e10vq
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)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 1, 2006
OR
|
|
|
o |
|
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 IncorporationDelaware
|
|
IRS Employer Identification No.38-0710690 |
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrants telephone number: 269-961-2000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one)
Large
accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Common Stock outstanding as of April 28, 2006 393,318,327 shares
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
April 1, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
(unaudited) |
|
* |
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
260.6 |
|
|
$ |
219.1 |
|
Accounts receivable, net |
|
|
1,028.1 |
|
|
|
879.1 |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
|
193.1 |
|
|
|
188.6 |
|
Finished goods and materials in process |
|
|
513.0 |
|
|
|
528.4 |
|
Deferred income taxes |
|
|
201.8 |
|
|
|
207.6 |
|
Other prepaid assets |
|
|
213.7 |
|
|
|
173.7 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,410.3 |
|
|
|
2,196.5 |
|
Property, net of accumulated depreciation
of $3,861.0 and $3,815.6 |
|
|
2,630.6 |
|
|
|
2,648.4 |
|
Goodwill |
|
|
3,455.8 |
|
|
|
3,455.3 |
|
Other intangibles, net of accumulated amortization
of $47.9 and $47.6 |
|
|
1,437.8 |
|
|
|
1,438.2 |
|
Pension |
|
|
625.9 |
|
|
|
629.8 |
|
Other assets |
|
|
227.4 |
|
|
|
206.3 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
10,787.8 |
|
|
$ |
10,574.5 |
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
83.6 |
|
|
$ |
83.6 |
|
Notes payable |
|
|
1,698.3 |
|
|
|
1,111.1 |
|
Accounts payable |
|
|
832.2 |
|
|
|
883.3 |
|
Accrued advertising and promotion |
|
|
358.1 |
|
|
|
320.9 |
|
Accrued income taxes |
|
|
213.2 |
|
|
|
148.3 |
|
Accrued salaries and wages |
|
|
153.6 |
|
|
|
276.5 |
|
Other current liabilities |
|
|
375.7 |
|
|
|
339.1 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,714.7 |
|
|
|
3,162.8 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
3,714.4 |
|
|
|
3,702.6 |
|
Deferred income taxes |
|
|
941.1 |
|
|
|
945.8 |
|
Other liabilities |
|
|
494.9 |
|
|
|
479.6 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Common stock, $.25 par value |
|
|
104.6 |
|
|
|
104.6 |
|
Capital in excess of par value |
|
|
68.7 |
|
|
|
58.9 |
|
Retained earnings |
|
|
3,431.3 |
|
|
|
3,266.1 |
|
Treasury stock, at cost |
|
|
(1,095.2 |
) |
|
|
(569.8 |
) |
Accumulated other comprehensive income (loss) |
|
|
(586.7 |
) |
|
|
(576.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,922.7 |
|
|
|
2,283.7 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
10,787.8 |
|
|
$ |
10,574.5 |
|
|
|
|
|
* |
|
Condensed from audited financial statements. |
Refer to Notes to Consolidated Financial Statements.
2
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
April 1, |
|
April 2, |
(Results are unaudited) |
|
2006 |
|
2005 |
|
Net sales |
|
$ |
2,726.5 |
|
|
$ |
2,572.3 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
1,529.8 |
|
|
|
1,436.4 |
|
Selling and administrative expense |
|
|
724.2 |
|
|
|
668.1 |
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
472.5 |
|
|
|
467.8 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
74.5 |
|
|
|
75.9 |
|
Other income (expense), net |
|
|
5.1 |
|
|
|
(17.4 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
403.1 |
|
|
|
374.5 |
|
Income taxes |
|
|
129.0 |
|
|
|
119.8 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
274.1 |
|
|
$ |
254.7 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
.69 |
|
|
$ |
.62 |
|
Diluted |
|
$ |
.68 |
|
|
$ |
.61 |
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
.2775 |
|
|
$ |
.2525 |
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
399.0 |
|
|
|
413.1 |
|
|
Diluted |
|
|
401.6 |
|
|
|
417.2 |
|
|
|
|
|
|
|
|
|
|
|
Actual shares outstanding at period end |
|
|
393.1 |
|
|
|
411.2 |
|
|
Refer to Notes to Consolidated Financial Statements.
3
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
|
|
|
|
|
|
|
|
|
|
|
Year-to-date period ended |
|
|
April 1, |
|
April 2, |
(unaudited) |
|
2006 |
|
2005 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
274.1 |
|
|
$ |
254.7 |
|
Adjustments to reconcile net earnings to
operating cash flows: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
81.3 |
|
|
|
101.6 |
|
Deferred income taxes |
|
|
(8.7 |
) |
|
|
(18.9 |
) |
Other (a) |
|
|
47.3 |
|
|
|
50.3 |
|
Postretirement benefit plan contributions |
|
|
(25.2 |
) |
|
|
(54.7 |
) |
Changes in operating assets and liabilities |
|
|
(205.0 |
) |
|
|
(123.0 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
163.8 |
|
|
|
210.0 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Additions to properties |
|
|
(62.6 |
) |
|
|
(40.6 |
) |
Investments in joint ventures |
|
|
(1.8 |
) |
|
|
|
|
Other |
|
|
1.4 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(63.0 |
) |
|
|
(38.9 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net issuances (reductions) of notes payable |
|
|
587.2 |
|
|
|
(89.5 |
) |
Reductions of long-term debt |
|
|
|
|
|
|
(2.3 |
) |
Net issuances of common stock |
|
|
38.2 |
|
|
|
145.4 |
|
Common stock repurchases |
|
|
(579.9 |
) |
|
|
(260.3 |
) |
Cash dividends |
|
|
(108.9 |
) |
|
|
(104.0 |
) |
Other |
|
|
1.7 |
|
|
|
(.7 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(61.7 |
) |
|
|
(311.4 |
) |
|
Effect of exchange rate changes on cash |
|
|
2.4 |
|
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
41.5 |
|
|
|
(152.1 |
) |
Cash and cash equivalents at beginning of period |
|
|
219.1 |
|
|
|
417.4 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
260.6 |
|
|
$ |
265.3 |
|
|
|
|
|
(a) |
|
Consists principally of non-cash expense accruals for employee compensation and benefit obligations. |
Refer to Notes to Consolidated Financial Statements.
4
Notes to Consolidated Financial Statements
for the quarter ended April 1, 2006 (unaudited)
Note 1 Accounting policies
Basis of presentation
The unaudited interim financial information included in this report reflects normal recurring
adjustments that management believes are necessary for a fair statement 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 23 to 47 of the Companys 2005 Annual Report on Form 10-K. The accounting policies used in
preparing these financial statements are the same as those applied in the prior year, except that
the Company adopted two new financial accounting standards at the beginning of its 2006 fiscal
year, one concerning inventory valuation, which is discussed within this Note, and one concerning
stock compensation, which is discussed in Note 2. Both of these standards were adopted
prospectively and comparative periods were not restated.
The condensed balance sheet data at December 31, 2005, was derived from audited financial
statements, but does not include all disclosures required by accounting principles generally
accepted in the United States. The results of operations for the quarterly period ended April 1,
2006, is not necessarily indicative of the results to be expected for other interim periods or the
full year.
The Companys fiscal year normally ends on the Saturday closest to December 31 and as a result, a
53rd week is added approximately every sixth year. The Companys 2005 fiscal year ended
on December 31 and its 2006 fiscal year will end on December 30, 2006. Each quarterly period in
2005 and 2006 includes thirteen weeks.
Inventory
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 151 Inventory Costs, to converge U.S. GAAP principles with
International Accounting Standards on inventory valuation. SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as
period charges, rather than as inventory value. This standard also provides that fixed production
overheads should be allocated to units of production based on the normal capacity of production
facilities, with excess overheads being recognized as period charges. The provisions of this
standard are effective for inventory costs incurred during fiscal years beginning after June 15,
2005, with earlier application permitted. The Company adopted this standard at the beginning of its
2006 fiscal year. Management believes the Companys pre-existing accounting policy for inventory
valuation was generally consistent with this guidance and does not, therefore, expect the adoption
of SFAS No. 151 to have a significant impact on 2006 financial results.
Note 2 Stock compensation
The Company uses various equity-based compensation programs to provide long-term performance
incentives for its global workforce. Currently, these incentives consist principally of stock
options, and to a lesser extent, executive performance shares and restricted stock grants. The
Company also sponsors a discounted stock purchase plan in the U.S. and matching-grant programs in
several international locations. Additionally, the Company awards stock options and restricted
stock to its outside directors. These awards are administered through several plans, as described
in Note 8 within Notes to Consolidated Financial Statements on pages 34 to 36 of the Companys 2005
Annual Report on Form 10-K.
In December 2004, the FASB issued SFAS No. 123(R) Share-Based Payment, which generally requires
public companies to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value and to recognize this cost over the requisite
service period. The Company adopted SFAS No. 123(R) as of the beginning of its 2006 fiscal year,
using the modified prospective method. Accordingly, prior years were not restated, but 2006 results
include compensation expense associated with unvested equity-based awards, which were granted prior
to 2006.
5
Prior to adoption of SFAS No. 123(R), the Company used the intrinsic value method prescribed by
Accounting Principles Board Opinion (APB) 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 stock options granted to employees and directors equaled the market
price of the underlying stock on the date of the grant, no compensation expense was recognized.
Expense attributable to other types of stock-based awards was generally recognized in the Companys
reported results under APB No. 25.
Certain of the Companys equity-based compensation plans contain provisions that accelerate vesting
of awards upon retirement, disability, or death of eligible employees and directors. Prior to
adoption of SFAS No. 123(R), the Company generally recognized stock compensation expense over the
stated vesting period of the award, with any unamortized expense recognized immediately if an
acceleration event occurred. SFAS No. 123(R) specifies that a stock-based award is considered
vested for expense attribution purposes when the employees retention of the award is no longer
contingent on providing subsequent service. Accordingly, beginning in 2006, the Company has
prospectively revised its expense attribution method so that the related compensation cost is
recognized immediately for awards granted to retirement-eligible individuals or over the period
from the grant date to the date retirement eligibility is achieved, if less than the stated vesting
period.
The Company classifies pre-tax stock compensation expense in selling, general, and administrative
expense principally within its corporate operations. Expense attributable to awards of equity
instruments is accrued in capital in excess of par within the Consolidated Balance Sheet.
For the quarter ended April 1, 2006, compensation expense for all types of equity-based programs
and the related income tax benefit recognized was $21.9 million and $7.8 million, respectively. As
a result of adopting SFAS No. 123(R) in the current period, the Companys reported pre-tax
stock-based compensation expense was $15.4 million higher (with net earnings and net earnings per
share (basic and diluted) correspondingly lower by $9.9 million and $.03, respectively) than if it
had continued to account for its equity-based programs under APB No. 25. Amounts for the
prior-year period are presented in the following table in accordance with SFAS No. 123 Accounting
for Stock-Based Compensation and related Interpretations. Reported amounts consist principally of
expense
recognized for executive performance share and restricted stock awards; pro forma amounts are
attributable primarily to stock option grants.
|
|
|
|
|
(millions, except per share data) |
|
Quarter ended |
|
|
April 2, 2005 |
|
Stock-based compensation expense,
pre-tax: |
|
|
|
|
As reported |
|
$ |
3.3 |
|
Pro forma |
|
$ |
14.9 |
|
|
Associated income tax benefit recognized: |
|
|
|
|
As reported |
|
$ |
1.2 |
|
Pro forma |
|
$ |
5.4 |
|
|
Stock-based compensation expense,
net of tax: |
|
|
|
|
As reported |
|
$ |
2.1 |
|
Pro forma |
|
$ |
9.5 |
|
|
Net earnings: |
|
|
|
|
As reported |
|
$ |
254.7 |
|
Pro forma |
|
$ |
247.3 |
|
|
Basic net earnings per share: |
|
|
|
|
As reported |
|
$ |
0.62 |
|
Pro forma |
|
$ |
0.60 |
|
|
Diluted net earnings per share: |
|
|
|
|
As reported |
|
$ |
0.61 |
|
Pro forma |
|
$ |
0.59 |
|
|
6
As of April 1, 2006, total stock-based compensation cost related to nonvested awards not yet
recognized was approximately $69 million and the weighted average period over which this amount is
expected to be recognized was approximately 1.7 years.
SFAS No. 123(R) also provides that any corporate income tax benefit realized upon exercise or
vesting of an award in excess of that previously recognized in earnings (referred to as a windfall
tax benefit) will be presented in the Statement of Cash Flows as a financing (rather than an
operating) cash flow. Realized windfall tax benefits are credited to capital in excess of par in
the Consolidated Balance Sheet. Realized shortfall tax benefits (amounts which are less than that
previously recognized in earnings) are first offset against the cumulative balance of windfall tax
benefits, if any, and then charged directly to income tax expense. Under the transition rules for
adopting SFAS No. 123(R) using the modified prospective method, the Company was permitted to
calculate a cumulative memo balance of windfall tax benefits from post-1995 years for the purpose
of accounting for future shortfall tax benefits. The Company completed such study prior to the
first period of adoption and currently has sufficient cumulative memo windfall tax benefits to
absorb arising shortfalls, such that earnings were not affected in the year-to-date period.
Cash flows realized in the periods presented are included in the following table. Within this
table, the 2006 windfall tax benefit of $2.4 million represents the year-to-date operating cash
flow reduction (and financing cash flow increase) related to the Companys adoption of SFAS No.
123(R) in the current period. Cash used by the Company to settle equity instruments granted under
stock-based awards was insignificant.
|
|
|
|
|
|
|
|
|
|
|
Year-to-date period ended |
|
|
April 1, |
|
April 2, |
(millions) |
|
2006 |
|
2005 |
|
Total cash received from option exercises and similar
instruments |
|
$ |
38.2 |
|
|
$ |
145.4 |
|
|
Tax benefits realized upon exercise or vesting of stock-
based awards: |
|
|
|
|
|
|
|
|
Windfall benefits classified as financing cash flow |
|
$ |
2.4 |
|
|
|
n/a |
|
Other amounts classified as operating cash flow |
|
|
2.6 |
|
|
|
9.8 |
|
|
Total |
|
$ |
5.0 |
|
|
$ |
9.8 |
|
|
Shares used to satisfy stock-based awards are normally issued out of treasury stock, although
management is authorized to issue new shares to the extent permitted by respective plan provisions.
Refer to Note 5 for information on shares issued during the current period to employees and
directors under various long-term incentive plans and share repurchases under the Companys 2006
stock repurchase authorization. The Company does not currently have a policy of repurchasing a
specified number of shares issued under employee benefit programs during any particular time
period.
Stock Options
During the periods presented, non-qualified stock options were granted to eligible employees with
exercise prices equal to the fair market value of the Companys stock on the grant date, a
contractual term of ten years, and a two-year graded vesting period. Grants to outside directors
included similar terms, but vested immediately. Additionally, reload options were awarded to
eligible employees and directors to replace previously-owned Company stock used by those
individuals to pay the exercise price, including related employment taxes, of vested pre-2004
option awards containing this accelerated ownership feature. These reload options are immediately
vested, with an expiration date which is the same as the original option grant.
For the periods presented, management estimated the fair value of each stock option award on the
date of grant using a lattice-based option valuation model that uses assumptions presented in the
following table. Weighted-average values are disclosed for certain inputs which incorporate a range
of assumptions. Expected volatilities are based principally on historical volatility of the
Companys stock over the contractual term of the options granted, and to a lesser extent, on
implied volatilities from traded options on the Companys stock. The Company generally uses
historical data to estimate option exercise and employee termination within the valuation model;
separate groups of employees that have similar historical exercise behavior are considered
separately for valuation purposes. The expected term of options granted is derived from the output
of the option valuation model and represents the period
7
of time that options granted are expected to be outstanding; the weighted-average output for all
employee groups is presented in the following table. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of
grant.
|
|
|
|
|
|
|
|
|
|
|
April 1, |
|
April 2, |
Stock option valuation model assumptions
for grants within the year-to-date period ended: |
|
2006 |
|
2005 |
|
Weighted-average expected volatility |
|
|
20.70 |
% |
|
|
22.00 |
% |
Weighted-average expected term (years) |
|
|
3.69 |
|
|
|
3.67 |
|
Weighted-average risk-free interest rate |
|
|
4.57 |
% |
|
|
3.71 |
% |
Dividend yield |
|
|
2.40 |
% |
|
|
2.40 |
% |
|
Weighed-average fair value of options granted |
|
$ |
7.66 |
|
|
$ |
7.45 |
|
|
A summary of option activity for the year-to-date period ended April 1, 2006, is presented in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
average |
|
Aggregate |
|
|
|
|
|
|
average |
|
remaining |
|
intrinsic |
Employee and director |
|
Shares |
|
exercise |
|
contractual |
|
value |
stock options |
|
(millions) |
|
price |
|
term (yrs.) |
|
(millions) |
|
Outstanding, beginning of period |
|
|
28.8 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
5.7 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1.1 |
) |
|
|
34 |
|
|
|
|
|
|
|
|
|
Forfeitures |
|
|
(0.1 |
) |
|
|
41 |
|
|
|
|
|
|
|
|
|
Expirations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
33.3 |
|
|
$ |
39 |
|
|
|
6.5 |
|
|
$ |
166.5 |
|
|
Exercisable, end of period |
|
|
25.7 |
|
|
$ |
38 |
|
|
|
5.6 |
|
|
$ |
154.2 |
|
|
The total intrinsic value of options exercised during the year-to-date period ended April 1, 2006,
was approximately $13 million; that attributable to options exercised during the year-to-date
period ended April 2, 2005, was approximately $38 million.
Other stock-based awards
During the periods presented, other stock-based awards consisted principally of executive
performance shares and restricted stock grants.
In the periods presented, the Company granted performance shares to a limited number of senior
executive-level employees, which entitled these employees to receive a specified number of shares
of the Companys common stock on the vesting date, provided cumulative three-year net sales growth
targets were achieved. Subsequent to the adoption of SFAS No. 123(R), management has estimated the
fair value of performance share awards based on the market price of the underlying stock on the
date of grant, reduced by the present value of estimated dividends foregone during the performance
period. The 2005 and 2006 target grants corresponded to approximately 270,000 and 280,000 shares,
respectively; each with a grant-date fair value of approximately $41 per share. The actual number
of shares issued on the vesting date could range from zero to 200% of target, depending on actual
performance achieved. No performance shares vested during the periods presented.
In the periods presented, the Company also granted restricted stock and restricted stock units to
eligible employees. Restrictions with respect to sale or transferability generally lapse after
three years and the grantee is normally entitled to receive shareholder dividends during the
vesting period. During the periods presented, management estimated the fair value of restricted
stock grants based on the market price of the underlying stock on the date of grant. A summary of
restricted stock activity for the year-to-date period ended April 1, 2006, is presented in the
following table:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
average |
Employee restricted stock |
|
Shares |
|
grant-date |
and restricted stock units |
|
(thousands) |
|
fair value |
|
Non-vested, beginning of period |
|
|
447 |
|
|
$ |
39 |
|
Granted |
|
|
56 |
|
|
|
44 |
|
Vested |
|
|
(54 |
) |
|
|
34 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
Non-vested, end of period |
|
|
449 |
|
|
$ |
41 |
|
|
The total fair value of restricted stock and restricted stock units vesting in each of the
year-to-date periods ended April 1, 2006 and April 2, 2005, was approximately $2 million.
Note 3 Cost-reduction initiatives
The Company undertakes cost-reduction initiatives as part of its sustainable growth model of
earnings reinvestment for reliability in meeting long-term growth targets. Initiatives undertaken
must meet certain pay-back and internal rate of return (IRR) targets. Each cost-reduction
initiative is of relatively short duration, and normally begins to deliver cash savings and/or
reduced depreciation during the first year of implementation, which is then used to fund new
initiatives. To implement these programs, the Company has incurred various up-front costs,
including asset write-offs, exit charges, and other project expenditures.
As discussed on page 31 of the Companys 2005 Annual Report, during 2005, the Company undertook an
initiative to consolidate U.S. bakery capacity, resulting in the closure and sale of its Des
Plaines, Illinois facility in late 2005 and closure of its Macon, Georgia facility in April 2006.
Related to this initiative, the Company incurred up-front costs of approximately $80 million in
2005 and expects to incur an additional $30 million in 2006, comprised of approximately two-thirds
cash costs and one-third asset write-offs. This estimate does not include any potential revision to
a multiemployer plan withdrawal liability associated with closure of the Macon, Georgia bakery.
Managements current estimate of this obligation of $16 million was originally recorded in 2005,
but is not finally determinable until early 2008. The current estimate is therefore subject to
adjustment throughout 2006 and 2007, based on trust asset performance, employer contributions,
employee hours attributable to the Companys participation in this plan, and other factors.
Up-front costs recorded in the current period were attributable to this bakery consolidation
initiative. Up-front costs recorded in the prior-year period were attributable to this same
initiative, as well as the final stages of a veggie-foods capacity consolidation project. Costs
recorded in both periods were classified in cost of goods sold within the Companys North American
operating segment. For the quarter ended April 1, 2006, total charges of approximately $7 million
were comprised of $2 million of asset write-offs and $5 million of cash expenditures, which
consisted principally of equipment removal and relocation costs. For the quarter ended April 2,
2005, total charges of approximately $27 million were comprised of $16 million for a multi-employer
pension plan withdrawal liability, $8 million of asset write-offs, and $3 million for idle facility
carrying costs and other cash expenditures.
Exit cost reserves were approximately $6 million at April 1, 2006, as compared to $13 million at
December 31, 2005. These reserves consisted principally of severance obligations associated with
projects commenced in 2005, which are expected to be paid out in 2006.
9
Note 4 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 for the
quarter ended April 1, 2006, was $5.1 million, as compared to other expense for the quarter ended
April 2, 2005, of $17.4 million. The favorable year-over-year variance of approximately $22.5
million was attributable principally to foreign exchange transactions and certain significant
charges in the prior-year period. Other income (expense), net for the quarter ended April 2, 2005,
included a charge of $6 million for a donation to the Kelloggs Corporate Citizenship Fund, a
private trust established for charitable giving, and a charge of approximately $7 million to reduce
the carrying value of a corporate commercial facility to estimated selling value. The carrying
value of all held-for-sale assets at April 1, 2006, was insignificant.
Note 5 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 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
274.1 |
|
|
|
399.0 |
|
|
$ |
.69 |
|
Dilutive potential
common shares |
|
|
|
|
|
|
2.6 |
|
|
|
(.01 |
) |
|
Diluted |
|
$ |
274.1 |
|
|
|
401.6 |
|
|
$ |
.68 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
254.7 |
|
|
|
413.1 |
|
|
$ |
.62 |
|
Dilutive potential
common shares |
|
|
|
|
|
|
4.1 |
|
|
|
(.01 |
) |
|
Diluted |
|
$ |
254.7 |
|
|
|
417.2 |
|
|
$ |
.61 |
|
|
During the quarter ended April 1, 2006, the Company issued 1.3 million shares to employees and
directors under various benefit plans and stock purchase programs, as further discussed in Note 2.
To offset these issuances and for general corporate purposes, the Companys Board of Directors has
authorized management to repurchase up to $650 million of the Companys common stock during 2006.
In connection with this authorization, during the year-to-date period ended April 1, 2006, the
Company spent $579.9 million to repurchase approximately 13.5 million shares. This activity
consisted principally of a February 21, 2006, private transaction with the W. K. Kellogg Foundation
Trust to repurchase approximately 12.8 million shares for $550 million.
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.
10
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
(millions) |
|
amount |
|
or benefit |
|
amount |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
$ |
274.1 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(14.0 |
) |
|
|
|
|
|
|
(14.0 |
) |
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
cash flow hedges |
|
|
3.1 |
|
|
|
(1.0 |
) |
|
|
2.1 |
|
Reclassification to net earnings |
|
|
2.0 |
|
|
|
(0.7 |
) |
|
|
1.3 |
|
Minimum pension liability adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.9 |
) |
|
|
(1.7 |
) |
|
|
(10.6 |
) |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
263.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
(millions) |
|
amount |
|
or benefit |
|
amount |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
$ |
254.7 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(30.3 |
) |
|
|
|
|
|
|
(30.3 |
) |
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
cash flow hedges |
|
|
3.1 |
|
|
|
(0.7 |
) |
|
|
2.4 |
|
Reclassification to net earnings |
|
|
8.9 |
|
|
|
(3.4 |
) |
|
|
5.5 |
|
Minimum pension liability adjustments |
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
(17.9 |
) |
|
|
(4.1 |
) |
|
|
(22.0 |
) |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
232.7 |
|
|
11
Accumulated other comprehensive income (loss) as of April 1, 2006, and December 31, 2005, consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
April 1, |
|
December 31, |
(millions) |
|
2006 |
|
2005 |
|
Foreign currency translation adjustments |
|
$ |
(433.5 |
) |
|
$ |
(419.5 |
) |
Cash flow hedges unrealized net loss |
|
|
(28.8 |
) |
|
|
(32.2 |
) |
Minimum pension liability adjustments |
|
|
(124.4 |
) |
|
|
(124.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss) |
|
$ |
(586.7 |
) |
|
$ |
(576.1 |
) |
|
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 36 to 39 of the Companys 2005 Annual Report on Form 10-K. Components of Company plan benefit
expense for the periods presented are included in the tables below.
Pension
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended |
(millions) |
|
April 1, 2006 |
|
April 2, 2005 |
|
Service cost |
|
$ |
23.2 |
|
|
$ |
20.9 |
|
Interest cost |
|
|
41.4 |
|
|
|
40.6 |
|
Expected return on plan assets |
|
|
(62.0 |
) |
|
|
(58.1 |
) |
Amortization of unrecognized
prior service cost |
|
|
3.1 |
|
|
|
2.0 |
|
Recognized net loss |
|
|
18.7 |
|
|
|
16.9 |
|
Other |
|
|
0.2 |
|
|
|
0.3 |
|
|
Total pension expense Company plans |
|
$ |
24.6 |
|
|
$ |
22.6 |
|
|
Other nonpension postretirement
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
(millions) |
|
April 1, 2006 |
|
April 2, 2005 |
|
Service cost |
|
$ |
4.5 |
|
|
$ |
3.5 |
|
Interest cost |
|
|
16.3 |
|
|
|
14.6 |
|
Expected return on plan assets |
|
|
(14.5 |
) |
|
|
(9.6 |
) |
Amortization of unrecognized
prior service cost |
|
|
(0.7 |
) |
|
|
(0.7 |
) |
Recognized net loss |
|
|
7.6 |
|
|
|
5.0 |
|
|
Postretirement benefit expense |
|
$ |
13.2 |
|
|
$ |
12.8 |
|
|
12
Postemployment
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
(millions) |
|
April 1, 2006 |
|
April 2, 2005 |
|
Service cost |
|
$ |
1.2 |
|
|
$ |
1.1 |
|
Interest cost |
|
|
0.5 |
|
|
|
0.4 |
|
Recognized net loss |
|
|
0.9 |
|
|
|
1.0 |
|
|
Postemployment benefit expense |
|
$ |
2.6 |
|
|
$ |
2.5 |
|
|
Management currently plans to contribute approximately $40 million to its defined benefit
pension plans and $20 million to its retiree health and welfare benefit plans during 2006, for a
total of $60 million. During 2005, the Company contributed approximately $156 million to defined
benefit pension plans and $241 million to retiree health and welfare benefit plans, for a total of
$397 million. Plan funding strategies are periodically modified to reflect managements current
evaluation of tax deductibility, market conditions, and competing investment alternatives.
Note 7 Operating segments
Kellogg Company is the worlds leading producer of cereal and a leading producer of
convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, and
veggie foods. Kellogg products are manufactured and marketed globally. The Company currently
manages its operations based on the geographic regions of North America, Europe, Latin America, and
Asia Pacific. This organizational structure is the basis of the operating segment data presented
below.
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
(millions) |
|
April 1, |
|
April 2, |
(Results are unaudited) |
|
2006 |
|
2005 |
|
Net sales |
|
|
|
|
|
|
|
|
North America |
|
$ |
1,865.1 |
|
|
$ |
1,715.8 |
|
Europe |
|
|
515.6 |
|
|
|
527.9 |
|
Latin America |
|
|
214.7 |
|
|
|
187.8 |
|
Asia Pacific (a) |
|
|
131.1 |
|
|
|
140.8 |
|
|
Consolidated |
|
$ |
2,726.5 |
|
|
$ |
2,572.3 |
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
|
|
|
|
|
|
North America |
|
$ |
351.7 |
|
|
$ |
324.0 |
|
Europe |
|
|
86.7 |
|
|
|
93.3 |
|
Latin America |
|
|
55.5 |
|
|
|
48.1 |
|
Asia Pacific (a) |
|
|
21.6 |
|
|
|
28.7 |
|
Corporate |
|
|
(43.0 |
) |
|
|
(26.3 |
) |
|
Consolidated |
|
$ |
472.5 |
|
|
$ |
467.8 |
|
|
|
|
|
(a) |
|
Includes Australia and Asia. |
13
Note 8 Acquisitions, other investments, and intangibles
Joint venture arrangements
During the first quarter of 2006, a subsidiary of the Company formed a joint venture with a
third-party company domiciled in Turkey, for the purpose of selling co-branded products in the
surrounding region. As of April 1, 2006, the Company had contributed approximately $1.8 million in
cash for a 50% equity interest in this arrangement. This Turkish joint venture is reflected in the
consolidated financial statements on the equity basis of accounting. Accordingly, the Company
records its share of the earnings or loss from this arrangement as well as other direct
transactions with or on behalf of the joint venture entity such as product sales and certain
administrative expenses. Results for the current period were insignificant.
Goodwill and other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization
|
|
Gross carrying amount |
|
Accumulated amortization |
|
|
April 1, |
|
December 31, |
|
April 1, |
|
December 31, |
(millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Trademarks |
|
$ |
29.5 |
|
|
$ |
29.5 |
|
|
$ |
20.6 |
|
|
$ |
20.5 |
|
Other |
|
|
29.1 |
|
|
|
29.1 |
|
|
|
27.3 |
|
|
|
27.1 |
|
|
Total |
|
$ |
58.6 |
|
|
$ |
58.6 |
|
|
$ |
47.9 |
|
|
$ |
47.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, |
|
April 2, |
|
|
2006 |
|
2005 |
|
Amortization expense (a) |
|
|
|
|
|
|
|
|
Quarter |
|
$ |
0.3 |
|
|
$ |
0.4 |
|
|
|
|
|
(a) |
|
The currently estimated aggregate amortization expense for each of the 5 succeeding fiscal
years is approximately $1.5 per year. |
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization
|
|
Total carrying amount |
|
|
April 1, |
|
December 31, |
(millions) |
|
2006 |
|
2005 |
|
Trademarks |
|
$ |
1,410.2 |
|
|
$ |
1,410.2 |
|
Other |
|
|
16.9 |
|
|
|
17.0 |
|
|
Total |
|
$ |
1,427.1 |
|
|
$ |
1,427.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the carrying amount of goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
United States |
|
Europe |
|
Latin America |
|
Asia Pacific (a) |
|
Consolidated |
|
December 31, 2005 |
|
$ |
3,453.2 |
|
|
|
|
|
|
|
|
|
|
$ |
2.1 |
|
|
$ |
3,455.3 |
|
Purchase accounting adjustment |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
April 1, 2006 |
|
$ |
3,453.8 |
|
|
|
|
|
|
|
|
|
|
$ |
2.0 |
|
|
$ |
3,455.8 |
|
|
|
|
|
(a) |
|
Includes Australia and Asia. |
14
KELLOGG COMPANY
PART I FINANCIAL INFORMATION
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Results of operations
Overview
Kellogg Company is the worlds leading producer of cereal and a leading producer of convenience
foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, and veggie
foods. Kellogg products are manufactured and marketed globally. We currently manage our operations
based on the geographic regions of North America, Europe, Latin America, and Asia Pacific. This
organizational structure is the basis of the operating segment data presented in this report.
For the quarter ended April 1, 2006, the Company achieved year-over-year net sales growth of 6%,
with strong results in both its North America and International divisions. The Company reported
operating profit of $472.5 million, net earnings of $274.1 million, and net earnings per share of
$.68. During the current period, we adopted SFAS No. 123(R) Share-Based Payment, which reduced
operating profit by $15.4 million ($9.9 million after tax or $.03 per share), due primarily to
recognition of compensation expense associated with employee and director stock option grants.
Results for the prior-year quarter ended April 2, 2005, were operating profit of $467.8 million,
net earnings of $254.7 million, and net earnings per share of $.61. Excluding the impact of
adopting SFAS No. 123(R) in the current period, our operating profit increased approximately 4%,
net earnings were up nearly 12%, and net earnings per share grew 16%. These rates of growth are
based on non-GAAP measures of our results. We are using these non-GAAP measures during our first
year of adopting SFAS No. 123(R) in order to assist investors in assessing the Companys financial
operating performance against comparative periods, which did not include stock option-related
compensation expense. The corresponding rates of GAAP-basis growth were: operating profit-1%; net
earnings-8%, net earnings per share-11%. Refer to the section herein entitled Stock compensation
for further information on the Companys adoption of SFAS No. 123(R).
Net sales and operating profit
The following tables provide an analysis of net sales and operating profit performance for the
first quarter of 2006 versus 2005:
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
Latin |
|
Asia Pacific |
|
|
|
|
|
Consoli- |
(dollars in millions) |
|
America |
|
Europe |
|
America |
|
(a) |
|
Corporate |
|
dated |
|
2006 net sales |
|
$ |
1,865.1 |
|
|
$ |
515.6 |
|
|
$ |
214.7 |
|
|
$ |
131.1 |
|
|
$ |
|
|
|
$ |
2,726.5 |
|
|
2005 net sales |
|
$ |
1,715.8 |
|
|
$ |
527.9 |
|
|
$ |
187.8 |
|
|
$ |
140.8 |
|
|
$ |
|
|
|
$ |
2,572.3 |
|
|
% change - 2006 vs. 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (tonnage) (b) |
|
|
5.6 |
% |
|
|
0.8 |
% |
|
|
6.5 |
% |
|
|
-1.0 |
% |
|
|
|
|
|
|
4.6 |
% |
Pricing/mix |
|
|
2.7 |
% |
|
|
4.6 |
% |
|
|
4.1 |
% |
|
|
-0.4 |
% |
|
|
|
|
|
|
2.8 |
% |
|
Subtotal internal business |
|
|
8.3 |
% |
|
|
5.4 |
% |
|
|
10.6 |
% |
|
|
-1.4 |
% |
|
|
|
|
|
|
7.4 |
% |
Foreign currency impact |
|
|
0.4 |
% |
|
|
-7.7 |
% |
|
|
3.7 |
% |
|
|
-5.4 |
% |
|
|
|
|
|
|
-1.4 |
% |
|
Total change |
|
|
8.7 |
% |
|
|
-2.3 |
% |
|
|
14.3 |
% |
|
|
-6.8 |
% |
|
|
|
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
Latin |
|
Asia Pacific |
|
|
|
|
|
Consoli- |
(dollars in millions) |
|
America |
|
Europe |
|
America |
|
(a) |
|
Corporate |
|
dated |
|
2006 operating profit |
|
$ |
351.7 |
|
|
$ |
86.7 |
|
|
$ |
55.5 |
|
|
$ |
21.6 |
|
|
$ |
(43.0 |
) |
|
$ |
472.5 |
|
|
2005 operating profit |
|
$ |
324.0 |
|
|
$ |
93.3 |
|
|
$ |
48.1 |
|
|
$ |
28.7 |
|
|
$ |
(26.3 |
) |
|
$ |
467.8 |
|
|
% change - 2006 vs. 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal business |
|
|
8.1 |
% |
|
|
0.6 |
% |
|
|
12.7 |
% |
|
|
-19.3 |
% |
|
|
-4.9 |
% |
|
|
5.6 |
% |
SFAS No. 123(R) adoption impact (c) |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
-58.7 |
% |
|
|
-3.3 |
% |
Foreign currency impact |
|
|
0.4 |
% |
|
|
-7.6 |
% |
|
|
2.6 |
% |
|
|
-5.3 |
% |
|
|
0.0 |
% |
|
|
-1.3 |
% |
|
Total change |
|
|
8.5 |
% |
|
|
-7.0 |
% |
|
|
15.3 |
% |
|
|
-24.6 |
% |
|
|
-63.6 |
% |
|
|
1.0 |
% |
|
|
|
|
(a) |
|
Includes Australia and Asia. |
|
(b) |
|
We measure the volume impact (tonnage) on revenues based on the stated weight of our product
shipments. |
|
(c) |
|
Impact of recognizing compensation expense associated with employee and director stock option
grants, as a result of the Companys adoption of SFAS No. 123(R) Share-based Payment in 2006. |
During the first quarter of 2006, consolidated net sales increased 6%. Internal net sales
(which excludes the impact of currency and, if applicable, acquisitions, dispositions, and shipping
day differences) grew approximately 7%. These results built on 8% reported growth and 6% internal
growth in net sales during the first quarter of 2005. During the quarter, successful innovation,
brand-building (advertising and consumer promotion) investment, and strong in-store execution
continued to drive sales growth and increased category share across virtually all of our business
units except certain markets in our Asia-Pacific operating segment.
North America reported net sales growth of nearly 9%, with internal growth across all major product
groups. Internal net sales of our North America retail cereal business increased approximately 6%,
building on a 4% rate of internal growth in the prior-year period. A large number of new product
introductions and successful brand-building activities supported continued sales growth in the
United States and Canada. Internal net sales of our North America retail snacks business increased
12%, on top of 7% growth in the prior-year period, with all components of our snacks portfolio
(wholesome snacks, cookies, crackers, toaster pastries, and fruit snacks) contributing to that
growth. After strong growth in each of the quarters of 2005, we believe a continued focus on new
product introductions, effective advertising campaigns, and successful execution in our direct
store-door delivery system made the current periods performance possible in categories that remain
difficult. Against a challenging comparison to 12% growth in the prior-year period, internal net
sales of our North America frozen and specialty channel (which includes food service, vending,
convenience, drug stores, and custom manufacturing) businesses collectively increased approximately
5%, with solid performance from virtually all components of this group.
Our International division collectively reported net sales growth of approximately 1% and internal
growth of 5%. This growth was expansive; excluding the impact of foreign currency movements, total
net sales increased in each of our European and Latin American business units, with leading dollar
contributions from France, South Africa, Mexico, and Venezuela. The internal sales decline in our
Asia Pacific operating segment (which represents less than 5% of our consolidated results) was
attributable to competitive factors in Australia, a distribution restructuring in Taiwan, and
category softness in Japan. We are responding to the competitive and category factors with new
product introductions and greater focus on health-oriented initiatives, which we believe will
mitigate these in-market issues during the remainder of 2006.
Consolidated operating profit increased 1% during the quarter, with internal operating profit up
nearly 6% versus the prior-year period. Our measure of internal operating profit growth is
consistent with our measure of internal sales
16
growth, except that during 2006, internal operating
profit growth also excludes the impact of incremental stock compensation expense associated with
our adoption of SFAS No. 123(R). We are using this non-GAAP measure during our first year of
adopting this FASB standard in order to assist investors in assessing the Companys financial
operating performance against comparative periods, which did not include stock option-related
compensation expense. In the current period, corporate selling, general, and administrative expense
(SGA) was higher and operating profit was lower by $15.4 million, reducing consolidated operating
profit growth by approximately three percentage points. Refer to the section herein entitled Stock
compensation for further information on the Companys adoption of SFAS No. 123(R).
Approximately two-thirds of this quarters 6% internal operating profit growth was attributable to
lower up-front costs from cost-reduction initiatives. As further discussed in the section herein
entitled Cost-reduction initiatives, our North America operating segment recorded $7 million of
charges in the first quarter of 2006, as compared to $27 million in the first quarter of 2005. We
expect the full-year 2006 operating profit impact of up-front costs to be comparable to the
full-year 2005 impact of $90 million. While certain initiatives are still in the planning stages,
we believe the segment
mix impact is likely to differ from the prior year, during which all related charges were
recognized in our North America operating segment.
The remainder of this quarters operating profit growth was achieved despite high single-digit
growth in brand-building expenditures, as well as significant cost pressures as discussed in the
next section on gross margin performance. For the full year of 2006, we expect to achieve mid
single-digit internal operating profit growth, although interim period growth rates will vary
across the year. The shape of our quarterly operating profit delivery is expected to be relatively
balanced throughout 2006; whereas, approximately 54% of our full-year 2005 operating profit was
recognized during the first half of that year. Accordingly, we expect low single-digit growth in
operating profit for the first half of 2006 with low double-digit growth during the second half of
2006.
Margin performance
Margin
performance for the first quarter of 2006 versus 2005 is presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
vs. prior |
|
|
2006 |
|
2005 |
|
year (pts.) |
|
Gross margin |
|
|
43.9 |
% |
|
|
44.2 |
% |
|
|
-0.3 |
|
|
SGA% (a) |
|
|
-26.6 |
% |
|
|
-26.0 |
% |
|
|
-0.6 |
|
|
Operating margin |
|
|
17.3 |
% |
|
|
18.2 |
% |
|
|
-0.9 |
|
|
|
|
|
(a) |
|
Selling, general, and administrative expense as a percentage of net sales. |
Our long-term goal is to achieve annual improvements in gross margin and to reinvest this
growth in brand-building and innovation expenditures, so as to maintain a relatively steady
operating margin. Our strategy for expanding our gross margin is to manage external cost pressures
through sales-driven operating leverage, mix improvements, productivity savings, and technological
initiatives to reduce the cost of product ingredients and packaging. Particular interim periods may
not reflect our long-term goal as was the case for the first quarter of 2006, in which our
consolidated gross margin declined 30 basis points versus the first quarter of 2005. Our
current-period gross margin results were significantly impacted by higher prices for fuel, energy,
and commodities, as well as increased employee benefit costs. In the aggregate, these input cost
pressures reduced our consolidated gross margin by approximately 140 basis points during the first
quarter of 2006.
Partially offsetting these unfavorable factors, the year-over-year decline in upfront costs related
to cost-reduction initiatives contributed favorably to our current-period gross margin performance
by approximately 70 basis points. As further discussed in the section herein entitled
Cost-reduction initiatives, cost of goods sold for the first quarter of 2006 included
program-related charges of $7 million, as compared to $27 million in the first quarter of 2005.
While gross margin performance in each interim period of 2006 could either be favorably or
unfavorably impacted by such variances, we expect the full year-over-year impact of up-front costs
to be relatively neutral.
Our profitability projections for full-year 2006 currently include an unfavorable gross margin
impact from input costs which is consistent with the magnitude of the first quarter 2006 impact.
Thus, while we expect these cost pressures to affect the Company throughout 2006, we believe the
favorable impact of late-2005/early-2006 price increases in
17
various markets and pay-back from prior
investment will result in slight gross margin expansion for the full year of 2006, as compared to
the full-year 2005 level of 44.9%.
For the quarter ended April 1, 2006, both our SGA% and operating profit margin were affected by our
fiscal 2006 adoption of SFAS No. 123(R). During the current period, we reported incremental stock
compensation expense of $15.4 million, which increased our SGA% and reduced our operating margin by
nearly 60 basis points. This first quarter impact is generally consistent with our expectations
regarding full-year 2006 margin dynamics. Refer to the section herein entitled Stock compensation
for further information on this subject.
Cost-reduction initiatives
We undertake cost-reduction initiatives as part of our sustainable growth model of earnings
reinvestment for reliability in meeting long-term growth targets. Initiatives undertaken must meet
certain pay-back and internal rate of return (IRR) targets. Each cost-reduction initiative is of
relatively short duration, and normally begins to deliver cash savings and/or reduced depreciation
during the first year of implementation, which is then used to fund new initiatives. To implement
these programs, we have incurred various up-front costs, including asset write-offs, exit charges,
and other project expenditures.
As discussed on page 31 of the Companys 2005 Annual Report, during 2005, we undertook an
initiative to consolidate U.S. bakery capacity, resulting in the closure and sale of our Des
Plaines, Illinois facility in late 2005 and closure of our Macon, Georgia facility in April 2006.
Related to this initiative, we incurred up-front costs of approximately $80 million in 2005 and
expect to incur an additional $30 million in 2006, comprised of approximately two-thirds cash costs
and one-third asset write-offs. This estimate does not include any potential revision to a
multiemployer plan withdrawal liability associated with closure of the Macon, Georgia bakery.
Managements current estimate of this obligation of $16 million was originally recorded in 2005,
but is not finally determinable until early 2008. The current estimate is therefore subject to
adjustment throughout 2006 and 2007, based on trust asset performance, employer contributions,
employee hours attributable to the Companys participation in this plan, and other factors.
Other potential initiatives to be commenced in 2006 are still in the planning stages and individual
actions will be announced as management commits to these discretionary investments. Our 2006
earnings target includes projected charges related to potential cost-reduction initiatives of
approximately $90 million or $.15 per share. Except for the portion attributable to the
aforementioned U.S. snacks bakery consolidation of $30 million, the specific cash versus non-cash
mix or cost of goods sold versus SGA impact of the remaining $60 million has not yet been
determined.
Up-front costs recorded in the current period were attributable to the bakery consolidation
initiative. Up-front costs recorded in the prior-year period were attributable to this same
initiative, as well as the final stages of a veggie-foods capacity consolidation project. Costs
recorded in both periods were classified in cost of goods sold within the Companys North American
operating segment. For the quarter ended April 1, 2006, total charges of approximately $7 million
were comprised of $2 million of asset write-offs and $5 million of other cash expenditures, which
consisted principally of equipment removal and relocation costs. For the quarter ended April 2,
2005, total charges of approximately $27 million were comprised of $16 million for a multi-employer
pension plan withdrawal liability, $8 million of asset write-offs, and $3 million for idle facility
carrying costs and other cash expenditures.
Exit cost reserves were approximately $6 million at April 1, 2006, as compared to $13 million at
December 31, 2005. These reserves consisted principally of severance obligations associated with
projects commenced in 2005, which are expected to be paid out in 2006.
Interest expense
Interest expense for the current quarter was $74.5 million, as compared to $75.9 million in the
prior-year period. We currently expect our full-year 2006 interest expense to be approximately even
with the full-year 2005 amount of $300.3 million.
18
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 for the quarter
ended April 1, 2006, was $5.1 million, as compared to other expense for the quarter ended April 2,
2005, of $17.4 million. The favorable year-over-year variance of approximately $22.5 million was
largely attributable to foreign exchange transactions and certain significant charges in the
prior-year period. Other income (expense), net for the quarter ended April 2, 2005, included a
charge of $6 million for a donation to the Kelloggs Corporate Citizenship Fund, a private trust
established for charitable giving, and a charge of approximately $7 million to reduce the carrying
value of a corporate commercial facility to estimated selling value. The carrying value of all
held-for-sale assets at April 1, 2006, was insignificant.
Income taxes
The consolidated effective income tax rate for the quarter ended April 1, 2006, was approximately
32%, which was comparable to the prior-period rate. Our full-year 2006 consolidated effective
income tax rate is currently projected to be approximately 32%. However, we believe this rate could
be up to 100 basis points lower if pending uncertain tax matters are resolved more favorably than
we currently expect. We expect that any incremental benefits from such discrete events would be
invested in cost-reduction initiatives and other growth opportunities.
Liquidity and capital resources
Our principal source of liquidity is operating cash flows, 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. The principal source of our operating cash flow is net earnings,
meaning cash receipts from the sale of our products, net of costs to manufacture and market our
products. Our cash conversion cycle is relatively short; although receivable collection patterns
vary around the world, in the United States, our days sales outstanding (DSO) averages 18-19 days.
As a result, the growth in our operating cash flow should generally reflect the growth in our net
earnings over time, although the specific performance for any interim period may be significantly
affected by the level of benefit plan contributions, working capital movements (operating assets
and liabilities) and other factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date period ended |
|
|
|
|
April 1, |
|
April 2, |
|
Change versus |
(dollars in millions) |
|
2006 |
|
2005 |
|
prior year |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
274.1 |
|
|
$ |
254.7 |
|
|
|
7.6 |
% |
|
Items in net earnings not requiring (providing)
cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
81.3 |
|
|
|
101.6 |
|
|
|
|
|
Deferred income taxes |
|
|
(8.7 |
) |
|
|
(18.9 |
) |
|
|
|
|
Other (a) |
|
|
47.3 |
|
|
|
50.3 |
|
|
|
|
|
|
|
|
|
|
Net earnings after non-cash items |
|
|
394.0 |
|
|
|
387.7 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefit plan
contributions |
|
|
(25.2 |
) |
|
|
(54.7 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Core working capital (b) |
|
|
(185.0 |
) |
|
|
(116.4 |
) |
|
|
|
|
Other working capital |
|
|
(20.0 |
) |
|
|
(6.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(205.0 |
) |
|
|
(123.0 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
163.8 |
|
|
$ |
210.0 |
|
|
|
-22.0 |
% |
|
|
|
|
(a) |
|
Consists principally of non-cash expense accruals for employee compensation and benefit
obligations. |
|
(b) |
|
Inventory and trade receivables less trade payables. |
For the first quarter of 2006, our operating cash flow declined by approximately $46 million,
versus the level achieved in the first quarter of 2005. As presented in this preceding table, this
decline was largely due to
19
unfavorable movements in our core working capital balance, partially
offset by a decline in the level of benefit plan contributions. For the full year of 2006, we
currently expect to contribute approximately $60 million to our employee benefit plans as compared
to approximately $397 million in 2005. This decline in 2006 reflects the improved funded position
of our major benefit plans that was achieved through a significant amount of funding in the
2003-2005 period. We do not expect to have significant statutory or contractual funding
requirements for our major retiree benefit plans during 2006. Actual 2006 contributions could
exceed our current projections, as influenced by our decision to undertake discretionary funding of
our benefit trusts versus other competing investment priorities, future changes in government
requirements, or renewals of union contracts.
In comparison to the prior-year period, the unfavorable movement in core working capital resulted
principally from a decline in trade payables during the first quarter of 2006; whereas, during the
first quarter of 2005, our trade payables balance increased from a historically low level at the
end of 2004. We believe the first quarter 2006 decline in trade payables represents a
beginning-of-year seasonal pattern, subsequent to which this balance is expected to remain fairly
steady through year-end 2006.
Despite this unfavorable movement in the absolute balance, average core working capital for the
trailing fifty-two weeks remained at 7% of net sales, consistent with the metric for the fiscal
year ended December 31, 2005. Historically, we have been able to reduce this percentage through
logistics improvements to reduce inventory on hand while continuing to meet customer requirements,
faster collection of accounts receivable, and extension of terms on trade payables. While our
long-term goal is to continue to improve this metric, we no longer expect movements in the absolute
balance of core working capital to represent a significant source of operating cash flow.
Our management measure of cash flow is defined as net cash provided by operating activities reduced
by expenditures for property additions. We use this non-GAAP 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 the most comparable GAAP measure, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date period ended |
|
Change |
|
|
April 1, |
|
April 2, |
|
versus |
(dollars in millions) |
|
2006 |
|
2005 |
|
prior year |
|
Net cash provided by operating activities |
|
$ |
163.8 |
|
|
$ |
210.0 |
|
|
|
|
|
Additions to properties |
|
|
(62.6 |
) |
|
|
(40.6 |
) |
|
|
|
|
|
Cash flow |
|
$ |
101.2 |
|
|
$ |
169.4 |
|
|
|
-40.3 |
% |
|
Our first quarter 2006 cash flow (as defined) declined approximately 40% versus the prior year,
attributable to the year-over-year reduction in operating cash flow, as previously discussed, and
increased spending for selected capacity expansions to accommodate our Companys strong sales
growth over the past several years. We expect this trend to continue in the near term, with
projected 2006 property expenditures reaching approximately 4.0% of net sales, as compared to 3.7%
for full-year 2005. The lower amount of first quarter 2006 cash flow was anticipated in our plan
and we currently expect our cash flow for full-year 2006 to be $900-$975 million, which represents
an increase over the full-year 2005 amount of approximately $125-$200 million. We expect this
increase to be funded principally by a decline in benefit plan contributions, partially offset by a
slight increase in capital spending as a percentage of sales.
Our Board of Directors has authorized stock repurchases for general corporate purposes and to
offset issuances for employee benefit programs of up to $650 million for 2006. In connection with
this authorization, during the year-to-date period ended April 1, 2006, we spent $579.9 million to
repurchase approximately 13.5 million shares. This activity consisted principally of a February 21,
2006, private transaction with the W. K. Kellogg Foundation Trust to repurchase approximately 12.8
million shares for $550 million.
In April 2006, our Board of Directors declared a dividend of $.2775 per common share, payable June
15, 2006, to shareholders of record at the close of business on June 1, 2006, and further
authorized an increase of approximately 5% from this level, to $.2910 per share, beginning with the
quarterly dividend to be paid in September 2006. This increase is consistent with our current plan
to maintain our dividend pay-out ratio between 40% and 50% of reported net earnings.
At April 1, 2006, our total debt was approximately $5.5 billion, as compared to $4.9 billion at
December 31, 2005. This increase is related principally to the significant level of stock
repurchase activity during the quarter, which we
20
believe represents a short-term peak in relation
to our forecasted debt balance at year-end 2006 of approximately $5.0 billion. Primarily due to our
prioritization of other uses of cash flow such as share repurchase, plus the aforementioned need to
selectively invest in production capacity, we do not expect to reduce our total debt balance during
2006, but remain committed to net debt reduction (total debt less cash) over the long term.
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,
including the pursuit of selected growth opportunities, 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 Companys 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 our outstanding short-term debt balance, which was $1.8 billion at
April 1, 2006. In addition, assuming continuation of market liquidity, we believe it would be
possible to term out certain short-term maturities or obtain additional credit facilities such that
the Company could further extend its ability to meet its long-term borrowing obligations through
2008.
Significant accounting policies and estimates
Stock compensation
In December 2004, the FASB issued SFAS No. 123(R) Share-Based Payment, which generally requires
public companies to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value and to recognize this cost over the requisite
service period. We adopted SFAS No. 123(R) as of the beginning of our 2006 fiscal year, using the
modified prospective method. Accordingly, prior years were not restated, but our 2006 results
include compensation expense associated with unvested equity-based awards, which were granted prior
to 2006. With the adoption of this pronouncement, stock-based compensation represents a significant
accounting policy of the Company, which is further described in Note 2 within Notes to the
Consolidated Financial Statements.
Beginning in the first quarter of 2006, our adoption of SFAS No. 123(R) has resulted in an increase
in the Companys SGA expense (principally within corporate operations) and a corresponding
reduction to earnings and net earnings per share, due primarily to recognition of compensation
expense associated with employee and director stock option grants. No such expense was recognized
under our previous accounting method in pre-2006 periods; however, we were required to disclose pro
forma results under the alternate fair value method prescribed by SFAS No. 123 Accounting for
Stock-Based Compensation. Using reported results for 2006 and pro forma results for 2005, the
comparable impact of stock compensation expense is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based |
|
|
(millions except per share data) |
|
compensation expense |
|
Diluted |
|
|
Pre-tax |
|
Net of tax |
|
EPS Impact |
|
Quarter ended April 1, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
As reported comparable |
|
$ |
6.5 |
|
|
$ |
4.2 |
|
|
$ |
0.01 |
|
SFAS No. 123(R) adoption impact |
|
|
15.4 |
|
|
|
9.9 |
|
|
|
0.03 |
|
|
As reported total |
|
$ |
21.9 |
|
|
$ |
14.1 |
|
|
$ |
0.04 |
|
|
Quarter ended April 2, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
As reported comparable |
|
$ |
3.3 |
|
|
$ |
2.1 |
|
|
$ |
|
|
Pro forma incremental |
|
|
11.6 |
|
|
|
7.4 |
|
|
|
0.02 |
|
|
Pro forma total |
|
$ |
14.9 |
|
|
$ |
9.5 |
|
|
$ |
0.02 |
|
|
For the full year of 2005, the pro forma incremental impact of stock compensation was $.09 per
share and we currently expect the full-year 2006 impact of adopting SFAS No. 123(R) to be
approximately $.10. The $.01 year-over-year increase in the estimated per-share impact is due
principally to an expected increase in the number of options granted during 2006 and a lower
expected average number of shares outstanding on which the calculation is based.
21
Our full-year estimate of the financial impact of adopting SFAS No. 123(R) represents a
critical accounting estimate, which requires significant judgments and assumptions likely to have a
material impact on our financial statements. Due to the need to determine the grant-date fair value
of equity instruments that have not yet been awarded, the actual impact on 2006 results will
depend, in part, on actual awards during the year and various market factors that affect the fair
value of those awards. Additionally, while the timing and volume of grants associated with
current-year long-term incentive compensation are within the Companys control, the timing and
volume of reload option grants are not. Reload options are awarded to eligible employees and
directors to replace previously-owned Company stock used by those individuals to pay the exercise
price, including related employment taxes, of vested pre-2004 option awards containing this
accelerated ownership feature. Under SFAS No. 123(R), these reload options result in additional
compensation expense in the year of grant and have historically comprised up to 40% of the
Companys total annual pro forma stock compensation expense. The Company has not granted options
containing an accelerated ownership feature since 2003; however, the potential requirement to award
reload options over the contractual 10-year term of the original grants could continue to
significantly impact the amount of our stock-based compensation expense for a number of years.
We estimate the fair value of each stock option award on the date of grant using a lattice-based
option valuation model, which requires us to make predictive assumptions regarding future stock
price volatility, employee exercise behavior, and dividend yield. Our methods for selecting these
valuation assumptions are explained in Note 2 within Notes to Consolidated Financial Statements. In
particular, our estimate of stock price volatility is based principally on historical volatility of
the contractual term of the options granted, and to a lesser extent, on implied volatilities from
traded options on the Companys stock. We decided to rely more heavily on historical volatility due
to the greater availability of data and reliability of trends over the maximum ten-year contractual
term of our employee stock option grants, as compared to the terms of more thinly traded options,
which rarely extend beyond two years. Recent historical volatilities using weekly price
observations have ranged from approximately 23% for 10 years to 13% for one year. In comparison,
implied volatilities are currently lower, averaging approximately 15% for traded options with terms
in excess of six months. Based on this data, we used a weighted-average volatility assumption of
20.7% for purposes of valuing our option grants in the year-to-date period, as compared to 22.0%
for the comparable prior-year period. All other assumptions held constant, a one percentage point
increase or decrease in our current-period volatility assumption would increase or decrease the
grant-date fair value of our option grants by approximately 4%.
To the extent that actual outcomes differ from our assumptions, we are not required to true up
grant-date fair-value based expense to final intrinsic values. However, these differences can
impact the classification of cash tax benefits realized upon exercise of stock options, as
explained in the following two paragraphs. Furthermore, as historical data has a significant
bearing on our forward-looking assumptions, significant variances between actual and predicted
experience could lead to prospective revisions in our assumptions, which could then significantly
impact the year-over-year comparability of stock-based compensation expense.
SFAS No. 123(R) also provides that any corporate income tax benefit realized upon exercise or
vesting of an award in excess of that previously recognized in earnings (referred to as a windfall
tax benefit) will be presented in the Statement of Cash Flows as a financing (rather than an
operating) cash flow. If this standard had been adopted in 2005, operating cash flow would have
been lower (and financing cash flow would have been higher) by approximately $20 million as a
result of this provision. For the first quarter of 2006, the corresponding reduction in operating
cash flow attributable to windfall tax benefits classified as financing cash flows was
approximately $2.4 million. The actual impact on full-year 2006 operating cash flow will depend, in
part, on the volume of employee stock option exercises during the year and the relationship between
the exercise-date market value of the underlying stock and the original grant-date fair value
previously determined for financial reporting purposes.
For balance sheet classification purposes, realized windfall tax benefits are credited to capital
in excess of par within the equity section of the Consolidated Balance Sheet. Realized shortfall
tax benefits (amounts which are less than that previously recognized in earnings) are first offset
against the cumulative balance of windfall tax benefits, if any, and then charged directly to
income tax expense, potentially resulting in volatility in our consolidated effective income tax
rate. Under the transition rules for adopting SFAS No. 123(R) using the modified prospective
method, we were permitted to calculate a cumulative memo balance of windfall tax benefits from
post-1995 years for the purpose of accounting for future shortfall tax benefits. We completed such
study prior to the first period of adoption and currently have sufficient cumulative memo windfall
tax benefits to absorb projected arising shortfalls, such that 2006 earnings are not expected to be
significantly affected by this provision. However, as employee stock option exercise behavior is
not within the Companys control, the likelihood exists of materially different reported results if
different assumptions or conditions were to prevail.
22
Future outlook & forward-looking statements
Our long-term annual growth targets are low single-digit for internal net sales, mid
single-digit for internal operating profit, and high single-digit for net earnings per share. We
currently expect to exceed our long-term internal sales growth target in 2006, principally
attributable to continued strong innovation performance in North America and rapid category
expansion in Latin America. For 2006, we currently expect the reported growth in operating profit
to be reduced by approximately four percentage points and the reported increase in net earnings per
share to be dampened by approximately $.10, due to the adoption of SFAS No. 123(R), as discussed in
the section herein entitled Stock compensation. Excluding these impacts, we otherwise expect to
meet our long-term annual growth targets for internal operating profit and net earnings per share
in 2006. In addition, we remain committed to growing our brand-building investment faster than the
rate of sales growth and will continue to reinvest in cost-reduction initiatives and other growth
opportunities.
Our Managements Discussion and Analysis contains forward-looking statements with projections
concerning, among other things, our strategy, financial principles, and plans; initiatives,
improvements, and growth; sales, gross margins, brand-building expenditures and other costs,
operating profit, and earnings per share; asset write-offs and expenditures related to
cost-reduction initiatives; the impact of accounting changes and significant accounting estimates;
our ability to meet interest and debt principal repayment obligations; future common stock
repurchases; debt issuances or reduction; effective income tax rate; cash flow and core working
capital improvements; capital expenditures; interest expense; 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 addition, our future results could be affected by a variety of other
factors, including:
|
|
the impact of competitive conditions; |
|
|
the effectiveness of pricing, advertising, and promotional programs; |
|
|
the success of innovation and new product introductions; |
|
|
the recoverability of the carrying value of goodwill and other intangibles; |
|
|
the success of productivity improvements and business transitions; |
|
|
fuel, energy, and commodity (ingredient and packaging) prices; |
|
|
labor wage and benefit costs; |
|
|
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; |
|
|
the underlying price and volatility of the Companys common stock and the impact of other variables affecting the
valuation of equity-based employee awards, such as interest rates and exercise behavior; |
|
|
changes in consumer behavior and preferences; |
|
|
the effect of U.S. and foreign economic conditions on items such as interest rates, taxes and tariffs, currency
conversion and availability; |
|
|
legal and regulatory 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.
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to disclosures contained on pages 21-22 of the Companys 2005 Annual Report on Form 10-K. In
addition to the price hedging strategies discussed therein, during the first quarter of 2006, the
Company entered into a 10-year over-the-counter commodity swap transaction to reduce fluctuations
in the price of natural gas used principally in its manufacturing processes. The notional amount of
the swap was approximately $109.2 million, which represents approximately 25% of the Companys
current annual forecasted North America manufacturing needs, and is priced based on the NYMEX
index. Assuming a 10% decrease in the price of natural gas as of the end of the current quarterly
reporting period, our settlement obligation under this swap would have increased by approximately
$7.8 million.
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 Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure based on managements 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 April 1, 2006, management carried out an evaluation under the supervision and with the
participation of the Companys Chief Executive Officer and the Companys Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures. Based on the foregoing, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures were effective.
During the last fiscal quarter, there have been no changes in the Companys internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
24
KELLOGG COMPANY
PART II OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to
our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The risk factors
disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended December
31, 2005, in addition to the other information set forth in this report, could materially affect
our business, financial condition or results. Additional risks and uncertainties not currently
known to the Company or that the Company deems to be immaterial also may materially adversely
affect our business, financial condition or results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Approximately 4,200 shares of Kellogg Company common stock was sold to one member of senior
management under the Kellogg Company Executive Stock Purchase Plan in February 2006 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
Companys common stock at fair market value (as determined over a thirty-day trading period).
Kellogg Company received approximately $186,000 under this Plan in 2006, 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 |
|
(b) Average |
|
Announced |
|
Purchased Under |
|
|
of Shares |
|
Price Paid per |
|
Plans or |
|
the Plans or |
Period |
|
Purchased |
|
Share |
|
Programs |
|
Programs |
Month #1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/1/06-1/28/06 |
|
|
.1 |
|
|
$ |
43.94 |
|
|
|
.1 |
|
|
$ |
650.0 |
|
Month #2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/29/06-2/25/06 |
|
|
13.7 |
|
|
|
43.02 |
|
|
|
13.7 |
|
|
$ |
70.1 |
|
Month #3: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/26/06-4/1/06 |
|
|
.2 |
|
|
|
44.78 |
|
|
|
.2 |
|
|
$ |
70.1 |
|
Total (1) |
|
|
14.0 |
|
|
$ |
43.05 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shares included in the table above were purchased as part of publicly announced plans or
programs, as follows: |
|
|
|
a. |
|
Approximately 13.5 million shares were purchased under a program authorized by
the Companys Board of Directors to repurchase up to $650 million of Kellogg common
stock during 2006 for general corporate purpose and to offset issuances for employee
benefit programs. This activity consisted principally of a February 21, 2006, private
transaction with the W. K. Kellogg Foundation Trust to repurchase approximately 12.8
million shares for $550 million. This repurchase program was announced in a press
release on October 31, 2005. |
|
|
|
b. |
|
Approximately .5 million shares were purchased from employees and directors in
stock swap and similar transactions pursuant to various shareholder-approved
equity-based compensation plans described on pages 34-36 of the Companys 2005 Annual
Report on Form 10-K. |
25
Item 4. Submission of Matters to a Vote of Security Holders
|
(a) |
|
On April 21, 2006, the Company held its Annual Meeting of Share Owners. |
|
|
(b) |
|
At that Annual Meeting, John T. Dillon, James M. Jenness, Daniel Jorndt, and William D.
Perez were re-elected for three-year terms, with Benjamin S. Carson, Sr. Claudio X.
Gonzalez, Gordon Gund, Dorothy A. Johnson, L. Ann McLaughlin Korologos, A. D. David Mackay,
Dr. William C. Richardson and Dr. John L. Zabriskie continuing as directors. |
|
|
(c) |
|
Four 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
Companys independent registered public accounting firm for 2006; the approval of the
Kellogg Company Senior Executive Annual Incentive Plan; and a Share Owner proposal by the
Office of the Comptroller of New York City, concerning the preparation and issuance by the
Board of Directors of a sustainability report on the Companys social and environmental
practices. |
|
|
|
|
In the election of directors, the following directors received the following votes: |
|
|
|
|
|
|
|
|
|
|
|
FOR |
|
WITHHELD |
John T. Dillon |
|
|
356,690,640 |
|
|
|
3,762,754 |
|
|
|
|
|
|
|
|
|
|
James M. Jenness |
|
|
354,386,265 |
|
|
|
6,067,129 |
|
|
|
|
|
|
|
|
|
|
Daniel Jorndt |
|
|
358,030,115 |
|
|
|
2,423,279 |
|
|
|
|
|
|
|
|
|
|
William D. Perez |
|
|
358,042,449 |
|
|
|
2,410,945 |
|
In addition, the following matters received the following votes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification of |
|
|
|
|
|
|
|
|
Independent |
|
Senior Executive |
|
|
|
|
|
|
|
|
|
Registered Public |
|
Annual |
|
Share Owner |
|
|
|
|
|
|
|
|
Accounting Firm |
|
Incentive Plan |
|
Proposal |
|
For |
|
|
|
|
|
|
353,413,754 |
|
306,608,628 |
|
19,475,684 |
|
Against |
|
|
|
|
|
|
5,384,082 |
|
10,958,137 |
|
284,691,255 |
|
Abstain |
|
|
|
|
|
|
1,655,556 |
|
2,739,851 |
|
16,139,575 |
|
Broker Non-Vote |
|
|
|
|
|
|
|
|
40,146,777 |
|
40,146,879 |
|
Item 6. Exhibits
(a) Exhibits:
|
31.1 |
|
Rule 13a-14(e)/15d-14(a) Certification from James M. Jenness |
|
|
31.2 |
|
Rule 13a-14(e)/15d-14(a) Certification from Jeffrey M. Boromisa |
|
|
32.1 |
|
Section 1350 Certification from James M. Jenness |
|
|
32.2 |
|
Section 1350 Certification from Jeffrey M. Boromisa |
26
KELLOGG COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
KELLOGG COMPANY
|
|
|
|
|
|
|
|
|
|
/s/ J.M. Boromisa |
|
|
|
|
|
|
|
|
|
J.M. Boromisa |
|
|
|
|
Principal Financial Officer; |
|
|
|
|
Senior Vice President Chief Financial Officer |
|
|
|
|
|
|
|
|
|
/s/ A.R. Andrews |
|
|
|
|
|
|
|
|
|
A.R. Andrews |
|
|
|
|
Principal Accounting Officer; |
|
|
|
|
Vice President Corporate Controller |
|
|
Date: May 1, 2006
27
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 James M. Jenness
|
|
E |
|
31.2
|
|
Rule 13a-14(e)/15d-14(a) Certification from Jeffrey M. Boromisa
|
|
E |
|
32.1
|
|
Section 1350 Certification from James M. Jenness
|
|
E |
|
32.2
|
|
Section 1350 Certification from Jeffrey M. Boromisa
|
|
E |
28