UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 24, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: NO. 001-13705
--------------------
KEEBLER FOODS COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3839556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
677 LARCH AVE., ELMHURST, IL 60126
(Address of principal executive offices)
630-833-2900
(Registrant's telephone number, including area code)
NOT APPLICABLE.
(Former name, former address and former fiscal year,
if changed since last report)
--------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO | |
NUMBER OF SHARES OF COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF THE CLOSE
OF BUSINESS ON MAY 28, 1999: 83,789,111.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
APRIL 24, January 2,
1999 1999
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,803 $ 23,515
Trade accounts and notes receivable, net 74,042 141,077
Inventories, net:
Raw materials 34,422 31,722
Package materials 12,911 13,081
Finished goods 89,643 120,550
Other 852 1,024
-------------- --------------
137,828 166,377
Deferred income taxes 50,014 57,713
Other 30,646 26,636
-------------- --------------
Total current assets 306,333 415,318
PROPERTY, PLANT AND EQUIPMENT, NET 568,335 564,524
GOODWILL, NET 388,355 391,449
TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 223,926 226,084
PREPAID PENSION 36,945 38,205
ASSETS HELD FOR SALE 2,418 2,972
OTHER ASSETS 16,324 17,228
-------------- --------------
Total assets $ 1,542,636 $ 1,655,780
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
2
</TABLE>
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
APRIL 24, January 2,
1999 1999
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 37,307 $ 112,730
Trade accounts payable 131,825 143,572
Other liabilities and accruals 229,011 232,087
Income taxes payable - 10,779
Plant and facility closing costs and severance 11,510 11,018
-------------- --------------
Total current liabilities 409,653 510,186
LONG-TERM DEBT 506,833 541,765
OTHER LIABILITIES:
Deferred income taxes 138,757 147,098
Postretirement/postemployment obligations 64,038 63,754
Plant and facility closing costs and severance 14,490 15,563
Deferred compensation 20,805 19,368
Other 33,004 28,745
-------------- --------------
Total other liabilities 271,094 274,528
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 100,000,000 shares authorized and - -
none issued)
Common stock ($.01 par value; 500,000,000 shares authorized and
84,477,504 and 84,125,164 shares issued, respectively) 845 841
Additional paid-in capital 175,402 169,532
Retained earnings 200,285 167,608
Treasury stock (21,476) (8,680)
-------------- --------------
Total shareholders' equity 355,056 329,301
-------------- --------------
Total liabilities and shareholders' equity $ 1,542,636 $ 1,655,780
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
</TABLE>
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SIXTEEN Sixteen
WEEKS ENDED Weeks Ended
APRIL 24, 1999 April 25, 1998
----------------- ----------------
<S> <C> <C>
NET SALES $ 852,033 $ 636,746
COSTS AND EXPENSES:
Cost of sales 380,703 264,087
Selling, marketing and administrative expenses 394,342 338,175
Other 6,343 2,808
----------------- ----------------
INCOME FROM OPERATIONS 70,645 31,676
Interest (income) (626) (389)
Interest expense 13,942 7,830
----------------- ----------------
INTEREST EXPENSE, NET 13,316 7,441
----------------- ----------------
INCOME BEFORE INCOME TAX EXPENSE 57,329 24,235
Income tax expense 24,652 10,195
----------------- ----------------
NET INCOME $ 32,677 $ 14,040
================= ================
BASIC NET INCOME PER SHARE $ 0.39 $ 0.17
WEIGHTED AVERAGE SHARES OUTSTANDING 83,848 82,339
DILUTED NET INCOME PER SHARE $ 0.37 $ 0.16
WEIGHTED AVERAGE SHARES OUTSTANDING 88,042 87,138
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
</TABLE>
<PAGE>
<TABLE>
KEEBLER FOODS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
SIXTEEN Sixteen
WEEKS ENDED Weeks Ended
APRIL 24, 1999 April 25, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES
Net income $ 32,677 $ 14,040
Adjustments to reconcile net income to cash from
operating activities:
Depreciation and amortization 23,475 16,236
Deferred income taxes (642) (2,762)
(Gain) loss on sale of property, plant and equipment (75) 133
Income tax benefit related to stock options exercised 4,541 -
Changes in assets and liabilities:
Trade accounts and notes receivable, net (6,965) (5,613)
Inventories, net 28,549 (5,249)
Income taxes payable (12,992) (7,358)
Other current assets (1,797) (551)
Trade accounts payable and other current liabilities (13,372) (8,793)
Plant and facility closing costs and severance (740) (2,564)
Other, net 7,304 1,351
---------------- ----------------
Cash provided from (used by) operating activities 59,963 (1,130)
CASH FLOWS (USED BY) INVESTING ACTIVITIES
Capital expenditures (22,889) (10,415)
Proceeds from property disposals 1,032 168
---------------- ----------------
Cash (used by) investing activities (21,857) (10,247)
CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES
Purchase of treasury stock (12,796) (3,335)
Exercise of options and warrant 1,333 20,157
Proceeds from receivables securitization 74,000 -
Long-term debt repayments (85,355) (5,300)
Revolving facility, net (25,000) -
---------------- ----------------
Cash (used by) provided from financing activities (47,818) 11,522
---------------- ----------------
(Decrease) increase in cash and cash equivalents (9,712) 145
Cash and cash equivalents at beginning of period 23,515 27,188
---------------- ----------------
Cash and cash equivalents at end of period $ 13,803 $ 27,333
================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
</TABLE>
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements included herein were
prepared pursuant to the rules and regulations for interim reporting under the
Securities Exchange Act of 1934. Accordingly, certain information and footnote
disclosures normally accompanying the annual financial statements were omitted.
The interim consolidated financial statements and notes should be read in
conjunction with the annual audited consolidated financial statements and notes
thereto. The accompanying unaudited interim consolidated financial statements
contain all adjustments, consisting only of normal adjustments, which in the
opinion of management were necessary for a fair statement of the results for the
interim periods. Results for the interim periods are not necessarily indicative
of results for the full year.
BUSINESS AND OWNERSHIP
On January 21, 1999, Keebler Foods Company ("Keebler") made a secondary public
offering of 16,200,000 shares of common stock. Artal Luxembourg S.A. ("Artal")
and Claremont Enterprises, Limited ("Claremont") sold all of the shares, with no
proceeds from the offering going to Keebler. As a result, Artal's ownership
percentage decreased from approximately 21% to 2% and Claremont's ownership
percentage was reduced from approximately 6% to 5% of the outstanding common
stock. Management's ownership remained at approximately 2% and the ownership
percentage of Flowers Industries, Inc. remained unchanged at approximately 55%.
FISCAL YEAR
Keebler's fiscal year consists of thirteen four week periods (fifty-two or
fifty-three weeks) and ends on the Saturday nearest December 31. The first
quarter consists of four four-week periods.
RECLASSIFICATIONS
Certain reclassifications of prior period data have been made to conform with
the current period reporting.
2. SEGMENT INFORMATION
In 1998, Keebler adopted Statement of Financial Accounting Standards ("SFAS")
No. 131 "Disclosures about Segments of an Enterprise and Related Information."
Keebler's reportable segments are Branded and Specialty. The reportable segments
were determined using Keebler's method of internal reporting, which divides and
analyzes the business by sales channel. The nature of the customers, products
and method of distribution can vary by sales channel. The reportable segments
represent an aggregation of similar sales channels. The Branded segment is
comprised of sales channels that principally market brand name cookie, cracker
and brownie products to retail outlets, as well as private label biscuit
products. Products in the Branded segment are sold by either a Keebler sales
employee or a distributor. The sales channels in the Specialty segment primarily
sell cookie and cracker products that are manufactured on a made-to-order basis
or that are produced in individual packs to be used in various institutions
(i.e., restaurants, hospitals, etc.), as well as cookies manufactured for the
Girl Scouts of America. Many of the products sold by the Specialty segment are
done so through the use of brokers.
Keebler evaluates the performance of the reportable segments and allocates
resources based on the segment's profit contribution, defined as earnings before
certain functional support costs, amortization, interest and income taxes. While
the accounting policies for each reportable segment are the same as for the
total company, the cost of sales used to determine a segment's profit
contribution is calculated using standard costs for each product, whereas actual
cost of sales is used to determine consolidated operating income (loss).
6
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SEGMENT INFORMATION (CONTINUED)
There are no intersegment transactions that result in revenue or profit (loss).
Asset information by reportable segment is not presented, as Keebler does not
report or generate such information internally. However, depreciation expense
included in the determination of a segment's profit contribution has been
presented. The depreciation expense for each reportable segment reflects the
amount absorbed in the standard cost of products sold, as well as the
depreciation that relates to assets used entirely by the respective segment. The
following table presents certain information included in the profit contribution
of each segment for the sixteen weeks ended April 24, 1999 and the sixteen weeks
ended April 25, 1998.
<TABLE>
<CAPTION>
Branded Specialty
Segment Segment Other (1) Total
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
SIXTEEN WEEKS ENDED APRIL 24, 1999:
NET SALES TO EXTERNAL CUSTOMERS........... $ 622,853 $ 229,180 $ - $ 852,033
DEPRECIATION EXPENSE...................... 6,951 2,061 8,371 17,383
PROFIT CONTRIBUTION....................... 81,378 53,474 - 134,852
SIXTEEN WEEKS ENDED APRIL 25, 1998:
Net sales to external customers........... $ 521,478 $ 115,268 $ - $ 636,746
Depreciation expense...................... 7,529 1,733 4,846 14,108
Profit contribution....................... 61,248 25,278 - 86,526
</TABLE>
(1) Represents expenses incurred by the functional support departments that are
not allocated to the reportable segments.
The net sales to external customers from the reportable segments equal the
consolidated net sales of Keebler. A reconciliation of segment profit
contribution to total consolidated income from continuing operations before
income tax expense for the sixteen weeks ended April 24, 1999 and the sixteen
weeks ended April 25, 1998 is as follows:
<TABLE>
<CAPTION>
Sixteen Weeks Ended
------------------------------
APRIL 24, 1999 April 25, 1998
-------------- --------------
<S> <C> <C>
INCOME BEFORE INCOME TAX EXPENSE: (IN THOUSANDS)
Reportable segments profit contribution........................................ $ 134,852 $ 86,526
Unallocated functional support costs (1)....................................... 64,207 54,850
Interest expense, net.......................................................... 13,316 7,441
-------------- --------------
Income before Income Tax Expense............................................ $ 57,329 $ 24,235
============== ==============
</TABLE>
(1) Includes support costs such as distribution, research and development,
corporate administration and other (income) expense, which are not allocated
internally to reportable segments.
7
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. RECEIVABLES SECURITIZATION
On January 29, 1999 Keebler entered into a Receivables Purchase Agreement
("Agreement") to replace $75.0 million of debt held under a Bridge facility
allowing funds to be borrowed at a lower cost to the Company. The accounting for
this Agreement is governed by SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Under the
guidelines of SFAS No. 125, a special-purpose entity was created, Keebler
Funding Corporation, as a subsidiary of Keebler Foods Company. All transactions
occurring under this Agreement occur through Keebler Funding Corporation and are
treated as a sale of accounts receivable and not as a debt instrument. At April
24, 1999, a net $74.0 million of accounts receivable have been sold at fair
value.
4. SUBSEQUENT EVENTS
As part of the continuing process of integrating President International, Inc.
into our operations, on May 14, 1999, Keebler announced the decision to close
its manufacturing facility in Sayreville, New Jersey due to excess capacity
within the Company's 18-plant manufacturing network. As a result, Keebler will
record a non-recurring, pre-tax restructuring and impairment charge to operating
income of approximately $69 million in the second quarter ending July 17, 1999.
The restructuring and impairment charge is expected to reduce second quarter
diluted after-tax earnings by approximately $0.48/share. The non-recurring
charge includes approximately $23 million for cash costs for severance and other
exit costs from the Sayreville facility. The remaining $46 million are non-cash
charges for asset impairments related to the Sayreville closing, including
write-downs of property, plant and equipment at Sayreville, equipment at other
locations and a reduction of goodwill acquired in the acquisition of Sunshine
Biscuits, Inc. in June 1996. Approximately 650 employees will be terminated as a
result of the closing of the Sayreville facility, of which approximately 600
employees are represented by unions. The exit activities will be substantially
completed by the end of the third quarter of 1999.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MATTERS AFFECTING COMPARABILITY
The following discussion of the financial condition and results of
operations for the sixteen weeks ended April 24, 1999 and April 25, 1998 should
be read in conjunction with Keebler's 1998 annual report on Form 10-K filed with
the Securities and Exchange Commission on March 22, 1999.
RESULTS OF OPERATIONS
Results of operations expressed as a percentage of net sales for the sixteen
weeks ended April 24, 1999 and April 25, 1998 are set forth below:
<TABLE>
<CAPTION>
Sixteen Weeks Ended
-----------------------------------
April 24, April 25,
1999 1998
---------------- ----------------
<S> <C> <C>
NET SALES............................................ 100.0 % 100.0 %
Cost of sales........................................ 44.7 41.5
Selling, marketing and administrative expenses....... 46.3 53.1
INCOME FROM OPERATIONS............................... 8.3 5.0
Interest Expense, Net................................ 1.6 1.2
NET INCOME........................................... 3.8 % 2.2 %
</TABLE>
Keebler's reportable segments are Branded and Specialty, which were
determined using Keebler's method of internal reporting, which divides and
analyzes the business by sales channel. The reportable segments represent an
aggregation of similar sales channels. We evaluate the performance of the
reportable segments and allocate resources based on the segment's profit
contribution, defined as earnings before certain functional support costs,
amortization, interest and income taxes. While the accounting policies for each
reportable segment are the same as for the total company, the cost of sales used
to determine a segment's profit contribution is calculated using standard costs
for each product, whereas actual cost of sales is used to determine consolidated
operating income (loss).
BRANDED SEGMENT
The Branded segment sells a number of well-recognized products, primarily to
retail outlets such as supermarkets, mass merchandisers, warehouse club stores,
convenience stores and drug stores, as well as to private label retailers.
<TABLE>
<CAPTION>
Sixteen Weeks Ended
--------------------------------------------
April 24, 1999 April 25, 1998
--------------------- ---------------------
$ % $ %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
($ IN MILLIONS)
NET SALES............................ $ 622.8 $ 521.5
PROFIT CONTRIBUTION.................. $ 81.3 13.1% $ 61.2 11.7%
</TABLE>
9
<PAGE>
Net sales in the Branded segment increased 19.4% in the first sixteen weeks
of 1999 to $622.8 million. The acquisition of President International, Inc.
("President") generated $88.3 million of the total increase in revenue.
Excluding the incremental sales from President, net revenues increased 2.5% over
the first quarter of 1998. Growth in Keebler's core business was primarily
driven by sales of new products as well as continued expansion in the CHEEZ-IT
brand. New product introductions included KEEBLER PEANUT BUTTER FUDGE STICKS,
KEEBLER EL FUDGE with peanut butter cream cookies, HOMESTYLE SOFT BATCH cookies
and CHEEZ-IT Snack Mix, as well as new single serve products. The overall
Branded segment revenue growth was limited by lost sales due to the
discontinuation of a number of lower margin Sunshine cookies, while converting
the remaining Sunshine cookie products to the KEEBLER brand. Net revenues also
increased through continued growth outside of supermarkets including in the mass
merchandisers and convenience channels. Price increases taken at the beginning
of the quarter also contributed to the revenue growth.
Profit contribution in the Branded segment was $81.3 million in the first
quarter of 1999 or 13.1% of net sales. The increase in profit contribution was
principally driven by a higher gross profit associated with Keebler's core
products and continued productivity gains in our bakeries, as well as the
inclusion of President. While the gross margin on Keebler's core products
improved, the combined margin for the Branded segment declined due to the
inclusion of President products, which generate lower gross margins than Keebler
products, but also have lower selling and distribution costs. Overall, lower
selling, marketing and administrative expenses, expressed as a percentage of net
sales, were achieved through distribution cost savings and reduced selling and
distribution costs associated with sales of President products. Combined, these
factors resulted in a 1.4 percentage point improvement in the profit
contribution rate over the first quarter of 1998.
SPECIALTY SEGMENT
The Specialty segment produces cookies and crackers for the foodservice
market, custom-baked products for other marketers of branded food products,
including sales of cookies to the Girl Scouts of America, and preformed pie
crusts. This segment also imports and distributes CARR'S crackers in the U.S.
under an exclusive long-term licensing and distribution agreement with United
Biscuits.
<TABLE>
<CAPTION>
Sixteen Weeks Ended
--------------------------------------------
April 24, 1999 April 25, 1998
--------------------- ---------------------
$ % $ %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
($ IN MILLIONS)
NET SALES............................ $ 229.2 $ 115.3
PROFIT CONTRIBUTION.................. $ 53.5 23.3% $ 25.3 21.9%
</TABLE>
For the quarter ended April 24, 1999, net sales in the Specialty segment
were $229.2 million, $113.9 million better than the prior year comparable
period. The acquisition of President contributed $106.4 million in incremental
sales. Increased sales of custom-baked products for other marketers of branded
food products drove the 6.6% growth in the Specialty core businesses. Volume
declines in the foodservice market partially offset gains received from price
increases realized in the quarter, which were taken late in the first quarter of
the prior year.
The Specialty segment's profit contribution of $53.5 million improved by 1.4
percentage points over the prior year comparable quarter. Excluding the impact
of President, profit contribution for the Specialty segment declined
quarter-on-quarter due to a shift in the sales mix to more custom-baked
products, which carry a higher cost of goods sold. Cost savings, realized from
changes in inventory management and integration synergies, were more than offset
by the sales mix changes.
COST OF SALES
Cost of sales was $380.7 million, or 44.7% of net sales, for the sixteen
weeks ended April 24, 1999 compared to $264.1 million, or 41.5% of net sales,
for the first quarter of 1998. The increase in cost of sales, both spending and
as a percentage of net sales, was due principally to the inclusion of President,
whose products carry a higher cost structure. Excluding the incremental costs
added by President, cost of sales, as a percentage of net sales, was 41.4% in
the first quarter compared to
10
<PAGE>
41.5% in the same period a year ago. Cost of sales in the quarter benefited from
initiatives implemented to increase productivity and efficiency at our
manufacturing facilities, along with other cost reduction programs. Lower raw
and packaging material expenses also favorably impacted cost of sales. These
benefits, however, were partially offset by a shift in the sales mix to products
with higher production costs.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES
Selling, marketing and administrative expenses of $394.3 million for the
first quarter of 1999 were $56.2 million higher than the prior year comparable
period, but 6.8 percentage points better as a percent of net sales. The 16.6%
increase in spending was primarily due to the inclusion of President expenses.
The remainder of the increase in selling, marketing and administrative expenses
was driven principally by higher volume, as well as higher marketing expenses
associated with our on-going commitment to building brand equity. Advertising
and consumer promotion spending increased by $3.6 million to $33.6 million for
the sixteen weeks ended April 24, 1999. The favorability in total selling,
marketing and administrative expenses, as a percent of net sales, was achieved
from savings gained on reduced distribution costs and synergies existing from
the integration of President.
INTEREST EXPENSE
Net interest expense of $13.3 million for the first sixteen weeks of 1999
was $5.9 million higher than the comparable sixteen weeks of a year ago. The
increase in net interest expense was primarily attributable to the incremental
interest associated with the additional debt incurred in order to finance the
President acquisition in September of 1998. Total debt outstanding increased
$250.7 million in the first sixteen weeks of 1999 versus the first sixteen weeks
of 1998. While total interest expense increased, the new financing agreements
contain lower interest rates, resulting in an improved weighted average interest
rate of 1.36 percentage points versus the first quarter of the prior year.
INCOME TAXES
Income tax expense was $24.7 million for the quarter ended April 24, 1999,
compared to $10.2 million for the same period in 1998. The $14.5 million
increase in income tax expense was primarily due to a $33.1 million improvement
in pre-tax earnings over the same period of a year ago. Also contributing to the
higher income tax expense was a change in the effective tax rate to 43%, as
compared to 42% in the first quarter of 1998. The inclusion of non-deductible
goodwill resulting from the acquisition of President was the primary reason for
the increase in the effective tax rate. The effective tax rate exceeded the
statutory rate for both periods presented due to nondeductible expenses,
principally amortization of intangibles, including trademarks, trade names,
other intangibles and goodwill.
NET INCOME
Net income for the first quarter of 1999 was $32.7 million compared to $14.0
million for the prior year comparable period. The significant growth of $18.7
million was achieved from both the inclusion of President in the results of
operations for the quarter ended April 24, 1999, as well as revenue gains
coupled with lower operating expenses resulting from cost savings programs from
the core Keebler business and integration synergies.
LIQUIDITY AND CAPITAL RESOURCES
For the first sixteen weeks of 1999, cash provided from operating activities
was $60.0 million. Net earnings of $32.7 million, as well as a reduced
investment in inventories, drove the favorable cash flow. The decrease in
inventories reflected normal seasonal reductions as the Girl Scouts cookie
selling season occurred during the quarter. Partially offsetting these positive
cash flows was a reduction in trade accounts payable and current liabilities
and an increased investment in trade accounts and notes receivable. The
additional funding of current liabilities was mainly attributable to the timing
of payments. Outstanding receivable balances relating to the annual Girl Scouts
cookie sale drove the increase in accounts receivables.
During the first quarter, cash used for investing activities totaled $21.9
million. Capital spending was made principally for continued enhancements,
automation or capacity expansion at manufacturing and distribution facilities,
as well as
11
<PAGE>
preparation for the shift in production from the Sayreville facility to other
production facilities. As part of our integration of President into our
operations and our continuing analysis of system-wide manufacturing and
distribution networks, we announced on May 14, 1999, the decision to close our
manufacturing facility in Sayreville, New Jersey. Expanding capacity at other
production facilities in order to absorb the production from Sayreville has
increased capital spending. Additionally, capital expenditures were incurred for
investments in information technology to bring the newly acquired President
facilities onto the Keebler SAP R/3 information system.
Financing activities for the first quarter of 1999 used $47.8 million of
cash principally to repay the Bridge facility and make other scheduled long-term
debt repayments, paydown the Revolving facility and to repurchase common stock
into treasury. These uses of cash were partially offset by net cash proceeds of
$74.0 million received from the sale of accounts receivable under the
Receivables Purchase Agreement entered into in the first quarter of 1999 which
allows funds to be borrowed at a lower cost to the Company. Employee stock
options exercised during the quarter provided another $1.3 million of cash.
As of April 24, 1999, cash and cash equivalents were $13.8 million and total
debt outstanding was $544.1 million of which current maturities were $37.3
million. Available borrowings under Keebler's Revolving facility were $350.0
million, of which $60.0 million was outstanding at April 24, 1999. Keebler has
met all financial covenants contained in the financing agreements. Available
cash, as well as existing credit facilities, are expected to be sufficient to
meet normal operating requirements for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
On May 19, 1999, the Financial Accounting Standards Board ("FASB") delayed
the effective date of Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." Citing
concerns about companies' ability to both modify their information systems for
year 2000 readiness and become educated with the new derivatives and hedging
standard, the FASB has delayed the effective date on SFAS No. 133 for one year,
to fiscal years beginning after June 15, 2000.
YEAR 2000 ISSUE
The Year 2000 issue arose because many existing computer programs use only
the last two digits to refer to a year. As a result, computer programs may not
properly recognize a year that begins with "20" instead of the familiar "19." If
not corrected, many businesses are at risk for possible computer application
miscalculations or systems failures causing disruptions in business operations.
These risks are commonly referred to as the "Y2K issues."
We utilize software and related technologies that will be affected by the
date change in the year 2000. We have completed a comprehensive review of our
computer systems and non-information technology systems to identify potential
Y2K issues. Since we have implemented the SAP R/3 Enterprise Wide Information
Systems and Manugistics software, both of which were developed/purchased as Y2K
compliant, we do not anticipate that the impact of Y2K issues on our business
will be material. Additionally, secondary information systems, which are not
material to our ability to forecast, manufacture or deliver product, have been
reviewed and Y2K issues identified. We are currently in the process of
correcting or upgrading these systems. We intend to be Y2K compliant on all
critical systems before the end of the third quarter of 1999.
We have undertaken efforts to verify that all of our material vendors and
suppliers will be Y2K compliant. Specifically, we sent a comprehensive
questionnaire to all of our significant suppliers and vendors regarding their
Y2K compliance in an attempt to identify any problem areas with respect to these
groups. Although the results of the questionnaire indicated that our material
vendors and suppliers intend to be Y2K compliant before the end of 1999, they
were not able to provide us any assurances. We are currently in the process of
developing a contingency plan to address any potential Y2K failures caused by a
third party. While we cannot assure that third parties will convert their
systems in a timely manner and in a way compatible with our systems, we believe
that our actions with third parties detailed above, along with the development
of any necessary contingency plan, will minimize these risks.
12
<PAGE>
We currently estimate that the incremental costs for becoming Y2K compliant
are approximately $2.0 - $3.0 million, which will be funded from cash provided
from operations and expensed as incurred. Spending of $1.8 million against this
estimate has occurred to date. This estimate is exclusive of Y2K issues
regarding the President acquisition. We have completed a comprehensive review of
President's computer systems and non-information technology systems to identify
potential Y2K issues. Many of the Y2K risks at President will be mitigated
through our implementation of the SAP R/3 Enterprise Wide Information Systems
and Manugistics software at the President facilities. We expect this
implementation to also be completed before the end of the third quarter of 1999.
We estimate additional costs of approximately $0.3 million will be necessary to
correct or upgrade President's secondary information systems in order to make
them Y2K compliant, against which there has not yet been any spending to date.
Based on the progress we have made in addressing our Y2K issues and our
compliance with Y2K issues on our primary business information systems, we do
not foresee significant risks associated with our Y2K compliance at this time.
As our plan is to address any significant risks associated with our Y2K issues
prior to being affected by them, a comprehensive contingency plan has not been
developed. However, if a significant risk related to our Y2K compliance or a
delay in the anticipated timeline for compliance occurs, we will develop
contingency plans as deemed necessary at that time.
The information presented above sets forth the steps we have taken to
address the Y2K issues. While we do not expect compliance with Y2K issues or the
most reasonably likely worst case scenario and related contingency plan to have
a material impact on our business, results of operations or financial condition,
there can be no assurance that a failure to be fully compliant by the Year 2000
would not have a material adverse impact on us. Although we have spent a large
amount of time and resources to address the Y2K issue, there is no assurance
that we will be successful in our efforts to identify and address all Y2K
issues. Even if we act in a timely manner to complete all planned review,
analysis, remediation and any contingency planning, there may be problems which
are discovered in the future and cannot be corrected in time to prevent an
adverse consequence. Also, there can be no guarantee that the systems of other
companies, banks, utilities and government agencies on which we rely will be
converted in a timely manner or that their contingency planning will be able to
fully address all potential interruptions.
The above discussion of our efforts and expectations relating to Y2K
compliance is forward-looking based on our best estimates given information that
is currently available and is subject to change. Readers are cautioned that
forward-looking statements contained in this discussion should be read in
conjunction with our disclosure under the heading "FORWARD-LOOKING STATEMENTS"
that follows below.
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this discussion are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject
to the safe harbor provisions of the Reform Act. Such forward-looking statements
include, without limitation, statements about:
- the competitiveness of the cookie and cracker industry;
- the future availability and prices of raw and packaging materials;
- potential regulatory obligations;
- our strategies and
- other statements that are not historical facts.
When used in this discussion, the words "anticipate," "believe," "estimate"
and similar expressions are generally intended to identify forward-looking
statements. Because such forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by such forward-looking
statements, including, but not limited to:
- changes in general economic or business conditions (including in the
cookie and cracker industry);
- actions of competitors;
- our ability to recover material costs in the pricing of our products;
13
<PAGE>
- the extent to which we are able to develop new products and markets for
our products;
- the time required for such development;
- the level of demand for such products and
- changes in our business strategies.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we are exposed that may adversely affect
results of operations and financial position include changes in future interest
rates and raw material prices. We seek to minimize or manage these market risks
through normal operating and financing activities and through the use of
interest rate swap agreements and commodity futures and options contracts. The
use of these instruments is limited to hedging activities and they are not
entered for trading or speculative purposes. These agreements and contracts are
entered into at a corporate level and as such, any income or expense associated
with these transactions is not allocated to our reportable segments.
Our exposure to market risk for changes in interest rates relates primarily
to long-term debt obligations. Our current debt structure consists of both fixed
and floating rate debt. Interest rate swap agreements are used to effectively
manage changes in interest rates related to the majority of our borrowings with
the objective of reducing overall interest costs. Sensitivity analysis was used
to assess the impact that changes in market prices have on the fair value of
interest rate swap agreements at year end. The fair value of the interest rate
swap agreements at April 24, 1999, with a notional amount of $527.3 million,
remains comparable to year end. Additionally, interest rates have not fluctuated
materially from year end and therefore, the sensitivity analysis performed as of
January 2, 1999 for interest rate swap agreements remains a valid estimate.
We enter into commodity futures and options contracts to neutralize the
impact of price increases on raw material purchases that are not likely to be
recovered through higher prices on our products. We also used sensitivity
analysis to assess the potential impact on the fair value of commodity futures
and options contracts. Assuming a ten percent increase or decrease in market
price, the fair value of open contracts with a notional amount of $62.7 million
at April 24, 1999 would be impacted by $6.1 million.
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KEEBLER FOODS COMPANY
(Registrant)
/s/ SAM K. REED
----------------------------------------------------
Sam K. Reed
President and Chief Executive Officer
Date: June 3, 1999
/s/ E. NICHOL MCCULLY
----------------------------------------------------
E. Nichol McCully
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: June 3, 1999
/s/ JAMES T. SPEAR
----------------------------------------------------
James T. Spear
Vice President Finance and Corporate Controller
(Principal Accounting Officer)
Date: June 3, 1999
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Keebler
Foods Company Consolidated Balance Sheet at April 24, 1999 and the Consolidated
Statement of Operations for the sixteen weeks ended April 24, 1999 found on
pages 2 through 4 of Keebler's Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001018848
<NAME> KEEBLER FOODS COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> JAN-1-2000
<PERIOD-START> JAN-3-1999
<PERIOD-END> APR-24-1999
<CASH> 13,803
<SECURITIES> 0
<RECEIVABLES> 81,781
<ALLOWANCES> 7,739
<INVENTORY> 137,828
<CURRENT-ASSETS> 306,333
<PP&E> 740,146
<DEPRECIATION> 171,811
<TOTAL-ASSETS> 1,542,636
<CURRENT-LIABILITIES> 409,653
<BONDS> 506,833
0
0
<COMMON> 845
<OTHER-SE> 354,211
<TOTAL-LIABILITY-AND-EQUITY> 1,542,636
<SALES> 852,033
<TOTAL-REVENUES> 852,033
<CGS> 380,703
<TOTAL-COSTS> 775,045
<OTHER-EXPENSES> 6,343
<LOSS-PROVISION> 6,114
<INTEREST-EXPENSE> 13,316
<INCOME-PRETAX> 57,329
<INCOME-TAX> 24,652
<INCOME-CONTINUING> 32,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,677
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.37
</TABLE>
