UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2020October 02, 2021
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-4171
KELLOGG COMPANY
| | | | | | | | | | | | | | |
| State of Incorporation— | Delaware | | IRS Employer Identification No. | 38-0710690 |
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant’s telephone number: 269-961-2000
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, $.25 par value per share | K | New York Stock Exchange |
1.750% Senior Notes due 2021 | K 21 | New York Stock Exchange |
| 0.800% Senior Notes due 2022 | K 22A | New York Stock Exchange |
| 1.000% Senior Notes due 2024 | K 24 | New York Stock Exchange |
| 1.250% Senior Notes due 2025 | K 25 | New York Stock Exchange |
| 0.500% Senior Notes due 2029 | K 29 | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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).
Yes ☐ No ☒
Common Stock outstanding as of September 26, 2020October 2, 2021 — 343,712,976341,122,803 shares
KELLOGG COMPANY
INDEX
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| Financial Statements | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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| Quantitative and Qualitative Disclosures about Market Risk | |
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| Controls and Procedures | |
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| Risk Factors | |
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| Unregistered Sales of Equity Securities and Use of Proceeds | |
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| Exhibits | |
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Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
| | | September 26,
2020 (unaudited) | December 28,
2019 | | October 2,
2021 (unaudited) | January 2,
2021 |
| Current assets | Current assets | | Current assets | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1,329 | | $ | 397 | | Cash and cash equivalents | $ | 440 | | $ | 435 | |
| Marketable securities | 250 | | 0 | | |
| Accounts receivable, net | Accounts receivable, net | 1,626 | | 1,576 | | Accounts receivable, net | 1,680 | | 1,537 | |
| Inventories | Inventories | 1,263 | | 1,226 | | Inventories | 1,378 | | 1,284 | |
| Other current assets | Other current assets | 285 | | 232 | | Other current assets | 301 | | 226 | |
| Total current assets | Total current assets | 4,753 | | 3,431 | | Total current assets | 3,799 | | 3,482 | |
| Property, net | Property, net | 3,484 | | 3,612 | | Property, net | 3,753 | | 3,713 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 657 | | 541 | | Operating lease right-of-use assets | 651 | | 658 | |
| Goodwill | Goodwill | 5,780 | | 5,861 | | Goodwill | 5,794 | | 5,799 | |
| Other intangibles, net | Other intangibles, net | 2,498 | | 2,576 | | Other intangibles, net | 2,441 | | 2,491 | |
| Investments in unconsolidated entities | Investments in unconsolidated entities | 398 | | 404 | | Investments in unconsolidated entities | 423 | | 391 | |
| Other assets | Other assets | 1,352 | | 1,139 | | Other assets | 1,546 | | 1,462 | |
| Total assets | Total assets | $ | 18,922 | | $ | 17,564 | | Total assets | $ | 18,407 | | $ | 17,996 | |
| Current liabilities | Current liabilities | | Current liabilities | |
| Current maturities of long-term debt | Current maturities of long-term debt | $ | 1,417 | | $ | 620 | | Current maturities of long-term debt | $ | 16 | | $ | 627 | |
| Notes payable | Notes payable | 116 | | 107 | | Notes payable | 497 | | 102 | |
| Accounts payable | Accounts payable | 2,449 | | 2,387 | | Accounts payable | 2,526 | | 2,471 | |
| Current operating lease liabilities | Current operating lease liabilities | 120 | | 114 | | Current operating lease liabilities | 128 | | 117 | |
| Accrued advertising and promotion | Accrued advertising and promotion | 807 | | 641 | | Accrued advertising and promotion | 834 | | 776 | |
| Accrued salaries and wages | | Accrued salaries and wages | 283 | | 378 | |
| Other current liabilities | Other current liabilities | 1,125 | | 909 | | Other current liabilities | 745 | | 767 | |
| Total current liabilities | Total current liabilities | 6,034 | | 4,778 | | Total current liabilities | 5,029 | | 5,238 | |
| Long-term debt | Long-term debt | 7,000 | | 7,195 | | Long-term debt | 7,020 | | 6,746 | |
| Operating lease liabilities | Operating lease liabilities | 523 | | 433 | | Operating lease liabilities | 503 | | 520 | |
| Deferred income taxes | Deferred income taxes | 587 | | 596 | | Deferred income taxes | 613 | | 562 | |
| Pension liability | Pension liability | 672 | | 705 | | Pension liability | 738 | | 769 | |
| Other liabilities | Other liabilities | 520 | | 543 | | Other liabilities | 495 | | 525 | |
| Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | 0 |
| Equity | Equity | | Equity | |
| Common stock, $.25 par value | Common stock, $.25 par value | 105 | | 105 | | Common stock, $.25 par value | 105 | | 105 | |
| Capital in excess of par value | Capital in excess of par value | 948 | | 921 | | Capital in excess of par value | 1,005 | | 972 | |
| Retained earnings | Retained earnings | 8,318 | | 7,859 | | Retained earnings | 8,796 | | 8,326 | |
| Treasury stock, at cost | Treasury stock, at cost | (4,570) | | (4,690) | | Treasury stock, at cost | (4,729) | | (4,559) | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (1,757) | | (1,448) | | Accumulated other comprehensive income (loss) | (1,693) | | (1,732) | |
| Total Kellogg Company equity | Total Kellogg Company equity | 3,044 | | 2,747 | | Total Kellogg Company equity | 3,484 | | 3,112 | |
| Noncontrolling interests | Noncontrolling interests | 542 | | 567 | | Noncontrolling interests | 525 | | 524 | |
| Total equity | Total equity | 3,586 | | 3,314 | | Total equity | 4,009 | | 3,636 | |
| Total liabilities and equity | Total liabilities and equity | $ | 18,922 | | $ | 17,564 | | Total liabilities and equity | $ | 18,407 | | $ | 17,996 | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
| | | | Quarter ended | | Year-to-date period ended | | Quarter ended | | Year-to-date period ended |
| (unaudited) | (unaudited) | September 26,
2020 | September 28,
2019 | | September 26,
2020 | September 28,
2019 | (unaudited) | October 2,
2021 | September 26,
2020 | | October 2,
2021 | September 26,
2020 |
| Net sales | Net sales | $ | 3,429 | | $ | 3,372 | | | $ | 10,306 | | $ | 10,355 | | Net sales | $ | 3,622 | | $ | 3,429 | | | $ | 10,761 | | $ | 10,306 | |
| Cost of goods sold | Cost of goods sold | 2,228 | | 2,372 | | | 6,764 | | 7,062 | | Cost of goods sold | 2,457 | | 2,228 | | | 7,206 | | 6,764 | |
| Selling, general and administrative expense | Selling, general and administrative expense | 790 | | 737 | | | 2,166 | | 2,252 | | Selling, general and administrative expense | 718 | | 790 | | | 2,132 | | 2,166 | |
| Operating profit | Operating profit | 411 | | 263 | | | 1,376 | | 1,041 | | Operating profit | 447 | | 411 | | | 1,423 | | 1,376 | |
| Interest expense | Interest expense | 63 | | 72 | | | 196 | | 221 | | Interest expense | 55 | | 63 | | | 172 | | 196 | |
| Other income (expense), net | Other income (expense), net | 70 | | 150 | | | 151 | | 247 | | Other income (expense), net | — | | 70 | | | 155 | | 151 | |
| Income before income taxes | Income before income taxes | 418 | | 341 | | | 1,331 | | 1,067 | | Income before income taxes | 392 | | 418 | | | 1,406 | | 1,331 | |
| Income taxes | Income taxes | 65 | | 91 | | | 268 | | 237 | | Income taxes | 92 | | 65 | | | 345 | | 268 | |
| Earnings (loss) from unconsolidated entities | Earnings (loss) from unconsolidated entities | (1) | | (2) | | | (7) | | (5) | | Earnings (loss) from unconsolidated entities | 5 | | (1) | | | — | | (7) | |
| Net income | Net income | 352 | | 248 | | | 1,056 | | 825 | | Net income | 305 | | 352 | | | 1,061 | | 1,056 | |
| Net income attributable to noncontrolling interests | 4 | | 1 | | | 10 | | 10 | | |
| Net income (loss) attributable to noncontrolling interests | | Net income (loss) attributable to noncontrolling interests | (2) | | 4 | | | 6 | | 10 | |
| Net income attributable to Kellogg Company | Net income attributable to Kellogg Company | $ | 348 | | $ | 247 | | | $ | 1,046 | | $ | 815 | | Net income attributable to Kellogg Company | $ | 307 | | $ | 348 | | | $ | 1,055 | | $ | 1,046 | |
| Per share amounts: | Per share amounts: | | Per share amounts: | |
| Basic earnings | Basic earnings | $ | 1.02 | | $ | 0.73 | | | $ | 3.05 | | $ | 2.39 | | Basic earnings | $ | 0.90 | | $ | 1.02 | | | $ | 3.09 | | $ | 3.05 | |
| Diluted earnings | Diluted earnings | $ | 1.01 | | $ | 0.72 | | | $ | 3.03 | | $ | 2.38 | | Diluted earnings | $ | 0.89 | | $ | 1.01 | | | $ | 3.07 | | $ | 3.03 | |
| | Average shares outstanding: | Average shares outstanding: | | Average shares outstanding: | |
| Basic | Basic | 343 | | 341 | | | 343 | | 341 | | Basic | 341 | | 343 | | | 341 | | 343 | |
| Diluted | Diluted | 346 | | 342 | | | 345 | | 342 | | Diluted | 343 | | 346 | | | 343 | | 345 | |
| Actual shares outstanding at period end | Actual shares outstanding at period end | | 344 | | 341 | | Actual shares outstanding at period end | | 341 | | 344 | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(millions)
| | | Quarter ended | | Year-to-date period ended | | Quarter ended | | Year-to-date period ended |
| | September 26, 2020 | | September 26, 2020 | | October 2, 2021 | | October 2, 2021 |
| (unaudited) | (unaudited) | Pre-tax
amount | Tax (expense)
benefit | After-tax
amount | | Pre-tax
amount | Tax (expense)
benefit | After-tax
amount | (unaudited) | Pre-tax
amount | Tax (expense)
benefit | After-tax
amount | | Pre-tax
amount | Tax (expense)
benefit | After-tax
amount |
| Net income | Net income | | $ | 352 | | | | $ | 1,056 | | Net income | | $ | 305 | | | | $ | 1,061 | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | |
| Foreign currency translation adjustments: | Foreign currency translation adjustments: | | Foreign currency translation adjustments: | |
| Foreign currency translation adjustments during period | Foreign currency translation adjustments during period | $ | (91) | | $ | 39 | | (52) | | | $ | (352) | | $ | 29 | | (323) | | Foreign currency translation adjustments during period | $ | (16) | | $ | (21) | | (37) | | | $ | 25 | | $ | (44) | | (19) | |
| Cash flow hedges: | Cash flow hedges: | | Cash flow hedges: | |
| Unrealized gain (loss) | Unrealized gain (loss) | 15 | | (4) | | 11 | | | (38) | | 10 | | (28) | | Unrealized gain (loss) | 3 | | (1) | | 2 | | | 42 | | (11) | | 31 | |
| Reclassification to net income | Reclassification to net income | 4 | | (1) | | 3 | | | 11 | | (3) | | 8 | | Reclassification to net income | 4 | | (1) | | 3 | | | 19 | | (5) | | 14 | |
| Postretirement and postemployment benefits: | Postretirement and postemployment benefits: | | Postretirement and postemployment benefits: | |
| | Reclassification to net income: | Reclassification to net income: | | Reclassification to net income: | |
| Net experience (gain) loss | Net experience (gain) loss | 0 | | 0 | | 0 | | | (2) | | 1 | | (1) | | Net experience (gain) loss | — | | — | | — | | | (2) | | 1 | | (1) | |
| Prior service cost | 0 | | 0 | | 0 | | | (1) | | 0 | | (1) | | |
| | Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
| Unrealized gain (loss) | Unrealized gain (loss) | 0 | | 0 | | 0 | | | 2 | | 0 | | 2 | | Unrealized gain (loss) | — | | — | | — | | | (1) | | — | | (1) | |
| | Reclassification to net income | | Reclassification to net income | (2) | | — | | (2) | | | (2) | | — | | (2) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | $ | (72) | | $ | 34 | | $ | (38) | | | $ | (380) | | $ | 37 | | $ | (343) | | Other comprehensive income (loss) | $ | (11) | | $ | (23) | | $ | (34) | | | $ | 81 | | $ | (59) | | $ | 22 | |
| Comprehensive income | Comprehensive income | | $ | 314 | | | $ | 713 | | Comprehensive income | | $ | 271 | | | $ | 1,083 | |
| Net Income attributable to noncontrolling interests | Net Income attributable to noncontrolling interests | | 4 | | | 10 | | Net Income attributable to noncontrolling interests | | (2) | | | 6 | |
| Other comprehensive income (loss) attributable to noncontrolling interests | Other comprehensive income (loss) attributable to noncontrolling interests | | 2 | | | (34) | | Other comprehensive income (loss) attributable to noncontrolling interests | | (4) | | | (17) | |
| Comprehensive income attributable to Kellogg Company | Comprehensive income attributable to Kellogg Company | | $ | 308 | | | $ | 737 | | Comprehensive income attributable to Kellogg Company | | $ | 277 | | | $ | 1,094 | |
| | | Quarter ended | | Year-to-date period ended | | Quarter ended | | Year-to-date period ended |
| | | September 28, 2019 | | September 28, 2019 | | September 26, 2020 | | September 26, 2020 |
| (unaudited) | (unaudited) | Pre-tax
amount | Tax (expense)
benefit | After-tax
amount | | Pre-tax
amount | Tax (expense)
benefit | After-tax
amount | (unaudited) | Pre-tax
amount | Tax (expense)
benefit | After-tax
amount | | Pre-tax
amount | Tax (expense)
benefit | After-tax
amount |
| Net income | Net income | | $ | 248 | | | | $ | 825 | | Net income | | $ | 352 | | | | $ | 1,056 | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | |
| Foreign currency translation adjustments: | Foreign currency translation adjustments: | | Foreign currency translation adjustments: | |
| Foreign currency translation adjustments during period | Foreign currency translation adjustments during period | $ | 35 | | $ | (38) | | (3) | | | $ | 96 | | $ | (47) | | 49 | | Foreign currency translation adjustments during period | $ | (91) | | $ | 39 | | (52) | | | $ | (352) | | $ | 29 | | (323) | |
| Cash flow hedges: | Cash flow hedges: | | Cash flow hedges: | |
| Unrealized gain (loss) on cash flow hedges | Unrealized gain (loss) on cash flow hedges | (12) | | 4 | | (8) | | | (12) | | 4 | | (8) | | Unrealized gain (loss) on cash flow hedges | 15 | | (4) | | 11 | | | (38) | | 10 | | (28) | |
| Reclassification to net income | Reclassification to net income | (1) | | 0 | | (1) | | | 2 | | (1) | | 1 | | Reclassification to net income | 4 | | (1) | | 3 | | | 11 | | (3) | | 8 | |
| Postretirement and postemployment benefits: | Postretirement and postemployment benefits: | | Postretirement and postemployment benefits: | |
| | Reclassification to net income: | Reclassification to net income: | | Reclassification to net income: | |
| Net experience (gain) loss | Net experience (gain) loss | (1) | | 0 | | (1) | | | (3) | | 1 | | (2) | | Net experience (gain) loss | — | | — | | — | | | (2) | | 1 | | (1) | |
| | Prior service cost | | Prior service cost | — | | — | | — | | | (1) | | — | | (1) | |
| Available-for-sale securities: | Available-for-sale securities: | | Available-for-sale securities: | |
| Unrealized gain (loss) | Unrealized gain (loss) | 1 | | 0 | | 1 | | | 4 | | 0 | | 4 | | Unrealized gain (loss) | — | | — | | — | | | 2 | | — | | 2 | |
| Reclassification to net income | (4) | | 0 | | (4) | | | (4) | | 0 | | (4) | | |
| | Other comprehensive income (loss) | Other comprehensive income (loss) | $ | 18 | | $ | (34) | | $ | (16) | | | $ | 83 | | $ | (43) | | $ | 40 | | Other comprehensive income (loss) | $ | (72) | | $ | 34 | | $ | (38) | | | $ | (380) | | $ | 37 | | $ | (343) | |
| Comprehensive income | Comprehensive income | | $ | 232 | | | $ | 865 | | Comprehensive income | | $ | 314 | | | $ | 713 | |
| Net Income attributable to noncontrolling interests | Net Income attributable to noncontrolling interests | | 1 | | | 10 | | Net Income attributable to noncontrolling interests | | 4 | | | 10 | |
| Other comprehensive income (loss) attributable to noncontrolling interests | Other comprehensive income (loss) attributable to noncontrolling interests | | (2) | | | 1 | | Other comprehensive income (loss) attributable to noncontrolling interests | | 2 | | | (34) | |
| Comprehensive income attributable to Kellogg Company | Comprehensive income attributable to Kellogg Company | | $ | 233 | | | $ | 854 | | Comprehensive income attributable to Kellogg Company | | $ | 308 | | | $ | 737 | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
| | | Quarter ended September 26, 2020 | | Quarter ended October 2, 2021 |
| | | Common stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total Kellogg
Company
equity | Non-controlling
interests | Total
equity | | Common stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total Kellogg
Company
equity | Non-controlling
interests | Total
equity |
| (unaudited) | (unaudited) | shares | amount | shares | amount | (unaudited) | shares | amount | shares | amount |
| Balance, June 27, 2020 | 421 | | $ | 105 | | $ | 929 | | $ | 8,166 | | 78 | | $ | (4,613) | | $ | (1,717) | | $ | 2,870 | | $ | 536 | | $ | 3,406 | | |
| Balance, July 3, 2021 | | Balance, July 3, 2021 | 421 | | $ | 105 | | $ | 973 | | $ | 8,688 | | 80 | | $ | (4,741) | | $ | (1,663) | | $ | 3,362 | | $ | 518 | | $ | 3,880 | |
| | Net income | Net income | | 348 | | | 348 | | 4 | | 352 | | Net income | | 307 | | | 307 | | (2) | | 305 | |
| Acquisition of noncontrolling interest and other | | Acquisition of noncontrolling interest and other | | 22 | | | 22 | | 30 | | 52 | |
| | Dividends declared ($0.57 per share) | | (196) | | | (196) | | | (196) | | |
| | Dividends declared ($0.58 per share) | | Dividends declared ($0.58 per share) | | (198) | | | (198) | | | (198) | |
| Distributions to noncontrolling interest | | Distributions to noncontrolling interest | | — | | (17) | | (17) | |
| Other comprehensive income | Other comprehensive income | | (40) | | (40) | | 2 | | (38) | | Other comprehensive income | | (30) | | (30) | | (4) | | (34) | |
| | Stock compensation | Stock compensation | | 18 | | | 18 | | | 18 | | Stock compensation | | 11 | | | 11 | | | 11 | |
| Stock options exercised and other | Stock options exercised and other | | 1 | | 0 | | (1) | | 43 | | | 44 | | | 44 | | Stock options exercised and other | | (1) | | (1) | | — | | 12 | | | 10 | | | 10 | |
| Balance, September 26, 2020 | 421 | | $ | 105 | | $ | 948 | | $ | 8,318 | | 77 | | $ | (4,570) | | $ | (1,757) | | $ | 3,044 | | $ | 542 | | $ | 3,586 | | |
| Balance, October 2, 2021 | | Balance, October 2, 2021 | 421 | | $ | 105 | | $ | 1,005 | | $ | 8,796 | | 80 | | $ | (4,729) | | $ | (1,693) | | $ | 3,484 | | $ | 525 | | $ | 4,009 | |
|
| | | Year-to-date period ended September 26, 2020 | | Year-to-date period ended October 2, 2021 |
| | | Common stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total Kellogg
Company
equity | Non-controlling
interests | Total
equity | | Common stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total Kellogg
Company
equity | Non-controlling
interests | Total
equity |
| (unaudited) | (unaudited) | shares | amount | shares | amount | (unaudited) | shares | amount | shares | amount |
| Balance, December 28, 2019 | 421 | | $ | 105 | | $ | 921 | | $ | 7,859 | | 79 | | $ | (4,690) | | $ | (1,448) | | $ | 2,747 | | $ | 567 | | $ | 3,314 | | |
| Balance, January 2, 2021 | | Balance, January 2, 2021 | 421 | | $ | 105 | | $ | 972 | | $ | 8,326 | | 77 | | $ | (4,559) | | $ | (1,732) | | $ | 3,112 | | $ | 524 | | $ | 3,636 | |
| Common stock repurchases | | Common stock repurchases | | 4 | | (240) | | | (240) | | | (240) | |
| Net income | | Net income | | 1,055 | | | 1,055 | | 6 | | 1,061 | |
| Acquisition of noncontrolling interest and other | | Acquisition of noncontrolling interest and other | | 22 | | | | 22 | | 30 | | 52 | |
| | Net income | | 1,046 | | | 1,046 | | 10 | | 1,056 | | |
| | Dividends declared ($1.71 per share) | | (586) | | | (586) | | | (586) | | |
| Dividends declared ($1.73 per share) | | Dividends declared ($1.73 per share) | | (590) | | | (590) | | | (590) | |
| Distributions to noncontrolling interest | Distributions to noncontrolling interest | | 0 | | (1) | | (1) | | Distributions to noncontrolling interest | | — | | (18) | | (18) | |
| Other comprehensive income | Other comprehensive income | | (309) | | (309) | | (34) | | (343) | | Other comprehensive income | | 39 | | 39 | | (17) | | 22 | |
| | Stock compensation | Stock compensation | | 55 | | | 55 | | | 55 | | Stock compensation | | 50 | | | 50 | | | 50 | |
| Stock options exercised and other | Stock options exercised and other | | (28) | | (1) | | (2) | | 120 | | | 91 | | | 91 | | Stock options exercised and other | | (39) | | 5 | | (1) | | 70 | | | 36 | | | 36 | |
| Balance, September 26, 2020 | 421 | | $ | 105 | | $ | 948 | | $ | 8,318 | | 77 | | $ | (4,570) | | $ | (1,757) | | $ | 3,044 | | $ | 542 | | $ | 3,586 | | |
| Balance, October 2, 2021 | | Balance, October 2, 2021 | 421 | | $ | 105 | | $ | 1,005 | | $ | 8,796 | | 80 | | $ | (4,729) | | $ | (1,693) | | $ | 3,484 | | $ | 525 | | $ | 4,009 | |
|
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY (cont.)
(millions)
| | | Quarter ended September 28, 2019 | | Quarter ended September 26, 2020 |
| | | Common stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total Kellogg
Company
equity | Non-controlling
interests | Total
equity | | Common stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total Kellogg
Company
equity | Non-controlling
interests | Total
equity |
| (unaudited) | (unaudited) | shares | amount | shares | amount | (unaudited) | shares | amount | shares | amount |
| Balance, June 29, 2019 | 421 | | $ | 105 | | $ | 895 | | $ | 7,858 | | 80 | | $ | (4,739) | | $ | (1,469) | | $ | 2,650 | | $ | 562 | | $ | 3,212 | | |
| Balance, June 27, 2020 | | Balance, June 27, 2020 | 421 | | $ | 105 | | $ | 929 | | $ | 8,166 | | 78 | | $ | (4,613) | | $ | (1,717) | | $ | 2,870 | | $ | 536 | | $ | 3,406 | |
| | Net income | Net income | | 247 | | | 247 | | 1 | | 248 | | Net income | | 348 | | | 348 | | 4 | | 352 | |
| | Dividends declared ($0.57 per share) | Dividends declared ($0.57 per share) | | (194) | | | (194) | | | (194) | | Dividends declared ($0.57 per share) | | (196) | | | (196) | | | (196) | |
| | Other comprehensive income | Other comprehensive income | | (14) | | (14) | | (2) | | (16) | | Other comprehensive income | | (40) | | (40) | | 2 | | (38) | |
| | Stock compensation | Stock compensation | | 13 | | | 13 | | | 13 | | Stock compensation | | 18 | | | 18 | | | 18 | |
| Stock options exercised and other | Stock options exercised and other | | 1 | | (1) | | 0 | | 25 | | | 25 | | | 25 | | Stock options exercised and other | | 1 | | — | | (1) | | 43 | | | 44 | | | 44 | |
| Balance, September 28, 2019 | 421 | | $ | 105 | | $ | 909 | | $ | 7,910 | | 80 | | $ | (4,714) | | $ | (1,483) | | $ | 2,727 | | $ | 561 | | $ | 3,288 | | |
| Balance, September 26, 2020 | | Balance, September 26, 2020 | 421 | | $ | 105 | | $ | 948 | | $ | 8,318 | | 77 | | $ | (4,570) | | $ | (1,757) | | $ | 3,044 | | $ | 542 | | $ | 3,586 | |
| | | Year-to-date period ended September 28, 2019 | | Year-to-date period ended September 26, 2020 |
| | | Common stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total Kellogg
Company
equity | Non-controlling
interests | Total
equity | | Common stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total Kellogg
Company
equity | Non-controlling
interests | Total
equity |
| (unaudited) | (unaudited) | shares | amount | shares | amount | (unaudited) | shares | amount | shares | amount |
| Balance, December 29, 2018 | 421 | | $ | 105 | | $ | 895 | | $ | 7,652 | | 77 | | $ | (4,551) | | $ | (1,500) | | $ | 2,601 | | $ | 558 | | $ | 3,159 | | |
| Common stock repurchases | | 4 | | (220) | | | (220) | | | (220) | | |
| Balance, December 28, 2019 | | Balance, December 28, 2019 | 421 | | $ | 105 | | $ | 921 | | $ | 7,859 | | 79 | | $ | (4,690) | | $ | (1,448) | | $ | 2,747 | | $ | 567 | | $ | 3,314 | |
| | Net income | Net income | | 815 | | | 815 | | 10 | | 825 | | Net income | | 1,046 | | | 1,046 | | 10 | | 1,056 | |
| Sale of subsidiary shares to noncontrolling interest | | 0 | | 1 | | 1 | | |
| Dividends declared ($1.69 per share) | | (574) | | | (574) | | | (574) | | |
| | Dividends declared ($1.71 per share) | | Dividends declared ($1.71 per share) | | (586) | | | (586) | | | (586) | |
| Distributions to noncontrolling interest | Distributions to noncontrolling interest | | 0 | | (9) | | (9) | | Distributions to noncontrolling interest | | — | | (1) | | (1) | |
| Other comprehensive income | Other comprehensive income | | 39 | | 39 | | 1 | | 40 | | Other comprehensive income | | (309) | | (309) | | (34) | | (343) | |
| Reclassification of tax effects relating to U.S. tax reform | | 22 | | | (22) | | 0 | | | 0 | | |
| | Stock compensation | Stock compensation | | 42 | | | 42 | | | 42 | | Stock compensation | | 55 | | | 55 | | | 55 | |
| Stock options exercised and other | Stock options exercised and other | | (28) | | (5) | | (1) | | 57 | | | 24 | | | 24 | | Stock options exercised and other | | (28) | | (1) | | (2) | | 120 | | | 91 | | | 91 | |
| Balance, September 28, 2019 | 421 | | $ | 105 | | $ | 909 | | $ | 7,910 | | 80 | | $ | (4,714) | | $ | (1,483) | | $ | 2,727 | | $ | 561 | | $ | 3,288 | | |
| Balance, September 26, 2020 | | Balance, September 26, 2020 | 421 | | $ | 105 | | $ | 948 | | $ | 8,318 | | 77 | | $ | (4,570) | | $ | (1,757) | | $ | 3,044 | | $ | 542 | | $ | 3,586 | |
|
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
| | | | Year-to-date period ended | | Year-to-date period ended |
| (unaudited) | (unaudited) | September 26,
2020 | September 28,
2019 | (unaudited) | October 2,
2021 | September 26,
2020 |
| Operating activities | Operating activities | | Operating activities | |
| Net income | Net income | $ | 1,056 | | $ | 825 | | Net income | $ | 1,061 | | $ | 1,056 | |
| Adjustments to reconcile net income to operating cash flows: | Adjustments to reconcile net income to operating cash flows: | | Adjustments to reconcile net income to operating cash flows: | |
| Depreciation and amortization | Depreciation and amortization | 355 | | 360 | | Depreciation and amortization | 346 | | 355 | |
| Postretirement benefit plan expense (benefit) | Postretirement benefit plan expense (benefit) | (113) | | (158) | | Postretirement benefit plan expense (benefit) | (112) | | (113) | |
| Deferred income taxes | Deferred income taxes | 57 | | (206) | | Deferred income taxes | 4 | | 57 | |
| Stock compensation | Stock compensation | 55 | | 42 | | Stock compensation | 50 | | 55 | |
| Multi-employer pension plan exit liability | Multi-employer pension plan exit liability | (5) | | 132 | | Multi-employer pension plan exit liability | — | | (5) | |
| | Other | Other | (34) | | (70) | | Other | (29) | | (34) | |
| Postretirement benefit plan contributions | Postretirement benefit plan contributions | (19) | | (19) | | Postretirement benefit plan contributions | (15) | | (19) | |
| Changes in operating assets and liabilities, net of acquisitions: | Changes in operating assets and liabilities, net of acquisitions: | | Changes in operating assets and liabilities, net of acquisitions: | |
| Trade receivables | Trade receivables | (113) | | (253) | | Trade receivables | (196) | | (113) | |
| Inventories | Inventories | (57) | | 16 | | Inventories | (103) | | (57) | |
| Accounts payable | Accounts payable | 108 | | 0 | | Accounts payable | 198 | | 108 | |
| All other current assets and liabilities | All other current assets and liabilities | 303 | | 256 | | All other current assets and liabilities | (59) | | 303 | |
| Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | 1,593 | | 925 | | Net cash provided by (used in) operating activities | 1,145 | | 1,593 | |
| Investing activities | Investing activities | | Investing activities | |
| Additions to properties | Additions to properties | (326) | | (436) | | Additions to properties | (408) | | (326) | |
| Issuance of notes receivable | | Issuance of notes receivable | (29) | | (19) | |
| Repayments from notes receivable | | Repayments from notes receivable | 28 | | 6 | |
| Purchase of marketable securities | Purchase of marketable securities | (250) | | 0 | | Purchase of marketable securities | — | | (250) | |
| Acquisitions, net of cash acquired | 0 | | (8) | | |
| Acquisition of cost method investments | (4) | | 0 | | |
| Divestiture | 0 | | 1,332 | | |
| | Investments in unconsolidated entities | | Investments in unconsolidated entities | (10) | | — | |
| | Purchases of available for sale securities | Purchases of available for sale securities | (75) | | (18) | | Purchases of available for sale securities | (56) | | (75) | |
| Sales of available for sale securities | Sales of available for sale securities | 13 | | 83 | | Sales of available for sale securities | 69 | | 13 | |
| Other | Other | (7) | | (22) | | Other | 21 | | 2 | |
| Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | (649) | | 931 | | Net cash provided by (used in) investing activities | (385) | | (649) | |
| Financing activities | Financing activities | | Financing activities | |
| Net issuances (reductions) of notes payable | Net issuances (reductions) of notes payable | 9 | | 9 | | Net issuances (reductions) of notes payable | 343 | | 9 | |
| Issuances of long-term debt | Issuances of long-term debt | 554 | | 40 | | Issuances of long-term debt | 361 | | 554 | |
| Reductions of long-term debt | Reductions of long-term debt | (45) | | (1,000) | | Reductions of long-term debt | (646) | | (45) | |
| Debt redemption costs | 0 | | (17) | | |
| | Net issuances of common stock | Net issuances of common stock | 105 | | 40 | | Net issuances of common stock | 50 | | 105 | |
| Common stock repurchases | Common stock repurchases | 0 | | (220) | | Common stock repurchases | (240) | | — | |
| Cash dividends | Cash dividends | (586) | | (574) | | Cash dividends | (590) | | (586) | |
| Collateral received on derivative instruments | (14) | | 0 | | |
| | Other | Other | (2) | | (9) | | Other | (18) | | (16) | |
| Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 21 | | (1,731) | | Net cash provided by (used in) financing activities | (740) | | 21 | |
| Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | (33) | | 7 | | Effect of exchange rate changes on cash and cash equivalents | (15) | | (33) | |
| Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | 932 | | 132 | | Increase (decrease) in cash and cash equivalents | 5 | | 932 | |
| Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 397 | | 321 | | Cash and cash equivalents at beginning of period | 435 | | 397 | |
| Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 1,329 | | $ | 453 | | Cash and cash equivalents at end of period | $ | 440 | | $ | 1,329 | |
| | Supplemental cash flow disclosures | | |
| Interest paid | $ | 124 | | $ | 180 | | |
| Income taxes paid | $ | 212 | | $ | 211 | | |
| | Supplemental cash flow disclosures of non-cash investing activities: | Supplemental cash flow disclosures of non-cash investing activities: | | Supplemental cash flow disclosures of non-cash investing activities: | |
| | Additions to properties included in accounts payable | Additions to properties included in accounts payable | $ | 108 | | $ | 93 | | Additions to properties included in accounts payable | $ | 91 | | $ | 108 | |
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
for the quarter ended September 26, 2020October 2, 2021 (unaudited)
Note 1 Accounting policies
Basis of presentation
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 20192020 Annual Report on Form 10-K.
The condensed balance sheet information at December 28, 2019January 2, 2021 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarter ended September 26, 2020October 2, 2021 are not necessarily indicative of the results to be expected for other interim periods or the full year.
During the quarter ended September 26, 2020, the Company began to recognize an estimate of certain customer allowances at the time of sale in accordance with ASC 606, resulting in an out-of-period adjustment of $14 million decreasing net sales and accounts receivable. The Company determined the adjustment to be immaterial to current and previously issued financial statements.
Accounts payable
The Company has agreements with certain third parties to provide accounts payable tracking systems which facilitatesfacilitate 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 facilitatingand the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We haveThe Company has no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under thesethe arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this agreementthe agreements for those payment obligations that have been sold by suppliers. The payment of these obligations by the Company is included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of September 26, 2020, $893October 2, 2021, $914 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $651$650 million of those payment obligations to participating financial institutions. As of December 28, 2019, $812January 2, 2021, $909 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $605$670 million of those payment obligations to participating financial institutions.
Adoption of new accounting standards
Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company adopted the ASU in the first quarter of 2020 and elected to apply it prospectively. The adoption did not have a material impact to the Company's Consolidated Financial Statements.
Accounting standards to be adopted in future periods
Compensation Retirement Benefits. In August 2018, the FASB issued ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removed disclosures that no longer are considered cost beneficial, clarified the specific requirements of disclosures, and added disclosure requirements identified as relevant. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company is currently assessing when to adopt the ASU and the impact of adoption.
Note 2 Sale of accounts receivable
The Company has a program in which a discrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).
The Company has two Receivable Sales Agreements (Monetization Programs) described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. The Monetization Programs are designed to effectively offset the impact on working capital of the Extended Terms Program. The Monetization Programs sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold at any time is $1,033 million.approximately $1.1 billion.
The Company has no retained interest in the receivables sold, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of September 26, 2020October 2, 2021 and December 28, 2019January 2, 2021 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.
Accounts receivable sold of $929$611 million and $774$783 million remained outstanding under these arrangements as of September 26, 2020October 2, 2021 and December 28, 2019,January 2, 2021, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on sale of receivables was $2 million and $6 million for the quarter and year-to-date periods ended October 2, 2021, respectively and was $3 million and $11 million for the quarter and year-to-date periods ended September 26, 2020, respectively and was $6 million and $21 million for the quarter and year-to-date periods ended September 28, 2019, respectively. The recorded loss is included in Other income and expense, net (OIE).
Other programs
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable invoices 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 $22$18 million and $89$55 million remained outstanding under these programs as of September 26, 2020October 2, 2021 and December 28, 2019,January 2, 2021, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on the sale of these receivables is included in OIE and is not material.
Note 3 Divestiture
On July 28, 2019, the Company completed its sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero International S.A. (“Ferrero”) for approximately $1.3 billion in cash, subject to a working capital adjustment mechanism. Both the total assets and net assets of the businesses were approximately $1.3 billion, resulting in a net pre-tax gain of $38 million during the third quarter of 2019, recorded in OIE, after including related costs to sell of $14 million. Additionally, the Company recognized curtailment gains related to the divestiture totaling $17 million in our U.S. pension and nonpension postretirement plans. The operating results for these businesses were primarily included in the North America reportable segment prior to the sale.Proceeds from the divestiture were used primarily to redeem $1.0 billion of debt during the third quarter of 2019.
In connection with the sale, the Company entered into a transition services agreement (TSA) with Ferrero, under which the Company will provide certain services to Ferrero to help facilitate an orderly transition of the businesses
following the sale. In return for these services, Ferrero is required to pay certain agreed upon fees that are designed to reimburse the Company for certain costs incurred by the Company in providing such services, plus specified nominal margins which are immaterial. The TSA provides for a term of services starting at the sale completion date and continuing for a period of up to 18 months.
Note 4 Goodwill and Other intangible assets
Goodwill and Intangible Assets
Changes in the carrying amount of goodwill, intangible assets subject to amortization, consisting primarily of customer relationships, and indefinite-lived intangible assets, consisting of brands and distribution agreements, are presented in the following tables:
Carrying amount of goodwill
| | | | | | | | | | | | | | | | | |
| (millions) | North
America | Europe | Latin
America | AMEA | Consoli-
dated |
| December 28, 2019 | $ | 4,422 | | $ | 347 | | $ | 213 | | $ | 879 | | $ | 5,861 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Currency translation adjustment | (1) | | 0 | | (44) | | (36) | | (81) | |
| September 26, 2020 | $ | 4,421 | | $ | 347 | | $ | 169 | | $ | 843 | | $ | 5,780 | |
Intangible assets subject to amortization
| | | | | | | | | | | | | | | | | |
| Gross carrying amount | | | | | |
| (millions) | North
America | Europe | Latin
America | AMEA | Consoli-
dated |
| December 28, 2019 | $ | 64 | | $ | 41 | | $ | 60 | | $ | 429 | | $ | 594 | |
| | | | | |
| | | | | |
| | | | | |
| Currency translation adjustment | 0 | | 0 | | (16) | | (24) | | (40) | |
| September 26, 2020 | $ | 64 | | $ | 41 | | $ | 44 | | $ | 405 | | $ | 554 | |
| | | | | |
| Accumulated Amortization | | | | | |
| December 28, 2019 | $ | 31 | | $ | 21 | | $ | 15 | | $ | 34 | | $ | 101 | |
| Amortization | 3 | | 3 | | 2 | | 13 | | 21 | |
| | | | | |
| Currency translation adjustment | 0 | | 0 | | (4) | | (2) | | (6) | |
| September 26, 2020 | $ | 34 | | $ | 24 | | $ | 13 | | $ | 45 | | $ | 116 | |
| | | | | |
| Intangible assets subject to amortization, net | | | | | |
| December 28, 2019 | $ | 33 | | $ | 20 | | $ | 45 | | $ | 395 | | $ | 493 | |
| | | | | |
| | | | | |
| Amortization | (3) | | (3) | | (2) | | (13) | | (21) | |
| | | | | |
| Currency translation adjustment | 0 | | 0 | | (12) | | (22) | | (34) | |
| September 26, 2020 | $ | 30 | | $ | 17 | | $ | 31 | | $ | 360 | | $ | 438 | |
For intangible assets in the preceding table, amortization was $21 million and $20 million for the year-to-date periods ended September 26, 2020 and September 28, 2019, respectively. The currently estimated aggregate annual amortization expense for full-year 2020 is approximately $28 million.
Intangible assets not subject to amortization
| | | | | | | | | | | | | | | | | |
| (millions) | North
America | Europe | Latin
America | AMEA | Consoli-
dated |
| December 28, 2019 | $ | 1,238 | | $ | 392 | | $ | 70 | | $ | 383 | | $ | 2,083 | |
| | | | | |
| | | | | |
| | | | | |
| Currency translation adjustment | 0 | | 17 | | (19) | | (21) | | (23) | |
| September 26, 2020 | $ | 1,238 | | $ | 409 | | $ | 51 | | $ | 362 | | $ | 2,060 | |
Note 53 Restructuring programs
The Company views its restructuring programs as part of its operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a 3 to 5-year period ofsubsequent to completion. Upon completionCompletion (or as each major stage is completed in the case of multi-year programs), is when the project begins to deliver cash savings and/or reduced depreciation.
During the secondthird quarter of 2019,2021, the Company announced a reorganization plan forreconfiguration of the EuropeanNorth America reportable segment supply chain network, designed to simplify the organization, increase organizational efficiency, and enhance key processes.drive increased productivity. The overall project is expected to be substantially completed by the end of fiscal year 2020.
The project is expected to resultearly 2024, with related productivity improvements commencing in cumulative pretax net charges of approximately $40 million, including certain non-cash credits. Cash costs are expected to be approximately $50 million. The total expected charges will include severance and other termination benefits and charges related to relocation, third party legal and consulting fees, and contract termination costs.
The charges related to this initiative were less than $1 million during the quarter ended September 26, 2020 and were $3 million for year-to-date period ended September 26, 2020. These charges were recorded in SG&A expense. Since inception, the Company has recognized total charges, including non-cash credits, of $41 million attributed to this initiative.
Additionally during the second quarter of 2019, the Company announced a reorganization plan which primarily impacted the North America reportable segment. The reorganization plan was designed to simplify the organization that supports the remaining North America reportable segment after the divestiture and related transition. The overall project is expected to be substantially completed by the end of fiscal year 2020.
2023. The overall project is expected to result in cumulative pretax charges of approximately $25 million. Cash costs are expected to approximate the pretax charges. Total expected charges will$45 million, which include severance and other termination benefits and charges related to third party consulting fees.
The charges related to this initiative were less than $1 million during the quarter ended and year-to-date period ended September 26, 2020. Since inception, the Company has recognized total charges of $21 million attributed to this initiative. These charges were recorded in SG&A expense.
In addition to the projects discussed above, during the year-to-date period ended September 26, 2020 the Company also incurred restructuringemployee-related costs of $4 million, in the Latin America reportable segmentother cash costs of $21 million and $8 million in the AMEA reportable segment related to reorganization and simplification of those businesses. Thesenon-cash costs, primarily relate to severance and other termination benefits.
Project K
As of the end of 2019, the Company completed implementation of all Project K initiatives. Total project charges, after-tax cash costs and annual savings delivered by Project K were in line with expectations.
During the quarter and year-to-date period ended September 28, 2019, the Company recorded total charges of $15 million and $38 million, respectively, related to Project K.
Total Projects
The tables below provide the details for charges incurred during the quarters and year-to-date periods ended September 26, 2020 and September 28, 2019 and program costs to date for all programs currently active as of September 26, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter ended | | Year-to-date period ended | | Program costs to date |
| (millions) | September 26, 2020 | September 28, 2019 | | September 26, 2020 | September 28, 2019 | | September 26, 2020 |
| Employee related costs | $ | 0 | | $ | (1) | | | $ | 13 | | $ | 41 | | | $ | 63 | |
| Pension curtailment (gain) loss, net | 0 | | 0 | | | 0 | | 0 | | | (5) | |
| Asset related costs | 0 | | 5 | | | 0 | | 15 | | | 0 | |
| | | | | | | |
| Other costs | 0 | | 14 | | | 2 | | 35 | | | 16 | |
| Total | $ | 0 | | $ | 18 | | | $ | 15 | | $ | 91 | | | $ | 74 | |
| | | | | | | |
| | Quarter ended | | Year-to-date period ended | | Program costs to date |
| (millions) | September 26, 2020 | September 28, 2019 | | September 26, 2020 | September 28, 2019 | | September 26, 2020 |
| North America | $ | 0 | | $ | 13 | | | $ | (2) | | $ | 45 | | | $ | 19 | |
| Europe | 0 | | 1 | | | 3 | | 35 | | | 41 | |
| Latin America | 0 | | 4 | | | 4 | | 8 | | | 4 | |
| AMEA | 0 | | 0 | | | 8 | | 3 | | | 8 | |
| Corporate | 0 | | 0 | | | 2 | | 0 | | | 2 | |
| Total | $ | 0 | | $ | 18 | | | $ | 15 | | $ | 91 | | | $ | 74 | |
Charges related to restructuring programs were less than $1 million during the quarter ended September 26, 2020. During the year-to-date period ended September 26, 2020, the Company recorded total charges of $15 million across all restructuring programs. The charges were comprised of $6 million recorded in COGS and $9 million recorded in SG&A expense.
During the quarter ended September 28, 2019, the Company recorded total net charges of $18 million across all restructuring programs. The charges were comprised of $13 million of expense recorded in COGS and $5 million of expense recorded in SG&A expense. During the year-to-date period ended September 28, 2019, the Company recorded total charges of $91 million across all restructuring programs. The charges were comprised of $30 million recorded in COGS and $61 million recorded in SG&A expense.
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 primarilyconsisting of accelerated depreciation and asset write-offs. Other costs consistwrite-off's, of third-party incremental costs$20 million. Charges incurred related to this restructuring program were $4 million during the developmentquarter and implementation of enhanced global structures and capabilities.
At September 26, 2020 total project reserves were $22 million,year-to-date periods ended October 2, 2021. These charges primarily related to severance paymentscosts, and were recorded in COGS expense.
All other costs of which a substantial portion will be paid in 2020. The following table provides details for exit cost reserves related torestructuring projects were immaterial during the reorganizations described above.periods presented.
| | | | | | | | | | | | | | | | |
| Employee
Related
Costs | Pension curtailment (gain) loss, net | | | Other
Costs | Total |
| Liability as of December 28, 2019 | $ | 37 | | $ | 0 | | | | $ | 1 | | $ | 38 | |
| 2020 restructuring charges | 13 | | 0 | | | | 2 | | 15 | |
| Cash payments | (28) | | 0 | | | | (3) | | (31) | |
| Non-cash charges and other | 0 | | 0 | | | | 0 | | 0 | |
| Liability as of September 26, 2020 | $ | 22 | | $ | 0 | | | | $ | 0 | | $ | 22 | |
Note 64 Equity
Earnings per share
Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, restricted stock units, and to a lesser extent, certain contingently issuable performance shares. There were 8 million and 11 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended October 2, 2021. There were 7 million anti-dilutive potential common shares excluded from the reconciliationcalculation for the quarter and year-to-date periods ended September 26, 2020. There were 10 million and 14 million anti-dilutive potential common shares excluded from the reconciliation for the quarter and year-to-date periods ended September 28, 2019. Please refer to the Consolidated Statement of Income for basic and diluted earnings per share for the quarter and year-to-date periods ended October 2, 2021 and September 26, 2020 and September 28, 2019.2020.
Share repurchases
In February 2020, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock through December 2022. During the year-to-date periodquarter ended September 26, 2020,October 2, 2021, the companyCompany did not repurchase any shares of common stock and $1.5 billion remains available under the authorization.
stock. During the year-to-date period ended September 28, 2019,October 2, 2021, the Company repurchased approximately 4 million shares of common stock for a total of $220$240 million. During the quarter and year-to-date periods ended September 26, 2020, the Company did not repurchase any shares of common stock.
Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges, adjustments for net experience losses and prior service cost related to employee benefit plans, and adjustments for unrealized gains and losses on available-for-sale securities, net of related tax effects.
Reclassifications out of Accumulated other comprehensive income (AOCI) for the quarter and year-to-date periods ended October 2, 2021 and September 26, 2020, and September 28, 2019, consisted of the following:
| | | | | | | | | | | |
| (millions) | | | |
Details about AOCI
components | Amount reclassified
from AOCI | Line item impacted
within Income Statement |
| | Quarter ended
October 2, 2021 | Year-to-date period ended
October 2, 2021 | |
| (Gains) losses on cash flow hedges: | | | |
| | | |
| | | |
| Interest rate contracts (a) | $ | 4 | | $ | 19 | | Interest expense |
| | | |
| $ | 4 | | $ | 19 | | Total before tax |
| (1) | | (5) | | Tax expense (benefit) |
| $ | 3 | | $ | 14 | | Net of tax |
| Amortization of postretirement and postemployment benefits: | | | |
| Net experience (gain) loss (b) | $ | — | | $ | (2) | | OIE |
| | | |
| $ | — | | $ | (2) | | Total before tax |
| — | | 1 | | Tax expense (benefit) |
| $ | — | | $ | (1) | | Net of tax |
| (Gains) losses on available-for-sale securities: | | | |
| Corporate bonds (a) | $ | (2) | | $ | (2) | | OIE |
| $ | (2) | | $ | (2) | | Total before tax |
| — | | — | | Tax expense (benefit) |
| $ | (2) | | $ | (2) | | Net of tax |
| Total reclassifications | $ | 1 | | $ | 11 | | Net of tax |
| | | | | | | | | | | |
| | | |
| (millions) | | | |
Details about AOCI
components | Amount reclassified
from AOCI | Line item impacted
within Income Statement |
| | Quarter ended
September 26, 2020 | Year-to-date period ended
September 26, 2020 | |
| (Gains) losses on cash flow hedges: | | | |
| | | |
| | | |
| Interest rate contracts (a) | $ | 4 | | $ | 11 | | Interest expense |
| | | |
| $ | 4 | | $ | 11 | | Total before tax |
| (1) | | (3) | | Tax expense (benefit) |
| $ | 3 | | $ | 8 | | Net of tax |
| Amortization of postretirement and postemployment benefits: | | | |
| Net experience loss (b) | $ | — | | $ | (2) | | OIE |
| Prior service cost (b) | — | | (1) | | OIE |
| $ | — | | $ | (3) | | Total before tax |
| — | | 1 | | Tax expense (benefit) |
| $ | — | | $ | (2) | | Net of tax |
| | | |
| | | |
| | | |
| | | |
| | | |
| Total reclassifications | $ | 3 | | $ | 6 | | Net of tax |
(a) See Derivative instruments and fair value measurements note
(b) See Employee benefits note
| | | | | | | | | | | |
| (millions) | | | |
Details about AOCI
components | Amount reclassified
from AOCI | Line item impacted
within Income Statement |
| | Quarter ended
September 26, 2020 | Year-to-date period ended
September 26, 2020 | |
| (Gains) losses on cash flow hedges: | | | |
| | | |
| | | |
| Interest rate contracts | $ | 4 | | $ | 11 | | Interest expense |
| | | |
| $ | 4 | | $ | 11 | | Total before tax |
| (1) | | (3) | | Tax expense (benefit) |
| $ | 3 | | $ | 8 | | Net of tax |
| Amortization of postretirement and postemployment benefits: | | | |
| Net experience (gain) loss | $ | 0 | | $ | (2) | | OIE |
| Prior service cost | 0 | | (1) | | See Note 9 for further details |
| $ | 0 | | $ | (3) | | Total before tax |
| 0 | | 1 | | Tax expense (benefit) |
| $ | 0 | | $ | (2) | | Net of tax |
| | | |
| | | |
| | | |
| | | |
| | | |
| Total reclassifications | $ | 3 | | $ | 6 | | Net of tax |
| | | | | | | | | | | |
| | | |
| (millions) | | | |
Details about AOCI
components | Amount reclassified
from AOCI | Line item impacted
within Income Statement |
| | Quarter ended
September 28, 2019 | Year-to-date period ended
September 28, 2019 | |
| (Gains) losses on cash flow hedges: | | | |
| | | |
| | | |
| Interest rate contracts | $ | (1) | | $ | 2 | | Interest expense |
| | | |
| $ | (1) | | $ | 2 | | Total before tax |
| 0 | | (1) | | Tax expense (benefit) |
| $ | (1) | | $ | 1 | | Net of tax |
| Amortization of postretirement and postemployment benefits: | | | |
| Net experience loss | $ | (1) | | $ | (3) | | See Note 9 for further details |
| | | |
| $ | (1) | | $ | (3) | | Total before tax |
| 0 | | 1 | | Tax expense (benefit) |
| $ | (1) | | $ | (2) | | Net of tax |
| (Gain) loss on available-for-sale securities: | | | |
| Corporate bonds | $ | (4) | | $ | (4) | | OIE |
| $ | (4) | | $ | (4) | | Total before tax |
| 0 | | 0 | | Tax expense (benefit) |
| $ | (4) | | $ | (4) | | Net of tax |
| Total reclassifications | $ | (6) | | $ | (5) | | Net of tax |
Accumulated other comprehensive income (loss), net of tax, as of September 26, 2020October 2, 2021 and December 28, 2019January 2, 2021 consisted of the following:
| | (millions) | (millions) | September 26,
2020 | December 28,
2019 | (millions) | October 2,
2021 | January 2,
2021 |
| Foreign currency translation adjustments | Foreign currency translation adjustments | $ | (1,688) | | $ | (1,399) | | Foreign currency translation adjustments | $ | (1,670) | | $ | (1,668) | |
| Cash flow hedges — unrealized net gain (loss) | Cash flow hedges — unrealized net gain (loss) | (80) | | (60) | | Cash flow hedges — unrealized net gain (loss) | (12) | | (57) | |
| Postretirement and postemployment benefits: | Postretirement and postemployment benefits: | | Postretirement and postemployment benefits: | |
| Net experience gain (loss) | Net experience gain (loss) | 6 | | 7 | | Net experience gain (loss) | 1 | | 2 | |
| Prior service credit (cost) | Prior service credit (cost) | 3 | | 4 | | Prior service credit (cost) | (12) | | (12) | |
| Available-for-sale securities unrealized net gain (loss) | Available-for-sale securities unrealized net gain (loss) | 2 | | 0 | | Available-for-sale securities unrealized net gain (loss) | — | | 3 | |
| Total accumulated other comprehensive income (loss) | Total accumulated other comprehensive income (loss) | $ | (1,757) | | $ | (1,448) | | Total accumulated other comprehensive income (loss) | $ | (1,693) | | $ | (1,732) | |
Note 75 Notes payable and long-term debt
The following table presents the components of notes payable at September 26, 2020October 2, 2021 and December 28, 2019:January 2, 2021:
| | | | September 26, 2020 | | December 28, 2019 | | October 2, 2021 | | January 2, 2021 |
| (millions) | (millions) | Principal
amount | Effective
interest rate | | Principal
amount | Effective
interest rate | (millions) | Principal
amount | Effective
interest rate | | Principal
amount | Effective
interest rate |
| U.S. commercial paper | U.S. commercial paper | $ | 0 | | 0 | % | | $ | 3 | | 1.78 | % | U.S. commercial paper | $ | 302 | | 0.15 | % | | $ | 25 | | 0.20 | % |
| Bank borrowings | Bank borrowings | 116 | | | 104 | | | Bank borrowings | 195 | | | 77 | | |
| Total | Total | $ | 116 | | | $ | 107 | | | Total | $ | 497 | | | $ | 102 | | |
In May of 2021, the Company issued €300 million of eight-year 0.50% Euro Notes due 2029, resulting in net proceeds of €298 million after discount and underwriting commissions. The 2029 Euro Notes were issued as a sustainability bond, and thus an amount equal to the net proceeds will be used to finance or refinance, in whole or in part, one or more eligible environmental or social projects described in the Company's Sustainability Bond Framework. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision.
Additionally, in May of 2021, the Company repaid the €500 million, seven-year 1.75% Euro Notes due 2021, upon maturity.
In May of 2020, the Company issued $500 million of ten-yearten-year 2.10% Notes due 2030, resulting in net proceeds after debt discount and underwriting commissions of $496 million. The proceeds from these notes were used for general corporate purposes, including the payment of offering related fees and expenses, repayment of a portion of the $600 million 4.00% Notes due 2020 when they maturematured on December 15, 2020, and repayment of a portion of commercial paper borrowings. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision.
In connection with the May 2020 debt issuance, the Company terminated forward starting interest rate swaps with notional amounts totaling $500 million, resulting in a $51 million loss that will be amortized to interest expense over the term of the Notes.
In August 2019, the Company redeemed $191 million of its 4.15% U.S. Dollar Notes due November 2019, $248 million of its 4.00% U.S. Dollar Notes due 2020, $202 million of its 3.25% U.S. Dollar Notes due 2021, and $50 million of its 2.65% U.S. Dollar Notes due 2023. In connection with the debt redemption, the Company incurred $15 million of interest expense, consisting primarily of a premium on the tender offer and also including accelerated
losses on pre-issuance interest rate hedges, acceleration of unamortized debt discount and fees on the redeemed
debt and fees related to the tender offer.
In September 2019, the Company redeemed $309 million of its 4.15% U.S. Dollar Notes due November 2019, the
remaining principal balance subsequent to the August redemption. In connection with the debt redemption, the
Company incurred $1 million of interest expense, consisting primarily of a premium and also including accelerated
losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees
related to the make whole call.
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 executive performance shares. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s 2019 Annual Report on Form 10-K.
In April 2020, the Amended and Restated Kellogg Company 2002 Employee Stock Purchase Plan was approved by shareholders, effective July 1, 2020. The plan is a tax-qualified employee stock purchase plan made available to substantially all U.S. employees, which allows participants to acquire Kellogg stock at a discounted price. The purpose of the plan is to encourage employees at all levels to purchase stock and become shareholders.
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 | | Year-to-date period ended |
| (millions) | September 26, 2020 | September 28, 2019 | | September 26, 2020 | September 28, 2019 |
| Pre-tax compensation expense | $ | 18 | | $ | 14 | | | $ | 59 | | $ | 46 | |
| Related income tax benefit | $ | 5 | | $ | 4 | | | $ | 16 | | $ | 12 | |
In February, the Company granted stock options, restricted stock units, and performance shares, in conjunction with our primary annual award, under the 2017 Long-Term Incentive Plan, approved by shareholders in 2017.
During the year-to-date period ended September 26, 2020, the Company granted approximately 0.6 million restricted stock units at a weighted average cost of $66 per share and 2.3 million non-qualified stock options 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 2019 Annual Report on Form 10-K.
Performance shares
In the first quarter of 2020, the Company granted performance shares to a limited number of senior level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three year cumulative organic net sales growth and three year aggregate operating cash flow.
Compensation cost related to organic net sales growth performance and cash flow targets are revised for changes in the expected outcome. The 2020 target grant currently corresponds to approximately 337,000 shares, with a grant-date fair value of $66 per share.
The 2017 performance share award, payable in stock, was settled at 90% of target in February 2020 for a total dollar equivalent of $6 million.
Note 96 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 20192020 Annual Report on Form 10-K. Components of Company benefit plan benefit(income) expense for the periods presented are included in the tables below. Excluding the service cost component, these amounts are included within Other income (expense) in the Consolidated Statement of Income.
Pension
| | | | Quarter ended | | Year-to-date period ended | | Quarter ended | | Year-to-date period ended |
| (millions) | (millions) | September 26, 2020 | September 28, 2019 | | September 26, 2020 | September 28, 2019 | (millions) | October 2, 2021 | September 26, 2020 | | October 2, 2021 | September 26, 2020 |
| Service cost | Service cost | $ | 9 | | $ | 9 | | | $ | 27 | | $ | 27 | | Service cost | $ | 9 | | $ | 9 | | | $ | 27 | | $ | 27 | |
| Interest cost | Interest cost | 31 | | 42 | | | 99 | | 131 | | Interest cost | 25 | | 31 | | | 75 | | 99 | |
| Expected return on plan assets | Expected return on plan assets | (87) | | (86) | | | (257) | | (254) | | Expected return on plan assets | (76) | | (87) | | | (231) | | (257) | |
| Amortization of unrecognized prior service cost | Amortization of unrecognized prior service cost | 1 | | 1 | | | 5 | | 5 | | Amortization of unrecognized prior service cost | 2 | | 1 | | | 6 | | 5 | |
| Recognized net (gain) loss | Recognized net (gain) loss | 7 | | 23 | | | 64 | | 34 | | Recognized net (gain) loss | 83 | | 7 | | | 63 | | 64 | |
| Net periodic benefit cost | Net periodic benefit cost | $ | (39) | | $ | (11) | | | $ | (62) | | $ | (57) | | Net periodic benefit cost | $ | 43 | | $ | (39) | | | $ | (60) | | $ | (62) | |
| Curtailment (gain) loss | Curtailment (gain) loss | 0 | | (11) | | | (7) | | (11) | | Curtailment (gain) loss | (1) | | — | | | (1) | | (7) | |
| Total pension (income) expense | Total pension (income) expense | $ | (39) | | $ | (22) | | | $ | (69) | | $ | (68) | | Total pension (income) expense | $ | 42 | | $ | (39) | | | $ | (61) | | $ | (69) | |
Other nonpension postretirement
| | | | Quarter ended | | Year-to-date period ended | | Quarter ended | | Year-to-date period ended |
| (millions) | (millions) | September 26, 2020 | September 28, 2019 | | September 26, 2020 | September 28, 2019 | (millions) | October 2, 2021 | September 26, 2020 | | October 2, 2021 | September 26, 2020 |
| Service cost | Service cost | $ | 2 | | $ | 5 | | | $ | 9 | | $ | 12 | | Service cost | $ | 3 | | $ | 2 | | | $ | 9 | | $ | 9 | |
| Interest cost | Interest cost | 7 | | 10 | | | 23 | | 30 | | Interest cost | 5 | | 7 | | | 15 | | 23 | |
| Expected return on plan assets | Expected return on plan assets | (24) | | (23) | | | (70) | | (65) | | Expected return on plan assets | (23) | | (24) | | | (69) | | (70) | |
| Amortization of unrecognized prior service cost | Amortization of unrecognized prior service cost | (1) | | (2) | | | (6) | | (6) | | Amortization of unrecognized prior service cost | (2) | | (1) | | | (6) | | (6) | |
| Recognized net (gain) loss | 0 | | (55) | | | 0 | | (55) | | |
| Net periodic benefit cost | (16) | | (65) | | | (44) | | (84) | | |
| Curtailment (gain) loss | 0 | | (6) | | | 0 | | (6) | | |
| | Total postretirement benefit (income) expense | Total postretirement benefit (income) expense | $ | (16) | | $ | (71) | | | $ | (44) | | $ | (90) | | Total postretirement benefit (income) expense | $ | (17) | | $ | (16) | | | $ | (51) | | $ | (44) | |
Postemployment
| | | | Quarter ended | | Year-to-date period ended | | Quarter ended | | Year-to-date period ended |
| (millions) | (millions) | September 26, 2020 | September 28, 2019 | | September 26, 2020 | September 28, 2019 | (millions) | October 2, 2021 | September 26, 2020 | | October 2, 2021 | September 26, 2020 |
| Service cost | Service cost | $ | 1 | | $ | 1 | | | $ | 3 | | $ | 3 | | Service cost | $ | 1 | | $ | 1 | | | $ | 3 | | $ | 3 | |
| Interest cost | Interest cost | 1 | | 0 | | | 1 | | 1 | | Interest cost | 1 | | 1 | | | 1 | | 1 | |
| Recognized net (gain) loss | Recognized net (gain) loss | 0 | | (1) | | | (2) | | (3) | | Recognized net (gain) loss | — | | — | | | (2) | | (2) | |
| Total postemployment benefit expense | Total postemployment benefit expense | $ | 2 | | $ | 0 | | | $ | 2 | | $ | 1 | | Total postemployment benefit expense | $ | 2 | | $ | 2 | | | $ | 2 | | $ | 2 | |
For the quarter and year-to-date periods ended October 2, 2021, the Company recognized a loss of $83 million and $63 million, respectively, related to the remeasurement of certain U.S. pension plans. For the quarter and year-to-date periods ended September 26, 2020, the Company recognized a loss of $7 million and $15 million, respectively, related to the remeasurement of a U.S. pension plan as current yearplan. These remeasurements were each the result of distributions are expected to exceedthat exceeded service and interest costs resulting in settlement accounting for that particular plan. The amount ofFor the quarter and year-to-date periods ended October 2, 2021, the remeasurement loss was driven primarily by lower than expected asset returns. For the quarter and year-to-date periods ended September 26, 2020, the remeasurements recognized waswere due primarily to changes in the discount rate relative to the previous measurement.measurements.
During the second quarter of 2020, the Company recognized a curtailment gain of $7 million, as certain U.S. pension plan benefits were frozen for a portion of the population. The Company remeasured the benefit obligation for the impacted pension plan, resulting in a mark-to-market loss of $49 million. TheThe loss was due primarily to a lower discount rate partially offset by plan asset returns in excess of the expected rate of return.
For the quarter and year-to-date periods ended September 28, 2019, the Company recognized a loss of $15 million and $26 million, respectively, related to the remeasurement of a U.S. pension plan as current year distributions were expected to exceed service and interest costs, resulting in settlement accounting for that particular plan. The amount of the remeasurement loss recognized was due primarily to an unfavorable change in the discount rate.
In conjunction with the completion of the sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice
cream cones businesses on July 28, 2019, the Company recognized curtailment gains in its U.S. pension and
nonpension postretirement plans of $11 million and $6 million, respectively, during the third quarter of 2019. Additionally, the Company was required to remeasure those plans. The Company recorded a mark-to-market loss of $8 million in our U.S. pension plan due to a lower discount rate and a reduction of the expected return on assets from 7.5% to 7.0% based on an updated target portfolio mix. These decreases were partially offset by better than expected asset returns. We recorded a mark-to-market gain of $55 million related to the remeasurement of a U.S. nonpension postretirement plan as a result of better than expected asset returns, partially offset by a lower discount rate and a reduction of the expected return on assets from 7.5% to 7.0% based on an updated target portfolio mix.
Company contributions to employee benefit plans are summarized as follows:
| | (millions) | (millions) | Pension | Nonpension postretirement | Total | (millions) | Pension | Nonpension postretirement | Total |
| Quarter ended: | Quarter ended: | | Quarter ended: | |
| October 2, 2021 | | October 2, 2021 | $ | — | | $ | 5 | | $ | 5 | |
| September 26, 2020 | September 26, 2020 | $ | 1 | | $ | 6 | | $ | 7 | | September 26, 2020 | $ | 1 | | $ | 6 | | $ | 7 | |
| September 28, 2019 | $ | 2 | | $ | 5 | | $ | 7 | | |
| Year-to-date period ended: | Year-to-date period ended: | | Year-to-date period ended: | |
| October 2, 2021 | | October 2, 2021 | $ | 2 | | $ | 13 | | $ | 15 | |
| September 26, 2020 | September 26, 2020 | $ | 4 | | $ | 15 | | $ | 19 | | September 26, 2020 | $ | 4 | | $ | 15 | | $ | 19 | |
| September 28, 2019 | $ | 6 | | $ | 13 | | $ | 19 | | |
| Full year: | Full year: | | Full year: | |
| Fiscal year 2020 (projected) | $ | 7 | | $ | 19 | | $ | 26 | | |
| Fiscal year 2019 (actual) | $ | 10 | | $ | 18 | | $ | 28 | | |
| Fiscal year 2021 (projected) | | Fiscal year 2021 (projected) | $ | 6 | | $ | 19 | | $ | 25 | |
| Fiscal year 2020 (actual) | | Fiscal year 2020 (actual) | $ | 8 | | $ | 24 | | $ | 32 | |
Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.
Multi-employerMulti-employer pension plan exit liability
During the third quarter of 2019, the Company incurred a pre-tax charge of $132 million due to withdrawing from
two multi-employer pension plans. The cash obligation was originally estimated to be approximately $8 million annually for 20 years. The net present value of the liability was determined using a risk free interest rate. The charge was recorded within COGS on the Consolidated Statement of Income and Other current liabilities and Other liabilities on the Consolidated Balance Sheet.
During the second quarter of 2020, the Company adjusted the estimated withdrawal liability associated with a plan withdrawn from during the third quarter of 2019.The adjustment resulted in a gain of $5 million during the second quarter and resulted from a July 2020 agreement with the plan under which the Company paid $7 million in full settlement of the withdrawal liability.
Note 107 Income taxes
The consolidated effective tax rate for the quarterquarters ended October 2, 2021 and September 26, 2020 was 24% and 16%, respectively. The consolidated effective tax rate for the year-to-date periods ended October 2, 2021 and September 28, 201926, 2020 was 16%25% and 27%20%, respectively.
The effective tax rate for the quarter ended October 2, 2021, wasunfavorably impacted by the establishment of a full valuation allowance of $20 million related to certain foreign deferred tax assets. During the current quarter, the Company determined that certain foreign deferred tax assets were no longer more likely than not to be realized in the future and a full valuation allowance was recorded on a discrete period basis. For the year-to-date period ended October 2, 2021, the effective tax rate was unfavorably impacted by the aforementioned valuation allowance as well as tax legislation in the United Kingdom (UK). During the second quarter of 2021, the Company recorded tax expense of $23 million as a result of tax legislation enacted in the UK in June 2021, which increased the statutory UK tax rate from 19 percent to 25 percent for tax periods after April 1, 2023. The Company revalued its net deferred tax balances related to the UK business to reflect the increased tax rate.
The effective tax rate for the quarter and year-to-date periods ended September 26, 2020, were favorably impacted by the reversal of a liability for uncertainuncertain tax positions of $32 million, resulting from the finalization of a tax examination. The reserves were related to the Company's estimate of the transition tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
The consolidated effective tax rate for the year-to-date periods ended September 26, 2020 and September 28, 2019 was 20% and 22%, respectively. The effective tax rate for the year-to-date period was favorably impacted by the reversal of the liability noted above.
As of September 26, 2020,October 2, 2021, the Company classified $16$13 million of unrecognized tax benefits as a net current tax liability. Management's estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability expected to be settled within one year, offset by approximately $3 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.
The Company’s total gross unrecognized tax benefits as of September 26, 2020October 2, 2021 was $62$60 million. Of this balance, $53$51 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
| | | | | |
|
December 28, 2019 | $ | 90 | |
Tax positions related to current year: | |
Additions | 3 | |
Reductions | 0 | |
Tax positions related to prior years: | |
Additions | 5 | |
Reductions | (34) | |
Settlements | (2) | |
Lapse in statute of limitations | 0 | |
September 26, 2020 | $ | 62 | |
The accrual balance for tax-related interest was approximately $13$14 million at September 26, 2020.October 2, 2021.
Note 118 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.
Derivative instruments are classified on the Consolidated Balance Sheet based on the contractual maturity of the instrument or the timing of the underlying cash flows of the instrument for derivatives with contractual maturities beyond one year. Any collateral associated with derivative instruments is classified as other assets or other current liabilities on the Consolidated Balance Sheet depending on whether the counterparty collateral is in an asset or liability position. Margin deposits related to exchange-traded commodities are recorded in accounts receivable, net on the Consolidated Balance Sheet. On the Consolidated Statement of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item. Cash flows associated with collateral and margin deposits on exchange-traded commodities are classified as investing cash flows when the collateral account is in an asset position and as financing cash flows when the collateral account is in a liability position.
Total notional amounts of the Company’s derivative instruments as of September 26, 2020October 2, 2021 and December 28, 2019January 2, 2021 were as follows:
| | | | | | | | |
| (millions) | September 26,
2020 | December 28,
2019 |
| Foreign currency exchange contracts | $ | 4,288 | | $ | 2,628 | |
| Cross-currency contracts | 1,556 | | 1,540 | |
| Interest rate contracts | 2,339 | | 1,871 | |
| Commodity contracts | 300 | | 524 | |
| Total | $ | 8,483 | | $ | 6,563 | |
| | | | | | | | |
| (millions) | October 2,
2021 | January 2,
2021 |
| Foreign currency exchange contracts | $ | 3,104 | | $ | 2,856 | |
| Cross-currency contracts | 1,360 | | 1,411 | |
| Interest rate contracts | 2,836 | | 2,632 | |
| Commodity contracts | 393 | | 314 | |
| Total | $ | 7,693 | | $ | 7,213 | |
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 September 26, 2020October 2, 2021 and December 28, 2019,January 2, 2021, 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 September 26, 2020October 2, 2021 or December 28, 2019.January 2, 2021.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of September 26, 2020October 2, 2021 and December 28, 2019:January 2, 2021:
Derivatives designated as hedging instruments
| | | | September 26, 2020 | | December 28, 2019 | | October 2, 2021 | | January 2, 2021 |
| (millions) | (millions) | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total | (millions) | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total |
| Assets: | Assets: | | Assets: | |
| Cross-currency contracts: | Cross-currency contracts: | | Cross-currency contracts: | |
| Other current assets | Other current assets | $ | 0 | | $ | 50 | | $ | 50 | | | $ | 0 | | $ | 45 | | $ | 45 | | Other current assets | $ | — | | $ | 27 | | $ | 27 | | | $ | — | | $ | 14 | | $ | 14 | |
| Other assets | Other assets | 0 | | 45 | | 45 | | | 0 | | 40 | | 40 | | Other assets | — | | 15 | | 15 | | | — | | 16 | | 16 | |
| Interest rate contracts: | | |
| Interest rate contracts(a): | | Interest rate contracts(a): | |
| Other current assets | Other current assets | 0 | | 0 | | 0 | | | 0 | | 7 | | 7 | | Other current assets | — | | 46 | | 46 | | | — | | — | | — | |
Other assets (a) | Other assets (a) | 0 | | 30 | | 30 | | | 0 | | 4 | | 4 | | Other assets (a) | — | | 51 | | 51 | | | — | | 60 | | 60 | |
| Total assets | Total assets | $ | 0 | | $ | 125 | | $ | 125 | | | $ | 0 | | $ | 96 | | $ | 96 | | Total assets | $ | — | | $ | 139 | | $ | 139 | | | $ | — | | $ | 90 | | $ | 90 | |
| Liabilities: | Liabilities: | | Liabilities: | |
| | Cross-currency contracts: | Cross-currency contracts: | | Cross-currency contracts: | |
| Other current liabilities | Other current liabilities | $ | 0 | | $ | (5) | | $ | (5) | | | $ | 0 | | $ | 0 | | $ | 0 | | Other current liabilities | $ | — | | $ | — | | $ | — | | | $ | — | | $ | (13) | | $ | (13) | |
| Other Liabilities | Other Liabilities | 0 | | (1) | | (1) | | | 0 | | 0 | | 0 | | Other Liabilities | — | | (7) | | (7) | | | — | | (21) | | (21) | |
| Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
| Other current liabilities | Other current liabilities | 0 | | (2) | | (2) | | | 0 | | (4) | | (4) | | Other current liabilities | — | | — | | — | | | — | | (3) | | (3) | |
| Other liabilities | 0 | | (1) | | (1) | | | 0 | | 0 | | 0 | | |
| | | Total liabilities | Total liabilities | $ | 0 | | $ | (9) | | $ | (9) | | | $ | 0 | | $ | (4) | | $ | (4) | | Total liabilities | $ | — | | $ | (7) | | $ | (7) | | | $ | — | | $ | (37) | | $ | (37) | |
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $0.7$1.2 billion as of September 26, 2020October 2, 2021 and December 28, 2019.
Derivatives not designated as hedging instruments
| | | | September 26, 2020 | | December 28, 2019 | | October 2, 2021 | | January 2, 2021 |
| (millions) | (millions) | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total | (millions) | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total |
| Assets: | Assets: | | Assets: | |
| Foreign currency exchange contracts: | Foreign currency exchange contracts: | | Foreign currency exchange contracts: | |
| Other current assets | Other current assets | $ | 0 | | $ | 63 | | $ | 63 | | | $ | 0 | | $ | 12 | | $ | 12 | | Other current assets | $ | — | | $ | 30 | | $ | 30 | | | $ | — | | $ | 48 | | $ | 48 | |
| Other assets | Other assets | 0 | | 5 | | 5 | | | 0 | | 0 | | 0 | | Other assets | — | | 3 | | 3 | | | — | | — | | — | |
| Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
| Other current assets | Other current assets | 0 | | 4 | | 4 | | | 0 | | 0 | | 0 | | Other current assets | — | | 4 | | 4 | | | — | | 4 | | 4 | |
| Other assets | Other assets | 0 | | 15 | | 15 | | | 0 | | 0 | | 0 | | Other assets | — | | 4 | | 4 | | | — | | 13 | | 13 | |
| Commodity contracts: | Commodity contracts: | | Commodity contracts: | |
| Other current assets | Other current assets | 2 | | 0 | | 2 | | | 9 | | 0 | | 9 | | Other current assets | 17 | | — | | 17 | | | 9 | | — | | 9 | |
| Total assets | Total assets | $ | 2 | | $ | 87 | | $ | 89 | | | $ | 9 | | $ | 12 | | $ | 21 | | Total assets | $ | 17 | | $ | 41 | | $ | 58 | | | $ | 9 | | $ | 65 | | $ | 74 | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Foreign currency exchange contracts: | Foreign currency exchange contracts: | | Foreign currency exchange contracts: | |
| Other current liabilities | Other current liabilities | $ | 0 | | $ | (47) | | $ | (47) | | | $ | 0 | | $ | (18) | | $ | (18) | | Other current liabilities | $ | — | | $ | (41) | | $ | (41) | | | $ | — | | $ | (73) | | $ | (73) | |
| Other liabilities | Other liabilities | 0 | | (7) | | (7) | | | 0 | | 0 | | 0 | | Other liabilities | — | | (5) | | (5) | | | — | | (4) | | (4) | |
| Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
| Other current liabilities | Other current liabilities | 0 | | (6) | | (6) | | | 0 | | 0 | | 0 | | Other current liabilities | — | | (7) | | (7) | | | — | | (6) | | (6) | |
| Other liabilities | Other liabilities | 0 | | (25) | | (25) | | | 0 | | (13) | | (13) | | Other liabilities | — | | (11) | | (11) | | | — | | (22) | | (22) | |
| Commodity contracts: | Commodity contracts: | | Commodity contracts: | |
| Other current liabilities | Other current liabilities | (1) | | 0 | | (1) | | | (1) | | 0 | | (1) | | Other current liabilities | (1) | | — | | (1) | | | (1) | | — | | (1) | |
| | Total liabilities | Total liabilities | $ | (1) | | $ | (85) | | $ | (86) | | | $ | (1) | | $ | (31) | | $ | (32) | | Total liabilities | $ | (1) | | $ | (64) | | $ | (65) | | | $ | (1) | | $ | (105) | | $ | (106) | |
The Company has designated its outstanding foreign currency denominated 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, including current and long-term, was approximately $2.7$2.4 billion as of September 26, 2020October 2, 2021 and $2.6$2.8 billion as of December 28, 2019.January 2, 2021.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of September 26, 2020October 2, 2021 and December 28, 2019.January 2, 2021.
| | (millions) | (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) | (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) |
| | September 26,
2020 | December 28,
2019 | | September 26,
2020 | December 28,
2019 | | October 2,
2021 | January 2,
2021 | | October 2,
2021 | January 2,
2021 |
| | Interest rate contracts | Interest rate contracts | | Current maturities of long-term debt | | $ | 494 | | $ | 493 | | | $ | 0 | | $ | 0 | | Interest rate contracts | | Long-term debt | | $ | 2,940 | | $ | 2,568 | | | $ | 22 | | $ | 25 | |
| Interest rate contracts | | Long-term debt | | $ | 2,853 | | $ | 2,643 | | | $ | 23 | | $ | 19 | | |
(a) The hedged long-term debt includes $14 million and $15$16 million of hedging adjustment on discontinued hedging relationships as of September 26, 2020October 2, 2021 and December 28, 2019,January 2, 2021, 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 September 26, 2020October 2, 2021 and December 28, 2019January 2, 2021 would be adjusted as detailed in the following table:
| | | | | | | | | | |
| As of September 26, 2020: | | Gross Amounts Not Offset in the
Consolidated Balance Sheet | | |
| As of October 2, 2021: | | As of October 2, 2021: | | 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 | Total asset derivatives | $ | 214 | | $ | (94) | | $ | 0 | | $ | 120 | | Total asset derivatives | $ | 197 | | $ | (59) | | $ | — | | $ | 138 | |
| Total liability derivatives | Total liability derivatives | $ | (95) | | $ | 94 | | $ | 0 | | $ | (1) | | Total liability derivatives | $ | (72) | | $ | 59 | | $ | 7 | | $ | (6) | |
| | | | | | | | | | |
| As of December 28, 2019: | | Gross Amounts Not Offset in the
Consolidated Balance Sheet | | |
| As of January 2, 2021: | | As of January 2, 2021: | | 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 | Total asset derivatives | $ | 117 | | $ | (27) | | $ | (7) | | $ | 83 | | Total asset derivatives | $ | 164 | | $ | (116) | | $ | — | | $ | 48 | |
| Total liability derivatives | Total liability derivatives | $ | (36) | | $ | 27 | | $ | 0 | | $ | (9) | | Total liability derivatives | $ | (143) | | $ | 116 | | $ | 5 | | $ | (22) | |
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended October 2, 2021 and September 26, 2020 and September 28, 2019 was as follows:
Derivatives and non-derivatives in net investment hedging relationships
| | (millions) | (millions) | Gain (loss)
recognized in
AOCI | | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component | (millions) | Gain (loss)
recognized in
AOCI | | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component |
| | | September 26,
2020 | | September 28,
2019 | | September 26,
2020 | | September 28,
2019 | | | October 2,
2021 | | September 26,
2020 | | October 2,
2021 | | September 26,
2020 | |
| Foreign currency denominated long-term debt | Foreign currency denominated long-term debt | $ | (94) | | | $ | 99 | | | $ | 0 | | | $ | 0 | | | Foreign currency denominated long-term debt | $ | 57 | | | $ | (94) | | | $ | — | | | $ | — | | |
| Cross-currency contracts | Cross-currency contracts | (61) | | | 49 | | | 8 | | | 9 | | Interest expense | Cross-currency contracts | 30 | | | (61) | | | 5 | | | 8 | | Interest expense |
| Total | Total | $ | (155) | | | $ | 148 | | | $ | 8 | | | $ | 9 | | | Total | $ | 87 | | | $ | (155) | | | $ | 5 | | | $ | 8 | | |
Derivatives not designated as hedging instruments
| | (millions) | (millions) | Location of gain
(loss) recognized
in income | Gain (loss)
recognized in
income | (millions) | Location of gain
(loss) recognized
in income | Gain (loss)
recognized in
income |
| | | | September 26,
2020 | | September 28,
2019 | | | October 2,
2021 | | September 26,
2020 |
| Foreign currency exchange contracts | Foreign currency exchange contracts | COGS | $ | (3) | | | $ | 7 | | Foreign currency exchange contracts | COGS | $ | 13 | | | $ | (3) | |
| Foreign currency exchange contracts | Foreign currency exchange contracts | Other income (expense), net | (1) | | | 0 | | Foreign currency exchange contracts | Other income (expense), net | (1) | | | (1) | |
| Foreign currency exchange contracts | Foreign currency exchange contracts | SG&A | (1) | | | 0 | | Foreign currency exchange contracts | SG&A | 1 | | | (1) | |
| | Commodity contracts | Commodity contracts | COGS | 17 | | | (21) | | Commodity contracts | COGS | 29 | | | 17 | |
| | Total | Total | | $ | 12 | | | $ | (14) | | Total | | $ | 42 | | | $ | 12 | |
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended October 2, 2021 and September 26, 2020 and September 28, 2019 was as follows:
Derivatives and non-derivatives in net investment hedging relationships
| | (millions) | (millions) | Gain (loss)
recognized in
AOCI | | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component | (millions) | Gain (loss)
recognized in
AOCI | | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component |
| | | September 26,
2020 | | September 28,
2019 | | September 26,
2020 | | September 28,
2019 | | | October 2,
2021 | | September 26,
2020 | | October 2,
2021 | | September 26,
2020 | |
| Foreign currency denominated long-term debt | Foreign currency denominated long-term debt | $ | (103) | | | $ | 115 | | | $ | 0 | | | $ | 0 | | | Foreign currency denominated long-term debt | $ | 128 | | | $ | (103) | | | $ | — | | | $ | — | | |
| Cross-currency contracts | Cross-currency contracts | 1 | | | 64 | | | 26 | | | 25 | | Interest expense | Cross-currency contracts | 47 | | | 1 | | | 15 | | | 26 | | Interest expense |
| Total | Total | $ | (102) | | | $ | 179 | | | $ | 26 | | | $ | 25 | | | Total | $ | 175 | | | $ | (102) | | | $ | 15 | | | $ | 26 | | |
Derivatives not designated as hedging instruments
| | | | | | | | | | | | | | |
| (millions) | Location of gain
(loss) recognized
in income | Gain (loss)
recognized in
income |
| | | September 26,
2020 | | September 28,
2019 |
| Foreign currency exchange contracts | COGS | $ | 43 | | | $ | (3) | |
| Foreign currency exchange contracts | Other income (expense), net | 5 | | | (1) | |
| Foreign currency exchange contracts | SGA | 3 | | | 0 | |
| Interest rate contracts | Interest expense | 1 | | | 0 | |
| Commodity contracts | COGS | (33) | | | (13) | |
| | | | |
| Total | | $ | 19 | | | $ | (17) | |
| | | | | | | | | | | | | | |
| (millions) | Location of gain
(loss) recognized
in income | Gain (loss)
recognized in
income |
| | | October 2,
2021 | | September 26,
2020 |
| Foreign currency exchange contracts | COGS | $ | (13) | | | $ | 43 | |
| Foreign currency exchange contracts | Other income (expense), net | (2) | | | 5 | |
| Foreign currency exchange contracts | SGA | 6 | | | 3 | |
| Interest rate contracts | Interest expense | 1 | | | 1 | |
| Commodity contracts | COGS | 96 | | | (33) | |
| | | | |
| Total | | $ | 88 | | | $ | 19 | |
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended October 2, 2021 and September 26, 2020 and September 28, 2019:2020:
| | | | | | September 26, 2020 | | | September 28, 2019 | | | | | October 2, 2021 | | | September 26, 2020 |
| (millions) | (millions) | | | Interest Expense | | | 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 | | | $ | 63 | | | | $ | 72 | | 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 | | | $ | 55 | | | | $ | 63 | |
| | Gain (loss) on fair value hedging relationships: | | | | | | | Gain (loss) on fair value hedging relationships: | | | | | |
| | Interest contracts: | | | | | | | Interest contracts: | | | | | |
| | Hedged items | | | (2) | | | | (5) | | | Hedged items | | | 3 | | | | (2) | |
| | Derivatives designated as hedging instruments | | | 2 | | | | 7 | | | Derivatives designated as hedging instruments | | | (2) | | | | 2 | |
| | | 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 | | | (4) | | | | 1 | | | Amount of gain (loss) reclassified from AOCI into income | | | (4) | | | | (4) | |
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the year-to-date periods ended October 2, 2021 and September 26, 2020 and September 28, 2019:2020:
| | | | | | | September 26, 2020 | | | September 28, 2019 | | | | | October 2, 2021 | | | September 26, 2020 |
| (millions) | (millions) | | | Interest Expense | | | 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 | | | $ | 196 | | | | $ | 221 | | 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 | | | $ | 172 | | | | $ | 196 | |
| | Gain (loss) on fair value hedging relationships: | | | | | | | Gain (loss) on fair value hedging relationships: | | | | | |
| | Interest contracts: | | | | | | | Interest contracts: | | | | | |
| | Hedged items | | | (5) | | | | (42) | | | Hedged items | | | 3 | | | | (5) | |
| | Derivatives designated as hedging instruments | | | 6 | | | | 44 | | | Derivatives designated as hedging instruments | | | (2) | | | | 6 | |
| | | 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 | | | (11) | | | | (2) | | | Amount of gain (loss) reclassified from AOCI into income | | | (19) | | | | (11) | |
During the next 12 months, the Company expects $16$17 million of net deferred losses reported in AOCI at September 26, 2020October 2, 2021 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 September 26, 2020October 2, 2021 was not material. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were 0no collateral posting as of September 26, 2020October 2, 2021 triggered by credit-risk-related contingent features.
Other fair value measurements
Marketable securities
During the quarter and year-to-date periods ended September 26, 2020, the Company invested $50 million and $250 million, respectively, in a mutual fund holding short term debt securities. The investment iswas measured at fair value using the net asset value (NAV) per share as a practical expedient and as a result, this investment has not been classified in the fair value hierarchy. As of September 26, 2020, fair value using the NAV was $250 million.
Available for sale securities
| | | September 26, 2020 | | December 28, 2019 | | October 2, 2021 | | January 2, 2021 |
| | Unrealized | | Unrealized | | | Unrealized | | Unrealized | |
| (millions) | (millions) | Cost | Gain (Loss) | Market Value | | Cost | Gain (Loss) | Market Value | (millions) | Cost | Gain (Loss) | Market Value | | Cost | Gain (Loss) | Market Value |
| Corporate bonds | Corporate bonds | $ | 62 | | $ | 2 | | $ | 64 | | | $ | 0 | | $ | 0 | | $ | 0 | | Corporate bonds | $ | 51 | | $ | — | | $ | 51 | | | $ | 62 | | $ | 3 | | $ | 65 | |
During the year-to-date period ended October 2, 2021, the Company's investments in level 2 corporate bonds were sold for approximately $69 million resulting in a gain of $2 million, recorded in Other income and (expense). Also during the year-to-date period ended October 2, 2021, the Company invested approximately $56 million in level 2 corporate bonds.
The market values of the Company's investments in level 2 corporate bonds wereare based on matrices or models from pricing vendors. Unrealized gains and losses wereare included in the Consolidated Statement of Comprehensive Income. Additionally, these investments wereare 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 20202022 to 2036.
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.
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 $7.9$7.8 billion and $7.0 billion, respectively, as of September 26, 2020.October 2, 2021. The fair value and carrying value of the Company's long-term debt were $7.8was $7.7 billion and $7.2$6.7 billion, respectively, as of December 28, 2019.January 2, 2021.
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 of approximately $96$101 million, net of collateral already received from those counterparties, as of September 26, 2020.October 2, 2021.
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 September 26, 2020, collateral related to reciprocal collateralization agreements andOctober 2, 2021, the Company posted $7 million in margin deposits for exchange-traded commodity derivative instruments, were immaterial.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 22% of consolidated trade receivables at September 26, 2020.October 2, 2021.
Note 129 Reportable segments
Kellogg Company is the world’sa leading producer of snacks, cereal, and frozen foods. It is the second largest producer of crackers, and a leading producer of savory snacks, and frozen foods.the world's leading producer of cereal. Additional product offerings include toaster pastries, cereal bars, veggie foods and noodles. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States, United Kingdom, Nigeria, Canada, Mexico, and Nigeria.Australia.
The Company manages its operations through 4 operating segments that 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 Middle East Africa) which consists of Africa, Middle East, Australia and other Asian and Pacific markets. These operating segments also represent our reportable segments.
On July 28, 2019, the Company completed its sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately $1.3 billion in cash. Both the total assets and net assets, consisting primarily of goodwill and intangibles, property, plant and equipment, and inventory, of the businesses were approximately $1.3 billion. The operating results for these businesses were primarily included in the North America reportable segment prior to the sale. Reported net sales for the divested businesses totaled $55 million and $562 million for the quarter and year-to-date periods ended September 28, 2019, respectively.
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. Reportable segment results were as follows:
| | | | Quarter ended | | Year-to-date period ended | | Quarter ended | | Year-to-date period ended |
| (millions) | (millions) | September 26,
2020 | September 28,
2019 | | September 26,
2020 | September 28,
2019 | (millions) | October 2,
2021 | September 26,
2020 | | October 2,
2021 | September 26,
2020 |
| Net sales | Net sales | | Net sales | |
| North America | North America | $ | 2,059 | | $ | 2,059 | | | $ | 6,323 | | $ | 6,496 | | North America | $ | 2,056 | | $ | 2,059 | | | $ | 6,199 | | $ | 6,323 | |
| Europe | Europe | 552 | | 527 | | | 1,624 | | 1,566 | | Europe | 631 | | 552 | | | 1,827 | | 1,624 | |
| Latin America | Latin America | 236 | | 244 | | | 686 | | 707 | | Latin America | 252 | | 236 | | | 754 | | 686 | |
| AMEA | AMEA | 582 | | 542 | | | 1,673 | | 1,586 | | AMEA | 683 | | 582 | | | 1,981 | | 1,673 | |
| Consolidated | Consolidated | $ | 3,429 | | $ | 3,372 | | | $ | 10,306 | | $ | 10,355 | | Consolidated | $ | 3,622 | | $ | 3,429 | | | $ | 10,761 | | $ | 10,306 | |
| Operating profit | Operating profit | | Operating profit | |
| North America | North America | $ | 321 | | $ | 208 | | | $ | 1,151 | | $ | 910 | | North America | $ | 328 | | $ | 321 | | | $ | 1,070 | | $ | 1,151 | |
| Europe | Europe | 63 | | 68 | | | 224 | | 164 | | Europe | 96 | | 63 | | | 277 | | 224 | |
| Latin America | Latin America | 31 | | 23 | | | 84 | | 61 | | Latin America | 29 | | 31 | | | 88 | | 84 | |
| AMEA | AMEA | 58 | | 53 | | | 142 | | 145 | | AMEA | 60 | | 58 | | | 186 | | 142 | |
| Total Reportable Segments | Total Reportable Segments | 473 | | 352 | | | 1,601 | | 1,280 | | Total Reportable Segments | 513 | | 473 | | | 1,621 | | 1,601 | |
| Corporate | Corporate | (62) | | (89) | | | (225) | | (239) | | Corporate | (66) | | (62) | | | (198) | | (225) | |
| Consolidated | Consolidated | $ | 411 | | $ | 263 | | | $ | 1,376 | | $ | 1,041 | | Consolidated | $ | 447 | | $ | 411 | | | $ | 1,423 | | $ | 1,376 | |
Supplemental product information is provided below for net sales to external customers:
| | | | | | | | | | | | | | | | | | | | |
| | Quarter ended | | Year-to-date period ended |
| (millions) | | September 26,
2020 | September 28,
2019 | | September 26,
2020 | September 28,
2019 |
| Snacks* | | $ | 1,593 | | $ | 1,610 | | | $ | 4,669 | | $ | 5,132 | |
| Cereal* | | 1,324 | 1,280 | | 4,093 | 3,811 |
| Frozen | | 279 | 260 | | 857 | 786 |
| Noodles and other | | 233 | 222 | | 687 | 626 |
| Consolidated | | $ | 3,429 | | $ | 3,372 | | | $ | 10,306 | | $ | 10,355 | |
* The year-to-date snacks and cereal net sales reflect the correction of an error in the Company’s first quarter 2020 disclosure. First quarter net
sales for snacks was understated $229 million and net sales for cereal was overstated $229 million within the disclosure included in our
previously issued first quarter financial statements. The revisions, which did not impact consolidated net sales, are not considered material to the
first, second or third quarter 2020 financial statements. | | | | | | | | | | | | | | | | | | | | |
| | Quarter ended | | Year-to-date period ended |
| (millions) | | October 2,
2021 | September 26,
2020 | | October 2,
2021 | September 26,
2020 |
| Snacks | | $ | 1,712 | | $ | 1,593 | | | $ | 5,015 | | $ | 4,669 | |
| Cereal | | 1,313 | | 1,324 | | | 4,023 | | 4,093 | |
| Frozen | | 277 | | 279 | | | 841 | | 857 | |
| Noodles and other | | 320 | | 233 | | | 882 | | 687 | |
| Consolidated | | $ | 3,622 | | $ | 3,429 | | | $ | 10,761 | | $ | 10,306 | |
Note 1310 Supplemental Financial Statement Data
| | | | | | | | |
| Consolidated Balance Sheet | | |
| (millions) | September 26, 2020 (unaudited) | December 28, 2019 |
| Trade receivables | $ | 1,414 | | $ | 1,315 | |
| Allowance for doubtful accounts | (22) | | (10) | |
| Refundable income taxes | 17 | | 56 | |
| Other receivables | 217 | | 215 | |
| Accounts receivable, net | $ | 1,626 | | $ | 1,576 | |
| Raw materials and supplies | $ | 334 | | $ | 303 | |
| Finished goods and materials in process | 929 | | 923 | |
| Inventories | $ | 1,263 | | $ | 1,226 | |
| Property | $ | 9,100 | | $ | 9,051 | |
| Accumulated depreciation | (5,616) | | (5,439) | |
| Property, net | $ | 3,484 | | $ | 3,612 | |
| Pension | $ | 298 | | $ | 241 | |
| Deferred income taxes | 219 | | 231 | |
| Nonpension postretirement benefits | 328 | | 283 | |
| Other | 507 | | 384 | |
| Other assets | $ | 1,352 | | $ | 1,139 | |
| Accrued income taxes | $ | 29 | | $ | 42 | |
| Accrued salaries and wages | 316 | | 290 | |
| Other | 780 | | 577 | |
| Other current liabilities | $ | 1,125 | | $ | 909 | |
| Income taxes payable | $ | 54 | | $ | 81 | |
| Nonpension postretirement benefits | 32 | | 33 | |
| Other | 434 | | 429 | |
| Other liabilities | $ | 520 | | $ | 543 | |
| | | | | | | | |
| Consolidated Balance Sheet | | |
| (millions) | October 2, 2021 (unaudited) | January 2, 2021 |
| Trade receivables | $ | 1,441 | | $ | 1,272 | |
| Allowance for credit losses | (17) | | (19) | |
| Refundable income taxes | 20 | | 66 | |
| Other receivables | 236 | | 218 | |
| Accounts receivable, net | $ | 1,680 | | $ | 1,537 | |
| Raw materials and supplies | $ | 374 | | $ | 338 | |
| Finished goods and materials in process | 1,004 | | 946 | |
| Inventories | $ | 1,378 | | $ | 1,284 | |
| Intangible assets not subject to amortization | $ | 2,048 | | $ | 2,068 | |
| Intangible assets subject to amortization, net | 393 | | 423 | |
| Other intangibles, net | $ | 2,441 | | $ | 2,491 | |
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Note 1411 Contingencies
The Company is subject to various legal proceedings, claims, and governmental inspections or investigations in the ordinary course of business covering matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, workers’ compensation, employment and other actions. These matters are subject to uncertainty and the outcome is not predictable with assurance. The Company uses a combination of insurance and self-insurance for a number of risks, including workers’ compensation, general liability, automobile liability and product liability.
In 2016, a class action complaint was filed against Kellogg in the Northern District of California relating to statements made on packaging for certain products. In August 2019, the Court ruled in favor of the plaintiff regarding certain statements made on the Company’s products and ordered the parties to conduct settlement discussions related to all matters in dispute. In October 2019, the plaintiff filed a motion to the Court to approve a settlement between Kellogg and the class. During 2019, the Company concluded that the contingency related to the unfavorable ruling was probable and estimable, resulting in a liability being recorded.recorded. In February 2020, the Court denied plaintiff’s motion to approve the settlement andJanuary 2021, the parties are continuing arbitration. This litigation, including any potentialreached a new settlement is not expected to have a material impact onthat was within the Company’s consolidated financial statements. Theamount of the contingency the Company will continue to evaluaterecorded in December 2019. In June 2021, the likelihoodcourt entered an order granting preliminary approval of potential outcomes as the litigation continues.settlement.
The Company has established accruals for certain matters where losses are deemed probable and reasonably estimable. There are other claims and legal proceedings pending against the Company for which accruals have not been established. It is reasonably possible that some of these matters could result in an unfavorable judgment against the Company and could require payment of claims in amounts that cannot be estimated at September 26, 2020.October 2, 2021. Based upon current information, management does not expect any of the claims or legal proceedings pending against the Company to have a material impact on the Company’s consolidated financial statements.
Note 15 Subsequent events
During October of 2020, the Company settled obligations associated with approximately 8,000 retired participants within our U.S. defined benefit pension plan to reduce pension obligations and administrative expenses. A group annuity contract was purchased on behalf of these participants with a third-party insurance provider resulting in a reduction of the Company's pension benefit obligations and plan assets of approximately $470 million.
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. Our MD&A references consumption and net sales in discussing our sales trends for certain categories and brands. We record net sales upon delivery of shipments to our customers. Consumption and share data noted within is based on Nielsen x-AOC or other comparable source, for the applicable period. Consumption refers to consumer purchases of our products from our customers. Unless otherwise noted, consumption and shipment trends are materially consistent.
For more than 110115 years, consumers have counted on Kellogg for great-tasting, high-quality and nutritious foods. TheseCurrently, these foods include snacks, such as crackers, savory snacks, toaster pastries, cereal bars and bites; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles. Kellogg products are manufactured and marketed globally.
COVID-19 Response
In March 2020,Since the World Health Organization categorized the novel coronavirus (COVID-19) as a pandemic and it has spread across the world. To limit the spread of COVID-19, governments took various actions to slow and otherwise control the spread of COVID-19, including the issuance of stay-at-home orders and social distancing guidelines. While many governments have eased stay-at-home orders, some governments have taken steps to reimplement restrictions. The Company has taken proactive steps to protect our people and otherwise mitigate the impact to our business. The Company’s business has been designated as “essential services”, “critical infrastructure” and the like by governments where we operate. The Company has taken numerous measures during the pandemic to fulfillin March 2020, our key objectives:objectives continue to be 1) ensuringprotecting the health and safety of our employees, 2) safely producing and delivering our foods to customers and consumers, and 3) supporting the communities in which we operate, and 4) maintaining financial flexibility.operate. Our efforts have been led by the Company’s Executive Committee, a committee composed of senior leaders, and our global Crisis Management Process. As part of that process, we have worked closely with medical, regulatory and other experts as we deliver on our objectives.
EmployeeProtect employee health and safety
The health and safety of our employees is our top priority. As a result,From the outset of the pandemic, the Company has designed and implemented a number of actions across the business. From the outset of the pandemic, the Company restrictedbusiness including restricting travel and visitors to its facilities, prohibitedlimiting external group meetings and established quarantineestablishing safety procedures for any potentially exposed employees. The Company subsequently required employees who could do so to work remotely to further minimize the exposure of our employees to COVID-19. At this time, most of our office employees continue to work remotely. remotely to minimize the exposure of our employees to COVID-19.For those who are not able to work remotely, the Company has implemented newenhanced protocols at all of our facilities to protect our employees, including temperature checks, social distancing, response plans, face coverings, contact tracing, enhanced sanitation procedures, and additional personal protection equipment
Maintain our ability to produce and deliver essential food supply
In addition to our efforts to keep our people safe, the Company has taken several actions to ensure that we maintain our ability to operate effectively during this pandemic, providing our foods to our customers and consumers. WhileIn certain parts of the world, the reacceleration of COVID cases has brought new governmental restrictions, in some instances causing temporary reductions in production. Additionally, as a result of global supply imbalances, we have experienced limited disruption in the operationmanaged through bottlenecks and shortages of our facilities, we are takingmaterials, labor, and freight that have required us to pursue alternative sources, incremental capacity, and temporary labor. We continue to take the appropriate actions to ensure the continuity of our business. We are working proactively with our suppliers to maintain our supply of raw materials and packaging during this time of increased demand for our products. We have secured access to contracted labor forces. We have made incremental investments in our workforce, additional warehouse capacity and increased access to transportation so that our products are delivered in a timely manner to our customers. In conjunction with our management of production capacity, we have simplified our operations (as well as our customers' operations) by prioritizing our offerings to increase the supply of our most demanded products to our customers, as well as delaying innovation launches and commercial activities. At the same time, the Company reinforced food safety practices across our manufacturing network.
We have partnered with our strategic technology providers in order to maintain support for our critical business and finance systems as well as additional network bandwidth and support for the transition to a work-from-home
environment. We have worked to mitigate system-related risks in this environment through heightened monitoring of cybersecurity and network capacity as well as reevaluation of contingency plans.
Support communities
Kellogg is a company with a heart and soul, and we are working together across our company to help our food bank partners and neighbors in need. Kellogg and our charitable funds have donated cash and food to global COVID-19 hunger relief efforts.As always, through our global Kellogg’s® Better Days purpose platform, we help deliver critical nourishment to people when they need it most. Local governments have identified food security as a top priority in their fight against COVID-19. With school and business closures and “shelter-at-home” mandates, Kellogg is providing support to our food bank partners on the front-lines, helping those who may not know where their next meal is coming from.
Maintain financial flexibility
At this time, the COVID-19 pandemic has not materially impacted our liquidity and we anticipate current cash and marketable security balances, operating cash flows, together with our credit facilities and other financing sources including commercial paper, credit and bond markets, will be adequate to meet our operating, investing and financing needs. We expect cash provided by operating activities of $1.8-$1.9 billion and capital expenditures of approximately $500 million in 2020. We currently have $2.5 billion of unused revolving credit agreements, including $1.5 billion effective through 2023 and $1.0 billion effective through January 2021, as well as continued access to the commercial paper markets. We are currently in compliance with all debt covenants and do not have material uncertainty about our ability to maintain compliance in future periods. In May, we issued $500 million of ten-year 2.10% Notes in anticipation of our $600 million December maturity. We continue to utilize available capacity within the Monetization Programs to maintain financial flexibility without negatively impacting working capital. Additionally, we utilized certain aspects of the Coronavirus Aid, Relief and Economic Security Act, to delay the employer share of certain U.S. payroll taxes until 2021 and 2022. Our utilization does not include a government loan and is not expected to result in any restrictions on the Company’s decisions on executive compensation, payment of dividends, or share buy-back programs. As the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs.
Monitoring future impacts
The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing. The Company iscontinues to actively monitoringmonitor the pandemic including, infection and hospitalization rates, vaccination efforts, and related governmental actions such as they continue to developexpanded or reduced stay-at home orders and evolve.social distancing guidelines. We will adjust our mitigation strategies as necessary to address any changing health, operational or financial risks that may arise. Beginning in March,Since the onset of the pandemic, the Company has experienced a significant increase in demand for our retail products as consumers stocked up on food for at-home consumption in those markets. While this demand has moderated for certain products, we will continue to manage our production capacity during this period of high demand.volatility. We continue to monitor the business for adverse impacts of the pandemic, including volatility in the foreign exchange markets, reduced demand in our away from home businesses, supply-chain disruptions in certain markets, increased costs of employee safety and maintaining food supply, and lower revenuespotential disruptions for certain emerging market countries with a higher concentration of traditional trade outlets.countries. In the event the Company experiences adverse impacts from the above or other factors, the Company would also evaluate the need to perform interim impairment tests for the Company’s goodwill, indefinite lived intangible assets, investments in unconsolidated affiliates and property, plant and equipment. 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. See further discussion within Future Outlook.
Segments
On July 28, 2019, we completed the sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero International S.A. (“Ferrero”) for $1.3 billion in cash, on a cash-free, debt-free basis and subject to a working capital adjustment mechanism. The operating results for these businesses were included in our North America and Latin America reportable segments prior to the sale.
We manage our operations through four operating segments that are based primarily on geographic 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 also 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 for evaluation of performance include currency-neutral and organic net sales, adjusted and currency-neutral adjusted operating profit, adjusted and currency-neutral adjusted diluted earnings per share (EPS), currency-neutral adjusted gross profit, currency neutral adjusted gross margin, adjusted other income (expense),effective tax rate, net debt, and cash flow. We determine currency-neutral results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.
•Currency-neutral net sales and organic net sales: We adjust the GAAP financial measure to exclude the impact of foreign currency, resulting in currency-neutral net sales. In addition, we exclude the impact of acquisitions, divestitures, foreign currency, and differences in shipping days including the 53rd week, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company
and each of our reportable segments for the periods presented. Management uses these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions.
•Adjusted: operating profit and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commoditiescommodity contracts, certain equity investments and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, the gaingain/loss on the divestiture, of selected cookies, fruit snacks, pie crusts, and ice cream cone businesses, 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, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commoditiescommodity contracts, certain equity investments and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, the gaingain/loss on the divestiture, of selected cookies, fruit snacks, pie crusts, and ice cream cone businesses, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
•Adjusted effective income tax rate: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected
return on plan assets, and other net periodic pension costs are not excluded), commoditiescommodity contracts, certain equity investments and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, the gaingain/loss on the divestiture, of selected cookies, fruit snacks, pie crusts, and ice cream cone businesses, and other costs impacting comparability.comparability In addition, we have excluded an adjustment for the reversal of a liability for uncertain tax positions, resulting from the finalization of a tax examination. The liability was related to the Company's estimate of the transition tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.. 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.rate, and other impacts to tax expense, including tax reform in the UK and U.S. and certain foreign valuation allowances. 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.
•Net debt: Defined as the sum of long-term debt, current maturities of long-term debt and notes payable,
less cash and cash equivalents and marketable securities. With respect to net debt, cash and cash equivalents and marketable securities are subtracted from the GAAP measure, total debt liabilities, because they could be used to reduce the Company’s debt obligations. Company management and investors use this non-GAAP measure to evaluate changes to the Company's capital structure and credit quality assessment.
•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, commoditiescommodity contracts, certain equity investments, 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. Mark-to-market gains/losses for certain equity investments are recorded based on observable price changes. Changes between contract and market prices for commoditiescommodity 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 $3$59 million and $45 million for the quarter and year-to-date periods ended October 2, 2021, respectively. Included within the aforementioned was a pre-tax mark-to-market expense for pension plans of $83 million and $63 million for the quarter and year-to-date periods ended October 2, 2021, respectively and a pre-tax mark-to-market gain on equity investments of $20 million for the quarter and year-to-date periods ended October 2, 2021. Additionally, we recorded a pre-tax mark-to-market expense of $71$3 million forand $71 million for the quarter and year-to-date periods ended September 26, 2020, respectively. Included within the aforementioned was a pre-tax mark-to-marketmark-to-market expense forfor pension plans ofof $7 million and $64 million for the quarter and year-to-date periods ended September 26, 2020, respectively. Additionally, we recorded a pre-tax mark-to-market benefit of $21 million and $15 million for the quarter and year-to-date periods ended September 28, 2019, respectively. Included within the aforementioned was a pre-tax mark-to-market benefit for pension plans of $32 million and $22 million for the quarter and year-to-date periods ended September 28, 2019, respectively.
Project K
In 2019, the Company completed implementation of all Project K initiatives. We recorded pre-tax charges related to this program of $15 million and $38 million for the quarter and year-to-date periods ended September 28, 2019, respectively.
Brexit impacts
During 2019, with the uncertainty of the United Kingdom's (U.K.) exit from the European Union (EU), commonly referred to as Brexit, we incurred certain costs to proactively prepare for the potential adverse impacts, such as delays at ports of entry and departure. As a result, we incurred pretax charges of $1 million and $7 million for the quarter and year-to-date periods ended September 28, 2019, respectively.
Business and portfolio realignment
One-time costs related to reorganizations in support of our Deploy for Growth priorities and a reshaped portfolio; investments in enhancing capabilities prioritized by our Deploy for Growth strategy; and completed and prospective divestitures and acquisitions, including the divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses. As a result, we incurred pre-tax charges, primarily related to reorganizations, of $23$6 million and $19 million for the the quarter and year-to-date periodperiods ended September 26, 2020.October 2, 2021, respectively. We also recorded pre-tax charges of $21 million and $135$23 million for the quarter and year-to-date periodsperiod ended September 28, 2019, respectively.26, 2020.
Multi-employer pension plan withdrawal
During the third quarter of 2019, the Company incurred a pre-tax charge of $132 million due to withdrawing from two multi-employer pension plans. During the second quarter of 2020, the Company recorded a pre-tax gain of approximately $5 million related to the settlement of onea multi-employer pension plan withdrawal liability from the prior year.liability.
DivestitureForeign valuation allowance
On July 28, 2019,During the third quarter of 2021, the Company completed its saledetermined that certain foreign deferred tax assets were no longer more likely than not to be realized in the future and a full valuation allowance of selected cookies, fruit$20 million was recorded.
UK tax rate change
During the second quarter of 2021, the Company recorded tax expense of $23 million as a result of tax legislation enacted in the UK in June 2021, which increased the statutory UK tax rate from 19 percent to 25 percent and fruit-flavored snacks, pie crusts, and ice cream cones businessesrequired us to Ferrero for approximately $1.3 billion in cash, subjectre-value our net deferred tax liability related to a working capital adjustment mechanism. The operating results for these businesses were included primarily in our North America reportable segment, andUK business to a lesser extent, Latin America, prior to the sale. Reported net sales for the divested businesses totaled $55 million and $562 for the quarter and year-to-date periods ended September 28, 2019.reflect this higher rate.
U.S. Tax Reform
During the third quarter of 2020, the Company reversed a liability for uncertain tax positions of $32 million, related to thethe finalization of a tax examination. The liability was related to the Company's estimate of the transition tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
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 September 26, 2020,October 2, 2021, our reported net sales increased 1.7%5.6% versus the prior year as strong organic net saleson positive price/mix across all regions and volume growth was partially offset by our final month lapping results from the businesses divested at the end of July 2019in Europe and unfavorable foreign currency. Demand for packaged foods for at-home consumption remained elevated as a result of the pandemic, although moderating from the previous quarter. This growth more than offset a decline in away-from-home channel net sales. AMEA. Organic net sales increased 4.5%5.1% from the prior year after excluding the impact of the divestiture and foreign currency.
Third quarter reported operating profit increased 56%9.1% versus the year-ago quarter due primarily to substantially lower charges for multi-employer pension plan withdrawal, business and portfolio realignment, and Project K, as well as higher net sales and favorable mark-to-market impacts. These impacts were partially offset by higher expense for advertising and promotion and performance-based compensation, and the impact of the divestiture. Currency-neutral adjusted operating profit decreased 9.1%, after excluding the impact of the multi-employer pension plan withdrawal, mark-to-market, and business and portfolio realignment.
Reported diluted EPS of $1.01 for the quarter was up 40% compared to thelapping incremental prior year quarterbrand building investment that shifted from the first half of $0.72 due primarily to higher operating profit,a lower tax rate due to the release of reserves for uncertain tax positions related to U.S. Tax reform, and lower interest expense. These impacts were partially offset by higher advertising and promotion and performance-based compensation costs, unfavorable year-over-year mark-to-market impacts, and the prior year gain on the divestiture.2020. Currency-neutral adjusted diluted EPS of $0.91 for the quarter decreased 11.7% compared to prior year quarter of $1.03, after excluding the impact of multi-employer pension plan withdrawal, gain on divestiture, U.S. Tax Reform, mark-to-market, and business and portfolio realignment.
adjusted operating profit increased 11.2%, after excluding the impact of mark-to-market, business and portfolio realignment, and foreign currency translation.
Reported diluted EPS of $0.89 for the quarter decreased 12% compared to the prior year quarter of $1.01 due primarily to higher mark-to-market expense and a higher effective tax rate compared to the prior year. Currency-neutral adjusted diluted EPS of $1.07 for the quarter increased 18% from the prior year quarter on strong operating profit growth, after excluding mark-to-market, business and portfolio realignment, certain Foreign valuation allowances, and foreign currency translation.
Reconciliation of certain non-GAAP Financial Measures
| | | | Quarter ended | Year-to-date period ended | | Quarter ended | Year-to-date period ended |
Consolidated results
(dollars in millions, except per share data) | Consolidated results
(dollars in millions, except per share data) | September 26,
2020 | September 28,
2019 | September 26,
2020 | September 28,
2019 | Consolidated results
(dollars in millions, except per share data) | October 2,
2021 | September 26,
2020 | October 2,
2021 | September 26,
2020 |
| Reported net income | Reported net income | $ | 348 | | $ | 247 | | $ | 1,046 | | $ | 815 | | Reported net income | $ | 307 | | $ | 348 | | $ | 1,055 | | $ | 1,046 | |
| Mark-to-market (pre-tax) | Mark-to-market (pre-tax) | 3 | | 21 | | (71) | | 15 | | Mark-to-market (pre-tax) | (59) | | 3 | | (45) | | (71) | |
| Project K (pre-tax) | — | | (15) | | — | | (38) | | |
| Brexit impacts (pre-tax) | — | | (1) | | — | | (7) | | |
| | Business and portfolio realignment (pre-tax) | Business and portfolio realignment (pre-tax) | — | | (21) | | (23) | | (135) | | Business and portfolio realignment (pre-tax) | (6) | | — | | (19) | | (23) | |
| Multi-employer pension plan withdrawal (pre-tax) | Multi-employer pension plan withdrawal (pre-tax) | — | | (132) | | 5 | | (132) | | Multi-employer pension plan withdrawal (pre-tax) | — | | — | | — | | 5 | |
| Gain on divestiture (pre-tax) | — | | 55 | | — | | 55 | | |
| | Income tax impact applicable to adjustments, net* | Income tax impact applicable to adjustments, net* | (1) | | (13) | | 22 | | 21 | | Income tax impact applicable to adjustments, net* | 17 | | (1) | | 16 | | 22 | |
| Foreign valuation allowance | | Foreign valuation allowance | (20) | | — | | (20) | | — | |
| UK tax rate change | | UK tax rate change | — | | — | | (23) | | — | |
| U.S. Tax Reform | U.S. Tax Reform | 32 | | — | | 32 | | — | | U.S. Tax Reform | — | | 32 | | — | | 32 | |
| Adjusted net income | Adjusted net income | $ | 313 | | $ | 353 | | $ | 1,080 | | $ | 1,036 | | Adjusted net income | $ | 375 | | $ | 313 | | $ | 1,145 | | $ | 1,080 | |
| Foreign currency impact | Foreign currency impact | (2) | | — | | (15) | | — | | Foreign currency impact | 8 | | — | | 40 | | — | |
| Currency-neutral adjusted net income | Currency-neutral adjusted net income | $ | 315 | | $ | 353 | | $ | 1,095 | | $ | 1,036 | | Currency-neutral adjusted net income | $ | 367 | | $ | 313 | | $ | 1,105 | | $ | 1,080 | |
| Reported diluted EPS | Reported diluted EPS | $ | 1.01 | | $ | 0.72 | | $ | 3.03 | | $ | 2.38 | | Reported diluted EPS | $ | 0.89 | | $ | 1.01 | | $ | 3.07 | | $ | 3.03 | |
| Mark-to-market (pre-tax) | Mark-to-market (pre-tax) | 0.01 | | 0.06 | | (0.21) | | 0.04 | | Mark-to-market (pre-tax) | (0.17) | | 0.01 | | (0.13) | | (0.21) | |
| Project K (pre-tax) | — | | (0.04) | | — | | (0.11) | | |
| Brexit impacts (pre-tax) | — | | — | | — | | (0.02) | | |
| | Business and portfolio realignment (pre-tax) | Business and portfolio realignment (pre-tax) | — | | (0.06) | | (0.06) | | (0.39) | | Business and portfolio realignment (pre-tax) | (0.02) | | — | | (0.05) | | (0.06) | |
| Multi-employer pension plan withdrawal (pre-tax) | Multi-employer pension plan withdrawal (pre-tax) | — | | (0.39) | | 0.01 | | (0.39) | | Multi-employer pension plan withdrawal (pre-tax) | — | | — | | — | | 0.01 | |
| Gain on divestiture (pre-tax) | — | | 0.16 | | — | | 0.16 | | |
| | Income tax impact applicable to adjustments, net* | Income tax impact applicable to adjustments, net* | — | | (0.04) | | 0.07 | | 0.06 | | Income tax impact applicable to adjustments, net* | 0.05 | | — | | 0.05 | | 0.07 | |
| Foreign valuation allowance | | Foreign valuation allowance | (0.06) | | — | | (0.06) | | — | |
| UK tax rate change | | UK tax rate change | — | | — | | (0.07) | | — | |
| U.S. Tax Reform | U.S. Tax Reform | 0.09 | | — | | 0.09 | | — | | U.S. Tax Reform | — | | 0.09 | | — | | 0.09 | |
| Adjusted diluted EPS | Adjusted diluted EPS | $ | 0.91 | | $ | 1.03 | | $ | 3.13 | | $ | 3.03 | | Adjusted diluted EPS | $ | 1.09 | | $ | 0.91 | | $ | 3.33 | | $ | 3.13 | |
| Foreign currency impact | Foreign currency impact | — | | — | | (0.04) | | — | | Foreign currency impact | 0.02 | | — | | 0.11 | | — | |
| Currency-neutral adjusted diluted EPS | Currency-neutral adjusted diluted EPS | $ | 0.91 | | $ | 1.03 | | $ | 3.17 | | $ | 3.03 | | Currency-neutral adjusted diluted EPS | $ | 1.07 | | $ | 0.91 | | $ | 3.22 | | $ | 3.13 | |
| Currency-neutral adjusted diluted EPS growth | Currency-neutral adjusted diluted EPS growth | (11.7) | % | | 4.6 | % | | Currency-neutral adjusted diluted EPS growth | 17.6 | % | | 2.9 | % | |
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.
* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
Net sales and operating profit
The following tables provide an analysis of net sales and operating profit performance for the third quarter of 20202021 versus 2019:2020:
| | Quarter ended September 26, 2020 | | |
| Quarter ended October 2, 2021 | | Quarter ended October 2, 2021 | |
| (millions) | (millions) | | North
America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated | (millions) | | North
America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated |
| Reported net sales | Reported net sales | | $ | 2,059 | | | $ | 552 | | | $ | 236 | | | $ | 582 | | | $ | — | | | $ | 3,429 | | Reported net sales | | $ | 2,055 | | | $ | 631 | | | $ | 252 | | | $ | 683 | | | $ | — | | | $ | 3,622 | |
| | Foreign currency impact on total business (inc)/dec | Foreign currency impact on total business (inc)/dec | | (1) | | | 21 | | | (39) | | | (18) | | | — | | | (37) | | Foreign currency impact on total business (inc)/dec | | 7 | | | 14 | | | 11 | | | (15) | | | — | | | 17 | |
| | Organic net sales | Organic net sales | | $ | 2,059 | | | $ | 531 | | | $ | 275 | | | $ | 600 | | | $ | — | | | $ | 3,466 | | Organic net sales | | $ | 2,048 | | | $ | 617 | | | $ | 241 | | | $ | 698 | | | $ | — | | | $ | 3,604 | |
| | Quarter ended September 28, 2019 | | |
| Quarter ended September 26, 2020 | | Quarter ended September 26, 2020 | |
| (millions) | (millions) | | (millions) | |
| Reported net sales | Reported net sales | | $ | 2,059 | | | $ | 527 | | | $ | 244 | | | $ | 542 | | | $ | — | | | $ | 3,372 | | Reported net sales | | $ | 2,059 | | | $ | 552 | | | $ | 236 | | | $ | 582 | | | $ | — | | | $ | 3,429 | |
| | Divestiture | | 54 | | | — | | | 1 | | | — | | | — | | | 55 | | |
| | Organic net sales | | $ | 2,005 | | | $ | 527 | | | $ | 242 | | | $ | 542 | | | $ | — | | | $ | 3,317 | | |
| | % change - 2020 vs. 2019: | | |
| | | % change - 2021 vs. 2020: | | % change - 2021 vs. 2020: | |
| Reported growth | Reported growth | | — | % | | 4.7 | % | | (3.0) | % | | 7.3 | % | | — | % | | 1.7 | % | Reported growth | | (0.2) | % | | 14.3 | % | | 6.7 | % | | 17.4 | % | | — | % | | 5.6 | % |
| | Foreign currency impact on total business (inc)/dec | Foreign currency impact on total business (inc)/dec | | — | % | | 4.0 | % | | (16.0) | % | | (3.4) | % | | — | % | | (1.1) | % | Foreign currency impact on total business (inc)/dec | | 0.3 | % | | 2.6 | % | | 4.5 | % | | (2.6) | % | | — | % | | 0.5 | % |
| Currency-neutral growth | | — | % | | 0.7 | % | | 13.0 | % | | 10.7 | % | | — | % | | 2.8 | % | |
| | Divestiture | | (2.7) | % | | — | % | | (0.4) | % | | — | % | | — | % | | (1.7) | % | |
| | | Organic growth | Organic growth | | 2.7 | % | | 0.7 | % | | 13.4 | % | | 10.7 | % | | — | % | | 4.5 | % | Organic growth | | (0.5) | % | | 11.7 | % | | 2.2 | % | | 20.0 | % | | — | % | | 5.1 | % |
| Volume (tonnage) | Volume (tonnage) | | 2.2 | % | | (1.6) | % | | 6.8 | % | | 7.1 | % | | — | % | | 3.3 | % | Volume (tonnage) | | (4.5) | % | | 10.3 | % | | (2.7) | % | | 8.6 | % | | — | % | | 1.4 | % |
| Pricing/mix | Pricing/mix | | 0.5 | % | | 2.3 | % | | 6.6 | % | | 3.6 | % | | — | % | | 1.2 | % | Pricing/mix | | 4.0 | % | | 1.4 | % | | 4.9 | % | | 11.4 | % | | — | % | | 3.7 | % |
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 September 26, 2020 | | |
| Quarter ended October 2, 2021 | | Quarter ended October 2, 2021 | |
| (millions) | (millions) | | North
America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated | (millions) | | North
America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated |
| Reported operating profit | Reported operating profit | | $ | 321 | | | $ | 62 | | | $ | 31 | | | $ | 59 | | | $ | (62) | | | $ | 411 | | Reported operating profit | | $ | 328 | | | $ | 96 | | | $ | 29 | | | $ | 60 | | | $ | (66) | | | $ | 447 | |
| Mark-to-market | Mark-to-market | | — | | | — | | | — | | | — | | | 10 | | | 10 | | Mark-to-market | | — | | | — | | | 1 | | | — | | | 3 | | | 4 | |
| | Business and portfolio realignment | Business and portfolio realignment | | — | | | — | | | — | | | — | | | — | | | — | | Business and portfolio realignment | | (6) | | | 2 | | | — | | | — | | | (1) | | | (6) | |
| Multi-employer pension plan withdrawal | | — | | | — | | | — | | | — | | | — | | | — | | |
| | Adjusted operating profit | Adjusted operating profit | | $ | 321 | | | $ | 62 | | | $ | 31 | | | $ | 59 | | | $ | (72) | | | $ | 400 | | Adjusted operating profit | | $ | 334 | | | $ | 94 | | | $ | 28 | | | $ | 60 | | | $ | (67) | | | $ | 449 | |
| Foreign currency impact | Foreign currency impact | | — | | | 2 | | | (5) | | | (1) | | | 1 | | | (3) | | Foreign currency impact | | 1 | | | 3 | | | 1 | | | (1) | | | 1 | | | 4 | |
| Currency-neutral adjusted operating profit | Currency-neutral adjusted operating profit | | $ | 321 | | | $ | 60 | | | $ | 36 | | | $ | 59 | | | $ | (73) | | | $ | 403 | | Currency-neutral adjusted operating profit | | $ | 333 | | | $ | 92 | | | $ | 27 | | | $ | 62 | | | $ | (68) | | | $ | 445 | |
| | | Quarter ended September 28, 2019 | | |
| Quarter ended September 26, 2020 | | Quarter ended September 26, 2020 | |
| (millions) | (millions) | | (millions) | |
| Reported operating profit | Reported operating profit | | $ | 208 | | | $ | 68 | | | $ | 23 | | | $ | 53 | | | $ | (89) | | | $ | 263 | | Reported operating profit | | $ | 321 | | | $ | 62 | | | $ | 31 | | | $ | 59 | | | $ | (62) | | | $ | 411 | |
| Mark-to-market | Mark-to-market | | — | | | — | | | — | | | — | | | (11) | | | (11) | | Mark-to-market | | — | | | — | | | — | | | — | | | 10 | | | 10 | |
| Project K | | (9) | | | (1) | | | (4) | | | — | | | — | | | (15) | | |
| Brexit impacts | | — | | | (1) | | | — | | | — | | | — | | | (1) | | |
| Business and portfolio realignment | | (2) | | | 1 | | | — | | | (2) | | | (18) | | | (21) | | |
| Multi-employer pension plan exit liability | | (132) | | | — | | | — | | | — | | | — | | | (132) | | |
| | Adjusted operating profit | Adjusted operating profit | | $ | 351 | | | $ | 69 | | | $ | 28 | | | $ | 56 | | | $ | (61) | | | $ | 444 | | Adjusted operating profit | | $ | 321 | | | $ | 62 | | | $ | 31 | | | $ | 59 | | | $ | (72) | | | $ | 400 | |
| | | % change - 2020 vs. 2019: | | |
| % change - 2021 vs. 2020: | | % change - 2021 vs. 2020: | |
| Reported growth | Reported growth | | 54.1 | % | | (8.9) | % | | 34.3 | % | | 8.8 | % | | 30.8 | % | | 55.9 | % | Reported growth | | 2.1 | % | | 55.1 | % | | (7.2) | % | | 3.7 | % | | (6.0) | % | | 9.1 | % |
| Mark-to-market | Mark-to-market | | — | % | | — | % | | — | % | | — | % | | 22.2 | % | | 10.0 | % | Mark-to-market | | — | % | | — | % | | 3.8 | % | | — | % | | (10.4) | % | | (1.6) | % |
| Project K | | 6.5 | % | | 1.1 | % | | 21.3 | % | | — | % | | 0.1 | % | | 7.2 | % | |
| Brexit impacts | | — | % | | 1.8 | % | | — | % | | — | % | | — | % | | 0.7 | % | |
| | Business and portfolio realignment | Business and portfolio realignment | | 1.7 | % | | (2.2) | % | | 0.1 | % | | 4.5 | % | | 26.4 | % | | 9.4 | % | Business and portfolio realignment | | (2.2) | % | | 3.9 | % | | (1.0) | % | | 0.2 | % | | (1.8) | % | | (1.5) | % |
| Multi-employer pension plan withdrawal | | 54.8 | % | | — | % | | — | % | | — | % | | — | % | | 38.3 | % | |
| | Adjusted growth | Adjusted growth | | (8.9) | % | | (9.6) | % | | 12.9 | % | | 4.3 | % | | (17.9) | % | | (9.7) | % | Adjusted growth | | 4.3 | % | | 51.2 | % | | (10.0) | % | | 3.5 | % | | 6.2 | % | | 12.2 | % |
| Foreign currency impact | Foreign currency impact | | — | % | | 3.3 | % | | (17.0) | % | | (1.7) | % | | 1.3 | % | | (0.6) | % | Foreign currency impact | | 0.4 | % | | 4.3 | % | | 3.4 | % | | (2.3) | % | | 1.0 | % | | 1.0 | % |
| Currency-neutral adjusted growth | Currency-neutral adjusted growth | | (8.9) | % | | (12.9) | % | | 29.9 | % | | 6.0 | % | | (19.2) | % | | (9.1) | % | Currency-neutral adjusted growth | | 3.9 | % | | 46.9 | % | | (13.4) | % | | 5.8 | % | | 5.2 | % | | 11.2 | % |
|
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.
North America
Reported net sales for the third quarter were flat versus the prior year due primarily to strong organic net sales growth offset by our final month lapping results from the businesses divested at the end of July 2019. Demand for packaged foods for at-home consumption remained elevated as a result of the pandemic, although moderating from the previous quarter. Net sales in away-from-home channels declined. Organic net sales increased 2.7% after excluding the impact of the divestiture.
| | | | | | | | | | | | | | | | | | | |
| Net sales % change - third quarter 2020 vs. 2019: | | | | |
| North America | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
| Snacks | (2.0) | % | — | % | (2.0) | % | (5.6) | % | 3.6 | % | | |
| Cereal | 0.5 | % | (0.1) | % | 0.6 | % | — | % | 0.6 | % | | |
| Frozen | 7.3 | % | (0.1) | % | 7.4 | % | — | % | 7.4 | % | | |
| | | | | | | |
North America snacks net sales decreased 2.0% due primarily to our final month lapping results from the businesses divested at the end of July 2019. Organic net sales increased 3.6% in the quarter due to high demand for packaged foods for at-home consumption as a result of the pandemic. Cracker consumption in the U.S. outpaced mid-single-digit growth in the category, led by Cheez-it, Club, Townhouse and Carr's. In salty snacks, Pringles posted double-digit consumption growth during the quarter, despite softness in on-the-go pack formats.
North America
Reported net sales for the third quarter decreased 0.2% versus the prior year as volume declined as a result of supply disruptions and lapping year-ago growth. Organic net sales decreased 0.5% after excluding the impact of foreign currency.
| | | | | | | | | | | | | | | |
| Net sales % change - third quarter 2021 vs. 2020: | | | | |
| North America | Reported net sales | Foreign currency | | | Organic net sales | | |
| Snacks | 3.6 | % | 0.2 | % | | | 3.4 | % | | |
| Cereal | (6.6) | % | 0.5 | % | | | (7.1) | % | | |
| Frozen | (0.7) | % | 0.3 | % | | | (1.0) | % | | |
| | | | | | | |
North America snacks net sales increased 3.6% led by the performance of its largest brands, Cheez-it and Pringles, which grew consumption and share during the quarter.
North America cereal net sales increased 0.5% during the third quarter, as pandemic-related consumption growth slowed from the previous quarterdecreased 6.6% and net sales in away-from-home channels declined. U.S. cereal consumption grew faster than the category, led by Mini-Wheats and Special K.
North America frozen foods net sales increased 7.3% decreased 0.7% during the third quarter, driven by double-digit consumptionquarter as they lapped strong prior year pandemic-related growth of Eggo and Morningstar Farms partially offset by declines in away-from-home channels and phasing out of certain non-core products. In frozen veggie foods, our MorningStar Farms brand grew consumption nearly 18% in thecurrent quarter with growth being limited by capacity limitations. In frozen breakfast, our Eggo brand grew share on strong growth in waffles, French toast, and pancakes.supply constraints.
Canada net sales increased, despite unfavorable foreign currency, due to growth in cereal and frozen foods resulting from share gains as well as pandemic-related consumption growth.
North America operating profit increased 54%2.1% primarily due primarily to lapping incremental prior year charges for multi-employer pension plan withdrawal and Project K. These impacts werebrand investment that shifted from the first half of 2020 partially offset by higher expense for advertisinginflation as a result of shortages in materials, freight, and promotion, incremental COVID-19-related expenses, and the impact of the divestiture.labor. Currency-neutral adjusted operating profit decreased 8.9%increased 3.9%, after excluding the impact of multi-employer pension withdrawal, Project K, and business and portfolio realignment.
Europe
Reported net sales increased 4.7%14% benefiting from higher volume and price/mix due primarily to favorable foreign currency translation, as pandemic-related consumption growth slowed fromin both cereal and snacks, led by the previous quarterUK and net sales in away-from-home channels declined. Russia. Organic net sales increased 0.7%.
Cereal net sales growth for the quarter was driven largely by consumption and share growth in developed markets. Snacks net sales declined due primarily to portable wholesome snacks category weakness as a result of reduced demand for on-the-go foods and pack formats during the pandemic, partially offset by growth in consumption and share for Pringles in the U.K.
Reported operating profit decreased 8.9% due primarily to higher advertising and promotion costs and incremental COVID-19-related expenses. Currency-neutral adjusted operating profit decreased 12.9% after excluding the impact of foreign currency, Project K, and business and portfolio realignment.
Latin America
Reported net sales decreased 3.0% due primarily to unfavorable foreign currency impacts partially offset by higher sales volume. Organic net sales increased 13.4%, after excluding the impact of the divestiture, and foreign currency.
Cereal net sales growth was led by growth in Mexico, Caricam, and Brazil due to elevated demand in modern trade channels. Snacks net sales increased slightly due to growth in Brazil, where local production and a new distributor are benefiting Pringles, and share gains in cookies.
Reported operating profit increased 34% due to higher organic net sales, and lack of Project K costs, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit increased almost 30% after excluding the impact of foreign currency and Project K.
AMEA
Reported net sales increased 7.3% due to broad-based growth across the region and categories, partially offset by unfavorable foreign currency. Organic net sales increased almost 11%12% after excluding the impact of foreign currency.
Cereal net sales growth for the quarter was drivenled by elevated demand in modern trade channelsthe UK and supported by overall regional share gains in Australia, South Korea, Saudi Arabia, and South Africa.gains.
Snacks net sales growth was broad-based across the region led by Pringles continued outpacing of category growth.
Reported operating profit increased 55% due to higher net sales and lapping incremental brand investment that shifted from the first half of 2020. Currency-neutral adjusted operating profit increased 47% after excluding the impact of foreign currency.
Latin America
Reported net sales increased 6.7% due primarily to strongbroad-based growth in Pringles, reflectingacross the region, led by snacks, and favorable foreign currency translation. Organic net sales increased investment in advertising and promotion during2.2%, after excluding the quarter.impact of foreign currency.
Reported operating profit decreased 7.2% due to primarily to input cost inflation and supply chain challenges and lapping strong prior year growth aided by the pandemic, partially offset by favorable foreign currency translation. Currency-neutral adjusted operating profit decreased 13% after excluding the impact of mark-to-market and foreign currency.
AMEA
Reported net sales increased 8.8%17% and organic net sales increased 20% after excluding the impact of foreign currency. This growth was due to both volume and price-mix, led by Africa, as well as growth in cereal in Australia and Asia, partially offset by the impact of COVID-related production restrictions on Pringles during the quarter.
Reported operating profit increased 4% due primarily to operating leverage from higher net sales, and the lapping of prior yearlower business and portfolio realignment charges, and favorable foreign currency partially offset by higher advertisingcost inflation. Currency-neutral adjusted operating profit increased 6%, after excluding the impact of foreign currency and promotion costsbusiness and portfolio realignment.
and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 6.0%, after excluding the impact of business and portfolio realignment, and foreign currency.
Corporate
Reported operating profit increased $27decreased $4 million versus the comparable prior year quarter due primarily to lower business and portfolio realignment charges, and favorableunfavorable mark-to-market impacts partially offset by higher performance-based compensation costs. Currency-neutral adjusted operating profit decreased $12increased $4 million from the prior year after excluding the impact of mark-to-market and business and portfolio realignment.mark-to-market.
The following tables provide an analysis of net sales and operating profit performance for the year-to-date periods ended October 2, 2021 versus September 26, 2020 versus September 28, 2019:2020:
| | Year-to-date period ended September 26, 2020 | | |
| Year-to-date period ended October 2, 2021 | | Year-to-date period ended October 2, 2021 | |
| (millions) | (millions) | | North
America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated | (millions) | | North
America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated |
| Reported net sales | Reported net sales | | $ | 6,323 | | | $ | 1,624 | | | $ | 686 | | | $ | 1,673 | | | $ | — | | | $ | 10,306 | | Reported net sales | | $ | 6,199 | | | $ | 1,827 | | | $ | 753 | | | $ | 1,981 | | | $ | — | | | $ | 10,761 | |
| | Foreign currency impact on total business (inc)/dec | Foreign currency impact on total business (inc)/dec | | (9) | | | (11) | | | (107) | | | (66) | | | — | | | (193) | | Foreign currency impact on total business (inc)/dec | | 33 | | | 105 | | | 21 | | | (10) | | | — | | | 149 | |
| | Organic net sales | Organic net sales | | $ | 6,332 | | | $ | 1,635 | | | $ | 792 | | | $ | 1,739 | | | $ | — | | | $ | 10,499 | | Organic net sales | | $ | 6,166 | | | $ | 1,722 | | | $ | 733 | | | $ | 1,992 | | | $ | — | | | $ | 10,612 | |
| | Year-to-date period ended September 28, 2019 | | |
| Year-to-date period ended September 26, 2020 | | Year-to-date period ended September 26, 2020 | |
| (millions) | (millions) | | (millions) | |
| Reported net sales | Reported net sales | | $ | 6,496 | | | $ | 1,566 | | | $ | 707 | | | $ | 1,586 | | | $ | — | | | $ | 10,355 | | Reported net sales | | $ | 6,323 | | | $ | 1,624 | | | $ | 686 | | | $ | 1,673 | | | $ | — | | | $ | 10,306 | |
| | Divestiture | | 556 | | | — | | | 6 | | | — | | | — | | | 562 | | |
| | Organic net sales | | $ | 5,940 | | | $ | 1,566 | | | $ | 702 | | | $ | 1,586 | | | $ | — | | | $ | 9,794 | | |
| | % change - 2020 vs. 2019: | | |
| | | % change - 2021 vs. 2020: | | % change - 2021 vs. 2020: | |
| Reported growth | Reported growth | | (2.7) | % | | 3.7 | % | | (3.1) | % | | 5.5 | % | | — | % | | (0.5) | % | Reported growth | | (2.0) | % | | 12.5 | % | | 9.9 | % | | 18.4 | % | | — | % | | 4.4 | % |
| | Foreign currency impact on total business (inc)/dec | Foreign currency impact on total business (inc)/dec | | (0.2) | % | | (0.7) | % | | (15.1) | % | | (4.2) | % | | — | % | | (1.9) | % | Foreign currency impact on total business (inc)/dec | | 0.5 | % | | 6.5 | % | | 3.0 | % | | (0.6) | % | | — | % | | 1.4 | % |
| Currency-neutral growth | | (2.5) | % | | 4.4 | % | | 12.0 | % | | 9.7 | % | | — | % | | 1.4 | % | |
| | Divestiture | | (9.1) | % | | — | % | | (0.9) | % | | — | % | | — | % | | (5.8) | % | |
| | | Organic growth | Organic growth | | 6.6 | % | | 4.4 | % | | 12.9 | % | | 9.7 | % | | — | % | | 7.2 | % | Organic growth | | (2.5) | % | | 6.0 | % | | 6.9 | % | | 19.0 | % | | — | % | | 3.0 | % |
| Volume (tonnage) | Volume (tonnage) | | 6.7 | % | | 5.3 | % | | 9.4 | % | | 8.9 | % | | — | % | | 7.3 | % | Volume (tonnage) | | (6.1) | % | | 2.0 | % | | 0.3 | % | | 5.3 | % | | — | % | | (1.3) | % |
| Pricing/mix | Pricing/mix | | (0.1) | % | | (0.9) | % | | 3.5 | % | | 0.8 | % | | — | % | | (0.1) | % | Pricing/mix | | 3.6 | % | | 4.0 | % | | 6.6 | % | | 13.7 | % | | — | % | | 4.3 | % |
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.
| | Year-to-date period ended September 26, 2020 | | |
| Year-to-date period ended October 2, 2021 | | Year-to-date period ended October 2, 2021 | |
| (millions) | (millions) | | North
America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated | (millions) | | North
America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated |
| Reported operating profit | Reported operating profit | | $ | 1,151 | | | $ | 224 | | | $ | 84 | | | $ | 142 | | | $ | (225) | | | $ | 1,376 | | Reported operating profit | | $ | 1,070 | | | $ | 277 | | | $ | 87 | | | $ | 186 | | | $ | (198) | | | $ | 1,423 | |
| Mark-to-market | Mark-to-market | | — | | | — | | | — | | | — | | | (7) | | | (7) | | Mark-to-market | | — | | | — | | | 1 | | | — | | | (2) | | | (2) | |
| | Business and portfolio realignment | Business and portfolio realignment | | 1 | | | (3) | | | (4) | | | (12) | | | (4) | | | (23) | | Business and portfolio realignment | | (12) | | | 2 | | | (4) | | | — | | | (4) | | | (19) | |
| Multi-employer pension plan withdrawal | | 5 | | | — | | | — | | | — | | | — | | | 5 | | |
| | Adjusted operating profit | Adjusted operating profit | | $ | 1,145 | | | $ | 227 | | | $ | 88 | | | $ | 155 | | | $ | (214) | | | $ | 1,401 | | Adjusted operating profit | | $ | 1,082 | | | $ | 275 | | | $ | 91 | | | $ | 186 | | | $ | (191) | | | $ | 1,443 | |
| Foreign currency impact | Foreign currency impact | | (1) | | | (2) | | | (12) | | | (6) | | | 2 | | | (20) | | Foreign currency impact | | 5 | | | 17 | | | 3 | | | 4 | | | 2 | | | 31 | |
| Currency-neutral adjusted operating profit | Currency-neutral adjusted operating profit | | $ | 1,146 | | | $ | 229 | | | $ | 100 | | | $ | 161 | | | $ | (216) | | | $ | 1,421 | | Currency-neutral adjusted operating profit | | $ | 1,078 | | | $ | 258 | | | $ | 87 | | | $ | 182 | | | $ | (193) | | | $ | 1,413 | |
| | | Year-to-date period ended September 28, 2019 | | |
| Year-to-date period ended September 26, 2020 | | Year-to-date period ended September 26, 2020 | |
| (millions) | (millions) | | (millions) | |
| Reported operating profit | Reported operating profit | | $ | 910 | | | $ | 164 | | | $ | 61 | | | $ | 145 | | | $ | (239) | | | $ | 1,041 | | Reported operating profit | | $ | 1,151 | | | $ | 224 | | | $ | 84 | | | $ | 142 | | | $ | (225) | | | $ | 1,376 | |
| Mark-to-market | Mark-to-market | | — | | | — | | | — | | | — | | | (7) | | | (7) | | Mark-to-market | | — | | | — | | | — | | | — | | | (7) | | | (7) | |
| Project K | | (23) | | | (2) | | | (8) | | | (4) | | | — | | | (38) | | |
| Brexit impacts | | — | | | (7) | | | — | | | — | | | — | | | (7) | | |
| | Business and portfolio realignment | Business and portfolio realignment | | (55) | | | (35) | | | (2) | | | (4) | | | (39) | | | (135) | | Business and portfolio realignment | | 1 | | | (3) | | | (4) | | | (12) | | | (4) | | | (23) | |
| Multi-employer pension plan exit liability | Multi-employer pension plan exit liability | | (132) | | | — | | | — | | | — | | | — | | | (132) | | Multi-employer pension plan exit liability | | 5 | | | — | | | — | | | — | | | — | | | 5 | |
| Adjusted operating profit | Adjusted operating profit | | $ | 1,120 | | | $ | 208 | | | $ | 72 | | | $ | 153 | | | $ | (193) | | | $ | 1,361 | | Adjusted operating profit | | $ | 1,145 | | | $ | 227 | | | $ | 88 | | | $ | 155 | | | $ | (214) | | | $ | 1,401 | |
| | | % change - 2020 vs. 2019: | | |
| % change - 2021 vs. 2020: | | % change - 2021 vs. 2020: | |
| Reported growth | Reported growth | | 26.5 | % | | 36.7 | % | | 37.4 | % | | (2.0) | % | | 5.7 | % | | 32.1 | % | Reported growth | | (7.0) | % | | 23.9 | % | | 4.0 | % | | 30.7 | % | | 12.3 | % | | 3.4 | % |
| Mark-to-market | Mark-to-market | | — | % | | — | % | | — | % | | — | % | | (0.1) | % | | 0.2 | % | Mark-to-market | | — | % | | — | % | | 0.8 | % | | — | % | | 1.9 | % | | 0.4 | % |
| Project K | | 3.2 | % | | 1.9 | % | | 16.8 | % | | 2.4 | % | | 0.1 | % | | 4.6 | % | |
| Brexit impacts | | — | % | | 5.5 | % | | — | % | | — | % | | — | % | | 0.8 | % | |
| | Business and portfolio realignment | Business and portfolio realignment | | 6.9 | % | | 20.4 | % | | (2.6) | % | | (5.3) | % | | 16.8 | % | | 12.1 | % | Business and portfolio realignment | | (1.1) | % | | 2.4 | % | | 0.3 | % | | 10.4 | % | | (0.2) | % | | 0.3 | % |
| Multi-employer pension plan withdrawal | Multi-employer pension plan withdrawal | | 14.2 | % | | — | % | | — | % | | — | % | | — | % | | 11.5 | % | Multi-employer pension plan withdrawal | | (0.4) | % | | — | % | | — | % | | — | % | | — | % | | (0.3) | % |
| Adjusted growth | Adjusted growth | | 2.2 | % | | 8.9 | % | | 23.2 | % | | 0.9 | % | | (11.1) | % | | 2.9 | % | Adjusted growth | | (5.5) | % | | 21.5 | % | | 2.9 | % | | 20.3 | % | | 10.6 | % | | 3.0 | % |
| Foreign currency impact | Foreign currency impact | | (0.1) | % | | (1.1) | % | | (17.0) | % | | (4.0) | % | | 0.8 | % | | (1.5) | % | Foreign currency impact | | 0.4 | % | | 7.5 | % | | 3.7 | % | | 2.6 | % | | 0.9 | % | | 2.2 | % |
| Currency-neutral adjusted growth | Currency-neutral adjusted growth | | 2.3 | % | | 10.0 | % | | 40.2 | % | | 4.9 | % | | (11.9) | % | | 4.4 | % | Currency-neutral adjusted growth | | (5.9) | % | | 14.0 | % | | (0.8) | % | | 17.7 | % | | 9.7 | % | | 0.8 | % |
|
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.
North America
Reported net sales decreased 2.7% versus the prior year-to-date period, due primarily to the absence of results from the businesses divested in July 2019, partially offset by strong organic growth. Net sales growth was driven by the acceleration of demand for snacks, cereal, and frozen food as consumers increased purchases of food for at-home consumption due to the pandemic, though this has moderated in the third quarter. This acceleration of demand was partly offset by a related decline in net sales in away-from-home channels. Organic net sales increased 6.6% after excluding the impact of the divestiture and foreign currency.
| | | | | | | | | | | | | | | | | | | |
| Net sales % change - third quarter year-to-date 2020 vs. 2019: | | | | |
| North America | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
| Snacks | (11.1) | % | (0.1) | % | (11.0) | % | (17.7) | % | 6.7 | % | | |
| Cereal | 9.1 | % | (0.3) | % | 9.4 | % | — | % | 9.4 | % | | |
| Frozen | 8.8 | % | (0.1) | % | 8.9 | % | — | % | 8.9 | % | | |
| | | | | | | |
North America snacks net sales decreased 11% due to the absence of the divested businesses, whose results were seasonally weighted to the first half of the year. Organic net sales increased 6.7% due to high demand for packaged foods for at-home consumption as a result of the pandemic.
North America cereal and frozen foods net sales grew 9.1% and 8.8%, respectively, due to elevated demand for packaged foods for at-home consumption as a result of the pandemic.
CanadaReported net sales growth was led by cereal and frozenfor the year-to-date period decreased 2.0% versus the prior year lapping elevated demand for packaged foods resulting from market share gains as well as pandemic-related consumption growth despite unfavorableconsumed at home during the early stages of the pandemic last year. Organic net sales decreased 2.5% after excluding the impact of foreign currency.
| | | | | | | | | | | | | | | |
| | | | | | | |
| Net sales % change - third quarter year-to-date 2021 vs. 2020: | | | | |
| North America | Reported net sales | Foreign currency | | | Organic net sales | | |
| Snacks | 3.0 | % | 0.4 | % | | | 2.6 | % | | |
| Cereal | (10.0) | % | 0.8 | % | | | (10.8) | % | | |
| Frozen | (2.0) | % | 0.4 | % | | | (2.4) | % | | |
| | | | | | | |
North America reportedsnacks net sales increased 3.0% led by the performance of its largest brands, Cheez-it and Pringles, which grew consumption and share during the year-to-date period.
North America cereal net sales decreased 10% and North America frozen foods net sales decreased 2.0% during the year-to-date period, as they lapped strong prior year pandemic-related growth and current period supply constraints.
North America operating profit increased 27%decreased 7.0% compared to the prior year due primarily to higherlower net sales and operating leverage,input cost inflation and the lapping of prior year charges for multi-employer pension plan withdrawalincremental costs and Project K, partially offset by the absence of results from the divested businesses.inefficiencies related to broader shortages. Currency-neutral adjusted operating profit increased 2.3%decreased 5.9%, after excluding the impact of multi-employer pension plan withdrawal, business and portfolio realignment, Project K and foreign currency.realignment.
Europe
Reported net sales increased 3.7%12.5% due to elevated demand for at-home consumption of cereal partially offset by unfavorablegrowth in snacks, as well as favorable foreign currency.currency translation. Organic net sales increased 4.4%.6.0% after excluding the impact of foreign currency.
Cereal net sales growth for the year-to-date period was driven largely by acceleratedfavorable foreign currency translation offset by lapping a pandemic-related surge in consumption in our developed markets as a result ofgrowth during the pandemic.prior year.
Snacks net sales declined slightly as a result of reduced demand for on-the-go foods and pack formats during the pandemic and a reductiongrowth was led by sustained momentum in Pringles, driven by innovation, effective advertising, and promotional activity in the first half of the year related to Pringles .successful consumer promotions.
Reported operating profit increased 37%24% due primarily to lower businesshigher net sales and portfolio realignment costs.favorable foreign currency translation partially offset by lapping unusually high operating leverage and postponement of brand investment during the onset of the pandemic. Currency-neutral adjusted operating profit increased 10%14% after excluding the impact of foreign currency, and business and portfolio realignment, Project K, and foreign currency.realignment.
Latin America
Reported net sales decreased 3.1%increased 10% due primarily to broad-based growth across the impact of unfavorableregion, led by snacks, and favorable foreign currency and the divestiture.translation. Organic net sales increased 13%6.9%, after excluding the impact of the divestiture and foreign currency. Organic net sales growth was driven by higher cereal sales, which accelerated during the pandemic as consumers increased purchases of food for at-home consumption in modern trade channels as a result of the pandemic.
Cereal net sales growth was led by growth in Mexico, Caricam, and Brazil.
Snacks net sales declined during the year-to-date period due to shut-downs of high frequency stores and diminished on-the-go snacking occasions during the pandemic.
Reported operating profit increased 37% due to operating leverage from higher net sales volume and lapping of prior year Project K costs, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit increased 40% after excluding the impact of foreign currency, Project K, and business and portfolio realignment.
AMEA
Reported net sales improved 5.5% due to growth in cereal, snacks, and noodles during the year-to-date period, partially offset by unfavorable foreign currency. Organic net sales increased 9.7% after excluding the impact of foreign currency.
Cereal net sales growth for the region was driven by elevated demand for at-home consumption of our products in developed markets, primarily Japan and Australia, as well as emerging markets in our MENAT business.
Snacks net sales increased despite pandemic-related disruptions, slowing economies in the region, and unfavorable foreign currency. Growth was led by Pringles, which gained share in in key markets within Asia, Africa, and the Middle East.
Noodles net sales growth during the period, reflecting the expansion of our business in the Middle East and South Africa.
Reported operating profit decreased 2.0%increased 4.0% due primarily to the negative impact offavorable foreign currency and higher business and portfolio realignment charges,translation partially offset by the impact of higher net sales volume.input cost inflation. Currency-neutral adjusted operating profit increased 4.9%,decreased 0.8% after excluding the impact of business and portfolio realignment, Project K,mark-to-market and foreign currency.
AMEA
Reported net sales increased 18% due to broad-based growth across the region and categories resulting from favorable price/mix and higher volume. Organic net sales also increased 19%.
Noodles and other net sales increased lead by strong growth from Multipro as well as our Kellogg's branded noodles business.
Snacks net sales increased due primarily to strong growth in Pringles across the region.
Cereal net sales growth was driven by broad-based growth across Asia and Australia.
Corporate
Reported operating profit increased $14 million versus the comparable prior year-to-date period31% due primarily to loweroperating leverage from higher net sales and the lapping of prior year business and portfolio realignment costs during the current year, partially offset by higher performance-based compensation costs.charges. Currency-neutral adjusted operating profit decreased $23 million from the prior year-to-date periodincreased 18%, after excluding the impact of business and portfolio realignment, and foreign currency.
Corporate
Reported operating profit increased $27 million versus the comparable prior year period due primarily to favorable mark-to-market impact and lower incentive compensation expense. Currency-neutral adjusted operating profit increased $21 million from the prior year after excluding the impact of mark-to-market.
Margin performance
Our currency-neutral adjusted gross profit and gross profit margin performance for the quarter ended October 2, 2021 and September 26, 2020 and September 28, 2019 are reconciled to the directly comparable GAAP measures as follows:
| | Quarter ended | Quarter ended | September 26, 2020 | | September 28, 2019 | GM change vs. prior
year (pts.) | Quarter ended | October 2, 2021 | | September 26, 2020 | GM change vs. prior
year (pts.) |
| Gross Profit (a) | Gross Margin (b) | | Gross Profit (a) | Gross Margin (b) | |
| (dollars in millions) | | (dollars in millions) | Gross Profit (a) | Gross Margin (b) | | Gross Profit (a) | Gross Margin (b) | GM change vs. prior
year (pts.) |
| Reported | Reported | $ | 1,200 | | 35.0 | % | | $ | 1,000 | | 29.7 | % | 5.3 | | Reported | $ | 1,165 | | 32.1 | % | | $ | 1,200 | | 35.0 | % |
| Mark-to-market | Mark-to-market | 11 | | 0.3 | % | | (12) | | (0.3) | % | 0.6 | | Mark-to-market | 4 | | 0.1 | % | | 11 | | 0.3 | % | (0.2) | |
| Project K | — | | — | % | | (13) | | (0.4) | % | 0.4 | | |
| Brexit impacts | — | | — | % | | (1) | | (0.1) | % | 0.1 | | |
| | Business and portfolio realignment | Business and portfolio realignment | — | | — | % | | (3) | | — | % | — | | Business and portfolio realignment | (6) | | (0.2) | % | | — | | — | % | (0.2) | |
| Multi-employer pension plan withdrawal | Multi-employer pension plan withdrawal | — | | — | % | | (132) | | (4.0) | % | 4.0 | | Multi-employer pension plan withdrawal | — | | — | % | | — | | — | % | — | |
| | Adjusted | | Adjusted | 1,167 | | 32.2 | % | | 1,189 | | 34.7 | % | (2.5) | |
| Foreign currency impact | Foreign currency impact | (10) | | 0.1 | % | | — | | — | % | 0.1 | | Foreign currency impact | 9 | | 0.1 | % | | — | | — | % | 0.1 | |
| Currency-neutral adjusted | Currency-neutral adjusted | $ | 1,199 | | 34.6 | % | | $ | 1,162 | | 34.5 | % | 0.1 | | Currency-neutral adjusted | $ | 1,157 | | 32.1 | % | | $ | 1,189 | | 34.7 | % | (2.6) | |
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.
(a) 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 530decreased 290 basis points due primarily to lower charges for multi-employer pension plan withdrawalversus the prior year as , favorable year-over-year mark-to-market impacts, partiallycost inflation and a mix shift towards emerging markets and lapping substantial operating leverage in the prior year quarter, more than offset by incremental COVID-19-related costs during the current quarter.productivity improvements and price realization. Currency-neutral adjusted gross margin increased 10decreased 260 basis points compared to the third quarter of 20192020 after eliminating the impact of multi-employer pension plan withdrawal, mark-to-market, Project K,business and portfolio realignment, and foreign currency.
Our currency-neutral adjusted gross profit and gross profit margin performance for the year-to-date periods ended October 2, 2021 and September 26, 2020 and September 28, 2019 are reconciled to the directly comparable GAAP measures as follows:
| | | | | | | | | | | | | | | | | | | | |
| Year-to-date period ended | September 26, 2020 | | September 28, 2019 | GM change vs. prior
year (pts.) |
| Gross Profit (a) | Gross Margin (b) | | Gross Profit (a) | Gross Margin (b) |
| Reported | $ | 3,542 | | 34.4 | % | | $ | 3,293 | | 31.8 | % | 2.6 | |
| Mark-to-market | (10) | | (0.1) | % | | (7) | | (0.1) | % | — | |
| Project K | — | | — | % | | (30) | | (0.3) | % | 0.3 | |
| Brexit impacts | — | | — | % | | (7) | | — | % | — | |
| Business and portfolio realignment | (4) | | — | % | | (11) | | (0.1) | % | 0.1 | |
| Multi-employer pension plan withdrawal | 5 | | — | % | | $ | (132) | | (1.3) | % | 1.3 | |
| | | | | | |
| Foreign currency impact | (59) | | 0.1 | % | | — | | — | % | 0.1 | |
| Currency-neutral adjusted | $ | 3,610 | | 34.4 | % | | $ | 3,481 | | 33.6 | % | 0.8 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Year-to-date period ended | October 2, 2021 | | September 26, 2020 | GM change vs. prior
year (pts.) |
| (dollars in millions) | Gross Profit (a) | Gross Margin (b) | | Gross Profit (a) | Gross Margin (b) |
| Reported | $ | 3,554 | | 33.0 | % | | $ | 3,542 | | 34.4 | % | (1.4) | |
| Mark-to-market | (9) | | (0.1) | % | | (10) | | (0.1) | % | — | |
| | | | | | |
| | | | | | |
| Business and portfolio realignment | (8) | | (0.1) | % | | (4) | | — | % | (0.1) | |
| Multi-employer pension plan withdrawal | — | | — | % | | $ | 5 | | — | % | — | |
| Adjusted | 3,571 | | 33.2 | % | | 3,551 | | 34.5 | % | (1.3) | |
| Foreign currency impact | 65 | | 0.2 | % | | — | | — | % | 0.2 | |
| Currency-neutral adjusted | $ | 3,506 | | 33.0 | % | | $ | 3,551 | | 34.5 | % | (1.5) | |
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Gross profit is equal to net sales less cost of goods sold.
(b) Gross profit as a percentage of net sales.
Reported gross margin for the year-to-date period increased 260 basis points due primarily to operating leverage as a result of higher net sales, lower charges for multi-employer pension plan withdrawal, and Project K, partially offset by incremental COVID-19-related costs, and unfavorable foreign currency. Currency-neutral adjusted gross margin increased 80 basis points compared to the prior year-to-date period after eliminating the impact of multi-employer pension plan withdrawal, Project K, and foreign currency.
Reported gross margin for the year-to-date period decreased 140 basis points versus the prior year as the impact of productivity improvements and price realization was more than offset by cost inflation, a mix shift towards emerging markets, and lapping substantial operating leverage in the prior year-to-date period when our plants were running limited SKUs at maximum capacity due to the acceleration of demand as a result of the pandemic. Currency-neutral adjusted gross margin decreased 150 basis points compared to 2020.
Restructuring Programs
We view our restructuring programs 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 3 to 5-year period ofsubsequent to completion. Upon completionCompletion (or as each major stage is completed in the case of multi-year programs), is when the project begins to deliver cash savings and/or reduced depreciation. We continually evaluate potential restructuring programs and may pursue future initiatives that generate meaningful savings that can be utilized in achieving our long-term profit growth targets.
During the secondthird quarter of 2019,2021, the Company announced a reorganization plan forreconfiguration of the EuropeanNorth America reportable segment supply chain network, designed to simplify the organization, increase organizational efficiency, and enhance key processes.drive increased productivity. The overall programproject is expected to be substantially completed by the end of fiscal year 2020.
early 2024, with related productivity improvements commencing in 2023. The programoverall project is expected to result in cumulative pretax charges of approximately $40$45 million, including certain non-cash credits. Cash costs are expected to be approximately $50 million. The total expected charges willwhich include severance and other termination benefits; and charges related to relocation, third party legal and consulting fees, and contract termination costs. Annual savings from the program are expected to be approximately $35 million, with the majority of the savings realized by the end of 2020. Since inception, the Company has recognized total charges, including non-cash credits, of $41 million attributed to this initiative.
Additionally during the second quarter of 2019, the Company announced a reorganization plan which primarily impacted the North America reportable segment. The reorganization plan was designed to simplify the organization that supports the remaining North America reportable segment after the divestiture and related transition. This program is expected to be substantially completed by the end of fiscal year 2020.
The overall program is expected to result in cumulative pretax charges of approximately $25 million. Cash costs are expected to approximate the pretax charges. Total expected charges will include severance and other termination benefits and charges related to third party consulting fees. Annual savings from the project are expected to be approximately $50 million, with the majority of the savings realized by the end of 2020. Since inception, the Company has recognized total charges of $21 million attributed to this initiative.
In addition to the projects discussed above, during the year-to-date period ended September 26, 2020 the Company also incurred restructuringemployee-related costs of $4 million, in the Latin America reportable segmentother cash costs of $21 million and $8 million in the AMEA reportable segmentnon-cash costs, primarily consisting of accelerated depreciation and asset write-off's, of $20 million. Charges incurred related to reorganization and simplification of those businesses. These costs primarily relate to severance and other termination benefits.
Project K
As of the end of 2019, the Company completed implementation of all Project K initiatives. Total project charges, after-tax cash costs and annual savings delivered by Project Kthis restructuring program were in line with expectations.
During$4 million during the quarter and year-to-date periodperiods ended September 28, 2019, the Company recorded total netOctober 2, 2021. These charges of $15 million and $38 million, respectivelyprimarily related to Project K.severance costs, and were recorded in COGS expense.
All other restructuring projects were immaterial during the periods presented.
Foreign currency translation
The reporting currency for our financial statements is the U.S. dollar. Certain of our assets, liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar, primarily in the euro, British pound, Mexican peso, Australian dollar, Canadian dollar, Brazilian Real, Nigerian Naira, and Russian ruble. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have significant impact on our results if such increase or decrease in the value of the U.S. dollar is substantial.
Interest expense
For the quarters ended October 2, 2021 and September 26, 2020, and September 28, 2019, interest expense was $63$55 million and $72$63 million, respectively. For the year-to-date periods ended October 2, 2021 and September 26, 2020, and September 28, 2019, interest expense was $196$172 million and $221$196 million, respectively. The decrease from the prior year is due primarily to lower average outstanding debt compared to the redemptionprior year as a result of approximately $1.0 billion ofthe debt redemptions in conjunction with the July 2019 divestiture.
Income Taxes
Our reported effective tax rate for the quarters ended October 2, 2021 and September 26, 2020 was 24% and September 28, 2019 was 16% and 27%, respectively. TheOur reported effective tax rate for the year-to-date periods ended October 2, 2021 and September 26, 2020 was 25% and September 28, 2019 was 20% and 22%, respectively. The effective tax rate for the quarter ended October 2, 2021, was favorably unfavorably impacted by the reversalestablishment of a liabilityfull valuation allowance of $20 million related to certain foreign deferred tax assets. During the quarter, the Company determined that certain foreign deferred tax assets were no longer more likely than not to be realized in the future and a full valuation allowance was recorded on a discrete period basis. The effective tax rate for uncertainthe year-to-date period ended October 2, 2021, was unfavorably impacted by the aforementioned valuation allowance as well as tax positionslegislation in the UK. During the second quarter of $322021, the Company recorded tax expense of $23 million resultingas a result of tax legislation enacted in the UK in June 2021, which increased the statutory UK tax rate from the finalization of a19 percent to 25 percent for tax examination.periods after April 1, 2023. The liability wasCompany revalued its net deferred tax balances related to the Company's estimate ofUK business to reflect the transitionincreased tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.rate.
The adjusted effective tax rate for the quarters ended October 2, 2021 and September 26, 2020 was 20% and September 28, 2019 was 23% and 18%23%, respectively.respectively. The adjusted effective tax rate for the year-to-date periods ended October 2, 2021 and September 26, 2020 was 22% and September 28, 2019 was 23% and 20%, respectively.
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.
| | | | | Quarter ended | Year-to-date period ended | | Quarter ended | Year-to-date period ended |
| Consolidated results (dollars in millions) | Consolidated results (dollars in millions) | September 26,
2020 | September 28,
2019 | September 26,
2020 | September 28,
2019 | Consolidated results (dollars in millions) | October 2,
2021 | September 26,
2020 | October 2,
2021 | September 26,
2020 |
| Reported income taxes | Reported income taxes | $ | 65 | | $ | 91 | | $ | 268 | | $ | 237 | | Reported income taxes | $ | 92 | | $ | 65 | | $ | 345 | | $ | 268 | |
| Mark-to-market | Mark-to-market | 1 | | 5 | | (19) | | 3 | | Mark-to-market | (16) | | 1 | | (12) | | (19) | |
| Project K | — | | (4) | | — | | (8) | | |
| Brexit impacts | — | | — | | — | | (1) | | |
| | Business and portfolio realignment | Business and portfolio realignment | — | | (12) | | (4) | | (39) | | Business and portfolio realignment | (1) | | — | | (5) | | (4) | |
| Multi-employer pension plan withdrawal | Multi-employer pension plan withdrawal | — | | (31) | | 1 | | (31) | | Multi-employer pension plan withdrawal | — | | — | | — | | 1 | |
| Gain on divestiture | — | | 55 | | — | | 55 | | |
| | Foreign valuation allowance | | Foreign valuation allowance | 20 | | — | | 20 | | — | |
| UK tax rate change | | UK tax rate change | — | | — | | 23 | | — | |
| U.S. Tax Reform | U.S. Tax Reform | (32) | | — | | (32) | | — | | U.S. Tax Reform | — | | (32) | | — | | (32) | |
| Adjusted income taxes | Adjusted income taxes | $ | 97 | | $ | 78 | | $ | 323 | | $ | 258 | | Adjusted income taxes | $ | 89 | | $ | 97 | | $ | 318 | | $ | 323 | |
| | Reported effective income tax rate | Reported effective income tax rate | 15.6 | % | 26.7 | % | 20.1 | % | 22.2 | % | Reported effective income tax rate | 23.5 | % | 15.6 | % | 24.5 | % | 20.1 | % |
| Mark-to-market | Mark-to-market | — | % | — | % | (0.3) | % | — | % | Mark-to-market | (0.4) | % | — | % | (0.1) | % | (0.3) | % |
| Project K | — | % | — | % | — | % | — | % | |
| Brexit impacts | — | % | — | % | — | % | 0.1 | % | |
| | Business and portfolio realignment | Business and portfolio realignment | — | % | (1.8) | % | — | % | (0.7) | % | Business and portfolio realignment | (0.1) | % | — | % | — | % | — | % |
| Multi-employer pension plan withdrawal | Multi-employer pension plan withdrawal | — | % | 1.3 | % | — | % | (0.1) | % | Multi-employer pension plan withdrawal | — | % | — | % | — | % | — | % |
| Gain on divestiture | — | % | 9.3 | % | — | % | 3.3 | % | |
| | Foreign valuation allowance | | Foreign valuation allowance | 4.4 | % | — | % | 1.4 | % | — | % |
| UK tax rate change | | UK tax rate change | — | % | — | % | 1.6 | % | — | % |
| U.S. Tax Reform | U.S. Tax Reform | (7.8) | % | — | % | (2.3) | % | — | % | U.S. Tax Reform | — | % | (7.8) | % | — | % | (2.3) | % |
| Adjusted effective income tax rate | Adjusted effective income tax rate | 23.3 | % | 17.9 | % | 22.7 | % | 19.6 | % | Adjusted effective income tax rate | 19.5 | % | 23.3 | % | 21.6 | % | 22.7 | % |
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.
Liquidity and capital resources
At this time, the COVID-19 pandemic has not materially impacted our liquidity and we anticipate current cash and marketable security balances, operating cash flows, together with our credit facilities and other financing sources including commercial paper, credit and bond markets, will be adequate to meet our operating, investing and financing needs. We expect cash provided by operating activities of $1.8-$1.6-$1.91.7 billion and capital expenditures of approximately $500 million in 2020.2021. We currently have $2.5 billion of unused revolving credit agreements, including $1.5 billion effective through 2023 and $1.0 billion effective through January 2021,2022, as well as continued access to the commercial paper markets. We are currently in compliance with all debt covenants and do not have material uncertainty about our ability to maintain compliance in future periods. In May, we issued $500 million of ten-year 2.10% Notes in anticipation of our $600 million December maturity. We continue to utilize available capacity within the Monetization Programs to maintain financial flexibility without negatively impacting working capital. Additionally, we utilized certain aspects of the Coronavirus Aid, Relief and Economic Security Act, to delay the employer share of certain U.S. payroll taxes until 2021 and 2022. Our utilization does not include a government loan and is not expected to result in any restrictions on the Company’s decisions on executive compensation, payment of dividends, or share buy-back programs.
As the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs. 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.
Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating and investing needs.
We have historically reported negative working capital primarily as the result of our focus to improve core working capital by reducing our levels of trade receivables and inventory while extending the timing of payment of our trade payables. The impacts of the extended customer terms program and the monetization programs on core working capital are largely offsetting. These programs are all part of our ongoing working capital management.
We periodically monitor our supplier payment terms to assess whether our terms are competitive and in line with local market terms. To the extent that such assessment indicates that our supplier payment terms are not aligned with local market terms, we may seek to adjust our terms, including extending or shortening our payment due dates as appropriate. Supplier payment term modifications did not have a material impact on our cash flows during 2020, and are not expected to have a material impact in 2021.
We have a substantial amount of indebtedness which results in current maturities of long-term debt and notes payable which can have a significant impact on working capital as a result of the timing of these required payments. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, pay dividends, fund acquisition opportunities, and repurchase our common stock, reduce our working capital amounts. We had negative working capital of $1.3 $1.2 billion and $0.9$1.3 billion as of October 2, 2021 and September 26, 2020, and September 28, 2019, respectively.
The following table reflects net debt amounts:
| | | | | | | | | | | | | | |
| | |
| (millions, unaudited) | | September 26, 2020 | | December 28, 2019 |
| Notes payable | | $ | 116 | | | $ | 107 | |
| Current maturities of long-term debt | | 1,417 | | | 620 | |
| Long-term debt | | 7,000 | | | 7,195 | |
| Total debt liabilities | | $ | 8,533 | | | $ | 7,922 | |
| Less: | | | | |
| Cash and cash equivalents | | (1,329) | | | (397) | |
| Marketable securities | | (250) | | | — | |
| Net debt | | $ | 6,954 | | | $ | 7,525 | |
The decrease in net debt from the prior year-end is primarily due to increased operating cash flow as the increase in cash and cash equivalents and marketable securities balances more than offset the $500 million debt issue during the second quarter. Marketable securities consists of our investment in a mutual fund holding short-term debt instruments, which we expect to hold until our December 2020 debt maturity. | | | | | | | | | | | | | | |
| | |
| (millions, unaudited) | | October 2, 2021 | | January 2, 2021 |
| Notes payable | | $ | 497 | | | $ | 102 | |
| Current maturities of long-term debt | | 16 | | | 627 | |
| Long-term debt | | 7,020 | | | 6,746 | |
| Total debt liabilities | | $ | 7,533 | | | $ | 7,475 | |
| Less: | | | | |
| Cash and cash equivalents | | (440) | | | (435) | |
| | | | |
| Net debt | | $ | 7,093 | | | $ | 7,040 | |
The following table sets forth a summary of our cash flows:
| | | | Year-to-date period ended | | Year-to-date period ended |
| (millions) | (millions) | September 26, 2020 | September 28, 2019 | (millions) | October 2, 2021 | September 26, 2020 |
| Net cash provided by (used in): | Net cash provided by (used in): | | Net cash provided by (used in): | |
| Operating activities | Operating activities | $ | 1,593 | | $ | 925 | | Operating activities | $ | 1,145 | | $ | 1,593 | |
| Investing activities | Investing activities | (649) | | 931 | | Investing activities | (385) | | (649) | |
| Financing activities | Financing activities | 21 | | (1,731) | | Financing activities | (740) | | 21 | |
| Effect of exchange rates on cash and cash equivalents | Effect of exchange rates on cash and cash equivalents | (33) | | 7 | | Effect of exchange rates on cash and cash equivalents | (15) | | (33) | |
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | $ | 932 | | $ | 132 | | Net increase (decrease) in cash and cash equivalents | $ | 5 | | $ | 932 | |
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, distribute, and market our products.
Net cash provided by our operating activities for the year-to-date period ended September 26, 2020,October 2, 2021, totaled $1,593$1,145 million compared to $925$1,593 million in the prior year period. The increasedecrease is due primarily to increased profitability,higher year-over-year income tax payments and lower cash outflows related to restructuringchanges in incentive compensation and business realignment.other accruals during the period.
Our cash conversion cycle (defined as days of inventory and trade receivables outstanding less days of trade payables outstanding, based on a trailing 12 month average), was approximately negative 109 days and negative 510 days for the 12 month periods ended October 2, 2021 and September 26, 2020, and September 28, 2019, respectively. The improvement from the prior year is due primarily to improvement in the number of days of trade payables outstanding which results from a decrease in charges related to prior restructuring activity.
We measure cash flow as net cash provided by operating activities reduced by expenditures for property additions. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow metric is reconciled to the most comparable GAAP measure, as follows:
| | | | Year-to-date period ended | | | Year-to-date period ended | |
| (millions) | (millions) | September 26, 2020 | September 28, 2019 | | (millions) | October 2, 2021 | September 26, 2020 | |
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 1,593 | | $ | 925 | | | Net cash provided by operating activities | $ | 1,145 | | $ | 1,593 | | |
| Additions to properties | Additions to properties | (326) | | (436) | | | Additions to properties | (408) | | (326) | | |
| Cash flow | Cash flow | $ | 1,267 | | $ | 489 | | | Cash flow | $ | 737 | | $ | 1,267 | | |
Our non-GAAP measure for cash flow increaseddeclined to $1,267$737 million in the year-to-date period ended September 26, 2020,October 2, 2021, from $489$1,267 million in the prior year period due primarily to increased profitability, divestiture-related restructuring costshigher capital expenditures as projects were delayed in the prior year due to the pandemic, and lower capital expenditures.higher year-over-year income tax payments and changes in incentive compensation and other accruals from the prior period.
Investing activities
Our net cash used in investing activities totaled $649$385 million for the year-to-date period ended September 26, 2020October 2, 2021 compared to cash provided of $931$649 million in the comparable prior year period. The decrease is due primarily to proceedsimpact of cash outflow from the salepurchase of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately $1.3 billion in cashsecurities in the prior year and the purchase of marketable securitiesperiod was partially offset by higher capital expenditures during the current year-to-date period as we invested in a mutual fund holding short-term debt instruments that we expect to hold until our December debt maturity.period.
Financing activities
Our net cash provided byused in financing activities for the year-to-date periodquarter ended September 26, 2020October 2, 2021 totaled $21$740 million compared to cash usedprovided of $1,731$21 million during the comparable prior year period, due primarily to proceeds fromperiod. The year-over-year variance was driven by the issuancerepayment of $500€500 million, of ten-year 2.10%seven-year 1.75% Euro Notes due 2030upon maturity in May 20202021 and debt redemptions during the third quarterrepurchase of 2019.
In December 2017, the board of directors approved an authorization to repurchase up to $1.5 billion$240 million of our common stock beginning in January 2018 through December 2019. during the current year, partially offset by the May 2021 issuance of €300 million eight-year 0.50% Euro Notes due 2029.
In February 2020, the board of directors approved a newan authorization to repurchase up to $1.5 billion of the Company's common stock through December 2022. These authorizations areThe authorization is intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs. Total purchases for the year-to-date period ended September 28, 2019,October 2, 2021, were 4 million shares for $220$240 million. The Company did not purchase shares in the year-to-date period ended September 26, 2020 and does not expect to purchase shares during the remainder of 2020.
We paid cash dividends of $586$590 million in the year-to-date period ended September 26, 2020,October 2, 2021, compared to $574$586 million during the comparable prior year period. The increase in dividends paid reflects our third quarter of 2019 increase in the quarterly dividend to $.57 per common share from the previous $.56 per common share. In October 2020,2021, the board of directors declared a dividend of $.57$.58 per common share, payable on December 15, 20202021 to shareholders of record at the close of business on December 1, 2020.2021.
We entered into an unsecured Five-Year Credit Agreement in January 2018, allowing us to borrow, on a revolving credit basis, up to $1.5 billion and expiring in January 2023.
In January 2020,2021, we entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to $1.0 billion at any time outstanding, to replace the $1.0 billion 364-day facility that expired in January 2020.2021.
The Five-Year and 364 Day Credit Agreements, which had no outstanding borrowings as September 26, 2020,October 2, 2021, contain customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agents may terminate the commitments under the credit facilities, accelerate any outstanding loans under the agreements, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest.
Our Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions and also contain a change of
control provision. There are no significant restrictions on the payment of dividends. We were in compliance with all covenants as of September 26, 2020.October 2, 2021.
The Notes do not contain acceleration of maturity clauses that are dependent on credit ratings. A change in our credit ratings could limit our access to the U.S. short-term debt market and/or increase the cost of refinancing long-term debt in the future. However, even under these circumstances, we would continue to have access to our 364-Day Credit Facility, which expires in January 2021,2022, as well as our Five-Year Credit Agreement, which expires in January 2023. This source of liquidity is unused and available on an unsecured basis, although we do not currently plan to use it.
Monetization and Accounts Payable 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 $1,033 million,approximately $1.1 billion, but may be increased or decreased as customers move in or out of the Extended Terms Program and as additional financial institutions move in or out of the Monetization Programs. Accounts receivable sold of $929$611 million and $774$783 million remained outstanding under this arrangement as of September 26, 2020October 2, 2021 and December 28, 2019,January 2, 2021, respectively.
The Monetization Programs are designed to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. Current DSO levels within North America are consistent with DSO levels prior to the execution of the Extended Term Program and Monetization Programs.
Refer to Note 2 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.
We periodically monitor our supplier payment terms to assess whether our terms are competitive and in line with local market terms. To the extent that such assessment indicates that our supplier payment terms are not aligned with local market terms, we may seek to adjust our terms, including extending or shortening our payment due dates as appropriate, however, we do not expect supplier payment term modifications to have a material impact on our cash flows during 2020.2021.
We have agreements with third parties (Accounts Payable Program) to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected, sell our payment obligations to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more of our payment obligations prior to their scheduled due dates at a discounted price to participating financial institutions. Our goal is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, our right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers.
Refer to Note 1 within Notes to Consolidated Financial Statements for further information related to accounts payable.
If financial institutions were to terminate their participation in the Monetization Programs and we are not able to modify related customer payment terms, working capital could be negatively impacted. Additionally, working capital could be negatively impacted if we shorten our supplier payment terms as a result of supplier negotiations. For suppliers participating in the Accounts Payable Programs, financial institutions may terminate their participation or we could experience a downgrade in our credit rating that could result in higher costs to suppliers. If working capital is negatively impacted as a result of these events and we were unable to secure alternative programs, we may have to utilize our various financing arrangements for short-term liquidity or increase our long-term borrowings.
Future outlook
The
Kellogg Company raisedaffirmed its full-year financial guidance reflectingon operating profit, earnings per share and cash flow, as an improved outlook for net sales is offset by the impact of industry-wide supply chain challenges and profit over-delivery duringhigh cost inflation expected to persist for the third quarter. The Company has made certain assumptions aboutremainder of the fourth quarter amidstyear. Specifically, the Company's updated its guidance as follows:
•Organic net sales growth is now expected to be 2-3% in 2021, an uncertain environment. Notably, the Company assumes at-home consumption growth will moderate in the fourth quarter, with away-from-home demand taking longer to stabilize, and emerging markets growth decelerating in the quarter. In addition, we expect advertising and promotion costs to increase during the fourth quarter and continued incremental COVID-19-related costs.from previous guidance of 0-1%, despite lapping last year's exceptional growth.
Specifically, based•Currency-neutral adjusted operating profit growth is unchanged from prior quarter, calling for a decline of approximately (1)-(2)% year on these assumption, the revised guidance ranges are:year as it laps last year's exceptional growth.
Organic net sales growth•Currency-neutral adjusted earnings per share for the full year is projected to be approximately 6%, versus previous guidance of 5% growth.
Currency-neutral adjusted operating profit is expected to increase approximately 2%, versus previous guidance of a 1% decline, and still weighed down by the absence of resultsunchanged from the divested businesses.
Currency-neutral adjusted EPS for the full year is expectedprior quarter, estimated to increase by approximately 2%, versus previous guidance of a 1% decline, and still weighed down by the absence of results from the divested businesses.+1-2% year on year.
Cash•Net cash provided by operating activities is projectedunchanged from prior quarter, expected to be $1.8-$1.9finish 2021 at approximately $1.6 - $1.7 billion, versus previous guidancewith capital expenditure of approximately $1.6$0.5 billion. Capital expenditures are expected to be approximately $0.5 billion, versus previous guidance of $0.6 billion as certain capital projects were delayed asAs a result, of the pandemic. Cashour non-GAAP measure for cash flow defined as cash provided by operating activities reduced by capital expenditures, is projected to be $1.3-$1.4 billion, versus previous guidance of $1.0 billion, reflecting third quarter performance partially offset by lower anticipated fourth quarter earnings.estimated at $1.1 - $1.2 billion.
Due to the current supply and labor challenges, operating profit, earnings per share, and cash flow could finish at the lower end of these guidance ranges. Excluded from this guidance are any significant supply chain or other prolonged market disruptions related to the pandemic, the global economy, a prolonged U.S. labor strike, or global economy.unexpected events that may be realized in the remainder of the year.
We are unable to reasonably estimate the potential full-year financial impact of mark-to-market adjustments because these impacts are dependent on future changes in market conditions. Similarly, because of volatility in foreign exchange rates and shifts in country mix of our international earnings, we are unable to reasonably estimate the potential full-year financial impact of foreign currency translation.
As a result, these impacts are not included in the guidance provided. Therefore, we are unable to provide a full reconciliation of these non-GAAP measures used in our guidance without unreasonable effort as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.
See the table below that outlines the projected impact of certain other items that are excluded from non-GAAP guidance for 2020:
2021: | | | | | | | | | | | |
| Impact of certain items excluded from Non-GAAP guidance: | Net Sales | Operating Profit | Earnings Per Share |
| Business and portfolio realignment (pre-tax) | | ~$40-30-$50M40M | ~$0.12-0.09-$0.150.12 |
| Income tax impact applicable to adjustments, net** | | | ~$0.02-$0.03 |
U.S. Tax ReformUK tax rate change | | | ~$0.090.07 |
| Foreign valuation allowance | | | $0.06 |
| | | |
| | | |
| | | |
| | | |
| Currency-neutral adjusted guidance* | | ~3-4%(1)-(2)% | ~2% | ~2%1-2% |
Absence of results from divested business | ~4% | | |
53rd Week | (1)-(2)% | | |
| Organic guidance* | ~6%2-3% | | |
* 20202021 full year guidance for net sales, operating profit, and earnings per share are provided on a non-GAAP basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. These items for 20202021 include impacts of 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), commoditiescommodity contracts, certain equity investments, and certain foreign currency contracts. The Company is providing quantification of known adjustment items where available.
** Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
| | | | | |
| Reconciliation of Non-GAAP amounts - Cash Flow Guidance | |
| (billions) | Full Year 20202021 |
| Net cash provided by (used in) operating activities | ~$1.8-1.91.6-$1.7 |
| Additions to properties | ~($0.5) |
| Cash Flow | ~$1.3-1.41.1-$1.2 |
| |
| |
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Forward-looking statements
This Report contains “forward-looking statements” with projections concerning, among other things, the Company’s restructuring programs, the integration of acquired businesses, our strategy, financial principles, and plans, initiatives, improvements and growth; sales, margins, advertising, promotion, merchandising, brand building, operating profit, and earnings per share; innovation; investments; capital expenditures, asset write-offs and expenditures and costs related to productivity or efficiency initiatives; the impact of accounting changes and significant accounting estimates; our ability to meet interest and debt principal repayment obligations; minimum contractual obligations; future common stock repurchases or debt reduction, effective income tax rate; cash flow and core working capital improvements; interest expense; commodity and energy prices; and employee benefit plan costs and funding. Forward-looking statements include predictions of future results or activities and may contain the words “expect,” “believe,” “will,” “can,” “anticipate,” “estimate,” “project,” “should,” or words or phrases of similar meaning. For example, forward-looking statements are found in this Item 1 and in several sections of Management’s Discussion and Analysis. Our actual results or activities may differ materially from these predictions.
Our future results could be affected by a variety of other factors, including uncertainty of the magnitude, duration, geographic reach, impact on the global economy and current and potential travel restrictions of the COVID-19 outbreak, the current, and uncertain future, impact of the COVID-19 outbreak on our business, growth, reputation, prospects, financial condition, operating results (including components of our financial results), and cash flows and liquidity, the expected benefitslength and costsseverity of the divestiture of selected cookies, fruit and fruit flavored-snacks, pie crusts, and ice-cream cones businesses of the Company, the risk that disruptions from the divestiture will divert management's focus or harm our 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 our provision of transition services to the divested businesses post-closing,Company's current work stoppage at U.S. cereal manufacturing plants, the ability to implement restructuring as planned, whether the expected amount of costs associated with restructuring will differ from forecasts, whether we will be able to realize the anticipated benefits from restructuring in the amounts and times expected, the ability to realize the anticipated benefits and synergies from business acquisitions 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, transportation costs, labor costs, disruptions or inefficiencies in supply chain, the availability of and interest rates on short-term and long-term
financing, actual market performance of benefit plan trust investments, the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs, changes in consumer behavior and preferences, the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability, legal and regulatory factors including changes in food safety, advertising and labeling laws and regulations, the ultimate impact of product recalls; business disruption or other losses from war, terrorist acts or political unrest; and the risks and uncertainties described in Item 1A below. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.
Item 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 118 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 20192020 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 September 26, 2020.October 2, 2021.
Volatile market conditions arising from the COVID-19 pandemic may result in significant changes in foreign exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our net sales and operating profit when translated to U.S. dollars. Primary exposures include the U.S. dollar versus the euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Brazilian real, Nigerian naira, Russian ruble and Egyptian pound, and in the case of inter-subsidiary transactions, the British pound versus the euro. There
is significant uncertainty surrounding the impact of COVID-19 on financial markets and we will continue to monitor the business for adverse impacts related to the pandemic.
During 2020, we've entered into forward starting interest swaps with notional amounts totaling €250 million and $550 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate Euro and U.S. Dollar denominated debt. These swaps were designated as cash flow hedges. In May of 2020,2021, the Company issued $500€300 million of ten-year 2.10%eight-year 0.50% Euro Notes due 2030,2029, resulting in net proceeds of €298 million after debt discount of $496 million.and underwriting commissions. In connection with this debt issuance, the companyCompany terminated forward starting interest rate swaps with notional amounts totaling $500€250 million, resulting in a $51$6 million loss.gain. These forward starting interest rate swaps were accounted for as cash flow hedges and the related lossgain was recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the Notes.
During the year-to-date period ended October 2, 2021, we entered into interest rate contracts with notional amounts totaling $450 million. The interest rate contracts are designated as fair value hedges of certain U.S. Dollar debt. We have interest rate contracts with notional amounts totaling $2.3$2.8 billion representing a net settlement receivable of $15$87 million as of September 26, 2020.October 2, 2021. We had interest rate contracts with notional amounts totaling $1.9$2.6 billion representing a net settlement obligationreceivable of $6$46 million as of December 28, 2019.January 2, 2021.
During the quarter ended October 2, 2021, we settled cross currency swaps with notional amounts totaling approximately €600 million, resulting in a gain of $18 million. These cross currency swaps were accounted for as net investment hedges and the related loss was recorded in accumulated other comprehensive income. During the quarter ended October 2, 2021, we also entered into cross currency swaps with notional amounts totaling approximately €600 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. We have cross currency swaps with notional amounts totaling $1.6$1.4 billion outstanding as of September 26, 2020October 2, 2021 representing a net settlement receivable of $89$35 million. The total notional amount of cross currency swaps outstanding as of December 28, 2019January 2, 2021 was $1.5$1.4 billion representing a net settlement receivableobligation of $85$4 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 September 26, 2020,October 2, 2021, 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 COMPANY
PART II — OTHER INFORMATION
Item 1A. Risk Factors
Except as set forth below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended December 28, 2019.January 2, 2021. 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.
The COVID-19 pandemic could materially adversely affect our business, financial condition, results of operations and/or cash flows.
The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing.Risks Related to Our Operations
Measures enacted by authorities, and actions taken byA shortage in the Company,labor pool, failure to mitigate the spread of the COVID-19 pandemic, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns, have impacted and may further impact all or portions of our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers. There is no certainty that measures taken by governmental authorities will be sufficient to mitigate the risks posed by the COVID-19 pandemic, and our ability to perform critical functions could be harmed. A shutdown of one or more of our manufacturing, warehousing or distribution facilities as a result of illness, government restrictionssuccessfully negotiate collectively bargained agreements, or other workforce disruptionsgeneral inflationary pressures orabsenteeism, or reductions changes in capacity utilization levels, could result in us incurring additional direct costsapplicable laws and experiencing lost revenue. Illness, travel restrictions or workforce disruptions could negatively affect our supply chain, manufacturing, distribution or other business.The COVID-19 pandemic could disrupt our supply chain, operations and routes to market or those of our suppliers, their suppliers or our brokers or distributors. These disruptions or our failure to effectively respond to them,regulations could increase product or distribution costs, or cause delays or inability to deliver products to our customers. We have experienced temporary disruptions to our supply chain in certain markets that, to date, have not been material to our consolidated results. These disruptions to our work force and supplylabor cost, which could have a material adverse effect on our business,consolidated operating results of operations,or financial condition. Our labor costs include the cost of providing benefits for employees. We sponsor a number of benefit plans for employees in the United States and cash flows.
Further, we have delayed certain capitalvarious foreign locations, including pension, retiree health and innovation projects due to the COVID-19 pandemic. Continued disruptions and uncertainties related to the COVID-19 pandemic for a sustained period could result in additional delays or modifications to these projectswelfare, active health care, severance and other productivity, capitalpostemployment benefits. We also participate in multiemployer pension plans for certain of our manufacturing locations. Our major pension plans and innovation projectsU.S. collectively bargained retiree health and hinderwelfare plans are funded with trust assets invested in a globally diversified portfolio of equity securities with smaller holdings of bonds, real estate and other investments. The annual cost of benefits can vary significantly from year to year and is materially affected by such factors as changes in the assumed or actual rate of return on major plan assets, a change in the weighted-average discount rate used to measure obligations, the rate or trend of health care cost inflation, and the outcome of collectively-bargained wage and benefit agreements. Many of our employees are covered by collectively-bargained agreements and other employees may seek to be covered by collectively-bargained agreements. Strikes or work stoppages and interruptions have occurred and are occurring, including an ongoing work stoppage and related negotiations of a collectively bargained agreement at our U.S. ready-to-eat cereal manufacturing locations, and could occur if we are unable to renew these agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could adversely impact our operating results. The terms and conditions of existing, renegotiated or new agreements could also increase our costs or otherwise affect our ability to achieve the project objectives.
The COVID-19 pandemic has also significantly increased economic and demand uncertainty, including inflation, interest rates, availability of capital markets, consumer spending rates and energy availability and costs (including
Table of Contentsfully implement future operational changes to enhance our efficiency.
fuel surcharges). We expect the COVID-19 pandemic may result in lower revenues in some of our emerging market countries that have a higher concentration of traditional trade outlets (such as small family-run stores).
The duration and significance of this sustained demand is uncertain. Volatility in financial markets and deterioration of national and global economic conditions could impact our business and operations in a variety of ways, including as follows:
•Consumers may shift purchases to more generic, lower-priced, or other value offerings, or may forego certain purchases altogether during economic downturns, which could result in a reduction in sales of higher margin products or a shift in our product mix to lower margin offerings adversely affecting the results of our operations;
•Disruptions or uncertainties related to the COVID-19 pandemic could result in delays or modifications to our strategic plans and initiatives and hinder our ability to achieve our objective to reduce our operating cost structure in both our supply chain and overhead costs;
•A strengthening in the U.S. dollar relative to other currencies in the countries in which we operate would negatively affect our reported results of operations and financial results due to currency translation losses and currency transaction losses;
•Decreased demand for our products due to unemployment as a result of the COVID-19 pandemic;
•Volatility in commodity and other input costs could substantially impact our result of operations and our commodity hedging activities might not sufficiently offset this volatility;
•Volatility in the equity markets or interest rates could substantially impact our pension costs and required pension contributions; and
•Increased volatility and pricing in the capital markets and commercial paper markets could limit our access to our preferred sources of liquidity when we would like, and our borrowing costs could increase.
These and other impacts of the COVID-19 pandemic could have the effect of heightening many of the other risks described in this “Risk Factors” section of our 10-K, such as those relating to our reputation, brands, product sales, results of operations or financial condition. The severity, magnitude and duration of the current COVID-19 pandemic is uncertain, rapidly changing and depends on events beyond our knowledge or control. We might not be able to anticipate or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. As a result, the impact of the COVID-19 pandemic could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2020, the board of directors approved an authorization to repurchase up to $1.5 billion of the Company's common stock through December 2022. These authorizations are intended to allow the Company to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs.
The following table provides information with respect to purchases of common shares under programs authorized by our board of directors during the quarter ended September 26, 2020.October 2, 2021.
(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 |
| Month #1: | | | | |
6/28/20207/4/2021 - 7/25/202031/2021 | — | | $ | — | | — | | $ | 1,5001,260 | |
| Month #2: | | | | |
7/26/20208/1/2021 - 8/22/202028/2021 | — | | $ | — | | — | | $ | 1,5001,260 | |
| Month #3: | | | | |
8/23/202029/2021 - 9/26/202010/2/2021 | — | | $ | — | | — | | $ | 1,5001,260 | |
| Total | — | | $ | — | | — | | |
Item 6. Exhibits
(a)Exhibits:
| | | | | |
| Rule 13a-14(e)/15d-14(a) Certification from Steven A. Cahillane |
| Rule 13a-14(e)/15d-14(a) Certification from Amit Banati |
| Section 1350 Certification from Steven A. Cahillane |
| Section 1350 Certification from Amit Banati |
| 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/ Amit Banati |
| Amit Banati |
Principal Financial Officer;
Senior Vice President and Chief Financial Officer |
|
| /s/ Kurt Forche |
| Kurt Forche |
Principal Accounting Officer;
Vice President and Corporate Controller |
Date: October 30, 2020November 5, 2021
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 Amit Banati | E |
| Section 1350 Certification from Steven A. Cahillane | E |
| Section 1350 Certification from Amit Banati | 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 |