UNITED STATES
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 June 30, 1996
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 July 31, 1996 was 135,474,100.
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 Six and Three Months
Ended June 30, 1996 and 1995 3-4
Condensed Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1996 and 1995 6
Net Sales and Operating Income by Segment for the Six and
Three Months Ended June 30, 1996 and 1995 7-8
Notes to Condensed Consolidated Financial Statements 9-10
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 4 - Submission of Matters to a Vote of Security-Holders 21-22
Item 6 - Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
EXHIBIT 11 26
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS (UNAUDITED)
Six Months Ended
Dollars in Millions (Except Per Share Data) June 30,
1996 1995
Net sales $2,704.6 $3,220.9
Cost of goods sold 1,454.6 1,765.1
Gross profit 1,250.0 1,455.8
Selling, general and administrative expenses 1,030.6 1,280.7
Gains on divestitures and restructuring charges - net (2.8) (1,094.3)
Interest expense 57.7 73.7
Interest income (3.0) (2.5)
Foreign exchange loss - net 3.6 3.3
Income before income taxes 163.9 1,194.9
Provision for income taxes 67.1 484.6
Net income 96.8 710.3
Preferred dividends - net of tax 2.0 2.0
Net Income Available for Common $ 94.8 $ 708.3
Per Common Share:
Net income $ 0.70 $ 5.30
Dividends declared $ 0.57 $ 0.57
Average Number of Common Shares
Outstanding (in thousands) 135,213 133,948
Reinvested Earnings:
Balance beginning of period $1,433.6 $ 867.6
Net income 96.8 710.3
Dividends (78.4) (77.1)
Common stock issued for stock purchase
and incentive plans (3.0) (1.5)
Balance end of period $1,449.0 $1,499.3
See accompanying notes to the condensed consolidated financial statements.
3
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS (UNAUDITED)
Three Months
Ended
Dollars in Millions (Except Per Share Data) June 30,
1996 1995
Net sales $1,481.8 $1,587.4
Cost of goods sold 790.1 894.1
Gross profit 691.7 693.3
Selling, general and administrative expenses 555.2 633.8
Gains on divestitures and restructuring charges - net --- (576.4)
Interest expense 28.2 27.2
Interest income (1.6) (0.5)
Foreign exchange loss - net 1.8 0.7
Income before income taxes 108.1 608.5
Provision for income taxes 43.5 264.3
Net income 64.6 344.2
Preferred dividends - net of tax 1.0 1.0
Net Income Available for Common $ 63.6 $ 343.2
Per Common Share:
Net income $ 0.47 $ 2.57
Dividends declared $ 0.285 $ 0.285
Average Number of Common Shares
Outstanding (in thousands) 135,329 134,077
Reinvested Earnings:
Balance beginning of period $1,423.4 $1,193.7
Net income 64.6 344.2
Dividends (39.3) (38.4)
Common stock issued for stock purchase
and incentive plans 0.3 (0.2)
Balance end of period $1,449.0 $1,499.3
See accompanying notes to the condensed consolidated financial statements.
4
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
Dollars in Millions 1996 1995
Assets
Current Assets:
Cash and cash equivalents $ 103.5 $ 93.2
Trade accounts receivable - net of allowances 476.8 398.3
Inventories:
Finished goods 258.4 203.6
Grains and raw materials 72.8 69.7
Packaging materials and supplies 36.2 33.4
Total inventories 367.4 306.7
Other current assets 266.5 281.9
Total Current Assets 1,214.2 1,080.1
Property, plant and equipment 1,970.5 1,946.0
Less accumulated depreciation 793.0 778.2
Property - net 1,177.5 1,167.8
Intangible assets - net of amortization 2,272.6 2,309.2
Other assets 63.2 63.3
Total Assets $4,727.5 $4,620.4
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 558.1 $ 643.4
Current portion of long-term debt 53.8 68.6
Trade accounts payable 342.4 298.4
Other current liabilities 796.7 691.3
Total Current Liabilities 1,751.0 1,701.7
Long-term debt 1,041.2 1,051.8
Other liabilities 555.3 536.3
Deferred income taxes 237.8 233.6
Preferred Stock, 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 (68.3) (71.7)
Treasury Preferred Stock, at cost, 145,703 shares and
122,562 shares, respectively (12.9) (10.6)
Common Shareholders' Equity:
Common stock, $5 par value, authorized 400,000,000
shares; issued 167,978,792 shares 840.0 840.0
Reinvested earnings 1,449.0 1,433.6
Cumulative translation adjustment (69.0) (77.8)
Deferred compensation (117.7) (118.1)
Treasury common stock, at cost, 32,520,218
shares and 33,172,737 shares, respectively (978.9) (998.4)
Total Common Shareholders' Equity 1,123.4 1,079.3
Total Liabilities and Shareholders' Equity $4,727.5 $4,620.4
See accompanying notes to the condensed consolidated financial statements.
5
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
Dollars in Millions June 30,
1996 1995
Cash Flows from Operating Activities:
Net income $ 96.8 $ 710.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 100.4 100.8
Deferred income taxes 7.1 22.2
Gains on divestitures - net of tax of $1.1
in 1996 and $476.2 in 1995 (1.7) (694.6)
Restructuring charges --- 76.5
Loss on disposition of property and equipment 10.0 18.0
Increase in trade accounts receivable (119.1) (99.2)
Increase in inventories (69.3) (50.5)
Decrease (increase) in other current assets 8.4 (53.1)
Increase in trade accounts payable 80.8 170.1
Increase in other current liabilities 96.7 68.8
Change in deferred compensation 3.7 4.1
Other items 27.4 49.4
Net Cash Provided by Operating Activities 241.2 322.8
Cash Flows from Investing Activities:
Additions to property, plant and equipment (102.4) (156.2)
Business acquisitions --- (49.3)
Business divestitures - net of tax of $1.1
in 1996 and $476.2 in 1995 42.1 1,253.4
Change in other assets 0.6 (2.6)
Net Cash (Used in) Provided by
Investing Activities (59.7) 1,045.3
Cash Flows from Financing Activities:
Cash dividends (78.4) (77.1)
Change in short-term debt (85.2) (1,377.6)
Proceeds from short-term debt to be refinanced --- (112.0)
Proceeds from long-term debt 3.2 212.6
Reduction of long-term debt (27.9) (38.8)
Issuance of common treasury stock 13.3 9.0
Repurchases of preferred stock (2.3) (1.4)
Net Cash Used in Financing Activities (177.3) (1,385.3)
Effect of Exchange Rate Changes on Cash and Cash
Equivalents 6.1 16.0
Net Increase (Decrease) in Cash and Cash Equivalents 10.3 (1.2)
Cash and Cash Equivalents - Beginning of Year 93.2 103.0
Cash and Cash Equivalents - End of Quarter $ 103.5 $ 101.8
See accompanying notes to the condensed consolidated financial statements.
6
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
Net Sales Operating Income(Loss)
Six Months Six Months
Ended Ended
Dollars in Millions June 30, June 30,
1996 1995 1996 1995
Foods (a)
U.S. and Canadian $1,314.0 $1,365.4 $173.9 $ 94.0
International 303.7 284.6 5.1 (26.8)
Total Foods $1,617.7 $1,650.0 $179.0 $ 67.2
Beverages (a)
U.S. and Canadian $ 910.2 $ 851.1 $ 78.9 $ 51.7
International 172.7 175.0 (17.0) (14.0)
Total Beverages $1,082.9 $1,026.1 $ 61.9 $ 37.7
Divested Businesses (b) $ 4.0 $ 544.8 $ 3.3 $1,204.4
Total Sales/Operating Income $2,704.6 $3,220.9 $244.2 $1,309.3
Less: General corporate expenses (c) 22.0 39.9
Interest expense - net 54.7 71.2
Foreign exchange loss - net 3.6 3.3
Income before income taxes $163.9 $1,194.9
Note: Operating income includes certain allocations of overhead expenses.
(a) The Foods and Beverages businesses reflect pretax restructuring charges of
$76.5 million for organizational realignment. U.S. and Canadian Foods and
Beverages include $39.1 million and $8.0 million, respectively, of this charge.
International Foods and Beverages include $29.0 million and $0.4 million,
respectively, of this charge.
(b) Total sales for the international divested businesses were $4.0 million and
$340.5 million for the six months ended June 30, 1996 and 1995, respectively.
Total sales for the U.S. and Canadian divested businesses were $204.3 million
for the six months ended June 30, 1995. Total operating income for the
international divested businesses was $3.3 million as of June 30, 1996, which
included a gain of $2.8 million on the sale of the Italian products business.
Total operating income for the international divested businesses was $583.4
million as of June 30, 1995, which included a gain of $4.9 million on the sale
of the Dutch honey business, a gain of $487.2 million on the sale of the
European pet food business and a gain of $74.5 million on the sale of the
Mexican chocolate business. Total operating income for the U.S. and Canadian
divested businesses was $621.0 million as of June 30, 1995, which included a
gain of $513.0 million on the sale of the U.S. and Canadian pet food business
and a gain of $91.2 million on the sale of the U.S. bean and chili business.
(c) General corporate expenses include a pretax provision of $10.6 million for
estimated litigation costs.
7
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
Net Sales Operating Income(Loss)
Three Months Three Months
Ended Ended
Dollars in Millions June 30, June 30,
1996 1995 1996 1995
Foods (a)
U.S. and Canadian $ 620.0 $ 627.0 $ 70.0 $ 2.3
International 153.4 142.3 4.2 (33.2)
Total Foods $ 773.4 $ 769.3 $ 74.2 $(30.9)
Beverages (a)
U.S. and Canadian $ 609.5 $ 563.2 $ 77.7 $ 43.4
International 98.9 108.1 (8.7) (7.8)
Total Beverages $ 708.4 $ 671.3 $ 69.0 $ 35.6
Divested Businesses (b) $ --- $ 146.8 $ --- $657.4
Total Sales/Operating Income $1,481.8 $ 1,587.4 $143.2 $662.1
Less: General corporate expenses (c) 6.7 26.2
Interest expense - net 26.6 26.7
Foreign exchange loss - net 1.8 0.7
Income before income taxes $108.1 $608.5
Note: Operating income includes certain allocations of overhead expenses.
(a) The Foods and Beverages businesses reflect pretax restructuring charges of
$76.5 million for organizational realignment. U.S. and Canadian Foods and
Beverages include $39.1 million and $8.0 million, respectively, of these
charges. International Foods and Beverages include $29.0 million and $0.4
million, respectively, of these charges.
(b) Total sales for the international divested businesses were $92.6 million
for the three months ended June 30, 1995. Total sales for the U.S. and
Canadian divested businesses were $54.2 million for the three months ended June
30, 1995. Total operating income for the international divested businesses was
$561.9 million, including a gain of $487.2 million on the sale of the European
pet food business and a gain of $74.5 million on the sale of the Mexican
chocolate business, for the three months ended June 30, 1995. Total operating
income for the U.S. and Canadian divested businesses was $95.5 million,
including a gain of $91.2 million on the sale of the U.S. bean and chili
business, for the three months ended June 30, 1995.
(c) General corporate expenses include a pretax provision of $10.6 million for
estimated litigation costs.
8
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
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 six and three months ended June 30, 1996
and 1995, the condensed consolidated balance sheet as of June 30, 1996, and the
condensed consolidated statements of cash flows for the six months ended June
30, 1996 and 1995, 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 June 30, 1996 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 report to shareholders for the six month transition
period ended December 31, 1995.
Certain previously reported amounts have been reclassified to conform to the
current presentation.
Note 2 - Litigation
On November 1, 1995, the Company filed suit against Borden, Inc. in Federal
District Court in New York alleging that Borden made material
misrepresentations and committed fraud in connection with the Company's
November 1994 acquisition of a Brazilian pasta business for $100 million. The
Company seeks to rescind the transaction and collect damages.
The Company is also a party to a number of lawsuits and claims, which it is
vigorously defending. Such matters arise out of the normal course of business
and relate to the Company's recent acquisition activity and other issues.
Certain of these actions seek damages in large amounts. While the results of
litigation cannot be predicted with certainty, management believes that the
final outcome of such litigation will not have a material adverse effect on the
Company's consolidated financial position or results of operations. Changes in
assumptions, as well as actual experience, could cause the estimates made by
management to change.
9
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
Note 3 - Pending Accounting Change
In October 1995, the FASB issued Statement #123, "Accounting for Stock-Based
Compensation." The Company is required to adopt this standard no later than
December 31, 1996. This Statement encourages companies to recognize expense
for stock options at an estimated fair value based on an option pricing model.
If expense is not recognized for stock options, pro forma footnote disclosure
is required of what net income and earnings per share would have been under the
Statement's approach to valuing and expensing stock options. Certain other new
disclosures will be required. The Company will implement the provisions of
this Statement in 1996, but has decided that it will not recognize the expense
related to stock options in the financial statements.
Note 4 - Revolving Credit Facilities
The Company renegotiated and reduced the level of its revolving credit
facilities by a total of $300.0 million during the second quarter. The
Company's revolving credit facilities now consist of a $900.0 million annually
extendible five-year revolving credit facility and a $300.0 million 364-day
annually extendible revolving credit facility which may, at the Company's
option, be converted into a two-year term loan.
Note 5 - Divestiture
On January 15, 1996, the Company completed the sale of its Italian products
business and realized a gain of $2.8 million.
Note 6 - Subsequent Event
The Company signed a definitive agreement to sell its North American frozen
foods business on May 15, 1996. The sale was completed on July 9, 1996 for
$185.8 million. The gain on the sale is estimated to be approximately $134
million.
10
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Presentation
This report discusses the six-month and three-month periods ended June 30, 1996
of the Company's new fiscal year reporting cycle which began January 1, 1996.
The comparisons of the six-month and three-month periods ended June 30, 1996
("current year") with the prior year six-month and three-month periods ended
June 30, 1995 ("prior year") are affected by the significant changes the
Company has made in its portfolio of businesses since March 1995.
Specifically, the Company divested the following businesses: U.S. and
Canadian pet food and Dutch honey (March 1995), European pet food (April
1995), Mexican chocolate (May 1995), U.S. bean and chili (June 1995) and
Italian products (January 1996). As a result of these transactions,
comparative results are more difficult to analyze. To aid in the analysis of
operating results, the discussion will compare the financial results as
reported, then will break out the impact of divested businesses and
restructuring charges, and compare the ongoing business results by business
segment.
Six Months Ended June 30, 1996 Compared with Six Months Ended June 30, 1995
Key Developments
Snapple Beverage Update
Sales results for Snapple beverages for the first six months of 1996 have been
below management expectations and even with last year. Although Snapple
beverages' sales improved in U.S. grocery channels, its sales were below last
year's levels in cold-channel accounts such as convenience stores and in
underdeveloped markets in the Midwest and South. In an effort to improve
overall sales trends, the Company is implementing a new and integrated
promotion, sampling and advertising campaign to build consumer awareness and
usage of the product on a national basis. In order to support these
efforts, the Company appointed Mike Schott, formerly of Nantucket Nectars and
Arizona Beverages, as President of the Snapple beverage business. Mr. Schott,
who has a significant level of beverage industry expertise, will report
directly to Bill Smithburg, Chairman, President and Chief Executive Officer.
The additional marketing investment of approximately $25 million combined
with the current sales shortfall is expected to take Snapple beverages'
operating income significantly below break-even for the year, but is intended
to help build brand-name awareness and increase usage for the future. Once
the beverage season is completed and management analyzes the results of the
new campaign, the Company will evaluate the best strategic course for this
business.
The Snapple beverage acquisition added $1.8 billion in intangible assets to the
Company's balance sheet as of December 31, 1995. The Company evaluated the
recoverability of Snapple beverages' long-lived assets and intangible assets,
including goodwill, as of December 31, 1995 using its best estimates of
undiscounted future cash flows, and believes that the net carrying value of
$1.9 billion is consistent with the Company's accounting policies and the
requirements of Financial Accounting Standards Board (FASB) Statement #121.
The estimate of future cash flows is subject to change and management's
intention is to assess the carrying value of the Snapple beverage business
using a consistent methodology at the conclusion of this beverage season, or
sooner if events or changes in circumstances indicate such an assessment is
necessary.
11
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Ready-to-Eat Cereal Price Reductions
Beginning in April of this year, significant price reductions were announced by
major ready-to-eat cereal manufacturers. These reductions are expected to have
a significant impact on the sales trends and margins in the ready-to-eat cereal
category. In June 1996, the Company responded to this competitive price move
with a series of price reductions averaging 15 percent on brands that represent
approximately 87 percent of the Company's U.S. Foods ready-to-eat cereal
business. These pricing actions are expected to reduce the Company's total
operating income by $30-$40 million in 1996. For 1997, the pricing actions are
expected to result in lower gross profit margins which will require the Company
to achieve improved levels of efficiency in advertising and merchandising (A&M)
and overhead spending to return the business to higher profit levels.
Consolidated Results
The following tables summarize the net sales and operating results for the six-
months ended June 30, 1996 as compared to the prior year:
<TABLE>
<CAPTION>
NET SALES
for the
Six Months Ended June 30,
Dollars in Millions 1996 1995
Industry Segments U.S. & Canadian International Total U.S. & Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $1,314.0 $303.7 $1,617.7 $1,365.4 $284.6 $1,650.0
Beverages 910.2 172.7 1,082.9 851.1 175.0 1,026.1
Ongoing Business 2,224.2 476.4 2,700.6 2,216.5 459.6 2,676.1
Divested Business -- 4.0 4.0 204.3 340.5 544.8
Total Company $2,224.2 $480.4 $2,704.6 $2,420.8 $800.1 $3,220.9
<CAPTION>
OPERATING INCOME (LOSS)
for the
Six Months Ended June 30,
Dollars in Millions 1996 1995
Industry Segments U.S. & Canadian International Total U.S. & Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $173.9 $ 5.1 $179.0 $ 94.0 $(26.8) $ 67.2
Beverages 78.9 (17.0) 61.9 51.7 (14.0) 37.7
Ongoing Business 252.8 (11.9) 240.9 145.7 (40.8) 104.9
Gains on divestiture -- 2.8 2.8 604.2 566.6 1,170.8
Divested Business -- 0.5 0.5 16.8 16.8 33.6
-- 3.3 3.3 621.0 583.4 1,204.4
Total Company $252.8 $ (8.6) $244.2 $766.7 $542.6 $1,309.3
<FN>
Note: Operating results include certain allocations of overhead expenses.
"Foods": includes all food lines as well as the food service business.
"Beverages": includes Gatorade thirst quencher sports beverages and Snapple premium teas and fruit drinks.
"Ongoing Business": includes the net sales and the operating income (inclusive of restructuring charges in
1995) of all Company businesses not reported as Divested Business (see below). Includes the net sales and
the operating income of the frozen foods business, which was divested on July 9, 1996.
"Divested Business": 1996 includes current year net sales and operating income through the divestiture date
for the Italian products business. 1995 includes prior year net sales and operating income for the
following businesses through their respective divestiture dates: U.S. and Canadian pet food and U.S. bean
and chili (U.S. & Canadian) and European pet food, Mexican chocolate, Dutch honey and Italian
products (International).
</FN>
</TABLE>
12
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated net sales decreased 16 percent due to the absence of divested
businesses in the current year. Excluding divested businesses, ongoing
business sales and volume increased 1 percent.
Consolidated gross profit margin was 46.2 percent in the current year compared
to 45.2 percent in the prior year. The increase in gross profit margin was
primarily due to product mix changes resulting from the portfolio changes. For
ongoing businesses, the gross profit margin increased primarily due to sales
growth and lower manufacturing costs for Gatorade thirst quencher in the United
States, and due to an improved sales mix in International Foods. These
increases were offset partly by decreases in the International Beverages
business.
Selling, general and administrative (SG&A) expenses declined $250.1 million, or
20 percent, due mainly to a 22 percent decrease in A&M expenses. The Company
spent $132.0 million in A&M in the prior year to support divested businesses.
A&M expenses were 23.2 percent of sales during the current year, down from 25.0
percent in the prior year. For ongoing businesses, A&M expenses were down 7
percent from the prior year reflecting increased efficiencies in A&M spending
in U.S. and Canadian Foods and reductions in the European Beverages business.
A&M spending was increased to support Snapple beverages in the United States
and the continued expansion of grain-based foods in Asia. Spending also
increased in U.S. Gatorade thirst quencher, although this mainly reflects
changes in the timing of spending as compared to the prior year. The Company
will continue to implement changes in A&M programs which are intended to
result in more effective merchandising and to remove unprofitable promotions.
Consolidated operating income was $244.2 million for the current year, which
included a $2.8 million gain on the divestiture of the Italian products
business. Prior year operating income was $1.31 billion, which included gains
on divestitures for the following businesses: $513.0 million (U.S. and
Canadian pet food); $91.2 million (U.S. bean and chili); $487.2 million
(European pet foods); $74.5 million (Mexican chocolate); and $4.9 million
(Dutch honey). Prior year operating income also included restructuring
charges of $76.5 million.
Excluding the gains on divestitures, restructuring charges and operating income
from divested businesses in both years, operating income increased 33 percent
from $181.4 million in the prior year to $240.9 million in the current year.
Net financing costs (net interest expense and foreign exchange losses)
decreased $16.2 million in the current year to $58.3 million. Compared to last
year, debt levels declined due to proceeds from the 1995 divestitures.
The effective tax rate in the first six months of 1996 was 40.9 percent versus
40.6 percent in the prior year. Excluding the impact of the gains on
divestitures in both years and restructuring charges and tax rate adjustments
in the prior year, the effective tax rate was 41.0 percent versus 40.6 percent.
13
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Industry Segment Operating Results
Foods
Net sales in the Foods segment decreased by 2 percent as compared to the prior
year due to a decline in U.S. and Canadian sales of 4 percent on a volume
decline of 2 percent. Lower volume was anticipated as the Company implemented
changes in its 1996 A&M programs with the intention of removing unprofitable
trade and consumer promotions from its merchandising mix.
International sales increased 7 percent primarily due to price and volume
increases in Brazil and new markets in Asia, offset partially by a decline in
the European cereal business. In Brazil, the increase in net sales was driven
primarily by price and volume increases, offset partially by unfavorable
foreign currency translations.
Total Foods' operating income for the six months ended June 30, 1996 was $179.0
million, an increase of $111.8 million from the prior year. Excluding
restructuring charges of $68.1 million in the prior year ($39.1 million and
$29.0 million for the U.S. and Canadian and International businesses,
respectively), operating income increased by $43.7 million or 32 percent from
the prior year. The increase reflects an improvement in the U.S. and Canadian
business where operating income, excluding restructuring charges in the prior
year, increased from $133.1 million to $173.9 million. This increase resulted
primarily from improvements in hot cereals, food service and Golden Grain,
offset partly by decreases in snacks and ready-to-eat cereals. The increased
operating income in the U.S. and Canadian business is primarily attributable to
improved efficiency in A&M spending.
Excluding the impact of restructuring charges in the prior year, operating
income in the International Foods business increased by $2.9 million to $5.1
million. This increase was primarily due to an improvement in European
cereals, due largely to lower overhead expenses, which more than offset
declines in Latin America, particularly in the Brazilian pasta business which
experienced declines due to significantly higher wheat costs, and in the
Asia/Pacific region, where underwriting continued in order to expand the grain-
based products business.
Beverages
Net sales for Beverages increased 6 percent on a volume increase of 3 percent.
U.S. and Canadian sales increased 7 percent due to an increase of 11 percent in
Gatorade thirst quencher sales, reflecting successful new packaging and flavor
introductions and more effective use of advertising combined with normal weather
conditions. Snapple beverage sales are even with last year on a volume
decrease of 4 percent. The Company now owns more of Snapple beverage's
distribution system compared to a year ago, which resulted in larger changes in
net sales than in related volume for the beverage business.
International sales decreased 1 percent primarily due to a withdrawal of
Snapple beverages in certain countries where pre-acquisition arrangements
existed in Gatorade thirst quencher in Australia and Korea. These declines more
than offset an increase in sales in Latin America, which was driven primarily
by price and volume increases, offset partially by unfavorable foreign currency
translations.
14
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total Beverages' operating income for the six months ended June 30, 1996 was
$61.9 million, an increase of $24.2 million from the prior year. Excluding
restructuring charges of $8.4 million in the prior year ($8.0 million and $0.4
million for the U.S. and Canadian and International businesses, respectively),
operating income increased by $15.8 million or 34 percent from the prior year.
This increase resulted primarily from improvements in U.S. Gatorade thirst
quencher which more than offset increased operating losses in the Snapple
beverage business. The decline in the Snapple beverage business results is due
to lower volumes and increased A&M and overhead expenses.
In the International Beverages business, operating losses increased from $13.6
million in the prior year to $17.0 million in the current year, exclusive of
restructuring charges. This is primarily due to lower operating results in
Latin America Snapple Beverages and lower Gatorade thirst quencher sales in
Australia and Korea. Operating income improved in the European Gatorade thirst
quencher business.
Three Months Ended June 30, 1996 Compared with Three Months Ended June 30, 1995
Consolidated Results
The following tables summarize the net sales and operating results for the
three months ended June 30, 1996 as compared to the prior year:
<TABLE>
<CAPTION>
NET SALES
for the
Three Months Ended June 30,
Dollars in Millions 1996 1995
Industry Segments U.S. & Canadian International Total U.S. & Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 620.0 $153.4 $ 773.4 $ 627.0 $142.3 $ 769.3
Beverages 609.5 98.9 708.4 563.2 108.1 671.3
Ongoing Business 1,229.5 252.3 1,481.8 1,190.2 250.4 1,440.6
Divested Business -- -- -- 54.2 92.6 146.8
Total Company $1,229.5 $252.3 $1,481.8 $1,244.4 $343.0 $1,587.4
15
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<CAPTION>
OPERATING INCOME (LOSS)
for the
Three Months Ended June 30,
Dollars in Millions 1996 1995
Industry Segments U.S. & Canadian International Total U.S. & Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 70.0 $ 4.2 $ 74.2 $ 2.3 $(33.2) $(30.9)
Beverages 77.7 (8.7) 69.0 43.4 (7.8) 35.6
Ongoing Business 147.7 (4.5) 143.2 45.7 (41.0) 4.7
Gains on divestitures -- -- -- 91.2 561.7 652.9
Divested Business -- -- -- 4.3 0.2 4.5
-- -- -- 95.5 561.9 657.4
Total Company $147.7 $(4.5) $143.2 $141.2 $520.9 $662.1
<FN>
Note: Operating results include certain allocations of overhead expenses.
"Foods": includes all food lines as well as the food service business.
"Beverages": includes Gatorade thirst quencher sports beverages and Snapple premium teas and fruit drinks.
"Ongoing Business": includes the net sales and the operating income (inclusive of restructuring charges
in 1995) of all Company businesses not reported as Divested Business (see below). Includes the net
sales and operating income of the frozen foods business, which was divested on July 9, 1996.
"Divested Business": Includes prior year net sales and operating income for the following businesses through
their respective divestiture dates: U.S. and Canadian pet food and U.S. bean and chili (U.S. & Canadian),
and European pet food, Mexican chocolate, Dutch honey and Italian products (International).
</FN>
</TABLE>
Consolidated net sales decreased 7 percent due to the absence of divested
businesses in the current year. Excluding divested businesses, ongoing
business sales and volume increased 3 percent.
Consolidated gross profit margin was 46.7 percent in the current year compared
to 43.7 percent in the prior year. The increase in gross profit margin was
due to the favorable impact of product mix changes resulting from the portfolio
changes, and increases in ongoing businesses. For ongoing businesses, gross
profit margin increased primarily due to lower production and packaging costs
in the U.S. and Canadian businesses, which were partly offset by a decline in
International Beverages.
Selling, general and administrative (SG&A) expenses declined $78.6 million, or
12 percent, due mainly to a 12 percent decrease in A&M expenses. A&M expenses
were 23.6 percent of sales during the current year, down from 25.0 percent in
the prior year. The Company spent $34.9 million in A&M in the prior year to
support divested businesses. During the current year, increased efficiencies in
A&M spending in the U.S. and Canadian Foods business were partially offset by
increases to support the U.S. and Canadian Gatorade thirst quencher and Snapple
beverage businesses. The Company will continue to implement changes in A&M
programs which are intended to eliminate ineffective merchandising spending in
order to increase profitability.
Consolidated operating income was $143.2 million for the current year. Prior
year operating income was $662.1 million, which included a $487.2 million gain
on the sale of the European pet food business, a $74.5 million gain on the sale
of the Mexican chocolate business and a $91.2 million gain on the sale of the
U.S. bean and chili business. Prior year operating income also included
restructuring charges of $76.5 million. Excluding the gains on divestitures
and operating income from divested
16
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
businesses in both years, as well as restructuring charges, operating
income increased by $62.0 million or 76 percent from the prior year.
Net financing costs increased by $1.0 million in the current year to $28.4
million. The increase was due to increased foreign exchange losses, primarily
in the Latin American countries.
The effective tax rate in the current year was 40.2 percent versus 43.4 percent
in the prior year. Excluding the impact of the gains on divestitures,
restructuring charges and tax rate adjustments in the prior year, the effective
tax rate was 40.3 percent.
Industry Segment Operating Results
Foods
Net sales in the Foods segment increased by 1 percent as compared to the prior
year. This increase was due to an increase in sales in the International Foods
business of 8 percent mostly offset by a decline of 1 percent in sales in the
U.S. and Canadian business. The increase in International Foods was primarily
due to increases in Brazil offset partly by a decrease in European cereals. In
Brazil, the increase in net sales was driven primarily by price and volume
increases offset partially by unfavorable foreign currency impacts.
The decline in U.S. and Canadian net sales is driven largely by declines in the
ready-to-eat cereal and Golden Grain businesses, due mainly to lower volume
associated with changes in A&M programs and customer rebates related to price
reductions, and in the food service coffee business, due to the loss of
unprofitable volume and reduced pricing related to lower commodity costs.
These declines were partly offset by increased sales in hot cereals.
Total Foods' operating income in the current year was $74.2 million, an
increase of $105.1 million from the prior year operating loss of $30.9 million.
Excluding restructuring charges of $68.1 million ($39.1 million and $29.0
million for the U.S. and Canadian and International businesses, respectively),
operating income increased by $37.0 million. The increase reflects improvement
in the U.S. and Canadian business where operating income, excluding
restructuring charges in the prior year, increased from $41.4 million to $70.0
million. This increase reflects improvements in the hot cereals, food service
and Golden Grain businesses offset partly by decreases in snacks and ready-to-
eat cereals. The decline in ready-to-eat cereals is largely due to the impact
of the recently announced price reductions in the current year.
Excluding the impact of restructuring charges in the prior year, operating
income in the International Foods business increased $8.4 million. This
increase reflects improvements in the European cereals business due largely to
lower overhead expenses, as well as in Latin America and the Asia/Pacific
region, which were offset by declines in the Brazilian pasta business due to
significantly higher wheat costs.
17
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Beverages
Net sales in the Beverages business increased 6 percent on a volume increase of
3 percent. This increase was driven by the U.S. and Canadian business, where
sales rose 8 percent due to a 16 percent increase in Gatorade thirst quencher
sales, partly offset by a 7 percent decrease in Snapple beverage sales.
International sales decreased 9 percent primarily due to declines in the
European Gatorade thirst quencher business and the withdrawal of the Snapple
beverage business in certain countries.
Beverages' operating income of $69.0 million increased $33.4 million from $35.6
million in the prior year. Excluding restructuring charges of $8.4 million in
the prior year, operating income improved $25.0 million or 57 percent driven by
improvements in U.S. and Canadian Gatorade thirst quencher offset by an
increased operating loss in the Snapple beverages business. The Snapple
beverage business results are due to lower sales as well as increased overhead
expenses.
For International Beverages, the operating loss increased from $7.8 million in
the prior year to $8.7 million in the current year. Excluding the impact of
restructuring charges in the prior year, the operating loss increased by $1.3
million primarily reflecting cost increases to expand the business in the
Asia/Pacific region and Latin America.
Liquidity and Capital Resources
Short-term and long-term debt (total debt) as of June 30, 1996 was $1.65
billion, a decrease of $110.7 million from December 31, 1995. The total debt-
to-total capitalization ratio was 59.1 percent and 61.7 percent as of June 30,
1996 and December 31, 1995, respectively.
The Company renegotiated and reduced the level of its revolving credit
facilities by a total of $300.0 million during the second quarter. The
Company's revolving credit facilities now consist of a $900.0 million annually
extendible five-year revolving credit facility and a $300.0 million 364-day
annually extendible revolving credit facility which may, at the Company's
option, be converted into a two-year term loan.
Following the announcement by the Company in June 1996 that the Snapple
beverage business would operate at a level significantly below break-even for
the year and that price reductions in the ready-to-eat cereal category would
negatively impact 1996 results, the credit rating agencies announced that they
are reviewing the status of its debt ratings for a potential downgrade, as
follows: Standard and Poor's ("CreditWatch with negative implications");
Fitch's ("FitchAlert"), and Moody's ("under review"). The Company's current
debt and commercial paper ratings are as follows: Standard and Poor's (A- and
A2); Fitch's (A- and F2); and Moody's (A3 and P2).
Net cash provided by operating activities was $241.2 million and $322.8 million
for the six months ended June 30, 1996 and 1995, respectively. The decrease
in net cash provided by operating activities reflects increased working capital
requirements partially offset by changes in other current assets and other
current liabilities. Capital expenditures for the current and prior year were
$102.4 million and
18
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$156.2 million, respectively. During the current and prior year, the Company
had proceeds related to business divestitures of $42.1 million and $1.25
billion, respectively, and outlays related to business acquisitions of $49.3
million during the prior year. Capital expenditures in the second half of the
fiscal year are expected to increase from current levels as the Company has
plans to invest in the expansion of production capacity for beverages in the
United States and for grain-based products in the United States and China.
The Company expects that capital expenditures and cash dividends for the
remainder of the year will be financed through a combination of cash flow from
operating activities and the proceeds from the divestiture of the frozen foods
business.
The majority of the Company's international business is in Latin American
countries, principally Brazil, where hedging markets are rapidly evolving but
are not yet as developed or efficient as the traditional foreign exchange
markets. Historically, the Company has not hedged in Latin America because the
opportunities were more limited and costly. The Company expects to use Latin
American hedge instruments in the future, where economical, to reduce exposure
to potentially significant currency movement.
Pending Accounting Change
In October 1995, the FASB issued Statement #123, "Accounting for Stock-Based
Compensation." The Company is required to adopt this standard no later than
December 31, 1996. This Statement encourages companies to recognize expense
for stock options at an estimated fair value based on an option pricing model.
If expense is not recognized for stock options, pro forma footnote disclosure
is required of what net income and earnings per share would have been under the
Statement's approach to valuing and expensing stock options. Certain other new
disclosures will be required. The Company will implement the provisions of
this Statement in 1996, but has decided that it will not recognize the expense
related to stock options in the financial statements.
Subsequent Event
The Company signed a definitive agreement to sell its North American frozen
foods business on May 15, 1996. The sale was completed on July 9, 1996 for
$185.8 million. The gain on the sale is estimated to be approximately $134
million.
Cautionary Statement on Forward-Looking Statements
Forward-looking statements, within the meaning of Section 21E of the Securities
and Exchange Act of 1934, are made of this Management's Discussion and
Analysis. Company results may differ materially from those of the forward-
looking statements. Forward-looking statements are based on management's
current views and assumptions, and involve risks and uncertainties that could
significantly affect expected results. For example, operating results may be
affected by external factors such as: actions of competitors; changes in laws
and regulations, including changes in accounting standards; distributor
relations; customer and consumer demand; effectiveness of A&M spending or
programs; consumer perception of health-related issues; fluctuations in the
cost and availability of supply-chain resources; and foreign economic
conditions, including currency rate fluctuations.
19
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Specifically for the Snapple beverage business, the operating results for the
rest of 1996 and beyond will depend in part on the successful execution of the
new promotion, sampling and advertising efforts in the upcoming quarter, as
well as on the Company's ability to hire experienced management with beverage
expertise. For the ready-to-eat cereal business, the ability to return the
business to higher profit levels will depend to a large degree on the
competitive environment as well as the ability of the Company to achieve
improved levels of A&M and overhead efficiency.
20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Note 2 in Part I is incorporated by reference herein.
Item 4 Submission of Matters to a Vote of Security-Holders.
(a) The Company's Annual Meeting of Shareholders was held on May 8, 1996.
Represented at the Meeting, either in person or by proxy, were
126,288,544 voting shares, of a total below.
(c) (i) To elect three directors in Class I to serve for three-year
terms expiring in May 1999 or until their successors are
elected and qualified. All nominees are named below.
- Kenneth I. Chenault
Votes For Election - 122,687,264
Votes Withheld - 3,601,280
- Thomas C. MacAvoy
Votes For Election - 122,539,262
Votes Withheld - 3,749,282
- Walter J. Salmon
Votes For Election - 122,531,635
Votes Withheld - 3,756,909
There were no votes against, abstentions or broker non-votes
with respect to the election of any nominee named above.
(ii) To ratify the Board of Directors' appointment of Arthur Andersen
LLP as independent public accountants for the Company for 1996.
Votes For Proposal - 124,114,255
Votes Against Proposal - 1,648,534
Votes Abstaining - 525,755
Broker Non-Votes - 0
Votes Withheld - 0
(iii) To consider a shareholder proposal regarding compensation
disclosure.
Votes for Proposal - 11,869,853
Votes Against Proposal - 93,852,135
Votes Abstaining - 2,168,516
Broker Non-Votes - 18,398,040
Votes Withheld - 0
(iv) To consider a shareholder proposal regarding the retention of
an investment banking firm.
Votes for Proposal - 11,670,970
Votes Against Proposal - 95,356,466
Votes Abstaining - 2,256,155
Broker Non-Votes - 17,004,953
Votes Withheld - 0
21
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security-Holders (Continued).
(a) Because of the change in year end, the Company also held an
Annual Meeting of Shareholders on November 8, 1995. Represented
at the Meeting, either in person or by proxy, were
123,803,119 voting shares, of a total below.
(c) (i) To elect five directors in Class III to serve for three-year
terms expiring in November 1998 or until their successors
are elected and qualified. All nominees are named below.
- Frank C. Carlucci
Votes For Election - 119,081,186
Votes Withheld - 4,721,933
- Silas S. Cathcart
Votes For Election - 119,388,405
Votes Withheld - 4,414,714
- Vernon R. Loucks, Jr.
Votes For Election - 119,124,317
Votes Withheld - 4,678,802
- William D. Smithburg
Votes For Election - 117,798,196
Votes Withheld - 6,004,923
- William L. Weiss
Votes For Election - 119,469,370
Votes Withheld - 4,333,749
There were no votes against, abstentions or broker non-votes
with respect to the election of any nominee named above.
(ii) To ratify the Board of Directors' appointment of Arthur Andersen
LLP as independent public accountants for the Company for
the six-month transition period ended December 31, 1995.
Votes For Proposal - 121,667,229
Votes Against Proposal - 1,570,360
Votes Abstaining - 565,530
Broker Non-Votes - 0
Votes Withheld - 0
(iii) To consider a shareholder proposal regarding compensation
disclosure.
Votes for Proposal - 11,896,817
Votes Against Proposal - 87,410,035
Votes Abstaining - 2,902,872
Broker Non-Votes - 21,593,395
Votes Withheld - 0
22
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
Item 6(a) See Exhibit 11.
Item 6(b) A Form 8-K was filed on May 20, 1996 to report the adoption of a new
shareholder rights plan to replace the plan adopted in 1986, which
expired on July 30, 1996.
All other items in Part II are either inapplicable to the Company
during the quarter ended June 30, 1996, 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.
23
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 August 9, 1996 Robert S. Thomason
Robert S. Thomason
Senior Vice President - Finance and
Chief Financial Officer
Date August 9, 1996 Thomas L. Gettings
Thomas L. Gettings
Vice President and
Corporate Controller
24
EXHIBIT INDEX
Exhibit Paper (P) or
Number Description Electronic (E)
(11) Statement Re Computation E
of Per Share Earnings
(27) Financial Data Schedule E
(submitted to the Securities
and Exchange Commission
in electronic format)
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 104
<SECURITIES> 0
<RECEIVABLES> 511
<ALLOWANCES> 34
<INVENTORY> 367
<CURRENT-ASSETS> 1214
<PP&E> 1971
<DEPRECIATION> 793
<TOTAL-ASSETS> 4728
<CURRENT-LIABILITIES> 1751
<BONDS> 1041
0
100
<COMMON> 840
<OTHER-SE> 202
<TOTAL-LIABILITY-AND-EQUITY> 4728
<SALES> 2705
<TOTAL-REVENUES> 2705
<CGS> 1455
<TOTAL-COSTS> 1455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 164
<INCOME-TAX> 67
<INCOME-CONTINUING> 97
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97
<EPS-PRIMARY> .70
<EPS-DILUTED> .69
</TABLE>
EXHIBIT (11)
THE QUAKER OATS COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Six Months Ended
June 30, June 30,
1996 1995
Calculation of Fully Diluted Earnings Per Share
Dollars in Millions (Except Per Share Data)
Income From Continuing Operations $ 96.8 $ 710.3
Less: Adjustments attributable to conversion
of ESOP Convertible Preferred Stock (0.5) (0.6)
Net Income Used for Fully Diluted Calculation $ 96.3 $ 709.7
Shares in Thousands
Average Number of Common Shares Outstanding 135,213 133,948
Plus Dilutive Securities:
Stock Options 971 1,297
ESOP Convertible Preferred Stock 2,479 2,615
Average Shares Outstanding Used for Fully
Diluted Calculation 138,663 137,860
Fully Diluted Earnings Per Share $0.69 $5.14
