PAGE 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1994
_ 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 1-12
THE QUAKER OATS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 36-1655315
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
Quaker Tower P.O. Box 049001 Chicago, Illinois
60604-9001
(Address of principal executive office) (Zip Code)
(312) 222-7111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 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 for such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES XX NO _____
The number of shares of Common Stock, $5.00 par value, outstanding as
of the close of business on October 31, 1994, was 66,754,184
THE QUAKER OATS COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Income
and Reinvested Earnings for the Three Months
Ended September 30, 1994 and 1993 3
Condensed Consolidated Balance Sheets as of
September 30, 1994 and June 30, 1994 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
September 30, 1994 and 1993 5
Net Sales and Operating Income by Segment for the
Three Months Ended September 30, 1994 and 1993 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-10
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX
EXHIBIT 11
<TABLE>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS (UNAUDITED)
<CAPTION>
Dollars in
Millions
(Except Per
Share Data)
Three Months Ended
September 30
1994 1993
<S> <C> <C>
Net sales $1,636.4 $1,534.3
Cost of goods sold 825.2 749.8
Gross profit 811.2 784.5
Selling, general and administrative expenses 693.6 609.7
Interest expense - net 15.5 14.3
Foreign exchange loss - net --- 7.6
Income before income taxes and cumulative
effect of accounting change 102.1 152.9
Provision for income taxes 40.7 61.5
Income before cumulative effect
of accounting change 61.4 91.4
Cumulative effect of accounting
change - net of tax (4.1) ---
Net income 57.3 91.4
Preferred dividends - net of tax 1.0 1.0
Net Income Available for Common $56.3 $90.4
Per Common Share:
Income before cumulative
effect of accounting change $0.90 $1.31
Cumulative effect of accounting change (0.06) ---
Net income $0.84 $1.31
Dividends declared $0.57 $0.53
Average Number of Common Shares
Outstanding (in thousands) 66,767 68,945
Reinvested Earnings:
Balance beginning of period $1,273.6 $1,190.1
Net income 57.3 91.4
Dividends (38.6) (36.5)
Common stock issued for stock purchase
and incentive plans (0.4) (0.2)
Balance end of period $1,291.9 $1,244.8
<FN>
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
Dollars in Millions September June 30
30 1994
1994
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $184.7 $140.4
Trade accounts receivable -
net of allowances 514.4 509.4
Inventories:
Finished goods 273.4 266.5
Grains and raw materials 85.8 78.8
Packaging materials and supplies 38.8 40.2
Total inventories 398.0 385.5
Other current assets 229.1 218.3
Total Current Assets 1,326.2 1,253.6
Other Receivables and Investments 80.1 82.1
Property, plant and equipment 2,158.1 2,125.9
Less accumulated depreciation 934.0 911.7
Property - Net 1,224.1 1,214.2
Intangible Assets -
Net of Amortization 502.4 493.4
Total Assets $3,132.8 $3,043.3
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $254.5 $211.3
Current portion of long-term debt 46.6 45.4
Trade accounts payable 387.4 406.3
Other current liabilities 659.0 596.1
Total Current Liabilities 1,347.5 1,259.1
Long-term Debt 721.5 759.5
Other Liabilities 505.0 481.4
Deferred Income Taxes 73.7 82.2
Preferred Stock, Series B, no par value,
authorized
1,750,000 shares; issued 1,282,051 of
$5.46 cumulative convertible shares
(liquidating preference of $78 per share) 100.0 100.0
Deferred Compensation (78.1) (80.8)
Treasury Preferred Stock, at cost, 56,574
shares and
47,817 shares, respectively (4.7) (3.9)
Common Shareholders' Equity:
Common stock, $5 par value, authorized
200,000,000 shares; issued 83,989,396 shares 420.0 420.0
Reinvested earnings 1,291.9 1,273.6
Cumulative translation adjustment (72.8) (75.4)
Deferred compensation (132.1) (143.5)
Treasury common stock, at cost, 17,267,056
shares and 17,185,100 shares, respectively (1,039.1) (1,028.9)
Total Common Shareholders' Equity 467.9 445.8
Total Liabilities and Shareholders' Equity $3,132.8 $3,043.3
<FN>
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Dollars in
Millions
Three Months Ended
September 30
1994 1993
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $57.3 $91.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting change 4.1 --
Depreciation and amortization 43.2 44.8
Deferred income taxes (6.8) 7.4
Loss on disposition of property and equipment 6.5 7.6
Decrease (increase) in trade accounts receivable 1.4 (16.3)
(Increase) decrease in inventories (9.1) 8.3
(Increase) in other current assets (9.6) (8.8)
(Decrease) increase in trade accounts payable (23.2) 4.6
Increase (decrease) in other current liabilities 58.3 (22.1)
Change in deferred compensation 14.1 11.5
Other items 18.9 41.4
Net Cash Provided by Operating Activities 155.1 169.8
Cash Flows from Investing Activities:
Additions to property, plant and equipment (44.6) (36.5)
Change in other receivables and investments (0.6) (4.5)
Purchase of businesses (14.0) (80.0)
Net Cash Used in Investing Activities (59.2) (121.0)
Cash Flows from Financing Activities:
Cash dividends (38.6) (36.5)
Change in short-term debt 43.2 55.7
Proceeds from long-term debt 0.7 105.0
Reduction of long-term debt (38.5) (63.1)
Issuance of common treasury stock 9.6 1.1
Repurchases of common stock (22.5) (111.3)
Repurchases of preferred stock (0.8) (0.3)
Net Cash Used in Financing Activities (46.9) (49.4)
Effect of Exchange Rate Changes on Cash and Cash
Equivalents (4.7) 9.2
Net Increase in Cash and Cash Equivalents 44.3 8.6
Cash and Cash Equivalents -
Beginning of Year 140.4 61.0
Cash and Cash Equivalents - End of Quarter $184.7 $69.6
<FN>
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
<CAPTION>
Dollars in
Millions
Net Sales Operating Income
Three Months Three Months
Ended Ended
September 30 September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
U.S. and Canadian Grocery Products $1,187.0 $1,128.0 $135.3 $161.6
International Grocery Products 449.4 406.3 7.5 20.5
Total Sales/Operating Income $1,636.4 $1,534.3 $142.8 $182.1
Less: General corporate expenses 25.2 7.3
Interest expense - net 15.5 14.3
Foreign exchange loss - net --- 7.6
Income before income taxes and
cumulative effect of accounting change $102.1 $152.9
</TABLE>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1994
Note 1 - Basis of Presentation
The condensed consolidated financial statements include The Quaker Oats
Company and its subsidiaries (the "Company"). The condensed consolidated
statements of income and reinvested earnings for the three months ended
September 30, 1994 and 1993, the condensed consolidated balance sheet as of
September 30, 1994, and the condensed consolidated statements of cash flows
for the three months ended September 30, 1994 and 1993, have been prepared
by the Company without audit. In the opinion of management, these
financial statements include all adjustments necessary to present fairly
the financial position, results of operations and cash flows as of
September 30, 1994 and for all periods presented. All adjustments made
have been of a normal recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted. The Company believes that the disclosures included are adequate
and provide a fair presentation of interim period results. Interim
financial statements are not necessarily indicative of the financial
position or operating results for an entire year. It is suggested that
these interim financial statements be read in conjunction with the audited
financial statements and the notes thereto included in the Company's
annual report to shareholders for the fiscal year ended June 30, 1994.
Certain previously reported amounts have been reclassified to conform to the
current presentation.
Note 2 - Litigation
On December 18, 1990, Judge Prentice H. Marshall of the United States
District Court for the Northern District of Illinois issued a memorandum
opinion stating that the Court would enter judgment against the Company in
favor of Sands, Taylor & Wood Co. The Court found that the use of the
words
"thirst aid" in advertising Gatorade thirst quencher infringed the
Plaintiff's rights in the trademark THIRST-AID. On July 9, 1991, Judge
Marshall entered a judgment of $42.6 million, composed of $31.4 million in
principal, plus prejudgment interest of $10.6 million and fees, expenses
and costs of $0.6 million. The order enjoined use of the phrase "THIRST-
AID"
in connection with the advertising or sale of Gatorade thirst quencher in
the United States. The Company subsequently appealed the judgment. On
September 2, 1992, the Court of Appeals for the Seventh Circuit vacated
the monetary award component of the District Court's judgment. The
appellate
court affirmed the finding of infringement, but found that the monetary
award was an inequitable "windfall" to the Plaintiff. The case was
remanded to the District Court for further proceedings. The Company filed
a request for rehearing that was denied. The Company also filed a Petition
for Certiorari with the U.S. Supreme Court that was denied. On June 7,
1993,
Judge Marshall issued a judgment on remand of $26.5 million, composed of
$20.7 million in principal, prejudgment interest of $5.4 million and fees,
expenses and costs of $0.4 million. The Company appealed this judgment to
the Court of Appeals for the Seventh Circuit. On September 13, 1994, the
Court of Appeals for the Seventh Circuit rendered an opinion affirming in
part and remanding in part the District Court's judgment on remand of a
$26.5 million monetary award. The Court of Appeals has affirmed the
lower court's award of a reasonable royalty, but has again remanded the
case to allow the District Court to explain the basis for and calculation
of
its royalty award. Management, with advice from outside legal counsel,
has determined that this opinion appears to indicate a range of exposure
between $16 million and $27 million. The Company has recorded a reserve
of $18.4 million for this litigation in the first quarter of fiscal 1995.
No amount has previously been recorded for this matter. The Company has
petitioned the Court of Appeals for a rehearing and is considering its
other options.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1994
The Company is not a party to any other pending legal proceedings or
environmental clean-up actions that it believes will have a material adverse
effect on its financial position or results of operations.
Note 3 - Two-for-one Stock Split-up
On September 14, 1994, the Board of Directors declared a two-for-one stock
split-up, subject to the adoption by shareholders of a proposed charter
amendment which would increase the authorized shares of common stock from
200 million to 400 million. If approved, shareholders of record on
November 9, 1994, will receive an additional share of common stock for each
share held and all per share information will be retroactively restated.
Earnings per share for the three months ended September 30, 1994 and 1993,
assuming approval of the authorized share increase, would have been $0.42
and $0.66, respectively.
Note 4 - Accounting Change
Effective July 1, 1994, the Company adopted FASB Statement #112, "Employers'
Accounting for Postemployment Benefits." The cumulative effect of adoption
was a $6.8 million pretax charge, or $4.1 million after-tax, in the first
quarter of fiscal 1995. The adoption of this statement will not have a
material effect on operating results or cash flows in fiscal 1995 or in
future years.
Note 5 - Subsequent Events
On November 2, 1994, the Company announced a definitive merger agreement
to acquire Snapple Beverage Corp. for $1.7 billion cash or the equivalent of
$14 per share. The Snapple business, with nearly $700 million in annual
sales, will be combined with the Gatorade thirst quencher business. Under
the terms of the merger greement, a Company subsidiary will commence a cash
tender offer, scheduled to begin November 4, 1994, for all outstanding
Snapple shares at $14 per share. Shares not purchased in the tender offer
will be acquired in a subsequent merger at the same price as soon as
practicable after the completion of the tender offer. The Company also
entered into an agreement with the holders of 68 percent of Snapple's stock,
who agreed to tender their shares to the Company. The tender offer is
subject to a number of conditions including the acquisition of a majority
of Snapple's shares and the expiration of the waiting period under the
Hart-Scott-Rodino Act. The Company also announced that it is evaluating
the potential sale of its European pet food business and its Mexican
chocolate business as part of realigning the Company's portfolio.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1994 Compared with
Three Months Ended September 30, 1993
Operating Results
Consolidated net sales for the first quarter of fiscal 1995 were
$1.64 billion, up 7 percent from the first quarter of fiscal 1994. The
increase in net sales reflects a 3 percent worldwide increase in volume, an
improved product mix and a favorable impact of translating European
currencies into U.S. dollars. Price increases did not have a significant
impact on sales.
U.S. and Canadian Grocery Products sales increased 5 percent to $1.19 billion
on a volume increase of 2 percent. Sales and volume growth were mainly
driven by food service, Golden Grain products and grain-based snacks.
International Grocery Products sales increased 11 percent to $449.4 million,
due to a 6 percent volume increase, mainly for Gatorade thirst quencher, and
a favorable currency translation impact.
Gross profit margin decreased to 49.6 percent from 51.1 percent in the
prior year primarily due to product mix changes and, to a lesser extent,
distribution and commodity cost increases. Selling, general and
administrative (SG&A) expenses rose 14 percent to $693.6 million due mainly
to a 16 percent increase in advertising and merchandising (A&M) expenses.
A&M expenses were 28.3 percent of net sales in the first quarter of fiscal
1995, up from 26.1 percent in the first quarter of fiscal 1994. SG&A
expenses for the first quarter of fiscal 1995 include a reserve of
$18.4 million for estimated litigation costs related to a 1984 trademark
lawsuit involving Gatorade thirst quencher advertising. (See Note 2 to
the condensed consolidated financial statements for a detailed discussion.)
Consolidated operating income was $142.8 million compared to $182.1 million
last year. U.S. and Canadian Grocery Products operating income was
$135.3 million versus $161.6 million in fiscal 1993. The decrease reflects
significant increases in A&M expenses across most businesses, primarily
Gatorade thirst quencher in a period of competitive expansion of the category.
Gatorade thirst quencher volume was even with the prior year's strong first
quarter. For the near term, we expect Gatorade thirst quencher A&M spending
to be higher than in the prior year. International Grocery Products
operating income decreased to $7.5 million versus $20.5 million in the prior
year mainly due to lower pet food volume in Europe, increased A&M expenses
across many businesses and decreased operating income in Brazil, which was
more than offset by reduced financing costs in that country.
The Company's reengineering programs announced in May 1994 are proceeding
as planned. The Company will continue to focus on worldwide efficiency
initiatives to improve its manufacturing, marketing, logistics and customer
service processes while lowering costs and to more effectively utilize human
and financial resources. These continuous improvement initiatives may
lead to charges in future periods.
Interest, Foreign Exchange and Income Taxes
Net financing costs (net interest expense and foreign exchange losses)
decreased $6.4 million, primarily as a result of improvements in the
Brazilian economy. Net interest expense increased due to additional
long-term debt, partially offsetting the improvements for Brazil. Through
various hedging strategies, the Company will continue to try to mitigate
the effects of foreign exchange fluctuations on its financial results,
except in certain countries and in certain currencies where hedging
opportunities are limited and costly.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has evaluated its deferred tax assets and believes that future
taxable income will be sufficient to realize these assets. A valuation
allowance has been provided for the deferred tax assets not expected to
be realized.
Liquidity and Capital Resources
Net cash provided by operating activities of $155.1 million and
$169.8 million for the first quarter of fiscal 1995 and 1994,
respectively, was well in excess of the Company's dividends and capital
expenditures. Capital expenditures for the first quarter of fiscal 1995 and
1994 were $44.6 million and $36.5 million, respectively, with no material
individual commitments outstanding.
During the first quarter of fiscal 1995, 0.3 million shares of the
Company's outstanding common stock were repurchased for $22.5 million
under a five million share repurchase program announced in August 1993.
One of the Company's financial objectives is to generate economic value
through the use of leverage, while maintaining a solid financial position
through strong operating cash flows. Short-term and long-term debt
(total debt) as of September 30, 1994 was $1.02 billion, an increase of
$6.4 million from June 30, 1994. The total debt-to-total capitalization ratio
was 67.8 percent and 68.8 percent as of September 30, 1994 and June 30, 1994,
respectively.
Commercial paper has been the Company's primary source of short-term
financing. Available levels of borrowings are adequate to meet the
Company's working capital needs.
Accounting Change
Effective July 1, 1994, the Company adopted FASB Statement #112, "Employers'
Accounting for Postemployment Benefits." The cumulative effect of adoption
was a $4.1 million after-tax charge in the first quarter of fiscal 1995. The
adoption of this statement will not have a material effect on operating
results or cash flows in fiscal 1995 or in future years.
Subsequent Events
On November 2, 1994, the Company announced a definitive merger agreement
to acquire Snapple Beverage Corp. for $1.7 billion cash or the equivalent of
$14 per share. The purchase will be funded through bank borrowings. The
Snapple business, with nearly $700 million in annual sales, will be combined
with the Gatorade thirst quencher business. Under the terms of the merger
agreement, a Company subsidiary will commence a cash tender offer, scheduled
to begin November 4, 1994, for all outstanding Snapple shares at $14 per share.
Shares not purchased in the tender offer will be acquired in a subsequent merger
at the same price as soon as practicable after the completion of the tender
offer. The Company also entered into an agreement with the holders of 68
percent of Snapple's stock, who agreed to tender their shares to the Company.
The tender offer is subject to a number of conditions including the acquisition
of a majority of Snapple's shares and the expiration of the waiting period under
the Hart-Scott-Rodino Act. The Company also announced that it is evaluating
the potential sale of its European pet food business and its Mexican chocolate
business as part of realigning the Company's portfolio.
6(a). See Exhibit 11.
Note 2 in Part I is incorporated by reference herein for Item I in Part II.
All other items in Part II are either inapplicable to the Company during the
quarter ended September 30, 1994, the answer is negative or a response has
been previously reported and an additional report of the information need
not be made, pursuant to the Instructions to Part II.
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.
The Quaker Oats Company
(Registrant)
Date November 7, 1994 Terry G. Westbrook
Terry G. Westbrook
Senior Vice President and
Chief Financial Officer
Date November 7, 1994 Thomas L. Gettings
Thomas L. Gettings
Vice President and
Corporate Controller
EXHIBIT INDEX
Exhibit Paper (P) or
Number Description Electronic (E)
(11) Statement Re Computation E
of Per Share Earnings
EXHIBIT 11
<TABLE>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
September 30
1994 1993
<S> <C> <C>
Calculation of Fully Diluted Earnings Per Share
Dollars in Millions (Except Per Share Data)
Income Before Cumulative Effect of Accounting Change $61.4 $91.4
Less: Adjustments attributable to conversion of
ESOP Convertible Preferred Stock (0.3) (0.4)
Income Before Cumulative Effect of Accounting Change
Used for Fully Diluted Calculation 61.1 91.0
Cumulative Effect of Accounting Change - Net of Tax (4.1) ----
Net Income Used for Fully Diluted Calculation $57.0 $91.0
Shares in Thousands
Average Number of Common Shares Outstanding 66,767 68,945
Plus Dilutive Securities:
Stock Options 1,172 880
ESOP Convertible Preferred Stock 1,327 1,344
Average Shares Outstanding Used for Fully
Diluted calculation 69,266 71,169
Fully Diluted Earnings Per Share Before Cumulative
Effect of Accounting Change $0.88 $1.28
Fully Diluted Cumulative Effect of
Accounting Change (0.06) ----
Fully Diluted Earnings Per Share $0.82 $1.28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-END> SEP-30-1994
<CASH> 185
<SECURITIES> 0
<RECEIVABLES> 537
<ALLOWANCES> 23
<INVENTORY> 398
<CURRENT-ASSETS> 1326
<PP&E> 2158
<DEPRECIATION> 934
<TOTAL-ASSETS> 3133
<CURRENT-LIABILITIES> 1348
<BONDS> 722
<COMMON> 420
0
100
<OTHER-SE> 48
<TOTAL-LIABILITY-AND-EQUITY> 3133
<SALES> 1636
<TOTAL-REVENUES> 1636
<CGS> 825
<TOTAL-COSTS> 825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 102
<INCOME-TAX> 41
<INCOME-CONTINUING> 61
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 4
<NET-INCOME> 57
<EPS-PRIMARY> .84
<EPS-DILUTED> .82
</TABLE>
