UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-4171
KELLOGG COMPANY
State of Incorporation--Delaware IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant's telephone number: 269-961-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
Common Stock outstanding April 23, 2004 - 410,653,813 shares
KELLOGG COMPANY
INDEX
PART I - Financial Information Page
Item 1:
Consolidated Balance Sheet - March 27, 2004, and
December 27, 2003 2
Consolidated Statement of Earnings - quarters ended
March 27, 2004 and March 29, 2003 3
Consolidated Statement of Cash Flows - quarters ended
March 27, 2004 and March 29, 2003 4
Notes to Consolidated Financial Statements 5-11
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-16
Item 3:
Quantitative and Qualitative Disclosures about Market Risk 17
Item 4:
Controls and Procedures 17
PART II - Other Information
Item 2:
Changes in Securities and Use of Proceeds 18
Item 4:
Submission of Matters to a Vote of Security Holders 18-19
Item 6:
Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
=======================================================================================================================
March 27, December 27,
2004 2003
(unaudited) *
=======================================================================================================================
Current assets
Cash and cash equivalents $196.1 $141.2
Accounts receivable, net 873.8 754.8
Inventories:
Raw materials and supplies 191.0 185.3
Finished goods and materials in process 433.7 464.5
Other current assets 278.2 242.1
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 1,972.8 1,787.9
Property, net of accumulated depreciation
of $3,511.2 and $3,439.3 2,735.8 2,780.2
Goodwill 3,098.3 3,098.4
Other intangibles, net of accumulated amortization
of $35.8 and $35.1 2,033.7 2,034.4
Other assets 464.3 441.8
- -----------------------------------------------------------------------------------------------------------------------
Total assets $10,304.9 $10,142.7
=======================================================================================================================
Current liabilities
Current maturities of long-term debt $78.7 $578.1
Notes payable 769.0 320.8
Accounts payable 710.7 703.8
Accrued advertising and promotion 381.1 323.1
Other current liabilities 886.2 840.2
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,825.7 2,766.0
Long-term debt 4,263.4 4,265.4
Deferred income taxes 1,063.4 1,062.8
Pension benefits 160.0 165.3
Nonpension postretirement benefits 285.7 291.0
Other liabilities 134.7 149.0
Shareholders' equity
Common stock, $.25 par value 103.8 103.8
Capital in excess of par value 1.0 24.5
Retained earnings 2,363.4 2,247.7
Treasury stock, at cost (164.4) (203.6)
Accumulated other comprehensive income (loss) (731.8) (729.2)
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,572.0 1,443.2
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,304.9 $10,142.7
=======================================================================================================================
* Condensed from audited financial statements.
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(millions, except per share data)
=======================================================================================
Quarter ended Quarter ended
March 27, March 29,
(Results are unaudited) 2004 2003
=======================================================================================
Net sales $2,390.5 $2,147.5
Cost of goods sold 1,355.5 1,231.1
Selling and administrative expense 614.8 569.0
------------------------------
Operating profit 420.2 347.4
Interest expense 78.2 92.0
Other income (expense), net (1.3) 0.7
------------------------------
Earnings before income taxes 340.7 256.1
Income taxes 120.9 92.2
------------------------------
Net earnings $219.8 $163.9
==============================
Net earnings per share:
Basic $.54 $.40
Diluted $.53 $.40
Dividends per share $.2525 $.2525
==============================
Average shares outstanding:
Basic 410.8 407.7
==============================
Diluted 414.4 409.3
==============================
Actual shares outstanding at period end 411.0 406.3
==============================
Refer to Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
==================================================================================================================
Year-to-date Year-to-date
period ended period ended
March 27, March 29,
(unaudited) 2004 2003
==================================================================================================================
Operating activities
Net earnings $219.8 $163.9
Adjustments to reconcile net earnings to
operating cash flows:
Depreciation and amortization 85.5 85.7
Deferred income taxes 7.2 13.4
Other 28.4 28.0
Postretirement benefit plan contributions (110.3) (46.8)
Changes in operating assets and liabilities 23.0 (55.9)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 253.6 188.3
- ------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to properties (42.2) (29.9)
Dispositions of businesses - 14.3
Other 0.4 1.2
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (41.8) (14.4)
- ------------------------------------------------------------------------------------------------------------------
Financing activities
Net issuances (reductions) of notes payable 448.1 10.5
Reductions of long-term debt (502.1) -
Net issuances of common stock 87.7 14.7
Common stock repurchases (82.2) (62.0)
Cash dividends (104.0) (102.9)
Other 0.0 2.4
- ------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (152.5) (137.3)
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (4.4) (0.4)
- ------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 54.9 36.2
Cash and cash equivalents at beginning of period 141.2 100.6
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $196.1 $136.8
==================================================================================================================
Refer to Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
for the quarter ended March 27, 2004 (unaudited)
Note 1 Accounting policies
The unaudited interim financial information included in this report reflects
normal recurring adjustments that management believes are necessary for a fair
presentation of the results of operations, financial position, and cash flows
for the periods presented. This interim information should be read in
conjunction with the financial statements and accompanying notes contained on
pages 32 to 52 of the Company's 2003 Annual Report. The accounting policies used
in preparing these financial statements are the same as those summarized in the
Company's 2003 Annual Report, except as discussed below. Certain amounts for
2003 have been reclassified to conform to current-period classifications. The
results of operations for the quarter ended March 27, 2004, are not necessarily
indicative of the results to be expected for other interim periods or the full
year.
Basis of presentation
The Company's fiscal year normally ends on the last Saturday of December and as
a result, a 53rd week is added every fifth or sixth year. The Company's 2004
fiscal year will end on January 1, 2005, and include a 53rd week. Quarters
normally consist of 13-week periods, with the fourth quarter of fiscal 2004
including a 14th week.
Medicare prescription benefits
In December 2003, the Medicare Prescription Drug Improvement and Modernization
Act of 2003 (the Act) became law. The Act introduces a prescription drug benefit
under Medicare Part D as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. At present, detailed regulations necessary to
implement the Act have not been issued, including those that would specify the
manner in which actuarial equivalency must be determined and the evidence
required to demonstrate actuarial equivalency to the Secretary of Health and
Human Services. Furthermore, as of the end of the Company's first quarter 2004
reporting period, the FASB had not yet issued final authoritative guidance on
accounting for subsidies provided by the Act. To address this uncertainty, in
January 2004, the FASB issued Staff Position (FSP) FAS 106-1, which permitted
plan sponsors to make a one-time election to defer recognition of the effects of
the Act in accounting for and making disclosures for postretirement benefit
plans until authoritative guidance was issued. Accordingly, the Company made
this deferral election and results for the current period do not reflect any
impacts of the Act.
In April 2004, the FASB issued proposed FSP FAS 106-2, which supercedes FSP FAS
106-1. FSP FAS 106-2 applies to sponsors of single-employer defined benefit
postretirement health care plans for which (a) the employer has concluded that
prescription drug benefits available under the plan are "actuarially equivalent"
and thus qualify for the subsidy under the Act and (b) the expected subsidy will
offset or reduce the employer's share of the cost of postretirement prescription
drug coverage provided by the plan. In general, the FSP concludes that plan
sponsors should follow SFAS No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions," in accounting for the effects of the Act.
Specifically, the effect of the subsidy on benefits attributable to past service
cost should be accounted for as an actuarial experience gain and the effect of
the subsidy on future costs should be accounted for as a reduction in service
cost. For employers such as Kellogg that elected deferral under FSP FAS 106-1,
this guidance is effective for the first interim or annual period beginning
after June 15, 2004, with earlier application permitted to the extent financial
statements for earlier periods have not yet been issued. When the FSP is
initially applied, a remeasurement of the plan's assets and accumulated
postretirement benefit obligation (APBO) should be made as of the earlier of (a)
the plan's measurement date that normally would have followed enactment of the
Act or (b) the end of the employer's interim or annual period that includes the
date of the plan enactment. To the extent that previously issued financial
results for periods prior to the effective date of the FSP would have been
affected by this remeasurement, the cumulative effect is included in
year-to-date results for the period of adoption, with restatement of any
pre-adoption interim periods when they are subsequently presented.
Based on current design, management believes that certain health care benefit
plans covering a significant portion of the Company's U.S. workforce will
qualify for the Medicare Part D subsidy, resulting in a reduction in the
Company's share of prescription drug benefits available under these plans.
Accordingly, the Company plans to adopt FSP FAS 106-2 as of its second quarter
2004 reporting period beginning March 28, 2004, and has performed a
remeasurement of its plan assets and obligations as of December 27, 2003. The
reduction in the APBO attributable to past service cost is approximately $73
million and the total reduction in benefit cost for full-year 2004 is
approximately $10 million, of which $5 million will be recognized in results for
the year-to-date period ended June 26, 2004.
Stock compensation
The Company uses various equity-based compensation programs to provide long-term
performance incentives for its global workforce. Currently, these incentives
consist of stock options, performance units, restricted stock grants, and stock
purchase plans with various preferred terms. These awards are administered
through several plans, as described in Note 8 to Consolidated Financial
Statements on pages 41-43 of the Company's 2003 Annual Report.
The Company currently uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to
account for its employee stock options and other stock-based compensation. Under
this method, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. The table below presents pro forma results
for the current and prior-year periods, as if the Company had used the alternate
fair value method of accounting for stock-based compensation, prescribed by SFAS
No. 123 "Accounting for Stock-Based Compensation" (as amended by SFAS No. 148).
Under this pro forma method, the fair value of each option grant was estimated
at the date of grant using the Black-Scholes option-pricing model and was
recognized over the vesting period, generally two years. Pricing model
assumptions included expected terms of 3-4 years; and risk-free interest rates,
dividend yields, and volatility assumptions consistent with the expected terms
and particular grant dates.
- --------------------------------------------------------------------------------------
(millions except per share data) Quarter ended
- --------------------------------------------------------------------------------------
March 27, March 29,
2004 2003
- --------------------------------------------------------------------------------------
Stock-based compensation expense, net of tax:
As reported $ 2.2 $ 2.7
Pro forma $ 9.7 $ 9.8
Net earnings:
As reported $ 219.8 $ 163.9
Pro forma $ 212.3 $ 156.8
Basic net earnings per share:
As reported $ 0.54 $ 0.40
Pro forma $ 0.52 $ 0.38
Diluted net earnings per share:
As reported $ 0.53 $ 0.40
Pro forma $ 0.51 $ 0.38
- --------------------------------------------------------------------------------------
Note 2 Exit activities
To position the Company for sustained reliable growth in earnings and cash flow
for the long term, management is undertaking a series of cost-reduction
initiatives. Continuing from 2003 are various manufacturing capacity
rationalization and efficiency initiatives in the Company's North American and
European operating segments. Some of these initiatives are still in the planning
stages and individual actions are being announced as plans are finalized.
During the first quarter of 2004, the Company commenced the global roll-out of
its SAP information technology system, resulting in accelerated depreciation of
legacy software assets to be abandoned during 2005, as well as related
consulting and other implementation expenses.
Taking into account the incremental costs of the SAP roll-out, plus other
various manufacturing efficiency initiatives, the Company recorded total charges
of approximately $9 million during the first quarter of 2004, principally
comprised of asset write-offs. Approximately 70% of these charges were recorded
in cost of goods sold, with the balance recorded in selling, general, and
administrative (SGA) expense. These charges impacted the Company's operating
segments as follows (in millions): North America-$4, Europe-$5. The exit cost
reserve balance at December 27, 2003, of approximately $19 million was
substantially paid out during the first quarter of 2004.
Note 3 Other income (expense), net
Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, charitable donations, and gains on
asset sales. Other income (expense), net for the year-to-date period ended March
29, 2003, includes a credit of approximately $10 million related to favorable
legal settlements; a charge of $8 million for a contribution to the Kellogg's
Corporate Citizenship Fund, a private trust established for charitable giving;
and a charge of $6.5 million to recognize the impairment of a cost-basis
investment in an e-commerce business venture.
Note 4 Equity
Earnings per share
Basic net earnings per share is determined by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
net earnings per share is similarly determined, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if all dilutive potential common shares had been issued. Dilutive
potential common shares are comprised principally of employee stock options
issued by the Company. Basic net earnings per share is reconciled to diluted net
earnings per share as follows:
- ----------------------------------------------------------------------------------------------------
Quarter Average Net
(millions, except Net shares earnings
per share data) earnings outstanding per share
- ----------------------------------------------------------------------------------------------------
2004
Basic $219.8 410.7 $.54
Dilutive potential
common shares - 3.7 (.01)
- ----------------------------------------------------------------------------------------------------
Diluted $219.8 414.4 $.53
- ----------------------------------------------------------------------------------------------------
2003
Basic $163.9 407.7 $.40
Dilutive potential
common shares - 1.6 -
- ----------------------------------------------------------------------------------------------------
Diluted $163.9 409.3 $.40
- ----------------------------------------------------------------------------------------------------
Comprehensive Income
Comprehensive income includes net earnings and all other changes in equity
during a period except those resulting from investments by or distributions to
shareholders. Accumulated other comprehensive income for the periods presented
consists of foreign currency translation adjustments pursuant to SFAS No. 52
"Foreign Currency Translation," unrealized gains and losses on cash flow hedges
pursuant to SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," and minimum pension liability adjustments pursuant to SFAS No. 87
"Employers' Accounting for Pensions."
Quarter Pretax Tax(expense) After-tax
(millions) amount benefit amount
- -----------------------------------------------------------------------------------------------------
2004
Net earnings $219.8
Other comprehensive income:
Foreign currency translation adjustments ($2.7) - (2.7)
Cash flow hedges:
Unrealized gain (loss) on
cash flow hedges 0.8 (0.1) 0.7
Reclassification to net earnings 4.9 (1.9) 3.0
Minimum pension liability adjustments (5.1) 1.5 (3.6)
- -----------------------------------------------------------------------------------------------------
($2.1) ($0.5) ($2.6)
- -----------------------------------------------------------------------------------------------------
Total comprehensive income $217.2
- -----------------------------------------------------------------------------------------------------
Pretax Tax(expense) After-tax
(millions) amount benefit amount
- -----------------------------------------------------------------------------------------------------
2003
Net earnings $163.9
Other comprehensive income:
Foreign currency translation adjustments $2.1 - 2.1
Cash flow hedges:
Unrealized gain (loss) on
cash flow hedges (9.6) 3.5 (6.1)
Reclassification to net earnings 7.7 (2.7) 5.0
Minimum pension liability adjustments - - -
- -----------------------------------------------------------------------------------------------------
$0.2 $0.8 $1.0
- -----------------------------------------------------------------------------------------------------
Total comprehensive income $164.9
- -----------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) as of March 27, 2004, and December
27, 2003, consisted of the following:
- -----------------------------------------------------------------------------------------------------
March 27, December 27,
(millions) 2004 2003
- -----------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $ (408.7) $ (406.0)
Cash flow hedges - unrealized net loss (48.2) (51.9)
Minimum pension liability adjustments (274.9) (271.3)
- -----------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $ (731.8) $ (729.2)
- -----------------------------------------------------------------------------------------------------
Note 5 Debt
In January 2004, the Company repaid $500 million of maturing seven-year Notes,
replacing these Notes with short-term debt.
Note 6 Employee benefits
The Company sponsors a number of U.S. and foreign pension, other postretirement,
and postemployment plans to provide various benefits for its employees. These
plans are described on pages 43-46 of the Company's 2003 Annual Report.
Components of benefit expense for the periods presented were:
Pension
- ---------------------------------------------------------------------------
Quarter ended
(millions) March 27, 2004 March 29, 2003
- ---------------------------------------------------------------------------
Service cost $18.9 $16.9
Interest cost 38.3 37.8
Expected return on plan assets (58.6) (56.1)
Amortization of unrecognized
prior service cost 2.0 1.8
Recognized net (gain) loss 12.8 7.2
Curtailment and special termination benefits -
net (gain) loss 1.2 2.0
- ---------------------------------------------------------------------------
Total pension expense - Company Plans $14.6 $9.6
- ---------------------------------------------------------------------------
Other nonpension postretirement
- ---------------------------------------------------------------------------
Quarter ended
(millions) March 27, 2004 March 29, 2003
- ---------------------------------------------------------------------------
Service cost $3.7 $3.1
Interest cost 14.7 15.1
Expected return on plan assets (9.9) (8.2)
Amortization of unrecognized
prior service cost (0.7) (0.6)
Recognized net (gain) loss 4.6 3.1
- ---------------------------------------------------------------------------
Postretirement benefit expense $12.4 $12.5
- ---------------------------------------------------------------------------
Postemployment
- ---------------------------------------------------------------------------
Quarter ended
(millions) March 27, 2004 March 29, 2003
- ---------------------------------------------------------------------------
Service cost $1.0 $0.8
Interest cost 0.5 0.5
Recognized net (gain) loss 0.9 0.8
- ---------------------------------------------------------------------------
Postemployment benefit expense $2.4 $2.1
- ---------------------------------------------------------------------------
Note 7 Operating segments
Kellogg Company is the world's leading producer of cereal and a leading producer
of convenience foods, including cookies, crackers, toaster pastries, cereal
bars, frozen waffles, and meat alternatives. Kellogg products are manufactured
and marketed globally. In recent years, the Company was managed in two major
divisions - the United States and International. During late 2003, the Company
reorganized its geographic management structure to North America, Europe, Latin
America, and Asia Pacific. This new organizational structure is the basis of the
operating segment data presented below. The prior period has been restated to
conform to the current-period presentation. This restatement includes: 1) the
combination of U.S. and Canadian results into North America, 2) the
reclassification of certain U.S. export operations from U.S. to Latin America,
and 3) the reallocation of certain selling, general, and administrative (SGA)
expenses between Corporate and North America.
Quarter ended Quarter ended
March 27, March 29,
(millions) 2004 2003
=============================================================================
Net sales
North America $1,598.3 $1,509.7
Europe 491.2 394.5
Latin America 168.3 144.7
Asia Pacific (a) 132.7 98.6
------------------------------
Consolidated $2,390.5 $2,147.5
==============================
- -----------------------------------------------------------------------------
Operating profit
North America $288.7 $259.0
Europe 82.4 58.3
Latin America 46.2 39.7
Asia Pacific (a) 25.8 16.9
Corporate (22.9) (26.5)
------------------------------
Consolidated $420.2 $347.4
==============================
(a) Includes Australia and Asia.
Note 8 Supplemental information on goodwill and other intangible assets
- --------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization:
(millions) Gross carrying amount Accumulated amortization
- --------------------------------------------------------------------------------------------------------------------------------
March 27, December 27, March 27, December 27,
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Trademarks $ 29.5 $ 29.5 $ 18.5 $ 18.3
Other 29.1 29.1 17.3 16.8
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 58.6 $ 58.6 $ 35.8 $ 35.1
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Amortization expense (millions) (a): March 27, March 29,
2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended $ 0.7 $ 0.8
- --------------------------------------------------------------------------------------------------------------------------------
(a) The currently estimated aggregate amortization expense for each of the 5 succeeding fiscal years is approximately
$3.0 million per year.
- ---------------------------------------------------------------------------------
Intangible assets not subject to amortization:
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
(millions) Total carrying amount
- ---------------------------------------------------------------------------------
March 27, December 27,
2004 2003
- ---------------------------------------------------------------------------------
Trademarks $ 1,404.0 $ 1,404.0
Direct store door (DSD) delivery system 578.9 578.9
Other 28.0 28.0
- ---------------------------------------------------------------------------------
Total $ 2,010.9 $ 2,010.9
- ---------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Changes in the carrying amount of goodwill for the year-to-date period ended
March 27, 2004:
- --------------------------------------------------------------------------------------------------------------------------------
Asia Consoli-
(millions) United States Europe Latin America Pacific (b) dated
--------------- ------- --------------- ------------------ ---------
December 27, 2003 $ 3,093.8 $ - $ 2.5 $ 2.1 $ 3,098.4
Foreign currency remeasurement impact and other - - (0.1) - (0.1)
- --------------------------------------------------------------------------------------------------------------------------------
March 27, 2004 $ 3,093.8 $ - $ 2.4 $ 2.1 $ 3,098.3
- --------------------------------------------------------------------------------------------------------------------------------
(b) Includes Australia and Asia.
KELLOGG COMPANY
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of operations
Overview
Kellogg Company is the world's leading producer of cereal and a leading producer
of convenience foods, including cookies, crackers, toaster pastries, cereal
bars, frozen waffles, and meat alternatives. Kellogg products are manufactured
and marketed globally. In recent years, we managed our operations in two major
divisions - the United States and International. In late 2003, we reorganized
our geographic management structure to North America, Europe, Latin America, and
Asia Pacific. This new organizational structure is the basis of the operating
segment data presented in this report.
For the quarter ended March 27, 2004, the Company reported net earnings per
share of $.53, a 33% increase over the prior-period amount of $.40. Consolidated
net sales increased 11% and operating profit was up 21%. The combination of
strong sales momentum and favorable foreign exchange rates resulted in a 34%
increase in net earnings for the quarter, despite substantially increased
commodity costs and significant brand-building expenditures.
Net sales and operating profit
The following tables provide an analysis of net sales and operating profit
performance for the first quarter of 2004 versus 2003:
- ----------------------------------------------------------------------------------------------------------------------
North Latin Asia Consoli-
(dollars in millions) America Europe America Pacific(b) Corporate dated
- ----------------------------------------------------------------------------------------------------------------------
2004 net sales $1,598.3 $ 491.2 $ 168.3 $ 132.7 $ - $2,390.5
- ----------------------------------------------------------------------------------------------------------------------
2003 net sales (a) $1,509.7 $ 394.5 $ 144.7 $ 98.6 $ - $2,147.5
- ----------------------------------------------------------------------------------------------------------------------
% change - 2004 vs. 2003:
Volume (tonnage) 1.4% 3.2% 10.7% 9.7% - 2.7%
Pricing/mix 3.7% 4.1% 5.9% 1.1% - 3.8%
- ----------------------------------------------------------------------------------------------------------------------
Subtotal - internal business 5.1% 7.3% 16.6% 10.8% - 6.5%
Foreign currency impact 0.8% 17.2% -0.3% 24.0% - 4.8%
- ----------------------------------------------------------------------------------------------------------------------
Total change 5.9% 24.5% 16.3% 34.8% - 11.3%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
North Latin Asia Consoli-
(dollars in millions) America Europe America Pacific(b) Corporate dated
- ----------------------------------------------------------------------------------------------------------------------
2004 operating profit $ 288.7 $ 82.4 $ 46.2 $ 25.8 $ (22.9) $ 420.2
- ----------------------------------------------------------------------------------------------------------------------
2003 operating profit (a) $ 259.0 $ 58.3 $ 39.7 $ 16.9 $ (26.5) $ 347.4
- ----------------------------------------------------------------------------------------------------------------------
% change - 2004 vs. 2003:
- ----------------------------------------------------------------------------------------------------------------------
Internal business 10.5% 22.2% 17.5% 22.7% 14.0% 15.7%
Foreign currency impact 1.0% 19.1% -1.2% 29.5% 0.0% 5.3%
- ----------------------------------------------------------------------------------------------------------------------
Total change 11.5% 41.3% 16.3% 52.2% 14.0% 21.0%
- ----------------------------------------------------------------------------------------------------------------------
(a) 2003 results were restated to conform to 2004 operating segment presentation as follows:
1) U.S. and Canadian results combined into North America, 2) certain U.S. export operations reclassified
from U.S. to Latin America, and 3) certain SGA expenditures reallocated between Corporate and North America.
(b) Includes Australia and Asia.
During the first quarter of 2004, reported net sales increased 11%, buoyed by a
favorable foreign currency impact of 5%. Internal net sales growth (which
excludes the impact of currency and if applicable, acquisitions, dispositions,
and shipping day differences) exceeded 6%, against a year-ago internal growth
rate of approximately 3%. During the quarter, successful innovation and
brand-building investment drove growth that was broad-based across all operating
segments. This first quarter performance exceeds our full-year target of low to
mid single-digit internal net sales growth.
North America reported net sales growth of approximately 6%, with internal
growth across all major product groups. Internal net sales of our North America
retail cereal business increased approximately 4%, on top of 4% growth in the
prior-year period. New-product innovations and effective consumer promotion
activities contributed importantly to this performance. Internal net sales of
our North America retail snacks business (consisting primarily of wholesome
snacks, cookies, crackers, and toaster pastries) increased 6%, primarily as a
result of successful launches of new cracker and fruit snack products. Within
our snacks portfolio, sales growth in wholesome snacks, crackers, and toaster
pastries offset a continued decline in cookie sales. Internal net sales of our
North America frozen and alternative channel (which includes food service,
vending, convenience, drug stores, and custom manufacturing) businesses
collectively increased approximately 4%, on top of a similar level of growth in
the first quarter of 2003.
Net sales in our European operating segment increased more than 24%, with strong
internal net sales growth of 7%. Our UK cereal business led this segment
performance, as both brand-building activities and innovation resulted in share
gains and category growth during the quarter. Also contributing to this growth
were strong cereal sales across continental Europe and continued expansion of
our European snacks business.
Continued strong performance in Latin America resulted in net sales growth of
16%, comprised principally of internal net sales growth. Most of this growth was
due to very strong price/mix and tonnage improvements in both cereal and snack
sales by our Mexican business unit, which benefited from a modest price increase
and expansion of its direct store door (DSD) delivery system.
Net sales in our Asia Pacific operating segment increased 35%, with internal
sales growth of 11%. Strong cereal sales in both Australia and Asia contributed
to this growth, with our Japanese business unit leading the performance in Asia.
Consolidated operating profit increased 21% during the quarter, with favorable
foreign currency movements contributing five percentage points to this growth.
Internal operating profit increased nearly 16%, despite a double-digit increase
in brand-building expenditures, as well as significantly higher commodity costs.
As discussed below, during the remainder of the year, we expect to absorb a
significant amount of asset write-offs and up-front costs related to
cost-reduction initiatives.
To position our Company for sustained reliable growth in earnings and cash flow
for the long term, we are undertaking a series of cost-reduction initiatives.
Continuing from 2003 are various manufacturing capacity rationalization and
efficiency initiatives in our North American and European operating segments.
Some of these initiatives are still in the planning stages and individual
actions are being announced as plans are finalized.
During the first quarter of 2004, we commenced the global roll-out of our SAP
information technology system, resulting in accelerated depreciation of legacy
software assets to be abandoned during 2005, as well as related consulting and
other implementation expenses.
Taking into account the incremental costs of the SAP roll-out, plus other
various supply chain efficiency initiatives, we recorded total charges of
approximately $9 million during the first quarter of 2004, principally comprised
of asset write-offs. Approximately 70% of these charges were recorded in cost of
goods sold, with the balance recorded in selling, general, and administrative
(SGA) expense. These charges impacted our operating segments as follows (in
millions): North America-$4, Europe-$5.
During the second quarter of 2004, we plan to initiate bargaining with the
union regarding our proposal to close our veggie foods manufacturing
facility in Worthington, Ohio and consolidate production at our Zanesville,
Ohio facility over the next year. If implemented as proposed, total asset
write-offs and up-front costs of the project could amount to approximately
$30 million during 2004 and 2005.
Margin performance
Margin performance for the first quarter of 2004 versus 2003 was:
- ---------------------------------------------------------------------------------------
Change
vs. prior
2004 2003 year (pts.)
- ---------------------------------------------------------------------------------------
Gross margin 43.3% 42.7% 0.6
- ---------------------------------------------------------------------------------------
SGA% (a) -25.7% -26.5% 0.8
- ---------------------------------------------------------------------------------------
Operating margin 17.6% 16.2% 1.4
- ---------------------------------------------------------------------------------------
(a) Selling, general, and administrative expense as a percentage of net sales.
The consolidated gross margin increased 60 basis points versus the prior-year
period. Our strong sales growth during the quarter created significant operating
leverage. This factor, combined with mix improvements and productivity savings,
offset the unfavorable impact of higher commodity, energy, and employee benefit
costs. For the full year of 2004, we expect continued pressure from commodity
prices and our investment in cost-reduction initiatives to limit gross margin
expansion, resulting in only a slight increase versus the full-year 2003 level
of 44.4%.
Interest expense
Interest expense for the quarter was $78.2 million, down 15% from the
prior-period amount of $92.0 million. We currently expect total year 2004
interest expense of approximately $320 million, down from the total year 2003
amount of $371.4 million, due primarily to continuing pay-down of our debt
balances and lower interest rates on refinancings.
Other income (expense), net
Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, charitable donations, and gains on
asset sales. Other income (expense), net for the quarter was a loss of $1.3
million versus income of $.7 million in the prior-year period. This prior-period
amount includes a credit of approximately $10 million related to favorable legal
settlements; a charge of $8 million for a contribution to the Kellogg's
Corporate Citizenship Fund, a private trust established for charitable giving;
and a charge of $6.5 million to recognize the impairment of a cost-basis
investment in an e-commerce business venture.
Income taxes
The consolidated effective income tax rate for the quarter was 35.5% versus
36.0% for the comparable prior-year period and 32.7% for the full year of 2003.
Our full-year 2003 effective income tax rate included over 200 basis points of
single-event benefits related primarily to implementation of various tax
planning initiatives and audit closures. Therefore, we currently expect an
ongoing rate for 2004 of approximately 35%.
Liquidity and capital resources
Our principal source of liquidity is operating cash flows resulting from net
earnings, supplemented by borrowings for major acquisitions and other
significant transactions. This cash-generating capability is one of our
fundamental strengths and provides us with substantial financial flexibility in
meeting operating and investing needs.
Our measure of first quarter 2004 cash flow (defined as net cash provided by
operating activities reduced by expenditures for property additions) was $211.4
million compared to $158.4 million in the prior-year period. We use this measure
of cash flow to focus management and investors on the amount of cash available
for debt repayment, dividend distributions, acquisition opportunities, and share
repurchases. Our cash flow metric is reconciled to GAAP-basis operating cash
flow as follows:
- -------------------------------------------------------------------------------------------------
Year-to-date period ended
- ------------------------------------------------------------------------------------- Change
(millions) March 27, March 29, versus
2004 2003 prior year
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 253.6 $ 188.3
Additions to properties (42.2) (29.9)
- -------------------------------------------------------------------------------------------------
Cash flow $ 211.4 $ 158.4 33.5%
- -------------------------------------------------------------------------------------------------
Our 2004 year-to-date cash flow increased significantly versus the prior-year
period, due primarily to favorable working capital movements, which more than
offset a $64 million year-over-year increase in benefit plan contributions. For
the year ended March 27, 2004, average core working capital as a percentage of
net sales was 8.0%, compared with 8.2% for the year ended December 27, 2003. For
the full year of 2004, we expect modest improvement in our core working capital
metric, expenditures for property additions of about 3% of net sales, and cash
flow of $925-$1,000 million. This forecast incorporates 2004 expenditures
associated with construction of a new production facility in Toluca, Mexico,
commenced in March 2004. This will be our third manufacturing operation in
Mexico and is in direct response to our strong sales of wholesome snacks in this
country.
In December 2003, our Board of Directors authorized management to repurchase up
to $300 million of Kellogg common stock during 2004. Under this authorization,
we paid $82.2 million to repurchase approximately 2.1 million shares during the
first quarter of 2004.
In January 2004, we repaid $500 million of maturing seven-year Notes, replacing
these Notes with short-term debt. During the full year of 2004, we currently
intend to reduce our total outstanding debt by at least $300 million.
We believe that we will be able to meet our interest and principal repayment
obligations and maintain our debt covenants for the foreseeable future, while
still meeting our operational needs through our strong cash flow, our program of
issuing short-term debt, and maintaining credit facilities on a global basis.
Our significant long-term debt issues do not contain acceleration of maturity
clauses that are dependent on credit ratings. A change in the Company's credit
ratings could limit its access to the U.S. short-term debt market and/or
increase the cost of refinancing long-term debt in the future. However, even
under these circumstances, we would continue to have access to our credit
facilities, which are in amounts sufficient to cover the outstanding short-term
debt balance and debt principal repayments through 2005.
Future outlook
Our long-term annual growth targets are low single-digit for internal net sales
and high single-digit for net earnings per share. In general, we expect 2004
results to be consistent with or modestly above these targets. These
expectations are despite several continuing challenges such as higher employee
benefits expense and increased commodity and energy prices. In addition to these
continuing challenges, the following important trends and uncertainties
particular to 2004 should be noted:
|X| Our 2004 fiscal year will include a 53rd week, which could add approximately
one percentage point of extra growth to our
sales results.
|X| We expect another year of sales decline for the cookie portion of our U.S.
snacks business, due principally to category factors, aggressive sku
eliminations, and discontinuance of a custom manufacturing business during
2003.
|X| We expect to incur a significant amount of asset write-offs and up-front
costs associated with cost-reduction initiatives throughout 2004.
|X| We expect full-year growth in brand-building expenditures to exceed the rate
of sales growth.
Forward-looking statements
Our Management's Discussion and Analysis contain "forward-looking statements"
with projections concerning, among other things, our strategy, financial
principles, and plans; initiatives, improvements, and growth; sales, gross
margins, advertising, promotion, merchandising, brand-building expenditures,
operating profit, and earnings per share; innovation opportunities; exit plans
and costs related to efficiency initiatives; the impact of accounting changes;
our ability to meet interest and debt principal repayment obligations; future
common stock repurchases or debt reduction; effective income tax rate; cash flow
and core working capital improvements; capital expenditures; interest expense;
commodity and energy prices; and employee benefit plan costs and funding.
Forward-looking statements include predictions of future results or activities
and may contain the words "expect," "believe," "will," "will deliver,"
"anticipate," "project," "should," or words or phrases of similar meaning. Our
actual results or activities may differ materially from these predictions. In
particular, future results or activities could be affected by factors related to
the Keebler acquisition, such as the substantial amount of debt incurred to
finance the acquisition, which could, among other things, hinder our ability to
adjust rapidly to changing market conditions, make us more vulnerable in the
event of a downturn, and place us at a competitive disadvantage relative to
less-leveraged competitors. In addition, our future results could be affected by
a variety of other factors, including:
|X| the impact of competitive conditions;
|X| the effectiveness of pricing, advertising, and promotional programs;
|X| the success of innovation and new product introductions;
|X| the recoverability of the carrying value of goodwill and other intangibles;
|X| the success of productivity improvements and business transitions;
|X| commodity and energy prices, and labor costs;
|X| the availability of and interest rates on short-term financing;
|X| actual market performance of benefit plan trust investments;
|X| the levels of spending on systems initiatives, properties, business
opportunities, integration of acquired businesses, and other general and
administrative costs;
|X| changes in consumer behavior and preferences;
|X| the effect of U.S. and foreign economic conditions on items such as interest
rates, statutory tax rates, currency conversion and availability;
|X| legal and regulatory factors; and,
|X| business disruption or other losses from war, terrorist acts, or political
unrest.
Forward-looking statements speak only as of the date they were made, and we
undertake no obligation to publicly update them.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to disclosures contained on pages 26-27 of the Company's 2003 Annual
Report.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure based on management's interpretation of the
definition of "disclosure controls and procedures," in Rules 13a-15(e) and
15d-15(e). In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable, rather than absolute,
assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of March 27, 2004, management carried out an evaluation under the supervision
and with the participation of the Company's Chief Executive Officer and the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
at a reasonable level of assurance.
During the last fiscal quarter, there have been no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
KELLOGG COMPANY
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Approximately 8,000 shares of Kellogg Company common stock were sold to four
members of senior management under the Kellogg Company Executive Stock Purchase
Plan in February 2004 in a private placement. The Kellogg Company Executive
Stock Purchase Plan allows selected senior level employees to elect to use all
or part of their annual bonus, on an after-tax basis, to purchase shares of the
Company's common stock at fair market value (as determined over a thirty-day
trading period). Kellogg Company received approximately $325,000 under this
Plan in 2004, which it used for general corporate purposes.
(e) Issuer Purchases of Equity Securities
(millions except per share data)
- ----------------------- --------------------- -------------------- --------------------- --------------------
(c) Total Number (d) Approximate
of Shares Dollar Value of
Purchased as Shares that May
Part of Publicly Yet Be
(a) Total Number Announced Purchased Under
of Shares (b) Average Price Plans or the Plans or
Period Purchased Paid per Share Programs Programs
- ----------------------- --------------------- -------------------- --------------------- --------------------
Month #1: -- -- -- $300.0
12/28/03-1/24/04
- ----------------------- --------------------- -------------------- --------------------- --------------------
Month #2: -- -- -- $300.0
1/25/04-2/21/04
- ----------------------- --------------------- -------------------- --------------------- --------------------
Month #3: 2.1 $39.03 $82.2 $217.8
2/22/04-3/27/04
- ----------------------- --------------------- -------------------- --------------------- --------------------
Total (1) 2.1 $39.03 $82.2
- ----------------------- --------------------- -------------------- --------------------- --------------------
(1) These shares were purchased in open-market transactions under a program
authorized by the Company's Board of Directors to repurchase for general
corporate purposes up to $300 million in Kellogg common stock during 2004.
This repurchase program was publicly announced in a press release on
December 18, 2003. A similar repurchase authority of $250 million expired
on December 31, 2003.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 23, 2004, the Company held its Annual Meeting of Share Owners.
(b) At that Annual Meeting, Benjamin S. Carson, Sr., Gordon Gund, Dorothy
A. Johnson, and Ann McLaughlin Korologos were re-elected for three-year
terms, with John T. Dillon, Claudio X. Gonzalez, Carlos M. Gutierrez,
James M. Jenness, L. Daniel Jorndt, William D. Perez, William C.
Richardson, and John L. Zabriskie continuing as directors.
(c) Three matters were voted on at such Annual Meeting: the re-election of
the four directors described in (b) above, the ratification of
PricewaterhouseCoopers LLP as the Company's independent auditors for
2004, and a Share Owner proposal by the Sisters of Mercy, Regional
Community of Detroit Charitable Trust, concerning the impacts of
genetically engineered food.
In the election of directors, the following directors received the
following votes:
FOR WITHHELD
Benjamin S. Carson, Sr 374,248,171 2,936,787
Gordon Gund 371,747,464 5,437,494
Dorothy A. Johnson 374,132,772 3,052,186
Ann McLaughlin Korologos 366,749,928 10,435,030
In addition, the following matters received the following votes:
Ratification of
Independent Share Owner
Auditors Proposal
For 366,238,026 14,728,950
Against 8,886,732 307,900,627
Abstain 2,060,229 21,883,220
Broker Non-Vote - 32,672,161
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Rule 13a-14(e)/15d-14(a) Certification from Carlos M. Gutierrez
31.2 Rule 13a-14(e)/15d-14(a) Certification from John A. Bryant
32.1 Section 1350 Certification from Carlos M. Gutierrez
32.2 Section 1350 Certification from John A. Bryant
(b) Reports on Form 8-K:
The Company furnished a Report on Form 8-K dated January 29,
2004 for its 2003 results, in which it furnished a press
release announcing those results under item 12 of such Report.
The Company furnished a Report on Form 8-K dated March 31,
2004 under which it reported a posting to its website detail
outlining the reclassification of reporting segments and
product groups under item 9 of such Report.
The Company furnished a Report on Form 8-K dated April 5,
2004 for its first quarter and full year 2004 earnings
estimates, in which it furnished a press release announcing
those earnings estimates under item 12 of such Report.
The Company furnished a Report on Form 8-K dated April 22,
2004 for its first quarter 2004 results, in which it furnished
a press release announcing those results under item 12 of such
Report.
KELLOGG COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KELLOGG COMPANY
/s/ J.A. Bryant
-------------------------------
J.A. Bryant
Principal Financial Officer;
Executive Vice President - Chief Financial Officer
/s/ J. M. Boromisa
-------------------------------
J. M. Boromisa
Principal Accounting Officer;
Senior Vice President - Corporate Controller
Date: May 3, 2004
KELLOGG COMPANY
EXHIBIT INDEX
Electronic (E)
Paper (P)
Incorp. By
Exhibit No. Description Ref. (IBRF)
31.1 Rule 13a-14(e)/15d-14(a) Certification from Carlos M. Gutierrez E
31.2 Rule 13a-14(e)/15d-14(a) Certification from John A. Bryant E
32.1 Section 1350 Certification from Carlos M. Gutierrez E
32.2 Section 1350 Certification from John A. Bryant E