OREANDA-NEWS. Kellogg Company (NYSE: K) today announced first-quarter 2016 results.  Currency-neutral comparable operating profit and earnings per share growth exceeded the company's expectations.  The company continued to make progress on its priorities, and trends continued to improve across the businesses, notably in U.S. Cereal category share.  Guidance for full-year currency-neutral comparable net sales, operating profit, and earnings per share was increased to reflect the better-than-expected performance of the Venezuelan business.  This performance is in addition to the momentum in many other businesses that the company expects will build across the remainder of the year.  In addition, Kellogg's initiatives designed to improve profitability continue to provide visibility and confidence in profit and earnings.

"We have made good progress on our priorities:  We have continued to improve our food; we've continued to expand the Pringles business; we've enhanced our sales capabilities; productivity initiatives continue to provide earnings visibility; and continue to feel momentum building," said John Bryant, Kellogg Company's chairman and chief executive officer.  "The actions we are taking are having an impact and we remain confident that they will drive continued improvement as this year progresses, and into 2017."

Financial Summary:

    

Quarter ended

(millions, except per share data)

    

April 2,

2016

  

April 4,

2015

  

%

Change

Reported Net Sales

    

$

3,395

    

$

3,556

    

(4.5)

%

Comparable Net Sales *

    

$

3,380

    

$

3,561

    

(5.1)

%

Comparable Net Sales excluding Venezuela *

    

$

3,371

    

$

3,480

    

(3.2)

%

Currency-Neutral Comparable Net Sales *

    

$

3,796

    

$

3,561

    

6.6

%

Currency-Neutral Comparable Net Sales excluding Venezuela *

    

$

3,444

    

$

3,480

    

(1.0)

%
               

Reported Operating Profit

    

$

438

    

$

384

    

14.0

%

Comparable Operating Profit *

    

$

520

    

$

527

    

(1.3)

%

Comparable Operating Profit excluding Venezuela *

    

$

515

    

$

515

    

(0.1)

%

Currency-Neutral Comparable Operating Profit *

    

$

711

    

$

527

    

34.9

%

Currency-Neutral Comparable Operating Profit excluding Venezuela *

    

$

524

    

$

515

    

1.7

%
               

Reported Net Income (Loss) Attributable to Kellogg Company

    

$

175

    

$

227

    

(22.9)

%

Comparable Net Income (Loss) Attributable to Kellogg Company *

    

$

341

    

$

351

    

(2.7)

%

Currency-Neutral Comparable Net Income (Loss) Attributable to Kellogg Company *

    

$

473

    

$

351

    

34.5

%
               

Reported Diluted Earnings Per Share

    

$

0.49

    

$

0.64

    

(23.4)

%

Comparable Diluted Earnings Per Share *

    

$

0.97

    

$

0.98

    

(1.0)

%

Currency-Neutral Comparable Diluted Earnings Per Share *

    

$

1.33

    

$

0.98

    

35.7

%

* Non-GAAP financial measures. See the tables herein for important information regarding these measures and a full reconciliation to the most comparable GAAP measure.

First-quarter 2016 reported net sales decreased by 4.5 percent to $3.4 billion.  This primarily was due to the effect of currency translation resulting from the remeasurement of the Venezuelan business in mid 2015.  Quarterly currency-neutral comparable net sales increased by 6.6 percent as the result of inflation-related sales growth in Venezuela; currency-neutral comparable net sales excluding the impact of Venezuela decreased by one percent.  Quarterly reported operating profit was $438 million, an increase of 14 percent.  Reported results were affected by mark-to-market accounting for pensions, year-over-year changes in up-front costs associated with efficiency and effectiveness programs, the remeasurement of the Venezuelan business, and integration costs.  Currency-neutral comparable operating profit increased by 34.9 percent, mostly due to the timing of pricing actions intended to address the impact of inflation in Venezuela; currency-neutral comparable operating profit excluding the impact of Venezuela increased by 1.7 percent.

Reconciliation of Reported to Currency-Neutral Comparable Earnings Per Share

      
   

Quarter ended
   

April 2,
 2016

April 4,
 2015
       

Reported EPS

  

$

0.49

  

$

0.64

  

Mark-to-Market

  

(0.06)

  

(0.13)

  

Project K and Cost Reduction Activities

  

(0.12)

  

(0.13)

  

Other Costs Impacting Comparability

  

(0.28)

  

(0.07)

  

Integration and Acquisitions/Dispositions

  

—

  

(0.01)

  

Remeasurement of Venezuelan Business

  

(0.02)

  

—

  
       

Comparable EPS

  

0.97

  

0.98

  

Comparable EPS excluding Venezuela

  

0.96

  

0.96

  
       

Foreign Exchange

  

(0.36)

  

—

  
       

Currency-Neutral Comparable EPS

  

$

1.33

  

$

0.98

  

Currency-Neutral Comparable EPS excluding Venezuela

  

$

0.98

  

$

0.96

  

Reported earnings for the first quarter of 2016 were $175 million, or $0.49 per share, a decrease of 23 percent from the $0.64 per share reported in the first quarter of last year.  This quarter's reported earnings per share included negative impacts from mark-to-market accounting, up-front costs associated with efficiency and effectiveness initiatives, the remeasurement of the Venezuelan business, and interest costs from a bond tender.  Excluding these items, comparable first-quarter 2016 earnings were $0.97 per share.  This result included a negative impact of $0.36 per share from currency translation, $0.34 per share of which was due to the impact of the Venezuelan business.  Currency-neutral comparable earnings were $1.33 per share and were $0.98 per share excluding the impact of Venezuela.  The base business in Venezuela contributed $0.01 per share to earnings.

North America

Kellogg North America posted reported net sales of $2.4 billion in the first quarter, a reported decrease of 1.5 percent; currency-neutral comparable net sales decreased by 1.2 percent.  The U.S. Morning Foods segment posted a currency-neutral comparable net sales decline of 1.2 percent.  However, Kellogg-branded cereals gained 20 basis points of share in the 13-week, publicly-available data.  Currency-neutral comparable net sales in the U.S. Snacks segment decreased by 2.6 percent, partially due to transitions in the sales force; key brands including Cheez-It and Pringles posted good rates of growth.  The U.S. Specialty Channels segment posted a 4.1 percent increase in currency-neutral comparable net sales in the quarter due to growth in all the key channels including both Foodservice and Convenience.  The North America Other segment, which is composed of the U.S. Frozen Foods, Kashi, and Canadian businesses, posted a 2.7 percent decrease in currency-neutral comparable net sales due to the expected effects from shelf resets driven by a packaging initiative in the U.S. Frozen Foods business and a sales decline in the Kashi business.  However, results for the Kashi business improved and we expect continued progress over the remainder of the year.  Reported operating profit in North America increased by 5.2 percent.  Currency-neutral comparable operating profit increased by 8.4 percent, primarily due to cost-savings from the Project K and zero-based budgeting initiatives.

International

Reported net sales decreased by 1.6 percent in Europe in the first quarter; currency-neutral comparable net sales decreased by 0.9 percent.  In Latin America, reported net sales decreased by 34.9 percent; currency-neutral comparable net sales increased by 90.3 percent; currency-neutral comparable net sales excluding the impact of Venezuela declined by two percent.  Reported net sales in Asia Pacific decreased by 5.8 percent; currency-neutral comparable net sales increased by 0.9 percent; the Asian business posted currency-neutral comparable net sales growth of 7.6 percent.  While not reported in our sales results, the joint ventures in China and West Africa continued to perform well.

Interest and Tax

Kellogg's interest expense was $217 million in the first quarter; $153 million was related to a bond tender completed during the quarter.  The comparable effective tax rate* in the quarter was 25.3 percent.

Cash flow

Year-to-date cash flow,* a non-GAAP measure defined as cash from operating activities after capital expenditure, was negative $139 million through the end of the first quarter; this included the negative impact of approximately $145 million from the bond tender.  Excluding the impact of this bond tender, our cash flow was comparable to the year-earlier quarter.

Kellogg Updates Guidance for 2016

Kellogg Company increased its guidance for currency-neutral comparable net sales, operating profit, and earnings per share due to the better-than-expected performance of the Venezuelan business.  Full-year currency-neutral comparable earnings are now expected to increase by between 13% and 15% to between $4.00 and $4.07 per share; expectations for comparable earnings, which includes the impact of currency translation, remain unchanged at between $3.64 and $3.71 per share.  The company now expects that full-year currency-neutral comparable operating profit growth will be in a range of 11-13% due to the timing of pricing actions in the Venezuelan business; full-year currency-neutral comparable operating profit growth excluding the impact of the Venezuelan business is still expected to be 4-6 percent.  Currency-neutral comparable net sales growth will be in a range of 4-6%, greater than the Company's long-term target, as the strong performance in Venezuela will more than offset slightly slower-than-anticipated first-half sales growth in some other businesses.  Full-year currency-neutral comparable net sales growth excluding the impact of the Venezuelan business is expected to be in a range between 0-2 percent.  (Guidance for net sales and operating profit excludes the impact of mark-to-market adjustments, integration costs, costs related to Project K, acquisitions, dispositions, foreign-currency translation, remeasurement of the Venezuelan business, and other items that could affect comparability.  Guidance for earnings per share excludes the impact of mark-to-market adjustments, integration costs, costs related to Project K, foreign-currency translation, remeasurement of the Venezuelan business, and other items that could affect comparability; it includes the impact of acquisitions and dispositions.)  The Company reaffirmed that it expects full-year cash flow to be approximately $1.1 billion.  Capital expenditure for the year is expected to be between four percent and five percent of sales, including the impact of the cash required by Project K and an increase in capital spending equal to approximately one percent of sales to support the growth of the Pringles business.

About Kellogg Company

At Kellogg Company (NYSE: K), we are driven to enrich and delight the world through foods and brands that matter. With 2015 sales of more than $13 billion, Kellogg is the world's leading cereal company; second largest producer of cookies and crackers; a leading producer of savory snacks; and a leading North American frozen foods company.  Every day, our well-loved brands nourish families so they can flourish and thrive. These brands include Kellogg's®, Keebler®, Special K®, Pringles®, Kellogg's Frosted Flakes®, Pop-Tarts®, Kellogg's Corn Flakes®, Rice Krispies®, Kashi®, Cheez-It®, Eggo®, Coco Pops®, Mini-Wheats®, and many more.

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
       
     

Quarter ended

(Results are unaudited)

    

April 2,
 2016

  

April 4,
 2015

Net sales

    

$

3,395

    

$

3,556

  

Cost of goods sold

    

2,150

    

2,311

  

Selling, general and administrative expense

    

807

    

861

  

Operating profit

    

438

    

384

  

Interest expense

    

217

    

54

  

Other income (expense), net

    

—

    

(26)

  

Income before income taxes

    

221

    

304

  

Income taxes

    

47

    

76

  

Earnings (loss) from unconsolidated entities

    

1

    

(1)

  

Net income

    

$

175

    

$

227

  

Net income (loss) attributable to noncontrolling interests

    

—

    

—

  

Net income attributable to Kellogg Company

    

$

175

    

$

227

  

Per share amounts:

          

Basic

    

$

0.50

    

$

0.64

  

Diluted

    

$

0.49

    

$

0.64

  

Dividends per share

    

$

0.50

    

$

0.49

  

Average shares outstanding:

          

Basic

    

351

    

355

  

Diluted

    

355

    

357

  

Actual shares outstanding at period end

    

350

    

353

  

Kellogg Company and Subsidiaries
SELECTED OPERATING SEGMENT DATA
(millions)
       
     

Quarter ended

(Results are unaudited)

    

April 2,
 2016

  

April 4,
 2015

Net sales

          

U.S. Morning Foods

    

$

767

    

$

776

  

U.S. Snacks

    

832

    

854

  

U.S. Specialty

    

376

    

361

  

North America Other

    

414

    

433

  

Europe

    

598

    

607

  

Latin America

    

192

    

295

  

Asia Pacific

    

216

    

230

  

Consolidated

    

$

3,395

    

$

3,556

  

Operating profit

          

U.S. Morning Foods

    

$

148

    

$

127

  

U.S. Snacks

    

83

    

80

  

U.S. Specialty

    

86

    

78

  

North America Other

    

45

    

59

  

Europe

    

70

    

61

  

Latin America

    

23

    

51

  

Asia Pacific

    

17

    

12

  

Total Reportable Segments

    

472

    

468

  

Corporate

    

(34)

    

(84)

  

Consolidated

    

$

438

    

$

384

  
           

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
     
   

Quarter ended

(unaudited)

  

April 2,
 2016

  

April 4,
 2015

Operating activities

        

Net income

  

$

175

    

$

227

  

Adjustments to reconcile net income to operating cash flows:

        

Depreciation and amortization

  

115

    

131

  

Postretirement benefit plan expense (benefit)

  

(28)

    

(21)

  

Deferred income taxes

  

—

    

(2)

  

Stock compensation

  

15

    

10

  

Venezuela remeasurement

  

6

    

—

  

Variable-interest entity impairment

  

—

    

25

  

Other

  

(33)

    

22

  

Postretirement benefit plan contributions

  

(17)

    

(12)

  

Changes in operating assets and liabilities, net of acquisitions

  

(228)

    

(220)

  

Net cash provided by (used in) operating activities

  

5

    

160

  

Investing activities

        

Additions to properties

  

(144)

    

(148)

  

Acquisitions, net of cash acquired

  

(18)

    

(117)

  

Other

  

7

    

3

  

Net cash provided by (used in) investing activities

  

(155)

    

(262)

  

Financing activities

        

Net issuances (reductions) of notes payable

  

(485)

    

(19)

  

Issuances of long-term debt

  

1,382

    

672

  

Reductions of long-term debt

  

(473)

    

(243)

  

Net issuances of common stock

  

164

    

57

  

Common stock repurchases

  

(198)

    

(285)

  

Cash dividends

  

(176)

    

(174)

  

Other

  

—

    

5

  

Net cash provided by (used in) financing activities

  

214

    

13

  

Effect of exchange rate changes on cash and cash equivalents

  

(5)

    

(5)

  

Increase (decrease) in cash and cash equivalents

  

59

    

(94)

  

Cash and cash equivalents at beginning of period

  

251

    

443

  

Cash and cash equivalents at end of period

  

310

    

$

349

  
         

Supplemental financial data:

        

Net cash provided by (used in) operating activities

  

$

5

    

$

160

  

Additions to properties

  

(144)

    

(148)

  

Cash Flow (operating cash flow less property additions) (a)

  

$

(139)

    

$

12

  
   

(a)

We use this non-GAAP measure of cash flow to focus management and investors on the amount of cash available for debt reduction, dividend distributions, acquisition opportunities, and share repurchase.

Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
         
   

April 2,
 2016

  

January 2,
 2016
   

(unaudited)

  

*

Current assets

        

Cash and cash equivalents

  

$

310

    

$

251

  

Accounts receivable, net

  

1,505

    

1,344

  

Inventories:

        

Raw materials and supplies

  

330

    

315

  

Finished goods and materials in process

  

868

    

935

  

Deferred income taxes

  

—

    

227

  

Other prepaid assets

  

206

    

164

  

Total current assets

  

3,219

    

3,236

  

Property, net of accumulated depreciation of $5,263 and $5,236

  

3,617

    

3,621

  

Investments in unconsolidated entities

  

465

    

456

  

Goodwill

  

4,974

    

4,968

  

Other intangibles, net of accumulated amortization of $49 and $47

  

2,293

    

2,268

  

Pension

  

248

    

231

  

Other assets

  

481

    

471

  

Total assets

  

$

15,297

    

$

15,251

  

Current liabilities

        

Current maturities of long-term debt

  

$

1,264

    

$

1,266

  

Notes payable

  

718

    

1,204

  

Accounts payable

  

1,926

    

1,907

  

Accrued advertising and promotion

  

465

    

447

  

Accrued income taxes

  

19

    

42

  

Accrued salaries and wages

  

212

    

325

  

Other current liabilities

  

558

    

548

  

Total current liabilities

  

5,162

    

5,739

  

Long-term debt

  

6,256

    

5,275

  

Deferred income taxes

  

447

    

685

  

Pension liability

  

937

    

946

  

Nonpension postretirement benefits

  

70

    

77

  

Other liabilities

  

384

    

391

  

Commitments and contingencies

        

Equity

        

Common stock, $.25 par value

  

105

    

105

  

Capital in excess of par value

  

754

    

745

  

Retained earnings

  

6,595

    

6,597

  

Treasury stock, at cost

  

(3,989)

    

(3,943)

  

Accumulated other comprehensive income (loss)

  

(1,434)

    

(1,376)

  

Total Kellogg Company equity

  

2,031

    

2,128

  

Noncontrolling interests

  

10

    

10

  

Total equity

  

2,041

    

2,138

  

Total liabilities and equity

  

$

15,297

    

$

15,251

  

 * Condensed from audited financial statements.

Kellogg Company and Subsidiaries
Reconciliation of As Reported Results to Currency-Neutral Comparable Results
(millions, except per share data)
 

Quarter ended

April 2, 2016

  

April 4, 2015

(Results are unaudited)

As

reported

Comparable

adjustments

Currency-neutral

 comparable

Currency-neutral comparable excluding Venezuela

  

As

reported

Comparable

adjustments

Currency-neutral

 comparable

Currency-neutral comparable excluding Venezuela

Net sales

$

3,395

  

$

(401)

  

$

3,796

  

$

3,444

    

$

3,556

  

$

(5)

  

$

3,561

  

$

3,480

  

Cost of goods sold

2,150

  

(125)

  

2,275

  

2,133

    

2,311

  

103

  

2,208

  

2,148

  

Selling, general and
administrative expense

807

  

(3)

  

810

  

787

    

861

  

35

  

826

  

817

  

Operating profit

438

  

(273)

  

711

  

524

    

384

  

(143)

  

527

  

515

  

Interest expense

217

  

148

  

69

  

65

    

54

  

—

  

54

  

54

  

Other income (expense),
net

—

  

(5)

  

5

  

2

    

(26)

  

(25)

  

(1)

  

—

  

Income (loss) before income taxes

221

  

(426)

  

647

  

461

    

304

  

(168)

  

472

  

461

  

Income taxes

47

  

(128)

  

175

  

115

    

76

  

(44)

  

120

  

117

  

Earnings (loss) from
unconsolidated entities

1

  

—

  

1

  

1

    

(1)

  

—

  

(1)

  

(1)

  

Net income (loss)

$

175

  

$

(298)

  

$

473

  

$

347

    

$

227

  

$

(124)

  

$

351

  

$

343

  

Net income (loss) attributable to noncontrolling interests

—

  

—

  

—

  

—

    

—

  

—

  

—

  

—

  

Net income (loss) attributable to Kellogg Company

$

175

  

$

(298)

  

$

473

  

$

347

    

$

227

  

$

(124)

  

$

351

  

$

343

  

Per share amounts:

                  

Basic

$

0.50

  

$

(0.85)

  

$

1.35

  

$

0.99

    

$

0.64

  

$

(0.35)

  

$

0.99

  

$

0.97

  

Diluted

$

0.49

  

$

(0.84)

  

$

1.33

  

$

0.98

    

$

0.64

  

$

(0.34)

  

$

0.98

  

$

0.96

  

Average shares outstanding:

                  

Basic

351

    

351

  

351

    

355

    

355

  

355

  

Diluted

355

    

355

  

355

    

357

    

357

  

357

  

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Kellogg Company and Subsidiaries
Supplement to Reconciliation of As Reported Results to Currency-Neutral Comparable Results
(millions, except per share data)

    
             

Quarter ended April 2, 2016

            

(Results are unaudited)

Mark-to-

market

Project K and cost reduction activities

Other costs impacting comparability

Integration costs
and
acquisitions/divestitures

Shipping

day

differences

Venezuela

remeasurement

Foreign

currency

impact

Comparable

adjustments

Net sales

$

—

  

$

—

  

$

—

  

$

15

  

$

—

  

$

—

  

$

(416)

  

$

(401)

  

Cost of goods sold

25

  

18

  

—

  

12

  

—

  

5

  

(185)

  

(125)

  

Selling, general and
administrative expense

(1)

  

34

  

—

  

3

  

—

  

1

  

(40)

  

(3)

  

Operating profit

(24)

  

(52)

  

—

  

—

  

—

  

(6)

  

(191)

  

(273)

  

Interest expense

—

  

—

  

153

  

—

  

—

  

—

  

(5)

  

148

  

Other income (expense), net

—

  

—

  

—

  

—

  

—

  

—

  

(5)

  

(5)

  

Income (loss) before income taxes

(24)

  

(52)

  

(153)

  

—

  

—

  

(6)

  

(191)

  

(426)

  

Income taxes

(5)

  

(9)

  

(54)

  

(1)

  

—

  

—

  

(59)

  

(128)

  

Net income (loss)

$

(19)

  

$

(43)

  

$

(99)

  

$

1

  

$

—

  

$

(6)

  

$

(132)

  

$

(298)

  

Net income (loss) attributable to
noncontrolling interests

—

  

—

  

—

  

—

  

—

  

—

  

—

  

—

  

Net income (loss) attributable to
Kellogg Company

$

(19)

  

$

(43)

  

$

(99)

  

$

1

  

$

—

  

$

(6)

  

$

(132)

  

$

(298)

  

Per share amounts:

                

Basic

$

(0.06)

  

$

(0.12)

  

$

(0.28)

  

$

—

  

$

—

  

$

(0.02)

  

$

(0.37)

  

$

(0.85)

  

Diluted

$

(0.06)

  

$

(0.12)

  

$

(0.28)

  

$

—

  

$

—

  

$

(0.02)

  

$

(0.36)

  

$

(0.84)

  
                 

Quarter ended April 4, 2015

            

(Results are unaudited)

Mark-to-

market

Project K and cost reduction activities

Other costs impacting comparability

Integration costs
and acquisitions/divestitures

Shipping

day

differences

Venezuela

remeasurement

Foreign

currency

impact

Comparable

adjustments

Net sales

$

—

  

$

(2)

  

$

—

  

$

—

  

$

(3)

  

$

—

  

$

—

  

$

(5)

  

Cost of goods sold

68

  

32

  

—

  

6

  

(3)

  

—

  

—

  

103

  

Selling, general and administrative
expense

(1)

  

34

  

—

  

2

  

—

  

—

  

—

  

35

  

Operating profit

(67)

  

(68)

  

—

  

(8)

  

—

  

—

  

—

  

(143)

  

Interest expense

—

  

—

  

—

  

—

  

—

  

—

  

—

  

—

  

Other income (expense), net

—

  

—

  

(25)

  

—

  

—

  

—

  

—

  

(25)

  

Income (loss) before income taxes

(67)

  

(68)

  

(25)

  

(8)

  

—

  

—

  

—

  

(168)

  

Income taxes

(21)

  

(21)

  

—

  

(2)

  

—

  

—

  

—

  

(44)

  

Net income (loss)

$

(46)

  

$

(47)

  

$

(25)

  

$

(6)

  

$

—

  

$

—

  

$

—

  

$

(124)

  

Net income (loss) attributable to
noncontrolling interests

—

  

—

  

—

  

—

  

—

  

—

  

—

  

—

  

Net income (loss) attributable to
Kellogg Company

$

(46)

  

$

(47)

  

$

(25)

  

$

(6)

  

$

—

  

$

—

  

$

—

  

$

(124)

  

Per share amounts:

                

Basic

$

(0.13)

  

$

(0.13)

  

$

(0.07)

  

$

(0.02)

  

$

—

  

$

—

  

$

—

  

$

(0.35)

  

Diluted

$

(0.13)

  

$

(0.13)

  

$

(0.07)

  

$

(0.01)

  

$

—

  

$

—

  

$

—

  

$

(0.34)

  

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Kellogg Company and Subsidiaries
Project K and cost reduction activities
(Pre-tax millions)
 
     

Quarter ended April 2, 2016
     

Net Sales

  

Cost of

goods

sold

  

Selling, general

and

administrative

expense

  

Total

2016

                  

U.S. Morning Foods

    

$

—

    

$

—

    

$

5

    

$

5

  

U.S. Snacks

    

—

    

7

    

13

    

20

  

U.S. Specialty

    

—

    

—

    

2

    

2

  

North America Other

    

—

    

5

    

4

    

9

  

Europe

    

—

    

6

    

8

    

14

  

Asia Pacific

    

—

    

—

    

—

    

—

  

Corporate

    

—

    

—

    

2

    

2

  

Total

    

$

—

    

$

18

    

$

34

    

$

52

  
   
     

Quarter ended April 4, 2015
     

Net Sales

  

Cost of

goods

sold

  

Selling, general

and

administrative

expense

  

Total

2015

                  

U.S. Morning Foods

    

$

—

    

$

5

    

$

3

    

$

8

  

U.S. Snacks

    

—

    

5

    

4

    

9

  

U.S. Specialty

    

—

    

—

    

1

    

1

  

North America Other

    

2

    

2

    

2

    

6

  

Europe

    

—

    

16

    

3

    

19

  

Asia Pacific

    

—

    

4

    

1

    

5

  

Corporate

    

—

    

—

    

20

    

20

  

Total

    

$

2

    

$

32

    

$

34

    

$

68

  

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Kellogg Company and Subsidiaries
Integration costs and acquisitions/divestitures
(Pre-tax millions)
 
     

Quarter ended April 2, 2016
     

Net Sales

  

Cost of 
goods

sold

  

Selling, general
 and

administrative

expense

  

Total

2016

                  

North America Other

    

$

(1)

    

$

1

    

$

—

    

$

—

  

Europe

    

(14)

    

11

    

3

    

—

  

Asia Pacific

    

—

    

—

    

—

    

—

  

Total

    

$

(15)

    

$

12

    

$

3

    

$

—

  
   
     

Quarter ended April 4, 2015
     

Net Sales

  

Cost of goods

sold

  

Selling, general
and

administrative

expense

  

Total

2015

                  

North America Other

    

$

—

    

$

—

    

$

—

    

$

—

  

Europe

    

—

    

3

    

2

    

5

  

Asia Pacific

    

—

    

3

    

—

    

3

  

Total

    

$

—

    

$

6

    

$

2

    

$

8

  

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Kellogg Company and Subsidiaries
Venezuela remeasurement
(Pre-tax millions)
 
     

Quarter ended April 2, 2016
     

Cost of

goods

sold

  

Selling, general

and

administrative

expense

  

Other

(income)

expense

  

Total

2016

                  

Latin America

    

$

5

    

$

1

    

$

—

    

$

6

  

Corporate

    

—

    

—

    

—

    

—

  

Total

    

$

5

    

$

1

    

$

—

    

$

6

  
   
     

Quarter ended April 4, 2015
     

Cost of

goods

sold

  

Selling, general

and

administrative

expense

  

Other

(income)

expense

  

Total

2015

                  

Latin America

    

$

—

    

$

—

    

$

—

    

$

—

  

Corporate

    

—

    

—

    

—

    

—

  

Total

    

$

—

    

$

—

    

$

—

    

$

—

  

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Kellogg Company and Subsidiaries
Reconciliation of Non-GAAP Amounts - Reported Net Sales to Currency-Neutral Comparable Net Sales

                    
                             

Quarter ended April 2, 2016

                            

(millions)

  

U.S.

Morning

Foods

  

U.S.

Snacks

  

U.S.

Specialty

  

North

America

Other

  

Total North

America

  

Europe

  

Latin

America

  

Asia

Pacific

  

Corporate

  

Kellogg

Consolidated

Reported net sales

  

$

767

    

$

832

    

$

376

    

$

414

    

$

2,389

    

$

598

    

$

192

    

$

216

    

$

—

    

$

3,395

  

Project K and cost reduction activities

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Integration costs and acquisitions/divestitures

  

—

    

—

    

—

    

1

    

1

    

14

    

—

    

—

    

—

    

15

  

Differences in shipping

days

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Comparable net sales

  

$

767

    

$

832

    

$

376

    

$

413

    

$

2,388

    

$

584

    

$

192

    

$

216

    

$

—

    

$

3,380

  

Comparable net sales excluding Venezuela

                          

$

183

            

$

3,371

  

Foreign currency impact

  

—

    

—

    

—

    

(11)

    

(11)

    

(21)

    

(369)

    

(15)

    

—

    

(416)

  

Currency-neutral comparable net sales

  

$

767

    

$

832

    

$

376

    

$

424

    

$

2,399

    

$

605

    

$

561

    

$

231

    

$

—

    

$

3,796

  

Currency-neutral comparable net sales excluding Venezuela

                          

$

209

            

$

3,444

  

Quarter ended April 4, 2015

                            

(millions)

  

U.S.

Morning

Foods

  

U.S.

Snacks

  

U.S.

Specialty

  

North

America

Other

  

Total North

America

  

Europe

  

Latin

America

  

Asia

Pacific

  

Corporate

  

Kellogg

Consolidated

Reported net sales

  

$

776

    

$

854

    

$

361

    

$

433

    

$

2,424

    

$

607

    

$

295

    

$

230

    

$

—

    

$

3,556

  

Project K and cost reduction activities

  

—

    

—

    

—

    

(2)

    

(2)

    

—

    

—

    

—

    

—

    

(2)

  

Integration costs and acquisitions/divestitures

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Differences in shipping

days

  

—

    

—

    

—

    

—

    

—

    

(3)

    

—

    

—

    

—

    

(3)

  

Comparable net sales

  

$

776

    

$

854

    

$

361

    

$

435

    

$

2,426

    

$

610

    

$

295

    

$

230

    

$

—

    

$

3,561

  

Comparable net sales excluding Venezuela

                          

$

214

            

$

3,480

  

Foreign currency impact

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Currency-neutral comparable net sales

  

$

776

    

$

854

    

$

361

    

$

435

    

$

2,426

    

$

610

    

$

295

    

$

230

    

$

—

    

$

3,561

  

Currency-neutral comparable net sales excluding Venezuela

                          

$

214

            

$

3,480

  

% change - 2016 vs. 2015:

                                

Reported growth

  

(1.2)

%

  

(2.6)

%

  

4.1

%

  

(4.5)

%

  

(1.5)

%

  

(1.6)

%

  

(34.9)

%

  

(5.8)

%

  

—

%

  

(4.5)

%

Project K and cost reduction activities

  

—

%

  

—

%

  

—

%

  

0.4

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

0.1

%

Integration costs and acquisitions/divestitures

  

—

%

  

—

%

  

—

%

  

0.1

%

  

0.1

%

  

2.3

%

  

—

%

  

(0.2)

%

  

—

%

  

0.4

%

Differences in shipping days

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

0.5

%

  

—

%

  

—

%

  

—

%

  

0.1

%

Comparable growth

  

(1.2)

%

  

(2.6)

%

  

4.1

%

  

(5.0)

%

  

(1.6)

%

  

(4.4)

%

  

(34.9)

%

  

(5.6)

%

  

—

%

  

(5.1)

%

Comparable growth excluding Venezuela

                          

(15.0)

%

          

(3.2)

%

Foreign currency impact

  

—

%

  

—

%

  

—

%

  

(2.3)

%

  

(0.4)

%

  

(3.5)

%

  

(125.2)

%

  

(6.5)

%

  

—

%

  

(11.7)

%

Currency-neutral comparable growth

  

(1.2)

%

  

(2.6)

%

  

4.1

%

  

(2.7)

%

  

(1.2)

%

  

(0.9)

%

  

90.3

%

  

0.9

%

  

—

%

  

6.6

%

Volume (tonnage)

                  

(1.1)

%

  

1.6

%

  

(3.2)

%

  

0.7

%

  

—

%

  

(0.7)%

  

Pricing/mix

                  

(0.1)

%

  

(2.5)

%

  

93.5

%

  

0.2

%

  

—

%

  

7.3

%

Currency-neutral comparable growth excluding Venezuela

                          

(2.0)

%

          

(1.0)

%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Kellogg Company and Subsidiaries
Reconciliation of Non-GAAP Amounts - Reported Operating Profit to Currency-Neutral Comparable Operating Profit
 

Quarter ended April 2, 2016

                            

(millions)

  

U.S.

Morning

Foods

  

U.S.

Snacks

  

U.S.

Specialty

  

North

America

Other

  

Total North

America

  

Europe

  

Latin

America

  

Asia

Pacific

  

Corporate

  

Kellogg

Consolidated

Reported

  

$

148

    

$

83

    

$

86

    

$

45

    

$

362

    

$

70

    

$

23

    

$

17

    

$

(34)

    

$

438

  

Mark-to-market

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

(24)

    

(24)

  

Project K and cost reduction activities

  

(5)

    

(20)

    

(2)

    

(9)

    

(36)

    

(14)

    

—

    

—

    

(2)

    

(52)

  

Other costs impacting comparability

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Integration costs and acquisitions/divestitures

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Differences in shipping

days

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Venezuela remeasurement

  

—

    

—

    

—

    

—

    

—

    

—

    

(6)

    

—

    

—

    

(6)

  

Comparable

  

$

153

    

$

103

    

$

88

    

$

54

    

$

398

    

$

84

    

$

29

    

$

17

    

$

(8)

    

$

520

  

Comparable excluding Venezuela

                  

—

        

$

24

        

$

(8)

    

$

515

  

Foreign currency impact

  

—

    

—

    

—

    

(1)

    

(1)

    

(2)

    

(190)

    

(1)

    

3

    

(191)

  

Currency-neutral comparable

  

$

153

    

$

103

    

$

88

    

$

55

    

$

399

    

$

86

    

$

219

    

$

18

    

$

(11)

    

$

711

  

Currency-neutral comparable excluding Venezuela

                          

$

27

        

$

(6)

    

$

524

  

Quarter ended April 4, 2015

                            

(millions)

  

U.S.

Morning

Foods

  

U.S.

Snacks

  

U.S.

Specialty

  

North

America

Other

  

Total North

America

  

Europe

  

Latin

America

  

Asia

Pacific

  

Corporate

  

Kellogg

Consolidated

Reported

  

$

127

    

$

80

    

$

78

    

$

59

    

$

344

    

$

61

    

$

51

    

$

12

    

$

(84)

    

$

384

  

Mark-to-market

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

(67)

    

(67)

  

Project K and cost reduction activities

  

(8)

    

(9)

    

(1)

    

(6)

    

(24)

    

(19)

    

—

    

(5)

    

(20)

    

(68)

  

Other costs impacting comparability

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Integration costs and acquisitions/divestitures

  

—

    

—

    

—

    

—

    

—

    

(5)

    

—

    

(3)

    

—

    

(8)

  

Differences in shipping

days

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Venezuela remeasurement

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Comparable

  

$

135

    

$

89

    

$

79

    

$

65

    

$

368

    

$

85

    

$

51

    

$

20

    

$

3

    

$

527

  

Comparable excluding Venezuela

                  

—

        

$

37

        

$

5

    

$

515

  

Foreign currency impact

  

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

    

—

  

Currency-neutral comparable

  

$

135

    

$

89

    

$

79

    

$

65

    

$

368

    

$

85

    

$

51

    

$

20

    

$

3

    

$

527

  

Currency-neutral comparable excluding Venezuela

                          

$

37

        

$

5

    

$

515

  

% change - 2016 vs. 2015:

                                

Reported growth

  

17.0

%

  

4.7

%

  

9.5

%

  

(24.6)

%

  

5.2

%

  

13.7

%

  

(53.9)%

    

37.2

%

  

59.4

%

  

14.0

%

Mark-to-market

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

16.5

%

  

11.6

%

Project K and cost reduction activities

  

3.5

%

  

(11.8)

%

  

(0.8)

%

  

(6.1)

%

  

(2.7)

%

  

9.1

%

  

(0.4)

%

  

33.9

%

  

389.6

%

  

3.4

%

Other costs impacting comparability

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

Integration costs and acquisitions/divestitures

  

—

%

  

—

%

  

—

%

  

(0.2)

%

  

—

%

  

7.5

%

  

—

%

  

11.8

%

  

(11.6)%

    

1.5

%

Differences in shipping days

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

0.6

%

  

—

%

  

—

%

  

—

%

  

0.1

%

Venezuela remeasurement

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

—

%

  

(12.8)

%

  

—

%

  

—

%

  

(1.3)

%

Comparable growth

  

13.5

%

  

16.5

%

  

10.3

%

  

(18.3)

%

  

7.9

%

  

(3.5)

%

  

(40.7)

%

  

(8.5)

%

  

(335.1)

%

  

(1.3)

%

Comparable growth excluding Venezuela

                          

(33.4)

%

      

(244.5)

%

  

(0.1)

%

Foreign currency impact

  

—

%

  

—

%

  

—

%

  

(2.9)

%

  

(0.5)

%

  

(4.1)

%

  

(370.1)

%

  

(2.2)

%

  

108.0

%

  

(36.2)

%

Currency-neutral comparable growth

  

13.5

%

  

16.5

%

  

10.3

%

  

(15.4)

%

  

8.4

%

  

0.6

%

  

329.4

%

  

(6.3)

%

  

(443.1)

%

  

34.9

%

Currency-neutral comparable growth excluding Venezuela

                          

(26.7)

%

      

(221.3)

%

  

1.7

%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Kellogg Company and Subsidiaries
Reconciliation of Non-GAAP Amounts - Reported Effective Tax Rate
to Currency-Neutral Comparable Effective Tax Rate
       
     

Quarter ended
     

April 2,
 2016

  

April 4,
 2015

Reported effective tax rate

    

21.3

%

  

25.1

%

Mark-to-market

    

(0.1)

%

  

(1.0)

%

Project K and cost reduction activities

    

0.8

%

  

(0.8)

%

Other costs impacting comparability

    

(4.9)

%

  

1.4

%

Integration costs and acquisitions/divestitures

    

(0.2)

%

  

0.1

%

Venezuela remeasurement

    

0.4

%

  

—

%

Comparable effective tax rate

    

25.3

%

  

25.4

%

Comparable effective tax rate excluding Venezuela

    

25.2

%

  

25.4

%

Foreign currency impact

    

(1.7)

%

  

—

%

Currency-neutral comparable effective tax rate

    

27.0

%

  

25.4

%

Currency-neutral comparable effective tax rate excluding Venezuela

    

25.1

%

  

25.4

%

For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section.

Significant items impacting comparability

Comparable and Currency-Neutral Comparable EPS
For all periods presented, Comparable and Currency-Neutral Comparable basic and diluted EPS are calculated using the same shares outstanding that are used for As Reported basic and diluted EPS.

Project K and cost reduction activities
During 2013, we announced Project K, a four-year efficiency and effectiveness program. The program is expected to generate a significant amount of savings that may be invested in key strategic areas of focus for the business. We expect that this investment will drive future growth in revenues, gross margin, operating profit, and cash flow. We recorded pre-tax charges related to this program of $45 million and $68 million for the quarters ended April 2, 2016 and April 4, 2015, respectively.

In 2015 we initiated the implementation of a zero-based budgeting (ZBB) program in our North America business.  During 2016 ZBB is being expanded to include the international segments of the business.  In support of the ZBB initiative, we incurred pre-tax charges of approximately $7 million for the quarter ended April 2, 2016.

Acquisitions and dispositions
In September 2015, we completed the acquisition of Mass Foods, Egypt's leading cereal company for $46 million, or $44 million net of cash and cash equivalents acquired.  In our European reportable segment, the acquisition added $5 million in net sales and less than $1 million of operating profit (before integration costs) that impacted the comparability of our reported results for the quarter ended April 2, 2016.

In January 2015, we completed the acquisition of a majority interest in Bisco Misr, the number one packaged biscuits company in Egypt for $125 million, or $117 million net of cash and cash equivalents acquired.  The quarter ended April 2, 2016 represents the final reporting period in which year-over-year comparability is impacted for this acquisition.  In our European reportable segment, the acquisition added $9 million in net sales and less than $1 million of operating profit (before integration costs) that impacted the comparability of our reported results for the quarter ended April 2, 2016.

Integration and transaction costs
We have incurred integration costs related to the integration of the 2015 acquisitions of Bisco Misr and Mass Foods, the 2015 entry into a joint venture with Tolaram Africa, and the 2012 acquisition of Pringles as we move these businesses into the Kellogg business model.  We recorded pre-tax integration and transaction costs that were less than $1 million for the quarter ended April 2, 2016 and $8 million for the quarter ended April 4, 2015.

Mark-to-market accounting for pension plans, commodities and certain foreign currency contracts
We recognize mark-to-market adjustments for pension plans, commodity contracts, and certain foreign currency contracts as incurred.  Actuarial gains/losses for pension plans are recognized in the year they occur.  Changes between contract and market prices for commodities contracts and certain foreign currency contracts result in gains/losses that are recognized in the quarter they occur.  We recorded pre-tax mark-to-market charges of $24 million and $67 million for the quarters ended April 2, 2016 and April 4, 2015, respectively.

Other costs impacting comparability
During the quarter ended April 2, 2016, we redeemed $475 million of our 7.45% U.S. Dollar Debentures due 2031.  In connection with the debt redemption, we incurred $153 million of interest expense, consisting primarily of a premium on the tender offer and also including accelerated losses on pre-issuance interest rate hedges, acceleration of fees and debt discount on the redeemed debt and fees related to the tender offer.

During the quarter ended April 4, 2015, we determined that certain assets related to a variable interest entity may not be fully recoverable and recorded a non-cash $25 million charge to other income (expense).

Venezuela remeasurement and long-lived asset impairment

During 2015 we experienced an increase in the amount of time it takes to exchange bolivars for U.S. dollars through the DIPRO (formerly CENCOEX) exchange.  Due to this reduced availability of U.S. dollars and upon review of U.S. dollar cash needs in our Venezuela operations as of the quarter ended July 4, 2015, we concluded that we were no longer able to obtain sufficient U.S. dollars on a timely basis through the DIPRO exchange resulting in a decision to remeasure our Venezuela subsidiary's financial statements using the DICOM (formerly SIMADI) rate.  We have evaluated all of the facts and circumstances surrounding our Venezuelan business and determined that as of April 2, 2016 the DICOM rate continues to be the appropriate rate to use for remeasuring our Venezuelan subsidiary's financial statements.

Following the change to the SIMADI rate as of July 4, 2015, certain non-monetary assets related to our Venezuelan subsidiary continued to be remeasured at historical exchange rates.  As these assets were utilized by our Venezuelan subsidiary during the second half of 2015 and first quarter of 2016 they were recognized in the income statement at historical exchange rates resulting in an unfavorable impact. We experienced an unfavorable impact of approximately $4 million in the quarter ended April 2, 2016 related to the utilization of these remaining non-monetary assets.

Additionally, with the introduction of the new DICOM floating rate we experienced an unfavorable COGS impact of approximately $2 million in the quarter ended April 2, 2016 related to the utilization of non-monetary assets that were originally acquired after our conversion to the SIMADI rate at July 4, 2015.  These non-monetary assets were recognized in the income statement at historical exchange rates during the quarter.

Foreign currency translation and the impact of Venezuela
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.

As a result of our decision to change the exchange rate that we use to remeasure our Venezuela subsidiary from DIPRO (formerly CENCOEX) to the DICOM (formerly SIMADI) exchange rate beginning mid-2015, the methodology we use to calculate the impact of foreign currency translation, as described above, results in certain key performance metrics that are difficult to interpret when Venezuela is included in the financial results.  To provide additional visibility to our business performance, we have also included key performance metrics excluding our Venezuela business. We believe the use of our standard currency-neutral methodology in combination with the additional visibility provided by excluding Venezuela from our key performance metrics provides important information to more fully understand currency-neutral operating results.