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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, 1997
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, 1997 - 207,785,531 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, 1997 and December 31, 1996 2
Consolidated Statement of Earnings - three months ended March 31, 1997 and 1996 3
Consolidated Statement of Cash Flows - three months ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations 6-9
PART II - Other Information
Item 4:
Submission of Matters to a Vote of Security Holders 10
Item 6:
Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit Index 12
</TABLE>
1
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CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
KELLOGG COMPANY AND SUBSIDIARIES MARCH 31, DECEMBER 31,
(millions) 1997 1996
(unaudited) *
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $226.3 $243.8
Accounts receivable, net 680.0 592.3
Inventories:
Raw materials and supplies 137.9 135.2
Finished goods and materials in process 269.0 289.7
Other current assets 318.7 267.6
- ---------------------------------------------------------------------
Total current assets 1,631.9 1,528.6
Property, net of accumulated depreciation
of $2,105.2 and $2,087.2 2,880.7 2,932.9
Other assets 622.2 588.5
- ---------------------------------------------------------------------
Total assets $5,134.8 $5,050.0
=====================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $501.2 $501.2
Notes payable 729.3 652.6
Accounts payable 299.7 335.2
Income taxes 121.7 50.5
Accrued liabilities 740.3 659.5
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TOTAL CURRENT LIABILITIES 2,392.2 2,199.0
LONG-TERM DEBT 721.9 726.7
NONPENSION POSTRETIREMENT BENEFITS 451.2 494.2
DEFERRED INCOME TAXES AND OTHER LIABILITIES 359.3 347.7
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 77.9 77.9
Capital in excess of par value 127.3 123.9
Retained earnings 4,223.1 4,150.3
Treasury stock, at cost (3,004.8) (2,903.4)
Currency translation adjustment (213.3) (166.3)
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TOTAL SHAREHOLDERS' EQUITY 1,210.2 1,282.4
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,134.8 $5,050.0
=====================================================================
*Condensed from audited financial statements.
</TABLE>
See accompanying notes to consolidated financial statements.
2
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CONSOLIDATED STATEMENT OF EARNINGS (Results are unaudited)
<TABLE>
<CAPTION>
KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31,
(millions, except per share data) 1997 1996
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<S> <C> <C>
NET SALES $1,688.9 $1,785.9
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Cost of goods sold 828.0 790.4
Selling and administrative expense 583.7 647.2
Non-recurring charges - 9.5
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OPERATING PROFIT 277.2 338.8
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Interest expense 25.4 13.7
Other income (expense), net 0.2 0.4
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EARNINGS BEFORE INCOME TAXES 252.0 325.5
Income taxes 91.4 119.4
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NET EARNINGS 160.6 206.1
===================================================================================
EARNINGS PER SHARE $ .77 $ .96
DIVIDENDS PER SHARE $ .42 $ .39
AVERAGE SHARES OUTSTANDING 208.9 215.2
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited)
<TABLE>
<CAPTION>
KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31,
(millions) 1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $160.6 $206.1
Items in net earnings not requiring (providing) cash:
Depreciation and amortization 68.4 63.8
Deferred income taxes (16.6) (2.6)
Other 5.3 25.4
Postretirement benefit plan contributions (78.2) (45.5)
Changes in operating assets and liabilities 30.9 (67.3)
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NET CASH PROIVDED BY OPERATING ACTIVITIES 170.4 179.9
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INVESTING ACTIVITIES
Additions to properties (61.8) (46.5)
Other (7.4) (2.1)
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NET CASH USED IN INVESTING ACTIVITIES (69.2) (48.6)
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FINANCING ACTIVITIES
Net (retirements) issuances of notes payable (423.3) 164.5
Issuance of long-term debt 500.0 -
Reductions of long-term debt (5.0) (0.6)
Issuances of common stock 3.4 -
Common stock repurchases (101.2) (213.7)
Cash dividends (87.8) (83.9)
Other (0.2) 3.9
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NET CASH USED IN FINANCING ACTIVITIES (114.1) (129.8)
- ---------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (4.6) (0.3)
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Increase (decrease) in cash and cash equivalents (17.5) 1.2
Cash and cash equivalents at beginning of period 243.8 221.9
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $226.3 $223.1
=============================================================================================
</TABLE>
Refer to accompanying notes to consolidated financial statements.
4
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Notes to Consolidated Financial Statements
for the three months ended March 31, 1997 (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 14 to 28 of the Company's 1996 Annual
Report. The accounting policies used in preparing these financial statements
are the same as those summarized in the Company's 1996 Annual Report.
The results of operations for the three months ended March 31, 1997 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 are comprised principally of
expenditures for employee training and relocation, management consulting, and
production redeployment.
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.
4. Standby lines of credit
On April 15, 1997, the Company entered into standby lines of credit totaling
$600 million, with $200 million expiring in 1998 and $400 million expiring in
2002. These lines, which replace $200 million in standby lines of credit
outstanding at December 31, 1996, are maintained as security for performance on
the Company's commercial paper and are unused.
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, cereal bars, and bagels throughout the world. The
Company holds a 40% annualized share of the global ready-to-eat cereal market.
In North America, the Company is the market leader in the toaster pastry,
cereal/granola bar, frozen waffle, and pre-packaged bagel categories.
For the first quarter of 1997, the Company reported an earnings decline despite
achieving growth in global volume. The Company's results were negatively
impacted by the effect of pricing actions implemented by the Company during the
second quarter of 1996. Additionally, the Company continued to experience
challenging trade conditions in the United Kingdom. Partially offsetting these
unfavorable factors, the Company experienced continued low double-digit growth
in other convenience foods volume, further supplemented by sales from the
Lender's Bagels business acquired in December 1996.
Total volume was up 10% for the quarter with global cereal volume up .5%.
Excluding volume from the Lender's Bagels business, total volume increased 3%.
This increase was led by strength in the Company's Latin American ready-to-eat
cereal and North American other convenience foods markets. Asia-Pacific markets
outside of Australia also exhibited strong growth. Shipment declines in the
United Kingdom offset growth in most other European markets. The Company's
volume declined by 2% in the U.S. ready-to-eat cereal market.
Despite the global volume increase, consolidated net sales were down 5% for the
quarter, primarily reflecting the impact of price reductions. The Company
implemented several pricing actions in 1996, most notably reductions announced
during the second quarter, averaging 19% on brands comprising approximately
two-thirds of its U.S. cereal business. Negative foreign currency movements
also contributed by 1% to the sales decline. This decline was partially offset
by the inclusion of sales from the Lender's Bagels business, which increased
consolidated net sales by 3%.
The first quarter gross profit margin was 51.0%, down 4.7 percentage points
from the prior year, reflecting the price reductions, partially offset by
operational cost savings.
Selling and administrative expense as a percentage of net sales (SGA%) was
34.6%, 1.6 percentage points favorable to the prior year SGA% of 36.2%. The
SGA% decreased primarily due to reduced advertising and promotional spending in
the U.S. market, in line with the Company's integrated pricing strategy. The
first quarter of 1996 included a relatively high level of spending related to
the Company's 90th Anniversary promotional program.
6
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First quarter 1996 operating profit included non-recurring charges of $9.5
million ($6.1 million after tax or $.03 per share), the effects of which have
been excluded from all applicable prior year amounts presented below for
comparison to 1997 first quarter results. These charges primarily related to
ongoing productivity and operational streamlining initiatives in the U.S. and
Europe, and were comprised principally of expenditures for employee training
and relocation, management consulting, and production redeployment.
Primarily reflecting the aforementioned price reductions, operating profit for
the quarter decreased 20% to $277.2 million, compared to 1996 operating profit
of $348.3 million.
Gross interest expense, prior to amounts capitalized, increased to $27.4
million, up from $14.4 million during the comparable 1996 period, principally
due to increased debt levels to fund the Lender's Bagels business acquisition
and the Company's common stock repurchase program.
The Company's first quarter effective income tax rate was 36.3%, comparable to
the prior year rate of 36.6%.
First quarter 1997 net earnings and earnings per share decreased 24% and 22%,
respectively, from prior year results. Net earnings per share were $.77 versus
$.99 a year ago, a $.22 decrease consisting of $.25 in business decline,
mitigated by $.02 from common stock repurchases and $.01 from the lower
effective tax rate.
Liquidity and capital resources
The Company's financial condition remained strong during the first quarter of
1997. A 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.
Net cash provided by operating activities during the first quarter was $170.4
million, comparable to the prior year level of $179.9 million, as the
unfavorable impacts of decreased earnings and higher postretirement benefit
plan funding were offset by favorable working capital movements. The ratio of
current assets to current liabilities was .7 as of March 31, 1997, equal to the
ratio as of December 31, 1996.
Net cash used in investing activities was $69.2 million, principally comprised
of $61.8 million in capital spending.
Net cash used in financing activities was $114.1 million, primarily related to
common stock repurchases of $101.2 million and dividend payments of $87.8
million, partially offset by a net increase in total debt of $71.7 million.
Dividends paid per share of common stock increased 8% to $.42 during the first
quarter of 1997.
Under existing plans authorized by the Company's Board of Directors, management
spent $101.2 million during the first quarter of 1997 to repurchase 1.5 million
shares of the Company's common
7
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stock at an average price of $68 per share. The open repurchase authorization
as of March 31, 1997 was $313.9 million.
On December 16, 1996, the Company purchased certain assets and liabilities of
the Lender's Bagels business from Kraft Foods, Inc. for $466 million of cash,
including related acquisition costs. The acquisition was initially financed
through commercial paper borrowings that were replaced on January 29, 1997
with $500 million of 7-year 6.625% fixed rate Euro Dollar Notes. In conjunction
with this issuance, the Company settled $500 million notional amount of
interest rate forward swap agreements which effectively fixed the interest rate
on the debt at 6.354%.
The remainder of 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. The $200 million of three-year notes and the $300 million of five-year
notes will mature during the third quarter of 1997 and are classified in
current maturities as of March 31, 1997. Management currently intends to
replace these borrowings with new long-term debt issuances as of the maturity
dates and, as of quarter-end, had entered into $300 million notional amount of
interest rate hedges to effectively fix the U.S. Treasury rate on which an
equivalent amount of future issuances would be priced. Short-term debt
outstanding at year-end consisted principally of U.S. commercial paper. The
ratio of total debt to market capitalization at March 31, 1997 was 14%, equal
to the ratio at December 31, 1996.
At March 31, 1997, 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.
On April 15, 1997, the Company entered into standby lines of credit totaling
$600 million, with $200 million expiring in 1998 and $400 million expiring in
2002. These lines, which replace $200 million in standby lines of credit
outstanding at December 31, 1996, are maintained as security for performance on
the Company's commercial paper and are unused.
Streamlining Initiatives
During 1995 and 1996, management commenced numerous productivity and
operational streamlining initiatives around the world in an effort to optimize
the Company's cost structure and move toward a global business model. The
consolidation of functions and the rationalization of capacity resulted in
elimination of approximately 2,000 employee positions by the end of 1996 and is
expected to result in a further reduction of 600 positions by year-end 1997.
From all of the streamlining initiatives under way as of year-end 1996, the
Company expects approximately $50 million of additional cash outlays in 1997.
Management believes that reserves established as of year-end 1996 are adequate
to meet these cash requirements. From these programs, the Company expects to
achieve average annual pre-tax savings of approximately $160 million in 1997
and future years (as compared to the base year of 1995). 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.
8
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The foregoing discussion of streamlining initiatives contains
forward-looking statements regarding headcount reductions, cash requirements,
and realizable savings. Actual amounts may vary depending on the final
determination of important factors such as identification of specific
employees to be separated from pre-determined pools; the impact of attrition on
involuntary separation programs; the level of employee participation in
out-placement programs, health care, and other separation benefits; actual
amounts of asset removal and relocation costs; dates of asset disposal and
costs to maintain assets up to the date of disposal; proceeds from asset
disposals; final negotiation of third party contract buy-outs; and other items.
Full Year Outlook
Management believes the Company's implementation of certain pricing measures
during 1996 improved the long-term brand value proposition to the consumer, but
has negatively impacted profitability in the short term, extending through the
first quarter of 1997. However, management expects to return to sales and
earnings growth during the second quarter of 1997, as the Company derives
benefits from the continued implementation of its global business model,
including innovative and differentiated new-product introductions and further
operational efficiencies. The Company will continue to pursue streamlining and
productivity initiatives to optimize its cost structure. Additionally,
management expects continued strong volume levels in the Company's Latin
American and Asia-Pacific regions and low double-digit growth in other
convenience foods volume.
Additional expectations for 1997 include an effective tax rate of 36-37%,
capital spending in line with the prior-year level of approximately $300
million, continued increases in shareholder dividends, and common stock
repurchase activity of approximately $415 million. Management expects total
interest expense for 1997 to increase by 70-80% over 1996 amounts due to higher
debt levels. The full-year gross profit margin is expected to be consistent
with the margin achieved by the Company during the first quarter of 1997.
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 strong credit rating, balance sheet,
and earnings history provide a base for obtaining additional financial
resources at competitive rates and terms.
The foregoing projections of volume growth, profitability, capital spending,
shareholder dividends, and common stock repurchase activity are forward-looking
statements which involve risks and uncertainties. Actual 1997 results may
differ materially due to the impact of the Company's pricing strategies on
volumes; the level of marketing spending and/or incremental pricing actions
required to maintain the Company's market share leadership position; general
economic and market conditions; actual volumes and product mix; the levels of
spending on capital, continued streamlining initiatives, and other general and
administrative costs; raw material price and labor cost fluctuations; changes
in statutory tax law; interest rates available on short-term financing; the
impact of stock market conditions on common stock repurchase activity; and
other items.
9
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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.
10
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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;
Vice President and Corporate Controller
Date: May 13, 1997
11
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KELLOGG COMPANY
EXHIBIT INDEX
Number Description Page
27.01 Financial Data Schedule 13
12
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 226
<SECURITIES> 0
<RECEIVABLES> 686
<ALLOWANCES> (6)
<INVENTORY> 407
<CURRENT-ASSETS> 1,632
<PP&E> 4,986
<DEPRECIATION> (2,105)
<TOTAL-ASSETS> 5,135
<CURRENT-LIABILITIES> 2,392
<BONDS> 722
0
0
<COMMON> 78
<OTHER-SE> 1,132
<TOTAL-LIABILITY-AND-EQUITY> 5,135
<SALES> 1,689
<TOTAL-REVENUES> 1,689
<CGS> 828
<TOTAL-COSTS> 828
<OTHER-EXPENSES> 584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 252
<INCOME-TAX> 91
<INCOME-CONTINUING> 161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
</TABLE>
