KELLANOVA - Quarter Report: 2021 July (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended July 03, 2021
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
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | |||||||||
| Common Stock, $.25 par value per share | K | New York Stock Exchange | |||||||||
| 0.800% Senior Notes due 2022 | K 22A | New York Stock Exchange | |||||||||
| 1.000% Senior Notes due 2024 | K 24 | New York Stock Exchange | |||||||||
| 1.250% Senior Notes due 2025 | K 25 | New York Stock Exchange | |||||||||
| 0.500% Senior Notes due 2029 | K 29 | New York Stock Exchange | |||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Common Stock outstanding as of July 3, 2021 — 340,878,954 shares
KELLOGG COMPANY
INDEX
| Page | ||||||||
| Financial Statements | ||||||||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
| Quantitative and Qualitative Disclosures about Market Risk | ||||||||
| Controls and Procedures | ||||||||
| Risk Factors | ||||||||
| Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||
| Exhibits | ||||||||
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
| July 3, 2021 (unaudited) | January 2, 2021 | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 395 | $ | 435 | ||||
| Accounts receivable, net | 1,659 | 1,537 | ||||||
| Inventories | 1,365 | 1,284 | ||||||
| Other current assets | 328 | 226 | ||||||
| Total current assets | 3,747 | 3,482 | ||||||
| Property, net | 3,666 | 3,713 | ||||||
| Operating lease right-of-use assets | 661 | 658 | ||||||
| Goodwill | 5,783 | 5,799 | ||||||
| Other intangibles, net | 2,454 | 2,491 | ||||||
| Investments in unconsolidated entities | 394 | 391 | ||||||
| Other assets | 1,508 | 1,462 | ||||||
| Total assets | $ | 18,213 | $ | 17,996 | ||||
| Current liabilities | ||||||||
| Current maturities of long-term debt | $ | 17 | $ | 627 | ||||
| Notes payable | 551 | 102 | ||||||
| Accounts payable | 2,491 | 2,471 | ||||||
| Current operating lease liabilities | 127 | 117 | ||||||
| Accrued advertising and promotion | 802 | 776 | ||||||
| Other current liabilities | 958 | 1,145 | ||||||
| Total current liabilities | 4,946 | 5,238 | ||||||
| Long-term debt | 7,029 | 6,746 | ||||||
| Operating lease liabilities | 517 | 520 | ||||||
| Deferred income taxes | 647 | 562 | ||||||
| Pension liability | 688 | 769 | ||||||
| Other liabilities | 506 | 525 | ||||||
| Commitments and contingencies | ||||||||
| Equity | ||||||||
Common stock, $.25 par value | 105 | 105 | ||||||
| Capital in excess of par value | 973 | 972 | ||||||
| Retained earnings | 8,688 | 8,326 | ||||||
| Treasury stock, at cost | (4,741) | (4,559) | ||||||
| Accumulated other comprehensive income (loss) | (1,663) | (1,732) | ||||||
| Total Kellogg Company equity | 3,362 | 3,112 | ||||||
| Noncontrolling interests | 518 | 524 | ||||||
| Total equity | 3,880 | 3,636 | ||||||
| Total liabilities and equity | $ | 18,213 | $ | 17,996 | ||||
See accompanying Notes to Consolidated Financial Statements.
3
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
| Quarter ended | Year-to-date period ended | ||||||||||||||||
| (unaudited) | July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | |||||||||||||
| Net sales | $ | 3,555 | $ | 3,465 | $ | 7,139 | $ | 6,877 | |||||||||
| Cost of goods sold | 2,331 | 2,268 | 4,749 | 4,536 | |||||||||||||
| Selling, general and administrative expense | 720 | 691 | 1,414 | 1,375 | |||||||||||||
| Operating profit | 504 | 506 | 976 | 966 | |||||||||||||
| Interest expense | 58 | 69 | 117 | 133 | |||||||||||||
| Other income (expense), net | 86 | 30 | 155 | 79 | |||||||||||||
| Income before income taxes | 532 | 467 | 1,014 | 912 | |||||||||||||
| Income taxes | 144 | 109 | 253 | 203 | |||||||||||||
| Earnings (loss) from unconsolidated entities | (3) | (4) | (5) | (5) | |||||||||||||
| Net income | 385 | 354 | 756 | 704 | |||||||||||||
| Net income attributable to noncontrolling interests | 5 | 3 | 8 | 6 | |||||||||||||
| Net income attributable to Kellogg Company | $ | 380 | $ | 351 | $ | 748 | $ | 698 | |||||||||
| Per share amounts: | |||||||||||||||||
| Basic earnings | $ | 1.12 | $ | 1.02 | $ | 2.19 | $ | 2.04 | |||||||||
| Diluted earnings | $ | 1.11 | $ | 1.02 | $ | 2.18 | $ | 2.02 | |||||||||
| Average shares outstanding: | |||||||||||||||||
| Basic | 341 | 343 | 341 | 342 | |||||||||||||
| Diluted | 343 | 345 | 343 | 345 | |||||||||||||
| Actual shares outstanding at period end | 341 | 343 | |||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
4
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(millions)
| Quarter ended | Year-to-date period ended | ||||||||||||||||||||||
| July 3, 2021 | July 3, 2021 | ||||||||||||||||||||||
| (unaudited) | Pre-tax amount | Tax (expense) benefit | After-tax amount | Pre-tax amount | Tax (expense) benefit | After-tax amount | |||||||||||||||||
| Net income | $ | 385 | $ | 756 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments: | |||||||||||||||||||||||
| Foreign currency translation adjustments during period | $ | 8 | $ | 11 | 19 | $ | 41 | $ | (23) | 18 | |||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Unrealized gain (loss) | (39) | 11 | (28) | 39 | (10) | 29 | |||||||||||||||||
| Reclassification to net income | 10 | (3) | 7 | 15 | (4) | 11 | |||||||||||||||||
| Postretirement and postemployment benefits: | |||||||||||||||||||||||
| Reclassification to net income: | |||||||||||||||||||||||
| Net experience (gain) loss | (1) | 1 | — | (2) | 1 | (1) | |||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Unrealized gain (loss) | 1 | — | 1 | (1) | — | (1) | |||||||||||||||||
Other comprehensive income (loss) | $ | (21) | $ | 20 | $ | (1) | $ | 92 | $ | (36) | $ | 56 | |||||||||||
| Comprehensive income | $ | 384 | $ | 812 | |||||||||||||||||||
| Net Income attributable to noncontrolling interests | 5 | 8 | |||||||||||||||||||||
| Other comprehensive income (loss) attributable to noncontrolling interests | (3) | (13) | |||||||||||||||||||||
| Comprehensive income attributable to Kellogg Company | $ | 382 | $ | 817 | |||||||||||||||||||
| Quarter ended | Year-to-date period ended | ||||||||||||||||||||||
| June 27, 2020 | June 27, 2020 | ||||||||||||||||||||||
| (unaudited) | Pre-tax amount | Tax (expense) benefit | After-tax amount | Pre-tax amount | Tax (expense) benefit | After-tax amount | |||||||||||||||||
| Net income | $ | 354 | $ | 704 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments: | |||||||||||||||||||||||
| Foreign currency translation adjustments during period | $ | (20) | $ | 10 | (10) | $ | (261) | $ | (10) | (271) | |||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges | 12 | (3) | 9 | (53) | 14 | (39) | |||||||||||||||||
| Reclassification to net income | 5 | (2) | 3 | 7 | (2) | 5 | |||||||||||||||||
| Postretirement and postemployment benefits: | |||||||||||||||||||||||
| Reclassification to net income: | |||||||||||||||||||||||
| Net experience (gain) loss | (1) | 1 | — | (2) | 1 | (1) | |||||||||||||||||
| Prior service cost | (1) | — | (1) | (1) | — | (1) | |||||||||||||||||
Available-for-sale securities: | |||||||||||||||||||||||
Unrealized gain (loss) | 5 | — | 5 | 2 | — | 2 | |||||||||||||||||
| Other comprehensive income (loss) | $ | — | $ | 6 | $ | 6 | $ | (308) | $ | 3 | $ | (305) | |||||||||||
| Comprehensive income | $ | 360 | $ | 399 | |||||||||||||||||||
| Net Income attributable to noncontrolling interests | 3 | 6 | |||||||||||||||||||||
| Other comprehensive income (loss) attributable to noncontrolling interests | (4) | (36) | |||||||||||||||||||||
| Comprehensive income attributable to Kellogg Company | $ | 361 | $ | 429 | |||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
| Quarter ended July 3, 2021 | ||||||||||||||||||||||||||||||||
Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non-controlling interests | Total equity | |||||||||||||||||||||||||
| (unaudited) | shares | amount | shares | amount | ||||||||||||||||||||||||||||
| Balance, April 3, 2021 | 421 | $ | 105 | $ | 954 | $ | 8,506 | 81 | $ | (4,762) | $ | (1,665) | $ | 3,138 | $ | 517 | $ | 3,655 | ||||||||||||||
| Net income | 380 | 380 | 5 | 385 | ||||||||||||||||||||||||||||
Dividends declared ($0.58 per share) | (197) | (197) | (197) | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | (1) | (1) | |||||||||||||||||||||||||||||
| Other comprehensive income | 2 | 2 | (3) | (1) | ||||||||||||||||||||||||||||
| Stock compensation | 19 | 19 | 19 | |||||||||||||||||||||||||||||
| Stock options exercised and other | — | (1) | (1) | 21 | 20 | 20 | ||||||||||||||||||||||||||
| Balance, July 3, 2021 | 421 | $ | 105 | $ | 973 | $ | 8,688 | 80 | $ | (4,741) | $ | (1,663) | $ | 3,362 | $ | 518 | $ | 3,880 | ||||||||||||||
| Year-to-date period ended July 3, 2021 | ||||||||||||||||||||||||||||||||
Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non-controlling interests | Total equity | |||||||||||||||||||||||||
| (unaudited) | shares | amount | shares | amount | ||||||||||||||||||||||||||||
| Balance, January 2, 2021 | 421 | $ | 105 | $ | 972 | $ | 8,326 | 77 | $ | (4,559) | $ | (1,732) | $ | 3,112 | $ | 524 | $ | 3,636 | ||||||||||||||
| Common stock repurchases | 4 | (240) | (240) | (240) | ||||||||||||||||||||||||||||
| Net income | 748 | 748 | 8 | 756 | ||||||||||||||||||||||||||||
Dividends declared ($1.15 per share) | (392) | (392) | (392) | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | (1) | (1) | |||||||||||||||||||||||||||||
| Other comprehensive income | 69 | 69 | (13) | 56 | ||||||||||||||||||||||||||||
| Stock compensation | 39 | 39 | 39 | |||||||||||||||||||||||||||||
| Stock options exercised and other | (38) | 6 | (1) | 58 | 26 | 26 | ||||||||||||||||||||||||||
| Balance, July 3, 2021 | 421 | $ | 105 | $ | 973 | $ | 8,688 | 80 | $ | (4,741) | $ | (1,663) | $ | 3,362 | $ | 518 | $ | 3,880 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
6
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY (cont.)
(millions)
| Quarter ended June 27, 2020 | ||||||||||||||||||||||||||||||||
Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non-controlling interests | Total equity | |||||||||||||||||||||||||
| (unaudited) | shares | amount | shares | amount | ||||||||||||||||||||||||||||
| Balance, March 28, 2020 | 421 | $ | 105 | $ | 911 | $ | 8,010 | 78 | $ | (4,625) | $ | (1,727) | $ | 2,674 | $ | 538 | $ | 3,212 | ||||||||||||||
| Net income | 351 | 351 | 3 | 354 | ||||||||||||||||||||||||||||
Dividends declared ($0.57 per share) | (195) | (195) | (195) | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | (1) | (1) | |||||||||||||||||||||||||||||
| Other comprehensive income | 10 | 10 | (4) | 6 | ||||||||||||||||||||||||||||
| Stock compensation | 18 | 18 | 18 | |||||||||||||||||||||||||||||
| Stock options exercised and other | — | — | — | 12 | 12 | 12 | ||||||||||||||||||||||||||
| Balance, June 27, 2020 | 421 | $ | 105 | $ | 929 | $ | 8,166 | 78 | $ | (4,613) | $ | (1,717) | $ | 2,870 | $ | 536 | $ | 3,406 | ||||||||||||||
| Year-to-date period ended June 27, 2020 | ||||||||||||||||||||||||||||||||
Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non-controlling interests | Total equity | |||||||||||||||||||||||||
| (unaudited) | shares | amount | shares | amount | ||||||||||||||||||||||||||||
| Balance, December 28, 2019 | 421 | $ | 105 | $ | 921 | $ | 7,859 | 79 | $ | (4,690) | $ | (1,448) | $ | 2,747 | $ | 567 | $ | 3,314 | ||||||||||||||
| Net income | 698 | 698 | 6 | 704 | ||||||||||||||||||||||||||||
Dividends declared ($1.14 per share) | (390) | (390) | (390) | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | (1) | (1) | |||||||||||||||||||||||||||||
| Other comprehensive income | (269) | (269) | (36) | (305) | ||||||||||||||||||||||||||||
| Stock compensation | 37 | 37 | 37 | |||||||||||||||||||||||||||||
| Stock options exercised and other | (29) | (1) | (1) | 77 | 47 | 47 | ||||||||||||||||||||||||||
| Balance, June 27, 2020 | 421 | $ | 105 | $ | 929 | $ | 8,166 | 78 | $ | (4,613) | $ | (1,717) | $ | 2,870 | $ | 536 | $ | 3,406 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
7
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
| Year-to-date period ended | ||||||||
| (unaudited) | July 3, 2021 | June 27, 2020 | ||||||
| Operating activities | ||||||||
| Net income | $ | 756 | $ | 704 | ||||
| Adjustments to reconcile net income to operating cash flows: | ||||||||
| Depreciation and amortization | 232 | 234 | ||||||
| Postretirement benefit plan expense (benefit) | (137) | (58) | ||||||
| Deferred income taxes | 50 | 23 | ||||||
| Stock compensation | 39 | 37 | ||||||
| Other | 3 | (17) | ||||||
| Postretirement benefit plan contributions | (10) | (12) | ||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Trade receivables | (138) | (165) | ||||||
| Inventories | (89) | (33) | ||||||
| Accounts payable | 139 | 105 | ||||||
| All other current assets and liabilities | (158) | 153 | ||||||
| Net cash provided by (used in) operating activities | 687 | 971 | ||||||
| Investing activities | ||||||||
| Additions to properties | (301) | (218) | ||||||
| Issuance of notes receivable | (29) | (19) | ||||||
| Repayments from notes receivable | 28 | — | ||||||
| Purchase of marketable securities | — | (200) | ||||||
| Investments in unconsolidated entities | (10) | — | ||||||
| Acquisition of cost method investments | (1) | (4) | ||||||
| Purchases of available for sale securities | (5) | (70) | ||||||
| Sales of available for sale securities | 6 | 7 | ||||||
| Other | (18) | (11) | ||||||
| Net cash provided by (used in) investing activities | (330) | (515) | ||||||
| Financing activities | ||||||||
| Net issuances (reductions) of notes payable | 450 | 13 | ||||||
| Issuances of long-term debt | 361 | 554 | ||||||
| Reductions of long-term debt | (616) | (40) | ||||||
| Net issuances of common stock | 38 | 60 | ||||||
| Common stock repurchases | (240) | — | ||||||
| Cash dividends | (392) | (390) | ||||||
| Collateral received on derivative instruments | — | 38 | ||||||
| Other | (2) | (1) | ||||||
| Net cash provided by (used in) financing activities | (401) | 234 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 4 | (40) | ||||||
| Increase (decrease) in cash and cash equivalents | (40) | 650 | ||||||
| Cash and cash equivalents at beginning of period | 435 | 397 | ||||||
| Cash and cash equivalents at end of period | $ | 395 | $ | 1,047 | ||||
| Supplemental cash flow disclosures of non-cash investing activities: | ||||||||
| Additions to properties included in accounts payable | $ | 79 | $ | 78 | ||||
See accompanying Notes to Consolidated Financial Statements.
8
Notes to Consolidated Financial Statements
for the quarter ended July 3, 2021 (unaudited)
Note 1 Accounting policies
Basis of presentation
The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects all adjustments, all of which are of a normal and recurring nature, that management believes are necessary for a fair statement of the results of operations, comprehensive income, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying footnotes within the Company’s 2020 Annual Report on Form 10-K.
The condensed balance sheet information at January 2, 2021 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarter ended July 3, 2021 are not necessarily indicative of the results to be expected for other interim periods or the full year.
Accounts payable
The Company has agreements with third parties to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. The Company has no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers. The payment of these obligations by the Company is included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of July 3, 2021, $937 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $672 million of those payment obligations to participating financial institutions. As of January 2, 2021, $909 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $670 million of those payment obligations to participating financial institutions.
Note 2 Sale of accounts receivable
The Company has a program in which a discrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).
The Company has two Receivable Sales Agreements (Monetization Programs) described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. The Monetization Programs sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold at any time is $1,033 million.
The Company has no retained interest in the receivables sold, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of July 3, 2021 and January 2, 2021 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.
9
Accounts receivable sold of $793 million and $783 million remained outstanding under these arrangements as of July 3, 2021 and January 2, 2021, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on sale of receivables was $2 million and $4 million for the quarter and year-to-date periods ended July 3, 2021, respectively and was $3 million and $8 million for the quarter and year-to-date periods ended June 27, 2020, respectively. The recorded loss is included in Other income and expense, net (OIE).
Other programs
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable invoices of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. Accounts receivable sold of $33 million and $55 million remained outstanding under these programs as of July 3, 2021 and January 2, 2021, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on the sale of these receivables is included in OIE and is not material.
Note 3 Equity
Earnings per share
Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, restricted stock units, and to a lesser extent, certain contingently issuable performance shares. There were 7 million and 11 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended July 3, 2021. There were 8 million and 7 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended June 27, 2020. Please refer to the Consolidated Statement of Income for basic and diluted earnings per share for the quarter and year-to-date periods ended July 3, 2021 and June 27, 2020.
Share repurchases
In February 2020, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock through December 2022. During the quarter ended July 3, 2021, the Company did not repurchase any shares of common stock. During the year-to-date period ended July 3, 2021, the Company repurchased approximately 4 million shares of common stock for a total of $240 million. During the quarter and year-to-date periods ended June 27, 2020, the Company did not repurchase any shares of common stock.
Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges, adjustments for net experience losses and prior service cost related to employee benefit plans, and adjustments for unrealized gains and losses on available-for-sale securities, net of related tax effects.
10
Reclassifications out of Accumulated other comprehensive income (AOCI) for the quarter and year-to-date periods ended July 3, 2021 and June 27, 2020, consisted of the following:
| (millions) | |||||||||||
| Details about AOCI components | Amount reclassified from AOCI | Line item impacted within Income Statement | |||||||||
| Quarter ended July 3, 2021 | Year-to-date period ended July 3, 2021 | ||||||||||
| (Gains) losses on cash flow hedges: | |||||||||||
| Interest rate contracts (a) | $ | 10 | $ | 15 | Interest expense | ||||||
| $ | 10 | $ | 15 | Total before tax | |||||||
| (3) | (4) | Tax expense (benefit) | |||||||||
| $ | 7 | $ | 11 | Net of tax | |||||||
| Amortization of postretirement and postemployment benefits: | |||||||||||
| Net experience (gain) loss (b) | $ | (1) | $ | (2) | OIE | ||||||
| $ | (1) | $ | (2) | Total before tax | |||||||
| 1 | 1 | Tax expense (benefit) | |||||||||
| $ | — | $ | (1) | Net of tax | |||||||
| Total reclassifications | $ | 7 | $ | 10 | Net of tax | ||||||
| (millions) | |||||||||||
| Details about AOCI components | Amount reclassified from AOCI | Line item impacted within Income Statement | |||||||||
| Quarter ended June 27, 2020 | Year-to-date period ended June 27, 2020 | ||||||||||
| (Gains) losses on cash flow hedges: | |||||||||||
| Interest rate contracts (a) | $ | 5 | $ | 7 | Interest expense | ||||||
| $ | 5 | $ | 7 | Total before tax | |||||||
| (2) | (2) | Tax expense (benefit) | |||||||||
| $ | 3 | $ | 5 | Net of tax | |||||||
| Amortization of postretirement and postemployment benefits: | |||||||||||
| Net experience loss (b) | $ | (1) | $ | (2) | OIE | ||||||
| Prior service cost (b) | (1) | (1) | OIE | ||||||||
| $ | (2) | $ | (3) | Total before tax | |||||||
| 1 | 1 | Tax expense (benefit) | |||||||||
| $ | (1) | $ | (2) | Net of tax | |||||||
| Total reclassifications | $ | 2 | $ | 3 | Net of tax | ||||||
(a) See Derivative instruments and fair value measurements note
(b) See Employee benefits note
11
Accumulated other comprehensive income (loss), net of tax, as of July 3, 2021 and January 2, 2021 consisted of the following:
| (millions) | July 3, 2021 | January 2, 2021 | ||||||
| Foreign currency translation adjustments | $ | (1,637) | $ | (1,668) | ||||
| Cash flow hedges — unrealized net gain (loss) | (17) | (57) | ||||||
| Postretirement and postemployment benefits: | ||||||||
| Net experience gain (loss) | 1 | 2 | ||||||
| Prior service credit (cost) | (12) | (12) | ||||||
| Available-for-sale securities unrealized net gain (loss) | 2 | 3 | ||||||
| Total accumulated other comprehensive income (loss) | $ | (1,663) | $ | (1,732) | ||||
Note 4 Notes payable and long-term debt
The following table presents the components of notes payable at July 3, 2021 and January 2, 2021:
| July 3, 2021 | January 2, 2021 | ||||||||||||||||
| (millions) | Principal amount | Effective interest rate | Principal amount | Effective interest rate | |||||||||||||
| U.S. commercial paper | $ | 425 | 0.15 | % | $ | 25 | 0.20 | % | |||||||||
| Bank borrowings | 126 | 77 | |||||||||||||||
| Total | $ | 551 | $ | 102 | |||||||||||||
In May of 2021, the Company issued €300 million of eight-year 0.50% Euro Notes due 2029, resulting in net proceeds of €298 million after discount and underwriting commissions. The 2029 Euro Notes were issued as a sustainability bond, and thus an amount equal to the net proceeds will be used to finance or refinance, in whole or in part, one or more eligible environmental or social projects described in the Company's Sustainability Bond Framework. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision.
Additionally, in May of 2021, the Company repaid the €500 million, seven-year 1.75% Euro Notes due 2021, upon maturity.
In May of 2020, the Company issued $500 million of ten-year 2.10% Notes due 2030, resulting in net proceeds after discount and underwriting commissions of $496 million. The proceeds from these notes were used for general corporate purposes, including the payment of offering related fees and expenses, repayment of a portion of the $600 million 4.00% Notes when they matured on December 15, 2020, and repayment of a portion of commercial paper borrowings. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision.
Note 5 Employee benefits
The Company sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described within the footnotes to the Consolidated Financial Statements included in the Company’s 2020 Annual Report on Form 10-K. Components of Company benefit plan (income) expense for the periods presented are included in the tables below. Excluding the service cost component, these amounts are included within Other income (expense) in the Consolidated Statement of Income.
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Pension
| Quarter ended | Year-to-date period ended | ||||||||||||||||
| (millions) | July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | |||||||||||||
| Service cost | $ | 9 | $ | 9 | $ | 18 | $ | 18 | |||||||||
| Interest cost | 25 | 33 | 50 | 68 | |||||||||||||
| Expected return on plan assets | (77) | (85) | (155) | (170) | |||||||||||||
| Amortization of unrecognized prior service cost | 2 | 2 | 4 | 4 | |||||||||||||
| Recognized net (gain) loss | (11) | 43 | (20) | 57 | |||||||||||||
| Net periodic benefit cost | $ | (52) | $ | 2 | $ | (103) | $ | (23) | |||||||||
| Curtailment (gain) loss | — | (7) | — | (7) | |||||||||||||
| Total pension (income) expense | $ | (52) | $ | (5) | $ | (103) | $ | (30) | |||||||||
Other nonpension postretirement
| Quarter ended | Year-to-date period ended | ||||||||||||||||
| (millions) | July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | |||||||||||||
| Service cost | $ | 3 | $ | 4 | $ | 6 | $ | 7 | |||||||||
| Interest cost | 5 | 8 | 10 | 16 | |||||||||||||
| Expected return on plan assets | (23) | (23) | (46) | (46) | |||||||||||||
| Amortization of unrecognized prior service cost | (2) | (3) | (4) | (5) | |||||||||||||
| Total postretirement benefit (income) expense | $ | (17) | $ | (14) | $ | (34) | $ | (28) | |||||||||
Postemployment
| Quarter ended | Year-to-date period ended | ||||||||||||||||
| (millions) | July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | |||||||||||||
| Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | |||||||||
| Recognized net (gain) loss | (1) | (1) | (2) | (2) | |||||||||||||
| Total postemployment benefit expense | $ | — | $ | — | $ | — | $ | — | |||||||||
For the quarter and year-to-date periods ended July 3, 2021, the Company recognized a gain of $11 million and a gain of $20 million, respectively, related to the remeasurement of certain U.S. pension plans. For the quarter and year-to-date periods ended June 27, 2020, the Company recognized a gain of $6 million and a loss of $8 million, respectively, related to the remeasurement of a U.S. pension plan. These remeasurements were each the result of distributions that exceeded or are expected to exceed service and interest costs resulting in settlement accounting for that particular plan. The amount of the remeasurements recognized were due primarily to changes in the discount rate relative to the previous measurements. For the current quarter remeasurement, the gain was driven by an increase in the discount rate from the prior year-end, partially offset by lower than expected asset returns.
During the second quarter of 2020, the Company recognized a curtailment gain of $7 million, as certain U.S. pension plan benefits were frozen for a portion of the population. The Company remeasured the benefit obligation for the impacted pension plan, resulting in a mark-to-market loss of $49 million. The loss was due primarily to a lower discount rate partially offset by plan asset returns in excess of the expected rate of return.
13
Company contributions to employee benefit plans are summarized as follows:
| (millions) | Pension | Nonpension postretirement | Total | ||||||||
| Quarter ended: | |||||||||||
| July 3, 2021 | $ | 1 | $ | 7 | $ | 8 | |||||
| June 27, 2020 | $ | — | $ | 6 | $ | 6 | |||||
| Year-to-date period ended: | |||||||||||
| July 3, 2021 | $ | 2 | $ | 8 | $ | 10 | |||||
| June 27, 2020 | $ | 3 | $ | 9 | $ | 12 | |||||
| Full year: | |||||||||||
| Fiscal year 2021 (projected) | $ | 6 | $ | 19 | $ | 25 | |||||
| Fiscal year 2020 (actual) | $ | 8 | $ | 24 | $ | 32 | |||||
Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.
Multi-employer pension plan exit liability
During the second quarter of 2020, the Company adjusted the estimated withdrawal liability associated with a plan withdrawn from during the third quarter of 2019. The adjustment resulted in a gain of $5 million during the second quarter and resulted from a July 2020 agreement with the plan under which the Company paid $7 million in full settlement of the withdrawal liability.
Note 6 Income taxes
The consolidated effective tax rate for the quarters ended July 3, 2021 and June 27, 2020 was 27% and 23%, respectively. The consolidated effective tax rate for the year-do-date periods ended July 3, 2021 and June 27, 2020 was 25% and 22%, respectively. The effective tax rate for the quarter and year-to-date periods ended July 3, 2021, were unfavorably impacted by tax legislation in the United Kingdom (UK). During the second quarter of 2021, the Company recorded tax expense of $23 million as a result of tax legislation enacted in the UK in June 2021, which increased the statutory UK tax rate from 19 percent to 25 percent for tax periods after April 1, 2023. The Company revalued its net deferred tax balances related to the UK business to reflect the increased tax rate.
As of July 3, 2021, the Company classified $15 million of unrecognized tax benefits as a net current tax liability. Management's estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability expected to be settled within one year, offset by approximately $3 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.
The Company’s total gross unrecognized tax benefits as of July 3, 2021 was $62 million. Of this balance, $53 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
The accrual balance for tax-related interest was approximately $14 million at July 3, 2021.
Note 7 Derivative instruments and fair value measurements
The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative and nonderivative financial instruments and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.
The Company designates derivatives and nonderivative hedging instruments as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.
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Derivative instruments are classified on the Consolidated Balance Sheet based on the contractual maturity of the instrument or the timing of the underlying cash flows of the instrument for derivatives with contractual maturities beyond one year. Any collateral associated with derivative instruments is classified as other assets or other current liabilities on the Consolidated Balance Sheet depending on whether the counterparty collateral is in an asset or liability position. Margin deposits related to exchange-traded commodities are recorded in accounts receivable, net on the Consolidated Balance Sheet. On the Consolidated Statement of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item. Cash flows associated with collateral and margin deposits on exchange-traded commodities are classified as investing cash flows when the collateral account is in an asset position and as financing cash flows when the collateral account is in a liability position.
Total notional amounts of the Company’s derivative instruments as of July 3, 2021 and January 2, 2021 were as follows:
| (millions) | July 3, 2021 | January 2, 2021 | ||||||
| Foreign currency exchange contracts | $ | 3,104 | $ | 2,856 | ||||
| Cross-currency contracts | 1,390 | 1,411 | ||||||
| Interest rate contracts | 2,799 | 2,632 | ||||||
| Commodity contracts | 717 | 314 | ||||||
| Total | $ | 8,010 | $ | 7,213 | ||||
Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at July 3, 2021 and January 2, 2021, measured on a recurring basis.
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps, cross-currency swaps and over-the-counter commodity and currency contracts.
The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of July 3, 2021 or January 2, 2021.
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The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of July 3, 2021 and January 2, 2021:
Derivatives designated as hedging instruments
| July 3, 2021 | January 2, 2021 | ||||||||||||||||||||||
| (millions) | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cross-currency contracts: | |||||||||||||||||||||||
| Other current assets | $ | — | $ | 30 | $ | 30 | $ | — | $ | 14 | $ | 14 | |||||||||||
| Other assets | — | 10 | 10 | — | 16 | 16 | |||||||||||||||||
| Interest rate contracts(a): | |||||||||||||||||||||||
| Other current assets | — | 47 | 47 | — | — | — | |||||||||||||||||
| Other assets | — | 50 | 50 | — | 60 | 60 | |||||||||||||||||
| Total assets | $ | — | $ | 137 | $ | 137 | $ | — | $ | 90 | $ | 90 | |||||||||||
| Liabilities: | |||||||||||||||||||||||
| Cross-currency contracts: | |||||||||||||||||||||||
| Other current liabilities | $ | — | $ | — | $ | — | $ | — | $ | (13) | $ | (13) | |||||||||||
| Other Liabilities | — | (18) | (18) | — | (21) | (21) | |||||||||||||||||
| Interest rate contracts: | |||||||||||||||||||||||
| Other current liabilities | — | — | — | — | (3) | (3) | |||||||||||||||||
| Other liabilities | — | (1) | (1) | — | — | — | |||||||||||||||||
| Total liabilities | $ | — | $ | (19) | $ | (19) | $ | — | $ | (37) | $ | (37) | |||||||||||
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.3 billion as of July 3, 2021 and $0.8 billion as of January 2, 2021.
Derivatives not designated as hedging instruments
| July 3, 2021 | January 2, 2021 | ||||||||||||||||||||||
| (millions) | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Foreign currency exchange contracts: | |||||||||||||||||||||||
| Other current assets | $ | — | $ | 30 | $ | 30 | $ | — | $ | 48 | $ | 48 | |||||||||||
| Other assets | — | 2 | 2 | — | — | — | |||||||||||||||||
| Interest rate contracts: | |||||||||||||||||||||||
| Other current assets | — | 4 | 4 | — | 4 | 4 | |||||||||||||||||
| Other assets | — | 4 | 4 | — | 13 | 13 | |||||||||||||||||
| Commodity contracts: | |||||||||||||||||||||||
| Other current assets | 24 | — | 24 | 9 | — | 9 | |||||||||||||||||
| Total assets | $ | 24 | $ | 40 | $ | 64 | $ | 9 | $ | 65 | $ | 74 | |||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency exchange contracts: | |||||||||||||||||||||||
| Other current liabilities | $ | — | $ | (70) | $ | (70) | $ | — | $ | (73) | $ | (73) | |||||||||||
| Other liabilities | — | (3) | (3) | — | (4) | (4) | |||||||||||||||||
| Interest rate contracts: | |||||||||||||||||||||||
| Other current liabilities | — | (6) | (6) | — | (6) | (6) | |||||||||||||||||
| Other liabilities | — | (13) | (13) | — | (22) | (22) | |||||||||||||||||
| Commodity contracts: | |||||||||||||||||||||||
| Other current liabilities | (11) | — | (11) | (1) | — | (1) | |||||||||||||||||
| Total liabilities | $ | (11) | $ | (92) | $ | (103) | $ | (1) | $ | (105) | $ | (106) | |||||||||||
The Company has designated its outstanding foreign currency denominated debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries’ foreign currency denominated net assets. The carrying
16
value of this debt, including current and long-term, was approximately $2.5 billion as of July 3, 2021 and $2.8 billion as of January 2, 2021.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of July 3, 2021 and January 2, 2021.
| (millions) | Line Item in the Consolidated Balance Sheet in which the hedged item is included | Carrying amount of the hedged liabilities | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a) | |||||||||||||||||||||||
| July 3, 2021 | January 2, 2021 | July 3, 2021 | January 2, 2021 | |||||||||||||||||||||||
| Interest rate contracts | Long-term debt | $ | 2,975 | $ | 2,568 | $ | 26 | $ | 25 | |||||||||||||||||
(a) The hedged long-term debt includes $15 million and $16 million of hedging adjustment on discontinued hedging relationships as of July 3, 2021 and January 2, 2021, respectively.
The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of July 3, 2021 and January 2, 2021 would be adjusted as detailed in the following table:
| As of July 3, 2021: | Gross Amounts Not Offset in the Consolidated Balance Sheet | |||||||||||||
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount | |||||||||||
| Total asset derivatives | $ | 201 | $ | (90) | $ | 5 | $ | 116 | ||||||
| Total liability derivatives | $ | (122) | $ | 90 | $ | 32 | $ | — | ||||||
| As of January 2, 2021: | Gross Amounts Not Offset in the Consolidated Balance Sheet | |||||||||||||
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount | |||||||||||
| Total asset derivatives | $ | 164 | $ | (116) | $ | — | $ | 48 | ||||||
| Total liability derivatives | $ | (143) | $ | 116 | $ | 5 | $ | (22) | ||||||
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The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended July 3, 2021 and June 27, 2020 was as follows:
Derivatives and non-derivatives in net investment hedging relationships
| (millions) | Gain (loss) recognized in AOCI | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component | |||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | |||||||||||||||||||||||
| Foreign currency denominated long-term debt | $ | (32) | $ | (18) | $ | — | $ | — | ||||||||||||||||||
| Cross-currency contracts | (10) | (4) | 5 | 9 | Interest expense | |||||||||||||||||||||
| Total | $ | (42) | $ | (22) | $ | 5 | $ | 9 | ||||||||||||||||||
Derivatives not designated as hedging instruments
| (millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income | ||||||||||||
| July 3, 2021 | June 27, 2020 | |||||||||||||
| Foreign currency exchange contracts | COGS | $ | (9) | $ | (5) | |||||||||
| Foreign currency exchange contracts | Other income (expense), net | — | (3) | |||||||||||
| Foreign currency exchange contracts | SG&A | 1 | — | |||||||||||
| Interest rate contracts | Interest expense | — | 1 | |||||||||||
| Commodity contracts | COGS | 55 | (26) | |||||||||||
| Total | $ | 47 | $ | (33) | ||||||||||
18
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended July 3, 2021 and June 27, 2020 was as follows:
Derivatives and non-derivatives in net investment hedging relationships
| (millions) | Gain (loss) recognized in AOCI | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component | |||||||||||||||||||||||
| July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | |||||||||||||||||||||||
| Foreign currency denominated long-term debt | $ | 71 | $ | (9) | $ | — | $ | — | ||||||||||||||||||
| Cross-currency contracts | 17 | 62 | 10 | 18 | Interest expense | |||||||||||||||||||||
| Total | $ | 88 | $ | 53 | $ | 10 | $ | 18 | ||||||||||||||||||
Derivatives not designated as hedging instruments
| (millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income | ||||||||||||
| July 3, 2021 | June 27, 2020 | |||||||||||||
| Foreign currency exchange contracts | COGS | $ | (26) | $ | 46 | |||||||||
| Foreign currency exchange contracts | Other income (expense), net | (1) | 6 | |||||||||||
| Foreign currency exchange contracts | SGA | 5 | 4 | |||||||||||
| Interest rate contracts | Interest expense | 1 | 1 | |||||||||||
| Commodity contracts | COGS | 67 | (50) | |||||||||||
| Total | $ | 46 | $ | 7 | ||||||||||
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended July 3, 2021 and June 27, 2020:
| July 3, 2021 | June 27, 2020 | |||||||||||||||||||
| (millions) | Interest Expense | Interest Expense | ||||||||||||||||||
| Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded | $ | 58 | $ | 69 | ||||||||||||||||
| Gain (loss) on fair value hedging relationships: | ||||||||||||||||||||
| Interest contracts: | ||||||||||||||||||||
| Hedged items | (6) | (2) | ||||||||||||||||||
| Derivatives designated as hedging instruments | 7 | 2 | ||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||
| Interest contracts: | ||||||||||||||||||||
| Amount of gain (loss) reclassified from AOCI into income | (10) | (5) | ||||||||||||||||||
19
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the year-to-date periods ended July 3, 2021 and June 27, 2020:
| July 3, 2021 | June 27, 2020 | |||||||||||||||||||
| (millions) | Interest Expense | Interest Expense | ||||||||||||||||||
| Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded | $ | 117 | $ | 133 | ||||||||||||||||
| Gain (loss) on fair value hedging relationships: | ||||||||||||||||||||
| Interest contracts: | ||||||||||||||||||||
| Hedged items | — | (3) | ||||||||||||||||||
| Derivatives designated as hedging instruments | — | 4 | ||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||
| Interest contracts: | ||||||||||||||||||||
| Amount of gain (loss) reclassified from AOCI into income | (15) | (7) | ||||||||||||||||||
During the next 12 months, the Company expects $17 million of net deferred losses reported in AOCI at July 3, 2021 to be reclassified to income, assuming market rates remain constant through contract maturities.
Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company’s credit rating is at or below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability position on July 3, 2021 was not material. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting as of July 3, 2021 triggered by credit-risk-related contingent features.
Other fair value measurements
Marketable Securities
During the quarter ended June 27, 2020, the Company invested $200 million in a mutual fund holding short term debt securities. The investment is measured at fair value using the net asset value (NAV) per share as a practical expedient and as a result, this investment has not been classified in the fair value hierarchy. As of June 27, 2020, fair value using NAV was $200 million.
Available for sale securities
| July 3, 2021 | January 2, 2021 | ||||||||||||||||||||||
| Unrealized | Unrealized | ||||||||||||||||||||||
| (millions) | Cost | Gain (Loss) | Market Value | Cost | Gain (Loss) | Market Value | |||||||||||||||||
| Corporate bonds | $ | 61 | $ | 2 | $ | 63 | $ | 62 | $ | 3 | $ | 65 | |||||||||||
During the year-to-date period ended July 3, 2021, the Company sold approximately $6 million of investments in level 2 corporate bonds. The resulting gain from the sale of these investments was less than $1 million dollars and was recorded in Other income and (expense).
The market values of the Company's investments in level 2 corporate bonds were based on matrices or models from pricing vendors. Unrealized gains and losses were included in the Consolidated Statement of Comprehensive Income. Additionally, these investments were recorded within Other current assets and Other assets on the Consolidated Balance Sheet, based on the maturity of the individual security. The maturity dates of the securities range from 2022 to 2036.
The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis. The Company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in
20
fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments.
Financial instruments
The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $7.8 billion and $7.0 billion, respectively, as of July 3, 2021. The fair value and carrying value of the Company's long-term debt were $7.7 billion and $6.7 billion, respectively, as of January 2, 2021.
Counterparty credit risk concentration and collateral requirements
The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.
Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company of approximately $74 million, net of collateral already received from those counterparties, as of July 3, 2021.
For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to the Company or its counterparties exceeds a certain amount. In addition, the Company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of July 3, 2021, the Company posted $37 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 23% of consolidated trade receivables at July 3, 2021.
Note 8 Reportable segments
Kellogg Company is a leading producer of snacks, cereal, and frozen foods. It is the second largest producer of crackers, and a leading producer of savory snacks, and the world's leading producer of cereal. Additional product offerings include toaster pastries, cereal bars, veggie foods and noodles. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States, United Kingdom, Nigeria, Canada, Mexico, and Australia.
The Company manages its operations through four operating segments that are based on geographic location – North America which includes U.S. businesses and Canada; Europe which consists of European countries; Latin America which consists of Central and South America and includes Mexico; and AMEA (Asia Middle East Africa) which consists of Africa, Middle East, Australia and other Asian and Pacific markets. These operating segments also represent our reportable segments.
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The measurement of reportable segment results is based on segment operating profit which is generally consistent with the presentation of operating profit in the Consolidated Statement of Income. Reportable segment results were as follows:
| Quarter ended | Year-to-date period ended | ||||||||||||||||
| (millions) | July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | |||||||||||||
| Net sales | |||||||||||||||||
| North America | $ | 2,013 | $ | 2,167 | $ | 4,143 | $ | 4,264 | |||||||||
| Europe | 618 | 546 | 1,196 | 1,072 | |||||||||||||
| Latin America | 266 | 223 | 502 | 450 | |||||||||||||
| AMEA | 658 | 529 | 1,298 | 1,091 | |||||||||||||
| Consolidated | $ | 3,555 | $ | 3,465 | $ | 7,139 | $ | 6,877 | |||||||||
| Operating profit | |||||||||||||||||
| North America | $ | 363 | $ | 464 | $ | 742 | $ | 830 | |||||||||
| Europe | 101 | 92 | 181 | 162 | |||||||||||||
| Latin America | 32 | 31 | 59 | 53 | |||||||||||||
| AMEA | 63 | 38 | 126 | 84 | |||||||||||||
| Total Reportable Segments | 559 | 625 | 1,108 | 1,129 | |||||||||||||
| Corporate | (55) | (119) | (132) | (163) | |||||||||||||
| Consolidated | $ | 504 | $ | 506 | $ | 976 | $ | 966 | |||||||||
Supplemental product information is provided below for net sales to external customers:
| Quarter ended | Year-to-date period ended | |||||||||||||||||||
| (millions) | July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||||||||
| Snacks | $ | 1,656 | $ | 1,522 | $ | 3,303 | $ | 3,076 | ||||||||||||
| Cereal | 1,336 | 1,444 | 2,710 | 2,769 | ||||||||||||||||
| Frozen | 267 | 284 | 564 | 578 | ||||||||||||||||
| Noodles and other | 296 | 215 | 562 | 454 | ||||||||||||||||
| Consolidated | $ | 3,555 | $ | 3,465 | $ | 7,139 | $ | 6,877 | ||||||||||||
Note 9 Supplemental Financial Statement Data
| Consolidated Balance Sheet | ||||||||
| (millions) | July 3, 2021 (unaudited) | January 2, 2021 | ||||||
| Trade receivables | $ | 1,407 | $ | 1,272 | ||||
| Allowance for credit losses | (23) | (19) | ||||||
| Refundable income taxes | 18 | 66 | ||||||
| Other receivables | 257 | 218 | ||||||
| Accounts receivable, net | $ | 1,659 | $ | 1,537 | ||||
| Raw materials and supplies | $ | 358 | $ | 338 | ||||
| Finished goods and materials in process | 1,007 | 946 | ||||||
| Inventories | $ | 1,365 | $ | 1,284 | ||||
| Intangible assets not subject to amortization | $ | 2,050 | $ | 2,068 | ||||
| Intangible assets subject to amortization, net | 404 | 423 | ||||||
| Other intangibles, net | $ | 2,454 | $ | 2,491 | ||||
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Note 10 Contingencies
The Company is subject to various legal proceedings, claims, and governmental inspections or investigations in the ordinary course of business covering matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, workers’ compensation, employment and other actions. These matters are subject to uncertainty and the outcome is not predictable with assurance. The Company uses a combination of insurance and self-insurance for a number of risks, including workers’ compensation, general liability, automobile liability and product liability.
In 2016, a class action complaint was filed against Kellogg in the Northern District of California relating to statements made on packaging for certain products. In August 2019, the Court ruled in favor of the plaintiff regarding certain statements made on the Company’s products and ordered the parties to conduct settlement discussions related to all matters in dispute. In October 2019, the plaintiff filed a motion to the Court to approve a settlement between Kellogg and the class. During 2019, the Company concluded that the contingency related to the unfavorable ruling was probable and estimable, resulting in a liability being recorded. In January 2021, the parties reached a new settlement that was within the amount of the contingency the Company recorded in December 2019. In June 2021, the court entered an order granting preliminary approval of the settlement.
The Company has established accruals for certain matters where losses are deemed probable and reasonably estimable. There are other claims and legal proceedings pending against the Company for which accruals have not been established. It is reasonably possible that some of these matters could result in an unfavorable judgment against the Company and could require payment of claims in amounts that cannot be estimated at July 3, 2021. Based upon current information, management does not expect any of the claims or legal proceedings pending against the Company to have a material impact on the Company’s consolidated financial statements.
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KELLOGG COMPANY
PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Kellogg Company, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this report. Our MD&A references consumption and net sales in discussing our sales trends for certain categories and brands. We record net sales upon delivery of shipments to our customers. Consumption and share data noted within is based on Nielsen x-AOC or other comparable source, for the applicable period. Consumption refers to consumer purchases of our products from our customers. Unless otherwise noted, consumption and shipment trends are materially consistent.
For more than 115 years, consumers have counted on Kellogg for great-tasting, high-quality and nutritious foods. Currently, these foods include snacks, such as crackers, savory snacks, toaster pastries, cereal bars and bites; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles. Kellogg products are manufactured and marketed globally.
COVID-19 Response
As over a year has passed since the World Health Organization categorized the novel coronavirus (COVID-19) as a pandemic in March 2020, our key objectives continue to be 1) protecting the health and safety of our employees, 2) safely producing and delivering our foods to customers and consumers, and 3) supporting the communities in which we operate. Our efforts have been led by the Company’s Executive Committee, a committee composed of senior leaders, and our global Crisis Management Process. As part of that process, we have worked closely with medical, regulatory and other experts as we deliver on our objectives.
Employee health and safety
The health and safety of our employees is our top priority. From the outset of the pandemic, the Company has designed and implemented a number of actions across the business including restricting travel and visitors to its facilities, prohibiting external group meetings and establishing quarantine procedures for any potentially exposed employees. At this time, most of our office employees continue to work remotely to minimize the exposure of our employees to COVID-19. For those who are not able to work remotely, the Company has implemented enhanced protocols at all of our facilities to protect our employees, including temperature checks, social distancing, response plans, face coverings, contact tracing, enhanced sanitation procedures, and additional personal protection equipment
Maintain our ability to produce and deliver essential food supply
In addition to our efforts to keep our people safe, the Company has taken several actions to ensure that we maintain our ability to operate effectively during this pandemic, providing our foods to our customers and consumers. In certain parts of the world, the reacceleration of COVID cases has brought new governmental restrictions, in some instances causing temporary reductions in production. Additionally, as a result of global supply imbalances, we have managed through bottlenecks and shortages of materials, labor, and freight that have required us to pursue alternative sources, incremental capacity, and temporary labor. Amidst a related rise in cost inflation, the Company has taken steps to preserve underlying profitability through productivity, mix, and revenue growth management. While to date we have experienced limited disruption in the operation of our facilities, we continue to take the appropriate actions to ensure the continuity of our business.
We have partnered with our strategic technology providers in order to maintain support for our critical business and finance systems as well as additional network bandwidth and support for the transition to a work-from-home environment. We have worked to mitigate system-related risks in this environment through heightened monitoring of cybersecurity and network capacity as well as reevaluation of contingency plans.
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Community support
Kellogg is a company with a heart and soul, and we are working together across our company to help our food bank partners and neighbors in need. Kellogg and our charitable funds have donated cash and food to global COVID-19 hunger relief efforts. As always, through our global Kellogg’s® Better Days purpose platform, we help deliver critical nourishment to people when they need it most. Local governments have identified food security as a top priority in their fight against COVID-19. Kellogg is providing support to our food bank partners on the front-lines, helping those who may not know where their next meal is coming from.
Monitoring future impacts
The severity, magnitude and duration of the current COVID-19 pandemic is uncertain and rapidly changing. The Company continues to actively monitor the pandemic including, infection and hospitalization rates, vaccination efforts, and related governmental actions such as expanded or reduced stay-at home orders and social distancing guidelines. We will adjust our mitigation strategies as necessary to address any changing health, operational or financial risks that may arise. Since the onset of the pandemic, the Company has experienced a significant increase in demand for our retail products as consumers stocked up on food for at-home consumption in those markets. While this demand has moderated for certain products, we will continue to manage our production capacity during this period of volatility. We continue to monitor the business for adverse impacts of the pandemic, including volatility in the foreign exchange markets, reduced demand in our away from home businesses, supply-chain disruptions in certain markets, increased costs of employee safety and maintaining food supply, and potential disruptions for certain emerging market countries. In the event the Company experiences adverse impacts from the above or other factors, the Company would also evaluate the need to perform interim impairment tests for the Company’s goodwill, indefinite lived intangible assets, investments in unconsolidated affiliates and property, plant and equipment. There can be no assurance that volatility and/or disruption in the global capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all. See further discussion within Future Outlook.
Segments
We manage our operations through four operating segments that are based primarily on geographic location – North America which includes the U.S. businesses and Canada; Europe which consists principally of European countries; Latin America which consists of Central and South America and includes Mexico; and AMEA (Asia Middle East Africa) which consists of Africa, Middle East, Australia and other Asian and Pacific markets. These operating segments also represent our reportable segments.
Non-GAAP financial measures
This filing includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Items excluded from our non-GAAP financial measures are discussed in the "Significant items impacting comparability" section of this filing. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions, including incentive compensation. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors’ understanding of our underlying operating performance and in their analysis of ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.
Non-GAAP financial measures used for evaluation of performance include currency-neutral and organic net sales, adjusted and currency-neutral adjusted operating profit, adjusted and currency-neutral adjusted diluted earnings per share (EPS), currency-neutral adjusted gross profit, currency neutral adjusted gross margin, adjusted effective tax rate, net debt, and cash flow. We determine currency-neutral results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.
•Currency-neutral net sales and organic net sales: We adjust the GAAP financial measure to exclude the impact of foreign currency, resulting in currency-neutral net sales. In addition, we exclude the impact of acquisitions, divestitures, foreign currency, and differences in shipping days including the 53rd week, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company
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and each of our reportable segments for the periods presented. Management uses these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions.
•Adjusted: operating profit and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, gain/loss on the divestiture, and other costs impacting comparability resulting in adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
•Currency-neutral adjusted: gross profit, gross margin, operating profit, and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, gain/loss on the divestiture, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
•Adjusted effective income tax rate: We adjust the GAAP financial measures to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, gain/loss on the divestiture, and other costs impacting comparability. We excluded the items which we believe may obscure trends in our pre-tax income and the related tax effect of those items on our adjusted effective income tax rate, and other impacts to tax expense, including tax reform in the UK and U.S. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's effective tax rate, excluding the pre-tax income and tax effect of the items noted above, for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate.
•Net debt: Defined as the sum of long-term debt, current maturities of long-term debt and notes payable,
less cash and cash equivalents and marketable securities. With respect to net debt, cash and cash equivalents and marketable securities are subtracted from the GAAP measure, total debt liabilities, because they could be used to reduce the Company’s debt obligations. Company management and investors use this non-GAAP measure to evaluate changes to the Company's capital structure and credit quality assessment.
•Cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. Cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure.
These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.
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Significant items impacting comparability
Mark-to-market accounting for pension plans, commodities and certain foreign currency contracts
We recognize mark-to-market adjustments for pension plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans are recognized in the year they occur. Changes between contract and market prices for commodities contracts and certain foreign currency contracts result in gains/losses that are recognized in the quarter they occur. We recorded a pre-tax mark-to-market benefit of $23 million and $14 million for the quarter and year-to-date periods ended July 3, 2021, respectively. Included within the aforementioned was a pre-tax mark-to-market benefit for pension plans of $10 million and $20 million for the quarter and year-to-date periods ended July 3, 2021, respectively. Additionally, we recorded a pre-tax mark-to-market expense of $86 million and $74 million for the quarter and year-to-date periods ended June 27, 2020, respectively. Included within the aforementioned was a pre-tax mark-to-market expense for pension plans of $43 million and $57 million for the quarter and year-to-date periods ended June 27, 2020, respectively.
Business and portfolio realignment
One-time costs related to reorganizations in support of our Deploy for Growth priorities and a reshaped portfolio; investments in enhancing capabilities prioritized by our Deploy for Growth strategy; and completed and prospective divestitures and acquisitions, including the divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses. As a result, we incurred pre-tax charges, primarily related to reorganizations, of $5 million and $13 million for the quarter and year-to-date periods ended July 3, 2021, respectively. We also recorded pre-tax charges of $17 million and $23 million for the quarter and year-to-date periods ended June 27, 2020, respectively.
Multi-employer pension plan withdrawal
During the second quarter of 2020, the Company recorded a pre-tax gain of approximately $5 million related to the settlement of a multi-employer pension plan withdrawal liability.
UK tax rate change
During the second quarter of 2021, the Company recorded tax expense of $23 million as a result of tax legislation enacted in the UK in June 2021, which increased the statutory UK tax rate from 19 percent to 25 percent and required us to re-value our net deferred tax liability related to our UK business to reflect this higher rate.
Foreign currency translation
We evaluate the operating results of our business on a currency-neutral basis. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period.
Financial results
For the quarter ended July 3, 2021, our reported net sales increased 2.6% versus the prior year on favorable foreign currency translation. Organic net sales decreased 0.4% from the prior year due to lapping elevated demand for packaged foods consumed at home during the early stages of the pandemic last year, mostly offset by strong growth in emerging markets, recovery in away-from-home channels, and positive price/mix.
Second quarter reported operating profit decreased 0.4% versus the year-ago quarter due to lapping unusually high operating leverage and delayed brand investment in the prior year quarter, partially offset by favorable mark-to-market and foreign currency translation. Currency-neutral adjusted operating profit decreased 15%, after excluding the impact of mark-to-market, business and portfolio realignment, and foreign currency translation.
Reported diluted EPS of $1.11 for the quarter increased 8.8% compared to the prior year quarter of $1.02 due to favorable mark-to-market impacts compared to the prior year. Currency-neutral adjusted diluted EPS of $1.08 for the quarter decreased 13% compared to prior year quarter of $1.24, due to lapping unusually strong prior year growth.
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Reconciliation of certain non-GAAP Financial Measures
| Quarter ended | Year-to-date period ended | |||||||||||||
| Consolidated results (dollars in millions, except per share data) | July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||
| Reported net income | $ | 380 | $ | 351 | $ | 748 | $ | 698 | ||||||
| Mark-to-market (pre-tax) | 23 | (86) | 14 | (74) | ||||||||||
| Business and portfolio realignment (pre-tax) | (5) | (17) | (13) | (23) | ||||||||||
| Multi-employer pension plan withdrawal (pre-tax) | — | 5 | — | 5 | ||||||||||
| Income tax impact applicable to adjustments, net* | (4) | 23 | (1) | 23 | ||||||||||
| UK tax rate change | (23) | — | (23) | — | ||||||||||
| Adjusted net income | $ | 389 | $ | 426 | $ | 770 | $ | 766 | ||||||
| Foreign currency impact | 20 | — | 32 | — | ||||||||||
| Currency-neutral adjusted net income | $ | 369 | $ | 426 | $ | 738 | $ | 766 | ||||||
| Reported diluted EPS | $ | 1.11 | $ | 1.02 | $ | 2.18 | $ | 2.02 | ||||||
| Mark-to-market (pre-tax) | 0.07 | (0.25) | 0.04 | (0.21) | ||||||||||
| Business and portfolio realignment (pre-tax) | (0.02) | (0.05) | (0.03) | (0.07) | ||||||||||
| Multi-employer pension plan withdrawal (pre-tax) | — | 0.01 | — | 0.01 | ||||||||||
| Income tax impact applicable to adjustments, net* | (0.01) | 0.07 | — | 0.07 | ||||||||||
| UK tax rate change | (0.07) | — | (0.07) | — | ||||||||||
| Adjusted diluted EPS | $ | 1.14 | $ | 1.24 | $ | 2.24 | $ | 2.22 | ||||||
| Foreign currency impact | 0.06 | — | 0.09 | — | ||||||||||
| Currency-neutral adjusted diluted EPS | $ | 1.08 | $ | 1.24 | $ | 2.15 | $ | 2.22 | ||||||
| Currency-neutral adjusted diluted EPS growth | (12.9) | % | (3.2) | % | ||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
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Net sales and operating profit
The following tables provide an analysis of net sales and operating profit performance for the second quarter of 2021 versus 2020:
| Quarter ended July 3, 2021 | ||||||||||||||||||||||||||||||||||||||
| (millions) | North America | Europe | Latin America | AMEA | Corporate | Kellogg Consolidated | ||||||||||||||||||||||||||||||||
| Reported net sales | $ | 2,013 | $ | 618 | $ | 266 | $ | 658 | $ | — | $ | 3,555 | ||||||||||||||||||||||||||
| Foreign currency impact on total business (inc)/dec | 17 | 54 | 23 | 8 | — | 103 | ||||||||||||||||||||||||||||||||
| Organic net sales | $ | 1,997 | $ | 564 | $ | 242 | $ | 650 | $ | — | $ | 3,452 | ||||||||||||||||||||||||||
| Quarter ended June 27, 2020 | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| Reported net sales | $ | 2,167 | $ | 546 | $ | 223 | $ | 529 | $ | — | $ | 3,465 | ||||||||||||||||||||||||||
| % change - 2021 vs. 2020: | ||||||||||||||||||||||||||||||||||||||
| Reported growth | (7.2) | % | 13.2 | % | 19.0 | % | 24.3 | % | — | % | 2.6 | % | ||||||||||||||||||||||||||
| Foreign currency impact on total business (inc)/dec | 0.8 | % | 9.9 | % | 10.5 | % | 1.5 | % | — | % | 3.0 | % | ||||||||||||||||||||||||||
| Organic growth | (8.0) | % | 3.3 | % | 8.5 | % | 22.8 | % | — | % | (0.4) | % | ||||||||||||||||||||||||||
| Volume (tonnage) | (11.9) | % | (3.8) | % | (0.7) | % | 9.5 | % | — | % | (4.2) | % | ||||||||||||||||||||||||||
| Pricing/mix | 3.9 | % | 7.1 | % | 9.2 | % | 13.3 | % | — | % | 3.8 | % | ||||||||||||||||||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
| Quarter ended July 3, 2021 | ||||||||||||||||||||||||||||||||||||||
| (millions) | North America | Europe | Latin America | AMEA | Corporate | Kellogg Consolidated | ||||||||||||||||||||||||||||||||
| Reported operating profit | $ | 363 | $ | 101 | $ | 32 | $ | 63 | $ | (54) | $ | 504 | ||||||||||||||||||||||||||
| Mark-to-market | — | — | (1) | — | 13 | 13 | ||||||||||||||||||||||||||||||||
| Business and portfolio realignment | (3) | — | — | — | (2) | (5) | ||||||||||||||||||||||||||||||||
| Adjusted operating profit | $ | 367 | $ | 101 | $ | 32 | $ | 63 | $ | (66) | $ | 497 | ||||||||||||||||||||||||||
| Foreign currency impact | 2 | 10 | 3 | 3 | 1 | 18 | ||||||||||||||||||||||||||||||||
| Currency-neutral adjusted operating profit | $ | 364 | $ | 91 | $ | 29 | $ | 60 | $ | (67) | $ | 478 | ||||||||||||||||||||||||||
| Quarter ended June 27, 2020 | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| Reported operating profit | $ | 464 | $ | 92 | $ | 31 | $ | 38 | $ | (119) | $ | 506 | ||||||||||||||||||||||||||
| Mark-to-market | — | — | — | — | (43) | (43) | ||||||||||||||||||||||||||||||||
| Business and portfolio realignment | — | (1) | (4) | (10) | (1) | (17) | ||||||||||||||||||||||||||||||||
| Multi-employer pension plan exit liability | 5 | — | — | — | — | 5 | ||||||||||||||||||||||||||||||||
| Adjusted operating profit | $ | 459 | $ | 94 | $ | 35 | $ | 48 | $ | (75) | $ | 562 | ||||||||||||||||||||||||||
| % change - 2021 vs. 2020: | ||||||||||||||||||||||||||||||||||||||
| Reported growth | (21.6) | % | 9.2 | % | 1.5 | % | 63.6 | % | 54.3 | % | (0.4) | % | ||||||||||||||||||||||||||
| Mark-to-market | — | % | — | % | (1.7) | % | — | % | 43.5 | % | 10.2 | % | ||||||||||||||||||||||||||
| Business and portfolio realignment | (0.7) | % | 1.7 | % | 12.1 | % | 33.6 | % | (1.1) | % | 1.7 | % | ||||||||||||||||||||||||||
| Multi-employer pension plan withdrawal | (0.8) | % | — | % | — | % | — | % | — | % | (0.7) | % | ||||||||||||||||||||||||||
| Adjusted growth | (20.1) | % | 7.5 | % | (8.9) | % | 30.0 | % | 11.9 | % | (11.6) | % | ||||||||||||||||||||||||||
| Foreign currency impact | 0.5 | % | 10.5 | % | 8.4 | % | 5.3 | % | 1.2 | % | 3.3 | % | ||||||||||||||||||||||||||
| Currency-neutral adjusted growth | (20.6) | % | (3.0) | % | (17.3) | % | 24.7 | % | 10.7 | % | (14.9) | % | ||||||||||||||||||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
29
North America
Reported net sales for the second quarter decreased 7.2% versus the prior year due to lapping elevated demand for packaged foods consumed at home during the early stages of the pandemic last year as well as timing of shipments into the first quarter of 2021. Organic net sales decreased 8.0% after excluding the impact of foreign currency.
| Net sales % change - second quarter 2021 vs. 2020: | |||||||||||
| North America | Reported net sales | Foreign currency | Organic net sales | ||||||||
| Snacks | 1.6 | % | 0.5 | % | 1.1 | % | |||||
| Cereal | (20.1) | % | 1.2 | % | (21.3) | % | |||||
| Frozen | (6.1) | % | 0.7 | % | (6.8) | % | |||||
North America snacks net sales increased 1.6% due primarily to the performance of key brands and favorable foreign currency translation, despite continued weakness in away-from-home channels. In salty snacks, Pringles growth outpaced the category, posting consumption growth during the quarter. In crackers, Cheez-it grew both consumption and share during the quarter.
North America cereal net sales decreased 20.1% and North America frozen foods net sales decreased 6.1% during the quarter, both due to lapping a pandemic-related surge in consumption growth during the prior-year quarter.
North America operating profit decreased 22% primarily due to the lower net sales and to lapping the prior year postponement of brand investment. Currency-neutral adjusted operating profit decreased 21%, after excluding the impact of business and portfolio realignment.
Europe
Reported net sales increased 13% due to favorable foreign currency translation as well as growth in snacks, led by Continental Europe and Russia. Organic net sales increased 3.3% after excluding the impact of foreign currency.
Cereal net sales growth for the quarter was driven largely by foreign currency translation offset by declines due to lapping a pandemic-related surge in consumption growth during the prior-year quarter.
Snacks net sales growth was led by sustained momentum in Pringles, driven by innovation, effective advertising, and successful consumer promotions.
Reported operating profit increased 9.2% due primarily to higher net sales and favorable foreign currency translation partially offset by lapping unusually high operating leverage and postponement of brand investment during the onset of the pandemic. Currency-neutral adjusted operating profit decreased 3.0% after excluding the impact of foreign currency, and business and portfolio realignment.
Latin America
Reported net sales increased 19% due primarily to broad-based growth across the region, led by snacks, and favorable foreign currency translation. Organic net sales increased 8.5%, after excluding the impact of foreign currency.
Reported operating profit increased 1.5% due to primarily to favorable foreign currency translation and lower business and portfolio realignment costs, partially offset by lapping unusually high operating leverage during the onset of the pandemic. Currency-neutral adjusted operating profit decreased 17% after excluding the impact of business and portfolio realignment costs and foreign currency.
AMEA
Reported net sales increased 24% and organic net sales increased 23% after excluding the impact of foreign currency. This growth was due to both volume and price-mix, and was broad-based across Asia, Africa, and Australia, as well as across cereal, snacks, and noodles and other.
Reported operating profit increased 64% due primarily to operating leverage from higher net sales and the lapping of prior year business and portfolio realignment charges. Currency-neutral adjusted operating profit increased 25%, after excluding the impact of business and portfolio realignment, and foreign currency.
30
Corporate
Reported operating profit increased $65 million versus the comparable prior year quarter due primarily to favorable mark-to-market impacts. Currency-neutral adjusted operating profit increased $8 million from the prior year after excluding the impact of mark-to-market.
31
The following tables provide an analysis of net sales and operating profit performance for the year-to-date periods ended July 3, 2021 versus June 27, 2020:
| Year-to-date period ended July 3, 2021 | ||||||||||||||||||||||||||||||||||||||
| (millions) | North America | Europe | Latin America | AMEA | Corporate | Kellogg Consolidated | ||||||||||||||||||||||||||||||||
| Reported net sales | $ | 4,143 | $ | 1,196 | $ | 502 | $ | 1,298 | $ | — | $ | 7,139 | ||||||||||||||||||||||||||
| Foreign currency impact on total business (inc)/dec | 26 | 91 | 10 | 5 | — | 132 | ||||||||||||||||||||||||||||||||
| Organic net sales | $ | 4,117 | $ | 1,105 | $ | 492 | $ | 1,293 | $ | — | $ | 7,008 | ||||||||||||||||||||||||||
| Year-to-date period ended June 27, 2020 | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| Reported net sales | $ | 4,264 | $ | 1,072 | $ | 450 | $ | 1,091 | $ | — | $ | 6,877 | ||||||||||||||||||||||||||
| % change - 2021 vs. 2020: | ||||||||||||||||||||||||||||||||||||||
| Reported growth | (2.9) | % | 11.6 | % | 11.5 | % | 19.0 | % | — | % | 3.8 | % | ||||||||||||||||||||||||||
| Foreign currency impact on total business (inc)/dec | 0.6 | % | 8.5 | % | 2.2 | % | 0.5 | % | — | % | 1.9 | % | ||||||||||||||||||||||||||
| Organic growth | (3.5) | % | 3.1 | % | 9.3 | % | 18.5 | % | — | % | 1.9 | % | ||||||||||||||||||||||||||
| Volume (tonnage) | (6.9) | % | (1.9) | % | 1.8 | % | 3.7 | % | — | % | (2.5) | % | ||||||||||||||||||||||||||
| Pricing/mix | 3.4 | % | 5.0 | % | 7.5 | % | 14.8 | % | — | % | 4.4 | % | ||||||||||||||||||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
| Year-to-date period ended July 3, 2021 | ||||||||||||||||||||||||||||||||||||||
| (millions) | North America | Europe | Latin America | AMEA | Corporate | Kellogg Consolidated | ||||||||||||||||||||||||||||||||
| Reported operating profit | $ | 742 | $ | 181 | $ | 59 | $ | 126 | $ | (132) | $ | 976 | ||||||||||||||||||||||||||
| Mark-to-market | — | — | (1) | — | (5) | (6) | ||||||||||||||||||||||||||||||||
| Business and portfolio realignment | (6) | — | (4) | — | (3) | (13) | ||||||||||||||||||||||||||||||||
| Adjusted operating profit | $ | 748 | $ | 181 | $ | 63 | $ | 126 | $ | (124) | $ | 994 | ||||||||||||||||||||||||||
| Foreign currency impact | 4 | 14 | 2 | 5 | 1 | 27 | ||||||||||||||||||||||||||||||||
| Currency-neutral adjusted operating profit | $ | 745 | $ | 167 | $ | 61 | $ | 120 | $ | (125) | $ | 967 | ||||||||||||||||||||||||||
| Year-to-date period ended June 27, 2020 | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| Reported operating profit | $ | 830 | $ | 162 | $ | 53 | $ | 84 | $ | (163) | $ | 966 | ||||||||||||||||||||||||||
| Mark-to-market | — | — | — | — | (17) | (17) | ||||||||||||||||||||||||||||||||
| Business and portfolio realignment | — | (2) | (4) | (12) | (4) | (23) | ||||||||||||||||||||||||||||||||
| Multi-employer pension plan exit liability | 5 | — | — | — | — | 5 | ||||||||||||||||||||||||||||||||
| Adjusted operating profit | $ | 825 | $ | 164 | $ | 57 | $ | 96 | $ | (142) | $ | 1,001 | ||||||||||||||||||||||||||
| % change - 2021 vs. 2020: | ||||||||||||||||||||||||||||||||||||||
| Reported growth | (10.5) | % | 11.9 | % | 10.4 | % | 49.4 | % | 19.2 | % | 1.1 | % | ||||||||||||||||||||||||||
| Mark-to-market | — | % | — | % | (1.0) | % | — | % | 5.9 | % | 1.2 | % | ||||||||||||||||||||||||||
| Business and portfolio realignment | (0.7) | % | 1.7 | % | 1.6 | % | 19.0 | % | 0.4 | % | 1.0 | % | ||||||||||||||||||||||||||
| Multi-employer pension plan withdrawal | (0.5) | % | — | % | — | % | — | % | — | % | (0.4) | % | ||||||||||||||||||||||||||
| Adjusted growth | (9.3) | % | 10.2 | % | 9.8 | % | 30.4 | % | 12.9 | % | (0.7) | % | ||||||||||||||||||||||||||
| Foreign currency impact | 0.4 | % | 8.7 | % | 3.8 | % | 5.5 | % | 0.8 | % | 2.6 | % | ||||||||||||||||||||||||||
| Currency-neutral adjusted growth | (9.7) | % | 1.5 | % | 6.0 | % | 24.9 | % | 12.1 | % | (3.3) | % | ||||||||||||||||||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
32
North America
Reported net sales for the year-to-date period decreased 2.9% versus the prior year lapping elevated demand for packaged foods consumed at home during the early stages of the pandemic last year. Organic net sales decreased 3.5% after excluding the impact of foreign currency.
| Net sales % change - second quarter year-to-date 2021 vs. 2020: | |||||||||||
| North America | Reported net sales | Foreign currency | Organic net sales | ||||||||
| Snacks | 2.7 | % | 0.4 | % | 2.3 | % | |||||
| Cereal | (11.6) | % | 0.9 | % | (12.5) | % | |||||
| Frozen | (2.7) | % | 0.5 | % | (3.2) | % | |||||
North America snacks net sales increased 2.7% due primarily to the performance of key brands despite continued weakness in away-from-home channels. In salty snacks, Pringles growth outpaced the category, posting consumption growth during the period. In crackers, Cheez-it grew both consumption and share during the period.
North America cereal net sales decreased 11.6% and North America frozen foods net sales decreased 2.7% during the year-to-date period, lapping a pandemic-related surge in consumption growth during the prior year.
North America operating profit decreased 10.5% compared to the prior year due to lower net sales and higher brand building expense, lapping elevated demand at the onset of the pandemic and postponement of brand investment. Currency-neutral adjusted operating profit decreased 9.7%, after excluding the impact of business and portfolio realignment.
Europe
Reported net sales increased 11.6% due to growth in snacks, led by Continental Europe and Russia, as well as favorable foreign currency translation. Organic net sales increased 3.1% after excluding the impact of foreign currency.
Cereal net sales growth for the year-to-date period was driven by favorable foreign currency translation offset by lapping a pandemic-related surge in consumption growth during the prior year.
Snacks net sales growth was led by sustained momentum in Pringles, driven by innovation, effective advertising, and successful consumer promotions.
Reported operating profit increased 11.9% due primarily to higher net sales and favorable foreign currency translation partially offset by lapping unusually high operating leverage and postponement of brand investment during the onset of the pandemic. Currency-neutral adjusted operating profit increased 1.5% after excluding the impact of foreign currency, and business and portfolio realignment.
Latin America
Reported net sales increased 11.5% due primarily to broad-based growth across the region, led by snacks, and favorable foreign currency translation. Organic net sales increased 9.3%, after excluding the impact of foreign currency.
Reported operating profit increased 10.4% due to primarily to higher net sales and favorable foreign currency translation, partially offset by lapping unusually high operating leverage during the onset of the pandemic. Currency-neutral adjusted operating profit increased 6.0% after excluding the impact of foreign currency.
AMEA
Reported net sales increased 19% due to broad-based growth across the region and categories resulting from favorable price/mix and higher volume. Organic net sales increased 19% after excluding the impact of foreign currency.
Cereal net sales growth was driven by elevated demand across the region, most notably Australia, India, and Japan.
Snacks net sales increased due primarily to strong growth in Pringles across the region.
33
Noodles and other net sales increased lead by strong growth from Multipro as well as our Kellogg's branded noodles business.
Reported operating profit increased 49% due primarily to operating leverage from higher net sales and the lapping of prior year business and portfolio realignment charges. Currency-neutral adjusted operating profit increased 25%, after excluding the impact of business and portfolio realignment, and foreign currency.
Corporate
Reported operating profit increased $31 million versus the comparable prior year period due primarily to favorable mark-to-market impacts. Currency-neutral adjusted operating profit increased $17 million from the prior year after excluding the impact of mark-to-market.
Margin performance
Our currency-neutral adjusted gross profit and gross profit margin performance for the quarter ended July 3, 2021 and June 27, 2020 are reconciled to the directly comparable GAAP measures as follows:
| Quarter ended | July 3, 2021 | June 27, 2020 | GM change vs. prior year (pts.) | |||||||||||||||||
| Gross Profit (a) | Gross Margin (b) | Gross Profit (a) | Gross Margin (b) | |||||||||||||||||
| Reported | $ | 1,225 | 34.5 | % | $ | 1,197 | 34.5 | % | — | |||||||||||
| Mark-to-market | 11 | 0.4 | % | (43) | (1.3) | % | 1.7 | |||||||||||||
| Business and portfolio realignment | (1) | (0.1) | % | (4) | (0.1) | % | — | |||||||||||||
| Multi-employer pension plan withdrawal | — | — | % | 5 | 0.1 | % | (0.1) | |||||||||||||
| Adjusted | 1,215 | 34.2 | % | 1,239 | 35.8 | % | (1.6) | |||||||||||||
| Foreign currency impact | 41 | 0.2 | % | — | — | % | 0.2 | |||||||||||||
| Currency-neutral adjusted | $ | 1,174 | 34.0 | % | $ | 1,239 | 35.8 | % | (1.8) | |||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Gross profit is equal to net sales less cost of goods sold.
(b) Gross profit as a percentage of net sales.
Reported gross margin for the quarter was flat versus the prior year as productivity improvements, price realization, and favorable mark-to-market impacts were offset by cost inflation, a mix shift towards emerging markets, and lapping substantial operating leverage during the second quarter of 2020 when our plants were running limited SKUs at maximum capacity due to the acceleration of demand as a result of the pandemic. Currency-neutral adjusted gross margin decreased 180 basis points compared to the second quarter of 2020 after eliminating the impact of mark-to-market and foreign currency.
Our currency-neutral adjusted gross profit and gross profit margin performance for the year-to-date periods ended July 3, 2021 and June 27, 2020 are reconciled to the directly comparable GAAP measures as follows:
| Year-to-date period ended | July 3, 2021 | June 27, 2020 | GM change vs. prior year (pts.) | |||||||||||||||||
| Gross Profit (a) | Gross Margin (b) | Gross Profit (a) | Gross Margin (b) | |||||||||||||||||
| Reported | $ | 2,391 | 33.5 | % | $ | 2,341 | 34.0 | % | (0.5) | |||||||||||
| Mark-to-market | (12) | (0.2) | % | (21) | (0.3) | % | 0.1 | |||||||||||||
| Business and portfolio realignment | (2) | — | % | (4) | (0.1) | % | 0.1 | |||||||||||||
| Multi-employer pension plan withdrawal | — | — | % | $ | 5 | 0.1 | % | (0.1) | ||||||||||||
| Adjusted | 2,405 | 33.7 | % | 2,361 | 34.3 | % | (0.6) | |||||||||||||
| Foreign currency impact | 56 | 0.2 | % | — | — | % | 0.2 | |||||||||||||
| Currency-neutral adjusted | $ | 2,349 | 33.5 | % | $ | 2,361 | 34.3 | % | (0.8) | |||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Gross profit is equal to net sales less cost of goods sold.
(b) Gross profit as a percentage of net sales.
34
Reported gross margin for the year-to-date period decreased 50 basis points versus the prior year as the impact of productivity improvements and price realization was more than offset by cost inflation, a mix shift towards emerging markets, and lapping substantial operating leverage in the prior year-to-date period when our plants were running limited SKUs at maximum capacity due to the acceleration of demand as a result of the pandemic. Currency-neutral adjusted gross margin decreased 80 basis points compared to the first half of 2020 after eliminating the impact of mark-to-market and foreign currency.
Foreign currency translation
The reporting currency for our financial statements is the U.S. dollar. Certain of our assets, liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar, primarily in the euro, British pound, Mexican peso, Australian dollar, Canadian dollar, Brazilian Real, Nigerian Naira, and Russian ruble. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have significant impact on our results if such increase or decrease in the value of the U.S. dollar is substantial.
Interest expense
For the quarters ended July 3, 2021 and June 27, 2020, interest expense was $58 million and $69 million, respectively. For the year-to-date periods ended July 3, 2021 and June 27, 2020, interest expense was $117 million and $133 million, respectively. The decrease from the prior year is due primarily to lower average outstanding debt compared to the prior year quarter as a result of the debt redemptions in December 2020 and May 2021.
Income Taxes
Our reported effective tax rate for the quarters ended July 3, 2021 and June 27, 2020 was 27% and 23%, respectively. Our reported effective tax rate for the year-to-date periods ended July 3, 2021 and June 27, 2020 was 25% and 22%, respectively. The effective tax rate for the quarter and year-to-date periods ended July 3, 2021, were unfavorably impacted by tax legislation in the UK. During the second quarter of 2021, the Company recorded discrete tax expense of $23 million as a result of tax legislation enacted in the UK in June 2021, which increased the statutory UK tax rate from 19 percent to 25 percent for tax periods after April 1, 2023. The Company revalued its net deferred tax balances related to the UK business to reflect the increased tax rate.
The adjusted effective tax rate for the quarter and year-to-date periods ended July 3, 2021 and June 27, 2020 was 23%.
Fluctuations in foreign currency exchange rates could impact the expected effective income tax rate as it is dependent upon U.S. dollar earnings of foreign subsidiaries doing business in various countries with differing statutory rates. Additionally, the rate could be impacted by tax legislation and if pending uncertain tax matters, including tax positions that could be affected by planning initiatives, are resolved more or less favorably than we currently expect.
| Quarter ended | Year-to-date period ended | |||||||||||||
| Consolidated results (dollars in millions) | July 3, 2021 | June 27, 2020 | July 3, 2021 | June 27, 2020 | ||||||||||
| Reported income taxes | $ | 144 | $ | 109 | $ | 253 | $ | 203 | ||||||
| Mark-to-market | 6 | (23) | 4 | (20) | ||||||||||
| Business and portfolio realignment | (2) | (1) | (3) | (4) | ||||||||||
| Multi-employer pension plan withdrawal | — | 1 | — | 1 | ||||||||||
| UK tax rate change | 23 | — | 23 | — | ||||||||||
| Adjusted income taxes | $ | 116 | $ | 132 | $ | 229 | $ | 226 | ||||||
| Reported effective income tax rate | 26.9 | % | 23.3 | % | 24.9 | % | 22.2 | % | ||||||
| Mark-to-market | — | % | (0.5) | % | — | % | (0.3) | % | ||||||
| Business and portfolio realignment | (0.1) | % | 0.4 | % | — | % | 0.1 | % | ||||||
| Multi-employer pension plan withdrawal | — | % | — | % | — | % | — | % | ||||||
| UK tax rate change | 4.4 | % | — | % | 2.3 | % | — | % | ||||||
| Adjusted effective income tax rate | 22.6 | % | 23.4 | % | 22.6 | % | 22.5 | % | ||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
35
Liquidity and capital resources
At this time, the COVID-19 pandemic has not materially impacted our liquidity and we anticipate current cash and marketable security balances, operating cash flows, together with our credit facilities and other financing sources including commercial paper, credit and bond markets, will be adequate to meet our operating, investing and financing needs. We expect cash provided by operating activities of $1.6-$1.7 billion and capital expenditures of approximately $500 million in 2021. We currently have $2.5 billion of unused revolving credit agreements, including $1.5 billion effective through 2023 and $1.0 billion effective through January 2022, as well as continued access to the commercial paper markets. We are currently in compliance with all debt covenants and do not have material uncertainty about our ability to maintain compliance in future periods. We continue to utilize available capacity within the Monetization Programs to maintain financial flexibility without negatively impacting working capital.
As the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs. There can be no assurance that volatility and/or disruption in the global capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all.
Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating and investing needs.
We have historically reported negative working capital primarily as the result of our focus to improve core working capital by reducing our levels of trade receivables and inventory while extending the timing of payment of our trade payables. The impacts of the extended customer terms program and the monetization programs on core working capital are largely offsetting. These programs are all part of our ongoing working capital management.
We periodically monitor our supplier payment terms to assess whether our terms are competitive and in line with local market terms. To the extent that such assessment indicates that our supplier payment terms are not aligned with local market terms, we may seek to adjust our terms, including extending or shortening our payment due dates as appropriate. Supplier payment term modifications did not have a material impact on our cash flows during 2020, and are not expected to have a material impact in 2021.
We have a substantial amount of indebtedness which results in current maturities of long-term debt and notes payable which can have a significant impact on working capital as a result of the timing of these required payments. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, pay dividends, fund acquisition opportunities, and repurchase our common stock, reduce our working capital amounts. We had negative working capital of $1.2 billion and $1.4 billion as of July 3, 2021 and June 27, 2020, respectively.
The following table reflects net debt amounts:
| (millions, unaudited) | July 3, 2021 | January 2, 2021 | ||||||||||||
| Notes payable | $ | 551 | $ | 102 | ||||||||||
| Current maturities of long-term debt | 17 | 627 | ||||||||||||
| Long-term debt | 7,029 | 6,746 | ||||||||||||
| Total debt liabilities | $ | 7,597 | $ | 7,475 | ||||||||||
| Less: | ||||||||||||||
| Cash and cash equivalents | (395) | (435) | ||||||||||||
| Net debt | $ | 7,202 | $ | 7,040 | ||||||||||
36
The following table sets forth a summary of our cash flows:
| Year-to-date period ended | ||||||||
| (millions) | July 3, 2021 | June 27, 2020 | ||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 687 | $ | 971 | ||||
| Investing activities | (330) | (515) | ||||||
| Financing activities | (401) | 234 | ||||||
| Effect of exchange rates on cash and cash equivalents | 4 | (40) | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | (40) | $ | 650 | ||||
Operating activities
The principal source of our operating cash flow is net earnings, meaning cash receipts from the sale of our products, net of costs to manufacture and market our products.
Net cash provided by our operating activities for the year-to-date period ended July 3, 2021, totaled $687 million compared to $971 million in the prior year period. The decrease is due primarily to higher year-over-year income tax payments and changes in incentive compensation and other accruals during the year.
Our cash conversion cycle (defined as days of inventory and trade receivables outstanding less days of trade payables outstanding, based on a trailing 12 month average), was approximately negative 11 days and negative 7 days for the 12 month periods ended July 3, 2021 and June 27, 2020, respectively. The improvement from the prior year is due primarily to improvement in the number of days of trade payables outstanding which results from an increase in capital spending in accounts payable and other working capital initiatives.
We measure cash flow as net cash provided by operating activities reduced by expenditures for property additions. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow metric is reconciled to the most comparable GAAP measure, as follows:
| Year-to-date period ended | ||||||||
| (millions) | July 3, 2021 | June 27, 2020 | ||||||
| Net cash provided by operating activities | $ | 687 | $ | 971 | ||||
| Additions to properties | (301) | (218) | ||||||
| Cash flow | $ | 386 | $ | 753 | ||||
Our non-GAAP measure for cash flow declined to $386 million in the year-to-date period ended July 3, 2021, from $753 million in the prior year period due primarily to higher capital expenditures as projects were delayed in the prior year due to the pandemic, and higher year-over-year income tax payments and incentive compensation.
Investing activities
Our net cash used in investing activities totaled $330 million for the year-to-date period ended July 3, 2021 compared to $515 million in the comparable prior year period. The impact of cash outflow from the purchase of securities in the prior year period was partially offset by higher capital expenditures during the current period.
Financing activities
Our net cash used in financing activities for the quarter ended July 3, 2021 totaled $401 million compared to cash provided of $234 million during the comparable prior year period. The year-over-year variance was driven by the repayment of €500 million, seven-year 1.75% Euro Notes upon maturity in May 2021 and the repurchase of $240 million of our common stock during the current year, partially offset by the May 2021 issuance of €300 million eight-year 0.50% Euro Notes due 2029.
In February 2020, the board of directors approved an authorization to repurchase up to $1.5 billion of the Company's common stock through December 2022. The authorization is intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs. Total purchases for the year-to-date period ended July 3, 2021, were 4 million shares for $240 million. The Company did not purchase shares in the year-to-date period ended June 27, 2020.
37
We paid cash dividends of $392 million in the year-to-date period ended July 3, 2021, compared to $390 million during the comparable prior year period. In July 2021, the board of directors declared a dividend of $.58 per common share, payable on September 15, 2021 to shareholders of record at the close of business on September 1, 2021.
We entered into an unsecured Five-Year Credit Agreement in January 2018, allowing us to borrow, on a revolving credit basis, up to $1.5 billion and expiring in January 2023.
In January 2021, we entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to $1.0 billion at any time outstanding, to replace the $1.0 billion 364-day facility that expired in January 2021.
The Five-Year and 364 Day Credit Agreements, which had no outstanding borrowings as July 3, 2021, contain customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agents may terminate the commitments under the credit facilities, accelerate any outstanding loans under the agreements, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest.
Our Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions and also contain a change of control provision. There are no significant restrictions on the payment of dividends. We were in compliance with all covenants as of July 3, 2021.
The Notes do not contain acceleration of maturity clauses that are dependent on credit ratings. A change in our credit ratings could limit our access to the U.S. short-term debt market and/or increase the cost of refinancing long-term debt in the future. However, even under these circumstances, we would continue to have access to our 364-Day Credit Facility, which expires in January 2022, as well as our Five-Year Credit Agreement, which expires in January 2023. This source of liquidity is unused and available on an unsecured basis, although we do not currently plan to use it.
Monetization and Accounts Payable programs
We have a program in which customers could extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program). In order to mitigate the net working capital impact of the Extended Terms Program for discrete customers, we entered into agreements to sell, on a revolving basis, certain trade accounts receivable balances to third party financial institutions (Monetization Programs). Transfers under the Monetization Programs are accounted for as sales of receivables resulting in the receivables being de-recognized from our Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum funding from receivables that may be sold at any time is currently $1,033 million, but may be increased or decreased as customers move in or out of the Extended Terms Program and as additional financial institutions move in or out of the Monetization Programs. Accounts receivable sold of $793 million and $783 million remained outstanding under this arrangement as of July 3, 2021 and January 2, 2021, respectively.
The Monetization Programs are designed to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. Current DSO levels within North America are consistent with DSO levels prior to the execution of the Extended Term Program and Monetization Programs.
Refer to Note 2 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.
We periodically monitor our supplier payment terms to assess whether our terms are competitive and in line with local market terms. To the extent that such assessment indicates that our supplier payment terms are not aligned with local market terms, we may seek to adjust our terms, including extending or shortening our payment due dates as appropriate, however, we do not expect supplier payment term modifications to have a material impact on our cash flows during 2021.
We have agreements with third parties (Accounts Payable Program) to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected, sell our payment obligations to designated
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third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more of our payment obligations prior to their scheduled due dates at a discounted price to participating financial institutions. Our goal is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, our right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers.
Refer to Note 1 within Notes to Consolidated Financial Statements for further information related to accounts payable.
If financial institutions were to terminate their participation in the Monetization Programs and we are not able to modify related customer payment terms, working capital could be negatively impacted. Additionally, working capital could be negatively impacted if we shorten our supplier payment terms as a result of supplier negotiations. For suppliers participating in the Accounts Payable Programs, financial institutions may terminate their participation or we could experience a downgrade in our credit rating that could result in higher costs to suppliers. If working capital is negatively impacted as a result of these events and we were unable to secure alternative programs, we may have to utilize our various financing arrangements for short-term liquidity or increase our long-term borrowings.
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Future outlook
Kellogg Company affirmed its full-year financial guidance on operating profit, earnings per share and cash flow, as an improved outlook for net sales is offset by the impact of industry-wide supply chain challenges and high cost inflation expected to persist in the second half. Specifically, the Company's updated its guidance as follows:
•Organic net sales growth is now expected to be 0-1% in 2021, an increase from previous guidance for flat net sales, reflecting recent momentum in the business, and despite lapping last year's exceptional growth.
•Currency-neutral adjusted operating profit growth is unchanged from prior quarter, calling for a decline of approximately (1)-(2)% year on year as it laps last year's exceptional growth.
•Currency-neutral adjusted earnings per share for the full year is unchanged from the prior quarter, estimated to increase by approximately +1-2% year on year.
•Net cash provided by operating activities is unchanged from prior quarter, expected to finish 2021 at approximately $1.6 - $1.7 billion, with capital expenditure of approximately $0.5 billion. As a result, our non-GAAP measure for cash flow is estimated at $1.1 - $1.2 billion.
Excluded from this guidance are any significant supply chain or other prolonged market disruptions related to the pandemic, global economy or other unexpected events in the second half of 2021.
We are unable to reasonably estimate the potential full-year financial impact of mark-to-market adjustments because these impacts are dependent on future changes in market conditions. Similarly, because of volatility in foreign exchange rates and shifts in country mix of our international earnings, we are unable to reasonably estimate the potential full-year financial impact of foreign currency translation.
As a result, these impacts are not included in the guidance provided. Therefore, we are unable to provide a full reconciliation of these non-GAAP measures used in our guidance without unreasonable effort as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.
See the table below that outlines the projected impact of certain other items that are excluded from non-GAAP guidance for 2021:
| Impact of certain items excluded from Non-GAAP guidance: | Net Sales | Operating Profit | Earnings Per Share | ||||||||
| Business and portfolio realignment (pre-tax) | $30-$40M | $0.09-$0.12 | |||||||||
| Income tax impact applicable to adjustments, net** | ~$0.03 | ||||||||||
| UK tax rate change | $0.07 | ||||||||||
| Currency-neutral adjusted guidance* | ~(1)-(2)% | ~1-2% | |||||||||
| Organic guidance* | ~0-1% | ||||||||||
* 2021 full year guidance for net sales, operating profit, and earnings per share are provided on a non-GAAP basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. These items for 2021 include impacts of mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodities and certain foreign currency contracts. The Company is providing quantification of known adjustment items where available.
** Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
| Reconciliation of Non-GAAP amounts - Cash Flow Guidance | |||||
| (billions) | Full Year 2021 | ||||
| Net cash provided by (used in) operating activities | $1.6-$1.7 | ||||
| Additions to properties | ~($0.5) | ||||
| Cash Flow | $1.1-$1.2 | ||||
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Forward-looking statements
This Report contains “forward-looking statements” with projections concerning, among other things, the Company’s restructuring programs, the integration of acquired businesses, our strategy, financial principles, and plans, initiatives, improvements and growth; sales, margins, advertising, promotion, merchandising, brand building, operating profit, and earnings per share; innovation; investments; capital expenditures, asset write-offs and expenditures and costs related to productivity or efficiency initiatives; the impact of accounting changes and significant accounting estimates; our ability to meet interest and debt principal repayment obligations; minimum contractual obligations; future common stock repurchases or debt reduction, effective income tax rate; cash flow and core working capital improvements; interest expense; commodity and energy prices; and employee benefit plan costs and funding. Forward-looking statements include predictions of future results or activities and may contain the words “expect,” “believe,” “will,” “can,” “anticipate,” “estimate,” “project,” “should,” or words or phrases of similar meaning. For example, forward-looking statements are found in this Item 1 and in several sections of Management’s Discussion and Analysis. Our actual results or activities may differ materially from these predictions.
Our future results could be affected by a variety of other factors, including uncertainty of the magnitude, duration, geographic reach, impact on the global economy and current and potential travel restrictions of the COVID-19 outbreak, the current, and uncertain future, impact of the COVID-19 outbreak on our business, growth, reputation, prospects, financial condition, operating results (including components of our financial results), and cash flows and liquidity, the expected benefits and costs of the divestiture of selected cookies, fruit and fruit flavored-snacks, pie crusts, and ice-cream cones businesses of the Company, risks relating to any unforeseen changes to or effects on liabilities, future capital expenditures, revenues, expenses, earnings, synergies, indebtedness, financial condition, losses and future prospects, the ability to implement restructuring as planned, whether the expected amount of costs associated with restructuring will differ from forecasts, whether we will be able to realize the anticipated benefits from restructuring in the amounts and times expected, the ability to realize the anticipated benefits and synergies from business acquisitions in the amounts and at the times expected, the impact of competitive conditions, the effectiveness of pricing, advertising, and promotional programs; the success of innovation, renovation and new product introductions; the recoverability of the carrying value of goodwill and other intangibles, the success of productivity improvements and business transitions, commodity and energy prices, transportation costs, labor costs, disruptions or inefficiencies in supply chain, the availability of and interest rates on short-term and long-term financing, actual market performance of benefit plan trust investments, the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs, changes in consumer behavior and preferences, the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability, legal and regulatory factors including changes in food safety, advertising and labeling laws and regulations, the ultimate impact of product recalls; business disruption or other losses from war, terrorist acts or political unrest; and the risks and uncertainties described in Item 1A below. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our Company is exposed to certain market risks, which exist as a part of our ongoing business operations. We use derivative financial and commodity instruments, where appropriate, to manage these risks. Refer to Note 6 within Notes to Consolidated Financial Statements for further information on our derivative financial and commodity instruments.
Refer to disclosures contained within Item 7A of our 2020 Annual Report on Form 10-K. Other than changes noted here, there have been no material changes in the Company’s market risk as of July 3, 2021.
Volatile market conditions arising from the COVID-19 pandemic may result in significant changes in foreign exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our net sales and operating profit when translated to U.S. dollars. Primary exposures include the U.S. dollar versus the euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Brazilian real, Nigerian naira, Russian ruble and Egyptian pound, and in the case of inter-subsidiary transactions, the British pound versus the euro. There is significant uncertainty surrounding the impact of COVID-19 on financial markets and we will continue to monitor the business for adverse impacts related to the pandemic.
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In May of 2021, the Company issued €300 million (approximately $353 million at July 3, 2021), which reflects the discount, fees and translation adjustments of eight-year 0.50% Euro Notes due 2029, resulting in net proceeds of €298 million after discount and underwriting commissions. In connection with this debt issuance, the Company terminated forward starting interest rate swaps with notional amounts totaling €250 million, resulting in a $6 million gain. These forward starting interest rate swaps were accounted for as cash flow hedges and the related gain was recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the Notes.
During the year-to-date period ended July 3, 2021, we entered into interest rate contracts with notional amounts totaling $450 million. The interest rate contracts are designated as fair value hedges of certain U.S. Dollar debt. We have interest rate contracts with notional amounts totaling $2.8 billion representing a net settlement receivable of $85 million as of July 3, 2021. We had interest rate contracts with notional amounts totaling $2.6 billion representing a net settlement receivable of $46 million as of January 2, 2021.
During the quarter ended July 3, 2021, we settled cross currency swaps with notional amounts totaling €565 million, resulting in a loss of $7 million. These cross currency swaps were accounted for as net investment hedges and the related loss was recorded in accumulated other comprehensive income. During the quarter ended July 3, 2021, we also entered into cross currency swaps with notional amounts totaling €565 million, as hedges against foreign currency volatility associated with our net investment in our wholly-owned foreign subsidiaries. These swaps were designated as net investment hedges. We have cross currency swaps with notional amounts totaling $1.4 billion outstanding as of July 3, 2021 representing a net settlement receivable of $22 million. The total notional amount of cross currency swaps outstanding as of January 2, 2021 was $1.4 billion representing a net settlement obligation of $4 million.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure under Rules 13a-15(e) and 15d-15(e). Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.
As of July 3, 2021, we carried out an evaluation under the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures.
Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
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KELLOGG COMPANY
PART II — OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended January 2, 2021. The risk factors disclosed under those Reports in addition to the other information set forth in this Report, could materially affect our business, financial condition, or results. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition, or results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2020, the board of directors approved an authorization to repurchase up to $1.5 billion of the Company's common stock through December 2022. These authorizations are intended to allow the Company to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs.
The following table provides information with respect to purchases of common shares under programs authorized by our board of directors during the quarter ended July 3, 2021.
(c) Issuer Purchases of Equity Securities
(millions, except per share data)
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
| Month #1: | ||||||||||||||
| 4/4/2021 - 5/1/2021 | — | $ | — | — | $ | 1,260 | ||||||||
| Month #2: | ||||||||||||||
| 5/2/2021 - 5/29/2021 | — | $ | — | — | $ | 1,260 | ||||||||
| Month #3: | ||||||||||||||
| 5/30/2021 - 7/3/2021 | — | $ | — | — | $ | 1,260 | ||||||||
| Total | — | $ | — | — | ||||||||||
Item 6. Exhibits
(a)Exhibits:
| 4.1 | Officers’ Certificate of Kellogg Company (with form of 0.500% Senior Notes due 2029), incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated May 20, 2021, Commission file number 1-4171. | ||||
| 31.1 | Rule 13a-14(e)/15d-14(a) Certification from Steven A. Cahillane | ||||
| 31.2 | Rule 13a-14(e)/15d-14(a) Certification from Amit Banati | ||||
| 32.1 | Section 1350 Certification from Steven A. Cahillane | ||||
| 32.2 | Section 1350 Certification from Amit Banati | ||||
| 101.INS | XBRL Instance Document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
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KELLOGG COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KELLOGG COMPANY | ||
| /s/ Amit Banati | ||
| Amit Banati | ||
| Principal Financial Officer; Senior Vice President and Chief Financial Officer | ||
| /s/ Kurt Forche | ||
| Kurt Forche | ||
| Principal Accounting Officer; Vice President and Corporate Controller | ||
Date: August 6, 2021
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KELLOGG COMPANY
EXHIBIT INDEX
| Exhibit No. | Description | Electronic (E) Paper (P) Incorp. By Ref. (IBRF) | ||||||
| Officers’ Certificate of Kellogg Company (with form of 0.500% Senior Notes due 2029), incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated May 20, 2021, Commission file number 1-4171. | IBRF | |||||||
| Rule 13a-14(e)/15d-14(a) Certification from Steven A. Cahillane | E | |||||||
| Rule 13a-14(e)/15d-14(a) Certification from Amit Banati | E | |||||||
| Section 1350 Certification from Steven A. Cahillane | E | |||||||
| Section 1350 Certification from Amit Banati | E | |||||||
| 101.INS | XBRL Instance Document | E | ||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | E | ||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | E | ||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | E | ||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | E | ||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | E | ||||||
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