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, 1997
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 June 30, 1997 was 137,370,179.
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, 1997 and 1996 3-4
Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1997 and 1996 6
Net Sales and Operating Income by Segment for the Six and
Three Months Ended June 30, 1997 and 1996 7-8
Notes to Condensed Consolidated Financial Statements 9-12
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13-20
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 22
SIGNATURES 23
EXHIBIT INDEX 24
EXHIBIT 11 25
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,
1997 1996
Net sales $ 2,597.2 $ 2,704.6
Cost of goods sold 1,331.8 1,454.6
Gross profit 1,265.4 1,250.0
Selling, general and administrative expenses 1,012.0 1,030.6
Loss (gain) on divestitures 1,414.6 (2.8)
Restructuring charges 11.8 --
Interest expense 49.5 57.7
Interest income (3.3) (3.0)
Foreign exchange loss - net 5.0 3.6
(Loss) income before income taxes (1,224.2) 163.9
(Benefit) provision for income taxes (190.2) 67.1
Net (Loss) Income (1,034.0) 96.8
Preferred dividends - net of tax 1.7 2.0
Net (Loss) Income Available for Common $(1,035.7) $ 94.8
Per Common Share:
Net (loss) income $ (7.58) $ 0.70
Dividends declared $ 0.57 $ 0.57
Average Number of Common Shares
Outstanding (in thousands) 136,572 135,213
Reinvested Earnings:
Balance beginning of period $ 1,521.3 $ 1,433.6
Net (loss) income (1,034.0) 96.8
Dividends (79.0) (78.4)
Common stock issued for stock purchase
and incentive plans -- (3.0)
Balance end of period $ 408.3 $ 1,449.0
See accompanying notes to the condensed consolidated financial statements.
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,
1997 1996
Net sales $ 1,395.5 $ 1,481.8
Cost of goods sold 704.1 790.1
Gross profit 691.4 691.7
Selling, general and administrative expenses 520.5 555.2
Loss on divestiture 10.6 --
Restructuring charges 11.8 --
Interest expense 24.0 28.2
Interest income (1.8) (1.6)
Foreign exchange loss - net 2.5 1.8
Income before income taxes 123.8 108.1
Provision for income taxes 48.0 43.5
Net Income 75.8 64.6
Preferred dividends - net of tax 0.8 1.0
Net Income Available for Common $ 75.0 $ 63.6
Per Common Share:
Net income $ 0.57 $ 0.47
Dividends declared $ 0.285 $ 0.285
Average Number of Common Shares
Outstanding (in thousands) 136,795 135,329
Reinvested Earnings:
Balance beginning of period $ 372.0 $ 1,423.4
Net income 75.8 64.6
Dividends (39.5) (39.3)
Common stock issued for stock purchase
and incentive plans -- 0.3
Balance end of period $ 408.3 $ 1,449.0
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
Dollars in Millions 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 100.6 $ 110.5
Trade accounts receivable - net of allowances 383.3 294.9
Inventories:
Finished goods 197.8 181.8
Grains and raw materials 67.5 62.1
Packaging materials and supplies 26.4 31.0
Total inventories 291.7 274.9
Other current assets 415.4 209.4
Total Current Assets 1,191.0 889.7
Property, plant and equipment 1,939.9 1,943.3
Less accumulated depreciation 771.4 742.6
Property - net 1,168.5 1,200.7
Intangible assets - net of amortization 415.7 2,237.2
Other assets 53.9 66.8
Total Assets $2,829.1 $4,394.4
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 90.4 $ 517.0
Current portion of long-term debt 118.0 51.1
Trade accounts payable 261.0 210.2
Income taxes payable 121.7 42.4
Other current liabilities 538.7 534.0
Total Current Liabilities 1,129.8 1,354.7
Long-term debt 919.9 993.5
Other liabilities 536.8 558.9
Deferred income taxes 65.5 238.4
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 (61.1) (64.9)
Treasury Preferred Stock, at cost, 211,528 shares
and 187,810 shares, respectively (18.4) (16.1)
Common Shareholders' Equity:
Common stock, $5 par value, authorized 400
million shares; issued 167,978,792 shares 840.0 840.0
Additional paid-in capital 5.7 --
Reinvested earnings 408.3 1,521.3
Cumulative translation adjustment (71.6) (68.2)
Deferred compensation (104.0) (103.4)
Treasury common stock, at cost, 30,608,613
shares and 31,885,727 shares, respectively (921.8) (959.8)
Total Common Shareholders' Equity 156.6 1,229.9
Total Liabilities and Shareholders' Equity $2,829.1 $4,394.4
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
Dollars in Millions June 30,
1997 1996
Cash Flows from Operating Activities:
Net (loss) income $(1,034.0) $ 96.8
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 89.4 100.4
Deferred income taxes 1.9 7.1
Loss (gain) on divestitures - net of tax of $(265.1)
and $1.1 in 1997 and 1996, respectively 1,149.5 (1.7)
Restructuring charges 11.8 --
Loss on disposition of property and equipment 22.0 10.0
Increase in trade accounts receivable (133.1) (119.1)
Increase in inventories (52.4) (69.3)
Decrease in other current assets 7.9 8.4
Increase in trade accounts payable 63.8 80.8
Increase in other current liabilities 110.7 96.7
Change in deferred compensation 3.2 3.7
Other items 18.2 27.4
Net Cash Provided by Operating Activities 258.9 241.2
Cash Flows from Investing Activities:
Additions to property, plant and equipment (93.5) (102.4)
Business divestitures - net of tax of $1.1 in 1996 300.0 42.1
Change in other assets -- 0.6
Net Cash Provided by (Used in) Investing Activities 206.5 (59.7)
Cash Flows from Financing Activities:
Cash dividends (79.0) (78.4)
Change in short-term debt (425.6) (85.2)
Proceeds from long-term debt 4.3 3.2
Reduction of long-term debt (9.1) (27.9)
Issuance of common treasury stock 39.1 13.3
Repurchases of preferred stock (2.3) (2.3)
Net Cash Used in Financing Activities (472.6) (177.3)
Effect of Exchange Rate Changes on Cash and Cash Equivalents (2.7) 6.1
Net (Decrease) Increase in Cash and Cash Equivalents (9.9) 10.3
Cash and Cash Equivalents - Beginning of Period 110.5 93.2
Cash and Cash Equivalents - End of Period $ 100.6 $103.5
See accompanying notes to the condensed consolidated financial statements.
<TABLE>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
<CAPTION>
Net Sales Operating Income (Loss) (a)
Six Months Six Months
Ended Ended
Dollars in Millions June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Foods
U.S. and Canadian $1,286.8 $1,235.0 $ 154.0 $165.6
International (b) 314.4 303.7 (7.2) 5.1
Total Foods $1,601.2 $1,538.7 $ 146.8 $170.7
Beverages
U.S. and Canadian $ 649.2 $ 623.8 $ 125.3 $111.7
International (c) 174.3 153.1 2.8 (10.0)
Total Beverages $ 823.5 $ 776.9 $ 128.1 $101.7
Divested Businesses (d) $ 172.5 $ 389.0 $(1,429.7) $(28.2)
Total Sales/Operating (Loss) Income $2,597.2 $2,704.6 $(1,154.8) $244.2
Less: General corporate expenses 18.2 22.0
Interest expense - net 46.2 54.7
Foreign exchange loss - net 5.0 3.6
(Loss) income before income taxes $(1,224.2) $163.9
<FN>
(a) Operating income (loss) includes certain allocations of overhead expenses.
(b) 1997 operating loss for the International Foods business includes a pretax
restructuring charge of $10.7 million for plant consolidations in the Brazilian
pasta business.
(c) 1997 operating income for the International Beverages business includes a
pretax restructuring charge of $1.1 million for the closing of an office in
Singapore.
(d) Total sales and operating income for the Italian products business
(divested January 1996) for the six months ended June 30, 1996, were $4.0
million and $3.3 million, respectively. Operating income includes a pretax
gain of $2.8 million on the sale of the Italian products business. Total sales
and operating income for the U.S. and Canadian frozen foods business (divested
July 1996) for the six months ended June 30, 1996, were $79.0 million and $8.3
million, respectively. Total sales for the Snapple beverages business
(divested May, 1997) for the six months ended June 30, 1997 and 1996, were
$172.5 million and $306.0 million, respectively. Operating losses of the
Snapple beverages business for the six months ended June 30, 1997 and 1996,
were $1.43 billion and $39.8 million, respectively. The 1997 operating loss
includes a pretax loss of $1.41 billion on the sale of the Snapple beverages
business.
</FN>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
<CAPTION>
Net Sales Operating Income (Loss) (a)
Three Months Three Months
Ended Ended
Dollars in Millions June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Foods
U.S. and Canadian $ 621.5 $ 583.4 $ 76.8 $ 66.6
International (b) 159.2 153.4 (8.0) 4.2
Total Foods $ 780.7 $ 736.8 $ 68.8 $ 70.8
Beverages
U.S. and Canadian $ 435.6 $ 438.1 $ 90.6 $ 95.6
International (c) 103.3 87.0 3.1 (4.3)
Total Beverages $ 538.9 $ 525.1 $ 93.7 $ 91.3
Divested Businesses (d) $ 75.9 $ 219.9 $ (5.6) $(18.9)
Total Sales/Operating Income $1,395.5 $1,481.8 $ 156.9 $143.2
Less: General corporate expenses 8.4 6.7
Interest expense - net 22.2 26.6
Foreign exchange loss - net 2.5 1.8
Income before income taxes $ 123.8 $108.1
<FN>
(a) Operating income (loss) includes certain allocations of overhead expenses.
(b) 1997 operating loss for the International Foods business includes a pretax
restructuring charge of $10.7 million for plant consolidations in the Brazilian
pasta business.
(c) 1997 operating income for the International Beverages business includes a
pretax restructuring charge of $1.1 million for the closing of an office in
Singapore.
(d) Total sales and operating income for the U.S. and Canadian frozen foods
business (divested July 1996) for the three months ended June 30, 1996, were
$36.6 million and $3.4 million, respectively. Total sales for the Snapple
beverages business (divested May 1997) for the three months ended June 30, 1997
and 1996, were $75.9 million and $183.3 million, respectively. Total operating
losses for the Snapple beverages business for the three months ended June 30,
1997 and 1996, were $5.6 million and $22.3 million, respectively. The 1997
operating loss includes a pretax loss of $10.6 million on the sale of the
Snapple beverages business.
</FN>
</TABLE>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
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, 1997
and 1996, the condensed consolidated balance sheet as of June 30, 1997, and the
condensed consolidated statements of cash flows for the six months ended June
30, 1997 and 1996, 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, 1997, 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 (GAAP) 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 year ended December 31, 1996.
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 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.
Note 3 - Sale of Snapple Beverage Corp.
On May 22, 1997, the Company completed the sale of 100 percent of its shares of
its wholly-owned subsidiary, Snapple Beverage Corp. (Snapple), to Triarc
Companies, Inc. (Triarc) for $300 million in cash. The disposition was made
pursuant to the Stock Purchase Agreement dated March 27, 1997, between the
Company and Triarc. The Company realized a pretax loss on the sale of $10.6
million ($.02 per share) in the second quarter of 1997, which, combined with
the previously recorded impairment loss in the first quarter of 1997, resulted
in a total pretax loss on the sale of $1.41 billion ($8.41 per share). As a
result of this transaction the Company expects to recapture approximately $250
million in taxes paid on previous capital gains arising from business
divestitures. The Company has
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
recognized a tax benefit and recorded an income tax receivable for this amount.
Of this amount, approximately $240 million is included in other current assets
and approximately $10 million is included in other assets in the condensed
consolidated balance sheet as of June 30, 1997.
Note 4 - Restructuring Charges
During the quarter ended June 30, 1997, the Company recorded pretax
restructuring charges of $11.8 million ($.06 per share). These charges
included $10.7 million for plant consolidations in the Brazilian pasta business
and $1.1 million for the closing of a beverages office in Singapore. Savings
from the restructuring actions are estimated to be about $5 million annually,
beginning in 1998, of which approximately 80 percent will be in cash.
Note 5 - Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Note 6 - Pending Accounting Changes
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
#128, "Earnings Per Share." This Statement simplifies the computation of
earnings per share and makes the computation more consistent with those of
International Accounting Standards. The Company will adopt this Statement
during the fourth quarter. The Company does not expect the adoption of this
new standard to significantly impact previously reported earnings per share or
earnings per share trends.
In July 1997, the FASB issued Statement #130, "Reporting Comprehensive Income,"
and Statement #131, "Disclosures About Segments of an Enterprise and Related
Information." Statement #130 establishes standards for reporting comprehensive
income in financial statements. Statement #131 expands certain reporting and
disclosure requirements for segments from current standards. The Company is
not required to adopt these Statements until 1998 and does not expect the
adoption of these new standards to result in material changes to previously
reported amounts or disclosures.
Note 7 - Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to foreign currency exchange rate,
commodity price and interest rate risks. Derivative financial and commodity
instruments are used to reduce the impact of these risks. The Company uses
derivatives only for purposes of reducing risk associated with underlying
exposures. The Company does not trade or use these instruments with the
objective of earning financial gains on the exchange rate, commodity price or
interest rate fluctuations alone, nor
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
does it utilize instruments where there are not underlying exposures.
Management believes that its use of derivative financial and commodity
instruments to reduce risk is in the Company's best interest.
Instruments used as hedges must be effective at reducing the risks associated
with the underlying exposure being hedged and must be designated as a hedge at
the inception of the contract. Accordingly, changes in the market value of
hedge instruments must have a high degree of inverse correlation with changes
in market values or cash flows of the underlying hedged item. Foreign currency
derivatives that meet these hedge criteria are accounted for under the fair
value method (as discussed below in Foreign Currency Exchange Rate Risk).
Commodity derivatives that meet these hedge criteria are accounted for under
the deferral method (as discussed below in Commodity Price Risk). Derivatives
that do not meet these hedge criteria are accounted for under the fair value
method with gains or losses recognized currently in the condensed consolidated
income statement.
Summarized below are the specified accounting policies by market risk category.
Foreign Currency Exchange Rate Risk
The Company uses forwards, purchased options, and currency swap agreements to
reduce foreign currency exchange rate risk related to projected cash flows from
foreign operations and net investments in foreign subsidiaries. Complex
instruments involving leverage or multipliers are not used. The fair value
method is used to account for these instruments. Under the fair value method,
the instruments are carried at fair value on the condensed consolidated balance
sheet as a component of other current assets (if a loss) or other accrued
liabilities (if a gain). Changes in the fair value of derivative instruments
which are used to reduce exchange rate risk in foreign currency denominated
operating income and net investments in highly inflationary economies are
recognized in the condensed consolidated income statement as foreign exchange
loss - net. Changes in the fair value of derivative instruments which are used
to reduce exchange rate risk in net investments in economies that are not
highly inflationary are recognized in the condensed consolidated balance sheet
as part of the cumulative translation adjustment in common shareholders'
equity. To the extent a hedge is no longer effective as a hedge of a net
investment due to a change in the underlying exposure, gains and losses are
recognized currently in the condensed consolidated income statement as foreign
exchange loss - net.
Commodity Price Risk
The Company uses commodity futures and options to reduce price exposures on
purchased or anticipated purchases of commodities. Complex instruments
involving leverage or multipliers are not used. The deferral method is used to
account for those instruments which effectively hedge the Company's price
exposures. For hedges of anticipated transactions, the Company has a policy
that the significant characteristics and terms of the anticipated transaction
must be identified and the transaction must be probable of occurring to qualify
for deferral method accounting.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
Under the deferral method, gains and losses on derivative instruments are
deferred in the condensed consolidated balance sheet as a component of other
current assets (if a loss) or other accrued liabilities (if a gain) until the
underlying inventory being hedged is sold. As the hedged inventory is sold,
the deferred gains and losses are recognized in the condensed consolidated
income statement as a component of cost of goods sold. Derivative instruments
that do not meet the above criteria required for deferral treatment, are
accounted for under the fair value method with gains and losses recognized
currently in the condensed consolidated income statement as a component of cost
of goods sold.
Interest Rate Risk
The Company has used interest rate swap agreements to reduce its exposure to
changes in interest rates and to balance its fixed and floating rate debt.
Currently there are no interest rate swap agreements outstanding. The
settlement costs of terminated swap agreements are reported in the condensed
consolidated balance sheet as a component of other assets and are being
amortized over the life of the original swap agreements. The amortization of
the settlement amounts is reported in the condensed consolidated income
statement as a component of interest expense.
Note 8 - Subsequent Event
In July 1997, the Company's Board of Directors approved restructuring actions
related to plant consolidations in the U.S. Foods business including closing a
rice cakes plant in Gridley, California and a Golden Grain/Near East plant in
Leominster, Massachusetts. These actions are expected to result in
approximately $37 million of restructuring charges in the third quarter of
1997. The anticipated charges are comprised of asset write-offs, severance and
termination benefits and other shut-down costs. Savings from the restructuring
actions are estimated to be about $8 million annually, beginning in 1998, of
which approximately 65 percent will be in cash.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
The following discussion addresses the operating results and financial
condition of the Company for the six and three months ended June 30, 1997. The
comparison of 1997 operations to those of 1996 are affected by the changes the
Company has made in its portfolio of businesses during these years,
specifically the divestiture of the Snapple beverages, U.S. and Canadian frozen
foods and Italian products businesses. As a result of these changes,
comparative results are more difficult to analyze. To assist in the analysis
of operating results, this discussion will address the financial results as
reported, describe the impact of divested businesses where applicable and
review the results of the ongoing businesses by industry segment.
Six Months Ended June 30, 1997 Compared with
Six Months Ended June 30, 1996
The following tables summarize the net sales and operating results of the
Company for the six months ended June 30, 1997 (current year) and June 30, 1996
(prior year):
<TABLE>
NET SALES
for the
Six Months Ended June 30,
<CAPTION>
Dollars in Millions 1997 1996
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $1,286.8 $314.4 $1,601.2 $1,235.0 $303.7 $1,538.7
Beverages 649.2 174.3 823.5 623.8 153.1 776.9
Ongoing Businesses 1,936.0 488.7 2,424.7 1,858.8 456.8 2,315.6
Divested Businesses 165.7 6.8 172.5 365.4 23.6 389.0
Total Company $2,101.7 $495.5 $2,597.2 $2,224.2 $480.4 $2,704.6
OPERATING INCOME (LOSS)
for the
Six Months Ended June 30,
<CAPTION>
Dollars in Millions 1997 1996
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 154.0 $(7.2) $ 146.8 $ 165.6 $ 5.1 $170.7
Beverages 125.3 2.8 128.1 111.7 (10.0) 101.7
Ongoing Businesses 279.3 (4.4) 274.9 277.3 (4.9) 272.4
(Loss)Gain
on divestitures (1,414.6) -- (1,414.6) -- 2.8 2.8
Divested Businesses (13.4) (1.7) (15.1) (24.5) (6.5) (31.0)
(1,428.0) (1.7) (1,429.7) (24.5) (3.7) (28.2)
Total Company $(1,148.7) $(6.1) $(1,154.8) $ 252.8 $ (8.6) $244.2
<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.
"(Loss)Gain on divestitures": 1997 includes a pretax loss of $1.41
billion on the sale of the Snapple beverages business. 1996
includes a pretax gain of $2.8 million on the sale of the Italian
products business.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Divested Businesses": 1997 includes current year net sales and
operating income (through the divestiture date) for the Snapple
beverages business (May 1997). 1996 includes prior year net sales
and operating income (through the divestiture date) for the Italian
products (January 1996), U.S. and Canadian frozen foods (July 1996)
and Snapple beverages businesses.
</FN>
</TABLE>
Consolidated net sales decreased 4 percent primarily due to the absence of
divested businesses in the current year. Excluding divested businesses, sales
and volume were 5 percent and 4 percent above the prior year, respectively.
While the June 1996 ready-to-eat cereals price reduction had an adverse impact
on Foods sales, an increase in U.S. ready-to-eat cereals volume of over 30
percent mitigated the impact of the price change. The Company does not expect
its above-industry growth rate in ready-to-eat cereals volume during the first
half of 1997 to be sustained at the current level during the second half of the
year. There were no other significant price changes that affected the
comparison of current and prior year net sales.
Consolidated gross profit margin was 48.7 percent in the current year compared
to 46.2 percent in the prior year. Excluding divested businesses, gross profit
margin increased from 47.5 percent in the prior year to 49.2 percent in the
current year reflecting improvement across all businesses mainly due to lower
costs.
Selling, general and administrative (SG&A) expenses decreased $18.6 million, or
2 percent, primarily due to the absence of general and administrative expenses
of the divested businesses. Excluding divested businesses, SG&A expenses
increased 9 percent driven by an increase in advertising and merchandising
(A&M) expenses of 16 percent. A&M expenses excluding divested businesses were
25.1 percent of sales during the current year, up from 22.6 percent in the
prior year.
Consolidated operating loss of $1.15 billion for the current year included a
$1.41 billion pretax loss on the sale of the Snapple beverages business and
pretax restructuring charges of $11.8 million related to plant consolidations
in the Brazilian pasta business and the closing of a beverages office in
Singapore. Prior year operating income included a $2.8 million pretax gain on
the sale of the Italian products business. Excluding the loss/gain on
divestitures, operating results from divested businesses and restructuring
charges, operating income of $286.7 million increased 5 percent from the prior
year, reflecting improvement in the Beverages segment that more than offset a
decline in the Foods segment.
Net financing costs (net interest expense and foreign exchange losses)
decreased $7.1 million in the current year. Debt levels declined by over $430
million in the first half of 1997 due to proceeds from divestitures and cash
from operations, resulting in lower interest expense.
Excluding the impact of the loss/gain on divestitures and restructuring
charges, the current year effective tax rate was 39.0 percent compared to 41.0
percent in the prior year. The decrease was primarily due to the Snapple
divestiture.
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 were 4 percent above the prior year with higher sales in both
the U.S. and Canadian and International businesses. U.S. and Canadian sales
and volume rose 4 percent. Sales increased in ready-to-eat and hot cereals,
Golden Grain, mixes and syrup. These gains more than offset lower sales in
rice cakes and food service as well as the adverse impact of the June 1996
ready-to-eat cereals price reduction. International sales increased 4 percent,
mainly due to higher sales in Latin America.
U.S. and Canadian operating income declined 7 percent from the prior year as
the favorable impact of the volume increase was more than offset by the ready-
to-eat cereals price reduction, increases in A&M expenses and operating income
declines in the increasingly competitive grain-based snacks business. Higher
A&M expenses in U.S. and Canadian Foods were primarily due to increased trade
and media spending across the businesses including increased support of hot and
ready-to-eat cereals and Golden Grain compared to the prior year.
International Foods operating income included a $10.7 million restructuring
charge related to plant consolidations in the Brazilian pasta business.
Excluding the restructuring charge, operating income was $1.6 million below the
prior year.
Beverages - Worldwide sales and volume of Gatorade thirst quencher increased 6
percent. U.S. and Canadian sales and volume rose 4 percent and 5 percent,
respectively, reflecting incremental sales from a new product, Gatorade Frost,
and core business growth. An initial strong season sell-in, resulting in a 15
percent sales increase in the first quarter, was partly offset in the second
quarter as cool and wet spring weather in North America depressed seasonal
demand. International sales increased 14 percent on a 9 percent volume
increase primarily due to double-digit sales growth of Gatorade thirst quencher
in Latin America and the Asia/Pacific region.
Operating income increased $26.4 million from the prior year due to sales
growth and lower packaging costs in the U.S. and Canadian business, partly
offset by higher A&M expenses. The increase in A&M expenses was driven by
media spending for the Gatorade Frost launch and support of other growth
initiatives. In the International Beverages business, the Company reduced its
underwriting in Asia/Pacific markets for Gatorade thirst quencher and improved
the profitability of the Latin American and European businesses. 1997
operating income of International Beverages included a $1.1 million
restructuring charge related to the closing of an office in Singapore.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared with
Three Months Ended June 30, 1996
The following tables summarize the net sales and operating results of the
Company for the three months ended June 30, 1997 (current year) and June 30,
1996 (prior year):
<TABLE>
NET SALES
for the
Three Months Ended June 30,
<CAPTION>
Dollars in Millions 1997 1996
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 621.5 $ 159.2 $ 780.7 $ 583.4 $ 153.4 $ 736.8
Beverages 435.6 103.3 538.9 438.1 87.0 525.1
Ongoing Businesses 1,057.1 262.5 1,319.6 1,021.5 240.4 1,261.9
Divested Businesses 73.4 2.5 75.9 208.0 11.9 219.9
Total Company $ 1,130.5 $ 265.0 $ 1,395.5 $ 1,229.5 $ 252.3 $ 1,481.8
OPERATING INCOME (LOSS)
for the
Three Months Ended June 30,
<CAPTION>
Dollars in Millions 1997 1996
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 76.8 $ (8.0) $ 68.8 $ 66.6 $ 4.2 $ 70.8
Beverages 90.6 3.1 93.7 95.6 (4.3) 91.3
Ongoing Businesses 167.4 (4.9) 162.5 162.2 (0.1) 162.1
Loss on divestiture (10.6) - (10.6) - - -
Divested Businesses 4.7 0.3 5.0 (14.5) (4.4) (18.9)
(5.9) 0.3 (5.6) (14.5) (4.4) (18.9)
Total Company $ 161.5 $ (4.6) $ 156.9 $ 147.7 $ (4.5) $ 143.2
<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.
"Loss on divestiture": includes a pretax loss of $10.6 million on the sale of
the Snapple beverages business.
"Divested Businesses": 1997 includes current year net sales and operating
income (through the divestiture date) for the Snapple beverages business (May
1997). 1996 includes prior year net sales and operating income (through the
divestiture date) for the Italian products (January 1996), U.S. and Canadian
frozen foods (July 1996) and Snapple beverages businesses.
</FN>
</TABLE>
Consolidated net sales decreased 6 percent primarily due to the absence of
divested businesses in the current year. Excluding divested businesses, sales
were 5 percent above the prior year on a 3 percent volume gain. While the June
1996 ready-to-eat cereals price reduction had an adverse impact on Foods sales,
an increase in U.S. ready-to-eat cereals volume of over 30 percent mitigated
the impact of the price change. The Company does not expect its above-
industry growth rate in ready-to-eat cereals volume during the second quarter
of 1997 to be sustained at the current level during the second half of
the year. There were no other significant price changes that affected the
comparison of current and prior year net sales.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated gross profit margin was 49.5 percent in the current year compared
to 46.7 percent in the prior year. For ongoing businesses, gross profit margin
increased to 49.8 percent from 48.1 percent in the prior year, primarily due to
lower packaging and ingredient costs in the U.S. and Canadian Foods and
Beverages businesses.
SG&A expenses decreased $34.7 million, or 6 percent, versus the prior year,
primarily due to the absence of divested businesses. Excluding divested
businesses, SG&A increased 9 percent driven by a 14 percent increase in A&M
expenses. A&M expenses for ongoing businesses were 24.9 percent of sales
during the current year, up from 22.7 percent in the prior year.
Consolidated operating income was $156.9 million for the current year, up 10
percent from the prior year. Excluding operating results from divested
businesses, loss on divestiture and restructuring charges, operating results of
$174.3 million was $12.2 million above the prior year reflecting improvement in
Foods and International Beverages.
Net financing costs (net interest expense and foreign exchange losses)
decreased $3.7 million in the current year. Debt levels declined over $470
million in the second quarter of 1997 due to proceeds from divestitures and
cash from operations, resulting in lower interest expense.
The effective tax rate in the current year was 39.0 percent versus 40.2 percent
in the prior year. The decrease was primarily due to the divestiture of
Snapple.
Industry Segment Operating Results
Foods - Net sales were 6 percent above the prior year with higher sales in both
the U.S. and Canadian and International businesses. U.S. and Canadian sales
and volume rose 7 percent and 6 percent, respectively. Sales increased in
ready-to-eat and hot cereals, Golden Grain, mixes and syrup. These gains more
than offset lower sales in rice cakes and food service as well as the adverse
impact of the June 1996 ready-to-eat cereals price reduction. International
sales increased 4 percent, mainly due to higher sales in Latin America.
U.S. and Canadian operating income increased 15 percent from the prior year as
the favorable impact of the volume increase more than offset the ready-to-eat
cereals price reduction, operating income declines in the increasingly
competitive snacks business and increases in A&M expenses. Higher A&M expenses
in U.S. and Canadian Foods were due to increased trade and media spending
across the businesses including increased support of hot cereals and grain-
based snacks compared to the prior year. 1997 operating income of
International Foods included a $10.7 million restructuring charge for plant
consolidations in the Brazilian pasta business. Operating income excluding the
restructuring charge was $1.5 million below the prior year.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Beverages - Worldwide sales and volume of Gatorade thirst quencher increased 3
percent. U.S. and Canadian sales declined 1 percent on flat volume; however,
exceptionally strong sales growth of 16 percent in the prior year affected the
comparison. The current quarter sales were also adversely impacted by cool and
wet spring weather in North America which depressed seasonal demand.
International sales increased 19 percent primarily due to double-digit sales
growth of Gatorade thirst quencher in Latin America and the Asia/Pacific
region.
Operating income increased 3 percent from the prior year due to international
sales growth and lower packaging costs in the U.S. and Canadian business,
partly offset by higher A&M expenses. Media spending to support the Gatorade
Frost launch began in the current quarter. In the International Beverages
business, the Company continued to improve results in the Latin American and
European businesses and reduced the operating losses in the Asia/Pacific
business. 1997 operating income of International Beverages included a $1.1
million restructuring charge related to the closing of an office in Singapore.
Liquidity and Capital Resources
Net cash provided by operating activities was $258.9 million, an increase of
$17.7 million from the prior year, primarily reflecting improvements in
profitability. Capital expenditures for the current and prior year were $93.5
million and $102.4 million, respectively. Capital expenditures are expected to
increase during the remainder of the current year as the Company continues its
expansion of production capacity for foods and beverages 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 cash flow from operating
activities and short-term debt.
Short-term and long-term debt (total debt) as of June 30, 1997, was $1.13
billion, a decrease of $433.3 million from December 31, 1996, reflecting the
use of the $300 million of Snapple divestiture proceeds and cash from operating
activities. Anticipated cash proceeds from the recapture of income taxes paid
on previous capital gains of approximately $240 million are expected to be
received by the end of the first half of 1998, and an additional $10 million by
the end of 1998.
Sale of Snapple Beverage Corp.
On May 22, 1997, the Company completed the sale of 100 percent of its shares of
its wholly-owned subsidiary, Snapple Beverage Corp. (Snapple), to Triarc
Companies, Inc. (Triarc) for $300 million in cash. The disposition was made
pursuant to the Stock Purchase Agreement dated March 27, 1997, between the
Company and Triarc. The Company realized a pretax loss on the sale of $10.6
million ($.02 per share) in the second quarter of 1997, which, combined with
the previously recorded impairment loss in the first quarter of 1997, resulted
in a total pretax loss on the sale of $1.41 billion ($8.41 per share).
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restructuring Charges
During the quarter ended June 30, 1997, the Company recorded pretax
restructuring charges of $11.8 million ($.06 per share). These charges
included $10.7 million for plant consolidations in the Brazilian pasta business
and $1.1 million for the closing of a beverages office in Singapore. Savings
from the restructuring actions are estimated to be about $5 million annually,
beginning in 1998, of which approximately 80 percent will be in cash.
Subsequent Event
In July 1997, the Company's Board of Directors approved restructuring actions
related to plant consolidations in the U.S. Foods business including closing a
rice cakes plant in Gridley, California and a Golden Grain/Near East plant in
Leominster, Massachusetts. These actions are expected to result in
approximately $37 million of restructuring charges in the third quarter of
1997. The anticipated charges are comprised of asset write-offs, severance and
termination benefits and other shut-down costs. Savings from the restructuring
actions are estimated to be about $8 million annually, beginning in 1998, of
which approximately 65 percent will be in cash.
Pending Accounting Changes
In March 1997, the FASB issued Statement #128, "Earnings Per Share." This
Statement simplifies the computation of earnings per share and makes the
computation more consistent with those of International Accounting Standards.
The Company will adopt this Statement during the fourth quarter. The Company
does not expect the adoption of this new standard to significantly impact
previously reported earnings per share or earnings per share trends.
In July 1997, the FASB issued Statement #130, "Reporting Comprehensive Income,"
and Statement #131, "Disclosures About Segments of an Enterprise and Related
Information." Statement #130 establishes standards for reporting comprehensive
income in financial statements. Statement #131 expands certain reporting and
disclosure requirements for segments from current standards. The Company is
not required to adopt these Statements until 1998 and does not expect the
adoption of these new standards to result in material changes to previously
reported amounts or disclosures.
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. The Company's 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 external factors such as: actions of competitors;
changes in laws and regulations, including changes in governmental
interpretations of regulations and changes in accounting standards; customer
demand; effectiveness of
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
spending or programs; fluctuations in the cost and availability of supply
chain resources; and foreign economic conditions, including currency rate
fluctuations.
The Company anticipates future restructuring actions as it continues to address
ways of improving profitability, including the reduction of shared services and
related overheads previously allocated to Snapple that remain with the Company.
These actions, in addition to the specific restructuring actions previously
announced and currently underway, could result in total 1997 pretax
restructuring charges between $70 million and $100 million. Reducing future
operating losses of the Brazilian pasta business will depend on the competitive
and commodity environments. The Company is currently reviewing strategies
relative to this and other non-core businesses which may result in future
charges.
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 14, 1997.
Represented at the Meeting, either in person or by proxy, were
123,520,644 voting shares, of a total below.
(c) (i) To elect two directors in Class II to serve for three-year terms
expiring in the year 2000 or until their successors are elected
and qualified. All nominees are named below.
- John H. Costello
Votes For Election - 116,848,812
Votes Withheld - 6,671,832
- Judy C. Lewent
Votes For Election - 117,025,647
Votes Withheld - 6,494,997
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 1997.
Votes For Proposal - 121,217,694
Votes Against Proposal - 1,712,102
Votes Abstaining - 590,848
Broker Non-Votes - 0
Votes Withheld - 0
(iii) To consider a shareholder proposal regarding compensation
disclosure.
Votes For Proposal - 11,169,598
Votes Against Proposal - 96,500,117
Votes Abstaining - 1,498,123
Broker Non-Votes - 14,352,806
Votes Withheld - 0
(iv) To consider a shareholder proposal regarding the separation of
the Foods and Beverages business.
Votes For Proposal - 13,683,896
Votes Against Proposal - 93,533,707
Votes Abstaining - 1,950,258
Broker Non-Votes - 14,352,783
Votes Withheld - 0
(v) To consider a shareholder proposal regarding
reconsideration of the Shareholder Rights Plan.
Votes For Proposal - 48,357,554
Votes Against Proposal - 58,674,259
Votes Abstaining - 2,133,747
Broker Non-Votes - 14,355,084
Votes Withheld - 0
Item 6 Exhibits and Reports on Form 8-K
Item 6(a) See Exhibit Index
Item 6(b) Reports on Form 8-K
Form 8-K was filed on June 2, 1997, to announce that the
Company had completed the sale of 100 percent of its shares of
its wholly-owned subsidiary, Snapple Beverage Corp., to Triarc
Companies, Inc. for $300 million.
All other items in Part II are either inapplicable to the
Company during the quarter ended June 30, 1997, 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 August 4, 1997 Robert S. Thomason
Robert S. Thomason
Senior Vice President - Finance and
Chief Financial Officer
Date August 4, 1997 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
(27) Financial Data Schedule E
(submitted to the Securities
and Exchange Commission
in electronic format)
<TABLE>
EXHIBIT (11)
THE QUAKER OATS COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
For the Six Months Ended
June 30, June 30,
Calculation of Fully Diluted Earnings Per Share 1997 (1) 1996
Dollars in Millions (Except Per Share Data)
<S> <C> <C>
(Loss) Income from Continuing Operations $(1,034.0) $ 96.8
Less: Dividends on ESOP Convertible Preferred Stock (1.7) -
Less: Adjustments attributable to conversion of
ESOP Convertible Preferred Stock - (0.5)
Net (Loss) Income Used for Fully Diluted Calculation $(1,035.7) $ 96.3
Shares in Thousands
Average Number of Common Shares Outstanding 136,572 135,213
Plus Dilutive Securities:
Stock Options - 971
ESOP Convertible Preferred Stock - 2,479
Average Shares Outstanding Used for Fully
Diluted Calculation 136,572 138,663
Fully Diluted Earnings Per Share $ (7.58) $ 0.69
<FN>
(1) In loss periods, dilutive common equivalent shares are excluded as the
effect would be antidilutive. For purposes of the loss per share calculation,
the loss was adjusted for the amount of dividends applicable to the ESOP
Convertible Preferred Stock.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 101
<SECURITIES> 0
<RECEIVABLES> 408
<ALLOWANCES> 25
<INVENTORY> 292
<CURRENT-ASSETS> 1,191
<PP&E> 1,940
<DEPRECIATION> 771
<TOTAL-ASSETS> 2,829
<CURRENT-LIABILITIES> 1,130
<BONDS> 920
0
100
<COMMON> 840
<OTHER-SE> (763)
<TOTAL-LIABILITY-AND-EQUITY> 2,829
<SALES> 2,597
<TOTAL-REVENUES> 2,597
<CGS> 1,332
<TOTAL-COSTS> 1,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> (1,224)
<INCOME-TAX> (190)
<INCOME-CONTINUING> (1,034)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,034)
<EPS-PRIMARY> (7.58)
<EPS-DILUTED> (7.58)
</TABLE>
