BATTLE CREEK, Mich., Jul 29, 2010 -- Kellogg Company (NYSE:K) today reported lower second quarter 2010 internal net sales, internal operating profit and currency-neutral earnings per share, reflecting weakness in the cereal category, lower Eggo sales, and the impact of the June 25 voluntary recall of select packages of breakfast cereals. The Company is reducing its 2010 internal net sales, internal operating profit, and currency-neutral earnings per share guidance.
Second quarter net earnings were $302 million, a 15 percent decline over the same quarter a year ago. Second quarter reported earnings per diluted share decreased 14 percent to $0.79 and decreased 11 percent on a currency-neutral basis. The estimated impact of the recall, including lost sales, reduced earnings per share by approximately $0.10 in the quarter and will reduce earnings per share by approximately $0.12 for the full year.
Reported net sales in the second quarter declined 5 percent to $3.1 billion. Internal net sales, excluding the effect of foreign currency translation, decreased 4 percent from the prior year. Total reported operating profit in the quarter decreased 13 percent to $483 million. Internal operating profit decreased 11 percent, driven primarily by the voluntary recall. Reported gross margin contracted 90 basis points to 42.6 percent in the quarter due to the impact of the recall.
"Our second quarter results reflect the deflationary environment in the cereal category, particularly in the U.S. and UK, softer Eggo sales, and the voluntary cereal recall," said David Mackay, Kellogg Company's chief executive officer. "The second quarter performance was weaker than expected, and we have lowered our full-year guidance to reflect the cost of the recall and the difficult business environment. However, we are anticipating a stronger back half driven by increased innovation, reinvestment in our business, and gradual improvement in category trends."
North America
Kellogg North America posted a second quarter net sales decline of 5 percent on a reported basis and a 6 percent decline on an internal basis. The decline was primarily driven by 13 percent lower North America Retail Cereal internal net sales reflecting continued weakness in the cereal category, the impact of the voluntary cereal recall, and a reduction in customer inventories. Strong performance in Pop-Tarts and the wholesome snacks categories contributed to Retail Snacks internal net sales growth of 1 percent. The North America Frozen and Specialty Channels businesses posted an internal net sales decline of 9 percent, as a result of softer Eggo sales as we began to recover from our previous supply disruption.
North America operating profit declined 15 percent on a reported basis and 16 percent on an internal basis. The voluntary cereal recall adversely impacted North America operating profit by 13 percent.
International
Kellogg International posted a 5 percent decline in second quarter 2010 reported net sales. On an internal basis, excluding the effects of currency translation, net sales for Kellogg International were flat. Second quarter internal net sales in Europe were down 3 percent primarily due to weakness in the U.K. cereal business and lower results in the Russia snacks business. Latin America internal net sales rose 5 percent, and Asia Pacific internal net sales grew 3 percent.
Kellogg International operating profit was 7 percent lower on a reported basis. Operating profit was flat on an internal basis due to flat internal net sales combined with a rise in advertising expenditures.
Interest and Tax
In the second quarter 2010, Kellogg's interest expense totaled $61 million, an improvement over the same quarter in 2009 as a result of lower debt. The second quarter effective tax rate was 29.7 percent.
Cash flow
Cash flow, defined as cash from operating activities less capital expenditures, was $446 million year-to-date. Reinforcing its commitment to returning cash to shareowners, Kellogg purchased $208 million of shares in the second quarter under its $2.5 billion three-year share repurchase authorization. For the first half of 2010, Kellogg repurchased $356 million of shares.
Kellogg Lowers 2010 Guidance
Kellogg continues to invest in its business to drive growth over the long term. Incorporating the challenges associated with the impact of the voluntary cereal recall and the current business environment, the Company lowered its 2010 guidance for full-year earnings per share growth on a currency-neutral basis to the range of 8 to 10 percent. The Company expects 2010 internal net sales growth to be in the flat to 1 percent range, and internal operating profit growth to be in the 4 to 6 percent range. Up-front costs for full-year 2010 are now expected to be approximately $0.12 per share compared with earlier estimates of $0.16 per share. Cash flow guidance was reduced to a range of $1.15 to $1.2 billion, in line with business results.
CEO Mackay concluded, "Our adjusted 2010 guidance reflects the challenges we faced in the first half as well as our commitment to reinvesting in our business for long-term sustainable growth. While the current environment remains challenging, our focus is on improving top-line growth, continuing to implement our cost savings and productivity initiatives, and reinvesting in our business. We remain committed to running the business the right way for the long term."
Conference Call / Webcast
Kellogg will host a conference call to discuss these results on July 29, 2010 at 9:30 a.m. Eastern Time. The conference call and accompanying presentation slides will be broadcast live over the Internet at http://investor.kelloggs.com. Analysts and institutional investors may participate in the Q&A session by dialing 888-465-4043 in the U.S., and 201-604-5146 outside of the U.S. Members of the media and the public are invited to attend in a listen-only mode. Rebroadcast information is available at http://investor.kelloggs.com.
About Kellogg Company
With 2009 sales of nearly $13 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, fruit-flavored snacks, frozen waffles, and veggie foods. The Company's brands include Kellogg's(R), Keebler(R), Pop-Tarts(R), Eggo(R), Cheez-It(R), Nutri-Grain(R), Rice Krispies(R), BearNaked(R), Morningstar Farms(R), Famous Amos(R), Special K(R), All-Bran(R), Frosted Mini-Wheats(R), Club(R) and Kashi(R). Kellogg products are manufactured in 18 countries and marketed in more than 180 countries around the world. For more information, visit the Kellogg Company web site at http://www.kelloggcompany.com.
The Kellogg Company logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=3194
Forward-Looking Statements Disclosure
This news release contains, or incorporates by reference, "forward-looking statements" with projections concerning, among other things, the Company's strategy, and the Company's sales, earnings, margin, operating profit, costs and expenditures, interest expense, tax rate, capital expenditure, dividends, cash flow, debt reduction, share repurchases, costs, brand building, ROIC, working capital, growth, new products, innovation, cost reduction projects, and competitive pressures. Forward-looking statements include predictions of future results or activities and may contain the words "expects," "believes," "should," "will," "will deliver," "anticipates," "projects," "estimates," or words or phrases of similar meaning.
The Company's actual results or activities may differ materially from these predictions. The Company's future results could also 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, renovation 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; labor costs; disruptions or inefficiencies in supply chain; 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 including changes in advertising and labeling laws and regulations; the ultimate impact of product recalls; business disruption or other losses from war, terrorist acts or political unrest; and other items.
Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
-------------------------------------------------------------------
Year-to-date period
Quarter ended ended
July July
July 3, 4, July 3, 4,
(Results are unaudited) 2010 2009 2010 2009
---------------------------- ------- ------ ------------ ------
Net sales $3,062 $3,229 $6,380 $6,398
Cost of goods sold 1,757 1,825 3,650 3,692
Selling, general and
administrative expense 822 851 1,610 1,624
---------------------------- ------- ------ ------------ ------
Operating profit 483 553 1,120 1,082
Interest expense 61 67 126 134
Other income (expense), net 7 9 8 9
---------------------------- ------- ------ ------------ ------
Income before income taxes 429 495 1,002 957
Income taxes 128 141 284 284
Earnings (loss) from joint
ventures -- (1) -- (1)
---------------------------- ------- ------ ------------ ------
Net income $301 $353 $718 $672
---------------------------- ------- ------ ------------ ------
Net income (loss)
attributable to
noncontrolling interests (1) (1) (2) (3)
---------------------------- ------- ------ ------------ ------
Net income attributable to
Kellogg Company $302 $354 $720 $675
---------------------------- ------- ------ ------------ ------
Per share amounts:
Basic $.80 $.93 $1.89 $1.77
Diluted $.79 $.92 $1.88 $1.76
Dividends per share $.3750 $.3400 $.7500 $.6800
---------------------------- ------- ------ ------------ ------
Average shares outstanding:
Basic 381 383 380 382
---------------------------- ------- ------ ------------ ------
Diluted 384 383 384 383
---------------------------- ------- ------ ------------ ------
Actual shares outstanding at
period end 378 383
---------------------------- ------- ------ ------------ ------
-------------------------------------------------------------------
Kellogg Company and Subsidiaries
SELECTED OPERATING SEGMENT DATA
----------------------------------------------------------
Year-to-date period
Quarter ended ended
July July
(millions) July 3, 4, July 3, 4,
(Results are
unaudited) 2010 2009 2010 2009
------------------- ------- ------ ------------ ------
Net sales
North America $2,064 $2,176 $4,339 $4,387
Europe 560 617 1,166 1,174
Latin America 240 258 462 488
Asia Pacific (a) 198 178 413 349
------------------- ------- ------ ------------ ------
Consolidated $3,062 $3,229 $6,380 $6,398
------------------- ------- ------ ------------ ------
Segment operating
profit
North America $362 $426 $857 $829
Europe 100 104 205 199
Latin America 47 57 92 106
Asia Pacific (a) 20 21 57 46
Corporate (46) (55) (91) (98)
------------------- ------- ------ ------------ ------
Consolidated $483 $553 $1,120 $1,082
------------------- ------- ------ ------------ ------
----------------------------------------------------------
(a) Includes Australia, Asia and South Africa.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
-------------------------------------------------------
Year-to-date period
ended
July
July 3, 4,
(unaudited) 2010 2009
---------------------------------- ------------ -----
Operating activities
Net income $718 $672
Adjustments to reconcile net
income
to operating cash flows:
Depreciation and amortization 178 189
Deferred income taxes (52) 30
Other 73 (8)
Postretirement benefit plan
contributions (36) (84)
Changes in operating assets and
liabilities (288) (103)
---------------------------------- ------------ -----
Net cash provided by operating
activities 593 696
---------------------------------- ------------ -----
Investing activities
Additions to properties (147) (161)
Other 2 1
---------------------------------- ------------ -----
Net cash used in investing
activities (145) (160)
---------------------------------- ------------ -----
Financing activities
Net issuances (reductions) of
notes payable 110 (882)
Issuances of long-term debt -- 745
Reductions of long-term debt (1) --
Net issuances of common stock 148 18
Common stock repurchases (a) (266) --
Cash dividends (286) (260)
Other 6 2
---------------------------------- ------------ -----
Net cash used in financing
activities (289) (377)
---------------------------------- ------------ -----
Effect of exchange rate changes on
cash and cash equivalents (22) 10
---------------------------------- ------------ -----
Increase in cash and cash
equivalents 137 169
Cash and cash equivalents at
beginning of period 334 255
---------------------------------- ------------ -----
Cash and cash equivalents at end
of period $471 $424
---------------------------------- ------------ -----
-------------------------------------------------------
Supplemental Financial Data:
Cash Flow (operating cash flow
less property additions) (b) $446 $535
-------------------------------------------------------
(a) Common stock repurchases in the year-to-date period
ended July 3, 2010 were $356; $90 million of these
purchases were paid in the third quarter of 2010.
(b) We use this non-GAAP measure of cash flow to focus
management and investors on the amount of cash
available for debt reduction, dividend distributions,
acquisition opportunities, and share repurchase.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
---------------------------------------------------
January
July 3, 2,
2010 2010
(unaudited) *
----------------------------- ----------- -------
Current assets
Cash and cash equivalents $471 $334
Accounts receivable, net 1,144 1,093
Inventories:
Raw materials and supplies 224 214
Finished goods and materials
in process 661 696
Deferred income taxes 141 128
Other prepaid assets 151 93
----------------------------- ----------- -------
Total current assets 2,792 2,558
Property, net of accumulated
depreciation
of $4,491 and $4,520 2,916 3,010
Goodwill 3,639 3,643
Other intangibles, net of
accumulated amortization
of $46 and $45 1,457 1,458
Pension 185 160
Other assets 396 371
----------------------------- ----------- -------
Total assets $11,385 $11,200
----------------------------- ----------- -------
Current liabilities
Current maturities of
long-term debt $954 $1
Notes payable 158 44
Accounts payable 1,075 1,077
Accrued advertising and
promotion 408 409
Accrued income taxes 12 33
Accrued salaries and wages 187 322
Other current liabilities 470 402
----------------------------- ----------- -------
Total current liabilities 3,264 2,288
Long-term debt 3,915 4,835
Deferred income taxes 428 425
Pension liability 440 430
Other liabilities 954 947
Commitments and contingencies
Equity
Common stock, $.25 par value 105 105
Capital in excess of par
value 481 472
Retained earnings 5,903 5,481
Treasury stock, at cost (2,010) (1,820)
Accumulated other
comprehensive income (loss) (2,096) (1,966)
----------------------------- ----------- -------
Total Kellogg Company equity 2,383 2,272
Noncontrolling interests 1 3
----------------------------- ----------- -------
Total equity 2,384 2,275
----------------------------- ----------- -------
Total liabilities and equity $11,385 $11,200
----------------------------- ----------- -------
* Condensed from audited financial statements.
Kellogg Company and Subsidiaries
Analysis of net sales and operating profit performance
Second quarter of 2010 versus 2009
-------------------------------------------------------------------------------------------
Asia
North Latin Pacific
(dollars in millions) America Europe America (a) Corporate Consolidated
---------------------------- --------- ------- ------- ------- --------- ------------
2010 net sales $ 2,064 $ 560 $ 240 $ 198 $ -- $ 3,062
---------------------------- --------- ------- ------- ------- --------- ------------
2009 net sales $ 2,176 $ 617 $ 258 $ 178 $ -- $ 3,229
---------------------------- --------- ------- ------- ------- --------- ------------
% change - 2010 vs. 2009:
Volume (tonnage) (b) -5.3% -3.3% -6.1% 3.9% -- -4.5%
Pricing/mix -.5% .8% 10.8% -.5% -- .6%
---------------------------- --------- ------- ------- ------- --------- ------------
Subtotal - internal business -5.8% -2.5% 4.7% 3.4% -- -3.9%
Foreign currency impact .7% -6.8% -12.0% 8.5% -- -1.3%
---------------------------- --------- ------- ------- ------- --------- ------------
Total change -5.1% -9.3% -7.3% 11.9% -- -5.2%
---------------------------- --------- ------- ------- ------- --------- ------------
-------------------------------------------------------------------------------------------
Asia
North Latin Pacific
(dollars in millions) America Europe America (a) Corporate Consolidated
---------------------------- --------- ------- ------- ------- --------- ------------
2010 operating profit $ 362 $ 100 $ 47 $ 20 $ (46) $ 483
---------------------------- --------- ------- ------- ------- --------- ------------
2009 operating profit $ 426 $ 104 $ 57 $ 21 $ (55) $ 553
---------------------------- --------- ------- ------- ------- --------- ------------
% change - 2010 vs. 2009:
Internal business -16.2% 6.3% -9.9% -10.3% 16.7% -11.1%
Foreign currency impact .9% -9.6% -7.1% 9.8% -- -1.5%
---------------------------- --------- ------- ------- ------- --------- ------------
Total change -15.3% -3.3% -17.0% -.5% 16.7% -12.6%
---------------------------- --------- ------- ------- ------- --------- ------------
(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.
Kellogg Company and Subsidiaries
Analysis of net sales and operating profit performance
Year-to-date 2010 versus 2009
---------------------------------------------------------------------------------------------
Asia
North Latin Pacific
(dollars in millions) America Europe America (a) Corporate Consolidated
---------------------------- --------- --------- ------- ------- --------- ------------
2010 net sales $ 4,339 $ 1,166 $ 462 $ 413 $ -- $ 6,380
---------------------------- --------- --------- ------- ------- --------- ------------
2009 net sales $ 4,387 $ 1,174 $ 488 $ 349 $ -- $ 6,398
---------------------------- --------- --------- ------- ------- --------- ------------
% change - 2010 vs. 2009:
Volume (tonnage) (b) -2.1% -1.0% -3.7% -.7% -- -2.0%
Pricing/mix .1% .7% 6.8% 3.0% -- .9%
---------------------------- --------- --------- ------- ------- --------- ------------
Subtotal - internal business -2.0% -.3% 3.1% 2.3% -- -1.1%
Foreign currency impact .9% -.4% -8.5% 16.3% -- .8%
---------------------------- --------- --------- ------- ------- --------- ------------
Total change -1.1% -.7% -5.4% 18.6% -- -.3%
---------------------------- --------- --------- ------- ------- --------- ------------
---------------------------------------------------------------------------------------------
Asia
North Latin Pacific
(dollars in millions) America Europe America (a) Corporate Consolidated
---------------------------- --------- --------- ------- ------- --------- ------------
2010 operating profit $ 857 $ 205 $ 92 $ 57 $ (91) $ 1,120
---------------------------- --------- --------- ------- ------- --------- ------------
2009 operating profit $ 829 $ 199 $ 106 $ 46 $ (98) $ 1,082
---------------------------- --------- --------- ------- ------- --------- ------------
% change - 2010 vs. 2009:
Internal business 2.1% 5.2% -5.0% .9% 8.1% 2.9%
Foreign currency impact 1.2% -2.1% -8.2% 23.1% -- .6%
---------------------------- --------- --------- ------- ------- --------- ------------
Total change 3.3% 3.1% -13.2% 24.0% 8.1% 3.5%
---------------------------- --------- --------- ------- ------- --------- ------------
(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.
Kellogg Company and Subsidiaries
Up-Front Costs*
$ millions
Year-to-date period ended July 3,
Quarter ended July 3, 2010 2010
------------------------------ -----------------------------------
Selling, Selling,
Cost of general and general and
goods administrative Cost of administrative
sold expense Total goods sold expense Total
----------------- ------- -------------- ----- ------------ -------------- -----
2010
North America $ 6 $ 1 $ 7 $ 13 $ 5 $ 18
Europe 5 (1) 4 8 -- 8
Latin America 1 -- 1 1 -- 1
Asia Pacific -- 1 1 1 2 3
Corporate -- 2 2 -- 2 2
------- -------------- ----- ------------ -------------- -----
Total $ 12 $ 3 $ 15 $ 23 $ 9 $ 32
----------------- ------- -------------- ----- ------------ -------------- -----
Year-to-date period ended July 4,
Quarter ended July 4, 2009 2009
------------------------------ -----------------------------------
Selling, Selling,
Cost of general and general and
goods administrative Cost of administrative
sold expense Total goods sold expense Total
----------------- ------- -------------- ----- ------------ -------------- -----
2009
North America $ 18 $ 11 $ 29 $ 35 $ 11 $ 46
Europe 9 -- 9 10 -- 10
Latin America 1 -- 1 2 -- 2
Asia Pacific 1 -- 1 1 -- 1
Corporate -- -- -- -- -- --
------- -------------- ----- ------------ -------------- -----
Total $ 29 $ 11 $ 40 $ 48 $ 11 $ 59
----------------- ------- -------------- ----- ------------ -------------- -----
----------------- ------- -------------- ----- ------------ -------------- -----
2010 Variance - better (worse) than 2009
North America $ 12 $ 10 $ 22 $ 22 $ 6 $ 28
Europe 4 1 5 2 -- 2
Latin America -- -- -- 1 -- 1
Asia Pacific 1 (1) -- -- (2) (2)
Corporate -- (2) (2) -- (2) (2)
------- -------------- ----- ------------ -------------- -----
Total $ 17 $ 8 $ 25 $ 25 $ 2 $ 27
----------------- ------- -------------- ----- ------------ -------------- -----
* Up-front costs are charges incurred by the Company which will result in future cash
savings and/or reduced depreciation
SOURCE: Kellogg Company
CONTACT: Kellogg Company Analyst Contact: Kathryn Koessel,(269)961-9089 Media Contact: Kris Charles,(269)961-3799
