1
EXHIBIT 13.01
PAGES 15 THROUGH 28 OF THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
2
SELECTED FINANCIAL DATA (dollar amounts in millions, except per share data)
SUMMARY OF OPERATIONS
EARNINGS
BEFORE (A)
NET % OPERATING % ACCOUNTING % NET %
SALES GROWTH PROFIT GROWTH CHANGE GROWTH EARNINGS GROWTH
----- ------ -------- ------ --------- ------ -------- ------
10-year
Compound
Growth Rate 10% 10% 11% 11%
- -----------
1994 $6,562.0 4 $1,162.6 9 $705.4 4 $705.4 4
1993 6,295.4 2 1,068.9 1 680.7 - 680.7 58
1992 6,190.6 7 1,062.8 3 682.8 13 431.2 (29)
1991 5,786.6 12 1,027.9 16 606.0 21 606.0 21
1990 5,181.4 11 886.0 21 502.8 19 502.8 7
1989 4,651.7 7 732.5 (8) 422.1 (12) 470.2 (2)
1988 4,348.8 15 794.1 15 480.4 21 480.4 21
1987 3,793.0 14 691.2 7 395.9 24 395.9 24
1986 3,340.7 14 647.4 16 318.9 13 318.9 13
1985 2,930.1 13 558.4 21 281.1 12 281.1 12
1984 2,602.4 9 463.2 12 250.5 3 250.5 3
PER COMMON SHARE DATA (B)
EARNINGS AVERAGE
BEFORE (A) SHARES
ACCOUNTING NET CASH BOOK OUTSTANDING SHAREHOLDERS'
CHANGE EARNINGS DIVIDENDS VALUE (MILLIONS) EQUITY
----------- -------- --------- ----- ----------- ---------
14% 14% 13%
1994 $3.15 $3.15 $1.40 $8.15 224.2 $1,807.5
1993 2.94 2.94 1.32 7.52 231.5 1,713.4
1992 2.86 1.81 1.20 8.20 238.9 1,945.2
1991 2.51 2.51 1.075 8.98 241.2 2,159.8
1990 2.08 2.08 .96 7.88 241.6 1,901.8
1989 1.73 1.93 .86 6.70 244.2 1,634.4
1988 1.95 1.95 .76 6.03 246.4 1,483.2
1987 1.60 1.60 .64 4.91 247.4 1,211.4
1986 1.29 1.29 .51 3.63 247.0 898.4
1985 1.14 1.14 .45 2.77 246.6 683.0
1984 .84 .84 .42 1.98 298.8 487.2
OTHER INFORMATION AND FINANCIAL RATIOS
FINANCIAL RATIOS
-------------------------------------
PRETAX
INTEREST RETURN ON DEBT TO CASH LONG-
PROPERTY, CAPITAL TOTAL NUMBER OF CURRENT COVERAGE AVERAGE TOTAL PROVIDED TERM
NET EXPENDITURES DEPRECIATION ASSETS EMPLOYEES RATIO (TIMES) EQUITY CAPITAL BY OPERATIONS DEBT
--------- ------------ ------------ ------ --------- ------- -------- ------- ------- ------------- -----
1994 $2,892.8 $354.3 $256.1 $4,467.3 15,657 1.2 23 40% 36% $966.8 $719.2
1993 2,768.4 449.7 265.2 4,237.1 16,151 1.0 27 37% 35% 800.2 521.6
1992 2,662.7 473.6 231.5 4,015.0 16,551 1.2 33 21% 21% 741.9 314.9
1991 2,646.5 333.5 222.8 3,925.8 17,017 .9 17 30% 18% 934.4 15.2
1990 2,595.4 320.5 200.2 3,749.4 17,239 .9 10 28% 26% 819.2 295.6
1989 2,406.3 508.7 167.6 3,390.4 17,268 .9 10 30% 34% 533.5 371.4
1988 2,131.9 538.1 139.7 3,297.9 17,461 .9 14 36% 32% 492.3 272.1
1987 1,738.8 478.4 113.1 2,680.9 17,762 .9 14 38% 27% 523.5 290.4
1986 1,281.1 329.2 92.7 2,084.2 17,383 1.1 13 40% 31% 542.7 264.1
1985 1,035.9 245.6 75.4 1,726.1 17,082 1.4 11 48% 38% 449.7 392.6
1984 856.0 228.9 63.9 1,667.1 17,239 1.1 26 27% 59% 331.5 364.1
(a) Net earnings for 1992 include a $251.6 million charge ($1.05 per
share) resulting from the adoption of Statement of Financial Accounting
Standards 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," as of January 1, 1992. Net earnings for 1989 include a
$48.1 million gain ($.20 per share) resulting from the adoption of
Statement of Financial Accounting Standards 96, "Accounting for Income
Taxes," as of January 1, 1989.
(b) All per share data retroactively restated to reflect 2 for 1 stock
splits in 1991 and 1986.
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[GRAPH]
1994 Global Market Share (volume) - The 1994 Global Market Share (volume) graph
shows in pie chart form, the Company's market share at 42% with all other
competition (collectively) at 58%.
[GRAPH]
Consolidated Net Sales - The Consolidated Net Sales graph shows in bar chart
form, total net sales for the Company as follows: 1984 $2.6 billion, 1989 $4.7
billion, 1994 $6.6 billion.
[GRAPH]
1994 Geographic Net Sales - The 1994 Geographic Net Sales graph shows in pie
chart form, the relative proportion of the Company's 1994 net sales
attributable to major geographic segments as follows: United States 59%,
Europe 25%, Other 16%.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
Kellogg revenues are generated from the sale of ready-to-eat cereals and other
grain-based convenience foods in nearly 160 countries. The ready-to-eat cereal
category continued to exhibit volume growth around the world in 1994, with
Kellogg continuing to demonstrate strong global leadership in market share.
The Company's 1994 annual market volume share was 42% globally, 36% in North
America, 49% in Europe, 47% in Asia-Pacific, and 73% in Latin America.
Consolidated net sales increased 4% over 1993, principally from higher selling
prices and, to a lesser extent, product mix improvements and lower trade
spending. Excluding the results of the Mrs. Smith's Frozen Foods pie business,
divested during the first quarter of 1994, and the Argentine snack business,
divested during the fourth quarter of 1993, consolidated net sales increased
7%. On a geographic basis, excluding the results of divested businesses, sales
increased 5% in the U.S., 9% in Europe, and 10% in all other areas.
The Company's reported total volume was down 2% versus the prior year. However,
excluding results of divested businesses, total volume increased 2% over the
previous year, buoyed by strong growth in the U.S. convenience foods market.
Recognizing the importance of this business, a new U.S. convenience foods
division was created in late 1993.
Despite intense competitive pressure in all developed markets, Kellogg's global
cereal volume grew 1% during 1994, with a volume decline in the U.S. cereal
market more than offset by volume growth in non-U.S. markets. The volume
decline in the U.S. cereal market reflected this competitive pressure and the
Company's introduction of a new strategy on pricing and market spending,
focusing on the reduction of inefficient price promotion on established brands.
The gross profit margin strengthened to 55%, up 2 percentage points over 1993.
This increase in gross margin was the result of favorable pricing, combined
with cost containment programs and productivity improvements which held cost of
goods sold essentially flat on a per-kilo basis.
Intense global competition requires heavy investment in value-added marketing
and new-product research and development. As a result, selling and
administrative expense for 1994 was up 9% over 1993, and represented 37% of net
sales, up one percentage point from the prior year. Beginning in the second
quarter of 1994, a shift in the marketing investment mix occurred toward
advertising from promotion. This trend continued throughout the remainder of
1994. Management believes that the strategy of investment in brand-building
advertising and reduction in price promotion spending on established brands,
coupled with a strong new-product program, will assist in delivering long-term
growth.
Operating profit increased 9% to $1.16 billion, reflecting strong margins and
efficient marketing investment. Excluding the results of divested businesses,
operating profit was up 11% in total, 10% in the U.S., 14% in Europe, and 13%
in all other areas. Foreign currency movements contributed favorably by 3% in
Europe and less than 1% in other non-U.S. areas.
Other income for 1994 includes a gain of $21.1 million ($13.3 million after tax
or $.06 per share) from the sale of the Mrs. Smith's Frozen Foods pie business.
Other expense includes a charge of $20.5 million ($13.1 million after tax or
$.06 per share), primarily from the initial funding of the Kellogg's Corporate
Citizenship Fund, a private trust established for charitable donations.
Gross interest expense, prior to amounts capitalized, increased to $52.3
million for 1994 compared to $40.4 million for 1993, due to higher debt levels,
incurred primarily to fund common stock repurchases, and increased interest
rates on short-term borrowings. The Company expects a further increase in
interest expense during 1995, primarily due to anticipated continuing increases
in U.S. interest rates.
The Company's effective income tax rate for the year was 37.6%, 3.4 percentage
points higher than the comparable rate for 1993. A primary factor contributing
to this variance is the one-time favorable impact of statutory rate reductions
in several foreign jurisdictions during 1993. The Company expects its effective
income tax rate for 1995 to be between 37% and 38%.
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[GRAPH]
Gross Margin - The Gross Margin graph shows in bar chart form, the Company's
gross margin percentage for the following years: 1992 52%, 1993 53%, 1994 55%.
[GRAPH]
1994 Geographic Operating Profit - The 1994 Geographic Operating Profit graph
shows in pie chart form, the Company's relative proportion of 1994 operating
profit attributable to major geographic segments as follows: United States
61%, Europe 24%, Other 15%.
[GRAPH]
Net Earnings (millions before accounting change) - The Net Earnings graph shows
in continuous bar chart form, the Company's net earnings for the period
1984-1994. Net Earnings are presented in millions before accounting change as
follows: 1984 $251, 1989 $422, 1994 $705.
Earnings per share for 1994 were $3.15, up 7%. Net earnings were $705.4
million, an increase of 4%. Excluding all one-time events and the results of
divested businesses, earnings per share for 1994 were $3.16, up 10% over 1993,
and net earnings were $708.8 million, up 7%.
1993 COMPARED TO 1992
Consolidated net sales increased by 2% for 1993. This increase was achieved
through higher selling prices and a 2% increase in cereal volume, partially
offset by unfavorable foreign currency movements. Excluding the unfavorable
impact of currency movements, 1993 sales would have increased 6%.
During 1993, sales within the United States rose by 6% from increased selling
prices and volume for both cereal and convenience foods. European sales,
which were significantly impacted by unfavorable foreign currency movements,
were down 8%, and sales in other areas increased by 2%. If the effects of
foreign currency are excluded, European sales would have risen 4% and other
area sales would have increased 6%.
The Company's gross margin improved to 53% from 52% in 1992, due to higher
selling prices, increased volume, cost containment, and productivity
improvements. Cost of sales per kilo declined over 1% versus the prior year.
As a percentage of net sales, selling and administrative expense was up one
percentage point to 36%, reflecting the Company's commitment to building
strong, long-term brand franchises through effective marketing and research and
development expenditures.
Total operating profit increased 1% in 1993 to $1.07 billion, primarily due to
the improvement in gross margin. Geographically, U.S. operating profit
increased 9% over 1992, with European and other areas operating profit
declining 13% and 7%, respectively. Unfavorable currency movements
significantly impacted non-U.S. operating profit results. Excluding the
currency impact, operating profit would have been essentially flat in Europe
and down 3% in other areas.
Other income for 1993 includes a pre-tax gain of $32.2 million ($24.1 million
after tax or $.10 per share) from the sale of Cereal Packaging Ltd., a wholly
owned subsidiary of Kellogg Company of Great Britain Ltd., and a pre-tax gain
of $33.7 million ($22.2 million after tax or $.10 per share) from the sale of
the Company's Argentine snack food business. Other expense for 1993 includes a
pre-tax charge of $64.3 million ($41.1 million after tax or $.18 per share)
from the write-down of certain assets in Europe and North America.
Other income for 1992 includes a pre-tax gain of $58.5 million ($39.2 million
after tax or $.16 per share) from the sale of Fearn International Inc., a
foodservice subsidiary. Other expense includes a pre-tax charge of $22.4
million ($13.5 million after tax or $.05 per share) from the disposition of
convenience foods operations in Canada and other North American assets.
Gross interest expense, prior to amounts capitalized, increased to $40.4
million for 1993 compared to $33.6 million for 1992, due to higher debt levels
incurred primarily to fund common stock repurchases.
The Company's effective tax rate was 34.2% for the year compared to 36.2% for
1992. The decrease in tax rate was partially as a result of statutory rate
decreases in various foreign jurisdictions which more than offset the 1%
increase in the U.S. statutory rate during 1993.
For 1993, earnings per share were $2.94, versus 1992 earnings per share of
$1.81. Net earnings were $680.7 million, compared to 1992 earnings of $431.2
million. The 1992 results include the effect of adopting FAS 106. Excluding
all one-time events and the effect of FAS 106, earnings per share were $2.92,
up 6% over $2.75 in 1992; and net earnings were $675.5 million, up 3% over 1992
earnings of $657.1 million. Without the negative impact of foreign currency
fluctuations, earnings per share would have been up 10% and net earnings up 6%.
LIQUIDITY AND CAPITAL RESOURCES
The financial condition of the Company remained strong during 1994. Consistent
with historical results, operations provided a strong, positive cash flow
during 1994 which resulted in a net increase in cash of $168.2 million during
the year. The strong cash flow, combined with a program of issuing commercial
paper and maintaining worldwide credit facilities, provides adequate liquidity
to meet the Company's operational needs. The Company maintains credit
facilities with banking institutions in the United States and other countries
where it conducts business. At year-end, the Company had $594.3 million of
short-term lines of credit, of which $554.2 million were available.
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[GRAPH]
Cash Flow From Operations (millions) - The Cash Flow From Operations graph
shows in bar chart form, the Company's cash flow in millions for the following
years: 1992 $742, 1993 $800, 1994 $967.
[GRAPH]
Capital Expenditures (millions) - The Capital Expenditures graph shows in bar
chart form, the Company's capital spending in millions for the following years:
1992 $474, 1993 $450, 1994 $354.
[GRAPH]
Stock Repurchased Since 1984 (based on shares outstanding at 12/31/83) - The
Stock Repurchased Since 1984 graph shows in pie chart form the relative
proportion of the Company's Common Stock repurchased versus outstanding as a
percentage of shares outstanding at 12/31/83. Common Stock repurchased and
outstanding were 29% and 71% respectively.
The ratio of current assets to current liabilities was 1.2:1.0 as of December
31, 1994, and 1.0:1.0 at December 31, 1993.
Capital spending for 1994 was $354.3 million compared with $449.7 million
during 1993. Capital expenditures have decreased, reflecting the Company's
application of value-based management principles and the ongoing strategy of
improving return on invested capital. Over the past several years, investment
has been focused on gaining entrance to relatively untapped markets, which are
expected to provide significant long- term growth potential in ready-to-eat
cereal consumption. As a result, the Company opened new plants in Latvia in
1993 and India in 1994, and expects to be manufacturing at new plants in China
and Argentina by mid-1995. Management anticipates that 1995 capital
expenditures will be approximately $350 million.
In recent years the Company has divested units that do not fit with its
long-term strategic plan. As discussed above, the results of operations for
1994, 1993, and 1992 reflect divestitures of non-core businesses. As a result
of an aggressive common stock repurchase program, combined with these strategic
divestitures and other operational factors, return on average equity (before
cumulative effect of accounting change) increased from 33% in 1992 to 37% in
1993 and to 40% in 1994.
During 1994 the Company spent $327.3 million to purchase 6,194,500 shares of
its common stock. Stock repurchases are made under plans authorized by the
Company's Board of Directors. The total authorized purchase amount for 1995 is
$325.4 million. Market conditions permitting, management intends to fully
utilize this authorization by the end of 1995.
Long-term debt outstanding at year-end 1994 consisted principally of $200
million of three-year notes issued in 1994, $200 million of five-year notes
issued in 1993, and $300 million of five-year notes issued in 1992. Short-term
debt outstanding at year-end 1994 and 1993 consisted principally of commercial
paper. The Company continues to enjoy the highest available debt ratings on
both its long-term debt and commercial paper.
The Company's net debt position (long-term debt plus notes payable less cash)
at December 31, 1994, was $728.6 million, down $83.1 million from December 31,
1993, as the increase in cash during the year more than offset the net increase
in total debt. The ratio of debt to total capitalization was 36% compared to
35% at December 31, 1993.
At December 31, 1994, the Company had available an unused "shelf registration"
of $200 million with the Securities and Exchange Commission to provide for the
issuance of debt in the United States. Such an offering would be added to the
Company's working capital and be available for general corporate purposes.
Dividends paid per share of common stock increased 6% to $1.40 in 1994,
marking the 38th consecutive year of increase. Management believes the trend
of increased dividends will continue in 1995.
LOOKING FORWARD
Management is not aware of any adverse trends that would materially affect the
Company's strong financial position. Should suitable investment opportunities
or working capital needs arise that would require additional financing,
management believes that the Company's triple A credit rating, strong balance
sheet, and its solid earnings history provides a base for obtaining additional
financial resources at competitive rates and terms.
Management's objective of maximizing shareholder value includes a constant
reassessment of its business strategies. The commitment to position the Company
for continued success will include in 1995 the implementation of a program to
improve productivity and streamline its cereal production operations. On
February 6, 1995, the Company announced plans to change its manufacturing
staffing patterns and reduce approximately 300-350 employee positions through a
voluntary program of incentives for early retirement and severance.
Approximately one-third of the reduction will be salaried positions in the
Company's U.S. cereal operations, with the remainder coming from outside the
United States. When fully implemented, management expects this program to
result in annual cost savings of $12-$15 million. Subject to the timing of
employee acceptance of these incentives, management expects to report a
non-recurring pre-tax charge to earnings of approximately $30-$40 million
during the second or third quarter of 1995, primarily comprised of expenses for
acceleration of pension and health care benefits and cash outlays for employee
separation payments.
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Kellogg Company and Subsidiaries
CONSOLIDATED EARNINGS AND RETAINED EARNINGS
Year ended December 31,
(in millions, except per share amounts)
1994 1993 1992
NET SALES $6,562.0 $6,295.4 $6,190.6
-------- -------- --------
Cost of goods sold 2,950.7 2,989.0 2,987.7
Selling and administrative expense 2,448.7 2,237.5 2,140.1
-------- -------- --------
OPERATING PROFIT 1,162.6 1,068.9 1,062.8
-------- -------- --------
Interest expense 45.4 33.3 29.2
Other income (expense), net 12.8 (1.5) 36.8
-------- -------- --------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 1,130.0 1,034.1 1,070.4
Income taxes 424.6 353.4 387.6
-------- -------- --------
EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 705.4 680.7 682.8
Cumulative effect of change in method of accounting for
postretirement benefits other than pensions - $1.05 per share
(net of income tax benefit of $144.6) (251.6)
-------- -------- --------
NET EARNINGS - $3.15, $2.94, $1.81 per share 705.4 680.7 431.2
Retained earnings, beginning of year 3,409.4 3,033.9 2,889.1
Dividends paid - $1.40, $1.32, $1.20 per share (313.6) (305.2) (286.4)
-------- -------- --------
RETAINED EARNINGS, END OF YEAR $3,801.2 $3,409.4 $3,033.9
======== ======== ========
See notes to consolidated financial statements.
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Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
At December 31,
(millions) 1994 1993
---- ----
CURRENT ASSETS
Cash and temporary investments $ 266.3 $ 98.1
Accounts receivable, less allowances of $6.2 & $6.0 564.5 536.8
Inventories:
Raw materials and supplies 141.7 148.5
Finished goods and materials in process 254.6 254.6
Deferred income taxes 79.4 85.5
Other current assets 127.0 121.6
--------- --------
TOTAL CURRENT ASSETS 1,433.5 1,245.1
--------- --------
PROPERTY
Land 47.3 40.6
Buildings 1,122.6 1,065.7
Machinery and equipment 3,141.0 2,857.6
Construction in progress 289.6 308.6
Accumulated depreciation (1,707.7) (1,504.1)
--------- --------
PROPERTY, NET 2,892.8 2,768.4
--------- --------
INTANGIBLE ASSETS 4.1 59.1
OTHER ASSETS 136.9 164.5
--------- --------
TOTAL ASSETS $ 4,467.3 $4,237.1
========= ========
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Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET continued
At December 31,
(millions, except share data)
1994 1993
CURRENT LIABILITIES
Current maturities of long-term debt $ .9 $ 1.5
Notes payable 274.8 386.7
Accounts payable 334.5 308.8
Accrued liabilities:
Income taxes 72.0 65.9
Salaries and wages 80.5 76.5
Advertising and promotion 257.5 233.8
Other 165.0 141.4
--------- ---------
TOTAL CURRENT LIABILITIES 1,185.2 1,214.6
--------- ---------
LONG-TERM DEBT 719.2 521.6
NONPENSION POSTRETIREMENT BENEFITS 486.8 450.9
DEFERRED INCOME TAXES 198.1 188.9
OTHER LIABILITIES 70.5 147.7
SHAREHOLDERS' EQUITY
Common stock, $.25 par value
Authorized: 330,000,000 shares
Issued: 310,356,488 shares in 1994 and 310,292,753 in 1993 77.6 77.6
Capital in excess of par value 68.6 72.0
Retained earnings 3,801.2 3,409.4
Treasury stock, at cost: 88,655,238 shares in 1994 and
82,372,409 in 1993 (1,980.6) (1,653.1)
Minimum pension liability adjustment (25.3)
Currency translation adjustment (159.3) (167.2)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 1,807.5 1,713.4
--------- ---------
TOTAL LIABILITIES AND SHAREHOLERS' EQUITY $ 4,467.3 $ 4,237.1
========= =========
See notes to consolidated financial statements.
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Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
(millions) 1994 1993 1992
OPERATING ACTIVITIES
Net earnings $ 705.4 $ 680.7 $ 431.2
Items in net earnings not requiring (providing) cash:
Cumulative effect of accounting change 251.6
Depreciation 256.1 265.2 231.5
Pre-tax gain on sale of subsidiaries (26.7) (65.9) (58.5)
Deferred income taxes 24.5 (22.3) .1
Other (49.3) 11.9 34.7
Change in operating assets and liabilities:
Accounts receivable (27.7) (17.7) (99.1)
Inventories 6.8 13.3 (15.3)
Other current assets (5.4) (32.3) (.9)
Accounts payable 25.7 (5.0) 24.0
Accrued liabilities 57.4 (27.7) (57.4)
------- ------- -------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 966.8 800.2 741.9
------- ------- -------
INVESTING ACTIVITIES
Additions to properties (354.3) (449.7) (473.6)
Proceeds from sale of subsidiaries 95.5 95.6 115.0
Property disposals 15.6 19.0 18.8
Other 7.8 (25.1) (10.6)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (235.4) (360.2) (350.4)
------- ------- -------
FINANCING ACTIVITIES
Net borrowings of notes payable (111.9) 176.7 21.6
Issuance of long-term debt 200.0 208.3 311.7
Reduction in long-term debt (2.9) (1.7) (270.2)
Issuance of common stock 2.3 2.9 13.4
Common stock repurchases (327.3) (548.1) (224.1)
Cash dividends (313.6) (305.2) (286.4)
Other (6.1) 2.9 11.4
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (559.5) (464.2) (422.6)
------- ------- -------
Effect of exchange rate changes on cash (3.7) (4.0) (20.6)
------- ------- -------
Increase (decrease) in cash and temporary investments 168.2 (28.2) (51.7)
Cash and temporary investments at beginning of year 98.1 126.3 178.0
------- ------- -------
CASH AND TEMPORARY INVESTMENTS AT END OF YEAR $ 266.3 $ 98.1 $ 126.3
======= ======= =======
See notes to consolidated financial statements.
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10
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 wholly 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 temporary investments - 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 capitalized interest
associated with significant capital additions.
Net earnings per share - Net earnings per share is determined by dividing net
earnings by the weighted average number of common shares outstanding
during the year.
NOTE 2 LEASES
Operating leases generally are for equipment and warehouse space. Rent expense
on all operating leases, which generally are renewable at the Company's option,
was $37.5 million in 1994, $43.7 million in 1993, and $42.4 million in 1992.
There are no significant future minimum rental commitments under non-cancelable
leases.
NOTE 3 RESEARCH AND DEVELOPMENT
Expenditures for research and development are expensed as incurred, and
generally include costs related to product and process advancements. Research
and development costs charged to earnings during 1994 were $71.7 million.
Comparable amounts for 1993 and 1992 were $59.2 million and $56.7 million,
respectively.
NOTE 4 DIVESTITURES AND OTHER NONRECURRING ITEMS
All gains from divestitures and nonrecurring charges are recorded in other
income (expense). None of the divestitures during the past three years were
significant to the Company's consolidated revenues and earnings.
During 1994, the Company recognized a pre-tax gain of $21.1 million ($13.3
million after-tax or $.06 per share) from the sale of the Mrs. Smith's Frozen
Foods pie business to The J. M. Smucker Co. The Company also recognized a
pre-tax charge of $20.5 million ($13.1 million after tax or $.06 per share)
primarily from the initial funding of the Kellogg's Corporate Citizenship Fund,
a private trust established for charitable donations.
During 1993, the Company recognized a pre-tax gain of $32.2 million ($24.1
million after tax or $.10 per share) from the sale of Cereal Packaging, Ltd., a
wholly owned subsidiary of Kellogg Company of Great Britain, Ltd., and a
pre-tax gain of $33.7 million ($22.2 million after tax or $.10 per share) from
the sale of the Argentine snack food business. The Company also recognized a
pre-tax charge of $64.3 million ($41.1 million after tax or $.18 per share)
from the write-down of certain assets in Europe and North America.
During 1992, the Company sold Fearn International Inc., a foodservice
subsidiary, resulting in a pre-tax gain of $58.5 million ($39.2 million after
tax or $.16 per share). The Company also recognized a pre-tax charge of $22.4
million ($13.5 million after tax or $.05 per share) from the disposition of
convenience foods operations in Canada and other North American assets.
NOTE 5 SHAREHOLDERS' EQUITY
Under plans authorized by the Board of Directors, the Company purchased
6,194,500 shares of its common stock in 1994, 9,487,508 shares in 1993, and
3,497,000 shares in 1992. All purchases are included in treasury stock. Net
exchange gains or losses resulting from the translation of assets and
liabilities of foreign subsidiaries, except those in highly inflationary
economies, are accumulated in the currency translation component of
shareholders' equity.
Components of shareholders' equity were:
(a) Minimum
Capital in pension Currency
Common excess of Retained Treasury liability translation
(millions) stock par value earnings stock adjustment adjustment
- ----------------------------------------------------------------------------------------------------
Balance, January 1, 1992 $77.4 $60.2 $2,889.1 ($ 880.9) $ 14.0
Stock options exercised .1 9.0
Net earnings 431.2
Dividends (286.4)
Exchange adjustments (144.4)
Common stock repurchases (224.1)
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1992 77.5 69.2 3,033.9 (1,105.0) (130.4)
Stock options exercised .1 2.8
Net earnings 680.7
Dividends (305.2)
Exchange adjustments (36.8)
Minimum pension liability
adjustment ($25.3)
Common stock repurchases (548.1)
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1993 77.6 72.0 3,409.4 (1,653.1) (25.3) (167.2)
Stock options exercised 2.3
Net earnings 705.4
Dividends (313.6)
Exchange adjustments 7.9
Minimum pension liability
adjustment 25.3
Common stock repurchases (327.3)
Other (5.7) (.2)
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $77.6 $68.6 $3,801.2 $(1,980.6) $0.0 ($159.3)
====================================================================================================
(a) Refer to Note 8 for explanation of the minimum pension liability
adjustments.
23
11
NOTE 6 DEBT
Notes payable consist principally of commercial paper borrowings in the United
States at the highest credit rating available, and to a lesser extent, bank
loans of foreign subsidiaries at competitive market rates. U.S. borrowings at
December 31, 1994, were $243.3 million with an effective interest rate of 5.9%
and at December 31, 1993, were $352.9 million with an effective interest rate
of 3.2%. At December 31, 1994, the Company had $594.3 million of short-term
lines of credit, of which $554.2 million were unused and available for
borrowing on an unsecured basis.
Long-term debt at year-end consisted of:
(millions) 1994 1993
- -----------------------------------------------------
(a) Three-Year Notes due 1997 $200.0
(b) Five-Year Notes due 1998 200.0 $200.0
(c) Five-Year Notes due 1997 299.4 299.2
Other 20.7 23.9
- -----------------------------------------------------
720.1 523.1
Less current maturities (.9) (1.5)
- -----------------------------------------------------
Balance, December 31, $719.2 $521.6
=====================================================
(a) In September 1994, the Company issued $200 million of three-year long-term
debt consisting of both 8.125% Euro Canadian Dollar Secured Notes and
5.25% Swiss Franc Secured Notes. These Notes were swapped into U.S. dollar
obligations, with a variable rate indexed to the Federal Reserve AA
composite rate on 30-day commercial paper, for the duration of the
three-year term.
(b) In October 1993, the Company issued $200 million of five-year 6.25% Euro
Canadian Dollar Notes which were swapped into 4.629% fixed rate U.S.
dollar obligations for the duration of the five-year term. In
December 1993, the Notes were swapped into variable rate debt for a
two-year period, indexed to the London Interbank Offered Rate.
(c) In July 1992, the Company issued $300 million of five-year 5.9% U.S.
dollar obligations. The Notes were swapped into variable rate debt for
a two-year period expiring July 1994, indexed to the London Interbank
Offered Rate.
In August 1993, the Company filed a $200 million "shelf registration" with the
Securities and Exchange Commission which remains unused at December 31, 1994.
Scheduled principal repayments on long-term debt are (in millions): 1996-$2,
1997-$502, 1998-$207, 1999-$1.
Interest paid, net of amounts capitalized, approximated interest expense in
each of the three years ended December 31, 1994. Interest expense capitalized
as part of the construction cost of fixed assets was (in millions): 1994-$6.9;
1993-$7.1: 1992-$4.4.
NOTE 7 STOCK OPTIONS
The Key Employee Long-Term Incentive Plan provides for benefits to be awarded
to executive level employees in the form of stock options, performance shares,
performance units, incentive stock options, restricted stock awards, and other
stock-based awards. Under this plan, options have been granted with exercise
prices equal to the fair market value of the Company's common stock at the time
of grant, exercisable for a ten-year period following the date of grant. The
plan also contains a reload option feature. When Company stock is surrendered
to pay the exercise price of a stock option, the holder of the option is
granted a new option for the number of shares surrendered. For all options
reloaded, the expiration date is not changed, but the option price becomes the
fair market value of the Company's stock on the date the new reload option is
granted. Under this plan, options for 10,620,578 and 9,949,433 shares were
available for grant at January 1, 1994, and December 31, 1994, respectively.
In addition, during 1994 shareholders approved the adoption of the Kellogg
Employee Stock Ownership Plan. This 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. Under this plan,
during 1994, options for 778,480 shares were granted with exercise prices equal
to fair market value, exercisable for a ten-year period following the date of
grant, subject to vesting rules. These rules provide for 50% of the options to
vest after three years and the remaining 50% to vest after five years, from
grant date. Under this plan, options for 5,228,710 shares remain available
for grant at December 31, 1994.
Transactions under these plans were:
Shares Average price
------ -------------
Under option, January 1, 1993 1,909,382 $52.92
Granted 848,885 62.40
Less exercised (293,494) 45.46
Less cancelled (30,186) 59.10
--------- ------
Under option, December 31, 1993 2,434,587 $56.95
Granted 1,607,984 53.46
Less exercised (85,647) 38.20
Less cancelled (151,589) 54.85
--------- ------
Under option, December 31, 1994 3,805,335 $56.03
========== ======
Exercisable, December 31, 1994 3,034,195 $57.54
========= ======
NOTE 8 PENSION BENEFITS
The Company has a number of U.S. and worldwide 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.
24
12
The components of pension expense were:
(millions) 1994 1993 1992
Service cost $29.0 $24.9 $23.7
Interest cost 60.3 57.8 57.2
Actual (return) loss on plan assets (3.5) (76.3) (22.8)
Net amortization and deferral (51.0) 26.7 (27.3)
----- ----- -----
Pension expense - Company plans 34.8 33.1 30.8
Pension expense - multiemployer plans 2.0 3.1 1.5
----- ----- -----
Total pension expense $36.8 $36.2 $32.3
===== ===== =====
Reconciliation of funded status of the plans at year-end was:
Underfunded Overfunded
(millions) 1994 1993 1994 1993
Accumulated benefit obligation:
Nonvested $ 5.6 $ 35.3 $ 51.7 $ 26.9
Vested 35.0 288.8 592.4 322.3
----- ------ ------ ------
Total 40.6 324.1 644.1 349.2
Projected salary increases 14.6 13.8 89.7 86.3
----- ------ ------ ------
Projected benefit obligation 55.2 337.9 733.8 435.5
Plan assets at fair value 9.5 279.5 711.9 404.4
----- ------ ------ ------
Assets (less) greater than
projected benefit obligation (45.7) (58.4) (21.9) (31.1)
Unrecognized net (gain) loss 7.7 41.3 83.3 25.7
Unrecognized transition amount (2.5) 19.3 .4 (14.6)
Unrecognized prior service cost 4.9 46.3 56.3 21.3
Minimum liability adjustment (1.9) (96.0)
----- ------ ------ ------
Prepaid (accrued) pension ($37.5) ($47.5) $118.1 $ 1.3
===== ====== ====== ======
The underfunded liability in excess of the unamortized prior service cost and
the net transition obligation was recorded as a reduction in shareholders'
equity of $25.3 million, net of tax, as of December 31, 1993. The shift from
underfunded to overfunded plan status at year-end 1994 versus year-end 1993,
was primarily due to plan funding and an increase in the assumed discount rate,
reducing the accumulated benefit obligation. The amount of intangible assets
related to underfunded pension plans was correspondingly reduced from $56.9
million at year-end 1993 to $1.9 million at year-end 1994.
The 1993 projected benefit obligation was impacted by plan improvements that
covered most U.S. employees. All gains and losses are recognized over the
average remaining service period of active employees.
The worldwide weighted averages for actuarially assumed discount rate,
long-term rate of compensation increase, and long-term rate of return on plan
assets were 8.3, 5.3, and 9.5 percent in 1994; 7.9, 5.4, and 9.5 percent in
1993; and 9.2, 6.7, and 9.6 percent in 1992.
The Company and certain subsidiaries sponsor 401K or similar savings plans for
active employees. Expense related to these plans was (in millions): 1994-$16;
1993-$16; 1992-$17.
NOTE 9 NONPENSION POSTRETIREMENT BENEFITS
Effective January 1, 1992, the Company adopted FAS 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". This standard requires that
the estimated cost of postretirement benefits, principally health care, be
accrued over the period earned rather than expensed as incurred.
The transition effect of adopting FAS 106 on the immediate recognition basis,
as of January 1, 1992, resulted in a charge of $251.6 million ($1.05 per share)
to 1992 earnings, net of approximately $144.6 million of income tax benefit.
The Company adopted FAS 106 on a worldwide basis; however, costs associated
with subsidiaries outside North America are insignificant.
The Company and its North American subsidiaries provide health care and certain
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 are met: 30 years
and any age; 20 years and age 55; 5 years and age 62.
Components of postretirement benefit expense were:
(millions) 1994 1993 1992
---- ---- ----
Service cost $13.3 $12.1 $10.9
Interest cost 39.2 38.6 34.9
Net amortization and deferral 3.1 1.0
----- ----- -----
Postretirement benefit expense $55.6 $51.7 $45.8
===== ===== =====
Actuarial assumptions used to determine the accumulated postretirement benefit
obligation include a discount rate of 8.5% for 1994, 7.75% for 1993, and 9% for
1992. The assumed health care cost trend was 8.5% for 1994, decreasing
gradually to 6% by the year 2000 and remaining at that level thereafter. These
trend rates reflect the Company's prior experience and management's expectation
that future rates will decline. Increasing the assumed health care cost trend
rates by 1 percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1994, by $67.8 million and
postretirement benefit expense for 1994 by $8.4 million. All gains and losses
are recognized over the average remaining service period of active plan
participants. The Company's postretirement health care plans currently are not
funded.
25
13
The accrued postretirement benefit cost included in the balance sheet at
year-end was:
(millions) 1994 1993
---- ----
Accumulated benefit obigation:
Retirees $250.7 $251.7
Active plan participants 254.5 265.0
------ ------
505.2 516.7
Unrecognized experience loss 1.0 (47.2)
Unrecognized prior service cost (.5) (.5)
------ ------
Accrued postretirement benefit cost $505.7 $469.0
====== ======
NOTE 10 INCOME TAXES
Effective January 1, 1992, the Company adopted FAS 109, "Accounting for Income
Taxes." This standard requires the use of the asset and liability approach for
financial reporting of income taxes. The Company previously accounted for
income taxes in conformity with FAS 96. The effect of the accounting change
was not material except for allowing recognition of the tax benefit associated
with the cumulative effect of adopting FAS 106 (refer to Note 9).
Earnings before income taxes and the provision for U.S. federal, state, and
foreign taxes on these earnings were:
(millions) 1994 1993 1992
---- ---- ----
Earnings before income taxes and
cumulative effect of accounting change:
United States $ 741.1 $ 703.3 $ 727.3
Foreign 388.9 330.8 343.1
-------- -------- --------
$1,130.0 $1,034.1 $1,070.4
Income taxes: ======== ======== ========
Currently payable:
Federal $ 207.4 $ 233.0 $ 226.8
State 42.4 38.0 27.8
Foreign 150.3 104.7 132.9
-------- -------- --------
400.1 375.7 387.5
Deferred:
Federal 18.1 (19.4) (4.2)
State .2 (2.2) (1.0)
Foreign 6.2 (.7) 5.3
-------- -------- --------
24.5 (22.3) .1
-------- -------- --------
Total income taxes $ 424.6 $ 353.4 $ 387.6
======== ======== ========
The difference between the U.S. federal statutory tax rate and the Company's
effective rate was:
1994 1993 1992
---- ---- ----
U.S. statutory rate 35.0% 35.0% 34.0%
Foreign rates varying from 35% 0.2 (1.5) 1.2
State income taxes, net of federal benefit 2.5 2.2 1.7
Other (.1) (1.5) (.7)
---- ---- ----
Effective income tax rate 37.6% 34.2% 36.2%
==== ==== ====
The deferred tax assets and liabilities included in the balance sheet at
year-end were:
Deferred tax assets Deferred tax liabilities
(millions) 1994 1993 1994 1993
Current:
Promotion and advertising $ 46.0 $ 54.4 $ 5.8 $ 7.5
Wages and payroll taxes 13.9 12.8
Pension 1.5 9.5 10.6
Health and postretirement benefits 15.3 13.1
State taxes 8.4 9.6
Other 22.7 27.9 13.0 11.4
------- ------- ------- -------
106.3 119.3 28.3 29.5
------- ------- ------- -------
Less valuation allowance (4.0) (5.9)
------- ------- ------- -------
102.3 113.4 28.3 29.5
------- ------- ------- -------
Noncurrent:
Depreciation and asset disposals 7.0 4.9 313.8 301.2
Postretirement benefits 177.7 162.3 28.0 15.4
Capitalized interest 3.5 3.7 32.7 32.6
State taxes 1.7 .7
Other 13.4 16.6 7.9 3.2
------- ------- ------- -------
203.3 188.2 382.4 352.4
------- ------- ------- -------
Less valuation allowance (13.9) (10.6)
------- ------- ------- -------
189.4 177.6 382.4 352.4
------- ------- ------- -------
Total deferred taxes $ 291.7 $ 291.0 $ 410.7 $ 381.9
======= ======= ======= =======
At December 31, 1994, foreign subsidiary earnings of $1.27 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 $57 million would be payable upon remittance of these earnings.
Subject to certain limitations, the withholding taxes would then be available
for use as tax credits against the U.S. tax liability.
Cash paid for income taxes was (in millions): 1994-$396; 1993-$425; 1992-$361.
26
14
NOTE 11 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, temporary investments, receivables, notes
payable, and long-term debt approximate fair value.
The Company uses derivative financial instruments only for the purpose of
hedging currency, price, and interest rate exposures which exist as a part of
its ongoing business operations. The Company does not engage in speculative
transactions.
The Company enters into forward contracts and options to hedge against the
adverse impact of fluctuations in foreign currency-denominated receivables,
payables, intercompany loans, and other commitments. Gains and losses on
forward contracts and options are not significant and are recognized in the
earnings statement in the same period as the hedged transaction. Gains and
losses related to currency hedges of net investments in foreign subsidiaries
are recorded in the cumulative translation adjustment component of
shareholders' equity.
Forward contracts and options generally have maturities of six months or less
and are entered into with major international financial institutions. The
notional amounts of open forward contracts and options were $91.2 million and
$77.5 million, at December 31, 1994 and 1993, respectively.
The Company enters into currency and interest rate swaps in connection with
certain debt issues (refer to Note 6 for a description of outstanding swaps).
Currency swaps are used to convert foreign currency-denominated debt to U.S.
dollars; thereby, minimizing the risk of currency fluctuations in these debt
issues. The Company enters into interest rate swaps to reduce borrowing costs
and to achieve a desired proportion of variable versus fixed rate debt, based
on current and projected market conditions. Gains and losses from currency and
interest rate swaps are not significant and are recognized over the life of the
debt issue as a component of interest expense. The notional amounts of
currency and interest rate swaps were $600 million and $723.9 million at
December 31, 1994 and 1993, respectively.
The Company also uses commodity futures and options to hedge raw material
costs. Gains and losses realized upon sale or exchange of these contracts are
not significant and are recognized in cost of goods sold. The notional amounts
of commodity futures and options outstanding at December 31, 1994 and 1993, as
well as related deferred gains or losses, were insignificant.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts, currency and interest rate swaps,
and commodity hedges. This credit loss is limited to the cost of replacing
these contracts at current market rates. Management believes that the risk of
such loss is remote.
Financial instruments which potentially subject the Company to concentrations
of credit risk are primarily cash, temporary investments, 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 12 QUARTERLY FINANCIAL DATA (unaudited)
(millions, except
per share data) Net sales Gross profit
1994 1993 1994 1993
---- ---- ---- ----
First $1,611.2 $1,518.4 $ 879.2 $ 793.4
Second 1,616.9 1,541.6 888.2 785.7
Third 1,741.9 1,669.2 985.7 897.3
Fourth 1,592.0 1,566.2 858.2 830.0
-------- -------- -------- --------
$6,562.0 $6,295.4 $3,611.3 $3,306.4
======== ======== ======== ========
Net earnings Earnings per share
1994 1993 1994 1993
---- ---- ---- ---
First $183.9 $179.2 $ .81 $ .76
Second 151.5 142.7 .68 .62
Third 216.7 209.3 .96 .90
Fourth 153.3 149.5 .70 .66
-------- -------- ------- --------
$ 705.4 $ 680.7 $ 3.15 $ 2.94
======== ======== ======= ========
The principal market for trading Kellogg shares is the New York Stock Exchange.
The shares are also traded on the Boston, Cincinnati, Midwest, Pacific, and
Philadelphia Stock Exchanges. On December 31, 1994, the closing price (on the
NYSE) was $58.125 and there were approximately 29,721 shareholders of record.
Dividends paid per share of common stock increased 6% to $1.40 in 1994, marking
the 38th consecutive year of increase. Management believes the trend of
increased dividends will continue in 1995.
Dividends paid and the quarterly price ranges on the New York Stock Exchange
during the last two years were:
1994 - Quarter Dividend High Low
- -------------- -------- ---- ---
Fourth $ .36 $60.50 $56.38
Third .36 57.38 51.25
Second .34 56.38 47.75
First .34 58.00 48.25
----- ------ ------
$1.40
===== ====== ======
1993
Fourth $ .34 $61.88 $48.75
Third .34 54.88 47.25
Second .32 61.00 51.00
First .32 67.88 59.38
----- ------ ------
$1.32
===== ====== ======
27
15
NOTE 13 OPERATING SEGMENTS
The Company operates in a single industry - manufacturing and marketing
convenience food products throughout the world. The following table describes
operations by geographic area. Geographic operating profit includes allocated
corporate overhead expenses. Corporate assets are comprised principally of
equity investments, cash, and temporary investments held for general corporate
purposes.
Net sales (a)
(millions) 1994 % change 1993 % change 1992 % change
- ---------- ---- -------- ---- -------- ---- --------
United States $3,840.8 2 $3,783.9 6 $3,564.9 5
% of total 59% 60% 58%
Europe 1,637.3 9 1,505.9 -8 1,643.6 14
% of total 25% 24% 27%
Other areas 1,083.9 8 1,005.6 2 982.1 6
% of total 16% 16% 15%
-------- -- -------- -- -------- --
Consolidated $6,562.0 4 $6,295.4 2 $6,190.6 7
======== == ======== == ======== ==
Operating profit(a)
(millions) 1994 % change 1993 % change 1992 % change
---- -------- ---- -------- ---- --------
United States $ 708.5 8 $ 658.0 9 $ 602.8 1
% of total 61% 62% 57%
Europe 279.3 14 245.1 -13 281.2 8
% of total 24% 23% 26%
Other areas 174.8 5 165.8 -7 178.8 3
% of total 15% 15% 17%
-------- -- -------- -- -------- --
Consolidated $1,162.6 9 $1,068.9 1 $1,062.8 3
======== == ======== == ======== ==
Identifiable assets(a)
(millions) 1994 % change 1993 % change 1992 % change
---- -------- ---- -------- ---- --------
United States $2,242.0 -4 $2,344.8 14 $2,065.1 11
% of total 50% 55% 51%
Europe 1,252.6 21 1,036.2 -6 1,106.7 -5
% of total 28% 24% 28%
Other areas 953.7 14 833.2 4 797.9 -9
% of total 21% 20% 20%
Corporate assets 19.0 -17 22.9 -49 45.3 74
% of total 1% 1% 1%
-------- -- -------- -- -------- --
Consolidated $4,467.3 5 $4,237.1 6 $4,015.0 2
======== == ======== == ======== ==
(a) Includes the results and assets of divested businesses through the date of
divestment. (Refer to Note 4.)
REPORT OF INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE 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 and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Kellogg
Company and its subsidiaries at December 31, 1994 and 1993, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
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
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Notes 9 and 10 to the financial statements, during 1992 the
Company changed its methods of accounting for post-retirement benefits other
than pensions and for income taxes.
Price Waterhouse LLP
Battle Creek, Michigan
February 3, 1995