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, 1999
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 March 31, 1999 was 134,853,526.
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, 1999 and 1998 3
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1999 and 1998 5
Net Sales and Operating Income by Segment for the
Three Months Ended March 31, 1999 and 1998 6
Notes to the Condensed Consolidated Financial Statements 7-11
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12-17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
<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,
1999 1998
Net sales $ 1,074.6 $ 1,092.3
Cost of goods sold 488.3 552.2
Gross profit 586.3 540.1
Selling, general and administrative expenses 444.1 435.0
Gain on divestiture and restructuring charges (8.4) 9.1
Interest expense 16.4 18.2
Interest income (2.5) (2.2)
Foreign exchange loss - net 14.3 4.2
Income before income taxes 122.4 75.8
Provision for income taxes 35.7 28.8
Net Income 86.7 47.0
Preferred dividends - net of tax 1.1 0.8
Net Income Available for Common $ 85.6 $ 46.2
Per Common Share:
Net income $ 0.63 $ 0.33
Net income - assuming dilution $ 0.61 $ 0.32
Dividends declared $ 0.285 $ 0.285
Average Number of Common Shares Outstanding
(in thousands) 135,251 138,625
Reinvested Earnings:
Balance - beginning of period $ 555.8 $ 431.0
Net income 86.7 47.0
Dividends (39.3) (40.0)
Balance - end of period $ 603.2 $ 438.0
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 1999 1998
Assets
Current Assets:
Cash and cash equivalents $ 168.3 $ 326.6
Marketable securities 131.9 27.5
Trade accounts receivable - net of allowances 312.5 283.4
Inventories:
Finished goods 214.9 189.1
Grains and raw materials 49.2 48.4
Packaging materials and supplies 24.2 23.9
Total inventories 288.3 261.4
Other current assets 213.3 216.1
Total Current Assets 1,114.3 1,115.0
Property, plant and equipment 1,764.9 1,818.8
Less: accumulated depreciation 722.6 748.6
Property - net 1,042.3 1,070.2
Intangible assets - net of amortization 243.3 245.7
Other assets 65.5 79.4
Total Assets $ 2,465.4 $ 2,510.3
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 33.2 $ 41.3
Current portion of long-term debt 90.5 95.2
Trade accounts payable 193.5 168.4
Other current liabilities 668.0 704.2
Total Current Liabilities 985.2 1,009.1
Long-term debt 778.3 795.1
Other liabilities 526.2 533.4
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 (43.4) (48.4)
Treasury Preferred Stock, at cost, 318,069 shares
and 302,969 shares, respectively (31.9) (29.9)
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 82.4 78.9
Reinvested earnings 603.2 555.8
Cumulative translation adjustment (96.9) (80.5)
Unrealized gain on marketable securities 1.5 0.4
Deferred compensation (66.8) (67.6)
Treasury common stock, at cost, 33,125,266
shares and 32,656,284 shares, respectively (1,212.4) (1,176.0)
Total Common Shareholders' Equity 151.0 151.0
Total Liabilities and Shareholders' Equity $ 2,465.4 $ 2,510.3
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,
1999 1998
Cash Flows from Operating Activities:
Net income $ 86.7 $ 47.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30.0 33.5
Deferred income taxes 3.4 (3.1)
Gain on divestiture - net of tax of $1.7 (3.4) --
Restructuring charges (3.3) 9.1
Loss (gain) on disposition of property,
plant and equipment 3.1 (1.1)
Increase in trade accounts receivable (40.6) (22.8)
Increase in inventories (36.5) (34.6)
Decrease in other current assets 1.1 15.2
Increase in trade accounts payable 28.1 19.2
Decrease in other current liabilities (22.5) (21.8)
Change in deferred compensation 5.8 5.6
Other items 16.7 (11.8)
Net Cash Provided by Operating Activities 68.6 34.4
Cash Flows from Investing Activities:
Capital gains tax recovery -- 240.0
Business divestitures 14.3 73.2
Purchase of marketable securities (103.3) (103.3)
Additions to property, plant and equipment (35.3) (34.9)
Proceeds on sale of property, plant and equipment 3.8 3.2
Net Cash (Used In) Provided by Investing Activities (120.5) 178.2
Cash Flows from Financing Activities:
Cash dividends (39.3) (40.0)
Change in short-term debt (5.4) (12.5)
Proceeds from long-term debt -- 0.5
Reduction of long-term debt (21.1) (22.7)
Issuance of common treasury stock 15.0 53.4
Repurchases of common stock (56.1) (87.8)
Repurchases of preferred stock (2.0) (1.1)
Net Cash Used in Financing Activities (108.9) (110.2)
Effect of Exchange Rate Changes on Cash and Cash Equivalents 2.5 1.3
Net (Decrease) Increase in Cash and Cash Equivalents (158.3) 103.7
Cash and Cash Equivalents - Beginning of Period 326.6 84.2
Cash and Cash Equivalents - End of Period $ 168.3 $ 187.9
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 (a) Operating Income (Loss)(b)
Three Months Three Months
Dollars in Millions Ended March 31, Ended March 31,
1999 1998 1999 1998
Foods:
U.S. and Canadian $ 605.9 $ 572.9 $ 112.8 $ 88.8
Latin American 73.2 95.2 5.8 8.6
Other (c) 52.1 46.9 5.9 (2.6)
Total Foods 731.2 715.0 124.5 94.8
Beverages:
U.S. and Canadian 267.6 205.7 28.3 17.0
Latin American 52.2 72.6 2.5 7.6
Other (c) 16.9 16.5 (3.0) (1.4)
Total Beverages 336.7 294.8 27.8 23.2
Total Ongoing Businesses 1,067.9 1,009.8 152.3 118.0
Divested Businesses (d) 6.7 82.5 -- (5.1)
Total Sales/Operating Income $ 1,074.6 $ 1,092.3 152.3 112.9
Less: Gain on divestiture and
restructuring charges (e) (f) (8.4) 9.1
General corporate expenses 10.1 7.8
Interest expense - net 13.9 16.0
Foreign exchange loss - net 14.3 4.2
Income before income taxes $ 122.4 $ 75.8
(a) Intersegment revenue is not material.
(b) Operating results exclude gain on divestiture, restructuring charges and
certain other expenses not allocated to operating segments such as income
taxes, general corporate expenses and financing costs.
(c) Other includes European and Asia/Pacific businesses.
(d) 1999 includes net sales and operating results (through the divestiture
date) for the Brazilian pasta business. 1998 includes three months of net
sales and operating results for the Ardmore Farms, Continental Coffee, Nile
Spice, Liqui-Dri and Brazilian pasta businesses.
(e) 1999 includes a pretax gain of $5.1 million for the sale of the Brazilian
pasta business and pretax income of $3.3 million to reverse certain prior
divestiture and restructuring reserves.
(f) 1998 includes pretax restructuring charges of $9.1 million for
organization alignment.
<6>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
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, 1999 and
1998, the condensed consolidated balance sheet as of March 31, 1999, and the
condensed consolidated statements of cash flows for the three months ended
March 31, 1999 and 1998, 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, 1999, and for all periods presented. All
adjustments made have been of a normal and 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, 1998.
Certain previously reported amounts have been reclassified to conform to the
current presentation.
Note 2 - Litigation
The Company is 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 past 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 - Restructuring Charges and Tax Adjustment
During the three months ended March 31, 1999 (current year), the Company
recorded pretax adjustments for $3.3 million to reverse certain prior
divestiture and restructuring reserves. These adjustments were primarily due
to higher proceeds than anticipated on the sale of a closed facility. During
the three months ended March 31, 1998 (prior year), the Company recorded pretax
restructuring charges of $9.1 million for organization alignment. The
Company's remaining restructuring actions are proceeding as planned, and the
related reserve balances are considered adequate to cover committed
restructuring actions.
In 1999, the Company also adjusted its tax accruals and tax assets to reflect
developments and information received during the current year. The net effect
of these adjustments was to reduce the current year tax provision by $8.4
million.
<7>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
Note 4 - Divestitures
On March 1, 1999, the Company completed the sale of its Brazilian pasta
business for $14.3 million and realized a pretax gain of $5.1 million. During
the first quarter of 1998, the Company received $240 million from the recovery
of income taxes paid on previous capital gains and cash proceeds of $73.2
million from the December 1997 divestiture of certain food service businesses.
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 - Marketable Securities
During 1999, the Company made investments in marketable securities. These
marketable securities are available for sale and consist of investments in
mutual funds and preferred stock. These investments are expected to be held
less than twelve months and are classified as marketable securities in the
consolidated balance sheet. In 1999, the Company recorded a net unrealized
gain of $1.1 million on its investments in marketable securities to adjust the
carrying value of these investments to fair value. The gain is classified as a
separate component of common shareholders' equity and is included in
comprehensive income.
Note 7 - Current and Pending Accounting Changes
In January 1998, Statement of Position (SOP) No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," was issued.
This SOP provides guidance on the accounting for computer software costs. In
April 1998, SOP No. 98-5, "Reporting on the Costs of Start-Up Activities," was
issued. This SOP provides guidance on accounting for the cost of start-up
activities. The Company's adoption of these new Statements in January 1999 did
not materially affect the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that all derivative instruments (including
certain derivative instruments imbedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The accounting provisions for qualifying hedges allow a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that the Company must formally document, designate, and
assess the effectiveness of transactions that qualify for hedge accounting.
The Company is not required to adopt this Statement until January 2000. The
Company has not determined its method of adopting this Statement or the impact
on its financial statements. However, when adopted, this Statement could
increase volatility in reported earnings and other comprehensive income of the
Company.
<8>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
Note 8 - Comprehensive Income
Total comprehensive income for the three months ended March 31, 1999 and 1998,
was $71.4 million and $55.4 million, respectively. Total comprehensive income
for the Company includes net income, foreign currency translation adjustments
and unrealized gains on investments.
Note 9 - Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to commodity price, foreign currency
exchange rate and interest rate risks and uses derivative financial and
commodity instruments to manage the impact of certain of these risks. The
Company uses derivatives only for purposes of managing risk associated with
underlying exposures. The Company does not trade or use instruments with the
objective of earning financial gains on the commodity price, exchange rate or
interest rate fluctuations alone, nor does it use instruments where there are
not underlying exposures. Complex instruments involving leverage or
multipliers are not used. Management believes that its use of these
instruments to manage risk is in the Company's best interest.
Instruments used as hedges must be effective at reducing the risks associated
with the underlying exposure and must be designated as a hedge at the inception
of the contract. Accordingly, changes in the market value of the instruments
must have a high degree of inverse correlation with changes in market values or
cash flows of the underlying hedged item.
Summarized below are the specific accounting policies by market risk category.
Commodity Price Risk
The Company uses commodity futures and options to manage price exposures on
commodity inventories or anticipated purchases of commodities. The deferral
method is used to account for those instruments that effectively hedge the
Company's price exposures. For hedges of anticipated transactions, 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. Under the deferral method, gains and losses on
derivative instruments are deferred in the condensed consolidated balance
sheets as a component of other current assets (if a loss) or other current
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 statements of income 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
statements of income as a component of cost of goods sold.
<9>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
Foreign Currency Exchange Rate Risk
The Company uses forward contracts, purchased options, and currency swap
agreements to manage foreign currency exchange rate risk related to projected
operating income from foreign operations and net investments in foreign
subsidiaries. The fair value method is used to account for these instruments.
Under the fair value method, the instruments are carried at fair value in the
condensed consolidated balance sheets as a component of other current assets
(deferred expense) or other current liabilities (deferred income). Changes in
the fair value of derivative instruments which are used to manage exchange rate
risk in foreign-currency denominated operating income and net investments in
highly inflationary economies are recognized in the condensed consolidated
statements of income as foreign exchange loss or gain. Changes in the fair
value of such instruments used to manage exchange rate risk on net investments
in economies that are not highly inflationary are recognized in the condensed
consolidated balance sheets as a component of the cumulative translation
adjustment in common shareholders' equity and are included in comprehensive
income. To the extent an instrument 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 statements of income as
foreign exchange loss or gain.
Interest Rate Risk
The Company has used interest rate swap agreements to reduce its exposure to
changes in interest rates and to balance the mix of its fixed and floating rate
debt. Currently, there are no interest swap agreements outstanding. The
settlement costs of terminated swap agreements are reported in the condensed
consolidated balance sheets 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 statements of
income as a component of interest expense.
Note 10 - Share Repurchases
During 1999, the Company repurchased 954,700 shares of its outstanding common
stock for $53.7 million. As of March 31, 1999, the Company repurchased $318
million under the $1 billion repurchase program announced in March 1998.
<10>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
Note 11 - Earnings Per Share
Reconciliations of basic earnings per share (EPS) to diluted EPS were as
follows:
Dollars in Millions
(Except Per Share Data) Three Months Ended March 31,
1999 1998
Income Shares Income Shares
Net income $ 86.7 $ 47.0
Less: Preferred dividends - net of tax 1.1 0.8
Net income available for common $ 85.6 135,251 $ 46.2 138,625
Net income per common share $ 0.63 $ 0.33
Net income available for common $ 85.6 135,251 $ 46.2 138,625
Effect of dilutive securities:
Stock options -- 3,002 -- 3,660
Non-vested awards -- 222 -- 96
ESOP Convertible Preferred Stock 0.5 2,097 0.7 2,229
$ 86.1 140,572 $ 46.9 144,610
Net income per common share -
assuming dilution $ 0.61 $ 0.32
The decrease in average common shares outstanding at March 31, 1999, compared
to March 31, 1998, reflects the continuation of the Company's share repurchase
program, partly offset by the exercise of employee stock options.
As of March 31, 1999 and 1998, certain stock options were excluded from the
computation of diluted EPS since the exercise prices were higher than the
average market price.
<11>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated net sales for the three months ended March 31, 1999 (current year)
decreased 2 percent from the three months ended March 31, 1998 (prior year),
due to the absence of divested businesses. Excluding divested businesses,
sales increased 6 percent from the prior year led by 30 percent growth in the
U.S. and Canadian Gatorade business and 6 percent growth in the U.S. and
Canadian Foods business, partly offset by declines in the Latin American
businesses. Price changes did not significantly affect the comparison of
current and prior year net sales. Weaker exchange rates negatively affected
sales, particularly in Latin America.
Consolidated gross profit margin was 54.6 percent in the current year compared
to 49.4 percent in the prior year, reflecting the impact of lower commodity and
packaging costs, cost-reduction efforts and the divestiture of lower-margin
businesses in 1998.
Selling, general and administrative (SG&A) expenses increased $9.1 million, or
2 percent, as the Company increased advertising and merchandising (A&M)
spending to support its brands. While A&M spending increased, other SG&A
expenses decreased as a result of previous restructuring actions, cost-
reduction programs and the absence of SG&A expenses related to divested
businesses.
Business segment operating income was $152.3 million in the current year
compared to $112.9 million in the prior year, primarily driven by growth in the
U.S. and Canadian Gatorade and Foods businesses.
Net financing costs (net interest expense and foreign exchange losses)
increased $8.0 million in the current year, reflecting higher foreign exchange
costs. Brazilian foreign exchange losses increased $11.8 million and were
partly offset by lower interest expense as a result of lower debt levels.
The current year consolidated operating results include a $5.1 million pretax
gain on the sale of the Brazilian pasta business and $3.3 million in pretax
adjustments to reverse prior divestiture and restructuring reserves. The
adjustments were primarily due to higher than anticipated proceeds on the sale
of a closed facility. The prior year consolidated operating results include
restructuring charges of $9.1 million for organization alignment. The Company's
remaining restructuring actions are proceeding as planned, and the related
reserve balances are considered adequate to cover committed restructuring
actions.
An adjustment was also made to reduce previously recorded tax accruals and tax
assets to reflect developments and information received during the current
year. The net effect of these adjustments was to reduce the current year tax
provision by $8.4 million. Excluding these adjustments and the tax effects of
the gain on sale, restructuring charges and adjustments noted above, the
Company's effective tax rate was 36.1 percent and 38.2 percent as of March 31,
1999 and 1998, respectively. The decrease in the effective tax rate was
primarily due to a lower effective state tax rate and a change in the mix of
foreign and domestic earnings.
<12>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Segment Results
Foods
U.S. and Canadian Foods - Volume and sales increased 2 percent and 6 percent,
respectively, primarily due to growth in hot cereals. Sales also increased in
ready-to-eat boxed cereals, grain-based snack bars, syrups and Canadian Foods,
partly offset by sales declines in flavored rice and pasta, rice cakes and
bagged ready-to-eat cereals. The sales increase in hot cereals reflects the
impact of advertising programs, new product introductions and more favorable
winter weather compared to the prior year. U.S. and Canadian operating income
increased 27 percent due to sales growth, lower supply chain costs and a
favorable product mix, partly offset by increases in A&M spending.
Latin American Foods - Volume and sales decreased 5 percent and 23 percent,
respectively, primarily driven by the Brazilian recession and currency
devaluation. As a result, operating income decreased $2.8 million. Although
the Brazilian currency has recently stabilized, the recession and volatility in
the Brazilian economy makes the current outlook for this business uncertain.
Other Foods - Volume and sales increased 10 percent and 11 percent,
respectively, primarily due to growth in the European cereals business.
Operating results improved dramatically due to the European sales growth and
significantly reduced operating losses in the Asia/Pacific business resulting
from recent restructuring actions.
Beverages
U.S. and Canadian Beverages - Volume and sales grew 36 percent and 30 percent,
respectively, due to new packaging and flavors and strong growth outside the
traditional retail channel, resulting in market share gains. Weather in key
West Coast and southeastern U.S. markets improved in the first quarter compared
to the prior year's cool, wet conditions, contributing to the sales increase.
The Company expects the volume growth to continue, although not at the same
pace as experienced in the first quarter of 1999. Operating income of $28.3
million increased $11.3 million from the prior year, reflecting the strong
sales growth, partly offset by increased A&M spending.
Latin American Beverages - Volume and sales decreased 20 percent and 28
percent, respectively, primarily driven by the Brazilian currency devaluation
and recessionary economies in Brazil and Colombia. As a result, operating
income decreased $5.1 million. Although the Brazilian currency has recently
stabilized, the recessionary and volatile economies in Brazil and Colombia make
the current outlook for these businesses uncertain.
Other Beverages - Volume decreased 11 percent, while sales increased 2 percent.
Product mix drove the disproportionate change in sales and volume. Sales
increases in Europe were mostly offset by declines in the Asia/Pacific business
resulting from recent restructuring actions. Operating losses increased $1.6
million as A&M spending increased.
<13>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Divested
On March 1, 1999, the Company completed the sale of its Brazilian pasta
business for $14.3 million and realized a pretax gain of $5.1 million. Current
year operating results from divested businesses reflect the Brazilian pasta
business through its divestiture date. Prior year operating results from
divested businesses reflect the Ardmore Farms, Continental Coffee, Nile Spice,
Liqui-Dri and Brazilian pasta businesses.
Liquidity and Capital Resources
Net cash provided by operating activities was $68.6 million, an increase of
$34.2 million from the prior year, reflecting improved operating profitability.
Capital expenditures for the current and prior year were $35.3 million and
$34.9 million, respectively. The rate of capital expenditures is expected to
increase during the remainder of the year as the Company continues to invest in
cost-reduction projects and production capacity in North America. The Company
expects that capital expenditures and cash dividends for the remainder of the
year will be financed through cash flow from operating activities.
Cash used in investing activities in the current year includes the Company's
purchase of marketable securities of $103.3 million partly offset by proceeds
from the sale of the Brazilian pasta business. Cash provided by investing
activities in the prior year includes a $240 million recovery of income taxes
paid on previous capital gains and proceeds of $73.2 million from the December
1997 divestiture of certain food service businesses. These prior year cash
flows were partly offset by the Company's purchase of marketable securities of
$103.3 million.
Financing activities used cash of $108.9 million and $110.2 million in the
current year and prior year, respectively, primarily to repurchase shares and
pay down debt. During the current year, the Company repurchased 954,700 shares
of its outstanding common stock for $53.7 million under the $1 billion
repurchase program announced in March 1998. During the current year,
approximately 477,000 employee stock options were exercised which provided cash
of $15.0 million.
Short-term and long-term debt (total debt) as of March 31, 1999 was $902.0
million, a decrease of $29.6 million from December 31, 1998. Amounts available
under revolving credit facilities and debt and commercial paper ratings were
unchanged during the current quarter.
<14>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to commodity price, foreign currency
exchange rate and interest rate risks and uses derivative financial and
commodity instruments to manage the impact of certain of these risks. The
Company uses derivatives only for purposes of managing risk associated with
underlying exposures. The Company does not trade or use instruments with the
objective of earning financial gains on the commodity price, exchange rate or
interest rate fluctuations alone, nor does it use instruments where there are
not underlying exposures. Complex instruments involving leverage or
multipliers are not used. Management believes that its use of these
instruments to manage risk is in the Company's best interest.
The Company has estimated its market risk exposures using sensitivity analyses.
Market risk exposure has been defined as the change in fair value of a
derivative commodity or financial instrument assuming a hypothetical 10 percent
adverse change in market prices or rates. Fair value was determined using
quoted market prices, if available. The results of the sensitivity analyses as
of March 31, 1999 did not differ materially from the amounts reported as of
December 31, 1998. Actual changes in market prices or rates may differ from
hypothetical changes.
Current and Pending Accounting Changes
In January 1998, Statement of Position (SOP) No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," was issued.
This SOP provides guidance on the accounting for computer software costs. In
April 1998, SOP No. 98-5, "Reporting on the Costs of Start-Up Activities," was
issued. This SOP provides guidance on accounting for the cost of start-up
activities. The Company's adoption of these new Statements in January 1999 did
not materially affect the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that all
derivative instruments (including certain derivative instruments imbedded in
other contracts) be recorded in the balance sheet as either an asset or a
liability measured at its fair value. The Statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting provisions for qualifying
hedges allow a derivative's gains and losses to offset related results of the
hedged item in the income statement, and require that the Company must formally
document, designate, and assess the effectiveness of transactions that qualify
for hedge accounting. Although the Company has not determined its method of
adopting this Statement, it will be required to adopt this Statement by January
2000. When adopted, this Statement could increase volatility in reported
earnings and other comprehensive income of the Company.
<15>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000
The Company uses software and other related technologies throughout its
business that will be affected by the date change in year 2000. The three areas
where year 2000 issues may affect the Company include: (1) the computer
systems, both hardware and software; (2) imbedded systems, as in computer chips
in machinery and process controls; and (3) third parties with material
relationships with the Company, such as major service providers, vendors,
suppliers and customers.
To address the year 2000 issue, the Company has developed and is executing a
detailed four-phase comprehensive readiness plan. The first phase of the
readiness plan, the assessment of the Company's internal systems, has been
completed. The second phase involves the remediation, replacement and testing
of computer systems (95 percent complete) and imbedded systems (90 percent
complete) and is scheduled for completion by mid-1999. The third phase will
continue through mid-1999 and includes the Company taking steps to assess the
year 2000 plans of its material third parties. These steps include contacting
the Company's major service providers, vendors, suppliers and customers who are
believed to be critical to the business operations after January 1, 2000, to
determine their stage of year 2000 compliance through questionnaires,
interviews, on-site visits, testing and other available means. The fourth
phase involves the development of contingency plans in the event of year 2000
non-compliance and is also expected to be completed by mid-1999.
While the Company's year 2000 readiness plans are under way, the consequences
of non-compliance by the Company, its major service providers, vendors,
suppliers or customers, could have a material adverse effect on the Company's
operations. Although the Company does not anticipate any major non-compliance
issues, it currently believes that the greatest risk of disruption in its
business exists in the event of non-compliance by its material third parties.
Some of the possible consequences of non-compliance by the Company or its
material third parties include, among other things: temporary plant closings;
delays in the delivery and receipt of products and supplies; invoice and
collection errors; and inventory obsolescence. Given these risks, the Company
is developing contingency plans intended to mitigate the possible disruption in
business operations that may result from year 2000 non-compliance. Contingency
plans may include stockpiling raw and packaging materials, increasing finished
goods inventory levels, securing alternate suppliers or other appropriate
measures. It is currently estimated that the aggregate cost of the Company's
year 2000 efforts will be approximately $12 million to $13 million, of which
approximately $9 million has been incurred to date. All of these costs are
being funded through operating cash flow. These amounts do not include any
costs associated with the implementation of contingency plans.
The Company's year 2000 readiness plan is an ongoing process and the estimates
of costs and completion dates for various components of the program as
described above are subject to change.
<16>
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
Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis. Statements that are not historical facts, including statements about
expectations or projected results, are forward-looking statements. 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
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 spending or programs;
fluctuations in the cost and availability of supply chain resources; foreign
economic conditions, including currency rate fluctuations; weather; and the
ability of the Company, and its major service providers, vendors, suppliers and
customers, to adequately address the year 2000 issue. Forward-looking
statements speak only as of the date they were made, and the company undertakes
no obligation to publicly update them.
<17>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Note 2 in Part I is incorporated by reference herein.
Item 6 Exhibits and Reports on Form 8-K
Item 6(a) See Exhibit Index.
All other items in Part II are either inapplicable to the Company during
the quarter ended March 31, 1999, 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.
<18>
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 5, 1999 /s/ Terence D. Martin
Terence D. Martin
Senior Vice President - Finance and
Chief Financial Officer
Date: May 5, 1999 /s/ Richard M. Gunst
Richard M. Gunst
Vice President and
Corporate Controller
<19>
EXHIBIT INDEX
Exhibit Paper (P) or
Number Description Electronic (E)
27 Financial Data Schedule E
<20>
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