<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 March 31, 1998
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 April 30, 1998 - 409,196,656 shares
<PAGE> 2
KELLOGG COMPANY
INDEX
PART I - Financial Information Page
Item 1:
Consolidated Balance Sheet - March 31, 1998 and December 31, 1997 2
Consolidated Statement of Earnings - three months ended
March 31, 1998 and 1997 3
Consolidated Statement of Cash Flows - three months ended
March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-6
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
PART II - Other Information
Item 4:
Submission of Matters to a Vote of Security Holders 12
Item 6:
Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
<PAGE> 3
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
==========================================================================================
KELLOGG COMPANY AND SUBSIDIARIES MARCH 31, December 31,
(millions) 1998 1997
(unaudited) *
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $165.2 $173.2
Accounts receivable, net 653.2 587.5
Inventories:
Raw materials and supplies 147.2 135.0
Finished goods and materials in process 303.9 299.3
Other current assets 308.1 272.7
-----------------------------
TOTAL CURRENT ASSETS 1,577.6 1,467.7
PROPERTY, net of accumulated depreciation
of $2,230.9 and $2,207.3 2,796.3 2,773.3
OTHER ASSETS 658.3 636.6
-----------------------------
TOTAL ASSETS $5,032.2 $4,877.6
=============================
CURRENT LIABILITIES
Current maturities of long-term debt $206.3 $211.2
Notes payable 450.2 368.6
Accounts payable 344.8 328.0
Income taxes 109.0 30.5
Other current liabilities 652.4 719.0
-----------------------------
TOTAL CURRENT LIABILITIES 1,762.7 1,657.3
LONG-TERM DEBT 1,417.7 1,415.4
NONPENSION POSTRETIREMENT BENEFITS 443.3 444.1
DEFERRED INCOME TAXES AND OTHER LIABILITIES 376.4 363.3
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 103.7 103.7
Capital in excess of par value 104.2 92.6
Retained earnings 1,318.7 1,240.4
Treasury stock, at cost (216.5) (157.3)
Accumulated other comprehensive income (278.0) (281.9)
-----------------------------
TOTAL SHAREHOLDERS' EQUITY 1,032.1 997.5
-----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,032.2 $4,877.6
=============================
*Condensed from audited financial statements.
Refer to Notes to Consolidated Financial Statements
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS (Results are unaudited)
=============================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31,
(millions, except per share data) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $1,642.9 $1,688.9
-------------------------------
Cost of goods sold 781.8 828.0
Selling and administrative expense 562.3 583.7
--------------------------------
OPERATING PROFIT 298.8 277.2
--------------------------------
Interest expense 29.1 25.4
Other income (expense), net 0.4 0.2
--------------------------------
EARNINGS BEFORE INCOME TAXES 270.1 252.0
Income taxes 99.4 91.4
---------------------------------
NET EARNINGS $170.7 $160.6
=================================
NET EARNINGS PER SHARE (BASIC AND DILUTED) .42 $.38
DIVIDENDS PER SHARE $.225 $.210
AVERAGE SHARES OUTSTANDING 410.2 417.9
---------------------------------
</TABLE>
Refer to Notes to Consolidated Financial Statements
3
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited)
=====================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31,
(millions) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $170.7 $160.6
Items in net earnings not requiring (providing) cash:
Depreciation and amortization 67.3 68.4
Deferred income taxes 1.7 (16.6)
Other 10.5 5.3
Postretirement benefit plan contributions (23.5) (78.2)
Changes in operating assets and liabilities (88.2) 30.9
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 138.5 170.4
----------------------
INVESTING ACTIVITIES
Additions to properties (79.7) (61.8)
Other (3.4) (7.4)
----------------------
NET CASH USED IN INVESTING ACTIVITIES (83.1) (69.2)
----------------------
FINANCING ACTIVITIES
Net reductions of notes payable (318.5) (423.3)
Issuances of long-term debt 400.0 500.0
Reductions of long-term debt (2.6) (5.0)
Net issuances of common stock 13.7 3.2
Common stock repurchases (61.3) (101.2)
Cash dividends (92.4) (87.8)
----------------------
NET CASH USED IN FINANCING ACTIVITIES (61.1) (114.1)
----------------------
Effect of exchange rate changes on cash (2.3) (4.6)
----------------------
Decrease in cash and cash equivalents (8.0) (17.5)
Cash and cash equivalents at beginning of period 173.2 243.8
----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $165.2 $226.3
======================
</TABLE>
Refer to Notes to Consolidated Financial Statements
4
<PAGE> 6
Notes to Consolidated Financial Statements
for the three months ended March 31, 1998 (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 23 to 32 of the Company's 1997 Annual
Report. The accounting policies used in preparing these financial statements are
the same as those summarized in the Company's 1997 Annual Report. Certain
amounts for 1997 have been reclassified to conform with current period
classifications.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results to be expected for other interim periods
or the full year.
2. Earnings per share
Basic net earnings per share is determined by dividing net earnings by the
weighted average number of common shares outstanding during the period.
Diluted net earnings per share is similarly determined except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all dilutive potential common shares had been
issued. Dilutive potential shares are principally comprised of employee stock
options issued by the Company and had an insignificant impact on earnings per
share during the periods presented.
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.
3. Debt
On February 4, 1998 the Company issued $400 million of three-year 5.75% fixed
rate U.S. Dollar Notes. These Notes were issued under an existing "shelf
registration" with the Securities and Exchange Commission, and provide an option
to holders to extend the obligation for an additional four years at a
predetermined interest rate of 5.63% plus the Company's then-current credit
spread. Concurrent with this issuance, the Company entered into a $400 million
notional, three-year fixed-to-floating interest rate swap, indexed to the
Federal Reserve AA composite rate on 30-day commercial paper.
5
<PAGE> 7
As of March 31, 1998, current maturities of long-term debt primarily consisted
of $200 million of five-year notes due October 1998. Management currently
intends to replace these notes with new long-term debt issuances as of the
maturity date and, as of March 31, 1998, had entered into interest rate hedges
to effectively fix the U.S. Treasury rate pricing on approximately one-half of
the future issuance. Subject to market conditions, management intends to
gradually increase the notional amount of interest rate hedges to cover the
entire issuance prior to the maturity date of the notes.
At year-end 1997, the Company had $775.1 million of short-term lines of credit.
During the first quarter of 1998, the Company reduced this amount by $150
million.
4. Changes in Accounting Principles
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by or distributions to shareholders. For the Company, comprehensive
income for all periods presented consisted solely of net earnings and foreign
currency translation adjustments pursuant to SFAS No. 52, "Foreign Currency
Translation", as follows (in millions):
<TABLE>
<CAPTION>
Three months ended March 31, 1998 1997
---------------------------- ---- ----
<S> <C> <C>
Net earnings $170.7 $160.6
Other comprehensive income (loss):
Foreign currency translation adjustments 4.0 (45.1)
Related tax effect (.1) (1.9)
--------- ---------
3.9 (47.0)
--------- ---------
Total comprehensive income $174.6 $113.6
========= =========
</TABLE>
6
<PAGE> 8
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 39%
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.
During the quarter ended March 31, 1998, the Company achieved double-digit
growth in net earnings per share, despite a decline in global sales volume.
Management believes the Company's volume results were impacted by competitive
conditions in major markets, including high levels of promotional spending in
the U.S. cereal category.
For the first quarter of 1998, Kellogg Company reported net earnings and
earnings per share of $170.7 million and $.42, respectively, compared to 1997
net earnings of $160.6 million and net earnings per share of $.38. (All per
share amounts reflect the 2-for-1 stock split effective August 22, 1997. All
earnings per share presented represent both basic and diluted earnings per
share.)
The quarter-over-quarter increase in net earnings per share of 10.5% or $.04
resulted from $.03 of business growth and $.01 of common stock repurchases. The
business growth was primarily from favorable pricing and mix in North America
and Europe, reduced marketing spending in the U.S. cereal market, and volume
growth in Latin America. Foreign currency and effective tax rate movements were
not significant factors in the earnings per share growth.
The Company reported the following volume results during the first quarter of
1998 versus the prior-year quarter:
<TABLE>
<CAPTION>
=======================================================
Change
-------------------------------------------------------
<S> <C>
Global cereal - 5.8%
-------------------------------------------------------
U.S. cereal -10.5%
-------------------------------------------------------
Global total - 5.9%
=======================================================
</TABLE>
Management believes the U.S. cereal volume decline was primarily related to the
Company's lower promotional spending during the quarter versus high levels of
marketing activity by other participants in the U.S. cereal category. Volume
softness in Canada, Australia, and the Company's European Area offset strong
volume growth in Latin American markets. Other convenience foods volume
7
<PAGE> 9
declined during the quarter, primarily due to results from the Lender's Bagels
business. Excluding the Lender's business, other convenience foods volume
increased marginally.
Consolidated net sales decreased 2.7% versus the prior-year quarter. Negative
foreign currency movements accounted for more than two-thirds of this decline.
The remaining decrease was primarily due to the global volume shortfall,
partially offset by favorable pricing and mix.
Margin performance for the first quarter was:
<TABLE>
<CAPTION>
=========================================================
1998 1997 Change
---------------------------------------------------------
<S> <C> <C> <C>
Gross margin 52.4% 51.0% + 1.4%
SGA%(a) -34.2% -34.6% + .4%
---------------------------------------------------------
Operating margin 18.2% 16.4% + 1.8%
=========================================================
(a) Selling, general, and administrative expense as a percentage of net sales.
</TABLE>
Gross margin performance for the first quarter of 1998 benefited from favorable
pricing and mix movements, as well as continued operational cost savings from
prior-year streamlining initiatives. The SGA% was slightly lower versus the
prior year, primarily due to reduced marketing spending, partially offset by
increased spending on research and development, technology, and process
reengineering initiatives.
Gross interest expense, prior to amounts capitalized, was $30.5 million, up 11%
from the prior-year amount of $27.4 million, due to higher average debt levels
and a slightly higher effective interest rate during the quarter.
The effective income tax rate was 36.8%, comparable to the prior-year rate of
36.3%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong during the quarter. 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 quarter was $138.5 million,
compared to $170.4 million in 1997, with the decrease due principally to
unfavorable working capital movements, partially offset by higher earnings and
lower benefit plan contributions. The unfavorable working capital movements were
primarily due to temporary increases in inventory levels and reduced promotion
liabilities. The ratio of current assets to current liabilities was .9 at March
31, 1998, consistent with the ratio at December 31, 1997.
Net cash used in investing activities was $83.1 million, principally comprised
of $79.7 million in property additions.
8
<PAGE> 10
Net cash used in financing activities was $61.1 million, primarily related to
common stock repurchases and dividend payments, partially offset by a net
increase in total debt of $79 million. The Company's first quarter per-share
dividend payment was $.225, a 7.1% increase over the prior-year payment of $.21.
Under existing plans authorized by the Company's Board of Directors, management
spent $61.3 million during the first quarter of 1998 to repurchase 1.4 million
shares of the Company's common stock at an average price of $45 per share. The
remaining repurchase authorization, which extends through December 31, 1998, was
$327.8 million at March 31, 1998.
Notes payable consist principally of commercial paper borrowings in the United
States. To reduce short-term borrowings, on February 4, 1998, the Company issued
$400 million of three-year 5.75% fixed rate U.S. Dollar Notes. Accordingly, an
equivalent amount of commercial paper borrowings was classified as long-term
debt in the December 31, 1997, balance sheet. These Notes were issued under an
existing "shelf registration" with the Securities and Exchange Commission, and
provide an option to holders to extend the obligation for an additional four
years at a predetermined interest rate of 5.63% plus the Company's then-current
credit spread. Concurrent with this issuance, the Company entered into a $400
million notional, three-year fixed-to-floating interest rate swap, indexed to
the Federal Reserve AA composite rate on 30-day commercial paper.
At year-end 1997, the Company had available $775.1 million of short-term lines
of credit. During the first quarter of 1998, the Company reduced this amount by
$150 million.
As of March 31, 1998, current maturities of long-term debt primarily consisted
of $200 million of five-year notes due October 1998. Management currently
intends to replace these notes with new long-term debt issuances as of the
maturity date and, as of March 31, 1998, had entered into interest rate hedges
to effectively fix the U.S. Treasury rate pricing on approximately one-half of
the future issuance. Subject to market conditions, management intends to
gradually increase the notional amount of interest rate hedges to cover the
entire issuance prior to the maturity date of the notes.
Other long-term debt at March 31, 1998, consisted principally of $500 million of
seven-year notes due 2004 and $500 million of four-year notes due 2001.
The ratio of total debt to market capitalization at March 31, 1998, was 12%, up
from 10% at December 31, 1997, principally due to a decrease in the market price
of the Company's stock since that date.
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
9
<PAGE> 11
require additional financing, management believes the Company's strong credit
rating, balance sheet, and earnings history provide a base for obtaining
additional financial resources at competitive rates and terms.
Management believes the competitive environment experienced in the first quarter
may continue in the Company's major markets during the remainder of 1998. In
response to these competitive conditions, the Company intends to increase its
marketing spending during the balance of the year. As a result of these actions
and other factors such as foreign currency fluctuations, the Company's second
quarter 1998 earnings could be lower than the prior year, and the full-year
objective for low double-digit growth in earnings per share may be difficult to
achieve. However, management remains committed to long-term growth in both
volume and earnings per share, derived from the continued benefits of product
innovation, cost structure optimization, and the global introduction of new
convenience foods.
Additional expectations for 1998 include the following approximate results: a
gross profit margin of 53%, an SGA% of 35%-36%, an effective income tax rate of
35%-36%, capital spending of $400 million, common stock repurchase activity of
$390 million, and an increase in interest expense of 10%.
To address the millennium date change issue (the inability of certain computer
software, hardware, and other equipment with embedded computer chips to properly
process two-digit year-date codes after 1999), the Company formed a global task
force to perform a risk assessment, and develop and execute action plans, as
necessary. The global risk assessment is substantially complete. Remediation and
testing activities for critical business operations are under way, with
remediation scheduled for completion by December 1998, and testing scheduled for
completion by March 1999. Remediation and testing of non-critical business
operations will continue, as necessary, throughout 1999. Management currently
believes that the total cost of becoming Year 2000 compliant will not be
significant to the Company's financial results, partly due to other significant
systems initiatives currently under way. While the Company believes all
necessary work will be completed, there can be no guarantee that all systems
will be in compliance by the year 2000 or that the systems of other companies
and government agencies on which the Company relies will be converted in a
timely manner. Such failure to complete the necessary work by the year 2000
could result in material financial risk.
In March 1998, the Accounting Standards Executive Committee of the AICPA (AcSEC)
issued Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." During April 1998, AcSEC also
issued SOP 98-5 "Reporting on the Costs of Start-up Activities." SOP 98-1
provides guidance on the classification of software project costs between
expense and capital. SOP 98-5 prescribes that the costs of opening a new
facility, commencing business in a new market, or similar start-up activities
must be expensed as incurred. Both of these pronouncements are generally
effective for financial statements for fiscal years beginning after December 15,
1998, with earlier adoption encouraged. SOP 98-1 is to be applied on a
prospective basis to costs incurred on or after the date of adoption. The
initial application of SOP 98-5 is to be reported as a cumulative effect of a
change in accounting principle. Management intends to adopt the provisions of
both pronouncements in the Company's first quarter 1999 financial statements,
and is currently reviewing the impact of adoption on the Company's financial
results.
10
<PAGE> 12
The foregoing projections of volume growth, profitability, capital spending, and
common stock repurchase activity are forward-looking statements that involve
risks and uncertainties. Actual 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 system
initiatives, properties, business opportunities, continued streamlining
initiatives, and other general and administrative functions; raw material price
and labor cost fluctuations; foreign currency exchange rate 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.
11
<PAGE> 13
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:
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.
12
<PAGE> 14
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;
Executive Vice President - Administration
/s/ A. Taylor
-------------------------------
A. Taylor
Principal Accounting Officer;
Vice President and Corporate Controller
Date: May 13, 1998
13
<PAGE> 15
KELLOGG COMPANY
EXHIBIT INDEX
Number Description
- ------ -----------
27.01 Financial Data Schedule
14
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 165,200
<SECURITIES> 0
<RECEIVABLES> 661,600
<ALLOWANCES> (8,400)
<INVENTORY> 451,100
<CURRENT-ASSETS> 1,577,600
<PP&E> 5,027,200
<DEPRECIATION> (2,230,900)
<TOTAL-ASSETS> 5,032,200
<CURRENT-LIABILITIES> 1,762,700
<BONDS> 1,417,700
0
0
<COMMON> 103,700
<OTHER-SE> 928,400
<TOTAL-LIABILITY-AND-EQUITY> 5,032,200
<SALES> 1,642,900
<TOTAL-REVENUES> 1,642,900
<CGS> 781,800
<TOTAL-COSTS> 781,800
<OTHER-EXPENSES> 561,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,100
<INCOME-PRETAX> 270,100
<INCOME-TAX> 99,400
<INCOME-CONTINUING> 170,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 170,700
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
