UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended |
OR
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 1-4171
KELLOGG COMPANY
State of Incorporation—Delaware | IRS Employer Identification No.38-0710690 |
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant’s telephone number: 616-961-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Common Stock outstanding JulyOctober 31, 2000 - 405,638,938— 405,638,988 shares
KELLOGG COMPANY
INDEX
PART I | Page | |||||
Item 1: | ||||||
Consolidated Balance Sheet December 31, 1999 | 2 | |||||
Consolidated Statement of Earnings ended | 3 | |||||
Consolidated Statement of Cash Flows — ended | 4 | |||||
Notes to Consolidated Financial Statements | ||||||
Item 2: | ||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||
PART II — Other Information | ||||||
Item 4: | ||||||
Submission of Matters to a Vote of Security Holders | ||||||
Item 6: | ||||||
Exhibits and Reports on Form 8-K | ||||||
Signatures | ||||||
Exhibit Index |
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)
June 30, | December 31, | September 30, | December 31, | |||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||
(unaudited) | * | (unaudited) | * | |||||||||||||||
Current assets | Current assets | Current assets | ||||||||||||||||
Cash and cash equivalents | Cash and cash equivalents | $ | 172.3 | $ | 150.6 | Cash and cash equivalents | $ | 216.3 | $ | 150.6 | ||||||||
Accounts receivable, net | Accounts receivable, net | 785.1 | 678.5 | Accounts receivable, net | 822.3 | 678.5 | ||||||||||||
Inventories: | ||||||||||||||||||
Raw materials and supplies | 145.0 | 141.2 | Raw materials and supplies | 146.5 | 141.2 | |||||||||||||
Finished goods and materials in process | 342.0 | 362.6 | Finished goods and materials in process | 320.6 | 362.6 | |||||||||||||
Other current assets | Other current assets | 243.3 | 236.3 | Other current assets | 212.6 | 236.3 | ||||||||||||
Total current assets | Total current assets | 1,687.7 | 1,569.2 | Total current assets | 1,718.3 | 1,569.2 | ||||||||||||
Property,net of accumulated depreciation of $2,561.9 and $2,515.8 | 2,593.7 | 2,640.9 | ||||||||||||||||
Property, net of accumulated depreciation of $2,583.8 and $2,515.8 | Property, net of accumulated depreciation of $2,583.8 and $2,515.8 | 2,535.6 | 2,640.9 | |||||||||||||||
Other assets | Other assets | 743.3 | 598.6 | Other assets | 745.5 | 598.6 | ||||||||||||
Total assets | Total assets | $ | 5,024.7 | $ | 4,808.7 | Total assets | $ | 4,999.4 | $ | 4,808.7 | ||||||||
Current liabilities | Current liabilities | Current liabilities | ||||||||||||||||
Current maturities of long-term debt | Current maturities of long-term debt | $ | 404.5 | $ | 2.9 | Current maturities of long-term debt | $ | 904.8 | $ | 2.9 | ||||||||
Notes payable | Notes payable | 611.7 | 518.6 | Notes payable | 579.9 | 518.6 | ||||||||||||
Accounts payable | Accounts payable | 410.3 | 305.3 | Accounts payable | 394.3 | 305.3 | ||||||||||||
Income taxes | Income taxes | 76.6 | 83.5 | Income taxes | 117.5 | 83.5 | ||||||||||||
Other current liabilities | Other current liabilities | 659.5 | 677.5 | Other current liabilities | 599.6 | 677.5 | ||||||||||||
Total current liabilities | Total current liabilities | 2,162.6 | 1,587.8 | Total current liabilities | 2,596.1 | 1,587.8 | ||||||||||||
| ||||||||||||||||||
Long-term debt | Long-term debt | 1,212.2 | 1,612.8 | Long-term debt | 709.1 | 1,612.8 | ||||||||||||
Nonpension postretirement benefits | Nonpension postretirement benefits | 415.8 | 424.9 | Nonpension postretirement benefits | 413.1 | 424.9 | ||||||||||||
Deferred income taxes and other liabilities | Deferred income taxes and other liabilities | 369.2 | 370.0 | Deferred income taxes and other liabilities | 372.5 | 370.0 | ||||||||||||
| ||||||||||||||||||
Shareholders’ equity | Shareholders’ equity | Shareholders’ equity | ||||||||||||||||
Common stock, $.25 par value | Common stock, $.25 par value | 103.8 | 103.8 | Common stock, $.25 par value | 103.8 | 103.8 | ||||||||||||
Capital in excess of par value | Capital in excess of par value | 101.9 | 104.5 | Capital in excess of par value | 102.0 | 104.5 | ||||||||||||
Retained earnings | Retained earnings | 1,431.0 | 1,317.2 | Retained earnings | 1,510.6 | 1,317.2 | ||||||||||||
Treasury stock, at cost | Treasury stock, at cost | (374.1 | ) | (380.9 | ) | Treasury stock, at cost | (374.0 | ) | (380.9 | ) | ||||||||
Accumulated other comprehensive income | Accumulated other comprehensive income | (397.7 | ) | (331.4 | ) | Accumulated other comprehensive income | (433.8 | ) | (331.4 | ) | ||||||||
Total shareholders’ equity | Total shareholders’ equity | 864.9 | 813.2 | Total shareholders’ equity | 908.6 | 813.2 | ||||||||||||
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 5,024.7 | $ | 4,808.7 | Total liabilities and shareholders’ equity | $ | 4,999.4 | $ | 4,808.7 | ||||||||
*Condensed from audited financial statements. | ||||||||||||||||||
| ||||||||||||||||||
Refer to Notes to Consolidated Financial Statements |
*Condensed from audited financial statements.
Refer to Notes to Consolidated Financial Statements
2
Kellogg Company and Subsidiaries
CONSOLIDATED EARNINGS
(millions, except per share data)
Three months ended | Six months ended | Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||
June 30, | June 30, | September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||||
(Results are unaudited) | 2000 | 1999 | Change | 2000 | 1999 | Change | (Results are unaudited) | 2000 | 1999 | 2000 | 1999 | ||||||||||||||||||||||||||||||||
Ready-to-eat cereal net sales | Ready-to-eat cereal net sales | $ | 1,347.1 | $ | 1,362.4 | $ | 2,651.7 | $ | 2,692.7 | Ready-to-eat cereal net sales | $ | 1,364.7 | $ | 1,393.1 | $ | 4,016.4 | $ | 4,085.8 | |||||||||||||||||||||||||
Convenience foods net sales | Convenience foods net sales | 454.0 | 422.0 | 901.3 | 837.0 | Convenience foods net sales | 481.0 | 475.3 | 1,382.3 | 1,312.3 | |||||||||||||||||||||||||||||||||
Consolidated | 1,801.1 | 1,784.4 | 0.9 | % | 3,553.0 | 3,529.7 | 0.7 | % | |||||||||||||||||||||||||||||||||||
Consolidated | 1,845.7 | 1,868.4 | 5,398.7 | 5,398.1 | |||||||||||||||||||||||||||||||||||||||
Cost of goods sold | Cost of goods sold | 849.5 | 838.3 | 1,686.4 | 1,674.7 | Cost of goods sold | 875.7 | 883.7 | 2,562.1 | 2,558.4 | |||||||||||||||||||||||||||||||||
Selling and administrative expense | Selling and administrative expense | 671.7 | 674.8 | 1,301.5 | 1,324.2 | Selling and administrative expense | 661.9 | 687.8 | 1,963.4 | 2,012.0 | |||||||||||||||||||||||||||||||||
Restructuring charges | Restructuring charges | 21.3 | — | 21.3 | 36.8 | Restructuring charges | — | 149.0 | 21.3 | 185.8 | |||||||||||||||||||||||||||||||||
Operating profit | Operating profit | 258.6 | 271.3 | -4.7 | % | 543.8 | 494.0 | 10.1 | % | Operating profit | 308.1 | 147.9 | 851.9 | 641.9 | |||||||||||||||||||||||||||||
Interest expense | Interest expense | 34.2 | 29.0 | 66.0 | 58.0 | Interest expense | 36.4 | 29.5 | 102.4 | 87.5 | |||||||||||||||||||||||||||||||||
Disposition-related charges | Disposition-related charges | — | (168.5 | ) | — | (168.5 | ) | ||||||||||||||||||||||||||||||||||||
Other income (expense), net | Other income (expense), net | 8.4 | (3.5 | ) | 7.6 | (6.2 | ) | Other income (expense), net | 0.2 | 2.2 | 7.8 | (4.0 | ) | ||||||||||||||||||||||||||||||
Earnings before income taxes | Earnings before income taxes | 232.8 | 238.8 | -2.5 | % | 485.4 | 429.8 | 12.9 | % | Earnings before income taxes | 271.9 | (47.9 | ) | 757.3 | 381.9 | ||||||||||||||||||||||||||||
Income taxes | Income taxes | 81.9 | 84.6 | 172.8 | 156.8 | Income taxes | 90.0 | (12.3 | ) | 262.8 | 144.5 | ||||||||||||||||||||||||||||||||
Net earnings | Net earnings | $ | 150.9 | $ | 154.2 | -2.1 | % | $ | 312.6 | $ | 273.0 | 14.5 | % | Net earnings | $ | 181.9 | ($35.6 | ) | $ | 494.5 | $ | 237.4 | |||||||||||||||||||||
Net earnings per share (basic and diluted) | Net earnings per share (basic and diluted) | $ | .37 | $ | .38 | -2.6 | % | $ | .77 | $ | .67 | 14.9 | % | Net earnings per share (basic and diluted) | $ | .45 | ($0.08 | ) | $ | 1.22 | $ | .59 | |||||||||||||||||||||
Dividends per share | Dividends per share | $ | .245 | $ | .235 | 4.3 | % | $ | .490 | $ | .470 | 4.3 | % | Dividends per share | $ | .253 | $ | .245 | $ | .743 | $ | .715 | |||||||||||||||||||||
Average shares outstanding | Average shares outstanding | 405.6 | 405.2 | 405.5 | 405.1 | Average shares outstanding | 405.6 | 405.2 | 405.6 | 405.1 | |||||||||||||||||||||||||||||||||
Actual shares outstanding at period end | Actual shares outstanding at period end | 405.6 | 405.2 | Actual shares outstanding at period end | 405.6 | 405.3 | |||||||||||||||||||||||||||||||||||||
Refer to Notes to Consolidated Financial Statements |
Refer to Notes to Consolidated Financial Statements
3
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
Six months ended | Nine months ended | |||||||||||||||||
June 30, | September 30, | |||||||||||||||||
(Results are unaudited) | (Results are unaudited) | 2000 | 1999 | (Results are unaudited) | 2000 | 1999 | ||||||||||||
Operating activities | Operating activities | Operating activities | ||||||||||||||||
Net earnings | Net earnings | $ | 312.6 | $ | 273.0 | Net earnings | $ | 494.5 | $ | 237.4 | ||||||||
Items in net earnings not requiring cash: | ||||||||||||||||||
Depreciation and amortization | 143.2 | 140.6 | Depreciation and amortization | 217.3 | 215.2 | |||||||||||||
Deferred income taxes | 9.0 | 10.7 | Deferred income taxes | 34.1 | (27.1 | ) | ||||||||||||
Restructuring charges, net of cash paid | 19.3 | 25.8 | Restructuring charges, net of cash paid | 17.8 | 173.1 | |||||||||||||
Other | 14.3 | 16.9 | Disposition-related charges | — | 168.5 | |||||||||||||
Other | 16.8 | 40.4 | ||||||||||||||||
Postretirement benefit plan contributions | Postretirement benefit plan contributions | (51.9 | ) | (40.6 | ) | Postretirement benefit plan contributions | (61.9 | ) | (64.1 | ) | ||||||||
Changes in operating assets and liabilities | Changes in operating assets and liabilities | (54.6 | ) | (126.8 | ) | Changes in operating assets and liabilities | (88.5 | ) | (194.0 | ) | ||||||||
Net cash provided by operating activities | Net cash provided by operating activities | 391.9 | 299.6 | Net cash provided by operating activities | 630.1 | 549.4 | ||||||||||||
Investing activities | Investing activities | Investing activities | ||||||||||||||||
Additions to properties | Additions to properties | (127.4 | ) | (115.3 | ) | Additions to properties | (172.5 | ) | (177.7 | ) | ||||||||
Acquisitions of businesses | Acquisitions of businesses | (124.7 | ) | — | Acquisitions of businesses | (135.3 | ) | — | ||||||||||
Dispositions of businesses | Dispositions of businesses | — | 16.0 | |||||||||||||||
Other | Other | (3.4 | ) | 8.4 | Other | (4.7 | ) | 22.2 | ||||||||||
Net cash used in investing activities | Net cash used in investing activities | (255.5 | ) | (106.9 | ) | Net cash used in investing activities | (312.5 | ) | (139.5 | ) | ||||||||
Financing activities | Financing activities | Financing activities | ||||||||||||||||
Net issuances of notes payable | 85.9 | 8.4 | ||||||||||||||||
Issuances of long-term debt | 1.6 | — | ||||||||||||||||
Net issuances (reductions) of notes payable | Net issuances (reductions) of notes payable | 55.1 | (101.0 | ) | ||||||||||||||
Reductions of long-term debt | Reductions of long-term debt | — | (2.3 | ) | Reductions of long-term debt | (1.1 | ) | (2.9 | ) | |||||||||
Net issuances of common stock | Net issuances of common stock | 4.2 | 4.4 | Net issuances of common stock | 4.5 | 7.8 | ||||||||||||
Cash dividends | Cash dividends | (198.8 | ) | (190.8 | ) | Cash dividends | (301.2 | ) | (290.3 | ) | ||||||||
Net cash used in financing activities | Net cash used in financing activities | (107.1 | ) | (180.3 | ) | Net cash used in financing activities | (242.7 | ) | (386.4 | ) | ||||||||
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | (7.6 | ) | (8.6 | ) | Effect of exchange rate changes on cash | (9.2 | ) | (9.1 | ) | ||||||||
Increase in cash and cash equivalents | Increase in cash and cash equivalents | 21.7 | 3.8 | Increase in cash and cash equivalents | 65.7 | 14.4 | ||||||||||||
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 150.6 | 136.4 | Cash and cash equivalents at beginning of period | 150.6 | 136.4 | ||||||||||||
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 172.3 | $ | 140.2 | Cash and cash equivalents at end of period | $ | 216.3 | $ | 150.8 | ||||||||
Refer to Notes to Consolidated Financial Statements |
Refer to Notes to Consolidated Financial Statements
4
Notes to Consolidated Financial Statements
for the three and sixnine months ended JuneSeptember 30, 2000 (unaudited)
1. Accounting policies
The unaudited interim financial information included herein reflects the adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. Such interim information should be read in conjunction with the financial statements and notes thereto contained on pages 22 to 34 of the Company’s 1999 Annual Report. The accounting policies used in preparing these financial statements are the same as those summarized in the Company’s 1999 Annual Report. Certain amounts for 1999 have been reclassified to conform to current periodcurrent-period classifications.
The results of operations for the three and sixnine months ended JuneSeptember 30, 2000, are not necessarily indicative of the results to be expected for other interim periods or the full year.
On May 18, 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached consensus on Issue No. 00-14 “Accounting for Certain Sales Incentives.” This Issue addresses the recognition, measurement, and income statement classification of sales incentives offered by vendors (including manufacturers) that have the effect of reducing the price of a product or service to a customer at the point of sale. For cash sales incentives within the scope of this Issue, costs are generally recognized at the date on which the related revenue is recorded by the vendor and are to be classified as a reduction of revenue. For non-cash sales incentives, such as package inserts, costs are to be classified within cost of sales. This Issue is effective for the fourth quarter of fiscal years beginning after December 15, 1999. The effect of adoption resulting from changes in recognition and measurement is reported either prospectively or as a cumulative effect of a change in accounting principle. The effect of adoption resulting from changes in classification is reflected retroactively via restatement of comparative financial statements. As a result of adopting EITF No. 00-14 in the quarter ended December 31, 2000, the Company will report the cost of consumer coupons as a reduction of net sales and the cost of package inserts and similar items within cost of goods sold. The Company has historically reported these costs as promotional expenditures within selling and administrative expense. As a result, full-year 2000 net sales are expected to decrease by approximately $100 million and cost of goods sold is expected to impact how the Company classifies costs related to consumer coupons, package inserts and other non-cash promotional offers, and certain marketing programs conducted with the retail trade. Management is currently assessing the impact of this guidance and believes adoption could result in a material reduction in net sales, with a corresponding reduction in selling, general,increase by approximately $75 million. Selling and administrative expense. Netexpense will correspondingly decrease, such that net earnings wouldwill not be affected. The Statement of Earnings for all comparative periods will be consistently reclassified.
2. Earnings per share
Basic net earnings per share is determined by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares are comprised principally of employee stock options issued by the Company and had an insignificant impact on earnings per share during the periods presented. Basic net
5
earnings per share is reconciled to diluted net earnings per share as follows (in millions, except per share data):
5
Average | Net | Average | Net | |||||||||||||||||||||||||||||||||
Net | shares | earnings | Net | shares | earnings (loss) | |||||||||||||||||||||||||||||||
earnings | outstanding | per share | earnings (loss) | outstanding | per share | |||||||||||||||||||||||||||||||
Quarter | Quarter | |||||||||||||||||||||||||||||||||||
2000 | ||||||||||||||||||||||||||||||||||||
Basic | $ | 150.9 | 405.6 | $ | .37 | Basic | $ | 181.9 | 405.6 | $ | .45 | |||||||||||||||||||||||||
Dilutive employee stock options | — | .5 | — | Dilutive employee stock options | — | .3 | — | |||||||||||||||||||||||||||||
Diluted | $ | 150.9 | 406.1 | $ | .37 | Diluted | $ | 181.9 | 405.9 | $ | .45 | |||||||||||||||||||||||||
1999 | ||||||||||||||||||||||||||||||||||||
Basic | $ | 154.2 | 405.2 | $ | .38 | Basic | $ | (35.6 | ) | 405.2 | $ | (.08 | ) | |||||||||||||||||||||||
Dilutive employee stock options | — | .4 | — | Dilutive employee stock options | — | .4 | — | |||||||||||||||||||||||||||||
Diluted | $ | 154.2 | 405.6 | $ | .38 | Diluted | $ | (35.6 | ) | 405.6 | $ | (.08 | ) | |||||||||||||||||||||||
Year-to-date | Year-to-date | |||||||||||||||||||||||||||||||||||
2000 | ||||||||||||||||||||||||||||||||||||
Basic | $ | 312.6 | 405.5 | $ | .77 | Basic | $ | 494.5 | 405.6 | $ | 1.22 | |||||||||||||||||||||||||
Dilutive employee stock options | — | .2 | — | Dilutive employee stock options | — | .2 | — | |||||||||||||||||||||||||||||
Diluted | $ | 312.6 | 405.7 | $ | .77 | Diluted | $ | 494.5 | 405.8 | $ | 1.22 | |||||||||||||||||||||||||
1999 | ||||||||||||||||||||||||||||||||||||
Basic | $ | 273.0 | 405.1 | $ | .67 | Basic | $ | 237.4 | 405.1 | $ | .59 | |||||||||||||||||||||||||
Dilutive employee stock options | — | .5 | — | Dilutive employee stock options | — | .5 | — | |||||||||||||||||||||||||||||
Diluted | $ | 273.0 | 405.6 | $ | .67 | Diluted | $ | 237.4 | 405.6 | $ | .59 | |||||||||||||||||||||||||
3. Comprehensive Income
Comprehensive income includes all changes in equity during a period except those resulting from investments by or distributions to shareholders. For the Company, comprehensive income for the periods presented consists solely of net earnings and foreign currency translation adjustments pursuant to SFAS No. 52 “Foreign Currency Translation” as follows (in millions):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||
2000 | 1999 | 2000 | 1999 | ||||||||||||||||
Net earnings | $ | 150.9 | $ | 154.2 | $ | 312.6 | $ | 273.0 | |||||||||||
Other comprehensive income (loss): | |||||||||||||||||||
Foreign currency translation adjustment | (43.3) | (4.2) | (66.3) | (36.4) | |||||||||||||||
Related tax effect | — | — | — | — | |||||||||||||||
(43.3 | ) | (4.2 | ) | (66.3 | ) | (36.4 | ) | ||||||||||||
Total comprehensive income | $ | 107.6 | $ | 150.0 | $ | 246.3 | $ | 236.6 | |||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
2000 | 1999 | 2000 | 1999 | ||||||||||||||
Net earnings (loss) | $ | 181.9 | $ | (35.6 | ) | $ | 494.5 | $ | 237.4 | ||||||||
Other comprehensive income (loss): | |||||||||||||||||
Foreign currency translation adjustment | (36.1 | ) | 5.0 | (102.4 | ) | (31.4 | ) | ||||||||||
Related tax effect | — | — | — | — | |||||||||||||
(36.1 | ) | 5.0 | (102.4 | ) | (31.4 | ) | |||||||||||
Total comprehensive income (loss) | $ | 145.8 | $ | (30.6 | ) | $ | 392.1 | $ | 206.0 | ||||||||
6
4. Debt
Notes payable at JuneSeptember 30, 2000, consist primarily of commercial paper borrowings in the United States in the amount of $560.4$539.4 million with an effective interest rate of 6.6%6.51%. Long-term debt consists primarily of fixed rate issuances of U.S. and Euro Dollar Notes, including $900 million due in 2001, $500 million due in 2004, and $200 million due in 2005. The amount due in 2001 includes $400 million in Notes which provide an option to holders to extend the obligation for an additional four years at a predetermined interest rate of 5.63% plus the Company’s then-current credit spread. Based on current interest rate levels, management does not believe thethese Notes will be extended and is currently examining refinancing strategies.
Associated with the debt due in 2001, the Company has entered into $600 million notional in fixed-to-floating interest rate swaps, which will expire in conjunction with the debt issues. These swaps are indexed to either three-month LIBOR or the Federal Reserve AA Composite Rate on 30-day commercial paper.
5. Restructuring charges
During the past several years, management has commenced major productivity and operational streamlining initiatives in an effort to optimize the Company’s cost structure. The incremental costs of these programs have been reported during these years as restructuring charges. Refer to pages 26-28 of the Company’s 1999 Annual Report for more information on these initiatives.
Operating profit for the quarternine months ended JuneSeptember 30, 2000, includes restructuring charges of $21.3 million ($14.7 million after tax or $.04 per share) for a supply chain efficiency initiative in Europe. The charges, recorded in the second quarter of 2000, were comprised principally of voluntary employee retirement and separation benefits. This program is expected to result in hourly and salaried headcount reductions of 190 by the end of 2000 and expected to generate approximately $13 million in annual pre-tax savings beginning in 2001.
Operating profit for the year-to-date periodthree months ended JuneSeptember 30, 1999, includes restructuring charges of $36.8$149.0 million ($25.694.9 million after tax or $.07$.23 per share). Operating profit for the nine months ended September 30, 1999, includes restructuring charges of $185.8 million ($120.5 million after tax or $.30 per share). The charges recorded in the third quarter of 1999 consisted of $128.2 million for closing the South Operations portion of the Company’s Battle Creek, Michigan cereal plant and $20.8 million primarily for manufacturing equipment write-offs related to previously closed or impaired facilities in various locations. The charges recorded in the year-to-date period also included $36.8 million recognized in the first quarter of 1999 for workforce reduction initiatives. initiatives around the world.
The third quarter 1999 charges for the South Operations closing consisted of approximately $110 million for asset write-offs and $18 million for equipment removal and building demolition costs. As part of the Company’s strategy of continuing cost reduction and efficiency improvement, these operations were closed in October 1999. Some production capacity was relocated to the Company’s other U.S. cereal plants during 2000. Approximately 525 hourly and salaried positions at the plant were eliminated by the end of the first quarter of 2000 through a combination of voluntary and involuntary separation programs (the Company recorded charges for employee separation and other plant closing
7
costs during the fourth quarter of 1999). These actions are expected to result in annual pre-tax savings of approximately $30 million in 2000 and a further $10 million in 2001, for a total ongoing annual benefit of $40 million.
The first quarter 1999 charges for workforce reduction initiatives were comprised principally of employee retirement and separation benefits in all four of the Company’s operating segments and in corporate operations. These initiatives eliminated approximately 325 employee positions in Europe, Asia-Pacific, and Latin America and generated approximately $15 million of pre-tax savings during 1999. These initiatives are expected to generate a further $10 million in pre-tax savings in 2000, for a total ongoing annual benefit of $25 million.
Total cash outlays during the JuneSeptember 2000 year-to-date period for ongoing streamlining initiatives were approximately $34 million.$42 million, compared to $55 million in 1999. Expected cash outlays are approximately $36$27 million for the remainder of 2000 and $6$7 million in 2001. Total incremental pre-tax savings expected from streamlining initiatives is approximately $50 million in 2000 and $25 million in 2001.
The components of restructuring charges, as well as reserve balance changes, during the sixnine months ended JuneSeptember 30, 2000, arewere (in millions):
Employee | ||||||||||||||||||||
retirement & | ||||||||||||||||||||
severance | Asset | Asset | Other | |||||||||||||||||
benefits (a) | write-offs | removal | costs | Total | ||||||||||||||||
Remaining reserve at December 31, 1999 | $ | 31.4 | $ | — | $ | 28.5 | $ | — | $ | 59.9 | ||||||||||
2000 restructuring charges | 19.5 | 1.8 | 21.3 | |||||||||||||||||
Amounts utilized during 2000 | (32.1 | ) | — | (13.2 | ) | (1.8 | ) | (47.1 | ) | |||||||||||
Remaining reserve at September 30, 2000 | $ | 18.8 | $ | — | $ | 15.3 | $ | — | $ | 34.1 | ||||||||||
7
Employee | |||||||||||||||||||||
retirement & | |||||||||||||||||||||
severance | Asset | Asset | Other | ||||||||||||||||||
benefits (a) | write-offs | removal | costs | Total | |||||||||||||||||
Remaining reserve at December 31, 1999 | $ | 31.4 | $ | — | $ | 28.5 | $ | — | $ | 59.9 | |||||||||||
2000 restructuring charges | 19.5 | 1.8 | 21.3 | ||||||||||||||||||
Amounts utilized during 2000 | (28.9 | ) | — | (8.6 | ) | (1.8 | ) | (39.3 | ) | ||||||||||||
Remaining reserve at June 30, 2000 | $ | 22.0 | $ | — | $ | 19.9 | $ | — | $ | 41.9 | |||||||||||
In October 2000, management announced the next phase in the Company’s growth strategy that emphasizes a stricter prioritization for resource allocation to the United States and the Company’s other core markets. As a result, management has undertaken restructuring initiatives around the world to support this strategy and prepare for the acquisition of Keebler (refer to Note 6). While many of these initiatives are in preliminary stages, management expects to take actions that will result in restructuring charges during the fourth quarter of this year. Management is determining specific employees who will be separated, the structure of separation packages, and specific action plans to achieve operational efficiencies in various markets. Therefore, the Company is unable to estimate the amount of charges at this time.
8
6. Acquisitions and investmentsKeebler acquisition
On October 26, 2000, the Company announced that it had reached agreement to acquire Keebler Foods Company, headquartered in Elmhurst, Illinois, in a transaction entered into with Keebler and with Flowers Industries, Inc., the majority shareholder of Keebler. Keebler Foods Company ranks second in U.S. market share of the cookie and cracker categories and has the third largest food direct store delivery (DSD) system in the United States. The Company has agreed to pay $42 in cash for each common share of Keebler and assume approximately $550 million of Keebler debt, resulting in a total acquisition cost of approximately $4.4 billion. The Company plans on issuing a combination of short-term and long-term debt to finance the acquisition. The transaction is subject to the satisfaction or waiver of several closing conditions including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, approvals by Keebler and Flowers shareholders, and other customary closing conditions. The Company has entered into a Voting Agreement with Flowers, whereby Flowers, as majority shareholder of Keebler, has agreed to execute a written consent in favor of the acquisition. Flowers will be seeking shareholder approval of certain matters in connection with the transaction, but the written consent to be delivered by Flowers would be sufficient to ensure approval and adoption of the acquisition of Keebler even if the Flowers shareholder approval is not obtained. Management expects to complete the acquisition during the first quarter of 2001.
7. Other acquisitions, investments, and dispositions
In January 20, 2000, the Company purchased certain assets and liabilities of the Mondo Baking Company Division of Southeastern Mills, Inc. for approximately $93 million in cash, including related acquisition costs. Mondo Baking Company, located in Rome, Georgia, has manufactured convenience foods for Kellogg since 1993. The acquisition was accounted for as a purchase and was financed through commercial paper borrowings. Assets acquired consist primarily of a manufacturing facility and assembled workforce.
During June 2000, the Company acquired the outstanding stock of Kashi Company for approximately $33 million in cash. Kashi is a leading natural cereal company located in La Jolla, California. Also during June, the Company committed to invest $7 million of cash in Transora, a new global business-to-business e-marketplace for the consumer products industry. To date, the Company has actually paid $1.4$3.5 million under this commitment. The investment in Transora will behas been accounted for under the cost method. In July 2000, the Company acquired certain assets and liabilities of a convenience foods operation located in its Asia-Pacific region for approximately $12 million in cash. The Company will operate this business under the “Healthy Snak People” name.
7.In September 1999, the Company reached agreement to sell certain assets and liabilities of the Lender’s Bagels business to Aurora Foods Inc. for $275 million in cash (the sale was completed in November 1999). As a result of this agreement, the Company recorded a pretax charge during the third quarter of 1999 of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for the future disposal of other assets associated with the Lender’s business which were not purchased by Aurora. Disposal of these other assets was completed by June 2000. Losses from asset sales and disposal costs approximated the original charge.
9
During July 1999, the Company sold its 51% interest in a United Kingdom corn milling operation to Cargill Inc., which owned the remaining 49%. As a result of this sale, the Company recorded a pretax gain of $10.4 million ($7.8 million after tax or $.02 per share).
In total, the Company recorded net disposition-related charges of $168.5 million ($111.5 million after tax or $.27 per share) during the third quarter of 1999.
8. Operating Segments
Kellogg Company is the world’s leading producer of ready-to-eat cereal and a leading producer of convenience foods, including toaster pastries, cereal bars, frozen waffles, wholesome snacks, and meat alternatives. Principal markets for these products include the United States and United Kingdom. Through June 2000, operations were managed via four major geographic areas-Northareas — North America, Europe, Asia-Pacific, and Latin America - which are the basis of the Company’s reportable operating segment information disclosed below.America. Beginning in July 2000, the Company changed its organizational structure, such that the Canadian business unit is included in the European Area and U.S. operations are managed separately. Thus, beginning with results for the three and nine months ending September 30, 2000 (including comparable prior-year periods), the Company’s reportable operating segments will consist of the United States, Europe/Canada, Asia-Pacific, and Latin America. Restated information for previously reported quarters of 2000 and 1999 is also provided below.
8
In October 2000, management announced a reorganization of the Company into two major divisions, the United States and International, with a focus on five core markets: United States, United Kingdom/Republic of Ireland, Mexico, Canada, and Australia/New Zealand. Further, as a result of entering into an agreement to acquire the Keebler Food Company, management announced a reorganization of the U.S. business into three divisions — Morning Foods (Cereal, Pop-Tarts(R), Eggo(R)), Snacking (Keebler brands, Nutri-Grain(R), Rice Krispies Treats(R), other Kellogg convenience foods), and Natural Foods. Management is currently evaluating the impact of these reorganizations on its disclosure requirements pursuant to SFAS #131 Disclosures about Segments of an Enterprise and Related Information. Beginning with results for the three months and full year ending December 31, 2000 (including comparable prior-year periods), the Company will provide disclosures based on the new organizational structure.
The measurement of operating segment results is generally consistent with the presentation of the Consolidated Statement of Earnings. Intercompany transactions between reportable operating segments were insignificant in the periods presented.
10
Operating segment data is presented below (in millions):
Three months ended June 30, | Six months ended June 30, | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||||||
Net sales | Net sales | Net sales | ||||||||||||||||||||||||||||||||||
North America | $ | 1,149.3 | $ | 1,106.7 | $ | 2,261.9 | $ | 2,235.1 | United States | $ | 1,102.8 | $ | 1,102.5 | $ | 3,184.1 | $ | 3,166.3 | |||||||||||||||||||
Europe | 373.3 | 411.7 | 756.6 | 800.5 | Europe/Canada | 463.8 | 499.6 | 1,401.0 | 1,471.4 | |||||||||||||||||||||||||||
Asia-Pacific | 113.0 | 115.1 | 220.3 | 212.7 | Asia-Pacific | 107.8 | 115.5 | 328.1 | 328.2 | |||||||||||||||||||||||||||
Latin America | 160.1 | 151.3 | 307.2 | 279.7 | Latin America | 166.2 | 150.9 | 473.4 | 430.6 | |||||||||||||||||||||||||||
Corporate and other | 5.4 | (0.4 | ) | 7.0 | 1.7 | Corporate and other | 5.1 | (0.1 | ) | 12.1 | 1.6 | |||||||||||||||||||||||||
Consolidated | $ | 1,801.1 | $ | 1,784.4 | $ | 3,553.0 | $ | 3,529.7 | Consolidated | $ | 1,845.7 | $ | 1,868.4 | $ | 5,398.7 | $ | 5,398.1 | |||||||||||||||||||
Operating profit excluding restructuring charges | ||||||||||||||||||||||||||||||||||||
Operating profit (loss) excluding restructuring charges | Operating profit (loss) excluding restructuring charges | |||||||||||||||||||||||||||||||||||
North America | $ | 209.5 | $ | 217.1 | $ | 431.9 | $ | 449.1 | United States | $ | 207.1 | $ | 228.5 | $ | 605.1 | $ | 645.8 | |||||||||||||||||||
Europe | 67.6 | 58.5 | 120.5 | 99.8 | Europe/Canada | 91.0 | 72.1 | 245.4 | 203.7 | |||||||||||||||||||||||||||
Asia-Pacific | 6.4 | 12.6 | 18.6 | 25.4 | Asia-Pacific | (2.3 | ) | 12.4 | 16.3 | 37.8 | ||||||||||||||||||||||||||
Latin America | 41.0 | 36.2 | 76.0 | 66.9 | Latin America | 45.5 | 40.3 | 121.5 | 107.2 | |||||||||||||||||||||||||||
Corporate and other | (44.6 | ) | (53.1 | ) | (81.9 | ) | (110.4 | ) | Corporate and other | (33.2 | ) | (56.4 | ) | (115.1 | ) | (166.8 | ) | |||||||||||||||||||
Consolidated | 279.9 | 271.3 | 565.1 | 530.8 | Consolidated | 308.1 | 296.9 | 873.2 | 827.7 | |||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Restructuring charges | (21.3 | ) | — | (21.3 | ) | (36.8 | ) | Restructuring charges | — | (149.0 | ) | (21.3 | ) | (185.8 | ) | |||||||||||||||||||||
Operating profit as reported | Operating profit as reported | $ | 308.1 | $ | 147.9 | $ | 851.9 | $ | 641.9 | |||||||||||||||||||||||||||
Operating profit as reported | $ | 258.6 | $ | 271.3 | $ | 543.8 | $ | 494.0 | ||||||||||||||||||||||||||||
9Restated segment information for previously reported quarters of 2000 and 1999 is presented below:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||
2000 | 1999 | 2000 | 1999 | ||||||||||||||
Net sales | |||||||||||||||||
United States | $ | 1,056.7 | $ | 1,019.0 | $ | 2,081.3 | $ | 2,063.8 | |||||||||
Europe/Canada | 465.9 | 499.4 | 937.2 | 971.8 | |||||||||||||
Asia-Pacific | 113.0 | 115.1 | 220.3 | 212.7 | |||||||||||||
Latin America | 160.1 | 151.3 | 307.2 | 279.7 | |||||||||||||
Corporate and other | 5.4 | (0.4 | ) | 7.0 | 1.7 | ||||||||||||
Consolidated | $ | 1,801.1 | $ | 1,784.4 | $ | 3,553.0 | $ | 3,529.7 | |||||||||
Operating profit (loss) excluding restructuring charges | |||||||||||||||||
United States | $ | 192.9 | $ | 201.5 | $ | 398.0 | $ | 417.3 | |||||||||
Europe/Canada | 84.2 | 74.1 | 154.4 | 131.6 | |||||||||||||
Asia-Pacific | 6.4 | 12.6 | 18.6 | 25.4 | |||||||||||||
Latin America | 41.0 | 36.2 | 76.0 | 66.9 | |||||||||||||
Corporate and other | (44.6 | ) | (53.1 | ) | (81.9 | ) | (110.4 | ) | |||||||||
Consolidated | 279.9 | 271.3 | 565.1 | 530.8 | |||||||||||||
Restructuring charges | (21.3 | ) | — | (21.3 | ) | (36.8 | ) | ||||||||||
Operating profit as reported | $ | 258.6 | $ | 271.3 | $ | 543.8 | $ | 494.0 | |||||||||
11
Three months ended March 31, 2000 1999 Net sales United States $ 1,024.6 $ 1,044.8 Europe/Canada 471.3 472.4 Asia-Pacific 107.3 97.6 Latin America 147.1 128.4 Corporate and other 1.6 2.1 Consolidated $ 1,751.9 $ 1,745.3 Operating profit (loss) excluding restructuring charges United States $ 205.1 $ 215.8 Europe/Canada 70.2 57.5 Asia-Pacific 12.2 12.8 Latin America 35.0 30.7 Corporate and other (37.3 ) (57.3 ) Consolidated 285.2 259.5 Restructuring charges — (36.8 ) Operating profit as reported $ 285.2 $ 222.7 Three months ended December 31, Twelve months ended December 31, 1999 1999 Net sales United States $ 847.9 $ 4,014.2 Europe/Canada 487.1 1,958.5 Asia-Pacific 113.8 442.0 Latin America 136.4 567.0 Corporate and other 0.9 2.5 Consolidated $ 1,586.1 $ 6,984.2 Operating profit (loss) excluding restructuring charges United States $ 157.3 $ 803.1 Europe/Canada 84.0 287.7 Asia-Pacific 15.4 53.2 Latin America 34.1 141.3 Corporate and other (45.1 ) (211.9 ) Consolidated 245.7 1,073.4 Restructuring charges (58.8 ) (244.6 ) Operating profit as reported $ 186.9 $ 828.8
12
KELLOGG COMPANY
PART I — FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of operations
Kellogg Company is the world’s leading producer of ready-to-eat cereal and a leading producer of convenience foods, including toaster pastries, cereal bars, frozen waffles, wholesome snacks, and meat alternatives. Principal markets for these products include the United States and United Kingdom. During the periods presented,present quarter, operations were managed viain four major geographic areas - North America, Europe,— United States, Europe/Canada, Asia-Pacific, and Latin America -— which are the basis of the Company’s reportable operating segment information.information in this filing.
In the secondthird quarter of 2000, Kellogg Company recorded its fifthsixth consecutive quarterly year-over-year increasesincrease in operating profit, net earnings, and earnings per share, excluding charges. TheseHigher energy prices and interest rates, strong competitive activity, weak foreign currencies, and an aged inventory write-off in Southeast Asia negatively impacted results were driven by cereal volumefor the quarter. The Company was able to more than offset these factors and deliver growth infor the quarter through manufacturing efficiencies, reduced marketing and overhead expenses, and recognition of a tax benefit related to U.S. research and Mexico, and strong operating profit delivery in Europe.experimental credits.
For the quarter ended JuneSeptember 30, 2000, Kellogg Company reported net earnings and earnings per share of $150.9 million and $.37, respectively, compared to 1999 net earnings of $154.2$181.9 million and earnings per share of $.38. June$.45, compared to a 1999 net loss of $35.6 million and loss per share of $.08. September 2000 year-to-date net earnings were $494.5 million and earnings per share were $312.6 million and $.77, respectively, versus$1.22, up from prior-year amounts of $273.0$237.4 million and $.67.$.59. (All earnings per share presented represent both basic and diluted earnings per share.)
During the second quarter of 2000, the Company reported restructuring charges of $21.3 million ($14.7 million after tax or $.04 per share) for a supply chain efficiency initiative in Europe. During the first quarter of 1999, the Company reported restructuring charges of $36.8 million ($25.6 million after tax or $.07 per share) for workforce reduction initiatives around the world. During the third quarter of 1999, the Company recorded restructuring charges of $149.0 million ($94.9 million after tax or $.23 per share). In addition, the Company recorded net disposition-related charges of $168.5 million ($111.5 million after tax or $.27 per share). In total, the Company recorded pretax restructuring and disposition-related charges for the third quarter of 1999 of $317.5 million ($206.4 million after tax or $.50 per share). Total pre-tax charges recorded for the September 1999 year-to-date period were $354.3 million ($232.0 million after tax or $.57 per share). These charges have been excluded from all applicable amounts presented below for purposes of comparison between years. Refer to the separate sectionsections below for more information on restructuring and disposition-related charges.
13
Excluding charges, net earnings (in millions) and earnings per share were:
Results excluding charges | 2000 | 1999 | Change | ||||||||||
Second quarter: | |||||||||||||
Net earnings | $ | 165.6 | $ | 154.2 | +7.4 | % | |||||||
Net earnings per share | $ | .41 | $ | .38 | +7.9 | % | |||||||
June year-to-date: | |||||||||||||
Net earnings | $ | 327.3 | $ | 298.6 | +9.6 | % | |||||||
Net earnings per share | $ | .81 | $ | .74 | +9.5 | % | |||||||
Results excluding charges | 2000 | 1999 | Change | ||||||||||
Third quarter: | |||||||||||||
Net earnings | $ | 181.9 | $ | 170.8 | +6.5 | % | |||||||
Net earnings per share | $ | .45 | $ | .42 | +7.1 | % | |||||||
September year-to-date: | |||||||||||||
Net earnings | $ | 509.2 | $ | 469.4 | +8.5 | % | |||||||
Net earnings per share | $ | 1.26 | $ | 1.16 | +8.6 | % | |||||||
10
The year-to-date increase in earnings per share of 9.5%8.6% or $.07$.10 consisted of $.06 in$.08 from business growth and $.01 in$.03 from favorable tax-rate movements. Foreignmovements, offset by $.01 from unfavorable foreign currency impacts were insignificant.movements.
The Company realized the following volume results during the three and sixnine months ended JuneSeptember 30, 2000:
Quarter | Year-to-date | Quarter | Year-to-date | ||||||||||||||||||
change | change | change | change | ||||||||||||||||||
Global cereal | +1.0 | % | +.6 | % | +1.7 | % | +1.0 | % | |||||||||||||
Global convenience foods | -5.4 | % | -6.2 | % | -9.6 | % | -7.4 | % | |||||||||||||
Consolidated | -.6 | % | -1.1 | % | -1.4 | % | -1.2 | % | |||||||||||||
North America | -.5 | % | -3.5 | % | |||||||||||||||||
Europe | -3.0 | % | +1.2 | % | |||||||||||||||||
United States | -3.9 | % | -4.0 | % | |||||||||||||||||
Europe/Canada | -.5 | % | +.7 | % | |||||||||||||||||
Asia-Pacific | +3.6 | % | +3.9 | % | +3.2 | % | +3.7 | % | |||||||||||||
Latin America | +3.4 | % | +5.4 | % | +7.9 | % | +6.2 | % | |||||||||||||
Consolidated | -.6 | % | -1.1 | % | -1.4 | % | -1.2 | % | |||||||||||||
During the fourth quarter of 1999, the Company divested the Lender’s Bagels business and acquired the Worthington Foods Company. While the net impact of these events on net sales and net earnings was insignificant during the first halfnine months of 2000, convenience foods volume results were negatively affected, due to the difference in density of Worthington’s products versus Lender’s products. Excluding volume from the Lender’s and Worthington and Lender’s businesses, as well as from other acquisitions during 2000, the Company’s volume results during the three and nine months ended September 30, 2000 would have been:
Quarter | Year-to-date | |||||||
change | ||||||||
Global cereal | +.8 | % | +.7 | % | ||||
Global convenience foods | + | % | + | % | ||||
Consolidated | + | |||||||
% | +1.8 | % | ||||||
United States | +1.2 | % | +1.6 | % | ||||
Asia-Pacific | +1.8 | % | +3.2 | % | ||||
AdjustedExcluding volume from the Kashi business acquired in June 2000, U.S. cereal volume for Worthington and Lender’s volume, the North American area exhibited solid volume growth during the quarter with bothwas essentially flat, negatively impacted by a sluggish category and by heavy price promotion by competitors late in the cerealperiod. Excluding volume from the Lender’s and convenience foodsWorthington businesses, contributing to the volume increase. U.S. retail cereal volume increased 4.7%. U.S. convenience foods volume growth remainedcontinued to grow, but at a mid single-digitslower rate consistentthan the last several quarters. Management believes factors reducing the
14
growth rate included new competitors entering a soft category and difficult comparisons with the past two quarters.Company’s successful product launches during the prior year period.
The volume shortfall in EuropeEurope/Canada during the quarter was attributable to decreased cereal sales, partially offset by a solid gain in convenience foods volume. Followingsales. Convenience food volume was relatively flat. While management believes successful consumer promotions drove strong shipments in the first quarter (which had been aided by extra billing days in the period), European cereal volume declined in the second quarter as the Company reduced trade spendinggrowth in the United Kingdom, and harmonized prices across Europe. A price increase was implementedvolume shortfalls in Spain in April, resulting in a volume decline inmost other European markets more than offset this market during the quarter. However, management believes that this price increase has been implemented
11
without major impact to the Company’s trade relationships in Spain, and thatgain. The Company achieved modest cereal volume growth will resume in Canada, despite a soft category in that market.
Excluding volume from the second half ofHealthy Snak People convenience foods business acquired in July 2000, the year.
Volumevolume growth in Asia-Pacific was attributable primarily to the convenience foods business, as cereal volume softness persisted in the established markets of Australia and Japan. Management believes thatrecord-setting quarterly cereal volume in the region. Cereal volume grew in essentially all markets except Japan. Convenience foods volume grew strongly in Australia, but was impactedpartially offset by heavy competitive activity during the quarter.a significant decline in Southeast Asia. Management is making changes to refocus this market on sustainable growth.
Latin America continued to achieve solid growth in both cereal and convenience foods volume, particularly in the Mexican market, where all-time monthlymarket. The region achieved its third consecutive year-over-year record for quarterly cereal volume records were achieved in both May and June.delivery.
Net sales by major product group were (in millions):
Comparable | Comparable | |||||||||||||||||||||||||||||||
Total | business | Total | business | |||||||||||||||||||||||||||||
Quarter | 2000 | 1999 | change | change(a) | 2000 | 1999 | change | change(a) | ||||||||||||||||||||||||
Global cereal | $ | 1,347.1 | $ | 1,362.4 | -1.1 | % | +2.0 | % | $ | 1,364.7 | $ | 1,393.1 | -2.0 | % | +1.0 | % | ||||||||||||||||
Global convenience foods | 454.0 | 422.0 | +7.6 | % | +7.0 | % | $ | 481.0 | 475.3 | +1.2 | % | +1.4 | % | |||||||||||||||||||
Consolidated | $ | 1,801.1 | $ | 1,784.4 | +.9 | % | +3.1 | % | $ | 1,845.7 | $ | 1,868.4 | -1.2 | % | +1.1 | % | ||||||||||||||||
Comparable | Comparable | |||||||||||||||||||||||||||||||
Total | business | Total | business | |||||||||||||||||||||||||||||
Year-to-date | 2000 | 1999 | change | change(a) | 2000 | 1999 | change | change(a) | ||||||||||||||||||||||||
Global cereal | $ | 2,651.7 | $ | 2,692.7 | -1.5 | % | +.9 | % | $ | 4,016.4 | $ | 4,085.8 | -1.7 | % | +1.0 | % | ||||||||||||||||
Global convenience foods | $ | 901.3 | 837.0 | +7.7 | % | +8.3 | % | 1,382.3 | 1,312.3 | +5.3 | % | +5.8 | % | |||||||||||||||||||
Consolidated | $ | 3,553.0 | $ | 3,529.7 | +.7 | % | +2.5 | % | $ | 5,398.7 | $ | 5,398.1 | — | +2.0 | % | |||||||||||||||||
(a) Excluding foreign exchange, acquisitions, and dispositions.
On an operating segment basis, net sales versus the prior year were:
North | Asia- | Latin | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Quarter | America | Europe | Pacific | America | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Volume | +4.6 | % | -3.0 | % | +3.6 | % | +3.4 | % | +2.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pricing/Mix | -.9 | % | +2.0 | % | -1.9 | % | +6.4 | % | +.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions & dispositions | +.2 | % | +.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency impact | -.1 | % | -8.3 | % | -3.5 | % | -4.0 | % | -2.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total change | +3.8 | % | -9.3 | % | -1.8 | % | +5.8 | % | +.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
United | Europe/ | Asia- | Latin | |||||||||||||||||||||||||||||||||||||
North | Asia- | Latin | ||||||||||||||||||||||||||||||||||||||
Year-to-date | America | Europe | Pacific | America | Consolidated | |||||||||||||||||||||||||||||||||||
Quarter | States | Canada | Pacific | America | Consolidated | |||||||||||||||||||||||||||||||||||
Volume | +1.8 | % | +1.2 | % | +3.9 | % | +5.4 | % | +2.0 | % | +1.2 | % | -.5 | % | +1.8 | % | +7.9 | % | +1.3 | % | ||||||||||||||||||||
Pricing/Mix | -.6 | % | +1.1 | % | +.8 | % | +7.0 | % | +.5 | % | -1.7 | % | +2.6 | % | -3.8 | % | +3.3 | % | -.2 | % | ||||||||||||||||||||
Acquisitions & dispositions | -.1 | % | — | +.5 | % | +1.8 | % | +.4 | % | |||||||||||||||||||||||||||||||
Foreign currency impact | +.1 | % | -7.8 | % | -1.1 | % | -2.5 | % | -1.8 | % | — | -9.3 | % | -6.5 | % | -1.1 | % | -2.7 | % | |||||||||||||||||||||
Total change | +1.2 | % | -5.5 | % | +3.6 | % | +9.9 | % | +.7 | % | — | -7.2 | % | -6.7 | % | +10.1 | % | -1.2 | % | |||||||||||||||||||||
1215
United | Europe/ | Asia- | Latin | ||||||||||||||||||||
Year-to-date | States | Canada | Pacific | America | Consolidated | ||||||||||||||||||
Volume | +1.6 | % | +.7 | % | +3.2 | % | +6.2 | % | +1.8 | % | |||||||||||||
Pricing/Mix | -1.2 | % | +1.7 | % | -.9 | % | +5.8 | % | +.2 | % | |||||||||||||
Acquisitions & dispositions | +.2 | % | — | +.7 | % | — | +.1 | % | |||||||||||||||
Foreign currency impact | — | -7.2 | % | -3.0 | % | -2.0 | % | -2.1 | % | ||||||||||||||
Total change | +.6 | % | -4.8 | % | — | +10.0 | % | — | |||||||||||||||
Operating profit (loss) on an operating segment basis was:
North | Asia- | Latin | Corporate | Consoli- | |||||||||||||||||||||
Quarter (millions) | America | Europe | Pacific | America | and other | dated | |||||||||||||||||||
2000 operating profit | $ | 209.5 | $ | 46.3 | $ | 6.4 | $ | 41.0 | ($44.6 | ) | $ | 258.6 | |||||||||||||
2000 restructuring charges (c) | 21.3 | 21.3 | |||||||||||||||||||||||
2000 operating profit excluding restructuring charges | $ | 209.5 | $ | 67.6 | $ | 6.4 | $ | 41.0 | ($44.6 | ) | $ | 279.9 | |||||||||||||
1999 operating profit | $ | 217.1 | $ | 58.5 | $ | 12.6 | $ | 36.2 | ($53.1 | ) | $ | 271.3 | |||||||||||||
% change — 2000 vs. 1999: | |||||||||||||||||||||||||
Comparable business | -.8 | % | +23.8 | % | -47.0 | % | +17.4 | % | +7.5 | % | +6.2 | % | |||||||||||||
Acquisitions & dispositions | -2.6 | % | -2.2 | % | |||||||||||||||||||||
Foreign currency impact | -.1 | % | -8.1 | % | -1.9 | % | -4.2 | % | +8.6 | % | -.8 | % | |||||||||||||
Total change | -3.5 | % | +15.7 | % | -48.9 | % | +13.2 | % | +16.1 | % | +3.2 | % | |||||||||||||
United | Europe/ | Asia- | Latin | Corporate | Consoli- | ||||||||||||||||||||
Quarter (millions) | States | Canada | Pacific | America | and other | dated | |||||||||||||||||||
2000 operating profit (loss) | $ | 207.1 | $ | 91.0 | ($2.3 | ) | $ | 45.5 | ($33.2 | ) | $ | 308.1 | |||||||||||||
1999 operating profit | $ | 100.3 | $ | 63.0 | $ | 12.4 | $ | 40.3 | ($68.1 | ) | $ | 147.9 | |||||||||||||
1999 restructuring charges (c) | 128.2 | 9.1 | — | — | 11.7 | 149.0 | |||||||||||||||||||
1999 operating profit excluding | |||||||||||||||||||||||||
restructuring charges | $ | 228.5 | $ | 72.1 | $ | 12.4 | $ | 40.3 | ($56.4 | ) | $ | 296.9 | |||||||||||||
% change — 2000 vs. 1999: | |||||||||||||||||||||||||
Comparable business | -6.2 | % | +37.2 | % | -115.8 | % | +14.0 | % | +30.7 | % | +7.5 | % | |||||||||||||
Acquisitions & dispositions | -3.2 | % | — | +4.4 | % | — | — | -2.5 | % | ||||||||||||||||
Foreign currency impact | — | -11.0 | % | -7.2 | % | -.9 | % | +10.2 | % | -1.2 | % | ||||||||||||||
Total change | -9.4 | % | +26.2 | % | -118.6 | % | +13.1 | % | +40.9 | % | +3.8 | % | |||||||||||||
North | Asia- | Latin | Corporate | Consoli- | United | Europe/ | Asia- | Latin | Corporate | Consoli- | ||||||||||||||||||||||||||||||||||||||||
Year-to-date (millions) | Year-to-date (millions) | America | Europe | Pacific | America | and other | dated | Year-to-date (millions) | States | Canada | Pacific | America | and other | dated | ||||||||||||||||||||||||||||||||||||
2000 operating profit | 2000 operating profit | $ | 431.9 | $ | 99.2 | $ | 18.6 | $ | 76.0 | ($81.9 | ) | $ | 543.8 | 2000 operating profit | $ | 605.1 | $ | 224.1 | $ | 16.3 | $ | 121.5 | ($115.1 | ) | $ | 851.9 | ||||||||||||||||||||||||
2000 restructuring charges (c) | 2000 restructuring charges (c) | 21.3 | 21.3 | 2000 restructuring charges (c) | — | 21.3 | — | — | — | 21.3 | ||||||||||||||||||||||||||||||||||||||||
2000 operating profit excluding restructuring charges | $ | 431.9 | $ | 120.5 | $ | 18.6 | $ | 76.0 | ($81.9 | ) | $ | 565.1 | ||||||||||||||||||||||||||||||||||||||
2000 operating profit excluding | 2000 operating profit excluding | |||||||||||||||||||||||||||||||||||||||||||||||||
restructuring charges | restructuring charges | $ | 605.1 | $ | 245.4 | $ | 16.3 | $ | 121.5 | ($115.1 | ) | $ | 873.2 | |||||||||||||||||||||||||||||||||||||
1999 operating profit | 1999 operating profit | $ | 444.4 | $ | 84.1 | $ | 19.4 | $ | 65.2 | ($119.1 | ) | $ | 494.0 | 1999 operating profit | $ | 512.9 | $ | 178.9 | $ | 31.8 | $ | 105.5 | ($187.2 | ) | $ | 641.9 | ||||||||||||||||||||||||
1999 restructuring charges (c) | 1999 restructuring charges (c) | 4.7 | 15.7 | 6.0 | 1.7 | 8.7 | 36.8 | 1999 restructuring charges (c) | 132.9 | 24.8 | 6.0 | 1.7 | 20.4 | 185.8 | ||||||||||||||||||||||||||||||||||||
1999 operating profit excluding restructuring charges | 1999 operating profit excluding restructuring charges | $ | 449.1 | $ | 99.8 | $ | 25.4 | $ | 66.9 | ($110.4 | ) | $ | 530.8 | 1999 operating profit excluding restructuring charges | $ | 645.8 | $ | 203.7 | $ | 37.8 | $ | 107.2 | ($166.8 | ) | $ | 827.7 | ||||||||||||||||||||||||
% change — 2000 vs. 1999: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Comparable business | -2.5 | % | +28.1 | % | -26.2 | % | +16.7 | % | +20.3 | % | +8.4 | % | Comparable business | -4.2 | % | +27.7 | % | -55.7 | % | +15.7 | % | +23.8 | % | +8.1 | % | |||||||||||||||||||||||||
Acquisitions & dispositions | -1.4 | % | -1.4 | % | Acquisitions & dispositions | -2.1 | % | — | +1.4 | % | — | — | -1.8 | % | ||||||||||||||||||||||||||||||||||||
Foreign currency impact | +.1 | % | -7.3 | % | -.4 | % | -3.2 | % | +5.6 | % | -.5 | % | Foreign currency impact | — | -7.3 | % | -2.6 | % | -2.3 | % | +7.2 | % | -.8 | % | ||||||||||||||||||||||||||
Total change | -3.8 | % | +20.8 | % | -26.6 | % | +13.5 | % | +25.9 | % | +6.5 | % | Total change | -6.3 | % | +20.4 | % | -56.9 | % | +13.4 | % | +31.0 | % | +5.5 | % | |||||||||||||||||||||||||
(c) Refer to section below on restructuring charges.
For the quarter, the comparable business sales growthdecline in North Americathe United States was 3.7%- -.5% (favorable volume of 4.6%1.2% less unfavorable pricing/mix impact of .9%1.7%) versus a comparable business operating profit decline of .8%6.2%. The operating profit decline was
16
attributable primarily to increased production, and distribution, costs and promotional expenditures for convenience foods products, increased advertising in the convenience foods business.cereal business, and higher energy costs. In Europe,the Europe/Canada segment, operating efficiencies and a timing-related decline in marketing expense resulted in comparable business growth in operating profit of 23.8%+37.2%, mitigatingbuilding on a sales declineincrease of 1.0%2.1% (unfavorable volume of 3.0%.5% offset by favorable pricing/mix of 2.0%2.6%). DespiteIn Asia-Pacific, comparable business sales growth of 1.7%declined 2.0% (favorable volume of 3.6%1.8% less unfavorable pricing/mix impact of 1.9%3.8%), Asia-Pacific and comparable business operating profit declined 47.0%, due primarily to planned investment115.8%. Driving this decline was an $8 million aged inventory write-off in new-business development.Southeast Asia. In Latin America, comparable business sales growth of 9.8%11.2% (favorable
13
volume of 3.4%7.9% plus favorable pricing/mix of 6.4%3.3%), combined with operating efficiencies resulted in comparable business operating profit growth of 17.4%14.0%.
Consolidated margin performance for the secondthird quarter and JuneSeptember year-to-date period was:
Quarter | Year-to-date | Quarter | Year-to-date | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
2000 | 1999 | Change | 2000 | 1999 | Change | 2000 | 1999 | Change | 2000 | 1999 | Change | ||||||||||||||||||||||||||||||||||||||||||||||
Gross margin | 52.8 | % | 53.0 | % | -.2 | % | 52.5 | % | 52.6 | % | -.1 | % | 52.6 | % | 52.7 | % | -.1 | % | 52.5 | % | 52.6 | % | -.1 | % | |||||||||||||||||||||||||||||||||
SGA% (b) | -37.3 | % | -37.8 | % | +.5 | % | -36.6 | % | -37.6 | % | +1.0 | % | -35.9 | % | -36.8 | % | +.9 | % | -36.3 | % | -37.3 | % | +1.0 | % | |||||||||||||||||||||||||||||||||
Operating margin | 15.5 | % | 15.2 | % | +.3 | % | 15.9 | % | 15.0 | % | +.9 | % | 16.7 | % | 15.9 | % | +.8 | % | 16.2 | % | 15.3 | % | +.9 | % | |||||||||||||||||||||||||||||||||
(b) Selling, general, and administrative expense as a percentage of net sales.
TheFor the quarter, the gross margin was relatively flat versus the prior year, as higher costs of production for Worthington and other new products and increased energy costs offset productivity gains. The decrease in SGA% versus the prior year was due to reduced advertising, promotion, and overhead expenses, partially offset by increased promotionalexpenses. Management expects that higher energy prices and research and development expense. The reduced overhead expense resulted,heavier marketing investment will reduce margins during the balance of the year, resulting in part, from prior-year streamlining initiatives and reduced consulting fees related to cost-saving programs. Management currently believes year-to-datea full-year operating profit margin results are reflective of full-year expectations. Full-year advertising expense is expected to be comparable to the prior year.15%-16%.
Gross interest expense, prior to amounts capitalized, was up slightly versus the prior-year quarter and year-to-date periods, due primarily to an increase in short-term interest rates. Management expects full-year interest expense (net of capitalization) to be approximately $130$135-$140 million.
Quarter | Year-to-date | Quarter | Year-to-date | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(millions) | 2000 | 1999 | Change | 2000 | 1999 | Change | 2000 | 1999 | Change | 2000 | 1999 | Change | |||||||||||||||||||||||||||||||||||||||||||||
Gross interest expense | $ | 35.6 | $ | 31.0 | +$4.6 | $ | 70.0 | $ | 62.4 | +$7.6 | $ | 37.1 | $ | 31.6 | +17.4 | % | $ | 107.1 | $ | 94.0 | +13.9 | % | |||||||||||||||||||||||||||||||||||
Other income (expense), net includes non-operating items such as interest income, foreign exchange gains and losses, and charitable donations. ForDuring the quarter, other income (expense), net was favorable by $11.9the Company recorded a $9 million versustax benefit, based on completing studies with respect to U.S. research and experimentation credits for prior years. As a result, the prior year. Transactional foreign exchange gains contributed significantly to this favorable variance.
The effective income tax rate (excluding charges) was down slightlysignificantly from the prior year, due primarilyyear. Also contributing to the rate reduction were the impact of country mix and lower statutory rates in the United Kingdom and Australia. Management
The variance in the 1999 reported rates (as compared to the rates excluding the impact of restructuring and disposition-related charges) relates primarily to the disposition of nondeductible goodwill and certain restructuring charges for which no tax benefit was provided, based on management’s assessment of the likelihood of recovering such benefit in future years.
17
Quarter | Year-to-date | ||||||||||||||||||||||||||||||||
Effective Income Tax Rate: | 2000 | 1999 | Change | 2000 | 1999 | Change | |||||||||||||||||||||||||||
Excluding charges (c) | 33.1 | % | 36.6 | % | -3.5 | % | 34.6 | % | 36.2 | % | -1.6 | % | |||||||||||||||||||||
As reported | 33.1 | % | 25.7 | % | +7.4 | % | 34.7 | % | 37.8 | % | -3.1 | % | |||||||||||||||||||||
(c) Refer to sections below on restructuring and disposition-related charges.
During October 2000, a statutory rate reduction was enacted in Germany, lowering the basic corporate rate from 30% to 25%, effective January 1, 2001. Accordingly, the Company will reduce its deferred tax liabilities in this jurisdiction during the fourth quarter. As a result of the aforementioned favorable developments in the U.S. and Germany, as well as anticipated benefits related to U.S. foreign tax credits in the fourth quarter, management has recently reduced the full-year outlook for the effective income tax rate from approximately 36% to a range of 35%-36% due35-36% to approximately 32%. After 2000, the expected impacts of country mix and anticipated final enactment of aeffective tax rate reduction in Germany during(excluding the second halfimpact of the year.
Quarter | Year-to-date | |||||||||||||||||||||||
Effective Income Tax Rate: | 2000 | 1999 | Change | 2000 | 1999 | Change | ||||||||||||||||||
Excluding charges (c) | 34.8 | % | 35.4 | % | -.6 | % | 35.4 | % | 36.0 | % | -.6 | % | ||||||||||||
As reported | 35.2 | % | 35.4 | % | -.2 | % | 35.6 | % | 36.5 | % | -.9 | % | ||||||||||||
14
Restructuring charges
During the past several years, management has commenced major productivity and operational streamlining initiatives in an effort to optimize the Company’s cost structure. The incremental costs of these programs have been reported during these years as restructuring charges. Refer to pages 26-28 of the Company’s 1999 Annual Report for more information on these initiatives.
Operating profit for the quarternine months ended JuneSeptember 30, 2000 includes restructuring charges of $21.3 million ($14.7 million after tax or $.04 per share) for a supply chain efficiency initiative in Europe. The charges, recorded in the second quarter of 2000, were comprised principally of voluntary employee retirement and separation benefits. This program is expected to result in hourly and salarysalaried headcount reductions of 190 by the end of 2000 and expected to generate approximately $13 million in annual pre-taxpretax savings beginning in 2001.
Operating profit for the year-to-date periodthree months ended JuneSeptember 30, 1999 includes restructuring charges of $36.8$149.0 million ($25.694.9 million after tax or $.07$.23 per share). Operating profit for the nine months ended September 30, 1999 includes restructuring charges of $185.8 million ($120.5 million after tax or $.30 per share). The charges recorded in the third quarter of 1999 consisted of $128.2 million for closing the South Operations portion of the Company’s Battle Creek, Michigan, cereal plant and $20.8 million primarily for manufacturing equipment write-offs related to previously closed or impaired facilities in various locations. The charges recorded in the year-to-date period also included $36.8 million recognized in the first quarter of 1999 for workforce reduction initiatives. initiatives around the world.
The third quarter 1999 charges for the South Operations closing consisted of approximately $110 million for asset write-offs and $18 million for equipment removal and building demolition costs. As part of the Company’s strategy of continuing cost reduction and efficiency improvement, these operations were closed in October 1999. Some production capacity was relocated to the Company’s other U.S. cereal plants during 2000. Approximately 525 hourly and salaried positions at the plant were eliminated by the end of the first quarter of 2000 through a combination of voluntary and involuntary separation
18
programs (the Company recorded charges for employee separation and other plant closing costs during the fourth quarter of 1999). These actions are expected to result in annual pre-tax savings of approximately $30 million in 2000 and a further $10 million in 2001, for a total ongoing annual benefit of $40 million.
The first quarter 1999 charges for workforce reduction initiatives were comprised principally of employee retirement and separation benefits in all four of the Company’s operating segments and in corporate operations. These initiatives eliminated approximately 325 employee positions in Europe, Asia-Pacific, and Latin America and generated approximately $15 million of pre-tax savings during 1999. These initiatives are expected to generate a further $10 million in pre-taxpretax savings in 2000, for a total ongoing annual benefit of $25 million.
Total cash outlays during the JuneSeptember 2000 year-to-date period for ongoing streamlining initiatives were approximately $34 million.$42 million, compared to $55 million in 1999. Expected cash outlays are approximately $36$27 million for the remainder of 2000 and $6$7 million in 2001. Total incremental pre-tax savings expected from streamlining initiatives isare approximately $50 million in 2000 and $25 million in 2001.
AcquisitionsRefer to Note 5 of Notes to Consolidated Financial Statements for more information on the components of restructuring charges, as well as reserve balance changes, during the nine months ended September 30, 2000.
In October 2000, management announced the next phase in the Company’s growth strategy that emphasizes a stricter prioritization for resource allocation to the United States and investmentsthe Company’s other core markets. As a result, management has recently undertaken restructuring initiatives around the world to support this strategy and prepare for the acquisition of Keebler. While many of these initiatives are in preliminary stages, management currently expects to take actions that will result in restructuring charges during the fourth quarter of this year. Management is currently determining specific employees who will be separated, the structure of separation packages, and specific action plans to achieve operational efficiencies in various markets. Therefore, the Company is unable to estimate the amount of charges at this time.
Keebler acquisition
On October 26, 2000, the Company announced that it had reached agreement to acquire Keebler Foods Company, headquartered in Elmhurst, Illinois, in a transaction entered into with Keebler and with Flowers Industries, Inc., the majority shareholder of Keebler. Keebler Foods Company ranks second in U.S. market share of the cookie and cracker categories and has the third largest food direct store delivery (DSD) system in the United States. The Company has agreed to pay $42 in cash for each common share of Keebler and assume approximately $550 million of Keebler debt, resulting in a total acquisition cost of approximately $4.4 billion. The Company plans on issuing a combination of short-term and long-term debt to finance the acquisition. The transaction is subject to the satisfaction or waiver of several closing conditions including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, approvals by Keebler and Flowers shareholders, and other customary closing conditions. The Company has entered into a Voting Agreement with Flowers, whereby Flowers, as majority shareholder of Keebler, has agreed to execute a written consent in favor of the acquisition. Flowers will be seeking shareholder approval of certain matters in connection with the
19
transaction, but the written consent to be delivered by Flowers would be sufficient to ensure approval and adoption of the acquisition of Keebler even if the Flowers shareholder approval is not obtained. Management expects to complete the acquisition during the first quarter of 2001.
Management believes annual pre-tax cost synergies resulting from this combination will reach approximately $170 million by 2003, resulting from purchasing, plant capacity rationalization, logistics, warehousing, and elimination of duplicative selling, general, and administrative functions. Of the total amount, management expects to realize savings of approximately $20 million in 2001 and an incremental $60 million in 2002. Including revenue synergies, management expects the Keebler business to grow at compound annual growth rates of approximately 5% for sales and approximately 15% for earnings before income taxes, depreciation, and amortization, during 2001-2004.
During 2001-2002, annual goodwill and intangibles amortization resulting from the acquisition is expected to be approximately $150 million. Due to this amortization expense, acquisition financing costs, and expenditures incurred to implement cost-synergy actions, the impact of the acquisition is expected to be dilutive to reported earnings per share through 2003. Cash-basis earnings per share, however, are expected to be accretive in 2001.
Other acquisitions, investments, and dispositions
In January 20, 2000, the Company purchased certain assets and liabilities of the Mondo Baking Company Division of Southeastern Mills, Inc. for approximately $93 million in cash, including related acquisition costs. Mondo Baking Company, located in Rome, Georgia, has manufactured convenience foods for Kellogg since 1993. The acquisition was accounted for as a purchase and was financed through commercial paper borrowings. Assets acquired consist primarily of a manufacturing facility and assembled workforce.
During June 2000, the Company acquired the outstanding stock of Kashi Company for approximately $33 million in cash. Kashi is a leading natural cereal company located in La Jolla, California. Also during June, the Company committed to invest $7 million of cash in Transora, a new global business-to-business e-marketplace for the consumer products industry. To date, the Company has actually paid $1.4$3.5 million under this commitment. The investment in Transora will behas been accounted for under the cost method. In July 2000, the Company acquired certain assets and liabilities of a convenience foods operation located in its Asia-Pacific region for approximately $12 million in cash. The Company will operate this business under the “Healthy Snak People” name.
15In September 1999, the Company reached agreement to sell certain assets and liabilities of the Lender’s Bagels business to Aurora Foods Inc. for $275 million in cash (the sale was completed in November 1999). As a result of this agreement, the Company recorded a pretax charge during the third quarter of 1999 of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for the future disposal of other assets associated with the Lender’s business which were not purchased by Aurora. Disposal of these other assets was completed by June 2000. Losses from asset sales and disposal costs approximated the original charge.
20
During July 1999, the Company sold its 51% interest in a United Kingdom corn milling operation to Cargill Inc., which owned the remaining 49%. As a result of this sale, the Company recorded a pretax gain of $10.4 million ($7.8 million after tax or $.02 per share).
In total, the Company recorded net disposition-related charges of $168.5 million ($111.5 million after tax or $.27 per share) during the third quarter of 1999.
Liquidity and capital resources
The Company’s financial condition remained strong during the first halfnine months of 2000. A strong cash flow, combined with a program of issuing commercial paper and maintaining worldwide credit facilities, provides adequate liquidity to meet the Company’s operational needs. The Company continues to maintain a Prime-1 rating on its commercial paper.
For the sixnine months ended JuneSeptember 30, 2000, net cash provided by operating activities was $391.9$630.1 million, up 30.8%14.7% from $299.6$549.4 million in 1999. The increase was due primarily to higher earnings (excluding charges) and favorable working capital movements. The favorable working capital movements were attributable principally to reduced inventory and lengthening of trade payables. payable terms, partially offset by reductions in other accrued liabilities. The favorable inventory movement was driven by comparison to unusually high levels in the prior year, resulting from new product launches and Year 2000 contingency planning. The unfavorable movement in other accrued liabilities is primarily due to utilization of pre-2000 reserves for restructuring and disposition-related activities.
At JuneSeptember 30, 2000, the ratio of current assets to current liabilities was .8,.7, down from 1.0 at December 31, 1999. This decrease was due primarily to a reclassification of $400$900 million in long-term debt to current maturities during the first quarternine months of 2000.
Net cash used in investing activities was $255.5$312.5 million, up from $106.9$139.5 million in 1999. The increase was due primarily to the acquisition of the Mondo Baking and Kashi companies, asbusiness acquisitions discussed above. Management expects total spending for property additions during the year to be approximately $270$250-$260 million, down from the 1999 amount of $266.2 million.
Net cash used in financing activities was $107.1$242.7 million, related primarily to dividend payments of $198.8$301.2 million, partially offset by a net increase in total debt of $87.5$54.0 million.
On October 27, 2000, the Company declared a dividend of $.2525 per common share, payable December 15, 2000, to shareholders of record at the close of business on November 30, 2000. The Company’s year-to-datetotal 2000 per share dividend payment was $.49, a 4.3% increase overof $.995, up from $.96 in 1999, represents the prior-year payment of $.47.44th consecutive year the Company has increased its dividend.
For 2000, the Company’s Board of Directors has authorized management to repurchase up to $150.0 million in common shares. There were no repurchases during the first halfnine months of 2000.
During the second quarter of 2000, the Company’s shareholders approved a resolution by the Board of Directors to increase the Company’s authorized number of shares from 500 million to one billion. This increase is to provide sufficient shares for such corporate purposes as may be determined by the Board, including acquiring other businesses,
21
entering into collaborative arrangements with other companies, stock splits or dividends, stock-based compensation, and future financings. Other than for the possibility of issuing new shares pursuant to the Company’s option plans, the Company at present has no commitments, agreements, or undertakings to issue any such additional shares.
Notes payable at JuneSeptember 30, 2000, consist primarily of commercial paper borrowings in the United States in the amount of $560.4$539.4 million with an effective interest rate of 6.6%6.51%. Long-term debt consists primarily of fixed rate issuances of U.S. and Euro Dollar Notes, including $900 million due in 2001, $500 million due in 2004, and $200 million due in 2005. The amount due in 2001 includes $400 million in Notes which provide an option to holders to extend the obligation for an additional four years at a predetermined interest rate of 5.63% plus the Company’s then-current credit spread. Based on current interest rate levels, management does not believe thethese Notes will be extended and is currently examining refinancing strategies.
16
Associated with the debt due in 2001, the Company has entered into $600 million notional in fixed-to-floating interest rate swaps, which will expire in conjunction with the debt issues. These swaps are indexed to either three-month LIBOR or the Federal Reserve AA Composite Rate on 30-day commercial paper.
The percentage of total debt to market capitalization at JuneSeptember 30, 2000, was 19%22%, up from 17% at December 31, 1999, due primarily to a lower stock price since year-end 1999.
Following the Company’s announcement of its agreement to acquire Keebler, Moody’s and Standard & Poor’s (S&P) placed the credit ratings of the Company under review for possible downgrade. Due to the significant incremental debt that will be created in this transaction, the ratings agencies indicated that a multi-level downgrade in the Company’s ratings is possible. Management believes that such a downgrade could moderately impact the Company’s borrowing costs. Debt ratings under review include Senior Unsecured (currently Moody’s-Aa2 and S&P-AA) and Commercial Paper (currently Prime-1).
Full-year and 2001 outlook
Management believes that while the Company has improved its ability to compete over the past two years, it is not aware of any adverse trends that would materially affectnow time to seek growth more aggressively. In October 2000, management announced the next phase in the Company’s strong financial position. Should suitablegrowth strategy. The next phase focuses on a simplification of the Kellogg business, a prioritization of resources, and a return to previous levels of marketing investments. The Company also intends to set more realistic short-term targets for the business. Resources and marketing investments will be focused in those markets in which the Company expects to achieve the highest return on its investment opportunities or working capital needs arise that would require additional financing, management believes thatincluding the Company’s strong credit rating, balance sheet,United States. The Company also intends to take actions designed to improve the profitability of other markets. Consistent with these objectives, in October 2000, the Company also announced a reorganization of the Company from four Area operating segments to two main operating divisions —Kellogg USA and earnings history provide a base for obtaining additional financial resources at competitive rates and terms.Kellogg International.
Despite marketplace challenges in both cereal and convenience foods,While these actions are expected to generate long-term sustainable growth, management believes the Company is improving performancemay be challenged to meet 2000 growth targets set earlier this year. In the Company’s August filing, management provided full-year 2000 targets for net sales
22
growth of 2-4% and operating profit and earnings per share growth of 8-10%. The continuation of conditions experienced in the year-to-date period — including higher energy prices and interest rates, strong competitive activity, and weak foreign currencies - could significantly impact the Company’s results during the remainder of the year. Although such conditions will be partially offset by the anticipated recognition of benefits related to U.S. foreign tax credits during the fourth quarter by quarter as it executes itsof 2000, management has elected to reinvest a portion of these benefits in brand-building marketing initiatives, consistent with the next phase in the Company’s growth strategies. Managementstrategy. Accordingly, management has recently reduced forecastedrevised its full-year 2000 targets for net sales growth from 4-6% to 2-4%, based on year-to-date volume and foreign currency movements during the year. Management expects the Company to achieve operating profit growth (excluding restructuring charges) to reflect marginal growth, and earnings per share growth is expected to be in the mid-single digit range. Growth in earnings per share is expected to exceed growth in operating profit, due primarily to anticipated recognition of 8-10%the aforementioned tax benefits.
Consistent with the next phase in 2000.the Company’s growth strategy, management expects to increase spending on marketing investment and business realignment during 2001. As a result, management expects the Company (excluding results from the Keebler business and restructuring charges) to achieve growth in operating profit up to the mid-single digit range during 2001. Earnings per share will be up modestly, excluding 2000 foreign tax credits that were one-time in nature. Including tax credits, reported earnings per share could be flat to down in 2001.
Upcoming accounting and disclosure changes
On May 18, 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached consensus on Issue No. 00-14 “Accounting for Certain Sales Incentives.” This Issue addresses the recognition, measurement, and income statement classification of sales incentives offered by vendors (including manufacturers) that have the effect of reducing the price of a product or service to a customer at the point of sale. For cash sales incentives within the scope of this Issue, costs are generally recognized at the date on which the related revenue is recorded by the vendor and are to be classified as a reduction of revenue. For non-cash sales incentives, such as package inserts, costs are to be classified within cost of sales. This Issue is effective for the fourth quarter of fiscal years beginning after December 15, 1999. The effect of adoption resulting from changes in recognition and measurement is reported either prospectively or as a cumulative effect of a change in accounting principle. The effectAs a result of adoption resulting from changes in classification is reflected retroactively via restatement of comparative financial statements.adopting EITF No. 00-14 in the quarter ended December 31, 2000, the Company will report the cost of consumer coupons as a reduction of net sales and the cost of package inserts and similar items within cost of goods sold. The Company has historically reported these costs as promotional expenditures within selling and administrative expense. As a result, full-year 2000 net sales are expected to decrease by approximately $100 million and cost of goods sold is expected to impact how the Company classifies costs related to consumer coupons, package inserts and other non-cash promotional offers, and certain marketing programs conducted with the retail trade. Management is currently assessing the impact of this guidance and believes adoption could result in a material reduction in net sales, with a corresponding reduction in selling, general,increase by approximately $75 million. Selling and administrative expense. Netexpense will correspondingly decrease, such that net earnings wouldwill not be affected. The Statement of Earnings for all comparative periods will be consistently reclassified.
Through June 2000, operations were managed via four major geographic areas -— North America, Europe, Asia-Pacific, and Latin America - which are the basis of the Company’s reportable operating segment information disclosed below.America. Beginning in July 2000, the
17
Company changed its organizational structure, such that the Canadian business unit is included in the European Areaarea and U.S. operations are managed separately. Thus, beginning with
23
results for the three and nine months ending September 30, 2000 (including comparable prior-year periods), the Company’s reportable operating segments will consist of the United States, Europe/Canada, Asia-Pacific, and Latin America.America, and are presented in this manner within this filing. As discussed above, in October 2000, management announced a reorganization of the Company into two major divisions, the United States and International, with a focus on five core markets: United States, United Kingdom/Republic of Ireland, Mexico, Canada, and Australia/New Zealand. Further, as a result of entering into an agreement to acquire the Keebler Food Company, management announced a reorganization of the U.S. business into three divisions — Morning Foods (Cereal, Pop-Tarts(R), Eggo(R)), Snacking (Keebler brands, Nutri-Grain(R), Rice Krispies Treats(R), other Kellogg convenience foods), and Natural Foods. Management is currently evaluating the impact of these reorganizations on its disclosure requirements pursuant to SFAS #131 “Disclosures about Segments of an Enterprise and Related Information.” Beginning with results for the three months and full year ending December 31, 2000 (including comparable prior-year periods), the Company will provide disclosures based on the new organizational structure.
Forward-looking statements
From time to time, in written reports and oral statements, the Company makes “forward-looking statements” discussing, among other things, projections concerning volume, sales, operating profit growth, gross profit margin, SGA%, effective income tax rate, capital spending, the impact of acquisitions and dispositions, andas well as savings, headcount reductions, and future cash outlays related to streamlining initiatives. Forward-looking statements include predictions of future results and may contain the words “expects,” “believes,” “will,” “will deliver,” “anticipates,” “projects,” or words or phrases of similar meaning. For example, forward-looking statements are found in several sections of Management’s Discussion and Analysis above. Actual results may differ materially due to the impact of competitive conditions, marketing spending, and/or incremental pricing actions on actual volumes and product mix; the success of new product introductions; the levels of spending on system initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs; raw material price and labor cost fluctuations; expenditures necessary to carry out streamlining initiatives and savings derived therefrom; foreign currency exchange rate fluctuations; changes in statutory tax law; interest rates available on short-term financing; and other items. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.
1824
KELLOGG COMPANY
PART II — OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Submission of Matters to a Vote of Security Holders | |||||
There were no |
report is filed. | |||||||
Exhibits and Reports on Form 8-K | |||||||
(a) Exhibits: | ||||||
2.01 — | ||||||
2.02 — |
19
October 26, 2000 between Flowers Industries, Inc., Kellogg Company and Kansas Merger Subsidiary, Inc. | ||||||
2.03 — | ||||||
2.04 — |
Company | ||||||
10.01 — | ||||||
Item 6. Exhibits and Reports on Form 8-K
27.01 | Financial Data Schedule |
(b) Reports on Form 8-K: |
No reports on Form 8-K were filed during the quarter for which this report is filed. |
2025
KELLOGG COMPANY
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.
KELLOGG COMPANY |
/s/ T. J. Webb |
T. J. Webb Principal Financial Officer; Executive Vice President |
/s/ J. M. Boromisa |
J. M. Boromisa Principal Accounting Officer; Vice President |
Date: August 11,November 9, 2000
2126
KELLOGG COMPANY
EXHIBIT INDEX
Electronic (E) | ||||
Paper (P) | ||||
Incorp. By | ||||
Exhibit No. | Description | Ref. (IBRF) | ||
Distribution Agreement dated as of October 26, 2000 between Flowers Industries, Inc. and Flowers Foods, Inc. Incorporated by reference to Exhibit 2.1 to the | ||||
Agreement and Plan of Restructuring and Merger dated as of October 26, 2000 between | ||||
Agreement and Plan of Merger dates as of October 26, 2000 between Keebler Foods Company, Kellogg Company and FK Acquisition Corp. Incorporated by reference to Exhibit 2.3 to the Form 8-K filed November 6, 2000. | IBRF | |||
2.04 | Voting Agreement dates as of October 26, 2000 between Flowers Industries, Inc. and Kellogg Company Incorporated by reference to Exhibit 2.4 to the Form 8-K filed November 6, 2000. | IBRF | ||
10.01 | Agreement between the Company and Jacobus | E | ||
27.01 | Financial Data Schedule | E |
2227