FORM 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the Fiscal Year Ended January 3, 2009
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
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other
jurisdiction of incorporation
or organization)
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38-0710690
(I.R.S. Employer
Identification No.)
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One Kellogg Square
Battle Creek, Michigan
49016-3599
(Address of Principal Executive
Offices)
Registrants telephone number:
(269) 961-2000
Securities registered pursuant to
Section 12(b) of the Securities Act:
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Title of each class:
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Name of each exchange on which registered:
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Common Stock, $.25 par value per share
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New York Stock Exchange
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Securities registered pursuant to
Section 12(g) of the Securities Act: None
Indicate by a check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the
Act. Yes o No þ
Note Checking the box above will not relieve
any registrant required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one)
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting
company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant (assuming only for purposes of
this computation that the W. K. Kellogg Foundation Trust,
directors and executive officers may be affiliates) as of the
close of business on June 27, 2008 was approximately
$13.8 billion based on the closing price of $47.96 for one
share of common stock, as reported for the New York Stock
Exchange on that date.
As of January 30, 2009, 381,939,149 shares of the
common stock of the registrant were issued and outstanding.
Parts of the registrants Proxy Statement for the Annual
Meeting of Shareowners to be held on April 24, 2009 are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
PART 1.
ITEM 1. BUSINESS
The
Company. Kellogg Company, founded in 1906 and
incorporated in Delaware in 1922, and its subsidiaries are
engaged in the manufacture and marketing of
ready-to-eat
cereal and convenience foods.
The address of the principal business office of Kellogg Company
is One Kellogg Square, P.O. Box 3599, Battle Creek,
Michigan
49016-3599.
Unless otherwise specified or indicated by the context,
Kellogg, we, us and
our refer to Kellogg Company, its divisions and
subsidiaries.
Financial Information About
Segments. Information on segments is located in
Note 17 within Notes to the Consolidated Financial
Statements which are included herein under Part II,
Item 8.
Principal
Products. Our principal products are
ready-to-eat
cereals and convenience foods, such as cookies, crackers,
toaster pastries, cereal bars, fruit snacks, frozen waffles and
veggie foods. These products were, as of February 23, 2009,
manufactured by us in 19 countries and marketed in more than 180
countries. Our cereal products are generally marketed under the
Kelloggs name and are sold principally to
the grocery trade through direct sales forces for resale to
consumers. We use broker and distribution arrangements for
certain products. We also generally use these, or similar
arrangements, in less-developed market areas or in those market
areas outside of our focus.
We also market cookies, crackers, and other convenience foods,
under brands such as Kelloggs, Keebler, Cheez-It,
Murray, Austin and Famous Amos, to
supermarkets in the United States through a direct store-door
(DSD) delivery system, although other distribution methods are
also used.
Additional information pertaining to the relative sales of our
products for the years 2006 through 2008 is located in
Note 17 within Notes to the Consolidated Financial
Statements, which are included herein under Part II,
Item 8.
Raw
Materials. Agricultural commodities are the
principal raw materials used in our products. Cartonboard,
corrugated, and plastic are the principal packaging materials
used by us. World supplies and prices of such commodities (which
include such packaging materials) are constantly monitored, as
are government trade policies. The cost of such commodities may
fluctuate widely due to government policy and regulation,
weather conditions, or other unforeseen circumstances.
Continuous efforts are made to maintain and improve the quality
and supply of such commodities for purposes of our short-term
and long-term requirements.
The principal ingredients in the products produced by us in the
United States include corn grits, wheat and wheat derivatives,
oats, rice, cocoa and chocolate, soybeans and soybean
derivatives, various fruits, sweeteners, flour, vegetable oils,
dairy products, eggs, and other filling ingredients, which are
obtained from various sources. Most of these commodities are
purchased principally from sources in the United States.
We enter into long-term contracts for the commodities described
in this section and purchase these items on the open market,
depending on our view of possible price fluctuations, supply
levels, and our relative negotiating power. While the cost of
some of these commodities has, and may continue to, increase
over time, we believe that we will be able to purchase an
adequate supply of these items as needed. As further discussed
herein under Part II, Item 7A, we also use commodity
futures and options to hedge some of our costs.
Raw materials and packaging needed for internationally based
operations are available in adequate supply and are sometimes
imported from countries other than those where used in
manufacturing.
Natural gas and propane are the primary sources of energy used
to power processing ovens at major domestic and international
facilities, although certain locations may use oil or propane on
a back-up or
alternative basis. In addition, considerable amounts of diesel
fuel are used in connection with the distribution of our
products. As further discussed herein under Part II,
Item 7A, we use
over-the-counter
commodity price swaps to hedge some of our natural gas costs.
Trademarks and
Technology. Generally, our products are marketed
under trademarks we own. Our principal trademarks are our
housemarks, brand names, slogans, and designs related to cereals
and convenience foods manufactured and marketed by us, and we
also grant licenses to third parties to use these marks on
various goods. These trademarks include Kelloggs
for cereals, convenience foods and our other products,
and the brand names of certain
ready-to-eat
cereals, including All-Bran, Apple Jacks, Bran Buds,
Complete Bran Flakes, Complete Wheat
Flakes, Cocoa Krispies, Cinnamon Crunch Crispix, Corn
Pops, Cruncheroos, Kelloggs Corn Flakes, Cracklin
Oat Bran, Crispix, Froot Loops, Kelloggs Frosted Flakes,
Frosted Mini-Wheats, Frosted Krispies, Just Right,
Kelloggs Low Fat Granola, Mueslix, Pops,
Product 19, Kelloggs Raisin Bran, Rice Krispies, Raisin
Bran
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Crunch, Smacks/Honey Smacks, Smart Start, Special K
and Special K Red Berries in the United
States and elsewhere; Zucaritas, Choco Zucaritas, Crusli
Sucrilhos, Sucrilhos Chocolate, Sucrilhos
Banana, Vector, Musli, NutriDia, and Choco
Krispis for cereals in Latin America; Vive
and Vector in Canada; Choco Pops,
Chocos, Frosties, Muslix, Fruit n Fibre,
Kelloggs Crunchy Nut Corn Flakes, Kelloggs Crunchy
Nut Red Corn Flakes, Honey Loops, Kelloggs Extra, Sustain,
Country Store, Ricicles, Smacks, Start, Smacks Choco Tresor,
Pops, and Optima for cereals in Europe;
and Cerola, Sultana Bran, Chex, Frosties, Goldies, Rice
Bubbles, Nutri-Grain, Kelloggs Iron Man Food, and
BeBig for cereals in Asia and Australia.
Additional Company trademarks are the names of certain
combinations of
ready-to-eat
Kelloggs cereals, including Fun Pak,
Jumbo, and Variety.
Other Company brand names include Kelloggs
Corn Flake Crumbs; Croutettes for herb
season stuffing mix; All-Bran, Choco Krispis, Froot Loops,
NutriDia, Kuadri-Krispis, Zucaritas, Special K, and
Crusli for cereal bars, Keloketas
for cookies, Komplete for biscuits; and
Kaos for snacks in Mexico and elsewhere in Latin
America; Pop-Tarts Pastry Swirls for toaster
danish; Pop-Tarts and Pop-Tarts Snak-Stix
for toaster pastries; Eggo, Special K, Froot Loops
and Nutri-Grain for frozen waffles and
pancakes; Rice Krispies Treats for baked snacks
and convenience foods; Special K and
Special K2O flavored water and flavored protein
water mixes; Nutri-Grain cereal bars,
Nutri-Grain yogurt bars, All-Bran
bars and crackers, for convenience foods in the United
States and elsewhere; K-Time, Rice Bubbles, Day Dawn, Be
Natural, Sunibrite and LCMs for
convenience foods in Asia and Australia; Nutri-Grain
Squares, Nutri-Grain Elevenses, and
Rice Krispies Squares for convenience foods in
Europe; Fruit Winders for fruit snacks in the
United Kingdom; Kashi and GoLean for
certain cereals, nutrition bars, and mixes; TLC
for granola and cereal bars, crackers and cookies;
Special K and Vector for meal
replacement products; Bear Naked for granola trail
mix and Morningstar Farms, Loma Linda, Natural Touch,
Gardenburger and Worthington for certain
meat and egg alternatives.
We also market convenience foods under trademarks and tradenames
which include Keebler, Cheez-It, E. L. Fudge,
Murray, Famous Amos, Austin, Ready Crust, Chips Deluxe, Club,
Fudge Shoppe, Hi-Ho, Sunshine, Krispy, MunchEms, Right
Bites, Sandies, Soft Batch, Stretch Island, Toasteds, Town
House, Vienna Fingers, Wheatables, and
Zesta. One of our subsidiaries is also the
exclusive licensee of the Carrs cracker and
cookie line in the United States.
Our trademarks also include logos and depictions of certain
animated characters in conjunction with our products, including
Snap!Crackle!Pop! for Cocoa Krispies
and Rice Krispies cereals and Rice
Krispies Treats convenience foods; Tony the Tiger
for Kelloggs Frosted Flakes, Zucaritas,
Sucrilhos and Frosties cereals and
convenience foods; Ernie Keebler for cookies,
convenience foods and other products; the Hollow Tree
logo for certain convenience foods; Toucan Sam
for Froot Loops; Dig Em
for Smacks; Sunny for
Kelloggs Raisin Bran, Coco the Monkey for
Coco Pops; Cornelius for
Kelloggs Corn Flakes; Melvin
the elephant for certain cereal and convenience foods;
Chocos the Bear, Kobi the Bear and
Sammy the seal for certain cereal products.
The slogans The Best To You Each Morning, The
Original & Best, Theyre Gr-r-reat!,
The Difference is K, One Bowl Stronger,
Supercharged, Earn Your Stripes and
Gotta Have My Pops, used in connection with our
ready-to-eat
cereals, along with L Eggo my Eggo, used in
connection with our frozen waffles and pancakes, Elfin
Magic, Childhood Is Calling, The Cookies in the
Passionate Purple Package and Uncommonly Good
used in connection with convenience food products,
Seven Whole Grains on a Mission used in connection
with Kashi all-natural foods and See Veggies
Differently used in connection with meat and egg
alternatives are also important Kellogg trademarks.
The trademarks listed above, among others, when taken as a
whole, are important to our business. Certain individual
trademarks are also important to our business. Depending on the
jurisdiction, trademarks are generally valid as long as they are
in use
and/or their
registrations are properly maintained and they have not been
found to have become generic. Registrations of trademarks can
also generally be renewed indefinitely as long as the trademarks
are in use.
We consider that, taken as a whole, the rights under our various
patents, which expire from time to time, are a valuable asset,
but we do not believe that our businesses are materially
dependent on any single patent or group of related patents. Our
activities under licenses or other franchises or concessions
which we hold are similarly a valuable asset, but are not
believed to be material.
Seasonality. Demand
for our products has generally been approximately level
throughout the year, although some of our convenience foods have
a bias for stronger demand in the second half of the year due to
events and holidays. We also custom-bake cookies for the Girl
Scouts of the U.S.A., which are principally sold in the first
quarter of the year.
Working
Capital. Although terms vary around the world
and by business types, in the United States we generally have
required payment for goods sold eleven or sixteen days
subsequent to the date of invoice as 2% 10/net 11 or 1% 15/net
16. Receipts from goods sold, supplemented as required by
borrowings, provide for our payment of dividends, repurchases of
our
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common stock, capital expansion, and for other operating
expenses and working capital needs.
Customers. Our
largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for approximately 20% of consolidated net sales during
2008, comprised principally of sales within the United States.
At January 3, 2009, approximately 17% of our consolidated
receivables balance and 27% of our U.S. receivables balance
was comprised of amounts owed by Wal-Mart Stores, Inc. and its
affiliates. No other customer accounted for greater than 10% of
net sales in 2008. During 2008, our top five customers,
collectively, including Wal-Mart, accounted for approximately
33% of our consolidated net sales and approximately 42% of
U.S. net sales. There has been significant worldwide
consolidation in the grocery industry in recent years and we
believe that this trend is likely to continue. Although the loss
of any large customer for an extended length of time could
negatively impact our sales and profits, we do not anticipate
that this will occur to a significant extent due to the consumer
demand for our products and our relationships with our
customers. Our products have been generally sold through our own
sales forces and through broker and distributor arrangements,
and have been generally resold to consumers in retail stores,
restaurants, and other food service establishments.
Backlog. For the
most part, orders are filled within a few days of receipt and
are subject to cancellation at any time prior to shipment. The
backlog of any unfilled orders at January 3, 2009 and
December 29, 2007 was not material to us.
Competition. We
have experienced, and expect to continue to experience, intense
competition for sales of all of our principal products in our
major product categories, both domestically and internationally.
Our products compete with advertised and branded products of a
similar nature as well as unadvertised and private label
products, which are typically distributed at lower prices, and
generally with other food products. Principal methods and
factors of competition include new product introductions,
product quality, taste, convenience, nutritional value, price,
advertising and promotion.
Research and
Development. Research to support and expand the
use of our existing products and to develop new food products is
carried on at the W. K. Kellogg Institute for Food and Nutrition
Research in Battle Creek, Michigan, and at other locations
around the world. Our expenditures for research and development
were approximately $181 million in 2008, $179 million
in 2007 and $191 million in 2006.
Regulation. Our
activities in the United States are subject to regulation by
various government agencies, including the Food and Drug
Administration, Federal Trade Commission and the Departments of
Agriculture, Commerce and Labor, as well as voluntary regulation
by other bodies. Various state and local agencies also regulate
our activities. Other agencies and bodies outside of the United
States, including those of the European Union and various
countries, states and municipalities, also regulate our
activities.
Environmental
Matters. Our facilities are subject to various
U.S. and foreign, federal, state, and local laws and
regulations regarding the discharge of material into the
environment and the protection of the environment in other ways.
We are not a party to any material proceedings arising under
these regulations. We believe that compliance with existing
environmental laws and regulations will not materially affect
our consolidated financial condition or our competitive position.
Employees. At
January 3, 2009, we had approximately 32,400 employees.
Financial Information About
Geographic Areas. Information on geographic
areas is located in Note 17 within Notes to the
Consolidated Financial Statements, which are included herein
under Part II, Item 8.
Executive
Officers. The names, ages, and positions of our
executive officers (as of February 23, 2009) are
listed below, together with their business experience. Executive
officers are generally elected annually by the Board of
Directors at the meeting immediately prior to the Annual Meeting
of Shareowners.
Chairman of the Board
Mr. Jenness has been our Chairman since February 2005 and
has served as a Kellogg director since 2000. From February 2005
until December 2006, he also served as our Chief Executive
Officer. He was Chief Executive Officer of Integrated
Merchandising Systems, LLC, a leader in outsource management of
retail promotion and branded merchandising from 1997 to December
2004. He is also a director of Kimberly-Clark Corporation.
President and Chief Executive Officer
Mr. Mackay became our President and Chief Executive Officer
on December 31, 2006 and has served as a Kellogg director since
February 2005. Mr. Mackay joined Kellogg Australia in 1985 and
held several positions with Kellogg USA, Kellogg Australia and
Kellogg New Zealand before leaving Kellogg in 1992. He rejoined
Kellogg Australia in 1998 as Managing Director and was appointed
Managing Director of Kellogg United Kingdom and Republic of
Ireland later in 1998. He was named Senior Vice President and
President, Kellogg USA in July 2000, Executive Vice President in
November 2000, and President and Chief
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Operating Officer in September 2003. He is also a director of
Fortune Brands, Inc.
Executive Vice President, Chief Operating Officer and Chief
Financial Officer
Mr. Bryant joined Kellogg in March 1998, working in support
of the global strategic planning process. He was appointed
Senior Vice President and Chief Financial Officer, Kellogg USA,
in August 2000, was appointed as Kelloggs Chief Financial
Officer in February 2002 and was appointed Executive Vice
President later in 2002. He also assumed responsibility for the
Natural and Frozen Foods Division, Kellogg USA, in September
2003. He was appointed Executive Vice President and President,
Kellogg International in June 2004 and was appointed Executive
Vice President and Chief Financial Officer, Kellogg Company,
President, Kellogg International in December 2006. In July
2007, Mr. Bryant was appointed Executive Vice President and
Chief Financial Officer, Kellogg Company, President, Kellogg
North America and in August 2008, he was appointed Executive
Vice President, Chief Operating Officer and Chief Financial
Officer.
Senior Vice President, Global Nutrition and
Corporate Affairs, Chief Sustainability Officer
Dr. Clark has been Kelloggs Senior Vice President of
Global Nutrition and Corporate Affairs since June 2006. She
joined Kellogg in 1977 and served in several roles of increasing
responsibility before being appointed to Vice President,
Worldwide Nutrition Marketing in 1996 and then to Senior Vice
President, Nutrition and Marketing Communications, Kellogg USA
in 1999. She was appointed to Vice President, Corporate and
Scientific Affairs in October 2002, and to Senior Vice
President, Corporate Affairs in August 2003. Her
responsibilities were recently expanded to include
sustainability.
Senior Vice President, Kellogg Company
President, Kellogg North America
Brad Davidson was appointed President, Kellogg North America in
August 2008. Mr. Davidson joined Kellogg Canada as a sales
representative in 1984. He held numerous positions in Canada,
including manager of trade promotions, account executive, brand
manager, area sales manager, director of customer marketing and
category management, and director of Western Canada. Mr.
Davidson transferred to Kellogg USA in 1997 as director, trade
marketing. He later was promoted to Vice President, Channel
Sales and Marketing and then to Vice President, National Teams
Sales and Marketing. In 2000, he was promoted to Senior Vice
President, Sales for the Morning Foods Division, Kellogg USA,
and to Executive Vice President and Chief Customer Officer,
Morning Foods Division, Kellogg USA in 2002. In June 2003, Mr.
Davidson was appointed President, U.S. Snacks and promoted in
August 2003 to Senior Vice President.
Senior Vice President, Kellogg Company
Executive Vice President, Kellogg International and
President, Kellogg Europe
Tim Mobsby has been Senior Vice President, Kellogg Company;
Executive Vice President, Kellogg International; and President,
Kellogg Europe since October 2000. Mr. Mobsby joined the
company in 1982 in the United Kingdom, where he fulfilled a
number of roles in the marketing area on both established brands
and in new product development. From January 1988 to mid 1990,
he worked in the cereal marketing group of Kellogg USA, his last
position being Vice President of Marketing. From 1990 to 1993,
he was President and Director General of Kellogg France &
Benelux, before returning to the United Kingdom as Regional
Director, Kellogg Europe and Managing Director, Kellogg Company
of Great Britain Limited. He was subsequently appointed Vice
President, Marketing, Innovation and Trade Strategy, Kellogg
Europe. He was Vice President, Global Marketing from February
to October 2000.
Senior Vice President, Kellogg Company
President, Kellogg International
Paul Norman was appointed President, Kellogg International in
August 2008. Mr. Norman joined Kelloggs U.K. sales
organization in 1987. He was promoted to director, marketing,
Kellogg de Mexico in January 1997; to Vice President, Marketing,
Kellogg USA in February 1999; and to President, Kellogg Canada
Inc. in December 2000. In February 2002, he was promoted to
Managing Director, United Kingdom/Republic of Ireland and to
Vice President in August 2003. He was appointed President, U.S.
Morning Foods in September 2004. In December 2005, Mr. Norman
was promoted to Senior Vice President.
Senior Vice President, General Counsel,
Corporate Development and Secretary
Mr. Pilnick was appointed Senior Vice President, General
Counsel and Secretary in August 2003 and assumed responsibility
for Corporate Development in June 2004. He joined Kellogg as
Vice President Deputy General Counsel and Assistant
Secretary in September 2000 and served in that position until
August 2003. Before joining Kellogg, he served as Vice President
and Chief Counsel of Sara Lee Branded Apparel and as Vice
President and Chief Counsel, Corporate Development and Finance
at Sara Lee Corporation.
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Kathleen
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Senior Vice President, Global Human Resources
Kathleen Wilson-Thompson has been Kellogg Companys Senior
Vice President, Global Human Resources since July 2005. She
served in various legal roles until 1995, when she assumed the
role of Human Resources Manager for one of our plants. In 1998,
she returned to the legal department as Corporate Counsel, and
was promoted to Chief Counsel, Labor and Employment in November
2001, a position she held until October 2003, when she was
promoted to Vice President, Chief Counsel, U.S. Businesses,
Labor and Employment.
Vice President and Corporate Controller
Mr. Andrews joined Kellogg Company in 1982. He served in
various financial roles before relocating to China as general
manager of Kellogg China in 1993. He subsequently served in
several leadership innovation and finance roles before being
promoted to Vice President, International Finance, Kellogg
International in 2000. In 2002, he was appointed to Assistant
Corporate Controller and assumed his current position in June
2004.
Availability of Reports; Website
Access; Other Information. Our internet address
is
http://www.kelloggcompany.com.
Through Investor Relations
Financials SEC Filings on
our home page, we make available free of charge our proxy
statements, our annual report on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K,
SEC Forms 3, 4 and 5 and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. Our
reports filed with the Securities and Exchange Commission are
also made available to read and copy at the SECs Public
Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information about
the Public Reference Room by contacting the SEC at
1-800-SEC-0330.
Reports filed with the SEC are also made available on its
website at www.sec.gov.
Copies of the Corporate Governance Guidelines, the Charters of
the Audit, Compensation and Nominating and Governance Committees
of the Board of Directors, the Code of Conduct for Kellogg
Company directors and Global Code of Ethics for Kellogg Company
employees (including the chief executive officer, chief
financial officer and corporate controller) can also be found on
the Kellogg Company website. Any amendments or waivers to the
Global Code of Ethics applicable to the chief executive officer,
chief financial officer and corporate controller can also be
found in the Investor Relations section of the
Kellogg Company website. Shareowners may also request a free
copy of these documents from: Kellogg Company,
P.O. Box CAMB, Battle Creek, Michigan
49086-1986
(phone:
(800) 961-1413),
Ellen Leithold of the Investor Relations Department at that same
address (phone:
(269) 961-2800)
or investor.relations@kellogg.com.
Forward-Looking
Statements. This Report contains
forward-looking statements with projections
concerning, among other things, our strategy, financial
principles, and plans; initiatives, improvements and growth;
sales, gross margins, advertising, promotion, merchandising,
brand building, operating profit, and earnings per share;
innovation; investments; capital expenditures; asset write-offs
and expenditures and costs related to productivity or efficiency
initiatives; the impact of accounting changes and significant
accounting estimates; our ability to meet interest and debt
principal repayment obligations; minimum contractual
obligations; future common stock repurchases or debt reduction;
effective income tax rate; cash flow and core working capital
improvements; interest expense; commodity and energy prices; and
employee benefit plan costs and funding. Forward-looking
statements include predictions of future results or activities
and may contain the words expect,
believe, will, will deliver,
anticipate, project, should,
or words or phrases of similar meaning. For example,
forward-looking statements are found in this Item 1 and in
several sections of Managements Discussion and Analysis.
Our actual results or activities may differ materially from
these predictions. Our future results could be affected by a
variety of 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; commodity and energy
prices, and labor costs; the availability of and interest rates
on short-term and long-term financing; actual market performance
of benefit plan trust investments; the levels of spending on
systems initiatives, properties, business opportunities,
integration of acquired businesses, and other general and
administrative costs; changes in consumer behavior and
preferences; the effect of U.S. and foreign economic
conditions on items such as interest rates, statutory tax rates,
currency conversion and availability; legal and regulatory
factors; the ultimate impact of product recalls; business
disruption or other losses from war, terrorist acts, or
political unrest and the risks and uncertainties described in
Item 1A below. Forward-looking statements speak only as of
the date they were made, and we undertake no obligation to
publicly update them.
ITEM 1A. RISK
FACTORS
In addition to the factors discussed elsewhere in this Report,
the following risks and uncertainties could materially adversely
affect our business, financial
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condition and results of operations. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations and
financial condition.
Our performance is affected by general economic and political
conditions and taxation policies.
Our results in the past have been, and in the future may
continue to be, materially affected by changes in general
economic and political conditions in the United States and other
countries, including the interest rate environment in which we
conduct business, the financial markets through which we access
capital and currency, political unrest and terrorist acts in the
United States or other countries in which we carry on business.
The enactment of or increases in tariffs, including value added
tax, or other changes in the application of existing taxes, in
markets in which we are currently active or may be active in the
future, or on specific products that we sell or with which our
products compete, may have an adverse effect on our business or
on our results of operations.
We operate in the highly competitive food industry.
We face competition across our product lines, including
ready-to-eat
cereals and convenience foods, from other companies which have
varying abilities to withstand changes in market conditions.
Some of our competitors have substantial financial, marketing
and other resources, and competition with them in our various
markets and product lines could cause us to reduce prices,
increase capital, marketing or other expenditures, or lose
category share, any of which could have a material adverse
effect on our business and financial results. Category share and
growth could also be adversely impacted if we are not successful
in introducing new products.
Our consolidated financial results and demand for our
products are dependent on the successful development of new
products and processes.
There are a number of trends in consumer preferences which may
impact us and the industry as a whole. These include changing
consumer dietary trends and the availability of substitute
products.
Our success is dependent on anticipating changes in consumer
preferences and on successful new product and process
development and product relaunches in response to such changes.
We aim to introduce products or new or improved production
processes on a timely basis in order to counteract obsolescence
and decreases in sales of existing products. While we devote
significant focus to the development of new products and to the
research, development and technology process functions of our
business, we may not be successful in developing new products or
our new products may not be commercially successful. Our future
results and our ability to maintain or improve our competitive
position will depend on our capacity to gauge the direction of
our key markets and upon our ability to successfully identify,
develop, manufacture, market and sell new or improved products
in these changing markets.
An impairment in the carrying value of goodwill or other
acquired intangibles could negatively affect our consolidated
operating results and net worth.
The carrying value of goodwill represents the fair value of
acquired businesses in excess of identifiable assets and
liabilities as of the acquisition date. The carrying value of
other intangibles represents the fair value of trademarks, trade
names, and other acquired intangibles as of the acquisition
date. Goodwill and other acquired intangibles expected to
contribute indefinitely to our cash flows are not amortized, but
must be evaluated by management at least annually for
impairment. If carrying value exceeds current fair value, the
intangible is considered impaired and is reduced to fair value
via a charge to earnings. Events and conditions which could
result in an impairment include changes in the industries in
which we operate, including competition and advances in
technology; a significant product liability or intellectual
property claim; or other factors leading to reduction in
expected sales or profitability. Should the value of one or more
of the acquired intangibles become impaired, our consolidated
earnings and net worth may be materially adversely affected.
As of January 3, 2009, the carrying value of intangible
assets totaled approximately $5.10 billion, of which
$3.64 billion was goodwill and $1.46 billion
represented trademarks, tradenames, and other acquired
intangibles compared to total assets of $10.95 billion and
shareholders equity of $1.45 billion.
We may not achieve our targeted cost savings from cost
reduction initiatives.
Our success depends in part on our ability to be an efficient
producer in a highly competitive industry. We have invested a
significant amount in capital expenditures to improve our
operational facilities. Ongoing operational issues are likely to
occur when carrying out major production, procurement, or
logistical changes and these, as well as any failure by us to
achieve our planned cost savings, could have a material adverse
effect on our business and consolidated financial position and
on the consolidated results of our operations and profitability.
We have a substantial amount of indebtedness.
We have indebtedness that is substantial in relation to our
shareholders equity. As of January 3, 2009, we had
total debt of approximately $5.46 billion and
shareholders equity of $1.45 billion.
Our substantial indebtedness could have important consequences,
including:
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impairing the ability to obtain additional financing for working
capital, capital expenditures or general
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6
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corporate purposes, particularly if the ratings assigned to our
debt securities by rating organizations were revised downward. A
downgrade in our credit ratings, particularly our short-term
credit rating, would likely reduce the amount of commercial
paper we could issue, increase our commercial paper borrowing
costs, or both;
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restricting our flexibility in responding to changing market
conditions or making us more vulnerable in the event of a
general downturn in economic conditions or our business;
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requiring a substantial portion of the cash flow from operations
to be dedicated to the payment of principal and interest on our
debt, reducing the funds available to us for other purposes such
as expansion through acquisitions, marketing spending and
expansion of our product offerings; and
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causing us to be more leveraged than some of our competitors,
which may place us at a competitive disadvantage.
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Our ability to make scheduled payments or to refinance our
obligations with respect to indebtedness will depend on our
financial and operating performance, which in turn, is subject
to prevailing economic conditions, the availability of, and
interest rates on, short-term financing, and financial, business
and other factors beyond our control.
Our results may be materially and adversely impacted as a
result of increases in the price of raw materials, including
agricultural commodities, fuel and labor.
Agricultural commodities, including corn, wheat, soybean oil,
sugar and cocoa, are the principal raw materials used in our
products. Cartonboard, corrugated, and plastic are the principal
packaging materials used by us. The cost of such commodities may
fluctuate widely due to government policy and regulation,
weather conditions, or other unforeseen circumstances. To the
extent that any of the foregoing factors affect the prices of
such commodities and we are unable to increase our prices or
adequately hedge against such changes in prices in a manner that
offsets such changes, the results of our operations could be
materially and adversely affected. In addition, we use
derivatives to hedge price risk associated with forecasted
purchases of raw materials. Our hedged price could exceed the
spot price on the date of purchase, resulting in an unfavorable
impact on both gross margin and net earnings.
Cereal processing ovens at major domestic and international
facilities are regularly fuelled by natural gas or propane,
which are obtained from local utilities or other local
suppliers. Short-term stand-by propane storage exists at several
plants for use in case of interruption in natural gas supplies.
Oil may also be used to fuel certain operations at various
plants. In addition, considerable amounts of diesel fuel are
used in connection with the distribution of our products. The
cost of fuel may fluctuate widely due to economic and political
conditions, government policy and regulation, war, or other
unforeseen circumstances which could have a material adverse
effect on our consolidated operating results or financial
condition.
A shortage in the labor pool or other general inflationary
pressures or changes in applicable laws and regulations could
increase labor cost, which could have a material adverse effect
on our consolidated operating results or financial condition.
Additionally, our labor costs include the cost of providing
benefits for employees. We sponsor a number of defined benefit
plans for employees in the United States and various foreign
locations, including pension, retiree health and welfare, active
health care, severance and other postemployment benefits. We
also participate in a number of multiemployer pension plans for
certain of our manufacturing locations. Our major pension plans
and U.S. retiree health and welfare plans are funded with
trust assets invested in a globally diversified portfolio of
equity securities with smaller holdings of bonds, real estate
and other investments. The annual cost of benefits can vary
significantly from year to year and is materially affected by
such factors as changes in the assumed or actual rate of return
on major plan assets, a change in the weighted-average discount
rate used to measure obligations, the rate or trend of health
care cost inflation, and the outcome of collectively-bargained
wage and benefit agreements.
Disruption of our supply chain could have an adverse effect
on our business, financial condition and results of
operations.
Our ability, including manufacturing or distribution
capabilities, and that of our suppliers, business partners and
contract manufacturers, to make, move and sell products is
critical to our success. Damage or disruption to our or their
manufacturing or distribution capabilities due to weather,
natural disaster, fire or explosion, terrorism, pandemics,
strikes or other reasons, could impair our ability to
manufacture or sell our products. Failure to take adequate steps
to mitigate the likelihood or potential impact of such events,
or to effectively manage such events if they occur, could
adversely affect our business, financial condition and results
of operations, as well as require additional resources to
restore our supply chain.
We may be unable to maintain our profit margins in the face
of a consolidating retail environment. In addition, the loss of
one of our largest customers could negatively impact our sales
and profits.
Our largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for approximately 20% of consolidated net sales during
2008, comprised principally of sales within the United States.
At January 3, 2009, approximately 17% of our
7
consolidated receivables balance and 27% of our
U.S. receivables balance was comprised of amounts owed by
Wal-Mart Stores, Inc. and its affiliates. No other customer
accounted for greater than 10% of net sales in 2008. During
2008, our top five customers, collectively, including Wal-Mart,
accounted for approximately 33% of our consolidated net sales
and approximately 42% of U.S. net sales. As the retail
grocery trade continues to consolidate and mass marketers become
larger, our large retail customers may seek to use their
position to improve their profitability through improved
efficiency, lower pricing and increased promotional programs. If
we are unable to use our scale, marketing expertise, product
innovation and category leadership positions to respond, our
profitability or volume growth could be negatively affected. The
loss of any large customer for an extended length of time could
negatively impact our sales and profits.
Our intellectual property rights are valuable, and any
inability to protect them could reduce the value of our products
and brands.
We consider our intellectual property rights, particularly and
most notably our trademarks, but also including patents, trade
secrets, copyrights and licensing agreements, to be a
significant and valuable aspect of our business. We attempt to
protect our intellectual property rights through a combination
of patent, trademark, copyright and trade secret laws, as well
as licensing agreements, third party nondisclosure and
assignment agreements and policing of third party misuses of our
intellectual property. Our failure to obtain or adequately
protect our trademarks, products, new features of our products,
or our technology, or any change in law or other changes that
serve to lessen or remove the current legal protections of our
intellectual property, may diminish our competitiveness and
could materially harm our business.
We may be unaware of intellectual property rights of others that
may cover some of our technology, brands or products. Any
litigation regarding patents or other intellectual property
could be costly and time-consuming and could divert the
attention of our management and key personnel from our business
operations. Third party claims of intellectual property
infringement might also require us to enter into costly license
agreements. We also may be subject to significant damages or
injunctions against development and sale of certain products.
Our operations face significant foreign currency exchange
rate exposure which could negatively impact our operating
results.
We hold assets and incur liabilities, earn revenue and pay
expenses in a variety of currencies other than the
U.S. dollar, including the British pound, euro, Australian
dollar, Canadian dollar, Venezuelan bolivar fuerte, Russian
rouble and Mexican peso. Because our consolidated financial
statements are presented in U.S. dollars, we must translate
our assets, liabilities, revenue and expenses into
U.S. dollars at then-applicable exchange rates.
Consequently, increases and decreases in the value of the
U.S. dollar may negatively affect the value of these items
in our consolidated financial statements, even if their value
has not changed in their original currency.
Changes in tax, environmental or other regulations or failure
to comply with existing licensing, trade and other regulations
and laws could have a material adverse effect on our
consolidated financial condition.
Our activities, both in and outside of the United States, are
subject to regulation by various federal, state, provincial and
local laws, regulations and government agencies, including the
U.S. Food and Drug Administration, U.S. Federal Trade
Commission, the U.S. Departments of Agriculture, Commerce
and Labor, as well as similar and other authorities of the
European Union and various state, provincial and local
governments, as well as voluntary regulation by other bodies.
Various state and local agencies also regulate our activities.
The manufacturing, marketing and distribution of food products
are subject to governmental regulation that is becoming
increasingly burdensome. Those regulations control such matters
as food quality and safety, ingredients, advertising, relations
with distributors and retailers, health and safety and the
environment. We are also regulated with respect to matters such
as licensing requirements, trade and pricing practices, tax and
environmental matters. The need to comply with new or revised
tax, environmental, food quality and safety or other laws or
regulations, or new or changed interpretations or enforcement of
existing laws or regulations, may have a material adverse effect
on our business and results of operations. Further, if we are
found to be out of compliance with applicable laws and
regulations in these areas, we could be subject to civil
remedies, including fines, injunctions, or recalls, as well as
potential criminal sanctions, any of which could have a material
adverse effect on our business.
Concerns with the safety and quality of food products could
cause consumers to avoid certain food products or
ingredients.
We could be adversely affected if consumers lose confidence in
the safety and quality of certain food products or ingredients,
or the food safety system generally. Adverse publicity about
these types of concerns, whether or not valid, may discourage
consumers from buying our products or cause production and
delivery disruptions.
If our food products become adulterated or misbranded, we
might need to recall those items and may experience product
liability if consumers are injured as a result.
Selling food products involves a number of legal and other
risks, including product contamination, spoilage,
8
product tampering or other adulteration. We may need to recall
some of our products if they become adulterated or misbranded.
We may also be liable if the consumption of any of our products
causes injury, illness or death. A widespread product recall or
market withdrawal could result in significant losses due to
their costs, the destruction of product inventory, and lost
sales due to the unavailability of product for a period of time.
For example, in January 2009, we initiated a recall of certain
Austin and Keebler branded peanut butter sandwich
crackers and certain Famous Amos and Keebler
branded peanut butter cookies as a result of potential
contamination of ingredients at a suppliers facility. The
recall was expanded in late January and February to include
Bear Naked, Kashi and Special K products
impacted by that same suppliers ingredients. The costs of
the recall negatively impacted gross margin and operating profit
in fiscal 2008. We could also suffer losses from a significant
product liability judgment against us. A significant product
recall or product liability case could also result in adverse
publicity, damage to our reputation, and a loss of consumer
confidence in our food products, which could have a material
adverse effect on our business results and the value of our
brands. Moreover, even if a product liability or consumer fraud
claim is meritless, does not prevail or is not pursued, the
negative publicity surrounding assertions against our Company
and our products or processes could adversely affect our
reputation or brands.
Technology failures could disrupt our operations and
negatively impact our business.
We increasingly rely on information technology systems to
process, transmit, and store electronic information. For
example, our production and distribution facilities and
inventory management utilize information technology to increase
efficiencies and limit costs. Furthermore, a significant portion
of the communications between our personnel, customers, and
suppliers depends on information technology. Like other
companies, our information technology systems may be vulnerable
to a variety of interruptions due to events beyond our control,
including, but not limited to, natural disasters, terrorist
attacks, telecommunications failures, computer viruses, hackers,
and other security issues. We have technology security
initiatives and disaster recovery plans in place or in process
to mitigate our risk to these vulnerabilities, but these
measures may not be adequate.
If we pursue strategic acquisitions, divestitures or joint
ventures, we may not be able to successfully consummate
favorable transactions or successfully integrate acquired
businesses.
From time to time, we may evaluate potential acquisitions,
divestitures or joint ventures that would further our strategic
objectives. With respect to acquisitions, we may not be able to
identify suitable candidates, consummate a transaction on terms
that are favorable to us, or achieve expected returns and other
benefits as a result of integration challenges. With respect to
proposed divestitures of assets or businesses, we may encounter
difficulty in finding acquirers or alternative exit strategies
on terms that are favorable to us, which could delay the
accomplishment of our strategic objectives, or our divesture
activities may require us to recognize impairment charges.
Companies or operations acquired or joint ventures created may
not be profitable or may not achieve sales levels and
profitability that justify the investments made. Our corporate
development activities may present financial and operational
risks, including diversion of management attention from existing
core businesses, integrating or separating personnel and
financial and other systems, and adverse effects on existing
business relationships with suppliers and customers. Future
acquisitions could also result in potentially dilutive issuances
of equity securities, the incurrence of debt, contingent
liabilities
and/or
amortization expenses related to certain intangible assets and
increased operating expenses, which could adversely affect our
results of operations and financial condition.
Economic downturns could limit consumer demand for our
products.
Retailers are increasingly offering private label products that
compete with our products. Consumers willingness to
purchase our products will depend upon our ability to offer
products that appeal to consumers at the right price. It is also
important that our products are perceived to be of a higher
quality than less expensive alternatives. If the difference in
quality between our products and those of store brands narrows,
or if such difference in quality is perceived to have narrowed,
then consumers may not buy our products. Furthermore, during
periods of economic uncertainty, consumers tend to purchase more
private label or other economy brands, which could reduce sales
volumes of our higher margin products or there could be a shift
in our product mix to our lower margin offerings. If we are not
able to maintain or improve our brand image, it could have a
material affect on our market share and our profitability.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters and principal research and
development facilities are located in Battle Creek, Michigan.
We operated, as of February 23, 2009, manufacturing plants
and distribution and warehousing facilities totaling more than
29 million square feet of building area in the United
States and other countries. Our plants have been designed and
constructed to meet our specific production requirements, and we
periodically invest money for capital and technological
9
improvements. At the time of its selection, each location was
considered to be favorable, based on the location of markets,
sources of raw materials, availability of suitable labor,
transportation facilities, location of our other plants
producing similar products, and other factors. Our manufacturing
facilities in the United States include four cereal plants and
warehouses located in Battle Creek, Michigan; Lancaster,
Pennsylvania; Memphis, Tennessee; and Omaha, Nebraska and other
plants in San Jose, California; Atlanta, Augusta, Columbus,
and Rome, Georgia; Chicago and Gardner, Illinois; Seelyville,
Indiana, Kansas City, Kansas; Florence, Louisville, and
Pikeville, Kentucky; Grand Rapids and Wyoming, Michigan; Blue
Anchor, New Jersey; Cary and Charlotte, North Carolina;
Cincinnati, Fremont, and Zanesville, Ohio; Muncy, Pennsylvania;
Rossville, Tennessee; Clearfield, Utah; and Allyn, Washington.
Outside the United States, we had, as of February 23, 2009,
additional manufacturing locations, some with warehousing
facilities, in Australia, Brazil, Canada, China, Colombia,
Ecuador, Germany, Great Britain, Guatemala, India, Japan,
Mexico, Russia, South Africa, South Korea, Spain, Thailand, and
Venezuela.
We generally own our principal properties, including our major
office facilities, although some manufacturing facilities are
leased, and no owned property is subject to any major lien or
other encumbrance. Distribution facilities (including related
warehousing facilities) and offices of non-plant locations
typically are leased. In general, we consider our facilities,
taken as a whole, to be suitable, adequate, and of sufficient
capacity for our current operations.
ITEM 3. LEGAL
PROCEEDINGS
We are subject to various legal proceedings and claims arising
out of our business which cover matters such as general
commercial, governmental regulations, antitrust and trade
regulations, product liability, intellectual property,
employment and other actions. In the opinion of management, the
ultimate resolution of these matters will not have a material
adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Information on the market for our common stock, number of
shareowners and dividends is located in Note 16 within
Notes to the Consolidated Financial Statements, which are
included herein under Part II, Item 8.
During the quarter ended January 3, 2009, the Company did
not acquire any shares of its common stock. During this period,
$500 million was the approximate dollar value of shares
that may have been purchased under existing plans or programs.
On July 25, 2008, the Board of Directors authorized the
repurchase of $500 million of Kellogg common stock during
2008 and 2009 for general corporate purposes and to offset
issuances for employee benefit programs. No purchases were made
under this program. The authorization for this program was
canceled on February 4, 2009 and replaced with a
$650 million authorization for 2009.
10
ITEM 6. SELECTED
FINANCIAL DATA
Kellogg
Company and Subsidiaries
Selected
Financial Data
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|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
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(millions, except per share data and number of employees)
|
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2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Operating trends (a)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
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|
$
|
12,822
|
|
|
$
|
11,776
|
|
|
$
|
10,907
|
|
|
$
|
10,177
|
|
|
$
|
9,614
|
|
|
|
|
|
Gross profit as a % of net sales
|
|
|
41.9
|
%
|
|
|
44.0
|
%
|
|
|
44.2
|
%
|
|
|
44.9
|
%
|
|
|
44.9
|
%
|
|
|
|
|
Depreciation
|
|
|
374
|
|
|
|
364
|
|
|
|
351
|
|
|
|
390
|
|
|
|
399
|
|
|
|
|
|
Amortization
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|
|
1
|
|
|
|
8
|
|
|
|
2
|
|
|
|
2
|
|
|
|
11
|
|
|
|
|
|
Advertising expense
|
|
|
1,076
|
|
|
|
1,063
|
|
|
|
916
|
|
|
|
858
|
|
|
|
806
|
|
|
|
|
|
Research and development expense
|
|
|
181
|
|
|
|
179
|
|
|
|
191
|
|
|
|
181
|
|
|
|
149
|
|
|
|
|
|
Operating profit
|
|
|
1,953
|
|
|
|
1,868
|
|
|
|
1,766
|
|
|
|
1,750
|
|
|
|
1,681
|
|
|
|
|
|
Operating profit as a % of net sales
|
|
|
15.2
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%
|
|
|
15.9
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%
|
|
|
16.2
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%
|
|
|
17.2
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%
|
|
|
17.5
|
%
|
|
|
|
|
Interest expense
|
|
|
308
|
|
|
|
319
|
|
|
|
307
|
|
|
|
300
|
|
|
|
309
|
|
|
|
|
|
Net earnings
|
|
|
1,148
|
|
|
|
1,103
|
|
|
|
1,004
|
|
|
|
980
|
|
|
|
891
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
382
|
|
|
|
396
|
|
|
|
397
|
|
|
|
412
|
|
|
|
412
|
|
|
|
|
|
Diluted
|
|
|
385
|
|
|
|
400
|
|
|
|
400
|
|
|
|
416
|
|
|
|
416
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3.01
|
|
|
|
2.79
|
|
|
|
2.53
|
|
|
|
2.38
|
|
|
|
2.16
|
|
|
|
|
|
Diluted
|
|
|
2.99
|
|
|
|
2.76
|
|
|
|
2.51
|
|
|
|
2.36
|
|
|
|
2.14
|
|
|
|
|
|
|
|
Cash flow trends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
1,267
|
|
|
$
|
1,503
|
|
|
$
|
1,410
|
|
|
$
|
1,143
|
|
|
$
|
1,229
|
|
|
|
|
|
Capital expenditures
|
|
|
461
|
|
|
|
472
|
|
|
|
453
|
|
|
|
374
|
|
|
|
279
|
|
|
|
|
|
|
|
Net cash provided by operating activities reduced by capital
expenditures (b)
|
|
|
806
|
|
|
|
1,031
|
|
|
|
957
|
|
|
|
769
|
|
|
|
950
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(681
|
)
|
|
|
(601
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)
|
|
|
(445
|
)
|
|
|
(415
|
)
|
|
|
(270
|
)
|
|
|
|
|
Net cash used in financing activities
|
|
|
(780
|
)
|
|
|
(788
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)
|
|
|
(789
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)
|
|
|
(905
|
)
|
|
|
(716
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)
|
|
|
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|
Interest coverage ratio (c)
|
|
|
7.5
|
|
|
|
7.0
|
|
|
|
6.9
|
|
|
|
7.1
|
|
|
|
6.8
|
|
|
|
|
|
|
|
Capital structure trends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (d)
|
|
$
|
10,946
|
|
|
$
|
11,397
|
|
|
$
|
10,714
|
|
|
$
|
10,575
|
|
|
$
|
10,562
|
|
|
|
|
|
Property, net
|
|
|
2,933
|
|
|
|
2,990
|
|
|
|
2,816
|
|
|
|
2,648
|
|
|
|
2,715
|
|
|
|
|
|
Short-term debt
|
|
|
1,388
|
|
|
|
1,955
|
|
|
|
1,991
|
|
|
|
1,195
|
|
|
|
1,029
|
|
|
|
|
|
Long-term debt
|
|
|
4,068
|
|
|
|
3,270
|
|
|
|
3,053
|
|
|
|
3,703
|
|
|
|
3,893
|
|
|
|
|
|
Shareholders equity (d), (e)
|
|
|
1,448
|
|
|
|
2,526
|
|
|
|
2,069
|
|
|
|
2,284
|
|
|
|
2,257
|
|
|
|
|
|
|
|
Share price trends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price range
|
|
$
|
40-59
|
|
|
$
|
49-57
|
|
|
$
|
42-51
|
|
|
$
|
42-47
|
|
|
$
|
37-45
|
|
|
|
|
|
Cash dividends per common share
|
|
|
1.300
|
|
|
|
1.202
|
|
|
|
1.137
|
|
|
|
1.060
|
|
|
|
1.010
|
|
|
|
|
|
|
|
Number of employees
|
|
|
32,394
|
|
|
|
26,494
|
|
|
|
25,856
|
|
|
|
25,606
|
|
|
|
25,171
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Fiscal years 2004 and 2008 contain
a 53rd shipping week. Refer to Note 1 within Notes to
Consolidated Financial Statements for further information.
|
|
(b)
|
|
The Company uses this non-GAAP
financial measure to focus management and investors on the
amount of cash available for debt repayment, dividend
distribution, acquisition opportunities, and share repurchase,
which is reconciled above.
|
|
(c)
|
|
Interest coverage ratio is
calculated based on earnings before interest expense, income
taxes, depreciation, and amortization, divided by interest
expense.
|
|
(d)
|
|
The Company adopted
SFAS No. 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans as
of the end of its 2006 fiscal year. The standard generally
requires company plan sponsors to reflect the net over- or
under-funded position of a defined postretirement benefit plan
as an asset or liability on the balance sheet. Accordingly, the
2006 balances associated with the identified captions within
this summary were materially affected by the adoption of this
standard. Refer to Note 1 within Notes to Consolidated
Financial Statements for further information.
|
|
(e)
|
|
2008 change due primarily to
currency translation adjustments of $(431) and net experience
losses in postretirement and postemployment benefit plans of
$(865).
|
11
ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Kellogg Company and Subsidiaries
RESULTS
OF OPERATIONS
Overview
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations
(MD&A) is intended to help the reader
understand Kellogg Company, our operations and our present
business environment. MD&A is provided as a supplement to,
and should be read in conjunction with, our Consolidated
Financial Statements and the accompanying notes thereto
contained in Item 8 of this report.
Kellogg Company is the worlds leading producer of cereal
and a leading producer of convenience foods, including cookies,
crackers, toaster pastries, cereal bars, fruit snacks, frozen
waffles, and veggie foods. Kellogg products are manufactured and
marketed globally. We currently manage our operations in four
geographic operating segments, comprised of North America and
the three International operating segments of Europe, Latin
America, and Asia Pacific. Beginning in 2007, the Asia Pacific
segment includes South Africa, which was formerly a part of
Europe. Prior years were restated for comparison purposes.
We manage our Company for sustainable performance defined by our
long-term annual growth targets. These targets are low
single-digit (1 to 3%) for internal net sales, mid single-digit
(4 to 6%) for internal operating profit, and high single-digit
(7 to 9%) for net earnings per share on a currency neutral
basis. See Foreign currency translation section on
page 15 for an explanation of the Companys definition of
currency neutral.
For our full year 2008, we exceeded our net sales target with
reported net sales growth of 9%, and internal growth of 5.4%.
Consolidated operating profit increased 4.5%, on internal growth
of 4.2%, in line with our target. Reported diluted earnings per
share grew 8%, within our target, to $2.99 per share, while
currency neutral EPS grew 10%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated results
|
|
|
|
|
|
|
(dollars in millions except per share data)
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales
|
|
|
|
$
|
12,822
|
|
|
$
|
11,776
|
|
|
$
|
10,907
|
|
|
|
Net sales growth:
|
|
As reported
|
|
|
8.9%
|
|
|
|
8.0%
|
|
|
|
7.2%
|
|
|
|
|
|
Internal (a)
|
|
|
5.4%
|
|
|
|
5.4%
|
|
|
|
6.8%
|
|
|
|
Operating profit
|
|
|
|
$
|
1,953
|
|
|
$
|
1,868
|
|
|
$
|
1,766
|
|
|
|
Operating profit growth:
|
|
As reported (b)
|
|
|
4.5%
|
|
|
|
5.8%
|
|
|
|
.9%
|
|
|
|
|
|
Internal (a)
|
|
|
4.2%
|
|
|
|
3.1%
|
|
|
|
4.3%
|
|
|
|
Diluted net earnings per share (EPS)
|
|
$
|
2.99
|
|
|
$
|
2.76
|
|
|
$
|
2.51
|
|
|
|
EP S growth (b)
|
|
|
|
|
8%
|
|
|
|
10%
|
|
|
|
6%
|
|
|
|
Currency neutral diluted EPS growth (c)
|
|
|
10%
|
|
|
|
7%
|
|
|
|
11%
|
|
|
|
|
|
|
(a)
|
|
Internal net sales and operating
profit growth for 2008 exclude the impact of currency, a
53rd
shipping week and acquisitions. Internal net sales and operating
profit for 2007 and 2006 excludes the impact of currency.
Additionally, internal operating profit growth for 2006 excludes
the impact of adopting SFAS No. 123(R) Share-Based
Payment. Accordingly, internal net sales operating profit
growth is a non-GAAP financial measure, which is further
discussed and reconciled to GAAP-basis growth on page 13.
|
|
|
(b)
|
|
At the beginning of 2006, we
adopted SFAS No. 123(R) Share-Based
Payment, which reduced our fiscal 2006 operating profit by
$65 million ($42 million after tax or $.11 per share),
due primarily to recognition of compensation expense associated
with employee and director stock option grants. Correspondingly,
our reported operating profit and net earnings growth for 2006
was reduced by approximately 4% and diluted net earnings per
share growth was reduced by approximately 5%.
|
|
|
(c)
|
|
See section entitled Foreign
currency translation for discussion and reconciliation of
this non-GAAP financial measure.
|
In combination with an attractive dividend yield, we believe
this profitable growth has and will continue to provide a strong
total return to our shareholders. We believe we can achieve this
sustainable growth through a strategy focused on growing our
cereal business, expanding our snacks business, and pursuing
selected growth opportunities. We support our business strategy
with operating principles that emphasize profit-rich,
sustainable sales growth, as well as cash flow and return
on invested capital. We believe our steady earnings growth,
strong cash flow, and continued investment during a multi-year
period of significant commodity and energy-driven cost inflation
demonstrates the strength and flexibility of our business model.
12
Net
sales and operating profit
2008
compared to 2007
The following tables provide an analysis of net sales and
operating profit performance for 2008 versus 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
|
North
|
|
|
|
Latin
|
|
Pacific
|
|
|
|
|
|
|
(dollars in millions)
|
|
America
|
|
Europe
|
|
America
|
|
(a)
|
|
Corporate
|
|
Consolidated
|
|
|
|
2008 net sales
|
|
|
$8,457
|
|
|
|
$2,619
|
|
|
|
$1,030
|
|
|
|
$716
|
|
|
|
$
|
|
|
|
$12,822
|
|
|
|
|
|
2007 net sales
|
|
|
$7,786
|
|
|
|
$2,357
|
|
|
|
$984
|
|
|
|
$649
|
|
|
|
$
|
|
|
|
$11,776
|
|
|
|
|
|
% change 2008 vs. 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (tonnage) (b)
|
|
|
1.3%
|
|
|
|
−.2%
|
|
|
|
−2.6%
|
|
|
|
6.3%
|
|
|
|
|
|
|
|
.9%
|
|
|
|
Pricing/mix
|
|
|
4.5%
|
|
|
|
3.9%
|
|
|
|
6.9%
|
|
|
|
1.8%
|
|
|
|
|
|
|
|
4.5%
|
|
|
|
|
|
Subtotal internal business
|
|
|
5.8%
|
|
|
|
3.7%
|
|
|
|
4.3%
|
|
|
|
8.1%
|
|
|
|
|
|
|
|
5.4%
|
|
|
|
Acquisitions (c)
|
|
|
.9%
|
|
|
|
5.5%
|
|
|
|
|
|
|
|
3.4%
|
|
|
|
|
|
|
|
1.8%
|
|
|
|
Shipping day differences (d)
|
|
|
1.9%
|
|
|
|
1.2%
|
|
|
|
.5%
|
|
|
|
1.0%
|
|
|
|
|
|
|
|
1.7%
|
|
|
|
Foreign currency impact
|
|
|
|
|
|
|
.7%
|
|
|
|
−.1%
|
|
|
|
−2.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change
|
|
|
8.6%
|
|
|
|
11.1%
|
|
|
|
4.7%
|
|
|
|
10.3%
|
|
|
|
|
|
|
|
8.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
|
North
|
|
|
|
Latin
|
|
Pacific
|
|
|
|
|
|
|
(dollars in millions)
|
|
America
|
|
Europe
|
|
America
|
|
(a)
|
|
Corporate
|
|
Consolidated
|
|
|
|
2008 operating profit
|
|
|
$1,447
|
|
|
|
$390
|
|
|
|
$209
|
|
|
|
$92
|
|
|
|
$(185)
|
|
|
|
$1,953
|
|
|
|
|
|
2007 operating profit
|
|
|
$1,345
|
|
|
|
$397
|
|
|
|
$213
|
|
|
|
$88
|
|
|
|
$(175)
|
|
|
|
$1,868
|
|
|
|
|
|
% change 2008 vs. 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal business
|
|
|
5.9%
|
|
|
|
−.6%
|
|
|
|
−1.5%
|
|
|
|
11.0%
|
|
|
|
−2.8%
|
|
|
|
4.2%
|
|
|
|
Acquisitions (c)
|
|
|
−.8%
|
|
|
|
−.6%
|
|
|
|
|
|
|
|
−6.2%
|
|
|
|
|
|
|
|
−1.0%
|
|
|
|
Shipping day differences (d)
|
|
|
2.5%
|
|
|
|
1.2%
|
|
|
|
−.9%
|
|
|
|
.8%
|
|
|
|
−1.9%
|
|
|
|
1.8%
|
|
|
|
Foreign currency impact
|
|
|
−.1%
|
|
|
|
−1.9%
|
|
|
|
.4%
|
|
|
|
−1.8%
|
|
|
|
|
|
|
|
−.5%
|
|
|
|
|
|
Total change
|
|
|
7.5%
|
|
|
|
−1.9%
|
|
|
|
−2.0%
|
|
|
|
3.8%
|
|
|
|
−4.7%
|
|
|
|
4.5%
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes Australia, Asia and South
Africa.
|
|
(b)
|
|
We measure the volume impact
(tonnage) on revenues based on the stated weight of our product
shipments.
|
|
(c)
|
|
Impact of results for the
year-to-date period ended January 3, 2009 from the
acquisitions of United Bakers, Bear Naked, Navigable Foods,
Specialty Cereals and certain assets and liabilities of the
Wholesome & Hearty Foods Company and IndyBake.
|
|
(d)
|
|
Impact of 53rd shipping week in
2008.
|
During 2008, our consolidated net sales increased almost 9%
driven by our North America business with increases in both
volume and price/mix for the year. Internal net sales grew over
5%, building on a 5% rate of internal growth during 2007. We had
a fifty-third week in our 2008 fiscal year which contributed
almost 2% to our reported growth over the prior year as did our
acquisitions. For further information on our acquisitions refer
to Note 2 within Notes to Consolidated Financial Statements
beginning on page 35. Management has estimated the pro
forma effect on the Companys results of operations as
though these business combinations had been completed at the
beginning of either 2008 or 2007 would have been immaterial.
Successful innovation, brand-building (advertising and consumer
promotion) investment as well as our recent price increases
continued to drive growth. Declines in volume in both Europe and
Latin America were more than offset by growth in pricing/mix due
to our price increases. Asia Pacific had a particularly strong
year experiencing growth of 8% driven by cereal sales across the
operating segment.
For 2008, our North America operating segment reported a net
sales increase of almost 9% with internal net sales growth of
6%. The growth was broad based and driven by our price
realization and strong innovation. The major product brands grew
as follows: retail cereal +3%; retail snacks (cookies, crackers,
toaster pastries, cereal bars, and fruit snacks) +6%; frozen and
specialty channels (frozen foods, food service and vending) +9%.
While retail cereal grew 3% for the year, we had a relatively
soft share performance in the fourth quarter facing aggressive
price-based incentives from our competitors. In addition, while
we estimate our consumption was up 2% across all channels,
reductions in trade inventory also adversely affected shipments.
As a result, our fourth quarter internal net sales declined by
3% which was up against a tough comparable of 8% growth in the
prior year. Our snacks business grew 6% in 2008 on top of 7%
growth last year. Our growth came from volume, price increases,
and successful innovations such as Townhouse Flipsides
and Cheez-It Duoz. We saw net sales growth in all
product categories toaster pastries, crackers,
cookies and wholesome snacks. Our Right Bites 100
calorie cookie and cracker packs performed well as we saw an
increase in demand for portion controlled portable food. Our
specialty and frozen channels grew over 9%. Our food service
business performed well, achieving mid single-digit growth for
the year. Frozen realized strong sales driven by innovations
such as Bake Shop Swirlz, Mini Muffin Tops and
French Toast Waffles.
Our International operating segments collectively achieved net
sales growth of 9%, or 5% on an internal basis. Europes
internal net sales grew by almost 4% attributable to price/mix,
as volume was down slightly. The UK and continental Europe have
been impacted by the economic crisis which has consumers
searching for value and retailers reducing inventory. Snacks
products are performing well across the region, especially in
the UK driven by Rice Krispies Squares. Latin
Americas internal net sales growth was 4% attributable to
our price increases and driven by cereal sales in Mexico and
Venezuela. This years growth is on top of last years
9% growth. Volume was down for the year due to the economic
environment which is impacting consumer confidence. Asia Pacific
had a very strong year with 8% internal net sales growth. The
growth was volume driven and broad based in both retail cereal
and retail snacks.
Consolidated operating profit grew by almost 5% on an as
reported basis and 4% on an internal basis. Operating profit in
all areas was impacted by significant cost pressures as
discussed in more detail in the Margin performance
section beginning on page 14. North America grew by 6%
driven by growth in net sales and lower exit costs which offset
higher
13
commodity costs. Costs associated with the peanut-related recall
of Kellogg products adversely impacted North Americas
operating profit by $34 million or 2% of the full year
operating profit. See the Subsequent event section
on page 18 for more details. Operating profit declined
slightly in both Europe and Latin America due to increased
commodity costs and cost reduction initiatives. Asia
Pacifics operating profit increased 11% on an internal
basis due to strong top line growth. On a consolidated basis,
operating profit from acquisitions decreased internal operating
profit by 1%, in line with our expectations, with Europe and
Asia Pacific being particularly impacted by our Russian and
Chinese acquisitions, respectively.
2007
compared to 2006
The following tables provide an analysis of net sales and
operating profit performance for 2007 versus 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
|
North
|
|
|
|
Latin
|
|
Pacific
|
|
|
|
|
|
|
(dollars in millions)
|
|
America
|
|
Europe
|
|
America
|
|
(a)
|
|
Corporate
|
|
Consolidated
|
|
|
|
2007 net sales
|
|
|
$7,786
|
|
|
|
$2,357
|
|
|
|
$984
|
|
|
|
$649
|
|
|
|
$
|
|
|
|
$11,776
|
|
|
|
|
|
2006 net sales
|
|
|
$7,349
|
|
|
|
$2,057
|
|
|
|
$891
|
|
|
|
$610
|
|
|
|
$
|
|
|
|
$10,907
|
|
|
|
|
|
% change 2007 vs. 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (tonnage) (b)
|
|
|
1.7%
|
|
|
|
2.2%
|
|
|
|
6.5%
|
|
|
|
−.9%
|
|
|
|
|
|
|
|
2.1%
|
|
|
|
Pricing/mix
|
|
|
3.8%
|
|
|
|
3.1%
|
|
|
|
2.3%
|
|
|
|
.6%
|
|
|
|
|
|
|
|
3.3%
|
|
|
|
|
|
Subtotal internal business
|
|
|
5.5%
|
|
|
|
5.3%
|
|
|
|
8.8%
|
|
|
|
−.3%
|
|
|
|
|
|
|
|
5.4%
|
|
|
|
Foreign currency impact
|
|
|
.5%
|
|
|
|
9.3%
|
|
|
|
1.6%
|
|
|
|
6.7%
|
|
|
|
|
|
|
|
2.6%
|
|
|
|
|
|
Total change
|
|
|
6.0%
|
|
|
|
14.6%
|
|
|
|
10.4%
|
|
|
|
6.4%
|
|
|
|
|
|
|
|
8.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
|
North
|
|
|
|
Latin
|
|
Pacific
|
|
|
|
|
|
|
(dollars in millions)
|
|
America
|
|
Europe
|
|
America
|
|
(a)
|
|
Corporate
|
|
Consolidated
|
|
|
|
|
2007 operating profit
|
|
|
$1,345
|
|
|
|
$397
|
|
|
|
$213
|
|
|
|
$88
|
|
|
|
$(175)
|
|
|
|
$1,868
|
|
|
|
|
|
2006 operating profit
|
|
|
$1,341
|
|
|
|
$321
|
|
|
|
$220
|
|
|
|
$90
|
|
|
|
$(206)
|
|
|
|
$1,766
|
|
|
|
|
|
% change 2007 vs. 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal business
|
|
|
−.1%
|
|
|
|
14.2%
|
|
|
|
−4.7%
|
|
|
|
−9.5%
|
|
|
|
14.4%
|
|
|
|
3.1%
|
|
|
|
Foreign currency impact
|
|
|
.5%
|
|
|
|
9.7%
|
|
|
|
1.5%
|
|
|
|
7.2%
|
|
|
|
|
|
|
|
2.7%
|
|
|
|
|
|
Total change
|
|
|
.4%
|
|
|
|
23.9%
|
|
|
|
−3.2%
|
|
|
|
−2.3%
|
|
|
|
14.4%
|
|
|
|
5.8%
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes Australia, Asia and South
Africa.
|
|
|
(b)
|
|
We measure the volume impact
(tonnage) on revenues based on the stated weight of our product
shipments.
|
During 2007, our consolidated net sales increased 8% on strong
results from broad based growth across our operating segments.
Internal net sales grew over 5%, building on a 7% rate of
internal growth during 2006. Successful innovation,
brand-building (advertising and consumer promotion) investment
and in-store execution continued to drive broad based sales
growth across each of our enterprise-wide product groups. In
fact, we achieved growth in retail cereal sales within each of
our operating segments.
For 2007, our North America operating segment reported a net
sales increase of 6%. Internal net sales grew over 5%, with each
major product group contributing as follows: retail cereal +3%;
retail snacks (cookies, crackers, toaster pastries, cereal bars,
fruit snacks) +7%; frozen and specialty (food service, club
stores, vending, convenience, drug and value stores) channels
+6%. The significant growth achieved by our North America snacks
business built on internal growth of +11% in 2006.
Our International operating segments collectively achieved net
sales growth of approximately 12% or 5% on an internal basis,
with leading dollar contributions from our businesses in the UK,
France, Mexico, and Venezuela. Internal sales of our Asia
Pacific operating segment (which represents approximately 5% of
our consolidated results) were approximately even with the prior
year, as solid growth in Asian markets was offset by weak
performance in our Australian business.
Consolidated operating profit for 2007 grew 6%, with internal
operating profit up 3% versus 2006. For 2007, Europe contributed
a strong 14% internal growth rate, driven by increased sales and
stronger gross margins, as well as lower up-front costs. Despite
a strong sales performance, operating profit in our North
American segment was dampened by continued commodity cost
pressures and significantly higher up-front costs associated
with cost reduction initiatives as more fully discussed on
page 16. Our Latin America and Asia Pacific operating
segments suffered operating profit declines, primarily driven by
lower gross margins due to increased commodity costs, as well as
the previously mentioned weak performance in our Australian
business.
Margin
performance
Margin performance is presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change vs.
|
|
|
|
|
|
|
|
|
prior year
|
|
|
|
|
|
|
|
|
(pts.)
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2008
|
|
2007
|
|
Gross margin (a)
|
|
|
41.9%
|
|
|
|
44.0%
|
|
|
|
44.2%
|
|
|
|
(2.1
|
)
|
|
|
(.2
|
)
|
SGA% (b)
|
|
|
−26.7%
|
|
|
|
−28.1%
|
|
|
|
−28.0%
|
|
|
|
1.4
|
|
|
|
(.1
|
)
|
|
|
Operating margin
|
|
|
15.2%
|
|
|
|
15.9%
|
|
|
|
16.2%
|
|
|
|
(.7
|
)
|
|
|
(.3
|
)
|
|
|
|
|
|
(a)
|
|
Gross profit as a percentage of net
sales. Gross profit is equal to net sales less cost of goods
sold.
|
|
(b)
|
|
Selling, general and administrative
(SGA) expense as a percentage of net sales.
|
We strive for gross profit dollar growth to reinvest in
brand-building and innovation. Our strategy for increasing our
gross profit is to manage external cost pressures through
product pricing and mix improvements, productivity savings, and
technological initiatives to reduce the cost of product
ingredients and packaging. For 2008, our gross profit was up
$188 million over 2007, an increase of 4%. Our gross profit
would have increased by an additional $5 million excluding
the impact of foreign currency.
Our decline in gross margin for 2007 and 2008 reflects the
impact of significant cost pressure with higher costs for
commodities, energy, and fuel being partially offset by the
impact of cost reduction initiatives and increased
14
pricing. For 2008, these cost pressures represented 10% of
2007s cost of goods sold, primarily associated with our
ingredient purchases. In 2007, these cost pressures represented
6% of the prior years cost of goods sold. In 2008,
acquisitions negatively impacted margin by 50 basis points.
For 2009, we expect inflationary trends to continue although we
plan to offset the expected 4% to 5% of cost pressures by
savings from cost reduction initiatives of up to 4% to keep the
gross margin percentage approximately flat year over year.
For 2008, our SGA% decreased over the prior year due to our
strong net sales growth, lower expense related to cost reduction
initiatives recorded in SGA, continued discipline in overhead
spending and efficiencies in advertising and promotion. For
2007, our SGA% was negatively impacted by the reorganization of
our direct store-door delivery (DSD) operations. Total program
costs of $77 million were recorded in SGA expense, as
discussed further in the Exit or disposal activities
section.
Foreign
currency translation
The reporting currency for our financial statements is the
U.S. dollar. Certain of our assets, liabilities, expenses
and revenues, are denominated in currencies other than the
U.S. dollar, primarily in the euro, British pound, Mexican
peso, Australian dollar and Canadian dollar. To prepare our
consolidated financial statements, we must translate those
assets, liabilities, expenses and revenues into
U.S. dollars at the applicable exchange rates. As a result,
increases and decreases in the value of the U.S. dollar
against these other currencies will affect the amount of these
items in our consolidated financial statements, even if their
value has not changed in their original currency. This could
have significant impact on our results if such increase or
decrease in the value of the U.S. dollar is substantial.
The recent volatility in the foreign exchange markets has
limited our ability to forecast future U.S. reported
earnings. As such, we are measuring diluted earnings per share
growth and providing guidance on future earnings on a currency
neutral basis, assuming earnings are translated at the prior
years exchange rates. This non-GAAP financial measure is
being used to focus management and investors on local currency
business results, thereby providing visibility to the underlying
trends of the Company. Management believes that excluding the
impact of foreign currency from EPS provides a better
measurement of comparability given the volatility in foreign
exchange markets.
Below is a reconciliation of reported diluted EPS to currency
neutral EPS for the fiscal years 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated results
|
|
2008
|
|
2007
|
|
2006
|
Diluted net earnings per share (EPS)
|
|
$
|
2.99
|
|
|
$
|
2.76
|
|
|
$
|
2.51
|
|
Translational impact (a)
|
|
|
0.04
|
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
Currency neutral diluted EPS
|
|
$
|
3.03
|
|
|
$
|
2.69
|
|
|
$
|
2.51
|
|
|
|
Currency neutral diluted EPS growth (b)
|
|
|
10%
|
|
|
|
7%
|
|
|
|
11%
|
|
|
|
|
|
|
(a)
|
|
Translational impact is the
difference between reported EPS and the translation of current
year net profits at prior year exchange rates, adjusted for any
gains (losses) on translational hedges.
|
|
(b)
|
|
The growth percentage for 2006 has
been adjusted for the impact of our adoption of SFAS
No. 123(R) Share-Based Payment, which reduced
our fiscal 2006 operating profit by $65 million
($42 million after tax or $.11 per share), due
primarily to recognition of compensation expense associated with
employee and director stock option grants. Correspondingly, our
reported operating profit and net earnings growth for 2006 was
reduced by approximately 4% and diluted net earnings per share
growth was reduced by approximately 5%.
|
Exit
or disposal activities
We view our continued spending on cost-reduction initiatives as
part of our ongoing operating principles to provide greater
visibility in achieving our long-term profit growth targets.
Initiatives undertaken are currently expected to recover cash
implementation costs within a five-year period of completion.
Each cost-reduction initiative is normally up to three years in
duration. Upon completion (or as each major stage is completed
in the case of multi-year programs), the project begins to
deliver cash savings
and/or
reduced depreciation. Certain of these initiatives represent
exit or disposal activities for which material charges have been
incurred. We include these charges in our measure of operating
segment profitability.
Cost
summary
For 2008 we recorded $27 million of costs associated with
exit or disposal activities comprised of $7 million of
asset write offs, $17 million of severance and other cash
costs and $3 million related to pension costs.
$23 million of the 2008 charges were recorded in cost of
goods sold within the Europe operating segment, with the balance
recorded in SGA expense in the Latin America operating segment.
For 2007, we recorded charges of $100 million, comprised of
$7 million of asset write-offs, $72 million for
severance and other exit costs including route franchise
settlements, $15 million for other cash expenditures, and
$6 million for a multiemployer pension plan withdrawal
liability. $23 million of the total 2007 charges were
recorded in cost of goods sold within the Europe operating
segment results, with $77 million recorded in SGA expense
within the North America operating results.
For 2006, we recorded charges of $82 million, comprised of
$20 million of asset write-offs, $30 million for
severance and other exit costs, $9 million for other cash
expenditures, $4 million for a
15
multiemployer pension plan withdrawal liability, and
$19 million for pension and other postretirement plan
curtailment losses and special termination benefits.
$74 million was recorded in cost of goods sold within
operating segment results and $8 million in SGA expense
within corporate results. The Companys operating segments
were impacted as follows (in millions): North America-$46;
Europe$28.
Exit cost reserves at January 3, 2009 were $2 million
related to severance payments. Exit cost reserves were
$5 million at December 29, 2007, consisting of
$2 million for severance and $3 million for lease
termination payments.
Specific
initiatives
During the fourth quarter of 2008, we executed a cost-reduction
initiative in Latin America that resulted in the elimination of
approximately 120 salaried positions. The cost of the
program was $4 million and was recorded in Latin
Americas SGA expense. The charge related primarily to
severance benefits which were paid by the end of the year. There
were no reserves as of January 3, 2009 related to this
program.
We commenced a multi-year European manufacturing optimization
plan in 2006 to improve utilization of our facility in
Manchester, England and to better align production in Europe.
The project resulted in an elimination of approximately
220 hourly and salaried positions from our Manchester
facility through voluntary early retirement and severance
programs. The pension trust funding requirements of these early
retirements exceeded the recognized benefit expense by
$5 million which was funded in 2006. During this program
certain manufacturing equipment was removed from service.
All of the costs for the European manufacturing optimization
plan have been recorded in cost of goods sold within our Europe
operating segment. The following tables present total project
costs and a reconciliation of employee severance reserves for
this initiative. All other cash costs were paid in the period
incurred. The project was completed in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other cash
|
|
|
|
Retirement
|
|
|
Project costs to date
|
|
Employee
|
|
costs
|
|
Asset
|
|
benefits
|
|
|
(millions)
|
|
severance
|
|
(a)
|
|
write-offs
|
|
(b)
|
|
Total
|
|
Year ended December 30, 2006
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
|
$9
|
|
|
$
|
28
|
|
Year ended December 29, 2007
|
|
|
7
|
|
|
|
8
|
|
|
|
4
|
|
|
|
|
|
|
|
19
|
|
Year ended January 3, 2009
|
|
|
5
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
8
|
|
|
|
Total project costs
|
|
$
|
24
|
|
|
$
|
13
|
|
|
$
|
6
|
|
|
|
$12
|
|
|
$
|
55
|
|
|
|
|
|
|
(a)
|
|
Primarily includes expenditures for
equipment removal and relocation, and temporary contracted
services to facilitate employee transitions.
|
|
|
(b)
|
|
Pension plan curtailment losses and
special termination benefits recognized under
SFAS No. 88 Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance reserves
|
|
|
|
|
|
|
|
|
to date
|
|
Beginning of
|
|
|
|
|
|
End of
|
(millions)
|
|
period
|
|
Accruals
|
|
Payments
|
|
period
|
|
Year ended December 29, 2007
|
|
$
|
12
|
|
|
$
|
7
|
|
|
$
|
(19
|
)
|
|
$
|
|
|
Year ended January 3, 2009
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
(3
|
)
|
|
$
|
2
|
|
|
|
In October 2007, we committed to reorganize certain production
processes at our plants in Valls, Spain and Bremen, Germany.
Commencement of this plan followed consultation with union
representatives at the Bremen facility regarding the elimination
of approximately 120 employee positions. This
reorganization plan improved manufacturing and distribution
efficiency across the Companys continental European
operations, and has been completed as of the end of the
Companys 2008 fiscal year.
All of the costs for European production process realignment
have been recorded in cost of goods sold within our Europe
operating segment.
The following tables present total project costs and a
reconciliation of employee severance reserves for this
initiative. All other cash costs were paid in the period
incurred.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other cash
|
|
|
|
|
Project costs to date
|
|
Employee
|
|
costs
|
|
Asset
|
|
|
(millions)
|
|
severance
|
|
(a)
|
|
write-offs
|
|
Total
|
|
Year ended December 29, 2007
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
4
|
|
Year ended January 3, 2009
|
|
|
4
|
|
|
|
1
|
|
|
|
10
|
|
|
|
15
|
|
|
|
Total project costs
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
11
|
|
|
$
|
19
|
|
|
|
|
|
|
(a)
|
|
Primarily includes expenditures for
equipment removal and relocation, and temporary contracted
services to facilitate employee transitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance
|
|
|
|
|
|
|
|
|
reserves to date
|
|
Beginning
|
|
|
|
|
|
End of
|
(millions)
|
|
of period
|
|
Accruals
|
|
Payments
|
|
period
|
|
Year ended December 29, 2007
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
2
|
|
Year ended January 3, 2009
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
(6
|
)
|
|
$
|
|
|
|
|
In July 2007, we began a plan to reorganize our direct
store-door delivery (DSD) operations in the southeastern United
States. This DSD reorganization plan was intended to integrate
our southeastern sales and distribution regions with the rest of
our U.S. DSD operations, resulting in greater efficiency
across the nationwide network. We exited approximately 517
distribution route franchise agreements with independent
contractors. The plan also resulted in the involuntary
termination or relocation of approximately 300 employee
positions. Total project costs incurred were $77 million,
principally consisting of cash expenditures for route franchise
settlements and to a lesser extent, for employee separation,
relocation, and reorganization. Exit reserves were
$3 million at December 29, 2007 and were paid in 2008.
All of the costs for the U.S. DSD reorganization plan have
been recorded in SGA expense within our North America operating
segment. This initiative is complete.
During 2006, we commenced several initiatives to enhance the
productivity and efficiency of our
16
U.S. cereal manufacturing network, primarily through
technological and sourcing improvements in warehousing and
packaging operations. In conjunction with these initiatives, we
offered voluntary separation incentives, which resulted in the
retirement of approximately 80 hourly employees by early
2007. During 2006, we incurred approximately $15 million of
total up-front costs, comprised of approximately 20% asset
write-offs and 80% cash costs, including $10 million of
pension and other postretirement plan curtailment losses. These
initiatives were complete by the end of 2007.
Also during 2006, we undertook an initiative to improve customer
focus and selling efficiency within a particular Latin American
market, leading to a shift from a third-party distributor to a
direct sales force model. As a result of this initiative, we
paid $8 million in cash during 2006 to exit the existing
distribution arrangement.
During 2008 we finalized our pension plan withdrawal liability
related to our North America snacks bakery consolidation which
was executed in 2005 and 2006. The final liability was
$20 million, $16 million of which was recognized in
2005 and $4 million in 2006; and was paid in the third
quarter of 2008.
Other
2008 cost reduction initiatives
In addition to investments in exit or disposal activities, we
undertook various other cost reduction initiatives during 2008.
We incurred $10 million of expense in connection with a
payment for the restructuring of our labor force at a
manufacturing facility in Mexico. This cost was recorded in cost
of goods sold in the Latin America operating segment.
We also incurred $17 million of expense for the elimination
of the accelerated ownership feature of certain employee stock
options. Refer to Note 8 within Notes to Consolidated
Financial Statements for further information. This expense was
recorded in SGA expense within corporate results.
During 2008, we also began a lean manufacturing initiative in
certain U.S., Latin American and European manufacturing
facilities. We are referring to this initiative as K LEAN which
stands for Kelloggs lean, efficient, agile network. This
program will ensure we are optimizing our manufacturing network,
reducing waste, developing best practices across our global
facilities and reducing future capital expenditures. We incurred
costs of $12 million for consulting recorded in cost of
goods sold primarily within our North America operating segment.
The total cost and cash outlay for this program is estimated to
be $65 million. This project is expected to be primarily
complete by the end of 2009.
Interest
expense
As illustrated in the following table, annual interest expense
for the
2006-2008
period has been relatively steady, which reflects a stable
effective interest rate on total debt and a relatively constant
debt balance throughout most of that time. Interest income
(recorded in other income (expense), net) increased from
approximately $11 million in 2006 to $20 million in
2008, resulting in net interest expense of approximately
$288 million for 2008. We currently expect that our
2009 gross interest expense will be approximately
$280 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change vs.
|
|
|
|
|
|
|
|
|
prior year
|
|
(dollars in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
2008
|
|
2007
|
|
Reported interest expense (a)
|
|
$
|
308
|
|
|
$
|
319
|
|
|
$
|
307
|
|
|
|
|
|
|
|
|
|
Amounts capitalized
|
|
|
6
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest expense
|
|
$
|
314
|
|
|
$
|
324
|
|
|
$
|
310
|
|
|
|
−3.1%
|
|
|
|
4.5%
|
|
|
|
|
|
|
(a)
|
|
Reported interest expense for 2007
includes charges of approximately $5 related to the early
redemption of long-term debt.
|
Other
income (expense), net
Other income (expense), net includes non-operating items such as
interest income, charitable donations, and gains and losses
related to foreign currency exchange and commodity derivatives.
Other income (expense), net for the periods presented was (in
millions): 2008$(12); 2007$(2); 2006$13. The
variability in other income (expense), net, among years reflects
the timing of certain charges explained in the following
paragraph.
Charges for contributions to the Kelloggs Corporate
Citizenship Fund, a private trust established for charitable
giving were as follows (in millions): 2008$4;
2007$12; 2006$3. Interest income was (in millions):
2008$20; 2007$23; 2006$11. Net foreign
currency exchange gains (losses) were (in millions):
2008$5; 2007$(8); 2006$(2). Income (expense)
recognized for premiums on commodity options was (in millions):
2008$(12); 2007$(7); 2006$0. Gains (losses) on
Company Owned Life Insurance (COLI), due to changes
in cash surrender value, were (in millions): 2008$(12);
2007$9; 2006$12.
Income
taxes
Our long-term objective is to achieve a consolidated effective
income tax rate of approximately 30% in comparison to a
U.S. federal statutory income tax rate of 35%. We pursue
planning initiatives globally in order to move toward our
target. Excluding the impact of discrete adjustments and the
cost of repatriating foreign earnings, our sustainable
consolidated effective income tax rate for 2008 was 31% and was
32% for both 2007 and 2006. We currently expect our 2009
sustainable rate to be approximately 31%. Our reported rates of
29.7% for 2008 and 28.7% for 2007 were lower than the
sustainable rate due to the
17
favorable effect of various discrete adjustments such as audit
settlements, international restructuring initiatives and
statutory rate changes. (Refer to Note 11 within Notes to
Consolidated Financial Statements for further information.) For
2009, we expect our consolidated effective income tax rate to be
approximately 30% to 31%. This could be impacted if pending
uncertain tax matters, including tax positions that could be
affected by planning initiatives, are resolved more or less
favorably than we currently expect. Fluctuations in foreign
currency exchange rates could also impact the effective tax rate
as it is dependent upon the U.S. dollar earnings of foreign
subsidiaries doing business in various countries with differing
statutory tax rates.
Subsequent
event
On January 14, 2009, we announced a precautionary hold on
certain Austin and Keebler branded peanut butter
sandwich crackers and certain Famous Amos and Keebler
branded peanut butter cookies while the U.S. Food and
Drug Administration and other authorities investigated Peanut
Corporation of America (PCA), one of Kelloggs
peanut paste suppliers for the cracker and cookie products. On
January 16, 2009, Kellogg voluntarily recalled those
products because the paste ingredients supplied to Kellogg had
the potential to be contaminated with salmonella. The recall was
expanded on January 31, February 2 and February 17, 2009 to
include certain Bear Naked, Kashi and Special K
products impacted by PCA ingredients.
We have incurred costs associated with the recalls and in
accordance with U.S. GAAP we recorded certain items
associated with this subsequent event in our fiscal year 2008
financial results.
The charges associated with the recalls reduced North America
full-year 2008 operating profit by $34 million or $0.06 of
EPS. We expect a similar impact in 2009. Of the total 2008
charges, $12 million related to estimated customer returns
and consumer rebates and was recorded as a reduction to net
sales; $21 million related to costs associated with
returned product and the disposal and write-off of inventory
which was recorded as cost of goods sold; and $1 million
related to other costs which were recorded as SGA expense.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is operating cash flows
supplemented by borrowings for major acquisitions and other
significant transactions. Our cash-generating capability is one
of our fundamental strengths and provides us with substantial
financial flexibility in meeting operating and investing needs.
Credit
environment
The U.S. and global economies began a period of uncertainty
starting in 2007. Financial markets continue to experience
unprecedented volatility. Beginning in the third quarter of 2008
and thereafter, global capital and credit markets, including
commercial paper markets, experienced increased instability and
disruption.
Our Companys financial strength was evident throughout
this period of uncertainty, as we continued to have access to
the U.S. and Canadian commercial paper markets. Although
interest rates on our U.S. commercial paper increased by an
average of 200 basis points during the period from
mid-September through October 2008, the average interest rate we
paid for commercial paper borrowings in 2008 declined to 3.5%
from an average of 5.4% in 2007. Our commercial paper and term
debt credit ratings have not been affected by the changes in the
credit environment, and the amount of our total debt outstanding
remained relatively flat over the past three years.
If needed, we have additional sources of liquidity available to
us. These sources include our access to public debt
and/or
equity markets, and the ability to sell trade receivables. Our
Five-Year Credit Agreement, which expires in 2011, allows us to
borrow up to $2.0 billion on a revolving credit basis. This
source of liquidity is unused and available on an unsecured
basis, although we do not currently plan to use it.
We monitor the financial strength of our third-party financial
institutions, including those that hold our cash and cash
equivalents as well as those who serve as counterparties to our
credit facilities, our derivative financial instruments, and
other arrangements.
We believe that our operating cash flows, together with our
credit facilities and other available debt financing, will be
adequate to meet our operating, investing and financing needs in
the foreseeable future. However, there can be no assurance that
continued or increased volatility and disruption in the global
capital and credit markets will not impair our ability to access
these markets on terms acceptable to us, or at all.
Operating
activities
The principal source of our operating cash flow is net earnings,
meaning cash receipts from the sale of our products, net of
costs to manufacture and market our products. Our cash
conversion cycle (defined as days of inventory and trade
receivables outstanding less days of trade payables outstanding,
based on a trailing 12 month average) is relatively short,
equating to approximately 22 days for 2008, 24 days
for 2007 and 26 days for 2006. The decrease in 2008 was the
result of a decrease in days of inventory outstanding, while the
decrease in 2007 reflected an increase in days of trade payables
outstanding.
18
The following table presents the major components of our
operating cash flow during the current and prior year-to-date
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
$1,148
|
|
|
|
$1,103
|
|
|
|
$1,004
|
|
year-over-year change
|
|
|
4.1%
|
|
|
|
9.9%
|
|
|
|
|
|
Items in net earnings not requiring (providing) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
375
|
|
|
|
372
|
|
|
|
353
|
|
Deferred income taxes
|
|
|
157
|
|
|
|
(69
|
)
|
|
|
(44
|
)
|
Other (a)
|
|
|
119
|
|
|
|
183
|
|
|
|
235
|
|
|
|
Net earnings after non-cash items
|
|
|
1,799
|
|
|
|
1,589
|
|
|
|
1,548
|
|
|
|
year-over-year change
|
|
|
13.2%
|
|
|
|
2.6%
|
|
|
|
|
|
Pension and other postretirement benefit plan contributions
|
|
|
(451
|
)
|
|
|
(96
|
)
|
|
|
(99
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core working capital (b)
|
|
|
121
|
|
|
|
16
|
|
|
|
(138
|
)
|
Other working capital
|
|
|
(202
|
)
|
|
|
(6
|
)
|
|
|
99
|
|
|
|
Total
|
|
|
(81
|
)
|
|
|
10
|
|
|
|
(39
|
)
|
|
|
Net cash provided by operating activities
|
|
|
$1,267
|
|
|
|
$1,503
|
|
|
|
$1,410
|
|
year-over-year change
|
|
|
−15.7%
|
|
|
|
6.6%
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Consists principally of non-cash
expense accruals for employee compensation and benefit
obligations.
|
|
|
(b)
|
|
Inventory, trade receivables and
trade payables.
|
Our net cash provided by operating activities for 2008 was
$236 million lower than 2007, due primarily to a
substantial increase in pension and other postretirement benefit
plan contributions in 2008 and an unfavorable year-over-year
variance in other working capital. Partially offsetting the
decrease was the impact of changes in deferred income taxes and
a favorable variance in core working capital.
Our net cash provided by operating activities for 2007 was
$93 million higher than the comparable period of 2006, due
primarily to growth in cash-basis earnings and favorable total
working capital performance. As compared to 2006, the favorable
movement in core working capital during 2007 was related
principally to higher accounts payable, which were due in part
to increased payment terms in international locations.
In 2008, core working capital was an average of 6.2% of net
sales, an improvement of 0.6% compared with 2007. In 2007, core
working capital was an average of 6.8% of net sales, consistent
with 2006. We manage core working capital through timely
collection of accounts receivable, extending terms on accounts
payable and careful monitoring of inventory.
Other working capital in 2008 reflected an increase in cash paid
associated with hedging programs, cash paid for advertising and
promotion, and the impact of changes in accrued salaries and
wages. Other working capital in 2007 was a use of cash versus a
source of cash in 2006. The difference related to a
year-over-year increase in the amount of income tax payments.
Recent adverse conditions in the equity markets caused the
actual rate of return on our pension and postretirement plan
assets to be significantly below our assumed long-term rate of
return of 8.9%. As a result, we decided to make additional
contributions to our pension and postretirement plans amounting
to $400 million in the fourth quarter of 2008. Our total
pension and postretirement plan funding for 2008 totaled
$451 million, while funding in 2007 and 2006 amounted to
$96 million and $99 million, respectively.
In 2006, the Pension Protection Act (PPA) became law in the
United States. The PPA revised the basis and methodology for
determining defined benefit plan minimum funding requirements as
well as maximum contributions to and benefits paid from
tax-qualified plans. The PPA will ultimately require us to make
additional contributions to our U.S. plans. We believe that
we will not be required to make any contributions under PPA
requirements until 2011. Our projections concerning timing of
PPA funding requirements are subject to change primarily based
on general market conditions affecting trust asset performance
and our future decisions regarding certain elective provisions
of the PPA.
We currently project that we will make total U.S. and
foreign plan contributions in 2009 of approximately
$100 million. Actual 2009 contributions could be different
from 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, trust asset performance, renewals of
union contracts, or higher-than-expected health care claims cost
experience.
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 financial measure of
cash flow to focus management and investors on the amount of
cash available for debt repayment, dividend distributions,
acquisition opportunities, and share repurchases. Our cash flow
metric is reconciled to the most comparable GAAP measure, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
Net cash provided by operating activities
|
|
|
$1,267
|
|
|
|
$1,503
|
|
|
|
$1,410
|
|
Additions to properties
|
|
|
(461
|
)
|
|
|
(472
|
)
|
|
|
(453
|
)
|
|
|
Cash flow
|
|
|
$806
|
|
|
|
$1,031
|
|
|
|
$957
|
|
year-over-year change
|
|
|
−21.8%
|
|
|
|
7.7%
|
|
|
|
|
|
|
|
Our 2008 cash flow (as defined) reflects the impact of the
additional pension contributions we made in the fourth quarter
of 2008. For 2009, we are expecting cash flow (as defined) in
the range of $1,050 million to $1,150 million. This
projection assumes an adverse impact on 2009 cash flow of
approximately $100 million associated with changes in
foreign currency exchange rates. We expect to achieve our target
principally through operating profit growth, lower contributions
to pension and other postretirement benefit plans in 2009, and
continued prudent management of our working capital.
19
Investing
activities
Our net cash used in investing activities for 2008 amounted to
$681 million, an increase of $80 million compared with
2007. Net cash used in investing activities of $601 million
in 2007 increased by $156 million compared with 2006.
Cash paid for acquisitions during 2008 and 2007 were the primary
drivers of increases in cash used in investing activities, as we
expanded our platform for future growth with acquisitions in
Russia, China, the U.S. and Australia. Acquisitions are
discussed in Note 2 within Notes to Consolidated Financial
Statements.
Cash paid for additions to properties as a percentage of net
sales amounted to 3.6% in 2008, 4.0% in 2007 and 4.2% in 2006.
In 2008, capital spending consisted primarily of construction
costs to increase capacity in Europe and to expand our global
research center in Battle Creek, Michigan. In 2007, we made
capacity expansions to accommodate sales growth, including the
purchase of a previously leased snacks manufacturing facility in
Chicago, Illinois.
We expect our K LEAN manufacturing efficiency initiative to
result in a trend toward lower capital spending. Going forward,
our long-term target for capital spending is between 3.0% and
4.0% of net sales.
Our 2009 capital plan includes spending for a new facility to
manufacture ready-to-eat cereal in Mexico and continued spending
on the ongoing project to expand the global research center in
Battle Creek, Michigan. The expansion of the W. K. Kellogg
Institute for Food and Nutrition Research reflects our
commitment to research and innovation which is a key driver to
the growth of our business.
Financing
activities
Our net cash used in financing activities for 2008, 2007 and
2006 amounted to $780 million, $788 million and
$789 million, respectively.
In March 2008, we issued $750 million of five-year 4.25%
fixed rate U.S. Dollar Notes under an existing shelf
registration statement. We used proceeds of $746 million
from issuance of this long-term debt to retire a portion of our
commercial paper. In conjunction with this debt issuance, we
entered into interest rate swaps with notional amounts totaling
$750 million, which effectively converted this debt from a
fixed rate to a floating rate obligation for the duration of the
five-year term. In 2008, we had cash outflows of
$465 million in connection with the repayment of five-year
U.S. Dollar Notes at maturity in June 2008. That debt had
an effective interest rate of 3.35%.
In January 2007, we increased our available credit via a
$400 million unsecured
364-Day
Credit Agreement. The $400 million Credit Agreement expired
in January 2008 and we decided not to renew it. In February
2007, we redeemed Euro Notes for $728 million. To partially
finance this redemption, we established a program to issue euro
commercial paper notes up to a maximum aggregate amount
outstanding at any time of $750 million or its equivalent
in alternative currencies. In December 2007, the Company issued
$750 million of five-year 5.125% fixed rate
U.S. Dollar Notes under the existing shelf registration
statement, using the proceeds to replace a portion of our
U.S. commercial paper.
During 2008, 2007 and 2006, we repurchased $650 million of
our common stock each year under programs authorized by our
Board of Directors. The number of shares repurchased amounted to
approximately 13 million, 12 million and
15 million shares, respectively, in 2008, 2007 and 2006.
The 2006 activity consisted principally of a private transaction
with the W. K. Kellogg Foundation Trust to repurchase
approximately 13 million shares for $550 million. On
February 4, 2009, the Board of Directors authorized a
$650 million share repurchase authorization for 2009 that
we plan to execute largely in the second half of the year. The
Board also canceled a $500 million share repurchase
authorization that it had authorized in third quarter 2008. We
made no purchases under the $500 million share repurchase
authorization because of our decision to use cash to fund
pension plans and reduce commercial paper in the fourth quarter
of 2008.
We paid quarterly dividends to shareholders totaling $1.30 per
share in 2008, $1.202 per share in 2007 and $1.137 per share in
2006. Cash paid for dividends increased by 8.2% in 2008, and by
5.7% in 2007. Our objective is to maintain our dividend pay-out
ratio between 40% and 50% of reported net earnings.
At January 3, 2009, our total debt was $5.5 billion,
approximately level with the balance at year-end 2007. Our
long-term debt agreements contain customary covenants that limit
the Company and some of its subsidiaries from incurring certain
liens or from entering into certain sale and lease-back
transactions. Some agreements also contain change in control
provisions. However, they do not contain acceleration of
maturity clauses that are dependent on credit ratings. A change
in the Companys credit ratings could limit our access to
the U.S. short-term debt market
and/or
increase the cost of refinancing long-term debt in the future.
However, even under these circumstances, we would continue to
have access to our aforementioned credit facilities.
We continue to 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 bolt-on
acquisitions. This will be accomplished through our strong cash
flow, our short-term borrowings, and our maintenance of credit
facilities on a global basis.
20
OFF-BALANCE
SHEET ARRANGEMENTS AND OTHER OBLIGATIONS
Off-balance
sheet arrangements
As of January 3, 2009 and December 29, 2007 the
Company did not have any material off-balance sheet arrangements.
Contractual
obligations
The following table summarizes future estimated cash payments to
be made under existing contractual obligations. Further
information on debt obligations is contained in Note 7
within Notes to Consolidated Financial Statements. Further
information on lease obligations is contained in Note 6.
Further information on uncertain tax positions is contained in
Note 11.
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and
|
|
(millions)
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
beyond
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
4,041
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1,428
|
|
|
$
|
751
|
|
|
$
|
752
|
|
|
$
|
1,108
|
|
Interest (a)
|
|
|
2,329
|
|
|
|
236
|
|
|
|
233
|
|
|
|
191
|
|
|
|
147
|
|
|
|
88
|
|
|
|
1,434
|
|
Capital leases
|
|
|
6
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
Operating leases
|
|
|
627
|
|
|
|
135
|
|
|
|
119
|
|
|
|
99
|
|
|
|
75
|
|
|
|
56
|
|
|
|
143
|
|
Purchase obligations (b)
|
|
|
361
|
|
|
|
278
|
|
|
|
50
|
|
|
|
23
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions (c)
|
|
|
35
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term (d)
|
|
|
1,141
|
|
|
|
99
|
|
|
|
56
|
|
|
|
155
|
|
|
|
221
|
|
|
|
239
|
|
|
|
371
|
|
|
|
Total
|
|
$
|
8,540
|
|
|
$
|
785
|
|
|
$
|
460
|
|
|
$
|
1,897
|
|
|
$
|
1,205
|
|
|
$
|
1,135
|
|
|
$
|
3,058
|
|
|
|
|
|
|
(a)
|
|
Includes interest payments on
long-term fixed rate debt and variable rate interest swaps.
|
|
|
(b)
|
|
Purchase obligations consist
primarily of fixed commitments under various co-marketing
agreements and to a lesser extent, of service agreements, and
contracts for future delivery of commodities, packaging
materials, and equipment. The amounts presented in the table do
not include items already recorded in accounts payable or other
current liabilities at year-end 2008, nor does the table reflect
cash flows we are likely to incur based on our plans, but are
not obligated to incur. Therefore, it should be noted that the
exclusion of these items from the table could be a limitation in
assessing our total future cash flows under contracts.
|
|
|
(c)
|
|
In addition to the $35 million
reported in the 2009 column and classified as a current
liability, the Company has $97 million recorded in
long-term liabilities for which it is not reasonably possible to
predict when it may be paid.
|
|
|
(d)
|
|
Other long-term contractual
obligations are those associated with noncurrent liabilities
recorded within the Consolidated Balance Sheet at year-end 2008
and consist principally of projected commitments under deferred
compensation arrangements, multiemployer plans, and supplemental
employee retirement benefits. The table also includes our
current estimate of minimum contributions to defined benefit
pension and postretirement benefit plans through 2014 as
follows: 2009$69; 2010$35; 2011$124;
2012$203; 2013$220; 2014$217.
|
CRITICAL
ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING
ESTIMATES
Promotional
expenditures
Our promotional activities are conducted either through the
retail trade or directly with consumers and include activities
such as in-store displays and events, feature price discounts,
consumer coupons, contests and loyalty programs. The costs of
these activities are generally recognized at the time the
related revenue is recorded, which normally precedes the actual
cash expenditure. The recognition of these costs therefore
requires management judgment regarding the volume of promotional
offers that will be redeemed by either the retail trade or
consumer. These estimates are made using various techniques
including historical data on performance of similar promotional
programs. Differences between estimated expense and actual
redemptions are normally insignificant and recognized as a
change in management estimate in a subsequent period. On a
full-year basis, these subsequent period adjustments have rarely
represented more than 0.3% of our Companys net sales.
However, our Companys total promotional expenditures
(including amounts classified as a revenue reduction)
represented approximately 40% of 2008 net sales; therefore,
it is likely that our results would be materially different if
different assumptions or conditions were to prevail.
Goodwill
and other intangible assets
We follow Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets, in evaluating impairment of
intangibles. We perform this evaluation at least annually during
the fourth quarter of each year in conjunction with our annual
budgeting process. Under SFAS No. 142, goodwill
impairment testing first requires a comparison between the
carrying value and fair value of a reporting unit with
associated goodwill. Carrying value is based on the assets and
liabilities associated with the operations of that reporting
unit, which often requires allocation of shared or corporate
items among reporting units. The fair value of a reporting unit
is based primarily on our assessment of profitability multiples
likely to be achieved in a theoretical sale transaction.
Similarly, impairment testing of other intangible assets
requires a comparison of carrying value to fair value of that
particular asset. Fair values of non-goodwill intangible assets
are based primarily on projections of future cash flows to be
generated from that asset. For instance, cash flows related to a
particular trademark would be based on a projected royalty
stream attributable to branded product sales. These estimates
are made using various inputs including historical data, current
and anticipated market conditions, management plans, and market
comparables.
We also apply the principles of SFAS No. 142 in
evaluating the useful life over which a non-goodwill intangible
asset is expected to contribute directly or indirectly to the
cash flows of the Company. An intangible asset with a finite
useful life is amortized; an intangible asset with an indefinite
useful life is not amortized, but is evaluated annually for
impairment. Reaching a determination on useful life requires
significant judgments and assumptions regarding the future
effects of obsolescence, demand, competition, other economic
factors (such as the stability of the industry, known
technological advances, legislative action that results in an
uncertain or changing
22
regulatory environment, and expected changes in distribution
channels), the level of required maintenance expenditures, and
the expected lives of other related groups of assets.
At January 3, 2009, goodwill and other intangible assets
amounted to $5.1 billion, consisting primarily of goodwill
and trademarks associated with the 2001 acquisition of Keebler
Foods Company. Within this total, approximately
$1.4 billion of non-goodwilll intangible assets were
classified as indefinite-lived, comprised principally of Keebler
trademarks. We currently believe that the fair value of our
goodwill and other intangible assets exceeds their carrying
value and that those intangibles so classified will contribute
indefinitely to the cash flows of the Company. However, if we
had used materially different assumptions regarding the future
performance of our North American snacks business or a different
weighted-average cost of capital in the valuation, this could
have resulted in significant impairment losses
and/or
amortization expense.
Retirement
benefits
Our Company sponsors a number of U.S. and foreign defined
benefit employee pension plans and also provides retiree health
care and other welfare benefits in the United States and Canada.
Plan funding strategies are influenced by tax regulations and
asset return performance. A substantial majority of plan assets
are invested in a globally diversified portfolio of equity
securities with smaller holdings of debt securities and other
investments. We follow SFAS No. 87
Employers Accounting for Pensions and
SFAS No. 106 Employers Accounting for
Postretirement Benefits Other Than Pensions (as amended by
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans)
for the measurement and recognition of obligations and expense
related to our retiree benefit plans. Embodied in both of these
standards is the concept that the cost of benefits provided
during retirement should be recognized over the employees
active working life. Inherent in this concept is the requirement
to use various actuarial assumptions to predict and measure
costs and obligations many years prior to the settlement date.
Major actuarial assumptions that require significant management
judgment and have a material impact on the measurement of our
consolidated benefits expense and accumulated obligation include
the long- term rates of return on plan assets, the health care
cost trend rates, and the interest rates used to discount the
obligations for our major plans, which cover employees in the
United States, United Kingdom, and Canada.
To conduct our annual review of the long-term rate of return on
plan assets, we model expected returns over a
20-year
investment horizon with respect to the specific investment mix
of each of our major plans. The return assumptions used reflect
a combination of rigorous historical performance analysis and
forward-looking views of the financial markets including
consideration of current yields on long-term bonds,
price-earnings ratios of the major stock market indices, and
long-term inflation. Our U.S. plan model, corresponding to
approximately 70% of our trust assets globally, currently
incorporates a long-term inflation assumption of 2.5% and an
active management premium of 1% (net of fees) validated by
historical analysis. Although we review our expected long-term
rates of return annually, our benefit trust investment
performance for one particular year does not, by itself,
significantly influence our evaluation. Our expected rates of
return are generally not revised, provided these rates continue
to fall within a more likely than not corridor of
between the 25th and 75th percentile of expected
long-term returns, as determined by our modeling process. Our
assumed rate of return for U.S. plans in 2008 of 8.9%
equated to approximately the 50th percentile expectation of
our 2008 model. Similar methods are used for various foreign
plans with invested assets, reflecting local economic
conditions. Foreign trust investments represent approximately
30% of our global benefit plan assets.
Based on consolidated benefit plan assets at January 3,
2009, a 100 basis point reduction in the assumed rate of
return would increase 2009 benefits expense by approximately
$31 million. Correspondingly, a 100 basis point
shortfall between the assumed and actual rate of return on plan
assets for 2008 would result in a similar amount of arising
experience loss. Any arising asset-related experience gain or
loss is recognized in the calculated value of plan assets over a
five-year period. Once recognized, experience gains and losses
are amortized using a declining-balance method over the average
remaining service period of active plan participants, which for
U.S. plans is presently about 13 years. Under this
recognition method, a 100 basis point shortfall in actual
versus assumed performance of all of our plan assets in 2008
would reduce pre-tax earnings by approximately $1 million
in 2010, increasing to approximately $5 million in 2014.
For each of the three fiscal years, our actual return on plan
assets exceeded/(was less than) the recognized assumed return by
the following amounts (in millions): 2008$(1,528);
2007$(99); 2006$257.
To conduct our annual review of health care cost trend rates, we
model our actual claims cost data over a five-year historical
period, including an analysis of pre-65 versus post-65 age
groups and other important demographic components of our covered
retiree population. This data is adjusted to eliminate the
impact of plan changes and other factors that would tend to
distort the underlying cost inflation trends. Our initial health
care cost trend rate is reviewed annually and adjusted as
necessary to remain consistent with recent historical experience
and our expectations regarding short-term future trends. In
comparison to our actual five-year compound annual claims cost
23
growth rate of approximately 5%, our initial trend rate for 2009
of 7.5% reflects the expected future impact of faster-growing
claims experience for certain demographic groups within our
total employee population. Our initial rate is trended downward
by 0.5% per year, until the ultimate trend rate of 4.5% is
reached. The ultimate trend rate is adjusted annually, as
necessary, to approximate the current economic view on the rate
of long-term inflation plus an appropriate health care cost
premium. Based on consolidated obligations at January 3,
2009, a 100 basis point increase in the assumed health care
cost trend rates would increase 2009 benefits expense by
approximately $15 million. A 100 basis point excess of
2009 actual health care claims cost over that calculated from
the assumed trend rate would result in an arising experience
loss of approximately $9 million. Any arising health care
claims cost-related experience gain or loss is recognized in the
calculated amount of claims experience over a four-year period.
Once recognized, experience gains and losses are amortized using
a straight-line method over 15 years, resulting in at least
the minimum amortization prescribed by SFAS No. 106. The
net experience gain arising from recognition of 2008 claims
experience was approximately $4 million.
To conduct our annual review of discount rates, we use several
published market indices with appropriate duration weighting to
assess prevailing rates on high quality debt securities, with a
primary focus on the Citigroup Pension Liability
Index®
for our U.S. plans. To test the appropriateness of these
indices, we periodically conduct a matching exercise between the
expected settlement cash flows of our plans and the bond
maturities, consisting principally of
AA-rated (or
the equivalent in foreign jurisdictions) non-callable issues
with at least $25 million principal outstanding. The model
does not assume any reinvestment rates and assumes that bond
investments mature just in time to pay benefits as they become
due. For those years where no suitable bonds are available, the
portfolio utilizes a linear interpolation approach to impute a
hypothetical bond whose maturity matches the cash flows required
in those years. During 2008, we refined our methodology for
setting our discount rate by inputting the cash flows for our
pension, postretirement and postemployment plans into the spot
yield curve underlying the Citigroup index. The
measurement dates for our defined benefit plans are consistent
with our fiscal year end. Accordingly, we select discount rates
to measure our benefit obligations that are consistent with
market indices during December of each year.
Based on consolidated obligations at January 3, 2009, a
25 basis point decline in the weighted-average discount
rate used for benefit plan measurement purposes would increase
2009 benefits expense by approximately $13 million. All
obligation-related experience gains and losses are amortized
using a straight-line method over the average remaining service
period of active plan participants.
Despite the previously-described rigorous policies for selecting
major actuarial assumptions, we periodically experience material
differences between assumed and actual experience. As of
January 3, 2009, we had consolidated unamortized prior
service cost and net experience losses of approximately
$1.9 billion, as compared to approximately
$0.6 billion at December 29, 2007. The year-over-year
increase in net unamortized amounts was attributable primarily
to poor asset performance during 2008. Of the total unamortized
amounts at January 3, 2009, approximately $1.5 billion
was related to asset losses during 2008, with the remainder
largely related to discount rate reductions and net unfavorable
health care claims experience (including upward revisions in the
assumed trend rate) prior to 2008. For 2009, we currently expect
total amortization of prior service cost and net experience
losses to be approximately $11 million higher than the
actual 2008 amount of approximately $58 million. Total
employee benefit expense for 2009 is expected to be slightly
higher than 2008 due to increased amortization of experience
losses which is offset by assumed asset returns on our 2008
contributions. Based on our current actuarial assumptions, we
expect 2010 pension expense to increase significantly primarily
due to the amortization of net experience losses.
During 2008 we made contributions in the amount of
$354 million to Kelloggs global tax-qualified pension
programs. This amount was mostly discretionary. We anticipate
having to make additional contributions in future years to make
up for the poor performance of global equity markets during
2008. Additionally we contributed $97 million to our
retiree medical programs; most of this contribution was also
discretionary and largely used to fund benefit obligations
related to our union retiree healthcare benefits.
Assuming actual future experience is consistent with our current
assumptions, annual amortization of accumulated prior service
cost and net experience losses during each of the next several
years would increase versus the 2008 amount.
Income
taxes
Our consolidated effective income tax rate is influenced by tax
planning opportunities available to us in the various
jurisdictions in which we operate. Judgment is required in
evaluating our tax positions to determine how much benefit
should be recognized in our income tax expense. We establish tax
reserves in accordance with FASB Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(FIN No. 48) which we adopted at the beginning of 2007.
FIN No. 48 is based on a benefit recognition model,
which we believe could result in a greater amount of benefit
(and a lower amount of reserve) being initially recognized in
certain
24
circumstances. Prior to the adoption of FIN No. 48,
our policy was to establish reserves that reflected the probable
outcome of known tax contingencies. Favorable resolution was
recognized as a reduction to our effective tax rate in the
period of resolution. The initial application of
FIN No. 48 resulted in a net decrease to the
Companys consolidated accrued income tax and related
interest liabilities of approximately $2 million, with an
offsetting increase to retained earnings.
The Company evaluates a tax position in two-steps in accordance
with FIN No. 48. The first step is to determine
whether it is more-likely-than not that a tax position will be
sustained upon examination based upon the technical merit of the
position. In weighing the technical merits of the position, we
consider the facts and circumstances of the position; we assume
the reviewing tax authority has full knowledge of the position;
and we consider the weight of authoritative guidance. The second
step is measurement; a tax position that meets the
more-likely-than not recognition threshold is measured to
determine the amount of benefit to recognize in the financial
statements. While reviewing the ranges of probable outcomes, the
Company records the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate
settlement. The tax position will be derecognized when it is no
longer more-likely-than not of being sustained.
For the periods presented, our income tax and related interest
reserves have averaged approximately $175 million. Reserve
adjustments for individual issues have rarely exceeded 1% of
earnings before income taxes annually. Significant tax reserve
adjustments impacting our effective tax rate would be separately
presented in the rate reconciliation table of Note 11
within Notes to Consolidated Financial Statements.
The current portion of our tax reserves is presented in the
balance sheet within accrued income taxes and the amount
expected to be settled after one year is recorded in other
liabilities. Likewise, the current portion of related interest
reserves are presented in the balance sheet within accrued other
current liabilities, with the amount expected to be settled
after one year recorded in other liabilities.
New
accounting pronouncements
New accounting pronouncements are discussed in Note 1
within Notes to Consolidated Financial Statements.
25
FUTURE
OUTLOOK
For 2009, despite a tough economic outlook, we expect our
business model and strategy will deliver internal net sales
growth of 3 to 4% and internal operating profit growth of mid
single-digits (4 to 6%) which are in line with our long-term
annual growth targets. We expect our earnings per share to grow
at high single-digits (7 to 9%) on a currency neutral basis.
Gross profit margin percentage is expected to remain
approximately flat as our cost reduction initiatives and price
realization offset pressure on cost of goods sold. Gross
interest expense for 2009 is expected to decline to
approximately $280 million driven by lower short-term
interest rates. Our effective tax rate is estimated to be
approximately 30% to 31%. We continue to remain committed to
investing in brand building, cost-reduction initiatives, and
other growth opportunities. Lastly, we expect our cash flow
performance to remain strong and are currently expecting 2009
cash flow to be between $1,050 million and
$1,150 million after capital expenditures.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Company is exposed to certain market risks, which exist as a
part of our ongoing business operations. We use derivative
financial and commodity instruments, where appropriate, to
manage these risks. As a matter of policy, we do not engage in
trading or speculative transactions. Refer to Note 12
within Notes to Consolidated Financial Statements for further
information on our accounting policies related to derivative
financial and commodity instruments.
Foreign
exchange risk
Our Company is exposed to fluctuations in foreign currency cash
flows related to third-party purchases, intercompany loans and
product shipments. Our Company is also exposed to fluctuations
in the value of foreign currency investments in subsidiaries and
cash flows related to repatriation of these investments.
Additionally, our Company is exposed to volatility in the
translation of foreign currency earnings to U.S. dollars.
Primary exposures include the U.S. dollar versus the
British pound, euro, Australian dollar, Canadian dollar, and
Mexican peso, and in the case of inter-subsidiary transactions,
the British pound versus the euro. In addition, we have
operations located in Venezuela where the local currency is
exposed to a highly volatile economic environment. We assess
foreign currency risk based on transactional cash flows and
translational volatility and may enter into forward contracts,
options, and currency swaps to reduce fluctuations in net long
or short currency positions. Forward contracts and options are
generally less than 18 months duration. Currency swap
agreements are established in conjunction with the term of
underlying debt issuances.
The total notional amount of foreign currency derivative
instruments at year-end 2008 was $924 million, representing
a settlement receivable of $22 million. The total notional
amount of foreign currency derivative instruments at year-end
2007 was $570 million, representing a settlement obligation
of $9 million. All of these derivatives were hedges of
anticipated transactions, translational exposure, or existing
assets or liabilities, and mature within 18 months.
Assuming an unfavorable 10% change in year-end exchange rates,
the settlement receivable would have decreased by approximately
$92 million at year-end 2008 and the settlement obligation
would have increased by $57 million at year-end 2007. These
unfavorable changes would generally have been offset by
favorable changes in the values of the underlying exposures.
Interest
rate risk
Our Company is exposed to interest rate volatility with regard
to future issuances of fixed rate debt and existing and future
issuances of variable rate debt. Primary exposures include
movements in U.S. Treasury rates, London Interbank Offered
Rates (LIBOR), and commercial paper rates. We periodically use
interest rate swaps and forward interest rate contracts to
reduce interest rate volatility and funding costs associated
with certain debt issues, and to achieve a desired proportion of
variable versus fixed rate debt, based on current and projected
market conditions.
In connection with the issuance of U.S. Dollar Notes on
March 6, 2008, we entered into interest rate swaps. Refer
to disclosures contained in Note 7 within Notes to
Consolidated Financial Statements. There were no interest rate
derivatives outstanding at year-end 2007. Assuming average
variable rate debt levels during the year, a one percentage
point increase in interest rates would have increased interest
expense by approximately $21 million in 2008 and
$19 million in 2007.
Price
risk
Our Company is exposed to price fluctuations primarily as a
result of anticipated purchases of raw and packaging materials,
fuel, and energy. Primary exposures include corn, wheat, soybean
oil, sugar, cocoa, paperboard, natural gas, and diesel fuel. We
have historically used the combination of long-term contracts
with suppliers, and exchange-traded futures and option contracts
to reduce price fluctuations in a desired percentage of
forecasted raw material purchases over a duration of generally
less than 18 months. During 2006, we entered into two
separate
10-year
over-the-counter commodity swap transactions to reduce
fluctuations in the price of natural gas used principally in our
manufacturing processes. The notional amount of the swaps
totaled $167 million as of January 3, 2009 and equates
to approximately 50% of our North America manufacturing needs.
At year-end 2007 the notional amount was $188 million.
26
The total notional amount of commodity derivative instruments at
year-end 2008, including the North America natural gas swaps,
was $267 million, representing a settlement obligation of
approximately $16 million. Assuming a 10% decrease in
year-end commodity prices, the settlement obligation would
increase by approximately $24 million, generally offset by
a reduction in the cost of the underlying commodity purchases.
The total notional amount of commodity derivative instruments at
year-end 2007, including the natural gas swaps, was
$229 million, representing a settlement receivable of
approximately $22 million. Assuming a 10% decrease in
year-end commodity prices, this settlement receivable would
decrease by approximately $22 million, generally offset by
a reduction in the cost of the underlying commodity purchases.
In some instances the Company has reciprocal collateralization
agreements with counterparties regarding fair value positions in
excess of certain thresholds. These agreements call for the
posting of collateral in the form of cash, treasury securities
or letters of credit if a fair value loss position to the
Company or our counterparties exceeds a certain amount. There
were no collateral balance requirements at January 3, 2009
or December 29, 2007.
In addition to the commodity derivative instruments discussed
above, we use long-term contracts with suppliers to manage a
portion of the price exposure associated with future purchases
of certain raw materials, including rice, sugar, cartonboard,
and corrugated boxes. The Company has contracts in place with
its suppliers that provide for pricing that is lower than market
prices at January 3, 2009. It should be noted the exclusion
of these positions from the analysis above could be a limitation
in assessing the net market risk of our Company.
27
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Kellogg Company and
Subsidiaries
Consolidated
Statement of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions, except per share data)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Net sales
|
|
$
|
12,822
|
|
|
$
|
11,776
|
|
|
$
|
10,907
|
|
|
|
|
|
Cost of goods sold
|
|
|
7,455
|
|
|
|
6,597
|
|
|
|
6,082
|
|
|
|
Selling, general and administrative expense
|
|
|
3,414
|
|
|
|
3,311
|
|
|
|
3,059
|
|
|
|
|
|
Operating profit
|
|
$
|
1,953
|
|
|
$
|
1,868
|
|
|
$
|
1,766
|
|
|
|
|
|
Interest expense
|
|
|
308
|
|
|
|
319
|
|
|
|
307
|
|
|
|
Other income (expense), net
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
13
|
|
|
|
|
|
Earnings before income taxes
|
|
|
1,633
|
|
|
|
1,547
|
|
|
|
1,472
|
|
|
|
Income taxes
|
|
|
485
|
|
|
|
444
|
|
|
|
467
|
|
|
|
Earnings (loss) from joint ventures
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Net earnings
|
|
$
|
1,148
|
|
|
$
|
1,103
|
|
|
$
|
1,004
|
|
|
|
|
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.01
|
|
|
$
|
2.79
|
|
|
$
|
2.53
|
|
|
|
Diluted
|
|
$
|
2.99
|
|
|
$
|
2.76
|
|
|
$
|
2.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
1.300
|
|
|
$
|
1.202
|
|
|
$
|
1.137
|
|
|
|
|
|
Refer to Notes to Consolidated Financial Statements.
28
Kellogg Company and
Subsidiaries
Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
|
|
(millions, except share data)
|
|
2008
|
|
2007
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
255
|
|
|
$
|
524
|
|
Accounts receivable, net
|
|
|
1,143
|
|
|
|
1,011
|
|
Inventories
|
|
|
897
|
|
|
|
924
|
|
Other current assets
|
|
|
226
|
|
|
|
243
|
|
|
|
Total current assets
|
|
$
|
2,521
|
|
|
$
|
2,702
|
|
|
|
Property, net
|
|
|
2,933
|
|
|
|
2,990
|
|
Goodwill
|
|
|
3,637
|
|
|
|
3,515
|
|
Other intangibles, net
|
|
|
1,461
|
|
|
|
1,450
|
|
Other assets
|
|
|
394
|
|
|
|
740
|
|
|
|
Total assets
|
|
$
|
10,946
|
|
|
$
|
11,397
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
1
|
|
|
$
|
466
|
|
Notes payable
|
|
|
1,387
|
|
|
|
1,489
|
|
Accounts payable
|
|
|
1,135
|
|
|
|
1,081
|
|
Other current liabilities
|
|
|
1,029
|
|
|
|
1,008
|
|
|
|
Total current liabilities
|
|
$
|
3,552
|
|
|
$
|
4,044
|
|
|
|
Long-term debt
|
|
|
4,068
|
|
|
|
3,270
|
|
Deferred income taxes
|
|
|
300
|
|
|
|
647
|
|
Pension liability
|
|
|
631
|
|
|
|
171
|
|
Other liabilities
|
|
|
947
|
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stock, $.25 par value, 1,000,000,000 shares
authorized
Issued: 418,842,707 shares in 2008 and
418,669,193 shares in 2007
|
|
|
105
|
|
|
|
105
|
|
Capital in excess of par value
|
|
|
438
|
|
|
|
388
|
|
Retained earnings
|
|
|
4,836
|
|
|
|
4,217
|
|
Treasury stock at cost
|
|
|
|
|
|
|
|
|
36,981,580 shares in 2008 and 28,618,052 shares in 2007
|
|
|
(1,790
|
)
|
|
|
(1,357
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(2,141
|
)
|
|
|
(827
|
)
|
|
|
Total shareholders equity
|
|
$
|
1,448
|
|
|
$
|
2,526
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
10,946
|
|
|
$
|
11,397
|
|
|
|
Refer to Notes to Consolidated Financial Statements.
29
Kellogg Company and
Subsidiaries
Consolidated
Statement of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
other
|
|
Total
|
|
Total
|
|
|
Common stock
|
|
excess of
|
|
Retained
|
|
Treasury stock
|
|
comprehensive
|
|
shareholders
|
|
comprehensive
|
(millions)
|
|
shares
|
|
amount
|
|
par value
|
|
earnings
|
|
shares
|
|
amount
|
|
income (loss)
|
|
equity
|
|
income (loss)
|
|
|
Balance, December 31, 2005
|
|
|
419
|
|
|
$
|
105
|
|
|
$
|
59
|
|
|
$
|
3,266
|
|
|
|
13
|
|
|
$
|
(570
|
)
|
|
$
|
(576
|
)
|
|
$
|
2,284
|
|
|
$
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revision (a)
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
|
|
1,004
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
122
|
|
|
|
122
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
Stock options exercised and other
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
(89
|
)
|
|
|
(7
|
)
|
|
|
308
|
|
|
|
|
|
|
|
265
|
|
|
|
|
|
Impact of adoption of SFAS No. 158 (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(592
|
)
|
|
|
(592
|
)
|
|
|
|
|
|
|
Balance, December 30, 2006
|
|
|
419
|
|
|
$
|
105
|
|
|
$
|
292
|
|
|
$
|
3,630
|
|
|
|
21
|
|
|
$
|
(912
|
)
|
|
$
|
(1,046
|
)
|
|
$
|
2,069
|
|
|
$
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of adoption of FIN No. 48 (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,103
|
|
|
|
1,103
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(475
|
)
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
|
|
219
|
|
|
|
219
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
Stock options exercised and other
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
(43
|
)
|
|
|
(4
|
)
|
|
|
205
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
Balance, December 29, 2007
|
|
|
419
|
|
|
$
|
105
|
|
|
$
|
388
|
|
|
$
|
4,217
|
|
|
|
29
|
|
|
$
|
(1,357
|
)
|
|
$
|
(827
|
)
|
|
$
|
2,526
|
|
|
$
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148
|
|
|
|
1,148
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(495
|
)
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,314
|
)
|
|
|
(1,314
|
)
|
|
|
(1,314
|
)
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
Stock options exercised and other
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(34
|
)
|
|
|
(5
|
)
|
|
|
217
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
Balance, January 3, 2009
|
|
|
419
|
|
|
$
|
105
|
|
|
$
|
438
|
|
|
$
|
4,836
|
|
|
|
37
|
|
|
$
|
(1,790
|
)
|
|
$
|
(2,141
|
)
|
|
$
|
1,448
|
|
|
$
|
(166
|
)
|
|
|
Refer to Notes to Consolidated Financial Statements.
|
|
|
(a)
|
|
Refer to Note 5 for further
information.
|
|
|
(b)
|
|
Refer to Note 11 for further
information.
|
30
Kellogg Company and
Subsidiaries
Consolidated
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,148
|
|
|
$
|
1,103
|
|
|
$
|
1,004
|
|
Adjustments to reconcile net earnings to operating cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
375
|
|
|
|
372
|
|
|
|
353
|
|
Deferred income taxes
|
|
|
157
|
|
|
|
(69
|
)
|
|
|
(44
|
)
|
Other (a)
|
|
|
119
|
|
|
|
183
|
|
|
|
235
|
|
Pension and other postretirement benefit contributions
|
|
|
(451
|
)
|
|
|
(96
|
)
|
|
|
(99
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
48
|
|
|
|
(63
|
)
|
|
|
(58
|
)
|
Inventories
|
|
|
41
|
|
|
|
(88
|
)
|
|
|
(107
|
)
|
Accounts payable
|
|
|
32
|
|
|
|
167
|
|
|
|
27
|
|
Accrued income taxes
|
|
|
(85
|
)
|
|
|
(67
|
)
|
|
|
66
|
|
Accrued interest expense
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
4
|
|
Accrued and prepaid advertising, promotion and trade allowances
|
|
|
(10
|
)
|
|
|
36
|
|
|
|
11
|
|
Accrued salaries and wages
|
|
|
(45
|
)
|
|
|
5
|
|
|
|
35
|
|
Exit plan-related reserves
|
|
|
(2
|
)
|
|
|
(9
|
)
|
|
|
1
|
|
All other current assets and liabilities
|
|
|
(63
|
)
|
|
|
30
|
|
|
|
(18
|
)
|
|
|
Net cash provided by operating activities
|
|
$
|
1,267
|
|
|
$
|
1,503
|
|
|
$
|
1,410
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties
|
|
$
|
(461
|
)
|
|
$
|
(472
|
)
|
|
$
|
(453
|
)
|
Acquisitions, net of cash acquired
|
|
|
(213
|
)
|
|
|
(128
|
)
|
|
|
|
|
Property disposals
|
|
|
13
|
|
|
|
3
|
|
|
|
9
|
|
Other
|
|
|
(20
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
Net cash used in investing activities
|
|
$
|
(681
|
)
|
|
$
|
(601
|
)
|
|
$
|
(445
|
)
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (reduction) of notes payable with maturities
less than or equal to 90 days
|
|
$
|
23
|
|
|
$
|
625
|
|
|
$
|
(344
|
)
|
Issuances of notes payable, with maturities greater than
90 days
|
|
|
190
|
|
|
|
804
|
|
|
|
1,065
|
|
Reductions of notes payable, with maturities greater than
90 days
|
|
|
(316
|
)
|
|
|
(1,209
|
)
|
|
|
(565
|
)
|
Issuances of long-term debt
|
|
|
756
|
|
|
|
750
|
|
|
|
|
|
Reductions of long-term debt
|
|
|
(468
|
)
|
|
|
(802
|
)
|
|
|
(85
|
)
|
Net issuances of common stock
|
|
|
175
|
|
|
|
163
|
|
|
|
218
|
|
Common stock repurchases
|
|
|
(650
|
)
|
|
|
(650
|
)
|
|
|
(650
|
)
|
Cash dividends
|
|
|
(495
|
)
|
|
|
(475
|
)
|
|
|
(450
|
)
|
Other
|
|
|
5
|
|
|
|
6
|
|
|
|
22
|
|
|
|
Net cash used in financing activities
|
|
$
|
(780
|
)
|
|
$
|
(788
|
)
|
|
$
|
(789
|
)
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(75
|
)
|
|
|
(1
|
)
|
|
|
16
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(269
|
)
|
|
$
|
113
|
|
|
$
|
192
|
|
Cash and cash equivalents at beginning of year
|
|
|
524
|
|
|
|
411
|
|
|
|
219
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
255
|
|
|
$
|
524
|
|
|
$
|
411
|
|
|
|
Refer to Notes to Consolidated Financial Statements.
|
|
|
(a)
|
|
Consists principally of non-cash
expense accruals for employee compensation and benefit
obligations.
|
31
Kellogg Company and
Subsidiaries
Notes to
Consolidated Financial Statements
NOTE 1
ACCOUNTING POLICIES
Basis
of presentation
The consolidated financial statements include the accounts of
Kellogg Company and its majority-owned subsidiaries
(Kellogg or the Company). Intercompany
balances and transactions are eliminated.
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 2007
and 2006 fiscal years each contained 52 weeks and ended on
December 29 and December 30, respectively. The
Companys 2008 fiscal year ended on January 3, 2009,
and included a 53rd week. While quarters normally consist
of 13-week periods, the fourth quarter of fiscal 2008 included a
14th week.
Use
of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Cash
and cash equivalents
Highly liquid investments with original maturities of three
months or less are considered to be cash equivalents.
Accounts
receivable
Accounts receivable consist principally of trade receivables,
which are recorded at the invoiced amount, net of allowances for
doubtful accounts and prompt payment discounts. Trade
receivables do not bear interest. Terms and collection patterns
vary around the world and by channel. In the United States, the
Company generally has required payment for goods sold eleven or
sixteen days subsequent to the date of invoice as 2% 10/net 11
or 1% 15/net 16, and days sales outstanding has averaged
approximately 19 days during the periods presented. The
allowance for doubtful accounts represents managements
estimate of the amount of probable credit losses in existing
accounts receivable, as determined from a review of past due
balances and other specific account data. Account balances are
written off against the allowance when management determines the
receivable is uncollectible. The Company does not have any
off-balance sheet credit exposure related to its customers.
Refer to Note 18 for an analysis of the Companys
accounts receivable and allowance for doubtful account balances
during the periods presented.
Inventories
Inventories are valued at the lower of cost of market. Cost is
determined on an average cost basis.
Property
The Companys property consists mainly of plants and
equipment used for manufacturing activities. These assets are
recorded at cost and depreciated over estimated useful lives
using straight-line methods for financial reporting and
accelerated methods, where permitted, for tax reporting. Major
property categories are depreciated over various periods as
follows (in years): manufacturing machinery and equipment 5-20;
computer and other office equipment 3-5; building components
15-30;
building structures 50. Cost includes an amount of interest
associated with significant capital projects. Plant and
equipment are reviewed for impairment when conditions indicate
that the carrying value may not be recoverable. Such conditions
include an extended period of idleness or a plan of disposal.
Assets to be abandoned at a future date are depreciated over the
remaining period of use. Assets to be sold are written down to
realizable value at the time the assets are being actively
marketed for sale and the disposal is expected to occur within
one year. As of year-end 2007 and 2008, the carrying value of
assets held for sale was insignificant.
Goodwill
and other intangible assets
The Companys goodwill and intangible assets are comprised
primarily of amounts related to the 2001 acquisition of Keebler
Foods Company (Keebler). Management expects the
Keebler trademarks to contribute indefinitely to the cash flows
of the Company. Accordingly, these intangible assets, have been
classified as an indefinite-lived intangible. Goodwill and
indefinite-lived intangibles are not amortized, but are tested
at least annually for impairment. Goodwill impairment testing
first requires a comparison between the carrying value and fair
value of a reporting unit, which for the Company is generally
equivalent to a North American product group or an International
market. If carrying value exceeds fair value, goodwill is
considered impaired and is reduced to the implied fair value.
Impairment testing for indefinite-lived intangible assets
requires a comparison between the fair value and carrying value
of the intangible asset. If carrying value exceeds fair value,
the intangible asset is considered impaired and is reduced to
fair value. The Company uses various market valuation techniques
to determine the fair value of intangible assets. Refer to
Note 2 for further information on goodwill and other
intangible assets.
32
Revenue
recognition and measurement
The Company recognizes sales upon delivery of its products to
customers net of applicable provisions for discounts, returns,
allowances, and various government withholding taxes.
Methodologies for determining these provisions are dependent on
local customer pricing and promotional practices, which range
from contractually fixed percentage price reductions to
reimbursement based on actual occurrence or performance. Where
applicable, future reimbursements are estimated based on a
combination of historical patterns and future expectations
regarding specific in-market product performance. The Company
classifies promotional payments to its customers, the cost of
consumer coupons, and other cash redemption offers in net sales.
The cost of promotional package inserts is recorded in cost of
goods sold. Other types of consumer promotional expenditures are
normally recorded in selling, general and administrative (SGA)
expense.
Advertising
The costs of advertising are expensed as incurred and are
classified within SGA expense.
Research
and development
The costs of research and development (R&D) are expensed as
incurred and are classified within SGA expense. R&D
includes expenditures for new product and process innovation, as
well as significant technological improvements to existing
products and processes. Total annual expenditures for R&D
are disclosed in Note 18 and are principally comprised of
internal salaries, wages, consulting, and supplies attributable
to time spent on R&D activities. Other costs include
depreciation and maintenance of research facilities and
equipment, including assets at manufacturing locations that are
temporarily engaged in pilot plant activities.
Stock-based
compensation
The Company uses stock-based compensation, including stock
options, restricted stock and executive performance shares, to
provide long-term performance incentives for its global
workforce. Refer to Note 8 for further information on these
programs and the amount of compensation expense recognized
during the periods presented.
The Company classifies pre-tax stock compensation expense
principally in SGA expense within its corporate operations.
Expense attributable to awards of equity instruments is accrued
in capital in excess of par value within the Consolidated
Balance Sheet.
Certain of the Companys stock-based compensation plans
contain provisions that accelerate vesting of awards upon
retirement, disability, or death of eligible employees and
directors. 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, the Company recognizes compensation cost
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.
Corporate income tax benefits realized upon exercise or vesting
of an award in excess of that previously recognized in earnings
(windfall tax benefit) is presented in the
Consolidated Statement of Cash Flows as a financing activity,
classified as other. Realized windfall tax benefits
are credited to capital in excess of par value 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. The Company currently has sufficient
cumulative windfall tax benefits to absorb arising shortfalls,
such that earnings were not affected during the periods
presented. Correspondingly, the Company includes the impact of
pro forma deferred tax assets (i.e., the as if
windfall or shortfall) for purposes of determining assumed
proceeds in the treasury stock calculation of diluted earnings
per share.
Employee
postretirement and postemployment benefits
The Company sponsors a number of U.S. and foreign plans to
provide pension, health care, and other welfare benefits to
retired employees, as well as salary continuance, severance, and
long-term disability to former or inactive employees. Refer to
Notes 9 and 10 for further information on these benefits
and the amount of expense recognized during the periods
presented.
In order to improve the reporting of pension and other
postretirement benefit plans in the financial statements, in
September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 158 Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, which was effective for the Company at the end of
its 2006 fiscal year. Prior periods were not restated. The
standard requires plan sponsors to measure the net over- or
under-funded position of a defined postretirement benefit plan
as of the sponsors fiscal year end and to display that
position as an asset or liability on the balance sheet. Any
unrecognized prior service cost, experience gains/losses, or
transition obligation is reported as a component of other
comprehensive income, net of tax, in shareholders equity.
In contrast, under pre-existing guidance, these unrecognized
amounts were disclosed in financial statement footnotes.
Uncertain
tax positions
In July 2006, the FASB issued Interpretation No. 48
Accounting for Uncertainty in Income Taxes
33
(FIN No. 48) to clarify what criteria must be met
prior to recognition of the financial statement benefit, in
accordance with SFAS No. 109, Accounting for
Income Taxes, of a position taken in a tax return. The
provisions of the final interpretation apply broadly to all tax
positions taken by an enterprise, including the decision not to
report income in a tax return or the decision to classify a
transaction as tax exempt. The prescribed approach is based on a
two-step benefit recognition model. The first step is to
evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than
not, based on the technical merits and without consideration of
detection risk, that the position will be sustained on audit,
including resolution of related appeals or litigation processes,
if any. The second step is to measure the appropriate amount of
the benefit to recognize. The amount of benefit to recognize is
measured as the largest amount of tax benefit that is greater
than 50 percent likely of being ultimately realized upon
settlement. The tax position must be derecognized when it is no
longer more likely than not of being sustained. The
interpretation also provides guidance on recognition and
classification of related penalties and interest, classification
of liabilities, and disclosures of unrecognized tax benefits.
The change in net assets, if any, as a result of applying the
provisions of this interpretation is considered a change in
accounting principle with the cumulative effect of the change
treated as an offsetting adjustment to the opening balance of
retained earnings in the period of transition.
The Company adopted FIN No. 48 as of the beginning of
its 2007 fiscal year. Prior to adoption, the Companys
pre-existing policy was to establish reserves for uncertain tax
positions that reflected the probable outcome of known tax
contingencies. As compared to the Companys historical
approach, the application of FIN No. 48 resulted in a
net decrease to accrued income tax and related interest
liabilities of approximately $2 million, with an offsetting
increase to retained earnings.
Interest recognized in accordance with FIN No. 48 may
be classified in the financial statements as either income taxes
or interest expense, based on the accounting policy election of
the enterprise. Similarly, penalties may be classified as income
taxes or another expense. The Company has historically
classified income tax-related interest and penalties as interest
expense and SGA expense, respectively, and continues to do so
under FIN No. 48.
Fair
value measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements to define fair value,
establish a framework for measuring fair value, and expand
disclosures about fair value measurements. The Company adopted
the provisions of SFAS No. 157 applicable to financial
assets and liabilities, as well as for other assets and
liabilities that are carried at fair value on a recurring basis,
as of the beginning of its 2008 fiscal year. The FASB provided
for a deferral of the implementation of this standard for
non-financial assets and non-financial liabilities, except for
those recognized at fair value in the financial statements at
least annually. Adoption of the initial provisions of
SFAS No. 157 did not have an impact on the measurement
of the Companys financial assets and liabilities but did
result in additional disclosures contained in Note 13
herein.
New
accounting pronouncements
Business combinations and
noncontrolling interests. In December 2007, the
FASB issued SFAS No. 141 (Revised
2007) Business Combinations and
SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statements, which are effective for
fiscal years beginning after December 15, 2008. These new
standards represent the completion of the FASBs first
major joint project with the International Accounting Standards
Board and are intended to improve, simplify, and converge
internationally the accounting for business combinations and the
reporting of noncontrolling interests (formerly minority
interests) in consolidated financial statements. Kellogg Company
will adopt these standards at the beginning of its 2009 fiscal
year. The effect of adoption will be prospectively applied to
transactions completed after the end of the Companys 2008
fiscal year, although the new presentation and disclosure
requirements for pre-existing noncontrolling interests will be
retrospectively applied to all prior-period financial
information presented.
SFAS No. 141(R) retains the underlying fair value
concepts of its predecessor (SFAS No. 141), but
changes the method for applying the acquisition method in a
number of significant respects including the requirement to
expense transaction fees and expected restructuring costs as
incurred, rather than including these amounts in the allocated
purchase price; the requirement to recognize the fair value of
contingent consideration at the acquisition date, rather than
the expected amount when the contingency is resolved; the
requirement to recognize the fair value of acquired in-process
research and development assets at the acquisition date, rather
than immediately expensing them; and the requirement to
recognize a gain in relation to a bargain purchase price, rather
than reducing the allocated basis of long-lived assets. Because
this standard is applied prospectively, the effect of adoption
on the Companys financial statements will depend primarily
on specific transactions, if any, completed after 2008.
Under SFAS No. 160, consolidated financial statements
will be presented as if the parent company investors
(controlling interests) and other minority investors
(noncontrolling interests) in partially-owned subsidiaries
34
have similar economic interests in a single entity. As a result,
the investment in the noncontrolling interest, previously
recorded on the balance sheet between liabilities and equity
(the mezzanine), will be reported as equity in the parent
companys consolidated financial statements subsequent to
the adoption of SFAS No. 160. Furthermore,
consolidated financial statements will include 100% of a
controlled subsidiarys earnings, rather than only the
parent companys share. Lastly, transactions between the
parent company and noncontrolling interests will be reported in
equity as transactions between shareholders, provided that these
transactions do not create a change in control. Previously,
acquisitions of additional interests in a controlled subsidiary
generally resulted in remeasurement of assets and liabilities
acquired; dispositions of interests generally resulted in a gain
or loss. The Company does not expect the adoption of
SFAS No. 160 to have a material impact on its
financial statements.
Disclosures about derivative
instruments. In March 2008, the FASB issued
SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of
SFAS No. 133. SFAS No. 161 requires
companies to disclose their objectives and strategies for using
derivative instruments, whether or not their derivatives are
designated as hedging instruments. The pronouncement requires
disclosure of the fair value of derivative instruments by
primary underlying risk exposures (e.g. interest rate, credit,
foreign exchange rate, combination of interest rate and foreign
exchange rate, or overall price). It also requires detailed
disclosures about the income statement impact of derivative
instruments by designation as fair-value hedges, cash-flow
hedges, or hedges of the foreign-currency exposure of a net
investment in a foreign operation. SFAS No. 161
requires disclosure of information that will enable financial
statement users to understand the level of derivative activity
entered into by the company (e.g., total number of interest-rate
swaps or total notional or quantity or percentage of forecasted
commodity purchases that are being hedged). The principles of
SFAS No. 161 may be applied on a prospective basis and
are effective for financial statements issued for fiscal years
beginning after November 15, 2008. For the Company,
SFAS No. 161 will be effective at the beginning of its
2009 fiscal year and will result in additional disclosures in
notes to the Companys consolidated financial statements.
Fair value. In
February 2008, the FASB issued Staff Position (FSP)
FAS 157-2,
Effective Date of FASB Statement No. 157, which
delays by one year the effective date of SFAS No. 157
for all non-financial assets and non-financial liabilities,
except for those that are recognized or disclosed at fair value
in the financial statements at least annually. Assets and
liabilities subject to this deferral include goodwill,
intangible assets, long-lived assets measured at fair value for
impairment assessments, and nonfinancial assets and liabilities
initially measured at fair value in a business combination. For
the Company, FSP
FAS 157-2
will be effective at the beginning of its 2009 fiscal year.
Management does not expect the adoption of the remaining
provisions to have a material impact on the measurement of the
Companys non-financial assets and liabilities.
Disclosures about postretirement
benefit plan assets. In December 2008, the FASB
issued FSP FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets, which provides
additional guidance on employers disclosures about the
plan assets of defined benefit pension or other postretirement
plans. The disclosures required by FSP FAS 132(R)-1 include
a description of how investment allocation decisions are made,
major categories of plan assets, valuation techniques used to
measure the fair value of plan assets, the impact of
measurements using significant unobservable inputs and
concentrations of risk within plan assets. The disclosures about
plan assets required by this FSP shall be provided for fiscal
years ending after December 15, 2009. For the Company, FSP
FAS 132(R)-1 will be effective for fiscal year end 2009 and
will result in additional disclosures related to the assets of
defined benefit pension plans in notes to the Companys
consolidated financial statements.
NOTE 2
ACQUISITIONS, OTHER INVESTMENTS, GOODWILL AND OTHER INTANGIBLE
ASSETS
Acquisitions
The Company made acquisitions in order to expand its presence
geographically and increase its manufacturing capacity.
Assets, liabilities, and results of operations of the acquired
businesses have been included in the Companys consolidated
financial statements beginning on the date of acquisition; such
amounts were insignificant to the Companys consolidated
financial position and results of operations. In addition, the
pro forma effect of these acquisitions on the Companys
results of operations, as though these business combinations had
been completed at the beginning of 2008 or 2007, would have been
immaterial when considered individually or in the aggregate.
At January 3, 2009, the valuation of assets acquired and
liabilities assumed in connection with these acquisitions is
considered complete.
Specialty
Cereals. In September 2008, the Company acquired
Specialty Cereals of Sydney, Australia, a manufacturer and
distributor of natural
ready-to-eat
cereals. The Company paid $37 million cash in connection
with the transaction, including approximately $5 million to
the sellers lenders to settle
35
debt of the acquired entity. Assets acquired consisted primarily
of property, plant and equipment of $19 million and
goodwill of $18 million (which will not be deductible for
income tax purposes). This acquisition is included in the Asia
Pacific operating segment.
IndyBake Products/Brownie
Products. In August 2008, the Company acquired
certain assets and liabilities of the business of IndyBake
Products and Brownie Products (collectively,
IndyBake), located in Indiana and Illinois.
IndyBake, a contract manufacturing business that produces
cracker, cookie and frozen dough products, had been a partner to
Kellogg for many years as a snacks contract manufacturer.
The Company paid approximately $42 million in cash in
connection with the transaction, including approximately
$8 million to the sellers lenders. Assets acquired
consisted primarily of property, plant and equipment of
$12 million and goodwill of $25 million (which will be
deductible for income tax purposes). Other assets acquired
amounted to $5 million, net of other liabilities acquired.
This acquisition is included in the North America operating
segment.
Navigable
Foods. In June 2008, the Company acquired a
majority interest in the business of Zhenghang Food Company Ltd.
(Navigable Foods) for approximately $36 million
(net of cash received). Navigable Foods, a manufacturer of
cookies and crackers in the northern and northeastern regions of
China, included approximately 1,800 employees, two
manufacturing facilities and a sales and distribution network.
During 2008, the Company paid a total of $31 million in
connection with the acquisition, including approximately
$22 million to lenders and other third parties to settle
debt and other obligations of the acquired entity. Assets
acquired consisted primarily of property, plant and equipment of
$23 million and goodwill of $19 million (which will be
deductible for income tax purposes). Other liabilities acquired
amounted to $6 million, net of other assets acquired. At
January 3, 2009, additional purchase price payable in June
2011 amounted to $5 million and was recorded on the
Companys Consolidated Balance Sheet in other liabilities.
This acquisition is included in the Asia Pacific operating
segment.
The Company recorded noncontrolling interest of $6 million
in connection with the acquisition, and obtained the option to
purchase the noncontrolling interest beginning June 30,
2011. The noncontrolling interest holder also obtained the
option to cause the Company to purchase its remaining interest.
The options, which have similar terms, include an exercise price
that is expected to approximate fair value on the date of
exercise.
United
Bakers. In January 2008, subsidiaries of the
Company acquired substantially all of the equity interests in
OJSC Kreker (doing business as United Bakers) and
consolidated subsidiaries. United Bakers is a leading producer
of cereal, cookie, and cracker products in Russia, with
approximately 4,000 employees, six manufacturing
facilities, and a broad distribution network.
The Company paid $110 million cash (net of $5 million
cash acquired), including approximately $67 million to
settle debt and other assumed obligations of the acquired
entities. Of the total cash paid, $5 million was spent in
2007 for transaction fees and advances. This acquisition is
included in the Europe operating segment.
The purchase agreement between the Company and the seller
provides for the payment of a currently undeterminable amount of
contingent consideration at the end of three years, which will
be calculated based on the growth of sales and earnings before
income taxes, depreciation and amortization. Such payment will
be recognized as additional purchase price when the contingency
is resolved.
The purchase price allocation for United Bakers was as follows:
|
|
|
|
|
|
(millions)
|
|
Asset/(liability)
|
|
Cash
|
|
$
|
5
|
|
Property, net
|
|
|
60
|
|
Goodwill (a)
|
|
|
77
|
|
Working capital, net (b)
|
|
|
(11
|
)
|
Long-term debt
|
|
|
(3
|
)
|
Deferred income taxes
|
|
|
(8
|
)
|
Other
|
|
|
(5
|
)
|
|
|
Total
|
|
$
|
115
|
|
|
|
|
|
|
(a)
|
|
Goodwill is not expected to be tax
deductible.
|
|
|
(b)
|
|
Inventory, receivables and other
current assets less current liabilities.
|
Bear Naked, Inc. and
Wholesome & Hearty Foods Company. In
late 2007, the Company completed two separate business
acquisitions for a total of approximately $123 million in
cash, including related transaction costs. A subsidiary of the
Company acquired 100% of the equity interests in Bear Naked,
Inc., a leading seller of premium-branded natural granola
products. Also, the Company acquired certain assets and
liabilities of the Wholesome & Hearty Foods Company, a
U.S. manufacturer of veggie foods marketed under the
Gardenburger®
brand. The combined purchase price allocation was as follows (in
millions): Goodwill$68; indefinite-lived trademark
intangibles$33; trademark intangibles with a
10-year
expected useful life$5; equipment$7; working capital
and other individually immaterial items$10. The amount of
tax-deductible goodwill is currently expected to approximate the
carrying value recognized for financial reporting purposes.
These acquisitions are included in the North America operating
segment.
36
Other
investments
In early 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. During 2007, the Company contributed approximately
$4 million in cash to its Turkish joint venture, in which
it owns a 50% equity interest. No additional contributions were
made during 2008. The Companys net investment as of
January 3, 2009 was approximately $6 million. This
joint venture is included in the Europe operating segment and is
accounted for using the equity method 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.
Goodwill
and other intangible assets
For 2007, the Company recorded in selling, general, and
administrative expense impairment losses of $7 million to
write off the remaining carrying value of several individually
insignificant trademarks, which were abandoned during the year.
Associated gross carrying amounts of $16 million and the
related accumulated amortization were retired from the
Companys balance sheet.
For the periods presented, the Companys intangible assets
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization
|
|
|
Gross
|
|
|
|
|
carrying
|
|
Accumulated
|
|
|
amount
|
|
amortization
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Trademarks
|
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
14
|
|
|
$
|
13
|
|
Other
|
|
|
41
|
|
|
|
29
|
|
|
|
28
|
|
|
|
28
|
|
|
|
Total
|
|
$
|
60
|
|
|
$
|
48
|
|
|
$
|
42
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Amortization expense (a)
|
|
$
|
1
|
|
|
$
|
8
|
|
|
|
|
|
|
(a)
|
|
The currently estimated aggregate
amortization expense for each of the five succeeding fiscal
years is approximately $2 million per year.
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization
|
|
|
Total carrying amount
|
|
(millions)
|
|
2008
|
|
2007
|
|
Trademarks
|
|
$
|
1,443
|
|
|
$
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the carrying amount of goodwill
|
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
North
|
|
|
|
Latin
|
|
Pacific
|
|
|
(millions)
|
|
America
|
|
Europe
|
|
America
|
|
(a)
|
|
Consolidated
|
|
December 30, 2006
|
|
$
|
3,446
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
3,448
|
|
Acquisitions
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
December 29, 2007
|
|
$
|
3,513
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
3,515
|
|
Purchase accounting adjustments
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Acquisitions
|
|
|
25
|
|
|
|
77
|
|
|
|
|
|
|
|
37
|
|
|
|
139
|
|
Currency translation adjustment
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(18
|
)
|
|
|
January 3, 2009
|
|
$
|
3,539
|
|
|
$
|
61
|
|
|
$
|
|
|
|
$
|
37
|
|
|
$
|
3,637
|
|
|
|
|
|
|
(a)
|
|
Includes Australia, Asia and South
Africa.
|
NOTE 3
EXIT OR DISPOSAL ACTIVITIES
The Company views its continued spending on cost-reduction
initiatives as part of its ongoing operating principles to
provide greater visibility in achieving its long-term profit
growth targets. Initiatives undertaken are currently expected to
recover cash implementation costs within a five-year period of
completion. Each cost-reduction initiative is normally up to
three years in duration. Upon completion (or as each major stage
is completed in the case of multi-year programs), the project
begins to deliver cash savings
and/or
reduced depreciation.
Cost
summary
The Company recorded $27 million of costs in 2008
associated with exit or disposal activities comprised of
$7 million of asset write offs, $17 million of
severance and other cash costs and $3 million related to
pension costs. $23 million of the 2008 charges were
recorded in cost of goods sold within the Europe operating
segment, with the balance recorded in selling, general and
administrative (SGA) expense in the Latin America operating
segment.
For 2007, the Company recorded charges of $100 million,
comprised of $7 million of asset write-offs,
$72 million for severance and other exit costs including
route franchise settlements, $15 million for other cash
expenditures, and $6 million for a multiemployer pension
plan withdrawal liability. $23 million of the total 2007
charges were recorded in cost of goods sold within the Europe
operating segment results, with $77 million recorded in SGA
expense within the North America operating results.
For 2006, the Company recorded charges of $82 million,
comprised of $20 million of asset write-offs,
$30 million for severance and other exit costs,
$9 million for other cash expenditures, $4 million for
a multiemployer pension plan withdrawal liability, and
$19 million for pension and other postretirement plan
curtailment losses and special termination benefits.
$74 million was recorded in cost of goods sold within
37
operating segment results, with $8 million recorded in SGA
expense within corporate results. The Companys operating
segments were impacted as follows (in millions): North
America$46; Europe$28.
Exit cost reserves at January 3, 2009 were $2 million
related to severance payments. Exit cost reserves were
$5 million at December 29, 2007, consisting of
$2 million for severance and $3 million for lease
termination payments.
Specific
initiatives
During the fourth quarter of 2008, the Company executed a
cost-reduction initiative in Latin America that resulted in the
elimination of approximately 120 salaried positions. The cost of
the program was $4 million and was recorded in Latin
Americas SGA expense. The charge related primarily to
severance benefits which were paid by the end of the year. There
were no reserves as of January 3, 2009 related to this
program.
The Company commenced a multi-year European manufacturing
optimization plan in 2006 to improve utilization of its facility
in Manchester, England and to better align production in Europe.
The project resulted in an elimination of approximately
220 hourly and salaried positions from the Manchester
facility through voluntary early retirement and severance
programs. The pension trust funding requirements of these early
retirements exceeded the recognized benefit expense by
$5 million which was funded in 2006. During this program
certain manufacturing equipment was removed from service.
All of the costs for the European manufacturing optimization
plan have been recorded in cost of goods sold within the
Companys Europe operating segment. The following tables
present total project costs and a reconciliation of employee
severance reserves for this initiative. All other cash costs
were paid in the period incurred. The project was completed in
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project costs to date
|
|
Employee
|
|
Other cash
|
|
Asset
|
|
Retirement
|
|
|
(millions)
|
|
severance
|
|
costs (a)
|
|
write-offs
|
|
benefits (b)
|
|
Total
|
|
Year ended December 30, 2006
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
9
|
|
|
$
|
28
|
|
Year ended December 29, 2007
|
|
|
7
|
|
|
|
8
|
|
|
|
4
|
|
|
|
|
|
|
|
19
|
|
Year ended January 3, 2009
|
|
|
5
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
8
|
|
|
|
Total project costs
|
|
$
|
24
|
|
|
$
|
13
|
|
|
$
|
6
|
|
|
$
|
12
|
|
|
$
|
55
|
|
|
|
|
|
|
(a)
|
|
Primarily includes expenditures for
equipment removal and relocation, and temporary contracted
services to facilitate employee transitions.
|
|
|
(b)
|
|
Pension plan curtailment losses and
special termination benefits recognized under
SFAS No. 88 Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance reserves to date
|
|
Beginning
|
|
|
|
|
|
End of
|
(millions)
|
|
of period
|
|
Accruals
|
|
Payments
|
|
period
|
|
Year ended December 29, 2007
|
|
$
|
12
|
|
|
$
|
7
|
|
|
$
|
(19
|
)
|
|
$
|
|
|
Year ended January 3, 2009
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
(3
|
)
|
|
$
|
2
|
|
|
|
In October 2007, management committed to reorganize certain
production processes at the Companys plants in Valls,
Spain and Bremen, Germany. Commencement of this plan followed
consultation with union representatives at the Bremen facility
regarding the elimination of approximately 120 employee
positions. This reorganization plan improved manufacturing and
distribution efficiency across the Companys continental
European operations, and has been completed as of the end of the
Companys 2008 fiscal year.
All of the costs for European production process realignment
have been recorded in cost of goods sold within the
Companys Europe operating segment.
The following tables present total project costs and a
reconciliation of employee severance reserves for this
initiative. All other cash costs were paid in the period
incurred.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project costs to date
|
|
Employee
|
|
Other cash
|
|
Asset
|
|
|
(millions)
|
|
severance
|
|
costs (a)
|
|
write-offs
|
|
Total
|
|
Year ended December 29, 2007
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
4
|
|
Year ended January 3, 2009
|
|
|
4
|
|
|
|
1
|
|
|
|
10
|
|
|
|
15
|
|
|
|
Total project costs
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
11
|
|
|
$
|
19
|
|
|
|
|
|
|
(a)
|
|
Primarily includes expenditures for
equipment removal and relocation, and temporary contracted
services to facilitate employee transitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance reserves to date
|
|
Beginning
|
|
|
|
|
|
End of
|
(millions)
|
|
of period
|
|
Accruals
|
|
Payments
|
|
period
|
|
Year ended December 29, 2007
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
2
|
|
Year ended January 3, 2009
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
(6
|
)
|
|
$
|
|
|
|
|
In July 2007, management commenced a plan to reorganize the
Companys direct store-door delivery (DSD) operations in
the southeastern United States. This DSD reorganization plan was
intended to integrate the Companys southeastern sales and
distribution regions with the rest of its U.S. DSD
operations, resulting in greater efficiency across the
nationwide network. The Company exited approximately 517
distribution route franchise agreements with independent
contractors. The plan also resulted in the involuntary
termination or relocation of approximately 300 employee
positions. Total project costs incurred were $77 million,
principally consisting of cash expenditures for route franchise
settlements and to a lesser extent, for employee separation,
relocation, and reorganization. Exit cost reserves were
$3 million as of December 29, 2007 and were paid in
2008. This initiative is complete.
During 2006, the Company commenced several initiatives to
enhance the productivity and efficiency of its U.S. cereal
manufacturing network, primarily through technological and
sourcing improvements in warehousing and packaging operations.
In conjunction with these initiatives, the Company offered
voluntary separation incentives, which resulted in the
retirement of approximately 80 hourly employees by early
2007. During 2006, the Company incurred approximately
$15 million of total up-front costs, comprised of
approximately 20% asset write-offs and 80% cash
38
costs, including $10 million of pension and other
postretirement plan curtailment losses. These initiatives were
complete by the end of 2007.
Also during 2006, the Company undertook an initiative to improve
customer focus and selling efficiency within a particular Latin
American market, leading to a shift from a third-party
distributor to a direct sales force model. As a result of this
initiative, the Company paid $8 million in cash during 2006
to exit the existing distribution arrangement.
During 2008 the Company finalized its pension plan withdrawal
liability related to its North America snacks bakery
consolidation which was executed in 2005 and 2006. The final
liability was $20 million, $16 million of which was
recognized in 2005 and $4 million in 2006; and was paid in
the third quarter of 2008.
NOTE 4
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes non-operating items such as
interest income, charitable donations, and gains and losses from
foreign currency exchange and commodity derivatives.
Other income (expense), net includes charges for contributions
to the Kelloggs Corporate Citizenship Fund, a private
trust established for charitable giving, as follows (in
millions): 2008$4; 2007$12; 2006$3. Interest
income was (in millions): 2008$20; 2007$23;
2006$11. Net foreign currency exchange gains (losses) were
(in millions): 2008$5; 2007$(8); 2006$(2).
Income (expense) recognized for premiums on commodity options
was (in millions): 2008$(12); 2007$(7);
2006$0. Gains (losses) on Company Owned Life Insurance
(COLI), due to changes in cash surrender value, were
(in millions): 2008$(12); 2007$9; 2006$12.
NOTE 5
EQUITY
During the year ended December 30, 2006, the Company
revised the classification of $101 million of prior net
losses realized upon reissuance of treasury shares from capital
in excess of par value to retained earnings on the Consolidated
Balance Sheet. Such reissuances occurred in connection with
employee and director stock option exercises and other
share-based settlements. The revision did not have an effect on
the Companys results of operations, total
shareholders equity, or cash flows.
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 in the following table. The total number of
anti-dilutive potential common shares excluded from the
reconciliation for each period was (in millions): 20085.8;
20070.8; 20060.7.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Net
|
|
|
Net
|
|
shares
|
|
earnings
|
(millions, except per share data)
|
|
earnings
|
|
outstanding
|
|
per share
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1,148
|
|
|
|
382
|
|
|
$
|
3.01
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
3
|
|
|
|
(.02
|
)
|
|
|
Diluted
|
|
$
|
1,148
|
|
|
|
385
|
|
|
$
|
2.99
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1,103
|
|
|
|
396
|
|
|
$
|
2.79
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
4
|
|
|
|
(.03
|
)
|
|
|
Diluted
|
|
$
|
1,103
|
|
|
|
400
|
|
|
$
|
2.76
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1,004
|
|
|
|
397
|
|
|
$
|
2.53
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
3
|
|
|
|
(.02
|
)
|
|
|
Diluted
|
|
$
|
1,004
|
|
|
|
400
|
|
|
$
|
2.51
|
|
|
|
Stock
transactions
The Company issues shares to employees and directors under
various equity-based compensation and stock purchase programs,
as further discussed in Note 8. The number of shares issued
during the periods presented was (in millions): 20085;
20074; 20067. Additionally, during 2006, the Company
established Kellogg
Directtm,
a direct stock purchase and dividend reinvestment plan for
U.S. shareholders. The total number of shares issued for
that purpose was less than one million in 2008, 2007 and 2006.
To offset these issuances and for general corporate purposes,
the Companys Board of Directors has authorized management
to repurchase specified amounts of the Companys common
stock in each of the periods presented. In each of the years
2008, 2007 and 2006, the Company spent $650 million to
repurchase the following number of shares (in millions);
200813; 200712; and 200615. The 2006 activity
consisted principally of a February 2006 private transaction
with the W. K. Kellogg Foundation Trust to repurchase
approximately 13 million shares for $550 million.
On July 25, 2008, the Board of Directors authorized the
repurchase of $500 million of Kellogg common stock during
2008 and 2009 for general corporate purposes and to offset
issuances for employee benefit programs. No purchases were made
under this program. This authorization was canceled on
39
February 4, 2009 and replaced with a $650 million
authorization for 2009.
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. 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 beginning in 2007
includes adjustments for net experience losses and prior service
cost pursuant to SFAS No. 158 Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans. The Company adopted SFAS No. 158 as of
the end of its 2006 fiscal year.
During 2008, the assets of the Companys postretirement and
postemployment benefit plans suffered losses of over
$1 billion due to the asset allocation of 70% in the equity
market. These losses are recognized in other comprehensive
income and for pension plans is recognized in the calculated
value of plan assets over a five-year period and once
recognized, are amortized using a declining-balance method over
the average remaining service period of active plan participants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
Pre-tax
|
|
(expense)
|
|
After-tax
|
(millions)
|
|
amount
|
|
benefit
|
|
amount
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
$
|
1,148
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
(431
|
)
|
|
$
|
|
|
|
|
(431
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedges
|
|
|
(33
|
)
|
|
|
12
|
|
|
|
(21
|
)
|
Reclassification to net earnings
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
3
|
|
Postretirement and postemployment benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts arising during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net experience loss
|
|
|
(1,402
|
)
|
|
|
497
|
|
|
|
(905
|
)
|
Prior service cost
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
2
|
|
Reclassification to net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net experience loss
|
|
|
49
|
|
|
|
(17
|
)
|
|
|
32
|
|
Prior service cost
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
6
|
|
|
|
|
|
$
|
(1,800
|
)
|
|
$
|
486
|
|
|
|
(1,314
|
)
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
$
|
(166
|
)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
$
|
1,103
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
4
|
|
|
$
|
|
|
|
|
4
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on cash flow hedges
|
|
|
34
|
|
|
|
(11
|
)
|
|
|
23
|
|
Reclassification to net earnings
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
4
|
|
Postretirement and postemployment benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts arising during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net experience gain
|
|
|
187
|
|
|
|
(68
|
)
|
|
|
119
|
|
Prior service cost
|
|
|
7
|
|
|
|
(4
|
)
|
|
|
3
|
|
Reclassification to net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net experience loss
|
|
|
89
|
|
|
|
(30
|
)
|
|
|
59
|
|
Prior service cost
|
|
|
10
|
|
|
|
(3
|
)
|
|
|
7
|
|
|
|
|
|
$
|
336
|
|
|
$
|
(117
|
)
|
|
|
219
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
$
|
1,322
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
$
|
1,004
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
10
|
|
|
$
|
|
|
|
|
10
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedges
|
|
|
(12
|
)
|
|
|
4
|
|
|
|
(8
|
)
|
Reclassification to net earnings
|
|
|
12
|
|
|
|
(4
|
)
|
|
|
8
|
|
Minimum pension liability adjustments
|
|
|
172
|
|
|
|
(60
|
)
|
|
|
112
|
|
|
|
|
|
$
|
182
|
|
|
$
|
(60
|
)
|
|
|
122
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
$
|
1,126
|
|
|
|
Accumulated other comprehensive income (loss) at year end
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
Foreign currency translation adjustments
|
|
$
|
(836
|
)
|
|
$
|
(405
|
)
|
Cash flow hedges unrealized net loss
|
|
|
(24
|
)
|
|
|
(6
|
)
|
Postretirement and postemployment benefits:
|
|
|
|
|
|
|
|
|
Net experience loss
|
|
|
(1,235
|
)
|
|
|
(362
|
)
|
Prior service cost
|
|
|
(46
|
)
|
|
|
(54
|
)
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
(2,141
|
)
|
|
$
|
(827
|
)
|
|
|
40
NOTE 6
LEASES AND OTHER COMMITMENTS
The Companys leases are generally for equipment and
warehouse space. Rent expense on all operating leases was (in
millions): 2008-$145; 2007-$135; 2006-$123. The Company was
subject to a residual value guarantee on one operating lease of
approximately $13 million, which was scheduled to expire in
July 2007. During the first quarter of 2007, the Company
recognized a liability in connection with this guarantee of
approximately $5 million, which was recorded in cost of
goods sold within the Companys North America operating
segment. During the second quarter of 2007, the Company
terminated the lease agreement and purchased the facility for
approximately $16 million, which discharged the residual
value guarantee obligation. During 2008, 2007 and 2006, the
Company entered into approximately $3 million,
$5 million and $2 million, respectively, in capital
lease agreements to finance the purchase of equipment.
At January 3, 2009, future minimum annual lease commitments
under noncancelable operating and capital leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Capital
|
(millions)
|
|
leases
|
|
leases
|
|
2009
|
|
$
|
135
|
|
|
$
|
1
|
|
2010
|
|
|
119
|
|
|
|
1
|
|
2011
|
|
|
99
|
|
|
|
1
|
|
2012
|
|
|
75
|
|
|
|
1
|
|
2013
|
|
|
56
|
|
|
|
0
|
|
2014 and beyond
|
|
|
143
|
|
|
|
2
|
|
|
|
Total minimum payments
|
|
$
|
627
|
|
|
$
|
6
|
|
Amount representing interest
|
|
|
|
|
|
|
(1
|
)
|
|
|
Obligations under capital leases
|
|
|
|
|
|
|
5
|
|
Obligations due within one year
|
|
|
|
|
|
|
(1
|
)
|
|
|
Long-term obligations under capital leases
|
|
|
|
|
|
$
|
4
|
|
|
|
One of the Companys subsidiaries was guarantor on loans to
independent contractors for the purchase of DSD route
franchises. In July 2007, the Company exited these agreements.
Refer to Note 3 for further information.
The Company has provided various standard indemnifications in
agreements to sell and purchase business assets and lease
facilities over the past several years, related primarily to
pre-existing tax, environmental, and employee benefit
obligations. Certain of these indemnifications are limited by
agreement in either amount
and/or term
and others are unlimited. The Company has also provided various
hold harmless provisions within certain service type
agreements. Because the Company is not currently aware of any
actual exposures associated with these indemnifications,
management is unable to estimate the maximum potential future
payments to be made. At January 3, 2009, the Company had
not recorded any liability related to these indemnifications.
NOTE 7
DEBT
Notes payable at year end consisted of commercial paper
borrowings in the United States and Canada, and to a lesser
extent, bank loans of foreign subsidiaries at competitive market
rates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Effective
|
|
|
|
Effective
|
|
|
Principal
|
|
interest
|
|
Principal
|
|
interest
|
(dollars in millions)
|
|
amount
|
|
rate
|
|
amount
|
|
rate
|
|
U.S. commercial paper
|
|
$
|
1,272
|
|
|
|
4.1
|
%
|
|
$
|
1,434
|
|
|
|
5.3
|
%
|
Canadian commercial paper
|
|
|
38
|
|
|
|
2.8
|
%
|
|
|
5
|
|
|
|
4.3
|
%
|
Other
|
|
|
77
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
$
|
1,387
|
|
|
|
|
|
|
$
|
1,489
|
|
|
|
|
|
|
|
Long-term debt at year end consisted primarily of issuances of
fixed rate U.S. Dollar Notes, as follows:
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
(a) 6.6% U.S. Dollar Notes due 2011
|
|
$
|
1,426
|
|
|
$
|
1,425
|
|
(a) 7.45% U.S. Dollar Debentures due 2031
|
|
|
1,089
|
|
|
|
1,088
|
|
(b) 2.875% U.S. Dollar Notes due 2008
|
|
|
|
|
|
|
465
|
|
(c) 5.125% U.S. Dollar Notes due 2012
|
|
|
749
|
|
|
|
750
|
|
(d) 4.25% U.S. Dollar Notes due 2013
|
|
|
792
|
|
|
|
|
|
Other
|
|
|
13
|
|
|
|
8
|
|
|
|
|
|
|
4,069
|
|
|
|
3,736
|
|
Less current maturities
|
|
|
(1
|
)
|
|
|
(466
|
)
|
|
|
Balance at year end
|
|
$
|
4,068
|
|
|
$
|
3,270
|
|
|
|
|
|
|
(a)
|
|
In March 2001, the Company issued
$4.6 billion of long-term debt instruments, primarily to
finance the acquisition of Keebler Foods Company. The preceding
table reflects the remaining principal amounts outstanding as of
year-end 2008 and 2007. The effective interest rates on these
Notes, reflecting issuance discount and swap settlement, were as
follows: due
2011-7.08%;
due
2031-7.62%.
Initially, these instruments were privately placed, or sold
outside the United States, in reliance on exemptions from
registration under the Securities Act of 1933, as amended (the
1933 Act). The Company then exchanged new debt
securities for these initial debt instruments, with the new debt
securities being substantially identical in all respects to the
initial debt instruments, except for being registered under the
1933 Act. These debt securities contain standard events of
default and covenants. The Notes due 2011 and the Debentures due
2031 may be redeemed in whole or in part by the Company at
any time at prices determined under a formula (but not less than
100% of the principal amount plus unpaid interest to the
redemption date). In December 2007, the Company redeemed
$72 million of the Notes due 2011.
|
|
|
(b)
|
|
In June 2003, the Company issued
$500 million of five-year 2.875% fixed rate U.S. Dollar
Notes, using the proceeds from these Notes to replace maturing
long-term debt. These Notes were issued under an existing shelf
registration statement. The effective interest rate on these
Notes, reflecting issuance discount and swap settlement, was
3.35%. The Notes contained customary covenants that limited the
ability of the Company and its restricted subsidiaries (as
defined) to incur certain liens or enter into certain sale and
lease-back transactions. In December 2005, the Company redeemed
$35 million of these Notes, and in June 2008 the Company
repaid the remainder of the notes.
|
|
|
(c)
|
|
In December 2007, the Company
issued $750 million of five-year 5.125% fixed rate U.S.
Dollar Notes, using the proceeds from these Notes to replace a
portion of its U.S. commercial paper. These Notes were issued
under an existing shelf registration statement. The effective
interest rate on these Notes, reflecting issuance discount and
swap settlement, is 5.12%. The Notes contain customary covenants
that limit the ability of the Company and its restricted
subsidiaries (as defined) to incur certain liens or enter into
certain sale and lease-back transactions. The customary
covenants also contain a change of control provision.
|
41
|
|
|
(d)
|
|
On March 6, 2008, the Company
issued $750 million of five-year 4.25% fixed rate U.S.
Dollar Notes, using the proceeds from these Notes to retire a
portion of its U.S. commercial paper. These Notes were issued
under an existing shelf registration statement. The Notes
contain customary covenants that limit the ability of the
Company and its restricted subsidiaries (as defined) to incur
certain liens or enter into certain sale and lease-back
transactions. The customary covenants also contain a change of
control provision. In conjunction with this debt issuance, the
Company entered into interest rate swaps with notional amounts
totaling $750 million, which effectively converted this
debt from a fixed rate to a floating rate obligation for the
duration of the five-year term. These derivative instruments,
which were designated as fair value hedges of the debt
obligation, resulted in an effective interest rate of 3.09% as
of January 3, 2009. The fair value adjustment for the
interest rate swaps was $43 million at January 3,
2009, and is recorded directly in the hedged debt balance.
|
In February 2007, the Company and two of its subsidiaries (the
Issuers) established a program under which the
Issuers may issue euro-commercial paper notes up to a maximum
aggregate amount outstanding at any time of $750 million or
its equivalent in alternative currencies. The notes may have
maturities ranging up to 364 days and will be senior
unsecured obligations of the applicable Issuer. Notes issued by
subsidiary Issuers will be guaranteed by the Company. The notes
may be issued at a discount or may bear fixed or floating rate
interest or a coupon calculated by reference to an index or
formula. As of January 3, 2009, no notes were outstanding
under this program.
At January 3, 2009, the Company had $2.2 billion of
short-term lines of credit, virtually all of which were unused
and available for borrowing on an unsecured basis. These lines
were comprised principally of an unsecured Five-Year Credit
Agreement, which the Company entered into during November 2006
and expires in 2011. The agreement allows the Company to borrow,
on a revolving credit basis, up to $2.0 billion, to obtain
letters of credit in an aggregate amount up to $75 million,
and to provide a procedure for lenders to bid on short-term debt
of the Company. The agreement contains customary covenants and
warranties, including specified restrictions on indebtedness,
liens, sale and leaseback transactions, and a specified interest
coverage ratio. If an event of default occurs, then, to the
extent permitted, the administrative agent may terminate the
commitments under the credit facility, accelerate any
outstanding loans, and demand the deposit of cash collateral
equal to the lenders letter of credit exposure plus
interest. The Company entered into a $400 million unsecured
364-Day
Credit Agreement effective January 31, 2007, containing
customary covenants, warranties, and restrictions similar to
those described herein for the Five-Year Credit Agreement. The
facility was available for general corporate purposes, including
commercial paper
back-up. The
$400 million Credit Agreement expired at the end of January
2008 and the Company did not renew it.
Scheduled principal repayments on long-term debt are (in
millions): 2009$1; 2010$1; 2011$1,428;
2012$751; 2013$752; 2014 and beyond$1,108.
Interest paid was (in millions): 2008$305; 2007$305;
2006$299. Interest expense capitalized as part of the
construction cost of fixed assets was (in millions):
2008$6; 2007$5; 2006$3.
NOTE 8
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 United States 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 within this Note.
The 2003 Long-Term Incentive Plan (2003 Plan),
approved by shareholders in 2003, permits benefits to be awarded
to employees and officers in the form of incentive and
non-qualified stock options, performance units, restricted stock
or restricted stock units, and stock appreciation rights. The
2003 Plan authorizes the issuance of a total of
(a) 25 million shares plus (b) shares not issued
under the 2001 Long-Term Incentive Plan, with no more than
5 million shares to be issued in satisfaction of
performance units, performance-based restricted shares and other
awards (excluding stock options and stock appreciation rights),
and with additional annual limitations on awards or payments to
individual participants. At January 3, 2009, there were
6.6 million remaining authorized, but unissued, shares
under the 2003 Plan. During the periods presented, specific
awards and terms of those awards granted under the 2003 Plan are
described in the following sections of this Note.
The Non-Employee Director Stock Plan (Director Plan)
was approved by shareholders in 2000 and allows each eligible
non-employee director to receive 2,100 shares of the
Companys common stock annually and annual grants of
options to purchase 5,000 shares of the Companys
common stock. At January 3, 2009, there were
0.3 million remaining authorized, but unissued, shares
under this plan. Shares other than options are placed in the
Kellogg Company Grantor Trust for Non-Employee Directors (the
Grantor Trust). Under the terms of the Grantor
Trust, shares are available to a director only upon termination
of service on the Board. Under this plan, awards were as
follows: 200854,465 options and 19,964 shares;
200751,791 options and 21,702 shares;
200650,000 options and 17,000 shares. Options granted
to directors under this plan are included in the option activity
tables within this Note.
42
The 2002 Employee Stock Purchase Plan was approved by
shareholders in 2002 and permits eligible employees to purchase
Company stock at a discounted price. This plan allows for a
maximum of 2.5 million shares of Company stock to be issued
at a purchase price equal to 95% of the fair market value of the
stock on the last day of the quarterly purchase period. Total
purchases through this plan for any employee are limited to a
fair market value of $25,000 during any calendar year. The Plan
was amended in 2007. Prior to amendment, Company stock was
issued at a purchase price equal to 85% of the fair market value
of the stock on the first or last day of the quarterly purchase
period. At January 3, 2009, there were 1.1 million
remaining authorized, but unissued, shares under this plan.
Shares were purchased by employees under this plan as follows
(approximate number of shares): 2008157,000;
2007232,000; 2006237,000. Options granted to
employees to purchase discounted stock under this plan are
included in the option activity tables within this Note.
Additionally, during 2002, a foreign subsidiary of the Company
established a stock purchase plan for its employees. Subject to
limitations, employee contributions to this plan are matched 1:1
by the Company. Under this plan, shares were granted by the
Company to match an approximately equal number of shares
purchased by employees as follows (approximate number of
shares): 200878,000; 200775,000; 200680,000.
The Executive Stock Purchase Plan was established in 2002 to
encourage and enable certain eligible employees of the Company
to acquire Company stock, and to align more closely the
interests of those individuals and the Companys
shareholders. This plan allowed for a maximum of
500,000 shares of Company stock to be issued. Under this
plan in 2006, approximately 4,000 shares were granted by
the Company to executives in lieu of cash bonuses. No shares
were granted under this plan in 2007. The plan expired in 2007
with approximately 460,000 authorized but unissued shares
remaining unused.
Compensation expense for all types of equity-based programs and
the related income tax benefit recognized were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Pre-tax compensation expense
|
|
$
|
74
|
|
|
$
|
81
|
|
|
$
|
96
|
|
|
|
Related income tax benefit
|
|
$
|
26
|
|
|
$
|
29
|
|
|
$
|
34
|
|
|
|
Pre-tax compensation expense for 2008 included $4 million
of expense related to the modification of certain stock options
to eliminate the accelerated ownership feature (AOF)
and $13 million representing cash compensation to holders
of modified stock options to replace the value of the AOF, which
is discussed in the section, Stock options.
As of January 3, 2009, total stock-based compensation cost
related to nonvested awards not yet recognized was approximately
$29 million and the weighted-average period over which this
amount was expected to be recognized was approximately
1.4 years.
Cash flows realized upon exercise or vesting of stock-based
awards in the periods presented are included in the following
table. Tax benefits realized upon exercise or vesting of
stock-based awards generally represent the tax benefit of the
difference between the exercise price and the strike price of
the option.
Cash used by the Company to settle equity instruments granted
under stock-based awards was insignificant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Total cash received from option exercises and similar instruments
|
|
$
|
175
|
|
|
$
|
163
|
|
|
$
|
218
|
|
|
|
Tax benefits realized upon exercise or vesting of stock-based
awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Windfall benefits classified as financing cash flow
|
|
$
|
12
|
|
|
$
|
15
|
|
|
$
|
22
|
|
Other amounts classified as operating cash flow
|
|
|
17
|
|
|
|
11
|
|
|
|
23
|
|
|
|
Total
|
|
$
|
29
|
|
|
$
|
26
|
|
|
$
|
45
|
|
|
|
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 periods presented to employees and directors
under various long-term incentive plans and share repurchases
under the Companys stock repurchase authorizations. 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 under the 2003 Plan 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
under the Director Plan included similar terms, but vested
immediately.
Effective April 25, 2008, the Company eliminated the AOF
from all outstanding stock options. Stock options that contained
the AOF feature included the vested pre-2004 option awards and
all reload options. Reload options are the stock options 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
options awards containing the AOF. The reload options were
immediately vested with an expiration date which was the same as
the original option grant. Apart from removing the AOF, the
stock
43
options were not otherwise affected. Holders of the stock
options received cash compensation to replace the value of the
AOF.
The Company accounted for the elimination of the AOF as a
modification in accordance with SFAS No. 123(R),
Share-Based Payment, which required the Company to
record a modification charge equal to the difference between the
value of the modified stock options on the date of modification
and their values immediately prior to modification. Since the
modified stock options were 100% vested and had relatively short
remaining contractual terms of one to five years, the Company
used a Black-Scholes model to value the awards for the purpose
of calculating the modification charge. The total fair value of
the modified stock options increased by $4 million due to
an increase in the expected term.
As a result of this action, pre-tax compensation expense for
2008 included $4 million of expense related to the
modification of stock options and $13 million representing
cash compensation paid to holders of the stock options to
replace the value of the AOF. Approximately 900 employees
were holders of the modified stock options.
Management estimates the fair value of each annual stock option
award on the date of grant using a lattice-based option
valuation model. Composite assumptions are 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, and to a lesser extent,
on implied volatilities from traded options on the
Companys stock. Historical volatility corresponds to the
contractual term of the options granted. The Company uses
historical data to estimate option exercise and employee
termination within the valuation models; separate groups of
employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected term
of options granted represents the period of time that options
granted are expected to be outstanding; the weighted-average
expected term for all employee groups is presented in the
following table. The risk-free rate for periods within the
contractual life of the options is based on the
U.S. Treasury yield curve in effect at the time of grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option valuation model assumptions
|
|
|
|
|
|
|
|
|
for grants within the year ended:
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Weighted-average expected volatility
|
|
|
20.75
|
%
|
|
|
17.46
|
%
|
|
|
17.94
|
%
|
|
|
|
|
Weighted-average expected term (years)
|
|
|
4.08
|
|
|
|
3.20
|
|
|
|
3.21
|
|
|
|
|
|
Weighted-average risk-free interest rate
|
|
|
2.66
|
%
|
|
|
4.58
|
%
|
|
|
4.65
|
%
|
|
|
|
|
Dividend yield
|
|
|
2.40
|
%
|
|
|
2.40
|
%
|
|
|
2.40
|
%
|
|
|
|
|
|
|
Weighed-average fair value of options granted
|
|
$
|
7.90
|
|
|
$
|
7.24
|
|
|
$
|
6.67
|
|
|
|
|
|
|
|
A summary of option activity for 2008 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 year
|
|
|
26
|
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
Forfeitures and expirations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
26
|
|
|
$
|
45
|
|
|
|
5.8
|
|
|
$
|
55
|
|
|
|
Exercisable, end of year
|
|
|
20
|
|
|
$
|
44
|
|
|
|
3.8
|
|
|
$
|
55
|
|
|
|
Additionally, option activity for comparable prior-year periods
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
(millions, except per share data)
|
|
2007
|
|
2006
|
|
Outstanding, beginning of year
|
|
|
27
|
|
|
|
29
|
|
Granted
|
|
|
8
|
|
|
|
10
|
|
Exercised
|
|
|
(8
|
)
|
|
|
(11
|
)
|
Forfeitures and expirations
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
Outstanding, end of year
|
|
|
26
|
|
|
|
27
|
|
|
|
Exercisable, end of year
|
|
|
20
|
|
|
|
20
|
|
|
|
Weighted-average exercise price:
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
$
|
41
|
|
|
$
|
38
|
|
Granted
|
|
|
51
|
|
|
|
46
|
|
Exercised
|
|
|
41
|
|
|
|
37
|
|
Forfeitures and expirations
|
|
|
44
|
|
|
|
43
|
|
|
|
Outstanding, end of year
|
|
$
|
44
|
|
|
$
|
41
|
|
|
|
Exercisable, end of year
|
|
$
|
42
|
|
|
$
|
40
|
|
|
|
The total intrinsic value of options exercised during the
periods presented was (in millions): 2008$55;
2007$86; 2006$114.
Other
stock-based awards
During the periods presented, other stock-based awards consisted
principally of executive performance shares and restricted stock
granted under the 2003 Plan.
In 2008, 2007 and 2006, the Company made performance share
awards to a limited number of senior executive-level employees,
which entitles these employees to receive a specified number of
shares of the Companys common stock on the vesting date,
provided cumulative three-year targets are achieved. The
cumulative three-year targets involved operating profit for the
2008 grant, cash flow for the 2007 grant and net sales growth
for the 2006 grant. Management estimates 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 2008, 2007 and 2006 target grants (as revised for
non-vested forfeitures and other adjustments) currently
correspond to approximately 187,000, 185,000 and
241,000 shares, respectively, with a grant-date fair value
of approximately $47, $46,
44
and $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. Based on the market price of the
Companys common stock at year-end 2008, the maximum future
value that could be awarded on the vesting date was (in
millions): 2008 award$17; 2007 award$17; and 2006
award$22. The 2005 performance share award, payable in
stock, was settled at 200% of target in February 2008 for a
total dollar equivalent of $28 million.
The Company also periodically grants restricted stock and
restricted stock units to eligible employees under the 2003
Plan. 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. Management estimates 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 ended January 3, 2009, is presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
average
|
Employee restricted stock
|
|
Shares
|
|
grant-date
|
and restricted stock units
|
|
(thousands)
|
|
fair value
|
|
Non-vested, beginning of year
|
|
|
374
|
|
|
$
|
47
|
|
Granted
|
|
|
162
|
|
|
|
52
|
|
Vested
|
|
|
(144
|
)
|
|
|
44
|
|
Forfeited
|
|
|
(15
|
)
|
|
|
49
|
|
|
|
Non-vested, end of year
|
|
|
377
|
|
|
$
|
48
|
|
|
|
Grants of restricted stock and restricted stock units for
comparable prior-year periods were: 200755,000;
2006190,000.
The total fair value of restricted stock and restricted stock
units vesting in the periods presented was (in millions):
2008$7; 2007$6; 2006$8.
NOTE 9
PENSION BENEFITS
The Company sponsors a number of U.S. and foreign pension
plans to provide retirement benefits for its employees. The
majority of these plans are funded or unfunded defined benefit
plans, although the Company does participate in a limited number
of multiemployer or other defined contribution plans for certain
employee groups. Defined benefits for salaried employees are
generally based on salary and years of service, while union
employee benefits are generally a negotiated amount for each
year of service. The Company uses its fiscal year end as the
measurement date for its defined benefit plans.
Obligations
and funded status
The aggregate change in projected benefit obligation, plan
assets, and funded status is presented in the following tables.
The Company adopted SFAS No. 158 Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans as of the end of its 2006 fiscal year. The standard
generally requires company plan sponsors to reflect the net
over- or under-funded position of a defined postretirement
benefit plan as an asset or liability on the balance sheet.
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
3,314
|
|
|
$
|
3,309
|
|
Service cost
|
|
|
85
|
|
|
|
96
|
|
Interest cost
|
|
|
197
|
|
|
|
188
|
|
Plan participants contributions
|
|
|
3
|
|
|
|
6
|
|
Amendments
|
|
|
11
|
|
|
|
(9
|
)
|
Actuarial gain (loss)
|
|
|
(18
|
)
|
|
|
(153
|
)
|
Benefits paid
|
|
|
(211
|
)
|
|
|
(198
|
)
|
Curtailment and special termination benefits
|
|
|
11
|
|
|
|
12
|
|
Foreign currency adjustments
|
|
|
(271
|
)
|
|
|
63
|
|
|
|
End of year
|
|
$
|
3,121
|
|
|
$
|
3,314
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value beginning of year
|
|
$
|
3,613
|
|
|
$
|
3,426
|
|
Actual return on plan assets
|
|
|
(930
|
)
|
|
|
206
|
|
Employer contributions
|
|
|
354
|
|
|
|
84
|
|
Plan participants contributions
|
|
|
3
|
|
|
|
6
|
|
Benefits paid
|
|
|
(177
|
)
|
|
|
(184
|
)
|
Special termination benefits
|
|
|
3
|
|
|
|
9
|
|
Foreign currency adjustments
|
|
|
(292
|
)
|
|
|
66
|
|
|
|
Fair value end of year
|
|
$
|
2,574
|
|
|
$
|
3,613
|
|
|
|
Funded status
|
|
$
|
(547
|
)
|
|
$
|
299
|
|
|
|
Amounts recognized in the Consolidated Balance Sheet consist
of
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
96
|
|
|
$
|
481
|
|
Current liabilities
|
|
|
(12
|
)
|
|
|
(11
|
)
|
Noncurrent liabilities
|
|
|
(631
|
)
|
|
|
(171
|
)
|
|
|
Net amount recognized
|
|
$
|
(547
|
)
|
|
$
|
299
|
|
|
|
Amounts recognized in accumulated other comprehensive income
consist of
|
|
|
|
|
|
|
|
|
Net experience loss
|
|
$
|
1,432
|
|
|
$
|
377
|
|
Prior service cost
|
|
|
82
|
|
|
|
96
|
|
|
|
Net amount recognized
|
|
$
|
1,514
|
|
|
$
|
473
|
|
|
|
The accumulated benefit obligation for all defined benefit
pension plans was $2.85 billion and $3.02 billion at
January 3, 2009 and December 29, 2007, respectively.
Information for pension plans with accumulated benefit
obligations in excess of plan assets were:
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
Projected benefit obligation
|
|
$
|
2,385
|
|
|
$
|
243
|
|
Accumulated benefit obligation
|
|
|
2,236
|
|
|
|
202
|
|
Fair value of plan assets
|
|
|
1,759
|
|
|
|
62
|
|
|
|
Expense
The components of pension expense are presented in the following
table. Pension expense for defined contribution plans relates
principally to multiemployer
45
plans in which the Company participates on behalf of certain
unionized workforces in the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Service cost
|
|
$
|
85
|
|
|
$
|
96
|
|
|
$
|
94
|
|
Interest cost
|
|
|
197
|
|
|
|
188
|
|
|
|
172
|
|
Expected return on plan assets
|
|
|
(300
|
)
|
|
|
(282
|
)
|
|
|
(257
|
)
|
Amortization of unrecognized prior service cost
|
|
|
12
|
|
|
|
13
|
|
|
|
12
|
|
Recognized net loss
|
|
|
36
|
|
|
|
64
|
|
|
|
80
|
|
Curtailment and special termination benefits net loss
|
|
|
12
|
|
|
|
4
|
|
|
|
17
|
|
|
|
Pension expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
|
42
|
|
|
|
83
|
|
|
|
118
|
|
Defined contribution plans
|
|
|
22
|
|
|
|
25
|
|
|
|
19
|
|
|
|
Total
|
|
$
|
64
|
|
|
$
|
108
|
|
|
$
|
137
|
|
|
|
Any arising obligation-related experience gain or loss is
amortized using a straight-line method over the average
remaining service period of active plan participants. Any
asset-related experience gain or loss is recognized as described
in the Assumptions section. The estimated net
experience loss and prior service cost for defined benefit
pension plans that will be amortized from accumulated other
comprehensive income into pension expense over the next fiscal
year are approximately $44 million and $12 million,
respectively.
Certain of the Companys subsidiaries sponsor 401(k) or
similar savings plans for active employees. Expense related to
these plans was (in millions): 2008$37; 2007$36;
2006$33. Company contributions to these savings plans
approximate annual expense. Company contributions to
multiemployer and other defined contribution pension plans
approximate the amount of annual expense presented in the
preceding table.
Assumptions
The worldwide weighted-average actuarial assumptions used to
determine benefit obligations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Discount rate
|
|
|
6.2%
|
|
|
|
6.2%
|
|
|
|
5.7%
|
|
Long-term rate of compensation increase
|
|
|
4.2%
|
|
|
|
4.4%
|
|
|
|
4.4%
|
|
|
|
The worldwide weighted-average actuarial assumptions used to
determine annual net periodic benefit cost were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Discount rate
|
|
|
6.2%
|
|
|
|
5.7%
|
|
|
|
5.4%
|
|
Long-term rate of compensation increase
|
|
|
4.4%
|
|
|
|
4.4%
|
|
|
|
4.4%
|
|
Long-term rate of return on plan assets
|
|
|
8.9%
|
|
|
|
8.9%
|
|
|
|
8.9%
|
|
|
|
To determine the overall expected long-term rate of return on
plan assets, the Company models expected returns over a
20-year
investment horizon with respect to the specific investment mix
of its major plans. The return assumptions used reflect a
combination of rigorous historical performance analysis and
forward-looking views of the financial markets including
consideration of current yields on long-term bonds,
price-earnings ratios of the major stock market indices, and
long-term inflation. The U.S. model, which corresponds to
approximately 70% of consolidated pension and other
postretirement benefit plan assets, incorporates a long-term
inflation assumption of 2.5% and an active management premium of
1% (net of fees) validated by historical analysis. Similar
methods are used for various foreign plans with invested assets,
reflecting local economic conditions. Although management
reviews the Companys expected long-term rates of return
annually, the benefit trust investment performance for one
particular year does not, by itself, significantly influence
this evaluation. The expected rates of return are generally not
revised, provided these rates continue to fall within a
more likely than not corridor of between the
25th and 75th percentile of expected long-term
returns, as determined by the Companys modeling process.
The expected rate of return for 2008 of 8.9% equated to
approximately the 50th percentile expectation. Any future
variance between the expected and actual rates of return on plan
assets is recognized in the calculated value of plan assets over
a five-year period and once recognized, experience gains and
losses are amortized using a declining-balance method over the
average remaining service period of active plan participants.
To conduct the annual review of discount rates, the Company uses
several published market indices with appropriate duration
weighting to assess prevailing rates on high quality debt
securities, with a primary focus on the Citigroup Pension
Liability
Index®
for the U.S. plans. To test the appropriateness of these
indices, the Company periodically conducts a matching exercise
between the expected settlement cash flows of the plans and the
bond maturities, consisting principally of
AA-rated (or
the equivalent in foreign jurisdictions) non-callable issues
with at least $25 million principal outstanding. The model
does not assume any reinvestment rates and assumes that bond
investments mature just in time to pay benefits as they become
due. For those years where no suitable bonds are available, the
portfolio utilizes a linear interpolation approach to impute a
hypothetical bond whose maturity matches the cash flows required
in those years. During 2008, the Company refined the methodology
for setting the discount rate by inputting the cash flows for
the pension, postretirement and postemployment plans into the
spot yield curve underlying the Citigroup index. The
measurement dates for the defined benefit plans are consistent
with the Companys fiscal year end. Accordingly, the
Company selects discount rates to measure the benefit
obligations that are consistent with market indices during
December of each year.
46
Plan
assets
The Companys year-end pension plan weighted-average asset
allocations by asset category were:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Equity securities
|
|
|
73%
|
|
|
|
74%
|
|
Debt securities
|
|
|
24%
|
|
|
|
23%
|
|
Other
|
|
|
3%
|
|
|
|
3%
|
|
|
|
Total
|
|
|
100%
|
|
|
|
100%
|
|
|
|
The Companys investment strategy for its major defined
benefit plans is to maintain a diversified portfolio of asset
classes with the primary goal of meeting long-term cash
requirements as they become due. Assets are invested in a
prudent manner to maintain the security of funds while
maximizing returns within the Companys guidelines. The
current weighted-average target asset allocation reflected by
this strategy is: equity securities74%; debt
securities24%; other2%. Investment in Company common
stock represented 1.8% and 1.5% of consolidated plan assets at
January 3, 2009 and December 29, 2007, respectively.
Plan funding strategies are influenced by tax regulations and
funding requirements. The Company currently expects to
contribute approximately $85 million to its defined benefit
pension plans during 2009.
Benefit
payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid (in millions):
2009$174; 2010$180; 2011$194; 2012$188;
2013$193; 2014 to 2018$1,083.
NOTE 10
NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement
The Company sponsors a number of plans to provide health care
and other welfare benefits to retired employees in the United
States and Canada, who have met certain age and service
requirements. The majority of these plans are funded or unfunded
defined benefit plans, although the Company does participate in
a limited number of multiemployer or other defined contribution
plans for certain employee groups. The Company contributes to
voluntary employee benefit association (VEBA) trusts to fund
certain U.S. retiree health and welfare benefit
obligations. The Company uses its fiscal year end as the
measurement date for these plans.
Obligations
and funded status
The aggregate change in accumulated postretirement benefit
obligation, plan assets, and funded status is presented in the
following tables. The Company adopted SFAS No. 158
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans as of the end of its 2006
fiscal year. The standard generally requires company plan
sponsors to reflect the net over- or under-funded position of a
defined postretirement benefit plan as an asset or liability on
the balance sheet.
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
Change in accumulated benefit obligation
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
1,075
|
|
|
$
|
1,208
|
|
Service cost
|
|
|
17
|
|
|
|
19
|
|
Interest cost
|
|
|
67
|
|
|
|
69
|
|
Actuarial loss (gain)
|
|
|
18
|
|
|
|
(174
|
)
|
Benefits paid
|
|
|
(60
|
)
|
|
|
(55
|
)
|
Foreign currency adjustments
|
|
|
(9
|
)
|
|
|
8
|
|
|
|
End of year
|
|
$
|
1,108
|
|
|
$
|
1,075
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value beginning of year
|
|
$
|
754
|
|
|
$
|
764
|
|
Actual return on plan assets
|
|
|
(236
|
)
|
|
|
36
|
|
Employer contributions
|
|
|
97
|
|
|
|
12
|
|
Benefits paid
|
|
|
(62
|
)
|
|
|
(58
|
)
|
|
|
Fair value end of year
|
|
$
|
553
|
|
|
$
|
754
|
|
|
|
Funded status
|
|
$
|
(555
|
)
|
|
$
|
(321
|
)
|
|
|
Amounts recognized in the Consolidated Balance Sheet consist
of
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
Noncurrent liabilities
|
|
|
(553
|
)
|
|
|
(319
|
)
|
|
|
Net amount recognized
|
|
$
|
(555
|
)
|
|
$
|
(321
|
)
|
|
|
Amounts recognized in accumulated other comprehensive income
consist of
|
|
|
|
|
|
|
|
|
Net experience loss
|
|
$
|
429
|
|
|
$
|
123
|
|
Prior service credit
|
|
|
(14
|
)
|
|
|
(16
|
)
|
|
|
Net amount recognized
|
|
$
|
415
|
|
|
$
|
107
|
|
|
|
Expense
Components of postretirement benefit expense were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Service cost
|
|
$
|
17
|
|
|
$
|
19
|
|
|
$
|
17
|
|
Interest cost
|
|
|
67
|
|
|
|
69
|
|
|
|
66
|
|
Expected return on plan assets
|
|
|
(63
|
)
|
|
|
(59
|
)
|
|
|
(58
|
)
|
Amortization of unrecognized prior service credit
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Recognized net loss
|
|
|
9
|
|
|
|
23
|
|
|
|
31
|
|
Curtailment and special termination benefits net loss
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
Postretirement benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
|
27
|
|
|
|
49
|
|
|
|
59
|
|
Defined contribution plans
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
Total
|
|
$
|
29
|
|
|
$
|
51
|
|
|
$
|
61
|
|
|
|
Any arising health care claims cost-related experience gain or
loss is recognized in the calculated amount of claims experience
over a four-year period and once recognized, is amortized using
a straight-line method over 15 years, resulting in at least
the minimum amortization prescribed by SFAS No. 106.
Any asset-related experience gain or loss is recognized as
described for pension plans on page 46. The estimated net
experience loss for defined benefit plans that will be amortized
from accumulated other comprehensive income into nonpension
postretirement benefit expense over the next fiscal year is
approximately $13 million,
47
partially offset by amortization of prior service credit of
$3 million.
Net losses from curtailment and special termination benefits
recognized in 2006 are related primarily to plant workforce
reductions in the United States as further described in
Note 3.
Assumptions
The weighted-average actuarial assumptions used to determine
benefit obligations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Discount rate
|
|
|
6.1%
|
|
|
|
6.4%
|
|
|
|
5.9%
|
|
|
|
The weighted-average actuarial assumptions used to determine
annual net periodic benefit cost were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Discount rate
|
|
|
6.4%
|
|
|
|
5.9%
|
|
|
|
5.5%
|
|
Long-term rate of return on plan assets
|
|
|
8.9%
|
|
|
|
8.9%
|
|
|
|
8.9%
|
|
|
|
The Company determines the overall discount rate and expected
long-term rate of return on VEBA trust obligations and assets in
the same manner as that described for pension trusts in
Note 9.
The assumed health care cost trend rate is 7.6% for 2009,
decreasing gradually to 4.5% by the year 2015 and remaining at
that level thereafter. These trend rates reflect the
Companys recent historical experience and
managements expectations regarding future trends. A one
percentage point change in assumed health care cost trend rates
would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
One percentage
|
|
One percentage
|
(millions)
|
|
point increase
|
|
point decrease
|
|
Effect on total of service and interest cost components
|
|
$
|
8
|
|
|
$
|
(9
|
)
|
Effect on postretirement benefit obligation
|
|
$
|
106
|
|
|
$
|
(103
|
)
|
|
|
Plan
assets
The Companys year-end VEBA trust weighted-average asset
allocations by asset category were:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Equity securities
|
|
|
72%
|
|
|
|
75%
|
|
Debt securities
|
|
|
26%
|
|
|
|
25%
|
|
Other
|
|
|
2%
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
|
100%
|
|
|
|
The Companys asset investment strategy for its VEBA trusts
is consistent with that described for its pension trusts in
Note 9. The current target asset allocation is 75% equity
securities and 25% debt securities. The Company currently
expects to contribute approximately $15 million to its VEBA
trusts during 2009.
Postemployment
Under certain conditions, the Company provides benefits to
former or inactive employees in the United States and several
foreign locations, including salary continuance, severance, and
long-term disability. The Company recognizes an obligation for
any of these benefits that vest or accumulate with service.
Postemployment benefits that do not vest or accumulate with
service (such as severance based solely on annual pay rather
than years of service) or costs arising from actions that offer
benefits to employees in excess of those specified in the
respective plans are charged to expense when incurred. The
Companys postemployment benefit plans are unfunded.
Actuarial assumptions used are generally consistent with those
presented for pension benefits on page 46. The aggregate
change in accumulated postemployment benefit obligation and the
net amount recognized were:
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
Change in accumulated benefit obligation
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
63
|
|
|
$
|
40
|
|
Service cost
|
|
|
5
|
|
|
|
6
|
|
Interest cost
|
|
|
4
|
|
|
|
2
|
|
Actuarial loss
|
|
|
1
|
|
|
|
22
|
|
Benefits paid
|
|
|
(7
|
)
|
|
|
(8
|
)
|
Foreign currency adjustments
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
End of year
|
|
$
|
65
|
|
|
$
|
63
|
|
|
|
Funded status
|
|
$
|
(65
|
)
|
|
$
|
(63
|
)
|
|
|
Amounts recognized in the Consolidated Balance Sheet consist
of
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(6
|
)
|
|
$
|
(7
|
)
|
Noncurrent liabilities
|
|
|
(59
|
)
|
|
|
(56
|
)
|
|
|
Net amount recognized
|
|
$
|
(65
|
)
|
|
$
|
(63
|
)
|
|
|
Amounts recognized in accumulated other comprehensive income
consist of
|
|
|
|
|
|
|
|
|
Net experience loss
|
|
$
|
34
|
|
|
$
|
36
|
|
|
|
Net amount recognized
|
|
$
|
34
|
|
|
$
|
36
|
|
|
|
Components of postemployment benefit expense were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Service cost
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
4
|
|
Interest cost
|
|
|
4
|
|
|
|
2
|
|
|
|
2
|
|
Recognized net loss
|
|
|
4
|
|
|
|
2
|
|
|
|
3
|
|
|
|
Postemployment benefit expense
|
|
$
|
13
|
|
|
$
|
10
|
|
|
$
|
9
|
|
|
|
All gains and losses are recognized over the average remaining
service period of active plan participants. The estimated net
experience loss that will be amortized from accumulated other
comprehensive income into postemployment benefit expense over
the next fiscal year is approximately $3 million.
48
Benefit
payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
Postretirement
|
|
Postemployment
|
|
2009
|
|
$
|
61
|
|
|
$
|
6
|
|
2010
|
|
|
65
|
|
|
|
7
|
|
2011
|
|
|
68
|
|
|
|
7
|
|
2012
|
|
|
69
|
|
|
|
7
|
|
2013
|
|
|
71
|
|
|
|
8
|
|
2014-2018
|
|
|
398
|
|
|
|
45
|
|
|
|
NOTE 11
INCOME TAXES
Earnings before income taxes and the provision for
U.S. federal, state, and foreign taxes on these earnings
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Earnings before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,032
|
|
|
$
|
999
|
|
|
$
|
1,049
|
|
Foreign
|
|
|
601
|
|
|
|
548
|
|
|
|
423
|
|
|
|
|
|
$
|
1,633
|
|
|
$
|
1,547
|
|
|
$
|
1,472
|
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
135
|
|
|
$
|
395
|
|
|
$
|
342
|
|
State
|
|
|
3
|
|
|
|
30
|
|
|
|
35
|
|
Foreign
|
|
|
190
|
|
|
|
88
|
|
|
|
134
|
|
|
|
|
|
|
328
|
|
|
|
513
|
|
|
|
511
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
173
|
|
|
|
(74
|
)
|
|
|
(10
|
)
|
State
|
|
|
22
|
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Foreign
|
|
|
(38
|
)
|
|
|
8
|
|
|
|
(30
|
)
|
|
|
|
|
|
157
|
|
|
|
(69
|
)
|
|
|
(44
|
)
|
|
|
Total income taxes
|
|
$
|
485
|
|
|
$
|
444
|
|
|
$
|
467
|
|
|
|
The difference between the U.S. federal statutory tax rate
and the Companys effective income tax rate was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
U.S. statutory income tax rate
|
|
|
35.0%
|
|
|
|
35.0%
|
|
|
|
35.0%
|
|
Foreign rates varying from 35%
|
|
|
−5.0
|
|
|
|
−4.0
|
|
|
|
−3.5
|
|
State income taxes, net of federal benefit
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.3
|
|
Foreign earnings repatriation
|
|
|
1.6
|
|
|
|
2.3
|
|
|
|
1.2
|
|
Tax audits
|
|
|
−1.5
|
|
|
|
|
|
|
|
−1.7
|
|
Net change in valuation allowances
|
|
|
|
|
|
|
−.5
|
|
|
|
.5
|
|
Statutory rate changes, deferred tax impact
|
|
|
−.1
|
|
|
|
−.6
|
|
|
|
|
|
International restructuring
|
|
|
|
|
|
|
−2.6
|
|
|
|
|
|
Other
|
|
|
−1.3
|
|
|
|
−2.0
|
|
|
|
−1.1
|
|
|
|
Effective income tax rate
|
|
|
29.7%
|
|
|
|
28.7%
|
|
|
|
31.7%
|
|
|
|
As presented in the preceding table, the Companys 2008
consolidated effective tax rate was 29.7%, as compared to 28.7%
in 2007 and 31.7% in 2006. The 2008 effective tax rate reflects
the favorable impact of various tax audit settlements. In
conjunction with a planned international legal restructuring,
management recorded a $33 million tax charge in the second
quarter and an additional $9 million during the third and
fourth quarters for a total charge of $42 million on
$1 billion of prior and current year unremitted foreign
earnings and capital. During the year, the Company repatriated
approximately $710 million of earnings and capital which
carried a cash tax charge of $24 million. This amount was
less than the charge recorded during the year due to the impact
of favorable movements in foreign currency. This cost was
further offset by foreign tax related items of $16 million,
reducing the net cost of repatriation to $8 million. The
Company has provided $18 million of deferred taxes related
to the remaining $290 million of unremitted foreign
earnings. These amounts are reflected in the foreign earnings
repatriation line item. At January 3, 2009, accumulated
foreign subsidiary earnings of approximately $834 million
were considered indefinitely invested in those businesses.
Accordingly, U.S. income deferred taxes have not been provided
on these earnings and it is not practical to estimate the
deferred tax impact of those earnings.
2007s effective rate benefited from the favorable effect
of discrete items in that year. In the first quarter of 2007,
management implemented an international restructuring initiative
which eliminated a foreign tax liability of approximately
$40 million. Accordingly, the reversal was recorded within
the Companys consolidated provision for income taxes. The
Company benefited from statutory rate reductions, primarily in
the United Kingdom and in Germany which resulted in an
$11 million reduction to income tax expense. During 2007,
the Company repatriated approximately $327 million of
current year foreign earnings, for a gross U.S. tax cost of
$35 million. This cost was offset by foreign tax credit
related items of $31 million, reducing the net cost of
repatriation to $4 million.
The Companys 2006 consolidated effective tax rate included
two significant, but partially-offsetting, discrete adjustments.
The Company reduced its reserves for uncertain tax positions by
$25 million, related principally to the closure of several
domestic tax audits. In addition, the Company revised its
repatriation plan for certain foreign earnings, giving rise to
an incremental net tax cost of $18 million.
Generally, the changes in valuation allowances on deferred tax
assets and corresponding impacts on the effective income tax
rate result from managements assessment of the
Companys ability to utilize certain future tax deductions,
operating losses and tax credit carryforwards prior to
expiration. For 2007, the .5% rate reduction presented in the
preceding table primarily reflects the reversal of a valuation
allowance against U.S. foreign tax credits which were
utilized in conjunction with the aforementioned 2007 foreign
earnings repatriation. Total tax benefits of carryforwards at
year-end 2008 and 2007 were approximately $27 million and
$17 million, respectively, with related valuation
allowances at year-end 2008 and 2007 of approximately $20 and
$17 million. Of the total carryforwards at year-end 2008
approximately
49
$2 million expire in 2009 with the remainder principally
expiring after five years.
The following table provides an analysis of the Companys
deferred tax assets and liabilities as of year-end 2008 and
2007. The significant increase in the employee
benefits caption of the Companys noncurrent deferred
tax asset during 2008 is principally related to net experience
losses associated with employer pension and other postretirement
benefit plans that are recorded in other comprehensive income,
net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
Deferred tax liabilities
|
|
(millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
U.S. state income taxes
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
59
|
|
|
$
|
44
|
|
Advertising and promotion-related
|
|
|
23
|
|
|
|
23
|
|
|
|
10
|
|
|
|
12
|
|
Wages and payroll taxes
|
|
|
27
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Inventory valuation
|
|
|
18
|
|
|
|
20
|
|
|
|
2
|
|
|
|
3
|
|
Employee benefits
|
|
|
479
|
|
|
|
153
|
|
|
|
26
|
|
|
|
66
|
|
Operating loss and credit carryforwards
|
|
|
27
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Hedging transactions
|
|
|
22
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
Depreciation and asset disposals
|
|
|
17
|
|
|
|
15
|
|
|
|
299
|
|
|
|
299
|
|
Capitalized interest
|
|
|
7
|
|
|
|
6
|
|
|
|
12
|
|
|
|
12
|
|
Trademarks and other intangibles
|
|
|
|
|
|
|
|
|
|
|
461
|
|
|
|
454
|
|
Deferred compensation
|
|
|
51
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
Deferred intercompany revenue
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
46
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
Unremitted foreign earnings
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Other
|
|
|
44
|
|
|
|
26
|
|
|
|
9
|
|
|
|
17
|
|
|
|
|
|
|
768
|
|
|
|
397
|
|
|
|
901
|
|
|
|
907
|
|
Less valuation allowance
|
|
|
(22
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes
|
|
$
|
746
|
|
|
$
|
375
|
|
|
$
|
901
|
|
|
$
|
907
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(155
|
)
|
|
$
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
|
Classified in balance sheet as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid assets
|
|
$
|
112
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
Accrued income taxes
|
|
|
(15
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
48
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
(300
|
)
|
|
|
(647
|
)
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(155
|
)
|
|
$
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
|
The change in valuation allowance against deferred tax assets
was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Balance at beginning of year
|
|
$
|
22
|
|
|
$
|
28
|
|
|
$
|
19
|
|
Additions charged to income tax expense
|
|
|
6
|
|
|
|
4
|
|
|
|
12
|
|
Reductions credited to income tax expense
|
|
|
(3
|
)
|
|
|
(12
|
)
|
|
|
(4
|
)
|
Currency translation adjustments
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
1
|
|
|
|
Balance at end of year
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
28
|
|
|
|
Cash paid for income taxes was (in millions): 2008$397;
2007$560; 2006$428. Income tax benefits realized
from stock option exercises and deductibility of other
equity-based awards are presented in Note 8.
Uncertain
tax positions
The Company adopted Interpretation No. 48 Accounting
for Uncertainty in Income Taxes
(FIN No. 48) as of the beginning of its 2007
fiscal year. This interpretation clarifies what criteria must be
met prior to recognition of the financial statement benefit, in
accordance with SFAS No. 109, Accounting for
Income Taxes, of a position taken in a tax return.
FIN No. 48 is based on a benefit recognition model.
Provided that the tax position is deemed more likely than not of
being sustained, FIN No. 48 permits a company to
recognize the largest amount of tax benefit that is greater than
50 percent likely of being ultimately realized upon
settlement. The tax position must be derecognized when it is no
longer more likely than not of being sustained. The initial
application of FIN No. 48 resulted in a net decrease
to the Companys consolidated accrued income tax and
related interest liabilities of approximately $2 million,
with an offsetting increase to retained earnings.
The Company files income taxes in the U.S. federal
jurisdiction, and in various state, local, and foreign
jurisdictions. For the past several years, the Companys
annual provision for U.S. federal income taxes has
represented approximately 70% of the Companys consolidated
income tax provision. With limited exceptions, the Company is no
longer subject to U.S. federal examinations by the Internal
Revenue Service (IRS) for years prior to 2006. During the second
quarter of 2008, the IRS commenced a focused review of the
Companys 2006 and 2007 U.S. federal income tax
returns which is anticipated to be completed during the second
quarter of 2009. The Company also entered into the IRS
Compliance Assurance Program (CAP) for the 2008 tax
year. The Company is also under examination for income and
non-income tax filings in various state and foreign
jurisdictions, most notably: 1) a
U.S.-Canadian
transfer pricing issue pending international arbitration
(Competent Authority) with a related advanced
pricing agreement for years
1997-2008;
and 2) an on-going examination of
2002-2005
U.K. income tax filings.
As of January 3, 2009, the Company has classified
$35 million of unrecognized tax benefits as a current
liability, representing several individually insignificant
income tax positions under examination in various jurisdictions.
Managements estimate of reasonably possible changes in
unrecognized tax benefits during the next twelve months is
comprised of the aforementioned current liability balance
expected to be settled within one year, offset by approximately
$5 million of projected additions related primarily to
ongoing intercompany transfer pricing activity. Management is
currently unaware of any issues under review that could result
in significant additional payments, accruals, or other material
deviation in this estimate.
Following is a reconciliation of the Companys total gross
unrecognized tax benefits as of the years ended January 3,
2009 and December 29, 2007. For the
50
2008 year, approximately $110 million represents the
amount that, if recognized, would affect the Companys
effective income tax rate in future periods. This amount differs
from the gross unrecognized tax benefits presented in the table
due to the decrease in U.S. federal income taxes which
would occur upon recognition of the state tax benefits included
therein.
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
Balance at beginning of year
|
|
$
|
169
|
|
|
$
|
143
|
|
Tax positions related to current year:
|
|
|
|
|
|
|
|
|
Additions
|
|
|
24
|
|
|
|
31
|
|
Reductions
|
|
|
|
|
|
|
|
|
Tax positions related to prior years:
|
|
|
|
|
|
|
|
|
Additions
|
|
|
2
|
|
|
|
22
|
|
Reductions
|
|
|
(56
|
)
|
|
|
(26
|
)
|
Settlements
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Lapses in statutes of limitation
|
|
|
(4
|
)
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
132
|
|
|
$
|
169
|
|
|
|
The current portion of the Companys unrecognized tax
benefits is presented in the balance sheet within accrued income
taxes within other current liabilities, and the amount expected
to be settled after one year is recorded in other liabilities.
The Company classifies income tax-related interest and penalties
as interest expense and selling, general, and administrative
expense, respectively. For the year ended January 3, 2009,
the Company recognized a reduction of $2 million of
tax-related interest and penalties and had approximately
$29 million accrued at January 3, 2009. For the year
ended December 29, 2007, the company recognized
$9 million of tax-related interest and penalties and had
$31 million accrued at year end.
NOTE 12
FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
The carrying values of the Companys short-term items,
including cash, cash equivalents, accounts receivable, accounts
payable and notes payable approximate fair value. The fair value
of long-term debt is calculated based on incremental borrowing
rates currently available on loans with similar terms and
maturities. The fair value of the Companys long-term debt
at January 3, 2009 exceeded its carrying value by
approximately $246 million.
The Company is exposed to certain market risks which exist as a
part of its ongoing business operations. Management uses
derivative financial and commodity instruments, where
appropriate, to manage these risks. In general, instruments used
as hedges must be effective at reducing the risk associated with
the exposure being hedged and must be designated as a hedge at
the inception of the contract. In accordance with
SFAS No. 133, the Company designates derivatives as
cash flow hedges, fair value hedges, net investment hedges, or
other contracts used to reduce volatility in the translation of
foreign currency earnings to U.S. dollars. The fair values
of all hedges are recorded in accounts receivable, other assets,
other current liabilities and other liabilities. Gains and
losses representing either hedge ineffectiveness, hedge
components excluded from the assessment of effectiveness, or
hedges of translational exposure are recorded in other income
(expense), net. Within the Consolidated Statement of Cash Flows,
settlements of cash flow and fair value hedges are classified as
an operating activity; settlements of all other derivatives are
classified as a financing activity.
Cash
flow hedges
Qualifying derivatives are accounted for as cash flow hedges
when the hedged item is a forecasted transaction. Gains and
losses on these instruments are recorded in other comprehensive
income until the underlying transaction is recorded in earnings.
When the hedged item is realized, gains or losses are
reclassified from accumulated other comprehensive income to the
Consolidated Statement of Earnings on the same line item as the
underlying transaction. For all cash flow hedges, gains and
losses representing either hedge ineffectiveness or hedge
components excluded from the assessment of effectiveness were
insignificant during the periods presented.
The cumulative net loss attributable to cash flow hedges
recorded in accumulated other comprehensive income at
January 3, 2009, was $24 million, related to forward
interest rate contracts settled during 2001 and 2003 in
conjunction with fixed rate long-term debt issuances,
10-year
natural gas price swaps entered into in 2006, and commodity
price cash flow hedges, partially offset by gains on foreign
currency cash flow hedges. The interest rate contract losses
will be reclassified into interest expense over the next
23 years. The natural gas swap losses will be reclassified
to cost of goods sold over the next 8 years. Gains and
losses related to foreign currency and commodity price cash flow
hedges will be reclassified into earnings during the next
18 months.
Fair
value hedges
Qualifying derivatives are accounted for as fair value hedges
when the hedged item is a recognized asset, liability, or firm
commitment. Gains and losses on these instruments are recorded
in earnings, offsetting gains and losses on the hedged item. For
all fair value hedges, gains and losses representing either
hedge ineffectiveness or hedge components excluded from the
assessment of effectiveness were insignificant during the
periods presented.
Net
investment hedges
Qualifying derivative and nonderivative financial instruments
are accounted for as net investment hedges when the hedged item
is a nonfunctional currency investment in a subsidiary. Gains
and losses on these instruments are included in foreign currency
translation adjustments in other comprehensive income.
51
Other
contracts
The Company also periodically enters into foreign currency
forward contracts and options to reduce volatility in the
translation of foreign currency earnings to U.S. dollars.
Gains and losses on these instruments are recorded in other
income (expense), net, generally reducing the exposure to
translation volatility during a full-year period.
Foreign
exchange risk
The Company is exposed to fluctuations in foreign currency cash
flows related primarily to third-party purchases, intercompany
transactions and nonfunctional currency denominated third-party
debt. The Company is also exposed to fluctuations in the value
of foreign currency investments in subsidiaries and cash flows
related to repatriation of these investments. Additionally, the
Company is exposed to volatility in the translation of foreign
currency earnings to U.S. dollars. Management assesses
foreign currency risk based on transactional cash flows and
translational volatility and enters into forward contracts,
options, and currency swaps to reduce fluctuations in net long
or short currency positions. Forward contracts and options are
generally less than 18 months duration. Currency swap
agreements are established in conjunction with the term of
underlying debt issues.
For foreign currency cash flow and fair value hedges, the
assessment of effectiveness is generally based on changes in
spot rates. Changes in time value are reported in other income
(expense), net.
Interest
rate risk
The Company is exposed to interest rate volatility with regard
to future issuances of fixed rate debt and existing issuances of
variable rate debt. The Company periodically uses interest rate
swaps, including forward-starting swaps, to reduce interest rate
volatility and funding costs associated with certain debt
issues, and to achieve a desired proportion of variable versus
fixed rate debt, based on current and projected market
conditions.
Variable-to-fixed
interest rate swaps are accounted for as cash flow hedges and
the assessment of effectiveness is based on changes in the
present value of interest payments on the underlying debt.
Fixed-to-variable
interest rate swaps are accounted for as fair value hedges and
the assessment of effectiveness is based on changes in the fair
value of the underlying debt, using incremental borrowing rates
currently available on loans with similar terms and maturities.
Price
risk
The Company is exposed to price fluctuations primarily as a
result of anticipated purchases of raw and packaging materials,
fuel, and energy. The Company has historically used the
combination of long-term contracts with suppliers, and
exchange-traded futures and option contracts to reduce price
fluctuations in a desired percentage of forecasted raw material
purchases over a duration of generally less than 18 months.
During 2006, the Company entered into two separate
10-year
over-the-counter
commodity swap transactions to reduce fluctuations in the price
of natural gas used principally in its manufacturing processes.
Commodity contracts are accounted for as cash flow hedges. The
assessment of effectiveness for exchange-traded instruments is
based on changes in futures prices. The assessment of
effectiveness for
over-the-counter
transactions is based on changes in designated indexes.
Credit
risk concentration
The Company is exposed to credit loss in the event of
nonperformance by counterparties on derivative financial and
commodity contracts. This credit loss is limited to the cost of
replacing these contracts at current market rates. In some
instances the Company has reciprocal collateralization
agreements with counterparties regarding fair value positions in
excess of certain thresholds. These agreements call for the
posting of collateral in the form of cash, treasury securities
or letters of credit if a fair value loss position to the
Company or its counterparties exceeds a certain amount. There
were no collateral balance requirements at January 3, 2009
or December 29, 2007.
Financial instruments, which potentially subject the Company to
concentrations of credit risk are primarily cash, cash
equivalents, and accounts receivable. The Company places its
investments in highly rated financial institutions and
investment-grade short-term debt instruments, and limits the
amount of credit exposure to any one entity. Management believes
concentrations of credit risk with respect to accounts
receivable is limited due to the generally high credit quality
of the Companys major customers, as well as the large
number and geographic dispersion of smaller customers. However,
the Company conducts a disproportionate amount of business with
a small number of large multinational grocery retailers, with
the five largest accounts comprising approximately 30% of
consolidated accounts receivable at January 3, 2009.
NOTE 13
FAIR VALUE MEASUREMENTS
SFAS No. 157, Fair Value Measurements, was
adopted by the Company as of the beginning of its 2008 fiscal
year, as discussed in Note 1 herein. As required by
SFAS No. 157, the Company has categorized its
financial assets and liabilities into a three-level fair value
hierarchy, based on the nature of the inputs used in determining
fair value. The hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities
(level 1) and the lowest priority to unobservable
inputs (level 3). Following is a description of each
52
category in the fair value hierarchy and the financial assets
and liabilities of the Company that are included in each
category at January 3, 2009.
Level 1 Financial assets and liabilities
whose values are based on unadjusted quoted prices for identical
assets or liabilities in an active market. For the Company,
level 1 financial assets and liabilities consist primarily
of commodity derivative contracts.
Level 2 Financial assets and liabilities
whose values are based on quoted prices in markets that are not
active or model inputs that are observable either directly or
indirectly for substantially the full term of the asset or
liability. For the Company, level 2 financial assets and
liabilities consist of interest rate swaps and
over-the-counter
commodity and currency contracts.
The Companys calculation of the fair value of interest
rate swaps is derived from a discounted cash flow analysis based
on the terms of the contract and the interest rate curve.
Commodity derivatives are valued using an income approach based
on the commodity index prices less the contract rate multiplied
by the notional amount. Foreign currency contracts are valued
using an income approach based on forward rates less the
contract rate multiplied by the notional amount.
Level 3 Financial assets and liabilities
whose values are based on prices or valuation techniques that
require inputs that are both unobservable and significant to the
overall fair value measurement. These inputs reflect
managements own assumptions about the assumptions a market
participant would use in pricing the asset or liability. The
Company does not have any level 3 financial assets or
liabilities.
The following table presents the Companys fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis as of January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (recorded in other receivables)
|
|
$
|
9
|
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
43
|
|
Derivatives (recorded in other assets)
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
43
|
|
|
|
Total assets
|
|
$
|
9
|
|
|
$
|
77
|
|
|
$
|
|
|
|
$
|
86
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (recorded in other current liabilities)
|
|
$
|
|
|
|
$
|
(17
|
)
|
|
$
|
|
|
|
$
|
(17
|
)
|
Derivatives (recorded in other liabilities)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
(21
|
)
|
|
$
|
|
|
|
$
|
(21
|
)
|
|
|
NOTE 14
CONTINGENCIES
The Company is subject to various legal proceedings and claims
in the ordinary course of business covering matters such as
general commercial, governmental regulations, antitrust and
trade regulations, product liability, intellectual property,
employment and other actions. Management has determined that the
ultimate resolution of these matters will not have a material
adverse effect on the Companys financial position or
results of operations.
NOTE 15
SUBSEQUENT EVENT
On January 14, 2009, the Company announced a precautionary
hold on certain Austin and Keebler branded peanut
butter sandwich crackers and certain Famous Amos and
Keebler branded peanut butter cookies while the
U.S. Food and Drug Administration and other authorities
investigated Peanut Corporation of America (PCA),
one of Kelloggs peanut paste suppliers for the cracker and
cookie products. On January 16, 2009, Kellogg voluntarily
recalled those products because the paste ingredients supplied
to Kellogg had the potential to be contaminated with salmonella.
The recall was expanded on January 31, February 2 and
February 17, 2009 to include certain Bear Naked,
Kashi and Special K products impacted by PCA
ingredients.
The Company has incurred costs associated with the recalls and
in accordance with U.S. GAAP recorded certain items
associated with this subsequent event in its fiscal year 2008
financial results.
The charges associated with the recalls reduced North America
full-year 2008 operating profit by $34 million or $0.06
EPS. Of the total charges, $12 million related to estimated
customer returns and consumer rebates and was recorded as a
reduction to net sales; $21 million related to costs
associated with returned product and the disposal and write-off
of inventory which was recorded as cost of goods sold; and
$1 million related to other costs which were recorded as
SGA expense.
NOTE 16
QUARTERLY FINANCIAL DATA (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
Gross profit
|
|
(millions, except per share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
First
|
|
$
|
3,258
|
|
|
$
|
2,963
|
|
|
$
|
1,364
|
|
|
$
|
1,264
|
|
Second
|
|
|
3,343
|
|
|
|
3,015
|
|
|
|
1,444
|
|
|
|
1,377
|
|
Third
|
|
|
3,288
|
|
|
|
3,004
|
|
|
|
1,403
|
|
|
|
1,342
|
|
Fourth
|
|
|
2,933
|
|
|
|
2,794
|
|
|
|
1,156
|
|
|
|
1,196
|
|
|
|
|
|
$
|
12,822
|
|
|
$
|
11,776
|
|
|
$
|
5,367
|
|
|
$
|
5,179
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
Net earnings per share
|
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$
|
315
|
|
|
$
|
321
|
|
|
$
|
.82
|
|
|
$
|
.81
|
|
|
$
|
.81
|
|
|
$
|
.80
|
|
|
|
|
|
Second
|
|
|
312
|
|
|
|
301
|
|
|
|
.82
|
|
|
|
.82
|
|
|
|
.76
|
|
|
|
.75
|
|
|
|
|
|
Third
|
|
|
342
|
|
|
|
305
|
|
|
|
.90
|
|
|
|
.89
|
|
|
|
.77
|
|
|
|
.76
|
|
|
|
|
|
Fourth
|
|
|
179
|
|
|
|
176
|
|
|
|
.47
|
|
|
|
.47
|
|
|
|
.45
|
|
|
|
.44
|
|
|
|
|
|
|
|
|
|
$
|
1,148
|
|
|
$
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal market for trading Kellogg shares is the New York
Stock Exchange (NYSE). At year-end 2008, the closing price on
the NYSE was $45.05 and there were 41,229 shareowners of
record.
Dividends paid per share and the quarterly price ranges on the
NYSE during the last two years were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
Stock price
|
2008 Quarter
|
|
per share
|
|
High
|
|
Low
|
|
First
|
|
$
|
.3100
|
|
|
$
|
53.00
|
|
|
$
|
46.25
|
|
Second
|
|
|
.3100
|
|
|
|
54.15
|
|
|
|
47.87
|
|
Third
|
|
|
.3400
|
|
|
|
58.51
|
|
|
|
47.62
|
|
Fourth
|
|
|
.3400
|
|
|
|
57.66
|
|
|
|
40.32
|
|
|
|
|
|
$
|
1.3000
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$
|
.2910
|
|
|
$
|
52.02
|
|
|
$
|
48.68
|
|
Second
|
|
|
.2910
|
|
|
|
54.42
|
|
|
|
51.05
|
|
Third
|
|
|
.3100
|
|
|
|
56.89
|
|
|
|
51.02
|
|
Fourth
|
|
|
.3100
|
|
|
|
56.31
|
|
|
|
51.49
|
|
|
|
|
|
$
|
1.2020
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 17
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, fruit snacks, frozen
waffles and veggie foods. Kellogg products are manufactured and
marketed globally. Principal markets for these products include
the United States and United Kingdom. The Company currently
manages its operations in four geographic operating segments,
comprised of North America and the three International operating
segments of Europe, Latin America and Asia Pacific. Beginning in
2007, the Asia Pacific segment includes South Africa, which was
formerly a part of Europe. Prior years were restated for
comparison purposes.
The measurement of operating segment results is generally
consistent with the presentation of the Consolidated Statement
of Earnings and Balance Sheet. Intercompany transactions between
operating segments were insignificant in all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
8,457
|
|
|
$
|
7,786
|
|
|
$
|
7,349
|
|
Europe
|
|
|
2,619
|
|
|
|
2,357
|
|
|
|
2,057
|
|
Latin America
|
|
|
1,030
|
|
|
|
984
|
|
|
|
891
|
|
Asia Pacific (a)
|
|
|
716
|
|
|
|
649
|
|
|
|
610
|
|
|
|
Consolidated
|
|
$
|
12,822
|
|
|
$
|
11,776
|
|
|
$
|
10,907
|
|
|
|
Segment operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,447
|
|
|
$
|
1,345
|
|
|
$
|
1,341
|
|
Europe
|
|
|
390
|
|
|
|
397
|
|
|
|
321
|
|
Latin America
|
|
|
209
|
|
|
|
213
|
|
|
|
220
|
|
Asia Pacific (a)
|
|
|
92
|
|
|
|
88
|
|
|
|
90
|
|
Corporate
|
|
|
(185
|
)
|
|
|
(175
|
)
|
|
|
(206
|
)
|
|
|
Consolidated
|
|
$
|
1,953
|
|
|
$
|
1,868
|
|
|
$
|
1,766
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
249
|
|
|
$
|
239
|
|
|
$
|
242
|
|
Europe
|
|
|
72
|
|
|
|
71
|
|
|
|
65
|
|
Latin America
|
|
|
24
|
|
|
|
24
|
|
|
|
22
|
|
Asia Pacific (a)
|
|
|
23
|
|
|
|
23
|
|
|
|
19
|
|
Corporate
|
|
|
7
|
|
|
|
15
|
|
|
|
5
|
|
|
|
Consolidated
|
|
$
|
375
|
|
|
|
372
|
|
|
$
|
353
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
9
|
|
Europe
|
|
|
2
|
|
|
|
13
|
|
|
|
27
|
|
Latin America
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Asia Pacific (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
305
|
|
|
|
303
|
|
|
|
271
|
|
|
|
Consolidated
|
|
$
|
308
|
|
|
$
|
319
|
|
|
$
|
307
|
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
418
|
|
|
$
|
388
|
|
|
$
|
396
|
|
Europe
|
|
|
25
|
|
|
|
27
|
|
|
|
7
|
|
Latin America
|
|
|
38
|
|
|
|
40
|
|
|
|
32
|
|
Asia Pacific (a)
|
|
|
16
|
|
|
|
14
|
|
|
|
18
|
|
Corporate
|
|
|
(12
|
)
|
|
|
(25
|
)
|
|
|
14
|
|
|
|
Consolidated
|
|
$
|
485
|
|
|
$
|
444
|
|
|
$
|
467
|
|
|
|
Total assets (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
8,443
|
|
|
$
|
8,255
|
|
|
$
|
7,996
|
|
Europe
|
|
|
1,545
|
|
|
|
2,017
|
|
|
|
2,325
|
|
Latin America
|
|
|
515
|
|
|
|
527
|
|
|
|
661
|
|
Asia Pacific (a)
|
|
|
408
|
|
|
|
397
|
|
|
|
385
|
|
Corporate
|
|
|
4,305
|
|
|
|
5,276
|
|
|
|
4,934
|
|
Elimination entries
|
|
|
(4,270
|
)
|
|
|
(5,075
|
)
|
|
|
(5,587
|
)
|
|
|
Consolidated
|
|
$
|
10,946
|
|
|
$
|
11,397
|
|
|
$
|
10,714
|
|
|
|
Additions to long-lived assets (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
288
|
|
|
$
|
443
|
|
|
$
|
316
|
|
Europe
|
|
|
244
|
|
|
|
76
|
|
|
|
54
|
|
Latin America
|
|
|
70
|
|
|
|
37
|
|
|
|
53
|
|
Asia Pacific (a)
|
|
|
103
|
|
|
|
21
|
|
|
|
27
|
|
Corporate
|
|
|
5
|
|
|
|
5
|
|
|
|
3
|
|
|
|
Consolidated
|
|
$
|
710
|
|
|
$
|
582
|
|
|
$
|
453
|
|
|
|
|
|
|
(a)
|
|
Includes Australia, Asia and South
Africa.
|
|
|
(b)
|
|
The Company adopted
SFAS No. 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans as
of the end of its 2006 fiscal year. The standard generally
requires company plan sponsors to reflect the net over- or
under-funded position of a defined postretirement benefit plan
as an asset or liability on the balance sheet. Accordingly, the
Companys consolidated and corporate total assets for 2006
were reduced by $512 and $152, respectively. Operating segment
total assets were reduced as follows: North America-$72;
Europe-$284; Latin America-$3; Asia Pacific-$1. Refer to
Note 1 for further information.
|
|
|
(c)
|
|
Includes plant, property,
equipment, and purchased intangibles.
|
54
The Companys largest customer, Wal-Mart Stores, Inc. and
its affiliates, accounted for approximately 20% of consolidated
net sales during 2008, 19% in 2007, and 18% in 2006, comprised
principally of sales within the United States.
Supplemental geographic information is provided below for net
sales to external customers and long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,866
|
|
|
$
|
7,224
|
|
|
$
|
6,843
|
|
United Kingdom
|
|
|
1,026
|
|
|
|
1,018
|
|
|
|
894
|
|
Other foreign countries
|
|
|
3,930
|
|
|
|
3,534
|
|
|
|
3,170
|
|
|
|
Consolidated
|
|
$
|
12,822
|
|
|
$
|
11,776
|
|
|
$
|
10,907
|
|
|
|
Long-lived assets (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,924
|
|
|
$
|
6,832
|
|
|
$
|
6,630
|
|
United Kingdom
|
|
|
260
|
|
|
|
378
|
|
|
|
369
|
|
Other foreign countries
|
|
|
847
|
|
|
|
745
|
|
|
|
685
|
|
|
|
Consolidated
|
|
$
|
8,031
|
|
|
$
|
7,955
|
|
|
$
|
7,684
|
|
|
|
|
|
|
(a)
|
|
Includes plant, property, equipment
and purchased intangibles.
|
Supplemental product information is provided below for net sales
to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
2007
|
|
2006
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail channel cereal
|
|
$
|
3,038
|
|
|
$
|
2,784
|
|
|
$
|
2,667
|
|
Retail channel snacks
|
|
|
3,960
|
|
|
|
3,553
|
|
|
|
3,318
|
|
Frozen and specialty channels
|
|
|
1,459
|
|
|
|
1,449
|
|
|
|
1,364
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Cereal
|
|
|
3,547
|
|
|
|
3,346
|
|
|
|
3,010
|
|
Convenience foods
|
|
|
818
|
|
|
|
644
|
|
|
|
548
|
|
|
|
Consolidated
|
|
$
|
12,822
|
|
|
$
|
11,776
|
|
|
$
|
10,907
|
|
|
|
NOTE 18
SUPPLEMENTAL FINANCIAL STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Research and development expense
|
|
$
|
181
|
|
|
$
|
179
|
|
|
$
|
191
|
|
Advertising expense
|
|
$
|
1,076
|
|
|
$
|
1,063
|
|
|
$
|
916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
|
2007
|
|
|
|
Trade receivables
|
|
$
|
876
|
|
|
$
|
908
|
|
Allowance for doubtful accounts
|
|
|
(10
|
)
|
|
|
(5
|
)
|
Other receivables
|
|
|
277
|
|
|
|
108
|
|
|
|
Accounts receivable, net
|
|
$
|
1,143
|
|
|
$
|
1,011
|
|
|
|
Raw materials and supplies
|
|
$
|
203
|
|
|
$
|
234
|
|
Finished goods and materials in process
|
|
|
694
|
|
|
|
690
|
|
|
|
Inventories
|
|
$
|
897
|
|
|
$
|
924
|
|
|
|
Deferred income taxes
|
|
$
|
112
|
|
|
$
|
103
|
|
Other prepaid assets
|
|
|
114
|
|
|
|
140
|
|
|
|
Other current assets
|
|
$
|
226
|
|
|
$
|
243
|
|
|
|
Land
|
|
$
|
94
|
|
|
$
|
86
|
|
Buildings
|
|
|
1,579
|
|
|
|
1,614
|
|
Machinery and equipment (a)
|
|
|
5,112
|
|
|
|
5,249
|
|
Construction in progress
|
|
|
319
|
|
|
|
354
|
|
Accumulated depreciation
|
|
|
(4,171
|
)
|
|
|
(4,313
|
)
|
|
|
Property, net
|
|
$
|
2,933
|
|
|
$
|
2,990
|
|
|
|
Other intangibles
|
|
$
|
1,503
|
|
|
$
|
1,491
|
|
Accumulated amortization
|
|
|
(42
|
)
|
|
|
(41
|
)
|
|
|
Other intangibles, net
|
|
$
|
1,461
|
|
|
$
|
1,450
|
|
|
|
Pension
|
|
$
|
96
|
|
|
$
|
481
|
|
Other
|
|
|
298
|
|
|
|
259
|
|
|
|
Other assets
|
|
$
|
394
|
|
|
$
|
740
|
|
|
|
Accrued income taxes
|
|
$
|
51
|
|
|
$
|
|
|
Accrued salaries and wages
|
|
|
280
|
|
|
|
316
|
|
Accrued advertising and promotion
|
|
|
357
|
|
|
|
378
|
|
Other
|
|
|
341
|
|
|
|
314
|
|
|
|
Other current liabilities
|
|
$
|
1,029
|
|
|
$
|
1,008
|
|
|
|
Nonpension postretirement benefits
|
|
$
|
553
|
|
|
$
|
319
|
|
Other
|
|
|
394
|
|
|
|
420
|
|
|
|
Other liabilities
|
|
$
|
947
|
|
|
$
|
739
|
|
|
|
|
|
|
(a)
|
|
Includes an insignificant amount of
capitalized internal-use software.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance at beginning of year
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
7
|
|
Additions charged to expense
|
|
|
6
|
|
|
|
1
|
|
|
|
2
|
|
Doubtful accounts charged to reserve
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
Balance at end of year
|
|
$
|
10
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
|
55
Managements
Responsibility for Financial Statements
Management is responsible for the preparation of the
Companys consolidated financial statements and related
notes. We believe that the consolidated financial statements
present the Companys financial position and results of
operations in conformity with accounting principles that are
generally accepted in the United States, using our best
estimates and judgments as required.
The independent registered public accounting firm audits the
Companys consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight
Board and provides an objective, independent review of the
fairness of reported operating results and financial position.
The Board of Directors of the Company has an Audit Committee
composed of five non-management Directors. The Committee meets
regularly with management, internal auditors, and the
independent registered public accounting firm to review
accounting, internal control, auditing and financial reporting
matters.
Formal policies and procedures, including an active Ethics and
Business Conduct program, support the internal controls and are
designed to ensure employees adhere to the highest standards of
personal and professional integrity. We have a rigorous internal
audit program that independently evaluates the adequacy and
effectiveness of these internal controls.
Managements
Report on Internal Control over Financial Reporting
Management is responsible for designing, maintaining and
evaluating adequate internal control over financial reporting,
as such term is defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended. Our
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles.
We conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in Internal
Control Integrated Framework, management concluded
that our internal control over financial reporting was effective
as of January 3, 2009. The effectiveness of our internal
control over financial reporting as of January 3, 2009 has
been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report
which follows.
A. D. David Mackay
President and Chief Executive Officer
John A. Bryant
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
56
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and Board of Directors of
Kellogg Company
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Kellogg Company
and its subsidiaries at January 3, 2009 and
December 29, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
January 3, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
January 3, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report
on Internal Control over Financial Reporting. Our responsibility
is to express opinions on these financial statements and on the
Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for defined benefit pension, other postretirement and
postemployment plans in 2006. Also, as discussed in Note 1
to the consolidated financial statements, the Company changed
the manner in which it accounts for uncertain tax positions in
2007.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Battle Creek, Michigan
February 23, 2009
57
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
(a) We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer as appropriate, to allow
timely decisions regarding required disclosure under
Rules 13a-15(e)
and
15d-15(e).
Disclosure controls and procedures, no matter how well designed
and operated, can provide only reasonable, rather than absolute,
assurance of achieving the desired control objectives.
As of January 3, 2009, management carried out an evaluation
under the supervision and with the participation of our Chief
Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the
reasonable assurance level.
(b) Pursuant to Section 404 of the Sarbanes-Oxley Act
of 2002, we have included a report of managements
assessment of the design and effectiveness of our internal
control over financial reporting as part of this Annual Report
on
Form 10-K.
The independent registered public accounting firm of
PricewaterhouseCoopers LLP also attested to, and reported on,
the effectiveness of our internal control over financial
reporting. Managements report and the independent
registered public accounting firms attestation report are
included in our 2008 financial statements in Item 8 of this
Report under the captions entitled Managements
Report on Internal Control over Financial Reporting and
Report of Independent Registered Public Accounting
Firm and are incorporated herein by reference.
(c) During the last fiscal quarter, there have been no
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER
INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Refer to the information in our Proxy Statement to be filed with
the Securities and Exchange Commission for the Annual Meeting of
Shareowners to be held on April 24, 2009 (the Proxy
Statement), under the caption
Proposal 1 Election of Directors,
which information is incorporated herein by reference.
Identification and Members of
Audit Committee; Audit Committee Financial
Expert
Refer to the information in the Proxy Statement under the
caption Board and Committee Membership, which
information is incorporated herein by reference.
Executive Officers of the
Registrant
Refer to Executive Officers under Item 1 at
pages 3 through 5 of this Report.
For information concerning
Section 16(a) of the Securities Exchange Act of 1934, refer
to the information under the caption Security
Ownership
Section 16(a) Beneficial Ownership Reporting
Compliance of the Proxy Statement, which information is
incorporated herein by reference.
Code of Ethics for Chief
Executive Officer, Chief Financial Officer and
Controller
We have adopted a Global Code of Ethics which applies to our
chief executive officer, chief financial officer, corporate
controller and all our other employees, and which can be found
at www.kelloggcompany.com. Any amendments or waivers to the
Global Code of Ethics applicable to our chief executive officer,
chief financial officer or corporate controller may also be
found at www.kelloggcompany.com.
ITEM 11. EXECUTIVE
COMPENSATION
Refer to the information under the captions
2008 Director Compensation and Benefits,
Compensation Discussion and Analysis,
Executive Compensation, Retirement and
Non-Qualified Defined Contribution and Deferred Compensation
Plans, Employment Agreements, and
Potential Post-Employment Payments, of the Proxy
Statement, which is incorporated herein by reference. See also
the information under the caption Compensation Committee
Report of the Proxy Statement, which information is
incorporated herein by reference;
58
however, such information is only furnished
hereunder and not deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Refer to the information under the captions Security
Ownership Five Percent Holders, Security
Ownership Officer and Director Stock Ownership
and Equity Compensation Plan Information of the
Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Refer to the information under the captions Corporate
Governance Director Independence and
Related Person Transactions of the Proxy Statement,
which information is incorporated herein by reference.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Refer to the information under the captions
Proposal 2 Ratification of
PricewaterhouseCoopers LLP Fees Paid to Independent
Registered Public Accounting Firm and
Proposal 2 Ratification of
PricewaterhouseCoopers LLP Preapproval Policies and
Procedures of the Proxy Statement, which information is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
The Consolidated Financial Statements and related Notes,
together with Managements Report on Internal Control over
Financial Reporting, and the Report thereon of
PricewaterhouseCoopers LLP dated February 23, 2009, are
included herein in Part II, Item 8.
(a) 1. Consolidated
Financial Statements
Consolidated Statement of Earnings for the years ended
January 3, 2009, December 29, 2007 and
December 30, 2006.
Consolidated Balance Sheet at January 3, 2009 and
December 29, 2007.
Consolidated Statement of Shareholders Equity for the
years ended January 3, 2009, December 29, 2007 and
December 30, 2006.
Consolidated Statement of Cash Flows for the years ended
January 3, 2009, December 29, 2007 and
December 30, 2006.
Notes to Consolidated Financial Statements.
Managements Report on Internal Control over Financial
Reporting.
Report of Independent Registered Public Accounting Firm.
(a) 2. Consolidated
Financial Statement Schedule
All financial statement schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or the notes thereto.
|
|
(a) 3.
|
Exhibits
required to be filed by Item 601 of
Regulation S-K
|
The information called for by this Item is incorporated herein
by reference from the Exhibit Index on pages 61
through 64 of this Report.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 23rd day of February, 2009.
KELLOGG COMPANY
|
|
|
|
By:
|
/s/ A.
D. David Mackay
|
A. D. David Mackay
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Name
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ A.
D. David Mackay
A.
D. David Mackay
|
|
President and Chief Executive Officer and Director (Principal
Executive Officer)
|
|
February 23, 2009
|
|
|
|
|
|
/s/ John
A. Bryant
John
A. Bryant
|
|
Executive Vice President, Chief Operating Officer and Chief
Financial Officer
(Principal Financial Officer)
|
|
February 23, 2009
|
|
|
|
|
|
/s/ Alan
R. Andrews
Alan
R. Andrews
|
|
Vice President and Corporate Controller (Principal Accounting
Officer)
|
|
February 23, 2009
|
|
|
|
|
|
*
James
M. Jenness
|
|
Chairman of the Board and Director
|
|
February 23, 2009
|
|
|
|
|
|
*
Benjamin
S. Carson Sr.
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
John
T. Dillon
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
Gordon
Gund
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
Dorothy
A. Johnson
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
Donald
R. Knauss
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
Ann
McLaughlin Korologos
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
Rogelio
M. Rebolledo
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
Sterling
K. Speirn
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
Robert
A. Steele
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
*
John
L. Zabriskie
|
|
Director
|
|
February 23, 2009
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Gary
H. Pilnick
Gary
H. Pilnick
|
|
Attorney-in-Fact
|
|
February 23, 2009
|
60
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
Electronic(E),
|
|
|
|
|
Paper(P) or
|
Exhibit
|
|
|
|
Incorp. By
|
No.
|
|
Description
|
|
Ref.(IBRF)
|
|
|
1
|
.01
|
|
Underwriting Agreement, dated March 3, 2008, by and among
Kellogg Company, Banc of America Securities LLC and Citigroup
Global Markets Inc., incorporated by reference to
Exhibit 1.1 to our Current Report on
Form 8-K
dated March 3, 2008, Commission file number 1-4171.
|
|
IBRF
|
|
3
|
.01
|
|
Amended Restated Certificate of Incorporation of Kellogg
Company, incorporated by reference to Exhibit 4.1 to our
Registration Statement on
Form S-8,
file number
333-56536.
|
|
IBRF
|
|
3
|
.02
|
|
Bylaws of Kellogg Company, as amended, incorporated by reference
to Exhibit 3.02 to our Annual Report on
Form 10-K
for the fiscal year ended December 28, 2002, file number
1-4171.
|
|
IBRF
|
|
4
|
.01
|
|
Fiscal Agency Agreement dated as of January 29, 1997,
between us and Citibank, N.A., Fiscal Agent, incorporated by
reference to Exhibit 4.01 to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 1997, Commission
file number 1-4171.
|
|
IBRF
|
|
4
|
.02
|
|
Amended and Restated Five-Year Credit Agreement dated as of
November 10, 2006 with twenty-four lenders, JPMorgan Chase
Bank, N.A., as Administrative Agent, J.P. Morgan Europe
Limited, as London Agent, JPMorgan Chase Bank, N.A., Toronto
Branch, as Canadian Agent, J.P. Morgan Australia Limited,
as Australian Agent, Barclays Bank PLC, as Syndication Agent and
Bank of America, N.A., Citibank, N.A. and Suntrust Bank, as
Co-Documentation Agents, incorporated by reference to
Exhibit 4.02 to our Annual Report on
Form 10-K
for the fiscal year ended December 30, 2006, Commission
file number 1-4171.
|
|
IBRF
|
|
4
|
.03
|
|
Indenture dated August 1, 1993, between us and Harris Trust
and Savings Bank, incorporated by reference to Exhibit 4.1
to our Registration Statement on
Form S-3,
Commission file number
33-49875.
|
|
IBRF
|
|
4
|
.04
|
|
Form of Kellogg Company
47/8% Note
Due 2005, incorporated by reference to Exhibit 4.06 to our
Annual Report on
Form 10-K
for the fiscal year ended December 31, 1999, Commission
file number 1-4171.
|
|
IBRF
|
|
4
|
.05
|
|
Indenture and Supplemental Indenture dated March 15 and
March 29, 2001, respectively, between Kellogg Company and
BNY Midwest Trust Company, including the forms of
6.00% notes due 2006, 6.60% notes due 2011 and
7.45% Debentures due 2031, incorporated by reference to
Exhibit 4.01 and 4.02 to our Quarterly Report on
Form 10-Q
for the quarter ending March 31, 2001, Commission file
number 1-4171.
|
|
IBRF
|
|
4
|
.06
|
|
Form of 2.875% Senior Notes due 2008 issued under the
Indenture and Supplemental Indenture described in
Exhibit 4.05, incorporated by reference to
Exhibit 4.01 to our Current Report on
Form 8-K
dated June 5, 2003, Commission file number 1-4171.
|
|
IBRF
|
|
4
|
.07
|
|
Agency Agreement dated November 28, 2005, between Kellogg
Europe Company Limited, Kellogg Company, HSBC Bank and HSBC
Institutional Trust Services (Ireland) Limited,
incorporated by reference to Exhibit 4.1 of our Current
Report in
Form 8-K
dated November 28, 2005, Commission file number 1-4171.
|
|
IBRF
|
|
4
|
.08
|
|
Canadian Guarantee dated November 28, 2005, incorporated by
reference to Exhibit 4.2 of our Current Report on
Form 8-K
dated November 28, 2005, Commission file number 1-4171.
|
|
IBRF
|
|
4
|
.09
|
|
364-Day
Credit Agreement dated as of January 31, 2007 with the
lenders named therein, JPMorgan Chase Bank, N.A., as
Administrative Agent, and Barclays Bank PLC, as Syndication
Agent. J.P. Morgan Securities Inc. and Barclays Capital
served as Joint Lead Arrangers and Joint Bookrunners,
incorporated by reference to Exhibit 4.09 to our Annual
Report on
Form 10-K
for the fiscal year ended December 30, 2006, Commission
file number 1-4171.
|
|
IBRF
|
|
4
|
.10
|
|
364-Day
Credit Agreement dated as of June 13, 2007 with JPMorgan
Chase Bank, N.A., incorporated by reference to Exhibit 4.01
to our Quarterly Report on
Form 10-Q
for the quarter ending June 30, 2007, Commission file
number 1-4171.
|
|
IBRF
|
|
4
|
.11
|
|
Form of Multicurrency Global Note related to Euro-Commercial
Paper Program, incorporated by reference to Exhibit 4.10 to
our Annual Report on
Form 10-K
for the fiscal year ended December 30, 2006, Commission
file number 1-4171.
|
|
IBRF
|
|
4
|
.12
|
|
Officers Certificate of Kellogg Company (with form of
4.25% Senior Note due March 6, 2013)
|
|
IBRF
|
|
10
|
.01
|
|
Kellogg Company Excess Benefit Retirement Plan, incorporated by
reference to Exhibit 10.01 to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 1983, Commission
file number 1-4171.*
|
|
IBRF
|
61
|
|
|
|
|
|
|
|
|
|
|
Electronic(E),
|
|
|
|
|
Paper(P) or
|
Exhibit
|
|
|
|
Incorp. By
|
No.
|
|
Description
|
|
Ref.(IBRF)
|
|
|
10
|
.02
|
|
Kellogg Company Supplemental Retirement Plan, incorporated by
reference to Exhibit 10.05 to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 1990, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.03
|
|
Kellogg Company Supplemental Savings and Investment Plan, as
amended and restated as of January 1, 2003, incorporated by
reference to Exhibit 10.03 to our Annual Report on
Form 10-K
for the fiscal year ended December 28, 2002, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.04
|
|
Kellogg Company International Retirement Plan, incorporated by
reference to Exhibit 10.05 to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 1997, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.05
|
|
Kellogg Company Executive Survivor Income Plan, incorporated by
reference to Exhibit 10.06 to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 1985, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.06
|
|
Kellogg Company Key Executive Benefits Plan, incorporated by
reference to Exhibit 10.09 to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 1991, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.07
|
|
Kellogg Company Key Employee Long Term Incentive Plan,
incorporated by reference to Exhibit 10.6 to our Annual
Report on Form 10-K for the fiscal year ended
December 29, 2007, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.08
|
|
Amended and Restated Deferred Compensation Plan for Non-Employee
Directors, incorporated by reference to Exhibit 10.1 to our
Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 29, 2003, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.09
|
|
Kellogg Company Senior Executive Officer Performance Bonus Plan,
incorporated by reference to Exhibit 10.10 to our Annual
Report on
Form 10-K
for the fiscal year ended December 31, 1995, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.10
|
|
Kellogg Company 2000 Non-Employee Director Stock Plan,
incorporated by reference to Exhibit 10.10 to our Annual
Report on Form 10-K for the fiscal year ended
December 29, 2007, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.11
|
|
Kellogg Company 2001 Long-Term Incentive Plan, as amended and
restated as of February 20, 2003, incorporated by reference
to Exhibit 10.11 to our Annual Report on
Form 10-K
for the fiscal year ended December 28, 2002.*
|
|
IBRF
|
|
10
|
.12
|
|
Kellogg Company Bonus Replacement Stock Option Plan,
incorporated by reference to Exhibit 10.12 to our Annual
Report on
Form 10-K
for the fiscal year ended December 31, 1997, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.13
|
|
Kellogg Company Executive Compensation Deferral Plan
incorporated by reference to Exhibit 10.13 to our Annual
Report on
Form 10-K
for the fiscal year ended December 31, 1997, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.14
|
|
Agreement between us and David Mackay, incorporated by reference
to Exhibit 10.1 to our Quarterly Report on
Form 10-Q
for the fiscal quarter ended September 27, 2003, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.15
|
|
Retention Agreement between us and David Mackay, incorporated by
reference to Exhibit 10.3 to our Quarterly Report on
Form 10-Q
for the fiscal period ended September 25, 2004, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.16
|
|
Employment Letter between us and James M. Jenness, incorporated
by reference to Exhibit 10.18 to our Annual Report in
Form 10-K
for the fiscal year ended January 1, 2005, Commission file
number 1-4171.*
|
|
IBRF
|
|
10
|
.17
|
|
Agreement between us and other executives, incorporated by
reference to Exhibit 10.05 of our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2000, Commission file number
1-4171.*
|
|
IBRF
|
|
10
|
.18
|
|
Stock Option Agreement between us and James Jenness,
incorporated by reference to Exhibit 4.4 to our
Registration Statement on
Form S-8,
file number
333-56536.*
|
|
IBRF
|
|
10
|
.19
|
|
Kellogg Company 2002 Employee Stock Purchase Plan, as amended
and restated as of January 1, 2008, incorporated by
reference to Exhibit 10.22 to our Annual Report on
Form 10-K for the fiscal year ended December 29, 2007,
Commission file number 1-4171.*
|
|
IBRF
|
62
|
|
|
|
|
|
|
|
|
|
|
Electronic(E),
|
|
|
|
|
Paper(P) or
|
Exhibit
|
|
|
|
Incorp. By
|
No.
|
|
Description
|
|
Ref.(IBRF)
|
|
|
10
|
.20
|
|
Kellogg Company 1993 Employee Stock Ownership Plan, incorporated
by reference to Exhibit 10.23 to our Annual Report on
Form 10-K for the fiscal year ended December 29, 2007,
Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.21
|
|
Kellogg Company 2003 Long-Term Incentive Plan, as amended and
restated as of December 8, 2006, incorporated by reference
to Exhibit 10.25 to our Annual Report on
Form 10-K
for the fiscal year ended December 30, 2006, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.22
|
|
Kellogg Company Senior Executive Annual Incentive Plan,
incorporated by reference to Annex II of our Board of
Directors proxy statement for the annual meeting of
shareholders held on April 21, 2006.*
|
|
IBRF
|
|
10
|
.23
|
|
Kellogg Company Severance Plan, incorporated by reference to
Exhibit 10.25 of our Annual Report on
Form 10-K
for the fiscal year ended December 28, 2002, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.24
|
|
Form of Non-Qualified Option Agreement for Senior Executives
under 2003 Long-Term Incentive Plan, incorporated by reference
to Exhibit 10.4 to our Quarterly Report on
Form 10-Q
for the fiscal period ended September 25, 2004, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.25
|
|
Form of Restricted Stock Grant Award under 2003 Long-Term
Incentive Plan, incorporated by reference to Exhibit 10.5
to our Quarterly Report on
Form 10-Q
for the fiscal period ended September 25, 2004, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.26
|
|
Form of Non-Qualified Option Agreement for Non-Employee Director
under 2000 Non-Employee Director Stock Plan, incorporated by
reference to Exhibit 10.6 to our Quarterly Report on
Form 10-Q
for the fiscal period ended September 25, 2004, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.27
|
|
2005-2007
Executive Performance Plan, incorporated by reference to
Exhibit 10.36 of our Annual Report in
Form 10-K
for our fiscal year ended January 1, 2005, Commission file
number 1-4171.*
|
|
IBRF
|
|
10
|
.28
|
|
First Amendment to the Key Executive Benefits Plan, incorporated
by reference to Exhibit 10.39 of our Annual Report in
Form 10-K
for our fiscal year ended January 1, 2005, Commission file
number 1-4171.*
|
|
IBRF
|
|
10
|
.29
|
|
2006-2008
Executive Performance Plan, incorporated by reference to
Exhibit 10.1 of our Current Report on
Form 8-K
dated February 17, 2006, Commission file number 1-4171 (the
2006
Form 8-K).*
|
|
IBRF
|
|
10
|
.30
|
|
Restricted Stock Grant/Non-Compete Agreement between us and John
Bryant, incorporated by reference to Exhibit 10.1 of our
Quarterly Report on
Form 10-Q
for the period ended April 2, 2005, Commission file number
1-4171 (the 2005 Q1
Form 10-Q).*
|
|
IBRF
|
|
10
|
.31
|
|
Restricted Stock Grant/Non-Compete Agreement between us and Jeff
Montie, incorporated by reference to Exhibit 10.2 of the
2005 Q1
Form 10-Q.*
|
|
IBRF
|
|
10
|
.32
|
|
Executive Survivor Income Plan, incorporated by reference to
Exhibit 10.42 of our Annual Report in
Form 10-K
for our fiscal year ended December 31, 2005, Commission
file number 1-4171.*
|
|
IBRF
|
|
10
|
.33
|
|
Purchase and Sale Agreement between us and W. K. Kellogg
Foundation Trust, incorporated by reference to Exhibit 10.1
to our Current Report on
Form 8-K/A
dated November 8, 2005, Commission file number 1-4171.
|
|
IBRF
|
|
10
|
.34
|
|
Purchase and Sale Agreement between us and W. K. Kellogg
Foundation Trust, incorporated by reference to Exhibit 10.1
to our Current Report on
Form 8-K
dated February 16, 2006, Commission file number 1-4171.
|
|
IBRF
|
|
10
|
.35
|
|
Agreement between us and A.D. David Mackay, incorporated by
reference to Exhibit 10.1 to our Current Report on
Form 8-K
dated October 20, 2006, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.36
|
|
Agreement between us and James M. Jenness, incorporated by
reference to Exhibit 10.2 to our Current Report on
Form 8-K
dated October 20, 2006, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.37
|
|
Agreement between us and Jeffrey M Boromisa, incorporated by
reference to Exhibit 10.1 to our Current Report on
Form 8-K
dated December 29, 2006, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.38
|
|
2007-2009
Executive Performance Plan, incorporated by reference to
Exhibit 10.1 of our Current Report on
Form 8-K
dated February 20, 2007, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.39
|
|
Agreement between us and Jeffrey W. Montie, dated July 23,
2007, incorporated by reference to Exhibit 10.1 to our
Current Report on
Form 8-K
dated July 23, 2007, Commission file number 1-4171.*
|
|
IBRF
|
63
|
|
|
|
|
|
|
|
|
|
|
Electronic(E),
|
|
|
|
|
Paper(P) or
|
Exhibit
|
|
|
|
Incorp. By
|
No.
|
|
Description
|
|
Ref.(IBRF)
|
|
|
10
|
.40
|
|
Letter Agreement between us and John A. Bryant, dated
July 23, 2007, incorporated by reference to
Exhibit 10.2 to our Current Report on
Form 8-K
dated July 23, 2007, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.41
|
|
Agreement between us and James M. Jenness, dated
February 22, 2008, incorporated by reference to
Exhibit 10.1 to our Current Report on
Form 8-K
dated February 22, 2008, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.42
|
|
2008-2010
Executive Performance Plan, incorporated by reference to
Exhibit 10.2 of our Current Report on
Form 8-K
dated February 22, 2008, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.43
|
|
Agreement between us and Jeffrey W. Montie, dated
August 11, 2008, incorporated by reference to
Exhibit 10.1 to our Current Report on
Form 8-K
dated August 11, 2008, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.44
|
|
Form of Amendment to Form of Agreement between us and certain
executives, incorporated by reference to Exhibit 10.1 to
our Current Report on
Form 8-K
dated December 18, 2008, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.45
|
|
Amendment to Letter Agreement between us and John A. Bryant,
dated December 18, 2008, incorporated by reference to
Exhibit 10.2 to our Current Report on
Form 8-K
dated December 18, 2008, Commission file number 1-4171.*
|
|
IBRF
|
|
10
|
.46
|
|
Form of Restricted Stock Grant Award under 2003 Long-Term
Incentive Plan, incorporated by reference to Exhibit 10.2
to our Current Report on
Form 8-K
dated December 18, 2008, Commission file number 1-4171.*
|
|
IBRF
|
|
21
|
.01
|
|
Domestic and Foreign Subsidiaries of Kellogg.
|
|
E
|
|
23
|
.01
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
E
|
|
24
|
.01
|
|
Powers of Attorney authorizing Gary H. Pilnick to execute our
Annual Report on
Form 10-K
for the fiscal year ended January 3, 2009, on behalf of the
Board of Directors, and each of them.
|
|
E
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification by A.D. David Mackay.
|
|
E
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification by John A. Bryant.
|
|
E
|
|
32
|
.1
|
|
Section 1350 Certification by A.D. David Mackay.
|
|
E
|
|
32
|
.2
|
|
Section 1350 Certification by John A. Bryant.
|
|
E
|
|
|
|
* |
|
A management contract or compensatory plan required to be filed
with this Report. |
We agree to furnish to the Securities and Exchange Commission,
upon its request, a copy of any instrument defining the rights
of holders of long-term debt of Kellogg and our subsidiaries and
any of our unconsolidated subsidiaries for which Financial
Statements are required to be filed.
We will furnish any of our shareowners a copy of any of the
above Exhibits not included herein upon the written request of
such shareowner and the payment to Kellogg of the reasonable
expenses incurred in furnishing such copy or copies.
64