KELLANOVA - Quarter Report: 2022 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 02, 2022
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 2, 2022 — 340,113,095 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 2, 2022 (unaudited) | January 1, 2022 | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 323 | $ | 286 | ||||
| Accounts receivable, net | 1,884 | 1,489 | ||||||
| Inventories | 1,678 | 1,398 | ||||||
| Other current assets | 376 | 221 | ||||||
| Total current assets | 4,261 | 3,394 | ||||||
| Property, net | 3,656 | 3,827 | ||||||
| Operating lease right-of-use assets | 643 | 640 | ||||||
| Goodwill | 5,744 | 5,771 | ||||||
| Other intangibles, net | 2,360 | 2,409 | ||||||
| Investments in unconsolidated entities | 426 | 424 | ||||||
| Other assets | 1,847 | 1,713 | ||||||
| Total assets | $ | 18,937 | $ | 18,178 | ||||
| Current liabilities | ||||||||
| Current maturities of long-term debt | $ | 854 | $ | 712 | ||||
| Notes payable | 320 | 137 | ||||||
| Accounts payable | 2,866 | 2,573 | ||||||
| Current operating lease liabilities | 122 | 116 | ||||||
| Accrued advertising and promotion | 776 | 714 | ||||||
| Accrued salaries and wages | 236 | 300 | ||||||
| Other current liabilities | 877 | 763 | ||||||
| Total current liabilities | 6,051 | 5,315 | ||||||
| Long-term debt | 5,838 | 6,262 | ||||||
| Operating lease liabilities | 502 | 502 | ||||||
| Deferred income taxes | 866 | 722 | ||||||
| Pension liability | 624 | 706 | ||||||
| Other liabilities | 498 | 456 | ||||||
| Commitments and contingencies | ||||||||
| Equity | ||||||||
Common stock, $.25 par value | 105 | 105 | ||||||
| Capital in excess of par value | 1,008 | 1,023 | ||||||
| Retained earnings | 9,387 | 9,028 | ||||||
| Treasury stock, at cost | (4,817) | (4,715) | ||||||
| Accumulated other comprehensive income (loss) | (1,601) | (1,721) | ||||||
| Total Kellogg Company equity | 4,082 | 3,720 | ||||||
| Noncontrolling interests | 476 | 495 | ||||||
| Total equity | 4,558 | 4,215 | ||||||
| Total liabilities and equity | $ | 18,937 | $ | 18,178 | ||||
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 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||
| Net sales | $ | 3,864 | $ | 3,555 | $ | 7,536 | $ | 7,139 | |||||||||
| Cost of goods sold | 2,721 | 2,331 | 5,234 | 4,749 | |||||||||||||
| Selling, general and administrative expense | 728 | 720 | 1,370 | 1,414 | |||||||||||||
| Operating profit | 415 | 504 | 932 | 976 | |||||||||||||
| Interest expense | 54 | 58 | 110 | 117 | |||||||||||||
| Other income (expense), net | 60 | 86 | 134 | 155 | |||||||||||||
| Income before income taxes | 421 | 532 | 956 | 1,014 | |||||||||||||
| Income taxes | 97 | 144 | 209 | 253 | |||||||||||||
| Earnings (loss) from unconsolidated entities | 2 | (3) | 3 | (5) | |||||||||||||
| Net income | 326 | 385 | 750 | 756 | |||||||||||||
| Net income (loss) attributable to noncontrolling interests | — | 5 | 2 | 8 | |||||||||||||
| Net income attributable to Kellogg Company | $ | 326 | $ | 380 | $ | 748 | $ | 748 | |||||||||
| Per share amounts: | |||||||||||||||||
| Basic earnings | $ | 0.96 | $ | 1.12 | $ | 2.20 | $ | 2.19 | |||||||||
| Diluted earnings | $ | 0.95 | $ | 1.11 | $ | 2.19 | $ | 2.18 | |||||||||
| Average shares outstanding: | |||||||||||||||||
| Basic | 339 | 341 | 340 | 341 | |||||||||||||
| Diluted | 342 | 343 | 342 | 343 | |||||||||||||
| Actual shares outstanding at period end | 340 | 341 | |||||||||||||||
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 2, 2022 | July 2, 2022 | ||||||||||||||||||||||
| (unaudited) | Pre-tax amount | Tax (expense) benefit | After-tax amount | Pre-tax amount | Tax (expense) benefit | After-tax amount | |||||||||||||||||
| Net income | $ | 326 | $ | 750 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustments: | |||||||||||||||||||||||
| Foreign currency translation adjustments during period | $ | (243) | $ | 1 | (242) | $ | (260) | $ | 2 | (258) | |||||||||||||
| Net investment hedges: | |||||||||||||||||||||||
| Net investment hedges gain (loss) | 255 | (67) | 188 | 356 | (94) | 262 | |||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Unrealized gain (loss) | 74 | (20) | 54 | 151 | (40) | 111 | |||||||||||||||||
| Reclassification to net income | 4 | (1) | 3 | 8 | (2) | 6 | |||||||||||||||||
| 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) | (4) | — | (4) | |||||||||||||||||
| Other comprehensive income (loss) | $ | 88 | $ | (86) | $ | 2 | $ | 249 | $ | (133) | $ | 116 | |||||||||||
| Comprehensive income | $ | 328 | $ | 866 | |||||||||||||||||||
| Net Income attributable to noncontrolling interests | — | 2 | |||||||||||||||||||||
| Other comprehensive income (loss) attributable to noncontrolling interests | (8) | (4) | |||||||||||||||||||||
| Comprehensive income attributable to Kellogg Company | $ | 336 | $ | 868 | |||||||||||||||||||
| 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 | $ | 50 | $ | — | 50 | $ | (47) | $ | — | (47) | |||||||||||||
| Net investment hedges: | |||||||||||||||||||||||
| Net investment hedges gain (loss) | (42) | 11 | (31) | 88 | (23) | 65 | |||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges | (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 | |||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
| Quarter ended July 2, 2022 | ||||||||||||||||||||||||||||||||
Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non-controlling interests | Total equity | |||||||||||||||||||||||||
| (unaudited) | shares | amount | shares | amount | ||||||||||||||||||||||||||||
| Balance, April 2, 2022 | 421 | $ | 105 | $ | 993 | $ | 9,254 | 83 | $ | (4,946) | $ | (1,611) | $ | 3,795 | $ | 500 | $ | 4,295 | ||||||||||||||
| Net income | 326 | 326 | — | 326 | ||||||||||||||||||||||||||||
Dividends declared ($0.58 per share) | (197) | (197) | (197) | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | (16) | (16) | |||||||||||||||||||||||||||||
| Other comprehensive income | 10 | 10 | (8) | 2 | ||||||||||||||||||||||||||||
| Stock compensation | 19 | 19 | 19 | |||||||||||||||||||||||||||||
| Stock options exercised and other | (4) | 4 | (2) | 129 | 129 | 129 | ||||||||||||||||||||||||||
| Balance, July 2, 2022 | 421 | $ | 105 | $ | 1,008 | $ | 9,387 | 81 | $ | (4,817) | $ | (1,601) | $ | 4,082 | $ | 476 | $ | 4,558 | ||||||||||||||
| Year-to-date period ended July 2, 2022 | ||||||||||||||||||||||||||||||||
Common stock | Capital in excess of par value | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total Kellogg Company equity | Non-controlling interests | Total equity | |||||||||||||||||||||||||
| (unaudited) | shares | amount | shares | amount | ||||||||||||||||||||||||||||
| Balance, January 1, 2022 | 421 | $ | 105 | $ | 1,023 | $ | 9,028 | 80 | $ | (4,715) | $ | (1,721) | $ | 3,720 | $ | 495 | $ | 4,215 | ||||||||||||||
| Common stock repurchases | 5 | (300) | (300) | (300) | ||||||||||||||||||||||||||||
| Net income | 748 | 748 | 2 | 750 | ||||||||||||||||||||||||||||
Dividends declared ($1.16 per share) | (394) | (394) | (394) | |||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | (17) | (17) | |||||||||||||||||||||||||||||
| Other comprehensive income | 120 | 120 | (4) | 116 | ||||||||||||||||||||||||||||
| Stock compensation | 35 | 35 | 35 | |||||||||||||||||||||||||||||
| Stock options exercised and other | (50) | 5 | (4) | 198 | 153 | 153 | ||||||||||||||||||||||||||
| Balance, July 2, 2022 | 421 | $ | 105 | $ | 1,008 | $ | 9,387 | 81 | $ | (4,817) | $ | (1,601) | $ | 4,082 | $ | 476 | $ | 4,558 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
6
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY (cont.)
(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.
7
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
| Year-to-date period ended | ||||||||
| (unaudited) | July 2, 2022 | July 3, 2021 | ||||||
| Operating activities | ||||||||
| Net income | $ | 750 | $ | 756 | ||||
| Adjustments to reconcile net income to operating cash flows: | ||||||||
| Depreciation and amortization | 238 | 232 | ||||||
| Postretirement benefit plan expense (benefit) | (137) | (137) | ||||||
| Deferred income taxes | 32 | 50 | ||||||
| Stock compensation | 35 | 39 | ||||||
| Other | 8 | 3 | ||||||
| Postretirement benefit plan contributions | (12) | (10) | ||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Trade receivables | (343) | (138) | ||||||
| Inventories | (306) | (89) | ||||||
| Accounts payable | 468 | 139 | ||||||
| All other current assets and liabilities | 72 | (158) | ||||||
| Net cash provided by (used in) operating activities | 805 | 687 | ||||||
| Investing activities | ||||||||
| Additions to properties | (267) | (301) | ||||||
| Issuance of notes receivable | — | (29) | ||||||
| Repayments from notes receivable | 10 | 28 | ||||||
| Investments in unconsolidated entities | — | (10) | ||||||
| Purchases of available for sale securities | (10) | (5) | ||||||
| Sales of available for sale securities | 9 | 6 | ||||||
| Settlement of net investment hedges | 37 | (8) | ||||||
| Collateral paid on derivatives | (103) | (20) | ||||||
| Other | 6 | 9 | ||||||
| Net cash provided by (used in) investing activities | (318) | (330) | ||||||
| Financing activities | ||||||||
| Net issuances (reductions) of notes payable | 183 | 450 | ||||||
| Issuances of long-term debt | — | 361 | ||||||
| Reductions of long-term debt | (28) | (616) | ||||||
| Net issuances of common stock | 173 | 38 | ||||||
| Common stock repurchases | (300) | (240) | ||||||
| Cash dividends | (394) | (392) | ||||||
| Other | (17) | (2) | ||||||
| Net cash provided by (used in) financing activities | (383) | (401) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (67) | 4 | ||||||
| Increase (decrease) in cash and cash equivalents | 37 | (40) | ||||||
| Cash and cash equivalents at beginning of period | 286 | 435 | ||||||
| Cash and cash equivalents at end of period | $ | 323 | $ | 395 | ||||
| Supplemental cash flow disclosures of non-cash investing activities: | ||||||||
| Additions to properties included in accounts payable | $ | 48 | $ | 79 | ||||
See accompanying Notes to Consolidated Financial Statements.
8
Notes to Consolidated Financial Statements
for the quarter ended July 2, 2022 (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 2021 Annual Report on Form 10-K.
The condensed balance sheet information at January 1, 2022 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarter ended July 2, 2022 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 2, 2022, $1.0 billion of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system. As of January 1, 2022, $905 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system.
Note 2 Proposed separation transactions
On June 21, 2022, the Company announced its intent to separate its North American cereal and plant-based foods businesses, via tax-free spin-offs, resulting in three independent public companies, each better positioned to unlock their full standalone potential. While we announced a plan to separate our plant-based food business through a tax free spin-off, we are also exploring other strategic alternatives, including a possible sale. Our current target is to complete the transactions by the end of 2023. We cannot assure that the transactions will be completed on the anticipated timeline or at all or that the terms of the separations will not change. The transactions will follow the satisfaction of customary conditions, including reviews and final approval by Kellogg’s Board of Directors, receipt of an Internal Revenue Service ruling and relevant tax opinions with respect to the tax-free nature of the transactions, effectiveness of appropriate filings with the U.S. Securities and Exchange Commission, and the completion of audited financials of the new independent companies.
Note 3 Sale of accounts receivable
The Company has a program in which a discrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).
The Company has two Receivable Sales Agreements (Monetization Programs) described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. The Monetization Programs sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold at any time is approximately $745 million. During 2022 the Company
9
amended the agreements to decrease the previous maximum receivables sold limit from approximately $1.1 billion as of January 1, 2022.
The Company has no retained interest in the receivables sold, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of July 2, 2022 and January 1, 2022 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.
Accounts receivable sold of $596 million and $549 million remained outstanding under these arrangements as of July 2, 2022 and January 1, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on sale of receivables was $3 million and $5 million for the quarter and year-to-date period ended July 2, 2022, respectively and was $2 million and $4 million for the quarter and year-to-date period ended July 3, 2021. 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 $16 million and $66 million remained outstanding under these programs as of July 2, 2022 and January 1, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on the sale of these receivables is included in OIE and is not material.
Note 4 Equity
Earnings per share
Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, restricted stock units, and certain contingently issuable performance shares. There were approximately 4 million and 6 million anti-dilutive potential common shares excluded from the calculation for the quarter and year-to-date periods ended July 2, 2022. There were approximately 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. 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 2, 2022 and July 3, 2021.
Share repurchases
In February 2020, the board of directors approved an authorization to repurchase up to $1.5 billion of our common stock through December 2022. During the year-to-date period ended July 2, 2022, the Company repurchased approximately 5 million shares of common stock for a total of $300 million. During the year-to-date period July 3, 2021, the Company repurchased approximately 4 million shares of common stock for a total of $240 million.
Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges, 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 2, 2022 and July 3, 2021, consisted of the following:
| (millions) | |||||||||||
| Details about AOCI components | Amount reclassified from AOCI | Line item impacted within Income Statement | |||||||||
| Quarter ended July 2, 2022 | Year-to-date period ended July 2, 2022 | ||||||||||
| (Gains) losses on cash flow hedges: | |||||||||||
| Interest rate contracts (a) | $ | 4 | $ | 8 | Interest expense | ||||||
| $ | 4 | $ | 8 | Total before tax | |||||||
| (1) | (2) | Tax expense (benefit) | |||||||||
| $ | 3 | $ | 6 | 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 | $ | 3 | $ | 5 | Net of tax | ||||||
| (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 | ||||||
(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 2, 2022 and January 1, 2022 consisted of the following:
| (millions) | July 2, 2022 | January 1, 2022 | ||||||
| Foreign currency translation adjustments | $ | (2,002) | $ | (1,748) | ||||
| Net investment hedges gain (loss) | 329 | 67 | ||||||
| Cash flow hedges — unrealized net gain (loss) | 104 | (13) | ||||||
| Postretirement and postemployment benefits: | ||||||||
| Net experience gain (loss) | (2) | (1) | ||||||
| Prior service credit (cost) | (26) | (26) | ||||||
| Available-for-sale securities unrealized net gain (loss) | (4) | — | ||||||
| Total accumulated other comprehensive income (loss) | $ | (1,601) | $ | (1,721) | ||||
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 2021 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.
Pension
| Quarter ended | Year-to-date period ended | ||||||||||||||||
| (millions) | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||
| Service cost | $ | 8 | $ | 9 | $ | 17 | $ | 18 | |||||||||
| Interest cost | 28 | 25 | 57 | 50 | |||||||||||||
| Expected return on plan assets | (72) | (77) | (143) | (155) | |||||||||||||
| Amortization of unrecognized prior service cost | 3 | 2 | 5 | 4 | |||||||||||||
| Recognized net (gain) loss | (10) | (11) | (31) | (20) | |||||||||||||
| Total pension (income) expense | $ | (43) | $ | (52) | $ | (95) | $ | (103) | |||||||||
Other nonpension postretirement
| Quarter ended | Year-to-date period ended | ||||||||||||||||
| (millions) | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||
| Service cost | $ | 3 | $ | 3 | $ | 6 | $ | 6 | |||||||||
| Interest cost | 6 | 5 | 12 | 10 | |||||||||||||
| Expected return on plan assets | (27) | (23) | (55) | (46) | |||||||||||||
| Amortization of unrecognized prior service cost | (3) | (2) | (5) | (4) | |||||||||||||
| Total postretirement benefit (income) expense | $ | (21) | $ | (17) | $ | (42) | $ | (34) | |||||||||
Postemployment
| Quarter ended | Year-to-date period ended | ||||||||||||||||
| (millions) | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||
| Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | |||||||||
| Recognized net experience (gain) loss | (1) | (1) | (2) | (2) | |||||||||||||
| Total postemployment benefit expense | $ | — | $ | — | $ | — | $ | — | |||||||||
12
For the quarter and year-to-date periods ended July 2, 2022, the Company recognized a gain of $10 million and $31 million, respectively, related to the remeasurement of certain U.S. pension plans. For the quarter and year-to-date periods ended July 3, 2021, the Company recognized a gain of $11 million and $20 million, respectively, related to the remeasurement of certain U.S. pension plans. These remeasurements were the result of distributions that exceeded service and interest costs resulting in settlement accounting for that particular plan. For the quarter and year-to-date periods ended July 2, 2022 and July 3, 2021, remeasurements recognized were due primarily to an increase in the discount rate relative to the previous remeasurement date partially offset by lower than expected return on plan assets. Fiscal 2022 net periodic benefit cost for the U.S. pension plans was initially determined using a weighted average discount rate of 3.0%. As a result of the remeasurements, this rate has increased to 3.6%.
Company contributions to employee benefit plans are summarized as follows:
| (millions) | Pension | Nonpension postretirement | Total | ||||||||
| Quarter ended: | |||||||||||
| July 2, 2022 | $ | — | $ | 5 | $ | 5 | |||||
| July 3, 2021 | $ | 1 | $ | 7 | $ | 8 | |||||
| Year-to-date period ended: | |||||||||||
| July 2, 2022 | $ | 1 | $ | 11 | $ | 12 | |||||
| July 3, 2021 | $ | 2 | $ | 8 | $ | 10 | |||||
| Full year: | |||||||||||
| Fiscal year 2022 (projected) | $ | 3 | $ | 17 | $ | 20 | |||||
| Fiscal year 2021 (actual) | $ | 4 | $ | 16 | $ | 20 | |||||
Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.
Note 6 Income taxes
The consolidated effective tax rate for the quarters ended July 2, 2022 and July 3, 2021 was 23% and 27%, respectively. The consolidated effective tax rate for the year-to-date periods ended July 2, 2022 and July 3, 2021 was 22% and 25%, respectively. The lower effective tax rate for the quarter and year-to-date periods ended July 2, 2022, compared to the same periods in 2021, was due to a decrease in net discrete tax expense. During the second quarter of 2021, the Company recorded tax expense of $23 million as a result of tax legislation enacted in the United Kingdom (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 2, 2022, the Company classified $14 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 2, 2022 was $49 million. Of this balance, $42 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 $8 million at July 2, 2022.
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.
13
The Company designates derivatives and nonderivative hedging instruments as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.
Derivative instruments are classified on the Consolidated Balance Sheet based on the contractual maturity of the instrument or the timing of the underlying cash flows of the instrument for derivatives with contractual maturities beyond one year. Any collateral associated with derivative instruments is classified as other assets or other current liabilities on the Consolidated Balance Sheet depending on whether the counterparty collateral is in an asset or liability position. Margin deposits related to exchange-traded commodities are recorded in accounts receivable, net on the Consolidated Balance Sheet. On the Consolidated Statement of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item. Cash flows associated with collateral and margin deposits on exchange-traded commodities are classified as investing cash flows when the collateral account is in an asset position and as financing cash flows when the collateral account is in a liability position.
Total notional amounts of the Company’s derivative instruments as of July 2, 2022 and January 1, 2022 were as follows:
| (millions) | July 2, 2022 | January 1, 2022 | ||||||
| Foreign currency exchange contracts | $ | 3,467 | $ | 2,828 | ||||
| Cross-currency contracts | 1,944 | 1,343 | ||||||
| Interest rate contracts | 2,634 | 2,816 | ||||||
| Commodity contracts | 773 | 360 | ||||||
| Total | $ | 8,818 | $ | 7,347 | ||||
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 2, 2022 and January 1, 2022, measured on a recurring basis.
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps, cross-currency swaps and over-the-counter commodity and currency contracts.
The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.
Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of July 2, 2022 or January 1, 2022.
14
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 2, 2022 and January 1, 2022:
Derivatives designated as hedging instruments
| July 2, 2022 | January 1, 2022 | ||||||||||||||||||||||
| (millions) | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cross-currency contracts: | |||||||||||||||||||||||
| Other current assets | $ | — | $ | 45 | $ | 45 | $ | — | $ | 32 | $ | 32 | |||||||||||
| Other assets | — | 115 | 115 | — | 15 | 15 | |||||||||||||||||
| Interest rate contracts(a): | |||||||||||||||||||||||
| Other current assets | — | 55 | 55 | — | 10 | 10 | |||||||||||||||||
| Other assets | — | 28 | 28 | — | 8 | 8 | |||||||||||||||||
| Total assets | $ | — | $ | 243 | $ | 243 | $ | — | $ | 65 | $ | 65 | |||||||||||
| Liabilities: | |||||||||||||||||||||||
| Cross-currency contracts: | |||||||||||||||||||||||
| Other current liabilities | $ | — | $ | — | $ | — | $ | — | $ | (2) | $ | (2) | |||||||||||
| Other liabilities | — | (5) | (5) | — | (7) | (7) | |||||||||||||||||
| Interest rate contracts: | |||||||||||||||||||||||
| Other current liabilities | — | — | — | — | (1) | (1) | |||||||||||||||||
| Other liabilities | — | (52) | (52) | — | (4) | (4) | |||||||||||||||||
| Total liabilities | $ | — | $ | (57) | $ | (57) | $ | — | $ | (14) | $ | (14) | |||||||||||
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.1 billion as of July 2, 2022 and $1.2 billion as of January 1, 2022.
Derivatives not designated as hedging instruments
| July 2, 2022 | January 1, 2022 | ||||||||||||||||||||||
| (millions) | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Foreign currency exchange contracts: | |||||||||||||||||||||||
| Other current assets | $ | — | $ | 70 | $ | 70 | $ | — | $ | 18 | $ | 18 | |||||||||||
| Other assets | — | 13 | 13 | — | 5 | 5 | |||||||||||||||||
| Interest rate contracts: | |||||||||||||||||||||||
| Other current assets | — | 2 | 2 | — | 4 | 4 | |||||||||||||||||
| Other assets | — | 7 | 7 | — | — | — | |||||||||||||||||
| Commodity contracts: | |||||||||||||||||||||||
| Other current assets | — | — | — | 5 | — | 5 | |||||||||||||||||
| Total assets | $ | — | $ | 92 | $ | 92 | $ | 5 | $ | 27 | $ | 32 | |||||||||||
| Liabilities: | |||||||||||||||||||||||
| Foreign currency exchange contracts: | |||||||||||||||||||||||
| Other current liabilities | $ | — | $ | (76) | $ | (76) | $ | — | $ | (20) | $ | (20) | |||||||||||
| Other liabilities | — | (6) | (6) | — | (6) | (6) | |||||||||||||||||
| Interest rate contracts: | |||||||||||||||||||||||
| Other current liabilities | — | (4) | (4) | — | (6) | (6) | |||||||||||||||||
| Other liabilities | — | (12) | (12) | — | (7) | (7) | |||||||||||||||||
| Commodity contracts: | |||||||||||||||||||||||
| Other current liabilities | (92) | — | (92) | (6) | — | (6) | |||||||||||||||||
| Total liabilities | $ | (92) | $ | (98) | $ | (190) | $ | (6) | $ | (39) | $ | (45) | |||||||||||
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
15
value of this debt, including current and long-term, was approximately $2.2 billion as of July 2, 2022 and $2.4 billion as of January 1, 2022.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of July 2, 2022 and January 1, 2022.
| (millions) | Line Item in the Consolidated Balance Sheet in which the hedged item is included | Carrying amount of the hedged liabilities | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a) | |||||||||||||||||||||||
| July 2, 2022 | January 1, 2022 | July 2, 2022 | January 1, 2022 | |||||||||||||||||||||||
| Interest rate contracts | Current maturities of long-term debt | $ | 208 | $ | — | $ | (2) | $ | — | |||||||||||||||||
| Interest rate contracts | Long-term debt | $ | 2,526 | $ | 2,903 | $ | (40) | $ | 12 | |||||||||||||||||
(a) The fair value adjustment related to current maturities of long-term debt includes ($2) million from discontinued hedging relationships as of July 2, 2022. The fair value adjustment related to long-term debt includes $14 million and $13 million from discontinued hedging relationships as of July 2, 2022 and January 1, 2022, respectively.
The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of July 2, 2022 and January 1, 2022 would be adjusted as detailed in the following table:
| As of July 2, 2022: | Gross Amounts Not Offset in the Consolidated Balance Sheet | |||||||||||||
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount | |||||||||||
| Total asset derivatives | $ | 335 | $ | (127) | $ | 28 | $ | 236 | ||||||
| Total liability derivatives | $ | (247) | $ | 127 | $ | 120 | $ | — | ||||||
| As of January 1, 2022: | Gross Amounts Not Offset in the Consolidated Balance Sheet | |||||||||||||
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount | |||||||||||
| Total asset derivatives | $ | 97 | $ | (47) | $ | 8 | $ | 58 | ||||||
| Total liability derivatives | $ | (59) | $ | 47 | $ | 12 | $ | — | ||||||
During the year-to-date period ended July 2, 2022, the Company settled certain interest rate contracts resulting in a net gain of approximately $82 million. These derivatives were accounted for as cash flow hedges and the related net gains were recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the related forecasted fixed rate debt, once issued. Additionally during the year-to-date period ended July 2, 2022, the Company settled certain cross currency swaps resulting in a net gain of $37 million. These cross currency swaps were accounted for as net investment hedges and the related net gain was recorded in accumulated other comprehensive income.
16
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the quarters ended July 2, 2022 and July 3, 2021 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 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| Foreign currency denominated long-term debt | $ | 134 | $ | (32) | $ | — | $ | — | ||||||||||||||||||
| Cross-currency contracts | 121 | (10) | 11 | 5 | Interest expense | |||||||||||||||||||||
| Total | $ | 255 | $ | (42) | $ | 11 | $ | 5 | ||||||||||||||||||
Derivatives not designated as hedging instruments
| (millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income | ||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Foreign currency exchange contracts | COGS | $ | 32 | $ | (9) | |||||||||
| Foreign currency exchange contracts | Other income (expense), net | (7) | — | |||||||||||
| Foreign currency exchange contracts | SG&A | 4 | 1 | |||||||||||
| Interest rate contracts | Interest expense | 1 | — | |||||||||||
| Commodity contracts | COGS | (78) | 55 | |||||||||||
| Total | $ | (48) | $ | 47 | ||||||||||
17
The effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the year-to-date periods ended July 2, 2022 and July 3, 2021 was as follows:
| (millions) | Gain (loss) recognized in AOCI | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component | |||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| Foreign currency denominated long-term debt | $ | 202 | $ | 71 | $ | — | $ | — | ||||||||||||||||||
| Cross-currency contracts | 154 | 17 | 17 | 10 | Interest expense | |||||||||||||||||||||
| Total | $ | 356 | $ | 88 | $ | 17 | $ | 10 | ||||||||||||||||||
| (millions) | Location of gain (loss) recognized in income | Gain (loss) recognized in income | ||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Foreign currency exchange contracts | COGS | $ | 20 | $ | (26) | |||||||||
| Foreign currency exchange contracts | Other income (expense), net | (9) | (1) | |||||||||||
| Foreign currency exchange contracts | SGA | 5 | 5 | |||||||||||
| Interest rate contracts | Interest expense | 2 | 1 | |||||||||||
| Commodity contracts | COGS | 34 | 67 | |||||||||||
| Total | $ | 52 | $ | 46 | ||||||||||
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the quarters ended July 2, 2022 and July 3, 2021:
| July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (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 | $ | 54 | $ | 58 | ||||||||||||||||
| Gain (loss) on fair value hedging relationships: | ||||||||||||||||||||
| Interest contracts: | ||||||||||||||||||||
| Hedged items | 13 | (6) | ||||||||||||||||||
| Derivatives designated as hedging instruments | (11) | 7 | ||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||
| Interest contracts: | ||||||||||||||||||||
| Amount of gain (loss) reclassified from AOCI into income | (4) | (10) | ||||||||||||||||||
18
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the year-to-date periods ended July 2, 2022 and July 3, 2021
| July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| (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 | $ | 110 | $ | 117 | ||||||||||||||||
| Gain (loss) on fair value hedging relationships: | ||||||||||||||||||||
| Interest contracts: | ||||||||||||||||||||
| Hedged items | 54 | — | ||||||||||||||||||
| Derivatives designated as hedging instruments | (51) | — | ||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||
| Interest contracts: | ||||||||||||||||||||
| Amount of gain (loss) reclassified from AOCI into income | (8) | (15) | ||||||||||||||||||
During the next 12 months, the Company expects $17 million of net deferred losses reported in AOCI at July 2, 2022 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 2, 2022 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 requirements as of July 2, 2022 triggered by credit-risk-related contingent features.
Other fair value measurements
Available for sale securities
| July 2, 2022 | January 1, 2022 | ||||||||||||||||||||||
| Unrealized | Unrealized | ||||||||||||||||||||||
| (millions) | Cost | Gain (Loss) | Market Value | Cost | Gain (Loss) | Market Value | |||||||||||||||||
| Corporate bonds | $ | 52 | $ | (4) | $ | 48 | $ | 52 | $ | — | $ | 52 | |||||||||||
During the year-to-date period ended July 2, 2022, the Company sold approximately $9 million of investments in level 2 corporate bonds. The resulting loss was less than $1 million and recorded in Other income and (expense). Also during the year-to-date period ended July 2, 2022, the Company purchased approximately $10 million in level 2 corporate bonds. 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 and recorded in Other income and (expense).
The market values of the Company's investments in level 2 corporate bonds are based on matrices or models from pricing vendors. Unrealized gains and losses are included in the Consolidated Statement of Comprehensive Income. Additionally, these investments are recorded within Other current assets and Other assets on the Consolidated Balance Sheet, based on the maturity of the individual security. The maturity dates of the securities range from 2024 to 2036.
The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis. The Company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments.
19
Equity investments
We hold equity investments in certain companies that we do not have the ability to exercise significant influence. Equity investments without a readily determinable fair value are recorded at original cost. Investments with a readily determinable fair value, which are level 2 investments, are measured at fair value based on observable market price changes, with gains and losses recorded through net earnings. Equity investments were approximately $40 million as of July 2, 2022 and January 1, 2022. Additionally, these investments were recorded within Other noncurrent assets on the Consolidated Balance Sheet.
Financial instruments
The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $5.8 billion, as of July 2, 2022. The fair value and carrying value of the Company's long-term debt was $6.9 billion and $6.3 billion, respectively, as of January 1, 2022.
Counterparty credit risk concentration and collateral requirements
The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.
Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this would result in a loss to the Company of approximately $180 million, net of collateral already received from those counterparties, as of July 2, 2022.
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 2, 2022, the Company posted $147 million in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, as well as the large number and geographic dispersion of smaller customers.
Note 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.
Corporate includes corporate administration and initiatives as well as share-based compensation.
20
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 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||
| Net sales | |||||||||||||||||
| North America | $ | 2,248 | $ | 2,013 | $ | 4,358 | $ | 4,143 | |||||||||
| Europe | 598 | 618 | 1,187 | 1,196 | |||||||||||||
| Latin America | 288 | 266 | 544 | 502 | |||||||||||||
| AMEA | 732 | 658 | 1,450 | 1,298 | |||||||||||||
| Total Reportable Segments | 3,866 | 3,555 | 7,539 | 7,139 | |||||||||||||
| Corporate | (2) | — | (3) | — | |||||||||||||
| Consolidated | $ | 3,864 | $ | 3,555 | $ | 7,536 | $ | 7,139 | |||||||||
| Operating profit | |||||||||||||||||
| North America | $ | 382 | $ | 363 | $ | 721 | $ | 742 | |||||||||
| Europe | 107 | 101 | 205 | 181 | |||||||||||||
| Latin America | 39 | 32 | 53 | 59 | |||||||||||||
| AMEA | 62 | 63 | 128 | 126 | |||||||||||||
| Total Reportable Segments | 590 | 559 | 1,107 | 1,108 | |||||||||||||
| Corporate | (175) | (55) | (175) | (132) | |||||||||||||
| Consolidated | $ | 415 | $ | 504 | $ | 932 | $ | 976 | |||||||||
Supplemental product information is provided below for net sales to external customers:
| Quarter ended | Year-to-date period ended | |||||||||||||||||||
| (millions) | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||||||||
| Snacks | $ | 1,917 | $ | 1,656 | $ | 3,692 | $ | 3,303 | ||||||||||||
| Cereal | 1,342 | 1,336 | 2,623 | 2,710 | ||||||||||||||||
| Frozen | 257 | 267 | 548 | 564 | ||||||||||||||||
| Noodles and other | 348 | 296 | 673 | 562 | ||||||||||||||||
| Consolidated | $ | 3,864 | $ | 3,555 | $ | 7,536 | $ | 7,139 | ||||||||||||
Note 9 Supplemental Financial Statement Data
| Consolidated Balance Sheet | ||||||||
| (millions) | July 2, 2022 (unaudited) | January 1, 2022 | ||||||
| Trade receivables | $ | 1,541 | $ | 1,240 | ||||
| Allowance for credit losses | (15) | (15) | ||||||
| Refundable income taxes | 28 | 62 | ||||||
| Other receivables | 330 | 202 | ||||||
| Accounts receivable, net | $ | 1,884 | $ | 1,489 | ||||
| Raw materials and supplies | $ | 434 | $ | 383 | ||||
| Finished goods and materials in process | 1,244 | 1,015 | ||||||
| Inventories | $ | 1,678 | $ | 1,398 | ||||
| Intangible assets not subject to amortization | $ | 1,991 | $ | 2,031 | ||||
| Intangible assets subject to amortization, net | 369 | 378 | ||||||
| Other intangibles, net | $ | 2,360 | $ | 2,409 | ||||
21
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.
Proposed separation transactions
On June 21, 2022, the Company announced its intent to separate its North American cereal and plant-based foods businesses, via tax-free spin-offs, resulting in three independent public companies, each better positioned to unlock their full standalone potential. The proposed separations are expected to create greater strategic, operational, and financial focus for each company and its stakeholders, and will build on our current momentum. While we currently intend to separate our plant-based food business through a tax free spin-offs, we are also exploring other strategic alternatives, including a possible sale. Our current target is to complete the transactions by the end of 2023.
War in Ukraine
The war in Ukraine and the related sanctions imposed have increased global economic and geopolitical uncertainty. In March 2022, we suspended all new investments and shipments of all products to Russia. We have no employees or direct operations in Ukraine. Our business in Russia consists of three manufacturing facilities and represented less than 1.5% of consolidated net sales and approximately 1% of consolidated operating profit for the year ended January 1, 2022. The net book value of assets related to our Russia business represents less than 0.5% of total assets as of July 2, 2022.
Impacts of the war to our net sales, earnings, and cash flows could extend beyond our business in Russia. Regional or global economic recessions, inflation, and supply chain challenges as a result of the war or further escalation could have a material impact on our results. Refer to Risk Factors in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.
COVID-19
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.
The severity, magnitude and duration of the current COVID-19 pandemic is uncertain. The Company continues to actively monitor the pandemic and will adjust our mitigation strategies as necessary to address any changing health, operational or financial risks that may arise. During the first year of the pandemic, the Company experienced a significant increase in demand for food for at-home consumption. 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 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 of 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.
22
Inflationary pressures
Events such as the ongoing COVID-19 pandemic and the war in Ukraine have resulted in certain impacts to the global economy, including market disruptions, supply chain challenges, and inflationary pressures. During the quarter ended July 2, 2022 we continued to experience elevated commodity and supply chain costs, including logistics, procurement, and manufacturing costs. We expect these market disruptions and inflationary pressures to continue throughout 2022.
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, and foreign currency, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions.
•Adjusted: gross profit, gross margin, operating profit and diluted EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the proposed separation transactions, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodity contracts, certain equity investments and certain foreign currency contracts, 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.
23
•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, costs of the proposed separation transactions, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodity contracts, certain equity investments and certain foreign currency contracts, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
•Adjusted effective income tax rate: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the proposed separation transactions, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodity contracts, certain equity investments and certain foreign currency contracts, 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 certain foreign valuation allowances. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's effective tax rate, excluding the pre-tax income and tax effect of the items noted above, for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate.
•Net debt: Defined as the sum of long-term debt, current maturities of long-term debt and notes payable,
less cash and cash equivalents and marketable securities. With respect to net debt, cash and cash equivalents and marketable securities are subtracted from the GAAP measure, total debt liabilities, because they could be used to reduce the Company’s debt obligations. Company management and investors use this non-GAAP measure to evaluate changes to the Company's capital structure and credit quality assessment.
•Cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. Cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure.
These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.
Significant items impacting comparability
Mark-to-market
We recognize mark-to-market adjustments for pension and postretirement benefit plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans are recognized in the year they occur. Mark-to-market gains/losses for certain equity investments are recorded based on observable price changes. Changes between contract and market prices for commodity contracts and certain foreign currency contracts result in gains/losses that are recognized in the quarter they occur. We recorded a pre-tax mark-to-market loss of $95 million and $26 million for the quarter and year-to-date periods ended July 2, 2022, respectively. Included within the aforementioned was a pre-tax mark-to-market benefit for pension plans of $10 million and $31 million for the quarter and year-to-date periods ended July 2, 2022, respectively. Additionally, 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.
Separation costs
In June of 2022, the Company announced its intent to separate its North American cereal and plant-based foods businesses, via tax-free spin-offs, resulting in three independent companies. While we announced a plan to
24
separate our plant-based food business through a tax free spin-off, we are also exploring other strategic alternatives, including a possible sale. As a result, we incurred pre-tax charges related to the proposed separation, primarily related to legal and consulting costs, of $4 million for the quarter and year-to-date periods ended July 2, 2022.
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. As a result, we incurred pre-tax charges, primarily related to reorganizations, of $6 million and $13 million for the quarter and year-to-date periods ended July 2, 2022, respectively. We also recorded pre-tax charges of $5 million and $13 million for the quarter and year-to-date periods ended July 3, 2021, respectively.
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 2, 2022, our reported net sales increased 8.7% versus the prior year as a result of positive price/mix, a recovery from last year's fire and strike in North America cereal, and growth in snacks across all four regions more than offset by unfavorable foreign currency. Organic net sales increased 12% from the prior year excluding foreign currency.
Second quarter reported operating profit decreased 18% versus the year-ago quarter as net sales growth was more than offset by unfavorable mark-to-market impact and unfavorable foreign currency translation. Currency-neutral adjusted operating profit increased 10%, after excluding the impact of mark-to-market, separation costs, and foreign currency translation.
Reported diluted EPS of $0.95 for the quarter decreased 14% compared to the prior year quarter of $1.11 due primarily to unfavorable mark-to-market and unfavorable foreign currency translation compared to the prior year quarter. Currency-neutral adjusted diluted EPS of $1.23 for the quarter increased 7.9% from the prior year quarter after excluding mark-to-market, separation costs, the UK tax rate change, and foreign currency translation.
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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 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||
| Reported net income | $ | 326 | $ | 380 | $ | 748 | $ | 748 | ||||||
| Mark-to-market (pre-tax) | (95) | 23 | (26) | 14 | ||||||||||
| Separation costs (pre-tax) | (4) | — | (4) | — | ||||||||||
| Business and portfolio realignment (pre-tax) | (6) | (5) | (13) | (13) | ||||||||||
| Income tax impact applicable to adjustments, net* | 27 | (4) | 11 | (1) | ||||||||||
| UK tax rate change | — | (23) | — | (23) | ||||||||||
| Adjusted net income | $ | 404 | $ | 389 | $ | 781 | $ | 770 | ||||||
| Foreign currency impact | (18) | — | (26) | — | ||||||||||
| Currency-neutral adjusted net income | $ | 422 | $ | 389 | $ | 807 | $ | 770 | ||||||
| Reported diluted EPS | $ | 0.95 | $ | 1.11 | $ | 2.19 | $ | 2.18 | ||||||
| Mark-to-market (pre-tax) | (0.28) | 0.07 | (0.08) | 0.04 | ||||||||||
| Separation costs (pre-tax) | (0.01) | — | (0.01) | — | ||||||||||
| Business and portfolio realignment (pre-tax) | (0.02) | (0.02) | (0.04) | (0.03) | ||||||||||
| Income tax impact applicable to adjustments, net* | 0.08 | (0.01) | 0.04 | — | ||||||||||
| UK tax rate change | — | (0.07) | — | (0.07) | ||||||||||
| Adjusted diluted EPS | $ | 1.18 | $ | 1.14 | $ | 2.28 | $ | 2.24 | ||||||
| Foreign currency impact | (0.05) | — | (0.08) | — | ||||||||||
| Currency-neutral adjusted diluted EPS | $ | 1.23 | $ | 1.14 | $ | 2.36 | $ | 2.24 | ||||||
| Currency-neutral adjusted diluted EPS growth | 7.9 | % | 5.4 | % | ||||||||||
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.
* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
26
Net sales and operating profit
The following tables provide an analysis of net sales and operating profit performance for the second quarter of 2022 versus 2021:
| Quarter ended July 2, 2022 | ||||||||||||||||||||||||||||||||||||||
| (millions) | North America | Europe | Latin America | AMEA | Corporate | Kellogg Consolidated | ||||||||||||||||||||||||||||||||
| Reported net sales | $ | 2,249 | $ | 598 | $ | 288 | $ | 732 | $ | (2) | $ | 3,864 | ||||||||||||||||||||||||||
| Foreign currency impact | (8) | (68) | (2) | (47) | — | (125) | ||||||||||||||||||||||||||||||||
| Organic net sales | $ | 2,257 | $ | 666 | $ | 290 | $ | 779 | $ | (2) | $ | 3,989 | ||||||||||||||||||||||||||
| Quarter ended July 3, 2021 | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| Reported net sales | $ | 2,013 | $ | 618 | $ | 266 | $ | 658 | $ | — | $ | 3,555 | ||||||||||||||||||||||||||
| % change - 2022 vs. 2021: | ||||||||||||||||||||||||||||||||||||||
| Reported growth | 11.8 | % | (3.3) | % | 8.2 | % | 11.2 | % | — | % | 8.7 | % | ||||||||||||||||||||||||||
| Foreign currency impact | (0.4) | % | (11.0) | % | (0.8) | % | (7.2) | % | — | % | (3.5) | % | ||||||||||||||||||||||||||
| Organic growth | 12.2 | % | 7.7 | % | 9.0 | % | 18.4 | % | — | % | 12.2 | % | ||||||||||||||||||||||||||
| Volume (tonnage) | 1.7 | % | (2.5) | % | (5.5) | % | (4.4) | % | — | % | (1.5) | % | ||||||||||||||||||||||||||
| Pricing/mix | 10.5 | % | 10.2 | % | 14.5 | % | 22.8 | % | — | % | 13.7 | % | ||||||||||||||||||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
| Quarter ended July 2, 2022 | ||||||||||||||||||||||||||||||||||||||
| (millions) | North America | Europe | Latin America | AMEA | Corporate | Kellogg Consolidated | ||||||||||||||||||||||||||||||||
| Reported operating profit | $ | 382 | $ | 107 | $ | 39 | $ | 62 | $ | (175) | $ | 415 | ||||||||||||||||||||||||||
| Mark-to-market | — | — | 7 | — | (110) | (104) | ||||||||||||||||||||||||||||||||
| Separation costs | (4) | — | — | — | — | (4) | ||||||||||||||||||||||||||||||||
| Business and portfolio realignment | (6) | — | — | — | — | (6) | ||||||||||||||||||||||||||||||||
| Adjusted operating profit | $ | 392 | $ | 107 | $ | 33 | $ | 62 | $ | (65) | $ | 529 | ||||||||||||||||||||||||||
| Foreign currency impact | (1) | (11) | (1) | (4) | — | (17) | ||||||||||||||||||||||||||||||||
| Currency-neutral adjusted operating profit | $ | 393 | $ | 117 | $ | 33 | $ | 66 | $ | (64) | $ | 546 | ||||||||||||||||||||||||||
| Quarter ended July 3, 2021 | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||
| % change - 2022 vs. 2021: | ||||||||||||||||||||||||||||||||||||||
| Reported growth | 5.3 | % | 5.7 | % | 24.1 | % | (1.4) | % | (221.9) | % | (17.7) | % | ||||||||||||||||||||||||||
| Mark-to-market | — | % | — | % | 23.3 | % | — | % | (226.0) | % | (23.2) | % | ||||||||||||||||||||||||||
| Separation costs | (1.2) | % | — | % | — | % | — | % | — | % | (0.9) | % | ||||||||||||||||||||||||||
| Business and portfolio realignment | (0.5) | % | (0.1) | % | (0.4) | % | (0.2) | % | 2.5 | % | (0.1) | % | ||||||||||||||||||||||||||
| Adjusted growth | 7.0 | % | 5.8 | % | 1.2 | % | (1.2) | % | 1.6 | % | 6.5 | % | ||||||||||||||||||||||||||
| Foreign currency impact | (0.3) | % | (10.5) | % | (2.7) | % | (6.0) | % | (0.7) | % | (3.4) | % | ||||||||||||||||||||||||||
| Currency-neutral adjusted growth | 7.3 | % | 16.3 | % | 3.9 | % | 4.8 | % | 2.3 | % | 9.9 | % | ||||||||||||||||||||||||||
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.
27
North America
Reported net sales for the second quarter increased 12% versus the prior year due to price/mix growth from revenue growth management, in-market momentum in snacks, and a faster than expected recovery in U.S. cereal.
| Net sales % change - second quarter 2022 vs. 2021: | |||||||||||
| North America | Reported net sales | Foreign currency | Organic net sales | ||||||||
| Snacks | 17.8 | % | (0.2) | % | 18.0 | % | |||||
| Cereal | 7.6 | % | (0.7) | % | 8.3 | % | |||||
| Frozen | (4.2) | % | (0.3) | % | (3.9) | % | |||||
North America snacks net sales increased led by the in-market performance of its largest brands, Cheez-it and Pringles.
North America cereal net sales increased due to the faster-than-expected recovery in shipments and share in our U.S. cereal business following the 2021 fire and strike.
North America frozen foods net sales decreased during the quarter due primarily to supply constraints.
North America operating profit increased 5.3% primarily due to net sales growth partially offset by higher one-time charges. Currency-neutral adjusted operating profit increased 7.3%, after excluding the impact of business and portfolio realignment and separation costs.
Europe
Reported net sales decreased 3.3% as unfavorable foreign currency more than offset price/mix and in-market momentum in snacks. Organic net sales increased 7.7% after excluding the impact of foreign currency.
Snacks net sales growth was broad-based across the region led by Pringles.
Cereal net sales declined for the quarter on an as reported basis due to unfavorable foreign currency.
Reported operating profit increased 5.7% due primarily to discipline in brand building investment, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit increased 16% after excluding the impact of foreign currency.
Latin America
Reported net sales increased 8.2%, as price/mix growth and in-market momentum in snacks across the region more than offset lower volume. Organic net sales increased 9.0%, after excluding the impact of foreign currency.
Snacks net sales grew across the region, led by Pringles.
Cereal net sales declined slightly, lapping strong prior year growth.
Reported operating profit increased 24% due to higher net sales and favorable mark-to-market impacts partially offset by input cost inflation and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 3.9% after excluding the impact of mark-to-market, and foreign currency.
AMEA
Reported net sales increased 11%, as price/mix growth more than offset a decline in volume and unfavorable foreign currency. Organic net sales increased 18% after excluding the impact of foreign currency.
Growth was led by snacks, noodles and other, while cereal declined slightly due to unfavorable foreign currency.
Reported operating profit decreased 1.4% due to cost inflation and unfavorable foreign currency, which more than offset higher net sales. Currency-neutral adjusted operating profit increased 4.8%, after excluding the impact of foreign currency.
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Corporate
Reported operating profit decreased $121 million versus the comparable prior year quarter due primarily to unfavorable mark-to-market impacts. Currency-neutral adjusted operating profit increased $2 million from the prior year after excluding mark-to-market.
The following tables provide an analysis of net sales and operating profit performance for the year-to-date periods ended July 2, 2022 versus July 3, 2021:
| Year-to-date period ended July 2, 2022 | ||||||||||||||||||||||||||||||||||||||
| (millions) | North America | Europe | Latin America | AMEA | Corporate | Kellogg Consolidated | ||||||||||||||||||||||||||||||||
| Reported net sales | $ | 4,358 | $ | 1,187 | $ | 543 | $ | 1,450 | $ | (3) | $ | 7,536 | ||||||||||||||||||||||||||
| Foreign currency impact | (8) | (103) | 4 | (79) | — | (187) | ||||||||||||||||||||||||||||||||
| Organic net sales | $ | 4,366 | $ | 1,290 | $ | 540 | $ | 1,530 | $ | (3) | $ | 7,722 | ||||||||||||||||||||||||||
| Year-to-date period ended July 3, 2021 | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| Reported net sales | $ | 4,143 | $ | 1,196 | $ | 502 | $ | 1,298 | $ | — | $ | 7,139 | ||||||||||||||||||||||||||
| % change - 2022 vs. 2021 : | ||||||||||||||||||||||||||||||||||||||
| Reported growth | 5.3 | % | (0.8) | % | 8.3 | % | 11.7 | % | — | % | 5.6 | % | ||||||||||||||||||||||||||
| Foreign currency impact | (0.2) | % | (8.6) | % | 0.8 | % | (6.1) | % | — | % | (2.6) | % | ||||||||||||||||||||||||||
| Organic growth | 5.5 | % | 7.8 | % | 7.5 | % | 17.8 | % | — | % | 8.2 | % | ||||||||||||||||||||||||||
| Volume (tonnage) | (3.5) | % | (2.1) | % | (5.9) | % | (3.7) | % | — | % | (3.6) | % | ||||||||||||||||||||||||||
| Pricing/mix | 9.0 | % | 9.9 | % | 13.4 | % | 21.5 | % | — | % | 11.8 | % | ||||||||||||||||||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
| Year-to-date period ended July 2, 2022 | ||||||||||||||||||||||||||||||||||||||
| (millions) | North America | Europe | Latin America | AMEA | Corporate | Kellogg Consolidated | ||||||||||||||||||||||||||||||||
| Reported operating profit | $ | 721 | $ | 204 | $ | 53 | $ | 128 | $ | (175) | $ | 932 | ||||||||||||||||||||||||||
| Mark-to-market | — | — | (1) | — | (55) | (56) | ||||||||||||||||||||||||||||||||
| Separation costs | (4) | — | — | — | — | (4) | ||||||||||||||||||||||||||||||||
| Business and portfolio realignment | (12) | — | — | — | (1) | (13) | ||||||||||||||||||||||||||||||||
| Adjusted operating profit | $ | 738 | $ | 204 | $ | 54 | $ | 128 | $ | (119) | $ | 1,005 | ||||||||||||||||||||||||||
| Foreign currency impact | (1) | (16) | (2) | (7) | — | (26) | ||||||||||||||||||||||||||||||||
| Currency-neutral adjusted operating profit | $ | 738 | $ | 220 | $ | 56 | $ | 135 | $ | (119) | $ | 1,031 | ||||||||||||||||||||||||||
| Year-to-date period ended July 3, 2021 | ||||||||||||||||||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||
| % change - 2022 vs. 2021: | ||||||||||||||||||||||||||||||||||||||
| Reported growth | (2.8) | % | 12.7 | % | (8.8) | % | 2.0 | % | (33.2) | % | (4.5) | % | ||||||||||||||||||||||||||
| Mark-to-market | — | % | — | % | (0.6) | % | — | % | (38.2) | % | (5.1) | % | ||||||||||||||||||||||||||
| Separation costs | (0.6) | % | — | % | — | % | — | % | — | % | (0.5) | % | ||||||||||||||||||||||||||
| Business and portfolio realignment | (0.8) | % | (0.1) | % | 5.2 | % | — | % | 1.4 | % | — | % | ||||||||||||||||||||||||||
| Adjusted growth | (1.4) | % | 12.8 | % | (13.4) | % | 2.0 | % | 3.6 | % | 1.1 | % | ||||||||||||||||||||||||||
| Foreign currency impact | (0.1) | % | (8.9) | % | (2.5) | % | (5.5) | % | (0.3) | % | (2.6) | % | ||||||||||||||||||||||||||
| Currency-neutral adjusted growth | (1.3) | % | 21.7 | % | (10.9) | % | 7.5 | % | 3.9 | % | 3.7 | % | ||||||||||||||||||||||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
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North America
Reported net sales for the year-to-date period increased 5.3% versus the prior year due to growth in snacks as well as positive price/mix from revenue growth management. Organic net sales increased 5.5% after excluding the impact of foreign currency.
| Net sales % change - second quarter year-to-date 2022 vs. 2021: | |||||||||||
| North America | Reported net sales | Foreign currency | Organic net sales | ||||||||
| Snacks | 11.3 | % | (0.1) | % | 11.4 | % | |||||
| Cereal | (1.7) | % | (0.3) | % | (1.4) | % | |||||
| Frozen | (3.1) | % | (0.1) | % | (3.0) | % | |||||
North America snacks net sales increased led by the performance of its largest brands, Cheez-it and Pringles, which grew consumption and share during the year-to-date period.
North America cereal and North America frozen foods net sales decreased during the year-to-date period, as they lapped strong prior year pandemic-related growth and current period supply constraints.
North America operating profit decreased 2.8% compared to the prior year due to input and logistics cost inflation and cost impact of rebuilding inventories in U.S. cereal. Currency-neutral adjusted operating profit decreased 1.3%, after excluding the impact of separation costs and business and portfolio realignment.
Europe
Reported net sales decreased 0.8% as growth in snacks and positive price/mix was more than offset by unfavorable foreign currency translation. Organic net sales increased 7.8% after excluding the impact of foreign currency.
Cereal net sales declined for the year-to-date period on an as reported basis due to unfavorable foreign currency.
Snacks net sales growth was led by sustained momentum in Pringles, driven by innovation, effective advertising, and successful consumer promotions.
Reported operating profit increased 13% despite unfavorable foreign currency. Currency-neutral adjusted operating profit increased 22% after excluding the impact of foreign currency translation.
Latin America
Reported net sales increased 8.3% due primarily to growth in snacks across the region. Organic net sales increased 7.5%, after excluding the impact of foreign currency.
Reported operating profit decreased 8.8% due to unfavorable foreign currency translation and input cost inflation. Currency-neutral adjusted operating profit decreased 11% after excluding the impact of mark-to-market, business and portfolio realignment costs, and foreign currency.
AMEA
Reported net sales increased 12% due to broad-based growth across the region and categories resulting from favorable price/mix and higher volume. Organic net sales also increased 18%.
Noodles and other net sales increased lead by strong growth from Multipro as well as our Kellogg's branded noodles business.
Snacks net sales increased due primarily to strong growth in Pringles across the region.
Cereal net sales growth was driven by broad-based growth across Asia and Australia.
Reported operating profit increased 2.0% due primarily to higher net sales partially offset by higher input costs and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 7.5%, after excluding the impact of foreign currency.
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Corporate
Reported operating profit decreased $43 million versus the comparable prior year period due primarily to unfavorable mark-to-market impacts. Currency-neutral adjusted operating profit increased $5 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 2, 2022 and July 3, 2021 are reconciled to the directly comparable GAAP measures as follows:
| Quarter ended | July 2, 2022 | July 3, 2021 | GM change vs. prior year (pts.) | |||||||||||||||||
| (dollars in millions) | Gross Profit (a) | Gross Margin (b) | Gross Profit (a) | Gross Margin (b) | ||||||||||||||||
| Reported | $ | 1,143 | 29.6 | % | $ | 1,225 | 34.5 | % | (4.9) | |||||||||||
| Mark-to-market | (107) | (2.8) | % | 11 | 0.4 | % | (3.2) | |||||||||||||
| Business and portfolio realignment | (2) | — | % | (1) | (0.1) | % | 0.1 | |||||||||||||
| Adjusted | 1,253 | 32.4 | % | 1,215 | 34.2 | % | (1.8) | |||||||||||||
| Foreign currency impact | (39) | — | % | — | — | % | — | |||||||||||||
| Currency-neutral adjusted | $ | 1,292 | 32.4 | % | $ | 1,215 | 34.2 | % | (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 decreased 490 basis points versus the prior year due primarily to unfavorable mark-to-market, cost inflation, and a mix shift towards emerging markets, which more than offset the impact of productivity and revenue growth management initiatives, and favorable mark-to-market impacts. Currency-neutral adjusted gross margin decreased 180 basis points compared to the second quarter of 2021 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 2, 2022 and July 3, 2021 are reconciled to the directly comparable GAAP measures as follows:
| Year-to-date period ended | July 2, 2022 | July 3, 2021 | GM change vs. prior year (pts.) | |||||||||||||||||
| (dollars in millions) | Gross Profit (a) | Gross Margin (b) | Gross Profit (a) | Gross Margin (b) | ||||||||||||||||
| Reported | $ | 2,302 | 30.5 | % | $ | 2,391 | 33.5 | % | (3.0) | |||||||||||
| Mark-to-market | (60) | (0.8) | % | (12) | (0.2) | % | (0.6) | |||||||||||||
| Business and portfolio realignment | (6) | (0.1) | % | (2) | — | % | (0.1) | |||||||||||||
| Adjusted | 2,368 | 31.4 | % | 2,405 | 33.7 | % | (2.3) | |||||||||||||
| Foreign currency impact | (58) | — | % | — | — | % | — | |||||||||||||
| Currency-neutral adjusted | $ | 2,426 | 31.4 | % | $ | 2,405 | 33.7 | % | (2.3) | |||||||||||
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.
(a) Gross profit is equal to net sales less cost of goods sold.
(b) Gross profit as a percentage of net sales.
Reported gross margin for the year-to-date period decreased 300 basis points versus the prior year due primarily to unfavorable mark-to-market, the residual impact of last year's fire and strike in our U.S. cereal plants, cost inflation, and a mix shift towards emerging markets, which more than offset the impact of productivity and revenue growth management initiatives, and favorable mark-to-market impacts. Currency-neutral adjusted gross margin decreased 230 basis points compared to 2021 after eliminating the impact of mark-to-market, business and portfolio realignment, 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
31
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 2, 2022 and July 3, 2021, interest expense was $54 million and $58 million, respectively. For the year-to-date periods ended July 2, 2022 and July 3, 2021, interest expense was $110 million and $117 million, respectively. The decrease from the prior year is due primarily to lower average outstanding debt compared to the prior year as a result of the debt redemption in May 2021.
Income Taxes
Our reported effective tax rate for the quarters ended July 2, 2022 and July 3, 2021 was 23% and 27%, respectively. Our reported effective tax rate for the year-to-date periods ended July 2, 2022 and July 3, 2021 was 22% and 25%, respectively. The lower effective tax rate for the quarter and year-to-date periods ended July 2, 2022, compared to the same periods in 2021, was due to a decrease in net discrete tax expense. 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.
Our adjusted effective tax rate for the quarters ended July 2, 2022 and July 3, 2021 was 24% and 23%, respectively. Our adjusted effective tax rate for the year-to-date periods ended July 2, 2022 and July 3, 2021 was 22% and 23%, respectively.
Fluctuations in foreign currency exchange rates could impact the expected effective income tax rate as it is dependent upon U.S. dollar earnings of foreign subsidiaries doing business in various countries with differing statutory rates. Additionally, the rate could be impacted by tax legislation and if pending uncertain tax matters, including tax positions that could be affected by planning initiatives, are resolved more or less favorably than we currently expect.
| Quarter ended | Year-to-date period ended | |||||||||||||
| Consolidated results (dollars in millions) | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||
| Reported income taxes | $ | 97 | $ | 144 | $ | 209 | $ | 253 | ||||||
| Mark-to-market | (25) | 6 | (5) | 4 | ||||||||||
| Separation costs | (1) | — | (1) | — | ||||||||||
| Business and portfolio realignment | (1) | (2) | (5) | (3) | ||||||||||
| UK tax rate change | — | 23 | — | 23 | ||||||||||
| Adjusted income taxes | $ | 124 | $ | 116 | $ | 220 | $ | 229 | ||||||
| Reported effective income tax rate | 23.0 | % | 26.9 | % | 21.9 | % | 24.9 | % | ||||||
| Mark-to-market | (0.6) | % | — | % | 0.1 | % | — | % | ||||||
| Separation costs | — | % | — | % | — | % | — | % | ||||||
| Business and portfolio realignment | 0.1 | % | (0.1) | % | (0.3) | % | — | % | ||||||
| UK tax rate change | — | % | 4.4 | % | — | % | 2.3 | % | ||||||
| Adjusted effective income tax rate | 23.5 | % | 22.6 | % | 22.0 | % | 22.6 | % | ||||||
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
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 approximately $1.8 billion and capital expenditures of approximately $600 million in 2022. We currently have $2.5 billion of unused revolving credit agreements, including $1.5 billion effective through 2026 and $1.0 billion effective through December 2022, as well as continued access to the commercial paper markets. We are currently in compliance with all debt covenants and
32
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 2021, and are not expected to have a material impact in 2022.
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 $1.8 billion and $1.9 billion as of July 2, 2022 and January 1, 2022, respectively.
The following table reflects net debt amounts:
| (millions, unaudited) | July 2, 2022 | January 1, 2022 | ||||||||||||
| Notes payable | $ | 320 | $ | 137 | ||||||||||
| Current maturities of long-term debt | 854 | 712 | ||||||||||||
| Long-term debt | 5,838 | 6,262 | ||||||||||||
| Total debt liabilities | $ | 7,012 | $ | 7,111 | ||||||||||
| Less: | ||||||||||||||
| Cash and cash equivalents | (323) | (286) | ||||||||||||
| Net debt | $ | 6,689 | $ | 6,825 | ||||||||||
The following table sets forth a summary of our cash flows:
| Year-to-date period ended | ||||||||
| (millions) | July 2, 2022 | July 3, 2021 | ||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 805 | $ | 687 | ||||
| Investing activities | (318) | (330) | ||||||
| Financing activities | (383) | (401) | ||||||
| Effect of exchange rates on cash and cash equivalents | (67) | 4 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 37 | $ | (40) | ||||
Operating activities
The principal source of our operating cash flow is net earnings, meaning cash receipts from the sale of our products, net of costs to manufacture, distribute, and market our products.
Net cash provided by our operating activities for the year-to-date period ended July 2, 2022, totaled $805 million compared to $687 million in the prior year period. The increase is due primarily to changes in incentive compensation and other accruals compared to the prior year.
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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 10 days and negative 11 days for the 12 month periods ended July 2, 2022 and July 3, 2021, respectively.
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 2, 2022 | July 3, 2021 | ||||||
| Net cash provided by operating activities | $ | 805 | $ | 687 | ||||
| Additions to properties | (267) | (301) | ||||||
| Cash flow | $ | 538 | $ | 386 | ||||
Our non-GAAP measure for cash flow increased to $538 million in the year-to-date period ended July 2, 2022, from $386 million in the prior year due primarily to lower capital expenditures and changes in incentive compensation and other accruals.
Investing activities
Our net cash used in investing activities totaled $318 million for the quarter ended July 2, 2022 compared to $330 million in the comparable prior year period due primarily to lower capital expenditures partially offset by higher cash paid for commodity derivative margin requirements.
Financing activities
Our net cash used in financing activities for the quarter ended July 2, 2022 totaled $383 million compared to cash used of $401 million during the comparable prior year period. The year-over-year variance was driven by an increase in net proceeds from stock issued related to stock-based compensation, partially offset by the repurchase of $300 million of our common stock during the current year versus $240 million in the prior year period.
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 2, 2022, were 5 million shares for $300 million. Total purchases for the year-to-date period ended July 3, 2021, were 4 million shares for $240 million.
We paid cash dividends of $394 million in the year-to-date period ended July 2, 2022, compared to $392 million during the comparable prior year period. In July 2022, the board of directors declared a dividend of $.59 per common share, a $.01 increase from the prior quarter, payable on September 15, 2022 to shareholders of record at the close of business on September 1, 2022.
We continue to maintain both a Five-Year and a 364-Day Credit Agreement, which had no outstanding borrowings as of July 2, 2022, and contain customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agents may terminate the commitments under the credit facilities, accelerate any outstanding loans under the agreements, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest.
Our Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions and also contain a change of control provision. There are no significant restrictions on the payment of dividends. We were in compliance with all covenants as of July 2, 2022.
The Notes do not contain acceleration of maturity clauses that are dependent on credit ratings. A change in our credit ratings could limit our access to the U.S. short-term debt market and/or increase the cost of refinancing long-term debt in the future. However, even under these circumstances, we would continue to have access to our 364-Day Credit Facility, which expires in December 2022, as well as our Five-Year Credit Agreement, which expires in
34
December 2026. This source of liquidity is unused and available on an unsecured basis, although we do not currently plan to use it.
Monetization and 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 approximately $745 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. During 2022, we reduced the funding capacity under the program from $1.1 billion to $745 million as a result of reduced utilization of the Extended Terms Program by certain customers. Accounts receivable sold of $596 million and $549 million remained outstanding under this arrangement as of July 2, 2022 and January 1, 2022, respectively.
The Monetization Programs are designed to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. Current DSO levels within North America are consistent with DSO levels prior to the execution of the Extended Term Program and Monetization Programs.
Refer to Note 3 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.
We periodically monitor our supplier payment terms to assess whether our terms are competitive and in line with local market terms. To the extent that such assessment indicates that our supplier payment terms are not aligned with local market terms, we may seek to adjust our terms, including extending or shortening our payment due dates as appropriate, however, we do not expect supplier payment term modifications to have a material impact on our cash flows during 2022.
We have agreements with third parties (Accounts Payable Program) to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected, sell our payment obligations to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more of our payment obligations prior to their scheduled due dates at a discounted price to participating financial institutions. Our goal is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, our right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers.
Refer to Note 1 within Notes to Consolidated Financial Statements for further information related to accounts payable.
If financial institutions were to terminate their participation in the Monetization Programs and we are not able to modify related customer payment terms, working capital could be negatively impacted. Additionally, working capital could be negatively impacted if we shorten our supplier payment terms as a result of supplier negotiations. For suppliers participating in the Accounts Payable Programs, financial institutions may terminate their participation or we could experience a downgrade in our credit rating that could result in higher costs to suppliers. If working capital is negatively impacted as a result of these events and we were unable to secure alternative programs, we may have to utilize our various financing arrangements for short-term liquidity or increase our long-term borrowings.
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Future outlook
Reflecting its first half results, underlying trends, and changes in the operating environment, Kellogg Company has updated its full-year 2022 guidance as follows:
•Organic net sales growth is expected to be 7-8%, up from previous guidance of approximately 4%. This reflects better than expected first half growth, as well as revenue growth management actions and good in-market momentum, particularly in snacks and emerging markets.
•Currency-neutral adjusted operating profit growth of 4-5%, up from previous guidance of 1-2%. This reflects the Company's better-than-expected results of the first half, and already incorporates continued high cost inflation and resumption of investment in the second half.
•Currency-neutral adjusted earnings per share to increase by approximately 2%, up from previous guidance of 1-2%, reflecting the improved operating profit outlook, partially offset by a reduction in non-operating, non-cash pension income, stemming from the remeasurement of certain U.S. pension plans.
•Net cash provided by operating activities of approximately $1.8 billion, up from $1.7 to $1.8 billion, with capital expenditure of approximately $0.6 billion, even after incorporating approximately $70-$80 million of incremental one-time charges related to the pending separation transactions. As a result, cash flow is expected to be approximately $1.2 billion, up from prior guidance of $1.1-1.2 billion.
Excluded from this guidance are any significant supply chain or other prolonged market disruptions related to the pandemic or global economy.
Reconciliation of non-GAAP measures
We are unable to reasonably estimate the potential full-year financial impact of mark-to-market adjustments because these impacts are dependent on future changes in 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.
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See the table below that outlines the projected impact of certain other items that are excluded from non-GAAP guidance for 2022:
| Impact of certain items excluded from Non-GAAP guidance: | Net Sales | Operating Profit | Earnings Per Share | ||||||||
| Separation costs (pre-tax) | $70-$80M | $0.21-$0.24 | |||||||||
| Business and portfolio realignment (pre-tax) | $30-$40M | $0.09-$0.12 | |||||||||
| Income tax impact applicable to adjustments, net** | ~$0.09 | ||||||||||
| Currency-neutral adjusted guidance* | 4-5% | ~2% | |||||||||
| Organic guidance* | 7-8% | ||||||||||
* 2022 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 2022 include impacts of mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodity contracts, certain equity investments, and certain foreign currency contracts. The Company is providing quantification of known adjustment items where available.
** Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
| Reconciliation of Non-GAAP amounts - Cash Flow Guidance | |||||
| (billions) | Full Year 2022 | ||||
| Net cash provided by (used in) operating activities | $1.8 | ||||
| Additions to properties | ~($0.6) | ||||
| Cash Flow | ~$1.2 | ||||
Forward-looking statements
This Report contains “forward-looking statements” with projections concerning, among other things, the anticipated separation of the Company’s North American cereal and plant-based foods businesses, 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 the ability to effect the spin-off transactions and to meet the conditions related thereto; the ability of the separated companies to each succeed as a standalone publicly traded company; potential uncertainty during the pendency of the spin-off transactions that could affect the Company’s financial performance; the possibility that the spin-off transactions will not be completed within the anticipated time period or at all, including with respect to the potential sale of our plant-based foods business; the possibility that the spin-off transactions will not achieve their intended benefits; the possibility of disruption, including changes to existing business relationships, disputes, litigation or unanticipated costs in connection with the spin-off transactions; uncertainty of the expected financial performance of the Company or the separated companies following completion of the spin-off transactions; negative effects of the announcement or pendency of the spin-off transactions on the market price of the Company’s securities and/or on the financial performance of the Company; uncertainty of the magnitude, duration, geographic reach, impact on the global economy and current and potential travel restrictions of the COVID-19 outbreak, the current, and uncertain future, impact of the COVID-19 outbreak on our business, growth, reputation, prospects, financial condition, operating results (including components of our financial results), and cash flows and liquidity, the residual impact of the 12-week labor strike at the Company's U.S. cereal plants, the impact of the war in Ukraine including the potential for broader economic disruption, 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
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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 7 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 2021 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 2, 2022.
Volatile market conditions arising from the COVID-19 pandemic and the war in Ukraine may result in significant changes in foreign exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our net sales and operating profit when translated to U.S. dollars. Primary exposures include the U.S. dollar versus the euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Brazilian real, Nigerian naira, Russian ruble 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 and the war in Ukraine on financial markets and we will continue to monitor the business for adverse impacts related to the pandemic. Our business in Russia represented less than 1.5% of consolidated net sales and approximately 1% of consolidated operating profit for the year ended January 1, 2022. The net book value of assets related to our Russia business represents less than 0.5% of total assets as of July 2, 2022. As such, our exposure to volatility in the exchange rate of the Russian ruble is unlikely to have a material impact on our consolidated financial statements.
The impact of possible currency devaluation in countries experiencing high inflation rates or significant exchange fluctuations, including Turkey, can impact our results and financial guidance. Effective April 3, 2022, we accounted for Turkey as a highly inflationary economy, as the projected three-year cumulative inflation rate exceeded 100%. Accordingly, our Turkey subsidiary uses the U.S. dollar as its functional currency and changes in the value of the Turkish Lira versus the U.S. dollar applied to our Lira-denominated net monetary asset position is recorded in income at the time of the change. Net monetary assets denominated in Turkish Lira are not material as of July 2, 2022.
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During the year-to-date period ended July 2, 2022, we terminated U.S. Dollar forward starting interest rate swaps and treasury locks with notional amounts totaling approximately $700 million, resulting in a gain of approximately $49 million. These forward starting interest rate swaps and treasury locks 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 forecasted fixed rate U.S. Dollar debt, once issued. During the year-to-date period ended July 2, 2022, we also entered into U.S.forward starting interest rate swaps and treasury locks with notional amounts totaling approximately $700 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate U.S. Dollar debt. These swaps were designated as cash flow hedges.
During the year-to-date period ended July 2, 2022, we terminated Euro forward starting interest rate swaps with notional amounts totaling approximately €250 million, resulting in a gain of $33 million. These forward starting interest rate swaps were accounted for as cash flow hedges and the related gain was recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the forecasted fixed rate Euro debt, once issued. During the year-to-date period ended July 2, 2022, we also entered into Euro forward starting interest rate swaps with notional amounts totaling approximately €250 million, as hedges against interest rate volatility associated with a forecasted issuance of fixed rate Euro debt. These swaps were designated as cash flow hedges.
We have interest rate contracts with notional amounts totaling $2.6 billion representing a net settlement receivable of $24 million as of July 2, 2022. We had interest rate contracts with notional amounts totaling $2.8 billion representing a net settlement receivable of $4 million as of January 1, 2022.
During the year-to-date period ended July 2, 2022, we settled cross currency swaps with notional amounts totaling approximately €565 million, resulting in a gain of $37 million. These cross currency swaps were accounted for as net investment hedges and the related gain was recorded in accumulated other comprehensive income. During the year-to-date period ended July 2, 2022, we also entered into cross currency swaps with notional amounts totaling approximately €1.3 billion, 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 $1.9 billion outstanding as of July 2, 2022 representing a net settlement receivable of $155 million. The total notional amount of cross currency swaps outstanding as of January 1, 2022 was $1.3 billion representing a net settlement receivable of $38 million.
Our company is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials, fuel, and energy. Primary exposures include corn, wheat, potato flakes, soybean oil, sugar, cocoa, cartonboard, natural gas, and diesel fuel. We have historically used the combination of long-term contracts with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted raw material purchases over a duration of generally less than 18 months.
Events such as the ongoing COVID-19 pandemic and the war in Ukraine have resulted in certain impacts to the global economy, including market disruptions, supply chain challenges, and inflationary pressures. During the year-to-date period ended July 2, 2022, we continue to experience elevated commodity and supply chain costs, including logistics, procurement, and manufacturing costs. We expect these market disruptions and inflationary pressures to continue throughout 2022.
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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 2, 2022, we carried out an evaluation under the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures.
Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There were no changes during the quarter ended July 2, 2022, that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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KELLOGG COMPANY
PART II — OTHER INFORMATION
Item 1A. Risk Factors
Except as set forth below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. The risk factors disclosed under those Reports in addition to the other information set forth in this Report, could materially affect our business, financial condition, or results of operations. 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 of operations.
The proposed separation of each of our North American cereal and plant-based foods businesses is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time, expense, and resources, which could disrupt or adversely affect our business.
On June 21, 2022, the Company announced a plan to separate its North American cereal and plant-based foods businesses resulting in three independent public companies, via tax-free spin-offs, resulting in three independent public companies, each better positioned to unlock their full standalone potential. Our current target is to complete the transactions by the end of 2023. We cannot assure that the transactions will be completed on the anticipated timeline or at all or that the terms of the separations will not change, including with respect to the potential sale of our plant-based foods business. The transactions will follow the satisfaction of customary conditions, including reviews and final approval by Kellogg’s Board of Directors, receipt of an Internal Revenue Service ruling and relevant tax opinions with respect to the tax-free nature of the transactions, effectiveness of appropriate filings with the U.S. Securities and Exchange Commission, and the completion of audited financials of the new independent companies. The failure to satisfy any of the required conditions could delay the completion of the spin-offs for a significant period of time or prevent them from occurring at all.
Unanticipated developments, including changes in the competitive conditions of our markets, possible delays in obtaining various tax opinions or rulings, negotiating challenges, the uncertainty of the financial markets, changes in the law, and challenges in executing the separation of the two businesses, could delay or prevent the completion of the spin-offs, or cause the spin-offs to occur on terms or conditions that are different or less favorable than initially expected. Any changes to the spin-offs or delay in completing the spin-offs could cause us not to realize some or all of the expected benefits, or realize them on a different timeline than initially expected. Further, our Board of Directors could decide, either because of a failure of conditions or because of market or other factors, to abandon the spin-offs. In addition, while we announced a plan to separate our plant-based food business through a tax free spin-off, we are also exploring other strategic alternatives, including a possible sale. No assurance can be given as to whether and when the spin-offs will occur.
Whether or not we complete the spin-offs, our ongoing business may be adversely affected and we may be subject to certain risks and consequences as a result of pursuing the spin-offs, including the following:
a.We have incurred expenses in connection with the spin-offs, and expect that the process of completing the spin-offs will be time-consuming and involve significant additional costs and expenses, which may not yield a discernible benefit if the spin-offs are not completed.
b.Executing the spin-offs will require significant time and attention from our senior management and employees, which may divert management’s attention from operating and growing our business and could adversely affect our business, financial results, and results of operations. Our employees may also be distracted due to uncertainty about their future roles with the separate companies pending completion of the spin-offs.
c.We may also experience increased difficulties in attracting, retaining, and motivating employees during the pendency of the spin-offs and following completion of the transactions, which could harm our businesses. In addition, if the spin-offs are not completed, we will still be required to pay certain costs and expenses incurred in connection therewith, such as legal, accounting, and other professional fees.
d.Some of our customers or suppliers may delay or defer decisions or may end their relationships with us.
e.We may experience negative reactions from the financial markets if we fail to complete the spin-offs or fail to complete them on a timely basis.
f.The announcement of the spin-offs may cause some investors to sell our shares, creating greater volatility in the trading price of our shares and potentially causing market prices to decline.
Any of the above factors could cause the separations (or the failure to execute the separations) to have a material adverse effect on our business, financial condition, results of operations, and the trading price of our common stock.
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The spin-offs may not achieve the anticipated benefits and will expose us to new risks.
We may not realize the anticipated strategic, financial, operational, or other benefits from the spin-offs. We cannot predict with certainty when the benefits expected from the spin-offs will occur or the extent to which they will be achieved. If the spin-offs are completed, our operational and financial profile will change and we will face new risks. As independent, publicly traded companies, our North American cereal and plant-based food businesses will each be smaller, less-diversified companies and may be more vulnerable to changing market conditions. There is no assurance that following the spin-offs each separate company will be successful. The announcement and/or completion of the spin-offs may cause uncertainty for or disruptions with our customers, partners, suppliers, and employees, which may negatively impact these relationships or our operations. In addition, we will incur one-time costs and ongoing costs in connection with, or as a result of, the spin-offs, including costs of operating as independent, publicly-traded companies that the three businesses will no longer be able to share. Those costs may exceed our estimates or could negate some of the benefits we expect to realize. If we do not realize the intended benefits or if our costs exceed our estimates, we or the businesses that are spun off could suffer a material adverse effect on the business, financial condition, results of operations, and trading price of us or the separated businesses.
If the proposed spin-offs are completed, the trading price of our common stock may decline and may experience greater volatility.
Upon completion of the proposed spin-offs, because the trading price for our shares will no longer reflect the value of the separated businesses, such trading price may be lower than immediately prior to the spin-offs. In addition, until the market has fully analyzed our value without the separated businesses, the price of our shares may experience greater volatility. If the proposed spin-offs are completed, our shares may not match some holders’ investment strategies or meet minimum criteria for inclusion in stock market indices or portfolios, which could cause certain investors to sell their shares, which could lead to declines in the trading price of our common stock. Further, there can be no assurance that the combined value of the shares of the three resulting companies will be equal to or greater than what the value of our common stock would have been had the proposed spin-offs not occurred.
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. This authorization is intended to allow the Company to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs.
The following table provides information with respect to purchases of common shares under programs authorized by our board of directors during the quarter ended July 2, 2022.
(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: | ||||||||||||||
| 4/3/2022 - 4/30/2022 | — | $ | — | — | $ | 960 | ||||||||
| Month #2: | ||||||||||||||
| 5/1/2022 - 5/28/2022 | — | $ | — | — | $ | 960 | ||||||||
| Month #3: | ||||||||||||||
| 5/29/2022 - 7/2/2022 | — | $ | — | — | $ | 960 | ||||||||
| Total | — | — | ||||||||||||
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Item 6. Exhibits
(a)Exhibits:
| Rule 13a-14(e)/15d-14(a) Certification from Steven A. Cahillane | |||||
| Rule 13a-14(e)/15d-14(a) Certification from Amit Banati | |||||
| Section 1350 Certification from Steven A. Cahillane | |||||
| Section 1350 Certification from Amit Banati | |||||
| 101.INS | XBRL Instance Document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
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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 4, 2022
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KELLOGG COMPANY
EXHIBIT INDEX
| Exhibit No. | Description | Electronic (E) Paper (P) Incorp. By Ref. (IBRF) | ||||||
| Rule 13a-14(e)/15d-14(a) Certification from Steven A. Cahillane | E | |||||||
| Rule 13a-14(e)/15d-14(a) Certification from Amit Banati | E | |||||||
| Section 1350 Certification from Steven A. Cahillane | E | |||||||
| Section 1350 Certification from Amit Banati | E | |||||||
| 101.INS | XBRL Instance Document | E | ||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | E | ||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | E | ||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | E | ||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | E | ||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | E | ||||||
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