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Section 1: 10-Q (10-Q)

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false--01-02Q12020000005506770000000070000000.560.570.250.25260000000015000000P3YThe number of sharoes earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year vesting period. 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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number 1-4171
KELLOGG COMPANY
State of Incorporation—
Delaware
  
IRS Employer Identification No.
38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant’s telephone number: 269-961-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.25 par value per share
K
New York Stock Exchange
1.750% Senior Notes due 2021
K 21
New York Stock Exchange
0.800% Senior Notes due 2022
K 22A
New York Stock Exchange
1.000% Senior Notes due 2024
K 24
New York Stock Exchange
1.250% Senior Notes due 2025
K 25
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes      No  
Common Stock outstanding as of March 28, 2020342,670,027 shares
 


Table of Contents

KELLOGG COMPANY
INDEX
 
 
 
Page
 
 
 
 
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Controls and Procedures
 
 
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Exhibits
 
 



Table of Contents

Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
 
March 28,
2020 (unaudited)
December 28,
2019
Current assets
 
 
Cash and cash equivalents
$
1,016

$
397

Accounts receivable, net
1,748

1,576

Inventories
1,189

1,226

Other current assets
337

232

Total current assets
4,290

3,431

Property, net
3,440

3,612

Operating lease right-of-use assets
596

541

Goodwill
5,772

5,861

Other intangibles, net
2,503

2,576

Investments in unconsolidated entities
402

404

Other assets
1,237

1,139

Total assets
$
18,240

$
17,564

Current liabilities
 
 
Current maturities of long-term debt
$
626

$
620

Notes payable
657

107

Accounts payable
2,329

2,387

Current operating lease liabilities
112

114

Accrued advertising and promotion
672

641

Other current liabilities
1,199

909

Total current liabilities
5,595

4,778

Long-term debt
7,163

7,195

Operating lease liabilities
474

433

Deferred income taxes
592

596

Pension liability
689

705

Other liabilities
515

543

Commitments and contingencies


Equity
 
 
Common stock, $.25 par value
105

105

Capital in excess of par value
911

921

Retained earnings
8,010

7,859

Treasury stock, at cost
(4,625
)
(4,690
)
Accumulated other comprehensive income (loss)
(1,727
)
(1,448
)
Total Kellogg Company equity
2,674

2,747

Noncontrolling interests
538

567

Total equity
3,212

3,314

Total liabilities and equity
$
18,240

$
17,564


See accompanying Notes to Consolidated Financial Statements.


3

Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
 
Quarter ended
(unaudited)
March 28,
2020
March 30,
2019
Net sales
$
3,412

$
3,522

Cost of goods sold
2,268

2,415

Selling, general and administrative expense
685

726

Operating profit
459

381

Interest expense
64

74

Other income (expense), net
51

52

Income before income taxes
446

359

Income taxes
94

72

Earnings (loss) from unconsolidated entities
(2
)
(2
)
Net income
350

285

Net income attributable to noncontrolling interests
3

3

Net income attributable to Kellogg Company
$
347

$
282

Per share amounts:
 
 
Basic earnings
$
1.01

$
0.82

Diluted earnings
$
1.01

$
0.82

Average shares outstanding:
 
 
Basic
342

342

Diluted
344

343

Actual shares outstanding at period end
343

340


See accompanying Notes to Consolidated Financial Statements.


4

Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(millions)

Quarter ended
March 28, 2020
(unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income
 
 
$
350

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments:
 
 
 
Foreign currency translation adjustments during period
$
(241
)
$
(20
)
(261
)
Cash flow hedges:
 
 
 
Unrealized gain (loss)
(65
)
17

(48
)
Reclassification to net income
2


2

Postretirement and postemployment benefits:
 
 
 
Reclassification to net income:
 
 
 
Net experience (gain) loss
(1
)

(1
)
Available-for-sale securities:
 
 
 
Unrealized gain (loss)
(3
)

(3
)
Other comprehensive income (loss)
$
(308
)
$
(3
)
$
(311
)
Comprehensive income
 
 
$
39

Net Income attributable to noncontrolling interests
 
 
3

Other comprehensive income (loss) attributable to noncontrolling interests
 
 
(32
)
Comprehensive income attributable to Kellogg Company
 
 
$
68








 
Quarter ended
March 30, 2019
(unaudited)
Pre-tax
amount
Tax (expense)
benefit
After-tax
amount
Net income
 
 
$
285

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
$
66

$
(10
)
56

Cash flow hedges:
 
 
 
Reclassification to net income
1


1

Postretirement and postemployment benefits:
 
 
 
Reclassification to net income:
 
 
 
Net experience (gain) loss
(1
)

(1
)
Available-for-sale securities:
 
 
 
Unrealized gain (loss)
2


2

Other comprehensive income (loss)
$
68

$
(10
)
$
58

Comprehensive income
 
 
$
343

Net Income attributable to noncontrolling interests
 
 
3

Other comprehensive income (loss) attributable to noncontrolling interests
 
 
3

Comprehensive income attributable to Kellogg Company
 
 
$
337


See accompanying Notes to Consolidated Financial Statements.

5

Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
 
 
Quarter ended March 28, 2020
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Kellogg
Company
equity
Non-controlling
interests
Total
equity
(unaudited)
shares
amount
shares
amount
Balance, December 28, 2019
421

$
105

$
921

$
7,859

79

$
(4,690
)
$
(1,448
)
$
2,747

$
567

$
3,314

Net income
 
 
 
347

 
 
 
347

3

350

Dividends declared ($0.57 per share)
 
 
 
(195
)
 
 
 
(195
)
 
(195
)
Other comprehensive income
 
 
 
 
 
 
(279
)
(279
)
(32
)
(311
)
Stock compensation
 
 
19

 
 
 
 
19

 
19

Stock options exercised and other
 
 
(29
)
(1
)
(1
)
65

 
35

 
35

Balance, March 28, 2020
421

$
105

$
911

$
8,010

78

$
(4,625
)
$
(1,727
)
$
2,674

$
538

$
3,212

 
 
 
 
 
 
 
 
 
 
 

 
Quarter ended March 30, 2019
 
 
Common
stock
Capital in
excess of
par value
Retained
earnings
 
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Kellogg
Company
equity
Non-controlling
interests
Total
equity
(unaudited)
shares
amount
shares
amount
Balance, December 29, 2018
421

$
105

$
895

$
7,652

77

$
(4,551
)
$
(1,500
)
$
2,601

$
558

$
3,159

Common stock repurchases
 
 
 
 
4

(220
)
 
(220
)
 
(220
)
Net income
 
 
 
282

 
 
 
282

3

285

Dividends declared ($0.56 per share)
 
 
 
(192
)
 
 
 
(192
)
 
(192
)
Other comprehensive income
 
 
 
 
 
 
55

55

3

58

Reclassification of tax effects relating to U.S. tax reform
 
 
 
22

 
 
(22
)

 

Stock compensation
 
 
13

 
 
 
 
13

 
13

Stock options exercised and other
 
 
(31
)
(2
)
(1
)
27

 
(6
)
 
(6
)
Balance, March 30, 2019
421

$
105

$
877

$
7,762

80

$
(4,744
)
$
(1,467
)
$
2,533

$
564

$
3,097

 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Consolidated Financial Statements.



6

Table of Contents

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
 
Quarter ended
(unaudited)
March 28,
2020
March 30,
2019
Operating activities
 
 
Net income
$
350

$
285

Adjustments to reconcile net income to operating cash flows:
 
 
Depreciation and amortization
117

124

Postretirement benefit plan expense (benefit)
(39
)
(38
)
Deferred income taxes
8

7

Stock compensation
19

13

Other
(11
)
(8
)
Postretirement benefit plan contributions
(6
)
(5
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
Trade receivables
(194
)
(229
)
Inventories
1

12

Accounts payable
44

(16
)
All other current assets and liabilities
102

(75
)
Net cash provided by (used in) operating activities
391

70

Investing activities
 
 
Additions to properties
(112
)
(148
)
Acquisition of cost method investments
(3
)

Purchases of available for sale securities
(65
)
(7
)
Sales of available for sale securities
5

7

Other
(27
)
(15
)
Net cash provided by (used in) investing activities
(202
)
(163
)
Financing activities
 
 
Net issuances (reductions) of notes payable
549

429

Reductions of long-term debt
(3
)

Net issuances of common stock
46

7

Common stock repurchases

(220
)
Cash dividends
(195
)
(192
)
Collateral received on derivative instruments
80


Net cash provided by (used in) financing activities
477

24

Effect of exchange rate changes on cash and cash equivalents
(47
)
20

Increase (decrease) in cash and cash equivalents
619

(49
)
Cash and cash equivalents at beginning of period
397

321

Cash and cash equivalents at end of period
$
1,016

$
272

 
 
 
Supplemental cash flow disclosures
 
 
Interest paid
$
8

$
8

Income taxes paid
$
18

$
79

 
 
 
Supplemental cash flow disclosures of non-cash investing activities:
 
 
   Additions to properties included in accounts payable
$
87

$
122

See accompanying Notes to Consolidated Financial Statements.

7

Table of Contents

Notes to Consolidated Financial Statements
for the quarter ended March 28, 2020 (unaudited)
Note 1 Accounting policies

Basis of presentation
The unaudited interim financial information of Kellogg Company (the Company) included in this report reflects all adjustments, all of which are of a normal and recurring nature, that management believes are necessary for a fair statement of the results of operations, comprehensive income, financial position, equity and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying footnotes within the Company’s 2019 Annual Report on Form 10-K.

The condensed balance sheet information at December 28, 2019 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarter ended March 28, 2020 are not necessarily indicative of the results to be expected for other interim periods or the full year.

Accounts payable
The Company has agreements with certain third parties to provide accounts payable tracking systems which facilitates participating suppliers’ ability to monitor and, if elected, sell payment obligations from the Company to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s goal in entering into these agreements is to capture overall supplier savings, in the form of payment terms or vendor funding, created by facilitating suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. We have no economic interest in the sale of these suppliers’ receivables and no direct financial relationship with the financial institutions concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under these arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this agreement for those payment obligations that have been sold by suppliers. The payment of these obligations by the Company is included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of March 28, 2020, $843 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $639 million of those payment obligations to participating financial institutions. As of December 28, 2019, $812 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system, and participating suppliers had sold $605 million of those payment obligations to participating financial institutions.

New accounting standards adopted in the period

Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company adopted the ASU in the first quarter of 2020 and elected to apply it prospectively. The adoption did not have a material impact to the Company's Consolidated Financial Statements.

Accounting standards to be adopted in future periods

Compensation Retirement Benefits. In August 2018, the FASB issued ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removed disclosures that no longer are considered cost beneficial, clarified the specific requirements of disclosures, and added disclosure requirements identified as relevant. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company is currently assessing when to adopt the ASU and the impact of adoption.
 


8

Table of Contents

Note 2 Sale of accounts receivable
The Company has a program in which a discrete group of customers are allowed to extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program).

The Company has two Receivable Sales Agreements (Monetization Programs) described below, which are intended to directly offset the impact the Extended Terms Program would have on the days-sales-outstanding (DSO) metric that is critical to the effective management of the Company's accounts receivable balance and overall working capital. The Monetization Programs are designed to effectively offset the impact on working capital of the Extended Terms Program. The Monetization Programs sell, on a revolving basis, certain trade accounts receivable invoices to third party financial institutions. Transfers under these agreements are accounted for as sales of receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. The Monetization Programs provide for the continuing sale of certain receivables on a revolving basis until terminated by either party; however the maximum receivables that may be sold at any time is $1,033 million

The Company has no retained interest in the receivables sold, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of March 28, 2020 and December 28, 2019 for these agreements as the fair value of these servicing arrangements as well as the fees earned were not material to the financial statements.
Accounts receivable sold of $930 million and $774 million remained outstanding under these arrangements as of March 28, 2020 and December 28, 2019, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on sale of receivables was $6 million and $8 million for the quarters ended March 28, 2020 and March 30, 2019, respectively. The recorded loss is included in Other income and expense (OIE).

Other programs
Additionally, from time to time certain of the Company's foreign subsidiaries will transfer, without recourse, accounts receivable invoices of certain customers to financial institutions. These transactions are accounted for as sales of the receivables resulting in the receivables being de-recognized from the Consolidated Balance Sheet. Accounts receivable sold of $23 million and $89 million remained outstanding under these programs as of March 28, 2020 and December 28, 2019, respectively. The proceeds from these sales of receivables are included in cash from operating activities in the Consolidated Statement of Cash Flows in the period of sale. The recorded net loss on the sale of these receivables is included in OIE and is not material.

Note 3 Divestiture
On July 28, 2019, the Company completed its sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero International S.A. (“Ferrero”) for approximately $1.3 billion in cash, subject to a working capital adjustment mechanism.  Both the total assets and net assets of the businesses were approximately $1.3 billion, resulting in a net pre-tax gain of $38 million during the third quarter of 2019, recorded in Other income and (expense), after including related costs to sell of $14 million. Additionally, the Company recognized curtailment gains related to the divestiture totaling $17 million in our U.S. pension and nonpension postretirement plans. The operating results for these businesses were primarily included in the North America reporting segment prior to the sale. Proceeds from the divestiture were used primarily to redeem $1.0 billion of debt during the third quarter of 2019.

In connection with the sale, the Company entered into a transition services agreement (TSA) with Ferrero, under which the Company will provide certain services to Ferrero to help facilitate an orderly transition of the businesses following the sale. In return for these services, Ferrero is required to pay certain agreed upon fees that are designed to reimburse the Company for certain costs incurred by the Company in providing such services, plus specified nominal margins. The TSA provides for a term of services starting at the sale completion date and continuing for a period of up to 18 months.


9

Table of Contents

Note 4 Goodwill and Other intangible assets

Goodwill and Intangible Assets
Changes in the carrying amount of goodwill, intangible assets subject to amortization, consisting primarily of customer relationships, and indefinite-lived intangible assets, consisting of brands and distribution agreements, are presented in the following tables:

Carrying amount of goodwill
(millions)
North
America
Europe
Latin
America
AMEA
Consoli-
dated
December 28, 2019
$
4,422

$
347

$
213

$
879

$
5,861

Currency translation adjustment
(3
)
(12
)
(35
)
(39
)
(89
)
March 28, 2020
$
4,419

$
335

$
178

$
840

$
5,772



Intangible assets subject to amortization
Gross carrying amount
 
 
 
 
 
(millions)
North
America
Europe
Latin
America
AMEA
Consoli-
dated
December 28, 2019
$
64

$
41

$
60

$
429

$
594

Currency translation adjustment


(12
)
(7
)
(19
)
March 28, 2020
$
64

$
41

$
48

$
422

$
575

 
 
 
 
 
 
Accumulated Amortization
 
 
 
 
 
December 28, 2019
$
31

$
21

$
15

$
34

$
101

Amortization
1

1

1

4

7

Currency translation adjustment


(3
)

(3
)
March 28, 2020
$
32

$
22

$
13

$
38

$
105

 
 
 
 
 
 
Intangible assets subject to amortization, net
 
 
 
 
 
December 28, 2019
$
33

$
20

$
45

$
395

$
493

Amortization
(1
)
(1
)
(1
)
(4
)
(7
)
Currency translation adjustment


(9
)
(7
)
(16
)
March 28, 2020
$
32

$
19

$
35

$
384

$
470


For intangible assets in the preceding table, amortization was $7 million for each of the quarters ended March 28, 2020 and March 30, 2019. The currently estimated aggregate annual amortization expense for full-year 2020 is approximately $28 million.
Intangible assets not subject to amortization
(millions)
North
America
Europe
Latin
America
AMEA
Consoli-
dated
December 28, 2019
$
1,238

$
392

$
70

$
383

$
2,083

Currency translation adjustment

(1
)
(14
)
(35
)
(50
)
March 28, 2020
$
1,238

$
391

$
56

$
348

$
2,033




10

Table of Contents

Note 5 Restructuring Programs
The Company views its restructuring programs as part of its operating principles to provide greater visibility in achieving its long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a 3 to 5-year period of completion. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.

During the second quarter of 2019, the Company announced a reorganization plan for the European reportable segment designed to simplify the organization, increase organizational efficiency, and enhance key processes. The overall project is expected to be substantially completed by the end of fiscal year 2020.
The project is expected to result in cumulative pretax net charges of approximately $40 million, including certain non-cash credits. Cash costs are expected to be approximately $50 million. The total expected charges will include severance and other termination benefits and charges related to relocation, third party legal and consulting fees, and contract termination costs.
During the quarter ended March 28, 2020, the Company recorded total charges of $1 million related to this initiative. These charges were recorded in SG&A expense. Since inception, the Company has recognized total charges, including non-cash credits, of $39 million attributed to this initiative.
Additionally during the second quarter of 2019, the Company announced a reorganization plan which primarily impacted the North America reportable segment. The reorganization plan was designed to simplify the organization that supports the remaining North America reportable segment after the divestiture and related transition. The overall project is expected to be substantially completed by the end of fiscal year 2020.
The overall project is expected to result in cumulative pretax charges of approximately $30 million. Cash costs are expected to approximate the pretax charges. Total expected charges will include severance and other termination benefits and charges related to third party consulting fees.
The charges related to this initiative were not material during the quarter ended March 28, 2020. These charges were recorded in SG&A expense. Since inception, the Company has recognized total charges of $21 million attributed to this initiative.
Project K
As of the end of 2019, the Company completed implementation of all Project K initiatives. Total project charges, after-tax cash costs and annual savings delivered by Project K were in line with expectations.

During the quarter ended March 30, 2019, the Company recorded total charges of $8 million related to Project K

The tables below provide the details for charges incurred during the quarters ended March 28, 2020 and March 30, 2019 and program costs to date for all programs currently active as of March 28, 2020.

11

Table of Contents

 
Quarter ended
 
Program costs to date
(millions)
March 28, 2020
March 30, 2019
 
March 28, 2020
Employee related costs
$

$
(3
)
 
$
50

Pension curtailment (gain) loss, net


 
(5
)
Asset related costs

3

 

Other costs
1

8

 
15

Total
$
1

$
8

 
$
60

 
 
 
 
 
 
Quarter ended
 
Program costs to date
(millions)
March 28, 2020
March 30, 2019
 
March 28, 2020
North America
$
(1
)
$
4

 
$
20

Europe
1

1

 
39

Latin America

2

 

AMEA

1

 

Corporate
1


 
1

Total
$
1

$
8

 
$
60



During the quarter ended March 28, 2020, the Company recorded total net charges of $1 million across all restructuring programs. These charges were in SG&A expense.
During the quarter ended March 30, 2019, the Company recorded total net charges of $8 million across all restructuring programs. The charges were comprised of $6 million recorded in COGS and $2 million recorded in SG&A expense.
Employee related costs consist primarily of severance and related benefits. Pension curtailment (gain) loss consists of curtailment gains or losses that resulted from project initiatives. Asset related costs consist primarily of accelerated depreciation and asset write-offs. Other costs consist of third-party incremental costs related to the development and implementation of enhanced global structures and capabilities.
At March 28, 2020 total project reserves were $22 million, related to severance payments and other costs of which a substantial portion will be paid in 2020. The following table provides details for exit cost reserves related to the European and North American reorganizations described above.
 
Employee
Related
Costs
Pension curtailment (gain) loss, net
Other
Costs
Total
Liability as of December 28, 2019
$
37

$

$
1

$
38

2020 restructuring charges


1

1

Cash payments
(15
)

(2
)
(17
)
Non-cash charges and other




Liability as of March 28, 2020
$
22

$

$

$
22



Note 6 Equity

Earnings per share
Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares consist principally of employee stock options issued by the Company, restricted stock units, and to a lesser extent, certain contingently issuable performance shares. There were 7 million and 14 million anti-dilutive potential common shares excluded from the

12

Table of Contents

reconciliation for the quarters ended March 28, 2020 and March 30, 2019, respectively. Please refer to the Consolidated Statement of Income for basic and diluted earnings per share for the quarters ended March 28, 2020 and March 30, 2019.

Share repurchases
In February 2020, the board of directors approved a new authorization to repurchase up to $1.5 billion of our common stock through December 2022. As of March 28, 2020, $1.5 billion remains available under the authorization.
During the quarter ended March 28, 2020, the Company did not repurchase any shares of common stock. During the quarter ended March 30, 2019, the Company repurchased approximately 4 million shares of common stock for a total of $220 million.

Comprehensive income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income consists of foreign currency translation adjustments, fair value adjustments associated with cash flow hedges and adjustments for net experience losses and prior service cost related to employee benefit plans, net of related tax effects.
Reclassifications out of AOCI for the quarters ended March 28, 2020 and March 30, 2019, consisted of the following:
(millions)
  
  
  
Details about AOCI
components
Amount reclassified
from AOCI
Line item impacted
within Income Statement
 
Quarter ended
March 28, 2020
Quarter ended
March 30, 2019
  
(Gains) losses on cash flow hedges:
 
 
 
Interest rate contracts
$
2

$
1

Interest expense
 
$
2

$
1

Total before tax
 


Tax expense (benefit)
 
$
2

$
1

Net of tax
Amortization of postretirement and postemployment benefits:
 
 
 
Net experience (gain) loss
$
(1
)
$
(1
)
OIE
 
$
(1
)
$
(1
)
Total before tax
 


Tax expense (benefit)
 
$
(1
)
$
(1
)
Net of tax
Total reclassifications
$
1

$

Net of tax

 
 
 
 

Accumulated other comprehensive income (loss), net of tax, as of March 28, 2020 and December 28, 2019 consisted of the following:
(millions)
March 28,
2020
December 28,
2019
Foreign currency translation adjustments
$
(1,628
)
$
(1,399
)
Cash flow hedges — unrealized net gain (loss)
(106
)
(60
)
Postretirement and postemployment benefits:
 
 
Net experience gain (loss)
6

7

Prior service credit (cost)
4

4

Available-for-sale securities unrealized net gain (loss)
(3
)

Total accumulated other comprehensive income (loss)
$
(1,727
)
$
(1,448
)



13

Table of Contents

Note 7 Notes payable
The following table presents the components of notes payable at March 28, 2020 and December 28, 2019:
 
March 28, 2020
 
December 28, 2019
(millions)
Principal
amount
Effective
interest rate
 
Principal
amount
Effective
interest rate
U.S. commercial paper
$
565

3.70
%
 
$
3

1.78
%
Bank borrowings
92

 
 
104

 
Total
$
657

 
 
$
107

 



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 consist principally of stock options, restricted stock units, and executive performance shares. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s 2019 Annual Report on Form 10-K.

In April 2020, the Amended and Restated Kellogg Company 2002 Employee Stock Purchase Plan was approved by shareholders. The plan is a tax-qualified employee stock purchase plan made available to substantially all U.S. employees, which allows participants to acquire Kellogg stock at a discounted price. The purpose of the plan is to encourage employees at all levels to purchase stock and become Shareowners

The Company classifies pre-tax stock compensation expense in COGS and SG&A expense principally within its Corporate segment. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized was as follows:
 
Quarter ended
(millions)
March 28, 2020
March 30, 2019
Pre-tax compensation expense
$
20

$
13

Related income tax benefit
$
5

$
3



In February, the Company granted stock options, restricted stock units, and performance shares, in conjunction with our primary annual award, under the 2017 Long-Term Incentive Plan, approved by shareholders in 2017.

During the quarter ended March 28, 2020, the Company granted approximately 0.6 million restricted stock units at a weighted average cost of $66 per share and 2.3 million non-qualified stock options at a weighted average cost of $7 per share. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described within the stock compensation footnote in the Company’s 2019 Annual Report on Form 10-K.
Performance shares
In the first quarter of 2020, the Company granted performance shares to a limited number of senior level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three year cumulative organic net sales growth and three year aggregate operating cash flow.
Compensation cost related to organic net sales growth performance and cash flow targets are revised for changes in the expected outcome. The 2020 target grant currently corresponds to approximately 346,000 shares, with a grant-date fair value of $66 per share.
The 2017 performance share award, payable in stock, was settled at 90% of target in February 2020 for a total dollar equivalent of $6 million.

14

Table of Contents

Note 9 Employee benefits
The Company sponsors a number of U.S. and foreign pension plans as well as other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described within the footnotes to the Consolidated Financial Statements included in the Company’s 2019 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.
Pension
 
Quarter ended
(millions)
March 28, 2020
March 30, 2019
Service cost
$
9

$
9

Interest cost
35

45

Expected return on plan assets
(85
)
(85
)
Amortization of unrecognized prior service cost
2

2

Recognized net (gain) loss
14

1

Total pension (income) expense
$
(25
)
$
(28
)

Other nonpension postretirement
 
Quarter ended
(millions)
March 28, 2020
March 30, 2019
Service cost
$
3

$
3

Interest cost
8

10

Expected return on plan assets
(23
)
(21
)
Amortization of unrecognized prior service cost
(2
)
(2
)
Total postretirement benefit (income) expense
$
(14
)
$
(10
)

Postemployment
 
Quarter ended
(millions)
March 28, 2020
March 30, 2019
Service cost
$
1

$
1

Interest cost


Recognized net (gain) loss
(1
)
(1
)
Total postemployment benefit expense
$

$



For the quarter ended March 28, 2020, the Company recognized a loss of $14 million, related to the remeasurement of a U.S. pension plan as current year distributions are expected to exceed service and interest costs resulting in settlement accounting for that particular plan. The amount of the remeasurement loss recognized was due primarily to a lower discount rate relative to the previous measurement.

Company contributions to employee benefit plans are summarized as follows:
(millions)
Pension
Nonpension postretirement
Total
Quarter ended:
 
 
 
March 28, 2020
$
3

$
3

$
6

March 30, 2019
$
1

$
4

$
5

Full year:
 
 
 
Fiscal year 2020 (projected)
$
7

$
19

$
26

Fiscal year 2019 (actual)
$
10

$
18

$
28



Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.

15

Table of Contents

Note 10 Income taxes
The consolidated effective tax rate for the quarter ended March 28, 2020 was 21% as compared to 20% in the first quarter of the prior year.

As of March 28, 2020, the Company classified $19 million of unrecognized tax benefits as a net current liability. The Company believes a decrease of $44 million in unrecognized tax benefits during the next twelve months is reasonably possible due to the finalization of tax examinations. In addition, this decrease is expected to be offset by approximately $3 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals or other material deviation in this estimate.
The Company’s total gross unrecognized tax benefits as of March 28, 2020 was $91 million, an increase of $1 million from December 28, 2019, resulting from project additions to the intercompany transfer pricing activity noted above. Of this balance, $82 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.

The accrual balance for tax-related interest was approximately $12 million at March 28, 2020.
 

Note 11 Derivative instruments and fair value measurements
The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative and nonderivative financial instruments and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged.
The Company designates derivatives and nonderivative hedging instruments as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.

Derivative instruments are classified on the Consolidated Balance Sheet based on the contractual maturity of the instrument or the timing of the underlying cash flows of the instrument for derivatives with contractual maturities beyond one year.  Any collateral associated with derivative instruments is classified as other assets or other current liabilities on the Consolidated Balance Sheet depending on whether the counterparty collateral is in an asset or liability position.  Margin deposits related to exchange-traded commodities are recorded in accounts receivable, net on the Consolidated Balance Sheet.  On the Consolidated Statement of Cash Flows, cash flows associated with derivative instruments are classified according to the nature of the underlying hedged item.  Cash flows associated with collateral and margin deposits on exchange-traded commodities are classified as investing cash flows when the collateral account is in an asset position and as financing cash flows when the collateral account is in a liability position.
Total notional amounts of the Company’s derivative instruments as of March 28, 2020 and December 28, 2019 were as follows:
(millions)
March 28,
2020
December 28,
2019
Foreign currency exchange contracts
$
3,374

$
2,628

Cross-currency contracts
1,529

1,540

Interest rate contracts
2,143

1,871

Commodity contracts
527

524

Total
$
7,573

$
6,563


Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at March 28, 2020 and December 28, 2019, measured on a recurring basis.

16

Table of Contents

Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps, cross-currency swaps and over-the-counter commodity and currency contracts.
The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. Cross-currency contracts are valued based on changes in the spot rate at the time of valuation compared to the spot rate at the time of execution, as well as the change in the interest differential between the two currencies. The Company’s calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of March 28, 2020 or December 28, 2019.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of March 28, 2020 and December 28, 2019:
Derivatives designated as hedging instruments
 
March 28, 2020
 
December 28, 2019
(millions)
Level 1
Level 2
Total
 
Level 1
Level 2
Total
Assets:
 
 
 
 
 
 
 
Cross-currency contracts:
 
 
 
 
 
 
 
Other current assets
$

$
75

$
75

 
$

$
45

$
45

Other assets

73

73

 

40

40

Interest rate contracts:
 
 

 
 
 

Other current assets



 

7

7

Other assets (a)

6

6