e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934
For the Fiscal Year Ended December 31, 2005
Commission file number 1-4171
Kellogg Company
(Exact Name of Registrant as Specified in its Charter)
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Delaware |
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38-0710690 |
(State of Incorporation) |
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(I.R.S. Employer Identification No.) |
One Kellogg Square
Battle Creek, Michigan 49016-3599
(Address of Principal Executive Offices)
Registrants telephone number: (269) 961-2000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: |
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Name of each exchange on which registered: |
Common Stock, $0.25 par value per share |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by a check mark if the
registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or
Section 15 (d) of the
Act. Yes o No þ
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past
90 days. Yes þ No o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
the registrants knowledge in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one)
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2 of the
Act). Yes o No þ
As of February 17, 2006, the
aggregate market value of the common stock held by
non-affiliates of the registrant (assuming only for purposes of
this computation that the W.K. Kellogg Foundation Trust,
directors and executive officers may be affiliates) was
approximately $13.1 billion, as determined by the
July 1, 2005, closing price of $44.64 for one share of
common stock, as reported for the New York Stock
Exchange Composite Transactions.
As of January 27, 2006,
405,472,156 shares of the common stock of the registrant
were issued and outstanding.
Parts of the registrants Proxy
Statement for the Annual Meeting of Share Owners to be held on
April 21, 2006 are incorporated by reference into
Part III of this Report.
The Exhibit Index starts on
page 52.
TABLE OF CONTENTS
PART I
The Company. Kellogg Company, incorporated in Delaware in
1922, and its subsidiaries are engaged in the manufacture and
marketing of
ready-to-eat cereal and
convenience foods.
The address of the principal business office of Kellogg Company
is One Kellogg Square, P.O. Box 3599, Battle Creek,
Michigan Creek
49016-3599. Unless
otherwise specified or indicated by the context, the term
Company as used in this report means Kellogg
Company, its divisions and subsidiaries.
In March, 2001, the Company acquired Keebler Foods Company in a
cash transaction valued at $4.56 billion.
Financial Information About Segments. Information on
segments is located in Note 14 to the Consolidated
Financial Statements which are included herein under
Part II, Item 8.
Principal Products. The principal products of the Company
are ready-to-eat
cereals and convenience foods, such as cookies, crackers,
toaster pastries, cereal bars, frozen waffles and meat
alternatives. These products were, as of December 31, 2005,
manufactured by the Company in 17 countries and marketed in more
than 180 countries. The Companys cereal products are
generally marketed under the Kelloggs name
and are sold principally to the grocery trade through direct
sales forces for resale to consumers. The Company uses broker
and distribution arrangements for certain products. It also
generally uses these, or similar arrangements, in less-developed
market areas or in those market areas outside of its focus.
The Company also markets cookies, crackers, and other
convenience foods, under brands such as Kelloggs,
Keebler, Cheez-It,
Murray, Austin and Famous Amos, to
supermarkets in the United States through a direct store-door
(DSD) delivery system, although other distribution methods are
also used.
Additional information pertaining to the relative sales of the
Companys products for the years 2003 through 2005 is
located in Note 14 to the Consolidated Financial
Statements, which are included herein under Part II,
Item 8.
Raw Materials. Agricultural commodities are the principal
raw materials used in the Companys products. Cartonboard,
corrugated, and plastic are the principal packaging materials
used by the Company. World supplies and prices of such
commodities (which include such packaging materials) are
constantly monitored, as are government trade policies. The cost
of such commodities may fluctuate widely due to government
policy and regulation, weather conditions, or other unforeseen
circumstances. Continuous efforts are made to maintain and
improve the quality and supply of such commodities for purposes
of the Companys short-term and long-term requirements.
The principal ingredients in the products produced by the
Company in the United States include corn grits, wheat and wheat
derivatives, oats, rice, cocoa and chocolate, soybeans and
soybean derivatives, various fruits, sweeteners, flour,
shortening, dairy products, eggs, and other filling ingredients,
which ingredients are obtained from various sources. Most of
these commodities are purchased principally from sources in the
United States.
The Company enters into long-term contracts for the commodities
described in this section and purchases these items on the open
market, depending on the Companys view of possible price
fluctuations, supply levels, and the Companys relative
negotiating power. While the cost of some of these commodities
has, and may continue to, increase over time, the Company
believes that it will be able to purchase an adequate supply of
these items as needed. The Company also uses commodity futures
and options to hedge some of its costs.
Raw materials and packaging needed for internationally based
operations are available in adequate supply and are sometimes
imported from countries other than those where used in
manufacture.
Cereal processing ovens at major domestic and international
facilities are regularly fueled by natural gas or propane, which
are obtained from local utilities or other local suppliers.
Short-term standby propane storage exists at several plants for
use in the event of interruption in natural gas supplies. Oil
may also be used to fuel certain operations at various plants in
the event of natural gas shortages or when its use presents
economic advantages. In addition, considerable amounts of diesel
fuel are used in connection with the distribution of the
Companys products.
Trademarks and Technology. Generally, the Companys
products are marketed under trademarks it owns. The
Companys principal trademarks are its housemarks, brand
names, slogans, and designs related to cereals and convenience
foods manufactured and marketed by the Company, with the Company
also licensing third parties to use these
1
marks on various goods. These trademarks include
Kelloggs for cereals and convenience foods
and other products of the Company, and the brand names of
certain ready-to-eat
cereals, including
All-Bran, Apple
Jacks, Bran Buds, Complete Bran Flakes,
Complete Wheat Flakes, Cocoa Krispies,
Cinnamon Crunch Crispix, Corn Pops, Cruncheroos, Kelloggs
Corn Flakes, Cracklin Oat Bran, Crispix, Froot Loops,
Kelloggs Frosted Flakes, Frosted Mini-Wheats, Frosted
Krispies, Just Right, Kelloggs Low Fat Granola,
Mueslix, Nutri-Grain, POPS, Product 19,
Kelloggs Raisin Bran, Rice Krispies, Raisin Bran Crunch,
Smacks, Smart Start, Special K, Special K Red
Berries, and Kelloggs Honey Crunch Corn Flakes
in the United States and elsewhere; Zucaritas,
Choco Zucaritas, Sucrilhos, Sucrilhos Chocolate,
Sucrilhos Banana, Vector, Musli, and
Choco Krispis for cereals in Latin America;
Vive and Vector in Canada;
Choco Pops, Chocos, Frosties, Muslix,
Fruit n Fibre, Kelloggs Crunchy Nut Corn
Flakes, Kelloggs Crunchy Nut Red Corn Flakes, Honey Loops,
Kelloggs Extra, Sustain, Mueslix, Country Store, Ricicles,
Smacks, Start, Smacks Choco Tresor, Pops, and
Optima for cereals in Europe; and Cerola,
Sultana Bran, Supercharged, Chex, Frosties, Goldies, Rice
Bubbles, Nutri-Grain, Kelloggs Iron Man Food, and
BeBig for cereals in Asia and Australia.
Additional Company trademarks are the names of certain
combinations of Kelloggs
ready-to-eat
cereals, including Handi-Pak, Snack-A-Longs, Fun Pak,
Jumbo, and Variety Pak. Other Company
brand names include Kelloggs Corn Flake
Crumbs; Croutettes for herb season stuffing mix;
Kuadri-Krispies, Zucaritas, Special K, and
Crusli for cereal bars, Keloketas
for cookies, Komplete for biscuits; and
Kaos for snacks in Mexico and elsewhere in Latin
America; Pop-Tarts Pastry Swirls for toaster
danish; Pop-Tarts and Pop-Tarts Snak-Stix
for toaster pastries; Eggo, Special K, Froot
Loops and Nutri-Grain for frozen waffles
and pancakes; Rice Krispies Treats for baked
snacks and convenience foods; Rice Krispies Treats Krunch
for popcorn; Nutri-Grain, Nutri-Grain
Muffin Bars, Nutri-Grain Minis and
Nutri-Grain Twists for convenience foods in the
United States and elsewhere;
K-Time, Rice
Bubbles, Day Dawn, Be Natural, Sunibrite and
LCMs for convenience foods in Asia and Australia;
Nutri-Grain Squares, Nutri-Grain
Elevenses, and Rice Krispies Squares for
convenience foods in Europe; Winders for fruit
snacks in the United Kingdom; Kelloggs Krave
for refueling snack bars; Kashi for
certain cereals, nutrition bars, and mixes; Vector
for meal replacement products; and Morningstar
Farms, Loma Linda, Natural Touch, and Worthington
for certain meat and egg alternatives.
The Company also markets convenience foods under trademarks and
tradenames which include Keebler,
Cheez-It,
E. L. Fudge, Murray, Famous Amos, Austin, Ready Crust,
Chips Deluxe, Club, Fudge Shoppe,
Hi-Ho, Sunshine,
MunchEms, Sandies, Soft Batch, Toasteds, Town House,
Vienna Fingers, Wheatables, and Zesta. One
of its subsidiaries is also the exclusive licensee of the
Carrs brand name in the United States.
Company trademarks also include logos and depictions of certain
animated characters in conjunction with the Companys
products, including Snap!Crackle!Pop! for
Rice Krispies cereals and Rice Krispies
Treats convenience foods; Tony the Tiger
for Kelloggs Frosted Flakes, Zucaritas,
Sucrilhos and Frosties cereals and
convenience foods; Ernie Keebler for cookies,
convenience foods and other products; the Hollow Tree
logo for certain convenience foods; Toucan Sam
for Froot Loops; Dig Em for
Smacks; Coco the Monkey for Cocoa Krispies
and Coco Pops; Cornelius for
Kelloggs Corn Flakes; Melvin the elephant
for certain cereal and convenience foods; Chocos
the Bear and Kobi the Bear for certain
cereal products.
The slogans The Best To You Each Morning, The
Original and Best and Theyre
Gr-r-reat!,
used in connection with the Companys
ready-to-eat cereals,
along with L Eggo my Eggo, used in
connection with the Companys frozen waffles and pancakes,
and Elfin Magic used in connection with
convenience food products are also important Company trademarks.
The trademarks listed above, among others, when taken as a
whole, are important to the Companys business. Certain
individual trademarks are also important to the Companys
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.
The Company considers that, taken as a whole, the rights under
its various patents, which expire from time to time, are a
valuable asset, but the Company does not believe that its
businesses are materially dependent on any single patent or
group of related patents. The Companys activities under
licenses or other franchises or concessions which it holds are
similarly a valuable asset, but are not believed to be material.
Seasonality. Demand for the Companys products has
generally been approximately level throughout the year, although
some of the Companys convenience foods have a bias for
stronger demand in the second half of the year due to events and
holidays. The Company also custom-bakes cookies for the Girl
Scouts of the U.S.A., which are principally sold in the first
quarter of the year.
2
Working Capital. Although terms vary around the world and
by business types, in the United States the Company generally
has required payment for goods sold eleven or sixteen days
subsequent to the date of invoice as 2% 10/net 11 or 1%
15/net 16. Receipts from goods sold, supplemented as
required by borrowings, provide for the Companys payment
of dividends, capital expansion, and for other operating
expenses and working capital needs.
Customers. The Companys largest customer, Wal-Mart
Stores, Inc. and its affiliates, accounted for approximately 17%
of consolidated net sales during 2005, comprised principally of
sales within the United States. At December 31, 2005,
approximately 12% of the Companys consolidated receivables
balance and 17% of the Companys U.S. receivables
balance was comprised of amounts owed by Wal-Mart Stores, Inc.
and its affiliates. During 2005, the Companys top five
customers, collectively, accounted for approximately 31% of the
Companys consolidated net sales and approximately 42% of
U.S. net sales. There has been significant worldwide
consolidation in the grocery industry in recent years and the
Company believes that this trend is likely to continue. Although
the loss of any large customer for an extended length of time
could negatively impact the Companys sales and profits,
the Company does not anticipate that this will occur to a
significant extent due to the consumer demand for the
Companys products and the Companys relationships
with its customers. Products of the Company have been generally
sold through its 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
December 31, 2005 and January 1, 2005, was not
material to the Company.
Competition. The Company has experienced, and expects to
continue to experience, intense competition for sales of all of
its principal products in its major product categories, both
domestically and internationally. The Companys 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 the Companys 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. The Companys
expenditures for research and development were approximately
$181.0 million in 2005, $148.9 million in 2004 and
$126.7 million in 2003.
Regulation. The Companys activities in the United
States are subject to regulation by various government agencies,
including the Food and Drug Administration, Federal Trade
Commission and the Departments of Agriculture, Commerce and
Labor, as well as voluntary regulation by other bodies. Various
state and local agencies also regulate the Companys
activities. Other agencies and bodies outside of the United
States, including those of the European Union and various
countries, states and municipalities, also regulate the
Companys activities.
Environmental Matters. The Companys facilities are
subject to various U.S. and foreign federal, state, and local
laws and regulations regarding the discharge of material into
the environment and the protection of the environment in other
ways. The Company is not a party to any material proceedings
arising under these regulations. The Company believes that
compliance with existing environmental laws and regulations will
not materially affect the consolidated financial condition or
the competitive position of the Company. The Company is
currently in substantial compliance with all material
environmental regulations affecting the Company and its
properties.
Employees. At December 31, 2005, the Company had
approximately 25,600 employees.
Financial Information About Geographic Areas. Information
on geographic areas is located in Note 14 to the
Consolidated Financial Statements, which are included herein
under Part II, Item 8.
Executive Officers. The names, ages, and positions of the
executive officers of the Company (as of February 15, 2006)
are listed below together with their business experience.
Executive officers are generally elected annually by the Board
of Directors at the meeting immediately prior to the Annual
Meeting of Share Owners.
James M. Jenness
Chairman of the Board and
Chief Executive
Officer 59
Mr. Jenness has been Chairman and Chief Executive Officer
of the Company since February 2005 and has served as a director
of the Company since 2000. He was Chief Executive Officer of
Integrated Merchandising Systems, LLC, a leader in outsource
management of retail promotion and branded merchandising from
1997 to December 2004.
A. D. David Mackay
President and Chief Operating
Officer 50
Mr. Mackay joined Kellogg Australia in 1985 and held
several positions with Kellogg USA and Kellogg
3
Australia and New Zealand before leaving Kellogg in 1992. He
rejoined Kellogg Australia in 1998 as managing director. He was
named Senior Vice President and President, Kellogg USA in July
2000, Executive Vice President in November 2000, and President
and Chief Operating Officer in September 2003.
John A. Bryant
Executive Vice President and President,
Kellogg
International 40
Mr. Bryant joined Kellogg Company in March 1998, working in
support of the global strategic planning process. He was
appointed Senior Vice President and Chief Financial Officer,
Kellogg USA, in August 2000, was appointed Chief Financial
Officer in February 2002 and was appointed Executive Vice
President later in 2002. He also assumed responsibility for the
Natural and Frozen Foods Division, Kellogg USA, in September
2003. He was appointed to his current position in June 2004.
Alan F. Harris
Executive Vice President and Chief Marketing
and Customer
Officer 51
Mr. Harris joined Kellogg Company of Great Britain Limited
as a product manager in 1984. In 1992, he was promoted to
Director of Global Marketing and Assistant to the Chairman. In
1993, he was promoted to President of Kellogg Canada and in 1994
to Executive Vice President Marketing and Sales,
Kellogg USA. Mr. Harris was promoted to Executive Vice
President and President of Kellogg Latin America in 1997 and to
President of Kellogg Europe in 1999. He was named Executive Vice
President and President, Kellogg International in October 2000
and was named to his current position in October 2003.
Jeffrey W. Montie
Executive Vice President and President,
Kellogg North
America 44
Mr. Montie joined Kellogg Company in 1987 as a brand
manager in the
U.S. ready-to-eat
cereal (RTEC) business and held assignments in Canada, South
Africa and Germany, and then served as Vice President, Global
Innovation for Kellogg Europe before being promoted. In December
2000, Mr. Montie was promoted to President, Morning Foods
Division of Kellogg USA and, in August 2002, to Senior Vice
President, Kellogg Company. Mr. Montie has been Executive
Vice President of Kellogg Company, President of the Morning
Foods Division of Kellogg North America since September 2003 and
President of Kellogg North America since June 2004.
Donna J. Banks
Senior Vice President, Global Supply
Chain 49
Dr. Banks joined the Company in 1983. She was appointed to
Senior Vice President, Research and Development in 1997, to
Senior Vice President, Global Innovation in 1999 and to Senior
Vice President, Research, Quality and Technology in 2000. She
was appointed to her current position in June 2004.
Jeffrey M. Boromisa
Senior Vice President and Chief Financial
Officer 50
Mr. Boromisa joined Kellogg Company in 1981 as a senior
auditor. He served in various financial positions until he was
named Vice President Purchasing of Kellogg North
America in 1997. In November 1999, Mr. Boromisa was
promoted to Vice President and Corporate Controller of Kellogg
Company and in 2002, he was promoted to Senior Vice President.
He assumed his current position in June 2004.
Celeste Clark
Senior Vice President, Corporate
Affairs 52
Ms. Clark has been Kellogg Companys Senior Vice
President of Corporate Affairs since August 2003. She joined the
Company in 1977 and served in several roles of increasing
responsibility before being appointed to Vice President,
Worldwide Nutrition Marketing in 1996 and then to Senior Vice
President, Nutrition and Marketing Communications, Kellogg USA
in 1999. In October 2002, she was appointed to Vice President,
Corporate and Scientific Affairs for the Company.
Gary H. Pilnick
Senior Vice President, General Counsel,
Corporate Development and
Secretary 41
Mr. Pilnick was appointed Senior Vice President, General
Counsel and Secretary in August 2003 and assumed responsibility
for Corporate Development in June 2004. He joined the Company as
Vice President Deputy General Counsel and Assistant
Secretary in September 2000 and served in that position until
August 2003. Before joining the Company, he served as Vice
President and Chief Counsel of Sara Lee Branded Apparel and as
Vice President and Chief Counsel, Corporate Development and
Finance at Sara Lee Corporation.
Kathleen Wilson-Thompson
Senior Vice President,
Global Human
Resources 48
Kathleen Wilson-Thompson has been Kellogg Companys Senior
Vice President, Global Human Resources since July 2005. She
served in various legal roles until 1995, when she assumed the
role of Human Resources Manager for one of the Companys
plants. In 1998, she returned to the legal department as
Corporate Counsel, and was promoted to Chief Counsel, Labor and
Employment in November 2001, a position she held until October
2003, when she was promoted to Vice President, Chief Counsel,
U.S. Businesses, Labor and Employment.
4
Alan R. Andrews
Vice President and Corporate
Controller 50
Mr. Andrews joined Kellogg Company in 1982. He served in
various financial roles before relocating to China as general
manager of Kellogg China in 1993. He subsequently served in
several leadership innovation and finance roles before being
promoted to Vice President, International Finance, Kellogg
International in 2000. In 2002, he was appointed to Assistant
Corporate Controller and assumed his current position in June
2004.
Availability of Reports; Website Access; Other
Information. Our internet address is
http://www.kelloggcompany.com. Through
Investor Relations
Financials SEC Filings on
our home page, we make available free of charge our proxy
statements, our annual report on
Form 10-K, our
quarterly reports on
Form 10-Q, our
current reports on
Form 8-K, SEC
Forms 3, 4 and 5 and any amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. Our
reports filed with the Securities and Exchange Commission are
also made available to read and copy at the SECs Public
Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information about the Public
Reference Room by contacting the SEC at
1-800-SEC-0330. Reports
filed with the SEC are also made available on its website at
www.sec.gov.
Copies of the Corporate Governance Guidelines, the Charters of
the Audit, Compensation and Nominating and Governance Committees
of the Board of Directors, the Code of Conduct for Kellogg
Company directors and Global Code of Ethics for Kellogg Company
employees (including the chief executive officer, chief
financial officer and corporate controller) can also be found on
the Kellogg Company website. Amendments or waivers to the Global
Code of Ethics applicable to the chief executive officer, chief
financial officer and corporate controller can also be found in
the Investor Relations section of the Kellogg
Company website. The Company will provide copies of any of these
documents to any Share Owner upon request.
Forward-Looking Statements. This Report contains
forward-looking statements with projections
concerning, among other things, the Companys strategy,
financial principles, and plans; initiatives, improvements and
growth; sales, gross margins, advertising, promotion,
merchandising, brand building, operating profit, and earnings
per share; innovation; investments; capital expenditure; asset
write-offs and expenditures and costs related to productivity or
efficiency initiatives; the impact of accounting changes and
significant accounting estimates; the Companys ability to
meet interest and debt principal repayment obligations; minimum
contractual obligations; future common stock repurchases or debt
reduction; effective income tax rate; cash flow and core working
capital improvements; interest expense; commodity and energy
prices; and employee benefit plan costs and funding.
Forward-looking statements include predictions of future results
or activities and may contain the words expect,
believe, will, will deliver,
anticipate, project, should,
or words or phrases of similar meaning. For example,
forward-looking statements are found in this Item 1 and in
several sections of Managements Discussion and Analysis
incorporated by reference. The Companys actual results or
activities may differ materially from these predictions. The
Companys future results could be affected by a variety of
factors, including the impact of competitive conditions; the
effectiveness of pricing, advertising, and promotional programs;
the success of innovation and new product introductions; the
recoverability of the carrying value of goodwill and other
intangibles; the success of productivity improvements and
business transitions; commodity and energy prices, and labor
costs; the availability of and interest rates on short-term and
long-term financing; actual market performance of benefit plan
trust investments; the levels of spending on systems
initiatives, properties, business opportunities, integration of
acquired businesses, and other general and administrative costs;
changes in consumer behavior and preferences; the effect of U.S.
and foreign economic conditions on items such as interest rates,
statutory tax rates, currency conversion and availability; legal
and regulatory factors; 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 the
Company undertakes no obligation to publicly update them.
In addition to the factors discussed elsewhere in this Report,
the following risks and uncertainties could materially adversely
affect the Companys business, financial condition and
results of operations. Additional risks and uncertainties not
presently known to the Company or that the Company currently
deems immaterial also may impair the Companys business
operations and financial condition.
5
The Companys performance is affected by general
economic and political conditions and taxation policies.
The Companys results in the past have been, and in the
future may continue to be, materially affected by changes in
general economic and political conditions in the United States
and other countries, including the interest rate environment in
which the Company conducts business, the financial markets
through which the Company accesses capital and currency,
political unrest and terrorist acts in the United States or
other countries in which the Company carries on business.
The enactment of or increases in tariffs, including value added
tax, or other changes in the application of existing taxes, in
markets in which the Company is currently active or may be
active in the future, or on specific products that it sells or
with which its products compete, may have an adverse effect on
its business or on its results of operations.
The Company operates in the highly competitive food
industry.
The Company faces competition across its product lines,
including ready-to-eat
cereals and convenience foods, from other companies which have
varying abilities to withstand changes in market conditions.
Some of the Companys competitors have substantial
financial, marketing and other resources, and competition with
them in the Companys various markets and product lines
could cause the Company to reduce prices, increase capital,
marketing or other expenditures, or lose category share, any of
which could have a material adverse effect on the business and
financial results of the Company. Category share and growth
could also be adversely impacted if the Company is not
successful in introducing new products.
The Companys consolidated financial results and demand
for the Companys products are dependent on the successful
development of new products and processes.
There are a number of trends in consumer preferences which may
impact on the Company and the industry as a whole. These include
changing consumer dietary trends and the availability of
substitute products.
The Companys 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. The Company aims to introduce products or new or
improved production processes on a timely basis in order to
counteract obsolescence and decreases in sales of existing
products. While the Company devotes significant focus to the
development of new products and to the research, development and
technology process functions of its business, it may not be
successful in developing new products or its new products may
not be commercially successful. The Companys future
results and its ability to maintain or improve its competitive
position will depend on its capacity to gauge the direction of
its key markets and upon its ability to successfully identify,
develop, manufacture, market and sell new or improved products
in these changing markets.
An impairment in the carrying value of goodwill or other
acquired intangible could negatively affect the Companys
consolidated operating results and net worth.
The carrying value of goodwill represents the fair value of
acquired business 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 the cash flows of the Company are not
amortized, but must be evaluated by management at least annually
for impairment. If carrying value exceeds current fair value,
the intangible is considered impaired and is reduced to fair
value via a charge to earnings. Events and conditions which
could result in an impairment include changes in the industries
in which the Company operates, including competition and
advances in technology; a significant product liability or
intellectual property claim; or other factors leading to
reduction in expected sales or profitability. Should the value
of one or more of the acquired intangibles become impaired, the
Companys consolidated earnings and net worth may be
materially adversely affected.
As of December 31, 2005, the carrying value of intangible
assets totaled approximately $4.9 billion, of which
$3.5 billion was goodwill and $1.4 billion represented
trademarks, trade names, and other acquired intangibles compared
to total assets of $10.6 billion and shareholders
equity of $2.3 billion.
The Company may not achieve its targeted cost savings from
cost reduction initiatives.
The Companys success depends in part on its ability to be
an efficient producer in a highly competitive industry. The
Company has invested a significant amount in capital expenditure
to improve its operational facilities. Ongoing operational
issues are likely to occur when carrying out major production,
procurement, or logistical changes and these as well as any
failure by the Company to achieve its planned cost savings could
have a material adverse effect on its business and consolidated
financial position and on the consolidated results of its
operations and profitability.
6
The Company has a substantial amount of indebtedness.
The Company has indebtedness that is substantial in relation to
its shareholders equity. As of December 31, 2005, the
Company had total debt of approximately $4.9 billion and
shareholders equity of $2.3 billion.
The Companys substantial indebtedness could have important
consequences, including:
|
|
|
the ability to obtain additional financing for working capital,
capital expenditure or general corporate purposes may be
impaired, particularly if the ratings assigned to the
Companys debt securities by rating organizations were
revised downward; |
|
|
restricting the Companys flexibility in responding to
changing market conditions or making it more vulnerable in the
event of a general downturn in economic conditions or its
business; |
|
|
a substantial portion of the cash flow from operations must be
dedicated to the payment of principal and interest on the
Companys debt, reducing the funds available to it for
other purposes including expansion through acquisitions,
marketing spending and expansion of its product offerings; and |
|
|
the Company may be more leveraged than some of its competitors,
which may place the Company at a competitive disadvantage. |
The Companys ability to make scheduled payments or to
refinance its obligations with respect to indebtedness will
depend on the Companys financial and operating
performance, which in turn, is subject to prevailing economic
conditions, the availability of, and interest rates on, short
term financing, and to financial, business and other factors
beyond the Companys control.
The results of the Company may be materially and adversely
impacted as a result of increases in the price of raw materials,
including agricultural commodities, fuel and labor.
Agricultural commodities, including corn, wheat, soybean oil,
sugar and cocoa, are the principal raw materials used in the
Companys products. Cartonboard, corrugated, and plastic
are the principal packaging materials used by the Company. The
cost of such commodities may fluctuate widely due to government
policy and regulation, weather conditions, or other unforeseen
circumstances. To the extent that any of the foregoing factors
affect the prices of such commodities and the Company is unable
to increase its prices or adequately hedge against such changes
in prices in a manner that offsets such changes, the results of
its operations could be materially and adversely affected.
Cereal processing ovens at major domestic and international
facilities are regularly fuelled by natural gas or propane,
which are obtained from local utilities or other local
suppliers. Short-term stand-by propane storage exists at several
plants for use of interruption in natural gas supplies. Oil may
also be used to fuel certain operations at various plants. In
addition, considerable amounts of diesel fuel are used in
connection with the distribution of the Companys products.
The cost of fuel may fluctuate widely due to economic and
political conditions, government policy and regulation, war, or
other unforeseen circumstances which could have a material
adverse effect on the Companys consolidated operating
results or financial condition.
A shortage in the labor pool or other general inflationary
pressures or changes in applicable laws and regulations could
increase labor cost, which could have a material adverse effect
on the Companys consolidated operating results or
financial conditions.
Additionally, the Companys labor costs include the cost of
providing benefits for employees. The Company sponsors a number
of defined benefit plans for employees in the United States and
various foreign locations, including pension, retiree health and
welfare, active health care, severance and other postemployment.
The Company also participates in a number of multiemployer
pension plans for certain of its manufacturing locations. The
Companys major pension plans and U.S. retiree health
and welfare plans are funded, with trust assets invested in a
globally diversified portfolio of equity securities with smaller
holdings of bonds, real estate and other investments. The annual
cost of benefits can vary significantly from year to year and is
materially affected by such factors as a change in the assumed
and actual rate of return on major plan assets, a change in the
weighted-average discount rate used to measure obligations, the
rate of health care cost inflation, and the outcome of
collectively bargained wage and benefit agreements.
The Company may be unable to maintain its profit margins in
the face of a consolidating retail environment. In addition, the
loss of one of the Companys largest customers could
negatively impact its sales and profits.
The Companys largest customer, Wal-Mart Stores, Inc. and
its affiliates, accounted for approximately 17% of consolidated
net sales during 2005, comprised principally of sales within the
United States. At December 31, 2005, approximately 12% of
the Companys consolidated receivables balance and 17% of
the Companys U.S. receivables balance was comprised
of amounts owed by Wal-Mart Stores, Inc. and its affiliates.
During 2005, the Companys top five
7
customers, collectively, accounted for approximately 31% of our
consolidated net sales and approximately 42% of U.S. net
sales. As the retail grocery trade continues to consolidate and
mass marketers become larger, the large retail customers of the
Company may seek to use their position to improve their
profitability through improved efficiency, lower pricing and
increased promotional programs. If the Company is unable to use
its scale, marketing expertise, product innovation and category
leadership positions to respond, the profitability or volume
growth of the Company could be negatively affected. The loss of
any large customer for an extended length of time could
negatively impact its sales and profits.
Changes in tax, environmental or other regulations or failure
to comply with existing licensing, trade and other regulations
and laws could have a material adverse effect on the
Companys consolidated financial condition.
The Companys activities, both in and outside of the United
States, are subject to regulation by various federal, state,
provincial and local laws, regulations and government agencies,
including the U.S. Food and Drug Administration,
U.S. Federal Trade Commission, the U.S. Departments of
Agriculture, Commerce and Labor, as well as similar and other
authorities of the European Union and various state, provincial
and local governments, as well as voluntary regulation by other
bodies. Various state and local agencies also regulate the
Companys activities.
The manufacturing, marketing and distribution of food products
is subject to governmental regulation that is becoming
increasingly onerous. Those regulations control such matters as
ingredients, advertising, relations with distributors and
retailers, health and safety and the environment. The Company is
also regulated with respect to matters such as licensing
requirements, trade and pricing practices, tax and environmental
matters. The need to comply with new or revised tax,
environmental or other laws or regulations, or new or changed
interpretations or enforcement of existing laws or regulations,
may have a material adverse effect on the Companys
business and results of operations.
The Companys operations face significant foreign
currency exchange rate exposure which could negatively impact
its operating results.
The Company holds assets and incurs liabilities, earns revenue
and pays expenses in a variety of currencies other than the
U.S. dollar, primarily the British Pound, Euro, Australian
dollar, Canadian dollar and Mexican peso. Because the
Companys consolidated financial statements are presented
in U.S. dollars, the Company must translate its assets,
liabilities, revenue and expenses into U.S. dollars at
then-applicable exchange rates. Consequently, increases and
decreases in the value of the U.S. dollar may negatively
affect the value of these items in the Companys
consolidated financial statements, even if their value has not
changed in their original currency. To the extent the Company
fails to manage its foreign currency exposure adequately, the
Companys consolidated results of operations may be
negatively affected.
If the Companys food products become adulterated or
misbranded, it might need to recall those items and may
experience product liability if consumers are injured as a
result.
The Company may need to recall some of its products if they
become adulterated or misbranded. The Company may also be liable
if the consumption of any of its products cause injury. A
widespread product recall could result in significant losses due
to the costs of a recall, the destruction of product inventory,
and lost sales due to the unavailability of product for a period
of time. The Company could also suffer losses from a significant
product liability judgment against it. A significant product
recall or product liability case could also result in a loss of
consumer confidence in the Companys food products, which
could have a material adverse effect on its business results and
the value of its brands.
|
|
Item 1B. |
Unresolved Staff Comments |
None.
The Companys corporate headquarters and principal research
and development facilities are located in Battle Creek, Michigan.
The Company operated, as of December 31, 2005,
manufacturing plants and distribution and warehousing facilities
totaling more than 28 million (28,000,000) square feet of
building area in the United States and other countries. The
Companys plants have been designed and constructed to meet
its specific production requirements, and the Company
periodically invests 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 other Company plants
producing similar products, and other factors. Manufacturing
facilities of the Company in the United States include four
cereal plants and warehouses located in Battle Creek, Michigan;
Lancaster, Pennsylvania; Memphis, Tennessee; and Omaha, Nebraska
and other plants in San Jose, California; Atlanta, Augusta,
Columbus, Macon, and Rome, Georgia; Chicago, Illinois; Kansas
City, Kansas; Florence, Louisville, and Pikeville, Kentucky;
Grand Rapids, Michigan; Blue Anchor, New Jersey; Cary and
8
Charlotte, North Carolina; Cincinnati, Fremont, and Zanesville,
Ohio; Muncy, Pennsylvania; Rossville, Tennessee and Allyn,
Washington.
Outside the United States, the Company had, as of
December 31, 2005, additional manufacturing locations, some
with warehousing facilities, in Australia, Brazil, Canada,
Colombia, Ecuador, Germany, Great Britain, Guatemala, India,
Japan, Mexico, South Africa, South Korea, Spain, Thailand, and
Venezuela.
The principal properties of the Company, including its major
office facilities, generally are owned by the Company, although
some manufacturing facilities are leased, and no owned property
is subject to any major lien or other encumbrance. Distribution
facilities (including related warehousing facilities) and
offices of non-plant locations typically are leased. In general,
the Company considers its facilities, taken as a whole, to be
suitable, adequate, and of sufficient capacity for its current
operations.
|
|
Item 3. |
Legal Proceedings |
The Company is not a party to any pending legal proceedings
which could reasonably be expected to have a material adverse
effect on the Company and its subsidiaries, considered on a
consolidated basis, nor are any of the Companys properties
or subsidiaries subject to any such proceedings.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
Not applicable.
PART II
|
|
Item 5. |
Market for the Registrants Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Information on the market for the Companys common stock,
number of share owners and dividends is located in Note 13
to the Consolidated Financial Statements, which are included
herein under Part II, Item 8.
The following table provides information with respect to
acquisitions by the Company of shares of its common stock during
the quarter ended December 31, 2005.
(millions, except per share data)
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
|
(c) |
|
Approximate |
|
|
Total Number of |
|
Dollar Value of |
|
|
Shares Purchased |
|
Shares that May |
|
|
(a) |
|
(b) |
|
as Part of Publicly |
|
Yet Be Purchased |
|
|
Total Number of |
|
Average Price |
|
Announced Plans |
|
Under the Plans |
|
|
Shares Purchased |
|
Paid Per Share |
|
or Programs |
|
or Programs |
Period |
|
|
|
|
|
|
|
|
|
Month #1: 10/2/05-10/29/05
|
|
|
|
|
|
$ |
46.11 |
|
|
|
|
|
|
$ |
411.9 |
|
Month #2: 10/30/05-11/26/05
|
|
|
10.2 |
|
|
$ |
42.93 |
|
|
|
10.2 |
|
|
$ |
10.8 |
|
Month #3: 11/27/05-12/31/05
|
|
|
.3 |
|
|
$ |
44.44 |
|
|
|
.3 |
|
|
|
|
|
Total(1)
|
|
|
10.5 |
|
|
$ |
42.98 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
(1) |
Shares included in the table above were purchased as part of
publicly announced plans or programs, as follows: |
|
|
|
|
a) |
Approximately 9.4 million shares were purchased during the
fourth quarter of 2005 under programs authorized by the
Companys Board of Directors to repurchase up to
$675 million of Kellogg common stock for general corporate
purposes and to offset issuances for employee benefit programs.
An initial $400 million repurchase program was publicly
announced in a press release on December 7, 2004. On
October 28, 2005, the Board of Directors approved an
increase in the authorized amount of 2005 stock repurchase to
$675 million and an additional $650 million for 2006.
This second repurchase program was publicly announced in a press
release on October 31, 2005. |
|
|
b) |
Approximately 1.1 million shares were purchased during the
fourth quarter of 2005 from employees and directors in stock
swap and similar transactions pursuant to various
shareholder-approved equity-based compen- sation plans described
in Note 8 to the Consolidated Financial Statements, which
are included herein under Part II, Item 8. |
9
|
|
Item 6. |
Selected Financial Data |
Kellogg Company and Subsidiaries
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per
share data and number of employees) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
Operating trends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
10,177.2 |
|
|
$ |
9,613.9 |
|
|
$ |
8,811.5 |
|
|
$ |
8,304.1 |
|
|
$ |
7,548.4 |
|
Gross profit as a % of net sales
|
|
|
44.9 |
% |
|
|
44.9 |
% |
|
|
44.4 |
% |
|
|
45.0 |
% |
|
|
44.2 |
% |
Depreciation
|
|
|
390.3 |
|
|
|
399.0 |
|
|
|
359.8 |
|
|
|
346.9 |
|
|
|
331.0 |
|
Amortization
|
|
|
1.5 |
|
|
|
11.0 |
|
|
|
13.0 |
|
|
|
3.0 |
|
|
|
107.6 |
|
Advertising expense
|
|
|
857.7 |
|
|
|
806.2 |
|
|
|
698.9 |
|
|
|
588.7 |
|
|
|
519.2 |
|
Research and development expense
|
|
|
181.0 |
|
|
|
148.9 |
|
|
|
126.7 |
|
|
|
106.4 |
|
|
|
110.2 |
|
Operating profit
|
|
|
1,750.3 |
|
|
|
1,681.1 |
|
|
|
1,544.1 |
|
|
|
1,508.1 |
|
|
|
1,167.9 |
|
Operating profit as a % of net sales
|
|
|
17.2 |
% |
|
|
17.5 |
% |
|
|
17.5 |
% |
|
|
18.2 |
% |
|
|
15.5 |
% |
Interest expense
|
|
|
300.3 |
|
|
|
308.6 |
|
|
|
371.4 |
|
|
|
391.2 |
|
|
|
351.5 |
|
Earnings before cumulative effect of accounting change (a):
|
|
|
980.4 |
|
|
|
890.6 |
|
|
|
787.1 |
|
|
|
720.9 |
|
|
|
474.6 |
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
412.0 |
|
|
|
412.0 |
|
|
|
407.9 |
|
|
|
408.4 |
|
|
|
406.1 |
|
|
Diluted
|
|
|
415.6 |
|
|
|
416.4 |
|
|
|
410.5 |
|
|
|
411.5 |
|
|
|
407.2 |
|
Earnings per share before cumulative effect of accounting change
(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.38 |
|
|
|
2.16 |
|
|
|
1.93 |
|
|
|
1.77 |
|
|
|
1.17 |
|
|
Diluted
|
|
|
2.36 |
|
|
|
2.14 |
|
|
|
1.92 |
|
|
|
1.75 |
|
|
|
1.16 |
|
|
Cash flow trends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
$ |
1,143.3 |
|
|
$ |
1,229.0 |
|
|
$ |
1,171.0 |
|
|
$ |
999.9 |
|
|
$ |
1,132.0 |
|
Capital expenditures
|
|
|
374.2 |
|
|
|
278.6 |
|
|
|
247.2 |
|
|
|
253.5 |
|
|
|
276.5 |
|
Net cash provided from operating activities
reduced by capital expenditures (c)
|
|
|
769.1 |
|
|
|
950.4 |
|
|
|
923.8 |
|
|
|
746.4 |
|
|
|
855.5 |
|
Net cash used in investing activities
|
|
|
(415.0 |
) |
|
|
(270.4 |
) |
|
|
(219.0 |
) |
|
|
(188.8 |
) |
|
|
(4,143.8 |
) |
Net cash provided from (used in) financing activities
|
|
|
(905.3 |
) |
|
|
(716.3 |
) |
|
|
(939.4 |
) |
|
|
(944.4 |
) |
|
|
3,040.2 |
|
Interest coverage ratio (b)
|
|
|
7.1 |
|
|
|
6.8 |
|
|
|
5.1 |
|
|
|
4.8 |
|
|
|
4.5 |
|
|
Capital structure trends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (d)
|
|
$ |
10,574.5 |
|
|
$ |
10,561.9 |
|
|
$ |
9,914.2 |
|
|
$ |
9,990.8 |
|
|
$ |
10,140.1 |
|
Property, net
|
|
|
2,648.4 |
|
|
|
2,715.1 |
|
|
|
2,780.2 |
|
|
|
2,840.2 |
|
|
|
2,952.8 |
|
Short-term debt
|
|
|
1,194.7 |
|
|
|
1,029.2 |
|
|
|
898.9 |
|
|
|
1,197.3 |
|
|
|
595.6 |
|
Long-term debt
|
|
|
3,702.6 |
|
|
|
3,892.6 |
|
|
|
4,265.4 |
|
|
|
4,519.4 |
|
|
|
5,619.0 |
|
Shareholders equity
|
|
|
2,283.7 |
|
|
|
2,257.2 |
|
|
|
1,443.2 |
|
|
|
895.1 |
|
|
|
871.5 |
|
|
Share price trends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price range
|
|
$ |
42-47 |
|
|
$ |
37-45 |
|
|
$ |
28-38 |
|
|
$ |
29-37 |
|
|
$ |
25-34 |
|
Cash dividends per common share
|
|
|
1.060 |
|
|
|
1.010 |
|
|
|
1.010 |
|
|
|
1.010 |
|
|
|
1.010 |
|
|
Number of employees
|
|
|
25,606 |
|
|
|
25,171 |
|
|
|
25,250 |
|
|
|
25,676 |
|
|
|
26,424 |
|
|
|
|
(a) |
Earnings before cumulative effect of accounting change for 2001
exclude the effect of a charge of $1.0 after tax to adopt SFAS
No. 133 Accounting for Derivative Instruments and
Hedging Activities. |
|
(b) |
Interest coverage ratio is calculated based on earnings before
interest expense, income taxes, depreciation, and amortization,
divided by interest expense. |
|
(c) |
The Company uses this non-GAAP financial measure to focus
management and investors on the amount of cash available for
debt repayment, dividend distribution, acquisition
opportunities, and share repurchase. |
|
(d) |
During 2005, the Company reclassified $578.9 attributable to its
direct store-door (DSD) delivery system from
indefinite-lived intangibles to goodwill, net of an associated
deferred tax liability of $228.5. Prior periods were likewise
reclassified, resulting in a net reduction to total assets of
$228.5. |
10
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Kellogg Company and Subsidiaries
Results Of Operations
Overview
Kellogg Company is the worlds leading producer of cereal
and a leading producer of convenience foods, including cookies,
crackers, toaster pastries, cereal bars, frozen waffles, and
meat alternatives. Kellogg products are manufactured and
marketed globally. We currently manage our operations based on
the geographic regions of North America, Europe, Latin America,
and Asia Pacific. This organizational structure is the basis of
the operating segment data presented in this report.
We manage our Company for sustainable performance defined by our
long-term annual growth targets of low single-digit for internal
net sales, mid single-digit for internal operating profit, and
high single-digit for net earnings per share. (Our measure of
internal growth excludes the impact of currency and,
if applicable, acquisitions, dispositions, and shipping day
differences.) In combination with an attractive dividend yield,
we believe this profitable growth will provide strong total
return to our shareholders. We plan to continue to achieve this
sustainability through a strategy focused on growing our cereal
business, expanding our snacks business, and pursuing selected
growth opportunities. We support our business strategy with
operating principles that emphasize sales dollars over shipment
volume (Volume to Value), as well as cash flow and return
on invested capital (Manage for Cash). We believe the
success of our strategy and operating principles are reflected
in our steady growth in earnings and strong cash flow over the
past several years. This performance has been achieved despite
significant challenges such as rising commodity, fuel, energy,
and employee benefit costs, as well as increased investment in
brand building, innovation, and cost-reduction initiatives.
For the year ended December 31, 2005, the Company reported
diluted net earnings per share of $2.36, a 10% increase over
fiscal 2004 results. Consolidated net sales grew approximately
6%, operating profit increased 4%, and net earnings were up 10%.
For the year ended January 1, 2005, net earnings per share
were $2.14, an 11% increase over fiscal 2003 net earnings per
share of $1.92. For 2005, net cash provided from operating
activities was $1,143.3 million and included nearly
$200 million of incremental benefit plan funding, as
compared to the 2004 amount of $1,229.0 million.
Net sales and operating profit
2005 compared to 2004
The following tables provide an analysis of net sales and
operating profit performance for 2005 versus 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
Latin |
|
Asia |
|
|
(dollars in millions) |
|
America |
|
Europe |
|
America |
|
Pacific(a) |
|
Corporate |
|
Consolidated |
|
2005 net sales
|
|
$ |
6,807.8 |
|
|
$ |
2,013.6 |
|
|
$ |
822.2 |
|
|
$ |
533.6 |
|
|
$ |
|
|
|
$ |
10,177.2 |
|
|
2004 net sales
|
|
$ |
6,369.3 |
|
|
$ |
2,007.3 |
|
|
$ |
718.0 |
|
|
$ |
519.3 |
|
|
$ |
|
|
|
$ |
9,613.9 |
|
|
% change 2005 vs. 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (tonnage) (b)
|
|
|
5.6% |
|
|
|
-.2% |
|
|
|
7.5% |
|
|
|
.8% |
|
|
|
|
|
|
|
4.5% |
|
|
Pricing/mix
|
|
|
2.2% |
|
|
|
2.0% |
|
|
|
3.2% |
|
|
|
.4% |
|
|
|
|
|
|
|
1.9% |
|
|
Subtotal internal business
|
|
|
7.8% |
|
|
|
1.8% |
|
|
|
10.7% |
|
|
|
1.2% |
|
|
|
|
|
|
|
6.4% |
|
|
Shipping day differences (c)
|
|
|
-1.4% |
|
|
|
-.9% |
|
|
|
|
|
|
|
-1.0% |
|
|
|
|
|
|
|
-1.1% |
|
|
Foreign currency impact
|
|
|
.5% |
|
|
|
-.6% |
|
|
|
3.8% |
|
|
|
2.6% |
|
|
|
|
|
|
|
.6% |
|
|
Total change
|
|
|
6.9% |
|
|
|
.3% |
|
|
|
14.5% |
|
|
|
2.8% |
|
|
|
|
|
|
|
5.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
Latin |
|
Asia |
|
|
(dollars in millions) |
|
America |
|
Europe |
|
America |
|
Pacific(a) |
|
Corporate |
|
Consolidated |
|
2005 operating profit
|
|
$ |
1,251.5 |
|
|
$ |
330.7 |
|
|
$ |
202.8 |
|
|
$ |
86.0 |
|
|
$ |
(120.7 |
) |
|
$ |
1,750.3 |
|
|
2004 operating profit
|
|
$ |
1,240.4 |
|
|
$ |
292.3 |
|
|
$ |
185.4 |
|
|
$ |
79.5 |
|
|
$ |
(116.5 |
) |
|
$ |
1,681.1 |
|
|
% change 2005 vs. 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal business
|
|
|
2.4% |
|
|
|
14.9% |
|
|
|
6.6% |
|
|
|
7.4% |
|
|
|
-4.1% |
|
|
|
5.2% |
|
|
Shipping day differences (c)
|
|
|
-2.1% |
|
|
|
-1.0% |
|
|
|
|
|
|
|
-2.2% |
|
|
|
.4% |
|
|
|
-1.8% |
|
|
Foreign currency impact
|
|
|
.6% |
|
|
|
-.8% |
|
|
|
2.8% |
|
|
|
3.0% |
|
|
|
|
|
|
|
.7% |
|
|
Total change
|
|
|
.9% |
|
|
|
13.1% |
|
|
|
9.4% |
|
|
|
8.2% |
|
|
|
-3.7% |
|
|
|
4.1% |
|
|
|
|
(a) |
Includes Australia and Asia. |
|
(b) |
We measure the volume impact (tonnage) on revenues based on
the stated weight of our product shipments. |
|
(c) |
Impact of 53rd week in 2004. Refer to Note 1 within Notes to
Consolidated Financial Statements for further information. |
11
During 2005, consolidated net sales increased nearly 6%.
Internal net sales also grew approximately 6%, which was on top
of 5% internal sales growth in the prior year.
During the year, successful innovation and brand-building
investment continued to drive strong growth across our North
American business units, which collectively reported a 7%
increase in net sales versus 2004. Internal net sales of our
North America retail cereal business increased 8%, with strong
performance in both the United States and Canada. As a result,
our dollar share of the U.S. ready-to-eat cereal category
increased 40 basis points during 2005, to 33.7% as of
January 1, 2006, representing the sixth consecutive year of
share growth.
Internal net sales of our North America retail snacks business
(consisting of wholesome snacks, cookies, crackers, and toaster
pastries) increased 7% on top of 8% growth in 2004. This growth
was attributable principally to sales of fruit snacks, toaster
pastries, cracker products, and major cookie brands. Partially
offsetting this growth was the impact of proactively managing
discontinuation of marginal cookie innovations.
Internal net sales of our North America frozen and specialty
channel (which includes food service, vending, convenience, drug
stores, and custom manufacturing) businesses collectively
increased approximately 8%, led by solid contributions from our
Eggo®
frozen foods and food service businesses.
Net sales in our European operating segment were approximately
even with 2004, with internal net sales growth at nearly 2%.
This growth was largely due to cereal and snacks sales across
southern Europe, partially offset by a sales decline in our
Nordics market, which resulted from a temporary delisting by a
major customer. Despite intense competitive pressures on our
U.K. business unit, we were able to maintain sales within this
market at nearly the prior-year level.
Strong performance in Latin America resulted in net sales growth
of nearly 15%, with internal sales growth at 11%. Most of this
growth was due to strong performance by our Mexico, Venezuela,
and Caribbean business units, although sales increased in
virtually all the Latin American markets in which we do business.
Net sales in our Asia Pacific operating segment increased
approximately 3%, with internal net sales growth at 1%. This
sales increase was largely due to innovation-related growth in
our Asian markets, partially offset by a decline in our
Australian business, which was unfavorably impacted by
competitive nutritional claims and timing of snack product
innovation versus the prior year. In late 2005, we introduced
new products and undertook health-oriented initiatives which we
believe will mitigate these in-market factors during 2006.
Consolidated operating profit increased 4% during 2005, with our
European operating segment contributing approximately one-half
of the total dollar increase. This disproportionate contribution
was attributable to a year-over-year shift in segment allocation
of charges from cost-reduction initiatives. As discussed in the
section beginning on page 14, the year-over-year change in
project cost allocation was a $65 million decline in Europe
(improving 2005 segment operating profit performance by
approximately 22%) and a $46 million increase in North
America (reducing 2005 segment operating profit performance by
approximately 4%).
Internal growth in consolidated operating profit was 5%. This
internal growth was achieved despite double digit growth in
brand-building and innovation expenditures and significant cost
pressures on gross margin, as discussed in the section beginning
on page 13. During 2005, we increased our consolidated
brand-building (advertising and consumer promotion) expenditures
by more than
11/2
times the rate of sales growth.
2004 compared to 2003
The following tables provide an analysis of net sales and
operating profit performance for 2004 versus 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
Latin |
|
Asia |
|
|
(dollars in millions) |
|
America |
|
Europe |
|
America |
|
Pacific(a) |
|
Corporate |
|
Consolidated |
|
2004 net sales
|
|
$ |
6,369.3 |
|
|
$ |
2,007.3 |
|
|
$ |
718.0 |
|
|
$ |
519.3 |
|
|
$ |
|
|
|
$ |
9,613.9 |
|
|
2003 net sales
|
|
$ |
5,954.3 |
|
|
$ |
1,734.2 |
|
|
$ |
666.7 |
|
|
$ |
456.3 |
|
|
$ |
|
|
|
$ |
8,811.5 |
|
|
% change 2004 vs. 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (tonnage) (b)
|
|
|
2.4% |
|
|
|
-.1% |
|
|
|
6.1% |
|
|
|
-.4% |
|
|
|
|
|
|
|
2.1% |
|
|
Pricing/mix
|
|
|
2.6% |
|
|
|
3.7% |
|
|
|
5.0% |
|
|
|
2.7% |
|
|
|
|
|
|
|
2.9% |
|
|
Subtotal internal business
|
|
|
5.0% |
|
|
|
3.6% |
|
|
|
11.1% |
|
|
|
2.3% |
|
|
|
|
|
|
|
5.0% |
|
|
Shipping day differences (c)
|
|
|
1.5% |
|
|
|
1.0% |
|
|
|
|
|
|
|
1.2% |
|
|
|
|
|
|
|
1.3% |
|
|
Foreign currency impact
|
|
|
.5% |
|
|
|
11.1% |
|
|
|
-3.4% |
|
|
|
10.3% |
|
|
|
|
|
|
|
2.8% |
|
|
Total change
|
|
|
7.0% |
|
|
|
15.7% |
|
|
|
7.7% |
|
|
|
13.8% |
|
|
|
|
|
|
|
9.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
Latin |
|
Asia |
|
|
(dollars in millions) |
|
America |
|
Europe |
|
America |
|
Pacific(a) |
|
Corporate |
|
Consolidated |
|
2004 operating profit
|
|
$ |
1,240.4 |
|
|
$ |
292.3 |
|
|
$ |
185.4 |
|
|
$ |
79.5 |
|
|
$ |
(116.5 |
) |
|
$ |
1,681.1 |
|
|
2003 operating profit
|
|
$ |
1,134.2 |
|
|
$ |
279.8 |
|
|
$ |
168.9 |
|
|
$ |
61.1 |
|
|
$ |
(99.9 |
) |
|
$ |
1,544.1 |
|
|
% change 2004 vs. 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal business
|
|
|
6.5% |
|
|
|
-7.4% |
|
|
|
14.1% |
|
|
|
13.8% |
|
|
|
-16.1% |
|
|
|
4.5% |
|
|
Shipping day differences (c)
|
|
|
2.4% |
|
|
|
1.1% |
|
|
|
|
|
|
|
2.8% |
|
|
|
-.5% |
|
|
|
2.0% |
|
|
Foreign currency impact
|
|
|
.5% |
|
|
|
10.8% |
|
|
|
-4.3% |
|
|
|
13.4% |
|
|
|
|
|
|
|
2.4% |
|
|
Total change
|
|
|
9.4% |
|
|
|
4.5% |
|
|
|
9.8% |
|
|
|
30.0% |
|
|
|
-16.6% |
|
|
|
8.9% |
|
|
|
|
(a) |
Includes Australia and Asia. |
|
(b) |
We measure the volume impact (tonnage) on revenues based on
the stated weight of our product shipments. |
|
(c) |
Impact of 53rd week in 2004. Refer to Note 1 within Notes to
Consolidated Financial Statements for further information. |
12
During 2004, consolidated net sales increased approximately 9%.
Internal net sales grew 5%, which was on top of approximately 4%
growth in the prior year. During 2004, successful innovation and
brand-building investment continued to drive growth in most of
our businesses.
North America reported net sales growth of approximately 7%,
with internal growth across all major product groups. Internal
net sales of our North America retail cereal business increased
approximately 2%, with successful innovation and consumer
promotion activities supporting sales growth and category share
gains in both the United States and Canada. Internal net sales
of our North America retail snacks business increased 8%, with
the wholesome snacks, crackers, and toaster pastries components
of our snacks portfolio all contributing to that growth. While
our cookie sales were essentially unchanged from the prior year,
we were pleased with this performance, in light of a category
decline in measured channels of approximately 4%. We believe the
recovery of our snacks business this year was due primarily to
successful product and packaging innovation, combined with
effective execution in our direct store-door (DSD) delivery
system. Internal net sales of our North America frozen and
specialty channel businesses collectively increased
approximately 4%.
Net sales in our European operating segment increased
approximately 16%, with internal sales growth of nearly 4%. Both
our U.K. business unit and pan-European cereal business achieved
internal net sales growth for the year of approximately 2%.
Sales of our snack products within the region grew at a strong
double-digit rate.
Strong performance in Latin America resulted in net sales growth
of approximately 8%, with internal net sales growth of 11% more
than offsetting unfavorable foreign currency movements. Most of
this growth was due to very strong price/mix and tonnage
improvements in both cereal and snack sales by our Mexican
business unit.
Net sales in our Asia Pacific operating segment increased
approximately 14% due primarily to favorable foreign currency
movements, with internal net sales growth at 2%. Strong internal
net sales performance in Australia was partially offset by a
sales decline in Asia, due primarily to the effect of negative
publicity regarding sugar-containing products in Korea
throughout most of the year.
Consolidated operating profit increased approximately 9% during
2004, with internal growth of more than 4%. This internal growth
was achieved despite increased brand-building expenditures and
significantly higher commodity costs. Furthermore, corporate
operating profit for 2004 included a charge of $9.5 million
related to CEO transition expenses. Lastly, as discussed in the
Cost-reduction initiatives section beginning
on page 14, we absorbed in operating profit significant
up-front costs in both 2003 and 2004, with 2004 charges
exceeding 2003 charges by approximately $38 million.
The CEO transition expenses arose from the departure of Carlos
Gutierrez, the Companys former CEO, related to his
appointment as U.S. Secretary of Commerce in early 2005. The
total charge (net of forfeitures) of $9.5 million was
comprised principally of $3.7 million for special pension
termination benefits and $5.5 million for accelerated
vesting of 606,250 stock options.
Operating profit for each of fiscal 2003 and 2004 includes
intangibles impairment losses of approximately $10 million.
The 2003 loss was to reduce the carrying value of a
contract-based intangible asset and was included in North
American operating profit. The 2004 loss was comprised of
$7.9 million to write off the remaining value of this same
contract-based intangible asset in North America and
$2.5 million to write off goodwill in Latin America.
Margin performance
Margin performance is presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change vs. |
|
|
prior year |
|
|
(pts.) |
|
|
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
|
Gross margin
|
|
|
44.9% |
|
|
|
44.9% |
|
|
|
44.4% |
|
|
|
|
|
|
|
.5 |
|
|
SGA% (a)
|
|
|
-27.7% |
|
|
|
-27.4% |
|
|
|
-26.9% |
|
|
|
-.3 |
|
|
|
-.5 |
|
|
Operating margin
|
|
|
17.2% |
|
|
|
17.5% |
|
|
|
17.5% |
|
|
|
-.3 |
|
|
|
|
|
|
|
|
(a) |
Selling, general, and administrative expense as a percentage of
net sales. |
Our long-term goal is to achieve annual improvements in gross
margin and to reinvest this growth in brand-building and
innovation expenditures, so as to maintain a relatively steady
operating margin. Our strategy for expanding our gross margin is
to manage external cost pressures through sales-driven operating
leverage, mix improvements, productivity savings, and
technological initiatives to reduce the cost of product
ingredients and packaging. In 2004, our consolidated gross
margin increased by 50 basis points to 44.9%. For 2005, we were
able to maintain our consolidated gross margin at this level,
overcoming the impact of several significant cost factors as
discussed in the following paragraphs. Supported by late 2005
price increases in various markets and pay-back from prior
investment, we expect to moderately expand our gross margin
again in 2006.
In 2005, we experienced an uncontrollable, weather-related hike
in fuel and energy costs during the second half of the year,
while in 2004, our
13
commodity costs rose significantly and remained historically
high throughout 2005. In summary, we believe market price
inflation negatively impacted our consolidated gross margin by
approximately 90 basis points in 2004 and a net 30 basis points
in 2005 (60 basis points from fuel/energy partially offset by an
easing in certain commodity prices). Our profitability
projections for 2006 currently include a 90-100 basis point
unfavorable gross margin impact from fuel, energy, and other
commodity price inflation.
Employee benefit costs (the majority of which is recorded in
cost of goods sold) also increased for both 2004 and 2005, with
total active and retired employee benefits expense reaching
nearly $300 million in 2005 versus approximately
$260 million in 2004 and $240 million in 2003. Our
profitability projections for 2006 currently include incremental
employee benefits expense of $20-$40 million.
In addition to external cost pressures, our discretionary
investment in cost reduction initiatives (refer to following
section) has placed short-term pressure on our gross margin
performance during the periods presented. The portion of total
program-related charges recorded in cost of goods sold was (in
millions): 2005-$90; 2004-$46; 2003-$67. Additionally, cost of
goods sold for 2005 includes a charge of approximately
$12 million, related to a lump-sum payment to members of
the major union representing the hourly employees at our U.S.
cereal plants for ratification of a wage and benefits agreement
with the Company covering the four-year period ended October
2009.
Cost-reduction initiatives
We view our continued spending on cost-reduction initiatives as
part of our sustainable growth model of earnings reinvestment
for reliability in meeting long-term growth targets. Initiatives
undertaken must meet certain pay-back and internal rate of
return (IRR) targets. We currently require each project to
recover total cash implementation costs within a five-year
period of completion or to achieve an IRR of at least 20%. Each
cost-reduction initiative is of relatively short duration
(normally one year or less), and begins to deliver cash savings
and/or reduced depreciation during the first year of
implementation, which is then used to fund new initiatives. To
implement these programs, the Company has incurred various
up-front costs, including asset write-offs, exit charges, and
other project expenditures, which we include in our measure and
discussion of operating segment profitability within the
Net sales and operating profit section
beginning on page 11.
In 2005, we undertook an initiative to consolidate U.S. snacks
bakery capacity, resulting in the closure of two facilities by
mid 2006. Major initiatives commenced in 2004 were the global
rollout of the SAP information technology system, reorganization
of pan-European operations, consolidation of U.S. meat
alternatives manufacturing operations, and relocation of our
U.S. snacks business unit to Battle Creek, Michigan. Major
actions implemented in 2003 included a wholesome snack plant
consolidation in Australia, manufacturing capacity
rationalization in the Mercosur region of Latin America, and a
plant workforce reduction in Great Britain. Additionally, during
all periods presented, we have undertaken various manufacturing
capacity rationalization and efficiency initiatives primarily in
our North American and European operating segments, as well as
the 2003 disposal of a manufacturing facility in China. Details
of each initiative are described in Note 3 to Consolidated
Financial Statements.
Related to the aforementioned U.S. snacks bakery consolidation,
we expect to incur approximately $30 million of project
costs in 2006, two-thirds comprised of cash costs and one-third
asset write-offs. Other potential initiatives to be commenced in
2006 are still in the planning stages and individual actions
will be announced as management commits to these discretionary
investments. Our 2006 earnings target includes projected charges
related to potential cost reduction initiatives of approximately
$90 million or $.15 per share. Except for the portion
attributable to the aforementioned U.S. snacks bakery
consolidation of $30 million, the specific cash versus
non-cash mix or cost of goods sold versus SGA impact of the
remaining $60 million has not yet been determined.
For 2005, total program-related charges were approximately
$90 million, comprised of $16 million for a
multiemployer pension plan withdrawal liability,
$44 million of asset write-offs, and $30 million for
severance and other cash expenditures. All of the charges were
recorded in cost of goods sold within the Companys North
American operating segment.
For 2004, total program-related charges were approximately
$109 million, comprised of $41 million in asset
write-offs, $1 million for special pension termination
benefits, $15 million in severance and other exit costs,
and $52 million in other cash expenditures such as
relocation and consulting. Approximately $46 million of the
total 2004 charges were recorded in cost of goods sold, with
approximately $63 million recorded in selling, general, and
administrative (SGA) expense. The 2004 charges impacted our
operating segments as follows (in millions): North
America-$44,
Europe-$65.
For 2003, total program-related charges were approximately
$71 million, comprised of $40 million in asset
write-offs, $8 million for special pension termination
benefits, and $23 million in severance and other cash exit
costs. Approximately $67 million of the total 2003 charges
were recorded in cost of
14
goods sold, with approximately $4 million recorded in SGA
expense. The 2003 charges impacted our operating segments as
follows (in millions): North
America-$36,
Europe-$21, Latin
America-$8, Asia
Pacific-$6.
Exit cost reserves were approximately $13 million at
December 31, 2005, consisting principally of severance
obligations associated with projects commenced in 2005, which
are expected to be paid out in 2006. At January 1, 2005,
exit cost reserves were approximately $11 million,
representing severance costs that were substantially paid out in
2005.
Interest expense
Between the acquisition of Keebler Foods Company in early 2001
and the end of 2004, our Company paid down nearly
$2.0 billion of debt, even early-retiring long-term debt in
each of the past three years. Net early-retirement premiums are
recorded in interest expense and were (in
millions): 2005-$13;
2004-$4;
2003-$17. These
premiums were or are expected to be largely recovered through
lower short-term interest rates over the original remaining
terms of the retired debt. As a result of this debt reduction,
interest expense declined significantly from 2003 to 2004, but
leveled off in 2005 as we reached a near-term steady state debt
position by year-end 2005, which is discussed further in the
Liquidity and Capital Resources section on page 16.
Nevertheless, based on prevailing interest rates, we currently
expect 2006 interest expense to decline 4-5% from the 2005
amount, due primarily to a shift in our total debt mix from
higher-rate long term to lower-rate short term.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change vs. |
(dollars in millions) |
|
|
|
prior year |
|
|
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
|
Reported interest expense
|
|
$ |
300.3 |
|
|
$ |
308.6 |
|
|
$ |
371.4 |
|
|
|
|
|
|
|
|
|
|
Amounts capitalized
|
|
|
1.2 |
|
|
|
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest expense
|
|
$ |
301.5 |
|
|
$ |
309.5 |
|
|
$ |
371.4 |
|
|
|
-2.6% |
|
|
|
-16.7% |
|
|
Other income (expense), net
Other income (expense), net includes non-operating items such as
interest income, foreign exchange gains and losses, charitable
donations, and gains on asset sales. Other income
(expense) for 2005 includes charges of $16 million for
contributions to the Kelloggs Corporate Citizenship Fund,
a private trust established for charitable giving, and a charge
of approximately $7 million to reduce the carrying value of
a corporate commercial facility to estimated selling value. The
carrying value of all held-for-sale assets at December 31,
2005, was insignificant.
Other income (expense), net for 2004 includes charges of
approximately $9 million for contributions to the
Kelloggs Corporate Citizenship Fund. Other income
(expense), net for 2003 includes credits of approximately
$17 million related to favorable legal settlements, a
charge of $8 million for a contribution to the
Kelloggs Corporate Citizenship Fund, and a charge of
$6.5 million to recognize the impairment of a cost-basis
investment in an e-commerce business venture.
Income taxes
The consolidated effective income tax rate for 2005 was
approximately 31%, which was below both the 2004 rate of nearly
35% and the 2003 rate of less than 33%. As compared to the
prior-period rates, the 2005 consolidated effective income tax
rate benefited primarily from the 2004 reorganization of our
European operations and to a lesser extent, from U.S. tax
legislation that allows a phased-in deduction from taxable
income equal to a stipulated percentage of qualified production
income (QPI), beginning in 2005. The resulting tax
savings have been reinvested, in part, in cost-reduction
initiatives, brand-building expenditures, and other growth
initiatives. We currently expect our 2006 consolidated effective
income tax rate to be 31-32%; however, this projection could be
significantly affected by the implementation of tax-savings
initiatives currently in the planning stages, the settlement of
several on-going domestic and international income tax audits,
or other similar discrete events within interim periods of 2006.
We expect that any incremental benefits from such discrete
events would be invested in cost-reduction initiatives and other
growth opportunities.
During 2005, we elected to repatriate approximately
$1.1 billion of dividends from foreign subsidiaries which
qualified for the temporary dividends-received-deduction
available under the American Jobs Creation Act. The associated
net tax cost of approximately $40 million was provided for
in 2004.
15
Liquidity and Capital Resources
Our principal source of liquidity is operating cash flows,
supplemented by borrowings for major acquisitions and other
significant transactions. This cash-generating capability is one
of our fundamental strengths and provides us with substantial
financial flexibility in meeting operating and investing needs.
The principal source of our operating cash flow is net earnings,
meaning cash receipts from the sale of our products, net of
costs to manufacture and market our products. Our cash
conversion cycle is relatively short; although receivable
collection patterns vary around the world, in the United States,
our days sales outstanding (DSO) averages 18-19 days.
As a result, the growth in our operating cash flow should
generally reflect the growth in our net earnings over time. As
presented in the schedule to the right, operating cash flow
performance for 2004 generally reflects this principle, except
for the level of benefit plan contributions and working capital
movements (operating assets and liabilities). In addition to
these two variables, operating cash flow performance for 2005
further deviates from this pattern due principally to the
significant portion of net earnings growth for the year
attributable to non-cash deferred income tax benefits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2005 |
|
2004 |
|
2003 |
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
980.4 |
|
|
$ |
890.6 |
|
|
$ |
787.1 |
|
|
|
year-over-year change
|
|
|
10.1 |
% |
|
|
13.1 |
% |
|
|
|
|
Items in net earnings not requiring (providing) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
391.8 |
|
|
|
410.0 |
|
|
|
372.8 |
|
|
Deferred income taxes
|
|
|
(59.2 |
) |
|
|
57.7 |
|
|
|
74.8 |
|
|
Other (a)
|
|
|
199.3 |
|
|
|
104.5 |
|
|
|
76.1 |
|
|
Net earnings after non-cash items
|
|
|
1,512.3 |
|
|
|
1,462.8 |
|
|
|
1,310.8 |
|
|
|
|
year-over-year change
|
|
|
3.4 |
% |
|
|
11.6 |
% |
|
|
|
|
Pension and other postretirement benefit plan contributions
|
|
|
(397.3 |
) |
|
|
(204.0 |
) |
|
|
(184.2 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core working capital (b)
|
|
|
45.4 |
|
|
|
46.0 |
|
|
|
(.1 |
) |
|
Other working capital
|
|
|
(17.1 |
) |
|
|
(75.8 |
) |
|
|
44.5 |
|
|
|
|
Total
|
|
|
28.3 |
|
|
|
(29.8 |
) |
|
|
44.4 |
|
|
Net cash provided by operating activities
|
|
$ |
1,143.3 |
|
|
$ |
1,229.0 |
|
|
$ |
1,171.0 |
|
|
|
year-over-year change
|
|
|
-7.0 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
(a) |
Consists principally of non-cash expense accruals for employee
benefit obligations |
|
(b) |
Inventory and trade receivables less trade payables |
The increasing level of benefit plan contributions during the
2003-2005 timeframe primarily reflects our decisions to improve
the funded position of several of our major pension and retiree
health care plans, as influenced by tax strategies and market
factors. We did not have significant statutory or contractual
funding requirements for our major retiree benefit plans during
the periods presented, nor do we expect to have in the next
several years.
Total minimum benefit plan contributions for 2006 are currently
expected to be approximately $59 million. Actual 2006 or
future years contributions could exceed our current
projections, as influenced by our decision to voluntarily
pre-fund our obligations versus other competing investment
priorities, future changes in government requirements, or
renewals of union contracts.
For 2005, the net favorable movement in core working capital was
related to increased trade payables, partially offset by an
unfavorable movement in trade receivables, which returned to
historical levels (in relation to sales) in early 2005 from
lower levels at the end of 2004. We believe these lower levels
were related to the timing of our 53rd week over the 2004
holiday period, which impacted the core working capital
component of our operating cash flow throughout 2005. Core
working capital as a percentage of sales has steadily improved
over the past several years, representing 7.0% of net sales for
the fiscal year ended December 31, 2005, as compared to
7.3% for 2004 and 8.2% for 2003. We have achieved this
multi-year reduction primarily through logistics improvements to
reduce inventory on hand while continuing to meet customer
requirements, faster collection of accounts receivable, and
extension of terms on trade payables. While our long-term goal
is to continue to improve this metric, we no longer expect
movements in the absolute balance of core working capital to
represent a significant source of operating cash flow.
The unfavorable movements in other working capital for 2004, as
presented in the preceding table, relate largely to higher
income tax payments and faster payment of customer promotional
incentives, as compared to prior years.
16
Our management measure of cash flow is defined as net cash
provided by operating activities reduced by expenditures for
property additions. We use this non-GAAP measure of cash flow to
focus management and investors on the amount of cash available
for debt repayment, dividend distributions, acquisition
opportunities, and share repurchase. Our cash flow metric is
reconciled to the most comparable GAAP measure, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2005 |
|
2004 |
|
2003 |
|
Net cash provided by operating activities
|
|
$ |
1,143.3 |
|
|
$ |
1,229.0 |
|
|
$ |
1,171.0 |
|
|
Additions to properties
|
|
|
(374.2 |
) |
|
|
(278.6 |
) |
|
|
(247.2 |
) |
|
Cash flow
|
|
$ |
769.1 |
|
|
$ |
950.4 |
|
|
$ |
923.8 |
|
|
year-over-year change
|
|
|
-19.1 |
% |
|
|
2.9 |
% |
|
|
|
|
|
Our 2005 cash flow (as defined) declined approximately 19%
versus the prior year, attributable primarily to incremental
benefit plan contributions as discussed on page 16 and
increased spending for selected capacity expansions to
accommodate our Companys strong sales growth over the past
several years. This increased capital spending represented 3.7%
of net sales, which exceeds our recent historical spending level
of approximately 3% of net sales for both 2004 and 2003. We
expect this trend to continue in the near term, with projected
2006 property expenditures reaching approximately 4.0% of net
sales. We currently expect our cash flow for 2006 to be
$875-$975 million, with the increase over the 2005 amount
funded principally by a decline in benefit plan contributions,
partially offset by a slight increase in capital spending as a
percentage of sales.
In order to support the continued growth of our North American
fruit snacks business, we completed two separate business
acquisitions during 2005 for a total of approximately
$50 million in cash, including related transaction costs.
In June 2005, we acquired a fruit snacks manufacturing facility
and related assets from Kraft Foods Inc. The facility is located
in Chicago, Illinois and employs approximately 400 active hourly
and salaried employees. In November 2005, we acquired
substantially all of the assets and certain liabilities of a
Washington State-based manufacturer of natural and organic fruit
snacks.
For 2005, our Board of Directors had originally authorized stock
repurchases for general corporate purposes and to offset
issuances for employee benefit programs of up to
$400 million. In October 2005, our Board of Directors
approved an increase in the authorized amount of 2005 stock
repurchases to $675 million and an additional
$650 million for 2006. Pursuant to this authorization, in
November 2005, we repurchased approximately 9.4 million
common shares from the W.K. Kellogg Foundation Trust (the
Trust) for $400 million in a privately
negotiated transaction pursuant to an agreement dated as of
November 8, 2005 (the 2005 Agreement). The 2005
Agreement provided the Trust with registration rights in certain
circumstances for additional common shares which the Trust might
desire to sell and provided the Company with rights to
repurchase those additional common shares. In combination with
open market transactions completed prior to November 2005, we
spent a total of $664 million to repurchase approximately
15.4 million shares during 2005. Pursuant to similar Board
authorizations applicable to those years, we paid
$298 million in 2004 for approximately 7.3 million
shares and $90 million during 2003 for approximately
2.9 million shares.
In connection with our 2006 stock repurchase authorization, we
entered into an agreement with the Trust dated as of
February 16, 2006 (the 2006 Agreement) to
repurchase approximately 12.8 million additional shares
from the Trust for $550 million. The 2006 Agreement
extinguished the registration and repurchase rights under the
2005 Agreement upon the Companys repurchase of those
additional shares on February 21, 2006.
In July 2005, we redeemed $723.4 million of long-term debt,
representing the remaining principal balance of our 6.0% U.S.
Dollar Notes due April 2006. In October 2005, we repaid
$200 million of maturing 4.875% U.S. Dollar Notes. In
December 2005, we redeemed $35.4 million of U.S. Dollar
Notes due June 2008. These payments were funded principally
through issuance of U.S. Dollar short-term debt.
During November 2005, subsidiaries of the Company issued
approximately $930 million of foreign currency-denominated
debt in offerings outside of the United States, consisting of
Euro 550 million of floating rate notes due 2007 and
approximately C$330 million of Canadian commercial paper.
These debt issuances were guaranteed by the Company and net
proceeds were used primarily for the payment of dividends
pursuant to the American Jobs Creation Act and the purchase of
stock and assets of other direct or indirect subsidiaries of the
Company, as well as for general corporate purposes. (Refer to
Note 7 within Notes to Consolidated Financial Statements for
further information on these debt issuances.)
At December 31, 2005, our total debt was approximately
$4.9 billion, approximately even with the balance at
year-end 2004. As discussed in the Interest expense
section on page 15, this debt balance represents nearly a
$2.0 billion reduction from a peak level of
$6.8 billion in early 2001. During 2005, we increased our
benefit trust investments through plan funding by approximately
13%, reduced the Companys common stock outstanding through
repurchase programs by approximately 4%, and implemented a
mid-year increase in the shareholder dividend level of
approximately 10%. Primarily due to the recent
17
prioritization of these uses of cash flow, plus the
aforementioned need to selectively invest in production
capacity, we no longer expect to reduce debt at the recent
historical pace, but remain committed to net debt reduction
(total debt less cash) over the long term. We currently expect
the total debt balance at year-end 2006 to remain at
approximately $4.9 billion.
We believe that we will be able to meet our interest and
principal repayment obligations and maintain our debt covenants
for the foreseeable future, while still meeting our operational
needs, including the pursuit of selected growth opportunities,
through our strong cash flow, our program of issuing short-term
debt, and maintaining credit facilities on a global basis. Our
significant long-term debt issues do not contain acceleration of
maturity clauses that are dependent on credit ratings. A change
in the Companys credit ratings could limit its 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
credit facilities, which are in amounts sufficient to cover the
outstanding short-term debt balance and debt principal
repayments through 2006.
Off-balance Sheet Arrangements and Other Obligations
Contractual obligations
The following table summarizes future estimated cash payments to
be made under existing contractual obligations. Further
information on debt obligations is contained in Note 7 within
Notes to Consolidated Financial Statements. Further information
on lease obligations is contained in Note 6.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations |
|
Payments due by period |
|
|
|
2011 and |
(millions) |
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
beyond |
|
Long-term debt(a)
|
|
$ |
6,476.8 |
|
|
$ |
282.9 |
|
|
$ |
847.2 |
|
|
$ |
653.3 |
|
|
$ |
181.8 |
|
|
$ |
181.7 |
|
|
$ |
4,329.9 |
|
Capital leases
|
|
|
4.6 |
|
|
|
1.9 |
|
|
|
1.4 |
|
|
|
.5 |
|
|
|
.5 |
|
|
|
.2 |
|
|
|
.1 |
|
Operating leases
|
|
|
459.1 |
|
|
|
102.3 |
|
|
|
85.6 |
|
|
|
63.7 |
|
|
|
47.5 |
|
|
|
43.3 |
|
|
|
116.7 |
|
Purchase obligations(b)
|
|
|
447.8 |
|
|
|
289.0 |
|
|
|
96.3 |
|
|
|
30.2 |
|
|
|
20.9 |
|
|
|
10.9 |
|
|
|
.5 |
|
Other long-term(c)
|
|
|
260.2 |
|
|
|
31.0 |
|
|
|
12.3 |
|
|
|
29.5 |
|
|
|
11.7 |
|
|
|
15.1 |
|
|
|
160.6 |
|
|
Total
|
|
$ |
7,648.5 |
|
|
$ |
707.1 |
|
|
$ |
1,042.8 |
|
|
$ |
777.2 |
|
|
$ |
262.4 |
|
|
$ |
251.2 |
|
|
$ |
4,607.8 |
|
|
|
|
(a) |
Long-term debt obligations include amounts due for both
principal and fixed-rate interest payments. |
|
(b) |
Purchase obligations consist primarily of fixed commitments
under various co-marketing agreements and to a lesser extent, of
service agreements, and contracts for future delivery of
commodities, packaging materials, and equipment. The amounts
presented in the table do not include items already recorded in
accounts payable or other current liabilities at year-end 2005,
nor does the table reflect cash flows we are likely to incur
based on our plans, but are not obligated to incur. Therefore,
it should be noted that the exclusion of these items from the
table could be a limitation in assessing our total future cash
flows under contracts. |
|
(c) |
Other long-term contractual obligations are those associated
with noncurrent liabilities recorded within the Consolidated
Balance Sheet at year-end 2005 and consist principally of
projected commitments under deferred compensation arrangements,
multiemployer pension plans, and other retiree benefits in
excess of those provided within our broad-based plans. We do not
currently have significant statutory or contractual funding
requirements for our broad-based retiree benefit plans during
the periods presented and have not included these amounts in the
table. Refer to Notes 9 and 10 within Notes to Consolidated
Financial Statements for further information on these plans,
including expected contributions for fiscal year 2006. |
Off-balance sheet arrangements
Our off-balance sheet arrangements are generally limited to a
residual value guarantee on one operating lease of approximately
$13 million and guarantees on loans to independent
contractors for their purchase of DSD route franchises up to
$17 million. We record the fair value of these loan
guarantees on our balance sheet, which we currently estimate to
be insignificant. Refer to Note 6 within Notes to Consolidated
Financial Statements for further information.
Significant Accounting Estimates
Our significant accounting policies are discussed in Note 1
within Notes to Consolidated Financial Statements. None of the
pronouncements adopted during the periods presented have had or
are expected to have a significant impact on our Companys
financial statements.
In December 2004, the FASB issued SFAS No. 123(Revised)
Share-Based Payment, which we adopted as of the
beginning of our 2006 fiscal year, using the modified
prospective method. Accordingly,
18
prior years were not restated, but 2006 results are being
presented as if we had applied the fair value method of
accounting for stock-based compensation from our 1996 fiscal
year. If this standard had been adopted in 2005, net earnings
per share would have been reduced by approximately $.09 and we
currently expect a similar impact of adoption for 2006. However,
the actual impact on 2006 will, in part, depend on the
particular structure of stock-based awards granted during the
year and various market factors that affect the fair value of
awards. We classify pre-tax stock compensation expense in
selling, general, and administrative expense principally within
our corporate operations.
SFAS No. 123(Revised) also provides that any corporate
income tax benefit realized upon exercise or vesting of an award
in excess of that previously recognized in earnings will be
presented in the Statement of Cash Flows as a financing (rather
than an operating) cash flow. If this standard had been adopted
in 2005, operating cash flow would have been lower (and
financing cash flow would have been higher) by approximately
$20 million as a result of this provision. The actual
impact on 2006 operating cash flow will depend, in part, on the
volume of employee stock option exercises during the year and
the relationship between the exercise-date market value of the
underlying stock and the original grant-date fair value
determined for financial reporting purposes.
Our critical accounting estimates, which require significant
judgments and assumptions likely to have a material impact on
our financial statements, are discussed in the following
sections on pages 19-21.
Promotional expenditures
Our promotional activities are conducted either through the
retail trade or directly with consumers and involve in-store
displays and events; feature price discounts on our products;
consumer coupons, contests, and loyalty programs; and similar
activities. The costs of these activities are generally
recognized at the time the related revenue is recorded, which
normally precedes the actual cash expenditure. The recognition
of these costs therefore requires management judgment regarding
the volume of promotional offers that will be redeemed by either
the retail trade or consumer. These estimates are made using
various techniques including historical data on performance of
similar promotional programs. Differences between estimated
expense and actual redemptions are normally insignificant and
recognized as a change in management estimate in a subsequent
period. On a full-year basis, these subsequent period
adjustments have rarely represented in excess of .4% (.004) of
our Companys net sales. However, as our Companys
total promotional expenditures (including amounts classified as
a revenue reduction) represented nearly 30% of 2005 net sales;
the likelihood exists of materially different reported results
if different assumptions or conditions were to prevail.
Intangibles
We follow SFAS No. 142 Goodwill and Other Intangible
Assets in evaluating impairment of intangibles. Under this
standard, goodwill impairment testing first requires a
comparison between the carrying value and fair value of a
reporting unit with associated goodwill. Carrying value is based
on the assets and liabilities associated with the operations of
that reporting unit, which often requires allocation of shared
or corporate items among reporting units. The fair value of a
reporting unit is based primarily on our assessment of
profitability multiples likely to be achieved in a theoretical
sale transaction. Similarly, impairment testing of other
intangible assets requires a comparison of carrying value to
fair value of that particular asset. Fair values of non-goodwill
intangible assets are based primarily on projections of future
cash flows to be generated from that asset. For instance, cash
flows related to a particular trademark would be based on a
projected royalty stream attributable to branded product sales.
These estimates are made using various inputs including
historical data, current and anticipated market conditions,
management plans, and market comparables. We periodically engage
third party valuation consultants to assist in this process. At
December 31, 2005, intangible assets, net, were
$4.9 billion, consisting primarily of goodwill and
trademarks associated with the 2001 acquisition of Keebler Foods
Company. While we currently believe that the fair value of all
of our intangibles exceeds carrying value, materially different
assumptions regarding future performance of our North American
snacks business or the weighted average cost of capital used in
the valuations could result in significant impairment losses.
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. A
substantial majority of plan assets are invested in a globally
diversified portfolio of equity securities with smaller holdings
of debt securities and other investments. We follow SFAS
No. 87 Employers Accounting for Pensions
and SFAS No. 106 Employers Accounting for
Postretirement Benefits Other Than Pensions for the
measurement and recognition of obligations and expense related
to our retiree benefit plans. Embodied in both of these
standards is the concept that the cost of benefits
19
provided during retirement should be recognized over the
employees active working life. Inherent in this concept is
the requirement to use various actuarial assumptions to predict
and measure costs and obligations many years prior to the
settlement date. Major actuarial assumptions that require
significant management judgment and have a material impact on
the measurement of our consolidated benefits expense and
accumulated obligation include the long-term rates of return on
plan assets, the health care cost trend rates, and the interest
rates used to discount the obligations for our major plans,
which cover employees in the United States, United Kingdom, and
Canada.
To conduct our annual review of the long-term rate of return on
plan assets, we work with third party financial consultants to
model expected returns over a 20-year investment horizon with
respect to the specific investment mix of each of our major
plans. The return assumptions used reflect a combination of
rigorous historical performance analysis and forward-looking
views of the financial markets including consideration of
current yields on long-term bonds, price-earnings ratios of the
major stock market indices, and long-term inflation. Our U.S.
plan model, corresponding to approximately 70% of our trust
assets globally, currently incorporates a long-term inflation
assumption of 2.8% and an active management premium of 1% (net
of fees) validated by historical analysis. Although we review
our expected long-term rates of return annually, our benefit
trust investment performance for one particular year does not,
by itself, significantly influence our evaluation. Our expected
rates of return are generally not revised, provided these rates
continue to fall within a more likely than not
corridor of between the 25th and 75th percentile of expected
long-term returns, as determined by our modeling process. Our
assumed rate of return for U.S. plans in 2005 of 8.9% equated to
approximately the 50th percentile expectation of our 2005 model.
Similar methods are used for various foreign plans with invested
assets, reflecting local economic conditions. Foreign plan
investments represent approximately 30% of our global benefit
plan investments.
Based on consolidated benefit plan assets at December 31,
2005, a 100 basis point reduction in the assumed rate of return
would increase 2006 benefits expense by approximately
$36 million. Correspondingly, a 100 basis point shortfall
between the assumed and actual rate of return on plan assets for
2006 would result in a similar amount of arising experience
loss. Any arising asset-related experience gain or loss is
recognized in the calculated value of plan assets over a
five-year period. Once recognized, experience gains and losses
are amortized using a declining-balance method over the average
remaining service period of active plan participants, which for
U.S. plans is presently about 12 years. Under this
recognition method, a 100 basis point shortfall in actual versus
assumed performance of all of our plan assets in 2006 would
reduce pre-tax earnings by approximately $1 million in
2007, increasing to approximately $6 million in year 2011.
For each of the three years ending December 31, 2005, our
actual return on plan assets exceeded the recognized assumed
return by the following amounts (in millions):
2005-$39.4;
2004-$95.6;
2003-$269.4.
To conduct our annual review of health care cost trend rates, we
work with third party financial consultants to model our actual
claims cost data over a five-year historical period, including
an analysis of pre-65 versus post-65 age groups and other
important demographic components of our covered employee
population. This data is adjusted to eliminate the impact of
plan changes and other factors that would tend to distort the
underlying cost inflation trends. Our initial health care cost
trend rate is reviewed annually and adjusted as necessary to
remain consistent with recent historical experience and our
expectations regarding short-term future trends. In comparison
to our actual five-year compound annual claims cost growth rate
of approximately 9%, our initial trend rate for 2006 of 10.5%
reflects the expected future impact of faster-growing claims
experience for certain demographic groups within our total
employee population. Our initial rate is trended downward by 1%
per year, until the ultimate trend rate of 4.75% is reached. The
ultimate trend rate is adjusted annually, as necessary, to
approximate the current economic view on the rate of long-term
inflation plus an appropriate health care cost premium. Based on
consolidated obligations at December 31, 2005, a 100 basis
point increase in the assumed health care cost trend rates would
increase 2006 benefits expense by approximately
$17 million. A 100 basis point excess of 2006 actual health
care claims cost over that calculated from the assumed trend
rate would result in an arising experience loss of approximately
$9 million. Any arising claims cost-related experience gain
or loss is recognized in the calculated value of claims cost
over a four-year period. Once recognized, experience gains and
losses are amortized over the average remaining service period
of active plan participants, which for U.S. plans is presently
about 15 years. The combined net experience loss arising
from recognition of all prior-years claims experience, together
with the revised trend rate assumption, was approximately
$129 million.
To conduct our annual review of discount rates, we use several
published market indices with appropriate duration weighting to
assess prevailing rates on high quality debt securities, with a
primary focus on the Citigroup Pension Liability
Index®
for our U.S. plans. To test the appropriateness of these
indices, we
20
periodically engage third party financial consultants to conduct
a matching exercise between the expected settlement cash flows
of our plans and bond maturities, consisting principally of
AA-rated (or the equivalent in foreign jurisdictions)
non-callable issues with at least $25 million principal
outstanding. The model does not assume any reinvestment rates
and assumes that bond investments mature just in time to pay
benefits as they become due. For those years where no suitable
bonds are available, the portfolio utilizes a linear
interpolation approach to impute a hypothetical bond whose
maturity matches the cash flows required in those years. As of
three different interim dates in 2005, this matching exercise
for our U.S. plans produced a discount rate within +/- 10 basis
points of the equivalent-dated Citigroup Pension Liability
Index®.
The measurement dates for our benefit plans are generally
consistent with our Companys fiscal year end. Thus, we
select discount rates to measure our benefit obligations that
are consistent with market indices during December of each year.
Based on consolidated obligations at December 31, 2005, a
25 basis point decline in the weighted average discount rate
used for benefit plan measurement purposes would increase 2006
benefits expense by approximately $15 million. All
obligation-related experience gains and losses are amortized
using a straight-line method over the average remaining service
period of active plan participants.
Despite the previously described rigorous policies for selecting
major actuarial assumptions, we periodically experience material
differences between assumed and actual experience. As of
December 31, 2005, we had consolidated unamortized net
experience losses of approximately $1.29 billion. Of this
total, approximately 70% was related to discount rate
reductions, 13% was related to net unfavorable health care
claims cost experience (including upward revisions in the
assumed trend rate), with the remainder related to asset returns
and other demographic factors. For 2006, we currently expect
incremental amortization of experience losses of approximately
$10 million. Assuming actual future experience is
consistent with our current assumptions, annual amortization of
accumulated experience losses during each of the next several
years would remain approximately level with the 2006 amount.
Income taxes
Our consolidated effective income tax rate is influenced by tax
planning opportunities available to us in the various
jurisdictions in which we operate. Significant judgment is
required in determining our effective tax rate and in evaluating
our tax positions. We establish reserves when, despite our
belief that our tax return positions are supportable, we believe
that certain positions are likely to be challenged and that we
may not succeed. We adjust these reserves in light of changing
facts and circumstances, such as the progress of a tax audit.
Our effective income tax rate includes the impact of reserve
provisions and changes to reserves that we consider appropriate.
While it is often difficult to predict the final outcome or the
timing of resolution of any particular tax matter, we believe
that our reserves reflect the probable outcome of known tax
contingencies. Favorable resolution would be recognized as a
reduction to our effective tax rate in the period of resolution.
Our tax reserves are presented in the balance sheet principally
within accrued income taxes. Significant tax reserve adjustments
impacting our effective tax rate would be separately presented
in the rate reconciliation table of Note 11 within Notes to
Consolidated Financial Statements. Historically, tax reserve
adjustments for individual issues have rarely exceeded 1% of
earnings before income taxes annually.
Future Outlook
Our long-term annual growth targets are low single-digit for
internal net sales, mid single-digit for internal operating
profit, and high single-digit for net earnings per share. In
addition, we remain committed to growing our brand-building
investment faster than the rate of sales growth. In general, we
expect 2006 results to be consistent with our growth targets for
net sales and operating profit. We expect each of our operating
segments to deliver low single-digit net sales growth in 2006,
except for Latin America, which we expect to achieve mid
single-digit growth due to a continuation of the more rapid
category expansion in that region. We expect the reported
increase in net earnings per share to be dampened by
approximately $.09, due to the adoption of SFAS
No. 123(Revised), as discussed on pages 18 and
19. We will continue to reinvest in cost-reduction
initiatives and other growth opportunities.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
The Company is exposed to certain market risks, which exist as a
part of the ongoing business operations and management uses
derivative financial and commodity instruments, where
appropriate, to manage these risks. The Company, as a matter of
policy, does not engage in trading or speculative transactions.
Refer to Note 12 to the Consolidated Financial Statements,
which are included herein under Part II, Item 8, for
further information on accounting policies related to derivative
financial and commodity instruments.
Foreign exchange risk
The Company is exposed to fluctuations in foreign currency cash
flows related to third-party purchases,
21
intercompany transactions, and nonfunctional currency
denominated third-party debt. The Company is also exposed to
fluctuations in the value of foreign currency investments in
subsidiaries and cash flows related to repatriation of these
investments. Additionally, the Company is exposed to volatility
in the translation of foreign currency earnings to
U.S. Dollars. Primary exposures include the
U.S. Dollar versus the British Pound, Euro, Australian
Dollar, Canadian Dollar, and Mexican Peso, and in the case of
inter-subsidiary transactions, the British Pound versus the
Euro. Management assesses foreign currency risk based on
transactional cash flows and translational positions and enters
into forward contracts, options, and currency swaps to reduce
fluctuations in net long or short currency positions. Forward
contracts and options are generally less than 18 months
duration. Currency swap agreements are established in
conjunction with the term of underlying debt issuances.
The total notional amount of foreign currency derivative
instruments at year-end 2005 was $467.3 million,
representing a settlement obligation of $21.9 million. The
total notional amount of foreign currency derivative instruments
at year-end 2004 was $375.5 million, representing a
settlement obligation of $60.3 million. All of these
derivatives were hedges of anticipated transactions,
translational exposure, or existing assets or liabilities, and
mature within 18 months. Assuming an unfavorable 10% change
in year-end exchange rates, the settlement obligation would have
increased by approximately $46.7 million at year-end 2005
and $37.5 million at year-end 2004. These unfavorable
changes would generally have been offset by favorable changes in
the values of the underlying exposures.
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. Primary exposures include
movements in U.S. Treasury rates, London Interbank Offered
Rates (LIBOR), and commercial paper rates. Management
periodically uses 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.
Note 7 to the Consolidated Financial Statements, which are
included herein under Part II, Item 8, provides
information on the Companys significant debt issues. There
were no interest rate derivatives outstanding at year-end 2005
and 2004. Assuming average variable rate debt levels during the
year, a one percentage point increase in interest rates would
have increased interest expense by approximately
$9.1 million in 2005 and $2.3 million in 2004.
Price risk
The Company is exposed to price fluctuations primarily as a
result of anticipated purchases of raw and packaging materials,
fuel, and energy. Primary exposures include corn, wheat, soybean
oil, sugar, cocoa, paperboard, natural gas, and diesel fuel.
Management uses the combination of long cash positions with
suppliers, and exchange-traded futures and option contracts to
reduce price fluctuations in a desired percentage of forecasted
purchases over a duration of generally less than one year. The
total notional amount of commodity derivative instruments at
year-end 2005 was $21.8 million, representing a settlement
receivable of approximately $1.0 million. Assuming a 10%
decrease in year-end commodity prices, this settlement
receivable would convert to an obligation of approximately
$1.3 million, generally offset by a reduction in the cost
of the underlying material purchases. The total notional amount
of commodity derivative instruments at year-end 2004 was
$61.3 million, representing a settlement obligation of
$4.8 million. Assuming a 10% decrease in year-end commodity
prices, this settlement obligation would have increased by
approximately $5.6 million, generally offset by a reduction
in the cost of the underlying material purchases.
In addition to the derivative commodity instruments discussed
above, management uses long cash positions with suppliers to
manage a portion of the price exposure. It should be noted that
the exclusion of these positions from the analysis above could
be a limitation in assessing the net market risk of the Company.
22
|
|
Item 8. |
Financial Statements and Supplementary Data |
Kellogg Company and Subsidiaries
Consolidated Statement of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions, except per share data) |
|
2005 |
|
2004 |
|
2003 |
|
Net sales
|
|
$ |
10,177.2 |
|
|
$ |
9,613.9 |
|
|
$ |
8,811.5 |
|
|
Cost of goods sold
|
|
|
5,611.6 |
|
|
|
5,298.7 |
|
|
|
4,898.9 |
|
Selling, general, and administrative expense
|
|
|
2,815.3 |
|
|
|
2,634.1 |
|
|
|
2,368.5 |
|
|
Operating profit
|
|
$ |
1,750.3 |
|
|
$ |
1,681.1 |
|
|
$ |
1,544.1 |
|
|
Interest expense
|
|
|
300.3 |
|
|
|
308.6 |
|
|
|
371.4 |
|
Other income (expense), net
|
|
|
(24.9 |
) |
|
|
(6.6 |
) |
|
|
(3.2 |
) |
|
Earnings before income taxes
|
|
$ |
1,425.1 |
|
|
$ |
1,365.9 |
|
|
$ |
1,169.5 |
|
Income taxes
|
|
|
444.7 |
|
|
|
475.3 |
|
|
|
382.4 |
|
|
Net earnings
|
|
$ |
980.4 |
|
|
$ |
890.6 |
|
|
$ |
787.1 |
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.38 |
|
|
$ |
2.16 |
|
|
$ |
1.93 |
|
|
Diluted
|
|
|
2.36 |
|
|
|
2.14 |
|
|
|
1.92 |
|
|
Refer to Notes to Consolidated Financial Statements.
23
Kellogg Company and Subsidiaries
Consolidated Statement of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Common stock |
|
Capital in |
|
|
|
Treasury stock |
|
other |
|
Total |
|
Total |
|
|
|
|
excess of |
|
Retained |
|
|
|
comprehensive |
|
shareholders |
|
comprehensive |
(millions) |
|
shares |
|
amount |
|
par value |
|
earnings |
|
shares |
|
amount |
|
income |
|
equity |
|
income |
|
Balance, December 28, 2002
|
|
|
415.5 |
|
|
$ |
103.8 |
|
|
$ |
49.9 |
|
|
$ |
1,873.0 |
|
|
|
7.6 |
|
|
$ |
(278.2 |
) |
|
$ |
(853.4 |
) |
|
$ |
895.1 |
|
|
$ |
418.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
(90.0 |
) |
|
|
|
|
|
|
(90.0 |
) |
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
787.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
787.1 |
|
|
|
787.1 |
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(412.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(412.4 |
) |
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124.2 |
|
|
|
124.2 |
|
|
|
124.2 |
|
Stock options exercised and other
|
|
|
|
|
|
|
|
|
|
|
(25.4 |
) |
|
|
|
|
|
|
(4.7 |
) |
|
|
164.6 |
|
|
|
|
|
|
|
139.2 |
|
|
|
|
|
|
Balance, December 27, 2003
|
|
|
415.5 |
|
|
$ |
103.8 |
|
|
$ |
24.5 |
|
|
$ |
2,247.7 |
|
|
|
5.8 |
|
|
$ |
(203.6 |
) |
|
$ |
(729.2 |
) |
|
$ |
1,443.2 |
|
|
$ |
911.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3 |
|
|
|
(297.5 |
) |
|
|
|
|
|
|
(297.5 |
) |
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
890.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
890.6 |
|
|
|
890.6 |
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(417.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(417.6 |
) |
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289.3 |
|
|
|
289.3 |
|
|
|
289.3 |
|
Stock options exercised and other
|
|
|
|
|
|
|
|
|
|
|
(24.5 |
) |
|
|
(19.4 |
) |
|
|
(10.7 |
) |
|
|
393.1 |
|
|
|
|
|
|
|
349.2 |
|
|
|
|
|
|
Balance, January 1, 2005
|
|
|
415.5 |
|
|
$ |
103.8 |
|
|
|
|
|
|
$ |
2,701.3 |
|
|
|
2.4 |
|
|
$ |
(108.0 |
) |
|
$ |
(439.9 |
) |
|
$ |
2,257.2 |
|
|
$ |
1,179.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.4 |
|
|
|
(664.2 |
) |
|
|
|
|
|
|
(664.2 |
) |
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
980.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
980.4 |
|
|
|
980.4 |
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(435.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(435.2 |
) |
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136.2 |
) |
|
|
(136.2 |
) |
|
|
(136.2 |
) |
Stock options exercised and other
|
|
|
3.0 |
|
|
|
.8 |
|
|
|
58.9 |
|
|
|
19.6 |
|
|
|
(4.7 |
) |
|
|
202.4 |
|
|
|
|
|
|
|
281.7 |
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
418.5 |
|
|
$ |
104.6 |
|
|
$ |
58.9 |
|
|
$ |
3,266.1 |
|
|
|
13.1 |
|
|
$ |
(569.8 |
) |
|
$ |
(576.1 |
) |
|
$ |
2,283.7 |
|
|
$ |
844.2 |
|
|
Refer to Notes to Consolidated Financial Statements.
24
Kellogg Company and Subsidiaries
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
(millions, except share data) |
|
2005 |
|
2004 |
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
219.1 |
|
|
$ |
417.4 |
|
Accounts receivable, net
|
|
|
879.1 |
|
|
|
776.4 |
|
Inventories
|
|
|
717.0 |
|
|
|
681.0 |
|
Other current assets
|
|
|
381.3 |
|
|
|
247.0 |
|
|
|
Total current assets
|
|
$ |
2,196.5 |
|
|
$ |
2,121.8 |
|
|
Property, net
|
|
|
2,648.4 |
|
|
|
2,715.1 |
|
Other assets
|
|
|
5,729.6 |
|
|
|
5,725.0 |
|
|
|
Total assets
|
|
$ |
10,574.5 |
|
|
$ |
10,561.9 |
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
83.6 |
|
|
$ |
278.6 |
|
Notes payable
|
|
|
1,111.1 |
|
|
|
750.6 |
|
Accounts payable
|
|
|
883.3 |
|
|
|
726.3 |
|
Other current liabilities
|
|
|
1,084.8 |
|
|
|
1,090.5 |
|
|
|
Total current liabilities
|
|
$ |
3,162.8 |
|
|
$ |
2,846.0 |
|
|
Long-term debt
|
|
|
3,702.6 |
|
|
|
3,892.6 |
|
Other liabilities
|
|
|
1,425.4 |
|
|
|
1,566.1 |
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stock, $.25 par value, 1,000,000,000 shares authorized
Issued: 418,451,198 shares in 2005 and 415,451,198 shares in 2004
|
|
|
104.6 |
|
|
|
103.8 |
|
Capital in excess of par value
|
|
|
58.9 |
|
|
|
|
|
Retained earnings
|
|
|
3,266.1 |
|
|
|
2,701.3 |
|
Treasury stock at cost:
|
|
|
|
|
|
|
|
|
|
|
13,121,446 shares in 2005 and 2,428,824 shares in 2004
|
|
|
(569.8 |
) |
|
|
(108.0 |
) |
Accumulated other comprehensive income (loss)
|
|
|
(576.1 |
) |
|
|
(439.9 |
) |
|
|
Total shareholders equity
|
|
$ |
2,283.7 |
|
|
$ |
2,257.2 |
|
|
|
Total liabilities and shareholders equity
|
|
$ |
10,574.5 |
|
|
$ |
10,561.9 |
|
|
Refer to Notes to Consolidated Financial Statements. In
particular, refer to Note 15 for supplemental information on
various balance sheet captions.
25
Kellogg Company and Subsidiaries
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
980.4 |
|
|
$ |
890.6 |
|
|
$ |
787.1 |
|
Adjustments to reconcile net earnings to operating cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
391.8 |
|
|
|
410.0 |
|
|
|
372.8 |
|
|
Deferred income taxes
|
|
|
(59.2 |
) |
|
|
57.7 |
|
|
|
74.8 |
|
|
Other
|
|
|
199.3 |
|
|
|
104.5 |
|
|
|
76.1 |
|
Pension and other postretirement benefit plan contributions
|
|
|
(397.3 |
) |
|
|
(204.0 |
) |
|
|
(184.2 |
) |
Changes in operating assets and liabilities
|
|
|
28.3 |
|
|
|
(29.8 |
) |
|
|
44.4 |
|
|
|
Net cash provided from operating activities
|
|
$ |
1,143.3 |
|
|
$ |
1,229.0 |
|
|
$ |
1,171.0 |
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties
|
|
$ |
(374.2 |
) |
|
$ |
(278.6 |
) |
|
$ |
(247.2 |
) |
Acquisitions of businesses
|
|
|
(50.4 |
) |
|
|
|
|
|
|
|
|
Dispositions of businesses
|
|
|
|
|
|
|
|
|
|
|
14.0 |
|
Property disposals
|
|
|
9.8 |
|
|
|
7.9 |
|
|
|
13.8 |
|
Other
|
|
|
(.2 |
) |
|
|
.3 |
|
|
|
.4 |
|
|
|
Net cash used in investing activities
|
|
$ |
(415.0 |
) |
|
$ |
(270.4 |
) |
|
$ |
(219.0 |
) |
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase of notes payable, with maturities less than or
equal to 90 days
|
|
$ |
360.2 |
|
|
$ |
388.3 |
|
|
$ |
208.5 |
|
Issuances of notes payable, with maturities greater than
90 days
|
|
|
42.6 |
|
|
|
142.3 |
|
|
|
67.0 |
|
Reductions of notes payable, with maturities greater than
90 days
|
|
|
(42.3 |
) |
|
|
(141.7 |
) |
|
|
(375.6 |
) |
Issuances of long-term debt
|
|
|
647.3 |
|
|
|
7.0 |
|
|
|
498.1 |
|
Reductions of long-term debt
|
|
|
(1,041.3 |
) |
|
|
(682.2 |
) |
|
|
(956.0 |
) |
Net issuances of common stock
|
|
|
221.7 |
|
|
|
291.8 |
|
|
|
121.6 |
|
Common stock repurchases
|
|
|
(664.2 |
) |
|
|
(297.5 |
) |
|
|
(90.0 |
) |
Cash dividends
|
|
|
(435.2 |
) |
|
|
(417.6 |
) |
|
|
(412.4 |
) |
Other
|
|
|
5.9 |
|
|
|
(6.7 |
) |
|
|
(.6 |
) |
|
|
Net cash used in financing activities
|
|
$ |
(905.3 |
) |
|
$ |
(716.3 |
) |
|
$ |
(939.4 |
) |
|
Effect of exchange rate changes on cash
|
|
|
(21.3 |
) |
|
|
33.9 |
|
|
|
28.0 |
|
|
Increase (decrease) in cash and cash equivalents
|
|
$ |
(198.3 |
) |
|
$ |
276.2 |
|
|
$ |
40.6 |
|
Cash and cash equivalents at beginning of year
|
|
|
417.4 |
|
|
|
141.2 |
|
|
|
100.6 |
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
219.1 |
|
|
$ |
417.4 |
|
|
$ |
141.2 |
|
|
Refer to Notes to Consolidated Financial Statements.
26
|
|
Note 1 |
Accounting policies |
Basis of presentation
The consolidated financial statements include the accounts of
Kellogg Company and its majority-owned subsidiaries.
Intercompany balances and transactions are eliminated. Certain
amounts in the prior-year financial statements have been
reclassified to conform to the current-year presentation. In
addition, certain current-year disclosures reflect revisions of
related amounts as compared to the disclosures reported in the
prior year. For purposes of consistency, such revisions have
also been reflected in the comparative prior-year amounts
presented herein.
The Companys fiscal year normally ends on the Saturday
closest to December 31 and as a result, a 53rd week is
added approximately every sixth year. The Companys 2005
and 2003 fiscal years ended on December 31 and 27,
respectively. The Companys 2004 fiscal year ended on
January 1, 2005, and included a 53rd week.
Cash and cash equivalents
Highly liquid temporary investments with original maturities of
less than three months are considered to be cash equivalents.
The carrying amount approximates fair value.
Accounts receivable
Accounts receivable consist principally of trade receivables,
which are recorded at the invoiced amount, net of allowances for
doubtful accounts and prompt payment discounts. Trade
receivables generally do not bear interest. Terms and collection
patterns vary around the world and by channel. In the United
States, the Company generally has required payment for goods
sold eleven or sixteen days subsequent to the date of invoice as
2% 10/net 11 or 1% 15/net 16, and days sales outstanding
(DSO) averages 18-19 days. The allowance for doubtful
accounts represents managements estimate of the amount of
probable credit losses in existing accounts receivable, as
determined from a review of past due balances and other specific
account data. Account balances are written off against the
allowance when management determines the receivable is
uncollectible. The Company does not have any off-balance-sheet
credit exposure related to its customers. Refer to Note 15 for
an analysis of the Companys accounts receivable and
allowance for doubtful account balances during the periods
presented.
Inventories
Inventories are valued at the lower of cost (principally
average) or market.
In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard
(SFAS) No. 151 Inventory Costs, to
converge U.S. GAAP principles with International Accounting
Standards on inventory valuation. SFAS No. 151 clarifies
that abnormal amounts of idle facility expense, freight,
handling costs, and spoilage should be recognized as period
charges, rather than as inventory value. This standard also
provides that fixed production overheads should be allocated to
units of production based on the normal capacity of production
facilities, with excess overheads being recognized as period
charges. The provisions of this standard are effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005, with earlier application permitted. The Company
adopted this standard at the beginning of its 2006 fiscal year.
Management believes the Companys pre-existing accounting
policy for inventory valuation was generally consistent with
this guidance and does not, therefore, currently expect the
adoption of SFAS No. 151 to have a significant impact on
2006 financial results.
Property
The Companys property consists mainly of plant 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. Cost
includes an amount of interest associated with significant
capital projects. Plant and equipment are reviewed for
impairment when conditions indicate that the carrying value may
not be recoverable. Such conditions include an extended period
of idleness or a plan of disposal. Assets to be abandoned at a
future date are depreciated over the remaining period of use.
Assets to be sold are written down to realizable value at the
time the assets are being actively marketed for sale and the
disposal is expected to occur within one year. As of year-end
2004 and 2005, the carrying value of assets held for sale was
insignificant.
Goodwill and other intangible assets
The Companys intangible assets consist primarily of
goodwill and major trademarks arising from the 2001 acquisition
of Keebler Foods Company (Keebler). Management
expects the Keebler trademarks, collectively, to contribute
indefinitely to the cash flows of the Company. Accordingly, this
asset has been classified as an indefinite-lived
intangible pursuant to SFAS No. 142 Goodwill and Other
27
Intangible Assets. Under this standard, goodwill and
indefinite-lived intangibles are not amortized, but are tested
at least annually for impairment. Goodwill impairment testing
first requires a comparison between the carrying value and fair
value of a reporting unit, which for the Company is
generally equivalent to a North American product group or
International country market. If carrying value exceeds fair
value, goodwill is considered impaired and is reduced to the
implied fair value. Impairment testing for non-amortized
intangibles requires a comparison between the fair value and
carrying value of the intangible asset. If carrying value
exceeds fair value, the intangible is considered impaired and is
reduced to fair value. The Company uses various market valuation
techniques to determine the fair value of intangible assets and
periodically engages third party valuation consultants for this
purpose. Refer to Note 2 for further information on goodwill and
other intangible assets.
Revenue recognition and measurement
The Company recognizes sales upon delivery of its products to
customers net of applicable provisions for discounts, returns,
and allowances. Methodologies for determining these provisions
are dependent on local customer pricing and promotional
practices, which range from contractually fixed percentage price
reductions to reimbursement based on actual occurrence or
performance. Where applicable, future reimbursements are
estimated based on a combination of historical patterns and
future expectations regarding specific in-market product
performance. The Company classifies promotional payments to its
customers, the cost of consumer coupons, and other cash
redemption offers in net sales. The cost of promotional package
inserts are recorded in cost of goods sold. Other types of
consumer promotional expenditures are normally recorded in
selling, general, and administrative (SGA) expense.
Advertising
The costs of advertising are generally expensed as incurred and
are classified within SGA.
Stock compensation
For the periods presented, the Company used the intrinsic value
method prescribed by Accounting Principles Board Opinion
(APB) No. 25 Accounting for Stock Issued to
Employees, to account for its employee stock options and
other stock-based compensation. Under this method, because the
exercise price of the Companys employee stock options
equals the market price of the underlying stock on the date of
the grant, no compensation expense was recognized. The following
table presents the pro forma results for the current and prior
years, as if the Company had used the alternate fair value
method of accounting for stock-based compensation, prescribed by
SFAS No. 123 Accounting for Stock-Based
Compensation (as amended by SFAS No. 148). Under this
pro forma method, the fair value of each option grant (net of
estimated unvested forfeitures) was estimated at the date of
grant using an option pricing model and was recognized over the
vesting period, generally two years. For 2003, the Company used
the Black-Scholes option pricing model. For 2004 and 2005, the
Company used a lattice-based or binomial model, which management
believes to be a superior method for valuing the impact of
different employee option exercise patterns under various
economic and market conditions. This change in methodology did
not have a significant impact on pro forma 2004 and 2005 results
versus prior years. Refer to Note 8 for further information on
the Companys stock compensation programs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
(millions except per share data) |
|
|
|
|
|
|
|
Stock-based compensation expense, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported (a)
|
|
$ |
11.8 |
|
|
$ |
11.4 |
|
|
$ |
12.5 |
|
|
Pro forma
|
|
$ |
48.7 |
|
|
$ |
41.8 |
|
|
$ |
42.1 |
|
Net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
980.4 |
|
|
$ |
890.6 |
|
|
$ |
787.1 |
|
|
Pro forma
|
|
$ |
943.5 |
|
|
$ |
860.2 |
|
|
$ |
757.5 |
|
Basic net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
2.38 |
|
|
$ |
2.16 |
|
|
$ |
1.93 |
|
|
Pro forma
|
|
$ |
2.29 |
|
|
$ |
2.09 |
|
|
$ |
1.86 |
|
Diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
2.36 |
|
|
$ |
2.14 |
|
|
$ |
1.92 |
|
|
Pro forma
|
|
$ |
2.27 |
|
|
$ |
2.07 |
|
|
$ |
1.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average pricing |
|
2005 |
|
2004 (a) |
|
2003 |
model assumptions |
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
3.81 |
% |
|
|
2.73 |
% |
|
|
1.89 |
% |
Dividend yield
|
|
|
2.40 |
% |
|
|
2.60 |
% |
|
|
2.70 |
% |
Volatility
|
|
|
22.00 |
% |
|
|
23.00 |
% |
|
|
25.75 |
% |
Average expected term (years)
|
|
|
3.42 |
|
|
|
3.69 |
|
|
|
3.00 |
|
Fair value of options granted
|
|
$ |
7.35 |
|
|
$ |
6.39 |
|
|
$ |
4.75 |
|
|
|
|
|
(a) |
|
As reported stock-based compensation expense for 2004 includes a
pre-tax charge of $5.5 ($3.6 after tax) related to the
accelerated vesting of .6 stock options pursuant to a separation
agreement between the Company and its former CEO. This
modification to the terms of the original awards was treated as
a renewal under FASB Interpretation No. 44 Accounting
for Certain Transactions involving Stock Compensation.
Accordingly, the Company recognized in SGA the intrinsic value
of the awards at the modification date. The pricing assumptions
for this renewal are excluded from the table above and were:
risk-free interest
rate-2.32%; dividend
yield-2.6%;
volatility-23%;
expected
term-.33 years,
resulting in a per-option fair value of $9.16. |
In December 2004, the FASB issued SFAS No. 123(Revised)
Share-Based Payment, which generally requires public
companies to measure the cost of employee services received in
exchange for an award of equity instruments based on the
grant-date fair value and to recognize this cost over the
requisite service period.
The standard is effective for public companies for annual
periods beginning after June 15, 2005, with several
transition options regarding prospective versus retrospective
application. The Company
28
adopted SFAS No. 123(Revised) as of the beginning of its
2006 fiscal year, using the modified prospective method.
Accordingly, prior years were not restated, but 2006 results are
being presented as if the Company had applied the fair value
method of accounting for stock-based compensation from its 1996
fiscal year. If this standard had been adopted in 2005, net
earnings per share would have been reduced by approximately $.09
and management currently expects a similar impact of adoption
for 2006. However, the actual impact on 2006 will, in part,
depend on the particular structure of stock-based awards granted
during the year and various market factors that affect the fair
value of awards. The Company classifies pre-tax stock
compensation expense in selling, general, and administrative
expense principally within its corporate operations.
SFAS No. 123(Revised) also provides that any corporate
income tax benefit realized upon exercise or vesting of an award
in excess of that previously recognized in earnings will be
presented in the Statement of Cash Flows as a financing (rather
than an operating) cash flow. If this standard had been adopted
in 2005, operating cash flow would have been lower (and
financing cash flow would have been higher) by approximately
$20 million as a result of this provision. The actual
impact on 2006 operating cash flow will depend, in part, on the
volume of employee stock option exercises during the year and
the relationship between the exercise-date market value of the
underlying stock and the original grant-date fair value
determined for financial reporting purposes.
Certain of the Companys equity-based compensation plans
contain provisions that accelerate vesting of awards upon
retirement, disability, or death of eligible employees and
directors. For the periods presented, the Company generally
recognized stock compensation expense over the stated vesting
period of the award, with any unamortized expense recognized
immediately if an acceleration event occurred.
SFAS 123(Revised) specifies that a stock-based award is
vested when the employees retention of the award is no
longer contingent on providing subsequent service. Accordingly,
beginning in 2006, the Company has prospectively revised its
expense attribution method so that the related compensation cost
is recognized 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. Management expects the
impact of this change in expense attribution method will be
immaterial.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
|
|
Note 2 |
Acquisitions and intangibles |
Acquisitions
In order to support the continued growth of its North American
fruit snacks business, the Company completed two separate
business acquisitions during 2005 for a total of approximately
$50 million in cash, including related transaction costs.
In June 2005, the Company acquired a fruit snacks manufacturing
facility and related assets from Kraft Foods Inc. The facility
is located in Chicago, Illinois and employs approximately 400
active hourly and salaried employees. The Company has begun to
pack some of its contract-manufactured products within this
facility and is planning to in-source some of this production
during 2006. In November 2005, the Company acquired
substantially all of the assets and certain liabilities of a
Washington State-based manufacturer of natural and organic fruit
snacks. Assets, liabilities, and results of the acquired
businesses have been included in the Companys consolidated
financial statements since the respective dates of acquisition.
As of December 31, 2005, the purchase price allocation was
substantially complete with the combined total allocated to
property ($22 million); goodwill and other indefinite-lived
intangibles ($16 million); and inventory and other working
capital ($12 million).
Goodwill and other intangible assets
During 2005, the Company reclassified $578.9 million
attributable to its direct store-door (DSD) delivery system
from indefinite-lived intangible assets to goodwill, net of an
associated deferred tax liability of $228.5 million. Prior
periods were likewise reclassified.
For 2004, the Company recorded in selling, general, and
administrative (SGA) expense impairment losses of
$10.4 million to write off the remaining carrying value of
certain intangible assets. As presented in the following tables,
the total amount consisted of $7.9 million attributable to
a long-term licensing
29
agreement in North America and $2.5 million of goodwill in
Latin America.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization |
|
|
|
Gross carrying |
|
Accumulated |
(millions) |
|
amount |
|
amortization |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Trademarks
|
|
$ |
29.5 |
|
|
$ |
29.5 |
|
|
$ |
20.5 |
|
|
$ |
19.4 |
|
Other
|
|
|
29.1 |
|
|
|
29.1 |
|
|
|
27.1 |
|
|
|
26.7 |
|
|
Total
|
|
$ |
58.6 |
|
|
$ |
58.6 |
|
|
$ |
47.6 |
|
|
$ |
46.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense (a) |
|
2005 |
|
2004(b) |
|
Year-to-date
|
|
$ |
1.5 |
|
|
$ |
11.0 |
|
|
|
|
|
(a) |
|
The currently estimated aggregate amortization expense for each
of the 5 succeeding fiscal years is approximately $1.5 per year. |
|
(b) |
|
Amortization for 2004 includes impairment loss of approximately
$7.9. |
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization |
|
(millions) |
|
Total carrying amount |
|
|
|
2005 |
|
2004 |
|
Trademarks
|
|
$ |
1,410.2 |
|
|
$ |
1,404.0 |
|
Other
|
|
|
17.0 |
|
|
|
25.7 |
|
|
Total
|
|
$ |
1,427.2 |
|
|
$ |
1,429.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the carrying amount of goodwill |
|
(millions) |
|
United States |
|
Europe |
|
Latin America |
|
Asia Pacific(a) |
|
Consolidated |
|
December 27, 2003
|
|
$ |
3,444.2 |
|
|
|
|
|
|
$ |
2.5 |
|
|
$ |
2.1 |
|
|
$ |
3,448.8 |
|
Purchase accounting adjustments
|
|
|
(.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.9 |
) |
Impairments
|
|
|
|
|
|
|
|
|
|
|
(2.5 |
) |
|
|
|
|
|
|
(2.5 |
) |
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.1 |
|
|
|
.1 |
|
|
January 1, 2005
|
|
$ |
3,443.3 |
|
|
|
|
|
|
|
|
|
|
$ |
2.2 |
|
|
$ |
3,445.5 |
|
Acquisitions
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2 |
|
Other
|
|
|
(.3 |
) |
|
|
|
|
|
|
|
|
|
|
(.1 |
) |
|
|
(.4 |
) |
|
December 31, 2005
|
|
$ |
3,453.2 |
|
|
|
|
|
|
|
|
|
|
$ |
2.1 |
|
|
$ |
3,455.3 |
|
|
|
|
(a) |
Includes Australia and Asia. |
|
|
Note 3 |
Cost-reduction initiatives |
The Company undertakes cost-reduction initiatives as part of its
sustainable growth model of earnings reinvestment for
reliability in meeting long-term growth targets. Initiatives
undertaken must meet certain pay-back and internal rate of
return (IRR) targets. Each cost-reduction initiative is of
relatively short duration, and normally begins to deliver cash
savings and/or reduced depreciation during the first year of
implementation, which is then used to fund new initiatives. To
implement these programs, the Company has incurred various
up-front costs, including asset write-offs, exit charges, and
other project expenditures.
Cost summary
For 2005, the Company recorded total program-related charges of
approximately $90 million, comprised of $16 million
for a multiemployer pension plan withdrawal liability,
$44 million of asset write-offs, and $30 million for
severance and other cash expenditures. All of the charges were
recorded in cost of goods sold within the Companys North
American operating segment.
For 2004, the Company recorded total program-related charges of
approximately $109 million, comprised of $41 million
in asset write-offs, $1 million for special pension
termination benefits, $15 million in severance and other
exit costs, and $52 million in other cash expenditures such
as relocation and consulting. Approximately $46 million of
the total 2004 charges were recorded in cost of goods sold, with
approximately $63 million recorded in selling, general, and
administrative (SGA) expense. The 2004 charges impacted the
Companys operating segments as follows (in millions):
North America-$44, Europe-$65.
For 2003, the Company recorded total program-related charges of
approximately $71 million, comprised of $40 million in
asset write-offs, $8 million for special pension
termination benefits, and $23 million in severance and
other cash costs. Approximately $67 million of the total
2003 charges were recorded in cost of goods sold, with
approximately $4 million recorded in SGA expense. The 2003
charges impacted the Companys operating segments as
follows (in millions): North America-$36, Europe-$21, Latin
America-$8, Asia Pacific-$6.
Exit cost reserves were approximately $13 million at
December 31, 2005, consisting principally of severance
obligations associated with projects commenced in 2005, which
are expected to be paid out in 2006. At January 1, 2005,
exit cost reserves were approximately $11 million,
representing severance costs that were substantially paid out in
2005.
30
Specific initiatives
To improve operational efficiency and better position its North
American snacks business for future growth, during 2005,
management undertook an initiative to consolidate U.S. bakery
capacity, resulting in the closure and sale of the
Companys Des Plaines, Illinois facility in late 2005 and
planned closure of its Macon, Georgia facility by mid 2006. As a
result of this initiative, approximately 350 employee positions
were eliminated through separation and attrition in 2005 and an
additional 350 positions are expected to be eliminated in 2006.
The Company incurred up-front costs of approximately
$80 million in 2005 and expects to incur an additional
$30 million in 2006 to complete this initiative. The total
project costs are expected to include approximately
$45 million in accelerated depreciation and other asset
write-offs and $65 million of cash costs, including
severance, removals, and a pension plan withdrawal liability.
The pension plan withdrawal liability is related to trust asset
under-performance in a multiemployer plan that covers the
majority of the Companys union employees in the Macon
bakery and is payable over a period not to exceed 20 years.
The final amount of the pension plan withdrawal liability will
not be determinable until early 2008. Results for 2005 include
managements current estimate of this liability of
approximately $16 million, which is subject to adjustment
through early 2008 based on trust asset performance, employer
contributions, employee hours attributable to the Companys
participation in this plan, and other factors.
During 2004, the Company commenced an operational improvement
initiative which resulted in the consolidation of meat
alternatives manufacturing at its Zanesville, Ohio facility and
the closure and sale of its Worthington, Ohio facility by mid
2005. As a result of this closing, approximately 280 employee
positions were eliminated through separation and attrition. The
Company recognized approximately $20 million of up-front
costs related to this initiative in 2004 and recorded an
additional $10 million of asset write-offs and cash costs
in 2005.
During 2004, the Companys global rollout of its SAP
information technology system resulted in accelerated
depreciation of legacy software assets to be abandoned in 2005,
as well as related consulting and other implementation expenses.
Total incremental costs for 2004 were approximately
$30 million. In close association with this SAP rollout,
management undertook a major initiative to improve the
organizational design and effectiveness of pan-European
operations. Specific benefits of this initiative were expected
to include improved marketing and promotional coordination
across Europe, supply chain network savings, overhead cost
reductions, and tax savings. To achieve these benefits,
management implemented, at the beginning of 2005, a new European
legal and operating structure headquartered in Ireland, with
strengthened pan-European management authority and coordination.
During 2004, the Company incurred various up-front costs,
including relocation, severance, and consulting, of
approximately $30 million. Additional relocation and other
costs to complete this business transformation during the next
several years are expected to be insignificant.
In order to integrate it with the rest of our U.S. operations,
during 2004, the Company completed the relocation of its U.S.
snacks business unit from Elmhurst, Illinois (the former
headquarters of Keebler Foods Company) to Battle Creek,
Michigan. About one-third of the approximately 300 employees
affected by this initiative accepted relocation or reassignment
offers. The recruiting effort to fill the remaining open
positions was substantially completed by year-end 2004.
Attributable to this initiative, the Company incurred
approximately $15 million in relocation, recruiting, and
severance costs during 2004. Subject to achieving certain
employment levels and other regulatory requirements, management
expects to defray a significant portion of these up-front costs
through various multi-year tax incentives, which began in 2005.
The Elmhurst office building was sold in late 2004, and the net
sales proceeds approximated carrying value.
During 2003, the Company implemented a wholesome snack plant
consolidation in Australia, which involved the exit of a leased
facility and separation of approximately 140 employees. The
Company incurred approximately $6 million in exit costs and
asset write-offs during 2003 related to this initiative.
Also in 2003, the Company undertook a manufacturing capacity
rationalization in the Mercosur region of Latin America, which
involved the closure of an owned facility in Argentina and
separation of approximately 85 plant and administrative
employees during 2003. The Company recorded an impairment loss
of approximately $6 million to reduce the carrying value of
the manufacturing facility to estimated fair value, and incurred
approximately $2 million of severance and closure costs
during 2003 to complete this initiative. In 2004, the Company
began importing its products for sale in Argentina from other
Latin America facilities.
In Great Britain, management initiated changes in plant crewing
to better match the work pattern to the demand cycle, which
resulted in voluntary workforce reductions of approximately 130
hourly and salaried employee positions. During 2003, the Company
incurred approximately $18 million in separation benefit
costs related to this initiative.
31
|
|
Note 4 |
Other income (expense), net |
Other income (expense), net includes non-operating items such as
interest income, foreign exchange gains and losses, charitable
donations, and gains on asset sales. Other income
(expense) for 2005 includes charges of $16 million for
contributions to the Kelloggs Corporate Citizenship Fund,
a private trust established for charitable giving, and a charge
of approximately $7 million to reduce the carrying value of
a corporate commercial facility to estimated selling value. The
carrying value of all held-for-sale assets at December 31,
2005, was insignificant.
Other income (expense), net for 2004 includes charges of
approximately $9 million for contributions to the
Kelloggs Corporate Citizenship Fund. Other income
(expense), net for 2003 includes credits of approximately
$17 million related to favorable legal settlements, a
charge of $8 million for a contribution to the
Kelloggs Corporate Citizenship Fund, and a charge of
$6.5 million to recognize the impairment of a cost-basis
investment in an e-commerce business venture.
Earnings per share
Basic net earnings per share is determined by dividing net
earnings by the weighted average number of common shares
outstanding during the period. Diluted net earnings per share is
similarly determined, except that the denominator is increased
to include the number of additional common shares that would
have been outstanding if all dilutive potential common shares
had been issued. Dilutive potential common shares are comprised
principally of employee stock options issued by the Company.
Basic net earnings per share is reconciled to diluted net
earnings per share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
shares |
|
|
(millions, except per share data) |
|
Earnings |
|
outstanding |
|
Per share |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
980.4 |
|
|
|
412.0 |
|
|
$ |
2.38 |
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
3.6 |
|
|
|
(.02 |
) |
|
|
Diluted
|
|
$ |
980.4 |
|
|
|
415.6 |
|
|
$ |
2.36 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
890.6 |
|
|
|
412.0 |
|
|
$ |
2.16 |
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
4.4 |
|
|
|
(.02 |
) |
|
|
Diluted
|
|
$ |
890.6 |
|
|
|
416.4 |
|
|
$ |
2.14 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
787.1 |
|
|
|
407.9 |
|
|
$ |
1.93 |
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
2.6 |
|
|
|
(.01 |
) |
|
|
Diluted
|
|
$ |
787.1 |
|
|
|
410.5 |
|
|
$ |
1.92 |
|
|
Comprehensive Income
Comprehensive income includes all changes in equity during a
period except those resulting from investments by or
distributions to shareholders. Comprehensive income for the
periods presented consists of net earnings, minimum pension
liability adjustments (refer to Note 9), unrealized gains
and losses on cash flow hedges pursuant to SFAS No. 133
Accounting for Derivative Instruments and Hedging
Activities, and foreign currency translation adjustments
pursuant to SFAS No. 52 Foreign Currency
Translation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax |
|
Tax (expense) |
|
After-tax |
(millions) |
|
amount |
|
benefit |
|
amount |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
$ |
980.4 |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$ |
(85.2 |
) |
|
$ |
|
|
|
|
(85.2 |
) |
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges
|
|
|
(3.7 |
) |
|
|
1.6 |
|
|
|
(2.1 |
) |
|
|
Reclassification to net earnings
|
|
|
26.4 |
|
|
|
(9.9 |
) |
|
|
16.5 |
|
|
Minimum pension liability adjustments
|
|
|
(102.7 |
) |
|
|
37.3 |
|
|
|
(65.4 |
) |
|
|
|
$ |
(165.2 |
) |
|
$ |
29.0 |
|
|
|
(136.2 |
) |
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
$ |
844.2 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
$ |
890.6 |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$ |
71.7 |
|
|
$ |
|
|
|
|
71.7 |
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges
|
|
|
(10.2 |
) |
|
|
3.1 |
|
|
|
(7.1 |
) |
|
|
Reclassification to net earnings
|
|
|
19.3 |
|
|
|
(6.9 |
) |
|
|
12.4 |
|
|
Minimum pension liability adjustments
|
|
|
308.9 |
|
|
|
(96.6 |
) |
|
|
212.3 |
|
|
|
|
|
|
$ |
389.7 |
|
|
$ |
(100.4 |
) |
|
|
289.3 |
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
$ |
1,179.9 |
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax |
|
Tax (expense) |
|
After-tax |
(millions) |
|
amount |
|
benefit |
|
amount |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
$ |
787.1 |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$ |
81.6 |
|
|
$ |
|
|
|
|
81.6 |
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges
|
|
|
(18.7 |
) |
|
|
6.6 |
|
|
|
(12.1 |
) |
|
|
Reclassification to net earnings
|
|
|
10.3 |
|
|
|
(3.8 |
) |
|
|
6.5 |
|
|
Minimum pension liability adjustments
|
|
|
75.7 |
|
|
|
(27.5 |
) |
|
|
48.2 |
|
|
|
|
|
|
$ |
148.9 |
|
|
$ |
(24.7 |
) |
|
|
124.2 |
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
$ |
911.3 |
|
|
Accumulated other comprehensive income (loss) at year end
consisted of the following:
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
Foreign currency translation adjustments
|
|
$ |
(419.5 |
) |
|
$ |
(334.3 |
) |
Cash flow hedges unrealized net loss
|
|
|
(32.2 |
) |
|
|
(46.6 |
) |
Minimum pension liability adjustments
|
|
|
(124.4 |
) |
|
|
(59.0 |
) |
|
Total accumulated other comprehensive income (loss)
|
|
$ |
(576.1 |
) |
|
$ |
(439.9 |
) |
|
|
|
Note 6 |
Leases and other commitments |
The Companys leases are generally for equipment and
warehouse space. Rent expense on all operating leases was
$115.1 million in 2005, $107.4 million in 2004, and
$107.9 million in 2003. Additionally, the Company is
subject to a residual value guarantee on one operating lease of
approximately $13 million. At December 31, 2005, the
Company had not recorded any liability related to this residual
value guarantee. During 2005, the Company entered into
approximately $3 million in capital lease agreements to
finance the purchase of equipment. Similar transactions in 2004
and 2003 were insignificant.
At December 31, 2005, future minimum annual lease
commitments under noncancelable capital and operating leases
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
Capital |
(millions) |
|
leases |
|
leases |
|
2006
|
|
$ |
102.3 |
|
|
$ |
1.9 |
|
2007
|
|
|
85.6 |
|
|
|
1.4 |
|
2008
|
|
|
63.7 |
|
|
|
.5 |
|
2009
|
|
|
47.5 |
|
|
|
.5 |
|
2010
|
|
|
43.3 |
|
|
|
.2 |
|
2011 and beyond
|
|
|
116.7 |
|
|
|
.1 |
|
|
Total minimum payments
|
|
$ |
459.1 |
|
|
$ |
4.6 |
|
Amount representing interest
|
|
|
|
|
|
|
(.3 |
) |
|
Obligations under capital leases
|
|
|
|
|
|
|
4.3 |
|
Obligations due within one year
|
|
|
|
|
|
|
(1.9 |
) |
|
Long-term obligations under capital leases
|
|
|
|
|
|
$ |
2.4 |
|
|
One of the Companys subsidiaries is guarantor on loans to
independent contractors for the purchase of DSD route
franchises. At year-end 2005, there were total loans outstanding
of $16.4 million to 517 franchisees. All loans are variable
rate with a term of 10 years. Related to this arrangement,
the Company has established with a financial institution a
one-year renewable loan facility up to $17.0 million with a
five-year term-out and servicing arrangement. The Company has
the right to revoke and resell the route franchises in the event
of default or any other breach of contract by franchisees.
Revocations are infrequent. The Companys maximum potential
future payments under these guarantees are limited to the
outstanding loan principal balance plus unpaid interest. The
fair value of these guarantees is recorded in the Consolidated
Balance Sheet and is currently estimated to be insignificant.
The Company has provided various standard indemnifications in
agreements to sell 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 December 31, 2005,
the Company had not recorded any liability related to these
indemnifications.
Notes payable at year end consisted of commercial paper
borrowings in the United States and Canada, and to a lesser
extent, bank loans of foreign subsidiaries at competitive market
rates, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2005 |
|
2004 |
|
|
|
Effective |
|
|
|
Effective |
|
|
Principal |
|
interest |
|
Principal |
|
interest |
|
|
amount |
|
rate |
|
amount |
|
rate |
|
U.S. commercial paper
|
|
$ |
797.3 |
|
|
|
4.4% |
|
|
$ |
690.2 |
|
|
|
2.5% |
|
Canadian commercial paper
|
|
|
260.4 |
|
|
|
3.4% |
|
|
|
12.1 |
|
|
|
2.7% |
|
Other
|
|
|
53.4 |
|
|
|
|
|
|
|
48.3 |
|
|
|
|
|
|
|
|
$ |
1,111.1 |
|
|
|
|
|
|
$ |
750.6 |
|
|
|
|
|
|
33
Long-term debt at year end consisted primarily of issuances of
fixed rate U.S. Dollar and floating rate Euro Notes, as follows:
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
(a) 4.875% U.S. Dollar Notes due 2005
|
|
$ |
|
|
|
$ |
199.8 |
|
(b) 6.0% U.S. Dollar Notes due 2006
|
|
|
|
|
|
|
722.2 |
|
(b) 6.6% U.S. Dollar Notes due 2011
|
|
|
1,495.4 |
|
|
|
1,494.5 |
|
(b) 7.45% U.S. Dollar Debentures due 2031
|
|
|
1,087.3 |
|
|
|
1,086.8 |
|
(c) 4.49% U.S. Dollar Notes due 2006
|
|
|
75.0 |
|
|
|
150.0 |
|
(d) 2.875% U.S. Dollar Notes due 2008
|
|
|
464.6 |
|
|
|
499.9 |
|
(e) Guaranteed Floating Rate Euro Notes due 2007
|
|
|
650.6 |
|
|
|
|
|
Other
|
|
|
13.3 |
|
|
|
18.0 |
|
|
|
|
|
3,786.2 |
|
|
|
4,171.2 |
|
Less current maturities
|
|
|
(83.6 |
) |
|
|
(278.6 |
) |
|
Balance at year end
|
|
$ |
3,702.6 |
|
|
$ |
3,892.6 |
|
|
|
|
|
(a) |
|
In October 1998, the Company issued $200 of seven-year 4.875%
fixed rate U.S. Dollar Notes to replace maturing long-term debt.
In conjunction with this issuance, the Company settled $200
notional amount of interest rate forward swap agreements, which,
when combined with original issue discount, effectively fixed
the interest rate on the debt at 6.07%. These Notes were repaid
in October 2005. |
|
(b) |
|
In March 2001, the Company issued $4,600 of long-term debt
instruments, primarily to finance the acquisition of Keebler
Foods Company. The table above reflects the remaining principal
amounts outstanding as of year-end 2005 and 2004. The effective
interest rates on these Notes, reflecting issuance discount and
swap settlement, were as follows: due 2006-6.39%; due
2011-7.08%; due 2031-7.62%. Initially, these instruments were
privately placed, or sold outside the United States, in reliance
on exemptions from registration under the Securities Act of
1933, as amended (the 1933 Act). The Company then
exchanged new debt securities for these initial debt
instruments, with the new debt securities being substantially
identical in all respects to the initial debt instruments,
except for being registered under the 1933 Act. These debt
securities contain standard events of default and covenants. The
Notes due 2006 and 2011, and the Debentures due 2031 may be
redeemed in whole or part by the Company at any time at prices
determined under a formula (but not less than 100% of the
principal amount plus unpaid interest to the redemption date).
In December 2003 and 2004, the Company redeemed $172.9 and
$103.7, respectively, of the Notes due 2006. In July 2005, the
Company redeemed $723.4, representing the remaining principal
balance of the Notes due 2006. |
|
(c) |
|
In November 2001, a subsidiary of the Company issued $375 of
five-year 4.49% fixed rate U.S. Dollar Notes to replace other
maturing debt. These Notes are guaranteed by the Company and
mature $75 per year over the five-year term. These Notes, which
were privately placed, contain standard warranties, events of
default, and covenants. They also require the maintenance of a
specified consolidated interest expense coverage ratio, and
limit capital lease obligations and subsidiary debt. In
conjunction with this issuance, the subsidiary of the Company
entered into a $375 notional US$/ Pound Sterling currency swap,
which effectively converted this debt into a 5.302% fixed rate
Pound Sterling obligation for the duration of the five-year term. |
|
(d) |
|
In June 2003, the Company issued $500 of five-year 2.875%
fixed rate U.S. Dollar Notes, using the proceeds from these
Notes to replace maturing long-term debt. These Notes were
issued under an existing shelf registration statement. In
conjunction with this issuance, the Company settled $250
notional amount of forward interest rate contracts for a loss of
$11.8, which is being amortized to interest expense over the
term of the debt. Taking into account this amortization and
issuance discount, the effective interest rate on these
five-year Notes is 3.35%. 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. In December 2005, the
Company redeemed $35.4 of these Notes. |
|
(e) |
|
In November 2005, a subsidiary of the Company issued Euro
550 of Guaranteed Floating Rate Notes (the Euro
Notes) due May 2007. The Euro Notes were issued and sold
in transactions outside of the United States in reliance on
Regulation S of the Securities Act of 1933, as amended. The
Euro Notes are guaranteed by the Company and generally bear
interest at a rate of 0.12% per annum above three-month EURIBOR
for each quarterly interest period. The Euro Notes may be
redeemed in whole or in part at par on interest payment dates or
upon the occurrence of certain events in 2006 and 2007. The Euro
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. |
At December 31, 2005, the Company had $2.1 billion of
short-term lines of credit, virtually all of which were unused
and available for borrowing on an unsecured basis. These lines
were comprised principally of an unsecured Five-Year Credit
Agreement, expiring November 2009. The agreement allows the
Company to borrow, on a revolving credit basis, up to
$2.0 billion, to obtain letters of credit in an aggregate
amount up to $75 million, and to provide a procedure for
the lenders to bid on short-term debt of the Company. The Credit
Agreement contains customary covenants and warranties, including
specified restrictions on indebtedness, liens, sale and
leaseback transactions, and a specified interest expense
coverage ratio. If an event of default occurs, then, to the
extent permitted, the administrative agent may terminate the
commitments under the new credit facility, accelerate any
outstanding loans, and demand the deposit of cash collateral
equal to the lenders letter of credit exposure plus
interest.
Scheduled principal repayments on long-term debt are (in
millions): 2006-$83.6; 2007-$652.5; 2008-$465.5; 2009-$0.8;
2010-$0.8; 2011 and beyond-$2,600.4.
Interest paid was (in millions): 2005-$295; 2004-$333;
2003-$372. Interest expense capitalized as part of the
construction cost of fixed assets was (in millions): 2005-$1.2;
2004-$0.9; 2003-$0.
|
|
Note 8 |
Stock compensation |
The Company uses various equity-based compensation programs to
provide long-term performance incentives for its global
workforce. Currently, these incentives are administered through
several plans, as described within this Note.
The 2003 Long-Term Incentive Plan (2003 Plan),
approved by shareholders in 2003, permits benefits to be awarded
to employees and officers in the form of incentive and
non-qualified stock options, performance units, restricted stock
or restricted stock units, and stock appreciation rights. The
2003 Plan authorizes the issuance of a total of
(a) 25 million shares plus (b) shares not issued
under the 2001 Long-Term Incentive Plan, with no more than
5 million shares to be issued in satisfaction of
performance units, performance-based restricted shares and other
awards (excluding stock options and stock appreciation rights),
and with additional annual limitations on awards or payments to
34
individual participants. Options granted under the 2003 Plan
generally vest over two years, subject to earlier vesting upon
retirement, death, or disability of the grantee or if a change
of control occurs. Restricted stock and performance share grants
under the 2003 Plan generally vest in three years, subject to
earlier vesting and payment if a change in control occurs.
The Non-Employee Director Stock Plan (Director Plan)
was approved by shareholders in 2000 and allows each eligible
non-employee director to receive 1,700 shares of the
Companys common stock annually and annual grants of
options to purchase 5,000 shares of the Companys common
stock. Shares other than options are placed in the Kellogg
Company Grantor Trust for Non-Employee Directors (the
Grantor Trust). Under the terms of the Grantor
Trust, shares are available to a director only upon termination
of service on the Board. Under this plan, awards were as
follows: 2005-55,000 options and 17,000 shares; 2004-55,000
options and 18,700 shares; 2003-55,000 options and
18,700 shares.
Options under all plans previously described are granted with
exercise prices equal to the fair market value of the
Companys common stock at the time of the grant and have a
term of no more than ten years, if they are incentive stock
options, or no more than ten years and one day, if they are
non-qualified stock options. These plans permit stock option
grants to contain an accelerated ownership feature
(AOF). An AOF option is generally granted when
Company stock is used to pay the exercise price of a stock
option or any taxes owed. The holder of the option is generally
granted an AOF option for the number of shares so used with the
exercise price equal to the then fair market value of the
Companys stock. For all AOF options, the original
expiration date is not changed but the options vest immediately.
Subsequent to 2003, the terms of options granted to employees
and directors have not contained an AOF feature.
In addition to employee stock option grants presented in the
tables on page 36, under its long-term incentive plans, the
Company granted restricted stock and restricted stock units to
eligible employees as follows (approximate number of shares):
2005-141,000
2004-140,000;
2003-209,000.
Restrictions with respect to sale or transferability generally
lapse after three years and the grantee is normally entitled to
receive shareholder dividends during the vesting period. During
the periods presented, the Company recognized associated
compensation expense, including amortization of similar pre-2003
grants, over the vesting period based on the grant-date market
price of the underlying shares.
Additionally, the Company granted performance units in 2003 and
performance shares in 2005 to a limited number of senior
executive-level employees, which entitled these employees to
receive shares of the Companys common stock on the vesting
date, provided cumulative three-year financial performance
targets were met. The 2003 grant represented the right to
receive a fixed dollar equivalent in common stock, valued on the
vesting date, provided a target gross margin level was achieved.
The 2003 award was modified in February 2006 to permit cash
settlement under certain circumstances. The 2003 award was
earned at 74% of target and vested in February 2006 for a total
dollar equivalent of $2.9 million. The 2005 grant
represents the right to receive a specified number of shares
provided a target net sales growth level is achieved. Based on
the market price of the Companys common stock at year-end
2005, the maximum future value that could be awarded on the
vesting date in 2007 is approximately $23.6 million. During
the periods presented, the Company recognized associated
compensation expense, including amortization of similar pre-2003
grants, over the performance period based on the expected dollar
value to be awarded on the vesting date. For the years
2003-2005, stock-based compensation expense, as reported, is
presented in Note 1 and consisted principally of amounts
recognized for executive performance plans.
The 2002 Employee Stock Purchase Plan was approved by
shareholders in 2002 and permits eligible employees to purchase
Company stock at a discounted price. This plan allows for a
maximum of 2.5 million shares of Company stock to be issued
at a purchase price equal to the lesser of 85% of the fair
market value of the stock on the first or last day of the
quarterly purchase period. Total purchases through this plan for
any employee are limited to a fair market value of $25,000
during any calendar year. Shares were purchased by employees
under this plan as follows (approximate number of shares):
2005-218,000;
2004-214,000;
2003-248,000.
Additionally, during 2002, a foreign subsidiary of the Company
established a stock purchase plan for its employees. Subject to
limitations, employee contributions to this plan are matched 1:1
by the Company. Under this plan, shares were granted by the
Company to match an approximately equal number of shares
purchased by employees as follows (approximate number of
shares): 2005-80,000;
2004-82,000;
2003-94,000.
The Executive Stock Purchase Plan was established in 2002 to
encourage and enable certain eligible employees of the Company
to acquire Company stock, and to align more closely the
interests of those individuals and the Companys
shareholders. This plan allows for a maximum of 500,000 shares
of Company stock to be issued. Under this plan, shares were
granted by the Company to executives in lieu of cash bonuses as
follows (approximate number of shares): 2005-2,000; 2004-8,000;
2003-11,000.
35
Transactions under these plans are presented in the tables
below. Refer to Note 1 for information on the Companys
method of accounting for these plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions, except per share data) |
|
2005 |
|
2004 |
|
2003 |
|
Under option, beginning of year
|
|
|
32.5 |
|
|
|
37.0 |
|
|
|
38.2 |
|
|
Granted
|
|
|
8.3 |
|
|
|
9.7 |
|
|
|
7.5 |
|
|
Exercised
|
|
|
(10.9 |
) |
|
|
(12.9 |
) |
|
|
(6.0 |
) |
|
Cancelled
|
|
|
(1.1 |
) |
|
|
(1.3 |
) |
|
|
(2.7 |
) |
|
Under option, end of year
|
|
|
28.8 |
|
|
|
32.5 |
|
|
|
37.0 |
|
|
Exercisable, end of year
|
|
|
21.3 |
|
|
|
22.8 |
|
|
|
24.4 |
|
|
Average prices per share
Under option, beginning of year
|
|
$ |
35 |
|
|
$ |
33 |
|
|
$ |
33 |
|
|
Granted
|
|
|
44 |
|
|
|
40 |
|
|
|
31 |
|
|
Exercised
|
|
|
34 |
|
|
|
32 |
|
|
|
28 |
|
|
Cancelled
|
|
|
41 |
|
|
|
41 |
|
|
|
35 |
|
|
Under option, end of year
|
|
$ |
38 |
|
|
$ |
35 |
|
|
$ |
33 |
|
|
Exercisable, end of year
|
|
$ |
37 |
|
|
$ |
35 |
|
|
$ |
34 |
|
|
Shares available, end of year, for stock-based awards that may
be granted under the following plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Kellogg Employee Stock Ownership Plan
|
|
|
|
|
|
|
1.4 |
|
|
|
1.3 |
|
2000 Non-Employee Director Stock Plan
|
|
|
.5 |
|
|
|
.5 |
|
|
|
.6 |
|
2002 Employee Stock Purchase Plan
|
|
|
1.7 |
|
|
|
1.9 |
|
|
|
2.1 |
|
Executive Stock Purchase Plan
|
|
|
.5 |
|
|
|
.5 |
|
|
|
.5 |
|
2003 Long-Term Incentive Plan (a)
|
|
|
20.1 |
|
|
|
24.7 |
|
|
|
30.5 |
|
|
Total
|
|
|
22.8 |
|
|
|
29.0 |
|
|
|
35.0 |
|
|
|
|
|
(a) |
|
Refer to description of Plan within this note for restrictions
on availability. |
Employee stock options outstanding and exercisable under these
plans as of December 31, 2005, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions, except per share data) |
|
|
Outstanding |
|
Exercisable |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
average |
|
|
|
Weighted |
Range of |
|
|
|
average |
|
remaining |
|
|
|
average |
exercise |
|
Number |
|
exercise |
|
contractual |
|
Number |
|
exercise |
prices |
|
of options |
|
price |
|
life (yrs.) |
|
of options |
|
price |
|
$24 - 33
|
|
|
6.0 |
|
|
$ |
28 |
|
|
|
5.1 |
|
|
|
5.8 |
|
|
$ |
28 |
|
34 - 38
|
|
|
5.4 |
|
|
|
35 |
|
|
|
4.7 |
|
|
|
5.4 |
|
|
|
35 |
|
39 - 43
|
|
|
6.5 |
|
|
|
39 |
|
|
|
7.2 |
|
|
|
3.9 |
|
|
|
40 |
|
44 - 51
|
|
|
10.9 |
|
|
|
44 |
|
|
|
6.3 |
|
|
|
6.2 |
|
|
|
45 |
|
|
|
|
|
28.8 |
|
|
|
|
|
|
|
|
|
|
|
21.3 |
|
|
|
|
|
|
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 few multiemployer or
other defined contribution plans for certain employee groups.
Defined benefits for salaried employees are generally based on
salary and years of service, while union employee benefits are
generally a negotiated amount for each year of service. The
Company uses its fiscal year end as the measurement date for the
majority of its plans.
Obligations and funded status
The aggregate change in projected benefit obligation, plan
assets, and funded status is presented in the following tables.
For 2005, the impact of amendments on the projected benefit
obligation is principally related to incremental benefits under
an agreement between the Company and the major union
representing the hourly employees at the Companys U.S.
cereal plants, which covers the four-year period ending October
2009.
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$ |
2,972.9 |
|
|
$ |
2,640.9 |
|
Service cost
|
|
|
80.3 |
|
|
|
76.0 |
|
Interest cost
|
|
|
160.1 |
|
|
|
157.3 |
|
Plan participants contributions
|
|
|
2.5 |
|
|
|
2.8 |
|
Amendments
|
|
|
42.2 |
|
|
|
23.0 |
|
Actuarial loss
|
|
|
114.3 |
|
|
|
144.2 |
|
Benefits paid
|
|
|
(144.0 |
) |
|
|
(155.0 |
) |
Foreign currency adjustments
|
|
|
(84.6 |
) |
|
|
68.8 |
|
Curtailment and special termination benefits
|
|
|
1.3 |
|
|
|
8.7 |
|
Other
|
|
|
.1 |
|
|
|
6.2 |
|
|
End of year
|
|
$ |
3,145.1 |
|
|
$ |
2,972.9 |
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value beginning of year
|
|
$ |
2,685.9 |
|
|
$ |
2,319.2 |
|
Actual return on plan assets
|
|
|
277.9 |
|
|
|
319.1 |
|
Employer contributions
|
|
|
156.4 |
|
|
|
139.6 |
|
Plan participants contributions
|
|
|
2.5 |
|
|
|
2.8 |
|
Benefits paid
|
|
|
(132.3 |
) |
|
|
(149.3 |
) |
Foreign currency adjustments
|
|
|
(67.9 |
) |
|
|
53.0 |
|
Other
|
|
|
.1 |
|
|
|
1.5 |
|
|
Fair value end of year
|
|
$ |
2,922.6 |
|
|
$ |
2,685.9 |
|
|
Funded status
|
|
$ |
(222.5 |
) |
|
$ |
(287.0 |
) |
Unrecognized net loss
|
|
|
826.3 |
|
|
|
868.4 |
|
Unrecognized transition amount
|
|
|
1.9 |
|
|
|
2.4 |
|
Unrecognized prior service cost
|
|
|
100.1 |
|
|
|
70.0 |
|
|
Prepaid pension
|
|
$ |
705.8 |
|
|
$ |
653.8 |
|
|
Amounts recognized in the Consolidated Balance Sheet consist
of
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$ |
683.3 |
|
|
$ |
730.9 |
|
Accrued benefit liability
|
|
|
(185.8 |
) |
|
|
(190.5 |
) |
Intangible asset
|
|
|
17.0 |
|
|
|
24.7 |
|
Other comprehensive income minimum pension liability
|
|
|
191.3 |
|
|
|
88.7 |
|
|
Net amount recognized
|
|
$ |
705.8 |
|
|
$ |
653.8 |
|
|
The accumulated benefit obligation for all defined benefit
pension plans was $2.87 billion and $2.70 billion at
December, 31 2005 and January 1, 2005, respectively.
Information for pension plans
36
with accumulated benefit obligations in excess of plan assets
were:
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
Projected benefit obligation
|
|
$ |
1,621.4 |
|
|
$ |
411.2 |
|
Accumulated benefit obligation
|
|
|
1,473.7 |
|
|
|
350.2 |
|
Fair value of plan assets
|
|
|
1,289.1 |
|
|
|
160.5 |
|
|
The significant increase in accumulated benefit obligations in
excess of plan assets for 2005 is related to unfavorable
movement in one of the major U.S. pension plans, partially
offset by favorable movements in several international plans.
At December 31, 2005, a cumulative after-tax charge of
$124.4 million ($191.3 million pretax) has been
recorded in other comprehensive income to recognize the
additional minimum pension liability in excess of unrecognized
prior service cost. Refer to Note 5 for further information on
the changes in minimum liability included in other comprehensive
income for each of the periods presented.
Expense
The components of pension expense are presented in the following
table. Pension expense for defined contribution plans relates
principally to multi-employer plans in which the Company
participates on behalf of certain unionized workforces in the
United States. The amount for 2005 includes a charge of
approximately $16 million for the Companys current
estimate of a multiemployer plan withdrawal liability, which is
further described in Note 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Service cost
|
|
$ |
80.3 |
|
|
$ |
76.0 |
|
|
$ |
67.5 |
|
Interest cost
|
|
|
160.1 |
|
|
|
157.3 |
|
|
|
151.1 |
|
Expected return on plan assets
|
|
|
(229.0 |
) |
|
|
(238.1 |
) |
|
|
(224.3 |
) |
Amortization of unrecognized transition obligation
|
|
|
.3 |
|
|
|
.2 |
|
|
|
.1 |
|
Amortization of unrecognized prior service cost
|
|
|
10.0 |
|
|
|
8.2 |
|
|
|
7.3 |
|
Recognized net loss
|
|
|
64.5 |
|
|
|
54.1 |
|
|
|
28.6 |
|
Other Adjustments
|
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
Curtailment and special termination
benefits net loss
|
|
|
1.6 |
|
|
|
12.2 |
|
|
|
8.1 |
|
|
Pension expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
|
87.7 |
|
|
|
69.9 |
|
|
|
38.4 |
|
|
Defined contribution plans
|
|
|
31.9 |
|
|
|
14.4 |
|
|
|
14.3 |
|
|
|
Total
|
|
$ |
119.6 |
|
|
$ |
84.3 |
|
|
$ |
52.7 |
|
|
Certain of the Companys subsidiaries sponsor 401(k) or
similar savings plans for active employees. Expense related to
these plans was (in millions): 2005-$30; 2004-$26; 2003-$26.
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 table above.
All gains and losses, other than those related to curtailment or
special termination benefits, are recognized over the average
remaining service period of active plan participants. Net losses
from special termination benefits and curtailment recognized in
2004 are related primarily to special termination benefits
granted to the Companys former CEO and other former
executive officers pursuant to separation agreements, and to a
lesser extent, liquidation of the Companys pension fund in
South Africa and continuing plant workforce reductions in Great
Britain. Net losses from special termination benefits recognized
in 2003 are related primarily to a plant workforce reduction in
Great Britain. Refer to Note 3 for further information on
this initiative.
Assumptions
The worldwide weighted-average actuarial assumptions used to
determine benefit obligations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Discount rate
|
|
|
5.4% |
|
|
|
5.7% |
|
|
|
5.9% |
|
Long-term rate of compensation increase
|
|
|
4.4% |
|
|
|
4.3% |
|
|
|
4.3% |
|
|
The worldwide weighted-average actuarial assumptions used to
determine annual net periodic benefit cost were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Discount rate
|
|
|
5.7% |
|
|
|
5.9% |
|
|
|
6.6% |
|
Long-term rate of compensation increase
|
|
|
4.3% |
|
|
|
4.3% |
|
|
|
4.7% |
|
Long-term rate of return on plan assets
|
|
|
8.9% |
|
|
|
9.3% |
|
|
|
9.3% |
|
|
To determine the overall expected long-term rate of return on
plan assets, the Company works with third party financial
consultants to model expected returns over a 20-year investment
horizon with respect to the specific investment mix of its major
plans. The return assumptions used reflect a combination of
rigorous historical performance analysis and forward-looking
views of the financial markets including consideration of
current yields on long-term bonds, price-earnings ratios of the
major stock market indices, and long-term inflation. The U.S.
model, which corresponds to approximately 70% of consolidated
pension and other postretirement benefit plan assets,
incorporates a long-term inflation assumption of 2.8% and an
active management premium of 1% (net of fees) validated by
historical analysis. Similar methods are used for various
foreign plans with invested assets, reflecting local economic
conditions. Although management reviews the Companys
expected long-term rates of return annually, the benefit trust
investment performance for one particular year does
37
not, by itself, significantly influence this evaluation. The
expected rates of return are generally not revised, provided
these rates continue to fall within a more likely than
not corridor of between the 25th and 75th percentile of
expected long-term returns, as determined by the Companys
modeling process. The expected rate of return for 2005 of 8.9%
equated to approximately the 50th percentile expectation. Any
future variance between the expected and actual rates of return
on plan assets is recognized in the calculated value of plan
assets over a five-year period and once recognized, experience
gains and losses are amortized using a declining-balance method
over the average remaining service period of active plan
participants.
Plan assets
The Companys year-end pension plan weighted-average asset
allocations by asset category were:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
Equity securities
|
|
|
73% |
|
|
|
76% |
|
Debt securities
|
|
|
24% |
|
|
|
23% |
|
Other
|
|
|
3% |
|
|
|
1% |
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
The Companys investment strategy for its major defined
benefit plans is to maintain a diversified portfolio of asset
classes with the primary goal of meeting long-term cash
requirements as they become due. Assets are invested in a
prudent manner to maintain the security of funds while
maximizing returns within the Companys guidelines. The
current weighted-average target asset allocation reflected by
this strategy is: equity securities-74%; debt securities-24%;
other-2%. Investment in Company common stock represented 1.5% of
consolidated plan assets at December 31, 2005 and
January 1, 2005. Plan funding strategies are influenced by
tax regulations. The Company currently expects to contribute
approximately $39 million to its defined benefit pension
plans during 2006.
Benefit payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid (in millions):
2006-$147; 2007-$150; 2008-$154; 2009-$159; 2010-$166;
2011-2015-$943.
|
|
Note 10 |
Nonpension postretirement and postemployment
benefits |
Postretirement
The Company sponsors a number of plans to provide health care
and other welfare benefits to retired employees in the United
States and Canada, who have met certain age and service
requirements. The majority of these plans are funded or unfunded
defined benefit plans, although the Company does participate in
a few multiemployer or other defined contribution plans for
certain employee groups. The Company contributes to voluntary
employee benefit association (VEBA) trusts to fund certain
U.S. retiree health and welfare benefit obligations. The Company
uses its fiscal year end as the measurement date for these plans.
Obligations and funded status
The aggregate change in accumulated postretirement benefit
obligation, plan assets, and funded status was:
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
Change in accumulated benefit obligation
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$ |
1,046.7 |
|
|
$ |
1,006.6 |
|
Service cost
|
|
|
14.5 |
|
|
|
12.1 |
|
Interest cost
|
|
|
58.3 |
|
|
|
55.6 |
|
Actuarial loss
|
|
|
164.6 |
|
|
|
24.3 |
|
Benefits paid
|
|
|
(60.4 |
) |
|
|
(53.9 |
) |
Foreign currency adjustments
|
|
|
1.2 |
|
|
|
2.0 |
|
|
End of year
|
|
$ |
1,224.9 |
|
|
$ |
1,046.7 |
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value beginning of year
|
|
$ |
468.4 |
|
|
$ |
402.2 |
|
Actual return on plan assets
|
|
|
32.5 |
|
|
|
54.4 |
|
Employer contributions
|
|
|
240.9 |
|
|
|
64.4 |
|
Benefits paid
|
|
|
(59.1 |
) |
|
|
(52.6 |
) |
|
Fair value end of year
|
|
$ |
682.7 |
|
|
$ |
468.4 |
|
|
Funded status
|
|
$ |
(542.2 |
) |
|
$ |
(578.3 |
) |
Unrecognized net loss
|
|
|
446.0 |
|
|
|
291.2 |
|
Unrecognized prior service cost
|
|
|
(26.3 |
) |
|
|
(29.2 |
) |
|
Accrued postretirement benefit cost recognized as a liability
|
|
$ |
(122.5 |
) |
|
$ |
(316.3 |
) |
|
Expense
Components of postretirement benefit expense were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Service cost
|
|
$ |
14.5 |
|
|
$ |
12.1 |
|
|
$ |
12.5 |
|
Interest cost
|
|
|
58.3 |
|
|
|
55.6 |
|
|
|
60.4 |
|
Expected return on plan assets
|
|
|
(42.1 |
) |
|
|
(39.8 |
) |
|
|
(32.8 |
) |
Amortization of unrecognized prior service cost
|
|
|
(2.9 |
) |
|
|
(2.9 |
) |
|
|
(2.5 |
) |
Recognized net losses
|
|
|
19.8 |
|
|
|
14.8 |
|
|
|
12.3 |
|
|
Postretirement benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
|
47.6 |
|
|
|
39.8 |
|
|
|
49.9 |
|
|
Defined contribution plans
|
|
|
1.3 |
|
|
|
1.8 |
|
|
|
1.3 |
|
|
|
Total
|
|
$ |
48.9 |
|
|
$ |
41.6 |
|
|
$ |
51.2 |
|
|
All gains and losses, other than those related to curtailment or
special termination benefits, are
38
recognized over the average remaining service period of active
plan participants.
Assumptions
The weighted-average actuarial assumptions used to determine
benefit obligations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Discount rate
|
|
|
5.5% |
|
|
|
5.8% |
|
|
|
6.0% |
|
|
The weighted-average actuarial assumptions used to determine
annual net periodic benefit cost were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Discount rate
|
|
|
5.8% |
|
|
|
6.0% |
|
|
|
6.9% |
|
Long-term rate of return on plan assets
|
|
|
8.9% |
|
|
|
9.3% |
|
|
|
9.3% |
|
|
The Company determines the overall expected long-term rate of
return on VEBA trust assets in the same manner as that described
for pension trusts in Note 9.
The assumed health care cost trend rate is 10.5% for 2006,
decreasing gradually to 4.75% by the year 2012 and remaining at
that level thereafter. These trend rates reflect the
Companys recent historical experience and
managements expectations regarding future trends. A one
percentage point change in assumed health care cost trend rates
would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
One percentage |
|
One percentage |
(millions) |
|
point increase |
|
point decrease |
|
Effect on total of service and interest cost components
|
|
$ |
8.1 |
|
|
$ |
(7.7 |
) |
Effect on postretirement benefit obligation
|
|
$ |
143.0 |
|
|
$ |
(118.4 |
) |
|
Plan assets
The Companys year-end VEBA trust weighted-average asset
allocations by asset category were:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
Equity securities
|
|
|
78% |
|
|
|
77% |
|
Debt securities
|
|
|
22% |
|
|
|
23% |
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
The Companys asset investment strategy for its VEBA trusts
is consistent with that described for its pension trusts in Note
9. The current target asset allocation is 74% equity securities,
25% debt securities and 1% other. The Company currently expects
to contribute approximately $20 million to its VEBA trusts
during 2006.
Postemployment
Under certain conditions, the Company provides benefits to
former or inactive employees in the United States and several
foreign locations, including salary continuance, severance, and
long-term disability. The Company recognizes an obligation for
any of these benefits that vest or accumulate with service.
Postemployment benefits that do not vest or accumulate with
service (such as severance based solely on annual pay rather
than years of service) or costs arising from actions that offer
benefits to employees in excess of those specified in the
respective plans are charged to expense when incurred. The
Companys postemployment benefit plans are unfunded.
Actuarial assumptions used are generally consistent with those
presented for pension benefits on page 37. The aggregate
change in accumulated postemployment benefit obligation and the
net amount recognized were:
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
Change in accumulated benefit obligation
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$ |
37.9 |
|
|
$ |
35.0 |
|
Service cost
|
|
|
4.5 |
|
|
|
3.5 |
|
Interest cost
|
|
|
2.0 |
|
|
|
1.9 |
|
Actuarial loss
|
|
|
7.4 |
|
|
|
7.8 |
|
Benefits paid
|
|
|
(9.0 |
) |
|
|
(10.8 |
) |
Foreign currency adjustments
|
|
|
(.6 |
) |
|
|
.5 |
|
|
End of year
|
|
$ |
42.2 |
|
|
$ |
37.9 |
|
|
Funded status
|
|
$ |
(42.2 |
) |
|
$ |
(37.9 |
) |
Unrecognized net loss
|
|
|
19.1 |
|
|
|
15.1 |
|
|
Accrued postemployment benefit cost recognized as a liability
|
|
$ |
(23.1 |
) |
|
$ |
(22.8 |
) |
|
Components of postemployment benefit expense were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Service cost
|
|
$ |
4.5 |
|
|
$ |
3.5 |
|
|
$ |
3.0 |
|
Interest cost
|
|
|
2.0 |
|
|
|
1.9 |
|
|
|
2.0 |
|
Recognized net losses
|
|
|
3.5 |
|
|
|
4.5 |
|
|
|
3.0 |
|
|
Postemployment benefit expense
|
|
$ |
10.0 |
|
|
$ |
9.9 |
|
|
$ |
8.0 |
|
|
Benefit payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
(millions) |
|
Postretirement |
|
Postemployment |
|
2006
|
|
$ |
67.1 |
|
|
$ |
9.5 |
|
2007
|
|
|
71.3 |
|
|
|
9.3 |
|
2008
|
|
|
75.0 |
|
|
|
8.6 |
|
2009
|
|
|
78.3 |
|
|
|
8.3 |
|
2010
|
|
|
81.2 |
|
|
|
8.4 |
|
2011-2015
|
|
|
429.4 |
|
|
|
42.8 |
|
|
39
Earnings before income taxes and the provision for U.S. federal,
state, and foreign taxes on these earnings were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Earnings before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
971.4 |
|
|
$ |
952.0 |
|
|
$ |
799.9 |
|
|
Foreign
|
|
|
453.7 |
|
|
|
413.9 |
|
|
|
369.6 |
|
|
|
|
$ |
1,425.1 |
|
|
$ |
1,365.9 |
|
|
$ |
1,169.5 |
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
376.8 |
|
|
$ |
249.8 |
|
|
$ |
141.9 |
|
|
|
State
|
|
|
26.4 |
|
|
|
30.0 |
|
|
|
40.5 |
|
|
|
Foreign
|
|
|
100.7 |
|
|
|
137.8 |
|
|
|
125.2 |
|
|
|
|
|
503.9 |
|
|
|
417.6 |
|
|
|
307.6 |
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(69.6 |
) |
|
|
51.5 |
|
|
|
91.7 |
|
|
|
State
|
|
|
.6 |
|
|
|
5.3 |
|
|
|
(8.6 |
) |
|
|
Foreign
|
|
|
9.8 |
|
|
|
.9 |
|
|
|
(8.3 |
) |
|
|
|
|
(59.2 |
) |
|
|
57.7 |
|
|
|
74.8 |
|
|
Total income taxes
|
|
$ |
444.7 |
|
|
$ |
475.3 |
|
|
$ |
382.4 |
|
|
The difference between the U.S. federal statutory tax rate and
the Companys effective income tax rate was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
U.S. statutory income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Foreign rates varying from 35%
|
|
|
-3.8 |
|
|
|
-.5 |
|
|
|
-.9 |
|
State income taxes, net of federal benefit
|
|
|
1.2 |
|
|
|
1.7 |
|
|
|
1.8 |
|
Foreign earnings repatriation
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
Net change in valuation allowances
|
|
|
-.2 |
|
|
|
-1.5 |
|
|
|
-.1 |
|
Statutory rate changes, deferred tax impact
|
|
|
|
|
|
|
.1 |
|
|
|
-.1 |
|
Other
|
|
|
-1.0 |
|
|
|
-2.1 |
|
|
|
-3.0 |
|
|
Effective income tax rate
|
|
|
31.2 |
% |
|
|
34.8 |
% |
|
|
32.7 |
% |
|
The consolidated effective income tax rate for 2005 was
approximately 31%, which was below both the 2004 rate of nearly
35% and the 2003 rate of less than 33%. As compared to the
prior-period rates, the 2005 consolidated effective income tax
rate benefited primarily from the 2004 reorganization of the
Companys European operations (refer to Note 3 for further
information) and to a lesser extent, the U.S. tax legislation
that allows a phased-in deduction from taxable income equal to a
stipulated percentage of qualified production income
(QPI), beginning in 2005.
During 2005, the Company elected to repatriate approximately
$1.1 billion of dividends from foreign subsidiaries which
qualified for the temporary dividends-received-deduction
available under the American Jobs Creation Act. The associated
net tax cost of approximately $40 million was provided for
in 2004, partially offset by related foreign tax credits of
approximately $12 million. At December 31, 2005,
remaining foreign subsidiary earnings of approximately
$700 million were considered permanently invested in those
businesses. Accordingly, U.S. income taxes have not been
provided on these earnings.
Generally, the changes in valuation allowances on deferred tax
assets and corresponding impacts on the effective income tax
rate result from managements assessment of the
Companys ability to utilize certain operating loss and tax
credit carryforwards prior to expiration. For 2004, the
1.5 percent rate reduction presented in the preceding table
primarily reflects reversal of a valuation allowance against
U.S. foreign tax credits, which were utilized in conjunction
with the aforementioned 2005 foreign earnings repatriation.
Total tax benefits of carryforwards at year-end 2005 and 2004
were approximately $23 million and $57 million,
respectively. Of the total carryforwards at year-end 2005, less
than $2 million expire in 2006 with the remainder
principally expiring after five years. After valuation
allowance, the carrying value of carryforward tax benefits at
year-end 2005 was only $3 million.
Income tax benefits realized from stock option exercises for
which no compensation expense is recognized under the intrinsic
value method (refer to Note 1) are recorded in Capital in
excess of par value within the Consolidated Balance Sheet. Such
benefits were approximately (in millions): 2005 $39;
2004 $37; 2003 $12.
The deferred tax assets and liabilities included in the balance
sheet at year end are presented in the following table. During
2005, the Company reclassified $578.9 million attributable
to its direct store-door (DSD) delivery system from
indefinite-lived intangibles to goodwill and accordingly reduced
noncurrent deferred tax liabilities by $228.5 million.
Prior periods were likewise reclassified.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
Deferred tax liabilities |
|
(millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state income taxes
|
|
$ |
12.1 |
|
|
$ |
6.8 |
|
|
$ |
|
|
|
$ |
|
|
|
Advertising and promotion-related
|
|
|
18.6 |
|
|
|
18.5 |
|
|
|
8.8 |
|
|
|
8.4 |
|
|
Wages and payroll taxes
|
|
|
28.8 |
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
Inventory valuation
|
|
|
25.5 |
|
|
|
20.2 |
|
|
|
6.3 |
|
|
|
6.9 |
|
|
Employee benefits
|
|
|
32.0 |
|
|
|
34.9 |
|
|
|
|
|
|
|
|
|
|
Operating loss and credit carryforwards
|
|
|
7.0 |
|
|
|
34.6 |
|
|
|
|
|
|
|
|
|
|
Hedging transactions
|
|
|
17.5 |
|
|
|
26.4 |
|
|
|
.1 |
|
|
|
|
|
|
Depreciation and asset disposals
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign earnings repatriation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.5 |
|
|
Deferred intercompany revenue
|
|
|
76.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
22.6 |
|
|
|
8.8 |
|
|
|
22.0 |
|
|
|
13.6 |
|
|
|
|
|
240.5 |
|
|
|
180.1 |
|
|
|
37.2 |
|
|
|
69.4 |
|
|
|
Less valuation allowance
|
|
|
(3.2 |
) |
|
|
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
237.3 |
|
|
$ |
176.3 |
|
|
$ |
37.2 |
|
|
$ |
69.4 |
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
Deferred tax liabilities |
|
(millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. state income taxes
|
|
$ |
|
|
|
$ |
|
|
|
$ |
54.4 |
|
|
$ |
48.6 |
|
|
Employee benefits
|
|
|
20.4 |
|
|
|
21.6 |
|
|
|
129.7 |
|
|
|
111.6 |
|
|
Operating loss and credit carryforwards
|
|
|
15.5 |
|
|
|
22.4 |
|
|
|
|
|
|
|
|
|
|
Hedging transactions
|
|
|
1.7 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
Depreciation and asset disposals
|
|
|
12.7 |
|
|
|
14.8 |
|
|
|
340.8 |
|
|
|
376.9 |
|
|
Capitalized interest
|
|
|
5.1 |
|
|
|
5.8 |
|
|
|
12.7 |
|
|
|
15.5 |
|
|
Trademarks and other intangibles
|
|
|
.1 |
|
|
|
.1 |
|
|
|
472.4 |
|
|
|
461.6 |
|
|
Deferred compensation
|
|
|
34.9 |
|
|
|
37.5 |
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
15.3 |
|
|
|
1.4 |
|
|
|
2.1 |
|
|
|
9.8 |
|
|
|
|
|
105.7 |
|
|
|
104.9 |
|
|
|
1,012.1 |
|
|
|
1,024.0 |
|
|
|
Less valuation allowance
|
|
|
(16.2 |
) |
|
|
(18.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
89.5 |
|
|
|
86.4 |
|
|
|
1,012.1 |
|
|
|
1,024.0 |
|
|
Total deferred taxes
|
|
$ |
326.8 |
|
|
$ |
262.7 |
|
|
$ |
1,049.3 |
|
|
$ |
1,093.4 |
|
|
The change in valuation allowance against deferred tax assets
was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Balance at beginning of year
|
|
$ |
22.3 |
|
|
$ |
36.8 |
|
|
$ |
34.7 |
|
Additions charged to income tax expense
|
|
|
.2 |
|
|
|
13.3 |
|
|
|
2.6 |
|
Reductions credited to income tax expense
|
|
|
(3.2 |
) |
|
|
(28.9 |
) |
|
|
(4.1 |
) |
Currency translation adjustments
|
|
|
.1 |
|
|
|
1.1 |
|
|
|
3.6 |
|
|
Balance at end of year
|
|
$ |
19.4 |
|
|
$ |
22.3 |
|
|
$ |
36.8 |
|
|
Cash paid for income taxes was (in millions): 2005-$425;
2004-$421; 2003-$289.
|
|
Note 12 |
Financial instruments and credit risk concentration |
The fair values of the Companys financial instruments are
based on carrying value in the case of short-term items, quoted
market prices for derivatives and investments, and, in the case
of long-term debt, incremental borrowing rates currently
available on loans with similar terms and maturities. The
carrying amounts of the Companys cash, cash equivalents,
receivables, and notes payable approximate fair value. The fair
value of the Companys long-term debt at December 31,
2005, exceeded its carrying value by approximately
$357 million.
The Company is exposed to certain market risks which exist as a
part of its ongoing business operations and uses derivative
financial and commodity instruments, where appropriate, to
manage these risks. In general, instruments used as hedges must
be effective at reducing the risk associated with the exposure
being hedged and must be designated as a hedge at the inception
of the contract. In accordance with SFAS No. 133, the
Company designates derivatives as either cash flow hedges, fair
value hedges, net investment hedges, or other contracts used to
reduce volatility in the translation of foreign currency
earnings to U.S. Dollars. The fair values of all hedges are
recorded in accounts receivable or other current liabilities.
Gains and losses representing either hedge ineffectiveness,
hedge components excluded from the assessment of effectiveness,
or hedges of translational exposure are recorded in other income
(expense), net. Within the Consolidated Statement of Cash Flows,
settlements of cash flow and fair value hedges are classified as
an operating activity; settlements of all other derivatives are
classified as a financing activity.
Cash flow hedges
Qualifying derivatives are accounted for as cash flow hedges
when the hedged item is a forecasted transaction. Gains and
losses on these instruments are recorded in other comprehensive
income until the underlying transaction is recorded in earnings.
When the hedged item is realized, gains or losses are
reclassified from accumulated other comprehensive income to the
Statement of Earnings on the same line item as the underlying
transaction. For all cash flow hedges, gains and losses
representing either hedge ineffectiveness or hedge components
excluded from the assessment of effectiveness were insignificant
during the periods presented.
The total net loss attributable to cash flow hedges recorded in
accumulated other comprehensive income at December 31,
2005, was $32.2 million, related primarily to forward
interest rate contracts settled during 2001 and 2003 in
conjunction with fixed-rate long-term debt issuances. This loss
will be reclassified into interest expense over the next 3-26
years. Other insignificant amounts related to foreign currency
and commodity price cash flow hedges will be reclassified into
earnings during the next 18 months.
Fair value hedges
Qualifying derivatives are accounted for as fair value hedges
when the hedged item is a recognized asset, liability, or firm
commitment. Gains and losses on these instruments are recorded
in earnings, offsetting gains and losses on the hedged item. For
all fair value hedges, gains and losses representing either
hedge ineffectiveness or hedge components excluded from the
assessment of effectiveness were insignificant during the
periods presented.
Net investment hedges
Qualifying derivative and nonderivative financial instruments
are accounted for as net investment hedges when the hedged item
is a foreign currency investment in a subsidiary. Gains and
losses on these instruments are recorded as a foreign currency
translation adjustment in other comprehensive income.
41
Other contracts
The Company also enters into foreign currency forward contracts
and options to reduce volatility in the translation of foreign
currency earnings to U.S. Dollars. Gains and losses on these
instruments are recorded in other income (expense), net,
generally reducing the exposure to translation volatility during
a full-year period.
Foreign exchange risk
The Company is exposed to fluctuations in foreign currency cash
flows related primarily to third-party purchases, intercompany
transactions, and nonfunctional currency denominated third party
debt. The Company is also exposed to fluctuations in the value
of foreign currency investments in subsidiaries and cash flows
related to repatriation of these investments. Additionally, the
Company is exposed to volatility in the translation of foreign
currency earnings to U.S. Dollars. The Company assesses foreign
currency risk based on transactional cash flows and
translational positions and enters into forward contracts,
options, and currency swaps to reduce fluctuations in net long
or short currency positions. Forward contracts and options are
generally less than 18 months duration. Currency swap
agreements are established in conjunction with the term of
underlying debt issues.
For foreign currency cash flow and fair value hedges, the
assessment of effectiveness is generally based on changes in
spot rates. Changes in time value are reported in other income
(expense), net.
Interest rate risk
The Company is exposed to interest rate volatility with regard
to future issuances of fixed rate debt and existing issuances of
variable rate debt. The Company currently uses interest rate
swaps, including forward-starting swaps, to reduce interest rate
volatility and funding costs associated with certain debt
issues, and to achieve a desired proportion of variable versus
fixed rate debt, based on current and projected market
conditions.
Variable-to-fixed interest rate swaps are accounted for as cash
flow hedges and the assessment of effectiveness is based on
changes in the present value of interest payments on the
underlying debt. Fixed-to-variable interest rate swaps are
accounted for as fair value hedges and the assessment of
effectiveness is based on changes in the fair value of the
underlying debt, using incremental borrowing rates currently
available on loans with similar terms and maturities.
Price risk
The Company is exposed to price fluctuations primarily as a
result of anticipated purchases of raw and packaging materials,
fuel, and energy. The Company uses the combination of long cash
positions with suppliers, and exchange-traded futures and option
contracts to reduce price fluctuations in a desired percentage
of forecasted purchases over a duration of generally less than
18 months.
Commodity contracts are accounted for as cash flow hedges. The
assessment of effectiveness is based on changes in futures
prices.
Credit risk concentration
The Company is exposed to credit loss in the event of
nonperformance by counterparties on derivative financial and
commodity contracts. This credit loss is limited to the cost of
replacing these contracts at current market rates. Management
believes the probability of such loss is remote.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily cash, cash
equivalents, and accounts receivable. The Company places its
investments in highly rated financial institutions and
investment-grade short-term debt instruments, and limits the
amount of credit exposure to any one entity. Management believes
concentrations of credit risk with respect to accounts
receivable is limited due to the generally high credit quality
of the Companys major customers, as well as the large
number and geographic dispersion of smaller customers. However,
the Company conducts a disproportionate amount of business with
a small number of large multinational grocery retailers, with
the five largest accounts comprising approximately 22% of
consolidated accounts receivable at December 31, 2005.
42
|
|
Note 13 |
Quarterly financial data (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
Gross profit |
|
(millions, except per share data) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
First
|
|
$ |
2,572.3 |
|
|
$ |
2,390.5 |
|
|
$ |
1,135.9 |
|
|
$ |
1,035.0 |
|
Second
|
|
|
2,587.2 |
|
|
|
2,387.3 |
|
|
|
1,198.6 |
|
|
|
1,080.2 |
|
Third
|
|
|
2,623.4 |
|
|
|
2,445.3 |
|
|
|
1,186.0 |
|
|
|
1,126.2 |
|
Fourth
|
|
|
2,394.3 |
|
|
|
2,390.8 |
|
|
|
1,045.1 |
|
|
|
1,073.8 |
|
|
|
|
$ |
10,177.2 |
|
|
$ |
9,613.9 |
|
|
$ |
4,565.6 |
|
|
$ |
4,315.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
Net earnings per share |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
|
|
|
|
|
|
|
|
|
First
|
|
$ |
254.7 |
|
|
$ |
219.8 |
|
|
$ |
.62 |
|
|
$ |
.61 |
|
|
$ |
.54 |
|
|
$ |
.53 |
|
Second
|
|
|
259.0 |
|
|
|
237.4 |
|
|
|
.63 |
|
|
|
.62 |
|
|
|
.58 |
|
|
|
.57 |
|
Third
|
|
|
274.3 |
|
|
|
247.0 |
|
|
|
.66 |
|
|
|
.66 |
|
|
|
.60 |
|
|
|
.59 |
|
Fourth
|
|
|
192.4 |
|
|
|
186.4 |
|
|
|
.47 |
|
|
|
.47 |
|
|
|
.45 |
|
|
|
.45 |
|
|
|
|
$ |
980.4 |
|
|
$ |
890.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal market for trading Kellogg shares is the New York
Stock Exchange (NYSE). The shares are also traded on the Boston,
Chicago, Cincinnati, Pacific, and Philadelphia Stock Exchanges.
At year-end 2005, the closing price (on the NYSE) was $43.22 and
there were 42,193 shareholders of record.
Dividends paid per share and the quarterly price ranges on the
NYSE during the last two years were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price |
|
|
Dividend |
|
|
|
|
per share |
|
High |
|
Low |
|
2005 Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$ |
.2525 |
|
|
$ |
45.59 |
|
|
$ |
42.41 |
|
Second
|
|
|
.2525 |
|
|
|
46.89 |
|
|
|
42.35 |
|
Third
|
|
|
.2775 |
|
|
|
46.99 |
|
|
|
43.42 |
|
Fourth
|
|
|
.2775 |
|
|
|
46.70 |
|
|
|
43.22 |
|
|
|
|
$ |
1.0600 |
|
|
|
|
|
|
|
|
|
|
2004 Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$ |
.2525 |
|
|
$ |
39.88 |
|
|
$ |
37.00 |
|
Second
|
|
|
.2525 |
|
|
|
43.41 |
|
|
|
38.41 |
|
Third
|
|
|
.2525 |
|
|
|
43.08 |
|
|
|
39.88 |
|
Fourth
|
|
|
.2525 |
|
|
|
45.32 |
|
|
|
41.10 |
|
|
|
|
$ |
1.0100 |
|
|
|
|
|
|
|
|
|
|
|
|
Note 14 |
Operating segments |
Kellogg Company is the worlds leading producer of cereal
and a leading producer of convenience foods, including cookies,
crackers, toaster pastries, cereal bars, frozen waffles, and
meat alternatives. Kellogg products are manufactured and
marketed globally. Principal markets for these products include
the United States and United Kingdom. The Company currently
manages its operations based on the geographic regions of North
America, Europe, Latin America, and Asia Pacific. This
organizational structure is the basis of the following operating
segment data. The measurement of operating segment results is
generally consistent with the presentation of the Consolidated
Statement of Earnings and Balance Sheet. Intercompany
transactions between reportable operating segments were
insignificant in all periods presented.
During 2005, the Company reclassified $578.9 million
attributable to its U.S. direct store-door (DSD) delivery system
from indefinite-lived intangibles to goodwill, net of an
associated deferred tax liability of $228.5 million. Prior
periods were likewise reclassified, resulting in a net reduction
to total and long-lived assets of $228.5 million within the
United States, the Companys North America operating
segment, and consolidated balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
6,807.8 |
|
|
$ |
6,369.3 |
|
|
$ |
5,954.3 |
|
|
Europe
|
|
|
2,013.6 |
|
|
|
2,007.3 |
|
|
|
1,734.2 |
|
|
Latin America
|
|
|
822.2 |
|
|
|
718.0 |
|
|
|
666.7 |
|
|
Asia Pacific(a)
|
|
|
533.6 |
|
|
|
519.3 |
|
|
|
456.3 |
|
|
|
Consolidated
|
|
$ |
10,177.2 |
|
|
$ |
9,613.9 |
|
|
$ |
8,811.5 |
|
|
Segment operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
1,251.5 |
|
|
$ |
1,240.4 |
|
|
$ |
1,134.2 |
|
|
Europe
|
|
|
330.7 |
|
|
|
292.3 |
|
|
|
279.8 |
|
|
Latin America
|
|
|
202.8 |
|
|
|
185.4 |
|
|
|
168.9 |
|
|
Asia Pacific(a)
|
|
|
86.0 |
|
|
|
79.5 |
|
|
|
61.1 |
|
|
Corporate
|
|
|
(120.7 |
) |
|
|
(116.5 |
) |
|
|
(99.9 |
) |
|
|
Consolidated
|
|
$ |
1,750.3 |
|
|
$ |
1,681.1 |
|
|
$ |
1,544.1 |
|
|
(a) Includes Australia and Asia.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
272.3 |
|
|
$ |
261.4 |
|
|
$ |
246.4 |
|
|
Europe
|
|
|
61.2 |
|
|
|
95.7 |
|
|
|
71.1 |
|
|
Latin America
|
|
|
20.0 |
|
|
|
15.4 |
|
|
|
21.6 |
|
|
Asia Pacific(a)
|
|
|
20.9 |
|
|
|
20.9 |
|
|
|
20.0 |
|
|
Corporate
|
|
|
17.4 |
|
|
|
16.6 |
|
|
|
13.7 |
|
|
|
Consolidated
|
|
$ |
391.8 |
|
|
$ |
410.0 |
|
|
$ |
372.8 |
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
1.4 |
|
|
$ |
1.7 |
|
|
$ |
4.0 |
|
|
Europe
|
|
|
12.4 |
|
|
|
15.6 |
|
|
|
18.2 |
|
|
Latin America
|
|
|
.2 |
|
|
|
.2 |
|
|
|
.2 |
|
|
Asia Pacific(a)
|
|
|
.3 |
|
|
|
.2 |
|
|
|
.3 |
|
|
Corporate
|
|
|
286.0 |
|
|
|
290.9 |
|
|
|
348.7 |
|
|
|
Consolidated
|
|
$ |
300.3 |
|
|
$ |
308.6 |
|
|
$ |
371.4 |
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
372.7 |
|
|
$ |
371.5 |
|
|
$ |
345.0 |
|
|
Europe
|
|
|
30.2 |
|
|
|
64.5 |
|
|
|
54.6 |
|
|
Latin America
|
|
|
21.5 |
|
|
|
39.8 |
|
|
|
40.0 |
|
|
Asia Pacific(a)
|
|
|
12.4 |
|
|
|
(.8 |
) |
|
|
3.3 |
|
|
Corporate
|
|
|
7.9 |
|
|
|
.3 |
|
|
|
(60.5 |
) |
|
|
Consolidated
|
|
$ |
444.7 |
|
|
$ |
475.3 |
|
|
$ |
382.4 |
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
7,944.6 |
|
|
$ |
7,641.5 |
|
|
$ |
7,735.8 |
|
|
Europe
|
|
|
2,356.7 |
|
|
|
2,324.2 |
|
|
|
1,765.4 |
|
|
Latin America
|
|
|
450.6 |
|
|
|
411.1 |
|
|
|
341.2 |
|
|
Asia Pacific(a)
|
|
|
294.7 |
|
|
|
347.4 |
|
|
|
300.4 |
|
|
Corporate
|
|
|
5,336.4 |
|
|
|
5,619.0 |
|
|
|
6,362.2 |
|
|
Elimination entries
|
|
|
(5,808.5 |
) |
|
|
(5,781.3 |
) |
|
|
(6,590.8 |
) |
|
|
Consolidated
|
|
$ |
10,574.5 |
|
|
$ |
10,561.9 |
|
|
$ |
9,914.2 |
|
|
Additions to long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
320.4 |
|
|
$ |
167.4 |
|
|
$ |
185.6 |
|
|
Europe
|
|
|
42.3 |
|
|
|
59.7 |
|
|
|
35.5 |
|
|
Latin America
|
|
|
38.5 |
|
|
|
37.2 |
|
|
|
15.4 |
|
|
Asia Pacific(a)
|
|
|
14.4 |
|
|
|
9.9 |
|
|
|
10.1 |
|
|
Corporate
|
|
|
.4 |
|
|
|
4.4 |
|
|
|
.6 |
|
|
|
Consolidated
|
|
$ |
416.0 |
|
|
$ |
278.6 |
|
|
$ |
247.2 |
|
|
|
|
|
(a) |
|
Includes Australia and Asia. |
The Companys largest customer, Wal-Mart Stores, Inc. and
its affiliates, accounted for approximately 17% of consolidated
net sales during 2005, 14% in 2004, and 13% in 2003, comprised
principally of sales within the United States.
Supplemental geographic information is provided below for net
sales to external customers and long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
6,351.6 |
|
|
$ |
5,968.0 |
|
|
$ |
5,608.3 |
|
|
United Kingdom
|
|
|
836.9 |
|
|
|
859.6 |
|
|
|
740.2 |
|
|
Other foreign countries
|
|
|
2,988.7 |
|
|
|
2,786.3 |
|
|
|
2,463.0 |
|
|
|
Consolidated
|
|
$ |
10,177.2 |
|
|
$ |
9,613.9 |
|
|
$ |
8,811.5 |
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
6,880.9 |
|
|
$ |
7,036.2 |
|
|
$ |
7,122.0 |
|
|
United Kingdom
|
|
|
663.2 |
|
|
|
734.1 |
|
|
|
435.1 |
|
|
Other foreign countries
|
|
|
810.7 |
|
|
|
648.2 |
|
|
|
627.6 |
|
|
|
Consolidated
|
|
$ |
8,354.8 |
|
|
$ |
8,418.5 |
|
|
$ |
8,184.7 |
|
|
Supplemental product information is provided below for net sales
to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2005 |
|
2004 |
|
2003 |
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail channel cereal
|
|
$ |
2,587.7 |
|
|
$ |
2,404.5 |
|
|
$ |
2,304.7 |
|
|
Retail channel snacks
|
|
|
2,976.6 |
|
|
|
2,801.4 |
|
|
|
2,547.6 |
|
|
Other
|
|
|
1,243.5 |
|
|
|
1,163.4 |
|
|
|
1,102.0 |
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cereal
|
|
|
2,932.8 |
|
|
|
2,829.2 |
|
|
|
2,583.5 |
|
|
Convenience foods
|
|
|
436.6 |
|
|
|
415.4 |
|
|
|
273.7 |
|
|
Consolidated
|
|
$ |
10,177.2 |
|
|
$ |
9,613.9 |
|
|
$ |
8,811.5 |
|
|
|
|
Note 15 |
Supplemental financial statement data |
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
|
|
|
|
|
|
Consolidated Statement of Earnings |
|
2005 |
|
2004 |
|
2003 |
|
Research and development expense
|
|
$ |
181.0 |
|
|
$ |
148.9 |
|
|
$ |
126.7 |
|
Advertising expense
|
|
$ |
857.7 |
|
|
$ |
806.2 |
|
|
$ |
698.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows |
|
2005 |
|
2004 |
|
2003 |
|
Trade receivables
|
|
$ |
(86.2 |
) |
|
$ |
13.8 |
|
|
$ |
(36.7 |
) |
Other receivables
|
|
|
(25.4 |
) |
|
|
(39.5 |
) |
|
|
18.8 |
|
Inventories
|
|
|
(24.8 |
) |
|
|
(31.2 |
) |
|
|
(48.2 |
) |
Other current assets
|
|
|
(15.3 |
) |
|
|
(17.8 |
) |
|
|
.4 |
|
Accounts payable
|
|
|
156.4 |
|
|
|
63.4 |
|
|
|
84.8 |
|
Other current liabilities
|
|
|
23.6 |
|
|
|
(18.5 |
) |
|
|
25.3 |
|
|
Changes in operating assets and liabilities
|
|
$ |
28.3 |
|
|
$ |
(29.8 |
) |
|
$ |
44.4 |
|
|
44
|
|
|
|
|
|
|
|
|
|
(millions) |
|
|
|
|
|
Consolidated Balance Sheet |
|
2005 |
|
2004 |
|
Trade receivables
|
|
$ |
782.7 |
|
|
$ |
700.9 |
|
Allowance for doubtful accounts
|
|
|
(6.9 |
) |
|
|
(13.0 |
) |
Other receivables
|
|
|
103.3 |
|
|
|
88.5 |
|
|
|
Accounts receivable, net
|
|
$ |
879.1 |
|
|
$ |
776.4 |
|
|
Raw materials and supplies
|
|
$ |
188.6 |
|
|
$ |
188.0 |
|
Finished goods and materials in process
|
|
|
528.4 |
|
|
|
493.0 |
|
|
|
Inventories
|
|
$ |
717.0 |
|
|
$ |
681.0 |
|
|
Deferred income taxes
|
|
$ |
207.6 |
|
|
$ |
101.9 |
|
Other prepaid assets
|
|
|
173.7 |
|
|
|
145.1 |
|
|
|
Other current assets
|
|
$ |
381.3 |
|
|
$ |
247.0 |
|
|
Land
|
|
$ |
75.5 |
|
|
$ |
78.3 |
|
Buildings
|
|
|
1,458.8 |
|
|
|
1,504.7 |
|
Machinery and equipment
|
|
|
4,692.4 |
|
|
|
4,751.3 |
|
Construction in progress
|
|
|
237.3 |
|
|
|
159.6 |
|
Accumulated depreciation
|
|
|
(3,815.6 |
) |
|
|
(3,778.8 |
) |
|
|
Property, net
|
|
$ |
2,648.4 |
|
|
$ |
2,715.1 |
|
|
Goodwill
|
|
$ |
3,455.3 |
|
|
$ |
3,445.5 |
|
Other intangibles
|
|
|
1,485.8 |
|
|
|
1,488.3 |
|
|
-Accumulated amortization
|
|
|
(47.6 |
) |
|
|
(46.1 |
) |
Pension
|
|
|
629.8 |
|
|
|
689.8 |
|
Other
|
|
|
206.3 |
|
|
|
147.5 |
|
|
|
Other assets
|
|
$ |
5,729.6 |
|
|
$ |
5,725.0 |
|
|
Accrued income taxes
|
|
$ |
148.3 |
|
|
$ |
96.2 |
|
Accrued salaries and wages
|
|
|
276.5 |
|
|
|
270.2 |
|
Accrued advertising and promotion
|
|
|
320.9 |
|
|
|
322.0 |
|
Other
|
|
|
339.1 |
|
|
|
402.1 |
|
|
|
Other current liabilities
|
|
$ |
1,084.8 |
|
|
$ |
1,090.5 |
|
|
Nonpension postretirement benefits
|
|
$ |
74.5 |
|
|
$ |
269.7 |
|
Deferred income taxes
|
|
|
945.8 |
|
|
|
959.1 |
|
Other
|
|
|
405.1 |
|
|
|
337.3 |
|
|
|
Other liabilities
|
|
$ |
1,425.4 |
|
|
$ |
1,566.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
2005 |
|
2004 |
|
2003 |
|
Balance at beginning of year
|
|
$ |
13.0 |
|
|
$ |
15.1 |
|
|
$ |
16.0 |
|
Additions charged to expense
|
|
|
|
|
|
|
2.1 |
|
|
|
6.4 |
|
Doubtful accounts charged to reserve
|
|
|
(7.4 |
) |
|
|
(4.3 |
) |
|
|
(7.3 |
) |
Currency translation adjustments
|
|
|
1.3 |
|
|
|
.1 |
|
|
|
|
|
|
Balance at end of year
|
|
$ |
6.9 |
|
|
$ |
13.0 |
|
|
$ |
15.1 |
|
|
During 2005, the Company reclassified $578.9 million
attributable to its direct store-door (DSD) delivery system from
indefinite-lived intangibles to goodwill, net of an associated
deferred tax liability of $228.5 million. Prior periods
were likewise reclassified, resulting in a net increase to
goodwill of $350.4 million, a decrease to other intangibles
of $578.9 million, and a decrease to noncurrent deferred
income tax liabilities of $228.5 million.
Note 16 Subsequent events
In connection with the Companys 2005 stock repurchase
authorization, in November 2005, the Company repurchased
approximately 9.4 million common shares from the W.K.
Kellogg Foundation Trust (the Trust) for
$400 million in a privately negotiated transaction pursuant
to an agreement dated as of November 8, 2005 (the
2005 Agreement). The 2005 Agreement provided the
Trust with registration rights in certain circumstances for
additional common shares which the Trust might desire to sell
and provided the Company with rights to repurchase those
additional common shares.
In connection with the Companys 2006 stock repurchase
authorization, the Company entered into an agreement with the
Trust dated as of February 16, 2006 (the 2006
Agreement) to repurchase approximately 12.8 million
additional shares from the Trust for $550 million. The 2006
Agreement extinguished the registration and repurchase rights
under the 2005 Agreement upon the Companys repurchase of
those additional shares on February 21, 2006.
Refer to Issuer Purchases of Equity Securities table, included
herein under Part II, Item 5, for information on the
Companys common stock repurchase programs.
45
Managements Responsibility for Financial Statements
Management is responsible for the preparation of the
Companys consolidated financial statements and related
notes. Management believes that the consolidated financial
statements present the Companys financial position and
results of operations in conformity with accounting principles
that are generally accepted in the United States, using our best
estimates and judgments as required.
The independent registered public accounting firm audits the
Companys consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight
Board and provides an objective, independent review of the
fairness of reported operating results and financial position.
The Board of Directors of the Company has an Audit Committee
composed of four 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 vigorous internal
audit program that independently evaluates the adequacy and
effectiveness of these internal controls.
Managements Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of management,
including our chief executive officer and chief financial
officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in Internal
Control Integrated Framework, management
concluded that our internal control over financial reporting was
effective as of December 31, 2005. Our managements
assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which follows
on page 47.
James M. Jenness
Chairman and Chief Executive Officer
Jeffrey M. Boromisa
Senior Vice President, Chief Financial Officer
46
REPORT OF
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
To the Shareholders and Board of Directors
of Kellogg Company:
Introduction
We have completed integrated audits of Kellogg Companys
2005 and 2004 consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Our opinions based on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)1 present fairly, in
all material respects, the financial position of Kellogg Company
and its subsidiaries at December 31, 2005 and
January 1, 2005 and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control over Financial
Reporting, appearing under Item 8, that the Company
maintained effective internal control over financial reporting
as of December 31, 2005 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Battle Creek, Michigan
February 27, 2006
47
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
(a) The Company maintains disclosure controls and
procedures that are designed to ensure that information required
to be disclosed in the Companys Exchange Act reports is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer
and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure based on
managements interpretation of the definition of
disclosure controls and procedures, in
Rules 13a-15(e)
and 15d-15(e). In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable, rather than absolute, assurance of achieving the
desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of December 31, 2005, management carried out an
evaluation under the supervision and with the participation of
the Companys Chief Executive Officer and the
Companys Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure
controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective.
(b) Pursuant to Section 404 of the Sarbanes-Oxley Act
of 2002, the Company has included a report of managements
assessment of the design and effectiveness of its internal
control over financial reporting as part of this Annual Report
on Form 10-K. The
independent registered public accounting firm of
PricewaterhouseCoopers LLP also attested to, and reported on,
managements assessment of the internal control over
financial reporting. Managements report and the
independent registered public accounting firms attestation
report are included in the Companys 2005 financial
statements in Item 8 of this Report under the captions
entitled Managements Report on Internal Control over
Financial Reporting and Report of Independent
Registered Public Accounting Firm and are incorporated
herein by reference.
(c) During the last fiscal quarter, there have been no
changes in the Companys internal control over financial
reporting that have materially affected, or are reasonably
likely to materially affect, the Companys internal control
over financial reporting.
|
|
Item 9B. |
Other Information |
Not applicable.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
Directors Refer to the information in the
Companys Proxy Statement to be filed with the Securities
and Exchange Commission for the Annual Meeting of Share Owners
to be held on April 21, 2006 (the Proxy
Statement), under the caption Election of
Directors, which information is incorporated herein by
reference.
Identification and Members of Audit Committee Refer
to the information in the Proxy Statement under the caption
About the Board of Directors, which information is
incorporated herein by reference.
Audit Committee Financial Expert Refer to the
information in the Proxy Statement under the caption About
the Board of Directors, which information is incorporated
herein by reference.
Executive Officers of the Registrant Refer to
Executive Officers of the Registrant under
Item 1 at pages 3 through 5 of this Report.
For information concerning Section 16(a) of the Securities
Exchange Act of 1934, refer to the information under the caption
Security Ownership Section 16(a)
Beneficial Ownership Reporting Compliance of the Proxy
Statement, which information is incorporated herein by reference.
Code of Ethics for Chief Executive Officer, Chief Financial
Officer and Controller The Company has adopted a
Global Code of Ethics which applies to its chief executive
officer, chief financial officer, corporate controller and all
its other employees, and which can be found at
www.kelloggcompany.com. Any amendments or waivers to the Global
Code of Ethics applicable to the Companys chief executive
officer, chief financial officer or corporate controller may
also be found at www.kelloggcompany.com.
|
|
Item 11. |
Executive Compensation |
Refer to the information under the captions Executive
Compensation and About the Board of
Directors Non-Employee Director Compensation and
Benefits of the Proxy Statement, which is incorporated
herein by reference. See also the information under the caption
Report of the
48
Compensation Committee on Executive Compensation of the
Proxy Statement, which information is not incorporated by
reference.
|
|
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 and Securities Authorized for Issuance
Under Equity Compensation Plans of the Proxy Statement,
which information is incorporated herein by reference.
|
|
Item 13. |
Certain Relationships and Related Transactions |
Refer to the information under the captions Executive
Compensation and About the Board of
Directors Non-Employee Director Compensation and
Benefits of the Proxy Statement, which information is
incorporated herein by reference.
|
|
Item 14. |
Principal Accounting Fees and Services |
Refer to the information under the captions Report of the
Audit Committee Audit Fees, Report of
the Audit Committee Audit-Related Fees,
Report of the Audit Committee Tax Fees,
Report of the Audit Committee All Other
Fees, and Report of the Audit Committee
Preapproval Policies and Procedures of the Proxy
Statement, which information is incorporated herein by reference.
PART IV
|
|
Item 15. |
Exhibits, Financial Statements and Schedules |
The previous Consolidated Financial Statements and related
Notes, together with Managements Report on Internal
Control over Financial Reporting, and the Report thereon of
PricewaterhouseCoopers LLP dated February 27, 2006, are
included herein in Part II, Item 8.
(a) 1. Consolidated Financial Statements
Consolidated Statement of Earnings for the years ended
December 31, 2005, January 1, 2005 and
December 27, 2003.
Consolidated Statement of Shareholders Equity for the
years ended December 31, 2005, January 1, 2005 and
December 27, 2003.
Consolidated Balance Sheet at December 31, 2005 and
January 1, 2005.
Consolidated Statement of Cash Flows for the years ended
December 31, 2005, January 1, 2005 and
December 27, 2003.
Notes to Consolidated Financial Statements.
Managements Report on Internal Control over Financial
Reporting.
Report of Independent Registered Public Accounting Firm.
(a) 2. Consolidated Financial Statement Schedule
All financial statement schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or the notes thereto.
(a) 3. Exhibits required to be filed by
Item 601 of
Regulation S-K
The information called for by this Item is incorporated herein
by reference from the Exhibit Index on pages 52
through 55 of this Report.
49
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 17th day of February, 2006.
|
|
|
|
|
James M. Jenness |
|
Chairman of the Board 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/ James M. Jenness
James M. Jenness |
|
Chairman of the Board,
Chief Executive Officer and
Director (Principal Executive Officer) |
|
February 17, 2006 |
|
/s/ Jeffrey M. Boromisa
Jeffrey M. Boromisa |
|
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer) |
|
February 17, 2006 |
|
/s/ Alan R. Andrews
Alan R. Andrews |
|
Vice President and
Corporate Controller
(Principal Accounting Officer) |
|
February 17, 2006 |
|
*
Benjamin S. Carson Sr. |
|
Director |
|
February 17, 2006 |
|
*
John T. Dillon |
|
Director |
|
February 17, 2006 |
|
*
Claudio X. Gonzalez |
|
Director |
|
February 17, 2006 |
|
*
Gordon Gund |
|
Director |
|
February 17, 2006 |
|
*
Dorothy A. Johnson |
|
Director |
|
February 17, 2006 |
50
|
|
|
|
|
|
|
Name |
|
Capacity |
|
Date |
|
|
|
|
|
|
*
L. Daniel Jorndt |
|
Director |
|
February 17, 2006 |
|
*
Ann McLaughlin Korologos |
|
Director |
|
February 17, 2006 |
|
*
A.D. David Mackay |
|
Director |
|
February 17, 2006 |
|
*
William D. Perez |
|
Director |
|
February 17, 2006 |
|
*
William C. Richardson |
|
Director |
|
February 17, 2006 |
|
*
John L. Zabriskie |
|
Director |
|
February 17, 2006 |
|
*By: |
|
/s/ Gary H. Pilnick
Gary H. Pilnick |
|
Attorney-in-Fact |
|
February 17, 2006 |
51
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic(E), | |
|
|
|
|
Paper(P) or | |
Exhibit | |
|
|
|
Incorp. By | |
No. | |
|
Description |
|
Ref.(IBRF) | |
| |
|
|
|
| |
|
2.01 |
|
|
Agreement and Plan of Restructuring and Merger dated as of
October 26, 2000 between Flowers Industries, Inc., Kellogg
Company and Kansas Merger Subsidiary, Inc., incorporated by
reference to Exhibit 2.02 to the Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 30, 2000, Commission file number 1-4171. |
|
|
IBRF |
|
|
2.02 |
|
|
Agreement and Plan of Merger dated as of October 26, 2000
between Keebler Foods Company, Kellogg Company and
FK Acquisition Corporation, incorporated by reference to
Exhibit 2.03 to the Companys Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30,
2000, Commission file number 1-4171. |
|
|
IBRF |
|
|
3.01 |
|
|
Amended Restated Certificate of Incorporation of Kellogg
Company, incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on Form S-8, file
number 333-56536. |
|
|
IBRF |
|
|
3.02 |
|
|
Bylaws of Kellogg Company, as amended, incorporated by reference
to Exhibit 3.02 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 28, 2002,
file number 1-4171. |
|
|
IBRF |
|
|
4.01 |
|
|
Fiscal Agency Agreement dated as of January 29, 1997,
between the Company and Citibank, N.A., Fiscal Agent,
incorporated by reference to Exhibit 4.01 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, Commission file
number 1-4171. |
|
|
IBRF |
|
|
4.02 |
|
|
Five-Year Credit Facility dated as of November 24, 2004
with twenty-three lenders, JPMorgan Chase Bank, N.A. as
Administrative Agent, JPMorgan Europe Limited, as London Agent,
JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Agent,
JPMorgan Australia Limited, as Australian Agent, Barclays Bank
PLC, as Syndication Agent and Bank of America, N.A., Citibank,
N.A. and Suntrust Bank, as Co-Documentation Agents, incorporated
by reference to Exhibit 4.02 to the Companys Annual
Report on Form 10-K for the fiscal year ended
January 1, 2005, Commission file number 1-4171. |
|
|
IBRF |
|
|
4.03 |
|
|
Indenture dated August 1, 1993, between the Company and
Harris Trust and Savings Bank, incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on
Form S-3, Commission file number 33-49875. |
|
|
IBRF |
|
|
4.04 |
|
|
Form of Kellogg Company
47/8% Note Due
2005, incorporated by reference to Exhibit 4.06 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 1999, Commission file
number 1-4171. |
|
|
IBRF |
|
|
4.05 |
|
|
Indenture and Supplemental Indenture dated March 15 and
March 29, 2001, respectively, between Kellogg Company and
BNY Midwest Trust Company, including the forms of
6.00% notes due 2006, 6.60% notes due 2011 and
7.45% Debentures due 2031, incorporated by reference to
Exhibit 4.01 and 4.02 to the Companys Quarterly
Report on Form 10-Q for the quarter ending March 31,
2001, Commission file number 1-4171. |
|
|
IBRF |
|
|
4.06 |
|
|
Form of 2.875% Senior Notes due 2008 issued under the
Indenture and Supplemental Indenture described in
Exhibit 4.05, incorporated by reference to
Exhibit 4.01 to the Companys Current Report on
Form 8-K dated June 5, 2003, Commission file
number 1-4171. |
|
|
IBRF |
|
|
4.07 |
|
|
Agency Agreement dated November 28, 2005, between Kellogg
Europe Company Limited, Kellogg Company, HSBC Bank and HSBC
Institutional Trust Services (Ireland) Limited,
incorporated by reference to Exhibit 4.1 of the
Companys Current Report in form 8-K dated
November 28, 2005, Commission file number 1-4171. |
|
|
IBRF |
|
|
4.08 |
|
|
Canadian Guarantee dated November 28, 2005, incorporated by
reference to Exhibit 4.2 of the Companys Current
Report on Form 8-K dated November 28, 2005, Commission
file number 1-4171. |
|
|
IBRF |
|
|
10.01 |
|
|
Kellogg Company Excess Benefit Retirement Plan, incorporated by
reference to Exhibit 10.01 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 1983, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.02 |
|
|
Kellogg Company Supplemental Retirement Plan, incorporated by
reference to Exhibit 10.05 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 1990, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.03 |
|
|
Kellogg Company Supplemental Savings and Investment Plan, as
amended and restated as of January 1, 2003, incorporated by
reference to Exhibit 10.03 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 28, 2002, Commission file number 1-4171.* |
|
|
IBRF |
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic(E), | |
|
|
|
|
Paper(P) or | |
Exhibit | |
|
|
|
Incorp. By | |
No. | |
|
Description |
|
Ref.(IBRF) | |
| |
|
|
|
| |
|
10.04 |
|
|
Kellogg Company International Retirement Plan, incorporated by
reference to Exhibit 10.05 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.05 |
|
|
Kellogg Company Executive Survivor Income Plan, incorporated by
reference to Exhibit 10.06 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 1985, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.06 |
|
|
Kellogg Company Key Executive Benefits Plan, incorporated by
reference to Exhibit 10.09 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 1991, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.07 |
|
|
Kellogg Company Key Employee Long Term Incentive Plan,
incorporated by reference to Exhibit 10.08 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.08 |
|
|
Amended and Restated Deferred Compensation Plan for Non-Employee
Directors, incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended March 29, 2003, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.09 |
|
|
Kellogg Company Senior Executive Officer Performance Bonus Plan,
incorporated by reference to Exhibit 10.10 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.10 |
|
|
Kellogg Company 2000 Non-Employee Director Stock Plan,
incorporated by reference to Exhibit 4.3 to the
Companys Registration Statement on Form S-8, file
number 333-56536.* |
|
|
IBRF |
|
|
10.11 |
|
|
Kellogg Company 2001 Long-Term Incentive Plan, as amended and
restated as of February 20, 2003, incorporated by reference
to Exhibit 10.11 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 28, 2002.* |
|
|
IBRF |
|
|
10.12 |
|
|
Kellogg Company Bonus Replacement Stock Option Plan,
incorporated by reference to Exhibit 10.12 to the
Companys December 31, 1997, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.13 |
|
|
Kellogg Company Executive Compensation Deferral Plan
incorporated by reference to Exhibit 10.13 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.14 |
|
|
Agreement between the Company and Alan F. Harris, incorporated
by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 27, 2003, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.15 |
|
|
Amendment to Agreement between the Company and Alan F. Harris,
incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended September 25, 2004, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.16 |
|
|
Agreement between the Company and David Mackay, incorporated by
reference to Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 27, 2003, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.17 |
|
|
Retention Agreement between the Company and David Mackay,
incorporated by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-Q for the fiscal
period ended September 25, 2004, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.18 |
|
|
Employment Letter between the Company and James M. Jenness,
incorporated by reference to Exhibit 10.18 to the
Companys Annual Report in Form 10-K for the fiscal
year ended January 1, 2005, Commission file
number 1-4171. |
|
|
IBRF |
|
|
10.19 |
|
|
Separation Agreement between the Company and Carlos M.
Gutierrez, incorporated by reference to Exhibit 10.19 of
the Companys Annual Report in Form 10-K for the
Companys fiscal year ended January 1, 2005,
Commission file number 1-4171. |
|
|
IBRF |
|
|
10.20 |
|
|
Agreement between the Company and other executives, incorporated
by reference to Exhibit 10.05 of the Companys
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.21 |
|
|
Stock Option Agreement between the Company and James Jenness,
incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on Form S-8, file
number 333-56536.* |
|
|
IBRF |
|
|
10.22 |
|
|
Kellogg Company 2002 Employee Stock Purchase Plan, as amended
and restated as of December 5, 2002, incorporated by
reference to Exhibit 10.21 of the Companys Annual
Report on Form 10-K for the fiscal year ended
December 28, 2002, Commission file number 1-4171.* |
|
|
IBRF |
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic(E), | |
|
|
|
|
Paper(P) or | |
Exhibit | |
|
|
|
Incorp. By | |
No. | |
|
Description |
|
Ref.(IBRF) | |
| |
|
|
|
| |
|
10.23 |
|
|
Kellogg Company Executive Stock Purchase Plan, incorporated by
reference to Exhibit 10.25 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.24 |
|
|
Kellogg Company Senior Executive Annual Incentive Plan,
incorporated by reference to Exhibit 10.26 to the
Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2001, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.25 |
|
|
Kellogg Company 2003 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.28 of the Companys Annual
Report in Form 10-K for the Companys fiscal year
ended January 1, 2005, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.26 |
|
|
Kellogg Company Senior Executive Annual Incentive Plan,
incorporated by reference to Annex II of the Companys
Board of Directors proxy statement for the annual meeting
of shareholders to be held on April 21, 2006.* |
|
|
IBRF |
|
|
10.27 |
|
|
Kellogg Company Severance Plan, incorporated by reference to
Exhibit 10.25 of the Companys Annual Report on
Form 10-K for the fiscal year ended December 28, 2002,
Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.28 |
|
|
Form of Non-Qualified Option Agreement for Senior Executives
under 2003 Long-Term Incentive Plan, incorporated by reference
to Exhibit 10.4 to the Companys Quarterly Report on
Form 10-Q for the fiscal period ended September 25,
2004, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.29 |
|
|
Form of Restricted Stock Grant Award under 2003 Long-Term
Incentive Plan, incorporated by reference to Exhibit 10.5
to the Companys Quarterly Report on Form 10-Q for the
fiscal period ended September 25, 2004, Commission file
number 1-4171.* |
|
|
IBRF |
|
|
10.30 |
|
|
Form of Non-Qualified Option Agreement for Non-Employee Director
under 2000 Non-Employee Director Stock Plan, incorporated by
reference to Exhibit 10.6 to the Companys Quarterly
Report on Form 10-Q for the fiscal period ended
September 25, 2004, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.31 |
|
|
Description of 2004 Senior Executive Annual Incentive Plan
factors, incorporated by reference to the Companys Current
Report on Form 8-K dated February 4, 2005, Commission
file number 1-4171 (the 2005 Form 8-K).* |
|
|
IBRF |
|
|
10.32 |
|
|
Annual Incentive Plan, incorporated by reference to
Exhibit 10.34 of the Companys Annual Report in
Form 10-K for the Companys fiscal year ended
January 1, 2005, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.33 |
|
|
Description of Annual Incentive Plan factors, incorporated by
reference to the 2005 Form 8-K.* |
|
|
IBRF |
|
|
10.34 |
|
|
2005-2007 Executive Performance Plan, incorporated by reference
to Exhibit 10.36 of the Companys Annual Report in
Form 10-K for the Companys fiscal year ended
January 1, 2005, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.35 |
|
|
Description of Changes to the Compensation of Non-Employee
Directors, incorporated by reference to the 2005 Form 8-K.* |
|
|
IBRF |
|
|
10.36 |
|
|
2003-2005 Executive Performance Plan, incorporated by reference
to Exhibit 10.38 of the Companys Annual Report in
Form 10-K for the Companys fiscal year ended
January 1, 2005, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.37 |
|
|
First Amendment to the Key Executive Benefits Plan, incorporated
by reference to Exhibit 10.39 of the Companys Annual
Report in Form 10-K for the Companys fiscal year
ended January 1, 2005, Commission file number 1-4171.* |
|
|
IBRF |
|
|
10.38 |
|
|
2006-2008 Executive Performance Plan, incorporated by reference
to Exhibit 10.1 of the Companys Current Report on
Form 8-K dated February 17, 2006, Commission file
number 1-4171 (the 2006 Form 8-K).* |
|
|
IBRF |
|
|
10.39 |
|
|
Compensation changes for named executive officers, incorporated
by reference to the 2006 Form 8-K. |
|
|
IBRF |
|
|
10.40 |
|
|
Restricted Stock Grant/Non-Compete Agreement between the Company
and John Bryant, incorporated by reference to Exhibit 10.1
of the Companys Quarterly Report on Form 10-Q for the
period ended April 2, 2005, Commission file
number 1-4171 (the 2005 Q1
Form 10-Q).* |
|
|
IBRF |
|
|
10.41 |
|
|
Restricted Stock Grant/Non-Compete Agreement between the Company
and Jeff Montie, incorporated by reference to
Exhibit 10.2 of the 2005 Q1 Form 10-Q.* |
|
|
IBRF |
|
|
10.42 |
|
|
Executive Survivor Income Plan. |
|
|
E |
|
|
21.01 |
|
|
Domestic and Foreign Subsidiaries of the Company. |
|
|
E |
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic(E), | |
|
|
|
|
Paper(P) or | |
Exhibit | |
|
|
|
Incorp. By | |
No. | |
|
Description |
|
Ref.(IBRF) | |
| |
|
|
|
| |
|
23.01 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
E |
|
|
24.01 |
|
|
Powers of Attorney authorizing Gary H. Pilnick to execute
the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2005, on behalf of the Board
of Directors, and each of them. |
|
|
E |
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certification by James M.
Jenness. |
|
|
E |
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certification by Jeffrey M.
Boromisa. |
|
|
E |
|
|
32.1 |
|
|
Section 1350 Certification by James M. Jenness. |
|
|
E |
|
|
32.2 |
|
|
Section 1350 Certification by Jeffrey M. Boromisa. |
|
|
E |
|
|
|
* |
A management contract or compensatory plan required to be filed
with this Report. |
The Company agrees 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 the Company and its
Subsidiaries and any of its unconsolidated Subsidiaries for
which Financial Statements are required to be filed.
The Company will furnish any of its share owners a copy of any
of the above Exhibits not included herein upon the written
request of such share owner and the payment to the Company of
the reasonable expenses incurred by the Company in furnishing
such copy or copies.
55