Unless otherwise specified or indicated by the context, references to the “Company,” “we,” “us” and “our” in this Annual Report on Form 10-K (“Annual Report”) refer to WK Kellogg Co and its subsidiaries.
Forward-Looking Statements. This Annual Report contains a number of “forward-looking statements” with expectations concerning, among other things, the results of the Spin-Off (as defined below); our strategy, financial principles, and plans; initiatives, improvements and growth; sales, margins, advertising, promotion, merchandising, brand building, operating profit, and earnings per share; innovation; investments; capital expenditures; asset write-offs and expenditures and costs related to productivity or efficiency initiatives; the impact of accounting changes and significant accounting estimates; our ability to meet interest and debt principal repayment obligations; minimum contractual obligations; future common stock repurchases or debt reduction; effective income tax rate; cash flow and core working capital improvements; interest expense; commodity and energy prices; environmental, social, and governance (“ESG”) performance; and employee benefit plan costs and funding. Forward-looking statements include predictions of future results or activities and may contain the words “expect,” “believe,” “will,” “can,” “anticipate,” “estimate,” “project,” “should,” or words or phrases of similar meaning. For example, forward-looking statements are found in Part 1, Item 1, Business, and in several sections of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our actual results or activities may differ materially from these predictions.
Our future results could be affected by a variety of other factors, including a decline in demand for ready-to-eat cereals; supply chain disruptions and increases in costs and/or shortages of raw materials, labor, fuels and utilities as a result of geopolitical, economic and market conditions; consumers’ perception of our brands or company; business disruptions; our ability to drive our growth targets to increase revenue and profit; our failure to achieve our targeted cost savings and efficiencies from cost reduction initiatives; strategic acquisitions, alliances, divestitures or joint ventures or organic growth opportunities we may pursue in the future; material disruptions at one of our facilities; our ability to attract, develop and retain the highly skilled people we need to support our business; a shortage of labor, our failure to successfully negotiate collectively bargained agreements, or other general inflationary pressures or changes in applicable laws and regulations that could increase labor costs; an increase in our post-retirement benefit-related costs and funding requirements caused by, among other things, volatility in the financial markets, changes in interest rates and actuarial assumptions; our inability to obtain sufficient capital to grow our business and to increase our revenues; an impairment of the carrying value of goodwill or other acquired intangibles; increases in the price of raw materials, including agricultural commodities, packaging, fuel and labor; increases in transportation costs and reduced availability of, or increases in, the price of oil or other fuels; competition, including with respect to retail and shelf space; the changing retail environment and the growing presence of alternative retail channels; the successful development of new products and processes; adverse changes in the global climate or extreme weather conditions; and other risks and uncertainties described in Part I, Item 1A, Risk Factors. Forward-looking statements speak only as of the date of this Annual Report, and we undertake no obligation to publicly update them except as required by law.
PART I
ITEM 1. BUSINESS
Our Company. WK Kellogg Co is an iconic North American food company with a differentiated portfolio of brands that have delighted our consumers for over a century. As a leading manufacturer, marketer and distributor of branded ready-to-eat cereal, we endeavor to provide consumers with high-quality products while promoting consumer health and well being. Our products are manufactured by us in the United States, Mexico, and Canada and marketed in the United States, Canada and the Caribbean. Kellogg Company (now known as Kellanova), formally founded in 1906 as a mission-led and family-oriented company, sprang to life when W. K. Kellogg changed breakfast forever by creating Corn Flakes in Battle Creek, Michigan. We have since upheld W. K. Kellogg’s passion and commitment to wellness by producing nutritious, high quality and delicious cereal.
We believe our business' long-standing success is attributable to the strength of our brands, our category expertise and over a century of institutional knowledge, all of which have created a diverse portfolio of cereals that are intended to enhance the lives of our consumers. Our product offerings are well diversified across the cereal sub-categories of taste, wellness and balance, with strong consumer appeal across the spectrum of ages and demographics. Iconic brands used in our business include Frosted Flakes, Special K, Froot Loops, Raisin Bran, Frosted Mini-Wheats, Rice Krispies, Kashi, Corn Flakes and Apple Jacks, among many others. We believe these brands also derive a differentiated advantage from the beloved brand characters which have been developed over time, starting in the 1950s with the introduction of Tony the Tiger, Toucan Sam and Snap, Crackle and Pop, which have since been joined by many other brand characters.
In September 2023, the board of directors of Kellanova approved a series of internal transactions resulting in the separation of the North America cereal business from Kellanova’s business (the “Internal Reorganization”) through the contribution by Kellanova of assets, liabilities and operations associated with the cereal business to WK Kellogg Co in exchange for the consideration described in the Separation and Distribution Agreement (the “Contribution”) and the distribution of shares of WK Kellogg Co common stock to Kellanova’s share owners (the “Distribution,” and together with the Internal Reorganization, the “Spin-Off”). On October 2, 2023, the Spin-Off was completed through Kellanova's distribution of one share of WK Kellogg Co common stock for every four shares of Kellanova common stock to Kellanova’s share owners as of the close of business on the record date of September 21, 2023. On October 2, 2023, WK Kellogg Co began “regular-way” trading as an independent publicly traded company under the stock symbol "KLG" on the New York Stock Exchange.
Agreements with Kellanova. In connection with the Spin Off, we entered into a Separation and Distribution Agreement and certain other agreements with Kellanova that provide a framework for our relationship with Kellanova after the Spin Off. The following summarizes the terms of these agreements, forms of which are filed with the SEC as exhibits this Annual Report on Form 10-K for the year ended December 30, 2023. The summaries of each of these agreements set forth below are qualified in their entirety by reference to the full text of the applicable agreements.
•Separation and Distribution Agreement: We entered into a Separation and Distribution Agreement with Kellanova that outlined the terms and conditions of the Spin Off. The Separation and Distribution Agreement provides for the principal actions taken by WK Kellogg and Kellanova in connection with the Spin Off and identified the assets transferred to, and the liabilities to be assumed by, WK Kellogg associated with the Spin Off.
•Transition Services Agreement: We entered into a Transition Services Agreement with Kellanova, pursuant to which Kellanova provides specified services to WK Kellogg and its subsidiaries, and WK Kellogg provides certain limited services to Kellanova, on a transitional basis to help ensure an orderly transition following the Spin Off. These services include information technology, procurement, distribution, logistics and order to delivery, research and development, accounting, finance, compliance and administrative activities.
•Supply Agreement: WK Kellogg entered into a Supply Agreement with Kellanova pursuant to which Kellanova will manufacture and supply to WK Kellogg certain cereal products that were manufactured at Kellanova facilities that were not be transferred to WK Kellogg pursuant to the terms of the Separation and Distribution Agreement.
•Management Services Agreement: WK Kellogg entered into a Management Services Agreement with Kellanova pursuant to which Kellanova has granted WK Kellogg and its subsidiaries the right to use Kellanova's pilot plant located in Battle Creek, Michigan for a specified number of days each year in order for WK Kellogg to conduct research and development and product trials on specified equipment.
•Tax Matters Agreement: The Tax Matters Agreement between WK Kellogg and Kellanova governs the respective rights, responsibilities and obligations of Kellanova and WK Kellogg after the Spin Off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns.
•Employee Matters Agreement: The Employee Matters Agreement addresses certain post-Spin Off employee matters issues between Kellanova and WK Kellogg, including transitions of employment for employees; allocation of and reimbursement and indemnification for employment-related liabilities; collective bargaining agreement matters; termination and severance benefits; employee benefits matters, including participation in benefit plans, assumption of certain employee benefit plans by WK Kellogg, service recognition, health and welfare and retirement plan matters; employee compensation matters, including equity and cash-based incentive compensation, retention and non-qualified deferred compensation matters; payroll reporting and withholding; access to employees; employee records; employment transition matters; mutual one-year salaried employee no-hire and two-year employee non-solicitation provisions (with customary exceptions); and other related employee matters.
•Intellectual Property Agreements: In connection with the Spin Off, we entered into the following Intellectual Property Agreements with Kellanova that provide for intellectual property use and selling rights: (A) Master Ownership and License Agreement Regarding Trademarks and Certain Related Intellectual Property and (B) Master Ownership and License Agreement Regarding Patents, Trade Secrets and Certain Related Intellectual Property.
Principal Products. Our principal products are cereals that are split across taste, wellness and balance sub-categories, and serve a diverse set of occasions and demographics.They are sold to retailers primarily through a direct sales force, and supplemented by brokers and distributors. Our leading taste brands include Frosted Flakes, Froot Loops, and Apple Jacks. Our wellness brands include Special K, Kashi, and Bear Naked. Our balance brands include Special K, Frosted Mini-Wheats, Raisin Bran, and Corn Flakes. Most of our products are also marketed under the “Kellogg’s” name.
Raw Materials. Agricultural commodities, including corn, wheat, rice, vegetable oils, sugar, cocoa, fruits and nuts are the principal raw materials used in our products. Carton board, corrugate, and flexible packaging are the principal packaging materials. We continually monitor world supplies and prices of such commodities and packaging materials, as well as government trade policies. The cost of such commodities and packaging materials may fluctuate widely due to government policy and regulation, changing weather patterns and conditions, climate change, and other supply and/or demand impacting events such as global health events (like the COVID-19 pandemic), geopolitical events, or other unforeseen circumstances. Continuous efforts are made to maintain and improve the quality and supply of such commodities and materials for purposes of our short-term and long-term requirements. While most of these ingredients are purchased from sources in the United States, some materials are imported due to regional availability and specification requirements.