-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, YQpB3Asv1b/oVV07BGkjbatrWNk4TyxJ1TUjTIMZgyC2K9Uq2uxFv4eG1tIrAjNw BpHwb+YZcD6Mk491+/coAw== 0000081371-95-000023.txt : 19950517 0000081371-95-000023.hdr.sgml : 19950516 ACCESSION NUMBER: 0000081371-95-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950512 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAKER OATS CO CENTRAL INDEX KEY: 0000081371 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 361655315 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00012 FILM NUMBER: 95538201 BUSINESS ADDRESS: STREET 1: 321 N CLARK ST STREET 2: PO BOX 9001 CITY: CHICAGO STATE: IL ZIP: 60610 BUSINESS PHONE: 3122228503 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1995 _ 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 1-12 THE QUAKER OATS COMPANY (Exact name of registrant as specified in its charter) New Jersey 36-1655315 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Quaker Tower P.O. Box 049001 Chicago, Illinois 60604-9001 (Address of principal executive office) (Zip Code) (312) 222-7111 (Registrant's telephone number, including area code) 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 for such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XX NO _____ The number of shares of Common Stock, $5.00 par value, outstanding as of the close of business on April 30, 1995, was 134,077,427. PAGE 2 THE QUAKER OATS COMPANY AND SUBSIDIARIES INDEX TO FORM 10-Q Page PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Statements of Income and Reinvested Earnings for the Nine and Three Months Ended March 31, 1995 and 1994 3-4 Condensed Consolidated Balance Sheets as of March 31, 1995 and June 30, 1994 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1995 and 1994 6 Net Sales and Operating Income by Segment for the Nine and Three Months Ended March 31, 1995 and 1994 7 Notes to Condensed Consolidated Financial Statements 8-10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 15 Item 5 - Other Information 15 Item 6 - Exhibits and Reports on Form 8-K 15 SIGNATURES 16 EXHIBIT INDEX PAGE 3
THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (UNAUDITED) Dollars in Millions (Except Per Share Data) Nine Months Ended March 31 1995 1994 Net sales $4,777.8 $4,337.4 Cost of goods sold 2,487.4 2,121.4 Gross profit 2,290.4 2,216.0 Selling, general and administrative expenses 1,969.4 1,789.0 Gains on divestitures (517.9) --- Interest expense - net 84.0 63.3 Foreign exchange loss - net 3.5 19.0 Income before income taxes and cumulative effect of accounting change 751.4 344.7 Provision for income taxes 289.5 136.7 Income before cumulative effect of accounting change 461.9 208.0 Cumulative effect of accounting change - net of tax (4.1) --- Net income 457.8 208.0 Preferred dividends - net of tax 3.0 3.1 Net Income Available for Common $ 454.8 $ 204.9 Per Common Share: Income before cumulative effect of accounting change $ 3.43 $ 1.51 Cumulative effect of accounting change $(0.03) $ --- Net income $ 3.40 $ 1.51 Dividends declared $0.855 $0.795 Average Number of Common Shares Outstanding (in thousands) 133,655 135,662 Reinvested Earnings: Balance beginning of period $1,273.6 $1,190.1 Net income 457.8 208.0 Dividends (116.4) (108.5) Common stock issued for stock purchase and incentive plans (1.3) (2.6) Two-for-one stock split-up (420.0) --- Balance end of period $1,193.7 $1,287.0 See accompanying notes to the condensed consolidated financial statements. PAGE 4 THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (UNAUDITED) Dollars in Millions (Except Per Share Data) Three Months Ended March 31 1995 1994 Net sales $1,633.5 $1,449.2 Cost of goods sold 871.0 701.5 Gross profit 762.5 747.7 Selling, general and administrative expenses 646.9 594.8 Gains on divestitures (517.9) --- Interest expense - net 44.5 26.6 Foreign exchange loss - net 2.6 4.9 Income before income taxes 586.4 121.4 Provision for income taxes 220.3 47.6 Net income 366.1 73.8 Preferred dividends - net of tax 1.0 1.1 Net Income Available for Common $ 365.1 $ 72.7 Per Common Share: Net income $ 2.73 $ 0.54 Dividends declared $ 0.285 $0.265 Average Number of Common Shares Outstanding (in thousands) 133,818 133,848 Reinvested Earnings: Balance beginning of period $ 867.6 $1,250.3 Net income 366.1 73.8 Dividends (38.7) (36.0) Common stock issued for stock purchase and incentive plans (1.3) (1.1) Balance end of period $1,193.7 $1,287.0 See accompanying notes to the condensed consolidated financial statements. PAGE 5 THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31 June 30 Dollars in Millions 1995 1994 Assets Current Assets: Cash and cash equivalents $ 105.6 $ 140.4 Trade accounts receivable - net of allowances 564.3 509.4 Inventories: Finished goods 329.4 266.5 Grains and raw materials 94.3 78.8 Packaging materials and supplies 54.7 40.2 Total inventories 478.4 385.5 Other current assets 251.2 218.3 Total Current Assets 1,399.5 1,253.6 Other receivables and investments 112.5 82.1 Property, plant and equipment 2,195.3 2,125.9 Less accumulated depreciation 909.7 911.7 Property - net 1,285.6 1,214.2 Intangible assets-net of amortization 489.5 493.4 Unallocated purchase costs 1,676.9 --- Total Assets $4,964.0 $3,043.3 Liabilities and Shareholders' Equity Current Liabilities: Short-term debt $1,181.1 $ 211.3 Current portion of long-term debt 35.8 45.4 Trade accounts payable 387.8 406.3 Income taxes payable 270.1 40.6 Other current liabilities 621.3 555.5 Total Current Liabilities 2,496.1 1,259.1 Long-term Debt 1,107.3 759.5 Other Liabilities 516.7 481.4 Deferred Income Taxes 38.9 82.2 Preferred Stock, Series B, no par value, authorized 1,750,000 shares; issued 1,282,051 of $5.46 cumulative convertible shares (liquidating preference of $78 per share) 100.0 100.0 Deferred Compensation (74.9) (80.8) Treasury Preferred Stock, at cost, 69,697 shares and 47,817 shares, respectively (5.4) (3.9) Common Shareholders' Equity: Common stock, $5 par value, authorized 400,000,000 shares and 200,000,000 shares, respectively; issued 167,978,792 shares 840.0 420.0 Reinvested earnings 1,193.7 1,273.6 Cumulative translation adjustment (91.7) (75.4) Deferred compensation (132.6) (143.5) Treasury common stock,at cost,34,036,663 shares& 34,370,200 shares,respectively (1,024.1) (1,028.9) Total Common Shareholders' Equity 785.3 445.8 Total Liabilities & Shareholders'Equity $4,964.0 $3,043.3 See accompanying notes to the condensed consolidated financial statements. PAGE 6 THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Dollars in Millions Nine Months Ended March 31 1995 1994 Cash Flows from Operating Activities: Net income $ 457.8 $ 208.0 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change 4.1 --- Depreciation and amortization 146.1 131.3 Deferred income taxes (3.2) 7.6 Gains on divestitures (517.9) --- Loss on disposition of property and equipment 8.3 9.5 Decrease (increase) in trade accounts receivable 15.5 (32.9) (Increase) in inventories (45.4) (30.1) (Increase) decrease in other current assets (34.6) 0.6 (Decrease) increase in trade accounts payable (40.4) 15.5 Increase (decrease) in other current liablilities 178.1 (36.7) Change in deferred compensation 16.8 15.0 Other items 28.3 62.5 Net Cash Provided by Operating Activities 213.5 350.3 Cash Flows from Investing Activities: Additions to property, plant and equipment (190.2) (116.0) Purchase of businesses (1,871.8) (96.3) Sale of businesses 730.3 4.2 Change in other receivables and investments 0.9 (9.0) Net Cash Used in Investing Activities (1,330.8) (217.1) Cash Flows from Financing Activities: Cash dividends (116.4) (108.5) Change in short-term debt 888.4 107.2 Proceeds from short-term debt to be refinanced 400.0 --- Proceeds from long-term debt 0.8 187.0 Reduction of long-term debt (85.4) (99.8) Issuance of common treasury stock 18.0 6.8 Repurchases of common stock (22.5) (197.2) Repurchases of preferred stock (1.5) (0.9) Net Cash Provided by (Used in) Financing Activities 1,081.4 (105.4) Effect of Exchange Rate Changes on Cash and Cash Equivalents 1.1 10.8 Net (Decrease) Increase in Cash and Cash Equivalents (34.8) 38.6 Cash and Cash Equivalents - Beginning of Year 140.4 61.0 Cash and Cash Equivalents - End of Quarter $ 105.6 $ 99.6 See accompanying notes to the condensed consolidated financial statements. PAGE 7 THE QUAKER OATS COMPANY AND SUBSIDIARIES NET SALES AND OPERATING INCOME BY SEGMENT (UNAUDITED) Dollars in Millions Net Sales Operating Income Nine Months Nine Months Ended Ended March 31 March 31 1995 1994 1995 1994 U.S. and Canadian Grocery Products $3,379.4 $3,096.2 $ 833.4 $ 377.4 International Grocery Products 1,398.4 1,241.2 54.8 79.3 Total Sales/Operating Income $4,777.8 $4,337.4 888.2 456.7 Less: General corporate expenses 49.3 29.7 Interest expense - net 84.0 63.3 Foreign exchange loss - net 3.5 19.0 Income before income taxes and cumulative effect of accounting change $ 751.4 $ 344.7 Three Months Three Months Ended Ended March 31 March 31 1995 1994 1995 1994 U.S. and Canadian Grocery Products $1,176.7 $1,042.9 $625.3 $131.2 International Grocery Products 456.8 406.3 21.9 33.7 Total Sales/Operating Income $1,633.5 $1,449.2 647.2 164.9 Less: General corporate expenses 13.7 12.0 Interest expense - net 44.5 26.6 Foreign exchange loss - net 2.6 4.9 Income before income taxes $586.4 $121.4
PAGE 8 THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1995 Note 1 - Basis of Presentation The condensed consolidated financial statements include The Quaker Oats Company and its subsidiaries (the "Company"). The condensed consolidated statements of income and reinvested earnings for the nine and three months ended March 31, 1995 and 1994, the condensed consolidated balance sheet as of March 31, 1995, and the condensed consolidated statements of cash flows for the nine months ended March 31, 1995 and 1994, have been prepared by the Company without audit. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of March 31, 1995 and for all periods presented. All adjustments made have been of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's annual report to shareholders for the fiscal year ended June 30, 1994. Certain previously reported amounts have been reclassified to conform to the current presentation. Note 2 - Litigation On December 18, 1990, Judge Prentice H. Marshall of the United States District Court for the Northern District of Illinois issued a memorandum opinion stating that the Court would enter judgment against the Company in favor of Sands, Taylor & Wood Co. The Court found that the use of the words "thirst aid" in advertising Gatorade thirst quencher infringed the Plaintiff's rights in the trademark THIRST-AID. On July 9, 1991, Judge Marshall entered a judgment of $42.6 million, composed of $31.4 million in principal, plus prejudgment interest of $10.6 million and fees, expenses and costs of $0.6 million. The order enjoined use of the phrase "THIRST-AID" in connection with the advertising or sale of Gatorade thirst quencher in the United States. The Company subsequently appealed the judgment. On September 2, 1992, the Court of Appeals for the Seventh Circuit vacated the monetary award component of the District Court's judgment. The appellate court affirmed the finding of infringement, but found that the monetary award was an inequitable "windfall" to the Plaintiff. The case was remanded to the District Court for further proceedings. The Company filed a request for rehearing that was denied. The Company also filed a Petition for Certiorari with the U.S. Supreme Court that was denied. On June 7, 1993, Judge Marshall issued a judgment on remand of $26.5 million, composed of $20.7 million in principal, prejudgment interest of $5.4 million and fees, expenses and costs of $0.4 million. The Company appealed this judgment to the Court of Appeals for the Seventh Circuit. On September 13, 1994, the Court of Appeals for the Seventh Circuit rendered an opinion affirming in part and remanding in part the District Court's judgment on remand of a $26.5 million monetary award. The Court of Appeals affirmed the lower court's award of a reasonable royalty, but again remanded the case to allow the District Court to explain the basis for and calculation of its royalty award. On April 11, 1995, Judge Marshall ruled again, affirming his prior ruling, and the Company plans to appeal again. Management, with advice from outside legal counsel, has determined that the Court of Appeals' opinion appears to indicate a range of exposure between $16 million and $27 million. The Company recorded a provision of $18.4 million for this litigation in the first quarter of fiscal 1995. No amount had previously been recorded for this matter. The Company is not a party to any other pending legal proceedings or environmental clean-up actions that it believes will have a material adverse effect on its financial position or results of operations. PAGE 9 THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1995 Note 3 - Acquisitions and Divestitures On December 6, 1994, the Company purchased Snapple Beverage Corp. for $1.7 billion. The acquisition was accounted for as a purchase and the results of Snapple are included in the consolidated financial statements since the date of acquisition. The excess purchase price over the fair value of assets acquired is being amortized over 40 years by the straight-line method. The allocation of the purchase price is based on preliminary estimates and assumptions. The allocation and amortization period are subject to revision once appraisals, evaluations and other studies of the fair value of Snapple's assets and liabilities are completed. On February 6, 1995, the Company announced a definitive agreement to sell its North American pet foods business to H. J. Heinz Company for $725.0 million. This transaction was completed on March 14, 1995. On February 3, 1995, the Company announced a definitive agreement to sell its European pet foods business to Dalgety PLC for $700.0 million. This transaction was completed on April 24, 1995. Included as an exhibit to this Form 10-Q are unaudited pro forma combined historical results as if Snapple was acquired and the pet food businesses were divested at the beginning of fiscal 1995. The balance sheet as of March 31, 1995 reflects the acquisition of Snapple and the divestiture of the North American pet foods business, but does not reflect the divestiture of the European pet foods business. Also included in the attached exhibit is unaudited pro forma combined balance sheet information as if the divestiture of the European pet foods business had occurred on March 31, 1995. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition and divestitures had been completed at the beginning of fiscal 1995 or as of March 31, 1995, nor are they necessarily indicative of future consolidated results. In November 1994, the Company purchased the Adria pasta business in Brazil and on January 31, 1995, the Company purchased the assets of Nile Spice Foods, Inc. Pro forma information for Adria and Nile Spice is not included above because it is not significant. In December 1994, the Company signed an agreement to sell its Mexican chocolate business to Nescalin S. A. de C.V., a subsidiary of Nestle S.A. This transaction was completed on May 12, 1995. Note 4 - Two-for-one Stock Split-up On November 9, 1994, shareholders of record received an additional share of common stock for each share held, pursuant to a two-for-one stock split-up approved by the Board of Directors. All per share information has been retroactively restated. Authorized shares have been increased from 200 million to 400 million, pursuant to shareholder approval on November 9, 1994. As a result of the increase in issued shares, common stock has been increased and reinvested earnings has been decreased by $420.0 million. Note 5 - Revolving Credit Facilities In May 1995, the Company changed its revolving credit facilities. The facilities now consist of a $600.0 million five-year annually extendible revolving credit facility and a $900.0 million 364-day annually extendible revolving credit facility which may, at the Company's option, be converted into a two-year term loan. Note 6 - Accounting Change Effective July 1, 1994, the Company adopted FASB Statement #112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of adoption was a $6.8 million pretax charge, or $4.1 million after-tax, in the first quarter of fiscal 1995. The adoption of this statement will not have a material effect on operating results or cash flows in fiscal 1995 or in future years. PAGE 10 THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1995 Note 7 - Short-term Debt to be Refinanced The condensed consolidated balance sheet as of March 31, 1995 includes the reclassification of $400.0 million of short-term debt to long-term debt, reflecting the Company's intent and ability to refinance this debt on a long-term basis. In April 1995, the Company began issuing medium-term notes following the filing of a prospectus supplement with the Securities and Exchange Commission for the intended issuance of $400.0 million of medium-term notes, under a shelf registration covering $600.0 million of debt securities filed in fiscal 1990. In fiscal 1994, $200.0 million of medium-term notes were issued under the shelf registration. Note 8 - Subsequent Events On May 1, 1995, the Company signed a definitive agreement to sell the Van Camp's pork and beans and Wolf Brand chili businesses to Hunt-Wesson, Inc., a subsidiary of ConAgra, Inc. The sale is subject to certain conditions precedent, including receipt of appropriate regulatory approval. The transaction is expected to be finalized by the end of the fiscal year. On May 10, 1995, the Board of Directors approved a change in the Company's fiscal year end from June 30 to December 31, effective the calendar year beginning January 1, 1996. A six-month fiscal transition period from July 1, 1995 through December 31, 1995, will precede the start of the new calendar-year cycle. The Company will file a Form 10-K no later than March 31, 1996 covering the six-month transition period from July 1, 1995 through December 31, 1995. PAGE 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine Months Ended March 31, 1995 Compared with Nine Months Ended March 31, 1994 Operating Results Consolidated net sales for the first nine months of fiscal 1995 were $4.78 billion, up 10 percent from the first nine months of fiscal 1994. The increase in net sales reflects an 11 percent worldwide increase in volume, including acquisitions, and a favorable impact of translating European currencies into U.S. dollars. Price increases did not have a significant impact on sales. U.S. and Canadian Grocery Products sales increased 9 percent to $3.38 billion on a volume increase of 10 percent. Sales and volume growth were mainly driven by the acquisition of Snapple in December 1994 and by increases in food service and Gatorade thirst quencher, partly reduced by decreases in hot cereals and pet foods. The sale of the North American pet food business was completed on March 14, 1995. International Grocery Products sales increased 13 percent to $1.40 billion, due mainly to volume increases and to the favorable effect of stronger European currencies. Volume increased 13 percent, primarily in Brazil and for Gatorade thirst quencher throughout Latin America. Brazilian volume increases were due to the acquisition of the Adria pasta business in November 1994 and the positive effects of the new economic plan in that country. Gross profit margin decreased to 47.9 percent of sales from 51.1 percent in the prior year primarily due to the effect of acquisitions, other product mix changes and commodity cost increases. Selling, general and administrative (SG&A) expenses rose 10 percent to $1.97 billion due mainly to an 11 percent increase in advertising and merchandising (A&M) expenses. A&M expenses were 26.8 percent of net sales in the first nine months of fiscal 1995, up slightly from 26.6 percent in the first nine months of fiscal 1994. SG&A expenses for the first nine months of fiscal 1995 included a provision of $18.4 million for estimated litigation costs related to a 1984 trademark lawsuit involving Gatorade thirst quencher advertising. (See Note 2 to the condensed consolidated financial statements for a detailed discussion.) Consolidated operating income was $888.2 million compared to $456.7 million last year. Included in fiscal 1995 operating income was a $513.0 million gain on the sale of the North American pet food business and a $4.9 million gain on the sale of the Mellona honey business in Holland. Excluding the gains on divestitures, consolidated operating income was $370.3 million. U.S. and Canadian Grocery Products operating income excluding the gain on divestiture of the North American pet food business was $320.4 million versus $377.4 million in fiscal 1994. The decrease reflects significant increases in A&M expenses across most major businesses, particularly Gatorade thirst quencher, and lower operating results for hot cereals. International Grocery Products operating income excluding the gain on divestiture of the Mellona honey business in Holland decreased to $49.9 million versus $79.3 million in the prior year. The decrease was mainly due to lower operating income in Brazil, which was more than offset by reduced financing costs in that country. In March 1995, the Company announced that the pending divestitures of its North American and European pet food businesses would necessitate further realignment of physical and human resources for its existing businesses and will result in a charge in the fourth quarter of fiscal 1995. These measures are to reduce overhead expenditures and will include the elimination of about 600 positions. The amount of the charge is expected to be approximately $75 million to $90 million, or $0.35 per share to $0.40 per share. PAGE 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Interest, Foreign Exchange and Income Taxes Net financing costs were $87.5 million, an increase of $5.2 million. Increases in interest expense for the Snapple acquisition borrowings were mostly offset by the positive effects of reduced inflation in Brazil. Fourth quarter interest expense is expected to decrease as compared to the third quarter because the after-tax proceeds on the North American and European pet food and Mexican chocolate divestitures and the anticipated Van Camp's beans and Wolf Brand chili divestitures (see Subsequent Events below) are expected to reduce short-term debt by approximately $1.2 billion by the end of fiscal 1995. (The after-tax proceeds on the North American pet food divestiture are already reflected in the March 31, 1995 balance sheet.) The effective tax rate for the first nine months of fiscal 1995 was 38.5 percent as compared to 39.7 percent in fiscal 1994. Excluding the gains on divestitures, the effective tax rate in fiscal 1995 was 41.4 percent. The increase resulted mainly from non-deductible goodwill amortization related to the Snapple acquisition. The Company has evaluated its deferred tax assets and believes that future taxable income will be sufficient to realize a majority of these assets. A valuation allowance has been provided for the deferred tax assets not expected to be realized. Three Months Ended March 31, 1995 Compared with Three Months Ended March 31, 1994 Operating Results Consolidated net sales for the third quarter of fiscal 1995 were $1.63 billion, up 13 percent from the third quarter of fiscal 1994, primarily due to the acquisitions of Snapple and Adria, volume increases and a favorable impact of translating European currencies into U.S. dollars. Volume increased 21 percent. Sales were also affected by product mix changes. Price increases did not have a significant impact on sales. U.S. and Canadian Grocery Products sales increased 13 percent to $1.18 billion on a volume increase of 21 percent. The increases resulted mainly from the inclusion of Snapple and from increases in Gatorade thirst quencher and food service, partially offset by decreases in hot cereals and pet foods, the latter caused by the sale of the North American pet food business on March 14, 1995. International Grocery Products sales increased 12 percent to $456.8 million, partly due to stronger European currencies. Volume increased 21 percent led by Brazilian grocery products, due primarily to the inclusion of Adria, and increases in Latin American Gatorade thirst quencher and European pet foods. Gross profit margin decreased to 46.7 percent of sales from 51.6 percent in the prior year mainly resulting from the effect of acquisitions, other product mix changes and commodity cost increases. SG&A expenses increased 9 percent to $646.9 million due mainly to a 6 percent increase in A&M expenses. A&M expenses were 24.9 percent of sales, a decrease from last year's 26.4 percent. Consolidated operating income was $647.2 million, which includes a $513.0 million gain on the sale of the North American pet food business and a $4.9 million gain on the sale of the Mellona honey business in Holland. Excluding the gains on divestitures, consolidated operating income was $129.3 million, a decrease of $35.6 million from last year. U.S. and Canadian Grocery Products operating income excluding the gain on divestiture was $112.3 million versus $131.2 million in fiscal 1994. The decrease mainly reflects significantly lower operating income for hot cereals due to lower volume resulting from loss of market share and higher A&M expenses. International Grocery Products operating income excluding the gain on divestiture decreased to $17.0 million from $33.7 million in the prior year. The change mainly reflects decreased operating income in Brazil, which was offset by reduced financing costs in that country. PAGE 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Interest, Foreign Exchange and Income Taxes Net financing costs increased $15.6 million, primarily due to increases in interest expense as a result of the Snapple acquisition, partly offset by the positive effects of reduced inflation in Brazil. The effective tax rate in the third quarter was 37.6 percent versus 39.2 percent in the third quarter of fiscal 1994. Excluding the gains on divestitures, the effective tax rate in the fiscal 1995 third quarter was 40.0 percent. The increase in the effective tax rate was mainly because of non- deductible goodwill amortization related to the Snapple acquisition, partly reduced by favorable tax treatment for operations in Puerto Rico. Liquidity and Capital Resources Short-term and long-term debt (total debt) as of March 31, 1995 was $2.32 billion, up $1.31 billion from June 30, 1994. On December 6, 1994, the Company acquired Snapple Beverage Corp. for $1.7 billion. The acquisition was financed with commercial paper borrowings. On March 14, 1995, the Company completed the sale of its North American pet food business for $725.0 million. The after-tax proceeds on the sale of over $500 million were used to reduce commercial paper borrowings. The total debt-to-total capitalization ratio was 74.3 percent and 68.8 percent as of March 31, 1995 and June 30, 1994, respectively. The Company completed the sale of its European pet food business on April 24, 1995, and the sale of its Mexican chocolate business on May 12, 1995 and anticipates completing the sales of its Van Camp's beans and Wolf Brand chili businesses (see Subsequent Events) prior to the end of fiscal 1995. The expected after- tax proceeds on these divestitures will be used to further reduce short-term borrowings, which will result in a lower total debt-to-total capitalization ratio as of June 30, 1995. The consolidated balance sheet as of March 31, 1995 includes the reclassification of $400.0 million of short-term debt to long-term debt, reflecting the Company's intent and ability to refinance this debt on a long- term basis. In April 1995, the Company began issuing medium-term notes following the filing of a prospectus supplement with the Securities and Exchange Commission for the intended issuance of $400.0 million of medium-term notes, under a shelf registration covering $600.0 million of debt securities filed in fiscal 1990. In fiscal 1994, $200.0 million of medium-term notes were issued under the shelf registration. In May 1995, the Company changed its revolving credit facilities. The facilities now consist of a $600.0 million five-year annually extendible revolving credit facility and a $900.0 million 364-day annually extendible revolving credit facility which may, at the Company's option, be converted into a two-year term loan. Net cash provided by operating activities was $213.5 million and $350.3 million for the first nine months of fiscal 1995 and 1994, respectively. The decrease between years results mainly from lower net income (excluding gains on divestitures) and changes in working capital. The Company will utilize cash flow from operating activities and cash flow from the divestitures to cover fiscal 1995 capital expenditures and cash dividends. Capital expenditures for the first nine months of fiscal 1995 and 1994 were $190.2 million and $116.0 million, respectively, with no material individual commitments outstanding. During the first quarter of fiscal 1995, 0.6 million shares of the Company's outstanding common stock were repurchased for $22.5 million under a ten million share repurchase program announced in August 1993. (The share information has been restated for the November 1994 two-for-one stock split-up.) PAGE 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Accounting Change Effective July 1, 1994, the Company adopted FASB Statement #112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of adoption was a $4.1 million after-tax charge in the first quarter of fiscal 1995. The adoption of this statement will not have a material effect on operating results or cash flows in fiscal 1995 or in future years. Subsequent Events On May 1, 1995, the Company signed a definitive agreement to sell the Van Camp's pork and beans and Wolf Brand chili businesses to Hunt-Wesson, Inc. a subsidiary of ConAgra, Inc. The sale is subject to certain conditions precedent, including receipt of appropriate regulatory approval. The transaction is expected to be finalized by the end of the fiscal year. On May 10, 1995, the Board of Directors approved a change in the Company's fiscal year end from June 30 to December 31, effective the calendar year beginning January 1, 1996. A six-month fiscal transition period from July 1, 1995 through December 31, 1995, will precede the start of the new calendar-year cycle. PAGE 15 PART II - OTHER INFORMATION Item 1 Legal Proceedings Note 2 in Part I is incorporated by reference herein. Item 5 Other Information Note 8 in Part I is incorporated by reference herein. Item 6 Exhibits and Reports on Form 8-K Item 6(a) See Exhibit 11. Item 6(b) Reports on Form 8-K Form 8-K/A was filed on February 17, 1995, amending Form 8-K filed on December 19, 1995, to provide historical and pro forma financial statements related to the acquisition of Snapple. Form 8-K was filed on March 29, 1995, describing the disposition of the North American pet food business and providing pro forma financial information with respect to the disposition. All other items in Part II are either inapplicable to the Company during the quarter ended March 31, 1995, the answer is negative or a response has been previously reported and an additional report of the information need not be made, pursuant to the Instructions to Part II. PAGE 16 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. The Quaker Oats Company (Registrant) Date May 12, 1995 Robert S. Thomason Robert S. Thomason Senior Vice President - Finance and Chief Financial Officer Date May 12, 1995 Thomas L. Gettings Thomas L. Gettings Vice President and Corporate Controller EXHIBIT INDEX Exhibit Paper (P) or Number Description Electronic (E) (11) Statement Re Computation E of Per Share Earnings (27) Financial Data Schedule E (submitted to the Securities and Exchange Commission in electronic format) (99) Unaudited Pro Forma E Combined Financial Information as of March 31, 1995 and For the Nine Months then Ended EX-27 2
5 1000000 3-MOS 6-MOS 9-MOS JUN-30-1994 JUN-30-1994 JUN-30-1994 SEP-30-1994 DEC-31-1994 MAR-31-1995 185 103 106 0 0 0 537 568 591 23 22 27 398 481 478 1326 1357 1400 2158 2283 2195 934 950 909 3133 5061 4964 1348 2974 2496 722 1026 1107 420 840 840 0 0 0 100 100 100 (35) (470) (135) 3133 5061 4964 1636 3144 4778 1636 3144 4778 825 1616 2487 825 1616 2487 0 0 0 2 4 6 18 44 92 102 165 751 41 69 289 61 96 462 0 0 0 0 0 0 4 4 4 57 92 458 .84 .67 3.43 .82 .66 3.31
EX-11 3 EXHIBIT (11) THE QUAKER OATS COMPANY AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS For the Nine Months Ended March 31, March 31, 1995 1994 Calculation of Fully Diluted Earnings Per Share Dollars in Millions (Except Per Share Data) Income Before Cumulative Effect of Accounting Change $ 461.9 $ 208.0 Less: Adjustments attributable to conversion of ESOP Convertible Preferred Stock (0.8) (1.1) Income Before Cumulative Effect of Accounting Change Used for Fully Diluted Calculation 461.1 206.9 Cumulative Effect of Accounting Change - Net of Tax (4.1) --- Net Income Used for Fully Diluted Calculation $ 457.0 $ 206.9 Shares in Thousands Average Number of Common Shares Outstanding 133,655 135,662 Plus Dilutive Securities: Stock Options 1,652 1,720 ESOP Convertible Preferred Stock 2,641 2,680 Average Shares Outstanding Used for Fully Diluted Calculation 137,948 140,062 Fully Diluted Earnings Per Share Before Cumulative Effect of Accounting Change $ 3.34 $ 1.48 Fully Diluted Cumulative Effect of Accounting Change (0.03) ---- Fully Diluted Earnings Per Share $ 3.31 $ 1.48 EX-99 4 Exhibit (99) to Form 10-Q NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined financial information should be read in conjunction with historical financial statements contained in the Company's Annual Report on Form 10-K; the unaudited pro forma financial information of the Company and Snapple Beverage Corp. contained in Form 8-K/A filed on February 17, 1995 to amend Form 8-K filed on December 19, 1994; the unaudited pro forma financial information of the Company and the North American pet food business contained in Form 8-K filed on March 29, 1995; and the unaudited pro forma financial information of the Company and the European pet food business contained in Form 8-K filed on May 5, 1995. The Snapple acquisition was completed on December 6, 1994. The North American pet food divestiture was completed on March 14, 1995. The European pet food divestiture was completed on April 24, 1995. The following pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred had the acquisition of Snapple and the dispositions of the North American and European pet food businesses been consummated in accordance with the assumptions set forth below, nor is it necessarily indicative of future operating results or financial position. Basis of Presentation The unaudited pro forma combined balance sheet information presents certain financial position information assuming the European pet food divestiture occurred on March 31, 1995. The acquisition of Snapple and the divestiture of the North American pet food business are included in the balance sheet as of March 31, 1995. The unaudited pro forma combined selected income statement information for the nine months ended March 31, 1995 present the consolidated results of operations assuming that the acquisition and dispositions occurred as of July 1, 1994. Balance Sheet Information Pro Forma Adjustments The following notes describe the historical and pro forma adjustments found on the accompanying schedule. (1) The adjustments included in the European pet food column reflect the assets sold and liabilities assumed, including accounts receivable, inventory, prepaid assets, fixed assets, accounts payable, and other current and non- current liabilities. Amounts in this column also reflect other items that are affected by the sale of the European pet food business, specifically writing- off intangibles. Deferred taxes have been reclassified to current liabilities. (2) This amount represents the estimated after-tax proceeds on the divestiture of the European pet food business, which are assumed to be used to pay down short-term debt. (3) This amount represents the estimated after-tax gain on the divestiture of the European pet food business. Income Statement Information Pro Forma Adjustments The following notes describe the historical and pro forma adjustments found on the accompanying schedule. (1) This column includes the historical net sales and net income for Snapple activity prior to the acquisition (from July 1, 1994 through December 5, 1994). Activity for Snapple from December 6, 1994 through March 31, 1995 is included in Quaker net sales and net income. (2) The amounts included in the North American pet food column reflect the direct activity of the business, including net sales and direct cost of sales, advertising and merchandising expenses, and other general direct expenses of the business for the period July 1, 1994 through March 13, 1995. Pretax income has been tax effected at the estimated tax rate for the period. (3) The amounts included in the European pet food column reflect the direct activity of the business, including net sales and direct cost of sales, advertising and merchandising expenses, and other general direct expenses of the business for the period July 1, 1994 through March 31, 1995. Pretax income has been tax effected at the estimated tax rate for the period. (4) This amount includes: amortization of Snapple goodwill ($17.5 million) resulting from the preliminary purchase price allocation; additional interest expense ($46.4 million) on the borrowings to acquire Snapple; and a reduction in interest expense ($48.3 million), as a result of the after-tax proceeds from the North American and European pet food dispositions reducing short-term borrowings. Interest expense has been calculated using the short-term rates on the borrowings obtained for the Snapple acquisition. These amounts have been tax effected as appropriate.
UNAUDITED COMBINED PRO FORMA BALANCE SHEET INFORMATION AS OF MARCH 31, 1995 European Pet Foods Pro Forma Pro Forma Quaker (1) Adjustments Combined Total Assets $4,964.0 ($346.3) $4,617.7 Current Assets $1,399.5 ($190.2) $1,209.3 Current Liabilities $1,279.2 ($120.4) $1,158.8 (excluding short-term debt) Short-term Debt $1,216.9 (2) ($488.0) $ 728.9 Long-term Debt $1,107.3 $1,107.3 Common Shareholders' Equity $ 785.3 (3) 287.2 $1,072.5 UNAUDITED COMBINED SELECTED PRO FORMA INCOME STATEMENT INFORMATION FOR THE NINE MONTHS ENDED MARCH 31, 1995 North American European Pro Forma Pro Forma Quaker Snapple Pet Food Pet Food Adjustments Combined (1) (2) (3) (4) Net Sales $4,777.8 $271.6 ($391.8) ($635.7) $4,021.9 Income Before Cumulative Effect of Accounting Change $461.9 $0.8 ($37.1) ($17.1) ($10.5) $ 398.0 Income Per Share Before Cumulative Effect of Accounting Change $3.43 $2.96 See accompanying general and numbered notes.
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