Kellogg Returns to Profitability Thanks to a Restructuring



The Kellogg Company (NYSE:K) returned to profitability in the final months of 2013, even though revenue dipped in the fourth-quarter. Kellogg — whose products include cereals like Special K and Frosted Flakes, Pringles chips, Pop-Tarts, and Eggo waffles — faces strong competition in both the breakfast and snack categories, as well as weak demand from customers. However, by decreasing expenses and repricing some assets based on changing market conditions, the company was able to recover from its year-ago loss.

For the three month period, the cereal maker earned $818 million, or $2.24 per share, a reversal of the $32 million loss, or 9 cents per share, that the company reported in the fourth-quarter of last year. Investors — who bid shares down around 2 percent in 2013 — responded to the Thursday mornings earnings release with modest optimism. In pre-market trading, shares rose as much as 0.14 percent, or 8 cents, to $57.45, although shares were trading down by as much as 2 percent shortly after the markets opened. It is important to note that earnings were significantly boosted by repricing asses. Kellogg recorded a benefit from repricing certain so-called “mark-to-market adjustments,” that added $1.83 per share to earnings.

According to Kellogg, those adjustments were “driven by the impact that asset returns and changes in interest rates had on pension plan.” Excluding the benefit and other one-time items, earnings came to 83 cents per share, which still surpassed Wall Street’s expectations.

But while earnings improved, revenue slipped as sales fell in several key markets. Revenue totaled $3.5 billion, representing a 2 percent decline from the $3.56 billion generated in the year-ago quarter. The quarter’s total also missed the slightly higher revenue of $4.53 billion expected by Wall Street. Sales in North America dipped 2.8 percent, a drop reflecting sales declines in its U.S. morning foods and snacks division. Similarly, sales decreased in the Latin America and Asia Pacific region bur rose 4 percent in Europe to $716 million.

Kellogg also reported full-year financial results for 2013; net income rose to $1.18 billion, or $4.94 per share — an increase from the $961 million, or $2.67 per share, the company earned the previous year. Adjusted earnings came in at $3.77 per share, while annual revenue rose 4 percent to $14.79 billion from $14.2 billion.

“Our Pringles business had an excellent year in 2013, although we continue to face challenges in some of our developed cereal businesses,” Kellogg president and Chief Executive Officer John Bryant explained in the earnings press release. “We are executing our strategy, and we are also progressing very well with Project K, our four-year efficiency-and-effectiveness program. Our expectations are that, over time, Project K will begin to provide us the fuel we need to drive growth in our categories, and across our businesses, in the years to come.”

When announced, Project K — a restructuring program — was expected to result in total cost savings of between $175 million and $200 million in the fiscal 2013, and the implementation of the program contributed to Kellogg’s full-year rebound. The cereal maker also said the company expected to reduce its workforce by about 7 percent over a four-year period, with employees dropping from 2013’s 31,000 to 28,800.

“We are excited by the potential and opportunities we see for growth in the categories in which we operate,” Bryant said in November when the efficiency program was revealed alongside third quarter earnings. “As a result, we are making the difficult decisions necessary to address structural cost-saving opportunities which will enable us to increase investment in our core markets and in opportunities for future growth.” For 2014, Kellogg forecast earnings per share growth of between 1 percent and 3 percent.

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