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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, 1997
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
----- -----
Common Stock outstanding July 31, 1997 - 206,347,543 shares
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KELLOGG COMPANY
INDEX
Page
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PART I - Financial Information
Item 1:
Consolidated Balance Sheet - June 30, 1997 and December 31, 1996 2
Consolidated Statement of Earnings - three and six months ended
June 30, 1997 and 1996 3
Consolidated Statement of Cash Flows - six months ended
June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-7
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
PART II - Other Information
Item 4:
Submission of Matters to a Vote of Security Holders 14-15
Item 6:
Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
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CONSOLIDATED BALANCE SHEET
======================================================================
KELLOGG COMPANY AND SUBSIDIARIES JUNE 30, December 31,
(millions) 1997 1996
(unaudited) *
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CURRENT ASSETS
Cash and cash equivalents $ 203.2 $ 243.8
Accounts receivable, net 630.8 592.3
Inventories:
Raw materials and supplies 140.9 135.2
Finished goods and materials in process 308.2 289.7
Other current assets 322.3 267.6
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TOTAL CURRENT ASSETS 1,605.4 1,528.6
PROPERTY, net of accumulated depreciation
of $2,159.3 and $2,087.2 2,878.8 2,932.9
OTHER ASSETS 606.6 588.5
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TOTAL ASSETS $5,090.8 $5,050.0
======================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $1.4 $501.2
Notes payable 757.4 652.6
Accounts payable 324.5 335.2
Income taxes 76.3 50.5
Accrued liabilities 756.8 659.5
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TOTAL CURRENT LIABILITIES 1,916.4 2,199.0
LONG-TERM DEBT 1,220.0 726.7
NONPENSION POSTRETIREMENT BENEFITS 447.0 494.2
DEFERRED INCOME TAXES AND OTHER LIABILITIES 358.2 347.7
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 78.0 77.9
Capital in excess of par value 143.7 123.9
Retained earnings 4,299.7 4,150.3
Treasury stock, at cost (3,153.6) (2,903.4)
Currency translation adjustment (218.6) (166.3)
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TOTAL SHAREHOLDERS' EQUITY 1,149.2 1,282.4
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,090.8 $5,050.0
======================================================================
*Condensed from audited financial statements.
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF EARNINGS (Results are unaudited)
==================================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended June 30 Six months ended June 30
(millions, except per share data) 1997 1996 1997 1996
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NET SALES $ 1,719.7 $ 1,651.4 $ 3,408.6 $ 3,437.3
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Cost of goods sold 810.8 775.2 1,638.8 1,565.6
Selling and administrative expense 617.5 708.5 1,201.2 1,355.7
Non-recurring charges 12.2 26.1 12.2 35.6
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OPERATING PROFIT 279.2 141.6 556.4 480.4
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Interest expense 27.0 16.1 52.4 29.8
Other income (expense), net 2.0 0.3 2.2 0.7
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EARNINGS BEFORE INCOME TAXES 254.2 125.8 506.2 451.3
Income taxes 90.6 47.7 182.0 167.1
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NET EARNINGS $ 163.6 $ 78.1 $ 324.2 $ 284.2
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EARNINGS PER SHARE $ .79 $ .37 $ 1.56 $ 1.33
PROFORMA EARNINGS PER SHARE, AFTER STOCK SPLIT $ .39 $ .18 $ .78 $ .66
DIVIDENDS PER SHARE $ .42 $ .39 $ .84 $ .78
AVERAGE SHARES OUTSTANDING 207.3 212.7 208.1 213.9
- ------------------------------------------------------------------------------------------------------------------
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) 1997 1996
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 324.2 $ 284.2
Items in net earnings not requiring (providing) cash:
Depreciation and amortization 140.7 126.0
Deferred income taxes 2.6 (0.5)
Non-recurring charges, net of cash paid 1.4 6.4
Other 0.6 35.2
Postretirement benefit plan contributions (83.3) (54.8)
Changes in operating assets and liabilities 28.1 (87.6)
- -------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 414.3 308.9
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INVESTING ACTIVITIES
Additions to properties (131.9) (109.2)
Other (8.0) 3.9
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NET CASH USED IN INVESTING ACTIVITIES (139.9) (105.3)
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (retirements) issuances of notes payable (395.2) 349.2
Issuance of long-term debt 500.0 -
Reductions of long-term debt (6.7) (3.1)
Issuances of common stock 20.1 -
Common stock repurchases (250.4) (356.3)
Cash dividends (174.8) (166.7)
Other - 7.3
- -------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (307.0) (169.6)
- -------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (8.0) (1.6)
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Increase (decrease) in cash and cash equivalents (40.6) 32.4
Cash and cash equivalents at beginning of period 243.8 221.9
- -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $203.2 $254.3
===========================================================================================
Refer to accompanying notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
for the six months ended June 30, 1997 (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 14 to 28 of the Company's 1996 Annual
Report. The accounting policies used in preparing these financial statements
are the same as those summarized in the Company's 1996 Annual Report.
The results of operations for the three and six months ended June 30, 1997, are
not necessarily indicative of the results to be expected for other interim
periods or the full year.
2. Derivative Financial and Commodity Instruments
In January 1997, the SEC issued new rules requiring expanded disclosure for
"market risk-sensitive" financial instruments. These rules will be fully
effective for the Company's annual financial statements for the year ended
December 31, 1997. As required for this interim filing, specific information on
the Company's accounting policies with regard to activities in derivative
financial and commodity instruments is provided below.
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 trading or speculative transactions.
In general, instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. Deferred gains or losses related to any instrument 1)
designated but ineffective as a hedge of existing assets, liabilities, or firm
commitments, or 2) designated as a hedge of an anticipated transaction which is
no longer likely to occur, are recognized immediately in the statement of
earnings.
The Company uses forward contracts to reduce fluctuations in foreign currency
cash flows related to third party raw material purchases, intercompany product
shipments, and intercompany loans. Foreign currency contracts are
marked-to-market with net amounts due to or from counter parties recorded in
accounts receivable or payable. For contracts hedging firm commitments,
mark-to-market gains and losses are deferred and recognized as an adjustment to
the basis of the transaction. For all other contracts, mark-to-market gains and
losses are recognized currently in other income or expense, generally
offsetting gains and losses from underlying hedged transactions. The Company
also uses forward contracts to reduce fluctuations in the value of foreign
currency investments in subsidiaries. These contracts are accounted for as
described above, except that mark-to-market adjustments are recorded in the
cumulative translation adjustment component of shareholders' equity.
The Company uses currency and interest rate swaps, including forward swaps, to
reduce interest rate volatility and funding costs associated with certain debt
issues. Interest rate forward swaps are marked-to-market with net
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amounts due to or from counter parties recorded in interest receivable or
payable. Mark-to-market gains and losses are deferred and recognized over the
life of the debt issue as a component of interest expense. For other swaps
entered into concurrently with the debt issue, the interest or currency
differential to be paid or received on the swap is recognized in the statement
of earnings as incurred, as a component of interest expense. If a swap position
were to be terminated prior to maturity, the gain or loss realized upon
termination would be deferred and amortized to interest expense over the
remaining term of the underlying debt issue or would be recognized immediately
if the underlying debt issue was settled prior to maturity.
The Company uses commodity futures and options to reduce fluctuations in raw
material costs. Commodity contracts are marked-to-market with net amounts due
to or from brokers recorded in accounts receivable or payable. Mark-to-market
gains and losses are deferred and recognized as an adjustment to the basis of
the underlying hedged raw material purchase.
The cash flows related to derivative financial instruments are classified in
the statement of cash flows in a manner consistent with those of the
transactions being hedged.
3. Non-recurring charges
Operating profit for the three and six months ended June 30, 1997, includes
non-recurring charges of $12.2 million ($8.0 million after tax or $.04 per
share). Operating profit for the three months ended June 30, 1996, includes
non-recurring charges of $26.1 million ($16.9 million after tax or $.08 per
share), and for the six month period, $35.6 million ($23.0 million after tax or
$.11 per share). These charges primarily relate to ongoing productivity and
operational streamlining initiatives in the U.S., Europe, and other
international locations, and are comprised principally of expenditures for
employee severance, training and relocation; associated management consulting;
and production redeployment.
4. Earnings per share
Earnings per share are based on the weighted average shares outstanding as
presented. The potential dilution of earnings per share from the exercise of
stock options is not material.
On August 1, 1997, the Company's Board of Directors approved a 2-for-1 stock
split to shareholders of record at the close of business August 8, 1997,
effective August 22, 1997. The proforma effect of applying the stock split is
presented in the Consolidated Statement of Earnings.
5. Long-term Debt
On January 29, 1997, the Company issued $500 million of seven-year 6.625% fixed
rate Euro Dollar Notes. In conjunction with this issuance, the Company settled
$500 million notional amount of interest rate forward swap agreements, which
effectively fixed the interest rate on the debt at 6.354%. The primary purpose
of this debt issuance was to finance the December 1996 acquisition of the
Lender's Bagels business.
The remainder of long-term debt outstanding at quarter-end 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.
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The $200 million of three-year notes and the $300 million of five-year notes
will mature during the third quarter of 1997. To replace these maturing notes,
the Company issued $500 million of four-year 6.125% Euro Dollar Notes on August
5, 1997. In conjunction with this issuance, the Company settled $400 million
notional amount of interest rate forward swap agreements which effectively
fixed the interest rate on the debt at 6.4%. The $500 million of current
maturities were classified as long-term debt as of June 30, 1997.
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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 Company operates in a single industry - manufacturing and marketing
grain-based convenience food products including ready-to-eat cereal, toaster
pastries, frozen waffles, cereal bars, and bagels throughout the world. The
Company holds a 40% annualized share of the global ready-to-eat cereal market.
In North America, the Company is the market leader in the toaster pastry,
cereal/granola bar, frozen waffle, and pre-packaged bagel categories.
For the second quarter of 1997, Kellogg Company reported net earnings of $163.6
million and net earnings per share of $.79, compared to 1996 net earnings of
$78.1 million and net earnings per share of $.37. For the June year-to-date
period, the Company reported net earnings of $324.2 million and net earnings
per share of $1.56, compared to 1996 net earnings of $284.2 million and net
earnings per share of $1.33.
During the current and prior-year periods, the Company reported non-recurring
charges related to productivity and operational streamlining initiatives which
have been excluded from all applicable amounts presented below for purposes of
comparison between years. Refer to the section below on streamlining
initiatives for more information.
Excluding non-recurring charges, the Company reported second quarter 1997 net
earnings per share of $.83, compared to $.45 in the second quarter of 1996,
a period during which results were significantly impacted by unfavorable
competitive conditions in the Company's U.S. and United Kingdom cereal markets.
On a year-to-date basis, net earnings per share were $1.60, an 11.1% increase
over the prior-year results of $1.44. The year-over-year increase in net
earnings per share of $.16 was derived from $.09 of business growth, $.04 of
common stock repurchases, and $.03 in favorable tax rate movements. The
business growth was principally attributable to cereal volume growth in all
four of the Company's global operating regions, continued double-digit growth
in other convenience foods volume, and reductions in manufacturing and
marketing costs.
The Company achieved the following volume growth results for the 1997 second
quarter and June year-to-date periods:
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=========================================================
VOLUME CATEGORY QUARTER YEAR-TO-
DATE
=========================================================
Global Cereal 5.5% 3.0%
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U.S. Cereal 6.6% 2.3%
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Global Total 14.1% 12.2%
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Global Total excluding Lender's* 7.8% 5.2%
=========================================================
* Lender's Bagels business acquired in December 1996.
For the quarter, the significant increase in U.S. cereal volume more than
offset a decline in Canada, resulting in net growth within the Company's North
American region. The Company's European region achieved record quarterly volume
levels, buoyed by a return to growth in the United Kingdom cereal market.
Volume declines in Australia were more than offset by strong increases in other
markets within the Company's Asia-Pacific region. The Company's Latin American
region experienced double-digit growth for the quarter. The Company's other
convenience foods business achieved strong double-digit growth for both the
quarter and year-to-date periods.
For the quarter, consolidated net sales increased 4.1%, with the favorable
volume impact being partially offset by unfavorable pricing, product mix, and
foreign currency movements. On a year-to-date basis, these unfavorable factors
more than offset the favorable volume impact, resulting in a .8% decrease in
consolidated net sales. The unfavorable pricing impact primarily relates to
reductions implemented by the Company during the second quarter of 1996,
averaging 19% on brands comprising approximately two-thirds of its U.S. cereal
business. Excluding the Lender's business, consolidated net sales increased
1.5% for the quarter and decreased 3.6% on a year-to-date basis.
Margin performance for the quarter and year-to-date periods was:
===========================================================================================
SECOND QUARTER YEAR-TO-DATE
===========================================================================================
FAVORABLE FAVORABLE
1997 1996 (UNFAVORABLE) 1997 1996 (UNFAVORABLE)
CHANGE CHANGE
===========================================================================================
Gross Margin 52.9% 53.1% (.2%) 51.9% 54.5% (2.6%)
- -------------------------------------------------------------------------------------------
SGA%* 35.9% 42.9% 7.0% 35.2% 39.4% 4.2%
- -------------------------------------------------------------------------------------------
Operating Margin 16.9% 10.2% 6.7% 16.7% 15.0% 1.7%
- -------------------------------------------------------------------------------------------
Net Margin 10.0% 5.7% 4.3% 9.7% 8.9% .8%
===========================================================================================
* Selling, general, and administrative expense as a percentage of net sales
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Gross margin performance was consistent with net sales movements and was
benefitted by year-over-year operational cost-savings. The significant
improvement in SGA% primarily reflects reduced advertising and promotional
spending in the U.S. market, in line with the Company's integrated pricing
strategy. Additionally, the first half of 1996 included a relatively high level
of spending related to the Company's 90th Anniversary promotional programs,
implementation costs associated with pricing actions, and competitive
conditions in the U.S. cereal market.
The year-over-year improvement in net margin was less than the improvement in
operating margin, principally due to higher interest expense, partially offset
by favorable income tax rate movements. The higher interest expense results
from increased debt levels to fund the Lender's Bagels business acquisition and
the Company's common stock repurchase program. The lower effective tax rate is
primarily due to favorable audit and other adjustments in several
jurisdictions. Information on interest expense and tax rates is presented
below:
=================================================================================================
SECOND QUARTER YEAR-TO-DATE
=================================================================================================
FAVORABLE FAVORABLE
1997 1996 (UNFAVORABLE) 1997 1996 (UNFAVORABLE)
CHANGE CHANGE
=================================================================================================
INTEREST EXPENSE
(MILLIONS):
- -------------------------------------------------------------------------------------------------
As Reported $ 27.0 $ 16.1 $52.4 $29.8
- -------------------------------------------------------------------------------------------------
Capitalized 2.3 .7 4.3 1.4
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Gross $29.3 $16.8 ($12.5) $56.7 $31.2 ($25.5)
- -------------------------------------------------------------------------------------------------
=================================================================================================
EFFECTIVE INCOME
TAX RATE 35.6% 37.5% 1.9% 35.9% 36.9% 1.0%
=================================================================================================
Liquidity and capital resources
The Company's financial condition remained strong throughout the first half of
1997. A strong cash flow, combined with a program of issuing commercial paper
and maintaining worldwide credit facilities, provides adequate liquidity to
meet the Company's operational needs.
Year-to-date, net cash provided by operating activities was $414.3 million,
compared to the prior year level of $308.9 million, with the increase due
principally to higher earnings and favorable working capital movements. The
ratio of current assets to current liabilities was .8 at June 30, 1997, as
compared to .7 at December 31, 1996.
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Net cash used in investing activities was $139.9 million, principally comprised
of $131.9 million in capital spending.
Net cash used in financing activities was $307.0 million, primarily related to
common stock repurchases of $250.4 million and dividend payments of $174.8
million, partially offset by a net increase in total debt of $98.1 million. On
a year-to-date basis, dividends paid per share of common stock increased 8%
over the prior year.
Under existing plans authorized by the Company's Board of Directors, management
spent $250.4 million during the first half of 1997 to repurchase 3.5 million
shares of the Company's common stock at an average price of $71 per share. The
open repurchase authorization as of June 30, 1997, was $164.7 million.
On August 1, 1997, the Company's Board of Directors approved a 2-for-1 stock
split to shareholders of record at the close of business August 8, 1997,
effective August 22, 1997. The proforma impact of this split on net earnings
per share is presented in the Consolidated Statement of Earnings.
On January 29, 1997, the Company issued $500 million of seven-year 6.625% fixed
rate Euro Dollar Notes. In conjunction with this issuance, the Company settled
$500 million notional amount of interest rate forward swap agreements which
effectively fixed the interest rate on the debt at 6.354%. The primary purpose
of this debt issuance was to finance the December 1996 acquisition of the
Lender's Bagels business.
The remainder of long-term debt outstanding at quarter-end 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.
The $200 million of three-year notes and the $300 million of five-year notes
will mature during the third quarter of 1997. To replace these maturing notes,
the Company issued $500 million of four-year 6.125% fixed rate Euro Dollar
Notes on August 5, 1997. In conjunction with this issuance, the Company settled
$400 million notional amount of interest rate forward swap agreements which
effectively fixed the interest rate on the debt at 6.4%. The $500 million of
current maturities were classified as long-term debt as of June 30, 1997.
Short-term debt outstanding at year-end consisted principally of U.S.
commercial paper. The ratio of total debt to market capitalization at June 30,
1997, was 11%, down from 14% at December 31, 1996, principally due to an
increase in the market price of the Company's stock since that date.
At June 30, 1997, 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.
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On April 15, 1997, the Company entered into standby lines of credit totaling
$600 million, with $200 million expiring in 1998 and $400 million expiring in
2002. These lines, which replace $200 million in standby lines of credit
outstanding at December 31, 1996, are maintained as security for performance on
the Company's commercial paper and are unused.
Streamlining Initiatives
Beginning in 1995 to the present, management has commenced numerous
productivity and operational streamlining initiatives in the U.S., Europe, and
other international locations in an effort to optimize the Company's cost
structure and move toward a global business model. The consolidation of
functions and the rationalization of capacity resulted in elimination of
approximately 2,000 employee positions by the end of 1996 and is expected to
result in a further reduction of 600 positions by year-end 1997. The costs of
these programs have been reported throughout 1995-1997 as non-recurring
charges.
Operating profit for the three and six months ended June 30, 1997, includes
non-recurring charges of $12.2 million ($8.0 million after tax or $.04 per
share). Operating profit for the three months ended June 30, 1996, includes
non-recurring charges of $26.1 million ($16.9 million after tax or $.08 per
share), and for the six month period, $35.6 million ($23.0 million after tax or
$.11 per share). These charges were comprised principally of expenditures for
employee severance, training, and relocation; associated management consulting;
and production redeployment.
From these programs, the Company expects to achieve average annual pre-tax
savings of approximately $160 million in 1997 and future years (compared to
the base year of 1995). These savings are not necessarily indicative of future
incremental earnings due to management's commitment to invest in competitive
business strategies, new markets, and growth opportunities.
The foregoing discussion of streamlining initiatives contains forward-looking
statements regarding headcount reductions, cash requirements, and realizable
savings. Actual amounts may vary depending on the final determination of
important factors such as identification of specific employees to be separated
from pre-determined pools; the impact of attrition on involuntary separation
programs; the level of employee participation in out-placement programs,
health care, and other separation benefits; actual amounts of asset removal and
relocation costs; dates of asset disposal and costs to maintain assets up to
the date of disposal; proceeds from asset disposals; final negotiation of third
party contract buy-outs; and other items.
Full Year Outlook
Management believes the Company's implementation of certain pricing measures
during 1996 improved the long-term brand value proposition to the consumer, but
negatively impacted profitability in the short term, extending through the
first quarter of 1997. Based on the results achieved during the second quarter
of 1997, combined with the expectation of benefits to be derived from the
continued implementation of its global business model, management believes the
Company is well-positioned to deliver sales and earnings growth during the
remainder of the year. The Company will continue to identify and pursue
streamlining and productivity initiatives to optimize its cost structure.
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On April 15, 1997, the Company entered into standby lines of credit totaling
$600 million, with $200 million expiring in 1998 and $400 million expiring in
2002. These lines, which replace $200 million in standby lines of credit
outstanding at December 31, 1996, are maintained as security for performance on
the Company's commercial paper and are unused.
Streamlining Initiatives
Beginning in 1995 to the present, management has commenced numerous
productivity and operational streamlining initiatives in the U.S., Europe, and
other international locations in an effort to optimize the Company's cost
structure and move toward a global business model. The consolidation of
functions and the rationalization of capacity resulted in elimination of
approximately 2,000 employee positions by the end of 1996 and is expected to
result in a further reduction of 600 positions by year-end 1997. The costs of
these programs have been reported throughout 1995-1997 as non-recurring
charges.
Operating profit for the three and six months ended June 30, 1997, includes
non-recurring charges of $12.2 million ($8.0 million after tax or $.04 per
share). Operating profit for the three months ended June 30, 1996, includes
non-recurring charges of $26.1 million ($16.9 million after tax or $.08 per
share), and for the six month period, $35.6 million ($23.0 million after tax or
$.11 per share). These charges were comprised principally of expenditures for
employee severance, training, and relocation; associated management consulting;
and production redeployment.
From these programs, the Company expects to achieve average annual pre-tax
savings of approximately $160 million in 1997 and future years (as compared to
the base year of 1995). These savings are not necessarily indicative of future
incremental earnings due to management's commitment to invest in competitive
business strategies, new markets, and growth opportunities.
The foregoing discussion of streamlining initiatives contains forward-looking
statements regarding headcount reductions, cash requirements, and realizable
savings. Actual amounts may vary depending on the final determination of
important factors such as identification of specific employees to be separated
from pre-determined pools; the impact of attrition on involuntary separation
programs; the level of employee participation in out-placement programs,
health care, and other separation benefits; actual amounts of asset removal and
relocation costs; dates of asset disposal and costs to maintain assets up to
the date of disposal; proceeds from asset disposals; final negotiation of third
party contract buy-outs; and other items.
Full Year Outlook
Management believes the Company's implementation of certain pricing measures
during 1996 improved the long-term brand value proposition to the consumer, but
negatively impacted profitability in the short term, extending through the
first quarter of 1997. Based on the results achieved during the second quarter
of 1997, combined with the expectation of benefits to be derived from the
continued implementation of its global business model, management believes the
Company is well-positioned to deliver sales and earnings growth during the
remainder of the year. The Company will continue to identify and pursue
streamlining and productivity initiatives to optimize its cost structure.
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Additional expectations for 1997 include a gross profit margin of 51-52%, an
SG&A% of 34-35%, an effective tax rate of approximately 36%, capital spending
of approximately $300 million, and common stock repurchase activity for the
full year of approximately $415 million. Management expects total interest
expense for 1997 to increase by approximately 70% over 1996 due to higher debt
levels.
During May 1997, the SEC issued disclosure guidance concerning the "Year 2000
Problem" related to the inability of certain computer software programs to
process 2-digit year-date codes ( for example, "00") after December 31, 1999.
To address this matter, the Company has formed a global task force which is
performing a global risk assessment and formulating an action plan to modify
program codes where necessary. Because of significant other systems initiatives
currently under way, management believes that the total cost of the Year 2000
plan will not be significant to the Company's financial results. However,
management does believe that failure by the Company, its customers, or vendors,
to complete the necessary work in a timely manner could result in material
financial risk, and is committed to devoting the necessary resources to
prevent such a failure.
Management is not aware of any adverse trends that would materially affect the
Company's strong financial position. Should suitable investment opportunities
or working capital needs arise that would require additional financing,
management believes that the Company's strong credit rating, balance sheet,
and earnings history provide a base for obtaining additional financial
resources at competitive rates and terms.
The foregoing projections of volume growth, profitability, capital spending,
shareholder dividends, and common stock repurchase activity are forward-looking
statements which involve risks and uncertainties. Actual 1997 results may
differ materially due to the impact of competitive conditions, marketing
spending and/or incremental pricing actions on actual volumes and product mix;
the levels of spending on capital, continued streamlining initiatives, and
other general and administrative costs; raw material price and labor cost
fluctuations; changes in statutory tax law; interest rates available on
short-term financing; the impact of stock market conditions on common stock
repurchase activity; and other items.
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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 Stockholders was held on April 25,
1997.
Represented at the Meeting, either in person or by proxy, were
187,644,448 voting shares, of a total 208,986,548 voting shares
outstanding. The matters voted upon at the Meeting are described in
(c) below.
(c)(i) To elect three (3) directors to serve for three-year (3) terms
expiring at the 2000 Annual Meeting of Stockholders or until their
respective successors are elected and qualified. All nominees are
named below.
Arnold G. Langbo
Votes for Election - 185,731,291
Votes Withheld - 1,913,157
J. Richard Munro
Votes for Election - 185,789,264
Votes Withheld - 1,855,184
Harold A. Poling
Votes for Election - 185,735,797
Votes Withheld - 1,908,651
There were no votes against, abstentions, or broker non-votes
with respect to the election of any nominee named above.
(ii) To approve amendment to the Company's Key Employee Long Term
Incentive Plan to put a maximum on the amount of awards that may be
granted under the Plan.
Votes for Proposal - 182,835,035
Votes Against Proposal - 4,024,446
Votes Abstaining - 784,917
Broker Non-votes - 50
Votes Withheld - 0
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(iii) To approve adoption of the CERES Principles.
Votes for Proposal - 12,060,506
Votes Against Proposal - 161,861,106
Votes Abstaining - 4,581,499
Broker Non-votes - 9,141,335
Votes Withheld - 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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- Key Employee Long Term Incentive Plan, as amended.
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 12, 1997
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KELLOGG COMPANY
EXHIBIT INDEX
Number Description
10.01 Key Employee Long Term Incentive Plan, as amended
27.01 Financial Data Schedule
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