-----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, CG4FYXAsriWUcdVIaA4WlpjRHdiYaZXKKGLVicymUPFi+7ogp26tG/GH5mPW2HaS l57DVZ0Gv3CeoAcASfDfrg== 0000081371-97-000009.txt : 19970805 0000081371-97-000009.hdr.sgml : 19970805 ACCESSION NUMBER: 0000081371-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970804 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAKER OATS CO CENTRAL INDEX KEY: 0000081371 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 361655315 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-02709 FILM NUMBER: 97651130 BUSINESS ADDRESS: STREET 1: QUAKER TOWER STREET 2: PO BOX 049001 CITY: CHICAGO STATE: IL ZIP: 60604-9001 BUSINESS PHONE: 3122228503 10-Q 1 UNITED STATES 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 June 30, 1997 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 June 30, 1997 was 137,370,179. 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 Six and Three Months Ended June 30, 1997 and 1996 3-4 Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 6 Net Sales and Operating Income by Segment for the Six and Three Months Ended June 30, 1997 and 1996 7-8 Notes to Condensed Consolidated Financial Statements 9-12 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 21 Item 4 - Submission of Matters to a Vote of Security Holders 21-22 Item 6 - Exhibits and Reports on Form 8-K 22 SIGNATURES 23 EXHIBIT INDEX 24 EXHIBIT 11 25 THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (UNAUDITED) Six Months Ended Dollars in Millions (Except Per Share Data) June 30, 1997 1996 Net sales $ 2,597.2 $ 2,704.6 Cost of goods sold 1,331.8 1,454.6 Gross profit 1,265.4 1,250.0 Selling, general and administrative expenses 1,012.0 1,030.6 Loss (gain) on divestitures 1,414.6 (2.8) Restructuring charges 11.8 -- Interest expense 49.5 57.7 Interest income (3.3) (3.0) Foreign exchange loss - net 5.0 3.6 (Loss) income before income taxes (1,224.2) 163.9 (Benefit) provision for income taxes (190.2) 67.1 Net (Loss) Income (1,034.0) 96.8 Preferred dividends - net of tax 1.7 2.0 Net (Loss) Income Available for Common $(1,035.7) $ 94.8 Per Common Share: Net (loss) income $ (7.58) $ 0.70 Dividends declared $ 0.57 $ 0.57 Average Number of Common Shares Outstanding (in thousands) 136,572 135,213 Reinvested Earnings: Balance beginning of period $ 1,521.3 $ 1,433.6 Net (loss) income (1,034.0) 96.8 Dividends (79.0) (78.4) Common stock issued for stock purchase and incentive plans -- (3.0) Balance end of period $ 408.3 $ 1,449.0 See accompanying notes to the condensed consolidated financial statements. THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (UNAUDITED) Three Months Ended Dollars in Millions (Except Per Share Data) June 30, 1997 1996 Net sales $ 1,395.5 $ 1,481.8 Cost of goods sold 704.1 790.1 Gross profit 691.4 691.7 Selling, general and administrative expenses 520.5 555.2 Loss on divestiture 10.6 -- Restructuring charges 11.8 -- Interest expense 24.0 28.2 Interest income (1.8) (1.6) Foreign exchange loss - net 2.5 1.8 Income before income taxes 123.8 108.1 Provision for income taxes 48.0 43.5 Net Income 75.8 64.6 Preferred dividends - net of tax 0.8 1.0 Net Income Available for Common $ 75.0 $ 63.6 Per Common Share: Net income $ 0.57 $ 0.47 Dividends declared $ 0.285 $ 0.285 Average Number of Common Shares Outstanding (in thousands) 136,795 135,329 Reinvested Earnings: Balance beginning of period $ 372.0 $ 1,423.4 Net income 75.8 64.6 Dividends (39.5) (39.3) Common stock issued for stock purchase and incentive plans -- 0.3 Balance end of period $ 408.3 $ 1,449.0 See accompanying notes to the condensed consolidated financial statements. THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, December 31, Dollars in Millions 1997 1996 Assets Current Assets: Cash and cash equivalents $ 100.6 $ 110.5 Trade accounts receivable - net of allowances 383.3 294.9 Inventories: Finished goods 197.8 181.8 Grains and raw materials 67.5 62.1 Packaging materials and supplies 26.4 31.0 Total inventories 291.7 274.9 Other current assets 415.4 209.4 Total Current Assets 1,191.0 889.7 Property, plant and equipment 1,939.9 1,943.3 Less accumulated depreciation 771.4 742.6 Property - net 1,168.5 1,200.7 Intangible assets - net of amortization 415.7 2,237.2 Other assets 53.9 66.8 Total Assets $2,829.1 $4,394.4 Liabilities and Shareholders' Equity Current Liabilities: Short-term debt $ 90.4 $ 517.0 Current portion of long-term debt 118.0 51.1 Trade accounts payable 261.0 210.2 Income taxes payable 121.7 42.4 Other current liabilities 538.7 534.0 Total Current Liabilities 1,129.8 1,354.7 Long-term debt 919.9 993.5 Other liabilities 536.8 558.9 Deferred income taxes 65.5 238.4 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 (61.1) (64.9) Treasury Preferred Stock, at cost, 211,528 shares and 187,810 shares, respectively (18.4) (16.1) Common Shareholders' Equity: Common stock, $5 par value, authorized 400 million shares; issued 167,978,792 shares 840.0 840.0 Additional paid-in capital 5.7 -- Reinvested earnings 408.3 1,521.3 Cumulative translation adjustment (71.6) (68.2) Deferred compensation (104.0) (103.4) Treasury common stock, at cost, 30,608,613 shares and 31,885,727 shares, respectively (921.8) (959.8) Total Common Shareholders' Equity 156.6 1,229.9 Total Liabilities and Shareholders' Equity $2,829.1 $4,394.4 See accompanying notes to the condensed consolidated financial statements. THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended Dollars in Millions June 30, 1997 1996 Cash Flows from Operating Activities: Net (loss) income $(1,034.0) $ 96.8 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 89.4 100.4 Deferred income taxes 1.9 7.1 Loss (gain) on divestitures - net of tax of $(265.1) and $1.1 in 1997 and 1996, respectively 1,149.5 (1.7) Restructuring charges 11.8 -- Loss on disposition of property and equipment 22.0 10.0 Increase in trade accounts receivable (133.1) (119.1) Increase in inventories (52.4) (69.3) Decrease in other current assets 7.9 8.4 Increase in trade accounts payable 63.8 80.8 Increase in other current liabilities 110.7 96.7 Change in deferred compensation 3.2 3.7 Other items 18.2 27.4 Net Cash Provided by Operating Activities 258.9 241.2 Cash Flows from Investing Activities: Additions to property, plant and equipment (93.5) (102.4) Business divestitures - net of tax of $1.1 in 1996 300.0 42.1 Change in other assets -- 0.6 Net Cash Provided by (Used in) Investing Activities 206.5 (59.7) Cash Flows from Financing Activities: Cash dividends (79.0) (78.4) Change in short-term debt (425.6) (85.2) Proceeds from long-term debt 4.3 3.2 Reduction of long-term debt (9.1) (27.9) Issuance of common treasury stock 39.1 13.3 Repurchases of preferred stock (2.3) (2.3) Net Cash Used in Financing Activities (472.6) (177.3) Effect of Exchange Rate Changes on Cash and Cash Equivalents (2.7) 6.1 Net (Decrease) Increase in Cash and Cash Equivalents (9.9) 10.3 Cash and Cash Equivalents - Beginning of Period 110.5 93.2 Cash and Cash Equivalents - End of Period $ 100.6 $103.5 See accompanying notes to the condensed consolidated financial statements. THE QUAKER OATS COMPANY AND SUBSIDIARIES NET SALES AND OPERATING INCOME BY SEGMENT (UNAUDITED)
Net Sales Operating Income (Loss) (a) Six Months Six Months Ended Ended Dollars in Millions June 30, June 30, 1997 1996 1997 1996 Foods U.S. and Canadian $1,286.8 $1,235.0 $ 154.0 $165.6 International (b) 314.4 303.7 (7.2) 5.1 Total Foods $1,601.2 $1,538.7 $ 146.8 $170.7 Beverages U.S. and Canadian $ 649.2 $ 623.8 $ 125.3 $111.7 International (c) 174.3 153.1 2.8 (10.0) Total Beverages $ 823.5 $ 776.9 $ 128.1 $101.7 Divested Businesses (d) $ 172.5 $ 389.0 $(1,429.7) $(28.2) Total Sales/Operating (Loss) Income $2,597.2 $2,704.6 $(1,154.8) $244.2 Less: General corporate expenses 18.2 22.0 Interest expense - net 46.2 54.7 Foreign exchange loss - net 5.0 3.6 (Loss) income before income taxes $(1,224.2) $163.9 (a) Operating income (loss) includes certain allocations of overhead expenses. (b) 1997 operating loss for the International Foods business includes a pretax restructuring charge of $10.7 million for plant consolidations in the Brazilian pasta business. (c) 1997 operating income for the International Beverages business includes a pretax restructuring charge of $1.1 million for the closing of an office in Singapore. (d) Total sales and operating income for the Italian products business (divested January 1996) for the six months ended June 30, 1996, were $4.0 million and $3.3 million, respectively. Operating income includes a pretax gain of $2.8 million on the sale of the Italian products business. Total sales and operating income for the U.S. and Canadian frozen foods business (divested July 1996) for the six months ended June 30, 1996, were $79.0 million and $8.3 million, respectively. Total sales for the Snapple beverages business (divested May, 1997) for the six months ended June 30, 1997 and 1996, were $172.5 million and $306.0 million, respectively. Operating losses of the Snapple beverages business for the six months ended June 30, 1997 and 1996, were $1.43 billion and $39.8 million, respectively. The 1997 operating loss includes a pretax loss of $1.41 billion on the sale of the Snapple beverages business. THE QUAKER OATS COMPANY AND SUBSIDIARIES NET SALES AND OPERATING INCOME BY SEGMENT (UNAUDITED) Net Sales Operating Income (Loss) (a) Three Months Three Months Ended Ended Dollars in Millions June 30, June 30, 1997 1996 1997 1996 Foods U.S. and Canadian $ 621.5 $ 583.4 $ 76.8 $ 66.6 International (b) 159.2 153.4 (8.0) 4.2 Total Foods $ 780.7 $ 736.8 $ 68.8 $ 70.8 Beverages U.S. and Canadian $ 435.6 $ 438.1 $ 90.6 $ 95.6 International (c) 103.3 87.0 3.1 (4.3) Total Beverages $ 538.9 $ 525.1 $ 93.7 $ 91.3 Divested Businesses (d) $ 75.9 $ 219.9 $ (5.6) $(18.9) Total Sales/Operating Income $1,395.5 $1,481.8 $ 156.9 $143.2 Less: General corporate expenses 8.4 6.7 Interest expense - net 22.2 26.6 Foreign exchange loss - net 2.5 1.8 Income before income taxes $ 123.8 $108.1 (a) Operating income (loss) includes certain allocations of overhead expenses. (b) 1997 operating loss for the International Foods business includes a pretax restructuring charge of $10.7 million for plant consolidations in the Brazilian pasta business. (c) 1997 operating income for the International Beverages business includes a pretax restructuring charge of $1.1 million for the closing of an office in Singapore. (d) Total sales and operating income for the U.S. and Canadian frozen foods business (divested July 1996) for the three months ended June 30, 1996, were $36.6 million and $3.4 million, respectively. Total sales for the Snapple beverages business (divested May 1997) for the three months ended June 30, 1997 and 1996, were $75.9 million and $183.3 million, respectively. Total operating losses for the Snapple beverages business for the three months ended June 30, 1997 and 1996, were $5.6 million and $22.3 million, respectively. The 1997 operating loss includes a pretax loss of $10.6 million on the sale of the Snapple beverages business.
THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 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 six and three months ended June 30, 1997 and 1996, the condensed consolidated balance sheet as of June 30, 1997, and the condensed consolidated statements of cash flows for the six months ended June 30, 1997 and 1996, 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 June 30, 1997, 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 (GAAP) 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 report to shareholders for the year ended December 31, 1996. Certain previously reported amounts have been reclassified to conform to the current presentation. Note 2 - Litigation On November 1, 1995, the Company filed suit against Borden, Inc. in Federal District Court in New York alleging that Borden made material misrepresentations and committed fraud in connection with the Company's November 1994 acquisition of a Brazilian pasta business for $100 million. The Company seeks to rescind the transaction and collect damages. The Company is also a party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise out of the normal course of business and relate to the Company's acquisition activity and other issues. Certain of these actions seek damages in large amounts. While the results of litigation cannot be predicted with certainty, management believes that the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. Changes in assumptions, as well as actual experience, could cause the estimates made by management to change. Note 3 - Sale of Snapple Beverage Corp. On May 22, 1997, the Company completed the sale of 100 percent of its shares of its wholly-owned subsidiary, Snapple Beverage Corp. (Snapple), to Triarc Companies, Inc. (Triarc) for $300 million in cash. The disposition was made pursuant to the Stock Purchase Agreement dated March 27, 1997, between the Company and Triarc. The Company realized a pretax loss on the sale of $10.6 million ($.02 per share) in the second quarter of 1997, which, combined with the previously recorded impairment loss in the first quarter of 1997, resulted in a total pretax loss on the sale of $1.41 billion ($8.41 per share). As a result of this transaction the Company expects to recapture approximately $250 million in taxes paid on previous capital gains arising from business divestitures. The Company has THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 recognized a tax benefit and recorded an income tax receivable for this amount. Of this amount, approximately $240 million is included in other current assets and approximately $10 million is included in other assets in the condensed consolidated balance sheet as of June 30, 1997. Note 4 - Restructuring Charges During the quarter ended June 30, 1997, the Company recorded pretax restructuring charges of $11.8 million ($.06 per share). These charges included $10.7 million for plant consolidations in the Brazilian pasta business and $1.1 million for the closing of a beverages office in Singapore. Savings from the restructuring actions are estimated to be about $5 million annually, beginning in 1998, of which approximately 80 percent will be in cash. Note 5 - Estimates and Assumptions The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 6 - Pending Accounting Changes In March 1997, the Financial Accounting Standards Board (FASB) issued Statement #128, "Earnings Per Share." This Statement simplifies the computation of earnings per share and makes the computation more consistent with those of International Accounting Standards. The Company will adopt this Statement during the fourth quarter. The Company does not expect the adoption of this new standard to significantly impact previously reported earnings per share or earnings per share trends. In July 1997, the FASB issued Statement #130, "Reporting Comprehensive Income," and Statement #131, "Disclosures About Segments of an Enterprise and Related Information." Statement #130 establishes standards for reporting comprehensive income in financial statements. Statement #131 expands certain reporting and disclosure requirements for segments from current standards. The Company is not required to adopt these Statements until 1998 and does not expect the adoption of these new standards to result in material changes to previously reported amounts or disclosures. Note 7 - Derivative Financial and Commodity Instruments The Company actively monitors its exposure to foreign currency exchange rate, commodity price and interest rate risks. Derivative financial and commodity instruments are used to reduce the impact of these risks. The Company uses derivatives only for purposes of reducing risk associated with underlying exposures. The Company does not trade or use these instruments with the objective of earning financial gains on the exchange rate, commodity price or interest rate fluctuations alone, nor THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 does it utilize instruments where there are not underlying exposures. Management believes that its use of derivative financial and commodity instruments to reduce risk is in the Company's best interest. Instruments used as hedges must be effective at reducing the risks associated with the underlying exposure being hedged and must be designated as a hedge at the inception of the contract. Accordingly, changes in the market value of hedge instruments must have a high degree of inverse correlation with changes in market values or cash flows of the underlying hedged item. Foreign currency derivatives that meet these hedge criteria are accounted for under the fair value method (as discussed below in Foreign Currency Exchange Rate Risk). Commodity derivatives that meet these hedge criteria are accounted for under the deferral method (as discussed below in Commodity Price Risk). Derivatives that do not meet these hedge criteria are accounted for under the fair value method with gains or losses recognized currently in the condensed consolidated income statement. Summarized below are the specified accounting policies by market risk category. Foreign Currency Exchange Rate Risk The Company uses forwards, purchased options, and currency swap agreements to reduce foreign currency exchange rate risk related to projected cash flows from foreign operations and net investments in foreign subsidiaries. Complex instruments involving leverage or multipliers are not used. The fair value method is used to account for these instruments. Under the fair value method, the instruments are carried at fair value on the condensed consolidated balance sheet as a component of other current assets (if a loss) or other accrued liabilities (if a gain). Changes in the fair value of derivative instruments which are used to reduce exchange rate risk in foreign currency denominated operating income and net investments in highly inflationary economies are recognized in the condensed consolidated income statement as foreign exchange loss - net. Changes in the fair value of derivative instruments which are used to reduce exchange rate risk in net investments in economies that are not highly inflationary are recognized in the condensed consolidated balance sheet as part of the cumulative translation adjustment in common shareholders' equity. To the extent a hedge is no longer effective as a hedge of a net investment due to a change in the underlying exposure, gains and losses are recognized currently in the condensed consolidated income statement as foreign exchange loss - net. Commodity Price Risk The Company uses commodity futures and options to reduce price exposures on purchased or anticipated purchases of commodities. Complex instruments involving leverage or multipliers are not used. The deferral method is used to account for those instruments which effectively hedge the Company's price exposures. For hedges of anticipated transactions, the Company has a policy that the significant characteristics and terms of the anticipated transaction must be identified and the transaction must be probable of occurring to qualify for deferral method accounting. THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 Under the deferral method, gains and losses on derivative instruments are deferred in the condensed consolidated balance sheet as a component of other current assets (if a loss) or other accrued liabilities (if a gain) until the underlying inventory being hedged is sold. As the hedged inventory is sold, the deferred gains and losses are recognized in the condensed consolidated income statement as a component of cost of goods sold. Derivative instruments that do not meet the above criteria required for deferral treatment, are accounted for under the fair value method with gains and losses recognized currently in the condensed consolidated income statement as a component of cost of goods sold. Interest Rate Risk The Company has used interest rate swap agreements to reduce its exposure to changes in interest rates and to balance its fixed and floating rate debt. Currently there are no interest rate swap agreements outstanding. The settlement costs of terminated swap agreements are reported in the condensed consolidated balance sheet as a component of other assets and are being amortized over the life of the original swap agreements. The amortization of the settlement amounts is reported in the condensed consolidated income statement as a component of interest expense. Note 8 - Subsequent Event In July 1997, the Company's Board of Directors approved restructuring actions related to plant consolidations in the U.S. Foods business including closing a rice cakes plant in Gridley, California and a Golden Grain/Near East plant in Leominster, Massachusetts. These actions are expected to result in approximately $37 million of restructuring charges in the third quarter of 1997. The anticipated charges are comprised of asset write-offs, severance and termination benefits and other shut-down costs. Savings from the restructuring actions are estimated to be about $8 million annually, beginning in 1998, of which approximately 65 percent will be in cash. THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Operating Results The following discussion addresses the operating results and financial condition of the Company for the six and three months ended June 30, 1997. The comparison of 1997 operations to those of 1996 are affected by the changes the Company has made in its portfolio of businesses during these years, specifically the divestiture of the Snapple beverages, U.S. and Canadian frozen foods and Italian products businesses. As a result of these changes, comparative results are more difficult to analyze. To assist in the analysis of operating results, this discussion will address the financial results as reported, describe the impact of divested businesses where applicable and review the results of the ongoing businesses by industry segment. Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996 The following tables summarize the net sales and operating results of the Company for the six months ended June 30, 1997 (current year) and June 30, 1996 (prior year): NET SALES for the Six Months Ended June 30,
Dollars in Millions 1997 1996 U.S. and U.S. and Canadian International Total Canadian International Total Foods $1,286.8 $314.4 $1,601.2 $1,235.0 $303.7 $1,538.7 Beverages 649.2 174.3 823.5 623.8 153.1 776.9 Ongoing Businesses 1,936.0 488.7 2,424.7 1,858.8 456.8 2,315.6 Divested Businesses 165.7 6.8 172.5 365.4 23.6 389.0 Total Company $2,101.7 $495.5 $2,597.2 $2,224.2 $480.4 $2,704.6 OPERATING INCOME (LOSS) for the Six Months Ended June 30, Dollars in Millions 1997 1996 U.S. and U.S. and Canadian International Total Canadian International Total Foods $ 154.0 $(7.2) $ 146.8 $ 165.6 $ 5.1 $170.7 Beverages 125.3 2.8 128.1 111.7 (10.0) 101.7 Ongoing Businesses 279.3 (4.4) 274.9 277.3 (4.9) 272.4 (Loss)Gain on divestitures (1,414.6) -- (1,414.6) -- 2.8 2.8 Divested Businesses (13.4) (1.7) (15.1) (24.5) (6.5) (31.0) (1,428.0) (1.7) (1,429.7) (24.5) (3.7) (28.2) Total Company $(1,148.7) $(6.1) $(1,154.8) $ 252.8 $ (8.6) $244.2 Note: Operating results include certain allocations of overhead expenses. "Foods": includes all food lines as well as the food service business. "Beverages": includes Gatorade thirst quencher sports beverages. "(Loss)Gain on divestitures": 1997 includes a pretax loss of $1.41 billion on the sale of the Snapple beverages business. 1996 includes a pretax gain of $2.8 million on the sale of the Italian products business. THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Divested Businesses": 1997 includes current year net sales and operating income (through the divestiture date) for the Snapple beverages business (May 1997). 1996 includes prior year net sales and operating income (through the divestiture date) for the Italian products (January 1996), U.S. and Canadian frozen foods (July 1996) and Snapple beverages businesses.
Consolidated net sales decreased 4 percent primarily due to the absence of divested businesses in the current year. Excluding divested businesses, sales and volume were 5 percent and 4 percent above the prior year, respectively. While the June 1996 ready-to-eat cereals price reduction had an adverse impact on Foods sales, an increase in U.S. ready-to-eat cereals volume of over 30 percent mitigated the impact of the price change. The Company does not expect its above-industry growth rate in ready-to-eat cereals volume during the first half of 1997 to be sustained at the current level during the second half of the year. There were no other significant price changes that affected the comparison of current and prior year net sales. Consolidated gross profit margin was 48.7 percent in the current year compared to 46.2 percent in the prior year. Excluding divested businesses, gross profit margin increased from 47.5 percent in the prior year to 49.2 percent in the current year reflecting improvement across all businesses mainly due to lower costs. Selling, general and administrative (SG&A) expenses decreased $18.6 million, or 2 percent, primarily due to the absence of general and administrative expenses of the divested businesses. Excluding divested businesses, SG&A expenses increased 9 percent driven by an increase in advertising and merchandising (A&M) expenses of 16 percent. A&M expenses excluding divested businesses were 25.1 percent of sales during the current year, up from 22.6 percent in the prior year. Consolidated operating loss of $1.15 billion for the current year included a $1.41 billion pretax loss on the sale of the Snapple beverages business and pretax restructuring charges of $11.8 million related to plant consolidations in the Brazilian pasta business and the closing of a beverages office in Singapore. Prior year operating income included a $2.8 million pretax gain on the sale of the Italian products business. Excluding the loss/gain on divestitures, operating results from divested businesses and restructuring charges, operating income of $286.7 million increased 5 percent from the prior year, reflecting improvement in the Beverages segment that more than offset a decline in the Foods segment. Net financing costs (net interest expense and foreign exchange losses) decreased $7.1 million in the current year. Debt levels declined by over $430 million in the first half of 1997 due to proceeds from divestitures and cash from operations, resulting in lower interest expense. Excluding the impact of the loss/gain on divestitures and restructuring charges, the current year effective tax rate was 39.0 percent compared to 41.0 percent in the prior year. The decrease was primarily due to the Snapple divestiture. THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Industry Segment Operating Results Foods - Net sales were 4 percent above the prior year with higher sales in both the U.S. and Canadian and International businesses. U.S. and Canadian sales and volume rose 4 percent. Sales increased in ready-to-eat and hot cereals, Golden Grain, mixes and syrup. These gains more than offset lower sales in rice cakes and food service as well as the adverse impact of the June 1996 ready-to-eat cereals price reduction. International sales increased 4 percent, mainly due to higher sales in Latin America. U.S. and Canadian operating income declined 7 percent from the prior year as the favorable impact of the volume increase was more than offset by the ready- to-eat cereals price reduction, increases in A&M expenses and operating income declines in the increasingly competitive grain-based snacks business. Higher A&M expenses in U.S. and Canadian Foods were primarily due to increased trade and media spending across the businesses including increased support of hot and ready-to-eat cereals and Golden Grain compared to the prior year. International Foods operating income included a $10.7 million restructuring charge related to plant consolidations in the Brazilian pasta business. Excluding the restructuring charge, operating income was $1.6 million below the prior year. Beverages - Worldwide sales and volume of Gatorade thirst quencher increased 6 percent. U.S. and Canadian sales and volume rose 4 percent and 5 percent, respectively, reflecting incremental sales from a new product, Gatorade Frost, and core business growth. An initial strong season sell-in, resulting in a 15 percent sales increase in the first quarter, was partly offset in the second quarter as cool and wet spring weather in North America depressed seasonal demand. International sales increased 14 percent on a 9 percent volume increase primarily due to double-digit sales growth of Gatorade thirst quencher in Latin America and the Asia/Pacific region. Operating income increased $26.4 million from the prior year due to sales growth and lower packaging costs in the U.S. and Canadian business, partly offset by higher A&M expenses. The increase in A&M expenses was driven by media spending for the Gatorade Frost launch and support of other growth initiatives. In the International Beverages business, the Company reduced its underwriting in Asia/Pacific markets for Gatorade thirst quencher and improved the profitability of the Latin American and European businesses. 1997 operating income of International Beverages included a $1.1 million restructuring charge related to the closing of an office in Singapore. THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended June 30, 1997 Compared with Three Months Ended June 30, 1996 The following tables summarize the net sales and operating results of the Company for the three months ended June 30, 1997 (current year) and June 30, 1996 (prior year): NET SALES for the Three Months Ended June 30,
Dollars in Millions 1997 1996 U.S. and U.S. and Canadian International Total Canadian International Total Foods $ 621.5 $ 159.2 $ 780.7 $ 583.4 $ 153.4 $ 736.8 Beverages 435.6 103.3 538.9 438.1 87.0 525.1 Ongoing Businesses 1,057.1 262.5 1,319.6 1,021.5 240.4 1,261.9 Divested Businesses 73.4 2.5 75.9 208.0 11.9 219.9 Total Company $ 1,130.5 $ 265.0 $ 1,395.5 $ 1,229.5 $ 252.3 $ 1,481.8 OPERATING INCOME (LOSS) for the Three Months Ended June 30, Dollars in Millions 1997 1996 U.S. and U.S. and Canadian International Total Canadian International Total Foods $ 76.8 $ (8.0) $ 68.8 $ 66.6 $ 4.2 $ 70.8 Beverages 90.6 3.1 93.7 95.6 (4.3) 91.3 Ongoing Businesses 167.4 (4.9) 162.5 162.2 (0.1) 162.1 Loss on divestiture (10.6) - (10.6) - - - Divested Businesses 4.7 0.3 5.0 (14.5) (4.4) (18.9) (5.9) 0.3 (5.6) (14.5) (4.4) (18.9) Total Company $ 161.5 $ (4.6) $ 156.9 $ 147.7 $ (4.5) $ 143.2 Note: Operating results include certain allocations of overhead expenses. "Foods": includes all food lines as well as the food service business. "Beverages": includes Gatorade thirst quencher sports beverages. "Loss on divestiture": includes a pretax loss of $10.6 million on the sale of the Snapple beverages business. "Divested Businesses": 1997 includes current year net sales and operating income (through the divestiture date) for the Snapple beverages business (May 1997). 1996 includes prior year net sales and operating income (through the divestiture date) for the Italian products (January 1996), U.S. and Canadian frozen foods (July 1996) and Snapple beverages businesses.
Consolidated net sales decreased 6 percent primarily due to the absence of divested businesses in the current year. Excluding divested businesses, sales were 5 percent above the prior year on a 3 percent volume gain. While the June 1996 ready-to-eat cereals price reduction had an adverse impact on Foods sales, an increase in U.S. ready-to-eat cereals volume of over 30 percent mitigated the impact of the price change. The Company does not expect its above- industry growth rate in ready-to-eat cereals volume during the second quarter of 1997 to be sustained at the current level during the second half of the year. There were no other significant price changes that affected the comparison of current and prior year net sales. THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated gross profit margin was 49.5 percent in the current year compared to 46.7 percent in the prior year. For ongoing businesses, gross profit margin increased to 49.8 percent from 48.1 percent in the prior year, primarily due to lower packaging and ingredient costs in the U.S. and Canadian Foods and Beverages businesses. SG&A expenses decreased $34.7 million, or 6 percent, versus the prior year, primarily due to the absence of divested businesses. Excluding divested businesses, SG&A increased 9 percent driven by a 14 percent increase in A&M expenses. A&M expenses for ongoing businesses were 24.9 percent of sales during the current year, up from 22.7 percent in the prior year. Consolidated operating income was $156.9 million for the current year, up 10 percent from the prior year. Excluding operating results from divested businesses, loss on divestiture and restructuring charges, operating results of $174.3 million was $12.2 million above the prior year reflecting improvement in Foods and International Beverages. Net financing costs (net interest expense and foreign exchange losses) decreased $3.7 million in the current year. Debt levels declined over $470 million in the second quarter of 1997 due to proceeds from divestitures and cash from operations, resulting in lower interest expense. The effective tax rate in the current year was 39.0 percent versus 40.2 percent in the prior year. The decrease was primarily due to the divestiture of Snapple. Industry Segment Operating Results Foods - Net sales were 6 percent above the prior year with higher sales in both the U.S. and Canadian and International businesses. U.S. and Canadian sales and volume rose 7 percent and 6 percent, respectively. Sales increased in ready-to-eat and hot cereals, Golden Grain, mixes and syrup. These gains more than offset lower sales in rice cakes and food service as well as the adverse impact of the June 1996 ready-to-eat cereals price reduction. International sales increased 4 percent, mainly due to higher sales in Latin America. U.S. and Canadian operating income increased 15 percent from the prior year as the favorable impact of the volume increase more than offset the ready-to-eat cereals price reduction, operating income declines in the increasingly competitive snacks business and increases in A&M expenses. Higher A&M expenses in U.S. and Canadian Foods were due to increased trade and media spending across the businesses including increased support of hot cereals and grain- based snacks compared to the prior year. 1997 operating income of International Foods included a $10.7 million restructuring charge for plant consolidations in the Brazilian pasta business. Operating income excluding the restructuring charge was $1.5 million below the prior year. THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Beverages - Worldwide sales and volume of Gatorade thirst quencher increased 3 percent. U.S. and Canadian sales declined 1 percent on flat volume; however, exceptionally strong sales growth of 16 percent in the prior year affected the comparison. The current quarter sales were also adversely impacted by cool and wet spring weather in North America which depressed seasonal demand. International sales increased 19 percent primarily due to double-digit sales growth of Gatorade thirst quencher in Latin America and the Asia/Pacific region. Operating income increased 3 percent from the prior year due to international sales growth and lower packaging costs in the U.S. and Canadian business, partly offset by higher A&M expenses. Media spending to support the Gatorade Frost launch began in the current quarter. In the International Beverages business, the Company continued to improve results in the Latin American and European businesses and reduced the operating losses in the Asia/Pacific business. 1997 operating income of International Beverages included a $1.1 million restructuring charge related to the closing of an office in Singapore. Liquidity and Capital Resources Net cash provided by operating activities was $258.9 million, an increase of $17.7 million from the prior year, primarily reflecting improvements in profitability. Capital expenditures for the current and prior year were $93.5 million and $102.4 million, respectively. Capital expenditures are expected to increase during the remainder of the current year as the Company continues its expansion of production capacity for foods and beverages in the United States and China. The Company expects that capital expenditures and cash dividends for the remainder of the year will be financed through cash flow from operating activities and short-term debt. Short-term and long-term debt (total debt) as of June 30, 1997, was $1.13 billion, a decrease of $433.3 million from December 31, 1996, reflecting the use of the $300 million of Snapple divestiture proceeds and cash from operating activities. Anticipated cash proceeds from the recapture of income taxes paid on previous capital gains of approximately $240 million are expected to be received by the end of the first half of 1998, and an additional $10 million by the end of 1998. Sale of Snapple Beverage Corp. On May 22, 1997, the Company completed the sale of 100 percent of its shares of its wholly-owned subsidiary, Snapple Beverage Corp. (Snapple), to Triarc Companies, Inc. (Triarc) for $300 million in cash. The disposition was made pursuant to the Stock Purchase Agreement dated March 27, 1997, between the Company and Triarc. The Company realized a pretax loss on the sale of $10.6 million ($.02 per share) in the second quarter of 1997, which, combined with the previously recorded impairment loss in the first quarter of 1997, resulted in a total pretax loss on the sale of $1.41 billion ($8.41 per share). THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restructuring Charges During the quarter ended June 30, 1997, the Company recorded pretax restructuring charges of $11.8 million ($.06 per share). These charges included $10.7 million for plant consolidations in the Brazilian pasta business and $1.1 million for the closing of a beverages office in Singapore. Savings from the restructuring actions are estimated to be about $5 million annually, beginning in 1998, of which approximately 80 percent will be in cash. Subsequent Event In July 1997, the Company's Board of Directors approved restructuring actions related to plant consolidations in the U.S. Foods business including closing a rice cakes plant in Gridley, California and a Golden Grain/Near East plant in Leominster, Massachusetts. These actions are expected to result in approximately $37 million of restructuring charges in the third quarter of 1997. The anticipated charges are comprised of asset write-offs, severance and termination benefits and other shut-down costs. Savings from the restructuring actions are estimated to be about $8 million annually, beginning in 1998, of which approximately 65 percent will be in cash. Pending Accounting Changes In March 1997, the FASB issued Statement #128, "Earnings Per Share." This Statement simplifies the computation of earnings per share and makes the computation more consistent with those of International Accounting Standards. The Company will adopt this Statement during the fourth quarter. The Company does not expect the adoption of this new standard to significantly impact previously reported earnings per share or earnings per share trends. In July 1997, the FASB issued Statement #130, "Reporting Comprehensive Income," and Statement #131, "Disclosures About Segments of an Enterprise and Related Information." Statement #130 establishes standards for reporting comprehensive income in financial statements. Statement #131 expands certain reporting and disclosure requirements for segments from current standards. The Company is not required to adopt these Statements until 1998 and does not expect the adoption of these new standards to result in material changes to previously reported amounts or disclosures. Cautionary Statement on Forward-Looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities and Exchange Act of 1934, are made throughout this Management's Discussion and Analysis. The Company's results may differ materially from those in the forward-looking statements. Forward-looking statements are based on management's current views and assumptions, and involve risks and uncertainties that could significantly affect expected results. For example, operating results may be affected by external factors such as: actions of competitors; changes in laws and regulations, including changes in governmental interpretations of regulations and changes in accounting standards; customer demand; effectiveness of THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS spending or programs; fluctuations in the cost and availability of supply chain resources; and foreign economic conditions, including currency rate fluctuations. The Company anticipates future restructuring actions as it continues to address ways of improving profitability, including the reduction of shared services and related overheads previously allocated to Snapple that remain with the Company. These actions, in addition to the specific restructuring actions previously announced and currently underway, could result in total 1997 pretax restructuring charges between $70 million and $100 million. Reducing future operating losses of the Brazilian pasta business will depend on the competitive and commodity environments. The Company is currently reviewing strategies relative to this and other non-core businesses which may result in future charges. PART II - OTHER INFORMATION Item 1 Legal Proceedings Note 2 in Part I is incorporated by reference herein. Item 4 Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on May 14, 1997. Represented at the Meeting, either in person or by proxy, were 123,520,644 voting shares, of a total below. (c) (i) To elect two directors in Class II to serve for three-year terms expiring in the year 2000 or until their successors are elected and qualified. All nominees are named below. - John H. Costello Votes For Election - 116,848,812 Votes Withheld - 6,671,832 - Judy C. Lewent Votes For Election - 117,025,647 Votes Withheld - 6,494,997 There were no votes against, abstentions or broker non-votes with respect to the election of any nominee named above. (ii) To ratify the Board of Directors' appointment of Arthur Andersen LLP as independent public accountants for the Company for 1997. Votes For Proposal - 121,217,694 Votes Against Proposal - 1,712,102 Votes Abstaining - 590,848 Broker Non-Votes - 0 Votes Withheld - 0 (iii) To consider a shareholder proposal regarding compensation disclosure. Votes For Proposal - 11,169,598 Votes Against Proposal - 96,500,117 Votes Abstaining - 1,498,123 Broker Non-Votes - 14,352,806 Votes Withheld - 0 (iv) To consider a shareholder proposal regarding the separation of the Foods and Beverages business. Votes For Proposal - 13,683,896 Votes Against Proposal - 93,533,707 Votes Abstaining - 1,950,258 Broker Non-Votes - 14,352,783 Votes Withheld - 0 (v) To consider a shareholder proposal regarding reconsideration of the Shareholder Rights Plan. Votes For Proposal - 48,357,554 Votes Against Proposal - 58,674,259 Votes Abstaining - 2,133,747 Broker Non-Votes - 14,355,084 Votes Withheld - 0 Item 6 Exhibits and Reports on Form 8-K Item 6(a) See Exhibit Index Item 6(b) Reports on Form 8-K Form 8-K was filed on June 2, 1997, to announce that the Company had completed the sale of 100 percent of its shares of its wholly-owned subsidiary, Snapple Beverage Corp., to Triarc Companies, Inc. for $300 million. All other items in Part II are either inapplicable to the Company during the quarter ended June 30, 1997, 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. 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 August 4, 1997 Robert S. Thomason Robert S. Thomason Senior Vice President - Finance and Chief Financial Officer Date August 4, 1997 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) EX-11 2 EXHIBIT (11) THE QUAKER OATS COMPANY AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Six Months Ended June 30, June 30, Calculation of Fully Diluted Earnings Per Share 1997 (1) 1996 Dollars in Millions (Except Per Share Data) (Loss) Income from Continuing Operations $(1,034.0) $ 96.8 Less: Dividends on ESOP Convertible Preferred Stock (1.7) - Less: Adjustments attributable to conversion of ESOP Convertible Preferred Stock - (0.5) Net (Loss) Income Used for Fully Diluted Calculation $(1,035.7) $ 96.3 Shares in Thousands Average Number of Common Shares Outstanding 136,572 135,213 Plus Dilutive Securities: Stock Options - 971 ESOP Convertible Preferred Stock - 2,479 Average Shares Outstanding Used for Fully Diluted Calculation 136,572 138,663 Fully Diluted Earnings Per Share $ (7.58) $ 0.69 (1) In loss periods, dilutive common equivalent shares are excluded as the effect would be antidilutive. For purposes of the loss per share calculation, the loss was adjusted for the amount of dividends applicable to the ESOP Convertible Preferred Stock.
EX-27 3
5 1,000,000 6-MOS DEC-31-1997 JUN-30-1997 101 0 408 25 292 1,191 1,940 771 2,829 1,130 920 0 100 840 (763) 2,829 2,597 2,597 1,332 1,332 0 6 49 (1,224) (190) (1,034) 0 0 0 (1,034) (7.58) (7.58)
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