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 28, 2004
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 28, 2004 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 __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of February 20, 2004 was 352,096,898 shares.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Third Quarter Ended
------------------------------------
January 28, 2004 January 29, 2003
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $2,097,181 $2,105,003
Cost of products sold...................................... 1,317,934 1,342,958
---------- ----------
Gross profit............................................... 779,247 762,045
Selling, general and administrative expenses............... 423,880 440,405
---------- ----------
Operating income........................................... 355,367 321,640
Interest income............................................ 5,588 9,149
Interest expense........................................... 53,725 58,870
Other expense, net......................................... 5,095 66,470
---------- ----------
Income from continuing operations before income taxes...... 302,135 205,449
Provision for income taxes................................. 99,898 75,600
---------- ----------
Income from continuing operations.......................... 202,237 129,849
Income from discontinued operations, net of tax............ -- 21,770
---------- ----------
Net income................................................. $ 202,237 $ 151,619
========== ==========
Income per common share
Diluted
Continuing operations................................. $ 0.57 $ 0.37
Discontinued operations............................... -- 0.06
---------- ----------
Net income.......................................... $ 0.57 $ 0.43
========== ==========
Average common shares outstanding--diluted............... 354,254 353,973
========== ==========
Basic
Continuing operations................................. $ 0.58 $ 0.37
Discontinued operations............................... -- 0.06
---------- ----------
Net income.......................................... $ 0.58 $ 0.43
========== ==========
Average common shares outstanding--basic................. 351,725 351,198
========== ==========
Cash dividends per share................................... $ 0.27 $ 0.4050
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
------------------------------------
January 28, 2004 January 29, 2003
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $6,083,166 $6,043,487
Cost of products sold...................................... 3,815,625 3,857,784
---------- ----------
Gross profit............................................... 2,267,541 2,185,703
Selling, general and administrative expenses............... 1,214,063 1,237,142
---------- ----------
Operating income........................................... 1,053,478 948,561
Interest income............................................ 15,901 21,764
Interest expense........................................... 160,254 165,325
Other expense, net......................................... 35,019 101,452
---------- ----------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle...... 874,106 703,548
Provision for income taxes................................. 293,557 250,790
---------- ----------
Income from continuing operations before cumulative effect
of change in accounting principle........................ 580,549 452,758
Income from discontinued operations, net of tax............ 27,200 88,738
---------- ----------
Income before cumulative effect of change in accounting
principle................................................ 607,749 541,496
Cumulative effect of change in accounting principle........ -- (77,812)
---------- ----------
Net income................................................. $ 607,749 $ 463,684
========== ==========
Income per common share
Diluted
Continuing operations................................. $ 1.64 $ 1.28
Discontinued operations............................... 0.08 0.25
Cumulative effect of change in accounting principle... -- (0.22)
---------- ----------
Net income.......................................... $ 1.72 $ 1.31
========== ==========
Average common shares outstanding--diluted............... 354,254 353,973
========== ==========
Basic
Continuing operations................................. $ 1.65 $ 1.29
Discontinued operations............................... 0.08 0.25
Cumulative effect of change in accounting principle... -- (0.22)
---------- ----------
Net income.......................................... $ 1.73 $ 1.32
========== ==========
Average common shares outstanding--basic................. 351,725 351,198
========== ==========
Cash dividends per share................................... $ 0.81 $ 1.2150
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 28, 2004 April 30, 2003*
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents.................................. $1,016,166 $ 801,732
Receivables, net........................................... 1,029,442 1,165,460
Inventories................................................ 1,309,837 1,152,953
Prepaid expenses and other current assets.................. 253,583 164,175
---------- ----------
Total current assets.................................. 3,609,028 3,284,320
---------- ----------
Property, plant and equipment.............................. 3,752,154 3,412,853
Less accumulated depreciation.............................. 1,692,021 1,454,987
---------- ----------
Total property, plant and equipment, net.............. 2,060,133 1,957,866
---------- ----------
Goodwill................................................... 2,015,311 1,849,389
Trademarks, net............................................ 656,373 610,063
Other intangibles, net..................................... 130,018 134,897
Other non-current assets................................... 1,439,114 1,388,216
---------- ----------
Total other non-current assets........................ 4,240,816 3,982,565
---------- ----------
Total assets.......................................... $9,909,977 $9,224,751
========== ==========
*Summarized from audited fiscal year 2003 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 28, 2004 April 30, 2003*
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................ $ 11,358 $ 146,838
Portion of long-term debt due within one year.............. 379,086 7,948
Accounts payable........................................... 920,077 938,168
Salaries and wages......................................... 46,270 43,439
Accrued marketing.......................................... 207,461 201,945
Other accrued liabilities.................................. 354,655 387,130
Income taxes............................................... 421,827 200,666
---------- ----------
Total current liabilities............................. 2,340,734 1,926,134
---------- ----------
Long-term debt............................................. 4,717,385 4,776,143
Deferred income taxes...................................... 170,901 183,998
Non-pension postretirement benefits........................ 193,054 192,663
Other liabilities and minority interest.................... 690,225 946,656
---------- ----------
Total long-term liabilities........................... 5,771,565 6,099,460
Shareholders' Equity:
Capital stock.............................................. 107,868 107,880
Additional capital......................................... 390,709 376,542
Retained earnings.......................................... 4,755,412 4,432,571
---------- ----------
5,253,989 4,916,993
Less:
Treasury stock at cost (79,644,446 shares at January 28,
2004 and 79,647,881 shares at April 30, 2003)......... 2,919,419 2,879,506
Unearned compensation.................................... 37,396 21,195
Accumulated other comprehensive loss..................... 499,496 817,135
---------- ----------
Total shareholders' equity............................ 1,797,678 1,199,157
---------- ----------
Total liabilities and shareholders' equity............ $9,909,977 $9,224,751
========== ==========
*Summarized from audited fiscal year 2003 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 28, 2004 January 29, 2003
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income................................................ $ 607,749 $ 463,684
Income from discontinued operations....................... (27,200) (88,738)
---------- -----------
Income from continuing operations......................... 580,549 374,946
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation............................................ 153,944 147,828
Amortization............................................ 15,836 9,972
Deferred tax provision.................................. 48,427 37,758
Gain on divestiture..................................... (26,338) --
Cumulative effect of change in accounting principle..... -- 77,812
Provision for transaction costs and restructuring....... -- 61,050
Other items, net........................................ 25,106 (51,784)
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables........................................... 168,842 158,922
Inventories........................................... (45,758) (75,500)
Prepaid expenses and other current assets............. (50,175) (89,403)
Accounts payable...................................... (125,864) (74,289)
Accrued liabilities................................... (68,863) (95,943)
Income taxes.......................................... 141,347 79,816
---------- -----------
Cash provided by operating activities.............. 817,053 561,185
---------- -----------
Cash Flows from Investing Activities:
Capital expenditures.................................... (119,817) (92,249)
Acquisitions, net of cash acquired...................... (75,368) (13,554)
Proceeds from spin-off.................................. -- 1,063,557
Proceeds from divestitures.............................. 60,467 54,981
Other items, net........................................ 14,775 (15,863)
---------- -----------
Cash used for investing activities................. (119,943) 996,872
---------- -----------
Cash Flows from Financing Activities:
Payments on long-term debt.............................. (73,988) (487,980)
Payments on commercial paper and short-term debt, net... (143,288) (177,333)
Dividends............................................... (284,908) (430,991)
Purchases of treasury stock............................. (122,730) --
Exercise of stock options............................... 66,762 6,523
Other items, net........................................ 12,467 14,215
---------- -----------
Cash used for financing activities................. (545,685) (1,075,566)
---------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... 63,009 36,995
Effect of discontinued operations........................... -- 102,228
---------- -----------
Net increase in cash and cash equivalents................... 214,434 621,714
Cash and cash equivalents at beginning of year.............. 801,732 202,403
---------- -----------
Cash and cash equivalents at end of period.................. $1,016,166 $ 824,117
========== ===========
Supplemental cash flow information:
Noncash activities:
Net assets spun-off..................................... $ -- $ 1,644,195
========== ===========
See Notes to Condensed Consolidated Financial Statements.
------------------
6
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The interim condensed consolidated financial statements of H. J. Heinz
Company, together with its subsidiaries (collectively referred to as the
"Company"), are unaudited. 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.
The results for 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 2004 presentation.
These statements should be read in conjunction with the Company's
consolidated financial statements and related notes, and management's
discussion and analysis of financial condition and results of operations
which appear in the Company's Annual Report on Form 10-K for the year ended
April 30, 2003.
(2) DISCONTINUED OPERATIONS AND SPIN-OFF
On December 20, 2002, the Company transferred to a wholly-owned subsidiary
("SKF Foods") certain assets and liabilities, including its U.S. and
Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup
and private label gravy, College Inn broths and its U.S. infant feeding
businesses and distributed all of the shares of SKF Foods common stock on a
pro rata basis to its shareholders. Immediately thereafter, SKF Foods
merged with a wholly-owned subsidiary of Del Monte Foods Company ("Del
Monte") resulting in SKF Foods becoming a wholly-owned subsidiary of Del
Monte.
In accordance with accounting principles generally accepted in the United
States of America, the operating results related to these businesses spun
off to Del Monte have been treated as discontinued operations in the
Company's consolidated statements of income. Net income from discontinued
operations for the nine months ended January 28, 2004 reflects the
favorable settlement of prior year tax liabilities related to the spun off
businesses. The discontinued operations generated sales of $257.4 million
and $1,091.3 million and net income of $21.8 million (net of $5.5 million
in tax) and $88.7 million (net of $35.4 million in tax) for the third
quarter and nine months ended January 29, 2003, respectively.
(3) SPECIAL ITEMS
DIVESTITURES
During the first quarter of Fiscal 2004, the Company sold its bakery
business in Northern Europe for $57.9 million. The transaction resulted in
a pretax gain of $26.3 million ($13.3 million after tax), which will be
used to offset reorganization and other costs during Fiscal 2004. Pro forma
results of the Company, assuming the divestiture had been made at the
beginning of each period presented, would not be materially different from
the results reported.
In the third quarter of Fiscal 2003, the Company was impacted by a loss on
the disposal of a North American fish and vegetable business of $9.4
million pretax ($10.1 million after tax), which was recorded in Selling,
General and Administrative expenses ("SG&A").
REORGANIZATION COSTS
The Company recognized $5.5 million pretax ($3.4 million after tax) for the
nine months ended January 28, 2004, all of which was recorded in the first
quarter of Fiscal 2004. These costs were recorded as a component of SG&A,
and were primarily due to employee termination and severance costs related
to ongoing efforts to reduce overhead costs at its North
7
American operations following last year's spin-off transaction with Del
Monte. Additionally, during the first quarter of Fiscal 2004, the Company
wrote down pizza crust assets to be disposed of in the United Kingdom
totaling $4.0 million pretax ($2.8 million after tax) which has been
included as a component of cost of products sold. For the third quarter of
Fiscal 2003, the Company recognized reorganization costs totaling $72.1
million pretax ($51.5 million after tax), of which $1.6 million was
recorded in cost of products sold, $30.9 million in SG&A and $39.6 million
in other expenses, net. For the first nine months of Fiscal 2003, the
Company recognized $100.7 million pretax ($70.1 million after tax), of
which $3.5 million was recorded in cost of products sold, $57.6 million in
SG&A and $39.6 million in other expenses, net. These Fiscal 2003
reorganization costs include employee termination and severance costs,
legal and other professional service costs and costs related to the early
retirement of debt.
During the first nine months of Fiscal 2004, the Company utilized $46.1
million of severance and exit cost accruals related to reorganization
costs. Amounts included in accrued expenses related to these initiatives
totaled $5.6 million and $46.2 million at January 28, 2004 and April 30,
2003, respectively.
(4) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
January 28, 2004 April 30, 2003
---------------- --------------
(Thousands of Dollars)
Finished goods and work-in-process................. $ 975,423 $ 902,186
Packaging material and ingredients................. 334,414 250,767
---------- ----------
$1,309,837 $1,152,953
========== ==========
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Effective May 2, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible
Assets." Under this standard, goodwill and intangibles with indefinite
useful lives are no longer amortized. As a result of adopting SFAS No. 142,
the Company recorded a transitional impairment charge which was calculated
as of May 2, 2002, and recorded as an effect of a change in accounting
principle in the nine-month period ended January 29, 2003, of $77.8
million. There was no tax effect associated with this charge. The charge,
which relates to certain of the Company's reporting units, has been
reflected in its segments as follows: Europe $54.6 million, Asia/Pacific
$2.7 million, and Other Operating Entities $20.5 million. The annual
impairment tests are performed in the fourth quarter of each fiscal year
unless events suggest an impairment may have occurred in the interim. No
impairment charges were recognized for the nine months ended January 28,
2004.
8
Changes in the carrying amount of goodwill for the nine months ended
January 28, 2004, by reportable segment, are as follows (see footnote 9 for
information on changes to reportable segments):
North
American Other
Consumer U.S. Asia/ Operating
(Thousands of Dollars) Products Foodservice Europe Pacific Entities Total
---------------------- -------- ----------- -------- -------- --------- ----------
Balance at April 30, 2003........... $891,608 $164,542 $637,371 $143,201 $12,667 $1,849,389
Acquisition......................... -- 46,051 2,930 5,000 4,728 58,709
Purchase accounting
reclassifications................. 4,327 540 (3,585) -- -- 1,282
Disposal............................ -- -- (11,469) -- -- (11,469)
Translation adjustments............. 4,068 -- 82,583 27,494 692 114,837
Other............................... 2,563 -- -- -- -- 2,563
-------- -------- -------- -------- ------- ----------
Balance at January 28, 2004......... $902,566 $211,133 $707,830 $175,695 $18,087 $2,015,311
======== ======== ======== ======== ======= ==========
Trademarks and other intangible assets at January 28, 2004 and April 30,
2003, subject to amortization expense, are as follows:
January 28, 2004 April 30, 2003
------------------------------- -------------------------------
Accum Accum
(Thousands of Dollars) Gross Amort Net Gross Amort Net
---------------------- -------- --------- -------- -------- --------- --------
Trademarks...................... $190,844 $ (49,560) $141,284 $191,832 $ (55,691) $136,141
Licenses........................ 208,186 (117,032) 91,154 208,186 (112,617) 95,569
Other........................... 100,619 (61,755) 38,864 96,938 (57,610) 39,328
-------- --------- -------- -------- --------- --------
$499,649 $(228,347) $271,302 $496,956 $(225,918) $271,038
======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to
amortization was $11.6 million and $10.0 million for the nine months ended
January 28, 2004 and January 29, 2003, respectively. Based upon the
amortizable intangible assets recorded on the balance sheet at January 28,
2004, amortization expense for each of the next five years is estimated to
be approximately $16.0 million.
Intangible assets not subject to amortization at January 28, 2004 and April
30, 2003 were $515.1 million and $473.9 million, respectively, and
consisted solely of trademarks.
(6) INCOME TAXES
The provision for income taxes consists of provisions for federal, state
and foreign income taxes. The Company operates in an international
environment with significant operations in various locations outside the
U.S. Accordingly, the consolidated income tax rate is a composite rate
reflecting the earnings in the various locations and the applicable tax
rates.
During the third quarter of Fiscal 2004, the Company reorganized certain of
its foreign operations and as a result incurred a foreign income tax
liability of $117.8 million, payable in Fiscal 2005. Because the Company
increased the tax basis in amortizable assets, cash flow is expected to be
positive in each of the nine years following Fiscal 2005.
(7) STOCK-BASED EMPLOYEE COMPENSATION PLANS
Stock-based compensation is accounted for by using the intrinsic
value-based method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees."
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the Company's stock option plans. If the
Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123,
9
income and income per common share from continuing operations before
cumulative effect of change in accounting principle would have been as
follows:
Third Quarter Ended Nine Months Ended
------------------------------------- -------------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
----------------- ----------------- ----------------- -----------------
(Thousands of Dollars, Except Per Share Amounts)
Income from continuing
operations before cumulative
effect of change in
accounting principle:
As reported............... $202,237 $129,849 $580,549 $452,758
Fair value-based expense,
net of tax.............. 7,834 6,496 20,830 19,874
-------- -------- -------- --------
Pro forma................. $194,403 $123,353 $559,719 $432,884
======== ======== ======== ========
Income per common share from
continuing operations before
cumulative effect of change
in accounting principle:
Diluted
As reported............. $ 0.57 $ 0.37 $ 1.64 $ 1.28
Pro forma............... $ 0.55 $ 0.35 $ 1.58 $ 1.22
Basic
As reported............. $ 0.58 $ 0.37 $ 1.65 $ 1.29
Pro forma............... $ 0.55 $ 0.35 $ 1.59 $ 1.23
The weighted-average fair value of options granted was $5.91 and $6.89 per
share in the nine months ended January 28, 2004 and January 29, 2003,
respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Nine Months Ended
------------------------------------
January 28, 2004 January 29, 2003
---------------- ----------------
Dividend yield........................................ 3.26% 4.26%
Volatility............................................ 20.20% 25.20%
Risk-free interest rate............................... 3.71% 3.98%
Expected term (years)................................. 6.50 6.50
During the first nine months of Fiscal 2004, the Company granted 907,531
restricted stock units to employees. The fair value of the awards granted
has been recorded as unearned compensation and is shown as a separate
component of shareholders' equity.
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
a revision to SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." This revised statement requires additional
annual disclosures regarding types of pension plan assets, investment
strategy, future plan contributions, expected benefit payments and other
items. The statement also requires quarterly disclosure of the components
of net periodic benefit cost and plan contributions. The annual disclosures
will be required for the Company's Form 10-K for its fiscal year ended
April 28, 2004, and the quarterly disclosures will be required beginning in
the quarter ended July 28, 2004.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act
introduced a prescription drug benefit under Medicare (Medicare Part D) and
a federal subsidy to sponsors of retirement health care plans that provide
a benefit that is at least actuarially equivalent to Medicare Part D. In
accordance with FASB Staff Position 106-1, the Company has elected to defer
recognizing the effects of the Act on the accounting for its retirement
health care plans because specific authoritative
10
guidance on the accounting for the Act's provisions is pending. Once
issued, this guidance could require the Company to change previously
reported financial information.
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R,
"Consolidation of Variable Interest Entities." FIN No. 46-R, which modifies
certain provisions and effective dates of FIN No. 46, sets forth criteria
to be used in determining whether an investment in a variable interest
entity should be consolidated, and is based on the general premise that
companies that control another entity through interests other than voting
interests should consolidate the controlled entity. The provisions of FIN
No. 46 become effective for the Company in its fourth quarter ended April
28, 2004. The Company is currently evaluating the impact the revised
accounting standard will have on the consolidated results of operations and
financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This statement affects the classification, measurement and disclosure
requirements of certain financial instruments including mandatorily
redeemable shares. SFAS No. 150 was effective for the Company for the
second quarter of Fiscal 2004. The adoption of SFAS No. 150 required the
prospective classification of Heinz Finance Company's $325 million of
mandatorily redeemable preferred shares from minority interest to long-term
debt and the $5.1 million quarterly preferred dividend from other expenses
to interest expense beginning in the second quarter ending October 29,
2003, with no resulting effect on the Company's profitability.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement
No. 123". SFAS No. 148 provides alternative methods of transition for
entities that voluntarily change to the fair value method of accounting for
stock-based employee compensation, and it also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the
effects of an entity's accounting policy decisions with respect to
stock-based employee compensation in both annual and interim financial
reporting. The disclosure provisions of SFAS No. 148 were effective for the
Company at April 30, 2003.
(9) SEGMENTS
The Company's reportable segments are primarily organized by geographical
area. The composition of segments and measure of segment profitability is
consistent with that used by the Company's management.
In the first quarter of Fiscal 2004, the Company changed its segment
reporting to reflect changes in organizational structure and management of
its businesses. The Company is now managing and reporting its North
American businesses under two segments, designated North American Consumer
Products and U.S. Foodservice. Changes in the remaining segments involve
the reclassification of certain operating and non-operating businesses
between existing segments. Prior periods have been restated to conform
with the current presentation. Descriptions of the Company's reportable
segments are as follows:
North American Consumer Products--This segment manufactures, markets and
sells ketchup, condiments, sauces, pasta meals, and frozen potatoes,
entrees, snacks and appetizers to the grocery channels in the United
States of America and our Canadian business.
U.S. Foodservice--This segment manufactures, markets and sells branded
and customized products to commercial and non-commercial food outlets
and distributors in the United States of America including ketchup,
condiments, sauces and frozen soups and desserts.
Europe--This segment includes the Company's operations in Europe and
sells products in all of the Company's core categories.
11
Asia/Pacific--This segment includes the Company's operations in New
Zealand, Australia, Japan, China, South Korea, Indonesia, Singapore and
Thailand. 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, India, Latin America, the Middle East and other areas that
sell products in all of the Company's core categories. During Fiscal
2003, the Company deconsolidated its Zimbabwe operations which had
historically been reported in this segment.
The Company's management evaluates performance based on several factors
including net sales, operating income excluding unusual costs and gains,
and the use of capital resources. Intersegment revenues are accounted for
at current market values. Items below the operating income line of the
consolidated statements of income are not presented by segment, since they
are excluded from the measure of segment profitability reviewed by the
Company's management.
The following table presents information about the Company's reportable
segments:
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net external sales:
North American Consumer
Products................. $ 521,753 $ 535,792 $1,494,413 $1,541,581
U.S. Foodservice........... 353,884 321,091 1,056,993 971,407
Europe..................... 827,451 769,114 2,337,255 2,156,687
Asia/Pacific............... 301,885 274,288 926,661 781,680
Other Operating Entities... 92,208 204,718 267,844 592,132
---------- ---------- ---------- ----------
Consolidated Totals........ $2,097,181 $2,105,003 $6,083,166 $6,043,487
========== ========== ========== ==========
Intersegment revenues:
North American Consumer
Products................. $ 13,449 $ 14,548 $ 42,429 $ 42,349
U.S. Foodservice........... 3,747 5,153 10,378 12,099
Europe..................... 2,729 4,554 10,352 11,955
Asia/Pacific............... 581 780 2,158 2,508
Other Operating Entities... 609 657 1,727 1,702
Non-Operating (a).......... (21,115) (25,692) (67,044) (70,613)
---------- ---------- ---------- ----------
Consolidated Totals........ $ -- $ -- $ -- $ --
========== ========== ========== ==========
Operating income (loss):
North American Consumer
Products................. $ 126,534 $ 103,807 $ 359,265 $ 329,085
U.S. Foodservice........... 54,658 51,536 161,308 148,225
Europe..................... 163,147 141,297 479,130 415,289
Asia/Pacific............... 34,026 29,313 112,029 75,113
Other Operating Entities... 2,554 40,785 22,184 93,500
Non-Operating (a).......... (25,552) (45,098) (80,438) (112,651)
---------- ---------- ---------- ----------
Consolidated Totals........ $ 355,367 $ 321,640 $1,053,478 $ 948,561
========== ========== ========== ==========
Operating income (loss)
excluding special items
(b):
North American Consumer
Products................. $ 126,534 $ 123,320 $ 360,761 $ 357,618
U.S. Foodservice........... 54,658 51,536 163,808 151,453
Europe..................... 163,147 141,297 454,331 415,289
Asia/Pacific............... 34,026 29,313 112,029 75,113
Other Operating Entities... 2,554 40,785 22,184 93,500
Non-Operating (a).......... (25,552) (22,698) (78,980) (73,950)
---------- ---------- ---------- ----------
Consolidated Totals........ $ 355,367 $ 363,553 $1,034,133 $1,019,023
========== ========== ========== ==========
---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
12
(b) Third Quarter ended January 29, 2003 - Excludes Del Monte transaction
related costs and cost to reduce overhead of the remaining businesses as
follows: North American Consumer Products $19.5 million and Non-Operating
$22.4 million.
Nine Months ended January 28, 2004 - Excludes the gain on disposal of the
bakery business in Northern Europe and costs to reduce overhead of the
remaining businesses as follows: North American Consumer Products $1.5
million, U.S. Foodservice $2.5 million, Europe $(24.8) million, and
Non-Operating $1.5 million.
Nine Months ended January 29, 2003 - Excludes Del Monte transaction related
costs and cost to reduce overhead of the remaining businesses as follows:
North American Consumer Products $28.5 million, U.S. Foodservice $3.2
million, and Non-Operating $38.7 million.
The Company's revenues are generated via the sale of products in the
following categories:
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Ketchup, Condiments and Sauces..... $ 735,347 $ 667,635 $2,229,197 $1,998,956
Frozen Foods....................... 526,150 506,938 1,402,629 1,469,338
Convenience Meals.................. 464,000 452,371 1,349,012 1,235,219
Infant Foods....................... 222,652 199,759 629,769 577,846
Other.............................. 149,032 278,300 472,559 762,128
---------- ---------- ---------- ----------
Total.......................... $2,097,181 $2,105,003 $6,083,166 $6,043,487
========== ========== ========== ==========
The above amounts include the impact of acquisitions, divestitures
(primarily affecting the Other and Frozen Foods categories) and foreign
exchange.
(10) NET INCOME PER COMMON SHARE
The following are reconciliations of income to income applicable to common
stock and the number of common shares outstanding used to calculate basic
EPS to those shares used to calculate diluted EPS:
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(In Thousands)
Income from continuing operations
before cumulative effect of change
in accounting principle........... $202,237 $129,849 $580,549 $452,758
Preferred dividends................. 4 5 12 14
-------- -------- -------- --------
Income from continuing operations
applicable to common stock before
cumulative effect of change in
accounting principle.............. 202,233 129,844 580,537 452,744
Cumulative effect of change in
accounting principle.............. -- -- -- (77,812)
-------- -------- -------- --------
Income from continuing operations
applicable to common stock........ $202,233 $129,844 $580,537 $374,932
======== ======== ======== ========
Average common shares
outstanding--basic.............. 351,725 351,198 351,725 351,198
Effect of dilutive securities:
Convertible preferred stock..... 146 147 146 147
Stock options and restricted
stock......................... 2,383 2,628 2,383 2,628
-------- -------- -------- --------
Average common shares
outstanding--diluted............ 354,254 353,973 354,254 353,973
======== ======== ======== ========
13
(11) COMPREHENSIVE INCOME
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net income.......................... $202,237 $151,619 $607,749 $463,684
Other comprehensive income:
Foreign currency translation
adjustment.................... 207,546 252,135 383,956 376,057
Minimum pension liability
adjustment.................... (28,613) (799) (53,632) (443)
Net deferred gains/(losses) on
derivatives from periodic
revaluations.................. (8,321) 15,341 (6,285) 26,932
Net deferred (gains)/losses on
derivatives reclassified to
earnings...................... 936 (10,777) (6,400) (23,988)
-------- -------- -------- --------
Comprehensive income................ $373,785 $407,519 $925,388 $842,242
======== ======== ======== ========
(12) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company operates internationally, with manufacturing and sales
facilities in various locations around the world, and utilizes certain
derivative and non-derivative financial instruments to manage its foreign
currency, commodity price, and interest rate exposures.
FOREIGN CURRENCY HEDGING: The Company uses forward contracts and option
contracts designed to mitigate its foreign currency exchange rate exposure
due to forecasted purchases of raw materials and sales of finished goods
and future settlement of foreign currency denominated assets and
liabilities. Derivatives used to hedge forecasted transactions and specific
cash flows associated with foreign currency denominated financial assets
and liabilities which meet the criteria for hedge accounting are designated
as cash flow hedges.
The Company uses certain foreign currency debt instruments as net
investment hedges of foreign operations. Losses of $25.4 million (net of
income taxes of $14.9 million), which represented effective hedges of net
investments, were reported as a component of accumulated other
comprehensive loss within unrealized translation adjustment for the nine
months ended January 28, 2004.
COMMODITY PRICE HEDGING: The Company uses commodity futures, swaps and
option contracts in order to reduce price risk associated with forecasted
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. Derivatives used to hedge forecasted commodity purchases
that 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 may be designated as cash flow
hedges or fair value hedges depending on the nature of the risk being
hedged. At January 28, 2004, the Company had interest rate swaps with a
total notional amount of $2.77 billion that satisfied the criteria for
hedge accounting and interest rate swaps with a total notional amount of
$907.6 million that were not eligible for hedge accounting but effectively
mitigate interest rate exposure. The net unrealized gains related to
interest rate swaps that satisfy the criteria for hedge accounting were
$206.6 million and $294.8 million at January 28, 2004 and April 30, 2003,
respectively. The net unrealized gains related to the other interest rate
swaps were $2.3 million and $2.1 million at January 28, 2004 and April 30,
2003, respectively.
HEDGE INEFFECTIVENESS: Hedge ineffectiveness related to cash flow hedges,
which is reported in current period earnings as other income and expense,
was not significant for the nine months ended January 28, 2004 and was a
net loss of $0.5 million for the nine months ended January 29, 2003.
14
DEFERRED HEDGING GAINS AND LOSSES: As of January 28, 2004, the Company is
hedging forecasted transactions for periods not exceeding two years. During
the next 12 months, the Company expects $6.9 million of net deferred loss
reported in accumulated other comprehensive loss to be reclassified to
earnings. Amounts reclassified to earnings because the hedged transaction
was no longer expected to occur were not significant for the nine months
ended January 28, 2004 and resulted in a net loss of $0.6 million for the
nine months ended January 29, 2003.
OTHER ACTIVITIES: The Company enters into certain derivative contracts in
accordance with its risk management strategy that do not meet the criteria
for hedge accounting. Although these derivatives do not qualify as hedges,
they have the economic impact of largely mitigating foreign currency,
commodity price or interest rate exposures. These derivative financial
instruments are accounted for on a full mark to market basis through
current earnings even though they were not acquired for trading purposes.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE OVERVIEW
We manufacture and market an extensive line of processed food products
throughout the world. Our principal products include ketchup, condiments and
sauces, frozen food, soups, beans and pasta meals, tuna and other seafood
products, infant food and other processed food products. Our products are sold
under highly competitive conditions, with many large and small competitors. We
regard our principle competition to be other manufacturers of processed foods,
including branded, retail products, foodservice products and private label
products that compete with us for consumer preference, distribution, shelf space
and merchandising support. Product quality and consumer value are important
areas of competition.
The following is a summary of the business measures for the third quarter
and nine months ended January 28, 2004 utilized by Senior Management and the
Board of Directors to gauge our business operating performance:
KEY PERFORMANCE MEASURES (IN MILLIONS)
Q3 Change 9 months Change
--------------- Better/ --------------- Better/
Continuing Operations FY04 FY03 (Worse) FY04 FY03 (Worse)
--------------------- ------ ------ ------- ------ ------ -------
Net Sales...................................... $2,097 $2,105 (0.4)% $6,083 $6,043 0.7%
Gross Profit Margin............................ 37.2% 36.2% 1.0pp 37.3% 36.2% 1.1pp
Organic Gross Profit Margin (1)................ 37.2% 36.3% 0.9pp 37.3% 36.2% 1.1pp
Marketing (% of Net Sales)..................... 3.4% 3.2% 0.2pp 3.5% 3.6% (0.1)pp
Operating Income............................... $ 355 $ 322 $ 33 $1,053 $ 949 $105
Organic Operating Income (2)................... $ 355 $ 364 (2.3)% $1,034 $1,019 1.5%
Capital Expenditures (% of Net Sales).......... 2.1% 1.4% (0.8)pp 2.0% 1.5% (0.4)pp
Cash Conversion Cycle.......................... 71 77 7days 70 79 10days
Cash provided by operations less capital
expenditures (3)............................. $ 279 $ 116 $ 163 $ 697 $ 469 $228
Total Company
-----------------------------------------------
Net Debt -- Excl. Preferred Stock (4).......... $3,560 $4,040 $479
-- Incl. Preferred Stock (4)......... $3,885 $4,040 $154
Organic Pre-Tax ROIC (5)....................... 23.8% 22.2% 1.7%
(Totals may not add due to rounding)
---------------
(1) Organic gross profit for the nine months ended January 28, 2004 excludes
costs to reduce overhead of the remaining businesses of $4.0 million.
Organic gross profit for the third quarter and nine months ended January 29,
2003 excludes Del Monte transaction related costs and costs to reduce
overhead of the remaining businesses of $1.6 million and $3.5 million,
respectively. See "Special Items" section below for further discussion
regarding the Del Monte transaction and these reorganization costs.
(2) Organic operating income for the nine months ended January 28, 2004 excludes
the gain on the disposal of the bakery business in Northern Europe of $28.8
million and costs to reduce overhead of the remaining businesses of $9.5
million. Organic operating income for the third quarter and nine months
ended January 29, 2003 excludes Del Monte transaction related costs and
costs to reduce overhead of the remaining businesses of $32.5 million and
$61.1 million, respectively, and loss on the exit of non-strategic
businesses of $9.4 million.
(3) Also referred to as "Operating Free Cash Flow".
(4) Net debt is defined as total debt, less cash and cash equivalents and the
value of interest rate swaps of $206.6 and $227.3 million for the periods
ended January 28, 2004 and January 29, 2003, respectively. Also, in order to
provide more meaningful comparisons in prior periods, the current period
calculation of net debt is shown excluding the effects of the prospective
classification of Heinz Finance Company's $325 million of mandatorily
redeemable preferred shares from minority interest to long-term debt
beginning in the second quarter of Fiscal 2004 as a result of the adoption
of Statement of Financial Accounting Standards ("SFAS") No. 150.
(5) The Organic ROIC calculation is based on 4-point average balance sheet
information that uses average net debt defined above as opposed to average
gross debt and uses organic net profit before tax.
16
The third quarter results were in-line with our expectations as:
- Overall, net sales were stable at $2.1 billion, as favorable foreign
exchange offset the impact of divestitures and the deconsolidation of
Zimbabwe. This result also reflects our strategic decision to improve the
consumer price-value relationship on a number of key products through
increased trade spending and point-of-purchase merchandising to achieve
more competitive consumer price points.
- Excluding divestitures and the Zimbabwe deconsolidation, net of
acquisitions, net sales increased 6.8%.
- Organic gross profit margin increased by 90 basis points, to 37.2%, led
by our European segment, reflecting solid supply chain performance and
the reduction of low-margin Stock Keeping Units.
- Consumer marketing was up slightly for the quarter. Additionally, we have
redirected our marketing spending against improving consumer price
points, value and point-of-purchase merchandising.
- Organic operating income decreased by a little more than 2%, but net
profit before tax increased by 5.3%. This reflects savings on minority
interest costs related to the deconsolidated Zimbabwe joint venture and
reduced interest costs.
- Capital Expenditures remained in the forecast range of 2 - 2.5% of net
sales and the Cash Conversion Cycle continued to show strong improvement,
dropping by 7 days to 71 days.
- Operating Free Cash Flow was very strong for the quarter, more than
double that of the prior year at $279 million. This was largely driven by
a successful focus on working capital reductions across the Company.
- Net Debt on a comparable basis was $479 million better than last year, or
$154 million better when you include preferred stock as SFAS 150 now
requires.
Highlights from our performance for the first nine months of the year
include:
- Net Sales are up 0.7%, driven by an increase in volume/mix of 1.0%. Net
price is down slightly, and foreign exchange gains of 7.1% have offset
virtually all of the decrease related to net divestitures and
deconsolidation.
- Organic gross profit margin of 37.3% is up 110 basis points, driven by
improvements in Asia/ Pacific, Europe and the Other Operating segment.
This increase was achieved despite solid growth in the U.S. Foodservice
business which has a lower gross margin than the Company average.
- Consumer marketing is down slightly, again due to the refocusing of
resources to sharpen retail price points.
- Organic operating income is up 1.5% versus last year primarily due to
gross margin improvements.
- Capital spending is within our forecasted range and we have driven 10
days out of the cash conversion cycle. As a result, operating free cash
flow is up 49%.
- Our year-to-date organic pre-tax ROIC is up 170 basis points at 23.8%.
SPECIAL ITEMS
DISCONTINUED OPERATIONS
On December 20, 2002, Heinz transferred to a wholly-owned subsidiary ("SKF
Foods") certain assets and liabilities, including its U.S. and Canadian pet food
and pet snacks, U.S. tuna, U.S.
17
retail private label soup and private label gravy, College Inn broths and its
U.S. infant feeding businesses and distributed all of the shares of SKF Foods
common stock on a pro rata basis to its shareholders. Immediately thereafter,
SKF Foods merged with a wholly-owned subsidiary of Del Monte Foods Company ("Del
Monte") resulting in SKF Foods becoming a wholly-owned subsidiary of Del Monte.
In accordance with accounting principles generally accepted in the United
States of America, the operating results related to these businesses spun off to
Del Monte have been treated as discontinued operations in the Company's
consolidated statements of income. Net income from discontinued operations for
the nine months ended January 28, 2004 relates to a favorable settlement of
prior year tax liabilities related to the spun off businesses. The discontinued
operations generated sales of $257.4 million and $1,091.3 million and net income
of $21.8 million (net of $5.5 million in tax) and $88.7 million (net of $35.4
million in tax) for the third quarter and nine months ended January 29, 2003,
respectively.
DIVESTITURES
During the first quarter of Fiscal 2004, the Company sold its bakery
business in Northern Europe for $57.9 million. The transaction resulted in a
pretax gain of $26.3 million ($13.3 million after-tax), which will be used to
offset reorganization and other costs during Fiscal 2004.
In the third quarter of Fiscal 2003, the Company was impacted by a loss on
the disposal of a North American fish and vegetable business of $9.4 million
pretax ($10.1 million after-tax), which was recorded in Selling, General and
Administrative expenses ("SG&A").
REORGANIZATION COSTS
The Company recognized $5.5 million pretax ($3.4 million after-tax) for the
nine months ended January 28, 2004, all of which was recorded in the first
quarter of Fiscal 2004. These costs were recorded as a component of SG&A and
were primarily due to employee termination and severance costs related to
ongoing efforts to reduce overhead costs at its North American operations
following last year's spin-off transaction with Del Monte. Additionally, during
the first quarter of Fiscal 2004, the Company wrote down pizza crust assets to
be disposed of in the United Kingdom totaling $4.0 million pretax ($2.8 million
after-tax) which has been included as a component of cost of products sold. For
the third quarter of Fiscal 2003, the Company recognized reorganization costs
totaling $72.1 million pretax ($51.5 million after-tax), of which $1.6 million
is recorded in cost of products sold, $30.9 million in SG&A and $39.6 million in
other expenses, net. For the first nine months of Fiscal 2003, the Company
recognized $100.7 million pretax ($70.1 million after-tax), of which $3.5
million is recorded in cost of products sold, $57.6 million in SG&A and $39.6
million in other expenses, net. These Fiscal 2003 reorganization costs include
employee termination and severance costs, legal and other professional service
costs and cost related to the early retirement of debt.
During the first nine months of Fiscal 2004, the Company utilized $46.1
million in severance and exit cost accruals related to reorganization costs.
THREE MONTHS ENDED JANUARY 28, 2004 AND JANUARY 29, 2003
In the first quarter of Fiscal 2004, the Company changed its segment
reporting to reflect changes in organizational structure and the management of
its business. The Company is now managing and reporting its North American
businesses under two segments, designated North American Consumer Products and
U.S. Foodservice. Certain changes were also made to the composition of the
remaining segments. These changes involve the reclassification of certain
operating and non-operating businesses between existing segments. Prior periods
have been restated to
18
conform with the current presentation. (See Note 9 to the condensed consolidated
financial statements for further discussion of the Company's reportable
segments.)
RESULTS OF CONTINUING OPERATIONS
Sales for the three months ended January 28, 2004 decreased $7.8 million,
or 0.4%, to $2.10 billion. Sales were favorably impacted by exchange translation
rates by 7.8%. Sales volume decreased 0.8% as strong increases in global ketchup
and the U.S. Foodservice and Other Operating Entities segments were offset by
lapping of buy-one, get-one free promotions in European seafood last year, and
competitive pressure on Plasmon baby food in Italy and the timing of soup
promotions in the UK. Additionally, volume in Indonesia was down due to the
timing of seasonal holiday sales which fell in the second quarter of Fiscal 2004
and in the third quarter of Fiscal 2003. Pricing decreased 0.2% and
divestitures, net of acquisitions, reduced sales 7.2% due primarily to the
deconsolidation of the Zimbabwe operations in Fiscal 2003.
Gross profit increased $17.2 million, or 2.3%, to $779.2 million, and the
gross profit margin increased to 37.2% from 36.2%. The gross profit margin
increase was primarily driven by the North American Consumer Products and Europe
segments largely due to the Company's progress in reducing less profitable Stock
Keeping Units, higher pricing in certain European markets and improved sales mix
and productivity, especially in developing markets. The aggregate increase in
gross profit also benefited from favorable exchange translation rates, partially
offset by the impact of divestitures. Last year's gross profit was unfavorably
impacted by reorganization costs of $1.6 million.
SG&A decreased $16.5 million, or 3.8%, to $423.9 million, and decreased as
a percentage of sales to 20.2% from 20.9%. These decreases were principally due
to the unfavorable impact of reorganization costs in the prior year of $30.9
million and a loss in the prior year on the disposal of a North American fish
and vegetable business of $9.4 million. This was partially offset by increases
due to exchange translation rates and higher pension costs. Operating income
increased $33.7 million, or 10.5%, to $355.4 million, and operating income
increased as a percentage of sales to 16.9% from 15.3%, largely due to the
lapping of prior year reorganization costs.
Net interest expense decreased $1.6 million, to $48.1 million, due to
decreased debt balances and declining interest rates partially offset by the
prospective classification of Heinz Finance Company's dividend on its
mandatorily redeemable preferred shares to interest expense from other expense.
This was completed in accordance with the adoption of SFAS No. 150 (see below
for further discussion). Other expense, net, decreased $61.4 million, to $5.1
million, chiefly attributable to a $39.6 million pretax charge related to the
early retirement of debt in Fiscal 2003, decreased minority interest expense as
a result of the Zimbabwe deconsolidation and the SFAS No. 150 reclassification
previously discussed as well as increased equity income. The effective tax rate
for the current quarter was 33.1% compared to 36.8% last year. The prior year
effective tax rate was unfavorably impacted by 3.5 percentage points due
primarily to the loss on the disposal of a North American fish and vegetable
business.
Income from continuing operations for the third quarter of Fiscal 2004 was
$202.2 million compared to $129.8 million in the year-earlier quarter, an
increase of 56%. Diluted earnings per share was $0.57 in the current year
compared to $0.37 in the prior year, up 54%.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment decreased $14.0
million, or 2.6%, due primarily to the divestiture of a North American fish and
vegetable business. Sales volume increased 0.1% as significant growth in Heinz
ketchup and Ore-Ida frozen potatoes was offset by
19
declines resulting from the California grocery strike and in Canadian juices and
drinks due primarily to the timing of price increases. The volume growth in
Heinz ketchup is compared to a weak prior year quarter and the volume growth in
Ore-Ida frozen potatoes was aided by the launch of Ore-Ida Extra Crispy
Potatoes. Early results of this new product launch are ahead of management
expectations. In addition, volume of SmartOnes frozen entrees remained stable as
increases resulting from the recent launch of the "Truth About Carbs" frozen
entrees were offset by double-digit declines in the nutritional frozen entree
category in the U.S. due to the impact of the low-carb dieting phenomenon. Lower
pricing decreased sales 2.4% due to the promotional timing on Bagel Bites and
price declines on Delimex snacks, Tater Tots and introductory pricing on the new
Ore-Ida Extra Crispy Potatoes. Favorable exchange translation rates increased
sales 2.3%.
Gross profit increased $1.2 million, or 0.5%, to $223.0 million, and the
gross profit margin increased to 42.7% from 41.4%, as manufacturing cost savings
were partially offset by unfavorable pricing. In addition, reorganization costs
unfavorably impacted last year's gross profit by $1.6 million. Operating income
increased $22.7 million, or 21.9%, to $126.5 million. Last year's operating
income was unfavorably impacted by $8.2 million of reorganization costs and
$11.3 million for the loss on the disposal of a North American fish and
vegetable business. Additionally, reductions in consumer marketing expenses were
offset by increased General & Administrative expenses ("G&A") due to increased
personnel costs.
U.S. FOODSERVICE
U.S. Foodservice's sales increased $32.8 million, or 10.2%. Sales volume
increased sales 3.6% primarily due to increases in Heinz ketchup, single-serve
condiments, Escalon processed tomato products and Dianne's frozen desserts. This
reflects stronger trends in the U.S. restaurant industry and successful product
innovation. Higher pricing increased sales by 1.7% primarily due to price
increases on Heinz ketchup and improved sales mix on Chef Francisco frozen
soups. Acquisitions, net of divestitures, increased sales 4.9%, due to the
acquisition of Truesoups LLC, a manufacturer and marketer of premium frozen
soups.
Gross profit increased $7.1 million, or 7.5%, to $102.1 million; however,
the gross profit margin decreased to 28.9% from 29.6%. This decrease in gross
profit margin is primarily due to unfavorable raw material costs. Operating
income increased $3.1 million, or 6.1%, to $54.7 million, primarily due to the
increase in gross profit, partially offset by increased G&A expense attributable
to increased personnel costs.
EUROPE
Heinz Europe's sales increased $58.3 million, or 7.6%. Favorable exchange
translation rates increased sales by 12.9%. Higher pricing increased sales 1.4%
primarily due to price increases on Heinz beans, ready-to-serve soups and infant
feeding products partially offset by reduced pricing on John West seafood. Lower
volumes decreased sales 4.2% due to declines in Europeon seafood and Italian
infant feeding as a result of competitive and trade pressures. Reduced seafood
volume reflects the overlap of strong promotional activity in the third quarter
of Fiscal 2003, as the business was rebounding from an earlier product recall.
Volume was also affected by our previously announced program to reduce
low-margin Stock Keeping Units. These decreases were partially offset by
increases in Heinz ketchup, specifically due to the introduction of the top-down
bottle, and in our UK frozen food business behind new product introductions.
Divestitures reduced sales 2.5%, primarily related to the sale of the UK frozen
pizza business and the Northern European bakery business.
Gross profit increased $38.2 million, or 13.3%, to $326.5 million, and the
gross profit margin increased to 39.5% from 37.5%. These increases are primarily
due to the rationalization of low-margin products, lower procurement costs,
increased pricing and favorable exchange translation rates, which were partially
offset by increased pension expense. Operating income increased
20
$21.9 million, or 15.5%, to $163.1 million, primarily attributable to the
favorable change in gross profit, partially offset by increased consumer
marketing and the unfavorable impact of exchange translation rates on SG&A.
ASIA/PACIFIC
Sales in Asia/Pacific increased $27.6 million, or 10.1%. Favorable exchange
translation rates increased sales by 18.0%. After a strong first-half
performance during which volume increased 5.8%, third quarter volume decreased
sales 3.4% primarily due to holiday timing of juice concentrate sales in
Indonesia and the continuing reduction of low-margin stock keeping units. Lower
pricing decreased sales 3.8% due primarily to declines in Tegel poultry driven
by declining short-term market prices for New Zealand poultry. Divestitures
decreased sales by 0.8%.
Gross profit increased $7.7 million, or 8.4%, to $99.1 million; however,
the gross profit margin decreased to 32.8% from 33.3%. The gross profit margin
decline is due primarily to decreased pricing, partially offset by savings due
to manufacturing cost improvements in Australia and Watties. Gross profit also
benefited from favorable exchange translation rates. Operating income increased
$4.7 million, or 16.1%, to $34.0 million, primarily due to the growth in gross
profit, offset partially by increased Selling & Distribution ("S&D") expenses
due to exchange translation rates.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities decreased $112.5 million, or 55.0%,
primarily due to the deconsolidation of the Company's Zimbabwe operations in
Fiscal 2003. The deconsolidation also impacted gross profit and operating
income. Gross profit decreased $38.8 million, or 60.0%, to $25.9 million, and
operating income decreased $38.2 million, or 93.7%, to $2.6 million. Excluding
the Zimbabwe operations in the prior year, sales increased 29.1%, primarily due
to strong volume increases of 17.7%, and operating income increased 1.9%. This
favorable performance was negatively impacted by the recall in the second
quarter of Fiscal 2004 of a soy-based infant formula product sold under the
Remedia brand.
Zimbabwe remains in a period of economic uncertainty. Should the current
situation continue, the Company could experience disruptions and delays
associated with its Zimbabwe operations. Therefore, as of the end of November
2002, the Company deconsolidated its Zimbabwean operations and classified its
remaining net investment of approximately $110 million as a cost investment
included in other non-current assets on the condensed consolidated balance sheet
as of January 28, 2004. Although our business continues to operate and we are
able to source raw materials, the country's economic situation continues to
deteriorate and the Company's ability to recover its investment could become
impaired.
NINE MONTHS ENDED JANUARY 28, 2004 AND JANUARY 29, 2003
RESULTS OF CONTINUING OPERATIONS
Sales for the nine months ended January 28, 2004 increased $39.7 million,
or 0.7%, to $6.08 billion. Sales were favorably impacted by volume of 1.0% and
exchange translation rates of 7.1%. The favorable volume impact was primarily
due to strong increases in the U.S. Foodservice, Asia/Pacific and Other
Operating Entities segments. Lower pricing decreased sales by 0.2%.
Divestitures, net of acquisitions, reduced sales 7.2% due primarily to the
deconsolidation of Zimbabwe.
Gross profit increased $81.8 million, or 3.7%, to $2.27 billion, and the
gross profit margin increased to 37.3% from 36.2%. The gross profit margin
increase was primarily driven by the Europe and Asia/Pacific segments. The
aggregate increase in gross profit also benefited from favorable exchange
translation rates, partially offset by the impact of higher pension costs,
divesti-
21
tures and the write down of UK pizza crust assets held for sale. For the first
nine months of Fiscal 2003, gross profit was also impacted by reorganization
costs of $3.5 million.
SG&A decreased $23.1 million, or 1.9%, to $1.21 billion, and as a
percentage of sales was reduced to 20.0% from 20.5%. The decrease is primarily
due to the gain recorded on the sale of the Northern European Bakery business in
the current year, and decreased marketing expense as a result of a shift to
increased trade promotion spending primarily in the North American Consumer
Products segment. Additionally, SG&A was impacted by the Fiscal 2003 loss of
$9.4 million that was recorded on the disposal of a North American fish and
vegetable business and the impact of reorganization costs of $5.5 million and
$57.6 million for the nine months ended January 28, 2004 and January 29, 2003,
respectively. These favorable items were offset by the impact of higher expenses
resulting from higher sales volume, higher exchange translation rates and
increases in pension costs. Operating income increased $104.9 million, or 11.1%,
to $1.05 billion, and increased as a percentage of sales to 17.3% from 15.7%.
Net interest expense increased $0.8 million, to $144.4 million, due to the
prospective classification of the Heinz Finance Company's dividend on its
mandatorily redeemable preferred shares to interest expense from other expense.
This treatment is in accordance with the adoption of SFAS No. 150 (see below for
further discussion) beginning in the second quarter of Fiscal 2004. This
increase was partially offset by declines from lower debt balances and lower
interest rates. Other expense, net, decreased $66.4 million, to $35.0 million,
attributable to a $39.6 million pretax charge related to early retirement of
debt in Fiscal 2003, decreased minority interest expense as a result of the
Zimbabwe deconsolidation, the SFAS No. 150 reclassification previously discussed
and increased equity income, partially offset by currency losses in the current
year. The effective tax rate for the current year was 33.6% compared to 35.6%
last year. The current year effective tax rate was unfavorably impacted by 0.5
percentage points due to the sale of the Northern European bakery business and
the prior year effective tax rate was unfavorably impacted by 1.1 percentage
points due primarily to the loss on the disposal of a North American fish and
vegetable business.
Income from continuing operations (before the cumulative effect of change
in accounting principle related to the adoption of SFAS No. 142) for the first
nine months of Fiscal 2004 was $580.5 million compared to $452.8 million in the
year-earlier period. Diluted earnings per share (before the cumulative effect of
change in accounting principle related to the adoption of SFAS No. 142) was
$1.64 in the current year compared to $1.28 in the prior year.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment decreased $47.2
million, or 3.1%. Sales volume increased 1.2% primarily due to Heinz ketchup and
Classico pasta sauces which benefited from Every Day Low Pricing. These
increases were partially offset by declines in SmartOnes frozen entrees, related
to the increased popularity of low-carb dieting and declines in the nutritional
frozen entree category in the U.S., and the effects of the rationalization of
Boston Market side dishes and Hot Bites snacks. Lower pricing decreased sales
2.4% consistent with our strategy to obtain more competitive consumer price
points on Boston Market HomeStyle meals, Heinz gravy and Classico pasta sauces,
as well as price declines on Delimex frozen snacks. Price was also unfavorably
affected by additional promotional spending on SmartOnes frozen entrees.
Divestitures in the prior year reduced sales 3.9% and favorable exchange
translation rates increased sales 2.1%.
Gross profit decreased $12.7 million, or 1.9%, to $642.0 million; however,
the gross profit margin increased to 43.0% from 42.5%, as manufacturing cost
savings offset unfavorable pricing. In addition, reorganization costs
unfavorably impacted gross profit by $2.4 million for the nine months ending
January 29, 2003. Operating income increased $30.2 million, or 9.2%, to $359.3
mil-
22
lion, primarily due to decreased consumer marketing expenses related to Boston
Market frozen entrees and the prior year launch of Easy Squeeze!. In addition,
reorganization costs unfavorably impacted operating income by $1.5 million and
$17.2 million for the nine months ending January 28, 2004 and January 29, 2003,
respectively, and last year's operating income was unfavorably impacted by $11.3
million from a loss on the disposal of a North American fish and vegetable
business.
U.S. FOODSERVICE
U.S. Foodservice's sales increased $85.6 million, or 8.8%. Sales volume
increased sales 3.2% primarily due to increases in Heinz ketchup, Escalon
processed tomato products, Dianne's frozen desserts and single serve condiments
as a result of a strengthening trend in the U.S. restaurant industry and
successful product innovation. Higher pricing increased sales by 2.3% chiefly
due to Heinz ketchup and single serve condiments. Acquisitions, net of
divestitures, increased sales 3.3%, primarily due to the acquisition of
Truesoups LLC, a manufacturer and marketer of premium frozen soups.
Gross profit increased $27.7 million, or 10.0%, to $305.8 million, and the
gross profit margin increased slightly to 28.9% from 28.6%. These increases are
primarily due to favorable pricing and sales mix, partially offset by
unfavorable raw material costs. In addition, reorganization costs unfavorably
impacted gross profit by $1.1 million for the nine months ending January 29,
2003. Operating income increased $13.1 million, or 8.8%, to $161.3 million,
primarily due to the growth in gross profit, partially offset by the impact of
higher sales volume on S&D and increased G&A expenses attributable to increased
personnel costs. In addition, reorganization costs unfavorably impacted
operating income by $2.5 million and $3.2 million for the nine months ending
January 28, 2004 and January 29, 2003, respectively.
EUROPE
Heinz Europe's sales increased $180.6 million, or 8.4%. Favorable exchange
translation rates increased sales by 11.9%. Volumes decreased 1.5% as increases
in Petite Navire seafood, Heinz salad cream and Heinz ketchup from the
introduction of the top-down bottle were more than offset by decreases in
convenience meals, due to promotional timing, weather conditions and the impact
of our previously announced program to reduce low-margin Stock Keeping Units,
Italian infant feeding, due to competitive and trade pressures, and frozen food
products. Pricing increased 0.1% as increased trade promotion spending related
to seafood was offset by recent price increases on Heinz beans, ready-to-serve
soups, John West seafood and infant feeding products. Also, pricing pressures
were experienced in Northern Europe resulting from the Netherland's largest
retailer rolling back prices in excess of 8% beginning in the second quarter.
Divestitures reduced sales 2.1%, primarily related to the sale of the UK frozen
pizza business and the Northern European bakery business.
Gross profit increased $82.9 million, or 9.9%, to $921.9 million, and the
gross profit margin increased to 39.4% from 38.9%. The increase in gross profit
is primarily due to improvements in the seafood business and favorable exchange
translation rates, partially offset by the impact of divestitures, the write
down of the UK pizza assets, and the impact of soft volume in our Italian baby
food and Northern European businesses. Operating income increased $63.8 million,
or 15.4%, to $479.1 million, primarily attributable to the favorable change in
gross profit and the gain on the sale of the Northern European bakery business,
partially offset by increased G&A expense primarily related to increased pension
expense.
ASIA/PACIFIC
Sales in Asia/Pacific increased $145.0 million, or 18.5%. Volume increased
sales 2.5% primarily due to strong sales of Heinz ketchup, Tegel poultry in New
Zealand, ABC sauces in Indonesia and
23
tuna in Australia. Favorable exchange translation rates increased sales by
16.7%. Lower pricing decreased sales 0.4% related to Tegel poultry, partially
offset by recent price increases on ABC sauces and juice concentrates.
Divestitures, net of acquisitions, reduced sales 0.2%.
Gross profit increased $59.1 million, or 24.0%, to $305.0 million, and the
gross profit margin increased to 32.9% from 31.5%. These increases are primarily
due to favorable exchange translation rates and supply chain improvements in
Australia and at Watties, partially offset by Tegel poultry's lower pricing and
higher commodity costs. Operating income increased $36.9 million, or 49.1%, to
$112.0 million, primarily due to the growth in gross profit and declining G&A
expense due to improved cost control particularly in our Australian business,
partially offset by the impact of exchange translation rates on SG&A expenses.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities decreased $324.3 million, or 54.8%,
primarily due to the deconsolidation of the Company's Zimbabwe operations in
Fiscal 2003. The deconsolidation also impacted gross profit and operating
income. Gross profit decreased $81.1 million, or 48.6%, to $85.8 million, and
operating income decreased $71.3 million, or 76.3%, to $22.2 million. Excluding
the Zimbabwe operations in the prior year, sales increased 17.5%, primarily due
to strong volume increases of 9.8%, and operating income increased 25.7%.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by continuing operating activities increased by more than 45%
to $817.1 million compared to $561.2 million last year. The increase in Fiscal
2004 versus Fiscal 2003 is primarily due to a successful focus on working
capital reductions across the Company which resulted in the ten day improvement
in the Company's cash conversion cycle versus the year ago period.
Cash used for investing activities totaled $119.9 million compared to cash
provided by investing activities of $996.9 million last year. Cash provided by
the spin-off of assets to Del Monte was $1,063.6 million in the prior year.
Acquisitions, net of divestitures, used $14.9 million in net cash in the first
nine months of Fiscal 2004 compared to providing $41.4 million in the prior
year. Capital expenditures totaled $119.8 million compared to $92.2 million last
year.
Cash used for financing activities totaled $545.7 million compared to
$1,075.6 million last year. The Company paid down $74.0 million in long-term
debt during the current period, compared to $488.0 million last year. Payments
on short-term borrowings were $143.3 million this year, compared to $177.3
million last year. Cash used for purchases of treasury stock, net of proceeds
from option exercises, was $56.0 million this year. There were no treasury stock
purchases in the prior year, and proceeds from option exercises provided $6.5
million in the prior year. Dividend payments totaled $284.9 million, compared to
$431.0 million for the same period last year, reflecting a reduction in the
dividend rate in the fourth quarter of Fiscal 2003 following the spin-off of SKF
Foods.
The Company's primary measure of cash flow performance is operating free
cash flow. For the first nine months of Fiscal 2004, the Company has had strong
operating free cash flow totaling $697.2 million as compared to $468.9 million
for the same period a year ago, or a increase of 48.7%. The increase in
operating free cash flow is the result of higher net income, improved working
capital performance, partially offset by a small increase in capital
expenditures. The Company anticipates that operating free cash flow for Fiscal
2004 should be substantially in excess of that of Fiscal 2003.
The Company continued its debt reduction efforts in the first nine months
of Fiscal 2004 by retiring approximately $217 million of debt, offset partially
by a $152 million increase in debt as a result of changes in foreign exchange
rates. At January 28, 2004, the Company's net debt was $3.89 billion. Excluding
the reclassification of Heinz Finance Company's preferred stock (see below
24
for further discussion), net debt would have been $3.56 billion, down
approximately $479.4 million compared to the year earlier quarter. Additional
net debt reductions are anticipated in Fiscal 2004 and the Company expects that
over $400 million of long-term debt maturing in Fiscal 2005 will be retired
resulting in further debt reductions by the end of Fiscal 2005.
In the first nine months of Fiscal 2004, the cash used for reorganization
costs was approximately $44.7 million.
The Company has enhanced its liquidity during the first nine months of
Fiscal 2004 by reducing short-term debt to $11.4 million at January 28, 2004
from $146.8 million at April 30, 2003. Over the same time period, cash and cash
equivalents have increased by 26.7% to $1.02 billion from $801.7 million. The
Company maintains committed credit facilities of $2.1 billion as well as in
excess of $500 million of other credit facilities used primarily by the
Company's foreign subsidiaries. These resources together with the Company's
anticipated strong operating cash flow and access to the capital market, if
required, should enable the Company to meet its cash requirements for
operations, including anticipated additional pension plan contributions, capital
expansion programs and dividends to shareholders.
The impact of inflation on both the Company's financial position and
results of operations is not expected to adversely affect Fiscal 2004 results.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
a revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This revised statement requires additional annual
disclosures regarding types of pension plan assets, investment strategy, future
plan contributions, expected benefit payments and other items. The statement
also requires quarterly disclosure of the components of net periodic benefit
cost and plan contributions. The annual disclosures will be required for the
Company's Form 10-K for its fiscal year ended April 28, 2004, and the quarterly
disclosures will be required beginning in the quarter ended July 28, 2004.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a
prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy
to sponsors of retirement health care plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. In accordance with FASB Staff
Position 106-1, the Company has elected to defer recognizing the effects of the
Act on the accounting for its retirement health care plans because specific
authoritative guidance on the accounting for the Act's provisions is pending.
Once issued, this guidance could require the Company to change previously
reported financial information.
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R,
"Consolidation of Variable Interest Entities." FIN No. 46-R, which modifies
certain provisions and effective dates of FIN No. 46, sets forth criteria to be
used in determining whether an investment in a variable interest entity should
be consolidated, and is based on the general premise that companies that control
another entity through interests other than voting interests should consolidate
the controlled entity. The provisions of FIN No. 46 become effective for the
Company in its fourth quarter ended April 28, 2004. The Company is currently
evaluating the impact the revised accounting standard will have on the
consolidated results of operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
statement affects the classification, measurement and disclosure requirements of
certain financial instruments, including mandatorily redeemable shares. SFAS No.
150 was effective for the Company in the second quarter of Fiscal 2004. The
adoption of SFAS No. 150 required the prospective classification of Heinz
Finance Company's $325 million of mandatorily redeemable preferred shares from
minority interest to
25
long-term debt and the $5.1 million quarterly preferred dividend from other
expenses to interest expense beginning in the second quarter of Fiscal 2004,
with no resulting effect on the Company's profitability.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- an amendment of FASB Statement No. 123". SFAS No. 148 provides
alternative methods of transition for entities that voluntarily change to the
fair value method of accounting for stock-based employee compensation, and it
also amends the disclosure provisions of SFAS No. 123 to require prominent
disclosure about the effects of an entity's accounting policy decisions with
respect to stock-based employee compensation in both annual and interim
financial reporting. The disclosure provisions of SFAS No. 148 were effective
for the Company at April 30, 2003. The Company is currently evaluating its
policy for recognizing expense related to stock options.
Effective May 2, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Under this standard, goodwill and intangibles with
indefinite useful lives are no longer amortized. As a result of adopting SFAS
No. 142, the Company recorded a transitional impairment charge which was
calculated as of May 2, 2002, and recorded as an effect of a change in
accounting principle in the nine month period ended January 29, 2003, of $77.8
million. There was no tax effect associated with this charge. The charge, which
relates to certain of the Company's reporting units, has been reflected in its
segments as follows: Europe $54.6 million, Asia/Pacific $2.7 million and Other
Operating Entities $20.5 million.
26
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
Statements about future growth, profitability, costs, expectations, plans,
or objectives included in this report, including the management's discussion and
analysis, the financial statements and footnotes, are forward-looking statements
based on management's estimates, assumptions, and projections. These
forward-looking statements are subject to risks, uncertainties, and other
important factors that could cause actual results to differ materially from
those expressed or implied in this report and the financial statements and
footnotes. These include, but are not limited to, sales, earnings, and volume
growth, general economic, political, and industry conditions, competitive
conditions, production, energy and raw material costs, the ability to maintain
favorable supplier relationships, achieving cost savings programs and gross
margins, currency valuations and interest rate fluctuations, success of
acquisitions, joint ventures, and divestitures, new product and packaging
innovations, the effectiveness of advertising, marketing, and promotional
programs, supply chain efficiency and cash flow initiatives, the impact of
e-commerce and e-procurement, risks inherent in litigation, including the
Remedia related claims in Israel and rights against its third party supplier,
international operations, particularly the performance of business in
hyperinflationary environments, changes in estimates in critical accounting
judgments, the possibility of increased pension expense and contributions, and
other factors described in "Cautionary Statement Relevant to Forward-Looking
Information" in the Company's Form 10-K for the fiscal year ended April 30,
2003, and the Company's subsequent filings with the Securities and Exchange
Commission. The forward-looking statements are and will be based on management's
then current views and assumptions regarding future events and speak only as of
their dates. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by the securities laws.
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 28, 2004. For additional information, refer to pages
21-23 of the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures, as of the end of the period covered by this report, were designed
and are functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company
believes that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
(b) Changes in Internal Controls
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
27
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
Nothing to report under this item.
28
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. The Company may have 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 set forth
herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
10. Deferred Compensation Plan for Non-Employee Directors of H.J. Heinz
Company (as amended and restated effective January 1, 2004).
12. Computation of Ratios of Earnings to Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer.
31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer.
32(a). Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements.*
32(b). Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements.*
(b) Reports on Form 8-K
During the last fiscal quarter of the period covered by this Report,
the Company furnished a Current Report on Form 8-K dated November 25,
2003, relating to its press release announcing its results for the
second quarter and six months ended October 29, 2003. The Form 8-K,
including its Item 12 and the Exhibit attached thereto shall not be
deemed "filed" for purposes of Section 18 of the Exchange Act or
otherwise subject to liability under that Section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act
of 1933, as amended, or the Exchange Act, except as expressly set forth
by specific reference to such filing.
* The Exhibit attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise subject to liability under that section, nor
shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except as expressly
set forth by specific reference in such filing.
29
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: February 25, 2004
By: /s/ ARTHUR B. WINKLEBLACK
..........................................
Arthur B. Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 25, 2004
By: /s/ EDWARD J. MCMENAMIN
..........................................
Edward J. McMenamin
Vice President -- Finance
(Principal Accounting Officer)
30
EXHIBIT INDEX
DESCRIPTION OF EXHIBIT
Exhibits required to be furnished by Item 601 of Regulation S-K are listed
below. Documents not designated as being incorporated herein by reference are
furnished herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
10. Deferred Compensation Plan for Non-Employee Directors of H.J. Heinz
Company (as amended and restated effective January 1, 2004).
12. Computation of Ratios of Earnings to Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer.
31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer.
32(a). Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements.*
32(b). Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements.*
* The Exhibit attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of
1933, as amended, or the Exchange Act, except as expressly set forth by
specific reference in such filing.