Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. KELLOGG CO (55067) 10-Q published on May 03, 2019 at 4:17 pm
Reporting Period: Mar 29, 2019
Effective December 30, 2018 in North America, the previous U.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. On a before basis, the previous Kashi reporting unit's percentage of excess of fair value over carrying value was approximately 18% using the same methodology as the 2018 annual impairment analysis, which was performed as of the beginning of the fourth quarter of 2018. The fair value of the previous Kashi reporting unit was estimated primarily based on a multiple of net sales and discounted cash flows.
The Company reviews its investment portfolio for any unrealized losses that would be deemed other-than-temporary and requires the recognition of an impairment loss in earnings. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than its cost, the Company's intent to hold the investment, and whether it is more likely than not that the Company will be required to sell the investment before recovery of the cost basis. The Company also considers the type of security, related industry and sector performance, and published investment ratings. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If conditions within individual markets, industry segments, or macro-economic environments deteriorate, the Company could incur future impairments.
On December 30, 2018 the Company reorganized its 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. In conjunction with the reorganization, certain global research and development resources and related costs were transferred from the North America business to Corporate. Prior period segment results were not restated for the transfer as the impacts were not considered material.
On March 31, 2019, the Company entered into a definitive agreement to sell selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses to Ferrero International S.A. (Ferrero) for approximately $1.3 billion in cash, subject to a working capital adjustment mechanism. In addition, the Company will have royalty free licenses to utilize certain brands for a specified transition period and, indefinitely on selected cracker products. The fair value of these licenses will be incremental non-cash consideration for the sale. The Company expects the businesses to be classified as held for sale during the second quarter and the transaction to be completed in the third quarter of 2019, subject to certain customary closing conditions including regulatory approvals. Both the total assets and net assets of the businesses, including a targeted working capital amount is estimated to be approximately $1.3 billion, and is expected to result in an immaterial pre-tax gain when recognized upon closing. During the year ended December 29, 2018, these businesses recorded net sales of approximately $900 million and operating profit of approximately $75 million, including an allocation of indirect corporate expenses, primarily in the North America reportable segment.
On April 1, 2019, we announced our entry into a stock and asset purchase agreement pursuant to which, subject to the satisfaction or waiver of certain conditions, we will divest to Ferrero International S.A. (“Ferrero”) selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses (such businesses, collectively, the “Business” and the divestiture of the Business, the “Divestiture”). There can be no assurance that we will be able to complete the Divestiture on the terms currently contemplated or at all. The Divestiture is subject to certain closing conditions, including, among others, the receipt of certain regulatory approvals and the absence of any law, injunction or other judgment prohibiting the Divestiture.