Corporate & U.S. News
BATTLE CREEK, Mich., Jan. 30 /PRNewswire-FirstCall/ -- Kellogg Company (NYSE: K) today reported that its fourth quarter results met expectations and finished off a very strong 2002.
Reported net earnings for the full year 2002 were $720.9 million, or $1.75 per diluted share, compared to last year's $473.6 million, or $1.16 per share. The 2002 earnings included $0.02 related to favorable legal settlements in the first quarter, while the 2001 earnings included net restructuring charges of $0.05, a loss on debt extinguishment of $0.02, adverse impact of $0.11 from specific activities related to integrating Keebler Foods, and $0.21 of amortization. (The Company adopted SFAS No. 142 in 2002, eliminating most of its amortization on a prospective basis.) Excluding these items, EPS in 2002 and 2001 was $1.73 and $1.55, respectively.
In the fourth quarter, reported net earnings were $191.0 million, or $0.47 per diluted share, compared to the year-ago period's $124.6 million, or $0.31 per share. The fourth quarter 2001 earnings included $0.02 from restructuring credits, $0.04 of costs from specific activities related to integrating Keebler Foods, and $0.06 of amortization eliminated by SFAS No. 142; excluding these items, EPS was $0.39.
"Significant changes to our business in 2001 were followed by a year of acceleration in 2002," said Carlos Gutierrez, Kellogg's chairman and chief executive officer. "By focusing on execution and adhering to our Volume to Value and Manage for Cash financial models, we achieved all our goals for the year: We boosted our sales growth, improved our profitability, invested behind our brands, generated more cash flow than we anticipated, and reduced our debt."
On a comparable basis, the growth rates for net sales, operating profit, and EPS were 4%, 8%, and 12%, respectively in 2002; for the quarter, these rates were 2%, 6%, and 21%, respectively. This basis adjusts year-ago sales and profit to assume Keebler was owned during the first quarter of 2001, and to exclude restructuring charges, the impact of factors associated with the integration of Keebler, the amortization of intangible assets eliminated by SFAS No. 142, results attributable to the since-divested Bake-Line Products, and, in the fourth quarter, a difference in shipping days created by changing the financial reporting periods for all business units to uniform 13-week quarters. This basis adjusts year-ago EPS to exclude the prior year's restructuring charges, extraordinary loss from debt extinguishment, accounting changes, the integration impact and the amortization eliminated by SFAS No. 142; it adjusts current-year EPS to exclude favorable legal settlements in the first quarter.
"Throughout the year, we saw broad-based acceleration in our sales growth, driven by investing in brand-building and innovation, and by a favorable mix shift," commented Mr. Gutierrez.
Reported net sales in 2002 increased by 10%, to $8.30 billion. On a comparable basis, adjusting for acquisitions and divestitures, as well as the year-ago impact of integrating Keebler, net sales increased a solid 4%, ahead of the Company's long-term target of low single-digit growth. In the fourth quarter, reported net sales were up 4%, to $1.98 billion, which translated into a comparable-basis gain of 2%, despite difficult comparisons.
U.S. Cereal sales were up 6% on a comparable basis in 2002, and 1% in the fourth quarter when they compared against a notably strong 13% gain in the year-ago period; that business posted its third consecutive year of increased share of the ready-to-eat cereal category. U.S. Snacks sales in 2002 increased by 1% on a comparable basis, led by successful new wholesome snacks products; sales for the division slipped 4% in the fourth quarter when the elimination of certain salesforce incentives contributed to a decline in biscuits sales. All other businesses in the U.S. posted comparable-basis sales growth of 5% for the year and 4% for the quarter, led by our frozen foods brands, Eggo and Morningstar Farms, and by Pop-Tarts. Kellogg International posted currency-adjusted sales growth of over 3% in the full year and the fourth quarter. Latin America led this growth, while Europe and the other international regions also posted gains for the quarter and the year.
"Key to sustaining our growth is our underlying profitability and investment behind our brands," Mr. Gutierrez continued. "Improving our gross profit margin enabled us to invest significantly in brand-building and still post operating profit growth that exceeded our long-term target."
Operating profit increased 29% in 2002, to $1.51 billion. On a comparable basis, which excludes the impact of restructuring charges, acquisitions, divestitures, the year-ago profit impact of the Keebler integration, and amortization eliminated by SFAS 142, operating profit was up 8% in 2002. In the fourth quarter, operating profit rose by 26% year-over-year, or 6% on a comparable basis. In both periods, gross profit margin improved meaningfully because of higher revenue, improved sales mix, and cost savings related to the Keebler integration. This allowed the Company to increase advertising and consumer promotion investment by 9% for the year and 8% for the quarter, on a comparable basis.
Mr. Gutierrez said, "Driving cash flow has become part of our business culture at Kellogg. In 2002, we generated yet another year of outstanding cash flow and paid down a substantial amount of debt. This has improved our financial flexibility."
Cash flow, defined as cash from operating activities less capital expenditures, increased by 17% in 2002, reaching the $1 billion mark, before year-end voluntary cash contributions to postretirement benefit funds. Driving this exceptional cash flow was continued improvement in working capital and more disciplined capital expenditure. The Company used this cash flow to reduce its outstanding debt by over $500 million in 2002, and to make a voluntary contribution to our benefit funds, which had a 2002 cash flow impact of approximately $254 million after taxes. The latter will partially offset an expected increase in benefit expense in 2003, owing to weak stock market returns and adjustments to various benefit plan assumptions. These factors did, however, require a reduction of book equity on the balance sheet of $306 million, which has no impact on our liquidity or debt covenants.
Kellogg Reaffirms 2003 Outlook
Kellogg reiterated its outlook for EPS of $1.86-1.90 in 2003, a high single-digit increase over comparable-basis 2002 EPS. It also estimated that EPS in the first quarter of 2003 will be $0.38-0.40, a double-digit increase over the comparable-basis results of the year-earlier period.
Driving EPS growth in 2003 will be low single-digit net sales growth across the Company's major operating units. While commodity costs and benefit expenses have risen sharply, gross profit margin is expected to expand modestly because of higher sales, favorable mix, and productivity initiatives. This should drive a mid-single-digit gain in operating profit, even as brand- building investment is increased faster than net sales.
Mr. Gutierrez concluded, "Kellogg employees all over the world deserve credit for our 2002 performance, which was outstanding on all key measures. There is no doubt in my mind that we improved our capabilities, our execution, and our financial strength. We achieved our goal of creating momentum for 2003, and we are set on a course for dependable financial performance in 2003 and beyond."
About Kellogg Company
With 2002 sales of more than $8 billion, Kellogg Company is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts, and ice cream cones. The company's brands include Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Murray, Austin, Morningstar Farms, Famous Amos, Carr's, Plantation, Ready Crust, and Kashi. Kellogg products are manufactured in 19 countries and marketed in more than 160 countries around the world. For more information, visit Kellogg's web site at http://www.kelloggs.com.
Forward-Looking Statements Disclosure
This news release contains forward-looking statements related to business performance, cash flow, costs, sales, operating profit, earnings and growth. Actual performance may differ materially from these statements due to factors related to the Keebler acquisition, including integration problems, failures to achieve synergies, unanticipated liabilities, and the substantial amount of indebtedness incurred to finance the acquisition (which could, among other things, hinder the company's ability to adjust rapidly, make the company more vulnerable to a downturn, and place the company at a competitive disadvantage to less-leveraged companies); competitive conditions and their impact; pricing and promotional spending; the effectiveness of marketing spending and programs; the success of productivity improvements and business transitions; the success of innovation and new product introductions; the availability of and interest rates on short-term financing; commodity prices and labor costs; actual market performance of investments; changes in consumer behavior and preferences; U.S. and foreign economic factors such as interest rates, statutory tax rates, and foreign currency translations or unavailability; legal factors; business disruption or other losses from terrorist acts or political unrest; and other factors.
Kellogg Company and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
Year-to-date Year-to-date (millions) period ended period ended December 28, December 31, 2002 2001
Operating activities Net earnings $720.9 $473.6 Items in net earnings not requiring cash: Depreciation and amortization 348.4 438.6 Deferred income taxes 111.2 71.5 Restructuring charges, net of cash paid - 31.2 Other 0.7 (66.0) Postretirement benefit plan contributions (446.6) (76.3) Changes in operating assets and liabilities 265.3 259.4
Net cash provided by operating activities 999.9 1,132.0
Investing activities Additions to properties (253.5) (276.5) Acquisitions of businesses (2.2) (3,858.0) Dispositions of businesses 60.9 - Other 6.0 (9.3)
Net cash used in investing activities (188.8) (4,143.8)
Financing activities Net issuances (reductions) of notes payable (92.4) 30.0 Issuances of long-term debt - 5,001.4 Reductions of long-term debt (439.3) (1,608.4) Net issuances of common stock 100.9 26.4 Common stock repurchases (101.0) - Cash dividends (412.6) (409.8) Other - 0.6
Net cash provided by (used in) financing activities (944.4) 3,040.2
Effect of exchange rate changes on cash 2.1 (1.0)
Increase (decrease) in cash and cash equivalents (131.2) 27.4 Cash and cash equivalents at beginning of period 231.8 204.4
Cash and cash equivalents at end of period $100.6 $231.8
Kellogg Company and Subsidiaries CONSOLIDATED EARNINGS
Year-to- Year-to- date date Quarter Quarter period period (millions, except per share data) ended ended ended ended Dec. 28, Dec. 31, Dec. 28, Dec. 31, (Quarterly results are unaudited) 2002 2001 2002 2001
Net sales $1,980.7 $1,896.9 $8,304.1 $7,548.4
Cost of goods sold 1,066.9 1,034.8 4,569.0 4,211.4 Selling and administrative expense 520.0 564.7 2,227.0 2,135.8 Restructuring charges - (15.0) - 33.3
Operating profit 393.8 312.4 1,508.1 1,167.9
Interest expense 94.0 99.7 391.2 351.5 Other income (expense), net 2.9 (6.4) 27.4 (12.3)
Earnings before income taxes, extraordinary loss, and cumulative effect of accounting change 302.7 206.3 1,144.3 804.1 Income taxes 111.7 81.7 423.4 322.1
Earnings before extraordinary loss and cumulative effect of accounting change 191.0 124.6 720.9 482.0 Extraordinary loss (net of tax) - - - (7.4) Cumulative effect of accounting change (net of tax) - - - (1.0)
Net earnings $191.0 $124.6 $720.9 $473.6
Per share amounts: Earnings before extraordinary loss and cumulative effect of accounting change: Basic $.47 $.31 $1.77 $1.19 Diluted $.47 $.31 $1.75 $1.18 Net earnings: Basic $.47 $.31 $1.77 $1.17 Diluted $.47 $.31 $1.75 $1.16
Dividends per share $.2525 $.2525 $1.01 $1.01
Average shares outstanding (basic) 407.9 406.5 408.4 406.1 Average shares outstanding (diluted) 410.6 408.3 411.5 407.2
Actual shares outstanding at period end 407.9 406.6
SUPPLEMENTAL FINANCIAL DATA (millions, except per share data)
Adjusted earnings per share (basic) $.47 $.39 $1.77 $1.56 Adjusted earnings per share (diluted) $.47 $.39 $1.75 $1.55 Amortization expense (net of tax) eliminated by SFAS No. 142 - $25.8 - $85.0 Cash flow (operating cash flow less property additions) ($188.1) $154.6 $746.4 $855.5
On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, amortization of goodwill and indefinite-lived intangible assets is eliminated in periods subsequent to adoption. Prior period financial results are not restated. However, comparative earnings information for prior periods is disclosed.
Beginning January 1, 2002, the Company has applied the consensus reached by the Emerging Issues Task Force of the FASB in Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." As a result, the Company has reclassified certain promotional expenditures from selling, general, and administrative expense (SGA) to net sales, and has reclassified promotional package inserts from SGA to cost of goods sold. Prior-period financial statements have been reclassified to comply with this guidance.
Other income (expense), net, for the year-to-date period ended December 28, 2002, includes a $24.7 credit related to legal settlements, comprised of $16.5 recorded in the first quarter and lesser amounts in subsequent quarters.
Operating profit for the year-to-date period ended December 31, 2001, includes net restructuring charges of $33.3 ($20.5 after tax or $.05 per share), comprised of charges of $48.3 and credits of $15.0. The charges related to preparing Kellogg for the Keebler integration and continued actions supporting the Company's growth strategy in the U.S. and S.E. Asia. Approximately 70% of these charges were comprised of asset write-offs, with the remainder consisting of employee severance and other cash costs. The credits resulted from adjustments to various restructuring and asset disposal reserves associated with the completion of numerous multi-year streamlining initiatives.
Operating profit for the quarter and year-to-date periods ended December 31, 2001, includes the financial impact of Keebler integration activities. During the quarter, this integration impact consisted primarily of employee- related costs such as relocation and retention, and impairment and accelerated depreciation of software assets being abandoned due to the conversion of the Company's U.S. business to the SAP system. In the year-to-date period, this integration impact also included the sales and gross profit impact of lowering trade inventories in order to transfer Kellogg snack foods to Keebler's direct store door delivery (DSD) system. For the quarter, management estimates that these activities reduced gross profit by $5.8, and increased selling, general, and administrative expense by $25.6, for a total operating profit reduction of $31.4 ($19.4 after tax or $.04 per share). For the year-to-date period, management estimates that these activities reduced net sales by $17.8, reduced gross profit by $23.4, and increased selling, general and administrative expense by $51.0, for a total operating profit reduction of $74.4 ($46.2 after tax or $.11 per share).
Net earnings for the year-to-date period ended December 31, 2001, include an extraordinary loss of $7.4 (net of tax benefit of $4.2) or $.02 per share, related to the extinguishment of $400 of long-term debt.
On January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". For the year-to-date period ended December 31, 2001, the Company reported a charge to earnings of $1.0 (net of tax benefit of $.6) and a charge to other comprehensive income of $14.9 (net of tax benefit of $8.6) in order to recognize the fair value of derivative instruments as either assets or liabilities on the balance sheet.
Adjusted earnings per share is defined as net earnings excluding restructuring charges, integration impact, extraordinary loss, cumulative effect of accounting change, and the pro forma impact of amortization expense eliminated by SFAS No. 142, divided by average shares outstanding.
Kellogg Company and Subsidiaries SELECTED OPERATING SEGMENT DATA
Year-to- Year-to- date date Quarter Quarter period period (millions) ended ended ended ended Dec. 28, Dec. 31, Dec. 28, Dec. 31, (Quarterly results are unaudited) 2002 2001 2002 2001
Net sales United States (a) $1,293.8 $1,261.3 $5,525.4 $4,889.4 Europe 367.7 324.7 1,469.8 1,360.7 Latin America 150.5 159.3 631.1 650.0 All other operating segments © 168.7 151.6 677.8 648.3 Corporate - - - - Consolidated (a) $1,980.7 $1,896.9 $8,304.1 $7,548.4
Segment operating profit United States (b) $285.4 $219.3 $1,073.0 $875.5 Europe 63.0 55.1 252.5 245.6 Latin America 41.3 42.2 170.1 171.1 All other operating segments © 35.3 31.1 104.0 103.1 Corporate (b) (31.2) (19.6) (91.5) (90.5) Consolidated (b) 393.8 328.1 1,508.1 1,304.8
Amortization eliminated by SFAS No. 142 (d) - (30.7) - (103.6) Restructuring charges - 15.0 - (33.3) Operating profit as reported (b) $393.8 $312.4 $1,508.1 $1,167.9
(a) Includes integration impact estimated to reduce net sales by $17.8 for the year-to-date period ended December 31, 2001.
(b) Includes integration impact estimated to reduce operating profit by $31.4 for the quarter and $74.4 for the year-to-date period ended December 31, 2001
© Includes Canada, Australia, and Asia.
(d) Operating segment profitability in prior periods has been restated to reflect the pro forma impact of this standard.
Kellogg Company and Subsidiaries CONSOLIDATED BALANCE SHEET
(millions, except per share data) December 28, December 31, 2002 2001 *
Current assets Cash and cash equivalents $100.6 $231.8 Accounts receivable, net 741.0 762.3 Inventories: Raw materials and supplies 172.2 170.7 Finished goods and materials in process 431.0 403.8 Other current assets 318.6 333.4
Total current assets 1,763.4 1,902.0 Property, net of accumulated depreciation of $3,012.4 and $2,659.2 2,840.2 2,952.8 Goodwill 3,106.6 3,069.5 Other intangibles, net of accumulated amortization of $20.6 and $19.1** 2,026.0 2,051.1 Other assets 483.1 393.2
Total assets $10,219.3 $10,368.6
Current liabilities Current maturities of long-term debt $776.4 $82.3 Notes payable 420.9 513.3 Accounts payable 619.0 577.5 Income taxes 151.7 77.3 Other current liabilities 1,046.9 957.2
Total current liabilities 3,014.9 2,207.6
Long-term debt 4,519.4 5,619.0 Nonpension postretirement benefits 329.6 475.1 Deferred income taxes and other liabilities 1,460.3 1,195.4
Shareholders' equity Common stock, $.25 par value 103.8 103.8 Capital in excess of par value 49.9 91.5 Retained earnings 1,873.0 1,564.7 Treasury stock, at cost (278.2) (337.1) Accumulated other comprehensive income (853.4) (551.4)
Total shareholders' equity 895.1 871.5
Total liabilities and shareholders' equity $10,219.3 $10,368.6
* Condensed from audited financial statements
** Effective January 1, 2002, the Company has reclassified accumulated amortization to the net carrying value of non-amortized intangibles pursuant to SFAS No. 142.