | 5 | 1 | ||||||
Total | $ 5 | $2 | ||||||
These costs represent employee severance and other cash costs associated with the elimination of hourly and salaried positions, as well as non-cash asset write offs at various global manufacturing facilities. CostsTo date, we have incurred $33 million in total exit costs for this program. The costs have impacted our operating segments, as follows (in millions): North America-$14; Europe-$18; and Asia Pacific-$1. Based on forecasted exchange rates, the Company currently expects to incur an additional $12 million in exit costs for this program impacted the following operating segments for the quarter and year-to-date periods ended October 2, 2010 and October 3, 2009 as follows:
COGS program | ||||||||
Quarter ended | Year-to-date period ended | |||||||
(millions) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||
North America | $— | $2 | $1 | $12 | ||||
Europe | — | 4 | 2 | 5 | ||||
Asia Pacific (a) | — | 1 | — | 1 | ||||
Total | $— | $7 | $3 | $18 | ||||
during 2011.
In 2009, the Company commenced various SGA programs which will resultresulted in an improvement in the efficiency and effectiveness of various support functions. Refer to page 3537 of the Company’s 20092010 Annual Report on Form 10-K for further information on this initiative. Based on forecasted foreign exchange rates,Costs for these programs impacted the Company currently expects to incur $40 million in total exit costs; $38 million has been incurred to date which representsfollowing operating segments during the quarters ended April 2, 2011 and April 3, 2010 as follows:
SGA programs | ||||
Quarter ended | ||||
(millions) | April 2, 2011 | April 3, 2010 | ||
North America | $— | $3 | ||
Europe | — | 1 | ||
Asia Pacific (a) | — | 1 | ||
Total | $— | $5 | ||
(a) | Includes Australia, Asia and South Africa. |
These costs represent severance and other cash costs associated with the elimination of salaried positions. These programs are expectedTo date, we have incurred $40 million in exit costs for these programs. The costs have impacted our operating segments as follows (in millions): North America-$21; Europe-$15; Asia Pacific-$3; and Latin America-$1. Based on forecasted exchange rates, the Company currently expects to be substantially complete by the end of 2010. Costsincur an additional $2 in exit costs for these programs impacted the following operating segments for the quarter and year-to-date periods ended October 2, 2010 and October 3, 2009 as follows:during 2011.
SGA programs | ||||||||
Quarter ended | Year-to-date period ended | |||||||
(millions) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||
North America | $6 | $— | $10 | $5 | ||||
Europe | 1 | 5 | 1 | 5 | ||||
Asia Pacific (a) | — | — | 2 | — | ||||
Total | $7 | $5 | $13 | $10 | ||||
Reserves for the COGS and SGA programs are primarily for employee severance and will be paid out by the end of 2010.2011. The detail is as follows:
(millions) | Balance January 2, 2010 | Accruals | Payments | Balance October 2, 2010 | ||||
COGS program | $6 | $2 | $(5) | $3 | ||||
SGA programs | 12 | 2 | (12) | 2 | ||||
Manufacturing optimization | 7 | — | (6) | 1 | ||||
Total | $25 | $4 | $(23) | $6 | ||||
Other prior year activities
The Company also incurred $6 million of exit costs for the quarter ended October 3, 2009 for two programs: the European manufacturing optimization plan in Bremen Germany; and the supply chain rationalization in Latin America. These costs were recorded in COGS within the Europe and Latin America operating segments.
The programs were completed as of the end of 2009. Refer to page 36 of the Company’s 2009 Annual Report on Form 10-K for further information on these initiatives.
The following tables present the total exit costs for these programs for the quarter and year-to-date periods ended October 3, 2009.
Quarter ended, October 3, 2009 | ||||||||||
(millions) | Employee severance | Other cash costs (a) | Asset write-offs | Retirement benefits (b) | Total | |||||
Manufacturing optimization | $1 | $— | $— | $— | $1 | |||||
Supply chain rationalization | 2 | — | 3 | — | 5 | |||||
Total | $3 | $— | $3 | $— | $6 | |||||
Year-to-date period ended, October 3, 2009 | ||||||||||
(millions) | Employee severance | Other cash costs (a) | Asset write-offs | Retirement benefits (b) | Total | |||||
Manufacturing optimization | $7 | $— | $— | $— | $ 7 | |||||
Supply chain rationalization | 2 | — | 3 | — | 5 | |||||
Total | $9 | $— | $3 | $— | $12 | |||||
(millions) | Balance January 1, 2011 | Accruals | Payments | Balance April 2, 2011 | ||||
COGS program | $2 | $4 | $(2) | $4 | ||||
SGA programs | 3 | — | (1) | 2 | ||||
Total | $5 | $4 | $(3) | $6 | ||||
Note 4 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, 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. The total number of anti-dilutive potential common shares excluded from the reconciliation were 9 million and 47 million for the quarter ended April 2, 2011 and year-to-date periods ended October 2, 2010, respectively, and 12 million and 201 million for the quarter and year-to-date periods ended OctoberApril 3, 2009, respectively.2010.
Quarters ended OctoberApril 2, 20102011 and OctoberApril 3, 2009:2010:
(millions, except per share data) | Net income attributable to Kellogg Company | Average shares outstanding | Earnings per share | |||||||||
2010 | ||||||||||||
Basic | $338 | 373 | $ 0.91 | |||||||||
Dilutive potential common shares | 3 | (0.01) | ||||||||||
Diluted | $338 | 376 | $ 0.90 | |||||||||
2009 | ||||||||||||
Basic | $361 | 382 | $0.94 | |||||||||
Dilutive potential common shares | 2 | — | ||||||||||
Diluted | $361 | 384 | $ 0.94 | |||||||||
Year-to-date periods ended October 2, 2010 and October 3, 2009:
(millions, except per share data) | Net income attributable to Kellogg Company | Average shares outstanding | Earnings per share | Net income attributable to Kellogg Company | Average shares outstanding | Earnings per share | ||||||||||||||||||
2011 | ||||||||||||||||||||||||
Basic | $366 | 365 | $1.00 | |||||||||||||||||||||
Dilutive potential common shares | 3 | — | ||||||||||||||||||||||
Diluted | $366 | 368 | $1.00 | |||||||||||||||||||||
2010 | ||||||||||||||||||||||||
Basic | $1,058 | 378 | $ 2.80 | $418 | 380 | $1.10 | ||||||||||||||||||
Dilutive potential common shares | 3 | (0.02) | 4 | (0.01) | ||||||||||||||||||||
Diluted | $1,058 | 381 | $ 2.78 | $418 | 384 | $1.09 | ||||||||||||||||||
2009 | ||||||||||||||||||||||||
Basic | $1,036 | 382 | $ 2.71 | |||||||||||||||||||||
Dilutive potential common shares | 1 | (0.01) | ||||||||||||||||||||||
Diluted | $1,036 | 383 | $ 2.70 | |||||||||||||||||||||
During the year-to-date periodquarter ended OctoberApril 2, 2010,2011, the Company issued 0.20.4 million shares to employees and directors under various benefit plans and stock purchase programs, as further discussed in Note 5.6.
On April 23, 2010, the Company’s board of directors authorized a $2.5 billion three-year share repurchase program for 2010 through 2012. This authorization replaced the previous share buyback program which authorized stock repurchases of up to $1,113 million for 2010. During the year-to-date periodquarter ended OctoberApril 2, 2010,2011, the Company repurchased 18
6 million shares of common stock for a total of $907$324 million. During the year-to-date periodquarter ended OctoberApril 3, 2009,2010, the Company spent $187$148 million to purchase approximately 43 million shares.
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 periods presented consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges and adjustments for net experience losses and prior service cost related to employee benefit plans.
Pre-tax adjustments to the Company’s other comprehensive income balances related to pension and post-retirement benefits arising during the periods for net experience gain (loss) and prior service credit (costs) are summarized as follows:
Quarter ended | Year-to-date period ended | |||||||
(millions) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||
Census-related valuation update | $ — | $— | ($16) | ($42) | ||||
Foreign currency remeasurement | (29) | — | 4 | (48) | ||||
Total | ($29) | $— | ($12) | ($90) | ||||
During the first quarter of 2010, the Company amended its U.S. postretirement healthcare benefit plan, which resulted in a $17 million decrease of a deferred tax asset.
Quarter ended April 2, 2011:
(millions) | Pre-tax amount | Tax (expense) or benefit | After-tax amount | |||||||
2011 | ||||||||||
Net income | $365 | |||||||||
Other comprehensive income: | ||||||||||
Foreign currency translation adjustments | $109 | $ — | 109 | |||||||
Cash flow hedges: | ||||||||||
Unrealized gain (loss) on cash flow hedges | 11 | (4) | 7 | |||||||
Reclassification to net earnings | (8) | 3 | (5 | ) | ||||||
Postretirement and postemployment benefits: | ||||||||||
Amounts arising during the period: | ||||||||||
Net experience gain (loss) | (12) | 4 | (8 | ) | ||||||
Prior service credit (cost) | (1) | — | (1 | ) | ||||||
Reclassification to net earnings: | ||||||||||
Net experience loss | 32 | (11) | 21 | |||||||
Prior service cost | 3 | (1) | 2 | |||||||
$134 | $ (9) | 125 | ||||||||
Total comprehensive income | $490 | |||||||||
Quarter ended October 2,April 3, 2010:
(millions) | Pre-tax amount | Tax (expense) or benefit | After-tax amount | |||||||
2010 | ||||||||||
Net income | $337 | |||||||||
Other comprehensive income: | ||||||||||
Foreign currency translation adjustments | $163 | $— | 163 | |||||||
Cash flow hedges: | ||||||||||
Unrealized gain (loss) on cash flow hedges | (2) | 1 | (1) | |||||||
Reclassification to net earnings | 6 | (1) | 5 | |||||||
Postretirement and postemployment benefits: | ||||||||||
Amounts arising during the period: | ||||||||||
Net experience gain (loss) | (27) | 8 | (19) | |||||||
Prior service credit (cost) | (2) | — | (2) | |||||||
Reclassification to net earnings: | ||||||||||
Net experience loss | 25 | (8) | 17 | |||||||
Prior service cost | 3 | (1) | 2 | |||||||
$166 | ($1) | 165 | ||||||||
Total comprehensive income | $502 | |||||||||
Quarter ended October 3, 2009:
(millions) | Pre-tax amount | Tax (expense) or benefit | After-tax amount | |||||||
2009 | ||||||||||
Net income | $360 | |||||||||
Other comprehensive income: | ||||||||||
Foreign currency translation adjustments | ($5) | $— | (5) | |||||||
Cash flow hedges: | ||||||||||
Unrealized gain (loss) on cash flow hedges | (26) | 9 | (17) | |||||||
Reclassification to net earnings | 18 | (6) | 12 | |||||||
Postretirement and postemployment benefits: | ||||||||||
Amounts arising during the period: | ||||||||||
Net experience gain (loss) | — | — | — | |||||||
Prior service credit (cost) | — | — | — | |||||||
Reclassification to net earnings: | ||||||||||
Net experience loss | 16 | (5) | 11 | |||||||
Prior service cost | 3 | (1) | 2 | |||||||
$6 | ($3) | 3 | ||||||||
Total comprehensive income | $363 | |||||||||
Year-to-date period ended October 2, 2010:
(millions) | Pre-tax amount | Tax (expense) or benefit | After-tax amount | |||||||
2010 | ||||||||||
Net income | $1,055 | |||||||||
Other comprehensive income: | ||||||||||
Foreign currency translation adjustments | $5 | $— | 5 | |||||||
Cash flow hedges: | ||||||||||
Unrealized gain (loss) on cash flow hedges | (41) | 12 | (29) | |||||||
Reclassification to net earnings | 37 | (10) | 27 | |||||||
Postretirement and postemployment benefits: | ||||||||||
Amounts arising during the period: | ||||||||||
Net experience gain (loss) | (12) | 3 | (9) | |||||||
Prior service credit (cost) | — | (17) | (17) | |||||||
Reclassification to net earnings: | ||||||||||
Net experience loss | 76 | (24) | 52 | |||||||
Prior service cost | 9 | (3) | 6 | |||||||
$74 | ($39) | 35 | ||||||||
Total comprehensive income | $1,090 | |||||||||
Year-to-date period ended October 3, 2009:
(millions) | Pre-tax amount | Tax (expense) or benefit | After-tax amount | Pre-tax amount | Tax (expense) or benefit | After-tax amount | ||||||||||||||
2009 | ||||||||||||||||||||
2010 | ||||||||||||||||||||
Net income | $1,032 | $417 | ||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||
Foreign currency translation adjustments | $107 | $— | 107 | $(46) | $— | (46) | ||||||||||||||
Cash flow hedges: | ||||||||||||||||||||
Unrealized gain (loss) on cash flow hedges | (8) | 3 | (5) | (35) | 11 | (24) | ||||||||||||||
Reclassification to net earnings | (5) | 2 | (3) | 13 | (4) | 9 | ||||||||||||||
Postretirement and postemployment benefits: | ||||||||||||||||||||
Amounts arising during the period: | ||||||||||||||||||||
Net experience gain (loss) | (73) | 23 | (50) | 18 | (6) | 12 | ||||||||||||||
Prior service credit (cost) | (17) | 6 | (11) | 1 | (17) | (16) | ||||||||||||||
Reclassification to net earnings: | ||||||||||||||||||||
Net experience loss | 47 | (15) | 32 | 25 | (8) | 17 | ||||||||||||||
Prior service cost | 8 | (3) | 5 | 4 | (1) | 3 | ||||||||||||||
$59 | $16 | 75 | $(20) | $(25) | (45) | |||||||||||||||
Total comprehensive income | $1,107 | $372 | ||||||||||||||||||
Accumulated other comprehensive income (loss) as of OctoberApril 2, 20102011 and January 2, 20101, 2011 consisted of the following:
(millions) | October 2, 2010 | January 2, 2010 | April 2, 2011 | January 1, 2011 | ||||||||||||
Foreign currency translation adjustments | ($766) | ($771) | $ (680) | $ (789) | ||||||||||||
Cash flow hedges—unrealized net loss | (32) | (30) | 27 | 25 | ||||||||||||
Postretirement and postemployment benefits: | ||||||||||||||||
Net experience loss | (1,061) | (1,104) | (1,062) | (1,075) | ||||||||||||
Prior service cost | (72) | (61) | (74) | (75) | ||||||||||||
Total accumulated other comprehensive income (loss) | ($1,931) | ($1,966) | $(1,789) | $(1,914) | ||||||||||||
Note 5 Debt
The following table presents the components of notes payable at April 2, 2011 and January 1, 2011:
(millions) | April 2, 2011 | January 1, 2011 | ||||||||||||||
Principal amount | Effective interest rate | Principal amount | Effective interest rate | |||||||||||||
U.S. commercial paper | $1,026 | 0.34 | % | $— | — | % | ||||||||||
Bank borrowings | 52 | 44 | ||||||||||||||
Total | 1,078 | 44 | ||||||||||||||
During the first quarter of 2011, the Company repaid its $946 million, ten-year 6.6% U.S. Dollar Notes at maturity with U.S. commercial paper.
In March 2011, the Company entered into an unsecured Four-Year Credit Agreement to replace its existing unsecured Five-Year Credit Agreement, which would have expired in November 2011. The Four-Year Credit Agreement allows the Company to borrow, on a revolving credit basis, up to $2.0 billion, to obtain letters of credit in an aggregate amount up to $75 million, U.S. swingline loans in an aggregate amount up to $200 million and European swingline loans in an aggregate amount up to $400 million and to provide a procedure for lenders to bid on short-term debt of the Company. The agreement contains customary covenants and warranties, including specified restrictions on indebtedness, liens, sale and leaseback transactions, 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.
Note 56 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, and to a lesser extent, executive performance shares and restricted stock grants. Additionally, the Company awards restricted stock to its non-employee directors. The interim information below should be read in conjunction with the disclosures included on pages 4041 to 4344 of the Company’s 20092010 Annual Report inon Form 10-K.
The Company classifies pre-tax stock compensation expense in selling, general and administrativeSGA expense principally within its corporate operations. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized were as follows:
Quarter ended | Year-to-date period ended | Quarter ended | ||||||||||
(millions) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | April 2, 2011 | April 3, 2010 | ||||||
Pre-tax compensation expense | $1 | $9 | $24 | $37 | $10 | $13 | ||||||
Related income tax benefit | $— | $3 | $8 | $13 | $ 4 | $ 5 |
As of OctoberApril 2, 2010,2011, total stock-based compensation cost related to non-vested awards not yet recognized was $40$71 million and the weighted-average period over which this amount is expected to be recognized was 2 years.
Stock options
During the year-to-date periodsperiod ended OctoberApril 2, 20102011 and OctoberApril 3, 2009,2010, the Company granted non-qualified stock options to eligible employees as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described on pages 4142 and 4243 of the Company’s 20092010 Annual Report on Form 10-K.
Year-to-date periodQuarter ended OctoberApril 2, 2010:2011:
Employee and director stock options | Shares (millions) | Weighted- average exercise price | Weighted- average remaining contractual term (yrs.) | Aggregate intrinsic value (millions) | ||||||||||||
Outstanding, beginning of period | 26 | $45 | ||||||||||||||
Granted | 4 | 53 | ||||||||||||||
Exercised | (4) | 44 | ||||||||||||||
Forfeitures and expirations | — | — | ||||||||||||||
Outstanding, end of period | 26 | $46 | 6.5 | $129 | ||||||||||||
Exercisable, end of period | 20 | $46 | 5.7 | $104 | ||||||||||||
Year-to-date period ended October 3, 2009: | ||||||||||||||||
Employee and director stock options | Shares (millions) | Weighted- average exercise price | Weighted- average remaining contractual term (yrs.) | Aggregate intrinsic value (millions) | ||||||||||||
Outstanding, beginning of period | 26 | $45 | ||||||||||||||
Granted | 4 | 40 | ||||||||||||||
Exercised | (1) | 36 | ||||||||||||||
Forfeitures and expirations | — | — | ||||||||||||||
Outstanding, end of period | 29 | $45 | 6.7 | $134 | ||||||||||||
Exercisable, end of period | 24 | $45 | 6.1 | $102 | ||||||||||||
Employee and director stock options | Shares (millions) | Weighted- average exercise price | Weighted- average remaining contractual term (yrs.) | Aggregate intrinsic value (millions) | ||||||||||||
Outstanding, beginning of period | 26 | $47 | ||||||||||||||
Granted | 5 | 53 | ||||||||||||||
Exercised | (3) | 44 | ||||||||||||||
Forfeitures and expirations | — | — | ||||||||||||||
Outstanding, end of period | 28 | $48 | 6.8 | $166 | ||||||||||||
Exercisable, end of period | 20 | $46 | 5.7 | $144 | ||||||||||||
Quarter ended April 3, 2010: | ||||||||||||||||
Employee and director stock options | Shares (millions) | Weighted- average exercise price | Weighted- average remaining contractual term (yrs.) | Aggregate intrinsic value (millions) | ||||||||||||
Outstanding, beginning of period | 26 | $45 | ||||||||||||||
Granted | 4 | 53 | ||||||||||||||
Exercised | (1) | 43 | ||||||||||||||
Forfeitures and expirations | — | — | ||||||||||||||
Outstanding, end of period | 29 | $46 | 6.8 | $211 | ||||||||||||
Exercisable, end of period | 23 | $46 | 6.1 | $177 | ||||||||||||
The weighted-average fair value of options granted was $7.59 per share for the period ended April 2, 2011 and $7.90 per share for the year-to-date period ended October 2, 2010 and $6.33 per share for the year-to-date period ended OctoberApril 3, 2009.2010. The fair value was estimated using the following assumptions:
Weighted- average expected volatility | Weighted- average expected term (years) | Weighted- average risk- free interest rate | Dividend yield | |||||
Grants within the year-to-date period ended October 2, 2010: | 20.00% | 4.94 | 2.54% | 2.80% | ||||
Weighted- average expected volatility | Weighted- average expected term (years) | Weighted- average risk- free interest rate | Dividend yield | |||||||||||||
Grants within the quarter ended April 2, 2011: | 17% | 6.98 | 3.07% | 3.10% | ||||||||||||
Grants within the quarter ended April 3, 2010: | 20% | 4.94 | 2.54% | 2.80% |
The total intrinsic value of options exercised was $40$20 million for the year-to-date periodquarter ended OctoberApril 2, 20102011 and $4$12 million for the year-to-date periodquarter ended OctoberApril 3, 2009.2010.
Performance shares
In the first quarter of 2010,2011, 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 on the vesting date, provided cumulative three-year operating profit and internal net sales growth targets are achieved.
The 20102011 target grant currently corresponds to approximately 210,000226,000 shares, with a grant-date fair value of $48 per share. The actual number of shares issued on the vesting date could range from 0 to 200% of target, depending on actual performance achieved. Based on the market price of the Company’s common stock at OctoberApril 2, 2010,2011, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:
(millions) | ||
| ||
2009 Award | $18 | |
2010 Award | $ | |
2011 Award | $24 |
The 20072008 performance share award, payable in stock, was settled at 150%69% of target in February 20102011 for a total dollar equivalent of $14$6 million.
Note 67 Employee benefits
The Company sponsors a number of U.S. and foreign pension, other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described on pages 4344 to 4749 of the Company’s 20092010 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.
Pension
Quarter ended | Year-to-date period ended | Quarter ended | ||||||||||||||||||
(millions) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | April 2, 2011 | April 3, 2010 | ||||||||||||||
Service cost | $22 | $20 | $66 | $60 | $ 26 | $ 23 | ||||||||||||||
Interest cost | 52 | 49 | 151 | 147 | 52 | 50 | ||||||||||||||
Expected return on plan assets | (82) | (80) | (238) | (237) | (92) | (79) | ||||||||||||||
Amortization of unrecognized prior service cost | 4 | 4 | 11 | 10 | 4 | 3 | ||||||||||||||
Recognized net loss | 20 | 12 | 60 | 35 | 26 | 20 | ||||||||||||||
Settlement cost | 1 | — | ||||||||||||||||||
Total pension expense | $16 | $5 | $50 | $15 | $ 17 | $ 17 | ||||||||||||||
Other nonpension postretirement | ||||||||||||||||||||
Quarter ended | Year-to-date period ended | |||||||||||||||||||
(millions) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||||||||||||||
Service cost | $5 | $4 | $15 | $13 | ||||||||||||||||
Interest cost | 16 | 16 | 48 | 49 | ||||||||||||||||
Expected return on plan assets | (16) | (17) | (48) | (51) | ||||||||||||||||
Amortization of unrecognized prior service cost | (1) | (1) | (2) | (2) | ||||||||||||||||
Recognized net loss | 4 | 3 | 13 | 9 | ||||||||||||||||
Total postretirement benefit expense | $8 | ��$5 | $26 | $18 | ||||||||||||||||
Postemployment | ||||||||||||||||||||
Quarter ended | Year-to-date period ended | |||||||||||||||||||
(millions) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||||||||||||||
Service cost | $1 | $2 | $4 | $5 | ||||||||||||||||
Interest cost | 1 | 1 | 3 | 3 | ||||||||||||||||
Recognized net loss | 1 | 1 | 3 | 3 | ||||||||||||||||
Total postemployment benefit expense | $3 | $4 | $10 | $11 | ||||||||||||||||
Other nonpension postretirement
Quarter ended | ||||
(millions) | April 2, 2011 | April 3, 2010 | ||
Service cost | $ 6 | $ 5 | ||
Interest cost | 16 | 16 | ||
Expected return on plan assets | (22) | (16) | ||
Amortization of unrecognized prior service cost | (1) | — | ||
Recognized net loss | 5 | 4 | ||
Total postretirement benefit expense | $ 4 | $ 9 | ||
Postemployment
Quarter ended | ||||
(millions) | April 2, 2011 | April 3, 2010 | ||
Service cost | $2 | $2 | ||
Interest cost | 1 | 1 | ||
Recognized net loss | 1 | 1 | ||
Total postemployment benefit expense | $4 | $4 | ||
Company contributions to employee benefit plans are summarized as follows:
(millions) | Pension | Nonpension postretirement | Total | |||||||||
Quarter ended: | ||||||||||||
October 2, 2010 | $ 6 | $ 3 | $ 9 | |||||||||
October 3, 2009 | $ 6 | $ 3 | $ 9 | |||||||||
Year-to-date period ended: | ||||||||||||
October 2, 2010 | $ 35 | $ 10 | $ 45 | |||||||||
October 3, 2009 | $ 83 | $ 10 | $ 93 | |||||||||
Full year: | ||||||||||||
Fiscal year 2010 (projected) | $335 | $280 | $615 | |||||||||
Fiscal year 2009 (actual) | $ 87 | $ 13 | $100 |
(millions) | Pension | Nonpension postretirement | Total | |||||||||
Quarter ended: | ||||||||||||
April 2, 2011 | $174 | $ 4 | $178 | |||||||||
April 3, 2010 | $ 19 | $ 3 | $ 22 | |||||||||
Full year: | ||||||||||||
Fiscal year 2011 (projected) | $180 | $ 20 | $200 | |||||||||
Fiscal year 2010 (actual) | $350 | $293 | $643 |
Plan funding strategies may be modified in response to management’s evaluation of tax deductibility, market conditions, and competing investment alternatives.
During the first quarter of 2010,2011, the Company amended itsre-measured a U.S. postretirement healthcarepension plan’s projected benefit plan, which resulted inobligation as a decreaseresult of lump sum settlement activity during 2011. In connection with the re-measurement, the Company incurred settlement expense totaling $1 million and recorded a deferred tax assetpre-tax net actuarial gain of $17 million. This impact was recorded$6 million in other comprehensive income.income during the first quarter.
Note 78 Income taxes
The consolidated effective income tax rate for 20102011 as compared to 2009 is2010 was as follows:
Effective income tax rate | ||||
Quarter ended: | ||||
| % | |||
| 27 | |||
| ||||
| ||||
| % |
The consolidated effective tax rate for the quarter ended OctoberApril 2, 2011, of 28% was comparable to prior year’s rate of 27%. Both periods were positively impacted by discrete items. The effective rate for the first quarter of 2011 benefited from an international legal restructuring, while the effective rate for the first quarter of 2010 was higher than thebenefited from an immaterial correction of an item related to prior period due to the positive impact of various provision-to-return adjustments.years.
As of OctoberApril 2, 2010,2011, the Company classified $48$11 million of unrecognized tax benefits as a current liability, representing several income tax positions under examination in various jurisdictions. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability balance, expected to be settled within one year, offset by $11$10 million of projected additions. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.
Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year-to-date period ended OctoberApril 2, 2010; $1062011; $55 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
(millions) | ||||
January 2, 2010 | $ | 130 | ||
Tax positions related to current year: | ||||
Additions | 10 | |||
Tax positions related to prior years: | ||||
Additions | 2 | |||
Reductions | (10 | ) | ||
Settlements | (4 | ) | ||
October 2, 2010 | $ | 128 | ||
The current portion of the Company’s unrecognized tax benefits is presented in the balance sheet within accrued income taxes and the amount expected to be settled after one year is recorded in other liabilities.
(millions) | ||||
January 1, 2011 | $ | 104 | ||
Tax positions related to current year: | ||||
Additions | 3 | |||
Tax positions related to prior years: | ||||
Additions | 4 | |||
Reductions | (4 | ) | ||
Settlements | (29 | ) | ||
April 2, 2011 | $ | 78 | ||
The Company classifieshad the following amounts of income tax-relatedtax related interest accrued as of January 1, 2011 and penalties as interest expense and SGA expense,April 2, 2011 respectively.
(millions) | ||||
Interest expense recognized for the year-to-date period ending October 2, 2010 | $ | 4 | ||
Interest accrued at October 2, 2010 | $ | 27 |
(millions) | ||||
Interest accrued at January 1, 2011 | $ | 26 | ||
Reduction of interest expense recognized for the period ended April 2, 2011 | $ | (3 | ) | |
Interest accrued at April 2, 2011 | $ | 17 |
Note 89 Derivative instruments and fair value measurements
The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract.
The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, orand uses other contracts used to reduce volatility in interest rates and the translation of foreign currency earnings to U.S. dollars. The fair value of derivative instruments is recorded in other prepaid 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. Within the Consolidated Statement of Cash Flows, settlements of cash flow and fair value hedges are classified as an operating activity; settlements of all other derivatives are classified as a financing activity. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.
Total notional amounts of the Company’s derivative instruments at Octoberas of April 2, 20102011 and January 2, 20101, 2011 were as follows:
(millions) | October 2, 2010 | January 2, 2010 | ||||||
Foreign currency exchange contracts | $1,206 | $1,588 | ||||||
Interest rate contracts | 1,900 | 1,900 | ||||||
Commodity contracts | 207 | 213 | ||||||
Total | $3,313 | $3,701 |
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.
Other contracts
The Company also periodically enters into foreign currency forward contracts and options to reduce volatility in the translation of foreign currency earnings to U.S. dollars. Gains and losses on these instruments are recorded in other income (expense), net, generally reducing the exposure to translation volatility during a full-year period.
Foreign currency exchange risk
The Company is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases, intercompany transactions and 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 enters into forward contracts, options, and currency swaps to reduce fluctuations in net 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 other income (expense), net.
Interest rate risk
The Company is exposed to interest rate volatility with regard to future issuances of fixed 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.
Commodity contracts are accounted for as cash flow hedges. The assessment of effectiveness for exchange-traded instruments is based on changes in futures prices. The assessment of effectiveness for over-the-counter transactions is based on changes in designated indices.
Credit-risk-related contingent features
Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company’s credit rating falls below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on October 2, 2010 was $39 million. If the credit-risk-related contingent features were triggered as of October 2, 2010, the Company would be required to post collateral of $39 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of October 2, 2010 triggered by credit-risk-related contingent features.
Fair value measurements
(millions) | April 2, 2011 | January 1, 2011 | ||||||
Foreign currency exchange contracts | $1,417 | $1,075 | ||||||
Interest rate contracts | 3,100 | 1,900 | ||||||
Commodity contracts | 354 | 379 | ||||||
Total | $4,871 | $3,354 | ||||||
Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that arewere included in each category at OctoberApril 2, 20102011 and January 2, 2010.1, 2011, measured on a recurring basis.
Level 1 –Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.
Level 2 –Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.
For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.
The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.
Level 3 –Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of OctoberApril 2, 20102011 or January 2, 2010.1, 2011.
Fair values of theseThe following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet measured at fair value on a recurring basis consists of derivatives designated as hedging instruments, and as of OctoberApril 2, 20102011 and January 2, 2010 were as follows:1, 2011:
Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||||||||||||||||||||||||||||||||
(millions) | October 2, 2010 | January 2, 2010 | October 2, 2010 | January 2, 2010 | October 2, 2010 | January 2, 2010 | April 2, 2011 | January 1, 2011 | April 2, 2011 | January 1, 2011 | April 2, 2011 | January 1, 2011 | ||||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency exchange contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Other prepaid assets | $— | $— | $34 | $7 | $34 | $7 | $— | $— | $20 | $7 | $20 | $7 | ||||||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Other prepaid assets | — | — | 1 | — | 1 | — | — | — | — | 5 | — | 5 | ||||||||||||||||||||||||||||||||||||
Other assets | — | — | 82 | 44 | 82 | 44 | — | — | 40 | 69 | 40 | 69 | ||||||||||||||||||||||||||||||||||||
Commodity contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Other prepaid assets | 6 | 4 | — | — | 6 | 4 | 23 | 23 | 2 | — | 25 | 23 | ||||||||||||||||||||||||||||||||||||
Total assets | $6 | $4 | $117 | $51 | $123 | $55 | $23 | $23 | $62 | $81 | $85 | $104 | ||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency exchange contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Other current liabilities | $— | $— | ($11) | ($31) | ($11) | ($31) | $— | $— | $(17 | ) | $(27 | ) | $(17 | ) | $(27 | ) | ||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | — | — | — | (1) | — | (1) | — | — | (7 | ) | — | (7 | ) | — | ||||||||||||||||||||||||||||||||||
Commodity contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Other current liabilities | (3) | — | (11) | (6) | (14) | (6) | — | — | (9 | ) | (10 | ) | (9 | ) | (10 | ) | ||||||||||||||||||||||||||||||||
Other liabilities | — | — | (30) | (14) | (30) | (14) | — | — | (22 | ) | (29 | ) | (22 | ) | (29 | ) | ||||||||||||||||||||||||||||||||
Total liabilities | ($3) | $— | ($52) | ($52) | ($55) | ($52) | $— | $— | $(55 | ) | $(66 | ) | $(55 | ) | $(66 | ) | ||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | $— | $— | $30 | $— | $30 | $— | ||||||||||||||||||||||||||||||||||||||||||
Total assets | $— | $— | $30 | $— | $30 | $— | ||||||||||||||||||||||||||||||||||||||||||
The effect of derivative instruments on the Consolidated Statement of Income for the quarters ended OctoberApril 2, 2011 and April 3, 2010 and October 3, 2009 werewas as follows:
Derivatives in fair value hedging relationships (millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income | Location of gain (loss) recognized in income | Gain (loss) recognized in income | ||||||||||||
October 2, 2010 | October 3, 2009 | April 2, 2011 | April 3, 2010 | |||||||||||||
Foreign currency exchange contracts | Other income (expense), net | $26 | $(30) | Other income (expense), net | $22 | $(29) | ||||||||||
Interest rate contracts | Interest expense | 9 | 9 | Interest expense | 15 | 10 | ||||||||||
Total | $35 | $(21) | $37 | $(19) | ||||||||||||
Derivatives in cash flow hedging relationships (millions) | Gain (loss) recognized in | Location of gain (loss) | Gain (loss) reclassified from AOCI into income | Location of gain (loss) recognized in income (a) | Gain (loss) recognized in income(a) | Gain (loss) recognized in AOCI | Location of gain (loss) reclassified from AOCI | Gain (loss) reclassified from AOCI into income | Location of gain (loss) recognized in income (a) | Gain (loss) recognized in income(a) | ||||||||||||||||||||||||||||||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | April 2, 2011 | April 3, 2010 | April 2, 2011 | April 3, 2010 | April 2, 2011 | April 3, 2010 | |||||||||||||||||||||||||||||||||||||
Foreign currency exchange contracts | $ 2 | $(16) | COGS | $(8) | $ (3) | Other income (expense), net | $ — | $ — | $ | (2 | ) | $ | (12 | ) | COGS | $ | (2 | ) | $ | (7 | ) | Other income (expense), net | $ | (1 | ) | $ | — | |||||||||||||||||||||
Foreign currency exchange contracts | (2) | 1 | SGA expense | (1) | — | Other income (expense), net | — | — | (1 | ) | 1 | SGA expense | — | — | Other income (expense), net | — | — | |||||||||||||||||||||||||||||||
Interest rate contracts | — | — | Interest expense | (1) | (1) | N/A | — | — | (1 | ) | — | Interest expense | 1 | (1 | ) | N/A | — | — | ||||||||||||||||||||||||||||||
Commodity contracts | (2) | (11) | COGS | 4 | (14) | Other income (expense), net | — | (2) | 15 | (24 | ) | COGS | 9 | (5 | ) | Other income (expense), net | — | (1 | ) | |||||||||||||||||||||||||||||
Total | $(2) | $(26) | $(6) | $(18) | $ — | $(2) | $ | 11 | $ | (35 | ) | $ | 8 | $ | (13 | ) | $ | (1 | ) | $ | (1 | ) | ||||||||||||||||||||||||||
Derivatives not designated as hedging instruments (millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income | ||||
| $ | $— | ||||
Total | $ | $— | ||||
(a) | Includes the ineffective portion and amount excluded from effectiveness testing. |
The effectCertain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Consolidated StatementCompany’s credit rating falls below BB+ (S&P), or Baa1 (Moody’s). The fair value of Income forall derivative instruments with credit-risk-related contingent features in a liability position on April 2, 2011 was $30 million. If the year-to-date periods ended Octobercredit-risk-related contingent features were triggered as of April 2, 2010 and October 3, 20092011, the Company would be required to post collateral of $30 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as follows:of April 2, 2011 triggered by credit-risk-related contingent features.
Derivatives in fair value hedging relationships (millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income | ||||
October 2, 2010 | October 3, 2009 | |||||
Foreign currency exchange contracts | Other income (expense), net | $(25) | $(38) | |||
Interest rate contracts | Interest expense | 29 | 18 | |||
Total | $ 4 | $(20) | ||||
Derivatives in cash flow hedging relationships (millions) | Gain (loss) AOCI | Location of gain (loss) reclassified from AOCI | Gain (loss) reclassified from AOCI into income | Location of gain (loss) recognized in income (a) | Gain (loss) recognized in income(a) | |||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | |||||||||||
Foreign currency exchange contracts | $(10) | $(19) | COGS | $(21) | $15 | Other income (expense), net | $— | $(1) | ||||||||
Foreign currency exchange contracts | — | 3 | SGA expense | (1) | (2) | Other income (expense), net | — | — | ||||||||
Interest rate contracts | — | 2 | Interest expense | (3) | (4) | N/A | — | — | ||||||||
Commodity contracts | (31) | 6 | COGS | (12) | (4) | Other income (expense), net | (1) | (2) | ||||||||
Total | $(41) | $ (8) | $(37) | $ 5 | $(1) | $(3) | ||||||||||
Derivatives not designated as hedging instruments (millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income | ||||||||||||||
October 2, 2010 | October 3, 2009 | |||||||||||||||
Foreign currency exchange contracts | Other income (expense), net | $— | $1 | |||||||||||||
Total | $— | $1 | ||||||||||||||
Financial instruments
The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate fair value. The fair value of the Company’s long-term debt is calculated based on broker quotes and was as follows at OctoberApril 2, 2010:2011:
(millions) | Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||
Current maturities of long-term debt | $ 975 | $ 948 | ||||||||||
Long-term debt | 4,567 | 3,929 | $ | 5,298 | $ | 4,905 | ||||||
Total | $ 5,542 | $ 4,877 | ||||||||||
Credit risk concentration
The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is
limited due to the credit ratings of the counterparties and the use of master netting and reciprocal collateralization agreements.
Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company of $57$42 million as of OctoberApril 2, 2010.2011.
For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or our counterparties exceeds a certain amount. There were no collateral balance requirements at OctoberApril 2, 2010.2011.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 28%35% of consolidated trade receivables at OctoberApril 2, 2010.2011.
Note 9 Voluntary product recall
On June 25, 2010, the Company announced a voluntary recall of select packages of Kellogg’s cereal in the U.S. due to an odor from waxy resins found in the package liner. Estimated customer returns and consumer rebates were recorded as a reduction of net sales; costs associated with returned product and the disposal and write-off of inventory were recorded as COGS; and other recall costs were recorded as SGA expenses. During the quarter, the Company refined the estimated costs of the recall, which resulted in a reduction of $1 million, for a year-to-date expense through October 2, 2010 of $47 million, or $.09 per share on a diluted basis. In addition to the costs of the voluntary recall, the Company also lost sales of the impacted products in the second and third quarters of 2010.
Note 10 Operating segments
Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom. The Company currently manages its operations in four geographic operating segments, consistingcomprised of North America and the three International operating segments of Europe, Latin America, and Asia Pacific.
Quarter ended | Year-to-date period ended | Quarter ended | ||||||||||||||||||||||
(millions) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | April 2, 2011 | April 3, 2010 | ||||||||||||||||||
Net sales | ||||||||||||||||||||||||
North America | $2,130 | $2,187 | $6,469 | $6,574 | $ 2,364 | $ 2,275 | ||||||||||||||||||
Europe | 564 | 631 | 1,730 | 1,805 | 621 | 606 | ||||||||||||||||||
Latin America | 247 | 262 | 709 | 750 | 261 | 222 | ||||||||||||||||||
Asia Pacific (a) | 216 | 197 | 629 | 546 | 239 | 215 | ||||||||||||||||||
Consolidated | $3,157 | $3,277 | $9,537 | $9,675 | $ 3,485 | $ 3,318 | ||||||||||||||||||
Segment operating profit | ||||||||||||||||||||||||
North America | $404 | $415 | $1,261 | $1,244 | ||||||||||||||||||||
North America (b) | $ 440 | $ 498 | ||||||||||||||||||||||
Europe | 102 | 105 | 307 | 304 | 101 | 105 | ||||||||||||||||||
Latin America | 34 | 51 | 126 | 157 | 48 | 45 | ||||||||||||||||||
Asia Pacific (a) | 25 | 28 | 82 | 74 | 31 | 37 | ||||||||||||||||||
Corporate | (24) | (32) | (115) | (130) | (48 | ) | (48 | ) | ||||||||||||||||
Consolidated | $541 | $567 | $1,661 | $1,649 | $ 572 | $ 637 | ||||||||||||||||||
(a) | Includes Australia, Asia and South Africa. |
(b) | Research and Development expense totaling $3 million was reallocated to Corporate from North America for the first quarter of 2010. |
KELLOGG COMPANY
PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of operations
Overview
For more than 100 years, consumers have counted on Kellogg for great-tasting, high-quality and nutritious foods. Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles and veggie foods. Kellogg products are manufactured and marketed globally. We currently manage our operations in four geographic operating segments, consisting of North America and the three International operating segments of Europe, Latin America and Asia Pacific.
We manage our Company for sustainable performance defined by our long-term annual growth targets. These targets are low single-digit (13 to 3%)4% for internal net sales, mid single-digit (4 to 6%) for internal operating profit, and high single-digit (7 to 9%) for net earnings per share on a currency neutralcurrency-neutral basis. Internal net sales and internal operating profit exclude the impact of foreign currency translation, acquisitions, dispositions and shipping day differences. See the “Foreign currency translation” section for an explanation of management’s definition of currency neutral.
For the quarter ended OctoberApril 2, 2010,2011, our reported net sales decreased 4% compared to the same period last year; internal net sales decreased 2%increased 5%. Consolidated operating profit decreased 5%10%, while internal operating profit decreased 3%.12%, compared to internal growth of 17% in the prior period. Diluted earnings per share (EPS) declined 4%8% to $0.90,$1.00, compared to $0.94$1.09 in the comparable prior period.year quarter. EPS on a currency neutralcurrency-neutral basis was down 2%10%.
On a year-to-date basis, Our performance was ahead of our reported net sales were down 1%, with internal net sales down 2%. Consolidated operating profit increased 1% on a reported basis and 1% on an internal basis. Diluted EPS was up 3%, at $2.78, compared to $2.70 in the prior year. EPS on a currency neutral basis was up 4%.
We have lowered our guidanceexpectations for the full year to reflect weaker performancequarter. We had strong top-line growth and invested in some ofbrand building and in our core cereal markets, continued competitive intensity and the impact of the voluntary cereal recall in the U.S. which is discussed further in the “Voluntary product recall” section. supply chain.
For the full year 2011, we now expect our internal net sales to be downincrease by approximately 1%4%, at the high end of our previous guidance of 3 to 4%. InternalThis increase offsets our expectations of higher input costs. We are on track to meet our internal operating profit is expected to be approximately flat compared to the prior year and currency neutral earnings per share is expected to grow 4 to 5%.
For 2011, we expect to grow internal net sales by low single-digits. Internal operating profit is expected to beguidance of flat to down 2%. EPS on a, and our currency-neutral basis is expectedearnings per diluted share growth of low single-digits (1 to grow low single-digits.
3%).
Net sales and operating profit
The following table provides an analysis of net sales and operating profit performance for the thirdfirst quarter of 20102011 versus 2009:2010:
(dollars in millions) | North America | Europe | Latin America | Asia Pacific (a) | Corporate | Consoli- dated | North America | Europe | Latin America | Asia Pacific (a) | Corporate | Consoli- dated | ||||||||||||||||||||||||||||||||||||
2011 net sales | $ | 2,364 | $ | 621 | $ | 261 | $ | 239 | $ | — | $ | 3,485 | ||||||||||||||||||||||||||||||||||||
2010 net sales | $ | 2,130 | $ | 564 | $ | 247 | $ | 216 | $ | — | $ | 3,157 | $ | 2,275 | $ | 606 | $ | 222 | $ | 215 | $ | — | $ | 3,318 | ||||||||||||||||||||||||
2009 net sales | $ | 2,187 | $ | 631 | $ | 262 | $ | 197 | $ | — | $ | 3,277 | ||||||||||||||||||||||||||||||||||||
% change — 2010 vs. 2009: | ||||||||||||||||||||||||||||||||||||||||||||||||
% change — 2011 vs. 2010: | ||||||||||||||||||||||||||||||||||||||||||||||||
Volume (tonnage) (b) | -4.2 | % | -4.9 | % | -3.8 | % | 11.1 | % | — | -3.4 | % | 1.8 | % | (.6 | )% | 4.1 | % | 4.9 | % | — | 1.8 | % | ||||||||||||||||||||||||||
Pricing/mix | 1.3 | % | -.5 | % | 8.4 | % | -9.4 | % | — | .9 | % | 1.7 | % | — | % | 6.1 | % | (2.7 | )% | — | 1.3 | % | ||||||||||||||||||||||||||
Subtotal — internal business | -2.9 | % | -5.4 | % | 4.6 | % | 1.7 | % | — | -2.5 | % | 3.5 | % | (.6 | )% | 10.2 | % | 2.2 | % | — | 3.1 | % | ||||||||||||||||||||||||||
Foreign currency impact | .3 | % | -5.0 | % | -10.1 | % | 7.3 | % | — | -1.1 | % | .4 | % | 3.1 | % | 7.2 | % | 9.2 | % | — | 1.9 | % | ||||||||||||||||||||||||||
Total change | -2.6 | % | -10.4 | % | -5.5 | % | 9.0 | % | — | -3.6 | % | 3.9 | % | 2.5 | % | 17.4 | % | 11.4 | % | — | 5.0 | % | ||||||||||||||||||||||||||
(dollars in millions) | North America | Europe | Latin America | Asia Pacific (a) | Corporate | Consoli- dated | North (c) | Europe | Latin America | Asia (a) | Corporate (c) | Consoli- dated | ||||||||||||||||||||||||||||||||||||
2011 operating profit | $ | 440 | $ | 101 | $ | 48 | $ | 31 | $ | (48 | ) | $ | 572 | |||||||||||||||||||||||||||||||||||
2010 operating profit | $ | 404 | $ | 102 | $ | 34 | $ | 25 | $ | (24 | ) | $ | 541 | $ | 498 | $ | 105 | $ | 45 | $ | 37 | $ | (48 | ) | $ | 637 | ||||||||||||||||||||||
2009 operating profit | $ | 415 | $ | 105 | $ | 51 | $ | 28 | $ | (32 | ) | $ | 567 | |||||||||||||||||||||||||||||||||||
% change — 2010 vs. 2009: | ||||||||||||||||||||||||||||||||||||||||||||||||
% change — 2011 vs. 2010: | ||||||||||||||||||||||||||||||||||||||||||||||||
Internal business | -2.9 | % | 2.4 | % | -18.2 | % | -16.8 | % | 20.7 | % | -3.0 | % | (12.1 | )% | (8.7 | )% | 1.0 | % | (23.2 | )% | (1.6 | )% | (12.3 | )% | ||||||||||||||||||||||||
Foreign currency impact | .3 | % | -5.4 | % | -14.0 | % | 6.9 | % | — | % | -1.7 | % | .4 | % | 4.7 | % | 7.3 | % | 7.8 | % | — | % | 2.1 | % | ||||||||||||||||||||||||
Total change | -2.6 | % | -3.0 | % | -32.2 | % | -9.9 | % | 20.7 | % | -4.7 | % | (11.7 | )% | (4.0 | )% | 8.3 | % | (15.4 | )% | (1.6 | )% | (10.2 | )% |
(a) | Includes Australia, Asia, and South Africa. |
(b) | We measure the volume impact (tonnage) on revenues based on the stated weight of our product shipments. |
(c) | Research and Development expense totaling $3 million was reallocated to Corporate from North America for the first quarter of 2010. |
Our consolidated net sales were down 4% reflecting weaknessgrew by 5%. The strong net sales growth during the quarter was due to increased volumes resulting from our recently launched innovations and our investment in our core cereal markets, competitive pressures,brand building, and thefavorable pricing/mix. Foreign exchange provided a favorable impact of the second quarter 2010 voluntary recall of select packages of breakfast cereals. Reported net sales was positively impacted by currency, resulting in an internal net sales decline ofalmost 2%.
Internal net sales for ourOur North America operating segment declinedhad internal net sales growth of 3%. North America has three product groups: retail cereal,cereal; retail snacks and frozen and specialty channels. Retail cereal’s internalInternal net sales declinedof retail cereal increased 2% driven by 6%pricing and strong innovation. We saw improving trends in the quarter. Heavy promotional pricing drove deflation into the category. Despite the deflation, the cereal category, continuedwhich responds well to be weakinnovation and we experienced a decreasebrand building investment. Our innovations, launched in consumption. Consumer consumption impacts purchases by retailers, whoJanuary, performed very well. We are excited about our primary customers. Our consumption was negatively impacted by the ongoing effect of the voluntary cereal recall that occurred in the second quarter of 2010. The brands involved in the recall, our kids’ brands, were the cornerstone of our back-to-school promotions in the third quarter. While we tried to re-work our promotional plans, our competitors were more aggressive than we expected and benefited from our supply issues resulting from the recall. We have also been impacted by less support from non-measured channels this year.half innovations.
The retail snack product group (cookies, crackers, toaster pastries, cereal bars and fruitfruit-flavored snacks) grew by less than 1%. The modesta strong 5%, on top of 5% growth was driven byPop-Tartsin the prior year. We saw net sales increases in crackers and strong wholesome snack bar sales including our bar innovations such asFiberPlusChocolate Peanut Butter andSpecial KFruit Crisps. The good performance in wholesome snacks, while cookie net sales were flat. During the quarter we launched a cracker innovation which has been very successful and helped drive a share gains in measured channels. Although our cookie sales were flat, we did increase share slightly, indicating improved trends in our cookie business. Consumption in the toaster pastry category was masked by weaker performance in cookies.down, but we grew share.
Internal net sales in the frozen and specialty channels (frozen foods, food service and vending) decreasedincreased 4%, driven by 5%. In ourgrowth in ourwaffle business. Our consumption in the waffle business our customers aregrew by more than 60%; however, shipment growth was not resetting their shelves as quicklyhigh as consumption as we had expected andwere lapping the pacerebuilding of consumers’ response is slower than projected.trade inventory in the first quarter of 2010. The veggie category remains strong. While our shipments were down, we saw strong underlying consumption growth fromMorningstar Farms.
Our International operating segments’ internalInternal net sales were downin our international operating segments increased 2% compared. The growth was driven by higher sales in Latin America and Asia Pacific, which offset Europe’s 1% decline. The U.K. continued to the prior year. Europe’s internal net sales declined 5% in the third quarter. We are seeing price deflation in many food categories across Europe, especiallybe a tough operating environment. The cereal category was flat and highly competitive. The softness in the U.K. Continued weaknesswas partially offset by growth in France, where the Russia snack business drove lower volumes and contributed to Europe’s lower top line results.cereal category grew mid single-digit. Latin America’s internal net sales growth wasgrew by 10% due to Brazil and Venezuela where we are lapping soft comparisons from the prior year. Net sales in Mexico were up 5%1%, on top ofagainst last year’s strong 9%7% growth. Cereal growth acrossResults in Mexico for the region mitigated a decline in snacks. Our decline in snacks is largely driven by Venezuela where we import products from Mexico. The imports have beenfirst quarter were negatively impacted by exchange rate controls in Venezuela. Internala customer dispute that has been resolved. In Asia Pacific, internal net sales were up 2% as a result of the strong sales in Asia Pacificour South Africa and India business. This growth was offset by net sales softness in Australia. Consumption in our Australia cereal business grew 2% driven by strongmore than 1% and we gained share. Our net sales performance across Asia and South Africa. This was muted by a declinedid not reflect the increase in Australia whereconsumption due to higher retailer inventory growth in the cereal category is facing price deflation.first quarter of 2010.
Consolidated operating profit declined by 5%10% on an asa reported basis, and by 3%12% on an internal basis, when excluding the impact of foreign currency translation. Softness in sales, increased investment in advertising, a decrease in volume going
through our manufacturing plantsbasis. The decline was due to higher input costs, supply chain investments and increased costs more than offsetbrand building. Our price execution lagged the benefitsignificant increase in input cost inflation. In addition, we lapped a strong first quarter 2010 performance with internal operating profit growth of lower incentive compensation expense, resulting in an overall decline in operating profit. Incentive compensation is based upon the Company’s actual results compared to our targets. Given results are lower than expected, incentive compensation decreased in the third quarter, including a year-to-date adjustment.17%.
Internal operating profit in North America decreased by 3%, Europe’s grew by 2%, Latin America’s declined by 18%12% against an increase of 22% in the prior year. Higher input costs and increased brand building to support our innovation launches were the main drivers. Europe’s internal operating profit declined by 9%, impacted by the difficult operating environment in the U.K. In Latin America, despite 10% net sales growth, internal operating profit increased by only 1% due to increased cost pressures. Asia Pacific’s internal operating profit declined by 17%23%, lapping last year’s growth of 10%. North America’sAustralia drove the decline in operating profit, was negatively impacted by increased promotional activitydue to the lapping of higher retail inventory growth in the cereal category, the ongoing impactfirst quarter of the second quarter 2010 voluntary recall as well as a slower than anticipated rebound in our waffle business. In addition, higher supply chain costs and increased advertising contributed to the decline. This was partially offset by lower up-front costs and lower incentive compensation expense. Europe’s increase in internal operating profit was attributable to supply chain efficiencies, lower up-front costs and a decrease in incentive compensation expense. Latin America’s decline was due primarily to increased commodity costs, incremental operating and distribution costs in Mexico as well as overhead inflation and a modest increase in advertising. Asia Pacific’s decline was due to increased investments in advertising and promotion. Corporate benefited from lower incentive compensation expense.
The following tables provide analysis of our net sales to operating performance for the year-to-date periods of 2010 compared to 2009. Our weak top-line growth in the second and third quarter of 2010 has more than offset our first quarter increase, resulting in a decrease in year-to-date internal net sales of 1%. Internal operating profit is up 1% compared to the prior year due to lower up-front costs and reduced incentive compensation expense which more than offset the softness in the business.
(dollars in millions) | North America | Europe | Latin America | Asia Pacific (a) | Corporate | Consoli- dated | ||||||||||||||||||
2010 net sales | $ | 6,469 | $ | 1,730 | $ | 709 | $ | 629 | $ | — | $
| 9,537
|
| |||||||||||
2009 net sales | $ | 6,574 | $ | 1,805 | $ | 750 | $ | 546 | $ | — | $ | 9,675 | ||||||||||||
% change — 2010 vs. 2009: | ||||||||||||||||||||||||
Volume (tonnage) (b) | -2.8 | % | -2.3 | % | -3.7 | % | 3.0 | % | — | -2.4 | % | |||||||||||||
Pricing/mix | .5 | % | .2 | % | 7.3 | % | -.9 | % | — | .9 | % | |||||||||||||
Subtotal — internal business | -2.3 | % | -2.1 | % | 3.6 | % | 2.1 | % | — | -1.5 | % | |||||||||||||
Foreign currency impact | .7 | % | -2.0 | % | -9.1 | % | 13.0 | % | — | .1 | % | |||||||||||||
Total change | -1.6 | % | -4.1 | % | -5.5 | % | 15.1 | % | — | -1.4 | % | |||||||||||||
(dollars in millions) | North America | Europe | Latin America | Asia Pacific (a) | Corporate | Consoli- dated | ||||||||||||||||||
2010 operating profit | $ | 1,261 | $ | 307 | $ | 126 | $ | 82 | $ | (115 | ) | $ | 1,661 | |||||||||||
2009 operating profit | $ | 1,244 | $ | 304 | $ | 157 | $ | 74 | $ | (130 | ) | $ | 1,649 | |||||||||||
% change — 2010 vs. 2009: | ||||||||||||||||||||||||
Internal business | .5 | % | 4.3 | % | -9.3 | % | -5.7 | % | 11.1 | % | .9 | % | ||||||||||||
Foreign currency impact | .8 | % | -3.3 | % | -10.1 | % | 17.0 | % | — | -.2 | % | |||||||||||||
Total change | 1.3 | % | 1.0 | % | -19.4 | % | 11.3 | % | 11.1 | % | .7 | % |
support innovation.
Margin performance
Margin performance for the thirdfirst quarter and year-to-date periods of 20102011 versus 20092010 is as follows:
Quarter | 2010 | 2009 | Change vs. prior year (pts.) | 2011 | 2010 | Change vs. prior year (pts.) | ||||||||||||||||||
Gross margin (a) | 43.4 | % | 43.9 | % | -0.5 | 40.8 | % | 43.0 | % | (2.2 | ) | |||||||||||||
SGA% (b) | -26.3 | % | -26.6 | % | 0.3 | |||||||||||||||||||
SGA (b) | (24.4 | )% | (23.8 | )% | (0.6 | ) | ||||||||||||||||||
Operating margin | 17.1 | % | 17.3 | % | -0.2 | 16.4 | % | 19.2 | % | (2.8 | ) | |||||||||||||
Year-to-date | 2010 | 2009 | Change | |||||||||||||||||||||
Gross margin (a) | 43.0 | % | 42.9 | % | 0.1 | |||||||||||||||||||
SGA% (b) | -25.6 | % | -25.9 | % | 0.3 | |||||||||||||||||||
Operating margin | 17.4 | % | 17.0 | % | 0.4 |
(a) | Gross profit as a percentage of net sales. Gross profit is equal to net sales less cost of goods sold. |
(b) | Selling, general, and administrative expense as a percentage of net sales. |
As illustrated in the preceding table, our consolidated gross margin decreaseddeclined by 50220 basis points in the quarter2011 due primarily to lower volume. While we are achieving savings from our cost reduction initiatives, we continue to experience inflationaryincreased cost pressures for fuel, energy, commodities, employee benefits and employee benefits.other supply chain investments. We have increased price, but those increases lagged input inflation. The full impact of our price increases will be recognized as we progress into the second quarter. Our selling, general and administrative (SGA) expenses were down inexpense as a percentage of net sales increased by 60 basis points primarily due to increased advertising and promotion investment.
For the quarter due a reduction in incentive compensation expense.
On a year-to-date basis, gross margin was flat compared to the priorfull year, comparable period. Wewe expect our full year gross margin to remain under pressure and be flat or down slightly. Our SGA expenses on a year-to-dateapproximately 50 basis were down due to the third quarter adjustment for lower incentive compensation expense.points.
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,euro, British pound, Mexican peso, Australian dollar and Canadian dollar. 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 a significant impact on our results if such increase or decrease in the value of the U.S. dollar is substantial.
Volatility in the foreign exchange markets has limited our ability to forecast future U.S. dollar reported earnings. As such, we are measuring diluted earnings per share growth and providing guidance on future earnings on a currency neutral basis, assuming earnings are translated at the prior year’s exchange rates. This non-GAAP financial measure is being used to focus management and investors on local currency business results, thereby providing visibility to the underlying trends of the Company. Management believes that excluding the impact of foreign currency from EPS provides a useful measurement of comparability given the volatility in foreign exchange markets.
Quarter ended | Year-to-date ended | Quarter ended | ||||||||||||||||||||||
Consolidated results | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | April 2, 2011 | April 3, 2010 | ||||||||||||||||||
Diluted net earnings per share (EPS) | $ | 0.90 | $ 0.94 | $ | 2.78 | $ 2.70 | $ | 1.00 | $ | 1.09 | ||||||||||||||
Translational impact (a) | 0.02 | 0.06 | 0.02 | 0.23 | (0.02 | ) | (0.02 | ) | ||||||||||||||||
Currency neutral EPS | $ | 0.92 | $ 1.00 | $ | 2.80 | $ 2.93 | $ | 0.98 | $ | 1.07 | ||||||||||||||
Currency neutral EPS growth (b) | -2% | 4% | (10 | )% | ||||||||||||||||||||
(a) | Translation impact is the difference between reported EPS and the translation of current year net profits at prior year exchange rates, adjusted for gains (losses) on translational |
(b) | Calculated as a percentage of growth from the prior year’s reported EPS. |
Voluntary product recall
On June 25, 2010, we announced a voluntary recall of select packages of Kellogg’s cereal in the U.S. due to an odor from waxy resins found in the package liner. Estimated customer returns and consumer rebates were recorded as a reduction of net sales; costs associated with returned product and the disposal and write-off of inventory were recorded as cost of goods sold (COGS); and other recall costs were recorded as selling, general and administrative expenses. During the quarter, we refined the estimated costs of the recall, which resulted in a reduction of $1 million, for a year-to-date expense through October 2, 2010 of $47 million, or $.09 per share on a diluted basis. In addition to the costs of the voluntary recall, we also lost sales of the impacted products in the second and third quarters of 2010.
Other costCost reduction initiatives
We view our continued spending on cost reduction initiatives as part of our ongoing 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 five-year period of completion. Each cost reduction initiative is normally up to three years in duration. 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. Certain of these initiatives represent exit or disposal plans for which material charges will be incurred. See further discussion in Note 3. We include these charges in our measure of operating segment profitability. In 2009, we announced our intention to achieve $1 billion plus of annual cost savings in three years (beginning in 2012). These initiatives are integral to meeting our $1 billion plus savings challenge.
20102011 activities
We incurred costs related to our cost reduction initiatives which do not qualify as exit costs under generally accepted accounting principles in the United States. These represent cash costs for consulting and other charges for our cost of goods sold COGS and selling, general and administrative (SGA)SGA programs.
Costs incurred during the quarter and year-to-date period ended October 2, 2010 wereas well as total program costs are as follows:
Quarter ended, October 2, 2010 | Year-to-date period ended, October 2, 2010 | |||||||||||
(millions) | COGS programs | SGA programs | Total | COGS programs | SGA programs | Total | ||||||
North America | $— | $1 | $1 | $12 | $2 | $14 | ||||||
Europe | 3 | — | 3 | 9 | — | 9 | ||||||
Latin America | 1 | — | 1 | 2 | — | 2 | ||||||
Asia Pacific | 1 | — | 1 | 2 | — | 2 | ||||||
Corporate | — | 1 | 1 | — | 3 | 3 | ||||||
Total | $5 | $2 | $7 | $25 | $5 | $30 | ||||||
Total program costs incurred to date were as follows:
Total program costs through October 2, 2010 | Quarter ended, April 2, 2011 | Total program costs through, April 2, 2011 | ||||||||||||||||||||||||||||
(millions) | COGS programs | SGA programs | Total | COGS programs | SGA programs | Total | COGS programs | SGA programs | Total | |||||||||||||||||||||
North America | $62 | $15 | $ 77 | $ | 1 | $ | — | $ | 1 | $ | 68 | $ | 14 | $ | 82 | |||||||||||||||
Europe | 19 | 2 | 21 | 1 | — | 1 | 21 | 3 | 24 | |||||||||||||||||||||
Latin America | 7 | — | 7 | — | — | — | 8 | — | 8 | |||||||||||||||||||||
Asia Pacific | 7 | — | 7 | 1 | — | 1 | 9 | — | 9 | |||||||||||||||||||||
Corporate | — | 3 | 3 | — | — | — | — | 3 | 3 | |||||||||||||||||||||
Total | $95 | $20 | $115 | $ | 3 | $ | — | $ | 3 | $ | 106 | $ | 20 | $ | 126 | |||||||||||||||
The additional cost and cash outlay in 20102011 for these programs, excluding exit costs, is estimated to be $10$5 to $15$10 million. The projects are expected to be substantially complete by the end of 2010.2011.
SAP reimplementation
We are reimplementing SAP which will result in process and productivity improvements. The program is expected to require an investmentapproximately $70 million of approximately $150 million, the majority of which is capital related. Inincremental expense, including consulting, in addition to internal resources, we are incurring incremental consulting costs associated with thecapital investments. The reimplementation which will take effect from 2011 through 2013.begin in 2011.
In the thirdfirst quarter of 2010,2011, we incurred approximately $2 million of consulting costs associated with this program in our North America operating segment. To date, we have incurred $11 million in program costs. These costs impacted our operating segments as follows (in millions): North America-$10; and Latin America-$1. The additional cost and cash outlay in 2011 through 2014 for a yearthis program is expected to date total of $6be approximately $60 million.
Prior year activities
During the thirdfirst quarter of OctoberApril 3, 2009,2010, we incurred $15$10 million of consulting and other costs in connection with our COGS and SGA programs. Costs were recorded in the following operating segments forduring the quarter and year-to-date period ended OctoberApril 3, 2009.2010.
Quarter ended, October 3, 2009 | Year-to-date period ended, October 3, 2009 | Quarter ended, April 3, 2010 | ||||||||||||||||||||||
(millions) | COGS programs | SGA programs | Total | COGS programs | SGA programs | Total | COGS programs | SGA programs | Total | |||||||||||||||
North America | $ 9 | $1 | $10 | $34 | $7 | $41 | $ | 6 | $ | 1 | $ | 7 | ||||||||||||
Europe | 3 | — | 3 | 6 | — | 6 | 2 | — | 2 | |||||||||||||||
Latin America | 1 | — | 1 | 3 | — | 3 | ||||||||||||||||||
Asia Pacific | 1 | — | 1 | 2 | — | 2 | 1 | — | 1 | |||||||||||||||
Total | $14 | $1 | $15 | $45 | $7 | $52 | $ | 9 | $ | 1 | $ | 10 | ||||||||||||
During the first quarter of 2010, the Company incurred $2 million of costs associated with the SAP reimplementation in our North America operating segment.
Interest expense
For the quarter and year-to-date period ended OctoberApril 2, 2010,2011, interest expense was $62$67 million, and $188 million, respectively, as compared to the quarter and year-to-date period ended OctoberApril 3, 20092010 with interest expense of $65 million and $199 million, respectively.million.
For the full year 2010,2011, we expect gross interest expense to be approximately $250$235 to $245 million, compared to 2009’s2010’s full year amount of $295$248 million. The forecasted decline is driven primarily by costs of the bond tender executed in 2009.
Income taxes
The consolidated effective income tax rate was 30%28% for the quarter ended OctoberApril 2, 2010,2011, as compared to 27% for the comparable quarter of 2009. The year-to-date consolidated effective tax rate2010. Refer to Note 8 of the Consolidated Financial Statements for 2010 was 29% consistent with 29% in the previous year.further discussion.
For the full year 2010,2011, we currently expect the consolidated effective income tax rate to be approximately 29%. We estimate 2011’s effective rate to be approximately 30%. Our estimate ofFluctuations in foreign currency exchange rates could impact the expected effective income tax rate for any periodas it is highly influenceddependent upon U.S. dollar earnings of foreign subsidiaries doing business in various countries with differing statutory rates. Additionally, the rate could be impacted if pending uncertain tax matters, including tax positions that could be affected by country mix of earnings, changes in statutory tax rates, timing of implementation of tax planning initiatives, and developments which affect our evaluation of uncertain tax positions.are resolved more or less favorably than we currently expect.
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.
The following table sets forth a summary of our cash flows:
Quarter ended | ||||||||
(millions) | April 2, 2011 | April 3, 2010 | ||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 310 | $ | 250 | ||||
Investing activities | (99) | (59) | ||||||
Financing activities | (266) | (134) | ||||||
Effect of exchange rates on cash and cash equivalents | 15 | (4) | ||||||
Net (decrease) increase in cash and cash equivalents | $ | (40) | $ | 53 | ||||
Operating activities
The principal source of our operating cash flow is net earnings, meaning cash receipts from the sale of our products, net of costs to manufacture and market our products.
Net cash provided by our operating activities for the first quarter of 2011 amounted to $310 million, an increase of $60 million compared with the first quarter of 2010, with the increase primarily attributable to lower incentive compensation payments during first quarter 2011 and the receipt of an income tax refund related to 2010 pension and postretirement plan contributions. The impact of higher pension and postretirement plan contributions in 2011 compared with first quarter 2010 partially offset the increase in operating cash flows during the period.
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) wasis relatively short, equating to approximately 22 days duringand 23 days for the 12 month periods ended OctoberApril 2, 2011 and April 3, 2010, and October 3, 2009. Duringrespectively. Compared with the 12 month period ended October 2,April 3, 2010, the unfavorable impact on the 2011 cash conversion cycle resulting from higher days of inventory outstanding was more than offset by an increase in days of trade payables outstanding.
Year-to-date period ended | Change versus prior year | |||||||||||
(millions) | October 2, 2010 | October 3, 2009 | ||||||||||
Operating activities | ||||||||||||
Net income | $1,055 | $1,032 | $23 | |||||||||
Items in net income not requiring (providing) cash: | ||||||||||||
Depreciation and amortization | 265 | 282 | (17) | |||||||||
Deferred income taxes | (53) | (9) | (44) | |||||||||
Other | 116 | (18) | 134 | |||||||||
Net Income after non-cash items | 1,383 | 1,287 | 96 | |||||||||
Postretirement benefit plan contributions | (45) | (93) | 48 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Core working capital (a) | (100) | (259) | 159 | |||||||||
Other working capital | (159) | 295 | (454) | |||||||||
(259) | 36 | (295) | ||||||||||
Net cash provided by operating activities | $1,079 | $1,230 | $(151) | |||||||||
Lower operating cash flow in 2010 was the result of an unfavorable year-over-year variance in other working capital, which more than offset a favorable variance relating to core working capital.
The unfavorable variance in other working capital in 2010 primarily reflected lower salary and wage accruals due to the decrease in incentive compensation and higher payments for advertising. An increase in cash paid for the settlement of hedge contracts in 2010 versus the prior year period was also a factor.
Cash flows associated with core working capital in 2010 were favorable compared with the same period in 2009, largely the result of improvements in trade payables and receivables. We continue to manage core working capital by focusing on the timely collection of trade receivables, extending terms on accounts payable and careful monitoring of inventory.
Our pension and other postretirement benefit plan contributions amounted to $45$178 million and $93$22 million for the year-to-date periods ended OctoberApril 2, 20102011 and OctoberApril 3, 2009,2010, respectively. For full year 2010,2011, we currently expect that our contributioncontributions to pension and other postretirement plans will total approximately $615 million, including a voluntary contribution of $500 million, net of tax.$200 million. Plan funding strategies may be modified in response to our evaluation of tax deductibility, market conditions and competing investment alternatives.
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 for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow metric is reconciled to the most comparable GAAP measure, as follows:
Year-to-date period ended | Change versus prior year | Quarter ended | Change versus prior year | |||||||||||||
(dollars in millions) | October 2, 2010 | October 3, 2009 | ||||||||||||||
(millions) | April 2, 2011 | April 3, 2010 | Change versus prior year | |||||||||||||
Net cash provided by operating activities | td,079 | td,230 | (12.3)% | $ | 310 | $ | 250 | |||||||||
Additions to properties | (252) | (252) | (103) | (60) | ||||||||||||
Cash flow | $ 827 | $ 978 | (15.4)% | $ | 207 | $ | 190 | 8.9 % | ||||||||
For 2010,2011, we are projecting cash flow (as defined) within a range of $450$1.1 billion to $500 million.$1.2 billion. This projection has been lowered to reflectreflects the impact of our voluntaryexpected pension and post-retirementpostretirement benefit plan contributions, net of tax.
Investing activities
Our net cash used in investing activities for 2010 year-to-dateduring the year to date period ended 2011 amounted to $250$99 million, on paran increase of $40 million compared with cash used of $251 million for the same period in 2009.2010. The increase was primarily attributable to a higher level of capital expenditures in 2011.
For fiscal year 2010,full-year 2011, we project that capital spending will totalof approximately $470 million. This reflects investment4% of net sales. In addition to continuing to invest in our supply chain and information technology infrastructure, as we reinstallhave increased investment in capacity to support growth and upgrade our SAP platform as well as investments in our supply chain.innovation.
For fiscal year 2011, we expect capital spending to be 4% of net sales, which is at the high end of our range of 3 to 4 percent of net sales.
Financing activities
Our net cash used in financing activities for the year-to-date period ended OctoberApril 2, 20102011 amounted to $611$266 million compared with $724$134 million for the comparable period in 2009.2010. The increase was primarily attributable to an increase in repurchases of common stock.
We had positive cash flows associated withspent $329 million and $148 million to repurchase common stock during the issuance of commercial paperyear to date periods ended April 2, 2011 and April 3, 2010, respectively. Of the $329 million spent in 2011, $5 million was related to shares purchased in 2010 while we reduced commercial paper outstanding duringthat did not settle prior to the first nine monthsend of 2009, primarily through the use of $7452010 reporting period, and $324 million proceeds associated with our May 2009 issuance of $750 million in long-term debt.
Cash inflows from net issuances of common stock amountedwas spent to $178 million in the first nine months of 2010 compared with $34 million during the same period in 2009, with the increase attributable to a higher level of stock option exercise activity in 2010.
During the year-to-date period ended October 2, 2010, we repurchased approximately 18repurchase 6 million shares of our common stock for a totalduring the first quarter of $907 million.2011. During full yearthe first quarter of 2010, we expect repurchases of our common stockspent $148 million to be up to $1.2 billion. Actual 2010 repurchases could be different from our current projections, as influenced by factors such as the impact of changes in our stock price and other competing priorities. During the year-to-date period ended Octoberrepurchase approximately 3 2009, we repurchased approximately 4 million shares of our common stock for a total of $187 million. The 2010 repurchase activity falls under a program approved in April 2010. stock.
On April 23, 2010, our board of directors authorized a $2.5 billion, three-year share repurchase program for 2010 through 2012. ThisAs of April 2, 2011, total purchases under the repurchase authorization replacedamounted to 27 million shares totaling $1.4 billion. During the previous share buyback program which authorized stock repurchasesremainder of up to $1,113 million for 2010.
During 2011 and 2012, we plan to execute the remaining repurchases under the 2010 authorization. We project total purchases of $800 million in 2011, which includes the $324 million executed in first quarter 2011, with the balance in 2012. Actual repurchases could be different from our current projections, as influenced by factors such as the impact of changes in our stock price and other competing priorities.
We paid cash dividendsused commercial paper to refinance $946 million of $435 million and $403 million duringlong-term debt that matured in the year-to-date periods ended October 2, 2010 and October 3, 2009, respectively. first quarter of 2011.
In October 2010,February 2011, the board of directors declared a dividend of $0.405 per common share, payable on DecemberMarch 15, 20102011 to shareholders of record at close of business on DecemberMarch 1, 2010.2011. In April 2011, our board of directors declared a dividend of $0.405 per common share, payable June 15, 2011 to shareholders of record at close of business on June 1, 2011. We also announced that the board plans to increase the quarterly dividend to $0.43 per share beginning with the third quarter of 2011. This increase is consistent with our current plan to maintain our dividend pay-out ratio between 40% and 50% of reported net income.
In March 2011, we entered into an unsecured Four-Year Credit Agreement to replace our existing unsecured Five-Year Credit Agreement, which would have expired in November 2011. The Four-Year Credit Agreement allows us to borrow, on a revolving credit basis, up to $2.0 billion, although we do not plan to use it. (See Note 5 within Notes to consolidated financial statements for additional information on the Four-Year Credit Agreement.)
We are in compliance with all debt covenants. 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.
We plan to refinance our $946 million of debt maturing in March 2011 prior to its maturity. We expect our access to public debt and commercial paper markets, along with operating cash flows, towill be adequate to meet future operating, investing and financing needs, including the pursuit of selected bolt-on acquisitions.
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.
Forward-looking statements
This Management’s Discussion and Analysis contains “forward-looking statements” with projections concerning, among other things, our strategy, financial principles, and plans; initiatives, improvements and growth; sales, gross 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,” “will deliver,“can,” “anticipate,” “project,” “should,” or words or phrases of similar meaning. Our actual results or activities may differ materially from these predictions. Our future results could be affected by a variety of factors, including:
the impact of competitive 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;
the success of productivity improvements and business transitions;
commodity and energy prices;
labor costs;
disruptions or inefficiencies in supply chain;
the availability of and interest rates on short-term and long-term financing;
actual market performance of benefit plan trust investments;
the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs;
changes in consumer behavior and preferences;
the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability;
legal and regulatory factors including changes in advertising and labeling laws and regulations;
the ultimate impact of product recalls;
business disruption or other losses from war, terrorist acts, or political unrest; and,
the risks and uncertainties described herein under Part II, Item 1A.
Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.
Item 3. 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. Refer to Note 89 within Notes to Consolidated Financial Statements for further information on our derivative financial and commodity instruments.
Refer to disclosures contained on pages 24-2625-26 of our 20092010 Annual Report on Form 10-K. Other than changes noted here, there have been no material changes in the Company’s market risk as of OctoberApril 2, 2010.2011.
During the quarter ended April 2, 2011, we entered into additional interest rate swaps in connection with certain U.S. Dollar Notes. The total notional amount of commodity derivative instrumentsinterest rate swaps at OctoberApril 2, 20102011 was $207 million,$3.1 billion, representing a settlement obligationreceivable of $38$63 million. The total notional amount of commodity derivative instrumentsinterest rate swaps at January 2, 20101, 2011 was $213 million, representing a settlement obligation of $16 million. Assuming an unfavorable 10% change in period-end commodity prices, the settlement obligation would have increased by $16 million and $18 million as of October 2, 2010 and January 2, 2010, respectively. Those unfavorable changes would generally have been offset by a reduction in the cost of the underlying commodity purchases.
The total notional amount of foreign currency derivative instruments at October 2, 2010 was $1,206 million,$1.9 billion, representing a settlement receivable of $21$74 million. Assuming an unfavorable 10% change in period-end exchange rates, the settlement receivable would have decreased by $121 million, generally offset by favorable changes in the values of the underlying exposures. The total notional amount of foreign currency derivative instruments at January 2, 2010 was $1,588 million, representing a settlement obligation of $24 million. Assuming an unfavorable 10% change in period-end exchange rates, the settlement obligation would have increased by $159 million, generally offset by favorable changes in the values of the underlying exposures.
Venezuela was designated as a highly inflationary economy as of the beginning of our 2010 fiscal year. Gains and losses resulting from the translation of the financial statements of subsidiaries operating in highly inflationary economies are recorded in earnings. As of the end of our 2009 fiscal year, we used the parallel rate to translate our Venezuelan subsidiary’s financial statements to U.S. dollars. In May 2010, the Venezuelan government effectively eliminated the parallel market. In June, several large Venezuelan commercial banks began operating the Transaction System for Foreign Currency Denominated Securities (SITME). We intend to use SITME to settle non-functional currency denominated assets and liabilities. Accordingly, we are using the SITME rate at October 2, 2010 to translate our Venezuelan subsidiary’s financial statements to U.S. dollars. During the second quarter of 2010, we recorded an $8 million foreign exchange gain in other income (expense), net, associated with the translation of our subsidiary’s financials into U.S. dollars. On a year-to-date basis we recorded a $4 million foreign exchange gain in other income (expense), net. On a consolidated basis, Venezuela represents only 1% to 2% of our business; therefore, any ongoing impact is expected to be immaterial.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure under Rules 13a-15(e) and 15d-15(e). Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.
As of OctoberApril 2, 2010,2011, we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
During the last fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
KELLOGG COMPANY
PART II — OTHER INFORMATION
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended January 2, 2010.1, 2011. The risk factors disclosed under this Part II, Item 1A and in Part I, Item 1A to our Annual report on Form 10-K for the fiscal year ended January 2, 2010,1, 2011, in addition to the other information set forth in this Report, could materially affect our business, financial condition, or results. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition, or results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
(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 | (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: | ||||||||||||||||||||||||||||||||
7/4/10 -7/31/10 | 589,237 | $51.41 | 589,237 | $2,111 | ||||||||||||||||||||||||||||
1/2/11-1/29/11 | 981,295 | $50.95 | 981,295 | $1,393 | ||||||||||||||||||||||||||||
Month #2: | ||||||||||||||||||||||||||||||||
8/1/10 - 8/28/10 | 9,946,271 | $50.27 | 9,946,271 | $1,611 | ||||||||||||||||||||||||||||
1/30/11-2/26/11 | 562,994 | $53.29 | 562,994 | $1,363 | ||||||||||||||||||||||||||||
Month #3: | ||||||||||||||||||||||||||||||||
8/29/10 - 10/2/10 | 401,500 | $49.79 | 401,500 | $1,591 | ||||||||||||||||||||||||||||
2/27/11-4/2/11 | 4,510,566 | $53.96 | 4,510,566 | $1,119 | ||||||||||||||||||||||||||||
Total | 10,937,008 | $50.31 | 10,937,008 | 6,054,855 | $53.41 | 6,054,855 | ||||||||||||||||||||||||||
On April 23, 2010, ourthe board of directors authorized a $2.5 billion three-year share repurchase program for 2010 through 2012. This authorization replaced the previous share buyback program which authorized stock repurchases of up to $1,113 million for 2010. During the year-to-date period ended October 2, 2010, we repurchased 18 million shares of our common stock for a total of $907 million. The 2010 repurchase activity falls under the program approved in April 2010.
(a) | Exhibits: |
31.1 | Rule 13a-14(e)/15d-14(a) Certification from John A. | |
31.2 | Rule 13a-14(e)/15d-14(a) Certification from Ronald L. Dissinger | |
32.1 | Section 1350 Certification from John A. | |
32.2 | Section 1350 Certification from Ronald L. Dissinger | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KELLOGG COMPANY |
/s/ R. L. Dissinger |
R. L. Dissinger |
Principal Financial Officer; Senior Vice President and Chief Financial Officer |
/s/ A. R. Andrews |
A. R. Andrews |
Principal Accounting Officer; Vice President — Corporate Controller |
Date: November 5, 2010May 10, 2011
EXHIBIT INDEX
Exhibit No. | Description | Electronic (E) Paper (P) Incorp. By Ref. (IBRF) | ||
31.1 | Rule 13a-14(e)/15d-14(a) Certification from John A. | E | ||
31.2 | Rule 13a-14(e)/15d-14(a) Certification from Ronald L. Dissinger | E | ||
32.1 | Section 1350 Certification from John A. | E | ||
32.2 | Section 1350 Certification from Ronald L. Dissinger | E | ||
101.INS | XBRL Instance Document | E | ||
101.SCH | XBRL Taxonomy Extension Schema Document | E | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | E | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | E | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | E | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | E |
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