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EXHIBIT 13.01
MANAGEMENT'S DISCUSSION AND ANALYSIS
Kellogg Company and Subsidiaries
RESULTS OF OPERATIONS
OVERVIEW
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, and meat alternatives. Principal markets for these products
include the United States and United Kingdom. Operations are 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.
During 1999, the Company increased sales and achieved double-digit growth in net
earnings and earnings per share, excluding charges (discussed below). Volume
gains in the Company's Latin America and Asia-Pacific cereal markets, continued
expansion of the Company's global convenience foods business, and cost savings
from ongoing streamlining and efficiency initiatives contributed significantly
to these results.
During 1998, the Company realized declines in earnings per share, both with and
without charges. The Company experienced significant competitive pressure
combined with category softness in its major ready-to-eat cereal markets, to
which it responded by accelerating investment in long-term growth strategies,
including product development, technology, and efficiency initiatives.
For 1999, Kellogg Company reported net earnings and earnings per share of $338.3
million and $.83, respectively, compared to 1998 net earnings of $502.6 million
and net earnings per share of $1.23. Net earnings and earnings per share for
1997 were $546.0 million and $1.32, respectively. (All earnings per share
presented represent both basic and diluted earnings per share.)
During the current and prior years, the Company reported charges for
restructuring, dispositions, and asset impairment losses that have been excluded
from all applicable amounts presented below for purposes of comparison between
years. Additionally, results for 1997 are presented before the cumulative effect
of a change in the method of accounting for business process reengineering
costs. Refer to "Charges & accounting change - summary" on page 15, and the
related sections that follow, for further information.
1999 COMPARED TO 1998
Excluding charges, 1999 net earnings of $606.2 million were up 10.4% from the
1998 level of $548.9 million. Net earnings per share increased 11.1% from $1.35
in 1998 to $1.50 in 1999. The $.15 increase in earnings per share consisted of
$.14 from business growth, $.01 from favorable foreign exchange movements, and
$.01 from prior-year share repurchase, partially offset by $.01 due to a higher
effective tax rate.
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The Company realized the following volume results during 1999:
================================================================================
Change
- --------------------------------------------------------------------------------
North America +2.4%
Europe +1.3%
Asia-Pacific +13.1%
Latin America +8.8%
- --------------------------------------------------------------------------------
Consolidated +3.4%
================================================================================
================================================================================
Change
- --------------------------------------------------------------------------------
Global cereal +1.6%
Global convenience foods +8.8%
- --------------------------------------------------------------------------------
Consolidated +3.4%
================================================================================
In North America, cereal volume was relatively flat, due primarily to a
significant reduction in U.S. volume during the fourth quarter. Management
believes this reduction resulted from a non-competitive level of marketing
spending by the Company during the period. Excluding the impact of acquisitions
and dispositions (refer to page 17), the North American convenience foods
business achieved low double-digit volume growth. The Company's Asia-Pacific and
Latin America segments achieved records for annual cereal volume delivery.
Cereal volume increased slightly in the Company's European segment amid
extremely competitive conditions and loss of a major customer in Germany.
Convenience food volumes significantly exceeded the prior year in all operating
segments, due primarily to continued new product rollouts and market expansion.
The Company continued to lead the global ready-to-eat cereal category with an
estimated 37% annualized share of worldwide volume. Category share for the
Company's operating segments was approximately 32% in North America, 40% in
Europe, 43% in Asia-Pacific, and 60% in Latin America.
Consolidated net sales increased 3.3%, due primarily to volume gains and
favorable product mix movements, partially offset by unfavorable foreign
currency impact. On an operating segment basis, net sales versus the prior year
were:
==============================================================================================================
North Asia-Pacific Latin
America Europe America Consolidated
- --------------------------------------------------------------------------------------------------------------
Business +4.3% -1.0% +11.1% +20.1% +4.6%
Foreign currency impact +.1% -3.9% +6.1% -9.1% -1.3%
==============================================================================================================
TOTAL CHANGE +4.4% -4.9% +17.2% +11.0% +3.3%
==============================================================================================================
Net sales by major product group were (in millions):
======================================================================================
1999 1998 Change
- --------------------------------------------------------------------------------------
Global cereal $5,304.7 $5,265.4 +.7%
Global convenience foods 1,679.5 1,496.7 +12.2%
- --------------------------------------------------------------------------------------
CONSOLIDATED $6,984.2 $6,762.1 +3.3%
======================================================================================
Margin performance for 1999 and 1998 was:
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======================================================================================
1999 1998 Change
- --------------------------------------------------------------------------------------
Gross margin 52.4% 51.5% +.9%
SGA% (a) 37.0% 37.2% +.2%
- --------------------------------------------------------------------------------------
Operating margin 15.4% 14.3% +1.1%
======================================================================================
(a) Selling, general, and administrative expense as a percentage of net sales.
The 1999 gross margin improved versus the prior year, due primarily to global
manufacturing efficiencies. The SGA% was relatively flat, as increased spending
on promotional activities offset benefits from overhead streamlining initiatives
around the world. This level of spending is consistent with management's
strategy to drive growth through increased marketing investment in the Company's
established cereal markets, as well as supporting the introduction of new
convenience food products around the world.
Operating profit on an operating segment basis was:
=========================================================================================================================
North Latin Corporate Consoli-
(millions) America Europe Asia-Pacific America and other dated
- -------------------------------------------------------------------------------------------------------------------------
1999 operating profit $668.8 $201.7 $48.6 $139.6 ($229.9) $828.8
Restructuring charges 197.9 22.4 4.6 1.7 18.0 244.6
=========================================================================================================================
1999 OPERATING PROFIT EXCLUDING
RESTRUCTURING CHARGES $866.7 $224.1 $53.2 $141.3 ($211.9) $1,073.4
=========================================================================================================================
1998 operating profit $790.8 $208.1 $44.9 $107.2 ($255.9) $895.1
Restructuring charges 40.8 3.3 3.4 - 23.0 70.5
=========================================================================================================================
1998 OPERATING PROFIT EXCLUDING
RESTRUCTURING CHARGES $831.6 $211.4 $48.3 $107.2 ($232.9) $965.6
=========================================================================================================================
% change - 1999 vs. 1998
Business +4.2% +10.3% +3.8% +39.1% +8.4% +12.4%
Foreign currency impact -- -4.3% +6.4% -7.3% +.6% -1.2%
=========================================================================================================================
TOTAL CHANGE +4.2% +6.0% +10.2% +31.8% +9.0% +11.2%
=========================================================================================================================
Gross interest expense, prior to amounts capitalized, was $127.2 million,
comparable to the prior-year amount of $127.3 million.
Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, and charitable donations. Other
income (expense), net for 1998 includes a credit of approximately $6 million
related to settlement of certain litigation. During 1996, the Company included
in operating profit a provision of $15 million for the potential settlement of
this litigation, which brought the total settlement reserve to $18 million. This
litigation was settled during the second quarter of 1998 for a cost of
approximately $12 million, and the remaining reserve of approximately $6 million
was reversed.
Excluding the impact of charges, the effective income tax rate for 1999 was
36.2%, compared to the prior-year rate of 35.7%. A statutory rate reduction in
Australia favorably impacted the 1999 tax rate by .6%. A statutory rate
reduction in the United Kingdom reduced the 1998 effective rate by .3%. The
effective income tax rate based on reported earnings was 37.0% for 1999 and
35.8%
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for 1998. The variance in the 1999 reported rate (as compared to the rate
excluding the impact of charges) relates primarily to the disposition of
nondeductible goodwill from the Lender's Bagels business 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.
1998 COMPARED TO 1997
Excluding charges, 1998 net earnings were $548.9 million, compared to 1997 net
earnings (before cumulative effect of accounting change) of $704.5 million. The
Company reported 1998 earnings per share of $1.35, a 20.6% decrease from the
prior-year result of $1.70. The year-over-year decrease in earnings per share of
$.35 resulted from $.33 of business decline, $.01 of unfavorable tax rate
movements, and $.03 of unfavorable foreign currency movements, partially offset
by a $.02 benefit from share repurchase. The business decline was attributable
principally to cereal category softness and competitive pressures in North
America and Europe, and continued global investments in brand-building marketing
activities and operational efficiency programs.
The Company realized the following volume results during 1998:
==========================================================================
Change
- -------------------------------------------------------------------------
North America -4.3%
Europe -1.2%
Asia-Pacific +6.9%
Latin America +16.2%
- -------------------------------------------------------------------------
Global total -1.3%
==========================================================================
==========================================================================
Change
- -------------------------------------------------------------------------
Global cereal -2.0%
Global convenience foods +1.1%
- -------------------------------------------------------------------------
Global total -1.3%
==========================================================================
Within North America and Europe, volume declines were due principally to
softness in the ready-to-eat cereal business. Asia-Pacific experienced record
volume due to a combination of cereal growth and new convenience food product
introductions. Latin America continued to post double-digit increases in both
ready-to-eat cereal and convenience foods, with record volume results throughout
1998. The global convenience foods volume increase was driven by double-digit
growth in the Company's international markets offset by softness within North
America, due primarily to declines in the Lender's Bagels business.
Consolidated net sales decreased 1.0% for 1998. Adjusted for unfavorable foreign
currency movements, sales were up .5% from the prior year, with the unfavorable
impact of volume declines more than offset by favorable pricing and product mix
movements. On an operating segment basis, net sales versus the prior year were:
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====================================================================================================================
North Asia-Pacific Latin
America Europe America Consolidated
- --------------------------------------------------------------------------------------------------------------------
Business -1.5% -.2% + 6.1% +15.7% +.5%
Foreign currency impact -.5% +.1% -14.6% -3.6% -1.5%
- --------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE -2.0% -.1% -8.5% +12.1% -1.0%
====================================================================================================================
Net sales by major product group were (in millions):
==============================================================================================
1998 1997 Change
- ----------------------------------------------------------------------------------------------
Global cereal $5,265.4 $5,435.8 -3.1%
Global convenience foods 1,496.7 1,394.3 +7.3%
- ----------------------------------------------------------------------------------------------
CONSOLIDATED $6,762.1 $6,830.1 -1.0%
==============================================================================================
Margin performance for 1998 and 1997 was:
==============================================================================================
1998 1997 Change
- ----------------------------------------------------------------------------------------------
Gross margin 51.5% 52.1% - .6%
SGA%(a) 37.2% 34.6% -2.6%
- ----------------------------------------------------------------------------------------------
Operating margin 14.3% 17.5% -3.2%
==============================================================================================
(a) Selling, general, and administrative expense as a percentage of net sales.
The gross margin decline was due to a combination of the fixed cost absorption
impact of lower volumes combined with incremental costs related to launching new
products in Europe and North America. The increase in SGA% reflects increased
global research and development costs to support the Company's ongoing
innovation strategy combined with significant marketing investment and increased
spending on operational efficiency programs.
Operating profit on an operating segment basis was:
=========================================================================================================================
North Latin Corporate
(millions) America Europe Asia-Pacific America and other Consolidated
- -------------------------------------------------------------------------------------------------------------------------
1998 OPERATING PROFIT EXCLUDING
CHARGES (A) $831.6 $211.4 $48.3 $107.2 ($232.9) $ 965.6
=========================================================================================================================
1997 operating profit as reported $847.0 $189.9 $22.5 $111.6 ($161.9) $1,009.1
Charges (a) 37.8 115.9 28.6 .2 1.6 184.1
- -------------------------------------------------------------------------------------------------------------------------
1997 OPERATING PROFIT EXCLUDING
CHARGES $884.8 $305.8 $51.1 $111.8 ($160.3) $1,193.2
=========================================================================================================================
% change - 1998 vs. 1997
Business -5.7% -31.3% +10.2% -1.5% -44.2% -17.8%
Foreign currency impact -.3% +.4% -15.6% -2.6% -1.0% -1.3%
=========================================================================================================================
TOTAL CHANGE -6.0% -30.9% -5.4% -4.1% -45.2% -19.1%
=========================================================================================================================
(a) 1998-restructuring charges; 1997-restructuring charges and asset impairment
losses. Refer to sections below on charges for further information.
Gross interest expense, prior to amounts capitalized, increased 8.0% to $127.3
million versus the prior-year amount of $117.9 million. The higher interest
expense resulted from overall increased debt levels, partially offset by a lower
effective interest rate.
Excluding the impact of charges, the effective income tax rate was 35.7%, an
increase of .4 percentage points versus the prior-year rate of 35.3%. The higher
effective tax rate was due
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primarily to lower earnings and country mix. For both 1998 and 1997, the
effective tax rate benefited from statutory rate reductions in the United
Kingdom, as well as favorable adjustments in other jurisdictions. The effective
income tax rate based on reported earnings (before cumulative effect of
accounting change) was 35.8% in 1998 and 37.6% in 1997. For 1997, the higher
reported rate (as compared to the rate excluding charges) relates primarily to
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.
CHARGES & ACCOUNTING CHANGE - SUMMARY
The table below summarizes the amounts that have been excluded from results of
operations above for purposes of comparison between years. These items are
discussed in detail in the following sections.
============================================================================================================
IMPACT ON
------------------------------------------------------------------------------
EARNINGS BEFORE
(millions, except INCOME TAXES &
per share data) OPERATING CUMULATIVE EFFECT OF NET EARNINGS
PROFIT ACCOUNTING CHANGE NET EARNINGS PER SHARE
============================================================================================================
1999
Restructuring charges $244.6 $244.6 $156.4 $.40
Disposition-related charges --- 168.5 111.5 .27
- ------------------------------------------------------------------------------------------------------------
TOTAL CHARGES $244.6 $413.1 $267.9 $.67
============================================================================================================
1998
RESTRUCTURING CHARGES $ 70.5 $ 70.5 $ 46.3 $.12
============================================================================================================
1997
Restructuring charges $161.1 $161.1 $125.5 $.30
Asset impairment losses 23.0 23.0 15.0 .04
- ------------------------------------------------------------------------------------------------------------
TOTAL CHARGES $184.1 $184.1 $140.5 $.34
============================================================================================================
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE --- --- $ 18.0 $.04
============================================================================================================
RESTRUCTURING CHARGES & ASSET IMPAIRMENT LOSSES
RESTRUCTURING CHARGES
During the current and prior 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.
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The 1999 restructuring charges consist of $193.2 million for closing the South
Operations portion of the Company's Battle Creek, Michigan, cereal plant, $32.7
million for workforce reduction initiatives around the world, and $18.7 million,
primarily for manufacturing equipment write-offs related to previously closed or
impaired facilities in various locations.
Approximately one-half of the charges for the South Operations closing are
comprised of asset write-offs, with the remainder consisting primarily of cash
costs for employee retirement and separation benefits, equipment removal, and
building demolition. As part of the Company's strategy of continuing cost
reduction and efficiency improvement, these operations were closed in October
1999. Some production capacity is being relocated to the Company's other North
American cereal plants. Approximately 525 hourly and salaried positions at the
Battle Creek plant will be eliminated by the end of the first quarter of 2000
through a combination of voluntary and involuntary separation programs. These
actions are expected to result in estimated annual pretax savings of $35 to $45
million, a portion of which will be realized in 2000.
The charges for workforce reduction initiatives are comprised principally of
employee retirement and separation benefit costs 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
during 1999 and are expected to generate approximately $25 million in pretax
savings in 2000.
The 1998 restructuring charges relate primarily to an overhead activity analysis
that resulted in the elimination of approximately 550 employees and 240
contractors from the Company's headquarters and North American operations
through a combination of involuntary early retirement and severance programs.
The charges consist mainly of employee retirement and separation benefits. This
program generated approximately $100 million of pretax savings during 1999.
The 1997 restructuring charges relate principally to management's plan to
optimize the Company's pan-European operations, as well as ongoing productivity
programs in the United States and Australia. A major component of the
pan-European initiatives was the late-1997 closing of plants and separation of
employees in Riga, Latvia; Svendborg, Denmark; and Verola, Italy. Approximately
50% of the total 1997 restructuring charges consist of manufacturing asset
write-downs, with the balance comprised principally of current and anticipated
cash outlays for employee separation benefits and equipment removal. The 1997
charges also include approximately $41 million of program-related non-exit
costs, such as production redeployment and associated consulting, incurred
during 1997. The 1997 programs eliminated approximately 600 positions by the end
of 1998. Total pretax savings from these programs, 60% of which was realized by
the end of 1999, are expected to be approximately $50 million.
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Refer to Note 3 within Notes to Consolidated Financial Statements for
information on the components of the restructuring charges by initiative, as
well as reserve balances remaining at December 31, 1999, 1998, and 1997.
Incremental pretax savings achieved or expected from streamlining initiatives by
year, and the relative impact on captions within the Consolidated Statement of
Earnings, are:
=============================================================
Relative impact on
==========================
Incremental
pretax Cost of
(millions) savings goods sold SGA (a)
- -------------------------------------------------------------
1997 $ 60 75% 25%
1998 10 75% 25%
1999 125 10% 90%
2000 expected 50 80% 20%
=============================================================
(a) Selling, general, and administrative expense.
Total cash outlays incurred or expected for streamlining initiatives by year
are:
==================================
(millions)
- ----------------------------------
1997 $85
1998 47
1999 69
2000 expected 60
==================================
ASSET IMPAIRMENT LOSSES
During 1997, the Company included in operating profit $23.0 million of asset
impairment losses, resulting from evaluation of the Company's ability to recover
components of its investments, based on management's ongoing strategic
assessment of local conditions, in the emerging markets of Asia-Pacific. These
investments consist of cereal manufacturing plant, property, and equipment
located in India and China. In both of these markets, demand for the Company's
locally produced products has fallen short of expectations during the initial
years of operation. As of year-end 1997, the future cash flows expected to be
generated from these operations were not projected to support the current
carrying value of the manufacturing assets during their remaining useful lives.
Therefore, pursuant to Statement of Financial Accounting Standards (SFAS) No.121
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of," management reduced the carrying value of these assets to fair
market value. Fair market value was based on independent real estate appraisal
in the case of plant and property, and internal engineering evaluations in the
case of equipment. These assets are currently being held and used with no plans
for future disposal. Management is implementing new strategies in these markets
that leverage the Company's ability to appeal to local tastes.
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2000 EVENTS
The Company's streamlining initiatives will continue in 2000. The Company
expects to implement streamlining initiatives in its European supply chain as
part of an ongoing efficiency program. As a result of this action, the Company
expects to record pretax restructuring charges of approximately $25 million in
the second quarter of 2000.
The foregoing discussion of streamlining initiatives contains forward-looking
statements regarding future charges, headcount reductions, cash requirements,
and realizable savings. Actual amounts may vary depending on the final
determination of important factors, such as identification of specific employees
to be separated from pre-determined pools, final negotiation of third-party
contract buy-outs, actual expenditures for facility closures, implementation of
cost-reduction programs currently in the planning stages, and other items.
ACQUISITIONS & DISPOSITIONS
ACQUISITIONS
On November 29, 1999, the Company purchased the outstanding common stock of
Worthington Foods, Inc. for approximately $300 million in cash, including
related acquisition costs. Additionally, during December 1999, the Company paid
off approximately $50 million of Worthington debt existing at the acquisition
date. Worthington Foods, Inc. is the leading manufacturer and marketer of soy
protein-based meat alternatives and other healthful foods. The acquisition was
accounted for as a purchase and was financed through commercial paper
borrowings. Results of Worthington Foods, Inc. operations have been included in
the Company's consolidated results from the date of acquisition. The impact of
this acquisition on the Company's fourth quarter 1999 results was insignificant.
The purchase price allocation includes approximately $12 million of exit
liabilities, comprised principally of employee involuntary separation and
relocation benefits. Refer to Note 2 within Notes to Consolidated Financial
Statements for further information.
On January 20, 2000, the Company purchased certain assets and liabilities of the
Mondo Baking Company Division of Southeastern Mills, Inc. for approximately $92
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.
DISPOSITIONS
During November 1999, the Company sold certain assets and liabilities of the
Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a
result of this transaction, the Company recorded a pretax charge of $178.9
million ($119.3 million after tax or $.29 per share). This charge includes
approximately $57 million for the future disposal of other assets associated
with the Lender's business, which were not purchased by Aurora.
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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.
The impact of these dispositions on operating results during the fourth quarter
of 1999 was insignificant.
ACCOUNTING CHANGE
On November 20, 1997, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus in EITF 97-13 that the
costs of business process reengineering activities are to be expensed as
incurred. Accordingly, for the fourth quarter of 1997, the Company reported a
charge of $18.0 million (net of tax benefit of $7.7 million) or $.04 per share
for write-off of business process reengineering costs. Such costs were expensed
as incurred during 1999, 1998, and the fourth quarter of 1997, and were
insignificant.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong during 1999. 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 1999, net cash provided by operating activities was $795.2 million, up 10.5%
from $719.7 million in 1998. The increase was due primarily to higher earnings
before restructuring and disposition-related charges, partially offset by
unfavorable working capital movements. The unfavorable working capital movements
were attributable principally to increased inventory levels and reduced accounts
payable balances. The increased inventory levels were related primarily to
temporary inventory build due to the South Operations plant closing, as
discussed in the "Restructuring charges" section on page 15. Reduced capital
spending and cost savings from operational efficiency initiatives contributed to
the lower accounts payable balances. At December 31, 1999, the ratio of current
assets to current liabilities was 1.0, up from .9 at December 31, 1998.
Net cash used in investing activities was $244.2 million, down from $398.0
million in 1998. The decrease was due primarily to a reduction in capital
spending, with the effect of acquisitions and dispositions essentially
offsetting during 1999.
Net cash used in financing activities was $527.6 million, related primarily to
dividend payments of $388.7 million and a net decrease in total debt of $151.8
million. The Company's total 1999 per share dividend payment of $.96, up from
$.92 in 1998, represents the 43rd consecutive year the Company has increased its
dividend.
During 1999, management was authorized by the Company's Board of Directors to
repurchase up to $149.4 million in shares of the Company's common stock. There
were no repurchases
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during 1999. For 2000, the Company's Board of Directors has authorized
management to repurchase up to $150.0 million in common shares.
Notes payable consist primarily of commercial paper borrowings in the United
States and borrowings under a $200 million revolving credit agreement in Europe
with several international banks. At December 31, 1999, outstanding borrowings
under the revolving credit agreement were $16.2 million with an effective
interest rate of 5.6%. U.S. borrowings at December 31, 1999, were $448.3 million
with an effective interest rate of 5.9%.
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.
Associated with several of these long-term debt issuances, the Company has
entered into fixed-to-floating interest rate swaps, generally expiring in
conjunction with the debt issuances and indexed to either three-month London
Interbank Offered Rate (LIBOR) or the Federal Reserve AA Composite Rate on
30-day commercial paper. Refer to Note 7 of Notes to Consolidated Financial
Statements for further information on debt and related swaps.
The percentage of total debt to market capitalization at December 31, 1999, was
17%, up from 16% at December 31, 1998, due primarily to a lower stock price
since the prior year-end.
YEAR 2000
The Company established a global program in 1997 to address the millennium date
change issue (the inability of certain computer software, hardware, and other
equipment with embedded computer chips to properly process two-digit year-date
codes after 1999). As a result of executing this program in a timely manner, the
Company has not experienced any significant date-related failures. While
failures are still possible, management believes that the financial impact of
any future failures is not likely to be significant.
The Company spent approximately $65 million during 1998 and 1999 to become Year
2000 compliant, and expects minimal additional spending during 2000. This amount
excludes the cost of other planned system initiatives that have contributed to
the overall Year 2000 readiness effort, but were implemented primarily for other
business reasons.
EURO CONVERSION
On January 1, 1999, eleven European countries (Germany, France, Spain, Italy,
Ireland, Portugal, Finland, Luxembourg, Belgium, Austria, and the Netherlands)
implemented a single currency zone, the Economic and Monetary Union (EMU). The
new currency, the Euro, has become the official currency of the participating
countries. Those countries' financial markets and banking systems are quoting
financial and treasury data in Euros from January 1, 1999.
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The Euro is existing alongside the old national currencies during a transition
period from January 1, 1999, to January 1, 2002. During this period, entities
within participating countries must complete changes that enable them to
transact in the Euro. National currencies will be withdrawn no later than July
1, 2002. This transition to the Euro currency involves changing budgetary,
accounting, pricing, costing, and fiscal systems in companies and public
administrations, as well as the simultaneous handling of parallel currencies and
conversion of data. During 1999, the Euro currency weakened versus the U.S.
Dollar and British Pound. The Euro needs to be observed over a longer period
before conclusions can be drawn on the currency's long-term strength.
In early 1998, management formed a task force to monitor EMU developments,
evaluate the impact of the Euro conversion on the Company's operations, and
develop and execute action plans, as necessary. Required business strategy,
system, and process changes within the Company's European region are being
completed in accordance with the Company's timetable for transacting with its
suppliers and customers in the Euro, beginning in 2001.
The Company's Euro program consists of two phases. Phase I aims to provide the
business with the capability to recognize the Euro as a foreign currency for
customer order-taking, invoice processing, and supplier payment purposes. The
Company expects to complete the necessary changes to order management and
related financial systems prior to 2001. Management believes the project
timetable is on target to meet this date.
In Phase II, the more significant portion of the program, all business systems
(for example, raw materials management, manufacturing, warehousing, and human
resource systems) will be reviewed and modified, as necessary, to handle the
Euro as a functional currency. Legally, this capability must exist in Company
business units operating in EMU member countries from January 1, 2002.
Operational systems are currently being analyzed and modified in order to comply
with the legal timetable.
Although management currently believes the Company will be able to accommodate
any required changes in its operations, there can be no assurance that the
Company, its customers, suppliers, financial service providers, or government
agencies will meet all of the Euro currency requirements on a timely basis. This
is, in part, because new requirements may emerge from individual national
governments at later stages. Such failure to complete the necessary work could
result in material financial risk.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted two Statements of Position (SOP)
issued by the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants. SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" provides guidance on the
classification of software project costs between expense and capital. SOP 98-5
"Reporting on Costs of Start-up Activities" prescribes that the costs of opening
a new facility, commencing business in a new market, or similar start-up
activities must be expensed as incurred. SOP 98-1 has been applied on a
prospective basis from January
13
1, 1999. The initial application of SOP 98-5 was to be reported as a cumulative
effect of a change in accounting principle, if material. The adoption of these
SOPs did not have a significant impact on the Company's financial results during
1999.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This Statement established accounting and
reporting standards for derivative instruments, requiring recognition of the
fair value of all derivatives as assets or liabilities on the balance sheet.
SFAS No. 133 was to be effective for fiscal years beginning after June 15, 1999.
In July 1999, the FASB issued SFAS No.137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 by one year. The
Company will adopt SFAS No. 133 on January 1, 2001. Management does not expect
the adoption to have a significant impact on the Company's financial results.
2000 OUTLOOK
Management is not aware of any adverse trends that would materially affect the
Company's strong financial position. Should suitable investment opportunities or
working capital needs arise that would require additional financing, management
believes that the Company's strong credit rating, balance sheet, and earnings
history provide a base for obtaining additional financial resources at
competitive rates and terms.
Cereal market conditions continue to be very challenging in both the United
States and United Kingdom; however, management believes the Company is making
progress in strengthening the fundamentals of its cereal business. The Company's
goal is to achieve solid, reliable growth in its established cereal markets,
combined with high growth in its global convenience foods business and in its
developing and emerging cereal businesses. Management believes this strategy
should deliver annual net sales growth of 4-6%. Management expects that this
rate of growth, combined with continued improvements in operational efficiency,
should produce operating profit growth of 8-10% and low double-digit growth in
earnings per share for 2000, excluding charges.
Additional expectations for 2000 include the following approximate results:
gross profit margin of 53%, SGA% of 37%, effective income tax rate of 36%, and
capital spending of $270 million.
As discussed on page 17, the Company acquired Worthington Foods and divested the
Lender's Bagels business in late 1999. Management expects the net impact of
these events on 2000 earnings per share to be approximately neutral. The net
impact on sales and operating profit growth is expected to be insignificant.
14
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; Year 2000 date-related issues; and the Euro conversion project.
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 the 1999 Annual Report to Share Owners in the letter
from Mr. Gutierrez and Mr. Langbo and in several sections of the Management's
Discussion and Analysis. 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, continued streamlining initiatives, integration of
acquired businesses, and other general and administrative costs; raw material
price and labor cost fluctuations; foreign currency exchange rate fluctuations;
changes in statutory tax law; interest rates available on short-term financing;
the ability of the Company's or third parties' computer software, hardware, and
other equipment with embedded computer chips to properly process two-digit
year-date codes; the ability of the Company or third parties to meet all of the
Euro currency requirements on a timely basis; 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.
15
SELECTED FINANCIAL DATA
(millions, except per share data and number of employees)
- ------------------------------------------------------------------------------------------------------------------------------------
(A)(B)
EARNINGS
(A) BEFORE AVERAGE
NET % OPERATING % ACCOUNTING % SHARES
SALES GROWTH PROFIT GROWTH CHANGE GROWTH OUTSTANDING(C)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 $ 6,984.2 3% $ 828.8 (7)% $338.3 (33)% 405.2
1998 6,762.1 (1) 895.1 (11) 502.6 (11) 407.8
1997 6,830.1 2 1,009.1 5 564.0 6 414.1
1996 6,676.6 (5) 958.9 14 531.0 8 424.9
1995 7,003.7 7 837.5 (28) 490.3 (30) 438.3
1994 6,562.0 4 1,162.6 16 705.4 4 448.6
1993 6,295.4 2 1,004.6 (5) 680.7 - 463.0
1992 6,190.6 7 1,062.8 3 682.8 13 477.7
1991 5,786.6 12 1,027.9 16 606.0 21 482.4
1990 5,181.4 11 886.0 21 502.8 19 483.2
1989 4,651.7 7 732.5 (8) 422.1 (12) 488.4
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (C)
------------------------------------------------------------
(A)(B) NET CASH
EARNINGS (D) NET CASH PROVIDED BY/
BEFORE PRICE/ STOCK PROVIDED BY (USED IN) COMMON
ACCOUNTING CASH EARNINGS PRICE OPERATING FINANCING STOCK
CHANGE DIVIDENDS RATIO RANGE ACTIVITIES ACTIVITIES REPURCHASES
- ------------------------------------------------------------------------------------------------------------------------------------
1999 $ .83 $ .96 37 $30 - 42 $ 795.2 ($527.6) $ -
1998 1.23 .92 28 30 - 50 719.7 (358.3) 239.7
1997 1.36 .87 36 32 - 50 879.8 (607.3) 426.0
1996 1.25 .81 26 31 - 40 711.5 94.0 535.7
1995 1.12 .75 34 26 - 40 1,041.0 (759.2) 374.7
1994 1.57 .70 18 24 - 30 966.8 (559.5) 327.3
1993 1.47 .66 19 23 - 34 800.2 (464.2) 548.1
1992 1.43 .60 23 27 - 37 741.9 (422.6) 224.1
1991 1.26 .54 26 17 - 33 934.4 (537.7) 83.6
1990 1.04 .48 18 14 - 19 819.2 (490.9) 86.9
1989 .87 .43 20 14 - 20 533.5 (143.2) 78.6
- ------------------------------------------------------------------------------------------------------------------------------------
RETURN ON RETURN ON
TOTAL AVERAGE SHAREHOLDERS' AVERAGE PROPERTY, CAPITAL DEPRECIATION
ASSETS ASSETS EQUITY EQUITY NET EXPENDITURES AND AMORTIZATION
- ------------------------------------------------------------------------------------------------------------------------------------
1999 $ 4,808.7 7% $ 813.2 40% $2,640.9 $266.2 $288.0
1998 5,051.5 10 889.8 53 2,888.8 373.9 278.1
1997 4,877.6 11 997.5 49 2,773.3 312.4 287.3
1996 5,050.0 11 1,282.4 37 2,932.9 307.3 251.5
1995 4,414.6 11 1,590.9 29 2,784.8 315.7 258.8
1994 4,467.3 16 1,807.5 40 2,892.8 354.3 256.1
1993 4,237.1 16 1,713.4 37 2,768.4 449.7 265.2
1992 4,015.0 11 1,945.2 21 2,662.7 473.6 231.5
1991 3,925.8 16 2,159.8 30 2,646.5 333.5 222.8
1990 3,749.4 14 1,901.8 28 2,595.4 320.5 200.2
1989 3,390.4 14 1,634.4 30 2,406.3 508.7 167.6
- ------------------------------------------------------------------------------------------------------------------------------------
(E) PRETAX
DEBT TO INTEREST
LONG-TERM MARKET COVERAGE CURRENT ADVERTISING R&D NUMBER OF
DEBT CAPITALIZATION (TIMES) RATIO EXPENSE EXPENSE EMPLOYEES
- ------------------------------------------------------------------------------------------------------------------------------------
1999 $1,612.8 17% 6 1.0 $674.1 $104.1 15,051
1998 1,614.5 16 7 .9 695.3 121.9 14,498
1997 1,415.4 10 9 .9 780.4 106.1 14,339
1996 726.7 14 13 .7 778.9 84.3 14,511
1995 717.8 5 12 1.1 891.5 72.2 14,487
1994 719.2 8 23 1.2 856.9 71.7 15,657
1993 521.6 7 27 1.0 772.4 59.2 16,151
1992 314.9 3 33 1.2 782.3 56.7 16,551
1991 15.2 3 17 .9 708.3 34.7 17,017
1990 295.6 7 10 .9 648.5 38.3 17,239
1989 371.4 10 10 .9 611.4 42.9 17,268
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Operating profit for 1999 includes restructuring charges of $244.6
($156.4 after tax or $.40 per share). Earnings before accounting change
for 1999 include disposition-related charges of $168.5 million ($111.5
million after tax or $.27 per share). Operating profit for 1998 includes
restructuring charges of $70.5 ($46.3 after tax or $.12 per share).
Operating profit for 1997 includes restructuring charges of $161.1 and
asset impairment losses of $23.0 ($140.5 after tax or $.34 per share).
Operating profit for 1996 includes restructuring charges of $136.1 ($97.8
after tax or $.23 per share). Earnings before accounting change for 1996
include a charge of $35.0 ($22.3 after tax or $.05 per share) for a
contribution to the Kellogg's Corporate Citizenship Fund. Operating
profit for 1995 includes restructuring charges of $348.0 and asset
impairment losses of $73.8 ($271.3 after tax or $.62 per share).
Operating profit for 1993 includes asset impairment losses of $64.3
($41.1 after tax or $.09 per share). Refer to Management's Discussion and
Analysis on pages 13-19 and Notes 2 and 3 within Notes to Consolidated
Financial Statements for further explanation of charges for years
1997-1999.
(b) Earnings before accounting change for 1997 exclude the effect of a charge
of $18.0 after tax ($.04 per share) to write off business process
reengineering costs in accordance with guidance issued by the Emerging
Issues Task Force of the FASB. Earnings before accounting change for 1992
and 1989 exclude the effect of adopting the following Statements of
Financial Accounting Standards (SFAS): in 1992, a charge of $251.6 ($.53
per share) net of $144.6 of income tax benefit for the transition effect
of SFAS #106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," and, in 1989, a gain of $48.1 ($.10 per share) for SFAS
#96 "Accounting for Income Taxes."
(c) All share data retroactively restated to reflect 2-for-1 stock splits in
1997 and 1991. All earnings per share data represent both basic and
diluted earnings per share.
(d) The price/earnings ratio was calculated based on year-end stock price
divided by earnings before the accounting changes referred to in note
(b). These earnings include the charges referred to in note (a).
Excluding the impact of these charges, the price/earnings ratio in 1999,
1998, 1997, 1996, 1995, and 1993 would have been 21, 25, 29, 21, 22, and
19, respectively.
(e) Debt to market capitalization was calculated based on year-end total debt
balance divided by market capitalization. Market capitalization was
calculated based on year-end stock price multiplied by the number of
shares outstanding at year-end.
16
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
Year ended December 31,
=============================================================================================================================
(millions, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
NET SALES $ 6,984.2 $ 6,762.1 $ 6,830.1
- -----------------------------------------------------------------------------------------------------------------------------
Cost of goods sold 3,325.1 3,282.6 3,270.1
Selling, general, and administrative expense 2,585.7 2,513.9 2,366.8
Restructuring charges 244.6 70.5 161.1
Asset impairment losses - - 23.0
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 828.8 895.1 1,009.1
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense 118.8 119.5 108.3
Disposition-related charges 168.5 - -
Other income (expense), net (4.8) 6.9 3.7
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 536.7 782.5 904.5
Income taxes 198.4 279.9 340.5
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 338.3 502.6 564.0
Cumulative effect of accounting change (net of tax) - - (18.0)
- -----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 338.3 $ 502.6 $ 546.0
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE AMOUNTS (BASIC AND DILUTED):
EARNINGS BEFORE CUMULATIVE EFFECT OF $ .83 $ 1.23 $ 1.36
ACCOUNTING CHANGE
Cumulative effect of accounting change - - (.04)
- -----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER SHARE $ .83 $ 1.23 $ 1.32
=============================================================================================================================
Refer to Notes to Consolidated Financial Statements.
17
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
===============================================================================================================
Common stock Capital in
------------ excess of Retained
(millions) shares amount par value earnings
- ---------------------------------------------------------------------------------------------------------------
Balance, January 1, 1997 311.5 $77.9 $123.9 $4,150.3
Common stock repurchases (pre-split)
Stock options exercised and other (pre-split) .6 .1 31.9
Retirement of treasury stock (105.3) (26.3) (55.8) (3,095.8)
Two-for-one stock split 206.8 51.7 (51.7)
Common stock repurchases (post-split)
Net earnings 546.0
Dividends (360.1)
Other comprehensive income
Stock options exercised and other (post-split) 1.2 .3 44.3
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 414.8 103.7 92.6 1,240.4
Common stock repurchases
Net earnings 502.6
Dividends (375.3)
Other comprehensive income
Stock options exercised and other .5 .1 12.4
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 415.3 103.8 105.0 1,367.7
Common stock repurchases
Net earnings 338.3
Dividends (388.7)
Other comprehensive income
Stock options exercised and other .2 - (.5) (.1)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 415.5 $103.8 $104.5 $1,317.2
===============================================================================================================
=================================================================================================================================
Accumulated
Treasury stock other Total Total
-------------- comprehensive shareholders' comprehensive
(millions) shares amount income equity income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1997 101.9 ($2,903.4) ($166.3) $1,282.4
Common stock repurchases (pre-split) 3.9 (290.9) (290.9)
Stock options exercised and other (pre-split) - (3.9) 28.1
Retirement of treasury stock (105.3) 3,177.9 -
Two-for-one stock split .5 - -
Common stock repurchases (post-split) 3.1 (135.1) (135.1)
Net earnings 546.0 $546.0
Dividends (360.1)
Other comprehensive income (115.6) (115.6) (115.6)
Stock options exercised and other (post-split) - (1.9) 42.7
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 4.1 (157.3) (281.9) 997.5 430.4
===============
Common stock repurchases 6.3 (239.7) (239.7)
Net earnings 502.6 $502.6
Dividends (375.3)
Other comprehensive income (10.5) (10.5) (10.5)
Stock options exercised and other (.1) 2.7 15.2
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 10.3 (394.3) (292.4) 889.8 492.1
===============
Common stock repurchases -
Net earnings 338.3 $338.3
Dividends (388.7)
Other comprehensive income (39.0) (39.0) (39.0)
Stock options exercised and other (.3) 13.4 12.8
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 10.0 ($ 380.9) ($331.4) $813.2 $299.3
=================================================================================================================================
Refer to Notes to Consolidated Financial Statements.
18
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
At December 31,
- ----------------------------------------------------------------------------------------------------------
(millions, except share data) 1999 1998
- ----------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 150.6 $ 136.4
Accounts receivable, net 678.5 693.0
Inventories 503.8 451.4
Other current assets 236.3 215.7
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,569.2 1,496.5
- ----------------------------------------------------------------------------------------------------------
PROPERTY, NET 2,640.9 2,888.8
OTHER ASSETS 598.6 666.2
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,808.7 $5,051.5
==========================================================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $ 2.9 $ 1.1
Notes payable 518.6 620.4
Accounts payable 305.3 386.9
Other current liabilities 761.0 710.1
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,587.8 1,718.5
- ----------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 1,612.8 1,614.5
OTHER LIABILITIES 794.9 828.7
SHAREHOLDERS' EQUITY
Common stock, $.25 par value,500,000,000 shares authorized
Issued: 415,451,198 shares in 1999 and 415,343,626 in 1998 103.8 103.8
Capital in excess of par value 104.5 105.0
Retained earnings 1,317.2 1,367.7
Treasury stock at cost:
9,995,564 shares in 1999 and 10,346,524 in 1998 (380.9) (394.3)
Accumulated other comprehensive income (331.4) (292.4)
- ----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 813.2 889.8
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,808.7 $5,051.5
==========================================================================================================
Refer to Notes to Consolidated Financial Statements.
19
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
===================================================================================================================
(millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $338.3 $502.6 $546.0
Items in net earnings not requiring (providing) cash:
Depreciation and amortization 288.0 278.1 287.3
Deferred income taxes (60.5) 46.2 38.5
Restructuring charges, net of cash paid 220.1 62.2 110.8
Disposition-related charges 168.5 - -
Asset impairment losses - - 23.0
Other 65.7 21.7 9.5
Pension and other postretirement benefit contributions (78.1) (88.8) (114.5)
Changes in operating assets and liabilities (146.8) (102.3) (20.8)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 795.2 719.7 879.8
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to properties (266.2) (373.9) (312.4)
Acquisitions of businesses (298.2) (27.8) (25.4)
Dispositions of businesses 291.2 - -
Property disposals 36.6 6.8 5.9
Other (7.6) (3.1) 2.6
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (244.2) (398.0) (329.3)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net reductions of notes payable, with maturities
less than or equal to 90 days (410.8) (152.9) (374.7)
Issuances of notes payable, with maturities greater than 90 days 292.1 5.5 4.8
Reductions of notes payable, with maturities greater than 90 days (19.0) (.8) (14.1)
Issuances of long-term debt - 600.0 1,000.0
Reductions of long-term debt (14.1) (210.3) (507.9)
Net issuances of common stock 12.9 15.2 70.7
Common stock repurchases - (239.7) (426.0)
Cash dividends (388.7) (375.3) (360.1)
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (527.6) (358.3) (607.3)
Effect of exchange rate changes on cash (9.2) (.2) (13.8)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 14.2 (36.8) (70.6)
Cash and cash equivalents at beginning of year 136.4 173.2 243.8
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $150.6 $136.4 $173.2
===================================================================================================================
Refer to Notes to Consolidated Financial Statements.
20
NOTE 1 ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Kellogg Company
and its majority-owned subsidiaries. Intercompany balances and transactions are
eliminated.
Certain amounts in the prior-year financial statements have been reclassified to
conform to the current-year presentation.
CASH AND CASH EQUIVALENTS
Highly liquid temporary investments with original maturities of less than three
months are considered to be cash equivalents. The carrying amount approximates
fair value.
INVENTORIES
Inventories are valued at the lower of cost (principally average) or market.
PROPERTY
Fixed assets are recorded at cost and depreciated over estimated useful lives
using straight-line methods for financial reporting and accelerated methods for
tax reporting. Cost includes an amount of interest associated with significant
capital projects.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets are amortized principally on a straight-line basis over the
estimated periods benefited, generally 40 years for goodwill and periods ranging
from 5 to 40 years for other intangible assets. The realizability of goodwill
and other intangibles is evaluated periodically when events or circumstances
indicate a possible inability to recover the carrying amount. Evaluation is
based on undiscounted cash flow projections over the remaining life of the
asset. An excess of carrying value over cash flows would result in recognition
of an impairment loss. The amount of the loss would be based on the difference
between carrying value and fair value of the asset, as measured by market
comparables or discounted cash flows in the absence of market data.
REVENUE RECOGNITION
The Company recognizes sales upon shipment of its products to customers net of
applicable provisions for discounts, returns, and allowances.
ADVERTISING
The costs of advertising are generally expensed as incurred.
RECENTLY ADOPTED PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted two Statements of Position (SOP)
issued by the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants. SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" provides guidance on the
classification of software project costs between expense and capital. SOP 98-5
"Reporting on Costs of Start-up Activities" prescribes that the costs of opening
a new facility, commencing business in a new market, or similar start-up
activities must be expensed as incurred. SOP 98-1 has been applied on a
prospective basis from January 1, 1999. The initial application of SOP 98-5 was
to be reported as a cumulative effect of a change in accounting principle, if
material. The adoption of these SOPs did not have a significant impact on the
Company's financial results during 1999.
On November 20, 1997, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus in EITF 97-13 that the
costs of business
21
process reengineering activities are to be expensed as incurred. Accordingly,
for the fourth quarter of 1997, the Company reported a charge of $18.0 million
(net of tax benefit of $7.7 million) or $.04 per share for write-off of business
process reengineering costs. Such costs were expensed as incurred during 1999,
1998, and the fourth quarter of 1997, and were insignificant.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This
Statement established accounting and reporting standards for derivative
instruments, requiring recognition of the fair value of all derivatives as
assets or liabilities on the balance sheet. SFAS No. 133 was to be effective for
fiscal years beginning after June 15, 1999. In July 1999, the FASB issued SFAS
No.137 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133." SFAS No. 137 delays the
effective date of SFAS No. 133 by one year. The Company will adopt SFAS No. 133
on January 1, 2001. Management does not expect the adoption to have a
significant impact on the Company's financial results.
COMMON STOCK SPLIT
On August 1, 1997, the Company's Board of Directors approved a 2-for-1 stock
split to shareholders of record at the close of business August 8, 1997,
effective August 22, 1997, and also authorized retirement of 105.3 million
common shares (pre-split) held in treasury. All per share and shares outstanding
data in the Consolidated Statement of Earnings and Notes to Consolidated
Financial Statements have been retroactively restated to reflect the stock
split.
STOCK COMPENSATION
The Company follows Accounting Principles Board Opinion (APB) #25, "Accounting
for Stock Issued to Employees," in accounting for its employee stock options and
other stock-based compensation. Under APB #25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized. As permitted,
the Company has elected to adopt the disclosure provisions only of SFAS #123,
"Accounting for Stock-Based Compensation." Refer to Note 8 for further
information.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
22
NOTE 2 ACQUISITIONS & DISPOSITIONS
ACQUISITIONS
On November 29, 1999, the Company purchased the outstanding common stock of
Worthington Foods, Inc. for approximately $300 million in cash, including
related acquisition costs. Additionally, during December 1999, the Company paid
off approximately $50 million of Worthington debt existing at the acquisition
date. Worthington Foods, Inc. is the leading manufacturer and marketer of soy
protein-based meat alternatives and other healthful foods. The acquisition was
accounted for as a purchase and was financed through commercial paper
borrowings. Results of Worthington Foods, Inc. operations have been included in
the Company's consolidated results from the date of acquisition. The impact of
this acquisition on the Company's fourth quarter 1999 results was insignificant.
The components of intangible assets included in the allocation of purchase
price, along with the related straight-line amortization periods, were:
==========================================================================================
Amount Amortization
(millions) period (yrs.)
- ------------------------------------------------------------------------------------------
Trademarks and tradenames $100.0 40
Goodwill 194.0 40
- ------------------------------------------------------------------------------------------
Total $294.0
==========================================================================================
The purchase price allocation includes approximately $12 million of exit
liabilities, comprised principally of employee involuntary separation and
relocation benefits.
The unaudited pro forma combined historical results, as if Worthington Foods,
Inc. had been acquired at the beginning of fiscal 1999 and 1998, respectively,
are estimated to be:
==========================================================================================
(millions, except per share data) 1999 1998
- ------------------------------------------------------------------------------------------
Net sales $7,130.1 $6,901.6
Net earnings $323.6 $493.3
Net earnings per share $ 0.80 $ 1.21
==========================================================================================
The pro forma results include amortization of the intangibles presented above
and interest expense on debt assumed issued to finance the purchase. The pro
forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of each of
the fiscal periods presented, nor are they necessarily indicative of future
consolidated results.
On January 20, 2000, the Company purchased certain assets and liabilities of the
Mondo Baking Company Division of Southeastern Mills, Inc. for approximately $92
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.
DISPOSITIONS
During November 1999, the Company sold certain assets and liabilities of the
Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a
result of this
23
transaction, the Company recorded a pretax charge of $178.9 million ($119.3
million after tax or $.29 per share). This charge includes approximately $57
million for disposal of other assets associated with the Lender's business,
which were not purchased by Aurora.
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.
The impact of these dispositions on operating results during the fourth quarter
of 1999 was insignificant.
24
NOTE 3 RESTRUCTURING CHARGES & ASSET IMPAIRMENT LOSSES
Operating profit for 1999 includes restructuring charges of $244.6 million
($156.4 million after tax or $.40 per share) for streamlining initiatives.
Operating profit for 1998 includes restructuring charges of $70.5 million ($46.3
million after tax or $.12 per share) for streamlining initiatives.
Operating profit for 1997 includes restructuring charges for streamlining
initiatives of $161.1 million and asset impairment losses of $23.0 million
($140.5 million after tax or $.34 per share).
RESTRUCTURING CHARGES
During the current and prior 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.
The 1999 restructuring charges consist of $193.2 million for closing the South
Operations portion of the Company's Battle Creek, Michigan, cereal plant, $32.7
million for workforce reduction initiatives around the world, and $18.7 million
primarily for manufacturing equipment write-offs related to previously closed or
impaired facilities in various locations.
As presented in the table on page 27, approximately one-half of the charges for
the South Operations closing are comprised of asset write-offs, with the
remainder consisting primarily of cash costs for employee retirement and
separation benefits, equipment removal, and building demolition. As part of the
Company's strategy of continuing cost reduction and efficiency improvement,
these operations were closed in October 1999. Some production capacity is being
relocated to the Company's other North American cereal plants. Approximately 525
hourly and salaried positions at the Battle Creek plant will be eliminated by
the end of the first quarter of 2000 through a combination of voluntary and
involuntary separation programs. These actions are expected to result in
estimated annual pretax savings of $35 to $45 million, a portion of which will
be realized in 2000.
The charges for workforce reduction initiatives are comprised principally of
employee retirement and separation benefit costs 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
during 1999 and are expected to generate approximately $25 million in pretax
savings in 2000.
The 1998 restructuring charges relate primarily to an overhead activity analysis
that resulted in the elimination of approximately 550 employees and 240
contractors from the Company's headquarters and North American operations
through a combination of involuntary early retirement and severance programs.
The charges consist mainly of employee retirement and separation benefits. This
program generated approximately $100 million of pretax savings during 1999.
The 1997 restructuring charges relate principally to management's plan to
optimize the Company's pan-European operations, as well as ongoing productivity
programs in the United States and Australia. A major component of the
pan-European initiatives was the late-1997 closing of plants and separation of
employees in Riga, Latvia; Svendborg, Denmark; and Verola, Italy. Approximately
50% of the total 1997 restructuring charges consist of manufacturing asset
write-downs, with the balance comprised principally of current and anticipated
cash outlays for employee separation benefits and equipment removal. The 1997
25
charges also include approximately $41 million of program-related non-exit
costs, such as production redeployment and associated consulting, incurred
during 1997. The 1997 programs eliminated approximately 600 positions by the end
of 1998. Total pretax savings from these programs, 60% of which was realized by
the end of 1999, are expected to be approximately $50 million.
The components of the restructuring charges by initiative, as well as reserve
balances remaining at December 31, 1999, 1998, and 1997, were:
==============================================================================================================================
U.S. OPERATIONAL Employee
STREAMLINING retirement &
severance Asset Asset Other
(millions) benefits (a) write-offs removal costs (d) Total
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1996 $ 3.3 $ - $ 25.1 $ - $ 28.4
1997 restructuring charges - 22.2 6.8 6.2 35.2
Amounts utilized during 1997 (3.3) (22.2) (16.8) (6.2) (48.5)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1997 - - 15.1 - 15.1
1998 restructuring charges - - - - -
Amounts utilized during 1998 - - (6.6) - (6.6)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1998 - - 8.5 - 8.5
1999 restructuring charges 55.5 108.4 28.2 1.1 193.2
Amounts utilized during 1999 (34.1) (108.4) (8.6) (1.1) (152.2)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1999 $ 21.4 $ - $ 28.1 $ - $ 49.5
==============================================================================================================================
==============================================================================================================================
PAN-EUROPEAN Employee
REORGANIZATION retirement &
severance Asset Asset Other
(millions) benefits write-offs removal costs (d) Total
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1996 $ 11.4 $ - $ 2.6 $ - $ 14.0
1997 restructuring charges 19.6 54.7 11.3 33.5 119.1
Amounts utilized during 1997 (11.6) (54.7) (3.8) (33.5) (103.6)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1997 19.4 - 10.1 - 29.5
1998 restructuring charges - - - - -
Amounts utilized during 1998 (17.6) - (11.5) - (29.1)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1998 (c) 1.8 - (1.4) - .4
1999 restructuring charges 10.9 10.9 .6 - 22.4
Amounts utilized during 1999 (10.0) (10.9) (.4) - (21.3)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1999 (c) $ 2.7 $ - ($ 1.2) $ - $ 1.5
==============================================================================================================================
26
==============================================================================================================================
AUSTRALIAN PLANT Employee
PRODUCTIVITY PROGRAM retirement &
severance Asset Asset Other
(millions) benefits write-offs removal costs (d) Total
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1996 $ 7.0 $ - $2.7 $ - $ 9.7
1997 restructuring charges 2.7 .6 .6 1.1 5.0
Amounts utilized during 1997 (5.7) (.6) (.8) (1.1) (8.2)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1997 4.0 - 2.5 - 6.5
1998 restructuring charges - - - - -
Amounts utilized during 1998 (1.4) - (.9) - (2.3)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1998 2.6 - 1.6 - 4.2
1999 restructuring charges 1.5 .2 (.4) .1 1.4
Amounts utilized during 1999 (1.0) (.2) (.6) (.1) (1.9)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1999 $ 3.1 $ - $ .6 $ - $ 3.7
==============================================================================================================================
==============================================================================================================================
NORTH AMERICAN Employee
OVERHEAD ACTIVITY ANALYSIS retirement &
severance Asset Asset Other
(millions) benefits (b) write-offs removal costs (d) Total
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1996 $ - $ - $ - $ - $ -
1997 restructuring charges - - - - -
Amounts utilized during 1997 - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1997 - - - - -
1998 restructuring charges 57.1 5.2 3.0 1.8 67.1
Amounts utilized during 1998 (22.7) (5.2) (.1) (1.8) (29.8)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1998 34.4 - 2.9 - 37.3
1999 restructuring charges 5.5 - 1.1 4.5 11.1
Amounts utilized during 1999 (35.7) - (3.0) (4.5) (43.2)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1999 $ 4.2 $ - $ 1.0 $ - $ 5.2
==============================================================================================================================
==============================================================================================================================
ALL OTHER Employee
retirement &
severance Asset Asset Other
(millions) benefits write-offs removal costs (d) Total
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1996 $ 2.2 $ - $ - $ - $ 2.2
1997 restructuring charges .1 .6 .6 .5 1.8
Amounts utilized during 1997 (2.1) (.6) - (.5) (3.2)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1997 .2 - .6 - .8
1998 restructuring charges 2.7 .3 - .4 3.4
Amounts utilized during 1998 (2.1) (.3) (.3) (.4) (3.1)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1998 .8 - .3 - 1.1
1999 restructuring charges 4.8 11.7 - - 16.5
Amounts utilized during 1999 (5.6) (11.7) (.3) - (17.6)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1999 $ - $ - $ - $ - $ -
==============================================================================================================================
27
==============================================================================================================================
CONSOLIDATED Employee
retirement &
severance Asset Asset Other
(millions) benefits (a)(b) write-offs removal costs (d) Total
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1996 $ 23.9 $ - $ 30.4 $ - $ 54.3
1997 restructuring charges 22.4 78.1 19.3 41.3 161.1
Amounts utilized during 1997 (22.7) (78.1) (21.4) (41.3) (163.5)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1997 23.6 - 28.3 - 51.9
1998 restructuring charges 59.8 5.5 3.0 2.2 70.5
Amounts utilized during 1998 (43.8) (5.5) (19.4) (2.2) (70.9)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1998 (c) 39.6 - 11.9 - 51.5
1999 restructuring charges 78.2 131.2 29.5 5.7 244.6
Amounts utilized during 1999 (86.4) (131.2) (12.9) (5.7) (236.2)
- ------------------------------------------------------------------------------------------------------------------------------
Remaining reserve at
December 31, 1999 (c) $ 31.4 $ - $ 28.5 $ - $ 59.9
==============================================================================================================================
(a) Includes approximately $32 of pension and postretirement health care
curtailment losses and special termination benefits recognized in 1999.
Refer to Notes 9 and 10.
(b) Includes approximately $18 and $4 of pension and postretirement health care
curtailment losses and special termination benefits recognized in 1998 and
1999, respectively. Refer to Notes 9 and 10.
(c) Negative removal reserves in Europe result from netting of anticipated
proceeds from asset sales with removal costs.
(d) Consist primarily of program-related non-exit costs incurred during the
period of the reported charge.
Incremental pretax savings achieved or expected from streamlining initiatives by
year, and the relative impact on captions within the Consolidated Statement of
Earnings, are:
===============================================================================
Relative impact on
------------------------------------
Incremental Cost of
(millions) pretax savings goods sold SGA (a)
- -------------------------------------------------------------------------------
1997 $ 60 75% 25%
1998 10 75% 25%
1999 125 10% 90%
2000 expected 50 80% 20%
===============================================================================
(a) Selling, general, and administrative expense.
Total cash outlays incurred or expected for streamlining initiatives by year
are:
==================================
(millions)
- ----------------------------------
1997 $85
1998 47
1999 69
2000 expected 60
==================================
ASSET IMPAIRMENT LOSSES
During 1997, the Company included in operating profit $23.0 million of asset
impairment losses, resulting from evaluation of the Company's ability to recover
components of its investments, based on management's ongoing strategic
assessment of local conditions, in the emerging markets of Asia-Pacific. These
investments consist of cereal manufacturing plant, property, and equipment
located in India and China. In both of these markets, demand
28
for the Company's locally produced products has fallen short of expectations
during the initial years of operation. As of year-end 1997, the future cash
flows expected to be generated from these operations were not projected to
support the current carrying value of the manufacturing assets during their
remaining useful lives. Therefore, pursuant to SFAS No.121 "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of,"
management reduced the carrying value of these assets to fair market value. Fair
market value was based on independent real estate appraisal in the case of plant
and property, and internal engineering evaluations in the case of equipment.
These assets are currently being held and used with no plans for future
disposal. Management is implementing new strategies in these markets that
leverage the Company's ability to appeal to local tastes.
2000 EVENTS
The Company's streamlining initiatives will continue in 2000. The Company
expects to implement streamlining initiatives in its European supply chain as
part of an ongoing efficiency program. As a result of this action, the Company
expects to record pretax restructuring charges of approximately $25 million in
the second quarter of 2000.
29
NOTE 4 OTHER INCOME (EXPENSE), NET
Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, and charitable donations.
Other income (expense), net for 1998 includes a credit of approximately $6
million related to settlement of certain litigation. During 1996, the Company
included in operating profit a provision of $15 million for the potential
settlement of this litigation, which brought the total settlement reserve to $18
million. This litigation was settled during the second quarter of 1998 for a
cost of approximately $12 million, and the remaining reserve of approximately $6
million was reversed.
30
NOTE 5 EQUITY
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 earnings per share is reconciled to
diluted net earnings per share as follows:
===================================================================================================
Average Net
Net shares earnings
(millions, except per share data) earnings outstanding per share
- ---------------------------------------------------------------------------------------------------
1999
Basic $338.3 405.2 $ .83
Dilutive employee stock options - .5 -
- ---------------------------------------------------------------------------------------------------
Diluted $338.3 405.7 $ .83
===================================================================================================
1998
Basic $502.6 407.8 $1.23
Dilutive employee stock options - .8 -
- ---------------------------------------------------------------------------------------------------
Diluted $502.6 408.6 $1.23
===================================================================================================
1997
Basic $546.0 414.1 $1.32
Dilutive employee stock options - 1.1 -
- ---------------------------------------------------------------------------------------------------
Diluted $546.0 415.2 $1.32
===================================================================================================
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:
================================================================================================
(millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Net earnings $338.3 $502.6 $546.0
Other comprehensive income:
Foreign currency translation adjustments (39.0) (11.1) (112.1)
Related tax effect - 0.6 (3.5)
- ------------------------------------------------------------------------------------------------
(39.0) (10.5) (115.6)
- ------------------------------------------------------------------------------------------------
Total comprehensive income $299.3 $492.1 $430.4
================================================================================================
31
NOTE 6 LEASES
Operating leases are generally for equipment and warehouse space. Rent expense
on all operating leases was $31.5 million in 1999, $36.5 million in 1998, and
$38.6 million in 1997. At December 31, 1999, future minimum annual rental
commitments under non-cancelable operating leases totaled $53 million consisting
of (in millions): 2000-$14; 2001-$11; 2002-$8; 2003-$7; 2004-$5; 2005 and
beyond-$8.
32
NOTE 7 DEBT
Notes payable consist of commercial paper borrowings in the United States at the
highest credit rating available, borrowings against a revolving credit agreement
in Europe and, to a lesser extent, bank loans of foreign subsidiaries at
competitive market rates. U.S. borrowings at December 31, 1999, were $448.3
million with an effective interest rate of 5.9%. U.S. borrowings at December 31,
1998, were $423.3 million with an effective interest rate of 5.2%. Associated
with these borrowings, during September 1997, the Company purchased a $225
million notional, four-year fixed interest rate cap. Under the terms of the cap,
if the Federal Reserve AA composite rate on 30-day commercial paper increased to
6.33%, the Company would pay this fixed rate on $225 million of its commercial
paper borrowings. If the rate increased to 7.68% or above, the cap would expire.
The Company sold this cap in November 1999; proceeds were insignificant.
In December 1998, the Company entered into a $200 million, three-year revolving
credit agreement with several international banks. At December 31, 1999,
outstanding borrowings under this agreement were $16.2 million with an effective
interest rate of 5.6%. At December 31, 1998, outstanding borrowings under this
agreement were $148.5 million with an effective interest rate of 5.5%.
Additionally, the Company has entered into financing arrangements that provide
for the sale of future foreign currency revenues. As of December 31, 1999, the
Company had committed to borrowings during 2000 in the cumulative principal
amount of approximately $366 million. No borrowings were outstanding under these
arrangements at December 31, 1999 or 1998. At December 31, 1999, the Company had
$718.2 million of total short-term lines of credit, of which $626.3 million were
unused and available for borrowing on an unsecured basis.
Long-term debt at year-end consisted of:
================================================================================
(millions) 1999 1998
- --------------------------------------------------------------------------------
(a) Seven-Year Notes due 2005 $ 200.0 $ 200.0
(b) Seven-Year Notes due 2004 500.0 500.0
(c) Four-Year Notes due 2001 500.0 500.0
(d) Three-Year Notes due 2001 400.0 400.0
Other 15.7 15.6
- --------------------------------------------------------------------------------
1,615.7 1,615.6
Less current maturities (2.9) (1.1)
- --------------------------------------------------------------------------------
Balance, December 31 $1,612.8 $1,614.5
================================================================================
(a) In October 1998, the Company issued $200 of seven-year 4.875% fixed rate
U.S. Dollar Notes to replace maturing long-term debt. The Company entered
into a series of interest rate hedges throughout 1998 to effectively fix
the interest rate prior to issuance. The effect of the hedges, when
combined with original issue discounts, resulted in an effective interest
rate on this debt of 6.07%.
(b) In January 1997, the Company issued $500 of seven-year 6.625% fixed rate
Euro Dollar Notes. In conjunction with this issuance, the Company settled
$500 notional amount of interest rate forward swap agreements, which
effectively fixed the interest rate on the debt at 6.354%. Associated with
this debt, during September 1997, the Company entered into a $225 notional,
4 1/2-year fixed-to-floating interest rate swap, indexed to the three-month
London Interbank Offered Rate (LIBOR). Under the terms of this swap, if
three-month LIBOR decreased to 4.71% or below, the swap would expire.
33
The Company terminated this swap agreement in November 1999. The amount
paid to discharge the agreement was insignificant.
(c) In August 1997, the Company issued $500 of four-year 6.125% Euro Dollar
Notes. In conjunction with this issuance, the Company settled $400
notional amount of interest rate forward swap agreements that effectively
fixed the interest rate on the debt at 6.4%. Associated with this debt,
during September 1997, the Company entered into a $200 notional, four-year
fixed-to-floating interest rate swap, indexed to three-month LIBOR.
(d) In February 1998, the Company issued $400 of three-year 5.75% fixed rate
U.S. Dollar Notes. These Notes were issued under an existing "shelf
registration" with the Securities and Exchange Commission, and 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. As a result of this option, the effective interest rate on
the three-year Notes is 5.23%. Concurrent with this issuance, the Company
entered into a $400 notional, three-year fixed-to-floating interest rate
swap, indexed to the Federal Reserve AA Composite Rate on 30-day
commercial paper.
Scheduled principal repayments on long-term debt are (in millions):
2000-$3; 2001-$900; 2002-$4; 2003-$1; 2004-$500; 2005 and beyond-$208.
Interest paid was (in millions): 1999-$124; 1998-$113; 1997-$85. Interest
expense capitalized as part of the construction cost of fixed assets was (in
millions): 1999-$8.4; 1998-$7.8; 1997- $9.6.
34
NOTE 8 STOCK OPTIONS
The Key Employee Long-Term Incentive Plan provides for benefits to be awarded to
executive-level employees in the form of stock options, performance shares,
performance units, incentive stock options, restricted stock grants, and other
stock-based awards. Options granted under this plan generally vest over two
years and, prior to September 1997, vested at the date of grant. The Bonus
Replacement Stock Option Plan allows certain key executives to receive stock
options that generally vest immediately in lieu of part or all of their
respective bonus. Options granted under this plan are issued from the Key
Employee Long-Term Incentive Plan. The Kellogg Employee Stock Ownership Plan is
designed to offer stock and other incentive awards based on Company performance
to employees who are not eligible to participate in the Key Employee Long-Term
Incentive Plan. Options awarded under the Kellogg Employee Stock Ownership Plan
are subject to graded vesting over a five-year period. Under these plans (the
"stock option plans"), options are granted with exercise prices equal to the
fair market value of the Company's common stock at the time of grant,
exercisable for a 10-year period following the date of grant, subject to vesting
rules.
The Key Employee Long-Term Incentive Plan contains an accelerated ownership
feature ("AOF"). An AOF option is granted when Company stock is surrendered to
pay the exercise price of a stock option. The holder of the option is granted an
AOF option for the number of shares surrendered. For all AOF options, the
original expiration date is not changed but the options vest immediately.
As permitted by SFAS #123 "Accounting for Stock-Based Compensation," the Company
has elected to account for the stock option plans under APB #25 "Accounting for
Stock Issued to Employees." Accordingly, no compensation cost has been
recognized for these plans.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. Had compensation cost
for the stock option plans been determined based on the fair value at the grant
date consistent with SFAS #123, the Company's net earnings and earnings per
share are estimated as follows:
========================================================================================================
(millions, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Net earnings
As reported $338.3 $502.6 $546.0
Pro forma $311.4 $484.4 $520.8
Net earnings per share (basic and diluted)
As reported $ .83 $ 1.23 $ 1.32
Pro forma $ .77 $ 1.19 $ 1.26
========================================================================================================
The fair value of each option grant was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.83% 5.56% 6.31%
Dividend yield 3.00% 2.00% 1.97%
Volatility 23.16% 21.28% 19.83%
Average expected term (years) 3.76 3.47 3.52
Fair value of options granted $ 6.38 $ 8.45 $ 7.48
========================================================================================================
35
Transactions under these plans were:
========================================================================================================
(millions, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Under option, January 1 16.4 12.4 11.2
Granted 6.6 6.8 6.0
Exercised (1.1) (1.7) (4.5)
Cancelled (2.0) (1.1) (0.3)
- --------------------------------------------------------------------------------------------------------
Under option, December 31 19.9 16.4 12.4
- --------------------------------------------------------------------------------------------------------
Exercisable, December 31 10.1 8.7 8.1
========================================================================================================
Shares available, December 31,
for options that may be granted under
the following plans:
Key Employee Long Term Incentive Plan 7.1 9.8 13.2
Kellogg Employee Stock Ownership Plan 4.6 6.0 6.9
- --------------------------------------------------------------------------------------------------------
Total shares available, December 31,
for options that may be granted 11.7 15.8 20.1
========================================================================================================
Average prices per share
---------------------------------------------
Under option, January 1 $38 $35 $33
Granted 36 43 36
Exercised 32 34 33
Cancelled 39 33 34
- --------------------------------------------------------------------------------------------------------
Under option, December 31 $38 $38 $35
- --------------------------------------------------------------------------------------------------------
Exercisable, December 31 $39 $36 $36
========================================================================================================
Employee stock options outstanding and exercisable under these plans as of
December 31, 1999, were:
=========================================================================================
(millions, except Outstanding Exercisable
--------------------------------------------------------------------
per share data) Weighted
Weighted average Weighted
Range of average remaining average
exercise Number of exercise contractual Number of exercise
prices options price life (yrs.) options price
- -----------------------------------------------------------------------------------------
$15 - 34 7.6 $33 8.0 2.5 $30
35 - 39 5.4 38 7.8 2.9 38
40 - 44 6.2 43 8.3 4.0 43
45 - 50 .7 48 7.7 .7 48
- -----------------------------------------------------------------------------------------
19.9 10.1
=========================================================================================
36
NOTE 9 PENSION BENEFITS
The Company has a number of U.S. and foreign pension plans to provide retirement
benefits for its employees. Benefits for salaried employees are generally based
on salary and years of service, while union employee benefits are generally a
negotiated amount for each year of service. Plan funding strategies are
influenced by tax regulations. Plan assets consist primarily of equity
securities with smaller holdings of bonds, real estate, and other investments.
Investment in Company common stock represented 1.9% and 2.4% of consolidated
plan assets at December 31, 1999 and 1998, respectively.
The components of pension expense were:
====================================================================================================================
(millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Service cost $ 42.6 $ 41.3 $ 29.9
Interest cost 83.7 81.3 79.6
Expected return on plan assets (125.1) (113.9) (104.7)
Amortization of unrecognized transition obligation 2.0 0.7 (0.3)
Amortization of unrecognized prior service cost 7.4 7.5 7.9
Recognized net losses 10.9 10.0 4.7
Curtailment loss and special
termination benefits 33.5 17.4 -
- --------------------------------------------------------------------------------------------------------------------
Pension expense - Company plans 55.0 44.3 17.1
Pension expense - multiemployer plans 1.4 1.2 1.9
- --------------------------------------------------------------------------------------------------------------------
Total pension expense $ 56.4 $ 45.5 $ 19.0
====================================================================================================================
The worldwide weighted average actuarial assumptions were:
==============================================================================================================================
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Discount rate 7.2% 6.7% 7.6%
Long-term rate of compensation increase 4.2% 4.9% 4.9%
Long-term rate of return on plan assets 10.4% 10.5% 10.5%
==============================================================================================================================
37
The aggregate change in projected benefit obligation, change in plan assets, and
funded status were:
==========================================================================================================
(millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year $1,331.2 $1,133.4
Service cost 42.6 41.3
Interest cost 83.7 81.3
Plan participants' contributions 1.3 1.4
Amendments 36.6 9.6
Actuarial (gain)/loss (58.4) 133.6
Benefits paid (76.1) (70.5)
Other (10.5) 1.1
- ----------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year $1,350.4 $1,331.2
==========================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $1,318.3 $1,209.0
Actual return on plan assets 299.8 132.6
Employer contribution 42.9 54.7
Plan participants' contributions 1.3 1.4
Benefits paid (76.1) (70.5)
Other (8.2) (8.9)
- ----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $1,578.0 $1,318.3
==========================================================================================================
FUNDED STATUS $ 227.6 $ (12.9)
Unrecognized net (gain)/loss (135.4) 111.5
Unrecognized transition amount 3.4 4.2
Unrecognized prior service cost 38.4 36.2
- ----------------------------------------------------------------------------------------------------------
Prepaid pension $ 134.0 $ 139.0
==========================================================================================================
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF
Prepaid benefit cost $ 207.9 $ 213.6
Accrued benefit liability (86.9) (88.4)
Intangible asset 13.0 13.8
- ----------------------------------------------------------------------------------------------------------
Net amount recognized $ 134.0 $ 139.0
==========================================================================================================
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were:
===================================================================================================
(millions) 1999 1998
- ---------------------------------------------------------------------------------------------------
Projected benefit obligation $ 89.7 $104.6
Accumulated benefit obligation 76.1 84.5
Fair value of plan assets - 8.3
===================================================================================================
All gains and losses, other than curtailment losses and special termination
benefits, are recognized over the average remaining service period of active
plan participants. Curtailment losses and special termination benefits
recognized in 1999 and 1998 were recorded as a component of restructuring
charges. Refer to Note 3 for further information.
Certain of the Company's subsidiaries sponsor 401(k) or similar savings plans
for active employees. Expense related to these plans was (in millions):
1999-$17; 1998-$16; 1997-$16.
38
NOTE 10 NONPENSION POSTRETIREMENT BENEFITS
Certain of the Company's North American subsidiaries provide health care and
other benefits to substantially all retired employees, their covered dependents,
and beneficiaries. Generally, employees are eligible for these benefits when one
of the following service/age requirements is met: 30 years and any age; 20 years
and age 55; 5 years and age 62. Plan assets consist primarily of equity
securities with smaller holdings of bonds.
Components of postretirement benefit expense were:
=======================================================================================================
(millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Service cost $ 9.3 $ 9.1 $ 9.6
Interest cost 37.4 36.8 37.2
Expected return on plan assets (17.8) (15.0) (13.3)
Amortization of unrecognized prior service cost (.5) (.5) (.5)
Recognized net gains (4.8) (5.3) (6.3)
Curtailment loss and special
termination benefits .5 1.0 -
- -------------------------------------------------------------------------------------------------------
Postretirement benefit expense $ 24.1 $ 26.1 $ 26.7
=======================================================================================================
The weighted average actuarial assumptions were:
=======================================================================================================
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Discount rate 8.0% 7.0% 7.25%
Long-term rate of return on plan assets 10.5% 10.5% 10.5%
=======================================================================================================
The aggregate change in accumulated postretirement benefit obligation, change in
plan assets, and funded status were:
=================================================================================
(millions) 1999 1998
- ---------------------------------------------------------------------------------
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Accumulated benefit obligation at beginning of year $ 548.8 $ 523.3
Service cost 9.3 9.1
Interest cost 37.4 36.8
Actuarial loss 15.3 7.6
Amendments (.2) 2.2
Benefits paid (30.6) (29.5)
Other .2 (.7)
- ---------------------------------------------------------------------------------
Accumulated benefit obligation at end of year $ 580.2 $ 548.8
=================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 177.4 $ 150.7
Actual return on plan assets 48.0 22.1
Employer contribution 35.2 34.1
Benefits paid (30.6) (29.5)
- ---------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 230.0 $ 177.4
=================================================================================
FUNDED STATUS $(350.2) $(371.4)
Unrecognized net gain (88.9) (80.9)
Unrecognized prior service cost (10.7) (6.2)
- ---------------------------------------------------------------------------------
Accrued postretirement benefit cost $(449.8) $(458.5)
=================================================================================
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF
Accrued benefit liability $(449.8) $(458.5)
=================================================================================
39
The assumed health care cost trend rate was 6% for 1999, decreasing gradually to
5% by the year 2003 and remaining at that level thereafter. These trend rates
reflect the Company's prior experience and management's expectation that future
rates will decline. A one percentage point change in assumed health care cost
trend rates would have the following effects:
==========================================================================================
ONE PERCENTAGE ONE PERCENTAGE
(MILLIONS) POINT INCREASE POINT DECREASE
- ------------------------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 6.8 $ (5.6)
Effect on postretirement benefit obligation $ 70.4 $ (58.5)
==========================================================================================
All gains and losses, other than curtailment losses and special termination
benefits, are recognized over the average remaining service period of active
plan participants. The net curtailment loss and special termination benefits for
1999 include a $2.2 million loss recorded as a component of restructuring
charges and a $1.7 million gain recorded as a component of disposition-related
charges. The net curtailment loss and special termination benefits for 1998 were
recorded as a component of restructuring charges. Refer to Notes 2 and 3 for
further information. Since December 1996, the Company has contributed to a
voluntary employee benefit association (VEBA) trust for funding of its
nonpension postretirement benefit obligations.
40
NOTE 11 INCOME TAXES
Earnings before income taxes and cumulative effect of accounting change, and the
provision for U.S. federal, state, and foreign taxes on these earnings, were:
===============================================================================================================
(millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
United States $235.1 $564.0 $576.4
Foreign 301.6 218.5 328.1
- ---------------------------------------------------------------------------------------------------------------
$536.7 $782.5 $904.5
===============================================================================================================
INCOME TAXES
Currently payable
Federal $135.9 $128.7 $129.4
State 20.6 17.8 29.6
Foreign 102.4 87.2 143.0
- ---------------------------------------------------------------------------------------------------------------
258.9 233.7 302.0
===============================================================================================================
Deferred
Federal (60.7) 30.6 50.2
State (4.5) 1.7 4.0
Foreign 4.7 13.9 (15.7)
- ---------------------------------------------------------------------------------------------------------------
(60.5) 46.2 38.5
- ---------------------------------------------------------------------------------------------------------------
Total income taxes $198.4 $279.9 $340.5
===============================================================================================================
The difference between the U.S. federal statutory tax rate and the Company's
effective rate was:
===============================================================================================================
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
U.S. statutory rate 35.0% 35.0% 35.0%
Foreign rate varying from 35% (.5) (2.0) (1.6)
State income taxes, net of federal benefit 2.0 2.4 2.4
Net change in valuation allowances (1.3) 2.9 1.6
Statutory rate changes, deferred tax impact (.6) (.3) (.5)
Other 2.4 (2.2) .7
- ---------------------------------------------------------------------------------------------------------------
Effective income tax rate 37.0% 35.8% 37.6%
===============================================================================================================
The changes in valuation allowances on deferred tax assets and corresponding
impacts on the effective income tax rate, as presented above, result primarily
from management's assessment of the Company's ability to utilize certain
operating loss and tax credit carryforwards. Total tax benefits of carryforwards
at year-end 1999 and 1998 were $43.2 million and $55.3 million, respectively,
and expire principally after five years.
41
The deferred tax assets and liabilities included in the balance sheet at
year-end were:
================================================================================================================================
Deferred tax assets Deferred tax liabilities
(millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Current:
Promotion and advertising $18.0 $26.0 $7.4 $9.9
Wages and payroll taxes 17.3 27.3 - -
Inventory valuation 9.6 6.1 11.4 11.6
Health and postretirement benefits 34.3 18.1 .3 3.8
State taxes 6.7 5.7 - -
Operating loss and credit carryforwards 1.5 1.7 - -
Other 35.0 21.9 7.1 4.4
- --------------------------------------------------------------------------------------------------------------------------------
122.4 106.8 26.2 29.7
Less valuation allowance (2.2) (1.5) - -
- --------------------------------------------------------------------------------------------------------------------------------
120.2 105.3 26.2 29.7
================================================================================================================================
Noncurrent:
Depreciation and asset disposals 16.7 15.7 291.9 327.1
Health and postretirement benefits 158.9 164.3 68.9 58.8
Capitalized interest - - 24.0 28.3
State taxes 1.6 - - 1.9
Operating loss and credit carryforwards 41.7 53.6 - -
Trademarks - 2.5 29.8 -
Other 32.2 19.4 14.4 17.5
- --------------------------------------------------------------------------------------------------------------------------------
251.1 255.5 429.0 433.6
Less valuation allowance (59.6) (67.1) - -
================================================================================================================================
191.5 188.4 429.0 433.6
- --------------------------------------------------------------------------------------------------------------------------------
Total deferred taxes $311.7 $293.7 $455.2 $463.3
================================================================================================================================
At December 31, 1999, foreign subsidiary earnings of $1.3 billion were
considered permanently invested in those businesses. Accordingly, U.S. income
taxes have not been provided on these earnings. Foreign withholding taxes of
approximately $82 million would be payable upon remittance of these earnings.
Subject to certain limitations, the withholding taxes would then be available
for use as credits against the U.S. tax liability.
Cash paid for income taxes was (in millions): 1999-$242; 1998-$211; 1997-$332.
42
NOTE 12 FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
The fair values of the Company's financial instruments are based on carrying
value in the case of short-term items, quoted market prices for derivatives and
investments, and, in the case of long-term debt, incremental borrowing rates
currently available on loans with similar terms and maturities. The carrying
amounts of the Company's cash, cash equivalents, receivables, notes payable, and
long-term debt approximate fair value.
The Company is exposed to certain market risks which exist as a part of its
ongoing business operations and uses derivative financial and commodity
instruments, where appropriate, to manage these risks. In general, instruments
used as hedges must be effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of the
contract. Deferred gains or losses related to any instrument 1) designated but
ineffective as a hedge of existing assets, liabilities, or firm commitments, or
2) designated as a hedge of an anticipated transaction which is no longer likely
to occur, are recognized immediately in the statement of earnings.
For all derivative financial and commodity instruments held by the Company,
changes in fair values of these instruments and the resultant impact on the
Company's cash flows and/or earnings would generally be offset by changes in
value of underlying exposures. The impact on the Company's results and financial
position of holding derivative financial and commodity instruments was
insignificant during the periods presented.
FOREIGN EXCHANGE RISK
The Company is exposed to fluctuations in foreign currency cash flows related
primarily to third-party purchases, intercompany product shipments, and
intercompany loans. The Company is also exposed to fluctuations in the value of
foreign currency investments in subsidiaries and cash flows related to
repatriation of these investments. Additionally, the Company is exposed to
volatility in the translation of foreign currency earnings to U.S. Dollars.
The Company assesses foreign currency risk based on transactional cash flows and
enters into forward contracts and other commitments to sell foreign currency
revenues, all of generally less than twelve months duration, to reduce
fluctuations in net long or short currency positions. Foreign currency contracts
are marked-to-market with net amounts due to or from counterparties recorded in
accounts receivable or payable. For contracts hedging firm commitments,
mark-to-market gains and losses are deferred and recognized as adjustments to
the basis of the transaction. For contracts hedging subsidiary investments,
mark-to-market gains and losses are recorded in the accumulated other
comprehensive income component of shareholders' equity. For all other contracts,
mark-to-market gains and losses are recognized currently in other income or
expense. Commitments to sell future foreign currency revenues are accounted for
as contingent borrowings.
The notional amounts of open forward contracts were $3.8 million and $22.2
million at December 31, 1999 and 1998, respectively. No borrowings were
outstanding under commitments to sell foreign currency revenues at December 31,
1999 or 1998. Refer to Supplemental Financial Information on pages 35 and 36 for
further information regarding these contracts.
INTEREST RATE RISK
The Company is exposed to interest rate volatility with regard to future
issuances of fixed rate debt and existing issuances of variable rate debt. The
Company uses interest rate caps, and currency and interest rate swaps, including
forward swaps, to reduce interest rate volatility and funding costs associated
with certain debt issues, and to achieve a desired
43
proportion of variable versus fixed rate debt, based on current and projected
market conditions.
Interest rate forward swaps are marked-to-market with net amounts due to or from
counterparties recorded in interest receivable or payable. Mark-to-market gains
and losses are deferred and recognized over the life of the debt issue as a
component of interest expense. For other caps and swaps entered into
concurrently with the debt issue, the interest or currency differential to be
paid or received on the instrument is recognized in the statement of earnings as
incurred, as a component of interest expense. If a position were to be
terminated prior to maturity, the gain or loss realized upon termination would
be deferred and amortized to interest expense over the remaining term of the
underlying debt issue or would be recognized immediately if the underlying debt
issue were settled prior to maturity.
The notional amounts of currency and interest rate swaps and caps were $600.0
million and $1.05 billion at December 31, 1999 and 1998, respectively. Refer to
Note 7 and Supplemental Financial Information on pages 35 and 36 for further
information regarding these swaps.
PRICE RISK
The Company is exposed to price fluctuations primarily as a result of
anticipated purchases of raw and packaging materials. The Company uses the
combination of long cash positions with suppliers, and exchange-traded futures
and option contracts to reduce price fluctuations in a desired percentage of
forecasted purchases over a duration of generally less than one year. Commodity
contracts are marked-to-market with net amounts due to or from brokers recorded
in accounts receivable or payable. Mark-to-market gains and losses are deferred
and recognized as adjustments to the basis of the underlying material purchase.
CREDIT RISK CONCENTRATION
The Company is exposed to credit loss in the event of nonperformance by
counterparties on derivative financial and commodity contracts. This credit loss
is limited to the cost of replacing these contracts at current market rates.
Management believes that the probability of such loss is remote.
Financial instruments which potentially subject the Company to concentrations of
credit risk are primarily cash, cash equivalents, and accounts receivable. The
Company places its investments in highly rated financial institutions and
investment grade short-term debt instruments, and limits the amount of credit
exposure to any one entity. Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of customers, generally
short payment terms, and their dispersion across geographic areas.
44
NOTE 13 QUARTERLY FINANCIAL DATA
(unaudited)
===================================================================================================================================
(millions, except Net sales Gross profit
per share data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
First $1,745.3 $1,642.9 $ 908.9 $ 861.1
Second 1,784.4 1,713.5 946.1 893.9
Third 1,868.4 1,805.8 984.7 936.9
Fourth 1,586.1 1,599.9 819.4 787.6
- -----------------------------------------------------------------------------------------------------------------------------------
$6,984.2 $6,762.1 $3,659.1 $3,479.5
===================================================================================================================================
Net earnings (a) Net Earnings per share (a)(b)
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
First $118.8 $170.7 $ .29 $ .42
Second 154.2 143.2 .38 .35
Third (35.6) 141.9 (.08) .35
Fourth 100.9 46.8 .25 .11
- -----------------------------------------------------------------------------------------------------------------------------------
$338.3 $502.6
===================================================================================================================================
(a) The quarterly results of 1999 and 1998 include the following
restructuring and disposition-related charges.
Refer to Notes 2 and 3 for further information.
================================================================================================
Net earnings Net Earnings per share (b)
1999 1998 1999 1998
------------------------------------------------------------------------------------------------
First ($ 25.6) $ - ($.07) $ -
Third (206.4) - ( .50) -
Fourth (35.9) (46.3) ( .09) ( .12)
------------------------------------------------------------------------------------------------
($267.9) ($46.3)
================================================================================================
(b) Earnings per share presented represent both basic and diluted earnings
per share.
The principal market for trading Kellogg shares is the New York Stock Exchange
(NYSE). The shares are also traded on the Boston, Chicago, Cincinnati, Pacific,
and Philadelphia Stock Exchanges. At year-end 1999, the closing price (on the
NYSE) was $30 13/16 and there were 47,511 shareholders of record. The reported
number of shareholders increased from 24,634 in 1998 due to the first-time
inclusion of participants in the Kellogg Company Dividend Reinvestment Plan.
The comparable number of shareholders of record for 1998 was 47,333.
Dividends paid and the quarterly price ranges on the NYSE during the last two
years were:
=============================================================================================================
Stock price
---------------------------
1999 - QUARTER Dividend High Low
- -------------------------------------------------------------------------------------------------------------
Fourth $.245 $40.94 $30.00
Third .245 39.00 31.50
Second .235 38.13 31.38
First .235 42.25 33.69
- -------------------------------------------------------------------------------------------------------------
$.960
=============================================================================================================
1998 - Quarter
- -------------------------------------------------------------------------------------------------------------
Fourth $.235 $37.63 $32.19
Third .235 39.19 29.56
Second .225 43.50 37.69
First .225 49.69 41.81
- -------------------------------------------------------------------------------------------------------------
$.920
=============================================================================================================
45
NOTE 14 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, and meat alternatives. Principal markets for these products
include the United States and United Kingdom. Operations are 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. The measurement of operating segment results is generally
consistent with the presentation of the Consolidated Statement of Earnings and
Balance Sheet. Intercompany transactions between reportable operating segments
were insignificant in all periods presented.
===============================================================================
(millions) 1999 1998 1997
- -------------------------------------------------------------------------------
NET SALES
North America $4,358.3 $ 4,175.9 $ 4,260.8
Europe 1,614.4 1,698.5 1,702.0
Asia-Pacific 442.0 377.0 411.9
Latin America 567.0 510.7 455.4
Corporate and other 2.5 - -
- --------------------------------------------------------------------------------
Consolidated $6,984.2 $ 6,762.1 $ 6,830.1
================================================================================
OPERATING PROFIT EXCLUDING CHARGES (a)
North America $ 866.7 $ 831.6 $ 884.8
Europe 224.1 211.4 305.8
Asia-Pacific 53.2 48.3 51.1
Latin America 141.3 107.2 111.8
Corporate and other (211.9) (232.9) (160.3)
- --------------------------------------------------------------------------------
Consolidated 1,073.4 965.6 1,193.2
Charges (a) (244.6) (70.5) (184.1)
- --------------------------------------------------------------------------------
Operating profit as reported $ 828.8 $ 895.1 $ 1,009.1
================================================================================
CHARGES (a)
North America $ 197.9 $ 40.8 $ 37.8
Europe 22.4 3.3 115.9
Asia-Pacific 4.6 3.4 28.6
Latin America 1.7 - .2
Corporate and other 18.0 23.0 1.6
- --------------------------------------------------------------------------------
Consolidated $ 244.6 $ 70.5 $ 184.1
================================================================================
DEPRECIATION AND AMORTIZATION
North America $ 151.3 $ 152.1 $ 153.7
Europe 57.8 54.6 59.6
Asia-Pacific 22.5 21.3 21.9
Latin America 14.5 14.2 12.5
Corporate and other 41.9 35.9 39.6
- --------------------------------------------------------------------------------
Consolidated $ 288.0 $ 278.1 $ 287.3
================================================================================
INTEREST EXPENSE
North America $ .3 $ .5 $ .3
Europe 9.3 4.4 1.9
Asia-Pacific - .1 .6
Latin America .6 .9 1.0
Corporate and other 108.6 113.6 104.5
- --------------------------------------------------------------------------------
Consolidated $ 118.8 $ 119.5 $ 108.3
================================================================================
INCOME TAXES EXCLUDING CHARGES (b)
North America $ 232.1 $ 224.8 $ 258.3
Europe 28.8 37.0 80.5
Asia-Pacific 9.5 7.3 12.1
Latin America 34.4 28.1 21.0
Corporate and other 38.8 6.9 12.2
- --------------------------------------------------------------------------------
Consolidated $ 343.6 $ 304.1 $ 384.1
Effect of charges (b) (145.2) (24.2) (43.6)
- --------------------------------------------------------------------------------
Income taxes as reported $ 198.4 $ 279.9 $ 340.5
================================================================================
TOTAL ASSETS
North America $ 2,478.1 $ 2,430.8 $ 2,519.2
Europe 1,157.3 1,336.0 1,154.5
Asia-Pacific 378.3 328.4 309.5
Latin America 414.3 380.9 361.4
Corporate and other 1,755.9 1,516.7 1,405.1
Elimination entries $(1,375.2) (941.3) (872.1)
- --------------------------------------------------------------------------------
Consolidated $ 4,808.7 $ 5,051.5 $ 4,877.6
================================================================================
ADDITIONS TO LONG-LIVED ASSETS
North America $ 465.8 $ 82.5 $ 166.5
Europe 67.4 169.1 60.7
Asia-Pacific 26.9 40.3 24.3
Latin America 47.4 41.7 43.3
Corporate and other 41.7 98.5 94.9
- --------------------------------------------------------------------------------
Consolidated $ 649.2 $ 432.1 $ 389.7
================================================================================
(a) Charges include restructuring charges in 1999 and 1998, and restructuring
and asset impairment charges in 1997. Refer to Note 3 for further
information.
(b) Charges include those described in (a) plus disposition-related charges
reported in earnings before income taxes.
Refer to Note 2 for further information.
Supplemental geographic information is provided below for revenues from external
customers and long-lived assets:
================================================================================
(millions) 1999 1998 1997
- --------------------------------------------------------------------------------
NET SALES
United States $4,014.1 $3,858.0 $3,922.2
United Kingdom 689.3 743.6 719.0
Other foreign countries 2,280.8 2,160.5 2,188.9
- --------------------------------------------------------------------------------
Consolidated $6,984.2 $6,762.1 $6,830.1
================================================================================
LONG-LIVED ASSETS
United States $1,549.3 $1,644.2 $1,707.1
United Kingdom 552.3 553.0 452.4
Other foreign countries 1,110.3 1,330.3 1,225.2
- --------------------------------------------------------------------------------
Consolidated $3,211.9 $3,527.5 $3,384.7
================================================================================
Supplemental product information is provided below for revenues from external
customers:
================================================================================
(millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Ready-to-eat cereal net sales $5,304.7 $5,265.4 $5,435.8
Convenience foods net sales 1,679.5 1,496.7 1,394.3
- --------------------------------------------------------------------------------
Consolidated $6,984.2 $6,762.1 $6,830.1
================================================================================
46
NOTE 15 SUPPLEMENTAL FINANCIAL STATEMENT DATA
(millions)
====================================================================================================================================
CONSOLIDATED STATEMENT OF EARNINGS 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Research and development expense $ 104.1 $ 121.9 $ 106.1
Advertising expense $ 674.1 $ 695.3 $ 780.4
====================================================================================================================================
====================================================================================================================================
CONSOLIDATED STATEMENT OF CASH FLOWS 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts receivable $ 21.0 ($ 102.6) $ 5.1
Inventories (39.1) (15.0) (8.1)
Other current assets 14.7 33.2 (11.0)
Accounts payable (84.8) 58.9 (8.7)
Other current liabilities (58.6) (76.8) 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN OPERATING ASSETS AND LIABILITIES ($ 146.8) ($ 102.3) ($ 20.8)
====================================================================================================================================
=============================================================================================================
CONSOLIDATED BALANCE SHEET 1999 1998
- -------------------------------------------------------------------------------------------------------------
Trade receivables $ 561.5 $ 555.2
Allowance for doubtful accounts (8.6) (12.9)
Other receivables 125.6 150.7
- -------------------------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE, NET $ 678.5 $ 693.0
- -------------------------------------------------------------------------------------------------------------
Raw materials and supplies $ 141.2 $ 133.3
Finished goods and materials in process 362.6 318.1
- -------------------------------------------------------------------------------------------------------------
INVENTORIES $ 503.8 $ 451.4
- -------------------------------------------------------------------------------------------------------------
Deferred income taxes $ 108.5 $ 89.9
Other prepaid assets 127.8 125.8
- -------------------------------------------------------------------------------------------------------------
OTHER CURRENT ASSETS $ 236.3 $ 215.7
- -------------------------------------------------------------------------------------------------------------
Land $ 44.1 $ 49.3
Buildings 1,255.3 1,247.9
Machinery and equipment 3,595.5 3,608.2
Construction in progress 261.8 341.4
Accumulated depreciation (2,515.8) (2,358.0)
- -------------------------------------------------------------------------------------------------------------
PROPERTY, NET $2,640.9 $2,888.8
- -------------------------------------------------------------------------------------------------------------
Goodwill $ 205.1 $ 197.0
-Accumulated amortization (4.4) (11.5)
Other intangibles 144.5 215.9
-Accumulated amortization (9.6) (21.9)
Other assets 263.0 286.7
- -------------------------------------------------------------------------------------------------------------
OTHER ASSETS $ 598.6 $ 666.2
- -------------------------------------------------------------------------------------------------------------
Accrued income taxes $ 83.5 $ 69.4
Accrued salaries and wages 126.0 100.7
Accrued advertising and promotion 211.8 243.4
Other 339.7 296.6
- -------------------------------------------------------------------------------------------------------------
OTHER CURRENT LIABILITIES $ 761.0 $ 710.1
- -------------------------------------------------------------------------------------------------------------
Nonpension postretirement benefits $ 424.9 $ 435.2
Deferred income taxes 251.3 259.2
Other 118.7 134.3
- -------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES $ 794.9 $ 828.7
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
47
REPORT OF INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
To the Shareholders and Board of Directors of Kellogg Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Kellogg
Company and its subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for business process reengineering costs effective October
1, 1997.
/s/ PricewaterhouseCoopers LLP
Battle Creek, Michigan
January 27, 2000
48
SUPPLEMENTAL FINANCIAL INFORMATION
QUANTITATIVE & QUALITATIVE DISCLOSURES RELATED TO MARKET RISK SENSITIVE
INSTRUMENTS
The Company is exposed to certain market risks which exist as a part of its
ongoing business operations and uses derivative financial and commodity
instruments, where appropriate, to manage these risks. The Company, as a matter
of policy, does not engage in trading or speculative transactions. Refer to Note
12 within Notes to Consolidated Financial Statements for further information on
accounting policies related to derivative financial and commodity instruments.
FOREIGN EXCHANGE RISK
The Company is exposed to fluctuations in foreign currency cash flows related to
third party purchases, intercompany product shipments, and intercompany loans.
The Company is also exposed to fluctuations in the value of foreign currency
investments in subsidiaries and cash flows related to repatriation of these
investments. Additionally, the Company is exposed to volatility in the
translation of foreign currency earnings to U.S. Dollars. Primary exposures
include the U.S. Dollar versus the British Pound, member currencies of the
European Monetary Union, Australian Dollar, Canadian Dollar, and Mexican Peso,
and in the case of inter-subsidiary transactions, the British Pound versus other
European currencies. The Company assesses foreign currency risk based on
transactional cash flows and enters into forward contracts and other commitments
to sell foreign currency revenues, all of generally less than twelve months
duration, to reduce fluctuations in net long or short currency positions. No
borrowings were outstanding under commitments to sell foreign currency revenues
at December 31, 1999 or 1998. As of December 31, 1999, the Company had committed
to borrowings during 2000 in the cumulative principal amount of approximately
$366 million.
The tables below summarize forward contracts held at year-end 1999 and 1998. All
contracts are valued in U.S. Dollars using year-end exchange rates, are hedges
of anticipated transactions, and mature within one year.
====================================================================================================================================
CONTRACTS TO SELL FOREIGN CURRENCY
- ------------------------------------------------------------------------------------------------------------------------------------
Currency Currency Notional value Exchange rate Fair value
sold received (millions) (fc/1US$) (millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Japanese Yen U.S. Dollar $3.8 $ - 102.12 $- $-
Belgian Franc British Pound - 1.9 - 35.11 - -
Swiss Franc German Deutschmark - .3 - 2.08 - -
Danish Kroner British Pound - 3.2 - 6.60 - (.1)
French Franc British Pound - 6.9 - 5.69 - (.1)
Irish Punt British Pound - 3.4 - .68 - -
Swedish Kroner Danish Kroner - 1.6 - 7.41 - .1
Venezuelan Bolivar U.S. Dollar - 2.1 - 726.67 - (.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $3.8 $19.4 $- ($ .7)
====================================================================================================================================
====================================================================================================================================
CONTRACTS TO PURCHASE FOREIGN CURRENCY
- ------------------------------------------------------------------------------------------------------------------------------------
Currency Currency Notional value Exchange rate Fair value
purchased exchanged (millions) (fc/1US$) (millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
German Deutschmark British Pound $ - $2.8 1.69 $ - $ -
====================================================================================================================================
INTEREST RATE RISK
The Company is exposed to interest rate volatility with regard to future
issuances of fixed rate debt and existing issuances of variable rate debt.
Primary exposures include movements in U.S. Treasury rates, London Interbank
Offered Rates (LIBOR), and commercial paper rates. The Company uses interest
49
rate caps, and currency and interest rate swaps, including forward swaps, to
reduce interest rate volatility and funding costs associated with certain debt
issues, and to achieve a desired proportion of variable versus fixed rate debt,
based on current and projected market conditions.
The tables below provide information on the Company's significant debt issues
and related hedging instruments at year-end 1999 and 1998. For foreign
currency-denominated debt, the information is presented in U.S. Dollar
equivalents. Variable interest rates are based on effective rates or implied
forward rates as of year-end 1999. Refer to Note 7 within Notes to
Consolidated Financial Statements for further information.
====================================================================================================================================
SIGNIFICANT DEBT ISSUES (millions)
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/99 12/31/98
Debt Principal by year of maturity FAIR VALUE Fair value
-------------------------------------------------------------
characteristics 1999 2000 2001 2004 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Euro Dollar $ 500.0 $ 494.7 $ 505.8
fixed rate 6.125%
effective rate (a) 6.400%
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U.S. Dollar $ 400.0 $ 397.1 $ 435.9
fixed rate 5.75%
effective rate (b) 5.23%
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Euro Dollar $ 500.0 $ 488.9 $ 510.2
fixed rate 6.625%
effective rate (a) 6.354%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Dollar $ 200.0 $ 179.4 $ 198.4
fixed rate 4.875%
effective rate (a) 6.070%
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U.S. commercial paper $ 423.3 $ 448.3 $ 448.3 $ 423.3
weighted avg. variable 5.2% 5.9%
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Multi-currency revolving
credit facility $ 148.5 $ 16.2 $ 16.2 $ 148.5
effective rate 5.5% 5.6%
====================================================================================================================================
(a) Effective fixed interest rate paid, as a result of settlement of forward
interest rate swap at date of debt issuance.
(b) Effective fixed interest rate paid, as a result of extendable feature.
Refer to Note 7 within Notes to Consolidated Financial Statements for
further information.
=============================================================================================================================
INTEREST RATE SWAPS (millions)
- -----------------------------------------------------------------------------------------------------------------------------
Year of maturity
Instrument ---------------- 12/31/99 12/31/98
characteristics 2001 FAIR VALUE Fair value
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate swap -- pay Notional amt. $ 200.0 ($1.1) $ 5.6
variable/receive fixed -- hedge Pay 6.15%
of existing debt issue Receive 6.40%
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate swap -- pay Notional amt. $ 400.0 ($3.2) 5.2
variable/receive fixed -- hedge Pay 4.72%
of existing debt issue Receive 5.23%
- -----------------------------------------------------------------------------------------------------------------------------
Other swaps & caps disposed of in 1999 $ - $ 1.3
=============================================================================================================================
PRICE RISK
The Company is exposed to price fluctuations primarily as a result of
anticipated purchases of raw and packaging materials. Primary exposures include
corn, wheat, soybeans, soybean oil, sugar, and paperboard. The Company uses the
combination of long cash positions with suppliers, and exchange-traded futures
and option contracts to reduce price fluctuations in a desired percentage of
forecasted purchases over a duration of generally less than one year. The fair
values of commodity contracts held
50
at year-end 1999 and 1998 were insignificant, and potential near-term changes in
commodity prices were not expected to have a significant impact on the Company's
future earnings or cash flows.
For all derivative financial and commodity instruments presented in the tables
above, changes in fair values of these instruments and the resultant impact on
the Company's cash flows and/or earnings would generally be offset by changes in
values of underlying transactions and positions. Therefore, it should be noted
that the exclusion of certain of the underlying exposures from the tables above
may be a limitation in assessing the net market risk of the Company.