0000055067k:MarkToMarketAdjustmentsMember2020-09-272021-01-02
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended January 2, 2021December 30, 2023
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| ☐ | 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 CompanyKellanova
(Exact name of registrant as specified in its charter)
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| Delaware | | 38-0710690 |
(State or other jurisdiction of Incorporation
or organization) | | (I.R.S. Employer Identification No.) |
One Kellogg Square412 N. Wells Street
Battle Creek, Michigan 49016-3599Chicago, IL 60654
(Address of Principal Executive Offices)
Registrant’s telephone number: (269) 961-2000
Securities registered pursuant to Section 12(b) of the Securities Act:
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| Title of each class: | Trading symbol(s): | Name of each exchange on which registered: |
| Common Stock, $.25 par value per share | K | New York Stock Exchange |
1.750% Senior Notes due 2021 | K 21 | New York Stock Exchange |
0.800% Senior Notes due 2022 | K 22A | New York Stock Exchange |
| 1.000% Senior Notes due 2024 | K 24 | New York Stock Exchange |
| 1.250% Senior Notes due 2025 | K 25 | New York Stock Exchange |
| 0.500% Senior Notes due 2029 | K 29 | New York Stock Exchange |
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 ☑ No ☐
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 ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☑ | | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | |
| | | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☑ No ☐
The aggregate market value of the common stock held by non-affiliates of the registrant (assuming for purposes of this computation only that the W. K. Kellogg Foundation Trust, directors and executive officers may be affiliates) as of the close of business on June 27, 202030, 2023 was approximately $17.8$19.2 billion based on the closing price of $63.86$67.40 for one share of common stock, as reported for the New York Stock Exchange on that date.
As of January 30, 2021, 343,950,31127, 2024, 340,678,265 shares of the common stock of the registrant were issued and outstanding.
Parts of the registrant’s Proxy Statement for the Annual Meeting of Shareowners to be held on April 30, 202126, 2024 are incorporated by reference into Part III of this Report.
PART I
ITEM 1. BUSINESS
The Company. Kellanova (formerly Kellogg Company,Company), founded in 1906 and incorporated in Delaware in 1922, and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cerealsnacks and convenience foods.
The address of the principal business office of Kellogg CompanyKellanova is One Kellogg Square, P.O. Box 3599, Battle Creek, Michigan 49016-3599.412 N. Wells Street, Chicago, Illinois 60654. Unless otherwise specified or indicated by the context, “Kellogg,“Kellanova,” the "Company," “we,” “us” and “our” refer to Kellogg Company,Kellanova, its divisions and subsidiaries.
On October 2, 2023, the Company completed the separation of its North America cereal business resulting in two independent companies, Kellanova and WK Kellogg Co. As a result of the distribution, Kellanova shareholders of record on September 21, 2023, received one share of WK Kellogg Co common stock for every four shares of Kellanova common stock.
Reported results were prepared in accordance with U.S. GAAP, include all net sales and expenses recognized during the periods, and reflect WK Kellogg Co as discontinued operations for all periods presented. All
amounts, percentages and disclosures for all periods presented reflect only the continuing operations of Kellanova unless otherwise noted. See the discussion in Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and in Note 2 within Notes to the Consolidated Financial Statements, which are located herein under Part II, Item 8.
Financial Information About Segments. Information on segments is located in Note 1718 within Notes to the Consolidated Financial Statements.
Principal Products. Our principal products are snacks, such as crackers, savory snacks, toaster pastries, cereal bars, granola bars and bites; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles. These products were, as of February 22, 2021,20, 2024, manufactured by us in 21 countries and marketed in more than 180 countries. They are sold to retailers through direct sales forces for resale to consumers. We use broker and distributor arrangements for certain products and channels, as well as in certain geographies.
Our snacks brands are marketed under brands such as Kellogg’s, Cheez-It, Pringles, Austin, Parati, and RXBAR. Our cereals and cereal bars are generally marketed under the Kellogg’s name, with some under the Kashi and Bear Naked brands. Our frozen foods are marketed under the Eggo and Morningstar Farms brands.
We also market crackers, crisps, and other convenience foods, under brands such as Kellogg’s, Cheez-It, Pringles, and Austin, to supermarkets in the United States through a variety of distribution methods.
Additional information pertaining to the relative sales of our products for the years 20182021 through 20202023 is located in Note 1718 within Notes to the Consolidated Financial Statements, which are included herein under Part II, Item 8.
Sustainability & Purpose. Environmental, Social and Governance (ESG) Leadership.In 2020, Kellogg launched a refreshed vision and purpose. Our Kellanova’s vision is a goodto be the world’s best snacks-led powerhouse, unleashing the full potential of our differentiated brands and just world where people are not just fed, but fulfilled.passionate people. Our purpose is creating better days, and a place at the table for everyone, through our trusted food brands. Our vision and purpose are integrated intobrought to life through our Deploy For Growth business strategy. Our leadership in areas like Nourishing withBetter Days™ Promise, our Foods, Feeding People in Need, Nurturing our Planet,promise to advance sustainable and Living our Founder's Values are keyequitable access to how we bring our Visionfood by addressing the intersection of wellbeing, hunger, sustainability, and Purpose to life.equity, diversity and inclusion (ED&I) for 4 billion people by the end of 2030 (from a 2015 baseline).
This work is not new - we’ve been making progress on these topics for many yearsdecades and have been reporting our results annually through our Better Days™ Promise report (formerly Corporate Responsibility ReportReport) and other disclosures since 2009. Each year, we assess which environmental, social and governance (“ESG”) topics are included and highlight progressThe information contained in our report is not incorporated by reference herein or otherwise made a part of this Annual Report on our commitments. We also report against the Sustainability Accounting Standards Board (“SASB”) and Task Force on Climate-related Financial Disclosures (“TCFD”) reporting frameworks, as well as many other industry disclosures like CDP and the Dow Jones Sustainability Index. In 2020, Kellogg’s sustainability performance is within the top 15%Form 10-K or any of our industry according toother filings with the 2020 S&P Global ESG Yearbook, making Kellogg among the world’s highest performing sustainable companies.Securities and Exchange Commission.
Our Commitments.Kellogg’s global signature purpose platform, Kellogg’s® Kellanova Better Days™, has helped make billions of Promise, is our promise to create 4 billion better days better for people in need, providing more than 3 billion servings of food since 2013. In 2019, Kellogg expanded our commitments again to increase ambition, capture a broader set of goals, and align to the United Nations Sustainable Development Goals. Through the updated Kellogg’s® Better Days goals, Kellogg is addressing food security and creating Better Days for 3 billion people by the end of 2030. To do so, we’re focused on2030 (from a 2015 baseline, unless otherwise indicated), includes the interconnected issues of wellbeing, hunger relief and climate resiliency to drive positive change for people, communities and the planet. Specifically, we are committed to:following commitments:
•Nourishing 11.5 billion people by fostering well-being with our foods by deliveringthat deliver nutrients of need and addressing hidden hungerby the end of 2030.
•Feeding 375400 million people in need throughfacing food donations and expanded child-feeding programs.
•Nurturing people and our planetinsecurity or crisis by supporting 1 million farmers and workers while conserving natural resources across our value chain by meeting our science-based targets, responsibly sourcing our ingredients, reducing organic waste and providing sustainable packaging.
•Living our founder’s values by engaging 1.5 billion people in the issueend of global food security by advocating on behalf of children facing hunger, encouraging employee volunteerism, ensuring an ethical supply chain, and supporting diversity and inclusion.2030.
•Nurturing people and planet by creating a climate-positive future, including advancing the wellbeing of 250,000 people in our food chain, from farming communities to processors, prioritizing support for vulnerable groups by the end of 2030 (from a 2023 baseline).
•Committing to set company-wide emission reductions in line with the Science Based Targets initiative (SBTi) Net-Zero Standard.
•Valuing ED&I in our workforce by aspiring for gender 50/50 parity at the management level globally and 25% People of Color at the management level in the U.S. by the end of 2025.
•And, engaging 2 billion people along our journey by the end of 2030.
Progress towards these goals willThe Company discusses the Kellanova Better Days™ Promise commitments in detail, including the methodologies used to track the metrics and commitments described above on the Kellanova Better Days™ Promise page on our website. The information on our web site is not, and shall not be reported annually, starting in fiscal 2021.deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the Securities and Exchange Commission.
Climate-Related Disclosure. Climate change and food security are core business issuesconsiderations for KelloggKellanova to ensure the long-term health andviability of the ingredients we use in our products. As a grain-basedplant-based food company, the success of Kellogg CompanyKellanova is dependent on having timely access to high quality, low cost ingredients, water and energy for manufacturing globally. Risks are identified annually through annual reporting and evaluated in the short (<3 years), medium (3 - 6 years) and long terms (>6 years). These natural capital dependencies are at risk of shortage, price volatility, regulation, and quality impacts due to climate change which is assessed as part of Kellogg’sKellanova’s overall enterprise risk management approach. Specific risks including water stress and social accountability are specifically identified and assessed on a regular basis, especially in emerging market expansion that fuels company growth.
Due to these risks, KelloggKellanova has implemented major short-short and long-term initiatives to mitigate and adapt to these environmental pressures, as well as the resulting challenge of food security. While these risks are not currently impacting business growth, they must be monitored, evaluated, and mitigated. The Company has incorporated the risks and opportunities of climate change and food security as part of the Global 2020 GrowthDifferentiate, Drive, & Deliver Strategy and Kellogg’s®Kellanova Better Days™ Promise by continuing to identify risk, incorporate sustainability indicators into strategic priorities, and report regularly to leadership, the Board, and publicly. Kellogg has been recognized as a 2020 CDP Supplier Engagement Leader, representing the top 7% of companies who disclosed to the full climate questionnaire.
Oversight.Kellogg Company’s Kellanova's Board of Directors, including its Social Responsibility and Public Policy Committee, of the Board of Directors oversees our corporate responsibility Better Days™ Promise strategy. Our Senior Vice President (SVP) ofChief Global Corporate Affairs Officer, Senior Vice President Global Supply Chain, Senior Vice President Chief Global Human Resources Officer, Senior Vice President Research and Development and other executives who reportsreport to the Chairman and CEO, isare responsible for successfully implementing the strategy and regularly updating the CEO and Board Committee. Our Chief Sustainability Officer (CSO) reports to the SVP ofSenior Vice President Chief Global Corporate Affairs.Affairs Officer. Additionally, numerous leaders are accountable for achieving specific corporate responsibilityESG commitments, based on their roles.
In addition, Kellanova has a Global Better Days™ Promise Council and regional Better Days™ Promise Councils. The Councils ensure execution on priority strategies to maximize environmental and social performance, share best practices to ensure we are progressing against our commitments.
Raw Materials. Agricultural commodities, including corn, wheat, rice, potato flakes, vegetable oils, sugar and cocoa, are the principal raw materials used in our products. Cartonboard, corrugate, and plasticflexible packaging are the principal packaging materials used by us. We continually monitor world supplies and prices of such commodities (which include such packaging materials), as well as government trade policies. The cost of such commodities may fluctuate widely due to government policy and regulation, changing weather patterns and conditions, climate change, and other supply and/or demand impacting events such as a pandemic (such as the COVID-19 pandemic),pandemics, geopolitical events, wars 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,wheat-based ingredients, potato flakes, oats, rice, cocoa and chocolate, soybeans and soybean derivatives, various fruits, sugars and sweeteners, vegetable oils, dairy products, eggs, and other ingredients, which are obtained from various sources. While most of these ingredients are purchased from sources in the United States, some materials are imported due to regional availability and specification requirements.
We enter into long-term contracts for the materials 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. Despite our ability to source materials necessary to meet increased demand for our products, certain ingredients, packaging and other goods and services have been adversely impacted by the COVID-19 pandemic. Although we are unable to predict the impact to our ability to source these materials and services in the future, we expect supply pressures are generally decreasing, though weather and marketgeopolitical issues are resulting in other disruptions to continue throughout 2021.and logistical delays into 2024. 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 sourced both locally and imported from countries other than those where used in manufacturing.
Natural gas and propane are the primary sources of energy used to power processing equipment at major domestic and international facilities, although certain locations may use electricity, oil, propane or solar cells as needed. In addition, considerable amounts of diesel fuel are used in connection with the distribution of our products.
Trademarks. Generally, our products are marketed under trademarks we own. Our principal trademarks are our housemarks, brand names, slogans, and designs related to snacks, frozen breakfast, international cereals snacksand noodles and various other foods manufactured and marketed by us, and weus. We also grant licenses to third parties to use these marks on various goods. These trademarks include Kellogg’s for cereals, convenience foods and other products, and the brand names of certain ready-to-eat cereals, including All-Bran, Apple Jacks, Cocoa Krispies, Kellogg’s Corn Flakes, Corn Pops,
Cracklin’ Oat Bran, Crispix, Eggo, Froot Loops, Kellogg’s Frosted Flakes, Krave, Frosted Krispies, Frosted Mini-Wheats, Mueslix, Kellogg's Raisin Bran, Raisin Bran CrunchAustin,Rice Krispies, Rice Krispies Treats, Smacks/Honey Smacks, Bisco, Cheez-It, Club, Luxe, Minueto, Parati, RXBAR, Special K Special K Red Berries, Toasteds, Town House, Zesta, and Smart Start in the United States and elsewhere; Sucrilhos, Kellogg's Extra, Radkau, Zoo Cartoon Müsli, and Choco Krispis for cereals in Latin America; Vector and Two Scoops in Canada; Coco Pops, Choco Krispies, Frosties, Fruit ‘n Fibre, Kellogg’s Crunchy Nut, Krave, Honey Loops, Kellogg’s Extra, Country Store, Smacks, Pops, Honey Bsss, Croco Copters, Chombos, W.K. Kellogg, Toppas and Tresor for cereals in Europe; and Froot Ring, Guardian, Just Right, Sultana Bran, Frosties, Rice Bubbles, Nutri-Grain, and Sustain for cereals in Asia and Australia. Additional trademarks are the names of certain combinations of ready-to-eat Kellogg’s cereals, including Fun Pak and Variety.
Other brand names include Kellogg’s Corn Flake Crumbs; Choco Krispis, Crunchy Nut, Kashi, Nutri-Grain, Special K, Squares, Zucaritas Kashi, Rice Krispies Treats, and Sucrilhos for cereal bars; Pop-Tarts for toaster pastries; Eggo Kashi and Nutri-GrainMorningStar Farms for frozen waffles and pancakes; MorningStar Farms and Special K for breakfast sandwiches; Rice Krispies Treats for convenience foods;Special K protein shakes; Nutri-Grain cereal bars for convenience foods in the United States and elsewhere; K-Time, Sunibrite, Split Stix Be Natural and LCMs for convenience foods in Australia; Choco Krispies,Nutri-Grain, Coco Pops, Crunchy Nut, Krave, Frosties, and Rice Krispies Squares for convenience foods in Europe; Kashi for certain cereals, convenience foods, and frozen foods; Kashi Go for cereals and nutrition bars; Special Kand Vector for meal bars;Bear Naked for granola cereal and snack bites, Pringles for crisps; and Morningstar Farms, Incogmeato, Veggitizers, and Gardenburger for certain meat alternatives.
We also Additionally, we market convenience foods under trademarks and tradenames which include Austin, Bisco, Cheez-It, Club, Luxe, Minueto, Parati, RXBAR, Special K, Toasteds, Town House, Zesta and Zoo Cartoon and beverages under the Trink trademark. One of our subsidiaries is also the exclusive licensee of the Carr’s cracker line in the United States.
These trademarks include Kellogg’s for convenience foods and other products, including the Kellogg's branded noodles business in Africa, and the brand names of certain ready-to-eat international cereals, including Sucrilhos, Zucaritas, Kellogg's Extra, Müsli,and Choco Krispis for cereals in Latin America; Coco Pops, Choco Krispies, Frosties, Fruit ‘n Fibre, Kellogg’s Crunchy Nut, Krave, Kellogg’s Extra, Country Store, Smacks, Pops, Honey Bsss, Zimmy's, Toppas,and Tresor for cereals in Europe; and Froot Ring, Chocos, Chex, Guardian, Just Right, Sultana Bran, Frosties, Rice Bubbles, Nutri-Grain,and Sustain for cereals in Asia and Australia.
Our trademarks also include logos and depictions of certain animated characters in conjunction with our products, including the characters Snap! Crackle! Pop!Snap, Crackle and Pop for Cocoa Krispies and Rice Krispies cereals anduse in connection Rice Krispies Treats convenience foods; Tony the Tiger for Kellogg’s Frosted Flakes, Zucaritas, Sucrilhos and Frosties cereals and convenience foods; Toucan Sam for Froot Loops and Froot Rings international cereal; Dig ‘Em for Smacks/Honey Smacks international cereal; SunnyZimmy for andKellogg’s Raisin Bran, Two Scoops Zimmy'sand Raisin Bran Crunch cereals; cereal; Coco the Monkey for Coco Pops, Choco Krispies and Chocos cereal; Cornelius (aka Cornelio) for Kellogg’s Corn Flakes; international cereal; Melvin the Elephant for certain cereal, dairy beverages and convenience foods; Chocovore, Poperto Cerealdo, Pops the Bee, and Sammy the Seal (aka Smaxey the Seal) for certain cereal products; and Mr. P or Julius Pringles for Pringles crisps.
The slogans The Original & Best, They���re Gr-r-reat! and Follow Your Nose, are used in connection with our ready-to-eat cereals, along with L’ Eggo my Eggo and L’Eggo with Eggo, are used in connection with our frozen waffles, pancakes and French toast sticks, and Snack Stacks used in connection with potato crisps and crackers are also important KelloggKellanova trademarks.
The trademarks listed above, among others, individually and 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.
Seasonality. Demand for our products is generally 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.
Working Capital. A description of our working capital is included in the Liquidity section of MD&A within Item 7 of this Report.
Customers. Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 19%15% of consolidated net sales during 2020,2023, comprised principally of sales within the United States. No other customer accounted for greater than 10% of net sales in 2020.2023. During 2020,2023, our top five customers, collectively, including Wal-Mart, accounted for approximately 34%approximately 26% of our consolidated net sales and approximately 51%46% of U.S. net sales. There has been significant worldwide consolidation in the grocery industry 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 2, 2021December 30, 2023 and December 28, 201931, 2022 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 (in millions): 2023-$116; 2022-$111; 2020-$135; 2019-$144; 2018-$154.117. Information concerning our research and development expense is located in Note 1 within Notes to the Consolidated Financial Statements.
Regulation. Our activities in the United States are subject to regulation by various government agencies, including but not limited to the Food and Drug Administration, the 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 release 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.
Human Capital Resources. At January 2, 2021,On December 30, 2023, we had approximately 31,00023,000 employees. The majority of our employees work on a full-time basis. We are also party to numerous collective bargaining agreements. Our human capital objectives include attracting, developing, engaging, rewarding and retaining our employees.
Equity, Diversity and Inclusion:Inclusion: In 2005, KelloggKellanova established an Office of Diversity & Inclusion. Since this time, our Company has enhanced our strategy to lead with Equity and beis currently known as the Office of Equity, Diversity and Inclusion. This office has been focused on recruiting and retaining diverse employees, creating awareness, of diversity issues, fostering a supportive, positive environment where inclusive behaviors are the norm, and embedding accountability for diversityinclusion throughout the organization. Our goal is to reflectcreate a place at the diversity of our consumers throughout our Company.table for everyone. We report to our Board of Directors on a periodic basis about the actions we have taken to make progress on our ED&I journey, and we are firmly committed to continuing to advance our ED&I priorities.&I. Our focus on equity, diversity and inclusion enables us to build a culture where employees are inspired to share their passion, talents and ideas. Our eight Business Employee Resource Groups, which include KVets and Supporters, KelloggKellanova Multinational Employee Resource Group, Kellogg’sKellanova’s Young Professionals, KelloggKellanova African American Resource Group, Women of Kellogg, Hola (our Latino resource group), KPride & Allies (our LBGTQ+ resource group), and Kapable (our resource group for people with disabilities and their supporters), also play a critical role in attracting diverse talent, providing mentoring and career development
opportunities, delivering commercial business insights and connecting people to the Company and the communities where we do business.
Through many initiatives, supported by our Business Employee Resource Groups and ED&I Champions, several leading organizations recognized KelloggKellanova for our commitment to building and supporting equity, diversity and inclusion in our workplace, marketplace and the communities where we work and live. These include Diversity Inc., Social Corporate Equity Index, Diversity Best Practice Index and Human Rights Campaign (HRC) Best Places to Work for LGBTQ Equality, to name a few.
Training and Development: We invest isin ongoing leadership development through programs such as our Step UP program for future managers, our Accelerate program for experienced managers and our executive leadership training program for developing our future leaders.
Employee Engagement: We communicate frequently and transparently with our employees through a variety of engagement vehicles, from externally managed global opinion surveys to weekly check-ins via our internal global recognition platform. We also provide a wide array of opportunities for volunteerism though Kellogg’sthrough Kellanova’s “Better Days” commitment, and provide matching donations for employees’ service to charities of their choosing in many regions.
Total Rewards: We provide a market-based competitive compensation through our salary, annual incentive and long-term incentive programs,, and a robust benefits package that promotes employee well-being across all aspects of their lives, including physical, financial, social and emotional wellbeing. We providesponsor a varietynumber of resourcesbenefit plans for eligible employees in the United States and servicesvarious foreign locations, including defined benefit pension plans, defined contributions retirement plans, retiree health and welfare, active health care, severance and other postemployment benefits. We continually review and implement new programs around the world to helpmeet the evolving needs of our employees, including, but not limited to benefit programs for retirement. Kellogg offers a comprehensive retiree medical plan for those who meet eligibility requirements. In addition, we provide a 401(k) plan forsame sex partners and progressive leave benefits (e.g., paternity/maternity and active employees.Military). We are also offering flexible work arrangements across our global population.
Health and Wellness: CreatingWe aim to create a culture where all colleagues feel supported and valued is paramount toin line with our corporate mission. The ongoing COVID-19 pandemic has led to unique challenges and we are striving to ensure the health, safety and general well-being of our colleagues. We continue to evolve our programs to meet our colleagues’ health and wellness needs, which we believe is essential to attract and retain employees of the highest caliber, and we offer a competitive benefits package focused on fostering work/life integration. My Total Health, ourOur global employee wellbeing framework, launched in 2019. It"My Total Health," addresses physical, financial, social and emotional wellbeing to support our employee’semployees' personal goals. On an ongoing basis, we focus on each aspect of wellbeing and provide useful information, education, tools and resources. For example, Kellogg hosted a global allIn North America, our “Find your Wings” employee Emotional Health event on Mindfulness in acknowledgement of Worldassistance program provides access to valuable Mental Health Day. Manyresources. In addition, our “Lean on Me” program trains employees on how to identify other employees that may be struggling with mental health challenges and pointing them towards our available resources. We also provide company paid access to gyms and mindfulness resources in many parts of the world. Most of our locations now use the My Total Health framework to guide how they communicate and engage with employees in support of their wellbeing.
Company Ethics: The Company has processes in place for compliance with the Code of Conduct for Kellogg CompanyKellanova Board of Directors and Global Code of Ethics for Kellogg CompanyKellanova employees, each including a requirement for annualregular certification that provides employees an opportunity to disclose actual or potential conflicts of interest, report actual or potential violations of the law, the Code or policy and acknowledge their obligation to comply with the applicable code. Ethics are deeply embedded in our values and business processes. The Company regularly re-enforces our commitment to ethics and integrity in employee communications, in our everyday actions and through our processes. In addition, the Company provides targeted training across the globe during the course of the of the year. The Company also maintains an ethics related hotline, managed by a third party, through which individuals can anonymously raise concerns or ask questions about business behavior.
Financial Information About Geographic Areas. Information on geographic areas is located in Note 1718 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 22, 2021) are listed below, together with their business experience. Executive officers are elected annually by the Board of Directors.
Executive Officers. The names, ages, and positions of our executive officers (as of February 20, 2024) are listed below, together with their business experience. Executive officers are elected annually by the Board of Directors. Senior Vice President, Kellogg CompanyKellanova
President, Kellogg LatinKellanova North America
Mr. Amaya assumed his current position in November 2019.on February 1, 2024. Prior to that, Mr. Amaya served as Senior Vice President, Kellanova (formerly Kellogg Company) and President, Kellanova Latin America. Mr. Amaya joined Kellogg CompanyKellanova in 2001 as a Marketing Intern for Eggo in the United States. Since then, he has held a variety of leadership positions in the U.S. and Latin America across the cereal, frozen and snacks businesses. Among his many contributions, Mr. Amaya led the complex and challenging regional integration of Pringles in 2012. In April 2013, he was appointed General Manager, Snacks and Growth Platforms for Latin America, and in 2015, he stepped up to the role of Vice President and General Manager, Category Marketing and Innovation, Latin America. He was promoted to Vice President and General Manager for Mexico in October 2016. In November 2019, Mr. Amaya was promoted to SVP and President Kellanova Latin America. Prior to Kellogg,Kellanova, Mr. Amaya held various marketing roles at Unilever Andina in the personal care division.division.
Senior Vice President & Chief Global Corporate Affairs Officer, Kellanova
Ms. Bahner assumed her current position in April 2023. Ms. Bahner has more than 30 years of Corporate Affairs experience within the food industry. She joined Kellanova (formerly known as Kellogg Company) in 2006. Ms. Bahner leads global Corporate Affairs – including Communications, Philanthropy, Sustainability and Government Relations. Prior to joining Kellanova, she held a variety of corporate affairs roles with Kraft Foods, and led public relations programs for food industry clients at both Edelman Public Relations Worldwide and Powers Agency. Ms. Bahner served as the Executive Sponsor of the company’s Women of Kellogg business employee resource group for more than nine years. She is the President of Kellanova’s Fund Board of Trustees and President of Kellanova’s 25‐Year Employees’ Fund, Inc.
Senior Vice PresidentChairman and Chief Financial Officer
Mr. Banati has been Senior Vice President, Chief Financial Officer and Principal Financial Officer, Kellanova (formerly known as Kellogg Company,Company) since July 2019.2019 and Vice Chairman since January 2023. Mr. Banati joined KelloggKellanova in March 2012 as President, Asia Pacific, and his responsibilities were expanded to President, Asia Pacific, Middle East and Africa in July 2018. Before joining Kellogg Company,Kellanova, Mr. Banati served in a variety of finance, general management and board roles at Kraft Foods, Cadbury Schweppes and Procter & Gamble. He has worked extensively across the Asia Pacific and Africa region. At Kraft Foods, he was President, North Asia and Asia Pacific Strategy. Prior to that, Mr. Banati served as President, Pacific, for Cadbury Schweppes and Chairman of Cadbury Schweppes Australia. He was a member of the company’s Chief Executive Committee. He also served as the Chief Financial Officer for Cadbury Schweppes Asia Pacific. Mr. Banati is a director of Fortune Brands Home Innovations.
Chairman and Chief Executive Officer
Mr. Cahillane has been Chairman of the Board of Kellanova (formerly known as Kellogg CompanyCompany) since March 2018, and President and Chief Executive Officer since October 2017. He has also served as a KelloggKellanova Director since October 2017. Prior to joining Kellogg,Kellanova, Mr. Cahillane served as Chief Executive Officer and President, and as a member of the board of directors, of Alphabet Holding Company, Inc., a holding company, and its wholly-owned operating subsidiary, The Nature’s Bounty Co., a health and wellness company, from September 2014. Prior to that, Mr. Cahillane served as Executive Vice President of The Coca-Cola Company, a beverage company, from February 2013 to February 2014 and President of Coca-Cola Americas, the global beverage maker’s largest business, with $25 billion in annual sales at that time, from January 2013 to February 2014. Mr. Cahillane served as President of various Coca-Cola operating groups from 2007 to 2012. He has also been a trustee of the W. K. Kellogg Foundation Trust since 2018.
Mr. Cahillane is a director of Colgate-Palmolive Company.Vice President and Corporate Controller
Mr. Forche was appointed Vice President and Corporate Controller, Kellanova (formerly known as Kellogg Company,Company), in July 2018. Previously, Mr. Forche served as Vice President, Assistant Corporate Controller since December 2016. Mr. Forche joined KelloggKellanova as an internal auditor in 1997, subsequently holding a number of Finance roles in the North American business until being named Senior Director, Corporate Financial Reporting in April 2014. Prior to joining KelloggKellanova in 1997, he spent four years at Price Waterhouse as an auditor.
Senior Vice President, Global Supply Chain
Mr. Hirst assumed his current position in April 2012. He joined the company in 1984 as a Food Technologist at the Springs, South Africa, plant. While at the facility, he was promoted to Quality Assurance Manager and Production Manager. From 1993 to 2001, Mr. Hirst held numerous positions in South Africa and Australia, including Production Manager, Plant Manager, and Director, Supply Chain. In 2001, Mr. Hirst was promoted to Director, Procurement at the Manchester, England, facility and was later named European Logistics Director. In 2005, he transferred to the U.S. when promoted to Vice President, Global Procurement. In 2008, he was promoted to Senior Vice President, Snacks Supply Chain and to Senior Vice President, North America Supply Chain, in October 2011.
Senior Vice President, Kellogg Company
President, Kellogg North America
Mr. Hood assumed his current position in July 2018. He most recently served as President, Kellogg Europe from 2013 to 2018. Mr. Hood joined Kellogg Company in 2012 as the Vice President of European Snacks. Prior to Kellogg, he served The Procter and Gamble Company starting in 1993, and had a distinguished 19-year career in Marketing and General Management, based in Cincinnati, Ohio. Mr. Hood has held a number of Board roles across the Food and Beverage Industry. He currently serves on the Consumer Brands Association Board of Directors and FMI Foundation Board of Trustees.
Senior Vice President, Global Human Services
Ms. Howell assumed her current position in June 2016. Prior to joining Kellanova (formerly known as Kellogg Company), she was Chief Human Resources Officer for Rockford, Michigan-based Wolverine Worldwide since 2014. Prior to Wolverine, Ms. Howell spent 24 years with General Motors where she led a team of 2,800 Human Resource professionals worldwide, supporting a global business at one of the top automotive companies in the world, and also among the largest public corporations. Ms. Howell joined General Motors as a Labor Relations Representative at its Ypsilanti, Michigan, assembly plant in 1990. Over the following years, she served in a series of key human resourceresources leadership roles in Europe, Asia and U.S. leading teams on six continents across an array of functional areas. Ms. Howell was promoted to Executive Director of North American Human Resources in 2011 and subsequently promoted to Senior Vice President of Global Human Resources.
Senior Vice President, Chief Growth Officer
served as Chief Brand & Advanced Analytics Officer. She is responsible for driving the growth agenda for the company through leadership of Global Brands, Innovation and R&D, Commercial Advanced Analytics, Marketing Excellence, and Licensing & Cultural Initiatives. Prior to joining Kellanova, Ms. Hughes was the Chief Marketing Officer for Pandora Americas. Her experience also includes marketing and brand leadership roles with The Estee Lauder Companies, Avon Products, Inc. and Sara Lee Corporation. Ms. Hughes serves on the Board of Directors for Crocs, Inc. She is also a Board Advisor for Pixability and a member of the Executive Leadership Council.
Senior Vice President, Kellogg CompanyKellanova
President, KelloggKellanova Asia Pacific, Middle East and Africa
Mr. Kapoor assumed his current position in July 2020. Prior to joining Kellanova (formerly known as Kellogg Company), he was Regional President, Pet Nutrition, Asia Pacific for Mars Inc. from January 2017 to June 2020. 2020. In this role, Mr. Kapoor had additional oversight of the confectionary and food business in Japan and New Zealand. Prior to that, he was Regional President, Asia Pacific, for Mars’ Royal Canin business fromJanuary 2015 toDecember 2016.2016. Mr. Kapoor served in various leadership roles at Mars Inc., starting his career as General Manager, South East Asia and India Mars Multisales in July 2011. Prior to Mars Inc., Mr. Kapoor was with Nokia from 2005 to 2011 and Procter & Gamble from 1993 to 2005.
Senior Vice President, Global Supply Chain
Mr. Lance has been Senior Vice President, Global Supply Chain, Kellanova (formerly known as Kellogg Company) since March 2022. Prior to his current role, he was Senior Vice President, KNA Supply Chain from October 2019 to March 2022 andVice President, Supply Chain Europe and Vice President, Supply Chain Latin America from May 2017 to October 2019. Prior to his Supply Chain roles, Mr. Lance served as Vice President, Snacks Engineering beginning in 2011. In 1997, Mr. Lance began his career at Kellanova and served in various roles including Production Supervisor at the Queretaro, Mexico, plant. He also served as the Plant Manager in Guatemala; Linares, Mexico, and Columbus, Georgia, U.S.
Senior Vice President, Kellogg CompanyKellanova
President, KelloggKellanova Europe
Mr. Lawlor assumed his current position in July 2018. He most recently served as Vice President, European Cereal from November 2017 to June 2018. Mr. Lawlor began his career at Kellanova (formerly known as Kellogg Company) in 1991, joining as a sales manager in its Dublin office. Following this, he held a number of senior roles, including running the company’s Middle Eastern business, setting up its Dubai office. Mr. Lawlor then served as General Manager of Kellogg Russia from October 2008 to August 2016 and led the integration of United Bakers Group, a local biscuit and cracker manufacturer. In August 2016, he was appointed Managing Director, UK/ROI where he refocused Kellogg’sthe company’s efforts to stabilize and grow its core cereal business.
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Monica H. McGurkVictor Marroquin | 5048 | |
Senior Vice President, Chief Growth OfficerKellanova Latin America
Ms. McGurk assumed her current position in January 2019. Ms. McGurk began her career at Kellogg in July 2018, serving as Chief Revenue and eCommerce Officer. Prior to Kellogg, Ms. McGurk was the Chief Growth Officer for Tyson Foods, Inc. through September 2017, having previously joined the company in 2016 as Executive Vice President of Strategy and New Ventures & President of Foodservice. Prior to joining Tyson Foods, Inc., Ms. McGurk worked for The Coca-Cola Company as Senior Vice President, Strategy, Decision Support and eCommerce, North America Group from 2014 to 2016, and as Vice President, Strategy and eCommerce from 2012 to 2014.
Vice Chairman, Corporate Development
and Chief Legal Officer
Mr. Pilnick was appointed Vice Chairman, Corporate Development and Chief Legal Officer in January 2016. In August 2003, heMarroquin was appointed Senior Vice President General Counsel and Secretary and assumed responsibility for Corporate Development& President Kellanova Latin America, 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, heFebruary 2024. Previously, Mr. Marroquin served as Vice PresidentGeneral Manager, Kellanova Mexico, since December 2020. Mr. Marroquin joined Kellanova (formerly Kellogg Company) in 1997. Mr. Marroquin served as VP & General Manager Andean Region – Colombia, Ecuador, Peru & Bolivia from July 2018 through 2020, General Manager – Kellogg Brazil from December 2016 to July 2018 and Chief CounselGeneral Manager of Sara Lee Branded Apparel– Ecuador & Peru from June 2014 through December 2016. Prior to that, Mr. Marroquin held a number of marketing, customer development and as Vice President and Chief Counsel, Corporate Development and Financecommercial management roles at Sara Lee Corporation.
the Company across Latin American countries.
Senior Vice President and Chief Legal Officer
Mr. Min has been Senior Vice President, Chief Legal Officer, Kellanova (formerly known as Kellogg Company) since October 2023. Previously, Mr. Min served as Regional General Counsel in Europe and Asia Pacific, Middle East and Africa regions. Prior to that, he served as Corporate Counsel, specializing in corporate governance, securities, and litigation. Mr. Min joined Kellanova in 2010 and has since worked in a variety of different areas, including food safety and regulatory compliance, class action litigation defense, recoveries, corporate governance and securities. Prior to Kellanova, Mr. Min was an attorney at the law firm of Jenner & Block.
Availability of Reports; Website Access; Other Information. Our internet address is http://www.kelloggcompany.com. Through “Investor Relations” — “Financial Reports” — “SEC Filings”www.kellanova.com. The information contained on, or accessible through, our home page, we make available freewebsite is not part of charge our proxy statements, our annual reportor incorporated into this Annual Report on Form 10-K, our quarterly10-K. All reports on Form 10-Q, our current reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendmentsrequired 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 reportsbe filed with the U.S. Securities and Exchange Commission are also made available to read and copy atcan be accessed through the SEC’s 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.Investor Relations section of our website.
Copies of theour Corporate Governance Guidelines, the Charters of the Audit, Compensation and Talent Management, and Nominating and Governance Committees of the Board of Directors, the Code of Conduct for Kellogg Company directorsthe Company's Board of Directors and Global Code of Ethics for Kellogg Companythe Company's employees (including the chief executive officer, chief financial officer and corporate controller) can also be found on the Kellogg CompanyKellanova 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 CompanyKellanova website. Shareowners may also request a free copy of these documents from: Kellogg Company,Kellanova, P.O. Box CAMB, Battle Creek, Michigan 49016-9935 (phone: (800) 961-1413), Investor Relations Department at that same address (phone: (269) 961-2800) or investor.relations@kellogg.com.investor.relations@Kellanova.com.
Forward-Looking Statements. This Report contains “forward-looking statements” with projections and expectations concerning, among other things, the Company’s restructuring programs,programs; the integration of acquired businesses,businesses; our strategy, financial principles, and plans; initiatives, improvements and growth; sales, 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; ESG performance; 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,” “can,” “anticipate,” “estimate,” “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 Management’s Discussion and Analysis. Our actual results or activities may differ materially from these predictions.
Our future results could be affected by a variety of other factors, including uncertainty of the magnitude, duration, geographic reach, impact on the global economy and current and potential travel restrictions of the COVID-19 outbreak, the current, and uncertain future, impact of the COVID-19 outbreak on ourmacroeconomic conditions; business growth, reputation, prospects, financial condition, operating results (including componentsdisruptions; consumers' and other stakeholders' perceptions of our financial results), and cash flows and liquidity, the expected benefits and costs of the divestiture of selected cookies, fruit and fruit flavored-snacks, pie crusts, and ice-cream cones businesses of the Company, the risk that disruptions from the divestiture will divert management's focus or harm the Company’s business, risks relating to any unforeseen changes to or effects on liabilities, future capital expenditures, revenues, expenses, earnings, synergies, indebtedness, financial condition, losses and future prospects, risks associated with the Company’s provision of transition services to the divested businesses post-closing,brands; the ability to implement restructurings as planned, whether the expected amount of costs associated with restructurings will differ from forecasts, whether the Company will be able to realize the anticipated benefits from restructurings in the amounts and times expected,expected; the ability to realize the anticipated benefits and synergies from business acquisitions in the amounts and at the times expected,expected; the impact of competitive conditions, conditions; the ability to realize the intended benefits of the separation of WK Kellogg Co (the "separation"); the possibility of disruption from the separation, including changes to existing business relationships, disputes, litigation or unanticipated costs; uncertainty of the expected financial performance of the Company following completion of the separation; the effectiveness of pricing, advertising, and promotional programs; the success of innovation, renovation and new product introductions; the success of our Better Days and sustainability programs; the recoverability of the carrying value of goodwill and other intangibles,intangibles; the success of productivity improvements and business transitions,transitions; commodity and energy prices, transportation costs, labor costs, disruptions or inefficiencies in supply chain,chain; the availability of and interest rates on short-term and long-term financing,financing; actual market performance of benefit plan trust investments,investments; the levels of spending on systems initiatives, properties, business opportunities,opportunities; integration of acquired businesses, andbusinesses; other general and administrative costs,costs; changes in consumer behavior and preferences,preferences; the effect of U.S. and foreign economic conditions on items such as interest rates,rates; statutory tax rates,rates; currency conversion and availability,availability; legal and regulatory factors including changes in food safety, 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 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 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.
Risks Related to Our Business
Our business is significantly impacted by general macroeconomic conditions, and accordingly, our business, results of operations and financial condition could be materially adversely affected by further deterioration or a protracted extension of current macroeconomic challenges. Geopolitical instability, including wars and conflicts (including conflicts in Ukraine and the Middle East), actual and potential shifts in U.S. and foreign, trade, economic and other policies, as well as other global events, have significantly increased macroeconomic uncertainty at a global level. The COVID-19 pandemicmacroeconomic environment is and has been characterized by record-high inflation, supply chain challenges, labor shortages, high interest rates, foreign currency exchange volatility, volatility in global capital markets and growing recession risk. Such economic volatility could materially adversely affect our business, financial condition, results of operations and/orand cash flows, and future market disruptions could negatively impact us. Further, adverse macroeconomic conditions may affect our customers’ and prospective customers’ operations and financial condition and make it difficult for our customers and prospective customers to accurately forecast and plan future business activities, which may in turn cause our customers to limit their purchase orders or affect their ability to pay amounts owed to us in a timely manner or at all, or adversely affect prospective customers’ ability or willingness to purchase our products. An economic downturn or a recession or increased uncertainty may also lead to increased credit and collectability risks, higher borrowing costs or reduced availability of capital and credit markets, reduced liquidity, adverse impacts on our suppliers, failures of counterparties including financial institutions and insurers, asset impairments, and declines in the value of our financial instruments.
Pandemics, epidemics or disease outbreaks, may disrupt our business, including, among other things, our supply chain and production processes, each of which could materially affect our operations, liquidity, financial condition and results of operations.. The severity, magnitudeactual or perceived effects of a disease outbreak, epidemic, pandemic or similar widespread public health concern could negatively affect our business, financial condition and durationresults of the current COVID-19 pandemic is uncertain and rapidly changing. Measures enacted by authorities, and actions taken by the Company, to mitigate the spreadoperations. The occurrence of other widespread public health concerns (including a resurgence of the COVID-19 pandemic, such as travel banspandemic) in some markets could lead to the implementation of restrictions and restrictions, quarantines, shelter-in-place orders and shutdowns, have impacted and may further impact all or portions of our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers. There is no certainty that measures taken by governmental authorities will be sufficient to mitigate the risks posed by the COVID-19 pandemic, and our ability to perform critical functions could be harmed.functions. A shutdown of one or more of our manufacturing, warehousing or distribution facilities as a result of illness, government restrictions or other workforce disruptions or absenteeism, or reductions in capacity utilization levels, could result in us incurring additional direct costs and experiencing lost revenue. Illness, travel restrictions or workforce disruptions could negatively affect our supply chain, manufacturing, distribution or other business. The COVID-19 pandemic could disrupt our supply chain, operations and routes to market or those of our suppliers, their suppliers or our brokers or distributors. These disruptions or our failure to effectively respond to them, could increase product or distribution costs, or cause delays or inability to deliver products to our customers. We have experienced temporary disruptionsDisruptions to our supply chain in certain markets that,have occurred from time to date, have not been material to our consolidated results. These disruptionstime. Disruptions to our work force and supply chain could have a material adverse effect on our business, results of operations, financial condition and cash flows. Further, we have delayed certain capital and innovation projects due to the COVID-19 pandemic. Continued disruptions and uncertainties related to the COVID-19 pandemic for a sustained period
Widespread public health concerns could result in additional delays or modifications to these projects and other productivity, capital and innovation projects and hindermaterially impact our ability to achievemeet the project objectives.
demands of our customers. The COVID-19 pandemic has also significantly increased economicpotential impact of widespread public health concerns on any of our supply, production or logistics providers could include, but is not limited to, problems with their respective businesses, finances, labor matters (including illness or absenteeism in workforce or closure due to positive testing), ability to source, import or secure ingredients and demand uncertainty, including inflation, interest rates,packaging, ability to transport products to our facilities, product quality issues, costs, production, insurance and reputation. Any of the foregoing could negatively affect the price and availability of capital markets, consumer spending ratesour products and energy availability and costs (including fuel surcharges). We expect the COVID-19 pandemic may result in lower revenues in some of our emerging market countries that have a higher concentration of traditional trade outlets (such as small family-run stores).
The duration and significance of this sustained demand is uncertain. Although our business has benefited from some of these measures, volatility in financial markets and deterioration of national and global economic conditions could impact our business and operations insupply chain. If disruptions caused by a varietywidespread public health concern continue for an extended period of ways, including as follows:
•Consumers may shift purchases to more generic, lower-priced, or other value offerings, or may forego certain purchases altogether during economic downturns, which could result in a reduction in sales of higher margin products or a shift in our product mix to lower margin offerings adversely affecting the results of our operations;
•Disruptions or uncertainties related to the COVID-19 pandemic could result in delays or modifications to our strategic plans and initiatives and hindertime, our ability to achieve our objective to reduce our operating cost structure in both our supply chain and overhead costs;
•A strengthening inmeet the U.S. dollar relative to other currencies in the countries in which we operate would negatively affect our reported results of operations and financial results due to currency translation losses and currency transaction losses;
•A significant portion of our workforce, including our management team, could become unable to work as a result of illness or government restrictions, or the attention of our management team could be diverted if key employees become ill from COVID-19 and unable to work;
•An increased reliance on our information technology systems due to many employees working remotely causing us to be increasingly subject to cyberattack;
•A shutdown of one or more of our manufacturing, warehousing or distribution facilities, or disruption in our supply chain, including but not limited to, as a result of illness, government restrictions or other workforce disruptions;
•An inability to effectively modify our trade promotion and advertising activities to reflect changing consumer shopping habits due to, among other things, reduced in-store visits and travel restrictions;
•Decreased demand for our products due to unemployment as a result of the COVID-19 pandemic;
•Volatility in commodity and other input costs could substantially impact our result of operations and our commodity hedging activities might not sufficiently offset this volatility;
•Volatility in the equity markets or interest rates could substantially impact our pension costs and required pension contributions; and
•Increased volatility and pricing in the capital markets and commercial paper markets could limit our access to our preferred sources of liquidity when we would like, and our borrowing costs could increase.
These and other impacts of the COVID-19 pandemic could have the effect of heightening many of the other risks described in this section, such as those relating to our reputation, brands, product sales, results of operations or financial condition. The severity, magnitude and duration of the current COVID-19 pandemic is uncertain, rapidly changing and depends on events beyond our knowledge or control. We might notmay be able to anticipate or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. As a result, the impact of the COVID-19 pandemic could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may not realize the benefits we expect from revenue growth management. We are utilizing formal revenue growth management practices to help us realize price in a more effective way. This data-driven approach addresses price strategy, price-pack architecture, promotion strategy, mix management, and trade strategies. Revenue growth management involves changes to the way we do business and may not always be accepted by our customers, consumers or third partythird-party providers causing us not to realize the anticipated benefits. In addition, the complexity of the execution requires a substantial amount of management and operational resources. These and related demands on our resources may divert the organization's attention from other business issues and have adverse effects on existing business relationships with suppliers and customers. Any failure to execute revenue growth management in accordance with our plans, including as a result of our revenue growth management process, could adversely affect our business or financial condition.
Our results may be negatively impacted if consumers do not maintain their favorable perception of our brands. We have a number of iconic brands with significant value. Promoting and protecting the value of these brands is critical to the success of our business. Brand value is primarily based in large part on consumer perceptions. Success in promotingSuccessful promotions and enhancing brand value enhancement depends in large part on our ability to provide high-quality products. Brand value could diminish significantly due to a number of factors, including consumer perception that we, or any of our employees or agents, have acted in an irresponsible manner, adverse publicity about our labor relations (whether or not valid), our products (whether or not valid), sponsorship or endorsement relationships (whether or not valid), our failure to maintain the quality of our products, the failure of our products or promotions to deliver consistently positive consumer experiences, the products becoming unavailable to consumers, or the failure to meet the nutrition expectations of our products or particular ingredients in our products (whether or not valid), including whether certainthe perception of healthfulness of our products are perceived to contribute to obesity.or their ingredients. In addition, due to our varied and geographically diverse consumer base, we must be responsive to local consumer needs,consumers, including with respect to when and how consumers consume food products and their desire for premium or value offerings and whether to provide an array of products that satisfy the broad spectrum of consumer preferences. Accordingly, we might fail to anticipate consumer preferences with respect to dietary trends or purchasing behaviors, invest sufficiently in maintaining, extending and expanding our brand image or achieve the desired effortseffects of our marketing efforts or use data-driven marketing and advertising to reach consumers at the right time with the right message. The growing use of social and digital media platforms by consumers, KelloggKellanova and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about Kellogg,Kellanova, our brands, our products, our labor relations or any of our employees or agents on social or digital media platforms could seriously damage our brands, reputation and brand loyalty, regardless of the information’s accuracy. Placement of our advertisements in digital media may also result in damage to our brands if the media itself experiences negative publicity itself. The harm may be immediate, without affording usand we may not be afforded an opportunity for redress or correction. Brand recognition and loyalty can also be impacted by the effectiveness of our advertising campaigns, marketing programs, influencers and sponsorships, as well as our use of social media. If we do not maintain the favorable perception of our brands, our results could be negatively impacted.
Unanticipated businessBusiness disruptions could have an adverse effect on our business, financial condition and results of operations. We manufacture and source products and materials on a global scale. We have a complex network of suppliers, owned manufacturing locations, contract manufacturer locations, warehousing and distribution networks and information systems that support our ability to provide our products to our customers consistently. Our ability to make, move and sell products globally is critical to our success. Factors that are hard to predict or beyond our control, such as product or raw material scarcity, workforce disruptions, weather (including any potential effects of climate change), natural disasters, water availability, fires or explosions, terrorism, political unrest, government restrictions, mandates or shutdowns, tariffs and other trade restrictions, cybersecurity breaches, health pandemics, such as the COVID-19 pandemic, disruptions in logistics, loss or impairment of key manufacturing sites, supplier capacity constraints, or strikes, could damage or disrupt our operations or our suppliers', their suppliers or our contract manufacturers' operations. If we do not effectively prepare for and respond to disruptions in our operations, for example, by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or cannot quickly repair damage to our information, technology, production or supply systems, we may be late in delivering or unable to deliver products to our customers. If that occurs, we may lose our customers' confidence, and long-term consumer demand for our products could decline. In addition, insurance policies that may provide coverage with regard to such events may not cover any or all of the resulting financial losses. These events could adversely affect our business, financial condition and results of operations.
We have experienced minor temporary workforce disruptionsIn addition, we may be unable to meet the demand for our products during certain business disruptions. Short term or sustained increases in consumer demand at our retail customers may exceed our production capacity or otherwise strain our supply chain as a result of the COVID-19 pandemic. We have implemented employee safety measures, based on guidance from the Centers for Disease Control and Prevention and World Health Organization, across all our supply chain facilities, including proper hygiene, social distancing, mask use, and temperature screenings. Illness, travel restrictions, absenteeism, or other workforce disruptions could negatively affect our supply chain, manufacturing, distribution, or other business processes.chain. We may face additional production disruptions in the future, which may place constraints on our ability to produce products in a timely manner or may increase our costs.
In addition, we experienced increased demand for our products during fiscal 2020 and were, at times, unable to fill all customer orders. Short term or sustained increases in consumer demand at our retail customers may exceed our production capacity or otherwise strain our supply chain. Our failure to meet the demand for our products could adversely affect our business and results of operations.
Our businesses rely on independent third parties for the supply of materials for, and the manufacture of, many products. Our businesses could be materially affected if we fail to develop or maintain our relationships with these third parties, if any of these third parties is unable to fulfill its obligations to us, if any of these third parties fails to comply with governmental regulations applicable to the supply of materials for or the manufacturing of our products or if any of these third parties ceases doing business with us or goes out of business. Additionally, from time to time, we experience operational difficulties with these third parties, which may include increases in costs, reductions in
the availability of materials or production capacity, delays in the addition of incremental capacity, failures to meet shipment or production deadlines, including as a result of public health crises (such as the COVID-19 pandemic) and related governmental restrictions or mandates and any naturally occurring or climate change induced acute (including extreme weather and natural disasters) or chronic (including prolonged temperature and weather patterns) climatic events, fire and water stress, cybersecurity incidents, errors in complying with specifications and insufficient quality control. The inability of a third-party supplier or manufacturer to ship orders in a timely manner or in desirable quantities or to meet our safety, quality and social compliance standards or regulatory requirements could have a material adverse impact on our businesses, reputation, financial condition, results of operations and cash flows. In addition, certain of our relationships with third-party manufacturers and suppliers require us to purchase minimum volumes, and we could incur significant penalties if we do not purchase the minimum quantities required under these commitments.
We may not achieve our targeted cost savings and efficiencies 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, manufacturing or logistical changes and these, as well as any failure by us to achieve our planned cost savings and efficiencies, 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 recently delayed the implementation of system upgrades and certain other cost-saving and productivity initiatives due to the COVID-19 pandemic. Continued disruptions Disruptions and uncertainties related to the COVID-19 pandemicadverse macroeconomic conditions, including rising inflation and economic slowdowns or recessions, for a sustained period of time could result in additional delays or modifications to our strategic plans and other initiatives and hinder our ability to achieve our cost savings and productivity initiatives on the same timelines.
Structural and Organizational Risks
We may not realize the anticipated benefits from the separation of WK Kellogg Co, which could harm our business. On October 2, 2023, the Company completed the spin-off of WK Kellogg Co (the “separation”). The Company may incur significant additional expenses and challenges arising from and following the separation of the WK Kellogg Co business. The Company may not be able to achieve the full strategic, financial, operational, or other benefits that are expected to result from the separation and the anticipated benefits of the separation are based on a number of assumptions, some of which may prove incorrect. Additionally, stranded margins and a potential loss of synergies from the separation could negatively impact our results of operations, financial condition and cash flows. A failure to realize all or some of the expected benefits of the spin-off, or if such benefits are delayed, could result in a material adverse effect on our business, results of operations and financial condition.
As a separated company, our shares may not match some holders’ investment strategies or meet minimum criteria for inclusion in stock market indices or portfolios, which could cause certain investors to sell their shares, which could lead to declines in the trading price of our common stock. Further, there can be no assurance that the combined value of the shares of the two separated companies will be equal to or greater than what the value of our common stock would have been had the separation not occurred.
Further, in connection with the separation, we and WK Kellogg Co entered a separation and distribution agreement and various other agreements. The separation and distribution agreement provides for cross-indemnities between the Company and WK Kellogg Co for liabilities allocated to the respective party pursuant to the terms of such agreement. If WK Kellogg Co or its successor entities are unable to satisfy their obligations under these agreements, we could incur operational difficulties or losses. In addition, the terms of the separation include licenses and other arrangements to provide for certain ongoing use of intellectual property in the operations of both businesses. For example, both the Company and WK Kellogg Co retain the ability to make ongoing use of certain brands and other intellectual property. As a result of this continuing shared use of brands and other intellectual property, there is a risk that conduct or events adversely affecting the reputation of WK Kellogg Co could also adversely affect our reputation.
The separation could result in substantial tax liability to us and our stockholders. The Company received an opinion of counsel and a private letter ruling from the U.S. Internal Revenue Service (the “IRS”) regarding the qualification of the spin-off of WK Kellogg Co and certain related transactions as a transaction that is generally tax-free to the Company and the shareholders of the Company for U.S. federal income tax purposes. A tax opinion is not binding on the IRS or the courts, and there can be no assurance that the IRS or a court will not take a contrary position. In addition, the Company’s tax counsel and the IRS relied on certain assumptions, representations and undertakings, including those relating to the past and future conduct of our business, and the opinion would not be valid if such assumptions, representations and undertakings were incorrect. If the IRS ultimately determines that the spin-off is taxable, then the spin-off could be treated as a taxable dividend or capital gain to the Company’s shareholders for U.S. federal income tax purposes, and the Company could incur significant U.S. federal income tax
liabilities. In certain circumstances if future significant acquisitions of our stock or the stock of WK Kellogg Co are determined to be part of a plan or series of related transactions that included the spin-off, the distribution would be taxable to us (but not to the Company’s shareholders). In this event, the resulting tax liability could be substantial. In connection with the spin-off, the Company entered into a Tax Matters Agreement with WK Kellogg Co, pursuant to which WK Kellogg Co agreed to not enter into transactions that could cause the spin-off or any related transactions to be taxable to us and to indemnify us for any tax liability resulting from any such transaction. However, there can be no assurance that WK Kellogg Co would have the resources or liquidity required to indemnify the Company for any such tax liability. In addition, these potential tax liabilities may discourage, delay or prevent a change of control of the Company.
If we pursue strategic acquisitions, alliances, 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, alliances, 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, integrate the acquired business into our existing operations in a timely and cost-efficient manner, including implementation of enterprise-resource planning systems, or achieve expected returns, expected synergies and other benefits as a result of integration or other challenges, or may not achieve those objectives on a timely basis. Future acquisitions of foreign companies or new foreign ventures would subject us to local laws and regulations and could potentially lead to risks related to, among other things, increased exposure to foreign exchange rate changes, government price control, repatriation of profits and liabilities relating to the U.S. Foreign Corrupt Practices Act (FCPA)(the “FCPA”).
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 divestiture 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.
The divestiture (the "Divestiture") of selected cookie, fruit and fruit-flavored snacks, pie crusts, and ice cream cone businesses, consummated on July 28, 2019 (the "Divested Business") may not achieve some or all of the anticipated benefits, the Divestiture may adversely affect our business, and there are execution risks associated with our continued provision of transition services to the Divested Business. To the extent we undertake divestitures in the future, we may face additional risks related to such activity. For example, risks related to our ability to find appropriate buyers, to execute transactions on favorable terms, to separate divested businesses from our remaining operations, and to effectively manage any transitional service arrangements. Any of these factors could materially and adversely affect our financial condition and operating results.
We may not be able to attract, develop and retain the highly skilled people we need to support our business.business. We depend on the skills and continued service of key personnel, including our experienced management team. In addition, our ability to achieve our strategic and operating goals depends on our ability to identify, recruit, hire, train and retain qualified individuals, including, for example, individuals with e-commerce, digital marketing and data analytics capabilities.capabilities and skilled labor in our manufacturing facilities. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, recruit, train, develop and retain other talented personnel. Recruiting and retention of talent has become especially challenging in the current employment market. Any such loss, failure or negative perception with respect to these individuals may adversely affect our business or financial results. In addition, activities related to identifying, recruiting, hiring and integrating qualified individuals may require significant time and expense. We may not be able to locate suitable replacements for any key employees who terminate their employment, or become ill as a result of COVID-19, or offer employment to potential replacements on reasonable terms, each of which may adversely affect our business and
financial results. results. Additionally, changes in regional preferences, immigration laws and policies could also make it more difficult for us to recruit or relocate skilled employees.
Risks Related to Our Industry
Our results may be materially and adversely impacted as a result of increases in the price of raw materials, including agricultural commodities, packaging, fuel and labor. Agricultural commodities, including vegetable oils, wheat, corn, wheat, rice,sugar, fruits and nuts, potato flakes, vegetable oils, sugarrice and cocoa, are the principal raw materials used in our products. Cartonboard, corrugated, and plasticflexible packaging are the principal packaging materials used by us. The cost of such commodities may fluctuate widely due to government policy, regulation, and/or shutdown, import and export requirements (including tariffs), global geopolitical conditions (including war and conflicts, such as the conflicts in Ukraine and the Middle East), general economic conditions (including inflationary pressures), sanctions, drought and other weather conditions (including the potential effects of climate change), a pandemic illness, (such as the COVID-19 outbreak)environmental or other sustainability regulation, or other unforeseen circumstances. Specifically, certain ingredients, packaging and other goods and services have been impacted by the COVID-19 pandemican unfavorable macroeconomic environment, including as a result of (among other things) labor shortages and inflationary pressures, and although we are unable to predict the impact to our ability to source such materials and services in the future, we expect thesesome supply pressures and market disruptions to continue into 2021.2024. 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. Also, sustained price increases may lead to declines in volume as competitors may not adjust their prices, or consumers may decide not to pay the higher prices or may increasingly purchase lower-priced offerings or forego some purchases altogether during an economic downturn such as the COVID-19 pandemic,or a recession or instances of increased inflationary pressures, which could lead to sales declines and loss of market share. In an inflationary environment, such as the current economic environment, depending on the market conditions of the food industry and the raising of interest rates by the United States Federal Reserve, we may be unable to raise the prices of our products enough to keep up with the rate of inflation, which would reduce our profit margins, and continued inflationary pressures could impact our business, financial condition, and results of operations. Food processing equipment at major domestic and internationalour facilities areis regularly fueled by electricity, oil, natural gas or propane, as well as electricity, oil and solar, which are obtained from local utilities, or other local suppliers.suppliers or onsite. Short-term stand-by propane and/or oil storage exists at several plants for use in case of interruption in natural gas supplies. In addition, considerable amounts of diesel fuel are used in connection with thedistribution of our products. The cost of fuel may fluctuate widely due to economic and political conditions, government policy, regulation and/or shutdown, war, or other unforeseen circumstances which could have a material adverse effect on our consolidated operating results or financial condition.
Our results may be adversely affected by increases in transportation costs and reduced availability of or increases in the price of oil or other fuels. We rely on trucking and railroad operators to deliver incoming ingredients to our manufacturing locations and to deliver finished products to our customers. customers. Shortages of truck
drivers and railroad workers have contributed to increased freight costs, which has had a material and adverse effect on our business, financial condition and results of operations. operations. In 2020,recent years, the cost of distribution decreasedgenerally increased due to a decline in transportation and logistics costs, driven by excess availability, warehousing efficiencies and lower fuel costs, however, we have experienced a recentan increase in transportation and logistics costs. In particular, compliance with the electronic device logging mandate has increased the cost of transportation for us and many other companies. Transportation costs are further increasing as a result of high levels of long-haul driver turnover and increased railroad traffic and service issues. issues. Additionally, energy and fuel costs can fluctuate dramatically and, at times, have resulted in significant cost increases, particularly for the price of oil and gasoline.
We operate in the highly competitive food industry. industry, including with respect to retail shelf space.We face competition across our product lines, including snacks, ready-to-eat cereals and other convenience foods, from other companies whichthat have varying abilities to withstand changes in market conditions. The principal aspects of our business where we face competition include brand recognition, taste, nutritional value, price, promotion, innovation, shelf space, navigating the growing e-commercee- commerce marketplace, convenient ordering and delivery to the consumer and customer service. Most of our competitors have substantial financial, marketing, sales and other resources, and some of our competitors may spend more aggressively on advertising and promotional activities than we do. Our competition with other companies 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. Our ability to compete also depends upon our ability to predict, identify, and interpret the tastes and dietary habits of consumers and to offer products that appeal to those preferences. For example, certain weight loss drugs, which may suppress a person’s appetite, may cause competition in our product categories to increase, if consumers reduce purchases of certain types of foods or of food products altogether. There are inherent marketplace risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance. If we do not succeed in offering
products that consumers want to buy, our sales and market share will decrease, resulting in reduced profitability. If we are unable to accurately predict which shifts in consumer preferences will be long-lasting, or are unable to introduce new and improved products to satisfy those preferences, our sales will decline. In addition, given the variety of backgrounds and identities of consumers in our consumer base, we must offer a sufficient array of products to satisfy the broad spectrum of consumer preferences.
In some cases, our competitors may be able to respond to changing business and economic conditions or consumer preferences more quickly than us. Category share and growth could also be adversely impacted if we are not successful in introducing new products, anticipating changes in consumer preferences with respect to dietary trends or purchasing behaviors or in effectively assessing, changing and setting proper pricing.
Further, our ability to compete may be limited by an inability to secure new retailers or maintain or add shelf and/or retail space for our products. There can be no assurance that retailers will provide sufficient, or any, shelf space, nor that online retailers will provide online access to, or adequate product visibility on, their platform. Unattractive placement or pricing may put our products at a disadvantage compared to those of our competitors. Even if we obtain shelf space or preferable shelf placement, our new and existing products may fail to achieve the sales expectations set by our retailers, potentially causing these retailers to remove our products from their shelves.
The changing retail environment and the growing presence of alternative retail channels, could negatively impact our sales and profits. Our businesses are largely concentrated in the traditional retail grocery trade. Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 19%15% of consolidated net sales during 2020,2023, comprised principally of sales within the United States. No other customer accounted for greater than 10% of net sales in 2020.2023. During 2020,2023, our top five customers, collectively, including Wal-Mart, accounted for approximately 34%26% of our consolidated net sales and approximately 51%46% of U.S. net sales. There can be no assurances that our largest customers will continue to purchase our products in the same mix or quantities or on the same terms as in the past. As the retail grocery trade continues to consolidate and retailers become larger, our large retail customers have sought, and may continue to seek in the future, to use their position to improve their profitability through improved efficiency, lower pricing, increased promotional programs funded by their suppliers and more favorable terms. Such consolidation can continue to adversely impact our smaller customers’ ability to compete effectively, resulting in an inability on their part to pay for our products or reduced or canceled orders of our products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own private label products. 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. TheAs a result of the consolidated nature of the retail environment, the loss of any large customer or severe adverse impact on the business operations of any large customer for an extended length of time could negatively impact our sales and profits.
Additionally, alternative retail channels, such as e-commerce retailers (including as a result of the integration of traditional and digital operations at key retailers), subscription services, discount and dollar stores, direct-to-consumer brands, drug stores and club stores, have continued to grow. This trend away from traditional retail grocery, and towards such channels, is expected to continue in the future. If we are not successful in expanding sales in alternative retail channels, our business or financial results may be negatively impacted. In particular, substantial growth in e-commerce has encouraged the entry of new competitors and business models, intensifying competition by simplifying distribution and lowering barriers to entry. The expanding presence of e-commerce retailers has impacted, and may continue to impact, consumer preferences and market dynamics, which in turn may
negatively affect our sales or profits. In addition, these alternative retail channels may create consumer price deflation, affecting our large retail and wholesale customer relationships and presenting additional challenges to
increasing prices in response to commodity or other cost increases. Also, if these alternative retail channels, such as e-commerce retailers were to take significant share away from traditional retailers that could have a flow over effect on our business and our financial results could be negatively impacted.
Our consolidated financial results and demand for our products are dependent on the successful development of new products and processes,. identification of changing consumer and customer preferences and behaviors, and meeting these preferences and behaviors. 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 consumer concerns regarding the health effects of ingredients such as sodium, trans fats, genetically modified organisms, sugar, or other product ingredients or attributes, 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. Trends within the food industry change often, and failure to identify and react to changes in these trends could lead to, among other things, reduced loyalty, reduced demand and price reductions for our brands and products. products. Additionally, certain weight loss drugs, which may suppress a person’s appetite, may impact demand for our products. 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. However, the COVID-19 pandemic has altered, and in some cases, delayed product innovation efforts. 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. In addition, if sales generated by new products cause a decline in sales of the Company's existing products, the Company's financial condition and results of operations could be materially adversely affected. 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.
Competition against private label brands could negatively impact our business. In nearly all of ourmarkets, including through the expansion into complementary product categories, we compete against branded products as well as private label products. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and private label products change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer private label products, which are typically sold at lower prices, then we could lose category share or sales volumes or shift our product mix to lower margin offerings, which could have a material effect on our business and consolidated financial position and on the consolidated results of our operations and profitability.
Adverse changes in the global climate or extreme weather conditions could adversely affect our business or operationsoperations.. Climate change is a core business issue for Kellogg to ensure the long-term health and viability of the ingredients we use in our products. As set forth in the Intergovernmental Panel on Climate Change Fifth Assessment Report, there is continuing scientific evidence, as well as concern from members of the general public, that emissions of greenhouse gases and contributing human activities have caused and will continue to cause significant changes in global temperatures and weather patterns and increase the frequency or severity of weather events, wildfires and flooding. As the pressures from climate change and global population growth lead to increased demand, the food system and global supply chain is becoming increasingly vulnerable to acute shocks, leading to increased prices and volatility, especially in the energy and commodity markets. markets. Adverse changes such as these could (i) unfavorably impact the cost or availability of raw or packaging materials, especially if such events have a negative impact on agricultural productivity or on the supply of water, (ii) disrupt production schedules and our ability, or the ability of our suppliers or contract manufacturers, to manufacture or distribute our products, (iii) reduce crop size or quality, (iv) disrupt the retail operations of our customers, or (v) unfavorably impact the demand for, or the consumer's ability to purchase, our products.
Additionally, we face climate-related transition risks, including new legislation and regulation aimed at addressing climate change and shifts in market preferences for more sustainable products and services. There is an increased focus by foreign, federal, state and local regulatory and legislative bodies regarding environmental policies relating to climate change, regulating greenhouse gas emissions, energy policies and sustainability, including single use plastics. This new or increased focus may result in new or increasedincreasingly stringent laws and regulations that could cause significant increases inincrease the risk that we are subject to litigation or government enforcement actions and require us to incur increased legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place strain on our costs of operationpersonnel, systems and delivery.resources. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. Lastly,In addition, consumers and customers may put an increased priority on purchasing products that are sustainably grown and made, requiring us to incur increased costs for additional transparency, due diligence and reporting. Our business may face increased scrutiny from the investment community, customers, consumers, employees,
activists, media, regulators and other stakeholders related to our sustainability initiatives, including the goals, targets
and objectives that we announce, and our methodologies and timelines for pursuing them. Any failure to meet or delay in meeting, or perceived failure to meet or delay in meeting, stakeholder expectations on environmental or sustainability matters or any perception of a failure to act responsibly with respect to the environment could lead to adverse publicity, which could damage our reputation, which in turn could adversely impact our financial results or our ability to raise capital, as well as expose us to regulatory and legal risks. As a result, climate change as well as actions taken to mitigate climate change could negatively affect our business and operations.
Risks Related to Our Operations
A shortage in the labor pool, failure to successfully negotiate collectively bargained agreements, 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. Our labor costs include the cost of providing benefits for employees. We sponsor a number of benefit plans for employees in the United States and various foreign locations, including pension, retiree health and welfare, active health care, severance and other postemploymentpost-employment benefits. We also participate in multiemployer pension plans for certain of our manufacturing locations. Our major pension plans and U.S. collectively bargained 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. Many of our employees are covered by collectively-bargained agreements and other employees may seek to be covered by collectively-bargained agreements. Strikes or work stoppages and interruptions have occurred and could occur in the future at any collectively-bargained location if we are unable to renew theseour current collective bargaining agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could adversely impact our operating results. The terms and conditions of existing, renegotiated or new agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency.
Multiemployer pension plans could adversely affect our business. We participate in “multiemployer” pension plans administered by labor unions representing some of our U.S. based employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. Our required contributions to these funds could increase because of a shrinking contribution base as a result of the insolvency or withdrawal of other companies that currently contribute to these funds, inability or failure of withdrawing companies to pay their withdrawal liability, lower than expected returns on pension fund assets or other funding deficiencies. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make withdrawal liability payments, and we would have to reflect that as an expense in our consolidated statement of operations and as a liability on our consolidated balance sheet. Our withdrawal liability fromobligation to a multiemployer plan would depend, in part, on the extent of the plan’s funding of vested benefits. In the ordinary course of our renegotiation of collective bargaining agreements with labor unions that maintain these plans, we may decide to discontinue participation in a plan, and in that event, we could face a withdrawal liability. One of the multiemployer plans in which we participate is reported to have significant underfunded liabilities. Such underfunding could increaseimpact the size of our potential withdrawal liability.
Our postretirement benefit-related costs and funding requirements could increase as a result of volatility in the financial markets, changes in interest rates and actuarial assumptions. Increases in the costs of postretirement medical and pension benefits may continue and could negatively affect our business as a result of increased usage of medical benefits by retired employees and medical cost inflation, an increase in participants enrolled, the effect of potential declines in the stock and bond markets on the performance of our pension and post-retirement plan assets, potential reductions in the discount rate used to determine the present value of our benefit obligations, and changes to our investment strategy that may impact our expected return on pension and post-retirement plan assets assumptions. U.S. generally accepted accounting principles require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. The Company’s accounting policy for defined benefit plans may subject earnings to volatility due to the recognition of actuarial gains and losses, particularly those due to the change in the fair value of pension and post-retirement plan assets and interest rates. In addition, funding requirements for our plans may become more significant. However, the ultimate amounts to be contributed are dependent upon, among other things, interest rates, underlying asset returns, and the impact of legislative or regulatory changes related to pension and post-retirement funding obligations.
We use available borrowings under the credit facilities and other available debt financing for cash to operate our business, which subjects us to market and counter-party risk, some of which is beyond our control. In addition to cash we generate from our business, our principal existing sources of cash are borrowings available under our credit facilities and other available debt financing. If our access to such financing was
unavailable or reduced, or if such financing were to become significantly more expensive for any reason, we may not be able to fund daily operations, which would cause material harm to our business or could affect our ability to operate our business as a going concern. In addition, if certain of our lenders experience difficulties that render them unable to fund future draws on the facilities, we may not be able to access all or a portion of these funds, which could have similar adverse consequences.
From time to time, we issue variable rate securities based on interbank offered rates (IBORs) and enter into interest rate swaps that contain a variable element based on an IBOR. LIBOR, or the London interbank offered rate, is expected to be phased out after 2021 when private-sector banks are no longer required to report the information used to set the rate. Once LIBOR ceases to be available, we may need to amend affected agreements, and we cannot predict what alternative index will be negotiated with our counterparties. Although we do not anticipate a significant impact to our financial position as a result of this transition given our current mix of fixed- and variable-rate debt, our interest expense could increase, and our available cash flow for general corporate requirements may be adversely affected.
We utilize extended payment terms for customers and suppliers supplemented with third party financingreceivable sales programs (or “monetization programs”). We also utilize accounts payable tracking systems, which facilitate participating suppliers’ ability to monitor and, if elected at their discretion, sell payment obligations from the Company to designated third-party financial institutions. Together, these programs assist in helping to effectively managing our core working capital. capital. If the extension of customer payment terms areis reversed, if we shorten supplier payment terms through negotiation or due to regulation, or if financial institutions terminate their participation in these programs, our ability to maintain current levels of core working capital could be adversely impacted.impacted. Our principal source of liquidity is operating cash flows supplemented by borrowings for major acquisitions and other significant transactions. In order to mitigate the net working capital impact of offering extended customer payment terms, we entered into agreements to sell, on a revolving basis, certain trade accounts receivable balances to third party financial institutions (Monetization Programs). In addition, in combination with extending supplier payment terms, we have agreements with third parties (Accounts Payable Program)Tracking Systems) to offerstructured payables programs to our suppliers. Participating suppliers which enable suppliers,may, if elected at their sole discretion, to enter bilateral agreementsmake offers to sell Companyone or more payment obligations of the Company prior to designated third-partytheir scheduled due dates at a discounted price to participating financial institutions.
If financial institutions were to terminate their participation in the Monetization Programs and we are not able to modify related customer payment terms, working capital could be negatively impacted. Additionally, working capital could be negatively impacted if we shorten our supplier payment terms as a result of supplier negotiations.negotiations or as a result of regulations regarding payment terms. For suppliers participating in the Accounts Payable Program,Tracking Systems, financial institutions may terminate their participation or we could experience a downgrade in our credit rating that could result in higher costs to suppliers. If working capital is negatively impacted as a result of these events and we were unable to secure alternative programs, we may have to utilize our various financing arrangements for short-term liquidity or increase our long-term borrowings.
We have a substantial amount of indebtedness. We have indebtedness that is substantial in relation to our shareholders’ equity, and we may incur additional indebtedness in the future, or enter into off-balance sheet financing, which would increase our leverage risks. risks. As of January 2, 2021,December 30, 2023, we had total debt of approximately $7.5$5.9 billion and total Kellogg CompanyKellanova equity of $3.1$3.2 billion. Our substantial indebtedness could have important consequences, including (i) impairing the ability to access global capital markets to obtain additional financing for working capital, capital expenditures or general corporate purposes, particularly if the ratings assigned to our debt securities by rating organizations were revised downward or if a rating organization announces that our ratings are under review for a potential downgrade, (ii) 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, (iii) 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, (iv) 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, paying dividends, repurchasing shares, marketing and other spending and expansion of our product offerings, (v) and causing us to be more leveraged than some of our competitors, which may place us at a competitive disadvantage.
Our ability to make scheduled payments or to refinance our obligations with respect to indebtedness or incur new 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.
An impairment of 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. Factors which could result in an impairment include, but are not limited to: (i) reduced demand for our products; (ii) higher commodity prices; (iii) lower prices for our products or increased marketing as a result of increased
competition; and (iv) significant disruptions to our operations as a result of both internal and external events. Should the value of one or more of the acquired intangibles become impaired, our consolidated earnings and net worth may
be materially adversely affected. Furthermore, we continueFor example, as a result of the annual impairment testing in 2023 the Company recognized a non-cash impairment of $34 million in selling, general and administrative expenserelated to evaluatea brand in the potential impact of COVID-19 on the fair value of our goodwill and other intangibles. While we concluded there were no indicators of impairment as of January 2, 2021, anyNorth America operating segment that relates to snack category products. Any significant sustained adverse change in consumer purchasing behaviors, government restrictions, financial results, or macroeconomic conditions could result in future impairment.
As of January 2, 2021,December 30, 2023, the carrying value of intangible assets totaled approximately $8.3$7.0 billion, of which $5.8$5.2 billion was goodwill and $2.5$1.8 billion represented trademarks, tradenames, and other acquired intangibles compared to total assets of $18.0$15.6 billion and total Kellogg CompanyKellanova equity of $3.1$3.2 billion.
Risks Related to Regulations and Litigation
We face risks related to tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions where the Company’s subsidiaries are organized. Due to economic and political conditions (including shifts in the geopolitical landscape), tax rates in the U.S. and various foreign jurisdictions have been and may be subject to significant change. The future effective tax rate could be effected by changes in mix of earnings in countries with differing statutory tax rates, changes in valuation of deferred tax asset and liabilities, or changes in tax laws or their interpretation which includes the Tax Cuts and Jobs Act (the “U.S. Tax Reform”) and contemplated changes in other countries of long-standing tax principles if finalized and adopted could have a material impact on our income tax expense and deferred tax balances. DuringThe Organization for Economic Cooperation and Development (OECD) has introduced a framework to implement a global minimum corporate income tax. Several countries in which we operate have adopted, and others are in the third quarterprocess of 2019, Swiss Federalintroducing and Zurich Cantonal events took place that resultedfinalizing legislation to implement the global minimum corporate income tax. Many aspects of the framework will be effective for tax years beginning in enactedJanuary 2024, with certain remaining impacts to be effective in 2025. While we do not expect the global minimum corporate income tax law changes (“Swiss Tax Reform”). The newto have a material impact to our effective tax rate in 2024, as the OECD releases additional guidance and countries implement legislation, is intended to replace certain preferential tax regimes with a new set of internationally accepted measures. Wewe will continue to monitor Swiss Tax Reform foranalyze any potential impacts. To the extent that additional interpretative guidance that could resultOECD and legislative changes take place in countries we operate, it is possible the changes to the amounts we have recorded.may adversely impact our effective tax rate. We are also subject to regular reviews, examinations and audits by the Internal Revenue Service and other taxing authorities with respect to taxes inside and outside of the U.S. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position. We also need to comply with new, evolving or revised tax laws and regulations. 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.
If our food products become adulterated, misbranded or mislabeled, we might need to recall those items and may experience regulatory enforcement and product liability claims if consumers are injured or damaged as a result. Selling food products involves a number of legal, regulatory and other risks, including product contamination, food borneforeign objects, food-borne illnesses, spoilage, product tampering, allergens, or other adulteration.adulteration, which could result in product liability claims. 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. We could also suffer losses from a significant product liability or consumer fraud judgment against us. In addition, we could be the target of claims that our advertising is false or deceptive under U.S. federal and state laws as well as foreign laws, including federal and state consumer protection statutes. Allegations of consumer fraud may result in fines, settlements and litigation expenses. A significant product recall, or product liability or consumer fraud 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. We could also be adversely affected if consumers lose confidence in the safety and quality of certain food products or ingredients, or the food safety system generally. If another company recalls or experiences negative publicity related to a product in a category in which we compete, consumers might reduce their overall consumption of products in this category. Adverse publicity about these types of concerns, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions.
Evolving tax, advertising, environmental, licensing, labeling, trade, food quality and safety, intellectual property, data privacy, artificial intelligence, or other regulations or failure to comply with existing licensing, labeling, trade, food quality and safety and other regulations and laws could have a material adverse effect on our consolidated financial conditioncondition.. Our
activities orand products, including our operation of our manufacturing facilities, 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, U.S. Customs and Border Protection, as well as similar and other authorities outside of the United States, International Accords and Treaties and others, including voluntary regulation by other bodies. Legal and
regulatory systems can change quickly, as demonstrated by Brexit. quickly. In addition, legal and regulatory systems in emerging and developing markets may be less developed, and less certain. These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic, regulatory or social events. In addition, the enforcement of remedies in certain foreign jurisdictions may be less certain, resulting in varying abilities to enforce intellectual property and contractual rights.
The manufacturing, marketing and distribution of food products are subject to governmental regulationregulations that impose additional regulatory requirements. Those regulations control such matters as food quality and safety (including the condition and operation of our manufacturing facilities where food is processed), ingredients, advertising and marketing (including, among other limitations, restricting the age of consumers to whom products are marketed and data privacy requirements), product or production requirements, labeling, sustainability of packaging (including plastics), import or export of our products or ingredients, relations with distributors and retailers, health and safety, the environment, and restrictions on the use of government programs, such as Supplemental Nutritional Assistance Program and the Special Supplemental Nutrition Program for Women, Infants and Children, to purchase certain of our products.
The marketing of food products has come under increased regulatory scrutiny in recent years, and the food industry has been subject to an increasing number of proceedings and claims relating to alleged false or deceptive labeling and marketing under federal, state and foreign laws or regulations. We are also regulated with respect to matters such as licensing requirements, trade and pricing practices, tax, anti-corruption standards, advertising and claims, data privacy, and environmental matters. The need to comply with new, evolving or revised tax, environmental, food quality and safety, labeling, data privacy, or other laws or regulations, or new, evolving or changed interpretations or enforcement of existing laws or regulations, may have a material adverse effect on our business and results of operations. Governmental and administrative bodies within the U.S. are considering a variety of trade and other regulatory reforms. Changes in legal or regulatory requirements (such as new food safety requirements and revised nutrition facts labeling, including front of pack labeling, and serving size regulations)regulations, and new corporate sustainability reporting requirements in the EU and elsewhere), or evolving interpretations of existing legal or regulatory requirements, may result in increased compliance costs, capital expenditures and other financial obligations that could adversely affect our business or financial results. 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, termination of necessary licenses or permits, or recalls, as well as potential criminal sanctions, any of which could have a material adverse effect on our business. Even if regulatory review does not result in these types of determinations, it could potentially create negative publicity or perceptions which could harm our business or reputation.
Modifications to international trade policy, including the ratification of the United States-Mexico-Canada Agreement, changes in the European Union (such as Brexit), or the imposition of increased or new tariffs, quotas or trade barriers on key commodities with other countries most significantly China, could have a negative impact on us or the industries we serve, including as a result of related uncertainty, and could materially and adversely impact our business, financial condition, results of operations and cash flows. Higher duties on existing tariffs or additional tariffs imposed by the United States on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could result in an increase in supply chain costs that we are not able to offset.
Our operations in certain emerging markets expose us to political, economic and regulatory risks.risks. Our growth strategy depends in part on our ability to expand our operations in emerging markets. However, some emerging markets have greater political, economic and currency volatility and greater vulnerability to infrastructure and labor disruptions than more established markets. In many countries outside of the United States, particularly those with emerging economies, it may be common for others to engage in business practices prohibited by laws and regulations with extraterritorial reach, such as the FCPA and the UKBA, or local anti-bribery laws. These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials, including in connection with obtaining permits or engaging in other actions necessary to do business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially and adversely affect our reputation, financial condition and results of operations. In addition, competition in emerging markets is increasing as our competitors grow their global operations and low cost local manufacturers expand and improve their production capacities. Our success in emerging markets is critical to our growth strategy. If we cannot
successfully increase our business in emerging markets and manage associated political, economic and regulatory risks, our product sales, financial condition and results of operations could be materially and adversely affected.
Risks Related to Our Intellectual Property and Technology
Technology failures, cyber attacks,incidents, security incidents, privacy breaches or data breaches could disrupt our operations or reputation and negatively impact our business.business. We increasingly rely on information technology systems and third partythird-party service providers, including through the internet, 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. Information technology systems are also integral to the reporting of our results of operations. Furthermore, a significant portion of the communications between, and storage of personal datainformation of, our personnel, customers, consumers and suppliers depends on information technology. Our information technology systems, and the systems of the parties we communicate and collaborate with, may be vulnerable to a variety of interruptions, such as a result of many of our employees working remotely, the updating of our enterprise platform or due to events beyond our or their control, including, but not limited to, network or hardware failures, malicious or disruptive software, unintentional or malicious actions of employees or contractors, cyberattacks by common hackers, criminal groups or nation-state organizations or social-activist (hacktivist) organizations, geopolitical events, natural disasters, a pandemic illness, (such as COVID-19), failures or impairments of telecommunications networks, or other catastrophic events.
Moreover, our computer systems have been, and will likely continue to be subjected to computer viruses, malware, ransomware or other malicious codes, social engineering attacks, unauthorized access attempts, password theft, physical breaches, employee or inside error, malfeasance and cyber- or phishing-attacks. Cyber threats are constantly evolving, are becoming more sophisticated and are being made by groups and individuals with a wide range of expertise and motives, and this increases the difficulty of detecting and successfully defending against them. These events could compromise our confidential information, impede or interrupt our business operations, and may result in other negative consequences, including remediation costs, loss of revenue, litigation and reputational damage. Furthermore, if a breach or other breakdown results in disclosure of confidential or personal information, we may suffer reputational, competitive and/or business harm. To date, we have not experienced a material breach of cyber security. While we have implemented physical, administrative, and technical controls and taken other preventive actions, such as the maintenance of an information security program that includes updating our technology and security policies, insurance, employee training, and monitoring and routinely testing our information technology systems to reduce the risk of cyber incidents and protect our information technology, theytechnology; however, these measures may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems.
The Company offers promotions, rebates, customer loyalty and other programs through which it may receive personal information, and it or its vendors could experience cyber-attacks,cyber incidents, security incidents, privacy breaches, data breaches, security breaches or other incidents that result in unauthorized disclosure of consumer, customer, employee or Company information. The Company must also successfully integrate the technology systems of acquired companies into the Company’s existing and future technology systems. In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal datainformation in the United States and other jurisdictions regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data.information. There iscontinues to be significant uncertainty with respect to compliance with such privacy and data protection laws and regulations, including with respect to the European Union General Data Protection Regulation (GDPR)(the “GDPR”) and the California Consumer Privacy Act of 2018 (CCPA), which went into effect on January 1, 2020 (each of which imposes additional obligations on companies regarding(the “CCPA”) and the handling of personal data and provides certain individual privacy rights to persons whose data is stored),California Privacy Rights Act because theythese laws are continuously evolving and developing and may be interpreted and applied differently from countryjurisdiction to countryjurisdiction and may create inconsistent or conflicting requirements. In addition, regulations to implement portions of the CCPAUnited States, several other states have not been finalizedintroduced or passed similar privacy legislation, which may impose varying standards and could significantly impact CCPA compliance measures.requirements on our data collection, use and processing activities. Our efforts to comply with privacy and data protection laws, including the GDPR, CCPA and CCPA,CPRA, may impose significant costs and challenges that are likely to increase over time.
If the Company suffers a loss as a result of a breach or other breakdown in its technology, including such cyber-attack,cyber incidents, security incidents, privacy breaches, data breaches, security breaches, issues with or errors in system
maintenance or security, migration of applications to the cloud, power outages, hardware or software failures, denial of service, telecommunication or other incident involving one of the Company's vendors, that result in unauthorized disclosure or significant unavailability of business, financial, personal or stakeholder information, the Company may suffer reputational, competitive and/or business harm and may be exposed to legal liability and government investigations, which may adversely affect the Company's results of operations and/or financial condition. The misuse, leakage or falsification of information could result in violations of data privacy laws and the Company may become subject to legal action and increased regulatory oversight. The Company could also be required to spend significant financial and other resources to remedy the damage caused by a security incident or security breach or to repair or replace networks and information systems. In addition, if the Company's suppliers or customers experience such a security incident, security breach or unauthorized disclosure or system failure, their businesses could be disrupted or otherwise negatively affected, which may result in a disruption in the Company's supply chain or reduced customer orders, which would adversely affect the Company's business operations. We have also outsourced several information technology support services and administrative
functions to third-party service providers, including cloud-based service providers, and may outsource other functions in the future to achieve cost savings and efficiencies. If these service providers do not perform effectively due to breach or system failure, we may not be able to achieve the expected benefits and our business may be disrupted.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brandsbrands. . We consider ourOur intellectual property rights particularly and most notably our trademarks, but also including patents, trade secrets, copyrights and licensing agreements, to beare a significant and valuable aspect of our business.business and include trademarks, patents, trade secrets, and copyrights owned or licensed under certain licensing agreements. We attempt to protect ourthese intellectual property rights through a combination of patent, trademark, copyrightusing the appropriate laws and trade secret laws, as well as licensing agreements third partyincluding licenses, development agreements, nondisclosure and assignment agreements, and policing ofassignments. We also police third party misuses of our intellectual property.property in traditional retail and digital environments. Our failure to obtain or adequately protect our trademarks, products, new features of our products, our technology, or any other form of intellectual property or any changerights may diminish our competitiveness and could materially harm our business. Similarly, changes in lawapplicable laws or other changes that serve to lessen or remove the current legal protections of our intellectual property, may also 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 or operations. In addition, if, in the course of developing new products or improving the quality of existing products, we are found to have infringed the intellectual property rights of others, directly or indirectly, such finding could have an adverse impact on our business, financial condition or results of operations and may limit our ability to introduce new products or improve the quality of existing products. Any litigation regarding patents or other intellectual property rights 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.
General Risk Factors
We are subject to risks generally associated with companies that operate globally. We are a global company and generated 43% and 42%almost half of our net sales for 2020both 2023 and 2019, respectively2022 outside the United States. We manufacture our products in 21 countries and have operations in more than 180 countries, so we are subject to risks inherent in multinational operations. Those risks include (i) compliance with U.S. laws affecting operations outside of the United States, such as OFAC trade sanction regulations and Anti-Boycott regulations, (ii) compliance with anti-corruption laws, including the FCPA and U.K.UK Bribery Act (UKBA)(the “UKBA”), (iii) compliance with antitrust and competition laws, data privacy laws, and a variety of other local, national and multi-national regulations and laws in multiple regimes, (iv) changes in tax laws, interpretation of tax laws and tax audit outcomes, (v) fluctuations or devaluations in currency values, especially in emerging markets, (vi) changes in capital controls, including currency exchange controls, government currency policies or other limits on our ability to import raw materials or finished product or repatriate cash from outside the United States, (vii) changes in local regulations and laws, the lack of well-established, reliable and/or impartial legal systems in certain countries in which we operate and the uncertainty of enforcement of remedies in such jurisdictions, and foreign ownership restrictions and the potential for nationalization or expropriation of property or other resources, (viii) laws relating to information security, privacy (including the GDPR), cashless payments, and consumer protection, (ix) uncertainty relating to Brexit and itsthe ongoing longer-term impact of changes in international trade policies (including Brexit) on the local and international markets, the flow of goods and materials across borders, and political environments, (x) discriminatory or conflicting fiscal policies, (xi) challenges associated with cross-border product distribution, (xii) increased sovereign risk, such as default by or deterioration in the economies and credit worthiness of local governments, (xiii) varying abilities to enforce intellectual property, contractual, and other legal rights, (xiv) greater risk of uncollectible accounts and longer collection cycles, (xv) loss of ability to manage our operations in certain markets which could result in the deconsolidation of such businesses, (xvi) design and implementation of effective control environment processes across our diverse operations and employee base, (xvii) imposition of more or new tariffs, quotas, trade barriers, price controls, and similar restrictions in the countries in which we or our suppliers or manufacturers operate or regulations, taxes or policies that might negatively affect our
sales, and (xviii) changes in trade policies and trade relations.relations, (xix) greater risk of uncollectible accounts or trade receivables and longer collection cycles, and (xx) political sentiment impacting global trade, including the willingness of non-U.S. consumers to purchase from U.S. corporations.
In addition, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest and government shutdowns, civil strife, acts of war, public corruption, expropriation and other economic or political or social uncertainties could interrupt and negatively affect our business operations or customer demand. The slowdown in economic growth or high unemployment in some emerging markets could constrain consumer spending, and declining consumer purchasing power could adversely impact our profitability. Continued instability in the banking and governmental sectors of certain countries in the European Union or the dynamicsprofitability. Dynamics associated with the federal and state debt and budget challenges in the United States could adversely affect us. All of these
factors could result in increased costs or decreased revenues, and could materially and adversely affect our product sales, financial condition and results of operations.
There may be uncertainty as a result of key global events during 2021.2023 that are expected to continue throughout 2024. For example, the continuingrising interest rates and inflation, recessionary pressures, geopolitical uncertainty, related to the COVID-19 pandemic, Brexitincluding wars and conflicts, fiscal and monetary policy uncertainty, international trade disputes, as well as ongoing terrorist activity, may adversely impact global stock markets (including The New York Stock Exchange on which our common shares are traded) and general global economic conditions. All of these factors are outside of our control but may nonetheless cause us to adjust our strategy in order to compete effectively in global markets.
Our performance is affected by general economic, political and social conditions and taxation policies. CCustomerustomer and consumer demand for our products may be impacted by the negative impacts caused by pandemics and public health crises, (including the COVID-19 pandemic), recession, financial and credit market disruptions, government shutdowns or other economic downturns in the United States or other nations. Our results in the past have been, and in the future may continue to be, materially affected by changes in general economic, political and social 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, trade policy, political and social unrest and terrorist acts in the United States or other countries in which we carry on business. The economic, political and social conditions resulting from Brexit and the uncertainty regarding the post-Brexit trade agreement (as defined below) in the transition period and beyond, among other events, may adversely impact our overall performance.
Deteriorating economic conditions in our major markets, affected by the COVID-19 pandemic, such as inflation, economic slowdowns or recessions, increased unemployment, decreases in disposable income, declines in consumer confidence, or economic slowdowns or recessions could result in reductions in sales of our products, reduced acceptance of innovations, and increased price competition. Such deterioration in any of the countries in which we do business could also cause slower collections on accounts receivable which may adversely impact our liquidity and financial condition. In addition, significant COVID-19 related changes in the political conditions in markets in which we manufacture, sell or distribute our products (including quarantines, import/export restrictions, price controls, governmental or regulatory actions, closures, or other restrictions that limit or close our operating and manufacturing facilities, restrict our employees’ ability to travel or perform necessary business functions or otherwise prevent our third-party suppliers or customers from sufficiently staffing operations, including operations necessary for the production, distribution, sale, and support of our products) could adversely impact our operations and results.
Financial institutions may be negatively impacted by economic conditions, including rising inflation and interest rates, and may consolidate or cease to do business which could result in a tightening in the credit markets, a low level of liquidity in many financial markets, and increased volatility in fixed income, credit, currency and equity markets. The COVID-19 pandemic hasAdverse macroeconomic conditions have increased volatility and pricing in the capital markets and as a result, we may not have access to preferred sources of liquidity when needed or on terms we find acceptable, causing our borrowing costs could increase. An economic or credit crisis could impair credit availability and our ability to raise capital when needed. A disruption in the financial markets may have a negative effect on our derivative counterparties and could impair our banking or other business partners, on whom we rely for access to capital and as counterparties to our derivative contracts. Any of these events would likely harm our business, results of operations and financial condition.
Our operations face significant foreign currency exchange rate exposure and currency restrictions 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 euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Brazilian real, and Nigerian naira, and Russian ruble.naira. 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 and face exposure to adverse movements in foreign currency exchange rates. For example, asduring the second quarter of 2023, the Nigerian government removed certain currency restrictions over the Nigerian Naira leading to a significant decline in the exchange rate of the Naira to the U.S. dollar on the official market in Nigeria. As a result of the United Kingdom’s termination of membershipthis decline in the European Union under new trade and cross border operating agreements, there could be significant volatility in currency exchange rate, fluctuations. Consequently, changes in the U.S. dollar value of the U.S. dollar may unpredictablyassets, liabilities, expenses and negatively affect the valuerevenues of these itemsour Nigerian business in our consolidated financial statements even if their value has not changed in their original currency.decreased significantly compared to prior periods.
The United Kingdom's exit from the European UnionGeopolitical and international regulatory events, uncertainty or other factors may have a negative effect on global economic conditions, financial markets and our businessbusiness. . The decisionGlobal political uncertainties, disruptions or major regulatory or policy changes, and/or the enforcement thereof may affect our business, financial performance, operations or products, including the ongoing impact of changes in international trade policies (for example, the United Kingdom toKingdom’s exit from the European Union,Union). While trading through Brexit has become normal course of business, we continue to closely monitor and the uncertainty concerning the post-Brexit trade agreement, may have a negative effect on globalmanage our inventory levels of imported raw materials, packaging and
economic conditions, financial marketsfinished goods in the UK. We have made investments in resources, systems and processes to meet the new ongoing requirements and we work to mitigate disruptions to our business. On January 29, 2020,local supply chain and distribution to reduce the European Parliament approvedimpact on our input and distribution costs. As the United Kingdom’s withdrawalEU and U.K. amend legislation and regulation post-Brexit, there is a risk of increased divergence between the EU and U.K. regulatory regimes and we continue to monitor for divergence in regulatory rules which could impact our supply chain operations. Despite our efforts to control costs, we have continued to see inflationary cost pressures rise in our UK business this year, as we have also experienced in other markets. If the UK’s exit from, the European Union, commonly referred to as “Brexit.” The United Kingdom officially left the European Union on January 31, 2020 and entered into a transition period that expired on December 31, 2020, during which the United Kingdom and the European Union negotiated a post-Brexitor new trade agreement (the “post-Brexit trade agreement”). The ultimate effects of Brexit on us will depend on the effects of the post-Brexit trade agreement, which went into effect on January 1, 2021.
The uncertainty concerning the post-Brexit trade agreement and the United Kingdom’s legal, political and economic relationshiparrangements with, the European Union may be a source of instability inEU negatively impact the international markets, create significant currency fluctuations, and/UK economy or otherwise adversely affect trading agreements or similar cross-border co-operation arrangements (whether economic, tax, fiscal, legal, regulatory or otherwise). We may also face new regulatory costs and challenges as a result of Brexit (including potentially divergent national laws and regulations between the United Kingdom and European Union) that could have an adverse effect on our operations. For example, the United Kingdom could lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increaseddisagreements on trade barriers that could maketerms then the impact to our doing business in the European Union and the European Economic Area more difficult. Any of these developments, or the perception that any of them could occur, could depress economic activity and restrict our access to capital, which could materially and adversely affect our product sales,operations, financial condition and results of operations.
Potential impacts to our business include: (i) reduced efficiency in processing of product shipments between the United Kingdom and other countries thatcash flows could impact our ability to have sufficient products in the appropriate market for sale to customers, (ii) requirement to increase inventory levels maintained in both the United Kingdom and other countries to ensure adequate supply of product to support both base and promotional activities normally executed with our customers, (iii) increased costs related to incremental warehousing and logistics services required to adequately service our customers, (iv) significant financial impact resulting from tariffs that are implemented between the United Kingdom and other countries as the location of our European production facilities and the markets we sell in regularly require significant import and export shipments involving the United Kingdom, and (v) our ability to realize future benefit from other assets on our balance sheet, such as deferred tax assets, may be impacted which could result in additional valuation allowances or reserves being established.
material.
Potential liabilities and costs from litigation could adversely affect our business.business. There is no guarantee that we will be successful in defending our self in civil, criminal or regulatory actions (inclusive of class action lawsuits and foreign litigation), including under general, commercial, employment, environmental, data privacy or security, intellectual property, food quality and safety, anti-trust and trade, advertising and claims, and environmental laws and regulations, or in asserting our rights under various laws. For example, our marketing or claims could face allegations of false or deceptive advertising or other criticisms which could end up in litigation and result in potential liabilities or costs. Furthermore, actions we have taken or may take, or decisions we have made or may make, as a consequence of the COVID-19 pandemic, may result in investigations, legal claims or litigation against us. As a result, we could incur substantial costs and fees in defending our self or in asserting our rights in these actions or meeting new legal requirements. The costs and other effects of potential and pending litigation and administrative actions against us, and new legal requirements, cannot be determined with certainty and may differ from expectations. In addition, we may be impacted by litigation trends, including class action lawsuits involving consumers, employees, and shareholders, which could have a material adverse effect on our reputation, the market price of our common stock, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Risk Management and Strategy. Kellanova has established a cybersecurity program (the “program”) that is designed based on reviewing industry common practices and recognized frameworks (i.e., NIST and ISO, among others). The Company works to evolve its program to address material risks from cybersecurity threats. The program is developed from a top-down strategic risk management approach.
The program includes processes that identify how security measures and controls are developed, implemented, and maintained, as well as cybersecurity and information security training and awareness. The program includes a risk management process designed to identify internal and external cybersecurity threats and vulnerabilities to the Company’s business and operations, assess the likelihood and potential impact of the threats and vulnerabilities to the Company, and assess and prioritize the risks from cybersecurity threats and vulnerabilities to inform action plans and strategies to mitigate and manage these risks. The program’s risk assessment process, based on a method and guidance from a recognized national standards organization, is conducted annually. The risk assessment along with risk-based analysis and judgment are used to select security controls to address risks. During this process, the following factors, among others, are considered: recognized frameworks, likelihood and severity of risk, impact on the Company and others if a risk materializes, feasibility and cost of controls, and impact of controls on operations and others.
Third-party security firms are used in different capacities to provide or operate some of these controls and technology systems, including cloud-based services and platforms. For example, third parties are used to conduct assessments, such as vulnerability scans and penetration testing. The Company uses a variety of processes to address cybersecurity threats related to the use of third-party technology and services, including pre-acquisition diligence, imposition of contractual obligations, and performance monitoring.
The Company, as a part of its program has a documented cybersecurity incident response plan and conducts tabletop exercises to enhance incident response preparedness. Business continuity and disaster recovery plans are used to prepare for the potential for a disruption in technology we rely on. The Company is a member of cybersecurity intelligence and risk sharing organizations. Employees undergo security awareness training.
The Company has an Enterprise Risk Management (“ERM”) program to address enterprise risks, and cybersecurity is a risk category evaluated and identified by that function. One of the leaders of the ERM process is Kellanova’s Vice President, Internal Audit, and the process includes individuals with designated areas of focus and subject matter experts across Kellanova, including cybersecurity leaders. As the enterprise risk owner for cybersecurity,
the Chief Digital and Information Officer supports the Chief Information Security Officer (“CISO”) and the information security team, which includes a Governance, Risk, and Compliance (GRC) function, to manage cybersecurity risk. The information security team collaborates on privacy and security governance.
Our computer systems have been and will likely continue to be subjected to cybersecurity threats. To date, we have not experienced a cyber security threat that has materially affected the Company, including its business strategy, results of operations, or financial conditions.
Additionally, in Item 1A Risk Factors under the headings of “Risks Related to Our Intellectual Property and Technology”, and “Technology failures, cyber incidents, privacy breaches or data breaches could disrupt our operations or reputation and negatively impact our business”, forward-looking cybersecurity threats that could have a material impact on the Company are discussed. Those sections of Item 1A should be read in conjunction with this Item 1C.
Governance. The Kellanova Board of Directors has risk oversight responsibility for Kellanova, which it administers directly and with assistance from its committees. Oversight of the information security program sits with the Audit Committee. The Audit Committee has oversight responsibilities with respect to ERM, including cybersecurity, information security and data protection risk exposures, and the steps management has taken to monitor and control these exposures. In addition to periodically providing the Executive Management Team with information and cybersecurity briefings, the Chief Digital and Information Officer (“CDIO”) and Chief Information Security Officer (“CISO”) provide at least biannual updates to the Audit Committee regarding cybersecurity, including on strategy and the Company's cybersecurity program. For cybersecurity incidents, the Company’s cybersecurity incident response plan includes a process for incidents to be evaluated for material impact. The escalation protocol includes reporting of security incidents to members of the Kellanova Executive Management Team and reporting of any cyber incidents that could have a material impact on the Company to the Audit Committee.
As mentioned above, the CISO is the management position with primary responsibility for the development, operation, and maintenance of our information security program. The Company’s CISO has work experience in various roles in risk management, including developing information and cybersecurity strategy/programs, information security audit and assessments, cybersecurity operations focused on identification, mitigation and response to cybersecurity threats. The CISO has experience leading enterprise global efforts to align systems to industry-accepted standards and practices, as well as regulatory compliance requirements. The CISO has degrees in the areas of management of information systems and cybersecurity, and also maintains several information security and technology certifications, including as a Certified Information System Security Professional (“CISSP”) and Boardroom Certified Qualified Technology Expert (“QTE”).
The CISO reports directly to the CDIO, who is a member of the Kellanova Executive Management Team. The Company’s CDIO has technology experience overseeing and executing technology strategies in complex, global, and matrixed environments. The CDIO has been in role since February 2019, bringing experience from overseeing and executing technology as European CIO at the Company, and over 20 years of experience leading IT strategy and change initiatives in the consumer packaged goods and manufacturing industries.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Chicago, Illinois and we maintain corporate offices and our principal research and development facilities are located in Battle Creek, Michigan.
We operated, as of February 22, 2021,20, 2024, offices, manufacturing plants and distribution and warehousing facilities totaling more than 37 36.5million 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 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 are located in Battle Creek, Michigan; Lancaster, Pennsylvania; Memphis, Tennessee; Omaha, Nebraska;
San Jose, California; Rome, Georgia; Kansas City, Kansas; Pikeville, Kentucky; Grand Rapids and Wyoming, Michigan; Blue Anchor, New Jersey; Cary, North Carolina; Cincinnati and Zanesville, Ohio; Muncy, Pennsylvania; and Jackson and Rossville, Tennessee.
Outside the United States, we had, as of February 22, 2021,20, 2024, additional manufacturing locations, some with warehousing facilities, in Australia, Belgium, Brazil, Canada, Colombia, Ecuador, Egypt, Ghana,Great Britain, India, Japan, Malaysia, Mexico, Nigeria,Poland, Russia, South Africa, South Korea, Spain, Thailand, and Turkey. We also have joint ventures in China, Nigeria, and Ghana which own or operate manufacturing or warehouse facilities.
We generally own many of our principal properties, including our corporate headquarters, principal research and development center and manufacturing facilities in the United States, and no owned property is subject to any major lien or other encumbrance. DistributionWe lease our corporate headquarters, and our distribution facilities (including related warehousing
facilities) and offices of non-plant locations are also 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, claims, and governmental inspections, audits or investigations arising out of our business which cover matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, employment and other actions. In the opinion of management, the ultimate resolution of these matters willis not expected to have a material adverse effect on our financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Information on theThe principal market for our common stock, numbertrading Kellanova shares (Ticker symbol: K) is the New York Stock Exchange (NYSE). At December 30, 2023 there were approximately 23,633 shareholders of shareowners and dividends is located in Note 16 within Notes to Consolidated Financial Statements.record.
In December 2017,February 2020, the Board of Directors approved an authorization to repurchase up to $1.5 billion of our common stock beginningexpiring in January 2018 through December 2019.2022. In February 2020,December 2022, the Board of Directors approved a new authorization to repurchase up to $1.5 billion of the Company'sour common stock through December 2022.2025. These authorizations arewere intended to allow us to repurchase shares for general corporate purposes and to offset issuances for employee benefit programs.
The following table provides information with respect to purchases of common shares under programs authorized by our Board of Directors during the quarter ended January 2, 2021.December 30, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions, except per share data) |
| | | | | |
|
| Period | | (a)
Total
Number
of
Shares
Purchased | | (b)
Average
Price
Paid Per
Share | | (c)
Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs | | (d)
Approximate
Dollar
Value of
Shares
that May
Yet Be
Purchased
Under the
Plans or
Programs
| Month #1:
9/27/20-10/24/20 | | — | | | $ | — | | — | | | $ | 1,500 | |
| Month #2:
10/25/20-11/21/20 | | — | | | $ | — | | — | | | $ | 1,500 | |
| Month #3:
11/22/20-1/2/21 | | — | | | $ | — | | — | | | $ | 1,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Period | | (a)
Total
Number
of
Shares
Purchased | | (b)
Average
Price
Paid Per
Share | | (c)
Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs | | (d)
Approximate
Dollar
Value of
Shares
that May
Yet Be
Purchased
Under the
Plans or
Programs |
Month #1:
10/01/23-10/28/23 | | — | | | $ | — | | | — | | | $ | 1,440 | |
Month #2:
10/29/23-11/25/23 | | 2.1 | | | $ | 52.61 | | | 2.1 | | | $ | 1,330 | |
Month #3:
11/26/23-12/30/23 | | — | | | $ | — | | | — | | | $ | 1,330 | |
ITEM 6. SELECTED FINANCIAL DATA[RESERVED]
Kellogg Company and SubsidiariesSelected Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions, except per share data and number of employees) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Operating trends | | | | | | | | | | |
| Net sales | | $ | 13,770 | | | $ | 13,578 | | | $ | 13,547 | | | $ | 12,854 | | | $ | 12,965 | |
| Gross profit as a % of net sales | | 34.3 | % | | 32.3 | % | | 34.9 | % | | 36.6 | % | | 37.3 | % |
| Depreciation | | 452 | | | 457 | | | 493 | | | 469 | | | 510 | |
| Amortization | | 27 | | | 27 | | | 23 | | | 12 | | | 7 | |
| Advertising expense | | 781 | | | 676 | | | 752 | | | 732 | | | 736 | |
| Research and development expense (a) | | 135 | | | 144 | | | 154 | | | 148 | | | 182 | |
| Operating profit | | 1,761 | | | 1,401 | | | $ | 1,706 | | | 1,387 | | | 1,483 | |
| Operating profit as a % of net sales | | 12.8 | % | | 10.3 | % | | 12.6 | % | | 10.8 | % | | 11.4 | % |
| Interest expense | | 281 | | | 284 | | | 287 | | | 256 | | | 406 | |
| Net income attributable to Kellogg Company | | 1,251 | | | 960 | | | 1,336 | | | 1,254 | | | 699 | |
| Average shares outstanding: | | | | | | | | | | |
| Basic | | 343 | | | 341 | | | 347 | | | 348 | | | 350 | |
| Diluted | | 345 | | | 343 | | | 348 | | | 350 | | | 354 | |
| Per share amounts: | | | | | | | | | | |
| Basic | | 3.65 | | | 2.81 | | | 3.85 | | | 3.61 | | | 1.99 | |
| Diluted | | 3.63 | | | 2.80 | | | 3.83 | | | 3.58 | | | 1.97 | |
| Cash flow trends | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | $ | 1,986 | | | $ | 1,176 | | | $ | 1,536 | | | $ | 403 | | | $ | 1,271 | |
| Capital expenditures | | 505 | | | 586 | | | $ | 578 | | | 501 | | | 507 | |
| Net cash provided by (used in) operating activities reduced by capital expenditures (b) | | 1,481 | | | 590 | | | 958 | | | (98) | | | 764 | |
| Net cash provided by (used in) investing activities | | (585) | | | 774 | | | (948) | | | 149 | | | (392) | |
| Net cash provided by (used in) financing activities | | (1,388) | | | (1,905) | | | (566) | | | (604) | | | (786) | |
| Interest coverage ratio (c) | | 8.3 | | | 7.2 | | | 8.1 | | | 9.4 | | | 4.6 | |
| Capital structure trends | | | | | | | | | | |
| Total assets | | $ | 17,996 | | | $ | 17,564 | | | $ | 17,780 | | | $ | 16,351 | | | $ | 15,111 | |
| Property, net | | 3,713 | | | 3,612 | | | 3,731 | | | 3,716 | | | 3,569 | |
| Short-term debt and current maturities of long-term debt | | 729 | | | 727 | | | 686 | | | 779 | | | 1,069 | |
| Long-term debt | | 6,746 | | | 7,195 | | | 8,207 | | | 7,836 | | | 6,698 | |
| Total Kellogg Company equity | | 3,112 | | | 2,747 | | | 2,601 | | | 2,178 | | | 1,891 | |
| Share price trends | | | | | | | | | | |
| Stock price range | | $53-71 | | $52-69 | | $56-75 | | $59-76 | | $70-87 |
| Cash dividends per common share | | 2.28 | | | 2.26 | | | 2.20 | | | 2.12 | | | 2.04 | |
| Number of employees | | 31,000 | | | 31,000 | | | 34,000 | | | 33,000 | | | 37,000 | |
The above amounts have been restated to include the impact of Accounting Standard Updates adopted in the first quarter of 2018. Additionally, the above prior year amounts have not been restated to include the impact of the Leases ASU adopted in the first quarter of 2019.
a.Research and development cost declines are due primarily to cost optimization and divestiture impacts.
b.We use this non-GAAP financial measure, which is reconciled above, to focus management and investors on the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, and share repurchase.
c.Interest coverage ratio is calculated based on net income attributable to Kellogg Company before interest expense, income taxes, depreciation and amortization, divided by interest expense.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kellogg CompanyKellanova and Subsidiaries
RESULTS OF OPERATIONS
Business overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Kellogg Company,Kellanova, 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, as well as Part II, 'Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year ended December 28, 2019, which provides additional information on comparisons of years 2019 and 2018.Report.
For more than 110115 years, consumers have counted on KelloggKellanova for great-tasting, high-quality and nutritious foods. These foods include snacks, such as crackers, savory snacks, toaster pastries, cereal bars and bites; and convenience foods, such as ready-to-eat cereals, frozen waffles, veggie foods and noodles. KelloggKellanova products are manufactured and marketed globally. Our MD&A references consumption and net sales in discussing our sales trends for certain categories and brands. We record net sales upon delivery of shipments to our customers. Consumption and share data noted within is based on Nielsen x-AOC or other comparable source, for the applicable period. Consumption refers to consumer purchases of our products from our customers. Unless otherwise noted, consumption and shipment trends are materially consistent.
COVID-19 responseSeparation transaction
In March 2020,On June 21, 2022, the World Health Organization categorized the novel coronavirus (COVID-19) as a pandemic,Company announced its intent to separate its North American cereal business, via tax-free spin-off. The transaction was completed on October 2, 2023, resulting in two independent public companies, Kellanova and it has spread across the world. To limit the spread of COVID-19, governments took various actions to slow and otherwise control the spread of COVID-19, including the issuance of stay-at-home orders and social distancing guidelines. While many governments have eased stay-at-home orders, some governments have taken steps to reimplement restrictions.The Company has taken proactive steps to protect our people and otherwise mitigate the impact to our business. The Company’s business has been designated as “essential services”, “critical infrastructure” and the like by governments where we operate.The Company has taken numerous measures during the pandemic to fulfill our key objectives: 1) ensuring the health and safety of our employees, 2) safely producing and delivering our foods to customers and consumers, 3) supporting the communities in which we operate, and 4) maintaining financial flexibility. Our efforts have been led by the Company’s Executive Committee, a committee composed of senior leaders, and our global Crisis Management Process.As part of that process, we have worked closely with medical, regulatory and other experts as we deliver on our objectives.WK Kellogg Co.
Employee healthIn accordance with applicable accounting guidance, the results of WK Kellogg Co are presented as discontinued operations in the Kellanova consolidated statement of income and, safety
as such, have been excluded from both continuing operations and segment results for all periods presented. The health and safety of our employees is our top priority.As a result,recast operating profit includes certain costs that are reported in continuing operations but relate to items that will be reimbursed by the Company has designed and implemented a number of actions acrosstransition services agreement (“TSA”) with WK Kellogg Co. We expect that the business. Fromcosts for such services will be fully reimbursed under the outsetTSA for the applicable future periods. Following the end of the pandemic, the Company restricted travel and visitors to its facilities, prohibited external group meetings and established quarantine procedures for any potentially exposed employees.The Company subsequently required employees who could do so to work remotely to further minimize the exposure of our employees to COVID-19. At this time, most of our office employees continue to work remotely.For those who are not able to work remotely, the Company implemented new protocols at all of our facilities to protect our employees, including temperature checks, social distancing, response plans, face coverings, contact tracing, enhanced sanitation procedures, and additional personal protection equipmentTSA period, we expect that such costs will no longer be incurred by Kellanova.
MaintainFurther, the Company reclassified the assets and liabilities of WK Kellogg Co as assets and liabilities of discontinued operations in the consolidated balance sheet as of December 31, 2022. The consolidated statements of cash flows are presented on a consolidated basis for both continuing operations and discontinued operations.
Nigerian Naira
During the second quarter of 2023, the Nigerian government removed certain currency restrictions over the Nigerian Naira leading to a significant decline in the exchange rate of the Naira to the U.S. dollar on the official market in Nigeria. As a result of this decline in the exchange rate, the U.S. dollar value of the assets, liabilities, expenses and revenues of our abilityNigerian business in our consolidated financial statements has decreased significantly compared to produce and deliver essential food supplyprior periods. The consolidated assets of our Nigerian business represented approximately 5% of our consolidated assets as of December 30, 2023, compared to 8% as of December 31, 2022. Net sales of our Nigerian business were 8% of our consolidated net sales for the year ended December 30, 2023 but could become a smaller percentage of our overall sales if exchange rates as of the end of the year persist or decline further in 2024.
In addition to our efforts to keep our people safe,consolidated Nigerian business, the Company also has taken several actions to ensurean investment in an unconsolidated entity, Tolaram Africa Foods PTE LTD (TAF), that we maintain our ability to operate effectively during this pandemic, providing our foods to our customers and consumers.While we have experienced limited disruption in the operation of our facilities, we are taking the appropriate actions to ensure the continuity of our business.We are working proactively with our suppliers to maintain our supply of raw materials and packaging during this time of increased demand for our products. We have secured access to contracted labor forces. We have made incremental investments in our workforce, additional warehouse capacity and increased access to transportation so that our products are deliveredholds an investment in a timely manner to our customers.Nigerian food manufacturer. This investment is accounted for under the equity method of accounting and is evaluated for indicators of other than temporary impairment. In conjunction with our management of production capacity, we have simplified our operations (as well as our customers' operations) by prioritizing our offerings to increase the supply of our most demanded products to our customers, as well as delaying innovation launches and commercial activities.At the same time,During 2023, the Company reinforced food safety practices across our manufacturing network.
War in Ukraine
The war in Ukraine and the related sanctions imposed have increased global economic and geopolitical uncertainty. In March 2022, we suspended all new investments and shipments of all products to Russia. We have partnered withno employees or direct operations in Ukraine. Our business in Russia consisted of three manufacturing facilities.
In December 2022 the Company entered into an agreement to sell our strategic technology providersRussian business to a third party, pending a number of local government regulatory approvals. In July 2023 the Company completed the sale of the Russian business. As a result of completing the transaction, the Company derecognized net assets of approximately $65 million and recorded a non-cash loss on the transaction of approximately $113 million, primarily related to the release of historical currency translation adjustments. The business was part of the Europe reportable segment and the sale resulted in ordera complete exit from the Russian market. The business in Russia represented approximately 1% of consolidated Kellanova net sales.
Impacts of the war to maintain support for our criticalnet sales, earnings, and cash flows extends beyond our business in Russia. Regional or global economic recessions, inflation, and finance systemssupply chain challenges as a result of the war or further escalation could have a material impact on our results.
Inflationary pressures
Geopolitical instability, including wars and conflicts (including conflicts in Ukraine and the Middle East), as well as additional network bandwidth and support for the transition to a work-from-home environment.Weother global events have worked to mitigate system-related risksresulted in this environment through heightened monitoring of cybersecurity and network capacity as well as reevaluation of contingency plans.
Community support
Kellogg is a company with a heart and soul, and we are working together across our company to help our food bank partners and neighbors in need. Kellogg and our charitable funds have donated cash and food to global COVID-19 hunger relief efforts.As always, through our global Kellogg’s® Better Days purpose platform, we help deliver critical nourishment to people when they need it most. Local governments have identified food security as a top priority in their fight against COVID-19. With school and business closures and “shelter-at-home” mandates, Kellogg is providing support to our food bank partners on the front-lines, helping those who may not know where their next meal is coming from.
Maintain financial flexibility
At this time, the COVID-19 pandemic has not materially impacted our liquidity and we anticipate current cash and operating cash flows, together with our credit facilities and other financing sources including commercial paper, credit and bond markets, will be adequate to meet our operating, investing and financing needs. We expect cash provided by operating activities of $1.6 billion and capital expenditures of approximately $500 million in 2021.We currently have $2.9 billion of unused revolving credit agreements, including $1.5 billion effective through January 2023 and $1.0 billion effective through January 2022, as well as continued accesscertain impacts to the commercial paper markets. We are currently in compliance with all debt covenantsglobal economy, including market disruptions, supply chain challenges, and do notinflationary pressures. During the year ended December 30, 2023 we continued to experience elevated commodity and supply chain costs, including procurement and manufacturing costs, although certain supply chain challenges have material uncertainty about our ability to maintain compliance in future periods.eased. We continue to utilize available capacity withinmitigate the Monetization Programsdollar impact of this input cost inflation through the execution of productivity initiatives and revenue growth management actions. Additionally, from time to maintain financial flexibility without negatively impacting working capital.Additionally,time we utilized certain aspectsmay enter into a combination of the Coronavirus Aid, Relieffixed price contracts with suppliers and Economic Security Act,commodity derivative instruments to delay the employer share of certain U.S. payroll taxes until 2021 and 2022. Our utilization does not include a government loan and is not expected to result in any restrictions on the Company’s decisions on executive compensation, payment of dividends, or share buy-back programs. Asmanage the impact of COVID-19 onvolatility in the economy and our operations evolves, we will continue to assess our liquidity needs.
Monitoring future impacts
The severity, magnitude and durationprice of the current COVID-19 pandemic is uncertain and rapidly changing.The Company is actively monitoring the pandemic and related governmental actions as they continue to develop and evolve.We will adjust our mitigation strategies as necessary to address any changing health, operational or financial risks that may arise. Beginning in March 2020, the Company experienced a significant increase in demand for our retail products as consumers stocked up on food for at-home consumption in those markets.While this demand has moderated for certain products, we will continue to manage our production capacity during this period of high demand.raw materials. We continue to monitor the business for adverse impacts of the pandemic, including volatility in the foreign exchange markets, reduced demand in our away from home businesses, supply-chain disruptions in certain markets, increased costs of employee safety and maintaining food supply, and lower revenues for certain emerging market countries with a higher concentration of traditional trade outlets. In the event the Company experiences adverse impacts from the above or other factors, the Company would also evaluate the needexpect input cost inflation to perform interim impairment tests for the Company’s goodwill, indefinite lived intangible assets, investments in unconsolidated affiliates and property, plant and equipment.There can be no assurance that volatility and/or 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. See further discussion within Future Outlook.flat during 2024.
Segments
On July 28, 2019, we completed the sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero International S.A. (“Ferrero”) for $1.3 billion in cash, on a cash-free, debt-free basis and subject to a working capital adjustment mechanism.During 2020 the working capital adjustment was finalized, resulting in a reduction of the sale proceeds and recognition of a pre-tax expense in Other income and (expense) of $4 million. The operating results for these businesses were included in our North America and Latin America reportable segments prior to the sale.
We manage our operations through four operating segments that are based primarily on geographic location – North America which includes the U.S. businesses and Canada; Europe which consists principally of European countries; Latin America which consists of Central and South America and includes Mexico; and AMEA (Asia Middle East Africa) which consists of Africa, Middle East, Australia and other Asian and Pacific markets.These operating segments also represent our reportable segments.segments
Non-GAAP Financial Measures
This filing includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Reported results were prepared in accordance with U.S. GAAP, include all net sales and expenses recognized during the periods. Items excluded from our non-GAAP financial measures are discussed in the "Significant items impacting comparability" section of this filing. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions, including incentive compensation. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors’ understanding of our underlying operating performance and in their analysis of ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.
Non-GAAP Financial Measures
Non-GAAP financial measures used for evaluation of performance include currency-neutral and organic net sales, adjusted and currency-neutral adjusted operating profit, adjusted and currency-neutral adjusted diluted earnings per share (EPS), adjusted and currency-neutral adjusted gross profit, adjusted and currency neutral adjusted gross margin, adjusted other income (expense),net debt and cash flow. We determine currency-neutral results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.
•Currency-neutral net sales and organic net sales: We adjust the GAAP financial measure to exclude the impact of foreign currency, resulting in currency-neutral net sales. In addition, we exclude the impact of acquisitions, divestitures, and foreign currency, and differences in shipping days including the 53rd week, resulting in organic net sales. We excluded the items which we believe may obscure trends in our underlying net sales performance. By providing these non-GAAP net sales measures, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses these non-GAAP measures to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results. These non-GAAP measures are also used to make decisions regarding the future direction of our business, and for resource allocation decisions.
•Adjusted: gross profit, gross margin, operating profit, operating margin, and diluted EPS:EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the separation transaction, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commoditiescommodity contracts, certain equity investments and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, gain/lossa gain on the divestiture,interest rate swaps, and other costs impacting comparability resulting in adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
•Currency-neutral adjusted: gross profit, gross margin, operating profit, operating margin, and diluted EPS:EPS: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the separation transaction, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commoditiescommodity contracts, certain equity investments and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, gain/lossa gain on divestiture,interest rate swaps, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted. We excluded the items which we believe may obscure trends in our underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the Company's profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments.
•Adjusted effectiveother income tax rate:(expense): We adjust the GAAP financial measuresmeasure to exclude the effect of restructuring programs, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded) and certain equity investments, losses resulting from divestitures, and other costs impacting comparability. We excluded the items which we believe may obscure trends in our underlying profitability. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's other income (expense), commoditiesexcluding the impact of the items noted above, for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability.
•Adjusted effective income tax rate: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the separation transaction, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodity contracts, certain equity investments, and certain foreign currency contracts, multi-employer pension plan withdrawal liabilities, the gain/lossa gain on divestiture,interest rate swaps, and other costs impacting comparability. comparability. We excluded the items which we believe may obscure trends in our pre-tax income and the related tax effect of those items on our adjusted effective income tax rate, and other impacts to tax expense, including U.S. Tax Reform and certain out-of-period adjustments, on our adjusted effective income tax rate.expense. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company's effective tax rate, excluding the pre-tax income and tax effect of the items noted above, for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate.
•Net debt: Defined as the sum of long-term debt, current maturities of long-term debt and notes payable,
less cash and cash equivalents, and marketable securities. With respect to net debt, cash and cash equivalents, and marketable securities are subtracted from the GAAP measure, total debt liabilities, because they could be used to reduce the Company’s debt obligations. Company management and investors use this non-GAAP measure to evaluate changes to the Company's capital structure and credit quality assessment.
•Cash flow:Free cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. CashFree cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of free cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure.
These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.
Significant items impacting comparability
Mark-to-market accounting for pension plans, commodities and certain foreign currency contracts
We recognize mark-to-market adjustments for pension and postretirement benefit plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans were recognized in the year they occur. Mark-to-market gains/losses for certain equity investments are recorded based on observable price changes. Changes between contract and market prices for commodities contracts and certain foreign currency contracts result in gains/losses that were recognized in the quarter they occur. We recorded a total pre-tax mark-to-market chargeloss of $162$163 million for 2020,2023, a total pre-tax market-to-market chargemark-to-market loss of $104$369 million for 20192022, and a total pre-tax mark-to-market chargegain of $343$100 million for 2018.in 2021. Included within the aforementioned totals was a pre-tax mark-to-market chargeloss for pension plans of $154$146 million for 2020,2023, a pre-tax mark-to-market chargeloss for pension plans of $229 million for 2022, and a pre-tax mark-to-market gain for pension plans of $98 million for 2019, and a pre-tax mark-to-market charge for pension plans of $335 million for 2018.2021.
Project KSeparation costs
In 2019,The Company successfully completed the Company completed implementationseparation of all Project K initiatives. We recorded pre-tax charges related to this program of $54 million in 2019 and $143 million in 2018.
See the Restructuring and cost reduction activities section for more information.
Brexit impacts
During 2019, with the uncertainty associated with the United Kingdom's exit from the European Union (EU), commonly referred to as Brexit, we incurred certain costs to proactively prepare for the potential adverse impacts of Brexit, such as delays at ports of entry and departure.its North America cereal business on October 2, 2023. As a result, we incurred pre-tax charges related to the separation, primarily related to legal and consulting costs, of $9$60 million in 2019for 2023 and a pre-tax charge of $3$8 million in 2018.for 2022.
Business and portfolio realignment
One-time costs related to divestitures and acquisitions, including the divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses; reorganizations in support of our Deploy for Growth priorities and a reshaped portfolio; and investments in enhancing capabilities prioritized by our Deploy for Growth strategy.strategy; and completed and prospective divestitures and acquisitions. As a result, we incurred pre-tax charges, primarily related to reorganizations of $38$2 million in 2020, $1562023, $15 million in 20192022, and $531 million in 2018.2021.
Intangible Asset Impairment
During the fourth quarter of 2023, the Company completed its annual impairment testing and determined the fair value of an intangible asset did not exceed its carrying value. As a result, we incurred pre-tax charges related to the impairment of $34 million for 2023.
Loss related to divestiture
During the third quarter of 2023, the Company completed the sale of the Russian business. As a result of completing the transaction, the Company recorded a non-cash loss on the transaction of approximately $113 million, primarily related to the release of historical currency translation adjustments.
Gain related to interest rate swaps
During the third quarter of 2022, the Company recognized a pre-tax gain of $18 million in interest expense related to a portion of certain forward-starting interest rate swaps no longer designated as cash flow hedges due to changes in forecasted debt issuance.
Valuation allowance
During the fourth quarter of 2023, the Company recorded a valuation allowance on deferred tax assets of $21 million in conjunction with the separation of our North America cereal business.
Multi-employer pension plan exit liabilityForeign valuation allowance
During the third quarter of 2019,2021, the Company incurreddetermined that certain foreign deferred tax assets were no longer more likely than not to be realized in the future and a pre-tax chargefull valuation allowance of $132$20 million due to withdrawing from two multi-employer pension plans. was recorded.
UK tax rate change
During the second quarter of 2020,2021, the Company recorded tax expense of $23 million as a pre-tax gainresult of approximately $5 million related to the settlement of one multi-employer pension plan withdrawal liability from the prior year.
Divestitures
On July 28, 2019, the Company completed its sale of selected cookies, fruit and fruit flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately $1.3 billion in cash, subject to a working capital adjustment mechanism. Both the total assets and net assets of the businesses were approximately $1.3 billion, resulting in a net pre-tax gain of $38 million during the third quarter, recorded in other income and (expense). Additionally, the company recognized curtailment gains related to the divestiture totaling $17 million in our U.S. pension and nonpension postretirement plans. During 2020 the working capital adjustment was finalized, resulting in a reduction of the sale proceeds and recognition of a pre-tax expense in Other income and (expense) of $4 million.
The operating results for the divested businesses were primarily includedtax legislation enacted in the North America reporting segment prior to the sale. Reported net sales for the divested businesses totaled $562 million for the first eight monthsUK in June of the year ended December 28, 2019 and $308 million for the last five months of the year ended December 29, 2018.
Additionally, during the fourth quarter of 2020, the Company divested its majority ownership of a small business in our Europe reportable segment, resulting in a pre-tax loss of $4 million. Net sales in 2020, totaled approximately $11 million for the business divested.
Acquisitions
In May of 2018, the Company acquired an incremental 1% ownership interest in Multipro, which along with concurrent changes to the shareholders' agreement, resulted in the Company now having a 51% controlling interest in and began consolidating Multipro, a leading distributor of a variety of food products in Nigeria and Ghana. In our AMEA reportable segment, year ended December 28, 2019, the acquisition added $271 million in net sales that impacted the comparability of 2018 reported results.
Impact of shipping day differences including 53rd week
During the fourth quarter of 2020, the Company had a difference in shipping days resulting from an additional week of business during the fiscal year. This impact increased reported net sales by $174 million for the year ended January 2, 2021.
Out-of-period adjustment
During the fourth quarter of 2019, the Company recorded an out-of-period adjustment to correct an error related to a prior year2021, which increased incomethe statutory UK tax expense by $39 million. See Note 13rate from 19 percent to the Consolidated Financial Statements.
U.S. Tax Reform
During the third quarter of 2020, the Company reversed a liability for uncertain tax positions of $32 million, related25 percent and required us to the finalization of a tax examination. The liability was related to the Company's estimate of the transitionre-value our net UK deferred tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.balance to reflect this higher rate.
Foreign currency translation
We evaluate the operating results of our business on a currency-neutral basis. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. Organic net sales exclude the impact of acquisitions, including the foreign currency impact calculated by applying the prior year foreign currency rates to current period results.
Financial results
For the full year ended January 2, 2021,December 30, 2023, our reported net sales increased 1.4%3.7% versus the prior year as strong organic net sales growth and the benefit of an additional week of business was partially offset by the impact of lapping results from the businesses divested at the end of July 2019, and unfavorable foreign currency. Demand for packaged foods for at-home consumption remained elevated as a result of the pandemic, although moderating in the back half of the year.This growthon positive price/mix across all regions which more than offset a declinethe impacts of price elasticity on volume and adverse foreign currency translation. Growth was led by Snacks across all four regions and consolidated net sales grew in away-from-home channel net sales.cereal and noodles and other. Organic net sales increased 6.0%8.3% from the prior year after excluding the impact of foreign currency.
Reported operating profit increased 24.3% versus the 53rd week,prior year due primarily to less unfavorable mark-to-market impacts, higher net sales, and recovery of gross margins, partially offset by loss on divestiture and higher costs related to the divestiture,separation of our North America cereal business. Currency-neutral adjusted operating profit increased 18.4%, after excluding the impact of mark-to-market, separation costs, intangible asset impairment, and foreign currency.
Reported operating profit increased almost 26% versus the prior year due primarily to substantially lower charges for multi-employer pension plan withdrawal, business and portfolio realignment, and Project K, and higher net sales, partially offset by the impact of the divestiture, and incremental COVID-19-related costs. Currency-neutral adjusted operating profit increased 3.5%, after excluding the impact of the multi-employer pension plan withdrawal, Project K, and business and portfolio realignment.
Reported diluted EPS of $3.63$2.25 for the year was up 30%increased 6.1% compared to the prior year EPS of $2.80$2.12 due primarily to higher operating profit and a lower tax rate due to the release of reserves for uncertain tax positions related to U.S. Tax reform. Theseless unfavorable mark-to-market impacts were partially offset by increased brand building investment, higher performance-based compensation costs, and related to the prior year gain on the divestiture.separation of our North America cereal business. Currency-neutral adjusted diluted EPS of $4.03$3.18 for the year increased 2.3%7.4% compared to prior year EPS of $3.94,$2.96, after excluding the impact of multi-employer pension plan withdrawal, gain/loss on divestiture, U.S. Tax Reform, Project K, and business and portfolio realignment.significant items impacting comparability.
Reconciliation of certain non-GAAP Financial Measures
| | | | | | | | | | | | | | |
| Consolidated results (dollars in millions, except per share data) | | 2020 | | 2019 |
| Reported net income attributable to Kellogg Company | | $ | 1,251 | | | $ | 960 | |
| Mark-to-market (pre-tax) | | (162) | | | (104) | |
| Project K (pre-tax) | | — | | | (54) | |
| Brexit impacts (pre-tax) | | — | | | (9) | |
| Business and portfolio realignment (pre-tax) | | (38) | | | (156) | |
| Multi-employer pension plan withdrawal (pre-tax) | | 5 | | | (132) | |
| Gain (loss) on divestiture (pre-tax) | | (8) | | | 55 | |
| Income tax impact applicable to adjustments, net* | | 45 | | | 50 | |
| U.S. Tax Reform | | 32 | | | — | |
| Out-of-period adjustment | | — | | | (39) | |
| | | | |
| Adjusted net income attributable to Kellogg Company | | $ | 1,377 | | | $ | 1,349 | |
| Foreign currency impact | | (13) | | | |
| Currency-neutral adjusted net income attributable to Kellogg Company | | 1,390 | | | $ | 1,349 | |
| Reported diluted EPS | | $ | 3.63 | | | $ | 2.80 | |
| Mark-to-market (pre-tax) | | (0.47) | | | (0.30) | |
| Project K (pre-tax) | | — | | | (0.15) | |
| Brexit impacts (pre-tax) | | — | | | (0.02) | |
| Business and portfolio realignment (pre-tax) | | (0.11) | | | (0.46) | |
| Multi-employer pension plan withdrawal (pre-tax) | | 0.01 | | | (0.39) | |
| Gain (loss) on divestiture (pre-tax) | | (0.02) | | | 0.16 | |
| Income tax impact applicable to adjustments, net* | | 0.13 | | | 0.14 | |
| U.S. Tax Reform | | 0.10 | | | — | |
| Out-of-period adjustment | | — | | | (0.12) | |
| | | | |
| Adjusted diluted EPS | | $ | 3.99 | | | $ | 3.94 | |
| Foreign currency impact | | (0.04) | | | |
| Currency-neutral adjusted diluted EPS | | 4.03 | | | $ | 3.94 | |
| Currency-neutral adjusted diluted EPS growth | | 2.3 | % | | |
| | | | | | | | | | | | | | |
| Consolidated results (dollars in millions, except per share data) | | 2023 | | 2022 |
| Reported net income attributable to Kellanova | | $ | 951 | | | $ | 960 | |
| Mark-to-market (pre-tax) | | (163) | | | (370) | |
| | | | |
| | | | |
| Separation costs (pre-tax) | | (60) | | | (8) | |
| Business and portfolio realignment (pre-tax) | | (2) | | | (15) | |
| Intangible asset impairment (pre-tax) | | (34) | | | — | |
| Gain related to interest rate swaps (pre-tax) | | — | | | 18 | |
| Loss on divestiture | | (113) | | | — | |
| Income tax impact applicable to adjustments, net* | | 55 | | | 85 | |
| Valuation allowance | | (21) | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| Adjusted net income attributable to Kellanova | | $ | 1,289 | | | $ | 1,250 | |
| Foreign currency impact | | 16 | | | |
| Currency-neutral adjusted net income attributable to Kellanova | | 1,273 | | | $ | 1,250 | |
| Reported diluted EPS | | $ | 2.25 | | | $ | 2.12 | |
| Mark-to-market (pre-tax) | | (0.47) | | | (1.07) | |
| | | | |
| | | | |
| Separation costs (pre-tax) | | (0.17) | | | (0.03) | |
| Business and portfolio realignment (pre-tax) | | (0.01) | | | (0.04) | |
| Intangible asset impairment (pre-tax) | | (0.10) | | | — | |
| Gain related to interest rate swaps (pre-tax) | | — | | | 0.05 | |
| Loss on divestiture (pre-tax) | | (0.33) | | | — | |
| Income tax impact applicable to adjustments, net* | | 0.17 | | | 0.25 | |
| Valuation allowance | | (0.06) | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| Adjusted diluted EPS from continuing operations | | $ | 3.23 | | | $ | 2.96 | |
| Foreign currency impact | | 0.05 | | | — | |
| Currency-neutral adjusted diluted EPS from continuing operations | | 3.18 | | | $ | 2.96 | |
| Currency-neutral adjusted diluted EPS growth | | 7.4 | % | | |
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
Net sales and operating profit
20202023 compared to 20192022
The following tables provide an analysis of net sales and operating profit performance for 20202023 versus 2019:2022:
| | Year ended January 2, 2021 | |
| Year ended December 30, 2023 | |
| (millions) | |
| (millions) | |
| (millions) | (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellanova
Consolidated |
| Reported net sales | Reported net sales | | $ | 8,361 | | | $ | 2,232 | | | $ | 914 | | | $ | 2,263 | | | $ | — | | | $ | 13,770 | |
| | Foreign currency impact on total business (inc)/dec | | (7) | | | 13 | | | (133) | | | (77) | | | — | | | (204) | |
| Currency-neutral net sales | | $ | 8,368 | | | $ | 2,219 | | | $ | 1,048 | | | $ | 2,340 | | | $ | — | | | $ | 13,974 | |
| Foreign currency | |
| | Impact of 53rd week | | 134 | | | 22 | | | — | | | 18 | | | — | | | 174 | |
| | Foreign currency impact on 53rd week (inc)/dec | | — | | | (1) | | | — | | | (1) | | | — | | | (2) | |
| Foreign currency | |
| | Foreign currency | |
| | Organic net sales | Organic net sales | | $ | 8,234 | | | $ | 2,198 | | | $ | 1,048 | | | $ | 2,322 | | | $ | — | | | $ | 13,802 | |
| | Year ended December 28, 2019 | |
| | Organic net sales | |
| | Organic net sales | |
| | Year ended December 31, 2022 | |
| Year ended December 31, 2022 | |
| Year ended December 31, 2022 | |
| (millions) | |
| (millions) | |
| (millions) | (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellanova
Consolidated |
| Reported net sales | Reported net sales | | $ | 8,390 | | | $ | 2,092 | | | $ | 940 | | | $ | 2,156 | | | $ | — | | | $ | 13,578 | |
| | Divestitures | |
| | | Divestitures | Divestitures | | 556 | | | — | | | 6 | | | — | | | — | | | 562 | |
| | Divestitures | |
| | Organic net sales | |
| Organic net sales | |
| Organic net sales | Organic net sales | | $ | 7,834 | | | $ | 2,092 | | | $ | 935 | | | $ | 2,156 | | | $ | — | | | $ | 13,017 | |
| | | % change - 2020 vs. 2019: | |
| % change - 2023 vs. 2022: | |
| | % change - 2023 vs. 2022: | |
| | % change - 2023 vs. 2022: | |
| Reported growth | |
| Reported growth | |
| Reported growth | Reported growth | | (0.4) | % | | 6.7 | % | | (2.8) | % | | 5.0 | % | | — | % | | 1.4 | % | | 3.8 | % | | 8.3 | % | | 16.3 | % | | (5.1) | % | | n/m | | 3.7 | % |
| | Foreign currency impact on total business (inc)/dec | | (0.1) | % | | 0.7 | % | | (14.2) | % | | (3.5) | % | | — | % | | (1.5) | % |
| Foreign currency | |
| | Foreign currency | |
| | Foreign currency | | | (0.2) | % | | 2.3 | % | | 7.9 | % | | (22.0) | % | | n/m | | (4.1) | % |
| Currency-neutral growth | Currency-neutral growth | | (0.3) | % | | 6.0 | % | | 11.4 | % | | 8.5 | % | | — | % | | 2.9 | % | Currency-neutral growth | | 4.0 | % | | 6.0 | % | | 8.4 | % | | 16.9 | % | | n/m | | 7.8 | % |
| | Divestitures | Divestitures | | (7.1) | % | | — | % | | (0.7) | % | | — | % | | — | % | | (4.5) | % |
| Impact of 53rd week | | 1.7 | % | | 1.0 | % | | — | % | | 0.8 | % | | — | % | | 1.4 | % |
| Foreign currency impact on 53rd week (inc)/dec | | — | % | | (0.1) | % | | — | % | | — | % | | — | % | | — | % |
| Divestitures | |
| Divestitures | | | — | % | | (3.2) | % | | — | % | | — | % | | n/m | | (0.5) | % |
| | Organic growth | |
| | Organic growth | |
| | Organic growth | Organic growth | | 5.1 | % | | 5.1 | % | | 12.1 | % | | 7.7 | % | | — | % | | 6.0 | % | | 4.0 | % | | 9.2 | % | | 8.4 | % | | 16.9 | % | | n/m | | 8.3 | % |
| Volume (tonnage) | Volume (tonnage) | | 4.8 | % | | 5.3 | % | | 8.9 | % | | 4.2 | % | | — | % | | 5.1 | % | Volume (tonnage) | | (6.1) | % | | (6.2) | % | | (7.0) | % | | 0.8 | % | | n/m | | (4.0) | % |
| Pricing/mix | Pricing/mix | | 0.3 | % | | (0.2) | % | | 3.2 | % | | 3.5 | % | | — | % | | 0.9 | % | Pricing/mix | | 10.1 | % | | 15.4 | % | | 15.4 | % | | 16.1 | % | | n/m | | 12.3 | % |
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
| | Year ended January 2, 2021 | |
| Year ended December 30, 2023 | |
| (millions) | |
| (millions) | |
| (millions) | (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellanova
Consolidated |
| Reported operating profit | Reported operating profit | | $ | 1,473 | | | $ | 302 | | | $ | 97 | | | $ | 202 | | | $ | (312) | | | $ | 1,761 | |
| Mark-to-market | Mark-to-market | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
| | Separation costs | |
| | Separation costs | |
| | Separation costs | |
| Business and portfolio realignment | Business and portfolio realignment | | (8) | | | (9) | | | (5) | | | (17) | | | (7) | | | (46) | |
| Multi-employer pension plan withdrawal | | 5 | | | — | | | — | | | — | | | — | | | 5 | |
| Intangible asset impairment | |
| Adjusted operating profit | Adjusted operating profit | | $ | 1,477 | | | $ | 311 | | | $ | 102 | | | $ | 218 | | | $ | (297) | | | $ | 1,811 | |
| Foreign currency impact | Foreign currency impact | | (1) | | | 1 | | | (13) | | | (5) | | | 2 | | | (16) | |
| Currency-neutral adjusted operating profit | Currency-neutral adjusted operating profit | | $ | 1,478 | | | $ | 309 | | | $ | 115 | | | $ | 224 | | | $ | (299) | | | $ | 1,827 | |
| | | Year ended December 28, 2019 | |
| Year ended December 31, 2022 | |
| | Year ended December 31, 2022 | |
| | Year ended December 31, 2022 | |
| (millions) | |
| (millions) | |
| (millions) | (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellanova
Consolidated |
| Reported operating profit | Reported operating profit | | $ | 1,215 | | | $ | 223 | | | $ | 85 | | | $ | 195 | | | $ | (316) | | | $ | 1,401 | |
| Mark-to-market | Mark-to-market | | — | | | — | | | — | | | — | | | (7) | | | (7) | |
| Project K | | (29) | | | (3) | | | (15) | | | (4) | | | (4) | | | (54) | |
| Brexit impacts | | — | | | (9) | | | — | | | — | | | — | | | (9) | |
| | Separation costs | |
| Separation costs | |
| Separation costs | |
| Business and portfolio realignment | Business and portfolio realignment | | (58) | | | (46) | | | (4) | | | (12) | | | (42) | | | (161) | |
| Multi-employer pension plan withdrawal | | (132) | | | — | | | — | | | — | | | — | | | (132) | |
| | Adjusted operating profit | |
| Adjusted operating profit | |
| Adjusted operating profit | Adjusted operating profit | | $ | 1,434 | | | $ | 280 | | | $ | 104 | | | $ | 211 | | | $ | (264) | | | $ | 1,764 | |
| | | % change - 2020 vs. 2019: | |
| % change - 2023 vs. 2022: | |
| | % change - 2023 vs. 2022: | |
| | % change - 2023 vs. 2022: | |
| Reported growth | |
| Reported growth | |
| Reported growth | Reported growth | | 21.3 | % | | 35.4 | % | | 14.2 | % | | 3.5 | % | | 1.2 | % | | 25.7 | % | | 12.8 | % | | 8.5 | % | | 12.0 | % | | 7.1 | % | | 29.9 | % | | 24.3 | % |
| Mark-to-market | Mark-to-market | | — | % | | — | % | | — | % | | — | % | | (0.6) | % | | — | % | Mark-to-market | | — | % | | — | % | | (0.5) | % | | — | % | | 32.3 | % | | 11.7 | % |
| Project K | | 2.8 | % | | 1.7 | % | | 17.3 | % | | 1.9 | % | | 1.2 | % | | 4.6 | % |
| Brexit impacts | | — | % | | 5.1 | % | | — | % | | — | % | | — | % | | 0.8 | % |
| | Separation costs | |
| | Separation costs | |
| | Separation costs | | | (3.6) | % | | — | % | | (2.6) | % | | — | % | | (5.6) | % | | (3.7) | % |
| Business and portfolio realignment | Business and portfolio realignment | | 4.6 | % | | 17.8 | % | | (1.2) | % | | (2.1) | % | | 13.1 | % | | 9.1 | % | Business and portfolio realignment | | 1.5 | % | | — | % | | (1.6) | % | | — | % | | 1.1 | % | | 1.2 | % |
| Multi-employer pension plan withdrawal | | 10.9 | % | | — | % | | — | % | | — | % | | — | % | | 8.6 | % |
| Intangible asset impairment | | Intangible asset impairment | | (3.8) | % | | — | % | | — | % | | — | % | | — | % | | (2.6) | % |
| Adjusted growth | Adjusted growth | | 3.0 | % | | 10.8 | % | | (1.9) | % | | 3.7 | % | | (12.5) | % | | 2.6 | % | Adjusted growth | | 18.7 | % | | 8.5 | % | | 16.7 | % | | 7.1 | % | | 2.1 | % | | 17.7 | % |
| Foreign currency impact | Foreign currency impact | | (0.1) | % | | 0.5 | % | | (12.6) | % | | (2.4) | % | | 0.8 | % | | (0.9) | % | Foreign currency impact | | — | % | | 2.6 | % | | 8.7 | % | | (12.8) | % | | 1.8 | % | | (0.7) | % |
| Currency-neutral adjusted growth | Currency-neutral adjusted growth | | 3.1 | % | | 10.3 | % | | 10.7 | % | | 6.1 | % | | (13.3) | % | | 3.5 | % | Currency-neutral adjusted growth | | 18.7 | % | | 5.9 | % | | 8.0 | % | | 19.9 | % | | 0.3 | % | | 18.4 | % |
|
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
North America
Reported net sales decreased 0.4%increased 3.8% versus the prior year due primarily to the absenceas a result of results from the businesses divested in July 2019, partiallyprice/mix growth that more than offset by strong organic growth and the benefit from the 53rd week.Net sales growth was driven by the acceleration of demand for snacks, cereal, and frozen food as consumers increased purchases of food for at-home consumption due to the pandemic, moderating beginning in the third quarter.This acceleration of demand was partly offset by a related decline in net sales in away-from-home channels and, to a lesser extent, the timing of shipments in certain categories during the 4th quarter.rising price elasticity. Organic net sales increased 5.1% after excluding the impact of the divestiture, foreign currency, and the 53rd week.
| | | | | | | | | | | | | | | | | | | | | | | |
| Net sales % change - 2020 vs. 2019: | | | | | |
| North America | Reported Net Sales | Foreign Currency | Currency-Neutral Net Sales | Divestiture | Impact of 53rd week | Foreign Currency impact on 53rd week | Organic Net Sales |
| Snacks | (7.2) | % | — | % | (7.2) | % | (12.2) | % | 1.7 | % | — | % | 3.3 | % |
| Cereal | 8.5 | % | (0.2) | % | 8.7 | % | — | % | 1.9 | % | (0.1) | % | 6.9 | % |
| Frozen | 9.6 | % | (0.1) | % | 9.7 | % | — | % | 1.6 | % | — | % | 8.1 | % |
North America snacks net sales decreased 7.2% due to the absence of the divested businesses, whose results were seasonally weighted to the first half of the year, partially offset by the benefit of the 53rd week.Organic net sales increased 3.3% due to high demand for packaged foods for at-home consumption as a result of the pandemic partly offset by a related decline in net sales in away-from-home channels.
North America cereal and frozen foods net sales grew 8.5% and 9.6%, respectively, due to elevated demand for packaged foods for at-home consumption as a result of the pandemic.
North America reported operating profit increased 21% due primarily to higher net sales and the lapping of prior year charges for multi-employer pension plan withdrawal, business and portfolio realignment and Project K costs, partially offset by the absence of results from the divested businesses, and incremental COVID-19-related costs. Currency-neutral adjusted operating profit increased 3.1%, after excluding the impact of multi-employer pension plan withdrawal, business and portfolio realignment, Project K and foreign currency.
Europe
Reported net sales increased 6.7% due to elevated demand for at-home consumption of cereal and the benefit of the 53rd week, partially offset by unfavorable foreign currency.Organic net sales increased 5.1%.
Cereal net sales growth was driven largely by accelerated consumption in our developed markets as a result of the pandemic.
Snacks net sales declined slightly as a result of reduced demand for on-the-go foods and pack formats during the pandemic and a reduction in advertising and promotional activity in the first half of the year related to Pringles due to the cancellation of a major sporting event.
Reported operating profit increased 35% due primarily to higher net sales and lower business and portfolio realignment costs partially offset by incremental COVID-19-related costs.Currency-neutral adjusted operating profit increased 10% after excluding the impact of business and portfolio realignment, Project K, and foreign currency.
Latin America
Reported net sales decreased 2.8% due primarily to the impact of unfavorable foreign currency. Organic net sales increased 12%,4.0% after excluding the impact of foreign currency.Organic net sales growth was driven by higher cereal sales, which accelerated during the pandemic as consumers increased purchases of food for at-home consumption in modern trade channels as a result of the pandemic.
Cereal net sales growth was led by Mexico and Caricam. | | | | | | | | | | | | | | | | | | |
| Net sales % change - 2023 vs. 2022: | | | | |
| North America | Reported Net Sales Growth | Foreign Currency | Currency-Neutral Net Sales Growth | Divestiture | | Organic Net Sales Growth |
| Snacks | 4.6 | % | (0.1) | % | 4.7 | % | — | % | | 4.7 | % |
| | | | | | |
| Frozen | (0.4) | % | (0.2) | % | (0.2) | % | — | % | | (0.2) | % |
Snacks net sales declined on a reported basis due primarily to unfavorable foreign currency. However, Pringles posted strong consumption and share performance , led by Mexico and Brazil.
Reported operating profit increased 14% due to higher net sales and lapping of prior year Project K costs, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit increased 11% after excluding the impact of foreign currency, Project K, and business and portfolio realignment.
AMEA
Reported net sales improved 5.0% due to growth in cereal, noodles, and Pringles, partially offset by unfavorable foreign currency.OrganicNorth America snacks net sales increased 7.7% after excluding the impact of foreign currency4.6% on price/mix growth in crackers, salty snacks, and the 53rd week.portable wholesome snacks.
Cereal net sales growth for the region was driven by elevated demand for at-home consumption of our products in developed markets as well as emerging markets.
Noodles net sales growth during the year was due primarily to the expansion of our business in Africa and the Middle East.
Reported operating profit increased 3.5% due primarily to the impact of higher net sales, which more than offset the prior year reversal of indirect excise tax liabilities resulting from participation in a tax amnesty program, and
North America frozen foods net sales decreased 0.4%, as rising price elasticities offset price/mix growth.
unfavorable foreign currency impacts.
North America operating profit increased 12.8% compared to the prior year due to higher net sales, recovery of gross margin, and reimbursement for transition services provided to WK Kellogg Co. These impacts were partially offset by a $34 million impairment charge taken on an intangible asset during the fourth quarter. Currency-neutral adjusted operating profit increased 6.1%18.7%, after excluding the impact of separation costs, intangible asset impairment, and business and portfolio realignment, Project K,realignment.
Europe
Reported net sales increased 8.3% due primarily to favorable price/mix, momentum in snacks, and favorable foreign currency translation. Organic net sales increased 9.2% after excluding the impact of the divestiture of our business in Russia and foreign currency.
| | | | | | | | | | | | | | | | | | | |
| Net sales % change - 2023 vs. 2022: | | | | | |
| Europe | Reported Net Sales Growth | Foreign Currency | Currency-Neutral Net Sales Growth | | Divestiture | | Organic Net Sales Growth |
| Snacks | 16.0 | % | 2.7 | % | 13.3 | % | | (3.7) | % | | 17.0 | % |
| Cereal | (0.2) | % | 1.9 | % | (2.1) | % | | (2.7) | % | | 0.6 | % |
| | | | | | | |
Snacks net sales growth was led by sustained momentum in Pringles, with growth across key markets.
Cereal net sales declined slightly on a reported basis primarily due to unfavorable foreign currency.
Reported operating profit increased 8.5% due primarily to higher net sales and favorable foreign currency. Currency-neutral adjusted operating profit increased 5.9% after excluding the impact of foreign currency.
Latin America
Reported net sales increased 16.3% driven by strong price/mix growth and favorable foreign currency translation, with growth in snacks and cereal. Organic net sales increased 8.4%, after excluding the impact of foreign currency.
| | | | | | | | | | | | | | | | | | | |
| Net sales % change - 2023 vs. 2022: | | | | | |
| Latin America | Reported Net Sales Growth | Foreign Currency | Currency-Neutral Net Sales Growth | | Divestiture | | Organic Net Sales Growth |
| Snacks | 12.4 | % | 5.6 | % | 6.8 | % | | — | % | | 6.8 | % |
| Cereal | 18.9 | % | 9.5 | % | 9.4 | % | | — | % | | 9.4 | % |
| | | | | | | |
Snacks net sales growth was led by double-digit consumption growth in key markets for salty snacks, including Mexico and Brazil.
Cereal net sales increased due to share gains in key markets, notably Mexico.
Reported operating profit increased 12.0% due to higher net sales and favorable foreign currency translation. Currency-neutral adjusted operating profit increased 8.0% after excluding the impact of mark-to-market and foreign currency.
AMEA
Reported net sales decreased 5.1% driven by unfavorable foreign currency primarily due to the devaluation of the Nigerian Naira, which more than offset growth in volume and price/mix. Organic net sales increased 16.9% after excluding foreign currency.
| | | | | | | | | | | | | | | | | | | |
| Net sales % change - 2023 vs. 2022: | | | | | |
| AMEA | Reported Net Sales Growth | Foreign Currency | Currency-Neutral Net Sales Growth | | Divestiture | | Organic Net Sales Growth |
| Snacks | 8.3 | % | (7.3) | % | 15.6 | % | | — | % | | 15.6 | % |
| Cereal | (1.0) | % | (7.0) | % | 6.0 | % | | — | % | | 6.0 | % |
| Noodles and Other | (14.0) | % | (38.4) | % | 24.4 | % | | — | % | | 24.4 | % |
Snacks net sales increased due primarily to strong growth in Pringles across the region.
Cereal net sales declined on a reported basis, as unfavorable foreign currency more than offset higher price/mix.
Noodles and other net sales decreased due to unfavorable foreign currency that more than offset higher volume and price/mix growth.
Reported operating profit increased 7.1% due primarily to the recovery of gross margins partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit increased 19.9%, after excluding the impact of foreign currency.
Corporate
Reported operating profit increased $4 millionsignificantly versus the prior year due primarily to lower business and portfolio realignment costs partially offset by higher performance-based compensation costs.less unfavorable mark-to-market impacts. Currency-neutral adjusted operating profit decreased $35increased $1 million from the prior year after excluding the impact of businessmark-to-market and portfolio realignment and foreign currency.separation costs.
Net sales and operating profit
2022 compared to 2018
The following tables provide an analysis of net sales and operating profit performance for 20192022 versus 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 28, 2019 | | | | | | |
| (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated |
| Reported net sales | | $ | 8,390 | | | $ | 2,092 | | | $ | 940 | | | $ | 2,156 | | | $ | — | | | $ | 13,578 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Foreign currency impact on total business (inc)/dec | | (11) | | | (101) | | | (33) | | | (87) | | | — | | | (231) | |
| Currency-neutral net sales | | $ | 8,400 | | | $ | 2,193�� | | | $ | 973 | | | $ | 2,243 | | | $ | — | | | $ | 13,810 | |
| | | | | | | | | | | | |
| Acquisitions | | — | | | — | | | — | | | 271 | | | — | | | 271 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Foreign currency impact on acquisitions (inc)/dec | | — | | | — | | | — | | | 49 | | | — | | | 49 | |
| Organic net sales | | $ | 8,400 | | | $ | 2,193 | | | $ | 973 | | | $ | 1,922 | | | $ | — | | | $ | 13,489 | |
| | | | | | | | | | | | |
| Year ended December 29, 2018 | | | | | | |
| (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellogg
Consolidated |
| Reported net sales | | $ | 8,688 | | | $ | 2,122 | | | $ | 947 | | | $ | 1,790 | | | $ | — | | | $ | 13,547 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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| Divestitures | | 305 | | | — | | | 4 | | | — | | | — | | | 308 | |
| Organic net sales | | $ | 8,383 | | | $ | 2,122 | | | $ | 943 | | | $ | 1,790 | | | $ | — | | | $ | 13,239 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| % change - 2019 vs. 2018: | | | | | | | | |
| Reported growth | | (3.4) | % | | (1.4) | % | | (0.7) | % | | 20.4 | % | | — | % | | 0.2 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Foreign currency impact | | (0.1) | % | | (4.7) | % | | (3.5) | % | | (4.9) | % | | — | % | | (1.7) | % |
| Currency-neutral growth | | (3.3) | % | | 3.3 | % | | 2.8 | % | | 25.3 | % | | — | % | | 1.9 | % |
| | | | | | | | | | | | |
| Acquisitions | | — | % | | — | % | | — | % | | 15.2 | % | | — | % | | 2.0 | % |
| Divestitures | | (3.5) | % | | — | % | | (0.4) | % | | — | % | | — | % | | (2.4) | % |
| | | | | | | | | | | | |
| Foreign currency impact on acquisitions (inc)/dec | | — | % | | — | % | | — | % | | 2.7 | % | | — | % | | 0.4 | % |
| Organic growth | | 0.2 | % | | 3.3 | % | | 3.2 | % | | 7.4 | % | | — | % | | 1.9 | % |
| Volume (tonnage) | | (1.8) | % | | 1.7 | % | | — | % | | 2.2 | % | | — | % | | (0.2) | % |
| Pricing/mix | | 2.0 | % | | 1.6 | % | | 3.2 | % | | 5.2 | % | | — | % | | 2.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2022 | | | | | | |
| (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellanova
Consolidated |
| Reported net sales | | $ | 6,331 | | | $ | 2,310 | | | $ | 1,089 | | | $ | 2,933 | | | $ | (9) | | | $ | 12,653 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Foreign currency impact | | (12) | | | (245) | | | 7 | | | (228) | | | — | | | (478) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Organic net sales | | $ | 6,343 | | | $ | 2,555 | | | $ | 1,082 | | | $ | 3,161 | | | $ | (9) | | | $ | 13,131 | |
| | | | | | | | | | | | |
| Year ended January 1, 2022 | | | | | | |
| (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellanova
Consolidated |
| Reported net sales | | $ | 5,775 | | | $ | 2,397 | | | $ | 962 | | | $ | 2,613 | | | $ | — | | | $ | 11,747 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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| | | | | | | | | | | | |
| % change - 2022 vs. 2021: | | | | | | | | | | | | |
| Reported growth | | 9.6 | % | | (3.6) | % | | 13.2 | % | | 12.2 | % | | — | % | | 7.7 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Foreign currency impact | | (0.2) | % | | (10.2) | % | | 0.8 | % | | (8.8) | % | | — | % | | (4.0) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Organic growth | | 9.8 | % | | 6.6 | % | | 12.4 | % | | 21.0 | % | | — | % | | 11.7 | % |
| Volume (tonnage) | | (1.2) | % | | (3.4) | % | | (5.2) | % | | (2.5) | % | | — | % | | (2.5) | % |
| Pricing/mix | | 11.0 | % | | 10.0 | % | | 17.6 | % | | 23.5 | % | | — | % | | 14.2 | % |
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
| | Year ended December 28, 2019 | |
| Year ended December 31, 2022 | |
| (millions) | |
| (millions) | |
| (millions) | (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate* | | Kellogg
Consolidated | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellanova
Consolidated |
| Reported operating profit | Reported operating profit | | $ | 1,215 | | | $ | 223 | | | $ | 85 | | | $ | 195 | | | $ | (316) | | | $ | 1,401 | |
| Mark-to-market | Mark-to-market | | — | | | — | | | — | | | — | | | (7) | | | (7) | |
| Project K | | (29) | | | (3) | | | (15) | | | (4) | | | (4) | | | (54) | |
| Brexit impacts | | — | | | (9) | | | — | | | — | | | — | | | (9) | |
| | Separation costs | |
| Separation costs | |
| Separation costs | |
| Business and portfolio realignment | Business and portfolio realignment | | (58) | | | (46) | | | (4) | | | (12) | | | (42) | | | (161) | |
| Multi-employer pension plan withdrawal | | (132) | | | — | | | — | | | — | | | — | | | (132) | |
| | Adjusted operating profit | |
| Adjusted operating profit | |
| Adjusted operating profit | Adjusted operating profit | | $ | 1,434 | | | $ | 280 | | | $ | 104 | | | $ | 211 | | | $ | (264) | | | $ | 1,764 | |
| Foreign currency impact | Foreign currency impact | | (1) | | | (13) | | | (1) | | | (8) | | | — | | | (23) | |
| Currency-neutral adjusted operating profit | Currency-neutral adjusted operating profit | | $ | 1,434 | | | $ | 293 | | | $ | 105 | | | $ | 219 | | | $ | (264) | | | $ | 1,788 | |
| | | Year ended December 29, 2018 | |
| Year ended January 2, 2021 | |
| | Year ended January 2, 2021 | |
| | Year ended January 2, 2021 | |
| (millions) | |
| (millions) | |
| (millions) | (millions) | | North America | | Europe | | Latin
America | | AMEA | | Corporate* | | Kellogg
Consolidated | | North America | | Europe | | Latin
America | | AMEA | | Corporate | | Kellanova
Consolidated |
| Reported operating profit | Reported operating profit | | $ | 1,397 | | | $ | 251 | | | $ | 102 | | | $ | 174 | | | $ | (218) | | | $ | 1,706 | |
| Mark-to-market | Mark-to-market | | — | | | — | | | — | | | — | | | 7 | | | 7 | |
| Project K | | (107) | | | (26) | | | (15) | | | (18) | | | (7) | | | (173) | |
| Brexit impacts | | — | | | (3) | | | — | | | — | | | — | | | (3) | |
| | Business and portfolio realignment | Business and portfolio realignment | | (3) | | | — | | | — | | | — | | | (2) | | | (5) | |
| | Business and portfolio realignment | |
| | Business and portfolio realignment | |
| | Adjusted operating profit | |
| Adjusted operating profit | |
| Adjusted operating profit | Adjusted operating profit | | $ | 1,507 | | | $ | 280 | | | $ | 117 | | | $ | 192 | | | $ | (216) | | | $ | 1,880 | |
| | | % change - 2019 vs. 2018: | |
| % change - 2022 vs. 2021: | |
| | % change - 2022 vs. 2021: | |
| | % change - 2022 vs. 2021: | |
| Reported growth | |
| Reported growth | |
| Reported growth | Reported growth | | (13.0) | % | | (11.2) | % | | (16.8) | % | | 11.9 | % | | (44.6) | % | | (17.8) | % | | (2.7) | % | | (5.9) | % | | 16.3 | % | | 2.7 | % | | (60.7) | % | | (12.3) | % |
| Mark-to-market | Mark-to-market | | — | % | | — | % | | — | % | | — | % | | (7.7) | % | | (0.7) | % | Mark-to-market | | — | % | | — | % | | (3.5) | % | | — | % | | (56.3) | % | | (10.2) | % |
| Project K | | 4.3 | % | | 7.5 | % | | (2.7) | % | | 8.6 | % | | 2.6 | % | | 4.8 | % |
| Brexit impacts | | — | % | | (2.4) | % | | — | % | | 0.2 | % | | — | % | | (0.4) | % |
| | Separation costs | |
| Separation costs | |
| Separation costs | | | (0.9) | % | | — | % | | — | % | | — | % | | — | % | | (0.6) | % |
| Business and portfolio realignment | Business and portfolio realignment | | (3.6) | % | | (16.4) | % | | (3.0) | % | | (6.3) | % | | (18.1) | % | | (8.3) | % | Business and portfolio realignment | | 0.6 | % | | 0.1 | % | | 4.7 | % | | 0.1 | % | | 4.9 | % | | 1.1 | % |
| Multi-employer pension plan withdrawal | | (8.8) | % | | — | % | | — | % | | — | % | | — | % | | (7.1) | % |
| | Adjusted growth | |
| Adjusted growth | |
| Adjusted growth | Adjusted growth | | (4.9) | % | | 0.1 | % | | (11.1) | % | | 9.4 | % | | (21.4) | % | | (6.1) | % | | (2.4) | % | | (5.8) | % | | 15.1 | % | | 2.6 | % | | (9.3) | % | | (2.6) | % |
| Foreign currency impact | Foreign currency impact | | — | % | | (4.5) | % | | (1.2) | % | | (4.4) | % | | 0.1 | % | | (1.2) | % | Foreign currency impact | | (0.1) | % | | (9.1) | % | | (1.1) | % | | (8.3) | % | | — | % | | (3.8) | % |
| Currency-neutral adjusted growth | Currency-neutral adjusted growth | | (4.9) | % | | 4.6 | % | | (9.9) | % | | 13.8 | % | | (21.5) | % | | (4.9) | % | Currency-neutral adjusted growth | | (2.3) | % | | 3.3 | % | | 16.2 | % | | 10.9 | % | | (9.3) | % | | 1.2 | % |
|
Note: Tables may not foot due to rounding.
*Corporate in 2019 includes the cost of certain global research and development activities that were previously included in the North America reportable segment in 2018 that totaled approximately $48 million.
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
North America
Reported net sales decreased 3.4%increased 9.6% versus the prior year due primarily to the absenceas a result of results from the businesses divestedrevenue growth management actions and sustained momentum in July 2019 partially offset by favorable price/mix.snacks. Organic net sales increased 0.2%9.8% after excluding the impact of the divestiture and foreign currency.
| | | | | | | | | | | | | | |
| Net sales % change - 2022 vs. 2021: | | | | |
| North America | Reported Net Sales Growth | Foreign Currency | | | | Organic Net Sales Growth |
| Snacks | 11.9 | % | (0.2) | % | | | | 12.1 | % |
| | | | | | |
| Frozen | (1.1) | % | (0.3) | % | | | | (0.8) | % |
North America snacks net sales increased 11.9% supported by consumption dollar growth in each of our three major categories, crackers, salty snacks, and portable wholesome snacks.
North America frozen foods net sales decreased 1.1% due primarily to supply constraints.
| | | | | | | | | | | | | | | | | |
| Net sales % change - 2019 vs. 2018: | | | |
| North America | Reported Net Sales | Foreign Currency | Currency-Neutral Net Sales | Divestiture | Organic Net Sales |
| Snacks | (4.1) | % | (0.1) | % | (4.0) | % | (6.2) | % | 2.2 | % |
| Cereal | (4.1) | % | (0.2) | % | (3.9) | % | — | % | (3.9) | % |
| Frozen | 1.6 | % | (0.1) | % | 1.7 | % | — | % | 1.7 | % |
North America snacks reported net salesoperating profit decreased 4.1% due primarily2.7% compared to the divestiture. Organic net sales increased 2.2% from the prior year due primarily to sustained momentum and innovations in key brands, including Cheez-It, Rice Krispies Treats, Pringles and Pop-Tarts partially offset by the first quarter supplier-related recall of RXBAR.
North America cereal reported net sales declined by 4.1% largely due to reduced advertising and promotional activity during two waves of pack-size harmonization during the first half of the year as well as softness in Special K and Mini-Wheats.
North America frozen foods reported net sales increased by 1.6%, lapping strong year-ago growth and negative impact of phasing out certain SKU’s. More than offsetting these factors was accelerated growth in MorningStar Farms as net sales, consumption, and share grew during the year on innovation and strong commercial programs.
North America reportedaccelerating input cost inflation. Currency-neutral adjusted operating profit decreased 13% due primarily to higher2.3%, after excluding the impact of business and portfolio realignment charges, the multi-employer pension plan exit liability and the absence of results from the businesses divested in July 2019 partially offset by lower Project Kseparation costs. Currency-neutral adjusted operating profit declined 4.9% as growth in the base business was more than offset by the impact of the divestiture. Additionally, North America operating profit benefited from the transfer of certain global research and development activities from North America to Corporate at the beginning of 2019.
Europe
Reported net sales decreased 1.4%3.6% reflecting the impact of unfavorable foreign currency, despite favorable price/mix and continued growth in snacks.Organic net sales increased 6.6% after excluding the impact of foreign currency.
| | | | | | | | | | | | | | |
| Net sales % change - 2022 vs. 2021: | | | | |
| Europe | Reported Net Sales Growth | Foreign Currency | | | | Organic Net Sales Growth |
| Snacks | 0.5 | % | (10.5) | % | | | | 11.0 | % |
| Cereal | (7.7) | % | (9.9) | % | | | | 2.2 | % |
| | | | | | |
Cereal net sales declined on a reported basis primarily due to unfavorable foreign currency partially offset by higher volume and favorable pricing/mix. Organiccurrency.
Snacks net sales growth was led by sustained momentum in Pringles, driven by innovation, effective advertising, and successful consumer promotions.
Reported operating profit decreased 5.9% due primarily to unfavorable foreign currency and high cost inflation.Currency-neutral adjusted operating profit increased 3.3% after excluding the impact of foreign currency.currency and charges related to business and portfolio realignment.
Growth was Latin America
Reported net sales increased 13.2% driven by strong price/mix growth and modestly favorable foreign currency translation, with growth in snacks led by Pringles, with increasedand cereal. Organic net sales and consumption in key markets behind innovation, effective brand-building, and new pack formats.
Cereal net sales decreased slightly, moderating from recent years' declines. Our share was relatively flat across the region.
As reported operating profit decreased 11% due primarily to higher one-time costs and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 4.6%12.4%, after excluding the impact of foreign currency and one-time costs.currency.
Latin America
Reported net sales decreased 0.7% due to unfavorable foreign currency and the impact of the divestiture, partially offset by favorable pricing/mix. Organic net sales increased 3.2% after excluding the impact of the divestiture and foreign currency, led by growth in Mexico and Brazil.
Cereal net sales growth in Mexico for the year, despite lapping strong prior year comparisons. Cereal net sales in Brazil also increased despite category softness. | | | | | | | | | | | | | | |
| Net sales % change - 2022 vs. 2021: | | | | |
| Latin America | Reported Net Sales Growth | Foreign Currency | | | | Organic Net Sales Growth |
| Snacks | 24.2 | % | 2.6 | % | | | | 21.6 | % |
| Cereal | 6.4 | % | (0.4) | % | | | | 6.8 | % |
| | | | | | |
Snacks net sales growth was led by Pringles, led by increasedsustained consumption growth and share gains in key markets for salty snacks.
Cereal net sales increased due to share gains in key markets, including Mexico and consumption growth in Mexico for the year.Brazil.
Reported operating profit decreased 17%increased 16.3% due primarily to higher net sales and favorable foreign currency translation partially offset by input costs and investments as well as higher one-time costs and unfavorable foreign currency.cost inflation. Currency-neutral adjusted operating profit decreased 10%increased 16.2% after excluding the impact of mark-to-market and foreign currency and one-time costs.currency.
AMEA
Reported net sales increased 12.2% driven by favorable price/mix partially offset by unfavorable foreign currency.Organic net sales also increased 21.0% after excluding foreign currency.
| | | | | | | | | | | | | | |
| Net sales % change - 2022 vs. 2021: | | | | |
| AMEA | Reported Net Sales Growth | Foreign Currency | | | | Organic Net Sales Growth |
| Snacks | 19.0 | % | (7.4) | % | | | | 26.4 | % |
| Cereal | (3.1) | % | (10.3) | % | | | | 7.2 | % |
| Noodles and other | 21.4 | % | (8.1) | % | | | | 29.5 | % |
AMEA
Reported net sales improved 20% primarily due to a full year of Multipro results, Pringles growth across the region, and favorable pricing/mix, partially offset by unfavorable foreign currency. OrganicSnacks net sales increased 7.4% after excludingdue primarily to strong growth in Pringles across the acquisition impact of Multipro andregion.
Cereal net sales declined on a reported basis due to unfavorable foreign currency.
Multipro posted double-digit reportedNoodles and other net sales increased lead by strong growth during the year and contributed to organic growth beginning in May, lapping the 2018 consolidation of thefrom Multipro as well as our Kellogg's branded noodles business.
Snacks posted solid growth led by sustained momentum in Pringles, which grew net sales and consumption collectively across the region.
Reported operating profit increased 12%2.7% due primarily to a full year of Multipro results, higher organic net sales more than offsetting high cost inflation and the reversal of indirect excise tax liabilities largely the result of participating in a tax amnesty program, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit improved 14%increased 10.9%, after excluding the impact of foreign currency, Project K, and business and portfolio realignment.currency.
Corporate
Reported operating profit decreased $98 millionsignificantly versus the prior year due primarily to higher business and portfolio realignment costs, unfavorable mark-to-market impacts, and the transfer of certain global research and development activities from North America to Corporate at the beginning of 2019. These impacts were partially offset by lower Project K costs. impacts.Currency-neutral adjusted operating profit decreased $48$16 million from the prior year after excluding the impact of mark-to-market, Project K, and business and portfolio realignment costs.mark-to-market.
Margin performance
20202023 versus 20192022 gross margin performance was as follows:
| | | | Change vs.
prior year (pts.) | | | Change vs.
prior year (pts.) |
| | 2020 | 2019 | |
| Reported gross margin (a) | Reported gross margin (a) | 34.3 | % | 32.3 | % | 2.0 | |
| Reported gross margin (a) | |
| Reported gross margin (a) | |
| Mark-to-market | Mark-to-market | (0.1) | % | — | % | (0.1) | |
| Project K | — | % | (0.3) | % | 0.3 | |
| Brexit impacts | — | % | — | % | — | |
| | Separation costs | |
| Separation costs | |
| Separation costs | |
| Business and portfolio realignment | Business and portfolio realignment | — | % | (0.1) | % | 0.1 | |
| Multi-employer pension plan withdrawal | — | % | (1.0) | % | 1.0 | |
| | Adjusted gross margin | |
| Adjusted gross margin | |
| Adjusted gross margin | Adjusted gross margin | 34.4 | % | 33.7 | % | 0.7 | |
| Foreign currency impact | Foreign currency impact | 0.1 | % | — | % | 0.1 | |
| Currency-neutral adjusted gross margin | Currency-neutral adjusted gross margin | 34.3 | % | 33.7 | % | 0.6 | |
|
Note: Tables may not foot due to rounding.
For information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Reported gross margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold.
Reported gross margin forincreased 250 basis points versus the prior year ended January 2, 2021 increased 200 basis points due primarily to operating leverage as a result ofless unfavorable mark-to-market impacts, higher net sales, lower charges for multi-employer pension plan withdrawal,service levels, and Project K,revenue growth management initiatives that were partially offset by incremental COVID-19-related costs, and unfavorable foreign currency.high input cost inflation. Currency-neutral adjusted gross margin increased 60 basis points compared to the prior year after eliminating the impact of multi-employer pension plan withdrawal, Project K, and foreign currency.2022.
Our 20202023 and 20192022 currency-neutral adjusted gross profit is reconciled to the most comparable U.S. GAAP measures as follows:
| | (dollars in millions) | (dollars in millions) | | 2020 | | 2019 | (dollars in millions) | | 2023 | | 2022 |
| Reported gross profit (a) | Reported gross profit (a) | | $ | 4,727 | | | $ | 4,381 | |
| Mark-to-market | Mark-to-market | | (6) | | | (4) | |
| Project K | | — | | | (35) | |
| Brexit impacts | | — | | | (9) | |
| | Separation costs | |
| Separation costs | |
| Separation costs | |
| Business and portfolio realignment | Business and portfolio realignment | | (7) | | | (17) | |
| Multi-employer pension plan withdrawal | | 5 | | | (132) | |
| | Adjusted gross profit | |
| Adjusted gross profit | |
| Adjusted gross profit | Adjusted gross profit | | 4,735 | | | 4,579 | |
| Foreign currency impact | Foreign currency impact | | (57) | | | — | |
| Currency-neutral adjusted gross profit | Currency-neutral adjusted gross profit | | $ | 4,792 | | | $ | 4,579 | |
|
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Gross profit is equal to net sales less cost of goods sold.
20192022 versus 20182021 gross margin performance was as follows:
| | | | Change vs.
prior year (pts.) | | | Change vs.
prior year (pts.) |
| | 2019 | 2018 | |
| Reported gross margin (a) | Reported gross margin (a) | 32.3 | % | 34.9 | % | (2.6) | |
| Reported gross margin (a) | |
| Reported gross margin (a) | |
| Mark-to-market | Mark-to-market | — | % | 0.1 | % | (0.1) | |
| Project K | (0.3) | % | (0.8) | % | 0.5 | |
| Brexit impacts | — | % | — | % | — | |
| | Business and portfolio realignment | Business and portfolio realignment | (0.1) | % | — | % | (0.1) | |
| Multi-employer pension plan withdrawal | (1.0) | % | — | % | (1.0) | |
| | Business and portfolio realignment | |
| | Business and portfolio realignment | |
| | Adjusted gross margin | |
| Adjusted gross margin | |
| Adjusted gross margin | Adjusted gross margin | 33.7 | % | 35.6 | % | (1.9) | |
| Foreign currency impact | Foreign currency impact | — | % | — | % | — | |
| Currency-neutral adjusted gross margin | Currency-neutral adjusted gross margin | 33.7 | % | 35.6 | % | (1.9) | |
| |
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Reported gross margin as a percentage of net sales. Gross margin is equal to net sales less cost of goods sold.
Reported gross margin for the year ended December 28, 2019, was unfavorable 260decreased 240 basis points due primarily toversus the recognitionprior year as the impact of productivity improvements and revenue growth management initiatives was more than offset by cost inflation, inefficiencies from worldwide supply bottlenecks and shortages, a $132 million liability related to our exit from two multi-employer pension plans. Additionally, margins were negatively impacted by the consolidation of Multipro results, higher input costs, mix shiftsshift towards emerging markets and costs related to growth in new pack formats.unfavorable mark-to-market. Currency-neutral adjusted gross margin was unfavorable 190decreased 150 basis points compared to the prior year after eliminating the impact of the multi-employer pension plan exit liability, mark-to-market, Project K, and business and portfolio realignment.2021.
Our 20192022 and 20182021 currency-neutral adjusted gross profit is reconciled to the most comparable U.S. GAAP measures as follows:
| | (dollars in millions) | (dollars in millions) | | 2019 | | 2018 | (dollars in millions) | | 2022 | | 2021 |
| Reported gross profit (a) | Reported gross profit (a) | | $ | 4,381 | | | $ | 4,726 | |
| Mark-to-market | Mark-to-market | | (4) | | | 6 | |
| Project K | | (35) | | | (99) | |
| Brexit impacts | | (9) | | | (2) | |
| | Business and portfolio realignment | Business and portfolio realignment | | (17) | | | — | |
| Multi-employer pension plan withdrawal | | (132) | | | — | |
| | Business and portfolio realignment | |
| | Business and portfolio realignment | |
| | Adjusted gross profit | |
| Adjusted gross profit | |
| Adjusted gross profit | Adjusted gross profit | | 4,578 | | | 4,821 | |
| Foreign currency impact | Foreign currency impact | | (73) | | | — | |
| Currency-neutral adjusted gross profit | Currency-neutral adjusted gross profit | | $ | 4,651 | | | $ | 4,821 | |
| |
Note: Tables may not foot due to rounding.
For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.
(a) Gross profit is equal to net sales less cost of goods sold.
Restructuring programs
We view our restructuring and cost reduction activities as part of our 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 three to five-year period of completion. 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.
During 2019, the Company announced a reorganization plan for the European reportable segment designed to simplify the organization, increase organizational efficiency, and enhance key processes. Since inception, the project has resulted in cumulative pretax net charges of approximately $37 million, including certain non-cash credits. Cash costs are approximately $50 million. The total charges include severance and other termination benefits and charges related to relocation, pension curtailment gains, third party legal and consulting fees, and contract termination costs. During 2020, the Company recorded total net charges of $(1) million related to this initiative, with $7 million recorded in SG&A expense and $(8) million recorded in OIE. This project is substantially complete as of the end of fiscal year 2020. Total charges and cash costs were in line with expectations.
Also during 2019, the Company announced a reorganization plan which primarily impacts the North America reportable segment. The reorganization plan is designed to simplify the organization that supports the remaining North America reportable segment after the divestiture and related transition. Since inception, the overall project resulted in cumulative pretax charges of approximately $23 million. Cash costs approximated the pretax charges. Total charges include severance and other termination benefits and charges related to third party consulting fees. During 2020, the Company recorded total charges of $2 million related to this initiative during 2020. This project is substantially complete as of the end of fiscal year 2020. Total charges and cash costs were in line with expectations.
In addition to the projects discussed above, during 2020 the Company incurred restructuring costs in each of its reportable segments related to various reorganization and simplification initiatives and supply chain optimization projects. The Company recorded total charges of $28 million related to these initiatives, including $6 million in COGS and $22 million in SG&A expense. These costs primarily relate to severance and other termination benefits.
Project K
As of the end of 2019, the Company completed implementation of all Project K initiatives. Total project charges, after-tax cash costs and annual savings delivered by Project K were in line with expectations.
Cumulatively, Project K resulted in total pre-tax charges of approximately $1.6 billion, with after-tax cash costs, including incremental capital investments of approximately $1.2 billion.
Annual cost savings generated from Project K are approximately $700 million. These savings were realized primarily in selling, general and administrative expense with additional benefit realized in gross profit as cost of goods sold savings are partially offset by negative volume and price impacts resulting from go-to-market business model changes. The overall savings profile of the project reflects our go-to-market initiatives that will impact both selling, general and administrative expense and gross profit. Cost savings have been utilized to offset inflation and fund investments in areas such as in-store execution, sales capabilities, including adding sales representatives, and in the design and quality of our products. We have also invested in production capacity in developing and emerging markets, and in global category teams.
Refer to Note 5 within Notes to Consolidated Financial Statements for further information related to Project K and other restructuring activities.
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, Canadian dollar, Brazilian Real, Nigerian Naira, Russian ruble, Polish zloty, and Russian ruble.Egyptian pound. 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.
Interest expense and interest income
Interest expense was $281$303 million and $284$201 million for the years ended January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively. Debt redemption costs included within interest expense for the years ended January 2, 2021 and December 28, 2019, totaled $20 million and $16 million, respectively. Interest expense capitalized as part of the construction cost of fixed assets was immaterial for both periods. The decreaseincrease from the prior year is due primarily to lower averagehigher interest rates on commercial paper and floating rate debt outstanding.versus the prior year as well as an $18 million gain in the prior year related to a portion of certain forward-starting interest rate swaps no longer designated as cash flow hedges due to changes in forecasted debt issuance.
Interest income (recorded in other income (expense), net) was $21$101 million and $24$33 million for the years ended January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively. The increase from the prior year is due to higher interest rates on cash deposits.
Income taxes
Our reported effective tax rate for 20202023 and 20192022 was 20.2%24.8% and 24.6%20.0%, respectively.
The 2020 effective income tax rate was favorably impacted by the reversal of a liability for uncertain tax positions of $32 million, resulting from the finalization of a tax examination during the third quarter. The reserves were related to the Company's estimate of the transition tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
The 2019higher effective tax rate was unfavorably impacted by a permanent basis difference in the assets sold to Ferrero as well as an out-of-period correction. During the fourth quarter of 2019, we recorded an out-of-period adjustment to correct an error in the tax rate applied to a deferred tax asset arising from an intellectual property transfer in a prior year. The adjustment increased income tax expense and decreased deferred tax assets by $39 million, respectively. We determined the adjustment to be immaterial to our Consolidated Financial Statements for the year ended December 28, 2019 and related30, 2023, compared to the prior annual and quarterly periods.year, was due primarily to a valuation allowance recorded in the fourth quarter of 2023 in conjunction with the separation of our North America cereal business.
Adjusted effective tax rates for 20202023 and 20192022 were 20.7% and were 22.2% and 19.5%20.8%, respectively.
The following table provides a reconciliation of reported to adjusted income taxes and effective income tax rate for 20202023 and 2019.2022.
| | | | | | | | | | | | | | |
| Consolidated results (dollars in millions) | | 2020 | | 2019 |
| Reported income taxes | | $ | 323 | | | $ | 321 | |
| Mark-to-market | | (39) | | | (24) | |
| Project K | | — | | | (14) | |
| Brexit impacts | | — | | | (1) | |
| Business and portfolio realignment | | (6) | | | (35) | |
| Multi-employer pension plan withdrawal | | 1 | | | (31) | |
| Gain on divestiture | | (1) | | | 55 | |
| U.S. Tax Reform | | (32) | | | — | |
| Out-of-period adjustment | | — | | | 39 | |
| Adjusted income taxes | | $ | 401 | | | $ | 333 | |
| Reported effective income tax rate | | 20.2 | % | | 24.6 | % |
| Mark-to-market | | (0.4) | | | 0.1 | |
| Project K | | — | | | (0.1) | |
| Brexit impacts | | — | | | 0.1 | |
| Business and portfolio realignment | | 0.1 | | | (0.1) | |
| Multi-employer pension plan withdrawal | | — | | | (0.1) | |
| Gain on divestiture | | — | | | 2.5 | |
| U.S. Tax Reform | | (1.8) | % | | — | % |
| Out-of-period adjustment | | — | | | 2.7 | |
| Adjusted effective income tax rate | | 22.2 | % | | 19.5 | % |
| | | | | | | | | | | | | | |
| Consolidated results (dollars in millions) | | 2023 | | 2022 |
| Reported income taxes | | $ | 258 | | | $ | 180 | |
| Mark-to-market | | (28) | | | (81) | |
| | | | |
| | | | |
| Separation costs | | (22) | | | (6) | |
| Business and portfolio realignment | | 4 | | | (3) | |
| Intangible asset impairment | | (8) | | | — | |
| | | | |
| Gain related to interest rate swaps | | — | | | 5 | |
| Foreign valuation allowance | | 21 | | | — | |
| | | | |
| | | | |
| | | | |
| Adjusted income taxes | | $ | 291 | | | $ | 265 | |
| Reported effective income tax rate | | 24.8 | % | | 20.0 | % |
| Mark-to-market | | 1.1 | | | (0.6) | |
| | | | |
| | | | |
| Separation costs | | (0.6) | | | (0.3) | |
| Business and portfolio realignment | | 0.2 | | | — | |
| Intangible asset impairment | | — | | | — | |
| Loss on divestiture | | 1.8 | | | — | |
| Gain related to interest rate swaps | | — | | | 0.1 | |
| Foreign valuation allowance | | 1.6 | | | — | |
| UK tax rate change | | — | | | |
| | | | |
| | | | |
| Adjusted effective income tax rate | | 20.7 | % | | 20.8 | % |
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
Fluctuations in foreign currency exchange rates could impact the expected effective income tax rate as it is dependent upon U.S. dollar earnings of foreign subsidiaries doing business in various countries with differing statutory rates. Additionally, the rate could be impacted by tax legislation and 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.
Brexit
The United Kingdom (UK) left the European Union on January 31, 2020. Following the conclusion of the transition period on December 31, 2020, the UK exited the European Union's Custom Union and Single Market moving onto trading terms consistent with the EU-UK Trade and Cooperation Agreement. Specific operational and financial impacts of Brexit continue to evolve and uncertainty remains relating to its impact on local and international markets and the flow of goods and materials across borders. While we do not expect such impacts to be material to the financial trends of our European and Consolidated businesses, we continue to monitor and evaluate potential impacts, including the following:
•Net sales could be negatively impacted by reduced efficiency in processing of product shipments between the United Kingdom and other countries resulting in insufficient products in the appropriate market for sale to customers,
•Cost of goods sold could increase due to increased costs related to incremental warehousing and logistics services required to adequately service our customers,
•Divergence in implementation of regulatory requirements or disagreements on the trade terms between the European union and the UK could result in unexpected delays, negatively impacting our ability to service customers in a timely and cost-effective manner.
LIQUIDITY AND CAPITAL RESOURCES
At this time the COVID-19 pandemic has not materially impacted our liquidity and we anticipate current cash and marketable security balances, operating cash flows, together with our credit facilities and other financing sources including commercial paper, credit and bond markets, will be adequate to meet our operating, investing and financing needs. We expect cash provided by operating activities of $1.6$1.7 billion and capital expenditures of approximately $500$700 million in 2021.2024. We currently have $2.9$2.5 billion of unused revolving credit agreements, including $1.5 billion effective through January 20232026 and $1.0 billion effective through January 2022,December 2024, as well as continued access to the commercial paper markets. We are currently in compliance with all debt covenants and do not have material uncertainty about our ability to maintain compliance in future periods. We continue to utilize available capacity within the Monetization Programs to maintain financial flexibility without negatively impacting working capital.
Additionally, we utilized certain aspects of the Coronavirus Aid, Relief and Economic Security Act, to delay the employer share of certain U.S. payroll taxes until 2021 and 2022. Our utilization does not include a government loan and is not expected to result in any restrictions on the Company’s decisions on executive compensation, payment of dividends, or share buy-back programs. As the impact of COVID-19 on the economy and our operations evolves, we will continue to assess our liquidity needs.
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.
We have historically reported negative working capital primarily as the result of our focus to improve core working capital by reducing our levels of trade receivables and inventory while extending the timing of payment of our trade payables.establishing competitive market-based terms with suppliers. The impacts of the extended customer terms programs and of the monetization programs are included in our calculation of core working capital and are largely offsetting.offsetting. These programs are all part of our ongoing working capital management.
We periodically monitor our supplier payment terms to assess whether our terms are competitive and in line with local market terms. To the extent that such assessment indicates that our supplier payment terms are not aligned with local market terms, we may seek to adjust our terms, including extending or shortening our payment due dates as appropriate. Supplier payment term modifications did not have a material impact on our cash flows during 2020,2023, and are not expected to have a material impact in 2021.2024.
We have a substantial amount of indebtedness which results in current maturities of long-term debt and notes payable which can have a significant impact on working capital as a result of the timing of these required payments. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, pay dividends, fund acquisition opportunities, and repurchase our common stock, reduce our working capital amounts.
We had negative working capital of $1.8$1.7 billion and $1.3$2.2 billion as of January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively.
In conjunction with the July 28, 2019 closing of the sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately $1.3 billion in cash, after-tax proceeds of
approximately $1.0 billion were used to redeem outstanding debt, which reduced our leverage and provides additional financial flexibility for future operating and investing needs.
We believe that our operating cash flows, together with our credit facilities and other available debt financing, including commercial paper, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that volatility and/or 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.
The following table sets forth a summary of our cash flows:
| | (dollars in millions) | (dollars in millions) | | 2020 | | 2019 | (dollars in millions) | | 2023 | | 2022 |
| Net cash provided by (used in): | Net cash provided by (used in): | |
| Operating activities | |
| Operating activities | |
| Operating activities | Operating activities | | $ | 1,986 | | | $ | 1,176 | |
| Investing activities | Investing activities | | (585) | | | 774 | |
| Financing activities | Financing activities | | (1,388) | | | (1,905) | |
| Effect of exchange rates on cash and cash equivalents | Effect of exchange rates on cash and cash equivalents | | 25 | | | 31 | |
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | | $ | 38 | | | $ | 76 | |
Operating activities
The principal source of our operating cash flows is net earnings, primarily cash receipts from the sale of our products, net of costs to manufacture and market our products.
Net cash provided by our operating activities for 20202023 totaled $1,986$1,645 million compared to $1,176$1,651 million in the prior year.The Net sales increase is due primarilyas well as profit margin recovery allowed us to increased profitability, and lowergenerate cash outflowsto offset incremental cash costs related to restructuring and business realignment.separation activities as well as the absence of North America cereal's cash flow in the fourth quarter. This resulted in similar year-over-year net cash provided by operating activities.
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 approximately negative 11 days and negative 5 days for 2020 and 2019, respectively. Core working capital in 2020 averaged 1.2% of net sales compared to 1.7% in 2019. The improvement from the prior year is due primarily to improvement in the number of days of trade payables outstanding which results from a decrease in charges related to prior restructuring activity.
Our total pension and postretirement benefit plan funding amounted to $32$42 million and $28$23 million for the years ended January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively.
The Pension Protection Act (PPA), and subsequent regulations, determines defined benefit plan minimum funding requirements in the United States. We believe that we will not be required to make any contributions under PPA requirements until 20222024 or beyond. Our projections concerning timing of PPA funding requirements are subject to change primarily based on general market conditions affecting trust asset performance, future discount rates based on average yields of high quality corporate bonds and our decisions regarding certain elective provisions of the PPA.
We currently project that we will make total U.S. and foreign benefit plan contributions in 20212024 of approximately $25$64 million. Actual 20212024 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.
We measure free cash flow as net cash provided by operating activities reduced by expenditures for property additions. We use this non-GAAP financial measure of free cash flow to focus management and investors on the amount of cash available over time for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our free cash flow metric is reconciled to the most comparable GAAP measure, as follows:
| | (dollars in millions) | (dollars in millions) | | 2020 | | 2019 | (dollars in millions) | | 2023 | | 2022 |
| Net cash provided by operating activities | Net cash provided by operating activities | | $ | 1,986 | | | $ | 1,176 | |
| Additions to properties | Additions to properties | | (505) | | | (586) | |
| Cash flow | | $ | 1,481 | | | $ | 590 | |
| Free cash flow | |
Investing activities
Our net cash used in investing activities for 20202023 totaled $585$562 million compared to cash provided of $774$448 million in 2019. The decrease is2022 due primarily to higher capital expenditures in preparation of the separation transaction as well as phasing of capital expenditures over the two preceding years.
Capital spending in 2023 included investments in our supply chain infrastructure, including manufacturing capacity expansions in multiple markets as well as investments in conjunction with the separation transaction.
Cash paid for additions to properties as a percentage of net sales was 5.1% and 3.9% in 2023 and 2022, respectively.
Financing activities
Our net cash used in financing activities totaled $1,110 million compared to $1,081 million during the prior year. During 2023, the net distribution received from WK Kellogg Co and proceeds from the sale of selected cookies, fruit$400 million ten-year U.S. Dollar Notes issuance were utilized to repay commercial paper and fruit-flavored snacks, pie crusts,$550 million, seven-year U.S. Dollar Notes upon maturity.
Total debt was $5.9 billion and ice cream cones businesses to Ferrero for approximately $1.3$6.6 billion in cash in the prior year.at year-end 2023 and 2022, respectively.
The following table reflects net debt amounts:
| | | | | | | | | | | | | | |
| | |
| (millions, unaudited) | | December 30, 2023 | | December 31, 2022 |
| Notes payable | | $ | 121 | | | $ | 467 | |
| Current maturities of long-term debt | | 663 | | | 780 | |
| Long-term debt | | 5,089 | | | 5,317 | |
| Total debt liabilities | | $ | 5,873 | | | $ | 6,564 | |
| Less: | | | | |
| Cash and cash equivalents | | (274) | | | (299) | |
| | | | |
| Net debt | | $ | 5,599 | | | $ | 6,265 | |
Capital spending in 2020 included investments in our supply chain infrastructure, including manufacturing capacity expansions in multiple markets and categories and initiatives targeting waste reductions and productivity improvements.
Cash paid for additions to properties as a percentageIn November 2023, we repaid $550 million, seven-year 2.65% U.S. Dollar Notes due 2023, upon maturity.
During the first quarter of net sales was 3.7% and 4.3% in 2020 and 2019, respectively.
Financing activities
Our net cash used in financing activities was $1,388 million and $1,905 for 2020 and 2019, respectively. The decrease in cash used is due primarily to2023, the issuance of $500Company issued $400 million of ten-year Notes in May 2020.
Total debt was $7.5 billion and $7.9 billion at year-end 2020 and 2019, respectively.
The following table reflects net debt amounts:
| | | | | | | | | | | | | | |
| | |
| (millions, unaudited) | | January 2, 2021 | | December 28, 2019 |
| Notes payable | | $ | 102 | | | $ | 107 | |
| Current maturities of long-term debt | | 627 | | | 620 | |
| Long-term debt | | 6,746 | | | 7,195 | |
| Total debt liabilities | | $ | 7,475 | | | $ | 7,922 | |
| Less: | | | | |
| Cash and cash equivalents | | (435) | | | (397) | |
| | | | |
| Net debt | | $ | 7,040 | | | $ | 7,525 | |
In May of 2020, we issued $500 million of ten-year 2.10%5.25% Notes due 2030,2033, resulting in net proceeds after
debt discount and underwriting commissions of $496$396 million. The proceeds from these notes were used for general corporate purposes, including
the payment of offering related fees and expenses, repayment of a portion of the $600$210 million 4.00%2.75% Notes due
2020 upon maturity,when they matured on March 1, 2023, and repayment of a portion of commercial paper borrowings. 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, as well as a change of control provision.
In December of 2020,November 2022, we redeemed $198repaid €600 million, of our 3.250% Seniorfive-year 0.80% Euro Notes due 2021 and $358 million of our 3.125% Senior Notes due 2022. Additionally, the remaining balance of the $600 million 4.00% Notes due 2020 was redeemed2022, upon maturity.
In August 2019, we redeemed $191 million of our 4.15% U.S. Dollar Notes due November 2019, $248 million of our 4.00% U.S. Dollar Notes due 2020, $202 million of our 3.25% U.S. Dollar Notes due 2021, and $50 million of our 2.65% U.S. Dollar Notes due 2023. In September 2019, we redeemed $309 million of our 4.15% U.S. Dollar Notes due November 2019, the remaining principal balance subsequent to the August redemption.
We paid quarterly dividends to shareholders totaling $2.28$2.34 per share in 20202023 versus $2.26$2.34 per share in 2019.2022. On February 19, 2021,16, 2024, the Board of Directors declared a dividend of $.57$.56 per common share, payable on March 15, 20212024 to shareholders of record at the close of business on March 2, 2021.1, 2024.
We entered into an unsecured Five-Year Credit Agreement in January 2018,December 2021, allowing us to borrow, on a revolving credit basis, up to $1.5 billion and expiring in January 2023.December 2026.
In January 2021,December 2023, we entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to $1.0 billion at any time outstanding, to replace the $1.0 billion 364-day facility that expiredwas set to expire in January 2021.December 2023.
The Five-Year and 364 Day Credit Agreements which had no outstanding borrowings as January 2, 2021,December 30, 2023, contain customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agents may terminate the commitments under the credit facilities, accelerate any outstanding loans under the agreements, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest. The Company was in compliance with all financial covenants contained in these agreements at January 2, 2021.December 30, 2023.
Our 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 and also contain a change of control provision. There are no significant restrictions on the payment of dividends. We were in compliance with all covenants as of January 2, 2021.December 30, 2023.
The Notes do not contain acceleration of maturity clauses that are dependent on credit ratings. A change in our 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 364-Day Credit Facility, which expires in January 2022,December 2024, as well as our Five-Year Credit Agreement, which expires in January 2023.December 2026. 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 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 select acquisitions. This will be accomplished through our strong cash flow, our short-term borrowings, and our maintenance of credit facilities on a global basis.
Monetization and Accounts Payable programsTracking Systems
We have a program in which customers could extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program). In order to mitigate the net working capital impact of the Extended Terms Program for discrete customers, we entered into agreements to sell, on a revolving basis, certain trade accounts receivable balances to third party financial institutions (Monetization Programs). Transfers under the Monetization Programs are accounted for as sales of receivables resulting in the receivables being de-recognized from our Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain
receivables on a revolving basis until terminated by either party; however the maximum funding from receivables that may be sold at any time is currently $1,033$975 million, but may be increased or decreased as customers move in or out of the Extended Terms Program and as additional financial institutions move in or out of the Monetization Programs. Accounts receivable sold of $783$697 million and $774$609 million remained outstanding under this arrangement as of January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively.
The Monetization Programs are designed to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. Current DSO levels within North America are consistent with DSO levels prior to the execution of the Extended Term Program and Monetization Programs.
Refer to Note 23 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.
We have agreements with third parties (Accounts Payable Program) to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected sell our payment obligations to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more of our payment obligations prior to their scheduled due dates at a discounted price to participating financial institutions. Our goal is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, our right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers.
Refer to Note 1 within Notes to Consolidated Financial Statements for further information related to accounts payable.
If financial institutions were to terminate their participation in the Monetization Programs and we are not able to modify related customer payment terms, working capital could be negatively impacted. Additionally, working capital
could be negatively impacted if we shorten our supplier payment terms as a result of supplier negotiations. For suppliers participating in the Accounts Payable Programs,Tracking Systems, financial institutions may terminate their participation or we could experience a downgrade in our credit rating that could result in higher costs to suppliers. If working capital is negatively impacted as a result of these events and we were unable to secure alternative programs, we may have to utilize our various financing arrangements for short-term liquidity or increase our long-term borrowings.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONSOff-balance sheet arrangements
At January 2, 2021, we did notWe have any material off-balance sheet arrangements.
Contractual obligations
The following table summarizes our contractual obligations that arise in the normal course of business and we believe cash flow from operations will be adequate to meet our liquidity and capital needs for at January 2, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contractual obligations | | Payments due by period |
| (millions) | | Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 and
beyond |
| Long-term debt: | | | | | | | | | | | | | | |
| Principal | | $ | 7,386 | | | 627 | | | 755 | | | 782 | | | 750 | | | 739 | | | 3,733 | |
| Interest (a) | | 1,981 | | | 225 | | | 213 | | | 192 | | | 174 | | | 167 | | | 1,010 | |
| Finance leases (b) | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Operating leases (c) | | 713 | | | 134 | | | 107 | | | 94 | | | 81 | | | 78 | | | 219 | |
| Purchase obligations (d) | | 1,560 | | | 1,277 | | | 102 | | | 53 | | | 22 | | | 19 | | | 87 | |
| Uncertain tax positions (e) | | 19 | | | 19 | | | — | | | — | | | — | | | — | | | — | |
| Other long-term obligations (f) | | 630 | | | 109 | | | 78 | | | 77 | | | 83 | | | 71 | | | 212 | |
| Total | | $ | 12,289 | | | $ | 2,391 | | | $ | 1,255 | | | $ | 1,198 | | | $ | 1,110 | | | $ | 1,074 | | | $ | 5,261 | |
(a)Includesleast the next 12 months. In addition to principal and interest payments on our outstanding long-term debt and notes payable balances, our contractual obligations primarily consist of lease payments, onincome taxes, pension and postretirement benefits and unconditional purchase obligations.
A summary of our interest rate swaps. Interest calculated on our variable rate debt was forecasted using the LIBOR forward rate curveoperating and finance lease obligations as of January 2, 2021.December 30, 2023 can be found in Note 8 “Leases and Other Commitments”, to the Consolidated Financial Statements contained in this report.
A summary of principal payments for long-term debt as of December 30, 2023 can be found in Note 9 “Debt”, to the Consolidated Financial Statements contained in this report.
Interest payments will be approximately $142 million per year from 2024 through 2028 and approximately $646 million in total from 2029 through the last debt maturity date.
A summary of our pension and postretirement benefit obligations as of December 30, 2023 can be found in Notes 11 “Pension Benefits” and Note 12 “Nonpension Postretirement and Postemployment Benefits”, to the Consolidated Financial Statements contained in this report.
See Note 14 “Income Taxes”, to the Consolidated Financial Statements contained in this report for discussion of uncertain tax positions.
(b)The total expected cash payments on our finance leases include interest expense totaling less than $1 million over the periods presented above.
(c)Operating leases represent the minimum rental commitments under non-cancelable operating leases.
(d)
Purchase
Our unconditional purchase obligations consist primarily of fixed commitments for raw materials to be utilized in the normal course of business and for marketing, advertising and other services. The amounts presentedAs of December 30, 2023, unconditional purchase obligations totaled approximately $1.5 billion. Approximately $1.3 billion of these unconditional purchase obligations will be settled in the table do not include items already recorded in accounts payable or other current liabilities at year-end 2020, 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 exclusionordinary course of these items from the table could be a limitation in assessing our total future cash flows under contracts.
(e)As of January 2, 2021, our total liability for uncertain tax positions was $65 million, of which $19 million scheduled to be paidbusiness in the next twelve12 months. We are not able to reasonably estimate the timing of future cash flows related to the remaining $46 million.
(f)Other long-term obligations are those associated with noncurrent liabilities recorded within the Consolidated Balance Sheet at year-end 2020 and consist principallyAs 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 2026 as follows: 2021-$43; 2022-$41; 2023-$39; 2024-$41; 2025-$39; 2026-$50.
In addition, $80 million of insurance loss reserves and $24 million of tax repatriation payable are expected to be paid over the next four and seven years, respectively, are included in the total above.December 30, 2023, we did not have any material off-balance sheet arrangements.
CRITICAL 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 immaterial and recognized as a change in management estimate in a subsequent period. On a full-year basis, these subsequent period adjustments represent approximately 0.5%less than 1% of our company’s net sales. However, our company’s total promotional expenditures (including amounts classified as a revenue reduction) are significant, so it is likely our results would be materially different if different assumptions or conditions were to prevail.
Property
Long-lived assets such as property, plant and equipment are tested for impairment when conditions indicate that the carrying value may not be recoverable. Management evaluates several conditions, including, but not limited to, the following: a significant decrease in the market price of an asset or an asset group; a significant adverse change in the extent or manner in which a long-lived asset is being used, including an extended period of idleness; and a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. For assets to be held and used, we project the expected future undiscounted cash flows generated by the long-lived asset or asset group over the remaining useful life of the primary asset. If the cash flow analysis yields an amount less than the carrying amount we determine the fair value of the asset or asset group by using comparable market data. There are inherent uncertainties associated with the judgments and estimates we use in these analyses.
At January 2, 2021, we have property, plant and equipment of $3.7 billion, net of accumulated depreciation, on our balance sheet.
Goodwill and other intangible assets
We perform anreview our operating segment and reporting unit structure annually or as significant changes in the organization occur and assess goodwill impairment evaluationrisk throughout the year by performing a qualitative review of goodwillentity-specific, industry, market and intangible assetsgeneral economic factors affecting our reporting units with indefinite useful lives at least annuallygoodwill. Annually during the fourth quarter, of each year in conjunction with our annual budgeting process.
Goodwillprocess, we may perform qualitative testing, or depending on factors such as prior-year test results, current year developments, current risk evaluations and other practical considerations, we may instead perform a quantitative impairment test. In our quantitative testing, first requireswe compare a comparison between the carrying value andreporting unit’s estimated fair value with its carrying value. The reporting unit’s fair value is estimated using a combination of a reporting unit with associated goodwill. Carrying valuemarket multiples and discounted cash flow methodologies. The market multiples approach 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. For the 2020 goodwill impairment test, the fair value of the reporting units was estimated based on market multiples ofeither sales if applicable, and/or earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings for companies that are comparable to our reporting units. In the event the fair value determined using the market multiples approach is close to the carrying value, we may also supplement our fair value determination usingThe discounted cash flows. Management believes theflow approach incorporates assumptions surrounding planned growth rates, market-based discount rates and estimates of residual value. The assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for our reporting units. These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables. If the carrying value of a reporting unit exceeds its fair value, we consider the reporting unit impaired and reduce its carrying value of goodwill such that the reporting unit’s new carrying value is the estimated fair value.
Similarly, impairment testing of indefinite-livedwe assess indefinite-life intangible assets requiresimpairment risk throughout the year by performing a comparison ofqualitative review and assessing events and circumstances that could affect the fair value or carrying value toof these intangible assets. Annually during the fourth quarter, in conjunction with our annual budgeting process, we may perform qualitative testing, or depending on factors such as prior-year test results, current year developments, current risk evaluations and other practical considerations, we may instead perform a quantitative impairment test. In the quantitative testing, we compare an intangible asset’s estimated fair value of that particular asset. Fair values of non-goodwillwith its carrying value with the intangible assets are based primarily on projectionsasset’s fair value being determined using estimates of future cash flows to be generated from that asset. For instance, cash flows related to a particular trademark would beasset based on a projectedestimates of future sales, as well as assumptions surrounding earnings growth rates, royalty stream attributable to branded product sales discounted atrates and discount rates consistent with rates used by market participants. These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables. If the carrying value of the asset exceeds its fair value, we consider the asset impaired and reduce its carrying value to the estimated fair value.
We also evaluate the useful life over which a non-goodwill intangible asset with a finite life is expected to contribute directly or indirectly to our cash flows. 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 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 2, 2021,December 30, 2023, goodwill and other intangible assets amounted to $8.3$7.0 billion, consisting primarily of goodwill and brands. Within this total, approximately $2.1$1.8 billion of non-goodwill intangible assets were classified as indefinite-lived, including $1.7$1.6 billion related to trademarks, comprised principally of Pringles and cracker-related trademarks. The majority of all goodwill and other intangible assets are recorded in our North America operating segment.
The Company's annual reporting unit. The Company currently believes the fair value ofunit goodwill and other intangible assets exceeds their carrying value and that those intangibles so classified will contribute indefinitely to cash flows. Through impairment testing, performed duringthrough the fourth quarter of 2020, no2023, consisted of quantitative testing due primarily to the passage of time since the last quantitative test. No heightened risk or qualitative indicators of impairment of individual intangible assets orany reporting units was identified.
AdditionallyThe Company's annual intangible asset impairment testing was also performed through the fourth quarter of 2023 consisting of qualitative or quantitative testing for all significant intangible assets. As a result of the annual impairment testing the Company has goodwillrecognized a non-cash impairment of $373$34 million at January 2, 2021 related to a brand in the RX reporting unit.North America operating segment that relates to snack category products. In performing the quantitative test of goodwill for RX,this brand, fair value was determined using a relief from royalty valuation method that includes estimates, and significant assumptions, of future cash flows to be generated from that asset based on a calculation which gave considerationestimates of future sales, royalty rate and discount rate consistent with rates used by market participants. After the impairment, the carrying value of this brand was $150 million at December 30, 2023. No other heightened risk or qualitative indicators of impairment of any other intangible assets was identified.
Fair value determinations used in the annual testing require considerable judgment and are sensitive to an income approach utilizing the discounted cash flow methodchanges in underlying assumptions, estimates, and the market approach using the guideline public company and guideline transaction methods. The significant assumptions utilized within the RX discounted cash flow method are forecasted net sales and profitability growth and the discount rate. The Company determinedfactors. Estimating the fair value of RX exceedsindividual reporting units or indefinite-lived intangible assets requires making assumptions and estimates regarding the carrying valueCompany’s future plans, as well as industry, economic, and no heightened riskregulatory conditions. If current expectations of impairment exists for the reporting unit.
In the fourth quarter of 2020 management finalized a decision to reorganize part of its North America operating segment, including the RX reporting unit, effective at the beginning of fiscal 2021. The reorganization further integrates the RX business with the restfuture growth rates and margins are not met, if market factors outside of the North American business and changes internal reporting provided to the segment manager. As a resultCompany’s control, such as market comparables, rising discount rates, income tax rates, foreign currency exchange rate volatility, or inflation, change, or if management’s expectations or plans otherwise change, then one or more of these changes, the Company has re-evaluated its North Americanour reporting units and determined that effective ator indefinite-lived assets might become impaired in the beginning of fiscal 2021, the RX reporting unit will be combined with the North America reporting unit. The Company evaluated the related impacted reporting units for impairment on a before and after basis and concluded that the fair values of each reporting unit exceeded their carrying values.future.
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 majority of plan assets are invested in a globally diversified portfolio of debt and equity securities with smaller holdings of other investments. We recognize the cost of benefits provided during retirement over the employees’ active working life to determine the obligations and expense related to our retiree benefit plans. 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, the mortality table and improvement scale, and the interest rates used to discount the obligations for our major plans, which cover employees in the United States, United Kingdom and Canada.
Our expense recognition policy for pension and nonpension postretirement benefits is to immediately recognize actuarial gains and losses in our operating results in the year in which they occur. Actuarial gains and losses are recognized annually as of our measurement date, which is our fiscal year-end, or when remeasurement is otherwise required under generally accepted accounting principles.
Additionally, for purposes of calculating the expected return on plan assets related to pension and nonpension postretirement benefits we use the fair value of plan assets.
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%56% of our trust assets globally, currently incorporates a long-term inflation assumption of 2.5% and a 20202023 weighted-average active management premium of 0.80%0.84% for the pension plans and 0.93% for the retiree medical plan, (net of fees) validated by historical analysis and future return expectations. 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 have generally not been 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. Because of a change in the asset mixes between the US pension and retiree medical trusts, separate rate of return assumptions were used in 2023. Our assumed rate of return for U.S. plans in 20202023 was 7.0%,7.75% for the pension plans and 8.00% for the retiree medical plan, which equated to approximately the 64th55th and 53rd percentile expectationexpectations of our model, respectively. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. Foreign trust investments represent approximately 30%44% of our global benefit plan assets.
Based on consolidated benefit plan assets at January 2, 2021,December 30, 2023, a 100 basis point increase or decrease in the assumed rate of return would correspondingly decrease or increase 20212024 benefits expense by approximately $63$23 million. For the years ended January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, our actual return on plan assets exceeded (was less than)was more than the recognized assumed return by $400$52 million and $730 million,less than the recognized by $1.5 billion, respectively.
Pension assets include a level 3 investment comprising 5%32% of total plan assets as of January 2, 2021.December 30, 2023. The investment, a buy-in annuity contract, is valued based on the calculated pension benefit obligation covered byestimated cost to enter an equivalent contract at the contract.balance sheet date.
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 in 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. This year, 2020 experience has been excluded from the averages since it has been influenced by COVID-19 claims and care deferral as a result of restrictions on elective care, therefore we are comparing to a four-year average (2016-2019).
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 four-year
compound annual claims cost growth rate of approximately 5.02%, ourOur initial trend rate for 20212024 of 5.00%6.50% reflects the expected future impactrecognition of faster-growing claims experience for certain demographic groups within our total employee population.increased short-term inflation and the health care provisions of the Inflation Reduction Act. Our initial rate is trendedremains flat through 2025 before trending downward by 0.25% 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. Any arising health care claims cost-related experience gain or loss is recognized in the year in which they occur. The experience gain arising from recognition of 20202023 claims experience was approximately $37$4 million.
Assumed mortality rates of plan participants are a critical estimate in measuring the expected payments a participant will receive over their lifetime and the amount of expense we recognize. In 2019, the Society of Actuaries (SOA) published updated mortality tables and an updated improvement scale. In 2020,2021, the SOA released an updated improvement scale that incorporatesincorporated an additional year of data. In 2022 and 2023, the SOA did not release an updated improvement scale. In determining the appropriate mortality assumptions as of 20202023 fiscal year-end, we used the 2019 SOA tables with collar adjustments based on Kellogg’sKellanova’s current population, consistent with the prior year. In addition, our assumption for future mortality improvement continues to be based on mortality information available from the Social Security Administration and other sources, we developed assumptions for future mortality improvementconsistent with the prior year and in line with our expectations for future experience. The changeThere were no changes to the mortality assumption decreased the year-end pension and postretirement benefit obligations by $1.4 million and $0.4 million, respectively.due to mortality assumption changes.
To conduct our annual review of discount rates, we selected the discount rate based on a cash-flow matching analysis using Willis Towers Watson’s proprietary RATE:Link tool and projections of the future benefit payments constituting the projected benefit obligation for the plans. RATE:Link establishes the uniform discount rate that produces the same present value of the estimated future benefit payments, as is generated by discounting each year’s benefit payments by a spot rate applicable to that year. The spot rates used in this process are derived from a yield curve created from yields on the 40th to 90th percentile of U.S. high quality bonds. A similar methodology is applied in Canada and Europe, andEurope. The projected benefit obligation for the plan in the United Kingdom the underlying yield curve was derived after further adjustmentsis set equal to the universefair value of bonds to remove government backed bonds.the buy-in annuity contracts. We use a December 31 measurement date for our defined benefit plans. Accordingly, we select yield curves to measure our benefit obligations that are consistent with market indices during December of each year.
Based on consolidated obligations at January 2, 2021,December 30, 2023, a 25 basis point decline in the yield curve used for benefit plan measurement purposes would decrease 20212024 benefits expense by approximately $9$2 million and would result in an immediate loss recognition of $181$174 million. All obligation-related actuarial gains and losses are recognized immediately in the year in which they occur.
Despite the previously-described policies for selecting major actuarial assumptions, we periodically experience material actuarial gains or losses due to differences between assumed and actual experience and due to changing economic conditions. During 2020,2023, we recognized a net actuarial loss of approximately $151$142 million compared to a net actuarial loss of approximately $94$228 million in 2019.2022. The total net loss recognized in 20202023 was driven by a loss of approximately $551$184 million of plan experience andfrom assumption changes, including decreases in the discount rate and from the UK
buy-in of annuities for existing scheme participants, and a loss of approximately $10 million from plan experience, partially offset by a $400gain of approximately $52 million gain from betterhigher than expected asset returns.
During 2020,2023, we made contributions in the amount of $8$25 million to Kellogg’sKellanova’s global tax-qualified pension programs. This amount was mostly non-discretionary. Additionally, we contributed $24$10 million to our retiree medical programs.
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. The calculation of our income tax provision and deferred income tax assets and liabilities is complex and requires the use of estimates and judgment.
We recognize tax benefits associated with uncertain tax positions when, in our judgment, it is more likely than not that the positions will be sustained upon examination by a taxing authority. For tax positions that meet the more likely than not recognition threshold, we initially and subsequently measure the tax benefits as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, new or emerging legislation and tax planning. The tax position will be derecognizedde-recognized when it is no longer more likely than not of being sustained. Significant adjustments to our liability for unrecognized tax benefits impacting our effective tax rate are separately presented in the rate reconciliation table of Note 1314 within Notes to Consolidated Financial Statements.
Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration as well as the reinvestment assertion regarding our undistributed foreign earnings. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future.
FUTURE OUTLOOK
The Company issued its initialaffirmed the financial guidance for 2021. Specifically, the2024 that it had first provided in August, 2023, at its Day@K investor event. The Company is projecting:
Organic•Organic-basis net sales to decrease bygrowth of approximately (1)%, as it compares3% or better against unusually strong, COVID-related growth in the prior year.a recast 2023.
Currency-neutral adjusted•Adjusted-basis operating profit to declineof approximately (2)%, as it compares against unusually strong, COVID-related growth and a 53rd week of business in the prior year.$1,850-1,900 million.
Currency-neutral adjusted•Adjusted-basis earnings per share to increase byof approximately 1%.$3.55-3.65.
•Net cash provided by operating activities is expected to beof approximately $1.6$1.7 billion, with capital expendituresexpenditure of approximately $0.5 billion.about $0.7 billion, which is elevated this year for the expansion of Pringles capacity in emerging markets. As a result, non-GAAPfree cash flow is expected to be approximately $1.1$1.0 billion.
Excluded from this guidance, are any significant supply chain or other prolonged market disruptions related to the pandemic or global economy.
Reconciliation of non-GAAP guidance measures
We are unable to reasonably estimate the potential full-year financial impact of mark-to-market adjustments because these impacts are dependent on future changes in market conditions (interest rates, return on assets, and commodity prices). Similarly, because of volatility in foreign exchange rates and shifts in country mix of our international earnings, we are unable to reasonably estimate the potential full-year financial impact of foreign currency translation.
The adjusted-basis dollar range guidance shown below incorporates an impact from foreign currency based solely on prevailing exchange rates as of December 30, 2023.
As a result, these impacts are not included in the guidance provided. Therefore, we are unable to provide a full reconciliation of these non-GAAP measures used in our guidance without unreasonable effort as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.
See the table below that outlines the projected impact of certain other items that are excluded from non-GAAP guidance for 2021:2024:
| | | | | | | | | | | |
| Impact of certain items excluded from Non-GAAP guidance: | Net Sales | Operating Profit | Earnings Per Share |
| Business and portfolio realignment (pre-tax) | | $30-60-$40M70M | $0.09-0.17 - $0.20 |
| Network optimization (pre-tax) | | $0.12150-$160M | $0.43 - $0.46 |
| Income tax impact applicable to adjustments, net** | | | ~$0.030.13 - $0.14 |
| | | |
Currency-neutral adjusted guidance*Adjusted guidance | | ~(2)%$1,850-$1,900M | ~1%$3.55 - $3.65 |
| | | |
| | | |
Organic guidance*guidance * | ~(1)% 3% | | |
| | | |
* 20212024 full year guidance for net sales, operating profit, and earnings per share are provided on a non-GAAP basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. These items for 20212024 include impacts of mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commoditiescommodity contracts, certain equity investments, and certain foreign currency contracts. The Company is providing quantification of known adjustment items where available.
** Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.
| | | | | |
| Reconciliation of Non-GAAP amounts - Free Cash Flow Guidance | |
| (billions) | |
| Full Year 20212024 |
| Net cash provided by (used in) operating activities | ~$1.6 $1.7 |
| Additions to properties | ~($0.5)0.7) |
| Free Cash Flow | ~$1.1 $1.0 |
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 1415 within Notes to Consolidated Financial Statements for further information on our derivative financial and commodity instruments.
Foreign exchange risk
Our company is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases, intercompany transactions, and when applicable, nonfunctional currency denominated third-party debt. 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, volatile market conditions arising from the COVID-19 pandemicgeopolitical events may result in significant changes in foreign exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect the translation of foreign currency denominated earnings to U.S. dollars. Primary exposures include the U.S. dollar versus the euro, British pound, Australian dollar, Canadian dollar, Mexican peso, Brazilian real, Nigerian naira, Russian rublePolish Zloty and Egyptian pound, and in the case of inter-subsidiary transactions, the British pound versus the euro.
The impactDuring the second quarter of possible2023, the Nigerian government removed certain currency devaluationsrestrictions over the Nigerian Naira leading to a significant decline in countries experiencing high inflation rates or significantthe exchange fluctuations, including Argentina, can impact our results and financial guidance. Effective July 1, 2018, we have accounted for Argentina as a highly inflationary economy, asrate of the projected three-year cumulative inflation rate exceeds 100%. Accordingly, our Argentina subsidiary will useNaira to the U.S. dollar as its functional currency. Accordingly, changeson the official market in Nigeria. As a result of this decline in the exchange rate, the U.S. dollar value of the Argentine Peso versus the U.S. dollar appliedassets, liabilities, expenses and revenues of our Nigerian business in our consolidated financial statements has decreased significantly compared to prior periods. The consolidated assets of our peso-denominated net monetary asset position is recorded in income at the timeNigerian business represented approximately 5% of the change. Net monetaryour consolidated assets denominated in Argentine Pesos were not material as of January 2, 2021.December 30, 2023, compared to 8% as of December 31, 2022. Net sales of our Nigerian business were 8% of our consolidated net sales year-to-date period ended December 30, 2023, but could become a smaller percentage of our overall sales if exchange rates as of year-end persist or decline further in 2024.
In addition to our consolidated Nigerian business, the Company also been periodshas an investment in an unconsolidated entity, Tolaram Africa Foods PTE LTD (TAF), that holds an investment in a Nigerian food manufacturer. This investment is accounted for under the equity method of increased market volatilityaccounting and is evaluated for indicators of other than temporary impairment. During 2023, the Company recorded significant foreign currency translation adjustments due to the devaluation of the Nigerian Naira. The Company, following its accounting practice of recording the operations of its subsidiary, TAF, on a one-month lag basis has recognized these adjustments based on the foreign currency exchange rate fluctuations specifically within the United Kingdom and Europe,rates as a result of the UK's exit fromend of November 2023. The aggregate effect of these adjustments for the European Union. On January 31, 2020, the United Kingdom left the European Union. Following the conclusionyear resulted in translation losses of the transition period on December 31, 2020, the United Kingdom exited the European Union's Custom Union and Single Market moving on to trading terms consistent with the European Union - United Kingdom Trade and Cooperation Agreement. While the specific operational and financial impacts of Brexit will continue to evolve and uncertainty remains relating to Brexit and its impact on the local and international markets and the flow of goods and materials across borders, we do not expect such impacts to be material to the financial trends of our European and Consolidated businesses. We will continue to monitor any changes that may arise and assess their potential impact on our business.approximately $141 million, which have been recognized in other comprehensive income.
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 long or short currency positions. Forward contracts and options are generally less than 18 months duration. Currency swap agreements may be established in conjunction with the term of underlying debt issuances.
The total notional amount of foreign currency derivative instruments, including cross currency swaps, at year-end 20202023 was $4.3$4.8 billion, representing a net settlement obligation of $33$21 million. The total notional amount of foreign currency derivative instruments at year-end 20192022 was $4.2$4.5 billion, representing a net settlement receivable of $79$153 million. All of these derivatives were hedges of anticipated transactions, translational exposure, or existing assets or liabilities. Foreign currency contracts generally mature within 18 months and cross currency contracts mature with the related debt. Assuming an unfavorable 10% change in year-end exchange rates, the settlement obligation would have increased by $272$329 million, resulting in a net settlement obligation of $305$350 million at year-end 20202023 and the settlement receivable would have decreased by $245$342 million at year-end 2019.2022. 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)Secured Overnight Financing Rate (SOFR), 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.
We entered into interest rate swaps, and in some instances terminated interest rate swaps, in connection with certain U.S. Dollar and Euro Notes. Refer to Note 8 within Notes to Consolidated Financial Statements. The total notional amount of interest rate swaps at year-end 20202023 was $2.6$2.3 billion, representing a net settlement receivableobligation of $46$93 million. The total notional amount of interest rate swaps at year-end 20192022 was $1.9$2.7 billion, representing a net settlement obligation of $6$23 million. Assuming average variable rate debt levels during the year, a one percentage point increase in interest rates would have increased interest expense by approximately $8$14 million and $13$12 million at year-end 20202023 and 2019,2022, respectively.
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, potato flakes, soybean oil, sugar, cocoa, cartonboard, 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.
Geopolitical instability, including wars and conflicts (including conflicts in Ukraine and the Middle East), actual and potential shifts in U.S. and foreign, trade, economic and other policies, as well as other global events, have resulted in certain impacts to the global economy, including market disruptions, supply chain challenges, and inflationary pressures. During the fiscal year ended December 30, 2023 we continued to experience elevated commodity and supply chain costs, including procurement and manufacturing costs, although certain supply chain challenges have eased. We continue to mitigate the dollar impact of this input cost inflation through the execution of productivity initiatives and revenue growth management actions. We continue to expect input cost inflation to be flat during 2024.
The total notional amount of commodity derivative instruments at year-end 20202023 was $314$201 million, representing a settlement receivableobligation of approximately $8less than a $1 million. The total notional amount of commodity derivative instruments at year-end 20192022 was $524$230 million, representing a settlement receivable of approximately $8$2 million. Assuming a 10%
decrease in year-end commodity prices, the settlement receivable would become a settlement obligation of $22 million at year-end 2020, and the settlement obligation would have increased by $11 million, resulting in a net settlement obligation of approximately $40$11 million at year-end 2019,2023, and the settlement receivable would have decreased by approximately $18 million at year-end 2022, generally offset by a reduction in the cost of the underlying commodity purchases.
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.
Reciprocal collateralization agreements
In some instances we have 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 net liability position to us or our counterparties exceeds a certain amount. As of January 2, 2021,December 30, 2023 and December 31, 2022, we had posted collateral related to reciprocal collateralization agreementsof $59 million and $9 million, respectively. As of December 30, 2023 and December 31, 2022, margin deposits for exchange-traded commodity derivative instruments, were immaterial. As of December 28, 2019, we were not required to post collateral and collected approximately $19 million of collateral, in the form of cash, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet. As of December 28, 2019, we posted $12 million, in margin deposits for exchange-traded commodity derivative instruments, which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Kellogg Company
Kellanova and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
| | | | | | | | | | | | | | | | | | | | |
| (millions, except per share data) | | 2020 | | 2019 | | 2018 |
| Net sales | | $ | 13,770 | | | $ | 13,578 | | | $ | 13,547 | |
| Cost of goods sold | | 9,043 | | | 9,197 | | | 8,821 | |
| Selling, general and administrative expense | | 2,966 | | | 2,980 | | | 3,020 | |
| Operating profit | | $ | 1,761 | | | $ | 1,401 | | | $ | 1,706 | |
| Interest expense | | 281 | | | 284 | | | 287 | |
| Other income (expense), net | | $ | 121 | | | $ | 188 | | | $ | (90) | |
| Income before income taxes | | 1,601 | | | 1,305 | | | 1,329 | |
| Income taxes | | 323 | | | 321 | | | 181 | |
| Earnings (loss) from unconsolidated entities | | (14) | | | (7) | | | 196 | |
| Net income | | $ | 1,264 | | | $ | 977 | | | $ | 1,344 | |
| Net income (loss) attributable to noncontrolling interests | | 13 | | | 17 | | | 8 | |
| Net income attributable to Kellogg Company | | $ | 1,251 | | | $ | 960 | | | $ | 1,336 | |
| Per share amounts: | | | | | | |
| Basic | | $ | 3.65 | | | $ | 2.81 | | | $ | 3.85 | |
| Diluted | | $ | 3.63 | | | $ | 2.80 | | | $ | 3.83 | |
| | | | | | |
Refer to Notes to Consolidated Financial Statements.(in millions of U.S. Dollars, except per share data)
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| (millions) | | Pre-tax
amount | Tax
(expense)
benefit | After-tax
amount | | Pre-tax
amount | Tax
(expense)
benefit | After-tax
amount | | Pre-tax
amount | Tax
(expense)
benefit | After-tax
amount |
| Net income | | | | $ | 1,264 | | | | | $ | 977 | | | | | $ | 1,344 | |
| Other comprehensive income: | | | | | | | | | | | | |
| Foreign currency translation adjustments | | $ | (405) | | $ | 84 | | (321) | | | $ | 100 | | $ | (19) | | 81 | | | $ | 5 | | $ | (53) | | (48) | |
| Cash flow hedges: | | | | | | | | | | | | |
| Unrealized gain (loss) on cash flow hedges | | (9) | | 2 | | (7) | | | 5 | | (1) | | 4 | | | 3 | | (1) | | 2 | |
| Reclassification to net income | | 14 | | (4) | | 10 | | | 4 | | (1) | | 3 | | | 8 | | (2) | | 6 | |
| Postretirement and postemployment benefits: | | | | | | | | | | | | |
| Amounts arising during the period: | | | | | | | | | | | | |
| Net experience gain (loss) | | (4) | | 1 | | (3) | | | (16) | | 5 | | (11) | | | (8) | | 1 | | (7) | |
| Prior service credit (cost) | | (21) | | 6 | | (15) | | | 3 | | (1) | | 2 | | | 1 | | 0 | | 1 | |
| Reclassification to net income: | | | | | | | | | | | | |
| Net experience (gain) loss | | (3) | | 1 | | (2) | | | (5) | | 1 | | (4) | | | (5) | | 1 | | (4) | |
| Prior service (credit) cost | | (1) | | 0 | | (1) | | | (1) | | 0 | | (1) | | | 0 | | 0 | | 0 | |
| Available-for-sale securities: | | | | | | | | | | | | |
| Unrealized gain (loss) | | 3 | | 0 | | 3 | | | 4 | | 0 | | 4 | | | 0 | | 0 | | 0 | |
| Reclassification to net income | | 0 | | 0 | | 0 | | | (4) | | 0 | | (4) | | | 0 | | 0 | | 0 | |
| Other comprehensive income (loss) | | $ | (426) | | $ | 90 | | $ | (336) | | | $ | 90 | | $ | (16) | | $ | 74 | | | $ | 4 | | $ | (54) | | $ | (50) | |
| Comprehensive income | | | | $ | 928 | | | | | $ | 1,051 | | | | | $ | 1,294 | |
| Net income (loss) attributable to noncontrolling interests | | | | 13 | | | | | 17 | | | | | 8 | |
| Other comprehensive income (loss) attributable to noncontrolling interests | | | | (52) | | | | | 0 | | | | | (7) | |
| Comprehensive income attributable to Kellogg Company | | | | $ | 967 | | | | | $ | 1,034 | | | | | $ | 1,293 | |
| | | | | | | | | | | | | | | | | | | | |
| (millions, except per share data) | | 2023 | | 2022 | | 2021 |
| Net sales | | $ | 13,122 | | | $ | 12,653 | | | $ | 11,747 | |
| Cost of goods sold | | 8,839 | | | 8,842 | | | 7,929 | |
| Selling, general and administrative expense | | 2,778 | | | 2,600 | | | 2,435 | |
| Operating profit | | $ | 1,505 | | | $ | 1,211 | | | $ | 1,383 | |
| Interest expense | | 303 | | | 201 | | | 205 | |
| Other income (expense), net | | (162) | | | (108) | | | 274 | |
| Income from continuing operations before income taxes | | 1,040 | | | 902 | | | 1,452 | |
| Income taxes | | 258 | | | 180 | | | 353 | |
| Earnings (loss) from unconsolidated entities | | 6 | | | 9 | | | 3 | |
| Net income from continuing operations | | $ | 788 | | | $ | 731 | | | $ | 1,103 | |
| Net income (loss) attributable to noncontrolling interests | | 13 | | | 2 | | | 7 | |
| Income from discontinued operations, net of taxes | | 176 | | | 231 | | | 392 | |
| Net income attributable to Kellanova | | $ | 951 | | | $ | 960 | | | $ | 1,488 | |
| Per share amounts: | | | | | | |
| Earnings Per Common Share - Basic | | | | | | |
| Earnings from continuing operations | | $ | 2.27 | | | $ | 2.14 | | | $ | 3.21 | |
| Earnings from discontinued operations | | $ | 0.51 | | | $ | 0.67 | | | $ | 1.15 | |
| Net Earnings Per Common Share - Basic | | $ | 2.78 | | | $ | 2.81 | | | $ | 4.36 | |
| Earnings Per Common Share - Diluted | | | | | | |
| Earnings from continuing operations | | $ | 2.25 | | | $ | 2.12 | | | $ | 3.19 | |
| Earnings from discontinued operations | | $ | 0.51 | | | $ | 0.67 | | | $ | 1.14 | |
| Net Earnings Per Common Share - Diluted | | $ | 2.76 | | | $ | 2.79 | | | $ | 4.33 | |
| | | | | | |
| | | | | | |
| | | | | | |
Refer to Notes to Consolidated Financial Statements.
Kellogg CompanyKellanova and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions of U.S. Dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| (millions) | | Pre-tax
amount | Tax
(expense)
benefit | After-tax
amount | | Pre-tax
amount | Tax
(expense)
benefit | After-tax
amount | | Pre-tax
amount | Tax
(expense)
benefit | After-tax
amount |
| Net income | | | | $ | 964 | | | | | $ | 962 | | | | | $ | 1,495 | |
| Other comprehensive income (loss): | | | | | | | | | | | | |
| Foreign currency translation adjustments: | | | | | | | | | | | | |
| Foreign currency translation adjustments during period | | $ | (446) | | $ | 2 | | (444) | | | $ | (412) | | $ | 3 | | (409) | | | $ | (222) | | $ | 5 | | (217) | |
| Net investment hedges: | | | | | | | | | | | | |
| Net investment hedges gain (loss) | | (128) | | 32 | | (96) | | | 287 | | (72) | | 215 | | | 236 | | (62) | | 174 | |
| Cash flow hedges: | | | | | | | | | | | | |
| Net deferred gain (loss) on cash flow hedges | | (19) | | 5 | | (14) | | | 221 | | (57) | | 164 | | | 38 | | (10) | | 28 | |
| Reclassification to net income | | 9 | | (2) | | 7 | | | (2) | | 1 | | (1) | | | 22 | | (6) | | 16 | |
| Postretirement and postemployment benefits: | | | | | | | | | | | | |
| Amounts arising during the period: | | | | | | | | | | | | |
| Net experience gain (loss) | | — | | — | | — | | | 5 | | (1) | | 4 | | | (2) | | 1 | | (1) | |
| Prior service credit (cost) | | (15) | | 8 | | (7) | | | (3) | | 1 | | (2) | | | (18) | | 4 | | (14) | |
| Reclassification to net income: | | | | | | | | | | | | |
| Net experience (gain) loss | | (1) | | — | | (1) | | | (2) | | 1 | | (1) | | | (2) | | — | | (2) | |
| Prior service (credit) cost | | (1) | | — | | (1) | | | 1 | | — | | 1 | | | — | | — | | — | |
| Available-for-sale securities: | | | | | | | | | | | | |
| Unrealized gain (loss) | | 1 | | — | | 1 | | | (5) | | — | | (5) | | | (1) | | — | | (1) | |
| Reclassification to net income | | 3 | | — | | 3 | | | 1 | | — | | 1 | | | (2) | | — | | (2) | |
| Other comprehensive income (loss) | | $ | (597) | | $ | 45 | | $ | (552) | | | $ | 91 | | $ | (124) | | $ | (33) | | | $ | 49 | | $ | (68) | | $ | (19) | |
| Comprehensive income | | | | $ | 412 | | | | | $ | 929 | | | | | $ | 1,476 | |
| Net income (loss) attributable to noncontrolling interests | | | | 13 | | | | | 2 | | | | | 7 | |
| Other comprehensive income (loss) attributable to noncontrolling interests | | | | (229) | | | | | (46) | | | | | (30) | |
| Comprehensive income attributable to Kellanova | | | | $ | 628 | | | | | $ | 973 | | | | | $ | 1,499 | |
Refer to Notes to Consolidated Financial Statements.
Kellanova and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in millions of U.S. Dollars, except per share data)
| | (millions, except share data) | (millions, except share data) | | 2020 | | 2019 | (millions, except share data) | | 2023 | | 2022 |
| Current assets | Current assets | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 435 | | | $ | 397 | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Accounts receivable, net | Accounts receivable, net | | 1,537 | | | 1,576 | |
| Inventories | Inventories | | 1,284 | | | 1,226 | |
| Other current assets | Other current assets | | 226 | | | 232 | |
| Current assets of discontinued operations | |
| Total current assets | Total current assets | | 3,482 | | | 3,431 | |
| Property, net | Property, net | | 3,713 | | | 3,612 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 658 | | | 541 | |
| Goodwill | Goodwill | | 5,799 | | | 5,861 | |
| Other intangibles, net | Other intangibles, net | | 2,491 | | | 2,576 | |
| Investment in unconsolidated entities | Investment in unconsolidated entities | | 391 | | | 404 | |
| Other assets | Other assets | | 1,462 | | | 1,139 | |
| Non-current assets of discontinued operations | |
| Total assets | Total assets | | $ | 17,996 | | | $ | 17,564 | |
| Current liabilities | Current liabilities | |
| Current maturities of long-term debt | |
| Current maturities of long-term debt | |
| Current maturities of long-term debt | Current maturities of long-term debt | | $ | 627 | | | $ | 620 | |
| Notes payable | Notes payable | | 102 | | | 107 | |
| Accounts payable | Accounts payable | | 2,471 | | | 2,387 | |
| Current operating lease liabilities | Current operating lease liabilities | | 117 | | | 114 | |
| Accrued advertising and promotion | Accrued advertising and promotion | | 776 | | | 641 | |
| Accrued salaries and wages | |
| Other current liabilities | Other current liabilities | | 1,145 | | | 909 | |
| Current liabilities of discontinued operations | |
| Total current liabilities | Total current liabilities | | 5,238 | | | 4,778 | |
| Long-term debt | Long-term debt | | 6,746 | | | 7,195 | |
| Operating lease liabilities | Operating lease liabilities | | 520 | | | 433 | |
| Deferred income taxes | Deferred income taxes | | 562 | | | 596 | |
| Pension liability | Pension liability | | 769 | | | 705 | |
| Other liabilities | Other liabilities | | 525 | | | 543 | |
| Commitments and contingencies | | 0 | | 0 |
| Non-current liabilities of discontinued operations | |
| Commitments and contingencies (Note 16) | | Commitments and contingencies (Note 16) | | |
| Equity | Equity | |
Common stock, $0.25 par value, 1,000,000,000 shares authorized Issued: 420,962,092 shares in 2020 and 420,829,201 shares in 2019 | | 105 | | | 105 | |
Common stock, $0.25 par value, 1,000,000,000 shares authorized Issued: 421,326,361 shares in 2023 and 421,209,894 shares in 2022 | |
Common stock, $0.25 par value, 1,000,000,000 shares authorized Issued: 421,326,361 shares in 2023 and 421,209,894 shares in 2022 | |
Common stock, $0.25 par value, 1,000,000,000 shares authorized Issued: 421,326,361 shares in 2023 and 421,209,894 shares in 2022 | |
| Capital in excess of par value | Capital in excess of par value | | 972 | | | 921 | |
| Retained earnings | Retained earnings | | 8,326 | | | 7,859 | |
Treasury stock, at cost 77,071,554 shares in 2020 and 79,286,171 shares in 2019 | | (4,559) | | | (4,690) | |
Treasury stock, at cost 80,738,167 shares in 2023 and 79,409,966 shares in 2022 | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | | (1,732) | | | (1,448) | |
| Total Kellogg Company equity | | 3,112 | | | 2,747 | |
| Total Kellanova equity | |
| Noncontrolling interests | Noncontrolling interests | | 524 | | | 567 | |
| Total equity | Total equity | | 3,636 | | | 3,314 | |
| Total liabilities and equity | Total liabilities and equity | | $ | 17,996 | | | $ | 17,564 | |
Refer to Notes to Consolidated Financial Statements.
Kellogg CompanyKellanova and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(in millions of U.S. Dollars, except per share data)
| | (millions) | (millions) | Common
stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total
Kellogg
Company
equity | Non-
controlling
interests | Total
equity | (millions) | Common
stock | Capital in
excess of
par value | Retained
earnings | Treasury stock | Accumulated
other
comprehensive
income (loss) | Total
Kellanova
equity | Non-
controlling
interests | Total
equity |
| shares | amount | shares | amount | shares | amount | shares | amount |
| Balance, December 30, 2017 | 421 | | $ | 105 | | $ | 878 | | $ | 7,069 | | 75 | | $ | (4,417) | | $ | (1,457) | | $ | 2,178 | | $ | 16 | | $ | 2,194 | |
| Balance, January 2, 2021 | |
| Common stock repurchases | Common stock repurchases | | 5 | | (320) | | | (320) | | | (320) | |
| Net income (loss) | Net income (loss) | | 1,336 | | | 1,336 | | 8 | | 1,344 | |
| Acquisition of noncontrolling interest | Acquisition of noncontrolling interest | | 0 | | 552 | | 552 | |
| Dividends declared ($2.20 per share) | | (762) | | | (762) | | 0 | (762) | |
| | Dividends declared ($2.31 per share) | |
| Dividends declared ($2.31 per share) | |
| Dividends declared ($2.31 per share) | |
| Distributions to noncontrolling interest | Distributions to noncontrolling interest | | 0 | | (11) | | (11) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | | (43) | | (43) | | (7) | | (50) | |
| Stock compensation | Stock compensation | | 59 | | | 59 | | | 59 | |
| Stock options exercised and other | Stock options exercised and other | 0 | | | (42) | | 9 | | (3) | | 186 | | | 153 | | | 153 | |
| Balance, December 29, 2018 | 421 | | $ | 105 | | $ | 895 | | $ | 7,652 | | 77 | | $ | (4,551) | | $ | (1,500) | | $ | 2,601 | | $ | 558 | | $ | 3,159 | |
| Balance, January 1, 2022 | |
| Common stock repurchases | Common stock repurchases | | 4 | | (220) | | | (220) | | | (220) | |
| Net income (loss) | Net income (loss) | | 960 | | | 960 | | 17 | | 977 | |
| | Sale of subsidiary shares to noncontrolling interest | | 0 | | 1 | | 1 | |
| Dividends declared ($2.26 per share) | | (769) | | | (769) | | | (769) | |
| Dividends declared ($2.34 per share) | |
| Distributions to noncontrolling interest | Distributions to noncontrolling interest | | 0 | | (9) | | (9) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | | 74 | | 74 | | 0 | | 74 | |
| Reclassification of tax effects relating to U.S. tax reform | | 22 | | | (22) | | 0 | | | 0 | |
| Stock compensation | Stock compensation | | 56 | | | 56 | | | 56 | |
| Stock options exercised and other | Stock options exercised and other | 0 | | | (30) | | (6) | | (2) | | 81 | | | 45 | | | 45 | |
| Balance, December 28, 2019 | 421 | | $ | 105 | | $ | 921 | | $ | 7,859 | | 79 | | $ | (4,690) | | $ | (1,448) | | $ | 2,747 | | $ | 567 | | $ | 3,314 | |
| | Balance, December 31, 2022 | |
| Common stock repurchases | |
| Net income (loss) | Net income (loss) | | 1,251 | | | 1,251 | | 13 | | 1,264 | |
| | Divestiture | | 0 | | (3) | | (3) | |
| | Dividends declared ($2.28 per share) | | (782) | | | (782) | | 0 | | (782) | |
| Dividends declared ($2.34 per share) | |
| Distributions to noncontrolling interest | Distributions to noncontrolling interest | | 0 | | (1) | | (1) | |
| Distribution of WK Kellogg Co. | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | | (284) | | (284) | | (52) | | (336) | |
| | Stock compensation | Stock compensation | | 76 | | | 76 | | | 76 | |
| Stock options exercised and other | Stock options exercised and other | 0 | | | (25) | | (2) | | (2) | | 131 | | | 104 | | | 104 | |
| Balance, January 2, 2021 | 421 | | $ | 105 | | $ | 972 | | $ | 8,326 | | 77 | | $ | (4,559) | | $ | (1,732) | | $ | 3,112 | | $ | 524 | | $ | 3,636 | |
| Balance, December 30, 2023 | |
Refer to Notes to Consolidated Financial Statements.
Kellogg CompanyKellanova and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2020 | | 2019 | | 2018 |
| Operating activities | | | | | | |
| Net income | | $ | 1,264 | | | $ | 977 | | | $ | 1,344 | |
| Adjustments to reconcile net income to operating cash flows: | | | | | | |
| Depreciation and amortization | | 479 | | | 484 | | | 516 | |
| Postretirement benefit plan expense (benefit) | | (77) | | | (89) | | | 170 | |
| Deferred income taxes | | 69 | | | 47 | | | 46 | |
| Stock compensation | | 76 | | | 56 | | | 59 | |
| Multi-employer pension plan exit liability | | (5) | | | 132 | | | 7 | |
| | | | | | |
| | | | | | |
| Gain from unconsolidated entities, net | | 0 | | | 0 | | | (200) | |
| | | | | | |
| Other | | (16) | | | (36) | | | (70) | |
| Tax payment related to divestitures | | 0 | | | (255) | | | 0 | |
| Postretirement benefit plan contributions | | (32) | | | (28) | | | (287) | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
| Trade receivables | | 75 | | | (145) | | | 76 | |
| Inventories | | (54) | | | 2 | | | (86) | |
| Accounts payable | | (9) | | | (9) | | | 115 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| All other current assets and liabilities | | 216 | | | 40 | | | (154) | |
| Net cash provided by (used in) operating activities | | $ | 1,986 | | | $ | 1,176 | | | $ | 1,536 | |
| Investing activities | | | | | | |
| Additions to properties | | $ | (505) | | | $ | (586) | | | $ | (578) | |
| Purchases of marketable securities | | (250) | | | 0 | | | 0 | |
| Sales of marketable securities | | 250 | | | 0 | | | 0 | |
| Acquisitions, net of cash acquired | | 0 | | | (8) | | | (28) | |
| Divestiture, net of cash disposed | | (7) | | | 1,332 | | | 0 | |
| | | | | | |
| Investments in unconsolidated entities | | 0 | | | 0 | | | (389) | |
| Acquisition of cost method investments | | (4) | | | (1) | | | (8) | |
| Purchases of available for sale securities | | (81) | | | (18) | | | 0 | |
| Sales of available for sale securities | | 19 | | | 83 | | | 0 | |
| Other | | (7) | | | (28) | | | 55 | |
| Net cash provided by (used in) investing activities | | $ | (585) | | | $ | 774 | | | $ | (948) | |
| Financing activities | | | | | | |
| Net increase (reduction) of notes payable, with maturities less than or equal to 90 days | | (16) | | | (18) | | | (264) | |
| Issuances of notes payable, with maturities greater than 90 days | | 44 | | | 62 | | | 62 | |
| Reductions of notes payable, with maturities greater than 90 days | | (34) | | | (69) | | | (23) | |
| Issuances of long-term debt | | 557 | | | 80 | | | 993 | |
| Reductions of long-term debt | | (1,229) | | | (1,009) | | | (408) | |
| Debt redemption costs | | (20) | | | (17) | | | 0 | |
| Net issuances of common stock | | 112 | | | 64 | | | 167 | |
| Common stock repurchases | | 0 | | | (220) | | | (320) | |
| Cash dividends | | (782) | | | (769) | | | (762) | |
| Collateral received on derivative instruments | | (19) | | | 0 | | | 0 | |
| Other | | (1) | | | (9) | | | (11) | |
| Net cash provided by (used in) financing activities | | $ | (1,388) | | | $ | (1,905) | | | $ | (566) | |
| Effect of exchange rate changes on cash and cash equivalents | | 25 | | | 31 | | | 18 | |
| Increase (decrease) in cash and cash equivalents | | $ | 38 | | | $ | 76 | | | $ | 40 | |
| Cash and cash equivalents at beginning of period | | 397 | | | 321 | | | 281 | |
| Cash and cash equivalents at end of period | | $ | 435 | | | $ | 397 | | | $ | 321 | |
| | | | | | |
| Supplemental cash flow disclosures: | | | | | | |
| Interest paid | | $ | 249 | | | $ | 284 | | | $ | 280 | |
| Income taxes paid | | $ | 281 | | | $ | 537 | | | $ | 188 | |
| | | | | | |
| Supplemental cash flow disclosures of non-cash investing activities: | | | | | | |
| | | | | | |
| Additions to properties included in accounts payable | | $ | 189 | | | $ | 128 | | | $ | 162 | |
| | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2023 | | 2022 | | 2021 |
| Operating activities | | | | | | |
| Net income | | $ | 964 | | | $ | 962 | | | $ | 1,495 | |
| Adjustments to reconcile net income to operating cash flows: | | | | | | |
| Depreciation and amortization | | 419 | | | 478 | | | 467 | |
| Postretirement benefit plan expense (benefit) | | 53 | | | 240 | | | (392) | |
| Deferred income taxes | | (21) | | | (46) | | | 125 | |
| Stock compensation | | 95 | | | 96 | | | 68 | |
| | | | | | |
| Loss on Russia Divestiture | | 113 | | | — | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other | | 40 | | | (42) | | | (44) | |
| | | | | | |
| Postretirement benefit plan contributions | | (42) | | | (23) | | | (20) | |
| Changes in operating assets and liabilities, net of acquisitions and divestitures: | | | | | | |
| Trade receivables | | (42) | | | (257) | | | (9) | |
| Inventories | | 139 | | | (411) | | | (135) | |
| Accounts payable | | (340) | | | 411 | | | 194 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| All other current assets and liabilities | | 267 | | | 243 | | | (48) | |
| Net cash provided by (used in) operating activities | | $ | 1,645 | | | $ | 1,651 | | | $ | 1,701 | |
| Investing activities | | | | | | |
| Additions to properties | | $ | (677) | | | $ | (488) | | | $ | (553) | |
| Issuance of notes receivable | | (4) | | | (22) | | | (28) | |
| Repayments from notes receivable | | — | | | 10 | | | 28 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Settlement of net investment hedges | | 68 | | | 37 | | | 19 | |
| Investments in unconsolidated entities | | — | | | — | | | (10) | |
| | | | | | |
| Purchases of available for sale securities | | (15) | | | (17) | | | (61) | |
| Sales of available for sale securities | | 64 | | | 19 | | | 72 | |
| Other | | 2 | | | 13 | | | 5 | |
| Net cash provided by (used in) investing activities | | $ | (562) | | | $ | (448) | | | $ | (528) | |
| Financing activities | | | | | | |
| Net increase (reduction) of notes payable, with maturities less than or equal to 90 days | | (356) | | | 337 | | | (27) | |
| Issuances of notes payable, with maturities greater than 90 days | | 35 | | | 28 | | | 73 | |
| Reductions of notes payable, with maturities greater than 90 days | | (25) | | | (35) | | | (63) | |
| Issuances of long-term debt | | 404 | | | 39 | | | 361 | |
| Reductions of long-term debt | | (780) | | | (648) | | | (650) | |
| | | | | | |
| Net issuances of common stock | | 60 | | | 277 | | | 63 | |
| Common stock repurchases | | (170) | | | (300) | | | (240) | |
| Cash dividends | | (800) | | | (797) | | | (788) | |
| Proceeds received from debt issued and retained by WK Kellogg Co | | 663 | | | — | | | — | |
| Cash retained by WK Kellogg Co at separation | | (78) | | | — | | | — | |
| Other | | (63) | | | 18 | | | (35) | |
| Net cash provided by (used in) financing activities | | $ | (1,110) | | | $ | (1,081) | | | $ | (1,306) | |
| Effect of exchange rate changes on cash and cash equivalents | | 2 | | | (109) | | | (16) | |
| Increase (decrease) in cash and cash equivalents | | $ | (25) | | | $ | 13 | | | $ | (149) | |
| Cash and cash equivalents at beginning of period | | 299 | | | 286 | | | 435 | |
| Cash and cash equivalents at end of period | | $ | 274 | | | $ | 299 | | | $ | 286 | |
| | | | | | |
| Supplemental cash flow disclosures: | | | | | | |
| Interest paid | | $ | 291 | | | $ | 220 | | | $ | 213 | |
| Income taxes paid | | $ | 322 | | | $ | 312 | | | $ | 365 | |
| | | | | | |
| Supplemental cash flow disclosures of non-cash investing activities: | | | | | | |
| | | | | | |
| Additions to properties included in accounts payable | | $ | 138 | | | $ | 209 | | | $ | 162 | |
Refer to Notes to Consolidated Financial Statements.
Kellogg CompanyKellanova and Subsidiaries
Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Kellanova (the Company), formerly Kellogg Company, those of the subsidiaries that it controls due to ownership of a majority voting interest (Kellogg(Kellanova or the Company).
On October 2, 2023, the Company completed the separation of its North America cereal business resulting in two independent companies, Kellanova and WK Kellogg Co. As a result of the distribution, Kellanova shareholders of record on September 21, 2023, received one share of WK Kellogg Co common stock for every four shares of Kellanova common stock.
In accordance with applicable accounting guidance, the results of WK Kellogg Co are presented as discontinued operations in the consolidated statements of operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Further, the Company reclassified the assets and liabilities of WK Kellogg Co as assets and liabilities of discontinued operations in the consolidated balance sheet as of December 31, 2022. The consolidated statements of comprehensive income, equity and cash flows are presented on a consolidated basis for both continuing operations and discontinued operations.All amounts, percentages and disclosures for all periods presented reflect only the continuing operations of Kellanova unless otherwise noted. See Note 2 for additional information.
The Company continually evaluates its involvement with variable interest entities (VIEs) to determine whether it has variable interests and is the primary beneficiary of the VIE. When these criteria are met, the Company is required to consolidate the VIE. The Company’s share of earnings or losses of nonconsolidated affiliates is included in its consolidated operating results using the equity method of accounting when it is able to exercise significant influence over the operating and financial decisions of the affiliate. The Company uses the cost method of accountingrecords investments in equity securities at fair value if it is not able to exercise significant influence over the operating and financial decisions of the affiliate. The Company's investments in equity securities without a readily determinable fair value are recorded at original cost with adjustments for fair value only when observable price changes from orderly transactions for the investment are identified. Our investments in unconsolidated affiliates and equity securities without a readily determinable fair value are evaluated, at least annually, for indicators of an other-than-temporary impairment. Intercompany balances and transactions are eliminated.
The Company’s 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 Company's 2020 fiscal year ended on January 2,Company’s 2023, 2022 and 2021 and included a 53rd week. While quarters normally consist of 13-week periods, the fourth quarter of fiscal 2020 included a 14th week. The Company’s 2019 and 2018 fiscal years each contained 52 weeks and ended on December 30, 2023,December 28, 2019,31, 2022, and December 29, 2018,January 1, 2022, respectively. Certain prior period amounts have been updated to conform to the current period presentation.
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 periods reported. The Company's critical estimates include those related to promotional expenditures, goodwill and other intangible assets, retirement benefits, and income taxes. Actual results could differ from those estimates.estimates and could be impacted from macroeconomic conditions.
Cash and cash equivalents
Highly liquid investments with remaining stated maturities of three months or less when purchased are considered cash equivalents and recorded at cost.
Accounts receivable
Accounts receivable consists principally of trade receivables, which are recorded at the invoiced amount, net of allowances for doubtful accountsexpected credit losses and prompt payment discounts. Trade receivables do not bear interest. The allowance for doubtful accountsexpected credit losses represents management’s estimate of the amount of probable credit losses in existing accounts receivable, as determined from a review of past due balances, historical loss information, and an evaluation of customer accounts for potential future losses. Account balances are written off against the allowance when management determines the receivable is uncollectible. For the fiscal years ended 20202023 and 20192022 the
Company did not have off-balance sheet credit exposure related to its customers. Please refer to Note 23 for information on sales of accounts receivable.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined on an average cost basis.
Property
The Company’s 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 15-30; office equipment 5; computer equipment and capitalized software 3-7; building components 20; building structures 10-50. Cost includes 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 disposed of 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 a sale is expected to occur within one year. There were no material assets held for sale at the fiscal year-end 20202023 or 2019.
Goodwill and other intangible assets
GoodwillThe Company reviews our operating segment and indefinite-lived intangibles are not amortized, but are tested at leastreporting unit structure annually for impairment of value and whenever events or as significant changes in circumstances indicate the carrying amount of the asset may be impaired. An intangible asset with a finite life is amortized on a straight-line basis over the estimated useful life, which materially approximates the pattern of economic benefit.
For theorganization occur and assesses goodwill impairment risk throughout the year by performing a qualitative review of entity-specific, industry, market and general economic factors affecting our reporting units with goodwill. Annually during the fourth quarter, in conjunction with our annual budgeting process, the Company may perform qualitative testing, or depending on factors such as prior-year test results, current year developments, current risk evaluations and other practical considerations, the Company may instead perform a quantitative impairment test. In our quantitative testing, the Company compares a reporting unit’s estimated fair value with its carrying value. The reporting unit’s fair value is estimated using a combination of the reporting units are estimated based on market multiples. This approach employsa market multiples and discounted cash flow methodologies. The market multiples approach is based on either sales or earnings before interest, taxes, depreciation and amortization for companies that are comparable to the Company’s reporting units. In the event the fair value determined using the market multiple approach is close to carrying value, the Company may supplement the fair value determination usingThe discounted cash flows.flow approach incorporates assumptions surrounding planned growth rates, market-based discount rates and estimates of residual value. The assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for the Company’s reporting units.
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, discounted at rates consistent with rates used by market participants.
These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables. If the carrying value of a reporting unit exceeds its fair value, the Company considers the reporting unit impaired and reduces its carrying value of goodwill such that the reporting unit’s new carrying value is the estimated fair value.
Similarly, the Company assesses indefinite-life intangible assets impairment risk throughout the year by performing a qualitative review and assessing events and circumstances that could affect the fair value or carrying value of these intangible assets. Annually during the fourth quarter, in conjunction with our annual budgeting process, the Company may perform qualitative testing, or depending on factors such as prior-year test results, current year developments, current risk evaluations and other practical considerations, the Company may instead perform a quantitative impairment test. In the quantitative testing, the Company compares an intangible asset’s estimated fair value with its carrying value with the intangible asset’s fair value being determined using estimates of future cash flows to be generated from that asset based on estimates of future sales, as well as assumptions surrounding earnings growth rates, royalty rates and discount rates consistent with rates used by market participants. These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables. If the carrying value of the asset exceeds its fair value, we consider the asset impaired and reduce its carrying value to the estimated fair value.
We amortize definite-life intangible assets over their estimated useful lives, which materially approximates the pattern of economic benefit and evaluate them for impairment as we do other long-lived assets.
Accounts payable
The Company establishes competitive market-based terms with our suppliers, regardless of whether they participate in supplier finance programs, which generally range from 0 to 150 days dependent on their respective industry and geography.
The Company has agreements with third parties to provide accounts payable tracking systems which facilitate participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. The Company has no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by the agreements for those payment obligations that have been sold by suppliers. The payment of these obligations by the Company is included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of January 2, 2021, $909December 30, 2023, $825 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $670 million of those payment obligations to participating financial institutions.system. As of December 28, 2019, $81231, 2022, $932 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $605 million of those payment obligations to participating financial institutions.system.
Revenue recognition
The Company recognizes sales upon delivery of its products to customers. Revenue, which includes shipping and handling charges billed to the customer, is reported net of applicable 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 recognizes revenue from the sale of food products which are sold to retailers through direct sales forces, broker and distributor arrangements. The Company also recognizes revenue from the license of our trademarks granted to third parties who usesuse these trademarks on their merchandise and revenue from hauling services provided to third parties within certain markets. Revenue from these licenses and hauling services is not material to the Company.
Contract balances recognized in the current period that are not the result of current period performance are not material to the Company. The Company also does not incur costs to obtain or fulfill contracts.
The Company does not adjust the promised amount of consideration for the effects of significant financing components as the Company expects, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
The Company accounts for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities (i.e., an expense)recorded in cost of goods sold (COGS) rather than as a promised service.
The Company excludes from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer for sales taxes.
Performance obligations
The Company recognizes revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. The customer is invoiced with payment terms which are commensurate with the customer’s credit profile. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.
The Company assesses the goods and services promised in its customers’ purchase orders and identifies a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, the Company considers all the goods or services promised, whether explicitly stated or implied based on customary business practices. For a purchase order that has more than one performance obligation, the Company allocates the total consideration to each distinct performance obligation on a relative standalone selling price basis.
Significant Judgments
The Company offers various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Where applicable, future provisions are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance.
The Company's 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 immaterial in relation to net sales and recognized as a change in management estimate in a subsequent period. The liability associated with these promotions was recorded in accrued advertising and promotion.
The Company classifies promotional expenditures to its customers, the cost of consumer coupons, and other cash redemption offers in net sales.
Advertising and promotion
The Company expenses production costs of advertising the first time the advertising takes place. Advertising expense is classified in selling, general and administrative (SGA) expense.
The Company also classifies consumer promotional payments to its customers, the cost of consumer coupons, and other cash redemption offersexpenditures in net sales. Promotional allowancesSGA expense. These promotional expenses are estimated using various techniques including historical cash expenditure and redemption experience and patterns. Differences between estimated expense and actual redemptions are normally immaterial and recognized as a change in management estimate in a subsequent period. The liability associated with these promotions areadvertising and promotional activities is recorded in other current liabilities.accrued advertising and promotion.
The cost of promotional package inserts is recorded in cost of goods sold (COGS). Other types of consumer promotional expenditures are recorded in SGA expense.
Research and development
The costs of research and development (R&D) are expensed as incurred and are classified in SGA expense. R&D includes expenditures for new product and process innovation, as well as significant technological improvements to existing products and processes. The Company’s R&D expenditures primarily consist 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, restricted stock units, and executive performance shares, to provide long-term performance incentives for its global workforce.
The Company classifies pre-tax stock compensation expense in SGA and COGS within its corporate operations. Expense attributable to awards of equity instruments is recorded in capital in excess of par value in the Consolidated Balance Sheet.
Certain of the Company’s stock-based compensation plans contain provisions that prorate 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 employee’s 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.
The Company recognizes compensation cost for stock option awards that have a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Income taxes
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax-related interest and penalties as interest expense and SGA expense, respectively, on the Consolidated Statement of Income. The current portion of the Company’s unrecognized tax benefits is presented in the Consolidated Balance Sheet in other current assets and other current liabilities, and the amounts expected to be settled after one year are recorded in other assets and other liabilities.
Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration as well as the reinvestment assertion regarding our undistributed foreign earnings. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future.
Derivative Instruments
The fair value of derivative instruments is recorded in other current assets, other assets, other current liabilities or other liabilities.
Derivative instruments are classified on the Consolidated Balance Sheet based on the contractual maturity of the instrument or the timing of the underlying cash flows of the instrument for derivatives with contractual maturities beyond one year. Any collateral associated with derivative instruments is classified as other assets or other current liabilities on the Consolidated Balance Sheet depending on whether the counterparty collateral is in an asset or liability position. Margin deposits related to exchange-traded commodities are recorded in accounts receivable, net on the Consolidated Balance Sheet. On the Consolidated Statement of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item. Cash flows associated with collateral and margin deposits on exchange-traded commodities are classified as investing cash flows when the collateral account is in an asset position and as financing cash flows when the collateral account is in a liability position.
Gains and losses representing either hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or hedges of translational exposure are recorded in the Consolidated Statement of Income in other income (expense), net (OIE) or interest expense. In the Consolidated Statement of Cash Flows, settlements of cash flow and fair value hedges are classified as an operating activity; settlements of all other derivative instruments, including instruments for which hedge accounting has been discontinued, are classified consistent with the nature of the instrument.
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 (loss) (AOCI) to the Consolidated Statement of Income on the same line item as the underlying hedged transaction.
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.
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 AOCI.
Derivatives not designated for hedge accounting. Gains and losses on these instruments are recorded in the Consolidated Statement of Income, on the same line item as the underlying hedged item.
Foreign currency exchange risk. The Company is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases, intercompany transactions and when applicable, 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 denominated earnings to U.S. dollars. Management assesses 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 long or short currency positions.
Forward contracts and options are generally less than 18 months duration.
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 OIE.
Interest rate risk. The 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. 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.
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.
Pension benefits, nonpension 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.
The recognition of benefit expense is based on actuarial assumptions, such as discount rate, long-term rate of compensation increase, and long-term rate of return on plan assets and health care cost trend rate. Service cost is reported in COGS and SGA expense on the Consolidated Statement of Income. All other components of net periodic pension cost are included in OIE.
Postemployment benefits. The Company recognizes an obligation for postemployment benefit plans that vest or accumulate with service. Obligations associated with the Company’s postemployment benefit plans, which are unfunded, are included in other current liabilities and other liabilities on the Consolidated Balance Sheet. All gains and losses are recognized over the average remaining service period of active plan participants.
Postemployment benefits that do not vest or accumulate with service or benefits to employees in excess of those specified in the respective plans are expensed as incurred.
Pension and nonpension postretirement benefits. The Company recognizes actuarial gains and losses in operating results in the year in which they occur. Experience gains and losses are recognized annually as of the measurement date, which is the Company’s fiscal year-end, or when remeasurement is otherwise required under generally accepted accounting principles. The Company uses the fair value of plan assets to calculate the expected return on plan assets.
Reportable segments are allocated service cost. All other components of pension and postretirement benefit expense, including interest cost, expected return on assets, prior service cost, and experience gains and losses are considered unallocated corporate costs and are not included in the measure of reportable segment operating results. See Note 1718 for more information on reportable segments. Management reviews the Company’s expected long-term rates of return annually; however, 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 fall between the 25th and 75th percentile of expected long-term returns, as determined by the Company’s modeling process.
For defined benefit pension and postretirement plans, the Company records the net overfunded or underfunded position as a pension asset or pension liability on the Consolidated Balance Sheet.
New accounting standardsLeases
The Company leases certain warehouses, equipment, vehicles, and office space primarily through operating lease agreements. Finance lease obligations and activity are not material to the Consolidated Financial Statements. Lease obligations are primarily for real estate assets, with the remainder related to manufacturing and distribution related equipment, vehicles, information technology equipment, and rail cars. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) permitting a company to reclassify the disproportionate income tax effectsA portion of the Tax CutsCompany's real estate leases include future variable rental payments that include inflationary adjustment factors. The future variability of these adjustments is unknown and Jobs Act of 2017 on items within accumulated other comprehensive income (AOCI) to retained earnings. We elected to adopt the ASU effectivetherefore not included in the first quarter of 2019 and reclassified the disproportionate income tax effect recorded within AOCI to retained earnings. This resulted in a decrease to AOCI and an increase to retained earnings of $22 million. The adjustment primarily related to deferred taxes previously recorded for pension and other postretirement benefits, as well as hedging positions for debt and net investment hedges.
Leases. In February 2016, the FASB issued an ASU which requires the recognition of lease assets and lease liabilities by lessees for all leases with terms greater than 12 months. The distinction between finance leases and operating leases remains, with similar classification criteria as current GAAP to distinguish between capital and operating leases. The principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases are recognized on the Consolidated Balance Sheet. Lessor accounting remains substantially similar to previous GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.
The Company adopted the ASU in the first quarter of 2019, using the optional transition method that allows for a cumulative-effect adjustment in the period of adoption with no restatement of prior periods. The Company elected the package of practical expedients permitted under the transition guidance that allows for the carry forward of historical lease classifications and consistent treatment of initial direct costs for existing leases. The Company also elected to apply the practical expedient that allows the continued historical treatment of land easements. The Company did not elect the practical expedient for the use of hindsight in evaluating the expected lease term of existing leases.
The adoption of the ASU resulted in the recording of operating lease assets and operating lease liabilities of approximately $453 million to $461 million respectively, as of December 30, 2018. The difference between the additional lease assets and lease liabilities, represents existing deferred rent and prepaid lease balances that were reclassified on the balance sheet. The adoption of the ASU did not have a material impact to the Company’s Consolidated Statements of Income or Cash Flows.
Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement that is a Service Contract.minimum lease payments. The ASU allows companiesCompany's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The leases have remaining terms which range from less than 1 year to capitalize implementation costs incurred in a hosting arrangement that is a service contract over17 years and the termmajority of leases provide the Company with the option to exercise one or more renewal terms. The length of the hosting arrangement, including periods covered by renewallease term used in recording lease assets and lease liabilities is based on the contractually required lease term adjusted for any options to renew or early terminate the lease that are reasonably certain of being executed.
The Company combines lease and non-lease components together in determining the minimum lease payments for the majority of leases. The Company has elected to not combine lease and non-lease components for assets controlled indirectly through third party service-related agreements that include significant production related costs. The Company has closely analyzed these agreements to ensure any embedded costs related to the securing of the leased asset is properly segregated and accounted for in measuring the lease assets and liabilities.
The majority of the leases do not include a stated interest rate, and therefore the Company's periodic incremental borrowing rate is used to determine the present value of lease payments. This rate is calculated based on a collateralized rate for the specific currencies used in leasing activities and the borrowing ability of the applicable Company legal entity.
Accounting standards to be exercised.adopted in future periods
Income Taxes: Improvements to Income Tax Disclosures: In December 2023, the FASB issued ASU 2023-09 to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. It will take effect for public entities fiscal years beginning after December 15, 2024, with early adoption permitted.The Company is currently assessing the impact of any incremental disclosures required by this ASU and the planned timing of adoption.
Segment Reporting: Improvements to Reportable Segment Disclosures. In November 2023, the FASB issued ASU 2023-07, which focuses on enhancing reportable segment disclosures under Segment Reporting (Topic 280). This new standard is designed to enhance the transparency of significant segment expenses on an interim and annual basis. It will take effect for public entities fiscal years beginning after December 15, 2023, with the option for earlier adoption at any time before the specified date, with retrospective requirements. The Company is currently assessing the impact of any incremental disclosures required by this ASU and the planned timing of adoption.
Accounting standards adopted during the period
Supplier Finance Programs: Disclosure of Supplier Finance Program Obligations.In September 2022, the FASB issued an ASU to improve the disclosures of supplier finance programs. Specifically, the ASU requires disclosure of key terms of the supplier finance programs and a rollforward of the related obligations. The amendments in this ASU do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and can be applied retrospectively or prospectively.2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company has historically presented information regarding the nature and amount of outstanding Accounts Payable obligations confirmed into supplier finance programs within the Accounting Policies note of the financial statements. The Company adopted the ASU in the first quarter of 20202023 and electedplans to apply it prospectively. The adoption did not have a material impact toinclude the Company's Consolidated Financial Statements.
Compensation Retirement Benefits. In August 2018,rollforward information in the FASB issued ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removed disclosures that no longer are considered cost beneficial, clarified the specific requirementsfirst quarter of disclosures, and added disclosure requirements identified as relevant. The ASU is effective for fiscal years ending after December 15, 2020 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company adopted the ASU in 2020. The adoption did not have a material impact to the Company's Consolidated Financial Statements.2024.
NOTE 2
DISCONTINUED OPERATIONS
As disclosed in Note 1, on October 2, 2023, the Company completed the separation of its North America cereal business resulting in two independent companies, Kellanova and WK Kellogg Co. As a result of the distribution, Kellanova shareholders of record on September 21, 2023, received one share of WK Kellogg Co common stock for every four shares of Kellanova common stock.
In accordance with applicable accounting guidance, the results of WK Kellogg Co are presented as discontinued operations in the consolidated statements of operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Further, the Company reclassified the assets and
liabilities of WK Kellogg Co as assets and liabilities of discontinued operations in the consolidated balance sheet as of December 31, 2022. The consolidated statements of cash flows are presented on a consolidated basis for both continuing operations and discontinued operations.
The following table presents key components of “Income from discontinued operations, net of income taxes” for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022:
| | | | | | | | | | | |
| (millions) | 2023 | 2022 | 2021 |
| Net sales | $ | 2,085 | | $ | 2,662 | | $ | 2,434 | |
| Cost of goods sold | $ | 1,387 | | $ | 1,858 | | $ | 1,692 | |
| Selling, general and administrative expense | $ | 479 | | $ | 381 | | $ | 373 | |
| Operating profit | $ | 219 | | $ | 423 | | $ | 369 | |
| Interest expense | $ | 26 | | $ | 17 | | $ | 18 | |
| Other income (expense), net | $ | 54 | | $ | (111) | | $ | 162 | |
| Income from discontinued operations before income taxes | $ | 247 | | $ | 295 | | $ | 513 | |
| Income taxes | $ | 71 | | $ | 64 | | $ | 121 | |
| Net income from discontinued operations, net of tax | $ | 176 | | $ | 231 | | $ | 392 | |
| | | |
The following table presents assets and liabilities that are classified as discontinued operations on the consolidated balance sheet as of December 31, 2022:
| | | | | |
| (millions) | |
| Cash and cash equivalents | $ | — | |
| Accounts receivable, net | $ | 204 | |
| Inventories | $ | 429 | |
| Other current assets | $ | 5 | |
| Total current assets of discontinued operations | $ | 638 | |
| Property, net | $ | 699 | |
| Operating lease right-of-use assets | $ | 7 | |
| Goodwill | $ | 305 | |
| Other intangibles | $ | 57 | |
| Other assets | $ | 210 | |
| Total assets of discontinued operations | $ | 1,916 | |
| |
| |
| |
| Accounts payable | $ | 405 | |
| Current operating lease liabilities | $ | 3 | |
| Accrued advertising and promotion | $ | 57 | |
| Accrued salaries and wages | $ | 52 | |
| Other current liabilities | $ | 31 | |
| Total current liabilities of discontinued operations | $ | 548 | |
| |
| Operating lease liabilities | $ | 4 | |
| Deferred income taxes | $ | 53 | |
| Pension liability | $ | 116 | |
| Other non-current liabilities | $ | 10 | |
| Total liabilities of discontinued operations | $ | 731 | |
The following table presents significant cash flow items from discontinued operations for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022:
| | | | | | | | | | | |
| (millions) | 2023 | 2022 | 2021 |
| Depreciation and amortization | $ | 52 | | $ | 74 | | $ | 72 | |
| Additions to properties | $ | 107 | | $ | 87 | | $ | 90 | |
| Postretirement benefit plan expense (benefit) | $ | (53) | | $ | 123 | | $ | (143) | |
On September 29, 2023, in connection with the planned separation, WK Kellogg Co entered into a Credit Agreement (the “Credit Agreement”) and borrowed $664 million under the term loan and revolving credit facility under the Credit Agreement. Approximately $663 million of these borrowings was paid by WK Kellogg Co to Kellanova in the form of a dividend. Pursuant to the conditions of the private letter ruling from the Internal Revenue Service, Kellanova used the proceeds from the dividend, along with cash on hand to repay outstanding commercial paper and the 2.65% Senior Notes due 2023, which had an outstanding principal balance of $550 million. In a pro rata spin-off of consolidated subsidiaries, the distribution of the assets and liabilities are recognized through equity instead of net income. Accordingly, Kellanova has recognized the distribution of net assets to WK Kellogg Co in retained earnings. Following the completion of the separation on October 2, 2023, the term loan and revolving credit facility under the Credit Agreement are no longer obligations of Kellanova.
In connection with the separation, WK Kellogg Co entered into several agreements with Kellanova that govern the relationship of the parties following the spin-off including a Separation and Distribution Agreement, a Manufacturing and Supply Agreement (“Supply Agreement”), a Tax Matters Agreement, Employee Matters Agreement, Transition Services Agreement (“TSA”), and various lease agreements.
Pursuant to the TSA, both Kellanova and WK Kellogg Co agree to provide certain services to each other, on an interim, transitional basis from and after the separation and the distribution for an initial duration of two years following the spin-off. The TSA covers various services such as supply chain, IT, commercial, sales, Finance, HR, R&D and other Corporate. The remuneration to be paid for such services is generally intended to allow the company providing the services to recover all of its costs and expenses of providing such services. The costs and reimbursements related to services provided by Kellanova under the TSA are recorded in continuing operations with the consolidated statement of operations. During 2023 Kellanova recorded approximately $52 million of cost reimbursements related to the TSA, of which $37 million is recognized in COGS and $15 million in SGA in the Consolidated Statement of Income. These reimbursements are a direct offset within the consolidated statement of income to the costs incurred related to providing services under the TSA.
Pursuant to the Supply Agreement, Kellanova will continue to supply certain inventory to WKKC for a period of up to three years following the spin-off. Net sales of $18 million and cost of sales of $16 million were recognized in 2023 following the spin-off related to the Supply Agreement. Prior to the spin-off, such transactions were eliminated in the consolidated financial statements as intercompany transactions.
NOTE 3
SALE OF ACCOUNTS RECEIVABLE
The Company has a program in which a discrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).
The Company has two Receivable Sales Agreements (Monetization Programs) described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. The Monetization Programs are designed to effectively offset the impact on working capital of the Extended Terms Program. The Monetization Programs sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however, the maximum receivables that may be sold at any time is $1,033approximately $975 million. During 2023 the Company amended the agreements to increase the previous maximum receivables sold limit from approximately $920 million as of December 31, 2022.
The Company has no retained interest in the receivables sold, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of January 2, 2021December 30, 2023 and December 28, 201931, 2022 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.statements.
Accounts receivable sold of $783$697 million and $774$609 million remained outstanding under these arrangements as of January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on
sale of receivables was $14$41 million, $25$16 million and $26$6 million for the years ended December 30, 2023, December 31, 2022 and January 2, 2021, December 28, 2019, and December 29, 2018,1, 2022, respectively. The recorded loss is included in Other income (expense), net.OIE.
Other programs
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable balances of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. Accounts receivable sold of $55$8 million and $89$31 million remained outstanding under these programs as of January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows. The recorded net loss on the sale of these receivables is included in Other income (expense), netOIE and is not material.
NOTE 4
DIVESTITURE
Russia
In July 2023 the Company completed the sale of its Russian business. As a result of completing the transaction, the Company derecognized net assets of approximately $65 million and recorded a non-cash loss on the transaction of approximately $113 million in OIE, primarily related to the release of historical currency translation adjustments. The business was part of the Europe reportable segment and the sale resulted in a complete exit from the Russian market. The business in Russia represented approximately 1% of consolidated Kellanova net sales.
NOTE 35
DIVESTITURES, WEST AFRICA INVESTMENTS AND ACQUISITIONSIN UNCONSOLIDATED ENTITIES
DivestitureThe Company holds a 50% ownership interest in Tolaram Africa Foods, PTE LTD (TAF), a holding company with a 49% interest in Dufil Prima Foods, Plc, a food manufacturer in West Africa. The investment in TAF is accounted for under the equity method of accounting and comprises substantially all of the investment in unconsolidated entities balance on the Consolidated Balance Sheet. The Company records the activity of TAF on a one-month lag due to the timing required to obtain the financial statements from TAF management. TAF, and other entities affiliated with TAF, are suppliers to Multipro, a consolidated subsidiary in West Africa.The related trade payables are generally settled on a monthly basis.These suppliers' net sales, totaling $796 million and $900 million for the years ended December 30, 2023 and December 31, 2022, respectively, consist primarily of inventory purchases by Multipro.
On July 28, 2019,
During the second quarter of 2023, the Company completedrecorded an out-of-period adjustment to correct an error in the foreign currency translation of its sale of selected cookies, fruitinvestment in TAF. The adjustment decreased investments in unconsolidated entities and fruit-flavored snacks, pie crusts,increased other comprehensive loss by $113 million, respectively. We determined the adjustment to be immaterial to our Consolidated Financial Statements for the year to date period ended December 30, 2023 and ice cream cones businessesrelated prior annual and quarterly periods.
During 2023, the Company recorded significant foreign currency translation adjustments due to Ferrero International S.A. (“Ferrero”) for approximately $1.3 billion in cash, subject to a working capital adjustment mechanism. Both the total assets and net assetsdevaluation of the businesses wereNigerian Naira. The Company, following its accounting practice of recording the operations of its subsidiary, TAF, on a one-month lag basis has recognized these additional adjustments based on the foreign currency exchange rates as of the end of November 2023. The aggregate effect of these adjustments for the year resulted in translation losses of approximately $141 million, which have been recognized in other comprehensive income.
approximately $1.3 billion, resulting in a net pre-tax gain of $38 million during the year ended December 28, 2019, recorded in Other income (expense), after including related costs to sell of $14 million. Additionally, the Company recognized curtailment gains related to the divestiture totaling $17 million in our U.S. pension and nonpension postretirement plans. During 2020 the working capital adjustment was finalized, resulting in a reduction of the sale proceeds and recognition of a pre-tax expense in Other income (expense) of $4 million. The operating results for these businesses were primarily included in the North America reporting segment prior to the sale.
Proceeds from the divestiture were used primarily to redeem $1.0 billion of debt during the third quarter of 2019. Additionally, the Company paid approximately $255 million of cash taxes on the divestiture in the fourth quarter of 2019.
In connection with the sale, the Company entered into a transition services agreement (TSA) with Ferrero, under which the Company will provide certain services to Ferrero to help facilitate an orderly transition of the businesses following the sale. In return for these services, Ferrero is required to pay certain agreed upon fees that are designed to reimburse the Company for certain costs incurred by the Company in providing such services, plus specified immaterial margins. The Company expects the TSA services to be complete in the first quarter of 2021.
Multipro acquisition
On May 2, 2018, the Company (i) acquired an incremental 1% ownership interest in Multipro, a leading distributor of a variety of food products in Nigeria and Ghana, and (ii) exercised its call option (Purchase Option) to acquire a 50% interest in Tolaram Africa Foods, PTE LTD (TAF), a holding company with a 49% equity interest in an affiliated food manufacturer, resulting in the Company having a 24.5% interest in the affiliated food manufacturer. The aggregate cash consideration paid was approximately $419 million and was funded through cash on hand and short-term borrowings, which was refinanced with long-term borrowings in May 2018. As part of the consideration for the acquisition, an escrow established in connection with the original Multipro investment in 2015, which represented a significant portion of the amount paid for the Company’s initial investment, was released by the Company. The amount paid to exercise the Purchase Option was subject to certain working capital and net debt adjustments based on the actual working capital and net debt existing on the exercise date compared to targeted amounts. These adjustments were finalized during 2018 and resulted in an increase in the purchase price of $1 million.
As a result of the Company’s incremental ownership interest in Multipro and concurrent changes to the shareholders' agreement, the Company now has a 51% controlling interest in and began consolidating Multipro. Accordingly, the acquisition was accounted for as a business combination and the assets and liabilities of Multipro were included in the December 29, 2018 Consolidated Balance Sheet and the results of its operations have been included in the Consolidated Statement of Income subsequent to the acquisition date. The aggregate of the consideration paid and the fair value of previously held equity interest totaled $626 million, or $617 million net of cash acquired. The Multipro investment was previously accounted for under the equity method of accounting and the Company recorded our share of equity income or loss from Multipro within Earnings (loss) from unconsolidated entities. In connection with the business combination, the Company recognized a one-time, non-cash gain on the disposition of our previously held equity interest in Multipro of $245 million, which is included within Earnings (loss) from unconsolidated entities.
For the post-acquisition period ended December 29, 2018, the acquisition added net sales of $536 million and net earnings of $8 million, including transaction fees and integration costs. The Company's consolidated unaudited pro forma historical net sales and net income, as if Multipro had been acquired at the beginning of 2017, exclusive of the non-cash $245 million gain on the disposition of the equity interest recognized in the second quarter of 2018, are estimated as follows:
| | | | | | | | |
| Year ended |
| (millions) | December 29, 2018 | December 30, 2017 |
| Net sales | $ | 13,829 | | $ | 13,511 | |
| Net Income attributable to Kellogg Company | $ | 1,336 | | $ | 1,255 | |
| | |
| | |
| | |
Investment in TAF
The investment in TAF, our interest in an affiliated food manufacturer, is accounted for under the equity method of accounting. During 2018, when the call option was exercised for TAF, the $458 million aggregate of the consideration paid upon exercise and the historical cost value of the Purchase Option was compared to the estimated fair value of the Company’s ownership percentage of TAF and the Company recognized a one-time, non-cash loss of $45 million within Earnings (loss) from unconsolidated entities, which represents an other than temporary excess of cost over fair value of the investment. The difference between the carrying amount of TAF and the underlying equity in net assets is primarily attributable to brand and customer list intangible assets, a portion of which is being amortized over future periods, and goodwill.
TAF and certain other unconsolidated entities of the Company are suppliers of Multipro. The related trade payables are generally settled on a monthly basis. TAF’s net sales, totaling $586 million and $581 million for the years ended January 2, 2021 and December 28, 2019 respectively, and $350 million for the seven months ended December 29, 2018, consist primarily of inventory purchases by Multipro.
NOTE 46
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill, intangible assets subject to amortization, consisting primarily of customer relationships, and indefinite-lived intangible assets, consisting of brands and distribution agreements, are presented in the following tables:
Carrying amount of goodwill
| | | | | | | | | | | | | | | | | |
| (millions) | North
America | Europe | Latin
America | AMEA | Consoli-
dated |
| December 29, 2018 | $ | 4,611 | | $ | 346 | | $ | 218 | | $ | 875 | | $ | 6,050 | |
| | | | | |
| Divestiture | (191) | | 0 | | 0 | | 0 | | (191) | |
| | | | | |
| Currency translation adjustment | 2 | | 1 | | (5) | | 4 | | 2 | |
| December 28, 2019 | $ | 4,422 | | $ | 347 | | $ | 213 | | $ | 879 | | $ | 5,861 | |
| | | | | |
| | | | | |
| | | | | |
| Currency translation adjustment | 1 | | 20 | | (33) | | (50) | | (62) | |
| January 2, 2021 | $ | 4,423 | | $ | 367 | | $ | 180 | | $ | 829 | | $ | 5,799 | |
| | | | | | | | | | | | | | | | | |
| (millions) | North
America | Europe | Latin
America | AMEA | Consolidated |
| January 1, 2022 | $ | 4,118 | | $ | 350 | | $ | 171 | | $ | 827 | | $ | 5,466 | |
| | | | | |
| | | | | |
| | | | | |
| Currency translation adjustment | (3) | | (22) | | 6 | | (66) | | (85) | |
| December 31, 2022 | $ | 4,115 | | $ | 328 | | $ | 177 | | $ | 761 | | $ | 5,381 | |
| | | | | |
| | | | | |
| | | | | |
| Currency translation adjustment | 1 | | 8 | | 14 | | (244) | | (222) | |
| December 30, 2023 | $ | 4,116 | | $ | 336 | | $ | 191 | | $ | 517 | | $ | 5,160 | |
Intangible assets subject to amortization
| | | | | | | | | | | | | | | | | |
| Gross carrying amount | | | | | |
| (millions) | North America | Europe | Latin
America | AMEA | Consoli-
dated |
| December 29, 2018 | $ | 74 | | $ | 43 | | $ | 63 | | $ | 428 | | $ | 608 | |
| Additions | 2 | | 0 | | 0 | | 0 | | 2 | |
| Divestiture | (12) | | 0 | | 0 | | 0 | | (12) | |
| Currency translation adjustment | 0 | | (2) | | (3) | | 1 | | (4) | |
| December 28, 2019 | $ | 64 | | $ | 41 | | $ | 60 | | $ | 429 | | $ | 594 | |
| Additions | 1 | | 0 | | 0 | | 0 | | 1 | |
| | | | | |
| Currency translation adjustment | 0 | | 1 | | (13) | | (39) | | (51) | |
| January 2, 2021 | $ | 65 | | $ | 42 | | $ | 47 | | $ | 390 | | $ | 544 | |
| | | | | |
| Accumulated Amortization | | | | | |
| December 29, 2018 | $ | 39 | | $ | 20 | | $ | 12 | | $ | 16 | | $ | 87 | |
| Amortization | 4 | | 2 | | 3 | | 18 | | 27 | |
| Divestiture | (12) | | 0 | | 0 | | 0 | | (12) | |
| Currency translation adjustment | 0 | | (1) | | 0 | | 0 | | (1) | |
| December 28, 2019 | $ | 31 | | $ | 21 | | $ | 15 | | $ | 34 | | $ | 101 | |
| Amortization (a) | 4 | | 3 | | 3 | | 17 | | 27 | |
| | | | | |
| Currency translation adjustment | 0 | | 0 | | (3) | | (4) | | (7) | |
| January 2, 2021 | $ | 35 | | $ | 24 | | $ | 15 | | $ | 47 | | $ | 121 | |
| | | | | |
| Intangible assets subject to amortization, net |
| December 29, 2018 | $ | 35 | | $ | 23 | | $ | 51 | | $ | 412 | | $ | 521 | |
| Additions | 2 | | 0 | | 0 | | 0 | | 2 | |
| Amortization | (4) | | (2) | | (3) | | (18) | | (27) | |
| | | | | |
| Currency translation adjustment | 0 | | (1) | | (3) | | 1 | | (3) | |
| December 28, 2019 | $ | 33 | | $ | 20 | | $ | 45 | | $ | 395 | | $ | 493 | |
| Additions | 1 | | 0 | | 0 | | 0 | | 1 | |
| Amortization | (4) | | (3) | | (3) | | (17) | | (27) | |
| | | | | |
| Currency translation adjustment | 0 | | 1 | | (10) | | (35) | | (44) | |
| January 2, 2021 | $ | 30 | | $ | 18 | | $ | 32 | | $ | 343 | | $ | 423 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| (millions) | Gross Amount | Accumulated Amortization | Net Amount | | Gross Amount | Accumulated Amortization | Net Amount |
| Intangibles subject to amortization (a) | $ | 334 | | $ | (154) | | $ | 180 | | | $ | 489 | | $ | (162) | | $ | 327 | |
| Intangibles not subject to amortization | $ | 1,750 | | $ | — | | $ | 1,750 | | | $ | 1,912 | | $ | — | | $ | 1,912 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(a) The currently estimated aggregate amortization expense for each of the next five succeeding fiscal periods is approximately $28$24 million per year through 2025.
Intangible assets not subject to amortization
| | | | | | | | | | | | | | | | | |
| (millions) | North America | Europe | Latin
America | AMEA | Consoli-
dated |
December 29, 2018
| $ | 1,985 | | $ | 401 | | $ | 73 | | $ | 381 | | $ | 2,840 | |
| Additions | 18 | | 0 | | 0 | | 0 | | 18 | |
| Divestiture | (765) | | 0 | | 0 | | 0 | | (765) | |
| Currency translation adjustment | 0 | | (9) | | (3) | | 2 | | (10) | |
December 28, 2019
| $ | 1,238 | | $ | 392 | | $ | 70 | | $ | 383 | | $ | 2,083 | |
| | | | | |
| Divestiture | 0 | | (3) | | 0 | | 0 | | (3) | |
| Currency translation adjustment | 0 | | 37 | | (15) | | (34) | | (12) | |
| January 2, 2021 | $ | 1,238 | | $ | 426 | | $ | 55 | | $ | 349 | | $ | 2,068 | |
2027.
Annual Impairment Testingimpairment testing
At January 2, 2021,December 30, 2023, goodwill and other intangible assets amounted to $8.3$7.0 billion, consisting primarily of goodwill and brands. Within this total, approximately $2.1$1.8 billion of non-goodwill intangible assets were classified as indefinite-lived, including $1.7$1.6 billion related to trademarks, comprised principally of Pringles and cracker-related trademarks. The majority of all goodwill and other intangible assets are recorded in our North America operating segment.
The Company's annual reporting unit. The Company currently believes the fair value ofunit goodwill and other intangible assets exceeds their carrying value and that those intangibles so classified will contribute indefinitely to cash flows. Through impairment testing, performed duringthrough the fourth quarter of 2020, no2023, consisted of quantitative testing due primarily to the passage of time since the last quantitative test. No heightened risk or qualitative indicators of goodwill impairment of individual intangible assets orany reporting units was identified.
Additionally,The Company's annual intangible asset impairment testing was also performed through the fourth quarter of 2023 consisting of qualitative or quantitative testing for all significant intangible assets. As a result of the annual impairment testing the Company has goodwillrecognized a non-cash impairment of $373$34 million at January 2, 2021 in selling, general and administrative expense related to a brand in the RX reporting unit.North America operating segment that primarily relates to snack category products. In performing the quantitative test of goodwill for RX,this brand, fair value was determined using a relief from royalty valuation method that includes estimates, and significant assumptions, of future cash flows to be generated from that asset based on a calculation which gave consideration to an income approach utilizingestimates of future sales, royalty rate and discount rate consistent with rates used by market participants. After the discounted cash flow method and the market approach using the guideline public company and guideline transaction methods. The significant assumptions utilized within the RX discounted cash flow method are forecasted net sales and profitability growth and the discount rate. The Company determined the fair value of RX exceedsimpairment, the carrying value and noof this brand was $150 million at December 30, 2023. No other heightened risk or qualitative indicators of impairment exists for the reporting unit.
In the fourth quarter of 2020 management finalized a decision to reorganize part of its North America operating segment, including the RX reporting unit, effective at the beginning of fiscal 2021. The reorganization further integrates the RX business with the rest of the North American business and changes internal reporting provided to the segment manager. As a result of these changes, the Company has re-evaluated its North American reporting units and determined that effective at the beginning of fiscal 2021, the RX reporting unit will be combined with the North America reporting unit. The Company evaluated the related impacted reporting units for impairment on a before and after basis and concluded that the fair values of each reporting unit exceeded their carrying values.any other intangible assets was identified.
NOTE 5
RESTRUCTURING PROGRAMS
The Company views its restructuring and cost reduction activities as part of its 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 3 to 5-year period of completion. 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.
During 2019, the Company announced a reorganization plan for its European reportable segment designed to simplify the organization, increase organizational efficiency, and enhance key processes. The Company recorded total net charges of $(1) million related to this initiative during 2020, with $7 million recorded in SG&A expense and $(8) million recorded in OIE. Since inception, the project resulted in cumulative pretax net charges of approximately $37 million, including certain non-cash credits. Total cash costs were approximately $50 million. The total charges include severance and other termination benefits and charges related to relocation, pension curtailment gains, third party legal and consulting fees, and contract termination costs. This project is substantially complete as of the end of fiscal year 2020. Total charges and cash costs were in line with expectations.
Also during 2019, the Company announced a reorganization plan which primarily impacted the North America reportable segment. The reorganization plan is designed to simplify the organization that supports the remaining North America reportable segment after the divestiture and related transition. The Company recorded total charges of $2 million related to this initiative during 2020. These charges were recorded in SG&A expense. Since inception, the project has resulted in cumulative pretax charges of approximately $23 million. Total charges include severance and other termination benefits and charges related to third party consulting fees. The project is substantially complete as of the end of fiscal year 2020. Total charges and cash costs were in line with expectations.
In addition to the projects discussed above, during 2020 the Company incurred restructuring costs in each of its reportable segments related to various reorganization and simplification initiatives and supply chain optimization projects. The Company recorded total charges of $28 million related to these initiatives, including $6 million in COGS and $22 million in SG&A expense. These costs primarily relate to severance and other termination benefits.
Project K
As of the end of 2019, the Company completed implementation of all Project K initiatives. Total project charges, after-tax cash costs and annual savings delivered by Project K were in line with expectations.
The total program resulted in pre-tax charges, of approximately $1.6 billion, with after-tax cash costs, including incremental capital expenditures, of approximately $1.2 billion. Total project charges consist of asset-related costs of approximately $500 million which consists primarily of asset impairments, accelerated depreciation and other exit-related costs; employee-related costs of approximately $400 million which includes severance, pension and other termination benefits; and other costs of approximately $700 million which consists primarily of charges related to the design and implementation of global business capabilities and a more efficient go-to-market model.
Total pre-tax charges related to Project K impacted reportable segments as follows: North America (approximately 65%), Europe (approximately 21%), Latin America (approximately 4%), AMEA (approximately 6%), and Corporate (approximately 4%).
The Company recognized charges of $1,574 million attributed to the Project K, with the charges comprised of $6 million recorded as a reduction of revenue, $928 million recorded in COGS, $807 million recorded in SGA and $(167) million recorded in OIE.
Total programs
The tables below provide the details for the charges incurred during 2020, 2019 and 2018 and program costs to date for all programs currently active as of January 2, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Program costs to date |
| (millions) | | 2020 | | 2019 | | 2018 | | January 2, 2021 |
| Employee related costs | | $ | 29 | | | $ | 49 | | | $ | 63 | | | $ | 79 | |
| Pension curtailment (gain) loss, net | | (8) | | | (5) | | | (30) | | | (13) | |
| Asset related costs | | 2 | | | 21 | | | 16 | | | 2 | |
| Asset impairment | | 0 | | | 0 | | | 14 | | | 0 | |
| Other costs | | 6 | | | 48 | | | 80 | | | 20 | |
| Total | | $ | 29 | | | $ | 113 | | | $ | 143 | | | $ | 88 | |
| | | | | | | | |
| | | | | | | | Program costs to date |
| (millions) | | 2020 | | 2019 | | 2018 | | January 2, 2021 |
| North America | | $ | 8 | | | $ | 50 | | | $ | 107 | | | $ | 29 | |
| Europe | | 3 | | | 47 | | | 3 | | | 41 | |
| Latin America | | 5 | | | 15 | | | 15 | | | 5 | |
| AMEA | | 12 | | | 3 | | | 11 | | | 12 | |
| Corporate | | 1 | | | (2) | | | 7 | | | 1 | |
| Total | | $ | 29 | | | $ | 113 | | | $ | 143 | | | $ | 88 | |
During 2020, the Company recorded total charges of $29 million across all restructuring programs. The charges were comprised of $6 million recorded in COGS, $31 million recorded in SG&A expense and $(8) million recorded in OIE.
The Company recorded $113 million of charges in 2019 associated with all restructuring programs. The charges were comprised of $35 million expense being recorded in COGS, a $83 million expense recorded in SG&A, and $(5) million recorded in OIE.
The Company recorded $143 million of costs in 2018 associated with all restructuring programs. The charges were comprised of $99 million being recorded in COGS, $74 million recorded SG&A and $(30) million recorded in OIE.
Employee related costs consisted of severance and pension charges. Pension curtailment (gain) loss consists of curtailment gains or losses that resulted from project initiatives. Asset impairments were recorded for fixed assets that were determined to be impaired and were written down to their estimated fair value. See Note 14 for more information. Asset related costs consist primarily of accelerated depreciation. Other costs incurred consist primarily of lease termination costs as well as third-party incremental costs related to the development and implementation of global business capabilities and a more efficient go-to-market model.
At January 2, 2021 total project reserves were $28 million, related to severance payments and other costs of which a substantial portion will be paid in 2021. The following table provides details for exit cost reserves.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | | Employee
Related
Costs | | Curtailment Gain Loss, net | | Asset
Impairment | | Asset Related
Costs | | Other
Costs | | Total |
| Liability as of December 29, 2018 | | $ | 62 | | | $ | 0 | | | $ | 0 | | | $ | 1 | | | $ | 10 | | | $ | 73 | |
| 2019 restructuring charges | | 49 | | | (5) | | | 0 | | | 21 | | | 48 | | | 113 | |
| Cash payments | | (74) | | | 0 | | | 0 | | | (10) | | | (57) | | | (141) | |
| Non-cash charges and other | | 0 | | | 5 | | | 0 | | | (12) | | | 0 | | | (7) | |
| Liability as of December 28, 2019 | | $ | 37 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1 | | | $ | 38 | |
| 2020 restructuring charges | | 29 | | | (8) | | | 0 | | | 2 | | | 6 | | | 29 | |
| Cash payments | | (38) | | | 0 | | | 0 | | | 0 | | | (7) | | | (45) | |
| Non-cash charges and other | | 0 | | | 8 | | | 0 | | | (2) | | | 0 | | | 6 | |
| Liability as of January 2, 2021 | | $ | 28 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 28 | |
NOTE 67
EQUITY
Earnings per share
Basic earnings per share is determined by dividing net income attributable to Kellogg CompanyKellanova by the weighted average number of common shares outstanding during the period. Diluted 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 consist principally of employee stock options issued by the Company, restricted stock units, and to a lesser extent, certain contingently issuable performance shares. The total number of anti-dilutive potential common shares excluded from the reconciliation for each period was (shares in millions): 2020-7.3; 2019-14.0; 2018-6.5.2023-3.9; 2022-2.9; 2021-10.6.
Stock transactions
The Company issues shares to employees and directors under various equity-based compensation and stock purchase programs, as further discussed in Note 9. The number of shares issued and outstanding during the periods presented was (shares in millions): 2020–9; 2019–15; 2018–8.10.
In February 2020, the boardBoard of directorsDirectors approved a new authorization to repurchase up to $1.5 billion of the Company's common stock through December 2022. In December 2022, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock through December 2025.
During 2020,2023, the Company didn't repurchase anyrepurchased 3 million shares of common stock.stock for a total of $170 million. During 2019,2022, the Company repurchased 5 million shares of common stock for a total of $300 million. During 2021, the Company repurchased 4 million shares of common stock for a total of $220$240 million. As of December 30, 2023, approximately $1.3 billion remains available under the December 2022 stock repurchase program.
Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income for all years presented consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges, andwhich are recorded in interest expense within the statement of income, upon reclassification from Accumulated Other Comprehensive Income (AOCI), adjustments for net experience gains (losses) and, prior service credit (cost)(costs) related to employee benefit plans. Duringplans and adjustments for unrealized (gains) losses on available-for-sale securities, which are recorded in other income (expense) within the year ended December 28, 2019,statement of income, upon reclassification from AOCI. The related tax effects of these items are recorded in income tax expense within the Company modified assumptions for a U.S. postemployment benefit plan. As a result, a net experience gain (loss) was recognized instatement of income, upon reclassification from AOCI.
Accumulated other comprehensive income (loss) as of December 30, 2023 and December 31, 2022 consisted of the following:
| | | | | | | | | | | | | | |
| (millions) | | December 30, 2023 | | December 31, 2022 |
| Foreign currency translation adjustments | | $ | (2,326) | | | $ | (2,111) | |
| Net investment hedges gain (loss) | | 186 | | | 282 | |
| Cash flow hedges — net deferred gain (loss) | | 143 | | | 150 | |
| Postretirement and postemployment benefits: | | | | |
| Net experience gain (loss) | | 1 | | | 2 | |
| Prior service credit (cost) | | (45) | | | (27) | |
| Available-for-sale securities unrealized net gain (loss) | | — | | | (4) | |
| Total accumulated other comprehensive income (loss) | | $ | (2,041) | | | $ | (1,708) | |
NOTE 8
LEASES AND OTHER COMMITMENTS
The Company recorded operating lease costs of $137 million, $132 million and $136 million for the years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively. Lease related costs associated with an offsetting reduction in the accumulated postemployment benefit obligation. See Note 10variable rent, short-term leases, and Note 11 for further details.sale-leaseback arrangements, as well as sublease income, are each immaterial.
Reclassifications from Accumulated Other Comprehensive Income (AOCI) for the year ended January 2, 2021, December 28, 2019, and December 29, 2018, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Details about AOCI
Components | | Amount
reclassified
from AOCI | | Line item impacted
within Income
Statement |
| (millions) | | 2020 | | 2019 | | 2018 | | |
| (Gains) and losses on cash flow hedges: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Interest rate contracts | | $ | 14 | | | $ | 4 | | | $ | 8 | | | Interest expense |
| | | | | | | | |
| | $ | 14 | | | $ | 4 | | | $ | 8 | | | Total before tax |
| | | (4) | | | (1) | | | (2) | | | Tax expense (benefit) |
| | | $ | 10 | | | $ | 3 | | | $ | 6 | | | Net of tax |
| Amortization of postretirement and postemployment benefits: | | | | | | | | |
| Net experience (gains) | | $ | (3) | | | $ | (5) | | | $ | (5) | | | OIE |
| Prior service (credit) cost | | (1) | | | (1) | | | 0 | | | OIE |
| | $ | (4) | | | $ | (6) | | | $ | (5) | | | Total before tax |
| | | 1 | | | 1 | | | 1 | | | Tax expense (benefit) |
| | | $ | (3) | | | $ | (5) | | | $ | (4) | | | Net of tax |
| (Gains) losses on available-for-sale securities | | | | | | | | |
| Corporate bonds | | $ | 0 | | | $ | (4) | | | $ | 0 | | | OIE |
| | $ | 0 | | | $ | (4) | | | $ | 0 | | | Total before tax |
| | 0 | | | 0 | | | 0 | | | Tax expense (benefit) |
| | $ | 0 | | | $ | (4) | | | $ | 0 | | | Net of tax |
| Total reclassifications | | $ | 7 | | | $ | (6) | | | $ | 2 | | | Net of tax |
Accumulated other comprehensive income (loss) as of January 2, 2021 and December 28, 2019 consisted of the following:
| | | | | | | | | | | | | | |
| (millions) | | January 2, 2021 | | December 28,
2019 |
| Foreign currency translation adjustments | | $ | (1,668) | | | $ | (1,399) | |
| Cash flow hedges — unrealized net gain (loss) | | (57) | | | (60) | |
| Postretirement and postemployment benefits: | | | | |
| Net experience gain (loss) | | 2 | | | 7 | |
| Prior service credit (cost) | | (12) | | | 4 | |
| Available-for-sale securities unrealized net gain (loss) | | 3 | | | 0 | |
| Total accumulated other comprehensive income (loss) | | $ | (1,732) | | | $ | (1,448) | |
| | | | | | | | | | | | | | | | | | | | |
| (millions) | | Year ended December 30, 2023 | | Year ended December 31, 2022 | | Year ended January 1, 2022 |
| Other information | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows from operating leases | | $ | 138 | | | $ | 121 | | | $ | 135 | |
| Right-of-use assets obtained in exchange for operating lease liabilities | | | | | | |
| New leases | | $ | 89 | | | $ | 84 | | | $ | 55 | |
| Modified leases | | $ | 74 | | | $ | 27 | | | $ | 53 | |
| | | | | | |
| Weighted-average remaining lease term - operating leases | | 7 years | | 7 years | | |
| Weighted-average discount rate - operating leases | | 3.6% | | 2.9% | | |
NOTE 7
LEASES AND OTHER COMMITMENTS
The Company leases certain warehouses, equipment, vehicles, and office space primarily through operating lease agreements. Finance lease obligations and activity are not material to the Consolidated Financial Statements. Lease obligations are primarily for real estate assets, with the remainder related to manufacturing and distribution related equipment, vehicles, information technology equipment, and rail cars. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
A portion of the Company's real estate leases include future variable rental payments that include inflationary adjustment factors. The future variability of these adjustments is unknown and therefore not included in the minimum lease payments. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The leases have remaining terms which range from less than 1 year to 20 years and the majority of leases provide the Company with the option to exercise one or more renewal terms. The length of the lease term used in recording lease assets and lease liabilities is based on the contractually required lease term adjusted for any options to renew or early terminate the lease that are reasonably certain of being executed.
The Company combines lease and non-lease components together in determining the minimum lease payments for the majority of leases. The Company has elected to not combine lease and non-lease components for assets controlled indirectly through third party service-related agreements that include significant production related costs. The Company has closely analyzed these agreements to ensure any embedded costs related to the securing of the leased asset is properly segregated and accounted for in measuring the lease assets and liabilities.
The majority of the leases do not include a stated interest rate, and therefore the Company's periodic incremental borrowing rate is used to determine the present value of lease payments. This rate is calculated based on a collateralized rate for the specific currencies used in leasing activities and the borrowing ability of the applicable Company legal entity. For the initial implementation of the lease standard, the incremental borrowing rate atAt December 29, 2018 was used to present value operating lease assets and liabilities.
The Company recorded operating lease costs of $135 million and $133 million for the years ended January 2, 2021 and December 28, 2019, respectively. Lease related costs associated with variable rent, short-term leases, and sale-leaseback arrangements, as well as sublease income, are each immaterial. Under the previous lease standard (Topic 840), rent expense on operating leases for the year ended December 29, 2018 was $133 million.
| | | | | | | | | | | | | | |
| (millions) | | Year ended January 2, 2021 | | Year ended December 28, 2019 |
| Other information | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 141 | | | $ | 134 | |
| Right-of-use assets obtained in exchange for operating lease liabilities | | | | |
| New leases | | $ | 144 | | | $ | 164 | |
| Modified leases | | $ | 84 | | | $ | 44 | |
| | | | |
| Weighted-average remaining lease term - operating leases | | 8 years | | 7 years |
| Weighted-average discount rate - operating leases | | 2.6% | | 2.9% |
At January 2, 2021,30, 2023 future maturities of operating leases were as follows:
| | (millions) | (millions) | | Operating
leases | |
| 2021 | | $ | 134 | | |
| 2022 | | 107 | | |
| 2023 | | 94 | | |
| (millions) | |
| (millions) | |
| 2024 | |
| 2024 | |
| 2024 | 2024 | | 81 | | |
| 2025 | 2025 | | 78 | | |
| 2026 and beyond | | 219 | | |
| 2025 | |
| 2025 | |
| 2026 | |
| 2026 | |
| 2026 | |
| 2027 | |
| 2027 | |
| 2027 | |
| 2028 | |
| 2028 | |
| 2028 | |
| 2029 and beyond | |
| 2029 and beyond | |
| 2029 and beyond | |
| Total minimum payments | |
| Total minimum payments | |
| Total minimum payments | Total minimum payments | | $ | 713 | | |
| Less interest | Less interest | | (76) | | |
| Less interest | |
| Less interest | |
| Present value of lease liabilities | |
| Present value of lease liabilities | |
| Present value of lease liabilities | Present value of lease liabilities | | $ | 637 | | |
|
Operating lease payments presented in the table above exclude $24$40 million of minimum lease payments for real-estate leases signed but not yet commenced as of January 2, 2021.December 30, 2023. The leases are expected to commence in 2021.2024.
At January 2, 2021,December 30, 2023, future minimum annual lease commitments under non-cancelable finance leases were immaterial.
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 2, 2021,December 30, 2023, the Company had not recorded any liability related to these indemnifications.
NOTE 89
DEBT
The following table presents the components of notes payable at year end January 2, 2021December 30, 2023 and December 28, 2019:31, 2022:
| | (millions) | (millions) | | 2020 | | 2019 | (millions) | | 2023 | | 2022 |
| | | Principal
amount | | Effective
interest rate | | Principal
amount | | Effective
interest rate | | | Principal
amount | | Effective
interest rate | | Principal
amount | | Effective
interest rate |
| U.S. commercial paper | U.S. commercial paper | | $ | 25 | | | 0.20 | % | | $ | 3 | | | 1.78 | % | U.S. commercial paper | | $ | — | | | — | | — | % | | $ | 330 | | | 4.46 | | 4.46 | % |
| | Bank borrowings | Bank borrowings | | 77 | | | 104 | | |
| Bank borrowings | |
| Bank borrowings | |
| Total | Total | | $ | 102 | | | | | $ | 107 | | | |
| Total | |
| Total | |
The following table presents the components of subordinated long-term debt at year end January 2, 2021December 30, 2023 and December 28, 2019:31, 2022:
| | | | | | | | | | | | | | |
| (millions) | | 2020 | | 2019 |
| (a) 4.50% U.S. Dollar Notes due 2046 | | $ | 638 | | | $ | 638 | |
| (b) 7.45% U.S. Dollar Debentures due 2031 | | 621 | | | 621 | |
| (c) 2.10% U.S. Dollar Notes due 2030 | | 496 | | | 0 | |
| (d) 4.30% U.S. Dollar Notes due 2028 | | 596 | | | 595 | |
| (e) 3.40% U.S. Dollar Notes due 2027 | | 596 | | | 596 | |
| (f) 3.25% U.S. Dollar Notes due 2026 | | 742 | | | 741 | |
| (g) 1.25% Euro Notes due 2025 | | 748 | | | 689 | |
| (h) 1.00% Euro Notes due 2024 | | 756 | | | 692 | |
| (i) 2.65% U.S. Dollar Notes due 2023 | | 542 | | | 539 | |
| (j) 2.75% U.S. Dollar Notes due 2023 | | 204 | | | 201 | |
| (k) 3.125% U.S. Dollar Notes due 2022 | | 0 | | | 353 | |
| (l) 0.80% Euro Notes due 2022 | | 731 | | | 669 | |
| (m) 1.75% Euro Notes due 2021 | | 610 | | | 558 | |
| (n) 3.25% U.S. Dollar Notes due 2021 | | 0 | | | 198 | |
| (o) 4.0% U.S. Dollar Notes due 2020 | | 0 | | | 601 | |
| | | | |
| | | | |
| Other | | 93 | | | 124 | |
| | 7,373 | | | 7,815 | |
| Less current maturities | | (627) | | | (620) | |
| Balance at year end | | $ | 6,746 | | | $ | 7,195 | |
| | | | | | | | | | | | | | |
| (millions) | | 2023 | | 2022 |
| 4.50% $650 million U.S. Dollar Notes due 2046 | | $ | 639 | | | $ | 639 | |
| 5.25% $400 million U.S. Dollar Notes due 2033 | | 397 | | | — | |
| 7.45% $625 million U.S. Dollar Debentures due 2031 | | 622 | | | 622 | |
| 2.10% $500 million U.S. Dollar Notes due 2030 | | 497 | | | 497 | |
| 0.50% €300 million Euro Notes due 2029 | | 329 | | | 317 | |
| 4.30% $600 million U.S. Dollar Notes due 2028 | | 552 | | | 539 | |
| 3.40% $600 million U.S. Dollar Notes due 2027 | | 598 | | | 597 | |
| 3.25% $750 million U.S. Dollar Notes due 2026 | | 747 | | | 745 | |
| 1.25% €600 million Euro Notes due 2025 | | 667 | | | 648 | |
| 1.00% €600 million Euro Notes due 2024 | | 655 | | | 617 | |
| 2.65% $600 million U.S. Dollar Notes due 2023 | | — | | | 547 | |
| 2.75% $400 million U.S. Dollar Notes due 2023 | | — | | | 210 | |
| | | | |
| | | | |
| | | | |
| Other | | 49 | | | 119 | |
| | 5,752 | | | 6,097 | |
| Less current maturities | | (663) | | | (780) | |
| Balance at year end | | $ | 5,089 | | | $ | 5,317 | |
(a)
In March 2016,
During the Companyfirst quarter of 2023, Kellanova issued $650$400 million of thirty-year 4.50% U.S. Dollarten-year 5.25% Notes using thedue 2033, resulting in net proceeds after discount and underwriting commissions of $396 million. The proceeds from these notes were used for general corporate purposes, which includedincluding the payment of offering related fees and expenses, repayment of the $210 million 2.75% Notes when they matured on March 1, 2023, and repayment of a portion of the Company's 7.45% U.S. Dollar Debentures due 2031 and a portion of its commercial paper borrowings. 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, as well as a change of control provision.
In connection with the debt issuance, Kellanova terminated forward starting interest rate swaps with notional amounts totaling $400 million, resulting in a gain of $47 million in the first quarter of 2023. These derivatives were accounted for as cash flow hedges. The total net gain of $91 million, including those realized in prior periods, were recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the Notes. At the time of debt issuance, the effective interest rate on the Notes, reflecting issuance discount and hedge settlement was 4.60% at January 2, 2021.
(b)In March 2001, the Company issued long-term debt instruments, primarily to finance the acquisition of Keebler Foods Company, of which $625 million of thirty-year 7.45% Debentures remain outstanding. The effective interest rate on the Debentures, reflecting issuance discount and hedge settlement, was 7.56% at January 2, 2021. The Debentures contain standard events of default and covenants, and can 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)3.06%.
(c)In May of 2020, the Company issued $500 million of ten-year 2.10% Notes, using the net proceeds for general corporate purposes, which included repayment of a portion of the $600 million 4.00% Notes due 2020 at maturity. The effective interest rate on the Notes reflecting issuance discount and hedge settlement, was 3.05% at January 2, 2021.
(d)In May 2018, the Company issued $600 million of ten-year 4.30% Senior Notes, using the net proceeds for general corporate purposes, which included repayment of the Company's $400 million, seven-year 3.25% U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of the Company's commercial paper borrowings used to finance the acquisition of ownership interests in TAF and Multipro. The effective interest rate on the Notes, reflecting issuance discount and hedge settlement, was 4.34% at January 2, 2021.
(e)In November 2017, the Company issued $600 million of ten-year 3.40% U.S. Dollar Notes, using the net proceeds for general corporate purposes, which included repayment of a portion of the Company's commercial paper borrowings used to finance the acquisition of Chicago Bar Company LLC, the maker of RXBAR. The effective interest rate on the Notes, reflecting issuance discount and hedge settlement, was 3.49% at January 2, 2021.
(f)In March 2016, the Company issued $750 million of ten-year 3.25% U.S. Dollar Notes, using the net proceeds for general corporate purposes, which included repayment of a portion of the Company's 7.45% U.S. Dollar Debentures due 2031 and a portion of its commercial paper borrowings. The effective interest rate on these Notes, reflecting issuance discount, hedge settlement and interest rate swaps was 4.23% at January 2, 2021. In September 2016, the Company entered into interest rate swaps with notional amounts totaling $300 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. This interest rate swap was subsequently terminated and undesignated. In October 2018, the Company entered into interest rate swaps with notional amounts totaling $450 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated this interest rate swap. The resulting unamortized loss from swap activity of $5 million at January 2, 2021 will be amortized to interest expense over the remaining term of the Notes.
(g)In March 2015, the Company issued €600 million (approximately $733 million at January 2, 2021, which reflects the discount, fees and translation adjustments) of ten-year 1.25% Euro Notes, using the proceeds from these Notes for general corporate purposes, which included repayment of a portion of the Company’s commercial paper borrowings. The effective interest rate on the Notes, reflecting issuance discount, hedge settlement and interest rate swaps, was 1.62% at January 2, 2021. The Notes were designated as a net investment hedge of the Company’s investment in its Europe subsidiary when issued. In May 2017, the Company entered into interest rate swaps with notional amounts totaling €600 million, which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps, and the resulting unamortized gain of $17 million at January 2, 2021 will be amortized to interest expense over the remaining term of the Notes.
(h)In May 2016, the Company issued €600 million (approximately $733 million USD at January 2, 2021, which reflects the discount, fees and translation adjustments) of eight-year 1.00% Euro Notes. The proceeds from these Notes were used for general corporate purposes, including, together with cash on hand and additional commercial paper borrowings, repayment of the Company's $750 million, seven-year 4.45% U.S. Dollar Notes due 2016 at maturity. The Notes were designated as a net investment hedge of the Company’s investment in its Europe subsidiary when issued. The effective interest rate on these Notes, reflecting issuance discount, hedge settlement and interest
rate swaps was 0.17% at January 2, 2021. In November 2016,2022, the Company entered into interest rate swaps with notional amounts totaling €300 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges ofrepaid the debt obligation. In October 2018, the Company entered into interest rate swaps with notional amounts totaling €300 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. The Company subsequently terminated these swaps, and the resulting unamortized gain of $17 million at January 2, 2021 will be amortized to interest expense over the remaining term of the Notes. In May of 2019, the Company entered into interest rate swaps with notional amounts totaling €600 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The fair value adjustment for the interest rate swaps was $9 million at January 2, 2021, recorded as an increase in the hedged debt balance.
(i)In November 2016, the Company issued $600 million of seven-year 2.65% U.S. Dollar Notes, using the net proceeds for general corporate purposes, which included repayment of the Company's 1.875% U.S. Dollar Notes due 2016 at maturity and a portion of its commercial paper borrowings. The effective interest rate on these Notes, reflecting issuance discount, hedge settlement and interest rate swaps was 3.08% at January 2, 2021. In 2016, the Company entered into interest rate swaps with notional amounts totaling $300 million, which effectively converted a portion of these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps, and the resulting unamortized loss of $7 million at January 2, 2021 will be amortized to interest expense over the remaining term of the Notes. In 2019, the Company redeemed $50 million of the Notes. In connection with the debt redemption, the Company incurred $2 million of interest expense, consisting primarily of a premium on the tender offer.
(j)In February 2013, the Company issued $400 million ($189 million previously redeemed) of ten-year 2.75% U.S. Dollar Notes, using net proceeds from these Notes for general corporate purposes, including, together with cash on hand, to repay a portion of the Company’s $750 million 4.25% U.S. Dollar Notes that matured in March 2013. The effective interest rate on these Notes, reflecting issuance discount hedge settlement and interest rate swaps, was 4.17%. In September 2016, the Company entered into interest rate swaps with notional amounts totaling $211 million, which effectively converted these Notes from a fixed rate to a floating rate obligation. These derivative instruments were designated as fair value hedges of the debt obligation. The Company subsequently terminated the interest rate swaps, and the resulting unamortized loss of $6 million at January 2, 2021 will be amortized to interest expense over the remaining term of the Notes.
(k)In May 2012, the Company issued $700 million ($342 million previously redeemed) of ten-year 3.125% U.S. Dollar Notes, using the net proceeds from these Notes for general corporate purposes, including financing a portion of the acquisition of Pringles. During 2020, the Company redeemed the remaining $358 million of the Notes. In conjunction with the debt redemption, the Company incurred $17 million of interest expense, consisting primarily of a premium on the tender offer.
(l)In May 2017, the Company issued €600 million (approximately $733 million USD at January 2, 2021, which reflects the discount and translation adjustments) of five-year 0.80% Euro Notes using the proceeds from these Notes for general corporate purposes, including, repayment of the Company's $400 million, five-year 1.75% U.S. Dollar Notes due 2017 at2022, upon maturity. The effective interest rate on the Notes, reflecting issuance discount and hedge settlement, was 0.87%. The Notes were designated as a net investment hedge of the Company's investment in its Europe subsidiary when issued.
(m)In May 2014, the Company issued €500 million (approximately $611 million at January 2, 2021, which reflects the discount and translation adjustments) of seven-year 1.75% Euro Notes, using the proceeds from these Notes for general corporate purposes, which included repayment of a portion of the Company’s commercial paper borrowings. The effective interest rate on the Notes, reflecting issuance discount and hedge settlement, was 2.36% at January 2, 2021. The Notes were designated as a net investment hedge of the Company’s investment in its Europe subsidiary when issued.
(n)In May 2018, the Company issued $400 million of three-year 3.25% Senior Notes, using the net proceeds for general corporate purposes, which included repayment of the Company's $400 million, seven-year 3.25% U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of the Company's commercial paper borrowings used to finance the acquisition of ownership interests in TAF and Multipro. In 2019, the Company redeemed $202 million of the Notes. In connection with the dept redemption, the Company incurred $6 million of interest expense, consisting primarily of a premium on the tender offer. In 2020, the Company redeemed the remaining $198 million of the Notes. In conjunction with the debt redemption, the Company incurred $3 million of interest expense, consisting primarily of a premium on the tender offer.
(o)In December 2010, the Company issued $1.0 billion ($150 million previously redeemed) of ten-year 4.0% fixed rate U.S. Dollar Notes, using the net proceeds from these Notes for incremental pension and postretirement benefit plan contributions and to retire a portion of its commercial paper. In 2019, the Company redeemed $248 million of the Notes. In connection with the debt redemption, the Company incurred $6 million of interest expense, consisting primarily of a premium on the tender offer, which was partially offset by accelerated gains on pre-issuance interest rate hedges. The remaining balance was redeemed at maturity in December of 2020.
In December of 2020, the Company redeemed $198 million of its 3.25% U.S. Dollar Notes due May 2021, and $358 million of its 3.125% U.S. Dollar Notes due 2022. In connection with the debt redemption, the Company incurred $20 million of interest expense, primarily consisting of premium on the tender offer, acceleration of unamortized debt discount on the redeemed debt, fees related to the tender offer, and also included accelerated losses on pre-issuance interest rate hedges.
In the third quarter of 2019, the Company redeemed $500 million of its 4.15% U.S. Dollar Notes due 2019, $248 million of its 4.00% U.S. Dollar Notes due 2020, $202 million of its 3.25% U.S. Dollar Notes due 2021, and $50 million of its 2.65% U.S. Dollar Notes due 2023. In connection with the debt redemption, the Company incurred $16 million of interest expense, consisting primarily of a premium on the tender offer, acceleration of unamortized debt discount on the redeemed debt, fees related to the tender offer, and also included accelerated gains and losses on pre-issuance interest rate hedges.
All of the Company’s 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 and also contain
a change of control provision. There are no significant restrictions on the payment of dividends by the Company. The Company was in compliance with all these covenants as of January 2, 2021.December 30, 2023.
The Company and two of its subsidiaries (the Issuers) maintain 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. There were 0no commercial paper notes outstanding under this program as of January 2, 2021December 30, 2023 and December 28, 2019.31, 2022.
At January 2, 2021,December 30, 2023, the Company had $3.0$3.1 billion of short-term lines of credit and letters of credit, of which $2.9$3.0 billion were unused and available for borrowing primarily on an unsecured basis. These lines were comprised principally of the January 2018December 2021 unsecured $1.5 billion Five-Year Credit Agreement, which expires in 2023,December 2026, and an unsecured $1.0 billion 364-Day Credit Agreement.
The Five-Year Credit Agreement allows the Company to borrow, on a revolving credit basis, up to $1.5 billion, which includes the ability to obtain letters of credit in an aggregate stated amount up to $75 million and to obtain European swingline loans in an aggregate principal amount up to the equivalent of $300 million. In December 2021, the Company terminated the original Five-Year Credit Agreement, which was
originally set to expire in January of 2023, and entered into a new Five-Year Credit Agreement, which expires in December 2026.
In January 2021,December 2023, the Company entered into an unsecured 364-Day Credit Agreement to borrow, on a revolving credit basis, up to $1.0 billion at any time outstanding, which is expected to replace the $1.0 billion 364-day facility that expiredmature in January 2021.December 2024.
The Five-Year and 364 Day Credit Agreements which had no outstanding borrowings as January 2, 2021,December 30, 2023, contain customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agents may terminate the commitments under the credit facilities, accelerate any outstanding loans under the agreements, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest. The Company was in compliance with all financial covenants contained in these agreements at January 2, 2021December 30, 2023 and December 28, 2019.31, 2022.
Scheduled principal repayments on long-term debt are (in millions): 2021–$627; 2022–$755; 2023–$782; 2024–$750;671; 2025–$739; 2026670; 2026–$757; 2027–$607; 2028–$608; 2028 and beyond–$3,733.2,519.
Financial institutions have issued standby letters of credit conditionally guaranteeing obligations on behalf of the Company totaling $82$68 million, including $49$67 million secured and $33$1 million unsecured, as of January 2, 2021.December 30, 2023. These obligations are related primarily to insurance programs. There were no amounts drawn down on the letters of credit as of January 2, 2021.December 30, 2023.
The Company has issued guarantees for a certain portion of debt of unconsolidated affiliates. These arrangements include cross guarantees back from the other shareholder in proportion to their ownership of the unconsolidated affiliates. These guarantees are not material to the Company.
Interest expense capitalized as part of the construction cost of fixed assets was immaterial for all periods presented.
NOTE 910
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, restricted stock units and executive performance shares. 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 restricted stock to its outsideoutside directors. These awards are administered through several plans, as described within this Note.
The 20172022 Long-Term Incentive Plan (2017(2022 Plan), approved by shareholders in 2017,April 2022, permits awards 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. TheThrough February 2022, the 2017 Plan, which replaced the 2013 Long-Term Incentive Plan (2013 Plan),(2017) had a remaining 13.8 million authorized but unissued shares which was replaced by the 2022 Plan. The 2022 Plan authorizes the issuance of a total of (a) 1614.0 million shares; plus (b) the total number of shares remaining
available for future grants under the 2013 Plan. The total number of shares remaining available for issuance under the 2017 Plan will be reduced by 2 shares for each share issued pursuant to an award under the 2017 Plan other than a stock option or stock appreciation right, or potentially issuable pursuant to an outstanding award other than a stock option or stock appreciation right, which will in each case reduce the total number of shares remaining by 1 share for each share issued.shares. At January 2, 2021,December 30, 2023, there were 1612.4 million remaining authorized, but unissued, shares under the 20172022 Plan.
In April 2020, the Amended and Restated Kellogg Company 2002 Employee Stock Purchase Plan was approved by shareholders, effective July 1, 2020. The plan is a tax-qualified employee stock purchase plan made available to substantially all U.S. employees, which allows participants to acquire KelloggKellanova stock at a discounted price. The purpose of the plan is to encourage employees at all levels to purchase stock and become shareholders.
Compensation expense for all types of equity-based programs and the related income tax benefit recognized were as follows:
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 |
| Pre-tax compensation expense | Pre-tax compensation expense | | $ | 81 | | | $ | 61 | | | $ | 64 | |
| Pre-tax compensation expense | |
| Pre-tax compensation expense | |
| Related income tax benefit | Related income tax benefit | | $ | 21 | | | $ | 16 | | | $ | 16 | |
| Related income tax benefit | |
| Related income tax benefit | |
As of January 2, 2021,December 30, 2023, total stock-based compensation cost related to non-vested awards not yet recognized was $95$108 million and the weighted-average period over which this amount is expected to be recognized was 2 years.
Cash flows realized upon exercise or vesting of stock-based awards in the periods presented are included in the following table. Tax windfall (shortfall) realized upon exercise or vesting of stock-based awards generally represent the difference between the grant date fair value of an award and the taxable compensation of an award.
Cash used by the Company to settle equity instruments granted under stock-based awards was not material.
| | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2020 | | 2019 | | 2018 |
| Total cash received from option exercises and similar instruments | | $ | 112 | | | $ | 64 | | | $ | 167 | |
| Tax windfall (shortfall) classified as cash flow from operating activities | | $ | 2 | | | $ | (2) | | | $ | 11 | |
| | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2023 | | 2022 | | 2021 |
| Total cash received from option exercises and similar instruments (a) | | $ | 60 | | | $ | 277 | | | $ | 63 | |
| Tax windfall (shortfall) classified as cash flow from operating activities (a) | | $ | 3 | | | $ | 3 | | | $ | (3) | |
(a) Activities prior to the spin-off remain unadjusted to ensure consistency with historical reporting
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 67 for information on shares issued during the periods presented to employees and directors under various long-term incentive plans and share repurchases under the Company’s 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.
Performance Shares and Restricted Stock optionsUnits
During the periods presented, stock-based awards consisted principally of performance shares and restricted stock units granted under the 2022 and 2017 Plans.
In the first quarter of 2023, the Company granted performance share units to eligible employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting, as well as dividend equivalent shares. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year performance period. The performance conditions of the award include net sales growth and cash flow related targets. Dividend equivalents accrue and vest in accordance with the underlying award. The 2023 target performance share unit currently corresponds to approximately 765,000 shares, with a grant-date fair value of $60 per share.
In 2022, the Company granted performance shares to a limited number of senior level employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting, as well as dividend equivalent shares. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year performance period. The performance conditions of the award include net sales growth and cash flow related targets. Dividend equivalents accrue and vest in accordance with the underlying award. The 2022-2024 EPP performance goals were established at the beginning of 2022 and did not contemplate the spin-off of WK Kellogg Co. The terms of the EPP provided for equitably adjusting the goals based on extraordinary events like a spin-off. The Company completed the spin-off of WK Kellogg Co on October 2, 2023. Adjustments were made to performance goals primarily to equitably adjust for the impact of the spin-off and the performance period ending on the date of the spin-off as well as account for the divestiture of the Company's business in Russia. In October 2023 the Board of Directors approved a payout of 140% to vest based on the holder's continued service with the Company through the original vesting period.
In 2021, the Company granted performance shares to a limited number of senior level employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting, as well as dividend equivalent shares. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year performance period. The performance conditions of the award include net sales growth and cash flow related targets. Dividend equivalents accrue and vest in accordance with the underlying award. The 2021-2023 EPP performance goals were established at the beginning of 2021 and did not contemplate the spin-off of WK Kellogg Co. The terms of the EPP provided for equitably adjusting the goals based on extraordinary events like a spin-off. The Company completed the spin-off of WK Kellogg Co on October 2,
2023. Adjustments were made to performance goals primarily to equitably adjust for the impact of the spin-off and the performance period ending on the date of the spin-off as well as account for the divestiture of the Company's business in Russia. In October 2023 the Board of Directors approved a payout of 165% to vest based on the holder's continued service with the Company through the original vesting period.
Based on the market price of the Company’s common stock at year-end 2023, the maximum future value that could be awarded on the vesting date was $86 million for the 2023 award. The 2020 performance share award, payable in stock, was settled at 175% of target in February 2023 for a total dollar equivalent of $34 million.
The Company also grants restricted stock units to eligible employees, typically with three-year cliff vesting earning dividend equivalent units. Dividend equivalents accrue and vest in accordance with the underlying award. 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 unit activity for the year ended December 30, 2023, is presented in the following table:
| | | | | | | | | | | | | | |
| Employee restricted stock units | | Shares (thousands)
| | Weighted-average
grant-date fair value
|
| Non-vested, beginning of year (a) | | 1,661 | | | $ | 64 | |
| Granted | | 572 | | | 68 | |
| Vested | | (491) | | | 65 | |
| Forfeited | | (359) | | | 65 | |
| Performance share conversion | | 1,486 | | | 63 | |
| Awards transferred to WK Kellogg Co | | (529) | | | 65 | |
| Adjustment for spin-off (b) | | 843 | | | — | |
| Non-vested, end of year | | 3,183 | | | $ | 58 | |
(a) Activities prior to the spin-off remain unadjusted to ensure consistency with historical reporting.
(b) In connection with the spin-off of WK Kellogg Co, the modification of restricted stock units resulted in incremental expense totaling approximately $11 million to be amortized over the remaining vesting period of the award.
Additionally, restricted stock unit activity for 2022 and 2021 is presented in the following table:
| | | | | | | | | | | | | | |
| Employee restricted stock units (a) | | 2022 | | 2021 |
| Shares (in thousands): | | | | |
| Non-vested, beginning of year | | 1,786 | | | 1,736 | |
| Granted | | 709 | | | 727 | |
| Vested | | (619) | | | (489) | |
| Forfeited | | (215) | | | (188) | |
| Non-vested, end of year | | 1,661 | | | 1,786 | |
| Weighted-average exercise price: | | | | |
| Non-vested, beginning of year | | $ | 60 | | | $ | 61 | |
| Granted | | 67 | | | 58 | |
| Vested | | 57 | | | 63 | |
| Forfeited | | 62 | | | 60 | |
| Non-vested, end of year | | $ | 64 | | | $ | 60 | |
(a) Activities prior to the spin-off remain unadjusted to ensure consistency with historical reporting
The total fair value of restricted stock units vesting in the periods presented was (in millions): 2023–$33; 2022–$41; 2021–$29.
Stock options
During 2021, non-qualified stock options were granted to eligible employees under the 2017 and 2013 Plans with exercise prices equal to the fair market value of the Company’s stock on the grant date, a contractual term of ten years, and a three-year graded vesting period. Since 2021, the Company has not granted non-qualified stock options to eligible employees. The non-qualified stock option grant was replaced with performance shares for the population of Long-Term Incentive grantees.
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 Company’s stock, and to a lesser extent, on implied volatilities from traded options on the Company’s 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: | | 2020 | | 2019 | | 2018 |
| Weighted-average expected volatility | | 18.00 | % | | 18.00 | % | | 18.00 | % |
| Weighted-average expected term (years) | | 6.70 | | 6.60 | | 6.60 |
| Weighted-average risk-free interest rate | | 1.35 | % | | 2.59 | % | | 2.82 | % |
| Dividend yield | | 3.40 | % | | 3.90 | % | | 3.00 | % |
| Weighted-average fair value of options granted | | $ | 7.34 | | | $ | 6.78 | | | $ | 10.00 | |
| | | | | | | | | | | | | |
Stock option valuation model
assumptions for grants within the
year ended: | | 2021 | | | |
| Weighted-average expected volatility | | 20.00 | % | | | |
| Weighted-average expected term (years) | | 6.7 | | | |
| Weighted-average risk-free interest rate | | 0.96 | % | | | |
| Dividend yield | | 3.90 | % | | | |
| Weighted-average fair value of options granted | | $ | 6.39 | | | | |
A summary of option activity for the year ended January 2, 2021December 30, 2023 is presented in the following table:
| Employee and
director stock
options | Employee and
director stock
options | | Shares
(millions) | | Weighted-
average
exercise
price | | Weighted-
average
remaining
contractual
term (yrs.) | | Aggregate
intrinsic
value
(millions) | Employee and director
stock options | | Shares
(millions) | | Weighted-
average
exercise
price | | Weighted-
average
remaining
contractual
term (yrs.) | | Aggregate
intrinsic
value
(millions) |
| Outstanding, beginning of year | | 14 | | | $ | 65 | | |
| Outstanding, beginning of year (a) | |
| Granted | |
| Granted | |
| Granted | Granted | | 3 | | | 65 | | |
| Exercised | Exercised | | (2) | | | 59 | | |
| Exercised | |
| Exercised | |
| Forfeitures and expirations | Forfeitures and expirations | | (1) | | | 68 | | | | | |
| Forfeitures and expirations | |
| Forfeitures and expirations | |
| Awards transferred to WK Kellogg Co | |
| Awards transferred to WK Kellogg Co | |
| Awards transferred to WK Kellogg Co | |
| Adjustment for spin-off (b) | |
| Adjustment for spin-off (b) | |
| Adjustment for spin-off (b) | |
| Outstanding, end of year | |
| Outstanding, end of year | |
| Outstanding, end of year | Outstanding, end of year | | 14 | | | $ | 65 | | | 4.7 | | $ | 15 | |
| Exercisable, end of year | Exercisable, end of year | | 10 | | | $ | 66 | | | 5.9 | | $ | 22 | |
(a) Activities prior to the spin-off remain unadjusted to ensure consistency with historical reporting.
(b) In connection with the spin-off of WK Kellogg Co, the modification of stock options resulted in incremental expense totaling approximately $10 million, of which $9 million was related to vested awards and was recognized immediately. The remaining expense will be amortized over the vesting period of the award.
Additionally, option activity for the comparable prior year periods is presented in the following table:
| | (millions, except per share data) | | 2019 | | 2018 |
| (millions, except per share data) (a) | | (millions, except per share data) (a) | | 2022 | | 2021 |
| Outstanding, beginning of year | Outstanding, beginning of year | | 14 | | | 14 | |
| Granted | Granted | | 3 | | | 3 | |
| Exercised | Exercised | | (1) | | | (2) | |
| Forfeitures and expirations | Forfeitures and expirations | | (2) | | | (1) | |
| Outstanding, end of year | Outstanding, end of year | | 14 | | | 14 | |
| Exercisable, end of year | Exercisable, end of year | | 10 | | | 10 | |
| Weighted-average exercise price: | Weighted-average exercise price: | |
| Outstanding, beginning of year | Outstanding, beginning of year | | $ | 66 | | | $ | 64 | |
| Outstanding, beginning of year | |
| Outstanding, beginning of year | |
| Granted | Granted | | 57 | | | 70 | |
| Exercised | Exercised | | 56 | | | 58 | |
| Forfeitures and expirations | Forfeitures and expirations | | 67 | | | 71 | |
| Outstanding, end of year | Outstanding, end of year | | $ | 65 | | | $ | 66 | |
| Exercisable, end of year | Exercisable, end of year | | $ | 65 | | | $ | 63 | |
(a) Activities prior to the spin-off remain unadjusted to ensure consistency with historical reporting.
The total intrinsic value of options exercised during the periods presented was (in millions): 2020–2023–$17; 2019–5; 2022–$7; 2018–44; 2021–$33.
Other stock-based awards
During the periods presented, other stock-based awards consisted principally of executive performance shares and restricted stock granted under the 2017 and 2013 Plans.
In the first quarter of 2020, the Company granted performance shares to a limited number of senior level employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting, as well as dividend equivalent shares. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three year net sales growth and cash flow related targets. Dividend equivalents accrue and vest in accordance with the underlying award. The 2020 target grant currently corresponds to approximately 327,000 shares, with a grant-date fair value of $66 per share.
In 2019, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three-year net sales growth and total shareholder return (TSR) of the Company's common stock relative to a select group of peer companies. Dividend equivalents accrue and vest in accordance with the underlying award. The 2019 target grant currently corresponds to approximately 213,000 shares, with a grant-date fair value of $73 per share.
In 2018, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company's common stock upon vesting. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award includes nets sales growth and TSR of the Company's common stock relative to a select group of peer companies. The 2018 target grant currently corresponds to approximately 143,000 shares, with a grant-date fair value of $88 per share.
A Monte Carlo valuation model was used to determine the fair value of awards with a TSR performance metric. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of the performance metric. Compensation cost related to performance metric is revised for changes in the expected outcome.
Based on the market price of the Company’s common stock at year-end 2020, the maximum future value that could be awarded on the vesting date was (in millions): 2020 award–$41; 2019 award– $26; and 2018 award–$18. The 2017 performance share award, payable in stock, was settled at 90% of target in February 2020 for a total dollar equivalent of $6 million.
The Company also grants restricted stock units to eligible employees under the 2017 Plan, typically with three year cliff vesting earning dividend equivalent units for awards granted beginning in 2019. Dividend equivalents accrue and vest in accordance with the underlying award. 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 unit activity for the year ended January 2, 2021, is presented in the following table:
| | | | | | | | | | | | | | |
Employee restricted stock units
| | Shares (thousands)
| | Weighted-average grant-date fair value
|
| Non-vested, beginning of year | | 1,901 | | | $ | 61 | |
| Granted | | 596 | | | 65 | |
| Vested | | (504) | | | 65 | |
| Forfeited | | (257) | | | 58 | |
| Non-vested, end of year | | 1,736 | | | $ | 61 | |
Additionally, restricted stock unit activity for 2019 and 2018 is presented in the following table:
| | | | | | | | | | | | | | |
| Employee restricted stock units | | 2019 | | 2018 |
| Shares (in thousands): | | | | |
| Non-vested, beginning of year | | 1,708 | | | 1,673 | |
| Granted | | 888 | | | 772 | |
| Vested | | (469) | | | (507) | |
| Forfeited | | (226) | | | (230) | |
| Non-vested, end of year | | 1,901 | | | 1,708 | |
| Weighted-average exercise price: | | | | |
| Non-vested, beginning of year | | $ | 65 | | | $ | 65 | |
| Granted | | 55 | | | 63 | |
| Vested | | 68 | | | 59 | |
| Forfeited | | 62 | | | 64 | |
| Non-vested, end of year | | $ | 61 | | | $ | 65 | |
The total fair value of restricted stock units vesting in the periods presented was (in millions): 2020–$34; 2019–$27; 2018–$35.6.
NOTE 1011
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. See Note 1213 for more information regarding the Company’s participation in multiemployer plans. 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 a December 31 measurement date for these plans and, when necessary, adjusts for plan contributions and significant events between December 31 and its fiscal year-end.
In recent years, the Company has taken actions to reduce global pension benefit obligations and moderate the impact of market-related volatility. Those actions include the following:
–In December 2020, the Company purchased a group annuity contract to cover pension benefit obligations of certain participants of the United Kingdom defined benefit pension plan for $268 million. This transaction represents an annuity buy-in, under which the Company retains both the fair value of the annuity contract (within plan assets) and the pension benefit obligations related to these participants. The fair value of the annuity buy-in contract at year-end is based on the calculated pension benefit obligations covered.
–In October 2020, the Company settled pension benefit obligations associated with approximately 8,000 retired participants within our U.S. defined benefit pension plan to reduce pension benefit obligations and administrative expenses. A group annuity contract was purchased on behalf of these participants with a third-party insurance provider, resulting in a reduction of the Company's pension benefit obligations and plan assets of approximately $453 million.
–In June of 2020, the Company recognized a curtailment gain of $7 million, as certain U.S. pension plan benefits were frozen for a portion of the participant population.
–In September 2019, the Company provided a voluntary one-time lump-sum cash settlement offer to certain eligible terminated vested participants in our U.S. pension plans in order to reduce pension benefit obligations and administrative costs. In December 2019, approximately $174 million was distributed from pension plan assets in connection with this offer.
–In conjunction with the completion of the sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses on July 28, 2019, the Company recognized a curtailment gain in its U.S. pension plans of $11 million, as certain U.S. pension plans benefits were frozen for the portion of the participant population that was impacted by the divestiture.
–In September 2018, the Company recognized a curtailment gain of $30 million as certain European pension plans were frozen as of December 29, 2018 in conjunction with Project K restructuring.
–In December 2018, as a result of the September 2017 amendment of certain U.S. and Canada defined benefit pension plans, compensation and service periods used to calculate pension benefits for active salaried employees who participate in the affected pension plans were frozen.
Obligations and funded status
The aggregate change in projected benefit obligation, plan assets, and funded status is presented in the following tables.
| | (millions) | (millions) | | 2020 | | 2019 | (millions) | | 2023 | | 2022 |
| Change in projected benefit obligation | Change in projected benefit obligation | |
| Beginning of year | Beginning of year | | $ | 5,654 | | | $ | 5,117 | |
| Beginning of year | |
| Beginning of year | |
| Service cost | Service cost | | 37 | | | 36 | |
| Interest cost | Interest cost | | 130 | | | 172 | |
| Plan participants’ contributions | | 1 | | | 1 | |
| | Amendments | |
| | Amendments | |
| | Amendments | Amendments | | 22 | | | 3 | |
| Actuarial (gain)loss | Actuarial (gain)loss | | 499 | | | 766 | |
| Benefits paid | Benefits paid | | (292) | | | (458) | |
| Curtailment and special termination benefits | | (15) | | | (13) | |
| Settlements | | (453) | | | 0 | |
| | Other | |
| Other | |
| Other | |
| | Foreign currency adjustments | |
| Foreign currency adjustments | |
| Foreign currency adjustments | Foreign currency adjustments | | 92 | | | 30 | |
| End of year | End of year | | $ | 5,675 | | | $ | 5,654 | |
| Change in plan assets | Change in plan assets | |
| Fair value beginning of year | |
| Fair value beginning of year | |
| Fair value beginning of year | Fair value beginning of year | | $ | 5,170 | | | $ | 4,677 | |
| Actual return on plan assets | Actual return on plan assets | | 656 | | | 874 | |
| Employer contributions | Employer contributions | | 8 | | | 10 | |
| Plan participants’ contributions | Plan participants’ contributions | | 1 | | | 1 | |
| Benefits paid | Benefits paid | | (269) | | | (426) | |
| Settlements | | (453) | | | 0 | |
| | Other | |
| | Other | |
| | Other | Other | | (8) | | | 0 | |
| Foreign currency adjustments | Foreign currency adjustments | | 106 | | | 34 | |
| Fair value end of year | Fair value end of year | | $ | 5,211 | | | $ | 5,170 | |
| Funded status | Funded status | | $ | (464) | | | $ | (484) | |
| Amounts recognized in the Consolidated Balance Sheet consist of | Amounts recognized in the Consolidated Balance Sheet consist of | |
| Other assets | Other assets | | $ | 324 | | | $ | 241 | |
| Other assets | |
| Other assets | |
| Other current liabilities | Other current liabilities | | (19) | | | (20) | |
| Other liabilities | | (769) | | | (705) | |
| Pension liability | |
| Net amount recognized | Net amount recognized | | $ | (464) | | | $ | (484) | |
| Amounts recognized in accumulated other comprehensive income consist of | Amounts recognized in accumulated other comprehensive income consist of | |
| Prior service cost | Prior service cost | | $ | 51 | | | $ | 37 | |
| Prior service cost | |
| Prior service cost | |
| Net amount recognized | Net amount recognized | | $ | 51 | | | $ | 37 | |
The accumulated benefit obligation for all defined benefit pension plans was $5.6$3 billion at January 2, 2021December 30, 2023 and $2.8 billion at December 28, 2019. 31, 2022.
Information for pension plans with accumulated benefit obligations in excess of plan assets were:
| | (millions) | (millions) | | 2020 | | 2019 | (millions) | | 2023 | | 2022 |
| Projected benefit obligation | Projected benefit obligation | | $ | 3,937 | | | $ | 4,061 | |
| Accumulated benefit obligation | Accumulated benefit obligation | | $ | 3,921 | | | $ | 4,033 | |
| Fair value of plan assets | Fair value of plan assets | | $ | 3,177 | | | $ | 3,362 | |
Information for pension plans with projected benefit obligations in excess of plan assets were:
Information for pension plans with projected benefit obligations in excess of plan assets were:
| | (millions) | (millions) | | 2020 | | 2019 | (millions) | | 2023 | | 2022 |
| Projected benefit obligation | Projected benefit obligation | | $ | 4,035 | | | $ | 4,180 | |
| Accumulated benefit obligation | Accumulated benefit obligation | | $ | 3,988 | | | $ | 4,114 | |
| Fair value of plan assets | Fair value of plan assets | | $ | 3,246 | | | $ | 3,455 | |
Expense
The components of pension expense are presented in the following table. Service cost is recorded in COGS and SGA expense. All other components of net periodic benefit cost are included in OIE. Pension expense for defined contribution plans relates to certain foreign-based defined contribution plans and multiemployer plans in the United States in which the Company participates on behalf of certain unionized workforces.
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Service cost | Service cost | | $ | 37 | | | $ | 36 | | | $ | 87 | |
| Interest cost | Interest cost | | 130 | | | 172 | | | 165 | |
| Expected return on plan assets | Expected return on plan assets | | (340) | | | (340) | | | (361) | |
| Amortization of unrecognized prior service cost | Amortization of unrecognized prior service cost | | 7 | | | 7 | | | 8 | |
| Other expense | | 8 | | | 0 | | | 0 | |
| Other expense (income) | |
| Recognized net (gain) loss | Recognized net (gain) loss | | 184 | | | 235 | | | 269 | |
| Net periodic benefit cost | Net periodic benefit cost | | 26 | | | 110 | | | 168 | |
| Curtailment and special termination benefits | Curtailment and special termination benefits | | (15) | | | (13) | | | (30) | |
| Pension (income) expense: | Pension (income) expense: | |
| Defined benefit plans | Defined benefit plans | | 11 | | | 97 | | | 138 | |
| Defined benefit plans | |
| Defined benefit plans | |
| Defined contribution plans | Defined contribution plans | | 20 | | | 20 | | | 27 | |
| Total | Total | | $ | 31 | | | $ | 117 | | | $ | 165 | |
The Company and certain of its subsidiaries sponsor 401(k) or similar savings plans for active employees. Expense related to these plans was (in millions)millions): 20202023 – $42$40 million; 2019 2022 – $39$41 million; 20182021 – $38$41 million. These amounts are not included in the preceding expense table. 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:
| | 2020 | | 2019 | | 2018 |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
| Discount rate | Discount rate | | 2.2 | % | | 2.9 | % | | 3.9 | % | Discount rate | | 4.8 | % | | 5.3 | % | | 2.6 | % |
| Long-term rate of compensation increase | Long-term rate of compensation increase | | 3.4 | % | | 3.4 | % | | 3.8 | % | Long-term rate of compensation increase | | 3.3 | % | | 3.5 | % | | 3.4 | % |
The worldwide weighted-average actuarial assumptions used to determine annual net periodic benefit cost were:
| | 2020 | | 2019 | | 2018 |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
| Discount rate | Discount rate | | 2.8 | % | | 3.7 | % | | 3.3 | % | Discount rate | | 5.3 | % | | 2.2 | % | | 1.3 | % |
| Discount rate - interest | | Discount rate - interest | | 5.2 | % | | 2.1 | % | | 1.0 | % |
| Long-term rate of compensation increase | Long-term rate of compensation increase | | 3.4 | % | | 4.0 | % | | 3.9 | % | Long-term rate of compensation increase | | 3.5 | % | | 3.5 | % | | 3.5 | % |
| Long-term rate of return on plan assets | Long-term rate of return on plan assets | | 6.8 | % | | 7.3 | % | | 7.4 | % | Long-term rate of return on plan assets | | 7.2 | % | | 5.9 | % | | 5.6 | % |
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.inflation. The U.S. model, which corresponds to approximately 70%approximately 56% of consolidated pension and other postretirement benefit plan assets, incorporates a long-term inflation assumption of 2.5% and an active management premium of 0.8%0.84% (net of fees) validated by historical analysis. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. The expected rate of return for 20202023 of 7.0%7.75% for the U.S. plans equated to approximately the 64th55th percentile expectation. Refer to Note 1.
In 2019, the Society of Actuaries (SOA) published updated mortality tables and an updated improvement scale. In 2020,2021, the SOA released an updated improvement scale that incorporates an additional year of data. In determining the appropriate mortality assumptions as of 20202023 fiscal year-end, the Company used the 2019 SOA tables with collar adjustments based on Kellogg’sKellanova’s current population, consistent with the prior year. In addition, based on
mortality information available from the Social Security Administration and other sources, the Company developed assumptions for future mortality improvement in line with our expectations for future experience. The changeThere were no changes to the mortality assumption decreased the year-end pension and postretirement benefit obligations by approximately $1 million.due to mortality assumption changes.
To conduct theour annual review of discount rates, the Companywe selected the discount rate based on a cash-flow matching analysis using Willis Towers Watson’s proprietary RATE:Link tool and projections of the future benefit payments that constituteconstituting the projected benefit obligation for the plans. RATE:Link establishes the uniform discount rate that produces the same present value of the estimated future benefit payments, as is generated by discounting each year’s benefit payments by a spot rate applicable to that year. TheWe use a December 31 measurement datesdate for theour defined benefit plans are consistent with the Company’s fiscal year end.plans. Accordingly, the Company selectswe select yield curves to measure our benefit obligations that are consistent with market indices during December of each year.
The Company may experience material actuarial gains or losses due to differences between assumed and actual experience and due to changingchanging economic conditions. During 2020,2023, the Company recognized a net actuarial loss of approximately $184approximately $171 million driven by a loss related to plan experience and assumption changes, including a loss due to decreases in the discount rate partially offset by a gainand from betterthe UK buy-in of annuities, as well as lower than expected asset returns.
Plan assets
The Company categorized Plan assets within a three level fair value hierarchy described as follows:
Investments stated at fair value as determined by quoted market prices (Level 1) include:
Cash and cash equivalents: Value based on cost, which approximates fair value.
Corporate stock, common: Value based on the last sales price on the primary exchange.
Investments stated at estimated fair value using significant observable inputs (Level 2) include:
Cash and cash equivalents: Institutional short-term investment vehicles valued daily.
Mutual funds: Valued at exit prices quoted in active or non-active markets or based on observable inputs.
Collective trusts: Valued at exit prices quoted in active or non-active markets or based on observable inputs.
Bonds: Value based on matrices or models from pricing vendors.
Limited partnerships: Equity options:Value is based on the ending net capital account balance at year end.exit prices quoted in active or non-active markets.
Investments stated at estimated fair value using significant unobservable inputs (Level 3) include:
Buy-in annuity contract: ValueValued based on the calculated pension benefit obligation covered byestimated cost to enter an equivalent contract at the non-participating annuity contractsbalance sheet date.
Secure income fund: Valued at year-end.exit prices quoted in non-active markets or based on observable inputs.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The Company’s practice regarding the timing of transfers between levels is to measure transfers in at the beginning of the month and transfers out at the end of the month. For the year ended January 2, 2021,December 30, 2023, the Company had no transfers between Levels 1 and 2.
The fair value of Plan assets as of January 2, 2021 summarized by levelDecember 30, 2023 and December 31, 2022 within the fair value hierarchy are as follows:
| | (millions) | (millions) | | Total
Level 1 | | Total
Level 2 | | Total
Level 3 | | Total
NAV (practical expedient)(a) | | Total |
| Cash and cash equivalents | | $ | 35 | | | $ | 4 | | | $ | 0 | | | $ | 3 | | | $ | 42 | |
| (millions) | |
| (millions) | |
| Cash and cash equivalents (a) | |
| Cash and cash equivalents (a) | |
| Cash and cash equivalents (a) | |
| Corporate stock, common | |
| Corporate stock, common | |
| Corporate stock, common | Corporate stock, common | | 325 | | | 0 | | | 0 | | | 0 | | | 325 | |
| | Mutual funds: | |
| | Collective trusts: | |
| | Collective trusts: | |
| | Collective trusts: | |
| Equity | Equity | | 0 | | | 0 | | | 0 | | | 2 | | | 2 | |
| Debt | | 0 | | | 5 | | | 0 | | | 0 | | | 5 | |
| Collective trusts: | |
| Equity | |
| Equity | Equity | | 0 | | | 0 | | | 0 | | | 1,508 | | | 1,508 | |
| | Debt | Debt | | 0 | | | 548 | | | 0 | | | 415 | | | 963 | |
| Limited partnerships | | 0 | | | 0 | | | 0 | | | 292 | | | 292 | |
| | Debt | |
| | Debt | |
| | Bonds, corporate | |
| | Bonds, corporate | |
| | Bonds, corporate | Bonds, corporate | | 0 | | | 220 | | | 0 | | | 141 | | | 361 | |
| Bonds, government | Bonds, government | | 0 | | | 861 | | | 0 | | | 0 | | | 861 | |
| Bonds, government | |
| Bonds, government | |
| Bonds, other | Bonds, other | | 0 | | | 64 | | | 0 | | | 0 | | | 64 | |
| Real estate | | 0 | | | 0 | | | 0 | | | 421 | | | 421 | |
| Bonds, other | |
| Bonds, other | |
| | Buy-in annuity contract | Buy-in annuity contract | | 0 | | | 0 | | | 280 | | | 0 | | | 280 | |
| Other | | 0 | | | 78 | | | 0 | | | 9 | | | 87 | |
| Total | | $ | 360 | | | $ | 1,780 | | | $ | 280 | | | $ | 2,791 | | | $ | 5,211 | |
| | Buy-in annuity contract | |
| | Buy-in annuity contract | |
| Other (b) | |
| Other (b) | |
| Other (b) | |
| Sub-total | |
| Sub-total | |
| Sub-total | |
| Investments measured at net asset value (NAV) practical expedient (c) | |
| Investments measured at net asset value (NAV) practical expedient (c) | |
| Investments measured at net asset value (NAV) practical expedient (c) | |
| Total plan assets | |
| Total plan assets | |
| Total plan assets | |
(a) CertainCash and cash equivalents includes Level 1 assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.of $60 million and $16 million for 2023 and 2022, respectively, and Level 2 assets of $0 million and ($5) million for 2023 and 2022, respectively.
The fair value(b) Other includes Level 2 assets of Plan$3 million and $64 million for 2023 and 2022, respectively, and Level 3 assets at December 28, 2019 are summarized as follows:of $26 million for 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | | Total
Level 1 | | Total
Level 2 | | Total
Level 3 | | Total
NAV (practical expedient)(a) | | Total |
| Cash and cash equivalents | | $ | 14 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 14 | |
| Corporate stock, common | | 354 | | | 0 | | | 0 | | | 0 | | | 354 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Mutual funds: | | | | | | | | | | |
| Equity | | 0 | | | 0 | | | 0 | | | 36 | | | 36 | |
| Debt | | 0 | | | 4 | | | 0 | | | 0 | | | 4 | |
| Collective trusts: | | | | | | | | | | |
| Equity | | 0 | | | 117 | | | 0 | | | 1,314 | | | 1,431 | |
| | | | | | | | | | |
| Debt | | 0 | | | 718 | | | 0 | | | 378 | | | 1,096 | |
| Limited partnerships | | 0 | | | 0 | | | 0 | | | 228 | | | 228 | |
| Bonds, corporate | | 0 | | | 443 | | | 0 | | | 211 | | | 654 | |
| Bonds, government | | 0 | | | 774 | | | 0 | | | 0 | | | 774 | |
| Bonds, other | | 0 | | | 70 | | | 0 | | | 0 | | | 70 | |
| Real estate | | 0 | | | 0 | | | 0 | | | 412 | | | 412 | |
| Other | | 0 | | | 61 | | | 0 | | | 36 | | | 97 | |
| Total | | $ | 368 | | | $ | 2,187 | | | $ | 0 | | | $ | 2,615 | | | $ | 5,170 | |
(a)(c) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
There were no unfunded commitments to purchase investments at January 2, 2021December 30, 2023 or December 28, 2019.31, 2022.
The Company’s 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 Plan’s investment policy. The investment policy specifies the type of investment vehicles appropriate for the Plan, asset allocation guidelines, criteria for the selection of investment managers, procedures to monitor overall investment performance as well as investment manager performance. Derivatives, including swaps, forward and futures contracts, may be used as asset class substitutes or for hedging or other risk management purposes. It also provides guidelines enabling Plan fiduciaries to fulfill their responsibilities.
The current weighted-average target asset allocation reflected by this strategy is: equity securities–34%38.0%; debt securities–29%40.0%; real estate and other–37%22.0%. Investment in Company common stock represented 1.1%1.9% and 1.2%2.1% of consolidated plan assets at January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively. Plan funding strategies are influenced by tax regulations and funding requirements. The Company currently expects to contribute, before
consideration of incremental discretionary contributions, approximately $6$46 million to its defined benefit pension plans during 2021.2024.
Level 3 gains and losses
Changes in fair value of the Plan's Level 3 assets are summarized as follows:
| | | | | | | | |
(millions) | | Annuity Contract |
December 28, 2019 | | $ | 0 | |
Purchases | | 268 | |
Realized and unrealized gain | | 4 | |
Currency translation | | 8 | |
January 2, 2021 | | $ | 280 | |
| | | | | | | | | | | |
| (millions) | | Annuity Contract | Other |
| January 1, 2022 | | $ | 269 | | $ | — | |
| Additions | | — | | 27 | |
| Realized and unrealized loss | | (75) | | (1) | |
| Currency translation | | (21) | | — | |
| December 31, 2022 | | $ | 173 | | $ | 26 | |
| | | |
| Additions | | 589 | | — | |
| Realized and unrealized loss | | 68 | | (1) | |
| Currency translation | | 9 | | 1 | |
| December 30, 2023 | | $ | 839 | | $ | 26 | |
Benefit payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions): 2021–$315; 2022–$322; 2023–$322; 2024–$326;205; 2025–$321; 2026212; 2026–$215; 2027–$214; 2028–$221; 2029 to 2030–2033–$1,575.1,115.
NOTE 1112
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 a December 31 measurement date for these plans and, when necessary, adjusts for plan contributions and significant events between December 31 and its fiscal year-end.
Obligations and funded status
The aggregate change in accumulated postretirement benefit obligation, plan assets, and funded status is presented in the following tables.
| | (millions) | (millions) | | 2020 | | 2019 | (millions) | | 2023 | | 2022 |
| Change in accumulated benefit obligation | Change in accumulated benefit obligation | |
| Beginning of year | |
| Beginning of year | |
| Beginning of year | Beginning of year | | $ | 1,116 | | | $ | 1,069 | |
| Service cost | Service cost | | 13 | | | 15 | |
| Interest cost | Interest cost | | 31 | | | 37 | |
| Actuarial (gain) loss | Actuarial (gain) loss | | 55 | | | 59 | |
| Benefits paid | Benefits paid | | (58) | | | (60) | |
| Curtailments | | 0 | | | (6) | |
| | | Amendments | |
| | Amendments | |
| | Amendments | |
| Other | |
| Foreign currency adjustments | Foreign currency adjustments | | 0 | | | 2 | |
| End of year | End of year | | $ | 1,157 | | | $ | 1,116 | |
| Change in plan assets | Change in plan assets | |
| Fair value beginning of year | Fair value beginning of year | | $ | 1,364 | | | $ | 1,140 | |
| Fair value beginning of year | |
| Fair value beginning of year | |
| Actual return on plan assets | Actual return on plan assets | | 178 | | | 282 | |
| Employer contributions | Employer contributions | | 24 | | | 18 | |
| Benefits paid | Benefits paid | | (75) | | | (76) | |
| Other | |
| Fair value end of year | Fair value end of year | | $ | 1,491 | | | $ | 1,364 | |
| Funded status | Funded status | | $ | 334 | | | $ | 248 | |
| Amounts recognized in the Consolidated Balance Sheet consist of | Amounts recognized in the Consolidated Balance Sheet consist of | |
| Other non-current assets | | $ | 369 | | | $ | 283 | |
| Other assets | |
| Other assets | |
| Other assets | |
| Other current liabilities | Other current liabilities | | (1) | | | (2) | |
| Other liabilities | Other liabilities | | (34) | | | (33) | |
| Net amount recognized | Net amount recognized | | $ | 334 | | | $ | 248 | |
| Amounts recognized in accumulated other comprehensive income consist of | Amounts recognized in accumulated other comprehensive income consist of | |
| Prior service credit | Prior service credit | | (50) | | | (59) | |
| Prior service credit | |
| Prior service credit | |
| Net amount recognized | Net amount recognized | | $ | (50) | | | $ | (59) | |
Information for postretirement benefit plans with accumulated benefit obligations in excess of plan assets were: | | | | | | | | | | | | | | |
| (millions) | | 2023 | | 2022 |
| Accumulated benefit obligation | | $ | 23 | | | $ | 21 | |
| Fair value of plan assets | | $ | — | | | $ | — | |
Information forExpense
The components of nonpension postretirement expense are presented in the following table. Service cost is recorded in COGS and SGA expense. All other components of net periodic benefit plans with accumulated benefit obligationscost are included in excess of plan assets were:
| | | | | | | | | | | | | | |
| (millions) | | 2020 | | 2019 |
| Accumulated benefit obligation | | $ | 35 | | | $ | 34 | |
| Fair value of plan assets | | $ | 0 | | | $ | 0 | |
Expense
OIE. Components of postretirement benefit expense (income) were:
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Service cost | Service cost | | $ | 13 | | | $ | 15 | | | $ | 18 | |
| Interest cost | Interest cost | | 31 | | | 37 | | | 36 | |
| Expected return on plan assets | Expected return on plan assets | | (94) | | | (86) | | | (94) | |
| Amortization of unrecognized prior service credit | Amortization of unrecognized prior service credit | | (9) | | | (9) | | | (9) | |
| Recognized net (gain) loss | Recognized net (gain) loss | | (29) | | | (137) | | | 81 | |
| Net periodic benefit cost | | (88) | | | (180) | | | 32 | |
| Curtailment | | 0 | | | (6) | | | 0 | |
| Postretirement benefit expense: | |
| Net periodic benefit expense (income) | |
| | Postretirement benefit expense (income): | |
| Postretirement benefit expense (income): | |
| Postretirement benefit expense (income): | |
| Defined benefit plans | |
| Defined benefit plans | |
| Defined benefit plans | Defined benefit plans | | (88) | | | (186) | | | 32 | |
| Defined contribution plans | Defined contribution plans | | 13 | | | 11 | | | 11 | |
| Total | Total | | $ | (75) | | | $ | (175) | | | $ | 43 | |
Assumptions
The weighted-average actuarial assumptions used to determine benefit obligations were:
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Discount rate | | 2.5 | % | | 3.3 | % | | 4.3 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Discount rate | | 5.1 | % | | 5.5 | % | | 2.9 | % |
The weighted-average actuarial assumptions used to determine annual net periodic benefit cost were:
| | 2020 | | 2019 | | 2018 |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
| Discount rate | Discount rate | | 3.3 | % | | 4.0 | % | | 3.6 | % | Discount rate | | 5.5 | % | | 2.8 | % | | 2.5 | % |
| Discount rate - interest | | Discount rate - interest | | 5.3 | % | | 2.3 | % | | 1.8 | % |
| Long-term rate of return on plan assets | Long-term rate of return on plan assets | | 7.0 | % | | 7.3 | % | | 7.5 | % | Long-term rate of return on plan assets | | 8.0 | % | | 7.0 | % | | 6.3 | % |
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 10.11.
The assumed U.S. health care cost trend rate is 5.00%6.50% for 2021,2024, remaining at this rate until 2025, then decreasing 0.25% annually to 4.5% by the year 2023in 2033 and remaining at that level thereafter. These trend rates reflect the Company’s historical experience and management’s expectations regarding future trends.
The Company may experience material actuarial gains or losses due to differences between assumed and actual experience and due to changing economic conditions. During 2020,2023, the Company recognized a net actuarial gain of approximately $29 million driven by a gain related to plan experience and assumption changes, including gain due to betterhigher than expected asset returns, partially offset by a loss resulting from decreases in the impact of higher discount rate.
rates and the impact of other assumption changes.Plan assets
The fair value of Plan assets as of January 2, 2021December 30, 2023 and December 31, 2022 are summarized by level within fair value hierarchy described in Note 10,11, are as follows:
| | (millions) | (millions) | | Total
Level 1 | | Total
Level 2 | | Total
Level 3 | | Total
NAV (practical expedient)(a) | | Total |
| (millions) | |
| (millions) | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 3 | | | $ | 3 | | | $ | 0 | | | $ | 0 | | | $ | 6 | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Corporate stock, common | |
| Corporate stock, common | |
| Corporate stock, common | Corporate stock, common | | 261 | | | 0 | | | 0 | | | 0 | | | 261 | |
| | Mutual funds: | Mutual funds: | |
| | Mutual funds: | |
| | Mutual funds: | |
| Equity | |
| Equity | |
| Equity | Equity | | 0 | | | 30 | | | 0 | | | 0 | | | 30 | |
| | Debt | | 0 | | | 54 | | | 0 | | | 0 | | | 54 | |
| Collective trusts: | |
| Equity | | 0 | | | 0 | | | 0 | | | 669 | | | 669 | |
| | Limited partnerships | | 0 | | | 0 | | | 0 | | | 135 | | | 135 | |
| | Bonds, corporate | |
| | Bonds, corporate | |
| | Bonds, corporate | Bonds, corporate | | 0 | | | 143 | | | 0 | | | 0 | | | 143 | |
| Bonds, government | Bonds, government | | 0 | | | 96 | | | 0 | | | 0 | | | 96 | |
| Bonds, government | |
| Bonds, government | |
| Bonds, other | Bonds, other | | 0 | | | 8 | | | 0 | | | 0 | | | 8 | |
| Real estate | | 0 | | | 0 | | | 0 | | | 89 | | | 89 | |
| Bonds, other | |
| Bonds, other | |
| | Total | | $ | 264 | | | $ | 334 | | | $ | 0 | | | $ | 893 | | | $ | 1,491 | |
| | Sub-total | |
| | Sub-total | |
| | Sub-total | |
| Investments measured at net asset value (NAV) practical expedient (a) | |
| Investments measured at net asset value (NAV) practical expedient (a) | |
| Investments measured at net asset value (NAV) practical expedient (a) | |
| Total plan assets | |
| Total plan assets | |
| Total plan assets | |
(a) Certain assetsAssets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The fair value of Plan assets at December 28, 2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (millions) | | Total
Level 1 | | Total
Level 2 | | Total
Level 3 | | Total
NAV (practical expedient)(a) | | Total |
| Cash and cash equivalents | | $ | 8 | | | $ | 1 | | | $ | 0 | | | $ | 0 | | | $ | 9 | |
| Corporate stock, common | | 253 | | | 0 | | | 0 | | | 0 | | | 253 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Mutual funds: | | | | | | | | | | |
| Equity | | 0 | | | 35 | | | 0 | | | 0 | | | 35 | |
| | | | | | | | | | |
| Debt | | 0 | | | 53 | | | 0 | | | 0 | | | 53 | |
| Collective trusts: | | | | | | | | | | |
| Equity | | 0 | | | 0 | | | 0 | | | 579 | | | 579 | |
| | | | | | | | | | |
| Limited partnerships | | 0 | | | 0 | | | 0 | | | 124 | | | 124 | |
| Bonds, corporate | | 0 | | | 136 | | | 0 | | | 0 | | | 136 | |
| Bonds, government | | 0 | | | 77 | | | 0 | | | 0 | | | 77 | |
| Bonds, other | | 0 | | | 9 | | | 0 | | | 0 | | | 9 | |
| Real estate | | 0 | | | 0 | | | 0 | | | 88 | | | 88 | |
| Other | | 0 | | | 1 | | | 0 | | | 0 | | | 1 | |
| Total | | $ | 261 | | | $ | 312 | | | $ | 0 | | | $ | 791 | | | $ | 1,364 | |
(a) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The Company’s asset investment strategy for its VEBA trusts is consistent with that described for its pension trusts in Note 10.11. The current target asset allocation is 70%69% equity securities, 23%26% debt securities, and 7%5% real estate.estate and other. The Company currently expects to contribute approximately $19$18 million to its VEBA trusts during 2021.2024.
There were no Level 3 assets during 20202023 and 2019.
Postemployment
Under certain conditions, the Company provides benefits to former or inactive employees, including salary continuance, severance, and long-term disability, in the United States and several foreign locations. The Company’s postemployment benefit plans are unfunded. Actuarial assumptions used are generally consistent with those presented for pension benefits in Note 10.11.
The aggregate change in accumulated postemployment benefit obligation and the net amount recognized were:
| | (millions) | (millions) | | 2020 | | 2019 | (millions) | | 2023 | | 2022 |
| Change in accumulated benefit obligation | Change in accumulated benefit obligation | |
| Beginning of year | |
| Beginning of year | |
| Beginning of year | Beginning of year | | $ | 48 | | | $ | 42 | |
| Service cost | Service cost | | 3 | | | 3 | |
| Interest cost | Interest cost | | 1 | | | 2 | |
| Actuarial (gain)loss | Actuarial (gain)loss | | 0 | | | 8 | |
| Benefits paid | Benefits paid | | (4) | | | (7) | |
| | End of year | End of year | | $ | 48 | | | $ | 48 | |
| | End of year | |
| | End of year | |
| Funded status | Funded status | | $ | (48) | | | $ | (48) | |
| Amounts recognized in the Consolidated Balance Sheet consist of | Amounts recognized in the Consolidated Balance Sheet consist of | |
| Other current liabilities | |
| Other current liabilities | |
| Other current liabilities | Other current liabilities | | $ | (6) | | | $ | (7) | |
| Other liabilities | Other liabilities | | (42) | | | (41) | |
| Net amount recognized | Net amount recognized | | $ | (48) | | | $ | (48) | |
| Amounts recognized in accumulated other comprehensive income consist of | Amounts recognized in accumulated other comprehensive income consist of | |
| Net prior service cost | Net prior service cost | | $ | 2 | | | $ | 3 | |
| Net prior service cost | |
| Net prior service cost | |
| Net experience gain | Net experience gain | | (18) | | | (22) | |
| Net amount recognized | Net amount recognized | | $ | (16) | | | $ | (19) | |
ComponentsThe components of postemployment benefit expense were:are presented in the following table. Service cost is recorded in COGS and SGA expense. All other components of net periodic benefit cost are included in OIE.
| | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2020 | | 2019 | | 2017 |
| Service cost | | $ | 2 | | | $ | 3 | | | $ | 3 | |
| Interest cost | | 1 | | | 2 | | | 1 | |
| Amortization of unrecognized prior service cost | | 1 | | | 1 | | | 1 | |
| Recognized net loss | | (3) | | | (5) | | | (5) | |
| Net periodic benefit cost | | $ | 1 | | | $ | 1 | | | $ | 0 | |
| Settlement cost | | (1) | | | (3) | | | 0 | |
| Postemployment benefit expense | | $ | 0 | | | $ | (2) | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2023 | | 2022 | | 2021 |
| Service cost | | $ | 2 | | | $ | 2 | | | $ | 2 | |
| Interest cost | | 1 | | | 1 | | | — | |
| Amortization of unrecognized prior service cost | | 1 | | | 1 | | | 1 | |
| Recognized net loss | | (2) | | | (1) | | | (1) | |
| Net periodic benefit cost | | $ | 2 | | | $ | 3 | | | $ | 2 | |
| Settlement cost | | — | | | (2) | | | (1) | |
| Postemployment benefit expense | | $ | 2 | | | $ | 1 | | | $ | 1 | |
Benefit payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| | | | | | | | | | | | | | |
| (millions) | | Postretirement | | Postemployment |
| 2021 | | $ | 64 | | | $ | 6 | |
| 2022 | | 65 | | | 6 | |
| 2023 | | 65 | | | 5 | |
| 2024 | | 65 | | | 5 | |
| 2025 | | 65 | | | 5 | |
| 2026-2029 | | 321 | | | 20 | |
| | | | | | | | | | | | | | |
| (millions) | | Postretirement | | Postemployment |
| 2024 | | $ | 25 | | | $ | 5 | |
| 2025 | | 25 | | | 5 | |
| 2026 | | 24 | | | 4 | |
| 2027 | | 24 | | | 4 | |
| 2028 | | 24 | | | 4 | |
| 2029-2033 | | 115 | | | 15 | |
NOTE 1213
MULTIEMPLOYER PENSION AND POSTRETIREMENT PLANS
The Company contributes to multiemployer defined contribution pension and postretirement benefit plans under the terms of collective-bargaining agreements that cover certain unionized employee groups in the United States. Contributions to these plans are included in total pension and postretirement benefit expense as reported in Note 1011 and Note 11,12, respectively.
Pension benefits
The risks of participating in multiemployer pension plans are different from single-employer plans. Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan are borne by the remaining participating employers.
The Company’s participation in Total contributions to multiemployer pension benefit plans for the year ended January 2,were as follows (millions): 2023 - $5; 2022 - $5; 2021 is outlined in the table below. The “EIN/PN” column provides the Employer Identification Number (EIN) and the three-digit plan number (PN). The most recent Pension Protection Act (PPA) zone status available for 2020 and 2019 is for the plan year-ends as indicated below. The zone status is based on information that the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are between 65 percent and 80 percent funded, and plans in the green zone are at least 80 percent funded. The “FIP/RP Status” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. In addition to regular plan contributions, the Company may be subject to a surcharge if the plan is in the red zone. The “Surcharge Imposed” column indicates whether a surcharge has been imposed on contributions to the plan. The last column lists the expiration date(s) of the collective-bargaining agreement(s) (CBA) to which the plans are subject. The Company was not listed in the available Forms 5500 of the three plans listed below as providing more than 5 percent of total contributions. At the date the Company’s financial statements were issued, certain Forms 5500 were not available for the plan years ending in 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | PPA Zone Status |
| Contributions
(millions) | | |
| Pension trust fund | EIN/PN | 2020 | 2019 | FIP/RP Status | 2020 | 2019 | 2018 | Surcharge
Imposed | Expiration
Date of
CBA |
| Bakery and Confectionery Union and Industry International Pension Fund (a) | 52-6118572 /
001 | Red - 12/31/2020 | Red - 12/31/2019 | Implemented | $ | 5.9 | | $ | 5.9 | | $ | 6.5 | | Yes | 2/20/2021 to 4 /16/2021 (b) |
| Central States, Southeast and Southwest Areas Pension Fund | 36-6044243 /
001 | Red - 12/31/2020 | Red - 12/31/2019 | Implemented | 0 | | 1.3 | | 1.9 | | Yes | (c) |
| Western Conference of Teamsters Pension Trust | 91-6145047 /
001 | Green - 12/31/2020 | Green - 12/31/2019 | NA | 0.9 | | 0.8 | | 1.0 | | No | 3/26/2022 (d) |
| Other Plans | | | | | 0.2 | | 0.7 | | 1.0 | | | (e) |
| Total contributions: | | | | | $ | 7.0 | | $ | 8.7 | | $ | 10.4 | | | |
(a)The Company is party to multiple CBAs requiring contributions to this fund, each with its own expiration date. Over 80 percent of the Company’s participants in this fund are covered by a single CBA that expires on 4/16/2021.
(b)The Company does not expect 2021 contributions to be materially different than 2020.
(c)During 2019, the Company terminated CBAs covered by this fund. As a result, the Company has withdrawn from the fund and recognized expense for its estimated withdrawal liability. The Company does not expect to make 2021 contributions.
(d)The Company does not expect 2021 contributions to be materially different than 2020.
(e)During 2019, the Company terminated the CBAs covered by certain of these funds. As a result, for the impacted funds, the Company recognized expense for the estimated withdrawal liability in each year and no longer made contributions following the termination. The Company does not expect 2021 contributions to the remaining funds to be materially different from 2020.- $7.
As discussed in Note 5, the Company engages in restructuring and cost reduction projects to help achieve its long-term growth targets. Current and future restructuring and cost reduction activities and other strategic initiatives could impact the Company's participation in certain multiemployer plans. In addition to regular contributions, the Company could be obligated to pay additional amounts, known as a withdrawal liability, if a multiemployer pension plan has unfunded vested benefits and the Company decreases or ceases participation in that plan. During 2019, the Company withdrew from two multi-employer pension plans. Additionally, the Company previously exited several multiemployer plans associated with Project K restructuring. During the second quarteras part of 2020, the Company adjusted the estimated withdrawal liability associated with a plan withdrawn from during the third quarter of 2019.past restructuring activities. The adjustment resulted in a gain of $5 million during the second quarter and resulted from a July 2020 agreement with the plan, under which the Company paid $7 million in full settlement of the withdrawal liability. In addition, the Company paid $5 million to settle a plan liability during the fourth quarter of 2020, resulting in no gain or loss as a result of settlement. The Companyrelated liabilities recognized expense related to the withdrawals as follows (millions): 2020 - $(5); 2019 - $132; 2018 - $7. While this isare our best estimate of the ultimate cost of withdrawing from the plans atthese plans. At this time we have not yet reached agreement on the ultimate amount of thethese withdrawal liability.liabilities. As a result, the actual cost could differ from our estimate based on final funding assessments. The net present value of the liabilities were determined using a risk free interest rate. The charge wascharges were recorded within Cost of goods sold on the Consolidated
Statement of Income and Other current liabilities and Other liabilities on the Consolidated Balance Sheet.Income. The cash obligation associated with the 2019 withdrawal activity is approximately $8 million annually and is payable over a maximum 20-year period; management has not determined the actual period over which the payments will be made.period. Withdrawal liability payments made to multiemployer plans were as follows (millions): 20202023 - $21; 2019$9; 2022 - $8; 2018$10; 2021 - $3.$10. The Company had withdrawal liabilities of $130$110 million and $156$117 million at January 2, 2021December 30, 2023 and December 28, 2019, respectively.31, 2022, respectively, included within Other current liabilities and Other liabilities on the Consolidated Balance Sheet.
Postretirement benefits
Multiemployer postretirement benefit plans provide health care and other welfare benefits to active and retired employees who have met certain age and service requirements. Contributions to multiemployer postretirement benefit plans were (in millions): 20202023 – $13; 2019$15; 2022 – $11; 2018$13; 2021 – $11.$13.
NOTE 1314
INCOME TAXES
The components of income before income taxes and the provision for income taxes were as follows:
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Income before income taxes | Income before income taxes | |
| United States | |
| United States | |
| United States | United States | | $ | 1,018 | | | $ | 938 | | | $ | 851 | |
| Foreign | Foreign | | 583 | | | 367 | | | 478 | |
| | | | 1,601 | | | 1,305 | | | 1,329 | |
| Income taxes | Income taxes | |
| Currently payable | Currently payable | |
| Currently payable | |
| Currently payable | |
| Federal | |
| Federal | |
| Federal | Federal | | 129 | | | 345 | | | 7 | |
| State | State | | 26 | | | 52 | | | 28 | |
| Foreign | Foreign | | 100 | | | 77 | | | 99 | |
| | | | 255 | | | 474 | | | 134 | |
| Deferred | Deferred | |
| Federal | Federal | | 56 | | | (124) | | | 109 | |
| Federal | |
| Federal | |
| State | State | | 9 | | | (29) | | | (59) | |
| Foreign | Foreign | | 3 | | | 0 | | | (3) | |
| | | | 68 | | | (153) | | | 47 | |
| Total income taxes | Total income taxes | | $ | 323 | | | $ | 321 | | | $ | 181 | |
The difference between the U.S. federal statutory tax rate and the Company’s effective income tax rate was:
| | | 2023 | | | | 2023 | | 2022 | | 2021 |
| U.S. statutory income tax rate | | U.S. statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Foreign rates varying from U.S. statutory rate | |
| | State income taxes, net of federal benefit | |
| State income taxes, net of federal benefit | |
| State income taxes, net of federal benefit | |
| Cost (benefit) of remitted and unremitted foreign earnings | |
| | | 2020 | | 2019 | | 2018 |
| U.S. statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Foreign rates varying from U.S. statutory rate | | (2.4) | | | (2.5) | | | (3.0) | |
| Excess tax benefits on share-based compensation | | 0 | | | 0 | | | (0.3) | |
| State income taxes, net of federal benefit | | 1.8 | | | 1.3 | | | 1.5 | |
| Cost (benefit) of remitted and unremitted foreign earnings | | 1.0 | | | 0.8 | | | 0.7 | |
| Legal entity restructuring, deferred tax impact | | 0 | | | 0 | | | (3.3) | |
| Discretionary pension contributions | | 0 | | | 0 | | | (2.3) | |
| Revaluation of investment in foreign subsidiary | | 0 | | | 2.5 | | | 0 | |
| | Net change in valuation allowance | |
| | Net change in valuation allowance | |
| | Net change in valuation allowance | Net change in valuation allowance | | 1.4 | | | (1.6) | | | 2.0 | |
| | Statutory rate changes, deferred tax impact | Statutory rate changes, deferred tax impact | | 0.2 | | | 0.3 | | | 0 | |
| U.S. deemed repatriation tax | | (2.0) | | | 0 | | | (1.2) | |
| Statutory rate changes, deferred tax impact | |
| Statutory rate changes, deferred tax impact | |
| | Divestiture | | 0 | | | 2.9 | | | 0 | |
| Out-of-period adjustment | | 0 | | | 3.0 | | | 0 | |
| Foreign derived intangible income | |
| Foreign derived intangible income | |
| Foreign derived intangible income | |
| | Other | |
| Other | |
| Other | Other | | (0.8) | | | (3.1) | | | (1.5) | |
| Effective income tax rate | Effective income tax rate | | 20.2 | % | | 24.6 | % | | 13.6 | % | Effective income tax rate | | 24.8 | % | | 20.0 | % | | 24.3 | % |
As presented in the preceding table, the Company’s 20202023 consolidated effective tax rate was 20.2%24.8%, as compared to 24.6%20.0% in 20192022 and 13.6%24.3% in 2018.2021.
The 2020higher effective incometax rate for the year ended December 30, 2023 as compared to prior year was due primarily to a valuation allowance recorded in the fourth quarter of 2023 in conjunction with the separation of our North America cereal business.
For the year ended December 31, 2022 the effective tax rate was favorably impacted by mark-to-market loss items and the reversalresulting impact on mix of a liability for uncertain tax positions of $32 million, resulting from the finalization of a tax examination during the third quarter. The reserves were related to
the Company's estimate of the transition tax liability in conjunction with the finalization of accounting under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.earnings.
The 20192021 effective income tax rate was unfavorably impacted by a permanent basis difference in the assets sold to Ferrero as well as an out-of-period correction. following items. During the fourthsecond quarter of 2019,2021, the CompanyCompany recorded an out-of-period adjustment to correct an error in the tax rate applied to a deferred tax asset arising from an intangible property transfer in a prior year. The adjustment increased income tax expense and decreased deferred tax assets by $39of $23 million respectively. We determined the adjustment to be immaterial to our Consolidated Financial Statements for the year ended December 28, 2019 and related prior annual and quarterly periods.
The 2018 effective income tax rate benefited from the reduction of the U.S. corporate tax rate as well as a $11 million reduction of income tax expense due to changes in estimates related to the Tax Cuts and Jobs Act, the impact of discretionary pension contributions totaling $250 million in 2018, which were designated as 2017 tax year contributions, and a $44 million discrete tax benefit as a result of tax legislation enacted in the remeasurement ofUK in June 2021, which increased the statutory UK tax rate from 19 percent to 25 percent for tax periods after April 1, 2023. The Company revalued its net deferred taxes following a legal entity restructuring.
Transition tax on foreign earnings: The transition tax is a tax on the previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. In order to determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. As of December 30, 2017, based on accumulated foreign earnings and profits of approximately $2.6 billion, which are primarily in Europe, the Company was able to make a reasonable estimate of the transition tax and recorded a transition tax obligation of $157 million. In the third quarter of 2018, the Company recorded a $16 million reductionbalances related to the transitionUK business to reflect the increased tax liability and tax expense based on updated estimates of E&P. During the fourth quarter of 2018, the Company, as part of completing its accounting under SAB 118, revised its estimate of the transition tax liability to $94 million, and recorded $47 million of tax reserves related to uncertainty in our interpretation of the statute and associated regulations.rate. During the third quarter, of 2020, the Company reversed $32 million of the liability previously recorded as a result of the finalization of an IRS tax examination.
Indefinite reinvestment assertion: Prior to the Tax Act, the Company treated a significant portion of its undistributed foreign earnings as indefinitely reinvested. In light of the Tax Act, which included a new territorial tax regime, as of the year ended December 30, 2017, Management determined that the Company would analyze its global capital structure and working capital strategy and considered the indefinite reinvestment assertion to be provisional under SAB 118. In the fourth quarter of 2018, we finished analyzing our global capital structure and working capital strategy and determined that $2.4 billion ofcertain foreign earnings as of December 30, 2017deferred tax assets were no longer consideredmore likely than not to be indefinitely invested. Accordingly, income tax expense of approximately $5realized in the future and a full valuation allowance totaling $20 million was recorded in the fourth quarter of 2018. The Company completed its assessment and accounting under SAB 118 for its indefinite investment assertion.on a discrete period basis.
As of January 2, 2021,December 30, 2023, approximately $900$800 million of unremitted earnings were considered indefinitely reinvested. The unrecognized deferred tax liability for these earnings is estimated at approximately $23$46 million. However, this estimate could change based on the manner in which the outside basis difference associated with these earnings reverses.
Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration. Changes resulting from management’s assessment will result in impacts to
deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The total tax benefit of carryforwards at year-end 20202023 and 20192022 were $329$350 million and $279$363 million, respectively, with related valuation allowances at year-end 20202023 and 20192022 of $192$300 million and $146$263 million, respectively. Of the total carryforwards at year-end 2020, substantially all will2023, $20 million expire after 2024.
The following table provides an analysis of the Company’s deferred tax assets and liabilities as of year-end 20202023 and 2019.2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Deferred tax
assets | | Deferred tax
liabilities |
| (millions) | | 2020 | | 2019 | | 2020 | | 2019 |
| U.S. state income taxes | | $ | 7 | | | $ | 0 | | | $ | 0 | | | $ | 6 | |
| Advertising and promotion-related | | 13 | | | 11 | | | — | | | — | |
| Wages and payroll taxes | | 26 | | | 15 | | | — | | | — | |
| Inventory valuation | | 17 | | | 17 | | | — | | | — | |
| Employee benefits | | 118 | | | 143 | | | — | | | — | |
| Operating loss, credit and other carryforwards | | 329 | | | 279 | | | — | | | — | |
| Hedging transactions | | 49 | | | 0 | | | 0 | | | 18 | |
| Depreciation and asset disposals | | — | | | — | | | 234 | | | 217 | |
| Operating lease right-of-use assets | | — | | | — | | | 141 | | | 111 | |
| Operating lease liabilities | | 136 | | | 111 | | | — | | | — | |
| Trademarks and other intangibles | | — | | | — | | | 527 | | | 526 | |
| Deferred compensation | | 18 | | | 19 | | | — | | | — | |
| Stock options | | 32 | | | 29 | | | — | | | — | |
| Other | | 41 | | | 36 | | | — | | | — | |
| | 786 | | | 660 | | | 902 | | | 878 | |
| Less valuation allowance | | (192) | | | (146) | | | — | | | — | |
| Total deferred taxes | | $ | 594 | | | $ | 514 | | | $ | 902 | | | $ | 878 | |
| Net deferred tax asset (liability) | | $ | (308) | | | $ | (364) | | | | | |
| Classified in balance sheet as: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other assets | | $ | 254 | | | $ | 231 | | | | | |
| Other liabilities | | (562) | | | (595) | | | | | |
| Net deferred tax asset (liability) | | $ | (308) | | | $ | (364) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Deferred tax
assets | | Deferred tax
liabilities |
| (millions) | | 2023 | | 2022 | | 2023 | | 2022 |
| U.S. state income taxes | | $ | — | | | $ | — | | | $ | 9 | | | $ | 27 | |
| Advertising and promotion-related | | 12 | | | 15 | | | — | | | — | |
| Wages and payroll taxes | | 15 | | | 19 | | | — | | | — | |
| Inventory valuation | | 12 | | | 19 | | | — | | | — | |
| Employee benefits | | 99 | | | 64 | | | — | | | — | |
| Operating loss, credit and other carryforwards | | 350 | | | 363 | | | — | | | — | |
| Research and development capitalization | | 40 | | | 22 | | | — | | | — | |
| Hedging transactions | | — | | | — | | | 8 | | | 37 | |
| Depreciation and asset disposals | | — | | | — | | | 177 | | | 286 | |
| Operating lease right-of-use assets | | — | | | — | | | 149 | | | 138 | |
| Operating lease liabilities | | 147 | | | 139 | | | — | | | — | |
| Trademarks and other intangibles | | — | | | — | | | 466 | | | 549 | |
| Deferred compensation | | 13 | | | 27 | | | — | | | — | |
| Stock options | | 43 | | | 28 | | | — | | | — | |
| Other | | 64 | | | 34 | | | — | | | — | |
| | 795 | | | 730 | | | 809 | | | 1,037 | |
| Less valuation allowance | | (300) | | | (263) | | | — | | | — | |
| Total deferred taxes | | $ | 495 | | | $ | 467 | | | $ | 809 | | | $ | 1,037 | |
| Net deferred tax asset (liability) | | $ | (314) | | | $ | (570) | | | | | |
| Classified in balance sheet as: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other assets | | $ | 183 | | | $ | 190 | | | | | |
| Other liabilities | | (497) | | | (760) | | * | | | |
| Net deferred tax asset (liability) | | $ | (314) | | | $ | (570) | | | | | |
*Other liabilities include $53 million reclassified to discontinued operations on the consolidated balance sheet at December 31, 2022.
The change in valuation allowance reducing deferred tax assets was:
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Balance at beginning of year | Balance at beginning of year | | $ | 146 | | | $ | 166 | | | $ | 153 | |
| Additions charged to income tax expense (b) | | 62 | | | 25 | | | 29 | |
| Reductions credited to income tax expense (a) | | (24) | | | (47) | | | (1) | |
| Additions charged to income tax expense (a) | |
| Reductions credited to income tax expense | |
| Acquisition of noncontrolling interest | |
| Currency translation adjustments | Currency translation adjustments | | 8 | | | 2 | | | (15) | |
| Balance at end of year | Balance at end of year | | $ | 192 | | | $ | 146 | | | $ | 166 | |
(a) During 2019, the Company decreased the valuation allowance by $32 million related to the revaluation of its investment in a foreign subsidiary.
(b) During 2020,2021, the Company increased the valuation allowance by $41$20 million to fully reserve for net deferred tax assets of a foreign subsidiary. During 2023, the Company established a state valuation allowance of $21 million due to projected, perpetual separate company losses for Kellanova post separation from the North America cereal business. Additionally, in 2023 the Company established a valuation allowance of $18 million related to the revaluationsale of its investment in a foreign subsidiary.
Uncertain tax positions
The Company is subject to federal income taxes in the U.S. as well as various state, local, and foreign jurisdictions. The Company’s 20202023 provision for U.S. federal income taxes represents approximately 60%50% of the Company’s consolidated income tax provision. The Company was chosen to participate in the Internal Revenue Service (IRS) Compliance Assurance Program (CAP) beginning with the 2008 tax year. As a result, with limited exceptions, the Company is no longer subject to U.S. federal examinations by the IRS for years prior to 2019.2022. The Company is under examination for income and non-income tax filings in various state and foreign jurisdictions.
As of January 2, 2021,December 30, 2023, the Company has classified $19$10 million of unrecognized tax benefits as a current tax liability. Managements estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability expected to be settled within one year, offset by approximately $4$3 million of projected additions during the next twelve months related primarily to ongoing intercompany transfer pricing activity.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 Company’s total gross unrecognized tax benefits as of the years ended December 30, 2023, December 31, 2022 and January 2, 2021, December 28, 2019 and December 29, 2018.1, 2022. For the 20202023 year, approximately $56 $28 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Balance at beginning of year | Balance at beginning of year | | $ | 90 | | | $ | 97 | | | $ | 60 | |
| Tax positions related to current year: | Tax positions related to current year: | |
| Additions (a) | | 5 | | | 5 | | | 51 | |
| Additions | |
| Additions | |
| Additions | |
| Tax positions related to prior years: | Tax positions related to prior years: | |
| Additions | Additions | | 8 | | | 4 | | | 4 | |
| Reductions (b) | | (35) | | | (14) | | | (13) | |
| Additions | |
| Additions | |
| Reductions | |
| Settlements | Settlements | | (2) | | | (1) | | | (4) | |
| Lapses in statutes of limitation | Lapses in statutes of limitation | | (1) | | | (1) | | | (1) | |
| Balance at end of year | Balance at end of year | | $ | 65 | | | $ | 90 | | | $ | 97 | |
(a) During the fourth quarter of 2018, the Company recorded, as part of its final estimate under SAB 118, $47 million of tax reserves related to uncertainty in our interpretation of the statute and associated regulations.
(b) During the third quarter of 2020, the Company released $32 million of tax reserves as a result of finalization of an IRS tax examination.
During the year ended January 2, 2021,December 30, 2023, the Company recognized $2 million of tax related interest benefit and paid tax-related interest totaling $1 million, andreducing the balance to $5 million at year-end. During the year ended December 31, 2022, the Company recognized $3$1 million of tax related interest, increasing the balance to $13$8 million at year-end. During the year ended December 28, 2019, the Company settled certain tax matters resulting in an $11 million net reduction of the tax interest accrual, decreasing the balance to $11 million at year-end. For the year ended December 29, 2018,January 1, 2022, the Company paid tax-related interest totaling $2 million and recognized $3$4 million of tax-related interest, increasing the accrual balance to $22$7 million at year-end.
NOTE 1415
DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative and nonderivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.
The Company designates derivatives and nonderivative hedging instruments as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.
Derivative instruments are classified on the Consolidated Balance Sheet based on the contractual maturity of the instrument or the timing of the underlying cash flows of the instrument for derivatives with contractual maturities beyond one year. Any collateral associated with derivative instruments is classified as other assets or other current liabilities on the Consolidated Balance Sheet depending on whether the counterparty collateral is in an asset or liability position. Margin deposits related to exchange-traded commodities are recorded in accounts receivable, net on the Consolidated Balance Sheet. On the Consolidated Statement of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item. Cash flows associated with collateral and margin deposits on exchange-traded commodities are classified as investing cash flows when the collateral account is in an asset position and as financing cash flows when the collateral account is in a liability position.
Total notional amounts of the Company’s derivative instruments as of January 2, 2021 and December 28, 2019 were as follows:
| | | | | | | | | | | | | | |
| (millions) | | 2020 | | 2019 |
| Foreign currency exchange contracts | | $ | 2,856 | | | $ | 2,628 | |
| Cross-currency contracts | | 1,411 | | | 1,540 | |
| Interest rate contracts | | 2,632 | | | 1,871 | |
| Commodity contracts | | 314 | | | 524 | |
| Total | | $ | 7,213 | | | $ | 6,563 | |
Total notional amounts of the Company’s derivative instruments as of December 30, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | |
| (millions) | | 2023 | | 2022 |
| Foreign currency exchange contracts | | $ | 3,141 | | | $ | 2,502 | |
| Cross-currency contracts | | 1,707 | | | 1,983 | |
| Interest rate contracts | | 2,289 | | | 2,657 | |
| Commodity contracts | | 201 | | | 230 | |
| Total | | $ | 7,338 | | | $ | 7,372 | |
Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, measured on a recurring basis.
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, cross-currency contracts and over-the-counter commodity andforeign currency contracts.
The Company’s 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. Over-the-counter 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. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.
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 management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of January 2, 2021December 30, 2023 or December 28, 2019.31, 2022.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of January 2, 2021December 30, 2023 and December 28, 2019:31, 2022:
Derivatives designated as hedging instruments
| | | | 2020 | | 2019 | | | 2023 | | 2022 |
| (millions) | (millions) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | (millions) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Assets: | Assets: | |
| Cross currency contracts: | Cross currency contracts: | |
| Cross currency contracts: | |
| Cross currency contracts: | |
| Other current assets | |
| Other current assets | |
| Other current assets | Other current assets | | $ | 0 | | | $ | 14 | | | $ | 14 | | | $ | 0 | | | $ | 45 | | | $ | 45 | |
| Other Assets | Other Assets | | 0 | | | 16 | | | 16 | | | 0 | | | 40 | | | 40 | |
| Interest rate contracts (a): | Interest rate contracts (a): | |
| Other current assets | |
| Other current assets | |
| Other current assets | Other current assets | | 0 | | | 0 | | | 0 | | | 0 | | | 7 | | | 7 | |
| Other assets | Other assets | | 0 | | | 60 | | | 60 | | | 0 | | | 4 | | | 4 | |
| Total assets | Total assets | | $ | 0 | | | $ | 90 | | | $ | 90 | | | $ | 0 | | | $ | 96 | | | $ | 96 | |
| Liabilities: | Liabilities: | |
| | Cross currency contracts: | Cross currency contracts: | |
| | Cross currency contracts: | |
| | Cross currency contracts: | |
| Other current liabilities | |
| Other current liabilities | |
| Other current liabilities | Other current liabilities | | $ | 0 | | | $ | (13) | | | $ | (13) | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Other liabilities | Other liabilities | | 0 | | | (21) | | | (21) | | | 0 | | | 0 | | | 0 | |
| Interest rate contracts (a): | Interest rate contracts (a): | |
| Other current liabilities | |
| Other current liabilities | |
| Other current liabilities | Other current liabilities | | 0 | | | (3) | | | (3) | | | 0 | | | (4) | | | (4) | |
| Other liabilities | Other liabilities | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | Total liabilities | Total liabilities | | $ | 0 | | | $ | (37) | | | $ | (37) | | | $ | 0 | | | $ | (4) | | | $ | (4) | |
| | Total liabilities | |
| | Total liabilities | |
(a)The fair value of the related hedged portion of the Company’s long-term debt, a level 2 liability, was $0.8 billion and $0.7$1.1 billion as of January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively.
Derivatives not designated as hedging instruments
| | | | 2020 | | 2019 | | | 2023 | | 2022 |
| (millions) | (millions) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | (millions) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Assets: | Assets: | |
| Foreign currency exchange contracts: | Foreign currency exchange contracts: | |
| Foreign currency exchange contracts: | |
| Foreign currency exchange contracts: | |
| Other current assets | Other current assets | | $ | 0 | | | $ | 48 | | | $ | 48 | | | $ | 0 | | | $ | 12 | | | $ | 12 | |
| | Other current assets | |
| Other current assets | |
| Other assets | |
| Interest rate contracts: | Interest rate contracts: | |
| Other current assets | |
| Other current assets | |
| Other current assets | Other current assets | | 0 | | | 4 | | | 4 | | | 0 | | | 0 | | | 0 | |
| Other assets | Other assets | | 0 | | | 13 | | | 13 | | | 0 | | | 0 | | | 0 | |
| Commodity contracts: | Commodity contracts: | |
| Other current assets | Other current assets | | 9 | | | 0 | | | 9 | | | 9 | | | 0 | | | 9 | |
| Other current assets | |
| Other current assets | |
| Total assets | Total assets | | $ | 9 | | | $ | 65 | | | $ | 74 | | | $ | 9 | | | $ | 12 | | | $ | 21 | |
| Liabilities: | Liabilities: | |
| Foreign currency exchange contracts: | Foreign currency exchange contracts: | |
| Foreign currency exchange contracts: | |
| Foreign currency exchange contracts: | |
| Other current liabilities | |
| Other current liabilities | |
| Other current liabilities | Other current liabilities | | $ | 0 | | | $ | (73) | | | $ | (73) | | | $ | 0 | | | $ | (18) | | | $ | (18) | |
| Other liabilities | Other liabilities | | 0 | | | (4) | | | (4) | | | 0 | | | 0 | | | 0 | |
| Interest rate contracts: | Interest rate contracts: | |
| Other current liabilities | Other current liabilities | | 0 | | | (6) | | | (6) | | | 0 | | | 0 | | | 0 | |
| Other current liabilities | |
| Other current liabilities | |
| Other liabilities | Other liabilities | | 0 | | | (22) | | | (22) | | | 0 | | | (13) | | | (13) | |
| Commodity contracts: | Commodity contracts: | |
| Other current liabilities | Other current liabilities | | (1) | | | 0 | | | (1) | | | (1) | | | 0 | | | (1) | |
| Other current liabilities | |
| Other current liabilities | |
| Total liabilities | Total liabilities | | $ | (1) | | | $ | (105) | | | $ | (106) | | | $ | (1) | | | $ | (31) | | | $ | (32) | |
The Company has designated a portion of its outstanding foreign currency denominated long-term debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries foreign currency denominated net assets. The carrying value of this debt was $2.8$1.7 billion and $2.6$1.6 billion as of January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of January 2, 2021December 30, 2023 and December 28, 2019.31, 2022.
| | (millions) | (millions) | | Line Item in the Consolidated Balance Sheet in which the hedged item is included | | Carrying amount of the hedged liabilities | | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a) | (millions) | | Line Item in the Consolidated Balance Sheet in which the hedged item is included | | Carrying amount of the hedged liabilities | | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a) |
| January 2,
2021 | December 28,
2019 | | January 2,
2021 | December 28,
2019 |
| | | | December 30,
2023 | | | | | | December 30,
2023 | December 31,
2022 | | December 30,
2023 | December 31,
2022 |
| Interest rate contracts | Interest rate contracts | | Current maturities of long-term debt | | $ | 0 | | $ | 493 | | | $ | 0 | | $ | 0 | |
| Interest rate contracts | Interest rate contracts | | Long-term debt | | $ | 2,568 | | $ | 2,643 | | | $ | 25 | | $ | 19 | |
(a)The fair value adjustment related to current maturities of long-term debt includes $2 million and $(3) million from discontinued hedging relationships as of December 30, 2023, and December 31, 2022, respectively. The hedged long-term debt includes $16$3 million and $15$13 million of hedging adjustment on discontinued hedging relationships as of January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, respectively.
The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of January 2, 2021December 30, 2023 and December 28, 201931, 2022 would be adjusted as detailed in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 30, 2023 | | | | |
| | | | Gross Amounts Not
Offset in the
Consolidated Balance
Sheet | | |
| | Amounts
Presented in
the
Consolidated
Balance
Sheet | | Financial
Instruments | | Cash
Collateral
Received/
Posted | | Net
Amount |
| Total asset derivatives | | $ | 86 | | | $ | (84) | | | $ | — | | | $ | 2 | |
| Total liability derivatives | | $ | (200) | | | $ | 84 | | | $ | 68 | | | $ | (48) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | | | | |
| | | | | Gross Amounts Not
Offset in the
Consolidated Balance
Sheet | | |
| | Amounts
Presented in
the
Consolidated
Balance
Sheet | | Financial
Instruments | | Cash
Collateral
Received/
Posted | | Net
Amount |
| Total asset derivatives | | $ | 304 | | | $ | (153) | | | $ | (33) | | | $ | 118 | |
| Total liability derivatives | | $ | (172) | | | $ | 153 | | | $ | 19 | | | $ | — | |
The Company settled certain interest rate contracts resulting in a net realized gains of approximately $85 million and $165 million during the years ended December 30, 2023 and December 31, 2022, respectively. These derivatives were accounted for as cash flow hedges and the related net gains were recorded in accumulated other comprehensive income and will be amortized to interest expense over the term of the related forecasted fixed rate debt, once issued. During the year ended December 31, 2022, the Company recognized an $18 million gain related to a portion of certain forward-starting interest rate swaps no longer designated as cash flow hedges due to changes in forecasted debt issuance.
Additionally, the Company settled certain cross currency swaps resulting in a net gains of approximately $68 million and $37 million during the years ended December 30, 2023 and December 31, 2022, respectively. These cross
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of January 2, 2021 | | | | |
| | | | Gross Amounts Not
Offset in the
Consolidated Balance
Sheet | | |
| | Amounts
Presented in
the
Consolidated
Balance
Sheet | | Financial
Instruments | | Cash
Collateral
Received/
Posted | | Net
Amount |
| Total asset derivatives | | $ | 164 | | | $ | (116) | | | $ | 0 | | | $ | 48 | |
| Total liability derivatives | | $ | (143) | | | $ | 116 | | | $ | 5 | | | $ | (22) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 28, 2019 | | | | |
| | | | | Gross Amounts Not
Offset in the
Consolidated Balance
Sheet | | |
| | Amounts
Presented in
the
Consolidated
Balance
Sheet | | Financial
Instruments | | Cash
Collateral
Received/
Posted | | Net
Amount |
| Total asset derivatives | | $ | 117 | | | $ | (27) | | | $ | (7) | | | $ | 83 | |
| Total liability derivatives | | $ | (36) | | | $ | 27 | | | $ | 0 | | | $ | (9) | |
The effect of derivative instruments on the Consolidated Statement of Income for the years ended December 30, 2023, December 31, 2022 and January 2, 2021 and December 28, 2019 were as follows:1, 2022:
Derivatives and non-derivatives in net investment hedging relationships
| | (millions) | (millions) | | Gain (loss)
recognized in
AOCI | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component | (millions) | | Gain (loss)
recognized in
AOCI | Gain (loss) excluded from assessment of hedge effectiveness | Location of gain (loss) in income of excluded component |
| | | 2020 | | 2019 | 2020 | | 2019 | |
| Foreign currency denominated long-term debt | Foreign currency denominated long-term debt | | $ | (236) | | | $ | 60 | | $ | 0 | | | $ | 0 | | |
| Foreign currency denominated long-term debt | |
| Foreign currency denominated long-term debt | |
| Cross-currency contracts | |
| Cross-currency contracts | |
| Cross-currency contracts | Cross-currency contracts | | (93) | | | 6 | | 34 | | | 34 | | Interest expense | | (71) | | | 123 | | 123 | | | 61 | | 61 | | 53 | 53 | | | 39 | | 39 | | | 26 | | 26 | | Interest expense | Interest expense |
| Total | Total | | $ | (329) | | | $ | 66 | | $ | 34 | | | $ | 34 | | |
| Derivatives not designated as hedging instruments | Derivatives not designated as hedging instruments | | |
| (millions) | |
| (millions) | |
| (millions) | (millions) | | Location of gain
(loss)
recognized in
income | | Gain (loss)
recognized in
income | | Location of gain
(loss)
recognized in
income | | Gain (loss)
recognized in
income |
| | | | | 2020 | | 2019 | | | | | 2023 | | 2022 | | 2021 |
| Foreign currency exchange contracts | Foreign currency exchange contracts | | COGS | | $ | 11 | | | $ | (16) | |
| Foreign currency exchange contracts | Foreign currency exchange contracts | | SGA | | (1) | | | (2) | |
| Foreign currency exchange contracts | Foreign currency exchange contracts | | OIE | | (6) | | | (4) | |
| Interest rate contracts | Interest rate contracts | | Interest expense | | 2 | | | 0 | |
| Commodity contracts | Commodity contracts | | COGS | | 6 | | | 4 | |
| | Total | Total | | | | $ | 12 | | | $ | (18) | |
| Total | |
| Total | |
The effect of fair value and cash flow hedge accounting on the Consolidated Income Statement for the years ended December 30, 2023, December 31, 2022 and January 2, 2021 and December 28, 2019:1, 2022:
| | | | | | | December 30, 2023 | |
| | | | | | December 30, 2023 | |
| | | | | | December 30, 2023 | | | | December 31, 2022 | January 1, 2022 |
| (millions) | | (millions) | | | | Interest expense | | | Interest expense | Interest expense |
| Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded | |
| Gain (loss) on fair value hedging relationships: | |
| Interest contracts: | |
| Interest contracts: | |
| Interest contracts: | |
| Hedged items | |
| Hedged items | |
| Hedged items | |
| Derivatives designated as hedging instruments | |
| | Gain (loss) on cash flow hedging relationships: | |
| Gain (loss) on cash flow hedging relationships: | |
| Gain (loss) on cash flow hedging relationships: | |
| Interest contracts: | |
| Interest contracts: | |
| Interest contracts: | |
| Amount of gain (loss) reclassified from AOCI into income | |
| Amount of gain (loss) reclassified from AOCI into income | |
| Amount of gain (loss) reclassified from AOCI into income | |
| | | | | | January 2, 2021 | | December 28, 2019 |
| (millions) | | | Interest Expense | | Interest Expense | |
| Total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value or cash flow hedges are recorded | | | $ | 281 | | | $ | 284 | | |
| Gain (loss) on fair value hedging relationships: | | | | | | |
| Interest contracts: | | | | | | |
| Hedged items | | | (7) | | | (33) | | |
| Derivatives designated as hedging instruments | | | 7 | | | 37 | | |
| | Gain (loss) on cash flow hedging relationships: | | | | | | |
| Interest contracts: | | | | | | |
| Amount of gain (loss) reclassified from AOCI into income | | | (14) | | | (4) | | |
|
During the next 12 months, the Company expects $17$10 million of net deferred losses reported in accumulated other comprehensive income (AOCI) at January 2, 2021December 30, 2023 to be reclassified to income, assuming market rates remain constant through contract maturities.
Certain of the Company’s derivative instruments contain provisions requiring the Company to post collateral on those derivative instruments that are in a liability position if the Company’s credit rating falls below BB+ (S&P), or Baa1 (Moody’s). The fair value of all derivative instruments with credit-risk-related contingent features in a liability
position on January 2, 2021December 30, 2023 was not material. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of January 2, 2021December 30, 2023 triggered by credit-risk-related contingent features.
Other fair value measurements
Fair Value Measurements on a Nonrecurring Basis
During the year ended December 29, 2018, long-lived assets of $19 million related to a manufacturing facility in the Company's North America reportable segment, were written down to an estimated fair value of $5 million due to Project K activities. The Company's calculation of the fair value of these long-lived assets is based on level 3 inputs, including market comparables, market trends and the condition of the assets. See Note 5Available for more information regarding Project K.
During the year ended January 2, 2021, the Company invested and sold $250 million in a mutual fund holding short term debt securities. The investment was measured at fair value using the net asset value (NAV) per share as a practical expedient and as a result, this investment has not been classified in the fair value hierarchy. The gain associated with the sale of the investment was less than $1 million and was recorded in other income and expense.securities
The following is a summary of the carrying and market values of the Company's available for sale securities:
| | 2020 | | 2019 |
| | 2023 | | | | 2023 | | 2022 |
| (millions) | (millions) | | Cost | | Unrealized Gain (Loss) | | Market Value | | Cost | | Unrealized Gain/(Loss) | | Market Value | (millions) | | Cost | | Unrealized Gain (Loss) | | Market Value | | Cost | | Unrealized Gain/(Loss) | | Market Value |
| Corporate Bonds | Corporate Bonds | | $ | 62 | | | $ | 3 | | | $ | 65 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
During the year ended December 28, 2019,30, 2023, the Company'sCompany sold approximately $64 million of investments in level 2 corporate bonds were sold for $63bonds. The resulting loss was approximately $3 million resulting in a gain of $4 million,and recorded in Other income and (expense). Also during the year ended December 30, 2023, the Company purchased approximately $15 million in level 2 corporate bonds. During the year ended December 31, 2022, the Company sold approximately $19 million of investments in level 2 corporate bonds. The resulting loss was approximately $1 million and recorded in Other income and (expense). Also during the year ended December 31, 2022, the Company purchased approximately $17 million in level 2 corporate bonds.
The market values of the Company's investments in level 2 corporate bonds wereare based on matrices or models from pricing vendors. Unrealized gains and losses were included in the Consolidated Statement of Comprehensive
Income. Additionally, these investments wereare recorded within Other current assets and Other assets on the Consolidated Balance Sheet, based on the maturity of the individual security.
The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition of an impairment loss in earnings.If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis.The Company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments.
Equity investments
We hold equity investments in certain companies that we do not have the ability to exercise significant influence. Equity investments without a readily determinable fair value are recorded at original cost. Investments with a readily determinable fair value, which are level 2 investments, are measured at fair value based on observable market price changes, with gains and losses recorded through net earnings. Equity investments were approximately $40 million as of December 30, 2023 and December 31, 2022, respectively. Additionally, these investments were recorded within Other noncurrent assets on the Consolidated Balance Sheet.
Financial instruments
The carrying values of the Company’s short-term items, including cash, cash equivalents, accounts receivable, accounts payable, notes payable and current maturities of long-term debt approximate fair value. The fair value of the Company’s long-term debt, which are level 2 liabilities, is calculated based on broker quotes. The fair value and carrying value of the Company's long-term debt was $7.7$5.0 billion and $6.7$5.1 billion, respectively, as of January 2, 2021.December 30, 2023. The fair value and carrying value of the Company's long-term debt was $5.1 billion and $5.3 billion, respectively, as of December 31, 2022.
Counterparty credit risk concentration
The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.
Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. Certain counterparties represent a concentration of credit risk to the Company. If those counterparties fail to perform according to the terms of derivative contracts, this could result in a loss to the Company, of approximately $12 million, net of collateral already received from those counterparties ascounterparties. As of January 2, 2021.December 30, 2023, the concentration of credit risk to the Company was immaterial.
For certain derivative contracts, reciprocal collateralization agreements with counterparties 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. In addition, the company is required to maintain cash margin accounts in connection with its open positions for exchange-traded commodity derivative instruments executed with the counterparty that are subject to enforceable netting agreements. As of January 2, 2021, collateralDecember 30, 2023, the Company posted $59 million related to reciprocal collateralization agreements andagreements. As of December 30, 2023, the Company posted $8 million in margin deposits for exchange-traded commodity derivative instruments, were immaterial.which was reflected as an increase in accounts receivable, net on the Consolidated Balance Sheet.
Management believes concentrations of credit risk with respect to accounts receivable is limited due to
the generally high credit quality of the Company’s 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 encompassing approximately 29%18% of consolidated trade receivables at January 2, 2021.December 30, 2023.
Refer to Note 1 for disclosures regarding the Company’s accounting policies for derivative instruments.
NOTE 1516
CONTINGENCIES
The Company is subject to various legal proceedings, claims, and governmental inspections or investigations in the ordinary course of business covering matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, data privacy, collective bargaining, workers’ compensation, employment and other actions. These matters are subject to uncertainty and the outcome is not predictable with assurance. The Company uses a combination of insurance and self-insurance for a number of risks, including workers’ compensation, general liability, automobile liability and product liability.
In 2016, a class action complaint was filed against Kellogg in the Northern District of California relating to statements made on packaging for certain products. In August 2019, the Court ruled in favor of the plaintiff regarding certain statements made on the Company’s products and ordered the parties to conduct settlement discussions related to all matters in dispute. In October 2019, the plaintiff filed a motion to the Court to approve a settlement between Kellogg and the class. During 2019, the Company concluded that the contingency related to the unfavorable ruling was probable and estimable, resulting in a liability being recorded. In February 2020, the Court denied plaintiff’s motion to approve the settlement and the parties are continuing arbitration. This litigation, including any potential settlement, is not expected to have a material impact on the Company’s consolidated financial statements. The Company will continue to evaluate the likelihood of potential outcomes as the litigation continues.
The Company has established accruals for certain matters where losses are deemed probable and reasonably estimable. There are other claims and legal proceedings pending against the Company for which accruals have not been established. It is reasonably possible that some of these matters could result in an unfavorable judgment against the Company and could require payment of claims in amounts that cannot be estimated at January 2, 2021.December 30, 2023. Based upon current information, management does not expect any of the claims or legal proceedings pending against the Company to have a material impact on the Company’s consolidated financial statements. The Company is subject to various legal proceedings, claims, and governmental inspections or investigations in the ordinary course of business covering matters such as general commercial, governmental regulations, antitrust and trade regulations, product liability, environmental, intellectual property, data privacy, collective bargaining, workers’ compensation, employment and other actions. These matters are subject to uncertainty and the outcome is not predictable with assurance.
NOTE 1617
QUARTERLY FINANCIAL DATA (unaudited)
| | | | | | | | | | | | | | |
| | Net sales | Gross profit |
| (millions) | 2020 | 2019 | 2020 | 2019 |
| First | $ | 3,412 | | $ | 3,522 | | $ | 1,144 | | $ | 1,107 | |
| Second | 3,465 | | 3,461 | | 1,197 | | 1,186 | |
| Third | 3,429 | | 3,372 | | 1,201 | | 1,000 | |
| Fourth | 3,464 | | 3,223 | | 1,185 | | 1,088 | |
| | $ | 13,770 | | $ | 13,578 | | $ | 4,727 | | $ | 4,381 | |
The following tables provide a summary of the quarterly consolidated financial data for the years ended December 30, 2023 and December 31, 2022.
| | | | | | | | | | | | | | |
| | Net sales | Gross profit |
| (millions) | 2023 | 2022 | 2023 | 2022 |
| First | $ | 3,342 | | $ | 3,057 | | $ | 984 | | $ | 998 | |
| Second | 3,351 | | 3,181 | | 1,094 | | 918 | |
| Third | 3,255 | | 3,251 | | 1,110 | | 948 | |
| Fourth | 3,174 | | 3,164 | | 1,095 | | 947 | |
| | $ | 13,122 | | $ | 12,653 | | $ | 4,283 | | $ | 3,811 | |
| | | | Net income (loss) attributable to Kellogg Company | Per share amounts | | Net income (loss) from continuing operations | Per share amounts from continuing operations |
| (millions) | (millions) | 2020 | 2019 | 2020 | 2019 | (millions) | 2023 | 2022 | 2023 | 2022 |
| | | | Basic | Diluted | Basic | Diluted | | | | Basic | Diluted | Basic | Diluted |
| First | First | $ | 347 | | $ | 282 | | $ | 1.01 | | $ | 1.01 | | $ | 0.82 | | $ | 0.82 | |
| Second | Second | 351 | | 286 | | 1.02 | | 1.02 | | 0.84 | | 0.84 | |
| Third | Third | 348 | | 247 | | 1.02 | | 1.01 | | 0.73 | | 0.72 | |
| Fourth | Fourth | 205 | | 145 | | 0.60 | | 0.59 | | 0.43 | | 0.42 | |
| | | $ | 1,251 | | $ | 960 | | | | $ | 788 | | $ | 731 | | | |
The principal market for trading Kellogg shares (Ticker symbol: K) is the New York Stock Exchange (NYSE). At January 2, 2021 there were 30,305 shareholders of record.
Dividends paid per share during the last two years were: | | | | | | | | | | | | | | | | | | | | |
| | Income (loss) from discontinued operations, net of taxes | Per share amounts from discontinued operations |
| (millions) | 2023 | 2022 | 2023 | 2022 |
| | | | Basic | Diluted | Basic | Diluted |
| First | $ | 68 | | $ | 100 | | $ | 0.20 | | $ | 0.19 | | $ | 0.29 | | $ | 0.29 | |
| Second | 64 | | 125 | | 0.19 | | 0.18 | | 0.37 | | 0.36 | |
| Third | 72 | | 78 | | 0.21 | | 0.21 | | 0.23 | | 0.22 | |
| Fourth | (28) | | (72) | | (0.08) | | (0.08) | | (0.21) | | (0.21) | |
| | $ | 176 | | $ | 231 | | | | | |
| | Quarter | 2020 | 2019 |
| | | | Net income (loss) attributable to Kellanova | Net earnings per common share |
| (millions) | | (millions) | 2023 | 2022 | 2023 | 2022 |
| | | | | Basic | Diluted | Basic | Diluted |
| First | First | $ | 0.57 | | $ | 0.56 | |
| Second | Second | 0.57 | | 0.56 | |
| Third | Third | 0.57 | | 0.57 | |
| Fourth | Fourth | 0.57 | | 0.57 | |
| | | $ | 2.28 | | $ | 2.26 | | | $ | 951 | | $ | 960 | | | |
During 2020, | | | | | | | | | | | | | | |
| | Average shares outstanding |
| 2023 | 2022 |
| | Basic | Diluted | Basic | Diluted |
| First | 342 | | 345 | | 340 | | 342 | |
| Second | 343 | | 345 | | 339 | | 342 | |
| Third | 342 | | 345 | | 341 | | 344 | |
| Fourth | 342 | | 344 | | 342 | | 345 | |
| | | | |
Dividends paid per share during the Company recorded the following in operating profit and other income (expense):last two years were:
| | | | | | | | | | | | | | | | | |
| | 2020 |
| (millions) | First | Second | Third | Fourth | Full Year |
| Operating profit | | | | | |
| Restructuring and cost reduction charges | $ | (1) | | $ | (14) | | $ | 0 | | $ | (22) | | $ | (37) | |
| Gains / (losses) on mark-to-market adjustments | 26 | | (43) | | 10 | | (1) | | (8) | |
| | | | | |
| Other income (expense) | | | | | |
| Restructuring and cost reduction charges | $ | 0 | | $ | 0 | | $ | 0 | | $ | 8 | | $ | 8 | |
| Gains / (losses) on mark-to-market adjustments | (14) | | (43) | | (7) | | (90) | | $ | (154) | |
| | | | | |
| | | | | | | | |
| Quarter | 2023 | 2022 |
| First | $ | 0.59 | | $ | 0.58 | |
| Second | 0.59 | | 0.58 | |
| Third | 0.60 | | 0.59 | |
| Fourth | 0.56 | | 0.59 | |
| | $ | 2.34 | | $ | 2.34 | |
During 2019, the Company recorded the following in operating profit and other income (expense):
| | | | | | | | | | | | | | | | | |
| | 2019 |
| (millions) | First | Second | Third | Fourth | Full Year |
| Operating profit | | | | | |
| Restructuring and cost reduction charges | $ | (8) | | $ | (65) | | $ | (18) | | $ | (27) | | $ | (118) | |
| Gains / (losses) on mark-to-market adjustments | (42) | | 46 | | (11) | | 0 | | (7) | |
| | | | | | |
| Other income (expense) | | | | | |
| Restructuring and cost reduction charges | $ | 0 | | $ | 0 | | $ | 0 | | $ | 5 | | $ | 5 | |
| Gains / (losses) on mark-to-market adjustments | 1 | | (11) | | 32 | | (120) | | $ | (98) | |
| | | | | |
NOTE 1718
REPORTABLE SEGMENTS
Kellogg CompanyKellanova is the world’s leading producer of cereal, second largest producer of crackers and a leading producer of cereal, savory snacks, and frozen foods. Additional product offerings include toaster pastries, cereal bars, veggie foods, and noodles. KelloggKellanova products are manufactured and marketed globally. Principal markets for these products include the United States, United Kingdom, Nigeria, Canada, Mexico and Nigeria.Australia.
The Company manages its operations through 4four operating segments that are based on geographic location - North America which includes U.S. businesses and Canada; Europe which consists principally of European countries; Latin America which consists of Central and South America and includes Mexico; and AMEA (Asia Middle East Africa) which consists of Africa, Middle East, Australia and other Asian and Pacific markets. These operating segments also represent our reportable segments.
On July 28, 2019, the Company completed its sale of selected cookies, fruit and fruit flavored snacks, pie crusts, and ice cream cone businesses to Ferrero for approximately $1.3 billion in cash. Both the total assets and the net assets, consisting primarily of goodwill and intangibles, property, plant and equipment, and inventory, of the businesses were approximately $1.3 billion. The operating results for these businesses were primarily included in the North America reporting segment prior to the sale. Reported net sales for the divested businesses totaled $562 million and $893 million for the years ended December 28, 2019 and December 29, 2018, respectively.
The measurement of reportable segment results is based on segment operating profit which is generally consistent with the presentation of operating profit in the Consolidated Statement of Income. Reportable segment results were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2020 | | 2019 | | 2018 |
| Net sales | | | | | | |
| North America | | $ | 8,361 | | | $ | 8,390 | | | $ | 8,688 | |
| Europe | | 2,232 | | | 2,092 | | | 2,122 | |
| Latin America | | 914 | | | 940 | | | 947 | |
| AMEA | | 2,263 | | | 2,156 | | | 1,790 | |
| Consolidated | | 13,770 | | | $ | 13,578 | | | $ | 13,547 | |
| Operating profit | | | | | | |
| North America (a)(b) | | $ | 1,473 | | | $ | 1,215 | | | $ | 1,397 | |
| Europe | | 301 | | | 222 | | | 251 | |
| Latin America | | 97 | | | 85 | | | 102 | |
| AMEA | | 202 | | | 195 | | | 174 | |
| Total Reportable Segments | | 2,073 | | | 1,717 | | | 1,924 | |
| Corporate (b) | | (312) | | | (316) | | | (218) | |
| Consolidated | | $ | 1,761 | | | $ | 1,401 | | | $ | 1,706 | |
| Depreciation and amortization (c) | | | | | | |
| North America | | $ | 282 | | | $ | 291 | | | $ | 341 | |
| Europe | | 84 | | | 80 | | | 78 | |
| Latin America | | 30 | | | 30 | | | 37 | |
| AMEA | | 79 | | | 76 | | | 57 | |
| Total Reportable Segments | | 475 | | | 477 | | | 513 | |
| Corporate | | 4 | | | 7 | | | 3 | |
| Consolidated | | $ | 479 | | | $ | 484 | | | $ | 516 | |
(a)During 2019, North America operating profit includes the recognition of multi-employer pension plan exit liabilities totaling $132 million.
(b)Corporate operating profit in 2020 and 2019 includes the cost of certain global research and development activities that were previously included in the North America reportable segment in 2018 totaling approximately $48 million.
(c)Includes asset impairment charges as discussed in Note 14. | | | | | | | | | | | | | | | | | | | | |
| (millions) | | 2023 | | 2022 | | 2021 |
| Net sales from continuing operations | | | | | | |
| North America | | $ | 6,574 | | | $ | 6,330 | | | $ | 5,775 | |
| Europe | | 2,501 | | | 2,310 | | | 2,397 | |
| Latin America | | 1,265 | | | 1,089 | | | 962 | |
| AMEA | | 2,785 | | | 2,933 | | | 2,613 | |
| Total Reportable Segments | | 13,125 | | | 12,662 | | | 11,747 | |
| Corporate | | (3) | | | (9) | | | — | |
| Consolidated | | $ | 13,122 | | | $ | 12,653 | | | $ | 11,747 | |
| Operating profit | | | | | | |
| North America | | $ | 1,024 | | | $ | 907 | | | $ | 932 | |
| Europe | | 357 | | | 329 | | | 350 | |
| Latin America | | 130 | | | 116 | | | 100 | |
| AMEA | | 270 | | | 252 | | | 246 | |
| Total Reportable Segments | | 1,781 | | | 1,604 | | | 1,628 | |
| Corporate | | (276) | | | (393) | | | (245) | |
| Consolidated | | $ | 1,505 | | | $ | 1,211 | | | $ | 1,383 | |
| Depreciation and amortization | | | | | | |
| North America | | $ | 180 | | | $ | 187 | | | $ | 191 | |
| Europe | | 80 | | | 81 | | | 92 | |
| Latin America | | 35 | | | 34 | | | 25 | |
| AMEA | | 65 | | | 94 | | | 84 | |
| Total Reportable Segments | | 360 | | | 396 | | | 392 | |
| Corporate | | 6 | | | 8 | | | 3 | |
| Consolidated | | $ | 366 | | | $ | 404 | | | $ | 395 | |
Certain items such as interest expense and income taxes, while not included in the measure of reportable segment operating results, are regularly reviewed by the CODMchief operating decision maker (CODM) for the Company’s internationally-based reportable segments as shown below.
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Interest expense | Interest expense | |
| North America | |
| North America | |
| North America | North America | | $ | 0 | | | $ | 0 | | | $ | 1 | |
| Europe | Europe | | 4 | | | 6 | | | 6 | |
| Latin America | Latin America | | 6 | | | 9 | | | 3 | |
| AMEA | AMEA | | 8 | | | 14 | | | 9 | |
| Corporate | Corporate | | 263 | | | 255 | | | 268 | |
| Consolidated | Consolidated | | $ | 281 | | | $ | 284 | | | $ | 287 | |
| Income taxes | Income taxes | |
| Europe | Europe | | $ | 29 | | | $ | 48 | | | $ | 23 | |
| Europe | |
| Europe | |
| Latin America | Latin America | | 20 | | | 16 | | | 30 | |
| AMEA | AMEA | | 33 | | | 23 | | | 23 | |
| Corporate & North America | Corporate & North America | | 241 | | | 234 | | | 105 | |
| Consolidated | Consolidated | | $ | 323 | | | $ | 321 | | | $ | 181 | |
Assets are reviewed by the CODM on a consolidated basis and therefore are not presented by operating segment. The CODM does review additions to long-lived assetsproperty based on operating segment.
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Additions to long-lived assets | |
| Additions to property | |
| North America | |
| North America | |
| North America | North America | | $ | 270 | | | $ | 356 | | | $ | 336 | |
| Europe | Europe | | 120 | | | 83 | | | 84 | |
| Latin America | Latin America | | 31 | | | 41 | | | 76 | |
| AMEA | AMEA | | 77 | | | 101 | | | 79 | |
| Corporate | Corporate | | 7 | | | 5 | | | 3 | |
| Consolidated | Consolidated | | $ | 505 | | | $ | 586 | | | $ | 578 | |
The Company’s largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 19%15% of consolidated net sales during 2020, 2019,2023, and 2018,16% and 17% of consolidated net sales from continuing operations during 2022 and 2021, respectively, comprised principally of sales within the United States.
Supplemental geographic information is provided below for net sales to external customers and long-lived assets:assets (property and right-of-use lease assets):
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Net sales | |
| Net sales from continuing operations | |
| United States | United States | | $ | 7,821 | | | $ | 7,885 | | | $ | 8,176 | |
| United States | |
| United States | |
| Nigeria | |
| Poland | |
| All other countries | All other countries | | 5,949 | | | 5,693 | | | 5,371 | |
| Consolidated | Consolidated | | $ | 13,770 | | | $ | 13,578 | | | $ | 13,547 | |
| Long-lived assets | |
| Long-lived assets from continuing operations | |
| United States | United States | | $ | 2,048 | | | $ | 1,996 | | | $ | 2,197 | |
| United States | |
| United States | |
| Nigeria | |
| Poland | |
| All other countries | All other countries | | 1,665 | | | 1,616 | | | 1,534 | |
| Consolidated | Consolidated | | $ | 3,713 | | | $ | 3,612 | | | $ | 3,731 | |
Supplemental product information is provided below for net sales from continuing operations to external customers:
| | (millions) | (millions) | | 2020 | | 2019 | | 2018 | (millions) | | 2023 | | 2022 | | 2021 |
| Snacks | Snacks | | $ | 6,281 | | | $ | 6,663 | | | $ | 6,797 | |
| Cereal | Cereal | | 5,433 | | | 5,029 | | | 5,203 | |
| Frozen | Frozen | | 1,139 | | | 1,037 | | | 1,020 | |
| Noodles and other | Noodles and other | | 917 | | | 849 | | | 527 | |
| Consolidated | Consolidated | | $ | 13,770 | | | $ | 13,578 | | | $ | 13,547 | |
NOTE 1819
SUPPLEMENTAL FINANCIAL STATEMENT DATA
| Consolidated Statement of Income (millions) | Consolidated Statement of Income (millions) | | 2020 | | 2019 | | 2018 | Consolidated Statement of Income (millions) | | 2023 | | 2022 | | 2021 |
| Research and development expense | Research and development expense | | $ | 135 | | | $ | 144 | | | $ | 154 | |
| Advertising expense | Advertising expense | | $ | 781 | | | $ | 676 | | | $ | 752 | |
| Consolidated Balance Sheet (millions) | Consolidated Balance Sheet (millions) | | 2020 | | 2019 | Consolidated Balance Sheet (millions) | | 2023 | | 2022 |
| Trade receivables | Trade receivables | | $ | 1,272 | | | $ | 1,315 | |
| Allowance for doubtful accounts | | (19) | | | (10) | |
| Allowance for expected credit losses | |
| Refundable income taxes | Refundable income taxes | | 66 | | | 56 | |
| Other receivables | Other receivables | | 218 | | | 215 | |
| Accounts receivable, net | Accounts receivable, net | | $ | 1,537 | | | $ | 1,576 | |
| Raw materials, spare parts, and supplies | Raw materials, spare parts, and supplies | | $ | 338 | | | $ | 303 | |
| Finished goods and materials in process | Finished goods and materials in process | | 946 | | | 923 | |
| Inventories | Inventories | | $ | 1,284 | | | $ | 1,226 | |
| Land | Land | | $ | 120 | | | $ | 116 | |
| Buildings | Buildings | | 2,135 | | | 2,021 | |
| Machinery and equipment | Machinery and equipment | | 6,080 | | | 5,852 | |
| Capitalized software | Capitalized software | | 543 | | | 496 | |
| Construction in progress | Construction in progress | | 641 | | | 566 | |
| Accumulated depreciation | Accumulated depreciation | | (5,806) | | | (5,439) | |
| Property, net | Property, net | | $ | 3,713 | | | $ | 3,612 | |
| Other intangibles | Other intangibles | | $ | 2,612 | | | $ | 2,677 | |
| Accumulated amortization | Accumulated amortization | | (121) | | | (101) | |
| Other intangibles, net | Other intangibles, net | | $ | 2,491 | | | $ | 2,576 | |
| Pension | Pension | | $ | 324 | | | $ | 241 | |
| Deferred income taxes | Deferred income taxes | | 254 | | | 231 | |
| Nonpension post retirement benefits | Nonpension post retirement benefits | | 369 | | | 283 | |
| Other | Other | | 515 | | | 384 | |
| Other assets | Other assets | | $ | 1,462 | | | $ | 1,139 | |
| Accrued income taxes | Accrued income taxes | | $ | 58 | | | $ | 42 | |
| Accrued salaries and wages | | 378 | | | 290 | |
| Other | | 709 | | | 577 | |
| Customer deposits | |
| Other current liabilities | |
| Other current liabilities | Other current liabilities | | $ | 1,145 | | | $ | 909 | |
| Income taxes payable | Income taxes payable | | $ | 56 | | | $ | 81 | |
| Nonpension postretirement benefits | Nonpension postretirement benefits | | 34 | | | 33 | |
| Other | Other | | 435 | | | 429 | |
| Other liabilities | Other liabilities | | $ | 525 | | | $ | 543 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts (millions) | | 2020 | | 2019 | | 2018 |
| Balance at beginning of year | | $ | 10 | | | $ | 10 | | | $ | 10 | |
| Additions charged to expense | | 13 | | | 9 | | | 4 | |
| Doubtful accounts charged to reserve | | (4) | | | (9) | | | (4) | |
| Balance at end of year | | $ | 19 | | | $ | 10 | | | $ | 10 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for expected credit losses (millions) | | 2023 | | 2022 | | 2021 |
| Balance at beginning of year | | $ | 13 | | | $ | 15 | | | $ | 19 | |
| Additions (reductions) charged to expense | | 5 | | | 4 | | | (1) | |
| Expected credit losses charged to reserve | | (2) | | | (6) | | | (3) | |
| Balance at end of year | | $ | 16 | | | $ | 13 | | | $ | 15 | |
NOTE 20
SUBSEQUENT EVENTS
On February 8, 2024, the Company announced the following reorganization plans.
The North America frozen supply chain network will be reorganized to drive increased productivity. The implementation of the reorganization plan is subject to satisfaction of any collective bargaining obligations. The reorganization will result in the expected closure of one production facility, with volume requirements being shifted to remaining production facilities across the Americas frozen network. The overall project is expected to be substantially completed by late 2024, with cost savings beginning to contribute to gross margin improvements in the second half of 2024 and reaching full-run rate in 2025.
This project is expected to result in cumulative pretax charges of approximately $75 million. Cash costs are expected to be approximately $20 million. The Company currently anticipates employee-related costs totaling approximately $10 million, which will include severance and other termination benefits; and other cash costs totaling approximately $10 million, which will primarily consist of charges related to capital expenses. Non-cash costs are expected to be approximately $55 million and primarily consist of asset impairment, accelerated depreciation, and asset write-offs.
The European cereal supply chain network is also proposed to be reorganized to drive efficiencies. The implementation of the reorganization plan is subject to satisfaction of any collective bargaining obligations and completion of consultation with impacted employees. The proposed reorganization will result in the expected closure of one production facility. The overall project is expected to be substantially completed by late 2026, with resulting efficiencies expected to begin contributing to gross margin improvements in late 2026.
This proposed reorganization is expected to result in cumulative pretax charges of approximately $120 million. Cash costs are expected to be approximately $80 million across three years. The Company currently anticipates employee-related costs totaling approximately $50 million, which will include severance and other related benefits (subject to consultation); and other cash costs totaling approximately $30 million, which will primarily consist of charges related to capital expenses. Non-cash costs are expected to be approximately $40 million and primarily consist of asset impairment, accelerated depreciation, and asset write-offs.
Management’s Responsibility for Financial Statements
Management is responsible for the preparation of the Company’s consolidated financial statements and related notes. We believe that the consolidated financial statements present the Company’s 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 Board of Directors of the Company has an Audit Committee composed of sixfour 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.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining 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 a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with 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 (2013) 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 (2013), management concluded that our internal control over financial reporting was effective as of January 2, 2021.December 30, 2023. The effectiveness of our internal control over financial reporting as of January 2, 2021December 30, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which follows.
/s/ Steven A. Cahillane
Steven A. Cahillane
President and Chief Executive Officer
/s/ Amit Banati
Amit Banati
Senior Vice PresidentChairman and Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Kellogg CompanyKellanova
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes, of Kellogg CompanyKellanova and its subsidiaries (the “Company”) as listed in the index appearing under Item 15(a)(1) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 2, 2021,December 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 2, 2021December 30, 2023 and December 28, 2019,31, 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2021December 30, 2023 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 2, 2021,December 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated 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 Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s 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 company’s 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 company’s 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
GoodwillIndefinite-Lived Intangible Asset Quantitative Impairment Assessment –RX Reporting Unit– One Brand in the North America Operating Segment
As described in Notes 1 and 46 to the consolidated financial statements, management evaluates goodwill for impairment annually and whenever events or changes in circumstances indicatethe Company’s consolidated indefinite-lived intangible assets balance was $1.8 billion as of December 30, 2023, of which the carrying amountvalue for one brand in the North America operating segment that primarily relates to snack category products was $150 million. Management assesses indefinite-life intangible assets impairment risk throughout the year by performing a qualitative review and assessing events and circumstances that could affect the fair value or carrying value of the goodwillintangible assets. Annually during the fourth quarter, management may be impaired.perform qualitative or quantitative testing for impairment. Management’s impairment testing performed through the fourth quarter of 2023 consisted of qualitative or quantitative testing for all significant indefinite-lived intangible assets. As discloseda result of the annual impairment testing, management recognized a non-cash impairment of $34 million in selling, general and administrative expense related to a brand in the consolidated financial statements,North America operating segment that primarily relates to snack category products. In performing the carrying amountquantitative test of RX goodwill as of January 2, 2021 was $373 million. Thethis brand, fair value for the RX reporting unit was determined by management using a relief from royalty valuation method that includes estimates, and significant assumptions, of future cash flows to be generated from that asset based on a calculation which gave consideration to an income approach utilizing the discounted cash flow methodestimates of future sales, royalty rate and thediscount rate consistent with rates used by market approach using the guideline public company and guideline transaction methods. The significant assumptions utilized within the RX discounted cash flow method are forecasted net sales and profitability growth and the discount rate.participants.
The principal considerations for our determination that performing procedures relating to the goodwillindefinite-lived intangible asset quantitative impairment assessment of one brand in the RX reporting unitNorth America operating segment is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the indefinite-lived intangible asset related to one brand in the North America operating segment; (ii) a high degree of auditor judgment, and subjectivity, in applying procedures relating to the fair value measurement of the RX reporting unit due to the significant judgment by management when determining the fair value of the RX reporting unit using the discounted cash flow model, (ii) the significant auditand effort in performing procedures and evaluating management’s significant assumptions related to forecasted netfuture sales, royalty rate, and profitability growth, and the discount raterate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the annual goodwillmanagement’s indefinite-lived intangible asset quantitative impairment test,assessment, including controls over the valuation of the RX reporting unit.Company’s indefinite-lived intangible asset related to one brand in the North America operating segment. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of one brand in the RX reporting unit,North America operating segment; (ii) evaluating the appropriateness of the discounted cash flow model,relief from royalty valuation method used by management; (iii) testing the completeness accuracy, and relevanceaccuracy of underlying data used in the modelrelief from royalty valuation method; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the forecasted netfuture sales, royalty rate, and profitability growth and the discount rate. Evaluating the reasonableness of management’s assumptionsassumption related to the forecasted netfuture sales and profitability growth involved evaluating whether the assumptionsassumption used by management werewas reasonable considering (i) the current and past performance of the reporting units,brand; (ii) the consistency with external market and industry data,data; and (iii) whether these assumptions werethe assumption was consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the Company’s discounted cash flow modelappropriateness of the relief from royalty valuation method and (ii) the reasonableness of the royalty rate and discount rate assumption.
/s/ PricewaterhouseCoopers LLP
Detroit, MichiganChicago, Illinois
February 22, 2021
We have served as the Company’s auditor since at least 1937. We have not been able to determine the specific year we began serving as auditor of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. 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 2, 2021,December 30, 2023, 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 evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Internal Control over Financial Reporting.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of management’s 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 audited, and reported on, the effectiveness of our internal control over financial reporting. Management’s report and the independent registered public accounting firm’s audit report are included in our 20202023 financial statements in Item 8 of this Report under the captions entitled “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by reference.
(c) Changes in Internal Control over Financial Reporting.
There were no changes during the quarter ended January 2, 2021,December 30, 2023, that materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
During the quarter ended December 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
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 30, 202126, 2024 (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 of this Report.
Compliance with Section 16(a) of the Exchange Act – Refer to the information in the Proxy Statement under the caption “Security Ownership—Delinquent Section 16(a) Reports,” 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.www.investor.kellanova.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.www.investor.kellanova.com.
ITEM 11. EXECUTIVE COMPENSATION
Refer to the information under the captions “2020“2023 Director Compensation and Benefits,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Retirement and Non-Qualified Defined Contribution and Deferred Compensation Plans,” “Potential Post-Employment Payments,” and "CEO Pay Ratio" of the Proxy Statement, which is incorporated herein by reference. See also the information under the caption “Compensation and Talent Management Committee Report” of the Proxy Statement, which information is incorporated herein by reference; 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”, and “Security Ownership — Officer and Director Stock Ownership” of the Proxy Statement, which information is incorporated herein by reference.
| | | | | | | | | | | | | | | | | | | | | | | |
| EQUITY COMPENSATION PLAN INFORMATION | |
| (millions, except per share data) | | | | | | | |
| | | | | | | |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights as of January 2, 2021 (a) | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights as of January 2, 2021 ($)(b) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding Securities Reflected in Column (a)) as of January 2, 2021
(c)(1) | |
| Equity compensation plans approved by security holders | | 15.5 | (2) | 65 | | 17.2 | (3) |
| Equity compensation plans not approved by security holders | | 0 | | NA | | 0.3 | |
| Total | | 15.5 | | 65 | | 17.5 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| EQUITY COMPENSATION PLAN INFORMATION | |
| (millions, except per share data) | | | | | | | |
| | | | | | | |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights as of December 30, 2023 (a) | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights as of December 30, 2023 ($)(b) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding Securities Reflected in Column (a)) as of December 30, 2023
(c)(1) | |
| Equity compensation plans approved by security holders | | 13.6 | | 55 | | 13.9 | (2) |
Equity compensation plans not approved by security holders (3) | | 0 | | NA | | 0.2 | |
| Total | | 13.6 | | 55 | | 14.1 | |
(1)The total number of shares remaining available for issuance under the 20172022 Long-Term Incentive Plan will be reduced by two shares for each share issued pursuant to an award other than a stock option or stock appreciation right, or potentially issuable pursuant to an outstanding award other than a stock option or stock appreciation right, which will in each case reduce the total number of shares remaining by one share for each share issued.Plan.
(2)Includes 13.6 million stock options and 1.7 million restricted share units.
(3)The total number of shares available remaining for issuance as of January 2, 2021December 30, 2023 for each Equity Compensation Plan approved by shareowners are as follows:
–The 20172022 Long-Term Incentive Plan - 15.712.4 million;
–The Amended and Restated 2002 Employee Stock Purchase Plan (effective January 1, 2021) - 1.51.2 million.
Three plans are considered “Equity compensation plans not approved by security holders.” The(3) Includes the Kellogg Share Incentive Plan, which was adopted in 2002 and is available to most U.K. employees of specified Kellogg Company subsidiaries; a similar plan, which is available to employees in the Republic of Ireland; and the Deferred Compensation Plan for Non-Employee Directors, which was adopted in 1986 and amended in 1993 and 2002.
Under the Kellogg Share Incentive Plan, eligible U.K. employees may contribute up to 1,500 Pounds Sterling annually to the plan through payroll deductions. The trustees of the plan use those contributions to buy shares of our common stock at fair market value on the open market, with Kellogg matching those contributions on a 1:1 basis. Shares must be withdrawn from the plan when employees cease employment. Under current law, eligible employees generally receive certain income and other tax benefits if those shares are held in the plan for a specified number of years. A similar plan is also available to employees in the Republic of Ireland. As these plans
are open market plans with no set overall maximum, no amounts for these plans are included in the above table. However, approximately 70,00042,000 shares were purchased by eligible employees under the Kellogg Share Incentive Plan, the plan for the Republic of Ireland and other similar predecessor plans during 2020,2023, with approximately an additional 70,00042,000 shares being provided as matched shares.
The Deferred Compensation Plan for Non-Employee Directors was amended and restated during 2013. Under the Deferred Compensation Plan for Non-Employee Directors, non-employee Directors may elect to defer all or part of their compensation (other than expense reimbursement) into units which are credited to their accounts. The units have a value equal to the fair market value of a share of our common stock on the appropriate date, with dividend equivalents being earned on the whole units in non-employee Directors’ accounts. Units must be paid in shares of our common stock, either in a lump sum or in up to ten annual installments, with the installments to begin as soon as practicable after the non-employee Director’s service as a Director terminates. No more than 300,000340,000 shares are authorized for use under this plan, of which approximately 44,00070,000 had been issued as of January 2, 2021.December 30, 2023.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Refer to the information under the captions “Corporate Governance — Director Independence” and “Corporate Governance — 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 3 — Ratification of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm — Fees Paid to Independent Registered Public Accounting Firm” and “Proposal 3 — Ratification of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm — 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 Management’s Report on Internal Control over Financial Reporting, and the Report thereon of PricewaterhouseCoopers LLP dated February 22, 2021,20, 2024, are included herein in Part II, Item 8.
(a) 1. Consolidated Financial Statements
Consolidated Statement of Income for the years ended December 30, 2023, December 31, 2022 and January 2, 2021, December 28, 2019 and December 29, 2018.1, 2022.
Consolidated Statement of Comprehensive Income for the years ended December 30, 2023, December 31, 2022 and January 2, 2021, December 28, 2019 and December 29, 2018.1, 2022.
Consolidated Balance Sheet at January 2, 2021December 30, 2023 and December 28, 2019.31, 2022.
Consolidated Statement of Equity for the years ended December 30, 2023, December 31, 2022 and January 2, 2021, December 28, 2019 and December 29, 2018.1, 2022.
Consolidated Statement of Cash Flows for the years ended December 30, 2023, December 31, 2022 and January 2, 2021, December 28, 2019 and December 29, 2018.1, 2022.
Notes to Consolidated Financial Statements.
Management’s Report on Internal Control over Financial Reporting.
Report of Independent Registered Public Accounting Firm.Firm (PCAOB ID 238).
(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 included in this Report.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
EXHIBIT INDEX
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | Separation and Distribution Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated October 2, 2023, Commission file number 1-4171. | | | IBRF | |
| | Amended Restated Certificate of Incorporation of Kellogg Company,Kellanova, incorporated by reference to Exhibit 4.13.1 to our Registration StatementCurrent Report on Form S-8,8-K dated October 2, 2023, Commission file number 333-56536.1-4171. | | | IBRF | |
| | Bylaws of Kellogg Company, as amended, incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K dated December 15, 2017,February 22, 2022, Commission file number 1-4171. | | | IBRFE | |
| | Indenture, dated March 15, 2001, between Kellogg Company and BNY Midwest Trust Company, including the form of 7.45% Debentures due 2031, incorporated by reference to Exhibit 4.01 to our Quarterly Report on Form 10-Q for the quarter ending March 31, 2001, Commission file number 1-4171. | | | IBRF | |
| | Supplemental Indenture, dated March 29, 2001, between Kellogg Company and BNY Midwest Trust Company, including the form of 7.45% Debentures due 2031, incorporated by reference to Exhibit 4.02 to our Quarterly Report on Form 10-Q for the quarter ending March 31, 2001, Commission file number 1-4171. | | | IBRF | |
| | Indenture, dated as of May 21, 2009, between Kellogg Company and The Bank of New York Mellon Trust Company, N.A., incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-3, Commission file number 333-209699. | | | IBRF | |
| | Officers’ Certificate of Kellogg Company (with form of Kellogg Company 4.000% Senior Note Due 2020), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated December 8, 2010, Commission file number 1-4171. | | | IBRF | |
| | Officers’ Certificate of Kellogg Company (with form of 1.125% Senior Note due 2015, 1.750% Senior Note due 2017 and 3.125% Senior Note due 2022), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated May 17, 2012, Commission file number 1-4171. | | | IBRF | |
| | Officer’s Certificate of Kellogg Company (with form of Floating Rate Senior Notes due 2015 and 2.750% Senior Notes due 2023), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated February 14, 2013, Commission file number 1-4171. | | | IBRF | |
| | Officer’s Certificate of Kellogg Company (with form of 1.250% Senior Notes due 2025), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated March 9, 2015, Commission file number 1-4171. | | | IBRF | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | Officers’ Certificate of Kellogg Company (with form of 3.250% Senior Notes due 2026 and 4.500% Senior Debentures due 2046), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated March 7, 2016, Commission file number 1-4171. | | | IBRF | |
| | Officers’ Certificate of Kellogg Company (with form of 1.000% Senior Notes due 2024), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated May 19, 2016, Commission file number 1-4171. | | | IBRF | |
| | Officers’ Certificate of Kellogg Company (with form of 2.650% Senior Notes due 2023), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated November 15, 2016, Commission file number 1-4171. | | | IBRF | |
| | Officers’ Certificate of Kellogg Company (with form of 0.800% Senior Notes due 2022), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated May 17, 2017, Commission file number 1-4171. | | | IBRF | |
| | Officers’ Certificate of Kellogg Company (with form of 3.400% Senior Notes due 2027), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated November 13, 2017, Commission file number 1-4171. | | | IBRF | |
| | Officers’ Certificate of Kellogg Company (with form of 3.250% Senior Notes due 2021 and form of 4.300% Senior Notes due 2028), incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated May 15, 2018, Commission file number 1-4171. | | | IBRF | |
| | Officers’ Certificate of Kellogg Company (with form of 1.750%0.500% Senior NoteNotes due 2021)2029), incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated May 23, 2014, Commission file number 1-4171.
| | | IBRF | |
| | Description of Equity Securities | | | E | |
| | Description of Debt Securities | | | E | |
| | 364-Day Credit Agreement dated as of January 28, 2020 with JPMorgan Chase Bank, N.A., as Administrative Agent, Barclays Bank PLC, as Syndication Agent, and JPMorgan Chase Bank, N.A., Barclays Bank PLC, BofA Securities, Inc., Citibank, N.A., Coöperatieve Rabobank U.A., New York Branch, Morgan Stanley MUFG Loan Partners, LLC and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners and the lenders named therein, incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated January 30, 2020,May 20, 2021, Commission file number 1-4171. | | | IBRF | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | Description of Equity Securities | | | E | |
| | Description of Debt Securities | | | E | |
| | Officers’ Certificate of Kellogg Company (with form of 2.100% Senior Notes due 2030), incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated June 1, 2020, Commission file number 1-4171. | | | IBRF | |
| | Officers' Certificate of Kellogg Company (with form of 5.250% Senior Notes due 2033), incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed March 1, 2023, Commission file number 1-4171. | | | IBRF | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | 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 | |
| | Kellogg Company Key Employee Long Term Incentive Plan, incorporated by reference to Exhibit 10.07 to our Annual Report on Form 10-K for the fiscal year ended December 29, 2007, Commission file number 1-4171.* | | | IBRF | |
| | 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 | |
| | 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 | |
| | Kellanova 2002 Employee Stock Purchase Plan, effective as of January 1, 2021* | | | E | |
| | Kellogg Company 2002 Employee Stock Purchase Plan, as amended and restated as of July 1, 2020, incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8, file number 333-239564.* | | | IBRF | |
| | 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 | |
| | Kellogg Company 2003 Long-Term Incentive Plan, as amended and restated as of December 8, 2006, incorporated by reference to Exhibit 10 to our Annual Report on Form 10-K for the fiscal year ended December 30, 2006, Commission file number 1-4171.* | | | IBRF | |
| | 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 | |
| | 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 | |
| | Five-Year Credit Agreement dated as of December 21, 2021 with JPMorgan Chase Bank, N.A., as Administrative Agent, JPMorgan Chase Bank, N.A., Barclays Bank PLC, BOFA Securities, INC., Citibank, N.A., Cooperatieve Rabobank U.A., New York Branch, and Morgan Stanley MUFG Loan Partners, LLC, as Joint Lead Arrangers and Joint Bookrunners, Bank of America, N.A., Barclays Bank PLC, Citibank, N.A., Cooperatieve Rabobank U.A., New York Branch, and Morgan Stanley MUFG Loan Partners, LLC as Co-Syndication agents and the lenders named therein, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K dated December 23, 2021, Commission file number 1-4171. | | | IBRF | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | 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 | |
| | 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 | |
| | Kellogg Company 2009 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8 dated April 27, 2009, Commission file number 333-158824.* | | | IBRF | |
| | Kellogg Company 2009 Non-Employee Director Stock Plan, incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8 dated April 27, 2009, Commission file number 333-158826.* | | | IBRF | |
| | Form of Option Terms and Conditions under 2009 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated February 25, 2011, Commission file number 1-4171.* | | | IBRF | |
| | Letter Agreement between us and Gary Pilnick, dated May 20, 2008, incorporated by reference to Exhibit 10.54 to our Annual Report on Form 10-K for the fiscal year ended January 1, 2011, commission file number 1-4171.* | | | IBRF | |
| | Form of Option Terms and Conditions, incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated February 23, 2012, Commission file number 1-4171.* | | | IBRF | |
| | Kellogg Company 2013 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8, file number 333-188222.* | | | IBRF | |
| | Kellogg Company Pringles Savings and Investment Plan, incorporated by reference to Exhibit 4.3 to our Registration Statement on Form S-8, file number 333-189638.* | | | IBRF | |
| | Amendment Number 1 to the Kellogg Company Pringles Savings and Investment Plan, incorporated by reference to Exhibit 4.4 to our Registration Statement on Form S-8, file number 333-189638.* | | | IBRF | |
| | Kellogg Company Deferred Compensation Plan for Non-Employee Directors, incorporated by reference to Exhibit 10.49 to our Annual Report on Form 10-K dated February 24, 2014, Commission file number 1-4171.* | | | IBRF | |
| | Kellogg Company Executive Compensation Deferral Plan, incorporated by reference to Exhibit 10.50 to our Annual Report on Form 10-K dated February 24, 2014, Commission file number 1-4171.* | | | IBRF | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | Kellogg Company Change of Control Severance Policy for Key Executives, incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated December 11, 2014.* | | | IBRF | |
| | Form of Option Terms and Conditions, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K dated February 24, 2015, Commission file number 1-4171.* | | | IBRF | |
| | Form of Option Terms and Conditions, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K dated February 23, 2016, Commission file number 1-4171.* | | | IBRF | |
| | 2017-2019 Executive Performance Plan, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K dated February 24, 2017, Commission file number 1-4171.* | | | IBRF | |
| | Form of Restricted Stock Unit Terms and Conditions, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K dated February 24, 2017, Commission file number 1-4171.* | | | IBRF | |
| | Kellogg Company 2017 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8, file number 333-217769.* | | | IBRF | |
| | Letter agreement with Steve Cahillane, dated September 22, 2017, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K dated September 28, 2017, Commission file number 1-4171.* | | | IBRF | |
| | 2021-2023 Executive Performance Plan, incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated February 23, 2021, Commission file number 1-4171.* | | | IBRF | |
| | Letter agreement with John Bryant, dated September 22, 2017,Form of Restricted Stock Unit Terms and Conditions, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K dated September 28, 2017,February 23, 2021, Commission file number 1-4171.* | | | IBRF | |
| | Five-Year Credit Agreement dated asForm of January 30, 2018 with JPMorgan Chase Bank, N.A., as Administrative Agent, Barclays Bank PLC, as Syndication Agent, Bank of America, N.A., Citibank, N.A., Cooperatieve Rabobank U.A., New York Branch, Morgan Stanley MUFG Loan Partners, LLCOption Terms and Wells Fargo Bank, National Association, as Documentation Agents, JPMorgan Chase Bank, N.A., Barclays Bank PLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Cooperatieve Rabobank U.A., New York Branch, Morgan Stanley MUFG Loan Partners, LLC and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners and the lenders named therein,Conditions, incorporated by reference to Exhibit 4.110.3 of our Current Report on Form 8-K dated February 1, 2018, Commission file number 1-4171. | | | IBRF | |
| | Letter Agreement with Paul Norman, dated February 16, 2018, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K dated February 16, 2018,23, 2021, Commission file number 1-4171.* | | | IBRF | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | 2018-2020 Executive Performance Plan, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K dated February 22, 2018, Commission file number 1-4171.* | | | IBRF | |
| | Form of Restricted Stock Unit Terms and Conditions, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K dated February 22, 2018, Commission File number 1-4171.* | | | IBRF | |
| | Form of Option Terms and Conditions, incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K dated February 22, 2018, Commission file number 4-4171.1-4171.* | | | IBRF | |
| | Amendment to the Kellogg Company 2017 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K dated June 11, 2018, Commission file number 1-4171.* | | | IBRF | |
| | 364-Day Credit Agreement dated as of January 29, 2019 with JPMorgan Chase Bank, N.A., as Administrative Agent, Barclays Bank PLC, as Syndication Agent, and JPMorgan Chase Bank, N.A. Barclays Bank PLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Coöperatieve Rabobank U.A., New York Branch, Morgan Stanley MUFG Loan Partners, LLC and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners and the lenders named therein, incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated February 4, 2019, Commission file number 1-4171. | | | IBRF | |
| | 2019-2021 Executive Performance Plan, incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated February 26, 2019, Commission file number 1-4171.* | | | IBRF | |
| | Form of Restricted Stock Unit Terms and Conditions, incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated February 26, 2019, Commission file number 1-4171.* | | | IBRF | |
| | Form of Option Terms and Conditions, incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K dated February 26, 2019, Commission file number 1-4171.* | | | IBRF | |
| | Agreement with Fareed Khan, dated May 2, 2019, incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, Commission file number 1-4171. | | | IBRF | |
| | 2020-2022 Executive Performance Plan, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K dated February 25, 2020, Commission file number 1-4171.* | | | IBRF | |
| | Form of Restricted Stock Unit Terms and Conditions, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K dated February 25, 2020, Commission file number 1-4171.* | | | IBRF | |
| | Form of Option Terms and Conditions, incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K dated February 25, 2020, Commission file number 1-4171.* | | | IBRF | |
| | 2022-2024 Performance Stock Unit Plan, incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated February 23, 2022, Commission file number 1-4171.* | | | IBRF | |
| | Form of Restricted Stock Unit Terms and Conditions, incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated February 23, 2022, Commission file number 1-4171.* | | | IBRF | |
| | Kellanova 2022 Long-Term Incentive Plan.* | | | E | |
| | Kellanova Aircraft Policy.* | | | E | |
| | | | | | | | | | | | | | | | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | Agreement, dated October 21, 2020, between Gollek Servicios, S.C. and Victor Hugo Marroquin.* | | | E | |
| | Kellanova Clawback Policy.* | | | E | |
| | 2023-2025 Performance Stock Unit Plan, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed February 22, 2023, Commission file number 1-4171.* | | | IBRF | |
| | Form of Restricted Stock Unit Terms and Conditions, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed February 22, 2023, Commission file number 1-4171.* | | | IBRF | |
| | Amendment to the Amended and Restated Kellogg Company 2002 Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, Commission file number 1-4171.* | | | IBRF | |
| | Employee Matters Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171.* | | | IBRF | |
| | Supply Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | | | IBRF | |
| | Master Ownership and License Agreement Regarding Patents, Trade Secrets and Certain Related Intellectual Property, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | | | IBRF | |
| | Master Ownership and License Agreement Regarding Trademarks and Certain Related Intellectual Property, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | | | IBRF | |
| | Tax Matters Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.5 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | | | IBRF | |
| | Transition Services Agreement, dated as of September 29, 2023, between Kellanova and WK Kellogg Co, incorporated by reference to Exhibit 10.6 of our Current Report on Form 8-K filed October 2, 2023, Commission file number 1-4171. | | | IBRF | |
| | | | | | | | | | | | | | | | | | | | |
Exhibit
No. | | Description | | Electronic(E),
Paper(P) or
Incorp. By
Ref.(IBRF) | |
| | 364-Day Credit Agreement dated as of December 19, 2023 with JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., Barclays Bank PLC, Citibank, N.A., Coöperatieve Rabobank U.A., New York Branch, and Morgan Stanley MUFG Loan Partners, LLC as Co-Syndication Agents, and JPMorgan Chase Bank, N.A., Barclays Bank PLC, BofA Securities, Inc., Citibank, N.A., Coöperatieve Rabobank U.A., New York Branch, and Morgan Stanley MUFG Loan Partners, LLC as Joint Lead Arrangers and Joint Bookrunners and the lenders named therein, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed December 20, 2023, Commission file number 1-4171. | | | IBRF | |
| | Domestic and Foreign Subsidiaries of Kellogg. | | | E | |
| | Consent of Independent Registered Public Accounting Firm. | | | E | |
| | Powers of Attorney authorizing Gary H. PilnickJohn K. Min to execute our Annual Report on Form 10-K for the fiscal year ended January 2, 2021,December 30, 2023, on behalf of the Board of Directors, and each of them. | | | E | |
| | Rule 13a-14(a)/15d-14(a) Certification by Steven A. Cahillane. | | | E | |
| | Rule 13a-14(a)/15d-14(a) Certification by Amit Banati. | | | E | |
| | Section 1350 Certification by Steven A. Cahillane. | | | E | |
| | Section 1350 Certification by Amit Banati. | | | E | |
| | | | | |
| 101.INS | | XBRL Instance Document | | | E | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | E | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | E | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | E | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | E | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | 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 KelloggKellanova 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 KelloggKellanova of the reasonable expenses incurred in furnishing such copy or copies.
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 22nd20th day of February, 2021.2024.
| | | | | | | | |
| | |
KELLOGG COMPANYKELLANOVA |
| |
| By: | | /s/ Steven A. Cahillane |
| | Steven A. Cahillane |
| | Chairman 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/ Steven A. Cahillane
Steven A. Cahillane | | Chairman and Chief Executive Officer and Director (Principal Executive Officer) | | February 22, 202120, 2024 |
| | |
/s/ Amit Banati
Amit Banati | | Senior Vice PresidentChairman and Chief Financial Officer (Principal Financial Officer) | | February 22, 202120, 2024 |
| | | | |
/s/ Kurt Forche
Kurt Forche | | Vice President and Corporate Controller (Principal Accounting Officer) | | February 22, 202120, 2024 |
| | |
*
Stephanie A. Burns | | Director | | February 22, 202120, 2024 |
| | | | |
*
Carter A. Cast | | Director | | February 22, 202120, 2024 |
| | |
*
Richard W. Dreiling | | Director | | February 22, 2021 |
| | |
| | | | |
| | | | |
*
Roderick D. Gillum | | Director | | February 22, 202120, 2024 |
| | | | |
*
Zachary Gund | | Director | | February 22, 202120, 2024 |
| | |
*
James M. Jenness | | Director | | February 22, 2021 |
| | |
*
Donald R. Knauss | | Director | | February 22, 202120, 2024 |
| | |
*
Mary A. Laschinger | | Director | | February 22, 202120, 2024 |
| | | | |
| | | | |
| | | | |
*
Erica L. Mann | | Director | | February 22, 202120, 2024 |
| | |
*
La June Montgomery Tabron | | Director | | February 22, 202120, 2024 |
| | | | |
*
J. Michael Schlotman | | Director | | February 22, 202120, 2024 |
| | |
*
Carolyn M. Tastad | | Director | | February 22, 202120, 2024 |
| | |
| | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | |
| * By: | | /s/ Gary H. PilnickJohn K. Min
Gary H. PilnickJohn K. Min | | Attorney-in-fact | | February 22, 202120, 2024 |