<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1995
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 1-4171
KELLOGG COMPANY
State of Incorporation--Delaware IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant's telephone number: 616-961-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
--------- ---------
Common Stock outstanding October 31, 1995 - 217,426,832 shares
<PAGE> 2
KELLOGG COMPANY
INDEX
Page
----
PART I - Financial Information
Item 1:
Consolidated Balance Sheet - September 30, 1995 and December 31, 1994 2
Consolidated Earnings - three and nine months ended September 30, 1995 3
Consolidated Statement of Cash Flows - nine months ended September 30,
1995 and 1994 4
Notes to Consolidated Financial Statements 5
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-10
PART II - Other Information
Item 4:
Submission of Matters to a Vote of Security Holders 11
Item 6:
Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index 13
1
<PAGE> 3
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
=============================================================================
KELLOGG COMPANY AND SUBSIDIARIES SEPTEMBER 30, December 31,
(millions) 1995 1994
(unaudited) *
- -----------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and temporary investments $463.5 $266.3
Accounts receivable, net 658.9 564.5
Inventories 399.3 396.3
Other current assets 221.5 206.4
- -----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,743.2 1,433.5
PROPERTY,net of accumulated depreciation
of $1,887.5 and $1,707.7 2,920.0 2,892.8
INTANGIBLE ASSETS 3.6 4.1
OTHER ASSETS 173.2 136.9
- -----------------------------------------------------------------------------
TOTAL ASSETS $4,840.0 $4,467.3
=============================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $2.0 $0.9
Notes payable 334.8 274.8
Accounts payable 388.0 334.5
Income taxes 120.5 72.0
Accrued liabilities 595.5 503.0
- -----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,440.8 1,185.2
LONG-TERM DEBT 718.2 719.2
NONPENSION POSTRETIREMENT BENEFITS 520.3 486.8
DEFERRED INCOME TAXES AND OTHER LIABILITIES 297.2 268.6
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 77.7 77.6
Capital in excess of par value 93.9 68.6
Retained earnings 4,119.4 3,801.2
Treasury stock, at cost (2,267.7) (1,980.6)
Currency translation adjustment (159.8) (159.3)
- -----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,863.5 1,807.5
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,840.0 $4,467.3
=============================================================================
</TABLE>
*Condensed from audited financial statements.
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
CONSOLIDATED EARNINGS (Results are unaudited)
<TABLE>
<CAPTION>
===========================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended September 30, Nine months ended September 30,
(millions, except per share data) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $1,844.7 $1,741.9 $5,340.8 $4,970.0
- -----------------------------------------------------------------------------------------------------------
Cost of goods sold 835.6 756.2 2,424.6 2,216.9
Selling and administrative expense 633.3 626.6 1,933.2 1,833.8
Non-recurring charges 0.0 0.0 52.8 0.0
- -----------------------------------------------------------------------------------------------------------
OPERATING PROFIT 375.8 359.1 930.2 919.3
- -----------------------------------------------------------------------------------------------------------
Interest expense 15.8 12.6 50.3 33.8
Other income (expense), net 5.5 0.8 21.8 4.8
- -----------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 365.5 347.3 901.7 890.3
Income taxes 135.5 130.6 339.8 338.2
- -----------------------------------------------------------------------------------------------------------
NET EARNINGS $230.0 $216.7 $561.9 $552.1
===========================================================================================================
EARNINGS PER SHARE $1.05 $.96 $2.56 $2.45
DIVIDENDS PER SHARE $.39 $.36 $1.11 $1.04
AVERAGE SHARES OUTSTANDING 218.7 223.4 219.8 225.0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited)
<TABLE>
<CAPTION>
====================================================================================
KELLOGG COMPANY AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30,
(millions) 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $561.9 $552.1
Items in net earnings not requiring (providing) cash:
Depreciation 205.4 189.1
Pre-tax gain on sale of subsidiaries - (21.1)
Deferred income taxes 6.4 5.6
Non-recurring charges, net of cash paid 35.4 -
Other 31.9 28.0
Pension contribution (61.7) (60.9)
Change in operating assets and liabilities 82.0 47.4
- ------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 861.3 740.2
- ------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to properties (222.1) (237.5)
Proceeds from sale of subsidiaries - 83.8
Other 7.3 16.5
- ------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (214.8) (137.2)
- ------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net borrowings of notes payable 60.0 (72.9)
Issuance of long-term debt - 200.0
Reduction in long-term debt 0.1 (2.8)
Common stock repurchases (284.9) (283.6)
Cash dividends (243.8) (233.7)
Other 23.2 (0.3)
- ------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (445.4) (393.3)
- ------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (3.9) 6.6
- ------------------------------------------------------------------------------------
Increase in cash and temporary investments 197.2 216.3
Cash and temporary investments at beginning of period 266.3 98.1
- ------------------------------------------------------------------------------------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD $463.5 $314.4
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
Notes To Consolidated Financial Statements
for the nine months ended September 30, 1995
(Unaudited)
1. Accounting policies
The unaudited interim financial information included herein reflects the
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations, financial position, and cash flows for the periods presented. Such
interim information should be read in conjunction with the financial statements
and notes thereto contained on pages 15 to 28 of the Company's 1994 Annual
Report. The accounting policies used in preparing these financial statements
are the same as those summarized in the Company's 1994 Annual Report.
The results of operations for the nine months ended September 30, 1995, are not
necessarily indicative of the results to be expected for other interim periods
or the full year.
2. Non-recurring charges
Operating profit for the nine months ended September 30, 1995, includes a
non-recurring charge of $52.8 million ($33.0 million after tax or $.15 per
share) related to productivity and operational streamlining initiatives in the
U.S., Australia, and Great Britain. The charge primarily consists of costs
related to employee benefits and separation payments.
As a result of further streamlining efforts in the U.S., and similar
productivity initiatives in Europe and Australia, the Company expects to report
a pre-tax charge of approximately $300 to $325 million in the fourth quarter
of 1995. Approximately 60% of the charge will be related to employee
retirement and severance benefits with the remainder consisting primarily of
asset write-off and removal costs resulting from a plant closing in San
Leandro, California, and reduced cereal production capacity at plants in Battle
Creek, Michigan, and Memphis, Tennessee.
During the fourth quarter, the Company also expects to record a non-recurring
charge of approximately $75 million, consisting principally of the write-down
of certain operating assets in North America and Asia-Pacific, bringing the
total expected fourth quarter charge to $375 to $400 million ($240 to $260
million after-tax or $1.10 to $1.20 per share). This charge results from the
evaluation of the ability of the Company to recover asset costs given changes
in local market conditions, sourcing of products, and other factors.
3. Other income/(expense)
Other income for the nine months ended September 30, 1994, includes a gain of
$21.1 million ($13.3 million after tax or $.06 per share) from the sale of the
Mrs. Smith's Frozen Foods pie business and other expense includes a charge of
$20.5 million ($13.1 million after tax or $.06 per share) primarily from the
initial funding of the Kellogg's Corporate Citizenship Fund.
5
<PAGE> 7
KELLOGG COMPANY
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of operations
Kellogg revenues are generated from the sale of ready-to-eat cereals and other
convenience foods in nearly 160 countries. The ready-to-eat cereal category
continued to exhibit volume growth on a global basis during the first nine
months of 1995, with Kellogg continuing to demonstrate strong global
leadership.
For the third quarter of 1995, the Company exhibited solid growth, reporting
increases in net sales, net earnings, and earnings per share. These quarterly
results were a Company record for all three measures, driven primarily by
volume growth combined with aggressive cost containment programs.
Consolidated net sales increased 6% for the third quarter and 7% for the first
nine months of 1995 over the comparable periods of 1994, principally from
volume growth and to a lesser extent, product mix and pricing.
The Company's total volume was up 5% for both the quarter and year-to-date
periods versus the prior year, excluding the effects of divested businesses.
Cereal volume increased 4% for the quarter and 3% for the year-to-date period,
driven by shipment increases in North American, Continental Europe and
Asia-Pacific markets. Latin America experienced slightly lower shipments, as
continuing volume reductions in Mexico, resulting from the effect on the local
economy of last year's peso devaluation, were partially offset by strong growth
in other Latin American markets. Volume for the Company's U.S. ready-to-eat
cereal business strengthened during the third quarter in comparison to a modest
third quarter in 1994 that was impacted by weak shipments due primarily to
reductions in customer inventory levels. Other convenience foods volume
increased significantly for both the quarter and the year-to-date periods
primarily due to strong sales of new products in the North American market,
where the Company continues to hold the number one position in dollar sales in
the toaster pastry, cereal/granola bar and frozen waffle categories.
The gross profit margin for the quarter declined to 54.7% from 56.6% in 1994,
and 54.6% year-to-date, down from 55.4% last year. These declines were
primarily attributable to North America, where changes in product mix and
higher costs caused gross margins to decline across all businesses, especially
when compared to strong results in the third quarter last year. The Company's
manufacturing operations continue to experience pressure from higher raw
material and packaging costs, partially offset by increased plant efficiencies
and productivity improvements. Management continues to expect the gross profit
margin for the full year to be comparable with 1994.
Selling and administrative expense increased 1% for the third quarter and 5%
for the first nine months of 1995. Selling and administrative expense as a
percentage of net sales was 34% for the
6
<PAGE> 8
quarter and 36% for the year-to-date period, as compared to last year's 36% and
37%, respectively. The decrease in selling and administrative expense as a
percentage of net sales reflects the Company's continued emphasis on cost
containment and carefully managed promotion spending. In line with the
Company's long-term strategy, promotion spending was down on established U.S.
ready-to-eat cereal brands for the quarter, as well as for the past twelve
months. Management believes that this strategy, combined with continued
investment in advertising and a strong new product development program, will
assist in adding further value to the Company's brand portfolio, thereby
delivering long-term profitable growth.
Operating profit increased 5% to $376 million for the quarter and 7% to $983
million year-to-date, excluding the non-recurring charge of $52.8 million
reported in the second quarter of 1995. Operating profit growth reflects the
increase in net sales, combined with progress in the Company's cost containment
programs. This quarter is the ninth in a row with year-over-year increases in
operating profit, excluding non-recurring events.
Other income for the first nine months of 1994 includes a gain of $21.1 million
($13.3 million after tax or $.06 per share) from the sale of the Mrs. Smith's
Frozen Foods pie business. Other expense includes a charge of $20.5 million
($13.1 million after tax or $.06 per share), primarily from the initial funding
of the Kellogg's Corporate Citizenship Fund, a private trust established for
charitable donations.
Gross interest expense, prior to amounts capitalized, increased to $17.8
million and $56.1 million for the quarter and year-to-date period respectively,
from $14.2 million and $38.9 million for the comparable periods of 1994, due to
increased interest rates on short-term borrowings. This increase in interest
expense was substantially offset by increases in interest income due to higher
cash balances.
The Company's third quarter income tax rate was 37.1% down from 37.6% last
year. The 1995 third quarter tax rate was impacted favorably by lower
effective tax rates in certain international locations. For the nine months
ended September 30, 1995, the income tax rate was 37.7% as compared to 38.0%
for 1994. The Company expects its effective income tax rate for the full year
of 1995 to be between 37% and 38%.
During the third quarter, the U.S. dollar was slightly weaker against most
European currencies compared to the third quarter of 1994, while some Latin
America operations, especially Mexico, experienced sharply lower currencies
against the U.S. dollar. Overall for the quarter, foreign exchange negatively
impacted the growth of net sales by 1%, operating profit by 2%, and net
earnings by 3%.
Earnings per share were $1.05 for the third quarter versus $.96 a year ago, a
9.4% increase derived from $.09 in business growth, $.02 in share repurchase,
and $.01 in tax rate reduction, partially offset by a $.03 negative foreign
currency exchange effect. Earnings per share were $2.56 for the year-to-date
period versus $2.45 a year ago. Earnings per share, excluding the
non-recurring charge, were $2.71 for the year-to-date period, up 10.6% from
the comparable period of 1994. Net earnings were
7
<PAGE> 9
$230.0 million for the quarter, and $561.9 million for the year-to-date period.
Net earnings year-to-date were $594.9 million, up $43.0 million or 7.8%,
excluding non-recurring events for both years.
Liquidity and capital resources
The financial condition of the Company remained strong during the first nine
months of 1995.
Operations provided a positive cash flow of $861.3 million, up 16% from the
prior year, principally due to higher net earnings, adjusted for the non-cash
components of non-recurring items, and improved working capital management.
The strong cash flow, combined with a program of issuing commercial paper and
maintaining worldwide credit facilities, provides adequate liquidity to meet
the Company's operational needs. The Company maintains credit facilities with
banking institutions in the United States and other countries where it conducts
business. The ratio of current assets to current liabilities was 1.2:1 as of
September 30, 1995, unchanged from the ratio at December 31, 1994.
Capital spending for the first nine months of 1995 was $222.1 million, compared
with $237.5 million during the first nine months of 1994. Management expects
total year 1995 capital spending to be slightly less than 1994's level of
approximately $350 million. The steady level of capital expenditures reflects
the Company's application of value-based management principles and the ongoing
strategy of improving return on invested capital. During the third quarter of
1995, cereal production began at two new facilities located in Pilar, Argentina
and Guangzhou, China. Also, construction continued on the Company's new
research center, the W. K. Kellogg Institute, located in Battle Creek,
Michigan. This facility is expected to be completed in 1997 with a total
investment of approximately $65 million.
As of September 30, 1995, the Company had spent $284.9 million during the year
to repurchase approximately 4.5 million shares of its common stock. Since
September of 1994, the Company has purchased approximately 5.2 million shares,
or 2.4% of the total shares outstanding as of that date, contributing an
average of $.02 per quarter to earnings per share growth over that time period.
Stock repurchases are made under plans authorized by the Company's Board of
Directors. On September 21, 1995, the Board authorized the additional purchase
of up to $400 million in Company stock through December 31, 1996. As of
September 30, 1995, the total remaining authorized purchase amount was $440.6
million.
Long-term debt outstanding at September 30, 1995, consisted principally of $200
million of three-year notes issued in 1994, $200 million of five-year notes
issued in 1993, and $300 million of five-year notes issued in 1992. Short-term
debt outstanding consisted principally of commercial paper. The Company's debt
ratings on both its long-term debt and commercial paper are the highest
available.
The Company's net debt position (long-term debt plus notes payable less cash
and temporary investments) at September 30, 1995, was $591.5 million, down
$137.1 million from December 31, 1994. The ratio of debt to total
capitalization was 36%, unchanged from December 31, 1994.
8
<PAGE> 10
At September 30, 1995, the Company had available an unused "shelf registration"
of $200 million with the Securities and Exchange Commission to provide for the
issuance of debt in the United States. The proceeds of such an offering would
be added to the Company's working capital and be available for general
corporate purposes.
During the third quarter of 1995, the Company paid $85.2 million in dividends,
reflecting a 39-cents per share rate, an 8.3% increase from the previous
quarterly rate of 36-cents per share.
Non-Recurring Charges
Management's objective to maximize shareholder value includes a constant
reassessment of its business strategies. The Company's commitment to be
positioned for future success has been the basis of several initiatives
announced during 1995 to improve productivity and streamline global operations.
Plans were announced during the first half of the year to improve
manufacturing efficiency in the U.S., Australia, and Great Britain. As a
result, the Company reported a total pre-tax charge during the second quarter
of $52.8 million ($33.0 million after tax or $.15 per share) related primarily
to voluntary severance and early retirement programs which eliminated 475
employee positions.
As a result of further streamlining efforts in the U.S. and similar
productivity initiatives in Europe and Australia, the Company expects to report
a pre-tax charge of approximately $300 to $325 million in the fourth quarter
of 1995. Approximately 60% of the charge will be related to employee
retirement and severance benefits with the remainder consisting primarily of
asset write-off and removal costs resulting from a plant closing in San
Leandro, California, and reduced cereal production capacity at plants in Battle
Creek, Michigan and Memphis, Tennessee.
During the fourth quarter, the Company also expects to record a non-recurring
charge of approximately $75 million, consisting principally of the write-down
of certain operating assets in North America and Asia-Pacific, bringing the
total expected fourth quarter charge to $375 to $400 million ($240 to $260
million after tax or $1.10 to $1.20 per share). This charge results from the
evaluation of the ability of the Company to recover asset costs given changes
in local market conditions, sourcing of products, and other strategic factors.
The combination of the second and fourth quarter initiatives are expected to
eliminate approximately 2,000 employee positions, nearly 13% of the global
workforce at December 1994, through a combination of voluntary early retirement
incentives, and voluntary and involuntary severance programs, and will require
cash outlays of approximately $60 million in 1995 and $100 million in 1996. The
Company expects to realize approximately $120 million of annual pre-tax savings
by 1997, with about one-half of this amount being achieved in 1996. These
savings are not necessarily indicative of future incremental earnings due to
management's commitment to hold product pricing below the rate of inflation,
while investing in competitive business strategies, new markets, and growth
opportunities. The Company will continue to focus on potential worldwide
9
<PAGE> 11
efficiency initiatives that improve its manufacturing, marketing, logistics and
customer service processes while lowering costs and more effectively utilizing
human and financial resources.
Looking forward
Management anticipates that 1995 will be another year of growth for the
Company. Management expects ongoing advances in global volume, the
continuation of product pricing below inflation, continual improvements in
operating efficiencies, strong cash flows and continued share repurchase
activity. The Company's business environment remains highly competitive around
the world.
Management is not aware of any adverse trends that would materially affect the
Company's strong financial position. Should suitable investment opportunities
or working capital needs arise that would require additional financing,
management believes that the Company's triple A credit rating, strong balance
sheet, and its solid earnings history provides a base for obtaining additional
financial resources at competitive rates and terms.
10
<PAGE> 12
KELLOGG COMPANY
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
There were no submissions of matters to a vote of security holders
during the quarter for which this report is filed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.01 - There is no instrument with respect to long-term debt
of the Company that involves indebtedness or securities
authorized thereunder exceeding ten percent of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to file a copy of any instrument or
agreement defining the rights of holders of long-term debt of
the Company upon request of the Securities and Exchange
Commission.
27.01- Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this report is filed.
11
<PAGE> 13
KELLOGG COMPANY
SIGNATURES
Pursuant to the requirements 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.
KELLOGG COMPANY
/s/ J. R. Hinton
--------------------------------------
J.R. Hinton
Principal Financial Officer;
Senior Vice President - Administration
/s/ A. Taylor
--------------------------------------
A. Taylor
Principal Accounting Officer;
Vice President and Corporate Controller
Date: November 10, 1995
12
<PAGE> 14
KELLOGG COMPANY
EXHIBIT INDEX
Number Description
27.01 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kellogg
Company and subsidiaries Consolidated financial statements for the nine months
ended September 30, 1995 and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 464
<SECURITIES> 0
<RECEIVABLES> 659
<ALLOWANCES> 0
<INVENTORY> 399
<CURRENT-ASSETS> 1,743
<PP&E> 4,808
<DEPRECIATION> (1,888)
<TOTAL-ASSETS> 4,840
<CURRENT-LIABILITIES> 1,441
<BONDS> 718
<COMMON> 78
0
0
<OTHER-SE> 94
<TOTAL-LIABILITY-AND-EQUITY> 4,840
<SALES> 5,341
<TOTAL-REVENUES> 5,341
<CGS> 2,425
<TOTAL-COSTS> 2,425
<OTHER-EXPENSES> 1,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> 902
<INCOME-TAX> 340
<INCOME-CONTINUING> 562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 562
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 0
</TABLE>
