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 JANUARY 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE NINE MONTHS ENDED JANUARY 30, 2002 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 456-5700
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 such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No __
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of March 8, 2002 was 350,353,230 shares.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Third Quarter Ended
------------------------------------
January 30, 2002 January 31, 2001
FY 2002 FY 2001
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $2,551,292 $2,269,642
Cost of products sold...................................... 1,550,254 1,385,506
---------- ----------
Gross profit............................................... 1,001,038 884,136
Selling, general and administrative expenses............... 605,622 543,976
---------- ----------
Operating income........................................... 395,416 340,160
Interest income............................................ 4,752 6,916
Interest expense........................................... 70,194 86,395
Other expenses (income), net............................... 19,697 (15,758)
---------- ----------
Income before income taxes................................. 310,277 276,439
Provision for income taxes................................. 108,617 5,919
---------- ----------
Net income................................................. $ 201,660 $ 270,520
========== ==========
Net income per share--diluted.............................. $ 0.57 $ 0.77
========== ==========
Average common shares outstanding--diluted................. 352,745 350,761
========== ==========
Net income per share--basic................................ $ 0.58 $ 0.78
========== ==========
Average common shares outstanding--basic................... 349,704 347,444
========== ==========
Cash dividends per share................................... $ 0.4050 $ 0.3925
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
------------------------------------
January 30, 2002 January 31, 2001
FY 2002 FY 2001*
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $7,301,932 $6,737,631
Cost of products sold...................................... 4,416,873 4,041,208
---------- ----------
Gross profit............................................... 2,885,059 2,696,423
Selling, general and administrative expenses............... 1,704,320 1,585,335
---------- ----------
Operating income........................................... 1,180,739 1,111,088
Interest income............................................ 14,379 18,215
Interest expense........................................... 220,824 249,515
Other expenses (income), net............................... 31,440 (1,045)
---------- ----------
Income before income taxes and cumulative effect of
accounting change........................................ 942,854 880,833
Provision for income taxes................................. 332,479 215,829
---------- ----------
Income before cumulative effect of accounting change....... 610,375 665,004
Cumulative effect of accounting change..................... -- (16,471)
---------- ----------
Net income................................................. $ 610,375 $ 648,533
========== ==========
Net income per share--diluted.............................. $ 1.73 $ 1.85
========== ==========
Average common shares outstanding--diluted................. 352,745 350,761
========== ==========
Net income per share--basic................................ $ 1.75 $ 1.87
========== ==========
Average common shares outstanding--basic................... 349,704 347,444
========== ==========
Cash dividends per share................................... $ 1.2025 $ 1.1525
========== ==========
* Restated, see Note 7.
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 30, 2002 May 2, 2001*
FY 2002 FY 2001
---------------- ------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 202,316 $ 138,849
Short-term investments, at cost which approximates market... 5 5,371
Receivables, net............................................ 1,363,373 1,383,550
Inventories................................................. 1,633,174 1,407,961
Prepaid expenses and other current assets................... 289,795 181,083
----------- ----------
Total current assets................................... 3,488,663 3,116,814
----------- ----------
Property, plant and equipment............................... 3,766,169 3,880,780
Less accumulated depreciation............................... 1,596,492 1,712,400
----------- ----------
Total property, plant and equipment, net............... 2,169,677 2,168,380
----------- ----------
Goodwill, net............................................... 2,531,586 2,077,451
Trademarks, net............................................. 682,677 567,692
Other intangibles, net...................................... 205,595 120,749
Other non-current assets.................................... 1,014,089 984,064
----------- ----------
Total other non-current assets......................... 4,433,947 3,749,956
----------- ----------
Total assets........................................... $10,092,287 $9,035,150
=========== ==========
*Summarized from audited fiscal year 2001 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 30, 2002 May 2, 2001*
FY 2002 FY 2001
---------------- ------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 172,700 $1,555,869
Portion of long-term debt due within one year............... 572,141 314,965
Accounts payable............................................ 845,685 962,497
Salaries and wages.......................................... 48,721 54,036
Accrued marketing........................................... 151,804 146,138
Accrued restructuring costs................................. 53,017 134,550
Other accrued liabilities................................... 365,900 388,582
Income taxes................................................ 149,919 98,460
----------- ----------
Total current liabilities.............................. 2,359,887 3,655,097
----------- ----------
Long-term debt.............................................. 4,864,133 3,014,853
Deferred income taxes....................................... 312,226 253,690
Non-pension postretirement benefits......................... 208,091 207,104
Other liabilities and minority interest..................... 805,106 530,679
----------- ----------
Total long-term debt, other liabilities and minority
interest............................................. 6,189,556 4,006,326
Shareholders' Equity:
Capital stock............................................... 107,885 107,900
Additional capital.......................................... 343,805 331,633
Retained earnings........................................... 4,887,020 4,697,213
----------- ----------
5,338,710 5,136,746
Less:
Treasury stock at cost (80,782,624 shares at January 30,
2002 and 82,147,565 shares at May 2, 2001)............. 2,908,241 2,922,630
Unearned compensation relating to the ESOP................ 230 3,101
Accumulated other comprehensive loss...................... 887,395 837,288
----------- ----------
Total shareholders' equity............................. 1,542,844 1,373,727
----------- ----------
Total liabilities and shareholders' equity............. $10,092,287 $9,035,150
=========== ==========
*Summarized from audited fiscal year 2001 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-----------------------------------
January 30, 2002 January 31, 2001
FY 2002 FY 2001
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
Cash provided by (used for) Operating Activities........... $ 334,341 $ (1,353)
--------- -----------
Cash Flows from Investing Activities:
Capital expenditures.................................. (130,183) (255,832)
Acquisitions, net of cash acquired.................... (802,668) (182,872)
Proceeds from divestitures............................ 31,889 93,340
Purchases of short-term investments................... (2,049) (1,084,033)
Sales and maturities of short-term investments........ 7,378 1,085,911
Investment in The Hain Celestial Group, Inc........... -- (79,743)
Other items, net...................................... (29,199) 8,477
--------- -----------
Cash used for investing activities............... (924,832) (414,752)
--------- -----------
Cash Flows from Financing Activities:
Payments on long-term debt............................ (37,526) (22,034)
Proceeds from (payments on) commercial paper and
short-term borrowings, net.......................... 2,219 (174,318)
Proceeds from long-term debt.......................... 770,772 1,078,701
Proceeds from preferred stock of subsidiary........... 325,000 --
Dividends............................................. (420,568) (400,370)
Purchases of treasury stock........................... (45,363) (90,420)
Exercise of stock options............................. 53,186 78,540
Other items, net...................................... 11,637 12,118
--------- -----------
Cash provided by financing activities............ 659,357 482,217
--------- -----------
Effect of exchange rate changes on cash and cash
equivalents.............................................. (5,399) (10,845)
--------- -----------
Net increase in cash and cash equivalents.................. 63,467 55,267
Cash and cash equivalents at beginning of year............. 138,849 137,617
--------- -----------
Cash and cash equivalents at end of period................. $ 202,316 $ 192,884
========= ===========
See Notes to Condensed Consolidated Financial Statements.
------------------
6
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
company. Those comments should be read in conjunction with these notes.
The company's Annual Report to Shareholders for the fiscal year ended May
2, 2001 includes additional information about the company, its operations,
and its financial position, and should be read in conjunction with this
quarterly report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2002 presentation.
(3) In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the results of
operations of these interim periods, have been included.
(4) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
January 30, 2002 May 2, 2001
---------------- -----------
(Thousands of Dollars)
Finished goods and work-in-process................. $1,267,266 $1,095,954
Packaging material and ingredients................. 365,908 312,007
---------- ----------
$1,633,174 $1,407,961
========== ==========
(5) RESTRUCTURING
In the fourth quarter of Fiscal 2001, the company announced a
restructuring initiative named "Streamline". This initiative includes a
worldwide organizational restructuring aimed at reducing overhead costs,
the closure of the company's tuna operations in Puerto Rico, the
consolidation of the company's North American canned pet food production
to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food
production at the company's Terminal Island, California facility), and the
divestiture of the company's U.S. fleet of fishing boats and related
equipment. For more information regarding Streamline, refer to the
company's Annual Report to Shareholders for the fiscal year ended May 2,
2001.
The major components of the restructuring charges and implementation costs
and the remaining accrual balances as of January 30, 2002 were as follows:
Non-Cash Employee
Asset Termination and Accrued Implementation
(Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total
--------------------- ----------- --------------- ---------- -------------- -------
Restructuring and implementation
costs--Fiscal 2001................... $ 110.5 $110.3 $ 55.4 $ 22.6 $ 298.8
Amounts utilized--Fiscal 2001.......... (110.5) (39.5) (4.7) (22.6) (177.3)
------- ------ ------ ------ -------
Accrued restructuring costs-- May 2,
2001................................. -- 70.8 50.7 -- 121.5
Restructuring and implementation
costs--Fiscal 2002................... -- 5.7 -- 10.4 16.1
Amounts utilized--Fiscal 2002.......... -- (52.7) (27.9) (10.4) (91.0)
------- ------ ------ ------ -------
Accrued restructuring costs--January
30, 2002............................. $ -- $ 23.8 $ 22.8 $ -- $ 46.6
======= ====== ====== ====== =======
7
During the first nine months of Fiscal 2002, the company recognized
restructuring charges and implementation costs totaling $16.1 million
pretax ($0.04 per share). [Note: All earnings per share amounts included in
the Notes to Condensed Consolidated Financial Statements are presented on
an after-tax diluted basis, unless otherwise noted.] Pretax charges of $8.7
million were classified as cost of products sold and $7.4 million as
selling, general and administrative expenses ("SG&A"). Implementation costs
($10.4 million pretax) were primarily cost premiums related to production
transfers, consulting costs and relocation costs.
During the first nine months of Fiscal 2002, the company utilized $80.6
million of severance and exit cost accruals, principally for the closure of
the company's tuna operations in Puerto Rico, ceasing canned pet food
production in its Terminal Island, California facility and its global
overhead reduction plan, primarily in Europe and North America.
(6) ACQUISITIONS
During the second quarter of Fiscal 2002, the company acquired Anchor Food
Products branded retail business which includes the retail licensing
rights to the T.G.I. Friday's brand of frozen snacks and appetizers and
the Poppers brand of retail appetizer lines. Also during the second
quarter of Fiscal 2002, the company completed the acquisition of Delimex
Holdings, Inc., a leading maker of frozen Mexican food products. Delimex
is a leading U.S. producer of frozen taquitos, tightly rolled fried corn
and flour tortillas with fillings such as beef, chicken or cheese. Delimex
also makes quesadillas, tamales and rice bowls.
During the first quarter of Fiscal 2002, the company completed the
acquisition of Borden Food Corporation's pasta sauce, dry bouillon and
soup business. Under this transaction, the company acquired such brands as
Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups
and Wyler's bouillons and soups.
The above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated to the
respective assets and liabilities based upon their estimated fair values as
of the acquisition dates. Final allocations of the purchase prices are not
expected to differ significantly from the preliminary allocations.
Operating results of the businesses acquired have been included in the
Consolidated Statements of Income from the respective acquisition dates
forward.
Pro forma results of the company, assuming all of the acquisitions had been
made at the beginning of each period presented, would not be materially
different from the results reported.
(7) RECENTLY ADOPTED ACCOUNTING STANDARDS
In Fiscal 2001, the company changed its method of accounting for revenue
recognition in accordance with Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition in Financial Statements". Under the new accounting
method, adopted retroactive to May 4, 2000, the company recognizes revenue
upon the passage of title, ownership and risk of loss to the customer. The
cumulative effect adjustment of $16.5 million in net income as of May 4,
2000 was recognized during the first quarter of Fiscal 2001. The Fiscal
2001 first nine month amounts have been restated for the effect of the
change in accounting for revenue recognition. Amounts originally reported
were as follows: Sales, $6.72 billion; Gross profit, $2.69 billion; Net
income, $661.2 million; Net income per share - diluted, $1.88; Net income
per share - basic, $1.90.
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued
new guidelines entitled "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's
Products". In addition, during May 2000, the EITF issued new guidelines
entitled "Accounting for Certain Sales Incentives". Both of these issues
provide guidance primarily on income statement classification of
consideration from a vendor to a purchaser of the vendor's products,
including both customers and consumers. Generally,
8
cash consideration is to be classified as a reduction of revenue, unless
specific criteria are met regarding goods or services that the vendor may
receive in return for this consideration.
In the fourth quarter of Fiscal 2002, the company will reclassify
promotional payments to its customers and the cost of consumer coupons and
other cash redemption offers from SG&A to net sales. The company is
currently assessing the combined impact of both issues, however, we believe
that, based on historical information, sales could be reduced up to 6 to
7%. SG&A will be correspondingly reduced such that net earnings will not be
affected.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets". These standards require
that all business combinations be accounted for using the purchase method
and that goodwill and intangible assets with indefinite useful lives should
not be amortized but should be tested for impairment at least annually, and
they provide guidelines for new disclosure requirements. These standards
outline the criteria for initial recognition and measurement of
intangibles, assignment of assets and liabilities including goodwill to
reporting units and goodwill impairment testing. The provisions of SFAS
Nos. 141 and 142 apply to all business combinations after June 30, 2001.
The company has not fully assessed the potential impact of the adoption of
SFAS No. 142 which is effective for the company in Fiscal 2003. The
reassessment of intangible assets, including the ongoing impact of
amortization, must be completed during the first quarter of 2003. The
assignment of goodwill to reporting units, along with completion of the
first step of the transitional goodwill impairment tests, must be completed
during the first six months of Fiscal 2003. Total amortization of goodwill
and intangible assets for the year ended May 2, 2001, was $51.6 million and
$33.6 million, respectively.
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses accounting for legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and the normal operation of
a long-lived asset, except for certain obligations of lessees. This
standard is effective for fiscal years beginning after June 15, 2002. The
company does not expect that the adoption of this standard will have a
significant impact on the consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 clarifies and
revises existing guidance on accounting for impairment of plant, property,
and equipment, amortized intangibles, and other long-lived assets not
specifically addressed in other accounting literature. This standard will
be effective for the company beginning in Fiscal 2003. The company does not
expect that the adoption of this standard will have a significant impact on
the consolidated financial statements.
(9) SEGMENTS
Descriptions of the company's reportable segments are as follows:
Heinz North America--This segment markets ketchup, condiments, sauces,
soups, pasta meals and infant foods to the grocery and foodservice
channels and includes the Canadian business.
U.S. Pet Products and Seafood--This segment markets dry and canned pet
food, pet snacks, tuna and other seafood.
U.S. Frozen--This segment markets frozen potatoes, entrees, snacks and
appetizers.
Europe--This segment includes the company's operations in Europe and
sells products in all of the company's core categories.
9
Asia/Pacific--This segment includes the company's operations in New
Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and
India. This segment's operations include products in all of the
company's core categories.
Other Operating Entities--This segment includes the company's operations
in Africa, Venezuela and other areas which sell products in all of the
company's core categories.
The company's management evaluates performance based on several factors
including net sales and the use of capital resources; however, the
primary measurement focus is operating income excluding unusual costs
and gains. Intersegment sales are accounted for at current market
values. Items below the operating income line of the Consolidated
Statements of Income are not presented by segment, because they are not
the primary measure of segment profitability reviewed by the company's
management.
Prior year quarterly segment information has been revised to conform
with current quarter presentation.
10
The following table presents information about the company's reportable
segments:
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 30, 2002 January 31, 2001 January 30, 2002 January 31, 2001
FY 2002 FY 2001 FY 2002 FY 2001*
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net external sales:
Heinz North America.............. $ 702,715 $ 632,375 $1,982,273 $1,853,998
U.S. Pet Products and Seafood.... 362,319 378,924 1,102,012 1,133,228
U.S. Frozen...................... 360,375 256,505 941,383 774,265
---------- ---------- ---------- ----------
North America Totals............. 1,425,409 1,267,804 4,025,668 3,761,491
Europe........................... 756,598 652,412 2,194,077 1,915,050
Asia/Pacific..................... 263,197 272,567 770,235 818,390
Other Operating Entities......... 106,088 76,859 311,952 242,700
---------- ---------- ---------- ----------
Consolidated Totals.............. $2,551,292 $2,269,642 $7,301,932 $6,737,631
========== ========== ========== ==========
Intersegment sales:
Heinz North America.............. $ 9,617 $ 10,022 $ 31,477 $ 30,531
U.S. Pet Products and Seafood.... 4,288 5,824 11,862 18,411
U.S. Frozen...................... 2,423 3,315 7,575 9,583
Europe........................... 1,944 979 4,360 3,157
Asia/Pacific..................... 713 1,023 1,942 2,004
Other Operating Entities......... 632 1,439 649 3,468
Non-Operating (a)................ (19,617) (22,602) (57,865) (67,154)
---------- ---------- ---------- ----------
Consolidated Totals.............. $ -- $ -- $ -- $ --
========== ========== ========== ==========
Operating income (loss):
Heinz North America.............. $ 141,338 $ 156,808 $ 425,122 $ 455,059
U.S. Pet Products and Seafood.... 46,372 38,652 150,371 134,855
U.S. Frozen...................... 60,265 36,353 165,593 133,622
---------- ---------- ---------- ----------
North America Totals............. 247,975 231,813 741,086 723,536
Europe........................... 136,785 107,742 406,787 333,691
Asia/Pacific..................... 20,411 22,336 71,362 86,585
Other Operating Entities......... 12,580 6,878 39,490 36,862
Non-Operating (a)................ (22,335) (28,609) (77,986) (69,586)
---------- ---------- ---------- ----------
Consolidated Totals.............. $ 395,416 $ 340,160 $1,180,739 $1,111,088
========== ========== ========== ==========
Operating income (loss) excluding
special items (b):
Heinz North America.............. $ 141,338 $ 171,544 $ 429,996 $ 495,582
U.S. Pet Products and Seafood.... 46,372 54,178 158,166 195,082
U.S. Frozen...................... 60,265 44,778 165,593 150,786
---------- ---------- ---------- ----------
North America Totals............. 247,975 270,500 753,755 841,450
Europe........................... 136,785 127,541 408,502 391,460
Asia/Pacific..................... 20,411 35,578 71,960 123,165
Other Operating Entities......... 12,580 7,239 39,490 26,160
Non-Operating (a)................ (22,335) (27,218) (76,793) (64,199)
---------- ---------- ---------- ----------
Consolidated Totals.............. $ 395,416 $ 413,640 $1,196,914 $1,318,036
========== ========== ========== ==========
*Restated, see Note 7.
---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) Third Quarter ended January 31, 2001 - Excludes implementation costs of
Operation Excel as follows: Heinz North America $14.7 million, U.S. Pet
Products and Seafood $15.5 million, U.S. Frozen $8.4 million, Europe $19.8
million, Asia/Pacific $13.2 million, Other Operating Entities $0.4 million
and Non-Operating $1.4 million.
Nine Months ended January 30, 2002 - Excludes implementation and
restructuring costs of Streamline as follows: Heinz North America $4.9
million, U.S. Pet Products and Seafood $7.8 million, Europe $1.7 million,
Asia/Pacific $0.6 million and Non-Operating $1.2 million.
11
Nine Months ended January 31, 2001 - Excludes implementation costs of
Operation Excel as follows: Heinz North America $40.5 million, U.S. Pet
Products and Seafood $60.2 million, U.S. Frozen $17.2 million, Europe $57.8
million, Asia/Pacific $36.6 million, Other Operating Entities ($10.7) million
and Non-Operating $5.4 million.
The company's revenues are generated via the sale of products in the
following categories:
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 30, 2002 January 31, 2001 January 30, 2002 January 31, 2001
FY 2002 FY 2001 FY 2002 FY 2001
---------------- ---------------- ---------------- ----------------
Ketchup, Condiments and Sauces..... $ 668,192 $ 596,762 $1,957,502 $1,824,391
Frozen Foods....................... 583,535 474,738 1,549,754 1,388,820
Seafood............................ 237,950 228,079 761,486 720,715
Convenience Meals.................. 397,498 313,785 1,090,633 874,698
Infant and Nutritional Foods....... 228,796 230,434 659,883 669,581
Pet Products....................... 259,419 287,630 781,095 854,568
Other.............................. 175,902 138,214 501,579 404,858
---------- ---------- ---------- ----------
Total.............................. $2,551,292 $2,269,642 $7,301,932 $6,737,631
========== ========== ========== ==========
(10) On May 3, 2001, the company reorganized its U.S. corporate structure by
consolidating its U.S. business into two major entities: H. J. Heinz
Finance Company (Heinz Finance) manages treasury functions and H. J. Heinz
Company, L.P. (Heinz LP) owns or leases the operating assets and manages
the U.S. business. Heinz Finance assumed primary liability for payment of
the company's outstanding senior unsecured debt and accrued interest by
becoming a co-obligor with the company. Heinz Finance's financial
statements for the nine months ended January 30, 2002 are attached as
Exhibit 99.
On July 6, 2001, Heinz Finance raised $325 million via the issuance of
Voting Cumulative Preferred Stock, Series A with a liquidation preference
of $100,000 per share. The Series A Preferred shares are entitled to
receive quarterly dividends at a rate of 6.226% per annum and are required
to be redeemed for cash on July 15, 2008. In addition, Heinz Finance issued
$750 million of 6.625% Guaranteed Notes due July 15, 2011 which are
guaranteed by the company. The proceeds were used for general corporate
purposes, including retiring commercial paper borrowings, financing
acquisitions and ongoing operations.
On September 6, 2001, the company, Heinz Finance and a group of domestic
and international banks entered into a $1.50 billion credit agreement which
expires in September 2006 and an $800 million credit agreement which
expires in September 2002. These credit agreements, which support the
company's commercial paper programs, replaced the $2.30 billion credit
agreement which expired on September 6, 2001. As of January 30, 2002, $1.38
billion of commercial paper was outstanding and classified as long-term
debt due to the long-term nature of the supporting credit agreement. As of
May 2, 2001, the company had $1.34 billion of commercial paper outstanding
and classified as short-term debt.
(11) DIVIDENDS
On September 17, 2001, the company's Board of Directors raised the
quarterly dividend on the company's common stock to $0.4050 per share from
$0.3925 per share, for an indicated annual rate of $1.62 per share.
12
(12) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of SFAS No. 128.
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 30, 2002 January 31, 2001 January 30, 2002 January 31, 2001
FY 2002 FY 2001 FY 2002 FY 2001
---------------- ---------------- ---------------- ----------------
(In Thousands, Except per Share Amounts)
Income before cumulative effect of
accounting change............... $201,660 $270,520 $610,375 $665,004
Preferred dividends............... 5 5 15 17
-------- -------- -------- --------
Income applicable to common stock
before effect of accounting
change.......................... 201,655 270,515 610,360 664,987
Cumulative effect of accounting
change.......................... -- -- -- (16,471)
-------- -------- -------- --------
Net income applicable to common
stock........................... $201,655 $270,515 $610,360 $648,516
======== ======== ======== ========
Average common shares
outstanding--basic............ 349,704 347,444 349,704 347,444
Effect of dilutive securities:
Convertible preferred stock... 164 178 164 178
Stock options................. 2,877 3,139 2,877 3,139
-------- -------- -------- --------
Average common shares
outstanding--diluted.......... 352,745 350,761 352,745 350,761
Income per share before cumulative
effect of accounting change--
basic........................... $ 0.58 $ 0.78 $ 1.75 $ 1.91
======== ======== ======== ========
Net income per share--basic....... $ 0.58 $ 0.78 $ 1.75 $ 1.87
======== ======== ======== ========
Income per share before cumulative
effect of accounting change--
diluted......................... $ 0.57 $ 0.77 $ 1.73 $ 1.90
======== ======== ======== ========
Net income per share--diluted... $ 0.57 $ 0.77 $ 1.73 $ 1.85
======== ======== ======== ========
(13) COMPREHENSIVE INCOME
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 30, 2002 January 31, 2001 January 30, 2002 January 31, 2001
FY 2002 FY 2001 FY 2002 FY 2001
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net income........................ $201,660 $270,520 $610,375 $ 648,533
Other comprehensive income (loss):
Foreign currency translation
adjustment.................. (51,197) 65,259 (51,571) (129,434)
Minimum pension liability
adjustment.................. (51) (241) 1,107 (1,774)
Deferred gains (losses) on
derivatives:
Net change from periodic
revaluations............ (900) -- (1,637) --
Net amount reclassified to
earnings................ 1,753 -- 1,994 --
-------- -------- -------- ---------
Comprehensive income.............. $151,265 $335,538 $560,268 $ 517,325
======== ======== ======== =========
(14) FINANCIAL INSTRUMENTS
The company operates internationally, with manufacturing and sales
facilities in various locations around the world, and utilizes certain
financial instruments to manage its foreign currency, commodity price and
interest rate exposures.
FOREIGN CURRENCY HEDGING: The company uses forward contracts and currency
swaps to mitigate its foreign currency exchange rate exposure due to
anticipated purchases of raw materials and sales of finished goods, and
future settlement of foreign currency denominated assets and liabilities.
Hedges of anticipated transactions are designated as cash flow hedges,
13
and consequently, the effective portion of unrealized gains and losses is
deferred as a component of accumulated other comprehensive loss and is
recognized in earnings at the time the hedged item affects earnings.
The company uses certain foreign currency debt instruments as net
investment hedges of foreign operations. During the nine months ended
January 30, 2002, gains of $6.2 million, net of income taxes of $3.6
million, which represented effective hedges of net investments, were
reported as a component of accumulated other comprehensive loss within
unrealized translation adjustment.
COMMODITY PRICE HEDGING: The company uses commodity futures and options in
order to reduce price risk associated with anticipated purchases of raw
materials such as corn, soybean oil and soybean meal. Commodity price risk
arises due to factors such as weather conditions, government regulations,
economic climate and other unforeseen circumstances. Hedges of anticipated
commodity purchases which meet the criteria for hedge accounting are
designated as cash flow hedges.
INTEREST RATE HEDGING: The company uses interest rate swaps to manage
interest rate exposure. These derivatives are designated as cash flow
hedges or fair value hedges depending on the nature of the particular risk
being hedged.
During Fiscal 2002, the company entered into interest rate swap agreements
to convert the interest rate exposure on certain of the company's existing
long-term debt from fixed to floating. The weighted average fixed rate of
the associated debt is 6.433%. The aggregate notional amount of these swaps
is $1.3 billion and their average duration is 12 years.
HEDGE INEFFECTIVENESS: During the nine months ended January 30, 2002, hedge
ineffectiveness related to cash flow hedges was a net loss of $0.3 million,
which is reported in the consolidated statements of income as other
expenses.
DEFERRED HEDGING GAINS AND LOSSES: As of January 30, 2002, the company is
hedging forecasted transactions for periods not exceeding 15 months. During
the next 12 months, the company expects $0.3 million of net deferred gain
reported in accumulated other comprehensive loss to be reclassified to
earnings.
(15) SUBSEQUENT EVENT
On March 7, 2002, Heinz Finance issued $700 million of 6.00% Guaranteed
Notes due March 15, 2012 and $550 million of 6.75% Guaranteed Notes due
March 15, 2032, which are guaranteed by the company. The proceeds will be
used to retire commercial paper borrowings. Heinz Finance converted $750
million of the new debt from fixed to floating through interest rate swap
agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, the company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The company believes that the following discussion
addresses the company's most critical accounting policies, which are those that
are most important to the portrayal of the company's financial condition and
results and require management's most subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain.
14
MARKETING COSTS -- In order to support the company's products, Heinz offers
various marketing programs to its customers which reimburse them for a portion
or all of their promotional activities related to the company's products. The
company regularly reviews and revises, when deemed necessary, estimates of costs
to the company for these marketing programs based on estimates of what has been
incurred by our customers. Actual costs incurred by the company may differ
significantly if factors such as the level and success of the customers'
programs or other conditions differ from our expectations.
INVENTORIES -- Inventories are stated at the lower of cost or market value.
Cost is principally determined by the first-in, first-out method. The company
records adjustments to the value of inventory based upon its forecasted plans to
sell its inventories. The physical condition (e.g., age and quality) of the
inventories is also considered in establishing its valuation. These adjustments
are estimates, which could vary significantly, either favorably or unfavorably,
from actual requirements if future economic conditions, customer inventory
levels or competitive conditions differ from our expectations.
PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS -- Property, plant and
equipment is recorded at cost and is depreciated on a straight-line basis over
the estimated useful lives of such assets. Changes in circumstances such as
technological advances, changes to the company's business model or changes in
the company's capital strategy can result in the actual useful lives differing
from the company's estimates. In those cases where the company determines that
the useful life of property, plant and equipment should be shortened, the
company would depreciate the net book value in excess of the salvage value, over
its revised remaining useful life thereby increasing depreciation expense.
Long-lived assets, including fixed assets and intangibles other than
goodwill, are reviewed by the company for impairment whenever events or changes
in circumstances indicate that the carrying amount of any such asset may not be
recoverable. The estimate of cash flow is based upon, among other things,
certain assumptions about expected future operating performance. The company's
estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, changes to its
business model or changes in its operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value,
the company recognizes an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset.
GOODWILL -- The company regularly reviews the individual components of
goodwill by evaluating the future cash flows of the businesses to determine the
recoverability of goodwill and recognizes, on a current basis, any diminution in
value. If future cash flows are less favorable than those anticipated, goodwill
may be impaired.
PENSION BENEFITS -- The company sponsors pension and other retirement plans
in various forms covering substantially all employees who meet eligibility
requirements. Several statistical and other factors which attempt to anticipate
future events are used in calculating the expense and liability related to the
plans. These factors include assumptions about the discount rate, expected
return on plan assets and rate of future compensation increases as determined by
the company, within certain guidelines. In addition, the company's actuarial
consultants also use subjective factors such as withdrawal and mortality rates
to estimate these factors. The actuarial assumptions used by the company may
differ materially from actual results due to changing market and economic
conditions, higher or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant impact to the amount
of pension expense recorded by the company.
STREAMLINE
In the fourth quarter of Fiscal 2001, the company announced a restructuring
initiative named "Streamline". This initiative includes a worldwide
organizational restructuring aimed at reducing
15
overhead costs, the closure of the company's tuna operations in Puerto Rico, the
consolidation of the company's North American canned pet food production to
Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production
at the company's Terminal Island, California facility), and the divestiture of
the company's U.S. fleet of fishing boats and related equipment. For more
information regarding Streamline, please refer to the company's Annual Report to
Shareholders for the fiscal year ended May 2, 2001.
During the first quarter of Fiscal 2002, the company recognized
restructuring charges and implementation costs totaling $16.1 million pretax
($0.04 per share). [Note: All earnings per share amounts included in
Management's Discussion and Analysis are presented on an after-tax diluted
basis]. Pretax charges of $8.7 million were classified as cost of products sold
and $7.4 million as selling, general and administrative expenses ("SG&A").
Implementation costs ($10.4 million pretax) were recognized as incurred and
consisted of incremental costs directly related to the implementation of the
Streamline initiative. These include cost premiums related to production
transfers, consulting costs and relocation costs.
In Fiscal 2001, the company completed the closure of its tuna operations in
Puerto Rico, ceased production of canned pet food in the company's Terminal
Island, California facility and sold its U.S. fleet of fishing boats and related
equipment. In addition, the company is continuing its implementation of its
global overhead reduction plan. To date, these actions have resulted in a net
reduction of the company's workforce of approximately 2,400 employees.
THREE MONTHS ENDED JANUARY 30, 2002 AND JANUARY 31, 2001
RESULTS OF OPERATIONS
For the three months ended January 30, 2002, sales increased $281.7
million, or 12.4%, to $2,551.3 million from $2,269.6 million last year. Sales
were favorably impacted by acquisitions (12.7%), higher pricing (2.9%) and
higher volumes (0.4%) and unfavorably impacted by foreign exchange translation
rates (1.7%) and divestitures (1.9%).
The favorable impact of acquisitions is primarily related to Classico and
Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and
soups in the North American segment; Delimex frozen Mexican foods, Anchor's
Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's
brand of frozen snacks and appetizers in the U.S. Frozen Segment; and the Honig
brands of soups, sauces and pasta meals, HAK brand of vegetables packed in
glass, KDR brand of sport drinks, juices, spreads and sprinkles in the Europe
segment.
Sales of the Heinz North America segment increased $70.3 million, or 11.1%.
Acquisitions, net of divestitures, increased sales 12.1%. Higher pricing
increased sales 0.3%, due mainly to grocery ketchup and infant feeding. Sales
volume decreased 0.4%, mainly due to decreases in grocery ketchup, lapping last
year's introduction of EZ Squirt, and gravy partially offset by increased volume
of foodservice sauces. The weaker Canadian dollar decreased sales 0.9%.
Sales of the U.S. Pet Products and Seafood segment decreased $16.6 million,
or 4.4%. Sales volume decreased 5.6% primarily in pet food partially offset by
volume increases in pet snacks. Higher pricing increased sales 1.2%, primarily
in tuna and pet snacks.
U.S. Frozen's sales increased $103.9 million, or 40.5%. Acquisitions
increased sales 43.3%. Sales volume increased 3.0% due primarily to SmartOnes
frozen entrees and Boston Market HomeStyle Meals partially offset by volume
decreases in frozen snacks. Divestitures reduced sales by 5.8% due to the sale
of Budget Gourmet.
Heinz Europe's sales increased $104.2 million, or 16.0%. Acquisitions, net
of divestitures, increased sales 13.0%. Volume increased by 3.5%, driven
primarily by ketchup, frozen foods, beans and salmon partially offset by volume
decreases in tuna. Higher pricing increased sales 1.4%,
16
primarily due to higher pricing in tuna, soups and beans. Unfavorable foreign
exchange translation rates decreased sales by 1.9%.
Sales in Asia/Pacific decreased $9.4 million, or 3.4%. Unfavorable exchange
rates reduced sales by 7.2%. Higher pricing increased sales 3.7%, primarily due
to sauces, infant feeding and juices. Sales volume increased 0.9% due primarily
to frozen foods, poultry, cooking oils and infant feeding partially offset by
volume decreases in canned meats and pet food. Divestitures, net of
acquisitions, reduced sales by 0.8%.
Sales for Other Operating Entities increased $29.2 million, or 38.0%.
Favorable pricing increased sales 50.7%, primarily in highly inflationary
countries. Other items net reduced sales by 12.7% mainly due to the divestitures
of the South African frozen and pet food businesses.
Last year's third quarter was positively impacted by special items which
net to $43.1 million after-tax ($0.13 per share). The following table provides a
comparison of the company's reported results and the results excluding special
items for the third quarter of Fiscal 2001.
Third Quarter Ended January 31, 2001
(Dollars in millions except per share amounts) -----------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- ------- --------- ------ -----
Reported results............................. $2,269.6 $884.1 $340.2 $270.5 $0.77
Operation Excel implementation costs....... -- 43.2 73.5 50.1 0.14
Italian tax benefit........................ -- -- -- (93.2) (0.27)
-------- ------ ------ ------ -----
Results excluding special items............ $2,269.6 $927.4 $413.6 $227.4 $0.65
======== ====== ====== ====== =====
(Note: Totals may not add due to rounding.)
Gross profit increased $116.9 million, or 13.2%, to $1,001.0 million from
$884.1 million and the gross profit margin increased to 39.2% from 39.0%.
Excluding the Fiscal 2001 special items noted above, gross profit increased
$73.7 million, or 7.9%, to $1,001.0 million from $927.4 million and the gross
profit margin decreased to 39.2% from 40.9%. Gross profit for the Heinz North
America segment increased $13.1 million, or 4.8% due primarily to acquisitions
offset by the decline in the foodservice business. The U.S. Pet Products and
Seafood segment's gross profit decreased $7.9 million, or 5.6%, primarily due to
volume decreases in pet food and a shift to less profitable larger size
products. U.S. Frozen's gross profit increased $45.4 million or 38.7%, due
primarily to acquisitions. Europe's gross profit increased $37.6 million, or
13.8%, due primarily to acquisitions and increased pricing. The Asia/Pacific
segment's gross profit decreased $17.2 million, or 17.3%, due primarily to
supply chain issues in New Zealand and Australia and declining sales in Japan.
Unfavorable foreign exchange rates were only partially offset by increased
pricing. A significant number of products produced in this region are sourced
from a different factory or line compared with prior year. Gross profit in the
Other Operating Entities segment increased $4.4 million, or 17.5%, due primarily
to favorable pricing.
Selling, general and administrative expenses ("SG&A") increased $61.6
million, or 11.3%, to $605.6 million from $544.0 million, and decreased as a
percentage of sales to 23.7% from 24.0%. Excluding the Fiscal 2001 special items
noted above, SG&A increased $91.9 million, or 17.9%, to $605.6 million from
$513.7 million and increased as a percentage of sales to 23.7% from 22.6%. This
increase is primarily attributable to acquisitions, increased promotional
spending in North America and Europe and increased selling and distribution
cost.
Operating income increased $55.3 million, or 16.2%, to $395.4 million from
$340.2 million, and increased as a percentage of sales to 15.5% from 15.0%.
Excluding the Fiscal 2001 special items noted above, operating income decreased
$18.2 million, or 4.4%, to $395.4 million from $413.6 million and decreased as a
percentage of sales to 15.5% from 18.2%.
Heinz North America's operating income decreased $15.5 million, or 9.9%, to
$141.3 million from $156.8 million. Excluding the Fiscal 2001 special items
noted above, operating income de-
17
creased $30.2 million, or 17.6%, to $141.3 million from $171.5 million, due
primarily to increased selling and distribution costs, increased promotional
spending and a decrease in the foodservice business partially offset by
acquisitions.
The U.S. Pet Products and Seafood segment's operating income increased $7.7
million, or 20.0%, to $46.4 million from $38.7 million. Excluding the Fiscal
2001 special items noted above, operating income decreased $7.8 million, or
14.4%, to $46.4 million from $54.2 million, due primarily to the decrease in
gross profit.
The U.S. Frozen segment's operating income increased $23.9 million, or
65.8%, to $60.3 million from $36.4 million. Excluding the Fiscal 2001 special
items noted above, operating income increased $15.5 million, or 34.6%, to $60.3
million from $44.8 million primarily due to the favorable impact of acquisitions
partially offset by the divestiture of Budget Gourmet.
Europe's operating income increased $29.0 million, or 27.0%, to $136.8
million from $107.7 million. Excluding the Fiscal 2001 special items noted
above, operating income increased $9.2 million, or 7.2%, to $136.8 million from
$127.5 million. Europe's increase is primarily attributable to the increase in
gross profit partially offset by increased marketing to support key brands
across Europe and integration costs associated with recent acquisitions.
Asia/Pacific's operating income decreased $1.9 million, or 8.6%, to $20.4
million from $22.3 million. Excluding the Fiscal 2001 special items noted above,
operating income decreased $15.2 million, or 42.6%, to $20.4 million from $35.6
million. This decrease is due primarily to supply chain issues in New Zealand
and Australia and declining sales in Japan. A significant number of products
produced in this region are sourced from a different factory or line compared
with prior year. Operations are expected to improve during the latter half of
Fiscal 2003.
Excluding special items, Other Operating Entities' operating income
increased $5.3 million or 73.8% primarily due to higher pricing.
Net interest expense decreased $14.0 million to $65.4 million from $79.5
million last year, driven by lower interest rates partially offset by increased
borrowings. Other expense increased $35.5 million to $19.7 million from other
income of $15.8 million last year primarily due to gains from foreign currency
hedge contracts recorded in the prior year quarter and an increase in minority
interest expense.
The effective tax rate for the current quarter was 35.0% compared to 2.1%
last year. The prior year quarter included the benefit from tax planning and new
tax legislation outlined above. Excluding the Fiscal 2001 special items noted
above, the effective rate was 35.0% for both periods.
Net income in the current quarter was $201.7 million compared to $270.5
million last year and diluted earnings per share was $0.57 in the current
quarter versus $0.77 in the same period last year. Excluding the Fiscal 2001
special items noted above, net income decreased $25.8 million to $201.7 million
from $227.4 million last year, and diluted earnings per share decreased 12.0%,
to $0.57 from $0.65 last year.
NINE MONTHS ENDED JANUARY 30, 2002 AND JANUARY 31, 2001
RESULTS OF OPERATIONS
For the nine months ended January 30, 2002, sales increased $564.3 million,
or 8.4%, to $7,301.9 million from $6,737.6 million last year. Sales were
favorably impacted by acquisitions (9.8%), higher pricing (2.0%) and higher
volumes (0.6%). Sales were unfavorably impacted by foreign exchange translation
rates (2.0%) and divestitures (2.0%).
Sales of the Heinz North America segment increased $128.3 million, or 6.9%.
Acquisitions, net of divestitures, increased sales 10.1%. Lower pricing
decreased sales 1.4%, primarily related to
18
foodservice ketchup. Sales volume decreased 1.1%, primarily in the foodservice
business, various sauces and infant feeding partially offset by volume increases
in soups and grilling sauces. The weaker Canadian dollar decreased sales 0.7%.
Sales of the U.S. Pet Products and Seafood segment decreased $31.2 million,
or 2.8%. Higher pricing increased sales 0.7%, primarily in tuna, partially
offset by lower pricing in dry dog food, pet snacks and cat food. Sales volume
decreased 2.2% primarily in pet food partially offset by volume increases in pet
treats and tuna. Divestitures decreased sales 1.3%.
U.S. Frozen's sales increased $167.1 million, or 21.6%. Acquisitions
increased sales 22.3%. Sales volume increased 5.7% due primarily to SmartOnes
frozen entrees, Boston Market HomeStyle Meals and Bagel Bites snacks partially
offset by volume decreases in frozen potatoes. Higher pricing increased sales
1.4%, primarily in SmartOnes frozen entrees and frozen potatoes partially offset
by lower pricing of Boston Market HomeStyle Meals. Divestures reduced sales by
7.8% due to the sale of Budget Gourmet.
Heinz Europe's sales increased $279.0 million, or 14.6%. Acquisitions, net
of divestitures, increased sales 13.4%. Higher pricing increased sales 2.4%,
primarily due to higher pricing in seafood, infant feeding, beans and soup.
Volume increased by 1.3%, driven primarily by grocery ketchup, salad cream,
beans, salmon and weight control entrees partially offset by volume decreases in
infant feeding and tuna. Unfavorable foreign exchange translation rates
decreased sales by 2.5%.
Sales in Asia/Pacific decreased $48.2 million, or 5.9%. Unfavorable
exchange rates reduced sales by 8.9%. Higher pricing increased sales 2.3%,
primarily due to higher pricing in sauces and juices partially offset by lower
pricing in cooking oils. Sales volume increased 1.2% due primarily to poultry,
frozen vegetables and juices partially offset by volume decreases in sauces,
corned beef and frozen potatoes. Divestitures, net of acquisitions, reduced
sales by 0.5%.
Sales for Other Operating Entities increased $69.3 million, or 28.5%.
Favorable pricing increased sales 32.3%, primarily in certain highly
inflationary countries. Sales volume increased 2.7%, primarily in infant feeding
and grocery ketchup offset by decreases in tuna. Other items net reduced sales
by 6.5% mainly due to the divestitures of the South African frozen and pet food
businesses.
The current year's results were negatively impacted by additional
Streamline restructuring charges and implementation costs totaling $16.1 million
pretax ($0.04 per share). Pretax charges of $8.7 million were classified as cost
of products sold and $7.4 million as SG&A. Last year's results were negatively
impacted by special items which net to $45.7 million after-tax ($0.13 per
share).
The following tables provide a comparison of the company's reported results
and the results excluding special items for the nine months ended January 30,
2002 and January 31, 2001.
Nine Months Ended January 30, 2002
(Dollars in millions except per share amounts) ------------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- -------- --------- ------ -----
Reported results........................... $7,301.9 $2,885.1 $1,180.7 $610.4 $1.73
Streamline implementation costs.......... -- 8.7 10.4 9.4 0.03
Streamline restructuring costs........... -- -- 5.7 3.6 0.01
-------- -------- -------- ------ -----
Results excluding special items............ $7,301.9 $2,893.8 $1,196.9 $623.3 $1.77
======== ======== ======== ====== =====
19
Nine Months Ended January 31, 2001
(Dollars in millions except per share amounts) ------------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- -------- --------- ------ -----
Reported results (a)....................... $6,737.6 $2,696.4 $1,111.1 $665.0 $1.90(b)
Operation Excel restructuring............ -- 33.5 33.5 20.8 0.06
Operation Excel implementation costs..... -- 96.1 207.2 140.5 0.40
Operation Excel reversals................ -- (21.4) (33.8) (25.9) (0.07)
Italian tax benefit...................... -- -- -- (93.2) (0.27)
Equity Loss on Investment in the Hain
Celestial Group....................... -- -- -- 3.5 0.01
-------- -------- -------- ------ -----
Results excluding special items............ $6,737.6 $2,804.6 $1,318.0 $710.7 $2.03
======== ======== ======== ====== =====
---------------
(a) Amounts have been restated for the effect of the change in accounting for
revenue recognition
(b) Before cumulative effect of accounting change
(Note: Totals may not add due to rounding.)
Gross profit increased $188.6 million, or 7.0%, to $2,885.1 million from
$2,696.4 million and the gross profit margin decreased to 39.5% from 40.0%.
Excluding the special items noted above, gross profit increased $89.2 million,
or 3.2%, to $2,893.8 million from $2,804.6 million and the gross profit margin
decreased to 39.6% from 41.6%. Gross profit for the Heinz North America segment
increased $10.0 million, or 1.2% due primarily to acquisitions partially offset
by lower pricing and the decline in the foodservice business. The U.S. Pet
Products and Seafood segment's gross profit decreased $48.8 million, or 11.1%,
primarily due to price decreases in pet food and pet snacks, increased
ingredient and manufacturing costs and a shift to less profitable larger size
products. Pet food ingredient costs also increased as a result of reformulating
recipes to improve palatability. U.S. Frozen's gross profit increased $67.7
million or 18.8%, due primarily to acquisitions and increased pricing. Europe's
gross profit increased $104.8 million, or 12.9%, due primarily to acquisitions
and increased pricing. The Asia/Pacific segment's gross profit decreased $54.7
million, or 17.4%, due primarily to unfavorable foreign exchange rates and poor
factory operations in connection with the movement of manufacturing to New
Zealand from Australia and Japan partially offset by increased pricing. New
Zealand's factories are experiencing inefficiencies as a result of significant
changes in the supply chain matrix. Gross profit in the Other Operating Entities
segment increased $10.9 million, or 14.4%, due primarily to favorable pricing.
SG&A increased $119.0 million, or 7.5%, to $1,704.3 million from $1,585.3
million, and decreased as a percentage of sales to 23.3% from 23.5%. Excluding
the special items noted above, SG&A increased $210.3 million, or 14.1%, to
$1,696.9 million from $1,486.6 million and increased as a percentage of sales to
23.2% from 22.1%. This increase is primarily attributable to acquisitions,
increased promotional spending in North America and Europe and increased selling
and distribution costs in North America.
Operating income increased $69.7 million, or 6.3%, to $1,180.7 million from
$1,111.1 million, and decreased as a percentage of sales to 16.2% from 16.5%.
Excluding the special items noted above, operating income decreased $121.1
million, or 9.2%, to $1,196.9 million from $1,318.0 million and decreased as a
percentage of sales to 16.4% from 19.6%.
Heinz North America's operating income decreased $29.9 million, or 6.6%, to
$425.1 million from $455.1 million. Excluding the special items noted above,
operating income decreased $65.6 million, or 13.2%, to $430.0 million from
$495.6 million, due primarily to the decrease in gross profit and higher selling
and distribution costs partially offset by the favorable impact of acquisitions.
The U.S. Pet Products and Seafood segment's operating income decreased
$15.5 million, or 11.5%, to $150.4 million from $134.9 million. Excluding the
special items noted above, operating
20
income decreased $36.9 million, or 18.9%, to $158.2 million from $195.1 million,
due primarily to the decrease in gross profit.
The U.S. Frozen segment's operating income increased $32.0 million, or
23.9%, to $165.6 million from $133.6 million. Excluding the special items noted
above, operating income increased $14.8 million, or 9.8%, to $165.6 million from
$150.8 million as the favorable impact of acquisitions and pricing was partially
offset by increased selling and distribution costs and the divestiture of Budget
Gourmet.
Europe's operating income increased $73.1 million, or 21.9%, to $406.8
million from $333.7 million. Excluding the special items noted above, operating
income increased $17.0 million, or 4.4%, to $408.5 million from $391.5 million.
This increase is primarily attributable to acquisitions and the tuna business
partially offset by increased marketing to support key brands across Europe and
integration costs.
Asia/Pacific's operating income decreased $15.2 million, or 17.6%, to $71.4
million from $86.6 million. Excluding the special items noted above, operating
income decreased $51.2 million, or 41.6%, to $72.0 million from $123.2 million.
This decrease is primarily attributable to the unfavorable operating performance
brought about by the movement of manufacturing to New Zealand for Australia and
Japan and the significant realignment of manufacturing facilities. Operations
are expected to improve during the latter half of Fiscal 2003.
Excluding special items, Other Operating Entities' operating income
increased $13.3 million or 51.0% primarily due to higher pricing.
Net interest expense decreased $24.9 million to $206.4 million from $231.3
million last year, driven by lower interest rates partially offset by increased
borrowings. Other expense increased $32.5 million to $31.4 million from other
income of $1.0 million last year. Excluding special items, other expense
increased $38.1 million to $31.4 million from other income of $6.7 million
primarily due to gains from foreign currency hedge contracts recorded in the
prior year and an increase in minority interest expense.
The effective tax rate for the current year was 35.3% compared to 24.5%
last year. Excluding the special items, the effective rate was 35.0% in both
years.
Net income for the current nine months was $610.4 million compared to
$648.5 million last year and diluted earnings per share was $1.73 compared to
$1.85 last year. Excluding the special items noted above and the cumulative
effect of the accounting change for revenue recognition in the prior year, net
income decreased $87.4 million to $623.3 million from $710.7 million last year,
and diluted earnings per share decreased 12.8%, to $1.77 from $2.03 last year.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities was $334.3 million compared to cash
used for operating activities of $1.4 million last year. The increase in Fiscal
2002 versus Fiscal 2001 is primarily due to expenditures in the prior year
related to Operation Excel and income taxes related to the reorganization of
certain foreign operations.
Cash used for investing activities totaled $924.8 million compared to
$414.8 million last year. Acquisitions in the current period required $802.7
million, due primarily to the purchase of Borden Food Corporation's pasta and
dry bouillon and soup business, Delimex Holdings, Inc. and Anchor Food Products
branded retail business and licensing rights to the T.G.I. Friday's brand of
frozen snacks and appetizers. Acquisitions in the prior period required $182.9
million, due primarily to the purchase of International DiverseFoods Inc. and
Alden Merrell. During the prior year period, the company also invested $79.7
million in The Hain Celestial Group, Inc. In the current period, proceeds from
divestitures provided $31.9 million compared to $93.3 million prior year.
Proceeds from divestures in the prior year primarily relate to the sale of the
company's domestic can making
21
facilities. Capital expenditures in the current period required $103.2 million
compared to $255.8 million last year.
Cash provided by financing activities increased to $659.4 million from
$482.2 million last year. Proceeds from long-term debt were $770.8 million
compared to $1,078.7 million last year. Payments on long-term debt required
$37.5 million this period compared to $22.0 million last year. Proceeds from
commercial paper and short-term borrowings provided $2.2 million compared to
requiring $174.3 million last year. In addition, $325.0 million was provided
during the current period through the issuance of Preferred Stock by H.J. Heinz
Finance Company ("Heinz Finance"), (see below). Cash provided from stock options
exercised totaled $53.2 million versus $78.5 million last year. Dividend
payments totaled $420.6 million compared to $400.4 million for the same period
last year. Share repurchases totaled $45.4 million (1.0 million shares) versus
$90.4 million (2.3 million shares) a year ago.
In the first nine months of Fiscal 2002, the cash requirements of
Streamline were $88.8 million, consisting of spending for severance and exit
costs ($78.4 million) and implementation costs ($10.4 million).
On July 6, 2001, Heinz Finance raised $325.0 million via the issuance of
Voting Cumulative Preferred Stock, Series A with liquidation preference of
$100,000 per share. The Series A Preferred shares are entitled to receive
quarterly dividends at a rate of 6.226% per annum and are required to be
redeemed for cash on July 15, 2008. In addition, Heinz Finance issued $750
million of 6.625% Guaranteed Notes due July 15, 2001. The proceeds were used for
general corporate purposes, including retiring commercial paper borrowings and
financing acquisitions and ongoing operations.
On September 6, 2001, the company, Heinz Finance and a group of domestic
and international banks entered into a $1.50 billion credit agreement which
expires in September 2006 and a $800 million credit agreement which expires in
September 2002. These credit agreements, which support the company's commercial
paper programs, replaced the $2.30 billion credit agreement which expired on
September 6, 2001. As of January 30, 2002, $1.38 billion of commercial paper is
classified as long-term debt due to the long-term nature of the supporting
credit agreement. As of May 2, 2001, the company had $1.34 billion of commercial
paper outstanding and classified as short-term debt.
In January 2002, Moody's Investors Service changed the credit ratings on
the company's debt to A-3 for long-term debt and P-1 for short-term debt. The
previous ratings were A-2 and P-1, respectively. The company's long-term and
short-term debt ratings by Standard & Poor's remained at A and A-1,
respectively.
On March 7, 2002, Heinz Finance issued $700 million of 6.00% Guaranteed
Notes due March 15, 2012 and $550 million of 6.75% Guaranteed Notes due March
15, 2032, which are guaranteed by the company. The proceeds will be used to
retire commercial paper borrowings. Heinz Finance converted $750 million of the
new debt from fixed to floating through interest rate swap agreements. Long-term
debt accounts for over 60% of the company's total debt.
COMMITMENTS AND CONTINGENCIES
The Securities and Exchange Commission recently issued an interpretive
release on disclosures related to liquidity and capital resources, including
off-balance sheet arrangements. The company is not aware of factors that are
reasonably likely to adversely affect liquidity trends or increase the company's
risk beyond the risk factors presented in other company filings. The following
additional information is provided to assist financial statement users.
Purchase Commitments -- The company has purchase commitments for materials,
supplies, services, and property, plant and equipment as part of the ordinary
conduct of business. A few of these commitments are long-term and are based on
minimum purchase requirements. In the aggregate, such commitments are not at
prices in excess of current market. Due to the proprietary
22
nature of some of the company's materials and processes, certain supply
contracts contain penalty provisions for early termination. The company does not
believe a material amount of penalties is reasonably likely to be incurred under
these contracts based upon historical experience and current expectations.
Leases -- The company has entered into operating and synthetic leases for
certain of its warehouses, equipment and office buildings where the economic
profile is favorable. Contractual obligations under existing synthetic leases,
which are due at the end of the lease period (fiscal years 2007 and 2008), total
approximately $220 million as of January 30, 2002. The liquidity impact of
outstanding leases is not material to the company - by reference to both annual
cash flow and total outstanding debt nor do they adversely affect the company's
on-going business.
Other Contractual Obligations -- The company does not have material
financial guarantees or other contractual commitments that are reasonably likely
to adversely affect liquidity.
Related Party Transactions -- The company does not have any related party
transactions that materially affect the results of operations, cash flow or
financial condition.
The company's financial position continues to remain strong, enabling it to
meet cash requirements for operations, capital expansion programs and dividends
to shareholders.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In Fiscal 2001, the company changed its method of accounting for revenue
recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition in Financial Statements". Under the new accounting method, adopted
retroactive to May 4, 2000, Heinz recognizes revenue upon the passage of title,
ownership and risk of loss to the customer. The cumulative effect adjustment of
$66.2 million in revenue ($16.5 million in net income) as of May 4, 2000, was
recognized during the first quarter of Fiscal 2001. The Fiscal 2001 nine month
amounts have been restated for the effect of the change in accounting for
revenue recognition. Amounts originally reported were as follows: Sales, $6.72
billion; Gross profit, $2.69 billion; Net income, $661.2 million; Net income per
share -- diluted, $1.88; Net income per share -- basic, $1.90.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued
new guidelines entitled "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products".
In addition, during May 2000, the EITF issued new guidelines entitled
"Accounting for Certain Sales Incentives". Both of these issues provide guidance
primarily on income statement classification of consideration from a vendor to a
purchaser of the vendor's products, including both customers and consumers.
Generally, cash consideration is to be classified as a reduction of revenue,
unless specific criteria are met regarding goods or services that the vendor may
receive in return for this consideration.
In the fourth quarter of Fiscal 2002, the company will reclassify
promotional payments to our customers and the cost of consumer coupons and other
cash redemption offers from SG&A to net sales. The company is currently
assessing the combined impact of both Issues, however, we believe that, based on
historical information. Sales could be reduced up to 6 to 7%. SG&A will be
correspondingly reduced such that net earnings will not be affected.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets." These standards require that all
business combinations be accounted for using the purchase method and that
goodwill and intangible assets with indefinite useful lives should not be
amortized but should be tested for impairment at least annually, and they
provide guidelines for new disclosure requirements. These standards outline the
criteria for initial recognition and measurement of intangibles, assignment of
assets and liabilities including
23
goodwill to reporting units and goodwill impairment testing. The provisions of
SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001.
The company has not fully assessed the potential impact of the adoption of
SFAS No. 142 which is effective for the company in Fiscal 2003. The reassessment
of intangible assets, including the ongoing impact of amortization, must be
completed during the first quarter of Fiscal 2003. The assignment of goodwill to
reporting units, along with completion of the first step of the transitional
goodwill impairment tests, must be completed during the first six months of
Fiscal 2003. Total amortization of goodwill and intangible assets for the year
ended May 2, 2001, was $51.6 million and $33.6 million, respectively.
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses accounting for legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and the normal operation of a long-lived
asset, except for certain obligations of lessees. This standard is effective for
fiscal years beginning after June 15, 2002. The company does not expect that the
adoption of this standard will have a significant impact on the consolidated
financial statements.
In October 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-lived Assets." SFAS No. 144 clarifies and revises existing
guidance on accounting for impairment of plant, property and equipment,
amortized intangibles, and other long-lived assets not specifically addressed in
other accounting literature. This standard will be effective for the company
beginning in Fiscal 2003. The company does not expect the adoption of this
standard to have a significant impact on the consolidated financial statements.
INFLATION
In general, costs are affected by inflation and the effects of inflation
may be experienced by the company in future periods. Management believes,
however, that such effects have not been material to the company during the past
three years in the United States or foreign non-hyperinflationary countries. The
company operates in certain countries around the world, such as Argentina,
Venezuela, Mexico and Zimbabwe that have experienced hyperinflation. In
hyperinflationary foreign countries, the company attempts to mitigate the
effects of inflation by increasing prices in line with inflation, where
possible, and efficiently managing its working capital levels.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by or on behalf of the company. The company
and its representatives may from time to time make written or oral
forward-looking statements, including certain statements included in or
incorporated by reference in this Form 10-Q, the company's other filings with
the Securities and Exchange Commission, and its reports to shareholders. These
forward-looking statements are based on management's views and assumptions and
involve risks, uncertainties and other important factors, some of which may be
beyond the control of the company, that could cause actual results to differ
materially from those expressed or implied in the forward-looking statements.
These include, but are not limited to, sales, earnings and volume growth,
competitive conditions, production costs, currency valuations and fluctuations
in those rates (notably the euro and the pound sterling), global economic and
industry conditions, including the impact of the economic downturn in the food
industry and the foodservice business in particular, achieving cost savings
programs, success of acquisitions (including integration), divestitures and
other business combinations and new product and packaging innovations, the
impact of e-commerce and e-procurement, supply chain efficiency and cash flow
initiatives, and other factors described in "Cautionary Statement Relevant to
Forward-Looking Information" in the company's Form 10-K for the fiscal year
ended May 2, 2001, as updated from time to time by the company in its subsequent
filings with the Securities and Exchange Commission. The forward-looking
statements are and will
24
be based on management's then current views and assumptions regarding future
events and operating performance and speak only as of their dates. The company
undertakes no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the company's market risk during the
nine months ended January 30, 2002. For additional information, refer to pages
41-42 of the company's Annual Report to Shareholders for the fiscal year ended
May 2, 2001.
25
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Note 6 to the Condensed Consolidated Financial Statements in Part
I--Item 1 of this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The company has omitted certain
exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The
company agrees to furnish such documents to the Commission upon request.
Documents not designated as being incorporated herein by reference are
filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
12. Computation of Ratios of Earnings to Fixed Charges.
99 Condensed consolidated and combined financial statements of H.J.
Heinz Finance Company and Subsidiaries for the nine months ended
January 30, 2002.
(b) Reports on Form 8-K.
A report on Form 8-K was filed with the Securities and Exchange Commission
on November 13, 2001 relating to its revised earnings outlook for the
second quarter ended October 31, 2001 and the full fiscal year ending May
1, 2002.
26
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.
H. J. HEINZ COMPANY
(Registrant)
Date: March 13, 2002
By: /s/ Arthur Winkleblack
..................................
Arthur Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 13, 2002
By: /s/ Bruna Gambino
..................................
Bruna Gambino
Corporate Controller
(Principal Accounting Officer)
27