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 OCTOBER 9, 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 OCTOBER 29, 1999: 83,674,117.
<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>
OCTOBER 9, January 2,
1999 1999
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,280 $ 23,515
Trade accounts and notes receivable, net 51,318 141,077
Inventories, net:
Raw materials 31,722 31,722
Package materials 15,262 13,081
Finished goods 128,323 120,550
Other 1,923 1,024
-------------- --------------
177,230 166,377
Deferred income taxes 57,779 57,713
Other 34,463 26,636
-------------- --------------
Total current assets 341,070 415,318
PROPERTY, PLANT AND EQUIPMENT, NET 541,609 564,524
GOODWILL, NET 376,249 391,449
TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 220,767 226,084
PREPAID PENSION 34,471 38,205
ASSETS HELD FOR SALE 6,737 2,972
OTHER ASSETS 15,593 17,228
-------------- --------------
Total assets $ 1,536,496 $ 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>
OCTOBER 9, January 2,
1999 1999
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 37,352 $ 112,730
Trade accounts payable 146,320 143,572
Other liabilities and accruals 257,263 232,087
Income taxes payable 6,128 10,779
Plant and facility closing costs and severance 21,367 11,018
-------------- --------------
Total current liabilities 468,430 510,186
LONG-TERM DEBT 435,482 541,765
OTHER LIABILITIES:
Deferred income taxes 136,146 147,098
Postretirement/postemployment obligations 63,565 63,754
Plant and facility closing costs and severance 17,217 15,563
Deferred compensation 22,976 19,368
Other 29,722 28,745
-------------- --------------
Total other liabilities 269,626 274,528
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
84,645,618 and 84,125,164 shares issued, respectively) 846 841
Additional paid-in capital 181,106 169,532
Retained earnings 211,036 167,608
Treasury stock (30,030) (8,680)
-------------- --------------
Total shareholders' equity 362,958 329,301
-------------- --------------
Total liabilities and shareholders' equity $ 1,536,496 $ 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 FORTY Forty
WEEKS ENDED Weeks Ended WEEKS ENDED Weeks Ended
OCTOBER 9, 1999 October 10, 1998 OCTOBER 9, 1999 October 10, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $ 615,844 $ 499,897 $ 2,055,724 $ 1,626,685
COSTS AND EXPENSES:
Cost of sales 261,244 205,515 899,296 678,287
Selling, marketing and administrative expenses 284,375 237,269 952,066 816,706
Other 7,265 2,315 22,025 7,038
Restructuring and impairment charge - - 69,208 -
---------------- ---------------- ---------------- ----------------
INCOME FROM OPERATIONS 62,960 54,798 113,129 124,654
Interest (income) (249) (1,637) (1,190) (3,043)
Interest expense 7,346 6,493 29,687 20,048
---------------- ---------------- ---------------- ----------------
INTEREST EXPENSE, NET 7,097 4,856 28,497 17,005
---------------- ---------------- ---------------- ----------------
INCOME BEFORE INCOME TAX EXPENSE 55,863 49,942 84,632 107,649
Income tax expense 23,742 20,976 41,204 45,212
---------------- ---------------- ---------------- ----------------
INCOME BEFORE EXTRAORDINARY ITEM 32,121 28,966 43,428 62,437
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of tax - 1,706 - 1,706
---------------- ---------------- ---------------- ----------------
NET INCOME $ 32,121 $ 27,260 $ 43,428 $ 60,731
================ ================ ================ ================
BASIC NET INCOME PER SHARE:
Income before extraordinary item $ 0.38 $ 0.35 $ 0.52 $ 0.75
Extraordinary item - 0.02 - 0.02
---------------- ---------------- ---------------- ----------------
Net income $ 0.38 $ 0.33 $ 0.52 $ 0.73
================ ================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING 83,708 83,761 83,785 83,088
================ ================ ================ ================
DILUTED NET INCOME PER SHARE:
Income before extraordinary item $ 0.37 $ 0.33 $ 0.50 $ 0.71
Extraordinary item - 0.02 - 0.02
---------------- ---------------- ---------------- ----------------
Net income $ 0.37 $ 0.31 $ 0.50 $ 0.69
================ ================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING 87,423 87,597 87,741 87,352
================ ================ ================ ================
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>
FORTY Forty
WEEKS ENDED Weeks Ended
OCTOBER 9, 1999 October 10, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES
Net income $ 43,428 $ 60,731
Adjustments to reconcile net income to cash from
operating activities:
Depreciation and amortization 62,651 46,483
Deferred income taxes (11,018) 1,057
Loss on early extinguishment of debt, net of tax - 1,706
Loss on sale of property, plant and equipment 249 337
Income tax benefit related to stock options exercised 8,838 -
Restructuring and impairment charge 46,071 -
Other - 1,053
Changes in assets and liabilities:
Trade accounts and notes receivable, net (35,241) (34,522)
Inventories, net (10,853) (5,334)
Income taxes payable (4,651) 7,597
Other current assets (7,827) (5,833)
Trade accounts payable and other current liabilities 27,016 37,894
Plant and facility closing costs and severance 11,554 (5,334)
Other, net 7,622 (635)
---------------- ----------------
Cash provided from operating activities 137,839 105,200
CASH FLOWS USED BY INVESTING ACTIVITIES
Capital expenditures (68,637) (35,990)
Proceeds from property disposals 2,833 744
Purchase of President International, Inc., net of cash acquired - (444,818)
---------------- ----------------
Cash used by investing activities (65,804) (480,064)
CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES
Purchase of treasury stock (21,350) (5,718)
Exercise of options and warrant 2,741 20,353
Proceeds from receivables securitization 125,000 -
Deferred debt issue costs - (1,837)
Long-term debt borrowings - 425,000
Long-term debt repayments (103,861) (157,465)
Revolving facility, net (77,800) 85,000
---------------- ----------------
Cash (used by) provided from financing activities (75,270) 365,333
---------------- ----------------
Decrease in cash and cash equivalents (3,235) (9,531)
Cash and cash equivalents at beginning of period 23,515 27,188
---------------- ----------------
Cash and cash equivalents at end of period $ 20,280 $ 17,657
================ ================
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 October 9,
1999, a net $125.0 million of accounts receivable have been sold at fair value,
which is the maximum amount currently available under the Agreement.
6
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE
The following table sets forth the activity in Keebler's plant and facility
closing costs and severance liabilities exclusive of the liabilities resulting
from the restructuring and impairment charge recorded in the second quarter of
1999:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JANUARY 2, OCTOBER 9,
1999 PROVISION SPENDING 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
KEEBLER COMPANY
Severance $ 49 $ 25 $ (50) $ 24
Facility Closure 11,484 751 (2,015) 10,220
Other 24 - (14) 10
------------ ------------ ------------ ------------
Subtotal 11,557 776 (2,079) 10,254
------------ ------------ ------------ ------------
SUNSHINE BISCUITS, INC.
Severance $ 86 $ - $ (17) $ 69
Facility Closure 2,227 - (204) 2,023
Other - - - -
------------ ------------ ------------ ------------
Subtotal 2,313 - (221) 2,092
------------ ------------ ------------ ------------
PRESIDENT INTERNATIONAL, INC.
Severance $ 6,594 $ - $ (555) $ 6,039
Facility Closure 5,670 - (46) 5,624
Other 447 - (101) 346
------------ ------------ ------------ ------------
Subtotal 12,711 - (702) 12,009
------------ ------------ ------------ ------------
TOTAL $ 26,581 $ 776 $ (3,002) $ 24,355
============ ============ ============ ============
</TABLE>
During the forty weeks ended October 9, 1999, Keebler expensed an additional
$0.8 million principally for costs related to the closure of distribution
facilities not included in the original plan adopted by management for the
acquisition of Keebler Company. Remaining costs primarily relate to
noncancelable lease obligations that are anticipated to extend beyond 1999, to
be paid out over the next seven years concluding in 2006.
5. 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 proportionate reduction of
goodwill acquired in the acquisition of Sunshine Biscuits, Inc. in June 1996. Of
the total $69.2 million charge, approximately $68.6 million was recorded as
plant and facility closing costs and severance, with the remaining $0.6 million
recorded as other liabilities and accruals. 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 October 9, 1999,
approximately 590 employees under union contract and approximately 40 employees
not under union contract have been terminated.
7
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. RESTRUCTURING AND IMPAIRMENT CHARGE (CONTINUED)
The following table sets forth the activity related to the liabilities accrued
in conjunction with the restructuring and impairment charge:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JANUARY 2, OCTOBER 9,
1999 PROVISION SPENDING 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Severance $ - $ 15,564 $ (8,666) $ 6,898
Facility Closure - 4,570 - 4,570
Fixed Asset Impairment - 37,824 (37,824) -
Goodwill Impairment - 7,600 (7,600) -
Other - 3,650 (555) 3,095
------------ ------------ ------------ ------------
TOTAL $ - $ 69,208 $ (54,645) $ 14,563
============ ============ ============ ============
</TABLE>
Substantially all of the remaining severance liability is expected to be spent
prior to the end of 1999, as now nearly all employees have been terminated.
Production at the Sayreville, New Jersey manufacturing facility ceased on
September 3, 1999, and as such, spending for exit costs associated with the
closure of the facility will commence in the fourth quarter of 1999. Spending
for exit costs related to the facility closure is expected to continue for
thirty-six months or until the facility is disposed of, whichever occurs
earlier. The majority of the remaining reserves existing at October 9, 1999, are
cash costs.
6. 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 October 9, 1999 and October 10, 1998
and the forty weeks ended October 9, 1999 and October 10, 1998.
8
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Branded Specialty
Segment Segment Other (a) Total
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
TWELVE WEEKS ENDED OCTOBER 9, 1999:
NET SALES TO EXTERNAL CUSTOMERS............. $ 500,764 $ 115,080 $ - $ 615,844
DEPRECIATION EXPENSE........................ 5,718 1,613 7,673 15,004
PROFIT CONTRIBUTION......................... 80,785 20,336 - 101,121
TWELVE WEEKS ENDED OCTOBER 10, 1998:
Net sales to external customers............. $ 398,587 $ 101,310 $ - $ 499,897
Depreciation expense........................ 5,304 1,680 6,325 13,309
Profit contribution......................... 66,469 21,318 - 87,787
FORTY WEEKS ENDED OCTOBER 9, 1999:
NET SALES TO EXTERNAL CUSTOMERS............. $ 1,607,432 $ 448,292 $ - $ 2,055,724
DEPRECIATION EXPENSE........................ 17,056 5,023 25,510 47,589
PROFIT CONTRIBUTION......................... 237,993 93,060 - 331,053
FORTY WEEKS ENDED OCTOBER 10, 1998:
Net sales to external customers............. $ 1,320,223 $ 306,462 $ - $ 1,626,685
Depreciation expense........................ 18,048 4,814 18,273 41,135
Profit contribution......................... 188,306 65,417 - 253,723
</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 income from continuing operations before
income tax expense for the twelve weeks ended October 9, 1999 and October 10,
1998 and the forty weeks ended October 9, 1999 and October 10, 1998 is as
follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
------------------------------ ------------------------------
OCTOBER 9, October 10, OCTOBER 9, October 10,
1999 1999 1999 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
INCOME BEFORE INCOME TAX EXPENSE:
Reportable segment's profit contribution.... $ 101,121 $ 87,787 $ 331,053 $ 253,723
Unallocated functional support costs (b).... 38,161 32,989 148,716 129,069
Restructuring and impairment charge......... - - 69,208 -
Interest expense, net....................... 7,097 4,856 28,497 17,005
-------------- -------------- -------------- --------------
Income before Income Tax Expense.......... $ 55,863 $ 49,942 $ 84,632 $ 107,649
============== ============== ============== ==============
</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.
9
<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 forty weeks ended October 9, 1999 and October 10,
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 forty weeks ended October 9, 1999 and October 10, 1998 are set forth below:
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
---------------------------- ---------------------------
October 9, October 10, October 9, October 10,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES........................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................... 42.4 41.1 43.7 41.7
Selling, marketing and administrative expenses...... 46.2 47.4 46.3 50.2
Restructuring and impairment charge................. - - 3.4 -
INCOME FROM OPERATIONS.............................. 10.2 11.0 5.5 7.7
Interest Expense, net............................... 1.1 1.0 1.4 1.1
INCOME BEFORE EXTRAORDINARY ITEM.................... 5.2 5.8 2.1 3.8
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of tax.. - 0.3 - 0.1
NET INCOME.......................................... 5.2% 5.5% 2.1% 3.7%
</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 Forty Weeks Ended
------------------------------------------- -------------------------------------------
October 9, 1999 October 10, 1998 October 9, 1999 October 10, 1998
--------------------- --------------------- --------------------- ---------------------
$ % $ % $ % $ %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN MILLIONS)
NET SALES.................. $ 500.7 $ 398.6 $1,607.4 $1,320.2
PROFIT CONTRIBUTION........ $ 80.8 16.1% $ 66.5 16.7% $ 238.0 14.8% $ 188.3 14.3%
</TABLE>
10
<PAGE>
Net sales in the Branded segment for the third quarter grew 25.6% over the
year-earlier quarter to $500.7 million and year-to-date net revenues of $1,607.4
million exceeded the comparable period of 1998 by $287.2 million. The
acquisition of President International Inc., ("President") accounted for $65.9
million and $219.4 million of the total increase in revenues for the twelve and
forty weeks ended October 9, 1999, respectively. The traditional core Keebler
business, which excludes sales attributed to the President acquisition,
generated growth of 9.1% in the third quarter and 5.1% for the first three
quarters of the year compared to the same timeframe of a year ago. Third quarter
and year-to-date revenues continued to be driven by sales of new products,
expansion of the CHEEZ-IT brand and incremental growth from achieving national
distribution of FAMOUS AMOS and MURRAY SUGAR FREE cookies. New product
introductions in the third quarter included CHEEZ-IT CHIP-ITS, KEEBLER RAINBOW
WAFERS, KEEBLER SNAX STIX and KEEBLER WALNUT CHIPS DELUXE cookies. Growth from
core CHEEZ-IT product lines was also realized, primarily through a variety of
different package sizes. Year-to-date revenues benefited from new products
introduced in the quarter, as well as from those introduced earlier in the year
such as KEEBLER PEANUT BUTTER FUDGE STICKS, KEEBLER DOUBLE FUDGE AND CARAMEL
cookies, KEEBLER EL FUDGE with peanut butter cream cookies, HOMESTYLE SOFT BATCH
cookies, KEEBLER WHEAT & CHEDDAR sandwich crackers and CHEEZ-IT Snack Mix. New
single serve products, both in new products and CHEEZ-IT brands, also spurred
volume growth. Net sales in the Branded segment for the current twelve and forty
weeks ended October 9, 1999, also benefited from price increases taken earlier
in the year. Revenue growth for both the current quarter and year-to-date
periods was limited by the continuing effects of product culls related to the
fourth quarter 1998 repositioning of the former, lower margin Sunshine cookies,
while converting the remaining Sunshine cookie products to the KEEBLER brand.
Growth in the retail business outside of supermarkets, including at mass
merchandisers and in the convenience channels, added to the improvements over
the prior year.
For the twelve and forty weeks ended October 9, 1999, profit contribution in
the Branded segment was $80.8 million, or 16.1% of net sales, and $238.0
million, or 14.8% of net sales, respectively. The increase in profit
contribution for both the third quarter and year-to-date was attributed to a
higher gross margin achieved on both KEEBLER and CHEEZ-IT core products and
incremental President's sales volume, combined with improved productivity at our
bakeries. For the quarter, the profit contribution margin declined 0.6
percentage points from the year-earlier quarter due principally to the inclusion
of President products and an increased marketing investment behind new product
introductions. For the forty weeks ended October 9, 1999, the profit
contribution margin increased by 0.5 percentage points, as a percent of net
sales, as the benefit of improved gross margins on KEEBLER and CHEEZ-IT brands
and productivity gains more than offset the impact of making lower margin
President products. Lower selling and distribution expenses have been realized
for the year from both improvements in Keebler's core distribution system and
lower President operating costs.
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 Forty Weeks Ended
------------------------------------------- -------------------------------------------
October 9, 1999 October 10, 1998 October 9, 1999 October 10, 1998
--------------------- --------------------- --------------------- ---------------------
$ % $ % $ % $ %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN MILLIONS)
NET SALES.................. $ 115.1 $ 101.3 $ 448.3 $ 306.5
PROFIT CONTRIBUTION........ $ 20.3 17.7% $ 21.3 21.0% $ 93.1 20.8% $ 65.4 21.3%
</TABLE>
For the twelve and forty weeks ended October 9, 1999, net sales in the
Specialty segment of $115.1 million and $448.3 million exceeded the 1998 quarter
and year-to-date periods by $13.8 million and $141.8 million, respectively. The
net sales growth represented a 13.6% improvement in the third quarter and a
46.3% increase for the year-to-date period. The inclusion of President
contributed an incremental $11.5 million and $131.3 million in sales for the
twelve and forty weeks ended October 9, 1999. In the core Specialty business,
which excludes sales attributed to the President acquisition, higher revenues
generated from volume increases of custom-baked products for other marketers of
branded food products continued as the driver of the growth resulting in a 2.5%
increase in the third quarter and a 13.2% increase on a year-to-date basis.
11
<PAGE>
Additionally, new retail products introduced, including a less expensive
specialty cracker, generated volume gains. Through the first three quarters,
sales in the foodservice market decreased principally due to both a shift in
sales mix to lower value products and volume declines.
The Specialty segment's profit contribution was $20.3 million, or 17.7% as a
percentage of net sales, for the quarter ended October 9, 1999. Excluding the
effects of President, the profit contribution margin declined $1.7 million
quarter-on-quarter due principally to a mix slanted towards lower profit margin
items in the foodservice market. The remaining businesses in the Specialty
segment realized slight increases in profit contribution over the prior quarter.
For the forty weeks ended October 9, 1999, profit contribution was $93.1 million
or 20.8%, as a percent of net sales. A shift in the sales mix to more custom
products, which carry a higher cost of goods sold, together with the same
factors driving the unfavorable quarterly variance were the primary reasons for
the decline in profit contribution margin for the year-to-date period. Savings
realized through cost reduction programs served to partially offset the effects
of the sales mix changes.
COST OF SALES
For the twelve weeks ended October 9, 1999, cost of sales was $261.2
million, or 42.4% of net sales, compared to $205.5 million, or 41.1% of net
sales, in the same quarter of a year ago. Year-to-date cost of sales for the
forty weeks ended October 9, 1999, was $899.3 million, or 43.7% of net sales,
versus $678.3 million, or 41.7% of net sales, for the year-earlier period. The
current quarter and year-to-date increases in cost of sales, both in dollar
spending and as a percentage of net sales, were principally caused by the
inclusion of President. Cost of sales, as a percentage of net sales, was 39.5%
and 40.6% for the twelve and forty weeks ended October 9, 1999, respectively,
after removing the impact of selling President products. Cost of sales in both
the third quarter and year-to-date periods benefited from savings generated from
initiatives directed at improving productivity and efficiency at our
manufacturing facilities and other cost reduction programs. Lower raw and
packaging material costs continued to benefit the quarter, as has been realized
for substantially the entire forty week period ended October 9, 1999. These
benefits were partially offset by a shift in the sales mix to products with
higher production costs in the Branded segment for the quarter and in both the
Branded and Specialty segments on a year-to-date basis.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES
Selling, marketing and administrative expenses for the third quarter and
year-to-date periods ended October 9, 1999, were $284.4 million and $952.1
million, respectively. These expenses increased 19.9% and 16.6% over the
comparable periods of a year ago. In addition to the inclusion of expenses
contributed by President, the higher selling, marketing and administrative
spending was caused by increased Keebler core volume, as well as by increased
compensation costs. On-going efforts to build brand equity, promote new products
and to support the achievement towards national distribution of FAMOUS AMOS and
MURRAY SUGAR FREE cookies, also contributed to increased marketing expense for
both the twelve and forty weeks ended October 9, 1999. Advertising and consumer
promotion spending for the year-to-date period ended October 9, 1999, was $76.5
million compared to $71.6 million for the year-earlier period. Selling,
marketing and administrative spending for the forty weeks ended October 9, 1999,
increased principally due to the same factors driving the quarterly variance.
After removing the impact of President, selling, marketing and administrative
expenses, as a percentage of net sales, finished 0.6 percentage points higher in
the quarter, but 0.1 percentage point lower on a year-to-date basis.
OTHER
For the twelve and forty weeks ended October 9, 1999, other expense of $7.3
million and $22.0 million, respectively, finished $5.0 million and $15.0 million
above the comparable periods of a year ago. Incremental amortization expense
resulting from the addition of over $400 million in intangible assets from the
President acquisition was the principal driver of the increase in both the
quarter and year-to-date periods. Additionally, various fees and costs
associated with the selling of accounts receivable under the Receivables
Purchase Agreement ("Agreement") contributed $1.5 million and $3.8 million of
the higher current quarter and year-to-date spending, respectively. All
transactions occurring under this Agreement are treated as a sale of accounts
receivable and not as a debt instrument.
12
<PAGE>
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 proportionate reduction of
goodwill acquired in the acquisition of Sunshine Biscuits, Inc. in June 1996. Of
the total $69.2 million charge, approximately $68.6 million was recorded as
plant and facility closing costs and severance, with the remaining $0.6 million
recorded as other liabilities and accruals. 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 October 9, 1999,
approximately 590 employees under union contract and approximately 40 employees
not under union contract have been terminated. Year-to-date spending against
cash costs as of October 9, 1999 was $9.2 million of which $8.7 million related
to severance costs. Substantially all exit activities, except for costs related
to the facility closure, are expected to be completed prior to the end of 1999.
The manufacturing facility was completely shut down on September 3, 1999, at
which time building maintenance/renovation began, as well as preparations to
sell the facility. The amount of suspended depreciation and amortization that
would have been recognized for the twelve and forty weeks ended October 9, 1999,
if prior period impairments had not been recognized is approximately $1.3
million and $2.1 million respectively.
INTEREST EXPENSE
For the quarter ended October 9, 1999, net interest expense of $7.1 million
was $2.2 million higher than the same twelve week period of a year ago.
Year-to-date, net interest expense of $28.5 million was also greater than the
previously reported amount for the respective timeframe of 1998, by $11.5
million. The increase in interest expense for both the twelve and forty weeks
ended October 9, 1999, compared to the year-earlier periods, was directly
related to the incremental debt incurred in order to finance the President
acquisition, which occurred late in the third quarter of 1998. At October 9,
1999, a higher average outstanding debt balance on the Term facility compared to
the prior year principally generated the additional interest expense. In
addition, changes in overall interest rates have resulted in lower swap income
than was realized in the prior year. In spite of higher interest expense
incurred during 1999, the current financing agreements contain lower interest
rates resulting in an improved weighted average interest rate as compared to a
year ago.
INCOME TAXES
Income tax expense for the twelve weeks ended October 9, 1999, of $23.7
million increased by $2.8 million as compared to the same period of a year ago.
The increase in income tax expense was principally due to an 11.9% increase in
the taxable income, coupled with a higher effective tax rate of 42.5% compared
to 42% for the third quarter of 1998. For the forty weeks ended October 9, 1999,
income tax expense was $4.0 million less than the comparable period ended
October 10, 1998 of $45.2 million. The decrease in the income tax expense for
the year-to-date period can be primarily associated with the $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, which was partially offset by an increase in taxable
income. Keebler had provided income taxes at an effective tax rate of 42% for
the twelve and forty weeks ended October 10, 1998. The annual effective tax rate
for 1998 was increased to 43% at year end due to the inclusion of additional
non-deductible goodwill resulting from the acquisition of President. 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.
During 1999, the annual effective tax rate was reduced 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.
13
<PAGE>
EXTRAORDINARY ITEM NET OF INCOME TAXES
In the third quarter of 1998, Keebler recorded an extraordinary charge for
the write-off of unamortized bank fees associated with the early extinguishment
of debt. The debt extinguishment was for the previously held Term Note A and was
done in conjunction with the debt financing related to the President
acquisition. The after-tax extraordinary charge recorded during the twelve weeks
ended October 10, 1998, was $1.7 million, with a related tax benefit of $1.1
million.
NET INCOME
For the twelve weeks ended October 9, 1999, net income of $32.1 million
finished $4.9 million ahead of the same period of the prior year. The higher net
income was principally generated through the revenue growth and cost savings
described above, offset partially by increased interest expense. Year-to-date
net income fell $17.3 million below a year ago to $43.4 million as a direct
result of the $69.2 million pre-tax restructuring and impairment charge recorded
in the second quarter of 1999. The same factors driving the favorable third
quarter results partially offset the effects of the restructuring and impairment
charge on a year-to-date basis.
LIQUIDITY AND CAPITAL RESOURCES
For the forty weeks ended October 9, 1999, cash provided from operating
activities totaled $137.8 million. Year-to-date net earnings of $43.4 million,
together with an increase in trade accounts payable and other current
liabilities, were the primary contributors to the favorable cash flow.
Additionally, the restructuring and impairment charge recorded in the first half
of 1999 included $46.1 million relating to the non-cash write-down of impaired
property, plant and equipment and intangible assets, with the remaining portion
of that charge relating to cash costs, a substantial portion of which will be
paid out before the end of 1999. Spending on exit costs related to the closure
of the Sayreville manufacturing facility is expected to continue for thirty-six
months or until the facility is disposed of, whichever occurs earlier. Partly
offsetting these positive cash resources was an increase in inventory levels in
anticipation of the holiday season and the annual Girl Scout cookie sale, which
occurs during the first quarter of the year, coupled with a higher investment in
trade accounts receivable.
Cash used by investing activities for the year totaled $65.8 million, with
$68.6 million used to fund capital expenditures during the latter half of 1999.
Capital spending was used to improve, expand, upgrade and automate the existing
production and distribution facilities and to relocate the remaining production
from the closed Sayreville facility to other Keebler locations. In addition,
investments were made to fund the continued efforts to convert the President
facilities onto the Keebler SAP R/3 information system. Asset disposals,
including the sale of the Atlanta manufacturing facility, generated the majority
of the $2.8 million proceeds.
During the first forty weeks of 1999, financing activities used $75.3
million of cash principally to make long-term debt payments to payoff the Bridge
facility, paydown the Revolving facility and make regularly scheduled principal
payments. In addition to the debt repayments of $181.7 million, $21.4 million
was utilized to purchase treasury stock, which fulfilled the previously
authorized $30.0 million Keebler common stock repurchase program. Partly
offsetting these uses of cash was $125.0 million in proceeds received from the
sale of accounts receivable under the Receivables Purchase Agreement entered
into during the first quarter of 1999, which allows funds to be borrowed at a
lower cost to the Company. An additional $2.7 million of cash resulted from the
exercise of employee stock options during the year.
As of October 9, 1999, cash and cash equivalents were $20.3 million and
total debt outstanding was $472.8 million, of which current maturities were
$37.4 million. Available borrowings under Keebler's Revolving facility were
$350.0 million, of which $7.2 million was outstanding at October 9, 1999. All
financial covenants contained in the financing agreements have been met by
Keebler. 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
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133." Citing
concerns about companies' ability to both modify
14
<PAGE>
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 which we expect we will complete before the end of 1999.
Our plan to test all business critical systems before the end of the third
quarter of 1999 has been completed. This testing did not indicate any Y2K
issues.
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 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 have developed a contingency plan
to address 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 a contingency plan, will minimize
these risks.
We currently estimate that the incremental costs for becoming Y2K compliant
are approximately $3.0 million, which will be funded by cash provided from
operations and expensed as incurred. Spending of $2.6 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 have been mitigated
through our implementation of the SAP and Manugistics software at the President
facilities throughout 1999, concluding during the third quarter. 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. We are currently in the final testing phase of these secondary
systems. All testing and spending related to President is expected to be
completed in November 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
have developed a comprehensive contingency plan to address potential critical
Y2K issues. Our plan includes performing a complete backup of all of our
computer systems (i.e. operational, financial and human resources) on December
31, 1999. In addition, facility checks will be performed at each of our
corporate, manufacturing, distribution and shipping locations on January 1, 2000
to determine if utilities and equipment are functioning properly. In the event
of a power failure at a specific location or order entry difficulties with our
hand-held personal computers, manual sales orders will be completed and sent to
another Keebler facility for processing into SAP. We have also identified a
sister location for each of our facilities which will allow us to shift
production and/or distribution capabilities in the event of failures at specific
sites. In addition, since Keebler does not rely on any one supplier, second
source suppliers and vendors are in place in the event that a supplier is unable
to meet our material requirements. Finally, we have established a plan with our
third-party payroll processing company for payroll processing in the event that
we are completely unable to perform the processing internally.
15
<PAGE>
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:
o the competitiveness of the cookie and cracker industry;
o the future availability and prices of raw and packaging materials;
o potential regulatory obligations;
o our strategies;
o other statements that are not historical facts and
o Year 2000 Issues
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:
o changes in general economic or business conditions (including in the
cookie and cracker industry);
o actions of competitors;
o our ability to recover material costs in the pricing of our products;
o the extent to which we are able to develop new products and markets for
our products;
o the time required for such development;
o the level of demand for such products and
o 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
16
<PAGE>
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 October 9, 1999, with a notional amount of
$509.8 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 $51.1 million
at October 9, 1999 would be impacted by $4.8 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.
17
<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: November 5, 1999
/s/ E. NICHOL MCCULLY
------------------------------------------------------
E. Nichol McCully
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 5, 1999
/s/ JAMES T. SPEAR
------------------------------------------------------
James T. Spear
Vice President Finance and Corporate Controller
(Principal Accounting Officer)
Date: November 5, 1999
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Keebler
Foods Company Consolidated Balance Sheet at October 9, 1999 and the Consolidated
Statement of Operations for the forty weeks ended October 9, 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> 10-MOS
<FISCAL-YEAR-END> JAN-1-2000
<PERIOD-START> JAN-3-1999
<PERIOD-END> OCT-9-1999
<CASH> 20,280
<SECURITIES> 0
<RECEIVABLES> 59,811
<ALLOWANCES> 8,493
<INVENTORY> 177,230
<CURRENT-ASSETS> 341,070
<PP&E> 731,509
<DEPRECIATION> 189,900
<TOTAL-ASSETS> 1,536,496
<CURRENT-LIABILITIES> 468,430
<BONDS> 435,482
0
0
<COMMON> 846
<OTHER-SE> 362,112
<TOTAL-LIABILITY-AND-EQUITY> 1,536,496
<SALES> 2,055,724
<TOTAL-REVENUES> 2,055,724
<CGS> 899,296
<TOTAL-COSTS> 1,920,570
<OTHER-EXPENSES> 22,025
<LOSS-PROVISION> 16,160
<INTEREST-EXPENSE> 28,497
<INCOME-PRETAX> 84,632
<INCOME-TAX> 41,204
<INCOME-CONTINUING> 43,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,428
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.50
</TABLE>
