1
EXHIBIT 13.01
FINANCIAL
RESULTS
TABLE OF CONTENTS
Management's Discussion and Analysis ........................................... 15
Selected Financial Data ........................................................ 23
Consolidated Financial Statements .............................................. 24
Notes to Consolidated Financial Statements ..................................... 28
Report of Independent Accountants .............................................. 39
Supplemental Financial Information ............................................. 39
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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, wholesome snacks, and meat alternatives. Principal markets for
these products include the United States and United Kingdom. Additionally, the
Company expects to complete its acquisition of Keebler Foods Company in March
2001. Keebler ranks second in U.S. market share in the cookie and cracker
categories and has the third largest food direct store door (DSD) delivery
system in the United States. Beginning in the fourth quarter of 2000, the
Company's operations are managed in two major divisions - U.S. and International
- - with International further delineated into Europe, Latin America, Canada,
Australia, and Asia. This geographic organization is the basis of the Company's
operating segment information in this report.
In 2000, the Company achieved growth in net earnings and earnings per share,
excluding charges, despite softness in the Company's U.S. convenience foods
business, higher energy prices and interest rates, weak foreign currencies, and
inventory write-offs in Southeast Asia. The Company was able to more than offset
these factors through manufacturing efficiencies, reduced advertising and
overhead expenses, and recognition of benefits related to U.S. tax credits.
During 1999, the Company increased sales and achieved double-digit growth in
net earnings and earnings per share, excluding charges. Volume gains in the
Company's Latin America, Australia, and Asian 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.
Net earnings (in millions) and earnings per share (both basic and diluted), as
reported, were:
2000 1999 1998
------- ------- -------
Net earnings $ 587.7 $ 338.3 $ 502.6
Net earnings per share $ 1.45 $ .83 $ 1.23
======= ======= =======
During the current and prior years, the Company reported restructuring and
disposition-related charges. The table below summarizes the amounts that have
been excluded from results of operations in the following sections for purposes
of comparison between years. These items are discussed in detail in the sections
on restructuring charges (page 18) and dispositions (page 20).
IMPACT ON
--------------------------------------------------
Earnings
before Net
(millions, except Operating income Net earnings
per share data) profit taxes earnings per share
-------- --------- -------- ---------
2000
RESTRUCTURING CHARGES $ 86.5 $ 86.5 $ 64.2 $ .16
-------- -------- -------- --------
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
======== ======== ======== ========
2000 COMPARED TO 1999
Excluding charges, net earnings (in millions) and earnings per share were:
2000 1999 Change
------- ------- -------
Net earnings $ 651.9 $ 606.2 +7.5%
Net earnings per share $ 1.61 $ 1.50 +7.3%
======= ======= =======
The full-year increase in earnings per share of $.11 consisted of $.02 from
business growth and $.11 from favorable tax-rate movements, partially offset by
$.02 from unfavorable foreign currency movements.
The Company continued to lead the global ready-to-eat cereal category in 2000
with an estimated 38% annualized share of worldwide dollar sales. Category share
for the Company's operating segments was approximately 31% in the United States,
43% in Europe, 60% in Latin America, 45% in Canada, 57% in Australia, and 50% in
Asia.
During the fourth quarter of 1999, the Company divested the Lender's Bagels
business and acquired Worthington Foods, Inc. While the net impact of these
events on net sales was insignificant during 2000, convenience foods volume
results were negatively affected, due to the higher density of Worthington's
products versus Lender's products. Volume results for 2000 were:
Comparable
Change vs. prior year As reported business (a)
- ------------------------ --------------- ---------------
Global cereal +1.0% +.6%
Global convenience foods -5.0% +1.4%
--------------- ---------------
Consolidated -.5% +.9%
=============== ===============
United States -2.4% +.3%
Europe -.8% -.8%
Latin America +7.7% +7.7%
Other operating +1.8% +1.4%
--------------- ---------------
Consolidated -.5% +.9%
=============== ===============
(a) Excluding acquisitions and dispositions. Refer to pages 19-20.
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Excluding volume from the Kashi business acquired in June 2000, U.S. cereal
volume for the year was essentially flat, negatively impacted by a sluggish
category, heavy price promotion by competitors, and trade inventory reductions
late in the year. Excluding volume from acquisitions and dispositions, U.S.
convenience foods volume grew approximately 1%, a significantly slower rate than
the last several years. Management believes factors reducing the growth rate in
2000 included having fewer new products in 2000 and lack of sustained marketing
support for products introduced in 1999.
The volume shortfall in Europe during the year was attributable to decreased
cereal sales. While management believes successful consumer promotions increased
cereal volume growth approximately 1% in the United Kingdom, volume shortfalls
in most other European markets more than offset this gain. Convenience foods
volume in Europe was approximately even with the prior year.
Latin America continued to achieve solid growth in both cereal and convenience
foods volume, particularly in the Mexican market, where an all-time annual
cereal volume record was achieved.
In other segments - consisting of Canada, Australia, and Asia - volume results
were mixed. In Canada, the Company achieved modest volume growth in both the
cereal and convenience foods businesses, with total volume increasing
approximately 2%. Excluding volume from The Healthy Snack People(TM) convenience
foods business acquired in July 2000, total shipments increased nearly 1% in
Australia, as strong growth in convenience foods volume more than offset a
shortfall in cereal sales. Cereal volume increased in Asia, led by strong
shipments in Korea. Asian convenience foods volume decreased significantly, as
the Company undertook restructuring initiatives to refocus these markets on
sustainable growth.
Net sales by major product group were:
Comparable
Total business
(millions) 2000 1999 change change (b)
-------- -------- -------- ---------
Global cereal $5,177.6 $5,304.7 -2.4% +.7%
Global convenience foods 1,777.1 1,679.5 +5.8% +2.5%
-------- -------- -------- --------
Consolidated $6,954.7 $6,984.2 -.4% +1.1%
======== ======== ======== ========
(b) Excluding foreign exchange, acquisitions, and dispositions.
On an operating segment basis, net sales versus the prior year were:
United Latin Other
States Europe America operating Consolidated
---------- ---------- ---------- ---------- ------------
Volume +.3% -.8% +7.7% +1.4% +.9%
Pricing/mix -.6% +1.4% +4.7% -.4% +.2%
Acquisitions & dispositions +1.6% -- -- +.5% +1.0%
Foreign currency impact -- -10.0% -1.9% -3.0% -2.5%
---------- ---------- ---------- ---------- ------------
Total change +1.3% -9.4% +10.5% -1.5% -.4%
========== ========== ========== ========== ============
For 2000, the comparable business sales decline in the United States was .3%
(favorable volume of .3% less unfavorable pricing/mix impact of .6%) versus a
comparable business operating profit decline of 5.9%. The operating profit
decline was attributable primarily to increased production, distribution, and
promotional expenditures for convenience foods products, and higher energy
costs. In Europe, operating efficiencies and a decline in marketing expense
resulted in comparable business growth in operating profit of 14.0%, building on
a sales increase of .6% (unfavorable volume of .8% offset by favorable
pricing/mix of 1.4%). In Latin America, comparable business sales growth of
12.4% (favorable volume of 7.7% plus favorable pricing/mix of 4.7%) combined
with operating efficiencies resulted in comparable business operating profit
growth of 16.0%. In other operating segments, comparable business operating
profit declined 1.8%, despite a sales increase of 1.0% (favorable volume of 1.4%
less unfavorable pricing/mix impact of .4%). Significantly contributing to this
operating profit decline was approximately $14 million in aged inventory
write-offs and related expenses in Southeast Asia as management initiated
restructuring actions to refocus certain Asian markets on sustainable growth.
Operating profit on an operating segment basis was:
United Latin Other
(millions) States Europe America operating (d) Corporate Consolidated
---------- ---------- ---------- ------------- ---------- ------------
2000 operating profit $ 744.2 $ 208.5 $ 146.5 $ 60.5 $ (169.9) $ 989.8
2000 restructuring charges (c) 2.0 26.7 14.6 28.7 14.5 86.5
---------- ---------- ---------- ---------- ---------- ----------
2000 OPERATING PROFIT
EXCLUDING RESTRUCTURING CHARGES $ 746.2 $ 235.2 $ 161.1 $ 89.2 $ (155.4) $ 1,076.3
1999 operating profit $ 605.1 $ 201.7 $ 139.6 $ 89.1 $ (206.7) $ 828.8
1999 restructuring charges (c) 197.9 22.4 1.7 4.6 18.0 244.6
---------- ---------- ---------- ---------- ---------- ----------
1999 OPERATING PROFIT
EXCLUDING RESTRUCTURING CHARGES $ 803.0 $ 224.1 $ 141.3 $ 93.7 $ (188.7) $ 1,073.4
---------- ---------- ---------- ---------- ---------- ----------
% change - 2000 vs. 1999:
Comparable business -5.9% +14.0% +16.0% -1.8% +6.8% +1.8%
Acquisitions & dispositions -1.2% -- -- +1.1% -- -.9%
Foreign currency impact -- -9.1% -2.0% -4.1% +10.9% -.6%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CHANGE -7.1% +4.9% +14.0% -4.8% +17.7% +.3%
========== ========== ========== ========== ========== ==========
(c) Refer to section on restructuring charges on page 18.
(d) Other operating includes Canada, Australia, and Asia. In 1999, other
operating also includes the Company's functional foods division. This
division was closed in 1999.
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Consolidated margin performance was:
2000 1999 Change
-------- -------- --------
Gross margin 52.2% 52.4% -.2%
SGA% (e) 36.7% 37.0% +.3%
-------- -------- --------
Operating margin 15.5% 15.4% +.1%
======== ======== ========
(e) Selling, general, and administrative expense as a percentage of net sales.
For 2000, the gross margin was relatively flat versus the prior year, as higher
costs of production for Worthington and other new products, aged inventory
write-offs in Southeast Asia, and increased energy costs offset productivity
gains and lower employee benefit costs. The decrease in SGA% versus the prior
year was due to reduced advertising and overhead expenses.
Gross interest expense, prior to amounts capitalized, was up versus the prior
year, due primarily to an increase in short-term interest rates.
(millions) 2000 1999 Change
---------- ---------- ----------
Gross interest expense $ 143.1 $ 127.2 +12.5%
========== ========== ==========
Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, charitable donations, and gains on
asset sales. Other income (expense), net for 2000 includes a credit of
approximately $12 million related to the 1999 sale of the Lender's Bagels
business. The total amount consists of approximately $9 million for disposal of
assets associated with the business which were not purchased by Aurora Foods
Inc. (refer to Note 2) and approximately $3 million for final working capital
settlement with Aurora.
During the fourth quarter of 2000, the Company recorded $24 million in tax
benefits, primarily related to utilization of U.S. foreign tax credit
carryforwards. During the third quarter, the Company recorded a $9 million tax
benefit, based on completing studies with respect to U.S. research and
experimentation credits for prior years. As a result, the effective income tax
rate was down significantly from the prior year. Also contributing to the lower
rate were the impact of lower statutory rates throughout the year in the United
Kingdom and Australia and enactment of a statutory rate reduction in Germany in
the fourth quarter. Excluding the impact of the Keebler acquisition, management
expects the Company's 2001 effective income tax rate to return to historical
levels.
Consolidated effective tax rate 2000 1999 Change
- ------------------------------- ---------- ---------- ---------
Excluding charges (f) 31.7% 36.2% -4.5%
As reported 32.3% 37.0% -4.7%
========== ========== =========
(f) Refer to sections on restructuring charges (page 18) and dispositions
(page 20).
The variance in the reported rates (as compared to the rates excluding the
impact of restructuring and disposition-related charges) relates primarily to
the disposition of nondeductible goodwill in 1999 and certain restructuring
charges in both years for which no tax benefit was provided, based on
management's assessment of the likelihood of recovering such benefit in future
years.
1999 COMPARED TO 1998
Excluding charges, net earnings (in millions) and earnings per share were:
1999 1998 Change
---------- ---------- ---------
Net earnings $ 606.2 $ 548.9 +10.4%
Net earnings per share $ 1.50 $ 1.35 +11.1%
========== ========== =========
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.
The Company realized the following volume results during 1999:
Comparable
Change vs. prior year As reported business (a)
- --------------------- ----------- ------------
Global cereal +1.6% +1.6%
Global convenience foods +8.8% +13.9%
---------- ----------
Consolidated +3.4% +4.1%
========== ==========
United States +2.3% +3.7%
Europe +1.3% +1.3%
Latin America +8.8% +8.8%
Other operating +9.1% +9.1%
---------- ----------
Consolidated +3.4% +4.1%
========== ==========
(a) Excluding acquisitions and dispositions. Refer to pages 19-20.
In the United States, cereal volume was relatively flat, due primarily to a
significant reduction in 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, the U.S. convenience foods business achieved low double-digit
volume growth. Cereal volume increased slightly in the Company's European
segment amid extremely competitive conditions and the loss of a major customer
in Germany. The Company's Latin America segment achieved a record for annual
cereal volume delivery. The Company experienced solid cereal volume gains in
other operating segments of Canada, Australia, and Asia. Convenience foods
volumes significantly exceeded the prior year in all operating segments, due
primarily to continued new product rollouts and market expansion.
Net sales by major product group were:
(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%
========== ========== =========
On an operating segment basis, net sales versus the prior year were:
United Latin Other
States Europe America operating Consolidated
---------- ---------- ---------- ---------- ------------
Volume +3.7% +1.3% +8.8% +9.1% +4.1%
Pricing/mix +.9% -2.4% +11.3% +.9% +.8%
Acquisitions &
dispositions -.6% -- -- -- -.3%
Foreign currency
impact -- -3.9% -9.1% +3.5% -1.3%
---------- ---------- ---------- ---------- ----------
TOTAL CHANGE +4.0% -5.0% +11.0% +13.5% +3.3%
========== ========== ========== ========== ==========
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Operating profit on an operating segment basis was:
United Latin Other
(millions) States Europe America operating (d) Corporate Consolidated
---------- ---------- ---------- ------------- ---------- ------------
1999 operating profit
excluding restructuring charges $ 803.0 $ 224.1 $ 141.3 $ 93.7 $ (188.7) $ 1,073.4
---------- ---------- ---------- ---------- ---------- ----------
1998 operating profit $ 753.9 $ 208.1 $ 107.2 $ 65.0 $ (239.1) $ 895.1
1998 restructuring charges (c) 32.8 3.3 -- 11.4 23.0 70.5
---------- ---------- ---------- ---------- ---------- ----------
1998 operating profit
excluding restructuring charges $ 786.7 $ 211.4 $ 107.2 $ 76.4 $ (216.1) $ 965.6
% change - 1999 vs. 1998:
Comparable business -1.1% +10.3% +39.1% +18.3% +12.0% +9.7%
Acquisitions & dispositions +3.2% -- -- -- -- +2.7%
Foreign currency impact -- -4.3% -7.3% +4.4% +.7% -1.2%
---------- ---------- ---------- ---------- ---------- ----------
Total change +2.1% +6.0% +31.8% +22.7% +12.7% +11.2%
========== ========== ========== ========== ========== ==========
(c) Refer to section on restructuring charges on page 18.
(d) Other operating includes Canada, Australia, Asia, and the Company's
functional foods division.
Margin performance for 1999 and 1998 was:
1999 1998 Change
-------- -------- --------
Gross margin 52.4% 51.5% +.9%
SGA% (e) 37.0% 37.2% +.2%
-------- -------- --------
Operating margin 15.4% 14.3% +1.1%
======== ======== ========
(e) 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.
Gross interest expense, prior to amounts capitalized, was comparable to the
prior year:
(millions) 1999 1998 Change
-------- -------- --------
Gross interest expense $ 127.2 $ 127.3 -.1%
======== ======== ========
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.
The consolidated effective income tax rate was:
Consolidated effective tax rate 1999 1998 Change
-------- -------- -------
Excluding charges (f) 36.2% 35.7% +.5%
As reported 37.0% 35.8% +1.2%
======== ======== =======
(f) Refer to sections on restructuring charges (page 18) and dispositions
(page 20).
A statutory rate reduction in Australia favorably impacted the consolidated 1999
tax rate by .6%. A statutory rate reduction in the United Kingdom reduced the
consolidated 1998 effective rate by .3%. 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.
RESTRUCTURING CHARGES
During the past several years, management has commenced major productivity and
operational streamlining initiatives in an effort to optimize the Company's cost
structure and align resources with the Company's growth strategy. The
incremental costs of these programs have been reported during these years as
restructuring charges.
The 2000 charges of $86.5 million consist of $65.2 million for actions
supporting the Company's "focus and align" strategy and $21.3 million for a
supply chain efficiency initiative in Europe.
In the fourth quarter of 2000, management adopted the "focus and align"
strategy, emphasizing a stricter prioritization for resource allocation to the
United States and the Company's other core markets. In conjunction with this
strategy, the Company was reorganized from four operating areas into two
divisions - U.S. and International. As a result, management initiated
restructuring actions around the world to support this strategy and
organization, including staff reductions in its global supply chain and
innovation organization, rationalization of international convenience foods
capacity, and restructuring of various non-core markets to improve return on
investment. Approximately one-half of the total charges are comprised of asset
write-offs with the remainder consisting primarily of cash costs associated with
involuntary employee separation programs. Approximately 500 salaried and hourly
positions were eliminated, primarily during the fourth quarter of 2000. As a
result of these initiatives, the Company currently expects to realize
approximately $45 million on a pretax basis from cost reductions and elimination
of operating losses in 2001.
During the second quarter of 2000, the Company implemented a supply chain
efficiency initiative in Europe. The restructuring charges from this program
were comprised principally of voluntary employee retirement and separation
benefits. This program resulted in hourly and salaried headcount reductions of
190 during 2000 and is currently expected to generate approximately $13 million
in pretax savings in 2001.
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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 1999 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 was relocated to the Company's other U.S. cereal
plants. Approximately 525 hourly and salaried positions at the Battle Creek
plant were eliminated by the end of the first quarter of 2000 through a
combination of voluntary and involuntary separation programs. These actions
resulted in pretax savings of approximately $30 million in 2000 and are
currently expected to result in a further $10 million of savings in 2001, for a
total 2001 benefit of $40 million.
The 1999 charges for workforce reduction initiatives are comprised principally
of employee retirement and separation benefit costs in all of the Company's
operating segments and in corporate operations. These initiatives eliminated
approximately 325 employee positions in Europe, Latin America, Australia, and
Asia during 1999 and generated approximately $15 million of pretax savings
during 1999, and a further $10 million in pretax savings in 2000, for a total
2000 benefit of $25 million.
The 1998 restructuring charges of $70.5 million 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 U.S. and
Canadian 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.
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, 2000, 1999, and 1998.
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)
----------- ---------- --------
1998 $ 10 75% 25%
1999 125 10% 90%
2000 50 80% 20%
2001 expected 75 50% 50%
======== ======== ========
(a) Selling, general, and administrative expense.
Total cash outlays incurred or expected for streamlining initiatives by year
are:
(millions)
1998 $ 47
1999 69
2000 68
2001 expected 38
2002 expected 2
=====
The Company's streamlining initiatives are expected to continue in 2001, related
primarily to the integration of the Kellogg and Keebler business models. In
addition to incurring integration costs throughout 2001, during the first
quarter of 2001 the Company expects to report restructuring charges for staff
reductions and inventory and capacity rationalization as a result of this
integration. As many of these initiatives are in the early stages of completion,
management is currently unable to estimate the total amount of charges to be
reported. Expected cash outlays and savings related to this integration are not
included in the tables above.
ACQUISITIONS AND DISPOSITIONS
KEEBLER ACQUISITION
The Company expects to complete its acquisition of Keebler Foods Company in
March 2001, in a transaction entered into with Keebler and with Flowers
Industries, Inc., the majority shareholder of Keebler. Keebler Foods Company,
headquartered in Elmhurst, Illinois, ranks second in U.S. market share in the
cookie and cracker categories and has the third largest food direct store door
(DSD) delivery system in the United States. Under the purchase agreement, the
Company will pay $42 in cash for each common share of Keebler or approximately
$3.6 billion, including related acquisition costs. As a result of the
acquisition, the Company will assume approximately $700 million of Keebler debt
and $216 million in obligations to cash out employee stock options, for a total
projected cash outlay of approximately $4.5 billion. The Company will finance
the acquisition through a combination of short and long-term debt. The
acquisition will be accounted for as a purchase.
During 2001, goodwill and intangibles amortization resulting from the
acquisition is expected to be approximately $125 million. A proposed FASB
Statement of Financial Accounting Standards on Business Combinations, which
would eliminate goodwill amortization, could reduce the total annual
amortization expense by approximately one-half in periods subsequent to issuance
of the final standard.
OTHER ACQUISITIONS AND INVESTMENTS
In January 2000, the Company purchased certain assets and liabilities of the
Mondo Baking Company Division of Southeastern Mills, Inc. for approximately $93
million in cash, including related acquisition costs. Mondo Baking Company,
located in Rome, Georgia, has manufactured convenience foods for Kellogg since
1993. The acquisition was accounted for as a purchase and was financed through
short-term borrowings. Assets acquired consist primarily of a manufacturing
facility and assembled workforce.
During June 2000, the Company acquired the outstanding stock of Kashi Company
for approximately $32 million in cash. Kashi is a leading natural cereal company
located in La Jolla, California. Also during June, the Company committed to
invest $7 million of cash in Transora, a new global business-to-business
e-marketplace for the consumer products industry. As of year-end 2000, the
Company has paid
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$3.5 million under this commitment. The investment in Transora has been
accounted for under the cost method. In July 2000, the Company acquired certain
assets and liabilities of a convenience foods operation located in Australia for
approximately $12 million in cash. The Company is operating this business under
the The Healthy Snack People(TM) name.
In November 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 short-term borrowings.
Results of Worthington Foods, Inc. operations have been included in the
Company's consolidated results from the date of acquisition. The purchase price
allocation included approximately $12 million of exit liabilities, comprised
principally of employee involuntary separation and relocation benefits, of which
approximately $3 million remained as of December 31, 2000. Refer to Note 2
within Notes to Consolidated Financial Statements for further information.
DISPOSITIONS
In 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 during the
third quarter of 1999 of $178.9 million. This charge included approximately $57
million for the future disposal of other assets associated with the Lender's
business, which were not purchased by Aurora. Disposal of these other assets was
completed during 2000. The original reserve of $57 million exceeded actual
losses from asset sales and related disposal costs by approximately $9 million.
This amount was recorded as a credit to other income (expense), net during the
year.
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 during the third
quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Management believes the Company's 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. In addition, during
the second quarter of 2000, the Company's shareholders approved an increase in
the Company's authorized number of shares from 500 million to one billion. This
increase allows the Company to issue shares in the future for corporate
purposes, including financings.
For 2000, net cash provided by operating activities was $880.9 million, up 10.8%
from $795.2 million in 1999. The increase was due primarily to higher earnings
(excluding charges) and favorable working capital movements. The favorable
working capital movements were attributable principally to reduced inventory and
lengthening of trade payable terms, partially offset by reductions in other
accrued liabilities. The favorable inventory movement was driven by comparison
to unusually high levels in the prior year, related primarily to temporary
inventory build due to the South Operations plant closing, as discussed on page
19. The unfavorable movement in other accrued liabilities was due primarily to
utilization of pre-2000 reserves for restructuring and disposition-related
activities.
At December 31, 2000, the ratio of current assets to current liabilities was .6,
down from 1.0 at December 31, 1999. This decrease was due primarily to a
reclassification of $900 million in long-term debt to current maturities during
2000.
Net cash used in investing activities was $379.3 million, up from $244.2 million
in 1999. The increase was due primarily to an increase in the cost of business
acquisitions net of dispositions, partially offset by a reduction in property
additions.
Excluding the impact of the Keebler acquisition, management believes 2001
expenditures for property additions will be approximately $225 million.
Net cash used in financing activities was $441.8 million, related primarily to
dividend payments of $403.9 million and a net reduction in total debt of $42.4
million. The Company's total 2000 per share dividend payment of $.995, up from
$.96 in 1999, represents the 44th consecutive year the Company has increased its
dividend.
For 2000, the Company's Board of Directors authorized management to repurchase
up to $150.0 million in common shares. There were no repurchases during the
year.
Notes payable at December 31, 2000, consisted primarily of commercial paper and
other short-term borrowings in the United States in the amount of $429.8 million
with an effective interest rate of 6.6%. Long-term debt consisted 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 included $400 million in Notes which provided 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. In February 2001,
the Company will pay holders $11.6 million to extinguish the Notes prior to the
extension date. Thus, the Company will report an extraordinary loss, net of tax,
of $7.4 million during the first quarter of 2001.
Associated with the debt due in 2001, the Company has entered into $600 million
notional in fixed-to-floating interest rate swaps, which expire in conjunction
with the debt issues. These swaps are indexed to either three-month LIBOR or the
Federal Reserve AA Composite Rate on 30-day commercial paper.
As discussed on page 19, the Company expects to complete its acquisition of
Keebler Foods Company in March 2001, resulting in a total projected cash outlay
of approximately $4.5 billion. To finance this transaction, the Company plans to
20
8
issue a combination of short and long-term debt during the first quarter of
2001. In anticipation of these future issuances, during December 2000 the
Company entered into $1.5 billion notional amount of forward-starting interest
rate swaps that effectively fixed a portion of the interest rate on an
equivalent amount of debt prior to issuance. These swaps will be settled in
conjunction with the issuances, resulting in cash payments or receipts that will
be amortized to interest expense over periods of five to thirty years. If these
swaps had been settled at December 31, 2000, the Company would have made a total
cash payment to counterparties of approximately $26 million. The incremental
amount of interest expense related to this payment will generally be offset by a
lower coupon rate on the underlying future debt issuance. Refer to Supplemental
Financial Information on pages 39-40 for further information.
Following the Company's announcement of its agreement to acquire Keebler,
Moody's and Standard & Poor's (S&P) placed the credit ratings of the Company's
senior unsecured debt and commercial paper under review for possible downgrade.
Due to the significant amount of incremental debt to be created in this
transaction, S&P downgraded the Company's senior unsecured debt from AA to BBB
and the Company's commercial paper from A-1 to A-2. Moody's downgraded the
Company's senior unsecured debt from Aa2 to Baa2 and the Company's commercial
paper from P-1 to P-2. These ratings are subject to revision or withdrawal at
any time.
S&P assigns a 'BBB' credit rating to obligations which it considers to "exhibit
adequate protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation." Similarly, Moody's assigns a
'Baa' credit rating to obligations it considers to "be medium-grade obligations,
i.e. neither highly protected nor poorly secured. Interest payments and
principal security are considered adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time."
As a result of these downgrades, the Company believes it will be moderately more
expensive to finance its activities through the issuance of debt. During 2001,
the Company believes that it will be able to continue paying dividends at
current levels and will have sufficient flexibility to borrow additional funds
as needed under the anticipated covenants in the debt it currently expects to
issue during the first quarter of 2001.
As a result of issuing debt to finance the Keebler acquisition, combined with
the downgrade of the Company's credit rating, management believes the Company's
total 2001 interest expense will increase to approximately $400-$425 million.
The percentage of total debt to market capitalization at December 31, 2000, was
20%, up from 17% at December 31, 1999, due primarily to a lower stock price
since year-end 1999.
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 have been
quoting financial and treasury data in Euros since January 1, 1999.
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, and current plans indicate that Central Banks in most member countries
expect to have withdrawn notes and coins by February 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
and 2000, the Euro weakened against the U.S. Dollar and the 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 have been
completed in accordance with the Company's timetable, in order to be ready to
transact with those suppliers and customers with whom it was agreed to do so
during 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 the local currency for
customer order-taking, invoice processing, and supplier payment purposes. The
Company has completed the necessary changes to order management and related
financial systems based on the current systems architecture and software. During
December 2000, the Company successfully converted over 600 customers across
Europe to Euro-based order-taking and invoicing.
In Phase II, the more significant portion of the program, all business systems
(for example, raw materials management, manufacturing, warehousing, and human
resource systems) and associated business processes 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 and business processes will
continue to be analyzed and modified during 2001 in order to comply with the
legal timetable. Management believes the project is on target to meet this date.
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
21
9
emerge from individual national governments at later stages. Such failure to
complete the necessary work could result in material financial risk.
ACCOUNTING AND DISCLOSURE CHANGES
Through June 2000, operations were managed via four major geographic areas -
North America, Europe, Asia-Pacific, and Latin America. Beginning in July 2000,
the Company changed its organizational structure, such that U.S. operations were
managed separately. In October 2000, management announced a reorganization of
the Company into two major divisions - U.S. and International - with
International further delineated into Europe, Latin America, Canada, Australia,
and Asia. Thus, beginning in the fourth quarter of 2000, the Company's
reportable operating segments under Statement of Financial Accounting Standards
(SFAS) No. 131 "Disclosures about Segments of an Enterprise and Related
Information" consist of the United States, Europe, and Latin America. All other
geographic areas have been combined under the quantitative threshold guidelines
of SFAS No. 131 for purposes of disclosure.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes 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, as amended by
Statements No. 137 and No. 138, is effective for fiscal years beginning after
June 15, 2000. The Company adopted SFAS No. 133 on January 1, 2001. Management
does not expect the adoption to have a significant impact on the Company's 2001
financial results.
In May 2000, the Emerging Issues Task Force (EITF) of the FASB reached consensus
on Issue No. 00-14 "Accounting for Certain Sales Incentives." This Issue
addresses the recognition, measurement, and income statement classification of
sales incentives offered by vendors (including manufacturers) that have the
effect of reducing the price of a product or service to a customer at the point
of sale. For cash sales incentives within the scope of this Issue, costs are
generally recognized at the date on which the related revenue is recorded by the
vendor and are to be classified as a reduction of revenue. For non-cash sales
incentives, such as package inserts, costs are to be classified within cost of
sales. Companies are to apply this consensus no later than in (a) annual
financial statements for the fiscal year beginning after December 15, 1999, or
(b) financial statements for the fiscal quarter beginning after March 15, 2001,
whichever is later. The effect of adoption resulting from changes in recognition
and measurement is reported either prospectively or as a cumulative effect of a
change in accounting principle. As a result of adopting EITF No. 00-14 in the
quarter ended June 30, 2001, the Company will report the cost of consumer
coupons as a reduction of net sales and the cost of package inserts and similar
items within cost of goods sold. The Company has historically reported these
costs as promotional expenditures within selling, general, and administrative
expense. As a result, full-year 2001 net sales are expected to decrease by
$90-$100 million and cost of goods sold is expected to increase by $60-$70
million. (These estimates exclude the impact of the expected acquisition of
Keebler Foods Company during the first quarter 2001.) Selling, general, and
administrative expense will correspondingly decrease, such that net earnings
will not be affected. The Statement of Earnings for all comparative periods will
be consistently reclassified resulting in the following impacts for the
full-year 2000: net sales decrease of approximately $94 million, cost of goods
sold increase of approximately $75 million, and selling, general, and
administrative expense decrease of approximately $169 million.
FORWARD-LOOKING STATEMENTS
This Report contains "forward-looking statements" with projections concerning,
among other things, the Company's strategy and plans for 2001; the Keebler
acquisition and the Company's sales, products, distribution systems, business,
and results after its completion; the 2001 effective income tax rate; charges,
benefits, and savings from restructuring actions and streamlining initiatives;
2001 amortization expense and property addition expenditures; the terms of the
debt to be issued to finance the Keebler acquisition; the 2001 interest expense;
the results of the Euro conversion; and the impact of any accounting and
disclosure changes. Forward-looking statements include predictions of future
results or activities and may contain the words "expects," "believes," "will,"
"will deliver," "anticipates," "projects," or words or phrases of similar
meaning. For example, forward-looking statements are found in several sections
of Management's Discussion and Analysis above. The Company's actual results or
activities may differ materially from these predictions. In particular, future
results or activities could be affected by factors related to the pending
Keebler acquisition, including integration problems, failures to achieve
synergies, unanticipated liabilities, and the substantial amount of indebtedness
incurred to finance the acquisition (which could, among other things, hinder the
Company's ability to adjust rapidly to changing market conditions, make the
Company more vulnerable in the event of a downturn, and place the Company at a
competitive disadvantage in relation to less-leveraged competitors). The
Company's future results could be affected by a variety of other factors,
including competitive conditions and their impact, pricing and promotional and
marketing spending, and/or incremental pricing actions on actual volumes and
product mix; the effectiveness of advertising and marketing spending or
programs; the success of new product introductions; the levels of spending on
system initiatives, properties, business opportunities, integration of acquired
businesses, and other general and administrative costs; the availability of and
interest rates on short-term financing; changes in consumer preferences;
commodity price and labor cost fluctuations; expenditures necessary to carry out
streamlining initiatives and savings derived therefrom; foreign currency
exchange rate fluctuations; changes in statutory tax and other laws; 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.
22
10
KELLOGG COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(millions, except per share data and number of employees)
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
OPERATING TRENDS
Net sales $ 6,954.7 $ 6,984.2 $ 6,762.1 $ 6,830.1 $ 6,676.6
Gross profit as a % of net sales 52.2% 52.4% 51.5% 52.1% 53.2%
Depreciation 275.6 273.6 261.8 272.0 251.5
Amortization 15.0 14.4 16.3 15.3 5.5
Advertising expense 604.2 674.1 695.3 780.4 778.9
R&D expense 118.4 104.1 121.9 106.1 84.3
Operating profit (a) 989.8 828.8 895.1 1,009.1 958.9
Operating profit, excluding charges 1,076.3 1,073.4 965.6 1,193.2 1,095.0
Operating profit, excluding
charges, as a % of net sales 15.5% 15.4% 14.3% 17.5% 16.4%
Interest expense 137.5 118.8 119.5 108.3 65.6
Earnings before accounting
change (a)(b) 587.7 338.3 502.6 564.0 531.0
Average shares outstanding (c) 405.6 405.2 407.8 414.1 424.9
Earnings before accounting
change per common share (a)(b)(c) 1.45 .83 1.23 1.36 1.25
============ ============ ============ ============ ============
(a) Operating profit for 2000 includes restructuring charges of $86.5 ($64.2
after tax or $.16 per share). 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. Refer to the Management's Discussion and Analysis on
pages 15-22 and Notes 2 and 3 within Notes to Consolidated Financial
Statements for further explanation of charges for years 1998-2000.
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
CASH FLOW TRENDS
Net cash provided from
operating activities $ 880.9 $ 795.2 $ 719.7 $ 879.8 $ 711.5
Capital expenditures 230.9 266.2 373.9 312.4 307.3
Net cash provided from operating
activities reduced by capital
expenditures 650.0 529.0 345.8 567.4 404.2
Net cash used in
investing activities (379.3) (244.2) (398.0) (329.3) (786.8)
Net cash (used in) provided
from financing activities (441.8) (527.6) (358.3) (607.3) 94.0
Interest coverage ratio (d) 9.9 11.5 10.4 13.7 20.6
------------- ------------- ------------- ------------- -------------
CAPITAL STRUCTURE TRENDS
Total assets $ 4,896.3 $ 4,808.7 $ 5,051.5 $ 4,877.6 $ 5,050.0
Property, net 2,526.9 2,640.9 2,888.8 2,773.3 2,932.9
Short-term debt 1,386.3 521.5 621.5 579.8 1,153.8
Long-term debt 709.2 1,612.8 1,614.5 1,415.4 726.7
Shareholders' equity 897.5 813.2 889.8 997.5 1,282.4
------------- ------------- ------------- ------------- -------------
SHARE PRICE TRENDS
Stock price range (c) $ 21-32 $ 30-42 $ 30-50 $ 32-50 $ 31-40
Cash dividends per
common share (c) .995 .96 .92 .87 .81
------------- ------------- ------------- ------------- -------------
Number of employees 15,196 15,051 14,498 14,339 14,511
============= ============= ============= ============= =============
(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.
(c) All share data retroactively restated to reflect a 2-for-1 stock split in
1997. All earnings per share data represent both basic and diluted earnings
per share.
(d) Interest coverage ratio was calculated based on operating profit excluding
charges [refer to note (a)], depreciation, and amortization divided by
interest expense.
23
11
KELLOGG COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
Year ended December 31,
(millions, except per share data) 2000 1999 1998
- --------------------------------- ------------ ------------ ------------
NET SALES $ 6,954.7 $ 6,984.2 $ 6,762.1
------------ ------------ ------------
Cost of goods sold 3,327.0 3,325.1 3,282.6
Selling, general, and administrative expense 2,551.4 2,585.7 2,513.9
Restructuring charges 86.5 244.6 70.5
------------ ------------ ------------
OPERATING PROFIT $ 989.8 $ 828.8 $ 895.1
------------ ------------ ------------
Interest expense 137.5 118.8 119.5
Disposition-related charges -- 168.5 --
Other income (expense), net 15.4 (4.8) 6.9
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES $ 867.7 $ 536.7 $ 782.5
Income taxes 280.0 198.4 279.9
------------ ------------ ------------
NET EARNINGS $ 587.7 $ 338.3 $ 502.6
------------ ------------ ------------
NET EARNINGS PER SHARE (BASIC AND DILUTED) $ 1.45 $ .83 $ 1.23
============ ============ ============
Refer to Notes to Consolidated Financial Statements.
24
12
EXHIBIT 13
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, 1998 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
Common stock repurchases
Net earnings 587.7
Dividends (403.9)
Other comprehensive income
Stock options exercised
and other (2.5)
-------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 415.5 $ 103.8 $ 102.0 $1,501.0
======== ======== ======== ========
Accumulated
Treasury stock other Total Total
-------------------------- comprehensive shareholders' comprehensive
(millions) shares amount income equity income
-------- -------- ------------- ------------- -------------
Balance, January 1, 1998 4.1 $ (157.3) $ (281.9) $ 997.5
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
--------
Common stock repurchases --
Net earnings 587.7 587.7
Dividends (403.9)
Other comprehensive income (103.9) (103.9) (103.9)
Stock options exercised
and other (.2) 6.9 4.4
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 9.8 $ (374.0) $ (435.3) $ 897.5 $ 483.8
======== ======== ======== ======== ========
Refer to Notes to Consolidated Financial Statements.
25
13
KELLOGG COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
At December 31,
(millions, except share data) 2000 1999
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 204.4 $ 150.6
Accounts receivable, net 685.3 678.5
Inventories 443.8 503.8
Other current assets 273.3 236.3
------------ ------------
TOTAL CURRENT ASSETS $ 1,606.8 $ 1,569.2
------------ ------------
PROPERTY, NET 2,526.9 2,640.9
OTHER ASSETS 762.6 598.6
------------ ------------
TOTAL ASSETS $ 4,896.3 $ 4,808.7
============ ============
CURRENT LIABILITIES
Current maturities of long-term debt $ 901.1 $ 2.9
Notes payable 485.2 518.6
Accounts payable 388.2 305.3
Other current liabilities 718.1 761.0
------------ ------------
TOTAL CURRENT LIABILITIES $ 2,492.6 $ 1,587.8
------------ ------------
LONG-TERM DEBT 709.2 1,612.8
OTHER LIABILITIES 797.0 794.9
SHAREHOLDERS' EQUITY
Common stock, $.25 par value, 1,000,000,000 shares authorized
Issued: 415,451,198 shares in 2000 and 415,451,198 in 1999 103.8 103.8
Capital in excess of par value 102.0 104.5
Retained earnings 1,501.0 1,317.2
Treasury stock at cost:
9,812,543 shares in 2000 and 9,995,564 shares in 1999 (374.0) (380.9)
Accumulated other comprehensive income (435.3) (331.4)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 897.5 $ 813.2
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,896.3 $ 4,808.7
============ ============
Refer to Notes to Consolidated Financial Statements.
26
14
KELLOGG COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
(millions) 2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES
Net earnings $ 587.7 $ 338.3 $ 502.6
Items in net earnings not requiring (providing) cash:
Depreciation and amortization 290.6 288.0 278.1
Deferred income taxes (1.4) (60.5) 46.2
Restructuring charges, net of cash paid 62.5 220.1 62.2
Disposition-related charges -- 168.5 --
Other (1.2) 65.7 21.7
Pension and other postretirement benefit contributions (84.3) (78.1) (88.8)
Changes in operating assets and liabilities 27.0 (146.8) (102.3)
-------- -------- --------
NET CASH PROVIDED FROM OPERATING ACTIVITIES $ 880.9 $ 795.2 $ 719.7
-------- -------- --------
INVESTING ACTIVITIES
Additions to properties (230.9) (266.2) (373.9)
Acquisitions of businesses (137.2) (298.2) (27.8)
Dispositions of businesses -- 291.2 --
Property disposals 4.8 36.6 6.8
Other (16.0) (7.6) (3.1)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES $ (379.3) $ (244.2) $ (398.0)
-------- -------- --------
FINANCING ACTIVITIES
Net increase (reduction) of notes payable, with maturities
less than or equal to 90 days 290.5 (410.8) (152.9)
Issuances of notes payable, with maturities greater than 90 days 3.5 292.1 5.5
Reductions of notes payable, with maturities greater than 90 days (331.6) (19.0) (.8)
Issuances of long-term debt -- -- 600.0
Reductions of long-term debt (4.8) (14.1) (210.3)
Net issuances of common stock 4.5 12.9 15.2
Common stock repurchases -- -- (239.7)
Cash dividends (403.9) (388.7) (375.3)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES $ (441.8) $ (527.6) $ (358.3)
-------- -------- --------
Effect of exchange rate changes on cash (6.0) (9.2) (.2)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 53.8 14.2 (36.8)
Cash and cash equivalents at beginning of year 150.6 136.4 173.2
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 204.4 $ 150.6 $ 136.4
======== ======== ========
Refer to Notes to Consolidated Financial Statements.
27
15
KELLOGG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 delivery 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.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes 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, as amended by Statements No. 137 and No. 138, is effective for
fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 on
January 1, 2001. Management does not expect the adoption to have a significant
impact on the Company's 2001 financial results.
RECENTLY ISSUED PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force (EITF) of the FASB reached consensus
on Issue No. 00-14 "Accounting for Certain Sales Incentives." This Issue
addresses the recognition, measurement, and income statement classification of
sales incentives offered by vendors (including manufacturers) that have the
effect of reducing the price of a product or service to a customer at the point
of sale. For cash sales incentives within the scope of this Issue, costs are
generally recognized at the date on which the related revenue is recorded by the
vendor and are to be classified as a reduction of revenue. For non-cash sales
incentives, such as package inserts, costs are to be classified within cost of
sales. Companies are to apply this consensus no later than in (a) annual
financial statements for the fiscal year beginning after December 15, 1999, or
(b) financial statements for the fiscal quarter beginning after March 15, 2001,
whichever is later. The effect of adoption resulting from changes in recognition
and measurement is reported either prospectively or as a cumulative effect of a
change in accounting principle. As a result of adopting EITF No. 00-14 in the
quarter ended June 30, 2001, the Company will report the cost of consumer
coupons as a reduction of net sales and the cost of package inserts and similar
items within cost of goods sold. The Company has historically reported these
costs as promotional expenditures within selling, general, and administrative
expense. As a result, full-year 2001 net sales are expected to decrease by
$90-$100 million and cost of goods sold is expected to increase by $60-$70
million. (These estimates exclude the impact of the expected acquisition of
Keebler Foods Company during the first quarter 2001.) Selling, general, and
administrative expense will correspondingly decrease, such that net earnings
will not be affected. The Statement of Earnings for all comparative periods will
be consistently reclassified resulting in the following impacts for the
full-year 2000: net sales decrease of approximately $94 million, cost of goods
sold increase of approximately $75 million, and selling, general, and
administrative expense decrease of approximately $169 million.
28
16
STOCK COMPENSATION
The Company follows Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," in accounting for its employee stock
options and other stock-based compensation. Under APB No. 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 No.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.
NOTE 2 ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS
ACQUISITIONS AND INVESTMENTS
In January 2000, the Company purchased certain assets and liabilities of the
Mondo Baking Company Division of Southeastern Mills, Inc. for approximately $93
million in cash, including related acquisition costs. Mondo Baking Company,
located in Rome, Georgia, has manufactured convenience foods for Kellogg since
1993. The acquisition was accounted for as a purchase and was financed through
short-term borrowings. Assets acquired consist primarily of a manufacturing
facility and assembled workforce.
During June 2000, the Company acquired the outstanding stock
of Kashi Company for approximately $32 million in cash. Kashi is a leading
natural cereal company located in La Jolla, California. Also during June, the
Company committed to invest $7 million of cash in Transora, a new global
business-to-business e-marketplace for the consumer products industry. As of
year-end 2000, the Company has paid $3.5 million under this commitment. The
investment in Transora has been accounted for under the cost method. In July
2000, the Company acquired certain assets and liabilities of a convenience foods
operation located in Australia for approximately $12 million in cash. The
Company is operating this business under The Healthy Snack People(TM) name.
In November 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 short-term borrowings.
Results of Worthington Foods, Inc. operations have been included in the
Company's consolidated results from the date of acquisition.
The components of intangible assets included in the final 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 190.0 40
---------- ----------
Total $ 290.0
========== ==========
The purchase price allocation included approximately $12 million of exit
liabilities, comprised principally of employee involuntary separation and
relocation benefits, of which approximately $3 million remained as of December
31, 2000.
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 $ .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.
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 included
approximately $57 million for disposal of other assets associated with the
Lender's business, which were not purchased by Aurora. Disposal of these other
assets was completed during 2000. The original reserve of $57 million exceeded
actual losses from asset sales and related disposal costs by approximately $9
million. This amount was recorded as a credit to other income (expense), net
during the year.
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.
KEEBLER ACQUISITION
The Company expects to complete its acquisition of Keebler Foods Company in
March 2001, in a transaction entered into with Keebler and with Flowers
Industries, Inc., the majority shareholder of Keebler. Keebler Foods Company,
headquartered in Elmhurst, Illinois, ranks second in the U.S. in the cookie and
cracker categories and has the third largest food direct store door (DSD)
delivery system in the United States. Under the purchase agreement, the Company
will pay $42 in cash for each common share of Keebler or approximately $3.6
billion, including related acquisition costs. As a result of the acquisition,
the Company will assume approximately $700 million of Keebler debt and $216
million in obligations to cash out employee stock options, for a total projected
cash outlay of approximately $4.5 billion. The Company will finance the
acquisition through a combination of short and long-term debt. The acquisition
will be accounted for as a purchase.
29
17
NOTE 3 RESTRUCTURING CHARGES
Operating profit for 2000 includes restructuring charges of $86.5 million ($64.2
million after tax or $.16 per share) for streamlining initiatives.
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.
During the past several years, management has commenced major productivity and
operational streamlining initiatives in an effort to optimize the Company's cost
structure and align resources with the Company's growth strategy. The
incremental costs of these programs have been reported during these years as
restructuring charges.
The 2000 charges of $86.5 million consist of $65.2 million for actions
supporting the Company's "focus and align" strategy and $21.3 million for a
supply chain efficiency initiative in Europe.
In the fourth quarter of 2000, management adopted the "focus and align"
strategy, emphasizing a stricter prioritization for resource allocation to the
United States and the Company's other core markets. In conjunction with this
strategy, the Company was reorganized from four operating areas into two
divisions - U.S. and International. As a result, management initiated
restructuring actions around the world to support this strategy and
organization, including staff reductions in its global supply chain and
innovation organization, rationalization of international convenience foods
capacity, and restructuring of various non-core markets to improve return on
investment. Approximately one-half of the total charges are comprised of asset
write-offs with the remainder consisting primarily of cash costs associated with
involuntary employee separation programs. Approximately 500 salaried and hourly
positions were eliminated, primarily during the fourth quarter of 2000. As a
result of these initiatives, the Company currently expects to realize
approximately $45 million on a pretax basis from cost reductions and elimination
of operating losses in 2001.
During the second quarter of 2000, the Company implemented a supply chain
efficiency initiative in Europe. The restructuring charges from this program
were comprised principally of voluntary employee retirement and separation
benefits. This program resulted in hourly and salaried headcount reductions of
190 during 2000 and is currently expected to generate approximately $13 million
in pretax savings in 2001.
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 1999 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 was relocated to the Company's other U.S. cereal
plants. Approximately 525 hourly and salaried positions at the Battle Creek
plant were eliminated by the end of the first quarter of 2000 through a
combination of voluntary and involuntary separation programs. These actions
resulted in pretax savings of approximately $30 million in 2000 and are
currently expected to result in a further $10 million in savings in 2001, for a
total 2001 benefit of $40 million.
The 1999 charges for workforce reduction initiatives are comprised principally
of employee retirement and separation benefit costs in all of the Company's
operating segments and in corporate operations. These initiatives eliminated
approximately 325 employee positions in Europe, Latin America, Australia, and
Asia during 1999 and generated approximately $15 million of pretax savings
during 1999, and a further $10 million in pretax savings in 2000, for a total
2000 benefit of $25 million.
The 1998 restructuring charges of $70.5 million 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 U.S. and
Canadian 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.
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)
----------- ---------- --------
1998 $ 10 75% 25%
1999 125 10% 90%
2000 50 80% 20%
2001 expected 75 50% 50%
======== ======== ========
(a) Selling, general, and administrative expense.
Total cash outlays incurred or expected for streamlining initiatives by year
are:
(millions)
1998 $ 47
1999 69
2000 68
2001 expected 38
2002 expected 2
=========
The Company's streamlining initiatives are expected to continue in 2001, related
primarily to the integration of the Kellogg and Keebler business models. In
addition to incurring integration costs throughout 2001, during the first
quarter of 2001 the Company expects to report restructuring charges for staff
reductions and inventory and capacity rationalization as a result of this
integration. As many of these initiatives are in the early stages of completion,
management is currently unable to estimate the total amount of charges to be
reported. Cash outlays and savings related to this integration are not included
in the tables above.
The components of the restructuring charges by initiative, as well as reserve
balances remaining at December 31, 2000, 1999, and 1998, were:
30
18
EXHIBIT 13
U.S. OPERATIONAL Employee
STREAMLINING retirement &
severance Asset Asset Other
(millions) benefits(a) write-offs removal costs(c) Total
------------ ---------- -------- -------- --------
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
2000 restructuring charges -- -- -- -- --
Amounts utilized during 2000 (20.0) -- (17.4) -- (37.4)
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 2000 $ 1.4 $ -- $ 10.7 $ -- $ 12.1
======== ======== ======== ======== ========
PAN-EUROPEAN Employee
REORGANIZATION retirement &
severance Asset Asset Other
(millions) benefit(a) write-offs removal costs(c) Total
------------ ---------- -------- -------- --------
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 (b) 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 (b) 2.7 -- (1.2) -- 1.5
2000 restructuring charges 19.6 -- -- 1.7 21.3
Amounts utilized during 2000 (21.3) -- 1.2 (1.7) (21.8)
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 2000 $ 1.0 $ -- $ -- $ -- $ 1.0
======== ======== ======== ======== ========
AUSTRALIAN PLANT Employee
PRODUCTIVITY retirement &
PROGRAM severance Asset Asset Other
(millions) benefits write-offs removal costs(c) Total
------------ ---------- -------- -------- --------
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
2000 restructuring charges -- -- -- -- --
Amounts utilized during 2000 (3.1) -- (.6) -- (3.7)
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 2000 $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
NORTH AMERICAN Employee
OVERHEAD ACTIVITY retirement &
ANALYSIS severance Asset Asset Other
(millions) benefits(a) write-offs removal costs(c) Total
------------ ---------- -------- -------- --------
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
2000 restructuring charges -- -- -- -- --
Amounts utilized during 2000 (3.1) -- (.5) -- (3.6)
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 2000 $ 1.1 $ -- $ .5 $ -- $ 1.6
======== ======== ======== ======== ========
GLOBAL STRATEGY Employee
REALIGNMENT retirement &
severance Asset Asset Other
(millions) benefits(a) write-offs removal costs(c) Total
------------ ---------- -------- -------- --------
Remaining reserve at
December 31, 1997 $ -- $ -- $ -- $ -- $ --
1998 restructuring charges -- -- -- -- --
Amounts utilized during 1998 -- -- -- -- --
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 1998 -- -- -- -- --
1999 restructuring charges -- -- -- -- --
Amounts utilized during 1999 -- -- -- -- --
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 1999 -- -- -- -- --
2000 restructuring charges 25.7 29.9 7.3 2.3 65.2
Amounts utilized during 2000 (5.9) (29.9) (1.6) (2.3) (39.7)
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 2000 $ 19.8 $ -- $ 5.7 $ -- $ 25.5
======== ======== ======== ======== ========
ALL OTHER Employee
retirement &
severance Asset Asset Other
(millions) benefits write-offs removal costs(c) Total
------------ ---------- -------- -------- --------
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 -- -- -- -- --
2000 restructuring charges -- -- -- -- --
Amounts utilized during 2000 -- -- -- -- --
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 2000 $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
CONSOLIDATED Employee
retirement &
severance Asset Asset Other
(millions) benefits(a) write-offs removal costs(c) Total
------------ ---------- -------- -------- --------
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 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 31.4 -- 28.5 -- 59.9
2000 restructuring charges 45.3 29.9 7.3 4.0 86.5
Amounts utilized during 2000 (53.4) (29.9) (18.9) (4.0) (106.2)
-------- -------- -------- -------- --------
Remaining reserve at
December 31, 2000 $ 23.3 $ -- $ 16.9 $ -- $ 40.2
======== ======== ======== ======== ========
(a) Includes pension and postretirement health care curtailment losses and
special termination benefits recognized as follows (refer to Notes 9 and
10):
2000 1999 1998
----- ----- -----
U.S. operational streamlining $ -- $ 32 $ --
Pan-European reorganization 5 -- --
North American overhead
activity analysis -- 4 18
Global strategy realignment 3 -- --
----- ----- -----
Consolidated $ 8 $ 36 $ 18
===== ===== =====
(b) Negative removal reserves in Europe result from netting of anticipated
proceeds from asset sales with removal costs.
(c) Consist primarily of program-related non-exit costs incurred during the
period of the reported charge.
31
19
NOTE 4 OTHER INCOME (EXPENSE), NET
Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, charitable donations, and gains on
asset sales.
Other income (expense), net for 2000 includes a credit of approximately $12
million related to the 1999 sale of the Lender's Bagels business. The total
amount consists of approximately $9 million for disposal of assets associated
with the business which were not purchased by Aurora Foods Inc. (refer to Note
2) and approximately $3 million for final working capital settlement with
Aurora.
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.
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
(millions, except Net shares earnings
per share data) earnings outstanding per share
---------- ---------- ----------
2000
Basic $ 587.7 405.6 $ 1.45
Dilutive employee
stock options -- .2 --
---------- ---------- ----------
Diluted $ 587.7 405.8 $ 1.45
========== ========== ==========
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
========== ========== ==========
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 of net earnings, minimum
pension liability adjustments (refer to Note 9), and foreign currency
translation adjustments pursuant to SFAS No. 52 "Foreign Currency Translation"
as follows:
(millions) 2000 1999 1998
-------- -------- --------
Net earnings $ 587.7 $ 338.3 $ 502.6
Other comprehensive
income:
Foreign currency
translation adjustments (97.4) (39.0) (11.1)
Minimum pension liability
adjustments (10.0) -- --
Related tax effect 3.5 -- .6
-------- -------- --------
(103.9) (39.0) (10.5)
-------- -------- --------
Total comprehensive income $ 483.8 $ 299.3 $ 492.1
======== ======== ========
NOTE 6 LEASES
Operating leases are generally for equipment and warehouse space. Rent expense
on all operating leases was $36.7 million in 2000, $31.5 million in 1999, and
$36.5 million in 1998. At December 31, 2000, future minimum annual rental
commitments under non-cancelable operating leases totaled $71 million consisting
of (in millions): 2001-$23; 2002-$15; 2003-$13; 2004-$9; 2005-$8; 2006 and
beyond-$3.
NOTE 7 DEBT
Notes payable consist of commercial paper and other short-term borrowings in the
United States and, to a lesser extent, bank loans of foreign subsidiaries at
competitive market rates. U.S. borrowings at December 31, 2000, were $429.8
million with an effective interest rate of 6.6%. U.S. borrowings at December 31,
1999, were $448.3 million with an effective interest rate of 5.9%.
Additionally, the Company has entered into financing arrangements that provide
for the sale of future foreign currency revenues. As of December 31, 2000, the
Company had committed to borrowings during 2001 in the cumulative principal
amount of approximately $160 million. 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, 2000 or 1999. On January 1, 2001, these borrowing
commitments were cancelled and replaced with foreign currency forward contracts.
At December 31, 2000, the Company had $796.0 million of total short-term lines
of credit, of which $747.9 million were unused and available for borrowing on an
unsecured basis.
32
20
Long-term debt at year-end consisted of:
(millions) 2000 1999
---------- ----------
(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 10.3 15.7
---------- ----------
1,610.3 1,615.7
Less current maturities (901.1) (2.9)
---------- ----------
Balance, December 31 $ 709.2 $ 1,612.8
========== ==========
(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. 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 provided 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 was 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. In February 2001, the Company will pay holders $11.6 to extinguish
the Notes prior to the extension date. Thus, the Company will report an
extraordinary loss, net of tax, of $7.4 during the first quarter of 2001.
Scheduled principal repayments on long-term debt are (in millions): 2001-$901;
2002-$1; 2003-$1; 2004-$500; 2005-$200; 2006 and beyond-$7.
Interest paid was (in millions): 2000-$141; 1999-$124; 1998-$113. Interest
expense capitalized as part of the construction cost of fixed assets was (in
millions): 2000-$5.6; 1999-$8.4; 1998-$7.8.
As discussed in Note 2, the Company expects to complete its acquisition of
Keebler Foods Company in March 2001, resulting in a total projected cash outlay
of approximately $4.5 billion. To finance this transaction, the Company plans to
issue a combination of short and long-term debt during the first quarter of
2001. In anticipation of these future issuances, during December 2000 the
Company entered into $1.5 billion notional amount of forward-starting interest
rate swaps that effectively fixed a portion of the interest rate on an
equivalent amount of debt prior to issuance. These swaps will be settled in
conjunction with the issuances, resulting in cash payments or receipts that will
be amortized to interest expense over periods of five to thirty years. If these
swaps had been settled at December 31, 2000, the Company would have made a total
cash payment to counterparties of approximately $26 million. The incremental
amount of interest expense related to this payment will generally be offset by a
lower coupon rate on the underlying future debt issuance.
Following the Company's announcement of its agreement to acquire Keebler,
Moody's and Standard & Poor's (S&P) placed the credit ratings of the Company's
senior unsecured debt and commercial paper under review for possible downgrade.
Due to the significant amount of incremental debt to be created in this
transaction, S&P downgraded the Company's senior unsecured debt from AA to BBB
and the Company's commercial paper from A-1 to A-2. Moody's downgraded the
Company's senior unsecured debt from Aa2 to Baa2 and the Company's commercial
paper from P-1 to P-2. These ratings are subject to revision or withdrawal at
any time.
S&P assigns a 'BBB' credit rating to obligations which it considers to "exhibit
adequate protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation." Similarly, Moody's assigns a
'Baa' credit rating to obligations it considers to "be medium-grade obligations,
i.e. neither highly protected nor poorly secured. Interest payments and
principal security are considered adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time."
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 incentive and non-qualified stock
options, performance units, restricted stock grants and other stock-based
awards. Options granted under this plan generally vest over two years with the
restricted stock grants under this plan generally vesting in three years. Under
the Key Employee Long Term Incentive Plan, approximately 100,000 shares were
granted to eligible employees during 2000.
The 2001 Long Term Incentive Plan, approved by shareholders in 2000, provides
for benefits to be awarded to employees and officers in the form of incentive
and non-qualified stock options, performance shares, performance units,
restricted stock grants, and other stock-based awards. Options granted under
this plan generally vest over two years, subject to earlier vesting if a change
of control occurs.
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 this plan generally vest over five years.
Options under all the plans described above are granted with exercise prices
equal to the fair market value of the Company's common stock at the time of the
grant and have a term of no more than ten years, if they are incentive stock
options, or no more than ten years and one day, if they are non-qualified
options.
The Key Employee Long Term Incentive Plan and the 2001 Long Term Incentive Plan
contain an accelerated ownership feature ("AOF"). An AOF option is generally
granted when Company stock is used to pay the exercise price of a stock option
or any taxes owed. The holder of the option is generally granted an AOF option
for the number of shares so used with the exercise price equal to the then fair
market value of the Company's common stock. For all AOF options, the original
expiration date is not changed but the options vest immediately.
33
21
The Non-Employee Director Stock Plan was approved by shareholders in 2000 and
allows each eligible non-employee director to receive 1,700 shares of the
Company's common stock and annual grants of options to purchase 5,000 shares of
the Company's common stock. The shares are placed in the Kellogg Company Grantor
Trust for Non-Employee Directors (the "Grantor Trust"). Under the terms of the
Grantor Trust, shares are available to a director only upon termination of
service on the Board. During 2000, there were 57,500 options and 20,000 shares
of common stock granted under this plan.
As permitted by SFAS No.123 "Accounting for Stock-Based Compensation", the
Company has elected to account for the stock option plans under APB No. 25
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized for these plans.
For the 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 No.123, the Company's net earnings
and earnings per share are estimated as follows:
(millions, except per share data) 2000 1999 1998
-------- -------- --------
Net earnings
As reported $ 587.7 $ 338.3 $ 502.6
Pro forma $ 569.2 $ 311.4 $ 484.4
Net earnings per share
(basic and diluted)
As reported $ 1.45 $ .83 $ 1.23
Pro forma $ 1.40 $ .77 $ 1.19
======== ======== ========
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:
2000 1999 1998
------ ------ ------
Risk-free interest rate 6.59% 4.83% 5.56%
Dividend yield 3.90% 3.00% 2.00%
Volatility 25.43% 23.16% 21.28%
Average expected term (years) 3.17 3.76 3.47
Fair value of options granted $ 4.60 $ 6.38 $ 8.45
====== ====== ======
Transactions under these plans were:
(millions, except per share data) 2000 1999 1998
-------- -------- --------
Under option, January 1 19.9 16.4 12.4
Granted 6.4 6.6 6.8
Exercised (.1) (1.1) (1.7)
Cancelled (2.8) (2.0) (1.1)
-------- -------- --------
Under option, December 31 23.4 19.9 16.4
======== ======== ========
Excercisable, December 31 13.7 10.1 8.7
======== ======== ========
Shares available, December 31,
for options that may be
granted under the
following plans:
Key Employee Long Term
Incentive Plan 3.2 7.1 9.8
Kellogg Employee Stock
Ownership Plan 4.8 4.6 6.0
2000 Non-employee Directors
Stock Plan .9 -- --
2001 Long Term Incentive Plan 26.0 -- --
-------- -------- --------
Total shares available, December 31,
for options that may be granted 34.9 11.7 15.8
======== ======== ========
Average prices per share
--------------------------------------------
Under option, January 1 $ 38 $ 38 $ 35
Granted 24 36 43
Exercised 26 32 34
Cancelled 36 39 33
-------- -------- --------
Under option, December 31 $ 34 $ 38 $ 38
======== ======== ========
Exercisable, December 31 $ 38 $ 39 $ 36
======== ======== ========
Employee stock options outstanding and exercisable under these plans as of
December 31, 2000, were:
(millions, except per share data)
Outstanding Exercisable
------------------------------------------ --------------------------
Weighted
Weighted average Weighted
Range of average remaining average
exercise Number exercise contractual Number exercise
prices of options price life (yrs.) of options price
- ---------- ---------- ---------- ---------- ---------- ----------
$15-29 7.6 $ 25 8.7 1.5 $ 27
30-39 9.3 36 7.1 6.2 36
40-44 5.8 43 7.3 5.3 43
45-50 0.7 48 6.7 0.7 48
---------- ---------- ---------- ---------- ----------
23.4 13.7
========== ========== ========== ========== ==========
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% of consolidated plan assets
at December 31, 2000 and 1999.
The components of pension expense were:
(millions) 2000 1999 1998
-------- -------- --------
Service cost $ 34.5 $ 42.6 $ 41.3
Interest cost 91.1 83.7 81.3
Expected return on plan assets (143.3) (125.1) (113.9)
Amortization of unrecognized
transition obligation .6 2.0 .7
Amortization of unrecognized
prior service cost 7.0 7.4 7.5
Recognized net (gain) loss (4.2) 10.9 10.0
Curtailment loss and special
termination benefits 8.5 33.5 17.4
-------- -------- --------
Pension (income) expense -
Company plans (5.8) 55.0 44.3
Pension expense - multiemployer plans 2.2 1.4 1.2
-------- -------- --------
Total pension (income) expense $ (3.6) $ 56.4 $ 45.5
======== ======== ========
34
22
The worldwide weighted average actuarial assumptions were:
2000 1999 1998
------ ------ ------
Discount rate 7.0% 7.2% 6.7%
Long-term rate of compensation increase 4.6% 4.2% 4.9%
Long-term rate of return on plan assets 10.4% 10.4% 10.5%
====== ====== ======
The aggregate change in projected benefit obligation, change in plan assets, and
funded status were:
(millions) 2000 1999
------------ ------------
Change in projected benefit obligation
Projected benefit obligation at beginning of year $ 1,350.4 $ 1,331.2
Service cost 34.5 42.6
Interest cost 91.1 83.7
Plan participants' contributions 1.4 1.3
Amendments 5.3 36.6
Actuarial (gain) loss 32.1 (58.4)
Benefits paid (91.8) (76.1)
Foreign currency adjustments (42.4) (9.8)
Other .9 (.7)
------------ ------------
Projected benefit obligation at end of year $ 1,381.5 $ 1,350.4
============ ============
Change in plan assets
Fair value of plan assets at beginning of year $ 1,578.0 $ 1,318.3
Actual return on plan assets (86.4) 299.8
Employer contribution 41.7 42.9
Plan participants' contributions 1.4 1.3
Benefits paid (91.8) (76.1)
Foreign currency adjustments (38.1) (3.5)
Other .2 (4.7)
------------ ------------
Fair value of plan assets at end of year $ 1,405.0 $ 1,578.0
============ ============
Funded status $ 23.5 $ 227.6
Unrecognized net (gain) loss 118.5 (135.4)
Unrecognized transition amount 2.7 3.4
Unrecognized prior service cost 34.8 38.4
------------ ------------
Prepaid pension $ 179.5 $ 134.0
============ ============
Amounts recognized in statement
of financial position consist of
Prepaid benefit cost $ 252.0 $ 207.9
Accrued benefit liability (87.1) (86.9)
Intangible asset 4.6 13.0
Minimum pension liability 10.0 --
------------ ------------
Net amount recognized $ 179.5 $ 134.0
============ ============
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) 2000 1999
---------- ----------
Projected benefit obligation $ 104.6 $ 89.7
Accumulated benefit obligation 86.1 76.1
Fair value of plan assets 7.1 --
========== ==========
All gains and losses, other than curtailment gains and 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 1998-2000 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):
2000-$16; 1999-$17; 1998-$16.
NOTE 10 NONPENSION POSTRETIREMENT BENEFITS
Certain of the Company's U.S. and Canadian 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) 2000 1999 1998
-------- -------- --------
Service cost $ 7.7 $ 9.3 $ 9.1
Interest cost 44.4 37.4 36.8
Expected return on plan assets (21.4) (17.8) (15.0)
Amortization of unrecognized
prior service cost (1.1) (.5) (.5)
Recognized net gains (3.2) (4.8) (5.3)
Curtailment loss (gain) and special
termination benefits (.1) .5 1.0
-------- -------- --------
Postretirement benefit expense $ 26.3 $ 24.1 $ 26.1
======== ======== ========
The weighted average actuarial assumptions were:
2000 1999 1998
------ ------ ------
Discount rate 7.5% 8.0% 7.0%
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) 2000 1999
---------- ----------
Change in accumulated benefit obligation
Accumulated benefit obligation
at beginning of year $ 580.2 $ 548.8
Service cost 7.7 9.3
Interest cost 44.4 37.4
Actuarial loss 28.9 15.3
Amendments -- (.2)
Benefits paid (42.3) (30.6)
Other (.3) .2
---------- ----------
Accumulated benefit obligation at end of year $ 618.6 $ 580.2
========== ==========
Change in plan assets
Fair value of plan assets at beginning of year $ 230.0 $ 177.4
Actual return on plan assets (7.4) 48.0
Employer contribution 42.6 35.2
Benefits paid (42.3) (30.6)
---------- ----------
Fair value of plan assets at end of year $ 222.9 $ 230.0
========== ==========
Funded status $ (395.7) $ (350.2)
Unrecognized net gain (26.4) (88.9)
Unrecognized prior service cost (9.4) (10.7)
---------- ----------
Accrued postretirement benefit cost $ (431.5) $ (449.8)
========== ==========
Amounts recognized in the statement
of financial position consist of
Accrued benefit liability $ (431.5) $ (449.8)
========== ==========
The assumed health care cost trend rate was 5% for 2000, decreasing gradually to
4.75% 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 $ 7.2 $ (6.0)
Effect on postretirement benefit
obligation $ 71.5 $ (60.0)
============ ============
All gains and losses, other than curtailment gains and losses and special
termination benefits, are recognized over the average remaining service period
of active plan participants. Curtailment gains or losses and special termination
benefits recognized in 1998 and 2000 were recorded as a component of
restructuring charges. The net curtailment loss and special termination benefits
for 1999 include a $2.2 million loss recorded as a component of
35
23
restructuring charges and a $1.7 million gain recorded as a component of
disposition-related charges. The Company contributes to a voluntary employee
benefit association (VEBA) trust for funding of its nonpension postretirement
benefit obligations.
NOTE 11 INCOME TAXES
Earnings before income taxes, and the provision for U.S. federal, state, and
foreign taxes on these earnings, were:
(millions) 2000 1999 1998
---------- ---------- ----------
Earnings before income taxes
United States $ 561.9 $ 235.1 $ 564.0
Foreign 305.8 301.6 218.5
---------- ---------- ----------
$ 867.7 $ 536.7 $ 782.5
---------- ---------- ----------
Income taxes
Currently payable
Federal $ 134.0 $ 135.9 $ 128.7
State 20.3 20.6 17.8
Foreign 127.1 102.4 87.2
---------- ---------- ----------
281.4 258.9 233.7
---------- ---------- ----------
Deferred
Federal (1.2) (60.7) 30.6
State 4.1 (4.5) 1.7
Foreign (4.3) 4.7 13.9
---------- ---------- ----------
(1.4) (60.5) 46.2
---------- ---------- ----------
Total income taxes $ 280.0 $ 198.4 $ 279.9
========== ========== ==========
The difference between the U.S. federal statutory tax rate and the Company's
effective rate was:
2000 1999 1998
------ ------ ------
U.S. statutory rate 35.0% 35.0% 35.0%
Foreign rates varying from 35% (.6) (.5) (2.0)
State income taxes, net of federal benefit 1.8 2.0 2.4
Net change in valuation allowances (3.0) (1.3) 2.9
Statutory rate changes, deferred tax impact (.3) (.6) (.3)
Other (.6) 2.4 (2.2)
------ ------ ------
Effective income tax rate 32.3% 37.0% 35.8%
====== ====== ======
The changes in valuation allowances on deferred tax assets and corresponding
impacts on the effective income tax rate, as presented above, result from
management's assessment of the Company's ability to utilize certain operating
loss and tax credit carryforwards. For 2000, the change in valuation allowance
relates primarily to utilization of U.S. foreign tax credit carryforwards. As a
result, the effective income tax rate was down significantly from the prior
year. Also contributing to the lower rate were the impact of lower statutory
rates throughout the year in the United Kingdom and Australia and enactment of a
statutory rate reduction in Germany in the fourth quarter.
Total tax benefits of carryforwards at year-end 2000 and 1999 were $20.3 million
and $43.2 million, respectively, and expire principally after five years.
The deferred tax assets and liabilities included in the balance sheet at
year-end were:
Deferred Deferred
Tax Assets Tax Liabilities
(millions) 2000 1999 2000 1999
-------- -------- -------- --------
Current:
Promotion and advertising $ 14.0 $ 18.0 $ 8.1 $ 7.4
Wages and payroll taxes 16.8 17.3 .3 --
Inventory valuation 8.7 9.6 11.0 11.4
Health and postretirement benefits 20.2 34.3 .2 .3
State taxes 6.9 6.7 -- --
Operating loss and credit carryforwards .5 1.5 .1 --
Deferred intercompany revenue 53.3 -- 7.0 --
Other 32.9 35.0 7.3 7.1
-------- -------- -------- --------
153.3 122.4 34.0 26.2
Less valuation allowance (3.6) (2.2) -- --
-------- -------- -------- --------
149.7 120.2 34.0 26.2
======== ======== ======== ========
Noncurrent:
Depreciation and asset disposals 12.8 16.7 289.1 291.9
Health and postretirement benefits 151.0 158.9 69.5 68.9
Capitalized interest -- -- 23.3 24.0
State taxes -- 1.6 5.2 --
Operating loss and credit carryforwards 19.8 41.7 -- --
Trademarks -- -- 30.6 29.8
Other 25.2 32.2 7.8 14.4
-------- -------- -------- --------
208.8 251.1 425.5 429.0
Less valuation allowance (32.5) (59.6) -- --
-------- -------- -------- --------
176.3 191.5 425.5 429.0
-------- -------- -------- --------
Total deferred taxes $ 326.0 $ 311.7 $ 459.5 $ 455.2
======== ======== ======== ========
At December 31, 2000, foreign subsidiary earnings of approximately $1.0 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 $58 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): 2000-$246; 1999-$242; 1998-$211.
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, generally less than twelve months duration, to reduce fluctuations in
net long or
36
24
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 $238.6 million and $3.8
million at December 31, 2000 and 1999, respectively. No borrowings were
outstanding under commitments to sell foreign currency revenues at December 31,
2000 or 1999.
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 proportion of variable versus
fixed rate debt, based on current and projected market conditions.
Mark-to-market gains and losses on interest rate forward swaps 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 interest rate swaps were $2.1 billion
and $600.0 million at December 31, 2000 and 1999, respectively. Refer to Note 7
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.
NOTE 13 QUARTERLY FINANCIAL DATA (UNAUDITED)
(millions, except
per share data) Net Sales Gross Profit
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
First $ 1,751.9 $ 1,745.3 $ 915.0 $ 908.9
Second 1,801.1 1,784.4 951.6 946.1
Third 1,845.7 1,868.4 970.0 984.7
Fourth 1,556.0 1,586.1 791.1 819.4
---------- ---------- ---------- ----------
$ 6,954.7 $ 6,984.2 $ 3,627.7 $ 3,659.1
========== ========== ========== ==========
Net earnings
Net earnings(a) per share(a)(b)
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
First $ 161.7 $ 118.8 $ .40 $ .29
Second 150.9 154.2 .37 .38
Third 181.9 (35.6) .45 (.08)
Fourth 93.2 100.9 .23 .25
---------- ---------- ---------- ----------
$ 587.7 $ 338.3
========== ==========
(a) The quarterly results of 2000 and 1999 include the following restructuring
and disposition-related charges. Refer to Notes 2 and 3 for further
information.
Net Earnings
Net Earnings Per Share(b)
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
First $ -- $ (25.6) $ -- $ (.07)
Second (14.7) -- (.04) --
Third -- (206.4) -- (.50)
Fourth (49.5) (35.9) (.12) (.09)
------ -------- ------ --------
$(64.2) ($267.9)
====== ========
(b) Earnings per share presented represents 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 2000, the closing price (on the
NYSE) was $26.25 and there were 46,711 shareholders of record.
37
25
Dividends paid and the quarterly price ranges on the NYSE during the last two
years were:
Stock Price
------------------
2000 - QUARTER Dividend High Low
-------- -------- --------
Fourth $ .2525 $ 28.75 $ 21.56
Third .2525 30.75 22.63
Second .2450 32.00 23.31
First .2450 30.50 20.75
-------- -------- --------
$ .9950
========
1999 - QUARTER
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
========
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. Through June 2000, operations were
managed via four major geographic areas - North America, Europe, Asia-Pacific,
and Latin America.
Beginning in July 2000, the Company changed its organizational structure, such
that U.S. operations were managed separately. In October 2000, management
announced a reorganization of the Company into two major divisions -- the United
States and International -- with International further delineated into Europe,
Latin America, Canada, Australia, and Asia. Thus, beginning in the fourth
quarter of 2000, the Company's reportable operating segments under SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" consist of
the United States, Europe, and Latin America. All other geographic areas have
been combined under the quantitative threshold guidelines of SFAS No. 131 for
purposes of the information presented below. Comparative periods have been
restated to conform to the current-year presentation.
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) 2000 1999 1998
---------- ---------- ----------
NET SALES
United States $ 4,067.4 $ 4,014.1 $ 3,858.0
Europe 1,463.4 1,614.4 1,700.2
Latin America 626.7 567.0 510.7
All other operating segments 776.7 788.8 694.8
Corporate 20.5 (.1) (1.6)
---------- ---------- ----------
Consolidated $ 6,954.7 $ 6,984.2 $ 6,762.1
========== ========== ==========
OPERATING PROFIT EXCLUDING CHARGES(a)
United States $ 746.2 $ 803.0 $ 786.8
Europe 235.2 224.1 211.4
Latin America 161.1 141.3 107.2
All other operating segments 89.2 93.7 76.3
Corporate (155.4) (188.7) (216.1)
---------- ---------- ----------
Consolidated $ 1,076.3 $ 1,073.4 $ 956.6
Charges(a) (86.5) (244.6) (70.5)
---------- ---------- ----------
OPERATING PROFIT AS REPORTED $ 989.8 $ 828.8 $ 895.1
========== ========== ==========
CHARGES(a)
United States $ 2.0 $ 197.9 $ 32.8
Europe 26.7 22.4 3.3
Latin America 14.6 1.7 --
All other operating segments 28.7 4.6 11.4
Corporate 14.5 18.0 23.0
---------- ---------- ----------
Consolidated $ 86.5 $ 244.6 $ 70.5
========== ========== ==========
DEPRECIATION AND AMORTIZATION
United States $ 131.4 $ 138.1 $ 138.9
Europe 57.1 57.8 54.6
Latin America 17.2 14.5 14.2
All other operating segments 40.8 35.7 34.5
Corporate 44.1 41.9 35.9
---------- ---------- ----------
Consolidated $ 290.6 $ 288.0 $ 278.1
========== ========== ==========
INTEREST EXPENSE
United States $ -- $ .2 $ .2
Europe 4.7 9.3 4.4
Latin America .1 .6 .9
All other operating segments .4 (.1) .4
Corporate 132.3 108.8 113.6
---------- ---------- ----------
Consolidated $ 137.5 $ 118.8 $ 119.5
========== ========== ==========
INCOME TAXES EXCLUDING CHARGES(b)
United States $ 197.1 $ 214.9 $ 214.1
Europe 43.4 28.8 37.0
Latin America 40.0 34.4 28.1
All other operating segments 11.1 26.7 18.0
Corporate 10.7 38.8 6.9
---------- ---------- ----------
Consolidated $ 302.3 $ 343.6 $ 304.1
Effect of charges (22.3) (145.2) (24.2)
---------- ---------- ----------
INCOME TAXES AS REPORTED $ 280.0 $ 198.4 $ 279.9
========== ========== ==========
(millions) 2000 1999 1998
---------- ---------- ----------
TOTAL ASSETS
United States $ 2,188.9 $ 2,214.9 $ 2,216.9
Europe 1,102.5 1,157.3 1,336.0
Latin America 444.6 414.3 380.9
All other operating segments 627.8 641.3 542.2
Corporate 2,061.2 1,755.9 1,760.6
Elimination entries (1,528.7) (1,375.0) (1,185.1)
---------- ---------- ----------
Consolidated $ 4,896.3 $ 4,808.7 $ 5,051.5
========== ========== ==========
ADDITIONS TO LONG-LIVED ASSETS
United States $ 135.4 $ 460.0 $ 79.3
Europe 71.7 67.4 169.1
Latin America 39.7 47.4 41.7
All other operating segments 42.7 37.0 44.2
Corporate 138.1 41.7 98.5
---------- ---------- ----------
Consolidated $ 427.6 $ 653.5 $ 432.8
========== ========== ==========
(a) Charges include restructuring charges in 2000, 1999, and 1998. Refer to
Note 3 for further information.
(b) Charges include those described in (a) and disposition-related charges in
1999 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) 2000 1999 1998
---------- ---------- ----------
NET SALES
United States $ 4,067.4 $ 4,014.1 $ 3,858.0
United Kingdom 652.8 689.3 743.6
Other foreign countries 2,234.5 2,280.8 2,160.5
---------- ---------- ----------
Consolidated $ 6,954.7 $ 6,984.2 $ 6,762.1
========== ========== ==========
LONG-LIVED ASSETS
United States $ 1,553.5 $ 1,549.3 $ 1,644.2
United Kingdom 535.4 552.3 553.0
Other foreign countries 1,154.0 1,110.3 1,330.3
---------- ---------- ----------
Consolidated $ 3,242.9 $ 3,211.9 $ 3,527.5
========== ========== ==========
Supplemental product information is provided below for revenues from external
customers:
(millions) 2000 1999 1998
---------- ---------- ----------
Ready-to-eat cereal net sales $ 5,177.6 $ 5,304.7 $ 5,265.4
Convenience foods net sales 1,777.1 1,679.5 1,496.7
---------- ---------- ----------
Consolidated $ 6,954.7 $ 6,984.2 $ 6,762.1
========== ========== ==========
38
26
NOTE 15 SUPPLEMENTAL FINANCIAL STATEMENT DATA
(millions)
CONSOLIDATED STATEMENT OF EARNINGS 2000 1999 1998
---------- ---------- ----------
Research and development expense $ 118.4 $ 104.1 $ 121.9
Advertising expense $ 604.2 $ 674.1 $ 695.3
========== ========== ==========
CONSOLIDATED STATEMENT OF CASH FLOWS 2000 1999 1998
---------- ---------- ----------
Accounts receivable $ 1.1 $ 21.0 $ (102.6)
Inventories 54.5 (39.1) (15.0)
Other current assets (20.2) 14.7 33.2
Accounts payable 75.1 (84.8) 58.9
Other current liabilities (83.5) (58.6) (76.8)
---------- ---------- ----------
CHANGES IN OPERATING ASSETS
AND LIABILITIES $ 27.0 $ (146.8) $ (102.3)
========== ========== ==========
CONSOLIDATED BALANCE SHEET
2000 1999
---------- ----------
Trade receivables $ 607.2 $ 561.5
Allowance for doubtful accounts (8.6) (8.6)
Other receivables 86.7 125.6
---------- ----------
ACCOUNTS RECEIVABLE, NET $ 685.3 $ 678.5
---------- ----------
Raw materials and supplies $ 138.2 $ 141.2
Finished goods and materials in process 305.6 362.6
---------- ----------
INVENTORIES $ 443.8 $ 503.8
---------- ----------
Deferred income taxes $ 136.5 $ 108.5
Other prepaid assets 136.8 127.8
---------- ----------
OTHER CURRENT ASSETS $ 273.3 $ 236.3
---------- ----------
Land $ 40.5 $ 44.1
Buildings 1,197.1 1,255.3
Machinery and equipment 3,683.1 3,595.5
Construction in progress 114.5 261.8
Accumulated depreciation (2,508.3) (2,515.8)
---------- ----------
PROPERTY, NET $ 2,526.9 $ 2,640.9
---------- ----------
Goodwill $ 218.7 $ 205.1
- Accumulated amortization (10.5) (4.4)
Other intangibles 217.8 144.5
- Accumulated amortization (18.6) (9.6)
Other 355.2 263.0
---------- ----------
OTHER ASSETS $ 762.6 $ 598.6
---------- ----------
Accrued income taxes $ 130.8 $ 83.5
Accrued salaries and wages 96.6 126.0
Accrued advertising and promotion 178.2 211.8
Other 312.5 339.7
---------- ----------
OTHER CURRENT LIABILITIES $ 718.1 $ 761.0
---------- ----------
Nonpension postretirement benefits $ 408.5 $ 424.9
Deferred income taxes 266.7 251.3
Other 121.8 118.7
---------- ----------
OTHER LIABILITIES $ 797.0 $ 794.9
========== ==========
39
27
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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. 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 of America, 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 our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Battle Creek, Michigan
January 24, 2001
40
28
SUPPLEMENTAL FINANCIAL INFORMATION
QUANTITATIVE AND 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, 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, 2000 or 1999. As of December 31, 2000, the Company had committed to
borrowings during 2001 in the cumulative principal amount of approximately $160
million. As of December 31, 1999, the Company had committed to borrowings during
2000 in the cumulative principal amount of approximately $366 million.
On January 1, 2001, these borrowing commitments were cancelled and replaced with
foreign currency forward contracts.
The tables below summarize forward contracts held at year-end 2000 and 1999. All
contracts are valued in U.S. Dollars using year-end exchange rates, are hedges
of existing assets, liabilities, or anticipated transactions, and mature within
one year, except where indicated.
CONTRACTS TO SELL FOREIGN CURRENCY
Notional Exchange Fair
Currency value rate value
Currency sold received (millions) (fc/1US$) (millions)
- ------------- -------- ----------------- ----------------- ------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------
Japanese Yen U.S. Dollar $ -- $ 3.8 -- 102.12 $ -- $ --
New Zealand Australian
Dollar Dollar 4.0 -- 2.38 -- (.2) --
Pound Sterling(a) Danish Kroner 18.3 -- .63 -- 1.0 --
Spanish Peseta Pound Sterling 21.4 -- 179.45 -- (.3) --
Euro U.S. Dollar 15.9 -- 1.12 -- (.7) --
Australian Dollar U.S. Dollar 27.4 -- 1.84 -- (.6) --
Mexican Peso U.S. Dollar 67.4 -- 9.51 -- 1.5 --
Canadian Dollar U.S. Dollar 33.0 -- 1.51 -- (.3) --
------ ------ ------ ------ ------ ------
TOTAL $187.4 $ 3.8 $ .4 $ --
====== ====== ====== ======
(a) Several contracts maturing 2001-2003.
CONTRACTS TO PURCHASE FOREIGN CURRENCY
Notional Exchange Fair
Currency Currency value rate value
purchased exchanged (millions) (fc/1US$) (millions)
- --------- --------- ----------------- ----------------- ------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------
U.S. Dollar Australian Dollar $ 3.5 $ -- 1.86 -- $ (.1) $ --
Pound Sterling South African Rand 1.8 -- .70 -- .1 --
U.S. Dollar South African Rand .2 -- 7.07 -- -- --
Swiss Franc Euro 5.2 -- 1.44 -- -- --
Pound Sterling U.S. Dollar 40.5 -- .68 -- .6 --
------ ------ ------ ------ ------ ------
TOTAL $ 51.2 $ -- $ .6 $ --
====== ====== ====== ======
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
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 2000 and 1999. 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 2000. Refer to Note 7 within Notes to Consolidated
Financial Statements for further information.
SIGNIFICANT DEBT ISSUES (MILLIONS)
Principal by year of maturity Fair value
Debt -------------------------------------- ------------------
characteristics 2000 2001 2004 2005 2000 1999
- --------------- ------ ------ ------ ------ ------ ------
Euro Dollar $500.0 $500.0 $494.7
fixed rate 6.125%
effective rate (a) 6.400%
------
U.S. Dollar $400.0 $409.0 $397.1
fixed rate 5.75%
effective rate (b) 5.23%
------
Euro Dollar $500.0 $499.7 $488.9
fixed rate 6.625%
effective rate (a) 6.354%
------
U.S. Dollar $200.0 $189.7 $179.4
fixed rate 4.875%
effective rate (a) 6.070%
------
U.S. commercial
paper $448.3 $429.8 $429.8 $448.3
weighted avg.
variable 5.9% 6.6%
------ ------
Multi-currency
revolving credit
facility $ 16.2 $ -- $ 16.2
effective rate 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 Fair value
Instrument -------- --------------
characteristics 2001 2000 1999
- --------------- -------- ------ ------
Interest rate swap - Notional amt. $ 200.0 ($.4) ($1.1)
pay variable/receive fixed - Pay 6.60%
hedge of existing debt issue Receive 6.40%
--------
Interest rate swap - Notional amt. $ 400.0 ($2.2) ($3.2)
pay variable/receive fixed - Pay 5.99%
hedge of existing debt issue Receive 5.23%
--------
Interest rate swap - Notional amt. $ 100.0 $ -- $ --
pay fixed/receive variable - Pay 5.98%
hedge of future debt issue(a) Receive 6.36%
--------
Interest rate swap - Notional amt. $ 975.0 ($26.9) $ --
pay fixed/receive variable - Pay 6.53%
hedge of future debt issue(a) Receive 6.36%
--------
Interest rate swap - Notional amt. $ 425.0 $ .5 $ --
pay fixed/receive variable - Pay 6.13%
hedge of future debt issue(a) Receive 6.36%
--------
(a) Forward-starting interest rate swaps which will be settled in conjunction
with a future debt issuance in 2001.
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 at year-end 2000 and 1999 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.
41