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 OCTOBER 27, 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 SIX MONTHS ENDED OCTOBER 27, 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 $0.25 per
share, outstanding as of October 31, 2004 was 349,329,166 shares.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Second Quarter Ended
-----------------------------------
October 27, 2004 October 29, 2003
FY 2005 FY 2004
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales....................................................... $2,199,560 $2,090,461
Cost of products sold....................................... 1,399,546 1,309,243
---------- ----------
Gross profit................................................ 800,014 781,218
Selling, general and administrative expenses................ 456,566 432,183
---------- ----------
Operating income............................................ 343,448 349,035
Interest income............................................. 5,983 4,548
Interest expense............................................ 56,600 54,292
Other expense, net.......................................... 2,777 12,945
---------- ----------
Income from continuing operations before income taxes....... 290,054 286,346
Provision for income taxes.................................. 92,775 94,859
---------- ----------
Income from continuing operations........................... 197,279 191,487
Income from discontinued operations, net of tax............. 1,686 --
---------- ----------
Net income.................................................. $ 198,965 $ 191,487
========== ==========
Income per common share
Diluted
Continuing operations.................................. $ 0.56 $ 0.54
Discontinued operations................................ -- --
---------- ----------
Net income........................................... $ 0.56 $ 0.54
========== ==========
Average common shares outstanding--diluted................ 354,145 354,258
========== ==========
Basic
Continuing operations.................................. $ 0.56 $ 0.54
Discontinued operations................................ -- --
---------- ----------
Net income........................................... $ 0.57 $ 0.54
========== ==========
Average common shares outstanding--basic.................. 350,569 351,805
========== ==========
Cash dividends per share.................................... $ 0.285 $ 0.27
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
-----------------------------------
October 27, 2004 October 29, 2003
FY 2005 FY 2004
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales....................................................... $4,202,586 $3,985,985
Cost of products sold....................................... 2,663,819 2,497,691
---------- ----------
Gross profit................................................ 1,538,767 1,488,294
Selling, general and administrative expenses................ 855,665 790,183
---------- ----------
Operating income............................................ 683,102 698,111
Interest income............................................. 12,644 10,313
Interest expense............................................ 109,946 106,529
Other expense, net.......................................... 9,160 29,924
---------- ----------
Income from continuing operations before income taxes....... 576,640 571,971
Provision for income taxes.................................. 184,525 193,659
---------- ----------
Income from continuing operations........................... 392,115 378,312
Income from discontinued operations, net of tax............. 1,686 27,200
---------- ----------
Net income.................................................. $ 393,801 $ 405,512
========== ==========
Income per common share
Diluted
Continuing operations.................................. $ 1.11 $ 1.07
Discontinued operations................................ -- 0.08
---------- ----------
Net income........................................... $ 1.11 $ 1.14
========== ==========
Average common shares outstanding--diluted................ 354,145 354,258
========== ==========
Basic
Continuing operations.................................. $ 1.12 $ 1.08
Discontinued operations................................ -- 0.08
---------- ----------
Net income........................................... $ 1.12 $ 1.15
========== ==========
Average common shares outstanding--basic.................. 350,569 351,805
========== ==========
Cash dividends per share.................................... $ 0.57 $ 0.54
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 27, 2004 April 28, 2004*
FY 2005 FY 2004
---------------- ---------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 1,267,694 $1,180,039
Receivables, net............................................ 1,066,209 1,093,155
Inventories................................................. 1,420,314 1,156,932
Prepaid expenses............................................ 205,505 165,177
Other current assets........................................ 67,427 15,493
----------- ----------
Total current assets................................... 4,027,149 3,610,796
----------- ----------
Property, plant and equipment............................... 3,862,458 3,727,224
Less accumulated depreciation............................... 1,769,396 1,669,938
----------- ----------
Total property, plant and equipment, net............... 2,093,062 2,057,286
----------- ----------
Goodwill.................................................... 2,009,148 1,959,914
Trademarks, net............................................. 673,721 643,901
Other intangibles, net...................................... 145,137 149,920
Other non-current assets.................................... 1,499,762 1,455,372
----------- ----------
Total other non-current assets......................... 4,327,768 4,209,107
----------- ----------
Total assets........................................... $10,447,979 $9,877,189
=========== ==========
* Summarized from audited fiscal year 2004 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 27, 2004 April 28, 2004*
FY 2005 FY 2004
---------------- ---------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 20,119 $ 11,434
Portion of long-term debt due within one year............... 447,017 425,016
Accounts payable............................................ 1,116,746 1,063,113
Salaries and wages.......................................... 49,696 50,101
Accrued marketing........................................... 194,592 230,495
Accrued interest............................................ 141,556 81,473
Other accrued liabilities................................... 252,989 280,123
Income taxes................................................ 357,359 327,313
----------- ----------
Total current liabilities.............................. 2,580,074 2,469,068
----------- ----------
Long-term debt.............................................. 4,676,639 4,537,980
Deferred income taxes....................................... 367,678 313,343
Non-pension postretirement benefits......................... 192,454 192,599
Other liabilities and minority interest..................... 465,510 470,010
----------- ----------
Total long-term liabilities............................ 5,702,281 5,513,932
Shareholders' Equity:
Capital stock............................................... 107,866 107,868
Additional capital.......................................... 413,099 403,043
Retained earnings........................................... 5,051,197 4,856,918
----------- ----------
5,572,162 5,367,829
Less:
Treasury stock at cost (81,767,354 shares at October 27,
2004 and 79,139,249 shares at April 28, 2004).......... 3,054,887 2,927,839
Unearned compensation..................................... 34,490 32,275
Accumulated other comprehensive loss...................... 317,161 513,526
----------- ----------
Total shareholders' equity............................. 2,165,624 1,894,189
----------- ----------
Total liabilities and shareholders' equity............. $10,447,979 $9,877,189
=========== ==========
* Summarized from audited fiscal year 2004 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
-----------------------------------
October 27, 2004 October 29, 2003
FY 2005 FY 2004
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income................................................ $ 393,801 $ 405,512
Income from discontinued operations, net of tax........... (1,686) (27,200)
---------- ---------
Income from continuing operations......................... 392,115 378,312
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation............................................ 109,609 101,660
Amortization............................................ 9,703 10,401
Deferred tax provision.................................. 20,269 39,283
Gain on sale of the Northern Europe bakery business..... -- (26,338)
Other items, net........................................ 446 25,923
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables........................................... 74,676 126,554
Inventories........................................... (217,029) (128,632)
Prepaid expenses and other current assets............. (32,057) (66,326)
Accounts payable...................................... 5,062 (27,581)
Accrued liabilities................................... (39,997) (36,808)
Income taxes.......................................... 56,765 96,811
---------- ---------
Cash provided by operating activities.............. 379,562 493,259
---------- ---------
Cash Flows from Investing Activities:
Capital expenditures.................................... (82,620) (74,837)
Acquisitions, net of cash acquired...................... (13,381) (69,483)
Proceeds from divestitures.............................. 39,407 60,467
Other items, net........................................ 4,063 (6,177)
---------- ---------
Cash used for investing activities................. (52,531) (90,030)
---------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt.............................. (11,022) (70,249)
Proceeds from/(payments on) commercial paper and
short-term debt, net.................................. 8,457 (130,084)
Dividends............................................... (199,522) (190,039)
Purchases of treasury stock............................. (169,016) (76,010)
Exercise of stock options............................... 38,434 52,308
Other items, net........................................ 11,323 11,372
---------- ---------
Cash used for financing activities................. (321,346) (402,702)
---------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 53,774 46,437
Effect of discontinued operations........................... 28,196 --
---------- ---------
Net increase in cash and cash equivalents................... 87,655 46,964
Cash and cash equivalents at beginning of year.............. 1,180,039 801,732
---------- ---------
Cash and cash equivalents at end of period.................. $1,267,694 $ 848,696
========== =========
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, except those which have been
disclosed elsewhere in this Quarterly Report on Form 10-Q, 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 2005
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 28, 2004.
(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. Net income from discontinued operations for the second quarter ended
October 27, 2004 and the six months ended October 29, 2003 reflects the
favorable settlement of tax liabilities related to the spun off businesses.
(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 was used to
offset reorganization costs during Fiscal 2004 and was recorded as a
component of selling, general and administrative expenses ("SG&A").
REORGANIZATION COSTS
During the first quarter of Fiscal 2004, the Company recognized $5.5
million pretax ($3.4 million after tax) of reorganization costs. 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 the Fiscal
2003 spin-off transaction with Del Monte. Additionally, during the first
quarter of Fiscal 2004, the Company wrote down pizza crust assets 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. Amounts included
in accrued expenses related to these initiatives totaled $2.8 million and
$10.0 million at October 27, 2004 and April 28, 2004, respectively.
7
(4) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
October 27, 2004 April 28, 2004
---------------- --------------
(Thousands of Dollars)
Finished goods and work-in-process........................ $1,063,055 $ 897,778
Packaging material and ingredients........................ 357,259 259,154
---------- ----------
$1,420,314 $1,156,932
========== ==========
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the six months ended October
27, 2004, by reportable segment, are as follows:
North
American Other
Consumer U.S. Asia/ Operating
Products Foodservice Europe Pacific Entities Total
-------- ----------- -------- -------- --------- ----------
(Thousands of Dollars)
Balance at April 28, 2004............ $923,939 $179,544 $670,935 $165,646 $19,850 $1,959,914
Acquisition.......................... -- 6,558 1,541 -- -- 8,099
Purchase accounting
reclassifications.................. (9,848) (1,185) -- (298) -- (11,331)
Disposal............................. (2,548) -- -- -- -- (2,548)
Translation adjustments.............. 8,134 -- 38,441 14,967 320 61,862
Impairment........................... -- -- -- -- (6,848) (6,848)
-------- -------- -------- -------- ------- ----------
Balance at October 27, 2004.......... $919,677 $184,917 $710,917 $180,315 $13,322 $2,009,148
======== ======== ======== ======== ======= ==========
During the second quarter of Fiscal 2005 based on preliminary valuation
results, purchase accounting adjustments were recorded to reclassify
goodwill to trademarks related to the Fiscal 2004 acquisition of Unifine
Richardson B.V., within the North American Consumer Products segment. The
Company expects to finalize the purchase price allocation related to this
acquisition in the third quarter of Fiscal 2005.
The above impairment, which was classified within cost of products sold,
was due to a deterioration of current and expected operating results of a
consolidated joint venture following a recall in Fiscal 2004. The Company
reached an agreement with third parties, the proceeds of which were offset
by the impairment and other damages incurred to date. 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.
Trademarks and other intangible assets at October 27, 2004 and April 28,
2004, subject to amortization expense, are as follows:
October 27, 2004 April 28, 2004
------------------------------- -------------------------------
Accum Accum
Gross Amort Net Gross Amort Net
-------- --------- -------- -------- --------- --------
(Thousands of Dollars)
Trademarks............................. $195,955 $ (52,998) $142,957 $188,927 $ (50,505) $138,422
Licenses............................... 208,186 (121,448) 86,738 208,186 (118,504) 89,682
Other.................................. 123,962 (65,563) 58,399 123,394 (63,156) 60,238
-------- --------- -------- -------- --------- --------
$528,103 $(240,009) $288,094 $520,507 $(232,165) $288,342
======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to
amortization was $7.4 million and $7.6 million for the six months ended
October 27, 2004 and October 29, 2003, respectively. Based upon the
amortizable intangible assets recorded on the balance sheet at October 27,
2004, amortization expense for each of the next five years is estimated to
be approximately $15 million.
8
Intangible assets not subject to amortization at October 27, 2004 and April
28, 2004 were $530.8 million and $505.5 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.
On October 22, 2004, the American Jobs Creation Act ("the AJCA") was signed
into law. The AJCA includes a deduction of 85% of certain foreign earnings
that are repatriated, as defined in the AJCA. The Company may elect to
apply this provision to qualifying earnings repatriations in either the
balance of Fiscal 2005 or in Fiscal 2006. The Company has started an
evaluation of the effects of the repatriation provision; however, the
Company does not expect to be able to complete this evaluation until after
Congress or the Treasury Department provide additional clarifying language
on key elements of the provision. The Company expects to complete its
evaluation of the effects of the repatriation provision within a reasonable
period of time following the publication of the additional clarifying
language. The range of possible amounts that the Company is considering for
repatriation under this provision is between zero and $1 billion. The
related potential range of income tax is between zero and $60 million.
(7) STOCK-BASED 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, income
and income per common share from continuing operations would have been as
follows:
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003
---------------- ---------------- ---------------- ----------------
(In Thousands, Except per Share Amounts)
Income from continuing
operations:
As reported.......... $197,279 $191,487 $392,115 $378,312
Fair value-based
expense, net of
tax................ 4,691 8,089 10,831 12,996
-------- -------- -------- --------
Pro forma............ $192,588 $183,398 $381,284 $365,316
======== ======== ======== ========
Income per common share
from continuing
operations:
Diluted
As reported........ $ 0.56 $ 0.54 $ 1.11 $ 1.07
Pro forma.......... $ 0.54 $ 0.52 $ 1.08 $ 1.03
Basic
As reported........ $ 0.56 $ 0.54 $ 1.12 $ 1.08
Pro forma.......... $ 0.55 $ 0.52 $ 1.09 $ 1.04
9
The weighted-average fair value of options granted was $9.33 and $5.93 per
share in the six months ended October 27, 2004 and October 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:
Six Months Ended
-------------------------
October 27, October 29,
2004 2003
----------- -----------
Dividend yield.............................................. 3.0% 3.3%
Volatility.................................................. 25.4% 20.3%
Risk-free interest rate..................................... 4.4% 3.7%
Expected term (years)....................................... 7.9 6.5
During the first six months of Fiscal 2005, the Company granted 312,117
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. The Company recognized amortization
related to the unearned compensation of $4.1 million and $3.5 million for
the second quarter ended October 27, 2004 and October 29, 2003,
respectively, and $9.2 million and $6.5 million for the six months ended
October 27, 2004 and October 29, 2003, respectively.
(8) PENSIONS AND OTHER POST RETIREMENT BENEFITS
The components of net periodic benefit cost are as follows:
Second Quarter Ended
-------------------------------------------------------------------------
October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003
---------------- ---------------- ---------------- ----------------
Pension Benefits Post Retirement Benefits
----------------------------------- -----------------------------------
(Thousands of Dollars)
Service cost................. $ 11,247 $ 9,887 $1,363 $1,193
Interest cost................ 30,189 27,617 4,094 3,804
Expected return on plan
assets..................... (41,345) (35,726) -- --
Amortization of net initial
asset...................... (211) (180) -- --
Amortization of prior service
cost....................... 2,273 2,029 (756) (577)
Amortization of unrecognized
loss....................... 13,831 9,716 1,201 954
-------- -------- ------ ------
Net periodic benefit cost.... $ 15,984 $ 13,343 $5,902 $5,374
======== ======== ====== ======
10
Six Months Ended
-------------------------------------------------------------------------
October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003
---------------- ---------------- ---------------- ----------------
Pension Benefits Post Retirement Benefits
----------------------------------- -----------------------------------
(Thousands of Dollars)
Service cost................. $ 22,445 $ 20,450 $ 2,735 $ 2,393
Interest cost................ 60,193 56,323 8,148 7,623
Expected return on plan
assets..................... (82,495) (73,509) -- --
Amortization of net initial
asset...................... (422) (380) -- --
Amortization of prior service
cost....................... 4,560 4,203 (1,512) (1,150)
Amortization of unrecognized
loss....................... 27,581 20,010 3,067 1,904
Loss/(gain) due to
curtailment, settlement and
special termination
benefits................... -- (2,348) -- 380
-------- -------- ------- -------
Net periodic benefit cost.... $ 31,862 $ 24,749 $12,438 $11,150
======== ======== ======= =======
As of October 27, 2004, the Company has contributed $21 million to fund its
obligations under these plans. As previously disclosed, the Company expects
to make combined cash contributions of approximately $40 million in Fiscal
2005.
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
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 elected to defer
recognizing the effects of the Act on the accounting for its retirement
health care plans in Fiscal 2004. In May 2004, the FASB issued Staff
Position 106-2 providing final guidance on the accounting for benefits
provided by the Act. Although detailed regulations necessary to implement
the Act have not yet been finalized, management believes that certain drug
benefits offered under the postretirement health care plans will qualify
for the subsidy under Medicare Part D. Accordingly, the Company adopted
Staff Position 106-2 as of its second quarter reporting period beginning
July 29, 2004 and has performed a remeasurement of its plan obligations as
of that date. The reduction in the benefit obligation is approximately
$18.8 million and has been reflected as an actuarial gain. The total
reduction in benefit cost for Fiscal 2005 is $2.3 million, comprised of
$0.9 million of interest cost, $0.1 million of service cost, and $1.4
million reduction in unrecognized loss amortization, recognized on a
pro-rata basis.
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 freestanding 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 ended
October 29, 2003, with no resulting effect on the Company's profitability.
11
(10) 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.
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 includes 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.
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.
The Company's management evaluates performance of segments based on
several factors including net sales, operating income excluding special
items, 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.
12
The following table presents information about the Company's reportable
segments:
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003
FY 2005 FY 2004 FY 2005 FY 2004
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net external sales:
North American Consumer
Products................. $ 565,927 $ 521,882 $1,054,759 $ 972,660
U.S. Foodservice............ 379,832 371,892 723,700 703,109
Europe...................... 814,771 774,651 1,603,496 1,509,804
Asia/Pacific................ 344,787 334,769 639,059 624,776
Other Operating Entities.... 94,243 87,267 181,572 175,636
---------- ---------- ---------- ----------
Consolidated Totals......... $2,199,560 $2,090,461 $4,202,586 $3,985,985
========== ========== ========== ==========
Intersegment revenues:
North American Consumer
Products................. $ 12,965 $ 14,903 $ 25,691 $ 28,980
U.S. Foodservice............ 5,339 3,099 9,581 6,631
Europe...................... 4,494 3,088 9,166 7,623
Asia/Pacific................ 1,013 903 1,610 1,577
Other Operating Entities.... 368 619 758 1,118
Non-Operating (a)........... (24,179) (22,612) (46,806) (45,929)
---------- ---------- ---------- ----------
Consolidated Totals......... $ -- $ -- $ -- $ --
========== ========== ========== ==========
Operating income (loss):
North American Consumer
Products................. $ 134,977 $ 126,469 $ 246,069 $ 232,731
U.S. Foodservice............ 57,964 57,450 112,304 106,650
Europe...................... 125,480 144,667 279,571 315,983
Asia/Pacific................ 42,858 43,737 75,121 78,003
Other Operating Entities.... 8,162 8,392 22,488 19,630
Non-Operating (a)........... (25,993) (31,680) (52,451) (54,886)
---------- ---------- ---------- ----------
Consolidated Totals......... $ 343,448 $ 349,035 $ 683,102 $ 698,111
========== ========== ========== ==========
Operating income (loss)
excluding special items (b):
North American Consumer
Products................. $ 134,977 $ 126,469 $ 246,069 $ 234,227
U.S. Foodservice............ 57,964 57,450 112,304 109,150
Europe...................... 125,480 144,667 279,571 291,184
Asia/Pacific................ 42,858 43,737 75,121 78,003
Other Operating Entities.... 8,162 8,392 22,488 19,630
Non-Operating (a)........... (25,993) (31,680) (52,451) (53,428)
---------- ---------- ---------- ----------
Consolidated Totals......... $ 343,448 $ 349,035 $ 683,102 $ 678,766
========== ========== ========== ==========
--------------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) Six Months ended October 29, 2003--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.
13
The results for the second quarter and the six months ended October 27,
2004 were impacted by a $21.1 million charge for trade promotion spending
for the Italian infant nutrition business. The charge relates to an
under-accrual in fiscal years 2001, 2002 and 2003. The amount of the charge
that corresponds to each of the fiscal years 2001, 2002 and 2003 is less
than 1% of net income for each of those years.
The Company's revenues are generated via the sale of products in the
following categories:
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003
FY 2005 FY 2004 FY 2005 FY 2004
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Ketchup, Condiments and
Sauces.................. $ 800,435 $ 751,555 $1,563,035 $1,493,850
Frozen Foods.............. 543,050 483,770 1,004,590 876,479
Convenience Meals......... 480,431 457,832 931,300 885,012
Infant Foods.............. 202,437 220,535 381,388 407,117
Other..................... 173,207 176,769 322,273 323,527
---------- ---------- ---------- ----------
Total................ $2,199,560 $2,090,461 $4,202,586 $3,985,985
========== ========== ========== ==========
(11) 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:
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003
FY 2005 FY 2004 FY 2005 FY 2004
---------------- ---------------- ---------------- ----------------
(In Thousands)
Income from continuing
operations............... $197,279 $191,487 $392,115 $378,312
Preferred dividends........ 4 4 8 8
-------- -------- -------- --------
Income from continuing
operations applicable to
common stock............. $197,275 $191,483 $392,107 $378,304
======== ======== ======== ========
Average common shares
outstanding--basic.... 350,569 351,805 350,569 351,805
Effect of dilutive
securities:
Convertible preferred
stock............... 140 148 140 148
Stock options and
restricted stock.... 3,436 2,305 3,436 2,305
-------- -------- -------- --------
Average common shares
outstanding--diluted... 354,145 354,258 354,145 354,258
======== ======== ======== ========
Stock options outstanding in the amounts of 16.3 million and 22.9 million
were not included in the computation of diluted earnings per share for the
six months ended October 27, 2004 and October 29, 2003, respectively,
because inclusion of these options would be antidilutive.
14
(12) COMPREHENSIVE INCOME
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 27, 2004 October 29, 2003 October 27, 2004 October 29, 2003
FY 2005 FY 2004 FY 2005 FY 2004
---------------- ---------------- ---------------- ----------------
(In Thousands)
Net income................. $198,965 $191,487 $393,801 $405,512
Other comprehensive income:
Foreign currency
translation
adjustments(a)...... 150,381 121,610 193,699 176,410
Minimum pension
liability
adjustment.......... (354) (20,209) (6,061) (25,019)
Net deferred
gains/(losses) on
derivatives from
periodic
revaluations........ 27,935 4,662 25,734 2,036
Net deferred
(gains)/losses on
derivatives
reclassified to
earnings............ (18,652) (12,094) (17,007) (7,336)
-------- -------- -------- --------
Comprehensive income....... $358,275 $285,456 $590,166 $551,603
======== ======== ======== ========
(a) In the second quarter of Fiscal 2005, a $14.0 million prior period
adjustment was made to the foreign currency translation adjustment and
deferred tax accounts related to a net investment hedge of a foreign
subsidiary.
(13) 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 financial instruments to manage its foreign currency, commodity
price, and interest rate exposures. There have been no material changes in
the Company's market risk during the six months ended October 27, 2004. For
additional information, refer to pages 23-24 of the Company's Annual Report
on Form 10-K for the fiscal year ended April 28, 2004.
As of October 27, 2004, the Company is hedging forecasted transactions for
periods not exceeding two years. During the next 12 months, the Company
expects $2.1 million of net deferred gain reported in accumulated other
comprehensive loss to be reclassified to earnings. Hedge ineffectiveness
related to cash flow hedges, which is reported in current period earnings
as other income and expense, was not significant for the six months ended
October 27, 2004 and October 29, 2003. Amounts reclassified to earnings
because the hedged transaction was no longer expected to occur were not
significant for the six months ended October 27, 2004 and October 29, 2003.
The Company uses certain foreign currency debt instruments as net
investment hedges of foreign operations. Losses of $17.0 million (net of
income taxes of $10.0 million), which represented effective hedges of net
investments, were reported as a component of accumulated other
comprehensive loss within unrealized translation adjustment for the six
months ended October 27, 2004.
15
(14) INVESTMENTS AND UNCONSOLIDATED SUBSIDIARIES
The consolidated financial statements include the accounts of the Company,
and entities in which the Company maintains a controlling financial
interest. Control is generally determined based on the majority ownership
of an entity's voting interests. In certain situations, control is based on
participation in the majority of an entity's economic risks and rewards.
Investments in certain companies over which the Company exerts significant
influence, but does not control the financial and operating decisions, are
accounted for as equity method investments. The Company has no material
investments in variable interest entities.
The Company holds an equity investment in The Hain Celestial Group, Inc.
("Hain"), a natural, specialty and snack food company. The total equity
investment in Hain as of October 27, 2004 was $185.5 million. Heinz
currently owns approximately six million shares of Hain stock at an average
basis of approximately $30.00 per share as of October 27, 2004. Since late
January 2004, Hain shares have been trading at less than 80% of Heinz's
carrying value. Heinz is assisting Hain with certain cost savings programs
that Hain is pursuing with the intention of improving its shareholder value
over the next 12 months. Absent a significant increase in the share price
of Hain, the Company believes it is likely to record a charge to pretax
earnings to write down its Hain investment in the third quarter of Fiscal
2005. This charge would have no effect on cash flows.
(15) SUBSEQUENT EVENTS
The Company and the holders of the $800 million remarketable securities due
2020 agreed to change the remarketing date from November 15 to December 1
beginning this year and to change the maturity date to December 1, 2020
from November 15, 2020. These changes allow for the remarketing to occur
each year after the anticipated filing of the Company's second quarter Form
10-Q. If the securities are not remarketed in any given year, then the
Company is required to repurchase the principal amount of securities plus
interest.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. 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. Net income from discontinued
operations for the second quarter ended October 27, 2004 and the six months
ended October 29, 2003 reflects the favorable settlement of tax liabilities
related to the spun off businesses.
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 was used to offset
reorganization costs during Fiscal 2004 and was recorded as a component of
selling, general and administrative expenses ("SG&A").
REORGANIZATION COSTS
During the first quarter of Fiscal 2004, the Company recognized $5.5
million pretax ($3.4 million after-tax) of reorganization costs. 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 the Fiscal 2003 spin-off
transaction with Del Monte. Additionally, during the first quarter of Fiscal
2004, the Company wrote down pizza crust assets in the United Kingdom totaling
$4.0 million pretax ($2.8 million after-tax) which have been included as a
component of cost of products sold.
THREE MONTHS ENDED OCTOBER 27, 2004 AND OCTOBER 29, 2003
RESULTS OF CONTINUING OPERATIONS
Sales for the three months ended October 27, 2004 increased $109.1 million,
or 5.2%, to $2.20 billion. Sales were favorably impacted by exchange translation
rates of 4.4% and volume of 0.5%. The favorable volume impact is mainly due to
strong increases in the North American Consumer Products segment, driven by
improvements in frozen potatoes and Delimex snacks, offset by declines in the
European seafood business and in the Asia/Pacific segment. Acquisitions, net of
divestitures, increased sales by 0.4%. Pricing decreased sales by 0.1% as
pricing improvements in the North American Consumer Products and U.S.
Foodservice segments were more than offset by a $21.1 million charge for trade
spending for the Italian infant nutrition business, as described in Note No. 10,
"Segments" in Item 1--"Financial Statements". The charge relates to prior years
and reflects an under-accrual quantified as the Company was upgrading trade
management processes and systems in Italy. Pricing was also unfavorably impacted
by market price pressures in the Tegel poultry business in New Zealand and in
the Netherlands.
Gross profit increased $18.8 million, or 2.4%, to $800.0 million; however,
the gross profit margin decreased to 36.4% from 37.4%. The decrease in the gross
profit margin is mainly due to lower pricing and increased product costs in the
European seafood business, the Italian trade spending charge, increased
commodity and fuel costs and market price pressures impacting the
17
Tegel poultry business. The increase in gross profit is primarily a result of
higher volume and favorable exchange translation rates.
SG&A increased $24.4 million, or 5.6%, to $456.6 million and increased
slightly as a percentage of sales to 20.8% from 20.7%. The increase is primarily
due to foreign exchange translation rates and higher fuel and distribution
costs. Operating income decreased $5.6 million, or 1.6%, to $343.4 million, and
decreased as a percentage of sales to 15.6% from 16.7% as a result of the
changes noted above.
Net interest expense increased $0.9 million, to $50.6 million largely due
to higher average interest rates in Fiscal 2005 offset by the benefits of lower
average net debt. Other expenses, net, decreased $10.2 million, resulting
primarily from lower currency losses. The effective tax rate for the current
quarter was 32.0% compared to 33.1% last year. The current year effective tax
rate was favorably impacted by changes to the capital structure in certain
foreign subsidiaries.
Income from continuing operations for the second quarter of Fiscal 2005 was
$197.3 million compared to $191.5 million in the year earlier quarter, an
increase of 3.0%. Diluted earnings per share was $0.56 in the current year
compared to $0.54 in the prior year, up 3.7%.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment increased $44.0
million, or 8.4%, to $565.9 million. Sales volume increased 3.4% as a result of
significant growth in frozen potatoes, primarily in the Ore-Ida brand, due to
increased media spend and the introduction of Ore-Ida Extra Crispy Potatoes and
new microwavable Easy Fries. Also contributing to the volume increase were
increased sales of Delimex snacks which were partially offset by declines in
Canadian juice sales. Pricing increased 3.7% largely due to more efficient trade
spending on SmartOnes frozen entrees, Ore-Ida potatoes and Classico pasta
sauces. Sales increased 2.1% due to the prior year acquisition of the Canadian
business of Unifine Richardson B.V., which manufactures and sells salad
dressings, sauces, and dessert toppings. Divestitures reduced sales 1.6% due to
the sale of Ethnic Gourmet Foods and Rosetto pasta to Hain in the first quarter.
Exchange translation rates increased sales 0.9%.
Gross profit increased $18.6 million, or 8.4%, to $240.8 million, and the
gross profit margin decreased slightly to 42.5% from 42.6%, as increases in
sales volume and net pricing were partially offset by unfavorable sales mix and
higher commodity costs. Operating income increased $8.5 million, or 6.7%, to
$135.0 million, due to the increase in gross profit partially offset by
increased pension and fuel costs and increased marketing expense on Ore-Ida
potatoes.
U.S. FOODSERVICE
Sales of the U.S. Foodservice segment increased $7.9 million, or 2.1%, to
$379.8 million. Higher pricing increased sales by 1.8%, as price increases were
initiated to offset fuel and commodity cost pressures. Favorable volume
increased sales 0.3% due to Escalon processed tomato products and Dianne's and
Alden Merrell frozen desserts partially offset by a decline in single serve
condiments.
Gross profit increased $5.9 million, or 5.4%, to $115.0 million, and the
gross profit margin increased to 30.3% from 29.3% primarily due to favorable
pricing partly offset by increased commodity costs. Operating income increased
$0.5 million, or 0.9%, to $58.0 million, primarily due to growth in gross
profit, partially offset by increased fuel and transportation costs.
18
EUROPE
Heinz Europe's sales increased $40.1 million, or 5.2%, to $814.8 million.
Favorable exchange translation rates increased sales by 9.1%. Volume decreased
0.6% principally due to promotional timing on European seafood which was
partially offset by increases in Heinz ketchup resulting from the successful
introduction of the Top Down bottle, growth from newly introduced Weight
Watchers products in the frozen foods category, increases in Heinz
ready-to-serve soups, and a restage of the Italian infant nutrition business.
Lower pricing decreased sales 3.0%, as price increases in Heinz ketchup and
soups were more than offset by the trade spending charge in the Italian infant
nutrition business, decreased pricing related to European seafood and market
price pressures in the Netherlands. Divestitures reduced sales 0.4%.
Gross profit decreased $7.6 million, or 2.5%, to $299.9 million, and the
gross profit margin decreased to 36.8% from 39.7%. The decrease in gross profit
margin is primarily due to lower pricing and increased product costs in the
European seafood business, and the charge for Italian trade spending. These
decreases were partially offset by cost improvements in the Netherlands.
Operating income decreased $19.2 million, or 13.3%, to $125.5 million, due to
the decline in gross profit and increased general and administrative expenses
offset by savings on consumer marketing primarily in the Italian and seafood
businesses.
ASIA/PACIFIC
Sales in Asia/Pacific increased $10.0 million, or 3.0%, to $344.8 million.
Favorable exchange translation rates increased sales by 5.0%. Volume decreased
sales 1.2%, as strong volume in frozen food products in the New Zealand business
was more than offset by declines from the discontinuation of an Indonesian
energy drink as well as declines in the Tegel poultry business in New Zealand
and tuna and infant feeding sales in Australia and China. Lower pricing reduced
sales 0.7% primarily due to market price pressures on the Tegel poultry business
in New Zealand.
Gross profit increased $0.1 million, to $111.4 million. The gross profit
margin decreased slightly to 32.3% from 33.3%. The favorable impact of exchange
translation rates in Australia and New Zealand and improved sales mix in
Indonesia were offset by Tegel poultry's lower pricing. Operating income
decreased $0.9 million, or 2.0%, to $42.9 million, due to reduced net pricing
and increased consumer marketing expense.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities increased $7.0 million, or 8.0%, to
$94.2 million. Volume increased 0.2% due primarily to improvements in infant
feeding in Latin America, as a result of an aggressive pricing and promotional
strategy, as well as improvements in beverages and ketchup in India. This
increase was offset by lower sales in Israel, following a product recall in the
third quarter of Fiscal 2004. Lower pricing reduced sales by 1.9%, mainly due to
price declines in Israel following the recall. The prior year acquisition of a
frozen food business in South Africa increased sales by 8.9%. Gross profit
increased $1.0 million, or 3.3%, to $29.9 million, due mainly to the impact of a
prior year acquisition in South Africa offset by lower sales volume and pricing
in Israel. Operating income decreased $0.4 million as the increase in gross
profit was more than offset by increased selling, general and administrative
expenses.
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. 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 consolidated balance sheets. Although the
Company's business continues to operate profitably and it is able to source raw
materials, the country's economic situation remains uncertain and the Company's
ability to recover its investment could become impaired if the economic and
political uncertainties continue to deteriorate.
19
SIX MONTHS ENDED OCTOBER 27, 2004 AND OCTOBER 29, 2003
RESULTS OF CONTINUING OPERATIONS
Sales for the six months ended October 27, 2004 increased $216.6 million,
or 5.4%, to $4.20 billion. Sales were favorably impacted by volume growth of
1.2% and exchange translation rates of 4.2%. The favorable volume impact is
mainly due to strong increases in the North American Consumer Products and
Europe segments. These increases were partially offset by lower sales in Israel,
following a product recall in the third quarter of Fiscal 2004. Acquisitions,
net of divestitures, increased sales by 0.5%. Lower pricing decreased sales by
0.5%, principally due to a $21.1 million charge for trade spending for the
Italian infant nutrition business, a restage of the Italian infant nutrition
business and market price pressures impacting Northern Europe and the Tegel
poultry business in New Zealand. The trade spending charge in the Italian infant
nutrition business relates to prior years and reflects an under-accrual
quantified as the Company was upgrading trade management processes and systems
in Italy. These price decreases were partially offset by increases in the North
American Consumer Products and U.S. Foodservice segments.
Gross profit increased $50.5 million, or 3.4%, to $1.54 billion; however,
the gross profit margin decreased to 36.6% from 37.3%. The decrease in the gross
profit margin is mainly due to lower pricing and increased product costs in the
European seafood business, the charge for Italian trade spending, increased
commodity costs and market price pressures impacting the Tegel poultry and Latin
America businesses. The increase in gross profit is primarily a result of
favorable exchange translation rates and higher volume. Last year's gross profit
was unfavorably impacted by the write down of U.K. pizza crust assets totaling
$4.0 million.
SG&A increased $65.5 million, or 8.3%, to $855.7 million, and increased as
a percentage of sales to 20.4% from 19.8%. The increase is primarily due to the
gain recorded on the sale of the Northern European bakery business in the prior
year, foreign exchange translation rates, higher fuel and distribution costs and
increased employee costs related to the new long-term incentive compensation
program. Last year's SG&A was unfavorably impacted by reorganization costs
totaling $5.5 million. Operating income decreased $15.0 million, or 2.1%, to
$683.1 million, and decreased as a percentage of sales to 16.3% from 17.5% as a
result of the changes noted above.
Net interest expense increased $1.1 million, to $97.3 million. Net interest
expense was unfavorably impacted by the adoption of SFAS No. 150 (see below for
further discussion) beginning in the second quarter of Fiscal 2004 and higher
average floating interest rates during Fiscal 2005. These amounts were largely
offset by the benefits of lower average net debt and lower cost for the
remarketable securities in Fiscal 2005. Other expenses, net, decreased $20.8
million, resulting from the SFAS 150 reclassification and lower currency losses.
The effective tax rate for the current year was 32.0% compared to 33.9% last
year. The current year effective tax rate was favorably impacted by changes to
the capital structure in certain foreign subsidiaries. The prior year effective
tax rate was unfavorably impacted by the sale of the Northern European bakery
business.
Income from continuing operations for the first six months of Fiscal 2005
was $392.1 million compared to $378.3 million in the year earlier period, an
increase of 3.6%. Diluted earnings per share was $1.11 in the current year
compared to $1.07 in the prior year, up 3.7%.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment increased $82.1
million, or 8.4%, to $1.05 billion. Sales volume increased 4.9% due to
significant growth in Ore-Ida frozen potatoes and SmartOnes frozen entrees,
aided by the introduction of Ore-Ida Extra Crispy Potatoes, new microwavable
Easy Fries, and several new "Truth About Carbs" frozen entrees. Strong perform-
20
ance in Boston Market HomeStyle meals and Delimex snacks also contributed to the
volume increase. Pricing increased sales 2.0% largely due to more efficient
trade spending on SmartOnes frozen entrees and Ore-Ida potatoes as well as
increases related to Classico pasta sauces. Sales increased 2.3% due to the
prior year acquisition of the Canadian business of Unifine Richardson B.V.,
which manufactures and sells salad dressings, sauces, and dessert toppings.
Divestitures reduced sales 1.4% due to the sale of Ethnic Gourmet Food and
Rosetto pasta to Hain in the first quarter. Exchange translation rates increased
sales 0.6%.
Gross profit increased $24.6 million, or 5.9%, to $443.5 million driven by
the increase in sales volume. The gross profit margin decreased to 42.0% from
43.1% due primarily to sales mix and higher commodity costs partially offset by
higher net pricing. Operating income increased $13.3 million, or 5.7%, to $246.1
million, due to the increase in gross profit partially offset by higher selling
and distribution costs driven by the volume increase and higher fuel costs.
Operating income for the six months ended October 29, 2003 was impacted by
reorganization costs totaling $1.5 million.
U.S. FOODSERVICE
Sales of the U.S. Foodservice segment increased $20.6 million, or 2.9%, to
$723.7 million. Higher pricing increased sales by 2.0%, as price increases were
initiated to offset fuel and commodity cost pressures. Acquisitions increased
sales 1.1%, due to the prior year acquisition of Truesoups LLC, a manufacturer
and marketer of premium frozen soups. Sales volume decreased sales 0.2% as
favorable volume in Escalon processed tomato products and Dianne's and Alden
Merrell frozen desserts was offset by declines at Portion Pac Inc. resulting
from the startup of a new warehouse management system that temporarily impacted
shipments of some portion control products early in the first quarter of Fiscal
2005.
Gross profit increased $12.9 million, or 6.3%, to $216.6 million, and the
gross profit margin increased to 29.9% from 29.0%. These increases are primarily
due to favorable pricing, sales mix, and the prior year acquisition of Truesoups
LLC, partly offset by increases in commodity costs. Operating income increased
$5.7 million, or 5.3%, to $112.3 million, primarily due to growth in gross
profit, partially offset by increased selling and distribution costs, due to the
issues discussed above regarding Portion Pac, Inc and increased fuel and
transportation costs. Operating income for the six months ended October 29, 2003
was impacted by reorganization costs totaling $2.5 million.
EUROPE
Heinz Europe's sales increased $93.7 million, or 6.2%, to $1.60 billion.
Favorable exchange translation rates increased sales by 8.8%. Volume increased
0.7% principally due to increases in Heinz ketchup resulting from the successful
introduction of the Top Down bottle, new Weight Watchers products in the frozen
foods category, increases in Heinz ready-to-serve soups, increases in Heinz
frozen desserts in the U.K due to increased promotional activity, and
improvements from a restage of the Italian infant nutrition business. These
increases were offset by declines in European seafood and the discontinuation of
frozen pizza and Bagel Bites in the U.K. Lower pricing decreased sales 2.6%,
primarily due to the trade spending charge in the Italian infant nutrition
business, increased trade promotion spending on European seafood, a restage of
the Italian infant nutrition business, and lower trade prices in the
Netherlands. Divestitures reduced sales 0.7%.
Gross profit increased $7.5 million, or 1.3%, to $602.9 million, while the
gross profit margin decreased to 37.6% from 39.4%. The decrease in gross profit
margin is primarily related to lower pricing and increased product costs in the
European seafood business, and the charge for Italian trade spending, partially
offset by manufacturing improvements in the Netherlands. The increase in gross
profit is primarily due to favorable exchange translation rates, partially
offset by trade promotional spending to reduce prices in Italy and the
Netherlands. Gross profit for the six months ended October 29, 2003 was impacted
by the write-down of the U.K. pizza crust assets totaling
21
$4.0 million. Operating income decreased $36.4 million, or 11.5%, to $279.6
million, largely due to the gain recognized in the prior year on the sale of the
Northern European bakery business, partially offset by growth in gross profit
and reduced consumer marketing expenses.
ASIA/PACIFIC
Sales in Asia/Pacific increased $14.3 million, or 2.3%, to $639.1 million.
Favorable exchange translation rates increased sales by 4.6%. Volume decreased
sales 1.1%, chiefly due to the discontinuation of an Indonesian energy drink, as
well as declines in infant feeding and tuna in Australia, infant feeding in
China and Asian sauces in Japan. These declines were offset by strong volume in
ABC sauces, frozen foods and convenience meals in New Zealand, and Indonesian
cordials and ready-to-drink beverages. Lower pricing reduced sales 1.2%
primarily due to market price pressures on Tegel poultry in New Zealand.
Gross profit increased $1.0 million, or 0.5%, to $206.9 million. The gross
profit margin decreased to 32.4% from 32.9%. The increase in gross profit is
primarily due to favorable exchange translation rates in Australia and New
Zealand and improved sales mix in Indonesia, partially offset by lower volume
and Tegel poultry's lower pricing. Operating income decreased $2.9 million, or
3.7%, to $75.1 million, due to reduced net pricing and increased consumer
marketing costs.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities increased $5.9 million, or 3.4%, to
$181.6 million. Volume decreased 2.3% due primarily to lower sales in Israel,
following a product recall in the third quarter of Fiscal 2004, partially offset
by improvements in ketchup and beverages in India. Lower pricing reduced sales
by 3.5%, mainly due to decreases in Latin America as a result of market price
pressures and price declines in Israel resulting from the effects of the recall.
The prior year acquisition of a frozen food business in South Africa increased
sales by 8.5%. Gross profit decreased $1.1 million, or 1.9%, to $58.8 million,
due mainly to lower sales in Israel and Latin America and overall poor
performance in Israel, partially offset by the impact of a prior year
acquisition in South Africa. Operating income increased $2.7 million due to
reduced general and administrative expenses, partially offset by increased
distribution costs.
During the first quarter of Fiscal 2005, the Company reached an agreement
with third parties related to a recall in Fiscal 2004. The proceeds of the
agreement offset recall related damages incurred to date.
LIQUIDITY AND FINANCIAL POSITION
The following discussion of liquidity and financial position references the
business measures of operating free cash flow and net debt as defined below.
These measures are utilized by senior management and the board of directors to
gauge our business operating performance, and management believes these measures
provide clarity in understanding the trends of the business. Management, and
investors, can benefit from the use of the operating free cash flow measure as
it provides cash flow derived from product sales and the short-term application
of cash, including the effect of capital expenditures. The limitation of
operating free cash flow is that it adjusts for cash used for capital
expenditures that is no longer available to the Company for other purposes.
Management compensates for this limitation by using the GAAP operating cash flow
number as well. Operating free cash flow does not represent residual cash flow
available for discretionary expenditures. Net debt is an additional measure that
is important to our liquidity and financial condition.
Cash provided by continuing operating activities was $379.6 million, a
decrease of $113.7 million from the prior year. The decrease in Fiscal 2005
versus Fiscal 2004 is primarily due to working capital movements, particularly
accounts receivable and inventories. While we continue to make progress in
reducing our cash conversion cycle, as expected, the rate of improvement has
lessened when compared to the working capital generated last Fiscal year.
22
Cash used for investing activities totaled $52.5 million compared to $90.0
million last year. Proceeds from divestitures, net of acquisitions, provided
$26.0 million in the first six months of Fiscal 2005. Included in the Fiscal
2005 net proceeds from divestitures, is a $20.2 million deposit related to the
sale of an oil and fats product line in Korea. The sale is expected to be
completed during the third quarter. In Fiscal 2004, acquisitions, net of
divestitures, used $9.0 million in cash. Capital expenditures totaled $82.6
million (2.0% of sales) compared to $74.8 million (1.9% of sales) last year.
Cash used for financing activities totaled $321.3 million compared to
$402.7 million last year. Long-term debt was reduced by $11.0 million during the
current period, compared to $70.2 million last year. Proceeds on short-term
borrowings were $8.5 million this year, compared to payments of $130.1 million
in the prior year. Cash used for the purchases of treasury stock, net of
proceeds from option exercises, was $130.6 million this year compared to $23.7
million in the prior year, in line with the Company's strategy of maintaining
fully diluted shares at a constant level. Dividend payments totaled $199.5
million, compared to $190.0 million for the same period last year, reflecting a
5.5% increase in the annual dividend on common stock.
The Company's primary measure of cash flow performance is operating free
cash flow (cash provided by operating activities less capital expenditures). For
the first six months of Fiscal 2005, the Company had operating free cash flow
totaling $296.9 million (cash provided by operating activities of $379.6 million
less capital expenditures of $82.6 million) as compared to $418.4 million for
the same period a year ago (cash provided by operating activities of $493.3
million less capital expenditures of $74.8 million). This decrease in operating
free cash flow is the result of working capital movement in the first six months
and increased capital expenditures in the current year. The Company is still
estimating operating free cash flow to be $800 million to $1 billion for the
entire 2005 fiscal year.
At October 27, 2004, the Company's net debt (total debt of $5,143.8
million, net of the value of interest rate swaps of $217.0 million, less cash
and cash equivalents of $1,267.7 million) was $3.66 billion, down approximately
$311.7 million as compared to the prior year amount of $3.97 billion (total debt
of $4,995.7 million, less the value of interest rate swaps of $176.3 million,
less cash and cash equivalents of $848.7 million). The Company expects that over
$400 million of long-term debt will be retired in Fiscal 2005.
The Company and the holders of the $800 million remarketable securities due
2020 agreed to change the remarketing date from November 15 to December 1
beginning this year and to change the maturity date to December 1, 2020 from
November 15, 2020. These changes allow for the remarketing to occur each year
after the anticipated filing of the Company's second quarter Form 10-Q. If the
securities are not remarketed in any given year, then the Company is required to
repurchase the principal amount of securities plus interest.
In August 2004, the Company and H.J. Heinz Finance Company, a subsidiary of
the Company, amended their $600 million 364-Day Credit Agreement and their $1.5
billion Five-Year Credit Agreement by combining the agreements into a $2.0
billion Five-Year Credit Agreement, expiring August 2009. The Credit Agreement
supports the Company's commercial paper borrowings and the remarketable
securities. As a result, these borrowings are classified as long-term debt based
upon the Company's ability to refinance these borrowings on a long-term basis.
The Company also maintains in excess of $500 million of other credit facilities
used primarily by the Company's foreign subsidiaries. These resources together
with the Company's existing cash balance of almost $1.3 billion, its 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
capital expansion programs, debt maturities, and dividends to shareholders.
The impact of inflation on both the Company's financial position and the
results of operations is not expected to adversely affect Fiscal 2005 results.
23
The Company holds an equity investment in The Hain Celestial Group, Inc.
("Hain"), a natural, specialty and snack food company. The total equity
investment in Hain as of October 27, 2004 was $185.5 million. Heinz currently
owns approximately six million shares of Hain stock at an average basis of
approximately $30.00 per share as of October 27, 2004. Since late January 2004,
Hain shares have been trading at less than 80% of Heinz's carrying value. Heinz
is assisting Hain with certain cost savings programs that Hain is pursuing with
the intention of improving its shareholder value over the next 12 months. Absent
a significant increase in the share price of Hain, the Company believes it is
likely to record a charge to pretax earnings to write down its Hain investment
in the third quarter of Fiscal 2005. This charge would have no effect on cash
flows.
CONTRACTUAL OBLIGATIONS
The Company is obligated to make future payments under various contracts
such as debt agreements, lease arrangements and unconditional purchase
obligations. In addition, the Company has purchase obligations for materials,
supplies, services and property, plant and equipment as part of the ordinary
conduct of business. A few of these obligations are long-term and are based on
minimum purchase requirements. In the aggregate, such commitments are not at
prices in excess of current markets. Due to the proprietary nature of some of
the Company's materials and processes, certain supply contracts contain penalty
provisions for early terminations. The Company does not believe that a material
amount of penalties are reasonably likely to be incurred under these contracts
based upon historical experience and current expectations. There have been no
material changes to contractual obligations during the six months ended October
27, 2004. For additional information, refer to page 22 of the Company's Annual
Report on Form 10-K for the fiscal year ended April 28, 2004.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 elected to defer recognizing the effects of the Act
on the accounting for its retirement health care plans in Fiscal 2004. In May
2004, the FASB issued Staff Position 106-2 providing final guidance on the
accounting for benefits provided by the Act. Although detailed regulations
necessary to implement the Act have not yet been finalized, management believes
that certain drug benefits offered under the postretirement health care plans
will qualify for the subsidy under Medicare Part D. Accordingly, the Company
adopted Staff Position 106-2 as of its second quarter reporting period beginning
July 29, 2004 and has performed a remeasurement of its plan obligations as of
that date. The reduction in the benefit obligation is approximately $18.8
million and has been reflected as an actuarial gain. The total reduction in
benefit cost for Fiscal 2005 is $2.3 million, comprised of $0.9 million of
interest cost, $0.1 million of service cost, and $1.4 million reduction in
unrecognized loss amortization, recognized on a pro-rata basis.
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 freestanding 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 ended October 29, 2003, with no resulting effect on the
Company's profitability.
24
DISCUSSION OF SIGNIFICANT ACCOUNTING ESTIMATES
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results and require management's most difficult, subjective and complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Marketing Costs--Trade promotions are an important component of the sales
and marketing of the Company's products and are critical to the support of the
business. Trade promotion costs include amounts paid to encourage retailers to
offer temporary price reductions for the sale of the Company's products to
consumers, amounts paid to obtain favorable display positions in retailers'
stores, and amounts paid to customers for shelf space in retail stores. Accruals
for trade promotions are recorded primarily at the time of sale of product to
the customer based on an estimate of the expected levels of performance of the
trade promotion, which is dependent upon factors such as historical trends with
similar promotions, expectations regarding customer participation, and sales and
payment trends with similar previously offered programs. Our original estimated
costs of trade promotions are reasonably likely to change in the future as a
result of changes in trends with regard to customer participation, particularly
for new programs and for programs related to the introduction of new products.
We perform monthly and quarterly evaluations of our outstanding trade
promotions; making adjustments, where appropriate, to reflect changes in our
estimates. Settlement of these liabilities typically occurs in subsequent
periods primarily through an authorized process for deductions taken by a
customer from amounts otherwise due to the Company. As a result, the ultimate
cost of a trade promotion program is dependent on the relative success of the
events and the actions and level of deductions taken by the Company's customers
for amounts they consider due to them. Final determination of the permissible
deductions may take extended periods of time and could have a significant impact
on the Company's results of operations depending on how actual results of the
programs compare to original estimates.
We offer coupons to consumers in the normal course of our business. Costs
associated with this activity, which we refer to as coupon redemption costs, are
accrued in the period in which the coupons are offered. The initial estimates
made for each coupon offering are based upon historical redemption experience
rates for similar products or coupon amounts. We perform subsequent estimates
that compare our actual redemption rates to the original estimates. We review
the assumptions used in the valuation of the estimates and determine an
appropriate accrual amount. Adjustments to our initial accrual may be required
if our actual redemption rates vary from our estimated redemption rates.
Inventories--Inventories are stated at the lower of cost or market value.
Cost is principally determined by the average cost method. The Company records
adjustments to the carrying value of inventory based upon its forecasted plans
to sell its inventories. The physical condition (e.g., age and quality) of the
inventories is also considered in establishing its valuation. These adjustments
are estimates, which could vary, either favorably or unfavorably, from actual
requirements if future economic conditions, customer inventory levels or
competitive conditions differ from our expectations.
Investments and Long-lived Assets and Property, Plant and
Equipment--Investments and long-lived assets are recorded at their respective
cost basis on the date of acquisition. Buildings, equipment and leasehold
improvements are depreciated on a straight-line basis over the estimated useful
life of such assets. The Company reviews investments and long-lived assets,
including intangibles with finite useful lives, and property, plant and
equipment, whenever circumstances
25
change such that the indicated recorded value of an asset may not be recoverable
or has suffered an other than temporary impairment. Factors that may affect
recoverability include changes in planned use of equipment or software, the
closing of facilities and changes in the underlying financial strength of
investments. The estimate of current value requires significant management
judgment and requires assumptions that can include: future volume trends,
revenue and expense growth rates and foreign exchange rates developed in
connection with the Company's internal projections and annual operating plans,
and in addition, external factors such as market value devaluation and inflation
which are developed in connection with the Company's longer-term strategic
planning. As each is management's best estimate on then available information,
resulting estimates may differ from actual cash flows.
Goodwill and Indefinite Lived Intangibles--Carrying values of goodwill and
intangible assets with indefinite lives are reviewed for impairment at least
annually, or when circumstances indicate that a possible impairment may exist,
in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
Indicators such as unexpected adverse economic factors, unanticipated
technological change or competitive activities, loss of key personnel, and acts
by governments and courts, may signal that an asset has become impaired. The
Company's measure of impairment is based on a discounted cash flow model that
requires significant judgment and requires assumptions about future volume
trends, revenue and expense growth rates and foreign exchange rates developed in
connection with the Company's internal projections and annual operating plans,
and in addition, external factors such as changes in macroeconomic trends and
cost of capital developed in connection with the Company's longer-term strategic
planning. Inherent in estimating future performance, in particular assumptions
regarding external factors such as capital markets, are uncertainties beyond the
Company's control. Management believes that because fair values of goodwill and
intangible assets with indefinite lives significantly exceed carrying value, it
is unlikely that a material impairment charge would be recognized.
Retirement Benefits--The Company sponsors pension and other retirement
plans in various forms covering substantially all employees who meet eligibility
requirements. Several statistical and other factors that attempt to anticipate
future events are used in calculating the expense and liability related to the
plans. These factors include assumptions about the discount rate, expected
return on plan assets, turnover rates and rate of future compensation increases
as determined by the Company, within certain guidelines. The discount rate
assumptions used to value pension and postretirement benefit obligations reflect
the rates available on high quality fixed income investments available (in each
country that the Company operates a benefit plan) as of the measurement date.
The weighted average discount rate used to measure the projected benefit
obligation for the year ending April 28, 2004 was 5.8%.
Over time, the expected rate of return on pension plan assets should
approximate the actual long-term returns. In developing the expected rate of
return, the Company considers actual real historic returns of asset classes, the
investment mix of plan assets, investment manager performance and projected
future returns of asset classes developed by respected consultants. The weighted
average expected rate of return on plan assets used to calculate annual expense
was 8.2% for the year ending April 28, 2004. For purposes of calculating Fiscal
2005 expense, the weighted average rate of return will remain at approximately
8.2%.
In addition, the Company's actuarial consultants also use subjective
factors such as withdrawal and mortality rates to estimate these factors. The
actuarial assumptions used by the Company may differ materially from actual
results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants. These
differences may result in a significant impact to the amount of pension expense
recorded by the Company.
26
SENSITIVITY OF ASSUMPTIONS
If we assumed a 100 basis point change in the following assumption, our
Fiscal 2004 projected benefit obligation and expense would increase (decrease)
by the following amounts (in millions):
100 BASIS POINT
-------------------
INCREASE DECREASE
-------- --------
PENSION BENEFITS
Discount rate used in determining projected benefit
obligation................................................ $(289.1) $312.4
Discount rate used in determining net pension expense....... $ (31.7) $ 37.4
Long-term rate of return on assets used in determining net
pension expense........................................... $ (18.4) $ 18.4
OTHER BENEFITS
Discount rate used in determining projected benefit
obligation................................................ $ (21.2) $ 23.2
Income Taxes--The Company computes its annual tax rate based on the
statutory tax rates and tax planning opportunities available to it in the
various jurisdictions in which it earns income. Significant judgment is required
in determining the Company's annual tax rate and in evaluating its tax
positions. The Company establishes reserves when it becomes probable that a tax
return position that it considers supportable may be challenged and that the
Company may not succeed in completely defending that challenge. The Company
adjusts these reserves in light of changing facts and circumstances, such as the
settlement of a tax audit. The Company's annual tax rate includes the impact of
reserve provisions and changes to reserves. While it is often difficult to
predict the final outcome or the timing of resolution of any particular tax
matter, the Company believes that its reserves reflect the probable outcome of
known tax contingencies. Favorable resolution would be recognized as a reduction
to the Company's tax rate in the period of resolution. The Company's tax
reserves are presented in the balance sheet principally within accrued income
taxes.
The Company records valuation allowances to reduce deferred tax assets to
the amount that is more likely than not to be realized. When assessing the need
for valuation allowances, the Company considers future taxable income and
ongoing prudent and feasible tax planning strategies. Should a change in
circumstances lead to a change in judgment about the realizability of deferred
tax assets in future years, the Company would adjust related valuation
allowances in the period that the change in circumstances occurs, along with a
corresponding increase or charge to income.
On October 22, 2004, the American Jobs Creation Act ("the AJCA") was signed
into law. The AJCA includes a deduction of 85% of certain foreign earnings that
are repatriated, as defined in the AJCA. The Company may elect to apply this
provision to qualifying earnings repatriations in either the balance of Fiscal
2005 or in Fiscal 2006. The Company has started an evaluation of the effects of
the repatriation provision; however, the Company does not expect to be able to
complete this evaluation until after Congress or the Treasury Department provide
additional clarifying language on key elements of the provision. The Company
expects to complete its evaluation of the effects of the repatriation provision
within a reasonable period of time following the publication of the additional
clarifying language. The range of possible amounts that the Company is
considering for repatriation under this provision is between zero and $1
billion. The related potential range of income tax is between zero and $60
million.
27
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, competitors'
actions, which affect, among other things, customer preferences and the pricing
of products, production, energy and raw material costs, product recalls, 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, product mix, 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 third parties,
international operations, particularly the performance of business in
hyperinflationary environments, changes in estimates in critical accounting
judgments and other laws and regulations, including tax laws, the possibility of
increased pension expense and contributions and other people-related costs, the
possibility of investment impairment, 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 28, 2004, 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
six months ended October 27, 2004. For additional information, refer to pages
23-24 of the Company's Annual Report on Form 10-K for the fiscal year ended
April 28, 2004.
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 Control over Financial Reporting
Although the Company believes that the Company's disclosure controls and
procedures, as of the end of the period covered by this report, were effective
and no change in the Company's internal control over reporting occurred during
the Company's most recent fiscal quarter that has materi-
28
ally affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting, the Company began to upgrade trade
management processes and systems for its Italian infant nutrition business in
Fiscal 2004 in response to trade spending increases and a previously identified
need to improve management organization, process and controls. The process and
system upgrades included the hiring of new management to enhance control over
trade spending, the transfer of accounting control of trade promotion funds from
the Italian sales department to the Italian finance department, the
establishment of a dedicated Trade Finance Group in Italy to improve processes
and controls, and to support the Italian sales team, and the implementation of a
new trade spending management system, portions of which became operational
during the quarter ended October 27, 2004. While the new trade spending
management system will not become fully operational until later in the Company's
fiscal year ending April 27, 2005, the Company is confident that the upgraded
trade management processes and systems in Italy have addressed the issues that
resulted in the under-accrual. See Note No. 10, "Segments" in Item 1--"Financial
Statements" for the amounts and years affected by this under-accrual.
29
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
In the second quarter of Fiscal 2005, the Company repurchased the following
number of shares of its common stock:
Maximum
Total Total Number of Number of Shares
Number of Average Shares Purchased as that May Yet Be
Shares Price Paid Part of Publicly Purchased Under
Period Purchased per Share Announced Programs the Programs
------ --------- ---------- ------------------- ----------------
July 29, 2004 - August
25, 2004............ 1,300,000 $36.92 -- --
August 26, 2004 -
September 22, 2004.. 500,000 $38.20 -- --
September 23, 2004 -
October 27, 2004.... -- -- -- --
--------- ------ ---- ----
Total................. 1,800,000 $37.28 -- --
========= ====== ==== ====
The shares repurchased were acquired under the share repurchase program
authorized by the Board of Directors on January 14, 2004 for a maximum of 15
million shares. All repurchases were made in open market transactions. As of
October 27, 2004, the maximum number of shares that may yet be purchased under
the 2004 program is 10,406,150.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of H.J. Heinz Company was held in
Pittsburgh, Pennsylvania, on September 8, 2004. The following individuals were
elected as directors for a term expiring at the next annual meeting of the
shareholders.
Director Shares For Shares Against Abstain Broker Non-vote
-------- ----------- -------------- -------- ---------------
W. R. Johnson.............. 294,003,098 7,777,894 -- --
C. E. Bunch................ 295,099,000 6,681,992 -- --
M. C. Choksi............... 295,221,253 6,559,739 -- --
L. S. Coleman, Jr. ........ 292,375,252 9,405,740 -- --
P. H. Coors................ 296,311,932 5,469,060 -- --
E. E. Holiday.............. 293,019,335 8,761,657 -- --
C. Kendle.................. 270,778,458 31,002,534 -- --
D. R. O'Hare............... 295,155,975 6,625,017 -- --
L. C. Swann................ 296,394,466 5,386,526 -- --
T. J. Usher................ 282,345,211 19,435,781 -- --
J. M. Zimmerman............ 296,464,908 5,316,084 -- --
30
Shareholders also acted upon the following proposal at the Annual Meeting:
Elected PricewaterhouseCoopers, LLP the Company's independent accountants
for the fiscal year ending April 27, 2005. Votes totaled 292,960,872 for,
6,000,249 against, 2,819,870 abstentions, and 50,666,494 broker non-votes.
ITEM 5. OTHER INFORMATION
Nothing to report under this item.
ITEM 6. EXHIBITS
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.
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.
31
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: November 29, 2004
By: /s/ ARTHUR B. WINKLEBLACK
..........................................
Arthur B. Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 29, 2004
By: /s/ EDWARD J. MCMENAMIN
..........................................
Edward J. McMenamin
Senior Vice President--Finance
and Corporate Controller
(Principal Accounting Officer)
32
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.
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.