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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-4171
KELLOGG COMPANY
State of Incorporation--Delaware IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant's telephone number: 616-961-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Common Stock outstanding July 31, 1995 - 219,204,635 shares
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KELLOGG COMPANY
INDEX
Page
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PART I - Financial Information
Item 1:
Consolidated Balance Sheet - June 30, 1995 and December 31, 1994 2
Consolidated Earnings - three and six months ended June 30, 1995 3
Consolidated Statement of Cash Flows - six months ended June 30,
1995 and 1994 4
Notes to Consolidated Financial Statements 5
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-10
PART II - Other Information
Item 4:
Submission of Matters to a Vote of Security Holders 11-12
Item 6:
Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
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CONSOLIDATED BALANCE SHEET
================================================================================
KELLOGG COMPANY AND SUBSIDIARIES JUNE 30, December 31,
(millions) 1995 1994
(unaudited) *
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CURRENT ASSETS
Cash and temporary investments $377.1 $266.3
Accounts receivable, net 648.6 564.5
Inventories 408.7 396.3
Other current assets 212.3 206.4
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TOTAL CURRENT ASSETS 1,646.7 1,433.5
PROPERTY, net of accumulated depreciation
of $1,857.5 and $1,707.7 2,923.2 2,892.8
INTANGIBLE ASSETS 3.6 4.1
OTHER ASSETS 173.9 136.9
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TOTAL ASSETS $4,747.4 $4,467.3
================================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $1.7 $0.9
Notes payable 342.1 274.8
Accounts payable 353.7 334.5
Income taxes 87.0 72.0
Accrued liabilities 588.3 503.0
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TOTAL CURRENT LIABILITIES 1,372.8 1,185.2
LONG-TERM DEBT 718.5 719.2
NONPENSION POSTRETIREMENT BENEFITS 511.5 486.8
DEFERRED INCOME TAXES AND OTHER LIABILITIES 286.9 268.6
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 77.7 77.6
Capital in excess of par value 84.7 68.6
Retained earnings 3,974.5 3,801.2
Treasury stock, at cost (2,129.8) (1,980.6)
Currency translation adjustment (149.4) (159.3)
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TOTAL SHAREHOLDERS' EQUITY 1,857.7 1,807.5
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,747.4 $4,467.3
================================================================================
*Condensed from audited financial statements.
See accompanying notes to consolidated financial statements.
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CONSOLIDATED EARNINGS (Results are unaudited)
=========================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended June 30, Six months ended June 30,
(millions, except per share data) 1995 1994 1995 1994
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NET SALES $1,780.1 $1,616.9 $3,496.1 $3,228.1
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Cost of goods sold 819.7 728.7 1,589.0 1,460.7
Selling and administrative expense 676.0 627.1 1,299.9 1,207.2
Non-recurring charge 52.8 0.0 52.8 0.0
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OPERATING PROFIT 231.6 261.1 554.4 560.2
Interest expense 16.5 11.5 34.5 21.2
Other income (expense), net 5.7 (4.1) 16.3 4.0
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EARNINGS BEFORE INCOME TAXES 220.8 245.5 536.2 543.0
Income taxes 84.9 94.0 204.3 207.6
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NET EARNINGS $135.9 $151.5 $331.9 $335.4
=========================================================================================================
EARNINGS PER SHARE $.62 $.68 $1.51 $1.49
DIVIDENDS PER SHARE $.36 $.34 $.72 $.68
AVERAGE SHARES OUTSTANDING 219.7 224.7 220.4 225.9
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited)
========================================================================================
KELLOGG COMPANY AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30,
(millions) 1995 1994
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OPERATING ACTIVITIES
Net earnings $331.9 $335.4
Items in net earnings not requiring (providing) cash:
Depreciation 137.0 122.8
Pre-tax gain on sale of subsidiaries - (21.1)
Deferred income taxes 4.5 3.2
Non-recurring charges, net of cash paid 43.7 -
Other 3.1 3.0
Pension contribution (61.0) (48.6)
Change in operating assets and liabilities 17.1 11.5
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NET CASH PROVIDED FROM OPERATING ACTIVITIES 476.3 406.2
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INVESTING ACTIVITIES
Additions to properties (144.7) (161.0)
Proceeds from sale of subsidiaries - 83.8
Other 5.9 18.9
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NET CASH USED IN INVESTING ACTIVITIES (138.8) (58.3)
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FINANCING ACTIVITIES
Net borrowings of notes payable 67.3 148.9
Issuance of long-term debt - -
Reduction in long-term debt (0.2) (2.6)
Common stock repurchases (147.6) (206.2)
Cash dividends (158.6) (153.4)
Other 14.6 (0.2)
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NET CASH USED IN FINANCING ACTIVITIES (224.5) (213.5)
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Effect of exchange rate changes on cash (2.2) (0.7)
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Increase in cash and temporary investments 110.8 133.7
Cash and temporary investments at beginning of period 266.3 98.1
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CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD $377.1 $231.8
========================================================================================
See accompanying notes to consolidated financial statements.
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Notes To Consolidated Financial Statements
for the six months ended June 30, 1995
(Unaudited)
1. Accounting policies
The unaudited interim financial information included herein reflects the
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations, financial position, and cash flows for the periods presented. Such
interim information should be read in conjunction with the financial statements
and notes thereto contained on pages 15 to 28 of the Company's Annual Report.
The accounting policies used in preparing these financial statements are the
same as those summarized in the Company's Annual Report.
The results of operations for the six months ended June 30, 1995, are not
necessarily indicative of the results to be expected for other interim periods
or the full year.
2. Non-recurring charge
Operating profit for the six months ended June 30, 1995, includes a
non-recurring charge of $52.8 million ($33.0 million after tax or $.15 per
share) related to productivity and operational streamlining initiatives in the
U.S. and international locations. The charge primarily consists of costs
related to employee benefits and separation payments.
3. Other income/(expense)
Other income for the six months ended June 30, 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 and 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.
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KELLOGG COMPANY
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of operations
Kellogg revenues are generated from the sale of ready-to-eat cereals and other
convenience foods in nearly 160 countries. The ready-to-eat cereal category
continued to exhibit volume growth around the world during the first half of
1995, with Kellogg continuing to demonstrate strong global leadership.
For the second quarter of 1995, the Company exhibited solid growth, reporting
double-digit increases in net sales, net earnings, and earnings per share,
excluding non-recurring charges. These strong results were based primarily on
volume growth combined with aggressive cost containment programs. Management
was especially pleased with the Company's cereal volume growth experienced in
the U.S. market during the quarter, where the industry category was actually
down versus a year ago, and the significant growth in other North American
convenience foods business, which reported a double-digit increase in volume
over last year.
Consolidated net sales increased 10% for the second quarter and 8% for the
first half of 1995 over the comparable periods of 1994, principally from volume
growth, product mix improvements, and higher selling prices.
The Company's total volume was up 6% for the quarter and 4% for the
year-to-date period versus the prior year. Cereal volume increased 3% for both
quarter and year-to-date periods. Cereal volume growth was strong in the
Company's major markets outside the U.S. with the exception of Germany and
Mexico. In Germany the Company faced pressure from softer economic conditions,
while in Mexico the significant currency devaluation coupled with domestic
price inflation resulted in lower volume and increased operating costs. The
Company's management team in Mexico has implemented an aggressive pricing and
cost containment program to offset the impact of these conditions. Volume for
the Company's U.S. ready-to-eat cereal business strengthened slightly during
both the second quarter and the year-to-date period. Other convenience foods
volume increased significantly for the quarter and the year-to-date period
primarily due to strong sales of new products in the North American market.
The gross profit margin for the quarter declined to 54.0% from 54.9% in 1994,
and 54.5% year-to-date, down from 54.8% last year. These declines were
primarily related to the other convenience foods product mix, as ready-to-eat
cereal margins actually improved slightly over 1994. The Company's
manufacturing operations experienced pressure from higher raw material and
packaging costs during the quarter. However, due to increasing plant
efficiencies and productivity improvements, combined with other factors, the
Company has been able to substantially offset the
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negative impact on gross profit margins without passing higher costs through to
customers. Management continues to expect the gross profit margin for the full
year to be in line with 1994.
Selling and administrative expense increased 8% both for the second quarter and
the first half of 1995, but was in line with last year's expense, as measured
as a percentage of net sales. Selling and administrative expense as a
percentage of net sales was 38% for the quarter and 37% for the year-to-date
period, as compared to last year's 39% and 37%, respectively. Beginning in the
second quarter of 1994, a shift in the marketing investment mix occurred toward
advertising from promotion. This trend has continued through the first half of
1995. Management believes that this strategy of emphasizing advertising and
other brand building activities, combined with a strong new product program,
will assist in adding further value to the Company's brand portfolio, thereby
delivering long-term profitable growth.
Management's objective of maximizing shareholder value includes a constant
reassessment of its business strategies. This commitment to position the
Company for continued success was the basis of an announcement in February 1995
of a program to improve productivity and streamline cereal production
operations in the U.S. and certain foreign locations.
Based on final identification of the employees participating in these early
retirement and severance programs, combined with certain additional global
productivity initiatives implemented subsequent to the February announcement,
the Company reported a total non-recurring pre-tax charge during the quarter
of $52.8 million ($33.0 million after tax or $.15 per share). The total pre-tax
charge consists of $17 million of pension benefits, $7 million of retiree
health care accruals, with the balance representing severance payments and
other program-related cash outlays to occur during the balance of 1995 and
1996. These initiatives will eliminate 475 employee positions by the end of
1995, approximately 60% of which are salaried positions primarily in the U.S.
and Europe, with the remainder comprised of hourly workforce in foreign
locations. As a result of this charge, the Company expects to realize annual
pre-tax savings of approximately $20 million beginning in 1996.
Operating profit, excluding the non-recurring charge, increased 9% to $284
million for the quarter and 8% to $607 million, year-to-date. Operating
profit growth reflects the increase in net sales, combined with achieving a
relatively flat per-kilo cost structure for manufacturing and marketing
spending. This quarter, before the non-recurring charge, is the eighth in a
row with year-over-year increases in operating profit.
Other income for the first six months of 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 $18.5
million and $38.3 million for the quarter and year-to-date period respectively,
from $13.2 million and $24.7 million for the
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comparable periods of 1994, due to increased interest rates on short-term
borrowings. This increase in interest expense was substantially offset by
increases in interest income due to higher cash balances.
The Company's second quarter income tax rate was 38.5%. The rate, excluding
the non-recurring charge, was 38.3%, even with the prior year. The 1995 second
quarter tax rate was impacted unfavorably by 1.2 percentage points due to
recognition of an increase in the statutory rate in Australia, retroactive to
the beginning of 1995, partially offset by favorable adjustments in certain
other foreign locations. For the six months ended June 30, 1995, the income
tax rate was 38.1%. Excluding the non-recurring charge, the rate for the first
six months of 1995 was 38.0%, as compared to 38.2% for 1994. The Company
expects its effective income tax rate for 1995 to be between 37% and 38%.
Earnings per share were $.62 for the second quarter and $1.51 for the
year-to-date period. Earnings per share, excluding the non- recurring charge,
were $.77 for the quarter and $1.66 for the year-to-date period, up 13.2% and
11.4% respectively, from the comparable periods of 1994. Net earnings were
$135.9 million for the quarter, and $331.9 million for the year-to-date period.
Net earnings for the quarter, excluding the non-recurring charge, were $168.9
million, up $17.4 million or 11.5% over last year. Net earnings year-to-date
were $364.9 million, up $29.7 million or 8.9%, excluding non-recurring events
for both years.
Liquidity and capital resources
The financial condition of the Company remained strong during the first half of
1995.
Operations provided a strong, positive cash flow of $476.3 million, up 17% from
the prior year, principally due to higher net earnings, adjusted for the
non-cash components of non-recurring items, partially offset by increased
pension funding. 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. The ratio of current assets to current liabilities
was 1.2:1 as of June 30, 1995, unchanged from the ratio at December 31, 1994.
Capital spending for the first six months of 1995 was $144.7 million, compared
with $161.0 million during the first six months of 1994. Although slightly
behind spending levels as of June 30, 1994, management expects total year 1995
capital spending to be about equal to 1994's level at approximately $350
million. The steady level of capital expenditures reflects the Company's
application of value-based management principles and the ongoing strategy of
improving return on invested capital. During the second quarter of 1995, the
Company broke ground for the construction of a new research center, the W. K.
Kellogg Institute, located in Battle Creek, Michigan. This facility is
expected to be completed in 1997 with a total investment of approximately $65
million. During the third quarter of 1995, production is expected to begin at
two new cereal facilities located in Pilar, Argentina and
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Guangzhou, China.
As of June 30, 1995, the Company had spent $147.6 million to purchase
approximately 2.5 million shares of its common stock. Since June of 1994, the
Company has purchased approximately 4.7 million shares, or 2.1% of the total
shares outstanding as of that date, contributing an average of $.03 per quarter
to earnings per share growth over that time period. Stock repurchases are made
under plans authorized by the Company's Board of Directors. The total
authorized purchase amount remaining for 1995 is $177.8 million. Market
conditions permitting, management intends to fully utilize this authorization
by the end of 1995.
Long-term debt outstanding at June 30, 1995, 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 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
and temporary investments) at June 30, 1995, was $685.2 million, down $43.4
million from December 31, 1994. The ratio of debt to total capitalization was
36%, unchanged from December 31, 1994.
At June 30, 1995, 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. The proceeds of 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 $.72 during the first
six months of 1995. The Company has announced an increase in the quarterly
dividend to $.39 from $.36 per share. The new dividend is payable September
15, 1995, to shareholders of record at the close of business on September 1,
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.
As part of the Company's on-going program to streamline its operations, improve
productivity, and reduce costs, on August 1, 1995, management announced its
intent to begin discussions with union leadership regarding a proposed shutdown
of the Company's cereal manufacturing facility in San Leandro, California, by
the end of 1995. This announcement was as a result of an extensive
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examination of the business which led management to conclude that the Company
needed to reduce cereal manufacturing capacity in order to remain competitive
in the North American market. A final decision on the proposed shutdown will
be made following a 60 day period during which management will receive input
from the union representing employees at the facility.
The proposed shutdown of this facility would eliminate about 8% of the
Company's U.S. cereal manufacturing capacity and approximately 325 salaried and
hourly employee positions, and would be expected to generate annual pre-tax
savings of $20-30 million. Due to the preliminary state of union negotiations,
the Company is unable to estimate, at this time, the full cost of closure of
this facility. However, provided this plan is implemented as currently
proposed, it is anticipated that asset write-offs and related removal costs of
$60-$70 million would be included as part of a pre-tax charge to be reported in
either the third or fourth quarter of this year.
The announcement of this plan is an important step in more effectively
utilizing the capacity of the North American operations, lowering the
manufacturing cost structure, and providing greater flexibility in the highly
competitive North American market. Additionally, the Company will continue to
focus on potential worldwide efficiency initiatives that improve its
manufacturing, marketing, logistics and customer service processes while
lowering costs and more effectively utilizing human and financial resources.
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KELLOGG COMPANY
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on April 21,
1995.
Represented at the Meeting, either in person or by proxy were
196,624,144 voting shares, of a total 221,096,969 voting shares
outstanding. The matters voted upon at the Meeting are described in
(c) below.
(c) (i) To elect four (4) directors to serve for three-year (3) terms
expiring at the 1998 Annual Meeting of Stockholders or until
their respective successors are elected and qualified. All
nominees are named below.
Gordon Gund
Votes for Election - 196,019,643
Votes Withheld - 604,501
William E. LaMothe
Votes for Election - 195,991,771
Votes Withheld - 632,373
Russell G. Mawby
Votes for Election - 196,051,181
Votes Withheld - 572,963
Ann McLaughlin
Votes for Election - 195,954,401
Votes Withheld - 669,743
There were no votes against, abstentions, or broker non-votes
with respect to the election of any nominee named above.
(ii) To approve adoption of the Senior Executive Officer
Performance Bonus Plan.
Votes for Proposal - 186,325,592
Votes Against Proposal - 8,335,526
Votes Abstaining - 1,963,026
Broker Non-votes - 0
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Votes Withheld - 0
(iii) To approve adoption of an Amendment to the Certificate of
Incorporation to provide that the size of the Board of
Directors shall not be less than seven (7) nor greater than
fifteen (15) persons.
Votes for Proposal - 192,996,963
Votes Against Proposal - 2,289,232
Votes Abstaining - 1,336,048
Broker Non-votes - 1,901
Votes Withheld - 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.01 - Amended Restated Certificate of Incorporation of the
Company, as amended through April 21, 1995.
3.02 - Bylaws of the Company, as amended through April 21,
1995.
4.01 - There is no instrument with respect to long-term debt
of the Company that involves indebtedness or securities
authorized thereunder exceeding ten percent of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to file a copy of any instrument or
agreement defining the rights of holders of long-term debt of
the Company upon request of the Securities and Exchange
Commission.
10.01 - Senior Executive Officers' Performance Bonus Plan.
27.01- Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this report is filed.
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KELLOGG COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KELLOGG COMPANY
/s/ J. R. Hinton
---------------------------------------
J.R. Hinton
Principal Financial Officer;
Senior Vice President - Administration
/s/ A. Taylor
---------------------------------------
A. Taylor
Principal Accounting Officer;
Vice President and Corporate Controller
Date: August 10, 1995
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KELLOGG COMPANY
EXHIBIT INDEX
Number Description Page
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3.01 Amended Restated Certificate of Incorporation of
the Company, as amended through April 21, 1995 15
3.02 Bylaws of the Company, as amended through
April 21, 1995 25
10.01 Senior Executive Officers' Performance Bonus Plan 42
27.01 Financial Data Schedule 46
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