-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ki1tujgPgozRwyK9/bDD9wpa9uCsN31czg+SOXfVaeiuOF67lcpql9TMtNRkBdCX wx8dDIayiAQr99wg7joBaQ== 0001018848-99-000009.txt : 19990830 0001018848-99-000009.hdr.sgml : 19990830 ACCESSION NUMBER: 0001018848-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990717 FILED AS OF DATE: 19990827 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEEBLER FOODS CO CENTRAL INDEX KEY: 0001018848 STANDARD INDUSTRIAL CLASSIFICATION: COOKIES & CRACKERS [2052] IRS NUMBER: 363839556 STATE OF INCORPORATION: DE FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13705 FILM NUMBER: 99700824 BUSINESS ADDRESS: STREET 1: 677 LARCH AVE CITY: ELMHURST STATE: IL ZIP: 60126 BUSINESS PHONE: 6308332900 FORMER COMPANY: FORMER CONFORMED NAME: KEEBLER CORP DATE OF NAME CHANGE: 19960715 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q (Mark One) |x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 17, 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: NO. 001-13705 -------------------- KEEBLER FOODS COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 36-3839556 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 677 LARCH AVE., ELMHURST, IL 60126 (Address of principal executive offices) 630-833-2900 (Registrant's telephone number, including area code) NOT APPLICABLE. (Former name, former address and former fiscal year, if changed since last report) -------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 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 | | NUMBER OF SHARES OF COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AS OF THE CLOSE OF BUSINESS ON AUGUST 20, 1999: 83,719,291. PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JULY 17, January 2, 1999 1999 -------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 22,208 $ 23,515 Trade accounts and notes receivable, net 56,691 141,077 Recoverable income taxes 8,298 - Inventories, net: Raw materials 34,593 31,722 Package materials 13,394 13,081 Finished goods 95,241 120,550 Other 1,452 1,024 -------------- -------------- 144,680 166,377 Deferred income taxes 55,138 57,713 Other 28,194 26,636 -------------- -------------- Total current assets 315,209 415,318 PROPERTY, PLANT AND EQUIPMENT, NET 537,808 564,524 GOODWILL, NET 378,495 391,449 TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 222,326 226,084 PREPAID PENSION 36,078 38,205 ASSETS HELD FOR SALE 6,737 2,972 OTHER ASSETS 16,182 17,228 -------------- -------------- Total assets $ 1,512,835 $ 1,655,780 ============== ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 2
KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JULY 17, January 2, 1999 1999 -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 37,299 $ 112,730 Trade accounts payable 137,252 143,572 Other liabilities and accruals 239,903 232,087 Income taxes payable - 10,779 Plant and facility closing costs and severance 28,074 11,018 -------------- -------------- Total current liabilities 442,528 510,186 LONG-TERM DEBT 462,753 541,765 OTHER LIABILITIES: Deferred income taxes 137,821 147,098 Postretirement/postemployment obligations 64,064 63,754 Plant and facility closing costs and severance 18,728 15,563 Deferred compensation 21,279 19,368 Other 32,687 28,745 -------------- -------------- Total other liabilities 274,579 274,528 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 100,000,000 shares authorized and none issued) - - Common stock ($.01 par value; 500,000,000 shares authorized and 84,550,864 and 84,125,164 shares issued, respectively) 845 841 Additional paid-in capital 178,514 169,532 Retained earnings 178,915 167,608 Treasury stock (25,299) (8,680) -------------- -------------- Total shareholders' equity 332,975 329,301 -------------- -------------- Total liabilities and shareholders' equity $ 1,512,835 $ 1,655,780 ============== ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3
KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
TWELVE Twelve TWENTY-EIGHT Twenty-Eight WEEKS ENDED Weeks Ended WEEKS ENDED Weeks Ended JULY 17, 1999 July 18, 1998 JULY 17, 1999 July 18, 1998 -------------- -------------- -------------- -------------- NET SALES $ 587,847 $ 490,042 $ 1,439,880 $ 1,126,788 COSTS AND EXPENSES: Cost of sales 257,349 208,685 638,052 472,772 Selling, marketing and administrative expenses 273,349 241,261 667,691 579,437 Other 8,417 1,916 14,760 4,723 Restructuring and impairment charge 69,208 - 69,208 - -------------- -------------- -------------- -------------- (LOSS) INCOME FROM OPERATIONS (20,476) 38,180 50,169 69,856 Interest (income) (315) (1,017) (941) (1,406) Interest expense 8,399 5,725 22,341 13,555 -------------- -------------- -------------- -------------- INTEREST EXPENSE, NET 8,084 4,708 21,400 12,149 -------------- -------------- -------------- -------------- (LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE (28,560) 33,472 28,769 57,707 Income tax (benefit) expense (7,190) 14,041 17,462 24,236 -------------- -------------- -------------- -------------- NET (LOSS) INCOME $ (21,370) $ 19,431 $ 11,307 $ 33,471 ============== ============== ============== ============== BASIC NET (LOSS) INCOME PER SHARE $ (0.25) $ 0.23 $ 0.14 $ 0.40 WEIGHTED AVERAGE SHARES OUTSTANDING 83,778 83,779 83,818 82,799 DILUTED NET (LOSS) INCOME PER SHARE $ (0.24) $ 0.22 $ 0.13 $ 0.38 WEIGHTED AVERAGE SHARES OUTSTANDING 87,622 87,748 87,871 87,243 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 4
KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
TWENTY-EIGHT Twenty-Eight WEEKS ENDED Weeks Ended JULY 17, 1999 July 18, 1998 --------------- --------------- CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES Net income $ 11,307 $ 33,471 Adjustments to reconcile net income to cash from operating activities: Depreciation and amortization 43,171 31,549 Deferred income taxes (6,702) (5,705) Loss on sale of property, plant and equipment 514 36 Income tax benefit related to stock options exercised 6,541 - Restructuring and impairment charge 46,071 - Changes in assets and liabilities: Trade accounts and notes receivable, net (21,614) (16,891) Inventories, net 21,697 (993) Recoverable income taxes and income taxes payable (19,077) 7,411 Other current assets (1,558) (3,155) Trade accounts payable and other current liabilities 616 10,167 Plant and facility closing costs and severance 19,861 (3,692) Other, net 7,864 3,211 --------------- --------------- Cash provided from operating activities 108,691 55,409 CASH FLOWS (USED BY) INVESTING ACTIVITIES Capital expenditures (49,801) (21,466) Proceeds from property disposals 2,420 414 --------------- --------------- Cash (used by) investing activities (47,381) (21,052) CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES Purchase of treasury stock (16,619) (4,685) Exercise of options and warrant 2,445 20,305 Proceeds from receivables securitization 106,000 - Long-term debt repayments (94,443) (12,300) Revolving facility, net (60,000) - --------------- --------------- Cash (used by) provided from financing activities (62,617) 3,320 --------------- --------------- (Decrease) increase in cash and cash equivalents (1,307) 37,677 Cash and cash equivalents at beginning of period 23,515 27,188 --------------- --------------- Cash and cash equivalents at end of period $ 22,208 $ 64,865 =============== =============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 5
KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION INTERIM FINANCIAL STATEMENTS The unaudited interim consolidated financial statements included herein were prepared pursuant to the rules and regulations for interim reporting under the Securities Exchange Act of 1934. Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements were omitted. The interim consolidated financial statements and notes should be read in conjunction with the annual audited consolidated financial statements and notes thereto. The accompanying unaudited interim consolidated financial statements contain all adjustments, consisting only of normal adjustments, which in the opinion of management were necessary for a fair statement of the results for the interim periods. Results for the interim periods are not necessarily indicative of results for the full year. BUSINESS AND OWNERSHIP On January 21, 1999, Keebler Foods Company ("Keebler") made a secondary public offering of 16,200,000 shares of common stock. Artal Luxembourg S.A. ("Artal") and Claremont Enterprises, Limited ("Claremont") sold all of the shares, with no proceeds from the offering going to Keebler. As a result, Artal's ownership percentage decreased from approximately 21% to 2% and Claremont's ownership percentage was reduced from approximately 6% to 5% of the outstanding common stock. Management's ownership remained at approximately 2% and the ownership percentage of Flowers Industries, Inc. remained unchanged at approximately 55%. FISCAL YEAR Keebler's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The first quarter consists of four four-week periods. RECLASSIFICATIONS Certain reclassifications of prior period data have been made to conform with the current period reporting. 2. ASSETS HELD FOR SALE On May 14, 1999, management announced the closure of the Sayreville, New Jersey manufacturing facility in order to eliminate excess capacity within Keebler's manufacturing network. As part of the total restructuring and impairment charge, the Sayreville facility was placed for sale together with other idle machinery and equipment held at various Keebler facilities. In addition, in June 1999, the Atlanta, Georgia manufacturing facility, which had been held for sale, was sold for $1.2 million with a realized loss of approximately $0.6 million. Disposition of the remaining assets held for sale is expected to occur within the next thirty-six months without a significant gain or loss. 3. RECEIVABLES SECURITIZATION On January 29, 1999, Keebler entered into a Receivables Purchase Agreement ("Agreement") to replace $75.0 million of debt held under a Bridge facility allowing funds to be borrowed at a lower cost to the Company. The accounting for this Agreement is governed by SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the guidelines of SFAS No. 125, a special-purpose entity was created, Keebler Funding Corporation, as a subsidiary of Keebler Foods Company. All transactions under this Agreement occur through Keebler Funding Corporation and are treated as a sale of accounts receivable and not as a debt instrument. At July 17, 1999, a net $106.0 million of accounts receivable have been sold at fair value. 6 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. RESTRUCTURING AND IMPAIRMENT CHARGE As part of the continuing process of integrating the business of President International, Inc. into our operations, on May 14, 1999, Keebler announced the decision to close its manufacturing facility in Sayreville, New Jersey due to excess capacity within the Company's 18-plant manufacturing network. As a result, a pre-tax restructuring and impairment charge to operating income of $69.2 million was recorded in the second quarter ending July 17, 1999. The restructuring and impairment charge included $23.1 million for cash costs related to severance and other exit costs from the Sayreville facility. The remaining $46.1 million was non-cash charges for asset impairments related to the Sayreville closing, including write-downs of property, plant and equipment at Sayreville and equipment at other locations, and a reduction of goodwill acquired in the acquisition of Sunshine Biscuits, Inc. in June 1996. Approximately 650 total employees will be terminated as a result of the closing of the Sayreville facility, of which approximately 600 employees are represented by unions. At July 17, 1999, approximately 460 employees under union contract have been terminated and approximately $3.2 million of cash costs have been spent related to severance and other exit costs from the Sayreville facility. The exit activities are expected to be substantially complete by the end of the third quarter of 1999. 5. SEGMENT INFORMATION In 1998, Keebler adopted Statement of Financial Standards ("SFAS") No. 131 "Disclosures about Segments of an Enterprise and Related Information." Keebler's reportable segments are Branded and Specialty. The reportable segments were determined using Keebler's method of internal reporting, which divides and analyzes the business by sales channel. The nature of the customers, products and method of distribution can vary by sales channel. The reportable segments represent an aggregation of similar sales channels. The Branded segment is comprised of sales channels that principally market brand name cookie, cracker and brownie products to retail outlets, as well as private label biscuit products. Either a Keebler sales employee or a distributor sells products in the Branded segment. The sales channels in the Specialty segment primarily sell cookie and cracker products that are manufactured on a made-to-order basis or that are produced in individual packs to be used in various institutions (i.e., restaurants, hospitals, etc.), as well as cookies manufactured for the Girl Scouts of America. Many of the products sold by the Specialty segment are done so through the use of brokers. Keebler evaluates the performance of the reportable segments and allocates resources based on the segment's profit contribution, defined as earnings before certain functional support costs, amortization, interest and income taxes. While the accounting policies for each reportable segment are the same as for the total company, the cost of sales used to determine a segment's profit contribution is calculated using standard costs for each product, whereas actual cost of sales is used to determine consolidated operating income (loss). There are no intersegment transactions that result in revenue or profit (loss). Asset information by reportable segment is not presented, as Keebler does not report or generate such information internally. However, depreciation expense included in the determination of a segment's profit contribution has been presented. The depreciation expense for each reportable segment reflects the amount absorbed in the standard cost of products sold, as well as the depreciation that relates to assets used entirely by the respective segment. The following table presents certain information included in the profit contribution of each segment for the twelve weeks ended July 17, 1999 and July 18, 1998 and the twenty-eight weeks ended July 17, 1999 and July 18, 1998. 7 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. SEGMENT INFORMATION (CONTINUED)
Branded Specialty Segment Segment Other (a) Total --------------- ---------------- ---------------- --------------- (IN THOUSANDS) TWELVE WEEKS ENDED JULY 17, 1999: NET SALES TO EXTERNAL CUSTOMERS............. $ 483,815 $ 104,032 $ - $ 587,847 DEPRECIATION EXPENSE........................ 4,387 1,349 9,466 15,202 PROFIT CONTRIBUTION......................... 75,830 19,250 - 95,080 TWELVE WEEKS ENDED JULY 18, 1998: Net sales to external customers............. $ 400,158 $ 89,884 $ - $ 490,042 Depreciation expense........................ 5,215 1,401 7,102 13,718 Profit contribution......................... 60,589 18,821 - 79,410 TWENTY-EIGHT WEEKS ENDED JULY 17, 1999: NET SALES TO EXTERNAL CUSTOMERS............. $ 1,106,668 $ 333,212 $ - $ 1,439,880 DEPRECIATION EXPENSE........................ 11,338 3,410 17,837 32,585 PROFIT CONTRIBUTION......................... 157,208 72,724 - 229,932 TWENTY-EIGHT WEEKS ENDED JULY 18, 1998: Net sales to external customers............. $ 921,636 $ 205,152 $ - $ 1,126,788 Depreciation expense........................ 12,744 3,134 11,948 27,826 Profit contribution......................... 121,837 44,099 - 165,936
(a) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments. The net sales to external customers from the reportable segments equal the consolidated net sales of Keebler. A reconciliation of segment profit contribution to total consolidated (loss) income from continuing operations before income tax (benefit) expense for the twelve weeks ended July 17, 1999 and July 18, 1998 and the twenty-eight weeks ended July 17, 1999 and July 18, 1998 is as follows:
Twelve Weeks Ended Twenty-Eight Weeks Ended ------------------------------ ------------------------------ JULY 17, 1999 July 18, 1998 JULY 17, 1999 July 18, 1998 -------------- -------------- -------------- -------------- (IN THOUSANDS) (LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE: Reportable segment's profit contribution...... $ 95,080 $ 79,410 $ 229,932 $ 165,936 Unallocated functional support costs (b)...... 46,348 41,230 110,555 96,080 Restructuring and impairment charge........... 69,208 - 69,208 - Interest expense, net......................... 8,084 4,708 21,400 12,149 -------------- -------------- -------------- -------------- (Loss) Income before Income Tax (Benefit) Expense.......................... $ (28,560) $ 33,472 $ 28,769 $ 57,707 ============== ============== ============== ==============
(b) Includes support costs such as distribution, research and development, corporate administration and other (income) expense, which are not allocated internally to reportable segments. 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW MATTERS AFFECTING COMPARABILITY The following discussion of the financial condition and results of operations for the twelve and twenty-eight weeks ended July 17, 1999 and July 18, 1998 should be read in conjunction with Keebler's 1998 annual report on Form 10-K filed with the Securities and Exchange Commission on March 22, 1999. RESULTS OF OPERATIONS Results of operations expressed as a percentage of net sales for the twelve and twenty-eight weeks ended July 17, 1999 and July 18, 1998 are set forth below:
Twelve Weeks Ended Twenty-Eight Weeks Ended --------------------------- --------------------------- July 17, July 18, July 17, July 18, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- NET SALES......................................... 100.0% 100.0% 100.0% 100.0% Cost of sales..................................... 43.8 42.6 44.3 42.0 Selling, marketing and administrative expenses.... 46.5 49.2 46.4 51.4 Restructuring and impairment charge............... 11.8 - 4.8 - (LOSS) INCOME FROM OPERATIONS..................... (3.5) 7.8 3.5 6.2 Interest Expense, net............................. 1.4 1.0 1.5 1.1 NET (LOSS) INCOME................................. (3.6)% 4.0% 0.8% 3.0%
Keebler's reportable segments are Branded and Specialty, which were determined using Keebler's method of internal reporting, which divides and analyzes the business by sales channel. The reportable segments represent an aggregation of similar sales channels. We evaluate the performance of the reportable segments and allocate resources based on the segment's profit contribution, defined as earnings before certain functional support costs, amortization, interest and income taxes. While the accounting policies for each reportable segment are the same as for the total company, the cost of sales used to determine a segment's profit contribution is calculated using standard costs for each product, whereas actual cost of sales is used to determine consolidated operating income (loss). BRANDED SEGMENT The Branded segment sells a number of well-recognized products, primarily to retail outlets such as supermarkets, mass merchandisers, warehouse club stores, convenience stores and drug stores, as well as to private label retailers.
Twelve Weeks Ended Twenty-Eight Weeks Ended ------------------------------------------- ------------------------------------------- July 17, 1999 July 18, 1998 July 17, 1999 July 18, 1998 --------------------- --------------------- --------------------- --------------------- $ % $ % $ % $ % ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ($ IN MILLIONS) NET SALES.................. $ 483.8 $ 400.1 $1,106.7 $ 921.6 PROFIT CONTRIBUTION........ $ 75.8 15.7% $ 60.6 15.1% $ 157.2 14.2% $ 121.8 13.2%
9 For the twelve weeks ended July 17, 1999, net revenues in the Branded segment of $483.8 million increased 20.9% over the same period a year ago and net sales for the first half of 1999 of $1,106.7 million finished 20.1% above the comparable period of 1998. The acquisition of President International, Inc. ("President") contributed $65.2 million and $153.5 million of total revenues in the second quarter and first half of 1999, respectively. Excluding the impact of President, Keebler experienced core business growth of 4.6% compared to the year-earlier quarter and first half revenues exceeded 1998 by $31.5 million or 3.4%. Sales of new products, together with on-going expansion of the CHEEZ-IT brand, drove the revenue growth in both the second quarter and the first half of 1999. New product introductions in the second quarter included KEEBLER DOUBLE FUDGE AND CARAMEL cookies and KEEBLER WHEAT 'N' CHEDDAR sandwich crackers. Increased sales of the CHEEZ-IT brand were achieved through new product introductions, as well as growth in the core product lines. Sales for the first half continued to be favorably impacted by new product introductions from earlier in the year including KEEBLER PEANUT BUTTER FUDGE STICKS, KEEBLER EL FUDGE with peanut butter cream cookies, HOMESTYLE SOFT BATCH cookies and CHEEZ-IT Snack Mix, as well as new single serve products. Product culls related to the repositioning of the former, lower margin Sunshine cookies, while converting the remaining Sunshine cookie products to the Keebler brand, limited the Branded segment revenue gains in both the second quarter and first half of 1999. Growth in the retail business outside supermarkets, including at mass merchandisers and in convenience channels, added to the improvement over the prior year. Price increases taken at the beginning of the year also favorably impacted revenues in the current quarter and first half of 1999. The Branded segment's profit contribution was $75.8 million, or 15.7% of net sales, in the second quarter of 1999 and $157.2 million, or 14.2% of net sales, in the first half of 1999. The growth in profit contribution for the twelve and twenty-eight weeks ended July 17, 1999 was driven by a higher gross margin achieved on Keebler's core products furthered by improved productivity at our bakeries and the inclusion of President results. The gross margin rate on President products is lower than our core products, resulting in an overall decline in gross margin in the Branded segment compared to the prior year. Yet as a percentage of net sales, selling, marketing and administrative expenses declined due to both the addition of President products which generate lower selling and distribution costs and improvements in Keebler's core distribution system. These factors caused a 0.6 percentage point and 1.0 percentage point increase in profit contribution in the second quarter and first half of 1999, respectively. SPECIALTY SEGMENT The Specialty segment produces cookies and crackers for the foodservice market, custom-baked products for other marketers of branded food products, including sales of cookies to the Girl Scouts of America, and preformed pie crusts. This segment also imports and distributes CARR'S crackers in the U.S. under an exclusive long-term licensing and distribution agreement with United Biscuits.
Twelve Weeks Ended Twenty-Eight Weeks Ended ------------------------------------------- ------------------------------------------- July 17, 1999 July 18, 1998 July 17, 1999 July 18, 1998 --------------------- --------------------- --------------------- --------------------- $ % $ % $ % $ % ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ($ IN MILLIONS) NET SALES.................. $ 104.0 $ 89.9 $ 333.2 $ 205.2 PROFIT CONTRIBUTION........ $ 19.2 18.5% $ 18.8 20.9% $ 72.7 21.8% $ 44.1 21.5%
Net sales in the Specialty segment of $104.0 million and $333.2 million for the second quarter and first half of 1999 surpassed the same periods last year by $14.1 million and $128.0 million, respectively. The improvement represented a 15.7% increase in the second quarter and a 62.4% improvement for the year-to-date period, with the inclusion of President accounting for $13.5 million and $119.8 million of the respective period's revenue growth. Higher sales of custom-baked products for other marketers of branded food products continued to drive the growth in the Specialty core business resulting in a 4.0% increase for the first half of 1999. Volume declines in the foodservice market and a soft pie crust market offset some of the custom-baked product gains. 10 Profit contribution for the Specialty segment was $19.2 million or 18.5%, as a percentage of net sales, for the twelve weeks ended July 17, 1999, and $72.7 million or 21.8%, as a percentage of net sales, for the first half of 1999. Removing the effects of President in the quarter, the profit contribution margin declined approximately 1.4 percentage points from the year-earlier quarter. Savings from cost reduction programs were not enough to completely offset the effects of select volume declines in some of the Specialty channels. COST OF SALES Cost of sales in the second quarter of 1999 was $257.3 million, or 43.8% of net sales, compared to $208.7 million, or 42.6% of net sales, in the same quarter of 1998. For the twenty-eight weeks ended July 17, 1999, cost of sales was $638.1 million, or 44.3% of net sales, versus $472.8 million, or 42.0% of net sales, from a year ago. The addition of President was the direct cause of the increase in cost of sales for the current quarter and first half of 1999, both in dollar spending and as a percentage of net sales. Before including the sale of President products, cost of sales, as a percentage of net sales, was 40.8% and 41.1% for the twelve and twenty-eight weeks ended July 17, 1999, respectively. In both the second quarter and first half of 1999, cost of sales was also favorably impacted by initiatives aimed at improving productivity and efficiency at our manufacturing facilities, other cost reduction programs and lower raw and packaging material costs. A shift in the sales mix to products with higher production costs in both the Branded and Specialty segments partially offset the benefits achieved from the cost reduction programs. SELLING, MARKETING AND ADMINISTRATIVE EXPENSES Selling, marketing and administrative expenses of $273.3 million and $667.7 million for the second quarter and first half of 1999, respectively, were $32.1 million and $88.3 million higher than the year-earlier comparable periods. The 13.3% and 15.2% increases in selling, marketing and administrative expenses for the quarter and year-to-date periods, respectively, was principally driven by the inclusion of President expenses. The balance of the increase in selling, marketing and administrative expenses was mainly due to higher volume coupled with increased marketing expenses associated with our continuing efforts to build brand equity. Advertising and consumer promotion spending was $23.0 million and $56.6 million for the twelve and twenty-eight weeks ended July 17, 1999, compared to $21.7 million and $51.7 million for the twelve and twenty-eight weeks ended July 18, 1998. Selling, marketing and administrative expenses, before including the impact of President, as a percentage of net sales, declined 2.7 and 5.0 percentage points for the second quarter and first half, respectively. OTHER Other expense for the twelve and twenty-eight weeks ended July 17, 1999, was $8.4 million and $14.8 million, respectively, compared to $1.9 million and $4.7 million for the twelve and twenty-eight weeks ended July 18, 1998. For both the second quarter and year-to-date periods, the increase was principally due to incremental amortization expense resulting from over $400 million of intangible assets added from the President acquisition. Additionally, $2.3 million of the increase related to the various fees and costs associated with the selling of accounts receivable under the Receivables Purchase Agreement ("Agreement"). All transactions occurring under this Agreement are treated as a sale of accounts receivable and not as a debt instrument. RESTRUCTURING AND IMPAIRMENT CHARGE As part of the continuing process of integrating President into our operations, on May 14, 1999, Keebler announced the decision to close its manufacturing facility in Sayreville, New Jersey due to the excess capacity within the Company's 18-plant manufacturing network. As a result, a $69.2 million pre-tax restructuring and impairment charge was recorded in the second quarter of 1999. The charge includes $23.1 million for cash costs related to severance and other exit costs from the Sayreville facility. The remaining $46.1 million relates to non-cash charges for asset impairments related to the Sayreville closing, including write-downs of property, plant and equipment at Sayreville, equipment at other locations and a reduction of goodwill acquired in the acquisition of Sunshine Biscuits, Inc. in June 1996. 11 INTEREST EXPENSE Net interest expense for the second quarter and year-to-date period ended July 17, 1999, of $8.1 million and $21.4 million was $3.4 million and $9.3 million higher than the second quarter and year-to-date period ended July 18, 1998, respectively. The increase in interest expense for both the quarter and first half of the year was primarily due to additional interest expense associated with the incremental debt incurred in the second half of 1998 in order to finance the acquisition of President. Outstanding debt at July 17, 1999, was $213.6 million above the level outstanding at July 18, 1998. Despite higher interest expense incurred during 1999, the current financing agreements contain lower interest rates resulting in an improvement in the weighted average interest rate of nearly a full percentage point compared to the prior year. INCOME TAXES Income tax (benefit) expense for the twelve and twenty-eight weeks ended July 17, 1999, decreased by $21.2 million and $6.8 million, respectively, compared to the same periods a year ago. The reduction in income tax expense was due principally to a $24.2 million tax benefit arising from the $69.2 million restructuring and impairment charge taken during the second quarter for the closure of the Sayreville, New Jersey manufacturing facility. Also contributing to the reduction in income tax expense was the adjustment of the anticipated effective income tax rate for 1999 to 42.5% from 43%. The reduction in the annual effective tax rate occurred in anticipation of implementing a change in the tax basis of the assets and liabilities that resulted from the Keebler acquisition. This change in tax basis subsequently results in the elimination of certain intangible amortization. Keebler had provided income taxes at an effective tax rate of 42% for the twelve and twenty-eight weeks ended July 18, 1998. The inclusion of additional non-deductible goodwill resulting from the acquisition of President was the primary reason for the higher rate over 1998. The effective tax rate remains above the federal statutory rate due to non-deductible expenses, primarily the amortization of intangibles, resulting from the Sunshine and President acquisitions. NET (LOSS) INCOME The twelve weeks ended July 17, 1999, resulted in a net loss of $21.4 million with the decrease from the prior year second quarter directly attributable to the $69.2 million restructuring and impairment charge for the closure of the Sayreville, New Jersey manufacturing facility. Year-to-date net income of $11.3 million was $22.2 million lower than the comparable period of the prior year with the decline also attributable to the restructuring and impairment charge recorded in the second quarter. Mitigating the effects of this charge was the inclusion of President results and integration synergies in 1999, and revenue gains combined with cost savings achieved from the Keebler core business. LIQUIDITY AND CAPITAL RESOURCES For the first half of 1999, cash provided from operating activities was $108.7 million. Year-to-date net earnings of $11.3 million and a reduced investment in inventories of $21.7 million were partially responsible for the positive cash flow. The lower inventory levels were due principally to the depletion of the Girl Scout finished goods inventory that existed at year- end in anticipation of the annual Girl Scout cookie sale that occurred during the first quarter of the year. In addition, the restructuring and impairment charge recorded in the second quarter of 1999 included $46.1 million relating to the non-cash write-down of impaired property, plant and equipment and intangible assets, while the remaining portion of the charge related to cash costs, the majority of which will be paid out in future periods. Partially offsetting these cash resources was an increased investment in trade accounts and notes receivable of $21.6 million. During the first twenty-eight weeks of 1999, cash used by investing activities of $47.4 million was primarily utilized to fund capital expenditures. The majority of the $49.8 million in capital spending in the first half of 1999 was used to automate, upgrade and enhance the existing manufacturing and distribution facilities and to relocate production from the recently closed Sayreville facility to other locations. Also, funds were spent on information technology to transition the President facilities onto the Keebler SAP R/3 information system and to ensure Y2K compliance. Proceeds received from asset disposals of $2.4 million partially offset capital expenditures, with the sale of the Atlanta manufacturing facility accounting for $1.2 million of the proceeds. 12 Financing activities used $62.6 million of cash in the first twenty-eight weeks of 1999 principally to make various long-term debt payments to paydown the Revolving facility, extinguish the Bridge facility and make regularly scheduled principal payments. Additionally, $16.6 million was spent to repurchase common stock into treasury. Net cash proceeds of $106.0 million received from the sale of accounts receivable under the Receivables Purchase Agreement entered into in the first quarter of 1999, which allows funds to be borrowed at a lower cost to the Company, partially offset the uses of cash. An additional $2.4 million of cash was generated from employee stock options exercised during the first half of 1999. As of July 17, 1999, cash and cash equivalents were $22.2 million, long-term debt outstanding was $462.8 million and current maturities were $37.3 million. Available borrowings under Keebler's Revolving facility were $350.0 million, of which $25.0 million was outstanding at July 17, 1999. Keebler has met all financial covenants contained in the financing agreements. Available cash, as well as existing credit facilities, are expected to be sufficient to meet normal operating requirements for the foreseeable future. NEW ACCOUNTING PRONOUNCEMENTS On May 19, 1999, the Financial Accounting Standards Board ("FASB") delayed the effective date of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Citing concerns about companies' ability to both modify their information systems for year 2000 readiness and become educated with the new derivatives and hedging standard, the FASB has delayed the effective date on SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. YEAR 2000 ISSUE The Year 2000 issue arose because many existing computer programs use only the last two digits to refer to a year. As a result, computer programs may not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many businesses are at risk for possible computer application miscalculations or systems failures causing disruptions in business operations. These risks are commonly referred to as the "Y2K issues." We utilize software and related technologies that will be affected by the date change in the year 2000. We have completed a comprehensive review of our computer systems and non-information technology systems to identify potential Y2K issues. Since we have implemented the SAP R/3 Enterprise Wide Information Systems ("SAP") and Manugistics software, both of which were developed/purchased as Y2K compliant, we do not anticipate that the impact of Y2K issues on our business will be material. In order to assess our Y2K readiness, Keebler conducted a complete simulation of the SAP production environment during the second quarter of 1999 which incorporated the December 29, 1999 through January 4, 2000 and February 28, 2000 through March 2, 2000 timeframes. The overall success of the full production simulation is further indication that the risk factors for potential issues in the year 2000 are minimal for the SAP environment. Additionally, secondary information systems, which are not material to our ability to forecast, manufacture or deliver product, have been reviewed and Y2K issues identified. We are currently in the process of correcting or upgrading these systems. We intend to be Y2K compliant on all critical systems before the end of the third quarter of 1999. We have undertaken efforts to verify that all of our material vendors and suppliers will be Y2K compliant. Specifically, we sent a comprehensive questionnaire to all of our significant suppliers and vendors regarding their Y2K compliance in an attempt to identify any problem areas with respect to these groups. Although the results of the questionnaire indicated that our material vendors and suppliers intend to be Y2K compliant before the end of 1999, they were not able to provide us any assurances. We are currently in the process of developing a contingency plan to address any potential Y2K failures caused by a third party. We expect the contingency plan to be finalized before the end of the third quarter of 1999. While we cannot assure that third parties will convert their systems in a timely manner and in a way compatible with our systems, we believe that our actions with third parties detailed above, along with the development of a contingency plan, will minimize these risks. We currently estimate that the incremental costs for becoming Y2K compliant are approximately $2.5 - $3.0 million, which will be funded by cash provided from operations and expensed as incurred. Spending of $2.3 million against this estimate has occurred to date. This estimate is exclusive of Y2K issues regarding the President acquisition. We have completed a comprehensive review of President's computer systems and non-information technology systems to identify potential Y2K issues. Many of the Y2K risks at President will be mitigated through our implementation of the SAP R/3 13 Enterprise Wide Information Systems and Manugistics software at the President facilities. We expect this implementation to also be completed before the end of the third quarter of 1999. We estimate additional costs of approximately $0.3 million will be necessary to correct or upgrade President's secondary information systems in order to make them Y2K compliant. All spending related to President is expected to occur by the end of the third quarter of 1999. Based on the progress we have made in addressing our Y2K issues and our compliance with Y2K issues on our primary business systems, we do not foresee significant risks associated with our Y2K compliance at this time. However, we are in the process of developing a comprehensive contingency plan to address potential critical Y2K issues. Our proposal will include plans for such issues as utility outages, equipment failures, facility checks on January 1, 2000 and review of adequate stock levels. We are also identifying activities that may be completed in advance of January 1, 2000. We expect this contingency plan to be completed by the end of the third quarter of 1999. The information presented above sets forth the steps we have taken to address the Y2K issues. While we do not expect compliance with Y2K issues or the most reasonably likely worst case scenario and related contingency plan to have a material impact on our business, results of operations or financial condition, there can be no assurance that a failure to be fully compliant by the Year 2000 would not have a material adverse impact on us. Although we have spent a large amount of time and resources to address the Y2K issue, there is no assurance that we will be successful in our efforts to identify and address all Y2K issues. Even if we act in a timely manner to complete all planned review, analysis, remediation and any contingency planning, there may be problems which are discovered in the future and cannot be corrected in time to prevent an adverse consequence. Also, there can be no guarantee that the systems of other companies, banks, utilities and government agencies on which we rely will be converted in a timely manner or that their contingency planning will be able to fully address all potential interruptions. The above discussion of our efforts and expectations relating to Y2K compliance is forward-looking based on our best estimates given information that is currently available and is subject to change. Readers are cautioned that forward-looking statements contained in this discussion should be read in conjunction with our disclosure under the heading "FORWARD-LOOKING STATEMENTS" that follows below. FORWARD-LOOKING STATEMENTS Certain statements incorporated by reference or made in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject to the safe harbor provisions of the Reform Act. Such forward-looking statements include, without limitation, statements about: - the competitiveness of the cookie and cracker industry; - the future availability and prices of raw and packaging materials; - potential regulatory obligations; - our strategies and - other statements that are not historical facts. When used in this discussion, the words "anticipate," "believe," "estimate" and similar expressions are generally intended to identify forward-looking statements. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to: - changes in general economic or business conditions (including in the cookie and cracker industry); - actions of competitors; - our ability to recover material costs in the pricing of our products; - the extent to which we are able to develop new products and markets for our products; - the time required for such development; - the level of demand for such products and - changes in our business strategies. 14 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risks to which we are exposed that may adversely affect results of operations and financial position include changes in future interest rates and raw material prices. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of interest rate swap agreements and commodity futures and options contracts. The use of these instruments is limited to hedging activities and they are not entered for trading or speculative purposes. These agreements and contracts are entered into at a corporate level and as such, any income or expense associated with these transactions is not allocated to our reportable segments. Our exposure to market risk for changes in interest rates relates primarily to long-term debt obligations. Our current debt structure consists of both fixed and floating rate debt. Interest rate swap agreements are used to effectively manage changes in interest rates related to the majority of our borrowings with the objective of reducing overall interest costs. Sensitivity analysis was used to assess the impact that changes in market prices have on the fair value of interest rate swap agreements at year end. The fair value of the interest rate swap agreements at July 17, 1999, with a notional amount of $521.5 million, remains comparable to year end. Additionally, interest rates have not fluctuated materially from year end and therefore, the sensitivity analysis performed as of January 2, 1999 for interest rate swap agreements remains a valid estimate. We enter into commodity futures and options contracts to neutralize the impact of price increases on raw material purchases that are not likely to be recovered through higher prices on our products. We also used sensitivity analysis to assess the potential impact on the fair value of commodity futures and options contracts. Assuming a ten percent increase or decrease in market price, the fair value of open contracts with a notional amount of $37.2 million at July 17, 1999 would be impacted by $3.2 million. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Keebler's Annual Meeting of Shareholders ("Meeting") was held on May 25, 1999. (c) Represented at the meeting, either in person or by proxy, were 81,447,213 voting shares that were voted as shown below: (i) To elect three directors to serve for three year terms expiring in the year 2002. All nominees are named below: - Sam K. Reed Votes for Election 81,311,100 Votes Withheld 136,113 - Amos R. McMullian Votes for Election 81,311,100 Votes Withheld 136,113 - Wayne H. Pace Votes for Election 81,385,077 Votes Withheld 62,136 (ii) To ratify the Board of Directors' appointment of PricewaterhouseCoopers LLP as independent public accountants for Keebler for 1999. Votes For Proposal 81,430,307 Votes Against Proposal 4,850 Votes Withheld 12,056 15 PART II: OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit NUMBER DESCRIPTION ------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K None. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. KEEBLER FOODS COMPANY (Registrant) /s/ Sam K. Reed ------------------------------------------------------ Sam K. Reed President, Chief Executive Officer and Director Date: August 27, 1999 /s/ E. Nichol McCully ------------------------------------------------------ E. Nichol McCully Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: August 27, 1999 /s/ James T. Spear ------------------------------------------------------ James T. Spear Vice President Finance and Corporate Controller (Principal Accounting Officer) Date: August 27, 1999 17 EX-27 2
5 This schedule contains summary financial information extracted from the Keebler Foods Company Consolidated Balance Sheet at July 17, 1999 and the Consolidated Statement of Operations for the twenty-eight weeks ended July 17, 1999 found on pages 2 through 4 of Keebler's Form 10-Q and is qualified in its entirety by reference to such financial statements. 0001018848 KEEBLER FOODS COMPANY 1,000 7-MOS JAN-1-2000 JAN-3-1999 JUL-17-1999 22,208 0 64,831 8,140 144,680 315,209 713,317 175,509 1,512,835 442,528 462,753 0 0 845 332,130 1,512,835 1,439,880 1,439,880 638,052 1,374,951 14,760 11,034 21,400 28,769 17,462 11,307 0 0 0 11,307 0.14 0.13
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