WK Kellogg Co(KLG) - 2025 Q4 - Annual Report

PART I — Financial Information Item 1: Financial Statements WK Kellogg Co's unaudited consolidated financial statements, restated, reveal decreased profitability and increased debt Unaudited Consolidated Balance Sheet Consolidated Balance Sheet Highlights (Millions USD) | Metric | June 28, 2025 | December 28, 2024 | Change | % Change | | :-------------------------- | :------------ | :---------------- | :----- | :------- | | Total Assets | $2,124 | $1,983 | $141 | 7.1% | | Cash and Cash Equivalents | $120 | $47 | $73 | 155.3% | | Inventories | $393 | $367 | $26 | 7.1% | | Total Current Liabilities | $749 | $851 | $(102) | (12.0)% | | Long-Term Debt | $681 | $460 | $221 | 48.0% | | Total Equity | $345 | $328 | $17 | 5.2% | Unaudited Consolidated Statement of Income Consolidated Statement of Income Highlights (Millions USD, except per share data) | Metric | Q2 2025 | Q2 2024 (Restated) | YTD 2025 | YTD 2024 (Restated) | | :----------------- | :------ | :----------------- | :------- | :------------------ | | Net Sales | $613 | $672 | $1,276 | $1,379 | | Cost of Goods Sold | $446 | $469 | $916 | $971 | | Operating Profit | $10 | $54 | $34 | $102 | | Net Income (Loss) | $8 | $37 | $29 | $71 | | Basic EPS | $0.09 | $0.43 | $0.34 | $0.82 | | Diluted EPS | $0.09 | $0.42 | $0.33 | $0.81 | - Net sales decreased by 8.8% for the quarter and 7.5% for the year-to-date period ended June 28, 2025, compared to the prior year[13] - Operating profit saw a significant decline of 81.5% for the quarter and 66.7% for the year-to-date period ended June 28, 2025, compared to the prior year[13] - Net income decreased by 78.4% for the quarter and 59.1% for the year-to-date period ended June 28, 2025, compared to the prior year[13] Unaudited Consolidated Statement of Comprehensive Income Consolidated Statement of Comprehensive Income Highlights (Millions USD) | Metric | Q2 2025 | Q2 2024 (Restated) | YTD 2025 | YTD 2024 (Restated) | | :--------------------- | :------ | :----------------- | :------- | :------------------ | | Net Income (Loss) | $8 | $37 | $29 | $71 | | Other Comprehensive Income (Loss) | $5 | $(3) | $2 | $(6) | | Comprehensive Income (Loss) | $13 | $34 | $31 | $65 | - Comprehensive income decreased from $34 million in Q2 2024 to $13 million in Q2 2025, and from $65 million YTD 2024 to $31 million YTD 2025[15] Unaudited Consolidated Statement of Equity Consolidated Statement of Equity Highlights (Millions USD) | Metric | Balance, Dec 28, 2024 | YTD 2025 Changes | Balance, June 28, 2025 | | :-------------------------- | :-------------------- | :--------------- | :--------------------- | | Total Equity | $328 | $17 | $345 | | Net Income | | $29 | | | Dividends Declared | | $(28) | | | Other Comprehensive Income | | $2 | | | Stock Compensation | | $8 | | | Stock Issuance | | $2 | | - Total equity increased from $328 million at December 28, 2024, to $345 million at June 28, 2025, primarily driven by net income and stock compensation, partially offset by dividends[19] Unaudited Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Highlights (Millions USD) | Activity | YTD June 28, 2025 | YTD June 29, 2024 (Restated) | | :------------------------ | :---------------- | :--------------------------- | | Operating Activities | $16 | $37 | | Investing Activities | $(124) | $(47) | | Financing Activities | $181 | $(30) | | Net Increase (Decrease) in Cash | $73 | $(42) | | Cash at End of Period | $120 | $47 | - Net cash provided by operating activities decreased from $37 million in YTD 2024 to $16 million in YTD 2025[22] - Net cash used in investing activities significantly increased from $(47) million in YTD 2024 to $(124) million in YTD 2025, primarily due to increased capital spending for supply chain optimization[22][139] - Net cash provided by financing activities dramatically shifted from an outflow of $(30) million in YTD 2024 to an inflow of $181 million in YTD 2025, driven by additional borrowings under the Credit Facility[22][140] Notes to Unaudited Consolidated Financial Statements Note 1 Accounting policies - The Company restated prior consolidated financial statements to correct an error that understated Inventory and overstated Cost of goods sold, and to reclassify certain cash, notes payable, and accounts payable items[28][29] Impact of Restatement on Net Income (Millions USD) | Period | As Reported | Adjustment | As Restated | | :--------------- | :---------- | :--------- | :---------- | | Q2 2024 Net Income | $31 | $6 | $37 | | YTD 2024 Net Income | $64 | $7 | $71 | - The Company participates in supplier finance programs, with $146 million of outstanding payment obligations as of June 28, 2025, up from $132 million at December 28, 2024[34][35] - New accounting standards for Income Taxes (ASU 2023-09) and Disaggregation of Income Statement Expenses (ASU 2024-03) will be adopted in fiscal years 2026 and 2028, respectively, with the Company currently evaluating their impact[36][37] Note 2 Sale of accounts receivable - The Company has a monetization agreement to sell trade receivables on a non-recourse basis, with $300 million outstanding as of June 28, 2025, down from $307 million at December 28, 2024[39][41] Net Loss on Sale of Receivables (Millions USD) | Period | Q2 2025 | YTD 2025 | Q2 2024 | YTD 2024 | | :-------- | :------ | :------- | :------ | :------- | | Net Loss | $4 | $8 | $5 | $9 | - Restricted cash related to the monetization program was $7 million as of June 28, 2025, a decrease from $15 million at December 28, 2024[42] Note 3 Equity - Basic and diluted earnings per share for Q2 2025 were $0.09, down from $0.43 and $0.42 respectively in Q2 2024; YTD 2025 basic EPS was $0.34 and diluted EPS was $0.33, down from $0.82 and $0.81 respectively in YTD 2024[13][44] Accumulated Other Comprehensive Income (Loss) (Millions USD) | Component | June 28, 2025 | December 28, 2024 | | :-------------------------------------- | :------------ | :---------------- | | Foreign currency translation adjustments | $(41) | $(49) | | Cash flow hedges — net deferred gain (loss) | $(1) | $5 | | Postretirement and postemployment benefits | $2 | $2 | | Total AOCI (Loss) | $(40) | $(42) | Note 4 Restructuring - The Company approved a restructuring plan on July 31, 2024, to consolidate its manufacturing network by closing its Omaha, Nebraska plant and scaling back its Memphis, Tennessee facility by the end of fiscal year 2026[47][131] - Cumulative restructuring pretax charges are estimated between $230 million and $270 million through 2027, including $30-$40 million in cash costs and $170-$190 million in non-cash charges[48][132] Restructuring Costs Incurred (Millions USD) | Cost Type | Q2 2025 | YTD 2025 | Project Costs to Date | | :------------------ | :------ | :------- | :-------------------- | | Employee related costs | $0 | $0 | $20 | | Pension curtailment loss, net | $0 | $0 | $3 | | Asset related costs | $13 | $27 | $58 | | Other costs | $1 | $1 | $3 | | Total | $14 | $28 | $84 | Note 5 Pension and postretirement benefits Pension Expense (Millions USD) | Component | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :------------------------ | :------ | :------ | :------- | :------- | | Service cost | $2 | $2 | $4 | $4 | | Interest cost | $7 | $7 | $14 | $14 | | Expected return on plan assets | $(8) | $(9) | $(16) | $(18) | | Amortization of unrecognized prior service cost | $0 | $1 | $1 | $2 | | Total Pension Expense | $1 | $1 | $3 | $2 | Other Nonpension Postretirement Benefit Income (Millions USD) | Component | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :------------------------ | :------ | :------ | :------- | :------- | | Service cost | $1 | $1 | $2 | $2 | | Interest cost | $6 | $6 | $12 | $12 | | Expected return on plan assets | $(15) | $(15) | $(30) | $(30) | | Amortization of unrecognized prior service cost | $(2) | $(2) | $(4) | $(4) | | Total Postretirement Benefit Income | $(10) | $(10) | $(20) | $(20) | - Company contributions to pension plans for YTD 2025 were $6 million, down from $10 million in YTD 2024, with projected full-year 2025 contributions of $19 million[54] Note 6 Operating leases - Operating lease costs for Q2 2025 were $8 million (up from $4 million in Q2 2024) and $15 million for YTD 2025 (up from $7 million in YTD 2024)[56] - Cash paid for operating leases for YTD 2025 was $14 million, an increase from $5 million in YTD 2024[57] - Future minimum operating lease payments total $132 million, with a weighted-average remaining lease term of 4.9 years and a weighted-average discount rate of 5.7%[57] - A new sublease agreement for a distribution center in Q1 2025 resulted in a $13 million increase in operating lease assets and liabilities[58] Note 7 Debt Debt Balances (Millions USD) | Component | June 28, 2025 | December 28, 2024 | | :------------------------ | :------------ | :---------------- | | Credit Facility term loan | $717 | $484 | | Credit Facility notes payable | $23 | $48 | | Other notes payable | $3 | $3 | | Total Borrowings | $743 | $535 | - Total borrowings increased by $208 million from December 28, 2024, to June 28, 2025, primarily due to an additional $245 million in Delayed Term Loans under the Credit Facility[59][60] - As of June 28, 2025, the Company had $332 million of remaining borrowing capacity under the Credit Facility[60] Note 8 Income taxes Consolidated Effective Tax Rate | Period | June 28, 2025 | June 29, 2024 | | :-------- | :------------ | :------------ | | Quarter | 25.4% | 26.8% | | Year-to-date | 22.7% | 26.4% | - The effective tax rate for Q2 2025 decreased to 25.4% from 26.8% in Q2 2024, and for YTD 2025 decreased to 22.7% from 26.4% in YTD 2024, primarily due to US state taxes and deductible stock compensation[61] - The Company is evaluating the impact of the newly signed 'One Big Beautiful Bill Act' (OBBBA) on its consolidated financial statements, effective December 31, 2025[62] Note 9 Derivative instruments - The Company uses derivative and nonderivative financial and commodity instruments to manage market risks (interest rates, foreign currency, commodity prices) and does not engage in trading or speculative hedging[63] Total Notional Amounts of Derivative Instruments (Millions USD) | Instrument Type | June 28, 2025 | December 28, 2024 | | :-------------------------- | :------------ | :---------------- | | Foreign currency exchange contracts | $323 | $284 | | Commodity contracts | $106 | $14 | | Interest rate contracts | $425 | $250 | | Total | $854 | $548 | - The Company expects approximately $1 million of net deferred gains from interest rate contracts in AOCI to be reclassified to interest expense within the next 12 months[73] Note 10 Reportable segments - The Company operates as one reportable segment, focused on manufacturing, marketing, and sales of cereal products in North America under brands like Kellogg's, Kashi, and Bear Naked[76][91] Net Sales by Geography (Millions USD) | Geography | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :---------- | :------ | :------ | :------- | :------- | | United States | $529 | $589 | $1,114 | $1,212 | | Canada | $75 | $75 | $145 | $150 | | Other | $9 | $8 | $17 | $17 | | Consolidated | $613 | $672 | $1,276 | $1,379 | Long-Lived Assets by Geography (Millions USD) | Geography | June 28, 2025 | December 28, 2024 | | :---------- | :------------ | :---------------- | | United States | $623 | $624 | | Canada | $166 | $129 | | Other | $35 | $33 | | Consolidated | $824 | $786 | Note 11 Supplemental financial statement data Inventories Breakdown (Millions USD) | Inventory Type | June 28, 2025 | December 28, 2024 | | :------------------ | :------------ | :---------------- | | Raw materials | $49 | $49 | | Manufacturing supplies | $53 | $53 | | Materials in process | $16 | $22 | | Finished goods | $275 | $243 | | Total Inventories | $393 | $367 | - Finished goods inventory increased by $32 million from December 28, 2024, to June 28, 2025[79] Note 12 Contingencies - The Company is subject to various legal proceedings and claims in the ordinary course of business, but management does not expect any pending matters to have a material impact on its consolidated financial statements[80][81] Note 13 Subsequent events - On July 10, 2025, the Company entered into a Merger Agreement with Ferrero International S.A., under which Ferrero will acquire WK Kellogg Co for $23.00 per share in cash[82][83] - The Merger is conditioned on shareholder approval, regulatory clearances (including Hart-Scott-Rodino Act), and other customary closing conditions, with an expected closing in the second half of 2025[84][95] - The Merger Agreement includes termination fees: the Company would pay Parent $73.5 million under certain conditions, and Parent would pay the Company $105 million if the Merger terminates due to antitrust legal prohibitions[86][87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition and operations, highlighting restatement impact, merger details, and factors affecting business performance Restatement of Previously Issued Financial Statements - The Company restated its unaudited consolidated financial statements for prior periods to correct an error related to inventory adjustments that inadvertently double-counted certain manufacturing expenses, and other reclassifications[28][29][90] Business Overview - WK Kellogg Co is a North American cereal company, manufacturing, marketing, and distributing branded ready-to-eat cereals in the United States, Canada, and the Caribbean, with iconic brands like Frosted Flakes, Special K, and Froot Loops[91][92] Proposed merger - On July 10, 2025, the Company entered into a Merger Agreement to be acquired by Ferrero International S.A. for $23.00 per share in cash, with the merger expected to close in the second half of 2025, subject to approvals[94][95] Separation from Kellanova - The Company was spun off from Kellanova (formerly Kellogg Company) on October 2, 2023, becoming an independent public company, with various agreements governing the post-spin relationship[26][97] Key Factors Affecting Our Business - The business is impacted by uncertain global trade relations, macroeconomic conditions (geopolitical instability, inflation, high interest rates), and a highly competitive retail environment[98][99][104][105] - Regulatory changes, specifically the FDA's plan to eliminate FD&C colors from manufactured food products, are expected to increase manufacturing costs and capital expenditures, with the Company committed to phased removal by end of 2027[102][103] Non-GAAP Financial Measures - The Company uses non-GAAP financial measures such as Organic net sales, Adjusted EBITDA, and Adjusted gross profit/margin to evaluate performance, excluding specific non-recurring or non-operational items[107][108] Significant items impacting comparability - The Company recorded a pre-tax mark-to-market gain of $1 million for Q2 and YTD 2025, compared to a $2 million loss for Q2 and YTD 2024[109] - Separation costs related to the Spin-Off were $8 million for Q2 2025 and $23 million for YTD 2025, primarily for transition costs and IT infrastructure[110][127] - Business portfolio realignment and restructuring costs were $18 million for Q2 2025 and $34 million for YTD 2025, related to supply chain network reconfiguration[111] Net Income Net Income and Adjusted EBITDA Performance (Millions USD) | Metric | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--------------- | :------ | :------ | :------- | :------- | | Reported Net Income (Loss) | $8 | $37 | $29 | $71 | | EBITDA | $39 | $76 | $91 | $150 | | Adjusted EBITDA | $57 | $83 | $134 | $161 | - Reported net income decreased by 78% for Q2 2025 and 59% for YTD 2025, driven by declining net sales, unplanned supply chain downtime, and increased restructuring costs[115][116] - Adjusted EBITDA decreased by 31% for Q2 2025 and 18% for YTD 2025, reflecting the operational challenges[115][116] Margin performance Gross Profit and Margin Performance (Millions USD) | Metric | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--------------- | :------ | :------ | :------- | :------- | | Reported Gross Profit | $166 | $202 | $360 | $408 | | Reported Gross Margin | 27.2% | 30.1% | 28.2% | 29.6% | | Adjusted Gross Profit | $171 | $208 | $371 | $417 | | Adjusted Gross Margin | 28.0% | 31.0% | 29.1% | 30.3% | - Reported gross margin decreased by 290 basis points for Q2 2025 and 140 basis points for YTD 2025, primarily due to declining net sales and unplanned supply chain downtime[119][122] - Adjusted gross margin also saw declines of 300 basis points for Q2 2025 and 120 basis points for YTD 2025[119][122] Net sales Net Sales Performance (Millions USD) | Metric | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--------------- | :------ | :------ | :------- | :------- | | Reported Net Sales | $613 | $672 | $1,276 | $1,379 | | Organic Net Sales | $613 | $672 | $1,280 | $1,379 | | Reported Net Sales Growth | (8.8)% | | (7.5)% | | | Organic Growth | (8.8)% | | (7.1)% | | | Volume (tonnage) | (8.1)% | | (8.3)% | | | Pricing/mix | (0.7)% | | 1.2% | | - Reported net sales decreased by 8.8% for Q2 2025 and 7.5% for YTD 2025, primarily due to an 8.1% volume decline in Q2 and 8.3% in YTD, reflecting price elasticity[124][125] - Price/mix decreased by 0.7% in Q2 2025 but was favorable at 1.2% for YTD 2025, partially offsetting volume declines[124][125] Selling, general and administrative expense Selling, General & Administrative Expense (Millions USD) | Metric | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--------------- | :------ | :------ | :------- | :------- | | SG&A Expense | $143 | $149 | $298 | $306 | | % of Net Sales | 23% | 22% | 23% | 22% | - SG&A expense decreased by 4.0% for Q2 2025 and 2.6% for YTD 2025, mainly due to a reduction in advertising and promotional expenses[126][127] - As a percentage of net sales, SG&A increased from 22% in the prior year periods to 23% in Q2 and YTD 2025, indicating less efficient sales leverage[126][127] Other income, net - Other income, net, increased to $7 million for Q2 2025 (from $4 million in Q2 2024) and $12 million for YTD 2025 (from $10 million in YTD 2024), driven by a decrease in financial fees and transactional foreign currency losses[128] Income taxes - The consolidated effective tax rate for Q2 2025 was 25.4% (down from 26.8% in Q2 2024) and 22.7% for YTD 2025 (down from 26.4% in YTD 2024), influenced by US state taxes and deductible stock compensation[129] Restructuring - The Company recorded $14 million in restructuring charges for Q2 2025 and $28 million for YTD 2025, related to its supply chain modernization plan, including asset-related costs, severance, and legal fees[133] - The restructuring plan involves closing the Omaha, Nebraska plant and scaling back the Memphis, Tennessee facility, with cumulative pretax charges estimated between $230 million and $270 million through 2027[131][132] Liquidity and capital resources - The Company's cash and cash equivalents increased by $73 million YTD 2025, reaching $120 million, compared to a decrease of $42 million in YTD 2024[22][137] - Net cash provided by operating activities decreased to $16 million YTD 2025 (from $37 million YTD 2024), while net cash used in investing activities increased to $124 million (from $47 million YTD 2024) due to supply chain optimization projects[138][139] - Net cash provided by financing activities significantly increased to $181 million YTD 2025 (from a $30 million outflow YTD 2024), primarily driven by additional borrowings of $245 million under the Credit Facility[134][140] - The Company declared a dividend of $0.165 per share in May 2025, payable in September 2025[141] Monetization and Supplier Finance Programs - The Company sells trade receivables under a monetization agreement, with $300 million outstanding as of June 28, 2025, and recorded a net loss on sale of receivables of $4 million for Q2 2025 and $8 million for YTD 2025[143][144] - The Company utilizes supplier finance programs, with $146 million of outstanding payment obligations as of June 28, 2025, allowing suppliers to sell payment obligations at a discount[145][146] Critical accounting estimates - There have been no material changes to the Company's critical accounting estimates since its 2024 Annual Report[147] Forward-looking statements - The report contains forward-looking statements regarding the proposed Merger, financial performance, strategic initiatives, and various market and operational risks, emphasizing that actual results may differ materially[148][149] Item 3: Quantitative and Qualitative Disclosures about Market Risk The Company manages market risks related to interest rates, foreign currency, and commodity prices using derivative instruments, with no material changes reported - The Company uses derivative financial and commodity instruments to manage market risks related to interest rates, foreign currency, and commodity prices, adhering to a policy against trading or speculative transactions[151] - No material changes in the Company's market risk were observed during the quarter ended June 28, 2025[152] Item 4: Controls and Procedures Management concluded that disclosure controls were ineffective due to a material weakness in inventory and cost of goods sold, with remediation efforts underway Disclosure Controls and Procedures - As of June 28, 2025, the Company's disclosure controls and procedures were deemed not effective due to a material weakness in internal control over financial reporting[153] Remediation of Material Weakness in Internal Control Over Financial Reporting - The Company is implementing a new control over Inventory and Cost of goods sold to validate the reliability of system-generated information, aiming to remediate the identified material weakness[154] Changes in Internal Control Over Financial Reporting - No changes in internal control over financial reporting during the quarter ended June 28, 2025, have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[156] PART II — Other Information Item 1: Legal Proceedings The Company is involved in various legal proceedings in the ordinary course of business, but does not anticipate any material adverse effect on its financial condition - The Company is not currently involved in any legal proceedings expected to have a material adverse effect on its financial condition or results of operations[158] Item 1A: Risk Factors This section updates risk factors, primarily focusing on the proposed merger with Ferrero International S.A., including completion uncertainties, potential adverse effects, termination fees, and business restrictions - The primary new risk factor is the proposed merger with Ferrero International S.A., with uncertainties regarding its completion, potential delays, and the imposition of unforeseen conditions by regulatory authorities[160][161][166][167] - Failure to complete the merger could lead to a decline in the Company's common stock price, negative publicity, adverse effects on relationships with stakeholders, and the obligation to pay a $73.5 million termination fee to Parent under certain circumstances[162][170][171] - During the pendency of the Merger Agreement, the Company is subject to restrictions on its business activities, which could limit strategic opportunities and responsiveness to competitive pressures[168] - The Company will incur significant direct and indirect costs related to the merger, regardless of its completion, and may face lawsuits that could delay the merger or result in substantial costs[173][174] Item 5: Other Information No insider trading arrangements under Rule 10b5-1(c) were adopted or terminated by the Company's directors or officers during the most recent fiscal quarter - No directors or officers adopted or terminated any Rule 10b5-1(c) trading arrangements during the most recent fiscal quarter[175] Item 6: Exhibits This section lists all exhibits filed with the Form 10-Q, including the Merger Agreement, certifications, voting agreements, and XBRL-related documents - Key exhibits include the Agreement and Plan of Merger with Ferrero International S.A., Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and various Voting Agreements related to the merger[176] Signatures The report is duly signed on behalf of WK Kellogg Co by its Chief Financial Officer, David McKinstray, and Principal Accounting Officer; Corporate Controller, Lisa Walter, on August 7, 2025 - The report was signed by David McKinstray, Chief Financial Officer, and Lisa Walter, Principal Accounting Officer; Corporate Controller, on August 7, 2025[180]