Kellogg (K) 10-Q 7 May 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information
	3 Months Ended Apr. 03, 2010	May. 01, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-04-03
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Trading Symbol	K
Entity Registrant Name	KELLOGG CO
Entity Central Index Key	0000055067
Current Fiscal Year End Date	--01-01
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		380,655,766

CONSOLIDATED BALANCE SHEET

CONSOLIDATED BALANCE SHEET (USD $)
In Millions	3 Months Ended Apr. 03, 2010	12 Months Ended Jan. 02, 2010
Current assets
Cash and cash equivalents	$387	$334	[1]
Accounts receivable, net	1,284	1,093	[1]
Inventories:
Raw materials and supplies	226	214	[1]
Finished goods and materials in process	591	696	[1]
Deferred income taxes	127	128	[1]
Other prepaid assets	139	93	[1]
Total current assets	2,754	2,558	[1]
Property, net of accumulated depreciation of $4,508 and $4,520	2,977	3,010	[1]
Goodwill	3,645	3,643	[1]
Other intangibles, net of accumulated amortization of $45 and $45	1,458	1,458	[1]
Pension	175	160	[1]
Other assets	380	371	[1]
Total assets	11,389	11,200	[1]
Current liabilities
Current maturities of long-term debt	948	1	[1]
Notes payable	128	44	[1]
Accounts payable	1,028	1,077	[1]
Accrued advertising and promotion	442	409	[1]
Accrued income taxes	142	33	[1]
Accrued salaries and wages	189	322	[1]
Other current liabilities	352	402	[1]
Total current liabilities	3,229	2,288	[1]
Long-term debt	3,898	4,835	[1]
Deferred income taxes	439	425	[1]
Pension liability	431	430	[1]
Other liabilities	951	947	[1]
Commitments and contingencies			[1]
Equity
Common stock, $.25 par value	105	105	[1]
Capital in excess of par value	480	472	[1]
Retained earnings	5,750	5,481	[1]
Treasury stock, at cost	(1,885)	(1,820)	[1]
Accumulated other comprehensive income (loss)	(2,011)	(1,966)	[1]
Total Kellogg Company equity	2,439	2,272	[1]
Noncontrolling interests	2	3	[1]
Total equity	2,441	2,275	[1]
Total liabilities and equity	$11,389	$11,200	[1]
[1]Condensed from audited financial statements.

CONSOLIDATED BALANCE SHEET (Par

CONSOLIDATED BALANCE SHEET (Parenthetical) (USD $)
In Millions, except Per Share data	Apr. 03, 2010	Jan. 02, 2010
Property, accumulated depreciation	$4,508	$4,520	[1]
Other intangibles, accumulated amortization	$45	$45	[1]
Common stock, par value per share	0.25	0.25	[1]
[1]Condensed from audited financial statements.

CONSOLIDATED STATEMENT OF INCOM

CONSOLIDATED STATEMENT OF INCOME (USD $)
In Millions, except Per Share data	3 Months Ended Apr. 03, 2010	3 Months Ended Apr. 04, 2009
Net sales	$3,318	$3,169
Cost of goods sold	1,893	1,867
Selling, general and administrative expense	788	773
Operating profit	637	529
Interest expense	65	67
Other income (expense), net	1	0
Income before income taxes	573	462
Income taxes	156	143
Net income	417	319
Net income (loss) attributable to noncontrolling interests	(1)	(2)
Net income attributable to Kellogg Company	$418	$321
Per share amounts:
Basic	1.1	0.84
Diluted	1.09	0.84
Dividends per share	0.375	0.34
Average shares outstanding:
Basic	380	382
Diluted	384	383
Actual shares outstanding at period end	380	382

CONSOLIDATED STATEMENT OF EQUIT

CONSOLIDATED STATEMENT OF EQUITY (USD $)
In Millions	Common stock	Capital in excess of par value	Retained earnings	Treasury stock	Accumulated other comprehensive income (loss)	Total Kellogg Company equity	Noncontrolling interests	Total comprehensive income (loss)	Total
Beginning Balance at Jan. 03, 2009	$105	$438	$4,836	($1,790)	($2,141)	$1,448	$7		$1,455
Beginning Balance (in shares) at Jan. 03, 2009	419			37
Common stock repurchases (in shares)				4
Common stock repurchases				(187)		(187)			(187)
Net income (loss)			1,212			1,212	(4)	1,208	1,208
Dividends			(546)			(546)			(546)
Other comprehensive income (loss)					175	175		175	175
Stock compensation		37				37			37
Stock options exercised and other (in shares)				(3)
Stock options exercised and other		(3)	(21)	157		133			133
Ending Balance (in shares) at Jan. 02, 2010	419			38
Ending Balance at Jan. 02, 2010	105	472	5,481	(1,820)	(1,966)	2,272	3	1,383	2,275	[1]
Common stock repurchases (in shares)				3
Common stock repurchases				(148)		(148)			(148)
Net income (loss)			418			418	(1)	417	417
Dividends			(142)			(142)			(142)
Other comprehensive income (loss)					(45)	(45)		(45)	(45)
Stock compensation		11				11			11
Stock options exercised and other (in shares)				(2)
Stock options exercised and other		(3)	(7)	83		73			73
Ending Balance (in shares) at Apr. 03, 2010	419			39
Ending Balance at Apr. 03, 2010	$105	$480	$5,750	($1,885)	($2,011)	$2,439	$2	$372	$2,441
[1]Condensed from audited financial statements.

CONSOLIDATED STATEMENT OF CASH

CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
In Millions	3 Months Ended Apr. 03, 2010		3 Months Ended Apr. 04, 2009
Operating activities
Net income	$417		$319
Adjustments to reconcile net income to operating cash flows:
Depreciation and amortization	87		84
Deferred income taxes	(11)		(31)
Other	44		21
Postretirement benefit plan contributions	(22)		(74)
Changes in operating assets and liabilities:
Trade receivables	(203)		(182)
Inventories	93		75
Accounts payable	(48)		(78)
Accrued income taxes	110		187
Accrued interest expense	(17)		(34)
Accrued and prepaid advertising, promotion and trade allowances	(4)		44
Accrued salaries and wages	(133)		(108)
All other current assets and liabilities	(63)		22
Net cash provided by operating activities	250		245
Investing activities
Additions to properties	(60)		(73)
Other	1		0
Net cash used in investing activities	(59)		(73)
Financing activities
Net issuances of notes payable	80		2
Reductions of long-term debt	0		(1)
Net issuances of common stock	74		7
Common stock repurchases	(148)		0
Cash dividends	(142)		(130)
Other	2		2
Net cash used in financing activities	(134)		(120)
Effect of exchange rate changes on cash and cash equivalents	(4)		(3)
Increase in cash and cash equivalents	53		49
Cash and cash equivalents at beginning of period	334	[1]	255
Cash and cash equivalents at end of period	$387		$304
[1]Condensed from audited financial statements.

Accounting policies

Accounting policies
	3 Months Ended Apr. 03, 2010
Accounting policies	Note1 Accounting policies Basis of presentation The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects normal recurring adjustments that management believes are necessary for a fair statement of the results of operations, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying notes contained on pages 27 to 56 of the Companys 2009 Annual Report on Form 10-K. The condensed balance sheet data at January2, 2010 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly period ended April3, 2010 are not necessarily indicative of the results to be expected for other interim periods or the full year. New accounting standard In December 2009, the FASB amended the Accounting Standards Codification related to the consolidation provisions that apply to variable interest entities. This guidance is effective for fiscal years that begin after November15, 2009 and was adopted by the Company on a prospective basis as of January3, 2010 without material impact to its consolidated financial statements.

Goodwill and other intangible a

Goodwill and other intangible assets
	3 Months Ended Apr. 03, 2010
Goodwill and other intangible assets	Note 2 Goodwill and other intangible assets Changes in the carrying amount of goodwill for the quarter ended April3, 2010 are presented in the following table. Certain of the Companys goodwill balances are subject to foreign currency translation adjustments. Fluctuations in exchange rates contributed to the change in goodwill balance for the period. Carrying amount of goodwill (millions) NorthAmerica Europe LatinAmerica AsiaPacific(a) Consolidated January 2, 2010 $3,539 $62 $0 $42 $3,643 Currency translation adjustment 0 1 0 1 2 April 3, 2010 $3,539 $63 $0 $43 $3,645 (a) Includes Australia, Asia and South Africa. Intangible assets subject to amortization Grosscarryingamount Accumulatedamortization (millions) April3, 2010 January2, 2010 April3, 2010 January2, 2010 Trademarks $19 $19 $15 $15 Other 41 41 30 30 Total $60 $60 $45 $45 For intangible assets in the preceding table, amortization was less than $1 million for each of the current and prior year quarterly periods. The currently estimated aggregate annual amortization expense for full-year 2010 and each of the four succeeding fiscal years is approximately $2 million. Intangible assets not subject to amortization (millions) Totalcarryingamount April3, 2010 January2, 2010 Trademarks $1,443 $1,443

Exit or disposal activities

Exit or disposal activities
	3 Months Ended Apr. 03, 2010
Exit or disposal activities	Note 3 Exit or disposal activities The Company views its continued spending on cost-reduction activities as part of its ongoing operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation. 2010 activities In 2010, the Company incurred exit costs of $7 million related to two ongoing programs which will result in cost of goods sold (COGS) and selling, general and administrative (SGA) expense savings. The COGS program is Kelloggs lean, efficient, and agile network (K LEAN). The SGA programs focus on the efficiency and effectiveness of various support functions. Total charges incurred during the quarter as well as total exit costs for all programs were: Quarter ended April3, 2010 (millions) COGS programs SGA programs Total Employee severance $2 $1 $3 Other cash costs (a) 0 4 4 Total $2 $5 $7 (a) Includes cash costs for equipment removal and relocation. Total program costs through April3, 2010 (millions) COGS programs SGA programs Total Employee severance $17 $18 $35 Other cash costs (a) 6 12 18 Retirement benefits (b) 3 0 3 Total $26 $30 $56 (a) Includes cash costs for equipment removal and relocation. (b) Pension plan curtailment losses and special termination benefits. In 2009, the Company commenced K LEAN to optimize the Companys global manufacturing network, reduce waste, develop best practices on a global basis and reduce capital expenditures. Based on forecasted foreign exchange rates, the Company currently expects to incur approximately $40 million in total exit costs including costs incurred to date. The program is expected to be substantially complete by the end of 2010. Refer to page 35 of the Companys 2009 Annual Report on Form 10-K for further information on this initiative. The following table presents exit costs incurred during the quarter as well as total exit costs for K LEAN by operating segment. COGS programs (millions) Forquarterended April 3, 2010 Totalprogram costs through April 3, 2010 North America $1 $15 Europe 1 10 Asia Pacific (a) 0 1 Total $2 $26 (a) Includes Australia, Asia and South Africa. In 2009, the Company commenced various SGA programs which will result in an improvement in the efficiency and effectiveness of various support functions. The programs realign these functions to provide greater consistency across processes, procedures and capabilities in order to support the global organization. Based on forecasted foreign exchange rates, the Company currently expects to incur approximately $45 million in total exit costs including costs incurred to date. The programs are expected to be substantially complete by the end of 2010

Equity

Equity
	3 Months Ended Apr. 03, 2010
Equity	Note 4 Equity Earnings per share Basic net earnings per share is determined by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, and to a lesser extent, certain contingently issuable performance shares. Basic net earnings per share is reconciled to diluted net earnings per share in the following table. The total number of anti-dilutive potential common shares excluded from the reconciliation were 1million for the quarter ended April3, 2010 and 22million for the quarter ended April4, 2009. Quarters ended April3, 2010 and April4, 2009: (millions, except per share data) Netincome attributableto KelloggCompany Average shares outstanding Net earnings pershare 2010 Basic $418 380 $1.10 Dilutive potential common shares 0 4 (0.01) Diluted $418 384 $1.09 2009 Basic $321 382 $0.84 Dilutive potential common shares 0 1 0.00 Diluted $321 383 $0.84 During the quarter ended April3, 2010, the Company issued 0.1million shares to employees and directors under various benefit plans and stock purchase programs, as further discussed in Note 5. In April 2010, the board of directors authorized a $2.5 billion three-year share repurchase program for 2010 through 2012. This authorization replaced the previous share buyback program which authorized stock repurchases of up to $1,113 million for 2010. During the quarter ended April3, 2010, the Company spent $148 million to repurchase approximately 3million shares of the Companys common stock. The 2010 repurchase activity falls under the program approved in April 2010. During the quarter ended April4, 2009, the Company had no stock repurchase activity. Comprehensive income Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income for all periods presented consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges and adjustments for net experience losses and prior service cost related to employee benefit plans. The Companys benefit plan related net experience losses and prior service cost increased by $19 million during the quarter ended April3, 2010 due to foreign currency remeasurement. Additionally, during the first quarter of 2010, the Company amended its U.S. postretirement healthcare benefit plan, which resulted in a decrease of a deferred tax asset of $17 million. The Companys benefit plan-related net experience losses and prior service cost decreased by $9 million during the quarter ended April4, 2009 due to foreign currency remeasurement. Quarter ended April3, 2010: (millions) Pre-tax

Stock compensation

Stock compensation
	3 Months Ended Apr. 03, 2010
Stock compensation	Note 5 Stock compensation The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, and to a lesser extent, executive performance shares and restricted stock grants. Additionally, the Company awards restricted stock to its non-employee directors. The interim information below should be read in conjunction with the disclosures included on pages 40 to 43 of the Companys 2009 Annual Report in Form 10-K. The Company classifies pre-tax stock compensation expense in selling, general and administrative expense principally within its corporate operations. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized were as follows: Quarter ended (millions) April3,2010 April4,2009 Pre-tax compensation expense $13 $13 Related income tax benefit $5 $5 As of April3, 2010, total stock-based compensation cost related to non-vested awards not yet recognized was approximately $54 million and the weighted-average period over which this amount is expected to be recognized was approximately 2 years. Stock options During the quarters ended April3, 2010 and April4, 2009, the Company granted non-qualified stock options to eligible employees as presented in the following activity tables. Terms of these grants and the Companys methods for determining grant-date fair value of the awards were consistent with that described on pages 41 and 42 of the Companys 2009 Annual Report on Form 10-K. Quarter ended April3, 2010: Employee and director stock options Shares (millions) Weighted- average exercise price Weighted- average remaining contractual term (yrs.) Aggregate intrinsic value (millions) Outstanding, beginning of period 26 $45 Granted 4 53 Exercised (1) 43 Forfeitures and expirations 0 0 Outstanding, end of period 29 $46 6.8 $211 Exercisable, end of period 23 $46 6.1 $177 Quarter ended April4, 2009: Employee and director stock options Shares (millions) Weighted- average exercise price Weighted- average remaining contractual term (yrs.) Aggregate intrinsic value (millions) Outstanding, beginning of period 26 $45 Granted 3 40 Exercised 0 0 Forfeitures and expirations 0 0 Outstanding, end of period 29 $45 7.1 $20 Exercisable, end of period 24 $45 6.6 $20 The weighted-average fair value of options granted was $7.90 per share for the quarter ended April3, 2010 and $6.33 per share for the quarter ended April4, 2009. The fair value was estimated using the following assumptions: Weighted- averageexpected volatility Weighted- averageexpected term (years) Weighted- averagerisk- free interest rate Dividend yield Grants within the quarter ended April3, 2010 20.00% 4.94 2.54% 2.80% The total intrinsi

Employee benefits

Employee benefits
	3 Months Ended Apr. 03, 2010
Employee benefits	Note 6 Employee benefits The Company sponsors a number of U.S. and foreign pension, other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described on pages 43 to 47 of the Companys 2009 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below. Pension Quarterended (millions) April3,2010 April4,2009 Service cost $23 $20 Interest cost 50 47 Expected return on plan assets (79) (76) Amortization of unrecognized prior service cost 3 3 Recognized net loss 20 11 Total pension expense $17 $5 Other nonpension postretirement Quarter ended (millions) April 3, 2010 April 4, 2009 Service cost $5 $5 Interest cost 16 16 Expected return on plan assets (16) (17) Recognized net loss 4 3 Total Postretirement benefit expense $9 $7 Postemployment Quarter ended (millions) April 3, 2010 April 4, 2009 Service cost $2 $1 Interest cost 1 1 Recognized net loss 1 1 Total Postemployment benefit expense $4 $3 Contributions to employee benefit plans are summarized as follows: (millions) Pension Nonpension postretirement Total Quarter ended: April3, 2010 $19 $3 $22 April4, 2009 $70 $4 $74 Full year: Fiscal year 2010 (projected) $35 $15 $50 Fiscal year 2009 (actual) $87 $13 $100 Plan funding strategies may be modified in response to managements evaluation of tax deductibility, market conditions, and competing investment alternatives. During the first quarter of 2010, the Company amended its U.S. postretirement healthcare benefit plan, which resulted in a decrease of a deferred tax asset of $17 million. This impact was recorded in other comprehensive income.

Income taxes

Income taxes
	3 Months Ended Apr. 03, 2010
Income taxes	Note 7 Income taxes The consolidated effective income tax rate for the first quarter of 2010, as compared to 2009 is as follows: April3, 2010 27 % April4, 2009 31 % The effective rate in the first quarter of 2010 benefited primarily from an immaterial correction of an item related to prior years. As of April3, 2010, the Company classified approximately $27 million of unrecognized tax benefits as a current liability, representing several individually insignificant income tax positions under examination in various jurisdictions. Managements estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability balance, expected to be settled within one year, offset by approximately $12 million of projected additions. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate. Following is a reconciliation of the Companys total gross unrecognized tax benefits for the quarter ended April3, 2010. Approximately $107 million of this total represents the amount that, if recognized, would affect the Companys effective income tax rate in future periods. (millions) January 2, 2010 $ 130 Tax positions related to current year: Additions 4 Reductions 0 Tax positions related to prior years: Additions 0 Reductions (5 ) Settlements 0 April 3, 2010 $ 129 The current portion of the Companys unrecognized tax benefits is presented in the balance sheet within accrued income taxes and the amount expected to be settled after one year is recorded in other liabilities. The Company classifies income tax-related interest and penalties as interest expense and SGA expense, respectively. (millions) Interest accrued at January2, 2010 $ 25 Interest expense recognized in the quarter $ 4 Interest accrued at April3, 2010 $ 29

Derivative instruments and fair

Derivative instruments and fair value measurements
	3 Months Ended Apr. 03, 2010
Derivative instruments and fair value measurements	Note8 Derivative instruments and fair value measurements The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, or other contracts used to reduce volatility in the translation of foreign currency earnings to U.S. dollars. The fair value of derivative instruments is recorded in other prepaid assets, other assets, other current liabilities or other liabilities. Gains and losses representing either hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or hedges of translational exposure are recorded in the Consolidated Statement of Income in other income (expense), net. Within the Consolidated Statement of Cash Flows, settlements of cash flow and fair value hedges are classified as an operating activity; settlements of all other derivatives are classified as a financing activity. As a matter of policy, the Company does not engage in trading or speculative hedging transactions. Total notional amounts of the Companys derivative instruments at April3, 2010 and January2, 2010 were as follows: (millions) April3, 2010 January2, 2010 Foreign currency exchange contracts $ 1,396 $1,588 Interest rate contracts 1,900 1,900 Commodity contracts 220 213 Total $ 3,516 $3,701 Cash flow hedges Qualifying derivatives are accounted for as cash flow hedges when the hedged item is a forecasted transaction. Gains and losses on these instruments are recorded in other comprehensive income until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income (loss) (AOCI) to the Consolidated Statement of Income on the same line item as the underlying transaction. Fair value hedges Qualifying derivatives are accounted for as fair value hedges when the hedged item is a recognized asset, liability, or firm commitment. Gains and losses on these instruments are recorded in earnings, offsetting gains and losses on the hedged item. Net investment hedges Qualifying derivative and nonderivative financial instruments are accounted for as net investment hedges when the hedged item is a nonfunctional currency investment in a subsidiary. Gains and losses on these instruments are included in foreign currency translation adjustments in AOCI. Other contracts The Company also periodically enters into foreign currency forward contracts and options to reduce volatility in the translation of foreign currency earnings to U.S. dollars. Gains and losses on these instruments are recorded in other income (expe

2009 voluntary product withdraw

2009 voluntary product withdrawal
	3 Months Ended Apr. 03, 2010
2009 voluntary product withdrawal	Note9 2009 voluntary product withdrawal On January16, 2009, the Company announced a recall of certain Austin and Keebler branded peanut butter sandwich crackers and certain Famous Amos and Keebler branded peanut butter cookies. The recall was expanded in February 2009 to include certain Bear Naked, Kashi and Special K products. The decision was made following an investigation by the United States Food and Drug Administration concerning a salmonella outbreak thought to be caused by tainted peanut-related products. The products subject to the recall contained peanut-based ingredients manufactured by the Peanut Corporation of America whose Blakely, Georgia plant was found to contain salmonella. Estimated customer returns and consumer rebates were recorded as a reduction of net sales; costs associated with returned product and the disposal and write-off of inventory were recorded as COGS; and other recall costs were recorded as SGA expenses. There were no costs associated with the withdrawal for the quarter ended April3, 2010. The following table presents a summary of the total charges for the quarter ended April4, 2009: (millions, except per share amount) Quarterended April 4, 2009 Reduction of net sales $13 Cost of goods sold 13 Selling, general and administrative expense 1 Total $27 Earnings per diluted share impact $0.05

Operating segments

Operating segments
	3 Months Ended Apr. 03, 2010
Operating segments	Note 10 Operating segments Kellogg Company is the worlds leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom. The Company currently manages its operations in four geographic operating segments, consisting of North America and the three International operating segments of Europe, Latin America, and Asia Pacific. Quarter ended (millions) April3, 2010 April4, 2009 Net sales North America $2,275 $2,211 Europe 606 557 Latin America 222 230 Asia Pacific (a) 215 171 Consolidated $3,318 $3,169 Segment operating profit North America $495 $403 Europe 105 95 Latin America 45 49 Asia Pacific (a) 37 25 Corporate (45) (43) Consolidated $637 $529 (a) Includes Australia, Asia and South Africa.