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 March 31, 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 April 30, 1996, was 135,290,190.
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 March 31, 1996 and 1995 3
Condensed Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1996 and 1995 5
Net Sales and Operating Income by Segment for the
Three Months Ended March 31, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
EXHIBIT 11 18
2
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) March 31,
1996 1995
Net sales $1,222.8 $1,633.5
Cost of goods sold 664.5 871.0
Gross profit 558.3 762.5
Selling, general and administrative expenses 475.4 646.9
Gains on divestitures (2.8) (517.9)
Interest expense 29.5 46.5
Interest income (1.4) (2.0)
Foreign exchange loss - net 1.8 2.6
Income before income taxes 55.8 586.4
Provision for income taxes 23.6 220.3
Net income 32.2 366.1
Preferred dividends - net of tax 1.0 1.0
Net Income Available for Common $ 31.2 $ 365.1
Per Common Share:
Net income $ 0.23 $ 2.73
Dividends declared $ 0.285 $ 0.285
Average Number of Common Shares
Outstanding (in thousands) 135,102 133,818
Reinvested Earnings:
Balance beginning of period $1,433.6 $ 867.6
Net income 32.2 366.1
Dividends (39.1) (38.7)
Common stock issued for stock purchase
and incentive plans (3.3) (1.3)
Balance end of period $1,423.4 $1,193.7
See accompanying notes to the condensed consolidated financial statements.
3
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
Dollars in Millions 1996 1995
Assets
Current Assets:
Cash and cash equivalents $ 70.6 $ 93.2
Trade accounts receivable - net of allowances 408.8 398.3
Inventories:
Finished goods 242.5 203.6
Grains and raw materials 79.4 69.7
Packaging materials and supplies 36.9 33.4
Total inventories 358.8 306.7
Other current assets 277.6 281.9
Total Current Assets 1,115.8 1,080.1
Property, plant and equipment 1,935.9 1,946.0
Less accumulated depreciation 770.4 778.2
Property - net 1,165.5 1,167.8
Intangible assets - net of amortization 2,289.3 2,309.2
Other assets 57.0 63.3
Total Assets $4,627.6 $4,620.4
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 610.8 $ 643.4
Current portion of long-term debt 69.8 68.6
Trade accounts payable 305.5 298.4
Other current liabilities 725.2 691.3
Total Current Liabilities 1,711.3 1,701.7
Long-term Debt 1,034.1 1,051.8
Other Liabilities 541.0 536.3
Deferred Income Taxes 231.5 233.6
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 (68.3) (71.7)
Treasury Preferred Stock, at cost, 134,406 shares
and 122,562 shares, respectively (11.4) (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 1,423.4 1,433.6
Cumulative translation adjustment (70.4) (77.8)
Deferred compensation (117.8) (118.1)
Treasury common stock, at cost, 32,746,061
shares and 33,172,737 shares, respectively (985.8) (998.4)
Total Common Shareholders' Equity 1,089.4 1,079.3
Total Liabilities and Shareholders' Equity $4,627.6 $4,620.4
See accompanying notes to the condensed consolidated financial statements.
4
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
Dollars in Millions March 31,
1996 1995
Cash Flows from Operating Activities:
Net income $ 32.2 $ 366.1
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 50.0 55.5
Deferred income taxes 0.9 1.2
Gains on divestitures (2.8) (517.9)
Loss on disposition of property and equipment 2.8 4.3
Increase in trade accounts receivable (49.9) (12.9)
Increase in inventories (59.0) (39.4)
Increase in other current assets (1.9) (34.3)
Increase in trade accounts payable 41.8 45.8
Increase in other current liabilities 23.5 194.8
Change in deferred compensation 3.7 3.7
Other items 19.0 (6.1)
Net Cash Provided by Operating Activities 60.3 60.8
Cash Flows from Investing Activities:
Additions to property, plant and equipment (50.7) (70.9)
Business acquisitions -- (44.6)
Business divestitures 43.2 730.3
Change in other assets 0.3 2.3
Net Cash (Used in) Provided by Investing Activities (7.2) 617.1
Cash Flows from Financing Activities:
Cash dividends (39.1) (38.7)
Change in short-term debt (32.1) (705.6)
Proceeds from short-term debt to be refinanced -- 100.0
Proceeds from long-term debt 2.6 0.1
Reduction of long-term debt (18.8) (34.9)
Issuance of common treasury stock 6.6 4.0
Repurchases of preferred stock (0.8) (0.5)
Net Cash Used in Financing Activities (81.6) (675.6)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents 5.9 0.3
Net (Decrease) Increase in Cash and Cash Equivalents (22.6) 2.6
Cash and Cash Equivalents - Beginning of Year 93.2 103.0
Cash and Cash Equivalents - End of Quarter $ 70.6 $ 105.6
See accompanying notes to the condensed consolidated financial statements.
5
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
Net Sales Operating Income
Three Months Three Months
Ended Ended
Dollars in Millions March 31, March 31,
1996 1995 1996 1995
Foods
U.S. and Canadian $ 694.0 $ 738.4 $103.9 $ 91.7
International 150.3 142.3 0.9 6.4
Total Foods $ 844.3 $ 880.7 $104.8 $ 98.1
Beverages
U.S. and Canadian $ 300.7 $ 287.9 $ 1.2 $ 8.3
International 73.8 66.9 (8.3) (6.2)
Total Beverages $ 374.5 $ 354.8 $ (7.1) $ 2.1
Divested Businesses (a) $ 4.0 $ 398.0 $ 3.3 $547.0
Total Sales/Operating Income $1,222.8 $1,633.5 $101.0 $647.2
Less: General corporate expenses 15.3 13.7
Interest expense - net 28.1 44.5
Foreign exchange loss - net 1.8 2.6
Income before income taxes $ 55.8 $586.4
Note: Operating income includes certain allocations of overhead expenses.
(a) Total sales for the international divested businesses were $4.0 million and
$247.9 million for the three months ended March 31, 1996 and 1995, respectively.
Total sales for the U.S. and Canadian divested businesses were $150.1 million
for the three months ended March 31, 1995. Total operating income for the
international divested businesses was $3.3 million, including a gain of $2.8
million on the sale of the Italian products business, and $21.5 million,
including a gain of $4.9 million on the sale of the Dutch honey business,
for the three months ended March 31, 1996 and 1995, respectively. Total
operating income for the U.S. and Canadian divested businesses was $525.5
million, including a gain of $513.0 million on the sale of the U.S. and Canadian
pet foods business, for the three months ended March 31, 1995.
6
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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
three months ended March 31, 1996 and 1995, the condensed
consolidated balance sheet as of March 31, 1996, and the condensed
consolidated statements of cash flows for the three months ended
March 31, 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 March 31, 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 - Fiscal-Year Change
To capture the results of a full beverage season in a single fiscal-
year period, the Company changed its fiscal year to align with the
calendar year, beginning January 1, 1996. A six month transition
period of July 1, 1995 through December 31, 1995 ("transition
period") preceded the start of this new fiscal year. These financial
statements reflect the first quarter results of the new fiscal year.
Note 3 - 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.
7
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
Note 4 - 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. The impact of this new Statement has not yet
been completely evaluated.
Note 5 - Divestitures
On January 15, 1996, the Company completed the sale of its Italian
products business and realized a gain of $2.8 million.
On March 12, 1996, the Company announced its intention to sell its
North American frozen foods business, which includes Aunt Jemima
frozen breakfast products and Celeste frozen pizza products. The
combined annual sales of the Aunt Jemima frozen breakfast products
and Celeste frozen pizza products businesses are approximately $175
million. The planned divestiture does not include the Aunt Jemima
syrup, corn products and pancake mix businesses.
8
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared with
Three Months Ended March 31, 1995
Summary
This report discusses the three-month period ended March 31, 1996,
which is the first quarter of the new fiscal year reporting cycle
starting January 1, 1996.
Presentation
The comparisons of the results for the three months ended March 31,
1996 to those of the three months ended March 31, 1995 ("last year")
are affected by the significant changes the Company has made in its
portfolio of businesses since November 1994. 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 major transactions, comparative
quarter results are more difficult to analyze. To aid in the analysis
of quarterly operating results, the discussion will compare the
financial results as reported, then break out the impact of divested
businesses, and compare the "ongoing" business results by business
segment.
The Snapple Acquisition
The acquisition of Snapple beverages in December 1994 for a tender-
offer price of $1.7 billion was the largest in the Company's history.
Since its acquisition, the Company has worked to upgrade Snapple
beverages' manufacturing standards, integrate its order-entry and
accounting systems, improve the efficiency and effectiveness of its
advertising and merchandising (A&M) programs and improve distributor
communications. Consolidated Snapple beverages' sales increased 10
percent versus last year on a volume increase of 4 percent.
Improving the financial results of the Snapple beverage business
remains the greatest challenge facing the Company. This will require
achieving significant increases in profitability during 1996. One
key to this challenge is achieving profitable volume growth which is
dependent upon successful execution of new marketing and sales
strategies. Achieving profitability is critical to the future
success and value of the Snapple beverage 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,
including intangible assets, 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
periodically assess the recoverability of long-lived assets using a
consistent methodology.
9
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Results
Net Sales
Consolidated net sales decreased 25 percent primarily due to the
absence of the divested businesses' results in the current quarter.
Excluding the divested businesses' results, sales decreased 1 percent
while volume increased 1 percent.
The following table summarizes the net sales comparisons for the
current quarter as compared to last year:
<TABLE>
<CAPTION>
Dollars in Millions Three Months Ended March 31,
1996 1995
U.S. U.S.
Industry Segments & Canadian International Total & Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 694.0 $150.3 $ 844.3 $ 738.4 $ 142.3 $ 880.7
Beverages 300.7 73.8 374.5 287.9 66.9 354.8
Ongoing Businesses 994.7 224.1 1,218.8 1,026.3 209.2 1,235.5
Divested Businesses -- 4.0 4.0 150.1 247.9 398.0
Total Company $ 994.7 $228.1 $1,222.8 $1,176.4 $ 457.1 $1,633.5
<FN>
"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 Businesses": includes the net sales of all Company businesses not reported as Divested Businesses (see below).
"Divested Businesses": 1996 includes net sales of the Italian products business through its divestiture date. 1995 includes
the net sales of the Italian products business and 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, and Dutch honey
(International).
</TABLE>
Foods
Net sales decreased by 4 percent for the Foods business,
representing a 6 percent decline in the U.S. and Canadian business,
partially offset by a 6 percent increase in the international
business. Volume in the U.S. and Canadian Foods business declined 3
percent, reflecting changes in A&M programs undertaken since last
year to increase profitability. International sales reflect
increases in Brazil and business expansion in the Asia/Pacific
region, 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
impacts.
Beverages
Net sales in the Beverages business increased 6 percent on a volume
increase of 5 percent. U.S. and Canadian sales increased 4 percent
with Snapple beverages increasing 11 percent and Gatorade thirst
quencher increasing 1 percent. Excluding the impact of price
increases in the current quarter, U.S. and Canadian beverage sales
increased 2 percent.
International sales increased 10 percent primarily due to increases
in Gatorade thirst quencher in Latin America and Europe. In Latin
America, the increase in net sales was driven primarily by price and
volume increases offset partially by unfavorable foreign currency
impacts.
10
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Financial Highlights
Consolidated gross profit margin was 45.7 percent in the current
quarter compared to 46.7 percent last year. The decrease in gross
profit margin was primarily due to product mix changes resulting from
the portfolio changes, particularly due to the increase in Snapple
beverages' net sales in relation to those of the total Company.
Snapple beverages has a lower gross profit margin than the Company's
historical average because of its use of external manufacturing and
distribution networks. Gross profit margin also declined due to
increases in commodity and packaging costs in the U.S. and Canadian
Foods businesses which were partly offset by improved margins in the
U.S. and Canadian Beverages business.
Selling, general and administrative (SG&A) expenses declined $171.5
million, or 27 percent, due mainly to a 32 percent decrease in A&M
expenses. A&M expenses were 22.6 percent of sales during the current
quarter, down from 24.9 percent last year. The Company will continue
to implement changes in A&M programs which are intended to increase
their effectiveness. The Company spent $97.1 million in A&M last
year to support divested businesses. During the quarter, increased
efficiencies in A&M spending in U.S. and Canadian Gatorade thirst
quencher and in the U.S. and Canadian Foods businesses offset
increases to support Snapple beverages and the continued expansion of
grain-based foods and beverages in the Asia/Pacific region.
Operating Income
Consolidated operating income was $101.0 million for the current
quarter, which included a $2.8 million gain on the divestiture of the
Italian products business. Last year's operating income was $647.2
million, which included a $513.0 million gain on the sale of the
North American pet food business and a $4.9 million gain on the sale
of the Dutch honey business. Excluding the gains on divestitures and
operating income from divested businesses in both quarters, operating
income declined by 3 percent from $100.2 million last year to $97.7
million in the current quarter.
The following table summarizes the operating results for the quarter
as compared to last year:
<TABLE>
<CAPTION>
Dollars in Millions Three Months Ended March 31,
1996 1995
Industry Segments U.S. & Canadian International Total U.S. & Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 103.9 $ 0.9 $ 104.8 $ 91.7 $ 6.4 $ 98.1
Beverages 1.2 (8.3) (7.1) 8.3 (6.2) 2.1
Ongoing Businesses 105.1 (7.4) 97.7 100.0 0.2 100.2
Divested Businesses -- 3.3 3.3 525.5 21.5 547.0
Total Company $ 105.1 $ (4.1) $ 101.0 $ 625.5 $ 21.7 $ 647.2
<FN>
Note: Operating income includes 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 Businesses": includes the operating income of all Company businesses not reported as Divested Businesses (see below).
"Divested Businesses": 1996 includes the operating income of the Italian products business through the divestiture date,
including the gain on the divestiture of $2.8 million. 1995 includes the operating income of the Italian products business
and the following businesses through their respective divestiture dates: U.S. and Canadian pet food, including the gain
on the divestiture of $513.0 million, and U.S. bean and chili (U.S. & Canadian), and European pet food, Mexican chocolate,
and Dutch honey, including the gain on the divestiture of $4.9 million, (International).
</TABLE>
11
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Foods
Total Foods' operating income in the quarter was $104.8 million, an
increase of 7 percent from last year's operating income of $98.1
million. The increase reflects an improvement of 13 percent in the
U.S. and Canadian business, where operating income rose from $91.7
million last year to $103.9 million during the current quarter. 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. Operating income in the International Foods business
declined by $5.5 million compared to last year due to declines in
Latin America and in the Asia/Pacific region, where underwriting
continued in order to expand the grain-based products business.
Beverages
The Beverages business reported an operating loss of $7.1 million
during the current quarter, compared to operating income of $2.1
million last year. Most of the decline is due to lower operating
results in the U.S. and Canadian business, where operating losses
increased in the Snapple beverage business and more than offset
improvements in Gatorade thirst quencher. The decline in the Snapple
beverage business results is due to increased A&M spending
(principally for equipment and shelf resets to prepare for the 1996
season), increased overhead expense and additional manufacturing
costs due to the operation of the new plant in Tolleson, Arizona
which more than offset the favorable impact of increased sales.
In the International Beverages business, the operating loss increased
from $6.2 million last year to $8.3 million in the current quarter.
This is primarily due to lower operating results in the Asia/Pacific
region, where underwriting costs increased to expand the Beverages
business, offset partly by improved results in the European Gatorade
thirst quencher business.
Interest, Foreign Exchange and Income Taxes
Net financing costs (net interest expense and net foreign exchange
loss) decreased $17.2 million in the current quarter to $29.9
million. The decline was primarily due to additional interest
expense last year related to higher debt levels.
With the divestiture of the European pet food business and the
Italian products business, the Company's exposure to European foreign
currency fluctuations is significantly reduced. The majority
of the Company's international business is now in Latin American
countries like Brazil, where hedging opportunities are more limited
and costly. The Company finances these businesses with equity,
local currency borrowings, U.S. dollar-denominated debt, parent
company loans or a combination of all four. The mix of financing
in hyper-inflationary countries has an impact on the level of interest
expense as well as the resulting foreign exchange translation gains
or losses incurred when foreign balance sheets are converted into U.S.
dollars.
12
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The effective tax rate in the first quarter was 42.3 percent versus
37.6 percent last year. Excluding the impact of the gains on
divestitures in both quarters, the effective tax rate was 42.5
percent versus 40.0 percent, which reflects changes in the impact of
non-deductible amortization of intangibles. The Company has
evaluated its deferred tax assets and believes that future taxable
income is sufficient to realize a majority of these assets. A
valuation allowance has been provided for the deferred tax assets
that are not expected to be realized.
Liquidity and Capital Resources
On December 6, 1994, the Company acquired Snapple Beverage Corp. for
a tender offer price of $1.7 billion. The acquisition was initially
financed with commercial paper borrowings. During fiscal 1995, the
Company divested businesses for approximately $1.7 billion. The
after-tax proceeds on the fiscal 1995 divestitures of $1.25 billion
were used to reduce the commercial paper borrowings.
Short-term and long-term debt (total debt) as of March 31, 1996 was
$1.71 billion, a decrease of $49.1 million from December 31, 1995.
The total debt-to-total capitalization ratio was 60.7 percent and
61.7 percent as of March 31, 1996 and December 31, 1995, respectively.
Net cash provided by operating activities was $60.3 million and $60.8
million for the three months ended March 31, 1996 and 1995,
respectively. Capital expenditures for the current and last year
quarter were $50.7 million and $70.9 million, respectively. During
the current and last year quarter, the Company had proceeds from
investing activities related to business divestitures of $43.2
million and $730.3 million, respectively, and outlays related to
business acquisitions of $44.6 million during last year. The Company
expects that its future capital expenditures and cash dividends will
be financed through a combination of cash flow from operating
activities and debt financing. Capital expenditures are expected to
increase from current levels in the near term as the Company has
plans to invest in the worldwide expansion of production capacity for
beverages and for grain-based products in the United States and
China.
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. The impact of this new Statement has not yet
been completely evaluated.
13
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 throughout this
Management's Discussion and Analysis. Company results may differ
materially from those in 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 the outcome of supply-chain management
programs, the effectiveness of a change in its advertising and
merchandising support, and new marketing and promotional programs, in
addition to external factors such as: actions of competitors;
changes in laws and regulations, including changes in accounting
standards; distributor relations; customer demand; effectiveness of
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.
14
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Note 3 in Part I is incorporated by reference herein.
Item 6(a) See Exhibit 11.
All other items in Part II are either inapplicable to the
Company during the quarter ended March 31, 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.
15
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 May 13, 1996 Robert S. Thomason
Robert S. Thomason
Senior Vice President - Finance and
Chief Financial Officer
Date May 13, 1996 Thomas L. Gettings
Thomas L. Gettings
Vice President and
Corporate Controller
16
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)
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 71
<SECURITIES> 0
<RECEIVABLES> 436
<ALLOWANCES> 27
<INVENTORY> 359
<CURRENT-ASSETS> 1116
<PP&E> 1936
<DEPRECIATION> 770
<TOTAL-ASSETS> 4628
<CURRENT-LIABILITIES> 1711
<BONDS> 1034
0
100
<COMMON> 840
<OTHER-SE> 170
<TOTAL-LIABILITY-AND-EQUITY> 4628
<SALES> 1223
<TOTAL-REVENUES> 1223
<CGS> 665
<TOTAL-COSTS> 665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 56
<INCOME-TAX> 24
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
EXHIBIT (11)
THE QUAKER OATS COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended
March 31, March 31,
1996 1995
Calculation of Fully Diluted Earnings Per Share
Dollars in Millions (Except Per Share Data)
Income From Continuing Operations $ 32.2 $ 366.1
Less: Adjustments attributable to conversion
of ESOP Convertible Preferred Stock (0.2) (0.3)
Net Income Used for Fully Diluted Calculation $ 32.0 $ 365.8
Shares in Thousands
Average Number of Common Shares Outstanding 135,102 133,818
Plus Dilutive Securities:
Stock Options 992 1,251
ESOP Convertible Preferred Stock 2,494 2,627
Average Shares Outstanding Used for Fully
Diluted Calculation 138,588 137,696
Fully Diluted Earnings Per Share $ 0.23 $ 2.65
