Objective: Our goal in composing a financial statement is to construct the most comprehensive, thorough document possible, in order to attract investors and to confirm that we have taken the time to explore as many potential issues for your business as may arise. Summary of findings: Our level of cereal marketing investment early in 1998 was not sufficient in the face of extremely competitive market conditions. This situation hurt our volume performance for much of the year and, combined with other issues in markets around the world, led to a decline in both sales and earnings.
Nonetheless, we continue to have the utmost confidence in the future of our grain-based businesses, and we are fully committed to return to both top-line and bottom-line growth. Description of firm and its management: Kellogg’s products are manufactured in 20 countries on 6 Continents and distributed in more than 160 countries. Mr. Langbo has been employed by the Kellogg’s Company since 1956. He was named President and Chief Operating Officer in 1990 and became Chairman of the Board and Chief Executive Officer in 1992.
In June of 1998, Mr. Carlos M. Gutierrez was named President and Chief Operating Officer. The competitive environment: The Company has experienced intense competition for sales of all of its principal products in its major markets, both domestically and internationally. The Company’s products compete with advertised and branded products of a similar nature as well as unadvertised and private label products, which are typically distributed at lower prices, and generally with other food products with different characteristics.
Principal methods and factors for competition include new product introductions, product quality, composition, and nutritional value, price, advertising and promotion. Economic climate and outlook: Although our 1998 business results were below our performance expectation, it was a year in which we put in place key elements of a stronger foundation for future growth. This included investments in new product development and a complete overhaul of our corporate headquarters and North American organizational structure.
Should suitable investment opportunities of working capital needs arise that would require additional financing; management believes that the Company’s strong credit rating, balance sheet and earnings history provide a base for obtaining additional financial resources at competitive rates and terms. Based on the expectation of cereal volume growth, and strong results from product innovation and the continued global rollout of convenience foods, management believes the Company is well positioned to deliver sales and earnings growth for the full year of 2000.
Litigation: The Company is not a party to any pending legal proceedings, which, if decided adversely, would be material to the Company on a consolidated basis, nor is any of the Company’s properties or subsidiaries subject to any such proceedings. Financial overview: Kellogg Company manufactures and markets ready-to-eat cereal and other grain-based convenience food products, including toaster pastries, frozen waffles, cereal bars, and bagels throughout the world. Principal markets for these products include the United States and Great Britain.
Operations are managed via four major geographic areas, North America, Europe, Asia-Pacific and Latin America-which is the basis of the Company’s reportable operating segment information. The Company leads the global ready-to-eat cereal category with an estimated 38% annualized share of worldwide volume. Additionally, the Company is the North American market leader in the toaster pastry, cereal/granola bar, frozen waffle and per-packaged bagel categories. During 1998, the Company realized declines in earnings per share both with and without unusual items.
The Company experienced significant competitive pressure combined with category softness in its major ready-to-eat cereal markets, to which it responded by accelerating investment in long-term growth strategies, in clouding product development, technology and efficiency initiatives. Short-term liquidity: Net cash provided by operating activities was $719. 7 million during 1998, compared to $879. 8 million in 1997, with the decrease due principally to lower earnings and unfavorable working capital movements. The ratio of current assets to current liabilities was . at December 31, 1998 and 1997. Capital structure and long-term solvency: Long-term debt consists primarily of fixed rate issuances of U. S. and Euro Dollar Notes, including $900 million due in 2001, $500 million due in 2004, and $200 million due in 2005. The amount due in 2001 includes $400 million in Notes, which provide an option to holders to extend the obligation.
For an additional four years at a predetermined interest rate of 5. 63% plus the Company’s then-current credit spread. The increase in operating margin for the quarter primarily reflects manufacturing efficiencies in the U.S. business and reduced overhead spending as a result of streamlining initiatives in North American and corporate operations. The year-to-date operating margin was flat versus the prior year as increased spending on promotional activities offset the benefits discussed above. This level of spending is consistent with management’s strategy to drive growth through increased marketing investment in the Company’s established cereal markets, as well as supporting the accelerated introduction of new convenience food products around the world.
Market measures: The Company is exposed to certain market risks, which exist as a part of its ongoing business operations and uses derivative financial and commodity instruments, where appropriate, to manage these risks. The Company, as a matter for policy, does not engage in trading or speculative transaction. Investment potential: We are pleased to report that the Kellogg Company dividend rose in 1998 for the 42nd consecutive year, with an increase of 5 cents per share to $. 92.
In 1999 Kellogg’s is well positioned to deliver double-digit earnings per share growth (excluding restructuring and disposition-related charges). We also continued our program of purchasing Kellogg share, with 1998 purchases totaling $239. 7 million. It is currently offering 80,000 new stock options. Outlook for performance, earnings projection: The Company’s streamlining initiatives will continue throughout 1999. The aforementioned overhead activity analysis will be extended to Europe and Latin America during the first half of 1999.
Management believes these initiatives will result in the elimination of several hundred-employee positions, requiring separation benefit costs to be incurred. Since the number of employees affected, their job functions, and their locations have not yet been identified. The costs that may have resulted are not known yet. Investment potential: We are pleased to report that the Kellogg Company dividend rose in 1998 for the 42nd consecutive year, with an increase of 5 cents per share to $. 92. We also continued our program of purchasing Kellogg share, with 1998 purchases totaling $239. 7 million.
Credit assessment: counter parties on derivative financial and commodity contracts expose The Company to credit loss in the event of nonperformance. This credit loss is limited to the cost for replacing these contracts at current market rates. Management believes that the probability of such loss is remote. Summary and conclusion: The seeking out, training, and retention of a diverse, highly talented workforce is central to Kellogg Company’s commitment to be a results-oriented organization ready for the challenges for the future and focused on creating value for you, our shareowners.
