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 15, 2000
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 18, 2000: 84,991,955.
<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 15, 2000 January 1, 2000
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,115 $ 20,717
Trade accounts and notes receivable, net 44,718 65,052
Inventories, net:
Raw materials 31,129 34,243
Package materials 17,575 13,907
Finished goods 104,610 126,954
Other 1,917 1,176
----------------- ------------------
155,231 176,280
Deferred income taxes 47,010 46,252
Other 33,302 27,278
----------------- ------------------
Total current assets 300,376 335,579
PROPERTY, PLANT AND EQUIPMENT, NET 609,343 553,031
GOODWILL, NET 530,858 370,188
TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 241,192 211,790
PREPAID PENSION 31,813 33,240
ASSETS HELD FOR SALE 1,162 6,662
OTHER ASSETS 21,755 17,693
----------------- ------------------
Total assets $ 1,736,499 $ 1,528,183
================= ==================
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 15, 2000 January 1, 2000
----------------- ------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 46,550 $ 37,283
Trade accounts payable 132,106 147,862
Other liabilities and accruals 225,060 237,447
Income taxes payable 1,549 23,603
Plant and facility closing costs and severance 15,584 11,290
----------------- ------------------
Total current liabilities 420,849 457,485
LONG-TERM DEBT 590,149 419,160
OTHER LIABILITIES:
Deferred income taxes 121,278 124,389
Postretirement/postemployment obligations 64,443 64,383
Plant and facility closing costs and severance 8,022 12,062
Deferred compensation 26,221 24,581
Other 21,430 16,808
----------------- ------------------
Total other liabilities 241,394 242,223
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
86,261,487 and 84,655,874 shares issued, respectively) 863 846
Additional paid-in capital 205,405 182,686
Retained earnings 317,851 255,813
Treasury stock (40,012) (30,030)
----------------- ------------------
Total shareholders' equity 484,107 409,315
----------------- ------------------
Total liabilities and shareholders' equity $ 1,736,499 $ 1,528,183
================= ==================
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 15, 2000 July 17, 1999 JULY 15, 2000 July 17, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 613,572 $ 587,847 $ 1,469,432 $ 1,439,880
COSTS AND EXPENSES:
Cost of sales 253,341 257,349 616,730 638,052
Selling, marketing and administrative expenses 286,967 273,349 682,247 667,691
Other 6,733 8,417 10,228 14,760
Restructuring and impairment charge (996) 69,208 (996) 69,208
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS 67,527 (20,476) 161,223 50,169
Interest (income) (736) (315) (1,485) (941)
Interest expense 11,723 8,399 25,621 22,341
-------------- -------------- -------------- --------------
INTEREST EXPENSE, NET 10,987 8,084 24,136 21,400
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 56,540 (28,560) 137,087 28,769
Income tax expense (benefit) 23,099 (7,190) 56,123 17,462
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 33,441 $ (21,370) $ 80,964 $ 11,307
============== ============== ============== ==============
BASIC NET INCOME (LOSS) PER SHARE $ 0.39 $ (0.25) $ 0.96 $ 0.14
WEIGHTED AVERAGE SHARES OUTSTANDING 84,449 83,778 84,096 83,818
DILUTED NET INCOME (LOSS) PER SHARE $ 0.38 $ (0.24) $ 0.93 $ 0.13
WEIGHTED AVERAGE SHARES OUTSTANDING 87,749 87,622 87,447 87,871
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 15, 2000 July 17, 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES
Net income $ 80,964 $ 11,307
Adjustments to reconcile net income to cash from
operating activities:
Depreciation and amortization 49,432 43,171
Deferred income taxes 3,759 (6,702)
(Gain) loss on sale of property, plant and equipment (1,785) 514
Gain on sale of value brands assets (5,700) -
Restructuring and impairment charge (615) 46,071
Income tax benefit related to stock options exercised 17,857 6,541
Changes in assets and liabilities:
Trade accounts and notes receivable, net 10,539 (21,614)
Inventories, net 29,201 21,697
Income taxes payable (20,918) (19,077)
Other current assets (4,921) (1,558)
Trade accounts payable and other current liabilities (42,508) 616
Plant and facility closing costs and severance (13,615) 19,861
Other, net (88) 7,864
---------------- ----------------
Cash provided from operating activities 101,602 108,691
CASH FLOWS USED BY INVESTING ACTIVITIES
Capital expenditures (36,662) (49,801)
Proceeds from property disposals 8,547 2,420
Purchase of Sesame Street license (10,000) -
Proceeds from sale of value brands assets 17,000 -
Purchase of Austin Quality Foods, Inc., net of cash acquired (253,797) -
---------------- ----------------
Cash used by investing activities (274,912) (47,381)
CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES
Purchase of treasury stock (9,982) (16,619)
Exercise of employee stock options 4,879 2,445
Proceeds from receivables securitization 21,000 106,000
Long-term debt repayments (24,263) (94,443)
Revolving facility, net 200,000 (60,000)
Dividends paid (18,926) -
---------------- ----------------
Cash provided from (used by) financing activities 172,708 (62,617)
---------------- ----------------
Decrease in cash and cash equivalents (602) (1,307)
Cash and cash equivalents at beginning of period 20,717 23,515
---------------- ----------------
Cash and cash equivalents at end of period $ 20,115 $ 22,208
================ ================
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.
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. ACQUISITION OF AUSTIN QUALITY FOODS, INC.
On March 6, 2000, Keebler Foods Company ("Keebler") acquired Austin Quality
Foods, Inc. ("Austin") from R&H Trust Co. (Jersey) Limited, as Trustee, HB
Marketing & Franchising L.P., 697163 Alberta Ltd., and William C. Burkhardt, for
an aggregate purchase price of $254.4 million, excluding related fees and
expenses paid of approximately $3.0 million. The acquisition of Austin was a
cash transaction funded with approximately $235.0 million from borrowings under
the $700.0 million Senior Credit Facility Agreement dated as of September 28,
1998, and the remainder from cash received on additional sales of accounts
receivable under Keebler's $125.0 million Receivables Purchase Agreement.
The acquisition of Austin by Keebler has been accounted for as a purchase. The
total purchase price and the fair value of liabilities assumed have been
allocated to the tangible and intangible assets of Austin based on respective
fair values. The acquisition has resulted in an unallocated excess purchase
price over fair value of net assets acquired of $168.5 million, which is being
amortized on a straight-line basis over a forty year period.
Results of operations for Austin from March 6, 2000 to July 15, 2000, have been
included in the consolidated statements of operations. The following unaudited
pro forma information has been prepared assuming the acquisition had taken place
at the beginning of each respective fiscal year reported. The unaudited pro
forma information includes adjustments for interest expense that would have been
incurred related to financing the purchase, additional depreciation of the
property, plant and equipment acquired and amortization of the trademarks, trade
names, other intangibles and goodwill arising from the acquisition. The
unaudited pro forma consolidated results of operations are not necessarily
indicative of the results that would have been reported had the Austin
acquisition been effected on the first day of the year reported.
6
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITION OF AUSTIN QUALITY FOODS, INC. (CONTINUED)
<TABLE>
<CAPTION>
Unaudited
(IN THOUSANDS EXCEPT PER SHARE DATA) For the Twenty-Eight Weeks Ended
----------------------------------------
July 15, 2000 July 17, 1999
------------------- -----------------
<S> <C> <C>
Net sales...................................................................... $ 1,496,927 $ 1,553,818
Net income..................................................................... $ 77,026 $ 8,241
Diluted net income per share................................................... $ 0.88 $ 0.09
</TABLE>
3. ASSETS HELD FOR SALE
On May 2, 2000, the Sayreville, New Jersey manufacturing facility, which had
been held for sale after its closure, was sold for $7.5 million. The sale
resulted in a pre-tax gain of approximately $2.0 million, which was recorded in
other income in the twelve weeks ended July 15, 2000. Disposition of the
remaining assets held for sale is expected to occur within the next thirty-six
months without a significant gain or loss.
4. DEBT
Long-term debt consisted of the following at July 15, 2000:
<TABLE>
<CAPTION>
(IN THOUSANDS) Interest Rate Final Maturity JULY 15, 2000
------------------ ----------------------- ------------------
<S> <C> <C> <C>
Revolving Facility.................................. 6.684% September 28, 2004 $ 200,000
Term Facility....................................... 6.655% September 28, 2004 296,000
Senior Subordinated Notes........................... 10.750% July 1, 2006 124,400
Other Senior Debt................................... Various 2001-2005 9,065
Capital Lease Obligations........................... Various 2002-2042 7,234
------------------
636,699
Less: Current maturities............................ 46,550
------------------
Total.......................................... $ 590,149
==================
</TABLE>
On March 6, 2000, Keebler utilized existing credit facilities in order to
finance the acquisition of Austin. The additional borrowings were under the
Revolving Facility, which was originally entered into on September 28, 1998. At
July 15, 2000, the outstanding balance on the Revolving Facility was $200.0
million, with an available balance of $150.0 million.
5. RESTRUCTURING AND IMPAIRMENT CHARGE
In May of 1999, Keebler closed its manufacturing facility in Sayreville, New
Jersey, which resulted in a pre-tax restructuring and impairment charge, in
1999, to operating income of $66.3 million in total. In the second quarter of
2000, the charge was reduced by an adjustment of $1.0 million. The adjustment
was for costs related to severance and other exit costs from the facility
closure due to lower-than-expected severance costs and the earlier-than-expected
sale of the facility. The restructuring and impairment charge included $19.2
million for cash costs related to severance and other exit costs from the
Sayreville facility. The remaining $46.1 million were 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 Sunshine Biscuits,
Inc. acquisition in June 1996. Approximately 650 employees were terminated as a
result of the closing of the Sayreville facility, of which approximately 600
employees were represented by unions.
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>
(IN THOUSANDS) January 1, 2000 Provision Spending Adjustment JULY 15, 2000
------------------ ------------ ------------ -------------- -------------------
<S> <C> <C> <C> <C> <C>
Severance................. $ 2,037 $ - $ (1,153) $ (140) $ 744
Facility closure.......... 2,567 - (848) (1,556) 163
Other..................... 1,717 - 176 700 2,593
------------------ ------------ ------------ -------------- -------------------
Total................. $ 6,321 $ - $ (1,825) $ (996) $ 3,500
================== ============ ============ ============== ===================
</TABLE>
At July 15, 2000, $3.3 million remained for plant and facility closing costs and
severance accruals and $0.2 million for other liabilities and accruals. Only
costs related to the settlement of worker's compensation claims (included in
other above), and health and welfare payments are expected to extend beyond the
year ended December 30, 2000.
6. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE
Throughout 2000, as part of the acquisition of Austin, Keebler recognized
estimated costs pursuant to a plan to exit certain activities of the acquired
company. These exit costs, for which there is no future economic benefit, were
provided for in the allocation of the purchase price and totaled $14.5 million.
Associated costs related to staff reductions of approximately 80 non-union
employees were estimated at $14.0 million. At July 15, 2000, approximately 60
employees had been terminated, with the remaining terminations scheduled to
occur during the second half of 2000. Spending on exit costs is expected to be
substantially complete before the end of 2001, with primarily health and welfare
payments extending beyond that timeframe.
During 1998, as part of acquiring President International, Inc. ("President"),
Keebler provided for $12.8 million in exit costs in the allocation of the
purchase price. At January 1, 2000, there remained $7.4 million in reserves of
which $2.3 million was spent during the first half of 2000. There were 260
employees at January 1, 2000, still expected to be terminated as part of the
exit plan, of which approximately 175 were represented by a union. In the first
half of 2000, approximately 150 employees under union contract and approximately
35 employees not under union contract had been terminated. The remaining
terminations are expected to occur throughout the remainder of the current year.
During the quarter ended July 15, 2000, Keebler adjusted accruals previously
established in the accounting for the Keebler and Sunshine acquisitions by
reducing goodwill and other intangibles by $0.5 million and $1.1 million,
respectively, to recognize exit costs that are now expected to be less than
initially anticipated.
8
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)
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 during 1999:
<TABLE>
<CAPTION>
(IN THOUSANDS) January 1, 2000 Provision Spending Adjustment JULY 15, 2000
----------------- --------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
KEEBLER COMPANY
Severance................... $ 24 $ - $ - $ - $ 24
Facility closure............ 7,829 - (1,258) (500) 6,071
----------------- --------------- -------------- -------------- ----------------
Subtotal................ 7,853 - (1,258) (500) 6,095
----------------- --------------- -------------- -------------- ----------------
SUNSHINE BISCUITS, INC.
Severance................... $ 63 $ - $ (12) $ - $ 51
Facility closure............ 1,962 - (679) (1,116) 167
----------------- --------------- -------------- -------------- ----------------
Subtotal................ 2,025 - (691) (1,116) 218
----------------- --------------- -------------- -------------- ----------------
PRESIDENT INTERNATIONAL, INC.
Severance................... $ 2,829 $ - $ (2,097) $ - $ 732
Facility closure............ 4,596 - (223) - 4,373
Other....................... 10 - (10) - -
----------------- --------------- -------------- -------------- ----------------
Subtotal................ 7,435 - (2,330) - 5,105
----------------- --------------- -------------- -------------- ----------------
AUSTIN QUALITY FOODS, INC.
Severance................... $ - $ 13,979 $ (5,236) $ - $ 8,743
Facility closure............ - 479 (408) - 71
Other....................... - 28 - - 28
----------------- --------------- -------------- -------------- ----------------
Subtotal................ - 14,486 * (5,644) - 8,842
----------------- --------------- -------------- -------------- ----------------
Total................. $ 17,313 $ 14,486 $ (9,923) $ (1,616) $ 20,260
================= =============== ============== ============== ================
* Recorded as part of the purchase price allocation.
</TABLE>
7. SEGMENT INFORMATION
Keebler has adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" for
reporting segment 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 and cracker products to retail outlets. Either a
Keebler sales employee or a distributor sells products in the Branded segment.
The sales channels in the Specialty segment primarily sell cookie, cracker and
brownie 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 the U.S.A. Many of the products sold by the Specialty segment are done
so through the use of brokers.
9
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SEGMENT INFORMATION (CONTINUED)
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 income (loss) from operations.
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 15, 2000 and July 17, 1999 and
the twenty-eight weeks ended July 15, 2000 and July 17, 1999. Prior year amounts
have been restated for reclassifications between reportable segments.
<TABLE>
<CAPTION>
Branded Specialty
Segment Segment Other (a) Total
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
TWELVE WEEKS ENDED JULY 15, 2000:
NET SALES TO EXTERNAL CUSTOMERS............. $ 482,077 $ 131,495 $ - $ 613,572
DEPRECIATION EXPENSE........................ 6,234 2,419 10,392 19,045
PROFIT CONTRIBUTION......................... 83,379 22,905 - 106,284
TWELVE WEEKS ENDED JULY 17, 1999:
Net sales to external customers............. $ 463,144 $ 124,703 $ - $ 587,847
Depreciation expense........................ 4,909 1,839 8,454 15,202
Profit contribution......................... 77,203 17,877 - 95,080
TWENTY-EIGHT WEEKS ENDED JULY 15, 2000:
NET SALES TO EXTERNAL CUSTOMERS............. $ 1,085,141 $ 384,291 $ - $ 1,469,432
DEPRECIATION EXPENSE........................ 13,989 6,812 16,268 37,069
PROFIT CONTRIBUTION......................... 171,409 80,486 - 251,895
TWENTY-EIGHT WEEKS ENDED JULY 17, 1999:
Net sales to external customers............. $ 1,053,945 $ 385,935 $ - $ 1,439,880
Depreciation expense........................ 10,508 4,241 17,836 32,585
Profit contribution......................... 157,543 72,389 - 229,932
(a) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments.
</TABLE>
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 (loss) from continuing operations
before income tax expense (benefit) for the twelve weeks ended July 15, 2000 and
July 17, 1999 and the twenty-eight weeks ended July 15, 2000 and July 17, 1999
is as follows:
10
<PAGE>
KEEBLER FOODS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Eight Weeks Ended
---------------------------------- ------------------------------------
JULY 15, 2000 July 17, 1999 JULY 15, 2000 July 17, 1999
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT):
Reportable segment's profit contribution..... $ 106,284 $ 95,080 $ 251,895 $ 229,932
Unallocated functional support costs (b)..... 39,753 46,348 91,668 110,555
Restructuring and impairment charge.......... (996) 69,208 (996) 69,208
Interest expense, net........................ 10,987 8,084 24,136 21,400
--------------- --------------- ---------------- ----------------
Income (Loss) before Income Tax
Expense (Benefit) ..................... $ 56,540 $ (28,560) $ 137,087 $ 28,769
=============== =============== ================ ================
(b) Includes support costs such as distribution, research and development, corporate administration and other (income) expense,
which are not allocated internally to reportable segments.
</TABLE>
8. SALE OF VALUE BRANDS ASSETS
On January 4, 2000, Keebler sold its Birmingham, Alabama, and North Little Rock,
Arkansas bakeries and the SUNNY and GREGS brands to Consolidated Biscuit
Company. As a result of the sale, Keebler recorded a $5.7 million pre-tax gain
in other income during the first quarter of 1999.
9. SUBSEQUENT EVENTS
On August 24, 2000, the Board of Directors of Keebler declared a quarterly cash
dividend of $0.1125 per share payable on September 20, 2000, to stockholders of
record on September 6, 2000.
11
<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 15, 2000 and July
17, 1999 should be read in conjunction with Keebler's 1998 annual report on Form
10-K filed with the Securities and Exchange Commission on March 20, 2000.
Keebler's operating results for the twenty-eight weeks ended July 15, 2000,
include the operating results of Austin Quality Foods, Inc. ("Austin") from the
acquisition date of March 6, 2000, whereas the comparable period ended July 17,
1999, does not. Keebler's operating results for the twenty-eight weeks ended
July 15, 2000, do not include the operating results of the Birmingham, Alabama,
and North Little Rock, Arkansas bakeries and the SUNNY and GREGS brands ("the
value brands business"), as these brands were sold to Consolidated Biscuit
Company on January 4, 2000. The comparable twenty-eight weeks ended July 17,
1999, includes the operating results of the value brands business.
RESULTS OF OPERATIONS
Results of operations expressed as a percentage of net sales for the twelve
and twenty-eight weeks ended July 15, 2000 and July 17, 1999 are set forth
below:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Eight Weeks Ended
-------------------------------------- ------------------------------------
July 15, 2000 July 17, 1999 July 15, 2000 July 17, 1999
------------------ ------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
NET SALES......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 41.3 43.8 42.0 44.3
Selling, marketing and administrative expenses.... 46.8 46.5 46.4 46.4
Restructuring and impairment charge............... (0.2) 11.8 (0.1) 4.8
INCOME (LOSS) FROM OPERATIONS..................... 11.0 (3.5) 11.0 3.5
Interest Expense, net............................. 1.8 1.4 1.6 1.5
NET INCOME (LOSS)................................. 5.5% (3.6)% 5.5% 0.8%
</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
income (loss) from operations. Prior year numbers have been restated for
reclassifications between reportable segments.
12
<PAGE>
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. 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 15, 2000 July 17, 1999 July 15, 2000 July 17, 1999
--------------------- -------------------- -------------------- --------------------
($ IN MILLIONS) $ % $ % $ % $ %
---------- ---------- --------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES........................ $ 482.1 $ 463.1 $1,085.1 $1,053.9
PROFIT CONTRIBUTION.............. $ 83.4 17.3% $ 77.2 16.7% $ 171.4 15.8% $ 157.5 14.9%
</TABLE>
For the quarter ended July 15, 2000, net sales of $482.1 million in the
Branded segment increased 4.1% over the same period of a year ago and net sales
of $1,085.1 million for the first half of 2000 finished 3.0% above the
comparable period of 1999. The acquisition of Austin accounted for net sales of
$36.7 million and $55.3 million for the twelve and twenty-eight weeks ended July
15, 2000, respectively. In addition, the sale of the value brands business,
which totaled $11.4 million and $26.1 million of net sales for the second
quarter and first half of 1999, respectively, affected comparisons for the
initial two quarters of 2000. Excluding the impact of Austin sales in the
current period and the revenue from the value brands business in the comparable
periods of a year ago, net sales for the quarter ended July 15, 2000 decreased
$6.3 million compared to the year-ago quarter and increased $2.0 million for the
first half of 2000. During the current quarter, good growth in core Keebler
brand cookie and cracker products, along with additional distribution points
picked up in the national rollout of FAMOUS AMOS and MURRAY SUGAR FREE drove
real volume gains that were offset by decreased sales of more promotion
sensitive products. Competitive activity constrained net sales of our secondary
cookie brands. For the first half of 2000, growth from new products, greater
distribution of FAMOUS AMOS and MURRAY SUGAR FREE cookies, and continued growth
in retail business outside supermarkets, including mass merchandisers and
convenience channels, were the primary drivers of the increase in net sales as
compared to the prior year. New products contributing to the overall
year-to-date growth included Keebler SNAX STIX, HARVEST BAKERY crackers, ELF
GRAHAMS and WHEATABLES SNACK MIX.
The profit contribution of the Branded segment was $83.4 million, or 17.3%
of net sales, in the second quarter of 2000 and $171.4 million, or 15.8% of net
sales, for the first half of 2000. The growth in profit contribution for the
twelve and twenty-eight weeks ended July 15, 2000 was driven by a higher gross
margins achieved on Keebler's core products furthered by improved productivity
and cost savings across the supply chain. Partially offsetting these
improvements was the inclusion of the gross margin on Austin sales, which was
lower than Keebler and President products. Higher distribution and freight,
which were the result of increased fuel costs, also slightly offset the growth
in profit contribution.
SPECIALTY SEGMENT
The Specialty segment produces cookies, crackers and brownies for the
foodservice market and private label retailers. In addition, we also produce
custom-baked products for other marketers of branded food products, including
sales of cookies to the Girl Scouts of the U.S.A.
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------------------ -----------------------------------------
July 15, 2000 July 17, 1999 July 15, 2000 July 17, 1999
--------------------- -------------------- -------------------- --------------------
($ IN MILLIONS) $ % $ % $ % $ %
---------- ---------- --------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES........................ $ 131.5 $ 124.7 $ 384.3 $ 385.9
PROFIT CONTRIBUTION.............. $ 22.9 17.5% $ 17.9 14.3% $ 80.5 20.9% $ 72.4 18.8%
</TABLE>
13
<PAGE>
For the twelve weeks ended July 15, 2000, net sales in the Specialty segment
were $131.5 million compared to $124.7 million in the comparable quarter of
1999. The $6.8 million or 5.4% increase in net sales was due to continued volume
growth in the foodservice channel and the Austin acquisition growth offset by
revenue declines in custom-baked and private label products. Volume gains in the
foodservice market were led by higher sales of both ice cream cones and Grab n'
Go products. Sales of Austin products contributed $9.8 million in incremental
revenue. Net sales for the year-to-date ended July 15, 2000 of $384.3 million
were just $1.6 million below the comparable twenty-eight week period of last
year. Lower sales of custom-baked and private label products were the primary
contributors of the revenue loss in the first half. Partially offsetting the
year-to-date sales decline were Austin sales, which added $15.7 million
incremental net sales and growth of 9.8% in foodservice sales.
The Specialty segment's profit contribution was $22.9 million or 17.5%, as a
percentage of net sales, for the quarter ended July 15, 2000, and $80.5 million
or 20.9%, as a percentage of net sales, for the first half of 2000. Removing the
effects of Austin, Keebler's profit contribution finished the twelve and
twenty-eight weeks 3.0 percentage points and 2.3 percentage points, as a
percentage of net sales, ahead of the respective periods of the prior year. A
product focus shift to higher margin products, which lowered cost of sales both
in dollar spending and as a percentage of net sales, was the primary contributor
to the increased profit margin. Additional cost reduction initiatives also
contributed to higher segment profits.
COST OF SALES
For the twelve weeks ended July 15, 2000, cost of sales was $253.3 million,
or 41.3% of net sales, versus $257.3 million, or 43.8% of net sales, in the
comparable quarter of a year ago. Year-to-date, cost of sales was $616.7
million, or 42.0% of net sales, as opposed to $638.1 million, or 44.3% of net
sales, from a year ago. Excluding Austin, cost of sales, as a percentage of net
sales, was 39.7% and 40.9% for the second quarter and twenty-eight weeks ended
July 15, 2000, respectively. The quarter and year-to-date improvements in cost
of sales, as a percentage of net sales, were mainly attributable to productivity
and cost savings and lower raw material costs. Lower sales of custom-baked, and
private label and value products also contributed to lower cost of sales. These
favorable factors more than offset the increase to cost of sales resulting from
the inclusion of Austin since its March 6, 2000 acquisition date. Also
contributing to the improvement in cost of sales was a favorable shift in the
overall business mix to higher margin products and channels of distribution.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES
For the quarter and year-to-date ended July 15, 2000, selling, marketing and
administrative expenses of $287.0 million and $682.2 million, respectively, were
$13.6 million and $14.6 million higher than the same periods of a year ago. The
5.0% and 2.2% increase in selling, marketing and administrative expenses for the
twelve and twenty-eight weeks, respectively, was primarily driven by the
inclusion of Austin expenses. The remaining balances were principally due to an
increase of $5.2 million and $11.0 million in selling and distribution for the
quarter and first half, respectively. Excluding Austin, selling, marketing and
administrative expenses finished the quarter and year-to-date periods, 2.5 and
1.3 percentage points, as a percentage of net sales, higher than the respective
periods of last year. The increased selling and distribution expense was mainly
due to transition expenses on converting certain non-core independent
distributor routes acquired in the President acquisition to Keebler's direct
store delivery system and higher fuel costs.
OTHER
Other expense for the second quarter and first half of 2000 was $6.7 million
and $10.2 million, respectively, compared to $8.4 million and $14.8 million for
the prior year comparable periods. The decrease for both the second quarter and
year-to-date periods was principally due to the $2.0 million pre-tax gain on the
sale of the Sayreville manufacturing facility in the second quarter of 2000 and
the $5.7 million pre-tax gain on the sale of the value brands business in the
first quarter of 2000. Partially offsetting these gains was incremental
amortization expense resulting from intangible assets added from the Austin
acquisition, higher costs related to the Receivables Purchase Agreement and
increased bank fees.
14
<PAGE>
RESTRUCTURING AND IMPAIRMENT CHARGE
In May of 1999, Keebler closed its manufacturing facility in Sayreville, New
Jersey, which resulted in a pre-tax restructuring and impairment charge to
income from operations of $66.3 million. In the second quarter of 2000 the
charge was reduced by an adjustment of $1.0 million. The adjustment was for
costs related to severance and other exit costs from the facility due to
lower-than-expected severance costs and the earlier-than-expected sale of the
facility. On May 2, 2000, the Sayreville, New Jersey facility was sold. The
restructuring and impairment charge included $19.2 million for cash costs
related to severance and other exit costs from the Sayreville facility. The
remaining $46.1 million were 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 Sunshine Biscuits, Inc. ("Sunshine") acquisition in
June 1996. Of the total $65.3 million charge, approximately $64.6 million was
recorded as plant and facility closing costs and severance. The remaining $0.7
million was recorded as other liabilities and accruals. Approximately 650 total
employees were terminated as a result of the closing of the Sayreville facility,
of which approximately 600 employees were represented by unions. At July 15,
2000, $3.3 million remained for plant and facility closing costs and severance
accruals and $0.2 million for other liabilities and accruals. Only costs related
to the settlement of workers' compensation claims and health and welfare
payments are expected to extend beyond the year ended December 30, 2000. The
amount of suspended depreciation and amortization that would have been
recognized for the twenty-eight weeks ended July 15, 2000, if the prior year
impairments had not been recognized, was approximately $2.8 million.
INTEREST EXPENSE, NET
Net interest expense for the second quarter and year-to-date period ended
July 15, 2000, of $11.0 million and $24.1 million was $2.9 million and $2.7
million higher than the second quarter and year-to-date period ended July 17,
1999, respectively. The increase in net interest expense was primarily due to
additional interest expense associated with the incremental debt incurred in
first quarter of 2000 in order to finance the acquisition of Austin. Outstanding
debt at July 15, 2000, was $136.6 million above the level outstanding at July
17, 1999. Also adding to the increase in expense was a higher weighted average
interest rate in 2000 compared to the same period in 1999.
INCOME TAX EXPENSE
Income tax expense for the twelve and twenty-eight weeks ended July 15,
2000, increased by $30.3 million and $38.7 million, respectively, compared to
the same periods of a year ago. Increased taxable earnings was the primary
driver of higher income tax expense. A lower effective tax rate of 40.9% in 2000
versus 42.5% in 1999 partially offset this increase. The effective tax rate
decreased due to higher taxable earnings and the adoption of a change in the tax
basis of the assets acquired and liabilities assumed in the Keebler acquisition,
in accordance with the Internal Revenue Code Section 338. Partially offsetting
the decrease in the effective tax rate was the increase in non-deductible
goodwill amortization expense as a result of the Austin acquisition. The
effective tax rate remains above the federal statutory rate due to nondeductible
expenses, primarily the amortization of intangibles resulting from acquisitions.
NET INCOME (LOSS)
Net income for the twelve and twenty-eight weeks ended July 15, 2000 was
$33.4 million and $81.0 million, respectively. Before restructuring and
impairment changes or credits, net income was $32.8 million in the current
quarter and $80.3 million for the twenty-eight weeks ended July 15, 2000. Net
income exceeded the second quarter and year-to-date of the prior year, also
before restructuring and impairment charges, by $9.2 million and $24.0 million,
respectively. The increase over the comparable quarter and first half of 1999
was a combination of the on-going strength of our core branded business,
successful integration of strategic acquisitions, realized cost savings from
productivity gains and efficiencies in operations, and a strategic shift away
from lower margin businesses.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first twenty-eight weeks of 2000, cash provided from operating
activities was $101.6 million. Year-to-date net earnings of $81.0 million and a
reduced investment in inventories of $29.2 million were primarily 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 income tax benefit of $17.9
million on stock options exercised contributed to the cash flow. Partially
offsetting these cash resources was lower trade accounts payable and other
current liabilities of $42.5 million, which was due primarily to timing of
disbursements and payment of year end incentives, and spending of $13.6 million
for plant and facility closing costs and severance.
For the first half of 2000, cash used by investing activities of $274.9
million was principally attributable to the $253.8 million, net of cash
acquired, in the acquisition of Austin during the first quarter. Also
contributing to uses of cash was the $10.0 million purchase of a license
agreement for the Sesame Street trademark from the Sesame Workshop, formerly
known as the Children's Television Workshop. The majority of the $36.7 million
in capital spending in the first half of 2000 was used for automation and
capacity enrichments, product development and several equipment upgrades related
to cost reduction programs for improved production expansion. Proceeds received
from asset disposals of $25.5 million partially offset capital expenditures,
with the sale of the value brands business and the Sayreville facility
accounting for $24.5 million of the proceeds.
Financing activities provided $172.7 million of cash during the first
twenty-eight weeks of 2000. The increase resulted principally from proceeds of
long-term debt borrowings under the existing Revolving facility to fund the
acquisition of Austin. Also contributing to the increase were net cash proceeds
of $21.0 million received from the sale of accounts receivable under the
Receivables Purchase Agreement and $4.9 million of cash generated from employee
stock options exercised during the first half of 2000. Partially offsetting the
positive cash flow were scheduled principal payments of $24.3 million, dividend
payments totaling $18.9 million and purchases of common stock into treasury of
$10.0 million.
As of July 15, 2000, cash and cash equivalents were $20.1 million, long-term
debt outstanding was $636.7 million and current maturities were $46.6 million.
Available borrowings under Keebler's Revolving facility were $350.0 million, of
which $200.0 million was outstanding at July 15, 2000. 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
In June 2000, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment of FASB
Statement No. 133. FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. FASB Statement No. 138
addresses a limited number of issues causing implementation difficulties for
numerous entities that apply FASB Statement No. 133.
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 sales trends
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 and
o other statements that are not historical facts.
16
<PAGE>
When used in this discussion, the words "anticipate," "believe," "estimate,"
"expect" 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 customers and competitors;
o our ability to recover material costs in the pricing of our products;
o the extent to which we are able to successfully 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 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 15, 2000, with a notional amount of $322.3 million,
remains comparable to year end. Additionally, interest rates have not fluctuated
materially from year end and therefore, the sensitivity analysis performed as of
January 1, 2000 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 $23.1 million
at July 15, 2000 would be impacted by $2.2 million.
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
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: August 28, 2000
/s/ E. NICHOL MCCULLY
------------------------------------------------------
E. Nichol McCully
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 28, 2000
/s/ JAMES T. SPEAR
------------------------------------------------------
James T. Spear
Vice President Finance and Corporate Controller
(Principal Accounting Officer)
Date: August 28, 2000
18
