KELLANOVA RESULTS OF OPERATIONS Business overview The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understandKellogg Company , our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 8 of this report, as well as Part II, 'Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year endedDecember 29, 2018 , which provides additional information on comparisons of years 2018 and 2017. For more than 110 years, consumers have counted onKellogg for great-tasting, high-quality and nutritious foods. These foods include snacks, such as crackers, savory snacks, toaster pastries, cereal bars and bites; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles.Kellogg products are manufactured and marketed globally. Consumption and share data noted within is based on Nielsen x-AOC or other comparable source, for the applicable period. Unless otherwise noted, consumption and shipment trends are materially consistent.
Segments
OnDecember 30, 2018 we reorganized our North American business. The reorganization eliminated the legacy business unit structure and internal reporting. In addition, we changed the internal reporting provided to the chief operating decision maker (CODM) and segment manager. As a result, we reevaluated our operating segments. In conjunction with the reorganization, certain global research and development resources and related activities were transferred from theNorth America business to Corporate. Prior period segment results were not restated for the transfer as the impacts were not considered material. In addition, we transferred ourMiddle East ,North Africa , andTurkey businesses (MENAT) fromKellogg Europe toKellogg AMEA, effectiveDecember 30, 2018 . This consolidated all of the Company'sAfrica business under a single regional management team. All comparable prior periods have been restated to reflect the change. For the years endedDecember 29, 2018 andDecember 30, 2017 , the change resulted in$273 million and$241 million , respectively, of reported net sales and$46 million and$56 million , respectively, of reported operating profit transferring fromEurope to AMEA.
On
We manage our operations through four operating segments that are based primarily on geographic location -North America which includes theU.S. businesses andCanada ;Europe which consists principally of European countries;Latin America which consists of Central andSouth America and includesMexico ; and AMEA (Asia Middle East Africa) which consists ofAfrica ,Middle East ,Australia and other Asian and Pacific markets. These operating segments also represent our reportable segments. Non-GAAP Financial Measures This filing includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Items excluded from our non-GAAP financial measures are discussed in the "Significant items impacting comparability" section of this filing. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions, including incentive compensation. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors' understanding of our underlying operating performance and in their analysis of ongoing 26 --------------------------------------------------------------------------------
operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.
Non-GAAP Financial Measures Non-GAAP financial measures used for evaluation of performance include currency-neutral and organic net sales, adjusted and currency-neutral adjusted operating profit, adjusted and currency-neutral adjusted diluted earnings per share (EPS), currency-neutral adjusted gross profit, currency neutral adjusted gross margin, adjusted other income (expense), and cash flow. We determine currency-neutral results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current periodU.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.
• Currency-neutral net sales and organic net sales: We adjust the GAAP
financial measure to exclude the impact of foreign currency, resulting in
currency-neutral net sales. In addition, we exclude the impact of
acquisitions, divestitures, foreign currency, and differences in shipping
days resulting in organic net sales. We excluded the items which we
believe may obscure trends in our underlying net sales performance. By
providing these non-GAAP net sales measures, management intends to provide
investors with a meaningful, consistent comparison of net sales
performance for the Company and each of our reportable segments for the
periods presented. Management uses these non-GAAP measures to evaluate the
effectiveness of initiatives behind net sales growth, pricing realization,
and the impact of mix on our business results. These non-GAAP measures are
also used to make decisions regarding the future direction of our
business, and for resource allocation decisions.
• Adjusted operating profit and diluted EPS: We adjust the GAAP financial
measures to exclude the effect of restructuring programs, mark-to-market
adjustments for pension plans (service cost, interest cost, expected
return on plan assets, and other net periodic pension costs are not
excluded), commodities and certain foreign currency contracts,
multi-employer pension plan exit liabilities, the gain on divestiture of
our cookies, fruit snacks, pie crusts, and ice cream cone businesses, and
other costs impacting comparability. We excluded the items which we
believe may obscure trends in our underlying profitability. By providing
these non-GAAP profitability measures, management intends to provide
investors with a meaningful, consistent comparison of the Company's
profitability measures for the periods presented. Management uses thesenon-GAAP financial measures to evaluate the effectiveness of initiatives
intended to improve profitability, as well as to evaluate the impacts of
inflationary pressures and decisions to invest in new initiatives within
each of our segments.
• Currency-neutral adjusted gross profit, gross margin, operating profit,
and diluted EPS: We adjust the GAAP financial measures to exclude the
effect of restructuring programs, mark-to-market adjustments for pension
plans (service cost, interest cost, expected return on plan assets, and
other net periodic pension costs are not excluded), commodities and
certain foreign currency contracts, multi-employer pension plan exit
liabilities, the gain on divestiture of our cookies, fruit snacks, pie
crusts, and ice cream cone businesses, and other costs impacting
comparability, and foreign currency, resulting in currency-neutraladjusted. We excluded the items which we believe may obscure trends in our
underlying profitability. By providing these non-GAAP profitability
measures, management intends to provide investors with a meaningful,
consistent comparison of the Company's profitability measures for the
periods presented. Management uses these non-GAAP financial measures to
evaluate the effectiveness of initiatives intended to improve
profitability, as well as to evaluate the impacts of inflationary
pressures and decisions to invest in new initiatives within each of our
segments.
• Adjusted Other income (expense), net: We adjust the GAAP financial measure
to exclude the effect of restructuring programs, mark-to-market
adjustments for pension plans (service cost, interest cost, expected
return on plan assets,and other net periodic pension costs are not
excluded), the gain on the divestiture of our selected cookies, fruit
snacks, pie crusts, and ice cream cone businesses, and other costs
impacting comparability. We excluded the items which we believe mayobscure trends in our underlying profitability. By providing this non-GAAP
measure, management intends to provide investors with a meaningful,
consistent comparison of the Company's other income (expense), net,
excluding the impact of the items noted above, for the periods presented.
Management uses these non-GAAP financial measures to evaluate the
effectiveness of initiatives intended to improve profitability.
27--------------------------------------------------------------------------------
• Adjusted effective income tax rate: We adjust the GAAP financial measures
to exclude the effect of restructuring programs, mark-to-market
adjustments for pension plans (service cost, interest cost, expected
return on plan assets, and other net periodic pension costs are not
excluded), commodities and certain foreign currency contracts,multi-employer pension plan exit liabilities, the gain on divestiture of
our selected cookies, fruit snacks, pie crusts, and ice cream cone
businesses, and other costs impacting comparability. We excluded the items
which we believe may obscure trends in our pre-tax income, the related tax
effect of those items, and other impacts to tax expense, including
Reform and certain out-of-period adjustments, on our adjusted effective
income tax rate. By providing this non-GAAP measure, management intends to
provide investors with a meaningful, consistent comparison of the
Company's effective tax rate, excluding the impact of items noted above,
for the periods presented. Management uses this non-GAAP measure to
monitor the effectiveness of initiatives in place to optimize our global
tax rate.
• Cash flow: Defined as net cash provided by operating activities reduced by
expenditures for property additions. Cash flow does not represent the
residual cash flow available for discretionary expenditures. We use thisnon-GAAP financial measure of cash flow to focus management and investors
on the amount of cash available for debt repayment, dividend
distributions, acquisition opportunities, and share repurchases once all
of the Company's business needs and obligations are met. Additionally,
certain performance-based compensation includes a component of this
non-GAAP measure.
These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.
Significant items impacting comparability Mark-to-market accounting for pension plans, commodities and certain foreign currency contracts We recognize mark-to-market adjustments for pension plans, commodity contracts, and certain foreign currency contracts as incurred. Actuarial gains/losses for pension plans were recognized in the year they occur. Changes between contract and market prices for commodities contracts and certain foreign currency contracts result in gains/losses that were recognized in the quarter they occur. We recorded a total pre-tax mark-to-market charge of$104 million for 2019, a total pre-tax mark-to-market charge of$343 million for 2018 and a total pre-tax mark-to-market benefit of$45 million in 2017. Included within the aforementioned totals was a pre-tax mark-to-market charge for pension plans of$98 million for 2019, a pre-tax mark-to-market charge for pension plans of$335 million for 2018 and a pre-tax mark-to-market benefit for pension plans of$86 million for 2017. Project K Project K continued generating savings used to invest in key strategic areas of focus for the business. We recorded pre-tax charges related to this program of$54 million in 2019,$143 million in 2018 and$263 million in 2017.
See the Restructuring and cost reduction activities section for more information.
Brexit impacts With the uncertainty associated with theUnited Kingdom's (U.K. ) exit from theEuropean Union (EU), commonly referred to as Brexit, we have begun preparations to proactively prepare for the potential adverse impacts of Brexit, such as delays at ports of entry and departure. As a result, we incurred pre-tax charges of$9 million in 2019 and a pre-tax charge of$3 million in 2018. Business and portfolio realignment One-time costs related to divestitures and acquisitions, including the divestiture of our cookies, fruit snacks, pie crusts, and ice-cream cone businesses; reorganizations in support of our Deploy for Growth priorities and a reshaped portfolio; and investments in enhancing capabilities prioritized by our Deploy for Growth strategy. As a result, we incurred pre-tax charges, primarily related to reorganizations of$156 million in 2019 and$5 million in 2018. Multi-employer pension plan exit liability During the third quarter of 2019, the Company incurred a pre-tax charge of$132 million due to withdrawing from two multi-employer pension plans. 28 --------------------------------------------------------------------------------
Divestitures
OnJuly 28, 2019 , the Company completed its sale of selected cookies, fruit and fruit flavored snacks, pie crusts, and ice cream cones businesses to 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, recorded in other income and (expense). Additionally, the company recognized curtailment gains related to the divestiture totaling$17 million in ourU.S. pension and nonpension postretirement plans. The operating results for the divested businesses were primarily included in theNorth America reporting segment prior to the sale. Reported net sales for the divested businesses totaled$308 million for the last five months of the year endedDecember 29, 2018 .
Acquisitions
In October of 2017, the Company acquiredChicago Bar Company LLC manufacturer of RXBAR, a high protein snack bar made of simple ingredients. In ourNorth America reported segments for the year endedDecember 29, 2018 , the acquisition added$186 million in net sales that impacted the comparability of 2017 reported results. In May of 2018, the Company acquired an incremental 1% ownership interest in Multipro, which along with concurrent changes to the shareholders' agreement, resulted in the Company now having a 51% controlling interest in and began consolidating Multipro, a leading distributor of a variety of food products inNigeria andGhana . In our AMEA reportable segment, year endedDecember 28, 2019 , the acquisition added$271 million in net sales that impacted the comparability of 2018 reported results. Additionally, for the year endedDecember 29, 2018 , the acquisition added$536 million in net sales that impacted the comparability of 2017 reported results. Shipping day differences InDecember 2017 , we eliminated a one-month timing difference in reporting of the financial results for theParati Group . This update resulted in an additional month of financial results being reported in the year endedDecember 30, 2017 , which included$14 million of net sales that impacted the comparability of 2018 versus 2017. Out-of-period adjustment During the fourth quarter of 2019, we recorded an out-of-period adjustment to correct an error related to a prior year which increased income tax expense by$39 million . See Note 13 to the Consolidated Financial Statements.U.S. Tax Reform The adoption ofU.S. Tax Reform impacted income tax expense in 2018 resulting in a net$11 million reduction of income tax expense for the year endedDecember 29, 2018 , primarily related to the transition tax and assertion on foreign earnings. Gain on unconsolidated entities, net In connection with the Multipro business combination, the Company recognized a one-time, non-cash gain on the disposition of our previously held equity interest in Multipro of$245 million . Additionally, the Company exercised its call option to acquire a 50% interest inTolaram Africa Foods ,PTE LTD , a holding company with a 49% equity interest in an affiliated food manufacturer, resulting in the Company having a 24.5% interest in the affiliated food manufacturer. In conjunction with the exercise, the Company recognized a one-time, non-cash loss of$45 million , which represents an other than temporary excess of cost over fair value of the investment. These amounts were recorded within Earnings (loss) from unconsolidated entities during the second quarter of 2018. Foreign currency translation We evaluate the operating results of our business on a currency-neutral basis. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior year period to determine what the current periodU.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. Organic net sales exclude the impact of acquisitions, including the foreign currency impact calculated by applying the prior year foreign currency rates to current period results. 29 -------------------------------------------------------------------------------- Financial results For the full year 2019, our reported net sales increased by 0.2% as a full year of Multipro results and organic net sales growth were largely offset by unfavorable foreign currency and the absence of results from the businesses divested in July. Organic net sales increased 1.9% after excluding the impact of acquisitions, divestitures, and foreign currency, with growth in all four regions. Reported operating profit decreased 18% due primarily to higher business and portfolio realignment charges, the multi-employer pension plan exit liability and the absence of results from the businesses divested in July partially offset by lower Project K costs. Currency-neutral adjusted operating profit decreased 4.9% after excluding the impact of business and portfolio realignment, multi-employer pension plan exit liability, Project K and foreign currency. Reported diluted EPS of$2.80 was down 27% compared to the prior year of$3.83 due to a one-time non-cash gain related to our transaction inWest Africa in the prior year, higher business and portfolio realignment charges, the multi-employer pension plan exit liability and the absence of results from the businesses divested in July partially offset by lower Project K costs and favorable mark-to-market impacts. Currency-neutral adjusted diluted EPS of$4.00 decreased 7.6% compared to$4.33 in the prior year, after excluding business and portfolio realignment, multi-employer pension plan exit liability, gain from unconsolidated entities, Project K, mark-to-market, and foreign currency.
Reconciliation of certain non-GAAP Financial Measures Consolidated results (dollars in millions, except per share data)
2019 2018
Reported net income attributable toKellogg Company $ 960 $ 1,336 Mark-to-market (pre-tax) (104 ) (343 ) Project K (pre-tax) (54 ) (143 ) Brexit impacts (pre-tax) (9 ) (3 ) Business and portfolio realignment (pre-tax) (156 ) (5 ) Multi-employer pension plan exit liability (pre-tax) (132 )
-
Gain on divestiture (pre-tax) 55
-
Income tax impact applicable to adjustments, net* 50 109 Adoption of U.S. Tax Reform - 11 Out-of-period adjustment (39 ) - Gain from unconsolidated entities, net -
200
Adjusted net income attributable to
(22 )
Currency-neutral adjusted net income attributable to
Kellogg Company $ 1,371 $ 1,510
Reported diluted EPS $ 2.80 $ 3.83
Mark-to-market (pre-tax) (0.30 ) (0.98 )
Project K (pre-tax) (0.15 ) (0.41 )
Brexit impacts (pre-tax) (0.02 ) (0.01 )
Business and portfolio realignment (pre-tax) (0.46 ) (0.01 )
Multi-employer pension plan exit liability (pre-tax) (0.39 ) -
Gain on divestiture (pre-tax) 0.16
-
Income tax impact applicable to adjustments, net* 0.14 0.30 Adoption of U.S. Tax Reform - 0.04 Out-of-period adjustment (0.12 ) - Gain from unconsolidated entities, net -
0.57
Adjusted diluted EPS$ 3.94 $ 4.33 Foreign currency impact (0.06 ) Currency-neutral adjusted diluted EPS$ 4.00 $ 4.33 Currency-neutral adjusted diluted EPS growth (7.6 )% Note: Tables may not foot due to rounding. For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section. * Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction. 30 -------------------------------------------------------------------------------- Net sales and operating profit 2019 compared to 2018 The following tables provide an analysis of net sales and operating profit performance for 2019 versus 2018: Year endedDecember 28, 2019 Latin Kellogg (millions) North America Europe America AMEA Corporate Consolidated Reported net sales$ 8,390 $ 2,092 $ 940 $ 2,156 $ -$ 13,578 Foreign currency impact on total business (inc)/dec (11 ) (101 ) (33 ) (87 ) - (231 ) Currency-neutral net sales$ 8,400 $ 2,193 $ 973 $ 2,243 $ -$ 13,810 Acquisitions - - - 271 - 271 Foreign currency impact on acquisitions (inc)/dec - - - 49 - 49 Organic net sales$ 8,400 $ 2,193 $ 973 $ 1,922 $ -$ 13,489
Year ended
Latin Kellogg
(millions) North America Europe America AMEA Corporate Consolidated
Reported net sales $ 8,688 $ 2,122 $ 947 $ 1,790 $ - $ 13,547
Divestitures 305 - 4 - - 308
Organic net sales $ 8,383 $ 2,122 $ 943 $ 1,790 $ - $ 13,239
% change - 2019 vs. 2018:
Reported growth (3.4 )% (1.4 )% (0.7 )% 20.4 % - % 0.2 %
Foreign currency impact on
total business (inc)/dec (0.1 )% (4.7 )% (3.5 )% (4.9 )% - % (1.7 )%
Currency-neutral growth (3.3 )% 3.3 % 2.8 % 25.3 % - % 1.9 %
Acquisitions - % - % - % 15.2 % - % 2.0 %
Divestitures (3.5 )% - % (0.4 )% - % - % (2.4 )%
Foreign currency impact on
acquisitions/divestitures
(inc)/dec - % - % - % 2.7 % - % 0.4 %
Organic growth 0.2 % 3.3 % 3.2 % 7.4 % - % 1.9 %
Volume (tonnage) (1.8 )% 1.7 % - % 2.2 % (0.2 )%
Pricing/mix 2.0 % 1.6 % 3.2 % 5.2 % 2.1 %
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to
the Significant items impacting comparability section.
31--------------------------------------------------------------------------------
Year ended
Latin Kellogg
(millions) North America Europe America AMEA Corporate* Consolidated
Reported operating profit $ 1,215 $ 223 $ 85 $ 195 $ (316 ) $ 1,401
Mark-to-market - - - - (7 ) (7 )
Project K (29 ) (3 ) (15 ) (4 ) (4 ) (54 )
Brexit impacts - (9 ) - - - (9 )
Business and portfolio
realignment (58 ) (46 ) (4 ) (12 ) (42 ) (161 )
Multi-employer pension plan
exit liability (132 ) - - - - (132 )
Adjusted operating profit
$ 211 $ (264 ) $ 1,764 Foreign currency impact (1 ) (13 ) (1 ) (8 ) - (23 ) Currency-neutral adjusted operating profit$ 1,434 $ 293 $ 105
Year ended
Latin Kellogg
(millions) North America Europe America AMEA Corporate* Consolidated
Reported operating profit $ 1,397 $ 251 $ 102 $ 174 $ (218 ) $ 1,706
Mark-to-market - - - - 7 7
Project K (107 ) (26 ) (15 ) (18 ) (7 ) (173 )
Brexit impacts - (3 ) - - - (3 )
Business and portfolio
realignment (3 ) - - - (2 ) (5 )
Adjusted operating profit
% change - 2019 vs. 2018: Reported growth (13.0 )% (11.2 )% (16.8 )% 11.9 % (44.6 )% (17.8 )% Mark-to-market - % - % - % - % (7.7 )% (0.7 )% Project K 4.3 % 7.5 % (2.7 )% 8.6 % 2.6 % 4.8 % Brexit impacts - % (2.4 )% - % 0.2 % - % (0.4 )% Business and portfolio realignment (3.6 )% (16.4 )% (3.0 )% (6.3 )% (18.1 )% (8.3 )% Multi-employer pension plan exit liability (8.8 )% - % - % - % - % (7.1 )% Adjusted growth (4.9 )% 0.1 % (11.1 )% 9.4 % (21.4 )% (6.1 )% Foreign currency impact - % (4.5 )% (1.2 )% (4.4 )% 0.1 % (1.2 )% Currency-neutral adjusted growth (4.9 )% 4.6 % (9.9 )%
13.8 % (21.5 )% (4.9 )%
Note: Tables may not foot due to rounding. * Corporate in 2019 includes the cost of certain global research and development activities that were previously included in theNorth America reportable segment in 2018 that totaled approximately$48 million . For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.North America Reported net sales decreased 3.4% versus the prior year due primarily to the absence of results from the businesses divested in July partially offset by favorable price/mix. Organic net sales increased 0.2% after excluding the impact of the divestiture and foreign currency. 32 -------------------------------------------------------------------------------- Net sales % change - 2019 vs. 2018: North America Reported Net Sales Foreign Currency Currency-Neutral Net Sales Divestitures Organic Net Sales Snacks (4.1 )% (0.1 )% (4.0 )% (7.1 )% 3.1 % Cereal (4.1 )% (0.2 )% (3.9 )% - % (3.9 )% Frozen 1.6 % (0.1 )% 1.7 % - % 1.7 %North America snacks reported net sales decreased 4.1% due primarily to the divestitures. Organic net sales increased 3.1% from the prior year due primarily to sustained momentum and innovations in key brands, including Cheez-It, Rice Krispies Treats, Pringles and Pop-Tarts partially offset by the first quarter supplier-related recall of RXBAR.North America cereal reported net sales declined by 4.1% largely due to reduced advertising and promotional activity during two waves of pack-size harmonization during the first half of the year as well as softness in Special K and Mini-Wheats.
North America reported operating profit decreased 13% due primarily to higher business and portfolio realignment charges, the multi-employer pension plan exit liability and the absence of results from the businesses divested in July partially offset by lower Project K costs. Currency-neutral adjusted operating profit declined 4.9% as growth in the base business was more than offset by the impact of the divestiture. Additionally,North America operating profit benefited from the transfer of certain global research and development activities fromNorth America to Corporate at the beginning of 2019.
Reported net sales decreased 1.4% due to unfavorable foreign currency partially offset by higher volume and favorable pricing/mix. Organic net sales increased 3.3% after excluding the impact of foreign currency.
Growth was driven by snacks, led by Pringles, with increased net sales and consumption in key markets behind innovation, effective brand-building, and new pack formats.
Cereal net sales decreased slightly, moderating from recent years' declines. Our share was relatively flat across the region.
As reported operating profit decreased 11% due primarily to higher one-time costs and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 4.6% after excluding the impact of foreign currency and one-time costs.
Latin America Reported net sales decreased 0.7% due to unfavorable foreign currency and the impact of the divestiture, partially offset by favorable pricing/mix. Organic net sales increased 3.2% after excluding the impact of the divestiture and foreign currency, led by growth inMexico andBrazil . Cereal net sales growth inMexico for the year, despite lapping strong prior year comparisons. Cereal net sales inBrazil also increased despite category softness.
Snacks net sales growth was led by Pringles, led by increased net sales and
consumption growth in
Reported operating profit decreased 17% due primarily to higher input costs and
investments as well as higher one-time costs and unfavorable foreign currency.
Currency-neutral adjusted operating profit decreased 10% after excluding the
impact of foreign currency and one-time costs.
33
--------------------------------------------------------------------------------AMEA
Reported net sales improved 20% primarily due to a full year of Multipro results, Pringles growth across the region, and favorable pricing/mix, partially offset by unfavorable foreign currency. Organic net sales increased 7.4% after excluding the acquisition impact of Multipro and foreign currency.
Multipro posted double-digit reported net sales growth during the year and contributed to organic growth beginning in May, lapping last year's consolidation of the business.
Snacks posted solid growth led by sustained momentum in Pringles, which grew net sales and consumption collectively across the region.
Reported operating profit increased 12% due to a full year of Multipro results, higher organic net sales, and the reversal of indirect excise tax liabilities largely the result of participating in a tax amnesty program, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit improved 14% after excluding the impact of foreign currency, Project K, and business and portfolio realignment.
Corporate
Reported operating profit decreased$98 million versus the prior year due primarily to higher business and portfolio realignment costs, unfavorable mark-to-market impacts, and the transfer of certain global research and development activities fromNorth America to Corporate at the beginning of 2019. These impacts were partially offset by lower Project K costs. Currency-neutral adjusted operating profit decreased$48 million after excluding the impact of mark-to-market, Project K, and business and portfolio realignment costs. 34 -------------------------------------------------------------------------------- 2018 compared to 2017 The following tables provide an analysis of net sales and operating profit performance for 2018 versus 2017: Year endedDecember 29, 2018 Latin Kellogg (millions) North America Europe America AMEA Corporate Consolidated Reported net sales$ 8,688 $ 2,122 $ 947 $ 1,790 $ -$ 13,547 Foreign currency impact on total business (inc)/dec (3 ) 46 (47 ) (102 ) - (106 ) Currency-neutral net sales$ 8,691 $ 2,076 $ 994 $ 1,892 $ -$ 13,653 Acquisitions 186 - - 536 - 722 Foreign currency impact on acquisitions (inc)/dec - - - 89 - 89 Organic net sales$ 8,505 $ 2,076 $ 994 $ 1,267 $ -$ 12,842
Year ended
Latin Kellogg
(millions) North America Europe America AMEA Corporate Consolidated
Reported net sales $ 8,673 $ 2,050 $ 944 $ 1,187 $ - $ 12,854
Shipping day differences - - 14 - - 14
Organic net sales $ 8,673 $ 2,050 $ 930 $ 1,187 $ - $ 12,840
% change - 2018 vs. 2017:
Reported growth 0.2 % 3.5 % 0.3 % 50.8 % - % 5.4 %
Foreign currency impact - % 2.2 % (5.0 )% (8.6 )% - % (0.8 )%
Currency-neutral growth 0.2 % 1.3 % 5.3 % 59.4 % - % 6.2 %
Acquisitions 2.1 % - % - % 45.2 % - % 5.6 %
Shipping day differences - % - % (1.6 )% - % - % (0.1 )%
Foreign currency impact on
acquisitions (inc)/dec - % - % - % 7.5 % - % 0.7 %
Organic growth (1.9 )% 1.3 % 6.9 % 6.7 % - % - %
Volume (tonnage) (0.2 )% 1.9 % 6.6 % 9.3 % - % 1.9 %
Pricing/mix (1.7 )% (0.6 )% 0.3 % (2.6 )% - % (1.9 )%
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
35--------------------------------------------------------------------------------
Year endedDecember 29, 2018 Latin Kellogg (millions) North America Europe America AMEA Corporate Consolidated Reported operating profit$ 1,397 $ 251 $ 102 $ 174 $ (218 ) $ 1,706 Mark-to-market - - - - 7 7 Project K (107 ) (26 ) (15 ) (18 ) (7 ) (173 ) Brexit impacts - (3 ) - - - (3 ) Business and portfolio realignment (3 ) - - - (2 ) (5 ) Adjusted operating profit$ 1,507 $ 280 $ 117 $ 192 $ (216 ) $ 1,880 Foreign currency impact (2 ) 6 (3 ) (7 ) 3 (3 ) Currency-neutral adjusted operating profit$ 1,509 $ 274 $ 120 $ 199 $ (219 ) $ 1,883 Year endedDecember 30, 2017 Latin Kellogg (millions) North America Europe America AMEA Corporate Consolidated Reported operating profit$ 1,246 $ 220 $ 108 $ 140 $ (327 ) $ 1,387 Mark-to-market - - - - (81 ) (81 ) Project K (345 ) (37 ) (8 ) (14 ) (7 ) (411 ) Adjusted operating profit$ 1,591 $ 257 $ 116 $ 154 $ (239 ) $ 1,879 % change - 2018 vs. 2017: Reported growth 12.1 % 14.6 % (5.2 )% 23.0 % 33.1 % 22.9 % Mark-to-market - % - % - % - % 25.2 % 7.3 % Project K 17.6 % 6.4 % (5.6 )% (0.7 )% (0.5 )% 16.1 % Brexit impacts - % (1.0 )% - % - % - % (0.2 )% Business and portfolio realignment (0.2 )% - % - % - % (0.8 )% (0.3 )% Adjusted growth (5.3 )% 9.2 % 0.4 % 23.7 % 9.2 % - % Foreign currency impact (0.1 )% 2.3 % (2.8 )% (4.6 )% 0.6 % (0.1 )% Currency-neutral adjusted growth (5.2 )% 6.9 % 3.2 % 28.3 % 8.6 % 0.1 %
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
North America Reported net sales increased 0.2% primarily due to the RX acquisition partially offset by unfavorable price/mix as a result of the year-on-year impact of list-price adjustments and rationalization of stock-keeping units related to the transition out of Direct-Store Delivery (DSD) in the back half of 2017, and a slight decrease in volume. Organic net sales decreased 1.9% from the prior year after excluding the impact of acquisitions and foreign currency. Net sales % change - 2018 vs. 2017: Currency-Neutral Net North America Reported Net Sales Foreign Currency Sales Acquisitions Organic Net Sales Snacks 0.4 % - % 0.4 % 3.7 % (3.3 )% Cereal (2.7 )% (0.1 )% (2.6 )% - % (2.6 )% Frozen 7.4 % (0.1 )% 7.5 % - % 7.5 %North America snacks reported net sales increased 0.4% due to the RX acquisition partially offset by unfavorable price/mix as a result of the year-on-year impact of list-price adjustments and rationalization of stock-keeping units 36 --------------------------------------------------------------------------------
related to the DSD exit in the back half of 2017. Organic net sales decreased 3.3% from the prior year after excluding the impact of acquisitions.
North America cereal reported net sales declined by 2.7% on lower volume and unfavorable pricing/mix as consumption and share were impacted by category-wide softness and the mid-year supply chain disruption for Honey Smacks, which returned to shelves in the fourth quarter, but offset improving performance elsewhere in the portfolio.North America frozen foods reported net sales increased by 7.4% on higher volume and favorable price/mix. Eggo® grew share and consumption during the year, benefiting from renovated food and packaging, including the relaunch of our premium Thick N' Fluffy line as well as continued success withDisney -shaped waffles.Morningstar Farms' consumption accelerated in 2018, as we refocused on our core offerings, renovating our food for cleaner labeling and honing our message around plant-based protein. Reported operating profit increased 12% from the prior year primarily due to lower restructuring charges as the prior year included costs associated with our DSD transition partially offset by a double-digit increase in brand building. Currency-neutral adjusted operating profit decreased 5.2% after excluding the impact of restructuring charges.
Reported net sales increased 3.5% due primarily to higher volume and favorable foreign currency partially offset by unfavorable pricing/mix. Organic net sales increased 1.3% after excluding the impact of foreign currency.
The return to organic net sales growth in 2018 was led by broad-based growth in
Pringles, and by expansion in
In Pringles, we ran a successful campaign during the World Cup in the summer and sustained the brand with new pack formats and effective media. The brand grew share in seven of our eight major markets.
Cereal net sales declines moderated during 2018 due to improving share
performance in markets across the region. Most notably, we grew share in both
the
Reported operating profit increased 14.6% due to higher net sales, lower restructuring charges, and favorable foreign currency. Currency-neutral adjusted operating profit increased 6.9% after excluding the impact of restructuring charges and foreign currency.
Latin America Reported net sales increased 0.3% due to higher volume partially offset by shipping day differences, unfavorable pricing/mix and unfavorable foreign currency. Organic net sales increased 6.9%, led byMexico and Mercosur markets, after excluding the impact of foreign currency and shipping days.Mexico posted net sales growth during the year on higher volume and favorable pricing/mix, growing consumption and share in cereal. Across the region, our cereal sales grew at a mid-single digit rate in 2018.
Our snacks business posted growth, led by Pringles in
Parati net sales grew on higher volume and favorable pricing/mix, and continued to grow consumption and share inBrazil , despite the trucker strike and volatile political environment. Reported operating profit decreased 5.2%, primarily due to higher restructuring charges and unfavorable foreign currency. Currency-neutral adjusted operating profit increased 3.2% after excluding the impact of restructuring and foreign currency.
AMEA
Reported net sales increased 51% due primarily to the consolidation of the
Multipro business partially offset by unfavorable foreign currency. Organic net
sales increased 6.7% on higher volume and slightly favorable pricing/mix after
excluding Multipro results and the impact of foreign currency.
37
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Organic growth was led by cereal, whose broad-based growth accelerated in 2018.
Our cereal business held share in the stabilized Australia market, gained share
in markets like Japan and Korea , and continued to generate double-digit growth
in emerging markets like India and Southeast Asia .
Our Pringles business posted high single-digit growth for the year as we continue to expand product offerings in certain markets while launching new pack-formats in others, extending the brand's distribution reach.
Reported operating profit increased 23% due to the consolidation of Multipro beginning inMay 2018 , as well as productivity and brand-building efficiencies as a result of Project K, partially offset by unfavorable foreign currency. Currency-neutral adjusted operating profit improved 28% after excluding the impact of restructuring and foreign currency.
Corporate
As reported operating expense improved 33% due primarily to favorable mark-to-market impacts. Currency-neutral adjusted operating profit increased 8.6% due primarily to lower pension costs, after excluding the impact of mark-to-market, restructuring and foreign currency.
Margin performance
2019 versus 2018 gross margin performance was as follows:
Change vs.
prior year (pts.)
2019 2018
Reported gross margin (a) 32.3 % 34.9 % (2.6 )
Mark-to-market - % 0.1 % (0.1 )
Project K (0.3 )% (0.8 )% 0.5
Brexit impacts - % - % -
Business and portfolio realignment (0.1 )% - % (0.1 )
Multi-employer pension plan exit liability (1.0 )% - % (1.0 )
Foreign currency impact - % - % -
Currency-neutral adjusted gross margin 33.7 % 35.6 % (1.9 )
Note: Tables may not foot due to rounding.
For information on the reconciling items in the table above, please refer to the
Significant items impacting comparability section.
(a) Reported gross margin as a percentage of net sales. Gross margin is equal to
net sales less cost of goods sold.
Reported gross margin for the year ended December 28, 2019 , was unfavorable 260
basis points due primarily to the recognition of a $132 million liability
related to our exit from two multi-employer pension plans. Additionally, margins
were negatively impacted by the consolidation of Multipro results, higher input
costs, mix shifts and costs related to growth in new pack formats.
Currency-neutral adjusted gross margin was unfavorable 190 basis points compared
to the prior year after eliminating the impact of the multi-employer pension
plan exit liability, mark-to-market, Project K, and business and portfolio
realignment.
38
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Our 2019 and 2018 currency-neutral adjusted gross profit is reconciled to the
most comparable U.S. GAAP measures as follows:
(dollars in millions) 2019 2018
Reported gross profit (a) $ 4,381 $ 4,726
Mark-to-market (4 ) 6
Project K (35 ) (99 )
Brexit impacts (9 ) (2 )
Business and portfolio realignment (17 ) -
Multi-employer pension plan exit liability (132 ) - Foreign currency impact
(73 ) -
Currency-neutral adjusted gross profit
Note: Tables may not foot due to rounding. For more information on the reconciling items in the table above, please refer to the Significant items impacting comparability section. (a) Gross profit is equal to net sales less cost of goods sold.
2018 versus 2017 gross margin performance was as follows:
Change vs.
prior year (pts.)
2018 2017
Reported gross margin (a) 34.9 % 36.6 % (1.7 )
Mark-to-market 0.1 % (0.6 )% 0.7
Project K (0.8 )% (0.9 )% 0.1
Brexit impacts - % - % -
Foreign currency impact 0.1 % - % 0.1
Currency-neutral adjusted gross margin 35.5 % 38.1 % (2.6 )
For more information on reconciling items in the table above, please refer to the Significant items impacting comparability section.
Reported gross margin for the year was unfavorable 170 basis points due primarily to the consolidation of Multipro results, the impact of the snacks transition out of DSD, and adverse mix and distribution costs, much of which was related to growth in new pack formats. Productivity and cost savings combined to offset rising inflation in distribution and packaging. These impacts were offset somewhat by favorable mark-to-market, lower restructuring costs and favorable foreign currency. Currency-neutral adjusted gross margin was unfavorable 260 basis points compared to the prior year after eliminating the impact of mark-to-market, restructuring and foreign currency. Our 2018 and 2017 currency-neutral adjusted gross profit is reconciled to the most comparableU.S. GAAP measures as follows: (dollars in millions) 2018 2017 Reported gross profit (a)$ 4,726 $ 4,699 Mark-to-market 6 (79 ) Project K (99 ) (115 ) Brexit impacts (2 ) - Foreign currency impact (19 ) -
Currency-neutral adjusted gross profit
For more information on reconciling items in the table above, please refer to
the Significant items impacting comparability section.
Restructuring programs
We view our restructuring and cost reduction activities as part of our 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 three to five-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.
Project K
As of the end of 2019, the Company has 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.
39
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Since inception, Project K has reduced the Company's cost structure, and
provided enduring benefits, including an optimized supply chain infrastructure,
an efficient global business services model, a global focus on categories,
increased agility from a more efficient organization design, and improved
effectiveness in go-to-market models. These benefits have strengthened existing
businesses in core markets, increased growth in developing and emerging markets,
and driven an increased level of value-added innovation.
Cumulatively, Project K resulted in total pre-tax charges of approximately $1.6
billion , with after-tax cash costs, including incremental capital investments of
approximately $1.2 billion .
Annual cost savings generated from Project K are approximately $700 million .
These savings were realized primarily in selling, general and administrative
expense with additional benefit realized in gross profit as cost of goods sold
savings are partially offset by negative volume and price impacts resulting from
go-to-market business model changes. The overall savings profile of the project
reflects our go-to-market initiatives that will impact both selling, general and
administrative expense and gross profit. Cost savings have been utilized to
offset inflation and fund investments in areas such as in-store execution, sales
capabilities, including adding sales representatives, and in the design and
quality of our products. We have also invested in production capacity in
developing and emerging markets, and in global category teams.
Refer to Note 5 within Notes to Consolidated Financial Statements for further
information related to Project K and other restructuring activities.
Other Programs
During 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
The Company recorded total net charges of$38 million related to this initiative during 2019, with$43 million recorded in SG&A expense and$(5) million recorded in OIE. Also during 2019, the Company announced a reorganization plan which primarily impacts theNorth America reportable segment. The reorganization plan is designed to simplify the organization that supports the remainingNorth 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 Company recorded total charges of$21 million related to this initiative during 2019. These charges were recorded in SG&A expense. Foreign currency translation The reporting currency for our financial statements is theU.S. dollar. Certain of our assets, liabilities, expenses and revenues are denominated in currencies other than theU.S. dollar, primarily in the euro, British pound, Mexican peso, Australian dollar, Canadian dollar, Brazilian Real, Nigerian Naira, and Russian ruble. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues intoU.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of theU.S. dollar against these other currencies will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have significant impact on our results if such increase or decrease in the value of theU.S. dollar is substantial. 40 -------------------------------------------------------------------------------- Interest expense Interest expense was$284 million and$287 million for the years endedDecember 28, 2019 andDecember 29, 2018 , respectively. Interest expense capitalized as part of the construction cost of fixed assets was immaterial for both periods. The slight decrease from the prior year is due primarily to interest savings related to the debt redemption and the impact of a favorable settlement of tax-related interest partially offset by debt redemption costs. Interest income (recorded in other income (expense), net) was$24 million and$16 million for the years endedDecember 28, 2019 andDecember 29, 2018 , respectively. Income taxes Our reported effective tax rate for 2019 and 2018 was 24.6% and 13.6%, respectively. The 2019 effective income tax rate was unfavorably impacted by a permanent basis difference in the assets sold to Ferrero as well as an out-of-period correction. During the fourth quarter of 2019, we recorded an out-of-period adjustment to correct an error in the tax rate applied to a deferred tax asset arising from an intellectual property transfer in a prior year. The adjustment increased income tax expense and decreased deferred tax assets by$39 million , respectively. We determined the adjustment to be immaterial to our Consolidated Financial Statements for the year endedDecember 28, 2019 and related prior annual and quarterly periods. The 2018 effective tax rate benefited from an$11 million net reduction of income tax expense related to our adoption ofU.S. Tax Reform, the favorable impact of discretionary pension contributions totaling$250 million , which were designated as 2017 tax year contributions, and a$44 million discrete tax benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring.
Adjusted effective tax rates for 2019 and 2018 and were 19.5% and 16.5%, respectively.
The following table provides a reconciliation of reported to adjusted income taxes and effective income tax rate for 2019 and 2018. Consolidated results (dollars in millions) 2019 2018 Reported income taxes
$ 321 $ 181 Mark-to-market (24 ) (75 ) Project K (14 ) (33 ) Brexit impacts (1 ) - Business and portfolio realignment (35 ) (1 )
Multi-employer pension plan exit liability (31 ) - Gain on divestiture
55 -
Out-of-period adjustment 39 -
Adoption of U.S. Tax Reform - (11 )
Adjusted income taxes $ 333 $ 301
Reported effective income tax rate 24.6 % 13.6 %
Mark-to-market 0.1 (1.7 )
Project K (0.1 ) (0.6 )
Brexit impacts 0.1 -
Business and portfolio realignment (0.1 ) -
Multi-employer pension plan exit liability (0.1 ) - Gain on divestiture
2.5 -
Out-of-period adjustment 2.7 -
Adoption of U.S. Tax Reform - % (0.6 )%
Adjusted effective income tax rate 19.5 % 16.5 %
Note: Tables may not foot due to rounding.
For more information on reconciling items in the table above, please refer to
the Significant items impacting comparability section.
Fluctuations in foreign currency exchange rates could impact the expected
effective income tax rate as it is dependent upon U.S. dollar earnings of
foreign subsidiaries doing business in various countries with differing
statutory rates. Additionally, the rate could be impacted by tax legislation and
if pending uncertain tax matters, including tax positions that could be affected
by planning initiatives, are resolved more or less favorably than we currently
expect.
41--------------------------------------------------------------------------------
Brexit
TheUnited Kingdom left theEuropean Union onJanuary 31, 2020 , and moved into the 11 month transition period in which the country will remain subject to theEuropean Union's Custom Union and Single Market rules while negotiating a future trade deal. The transition may be extended, if no trade deal or extension is reached byDecember 31, 2020 , theUnited Kingdom will move toWorld Trade Organization trade terms with theEuropean Union . The impact to the financial trends of our European and Consolidated businesses resulting from the future trading relationship between theUnited Kingdom and theEuropean Union will continue to be monitored and evaluated over the course of 2020. During 2019, we generated approximately 5% of our net sales and hold approximately 3% of consolidated assets in theUnited Kingdom as ofDecember 28, 2019 . As details of theUnited Kingdom's withdrawal from theEuropean Union are finalized, we will continue to evaluate the impacts to our business. Brexit may impact our future financial trends in areas such as:
• Net sales could be negatively impacted by reduced efficiency in processing
of product shipments between the
resulting in insufficient products in the appropriate market for sale to
customers,
• Cost of goods sold could increase due to increased costs related toincremental warehousing and logistics services required to adequately
service our customers,
• Cost of goods sold could increase significantly due to tariffs that are
implemented between the
of our European production facilities and the markets we sell in regularly
require significant import and export shipments involving the United
Kingdom ,
• Profitability may be impacted as we update our conclusions on our ability
to realize future benefit from other assets, such as deferred tax assets,
or as we evaluate the effectiveness of existing or future derivative
contracts. This may result in additional valuation allowances or reserves
being established, or require changes in the notional value of derivative
contracts,
• Cash flow could decrease as a result of the requirement to increase
inventory levels maintained in both the
to ensure adequate supply of product to support both base and promotional
activities normally executed with our customers.
LIQUIDITY AND CAPITAL RESOURCES 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. We have historically reported negative working capital primarily as the result of our focus to improve core working capital by reducing our levels of trade receivables and inventory while extending the timing of payment of our trade payables. The impacts of the extended customer terms programs and of the monetization programs are included in our calculation of core working capital and are largely offsetting. Core working capital was improved by the extension of supplier payment terms. These programs are all part of our ongoing working capital management. We have a substantial amount of indebtedness which results in current maturities of long-term debt and notes payable which can have a significant impact on working capital as a result of the timing of these required payments. These factors, coupled with the use of our ongoing cash flows from operations to service our debt obligations, pay dividends, fund acquisition opportunities, and repurchase our common stock, reduce our working capital amounts. We had negative working capital of$1.3 billion and$1.4 billion as ofDecember 28, 2019 andDecember 29, 2018 , respectively. In conjunction with theJuly 28, 2019 closing of the sale of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately$1.3 billion in cash, after-tax proceeds of approximately$1.0 billion were used to redeem outstanding debt, which reduced our leverage and provides additional financial flexibility for future operating and investing needs. We believe that our operating cash flows, together with our credit facilities and other available debt financing, including commercial paper, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that volatility and/or disruption in the global capital and credit markets will not impair our ability to access these markets on terms acceptable to us, or at all. 42 --------------------------------------------------------------------------------
The following table sets forth a summary of our cash flows: (dollars in millions)
2019 2018
Net cash provided by (used in):
Operating activities $ 1,176 $ 1,536
Investing activities 774 (948 )
Financing activities (1,905 ) (566 )
Effect of exchange rates on cash and cash equivalents 31 18
Net increase (decrease) in cash and cash equivalents
Operating activities The principal source of our operating cash flows is net earnings, primarily cash receipts from the sale of our products, net of costs to manufacture and market our products. Our net cash provided by operating activities for 2019 totaled$1,176 million , a decrease of$360 million as compared to 2018. The decrease was due primarily to the current year impact of the divestiture, including related taxes paid and restructuring costs, and the year-over-year impact of accounts receivable partially offset by lower pension contributions. Our cash conversion cycle (defined as days of inventory and trade receivables outstanding less days of trade payables outstanding, based on a trailing 12 month average), is approximately negative 5 and negative 6 days for 2019 and 2018, respectively. Core working capital in 2019 averaged 1.7% of net sales compared to 2.4% in 2018. Our total pension and postretirement benefit plan funding amounted to$28 million and$287 million for the years endedDecember 28, 2019 andDecember 29, 2018 , respectively. The 2018 contributions included$250 million of pre-tax discretionary contributions toU.S. plans designated for the 2017 tax year. The Pension Protection Act (PPA), and subsequent regulations, determines defined benefit plan minimum funding requirements inthe United States . We believe that we will not be required to make any contributions under PPA requirements until 2022 or beyond. Our projections concerning timing of PPA funding requirements are subject to change primarily based on general market conditions affecting trust asset performance, future discount rates based on average yields of high quality corporate bonds and our decisions regarding certain elective provisions of the PPA. We currently project that we will make totalU.S. and foreign benefit plan contributions in 2020 of approximately$26 million . Actual 2020 contributions could be different from our current projections, as influenced by our decision to undertake discretionary funding of our benefit trusts versus other competing investment priorities, future changes in government requirements, trust asset performance, renewals of union contracts, or higher-than-expected health care claims cost experience. We measure cash flow as net cash provided by operating activities reduced by expenditures for property additions. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available over time for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow metric is reconciled to the most comparable GAAP measure, as follows: (dollars in millions) 2019 2018 Net cash provided by operating activities$ 1,176 $ 1,536 Additions to properties (586 ) (578 ) Cash flow$ 590 $ 958 Investing activities Our net cash provided by investing activities for 2019 totaled$774 million compared to cash used of$948 million in 2018. The change was due primarily to the divestiture of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero for approximately$1.3 billion of cash as well as our acquisition of an ownership interest inTolaram Africa Foods ,PTE LTD (TAF) for$381 million during 2018. Capital spending in 2019 included investments in our supply chain infrastructure, including new plants in emerging markets, network optimization, and packaging flexibility in global manufacturing and distribution. Cash paid for additions to properties as a percentage of net sales was 4.3% in both 2019 and 2018. 43 -------------------------------------------------------------------------------- Financing activities Our net cash used by financing activities was$1,905 million and$566 million for the years endedDecember 28, 2019 andDecember 29, 2018 , respectively.
Total debt was
InAugust 2019 , the Company redeemed$191 million of its 4.15%U.S. Dollar Notes dueNovember 2019 ,$248 million of its 4.00%U.S. Dollar Notes due 2020,$202 million of its 3.25%U.S. Dollar Notes due 2021, and$50 million of its 2.65%U.S. Dollar Notes due 2023. InSeptember 2019 , the Company redeemed$309 million of its 4.15%U.S. Dollar Notes dueNovember 2019 , the remaining principal balance subsequent to the August redemption. InMay 2018 , we issued$600 million of ten-year 4.30% Senior Notes due 2028 and$400 million of three-year 3.25% Senior Notes due 2021, resulting in aggregate net proceeds after debt discount of$994 million . The proceeds from these Notes were used for general corporate purposes, including the repayment of our$400 million , seven-year 3.25%U.S. Dollar Notes due 2018 at maturity, and the repayment of a portion of our commercial paper borrowings used to finance our acquisition of ownership interests in TAF and Multipro. We paid quarterly dividends to shareholders totaling$2.26 per share in 2019. Total cash paid for dividends increased by 2.7% in 2019. OnFebruary 21, 2020 , the board of directors declared a dividend of$.57 per common share, payable onMarch 16, 2020 to shareholders of record at the close of business onMarch 3, 2020 . We entered into an unsecured Five-Year Credit Agreement inJanuary 2018 , allowing us to borrow, on a revolving credit basis, up to$1.5 billion and expiring inJanuary 2023 .
In
The Five-Year and 364 Day Credit Agreements which had no outstanding borrowings asDecember 28, 2019 , contain customary covenants and warranties, including specified restrictions on indebtedness, liens and a specified interest expense coverage ratio. If an event of default occurs, then, to the extent permitted, the administrative agents may terminate the commitments under the credit facilities, accelerate any outstanding loans under the agreements, and demand the deposit of cash collateral equal to the lender's letter of credit exposure plus interest. During the third quarter of 2019, in connection with the divestiture of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses, the Company withdrew from two multi-employer pension plans and recorded withdrawal liabilities of$132 million . While this represents our best estimate of the cost of withdrawing from the plans at this time, we have not yet reached agreement on the ultimate amount of the withdrawal liability. Subsequent to the end of the year, the Company and the lenders under the Five-Year and 364-Day Credit agreements entered into a waiver agreement addressing any matters that arose or may arise from these liabilities under the agreements, as long as the aggregate amount of such liabilities does not exceed$250 million . The Company was in compliance with all financial covenants contained in these agreements atDecember 28, 2019 . Our Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions and also contain a change of control provision. There are no significant restrictions on the payment of dividends. We were in compliance with all covenants as ofDecember 28, 2019 . The Notes do not contain acceleration of maturity clauses that are dependent on credit ratings. A change in our credit ratings could limit our access to theU.S. short-term debt market and/or increase the cost of refinancing long-term debt in the future. However, even under these circumstances, we would continue to have access to our 364-Day Credit Facility, which expires inJanuary 2021 , as well as our Five-Year Credit Agreement, which expires inJanuary 2023 . This source of liquidity is unused and available on an unsecured basis, although we do not currently plan to use it. We monitor the financial strength of our third-party financial institutions, including those that hold our cash and cash equivalents as well as those who serve as counterparties to our credit facilities, our derivative financial instruments, and other arrangements. 44 -------------------------------------------------------------------------------- We continue to believe that we will be able to meet our interest and principal repayment obligations and maintain our debt covenants for the foreseeable future, while still meeting our operational needs, including the pursuit of select acquisitions. This will be accomplished through our strong cash flow, our short-term borrowings, and our maintenance of credit facilities on a global basis. Monetization and Accounts Payable programs We have a program in which customers could extend their payment terms in exchange for the elimination of early payment discounts (Extended Terms Program). In order to mitigate the net working capital impact of the Extended Terms Program for discrete customers, we entered into agreements to sell, on a revolving basis, certain trade accounts receivable balances to third party financial institutions (Monetization Programs). Transfers under the Monetization Programs are accounted for as sales of receivables resulting in the receivables being de-recognized from our 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 funding from receivables that may be sold at any time is currently$1,033 million , but may be increased or decreased as customers move in or out of the Extended Terms Program and as additional financial institutions move in or out of the Monetization Programs. Accounts receivable sold of$774 million and$900 million remained outstanding under this arrangement as ofDecember 28, 2019 andDecember 29, 2018 , respectively. The Monetization Programs are designed 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. Current DSO levels withinNorth America are consistent with DSO levels prior to the execution of the Extended Term Program and Monetization Programs.
Refer to Note 2 within Notes to Consolidated Financial Statements for further information related to the sale of accounts receivable.
Additionally we have agreements with third parties (Accounts Payable Program) to provide accounts payable tracking systems which facilitate participating suppliers' ability to monitor and, if elected, sell our payment obligations to designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to sell one or more of our payment obligations prior to their scheduled due dates at a discounted price to participating financial institutions. Our 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. We have no economic interest in the sale of these suppliers' receivables and no direct financial relationship with the financial institutions concerning these services. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers' decisions to sell amounts under the arrangements. However, our 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.
Refer to Note 1 within Notes to Consolidated Financial Statements for further information related to accounts payable.
If financial institutions were to terminate their participation in the Monetization or Accounts Payable Programs, working capital could be negatively impacted. In addition, a downgrade in our credit rating could result in higher costs to participating Accounts Payable Programs suppliers or our extended payment terms being reversed, the latter of which could negatively impact working capital. If working capital is negatively impacted as a result of these events and we were unable to secure alternative programs, we may have to utilize our various financing arrangements for short-term liquidity or increase our long-term borrowings.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off-balance sheet arrangements
At
45
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Contractual obligations
The following table summarizes our contractual obligations at December 28, 2019 :
Contractual obligations Payments due by period
2025 and
(millions) Total 2020 2021 2022 2023 2024 beyond
Long-term debt:
Principal $ 7,838 620 835 1,039 771 677 3,896
Interest (a) 2,100 250 216 193 172 158 1,111
Finance leases (b) - - - - - - -
Operating leases (c) 610 129 98 80 67 55 181Purchase obligations (d) 1,522 1,011 227 101
59 42 82
Uncertain tax positions
(e) 19 19 - - - - -
Other long-term
obligations (f) 709 132 77 78 77 75 270
Total $ 12,798 $ 2,161 $ 1,453 $ 1,491 $ 1,146 $ 1,007 $ 5,540
(a) Includes interest payments on our long-term debt and payments on our
interest rate swaps. Interest calculated on our variable rate debt was
forecasted using the LIBOR forward rate curve as of December 28, 2019 .
(b) The total expected cash payments on our finance leases include interest
expense totaling less than
(c) Operating leases represent the minimum rental commitments under
non-cancelable operating leases.
(d) Purchase obligations consist primarily of fixed commitments for rawmaterials to be utilized in the normal course of business and for marketing,
advertising and other services. The amounts presented in the table do not
include items already recorded in accounts payable or other current
liabilities at year-end 2019, nor does the table reflect cash flows we are
likely to incur based on our plans, but are not obligated to incur.
Therefore, it should be noted that the exclusion of these items from thetable could be a limitation in assessing our total future cash flows under
contracts.
(e) As of
months. We are not able to reasonably estimate the timing of future cash
flows related to the remaining
(f) Other long-term obligations are those associated with noncurrent liabilities
recorded within the Consolidated Balance Sheet at year-end 2019 and consist
principally of projected commitments under deferred compensation
arrangements, multiemployer plans, and supplemental employee retirement
benefits. The table also includes our current estimate of minimum
contributions to defined benefit pension and postretirement benefit plans
through 2024 as follows: 2020-$46; 2021-$39; 2022-$40; 2023-$39; 2024-$48;
2025-$68.
In addition,
CRITICAL ACCOUNTING ESTIMATES Promotional expenditures Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in-store displays and events, feature price discounts, consumer coupons, contests and loyalty programs. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally immaterial and recognized as a change in management estimate in a subsequent period. On a full-year basis, these subsequent period adjustments represent approximately 0.3% of our company's net sales. However, our company's total promotional expenditures (including amounts classified as a revenue reduction) are significant, so it is likely our results would be materially different if different assumptions or conditions were to prevail. Property Long-lived assets such as property, plant and equipment are tested for impairment when conditions indicate that the carrying value may not be recoverable. Management evaluates several conditions, including, but not limited to, the following: a significant decrease in the market price of an asset or an asset group; a significant adverse change in the extent or manner in which a long-lived asset is being used, including an extended period of idleness; and a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. For assets to be held and used, we project the expected future undiscounted cash flows generated by the long-lived asset or asset group over the remaining useful life of the primary asset. If the cash flow analysis yields an amount less than the carrying amount we determine the fair value of the asset or asset group by using comparable market data. There are inherent uncertainties associated with the judgments and estimates we use in these analyses. AtDecember 28, 2019 , we have property, plant and equipment of$3.6 billion , net of accumulated depreciation, on our balance sheet. 46 --------------------------------------------------------------------------------Goodwill and other intangible assets We perform an impairment evaluation of goodwill and intangible assets with indefinite useful lives at least annually during the fourth quarter of each year in conjunction with our annual budgeting process.Goodwill impairment testing first requires a comparison between the carrying value and fair value of a reporting unit with associated goodwill. Carrying value is based on the assets and liabilities associated with the operations of that reporting unit, which often requires allocation of shared or corporate items among reporting units. For the 2019 goodwill impairment test, the fair value of the reporting units was estimated based on market multiples of sales, if applicable, and/or earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings for companies comparable to our reporting units. In the event the fair value determined using the market multiples approach is close to the carrying value, we may also supplement our fair value determination using discounted cash flows. Management believes the assumptions used for the impairment test are consistent with those utilized by a market participant performing similar valuations for our reporting units. Similarly, impairment testing of indefinite-lived intangible assets requires a comparison of carrying value to fair value of that particular asset. Fair values of non-goodwill intangible assets are based primarily on projections of future cash flows to be generated from that asset. For instance, cash flows related to a particular trademark would be based on a projected royalty stream attributable to branded product sales discounted at rates consistent with rates used by market participants. These estimates are made using various inputs including historical data, current and anticipated market conditions, management plans, and market comparables. We also evaluate the useful life over which a non-goodwill intangible asset with a finite life is expected to contribute directly or indirectly to our cash flows. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets. OnDecember 30, 2018 the Company reorganized our North American business. The reorganization eliminated the legacy business unit structure and internal reporting. In addition, the Company changed the internal reporting provided to the chief operating decision maker (CODM) and segment manager. As a result, the Company reevaluated its operating segments and reporting units. In addition, we transferred the management of ourMiddle East ,North Africa , andTurkey businesses fromKellogg Europe toKellogg AMEA, effectiveDecember 30, 2018 .
Refer to Note 4,
As a result of these changes in operating segments and related reporting units, the Company re-allocated goodwill between reporting units where necessary and compared the carrying value to the fair value of each impacted reporting unit on a before and after basis. This evaluation was only required to be performed on reporting units impacted by the changes noted above. EffectiveDecember 30, 2018 inNorth America , the previousU.S. Snacks,U.S. Morning Foods ,U.S. Specialty Channels,U.S. Frozen Foods , Kashi,Canada and RX operating segments are now a single operating segment (Kellogg North America ). At the beginning of 2019, the Company evaluated the related impacted reporting units for impairment on a before and after basis and concluded that the fair values of each reporting unit exceeded their carrying values. Approximately$46 million of goodwill was re-allocated between the impacted reporting units withinKellogg Europe andKellogg AMEA related to the transfer of businesses between these operating segments. The Company performed a goodwill evaluation of the impacted reporting units on a before and after basis and concluded that the fair value of the impacted reporting units exceeded their carrying values. Additionally, during the first quarter of 2019, the Company determined that it was more likely than not that the Company would be selling selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses within theNorth America reporting unit. As a result, the Company performed a goodwill impairment evaluation on theNorth America reporting unit in the first quarter of 2019 and concluded that the fair value 47 -------------------------------------------------------------------------------- exceeded the carrying value of the reporting unit. During the second quarter of 2019, the Company entered into a definitive agreement to sell the businesses to Ferrero. The sale was completed during the third quarter of 2019 and resulted in the divestiture of the net assets and liabilities of these businesses, included in theNorth America reporting unit, including$191 million ofGoodwill and$765 million of Net Intangibles. In addition to the cash consideration received, the Company entered into a perpetual royalty-free licensing agreement with Ferrero, allowingKellogg the use of certain brand names for cracker products. The license agreement was fair valued at$18 million and recorded as an indefinite-lived intangible asset. AtDecember 28, 2019 , goodwill and other intangible assets amounted to$8.4 billion , consisting primarily of goodwill and brands originally associated with the 2001 acquisition ofKeebler Foods Company and the 2012 acquisition of Pringles. Within this total, approximately$2.1 billion of non-goodwill intangible assets were classified as indefinite-lived, including$1.7 billion related to trademarks, comprised principally of Pringles and cracker-related trademarks. The majority of these intangible assets are recorded in ourNorth America reporting unit. The Company currently believes the fair value of goodwill and other intangible assets exceeds their carrying value and that those intangibles so classified will contribute indefinitely to cash flows. Through impairment testing performed during the fourth quarter of 2019, no heightened risk of impairment of individual intangible assets or reporting units was identified. Additionally the Company has goodwill of$606 million and$373 million atDecember 28, 2019 related to the Multipro and RX reporting units, respectively. The Company performed additional goodwill impairment testing for Multipro using both an EBITDA market multiple and discounted cash flow method. The Company performed additional goodwill impairment testing for RX using both a sales market multiple and discounted cash flow method. Significant assumptions utilized within the Multipro discounted cash flow model include forecasted net sales growth and gross margin. The significant assumption utilized within the RX discounted cash flow model is forecasted net sales growth. The Company determined the fair value of Multipro and RX exceed the carrying value and no heightened risk of impairment exists for the reporting units. Retirement benefits Our company sponsors a number ofU.S. and foreign defined benefit employee pension plans and also provides retiree health care and other welfare benefits inthe United States andCanada . Plan funding strategies are influenced by tax regulations and asset return performance. A majority of plan assets are invested in a globally diversified portfolio of debt and equity securities with smaller holdings of other investments. We recognize the cost of benefits provided during retirement over the employees' active working life to determine the obligations and expense related to our retiree benefit plans. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and accumulated obligation include the long-term rates of return on plan assets, the health care cost trend rates, the mortality table and improvement scale, and the interest rates used to discount the obligations for our major plans, which cover employees inthe United States ,United Kingdom andCanada . Our expense recognition policy for pension and nonpension postretirement benefits is to immediately recognize actuarial gains and losses in our operating results in the year in which they occur. Actuarial gains and losses are recognized annually as of our measurement date, which is our fiscal year-end, or when remeasurement is otherwise required under generally accepted accounting principles. Additionally, for purposes of calculating the expected return on plan assets related to pension and nonpension postretirement benefits we use the fair value of plan assets. To conduct our annual review of the long-term rate of return on plan assets, we model expected returns over a 20-year investment horizon with respect to the specific investment mix of each of our major plans. The return assumptions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets including consideration of current yields on long-term bonds, price-earnings ratios of the major stock market indices, and long-term inflation. OurU.S. plan model, corresponding to approximately 72% of our trust assets globally, currently incorporates a long-term inflation assumption of 2.5% and a 2019 weighted-average active management premium of 0.93% (net of fees) validated by historical analysis and future return expectations. Although we review our expected long-term rates of return annually, our benefit trust investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return have generally not been revised, provided these rates continue to fall within a "more likely than not" corridor of between the 25th and 75th percentile of expected long-term returns, as determined by our modeling process. Our assumed rate of return forU.S. plans in 2019 was 7.5% prior to the mid-year remeasurement, and 7.0% after the mid-year 48 -------------------------------------------------------------------------------- remeasurement, based on an updated target portfolio mix with an active management premium of 0.80% (net of fees), equated to approximately the 53rd percentile and 54th percentile expectation of our model, respectively. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. Foreign trust investments represent approximately 28% of our global benefit plan assets. Based on consolidated benefit plan assets atDecember 28, 2019 , a 100 basis point increase or decrease in the assumed rate of return would correspondingly increase or decrease 2020 benefits expense by approximately$64 million . For the years endedDecember 28, 2019 andDecember 29, 2018 , our actual return on plan assets exceeded (was less than) the recognized assumed return by$730 million and$(845) million , respectively. To conduct our annual review of health care cost trend rates, we model our actual claims cost data over a five-year historical period, including an analysis of pre-65 versus post-65 age groups and other important demographic components in our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial health care cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. In comparison to our actual five-year compound annual claims cost growth rate of approximately 5.12%, our initial trend rate for 2020 of 5.25% reflects the expected future impact of faster-growing claims experience for certain demographic groups within our total employee population. Our initial rate is trended downward by 0.25% per year, until the ultimate trend rate of 4.5% is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Based on consolidated obligations atDecember 28, 2019 , a 100 basis point increase in the assumed health care cost trend rates would increase 2020 benefits expense by approximately$3 million and generate an immediate loss recognition of$7 million . A one percent increase in 2020 health care claims cost over that projected from the assumed trend rate would result in an experience loss of approximately$7 million and would increase 2020 expense by$0.3 million . Any arising health care claims cost-related experience gain or loss is recognized in the year in which they occur. The experience gain arising from recognition of 2019 claims experience was approximately$15 million . Assumed mortality rates of plan participants are a critical estimate in measuring the expected payments a participant will receive over their lifetime and the amount of expense we recognize. In 2019, theSociety of Actuaries (SOA) published updated mortality tables and an updated improvement scale. The expectations of future mortality rates in the new SOA tables were consistent with priorKellogg mortality assumptions. In determining the appropriate mortality assumptions as of 2019 fiscal year-end, we adopted the new SOA tables with collar adjustments based onKellogg's current population. In addition, based on mortality information available from theSocial Security Administration and other sources, we developed assumptions for future mortality improvement in line with our expectations for future experience. The change to the mortality assumption impacted the year-end pension and postretirement benefit obligations by$77 million and($13) million , respectively. To conduct our annual review of discount rates, we selected the discount rate based on a cash-flow matching analysis using Willis Towers Watson's proprietary RATE:Link tool and projections of the future benefit payments constituting the projected benefit obligation for the plans. RATE:Link establishes the uniform discount rate that produces the same present value of the estimated future benefit payments, as is generated by discounting each year's benefit payments by a spot rate applicable to that year. The spot rates used in this process are derived from a yield curve created from yields on the 40th to 90th percentile ofU.S. high quality bonds. A similar methodology is applied inCanada andEurope , except the smaller bond markets imply that yields between the 10th and 90th percentiles are preferable and in theU.K. the underlying yield curve was derived after further adjustments to the universe of bonds to remove government backed bonds. We use aDecember 31 measurement date for our defined benefit plans. Accordingly, we select yield curves to measure our benefit obligations that are consistent with market indices during December of each year. Based on consolidated obligations atDecember 28, 2019 , a 25 basis point decline in the yield curve used for benefit plan measurement purposes would decrease 2020 benefits expense by approximately$8 million and would result in an immediate loss recognition of$238 million . All obligation-related actuarial gains and losses are recognized immediately in the year in which they occur. Despite the previously-described policies for selecting major actuarial assumptions, we periodically experience material actuarial gains or losses due to differences between assumed and actual experience and due to changing economic conditions. During 2019, we recognized a net actuarial loss of approximately$94 million compared to a net actuarial loss of approximately$346 million in 2018. The total net loss recognized in 2019 was driven by a$730 million gain from better than expected asset returns, offset by a loss of approximately$824 million of plan 49 -------------------------------------------------------------------------------- experience and assumption changes, including decreases in the discount rate and the change in mortality assumptions. During 2019, we also recognized curtailment gains of$19 million related to benefit changes and certain events affecting our benefit programs. During 2019, we made contributions in the amount of$10 million toKellogg's global tax-qualified pension programs. This amount was mostly non-discretionary. Additionally, we contributed$18 million to our retiree medical programs. Income taxes Our consolidated effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we operate. The calculation of our income tax provision and deferred income tax assets and liabilities is complex and requires the use of estimates and judgment. We recognize tax benefits associated with uncertain tax positions when, in our judgment, it is more likely than not that the positions will be sustained upon examination by a taxing authority. For tax positions that meet the more likely than not recognition threshold, we initially and subsequently measure the tax benefits as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, new or emerging legislation and tax planning. The tax position will be derecognized when it is no longer more likely than not of being sustained. Significant adjustments to our liability for unrecognized tax benefits impacting our effective tax rate are separately presented in the rate reconciliation table of Note 13 within Notes to Consolidated Financial Statements. Management monitors the Company's ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration as well as the reinvestment assertion regarding our undistributed foreign earnings. Changes resulting from management's assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. OnDecember 22, 2017 , theU.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act includes a provision designed to tax currently global intangible low taxed income (GILTI) starting in 2018. Under the provision, aU.S. shareholder is required to include in gross income the amount of its GILTI, which is 50% of the excess of the shareholder's net tested income of its controlled foreign corporation over the deemed tangible income return. The amount of GILTI included by aU.S. shareholder is computed by aggregating all controlled foreign corporations (CFC). Shareholders are allowed to claim a foreign tax credit for 80 percent of the taxes paid or accrued with respect to the tested income of each CFC, subject to some limitations.
ACCOUNTING STANDARDS TO BE ADOPTED IN FUTURE PERIODS
Cloud Computing Arrangements. InAugust 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 afterDecember 15, 2019 and can be applied retrospectively or prospectively. Early adoption is permitted. The Company plans to adopt the ASU in the first quarter of 2020 and apply it prospectively. The adoption is not expected to have a material impact to the Company's Consolidated Financial Statements. Compensation Retirement Benefits. InAugust 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 afterDecember 15, 2020 and can be applied retrospectively or prospectively. Early adoption is permitted. We are currently assessing when to adopt the ASU and the impact of adoption. 50
-------------------------------------------------------------------------------- FUTURE OUTLOOK The Company issued its initial financial guidance for 2020. Specifically, the Company is projecting:
Organic net sales to increase by 1-2%.
Currency-neutral adjusted operating profit to decline approximately (4)%, as the absence of the results from the divested businesses more than offsets growth in the base business.
Currency-neutral adjusted earnings per share to decline by approximately (3)-(4)%, as the absence of results from the divested businesses more than offset growth in the base business.
Non-GAAP operating cash flow to improve to
We are unable to reasonably estimate the potential full-year financial impact of mark-to-market adjustments because these impacts are dependent on future changes in market conditions (interest rates, return on assets, and commodity prices). Similarly, because of volatility in foreign exchange rates and shifts in country mix of our international earnings, we are unable to reasonably estimate the potential full-year financial impact of foreign currency translation. As a result, these impacts are not included in the guidance provided. Therefore, we are unable to provide a full reconciliation of these non-GAAP measures used in our guidance without unreasonable effort as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. See the table below that outlines the projected impact of certain other items that are excluded from non-GAAP guidance for 2020: Impact of certain items excluded from Non-GAAP Earnings Per guidance: Net Sales Operating Profit Share Business and portfolio realignment (pre-tax)~$60-$70M
Income tax impact applicable to adjustments, net**
Currency-neutral adjusted guidance* (2)%-0% ~(4)%
~(3)%
Absence of results from divested businesses ~4% 53rd week
(1)%-(2)%
Organic guidance 1%-2%
* 2020 full year guidance for net sales, operating profit, and earnings per
share are provided on a non-GAAP basis only because certain information
necessary to calculate such measures on a GAAP basis is unavailable, dependent
on future events outside of our control and cannot be predicted without
unreasonable efforts by the Company. These items for 2020 include impacts of
mark-to-market adjustments for pension plans (service cost, interest cost,
expected return on plan assets, and other net periodic pension costs are not
excluded), commodities and certain foreign currency contracts. The Company is
providing quantification of known adjustment items where available.
Reconciliation of Non-GAAP amounts - Cash Flow Guidance (billions)
Full Year 2020
Net cash provided by (used in) operating activities ~$1.5-$1.6
Additions to properties ~($0.6 )
Cash Flow ~$0.9-$1.0
51--------------------------------------------------------------------------------
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