EX-99.1 2 k16941exv99w1.htm FINANCIAL RESULTS FOR THE PERIOD ENDED JUNE 30, 2007 exv99w1
 

             
(KELLOGG'S LOGO)   Kellogg Company News
 
            
 
  For release:   July 26, 2007    
 
  Analyst/Media        
 
  Contact:   Simon D. Burton, CFA (269) 961-6636    
Kellogg Announces Strong First Half and Increased Investment
     BATTLE CREEK, Mich. — Kellogg Company (NYSE: K) today reported excellent second quarter sales, operating profit, earnings, and cash flow growth. The Company posted better-than-expected results despite continued inflation and a difficult competitive environment. Effective innovation and brand building both contributed to the quarter’s growth and provide additional confidence for the remainder of the year.
     Reported net earnings for the quarter were $301 million, a 13% increase from last year’s $267 million. Earnings were $0.75 per diluted share, an increase of 12% from last year’s $0.67 per share. This year’s second quarter results included up-front costs related to cost-reduction initiatives that equated to approximately $0.08 of earnings per share.
     “We have remained committed to our business model, operating principles, and strategy,” said David Mackay, Kellogg’s chief executive officer. “This focus continued to provide strong returns in the second quarter and we now enter the second half of the year with additional confidence and the flexibility to increase our investment in future growth.”
     Reported net sales in the quarter increased by 9% to $3.0 billion. Internal net sales growth, which excludes the effect of foreign-currency translation, was 6% and built on growth of 7% in the second quarter of last year.
     Kellogg North America posted reported net sales growth of 7%; internal net sales growth was 6%, driven by growth in each of the businesses. The Retail Cereal business posted internal sales growth of 3%, as the result of innovation introduced during the past year and strong brand-building programs. The Retail Snacks business posted 9% internal sales growth; each of the cookie, cracker, and wholesome snack businesses posted good growth. In combination, the North America Frozen and Specialty Channels businesses posted 8% internal net sales growth. The frozen food, foodservice and vending, and convenience and drug businesses all posted growth.
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     Kellogg International reported second quarter net sales growth of 13%, and 6% internal sales growth. This internal growth built on a strong comparison of 5% growth posted in the second quarter of last year. The Latin American region posted internal sales growth of 8%, which built on double-digit growth in the comparable quarter of last year. Both the cereal and snacks businesses contributed to these results. Internal net sales in the European business increased by 7%, as the result of mid single-digit growth in the cereal business and double-digit growth in the snacks business. The Asia Pacific region posted an internal net sales decline of 1 percent.
     Reported gross margin in the second quarter expanded by approximately 120 basis points as the result of operating leverage, cost-savings, and a favorable impact from pricing actions. In addition, quarterly gross margin benefited from lower spending for consumer promotion as a result of last year’s efficiency initiative and a difference in the amount of up-front costs related to cost-reduction initiatives recognized in cost of goods sold. This performance led to gross profit growth of 11 percent.
     Reported operating profit was $518 million in the second quarter, an increase of 12% from the second quarter of last year. Internal operating profit growth, which excludes the impact of foreign exchange, was 9% in the second quarter. The Company achieved these results despite a significant increase in cost inflation and a double-digit increase in its advertising investment which supported both new and existing brands. The Company now expects that up-front costs for the full year will equate to approximately $0.17 of earnings per share. Up-front costs in the second quarter totaled approximately $0.08 of earnings per share, significantly higher than the investment in the second quarter of 2006; this increased investment lowered internal operating profit growth by almost 5 percent.
     Cash flow, defined as cash from operating activities less capital expenditures, was $569 million in the first half of the year, $229 million more than was generated in the first half of 2006. Strong net earnings growth, excellent performance in trade payables, and the timing of brand-building investment all contributed to this improvement.
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Kellogg Expresses Increased Confidence for the Full Year
     Kellogg Company continues to expect that full-year earnings will be approximately $2.71 to $2.74 per share. The Company expects to achieve this growth despite significantly increased investment in brand building and its increased estimate for full-year cost inflation of $0.26 — $0.30 per share, or an increase of $0.08 from prior expectations. The Company continues to expect that full-year cash flow will be approximately $950 million to $1.025 billion. The Company also continues to expect that internal sales and operating profit will increase at a mid single-digit rate for the full year.
     Mr. Mackay concluded, “Our momentum continued in the second quarter and the good results through the first half of the year have provided us with increased levels of confidence that 2007 will be another year of dependable, sustainable growth. Most important, though, is the fact that we will post this growth while continuing to make significant and increased investment in future growth.”
About Kellogg Company
     With 2006 sales of nearly $11 billion, Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. The Company’s brands include Kellogg’s, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Murray, Morningstar Farms, Austin, Famous Amos, and Kashi. Kellogg products are manufactured in 17 countries and marketed in more than 180 countries around the world. For more information, visit Kellogg’s web site at http://www.kelloggcompany.com.
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Forward-Looking Statements Disclosure
     This news release contains forward-looking statements related to business performance, earnings, costs, brand building, and cost-saving initiatives. Actual performance may differ materially from these statements due to factors related to competitive conditions and their impact; the effectiveness of advertising, pricing and promotional spending; the success of productivity improvements and business transitions; the success of innovation and new product introductions; the recoverability of the carrying value of goodwill and other intangibles; the availability of and interest rates on short-term financing; commodity and energy prices and labor costs; actual market performance of benefit plan trust investments; the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses; changes in consumer behavior and preferences; U.S. and foreign economic factors such as interest rates, statutory tax rates, and foreign currency conversions or unavailability; legal and regulatory factors; business disruption or other losses from terrorist acts or political unrest; and other factors. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.

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Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(millions, except per share data)
                                 
    Quarter ended     Year-to-date period ended  
    June 30,     July 1,     June 30,     July 1,  
(Results are unaudited)   2007     2006     2007     2006  
 
 
                                
Net sales
   $ 3,015     $ 2,773     $ 5,978     $ 5,500  
 
                                
Cost of goods sold
     1,638       1,538       3,337       3,068  
Selling, general, and administrative expense
     859       774       1,624       1,498  
 
 
                                
Operating profit
     518       461       1,017       934  
 
                                
Interest expense
     76       77       154       152  
Other income (expense), net
     —       4       2       9  
 
 
                                
Earnings before income taxes
     442       388       865       791  
Income taxes
     141       121       243       250  
 
 
                                
Net earnings
   $ 301     $ 267     $ 622     $ 541  
 
 
                                
Net earnings per share:
                                
Basic
   $ .76     $ .68     $ 1.56     $ 1.36  
Diluted
   $ .75     $ .67     $ 1.55     $ 1.35  
 
                                
Dividends per share
   $ .2910     $ .2775     $ .5820     $ .5550  
 
 
                                
Average shares outstanding:
                                
Basic
     397       394       397       396  
 
Diluted
     401       397       401       399  
 
 
                                
Actual shares outstanding at period end
                     396       396  
 

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Kellogg Company and Subsidiaries
SELECTED OPERATING SEGMENT DATA
(millions)
                                 
    Quarter ended     Year-to-date period ended  
    June 30,     July 1,     June 30,     July 1,  
(Results are unaudited)   2007     2006     2007     2006  
 
 
                                
Net sales
                                
North America
   $ 1,980     $ 1,859     $ 3,982     $ 3,724  
Europe
     623       538       1,197       1,028  
Latin America
     253       225       482       440  
Asia Pacific(a)
     159       151       317       308  
 
Consolidated
   $ 3,015     $ 2,773     $ 5,978     $ 5,500  
 
 
                                
Operating profit
                                
North America
   $ 365     $ 327     $ 726     $ 679  
Europe
     127       97       235       181  
Latin America
     55       58       102       113  
Asia Pacific(a)
     20       24       47       49  
Corporate
     (49 )     (45 )     (93 )     (88 )
 
Consolidated
   $ 518     $ 461     $ 1,017     $ 934  
 
                                
 
(a)   Includes Australia, Asia and South Africa.

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Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
                 
    Year-to-date period ended  
    June 30,     July 1,  
(unaudited)   2007     2006  
 
 
                
Operating activities
                
Net earnings
   $ 622     $ 541  
Adjustments to reconcile net earnings to operating cash flows:
                
Depreciation and amortization
     185       173  
Deferred income taxes
     (92 )     (2 )
Other(a)
     79       74  
Postretirement benefit plan contributions
     (34 )     (30 )
Changes in operating assets and liabilities
     (10 )     (254 )
 
 
                
Net cash provided by operating activities
     750       502  
 
 
                
Investing activities
                
Additions to properties
     (181 )     (162 )
Investments in joint ventures and other
     (4 )     (1 )
 
 
                
Net cash used in investing activities
     (185 )     (163 )
 
Financing activities
                
Net issuances of notes payable
     699       433  
Reductions of long-term debt
     (729 )     —  
Issuances of common stock
     100       116  
Common stock repurchases
     (264 )     (580 )
Cash dividends
     (232 )     (218 )
Other
     10       7  
 
 
                
Net cash used in financing activities
     (416 )     (242 )
 
 
                
Effect of exchange rate changes on cash
     14       (1 )
 
 
                
Increase (decrease) in cash and cash equivalents
     163       96  
Cash and cash equivalents at beginning of period
     411       219  
 
 
                
Cash and cash equivalents at end of period
   $ 574     $ 315  
 
 
                
Supplemental Financial Data:
                
 
                
Cash Flow (operating cash flow less property additions)(b)
   $ 569     $ 340  
 
(a)   Consists principally of non-cash expense accruals for employee compensation and benefit obligations.
 
(b)   We use this non-GAAP measure of cash flow to focus management and investors on the amount of cash available for debt reduction, dividend distributions, acquisition opportunities, and share repurchase.

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Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)   June 30,     December 30,  
    2007     2006  
    (unaudited)     *  
 
 
Current assets
                
Cash and cash equivalents
   $ 574     $ 411  
Accounts receivable, net
     1,118       945  
Inventories:
                
Raw materials and supplies
     219       201  
Finished goods and materials in process
     596       623  
Deferred income taxes
     149       116  
Other prepaid assets
     125       131  
 
Total current assets
     2,781       2,427  
 
Property, net of accumulated depreciation of $4,310 and $4,102
     2,845       2,816  
Goodwill
     3,448       3,448  
Other intangibles, net of accumulated amortization of $41 and $49
     1,412       1,420  
Pension
     383       353  
Other assets
     254       250  
 
Total assets
   $ 11,123     $ 10,714  
 
 
Current liabilities
                
Current maturities of long-term debt
   $ 466     $ 723  
Notes payable
     1,969       1,268  
Accounts payable
     971       910  
Accrued advertising and promotion
     398       338  
Accrued income taxes
     92       152  
Accrued salaries and wages
     225       311  
Other current liabilities
     341       318  
 
Total current liabilities
     4,462       4,020  
 
Long-term debt
     2,588       3,053  
Deferred income taxes
     572       619  
Other liabilities
     1,100       953  
 
Shareholders’ equity
                
Common stock, $.25 par value
     105       105  
Capital in excess of par value
     329       292  
Retained earnings
     4,011       3,630  
Treasury stock, at cost
     (1,044 )     (912 )
Accumulated other comprehensive income (loss)
     (1,000 )     (1,046 )
 
Total shareholders’ equity
     2,401       2,069  
 
 
Total liabilities and shareholders’ equity
   $ 11,123     $ 10,714  
 
*   Condensed from audited financial statements.

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