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 JULY 17, 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 AUGUST 20, 1999: 83,719,291.
<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>
JULY 17, January 2,
1999 1999
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,208 $ 23,515
Trade accounts and notes receivable, net 56,691 141,077
Recoverable income taxes 8,298 -
Inventories, net:
Raw materials 34,593 31,722
Package materials 13,394 13,081
Finished goods 95,241 120,550
Other 1,452 1,024
-------------- --------------
144,680 166,377
Deferred income taxes 55,138 57,713
Other 28,194 26,636
-------------- --------------
Total current assets 315,209 415,318
PROPERTY, PLANT AND EQUIPMENT, NET 537,808 564,524
GOODWILL, NET 378,495 391,449
TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 222,326 226,084
PREPAID PENSION 36,078 38,205
ASSETS HELD FOR SALE 6,737 2,972
OTHER ASSETS 16,182 17,228
-------------- --------------
Total assets $ 1,512,835 $ 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>
JULY 17, January 2,
1999 1999
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 37,299 $ 112,730
Trade accounts payable 137,252 143,572
Other liabilities and accruals 239,903 232,087
Income taxes payable - 10,779
Plant and facility closing costs and severance 28,074 11,018
-------------- --------------
Total current liabilities 442,528 510,186
LONG-TERM DEBT 462,753 541,765
OTHER LIABILITIES:
Deferred income taxes 137,821 147,098
Postretirement/postemployment obligations 64,064 63,754
Plant and facility closing costs and severance 18,728 15,563
Deferred compensation 21,279 19,368
Other 32,687 28,745
-------------- --------------
Total other liabilities 274,579 274,528
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
84,550,864 and 84,125,164 shares issued, respectively) 845 841
Additional paid-in capital 178,514 169,532
Retained earnings 178,915 167,608
Treasury stock (25,299) (8,680)
-------------- --------------
Total shareholders' equity 332,975 329,301
-------------- --------------
Total liabilities and shareholders' equity $ 1,512,835 $ 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>
TWELVE Twelve TWENTY-EIGHT Twenty-Eight
WEEKS ENDED Weeks Ended WEEKS ENDED Weeks Ended
JULY 17, 1999 July 18, 1998 JULY 17, 1999 July 18, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 587,847 $ 490,042 $ 1,439,880 $ 1,126,788
COSTS AND EXPENSES:
Cost of sales 257,349 208,685 638,052 472,772
Selling, marketing and administrative expenses 273,349 241,261 667,691 579,437
Other 8,417 1,916 14,760 4,723
Restructuring and impairment charge 69,208 - 69,208 -
-------------- -------------- -------------- --------------
(LOSS) INCOME FROM OPERATIONS (20,476) 38,180 50,169 69,856
Interest (income) (315) (1,017) (941) (1,406)
Interest expense 8,399 5,725 22,341 13,555
-------------- -------------- -------------- --------------
INTEREST EXPENSE, NET 8,084 4,708 21,400 12,149
-------------- -------------- -------------- --------------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE (28,560) 33,472 28,769 57,707
Income tax (benefit) expense (7,190) 14,041 17,462 24,236
-------------- -------------- -------------- --------------
NET (LOSS) INCOME $ (21,370) $ 19,431 $ 11,307 $ 33,471
============== ============== ============== ==============
BASIC NET (LOSS) INCOME PER SHARE $ (0.25) $ 0.23 $ 0.14 $ 0.40
WEIGHTED AVERAGE SHARES OUTSTANDING 83,778 83,779 83,818 82,799
DILUTED NET (LOSS) INCOME PER SHARE $ (0.24) $ 0.22 $ 0.13 $ 0.38
WEIGHTED AVERAGE SHARES OUTSTANDING 87,622 87,748 87,871 87,243
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>
TWENTY-EIGHT Twenty-Eight
WEEKS ENDED Weeks Ended
JULY 17, 1999 July 18, 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES
Net income $ 11,307 $ 33,471
Adjustments to reconcile net income to cash from
operating activities:
Depreciation and amortization 43,171 31,549
Deferred income taxes (6,702) (5,705)
Loss on sale of property, plant and equipment 514 36
Income tax benefit related to stock options exercised 6,541 -
Restructuring and impairment charge 46,071 -
Changes in assets and liabilities:
Trade accounts and notes receivable, net (21,614) (16,891)
Inventories, net 21,697 (993)
Recoverable income taxes and income taxes payable (19,077) 7,411
Other current assets (1,558) (3,155)
Trade accounts payable and other current liabilities 616 10,167
Plant and facility closing costs and severance 19,861 (3,692)
Other, net 7,864 3,211
--------------- ---------------
Cash provided from operating activities 108,691 55,409
CASH FLOWS (USED BY) INVESTING ACTIVITIES
Capital expenditures (49,801) (21,466)
Proceeds from property disposals 2,420 414
--------------- ---------------
Cash (used by) investing activities (47,381) (21,052)
CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES
Purchase of treasury stock (16,619) (4,685)
Exercise of options and warrant 2,445 20,305
Proceeds from receivables securitization 106,000 -
Long-term debt repayments (94,443) (12,300)
Revolving facility, net (60,000) -
--------------- ---------------
Cash (used by) provided from financing activities (62,617) 3,320
--------------- ---------------
(Decrease) increase in cash and cash equivalents (1,307) 37,677
Cash and cash equivalents at beginning of period 23,515 27,188
--------------- ---------------
Cash and cash equivalents at end of period $ 22,208 $ 64,865
=============== ===============
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. ASSETS HELD FOR SALE
On May 14, 1999, management announced the closure of the Sayreville, New Jersey
manufacturing facility in order to eliminate excess capacity within Keebler's
manufacturing network. As part of the total restructuring and impairment charge,
the Sayreville facility was placed for sale together with other idle machinery
and equipment held at various Keebler facilities. In addition, in June 1999, the
Atlanta, Georgia manufacturing facility, which had been held for sale, was sold
for $1.2 million with a realized loss of approximately $0.6 million. Disposition
of the remaining assets held for sale is expected to occur within the next
thirty-six months without a significant gain or loss.
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
under this Agreement occur through Keebler Funding Corporation and are treated
as a sale of accounts receivable and not as a debt instrument. At July 17, 1999,
a net $106.0 million of accounts receivable have been sold at fair value.
6
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. RESTRUCTURING AND IMPAIRMENT CHARGE
As part of the continuing process of integrating the business of 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, a pre-tax restructuring and impairment charge to operating income of
$69.2 million was recorded in the second quarter ending July 17, 1999. The
restructuring and impairment charge included $23.1 million for cash costs
related to severance and other exit costs from the Sayreville facility. The
remaining $46.1 million was non-cash charges for asset impairments related to
the Sayreville closing, including write-downs of property, plant and equipment
at Sayreville and equipment at other locations, and a reduction of goodwill
acquired in the acquisition of Sunshine Biscuits, Inc. in June 1996.
Approximately 650 total employees will be terminated as a result of the closing
of the Sayreville facility, of which approximately 600 employees are represented
by unions. At July 17, 1999, approximately 460 employees under union contract
have been terminated and approximately $3.2 million of cash costs have been
spent related to severance and other exit costs from the Sayreville facility.
The exit activities are expected to be substantially complete by the end of the
third quarter of 1999.
5. SEGMENT INFORMATION
In 1998, Keebler adopted Statement of Financial 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. Either a Keebler sales employee or a distributor sells products in the
Branded segment. 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).
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 twelve weeks ended July 17, 1999 and July 18, 1998 and
the twenty-eight weeks ended July 17, 1999 and July 18, 1998.
7
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Branded Specialty
Segment Segment Other (a) Total
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
TWELVE WEEKS ENDED JULY 17, 1999:
NET SALES TO EXTERNAL CUSTOMERS............. $ 483,815 $ 104,032 $ - $ 587,847
DEPRECIATION EXPENSE........................ 4,387 1,349 9,466 15,202
PROFIT CONTRIBUTION......................... 75,830 19,250 - 95,080
TWELVE WEEKS ENDED JULY 18, 1998:
Net sales to external customers............. $ 400,158 $ 89,884 $ - $ 490,042
Depreciation expense........................ 5,215 1,401 7,102 13,718
Profit contribution......................... 60,589 18,821 - 79,410
TWENTY-EIGHT WEEKS ENDED JULY 17, 1999:
NET SALES TO EXTERNAL CUSTOMERS............. $ 1,106,668 $ 333,212 $ - $ 1,439,880
DEPRECIATION EXPENSE........................ 11,338 3,410 17,837 32,585
PROFIT CONTRIBUTION......................... 157,208 72,724 - 229,932
TWENTY-EIGHT WEEKS ENDED JULY 18, 1998:
Net sales to external customers............. $ 921,636 $ 205,152 $ - $ 1,126,788
Depreciation expense........................ 12,744 3,134 11,948 27,826
Profit contribution......................... 121,837 44,099 - 165,936
</TABLE>
(a) 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 (loss) income from continuing operations
before income tax (benefit) expense for the twelve weeks ended July 17, 1999 and
July 18, 1998 and the twenty-eight weeks ended July 17, 1999 and July 18, 1998
is as follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------ ------------------------------
JULY 17, 1999 July 18, 1998 JULY 17, 1999 July 18, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
(LOSS) INCOME BEFORE INCOME TAX
(BENEFIT) EXPENSE:
Reportable segment's profit contribution...... $ 95,080 $ 79,410 $ 229,932 $ 165,936
Unallocated functional support costs (b)...... 46,348 41,230 110,555 96,080
Restructuring and impairment charge........... 69,208 - 69,208 -
Interest expense, net......................... 8,084 4,708 21,400 12,149
-------------- -------------- -------------- --------------
(Loss) Income before Income Tax
(Benefit) Expense.......................... $ (28,560) $ 33,472 $ 28,769 $ 57,707
============== ============== ============== ==============
</TABLE>
(b) Includes support costs such as distribution, research and development,
corporate administration and other (income) expense, which are not allocated
internally to reportable segments.
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 twelve and twenty-eight weeks ended July 17, 1999 and July
18, 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 twelve
and twenty-eight weeks ended July 17, 1999 and July 18, 1998 are set forth
below:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Eight Weeks Ended
--------------------------- ---------------------------
July 17, July 18, July 17, July 18,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 43.8 42.6 44.3 42.0
Selling, marketing and administrative expenses.... 46.5 49.2 46.4 51.4
Restructuring and impairment charge............... 11.8 - 4.8 -
(LOSS) INCOME FROM OPERATIONS..................... (3.5) 7.8 3.5 6.2
Interest Expense, net............................. 1.4 1.0 1.5 1.1
NET (LOSS) INCOME................................. (3.6)% 4.0% 0.8% 3.0%
</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>
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------------------- -------------------------------------------
July 17, 1999 July 18, 1998 July 17, 1999 July 18, 1998
--------------------- --------------------- --------------------- ---------------------
$ % $ % $ % $ %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN MILLIONS)
NET SALES.................. $ 483.8 $ 400.1 $1,106.7 $ 921.6
PROFIT CONTRIBUTION........ $ 75.8 15.7% $ 60.6 15.1% $ 157.2 14.2% $ 121.8 13.2%
</TABLE>
9
<PAGE>
For the twelve weeks ended July 17, 1999, net revenues in the Branded
segment of $483.8 million increased 20.9% over the same period a year ago and
net sales for the first half of 1999 of $1,106.7 million finished 20.1% above
the comparable period of 1998. The acquisition of President International, Inc.
("President") contributed $65.2 million and $153.5 million of total revenues in
the second quarter and first half of 1999, respectively. Excluding the impact of
President, Keebler experienced core business growth of 4.6% compared to the
year-earlier quarter and first half revenues exceeded 1998 by $31.5 million or
3.4%. Sales of new products, together with on-going expansion of the CHEEZ-IT
brand, drove the revenue growth in both the second quarter and the first half of
1999. New product introductions in the second quarter included KEEBLER DOUBLE
FUDGE AND CARAMEL cookies and KEEBLER WHEAT 'N' CHEDDAR sandwich crackers.
Increased sales of the CHEEZ-IT brand were achieved through new product
introductions, as well as growth in the core product lines. Sales for the first
half continued to be favorably impacted by new product introductions from
earlier in the year including 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. Product culls related
to the repositioning of the former, lower margin Sunshine cookies, while
converting the remaining Sunshine cookie products to the Keebler brand, limited
the Branded segment revenue gains in both the second quarter and first half of
1999. Growth in the retail business outside supermarkets, including at mass
merchandisers and in convenience channels, added to the improvement over the
prior year. Price increases taken at the beginning of the year also favorably
impacted revenues in the current quarter and first half of 1999.
The Branded segment's profit contribution was $75.8 million, or 15.7% of
net sales, in the second quarter of 1999 and $157.2 million, or 14.2% of net
sales, in the first half of 1999. The growth in profit contribution for the
twelve and twenty-eight weeks ended July 17, 1999 was driven by a higher gross
margin achieved on Keebler's core products furthered by improved productivity at
our bakeries and the inclusion of President results. The gross margin rate on
President products is lower than our core products, resulting in an overall
decline in gross margin in the Branded segment compared to the prior year. Yet
as a percentage of net sales, selling, marketing and administrative expenses
declined due to both the addition of President products which generate lower
selling and distribution costs and improvements in Keebler's core distribution
system. These factors caused a 0.6 percentage point and 1.0 percentage point
increase in profit contribution in the second quarter and first half of 1999,
respectively.
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>
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------------------- -------------------------------------------
July 17, 1999 July 18, 1998 July 17, 1999 July 18, 1998
--------------------- --------------------- --------------------- ---------------------
$ % $ % $ % $ %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN MILLIONS)
NET SALES.................. $ 104.0 $ 89.9 $ 333.2 $ 205.2
PROFIT CONTRIBUTION........ $ 19.2 18.5% $ 18.8 20.9% $ 72.7 21.8% $ 44.1 21.5%
</TABLE>
Net sales in the Specialty segment of $104.0 million and $333.2 million for
the second quarter and first half of 1999 surpassed the same periods last year
by $14.1 million and $128.0 million, respectively. The improvement represented a
15.7% increase in the second quarter and a 62.4% improvement for the
year-to-date period, with the inclusion of President accounting for $13.5
million and $119.8 million of the respective period's revenue growth. Higher
sales of custom-baked products for other marketers of branded food products
continued to drive the growth in the Specialty core business resulting in a 4.0%
increase for the first half of 1999. Volume declines in the foodservice market
and a soft pie crust market offset some of the custom-baked product gains.
10
<PAGE>
Profit contribution for the Specialty segment was $19.2 million or 18.5%,
as a percentage of net sales, for the twelve weeks ended July 17, 1999, and
$72.7 million or 21.8%, as a percentage of net sales, for the first half of
1999. Removing the effects of President in the quarter, the profit contribution
margin declined approximately 1.4 percentage points from the year-earlier
quarter. Savings from cost reduction programs were not enough to completely
offset the effects of select volume declines in some of the Specialty channels.
COST OF SALES
Cost of sales in the second quarter of 1999 was $257.3 million, or 43.8% of
net sales, compared to $208.7 million, or 42.6% of net sales, in the same
quarter of 1998. For the twenty-eight weeks ended July 17, 1999, cost of sales
was $638.1 million, or 44.3% of net sales, versus $472.8 million, or 42.0% of
net sales, from a year ago. The addition of President was the direct cause of
the increase in cost of sales for the current quarter and first half of 1999,
both in dollar spending and as a percentage of net sales. Before including the
sale of President products, cost of sales, as a percentage of net sales, was
40.8% and 41.1% for the twelve and twenty-eight weeks ended July 17, 1999,
respectively. In both the second quarter and first half of 1999, cost of sales
was also favorably impacted by initiatives aimed at improving productivity and
efficiency at our manufacturing facilities, other cost reduction programs and
lower raw and packaging material costs. A shift in the sales mix to products
with higher production costs in both the Branded and Specialty segments
partially offset the benefits achieved from the cost reduction programs.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES
Selling, marketing and administrative expenses of $273.3 million and $667.7
million for the second quarter and first half of 1999, respectively, were $32.1
million and $88.3 million higher than the year-earlier comparable periods. The
13.3% and 15.2% increases in selling, marketing and administrative expenses for
the quarter and year-to-date periods, respectively, was principally driven by
the inclusion of President expenses. The balance of the increase in selling,
marketing and administrative expenses was mainly due to higher volume coupled
with increased marketing expenses associated with our continuing efforts to
build brand equity. Advertising and consumer promotion spending was $23.0
million and $56.6 million for the twelve and twenty-eight weeks ended July 17,
1999, compared to $21.7 million and $51.7 million for the twelve and
twenty-eight weeks ended July 18, 1998. Selling, marketing and administrative
expenses, before including the impact of President, as a percentage of net
sales, declined 2.7 and 5.0 percentage points for the second quarter and first
half, respectively.
OTHER
Other expense for the twelve and twenty-eight weeks ended July 17, 1999,
was $8.4 million and $14.8 million, respectively, compared to $1.9 million and
$4.7 million for the twelve and twenty-eight weeks ended July 18, 1998. For both
the second quarter and year-to-date periods, the increase was principally due to
incremental amortization expense resulting from over $400 million of intangible
assets added from the President acquisition. Additionally, $2.3 million of the
increase related to the various fees and costs associated with the selling of
accounts receivable under the Receivables Purchase Agreement ("Agreement"). All
transactions occurring under this Agreement are treated as a sale of accounts
receivable and not as a debt instrument.
RESTRUCTURING AND IMPAIRMENT CHARGE
As part of the continuing process of integrating President into our
operations, on May 14, 1999, Keebler announced the decision to close its
manufacturing facility in Sayreville, New Jersey due to the excess capacity
within the Company's 18-plant manufacturing network. As a result, a $69.2
million pre-tax restructuring and impairment charge was recorded in the second
quarter of 1999. The charge includes $23.1 million for cash costs related to
severance and other exit costs from the Sayreville facility. The remaining $46.1
million relates to 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.
11
<PAGE>
INTEREST EXPENSE
Net interest expense for the second quarter and year-to-date period ended
July 17, 1999, of $8.1 million and $21.4 million was $3.4 million and $9.3
million higher than the second quarter and year-to-date period ended July 18,
1998, respectively. The increase in interest expense for both the quarter and
first half of the year was primarily due to additional interest expense
associated with the incremental debt incurred in the second half of 1998 in
order to finance the acquisition of President. Outstanding debt at July 17,
1999, was $213.6 million above the level outstanding at July 18, 1998. Despite
higher interest expense incurred during 1999, the current financing agreements
contain lower interest rates resulting in an improvement in the weighted average
interest rate of nearly a full percentage point compared to the prior year.
INCOME TAXES
Income tax (benefit) expense for the twelve and twenty-eight weeks ended
July 17, 1999, decreased by $21.2 million and $6.8 million, respectively,
compared to the same periods a year ago. The reduction in income tax expense was
due principally to a $24.2 million tax benefit arising from the $69.2 million
restructuring and impairment charge taken during the second quarter for the
closure of the Sayreville, New Jersey manufacturing facility. Also contributing
to the reduction in income tax expense was the adjustment of the anticipated
effective income tax rate for 1999 to 42.5% from 43%. The reduction in the
annual effective tax rate occurred in anticipation of implementing a change in
the tax basis of the assets and liabilities that resulted from the Keebler
acquisition. This change in tax basis subsequently results in the elimination of
certain intangible amortization. Keebler had provided income taxes at an
effective tax rate of 42% for the twelve and twenty-eight weeks ended July 18,
1998. The inclusion of additional non-deductible goodwill resulting from the
acquisition of President was the primary reason for the higher rate over 1998.
The effective tax rate remains above the federal statutory rate due to
non-deductible expenses, primarily the amortization of intangibles, resulting
from the Sunshine and President acquisitions.
NET (LOSS) INCOME
The twelve weeks ended July 17, 1999, resulted in a net loss of $21.4
million with the decrease from the prior year second quarter directly
attributable to the $69.2 million restructuring and impairment charge for the
closure of the Sayreville, New Jersey manufacturing facility. Year-to-date net
income of $11.3 million was $22.2 million lower than the comparable period of
the prior year with the decline also attributable to the restructuring and
impairment charge recorded in the second quarter. Mitigating the effects of this
charge was the inclusion of President results and integration synergies in 1999,
and revenue gains combined with cost savings achieved from the Keebler core
business.
LIQUIDITY AND CAPITAL RESOURCES
For the first half of 1999, cash provided from operating activities was
$108.7 million. Year-to-date net earnings of $11.3 million and a reduced
investment in inventories of $21.7 million were partially responsible for the
positive cash flow. The lower inventory levels were due principally to the
depletion of the Girl Scout finished goods inventory that existed at year- end
in anticipation of the annual Girl Scout cookie sale that occurred during the
first quarter of the year. In addition, the restructuring and impairment charge
recorded in the second quarter of 1999 included $46.1 million relating to the
non-cash write-down of impaired property, plant and equipment and intangible
assets, while the remaining portion of the charge related to cash costs, the
majority of which will be paid out in future periods. Partially offsetting these
cash resources was an increased investment in trade accounts and notes
receivable of $21.6 million.
During the first twenty-eight weeks of 1999, cash used by investing
activities of $47.4 million was primarily utilized to fund capital expenditures.
The majority of the $49.8 million in capital spending in the first half of 1999
was used to automate, upgrade and enhance the existing manufacturing and
distribution facilities and to relocate production from the recently closed
Sayreville facility to other locations. Also, funds were spent on information
technology to transition the President facilities onto the Keebler SAP R/3
information system and to ensure Y2K compliance. Proceeds received from asset
disposals of $2.4 million partially offset capital expenditures, with the sale
of the Atlanta manufacturing facility accounting for $1.2 million of the
proceeds.
12
<PAGE>
Financing activities used $62.6 million of cash in the first twenty-eight
weeks of 1999 principally to make various long-term debt payments to paydown the
Revolving facility, extinguish the Bridge facility and make regularly scheduled
principal payments. Additionally, $16.6 million was spent to repurchase common
stock into treasury. Net cash proceeds of $106.0 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, partially offset the uses of cash. An additional $2.4 million of
cash was generated from employee stock options exercised during the first half
of 1999.
As of July 17, 1999, cash and cash equivalents were $22.2 million,
long-term debt outstanding was $462.8 million and current maturities were $37.3
million. Available borrowings under Keebler's Revolving facility were $350.0
million, of which $25.0 million was outstanding at July 17, 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 ("SAP") 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. In order to assess our Y2K readiness, Keebler
conducted a complete simulation of the SAP production environment during the
second quarter of 1999 which incorporated the December 29, 1999 through January
4, 2000 and February 28, 2000 through March 2, 2000 timeframes. The overall
success of the full production simulation is further indication that the risk
factors for potential issues in the year 2000 are minimal for the SAP
environment. 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. We expect the contingency plan to be finalized before the end of
the third quarter of 1999. 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 a contingency plan, will minimize these risks.
We currently estimate that the incremental costs for becoming Y2K compliant
are approximately $2.5 - $3.0 million, which will be funded by cash provided
from operations and expensed as incurred. Spending of $2.3 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
13
<PAGE>
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. All spending
related to President is expected to occur by the end of the third quarter of
1999.
Based on the progress we have made in addressing our Y2K issues and our
compliance with Y2K issues on our primary business systems, we do not foresee
significant risks associated with our Y2K compliance at this time. However, we
are in the process of developing a comprehensive contingency plan to address
potential critical Y2K issues. Our proposal will include plans for such issues
as utility outages, equipment failures, facility checks on January 1, 2000 and
review of adequate stock levels. We are also identifying activities that may be
completed in advance of January 1, 2000. We expect this contingency plan to be
completed by the end of the third quarter of 1999.
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;
- 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.
14
<PAGE>
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 July 17, 1999, with a notional amount of $521.5 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 $37.2 million
at July 17, 1999 would be impacted by $3.2 million.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Keebler's Annual Meeting of Shareholders ("Meeting") was held on
May 25, 1999.
(c) Represented at the meeting, either in person or by proxy, were
81,447,213 voting shares that were voted as shown below:
(i) To elect three directors to serve for three year terms
expiring in the year 2002. All nominees are named below:
- Sam K. Reed
Votes for Election 81,311,100
Votes Withheld 136,113
- Amos R. McMullian
Votes for Election 81,311,100
Votes Withheld 136,113
- Wayne H. Pace
Votes for Election 81,385,077
Votes Withheld 62,136
(ii) To ratify the Board of Directors' appointment of
PricewaterhouseCoopers LLP as independent public
accountants for Keebler for 1999.
Votes For Proposal 81,430,307
Votes Against Proposal 4,850
Votes Withheld 12,056
15
<PAGE>
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.
16
<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, Chief Executive Officer and Director
Date: August 27, 1999
/s/ E. Nichol McCully
------------------------------------------------------
E. Nichol McCully
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 27, 1999
/s/ James T. Spear
------------------------------------------------------
James T. Spear
Vice President Finance and Corporate Controller
(Principal Accounting Officer)
Date: August 27, 1999
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Keebler Foods
Company Consolidated Balance Sheet at July 17, 1999 and the Consolidated
Statement of Operations for the twenty-eight weeks ended July 17, 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> 7-MOS
<FISCAL-YEAR-END> JAN-1-2000
<PERIOD-START> JAN-3-1999
<PERIOD-END> JUL-17-1999
<CASH> 22,208
<SECURITIES> 0
<RECEIVABLES> 64,831
<ALLOWANCES> 8,140
<INVENTORY> 144,680
<CURRENT-ASSETS> 315,209
<PP&E> 713,317
<DEPRECIATION> 175,509
<TOTAL-ASSETS> 1,512,835
<CURRENT-LIABILITIES> 442,528
<BONDS> 462,753
0
0
<COMMON> 845
<OTHER-SE> 332,130
<TOTAL-LIABILITY-AND-EQUITY> 1,512,835
<SALES> 1,439,880
<TOTAL-REVENUES> 1,439,880
<CGS> 638,052
<TOTAL-COSTS> 1,374,951
<OTHER-EXPENSES> 14,760
<LOSS-PROVISION> 11,034
<INTEREST-EXPENSE> 21,400
<INCOME-PRETAX> 28,769
<INCOME-TAX> 17,462
<INCOME-CONTINUING> 11,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,307
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.13
</TABLE>
