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| K > SEC Filings for K > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-2008
Quarterly Report
North Latin Asia Pacific
(dollars in millions) America Europe America (a) Corporate Consolidated
2008 net sales $ 2,156 $ 666 $ 277 $ 189 $ - $ 3,288
2007 net sales $ 1,960 $ 604 $ 270 $ 170 $ - $ 3,004
% change - 2008 vs.
2007:
Volume (tonnage) (b) 4.4 % -1.5 % -8.1 % 7.4 % - 2.3 %
Pricing/mix 4.7 % 4.4 % 6.7 % 2.2 % - 4.6 %
Subtotal - internal
business 9.1 % 2.9 % -1.4 % 9.6 % - 6.9 %
Acquisitions (c) .9 % 5.7 % - 3.7 % - 2.0 %
Foreign currency
impact - 1.6 % 4.1 % -1.5 % - 0.6 %
Total change 10.0 % 10.2 % 2.7 % 11.8 % - 9.5 %
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North Latin Asia Pacific
(dollars in millions) America Europe America (a) Corporate Consolidated
2008 operating profit $ 380 $ 113 $ 61 $ 26 $ (47 ) $ 533
2007 operating profit $ 333 $ 110 $ 66 $ 18 $ (35 ) $ 492
% change - 2008 vs. 2007:
Internal business 14.7 % 2.9 % -10.2 % 54.6 % -35.8 % 8.6 %
Acquisitions (c) -.4 % 2.0 % - -6.0 % - 0.0 %
Foreign currency impact -.1 % -2.0 % 3.9 % -1.6 % - 0.0 %
Total change 14.2 % 2.9 % -6.3 % 47.0 % -35.8 % 8.6 %
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(a) Includes Australia, Asia and South Africa.
(b) We measure the volume impact (tonnage) on revenues based on the stated weight of our product shipments.
(c) Impact of results for the quarterly period ended September 27, 2008 from the acquisitions of United Bakers, Bear Naked, Specialty Cereals, Navigable Foods and certain assets and liabilities of the Wholesome & Hearty Foods Company and IndyBake Products.
Our strong consolidated net sales performance for the third quarter of 2008 was
driven by our North America business with increases in both volume and price/mix
for the quarter. Successful innovation, brand-building (advertising and consumer
promotion) investment, as well as our recent price increases continued to drive
the growth. Also contributing to our growth are our acquisitions including Bear
Naked and the acquisition of certain assets and liabilities from the Wholesome &
Hearty Foods Company which were completed in 2007. For further information on
our 2008 acquisitions, refer to Note 2 within Notes to Consolidated Financial
Statements, which is included herein under Part I, Item 2. Management has
estimated that the pro forma effect on the Company's results of operations, as
though these business combinations had been completed at the beginning of 2007,
would have been immaterial. The growth in North America was partially offset by
soft top-line growth in Europe and Latin America which are being impacted by the
global economic slow down.
For the quarter, our North America operating segment reported strong, internal
net sales growth of 9%, with each major product group contributing as follows:
retail cereal +7%; retail snacks (cookies, crackers, cereal bars, toaster
pastries, and fruit snacks) +10%; frozen and specialty channels (frozen foods,
food service and vending) +12%. The broad based growth was driven by volume
growth, strong price realization and successful innovations. Retail cereal
performed well with strong results from our core brands such as Mini-Wheats,
Raisin Bran Crunch and Corn Pops and innovations such as Special K Cinnamon
Pecan and Mini-Wheats Blueberry Muffin. Kashi's strong performance was lead by
Go Lean Crunch Honey Almond Flax and Organic Promise. Our growth in snacks is
driven from growth in volume, our previously announced price increases, and
successful innovations such as Townhouse Flipsides. Core brands such as
Cheez-It, Nutri-Grain and Chips Deluxe are performing well. In the quarter, our
"Right Bites" 100 calorie cookie and cracker packs saw strong growth. Our frozen
and specialty channels grew both volume and net sales realization with the
specialty channel building upon the cereal and snacks innovation. Frozen
realized strong sales due to innovations such as Bake Shop Swirlz as well as
buying ahead of a previously announced price increase.
Our International operating segments collectively reported internal net sales
growth of approximately 3%. Europe benefited from strong growth in the UK which
was partially offset by softness in other markets impacted by the economic slow
down. In Latin America, Mexico has been particularly impacted by economic
weakness. Asia Pacific's performance was strong in the third quarter led by
growth from Australia and South Africa.
For the quarter, our consolidated operating profit increased 9% both on a
reported basis and on an internal basis. This growth was driven by strong price
realization that offset higher commodity costs as well as productivity
initiatives. Third quarter operating profit also benefited from lower
incremental exit-plan related charges as compared to the third quarter of 2007.
As discussed in the "Exit or disposal plans" section herein, this quarter's
operating profit included $3 million of exit-plan related charges as compared to
$30 million recorded in the third quarter of 2007. The net incremental impact on
the operating segments is (in millions): North America-$28 (all within selling,
general and administrative expense) and Europe-($1) (all within cost of goods
sold).
Internal operating profit for our North America operating segment was strong due
to lower exit costs; and increased sales, driven by price increases and
innovation partially offset by higher commodity costs. Europe's internal
operating profit increased due to increased prices which offset higher commodity
costs and selective investment of advertising and promotion spend by
concentrating on the most effective means. Latin America's operating profit
decreased due to soft top line growth, increased commodity costs as well as
import restrictions placed by the Venezuelan government. Internal operating
profit growth in Asia Pacific was driven by its strong net sales performance.
The following tables provide analysis of our net sales and operating profit performance for the year-to-date periods of 2008 as compared to 2007. The year-to-date net sales performance was similar to the quarter with growth driven by increased price/mix realized in North America. We are experiencing slowing growth in Latin America and Europe due to global economic conditions. Reported operating profit for the year-to-date period was up versus prior year due to sales growth and lower exit costs and other cost reduction initiatives, offset by increased commodity and fuel costs.
North Latin Asia Pacific
(dollars in millions) America Europe America (a) Corporate Consolidated
2008 net sales $ 6,431 $ 2,089 $ 813 $ 556 $ - $ 9,889
2007 net sales $ 5,942 $ 1,801 $ 752 $ 487 $ - $ 8,982
% change - 2008 vs.
2007:
Volume (tonnage) (b) 2.0 % 0.7 % -3.2 % 6.9 % - 1.5 %
Pricing/mix 4.8 % 3.6 % 7.1 % 1.0 % - 4.6 %
Subtotal - internal
business 6.8 % 4.3 % 3.9 % 7.9 % - 6.1 %
Acquisitions (c) .9 % 5.3 % - 1.3 % - 1.7 %
Foreign currency
impact .5 % 6.4 % 4.3 % 5.0 % - 2.3 %
Total change 8.2 % 16.0 % 8.2 % 14.2 % - 10.1 %
North Latin Asia Pacific
(dollars in millions) America Europe America (a) Corporate Consolidated
2008 operating profit $ 1,163 $ 347 $ 166 $ 79 $ (147 ) $ 1,608
2007 operating profit $ 1,059 $ 345 $ 168 $ 65 $ (128 ) $ 1,509
% change - 2008 vs. 2007:
Internal business 9.8 % -.7 % -5.2 % 17.2 % -14.8 % 5.6 %
Acquisitions (c) -.7 % -.8 % - -1.7 % - -0.8 %
Foreign currency impact .7 % 2.3 % 4.0 % 6.6 % - 1.8 %
Total change 9.8 % 0.8 % -1.2 % 22.1 % -14.8 % 6.6 %
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(a) Includes Australia, Asia and South Africa.
(b) We measure the volume impact (tonnage) on revenues based on the stated weight of our product shipments.
(c) Impact of results for the year-to-date period ending September 27, 2008 from the acquisitions of United Bakers, Bear Naked, Specialty Cereals, Navigable Foods and certain assets and liabilities of the Wholesome & Hearty Foods Company and IndyBake Products.
Margin performance
Margin performance for the third quarter and year-to-date periods of 2008 versus
2007 are presented in the following table:
Change
vs. prior
Quarter 2008 2007 year (pts.)
Gross margin (a) 42.7 % 44.7 % -2.0
SGA% (b) -26.5 % -28.3 % 1.8
Operating margin 16.2 % 16.4 % -0.2
Year-to-date 2008 2007 Change
Gross margin (a) 42.6 % 44.3 % -1.7
SGA% (b) -26.3 % -27.5 % 1.2
Operating margin 16.3 % 16.8 % -0.5
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(a) Gross profit as a percentage of net sales. Gross profit is equal to net sales less cost of goods sold.
(b) Selling, general and administrative expense as a percentage of net sales.
We strive for gross profit dollar growth to reinvest in brand-building and innovation expenditures. We maximize our gross profit dollars by managing external cost pressures through product pricing and mix improvements, implementing productivity savings and technological initiatives as well as entering into commodity hedges and fixed price contracts to reduce the cost of product ingredients and packaging. For the quarter, our gross profit was up $61 million, a 5% increase over the comparable 2007 period. Year-to-date gross profit was up $228 million, a 6% increase over the comparable 2007 period.
As illustrated in the preceding table, our consolidated gross margin declined
200 basis points in the quarter and 170 basis points year-to-date versus the
prior year periods. Our recent acquisitions lowered gross margin by
approximately 50 basis points for both the quarter and year-to-date periods. We
also continue to experience inflationary cost pressures for fuel, energy,
commodities and benefits. During this period, higher costs were offset by
savings from cost reduction initiatives and price increases.
For the full-year 2008, we currently expect cost pressures to be approximately
9% of prior year's cost of goods sold. Accordingly, we believe our full year
consolidated gross margin could decline by approximately 200 basis points, half
of which relates to acquisitions and increased investments in exit plans and
other cost reduction initiatives expected in cost of goods sold.
Exit or disposal plans
We view our continued spending on cost reduction initiatives as part of our
ongoing operating principles to provide greater visibility in achieving our
long-term profit growth targets. Initiatives undertaken are currently expected
to recover cash implementation costs within a five-year period of completion.
Each cost reduction initiative is normally up to three years in duration. 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. Certain of these initiatives represent exit or disposal plans for
which material charges will be incurred. We include these charges in our measure
of operating segment profitability.
Ongoing initiatives
We currently have two ongoing initiatives: the European manufacturing
optimization plan (Manchester, England) and the reorganization of production
processes to reflect changing market dynamics (Valls, Spain and Bremen,
Germany). Total costs associated with these ongoing initiatives were $3 million
and $2 million during the quarterly periods ended September 27, 2008 and
September 29, 2007, respectively; on a year-to-date basis the costs for 2008 and
2007 amounted to $14 million and $14 million respectively. These costs were
recorded in cost of goods sold and were attributable to the Europe operating
segment.
We commenced the multi-year European manufacturing optimization plan in 2006 to
improve utilization of our facility in Manchester, England and to better align
production in Europe. Based on forecasted foreign exchange rates, we currently
expect to incur approximately $55 million in total project costs. Of the
$55 million in total project costs, $50 million has been incurred to date, of
which $21 million represented costs related to employee severance. Refer to page
39 of the Company's 2007 Annual Report on Form 10-K for further information on
this initiative.
The following tables present quarter and year-to-date project costs for our
European manufacturing optimization plan. There were no exit cost reserves for
this project at September 27, 2008 and December 29, 2007.
Project costs
Quarter ended Year-to-date period ended
(millions) September 27, 2008 September 29, 2007 September 27, 2008 September 29, 2007
Employee severance $ - $ - $ 3 $ 7
Other cash costs (a) 1 2 2 4
Asset write-offs (b) - - (4 ) 3
Retirement benefits (c) - - 2 -
Total $ 1 $ 2 $ 3 $ 14
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(a) Primarily includes expenditures for equipment removal and relocation, and temporary contracted services to facilitate employee transitions.
(b) Net of gain on the sale of assets previously written down to estimated fair market value less cost to sell.
(c) Pension plan curtailment losses and special termination benefits recognized under SFAS No. 88 "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
We commenced the reorganization of certain production processes at our plants in Valls, Spain and Bremen, Germany in October 2007. Based on forecasted foreign exchange rates, we expect to incur approximately $20 million of total project costs, comprised primarily of asset write-offs, employee separation benefits and other cash costs. Of the $20 million in total project costs, $15 million has been incurred to date, of which $6 million represented costs related to employee severance. This initiative is expected to be completed by the end of 2008. Refer to page 40 of the Company's 2007 Annual Report on Form 10-K for further information on this initiative.
The following tables present quarter and year-to-date project costs for the reorganization of production processes at our plants in Valls, Spain and Bremen, Germany, along with a reconciliation of employee severance reserves for this initiative.
Project costs
Year-to-date period ended
Quarter ended September 27,
(millions) September 27, 2008 2008
Employee severance $ - $ 4
Asset write-offs 2 6
Other cash costs (a) - 1
Total $ 2 $ 11
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(a) Primarily includes expenditures for equipment removal and relocation, and legal and consulting fees to facilitate employee transitions.
Employee severance
(millions) reserves
December 29, 2007 $ 2
Accruals 4
Payments (5 )
September 27, 2008 $ 1
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2007 initiative
Selling, general, and administrative expense for the quarter and year-to-date
periods ended September 29, 2007, included total exit plan-related charges of
$28 million and $66 million respectively. These costs were recorded in our North
America operating segment and related to the reorganization of our direct
store-door delivery (DSD) operations in the southeastern United States. This
initiative has been completed.
Other cost reduction initiatives
During the second quarter of 2008 we incurred $17 million of expense associated
with other cost reduction initiatives related to the elimination of the
accelerated ownership feature of certain employee stock options. Refer to Note 8
within Notes to Consolidated Financial Statements, which is included herein
under Part I, Item 2 for further information. This expense was recorded in
selling, general and administrative expense within corporate operating profit.
We incurred $10 million of expense during the first quarter of 2008 in
connection with a payment for the restructuring of our labor force at a
manufacturing facility in Mexico. This cost was recorded in cost of goods sold
and was attributable to the Latin America operating segment.
Interest expense
For the quarter ended September 27, 2008, interest expense was $71 million and
interest income (which is recorded within other income) was $5 million, as
compared to the quarter ended September 29, 2007 with interest expense of
$79 million and interest income of $6 million.
For the year-to-date period ended September 27, 2008, interest expense was
$230 million and interest income (which is recorded within other income) was
$15 million, as compared to the year-to-date period ended September 29, 2007
with interest expense of $233 million and interest income of $15 million. For
the full year of 2008, we currently expect interest expense, net of interest
income, to approximate the 2007 level.
Income taxes
The consolidated effective income tax rate was approximately 28% for the quarter
ended September 27, 2008, as compared to 27% for the comparable quarter of 2007.
The third quarter 2008 provision for income taxes was positively impacted by
various individually insignificant provision-to-return adjustments. The third
quarter 2007 effective income tax rate was positively impacted by statutory rate
reductions as discussion on page 52 of the Company's 2007 Annual Report on Form
10-K.
For the year-to-date period ended September 27, 2008, the consolidated effective
income tax rate was 29%, as compared to 28% for the comparable prior
year-to-date period.
For the full year 2008, we currently expect the consolidated effective income
tax rate to be approximately 30%. Our estimate of effective income tax rate for
any period is highly influenced by country mix of earnings, changes in statutory
tax rates, timing of implementation of tax planning initiatives, and
developments which affect our evaluation of uncertain tax positions.
Liquidity and capital resources
Overview
Our principal source of liquidity is operating cash flows, supplemented by
borrowings for major acquisitions and other significant transactions. Our
cash-generating capability is one of our fundamental strengths and provides us
with substantial financial flexibility in meeting operating and investing needs.
During the third quarter of 2008 and thereafter, global capital and credit
markets, including commercial paper markets, experienced increased volatility
and disruption. Despite this volatility and disruption, we continued to have
access to commercial paper.
Beginning in mid-September 2008, interest rates on our commercial paper
borrowings increased by an average of 200 basis points. This was the result of
an increase in the London Interbank Offered Rate (LIBOR), which is the benchmark
used to determine the interest rate charged on commercial paper. LIBOR, which is
based on the interest rate that banks pay one another for short term borrowings,
increased in response to the turmoil in the markets. We do not expect the
increase in interest rates on commercial paper to have a significant impact on
our full-year 2008 interest expense.
If needed, we have additional sources of liquidity available to us. These
sources include our short-term lines of credit, our access to public debt and/or
equity markets, and the ability to sell trade receivables. Our Five-Year Credit
Agreement, which expires in 2011, allows us to borrow, on a revolving credit
basis, up to $2.0 billion. This source of liquidity is unused and available on
an unsecured basis. Further information on our credit facilities is located on
page 44 of the Company's Annual Report on Form 10-K.
We believe that our operating cash flow, together with our credit facilities and
other available debt financing, will be adequate to meet our operating,
investing and financing needs in the foreseeable future.
We monitor the financial strength of our third-party financial institutions,
. . .
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