Washington, D.C. 20549
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Item 1. Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects all adjustments, all of which are of a normal and recurring nature, that management believes are necessary for a fair statement of the results of operations, comprehensive income, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying footnotes within the Company’s 20172018 Annual Report on Form 10-K.
The Company has agreements with certain third parties to provide accounts payable tracking systems which facilitates participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into these agreements is to capture overall supplier savings, in the form of payment terms or vendor funding, created by facilitating suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under these arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this agreement for those payment obligations that have been sold by suppliers. As of March 31, 2018, $72430, 2019, $849 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $547$593 million of those payment obligations to participating financial institutions. As of December 30, 2017, $85029, 2018, $893 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $674$701 million of those payment obligations to participating financial institutions.
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable balances of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. Accounts receivable sold of $43$29 million and $86$93 million remained outstanding under these programs as of March 31, 201830, 2019 and December 30, 2017,29, 2018, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows.Flows in the period of sale. The recorded net loss on the sale of these receivables is included in Other income and expense (OIE) and is not material.
Changes in the carrying amount of goodwill, intangible assets subject to amortization, consisting primarily of customer lists,relationships, distribution agreements, and indefinite-lived intangible assets, consisting of brands, are presented in the following tables:
The Company views its restructuring and cost reduction activities as part of its operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year3 to 5-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.
The Company currently anticipates that the program will result in total pre-tax charges, once all phases are approved and implemented, of $1.5 to $1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be approximately $1.1$1.2 billion. Based on current estimates and actual charges to date, the Company expects the total project charges will consist of asset-related costs of approximately $500 million which will consist primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs of approximately $500$400 million which will includeincludes severance, pension and other termination benefits; and other costs of approximately $600$700 million which consists primarily of charges related to the design and implementation of global business capabilities and a more efficient go-to-market model.
The Company currently expects that total pre-tax charges related to Project K will impact reportable segments as follows: U.S. Snacks (approximately 34%), U.S. Morning Foods (approximately 17%), U.S. Specialty (approximately 1%), North America Other (approximately 13%65%), Europe (approximately 22%), Latin America (approximately 2%3%), Asia-PacificAMEA (approximately 6%), and Corporate (approximately 5%4%).
Employee related costs consist primarily of severance and related benefits. Pension curtailment (gain) loss consists of curtailment gains or losses that resulted from project initiatives. Asset related costs consist primarily of accelerated depreciation. Asset impairments were recorded for fixed assets that were determined to be impaired and were written down to their estimated fair value. Other costs consist of lease termination costs as well as third-party incremental costs related to the development and implementation of global business capabilities and a more efficient go-to-market model.
In December 2017, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock beginning in January 2018 through December 2019. As of March 31, 2018, $1.5 billion30, 2019, $960 million remains available under the authorization.
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 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.plans, net of related tax effects.
Accumulated other comprehensive income (loss), net of tax, as of March 31, 201830, 2019 and December 30, 201729, 2018 consisted of the following:
| | | (millions) | March 31,
2018 | December 30, 2017 | March 30,
2019 | December 29,
2018 |
| Foreign currency translation adjustments | $ | (1,377 | ) | $ | (1,426 | ) | $ | (1,427 | ) | $ | (1,467 | ) |
| Cash flow hedges — unrealized net gain (loss) | (59 | ) | (61 | ) | (66 | ) | (53 | ) |
| Postretirement and postemployment benefits: | | |
| Net experience loss | 33 |
| 34 |
| |
| Prior service cost | (4 | ) | (4 | ) | |
| Net experience gain (loss) | | 21 |
| 23 |
|
| Prior service credit (cost) | | 3 |
| (3 | ) |
| Available-for-sale securities unrealized net gain (loss) | | 2 |
| — |
|
| Total accumulated other comprehensive income (loss) | $ | (1,407 | ) | $ | (1,457 | ) | $ | (1,467 | ) | $ | (1,500 | ) |
Note 6 Leases
The Company leases certain warehouses, equipment, vehicles, and office space primarily through operating lease agreements. Finance lease obligations and activity are not material to the Consolidated Financial Statements. Lease obligations are primarily for real estate assets, with the remainder related to manufacturing and distribution related equipment, vehicles, information technology equipment, and rail cars. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
A portion of the Company's real estate leases include future variable rental payments that include inflationary adjustment factors. The future variability of these adjustments is unknown and therefore not included in the minimum lease payments. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The leases have remaining terms which range from less than 1 year to 10 years and the majority of leases provide the Company with the option to exercise one or more renewal terms. The length of the lease term used in recording
lease assets and lease liabilities is based on the contractually required lease term adjusted for any options to renew or early terminate the lease that are reasonably certain of being executed.
The Company combines lease and non-lease components together in determining the minimum lease payments for the majority of leases. The Company has elected to not combine lease and non-lease components for certain asset types in service-related agreements that include significant production related costs. The Company has closely analyzed these agreements to ensure any embedded costs related to the securing of the leased asset is properly segregated and accounted for in measuring the lease assets and liabilities.
The majority of the leases do not include a stated interest rate, and therefore the Company's periodic incremental borrowing rate is used to determine the present value of lease payments. This rate is calculated based on a collateralized rate for the specific currencies used in leasing activities and the borrowing ability of the applicable Company legal entity. For the initial implementation of the lease standard, the incremental borrowing rate at December 29, 2018 was used to present value operating lease assets and liabilities.
The Company recorded operating lease costs of $32 million for the quarter ended March 30, 2019. Lease related costs associated with variable rent, short-term leases, and sale-leaseback arrangements, as well as sublease income, are each immaterial.
|
| | | | |
| (millions) | | Quarter ended March 30, 2019 |
| Other information | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows from operating leases | | $ | 31 |
|
| Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 12 |
|
| Weighted-average remaining lease term - operating leases | | 6 years |
| Weighted-average discount rate - operating leases | | 3.1% |
At March 30, 2019 future maturities of operating leases were as follows:
|
| | | | |
| (millions) | | Operating leases |
| 2019 (nine months remaining) | | 93 |
|
| 2020 | | 94 |
|
| 2021 | | 71 |
|
| 2022 | | 57 |
|
| 2023 | | 47 |
|
| 2024 and beyond | | 125 |
|
| Total minimum payments | | $ | 487 |
|
| Less interest | | (40 | ) |
| Present value of lease liabilities | | $ | 447 |
|
Operating lease payments presented in the table above exclude $144 million of minimum lease payments for real-estate leases signed but not yet commenced. The leases are expected to commence in 2019 and 2020.
As previously disclosed in our 2018 Annual Report on Form 10-K and under previous lease standard (Topic 840), at December 29, 2018, future minimum annual lease commitments under non-cancelable operating leases were as follows:
|
| | | | |
| (millions) | | Operating leases |
| 2019 | | 121 |
|
| 2020 | | 97 |
|
| 2021 | | 73 |
|
| 2022 | | 57 |
|
| 2023 | | 48 |
|
| 2024 and beyond | | 129 |
|
| Total minimum payments | | $ | 525 |
|
Rent expense on operating leases for the year ended December 29, 2018 was $133 million.
Note 7 Debt
The following table presents the components of notes payable at March 31, 201830, 2019 and December 30, 2017:29, 2018:
|
| | | | | | | | | | | |
| | March 31, 2018 | | December 30, 2017 |
| (millions) | Principal amount | Effective interest rate (a) | | Principal amount | Effective interest rate (a) |
| U.S. commercial paper | $ | 191 |
| 2.15 | % | | $ | 196 |
| 1.76 | % |
| Europe commercial paper | 197 |
| (0.31 | )% | | 96 |
| (0.32 | )% |
| Bank borrowings | 81 |
| | | 78 |
| |
| Total | $ | 469 |
| | | $ | 370 |
| |
(a) Negative effective interest rates on certain borrowings in Europe are the result of efforts by the European Central Bank to stimulate the economy in the eurozone. |
| | | | | | | | | | | |
| | March 30, 2019 | | December 29, 2018 |
| (millions) | Principal amount | Effective interest rate | | Principal amount | Effective interest rate (a) |
| U.S. commercial paper | $ | 409 |
| 2.68 | % | | $ | 15 |
| 2.75 | % |
| Bank borrowings | 196 |
| | | 161 |
| |
| Total | $ | 605 |
| | | $ | 176 |
| |
The Company has entered into interest rate swaps with notional amounts totaling $1.4 billion, which effectively converts a portion of the associated U.S. Dollar Notes and Euro Notes from fixed rate to floating rate obligations. These derivative instruments are designated as fair value hedges. The effective interest rates on debt obligations resulting from the Company’s interest rate swaps as of March 31, 2018 were as follows: (a) seven-year 3.25% U.S. Dollar Notes due 2018 – 2.57%; (b) ten-year 4.15% U.S. Dollar Notes due 2019 – 3.51%; (c) ten-year 4.00% U.S. Dollar Notes due 2020 – 3.39%; (d) ten-year 3.125% U.S. Dollar Notes due 2022 – 3.97%; (e) ten-year 2.75% U.S. Dollar Notes due 2023 – 4.09%; (f) seven-year 2.65% U.S. Dollar Notes due 2023 – 3.47%; (g) eight-year
1.00% Euro Notes due 2024 – 0.75%; (h) ten-year 1.25% Euro Notes due 2025 - 1.28% and (i) ten-year 3.25% U.S. Notes due 2026 – 3.82%.
Note 8 Stock compensation
The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units, and to a lesser extent, executive performance shares and restricted stock grants. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s 20172018 Annual Report on Form 10-K.
The Company classifies pre-tax stock compensation expense in COGS and SG&A expense principally within its Corporate segment. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized was as follows:
|
| | | | | | |
| | Quarter ended |
| (millions) | March 31, 2018 | April 1, 2017 |
| Pre-tax compensation expense | $ | 17 |
| $ | 18 |
|
| Related income tax benefit | $ | 4 |
| $ | 6 |
|
As of March 31, 2018, total stock-based compensation cost related to non-vested awards not yet recognized was $130 million and the weighted-average period over which this amount is expected to be recognized was 2 years.
Stock options |
| | | | | | |
| | Quarter ended |
| (millions) | March 30, 2019 | March 31, 2018 |
| Pre-tax compensation expense | $ | 13 |
| $ | 17 |
|
| Related income tax benefit | $ | 4 |
| $ | 4 |
|
During the quartersquarter ended March 31, 2018 and April 1, 2017,30, 2019, the Company granted approximately 0.9 million restricted stock units at a weighted average cost of $56 per share and 2.8 million non-qualified stock options to eligible employees as presented in the following activity tables.at a weighted average cost of $7 per share. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described within the stock compensation footnote in the Company’s 20172018 Annual Report on Form 10-K.
Quarter ended March 31, 2018:
|
| | | | | | | | | | |
| | 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 | 14 |
| $ | 64 |
| | |
| | Granted | 3 |
| 70 |
| | |
| | Exercised | (1 | ) | 57 |
| | |
| | Forfeitures and expirations | — |
| — |
| | |
| | Outstanding, end of period | 16 |
| $ | 65 |
| 6.9 | $ | 52 |
|
| | Exercisable, end of period | 11 |
| $ | 63 |
| 5.9 | $ | 52 |
|
Quarter ended April 1, 2017:
|
| | | | | | | | | | |
| | 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 | 15 |
| $ | 62 |
| | |
| | Granted | 2 |
| 73 |
| | |
| | Exercised | (1 | ) | 56 |
| | |
| | Forfeitures and expirations | — |
| — |
| | |
| | Outstanding, end of period | 16 |
| $ | 64 |
| 7.2 | $ | 147 |
|
| | Exercisable, end of period | 11 |
| $ | 60 |
| 6.3 | $ | 140 |
|
The weighted-average grant date fair value of options granted was $10.00 per share and $10.14 per share for the quarters ended March 31, 2018 and April 1, 2017, respectively. 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 quarter ended March 31, 2018: | 18 | % | 6.6 | 2.82 | % | 3.00 | % |
| Grants within the quarter ended April 1, 2017: | 18 | % | 6.6 | 2.26 | % | 2.80 | % |
The total intrinsic value of options exercised was $10 million and $12 million for the quarters ended March 31, 2018 and April 1, 2017, respectively.
Performance shares
In the first quarter of 2018,2019, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include adjustedorganic net sales growth and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies.
A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of adjustedorganic net sales growth achievement. Compensation cost related to adjustedorganic net sales growth performance is revised for changes in the expected outcome. The 20182019 target grant currently corresponds to approximately 188,000256,000 shares, with a grant-date fair value of $72$59 per share.
Based on the market price of the Company’s common stock at March 31, 2018, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:
|
| | | |
| (millions) | March 31, 2018 |
| 2016 Award | $ | 17 |
|
| 2017 Award | $ | 15 |
|
| 2018 Award | $ | 24 |
|
The 20152016 performance share award, payable in stock, was settled at 75%85% of target in February 20182019 for a total dollar equivalent of $8$6 million.
Other stock-based awards
During the quarter ended March 31, 2018, the Company granted restricted stock units and a nominal number of restricted stock awards to eligible employees as presented in the following table. Terms of these grants and the Company’s method of determining grant-date fair value were consistent with that described within the stock compensation footnote in the Company’s 2017 Annual Report on Form 10-K.
Quarter ended March 31, 2018:
|
| | | | | |
| Employee restricted stock units | Shares (thousands) | Weighted-average grant-date fair value |
| Non-vested, beginning of year | 1,673 |
| $ | 65 |
|
| Granted | 635 |
| 64 |
|
| Vested | (399 | ) | 59 |
|
| Forfeited | (44 | ) | 67 |
|
| Non-vested, end of period | 1,865 |
| $ | 66 |
|
Quarter ended April 1, 2017: |
| | | | | |
| Employee restricted stock and restricted stock units | Shares (thousands) | Weighted-average grant-date fair value |
| Non-vested, beginning of year | 1,166 |
| $ | 63 |
|
| Granted | 629 |
| 67 |
|
| Vested | (25 | ) | 55 |
|
| Forfeited | (22 | ) | 64 |
|
| Non-vested, end of period | 1,748 |
| $ | 65 |
|
Note 9 Employee benefits
The Company sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described within the footnotes to the Consolidated Financial Statements included in the Company’s 20172018 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.
| | | | Quarter ended | Quarter ended |
| (millions) | March 31, 2018 | April 1, 2017 | March 30, 2019 | March 31, 2018 |
| Service cost | $ | 22 |
| $ | 25 |
| $ | 9 |
| $ | 22 |
|
| Interest cost | 42 |
| 41 |
| 45 |
| 42 |
|
| Expected return on plan assets | (92 | ) | (90 | ) | (85 | ) | (92 | ) |
| Amortization of unrecognized prior service cost | 2 |
| 2 |
| 2 |
| 2 |
|
| Recognized net (gain) loss | (9 | ) | 3 |
| 1 |
| (9 | ) |
| Net periodic benefit cost | (35 | ) | (19 | ) | |
| Curtailment (gain) loss | — |
| 1 |
| |
| Total pension (income) expense | $ | (35 | ) | $ | (18 | ) | $ | (28 | ) | $ | (35 | ) |
Other nonpension postretirement | | | | Quarter ended | Quarter ended |
| (millions) | March 31, 2018 | April 1, 2017 | March 30, 2019 | March 31, 2018 |
| Service cost | $ | 5 |
| $ | 5 |
| $ | 3 |
| $ | 5 |
|
| Interest cost | 9 |
| 9 |
| 10 |
| 9 |
|
| Expected return on plan assets | (24 | ) | (24 | ) | (21 | ) | (24 | ) |
| Amortization of unrecognized prior service (gain) | (2 | ) | (2 | ) | (2 | ) | (2 | ) |
| Recognized net (gain) loss | — |
| (29 | ) | |
| Net periodic benefit cost | (12 | ) | (41 | ) | |
| Curtailment loss | — |
| 3 |
| |
| Total postretirement benefit (income) expense | $ | (12 | ) | $ | (38 | ) | $ | (10 | ) | $ | (12 | ) |
| | | | Quarter ended | Quarter ended |
| (millions) | March 31, 2018 | April 1, 2017 | March 30, 2019 | March 31, 2018 |
| Service cost | $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 1 |
|
| Interest cost | — |
| 1 |
| — |
| — |
|
| Recognized net (gain) loss | (1 | ) | 1 |
| (1 | ) | (1 | ) |
| Total postemployment benefit expense | $ | — |
| $ | 3 |
| $ | — |
| $ | — |
|
During
For the quarter ended March 31, 2018,30, 2019, the Company recognized a gainloss of $9$1 million related to the remeasurement of a U.S. pension plan as current year distributions are expected to exceed service and interest costs resulting in settlement accounting for that particular plan. The amount of the remeasurement gainloss recognized during the quarter was due primarily to a favorablean unfavorable change in the discount rate relative to prior year end.
During the quarter ended April 1, 2017, the Company recognized curtailment losses of $1 million and $3 million within pension and nonpension postretirement plan, respectively, in conjunction with Project K restructuring activity. In addition, the Company remeasured the benefit obligation for impacted pension and nonpension postretirement plans. The remeasurement resulted in a mark-to-market loss of $3 million on a pension plan due primarily to a lower discount rate and a $29 million gain on a nonpension postretirement plan primarily due to plan asset investment returns slightly mitigated by the impact of a lower discount rate.
Company contributions to employee benefit plans are summarized as follows:
| | | (millions) | Pension | Nonpension postretirement | Total | Pension | Nonpension postretirement | Total |
| Quarter ended: | | |
| March 30, 2019 | | $ | 1 |
| $ | 4 |
| $ | 5 |
|
| March 31, 2018 | $ | 15 |
| $ | 4 |
| $ | 19 |
| $ | 15 |
| $ | 4 |
| $ | 19 |
|
| April 1, 2017 | $ | 21 |
| $ | 3 |
| $ | 24 |
| |
| Full year: | | |
| Fiscal year 2018 (projected) | $ | 24 |
| $ | 13 |
| $ | 37 |
| |
| Fiscal year 2017 (actual) | $ | 31 |
| $ | 13 |
| $ | 44 |
| |
| Fiscal year 2019 (projected) | | $ | 7 |
| $ | 18 |
| $ | 25 |
|
| Fiscal year 2018 (actual) | | $ | 270 |
| $ | 17 |
| $ | 287 |
|
ActualPrior year contributions included $250 million of pre-tax discretionary contributions to U.S. plans in the second quarter of 2018 contributions coulddesignated for the 2017 tax year. Plan funding strategies may be different from current projections, as influenced by potential discretionary fundingmodified in response to management's evaluation of our benefit trusts versus othertax deductibility, market conditions, and competing investment priorities.
Additionally, during the first quarter of 2017, the Company recognized expense totaling $26 million related to the exit of several multi-employer plans associated with Project K restructuring activity. This amount represents management's best estimate, actual results could differ. The cash obligation is payable over a maximum 20-year period; management has not determined the actual period over which the payments will be made.alternatives.
Note 10 Income taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code including but not limited to, reducing the corporate tax rate from 35% to 21%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may be electively paid over eight years, and accelerating first year expensing of certain capital expenditures.
The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company may complete the accounting for the impacts of the Tax Act under ASC Topic 740. Per SAB 118, the Company must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, the Company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. If a Company cannot determine a provisional estimate to be included in the financial statements, the Company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a Company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined.
The transition tax is on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. In order to determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. The Company's estimate was unchanged during the first quarter of 2018. The Company is awaiting further interpretative guidance, continuing to assess available tax methods and elections, and continuing to gather additional information in order to finalize calculations and complete the accounting for the transition tax liability.
In addition to the transition tax, the Tax Act introduced a territorial tax system, which was effective beginning in 2018. The territorial tax system will impact the Company’s overall global capital and legal entity structure, working capital, and repatriation plan on a go-forward basis. In light of the territorial tax system, and other new international provisions within the Tax Act effective beginning in 2018, the Company is currently analyzing its global capital and legal entity structure, working capital requirements, and repatriation plans. Based on the Company's analysis of the territorial tax system and other new international tax provisions as of March 31, 2018, the Company continues to support the assertion to indefinitely reinvest $2.6 billion of accumulated foreign earnings and profits in Europe and other non-U.S. jurisdictions. As a result, as a reasonable provisional estimate, the Company did not record any new deferred tax liabilities associated with the territorial tax system or any changes to the indefinite reinvestment
assertion. Further, it is impracticable for the Company to estimate any future tax costs for any unrecognized deferred tax liabilities associated with its indefinite reinvestment assertion as of March 31, 2018, because the actual tax liability, if any, would be dependent on complex analysis and calculations considering various tax laws, exchange rates, circumstances existing when a repatriation, sale, or liquidation occurs, or other factors. If there are any changes to our indefinite reinvestment assertion as a result of finalizing our assessment of the new Tax Act, the Company will adjust its provisional estimates, record, and disclose any tax impacts in the appropriate period, pursuant to SAB 118.
The consolidated effective tax rate for the quarter ended March 31, 201830, 2019 was 13%20% as compared to 14%13% in the same quarter of the prior year. The effective tax rate for the first quarter ended March 31,of 2018 benefited from a $44 million discrete tax benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring as well as the reduction in the U.S. corporate tax rate effective at the beginning of 2018. These impacts were mitigated somewhat by an increased weighting of taxable income in higher tax rate jurisdictions versus the prior year. The effective tax rate for the quarter ended April 1, 2017 benefited from a deferred tax benefit of $38 million resulting from intercompany transfers of intellectual property.restructuring.
As of March 31, 2018,30, 2019, the Company classified $10 million of unrecognized tax benefits as a net current liability. 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 approximately $6$2 million of projected additions related primarily to ongoing intercompany transfer pricing activity. 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 theThe Company’s total gross unrecognized tax benefits for the quarter endedas of March 31, 2018; $5030, 2019 was $97 million, ofunchanged from year-end. Of this totalbalance, $87 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
|
| | | |
| (millions) |
| December 30, 2017 | $ | 60 |
|
| Tax positions related to current year: | |
| Additions | 2 |
|
| Reductions | — |
|
| Tax positions related to prior years: | |
| Additions | 1 |
|
| Reductions | — |
|
| Settlements | — |
|
| Lapse in statute of limitations | — |
|
| March 31, 2018 | $ | 63 |
|
The accrual balance for tax-related interest was approximately $24$22 million at March 31, 2018.30, 2019.
Note 11 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 and nonderivative financial instruments 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.
The Company designates derivatives and nonderivative hedging instruments as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. 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 as of March 31, 201830, 2019 and December 30, 201729, 2018 were as follows:
| | | (millions) | March 31,
2018 | December 30,
2017 | March 30,
2019 | December 29,
2018 |
| Foreign currency exchange contracts | $ | 1,277 |
| $ | 2,172 |
| $ | 2,371 |
| $ | 1,863 |
|
| Cross-currency contracts | 736 |
| — |
| 1,372 |
| 1,197 |
|
| Interest rate contracts | 1,710 |
| 2,250 |
| 1,646 |
| 1,608 |
|
| Commodity contracts | 550 |
| 544 |
| 535 |
| 417 |
|
| Total | $ | 4,273 |
| $ | 4,966 |
| $ | 5,924 |
| $ | 5,085 |
|
Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at March 31, 201830, 2019 and December 30, 2017,29, 2018, 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, cross-currency 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. Over-the-counter 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. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. 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 March 31, 201830, 2019 or December 30, 2017.29, 2018.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of March 31, 201830, 2019 and December 30, 2017:29, 2018:
Derivatives designated as hedging instruments
| | | | March 31, 2018 | | December 30, 2017 | March 30, 2019 | | December 29, 2018 |
| (millions) | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total |
| Assets: | | | | |
| Cross-currency contracts: | | | | |
| Other assets | | $ | — |
| $ | 71 |
| $ | 71 |
| | $ | — |
| $ | 79 |
| $ | 79 |
|
| Interest rate contracts: | | |
| | |
|
| Other assets (a) | | — |
| 35 |
| 35 |
| | — |
| 17 |
| 17 |
|
| Total assets | | $ | — |
| $ | 106 |
| $ | 106 |
|
| $ | — |
| $ | 96 |
| $ | 96 |
|
| Liabilities: | |
| | |
| |
| | |
|
| Cross-currency contracts: | | | | |
| Other Liabilities | | $ | (8 | ) | $ | (8 | ) | | | |
| Interest rate contracts: | |
| | |
| |
| | |
|
| Other liabilities (a) | — |
| (32 | ) | (32 | ) | | — |
| (54 | ) | (54 | ) | — |
| (15 | ) | (15 | ) | | — |
| (22 | ) | (22 | ) |
| Total liabilities | $ | — |
| $ | (40 | ) | $ | (40 | ) |
| $ | — |
| $ | (54 | ) | $ | (54 | ) | $ | — |
| $ | (15 | ) | $ | (15 | ) |
| $ | — |
| $ | (22 | ) | $ | (22 | ) |
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.4$1.7 billion and $2.3$1.6 billion as of March 31, 201830, 2019 and December 30, 2017,29, 2018, respectively.
Derivatives not designated as hedging instruments
| | | | March 31, 2018 | | December 30, 2017 | March 30, 2019 | | December 29, 2018 |
| (millions) | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total |
| Assets: | | | | | | |
| Foreign currency exchange contracts: | | | | | | |
| Other prepaid assets | $ | — |
| $ | 9 |
| $ | 9 |
| | $ | — |
| $ | 10 |
| $ | 10 |
| |
| Other current assets | | $ | — |
| $ | 11 |
| $ | 11 |
| | $ | — |
| $ | 3 |
| $ | 3 |
|
| Commodity contracts: | | | | | | |
| Other prepaid assets | 5 |
| — |
| 5 |
| | 6 |
| — |
| 6 |
| |
| Other current assets | | 3 |
| — |
| 3 |
| | 3 |
| — |
| 3 |
|
| Total assets | $ | 5 |
| $ | 9 |
| $ | 14 |
|
| $ | 6 |
| $ | 10 |
| $ | 16 |
| $ | 3 |
| $ | 11 |
| $ | 14 |
|
| $ | 3 |
| $ | 3 |
| $ | 6 |
|
| Liabilities: | | | | | | |
| Foreign currency exchange contracts: | | | | | | |
| Other current liabilities | $ | — |
| $ | (6 | ) | $ | (6 | ) | | $ | — |
| $ | (14 | ) | $ | (14 | ) | $ | — |
| $ | (17 | ) | $ | (17 | ) | | $ | — |
| $ | (4 | ) | $ | (4 | ) |
| Commodity contracts: | | | | | | |
| Other current liabilities | (7 | ) | — |
| (7 | ) | | $ | (7 | ) | $ | — |
| $ | (7 | ) | (13 | ) | — |
| (13 | ) | | (9 | ) | — |
| (9 | ) |
| Total liabilities | $ | (7 | ) | $ | (6 | ) | $ | (13 | ) |
| $ | (7 | ) | $ | (14 | ) | $ | (21 | ) | $ | (13 | ) | $ | (17 | ) | $ | (30 | ) |
| $ | (9 | ) | $ | (4 | ) | $ | (13 | ) |
The Company has designated its outstanding foreign currency denominated long-term debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries’ foreign currency denominated net assets. The carrying value of this debt was approximately $2.8 billion and $2.7$2.6 billion as of March 31, 201830, 2019 and December 30, 2017, respectively.
29, 2018.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of March 31, 201830, 2019 and December 30, 2017.29, 2018.
| | | (millions) | | Line Item in the Consolidated Balance Sheet in which the hedged item is included | | Carrying amount of the hedged liabilities | | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a) | | Line Item in the Consolidated Balance Sheet in which the hedged item is included | | Carrying amount of the hedged liabilities | | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a) |
| | | March 31,
2018 | December 30,
2017 | | March 31,
2018 | December 30,
2017 | | March 30,
2019 | December 29,
2018 | | March 30,
2019 | December 29,
2018 |
| Interest rate contracts | | Current maturities of long-term debt | | $ | 401 |
| $ | 402 |
| | $ | 1 |
| $ | 2 |
| | Current maturities of long-term debt | | $ | 502 |
| $ | 503 |
| | $ | 2 |
| $ | 3 |
|
| Interest rate contracts | | Long-term debt | | $ | 3,406 |
| $ | 3,481 |
| | $ | (53 | ) | $ | (22 | ) | | Long-term debt | | $ | 3,354 |
| $ | 3,354 |
| | $ | 7 |
| $ | (18 | ) |
(a) The current maturities of hedged long-term debt includes $1$2 million and $2$3 million of hedging adjustment on discontinued hedging relationships as of March 31, 201830, 2019 and December 30, 2017,29, 2018, respectively. The hedged long-term debt includes $(20)$(11) million and $32(12) million of hedging adjustment on discontinued hedging relationships as of March 31, 201830, 2019 and December 30, 2017,29, 2018, respectively.
The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of March 31, 201830, 2019 and December 30, 201729, 2018 would be adjusted as detailed in the following table:
| | As of March 31, 2018: | | | | |
| As of March 30, 2019: | | | | |
| | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | |
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount | Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount |
| Total asset derivatives | $ | 14 |
| $ | (12 | ) | $ | — |
| $ | 2 |
| $ | 120 |
| $ | (32 | ) | $ | — |
| $ | 88 |
|
| Total liability derivatives | $ | (53 | ) | $ | 12 |
| $ | 30 |
| $ | (11 | ) | $ | (45 | ) | $ | 32 |
| $ | 2 |
| $ | (11 | ) |
| | As of December 30, 2017: | | |
As of December 29, 2018: | | |
| | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | |
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount | Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount |
| Total asset derivatives | $ | 16 |
| $ | (15 | ) | $ | — |
| $ | 1 |
| $ | 102 |
| $ | (27 | ) | $ | (2 | ) | $ | 73 |
|
| Total liability derivatives | $ | (75 | ) | $ | 15 |
| $ | 37 |
| $ | (23 | ) | $ | (35 | ) | $ | 27 |
| $ | — |
| $ | (8 | ) |
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended March 30, 2019 and March 31, 2018 and April 1, 2017 was as follows:
Derivatives and non-derivatives in net investment hedging relationships
| | | (millions) | Gain (loss) recognized in AOCI | | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component | Gain (loss) recognized in AOCI | | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component |
| | March 31,
2018 | | April 1,
2017 | | March 31,
2018 | | April 1,
2017 | | March 30,
2019 | | March 31,
2018 | | March 30,
2019 | | March 31,
2018 | |
| Foreign currency denominated long-term debt | $ | (73 | ) | | $ | (25 | ) | | $ | — |
| | $ | — |
| | $ | 51 |
| | $ | (73 | ) | | $ | — |
| | $ | — |
| |
| Cross-currency contracts | (8 | ) | | — |
| | 3 |
| | — |
| Other income (expense), net | (8 | ) | | (8 | ) | | 8 |
| | 3 |
| Interest expense |
| Total | $ | (81 | ) | | $ | (25 | ) | | $ | 3 |
| | $ | — |
| | $ | 43 |
| | $ | (81 | ) | | $ | 8 |
| | $ | 3 |
| |
Derivatives not designated as hedging instruments
| | | (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 |
| | | March 31,
2018 | | April 1,
2017 | | March 30,
2019 | | March 31,
2018 |
| Foreign currency exchange contracts | COGS | $ | 3 |
| | $ | (9 | ) | COGS | $ | (11 | ) | | $ | 3 |
|
| Foreign currency exchange contracts | Other income (expense), net | (4 | ) | | (5 | ) | Other income (expense), net | (1 | ) | | (4 | ) |
| Foreign currency exchange contracts | SG&A | 1 |
| | — |
| SG&A | — |
| | 1 |
|
| Commodity contracts | COGS | 5 |
| | (13 | ) | COGS | (32 | ) | | 5 |
|
| Commodity contracts | SG&A | — |
| | 1 |
| |
| Total | | $ | 5 |
|
| $ | (26 | ) | | $ | (44 | ) |
| $ | 5 |
|
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended March 30, 2019 and March 31, 2018 and April 1, 2017:2018:
| | | | | March 31, 2018 | | April 1, 2017 | | March 30, 2019 | | March 31, 2018 |
| (millions) | (millions) | | Interest Expense | | COGS | Interest Expense | (millions) | | Interest Expense | | Interest Expense |
| Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded | Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded | | $ | 69 |
| | $ | 2,088 |
| $ | 61 |
| Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded | | $ | 74 |
| | $ | 69 |
|
| | Gain (loss) on fair value hedging relationships: | | | | | Gain (loss) on fair value hedging relationships: | | | | |
| | Interest contracts: | | | | | Interest contracts: | | | | |
| | Hedged items | | 32 |
| | — |
| 9 |
| Hedged items | | (24 | ) | | 32 |
|
| | Derivatives designated as hedging instruments | | (28 | ) | | — |
| (4 | ) | Derivatives designated as hedging instruments | | 24 |
| | (28 | ) |
| | | | | | | | | |
| | Gain (loss) on cash flow hedging relationships: | | | | | Gain (loss) on cash flow hedging relationships: | | | | |
| | Interest contracts: | | | | | Interest contracts: | | | | |
| | Amount of gain (loss) reclassified from AOCI into income | | (2 | ) | | — |
| (2 | ) | Amount of gain (loss) reclassified from AOCI into income | | (1 | ) | | (2 | ) |
| | Foreign exchange contracts: | | | | | |
| | Amount of gain (loss) reclassified from AOCI into income | | — |
| | 1 |
| — |
| |
During the next 12 months, the Company expects $7$10 million of net deferred losses reported in AOCI at March 31, 201830, 2019 to be reclassified to income, assuming market rates remain constant through contract maturities.
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 is at or 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 March 31, 201830, 2019 was $39$3 million. If the credit-risk-related contingent features were triggered as of March 31, 2018,30, 2019, the Company would be required to post additional collateral of $23$3 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 as of March 31, 201830, 2019 triggered by credit-risk-related contingent features.
Other fair value measurements
The following is a summary of the carrying and market values of the Company's available for sale securities:
|
| | | | | | | | | | | | | | | | | | | |
| | March 30, 2019 | | December 29, 2018 |
| | | Unrealized | | | | Unrealized | |
| (millions) | Cost | Gain (Loss) | Market Value | | Cost | Gain (Loss) | Market Value |
| Corporate bonds | $ | 59 |
| $ | 2 |
| $ | 61 |
| | $ | 59 |
| $ | — |
| $ | 59 |
|
The market values of the Company's investments in level 2 corporate bonds are based on matrices or models from pricing vendors. Unrealized gains and losses are included in the Consolidated Statement of Comprehensive Income.
The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis. The Company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments.
The investments are recorded within Other current assets and Other assets on the Consolidated Balance Sheet, based on the maturity of the individual security. The maturity dates of the securities range from 2020 to 2029.
Financial instruments
The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $8.1$8.4 billion and $7.9$8.2 billion, respectively, as of March 31,30, 2019. The fair value and carrying value of the Company's long-term debt were both $8.2 billion as of December 29, 2018.
Counterparty credit risk concentration and collateral requirements
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 and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.
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. As of March 31, 2018,30, 2019, the Company was not in a significantmaterial net asset position with any counterparties with which a master netting agreement would apply.
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 its counterparties exceeds a certain amount. In addition, the Company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the
counterparty that are subject to enforceable netting agreements. As of March 31, 2018,30, 2019, the Company posted $16 millionhad no collateral posting requirements related to reciprocal collateralization agreements.agreements and collected approximately $20 million of collateral related to reciprocal collaterization agreements which is reflected as an increase in other liabilities. As of March 31, 201830, 2019 the Company posted $14$30 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.
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 21%20% of consolidated trade receivables at March 31, 2018.30, 2019.
Note 12 Reportable segments
Kellogg Company is the world’s leading producer of cereal, second largest producer of cookies and crackers, and a leading producer of savory snacks and frozen foods. Additional product offerings include toaster pastries, cereal bars, fruit-flavored snacks, veggie foods and veggie foods.noodles. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States, United Kingdom, and United Kingdom.Nigeria.
On December 30, 2018 the Company reorganized its North American business. The reorganization eliminated the legacy business unit structure and internal reporting. In addition, the Company changed the internal reporting provided to the chief operating decision maker (CODM) and segment manager. As a result, the Company reevaluated its operating segments. In conjunction with the reorganization, certain global research and development resources and related costs were transferred from the North America business to Corporate. Prior period segment results were not restated for the transfer as the impacts were not considered material.
In addition, the Company transferred its Middle East, North Africa, and Turkey businesses from Kellogg Europe to Kellogg AMEA, effective December 30, 2018. This consolidated the Company's Africa business under a single regional management team. All comparable prior periods have been restated to reflect the change. For the quarter ended March 31, 2018, the change resulted in $67 million of reported net sales and $14 million of reported operating profit transferring from Kellogg Europe to Kellogg AMEA.
The Company manages its operations through tenfour operating segments that are based on product category or geographic location. These operating segments are evaluated for similarity with regards to economic characteristics, products, production processes, types or classes of customers, distribution methods and regulatory environments to determine if they can be aggregated into reportable segments. The reportable segments are discussed in greater detail below.
The U.S. Snacks operating segment includes cookies, crackers, cereal bars, savory snacks and fruit-flavored snacks.
U.S. Morning Foods includes primarily cereal and toaster pastries.
U.S. Specialty primarily represents food away from home channels, including food service, convenience, vending, Girl Scouts and food manufacturing. The food service business is mostly non-commercial, serving institutions such as schools and hospitals. The convenience business includes traditional convenience stores as well as alternate retail outlets.
North America Other includes the U.S. Frozen, Kashi, Canada, and RXBAR operating segments. As these operating segments are not considered economically similar enough to aggregate with other operating segments and are immaterial for separate disclosure, they have been grouped together as a single reportable segment.
The three remaining reportable segments are based on geographic location – North America which includes U.S. businesses and Canada; Europe which consists principally of European countries; Latin America which consists of Central and South America and includes Mexico; and AMEA
(Asia PacificMiddle East Africa) which consists of Sub-Saharan Africa, Middle East, Australia and other Asian and Pacific markets. These operating segments also represent our reportable segments.
The measurement of reportable segment results is based on segment operating profit which is generally consistent with the presentation of operating profit in the Consolidated Statement of Income. Intercompany transactions between operating segmentsReportable segment results were insignificant in all periods presented. Certain immaterial reclassifications have been made to the prior year amounts to conform with current year presentation.
as follows:
| | | | Quarter ended | Quarter ended |
| (millions) | March 31,
2018 | April 1,
2017 | March 30,
2019 | March 31,
2018 |
| Net sales | | |
| U.S. Snacks | $ | 762 |
| $ | 795 |
| |
| U.S. Morning Foods | 691 |
| 708 |
| |
| U.S. Specialty | 398 |
| 393 |
| |
| North America Other | 479 |
| 392 |
| |
| North America | | $ | 2,289 |
| $ | 2,330 |
|
| Europe | 587 |
| 513 |
| 497 |
| 520 |
|
| Latin America | 232 |
| 220 |
| 225 |
| 232 |
|
| Asia Pacific | 252 |
| 227 |
| |
| AMEA | | 511 |
| 319 |
|
| Consolidated | $ | 3,401 |
| $ | 3,248 |
| $ | 3,522 |
| $ | 3,401 |
|
| Operating profit | | |
| U.S. Snacks | $ | 102 |
| $ | (36 | ) | |
| U.S. Morning Foods | 150 |
| 157 |
| |
| U.S. Specialty | 80 |
| 96 |
| |
| North America Other | 67 |
| 49 |
| |
| North America | | $ | 380 |
| $ | 399 |
|
| Europe | 74 |
| 66 |
| 60 |
| 60 |
|
| Latin America | 22 |
| 33 |
| 21 |
| 22 |
|
| Asia Pacific | 27 |
| 22 |
| |
| AMEA | | 47 |
| 41 |
|
| Total Reportable Segments | 522 |
| 387 |
| 508 |
| 522 |
|
| Corporate | (12 | ) | (107 | ) | (127 | ) | (12 | ) |
| Consolidated | $ | 510 |
| $ | 280 |
| $ | 381 |
| $ | 510 |
|
Supplemental product information is provided below for net sales to external customers:
| | | | | Quarter ended | | Quarter ended |
| (millions) | | March 31,
2018 | | April 1,
2017 | | March 30,
2019 | March 31,
2018 |
| Snacks | | $ | 1,775 |
| | $ | 1,717 |
| | $ | 1,780 |
| $ | 1,775 |
|
| Cereal | | 1,351 |
| | 1,298 |
| | 1,275 |
| 1,351 |
|
| Frozen | | 275 |
| | 233 |
| | 271 |
| 275 |
|
| Noodles and other | | | 196 |
| — |
|
| Consolidated | | $ | 3,401 |
| | $ | 3,248 |
| | $ | 3,522 |
| $ | 3,401 |
|
Note 13 Supplemental Financial Statement Data
| | | Consolidated Balance Sheet | | |
| (millions) | March 31, 2018 (unaudited) | December 30, 2017 | March 30, 2019 (unaudited) | December 29, 2018 |
| Trade receivables | $ | 1,459 |
| $ | 1,250 |
| $ | 1,394 |
| $ | 1,163 |
|
| Allowance for doubtful accounts | (11 | ) | (10 | ) | (10 | ) | (10 | ) |
| Refundable income taxes | 26 |
| 23 |
| 22 |
| 28 |
|
| Other receivables | 127 |
| 126 |
| 227 |
| 194 |
|
| Accounts receivable, net | $ | 1,601 |
| $ | 1,389 |
| $ | 1,633 |
| $ | 1,375 |
|
| Raw materials and supplies | $ | 335 |
| $ | 333 |
| $ | 356 |
| $ | 339 |
|
| Finished goods and materials in process | 879 |
| 884 |
| 963 |
| 991 |
|
| Inventories | $ | 1,214 |
| $ | 1,217 |
| $ | 1,319 |
| $ | 1,330 |
|
| Property | $ | 9,471 |
| $ | 9,366 |
| $ | 9,279 |
| $ | 9,173 |
|
| Accumulated depreciation | (5,758 | ) | (5,650 | ) | (5,546 | ) | (5,442 | ) |
| Property, net | $ | 3,713 |
| $ | 3,716 |
| $ | 3,733 |
| $ | 3,731 |
|
| Pension | $ | 290 |
| $ | 252 |
| $ | 251 |
| $ | 228 |
|
| Deferred income taxes | 254 |
| 246 |
| 245 |
| 246 |
|
| Other | 536 |
| 529 |
| 612 |
| 594 |
|
| Other assets | $ | 1,080 |
| $ | 1,027 |
| $ | 1,108 |
| $ | 1,068 |
|
| Accrued income taxes | $ | 65 |
| $ | 30 |
| $ | 29 |
| $ | 48 |
|
| Accrued salaries and wages | 199 |
| 311 |
| 205 |
| 309 |
|
| Accrued advertising and promotion | 597 |
| 582 |
| 582 |
| 557 |
|
| Other | 547 |
| 551 |
| 570 |
| 502 |
|
| Other current liabilities | $ | 1,408 |
| $ | 1,474 |
| $ | 1,386 |
| $ | 1,416 |
|
| Income taxes payable | $ | 192 |
| $ | 192 |
| $ | 118 |
| $ | 115 |
|
| Nonpension postretirement benefits | 39 |
| 40 |
| 35 |
| 34 |
|
| Other | 352 |
| 373 |
| 330 |
| 355 |
|
| Other liabilities | $ | 583 |
| $ | 605 |
| $ | 483 |
| $ | 504 |
|
Note 14 Subsequent Event
On May 2, 2018,March 31, 2019, the Company (i) acquired additional ownershipentered into a definitive agreement to sell selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero International S.A. (Ferrero) for approximately $1.3 billion in Multipro,cash, subject to a leading distributorworking capital adjustment mechanism. In addition, the Company will have royalty free licenses to utilize certain brands for a specified transition period and, indefinitely on selected cracker products. The fair value of a varietythese licenses will be incremental non-cash consideration for the sale. The Company expects the businesses to be classified as held for sale during the second quarter and the transaction to be completed in the third quarter of food products in Nigeria2019, subject to certain customary closing conditions including regulatory approvals. Both the total assets and Ghana, and (ii) exercised its call option (Purchase Option) to acquire an ownership interest in Tolaram Africa Foods, PTE LTD (TAF), onenet assets of the holding companiesbusinesses, including a targeted working capital amount is estimated to be approximately $1.3 billion, and is expected to result in an immaterial pre-tax gain when recognized upon closing. During the year ended December 29, 2018, these businesses recorded net sales of an affiliated food manufacturing entity under common ownership. The aggregate consideration paid was approximately $420$900 million and was funded through cash on hand and short-term borrowings.
As a resultoperating profit of the Company’s additional ownership in Multipro as well as certain concurrent changes to the shareholders’ agreement, the assets and liabilitiesapproximately $75 million, including an allocation of Multipro will be includedindirect corporate expenses, primarily in the Consolidated Balance Sheet and the results of its operations will be included in the Consolidated Statement of Income subsequent to the acquisition date. The major classes of assets and liabilities of Multipro are expected to be net working capital (deficit), property, intangible assets (amortizable and non-amortizable), non-controlling interests and goodwill. North America reportable segment.
The consideration paid for the exercise of the call option in TAF, together with the existing cost value of the Purchase Option, will be (i) evaluated for impairment and (ii) accounted for under the equity method of accounting subsequent to the acquisition date. Any difference between the amount paid and the underlying equity in net assets will be identified and amortized over future periods, as appropriate.
KELLOGG COMPANY
PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Kellogg Company, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this report.
For more than 100 years, consumers have counted on Kellogg for great-tasting, high-quality and nutritious foods. These foods include snacks, such as cookies, crackers, savory snacks, toaster pastries, cereal bars and bites, fruit-flavored snacks; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods, and veggie foods.noodles.
Kellogg products are manufactured and marketed globally.
Segments
On December 30, 2018 we reorganized our North American business. The reorganization eliminated the legacy business unit structure and internal reporting. In addition, we changed the internal reporting provided to the chief operating decision maker (CODM) and segment manager. As a result, we reevaluated our operating segments.
In addition, we transferred our Middle East, North Africa, and Turkey businesses from Kellogg Europe to Kellogg AMEA, effective December 30, 2018. This consolidated all of the Company's Africa business under a single regional management team. All comparable prior periods have been restated to reflect the change. For the quarter ended March 31, 2018, the change resulted in $67 million of reported net sales and $14 million of reported operating profit transferring from Europe to AMEA.
On March 31, 2019, we entered into a stock and asset purchase agreement with Ferrero International S.A. (“Ferrero”), pursuant to which, subject to the satisfaction or waiver of certain conditions, we will divest to Ferrero selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses for $1.3 billion in cash, on a cash-free, debt-free basis and subject to a working capital adjustment mechanism.
Consummation of the divestiture is subject to customary closing conditions, including the receipt of certain regulatory approvals, the absence of any law, injunction or other judgment prohibiting the divestiture, the accuracy of the representations and warranties of each party (subject to materiality qualifiers) and the compliance by each party with its covenants in all material respects. The divestiture is currently expected to close at the end of July 2019.
We manage our operations through tenfour operating segments that are based primarily on product category or geographic location.location – North America which includes the U.S. businesses and Canada; Europe which consists principally of European countries; Latin America which consists of Central and South America and includes Mexico; and AMEA (Asia Middle East Africa) which consists of Africa, Middle East, Australia and other Asian and Pacific markets. These operating segments are evaluated for similarity with regards to economic characteristics, products, production processes, types or classes of customers, distribution methods and regulatory environments to determine if they can be aggregated into reportable segments. We report results of operations in the following reportable segments: U.S. Snacks: U.S. Morning Foods; U.S. Specialty; North America Other; Europe; Latin America; and Asia Pacific. The reportable segments are discussed in greater detail in Note 12 within Notes to Consolidated Financial Statements.
Restatement of 2017 financial statements
Financial statements for 2017 were restated to reflect changes in accounting standards that were adopted on a retrospective basis, as well as product transfer betweenalso represent our reportable segments.
Non-GAAP financial measures
This filing includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Items excluded from our non-GAAP financial measures are discussed in the "Significant items impacting comparability" section of this filing. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions, including incentive compensation. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors’ understanding of our underlying operating performance and in their analysis of ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.
Non-GAAP financial measures used include currency-neutral and organic net sales, adjusted and currency-neutral adjusted operating profit, adjusted and currency-neutral adjusted diluted EPS, currency-neutral gross profit, currency-neutral gross margin, and cash flow. We determine currency-neutral results by dividing or multiplying, as
appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.
Currency-neutral net sales and organic net sales: We adjust the GAAP financial measure to exclude the impact of foreign currency, resulting in currency-neutral sales. In addition, we exclude the impact of acquisitions, dispositions, related integration costs, shipping day differences, and foreign currency, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions.
Currency-neutral adjusted: gross profit, gross margin, SG&A, SG&A%,Adjusted: operating profit, operating profit margin, net income, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project Krestructuring and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, and other costs impacting comparability resulting in adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
Currency-neutral adjusted: gross profit, gross margin, operating profit, net income, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, such as Project K, ZBB, and Revenue Growth Management, to assess performance of newly acquired businesses, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
Adjusted effective income tax rate: We adjust the GAAP financial measures to exclude the effect of Project Krestructuring and cost reduction activities, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts.contracts, and other costs impacting comparability. We excluded the items which we believe may obscure trends in our pre-tax income and the related tax effect of those items on our adjusted effective income tax rate. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's effective tax rate, excluding the pre-tax income and tax effect of the items noted above, for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate.
Cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. Cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure.
These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.
Significant items impacting comparability
Mark-to-market accounting for pension plans, commodities and certain foreign currency contracts
We recognize mark-to-market adjustments for pension plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans are recognized in the year they occur. Changes between contract and market prices for commodities contracts and certain foreign currency contracts result in gains/losses that are recognized in the quarter they occur. We recorded a pre-tax mark-to-market benefitexpense of $39$41 million andfor the quarter ended March 30, 2019. Included within the aforementioned was a pre-tax mark-to-market chargebenefit for pension plans of $21$1 million for the quarter ended March 30, 2019. Additionally, we recorded a pre-tax mark-to-market benefit of $39 million for the quarter ended March 31, 2018 and April 1, 2017, respectively.2018. Included within the aforementioned was a pre-tax mark-to-market benefit for pension plans of $25 million and $1 million for the quarter ended March 31, 2018 and April 1, 2017, respectively.2018.
Project KRestructuring and cost reduction activities
Project K continued generating savings used to invest in key strategic areas of focus for the business. We recorded pre-tax charges related to this program of $20$8 million and $142$20 million for the quarterquarters ended March 30, 2019 and March 31, 2018, and April 1, 2017, respectively.
See the Restructuring and cost reduction activities section for more information.
Brexit impacts
With the uncertainty of the United Kingdom (U.K.) exiting the European Union (EU), commonly referred to as Brexit, we have begun preparations to proactively prepare for the potential adverse impacts of Brexit, such as delays at ports of entry and departure. As a result, we incurred pre-tax charges of $3 million for the quarter ended March 30, 2019.
Business and portfolio realignment
Up front and/or one-time costs related to: pending and prospective divestitures and acquisitions, including our previously announced proposed divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses; reorganizations in support of our Deploy for Growth priorities and a reshaped portfolio; and investments in enhancing capabilities prioritized by our Deploy for Growth strategy. As a result, we incurred pre-tax charges of $31 million for the quarter ended March 30, 2019.
Acquisitions
In OctoberMay of 2017,2018, the Company acquired Chicago Baran incremental 1% ownership interest in Multipro, which along with concurrent changes to the shareholders' agreement, resulted in the Company LLC, manufacturernow having a 51% controlling interest in and began consolidating Multipro, a leading distributor of RXBAR, a high protein snack bar madevariety of simple ingredients.food products in Nigeria and Ghana. In our North America OtherAMEA reportable segment, for the quarter ended March 31, 201830, 2019, the acquisition added $51$198 million in net sales that impacted the comparability of our reported results.
Foreign currency translation
We evaluate the operating results of our business on a currency-neutral basis. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current-period local currency operating results by the
currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period.
Financial results
For the quarter ended March 31, 2018,30, 2019, our reported net sales improved by 4.7%3.5% due primarily to the RXBAR acquisition in North America Other, favorable foreign currency translation, and improved business delivery.consolidation of Multipro results (May 2018). These impacts were partially offset by the previously announced list-price adjustments and other impacts in U.S. Snacks related to its transition from DSD. Currency-neutralunfavorable foreign currency which reduced net sales increased 2.2% after eliminating the impact foreign currency.3.7 percentage points. Organic net sales increased 0.6%0.3% from the prior year after excluding RXBAR results.the impact of Multipro and foreign currency, due to growth in our international businesses and favorable price realization.
First quarter reported operating profit and operating profit margin increaseddecreased 25% versus the year-ago quarter, driven primarily by productivity savingshigher input and higher net sales, as well as by significantly lower restructuring chargesdistribution costs, business realignment costs in the current quarter, and favorableunfavorable year-on-year mark-to-market impacts year-on-year. Operating profit and foreign currency impacts. Currency-neutral adjusted operating profit margin both increased on a currency-neutral adjusted basis, as well, owing to the higher sales growthdecreased 4.6% after excluding foreign currency, mark-to-market, business realignment, restructuring, and strong productivity savings related to the Project K restructuring program. These savings, driven primarily by last summer's exit and elimination of overhead from its U.S. Snacks segment's Direct Store Delivery system, more than offset a substantial year-on-year increase in advertising and promotion investment, as well as various cost pressures, including a significant rise in freight costs.costs preparing for potential Brexit.
Reported diluted EPS of $1.27$0.82 for the quarter was up 69%down 35% compared to the prior year quarter of $.75$1.27 due primarily to lower restructuring charges, favorable mark-to-market adjustments, favorable currency translation,higher input and distribution costs, a lower effectivehigher tax rate, business realignment costs in the current quarter, and improved business delivery.unfavorable year-on-year mark-to-market and foreign currency impacts. Currency-neutral adjusted diluted EPS of $1.19 increased$1.04 decreased by 11%15% compared to prior year quarter of $1.07,$1.23, after excluding the impact of foreign currency, mark-to-market, business realignment, restructuring, and foreign currency.costs preparing for potential Brexit.
Reconciliation of certain non-GAAP Financial Measures | | | | Quarter ended | Quarter ended |
Consolidated results (dollars in millions, except per share data) | March 31,
2018 | April 1,
2017 | March 30,
2019 | March 31,
2018 |
| Reported net income | $ | 444 |
| $ | 266 |
| $ | 282 |
| $ | 444 |
|
| Mark-to-market (pre-tax) | 39 |
| (21 | ) | (41 | ) | 39 |
|
| Project K and cost reduction activities (pre-tax) | (20 | ) | (142 | ) | |
| Restructuring and cost reduction activities (pre-tax) | | (8 | ) | (20 | ) |
| Brexit impacts (pre-tax) | | (3 | ) | — |
|
| Business and portfolio realignment (pre-tax) | | (31 | ) | — |
|
| Income tax impact applicable to adjustments, net* | (3 | ) | 50 |
| 19 |
| (3 | ) |
| Adjusted net income | | $ | 346 |
| $ | 428 |
|
| Foreign currency impact | 13 |
| | (11 | ) | |
| Currency-neutral adjusted net income | $ | 415 |
| $ | 379 |
| $ | 357 |
| $ | 428 |
|
| Reported diluted EPS | $ | 1.27 |
| $ | 0.75 |
| $ | 0.82 |
| $ | 1.27 |
|
| Mark-to-market (pre-tax) | 0.11 |
| (0.06 | ) | (0.12 | ) | 0.11 |
|
| Project K and cost reduction activities (pre-tax) | (0.06 | ) | (0.40 | ) | |
| Restructuring and cost reduction activities (pre-tax) | | (0.02 | ) | (0.06 | ) |
| Brexit impacts (pre-tax) | | (0.01 | ) | — |
|
| Business and portfolio realignment (pre-tax) | | (0.09 | ) | — |
|
| Income tax impact applicable to adjustments, net* | (0.01 | ) | 0.14 |
| 0.05 |
| (0.01 | ) |
| Adjusted diluted EPS | | $ | 1.01 |
| $ | 1.23 |
|
| Foreign currency impact | 0.04 |
| | (0.03 | ) | |
| Currency-neutral adjusted diluted EPS | $ | 1.19 |
| $ | 1.07 |
| $ | 1.04 |
| $ | 1.23 |
|
| Currency-neutral adjusted diluted EPS growth | 11.2 | % |
|
| (15.4 | )% |
|
|
Note: Tables may not foot due to rounding.
* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
Net sales and operating profit
The following tables provide an analysis of net sales and operating profit performance for the first quarter of 20182019 versus 2017:2018:
| | | Quarter ended March 30, 2019 | | | | | | | | | | | | | |
| (millions) | | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported net sales | | | $ | 2,289 |
| | $ | 497 |
| | $ | 225 |
| | $ | 511 |
| | $ | — |
| | $ | 3,522 |
|
| Foreign currency impact on total business (inc)/dec | | | (6 | ) | | (46 | ) | | (17 | ) | | (55 | ) | | — |
| | (123 | ) |
| Currency-neutral net sales | | | $ | 2,295 |
| | $ | 543 |
| | $ | 242 |
| | $ | 566 |
| | $ | — |
| | $ | 3,645 |
|
| Acquisitions | | | — |
| | — |
| | — |
| | 198 |
| | — |
| | 198 |
|
| Foreign currency impact on acquisitions (inc)/dec | | | — |
| | — |
| | — |
| | 36 |
| | — |
| | 36 |
|
| Organic net sales | | | $ | 2,295 |
| | $ | 543 |
| | $ | 242 |
| | $ | 332 |
| | $ | — |
| | $ | 3,411 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter ended March 31, 2018 | Quarter ended March 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | | U.S. Snacks | | U.S. Morning Foods | | U.S. Specialty | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported net sales | | $ | 762 |
| | $ | 691 |
| | $ | 398 |
| | $ | 479 |
| | $ | 587 |
| | $ | 232 |
| | $ | 252 |
| | $ | — |
| | $ | 3,401 |
| | $ | 2,330 |
| | $ | 520 |
| | $ | 232 |
| | $ | 319 |
| | $ | — |
| | $ | 3,401 |
|
| Foreign currency impact | | — |
| | — |
| | — |
| | 5 |
| | 62 |
| | 4 |
| | 11 |
| | — |
| | 82 |
| |
| Currency-neutral net sales | | $ | 762 |
| | $ | 691 |
| | $ | 398 |
| | $ | 474 |
| | $ | 525 |
| | $ | 228 |
| | $ | 241 |
| | $ | — |
| | $ | 3,319 |
| |
| Acquisitions/divestitures | | — |
| | — |
| | — |
| | 51 |
| | — |
| | — |
| | — |
| | — |
| | 51 |
| |
| Organic net sales | | $ | 762 |
| | $ | 691 |
| | $ | 398 |
| | $ | 423 |
| | $ | 525 |
| | $ | 228 |
| | $ | 241 |
| | $ | — |
| | $ | 3,268 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter ended April 1, 2017 | | | | | | | | | | | | | |
| (millions) | | U.S.
Snacks | | U.S.
Morning
Foods | | U.S. Specialty | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated | |
| Reported net sales | | $ | 795 |
| | $ | 708 |
| | $ | 393 |
| | $ | 392 |
| | $ | 513 |
| | $ | 220 |
| | $ | 227 |
| | $ | — |
| | $ | 3,248 |
| |
| | | | | | | | | | | | | | | | | | | | |
| % change - 2018 vs. 2017: | | | | | | | | | | | | | | | |
| % change - 2019 vs. 2018: | | | | | | | | | | | | | |
| Reported growth | | (4.1 | )% | | (2.4 | )% | | 1.3 | % | | 22.1 | % | | 14.4 | % | | 5.3 | % | | 11.0 | % | | — | % | | 4.7 | % | | (1.8 | )% | | (4.4 | )% | | (3.0 | )% | | 60.4 | % | | — | % | | 3.5 | % |
| Foreign currency impact | | — | % | | — | % | | — | % | | 1.2 | % | | 12.2 | % | | 2.0 | % | | 4.8 | % | | — | % | | 2.5 | % | |
| Foreign currency impact on total business (inc)/dec | | | (0.3 | )% | | (8.8 | )% | | (7.3 | )% | | (17.1 | )% | | — | % | | (3.7 | )% |
| Currency-neutral growth | | (4.1 | )% | | (2.4 | )% | | 1.3 | % | | 20.9 | % | | 2.2 | % | | 3.3 | % | | 6.2 | % | | — | % | | 2.2 | % | | (1.5 | )% | | 4.4 | % | | 4.3 | % | | 77.5 | % | | — | % | | 7.2 | % |
| Acquisitions/divestitures | | — | % | | — | % | | — | % | | 13.1 | % | | — | % | | — | % | | — | % | | — | % | | 1.6 | % | |
| Acquisitions | | | — | % | | — | % | | — | % | | 62.0 | % | | — | % | | 5.8 | % |
| Foreign currency impact on acquisitions (inc)/dec | | | — | % | | — | % | | — | % | | 11.4 | % | | — | % | | 1.1 | % |
| Organic growth | | (4.1 | )% | | (2.4 | )% | | 1.3 | % | | 7.8 | % | | 2.2 | % | | 3.3 | % | | 6.2 | % | | — | % | | 0.6 | % | | (1.5 | )% | | 4.4 | % | | 4.3 | % | | 4.1 | % | | — | % | | 0.3 | % |
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
| | | Quarter ended March 30, 2019 | | | | | | | | | | | | | |
| (millions) | | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported operating profit | | | $ | 380 |
| | $ | 60 |
| | $ | 21 |
| | $ | 47 |
| | $ | (127 | ) | | $ | 381 |
|
| Mark-to-market | | | — |
| | — |
| | — |
| | — |
| | (42 | ) | | (42 | ) |
| Restructuring and cost reduction activities | | | (4 | ) | | (1 | ) | | (2 | ) | | (1 | ) | | — |
| | (8 | ) |
| Brexit impacts | | | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Business and portfolio realignment | | | (11 | ) | | (4 | ) | | — |
| | — |
| | (16 | ) | | (31 | ) |
| Adjusted operating profit | | | $ | 395 |
| | $ | 67 |
| | $ | 22 |
| | $ | 48 |
| | $ | (68 | ) | | $ | 465 |
|
| Foreign currency impact | | | (1 | ) | | (7 | ) | | (1 | ) | | (4 | ) | | — |
| | (12 | ) |
| Currency-neutral adjusted operating profit | | | $ | 396 |
| | $ | 74 |
| | $ | 23 |
| | $ | 52 |
| | $ | (68 | ) | | $ | 477 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter ended March 31, 2018 | Quarter ended March 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | | U.S. Snacks | | U.S. Morning Foods | | U.S. Specialty | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
| Reported operating profit | | $ | 102 |
| | $ | 150 |
| | $ | 80 |
| | $ | 67 |
| | $ | 74 |
| | $ | 22 |
| | $ | 27 |
| | $ | (12 | ) | | $ | 510 |
| | $ | 399 |
| | $ | 60 |
| | $ | 22 |
| | $ | 41 |
| | $ | (12 | ) | | $ | 510 |
|
| Mark-to-market | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | 30 |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | 30 |
|
| Project K and cost reduction activities | | (6 | ) | | (2 | ) | | — |
| | (2 | ) | | (7 | ) | | (2 | ) | | — |
| | (1 | ) | | (20 | ) | |
| Foreign currency impact | | — |
| | — |
| | — |
| | — |
| | 8 |
| | 1 |
| | 1 |
| | 1 |
| | 11 |
| |
| Currency-neutral adjusted operating profit | | $ | 108 |
| | $ | 152 |
| | $ | 80 |
| | $ | 69 |
| | $ | 73 |
| | $ | 23 |
| | $ | 26 |
| | $ | (42 | ) | | $ | 489 |
| |
| | | | | | | | | | | | | | | | | | | | |
| Quarter ended April 1, 2017 | | | | | | | | | | | | | |
| (millions) | | U.S.
Snacks | | U.S.
Morning
Foods | | U.S. Specialty | | North America Other | | Europe | | Latin America | | Asia Pacific | | Corporate | | Kellogg Consolidated | |
| Reported operating profit | | $ | (36 | ) | | $ | 157 |
| | $ | 96 |
| | $ | 49 |
| | $ | 66 |
| | $ | 33 |
| | $ | 22 |
| | $ | (107 | ) | | $ | 280 |
| |
| Mark-to-market | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (47 | ) | | (47 | ) | |
| Project K and cost reduction activities | | (120 | ) | | (1 | ) | | — |
| | (7 | ) | | (6 | ) | | (1 | ) | | (1 | ) | | (2 | ) | | (138 | ) | |
| Restructuring and cost reduction activities | | | (10 | ) | | (7 | ) | | (2 | ) | | — |
| | (1 | ) | | (20 | ) |
| Adjusted operating profit | | $ | 84 |
| | $ | 158 |
| | $ | 96 |
| | $ | 56 |
| | $ | 72 |
| | $ | 34 |
| | $ | 23 |
| | $ | (58 | ) | | $ | 465 |
| | $ | 409 |
| | $ | 67 |
| | $ | 24 |
| | $ | 41 |
| | $ | (41 | ) | | $ | 500 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % change - 2018 vs. 2017: | | | | | | | | | | | | | | | |
| % change - 2019 vs. 2018: | | | | | | | | | | | | | |
| Reported growth | | 382.7 | % | | (4.8 | )% | | (16.2 | )% | | 36.6 | % | | 11.8 | % | | (33.0 | )% | | 25.6 | % | | 88.2 | % | | 81.7 | % | | (4.7 | )% | | (1.2 | )% | | (8.1 | )% | | 15.8 | % | | (907.7 | )% | | (25.4 | )% |
| Mark-to-market | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 59.6 | % | | 35.3 | % | | — | % | | — | % | | — | % | | — | % | | (812.2 | )% | | (13.7 | )% |
| Project K and cost reduction activities | | 353.8 | % | | (0.9 | )% | | — | % | | 14.3 | % | | 0.1 | % | | (2.4 | )% | | 3.6 | % | | 0.3 | % | | 38.9 | % | |
| Restructuring and cost reduction activities | | | 1.6 | % | | 8.3 | % | | (1.1 | )% | | (1.4 | )% | | 4.0 | % | | 2.1 | % |
| Brexit impacts | | | — | % | | (4.5 | )% | | — | % | | — | % | | — | % | | (0.6 | )% |
| Business and portfolio realignment | | | (2.7 | )% | | (5.8 | )% | | — | % | | (0.1 | )% | | (38.4 | )% | | (6.3 | )% |
| Adjusted growth | | | (3.6 | )% | | 0.8 | % | | (7.0 | )% | | 17.3 | % | | (61.1 | )% | | (6.9 | )% |
| Foreign currency impact | | — | % | | — | % | | — | % | | 0.9 | % | | 10.6 | % | | 2.2 | % | | 4.7 | % | | 2.1 | % | | 2.4 | % | | (0.2 | )% | | (9.1 | )% | | (4.4 | )% | | (9.4 | )% | | — | % | | (2.3 | )% |
| Currency-neutral adjusted growth | | 28.9 | % | | (3.9 | )% | | (16.2 | )% | | 21.4 | % | | 1.1 | % | | (32.8 | )% | | 17.3 | % | | 26.2 | % | | 5.1 | % | | (3.4 | )% | | 9.9 | % | | (2.6 | )% | | 26.7 | % | | (61.1 | )% | | (4.6 | )% |
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
U.S. SnacksNorth America
This segment consists of crackers, cookies, savory snacks, wholesome snacks and fruit-flavored snacks.
As reported and Currency-neutralReported net sales were 4.1% lowerdecreased 1.8% versus the comparable quarter of 2018 due primarily to price/mix as a result of the year on year impact of list-price adjustments and rationalization of stock-keeping units related to the DSD exit during the second half of 2017. These impacts were partiallylower volume partly offset by offset by improved performance by key brands.
All of our ex-DSD categories experienced year over year gains in velocity during the first quarter, as we now have a stronger set of SKUs on the shelf which are being supported with sufficient brand-building.
The Big 3 crackers brands (Cheez-it, Club and Townhouse) collectively returned to consumption and share growth during the first quarter of 2018. Pringles, which was never in DSD, grew both consumption and share during the first quarter as a result of our successful flavor-stacking campaign, involving both media and in-store activation.
As reported operating profit increased significantly due to lower Project K restructuring charges and overhead reductions in conjunction with our DSD transition partially offset by a significant increase in brand investment. Currency-neutral adjusted operating profit increased 29%favorable pricing/mix. Organic net sales decreased 1.5% after excluding the impact of restructuring charges.foreign currency.
|
| | | | | | |
| Net sales % change - first quarter 2019 vs. 2018: | | |
| North America | Reported net sales | Foreign currency | Currency-neutral net sales |
| Snacks | (0.2 | )% | (0.2 | )% | — | % |
| Cereal | (4.9 | )% | (0.5 | )% | (4.4 | )% |
| Frozen | (1.5 | )% | (0.2 | )% | (1.3 | )% |
U.S. Morning FoodsNorth America snacks currency-neutral net sales were flat in the quarter due to sustained momentum and innovations in key brands, including Cheez-It, Rice Krispies Treats, Pringles and Pop-Tarts, which all grew consumption during the quarter. These impacts were mostly offset by the unfavorable impact of the RXBAR recall.
This segment consists of
North America cereal and toaster pastries. As reported and Currency-neutralcurrency-neutral net sales declined 2.4% asby 4.4% driven by loss of share and lower consumption of our Special K branded cereals, continued category softness, and a result of decreased volume partially offset by favorable pricing/mix.
Despite heavy competitor promotion that held backshift in overall cereal trade inventory. While our performance in kid-oriented brands, a focus on food news and brand communication in the adult-oriented Health & Wellness segment helped moderate our declines from
2017. Special K returned to consumption and share growth during the first quarter as a result of communication around its new inner-strength positioning. Similarly, Mini-Wheats, Raisin Bran, and Rice Krispies all started to improve their trendstrend did not change significantly, shipments lagged during the quarter as we renewed communication about their key wellness attributes.suggesting the shift in trade inventory.
AsNorth America frozen currency-neutral net sales declined by 1.3%, comparing against a notably strong, double-digit growth in the prior year quarter.
North America reported operating profit decreased 4.8%4.7% due to higher restructuring chargesinput and distribution costs and lower net sales. Currency-neutral adjusted operating profit decreased 3.9%declined 3.4% after excluding the impact of restructuring, charges.business realignment costs, and foreign currency.
U.S. SpecialtyEurope
This segment is comprised of sales of most of our brands through channels such as foodservice, convenience stores, vending, and others. As reported and Currency-neutralReported net sales improved 1.3% as a result of higher volume and improved pricing/mix.
The Vending, Convenience, and Girls Scouts channels posted strong growth. Foodservice posted a modest decline against a strong first quarter of 2017.
As Reported operating profit and Currency-neutral adjusted operating profit decreased 16.2%4.4% due to a revised allocation of costs between U.S. operating segments.
North America Other
This segment is composed of our U.S. Frozen Foods, Kashi Company, Canada, and RXBAR businesses.
As reportedunfavorable foreign currency. Organic net sales increased 22.1% due to the RXBAR acquisition, higher volume, favorable pricing/mix, and favorable foreign currency. Currency-neutral net sales increased 20.9%4.4% after excluding the impact of foreign currency. Organic net sales increased 7.8% from the prior year after excluding RXBAR results, ledcurrency driven by growth momentum in U.S. Frozen Foods.
RXBAR consumption and share grew as we continued to expand distribution of core bars.
The U.S. Frozen business reported increased net sales on higher volume and favorable price/mix.
Growth was driven by snacks, led by EggoPringles and accompanied by a return to growth in wholesome snacks. PringlesMorningstar Farmsboth grew sharebehind innovation and consumptionan effective marketing campaign.
Cereal sales declined during the quarter benefitingbut moderated from renovated foodthe prior year. The declines were isolated to the UK and packaging, new innovations, and a focus on core offerings.France markets as cereal grew almost everywhere else in the region.
As Reportedreported operating profit increased 36.6%decreased 1.2% due primarily to lower restructuring charges, Project K and ZBB savings and favorableunfavorable foreign currency. Currency-neutral adjusted operating profit increased 21.4% after excluding the impact9.9% as a result of restructuring charges and foreign currency.
Europe
As Reported net sales increased 14.4% due to favorable foreign currency and higher volume partially offset by unfavorable pricing/mix. Currency-neutral net sales and Organic net sales increased 2.2%improved gross profit margin after excluding the impact of foreign currency as the impact of sales growth and productivity savings more than offset the effect of a significant increase in brand investment.
Growth was led by Pringles, which lapped year-ago promotional disruptions in some markets. Pringlescontinuedcosts related to grow across the region, well beyond the markets that experienced last year's disruption.
Cereal currency-neutral net sales declined modestly due to softness in Northern Europe, but trends continue to improve. The U.K. cerealrestructuring, business grew consumptionrealignment and share during the quarter, continuing its improving trend with growth in several brands.
Additionally, emerging markets were also a driver of Europe's growth in both cereal and snacks, led by Egypt and Russia.
As reported operating profit increased 11.8% due primarily to favorable foreign currency. Currency-neutral adjusted operating profit increased 1.1% after excluding the impact of restructuring charges and foreign currency.Brexit.
Latin America
As reportedReported net sales improved 5.3%decreased 3.0% due to increased volume, favorable pricing/mix and favorableunfavorable foreign currency. Currency-neutralOrganic net sales increased 3.3%4.3% after excluding the impact of foreign currency.currency driven by both favorable price/mix and higher volume.
Growth was driven by Mexico cereal and Parati in Brazil. Mexico's cereal consumption growth continues to accelerate behind strong commercial programs, effective in-store execution, and continued expansion in high-frequency stores. Parati posted its eighth straight quarter of organicgrowth in net sales, growth, growingshare, and consumption and shareduring the quarter in cereal, while snacks growth was led by Pringles. Mercosur posted double-digit growth driven by cereal, Pringles, and Parati. We continue to leverage Parati's presence and expertise in high-frequency stores.key categories.
Caribbean/Central America declines moderated sequentially in the first quarter despite post-hurricane store closings in Puerto Rico.
As reportedReported operating profit decreased 8.1% due primarily to unfavorable foreign currency, higher input costs and investments. Currency-neutral adjusted operating profit decreased 33%, primarily due to the expected negative impact of transactional currency exchange on cost of goods sold. We expect this impact is isolated to the first quarter. The positive impact of foreign currency translation was mostly offset by the higher restructuring charges.
Asia Pacific
As reported net sales improved 11.0% due to higher volume and favorable foreign currency partially offset by unfavorable price/mix. Currency-neutral net sales increased 6.2%,2.6% after excluding the impact of foreign currency.currency and restructuring.
Cereal and wholesome snacks businesses experiencedAMEA
Reported net sales improved 60% due to higher volume from the consolidation of Multipro results, Pringles growth across Asiathe region, and Africa, including double-digit growth in India, Souththe Middle East, Asia,North Africa, Turkey business, partially offset by unfavorable foreign currency. Organic net sales increased 4.1% due to favorable price/mix and Korea. To achieve this growth, we are executing our emerging market cereal category development model: leveraginghigher volume after excluding the Kellogg master brand, launching affordableimpact of Multipro and locally relevant innovation, offering the right price/pack combination across retail channels, and expanding the quantity and quality of our distribution.foreign currency.
Our Pringles business posted double-digit growth for the quarter in Asia Pacific. We continue to expand product offerings in certain markets while launching new pack-formats in others, extending the brand's distribution reach.
Australia, our largest market in the region, posted share gains during the quarter, continuing its stabilization trend.
As reportedReported operating profit increased 25.6%16% due to the consolidation of Multipro results and higher organic net sales, lower restructuring charges, and productivity and brand-building efficiencies as a result of Project K and ZBB initiatives, partially offset by a double-digit increase in brand building.sales. Currency-neutral adjusted operating profit improved 17.3%27% after excluding the impact of restructuring and foreign currency.
Outside of our reported results, our joint ventures in West Africa and China continued to perform extremely well. Double-digit growth was driven by strong noodles volume in West Africa and by e-commerce sales in China.
Corporate
As reportedReported operating profit increased $95decreased $115 million versus the comparable prior year quarter due primarily to the favorable impact of year on yearunfavorable mark-to-market impacts and business realignment costs. Currency-neutral adjusted operating profit improved $16decreased $27 million after excluding the impact of mark-to-market restructuring charges, and foreign currency.business realignment costs.
Margin performance
MarginOur currency-neutral adjusted gross profit and gross profit margin performance for the first quarter and year-to-date periods of 2019 versus 2018 versus 2017 isare reconciled to the directly comparable GAAP measures as follows:
|
| | | | | | |
| Quarter | 2018 | 2017 | Change vs. prior year (pts.) |
| Reported gross margin (a) | 36.8 | % | 35.7 | % | 1.1 |
|
| Mark-to-market (COGS) | 0.9 | % | (1.4 | )% | 2.3 |
|
| Project K and cost reduction activities (COGS) | (0.4 | )% | (0.4 | )% | — |
|
| Foreign currency impact | — | % | — | % | — |
|
| Currency-neutral adjusted gross margin | 36.3 | % | 37.5 | % | (1.2 | ) |
| Reported SG&A% | (21.8 | )% | (27.1 | )% | 5.3 |
|
| Mark-to-market (SG&A) | — | % | (0.1 | )% | 0.1 |
|
| Project K and cost reduction activities (SG&A) | (0.2 | )% | (3.8 | )% | 3.6 |
|
| Foreign currency impact | — | % | — | % | — |
|
| Currency-neutral adjusted SG&A% | (21.6 | )% | (23.2 | )% | 1.6 |
|
| Reported operating margin | 15.0 | % | 8.6 | % | 6.4 |
|
| Mark-to-market | 0.9 | % | (1.5 | )% | 2.4 |
|
| Project K and cost reduction activities | (0.6 | )% | (4.2 | )% | 3.6 |
|
| Foreign currency impact | — | % | — | % | — |
|
| Currency-neutral adjusted operating margin | 14.7 | % | 14.3 | % | 0.4 |
|
|
| | | | | | | | | | | | | |
| Quarter | 2019 | | 2018 | GM change vs. prior year (pts.) |
| | Gross Profit (a) | Gross Margin (b) | | Gross Profit (a) | Gross Margin (b) |
| Reported | $ | 1,107 |
| 31.4 | % | | $ | 1,252 |
| 36.8 | % | (5.4 | ) |
| Mark-to-market | (42 | ) | (1.2 | )% | | 30 |
| 0.9 | % | (2.1 | ) |
| Restructuring and cost reduction activities | (6 | ) | (0.2 | )% | | (13 | ) | (0.4 | )% | 0.2 |
|
| Brexit impacts | (3 | ) | (0.1 | )% | | — |
| — | % | (0.1 | ) |
| Business and portfolio realignment | (4 | ) | (0.1 | )% | | — |
| — | % | (0.1 | ) |
| Foreign currency impact | (36 | ) | 0.1 | % | | — |
| — | % | 0.1 |
|
| Currency-neutral adjusted | $ | 1,198 |
| 32.9 | % | | $ | 1,235 |
| 36.3 | % | (3.4 | ) |
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Reported gross profit as a percentage of net sales. Gross profit is equal to net sales less cost of goods sold.
(b) Gross profit as a percentage of net sales.
Reported gross margin for the quarter was favorable 110unfavorable 540 basis points due primarily to productivity savingsthe consolidation of Multipro results, higher input and distribution costs, mix shifts and costs related to growth in new pack formats, as a result of Project K restructuring initiativeswell as unfavorable mark-to-market and favorable mark-to-market adjustments, partially offset by the impact of U.S. Snacks transition out of DSD distribution and a substantial year-over-year increase in freight costs. The former reflects the elimination of the list price premium, as DSD services are no longer provided, and the inclusion of logistics costs in COGS in a warehouse distribution model. Logistics costs were expensed to SG&A in the DSD model.foreign currency impacts. Currency-neutral adjusted gross margin was unfavorable 120340 basis points compared to the first quarter of 20172018 after eliminating the impact of mark-to-market and restructuring.
Reported SG&A% for the quarter was favorable 530 basis points due primarily to overhead savings realized from Project K and lower Project K restructuring charges. Currency-neutral adjusted SG&A% was favorable 160 basis points after excluding the impact of restructuring and mark-to-market
Reported operating margin for the quarter was favorable 640 basis points due to significantly lower restructuring charges, favorable market-to-market and foreign currency impacts, as well as productivity savings from Project K restructuring, which includes this year's exit from its U.S. Snacks segment's Direct Store Delivery sales and delivery system. These savings more than offset a substantial year-over-year increase in advertising and promotion investment. Currency-neutral adjusted operating margin was favorable 40 basis points after excluding the impact of mark-to-market, restructuring, and foreign currency.
Our currency-neutral adjusted gross profit, currency-neutral adjusted SG&A, and currency-neutral adjusted operating profit measures are reconciled to the directly comparable GAAP measures as follows:
|
| | | | | | |
| | Quarter ended |
| (dollars in millions) | March 31,
2018 | April 1,
2017 |
| Reported gross profit (a) | $ | 1,252 |
| $ | 1,160 |
|
| Mark-to-market (COGS) | 30 |
| (45 | ) |
| Project K and cost reduction activities (COGS) | (13 | ) | (13 | ) |
| Foreign currency impact | 29 |
| — |
|
| Currency-neutral adjusted gross profit | 1,206 |
| 1,218 |
|
| Reported SG&A | $ | 742 |
| $ | 880 |
|
| Mark-to-market (SG&A) | — |
| 2 |
|
| Project K and cost reduction activities (SG&A) | 7 |
| 125 |
|
| Foreign currency impact | 18 |
| — |
|
| Currency-neutral adjusted SG&A% | 717 |
| 753 |
|
| Reported operating profit | $ | 510 |
| $ | 280 |
|
| Mark-to-market | 30 |
| (47 | ) |
| Project K and cost reduction activities | (20 | ) | (138 | ) |
| Foreign currency impact | 11 |
| — |
|
| Currency-neutral adjusted operating profit | 489 |
| 465 |
|
Restructuring and cost reduction activities
We view our restructuring and cost reduction activities as part of our operating principles to provide greater visibility in achieving our long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a 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. We continually evaluate potential restructuring and cost reduction initiatives and may pursue future initiatives that generate meaningful savings that can be utilized in achieving our long-term profit growth targets.
Project K
Project K is expected to continuecontinued generating savings that may be investedused to invest in key strategic areas of focus for the business to drive future growth or utilized to achieve our growth initiatives.
The program’s focus is on strengthening existing businesses in core markets, increasing growth in developing and emerging markets, driving an increased level of value-added innovation, implementing a more efficient go-to-market model for certain businesses and creating a more efficient organizational design in several markets.
Since inception, Project K has provided significant benefitsreduced the Company’s cost structure, and is expected to continue to provide a number ofenduring benefits, in the future, including an optimized supply chain infrastructure, the implementation ofan efficient global business services model, a new global focus on categories, increased agility from a more efficient organization design, and improved effectiveness in go-to-market models. These benefits are intended to strengthen existing businesses in core markets, increase growth in developing and emerging markets, and drive an increased level of value-added innovation.
The Company approved all remaining Project K initiatives as of the end of 2018 and implementation of these remaining initiatives will be completed in 2019. Project charges, after-tax cash costs and annual savings remain in line with expectations.
We currently anticipate that Project K will result in total pre-tax charges, once all phases are approved and implemented, of $1.5 toapproximately $1.6 billion, with after-tax cash costs, including incremental capital investments, estimated to be approximately $1.1$1.2 billion. Cash expenditures of approximately $950$1,150 million have been incurred through the end of fiscal year 2017. Total cash expenditures, as defined, are expected to be approximately $175 million for 2018. Total charges forAs we complete the implementation of previously approved Project K initiatives in 2018 are expected2019, we expect to beincur additional charges of approximately $75 to $125$50 million.
We expect annual cost savings generated from Project K will be approximately $600 to $700 million in 2019. The savings will be realized primarily in selling, general and administrative expense with additional benefit realized in gross profit as cost of goods sold savings are partially offset by negative volume and price impacts resulting from go-to-market business model changes. The overall savings profile of the project reflects our go-to-market initiatives that will
impact both selling, general and administrative expense and gross profit. We have realized approximately $480$650 million of annual savings through the end of 2017.2018. Cost savings have been utilized to increase marginsoffset inflation and be strategically investedfund investments in areas such as in-store execution, sales capabilities, including adding sales representatives, re-establishing the Kashi business, unit, and in the design and quality of our products. We have also invested in production capacity in developing and emerging markets, and in global category teams.
We funded much of the initial cash requirements for Project K through our supplier financing initiative. We are now able to fund much of the cash costs for the project through cash on hand as we have started to realize cash savings from the project.
We also expect that the project will have an impact on our consolidated effective income tax rate during the execution of the project due to the timing of charges being taken in different tax jurisdictions. The impact of this project on our consolidated effective income tax rate will be excluded from the adjusted income tax rate that will be disclosed on a quarterly basis.
We will complete the implementation of Project K in 2018, with annual savings expected to increase through 2019. Project charges, after-tax cash costs and annual savings remain in line with expectations.
Refer to Note 54 within Notes to Consolidated Financial Statements for further information related to Project K and other restructuring activities.
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, includingprimarily in the euro, British pound, Mexican peso, Australian dollar, Canadian dollar, Mexican peso, Russian ruble, Brazilian Real, Nigerian Naira, and Nigerian Naira.Russian ruble. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have a significant impact on our results if such increase or decrease in the value of the U.S. dollar is substantial.
Interest expense
For the quarters ended March 30, 2019 and March 31, 2018, and April 1, 2017, interest expense was $69$74 million and $61$69 million, respectively. The increase from the comparable prior year periodquarter is due primarily to higher interest rates on floating rate debt as well asthe issuance of $400 million of three-year 3.25% Senior Notes issued in November 2017due 2021 in conjunction with our acquisitionpurchase of additional equity interests in Tolaram Africa Foods, PTE LTD and Multipro in the RXBAR business.second quarter of 2018.
Income taxesTaxes
Our reported effective tax rate for the quarters ended March 31, 201830, 2019 and April 1, 2017 was 13% and 14%, respectively. For the quarter ended March 31, 2018 thewas 20% and 13%, respectively. The effective tax rate for the first quarter of 2018 benefited from a $44 million discrete tax benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring, as well as the reduction in the U.S. corporate tax rate effective at the beginning of 2018. These impacts were mitigated somewhat by an increased weighting of taxable income in higher tax rate jurisdictions versus the prior year. The effective tax rate for the quarter ended April 1, 2017, benefited from a deferred tax benefit of $38 million resulting from the intercompany transfer of intellectual property.
restructuring.
The adjusted effective income tax rate for the quarters ended March 30, 2019 and March 31, 2018 was 21% and April 1, 2017 was 13% and 20%, respectively. The decrease from the comparable prior year quarter is due primarily to the reduction in the U.S. corporate tax rate.
For the full year 2018, we currently expect the effective income tax rate to be approximately 20-21%. Fluctuations in foreign currency exchange rates could impact the expected effective income tax rate as it is dependent upon U.S. dollar earnings of foreign subsidiaries doing business in various countries with differing statutory rates. Additionally, the rate could be impacted by tax legislation and if pending uncertain tax matters, including tax positions that could be affected by planning initiatives, are resolved more or less favorably than we currently expect.
The following table provides a reconciliation of as reported to adjusted income taxes and effective tax rate for the quarters ended March 31, 2018 and April 1, 2017. | | | | Quarter ended | Quarter ended |
| Consolidated results (dollars in millions) | March 31,
2018 | April 1,
2017 | March 30,
2019 | March 31,
2018 |
| Reported income taxes | $ | 67 |
| $ | 43 |
| $ | 72 |
| $ | 67 |
|
| Mark-to-market | 7 |
| (4 | ) | (12 | ) | 7 |
|
| Project K and cost reduction activities | (4 | ) | (46 | ) | |
| Restructuring and cost reduction activities | | — |
| (4 | ) |
| Brexit impacts | | — |
| — |
|
| Business and portfolio realignment | | (7 | ) | — |
|
| Adjusted income taxes | 64 |
| 93 |
| $ | 91 |
| $ | 64 |
|
| Reported effective income tax rate | 13.1 | % | 14.0 | % | 20.0 | % | 13.1 | % |
| Mark-to-market | 0.5 | % | (0.2 | )% | (0.8 | )% | 0.5 | % |
| Project K and cost reduction activities | (0.3 | )% | (5.5 | )% | |
| Restructuring and cost reduction activities | | 0.4 | % | (0.3 | )% |
| Brexit impacts | | 0.1 | % | — | % |
| Business and portfolio realignment | | (0.2 | )% | — | % |
| Adjusted effective income tax rate | 12.9 | % | 19.7 | % | 20.5 | % | 12.9 | % |
Investments
Brexit
In June 2016, a majority of voters in Unconsolidated entitiesthe United Kingdom elected to withdraw from the European Union in a national referendum. In February 2017, the British Parliament voted in favor of allowing the British government to begin negotiating the terms of the United Kingdom’s withdrawal from the European Union, and, in March 2017, the British government invoked Article 50 of the Treaty on European Union, which, per the terms of the treaty, formally triggered a two-year negotiation process and put the United Kingdom on a course to withdraw from the European Union by the end of March 2019. The European Union recently granted an extension of the withdrawal date to October 31, 2019. With no agreement concluded as yet, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal.
After-tax earnings from unconsolidated entities for
The impact to the quarter ended March 31, 2018 decreased to less than $1 million loss compared to prior year income of $2 million. The decrease was driven by increased advertising and promotional activities in onefinancial trends of our joint ventures withinEuropean and Consolidated businesses resulting from Brexit is currently being evaluated. During 2018 we generated approximately 5% of our net sales and hold approximately 3% of consolidated assets in the all other unconsolidated entities. Net sales attributableUnited Kingdom as of March 30, 2019. As details of the United Kingdom’s withdrawal from the European Union are finalized, we will continue to evaluate the impacts to our share of the unconsolidated entities were approximately $104 million for Multipro and approximately $7 million for all other unconsolidated entities.business.
The components of our unconsolidated entities’ net sales growth for first quarter of 2018 versus 2017 are shown in the following table: |
| | | | | | |
| | Multipro | Other | Total unconsolidated entities |
| Contributions from volume growth (a) | 26.4 | % | 55.9 | % | 27.1 | % |
| Net price realization and mix | (4.5 | ) | (23.2 | ) | (4.6 | ) |
| Currency-neutral adjusted growth | 21.9 |
| 32.7 |
| 22.5 |
|
| Foreign currency impact | (0.1 | ) | 5.6 |
| 0.3 |
|
| Reported net sales growth | 21.8 | % | 38.3 | % | 22.8 | % |
| (a) Measured in tons based on the stated weight of our product shipments. |
Liquidity and capital resources
Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating and investing needs.
We have historically reported negative working capital primarily as the result of our focus to improve core working capital by reducing our levels of trade receivables and inventory while extending the timing of payment of our trade payables. In addition, weThe impacts of the extended customer terms program and the monetization programs are included in our calculation of core working capital and are largely offsetting. Core working capital was improved by the extension of supplier payment terms. These programs are all part of our ongoing working capital management.
We have a substantial amount of indebtedness which results in current maturities of long-term debt and notes payable which can have a significant impact on working capital as a result of the timing of these required payments. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, pay dividends, fund acquisition opportunities, and repurchase our common stock, reduce our working capital amounts. We had negative working capital of $1.2$1.6 billion and $1.6$1.2 billion as of March 30, 2019 and March 31, 2018, and April 1, 2017, respectively.
We believe that our operating cash flows, together with our credit facilities and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that volatility and/or disruption in the global capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all.
The following table sets forth a summary of our cash flows:
| | | | Quarter ended | Quarter ended |
| (millions) | March 31, 2018 | April 1, 2017 | March 30, 2019 | March 31, 2018 |
| Net cash provided by (used in): | | |
| Operating activities | $ | 228 |
| $ | (34 | ) | $ | 70 |
| $ | 228 |
|
| Investing activities | (131 | ) | 114 |
| (163 | ) | (131 | ) |
| Financing activities | (38 | ) | (77 | ) | 24 |
| (38 | ) |
| Effect of exchange rates on cash and cash equivalents | 30 |
| 15 |
| 20 |
| 30 |
|
| Net increase (decrease) in cash and cash equivalents | $ | 89 |
| $ | 18 |
| $ | (49 | ) | $ | 89 |
|
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 quarter ended March 31, 2018,30, 2019, totaled $228$70 million, an increasea decrease of $262$158 million over the same period in 2017,2018, due to lower net income primarily as restated, due primarily toa result of higher input and distribution costs and the terminationtiming of tax payments. First quarter operating cash flow exceeded our accounts receivable securitization program at the end of 2017. Collections of deferred purchase price on securitized trade receivables totaled $245 million in the quarter ended April 1, 2017 versus zero in the current quarter.
After-tax Project K cash payments were $66 million and $37 million for the quarters ended March 31, 2018 and April 1, 2017, respectively.expectations.
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), iswas approximately negative 6 days and zero days for both of the 12 month periods ended March 31, 201830, 2019 and April 1, 2017, respectively. Compared with the 12 month period ended April 1, 2017, the 2018 cash conversion cycle was positively impacted by an increase in the days of trade payables outstanding attributable to a supplier financing initiative.
Our pension and other postretirement benefit plan contributions amounted to $19 million and $24 million for the quarters ended March 31, 2018 and April 1, 2017, respectively. For the full year 2018, we currently expect that our contributions to pension and other postretirement plans will total approximately $37 million. Actual 2018 contributions could be different from our current projections, as influenced by potential discretionary funding of our benefit trusts versus other competing investment priorities.2018.
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: | | | | Quarter ended | Quarter ended |
| (millions) | March 31, 2018 | April 1, 2017 | March 30, 2019 | March 31, 2018 |
| Net cash provided by operating activities | $ | 228 |
| $ | (34 | ) | $ | 70 |
| $ | 228 |
|
| Additions to properties | (132 | ) | (130 | ) | (148 | ) | (132 | ) |
| Cash flow | $ | 96 |
| $ | (164 | ) | $ | (78 | ) | $ | 96 |
|
Our non-GAAP measure for cash flow decreased to ($78) million in the first quarter of 2019 from $96 million in the comparable prior year quarter due to lower net income, the timing of tax payments, and higher capital expenditures.
Investing activities
Our net cash used in investing activities totaled $131$163 million for the quarter ended March 31, 201830, 2019 compared to cash provided of $114$131 million in the same period of 2017, as restated. The decrease from the prior year was primarily due to the impact of collections of deferred purchase price on securitized trade receivables during the first quarter of 2017. This program was terminated at2018 due primarily higher capital expenditures.
During the endsecond quarter of 2017.2019, we entered into a definitive agreement to sell selected cookie, fruit snacks, pie crusts, and ice cream cone businesses. Upon closing, we expect to use the divestiture proceeds to reduce debt, creating financial flexibility for opportunistic share repurchases or potential future acquisitions.
Financing activities
Our net cash used inprovided by financing activities for the quarter ended March 31, 201830, 2019 totaled $38$24 million compared to $77 million in the same periodcash used of 2017. The difference is due to common stock repurchases of $125$38 million during the
first quarter of 2017 mitigated somewhat by lower proceeds from net issuance of notes payable during the first comparable quarter of 2018 versus 2017.
In November 2017, we issued $600 million of ten-year 3.4% Senior Notesdue primarily to pay downproceeds from commercial paper issued in conjunction with the purchaseborrowings partially offset by share repurchases. Commercial paper outstanding as of Chicago Bar Co., LLC, manufacturer of RXBAR.
In May 2017, we issued €600March 30, 2019 totaled $409 million of five-year 0.80% Euro Notes due 2022 and repaid our 1.75% fixed rate $400compared to $388 million U.S. Dollar Notes due 2017 at maturity. Additionally, we repaid our 2.05% fixed rate Cdn. $300 million Canadian Dollar Notes at maturity.March 31, 2018.
In December 2017, the board of directors approved a new authorization to repurchase up to $1.5 billion in shares beginning in 2018 through December 2019. Total purchases for the quarter ended March 30, 2019, were 4 million shares for $220 million. We did not repurchase shares during the quarter ended March 31, 2018 as we weighed several investment alternatives, including additional investments in West Africa and discretionary pension contributions. Total purchases for the quarter ended April 1, 2017, were 2 million shares for $125 million.2018.
We paid cash dividends of $187$192 million in the quarter ended March 31, 2018,30, 2019, compared to $182$187 million during the same period in 2017.2018. The increase in dividends paid reflects our third quarter 20172018 increase in the quarterly dividend to $.54$.56 per common share from the previous $.52$.54 per common share. In April 2018,2019, the board of directors declared a dividend of $.54$.56 per common share, payable on June 15, 201814, 2019 to shareholders of record at the close of business on June 1, 2018.3, 2019. In addition, the board of directors announced plans to increase the dividend to $.57 per common share beginning with the third quarter of 2019. The dividend is broadly in line with our current plan to maintain our long-term dividend pay-out of approximately 50% of adjusted net income. In addition, the board of directors announced plans to increase the quarterly dividend to $.56 per common share beginning with the third quarter of 2018.
We entered into an unsecured Five-Year Credit Agreement in February 2014, allowing us to borrow, on a revolving credit basis, up to $2.0 billion and expiring in 2019. In January 2018, we entered into an unsecured Five-Year Credit Agreement to replace the existing agreement allowing us to borrow up to $1.5 billion, on a revolving basis.
In January 2018,2019, we entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to $1.0 billion at any time outstanding, to replace the $800 million$1.0 billion 364-day facility that expired in January 2018.2019. The new credit facilities contains customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative 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. There are no borrowings outstanding under the new credit facilities.
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 expect our access to public debt and commercial paper markets, along with operating cash flows, will be adequate to meet future operating, investing and financing needs, including the pursuit of selected acquisitions.
During 2016, we initiatedMonetization programs
We have a program in which customers could extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).
In order to mitigate the net working capital impact of the Extended Terms Program for discrete customers, we entered into agreements to sell, on a revolving basis, certain trade accounts receivable balances to third party financial institutions (Monetization Programs). Transfers under the Monetization Programs are accounted for as sales of receivables resulting in the receivables being de-recognized from our Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum funding from receivables that may be sold at any time is currently $988$1,033 million, (increased from $800 million as of December 30, 2017, reflecting the execution of a second monetization program on March 20, 2018), but may be increased or decreased as customers move in or out of the Extended Terms Program and as additional financial institutions are added tomove in or out of the Monetization Programs. Accounts receivable sold of $929$944 million and $601$900 million remained outstanding under this arrangement as of March 31, 201830, 2019 and December 30, 2017,29, 2018, respectively.
Previously, in order
The Monetization Programs are designed to mitigatedirectly offset the net working capital impact of the Extended Terms Program for certain customers, we entered into agreementswould have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. Current DSO levels within North America are consistent with DSO levels prior to the execution of the Extended Term Program and Monetization Programs.
If financial institutions (Securitization Program)were to sell these receivables resultingterminate their participation in the receivables being de-recognized fromMonetization Programs and we were unable secure alternative arrangements, our consolidated balance sheet. The maximum funding from receivables that may be sold at any time was $600 million. In December 2017, we terminated the Securitizationability to offer our Extended Terms Program such that no receivables were sold after December 28, 2017. In March 2018 we substantially replaced the securitization
program with a second monetization program. Terminating the Securitization Program had no impact onand effectively manage our Cash Flow.
As of December 30, 2017, approximately $433 million of accounts receivable sold under the Securitization Program remained outstanding, for which we received cash of approximately $412 millionbalance and a deferred purchase price asset of approximately $21 million.overall working capital could be negatively impacted.
Refer to Note 2 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.
Future outlook
Excluding divestiture impacts, guidance previously provided is unchanged. The Company updated financial guidance for 2018. While we reaffirmed previous guidance forestimated divestiture impacts provided below assume the base business, we are raising guidance for currency-neutral net sales and currency-neutral adjusted operating profit to reflecttransaction closes at the impactend of our expanded investment in West Africa and the resultant consolidation of Multipro's results.July 2019.
WePre-divestiture, we expect currency-neutral net sales to be up 3-4% in 2018. This reflects eight months of2019, as previously guided. The divestiture would reduce our outlook by approximately 2-3% as we lose net sales for Multipro, which addsthe divested brands for approximately five months. There is no change to the base business. There were no changes to theour outlook for the base businessorganic net sales growth of Kellogg, which1-2% as divestitures are excluded from organic.
Pre-divestiture, currency-neutral adjusted operating profit is expected to be flat.approximately flat during 2019, per our previous guidance. The divestiture would reduce our forecast approximately 4-5%, reflecting the loss of operating profit for the divested brands and includes certain indirect expenses expected to remain during the transition period.
We expectPre-divestiture, currency-neutral adjusted operating profit will be up 5-7% with the addition of Multipro for the remaining eight months of the year contributing more than one point of additional growth. RXBAREPS is expected to contribute 1-2% of this growth, while the remaining growth is driven by remaining Project K and ZBB savings, partially offset by an increase in brand building as well as a significant increase in freight costs.
Finally, we expect currency-neutral adjusted EPS to growdecrease in the range of 95 to 11%7% in 2019, as previously guided. This decline reflects the 2018 unchanged from previous guidance, driven by growthdiscrete tax benefits, especially in adjusted operating profit and the benefit on effective tax rate of recent U.S. Tax Reform. The increased investments in Multipro and TAF should have an immaterialfirst half, as well as the impact on OIE of the financial markets' decline in late 2018, which reduced the value of pension assets entering the new year. The pending divestiture will likely reduce currency-neutral adjusted EPS by approximately 4-5% suggesting an overall 10-11% decline in currency-neutral adjusted EPS in 2018, as contribution to operating profit from consolidating Multipro is largely offset by increased interest expense and the combination of lower Earnings from unconsolidated entities and higher deduction related to Net income attributable to noncontrolling interests.2019.
We continue to project NetPre-divestiture, full-year non-GAAP cash provided by operating activities to increase to $1.7-1.8 billion in 2018, driven by higher net income, sustained working-capital improvement, and benefits from U.S. Tax Reform. Capital expenditureflow is still expected to be roughly flat at $0.5 billion.compared to the prior year. The lapping of the 2018 voluntary pension contribution is offset by increased tax cash payments. We will provide updated cash flow guidance for the divestiture when we have improved visibility to all of the related impacts.
We are unable to reasonably estimate the potential full-year financial impact of Multipro is immaterialmark-to-market adjustments, costs associated with Brexit and business and portfolio realignment because these impacts are dependent on future changes in market conditions (interest rates, return on assets, and commodity prices) or future decisions to be made by our Cash Flowmanagement team and Board of Directors. Similarly, because of volatility in 2018. Thisforeign exchange rates
and shifts in country mix of our international earnings, we are unable to reasonably estimate excludes the potential full-year financial impact of discretionary pension contributions, whichforeign currency translation.
As a result, these impacts are being contemplated.not included in the guidance provided. Therefore, we are unable to provide a full reconciliation of these non-GAAP measures used in our guidance without unreasonable effort as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.
See the table below that outlines the projected impact of certain other items that are excluded from non-GAAP guidance for 2019:
|
| | | |
| Impact of certain items excluded from Non-GAAP guidance: | Net salesSales | Operating profitProfit | EPSEarnings Per Share |
Project K and cost reductionrestructuring activities (pre-tax) | | $90-110M45-55M | $0.27-$0.320.13-0.16 |
Income tax benefitimpact applicable to adjustments, net** | | | $0.05 - $0.270.03-0.04 |
Currency-neutral adjusted guidance*guidance (before pending divestiture)* | 3-4% | 5-7%~Flat | 9-11%(5)-(7)% |
| | | |
| Pending divestiture impacts | ~(2)-(3)% | ~(4)-(5)% | ~(4)-(5)% |
| Updated Currency-neutral adjusted guidance (including pending divestiture)* | 1-2% | (4)-(5)% | (10)-(11)% |
| Subtract: Acquisitions | 2% | | |
| Add Back: Divestiture | ~(2)-(3)% | | |
| Organic guidance | 1-2% | | |
* 20182019 full year guidance for net sales, operating profit, and earnings per share are provided on a non-GAAP currency-neutral adjusted basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. These items for 2019 include impacts of Brexit, costs associated with business and portfolio realignment, and mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts. The Company is providing quantification of known adjustment items where available.
** Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
|
| |
| Reconciliation of Non-GAAP amounts - Cash Flow Guidance | |
| Approximate |
| (billions) | Full Year 20182019 |
| Net cash provided by (used in) operating activities | ~$1.7 - $1.81.5-1.6 |
| Additions to properties | ~($.5)0.6) |
Cash FlowFlow* | ~$1.2 - $1.30.9-1.0 |
* Represents pre-divestiture forecast. We will provide updated cash flow guidance for the divestiture when we have improved visibility to all of the related impacts.
Forward-looking statements
This Report contains “forward-looking statements” with projections concerning, among other things, the Company’s global growth and efficiency program (Project K), the integration of acquired businesses, our strategy, zero-based budgeting, 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,” “can,” “anticipate,” “project,” “should,” “estimate,” or words or phrases of similar meaning. For example, forward-looking statements are found in Item 1 and in several sections of Management’s Discussion and Analysis. Our actual results or activities may differ materially from these predictions. Our future results could be affected by a variety of factors, including:
the expected benefits and costs of the divestiture of selected cookies, fruit and fruit flavored-snacks, pie crusts, and ice-cream cones businesses of the Company, the expected timing of the completion of the divestiture, the ability of the Company to complete the divestiture considering the various conditions to the completion of the divestiture, some of which are outside the Company’s control, including those conditions related to regulatory approvals, the risk that disruptions from the divestiture will divert management's focus or harm the Company’s business, risks relating to any unforeseen changes to or effects on liabilities, future capital expenditures,
revenues, expenses, earnings, synergies, indebtedness, financial condition, losses and future prospects, risks associated with the Company’s provision of transition services to the divested businesses post-closing;
the ability to implement Project K, including exiting our Direct-Store-Door distribution system, as planned, whether the expected amount of costs associated with Project K will exceed forecasts, whether the Company will be able to realize the anticipated benefits from Project K in the amounts and times expected;
the ability to realize the benefits we expect from the adoption of zero-based budgeting in the amounts and at the times expected;
the ability to realize the anticipated benefits from our implementation of a more formal revenue growth management discipline;
the ability to realize the anticipated benefits and synergies from acquired businesses in the amounts and at the times expected;
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 and transportation 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 food safety, advertising and labeling laws and regulations;
the ultimate impact of product recalls;
adverse changes in global climate or extreme weather conditions;
business disruption or other losses from natural disasters, war, terrorist acts, or political unrest; and,
the risks and uncertainties described 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 11 within Notes to Consolidated Financial Statements for further information on our derivative financial and commodity instruments.
Refer to disclosures contained within Item 7A of our 20172018 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 March 30, 2019.
There have also been periods of increased market volatility and currency exchange rate fluctuations specifically within the United Kingdom and Europe, as a result of the UK referendum held on June 23, 2016, in which voters approved an exit from the European Union, commonly referred to as Brexit. As a result of the referendum, the British government formally initiated the process for withdrawal in March 2017. In January 2019, the draft of the withdrawal agreement, that was previously published in November 2018, was rejected by the UK parliament. The terms of withdrawal have not been established. The European Union granted an extension from the original March
29, 2019 deadline to October 31, 2018.
In2019. If no agreement is concluded by that date, the first quarter in 2018, we entered into forward starting interest rate swapsUnited Kingdom will leave the European Union at such time. Accordingly, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with notional amounts totaling $300 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate debt to be used for general corporate purposes. These swaps were designated as cash flow hedges. The forward starting interest rate swaps were still outstanding as of March 31, 2018 with a loss immaterialrespect to the financial statements.laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal. We recognize that there are still significant uncertainties surrounding the ultimate resolution of Brexit negotiations, and we will continue to monitor any changes that may arise and assess their potential impact on our business.
During the quarter ended March 31, 2018,2019, we entered into cross currency swaps with notional amounts totaling approximately $737€150 million, as hedges against foreign currency volatility associated with our net investment in our wholly-owned foreign subsidiaries. These swaps were designated as net investment hedges. TheWe have cross currency swaps were still outstanding as of March 31, 2018 with a loss of $8M.
We have interest rate swaps with notional amounts totaling $1.4 billion and $2.3 billion outstanding atas of March 31, 2018 and December 31, 2017, respectively,30, 2019 representing a settlement obligationreceivable of $32 million and $54 million, respectively.$71 million. The interest ratetotal notional amount of cross currency swaps are designatedoutstanding as fair value hedges of certain U.S. Dollar debt. During the quarter ended March 31,December 29, 2018 we settled interest rate swaps with notional amounts totaling approximately $869 million which were previously designated as fair value hedgeswas $1.2 billion representing a net settlement receivable of certain U.S. Dollar Notes. We recorded an aggregate loss of $49 million related to the settled swaps that will be amortized as interest expense over the life of the related fixed rate debt. Assuming average variable rate debt levels during the year, a one percentage point increase in interest rates would have increased interest expense by approximately $15 million and $27 million at March 31, 2018 and December 31, 2016, respectively.$79 million.
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 March 31, 2018,30, 2019, 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.
Kellogg’s Project K initiative which includes the reorganization and relocation of certain financial, information technology, and logistics and distribution processes; internal to the organization was initiated in 2014. This initiative is expected to continue through 2018 and will continue to impact the design of our control framework. During efforts associated with Project K, we have implemented additional controls to monitor and maintain appropriate internal controls over financial reporting. There were no other changes during the quarter ended March 31, 2018, that materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
KELLOGG COMPANY
PART II — OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes in ourThe following risk factors fromare in addition to those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.29, 2018. The risk factors disclosed under those Reports 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.
In our pursuit of strategic acquisitions, alliances, divestitures (such as the recently-announced divestiture of selected cookies, fruit and fruit flavored-snacks, pie crusts and ice cream cones businesses) or joint ventures, we may not be able to successfully consummate favorable transactions or successfully integrate acquired businesses.
From time to time, we may evaluate potential acquisitions, alliances, divestitures (such as the recently-announced divestiture of selected cookies, fruit and fruit flavored-snacks, pie crusts and ice cream cones businesses) or joint ventures that would further our strategic objectives. With respect to acquisitions, we may not be able to identify suitable candidates, consummate a transaction on terms that are favorable to us, or achieve expected returns, expected synergies and other benefits as a result of integration challenges, or may not achieve those objectives on a timely basis. Future acquisitions of foreign companies or new foreign ventures would subject us to local laws and regulations and could potentially lead to risks related to, among other things, increased exposure to foreign exchange rate changes, government price control, repatriation of profits and liabilities relating to the U.S. Foreign Corrupt Practices Act.
With respect to proposed divestitures of assets or businesses, we may encounter difficulty in finding acquirers or alternative exit strategies on terms that are favorable to us, which could delay the accomplishment of our strategic objectives, or our divestiture activities may require us to recognize impairment charges. Companies or operations acquired or joint ventures created may not be profitable or may not achieve sales levels and profitability that justify the investments made. Our corporate development activities may present financial and operational risks, including diversion of management attention from existing core businesses, integrating or separating personnel and financial and other systems, and adverse effects on existing business relationships with suppliers and customers. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to certain intangible assets and increased operating expenses, which could adversely affect our results of operations and financial condition.
The recently-announced divestiture of selected cookies, fruit and fruit flavored-snacks, pie crusts and ice cream cones businesses is subject to various risks and uncertainties, and may not be completed on the terms or timeline currently contemplated, if at all.
On April 1, 2019, we announced our entry into a stock and asset purchase agreement pursuant to which, subject to the satisfaction or waiver of certain conditions, we will divest to Ferrero International S.A. (“Ferrero”) selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses (such businesses, collectively, the “Business” and the divestiture of the Business, the “Divestiture”). There can be no assurance that we will be able to complete the Divestiture on the terms currently contemplated or at all. The Divestiture is subject to certain closing conditions, including, among others, the receipt of certain regulatory approvals and the absence of any law, injunction or other judgment prohibiting the Divestiture.
If we complete the Divestiture, there can be no assurance that we will achieve all of the anticipated benefits and we could face unanticipated challenges.
Executing the Divestiture will require us to incur costs and will require the time and attention of our senior management and key employees, which could distract them from operating our business, disrupt operations, and result in the loss of business opportunities, each of which could adversely affect our business, financial condition, and results of operations. We may also experience increased difficulty in attracting, retaining and motivating key employees during the pendency of the Divestiture and following its completion, which could harm our business. Even if the Divestiture is completed, we may not realize some or all of the anticipated benefits from the Divestiture and the Divestiture may in fact adversely affect our remaining business following the completion of the Divestiture and risks associated with our provision of transition services to the Business post-closing.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In December 2017, the board of directors approved an authorization to repurchase of up to $1.5 billion of our common stock beginning in January 2018 through December 2019. This authorization is intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs. During the first quarter of 2018,2019, the Company did not repurchase anyrepurchased 4 million shares for a total of common stock.$220 million.
The following table provides information with respect to purchases of common shares under programs authorized by our board of directors during the quarter ended March 31, 2018.
30, 2019.
(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: | | | | | | | | |
| 12/31/2017 - 1/27/2018 | — |
| $ | — |
| — |
| $ | 1,500 |
| |
| 12/30/2018 - 1/26/2019 | | — |
| $ | — |
| — |
| $ | 1,180 |
|
| Month #2: | | | | | | | | |
| 1/28/2018 - 2/24/2018 | — |
| $ | — |
| — |
| $ | 1,500 |
| |
| 1/27/2019 - 2/23/2019 | | 3.9 |
| $ | 56.62 |
| 3.9 |
| $ | 960 |
|
| Month #3: | | | | | | | | |
| 2/25/2018 - 3/31/2018 | — |
| $ | — |
| — |
| $ | 1,500 |
| |
| 2/24/2019 - 3/30/2019 | | — |
| $ | — |
| — |
| $ | 960 |
|
| Total | — |
| $ | — |
| — |
| | 3.9 |
| $ | 56.62 |
| 3.9 |
| |
Item 6. Exhibits
|
| |
| | |
| 31.1 | Rule 13a-14(e)/15d-14(a) Certification from Steven A. Cahillane |
| 31.2 | Rule 13a-14(e)/15d-14(a) Certification from Fareed Khan |
| 32.1 | Section 1350 Certification from Steven A. Cahillane |
| 32.2 | Section 1350 Certification from Fareed Khan |
| 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 |
KELLOGG COMPANY
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/ Fareed Khan |
| Fareed Khan |
Principal Financial Officer; Senior Vice President and Chief Financial Officer |
| |
/s/ Donald O. MondanoKurt Forche |
Donald O. MondanoKurt Forche |
Principal Accounting Officer; Vice President and Corporate Controller |
Date: May 4, 20183, 2019
KELLOGG COMPANY
EXHIBIT INDEX
|
| | |
| Exhibit No. | Description | Electronic (E) Paper (P) Incorp. By Ref. (IBRF) |
| Rule 13a-14(e)/15d-14(a) Certification from Steven A. Cahillane | E |
| Rule 13a-14(e)/15d-14(a) Certification from Fareed Khan | E |
| Section 1350 Certification from Steven A. Cahillane | E |
| Section 1350 Certification from Fareed Khan | 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 |