1 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 <TABLE> <S><C> State of Incorporation--Delaware IRS Employer Identification No.38-0710690 </TABLE> 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
2 KELLOGG COMPANY INDEX <TABLE> <CAPTION> Page ---- PART I - Financial Information <S> <C> 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 </TABLE> 1
3 CONSOLIDATED BALANCE SHEET ====================================================================== <TABLE> <CAPTION> KELLOGG COMPANY AND SUBSIDIARIES JUNE 30, December 31, (millions) 1997 1996 (unaudited) * - ---------------------------------------------------------------------- <S> <C> <C> 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 - ---------------------------------------------------------------------- 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 - ---------------------------------------------------------------------- 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 - ---------------------------------------------------------------------- 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) - ---------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 1,149.2 1,282.4 - ---------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,090.8 $5,050.0 ====================================================================== *Condensed from audited financial statements. </TABLE> See accompanying notes to consolidated financial statements. 2
4 <TABLE> <CAPTION> 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 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> NET SALES $ 1,719.7 $ 1,651.4 $ 3,408.6 $ 3,437.3 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------ OPERATING PROFIT 279.2 141.6 556.4 480.4 - ------------------------------------------------------------------------------------------------------------------ Interest expense 27.0 16.1 52.4 29.8 Other income (expense), net 2.0 0.3 2.2 0.7 - ------------------------------------------------------------------------------------------------------------------ EARNINGS BEFORE INCOME TAXES 254.2 125.8 506.2 451.3 Income taxes 90.6 47.7 182.0 167.1 - ------------------------------------------------------------------------------------------------------------------ NET EARNINGS $ 163.6 $ 78.1 $ 324.2 $ 284.2 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------ </TABLE> See accompanying notes to consolidated financial statements. 3
5 CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited) <TABLE> <CAPTION> KELLOGG COMPANY AND SUBSIDIARIES Six months ended June 30, (millions) 1997 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> 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 - ------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to properties (131.9) (109.2) Other (8.0) 3.9 - ------------------------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------------------------- 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 =========================================================================================== </TABLE> Refer to accompanying notes to consolidated financial statements. 4
6 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 5
7 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. 6
8 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. 7
9 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: 8
10 ========================================================= VOLUME CATEGORY QUARTER YEAR-TO- DATE ========================================================= Global Cereal 5.5% 3.0% --------------------------------------------------------- U.S. Cereal 6.6% 2.3% --------------------------------------------------------- Global Total 14.1% 12.2% --------------------------------------------------------- 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: <TABLE> <CAPTION> =========================================================================================== SECOND QUARTER YEAR-TO-DATE =========================================================================================== FAVORABLE FAVORABLE 1997 1996 (UNFAVORABLE) 1997 1996 (UNFAVORABLE) CHANGE CHANGE =========================================================================================== <S> <C> <C> <C> <C> <C> <C> 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% =========================================================================================== </TABLE> * Selling, general, and administrative expense as a percentage of net sales 9
11 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: <TABLE> <CAPTION> ================================================================================================= SECOND QUARTER YEAR-TO-DATE ================================================================================================= FAVORABLE FAVORABLE 1997 1996 (UNFAVORABLE) 1997 1996 (UNFAVORABLE) CHANGE CHANGE ================================================================================================= <S> <C> <C> <C> <C> <C> <C> INTEREST EXPENSE (MILLIONS): - ------------------------------------------------------------------------------------------------- As Reported $ 27.0 $ 16.1 $52.4 $29.8 - ------------------------------------------------------------------------------------------------- Capitalized 2.3 .7 4.3 1.4 - ------------------------------------------------------------------------------------------------- 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% ================================================================================================= </TABLE> 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. 10
12 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. 11
13 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. 12
14 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. 12
15 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. 13
16 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 14
17 (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. 15
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/ 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 16
19 KELLOGG COMPANY EXHIBIT INDEX Number Description 10.01 Key Employee Long Term Incentive Plan, as amended 27.01 Financial Data Schedule 17