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Issue Date: Vol. 41, No. 8 / July 25, 2001 - August 24, 2001, Posted On: 7/25/2001


The Quaker Oats Co.

As The Quaker Oats Co. awaits final Federal Trade Commission approval of its proposed merger with PepsiCo, the company reported earnings per share, excluding unusual items, of $1.24 for its second quarter ended June 30, 2001. This represents an increase of 12% over the $1.11 per share, on the same basis, earned in the second quarter of 2000.

Sales for the quarter were up 8%, from $1.40 billion to $1.51 billion. Operating income for the quarter was $291.3 million, versus $253 million in the second quarter of 2000, an increase of 15%.

For the six months ended June 30, 2001, Quaker's sales increased 7%, and operating income increased 10%. Diluted earnings per share, excluding unusual items, were $2.04, up 9% from a comparable $1.88 in the prior year.

"Quaker delivered exceptionally strong results in the second quarter, especially in light of tough year-ago comparisons," said Robert S. Morrison, chairman, president and chief executive officer. "Foods and Beverages both achieved 8% sales growth. Gross margin and operating margin each expanded over 100 basis points, and operating income grew 15%. Each region of the world contributed to these strong operating income results - the U.S. and Canada, Europe, Latin America and Asia."

Morrison noted that earnings per share growth was strong despite the cancellation of Quaker's share repurchase program , a result of the pending merger with PepsiCo , and the increased number of shares outstanding. In addition, net financing expenses (interest and foreign exchange) were greater than they had been in the prior year.

Operating income for U.S. and Canadian Food was $97 million, versus $86.8 million in the year-ago quarter, representing a 12% increase. This double-digit increase was on top of 21% growth in the second quarter last year. Second-quarter sales in this segment were $550 million, versus $515.7 million last year, an increase of 7%. Every major line of business in the U.S. experienced sales growth.

Volume for the U.S. and Canadian Foods portfolio increased 4%; grain-based snacks increased 9% and ready-to-eat cereals increased 8%.

In the U.S. and Canada, beverage operating income was $155.8 million, up 12% from $138.8 million in the year-ago quarter. U.S. and Canadian Beverages sales in the quarter were $689.5 million, versus $629.3 million last year, an increase of 10%. Volume in the U.S. and Canada increased 6% in the second quarter, on top of a 15% increase in the prior year. New flavors like Passion Fruit, "Starfruit" and "High Tide Gatorade Frost," backed by extensive marketing support, all contributed to Gatorade's strong performance. And this growth was achieved despite a cooler, wetter spring than in 2000.

Outside of the U.S. and Canada, Gatorade operating income was up 52% to $20.8 million, compared with $13.7 million in the second quarter of last year. Latin American operating income increased 27% and European and Asian operating income more than tripled to $5.3 million in the quarter, from $1.5 million last year.

For 2001, Quaker's financial outlook, as an independent company, is unchanged from previous guidance. For the full year, the company expects to deliver mid-single-digit sales growth, high-single-digit operating income growth and low-double-digit earnings-per-share growth. Quaker intends to continue its strategy of using cost savings to help fund brand-building activities.

For the third quarter, the company expects to achieve mid-to-high single-digit sales, operating income and earnings-per-share growth.

Quaker and PepsiCo are continuing discussions with the Federal Trade Commission on their proposed merger, which would couple category-leading "Gatorade" sports drink with Pepsi's already impressive roster of mainstream and alternative cold beverages.

The Quaker Oats Co. is an international marketer of foods and beverage. Its major brands include "Gatorade" thirst quencher; "Quaker" cereals and grain-based snacks; "Rice-A-Roni," "Pasta Roni" and "Near East" side dishes; and "Aunt Jemima" mixes and syrups.


Topic: Vic Lavay: Report from Wall Street

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