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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 March 31, 1996
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
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Common Stock outstanding April 30, 1996 - 212,644,073 shares
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KELLOGG COMPANY
INDEX
<TABLE>
<CAPTION>
Page
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PART I - Financial Information
Item 1:
Consolidated Balance Sheet - March 31, 1996 and December 31, 1995 2
Consolidated Earnings - three months ended March 31, 1996 and 1995 3
Consolidated Statement of Cash Flows - three months ended March 31,
1996 and 1995 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
</TABLE>
1
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
=====================================================================
KELLOGG COMPANY AND SUBSIDIARIES MARCH 31, December 31,
(millions) 1996 1995
(unaudited) *
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 223.1 $ 221.9
Accounts receivable, net 658.8 590.1
Inventories:
Raw materials and supplies 127.8 129.7
Finished goods and materials in process 254.6 247.0
Other current assets 269.1 240.1
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TOTAL CURRENT ASSETS 1,533.4 1,428.8
PROPERTY, net of accumulated depreciation
of $2,012.8 and $1,953.0 2,749.5 2,784.8
OTHER ASSETS 257.2 201.0
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TOTAL ASSETS $4,540.1 $4,414.6
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CURRENT LIABILITIES
Current maturities of long-term debt $ 1.9 $ 1.9
Notes payable 352.5 188.0
Accounts payable 343.3 370.8
Income taxes 125.8 64.2
Accrued liabilities 642.5 640.5
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TOTAL CURRENT LIABILITIES 1,466.0 1,265.4
LONG-TERM DEBT 722.1 717.8
NONPENSION POSTRETIREMENT BENEFITS 553.7 546.1
DEFERRED INCOME TAXES AND OTHER LIABILITIES 296.3 294.4
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 77.8 77.8
Capital in excess of par value 110.0 105.2
Retained earnings 4,085.3 3,963.0
Treasury stock, at cost (2,575.7) (2,361.2)
Currency translation adjustment (195.4) (193.9)
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TOTAL SHAREHOLDERS' EQUITY 1,502.0 1,590.9
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,540.1 $4,414.6
=====================================================================
*Condensed from audited financial statements.
</TABLE>
See accompanying notes to consolidated financial statements.
2
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<TABLE>
<CAPTION>
CONSOLIDATED EARNINGS (Results are unaudited)
============================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31,
(millions, except per share data) 1996 1995
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<S> <C> <C>
NET SALES $1,785.9 $1,716.0
Cost of goods sold 790.4 769.3
Selling and administrative expense 647.2 623.9
Non-recurring charges 9.5 -
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OPERATING PROFIT 338.8 322.8
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Interest expense 13.7 18.0
Other income (expense), net 0.4 10.6
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EARNINGS BEFORE INCOME TAXES 325.5 315.4
Income taxes 119.4 119.4
NET EARNINGS $ 206.1 $ 196.0
==========================================================================
EARNINGS PER SHARE $ 0.96 $ 0.89
DIVIDENDS PER SHARE $ 0.39 $ 0.36
AVERAGE SHARES OUTSTANDING 215.2 221.0
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited)
============================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31,
(millions) 1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $206.1 $196.0
Items in net earnings not requiring (providing) cash:
Depreciation 63.8 67.2
Deferred income taxes (2.6) 0.6
Other 25.4 2.3
Pension contributions (45.5) (60.0)
Changes in operating assets and liabilities (67.3) 7.6
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NET CASH PROVIDED BY OPERATING ACTIVITIES 179.9 213.7
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INVESTING ACTIVITIES
Additions to properties (46.5) (70.7)
Other (2.1) 4.0
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NET CASH USED IN INVESTING ACTIVITIES (48.6) (66.7)
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FINANCING ACTIVITIES
Net borrowings of notes payable 164.5 50.1
Reduction in long-term debt (0.6) (0.3)
Common stock repurchases (213.7) (91.5)
Cash dividends (83.9) (79.5)
Other 3.9 0.7
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NET CASH USED IN FINANCING ACTIVITIES (129.8) (120.5)
- ----------------------------------------------------------------------------
Effect of exchange rate changes on cash (0.3) 2.1
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Increase in cash and cash equivalents 1.2 28.6
Cash and cash equivalents at beginning of peri 221.9 266.3
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $223.1 $294.9
============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Notes To Consolidated Financial Statements
for the three months ended March 31, 1996
(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 1995 Annual
Report. The accounting policies used in preparing these financial statements
are the same as those summarized in the Company's 1995 Annual Report.
The results of operations for the three months ended March 31, 1996, 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 three months ended March 31, 1996 includes
non-recurring charges of $9.5 million ($6.1 million after tax or $.03 per
share) primarily related to ongoing productivity and operational streamlining
initiatives in the U.S. and Europe, and is comprised principally of
expenditures for employee training and relocation, management consulting, and
production redeployment.
During 1995, the Company recorded pre-tax non-recurring charges of $348.0
million related to operational streamlining initiatives in the U.S., Australia,
and Europe. As a result, approximately 2,000 employee positions will be
eliminated by the end of 1996, through a combination of voluntary early
retirement incentives, and voluntary and involuntary severance programs.
Associated with these 1995 initiatives, the Company expects to incur an
additional $30 million of costs during 1996 related to workforce and production
redeployment. These costs will be recorded as non-recurring charges as
incurred. The streamlining initiatives are expected to require pre-tax cash
outlays of approximately $120 to $130 million during 1996, consisting of $94
million in accrued liabilities as of year-end 1995 and the aforementioned $30
million to be expensed in 1996. Cash outlays during the first quarter of 1996
were approximately $27 million. From these programs, the Company expects to
realize approximately $120 million of annual pre-tax savings by 1997, with
about 60% of this amount to be achieved in 1996.
In early 1996, the Company commenced a plan to consolidate and reorganize
certain aspects of its European operations, and intends to further streamline
operations in other foreign locations. While these programs are in the early
stages of development, management believes that the combination of these 1996
initiatives with redeployment expenditures from 1995 initiatives could generate
total pre-tax non-recurring charges during 1996, as previously announced, in an
estimated range of $75-$100 million.
3. Earnings per share
Earnings per share are based on the weighted average shares outstanding as
presented. The potential dilution of earnings per share from the exercise of
stock options is not material.
5
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KELLOGG COMPANY
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of operations
Kellogg Company operates in a single industry - manufacturing and marketing
grain-based convenience food products including ready-to-eat cereal, toaster
pastries, frozen waffles, and cereal bars throughout the world. The Company
holds a 42 percent share of the global ready-to-eat cereal market, more than
double that of its nearest competitor, and currently markets 12 of the world's
15 top brands. In North America, the Company continues to hold the number one
position in dollar sales in the toaster pastry, cereal/granola bar and frozen
waffle categories. Management believes that these high-growth non-cereal
categories offer significant potential for long-term global expansion.
For the first quarter of 1996, the Company exhibited solid financial results,
reporting increases in net sales, net earnings, and earnings per share. These
quarterly results were driven primarily by volume growth combined with
aggressive cost containment, productivity improvements, and common stock
repurchases.
For the first quarter, total volume and consolidated net sales both increased
4%. Global cereal volume was up 2.5%, driven by a solid increase in shipments
in North American, Asia Pacific, and most Latin American markets. Ready-to-eat
cereal volume was negatively impacted by continued recessionary conditions in
Mexico, as well as by economic and competitive issues in several European
markets. Other convenience foods volume exhibited a continuation of low
double-digit growth during the quarter.
Pricing was not a significant factor in the sales increase. The Company has not
taken a retail cereal price increase in the U.S. in more than two years and
generally continues to hold pricing below the level of inflation in other areas
of the world. Since the beginning of 1996, the Company has taken two major
price decreases in the U.S.: a 9% reduction in the price of Kellogg's (R) Low
Fat Granola cereal and a 16% reduction in the price of Kellogg's (R) Raisin
Bran cereal. These price reductions will be substantially offset by adjustments
to price promotion spending and other cost reduction initiatives.
The gross profit margin for the quarter was 55.7%, up .5 percentage points over
the comparable 1995 period. This increase resulted primarily from higher
production volumes combined with cost-control and productivity improvements,
particularly in North American operations where significant efficiency
initiatives were implemented during 1995. The Company continues to experience
higher grain prices; however, management expects to largely offset these price
increases through the efficiencies of its global purchasing program and other
cost containment measures.
6
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Selling and administrative expense increased nearly 4% for the quarter, but was
down slightly as a percentage of net sales to 36.2%, compared to 36.4% during
the first quarter of 1995. This decline in selling and administrative expense
as a percentage of net sales was especially significant in light of increased
spending related to the Company's 90th Anniversary promotional programs during
the quarter, including special commemorative packaging. The Company remains
committed to its long-term strategy of emphasizing efficient brand-building
activities and eliminating inefficient price promotion spending.
Operating profit for the quarter included non-recurring charges of $9.5 million
($6.1 million after tax or $.03 per share) primarily related to ongoing
productivity and operational streamlining initiatives in the U.S. and Europe,
and was comprised principally of expenditures for employee training and
relocation, management consulting, and production redeployment. (Refer to the
section below on non-recurring charges.)
First quarter operating profit, excluding non-recurring charges, increased 8%
to $348.3 million, reflecting increased sales and spending efficiencies. This
was the eleventh quarter in a row with year-over-year increases in operating
profit, excluding non-recurring events. The operating profit margin was 19.5%,
up .7 percentage points over the first quarter 1995 margin of 18.8%.
Gross interest expense, prior to amounts capitalized, decreased to $14.4
million from $19.9 million during the comparable 1995 period, principally due
to reduced interest rates on short-term borrowings. For the year, the Company
expects total interest expense to be in line with 1995 levels. Other income,
net, decreased $10.2 million, primarily due to lower foreign exchange gains and
interest income during the quarter.
Excluding the effect of non-recurring charges, the Company's first quarter
income tax rate was 36.6%, down from 37.9% last year. The 1996 first quarter
tax rate was favorably impacted by lower effective tax rates in several foreign
jurisdictions. The Company expects its effective income tax rate for the
full year of 1996 to be between 37% and 38%, in line with 1995.
First quarter 1996 net earnings and earnings per share increased 5% and 8%,
respectively, over the first quarter of 1995. Excluding non-recurring charges,
earnings per share were $.99 versus $.89 a year ago, an 11% increase derived
from $.07 in business growth, $.03 in share repurchase, and $.02 in tax rate
reduction, partially offset by a $.02 negative foreign currency exchange
effect. Net earnings for the quarter, excluding non-recurring charges, were
$212.2 million, up 8%.
7
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Liquidity and capital resources
The Company's financial condition remained solid during the first quarter of
1996 with operations providing a strong, positive cash flow. This 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 continues to enjoy the highest available
credit ratings on both its long-term debt and commercial paper.
Net cash provided from operations for the quarter was $179.9 million, compared
to $213.7 million for the 1995 period. Despite increased earnings and effective
working capital management, cash flow from operations was down slightly from
prior year levels principally due to employee severance payments and other cash
expenditures related to the Company's ongoing productivity initiatives. The
ratio of current assets to current liabilities was 1:1 as of March 31, 1996,
relatively unchanged from December 31, 1995.
Net cash used in investing activities for the quarter was $48.6 million, based
primarily on capital spending of $46.5 million. The Company's global
infrastructure currently includes 29 manufacturing plants in 20 countries on 6
continents. During the quarter, the Company commenced construction of a new
cereal production facility in Thailand, scheduled to begin production in 1997,
which will further enhance its ability to serve high-growth Asia-Pacific
markets. Construction continued on the Company's new food 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. Management anticipates that total year 1996 capital expenditures will
be $300-$350 million.
Net cash used in financing activities was $129.8 million, principally related
to common stock repurchases and dividends, net of additional short-term
borrowing. Under an existing plan authorized by the Company's Board of
Directors, management spent $213.7 million during the first quarter to purchase
2.8 million shares of the Company's common stock. On April 19, 1996, the Board
of Directors authorized an additional $200 million for common stock repurchases
during 1996. Combined with the previous authorization of $137 million remaining
at the end of the first quarter, this action provided a total authorization of
$337 million to be spent during the remaining nine months of 1996. Market
conditions permitting, management intends to fully utilize this authorization
by the end of the year.
During the first quarter, the Company paid $83.9 million in dividends at a rate
of $.39 per common share, an 8% increase over the first quarter 1995 per share
amount. At March 31, 1996, common shares outstanding totaled 214.0 million,
compared to 220.1 million at March 31, 1995. During the quarter, the average
number of shares outstanding was 215.2 million, compared to an average of 221.0
million during the prior year period.
On April 19, 1996, stockholders approved an increase in the authorized number
of shares of the Company's common stock from 330 million to 500 million. This
increase in authorized shares is intended to provide sufficient shares for such
corporate purposes as may be determined by the Company's Board of Directors,
including business acquisitions, collaborative business arrangements, effecting
a stock split or issuing a stock dividend, flexibility for possible future
8
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financing, and attracting and retaining valuable employees through stock
compensation awards. The Company at present has no commitments, agreements, or
undertakings to issue any such additional shares.
Long-term debt outstanding at quarter-end 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 at quarter-end consisted principally of U.S. commercial paper. The
Company's net debt position (long-term debt plus notes payable less cash) at
March 31, 1996, was $853.4 million, up $167.6 million from December 31, 1995,
principally due to an increase in short-term debt to fund common stock
repurchases. The ratio of debt to total capitalization was 42%, up from 36% at
December 31, 1995.
At March 31, 1996, 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.
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 provide a base for obtaining additional
financial resources at competitive rates and terms.
Non-recurring charges
During 1995, the Company recorded pre-tax non-recurring charges of $348.0
million related to operational streamlining initiatives in the U.S., Australia,
and Europe. As a result, approximately 2,000 employee positions will be
eliminated by the end of 1996, through a combination of voluntary early
retirement incentives, and voluntary and involuntary severance programs.
Associated with these 1995 initiatives, the Company expects to incur an
additional $30 million of costs during 1996 related to workforce and production
redeployment. These costs will be recorded as non-recurring charges as
incurred. The streamlining initiatives are expected to require pre-tax cash
outlays of approximately $120 to $130 million during 1996, consisting of $94
million in accrued liabilities as of year-end 1995 and the aforementioned $30
million to be expensed in 1996. From these programs, the Company expects to
realize approximately $120 million of annual pre-tax savings by 1997, with
about 60% of this amount to be achieved in 1996. These savings are not
necessarily indicative of future incremental earnings due to management's
commitment to invest in competitive business strategies, new markets, and
growth opportunities.
In early 1996, the Company commenced a plan to consolidate and reorganize
certain aspects of its European operations, and intends to further streamline
operations in other foreign locations. While these programs are in the early
stages of development, management believes that the combination of these 1996
initiatives with redeployment expenditures from 1995 initiatives could generate
total pre-tax non-recurring charges during 1996, as previously announced, in an
9
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estimated range of $75-$100 million. The foregoing is a forward-looking
statement. Actual amounts may vary depending on the final determination of
important factors such as the magnitude of centralization of operations, the
number of employees affected and the type of separation programs, product
sourcing reviews, asset utilization analyses, and other items which have yet to
be determined. In addition, the recognition of these charges will be dependent
upon the timing of management approvals of elements of the streamlining
programs.
10
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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
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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;
ice President and Corporate Controller
Date: May 10, 1996
12
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KELLOGG COMPANY
EXHIBIT INDEX
Number Description Page
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27.01 Financial Data Schedule 14
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kellogg
Company and subsidiaries Consolidated financial statements for the three months
ended March 31, 1996 and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 223
<SECURITIES> 0
<RECEIVABLES> 666
<ALLOWANCES> (7)
<INVENTORY> 382
<CURRENT-ASSETS> 1,533
<PP&E> 4,763
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<TOTAL-ASSETS> 4,540
<CURRENT-LIABILITIES> 1,466
<BONDS> 722
0
0
<COMMON> 78
<OTHER-SE> 1,424
<TOTAL-LIABILITY-AND-EQUITY> 4,540
<SALES> 1,786
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<CGS> 790
<TOTAL-COSTS> 790
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<EPS-DILUTED> 0.96
</TABLE>
