1
EXHIBIT 13.01
SELECTED FINANCIAL DATA
(millions, except per share data)
SUMMARY OF OPERATIONS
========================================================================================================
EARNINGS
(a) BEFORE (a)(b)
NET % OPERATING % ACCOUNTING % NET %
SALES GROWTH PROFIT GROWTH CHANGE GROWTH EARNINGS GROWTH
- --------------------------------------------------------------------------------------------------------
10-year
Compound
Growth Rate 9% 4% 6% 6%
1995 $7,003.7 7 $837.5 (28) $490.3 (30) $490.3 (30)
1994 6,562.0 4 1,162.6 16 705.4 4 705.4 4
1993 6,295.4 2 1,004.6 (5) 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
========================================================================================================
============================================================================================
PER COMMON SHARE DATA (c)
-------------------------------------------
EARNINGS
BEFORE (a)(b) AVERAGE
ACCOUNTING NET CASH BOOK SHARES SHAREHOLDERS'
CHANGE EARNINGS DIVIDENDS VALUE OUTSTANDING EQUITY
- --------------------------------------------------------------------------------------------
10-year
Compound
Growth Rate 7% 7% 13%
1995 $2.24 $2.24 $1.50 $7.34 219.2 $1,590.9
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
============================================================================================
OTHER INFORMATION AND FINANCIAL RATIOS
============================================================================================================
PROPERTY, CAPITAL TOTAL ADVERTISING R&D NUMBER OF
NET EXPENDITURES DEPRECIATION ASSETS EXPENSE EXPENSE EMPLOYEES
- ------------------------------------------------------------------------------------------------------------
1995 $2,784.8 $315.7 $258.8 $4,414.6 $891.5 $72.2 14,487
1994 2,892.8 354.3 256.1 4,467.3 856.9 71.7 15,657
1993 2,768.4 449.7 265.2 4,237.1 772.4 59.2 16,151
1992 2,662.7 473.6 231.5 4,015.0 782.3 56.7 16,551
1991 2,646.5 333.5 222.8 3,925.8 708.3 34.7 17,017
1990 2,595.4 320.5 200.2 3,749.4 648.5 38.3 17,239
1989 2,406.3 508.7 167.6 3,390.4 611.4 42.9 17,268
1988 2,131.9 538.1 139.7 3,297.9 560.9 42.0 17,461
1987 1,738.8 478.4 113.1 2,680.9 486.9 40.0 17,762
1986 1,281.1 329.2 92.7 2,084.2 355.6 38.2 17,383
1985 1,035.9 245.6 75.4 1,726.1 302.2 33.9 17,082
============================================================================================================
=========================================================================================================
FINANCIAL RATIOS
-------------------------------------------
PRETAX CASH (USED IN)/
INTEREST RETURN ON DEBT TO CASH PROVIDED BY
CURRENT COVERAGE AVERAGE TOTAL PROVIDED BY FINANCING LONG-TERM
RATIO (TIMES) EQUITY CAPITAL OPERATIONS ACTIVITIES DEBT
- ---------------------------------------------------------------------------------------------------------
1995 1.1 12 29% 36% $1,041.0 ($759.2) $717.8
1994 1.2 23 40% 36% 966.8 (559.5) 719.2
1993 1.0 27 37% 35% 800.2 (464.2) 521.6
1992 1.2 33 21% 21% 741.9 (422.6) 314.9
1991 .9 17 30% 18% 934.4 (537.7) 15.2
1990 .9 10 28% 26% 819.2 (490.9) 295.6
1989 .9 10 30% 34% 533.5 (143.2) 371.4
1988 .9 14 36% 32% 492.3 52.1 272.1
1987 .9 14 38% 27% 523.5 (130.5) 290.4
1986 1.1 13 40% 31% 542.7 (144.1) 264.1
1985 1.4 11 48% 38% 449.7 (384.4) 392.6
=========================================================================================================
(a) Operating profit for 1995 includes non-recurring charges of $421.8
million ($271.3 million after tax or $1.24 per share). Operating profit
for 1993 includes non-recurring charges of $64.3 million ($41.1 million
after tax or $.18 per share). See Management's Discussion and Analysis on
pages 16-19 and Note 4 within Notes to Consolidated Financial Statements
for further explanation.
(b) Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards (SFAS) #106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The transition effect of adopting SFAS #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 $144.6
million of income tax benefit. The Company adopted SFAS #106 on a
worldwide basis; however, costs associated with subsidiaries outside North
America are insignificant. Net earnings for 1989 include a $48.1 million
gain ($.20 per share) resulting from the adoption of SFAS #96, "Accounting
for Income Taxes," as of January 1, 1989.
(c) All per share data retroactively restated to reflect 2 for 1 stock splits
in 1991 and 1986.
15
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Kellogg revenues are generated from the sale of ready-to-eat cereals and other
grain-based convenience foods in nearly 160 countries. During 1995, the
Company continued to demonstrate strong global market leadership with a 42%
annual share of worldwide cereal category volume; 36% in North America, 48% in
Europe, 48% in Asia-Pacific, and 69% in Latin America.
1995 was a year in which the Company took major steps to position itself for
the future, initiating various programs to streamline operations and improve
productivity. These initiatives, and related non-recurring charges incurred,
are described below. Excluding these non-recurring charges, the Company
exhibited strong increases in earnings and earnings per share, driven by a
return to growth in the U.S. cereal business, low double-digit volume growth in
other convenience foods, and an aggressive focus on cost efficiencies.
[GRAPH]
1995 Geographic Net Sales - The 1995 Geographic Net Sales graph shows in pie
chart form, the relative proportion of the Company's 1995 net sales
attributable to major geographic segments as follows: United States 58%,
Europe 26%, Other 16%.
[END GRAPH]
Consolidated net sales increased 7% over 1994, principally from volume growth
and product mix improvements. On a geographic basis, sales increased 6% in the
U.S., 9% in Europe, and 5% in all other areas. Foreign currency movements had
an insignificant effect on consolidated net sales, but contributed favorably by
7% in Europe and unfavorably by 13% in other non-U.S. areas, primarily due to
the significant currency devaluation in Mexico.
The Company's total volume was up 4% versus the prior year. Excluding results
of divested businesses, total volume increased 5%. Despite intense competitive
pressure in all developed markets, Kellogg's global cereal volume grew 3%
during 1995, driven by shipment increases in North American, Continental
Europe, and Asia-Pacific markets. Latin America experienced slightly lower
shipments, as a volume reduction in Mexico, resulting from the effect on the
local economy of 1994's peso devaluation, was partially offset by strong growth
in other Latin American markets. Other convenience foods volume growth was
driven by strong sales of new products in the North American market, where the
Company continues to hold the number one position in dollar sales in the
toaster pastry, cereal/granola bar, and frozen waffle categories.
The gross profit margin decreased to 54.6% from 55.0% in 1994, primarily due to
changes in product mix and higher costs in North American operations.
Management expects 1996 margins to be in line with 1995, with increased plant
efficiencies and productivity improvements helping to offset continued pressure
from higher raw material and packaging costs.
Selling and administrative expense for 1995 was up 5% over 1994, and
represented 36.6% of net sales, down .7 percentage points from the prior year.
The decrease in selling and administrative expense as a percentage of net sales
reflects the Company's continued emphasis on cost containment and carefully
managed marketing spending. In line with the Company's long-term strategy,
which was initiated in early 1994, there has been a shift over the last two
years from price promotion on established brands toward advertising and other
brand value-building activities. Management believes that this strategy,
combined with a strong new-product development program, will assist in adding
further value to the Company's brand portfolio, thereby delivering long-term
profitable growth.
================================================================================================================
Operating Profit by Area United
(millions) States Europe Other Consolidated
- ----------------------------------------------------------------------------------------------------------------
1995 operating profit as reported $443.1 $293.6 $100.8 $ 837.5
Non-recurring charges 325.0 38.4 58.4 421.8
- ----------------------------------------------------------------------------------------------------------------
Operating profit excluding non-recurring charges $768.1 $332.0 $159.2 $1,259.3
- ----------------------------------------------------------------------------------------------------------------
1994 operating profit as reported $708.5 $287.5 $166.6 $1,162.6
- ----------------------------------------------------------------------------------------------------------------
% growth - 1995 versus 1994, excluding non-recurring charges +8% +15% -4% +8%
================================================================================================================
Operating profit, excluding non-recurring charges of $421.8 million, increased
8% to $1.26 billion. Operating profit, excluding the charges, was up 8% in the
U.S., up 15% in Europe, and down 4% in all other areas. Excluding both
non-recurring charges and foreign currency impact, operating profit was up 7%
in Europe and up 18% in other non-U.S. areas. While foreign currency movements
had a significant impact on geographic results, the net unfavorable impact on
consolidated operating profit was only 1%.
Gross interest expense, prior to amounts capitalized, increased to $69.8
million for 1995, up $17.5 million from 1994, due primarily to increased
interest rates on short-term borrowings. This increase in interest expense was
substantially offset by increases in interest income due to higher average cash
balances throughout the year. The Company expects interest expense during 1996
to remain at 1995 levels.
Other income for 1994 included 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
16
3
expense for 1994 included 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.
The Company's effective income tax rate for the year, excluding the effect of
non-recurring charges, was 37.5%, .1 percentage point lower than the
comparable rate for 1994. The Company expects its effective income tax rate
for 1996 to remain between 37% and 38%. The Company's effective income tax
rate for 1995, including the effect of non-recurring charges, was 38.4%.
Earnings per share for 1995 were $2.24, compared to $3.15 in 1994. Net
earnings were $490.3 million versus $705.4 million for the prior year.
Excluding all non-recurring events for both years, net earnings for 1995 were
$761.6 million, up 8%, and earnings per share were $3.48, up 10% or $.33 over
1994, derived from $.31 in business growth, $.05 in share repurchase, and $.01
in tax rate reduction, partially offset by a $.04 negative foreign currency
exchange effect. Foreign currency movements contributed favorably to net
earnings by 6% in Europe and unfavorably by 21% in other non-U.S. areas,
netting to an unfavorable consolidated impact of only 1%.
[GRAPH]
Drivers of EPS Growth - 1995 vs. 1994 (excluding non-recurring events) - The
Drivers of EPS Growth graph shows, in a stacked single cylinder form, the
relative contributions to the Company's 1995 earnings per share increase versus
1994, excluding non-recurring events in both periods. The drivers were
Business Growth, Share Repurchase, Tax Rate, and Foreign Exchange for $.31,
$.05, $.01, and ($.04), respectively.
[END GRAPH]
1994 COMPARED TO 1993
Consolidated 1994 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 1994 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 9% in all other
areas.
The Company's total volume was down 2% in 1994 versus 1993. However, excluding
results of divested businesses, total volume increased 2% over 1993, buoyed by
strong growth in the U.S. convenience foods market.
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 competitive pressure and
the Company's introduction of its new strategy on pricing and market spending.
The gross profit margin strengthened to 55.0%, 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.
Selling and administrative expense for 1994 was up 9% over 1993, and was 37.3%
of net sales, up one percentage point from the prior year, representing
investment in value-added marketing and new-product research and development.
Operating profit was $1.16 billion, up 9% from 1993 operating profit,
excluding non-recurring charges. Excluding the results of divested businesses
and non-recurring charges, operating profit was up 11% in total, 10% in the
U.S., 15% in Europe, and 11% in all other areas. Foreign currency movements
contributed favorably by 3% in Europe and less than 1% in other non-U.S. areas.
Reported operating profit for 1993 was $1.00 billion and included non-recurring
charges of $64.3 million ($41.1 million after tax or $.18 per share)
principally from the write-down of certain assets in Europe and North America.
Other income for 1993 included a 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 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.
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'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 was the one-time favorable impact of statutory rate reductions
in several foreign jurisdictions during 1993.
Earnings per share for 1994 were $3.15, up 7%. Net earnings were $705.4
million, an increase of 4%. Excluding all non-recurring 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%.
17
4
LIQUIDITY AND CAPITAL RESOURCES
The financial condition of the Company remained strong during 1995. Consistent
with historical results, operations provided a strong, positive cash flow
during 1995 which resulted in net cash provided from operations of $1.04
billion, principally due to higher net earnings, adjusted for the non-cash
components of non-recurring events, and improved working capital management.
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 $623.5 million of short-term lines of
credit, of which $607.9 million were available. The ratio of current assets to
current liabilities was 1.1:1.0 as of December 31, 1995, and 1.2:1.0 at
December 31, 1994.
Net cash used in investing activities for 1995 was $308.9 million, primarily
related to capital spending of $315.7 million. Capital expenditures decreased
by $38.6 million from $354.3 million during 1994, 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 and other convenience foods consumption. As a result, the Company
opened new plants in Latvia in 1993, India in 1994, China and Argentina in
1995, and commenced construction of a new plant in Thailand in early 1996.
Also, construction began in 1995 on the Company's new food 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. Management anticipates that 1996 capital expenditures will be
$300-$350 million.
Net cash used in financing activities was $759.2 million related primarily to
common stock repurchases and dividends. During 1995, the Company spent $374.7
million to purchase 5,684,864 shares of its common stock, contributing $.05 to
earnings per share growth over that time period. Stock repurchases are made
under plans authorized by the Company's Board of Directors. On September 21,
1995, the Board authorized the additional purchase of up to $400 million in
Company stock through December 31, 1996. As of December 31, 1995, the total
remaining authorized purchase amount was $350.7 million. Market conditions
permitting, management intends to fully utilize this authorization by the end
of 1996.
[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 31% and 69% respectively.
[END GRAPH]
Dividends paid per share of common stock increased 7% to $1.50 in 1995,
marking the 39th consecutive year of increase. Management believes the trend
of increased dividends will continue in 1996. Total dividends paid during 1995
were $328.5 million.
Long-term debt outstanding at year-end 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 at year-end 1995 and 1994 consisted principally of U.S.
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, 1995, was $685.8 million, down $42.8 million from December 31,
1994, as the increase in operating cash flow during the year allowed the
Company to reduce short-term debt. The ratio of debt to total capitalization
was 36%, unchanged from December 31, 1994.
At December 31, 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.
NON-RECURRING CHARGES
Management's objective to maximize shareholder value includes a constant
reassessment of its business strategies. The Company's commitment to be
positioned for future success was the basis of several initiatives announced
during 1995 to improve productivity and streamline global operations.
During 1995, the Company recorded total non-recurring charges of $421.8 million
($271.3 million after tax or $1.24 per share), primarily related to
streamlining initiatives. Approximately 2,000 employee positions will be
eliminated by the end of 1996, nearly 13% of the global workforce at December
1994, through a combination of voluntary early retirement incentives, and
voluntary and involuntary severance programs. These initiatives required
pre-tax cash outlays of approximately $40 million in 1995 and will require
additional cash outlays of approximately $120 to $130 million in 1996. The
Company expects to realize approximately $120 million of annual pre-tax savings
by 1997, with about 60% of this amount being achieved in 1996. These savings
are not necessarily indicative of future incremental earnings due to
management's commitment to hold product pricing below the
18
5
rate of inflation, while investing in competitive business strategies, new
markets, and growth opportunities.
During the first half of 1995, plans were announced to improve manufacturing
efficiency in the U.S., Australia, and Great Britain. As a result, the
Company reported total pre-tax charges during the second quarter of $52.8
million related primarily to severance and early retirement programs which
eliminated 475 employee positions.
During the fourth quarter, the Company reported pre-tax charges totaling $369.0
million, comprised of $295.2 million to further streamline operations and $73.8
million for asset impairment losses. The streamlining initiatives were
primarily related to hourly workforce and capacity realignments in the
Company's U.S., European, and Australian manufacturing operations.
Approximately 50% of the streamlining charges relate to employee retirement and
severance benefits, with the remainder consisting principally of asset
write-off and removal costs resulting from a plant closing in San Leandro,
California, and production realignments in other locations.
The asset impairment losses of $73.8 million consisted principally of the
write-down of certain operating assets in North America and the Asia-Pacific
region, and resulted from the evaluation of the Company's ability to recover
asset costs given changes in local market conditions, sourcing of products, and
other strategic factors.
Associated with the 1995 streamlining efforts were additional costs incurred to
redeploy manufacturing and employee resources. The charges reported included
total expenses of $18 million incurred for employee retraining and relocation,
consulting, and relocated production line start-up. The Company expects an
additional $30 million of similar costs in 1996 which will be recorded as
non-recurring charges as incurred. These additional costs are included in the
estimated cash outlay figures for 1996 stated above.
The Company continues to focus on optimizing its worldwide efficiency through
improvements in its manufacturing, marketing, logistics, and customer service
processes while lowering costs and more effectively utilizing human and
financial resources. In early 1996, the Company commenced a plan to
consolidate and reorganize certain aspects of its European operations to better
serve the Pan-European marketplace. Also, the Company intends to further
streamline operations in Australia. As a result, the Company expects to incur
pre-tax non-recurring charges during 1996 of approximately $45 to $70 million
related to these initiatives. The foregoing is a forward-looking statement.
Actual amounts may vary depending on the final determination of important
factors such as the magnitude of centralization of operations, the number of
employees affected and the type of separation programs, product sourcing
reviews, asset utilization analyses, and other items which have yet to be
determined. In addition, the recognition of these charges will be dependent
upon the timing of management approvals of elements of the reorganization plan
and specific communications to employees.
For all of the initiatives described above, the combined non-recurring charges
expected to be recognized during 1996 are $75 to $100 million. Refer to Note 4
to the consolidated financial statements for further explanation of
non-recurring charges.
1996 OUTLOOK
Management anticipates that 1996 will be another year of growth for the
Company, achieved through increases in global volume, the continuation of
product pricing below inflation, continual improvements in operating
efficiencies, strong cash flows, and continued share repurchase activity. The
Company's business environment remains highly competitive around the world.
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 provide a base for obtaining additional
financial resources at competitive rates and terms.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) #121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This new
standard requires that long-lived assets be reviewed for impairment whenever
the carrying amount of that asset may not be recoverable. The recoverability
is based on the estimated future cash flows resulting from the use of the
asset. Adoption of SFAS #121 is required in 1996. The Company does not
expect the adoption of SFAS #121 to have a significant impact on the Company's
financial condition or results of operations.
In October 1995, the FASB issued SFAS #123, "Accounting for Stock-based
Compensation". This new standard encourages, but does not require, a
fair-value based method of accounting for stock-based compensation plans.
Adoption of the disclosure requirements of SFAS #123 is required in 1996. The
Company has decided to adopt only the disclosure provisions of SFAS #123 and,
therefore, there will be no impact on the Company's financial condition or
results of operations.
19
6
Kellogg Company and Subsidiaries
CONSOLIDATED EARNINGS AND RETAINED EARNINGS
Year ended December 31,
===============================================================================================
(millions, except per share data) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
NET SALES $7,003.7 $6,562.0 $6,295.4
- -----------------------------------------------------------------------------------------------
Cost of goods sold 3,177.7 2,950.7 2,989.0
Selling and administrative expense 2,566.7 2,448.7 2,237.5
Non-recurring charges 421.8 - 64.3
- -----------------------------------------------------------------------------------------------
OPERATING PROFIT 837.5 1,162.6 1,004.6
- -----------------------------------------------------------------------------------------------
Interest expense 62.6 45.4 33.3
Other income (expense), net 21.1 12.8 62.8
- -----------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 796.0 1,130.0 1,034.1
Income taxes 305.7 424.6 353.4
- -----------------------------------------------------------------------------------------------
NET EARNINGS - $2.24, $3.15, $2.94 PER SHARE 490.3 705.4 680.7
Retained earnings, beginning of year 3,801.2 3,409.4 3,033.9
Dividends paid - $1.50, $1.40, $1.32 per share (328.5) (313.6) (305.2)
- -----------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR $3,963.0 $3,801.2 $3,409.4
===============================================================================================
See notes to consolidated financial statements.
20
7
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
At December 31,
=======================================================================================================
(millions, except share data) 1995 1994
- -------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 221.9 $ 266.3
Accounts receivable, less allowances of $6.4 and $6.2 590.1 564.5
Inventories 376.7 396.3
Other current assets 240.1 206.4
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,428.8 1,433.5
- -------------------------------------------------------------------------------------------------------
PROPERTY, NET 2,784.8 2,892.8
OTHER ASSETS 201.0 141.0
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,414.6 $ 4,467.3
=======================================================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $ 1.9 $ .9
Notes payable 188.0 274.8
Accounts payable 370.8 334.5
Accrued liabilities 704.7 575.0
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,265.4 1,185.2
- -------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 717.8 719.2
OTHER LIABILITIES 840.5 755.4
SHAREHOLDERS' EQUITY
Common stock, $.25 par value, 330,000,000 shares authorized
Issued: 311,128,152 shares in 1995 and 310,356,488 in 1994 77.8 77.6
Capital in excess of par value 105.2 68.6
Retained earnings 3,963.0 3,801.2
Treasury stock, at cost: 94,423,270 shares in 1995 and 88,655,238 in 1994 (2,361.2) (1,980.6)
Currency translation adjustment (193.9) (159.3)
- -------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,590.9 1,807.5
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,414.6 $ 4,467.3
=======================================================================================================
See notes to consolidated financial statements.
21
8
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
================================================================================================
(millions) 1995 1994 1993
- ------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 490.3 $ 705.4 $ 680.7
Items in net earnings not requiring (providing) cash:
Depreciation 258.8 256.1 265.2
Pre-tax gain on sale of subsidiaries -- (26.7) (65.9)
Deferred income taxes (78.7) 24.5 (22.3)
Non-recurring charges, net of cash paid 385.3 -- 64.3
Other 9.1 22.2 15.6
Pension contributions (74.5) (71.5) (68.0)
Changes in operating assets and liabilities 50.7 56.8 (69.4)
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 1,041.0 966.8 800.2
- ------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to properties (315.7) (354.3) (449.7)
Proceeds from sale of subsidiaries -- 95.5 95.6
Property disposals 6.3 15.6 19.0
Other .5 7.8 (25.1)
- ------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (308.9) (235.4) (360.2)
- ------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net borrowings of notes payable (86.8) (111.9) 176.7
Issuance of long-term debt -- 200.0 208.3
Reduction in long-term debt (.4) (2.9) (1.7)
Issuance of common stock 36.8 2.3 2.9
Common stock repurchases (374.7) (327.3) (548.1)
Cash dividends (328.5) (313.6) (305.2)
Other (5.6) (6.1) 2.9
- ------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (759.2) (559.5) (464.2)
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (17.3) (3.7) (4.0)
- ------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (44.4) 168.2 (28.2)
Cash and cash equivalents at beginning of year 266.3 98.1 126.3
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 221.9 $ 266.3 $ 98.1
================================================================================================
See notes to consolidated financial statements.
22
9
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 capitalized interest associated with
significant capital additions.
Advertising
The costs of advertising are generally expensed as incurred.
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 period.
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 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 $32.0 million in 1995, $37.5 million in 1994, and $43.7 million in 1993.
At December 31, 1995, future minimum annual rental commitments under
non-cancelable operating leases totalled $47.4 million consisting of $15.7
million for 1996, $11.0 million for 1997, $6.2 million for 1998, $4.1 million
for 1999, $3.6 million for 2000, and $6.8 million in later years.
NOTE 3 OTHER INCOME AND EXPENSE
Other income and expense includes non-operating items such as interest income,
foreign exchange gains and losses, and charitable donations.
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
to The J. M. Smucker Co. Other expense for 1994 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.
Other income for 1993 includes a 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 gain of $33.7
million ($22.2 million after tax or $.10 per share) from the sale of the
Argentine snack food business.
NOTE 4 NON-RECURRING CHARGES
Operating profit for 1995 includes total non-recurring charges of $421.8
million ($271.3 million after tax or $1.24 per share), comprised of $348.0
million related to streamlining initiatives and $73.8 million for asset
impairment losses.
The streamlining initiatives primarily concerned operational workforce and
capacity realignments in the U.S., Australia, and Europe, eliminating
approximately 2,000 employee positions by the end of 1996 through a
combination of voluntary early retirement incentives, and voluntary and
involuntary severance programs. These initiatives required pre-tax cash
outlays of approximately $40 million in 1995 and will require additional cash
outlays of approximately $120 to $130 million in 1996. The Company expects to
realize approximately $120 million of annual pre-tax savings by 1997, with
about 60% of this amount being achieved in 1996.
Associated with the 1995 streamlining efforts were additional costs incurred to
redeploy manufacturing and employee resources. The charges reported included
total expenses of $18 million incurred for employee retraining and relocation,
consulting, and relocated production line start-up. The Company expects an
additional $30 million of similar costs in 1996 which will be recorded as
non-recurring charges as incurred. These additional costs are included in the
estimated cash outlay figures for 1996 stated above.
The components of the streamlining charges, as well as reserve balances
remaining at December 31, 1995, were:
=========================================================================================
Amounts charged
--------------------------- Amounts Remaining
(millions) Cash Non-cash Total utilized reserve
- -----------------------------------------------------------------------------------------
Employee retirement
and severance benefits (a) $183.6 $183.6 $126.1 $57.5
Asset write-offs 106.5 106.5 106.5 ---
Asset removal 39.5 39.5 3.0 36.5
Other 18.4 18.4 18.4 ---
- -----------------------------------------------------------------------------------------
$241.5 $106.5 $348.0 $254.0 $94.0
=========================================================================================
(a) Includes approximately $100 million of pension and post-retirement health
care curtailment losses and special termination benefits recognized in the
current year. Refer to Notes 8 and 9.
The asset impairment losses of $73.8 million consist principally of the
write-down of certain operating assets in North America and the Asia-Pacific
region, and result from the evaluation of the Company's ability to recover
asset costs given changes in local market conditions, sourcing of products, and
other strategic factors.
Operating profit for 1993 includes non-recurring charges of $64.3 million
($41.1 million after tax or $.18 per share) principally from the write-down of
certain assets in Europe and North America.
NOTE 5 SHAREHOLDERS' EQUITY
Under plans authorized by the Board of Directors, the Company purchased
5,684,864 shares of its common stock in 1995, 6,194,500 shares in 1994, and
9,487,508 shares in 1993. 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.
23
10
Components of shareholders' equity were:
===================================================================================================================================
Minimum
Common stock Capital in Treasury stock pension Currency
----------------- excess of Retained ----------------- liability translation
(millions) shares amount par value earnings shares amount adjustment adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 310.2 $77.5 $69.2 $3,033.9 72.9 ($1,105.0) $ -- ($130.4)
Stock options exercised .1 .1 2.8
Net earnings 680.7
Dividends (305.2)
Exchange adjustments (36.8)
Minimum pension liability adjustment (25.3)
Common stock repurchases 9.5 (548.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 310.3 77.6 72.0 3,409.4 82.4 (1,653.1) (25.3) (167.2)
Stock options exercised .1 2.3
Net earnings 705.4
Dividends (313.6)
Exchange adjustments 7.9
Minimum pension liability adjustment 25.3
Common stock repurchases 6.2 (327.3)
Other (5.7) .1 (.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 310.4 77.6 68.6 3,801.2 88.7 (1,980.6) -- (159.3)
Stock options exercised .7 .2 36.6
Net earnings 490.3
Dividends (328.5)
Exchange adjustments (34.6)
Common stock repurchases 5.7 (374.7)
Other -- (5.9)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 311.1 $77.8 $105.2 $3,963.0 94.4 ($2,361.2) $ -- ($193.9)
===================================================================================================================================
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, 1995, were $173.4 million with an effective interest rate of 5.7%
and at December 31, 1994, were $243.3 million with an effective interest rate
of 5.9%. At December 31, 1995, the Company had $623.5 million of short-term
lines of credit, of which $607.9 million were unused and available for
borrowing on an unsecured basis.
Long-term debt at year-end consisted of:
===========================================================
(millions) 1995 1994
- -----------------------------------------------------------
(a) Three-Year Notes due 1997 $200.0 $200.0
(b) Five-Year Notes due 1998 200.0 200.0
(c) Five-Year Notes due 1997 299.6 299.4
Other 20.1 20.7
- -----------------------------------------------------------
719.7 720.1
Less current maturities (1.9) (.9)
- -----------------------------------------------------------
Balance, December 31 $717.8 $719.2
===========================================================
(a) In September 1994, the Company issued $200 million of three-year 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. This swap expired
in December 1995.
(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, 1995.
Scheduled principal repayments on long-term debt are (in millions): 1996-$2,
1997-$502, 1998-$206, 1999-$1, 2000-$1.
Interest paid, net of amounts capitalized, approximated interest expense in
each of the three years ended December 31, 1995. Interest expense capitalized
as part of the construction cost of fixed assets was (in millions):
1995-$7.2; 1994-$6.9; 1993-$7.1.
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 grants, and other
stock-based awards. 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. Under these plans, 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 10-year period following the date of grant, subject
to vesting rules. Options awarded to executive-level employees are vested at
the date of grant, while options awarded to other employees are subject to
graded vesting over a five-year period.
The Key Employee Long-Term Incentive 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 the Key Employee Long-Term Incentive Plan, options for 9,949,433 and
8,905,323 shares were available for grant at January 1, 1995, and December 31,
1995, respectively. Under the Kellogg Employee Stock Ownership Plan, options
for 5,228,710 and 4,616,160 shares were available for grant at January 1, 1995,
and December 31, 1995, respectively.
24
11
Transactions under these plans were:
=======================================================================================
1995 1994 1993
- ---------------------------------------------------------------------------------------
Under option, January 1 3,805,335 2,434,587 1,909,382
Granted 2,588,928 1,607,984 848,885
Exercised (1,915,322) (85,647) (293,494)
Cancelled (56,183) (151,589) (30,186)
- --------------------------------------------------------------------------------------
Under option, December 31 4,422,758 3,805,335 2,434,587
- --------------------------------------------------------------------------------------
Exercisable, December 31 3,052,873 3,034,195 2,434,587
- --------------------------------------------------------------------------------------
Shares available, December 31, for
options that may be granted 13,521,483 15,178,143 10,620,578
- --------------------------------------------------------------------------------------
Average prices per share
Exercised $54.61 $38.20 $45.46
Under option, December 31 $59.15 $56.03 $56.95
======================================================================================
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. Investment in Company common stock represented 8.9% and 7.7% of
consolidated plan assets at December 31, 1995 and 1994, respectively.
The components of pension expense were:
========================================================================================
(millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------
Service cost $27.4 $29.0 $24.9
Interest cost 66.0 60.3 57.8
Actual (return) loss on plan assets (163.3) (3.5) (76.3)
Net amortization and deferral 100.3 (51.0) 26.7
Curtailment loss and special termination benefits expense 77.7 - -
- ----------------------------------------------------------------------------------------
Pension expense - Company plans 108.1 34.8 33.1
Pension expense - multiemployer plans 1.8 2.0 3.1
- ----------------------------------------------------------------------------------------
Total pension expense $109.9 $36.8 $36.2
========================================================================================
The worldwide weighted average actuarial assumptions were:
=========================================================================================
1995 1994 1993
- -----------------------------------------------------------------------------------------
Discount rate 7.5% 8.3% 7.9%
Long-term rate of compensation increase 5.1% 5.3% 5.4%
Long-term rate of return on plan assets 9.6% 9.5% 9.5%
=========================================================================================
Reconciliation of funded status of the plans at year-end was:
========================================================================================
UNDERFUNDED Overfunded
(millions) 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------
Accumulated benefit obligation:
Nonvested $ 43.3 $ 5.6 $ 37.3 $ 51.7
Vested 228.9 35.0 562.9 592.4
- ----------------------------------------------------------------------------------------
Total 272.2 40.6 600.2 644.1
Projected salary increases 60.9 14.6 45.0 89.7
- ----------------------------------------------------------------------------------------
Projected benefit obligation 333.1 55.2 645.2 733.8
Plan assets at fair value 227.8 9.5 680.3 711.9
- ----------------------------------------------------------------------------------------
Assets (less) greater than
projected benefit obligation (105.3) (45.7) 35.1 (21.9)
Unrecognized net (gain) loss 46.0 7.7 22.8 83.3
Unrecognized transition amount (5.1) (2.5) 2.2 .4
Unrecognized prior service cost 11.8 4.9 38.5 56.3
Minimum liability adjustment (7.3) (1.9) - -
- ----------------------------------------------------------------------------------------
Prepaid (accrued) pension ($59.9) ($37.5) $98.6 $118.1
========================================================================================
Curtailment losses and special termination benefits expense recognized in 1995
relate to operational workforce reduction initiatives undertaken during the
year and are recorded as a component of non-recurring charges. Refer to Note 4
for further explanation.
The amount of intangible assets related to underfunded pension plans was $7.3
million and $1.9 million at year-end 1995 and 1994, respectively. All gains
and losses, other than curtailment losses, are recognized over the average
remaining service period of active employees.
The Company and certain subsidiaries sponsor 401(k) or similar savings plans
for active employees. Expense related to these plans was (in millions):
1995-$18; 1994-$16; 1993-$16.
NOTE 9 NONPENSION POSTRETIREMENT BENEFITS
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 is met: 30 years
and any age; 20 years and age 55; 5 years and age 62.
Components of postretirement benefit expense were:
==========================================================================================
(millions) 1995 1994 1993
- ------------------------------------------------------------------------------------------
Service cost $11.8 $13.3 $12.1
Interest cost 41.5 39.2 38.6
Net amortization and deferral (.6) 3.1 1.0
Curtailment loss 26.3 - -
- ------------------------------------------------------------------------------------------
Postretirement benefit expense $79.0 $55.6 $51.7
==========================================================================================
Discount rate used for accumulated benefit obligation 7.25% 8.50% 7.75%
==========================================================================================
The assumed health care cost trend rate was 8.0% for 1995, 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. 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, 1995, by $68.9 million and
postretirement benefit expense for 1995 by $8.5 million. All gains and losses,
other than curtailment losses, are recognized over the average remaining
service period of active plan participants. Curtailment losses recognized in
1995 relate to operational workforce reduction initiatives undertaken during
the year and are recorded as a component of non-recurring charges. Refer to
Note 4 for further explanation. The Company's postretirement health care plans
currently are not funded.
The accrued postretirement benefit cost included in the balance sheet at
year-end was:
================================================================================
(millions) 1995 1994
- --------------------------------------------------------------------------------
Accumulated benefit obligation:
Retirees $270.2 $250.7
Active plan participants 300.9 254.5
- --------------------------------------------------------------------------------
571.1 505.2
Unrecognized experience gain (loss) (14.2) 1.0
Unrecognized prior service adjustments 9.2 (.5)
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $566.1 $505.7
================================================================================
25
12
NOTE 10 INCOME TAXES
Earnings before income taxes and the provision for U.S. federal, state, and
foreign taxes on these earnings were:
================================================================================
(millions) 1995 1994 1993
- --------------------------------------------------------------------------------
Earnings before income taxes:
United States $463.1 $ 741.1 $ 703.3
Foreign 332.9 388.9 330.8
- --------------------------------------------------------------------------------
$796.0 $1,130.0 $1,034.1
================================================================================
Income taxes:
Currently payable:
Federal $205.2 $ 207.4 $ 233.0
State 34.7 42.4 38.0
Foreign 144.5 150.3 104.7
- --------------------------------------------------------------------------------
384.4 400.1 375.7
- --------------------------------------------------------------------------------
Deferred:
Federal (81.0) 18.1 (19.4)
State (10.7) .2 (2.2)
Foreign 13.0 6.2 (.7)
- --------------------------------------------------------------------------------
(78.7) 24.5 (22.3)
- --------------------------------------------------------------------------------
Total income taxes $305.7 $ 424.6 $ 353.4
================================================================================
The difference between the U.S. federal statutory tax rate and the Company's
effective rate was:
================================================================================
1995 1994 1993
- --------------------------------------------------------------------------------
U.S. statutory rate 35.0% 35.0% 35.0%
Foreign rates varying from 35% .2 .2 (1.5)
State income taxes, net of federal benefit 2.0 2.5 2.2
Net change in valuation allowance 1.9 .1 --
Other (.7) (.2) (1.5)
- --------------------------------------------------------------------------------
Effective income tax rate 38.4% 37.6% 34.2%
================================================================================
The deferred tax assets and liabilities included in the balance sheet at
year-end were:
==================================================================================
Deferred Deferred
tax assets tax liabilities
(millions) 1995 1994 1995 1994
- ----------------------------------------------------------------------------------
Current:
Promotion and advertising $ 43.3 $ 46.0 $ 6.3 $ 5.8
Wages and payroll taxes 24.9 14.4
Health and postretirement benefits 15.5 15.4 10.4 9.5
State taxes 9.8 8.4
Other 17.3 23.0 18.2 13.9
- ----------------------------------------------------------------------------------
110.8 107.2 34.9 29.2
- ----------------------------------------------------------------------------------
Less valuation allowance (4.0)
- ----------------------------------------------------------------------------------
110.8 103.2 34.9 29.2
- ----------------------------------------------------------------------------------
Noncurrent:
Depreciation and asset disposals 24.7 7.0 280.2 313.9
Postretirement benefits 196.3 174.9 6.7 25.2
Capitalized interest 3.1 3.5 32.8 32.7
State taxes 11.1 1.7
Other 13.2 13.8 9.9 8.2
- ----------------------------------------------------------------------------------
248.4 200.9 329.6 380.0
- ----------------------------------------------------------------------------------
Less valuation allowance (32.7) (13.9)
- ----------------------------------------------------------------------------------
215.7 187.0 329.6 380.0
- ----------------------------------------------------------------------------------
Total deferred taxes $326.5 $290.2 $364.5 $409.2
==================================================================================
The 1995 increase in valuation allowance on deferred tax assets and
corresponding impact on the effective income tax rate, as presented above,
primarily relate to asset impairment losses recorded as non-recurring charges
(refer to Note 4) for which no tax benefit was currently provided, based on
management's assessment of the likelihood of recovering such benefits in future
years.
At December 31, 1995, foreign subsidiary earnings of $1.21 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 $74 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): 1995-$404; 1994-$396; 1993-$425.
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, cash equivalents, 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, as a matter of policy, 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 twelve months or
less and are entered into with major international financial institutions. The
notional amounts of open forward contracts and options were $131.1 million and
$91.2 million at December 31, 1995 and 1994, 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.
26
13
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 $400
million and $600 million at December 31, 1995 and 1994, 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 Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange forward contracts and options, and currency
and interest rate swaps. 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 12 QUARTERLY FINANCIAL DATA (UNAUDITED)
====================================================================================
(millions, except
per share data) Net sales Gross profit
1995 1994 1995 1994
- ------------------------------------------------------------------------------------
First $1,716.0 $1,611.2 $ 946.7 $ 879.2
Second 1,780.1 1,616.9 960.4 888.2
Third 1,844.7 1,741.9 1,009.1 985.7
Fourth 1,662.9 1,592.0 909.8 858.2
- ------------------------------------------------------------------------------------
$7,003.7 $6,562.0 $3,826.0 $3,611.3
====================================================================================
Net earnings Earnings per share
1995 1994 1995 1994
- ------------------------------------------------------------------------------------
First $196.0 $183.9 $ .89 $.81
Second (a) 135.9 151.5 .62 .68
Third 230.0 216.7 1.05 .96
Fourth (a) (71.6) 153.3 (.33) .70
- ------------------------------------------------------------------------------------
$490.3 $705.4
====================================================================================
(a) Second quarter of 1995 includes non-recurring charges of $33.0 million
after tax or $.15 per share. Fourth quarter of 1995 includes non-recurring
charges of $238.3 million after tax or $1.10 per share. Refer to Note 4 for
further explanation.
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 1995, the closing price (on the
NYSE) was $77.25 and there were 28,073 shareholders of record. Dividends paid
per share of common stock increased 7% to $1.50 in 1995, marking the 39th
consecutive year of increase. Management believes the trend of increased
dividends will continue in 1996.
Dividends paid and the quarterly price ranges on the NYSE during the last two
years were:
==========================================================
1995 - QUARTER Dividend High Low
Fourth $ .39 $79.50 $70.50
Third .39 73.63 66.75
Second .36 73.88 58.00
First .36 60.38 52.50
- ----------------------------------------------------------
$1.50
==========================================================
1994 - Quarter
- ----------------------------------------------------------
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
==========================================================
NOTE 13 OPERATING SEGMENTS
The Company operates in a single industry - manufacturing and marketing
grain-based convenience food products including ready-to-eat cereal, toaster
pastries, frozen waffles, and cereal bars 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 cash and cash equivalents held for general corporate purposes.
(millions)
=========================================================================================
% % %
NET SALES 1995 CHANGE 1994 change 1993 change
- -----------------------------------------------------------------------------------------
United States $4,080.3 + 6 $3,840.8 + 2 $3,783.9 + 6
% of total 58% 59% 60%
Europe 1,829.1 + 9 1,683.7 + 9 1,545.8 - 8
% of total 26% 26% 25%
Other areas 1,094.3 + 5 1,037.5 + 7 965.7 + 2
% of total 16% 15% 15%
- -----------------------------------------------------------------------------------------
Consolidated $7,003.7 + 7 $6,562.0 + 4 $6,295.4 + 2
=========================================================================================
% % %
OPERATING PROFIT (a) 1995 CHANGE 1994 change 1993 change
- ---------------------------------------------------------------------------------------------
United States $443.1 -37 $ 708.5 + 14 $ 621.6 + 3
% of total 53% 61% 62%
Europe 293.6 + 2 287.5 + 24 231.0 -19
% of total 35% 25% 23%
Other areas 100.8 -39 166.6 + 10 152.0 -13
% of total 12% 14% 15%
- -------------------------------------------------------------------------------------------
Consolidated $837.5 -28 $1,162.6 + 16 $1,004.6 - 5
===========================================================================================
% % %
IDENTIFIABLE ASSETS 1995 CHANGE 1994 change 1993 change
- --------------------------------------------------------------------------------------------
United States $2,286.0 + 2 $2,242.0 - 4 $2,344.8 +14
% of total 52% 50% 55%
Europe 1,269.4 - 1 1,282.5 + 21 1,060.0 - 6
% of total 29% 29% 25%
Other areas 838.5 - 9 923.8 + 14 809.4 + 5
% of total 19% 21% 19%
Corporate assets 20.7 + 9 19.0 - 17 22.9 -49
% of total -- -- 1%
- -------------------------------------------------------------------------------------------
Consolidated $4,414.6 - 1 $4,467.3 + 5 $4,237.1 + 6
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(a) Operating profit for 1995 includes non-recurring charges of $421.8 million
consisting of $325.0, $38.4, and $58.4 million for United States, Europe,
and other areas, respectively. Operating profit for 1993 includes
non-recurring changes of $64.3 million consisting of $36.4, $19.1, and
$8.8 million for the United States, Europe, and other areas, respectively.
Refer to Note 4.
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14
NOTE 14 SUPPLEMENTAL FINANCIAL STATEMENT DATA (millions)
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STATEMENT OF EARNINGS 1995 1994 1993
- --------------------------------------------------------------------------------------------
Research and development expense $ 72.2 $ 71.7 $ 59.2
Advertising expense $891.5 $856.9 $772.4
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STATEMENT OF CASH FLOWS 1995 1994 1993
- --------------------------------------------------------------------------------------------
Change in operating assets and liabilities:
Accounts receivable ($25.6) ($27.7) ($17.7)
Inventories 19.6 6.8 13.3
Other current assets (33.7) (5.4) (32.3)
Accounts payable 36.3 25.7 (5.0)
Accrued liabilities 54.1 57.4 (27.7)
- --------------------------------------------------------------------------------------------
Total change in operating assets and liabilities $50.7 $56.8 ($69.4)
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===============================================================================
BALANCE SHEET 1995 1994
- -------------------------------------------------------------------------------
Raw materials and supplies $ 129.7 $ 141.7
Finished goods and materials in process 247.0 254.6
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Total inventories 376.7 396.3
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Deferred income taxes 91.2 79.4
Other current assets 148.9 127.0
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Total other current assets 240.1 206.4
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Land 50.0 47.3
Buildings 1,202.8 1,122.6
Machinery and equipment 3,283.0 3,141.0
Construction in progress 202.0 289.6
Accumulated depreciation (1,953.0) (1,707.7)
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Property, net 2,784.8 2,892.8
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Accrued income taxes 64.2 72.0
Accrued salaries and wages 121.8 80.5
Accrued advertising and promotion 266.3 257.5
Other accrued liabilities 252.4 165.0
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Total accrued liabilities 704.7 575.0
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Nonpension postretirement benefits 546.1 486.8
Deferred income taxes 201.7 198.1
Other liabilities 92.7 70.5
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Total other liabilities $ 840.5 $ 755.4
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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, 1995 and 1994, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1995, 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.
Price Waterhouse LLP
Battle Creek, Michigan
February 2, 1996
28