WK Kellogg Co(KLG) - 2024 Q1 - Quarterly Report

PART I — Financial Information Item 1: Financial Statements This section presents WK Kellogg Co's unaudited combined financial statements and related notes, detailing financial position, performance, and cash flows post-spin-off Unaudited Combined Balance Sheet Total assets increased to $1,866 million from $1,436 million, while total liabilities rose to $1,670 million from $749 million, primarily due to new debt and postretirement plan assumptions Combined Balance Sheet Summary (Millions USD) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,866 | $1,436 | | Total current assets | $739 | $670 | | Property, net | $721 | $645 | | Postretirement plan assets | $270 | - | | Total Liabilities | $1,670 | $749 | | Total current liabilities | $931 | 666 | | Long-term debt | $487 | - | | Pension liability | $130 | - | | Total Equity | $196 | $687 | Unaudited Combined Statement of Income Q3 2023 net sales slightly decreased to $692 million, but net income rose to $42 million, while year-to-date net sales increased to $2,112 million but net income declined to $95 million due to spin-off costs Combined Statement of Income Summary (Millions USD) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $692 | $705 | $2,112 | $2,018 | | Operating profit | $17 | $7 | $71 | $83 | | Net income | $42 | $23 | $95 | $127 | | Basic and diluted EPS | $0.49 | $0.27 | $1.10 | $1.48 | Unaudited Combined Statement of Cash Flows Year-to-date operating cash flow significantly increased to $184 million, while investing activities used $89 million and financing activities used $31 million, reflecting debt and a large dividend Combined Statement of Cash Flows Summary (Millions USD) | Activity | YTD Sep 30, 2023 | YTD Oct 1, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $184 | $53 | | Net cash used in investing activities | $(89) | $(38) | | Net cash used in financing activities | $(31) | $(15) | | Increase in cash and cash equivalents | $64 | - | Notes to Unaudited Combined Financial Statements These notes provide crucial context on the spin-off from Kellanova, detailing accounting policies, new debt facilities, retirement benefit obligations, related-party transactions, and separation costs - WK Kellogg Co spun off from Kellanova on October 2, 2023, trading as "KLG", with financial statements prepared on a carve-out basis including allocated corporate expenses[22][23][27] - The company assumed pension and postretirement plan assets and liabilities, recording a $130 million pension liability and $270 million in postretirement plan assets as of September 30, 2023[51] - A new Credit Agreement was established on September 12, 2023, including a $500 million term loan and a $350 million revolving credit facility, with total borrowings at $664 million as of September 30, 2023[56][64] - A $663 million dividend was paid to Kellanova on September 29, 2023, funded by new debt financing[39][72] - Significant spin-off costs totaled $28 million for the quarter and $89 million year-to-date through September 30, 2023[84] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's standalone operations, financial performance, liquidity, and capital resources, addressing challenges like supply chain disruptions, inflation, and market competition - Key business challenges include ongoing supply chain disruptions, inflationary pressures on raw materials and labor, and intense competition in the ready-to-eat cereal category[106][107][111] - The company's strategy to combat inflation involves productivity initiatives and revenue growth management actions, including price increases, to offset rising input costs[107] Results of Operations Q3 2023 net sales decreased 1.9% to $692 million despite improved gross margin, while year-to-date net sales increased 4.6% but net income declined 25% due to spin-off costs Net Sales Performance | Period | Net Sales Change | Volume Change | Pricing/Mix Change | | :--- | :--- | :--- | :--- | | Q3 2023 vs Q3 2022 | (1.9)% | (13.4)% | 11.5% | | YTD 2023 vs YTD 2022 | 4.6% | (9.7)% | 14.3% | Gross Margin Performance | Period | Reported Gross Margin | Adjusted Gross Margin | | :--- | :--- | :--- | | Q3 2023 | 28.4% | 27.9% | | Q3 2022 | 24.7% | 25.0% | | Change (bps) | +370 | +290 | EBITDA Reconciliation (Millions USD) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Reported net income | $42 | $23 | $95 | $127 | | EBITDA | $72 | $43 | $174 | $210 | | Adjusted EBITDA | $55 | $32 | $215 | $153 | - SG&A expense increased 30.1% year-to-date, driven by $61 million in incremental separation costs and a $49 million increase in advertising and promotion expense[132] Liquidity and Capital Resources The company now manages its own liquidity, securing a new credit facility with $664 million in borrowings, and reported strong year-to-date operating cash flow of $184 million, while declaring a $0.16 per share dividend - The company now relies on its own cash flow and credit facilities for liquidity, no longer participating in Kellanova's centralized cash management[139] - As of September 30, 2023, the company had $664 million in borrowings under its new credit facility, with an additional $436 million available[140] - The Board of Directors declared a dividend of $0.16 per common share, payable on December 15, 2023[94][140] Summary of Cash Flows (YTD, Millions USD) | Activity | Sep 30, 2023 | Oct 1, 2022 | | :--- | :--- | :--- | | Operating activities | $184 | $53 | | Investing activities | $(89) | $(38) | | Financing activities | $(31) | $(15) | Item 3: Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency, commodity prices, and interest rates, with primary exposure to variable-rate debt, where a 125 basis point rate change would have an immaterial impact - The company is exposed to interest rate risk from its new variable-rate Credit Facility, which is based on SOFR plus a margin[161] - A hypothetical 1.25% (125 basis point) change in interest rates would have an impact of less than $1 million on pre-tax income for the quarter[161] Item 4: Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[162] - No material changes were made to the company's internal controls over financial reporting during the third quarter of 2023[163] PART II — Other Information Item 1A: Risk Factors No material changes were reported to the company's risk factors from those previously disclosed in its Form 10 Registration Statement - No material changes were reported to the risk factors previously disclosed in the company's Form 10 Registration Statement[166] Item 6: Exhibits This section lists exhibits filed with the Form 10-Q, including key agreements like the Separation and Distribution Agreement, Credit Facility, and CEO/CFO certifications - Key agreements filed as exhibits include the Separation and Distribution Agreement, Tax Matters Agreement, and the new Credit Facility agreement, defining the company's standalone structure and obligations[170][171]