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 April 01,September 30, 2023
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-4171
KELLOGG COMPANYKellanova
| | | | | | | | | | | | | | |
State of Incorporation— | Delaware | | IRS Employer Identification No. | 38-0710690 |
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599412 N. Wells Street, Chicago , IL 60654
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 |
1.000% 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 April 1,October 28, 2023 — 342,758,421342,519,743 shares
KELLOGG COMPANYKELLANOVA
INDEX
| | | | | | | | |
| | Page |
| | |
| | |
| Financial Statements | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| | |
| Quantitative and Qualitative Disclosures about Market Risk | |
| | |
| Controls and Procedures | |
| | |
| | |
| Risk Factors | |
| | |
| Unregistered Sales of Equity Securities and Use of Proceeds | |
| | |
| Exhibits | |
| | |
| | |
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg CompanyKellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED BALANCE SHEET
(in millions of U.S. dollars, except per share data)
| | | | | | | | |
| April 1, 2023 | December 31, 2022 |
Current assets | | |
Cash and cash equivalents | $ | 347 | | $ | 299 | |
Accounts receivable, net | 1,820 | | 1,736 | |
Inventories | 1,801 | | 1,768 | |
Other current assets | 356 | | 383 | |
Total current assets | 4,324 | | 4,186 | |
Property, net | 3,786 | | 3,789 | |
Operating lease right-of-use assets | 611 | | 617 | |
Goodwill | 5,690 | | 5,686 | |
Other intangibles, net | 2,297 | | 2,296 | |
Investments in unconsolidated entities | 434 | | 432 | |
Other assets | 1,488 | | 1,490 | |
Total assets | $ | 18,630 | | $ | 18,496 | |
Current liabilities | | |
Current maturities of long-term debt | $ | 567 | | $ | 780 | |
Notes payable | 471 | | 467 | |
Accounts payable | 2,900 | | 2,973 | |
Current operating lease liabilities | 113 | | 121 | |
Accrued advertising and promotion | 813 | | 766 | |
Accrued salaries and wages | 214 | | 370 | |
Other current liabilities | 923 | | 872 | |
Total current liabilities | 6,001 | | 6,349 | |
Long-term debt | 5,759 | | 5,317 | |
Operating lease liabilities | 477 | | 486 | |
Deferred income taxes | 728 | | 760 | |
Pension liability | 711 | | 709 | |
Other liabilities | 475 | | 500 | |
Commitments and contingencies | | |
Equity | | |
Common stock, $.25 par value | 105 | | 105 | |
Capital in excess of par value | 1,033 | | 1,068 | |
Retained earnings | 9,293 | | 9,197 | |
Treasury stock, at cost | (4,666) | | (4,721) | |
Accumulated other comprehensive income (loss) | (1,713) | | (1,708) | |
Total Kellogg Company equity | 4,052 | | 3,941 | |
Noncontrolling interests | 427 | | 434 | |
Total equity | 4,479 | | 4,375 | |
Total liabilities and equity | $ | 18,630 | | $ | 18,496 | |
(Unaudited) | | | | | | | | |
| September 30, 2023 | December 31, 2022 |
Current assets | | |
Cash and cash equivalents | $ | 1,099 | | $ | 299 | |
Accounts receivable, net | 1,876 | | 1,736 | |
Inventories | 1,632 | | 1,768 | |
Other current assets | 379 | | 383 | |
Total current assets | 4,986 | | 4,186 | |
Property, net | 3,762 | | 3,789 | |
Operating lease right-of-use assets | 605 | | 617 | |
Goodwill | 5,496 | | 5,686 | |
Other intangibles, net | 2,065 | | 2,296 | |
Investments in unconsolidated entities | 194 | | 432 | |
Other assets | 1,587 | | 1,490 | |
Total assets | $ | 18,695 | | $ | 18,496 | |
Current liabilities | | |
Current maturities of long-term debt | $ | 1,193 | | $ | 780 | |
Notes payable | 353 | | 467 | |
Accounts payable | 2,789 | | 2,973 | |
Current operating lease liabilities | 127 | | 121 | |
Accrued advertising and promotion | 886 | | 766 | |
Accrued salaries and wages | 305 | | 370 | |
Other current liabilities | 871 | | 872 | |
Total current liabilities | 6,524 | | 6,349 | |
Long-term debt | 5,530 | | 5,317 | |
Operating lease liabilities | 471 | | 486 | |
Deferred income taxes | 702 | | 760 | |
Pension liability | 722 | | 709 | |
Other liabilities | 469 | | 500 | |
Commitments and contingencies | | |
Equity | | |
Common stock, $.25 par value | 105 | | 105 | |
Capital in excess of par value | 1,070 | | 1,068 | |
Retained earnings | 9,509 | | 9,197 | |
Treasury stock, at cost | (4,692) | | (4,721) | |
Accumulated other comprehensive income (loss) | (1,954) | | (1,708) | |
Total Kellanova equity | 4,038 | | 3,941 | |
Noncontrolling interests | 239 | | 434 | |
Total equity | 4,277 | | 4,375 | |
Total liabilities and equity | $ | 18,695 | | $ | 18,496 | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg CompanyKellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF INCOME
(in millions of U.S. dollars, except per share data)
| | | | | | | | | | | |
| Quarter ended | | |
(unaudited) | April 1, 2023 | April 2, 2022 | | | |
Net sales | $ | 4,053 | | $ | 3,672 | | | | |
Cost of goods sold | 2,843 | | 2,513 | | | | |
Selling, general and administrative expense | 770 | | 642 | | | | |
Operating profit | 440 | | 517 | | | | |
Interest expense | 80 | | 56 | | | | |
Other income (expense), net | 26 | | 74 | | | | |
Income before income taxes | 386 | | 535 | | | | |
Income taxes | 86 | | 112 | | | | |
Earnings (loss) from unconsolidated entities | 2 | | 1 | | | | |
Net income | 302 | | 424 | | | | |
Net income (loss) attributable to noncontrolling interests | 4 | | 2 | | | | |
Net income attributable to Kellogg Company | $ | 298 | | $ | 422 | | | | |
Per share amounts: | | | | | |
Basic earnings | $ | 0.87 | | $ | 1.24 | | | | |
Diluted earnings | $ | 0.86 | | $ | 1.23 | | | | |
| | | | | |
Average shares outstanding: | | | | | |
Basic | 342 | | 340 | | | | |
Diluted | 345 | | 342 | | | | |
Actual shares outstanding at period end | 343 | | 338 | | | | |
(Unaudited) | | | | | | | | | | | | | | | | | |
| Quarter ended | | Year-to-date period ended |
| September 30, 2023 | October 1, 2022 | | September 30, 2023 | October 1, 2022 |
Net sales | $ | 3,939 | | $ | 3,946 | | | $ | 12,033 | | $ | 11,482 | |
Cost of goods sold | 2,596 | | 2,793 | | | 8,147 | | 8,027 | |
Selling, general and administrative expense | 861 | | 785 | | | 2,455 | | 2,155 | |
Operating profit | 482 | | 368 | | | 1,431 | | 1,300 | |
Interest expense | 83 | | 39 | | | 245 | | 149 | |
Other income (expense), net | (24) | | 54 | | | 38 | | 188 | |
Income before income taxes | 375 | | 383 | | | 1,224 | | 1,339 | |
Income taxes | 104 | | 74 | | | 294 | | 283 | |
Earnings (loss) from unconsolidated entities | (1) | | 3 | | | 4 | | 6 | |
Net income | 270 | | 312 | | | 934 | | 1,062 | |
Net income (loss) attributable to noncontrolling interests | 1 | | 2 | | | 10 | | 4 | |
Net income attributable to Kellanova | $ | 269 | | $ | 310 | | | $ | 924 | | $ | 1,058 | |
Per share amounts: | | | | | |
Basic earnings | $ | 0.79 | | $ | 0.91 | | | $ | 2.70 | | $ | 3.11 | |
Diluted earnings | $ | 0.78 | | $ | 0.90 | | | $ | 2.68 | | $ | 3.09 | |
| | | | | |
Average shares outstanding: | | | | | |
Basic | 342 | | 341 | | | 342 | | 340 | |
Diluted | 345 | | 344 | | | 345 | | 343 | |
Actual shares outstanding at period end | | | | 343 | | 341 | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg CompanyKellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(millions)(in millions of U.S. dollars) (Unaudited)
| | | Quarter ended | | | Quarter ended | | Year-to-date period ended |
| | April 1, 2023 | | | September 30, 2023 | | September 30, 2023 |
(unaudited) | Pre-tax amount | Tax (expense) benefit | After-tax amount | | |
| | | Pre-tax amount | Tax (expense) benefit | After-tax amount | | Pre-tax amount | Tax (expense) benefit | After-tax amount |
Net income | Net income | | $ | 302 | | | Net income | | $ | 270 | | | | $ | 934 | |
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 | $ | 42 | | $ | 3 | | 45 | | | Foreign currency translation adjustments during period | $ | (134) | | $ | 1 | | (133) | | | $ | (475) | | $ | 3 | | (472) | |
Net investment hedges: | Net investment hedges: | | | Net investment hedges: | |
Net investment hedges gain (loss) | Net investment hedges gain (loss) | (57) | | 15 | | (42) | | | Net investment hedges gain (loss) | 111 | | (26) | | 85 | | | 17 | | (4) | | 13 | |
Cash flow hedges: | Cash flow hedges: | | | Cash flow hedges: | |
Net deferred gain (loss) on cash flow hedges | Net deferred gain (loss) on cash flow hedges | (18) | | 5 | | (13) | | | Net deferred gain (loss) on cash flow hedges | 40 | | (10) | | 30 | | | 37 | | (9) | | 28 | |
Reclassification to net income | Reclassification to net income | 3 | | (1) | | 2 | | | Reclassification to net income | 2 | | (1) | | 1 | | | 7 | | (2) | | 5 | |
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) | | — | | (1) | | | Net experience (gain) loss | (1) | | — | | (1) | | | (2) | | — | | (2) | |
| Available-for-sale securities: | Available-for-sale securities: | | | Available-for-sale securities: | |
Unrealized gain (loss) | Unrealized gain (loss) | 1 | | — | | 1 | | | Unrealized gain (loss) | (1) | | — | | (1) | | | — | | — | | — | |
| Reclassification to net income | | Reclassification to net income | 1 | | — | | 1 | | | 1 | | — | | 1 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | $ | (30) | | $ | 22 | | $ | (8) | | | Other comprehensive income (loss) | $ | 18 | | $ | (36) | | $ | (18) | | | $ | (415) | | $ | (12) | | $ | (427) | |
Comprehensive income | Comprehensive income | | $ | 294 | | | Comprehensive income | | $ | 252 | | | $ | 507 | |
Net Income attributable to noncontrolling interests | Net Income attributable to noncontrolling interests | | 4 | | | Net Income attributable to noncontrolling interests | | 1 | | | 10 | |
Other comprehensive income (loss) attributable to noncontrolling interests | Other comprehensive income (loss) attributable to noncontrolling interests | | (3) | | | Other comprehensive income (loss) attributable to noncontrolling interests | | (7) | | | (181) | |
Comprehensive income attributable to Kellogg Company | | $ | 293 | | | |
Comprehensive income attributable to Kellanova | | Comprehensive income attributable to Kellanova | | $ | 258 | | | $ | 678 | |
| | | Quarter ended | | | Quarter ended | | Year-to-date period ended |
| | April 2, 2022 | | | October 1, 2022 | | October 1, 2022 |
(unaudited) | Pre-tax amount | Tax (expense) benefit | After-tax amount | | |
| | | Pre-tax amount | Tax (expense) benefit | After-tax amount | | Pre-tax amount | Tax (expense) benefit | After-tax amount |
Net income | Net income | | $ | 424 | | | Net income | | $ | 312 | | | | $ | 1,062 | |
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 | $ | (17) | | $ | 1 | | (16) | | | Foreign currency translation adjustments during period | $ | (249) | | $ | 4 | | (245) | | | $ | (509) | | $ | 6 | | (503) | |
Net investment hedges: | Net investment hedges: | | | Net investment hedges: | |
Net investment hedges gain (loss) | Net investment hedges gain (loss) | 101 | | (27) | | 74 | | | Net investment hedges gain (loss) | 260 | | (68) | | 192 | | | 616 | | (162) | | 454 | |
Cash flow hedges: | Cash flow hedges: | | | Cash flow hedges: | |
Net deferred gain (loss) on cash flow hedges | Net deferred gain (loss) on cash flow hedges | 77 | | (20) | | 57 | | | Net deferred gain (loss) on cash flow hedges | 62 | | (16) | | 46 | | | 213 | | (56) | | 157 | |
Reclassification to net income | Reclassification to net income | 4 | | (1) | | 3 | | | Reclassification to net income | (14) | | 3 | | (11) | | | (6) | | 1 | | (5) | |
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) | | — | | (1) | | | Net experience (gain) loss | — | | — | | — | | | (2) | | 1 | | (1) | |
| Available-for-sale securities: | Available-for-sale securities: | | | Available-for-sale securities: | |
Unrealized gain (loss) | Unrealized gain (loss) | (3) | | — | | (3) | | | Unrealized gain (loss) | (2) | | — | | (2) | | | (6) | | — | | (6) | |
| Reclassification to net income | | Reclassification to net income | 1 | | — | | 1 | | | 1 | | — | | 1 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | $ | 161 | | $ | (47) | | $ | 114 | | | Other comprehensive income (loss) | $ | 58 | | $ | (77) | | $ | (19) | | | $ | 307 | | $ | (210) | | $ | 97 | |
Comprehensive income | Comprehensive income | | $ | 538 | | | Comprehensive income | | $ | 293 | | | $ | 1,159 | |
Net Income attributable to noncontrolling interests | Net Income attributable to noncontrolling interests | | 2 | | | Net Income attributable to noncontrolling interests | | 2 | | | 4 | |
Other comprehensive income (loss) attributable to noncontrolling interests | Other comprehensive income (loss) attributable to noncontrolling interests | | 4 | | | Other comprehensive income (loss) attributable to noncontrolling interests | | (22) | | | (26) | |
Comprehensive income attributable to Kellogg Company | | $ | 532 | | | |
Comprehensive income attributable to Kellanova | | Comprehensive income attributable to Kellanova | | $ | 313 | | | $ | 1,181 | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg CompanyKellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF EQUITY
(millions)(in millions of U.S. dollars, except per share data)
(Unaudited)
| | | Quarter ended April 1, 2023 | | Quarter ended September 30, 2023 |
| | 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 Kellanova equity | Non-controlling interests | Total equity |
(unaudited) | shares | amount | shares | amount | |
Balance, December 31, 2022 | 421 | | $ | 105 | | $ | 1,068 | | $ | 9,197 | | 79 | | $ | (4,721) | | $ | (1,708) | | $ | 3,941 | | $ | 434 | | $ | 4,375 | | |
| | | shares | amount | Capital in excess of par value | Retained earnings | shares | amount | Accumulated other comprehensive income (loss) | Total Kellanova equity | Non-controlling interests | Total equity |
Balance, July 1, 2023 | | Balance, July 1, 2023 | 421 | | $ | 105 | | 79 | | $ | (4,700) | |
Common stock repurchases | | Common stock repurchases | | — | | — | | | — | | | — | |
Net income | Net income | | 298 | | | 298 | | 4 | | 302 | | Net income | | 269 | | | 269 | | 1 | | 270 | |
| Dividends declared ($0.59 per share) | | (202) | | | (202) | | | (202) | | |
Dividends declared ($0.60 per share) | | Dividends declared ($0.60 per share) | | (205) | | | (205) | | | (205) | |
Distributions to noncontrolling interest | Distributions to noncontrolling interest | | — | | (8) | | (8) | | Distributions to noncontrolling interest | | — | | (11) | | (11) | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | (5) | | (5) | | (3) | | (8) | | Other comprehensive income (loss) | | (11) | | (11) | | (7) | | (18) | |
| Stock compensation | Stock compensation | | 22 | | | 22 | | | 22 | | Stock compensation | | 19 | | | 19 | | | 19 | |
Stock options exercised, issuance of other stock awards and other | Stock options exercised, issuance of other stock awards and other | | (57) | | — | | (1) | | 55 | | | (2) | | | (2) | | Stock options exercised, issuance of other stock awards and other | | (5) | | (2) | | — | | 8 | | | 1 | | | 1 | |
Balance, April 1, 2023 | 421 | | $ | 105 | | $ | 1,033 | | $ | 9,293 | | 78 | | $ | (4,666) | | $ | (1,713) | | $ | 4,052 | | $ | 427 | | $ | 4,479 | | |
Balance, September 30, 2023 | | Balance, September 30, 2023 | 421 | | $ | 105 | | $ | 1,070 | | $ | 9,509 | | 79 | | $ | (4,692) | | $ | (1,954) | | $ | 4,038 | | $ | 239 | | $ | 4,277 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter ended April 2, 2022 |
| 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) | shares | amount | shares | amount |
Balance, January 1, 2022 | 421 | | $ | 105 | | $ | 1,023 | | $ | 9,028 | | 80 | | $ | (4,715) | | $ | (1,721) | | $ | 3,720 | | $ | 495 | | $ | 4,215 | |
Common stock repurchases | | | | | 5 | | (300) | | | (300) | | | (300) | |
Net income | | | | 422 | | | | | 422 | | 2 | | 424 | |
| | | | | | | | | | |
| | | | | | | | | | |
Dividends declared ($0.58 per share) | | | | (197) | | | | | (197) | | | (197) | |
Distributions to noncontrolling interest | | | | | | | | — | | (1) | | (1) | |
Other comprehensive income (loss) | | | | | | | 110 | | 110 | | 4 | | 114 | |
| | | | | | | | | | |
Stock compensation | | | 16 | | | | | | 16 | | | 16 | |
Stock options exercised, issuance of other stock awards and other | | | (46) | | 1 | | (2) | | 69 | | | 24 | | | 24 | |
Balance, April 2, 2022 | 421 | | $ | 105 | | $ | 993 | | $ | 9,254 | | 83 | | $ | (4,946) | | $ | (1,611) | | $ | 3,795 | | $ | 500 | | $ | 4,295 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year-to-date period ended September 30, 2023 |
| Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellanova equity | Non-controlling interests | Total equity |
| shares | amount | shares | amount |
Balance, December 31, 2022 | 421 | | $ | 105 | | $ | 1,068 | | $ | 9,197 | | 79 | | $ | (4,721) | | $ | (1,708) | | $ | 3,941 | | $ | 434 | | $ | 4,375 | |
Common stock repurchases | | | | | 1 | | (60) | | | (60) | | | (60) | |
Net income | | | | 924 | | | | | 924 | | 10 | | 934 | |
| | | | | | | | | | |
| | | | | | | | | | |
Dividends declared ($1.78 per share) | | | | (610) | | | | | (610) | | | (610) | |
Distributions to noncontrolling interest | | | | | | | | — | | (24) | | (24) | |
Other comprehensive income (loss) | | | | | | | (246) | | (246) | | (181) | | (427) | |
Stock compensation | | | 62 | | | | | | 62 | | | 62 | |
Stock options exercised, issuance of other stock awards and other | | | (60) | | (2) | | (1) | | 89 | | | 27 | | | 27 | |
Balance, September 30, 2023 | 421 | | $ | 105 | | $ | 1,070 | | $ | 9,509 | | 79 | | $ | (4,692) | | $ | (1,954) | | $ | 4,038 | | $ | 239 | | $ | 4,277 | |
| | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg CompanyKellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF CASH FLOWSEQUITY (cont.)
(millions)(in millions of U.S. dollars, except per share data)
| | | | | | | | |
| Quarter ended |
(unaudited) | April 1, 2023 | April 2, 2022 |
Operating activities | | |
Net income | $ | 302 | | $ | 424 | |
Adjustments to reconcile net income to operating cash flows: | | |
Depreciation and amortization | 116 | | 119 | |
Postretirement benefit plan expense (benefit) | (15) | | (73) | |
Deferred income taxes | (6) | | 42 | |
Stock compensation | 22 | | 16 | |
| | |
| | |
Other | (10) | | 28 | |
Postretirement benefit plan contributions | (5) | | (7) | |
Changes in operating assets and liabilities, net of acquisitions: | | |
Trade receivables | (110) | | (184) | |
Inventories | (27) | | (160) | |
Accounts payable | 9 | | 207 | |
All other current assets and liabilities | — | | (85) | |
Net cash provided by (used in) operating activities | 276 | | 327 | |
Investing activities | | |
Additions to properties | (203) | | (138) | |
Issuance of notes receivable | (5) | | — | |
| | |
| | |
| | |
| | |
| | |
| | |
Purchases of available for sale securities | (5) | | (2) | |
Sales of available for sale securities | 5 | | 1 | |
Settlement of net investment hedges | 17 | | 37 | |
Collateral paid on derivatives | (15) | | (13) | |
Other | 1 | | 3 | |
Net cash provided by (used in) investing activities | (205) | | (112) | |
Financing activities | | |
Net issuances (reductions) of notes payable | 3 | | 313 | |
Issuances of long-term debt | 401 | | — | |
Reductions of long-term debt | (216) | | (25) | |
| | |
Net issuances of common stock | 19 | | 40 | |
Common stock repurchases | — | | (300) | |
Cash dividends | (202) | | (197) | |
| | |
Other | (38) | | (2) | |
Net cash provided by (used in) financing activities | (33) | | (171) | |
Effect of exchange rate changes on cash and cash equivalents | 10 | | (17) | |
Increase (decrease) in cash and cash equivalents | 48 | | 27 | |
Cash and cash equivalents at beginning of period | 299 | | 286 | |
Cash and cash equivalents at end of period | $ | 347 | | $ | 313 | |
| | |
Supplemental cash flow disclosures of non-cash investing activities: | | |
Additions to properties included in accounts payable | $ | 105 | | $ | 90 | |
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter ended October 1, 2022 |
| Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellanova equity | Non-controlling interests | Total equity |
| shares | amount | shares | amount |
Balance, July 2, 2022 | 421 | | $ | 105 | | $ | 1,008 | | $ | 9,387 | | 81 | | $ | (4,817) | | $ | (1,601) | | $ | 4,082 | | $ | 476 | | $ | 4,558 | |
| | | | | | | | | | |
Net income | | | | 310 | | | | | 310 | | 2 | | 312 | |
| | | | | | | | | | |
Dividends declared ($0.59 per share) | | | | (202) | | | | | (202) | | | (202) | |
Distributions to noncontrolling interest | | | | | | | | — | | (1) | | (1) | |
Other comprehensive income | | | | | | | 3 | | 3 | | (22) | | (19) | |
| | | | | | | | | | |
Stock compensation | | | 21 | | | | | | 21 | | | 21 | |
Stock options exercised and other | | | (2) | | 4 | | (1) | | 67 | | | 69 | | | 69 | |
Balance, October 1, 2022 | 421 | | $ | 105 | | $ | 1,027 | | $ | 9,499 | | 80 | | $ | (4,750) | | $ | (1,598) | | $ | 4,283 | | $ | 455 | | $ | 4,738 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year-to-date period ended October 1, 2022 |
| Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellanova equity | Non-controlling interests | Total equity |
| shares | amount | shares | amount |
Balance, January 1, 2022 | 421 | | $ | 105 | | $ | 1,023 | | $ | 9,028 | | 80 | | $ | (4,715) | | $ | (1,721) | | $ | 3,720 | | $ | 495 | | $ | 4,215 | |
Common stock repurchases | | | | | 5 | | (300) | | | (300) | | | (300) | |
Net income | | | | 1,058 | | | | | 1,058 | | 4 | | 1,062 | |
| | | | | | | | | | |
Dividends declared ($1.75 per share) | | | | (596) | | | | | (596) | | | (596) | |
Distributions to noncontrolling interest | | | | | | | | — | | (18) | | (18) | |
Other comprehensive income | | | | | | | 123 | | 123 | | (26) | | 97 | |
| | | | | | | | | | |
Stock compensation | | | 56 | | | | | | 56 | | | 56 | |
Stock options exercised and other | | | (52) | | 9 | | (5) | | 265 | | | 222 | | | 222 | |
Balance, October 1, 2022 | 421 | | $ | 105 | | $ | 1,027 | | $ | 9,499 | | 80 | | $ | (4,750) | | $ | (1,598) | | $ | 4,283 | | $ | 455 | | $ | 4,738 | |
| | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
Kellanova and Subsidiaries (formerly known as Kellogg Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions of U.S. dollars)
(Unaudited)
| | | | | | | | |
| Year-to-date period ended |
| September 30, 2023 | October 1, 2022 |
Operating activities | | |
Net income | $ | 934 | | $ | 1,062 | |
Adjustments to reconcile net income to operating cash flows: | | |
Depreciation and amortization | 338 | | 351 | |
Postretirement benefit plan expense (benefit) | (105) | | (189) | |
Deferred income taxes | — | | 26 | |
Stock compensation | 62 | | 56 | |
Loss on Russia divestiture | 113 | | — | |
| | |
Other | 9 | | (16) | |
Postretirement benefit plan contributions | (13) | | (17) | |
Changes in operating assets and liabilities, net of acquisitions: | | |
Trade receivables | (229) | | (526) | |
Inventories | 69 | | (343) | |
Accounts payable | (32) | | 501 | |
All other current assets and liabilities | 254 | | 275 | |
Net cash provided by (used in) operating activities | 1,400 | | 1,180 | |
Investing activities | | |
Additions to properties | (506) | | (350) | |
Issuance of notes receivable | (4) | | — | |
Repayments from notes receivable | — | | 10 | |
| | |
| | |
| | |
| | |
| | |
Purchases of available for sale securities | (15) | | (15) | |
Sales of available for sale securities | 15 | | 14 | |
Settlement of net investment hedges | 29 | | 37 | |
| | |
Other | 9 | | (8) | |
Net cash provided by (used in) investing activities | (472) | | (312) | |
Financing activities | | |
Net issuances (reductions) of notes payable | (115) | | 37 | |
Issuances of long-term debt | 896 | | — | |
Reductions of long-term debt | (227) | | (33) | |
| | |
Net issuances of common stock | 51 | | 244 | |
Common stock repurchases | (60) | | (300) | |
Cash dividends | (610) | | (596) | |
| | |
Other | (55) | | (17) | |
Net cash provided by (used in) financing activities | (120) | | (665) | |
Effect of exchange rate changes on cash and cash equivalents | (8) | | (116) | |
Increase (decrease) in cash and cash equivalents | 800 | | 87 | |
Cash and cash equivalents at beginning of period | 299 | | 286 | |
Cash and cash equivalents at end of period | $ | 1,099 | | $ | 373 | |
| | |
Supplemental cash flow disclosures of non-cash investing activities: | | |
Additions to properties included in accounts payable | $ | 107 | | $ | 75 | |
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
for the quarter ended April 1,September 30, 2023 (unaudited)
Note 1 Accounting policies
Basis of presentation
The unaudited interim financial information of Kellanova (the Company), formerly 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. The accompanying unaudited financial statements also include the historical results of WK Kellogg Co, as the separation was completed on October 2, 2023. This interim information should be read in conjunction with the financial statements and accompanying footnotes within the Company’s 2022 Annual Report on Form 10-K.
The condensed balance sheet information at December 31, 2022 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 April 1,September 30, 2023 are not necessarily indicative of the results to be expected for other interim periods or the full year.
Certain prior period amounts have been reclassified to conform with current period presentation.
Accounts payable - Supplier Finance Programs
The Company establishes competitive market-based terms with our suppliers, regardless of whether they participate in supplier finance programs, which generally range from 0 to 150 days dependent on their respective industry and geography.
The Company has agreements with third parties to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company has no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers. The payment of these obligations by the Company is included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of April 1,September 30, 2023, $1.1$1.0 billion of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system. As of December 31, 2022, $1.1 billion of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system.
Accounting standards adopted in the period
Supplier Finance Programs: Disclosure of Supplier Finance Program Obligations. In September 2022, the FASB issued an ASU to improve the disclosures of supplier finance programs. Specifically, the ASU requires disclosure of key terms of the supplier finance programs and a rollforward of the related obligations. The amendments in this ASU do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company has historically presented information regarding the nature and amount of outstanding Accounts Payable obligations confirmed into supplier finance programs within the Accounting Policies note of the financial statements. The Company adopted the ASU in the first quarter of 2023 and plans to include the rollforward information in the first quarter of 2024.
Note 2 Proposed separationSeparation transaction
During 2022, theKellogg Company announced its intent to separate its North American cereal business, via tax-free spin-off, with a target to complete the transaction during the fourth quarter of 2023, resulting in two independent public companies, each better positioned to unlock their full standalone potential.
Kellanova (formerly Kellogg Company) and WK Kellogg Co.
The transaction will follow the satisfaction of customary conditions, including reviews and final approval by Kellogg’s Board of Directors, receipt of an Internal Revenue Service ruling and relevant tax opinions with respect to the tax-free nature of the transaction, effectiveness of appropriate filings with the U.S. Securities and Exchange Commission, and the completion of audited financials of the new independent company.
We cannot assure that the North American cereal transaction will be completed on the anticipated timeline or at all or that the terms
In preparation of the separation, will not change.
Thethe Company incurred pre-tax charges related to the proposed separation of $51$56 million and $184 million for the quarter and year-to-date period ended April 1,September 30, 2023, respectively, including $4$3 million and $21 million recorded in COGS, respectively, and $47$53 million and $163 million recorded in SGA expense.SG&A, respectively. The Company incurred pre-tax charges of $18 million and $22 million for the quarter and year-to-date period ended October 1, 2022, respectively, all of which were recorded in SG&A. These charges were primarily related to legal and consulting costs.
In connection with the separation, WK Kellogg Co entered into several agreements with Kellanova that govern the relationship of the parties following the Spin-Off including a Separation and Distribution Agreement, a Manufacturing and Supply Agreement, a Tax Matters Agreement, Employee Matters Agreement, Transition Services Agreement, and various lease agreements
On October 2, 2023, the Company completed the separation of its North America cereal business resulting in two independent companies, Kellanova and WK Kellogg Co. As a result of the distribution, Kellanova shareholders of record on September 21, 2023, received one share of WK Kellogg Co common stock for every four shares of Kellanova common stock. On October 2, 2023, WK Kellogg Co began trading as an independent publicly traded company under the stock symbol “KLG” on the New York Stock Exchange and Kellanova continued trading under the stock symbol "K".
Note 3 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 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 approximately $945 million.$1.1 billion. During 2023 the Company amended the agreements to increase the previous maximum receivables sold limit from approximately $920 million as of December 31, 2022.
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 April 1,September 30, 2023 and December 31, 2022 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 $911$957 million and $865 million remained outstanding under these arrangements as of April 1,September 30, 2023 and December 31, 2022, 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 $12$14 million and $2$40 million for the quartersquarter and year-to-date period ended AprilSeptember 30, 2023, respectively and was $6 million and $11 million for the quarter and year-to-date period ended October 1, 2023 and April 2, 2022, .2022. 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 $28$40 million and $31 million remained outstanding under these programs as of April 1,September 30, 2023 and December 31, 2022, 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 4 Divestiture
Russia
In December 2022July 2023 the Company entered into an agreementcompleted the sale of its Russian business. As a result of completing the transaction, the Company derecognized net assets of approximately $65 million and recorded a non-cash loss on the transaction of approximately $113 million in OIE, primarily related to sell our Russian business to a third party, pending a numberthe release of local government regulatory approvals.historical currency translation adjustments. The business is awas part of ourthe Europe reportable segment. The pendingsegment and the sale includes the entirety of the Company’s operations in Russia and will resultresulted in a complete exit from the Russian market. Although the Company has entered into a definitive agreement to sell its Russian business, there is no assurance that we will obtain the necessary regulatory approvals or that the other terms and conditions to complete the sale will be satisfied or approved.
As of April 1, 2023 the pending sale did not meet the criteria for held for sale accounting due to uncertainty related to the evolving regulatory approvals that are required in order to complete the transaction. If approved, the
Company expects to incur a loss on the transaction due to the release of historical foreign currency translation adjustments (CTA). The net book value of the assets related to the Russian business was $70 million, which are expected to be recoverable on a held and used basis, and historical CTA losses was $95 million. The net value of assets and CTA losses collectively represent less than 1% of total Company assets as of April 1, 2023. The Kellogg business in Russia representsrepresented approximately 1% of consolidated Kellogg CompanyKellanova net sales.
Note 5 EquityInvestments in unconsolidated entities
The Company holds a 50% ownership interest in Tolaram Africa Foods, PTE LTD (TAF), a holding company with a 49% interest in Dufil Prima Foods, Plc, a food manufacturer in West Africa. The investment in TAF is accounted for under the equity method of accounting and is evaluated for indicators of other than temporary impairment. The company records the activity of TAF on a one-month lag due to the timing required to obtain the financial statements from TAF management.
During the second quarter of 2023, the Company recorded an out-of-period adjustment to correct an error in the foreign currency translation of its investment in TAF. The adjustment decreased investments in unconsolidated entities and increased other comprehensive loss by $113 million, respectively. We determined the adjustment to be immaterial to our Consolidated Financial Statements for the quarter and year to date periods ended July 1, 2023 and related prior annual and quarterly periods.
During the third quarter of 2023, the devaluation of the Nigerian Naira required an additional foreign currency translation adjustment. Based on the foreign currency exchange rates at the end of August 2023 and the accounting method used by the Company to record the results of operations of TAF on a one-month lag, the adjustment resulted in additional translation losses of approximately $129 million recognized in other comprehensive income.
Note 6 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 certain contingently issuable performance shares. There were approximately 46 million and 84 million anti-dilutive potential common shares excluded from the calculation for the quartersquarter and year-to-date periods ended AprilSeptember 30, 2023, respectively. There were approximately 2 million and 4 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended October 1, 2023 and April 2, 2022, respectively. Please refer to the Consolidated Statement of Income for basic and diluted earnings per share for the quartersquarter and year-to-date periods ended April 1,September 30, 2023 and April 2,October 1, 2022.
Share repurchases
In December 2022, the Board of Directors approved an authorization to repurchase up to $1.5 billion of our common stock through December 2025. During the quarteryear-to-date period ended April 1,September 30, 2023, the Company did not repurchase anyrepurchased approximately 1 million shares of common stock for a total of $60 million. During the quarteryear-to-date period ended April 2,October 1, 2022, the Company repurchased approximately 5 million shares of common stock for a total of $300 million.
Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges, which are recorded in interest expense within the statement of income, upon reclassification from Accumulated Other Comprehensive Income (AOCI), adjustments for net experience gains (losses), prior service credit (costs) related to employee benefit plans and adjustments for unrealized (gains) losses on available-for-sale securities, which are recorded in other income (expense) within the statement of income, upon reclassification from AOCI. The related tax effects of these items are recorded in income tax expense within the statement of income, upon reclassification from AOCI.
Accumulated other comprehensive income (loss), net of tax, as of September 30, 2023 and December 31, 2022 consisted of the following:
Accumulated other comprehensive income (loss), net | | | | | | | | |
(millions) | September 30, 2023 | December 31, 2022 |
Foreign currency translation adjustments | $ | (2,401) | | $ | (2,111) | |
Net investment hedges gain (loss) | 295 | | 282 | |
Cash flow hedges — net deferred gain (loss) | 183 | | 150 | |
Postretirement and postemployment benefits: | | |
Net experience gain (loss) | — | | 2 | |
Prior service credit (cost) | (27) | | (27) | |
Available-for-sale securities unrealized net gain (loss) | (4) | | (4) | |
Total accumulated other comprehensive income (loss) | $ | (1,954) | | $ | (1,708) | |
Note 7 Notes payable and long-term debt
The following table presents the components of tax, as of April 1,Notes payable at September 30, 2023 and December 31, 2022 consisted of the following:2022:
| | | | | | | | |
(millions) | April 1, 2023 | December 31, 2022 |
Foreign currency translation adjustments | $ | (2,063) | | $ | (2,111) | |
Net investment hedges gain (loss) | 240 | | 282 | |
Cash flow hedges — net deferred gain (loss) | 139 | | 150 | |
Postretirement and postemployment benefits: | | |
Net experience gain (loss) | 1 | | 2 | |
Prior service credit (cost) | (27) | | (27) | |
Available-for-sale securities unrealized net gain (loss) | (3) | | (4) | |
Total accumulated other comprehensive income (loss) | $ | (1,713) | | $ | (1,708) | |
Note 6 Long-term debt
| | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
(millions) | Principal amount | Effective interest rate | | Principal amount | Effective interest rate |
U.S. commercial paper | $ | — | | 5.44 | % | | $ | 330 | | 4.46 | % |
Bank borrowings | 353 | | | | 137 | | |
Total | $ | 353 | | | | $ | 467 | | |
On September 29, 2023, in connection with the planned separation, WK Kellogg Co entered into a Credit Agreement (the “Credit Agreement”), consisting of a $500 million (the "Term Loan"), $250 million delayed draw term loan, and $350 million equivalent multicurrency revolving credit facility (collectively, the “Credit Facility”).
The Credit Facility has an initial term of five years and matures on September 29, 2028. Interest on the loans under the Credit Agreement are to be calculated by reference to Secured Overnight Financing Rate (“SOFR”) or an alternative base rate, plus an interest rate margin equal to (x) in the case of SOFR loans, 1.75% and (y) in the case of alternate base rate loans, 0.75%, each with related step-ups and step-downs based on WK Kellogg Co’s consolidated net leverage ratio as defined by the Credit Agreement. Interest expense for the quarter and year-to-date period ended September 30, 2023 was immaterial.
Under the Credit Facility, WK Kellogg Co has the right at any time, subject to customary conditions, to request incremental term loans or an increase to the revolving credit facility in an aggregate principal amount of (i) up to the greater of (x) $250 million and (y) 100% of Consolidated EBITDA, as defined in the Credit Agreement, for the preceding four fiscal quarters of WK Kellogg Co. Any such addition of or increase in loans will be subject to certain customary conditions precedent and other provisions.
The Credit Facility also contains customary mandatory prepayments, including with respect to asset sale proceeds and proceeds from certain occurrences of indebtedness. WK Kellogg Co may voluntarily repay outstanding loans under the Credit Facility at any time without premium or penalty.
The Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to 2.50% in year one, 5.00% in year two and three, 7.50% in year four and 10.00% in year five, of the original principal amount thereon, with the balance being payable on the date that is five years after the closing of the Credit Facility.
The obligations under the Credit Facility (collectively, “Credit Facility Obligations”) are guaranteed (the “Credit Facility Guarantees”) exclusively by the existing and future direct and indirect subsidiaries of WK Kellogg Co (in such capacity, the “Credit Facility Guarantors”). The Credit Facility Obligations are expected to be secured by first priority liens on substantially all assets, subject to customary exceptions, of WK Kellogg Co and the Credit Facility Guarantors. The Credit Facility Guarantee and security interest of a Credit Facility Guarantor may be released where such Credit Facility Guarantor ceases to be a consolidated subsidiary of WK Kellogg Co pursuant to a transaction permitted under the Credit Facility. The Credit Facility contains various covenants, including, for example, those that restrict WK Kellogg Co's ability and the ability of their consolidated subsidiaries to incur certain types of indebtedness or to grant certain liens on their respective property or assets.
WK Kellogg Co incurred $7 million of debt issuance costs, of which $5 million is related to the term loan and is reflected as a reduction in long-term debt, and $2 million is related to the revolving credit facility and is reflected in other assets.
As of September 30, 2023, WK Kellogg Co borrowings under the Credit Facility included a $500 million term loan, of which $9 million represents the current portion, and $164 million of borrowings under the revolving credit facility was recognized as notes payable.
During the first quarter of 2023, the CompanyKellanova issued $400 million of ten-year 5.25% Notes due 2033, resulting in net proceeds after discount and underwriting commissions of $396 million. The proceeds from these notes were used for general corporate purposes, including the payment of offering related fees and expenses, repayment of the $210 million 2.75% Notes when they matured on March 1, 2023, 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 debt issuance, the CompanyKellanova terminated forward starting interest rate swaps with notional amounts totaling $400 million, resulting in a gain of $47 million in the first quarter of 2023. These derivatives were accounted for as cash flow hedges. The total net gain of $91 million, including those realized in prior periods, were recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the Notes. The effective interest rate on the Notes, reflecting issuance discount and hedge settlement is 3.06% at April 1, 2023.
Note 78 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 2022 Annual Report on Form 10-K. Components of Company benefit plan (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.
PensionIn connection with the planned separation transaction, the company amended and legally split certain pension and postretirement benefit plans, several remeasurements occurred during the third quarter of 2023.
| | | | | | | | | | | |
| Quarter ended | | |
(millions) | April 1, 2023 | April 2, 2022 | | | |
Service cost | $ | 6 | | $ | 9 | | | | |
Interest cost | 44 | | 29 | | | | |
Expected return on plan assets | (53) | | (71) | | | | |
Amortization of unrecognized prior service cost | 2 | | 2 | | | | |
Recognized net gain | — | | (21) | | | | |
Total pension income | $ | (1) | | $ | (52) | | | | |
| | | | | |
| | | | | |
Pension
Other nonpension postretirement
| | | | | | | | | | | |
| Quarter ended | | |
(millions) | April 1, 2023 | April 2, 2022 | | | |
Service cost | $ | 2 | | $ | 3 | | | | |
Interest cost | 10 | | 6 | | | | |
Expected return on plan assets | (24) | | (28) | | | | |
Amortization of unrecognized prior service cost | (2) | | (2) | | | | |
| | | | | |
| | | | | |
| | | | | |
Total postretirement benefit income | $ | (14) | | $ | (21) | | | | |
Postemployment
| | | Quarter ended | | | Quarter ended | | Year-to-date period ended |
(millions) | (millions) | April 1, 2023 | April 2, 2022 | | (millions) | September 30, 2023 | October 1, 2022 | | September 30, 2023 | October 1, 2022 |
Service cost | Service cost | $ | 1 | | $ | 1 | | | Service cost | $ | 6 | | $ | 6 | | | $ | 18 | | $ | 23 | |
Interest cost | | Interest cost | 44 | | 34 | | | 132 | | 91 | |
Expected return on plan assets | | Expected return on plan assets | (54) | | (57) | | | (161) | | (200) | |
Amortization of unrecognized prior service cost | | Amortization of unrecognized prior service cost | 2 | | 2 | | | 7 | | 7 | |
Recognized net loss (gain) | | Recognized net loss (gain) | 10 | | (15) | | | 10 | | (46) | |
Total pension income | | Total pension income | $ | 8 | | $ | (30) | | | $ | 6 | | $ | (125) | |
| Recognized net experience gain | (1) | | (1) | | | |
Total postemployment expense | $ | — | | $ | — | | | |
|
For the quarter and year-to-date periods ended April 2,September 30, 2023, the Company recognized a loss of $10 million related to the remeasurement of a U.S. pension plan. The remeasurement was due to the amendment of the plan to split the pension plan in anticipation of the separation transaction. The remeasurement recognized was due primarily to a lower than expected return on plan assets.
For the quarter and year-to-date periods ended October 1, 2022, the Company recognized a gain of $21$15 million and $46 million, respectively, related to the remeasurement of two U.S. pension plans. These remeasurements were the result of distributions that exceeded service and interest costs resulting in settlement accounting for those specific plans. The remeasurements recognized were due primarily to an increase in the discount rate relative to the previous remeasurement date partially offset by lower than expected return on plan assets.
Other nonpension postretirement
| | | | | | | | | | | | | | | | | |
| Quarter ended | | Year-to-date period ended |
(millions) | September 30, 2023 | October 1, 2022 | | September 30, 2023 | October 1, 2022 |
Service cost | $ | 2 | | $ | 2 | | | $ | 5 | | $ | 8 | |
Interest cost | 11 | | 6 | | | 31 | | 18 | |
Expected return on plan assets | (25) | | (28) | | | (73) | | (83) | |
Amortization of unrecognized prior service cost | (2) | | (2) | | | (7) | | (7) | |
Recognized net (gain) loss | (67) | | — | | | (67) | | — | |
| | | | | |
| | | | | |
Total postretirement benefit income | $ | (81) | | $ | (22) | | | $ | (111) | | $ | (64) | |
For the quarter and year-to-date periods ended September 30, 2023, the Company recognized a gain of $67 million related to the remeasurement of other postretirement benefit plans. These remeasurements were the result of separating the other postretirement benefit plans impacted by the separation transaction. The remeasurements recognized were due primarily to a higher than expected return on plan assets.
Postemployment
| | | | | | | | | | | | | | | | | |
| Quarter ended | | Year-to-date period ended |
(millions) | September 30, 2023 | October 1, 2022 | | September 30, 2023 | October 1, 2022 |
Service cost | $ | 1 | | $ | — | | | $ | 2 | | $ | 2 | |
Interest cost | 1 | | 1 | | | 2 | | 1 | |
| | | | | |
Recognized net experience gain | (1) | | — | | | (2) | | (2) | |
Total postemployment expense | $ | 1 | | $ | 1 | | | $ | 2 | | $ | 1 | |
For the quarter and year-to-date periods ended September 30, 2023, the Company recognized a gain of $1 million and $2 million, respectively, related to the remeasurement of a U.S. postemployment benefit plan. The remeasurement was the result of separating the postemployment plan impacted by the separation transaction. The remeasurement recognized was due primarily to a higher than expected return on plan assets.
In May 2023, the Company purchased a group annuity to cover pension benefit obligations of certain participants of the United Kingdom defined benefit pension plan for approximately $590 million. This transaction represents an annuity buy-in, under which the Company retains both the fair value of the annuity contract (within plan assets) and the pension benefit obligation related to these participants.
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: | |
April 1, 2023 | $ | — | | $ | 5 | | $ | 5 | | |
April 2, 2022 | $ | 1 | | $ | 6 | | $ | 7 | | |
| September 30, 2023 | | September 30, 2023 | $ | — | | $ | 3 | | $ | 3 | |
October 1, 2022 | | October 1, 2022 | $ | 1 | | $ | 4 | | $ | 5 | |
Year-to-date period ended: | | Year-to-date period ended: | |
September 30, 2023 | | September 30, 2023 | $ | — | | $ | 13 | | $ | 13 | |
October 1, 2022 | | October 1, 2022 | $ | 2 | | $ | 15 | | $ | 17 | |
Full year: | Full year: | | Full year: | |
Fiscal year 2023 (projected) | Fiscal year 2023 (projected) | $ | 5 | | $ | 21 | | $ | 26 | | Fiscal year 2023 (projected) | $ | 5 | | $ | 21 | | $ | 26 | |
Fiscal year 2022 (actual) | Fiscal year 2022 (actual) | $ | 3 | | $ | 20 | | $ | 23 | | Fiscal year 2022 (actual) | $ | 3 | | $ | 20 | | $ | 23 | |
Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.
Note 89 Income taxes
The consolidated effective tax rate for the quarters ended April 1,September 30, 2023 and April 2,October 1, 2022 was 22%28% and 19%, respectively. The consolidated effective tax rates for the year-to-date periods ended September 30, 2023 and October 1, 2022 was 24% and 21%, respectively.
The increase in effective tax rate for the quarter ended September 30, 2023 versus the prior year quarter is due to zero tax benefit recognized on the $113 million loss incurred on the divestiture of the Russia business.
As of April 1,September 30, 2023, the Company classified $21classified $11 million of unrecognizedunrecognized 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 approximatelyapproximately $3 million ofof 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 April 1,September 30, 2023 was $37was $34 million. Of this balance, $30$28 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
The accrual balance for tax-related interest was approximately $9 million at April 1, 2023.
Note 910 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 April 1,September 30, 2023 and December 31, 2022 were as follows:
| (millions) | (millions) | April 1, 2023 | December 31, 2022 | (millions) | September 30, 2023 | December 31, 2022 |
Foreign currency exchange contracts | Foreign currency exchange contracts | $ | 2,957 | | $ | 2,502 | | Foreign currency exchange contracts | $ | 2,826 | | $ | 2,502 | |
Cross-currency contracts | Cross-currency contracts | 2,101 | | 1,983 | | Cross-currency contracts | 1,925 | | 1,983 | |
Interest rate contracts | Interest rate contracts | 2,275 | | 2,657 | | Interest rate contracts | 2,251 | | 2,657 | |
Commodity contracts | Commodity contracts | 456 | | 230 | | Commodity contracts | 376 | | 230 | |
Total | Total | $ | 7,789 | | $ | 7,372 | | Total | $ | 7,378 | | $ | 7,372 | |
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 April 1,September 30, 2023 and December 31, 2022, 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 April 1,September 30, 2023 or December 31, 2022.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of April 1,September 30, 2023 and December 31, 2022:
Derivatives designated as hedging instruments
| | | April 1, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
(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 | $ | — | | $ | 63 | | $ | 63 | | | $ | — | | $ | 88 | | $ | 88 | | Other current assets | $ | — | | $ | 77 | | $ | 77 | | | $ | — | | $ | 88 | | $ | 88 | |
Other assets | Other assets | — | | 26 | | 26 | | | — | | 36 | | 36 | | Other assets | — | | 25 | | 25 | | | — | | 36 | | 36 | |
Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
Other current assets | Other current assets | — | | — | | — | | | — | | 45 | | 45 | | Other current assets | — | | 23 | | 23 | | | — | | 45 | | 45 | |
Other assets | Other assets | — | | 10 | | 10 | | | — | | 25 | | 25 | | Other assets | — | | — | | — | | | — | | 25 | | 25 | |
Total assets | Total assets | $ | — | | $ | 99 | | $ | 99 | | | $ | — | | $ | 194 | | $ | 194 | | Total assets | $ | — | | $ | 125 | | $ | 125 | | | $ | — | | $ | 194 | | $ | 194 | |
Liabilities: | Liabilities: | | Liabilities: | |
| Cross-currency contracts: | Cross-currency contracts: | | Cross-currency contracts: | |
Other current liabilities | Other current liabilities | $ | — | | $ | (7) | | $ | (7) | | | $ | — | | $ | — | | $ | — | | Other current liabilities | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | |
Other liabilities | Other liabilities | — | | — | | — | | | — | | — | | — | | Other liabilities | — | | — | | — | | | — | | — | | — | |
Interest rate contracts(a): | Interest rate contracts(a): | | Interest rate contracts(a): | |
Other current liabilities | Other current liabilities | — | | — | | — | | | — | | — | | — | | Other current liabilities | — | | (16) | | (16) | | | — | | — | | — | |
Other liabilities | Other liabilities | — | | (77) | | (77) | | | — | | (86) | | (86) | | Other liabilities | — | | (62) | | (62) | | | — | | (86) | | (86) | |
| Total liabilities | Total liabilities | $ | — | | $ | (84) | | $ | (84) | | | $ | — | | $ | (86) | | $ | (86) | | Total liabilities | $ | — | | $ | (78) | | $ | (78) | | | $ | — | | $ | (86) | | $ | (86) | |
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.0 billion as of September 30, 2023 and $1.1 billion as of April 1, 2023 and December 31, 2022, respectively.2022.
Derivatives not designated as hedging instruments
| | | April 1, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
(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 | $ | — | | $ | 58 | | $ | 58 | | | $ | — | | $ | 74 | | $ | 74 | | Other current assets | $ | — | | $ | 56 | | $ | 56 | | | $ | — | | $ | 74 | | $ | 74 | |
Other assets | Other assets | — | | 14 | | 14 | | | — | | 14 | | 14 | | Other assets | — | | 7 | | 7 | | | — | | 14 | | 14 | |
Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
Other current assets | Other current assets | — | | 9 | | 9 | | | — | | 4 | | 4 | | Other current assets | — | | 9 | | 9 | | | — | | 4 | | 4 | |
Other assets | Other assets | — | | 6 | | 6 | | | — | | 14 | | 14 | | Other assets | — | | 11 | | 11 | | | — | | 14 | | 14 | |
Commodity contracts: | Commodity contracts: | | Commodity contracts: | |
Other current assets | Other current assets | 6 | | — | | 6 | | | 4 | | — | | 4 | | Other current assets | 4 | | — | | 4 | | | 4 | | — | | 4 | |
Total assets | Total assets | $ | 6 | | $ | 87 | | $ | 93 | | | $ | 4 | | $ | 106 | | $ | 110 | | Total assets | $ | 4 | | $ | 83 | | $ | 87 | | | $ | 4 | | $ | 106 | | $ | 110 | |
Liabilities: | Liabilities: | | Liabilities: | |
Foreign currency exchange contracts: | Foreign currency exchange contracts: | | Foreign currency exchange contracts: | |
Other current liabilities | Other current liabilities | $ | — | | $ | (45) | | $ | (45) | | | $ | — | | $ | (50) | | $ | (50) | | Other current liabilities | $ | — | | $ | (49) | | $ | (49) | | | $ | — | | $ | (50) | | $ | (50) | |
Other liabilities | Other liabilities | — | | (11) | | (11) | | | — | | (9) | | (9) | | Other liabilities | — | | (3) | | (3) | | | — | | (9) | | (9) | |
Interest rate contracts: | Interest rate contracts: | | Interest rate contracts: | |
Other current liabilities | Other current liabilities | — | | (11) | | (11) | | | — | | (7) | | (7) | | Other current liabilities | — | | (11) | | (11) | | | — | | (7) | | (7) | |
Other liabilities | Other liabilities | — | | (9) | | (9) | | | — | | (18) | | (18) | | Other liabilities | — | | (14) | | (14) | | | — | | (18) | | (18) | |
Commodity contracts: | Commodity contracts: | | Commodity contracts: | |
Other current liabilities | Other current liabilities | (6) | | — | | (6) | | | (2) | | — | | (2) | | Other current liabilities | (12) | | — | | (12) | | | (2) | | — | | (2) | |
| Total liabilities | Total liabilities | $ | (6) | | $ | (76) | | $ | (82) | | | $ | (2) | | $ | (84) | | $ | (86) | | Total liabilities | $ | (12) | | $ | (77) | | $ | (89) | | | $ | (2) | | $ | (84) | | $ | (86) | |
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 $1.6 billion as of April 1,September 30, 2023 and December 31, 2022, respectively.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of April 1,September 30, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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) |
| | | | April 1, 2023 | December 31, 2022 | | April 1, 2023 | December 31, 2022 |
Interest rate contracts | | Current maturities of long-term debt | | $ | 273 | | $ | 483 | | | $ | (2) | | $ | (3) | |
Interest rate contracts | | Long-term debt | | $ | 2,288 | | $ | 2,250 | | | $ | (63) | | $ | (74) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 30, 2023 | December 31, 2022 | | September 30, 2023 | December 31, 2022 |
Interest rate contracts | | Current maturities of long-term debt | | $ | 897 | | $ | 483 | | | $ | 3 | | $ | (3) | |
Interest rate contracts | | Long-term debt | | $ | 1,623 | | $ | 2,250 | | | $ | (59) | | $ | (74) | |
(a) The fair value adjustment related to current maturities of long-term debt includes ($2)$3 million and ($3) million from discontinued hedging relationships as of April 1,September 30, 2023 and December 31, 2022, respectively. The fair value adjustment related to long-term debt includes $11$3 million and $13 million from discontinued hedging relationships as of April 1,September 30, 2023 and December 31, 2022, 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 April 1,September 30, 2023 and December 31, 2022 would be adjusted as detailed in the following table:
| | | | | | | | | |
As of April 1, 2023: | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | |
As of September 30, 2023: | | As of September 30, 2023: | | 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 | $ | 192 | | $ | (135) | | $ | (1) | | $ | 56 | | Total asset derivatives | $ | 212 | | $ | (138) | | $ | 25 | | $ | 99 | |
Total liability derivatives | Total liability derivatives | $ | (166) | | $ | 135 | | $ | 31 | | $ | — | | Total liability derivatives | $ | (167) | | $ | 138 | | $ | 29 | | $ | — | |
| | | | | | | | | | | | | | |
| | | | |
As of December 31, 2022: | | Gross Amounts Not Offset in the Consolidated Balance Sheet | |
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount |
Total asset derivatives | $ | 304 | | $ | (153) | | $ | (33) | | $ | 118 | |
Total liability derivatives | $ | (172) | | $ | 153 | | $ | 19 | | $ | — | |
During the quartersquarter and year-to-date periods ended AprilSeptember 30, 2023, the Company settled certain interest rate contracts resulting in a net realized gain of approximately $14 million and $85 million, respectively. During the quarter and year-to-date periods ended October 1, 2023 and April 2, 2022, the Company settled certain interest rate contracts resulting in a net realized gain of approximately $47$83 million and $82$165 million, respectively. These derivatives were accounted for as cash flow hedges and the related net gains were recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the related forecasted fixed rate debt, once issued. During the quarter ended October 1, 2022, the Company recognized an $18 million gain related to a portion of certain forward-starting interest rate swaps no longer designated as cash flow hedges due to changes in forecasted debt issuance.
During the quartersquarter and year-to-date periods ended AprilSeptember 30, 2023, the Company settled certain cross currency swaps resulting in a net realized gain of approximately $12 million and $29 million, respectively. During the year-to-date period ended October 1, 2023 and April 2, 2022, the Company settled certain cross currency swaps resulting in a net realized gain of approximately $17 million and $37 million, respectively.million. These cross currency swaps were accounted for as net investment hedges and the related net gain was recorded in accumulated other comprehensive income.
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended April 1,September 30, 2023 and April 2,October 1, 2022 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 |
| | April 1, 2023 | | April 2, 2022 | | April 1, 2023 | | April 2, 2022 | | | September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 | |
Foreign currency denominated long-term debt | Foreign currency denominated long-term debt | $ | (32) | | | $ | 68 | | | $ | — | | | $ | — | | | Foreign currency denominated long-term debt | $ | 44 | | | $ | 137 | | | $ | — | | | $ | — | | |
Cross-currency contracts | Cross-currency contracts | (25) | | | 33 | | | 14 | | | 6 | | Interest expense | Cross-currency contracts | 67 | | | 123 | | | 14 | | | 11 | | Interest expense |
Total | Total | $ | (57) | | | $ | 101 | | | $ | 14 | | | $ | 6 | | | Total | $ | 111 | | | $ | 260 | | | $ | 14 | | | $ | 11 | | |
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 |
| | | April 1, 2023 | | April 2, 2022 | | | September 30, 2023 | | October 1, 2022 |
Foreign currency exchange contracts | Foreign currency exchange contracts | COGS | $ | (6) | | | $ | (12) | | Foreign currency exchange contracts | COGS | $ | 10 | | | $ | 14 | |
Foreign currency exchange contracts | Foreign currency exchange contracts | Other income (expense), net | (4) | | | (2) | | Foreign currency exchange contracts | Other income (expense), net | (1) | | | (9) | |
Foreign currency exchange contracts | Foreign currency exchange contracts | SG&A | (2) | | | 1 | | Foreign currency exchange contracts | SG&A | 1 | | | 3 | |
Interest rate contracts | Interest rate contracts | Interest expense | — | | | 1 | | Interest rate contracts | Interest expense | — | | | 1 | |
Commodity contracts | Commodity contracts | COGS | (39) | | | 112 | | Commodity contracts | COGS | (22) | | | (1) | |
| Total | Total | | $ | (51) | | | $ | 100 | | Total | | $ | (12) | | | $ | 8 | |
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended September 30, 2023 and October 1, 2022 was as follows:
Derivatives and non-derivatives in net investment hedging relationships
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
(millions) | Gain (loss) recognized in AOCI | | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component |
| September 30, 2023 | | October 1, 2022 | | September 30, 2023 | | October 1, 2022 | |
Foreign currency denominated long-term debt | $ | 10 | | | $ | 339 | | | $ | — | | | $ | — | | |
Cross-currency contracts | 7 | | | 277 | | | 42 | | | 28 | | Interest expense |
Total | $ | 17 | | | $ | 616 | | | $ | 42 | | | $ | 28 | | |
Derivatives not designated as hedging instruments
| | | | | | | | | | | | | | |
| | | | |
(millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income |
| | September 30, 2023 | | October 1, 2022 |
Foreign currency exchange contracts | COGS | $ | (4) | | | $ | 34 | |
Foreign currency exchange contracts | Other income (expense), net | (11) | | | (18) | |
Foreign currency exchange contracts | SGA | (4) | | | 8 | |
Interest rate contracts | Interest expense | — | | | 3 | |
Commodity contracts | COGS | (85) | | | 33 | |
| | | | |
Total | | $ | (104) | | | $ | 60 | |
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended April 1,September 30, 2023 and April 2,October 1, 2022:
| | | | | | April 1, 2023 | | | April 2, 2022 | | | | | September 30, 2023 | | | October 1, 2022 |
(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 | | | $ | 80 | | | | $ | 56 | | 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 | | | $ | 83 | | | | $ | 39 | |
| | Gain (loss) on fair value hedging relationships: | | | | | | | Gain (loss) on fair value hedging relationships: | | | | | |
| | Interest contracts: | | | | | | | Interest contracts: | | | | | |
| | Hedged items | | | (12) | | | | 41 | | | Hedged items | | | (1) | | | | 35 | |
| | Derivatives designated as hedging instruments | | | 13 | | | | (40) | | | Derivatives designated as hedging instruments | | | 2 | | | | (34) | |
| | | 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 | | | (3) | | | | (4) | | | Amount of gain (loss) reclassified from AOCI into income | | | (2) | | | | 14 | |
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the year-to-date periods ended September 30, 2023 and October 1, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | September 30, 2023 | | | | October 1, 2022 |
(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 | | | | $ | 245 | | | | | $ | 149 | |
| Gain (loss) on fair value hedging relationships: | | | | | | | | |
| Interest contracts: | | | | | | | | |
| Hedged items | | | | (5) | | | | | 89 | |
| Derivatives designated as hedging instruments | | | | 8 | | | | | (85) | |
| | | | | | | | | | |
| Gain (loss) on cash flow hedging relationships: | | | | | | | | |
| Interest contracts: | | | | | | | | |
| Amount of gain (loss) reclassified from AOCI into income | | | | (7) | | | | | 6 | |
During the next 12 months, the Company expects $10 million of net deferred losses reported in AOCI at April 1,September 30, 2023 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 ifwhen the Company’s credit rating is at or below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instrumentsexceeds certain thresholds with credit-risk-related contingent features in a liability position on April 1, 2023 was not material.each counterparty. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were noThe collateral posting requirements as of April 1,September 30, 2023, triggered by credit-risk-relatedthreshold contingent features.features was not material.
Other fair value measurements
Available for sale securities
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| | Unrealized | | | | Unrealized | |
(millions) | Cost | Gain (Loss) | Market Value | | Cost | Gain (Loss) | Market Value |
Corporate bonds | $ | 50 | | $ | (4) | | $ | 46 | | | $ | 52 | | $ | (5) | | $ | 47 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| | Unrealized | | | | Unrealized | |
(millions) | Cost | Gain (Loss) | Market Value | | Cost | Gain (Loss) | Market Value |
Corporate bonds | $ | 52 | | $ | (4) | | $ | 48 | | | $ | 52 | | $ | (5) | | $ | 47 | |
During the quarteryear-to-date period ended April 1,September 30, 2023, the Company sold approximately $5$15 million of investments in level 2 corporate bonds. The resulting gainloss was immaterialapproximately $1 million and recorded in Other income and (expense). Also during the quarteryear-to-date period ended April 1,September 30, 2023, the Company purchased approximately $5$15 million in level 2 corporate bonds. During the quarteryear-to-date period ended April 2,October 1, 2022, the Company sold level 2 corporate bonds for approximately $14 million. The resulting loss approximately $1 million resulting in an immaterial gainand recorded in Other income and (expense). Also during the quarteryear-to-date period ended April 2,October 1, 2022, the Company purchased approximately $2$15 million in level 2 corporate bonds.
The market values of the Company's investments in level 2 corporate bonds are based on matrices or models from pricing vendors. Unrealized gains and losses are included in the Consolidated Statement of Comprehensive Income. Additionally, these investments are recorded within Other current assets and Other assets on the Consolidated Balance Sheet, based on the maturity of the individual security. The maturity dates of the securities range from 2024 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.
Equity investments
We hold equity investments in certain companies that we do not have the ability to exercise significant influence. Equity investments without a readily determinable fair value are recorded at original cost. Investments with a readily determinable fair value, which are level 2 investments, are measured at fair value based on observable market price changes, with gains and losses recorded through net earnings. Equity investments were approximately $40 million as of April 1,September 30, 2023 and December 31, 2022. Additionally, these investments were recorded within Other noncurrent assets on the Consolidated Balance Sheet.
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 $5.6$5.2 billion and $5.8$5.5 billion, respectively, as of April 1,September 30, 2023. The fair value and carrying value of the Company's long-term debt was $5.1 billion and $5.3 billion, respectively, as of December 31, 2022.
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 $20$43 million, net of collateral already received from those counterparties, as of April 1,September 30, 2023.
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 April 1,September 30, 2023, the Company posted $25$22 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers.
Note 1011 Reportable segments
Kellogg CompanyKellanova is a leading producer of snacks, cereal, and frozen foods. It is the second largest producer of crackers, and a leading producer of savory snacks and the world's leading producer of cereal. Additional product offerings include toaster pastries, cereal bars, veggie foods and noodles. KelloggKellanova products are manufactured and marketed globally. Principal markets for these products include the United States, United Kingdom, Nigeria, Canada, Mexico, and Australia.
The Company manages its operations through four operating segments that are based on geographic location – North America which includes U.S. businesses and Canada; Europe which consists 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.
Corporate includes corporate administration and initiatives as well as share-based compensation.
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 | | |
(millions) | April 1, 2023 | April 2, 2022 | | | |
Net sales | | | | | |
North America | $ | 2,388 | | $ | 2,110 | | | | |
Europe | 604 | | 589 | | | | |
Latin America | 292 | | 256 | | | | |
AMEA | 770 | | 718 | | | | |
Total Reportable Segments | 4,054 | | 3,673 | | | | |
Corporate | (1) | | (1) | | | | |
Consolidated | $ | 4,053 | | $ | 3,672 | | | | |
Operating profit | | | | | |
North America | $ | 366 | | $ | 339 | | | | |
Europe | 92 | | 98 | | | | |
Latin America | 25 | | 14 | | | | |
AMEA | 74 | | 66 | | | | |
Total Reportable Segments | 557 | | 517 | | | | |
Corporate | (117) | | — | | | | |
Consolidated | $ | 440 | | $ | 517 | | | | |
| | | | | | | | | | | | | | | | | |
| Quarter ended | | Year-to-date period ended |
(millions) | September 30, 2023 | October 1, 2022 | | September 30, 2023 | October 1, 2022 |
Net sales | | | | | |
North America | $ | 2,329 | | $ | 2,338 | | | $ | 7,042 | | $ | 6,696 | |
Europe | 616 | | 562 | | | 1,888 | | 1,749 | |
Latin America | 338 | | 282 | | | 966 | | 826 | |
AMEA | 657 | | 767 | | | 2,139 | | 2,217 | |
Total Reportable Segments | 3,940 | | 3,949 | | | 12,035 | | 11,488 | |
Corporate | (1) | | (3) | | | (2) | | (6) | |
Consolidated | $ | 3,939 | | $ | 3,946 | | | $ | 12,033 | | $ | 11,482 | |
Operating profit | | | | | |
North America | $ | 312 | | $ | 322 | | | $ | 1,048 | | $ | 1,043 | |
Europe | 97 | | 75 | | | 293 | | 280 | |
Latin America | 42 | | 29 | | | 105 | | 82 | |
AMEA | 63 | | 64 | | | 204 | | 192 | |
Total Reportable Segments | 514 | | 490 | | | 1,650 | | 1,597 | |
Corporate | (32) | | (122) | | | (219) | | (297) | |
Consolidated | $ | 482 | | $ | 368 | | | $ | 1,431 | | $ | 1,300 | |
Supplemental product information is provided below for net sales to external customers:
| | | Quarter ended | | | Quarter ended | | Year-to-date period ended |
(millions) | (millions) | | April 1, 2023 | April 2, 2022 | | (millions) | | September 30, 2023 | October 1, 2022 | | September 30, 2023 | October 1, 2022 |
Snacks | Snacks | | $ | 2,022 | | $ | 1,775 | | | Snacks | | $ | 2,040 | | $ | 1,943 | | | $ | 6,114 | | $ | 5,635 | |
Cereal | Cereal | | 1,390 | | 1,281 | | | Cereal | | 1,368 | | 1,355 | | | 4,155 | | 3,978 | |
Frozen | Frozen | | 292 | | 291 | | | Frozen | | 281 | | 281 | | | 838 | | 829 | |
Noodles and other | Noodles and other | | 349 | | 325 | | | Noodles and other | | 250 | | 367 | | | 926 | | 1,040 | |
Consolidated | Consolidated | | $ | 4,053 | | $ | 3,672 | | | Consolidated | | $ | 3,939 | | $ | 3,946 | | | $ | 12,033 | | $ | 11,482 | |
Note 1112 Supplemental Financial Statement Datafinancial statement data
| Consolidated Balance Sheet | Consolidated Balance Sheet | | Consolidated Balance Sheet | |
(millions) | (millions) | April 1, 2023 (unaudited) | December 31, 2022 | (millions) | September 30, 2023 (unaudited) | December 31, 2022 |
Trade receivables | Trade receivables | $ | 1,577 | | $ | 1,449 | | Trade receivables | $ | 1,657 | | $ | 1,449 | |
Allowance for credit losses | Allowance for credit losses | (20) | | (13) | | Allowance for credit losses | (16) | | (13) | |
Refundable income taxes | Refundable income taxes | 31 | | 82 | | Refundable income taxes | 23 | | 82 | |
Other receivables | Other receivables | 232 | | 218 | | Other receivables | 212 | | 218 | |
Accounts receivable, net | Accounts receivable, net | $ | 1,820 | | $ | 1,736 | | Accounts receivable, net | $ | 1,876 | | $ | 1,736 | |
Raw materials and supplies | Raw materials and supplies | $ | 443 | | $ | 426 | | Raw materials and supplies | $ | 399 | | $ | 426 | |
Finished goods and materials in process | Finished goods and materials in process | 1,358 | | 1,342 | | Finished goods and materials in process | 1,233 | | 1,342 | |
Inventories | Inventories | $ | 1,801 | | $ | 1,768 | | Inventories | $ | 1,632 | | $ | 1,768 | |
Intangible assets not subject to amortization | Intangible assets not subject to amortization | $ | 1,975 | | $ | 1,969 | | Intangible assets not subject to amortization | $ | 1,854 | | $ | 1,969 | |
Intangible assets subject to amortization, net | Intangible assets subject to amortization, net | 322 | | 327 | | Intangible assets subject to amortization, net | 211 | | 327 | |
Other intangibles, net | Other intangibles, net | $ | 2,297 | | $ | 2,296 | | Other intangibles, net | $ | 2,065 | | $ | 2,296 | |
|
KELLOGG COMPANYKELLANOVA (formerly known as 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,Kellanova, 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 115 years, consumers have countedConsumers count on KelloggKellanova for great-tasting, high-quality and nutritious foods. Currently, 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. KelloggKellanova products are manufactured and marketed globally.
Proposed separationSeparation transaction
During 2022, the Company announced its intent to separate its North American cereal business, via tax-free spin-off, with a target to complete thespin-off. The transaction during the fourth quarter ofwas completed on October 2, 2023, resulting in two independent public companies, each better positioned to unlock their full standalone potential. The proposed separation of the North American cereal business is expected to create greater strategic, operational,Kellanova and financial focus for the company and its stakeholders, and will build on our current momentum.WK Kellogg Co.
WarNigerian Naira
During the second quarter of 2023, the Nigerian government removed certain currency restrictions over the Nigerian Naira leading to a significant decline in Ukrainethe exchange rate of the Naira to the U.S. dollar on the official market in Nigeria. As a result of this decline in the exchange rate, the U.S. dollar value of the assets, liabilities, expenses and revenues of our Nigerian business in our consolidated financial statements has decreased significantly compared to prior periods. The consolidated assets of our Nigerian business represented approximately 5% of our consolidated assets as of September 30, 2023, compared to 8% as of December 31, 2022. Net sales of our Nigerian business were 7% of our consolidated net sales for the year-to-date period ended September 30, 2023 but could become a smaller percentage of our overall sales if exchange rates as of the end of the third quarter persist throughout the remainder of 2023.
In addition to our consolidated Nigerian business, the Company also has an investment in an unconsolidated entity, Tolaram Africa Foods PTE LTD, that holds an investment in a Nigerian food manufacturer. This investment is accounted for under the equity method of accounting and is evaluated for indicators of other than temporary impairment. Due to the devaluation of the Naira and the accounting method used by the Company to record the results of operations of TAF on a one-month-lag, the Company recorded a foreign currency translation adjustment on the value of the TAF investment during the third quarter of 2023. Based on the foreign currency exchange rates at the end of August 2023, the adjustment resulted in translation losses of approximately $129 million through other comprehensive income.
Russia
The war in Ukraine and the related sanctions imposed have increased global economic and geopolitical uncertainty. In March 2022, we suspended all new investments and shipments of all products to Russia. We have no employees or direct operations in Ukraine. Our business in Russia consistsconsisted of three manufacturing facilities.
In December 2022 the Company entered into an agreement to sell our Russian business to a third party, pending a number of local government regulatory approvals. In July 2023 the Company completed the sale of the Russian business. As a result of completing the transaction, the Company derecognized net assets of approximately $65 million and recorded a non-cash loss on the transaction of approximately $113 million, primarily related to the release of historical currency translation adjustments. The business is awas part of ourthe Europe reportable segment. The pendingsegment and the sale includes the entirety of the Company’s operations in Russia and will resultresulted in a complete exit from the Russian market. Although the Company has entered into a definitive agreement to sell its Russian business, there is no assurance that we will obtain the necessary regulatory approvals or that the other terms and conditions to complete the sale will be satisfied or approved.
As of April 1, 2023 the pending sale did not meet the criteria for held for sale accounting due to uncertainty related to the evolving regulatory approvals that are required in order to complete the transaction. If approved, the
Company expects to incur a loss on the transaction due to the release of historical foreign currency translation adjustments (CTA). The net book value of the assets related to the Russian business was $70 million, which are expected to be recoverable on a held and used basis, and historical CTA losses was $95 million. The net value of assets and CTA losses collectively represent less than 1% of total Company assets as of April 1, 2023. The Kellogg business in Russia representsrepresented approximately 1% of consolidated Kellogg CompanyKellanova net sales.
Impacts of the war to our net sales, earnings, and cash flows extends beyond our business in Russia. Regional or global economic recessions, inflation, and supply chain challenges as a result of the war or further escalation could have a material impact on our results.
Inflationary pressures
Events such as the COVID-19 pandemic and the war in Ukraine have resulted in certain impacts to the global economy, including market disruptions, supply chain challenges, and inflationary pressures. During the quarter ended April 1,September 30, 2023 we continued to experience elevated commodity and supply chain costs, including logistics, procurement and manufacturing costs.costs, although certain supply chain challenges have eased. We continue to mitigate the dollar impact of this input cost inflation through the execution of productivity initiatives and revenue growth management actions. Additionally, from time to time we may enter into a combination of fixed price contracts with suppliers and commodity derivative instruments to manage the impact of volatility in the price of raw materials. We continue to expect these market disruptions and inflationary pressuresinput cost inflation to continue throughoutmoderate during the fourth quarter 2023.
Segments
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 effective tax rate, net debt, and free 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, and foreign currency, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions.
•Adjusted: gross profit, gross margin, operating profit, operating margin, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the planned separation transaction, 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), commodity contracts, certain equity investments and certain foreign currency contracts, a gain on interest rate swaps, 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, operating margin, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the planned separation transaction, 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), commodity contracts, certain equity investments and certain foreign currency contracts, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, 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, costs of the planned separation transaction, 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), commodity contracts, certain equity investments and certain foreign currency contracts, a gain on interest rate swaps, and other costs impacting comparability. We excluded the items which we believe may obscure trends in our pre-tax income and the related tax effect of those items on our adjusted effective income tax rate, and other impacts to tax expense. 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.
•CashFree cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. CashFree 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
We recognize mark-to-market adjustments for pension and postretirement benefit 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 commodity 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 loss of $58$98 million and $26 million for the quarter and year-to-date period ended April 1, 2023. Additionally, we recorded a pre-tax mark-to-market gain of $68 million for the quarter ended April 2, 2022.September 30, 2023, respectively. Included within the aforementioned was a pre-tax mark-to-market gain for pension plans of $21$57 million for the quarter and year-to-date periods ended April 2, 2022.September 30, 2023. Additionally, we recorded a pre-tax mark-to-market loss of $43 million and $69 million for the quarter and year-to-date period ended October 1, 2022, respectively. Included within the aforementioned was a pre-tax mark-to-market gain for pension plans of $15 million and $45 million for the quarter and year-to-date period ended October 1, 2022, respectively.
Separation costs
The Company continues to work towards its plannedIn conjunction with the separation of itsour North America cereal business. As a result, webusiness, the Company incurred pre-tax charges, related to the planned separation, primarily related to legal and consulting costs, of $51$56 million and $184 million for the quarter and year-to-date period ended AprilSeptember 30, 2023. We recorded pre-tax charges of $18 million and $22 million for the quarter and year-to-date periods ended October 1, 2023.2022, respectively.
Business and portfolio realignment
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 prospective divestitures and acquisitions. As a result, we incurred pre-tax charges, primarily related to reorganizations, of $1$2 million and $4 million for the quarter and year-to-date periods ended April 1, 2023.September 30, 2023, respectively. We recorded pre-tax charges of $7$4 million and $18 million for the quarter and year-to-date period ended April 2, 2022.October 1, 2022, respectively.
Loss related to divestiture
In July 2023, the Company completed the sale of the Russian business. As a result of completing the transaction, the Company recorded a non-cash loss on the transaction of approximately $113 million, primarily related to the release of historical currency translation adjustments.
Gain related to interest rate swaps
During the third quarter or 2022, the Company recognized a pre-tax gain of $18 million in interest expense related to a portion of certain forward-starting interest rate swaps no longer designated as cash flow hedges due to changes in forecasted debt issuance.
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 April 1,September 30, 2023, our reported net sales increased 10%were flat versus the prior year as a resultunfavorable currency and the divestiture of our Russia business offset positive price/mix, sustained momentum in snacks and noodles, as well as a recovery of North America cereal that drove net sales growth which more than offset the impacts of price elasticity, halted shipments into Russia, and unfavorable currency.mix. Organic net sales increased 14%4% from the prior year excluding foreign currency.currency and divestitures.
FirstThird quarter reported operating profit decreased 15%increased 31% versus the year-ago quarter as net sales growth was more thanprimarily due to favorable mark-to-market impacts and continued gross margin recovery, partially offset by unfavorable mark-to-market impacts andhigher separation costs. Currency-neutral adjusted operating profit increased 18%10%, after excluding the impact of mark-to-market, separation costs, and foreign currency translation.
Reported diluted EPS of $0.86$0.78 for the quarter decreased 30%13% compared to the prior year quarter of $1.23$0.90 due to unfavorable mark-to-market impacts,the loss on divestiture of our Russia business, higher interest expense, incremental separation costs, and lower pension income. Currency-neutral adjusted diluted EPS of $1.13$0.99 for the quarter increased 2.7%decreased 2% from the prior year quarter after excluding mark-to-market, separation costs, loss of divestiture, and foreign currency translation.
Reconciliation of certain non-GAAP Financial Measures
| | | Quarter 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) | April 1, 2023 | April 2, 2022 | | Consolidated results (dollars in millions, except per share data) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 |
Reported net income | Reported net income | $ | 298 | | $ | 422 | | | Reported net income | $ | 269 | | $ | 310 | | $ | 924 | | $ | 1,058 | |
Mark-to-market (pre-tax) | Mark-to-market (pre-tax) | (58) | | 68 | | | Mark-to-market (pre-tax) | 98 | | (43) | | 25 | | (69) | |
| Project K (pre-tax) | | Project K (pre-tax) | — | | — | | — | | — | |
Separation costs (pre-tax) | Separation costs (pre-tax) | (51) | | — | | | Separation costs (pre-tax) | (56) | | (18) | | (184) | | (22) | |
Business and portfolio realignment (pre-tax) | Business and portfolio realignment (pre-tax) | (1) | | (7) | | | Business and portfolio realignment (pre-tax) | (2) | | (4) | | (4) | | (18) | |
| Gain related to interest rate swaps (pre-tax) | | Gain related to interest rate swaps (pre-tax) | — | | 18 | | — | | 18 | |
Loss on divestiture (pre-tax) | | Loss on divestiture (pre-tax) | (113) | | — | | (113) | | — | |
Income tax impact applicable to adjustments, net* | Income tax impact applicable to adjustments, net* | 27 | | (16) | | | Income tax impact applicable to adjustments, net* | (12) | | 11 | | 35 | | 22 | |
| Adjusted net income | Adjusted net income | $ | 380 | | $ | 376 | | | Adjusted net income | $ | 354 | | $ | 346 | | $ | 1,164 | | $ | 1,127 | |
Foreign currency impact | Foreign currency impact | (8) | | — | | | Foreign currency impact | 14 | | — | | 7 | | — | |
Currency-neutral adjusted net income | Currency-neutral adjusted net income | $ | 389 | | $ | 376 | | | Currency-neutral adjusted net income | $ | 340 | | $ | 346 | | $ | 1,157 | | $ | 1,127 | |
Reported diluted EPS | Reported diluted EPS | $ | 0.86 | | $ | 1.23 | | | Reported diluted EPS | $ | 0.78 | | $ | 0.90 | | $ | 2.68 | | $ | 3.09 | |
Mark-to-market (pre-tax) | Mark-to-market (pre-tax) | (0.17) | | 0.20 | | | Mark-to-market (pre-tax) | 0.28 | | (0.13) | | 0.07 | | (0.20) | |
| Separation costs (pre-tax) | Separation costs (pre-tax) | (0.15) | | — | | | Separation costs (pre-tax) | (0.16) | | (0.05) | | (0.53) | | (0.06) | |
Business and portfolio realignment (pre-tax) | Business and portfolio realignment (pre-tax) | — | | (0.02) | | | Business and portfolio realignment (pre-tax) | (0.01) | | (0.01) | | (0.01) | | (0.05) | |
| Gain related to interest rate swaps (pre-tax) | | Gain related to interest rate swaps (pre-tax) | — | | 0.05 | | — | | 0.05 | |
Loss on divestiture (pre-tax) | | Loss on divestiture (pre-tax) | (0.33) | | — | | (0.33) | | — | |
Income tax impact applicable to adjustments, net* | Income tax impact applicable to adjustments, net* | 0.08 | | (0.05) | | | Income tax impact applicable to adjustments, net* | (0.03) | | 0.03 | | 0.11 | | 0.06 | |
| Adjusted diluted EPS | Adjusted diluted EPS | $ | 1.10 | | $ | 1.10 | | | Adjusted diluted EPS | $ | 1.03 | | $ | 1.01 | | $ | 3.37 | | $ | 3.29 | |
Foreign currency impact | Foreign currency impact | (0.03) | | — | | | Foreign currency impact | 0.04 | | — | | 0.02 | | — | |
Currency-neutral adjusted diluted EPS | Currency-neutral adjusted diluted EPS | $ | 1.13 | | $ | 1.10 | | | Currency-neutral adjusted diluted EPS | $ | 0.99 | | $ | 1.01 | | $ | 3.35 | | $ | 3.29 | |
Currency-neutral adjusted diluted EPS growth | Currency-neutral adjusted diluted EPS growth | 2.7 | % | | | Currency-neutral adjusted diluted EPS growth | (2.0) | % | | 1.8 | % | |
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.
*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 firstthird quarter of 2023 versus 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarter ended April 1, 2023 | | | | | | | | | | | | |
(millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
Reported net sales | | $ | 2,388 | | | $ | 604 | | | $ | 292 | | | $ | 770 | | | $ | (1) | | | $ | 4,053 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency impact | | (10) | | | (30) | | | 8 | | | (91) | | | — | | | (123) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Organic net sales | | $ | 2,398 | | | $ | 634 | | | $ | 284 | | | $ | 861 | | | $ | (1) | | | $ | 4,176 | |
| | | | | | | | | | | | |
Quarter ended April 2, 2022 | | | | | | | | | | | | |
(millions) | | | | | | | | | | | | |
Reported net sales | | $ | 2,109 | | | $ | 589 | | | $ | 256 | | | $ | 718 | | | $ | (1) | | | $ | 3,672 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
% change - 2023 vs. 2022: | | | | | | | | | | | | |
Reported growth | | 13.2 | % | | 2.5 | % | | 14.2 | % | | 7.2 | % | | n/m | | 10.4 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency impact | | (0.5) | % | | (5.1) | % | | 2.9 | % | | (12.6) | % | | n/m | | (3.3) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Organic growth | | 13.7 | % | | 7.6 | % | | 11.3 | % | | 19.8 | % | | n/m | | 13.7 | % |
Volume (tonnage) | | (0.6) | % | | (5.9) | % | | (7.5) | % | | 0.4 | % | | n/m | | (1.9) | % |
Pricing/mix | | 14.3 | % | | 13.5 | % | | 18.8 | % | | 19.4 | % | | n/m | | 15.6 | % |
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarter ended April 1, 2023 | | | | | | | | | | | | |
(millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellogg Consolidated |
Reported operating profit | | $ | 366 | | | $ | 92 | | | $ | 25 | | | $ | 74 | | | $ | (116) | | | $ | 440 | |
Mark-to-market | | — | | | — | | | (2) | | | — | | | (55) | | | (57) | |
| | | | | | | | | | | | |
Separation costs | | (51) | | | — | | | — | | | — | | | — | | | (51) | |
Business and portfolio realignment | | (1) | | | — | | | — | | | — | | | — | | | (1) | |
| | | | | | | | | | | | |
Adjusted operating profit | | $ | 418 | | | $ | 92 | | | $ | 27 | | | $ | 74 | | | $ | (61) | | | $ | 549 | |
Foreign currency impact | | (1) | | | (5) | | | 1 | | | (6) | | | 1 | | | (11) | |
Currency-neutral adjusted operating profit | | $ | 419 | | | $ | 97 | | | $ | 26 | | | $ | 80 | | | $ | (62) | | | $ | 560 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Quarter ended April 2, 2022 | | | | | | | | | | | | |
(millions) | | | | | | | | | | | | |
Reported operating profit | | $ | 339 | | | $ | 98 | | | $ | 14 | | | $ | 66 | | | $ | — | | | $ | 517 | |
Mark-to-market | | — | | | — | | | (8) | | | — | | | 55 | | | 48 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Business and portfolio realignment | | (6) | | | — | | | — | | | — | | | (1) | | | (7) | |
| | | | | | | | | | | | |
Adjusted operating profit | | $ | 345 | | | $ | 98 | | | $ | 22 | | | $ | 66 | | | $ | (54) | | | $ | 476 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
% change - 2023 vs. 2022: | | | | | | | | | | | | |
Reported growth | | 8.0 | % | | (6.0) | % | | 75.7 | % | | 11.8 | % | | n/m | | (14.9) | % |
Mark-to-market | | — | % | | — | % | | 51.4 | % | | — | % | | n/m | | (20.9) | % |
| | | | | | | | | | | | |
Separation costs | | (15.1) | % | | — | % | | — | % | | — | % | | n/m | | (10.9) | % |
Business and portfolio realignment | | 2.1 | % | | — | % | | — | % | | — | % | | n/m | | 1.5 | % |
| | | | | | | | | | | | |
Adjusted growth | | 21.0 | % | | (6.0) | % | | 24.3 | % | | 11.8 | % | | n/m | | 15.4 | % |
Foreign currency impact | | (0.4) | % | | (5.2) | % | | 4.3 | % | | (9.5) | % | | n/m | | (2.3) | % |
Currency-neutral adjusted growth | | 21.4 | % | | (0.8) | % | | 20.0 | % | | 21.3 | % | | (13.7) | % | | 17.7 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarter ended September 30, 2023 | | | | | | | | | | | | |
(millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellanova Consolidated |
Reported net sales | | $ | 2,329 | | | $ | 616 | | | $ | 338 | | | $ | 657 | | | $ | (1) | | | $ | 3,939 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency impact | | (2) | | | 49 | | | 32 | | | (202) | | | — | | | (123) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Organic net sales | | $ | 2,332 | | | $ | 567 | | | $ | 306 | | | $ | 859 | | | $ | (1) | | | $ | 4,062 | |
| | | | | | | | | | | | |
Quarter ended October 1, 2022 | | | | | | | | | | | | |
(millions) | | | | | | | | | | | | |
Reported net sales | | $ | 2,338 | | | $ | 562 | | | $ | 283 | | | $ | 767 | | | $ | (3) | | | $ | 3,946 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Divestiture | | 0 | | 38 | | | 0 | | 0 | | 0 | | 38 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Organic net sales | | $ | 2,338 | | | $ | 524 | | | $ | 283 | | | $ | 767 | | | $ | (3) | | | $ | 3,908 | |
| | | | | | | | | | | | |
% change - 2023 vs. 2022: | | | | | | | | | | | | |
Reported growth | | (0.4) | % | | 9.5 | % | | 19.2 | % | | (14.3) | % | | n/m | | (0.2) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency impact | | (0.1) | % | | 8.7 | % | | 11.3 | % | | (26.4) | % | | n/m | | (3.1) | % |
Currency-neutral growth | | (0.3) | % | | 0.8 | % | | 7.9 | % | | 12.1 | % | | n/m | | 2.9 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Divestiture | | — | % | | (7.4) | % | | — | % | | — | % | | n/m | | (1.0) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Organic growth | | (0.3) | % | | 8.2 | % | | 7.9 | % | | 12.1 | % | | n/m | | 3.9 | % |
Volume (tonnage) | | (10.2) | % | | (7.7) | % | | (9.2) | % | | (1.9) | % | | n/m | | (7.4) | % |
Pricing/mix | | 9.9 | % | | 15.9 | % | | 17.1 | % | | 14.0 | % | | n/m | | 11.3 | % |
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.
| | | | | | | | | | | | | | | |
Net sales % change - first quarter 2023 vs. 2022: | | | | | |
| Reported Net Sales | Foreign Currency | | | Organic Net Sales | | |
North America | | | | | | | |
Snacks | 15.1 | % | (0.3) | % | | | 15.4 | % | | |
Cereal | 15.7 | % | (0.8) | % | | | 16.5 | % | | |
Frozen | 0.1 | % | (0.5) | % | | | 0.6 | % | | |
| | | | | | | |
Europe | | | | | | | |
Snacks | 9.2 | % | (5.2) | % | | | 14.4 | % | | |
Cereal | (4.4) | % | (5.0) | % | | | 0.6 | % | | |
| | | | | | | |
Latin America | | | | | | | |
Snacks | 11.1 | % | (0.6) | % | | | 11.7 | % | | |
Cereal | 15.9 | % | 5.1 | % | | | 10.8 | % | | |
| | | | | | | |
AMEA | | | | | | | |
Snacks | 15.0 | % | (11.1) | % | | | 26.1 | % | | |
Cereal | 1.2 | % | (9.5) | % | | | 10.7 | % | | |
Noodles and other | 7.5 | % | (15.6) | % | | | 23.1 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarter ended September 30, 2023 | | | | | | | | | | | | |
(millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellanova Consolidated |
Reported operating profit | | $ | 312 | | | $ | 97 | | | $ | 42 | | | $ | 63 | | | $ | (32) | | | $ | 482 | |
Mark-to-market | | — | | | — | | | 3 | | | — | | | 39 | | | 41 | |
| | | | | | | | | | | | |
Separation costs | | (55) | | | — | | | (1) | | | — | | | — | | | (56) | |
Business and portfolio realignment | | (2) | | | — | | | — | | | — | | | — | | | (2) | |
| | | | | | | | | | | | |
Adjusted operating profit | | $ | 369 | | | $ | 97 | | | $ | 40 | | | $ | 63 | | | $ | (71) | | | $ | 498 | |
Foreign currency impact | | — | | | 8 | | | 4 | | | (10) | | | 1 | | | 3 | |
Currency-neutral adjusted operating profit | | $ | 369 | | | $ | 89 | | | $ | 37 | | | $ | 73 | | | $ | (72) | | | $ | 495 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Quarter ended October 1, 2022 | | | | | | | | | | | | |
(millions) | | | | | | | | | | | | |
Reported operating profit | | $ | 322 | | | $ | 75 | | | $ | 28 | | | $ | 64 | | | $ | (120) | | | $ | 368 | |
Mark-to-market | | — | | | — | | | (1) | | | — | | | (58) | | | (58) | |
| | | | | | | | | | | | |
Separation costs | | (18) | | | — | | | — | | | — | | | — | | | (18) | |
Business and portfolio realignment | | (3) | | | — | | | — | | | — | | | (1) | | | (4) | |
| | | | | | | | | | | | |
Adjusted operating profit | | $ | 342 | | | $ | 76 | | | $ | 29 | | | $ | 64 | | | $ | (62) | | | $ | 449 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
% change - 2023 vs. 2022: | | | | | | | | | | | | |
Reported growth | | (3.0) | % | | 28.7 | % | | 47.5 | % | | (1.5) | % | | 73.2 | % | | 30.5 | % |
Mark-to-market | | — | % | | — | % | | 12.9 | % | | — | % | | 86.0 | % | | 27.5 | % |
| | | | | | | | | | | | |
Separation costs | | (11.0) | % | | — | % | | (4.9) | % | | — | % | | — | % | | (8.6) | % |
Business and portfolio realignment | | 0.4 | % | | 0.4 | % | | 0.7 | % | | — | % | | 0.8 | % | | 0.6 | % |
| | | | | | | | | | | | |
Adjusted growth | | 7.6 | % | | 28.3 | % | | 38.8 | % | | (1.5) | % | | (13.6) | % | | 11.0 | % |
Foreign currency impact | | (0.1) | % | | 11.2 | % | | 12.3 | % | | (15.7) | % | | 2.4 | % | | 0.7 | % |
Currency-neutral adjusted growth | | 7.7 | % | | 17.1 | % | | 26.5 | % | | 14.2 | % | | (16.0) | % | | 10.3 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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.
North America
Reported net sales for the firstthird quarter increased 13%was flat versus the prior year due to inflation-drivenfavorable price/mix offset by the impact of price realizationelasticity and a mix shift toward snacks, and featuring sustained momentum in snacks and continued recovery in North America cereal.
lapping last year's replenishment of trade inventory. | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Net sales % change - third quarter 2023 vs. 2022: | | | | |
North America | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
Snacks | 0.2 | % | — | % | 0.2 | % | — | % | 0.2 | % | | |
Cereal | (1.5) | % | (0.2) | % | (1.3) | % | — | % | (1.3) | % | | |
Frozen | (0.1) | % | (0.1) | % | — | % | — | % | — | % | | |
| | | | | | | |
North America snacks net sales increased 15% due to both volume and price/mixwere flat lapping strong growth led by double-digit consumption growth of our Rice Krispies Treats, Pringles, Club, and Townhouse brands. Cheez-it, lapping an exceptionalin the prior year quarter, also grew consumption.quarter.
North America cereal net sales increased due todecreased 1.5% lapping the recovery in shipments and shareprior year replenishment of retailer inventory levels following in our U.S. cereal business following the 2021 fire and strike.
North America frozen net sales were flat versus the prior year quarter due to rising price elasticity.
North America operating profit increased 8.0% primarily due togrowth in net sales and the lapping of residual fire and strikedecreased 3% as incremental separation costs in the year-ago period, which more than offset the impact of high input-cost inflation and other supply pressures, costs related tobenefit from gross margin recovery during the pending separation, and higher brand-building investment.quarter. Currency-neutral adjusted operating profit increased 21%8%, after excluding the impact of business and portfolio realignment and separation costs.
Europe
Reported net sales increased 2.5%10% as favorable price/mix and momentum in snacks was partiallymore than offset by unfavorable foreign currency and the impact of suspending shipments into Russia.price elasticity and the divestiture of our Russia business. Organic net sales increased 7.6%8% after excluding the impact of the divestiture and foreign currency.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Net sales % change - third quarter 2023 vs. 2022: | | | | |
Europe | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
Snacks | 18.1 | % | 9.4 | % | 8.7 | % | (8.5) | % | 17.2 | % | | |
Cereal | 0.6 | % | 8.0 | % | (7.4) | % | (6.3) | % | (1.1) | % | | |
| | | | | | | |
Snacks net sales growth was broad-basedstrong across the region, led by Pringlesand portable wholesome snacks.
Cereal net sales declined forgrew slightly as growth in the quarter on anU.K. and Ireland was largely offset by declines in continental Europe, as reported basis but grew on a currency neutral basis.price elasticity continues to rise.
Reported operating profit decreased 6.0%increased 29% due primarily to unfavorablegross margin recovery and favorable foreign currency and lapping an exceptionalversus prior year quarter. Currency-neutral adjusted operating profit decreased 0.8%increased 17% after excluding the impact of foreign currency.
Latin America
Reported net sales increased 14%, as19% driven by price/mix growth and in-market momentumfavorable foreign currency led by our two largest markets in snacks and cereal across the region, more thanMexico and Brazil, partially offset by lower volume.volume driven mostly by rising elasticity, price pack architecture changes and SKU rationalization. Organic net sales increased 11%8%, after excluding the impact of foreign currency.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Net sales % change - third quarter 2023 vs. 2022: | | | | |
Latin America | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
Snacks | 27.2 | % | 9.8 | % | 17.4 | % | — | % | 17.4 | % | | |
Cereal | 14.4 | % | 12.3 | % | 2.1 | % | — | % | 2.1 | % | | |
| | | | | | | |
| | | | | | | |
Snacks net sales increased led by Pringles growth in Mexico and Brazil.
Cereal net sales increased across the region.region led by strong growth in Mexico and our Pacific sub-region.
Reported operating profit increased 48% as the impact of net sales growth, gross margin recovery, and favorable mark-to-market. Currency-neutral adjusted operating profit increased 27% after excluding the impact of mark-to-market, and foreign currency.
AMEA
Reported net sales decreased 14% due primarily to unfavorable foreign currency as a result of the devaluation of the Nigerian Naira. Organic net sales increased 12% on positive price/mix after excluding the impact of foreign currency.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Net sales % change - third quarter 2023 vs. 2022: | | | | |
AMEA | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
Snacks | 7.7 | % | (5.5) | % | 13.2 | % | — | % | 13.2 | % | | |
Cereal | (1.3) | % | (5.3) | % | 4.0 | % | — | % | 4.0 | % | | |
Noodles and other | (32.3) | % | (48.7) | % | 16.4 | % | — | % | 16.4 | % | | |
| | | | | | | |
Net sales growth in snacks was led by Pringles, which grew net sales across key markets including Australia, Asia, Africa, and the Middle East.
Cereal net sales decreased due to unfavorable foreign currency but grew on an organic basis.
Noodles and other net sales decreased due to unfavorable foreign currency but increased on an organic basis on strong price/mix growth and flat volume.
Reported operating profit decreased 2% due primarily to unfavorable foreign currency translation. Currency-neutral adjusted operating profit increased 14%, after excluding the impact of foreign currency.
Corporate
Reported operating profit increased significantly versus the comparable prior year quarter due primarily to favorable mark-to-market impacts. Currency-neutral adjusted operating profit decreased $10 million from the prior year after excluding mark-to-market.
The following tables provide an analysis of net sales and operating profit performance for the year-to-date periods ended September 30, 2023 versus October 1, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year-to-date period ended September 30, 2023 | | | | | | | | | | | | |
(millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellanova Consolidated |
Reported net sales | | $ | 7,042 | | | $ | 1,888 | | | $ | 966 | | | $ | 2,139 | | | $ | (2) | | | $ | 12,033 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency impact | | (19) | | | 27 | | | 61 | | | (414) | | | — | | | (345) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Organic net sales | | $ | 7,061 | | | $ | 1,861 | | | $ | 904 | | | $ | 2,553 | | | $ | (2) | | | $ | 12,377 | |
| | | | | | | | | | | | |
Year-to-date period ended October 1, 2022 | | | | | | | | | | | | |
(millions) | | | | | | | | | | | | |
Reported net sales | | $ | 6,696 | | | $ | 1,749 | | | $ | 826 | | | $ | 2,217 | | | $ | (6) | | | $ | 11,482 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Divestiture | | — | | | 38 | | | — | | | — | | | — | | | 38 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Organic net sales | | $ | 6,696 | | | $ | 1,711 | | | $ | 826 | | | $ | 2,217 | | | $ | (6) | | | $ | 11,444 | |
| | | | | | | | | | | | |
% change - 2023 vs. 2022: | | | | | | | | | | | | |
Reported growth | | 5.2 | % | | 8.0 | % | | 16.8 | % | | (3.5) | % | | n/m | | 4.8 | % |
Foreign currency impact | | (0.3) | % | | 1.6 | % | | 7.4 | % | | (18.7) | % | | n/m | | (3.0) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Currency-neutral growth | | 5.5 | % | | 6.4 | % | | 9.4 | % | | 15.2 | % | | n/m | | 7.8 | % |
Divestitures | | — | % | | (2.4) | % | | — | % | | — | % | | n/m | | (0.4) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Organic growth | | 5.5 | % | | 8.8 | % | | 9.4 | % | | 15.2 | % | | n/m | | 8.2 | % |
Volume (tonnage) | | (7.2) | % | | (5.8) | % | | (9.0) | % | | (1.6) | % | | n/m | | (5.6) | % |
Pricing/mix | | 12.7 | % | | 14.6 | % | | 18.4 | % | | 16.8 | % | | n/m | | 13.8 | % |
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year-to-date period ended September 30, 2023 | | | | | | | | | | | | |
(millions) | | North America | | Europe | | Latin America | | AMEA | | Corporate | | Kellanova Consolidated |
Reported operating profit | | $ | 1,048 | | | $ | 293 | | | $ | 106 | | | $ | 204 | | | $ | (220) | | | $ | 1,431 | |
Mark-to-market | | — | | | — | | | (2) | | | — | | | (29) | | | (31) | |
| | | | | | | | | | | | |
Separation costs | | (182) | | | — | | | (2) | | | — | | | — | | | (184) | |
Business and portfolio realignment | | (4) | | | — | | | — | | | — | | | (1) | | | (4) | |
| | | | | | | | | | | | |
Adjusted operating profit | | $ | 1,233 | | | $ | 293 | | | $ | 110 | | | $ | 204 | | | $ | (190) | | | $ | 1,649 | |
Foreign currency impact | | (3) | | | 5 | | | 7 | | | (23) | | | 4 | | | (9) | |
Currency-neutral adjusted operating profit | | $ | 1,236 | | | $ | 288 | | | $ | 102 | | | $ | 227 | | | $ | (194) | | | $ | 1,659 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Year-to-date period ended October 1, 2022 | | | | | | | | | | | | |
(millions) | | | | | | | | | | | | |
Reported operating profit | | $ | 1,043 | | | $ | 280 | | | $ | 82 | | | $ | 192 | | | $ | (296) | | | $ | 1,300 | |
Mark-to-market | | — | | | — | | | (2) | | | — | | | (113) | | | (114) | |
| | | | | | | | | | | | |
Separation costs | | (22) | | | — | | | — | | | — | | | — | | | (22) | |
Business and portfolio realignment | | (15) | | | — | | | — | | | — | | | (2) | | | (18) | |
| | | | | | | | | | | | |
Adjusted operating profit | | $ | 1,080 | | | $ | 280 | | | $ | 84 | | | $ | 192 | | | $ | (182) | | | $ | 1,454 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
% change - 2023 vs. 2022: | | | | | | | | | | | | |
Reported growth | | 0.5 | % | | 4.9 | % | | 28.9 | % | | 6.2 | % | | 25.8 | % | | 10.0 | % |
Mark-to-market | | — | % | | — | % | | (0.4) | % | | — | % | | 30.0 | % | | 6.7 | % |
| | | | | | | | | | | | |
Separation costs | | (15.0) | % | | — | % | | (2.3) | % | | — | % | | — | % | | (11.3) | % |
Business and portfolio realignment | | 1.3 | % | | 0.3 | % | | 0.6 | % | | — | % | | 0.5 | % | | 1.1 | % |
| | | | | | | | | | | | |
Adjusted growth | | 14.2 | % | | 4.6 | % | | 31.0 | % | | 6.2 | % | | (4.7) | % | | 13.5 | % |
Foreign currency impact | | (0.3) | % | | 1.8 | % | | 8.9 | % | | (12.0) | % | | 1.9 | % | | (0.6) | % |
Currency-neutral adjusted growth | | 14.5 | % | | 2.8 | % | | 22.1 | % | | 18.2 | % | | (6.6) | % | | 14.1 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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 year-to-date period increased 5% versus the prior year as price/mix and momentum in snacks more than offset the impact of lapping the replenishment of inventory in our North America cereal business following the 2021 fire and strike. Organic net sales increased 6% after excluding the impact of foreign currency. | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Net sales % change - third quarter year-to-date 2023 vs. 2022: | | | | |
North America | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
Snacks | 6.2 | % | (0.2) | % | 6.4 | % | — | % | 6.4 | % | | |
Cereal | 4.9 | % | (0.5) | % | 5.4 | % | — | % | 5.4 | % | | |
Frozen | 0.9 | % | (0.3) | % | 1.2 | % | — | % | 1.2 | % | | |
| | | | | | | |
North America snacks net sales increased led by the performance of its largest brands, Cheez-it, Pringles, Rice, Krispies Treats, Club and Townhouse.
North America cereal net sales increased despite lapping the prior year replenishment of retailer inventory levels following the 2021 fire and strike.
North America operating profit increased 1% compared to the prior year due to higher net sales and lapping of residual fire and strike costs, which more than offset incremental separation costs. Currency-neutral adjusted operating profit increased 15%, after excluding the impact of separation costs and business and portfolio realignment.
Europe
Reported net sales increased 8% as growth in snacks and positive price/mix, and favorable foreign currency translation more than offset the impact of the divestiture. Organic net sales increased 9% after excluding the impact of foreign currency and the divestiture.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Net sales % change - third quarter year-to-date 2023 vs. 2022: | | | | |
Europe | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
Snacks | 16.2 | % | 1.9 | % | 14.3 | % | (2.7) | % | 17.0 | % | | |
Cereal | (0.7) | % | 1.2 | % | (1.9) | % | (2.0) | % | 0.1 | % | | |
| | | | | | | |
Cereal net sales declined for the year-to-date period on an as reported basis due to unfavorable foreign currency.
Snacks net sales growth was led by Pringles, despite the divestiture of our business in Russia.
Reported operating profit increased 5% due to higher input costs and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 3% after excluding the impact of foreign currency translation.
Latin America
Reported net sales increased 17% due primarily to growth in snacks across the region, favorable price/mix and favorable foreign currency, partially offset by lower volume driven mostly by price pack architecture changes and SKU rationalization. Organic net sales increased 9%, after excluding the impact of foreign currency.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Net sales % change - third quarter year-to-date 2023 vs. 2022: | | | | |
Latin America | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
Snacks | 14.4 | % | 4.7 | % | 9.7 | % | — | % | 9.7 | % | | |
Cereal | 18.3 | % | 9.2 | % | 9.1 | % | — | % | 9.1 | % | | |
| | | | | | | |
| | | | | | | |
Reported operating profit increased 29% as the impact of higher net sales more than offset input cost inflation. Currency-neutral adjusted operating profit increased 22% after excluding the impact of mark-to-market and foreign currency.
Cereal net sales increased across the region led by strong growth in Mexico.
Reported operating profit increased 76% as the impact of net sales growth and favorable mark-to-market more than offset higher input costs and increased brand-building investment. Currency-neutral adjusted operating profit increased 20% after excluding the impact of mark-to-market, and foreign currency.
AMEA
Reported net sales increased 7.2%, as price/mix growth and momentum in snacks, noodles and other, and cereal more than offsetdecreased 4% caused by unfavorable foreign currency.currency primarily due to the devaluation of the Nigerian Naira. Organic net sales increased 20% after excluding the impact of foreign currency.15%.
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Net sales % change - third quarter year-to-date 2023 vs. 2022: | | | | |
AMEA | Reported net sales | Foreign currency | Currency-neutral net sales | Divestiture | Organic net sales | | |
Snacks | 8.8 | % | (7.8) | % | 16.6 | % | — | % | 16.6 | % | | |
Cereal | (0.6) | % | (7.4) | % | 6.8 | % | — | % | 6.8 | % | | |
Noodles and other | (11.2) | % | (31.1) | % | 19.9 | % | — | % | 19.9 | % | | |
| | | | | | | |
Growth was led by snacks, noodlesSnacks net sales increased due primarily to strong growth in Pringles across the region.
Noodles and other as well as cereal despitenet sales declined during the year-to-date period due to unfavorable foreign currency.
Reported operating profit increased 12% as higher net sales more than6% due primarily to the recovery of gross margins partially offset the impacts of high cost inflation, increased brand-building investment, andby unfavorable foreign currency translation.currency. Currency-neutral adjusted operating profit increased 21%18%, after excluding the impact of foreign currency.
Corporate
Reported operating profit decreased significantly versus the comparable prior year quarterperiod due primarily to unfavorable mark-to-market impacts. Currency-neutral adjusted operating profit decreased $8$12 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 April 1,September 30, 2023 and April 2,October 1, 2022 are reconciled to the directly comparable GAAP measures as follows:
| Quarter ended | Quarter ended | April 1, 2023 | | April 2, 2022 | GM change vs. prior year (pts.) | Quarter ended | September 30, 2023 | | October 1, 2022 | GM change vs. prior year (pts.) |
(dollars in millions) | (dollars in millions) | Gross Profit (a) | Gross Margin (b) | | Gross Profit (a) | Gross Margin (b) | (dollars in millions) | Gross Profit (a) | Gross Margin (b) | | Gross Profit (a) | Gross Margin (b) |
Reported | Reported | $ | 1,210 | | 29.9 | % | | $ | 1,159 | | 31.6 | % | (1.7) | | Reported | $ | 1,343 | | 34.1 | % | | $ | 1,153 | | 29.2 | % | 4.9 | |
Mark-to-market | Mark-to-market | (55) | | (1.3) | % | | 47 | | 1.3 | % | (2.6) | | Mark-to-market | 40 | | 1.0 | % | | (60) | | (1.5) | % | 2.5 | |
Separation costs | Separation costs | (4) | | (0.1) | % | | — | | — | % | (0.1) | | Separation costs | (3) | | — | % | | — | | — | % | — | |
| Business and portfolio realignment | Business and portfolio realignment | — | | — | % | | (4) | | (0.1) | % | 0.1 | | Business and portfolio realignment | (2) | | (0.1) | % | | (2) | | (0.1) | % | — | |
| Adjusted | Adjusted | 1,269 | | 31.3 | % | | 1,116 | | 30.4 | % | 0.9 | | Adjusted | 1,307 | | 33.2 | % | | 1,215 | | 30.8 | % | 2.4 | |
Foreign currency impact | Foreign currency impact | (28) | | 0.3 | % | | — | | — | % | 0.3 | | Foreign currency impact | (3) | | 0.9 | % | | — | | — | % | 0.9 | |
Currency-neutral adjusted | Currency-neutral adjusted | $ | 1,297 | | 31.0 | % | | $ | 1,116 | | 30.4 | % | 0.6 | | Currency-neutral adjusted | $ | 1,311 | | 32.3 | % | | $ | 1,215 | | 30.8 | % | 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 quarter decreased 170increased 490 basis points versus the prior year due primarily to unfavorablefavorable mark-to-market, cost inflation,improved efficiencies as a result of receding bottlenecks and a mix shift towards emerging markets, which more than offset the lapping of residual fire and strike costs in the year-ago period, andshortages, as well as the impact of productivity and revenue growth management initiatives. Currency-neutral adjusted gross margin increased 60150 basis points compared to the firstthird quarter of 2022 after eliminating the impact of mark-to-market, separation costs and foreign currency.
Our currency-neutral adjusted gross profit and gross profit margin performance for the year-to-date periods ended September 30, 2023 and October 1, 2022 are reconciled to the directly comparable GAAP measures as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Year-to-date period ended | September 30, 2023 | | October 1, 2022 | GM change vs. prior year (pts.) |
(dollars in millions) | Gross Profit (a) | Gross Margin (b) | | Gross Profit (a) | Gross Margin (b) |
Reported | $ | 3,885 | | 32.3 | % | | $ | 3,455 | | 30.1 | % | 2.2 | |
Mark-to-market | (27) | | (0.2) | % | | (120) | | (1.0) | % | 0.8 | |
Separation costs | (21) | | (0.2) | % | | — | | — | % | (0.2) | |
| | | | | | |
Business and portfolio realignment | (3) | | — | % | | (9) | | (0.1) | % | 0.1 | |
| | | | | | |
Adjusted | 3,936 | | 32.7 | % | | 3,584 | | 31.2 | % | 1.5 | |
Foreign currency impact | (42) | | 0.6 | % | | — | | — | % | 0.6 | |
Currency-neutral adjusted | $ | 3,979 | | 32.1 | % | | $ | 3,584 | | 31.2 | % | 0.9 | |
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.
(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 220 basis points versus the prior year due primarily to favorable mark-to-market, the impact of improved efficiencies resulting from receding bottlenecks and shortages,as well as the impact of productivity and revenue growth management initiatives. Currency-neutral adjusted gross margin increased 90 basis points compared to 2022 after eliminating the impact of mark-to-market, separation costs and foreign currency.
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, Australian dollar, Canadian dollar, Mexican peso, Brazilian Real, Nigerian Naira, Russian ruble, Polish zloty, and Egyptian pound. 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 April 1,September 30, 2023 and April 2,October 1, 2022, interest expense was $80$83 million and $56$39 million, respectively. For the year-to-date periods ended September 30, 2023 and October 1, 2022, interest expense was $245 million and $149 million. The increase from the prior year quarter is due primarily to higher interest rates on commercial paper and floating rate debt versus the prior year.year as well as an $18 million gain in the prior year quarter related to a portion of certain forward-starting interest rate swaps no longer designated as cash flow hedges due to changes in forecasted debt issuance.
Income Taxes
Our reported effective tax rate for the quarters ended April 1,September 30, 2023 and April 2,October 1, 2022 was 22%28% and 21%19%, respectively.
Our adjusted effective tax rate for the quarters ended April 1,September 30, 2023 and April 2,October 1, 2022 was 23%21% and 20%.
The increase in effective tax rate for the quarter ended September 30, 2023 versus the prior year quarter is due to zero tax benefit recognized on the $113 million loss incurred on the divestiture of the Russia business.
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 | | | Quarter ended | Year-to-date period ended |
Consolidated results (dollars in millions) | Consolidated results (dollars in millions) | April 1, 2023 | April 2, 2022 | | Consolidated results (dollars in millions) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 |
Reported income taxes | Reported income taxes | $ | 86 | | $ | 112 | | | Reported income taxes | $ | 104 | | $ | 74 | | $ | 294 | | $ | 283 | |
Mark-to-market | Mark-to-market | (15) | | 20 | | | Mark-to-market | 25 | | (11) | | 6 | | (16) | |
| Separation costs | Separation costs | (12) | | — | | | Separation costs | (12) | | (4) | | (45) | | (5) | |
Business and portfolio realignment | Business and portfolio realignment | (1) | | (4) | | | Business and portfolio realignment | — | | — | | 3 | | (6) | |
| Gain related to interest rate swaps | | Gain related to interest rate swaps | — | | 5 | | — | | 5 | |
Loss on divestiture | | Loss on divestiture | — | | — | | — | | — | |
| Adjusted income taxes | Adjusted income taxes | $ | 113 | | $ | 97 | | | Adjusted income taxes | $ | 92 | | $ | 85 | | $ | 330 | | $ | 305 | |
| Reported effective income tax rate | Reported effective income tax rate | 22.3 | % | 21.0 | % | | Reported effective income tax rate | 27.9 | % | 19.2 | % | 24.1 | % | 21.1 | % |
Mark-to-market | Mark-to-market | (0.4) | % | 1.2 | % | | Mark-to-market | (0.9) | % | (0.7) | % | — | % | (0.1) | % |
| Separation costs | Separation costs | (0.1) | % | — | % | | Separation costs | 1.1 | % | (0.2) | % | — | % | (0.1) | % |
Business and portfolio realignment | Business and portfolio realignment | (0.1) | % | (0.6) | % | | Business and portfolio realignment | — | % | — | % | 0.3 | % | (0.1) | % |
| Gain related to interest rate swaps | | Gain related to interest rate swaps | — | % | 0.3 | % | — | % | 0.1 | % |
Loss on divestiture | | Loss on divestiture | 7.0 | % | — | % | 1.8 | % | — | % |
| Adjusted effective income tax rate | Adjusted effective income tax rate | 22.9 | % | 20.4 | % | | Adjusted effective income tax rate | 20.7 | % | 19.7 | % | 22.0 | % | 21.3 | % |
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.
Liquidity and capital resources
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 expecthave generated $1.4 billion of operating cash provided by operating activities of approximately $1.7-$1.8 billion and capital expenditures of approximately $700 million in 2023.flow through September 30, 3023. We currently have $2.5 billion of ongoing unused revolving credit agreements, including $1.5 billion effective through 2026 and $1.0 billion effective through December 2023, 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. We continue to utilize available capacity within the Monetization Programs to maintain financial flexibility without negatively impacting working capital.
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 2022, and are not expected to have a material impact in 2023.
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 $1.7 $1.5 billion and $2.2 billion as of April 1,September 30, 2023 and December 31, 2022, respectively.
The following table reflects net debt amounts:
| | (millions, unaudited) | (millions, unaudited) | | April 1, 2023 | | December 31, 2022 | (millions, unaudited) | | September 30, 2023 | | December 31, 2022 |
Notes payable | Notes payable | | $ | 471 | | | $ | 467 | | Notes payable | | $ | 353 | | | $ | 467 | |
Current maturities of long-term debt | Current maturities of long-term debt | | 567 | | | 780 | | Current maturities of long-term debt | | 1,193 | | | 780 | |
Long-term debt | Long-term debt | | 5,759 | | | 5,317 | | Long-term debt | | 5,530 | | | 5,317 | |
Total debt liabilities | Total debt liabilities | | $ | 6,797 | | | $ | 6,564 | | Total debt liabilities | | $ | 7,076 | | | $ | 6,564 | |
Less: | Less: | | Less: | |
Cash and cash equivalents | Cash and cash equivalents | | (347) | | | (299) | | Cash and cash equivalents | | (1,099) | | | (299) | |
| Net debt | Net debt | | $ | 6,450 | | | $ | 6,265 | | Net debt | | $ | 5,977 | | | $ | 6,265 | |
The following table sets forth a summary of our cash flows:
| | | Year-to-date period ended | | Year-to-date period ended |
(millions) | (millions) | April 1, 2023 | April 2, 2022 | (millions) | September 30, 2023 | October 1, 2022 |
Net cash provided by (used in): | Net cash provided by (used in): | | Net cash provided by (used in): | |
Operating activities | Operating activities | 276 | | $ | 327 | | Operating activities | 1,400 | | $ | 1,180 | |
Investing activities | Investing activities | (205) | | (112) | | Investing activities | (472) | | (312) | |
Financing activities | Financing activities | (33) | | (171) | | Financing activities | (120) | | (665) | |
Effect of exchange rates on cash and cash equivalents | Effect of exchange rates on cash and cash equivalents | 10 | | (17) | | Effect of exchange rates on cash and cash equivalents | (8) | | (116) | |
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | $ | 48 | | $ | 27 | | Net increase (decrease) in cash and cash equivalents | $ | 800 | | $ | 87 | |
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 quarter ended April 1,September 30, 2023, totaled $276$1,400 million compared to $327$1,180 million in the prior year period. The decreaseincrease is due primarily to incremental separation costslower tax payments and incentive compensation.working capital improvements.
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 1 day2 days and negative 108 days for the 12 month periods ended April 1,September 30, 2023 and April 2,October 1, 2022, respectively. The increase is due primarily to days sales in inventory, which are lapping the impact of the 2021 fire and strike in our North America cereal business.
We measure free 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 free cash flow metric is reconciled to the most comparable GAAP measure, as follows:
| | | Quarter ended | | | Quarter ended | |
(millions) | (millions) | April 1, 2023 | April 2, 2022 | | (millions) | September 30, 2023 | October 1, 2022 | |
Net cash provided by operating activities | Net cash provided by operating activities | $ | 276 | | $ | 327 | | | Net cash provided by operating activities | $ | 1,400 | | $ | 1,180 | | |
Additions to properties | Additions to properties | (203) | | (138) | | | Additions to properties | (506) | | (350) | | |
Cash flow | $ | 73 | | $ | 189 | | | |
Free cash flow | | Free cash flow | $ | 894 | | $ | 830 | | |
Our non-GAAP measure for free cash flow decreasedincreased to $73$894 million in the quarteryear-to-date period ended April 1,September 30, 2023, from $189$830 million in the prior year due primarily to lower tax payments and working capital improvements partially offset by higher capital expenditures and incremental separation costs, and incentive compensation.costs.
Investing activities
Our net cash used in investing activities totaled $205$472 million for the quarteryear-to-date period ended April 1,September 30, 2023 compared to $112$312 million in the comparable prior year period due primarily to higher capital expenditures.expenditures driven by the separation transaction.
Financing activities
Our net cash used in financing activities for the quarteryear-to-date period ended April 1,September 30, 2023 totaled $33$120 million compared to cash used of $171$665 million during the comparable prior year period. The year-over-year variance was driven by the repurchase$500 million term loan borrowing and $164 million draw on the revolving credit facility by WK Kellogg Co in anticipation of $300 million of our common stock during the prior year.separation transaction on October 2, 2023.
Additionally, during the first quarter of 2023, the Company issued $400 million of ten-year 5.25% Notes due 2033, resulting in net proceeds after discount and underwriting commissions of $396 million. The proceeds from these notes were used for general corporate purposes, including the payment of offering related fees and expenses, repayment of the $210 million 2.75% Notes when they matured on March 1, 2023, 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 December 2022, the Board of Directors approved an authorization to repurchase up to $1.5 billion of the Company's common stock through December 2025. This authorization is intended to allow the Company to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs.
Total purchases for the quarter ended April 2, 2022, were 5 million shares for $300 million. The Company didn't repurchase shares duringDuring the quarter and year-to-date periods ended AprilJuly 1, 2023.2023, the Company repurchased approximately 1 million shares of common stock for a total of $60 million.
We paid cash dividends of $202$610 million in the year-to-date period ended April 1,September 30, 2023, compared to $197$596 million during the comparable prior year period. In AprilOctober 2023, the Board of Directors declared a dividend of $.59$.56 per common share, payable on JuneDecember 15, 2023 to shareholders of record at the close of business on JuneDecember 1, 2023. Additionally, the Company's Board of Directors announced plans to increase the quarterly dividend to $0.60 per share beginning with the third quarter of 2023.
We continue to maintain both a Five-Year and a 364-Day Credit Agreement, which had no outstanding borrowings as of April 1,September 30, 2023, and 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 April 1,September 30, 2023.
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 December 2023, as well as our Five-Year Credit Agreement, which expires in December 2026. This source of liquidity is unused and available on an unsecured basis, although we do not currently plan to use it.
Monetization and Supplier Finance 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 approximately $945 million,$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. During 2023 the Company amended the agreements to increase the previous maximum receivables sold limit from approximately $920 million as of December 31, 2022. Accounts receivable sold of $911$957 million and $865 million remained outstanding under this arrangement as of April 1,September 30, 2023 and December 31, 2022, 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 3 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 2023.
The Company establishes competitive market-based terms with our suppliers, regardless of whether they participate in supplier finance programs, which generally range from 0 to 150 days dependent on their respective industry and geography. We have agreements with third parties (Supplier Finance Programs) 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. 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 Supplier Finance 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 outlookCritical accounting estimates
Goodwill and other intangible assets
We review our operating segment and reporting unit structure annually or as significant changes in the organization occur and assess goodwill impairment risk throughout the year by performing a qualitative review of entity-specific, industry, market and general economic factors affecting our reporting units with goodwill. Similarly, we assess indefinite-life intangible assets impairment risk throughout the year by performing a qualitative review and assessing events and circumstances that could affect the fair value or carrying value of these intangible assets. No interim triggering events requiring further impairment assessments of goodwill or indefinite-life intangibles have been noted during 2023. Annually during the fourth quarter, in conjunction with our annual budgeting process, we perform
Reflecting its strong year-to-datequalitative or quantitative testing, depending on factors such as prior-year test results, underlying trends,current year developments, current risk evaluations and confidenceother practical considerations. Refer to our Critical Accounting Estimates in its outlook, Kellogg Company has updated its full-year 2023 guidance as follows:
•Raises its organic-basis net sales growth guidance to a tightened range of +6% to +7%, from its prior guidance of +5 to +7%. This reflectsour 2022 Form 10-K for further details on the strength of its first quarter results,methodologies used for evaluating goodwill and the guidance continues to assume price/mix growth, and sustained momentum in snacks and emerging markets, partially offset by the assumption of a gradual rise in price elasticities.intangible assets.
•Raises its guidanceThe annual testing for adjusted-basis operating profit growthgoodwill and intangible asset impairment is currently underway and will be reported on in the 2023 Form 10-K. Fair value determinations used in the annual testing require considerable judgment and are sensitive to +8% to +10% on a currency-neutral basis, from its prior guidance of +7 to +9%. This reflects the higher net sales and earlier progress toward profit margin recovery.
•Raises its guidance for an adjusted-basis earnings per share decline to (1)% to (3)% on a currency-neutral basis, from prior guidance of approximately (2)% to (4)%. This improved outlook reflects the higher operating profit outlook, while still incorporating significant year-on-year pressure from the impact on pension income and interest expense of lower financial asset values and higher interest rates.
•Affirms for net cash provided by operating activities to be approximately $1.7 - $1.8 billion, with capital expenditure of approximately $0.7 billion, resulting in affirming its guidance for cash flow of approximately $1.0 - $1.1 billion. This is below 2022 levels due solely to approximately $0.3 billion of up-front charges and capital expenditure related to the Company's pending separation, without which cash flow would be higher year on year.
Excluded from this guidance are any significant supply chain or other prolonged market disruptions related to the pandemic or global economy.
Reconciliation of non-GAAP measures
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 underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units or indefinite-lived intangible assets requires making assumptions and estimates regarding the Company’s future plans, as well as industry, economic, and regulatory conditions. Similarly, becauseIf current expectations of volatility in foreign exchangefuture growth rates and shifts in country mixmargins are not met, if market factors outside of the Company’s control, such as market comparables, rising discount rates, income tax rates, foreign currency exchange rate volatility, or inflation, change, or if management’s expectations or plans otherwise change, then one or more 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 includedreporting units or indefinite-lived assets might become impaired 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.future.
See the table below that outlines the projected impact of certain other items that are excluded from non-GAAP guidance for 2023: | | | | | | | | | | | |
Impact of certain items excluded from Non-GAAP guidance: | Net Sales | Operating Profit | Earnings Per Share |
Separation costs (pre-tax) | | $230M - $240M | $0.67 - $0.70 |
Business and portfolio realignment (pre-tax) | | $20M-$25M | $0.06 - $0.07 |
| | | |
Income tax impact applicable to adjustments, net** | | | $0.13 - $0.18 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Currency-neutral adjusted guidance* | | ~ 8-10% | ~(1)-(3)% |
| | | |
| | | |
Organic guidance* | ~ 6-7% | | |
* 2023 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 2023 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), commodity 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 2023 |
Net cash provided by (used in) operating activities | $1.7 - $1.8 |
Additions to properties | ~($0.7) |
Cash Flow | ~$1.0 - $1.1 |
| |
| |
| |
Forward-looking statements
This Report contains “forward-looking statements” with projections concerning, among other things, the anticipated separation of the Company’s North American cereal business,WK Kellogg Co, 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; ESG performance; 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 the ability to effectrealize the separation transaction and to meet the conditions related thereto; the ability of the North American cereal business to succeed as a standalone publicly traded company; potential uncertainty during the pendencyintended benefits of the separation transaction that could affect the Company’s financial performance; the possibility that the separation transaction will not be completed within the anticipated time period or at all, the possibility that the separation transaction will not achieve its intended benefits;of WK Kellogg Co (the "separation"); the possibility of disruption from the separation, including changes to existing business relationships, disputes, litigation or unanticipated costs in connection with the separation transaction;costs; uncertainty of the expected financial performance of the Company or the separated North American cereal business following completion of the separation transaction;separation; negative effects of the announcement or pendency of the separation transaction on the market price of the Company’s securities and/or on the financial performance of the Company;Company as a result of the separation; 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 residual impact of the 12-week labor strike at the Company's U.S. cereal plants and a fire at one of the 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 910 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 2022 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 April 1,September 30, 2023.
Volatile market conditions arising from events such as the war in Ukraine 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, Polish zloty and Egyptian pound, and in the case of inter-subsidiary transactions, the British pound versus the euro. There is
During the second quarter of 2023, the Nigerian government removed certain currency restrictions over the Nigerian Naira leading to a significant uncertainty surrounding the impact of the war in Ukraine on financial markets and we will continue to monitor the business for adverse impacts related to the pandemic. Our business in Russia represented approximately 1% of consolidated net sales for the year ended December 31, 2022. The net book value of assets related to our Russia business represents less than 1% of total Company assets as of April 1, 2023. As such, our exposure to volatilitydecline in the exchange rate of the Russian ruble is unlikelyNaira to havethe U.S. dollar on the official market in Nigeria. As a material impact onresult of this decline in the exchange rate, the U.S. dollar value of the assets, liabilities, expenses and revenues of our Nigerian business in our consolidated financial statements.statements has decreased significantly compared to prior periods. The consolidated assets of our Nigerian business represented approximately 5% of our consolidated assets as of September 30, 2023, compared to 8% as of December 31, 2022. Net sales of our Nigerian business were 7% of our consolidated net sales year-to-date period ended September 30, 2023, but could become a smaller percentage of our overall sales if exchange rates as of the quarter ended September 30, 2023, persist throughout the remainder of 2023.
During the third quarter of 2023, the devaluation of the Nigerian Naira required an additional foreign currency translation adjustment. Based on the foreign currency exchange rates at the end of August 2023 and the accounting method used by the Company to record the results of operations of TAF on a one-month lag, the adjustment resulted in additional translation losses of approximately $129 million recognized in other comprehensive income.
During the quarteryear-to-date period ended April 1,September 30, 2023, we settled certain U.S. Dollar forward starting interest rate swaps with notional amounts totaling approximately $400 million1.0 billion, resulting in a realized gain of approximately $4774 million. These forward starting interest rate swaps were accounted for as cash flow hedges and the related gain was recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the fixed rate U.S. Dollar debt, once issued. During the year-to-date period ended September 30, 2023, we also entered into U.S. forward starting interest rate swaps with notional amounts totaling approximately $600 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate U.S. Dollar debt. These swaps were designated as cash flow hedges.
During the year-to-date period ended September 30, 2023, we settled certain euro forward starting interest rate swaps with notional amounts totaling approximately €250 million, resulting in a realized gain of approximately $11 million. These forward starting interest rate swaps were accounted for as cash flow hedges and the related gain was recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the fixed rate euro debt, once issued. During the year-to-date period ended September 30, 2023, we also entered into euro forward starting interest rate swaps with notional amounts totaling approximately €200 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate euro debt. These swaps were designated as cash flow hedges.
We have interest rate contracts with notional amounts totaling $2.3 billion representing a net settlement obligation of $7260 million as of April 1,September 30, 2023. We had interest rate contracts with notional amounts totaling $2.7 billion representing a net settlement obligation of $23 million as of December 31, 2022.
During the quarteryear-to-date period ended April 1,September 30, 2023, we settled cross currency swaps with notional amounts totaling approximately €182452 million, resulting in a gain of $1729 million. These cross currency swaps were accounted for as net investment hedges and the related gain was recorded in accumulated other comprehensive income. During the quarteryear-to-date period ended April 1,September 30, 2023, we also entered into cross currency swaps with notional amounts totaling approximately €250400 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 $2.11.9 billion outstanding as of April 1,September 30, 2023 representing a net settlement receivable of $82102 million. The total notional amount of cross currency swaps outstanding as of December 31, 2022 was $2.0 billion representing a net settlement receivable of $124 million.
Our Company is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials, fuel, and energy. Primary exposures include corn, wheat, potato flakes, soybean oil, sugar, cocoa, cartonboard, natural gas, and diesel fuel. We have historically used the combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months.
Events such as the ongoing war in Ukraine have resulted in certain impacts to the global economy, including market disruptions, supply chain challenges, and inflationary pressures. During the year-to-date period ended April 1,September 30, 2023, we continue to experience elevated commodity and supply chain costs, including logistics, procurement and manufacturing costs.costs, although certain supply chain challenges eased. We expect these market disruptions and inflationary pressuresinput cost inflation to continue throughoutmoderating during the fourth quarter 2023.
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 April 1,September 30, 2023, 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.
There were no changes during the quarter ended April 1,September 30, 2023, that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
KELLOGG COMPANYKellanova (formerly known as Kellogg Company)
PART II — OTHER INFORMATION
Item 1A. Risk Factors
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 31, 2022. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In December 2022, the Board of Directors approved an authorization to repurchase up to $1.5 billion of the Company's common stock through December 2025. This authorization is 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 April 1,September 30, 2023.
(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: | | | | |
1/1/7/2/2023 - 1/28/7/29/2023 | — | | $ | — | | — | | $ | 1,5001,440 | |
Month #2: | | | | |
1/29/7/30/2023 - 2/25/8/26/2023 | — | | $ | — | | — | | $ | 1,5001,440 | |
Month #3: | | | | |
2/26/8/27/2023 - 4/1/9/30/2023 | — | | $ | — | | — | | $ | 1,5001,440 | |
Total | — | | | — | | |
Item 5. Other Information
None.
Item 6. Exhibits
(a)Exhibits:
| | | | | | | | |
| Officers' CertificateSeparation and Distribution Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Company (with form of 5.250% Senior Notes due 2033),Co, incorporated by reference to Exhibit 4.12.1 of our Current Report on Form 8-K filed March 1,October 2, 2023, Commission file number 1-4171. | |
| Restated Certificate of Incorporation of Kellanova, incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | |
| 2023-2025 Performance Stock Unit Plan,Credit Facility by and among WK Kellogg Co and the lenders name therein, dated as of September 12, 2023, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 22,September 12, 2023, Commission file number 1-4171.* | |
| Employee Matters Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171.* | |
| Supply Agreement, dated as of Restricted Stock Unit TermsSeptember 29, 2023, between Kellanova and Conditions,WK Kellogg Co, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed February 22,October 2, 2023, Commission file number 1-4171.* | |
| Master Ownership and License Agreement Regarding Patents, Trade Secrets and Certain Related Intellectual Property, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | |
| Master Ownership and License Agreement Regarding Trademarks and Certain Related Intellectual Property, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | |
| Tax Matters Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | |
| Transition Services Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | |
| 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 | |
| |
*A management contract or compensatory plan required to be filed with this Report.
KELLOGG COMPANYKELLANOVA
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 COMPANYKELLANOVA |
|
/s/ Amit Banati |
Amit Banati |
Principal Financial Officer; Vice Chairman and Chief Financial Officer |
|
/s/ Kurt Forche |
Kurt Forche |
Principal Accounting Officer; Vice President and Corporate Controller |
Date: May 4,November 8, 2023
KELLOGG COMPANYKellanova
EXHIBIT INDEX
| | | | | | | | |
Exhibit No. | Description | Electronic (E) Paper (P) Incorp. By Ref. (IBRF) |
| Officers' CertificateSeparation and Distribution Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Company (with form of 5.250% Senior Notes due 2033),Co, incorporated by reference to Exhibit 4.12.1 of our Current Report on Form 8-K filed March 1,October 2, 2023, Commission file number 1-4171. | IBRF |
| Restated Certificate of Incorporation of Kellanova, incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | IBRF |
| 2023-2025 Performance Stock Unit Plan,Credit Facility by and among WK Kellogg Co and the lenders name therein, dated as of September 12, 2023, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 22,September 12, 2023, Commission file number 1-4171. | IBRF |
| Employee Matters Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171.* | IBRF |
| FormSupply Agreement, dated as of Restricted Stock Unit TermsSeptember 29, 2023, between Kellanova and Conditions,WK Kellogg Co, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed February 22,October 2, 2023, Commission file number 1-4171.* | IBRF |
| Master Ownership and License Agreement Regarding Patents, Trade Secrets and Certain Related Intellectual Property, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | IBRF |
| Master Ownership and License Agreement Regarding Trademarks and Certain Related Intellectual Property, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | IBRF |
| Tax Matters Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | IBRF |
| Transition Services Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | 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 |
|
*A management contract or compensatory plan required to be filed with this Report.