UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 2004
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 COMPANY
State of Incorporation--Delaware IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant's telephone number: 269-961-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
Common Stock outstanding October 22, 2004 - 412,910,481 shares
KELLOGG COMPANY
INDEX
PART I - Financial Information Page
Item 1:
Consolidated Balance Sheet - September 25, 2004, and
December 27, 2003 2
Consolidated Statement of Earnings - quarters and year-to-date
periods ended September 25, 2004 and September 27, 2003 3
Consolidated Statement of Cash Flows - year-to-date periods
ended September 25, 2004 and September 27, 2003 4
Notes to Consolidated Financial Statements 5-12
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-18
Item 3:
Quantitative and Qualitative Disclosures about Market Risk 19
Item 4:
Controls and Procedures 19
PART II - Other Information
Item 2:
Changes in Securities and Use of Proceeds 20
Item 5:
Other Information 20
Item 6:
Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
==================================================================================================================
Sept. 25, December 27,
2004 2003
(unaudited) *
==================================================================================================================
Current assets
Cash and cash equivalents $423.0 $141.2
Accounts receivable, net 920.6 754.8
Inventories:
Raw materials and supplies 192.7 185.3
Finished goods and materials in process 448.6 464.5
Other current assets 256.3 242.1
- ------------------------------------------------------------------------------------------------------------------
Total current assets 2,241.2 1,787.9
Property, net of accumulated depreciation
of $3,655.5 and $3,439.3 2,648.5 2,780.2
Goodwill 3,094.9 3,098.4
Other intangibles, net of accumulated amortization
of $45.3 and $35.1 2,024.5 2,034.4
Other assets 460.1 441.8
- ------------------------------------------------------------------------------------------------------------------
Total assets $10,469.2 $10,142.7
==================================================================================================================
Current liabilities
Current maturities of long-term debt $78.6 $578.1
Notes payable 544.7 320.8
Accounts payable 797.6 703.8
Accrued advertising and promotion 387.9 323.1
Other current liabilities 880.3 840.2
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,689.1 2,766.0
Long-term debt 4,271.0 4,265.4
Deferred income taxes 1,050.4 1,062.8
Pension benefits 176.0 165.3
Nonpension postretirement benefits 271.5 291.0
Other liabilities 139.9 149.0
Shareholders' equity
Common stock, $.25 par value 103.8 103.8
Capital in excess of par value - 24.5
Retained earnings 2,622.0 2,247.7
Treasury stock, at cost (115.7) (203.6)
Accumulated other comprehensive income (loss) (738.8) (729.2)
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,871.3 1,443.2
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,469.2 $10,142.7
==================================================================================================================
<FN>
* Condensed from audited financial statements.
</FN>
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED EARNINGS
(millions, except per share data)
======================================================================================================
Year-to-date Year-to-date
Quarter ended Quarter ended period ended period ended
Sept. 25, Sept. 27, Sept. 25, Sept. 27,
(Results are unaudited) 2004 2003 2004 2003
======================================================================================================
Net sales $2,445.3 $2,281.6 $7,223.1 $6,676.5
Cost of goods sold 1,319.1 1,247.6 3,981.7 3,710.8
Selling and administrative expense 669.4 603.2 1,926.0 1,773.4
------------------------------ -----------------------------
Operating profit 456.8 430.8 1,315.4 1,192.3
Interest expense 76.2 87.0 230.5 268.5
Other income (expense), net (3.5) 7.6 (9.8) 2.2
------------------------------ -----------------------------
Earnings before income taxes 377.1 351.4 1,075.1 926.0
Income taxes 130.1 120.1 370.9 326.9
------------------------------ -----------------------------
Net earnings $247.0 $231.3 $704.2 $599.1
============================== =============================
Net earnings per share:
Basic $.60 $.57 $1.71 $1.47
Diluted $.59 $.56 $1.69 $1.46
Dividends per share $.2525 $.2525 $.7575 $.7575
============================== =============================
Average shares outstanding:
Basic 412.4 408.3 411.7 407.6
============================== =============================
Diluted 416.7 410.9 415.8 410.0
============================== =============================
Actual shares outstanding at period end 412.6 408.2
=============================
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
==================================================================================================================
Year-to-date Year-to-date
period ended period ended
Sept. 25, Sept. 27,
(unaudited) 2004 2003
==================================================================================================================
Operating activities
Net earnings $704.2 $599.1
Adjustments to reconcile net earnings to
operating cash flows:
Depreciation and amortization 293.5 272.0
Deferred income taxes 7.6 57.5
Other 96.7 59.9
Postretirement benefit plan contributions (140.7) (59.9)
Changes in operating assets and liabilities 67.8 54.4
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,029.1 983.0
- ------------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to properties (169.5) (121.2)
Dispositions of businesses - 14.0
Other 1.0 8.3
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (168.5) (98.9)
- ------------------------------------------------------------------------------------------------------------------
Financing activities
Net issuances of notes payable 223.9 (135.0)
Issuances of long-term debt 7.0 498.1
Reductions of long-term debt (503.0) (710.9)
Net issuances of common stock 242.0 80.4
Common stock repurchases (229.3) (76.3)
Cash dividends (313.1) (308.8)
Other (2.7) -
- ------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (575.2) (652.5)
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (3.6) 9.7
- ------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 281.8 241.3
Cash and cash equivalents at beginning of period 141.2 100.6
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $423.0 $341.9
==================================================================================================================
Refer to Notes to Consolidated Financial Statements.
Notes to Consolidated Financial
Statements for the quarter and year-to-date periods
ended September 25, 2004 (unaudited)
Note 1 Accounting policies
The unaudited interim financial information included in this report reflects
normal recurring adjustments that management believes are necessary for a fair
presentation of the results of operations, financial position, 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 32 to 52 of the Company's 2003 Annual Report. The accounting policies used
in preparing these financial statements are the same as those summarized in the
Company's 2003 Annual Report, except as discussed below. Certain amounts for
2003 have been reclassified to conform to current-period classifications. The
results of operations for the quarter and year-to-date periods ended September
25, 2004, are not necessarily indicative of the results to be expected for other
interim periods or the full year.
Basis of presentation
The Company's fiscal year normally ends on the last Saturday of December and as
a result, a 53rd week is added every fifth or sixth year. The Company's 2004
fiscal year will end on January 1, 2005, and include a 53rd week. Quarters
normally consist of 13-week periods, with the fourth quarter of fiscal 2004
including a 14th week.
Medicare prescription benefits
In December 2003, the Medicare Prescription Drug Improvement and Modernization
Act of 2003 (the Act) became law. The Act introduces a prescription drug benefit
under Medicare Part D as well as a federal subsidy (beginning in 2006) to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. In January 2004, the Company
elected, pursuant to FASB Staff Position (FSP) FAS 106-1, to defer accounting
recognition of the effects of the Act until authoritative FASB guidance was
issued.
In May 2004, the FASB issued FSP FAS 106-2, which applies to sponsors of
single-employer defined benefit postretirement health care plans that are
impacted by the Act. In general, the FSP concludes that plan sponsors should
follow SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other
Than Pensions," in accounting for the effects of the Act, with benefits
attributable to past service cost accounted for as an actuarial experience gain.
The FSP is generally effective for the first interim period beginning after June
15, 2004, with earlier application encouraged. For employers such as Kellogg
that elected deferral under FSP FAS 106-1, this guidance may be adopted
retroactively to the date of Act enactment or prospectively from the date of
adoption.
While detailed regulations necessary to implement the Act have not yet been
issued, management believes that certain health care benefit plans covering a
significant portion of the Company's U.S. workforce will qualify for the
Medicare Part D subsidy, resulting in a reduction in the Company's share of
prescription drug benefits available under these plans. Accordingly, the Company
adopted FSP FAS 106-2 as of its second quarter 2004 reporting period beginning
March 28, 2004, and has performed a remeasurement of its plan assets and
obligations as of December 27, 2003. The reduction in the benefit obligation
attributable to past service cost is approximately $73 million and the total
reduction in benefit cost for full-year 2004 is approximately $10 million.
Stock compensation
The Company uses various equity-based compensation programs to provide long-term
performance incentives for its global workforce. Currently, these incentives
consist of stock options, performance units, restricted stock grants, and stock
purchase plans with various preferred terms. These awards are administered
through several plans, as described in Note 8 to Consolidated Financial
Statements on pages 41-43 of the Company's 2003 Annual Report.
The Company currently uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to
account for its employee stock options and other stock-based compensation. Under
this method, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. The table below presents pro forma results
for the current and prior-year periods, as if the Company had used the alternate
fair value method of accounting for stock-based compensation, prescribed by SFAS
No. 123 "Accounting for Stock-Based Compensation" (as amended by SFAS No. 148).
Under this pro forma method, the fair value of each option grant was estimated
at the date of grant using an option-pricing model and was recognized over the
vesting period, generally two years. Pricing model assumptions included expected
terms of 3-4 years; and risk-free interest rates, dividend yields, and
volatility assumptions consistent with the expected terms and particular grant
dates.
- -------------------------------------------------------------------------------------------------------------------------
(millions except per share data) Quarter ended Year-to-date period ended
- -------------------------------------------------------------------------------------------------------------------------
September September September September
25, 2004 27, 2003 25, 2004 27, 2003
- -------------------------------------------------------------------------------------------------------------------------
Stock-based compensation expense, net of tax:
As reported $ 2.3 $ 3.5 $ 6.7 $ 8.5
Pro forma $11.1 $10.6 $31.5 $30.4
Net earnings:
As reported $ 247.0 $ 231.3 $ 704.2 $ 599.1
Pro forma $ 238.2 $ 224.2 $ 679.4 $ 577.2
Basic net earnings per share:
As reported $0.60 $0.57 $1.71 $1.47
Pro forma $0.58 $0.55 $1.65 $1.42
Diluted net earnings per share:
As reported $0.59 $0.56 $1.69 $1.46
Pro forma $0.57 $0.55 $1.64 $1.41
- -------------------------------------------------------------------------------------------------------------------------
Note 2 Cost-reduction initiatives
To position the Company for sustained reliable growth in earnings and cash flow
for the long term, management is undertaking a series of cost-reduction
initiatives. Continuing from 2003 are various manufacturing capacity
rationalization and efficiency initiatives in the Company's North American and
European operating segments. Major initiatives commenced in the first and second
quarters of 2004 include 1) global rollout of the SAP information technology
system, 2) reorganization of pan-European operations, 3) consolidation of U.S.
veggie foods manufacturing operations, and 4) relocation of the Company's U.S.
snacks business unit to Battle Creek, Michigan. Additional initiatives are still
in the planning stages and individual actions are being announced as plans are
finalized.
The Company's global rollout of its SAP information technology system is
resulting in accelerated depreciation of legacy software assets to be abandoned
in 2005, as well as related consulting and other implementation expenses. Total
incremental costs for 2004 are expected to be approximately $35 million. In
close association with this SAP rollout, management has undertaken a major
initiative to improve the organizational design and effectiveness of
pan-European operations. Specific benefits of this initiative are expected to
include improved marketing and promotional coordination across Europe, supply
chain network savings, and overhead cost reductions. To achieve these benefits,
management intends to implement, by early 2005, a new European legal and
operating structure with strengthened pan-European management authority and
coordination. To complete this business transformation, the Company expects to
incur various up-front costs, including relocation, severance, and consulting,
of approximately $30 million during 2004.
To improve operations and provide for future growth, the Company is moving
forward with its plan to close its veggie foods manufacturing facility in
Worthington, Ohio. The plan includes the out-sourcing of certain operations and
consolidation of remaining production at the Zanesville, Ohio facility by early
2005. The Worthington facility employs approximately 300 employees. Total asset
write-offs and up-front costs of the project are expected to be approximately
$30 million, the majority of which is being recognized during 2004.
As the next logical step in the integration process, the Company has
substantially completed the relocation of its U.S. snacks business unit from
Elmhurst, Illinois (the former headquarters of Keebler Foods Company) to Battle
Creek, Michigan. About one-third of the approximately 300 employees affected by
this initiative accepted relocation/reassignment offers. The recruiting effort
to fill the remaining open positions is substantially complete. Attributable to
this initiative, management expects to incur approximately $20 million in
relocation, recruiting, and severance costs principally during 2004. Subject to
achieving certain employment levels and other regulatory requirements,
management expects to defray a significant portion of these up-front costs
through various multi-year tax incentives, beginning in 2005.
Taking into account the incremental costs of all of the above-described
initiatives, the Company recorded total charges of approximately $32 million for
the quarter and $61 million for the year-to-date period ended September 25,
2004. Approximately 50% of the year-to-date charges were comprised of asset
write-offs, with the remainder consisting of severance, relocation, consulting,
and other cash costs. Approximately 50% of the year-to-date charges were
recorded in cost of goods sold, with the balance recorded in selling, general,
and administrative (SGA) expense. The year-to-date charges impacted the
Company's operating segments as follows (in millions): North America-$31,
Europe-$30. The exit cost reserve balance at December 27, 2003, of approximately
$19 million was substantially paid out during the first quarter of 2004.
Principally attributable to severance costs accrued during the second and third
quarters of 2004, exit cost reserves at September 25, 2004, totaled
approximately $8 million.
Cost of goods sold for the quarter ended September 27, 2003 included charges of
approximately $11 million for asset write-offs and exit costs associated with
all in-process cost-reduction initiatives. The third quarter 2003 charges were
comprised of approximately $6 million for a plant closure-related impairment
loss in Argentina, $3 million for equipment disposals in the Company's U.S.
snacks business, and $2 million for plant closure-related costs in Australia.
For the year-to-date period, cost of goods sold also included charges of
approximately $15 million, attributable primarily to equipment disposals in the
Company's U.S. snacks business. Reserves for exit costs at September 27, 2003,
were insignificant.
Note 3 Other income (expense), net
Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, charitable donations, and gains on
asset sales. Other income (expense), net for the year-to-date period ended
September 25, 2004, includes a charge of approximately $8 million for a
contribution to the Kellogg's Corporate Citizenship Fund, a private trust
established for charitable giving.
Other income (expense), net for the year-to-date period ended September 27, 2003
includes a credit of approximately $17 million related to favorable legal
settlements; a charge of $8 million for a contribution to the Kellogg's
Corporate Citizenship Fund; and a charge of $6.5 million to recognize the
impairment of a cost-basis investment in an e-commerce business venture.
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 are comprised principally of employee stock options
issued by the Company. Basic net earnings per share is reconciled to diluted net
earnings per share as follows:
- ------------------------------------------------------------------------------------------------------
Quarter Average Net
(millions, except Net shares earnings
per share data) earnings outstanding per share
- ------------------------------------------------------------------------------------------------------
2004
Basic $247.0 412.4 $0.60
Dilutive potential
common shares - 4.3 (0.01)
- ------------------------------------------------------------------------------------------------------
Diluted $247.0 416.7 $0.59
- ------------------------------------------------------------------------------------------------------
2003
Basic $231.3 408.3 $0.57
Dilutive potential
common shares - 2.6 (0.01)
- ------------------------------------------------------------------------------------------------------
Diluted $231.3 410.9 $0.56
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Year-to-date Average Net
(millions, except Net shares earnings
per share data) earnings outstanding per share
- ------------------------------------------------------------------------------------------------------
2004
Basic $704.2 411.7 $1.71
Dilutive potential
common shares - 4.1 (0.02)
- ------------------------------------------------------------------------------------------------------
Diluted $704.2 415.8 $1.69
- ------------------------------------------------------------------------------------------------------
2003
Basic $599.1 407.6 $1.47
Dilutive potential
common shares - 2.4 (0.01)
- ------------------------------------------------------------------------------------------------------
Diluted $599.1 410.0 $1.46
- ------------------------------------------------------------------------------------------------------
Comprehensive Income
Comprehensive income includes net earnings and all other changes in equity
during a period except those resulting from investments by or distributions
to shareholders. Accumulated other comprehensive income for the periods
presented consists of foreign currency translation adjustments pursuant
to SFAS No. 52 "Foreign Currency Translation," unrealized gains and losses
on cash flow hedges pursuant to SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," and minimum pension liability
adjustments pursuant to SFAS No. 87 "Employers' Accounting for Pensions."
- --------------------------------------------------------------------------------------------------
Quarter Pre-tax Tax (expense) After-tax
(millions) Amount or benefit amount
- --------------------------------------------------------------------------------------------------
2004
Net earnings $247.0
Other comprehensive income:
Foreign currency translation adjustments 1.2 - 1.2
Cash flow hedges:
Unrealized gain (loss) on
cash flow hedges (5.8) 1.8 (4.0)
Reclassification to net earnings 3.0 (1.0) 2.0
Minimum pension liability adjustments 0.6 - 0.6
- ---------------------------------------------------------------------------------------------------
(1.0) 0.8 (0.2)
- ---------------------------------------------------------------------------------------------------
Total comprehensive income $246.8
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Pre-tax Tax (expense) After-tax
(millions) Amount or benefit amount
- ---------------------------------------------------------------------------------------------------
2003
Net earnings $231.3
Other comprehensive income:
Foreign currency translation adjustments 2.0 - 2.0
Cash flow hedges:
Unrealized gain (loss) on
cash flow hedges 1.8 (0.7) 1.1
Reclassification to net earnings 1.3 (0.5) 0.8
Minimum pension liability adjustments - - -
- ---------------------------------------------------------------------------------------------------
5.1 (1.2) 3.9
- ---------------------------------------------------------------------------------------------------
Total comprehensive income $235.2
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Year-to-date Pre-tax Tax (expense) After-tax
(millions) Amount or benefit amount
- ---------------------------------------------------------------------------------------------------
2004
Net earnings $704.2
Other comprehensive income:
Foreign currency translation adjustments (9.1) - (9.1)
Cash flow hedges:
Unrealized gain (loss) on
cash flow hedges (8.0) 2.7 (5.3)
Reclassification to net earnings 13.4 (4.9) 8.5
Minimum pension liability adjustments (5.4) 1.7 (3.7)
- ---------------------------------------------------------------------------------------------------
(9.1) (0.5) (9.6)
- ---------------------------------------------------------------------------------------------------
Total comprehensive income $694.6
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Pre-tax Tax (expense) After-tax
(millions) Amount or benefit amount
- ---------------------------------------------------------------------------------------------------
2003
Net earnings $599.1
Other comprehensive income:
Foreign currency translation adjustments 35.5 - 35.5
Cash flow hedges:
Unrealized gain (loss) on
cash flow hedges (14.2) 4.8 (9.4)
Reclassification to net earnings 10.5 (3.8) 6.7
Minimum pension liability adjustments - - -
- ----------------------------------------------------------------------------------------------------
31.8 1.0 32.8
- ----------------------------------------------------------------------------------------------------
Total comprehensive income $631.9
- ----------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) as of September 25, 2004, and
December 27, 2003, consisted of the following:
- --------------------------------------------------------------------------------
September 25, December 27,
(millions) 2004 2003
- --------------------------------------------------------------------------------
Foreign currency translation adjustments $ (415.1) $ (406.0)
Cash flow hedges -- unrealized net loss (48.7) (51.9)
Minimum pension liability adjustments (275.0) (271.3)
- --------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $ (738.8) $ (729.2)
- --------------------------------------------------------------------------------
Note 5 Debt
In January 2004, the Company repaid $500 million of maturing seven-year Notes,
replacing these Notes with short-term debt.
Note 6 Employee benefits
The Company sponsors a number of U.S. and foreign pension, other postretirement,
and postemployment plans to provide various benefits for its employees. These
plans are described on pages 43-46 of the Company's 2003 Annual Report.
Components of benefit expense for the periods presented were:
Pension
- ---------------------------------------------------------------------------------------------------------------------------
Quarter ended Year-to-date period ended
(millions) Sept. 25, 2004 Sept. 27, 2003 Sept. 25, 2004 Sept. 27, 2003
- ---------------------------------------------------------------------------------------------------------------------------
Service cost $18.4 $16.8 $55.4 $50.6
Interest cost 38.2 37.7 114.5 113.3
Expected return on plan assets (58.4) (56.0) (175.1) (168.2)
Amortization of unrecognized
prior service cost 2.0 1.8 5.8 5.5
Recognized net (gain) loss 12.6 7.2 38.0 21.5
Curtailment and special termination benefits -
net (gain) loss (1.2) 2.1 0.6 6.1
- ---------------------------------------------------------------------------------------------------------------------------
Total pension expense - Company Plans $11.6 $9.6 $39.2 $28.8
- ---------------------------------------------------------------------------------------------------------------------------
Other nonpension postretirement
- ---------------------------------------------------------------------------------------------------------------------------
Quarter ended Year-to-date period ended
(millions) Sept. 25, 2004 Sept. 27, 2003 Sept. 25, 2004 Sept. 27, 2003
- ---------------------------------------------------------------------------------------------------------------------------
Service cost $3.0 $3.1 $9.0 $9.4
Interest cost 13.9 15.1 41.6 45.3
Expected return on plan assets (9.9) (8.2) (29.8) (24.6)
Amortization of unrecognized
prior service cost (0.8) (0.6) (2.2) (1.9)
Recognized net (gain) loss 3.7 3.0 11.1 9.2
Curtailment and special termination benefits -
net (gain) loss 0.3 - 0.3 -
- ---------------------------------------------------------------------------------------------------------------------------
Postretirement benefit expense $10.2 $12.4 $30.0 $37.4
- ---------------------------------------------------------------------------------------------------------------------------
Postemployment
- ----------------------------------------------------------------------------------------------------------------------
Quarter ended Year-to-date period ended
(millions) Sept. 25, 2004 Sept. 27, 2003 Sept. 25, 2004 Sept. 27, 2003
- ----------------------------------------------------------------------------------------------------------------------
Service cost $0.9 $0.8 $2.6 $2.3
Interest cost 0.4 0.5 1.4 1.5
Recognized net (gain) loss 0.9 0.8 2.6 2.3
- ----------------------------------------------------------------------------------------------------------------------
Postemployment benefit expense $2.2 $2.1 $6.6 $6.1
- ----------------------------------------------------------------------------------------------------------------------
Note 7 Operating segments
Kellogg Company is the world's leading producer of cereal and a leading producer
of convenience foods, including cookies, crackers, toaster pastries, cereal
bars, frozen waffles, and meat alternatives. Kellogg products are manufactured
and marketed globally. In recent years, the Company was managed in two major
divisions - United States and International. During late 2003, the Company
reorganized its geographic management structure to North America, Europe, Latin
America, and Asia Pacific. This new organizational structure is the basis of the
operating segment data presented below. The prior periods have been restated to
conform to the current-period presentation. This restatement includes: 1) the
combination of U.S. and Canadian results into North America, 2) the
reclassification of certain U.S. export operations from U.S. to Latin America,
and 3) the reallocation of certain selling, general, and administrative (SGA)
expenses between Corporate and North America.
======================================================================================================
Year-to-date Year-to-date
Quarter ended Quarter ended period ended period ended
Sept. 25, Sept. 27, Sept. 25, Sept.27,
(millions) 2004 2003 2004 2003
======================================================================================================
Net sales
North America $1,610.3 $1,525.6 $4,776.1 $4,533.4
Europe 510.5 451.1 1,517.7 1,308.5
Latin America 192.9 181.5 547.1 497.0
Asia Pacific (a) 131.6 123.4 382.2 337.6
------------------------------ -----------------------------
Consolidated $2,445.3 $2,281.6 $7,223.1 $6,676.5
============================== =============================
- ------------------------------------------------------------------------------------------------------
Segment operating profit
North America $317.4 $312.8 $906.4 $856.1
Europe 97.1 86.8 275.5 227.6
Latin America 54.2 44.8 150.5 131.3
Asia Pacific (a) 19.4 16.8 62.2 54.0
Corporate (31.3) (30.4) (79.2) (76.7)
------------------------------ -----------------------------
Consolidated 456.8 430.8 1,315.4 1,192.3
============================== =============================
<FN>
(a) Includes Australia and Asia.
</FN>
Note 8 Supplemental information on goodwill and other intangible assets
Selling, general, and administrative expense for the period ended September 25,
2004, includes impairment losses of $10.4 million to write off the remaining
carrying value of certain intangible assets. As presented in the tables below,
the total amount consists of $7.9 million attributable to a long-term licensing
agreement in North America and $2.5 million of goodwill in Latin America.
- ----------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization:
- ----------------------------------------------------------------------------------------------------------------------------
(millions) Gross carrying amount Accumulated amortization
- ----------------------------------------------------------------------------------------------------------------------------
September 25, December 27, September 25, December 27,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Trademarks $ 29.5 $ 29.5 $ 19.1 $ 18.3
Other 29.1 29.1 26.2 16.8
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 58.6 $ 58.6 $ 45.3 $ 35.1
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
September 25, September 27,
Amortization expense (millions) (a): 2004 (b) 2003
- ----------------------------------------------------------------------------------------------------------------------------
Quarter $ 8.6 $ 0.4
- ----------------------------------------------------------------------------------------------------------------------------
Year-to-date $ 10.2 $ 1.2
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The currently estimated aggregate amortization expense for each of the 5
succeeding fiscal years is approximately $3.0 million per year.
(b) Includes impairment loss of approximately $7.9 million, as discussed above.
</FN>
- ----------------------------------------------------------------------------------------------------------------------------
Intangible assets not subject to amortization:
- ----------------------------------------------------------------------------------------------------------------------------
(millions) Total carrying amount
- ----------------------------------------------------------------------------------------------------------------------------
September 25, December 27,
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Trademarks $ 1,404.0 $ 1,404.0
Direct store door (DSD) delivery system 578.9 578.9
Other 28.3 28.0
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 2,011.2 $ 2,010.9
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Changes in the carrying amount of goodwill for the year-to-date period ended
September 25, 2004:
- ----------------------------------------------------------------------------------------------------------------------------
Consoli-
(millions) North America Europe Latin America Asia Pacific (c) dated
December 27, 2003 $ 3,093.8 $ - $ 2.5 $ 2.1 $ 3,098.4
Purchase accounting adjustments (0.9) - - - (0.9)
Impairments - - (2.5) - (2.5)
Foreign currency remeasurement impact and other - - - (0.1) (0.1)
- ----------------------------------------------------------------------------------------------------------------------------
September 25, 2004 $ 3,092.9 $ - $ - $ 2.0 $ 3,094.9
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(c) Includes Australia and Asia.
</FN>
KELLOGG COMPANY
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of operations
Overview
Kellogg Company is the world's leading producer of cereal and a leading producer
of convenience foods, including cookies, crackers, toaster pastries, cereal
bars, frozen waffles, and meat alternatives. Kellogg products are manufactured
and marketed globally. In recent years, we managed our operations in two major
divisions - United States and International. In late 2003, we reorganized our
geographic management structure to North America, Europe, Latin America, and
Asia Pacific. This new organizational structure is the basis of the operating
segment data presented in this report.
For the quarter ended September 25, 2004, the Company reported net earnings per
share of $.59, a 5% increase over the prior-period amount of $.56. Consolidated
net sales and net earnings each grew 7%, with operating profit up 6%. These
results were achieved despite higher commodity costs, increased brand-building
expenditures, and significant up-front charges related to cost-reduction
initiatives. The current-quarter results contributed to strong year-to-date
performance, with net earnings and earnings per share growth of 18% and 16%,
respectively.
Net sales and operating profit
The following tables provide an analysis of net sales and operating profit
performance for the third quarter of 2004 versus 2003:
- -----------------------------------------------------------------------------------------------------------------------
(dollars in millions) North America Europe Latin Asia Corporate Consoli-
America Pacific (b) dated
- -----------------------------------------------------------------------------------------------------------------------
2004 net sales $ 1,610.3 $ 510.5 $ 192.9 $ 131.6 $ - $2,445.3
- -----------------------------------------------------------------------------------------------------------------------
2003 net sales (a) $ 1,525.6 $ 451.1 $ 181.5 $ 123.4 $ - $2,281.6
- -----------------------------------------------------------------------------------------------------------------------
% change - 2004 vs. 2003:
Volume (tonnage) 2.5% -1.6% 6.0% -3.3% - 1.8%
Pricing/mix 2.6% 4.0% 5.0% 3.6% - 3.0%
- -----------------------------------------------------------------------------------------------------------------------
Subtotal - internal business 5.1% 2.4% 11.0% 0.3% - 4.8%
Foreign currency impact 0.5% 10.8% -4.7% 6.2% - 2.4%
- -----------------------------------------------------------------------------------------------------------------------
Total change 5.6% 13.2% 6.3% 6.5% - 7.2%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
(dollars in millions) North America Europe Latin Asia Corporate Consoli-
America Pacific (b) dated
- -----------------------------------------------------------------------------------------------------------------------
2004 operating profit $ 317.4 $ 97.1 $ 54.2 $ 19.4 $ (31.3) $ 456.8
- -----------------------------------------------------------------------------------------------------------------------
2003 operating profit (a) $ 312.8 $ 86.8 $ 44.8 $ 16.8 $ (30.4) $ 430.8
- -----------------------------------------------------------------------------------------------------------------------
% change - 2004 vs. 2003:
Internal business 1.0% 0.2% 26.5% 8.7% -2.6% 3.7%
Foreign currency impact 0.5% 11.6% -5.8% 6.1% 0.0% 2.3%
- -----------------------------------------------------------------------------------------------------------------------
Total change 1.5% 11.8% 20.7% 14.8% -2.6% 6.0%
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(a) 2003 results were restated to conform to 2004 operating segment
presentation as follows: 1) U.S. and Canadian results combined into North
America, 2) certain U.S. export operations reclassified from U.S. to Latin
America, and 3) certain SGA expenditures reallocated between Corporate and
North America.
(b) Includes Australia and Asia.
</FN>
During the third quarter of 2004, consolidated net sales increased 7%. Internal
net sales (which excludes the impact of currency and, if applicable,
acquisitions, dispositions, and shipping day differences) grew approximately 5%,
which was on top of a similar rate of growth in the year-ago period. During the
quarter, successful innovation and brand-building investment continued to drive
growth in most of our businesses.
North America reported net sales growth of approximately 6%, with internal
growth across all major product groups. Internal net sales of our North America
retail cereal business increased approximately 1%, against a difficult
comparative growth rate of 10% in the prior-year period. Successful innovation
and consumer promotion activities supported continued sales growth and category
share gains in both the United States and Canada. Internal net sales of our
North America retail snacks business increased 9%, with all components of our
snacks portfolio (wholesome snacks, cookies, crackers, and toaster pastries)
contributing to that growth. We believe the strong performance of our snacks
business this quarter was due primarily to successful product and packaging
innovation, combined with effective execution in our direct store-door delivery
system. Internal net sales of our North America frozen and specialty channel
(which includes food service, vending, convenience, drug stores, and custom
manufacturing) businesses collectively increased approximately 6%.
Net sales in our European operating segment increased 13%, comprised of
favorable foreign exchange movements of 11% and internal sales growth of 2%.
Internal sales growth for the quarter was lower than the 4% year-to-date growth,
due, in part, to the timing of promotional campaigns and new-product
introductions in our UK cereal business. Sales of our snack products within the
region continued to grow at a strong double-digit rate.
Continued strong performance in Latin America resulted in net sales growth of
6%, with internal net sales growth of 11% more than offsetting unfavorable
foreign currency movements. Most of this growth was due to very strong price/mix
and tonnage improvements in both cereal and snack sales by our Mexican business
unit.
Net sales in our Asia Pacific operating segment increased 6% due to favorable
foreign currency movements, with internal net sales performance essentially
flat. Performance was weakened by the continuing effects of negative publicity
on sugar-containing products in Korea and competitive conditions in Australia.
Consolidated operating profit increased 6% during the quarter, with internal
growth of approximately 4%. This internal growth was achieved despite increased
brand-building expenditures, intangibles impairment losses of over $10 million
(refer to Note 8 within Notes to Consolidated Financial Statements), and sharply
higher commodity costs. Furthermore, as discussed in the "Cost-reduction
initiatives" section below, we are absorbing a significant amount of up-front
costs during 2004.
The following tables provide an analysis of net sales and operating profit
performance for the year-to-date period ended September 25, 2004, versus the
comparable prior-year period:
- ----------------------------------------------------------------------------------------------------------------------
North Latin Asia Consoli-
(dollars in millions) America Europe America Pacific(b) Corporate dated
- ----------------------------------------------------------------------------------------------------------------------
2004 net sales $4,776.1 $1,517.7 $ 547.1 $ 382.2 $ - $7,223.1
- ----------------------------------------------------------------------------------------------------------------------
2003 net sales (a) $4,533.4 $1,308.5 $ 497.0 $ 337.6 $ - $6,676.5
- ----------------------------------------------------------------------------------------------------------------------
% change - 2004 vs. 2003:
Volume (tonnage) 1.8% 0.3% 8.4% -0.7% - 2.0%
Pricing/mix 3.1% 3.9% 5.8% 2.1% - 3.3%
- ----------------------------------------------------------------------------------------------------------------------
Subtotal - internal business 4.9% 4.2% 14.2% 1.4% - 5.3%
Foreign currency impact 0.5% 11.8% -4.1% 11.8% - 2.9%
- ----------------------------------------------------------------------------------------------------------------------
Total change 5.4% 16.0% 10.1% 13.2% - 8.2%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
North Latin Asia Consoli-
(dollars in millions) America Europe America Pacific(b) Corporate dated
- ----------------------------------------------------------------------------------------------------------------------
2004 operating profit $ 906.4 $ 275.5 $ 150.5 $ 62.2 $ (79.2) $1,315.4
- ----------------------------------------------------------------------------------------------------------------------
2003 operating profit (a) $ 856.1 $ 227.6 $ 131.3 $ 54.0 $ (76.7) $1,192.3
- ----------------------------------------------------------------------------------------------------------------------
% change - 2004 vs. 2003:
Internal business 5.3% 8.4% 19.4% 1.5% -3.0% 7.4%
Foreign currency impact 0.6% 12.6% -4.9% 13.6% 0.0% 2.9%
- ----------------------------------------------------------------------------------------------------------------------
Total change 5.9% 21.0% 14.5% 15.1% -3.0% 10.3%
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(a) 2003 results were restated to conform to 2004 operating segment
presentation as follows: 1) U.S. and Canadian results combined into North
America, 2) certain U.S. export operations reclassified from U.S. to Latin
America, and 3) certain SGA expenditures reallocated between Corporate and
North America.
(b) Includes Australia and Asia.
</FN>
Cost-reduction initiatives
To position our Company for sustained reliable growth in earnings and cash flow
for the long term, we are undertaking a series of cost-reduction initiatives.
Continuing from 2003 are various manufacturing capacity rationalization and
efficiency initiatives in our North American and European operating segments.
Initiatives commenced in the first and second quarters of 2004 include 1) global
roll-out of our SAP information technology system, 2) reorganization of
pan-European operations, 3) consolidation of U.S. veggie foods manufacturing
operations, and 4) relocation of our U.S. snacks business unit to Battle Creek,
Michigan. Additional initiatives are still in the planning stages and individual
actions are being announced as plans are finalized.
Related to commenced projects, we expect to incur approximately $125 million of
up-front cash expenditures and asset write-offs to complete these initiatives,
the majority of which is being recognized in earnings during 2004. These costs
are included in our 2004 consolidated performance target of high single-digit
growth in net earnings per share, as well as our projections for full-year cash
flow. Additional information on individual projects is contained in Note 2 to
Consolidated Financial Statements.
Taking into account the incremental costs of all in-process initiatives, we
recorded total charges of approximately $32 million for the quarter and $61
million for the year-to-date period ended September 25, 2004. Approximately 50%
of the year-to-date charges were comprised of asset write-offs, with the
remainder consisting of severance, relocation, consulting, and other cash costs.
Approximately 50% of the year-to-date charges were recorded in cost of goods
sold, with the balance recorded in selling, general, and administrative (SGA)
expense. The year-to-date charges impacted our operating segments as follows (in
millions): North America-$31, Europe-$30.
Cost of goods sold for the quarter ended September 27, 2003 included charges of
approximately $11 million for asset write-offs and exit costs associated with
all in-process cost-reduction initiatives. The third quarter 2003 charges were
comprised of approximately $6 million for a plant closure-related impairment
loss in Argentina, $3 million for equipment disposals in our U.S. snacks
business, and $2 million for plant closure-related costs in Australia. For the
year-to-date period, cost of goods sold also included charges of approximately
$15 million, attributable primarily to equipment disposals in our U.S. snacks
business.
Margin performance
Margin performance for the third quarter and year-to-date periods of 2004 versus
2003 was:
- ---------------------------------------------------------------------------------------
Change
vs. prior
Quarter 2004 2003 year (pts.)
- ---------------------------------------------------------------------------------------
Gross margin 46.1% 45.3% 0.8
- ---------------------------------------------------------------------------------------
SGA% (a) -27.4% -26.4% -1.0
- ---------------------------------------------------------------------------------------
Operating margin 18.7% 18.9% -0.2
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Year-to-date 2004 2003 Change
- ---------------------------------------------------------------------------------------
Gross margin 44.9% 44.4% 0.5
- ---------------------------------------------------------------------------------------
SGA% (a) -26.7% -26.5% -0.2
- ---------------------------------------------------------------------------------------
Operating margin 18.2% 17.9% 0.3
- ---------------------------------------------------------------------------------------
<FN>
(a) Selling, general, and administrative expense as a percentage of net sales.
</FN>
Year-over-year, our consolidated gross margin increased 80 basis points for the
quarter and 50 basis points year-to-date. Our strong sales growth continued to
produce significant operating leverage. This factor, combined with mix
improvements and productivity savings, offset the unfavorable impact of higher
commodity costs, as well as charges associated with our cost-reduction
initiatives. For the full year of 2004, we expect continued pressure from
commodity prices and our investment in cost-reduction initiatives to limit gross
margin expansion, resulting in only a modest increase versus the full-year 2003
level of 44.4%.
Interest expense
Interest expense for the year-to-date period was $230.5 million, down 14% from
the prior-period amount of $268.5 million. We currently expect total year 2004
interest expense of approximately $315 million, down from the total year 2003
amount of $371.4 million, due primarily to continuing pay-down of our debt
balances and lower interest rates on refinancings.
Other income (expense), net
Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, charitable donations, and gains on
asset sales. Other income (expense), net for the year-to-date period was a loss
of $9.8 million versus a gain of $2.2 million in the prior-year period. The
current-period amount includes a charge of approximately $8 million for a
contribution to the Kellogg's Corporate Citizenship Fund, a private trust
established for charitable giving. The prior-period amount includes a credit of
approximately $17 million related to favorable legal settlements; a charge of $8
million for a contribution to the Kellogg's Corporate Citizenship Fund; and a
charge of $6.5 million to recognize the impairment of a cost-basis investment in
an e-commerce business venture.
Income taxes
The consolidated effective income tax rate for the year-to-date period was 34.5%
versus 35.3% for the comparable prior-year period and 32.7% for the full year of
2003. (The 2003 rate included over 200 basis points of single-event benefits.)
In October 2004, the American Jobs Creation Act of 2004 (the "Act") was enacted.
This legislation implements a one-year reduced income tax rate on repatriation
of foreign earnings and a phased-in tax deduction related to profits from
domestic manufacturing activities. We are currently reviewing the impact of this
legislation on our Company. Uncertainties currently exist regarding
implementation and U.S. GAAP presentation of certain of the Act's provisions.
Without regard to the potential future impacts of the Act, we currently expect a
full-year 2004 effective income tax rate of 34-35%.
Liquidity and capital resources
Our principal source of liquidity is operating cash flow resulting from net
earnings, supplemented by borrowings for major acquisitions and other
significant transactions. This cash-generating capability is one of our
fundamental strengths and provides us with substantial financial flexibility in
meeting operating and investing needs.
Our measure of year-to-date 2004 cash flow (defined as net cash provided by
operating activities reduced by expenditures for property additions) was $859.6
million compared to $861.8 million in the prior-year period. We use this measure
of cash flow to focus management and investors on the amount of cash available
for debt repayment, dividend distributions, acquisition opportunities, and share
repurchases. Our cash flow metric is reconciled to GAAP-basis operating cash
flow as follows:
- -----------------------------------------------------------------------------------------------------
Year-to-date period ended Change
---------------------------------- versus
September 25, September 27, prior
(millions) 2004 2003 year
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities $1,029.1 $983.0
Additions to properties (169.5) (121.2)
- -----------------------------------------------------------------------------------------------------
Cash flow $859.6 $861.8 -0.3%
- -----------------------------------------------------------------------------------------------------
Our 2004 year-to-date cash flow was approximately even with the prior-year
amount, as the cash flow improvement from net earnings growth was offset by a
significant increase in benefit plan contributions and higher capital spending.
For the year ended September 25, 2004, average core working capital (inventory
and trade receivables less trade payables) as a percentage of net sales was
7.5%, compared with 8.2% for the year ended December 27, 2003. For the full year
of 2004, we expect modest improvement in our core working capital metric,
expenditures for property additions of about 3% of net sales, and cash flow of
$925 million to $1.0 billion.
In December 2003, our Board of Directors authorized management to repurchase up
to $300 million of Kellogg common stock during 2004. Under this authorization,
we paid $229.3 million to repurchase approximately 5.8 million shares during the
year-to-date period ended September 25, 2004.
In January 2004, we repaid $500 million of maturing seven-year Notes, replacing
these Notes with short-term debt. During the full year of 2004, we currently
intend to reduce our total outstanding debt by at least $300 million.
Citing lower debt levels and strong operating performance, both Standard &
Poor's (S&P) and Moody's Investor Services have recently raised their credit
ratings on our Company's senior unsecured debt. In August 2004, S&P upgraded its
rating from BBB to BBB+, and in October 2004, Moody's upgraded from Baa2 to
Baa1. Within these organizations' systems, these credit ratings generally
indicate medium-grade obligations, currently exhibiting adequate protection
parameters. Our investors should be aware that a security rating is not a
recommendation to buy, sell or hold securities, that it may be subject to
revision or withdrawal at any time by the assigning rating organization, and
that each rating should be evaluated independently of any other rating.
We believe that we will be able to meet our interest and principal repayment
obligations and maintain our debt covenants for the foreseeable future, while
still meeting our operational needs through our strong cash flow, our program of
issuing short-term debt, and maintaining credit facilities on a global basis.
Our significant long-term debt issues do not contain acceleration of maturity
clauses that are dependent on credit ratings. A change in the Company's credit
ratings could limit its 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 credit
facilities, which are in amounts sufficient to cover the outstanding short-term
debt balance and debt principal repayments through 2005.
Future outlook
Our long-term annual growth targets are low single-digit for internal net sales
and high single-digit for net earnings per share. In general, we expect 2004
results to be modestly above these targets due primarily to strong business
momentum and favorable foreign exchange movements.
We began 2004 with several important challenges, including expectations for
increased commodity prices, higher employee benefit costs, and a sales decline
for the cookie portion of our U.S. snacks business. As a result of various cost
containment initiatives, the enactment of Medicare Part D, and other factors, we
now believe our employee benefit costs will be approximately even with the prior
year. Despite continued sluggishness in the category, our cookie sales have
recently outperformed our expectations. However, we continue to expect sharply
increased commodity costs for the full year of 2004. In addition, we remain
committed to growing our brand-building investment at approximately twice the
rate of sales growth, and expect to meet that long-term target during 2004.
Lastly, we will continue to incur up-front costs related to cost-reduction
initiatives during the remainder of 2004 and into 2005.
Forward-looking statements
Our Management's Discussion and Analysis contain "forward-looking statements"
with projections concerning, among other things, our strategy, financial
principles, and plans; initiatives, improvements, and growth; sales, gross
margins, advertising, promotion, merchandising, brand-building expenditures,
operating profit, and earnings per share; innovation opportunities; exit plans
and costs related to efficiency initiatives; the impact of accounting changes;
our ability to meet interest and debt principal repayment obligations; future
common stock repurchases or debt reduction; effective income tax rate; cash flow
and core working capital improvements; capital expenditures; interest expense;
commodity and energy prices; and employee benefit plan costs and funding.
Forward-looking statements include predictions of future results or activities
and may contain the words "expect," "believe," "will," "will deliver,"
"anticipate," "project," "should," or words or phrases of similar meaning. Our
actual results or activities may differ materially from these predictions. In
particular, future results or activities could be affected by factors related to
the Keebler acquisition, such as the substantial amount of debt incurred to
finance the acquisition, which could, among other things, hinder our ability to
adjust rapidly to changing market conditions, make us more vulnerable in the
event of a downturn, and place us at a competitive disadvantage relative to
less-leveraged competitors. In addition, our future results could be affected by
a variety of other factors, including:
|X| the impact of competitive conditions;
|X| the effectiveness of pricing, advertising, and promotional programs;
|X| the success of innovation and new product introductions;
|X| the recoverability of the carrying value of goodwill and other intangibles;
|X| the success of productivity improvements and business transitions;
|X| commodity and energy prices, and labor costs;
|X| the availability of and interest rates on short-term financing;
|X| actual market performance of benefit plan trust
investments;
|X| the levels of spending on systems initiatives, properties, business
opportunities, integration of acquired businesses, and other general and
administrative costs;
|X| changes in consumer behavior and preferences;
|X| the effect of U.S. and foreign economic conditions on items such as interest
rates, statutory tax rates, currency conversion and availability;
|X| legal and regulatory factors; and,
|X| business disruption or other losses from war, terrorist acts, or political
unrest.
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
Refer to disclosures contained on pages 26-27 of the Company's 2003 Annual
Report.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's 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 the Company's management, including its Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure based on management's interpretation of the
definition of "disclosure controls and procedures," in Rules 13a-15(e) and
15d-15(e). In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable, rather than absolute,
assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of September 25, 2004, management carried out an evaluation under the
supervision and with the participation of the Company's Chief Executive Officer
and the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
at a reasonable level of assurance.
During the last fiscal quarter, except as indicated below, there have been no
changes in the Company's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. As has been previously
reported, the Company is in the process of rolling out its SAP information
technology system on a global basis and implementing a major initiative to
improve the organizational design and effectiveness of pan-European operations.
In connection with these activities, the Company transitioned a portion of its
European operations to the SAP information technology system during the last
fiscal quarter. Management does not, however, currently believe that this has
adversely affected the Company's internal control over financial reporting.
KELLOGG COMPANY
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(e) Issuer Purchases of Equity Securities
(millions, except per share data)
- ----------------------- --------------------- -------------------- --------------------- --------------------
(c) Total Number (d) Approximate
of Shares Dollar Value of
Purchased as Shares that May
Part of Publicly Yet Be
(a) Total Number Announced Purchased Under
of Shares (b) Average Price Plans or the Plans or
Period Purchsed Paid per Share Programs Programs
- ----------------------- --------------------- -------------------- --------------------- --------------------
Month #1: .6 $40.04 .6 $115.6
6/27/04-7/24/04
- ----------------------- --------------------- -------------------- --------------------- --------------------
Month #2: 1.0 39.83 1.0 77.0
7/25/04-8/21/04
- ----------------------- --------------------- -------------------- --------------------- --------------------
Month #3: .7 41.62 .7 70.7
8/22/04-9/25/04
- ----------------------- --------------------- -------------------- --------------------- --------------------
Total (1) 2.3 40.41 2.3
- ----------------------- --------------------- -------------------- --------------------- --------------------
<FN>
(1) Shares included in the table above were purchased as part of publicly
announced plans or programs, as follows:
a. Approximately 1.7 million shares were purchased in open-market
transactions under a program authorized by the Company's Board of
Directors to repurchase for general corporate purposes up to
$300 million in Kellogg common stock during 2004. This repurchase
program was publicly announced in a press release on December 18, 2003.
b. Approximately .6 million shares were purchased from employees and
directors in stock swap and similar transactions pursuant to various
shareholder-approved equity-based compensation plans described on pages
41-42 of the Company's 2003 Annual Report to Shareholders, filed as
exhibit 13.01 to the Company's 2003 Form 10-K.
</FN>
Item 5. Other Information.
As previously disclosed, as part of our regular compensation program, Kellogg
Company currently makes grants of stock options, restricted shares and
performance units to employees (including executive officers) and stock options
to non-employee directors in accordance with established programs described in
our proxy statement for the annual share owners meeting. The grants are made
pursuant to our 2003 Long-Term Incentive Plan and our 2000 Non-Employee Director
Stock Plan, copies of which are on file with the SEC. With this Form 10-Q, the
Company is filing copies of the form of individual award agreements typically
used in connection with such grants. Individual grants have been, and will
continue to be, reported on SEC Forms 3, 4 and 5 and, in the case of named
executive officers, in our proxy statement.
During the quarter covered by this report and prior to the filing of the form of
award agreements included herein, Kellogg Company granted stock options through
the accelerated ownership feature described below to the following named
executive officers:
On August 27, 2004, Carlos M. Gutierrez exercised approximately 420,000
non-qualified stock options containing an accelerated ownership feature (AOF)
and used approximately 365,000 shares of Kellogg Company stock owned to pay for
the exercise price and taxes owed. An option containing an AOF feature provides
the optionee with another option to purchase, at the then-current market price
and for the remaining term of the original option, that number of company shares
used to exercise the original options or pay taxes owed in connection with the
exercise of the options. Because his original options contained an AOF feature,
Mr. Gutierrez received non-qualified stock options for approximately 365,000
shares at $41.96, the then-current market price of Kellogg Company stock, and
for the remaining terms of the original options, but otherwise with the same
provisions as the original options.
On September 3, 2004, Jeffrey W. Montie exercised approximately 49,000
non-qualified stock options containing an AOF feature, using approximately
40,000 shares of Kellogg Company stock owned to pay for the exercise price and
taxes owed. He received non-qualified options for approximately 40,000 shares at
$42.80, the then-current market price of Kellogg Company stock, and for the
remaining terms of the original options, but otherwise with the same provisions
as the original options.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Separation Agreement between the Company and King T. Pouw
10.2 Amendment of 2003 Employment Agreement between the Company and
Alan Harris
10.3 Retention Agreement between the Company and David Mackay
10.4 Form of Non-Qualified Option Agreement for Senior Executives under
2003 Long-Term Incentive Plan.
10.5 Form of Restricted Stock Grant Award under 2003 Long-Term Incentive
Plan.
10.6 Form of Non-Qualified Option Agreement for Non-Employee Directors
under 2000 Non-Employee Director Stock Plan
31.1 Rule 13a-14(e)/15d-14(a) Certification from Carlos M. Gutierrez
31.2 Rule 13a-14(e)/15d-14(a) Certification from Jeffrey M. Boromisa
32.1 Section 1350 Certification from Carlos M. Gutierrez
32.2 Section 1350 Certification from Jeffrey M. Boromisa
(b) Reports on Form 8-K:
The Company furnished a Report on Form 8-K dated July 26, 2004 for its
second quarter 2004 results, in which it furnished a press release
announcing those results under item 12 of such Report.
The Company furnished a Report on Form 8-K dated October 25, 2004 for
its third quarter 2004 results, in which it furnished a press release
announcing those results under item 2.02 of such Report.
KELLOGG COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KELLOGG COMPANY
/s/ J.M. Boromisa
-------------------------------
J.M. Boromisa
Principal Financial Officer;
Senior Vice President - Chief Financial Officer
/s/ A.R. Andrews
-------------------------------
A.R. Andrews
Principal Accounting Officer;
Vice President - Corporate Controller
Date: November 1, 2004
KELLOGG COMPANY
EXHIBIT INDEX
Electronic (E)
Paper (P)
Incorp. By
Exhibit No. Description Ref. (IBRF)
10.1 Separation Agreement between the Company and
King T. Pouw E
10.2 Amendment of 2003 Employment Agreement between
the Company and Alan Harris E
10.3 Retention Agreement between the Company and David Mackay E
10.4 Form of Non-Qualified Option Agreement for Senior Executives
under 2003 Long-Term Incentive Plan. E
10.5 Form of Restricted Stock Grant Award under 2003 Long-Term
Incentive Plan E
10.6 Form of Non-Qualified Option Agreement for Non-Employee
Directors under 2000 Non-Employee Director Stock Plan E
31.1 Rule 13a-14(e)/15d-14(a) Certification from
Carlos M. Gutierrez E
31.2 Rule 13a-14(e)/15d-14(a) Certification from
Jeffrey M. Boromisa E
32.1 Section 1350 Certification from Carlos M. Gutierrez E
32.2 Section 1350 Certification from Jeffrey M. Boromisa E