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 29, 2003
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 30, 2003 - 406,537,435 shares
KELLOGG COMPANY
INDEX
PART I - Financial Information Page
Item 1:
Consolidated Balance Sheet - March 29, 2003, and
December 28, 2002 3
Consolidated Statement of Earnings - quarters
ended March 29, 2003 and March 30, 2002 4
Consolidated Statement of Cash Flows - quarters
ended March 29, 2003 and March 30, 2002 5
Notes to Consolidated Financial Statements 6-12
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 18
PART II - Other Information
Item 2:
Changes in Securities and Use of Proceeds 19
Item 4:
Submission of Matters to a Vote of Security Holders 19
Item 6:
Exhibits and Reports on Form 8-K 19
Signatures 20-22
Exhibit Index 23
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
==================================================================================================================
March 29, December 28,
2003 2002
(unaudited) *
==================================================================================================================
Current assets
Cash and cash equivalents $136.8 $100.6
Accounts receivable, net 811.1 741.0
Inventories:
Raw materials and supplies 179.0 172.2
Finished goods and materials in process 417.2 431.0
Other current assets 322.4 318.6
------------------------------------------------------------------------------------------------------------------
Total current assets 1,866.5 1,763.4
Property, net of accumulated depreciation
of $3,091.2 and $3,012.4 2,776.2 2,840.2
Goodwill 3,102.1 3,106.6
Other intangibles, net of accumulated amortization
of $20.9 and $20.6 2,025.6 2,026.0
Other assets 487.6 483.1
------------------------------------------------------------------------------------------------------------------
Total assets $10,258.0 $10,219.3
==================================================================================================================
Current liabilities
Current maturities of long-term debt $1,275.9 $776.4
Notes payable 431.4 420.9
Accounts payable 583.3 619.0
Accrued advertising and promotion 346.3 309.0
Other current liabilities 881.6 889.6
------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,518.5 3,014.9
Long-term debt 4,019.1 4,519.4
Deferred income taxes 985.6 986.4
Pension benefits 341.2 334.5
Nonpension postretirement benefits 344.5 329.6
Other liabilities 140.1 139.4
Shareholders' equity
Common stock, $.25 par value 103.8 103.8
Capital in excess of par value 44.6 49.9
Retained earnings 1,934.0 1,873.0
Treasury stock, at cost (321.0) (278.2)
Accumulated other comprehensive income (852.4) (853.4)
------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 909.0 895.1
------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,258.0 $10,219.3
==================================================================================================================
* Condensed from audited financial statements
Refer to Notes to Consolidated Financial Statements.
3
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(millions, except per share data)
======================================================================================
Quarter ended Quarter ended
March 29, March 30,
(Results are unaudited) 2003 2002
======================================================================================
Net sales $2,147.5 $2,061.8
Cost of goods sold 1,231.1 1,177.2
Selling and administrative expense 569.0 557.5
-----------------------------
Operating profit 347.4 327.1
Interest expense 92.0 98.1
Other income (expense), net 0.7 14.4
-----------------------------
Earnings before income taxes 256.1 243.4
Income taxes 92.2 90.8
-----------------------------
Net earnings $163.9 $152.6
=============================
Net earnings per share:
Basic $.40 $.37
Diluted $.40 $.37
Dividends per share $.2525 $.2525
=============================
Average shares outstanding:
Basic 407.7 407.1
=============================
Diluted 409.3 409.4
=============================
Actual shares outstanding at period end 406.3 408.3
=============================
Refer to Notes to Consolidated Financial Statements.
4
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
==================================================================================================================
Year-to-date Year-to-date
period ended period ended
March 29, March 30,
(unaudited) 2003 2002
==================================================================================================================
Operating activities
Net earnings $163.9 $152.6
Adjustments to reconcile net earnings to
operating cash flows:
Depreciation and amortization 85.7 87.0
Deferred income taxes 13.4 11.4
Other 66.9 14.4
Postretirement benefit plan contributions (46.8) (24.5)
Changes in operating assets and liabilities (94.8) 46.6
------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 188.3 287.5
------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to properties (29.9) (32.9)
Dispositions of businesses 14.3 -
Other 1.2 (0.4)
------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14.4) (33.3)
------------------------------------------------------------------------------------------------------------------
Financing activities
Net issuances (reductions) of notes payable 10.5 (127.6)
Reductions of long-term debt - (25.0)
Net issuances of common stock 14.7 42.0
Common stock repurchases (62.0) (0.4)
Cash dividends (102.9) (102.9)
Other 2.4 -
------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (137.3) (213.9)
------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (0.4) (11.1)
------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 36.2 29.2
Cash and cash equivalents at beginning of period 100.6 231.8
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $136.8 $261.0
==================================================================================================================
Refer to Notes to Consolidated Financial Statements.
5
Notes to Consolidated Financial Statements
for the quarter ended March 29, 2003 (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 30 to 48 of the Company's 2002 Annual Report. The accounting policies used
in preparing these financial statements are the same as those summarized in the
Company's 2002 Annual Report, except as discussed below. Certain amounts for
2002 have been reclassified to conform to current-period classifications. The
results of operations for the quarter ended March 29, 2003, are not necessarily
indicative of the results to be expected for other interim periods or the full
year.
Interim reporting periods
Beginning in 2002, the Company has reported interim periods on a thirteen-week
quarter basis, commonly referred to as "4-4-5" because of the number of weeks in
each sub-period of the quarter. Interim results for 2003 are being reported for
the periods ended March 29, June 28, September 27, and December 27. Interim
results for 2002 were reported for the periods ended March 30, June 29,
September 28, and December 28.
Accounting for exit costs
The Company has adopted SFAS No. 146 "Accounting for Costs Associated with Exit
or Disposal," with respect to exit or disposal activities initiated after
December 31, 2002. This statement is intended to achieve consistency in timing
of recognition between exit costs, such as one-time employee separation benefits
and contract termination payments, and all other costs. Under pre-existing
literature, certain costs associated with exit activities were recognized when
management committed to a plan. Under SFAS No. 146, costs are recognized when a
liability has been incurred under general concepts. For instance, under
pre-existing literature, plant closure costs would be accrued at the plan
commitment date. Under SFAS No. 146, these costs would be recognized as closure
activities are performed. These provisions could be expected to have the general
effect of delaying recognition of certain costs related to restructuring
programs. However, management does not currently expect adoption of this
standard to have a significant impact on the Company's 2003 financial results.
Guarantees
With respect to guarantees entered into or modified after December 31, 2002, the
Company has applied guidance contained in FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of indebtedness of Others." This interpretation clarifies
the requirement for recognition of a liability by a guarantor at the inception
of the guarantee, based on the fair value of the non-contingent obligation to
perform. Management does not currently expect application of this guidance to
have a significant impact on the Company's 2003 financial results.
Variable interest entities
During January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities." Under previous practice, entities were included in
consolidated financial statements based on controlling voting interests. Under
this interpretation, previously unconsolidated entities (often referred to as
"special purpose entities") will be included in the consolidated financial
statements of the "primary beneficiary" as a result of non-voting financial
interests that are established through contractual or other means. For variable
interest entities created after January 31, 2003, this interpretation is
effective immediately. For any pre-existing variable interest entities, this
interpretation would be effective beginning with the Company's fiscal 2003 third
quarter. Management does not currently believe these requirements will be
applicable to any existing financial arrangement of the Company.
6
Hedging activities
During April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities, resulting primarily from decisions reached by the FASB
Derivatives Implementation Group subsequent to the original issuance of SFAS No.
133. This Statement is generally effective prospectively for contracts and
hedging relationships entered into after June 30, 2003. Management currently
believes that adoption of SFAS No. 149 will have minimal impact on the Company,
except that cash flows associated with certain derivatives will be classified in
the financing rather than the operating section of the cash flow statement. Such
derivatives are generally limited to net investment hedges and those used by the
Company to reduce volatility in the translation of foreign currency earnings to
U.S. Dollars. Management believes that the impact of this classification change
during 2003 will be insignificant.
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 40 and 41 of the Company's 2002 Annual Report.
The Company 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-Sholes option pricing model and was
recognized over the vesting period, generally two years. Pricing model
assumptions included an expected term of three years; and risk-free interest
rate, dividend yield, and volatility assumptions consistent with the expected
term and particular grant date.
--------------------------------------------------------------------------------
(millions except per share data) Quarter ended
--------------------------------------------------------------------------------
March 29, March 30,
2003 2002
--------------------------------------------------------------------------------
Stock-based compensation expense, net of tax:
As reported $ 2.7 $ 2.7
Pro forma $ 9.8 $ 13.2
Net earnings:
As reported $ 163.9 $ 152.6
Pro forma $ 156.8 $ 142.1
Basic net earnings per share:
As reported $ 0.40 $ 0.37
Pro forma $ 0.38 $ 0.35
Diluted net earnings per share:
As reported $ 0.40 $ 0.37
Pro forma $ 0.38 $ 0.35
--------------------------------------------------------------------------------
7
Note 2 Exit activities
Keebler
On March 26, 2001, the Company acquired Keebler Foods Company ("Keebler") in a
cash transaction valued at $4.56 billion. The final purchase price allocation
included $71.3 million of liabilities related to management's plans, as of the
acquisition date, to exit certain activities and operations of the acquired
company. As presented in the table below, remaining reserves of $19.3 million
existed at year-end 2002, to be spent principally during 2003. At March 29,
2003, acquisition-date exit plans were substantially complete and remaining
reserves consisted primarily of contractual obligations for severance and
leases. During the quarter ended March 29, 2003, $3.0 million of excess reserves
were reversed and recorded as a credit to other income (expense), net. This
excess resulted primarily from lower than projected employee severance payments
and higher than projected proceeds from sale of leased vehicles.
------------------------------------------------------------------------------------------------------------------------------------
(millions) Employee Lease & other
severance Employee contract Facility
benefits relocation termination closure costs Total
------------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at December 28, 2002 $ 7.2 $ 0.6 $ 9.6 $ 1.9 $ 19.3
2003 year-to-date activity:
Utilized (2.1) (0.1) (1.2) (0.3) (3.7)
Reversed (1.0) (0.4) (1.1) (0.5) (3.0)
------------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at March 29, 2003 $ 4.1 $ 0.1 $ 7.3 $ 1.1 $ 12.6
------------------------------------------------------------------------------------------------------------------------------------
During April 2002, the Company sold certain assets of Keebler's Bake-Line
private-label unit, including a bakery in Marietta, Oklahoma, to Atlantic Baking
Group, Inc. for approximately $65 million in cash and a $10 million note to be
paid at a later date. In January 2003, the Company sold additional private-label
operations for approximately $14 million in cash. For both of these
transactions, the carrying value of net assets sold, including allocated
goodwill, approximated the net sales proceeds.
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 period ended March 29, 2003,
includes a credit of approximately $10 million related to favorable legal
settlements; a $3 million credit related to a reversal of Keebler exit
liabilities (refer to Note 2); 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. Other income (expense), net for
the period ended March 30, 2002, includes a $16.5 million credit ($10.2 million
after tax or $.02 per share), related to favorable legal settlements.
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:
8
----------------------------------------------------------------------------------------------------------
Quarter Average Net
(millions, except Net shares earnings
per share data) earnings outstanding per share
----------------------------------------------------------------------------------------------------------
2003
Basic $163.9 407.7 $.40
Dilutive employee
stock options - 1.6 -
----------------------------------------------------------------------------------------------------------
Diluted $163.9 409.3 $.40
----------------------------------------------------------------------------------------------------------
2002
Basic $152.6 407.1 $.37
Dilutive employee
stock options - 2.3 -
----------------------------------------------------------------------------------------------------------
Diluted $152.6 409.4 $.37
----------------------------------------------------------------------------------------------------------
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.
9
Quarter 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
--------------------------------------------------------------------------------------
Pretax Tax (expense) After-tax
(millions) amount benefit amount
--------------------------------------------------------------------------------------
2002
Net earnings $152.6
Other comprehensive income:
Foreign currency translation adjustments ($15.6) $- (15.6)
Cash flow hedges:
Unrealized gain (loss) on
cash flow hedges (7.0) 2.3 (4.7)
Reclassification to net earnings 1.5 (0.6) 0.9
Minimum pension liability adjustments - - -
--------------------------------------------------------------------------------------
($21.1) $1.7 ($19.4)
--------------------------------------------------------------------------------------
Total comprehensive income $133.2
--------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) as of March 29, 2003, and December
28, 2002, consisted of the following:
--------------------------------------------------------------------------------------
March 29, December 28,
(millions) 2003 2002
--------------------------------------------------------------------------------------
Foreign currency translation adjustments $ (485.5) $ (487.6)
Cash flow hedges - unrealized net loss (47.4) (46.3)
Minimum pension liability adjustments (319.5) (319.5)
--------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $ (852.4) $ (853.4)
--------------------------------------------------------------------------------------
10
Note 5 Debt
On April 1, 2003, the Company repaid approximately $700 million of maturing
U.S. Dollar Notes and initially replaced this debt with U.S. short-term debt.
Subject to market conditions, management currently plans to refinance a portion
of this U.S. short-term debt with five-year notes during the next several
months. In anticipation of this refinancing, the Company has entered into
forward interest rate contracts to fix the Treasury component of the coupon rate
on $250 million notional amount of long-term debt. As of March 29, 2003, these
contracts represented a settlement obligation of $3.2 million and were
unfavorable to market rates by approximately 25 basis points.
Note 6 Operating segments
Kellogg Company is the world's leading producer of cereal and a leading producer
of convenience foods such as cereal bars, frozen waffles, toaster pastries,
cookies, and crackers. The Company also produces natural and vegetarian foods.
Kellogg products are manufactured in 19 countries and marketed in more than 180
countries around the world. Principal markets for these products include the
United States and United Kingdom. The Company is managed in two major divisions
- the United States and International - with International further delineated
into Europe, Latin America, Canada, Australia, and Asia. This organizational
structure is the basis of the operating segment data presented below.
==========================================================================================
Quarter ended Quarter ended
(millions) March 29, March 30,
2003 2002
==========================================================================================
Net sales
United States $1,435.9 $1,426.8
Europe 394.5 325.8
Latin America 139.7 150.5
All other operating segments* 177.4 158.7
Corporate - -
-------------------------------
Consolidated $2,147.5 $2,061.8
===============================
------------------------------------------------------------------------------------------
Operating profit
United States $240.3 $242.1
Europe 58.3 45.5
Latin America 39.6 37.2
All other operating segments* 35.8 20.2
Corporate (26.6) (17.9)
-------------------------------
Consolidated $347.4 $327.1
===============================
* Includes Canada, Australia, and Asia.
11
Note 7 Supplemental information on goodwill and other intangible assets
------------------------------------------------------------------------------------------------------------------------------------
Intangible assets subject to amortization:
(millions) Gross carrying amount Accumulated amortization
------------------------------------------------------------------------------------------------------------------------------------
March 29, 2003 December 28, 2002 March 29, 2003 December 28, 2002
------------------------------------------------------------------------------------------------------------------------------------
Trademarks $ 29.5 $ 29.5 $ 17.4 $ 17.2
Other 6.7 6.7 3.5 3.4
------------------------------------------------------------------------------------------------------------------------------------
Total $ 36.2 $ 36.2 $ 20.9 $ 20.6
------------------------------------------------------------------------------------------------------------------------------------
Quarter ended March 29, 2003 March 30, 2002
------------------------------------------------------------------------------------------------------------------------------------
Amortization expense (a) $ 0.4 $ 0.4
------------------------------------------------------------------------------------------------------------------------------------
(a) The currently estimated aggregate amortization expense for each of the 5 succeeding fiscal years is approximately $1.2 million
per year.
Intangible assets not subject to amortization:
(millions) Total carrying amount
------------------------------------------------------------------------------------------------------------------------------------
March 29, 2003 December 28, 2002
------------------------------------------------------------------------------------------------------------------------------------
Trademarks $ 1,404.0 $ 1,404.0
Direct store door (DSD) delivery system 578.9 578.9
Other 27.4 27.5
------------------------------------------------------------------------------------------------------------------------------------
Total $ 2,010.3 $ 2,010.4
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Changes in the carrying amount of goodwill for the year-to-date period ended March 29, 2003:
------------------------------------------------------------------------------------------------------------------------------------
Consoli-
(millions) United States Europe Latin America Other (b) dated
------------------------------------------------------------------------------------------------------------------------------------
December 28, 2002 $ 3,103.2 $ - $ 2.0 $ 1.4 $ 3,106.6
Dispositions (4.8) - - - (4.8)
Foreign currency remeasurement impact and other - - 0.1 0.2 0.3
------------------------------------------------------------------------------------------------------------------------------------
March 29, 2003 $ 3,098.4 $ - $ 2.1 $ 1.6 $ 3,102.1
------------------------------------------------------------------------------------------------------------------------------------
(b) Other operating segments include Australia, Asia, and Canada.
12
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 such as cereal bars, frozen waffles, toaster pastries,
cookies, and crackers. The Company also produces natural and vegetarian foods.
Kellogg products are manufactured and marketed globally. The Company is managed
in two major divisions - the United States and International - with
International further delineated into Europe, Latin America, Canada, Australia,
and Asia. This organizational structure is the basis of the operating segment
data presented in this report.
Our first quarter earnings performance was marked by internal sales and
operating profit growth across all of our segments and businesses, including a
resumption of growth for our U.S. snacks business. We believe this performance
was driven primarily by execution of our "Volume to Value" operating principle,
which emphasizes sales dollars over shipment volume, and prioritizes
brand-building and innovation activities over price discounting.
For the quarter ended March 29, 2003, our Company reported net earnings per
share of $.40 versus the prior period amount of $.37. This year-over-year
increase of $.03 was comprised of $.03 of business growth, $.01 from reduced
interest expense, and $.01 from a lower effective income tax rate, partially
offset by $.02 of favorable legal settlements in the prior-year period.
Net sales and operating profit
The following tables provide an analysis of net sales and operating profit
performance for the first quarter of 2003 versus 2002:
13
----------------------------------------------------------------------------------------------------------------------
(dollars in millions) United Europe Latin Other Corporate Consoli-
States America operating dated
(b)
----------------------------------------------------------------------------------------------------------------------
2003 net sales $1,435.9 $ 394.5 $ 139.7 $ 177.4 $ - $2,147.5
----------------------------------------------------------------------------------------------------------------------
2002 net sales $1,426.8 $ 325.8 $ 150.5 $ 158.7 $ - $2,061.8
----------------------------------------------------------------------------------------------------------------------
% change - 2003 vs. 2002:
Volume 1.2% -2.1% 4.0% -7.6% - 0.1%
Pricing/mix 1.7% 4.7% 9.3% 8.9% - 3.3%
----------------------------------------------------------------------------------------------------------------------
Subtotal - internal business 2.9% 2.6% 13.3% 1.3% - 3.4%
Dispositions (a) -2.3% 0.0% 0.0% 0.0% - -1.5%
Foreign currency impact 0.0% 18.5% -20.5% 10.4% - 2.3%
----------------------------------------------------------------------------------------------------------------------
Total change 0.6% 21.1% -7.2% 11.7% - 4.2%
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
(dollars in millions) United Europe Latin Other Corporate Consoli-
States America operating dated
(b)
----------------------------------------------------------------------------------------------------------------------
2003 operating profit $ 240.3 $ 58.3 $ 39.6 $ 35.8 $ (26.6) $ 347.4
----------------------------------------------------------------------------------------------------------------------
2002 operating profit $ 242.1 $ 45.5 $ 37.2 $ 20.2 $ (17.9) $ 327.1
----------------------------------------------------------------------------------------------------------------------
% change - 2003 vs. 2002:
Internal business 2.1% 9.9% 28.1% 60.8% -49.3% 7.3%
Dispositions (a) -2.8% 0.0% 0.0% 0.0% 0.0% -2.2%
Foreign currency impact 0.0% 18.2% -21.7% 16.8% 0.0% 1.1%
----------------------------------------------------------------------------------------------------------------------
Total change -0.7% 28.1% 6.4% 77.6% -49.3% 6.2%
----------------------------------------------------------------------------------------------------------------------
(a) Impact of results for the comparable 2002 periods prior to divestiture of various U.S. private label
operations.
Refer to Note 2 within Notes to Consolidated Financial Statements for further
information.
(b) Includes Canada, Australia, and Asia.
During the first quarter of 2003, we achieved consolidated internal net
sales growth in excess of 3%, which was the sixth consecutive quarter of
year-over-year growth in internal net sales. U.S. net sales in the retail cereal
channel increased over 4%, buoyed by a combination of volume growth and
pricing/mix improvements. Excluding the impact of private-label business
divestitures during the past year, internal net sales of our U.S. snacks
business (which includes cereal bars and other wholesome snacks, cookies, and
crackers), also increased nearly 4%. Internal net sales for our other U.S.
businesses (which include frozen waffles, toaster pastries, natural and
vegetarian foods, and the food service channel), were approximately even with
the prior year. Solid growth in frozen waffles, natural, and vegetarian foods,
was offset by a decline in toaster pastry sales against a strong year-ago
performance, as well as category softness in our foodservice channel. Total
international net sales increased approximately 5% in local currencies, as
pricing and mix improvements across all areas offset volume declines in certain
markets. Latin America exhibited strong internal sales growth in both cereal and
snacks, as a result of both volume and pricing/mix improvements. In Europe,
pricing/mix improvements more than offset a volume decline, leading to modest
internal sales growth. This volume decline was attributable primarily to UK
cereal shipments, due in part, to category softness and also a shift into
lighter, more profitable products in conjunction with our Volume to Value
strategy. In all other international segments, solid internal sales growth in
Canada and Asia was partially offset by a modest sales decline in Australia.
This decline was attributable to reduced cereal shipments, resulting from trade
inventory reductions and discontinuance of a private-label product line in late
2002. We are prioritizing brand-building investment in the UK and Australia to
return these businesses to local currency sales growth.
Consolidated internal operating profit increased over 7% during the first
quarter of 2003, driven by local currency growth in international operating
profit of approximately 26%. In the U.S., increased commodity and energy prices,
and higher employee benefit expenses, held operating profit growth to 2%.
Although we believe higher employee benefit expenses will continue throughout
the year, we expect commodity and energy prices to moderate during the remainder
of the year.
14
Margin performance
Margin performance for the first quarter of 2003 versus 2002 is presented in the
following table.
-------------------------------------------------------------------------------------------
Change
vs. prior
2003 2002 year (pts.)
-------------------------------------------------------------------------------------------
Gross margin 42.7% 42.9% -0.2
-------------------------------------------------------------------------------------------
SGA% (a) -26.5% -27.0% 0.5
-------------------------------------------------------------------------------------------
Operating margin 16.2% 15.9% 0.3
-------------------------------------------------------------------------------------------
(a) Selling, general, and administrative expense as a percentage of net sales.
The consolidated gross margin declined slightly versus the prior-year period,
due primarily to the aforementioned manufacturing cost increases in our U.S.
operating segment. This decline was more than offset by a reduction in SGA%,
attributable principally to lower overhead expenses. For the year, we expect the
consolidated gross margin to increase slightly, as pricing and mix improvements,
and savings from supply chain productivity initiatives, mitigate the cost
pressures.
Interest expense
We currently expect total year 2003 interest expense to be approximately $360
million, reduced from the total year 2002 amount of $391.2 million, due
primarily to continuing pay-down of our debt balances. The first quarter 2003
interest expense of $92.0 million was consistent with expectations. Gross
interest expense, prior to amounts capitalized to construction projects, was not
significantly different from reported interest expense in either the current or
prior-year periods.
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 period ended March 29, 2003,
includes a credit of approximately $10 million related to favorable legal
settlements; a $3 million credit related to a reversal of Keebler exit
liabilities (refer to Note 2 within Notes to Consolidated Financial Statements);
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. Other income (expense), net for the period ended March 30,
2002, includes a $16.5 million credit ($10.2 million after tax or $.02 per
share), related to favorable legal settlements.
Income taxes
We currently expect the total year 2003 consolidated effective income tax rate
to be approximately 36%, reduced from the total year 2002 rate of 37%, due
primarily to the implementation of various foreign and state tax planning
initiatives. The first quarter 2003 consolidated effective tax rate of 36% is
consistent with these full-year expectations.
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 2003 cash flow (defined as net cash provided
by operating activities reduced by expenditures for property additions) was
$158.4 million compared to $254.6 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 repurchase. Our cash flow metric is reconciled to GAAP-basis operating
cash flow as follows:
15
--------------------------------------------------------------------------------------
Year-to-date period ended
--------------------------------------------------------------------------------------
(millions) March 29, 2003 March 30, 2002
--------------------------------------------------------------------------------------
Net cash provided by operating activities $ 188.3 $ 287.5
Additions to properties (29.9) (32.9)
--------------------------------------------------------------------------------------
Cash flow $ 158.4 $ 254.6
--------------------------------------------------------------------------------------
Although nearly $100 million lower than the prior-year period, our first quarter
2003 cash flow is consistent with full-year expectations, which are based on
continuing, but slowing improvement in core working capital (inventory and trade
receivables less trade payables). For the twelve months ended March 29, 2003,
core working capital as a percentage of sales was 8.7%, versus 8.8% for
full-year 2002.
We are targeting for full-year 2003 cash flow of approximately $800
million, compared to the 2002 amount of $746.4 million, (which was net of
year-end 2002 voluntary benefit plan contributions of approximately $254
million).
During April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities, resulting primarily from decisions reached by the FASB
Derivatives Implementation Group subsequent to the original issuance of SFAS No.
133. This Statement is generally effective prospectively for contracts and
hedging relationships entered into after June 30, 2003. We currently believe
that adoption of SFAS No. 149 will have minimal impact on the Company, except
that cash flows associated with certain derivatives will be classified in the
financing rather than the operating section of the cash flow statement. Such
derivatives are generally limited to net investment hedges and those used by the
Company to reduce volatility in the translation of foreign currency earnings to
U.S. Dollars. We believe that the impact of this classification change during
2003 will be insignificant.
Our Board of Directors has authorized management to repurchase up to $250
million of stock during 2003, generally to offset or partially offset issuances
under employee benefit programs. Under this authorization, we paid approximately
$62 million during the first quarter of 2003 to repurchase approximately 2.1
million shares.
On April 1, 2003, we repaid approximately $700 million of maturing U.S.
Dollar Notes and initially replaced this debt with U.S. short-term debt. Subject
to market conditions, we currently plan to refinance a portion of this U.S.
short-term debt with five-year notes during the next several months. In
anticipation of this refinancing, we have entered into forward interest rate
contracts to fix the Treasury component of the coupon rate on $250 million
notional amount of long-term debt. As of March 29, 2003, these contracts
represented a settlement obligation of $3.2 million and were unfavorable to
market rates by approximately 25 basis points.
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 2003.
16
Future outlook
During 2003, our Company faces several important challenges, including
- higher employee benefits expense;
- significant increases in the prices of certain grains, cocoa, packaging, and
energy;
- increased cost and reduced availability of certain types of insurance such
as earthquake or incidents of terrorism;
- economic volatility in Latin America; and
- a fundamental change in strategy for our snacks business,
from an "acquire-and-integrate" approach to one of sustainable, organic
growth.
We believe these cost increases and risks can be largely offset with pricing and
mix improvements, a series of supply chain productivity initiatives, and the
momentum in operating performance and cash flow expansion we established in
2002. As a result, we should be able to achieve our full-year 2003 net earnings
per share target of $1.86-$1.90, as compared to 2002 net earnings per share of
$1.75, which included $.02 from favorable legal settlements.
Forward-looking statements
Our Management's Discussion and Analysis contain "forward-looking
statements" with projections concerning, among other things, our strategy and
plans; gross margins, brand-building, and earnings per share; exit plans and
costs related to the Keebler acquisition; the impact of accounting changes; our
ability to meet interest and debt principal repayment obligations; future common
stock repurchases; effective income tax rate; cash flow; property addition
expenditures; interest expense; commodity and energy prices; 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, including integration problems,
failures to achieve savings, unanticipated liabilities, and 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
- competitive conditions in our markets;
- marketing spending levels and pricing actions of competitors;
- the impact of competitive conditions, marketing spending, and/or
incremental pricing actions on actual volumes and product mix;
- effectiveness of advertising and marketing spending or programs;
- the success of innovations and new product introductions;
- the availability of and interest rates on short-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;
- commodity and energy prices and labor costs;
- changes in consumer behavior and preferences;
- changes in U.S. or foreign regulations affecting the food industry;
- the success of productivity initiatives;
- the success of business transitions;
- the recoverability of the carrying value of goodwill and other
intangibles;
- U.S. and foreign economic conditions, including currency conversion
controls and rate fluctuations;
- legal factors; and,
- 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.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to disclosures contained on pages 50-52 of the Company's 2002 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 Rule 13a-14(c). 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 judgement in evaluating the cost-benefit relationship of
possible controls and procedures.
Within 90 days prior to the date of this report, 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.
There have been no significant changes in the Company's internal controls or in
the other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation. Therefore, no
corrective actions were taken.
18
KELLOGG COMPANY
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Approximately 11,000 shares of Kellogg Company common stock were sold to
6 members of senior management under the Kellogg Company Executive Stock
Purchase Plan in February 2003 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 $335,000
under this Plan in 2003, which it used for general corporate purposes.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 25, 2003, the Company held its Annual Meeting of Share Owners.
(b) At that Annual Meeting, John T. Dillon, James M. Jenness, L. Daniel
Jorndt and William D. Perez were re-elected for three-year terms, with
Benjamin S. Carson, Sr., Claudio X. Gonzalez, Gordon Gund, Carlos M.
Gutierrez, Dorothy A. Johnson, Ann McLaughlin Korologos, William C.
Richardson and John L. Zabriskie being continuing directors.
(c) Two matters were voted on at such Annual Meeting: the re-election of
the four directors described in (b) above and the approval of the
Company's 2003 Long-Term Incentive Plan.
In the election of directors, the following directors received the
following votes:
FOR WITHHELD
John T. Dillon 327,754,129 18,147,438
James M. Jenness 341,239,527 4,662,040
L. Daniel Jorndt 327,816,968 18,084,599
William D. Perez 327,761,749 18,139,818
In addition, the 2003 Long-Term Incentive Plan received the following
votes: For, 252,508,296 shares; Against, 56,524,443 shares; Abstain, 2,956,280
shares, and Broker Non-Votes, 33,912,548 shares.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 - Deferred Compensation Plan for Non-Employee Directors
99.1 - Section 906 Certification from Carlos M. Gutierrez
99.2 - Section 906 Certification from John A. Bryant
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K dated April 24, 2003,
in which it furnished a press release announcing its first
quarter results under Items 9 and 12 of such Report.
19
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 9, 2003
20
CERTIFICATION
I, Carlos M. Gutierrez, Chairman of the Board, President and Chief Executive
Officer of Kellogg Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kellogg Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Carlos M. Gutierrez
Date: May 9, 2003 ________________________________
Chairman of the Board,
President and Chief
Executive Officer
21
CERTIFICATION
I, John A. Bryant, Executive Vice President and Chief Financial Officer of
Kellogg Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kellogg Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ John A. Bryant
Date: May 9, 2003 ________________________________
Executive Vice President
and Chief Financial Officer
22
KELLOGG COMPANY
EXHIBIT INDEX
Electronic (E)
Paper (P)
Incorp. By
Exhibit No. Description Ref. (IBRF)
10.1 Deferred Compensation Plan for Non-Employee Directors E
99.1 Section 906 Certification from Carlos M. Gutierrez E
99.2 Section 906 Certification from John A. Bryant E
23