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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 September 30, 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
---- ----
Common Stock outstanding October 31, 1997 - 410,911,431 shares
<PAGE> 2
KELLOGG COMPANY
INDEX
Page
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PART I - Financial Information
Item 1:
Consolidated Balance Sheet - September 30, 1997 and December 31, 1996 2
Consolidated Statement of Earnings - three and nine months ended
September 30, 1997 and 1996 3
Consolidated Statement of Cash Flows - nine months ended
September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-8
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-15
PART II - Other Information
Item 4:
Submission of Matters to a Vote of Security Holders 16
Item 6:
Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
==============================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES SEPTEMBER 30, DECEMBER 31,
(millions, except share data) 1997 1996
(unaudited) *
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $274.4 $243.8
Accounts receivable, net 664.2 592.3
Inventories:
Raw materials and supplies 152.2 135.2
Finished goods and materials in process 288.1 289.7
Other current assets 294.6 267.6
- --------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,673.5 1,528.6
PROPERTY, net of accumulated depreciation
of $2,194.0 and $2,087.2 2,868.0 2,932.9
OTHER ASSETS 628.0 588.5
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,169.5 $5,050.0
==============================================================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $5.7 $501.2
Notes payable 781.6 652.6
Accounts payable 371.9 335.2
Income taxes 83.0 50.5
Accrued liabilities 708.0 659.5
- --------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,950.2 2,199.0
LONG-TERM DEBT 1,218.7 726.7
NONPENSION POSTRETIREMENT BENEFITS 444.9 494.2
DEFERRED INCOME TAXES AND OTHER LIABILITIES 368.0 347.7
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 103.6 77.9
Capital in excess of par value 80.6 123.9
Retained earnings 1,318.2 4,150.3
Treasury stock, at cost (62.0) (2,903.4)
Currency translation adjustment (252.7) (166.3)
- --------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,187.7 1,282.4
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,169.5 $5,050.0
==============================================================================================================
*Condensed from audited financial statements.
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS (RESULTS ARE UNAUDITED)
===============================================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended September 30, Nine months ended September 30,
(millions, except per share data) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $1,803.8 $1,681.6 $5,212.4 $5,118.9
- -------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold 859.4 816.0 2,498.2 2,381.6
Selling and administrative expense 587.8 562.3 1,789.0 1,918.0
Non-recurring charges 9.7 24.8 21.9 60.4
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 346.9 278.5 903.3 758.9
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense 27.7 16.8 80.1 46.6
Other income (expense), net (2.7) (2.6) (0.5) (1.9)
- -------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 316.5 259.1 822.7 710.4
Income taxes 109.3 99.6 291.3 266.7
- -------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $207.2 $159.5 $531.4 $443.7
===============================================================================================================================
EARNINGS PER SHARE $.50 $.38 $1.28 $1.04
DIVIDENDS PER SHARE $.225 $.21 $.645 $.60
AVERAGE SHARES OUTSTANDING 412.6 423.2 415.1 426.3
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (RESULTS ARE UNAUDITED)
========================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Nine months ended September 30,
(millions) 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $531.4 $443.7
Items in net earnings not requiring (providing) cash:
Depreciation and amortization 209.7 185.5
Deferred income taxes 31.5 4.7
Non-recurring charges, net of cash paid 4.3 18.4
Other (6.7) 35.2
Postretirement benefit plan contributions (88.7) (55.4)
Changes in operating assets and liabilities 17.6 (77.0)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 699.1 555.1
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to properties (220.4) (199.0)
Acquisitions of businesses (24.1) -
Other 9.0 18.3
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (235.5) (180.7)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (retirements) issuances of notes payable (371.0) 382.7
Issuance of long-term debt 1,000.0 -
Reductions of long-term debt (510.0) (4.9)
Issuances of common stock 62.0 10.6
Common stock repurchases (334.0) (427.5)
Cash dividends (267.7) (255.7)
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (420.7) (294.8)
- --------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (12.3) (1.1)
- --------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 30.6 78.5
Cash and cash equivalents at beginning of period 243.8 221.9
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $274.4 $300.4
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Notes to Consolidated Financial Statements
for the nine months ended September 30, 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 and nine months ended September 30,
1997, are not necessarily indicative of the results to be expected for other
interim periods or the full year.
2. Derivative Financial and Commodity Instruments
In January 1997, the Securities and Exchange Commission issued new rules
requiring expanded disclosure for "market risk-sensitive" financial instruments.
These rules will be fully effective for the Company's annual financial
statements for the year ended December 31, 1997. As required for this interim
filing, specific information on the Company's accounting policies with regard to
activities in derivative financial and commodity instruments is provided below.
The Company uses derivative financial instruments only for the purpose of
hedging currency, price, and interest rate exposures which exist as a part of
its ongoing business operations. The Company, as a matter of policy, does not
engage in trading or speculative transactions.
In general, instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. Deferred gains or losses related to any instrument 1) designated
but ineffective as a hedge of existing assets, liabilities, or firm commitments,
or 2) designated as a hedge of an anticipated transaction which is no longer
likely to occur, are recognized immediately in the statement of earnings.
The Company uses forward contracts to reduce fluctuations in foreign currency
cash flows related to third-party purchases, intercompany product shipments, and
intercompany loans. Foreign currency contracts are marked- to-market with net
amounts due to or from counter parties recorded in accounts receivable or
payable. For contracts hedging firm commitments, mark-to-market gains and losses
are deferred and recognized as adjustments to the basis of the transaction. For
all other contracts, mark-to-market gains and losses are recognized currently in
other income or expense, generally offsetting gains and losses from underlying
hedged transactions. The Company also uses forward contracts to reduce
fluctuations in the value of foreign currency investments in subsidiaries. These
contracts are accounted for as described above, except that mark-to-market
adjustments are recorded in the cumulative translation adjustment component of
shareholders' equity.
The Company uses interest rate caps, and currency and interest rate swaps,
including forward swaps, to reduce interest rate volatility and funding
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costs associated with certain debt issues. Interest rate forward swaps are
marked-to-market with net amounts due to or from counter parties recorded in
interest receivable or payable. Mark-to-market gains and losses are deferred and
recognized over the life of the debt issue as a component of interest expense.
For other caps and swaps entered into concurrently with the debt issue, the
interest or currency differential to be paid or received on the instrument is
recognized in the statement of earnings as incurred, as a component of interest
expense. If a position were to be terminated prior to maturity, the gain or
loss realized upon termination would be deferred and amortized to interest
expense over the remaining term of the underlying debt issue or would be
recognized immediately if the underlying debt issue was settled prior to
maturity.
The Company uses commodity futures and options to reduce fluctuations in raw
material costs. Commodity contracts are marked-to-market with net amounts due to
or from brokers recorded in accounts receivable or payable. Mark-to-market gains
and losses are deferred and recognized as adjustments to the basis of the
underlying hedged raw material purchase.
The cash flows related to derivative financial instruments are classified in the
statement of cash flows in a manner consistent with those of the transactions
being hedged.
3. Non-recurring charges
Operating profit for the three months ended September 30, 1997, includes
non-recurring charges of $9.7 million ($6.6 million after tax or $.02 per
share), and for the nine month period, $21.9 million ($14.6 million after tax or
$.04 per share) . Operating profit for the three months ended September 30,
1996, includes non-recurring charges of $24.8 million ($21.3 million after tax
or $.05 per share), and for the nine month period, $60.4 million ($44.3 million
after tax or $.10 per share). These charges primarily relate to ongoing
productivity and operational streamlining initiatives in the U.S., Europe, and
other international locations, and are comprised principally of expenditures for
employee severance, benefits, training and relocation; associated management
consulting; and production redeployment. The 1996 charges also include a
provision of $15 million for the potential settlement of certain international
litigation.
4. 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.
On August 1, 1997, the Company's Board of Directors approved a 2-for-1 stock
split to shareholders of record at the close of business August 8, 1997,
effective August 22, 1997, and also authorized retirement of 105.3 million
common shares (pre-split) held in treasury. All per share and shares outstanding
data in this filing have been retroactively restated to reflect the stock split.
To present the effect of these transactions on the separate components of
Shareholders' Equity, the following schedule reconciles balances from December
31, 1996, to September 30, 1997:
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<TABLE>
<CAPTION>
============================================================================================================================
Capital
Shareholders' equity in excess Retained Treasury stock,
(millions) Common stock of par earnings at cost
============================================================================================================================
SHARES AMOUNT SHARES AMOUNT
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 311.5 $ 77.9 $123.9 $4,150.3 101.9 ($2,903.4)
1996
Net earnings 531.4
Cash dividends ( 267.7)
Common stock 0.6 0.1 31.9 3.9 ( 290.2)
repurchase*/other-pre-split
Retirement of treasury (105.3) ( 26.3) ( 55.8) ( 3,095.8) (105.3) 3,177.9
stock
SUBTOTAL 206.8 $ 51.7 $100.0 $1,318.2 .5 ($ 15.7)
Stock split 206.8 51.7 ( 51.7) .5
Common stock 1.0 0.2 32.3 1.0 ( 46.3)
repurchase*/other-post-split
BALANCE, SEPTEMBER 30, 414.6 $103.6 $ 80.6 $1,318.2 2.0 ($ 62.0)
1997
============================================================================================================================
</TABLE>
* Summary of share repurchase activity for the nine months ended September 30,
1997 (millions):
Shares repurchased prior to stock split 3.9
Restated for stock split 3.9
Shares repurchased subsequent to stock split 1.0
---
Total number of shares repurchased-split adjusted 8.8
===
5. Notes payable and Long-term debt
Notes payable consist principally of commercial paper borrowings in the United
States. Associated with these borrowings, during September 1997, the Company
purchased $225 million notional, four-year fixed rate interest rate caps. Under
the terms of these caps, if 30-day interest rates increase by more than .5%
above current rates (existing at the inception of the cap), the Company will pay
a fixed rate on this portion of its commercial paper borrowings. If 30-day rates
increase by more than 2% above current rates, the cap will expire.
On January 29, 1997, the Company issued $500 million of seven-year 6.625% fixed
rate Euro Dollar Notes. This debt was issued primarily to fund the purchase of
the Lender's Bagels business, acquired in December, 1996. In conjunction with
7
<PAGE> 9
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%. Associated with this debt, during September 1997, the Company
entered into a $225 million notional, 4 1/2-year fixed-to-floating interest
rate swap, indexed to three-month LIBOR. Under the terms of this swap, if
three-month LIBOR decreases by more than 1% below current rates (existing at
the inception of the swap), the swap will expire.
To replace other long-term debt maturing during the quarter, the Company issued
$500 million of four-year 6.125% Euro Dollar Notes on August 5, 1997. In
conjunction with this issuance, the Company settled $400 million notional amount
of interest rate forward swap agreements which effectively fixed the interest
rate on the debt at 6.4%. Associated with this debt, during September 1997, the
Company entered into a $200 million notional, four-year fixed-to-floating
interest rate swap, indexed to three-month LIBOR.
As of September 30, 1997, other long-term debt consisted principally of $200
million of five-year notes due October 1998.
8
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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 leads the global ready-to-eat cereal category, with an estimated 40%
annualized share of worldwide volume. Additionally, the Company is the North
American market leader in the toaster pastry, cereal/granola bar, frozen waffle,
and pre-packaged bagel categories.
For the third quarter of 1997, Kellogg Company reported net earnings of $207.2
million and net earnings per share of $.50, compared to 1996 net earnings of
$159.5 million and net earnings per share of $.38. For the September
year-to-date period, the Company reported net earnings of $531.4 million and net
earnings per share of $1.28, compared to 1996 net earnings of $443.7 million and
net earnings per share of $1.04. (All per share amounts reflect the 2-for-1
common stock split effective August 22, 1997.)
During the current and prior-year periods, the Company reported non-recurring
charges related to productivity and operational streamlining initiatives which
have been excluded from all applicable amounts presented below for purposes of
comparison between years. Refer to the section below on streamlining initiatives
for more information.
Excluding non-recurring charges, the Company reported third quarter 1997 net
earnings per share of $.52, compared to $.43 in the third quarter of 1996. On a
year-to-date basis, net earnings per share were $1.32, a 15.8% increase over the
prior-year results of $1.14. The year-over-year increase in net earnings per
share of $.18 was comprised of $.12 of business growth, $.03 of common stock
repurchases, and $.03 in favorable tax rate movements. The business growth was
principally attributable to cereal volume growth in the Company's U.S. and Latin
American markets, continued double-digit growth in other convenience foods
volume, and reductions in manufacturing and marketing costs. Dilution of
earnings per share due to results of the Lenders' Bagels business, acquired in
December 1996, was $.02 for the quarter and $.03 for the year-to-date period.
The Company achieved the following volume growth for the 1997 third quarter and
September year-to-date periods:
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<TABLE>
<CAPTION>
==================================================================
Volume category Quarter Year-to-
date
==================================================================
<S> <C> <C>
Global cereal 4.6% 3.5%
U.S. cereal 9.0% 4.5%
Global total 11.0% 11.8%
Global total excluding Lender's* 5.7% 5.4%
==================================================================
</TABLE>
* Lender's Bagels business acquired in December 1996.
Management believes that a portion of the significant increase in U.S. cereal
shipments during the quarter reflects normalization of retail inventories versus
depressed levels in the prior year, and also some forward-buying in anticipation
of fourth quarter promotional programs. Softness in the Company's United Kingdom
and Australia cereal volume was more than offset by growth in most other
non-U.S. markets. The Company's Latin American region achieved record quarterly
volume results. Other convenience foods volume continued to increase at
double-digit rates, even after excluding results of the Lender's Bagels
business.
For the quarter and year-to-date periods, consolidated net sales increased 7.3%
and 1.8%, respectively. The favorable impact of strong volumes was partially
offset by unfavorable product mix movements and a negative foreign currency
impact of 2%. An additional factor impacting the year-to-date comparison was the
effect of price reductions implemented by the Company during the second quarter
of 1996, averaging 19% on brands comprising approximately two-thirds of its U.S.
cereal business. Excluding the Lender's business, consolidated net sales
increased 5.2% for the quarter and declined .7% on a year-to-date basis.
Margin performance for the quarter and year-to-date periods was:
<TABLE>
<CAPTION>
====================================================================================
Third quarter Year-to-date
====================================================================================
FAVORABLE FAVORABLE
1997 1996 (UNFAVORABLE) 1997 1996 (UNFAVORABLE)
CHANGE CHANGE
====================================================================================
<S> <C> <C> <C> <C> <C> <C>
Gross margin 52.4% 51.5% .9% 52.1% 53.5% (1.4%)
SGA%* 32.6% 33.4% .8% 34.3% 37.5% 3.2%
Operating margin 19.8% 18.0% 1.8% 17.8% 16.0% 1.8%
Net margin 11.9% 10.8% 1.1% 10.5% 9.5% 1.0%
====================================================================================
</TABLE>
* Selling, general, and administrative expense as a percentage of net sales
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Gross margin performance for the quarter was benefitted by volume increases and
year-over-year operational cost savings. For the year-to-date period, these
favorable factors were more than offset by the negative impact of prior-year
pricing actions. The improvement in SGA% primarily reflects reduced promotional
spending in the U.S. market, in line with the Company's integrated pricing
strategy. Additionally, the first half of 1996 included a relatively high level
of spending related to the Company's 90th Anniversary promotional programs,
implementation costs associated with pricing actions, and competitive conditions
in the U.S. cereal market.
The year-over-year improvement in net margin was less than the improvement in
operating margin, principally due to higher interest expense, partially offset
by favorable income tax rate movements. The higher interest expense results from
increased debt levels to fund the Lender's Bagels business acquisition and the
Company's common stock repurchase program. The lower effective tax rate is
primarily due to enactment during the quarter of a 1.5% statutory rate reduction
in the United Kingdom, retroactive to January 1, 1997. Information on interest
expense and tax rates is presented below:
<TABLE>
<CAPTION>
=======================================================================================================
Third quarter Year-to-date
=======================================================================================================
FAVORABLE FAVORABLE
1997 1996 (UNFAVORABLE) 1997 1996 (UNFAVORABLE)
CHANGE CHANGE
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
INTEREST EXPENSE
(MILLIONS):
As reported $27.7 $16.8 $80.1 $46.6
Capitalized 2.7 1.0 7.0 2.4
Gross $30.4 $17.8 ($12.6) $87.1 $49.0 ($38.1)
EFFECTIVE INCOME TAX 34.4% 36.3% 1.9% 35.4% 36.7% 1.3%
RATE
=======================================================================================================
</TABLE>
Liquidity and capital resources
The Company's financial condition remained strong throughout the 1997
year-to-date period. 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.
Year-to-date, net cash provided by operating activities was $699.1 million,
compared to the prior year level of $555.1 million, with the increase due
principally to higher earnings and favorable working capital movements. The
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ratio of current assets to current liabilities was .9 at September 30, 1997, as
compared to .7 at December 31, 1996.
Net cash used in investing activities was $235.5 million, principally comprised
of $220.4 million in property additions.
Net cash used in financing activities was $420.7 million, primarily related to
common stock repurchases of $334.0 million and dividend payments of $267.7
million, partially offset by a net increase in total debt of $119 million.
On August 1, 1997, the Company's Board of Directors approved a 2-for-1 stock
split to shareholders of record at the close of business August 8, 1997,
effective August 22, 1997, and also authorized retirement of 105.3 million
common shares (pre-split) held in treasury. All per share and shares outstanding
data in this filing have been restated retroactively to reflect the stock split.
Under existing plans authorized by the Company's Board of Directors, management
spent $334.0 million during the year-to-date period to repurchase 8.8 million
shares (on a post-split basis) of the Company's common stock at an average price
of $37.76 per share. The open repurchase authorization as of September 30, 1997,
was $81.1 million.
On October 31, 1997, the Company's Board of Directors declared a regular
dividend of $.225 per common share, payable December 15, 1997, to shareholders
of record at the close of business on November 28, 1997. This declaration brings
the Company's total 1997 dividend payment to $.87, a 7.4% increase over the
prior year payment of $.81.
Notes payable consist principally of commercial paper borrowings in the United
States. Associated with these borrowings, during September 1997, the Company
purchased $225 million notional, four-year fixed rate interest rate caps. Under
the terms of these caps, if 30-day interest rates increase by more than .5%
above current rates (existing at the inception of the cap), the Company will pay
a fixed rate on this portion of its commercial paper borrowings. If 30-day rates
increase by more than 2% above current rates, the cap will expire.
On January 29, 1997, the Company issued $500 million of seven-year 6.625% fixed
rate Euro Dollar Notes. This debt was issued primarily to fund the purchase of
the Lender's Bagels business, acquired in December 1996. 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%. Associated with this debt, during September 1997, the Company entered
into a $225 million notional, 4 1/2-year fixed-to-floating interest rate swap,
indexed to three-month LIBOR. Under the terms of this swap, if three-month LIBOR
decreases by more than 1% below current rates (existing at the inception of the
swap), the swap will expire.
To replace other long-term debt maturing during the quarter, the Company issued
$500 million of four-year 6.125% Euro Dollar Notes on August 5, 1997. In
conjunction with this issuance, the Company settled $400 million notional amount
of interest rate forward swap agreements which effectively fixed the interest
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<PAGE> 14
rate on the debt at 6.4%. Associated with this debt, during September 1997, the
Company entered into a $200 million notional, four-year fixed-to-floating
interest rate swap, indexed to three-month LIBOR.
As of September 30, 1997, other long-term debt consisted principally of $200
million of five-year notes due October 1998.
The ratio of total debt to market capitalization at September 30, 1997, was 12%,
down from 14% at December 31, 1996, principally due to an increase in the market
price of the Company's stock since that date.
At September 30, 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
From 1995 to the present, management has commenced major productivity and
operational streamlining initiatives in the U.S., Europe, and other
international locations in an effort to optimize the Company's cost structure
and move toward a global business model. The incremental costs of these programs
have been reported throughout 1995-1997 as non-recurring charges.
Operating profit for the three months ended September 30, 1997, includes
non-recurring charges of $9.7 million ($6.6 million after tax or $.02 per
share), and for the nine month period, $21.9 million ($14.6 million after tax or
$.04 per share). Operating profit for the three months ended September 30, 1996,
includes non-recurring charges of $24.8 million ($21.3 million after tax or $.05
per share), and for the nine month period, $60.4 million ($44.3 million after
tax or $.10 per share). These charges are comprised principally of expenditures
for employee severance, benefits, training and relocation; associated management
consulting; and production redeployment. The 1996 charges also include a
provision of $15 million for the potential settlement of certain international
litigation.
Furthering the streamlining of pan-European operations, on October 17, 1997,
management announced its decision to close cereal manufacturing facilities in
Riga, Latvia; Svendborg, Denmark; and Verola, Italy, impacting approximately 400
employees at these facilities. The Company will move production, as needed, to
other European facilities in the United Kingdom, Germany, and Spain. Management
believes that this action is key to achieving a flexible, integrated network of
manufacturing and distribution across Europe, and will generate $60-$70 million
annual pre-tax savings when fully implemented. As a result of these plant
closings, combined with related initiatives to optimize its European
distribution network, the Company expects to record pre-tax non-recurring
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charges in the quarter ended December 31, 1997, of up to $150 million.
Approximately 40% of the total charges are expected to consist of employee
separation benefits, equipment removal, and other anticipated cash outlays, with
the balance representing asset write-downs.
All streamlining programs, including the aforementioned pan-European
initiatives, are expected to result in the elimination of approximately 3,000
employee positions by the end of 1998, with approximately 80% of this headcount
reduction already achieved. These programs are expected to deliver average
annual pre-tax savings in excess of $200 million by the year 2000, with
approximately 75% of that amount being realized currently. 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.
The foregoing discussion of streamlining initiatives contains forward-looking
statements regarding non-recurring charges to be recognized, 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 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. Based on the results achieved during the second and
third quarters of 1997, combined with the expectation of benefits to be derived
from the continued implementation of its global business model, management
believes the Company is well-positioned to deliver sales and earnings growth for
the full year 1997. The Company will continue to identify and pursue
streamlining and productivity initiatives to optimize its cost structure.
Additional expectations for 1997 include a gross profit margin of 51-52%, an
SG&A% of 34-35%, an effective income tax rate of 35-36%, capital spending of
$300-$350 million, and common stock repurchase activity for the full year of
approximately $415 million. Management expects 1997 interest expense to exceed
the prior year amount by approximately 70% due to higher debt levels.
During May 1997, the SEC issued disclosure guidance concerning the "Year 2000
Problem" related to the inability of certain computer software programs to
process 2-digit year-date codes (for example, "00") after December 31, 1999. To
address this matter, the Company formed a global task force which is performing
a global risk assessment and executing actions plans, as necessary. Because of
significant other systems initiatives currently under way, management believes
that the total cost of the Year 2000 plan will not be significant to the
Company's financial results. However, management does believe that failure by
the Company, its customers, or vendors, to complete the necessary work in a
14
<PAGE> 16
timely manner could result in material financial risk, and is committed to
devoting the necessary resources to prevent such a failure.
The foregoing projections of profitability, capital spending, 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
competitive conditions, marketing spending and/or incremental pricing actions
on 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.
15
<PAGE> 17
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 the 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.
16
<PAGE> 18
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 12, 1997
17
<PAGE> 19
KELLOGG COMPANY
EXHIBIT INDEX
Number Description
------ -----------
27.01 Financial Data Schedule
<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, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 274,400,000
<SECURITIES> 0
<RECEIVABLES> 670,900,000
<ALLOWANCES> (6,700,000)
<INVENTORY> 440,300,000
<CURRENT-ASSETS> 1,673,500,000
<PP&E> 5,062,000,000
<DEPRECIATION> (2,194,000,000)
<TOTAL-ASSETS> 5,169,500,000
<CURRENT-LIABILITIES> 1,950,200,000
<BONDS> 1,218,700,000
0
0
<COMMON> 103,600,000
<OTHER-SE> 1,084,100,000
<TOTAL-LIABILITY-AND-EQUITY> 5,169,500,000
<SALES> 5,212,400,000
<TOTAL-REVENUES> 5,212,400,000
<CGS> 2,498,200,000
<TOTAL-COSTS> 2,498,200,000
<OTHER-EXPENSES> 1,811,400,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,100,000
<INCOME-PRETAX> 822,700,000
<INCOME-TAX> 291,300,000
<INCOME-CONTINUING> 531,400,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 531,400,000
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
</TABLE>
