1
UNITED STATES
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 March 31, 1999
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 April 30, 1999 - 405,119,760 shares
2
KELLOGG COMPANY
INDEX
PART I - Financial Information Page
Item 1:
Consolidated Balance Sheet - March 31, 1999, and
December 31, 1998 2
Consolidated Statement of Earnings - three months
ended March 31, 1999, and 1998 3
Consolidated Statement of Cash Flows - three months ended
March 31, 1999, and 1998 4
Notes to Consolidated Financial Statements 5-8
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-15
PART II - Other Information
Item 4:
Submission of Matters to a Vote of Security Holders 16
Item 6:
Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
3
CONSOLIDATED BALANCE SHEET
===========================================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES MARCH 31, December 31,
(millions, except per share data) 1999 1998
(unaudited) *
- ---------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $140.4 $136.4
Accounts receivable, net 724.0 693.0
Inventories:
Raw materials and supplies 143.0 133.3
Finished goods and materials in process 330.6 318.1
Other current assets 236.5 215.7
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,574.5 1,496.5
PROPERTY, net of accumulated depreciation
of $2,380.4 and $2,358.0 2,844.5 2,888.8
OTHER ASSETS 672.0 666.2
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,091.0 $5,051.5
===========================================================================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $2.8 $1.1
Notes payable 624.1 620.4
Accounts payable 397.8 386.9
Income taxes 61.3 69.4
Other current liabilities 676.1 640.7
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,762.1 1,718.5
LONG-TERM DEBT 1,611.2 1,614.5
NONPENSION POSTRETIREMENT BENEFITS 435.5 435.2
DEFERRED INCOME TAXES AND OTHER LIABILITIES 398.7 393.5
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 103.8 103.8
Capital in excess of par value 107.4 105.0
Retained earnings 1,391.2 1,367.7
Treasury stock, at cost (394.3) (394.3)
Accumulated other comprehensive income (324.6) (292.4)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 883.5 889.8
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,091.0 $5,051.5
===========================================================================================================================
*Condensed from audited financial statements.
Refer to Notes to Consolidated Financial Statements.
2
4
CONSOLIDATED STATEMENT OF EARNINGS (Results are unaudited)
============================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31,
(millions, except per share data) 1999 1998
- ------------------------------------------------------------------------------------------------------------
NET SALES $1,745.3 $1,642.9
- ------------------------------------------------------------------------------------------------------------
Cost of goods sold 836.4 781.8
Selling and administrative expense 649.4 562.3
Non-recurring charges 36.8 -
- ------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 222.7 298.8
- ------------------------------------------------------------------------------------------------------------
Interest expense 29.0 29.1
Other income (expense), net (2.7) 0.4
- ------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 191.0 270.1
Income taxes 72.2 99.4
- ------------------------------------------------------------------------------------------------------------
NET EARNINGS $118.8 $170.7
============================================================================================================
NET EARNINGS PER SHARE (BASIC AND DILUTED) $.29 $.42
DIVIDENDS PER SHARE $.235 $.225
AVERAGE SHARES OUTSTANDING 405.0 410.2
- ------------------------------------------------------------------------------------------------------------
Refer to Notes to Consolidated Financial Statements.
3
5
CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited)
==============================================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31,
(millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $118.8 $170.7
Items in net earnings not requiring cash:
Depreciation and amortization 68.0 67.3
Deferred income taxes 10.8 1.7
Non-recurring charges, net of cash paid 29.7 -
Other 16.4 10.5
Postretirement benefit plan contributions (33.0) (23.5)
Changes in operating assets and liabilities (61.0) (88.2)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 149.7 138.5
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to properties (55.6) (79.7)
Other 6.8 (3.4)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (48.8) (83.1)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net issuances (reductions) of notes payable 3.7 (318.5)
Issuances of long-term debt - 400.0
Reductions of long-term debt (1.4) (2.6)
Net issuances of common stock 2.4 13.7
Common stock repurchases - (61.3)
Cash dividends (95.3) (92.4)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (90.6) (61.1)
- ------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (6.3) (2.3)
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4.0 (8.0)
Cash and cash equivalents at beginning of period 136.4 173.2
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $140.4 $165.2
==============================================================================================================================
Refer to Notes to Consolidated Financial Statements.
4
6
Notes to Consolidated Financial Statements
for the three months ended March 31, 1999 (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 22 to 32 of the Company's 1998 Annual
Report. Except as discussed below, the accounting policies used in preparing
these financial statements are the same as those summarized in the Company's
1998 Annual Report. Certain amounts for 1998 have been reclassified to conform
with current period classifications.
Effective January 1, 1999, the Company adopted two Statements of Position (SOP)
issued by the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants. SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" provides guidance on the
classification of software project costs between expense and capital. SOP 98-5
"Reporting on Costs of Start-up Activities" prescribes that the costs of opening
a new facility, commencing business in a new market, or similar start-up
activities must be expensed as incurred. SOP 98-1 has been applied on a
prospective basis from January 1, 1999. The initial application of SOP 98-5 was
to be reported as a cumulative effect of a change in accounting principle, if
material. The adoption of these SOPs did not have a significant impact on the
Company's financial results during the quarter ended March 31, 1999.
The results of operations for the three months ended March 31, 1999, are not
necessarily indicative of the results to be expected for other interim periods
or the full year.
2. Earnings per share
Basic net earnings per share is determined by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
net earnings per share is similarly determined, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if all dilutive potential common shares had been issued. Dilutive
potential common shares are principally comprised of employee stock options
issued by the Company and had an insignificant impact on earnings per share
during the periods presented. Basic net earnings per share is reconciled to
diluted net earnings per share as follows (in millions, except per share data):
Average Net
Net shares earnings
earnings outstanding per share
---------------------------------------
1999
Basic $118.8 405.0 $.29
Dilutive employee stock options - .7 -
-------------------------------------
Diluted $118.8 405.7 $.29
=====================================
1998
Basic $170.7 410.2 $.42
Dilutive employee stock options - 1.1 -
-------------------------------------
Diluted $170.7 411.3 $.42
=====================================
5
7
3. Comprehensive Income
Comprehensive income includes all changes in equity during a period except those
resulting from investments by or distributions to shareholders. For the Company,
comprehensive income for the periods presented consists solely of net earnings
and foreign currency translation adjustments pursuant to SFAS No. 52, "Foreign
Currency Translation," as follows (in millions):
Three months ended March 31,
1999 1998
---- ----
Net earnings $118.8 $170.7
Other comprehensive income (loss):
Foreign currency translation adjustment (32.2) 4.0
Related tax effect - (.1)
-------------------------
(32.2) 3.9
-------------------------
Total comprehensive income $86.6 $174.6
=========================
4. Debt
Notes payable primarily consist of commercial paper borrowings in the United
States and borrowings under a $200 million revolving credit agreement in Europe
with several international banks. At March 31, 1999, outstanding borrowings
under the revolving credit agreement were $129.6 million with an effective
interest rate of 5.45%. U.S. borrowings at March 31, 1999, were $411.3 million
with an effective interest rate of 4.86%. Associated with the U.S. borrowings,
the Company holds a $225 million notional, fixed interest rate cap which expires
in September 2001. Under the terms of the cap, if the Federal Reserve AA
Composite Rate on 30-day commercial paper increases to 6.33%, the Company will
pay this fixed rate on $225 million of its commercial paper borrowings. If the
rate increases to 7.68% or above, the cap will expire. As of March 31, 1999, the
rate was 4.84%.
Long-term debt primarily consists of fixed rate issuances of U.S. and Euro
Dollar Notes, including $200 million due in 2005, $500 million due in 2004, and
$900 million due in 2001. The amount due in 2001 includes $400 million in Notes
which provide an option to holders to extend the obligation for an additional
four years at a predetermined interest rate of 5.63% plus the Company's
then-current credit spread.
Associated with several of these long-term debt issuances, the Company has
entered into fixed-to-floating interest rate swaps, generally expiring in
conjunction with the debt issuances, and indexed to either the three-month
London Interbank Offered Rate (LIBOR) or the Federal Reserve AA Composite Rate
on 30-day commercial paper. One of the swap agreements, with a notional value of
$225 million, will expire if three-month LIBOR falls to 4.71% or below. At March
31, 1999, three-month LIBOR was 4.97%. The total notional amount of all interest
rate swaps at March 31, 1999, was $825 million, unchanged from December 31,
1998.
6
8
5. Non-recurring charges
Operating profit for the quarter ended March 31, 1999, includes non-recurring
charges of $36.8 million ($25.6 million after tax or $.07 per share), related to
ongoing overhead activity analysis and other workforce reduction initiatives
around the world. During 1998, management commenced an overhead activity
analysis in North America to better align the Company's work activities to its
growth strategy. The process includes evaluating work performed by employees as
well as consulting and other external services. During the first quarter of
1999, this analysis was extended to Europe and Latin America.
The charges reported during the first quarter of 1999 were principally comprised
of employee retirement and separation benefits, expenditures for employee and
office relocation, and other related costs. Overhead activity analysis and other
new initiatives undertaken during the quarter in Europe, Latin America, and
Asia-Pacific are expected to eliminate or restructure approximately 350 employee
positions by the end of the year and generate approximately $25 million in
pre-tax savings by 2000. Cash outlays for all streamlining initiatives during
the quarter, including those continuing from prior years, was approximately $30
million. Cash outlays for all previously announced initiatives are expected to
be $40-$50 million during the remainder of 1999.
The components of the streamlining charges, as well as reserve balance changes,
during the three months ended March 31, 1999, were (in millions):
Employee
retirement &
severance Asset Asset Other
benefits (a) write-offs removal costs Total
----------------------------------------------------------------------------
Remaining reserve at
December 31, 1998 $39.6 $ - $11.9 $ - $51.5
1999 streamlining charges (a) 26.8 2.2 1.8 6.0 36.8
Amounts utilized during 1999 (26.4) (2.2) (5.0) (6.0) (39.6)
Remaining reserve at
---------------------------------------------------------------------------
March 31, 1999 $40.0 $ - $8.7 $ - $48.7
===========================================================================
(a) Includes approximately $3.8 and $.4 of pension and postretirement health
care special termination benefits, respectively.
7
9
6. Operating Segments
The Company manufactures and markets ready-to-eat cereal and other grain-based
convenience food products, including toaster pastries, frozen waffles, cereal
bars, and bagels, throughout the world. Principal markets for these products
include the United States and Great Britain. Operations are managed via four
major geographic areas - North America, Europe, Asia-Pacific, and Latin America
- - which are the basis of the Company's reportable operating segment information
disclosed below. The measurement of operating segment results is generally
consistent with the presentation of the Consolidated Statement of Earnings.
Intercompany transactions between reportable operating segments were
insignificant in the periods presented. Operating segment data is presented
below (in millions):
Three months ended March 31,
1999 1998
-----------------------------
Net sales
North America $1,128.4 $1,043.4
Europe 388.8 387.4
Asia-Pacific 97.6 91.3
Latin America 128.4 120.8
Corporate and other 2.1 -
----------------------------
Consolidated $1,745.3 $1,642.9
============================
Operating profit excluding non-recurring charges
North America $232.0 $252.5
Europe 41.3 46.0
Asia-Pacific 12.8 12.8
Latin America 30.7 30.2
Corporate and other (57.3) (42.7)
----------------------------
Consolidated 259.5 298.8
Non-recurring charges (36.8) -
---------------------------
Operating profit as reported $222.7 $298.8
===========================
8
10
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 is a leading manufacturer and marketer of ready-to-eat cereal
and other grain-based convenience food products, including toaster pastries,
frozen waffles, cereal bars, and bagels, throughout the world. Principal markets
for these products include the United States and Great Britain. Operations are
managed via four major geographic areas - North America, Europe, Asia-Pacific,
and Latin America.
During the first quarter of 1999, the Company reported strong growth in global
volume and sales. Primarily due to a difficult comparison with the prior year,
the Company experienced a decline in net earnings versus the first quarter of
1998, a period in which the Company's level of marketing spending was not
competitive.
For the quarter ended March 31, 1999, Kellogg Company reported net earnings and
earnings per share of $118.8 million and $.29, respectively, compared to 1998
net earnings of $170.7 million and net earnings per share of $.42. (All earnings
per share presented represent both basic and diluted earnings per share.)
During the current quarter, the Company reported non-recurring charges of $36.8
million ($25.6 million after tax or $.07 per share), related to ongoing overhead
activity analysis and other workforce reduction initiatives around the world.
These charges have been excluded from all applicable amounts presented below for
purposes of comparison between years.
Excluding non-recurring charges, the Company reported first quarter 1999 net
earnings per share of $.36, a 14% decrease from the prior-year result of $.42.
The year-over-year decline in earnings per share primarily resulted from
increased marketing expenditures, partially offset by net sales growth and a
$.01 per share benefit from prior-year share repurchase.
The Company achieved the following volume growth during the first quarter of
1999:
CHANGE
- ----------------------------------------------------------------------------------------
North America +8.7%
Europe +6.1%
Asia-Pacific +12.9%
Latin America +12.1%
- ----------------------------------------------------------------------------------------
Consolidated +8.7%
========================================================================================
========================================================================================
CHANGE
- ----------------------------------------------------------------------------------------
Global cereal +7.4%
Global convenience foods +12.5%
- ----------------------------------------------------------------------------------------
Consolidated +8.7%
========================================================================================
9
11
The North America volume growth was driven by increases in both cereal and
convenience food shipments, buoyed by increased promotional activity, improved
performance in the mass-merchandising channel, and new products. Outside North
America, convenience foods volumes significantly exceeded the prior year in all
operating segments due to continued product roll-out. In Europe, cereal volume
benefited from price reductions and trade promotional programs. Asia-Pacific
cereal shipments were driven by strong volume in the Australian market. Despite
tenuous economic conditions in the region, Latin America achieved solid cereal
volume growth during the quarter, led by a strong performance in Mexico.
Consolidated net sales increased 6.2% versus the prior year, primarily due to
volume gains, partially offset by trade spending and a negative foreign currency
impact of 1.7%. On an operating segment basis, net sales versus the prior year
were:
- -------------------------------------------------------------------------------------------------------------------------
NORTH ASIA- LATIN
AMERICA EUROPE PACIFIC AMERICA CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------
Business +8.6% +.8% +8.9% +21.6% +7.9%
Foreign currency impact -.5% -.5% -2.1% -15.3% -1.7%
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE +8.1% +.3% +6.8% +6.3% +6.2%
- ----------------------------------------------------------------------------------------------------------------------
Net sales by major product group were:
- ----------------------------------------------------------------------------------------
1999 1998 CHANGE
- ----------------------------------------------------------------------------------------
Global cereal $1,330.3 $1,266.3 +5.1%
Global convenience foods 415.0 376.6 +10.2%
- ----------------------------------------------------------------------------------------
CONSOLIDATED $1,745.3 $1,642.9 +6.2%
- ----------------------------------------------------------------------------------------
First quarter margin performance was:
- ----------------------------------------------------------------------------------------
1999 1998 CHANGE
- ----------------------------------------------------------------------------------------
Gross margin 52.1% 52.4% - .3%
SGA% (a) -37.2% -34.2% -3.0%
- ----------------------------------------------------------------------------------------
Operating margin 14.9% 18.2% -3.3%
- ----------------------------------------------------------------------------------------
(a) Selling, general and administrative expense as a percentage of net sales.
The decrease in operating margin primarily reflects increased spending on
promotional activities in the Company's major markets during the quarter. This
level of spending is consistent with management's strategy to drive growth
through increased marketing investment in the Company's seven largest cereal
markets, as well as supporting the accelerated introduction of new convenience
food products around the world. In comparison, the level of marketing spending
during the first quarter of 1998 was significantly lower and not competitive
with category activity in major markets.
Operating profit for the quarter ended March 31, 1999, included non-recurring
charges of $36.8 million ($25.6 million after tax or $.07 per share), related to
ongoing overhead activity analysis and other workforce reduction initiatives
around the world. During 1998, management commenced an overhead activity
analysis in North America to better align the Company's work activities to its
growth strategy. The process includes evaluating work performed by employees as
well as consulting and other external services. During the first quarter of
1999, this analysis was extended to Europe and Latin America.
10
12
The charges reported during the first quarter of 1999 were principally comprised
of employee retirement and separation benefits, expenditures for employee and
office relocation, and other related costs. Overhead activity analysis and other
new initiatives undertaken during the quarter in Europe, Latin America, and
Asia-Pacific are expected to eliminate or restructure approximately 350 employee
positions by the end of the year and generate approximately $25 million in
pre-tax savings by 2000. Cash outlays for all streamlining initiatives during
the quarter, including those continuing from prior years, was approximately $30
million. Cash outlays for all previously announced initiatives are expected to
be $40-$50 million during the remainder of 1999.
The Company's streamlining initiatives will continue throughout 1999. The
combination of initiatives commenced during the first quarter of 1999 and other
ongoing cost-reduction programs is expected to result in more than $50 million
in incremental savings for the full year 1999.
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, final negotiation of third party contract buy-outs,
actual expenditures for facility closures, implementation of cost-reduction
programs currently in the planning stages, and other items.
Operating profit (loss) on an operating segment basis was:
- -------------------------------------------------------------------------------------------------------------------------
(millions) NORTH ASIA- LATIN CORPORATE CONSOLI-
AMERICA EUROPE PACIFIC AMERICA AND OTHER DATED
- -------------------------------------------------------------------------------------------------------------------------
1999 operating profit (loss) $227.3 $25.6 $6.8 $29.0 ($66.0) $222.7
Non-recurring charges 4.7 15.7 6.0 1.7 8.7 36.8
- -------------------------------------------------------------------------------------------------------------------------
1999 OPERATING PROFIT (LOSS) EXCLUDING 232.0 41.3 12.8 30.7 (57.3) 259.5
NON-RECURRING CHARGES
1998 OPERATING PROFIT (LOSS) $252.5 $46.0 $12.8 $30.2 ($42.7) $298.8
- -------------------------------------------------------------------------------------------------------------------------
% change - 1999 vs. 1998
Business -7.7% -8.2% +3.8% +12.2% -34.2% -11.5%
Foreign currency impact -.4% -2.0% -3.7% -10.5% -- -1.7%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE -8.1% -10.2% +.1% +1.7% -34.2% -13.2%
- -------------------------------------------------------------------------------------------------------------------------
Gross interest expense, prior to amounts capitalized, was $31.4 million, up
slightly from the prior-year amount of $30.5 million, primarily due to a
year-over-year increase in total debt of $164 million.
Excluding the impact of non-recurring charges, the effective income tax rate for
the quarter was 36.6%, comparable to the prior-year rate of 36.8%. The effective
income tax rate based on reported earnings for the quarter was 37.8%. The higher
reported rate (as compared to the rate excluding the impact of non-recurring
charges) primarily relates to certain non-recurring charges for which no tax
benefit was provided, based on management's assessment of the likelihood of
recovering such benefit in future years.
11
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong during the first quarter of
1999. 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. The Company continues to maintain a Prime-1
rating on its commercial paper.
Net cash provided by operating activities was $149.7 million during the quarter,
increased from $138.5 million in 1998, as a favorable variance in working
capital movements offset the impact of lower earnings. At March 31, 1999, the
ratio of current assets to current liabilities was .9, unchanged from December
31, 1998.
Net cash used in investing activities was $48.8 million, down from $83.1 million
in 1998. The reduction was primarily due to property additions, which decreased
from $79.7 million in the first quarter of 1998 to $55.6 million in 1999.
Net cash used in financing activities was $90.6 million, primarily related to
dividend payments of $95.3 million, partially offset by a net increase in total
debt of $2.3 million. The Company's first quarter 1999 per share dividend
payment was $.235, a 4.4% increase over the prior-year payment of $.225.
Management is authorized by the Company's Board of Directors to repurchase up to
$149.4 million in shares of the Company's common stock during 1999. There were
no repurchases during the first quarter of 1999.
Notes payable primarily consist of commercial paper borrowings in the United
States and borrowings under a $200 million revolving credit agreement in Europe
with several international banks. At March 31, 1999, outstanding borrowings
under the revolving credit agreement were $129.6 million with an effective
interest rate of 5.45%. U.S. borrowings at March 31, 1999, were $411.3 million
with an effective interest rate of 4.86%. Associated with the U.S. borrowings,
the Company holds a $225 million notional, fixed interest rate cap which expires
in September 2001. Under the terms of the cap, if the Federal Reserve AA
Composite Rate on 30-day commercial paper increases to 6.33%, the Company will
pay this fixed rate on $225 million of its commercial paper borrowings. If the
rate increases to 7.68% or above, the cap will expire. As of March 31, 1999, the
rate was 4.84%.
Long-term debt primarily consists of fixed rate issuances of U.S. and Euro
Dollar Notes, including $200 million due in 2005, $500 million due in 2004, and
$900 million due in 2001. The amount due 2001 includes $400 million in Notes
which provide an option to holders to extend the obligation for an additional
four years at a predetermined interest rate of 5.63% plus the Company's
then-current credit spread.
Associated with several of these long-term debt issuances, the Company has
entered into fixed-to-floating interest rate swaps, generally expiring in
conjunction with the debt issuances and indexed to either three-month LIBOR or
the Federal Reserve AA Composite Rate on 30-day commercial paper. One of the
swap agreements, with a notional value of $225 million, will expire if
three-month LIBOR falls to 4.71% or below. At March 31, 1999, three-month LIBOR
was 4.97%. The total notional amount of all interest rate swaps at March 31,
1999, was $825 million, unchanged from December 31, 1998.
12
14
The ratio of total debt to market capitalization at March 31, 1999, was 17%, up
from 16% at December 31, 1998, primarily due to a slightly lower stock price
since year-end.
YEAR 2000
The Company established a global program in 1997 to address the millennium date
change issue (the inability of certain computer software, hardware, and other
equipment with embedded computer chips to properly process two-digit year-date
codes after 1999). The program is structured to address all date-related risks
to the Company's business in four major categories: information technology
systems, embedded technology systems, suppliers, and customers.
In the information technology and embedded systems categories, the inventories
and detailed assessments are complete. As of the end of the first quarter of
1999, remediation was 90% complete and testing was 75% complete. Remediation and
testing are on schedule with planned completion by June 30, 1999, for business
critical and important systems.
The Company is spending approximately $70 million during 1998 and 1999 to become
Year 2000 compliant. On a global basis, spending through March 31, 1999, was
consistent with the overall percentage of program completion of approximately
80%. These amounts do not include the effect of other planned system initiatives
that will contribute to the Year 2000 compliance effort. Management believes
that to the extent these other planned system initiatives impact the Year 2000
project, they will be completed as scheduled by mid-1999.
The Company is continuing a contingency planning process started in 1998
designed to mitigate business risks due to unexpected date-related issues across
all key business units worldwide. The testing results for information technology
and embedded systems are being coupled with risk assessments of the Company's
suppliers, customers, and other internal initiatives, and incorporated into this
contingency planning process. As of March 31, 1999, contingency plans had been
identified for the Company's greatest business risks, and their implementation
was being planned in each of the Company's four operating segments of North
America, Europe, Asia-Pacific, and Latin America.
While management believes that the estimated cost of becoming Year 2000
compliant is not significant to the Company's financial results, failure to
complete all the work in a timely manner could result in material financial
risk. While management expects all planned work to be completed, there can be no
guarantee that all systems will be in compliance by the year 2000, that the
systems of other companies and government agencies on which the Company relies
will be converted in a timely manner, or that contingency planning will be able
to fully address all potential interruptions. Therefore, date-related issues
could cause delays in the Company's ability to produce or ship its products,
process transactions, or otherwise conduct business in any of its markets.
13
15
EURO CONVERSION
On January 1, 1999, eleven European countries (Germany, France, Spain, Italy,
Ireland, Portugal, Finland, Luxembourg, Belgium, Austria, and the Netherlands)
implemented a single currency zone, the Economic and Monetary Union (EMU). The
new currency, the Euro, has become the official currency of the participating
countries. Those countries' financial markets and banking systems are quoting
financial and treasury data in Euros from January 1, 1999.
The Euro will exist alongside the old national currencies during a transition
period from January 1, 1999, to January 1, 2002. During this period, entities
within participating countries must complete changes which enable them to
transact in the Euro. National currencies will be withdrawn no later than July
1, 2002. This transition to the Euro currency will involve changing budgetary,
accounting, pricing, costing, and fiscal systems in companies and public
administrations, as well as the simultaneous handling of parallel currencies and
conversion of legacy data. During the first quarter of 1999, the Euro currency
has demonstrated varied levels of stability, and needs to be observed over a
longer period before conclusions can be drawn on the currency's long-term
viability.
In early 1998, management formed a task force to monitor EMU developments,
evaluate the impact of the Euro conversion on the Company's operations, and
develop and execute action plans, as necessary. The task force has completed a
full EMU impact assessment identifying company-wide, cross-functional effects of
the Euro. Required business strategy, system, and process changes within the
Company's European region are under way with certain markets already Euro
compliant. Many of these changes will be made in conjunction with other
significant technology initiatives currently under way, and will be completed in
accordance with the Company's timetable for transacting with its suppliers and
customers in the Euro. Results of management's customer analysis indicate that
the Company will be invoicing larger customers in the Euro beginning in 2001.
The Company's suppliers are generally prepared to transact in the Euro at any
time; the Company plans to commence Euro-denominated transactions with suppliers
in 2002.
The Company's Euro program consists of two phases. Phase I aims to provide the
business with the capability to recognize the Euro as a foreign currency for
customer order-taking, invoice processing, and vendor payment purposes. The
Company expects to complete the necessary changes to order management and
related financial systems prior to 2001. Management believes the project
timetable is on target to meet this date.
In Phase II, the more significant portion of the program, all business systems
(for example, raw materials management, manufacturing, warehousing, human
resource systems) will be reviewed and modified, as necessary, to handle the
Euro as a functional currency. Legally, this capability must exist in Company
business units operating in EMU member countries from January 1, 2002.
Manufacturing and operational systems are currently being analyzed and modified
in order to comply with the legal timetable. This change does not represent any
currency exposure as the national currency exchange rates were fixed in relation
to the Euro on January 1, 1999.
14
16
Although management currently believes the Company will be able to accommodate
any required changes in its operations, there can be no assurance that the
Company, its customers, suppliers, financial service providers, or government
agencies will meet all of the Euro currency requirements on a timely basis. This
is, in part, because new requirements may emerge from individual national
governments at later stages. Such failure to complete the necessary work could
result in material financial risk.
FULL-YEAR OUTLOOK
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. Based on the expectation of cereal volume growth,
and strong results from product innovation and the continued global roll-out of
convenience foods, management believes the Company is well-positioned to deliver
sales and earnings growth for the full year 1999. The Company will continue to
identify and pursue streamlining and productivity initiatives to optimize its
cost structure.
The Company continues to review strategies related to the Lender's Bagels
business, given its performance since acquisition. Based on a business update
completed during the first quarter of 1999, the Company has evaluated the
recoverability of Lender's long-lived assets as of March 31, 1999. Although this
evaluation has not resulted in recognition of an impairment loss, management
continues to assess the profitability realized or likely to be realized by the
Lender's Bagels business, and is reviewing various strategies including possible
divestiture. Changes in management strategy regarding the Lender's Bagels
business could impact the projected cash flows used to evaluate the carrying
value of long-lived assets. A change that results in recognition of an
impairment loss would require the Company to reduce the carrying value of
long-lived assets to fair market value, which management believes is less than
the carrying value. The carrying value of Lender's Bagels business long-lived
assets, including intangible assets, as of March 31, 1999, was $427 million.
Additional expectations for 1999 include a gross profit margin of 51-52%, an
SGA% of 36-37%, an effective income tax rate of 36-37%, and capital spending of
approximately $270 million.
The foregoing projections concerning volume growth, profitability, and capital
spending, as well as financial impacts of strategies concerning the Lender's
Bagels business are forward-looking statements that involve risks and
uncertainties. Actual 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 success of new product introductions; the
levels of spending on system initiatives, properties, business opportunities,
continued streamlining initiatives, and other general and administrative costs;
raw material price and labor cost fluctuations; foreign currency exchange rate
fluctuations; changes in statutory tax law; interest rates available on
short-term financing; and other items.
15
17
KELLOGG COMPANY
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
There were no submissions of matters to a vote of security
holders during the quarter for which the report is filed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.01 - Agreement between the Company and D. W. Thomason
dated March 1, 1999.
10.02 - Agreement between the Company and J. Groot dated
December 17, 1998.
10.03 - Agreement between the Company and J. D. Cook
dated January 26, 1999.
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.
16
18
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/ A. Taylor
-------------------------------
A. Taylor
Principal Accounting Officer;*
Vice President - Corporate Controller
Date: May 12, 1999
*Also duly authorized to sign on behalf of the registrant.
17
19
KELLOGG COMPANY
EXHIBIT INDEX
Electronic (E)
Paper (P)
Incorp. By
Exhibit No. Description Ref. (IBRF)
- ----------- ----------- -----------
10.01 Agreement between the Company and E
D. W. Thomason dated March 1,1999.
10.02 Agreement between the Company and E
J. Groot dated December 17, 1998.
10.03 Agreement between the Company and E
J. D. Cook dated January 26, 1999.
27.01 Financial Data Schedule E
18