Kellogg`s Company Essay, Research Paper

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. Appendix # 1-

Market Research 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. Appendix #

2-Financial Forecasts 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 .9 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, Summary,

and Conclusions 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.