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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)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 02, 2022
OR
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☐ | 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
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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:
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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 |
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 |
0.500% Senior Notes due 2029 | K 29 | 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.
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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 April 2, 2022 — 337,872,583 shares
KELLOGG COMPANY
INDEX
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| Financial Statements | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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| Quantitative and Qualitative Disclosures about Market Risk | |
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| Controls and Procedures | |
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| Risk Factors | |
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| Unregistered Sales of Equity Securities and Use of Proceeds | |
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| Exhibits | |
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Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
| | | | | | | | |
| April 2, 2022 (unaudited) | January 1, 2022 |
Current assets | | |
Cash and cash equivalents | $ | 313 | | $ | 286 | |
Accounts receivable, net | 1,687 | | 1,489 | |
Inventories | 1,559 | | 1,398 | |
Other current assets | 257 | | 221 | |
Total current assets | 3,816 | | 3,394 | |
Property, net | 3,773 | | 3,827 | |
Operating lease right-of-use assets | 681 | | 640 | |
Goodwill | 5,783 | | 5,771 | |
Other intangibles, net | 2,409 | | 2,409 | |
Investments in unconsolidated entities | 425 | | 424 | |
Other assets | 1,725 | | 1,713 | |
Total assets | $ | 18,612 | | $ | 18,178 | |
Current liabilities | | |
Current maturities of long-term debt | $ | 891 | | $ | 712 | |
Notes payable | 450 | | 137 | |
Accounts payable | 2,705 | | 2,573 | |
Current operating lease liabilities | 124 | | 116 | |
Accrued advertising and promotion | 716 | | 714 | |
Accrued salaries and wages | 198 | | 300 | |
Other current liabilities | 764 | | 763 | |
Total current liabilities | 5,848 | | 5,315 | |
Long-term debt | 5,953 | | 6,262 | |
Operating lease liabilities | 536 | | 502 | |
Deferred income taxes | 808 | | 722 | |
Pension liability | 659 | | 706 | |
Other liabilities | 513 | | 456 | |
Commitments and contingencies | | |
Equity | | |
Common stock, $.25 par value | 105 | | 105 | |
Capital in excess of par value | 993 | | 1,023 | |
Retained earnings | 9,254 | | 9,028 | |
Treasury stock, at cost | (4,946) | | (4,715) | |
Accumulated other comprehensive income (loss) | (1,611) | | (1,721) | |
Total Kellogg Company equity | 3,795 | | 3,720 | |
Noncontrolling interests | 500 | | 495 | |
Total equity | 4,295 | | 4,215 | |
Total liabilities and equity | $ | 18,612 | | $ | 18,178 | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(millions, except per share data)
| | | | | | | | | | | |
| Quarter ended | | |
(unaudited) | April 2, 2022 | April 3, 2021 | | | |
Net sales | $ | 3,672 | | $ | 3,584 | | | | |
Cost of goods sold | 2,513 | | 2,418 | | | | |
Selling, general and administrative expense | 642 | | 694 | | | | |
Operating profit | 517 | | 472 | | | | |
Interest expense | 56 | | 59 | | | | |
Other income (expense), net | 74 | | 69 | | | | |
Income before income taxes | 535 | | 482 | | | | |
Income taxes | 112 | | 109 | | | | |
Earnings (loss) from unconsolidated entities | 1 | | (2) | | | | |
Net income | 424 | | 371 | | | | |
Net income (loss) attributable to noncontrolling interests | 2 | | 3 | | | | |
Net income attributable to Kellogg Company | $ | 422 | | $ | 368 | | | | |
Per share amounts: | | | | | |
Basic earnings | $ | 1.24 | | $ | 1.07 | | | | |
Diluted earnings | $ | 1.23 | | $ | 1.07 | | | | |
| | | | | |
Average shares outstanding: | | | | | |
Basic | 340 | | 342 | | | | |
Diluted | 342 | | 344 | | | | |
Actual shares outstanding at period end | 338 | | 340 | | | | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(millions)
| | | | | | | | | | | | | | | |
| Quarter ended | | |
| April 2, 2022 | | |
(unaudited) | Pre-tax amount | Tax (expense) benefit | After-tax amount | | | | |
Net income | | | $ | 424 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments: | | | | | | | |
Foreign currency translation adjustments during period | $ | 84 | | $ | (26) | | 58 | | | | | |
Cash flow hedges: | | | | | | | |
Unrealized gain (loss) | 77 | | (20) | | 57 | | | | | |
Reclassification to net income | 4 | | (1) | | 3 | | | | | |
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) | $ | 161 | | $ | (47) | | $ | 114 | | | | | |
Comprehensive income | | | $ | 538 | | | | | |
Net Income attributable to noncontrolling interests | | | 2 | | | | | |
Other comprehensive income (loss) attributable to noncontrolling interests | | | 4 | | | | | |
Comprehensive income attributable to Kellogg Company | | | $ | 532 | | | | | |
| | | | | | | |
| Quarter ended | | |
| April 3, 2021 | | |
(unaudited) | Pre-tax amount | Tax (expense) benefit | After-tax amount | | | | |
Net income | | | $ | 371 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments: | | | | | | | |
Foreign currency translation adjustments during period | $ | 33 | | $ | (34) | | (1) | | | | | |
Cash flow hedges: | | | | | | | |
Unrealized gain (loss) on cash flow hedges | 78 | | (21) | | 57 | | | | | |
Reclassification to net income | 5 | | (1) | | 4 | | | | | |
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) | $ | 113 | | $ | (56) | | $ | 57 | | | | | |
Comprehensive income | | | $ | 428 | | | | | |
Net Income attributable to noncontrolling interests | | | 3 | | | | | |
Other comprehensive income (loss) attributable to noncontrolling interests | | | (10) | | | | | |
Comprehensive income attributable to Kellogg Company | | | $ | 435 | | | | | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EQUITY
(millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter ended April 2, 2022 |
| 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, January 1, 2022 | 421 | | $ | 105 | | $ | 1,023 | | $ | 9,028 | | 80 | | $ | (4,715) | | $ | (1,721) | | $ | 3,720 | | $ | 495 | | $ | 4,215 | |
Common stock repurchases | | | | | 5 | | (300) | | | (300) | | | (300) | |
Net income | | | | 422 | | | | | 422 | | 2 | | 424 | |
| | | | | | | | | | |
| | | | | | | | | | |
Dividends declared ($0.58 per share) | | | | (197) | | | | | (197) | | | (197) | |
Distributions to noncontrolling interest | | | | | | | | — | | (1) | | (1) | |
Other comprehensive income | | | | | | | 110 | | 110 | | 4 | | 114 | |
| | | | | | | | | | |
Stock compensation | | | 16 | | | | | | 16 | | | 16 | |
Stock options exercised and other | | | (46) | | 1 | | (2) | | 69 | | | 24 | | | 24 | |
Balance, April 2, 2022 | 421 | | $ | 105 | | $ | 993 | | $ | 9,254 | | 83 | | $ | (4,946) | | $ | (1,611) | | $ | 3,795 | | $ | 500 | | $ | 4,295 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter ended April 3, 2021 |
| 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, January 2, 2021 | 421 | | $ | 105 | | $ | 972 | | $ | 8,326 | | 77 | | $ | (4,559) | | $ | (1,732) | | $ | 3,112 | | $ | 524 | | $ | 3,636 | |
Common stock repurchases | | | | | 4 | | (240) | | | (240) | | | (240) | |
Net income | | | | 368 | | | | | 368 | | 3 | | 371 | |
| | | | | | | | | | |
| | | | | | | | | | |
Dividends declared ($0.57 per share) | | | | (195) | | | | | (195) | | | (195) | |
| | | | | | | | | | |
Other comprehensive income | | | | | | | 67 | | 67 | | (10) | | 57 | |
| | | | | | | | | | |
Stock compensation | | | 20 | | | | | | 20 | | | 20 | |
Stock options exercised and other | | | (38) | | 7 | | — | | 37 | | | 6 | | | 6 | |
Balance, April 3, 2021 | 421 | | $ | 105 | | $ | 954 | | $ | 8,506 | | 81 | | $ | (4,762) | | $ | (1,665) | | $ | 3,138 | | $ | 517 | | $ | 3,655 | |
| | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
| | | | | | | | |
| Year-to-date period ended |
(unaudited) | April 2, 2022 | April 3, 2021 |
Operating activities | | |
Net income | $ | 424 | | $ | 371 | |
Adjustments to reconcile net income to operating cash flows: | | |
Depreciation and amortization | 119 | | 112 | |
Postretirement benefit plan expense (benefit) | (73) | | (68) | |
Deferred income taxes | 42 | | 17 | |
Stock compensation | 16 | | 20 | |
| | |
| | |
Other | 28 | | 13 | |
Postretirement benefit plan contributions | (7) | | (2) | |
Changes in operating assets and liabilities, net of acquisitions: | | |
Trade receivables | (184) | | (155) | |
Inventories | (160) | | (50) | |
Accounts payable | 207 | | 118 | |
All other current assets and liabilities | (85) | | (141) | |
Net cash provided by (used in) operating activities | 327 | | 235 | |
Investing activities | | |
Additions to properties | (138) | | (173) | |
Issuance of notes receivable | — | | (20) | |
Repayments from notes receivable | — | | 28 | |
| | |
| | |
Investments in unconsolidated entities | — | | (10) | |
| | |
| | |
Purchases of available for sale securities | (2) | | (2) | |
Sales of available for sale securities | 1 | | 5 | |
Settlement of net investment hedges | 37 | | (1) | |
Other | (10) | | (16) | |
Net cash provided by (used in) investing activities | (112) | | (189) | |
Financing activities | | |
Net issuances (reductions) of notes payable | 313 | | 326 | |
| | |
Reductions of long-term debt | (25) | | (4) | |
| | |
Net issuances of common stock | 40 | | 18 | |
Common stock repurchases | (300) | | (240) | |
Cash dividends | (197) | | (195) | |
| | |
Other | (2) | | — | |
Net cash provided by (used in) financing activities | (171) | | (95) | |
Effect of exchange rate changes on cash and cash equivalents | (17) | | 5 | |
Increase (decrease) in cash and cash equivalents | 27 | | (44) | |
Cash and cash equivalents at beginning of period | 286 | | 435 | |
Cash and cash equivalents at end of period | $ | 313 | | $ | 391 | |
| | |
Supplemental cash flow disclosures of non-cash investing activities: | | |
Additions to properties included in accounts payable | $ | 90 | | $ | 97 | |
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
for the quarter ended April 2, 2022 (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 2021 Annual Report on Form 10-K.
The condensed balance sheet information at January 1, 2022 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 April 2, 2022 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 third parties to provide accounts payable tracking systems which facilitate 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 is to capture overall supplier savings, in the form of payment terms or vendor funding, and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. The Company has 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 the arrangements. However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by the agreements 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 April 2, 2022, $949 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system. As of January 1, 2022, $905 million of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system.
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 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 approximately $1.1 billion.
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 April 2, 2022 and January 1, 2022 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 $468 million and $549 million remained outstanding under these arrangements as of April 2, 2022 and January 1, 2022, 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 $2 million for both the quarters ended April 2, 2022 and April 3, 2021. The recorded loss is included in Other income and expense, net (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 $26 million and $66 million remained outstanding under these programs as of April 2, 2022 and January 1, 2022, 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 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 certain contingently issuable performance shares. There were 8 million and 12 million anti-dilutive potential common shares excluded from the calculation for the quarters ended April 2, 2022 and April 3, 2021, respectively. Please refer to the Consolidated Statement of Income for basic and diluted earnings per share for the quarters ended April 2, 2022 and April 3, 2021.
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. During the quarter ended April 2, 2022, the Company repurchased approximately 5 million shares of common stock for a total of $300 million. During the quarter ended April 3, 2021, the Company repurchased approximately 4 million shares of common stock for a total of $240 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, adjustments for net experience losses and prior service cost related to employee benefit plans, and adjustments for unrealized gains and losses on available-for-sale securities, net of related tax effects.
Reclassifications out of Accumulated other comprehensive income (AOCI) for the quarters ended April 2, 2022 and April 3, 2021, consisted of the following:
| | | | | | | | | | | |
(millions) | | | |
Details about AOCI components | Amount reclassified from AOCI | Line item impacted within Income Statement |
| Quarter ended April 2, 2022 | Quarter ended April 3, 2021 | |
(Gains) losses on cash flow hedges: | | | |
| | | |
| | | |
Interest rate contracts (a) | $ | 4 | | $ | 5 | | Interest expense |
| | | |
| $ | 4 | | $ | 5 | | Total before tax |
| (1) | | (1) | | Tax expense (benefit) |
| $ | 3 | | $ | 4 | | Net of tax |
Amortization of postretirement and postemployment benefits: | | | |
Net experience (gain) loss (b) | $ | (1) | | $ | (1) | | OIE |
| | | |
| $ | (1) | | $ | (1) | | Total before tax |
| — | | — | | Tax expense (benefit) |
| $ | (1) | | $ | (1) | | Net of tax |
| | | |
| | | |
| | | |
| | | |
| | | |
Total reclassifications | $ | 2 | | $ | 3 | | Net of tax |
(a) See Derivative instruments and fair value measurements note
(b) See Employee benefits note
Accumulated other comprehensive income (loss), net of tax, as of April 2, 2022 and January 1, 2022 consisted of the following:
| | | | | | | | |
(millions) | April 2, 2022 | January 1, 2022 |
Foreign currency translation adjustments | $ | (1,627) | | $ | (1,681) | |
Cash flow hedges — unrealized net gain (loss) | 47 | | (13) | |
Postretirement and postemployment benefits: | | |
Net experience gain (loss) | (2) | | (1) | |
Prior service credit (cost) | (26) | | (26) | |
Available-for-sale securities unrealized net gain (loss) | (3) | | — | |
Total accumulated other comprehensive income (loss) | $ | (1,611) | | $ | (1,721) | |
Note 4 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 2021 Annual Report on Form 10-K. Components of Company benefit plan (income) expense for the periods presented are included in the tables below. Excluding the service cost component, these amounts are included within Other income (expense) in the Consolidated Statement of Income.
Pension
| | | | | | | | | | | |
| Quarter ended | | |
(millions) | April 2, 2022 | April 3, 2021 | | | |
Service cost | $ | 9 | | $ | 9 | | | | |
Interest cost | 29 | | 25 | | | | |
Expected return on plan assets | (71) | | (78) | | | | |
Amortization of unrecognized prior service cost | 2 | | 2 | | | | |
Recognized net (gain) loss | (21) | | (9) | | | | |
| | | | | |
| | | | | |
Total pension (income) expense | $ | (52) | | $ | (51) | | | | |
Other nonpension postretirement
| | | | | | | | | | | |
| Quarter ended | | |
(millions) | April 2, 2022 | April 3, 2021 | | | |
Service cost | $ | 3 | | $ | 3 | | | | |
Interest cost | 6 | | 5 | | | | |
Expected return on plan assets | (28) | | (23) | | | | |
Amortization of unrecognized prior service cost | (2) | | (2) | | | | |
| | | | | |
| | | | | |
| | | | | |
Total postretirement benefit (income) expense | $ | (21) | | $ | (17) | | | | |
Postemployment
| | | | | | | | | | | |
| Quarter ended | | |
(millions) | April 2, 2022 | April 3, 2021 | | | |
Service cost | $ | 1 | | $ | 1 | | | | |
| | | | | |
Recognized net experience (gain) loss | (1) | | (1) | | | | |
Total postemployment benefit expense | $ | — | | $ | — | | | | |
For the quarter ended April 2, 2022, the Company recognized a gain of $21 million, related to the remeasurement of a certain U.S. pension plan. For the quarter ended April 3, 2021, the Company recognized a gain of $9 million related to the remeasurement of a U.S. pension plan. These remeasurements were the result of distributions that exceeded service and interest costs resulting in settlement accounting for that particular plan. The remeasurements recognized were due primarily to changes in the discount rate relative to the previous measurements.
Company contributions to employee benefit plans are summarized as follows:
| | | | | | | | | | | |
(millions) | Pension | Nonpension postretirement | Total |
Quarter ended: | | | |
April 2, 2022 | $ | 1 | | $ | 6 | | $ | 7 | |
April 3, 2021 | $ | 1 | | $ | 1 | | $ | 2 | |
| | | |
| | | |
| | | |
Full year: | | | |
Fiscal year 2022 (projected) | $ | 3 | | $ | 17 | | $ | 20 | |
Fiscal year 2021 (actual) | $ | 4 | | $ | 16 | | $ | 20 | |
Plan funding strategies may be modified in response to management's evaluation of tax deductibility, market conditions, and competing investment alternatives.
Note 5 Income taxes
The consolidated effective tax rate for the quarters ended April 2, 2022 and April 3, 2021 was 21% and 23%, respectively.
As of April 2, 2022, the Company classified $14 million of unrecognized tax benefits as a net current tax liability. Management's estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months consists of the current liability expected to be settled within one year, 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 April 2, 2022 was $48 million. Of this balance, $41 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 $8 million at April 2, 2022.
Note 6 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 April 2, 2022 and January 1, 2022 were as follows:
| | | | | | | | |
(millions) | April 2, 2022 | January 1, 2022 |
Foreign currency exchange contracts | $ | 3,095 | | $ | 2,828 | |
Cross-currency contracts | 1,744 | | 1,343 | |
Interest rate contracts | 2,789 | | 2,816 | |
Commodity contracts | 427 | | 360 | |
Total | $ | 8,055 | | $ | 7,347 | |
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 April 2, 2022 and January 1, 2022, measured on a recurring basis.
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 April 2, 2022 or January 1, 2022.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of April 2, 2022 and January 1, 2022:
Derivatives designated as hedging instruments
| | | | | | | | | | | | | | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
(millions) | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total |
Assets: | | | | | | | |
Cross-currency contracts: | | | | | | | |
Other current assets | $ | — | | $ | 39 | | $ | 39 | | | $ | — | | $ | 32 | | $ | 32 | |
Other assets | — | | 22 | | 22 | | | — | | 15 | | 15 | |
Interest rate contracts(a): | | | | | | | |
Other current assets | — | | 3 | | 3 | | | — | | 10 | | 10 | |
Other assets | — | | 6 | | 6 | | | — | | 8 | | 8 | |
Total assets | $ | — | | $ | 70 | | $ | 70 | | | $ | — | | $ | 65 | | $ | 65 | |
Liabilities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Cross-currency contracts: | | | | | | | |
Other current liabilities | $ | — | | $ | — | | $ | — | | | $ | — | | $ | (2) | | $ | (2) | |
Other liabilities | — | | (27) | | (27) | | | — | | (7) | | (7) | |
Interest rate contracts: | | | | | | | |
Other current liabilities | — | | (1) | | (1) | | | — | | (1) | | (1) | |
Other liabilities | — | | (40) | | (40) | | | — | | (4) | | (4) | |
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Total liabilities | $ | — | | $ | (68) | | $ | (68) | | | $ | — | | $ | (14) | | $ | (14) | |
(a) The fair value of the related hedged portion of the Company's long-term debt, a level 2 liability, was $1.1 billion as of April 2, 2022 and $1.2 billion as of January 1, 2022.
Derivatives not designated as hedging instruments
| | | | | | | | | | | | | | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
(millions) | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total |
Assets: | | | | | | | |
Foreign currency exchange contracts: | | | | | | | |
Other current assets | $ | — | | $ | 43 | | $ | 43 | | | $ | — | | $ | 18 | | $ | 18 | |
Other assets | — | | 3 | | 3 | | | — | | 5 | | 5 | |
Interest rate contracts: | | | | | | | |
Other current assets | — | | 2 | | 2 | | | — | | 4 | | 4 | |
Other assets | — | | 5 | | 5 | | | — | | — | | — | |
Commodity contracts: | | | | | | | |
Other current assets | 6 | | — | | 6 | | | 5 | | — | | 5 | |
Total assets | $ | 6 | | $ | 53 | | $ | 59 | | | $ | 5 | | $ | 27 | | $ | 32 | |
Liabilities: | | | | | | | |
Foreign currency exchange contracts: | | | | | | | |
Other current liabilities | $ | — | | $ | (60) | | $ | (60) | | | $ | — | | $ | (20) | | $ | (20) | |
Other liabilities | — | | (4) | | (4) | | | — | | (6) | | (6) | |
Interest rate contracts: | | | | | | | |
Other current liabilities | — | | (4) | | (4) | | | — | | (6) | | (6) | |
Other liabilities | — | | (11) | | (11) | | | — | | (7) | | (7) | |
Commodity contracts: | | | | | | | |
Other current liabilities | (7) | | — | | (7) | | | (6) | | — | | (6) | |
| | | | | | | |
Total liabilities | $ | (7) | | $ | (79) | | $ | (86) | | | $ | (6) | | $ | (39) | | $ | (45) | |
The Company has designated its outstanding foreign currency denominated debt as a net investment hedge of a portion of the Company’s investment in its subsidiaries’ foreign currency denominated net assets. The carrying
value of this debt, including current and long-term, was approximately $2.3 billion as of April 2, 2022 and $2.4 billion as of January 1, 2022.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for existing fair value hedges as of April 2, 2022 and January 1, 2022.
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(millions) | | Line Item in the Consolidated Balance Sheet in which the hedged item is included | | Carrying amount of the hedged liabilities | | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a) |
| | | | April 2, 2022 | January 1, 2022 | | April 2, 2022 | January 1, 2022 |
Interest rate contracts | | Current maturities of long-term debt | | $ | 208 | | $ | — | | | $ | (3) | | $ | — | |
Interest rate contracts | | Long-term debt | | $ | 2,616 | | $ | 2,903 | | | $ | (26) | | $ | 12 | |
(a) The fair value adjustment related to current maturities of long-term debt includes ($3) million from discontinued hedging relationships as of April 2, 2022. The fair value adjustment related to long-term debt includes $15 million and $13 million from discontinued hedging relationships as of April 2, 2022 and January 1, 2022, respectively.
The Company has elected to not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheet as of April 2, 2022 and January 1, 2022 would be adjusted as detailed in the following table:
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As of April 2, 2022: | | Gross Amounts Not Offset in the Consolidated Balance Sheet | |
| Amounts Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received/ Posted | Net Amount |
Total asset derivatives | $ | 129 | | $ | (106) | | $ | — | | $ | |